Express Loan Programs; Affiliation Standards, 7622-7652 [2020-02128]
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Federal Register / Vol. 85, No. 27 / Monday, February 10, 2020 / Rules and Regulations
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 103, 120, and 121
RIN 3245–AG74
Express Loan Programs; Affiliation
Standards
U.S. Small Business
Administration.
ACTION: Interim final rule; request for
comments.
AGENCY:
The U.S. Small Business
Administration (SBA or Agency) is
amending various regulations governing
its business loan programs, including
the SBA Express and Export Express
Loan Programs and the Microloan and
Development Company (504) loan
programs. SBA previously published a
Notice of Proposed Rulemaking
addressing all of the topics and issues
covered by this interim final rule and
received extensive comments from the
public. SBA is publishing this rule
interim final rather than proceeding to
a final rule in order to provide the
public with an additional opportunity to
comment. In addition, the rule will
become effective in 30 days but
compliance with two of the regulatory
changes will not be required until
October 1, 2020.
DATES:
Effective date: This rule is effective
March 11, 2020.
Compliance date: The compliance
date for §§ 103.5(b) and 120.221(a) is
October 1, 2020.
Comment date: Comments on this
rule must be received on or before April
10, 2020.
ADDRESSES: You may submit comments,
identified by RIN 3245–AG74, by any of
the following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments
(Regulations.Gov Docket: SBA–2018–
0009).
• Mail: Rosemarie Drake, Office of
Financial Assistance, Office of Capital
Access, Small Business Administration,
409 Third Street SW, Washington, DC
20416.
• Hand Delivery/Courier: Rosemarie
Drake, Office of Financial Assistance,
Office of Capital Access, Small Business
Administration, 409 Third Street SW,
Washington, DC 20416.
SBA will post all comments on
www.regulations.gov. If you wish to
submit confidential business
information (CBI) as defined in the User
Notice at www.regulations.gov, please
submit the information to Rosemarie
Drake, Office of Financial Assistance,
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SUMMARY:
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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:
Dianna L. Seaborn, Director, Office of
Financial Assistance, Office of Capital
Access, Small Business Administration,
409 Third Street SW, Washington, DC
20416; telephone: (202) 205–3645;
email: Dianna.Seaborn@sba.gov.
SUPPLEMENTARY INFORMATION:
I. Background Information
The SBA programs affected by this
interim final rule are:
1. The 7(a) Loan Program authorized
pursuant to Section 7(a) of the Small
Business Act (the Act) (15 U.S.C.
636(a));
2. The Business Disaster Loan
Programs (collectively, Economic Injury
Disaster Loans, Military Reservist
Economic Injury Disaster Loans, and
Physical Disaster Business Loans)
authorized pursuant to Section 7(b) of
the Act (15 U.S.C. 636(b));
3. The Microloan Program authorized
pursuant to Section 7(m) of the Act (15
U.S.C. 636(m));
4. The Intermediary Lending Pilot
(ILP) Program authorized pursuant to
Section 7(l) of the Act (15 U.S.C. 636(l));
5. The Surety Bond Guarantee
Program authorized pursuant to Part B
of Title IV of the Small Business
Investment Act of 1958 (15 U.S.C. 694b
et seq.); and
6. The Development Company
Program (the 504 Loan Program)
authorized pursuant to Title V of the
Small Business Investment Act of 1958
(15 U.S.C. 695 et seq.). (In this interim
final rule, the 7(a), Microloan, ILP, and
504 Loan Programs are collectively
referred to as the Business Loan
Programs.)
On September 28, 2018, SBA
published a proposed rule with request
for comments in the Federal Register to
incorporate the requirements related to
the SBA Express and Export Express
Loan Programs; add a regulation
pertaining to the 7(a) and Development
Company (504) loan programs regarding
when the owners of a small business
Applicant are required to inject excess
liquid assets into the project; amend
certain regulations setting forth the
affiliation principles applicable to SBA
financial assistance programs; limit
certain fees payable by loan Applicants
to amounts deemed reasonable by SBA;
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clarify the responsibility of a Lender for
the contingent liabilities associated with
7(a) loans purchased from the Federal
Deposit Insurance Corporation; and,
finally, amend certain regulations
governing the use of microloan grant
funds by Microloan Intermediaries and
the maximum maturity of a microloan.
(83 FR 49001) The original comment
period was scheduled to end November
27, 2018. On November 16, 2018, SBA
announced an extension of the public
comment period for an additional 15
business days to December 18, 2018. (83
FR 57693)
II. Summary of Comments
During the public comment period,
4,251 comments were submitted, 142 of
which were duplicate submissions,
meaning an identical comment
submitted multiple times by the same
commenter.
The comments submitted came from
17 Congressional representatives or
State government offices, 48 trade
associations or non-profit organizations,
64 Certified Development Companies
(CDCs), 86 Agents or Lender Service
Providers (LSPs), 259 banks and nonbank lenders, SBA’s Office of Advocacy,
and 3,635 individuals. The Agency’s
responses to the Office of Advocacy’s
comments are included in section III.C
below.
The majority of the regulatory changes
proposed by SBA, including but not
limited to incorporating SBA Express
and Export Express Loan Program
Requirements, modifying certain
regulations concerning the Microloan
Program, and technical corrections or
conforming amendments, were
supported by the commenters with
either no opposition or recommendation
for minor modifications.
While there were a significant number
of comments in opposition to the
proposed changes to limit fees that
Lenders and Agents may charge small
business Applicants in connection with
an SBA-guaranteed loan, SBA notes that
most of these comments were generated
through a single website through which
interested parties could submit a public
comment to SBA ‘‘with one click.’’ This
website’s electronic mechanism autogenerated a rotating boilerplate
comment letter and submitted the
comment letter on behalf of the
individual who simply had to provide a
name, street address, zip code, phone
number, and email address.
Approximately 54 percent of the total
comments received by SBA were
comprised of these auto-generated
boilerplate comments, and more than 90
percent of the comments received on the
proposed changes to the regulations
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concerning fees that Agents may charge
Applicants in connection with SBAguaranteed loans were comprised of
these auto-generated boilerplate
comments. The website promoting these
auto-generated comments was created
by a coalition made up of small
business-focused lenders, facilitators,
and associations working with small
businesses and entrepreneurs. As
discussed more fully in the Section-bySection Analysis below, the information
contained on the coalition’s website and
communicated on their social media
platforms contained significant
inaccuracies regarding both the current
and proposed SBA rules regarding
Agent fees. SBA considered this
misinformation by the coalition when
reviewing the comments received.
SBA received a large number of
comments on the proposed changes to
the affiliation principles applicable to
the financial assistance programs set out
in § 121.301(f). The majority of these
comments were in response to the
proposed changes to § 121.301(f)(4),
which would expand the ‘‘identity of
interest’’ basis for affiliation to include
businesses with common investments
and businesses that are economically
dependent. Many commenters who
opposed these proposed changes
expressed concern that the changes
would negatively impact poultry
farmers and other agricultural
producers.
SBA also received comments from 75
individuals or entities expressing
general concerns unassociated with any
specific section of the proposed
regulations. One concern, expressed by
58 commenters, was related to the
determination that the rule is not a
‘‘significant’’ regulatory action for the
purposes of Executive Order 12866.
Since the end of the public comment
period, the Office of Management and
Budget has changed the designation of
the rule to ‘‘significant.’’ In this interim
final rule, SBA has amended the
Regulatory Impact Analysis and
Regulatory Flexibility Analysis to reflect
the change in designation.
SBA also received 54
recommendations for the Agency to
consider requesting a statutory
amendment to increase the maximum
size of SBA Express loans from
$350,000 to $500,000. SBA included a
request in the President’s fiscal year
2020 budget to increase the maximum
SBA Express loan amount to $1,000,000
and agrees that an increase in the
maximum loan size is needed.
SBA received 13 comments that
generally opposed the proposed rule as
a whole, but none provided specific
reasons or explanation for why the
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proposed regulations should not be put
into place.
Finally, SBA received two comments
related to general 7(a) Loan Program
policy that were not related to any
regulation included in the proposed
modifications. SBA will consider those
comments when updating future
program guidance.
SBA has addressed in detail the
comments received on specific
proposed regulatory changes within the
appropriate Section-by-Section analysis
below.
III. Section-by-Section Analysis of
Comments and Changes
A. Business Loan Programs
1. SBA Express and Export Express
Loan Programs
Section 120.441 SBA Express and
Export Express Loan Programs
SBA proposed to add a regulation
providing general descriptions of the
SBA Express and Export Express Loan
Programs.
SBA received 60 comments on this
proposed change. Fifty-nine of the
comments supported this proposed
change with a recommendation that
SBA amend this section and other
relevant subsections to clarify that
SBA’s general Loan Program
Requirements apply to SBA Express and
Export Express loans, except when such
requirements are inconsistent with other
requirements or guidance provided in
SBA Loan Program Requirements
specific to SBA Express or Export
Express. SBA believes that this
recommendation has already been
addressed in the regulatory language
proposed in § 120.441(a) and (b), which
applies to the associated regulations in
§§ 120.442 through 120.447. It is
repetitive and unnecessary to include
this statement in all subsequent related
sections.
One commenter expressed concern
that SBA granting Lenders unilateral
authority to process SBA Express and
Export Express loans could
‘‘disproportionately affect’’ women and
minority business owners because the
proposed regulations do not appear to
incorporate necessary safeguards against
‘‘stifled growth in urban communities
and sustainability for women and other
minority businesses within these
communities.’’ The commenter did not
provide any evidence to support his or
her concern. SBA does not agree that
delegating loan making authority to
lenders disproportionately affects
women or minority business owners.
The SBA Express and Export Express
Programs began operating as pilot
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programs in 1995 and 1998,
respectively, and were made permanent
in 2004 and 2010, respectively. As
explained in the description of the
programs being added as § 120.441, both
programs were designed for Lenders to
process loans exclusively under
delegated authority and Congress has
authorized SBA to permit qualified
Lenders to make SBA Express and
Export Express loans using, to the
maximum extent practicable, their own
processes, analyses, and documentation.
SBA is adopting the regulation as
proposed.
Section 120.442 Process To Obtain or
Renew SBA Express or Export Express
Authority
SBA proposed adding a regulation
that sets forth the criteria and process to
obtain or renew SBA Express or Export
Express authority.
SBA received 57 comments on this
proposed change. All commenters
supported the addition of the regulation.
SBA is adopting the regulation as
proposed.
Section 120.443 SBA Express and
Export Express Loan Processing
Requirements
SBA proposed adding a regulation
that sets forth the requirements for loan
processing under the SBA Express and
Export Express loan programs.
SBA received 59 comments on this
proposed change. All commenters
supported the addition of the regulation.
SBA is adopting the regulation as
proposed with one modification.
An additional eligibility requirement
applicable to Export Express, which has
been a part of the Export Express
Program since it was established and
which is currently set out in SBA’s
Standard Operating Procedures 50 10,
Lender and Development Company
Loan Programs, as amended from time
to time (SOP 50 10), was inadvertently
omitted from the proposed rule. This
additional eligibility requirement states
that, in addition to the eligibility
requirements for all 7(a) loans,
Applicants for Export Express loans
must have been in operation, although
not necessarily in exporting, for at least
12 full months. However, Applicants
that have been in operation for less than
12 months are eligible if the Lender
determines that the Applicant’s key
personnel have clearly demonstrated
export expertise and substantial
previous successful business
experience, and the Lender processes
the Export Express loan using
conventional commercial loan
underwriting procedures and does not
rely solely on credit scoring or credit
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matrices to approve the loan.1 The
Export Express Lender must document
that the Applicant’s key personnel have
the requisite experience in exporting.
The Export Working Capital Program,
which Export Express was based on, has
a similar requirement set out in
§ 120.341.
As one of the stated purposes of the
proposed rule was to ‘‘incorporate into
the regulations governing the 7(a) Loan
Program the requirements specifically
applicable to the SBA Express and
Export Express Loan Programs in order
to provide additional clarity for SBA
Express and Export Express Lenders,’’
SBA is modifying § 120.443 to include
the additional eligibility requirement
applicable to Export Express which was
inadvertently omitted in the proposed
rule. SBA is adding a new paragraph (b)
to incorporate the requirement. SBA is
redesignating the remaining paragraphs
as (c) through (f).
Section 120.444 Eligible Uses of SBA
Express and Export Express Loan
Proceeds
SBA proposed adding a regulation to
identify the eligible uses of loan
proceeds for SBA Express and Export
Express loans.
SBA received 59 comments on this
proposed change. Fifty-seven
commenters supported the addition of
the regulation. One SBA Lender
commented in opposition to
§ 120.444(b)(4) which states, ‘‘Export
Express Lenders are responsible for
ensuring that U.S. companies are
authorized to conduct business with the
Persons and countries to which the
Borrower will be exporting.’’ This
Lender believes this requirement to be
unnecessary and burdensome and
instead recommends a risk-based
approach, such as having the customer
sign an attestation as to the licensing
requirements for lower-risk transactions
or, for higher-risk transactions, requiring
customers to provide a copy of the
license(s) or a letter from an export
attorney as to why a license is not
required. This requirement has always
been part of the Export Express Program
and, pursuant to the current procedure
in SOP 50 10, Export Express Lenders
can satisfy this requirement by checking
the Ex-Im Bank Country Limitation
Schedule and, for certain types of
Export Express loans, the Department of
Treasury’s Office of Foreign Assets
Control (OFAC) sanctions list. SBA is
not expanding this requirement and,
1 Non-bank Lenders that do not have a
conventional loan portfolio must submit their
underwriting procedures to the Office of Credit Risk
Management for written approval prior to making
an Export Express loan.
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therefore, the Agency does not agree
that this regulation as proposed will
cause any undue burden on Export
Express Lenders.
Another Lender expressed concern
that while the summary of the proposed
change in the preamble to the proposed
rule references the SBA Express
Lender’s responsibility to ‘‘take
reasonable steps to ensure and
document that the loan proceeds are
used exclusively for business-related
purchases,’’ there is no regulatory
language proposed in § 120.444 that
describes this requirement. The Lender
objected to the language in the
preamble, claiming that it would be
impractical for the Lender to fulfill any
such proposed responsibility
‘‘postdisbursement.’’ In addition, the
Lender stated that during the loan
application and documentation
processes, the Applicant already attests
that all funds will be exclusively used
for business-related purposes. This
responsibility is an existing requirement
for all Lenders making 7(a) loans,
including SBA Express Lenders on SBA
Express loans, pursuant to §§ 120.120
and 120.130. SBA’s SOP 50 10, Subpart
B, Chapter 7 clearly outlines the
acceptable documentation with which
Lenders may document disbursement.
The Lender’s responsibility as described
in the preamble of the proposed rule
references this existing requirement,
which SBA is not expanding and,
therefore, the Agency does not agree
with the commenter’s objections.
SBA is adopting the regulation as
proposed with two minor technical
clarifications to § 120.444(b)(3) to
replace ‘‘overseas operations’’ with
‘‘operations outside of the United
States’’ and to replace ‘‘U.S.’’ with
‘‘United States.’’
Section 120.445 Terms and Conditions
of SBA Express and Export Express
Loans
SBA proposed to add a new
regulation to identify those terms and
conditions of SBA Express and Export
Express loans that are unique to these
two programs, including maximum loan
amounts and guaranty percentages,
maturities, interest rates, collateral and
insurance requirements, allowable fees,
and requirements concerning loan
increases.
SBA received 59 comments on this
proposed regulation, with 57
commenters supporting the addition of
the regulation. One individual opposed
the provision in § 120.445(g) that
prohibits SBA Express and Export
Express Lenders from selling the
guaranteed portion of an SBA Express or
Export Express revolving line of credit
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on the secondary market. This
commenter argued that any product that
has ended its draw period and is in
principal and interest repayment should
be able to be sold on the secondary
market, regardless of delivery method or
whether the loan is a line of credit.
SBA’s existing Loan Program
Requirements for all 7(a) loans,
including SBA Express and Export
Express loans, prohibit revolving loans
or line of credit facilities to be sold on
the secondary market. SBA appreciates
the opinion expressed by this
commenter but is not electing to modify
this Loan Program Requirement.
One SBA Lender objected to the
proposed change to require SBA Express
and Export Express Lenders to comply
with the same rules that apply to all
other 7(a) Lenders with respect to the
fees that may be collected from an
Applicant or Borrower on SBA Express
and Export Express loans. This Lender
stated that it does not charge an
‘‘application fee’’ in connection with its
SBA-guaranteed loans; rather, it charges
a ‘‘loan fee.’’ Further, this Lender
asserted that, if it ‘‘will be required to
document ‘packaging fees’ and process
the related paperwork and transmittal
[to SBA’s Fiscal and Transfer Agent]’’
then the Lender will likely have to
increase the fees it charges to
Applicants and the Lender’s ‘‘delivery
process efficiency will be impaired.’’
This Lender appears to have
misunderstood the proposed changes
regarding fees, as well as the current
requirements concerning disclosure of
fees.
As stated in the preamble to the
proposed rule, SBA proposed changes to
the fees a Lender is permitted to collect
from an Applicant in order to simplify
the rules regarding such fees. SBA
stated that, regardless of what the fee is
called (e.g., a packaging fee, an
application fee, etc.), the Lender would
be permitted to charge an Applicant a
fee up to a certain amount, depending
on the loan amount. Thus, whether this
Lender calls the fee an ‘‘application fee’’
or a ‘‘loan fee,’’ as long as the fee
charged does not exceed the maximum
set forth in § 120.221(a), the Lender
would be permitted to charge the fee.
Further, while the proposed rule did not
change the requirement that, if the
Lender charges an Applicant a fee for
assistance with obtaining an SBAguaranteed loan, the Lender must
disclose the fee on SBA Form 159, the
proposed rule did eliminate the current
requirement that the Lender itemize fees
over $2,500. Thus, if this Lender charges
a ‘‘loan fee’’ it would need to disclose
the fee on SBA Form 159, but it would
not be required to itemize the fee or
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provide supporting documentation.
Finally, the requirement to submit the
completed SBA Form 159 to SBA’s
Fiscal and Transfer Agent after there has
been an initial disbursement on the loan
is a current requirement applicable to
all 7(a) Lenders, including SBA Express
and Export Express Lenders. SBA
disagrees with the Lender’s contention
that the proposed change will increase
the burden on SBA Express and Export
Express Lenders and is adopting as
proposed the change to require SBA
Express and Export Express Lenders to
comply with the same rules that apply
to all other 7(a) Lenders with respect to
the fees that may be collected from an
Applicant or Borrower.
With respect to interest rates, SBA
stated in the proposed rule that SBA
Express and Export Express Lenders
may charge up to 4.5 percent over the
prime rate on loans over $50,000 and up
to 6.5 percent over the prime rate for
loans of $50,000 or less, regardless of
the maturity of the loan, and did not
distinguish between fixed or variable
interest rate loans. Since the publication
of the proposed rule, SBA published a
document in the Federal Register
revising the maximum allowable fixed
interest rate for 7(a) loans under 13 CFR
120.213. (83 FR 55478, November 6,
2018) In that Federal Register
document, SBA set the maximum
allowable fixed interest rates for SBA
Express and Export Express loans at the
same levels as the maximum fixed
interest rates allowable for 7(a) loans
generally.
Consequently, SBA is modifying
§ 120.445(d) to differentiate between
fixed and variable rate loans and to
provide that the maximum allowable
fixed interest rate for SBA Express and
Export Express loans is the same as the
maximum fixed interest rate allowable
for 7(a) loans generally as set forth in 13
CFR 120.213. SBA is adopting the
remainder of the regulation as proposed.
Section 120.446 SBA Express and
Export Express Loan Closing, Servicing,
Liquidation, and Litigation
Requirements
SBA proposed to add a new
regulation providing that SBA Express
and Export Express Lenders must close,
service, liquidate, and litigate their SBA
Express and Export Express loans using
the same documentation and procedures
they use for their similarly-sized, nonSBA guaranteed commercial loans,
which must comply with law, prudent
lending practices, and Loan Program
Requirements. Additionally, the
proposed regulation provided that SBA
Express and Export Express Lenders
must comply with the loan servicing
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and liquidation responsibilities set forth
for 7(a) Lenders in 13 CFR part 120,
subpart E, and other Loan Program
Requirements. The proposed regulation
also described the circumstances under
which SBA will honor the guaranty on
SBA Express and Export Express loans.
SBA received 59 comments on this
proposed regulation, all of which
supported its incorporation into the
regulations. SBA is adopting the
regulation as proposed.
Section 120.447 Oversight of SBA
Express and Export Express Lenders
SBA proposed to add a new
regulation explaining that SBA Express
and Export Express Lenders are subject
to the same risk-based lender oversight
as other 7(a) Lenders, including
supervision and enforcement
provisions, in accordance with 13 CFR
part 120, subpart I.
SBA received 57 comments on this
proposed regulation, all of which
supported its incorporation into the
regulations. SBA is adopting the
regulation as proposed with one minor
technical clarification to insert ‘‘other’’
before ‘‘7(a) Lenders’’ and a minor edit
to the section heading.
2. Credit Elsewhere and the Personal
Resources of Owners of the Small
Business Applicant
Section 120.102 Funds Not Available
From Alternative Sources, Including the
Personal Resources of Owners
To aid SBA Lenders in determining
whether an Applicant has access to
‘‘credit elsewhere,’’ SBA proposed to
reinstitute a ‘‘personal resources test.’’
The personal resources test provides
SBA Lenders (i.e., both 7(a) Lenders and
CDCs) with a bright-line test to analyze
the resources of individuals and entities
that own 20 percent or more of the
Applicant business in order to
determine if any of the owners have
liquid assets available that can provide
some or all of the desired financing.
When an owner of 20 percent or more
has liquid assets that exceed stated
thresholds, SBA proposed to require an
injection of cash from any such owner
to reduce the SBA loan amount. SBA
proposed specific thresholds setting the
required injection of such owners’
excess liquid assets based on the size of
the total financing package (defined for
the purposes of this section as any SBA
loans and any other financing, including
loans from any other source, requested
by the Applicant business at or about
the same time). As set forth in SOP 50
10, SBA considers ‘‘at or about the same
time’’ to mean loans approved within 90
days of each other.
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SBA received 200 comments on this
proposed change. Of these comments,
135 expressed concern with this change,
including 103 SBA Lenders, 18
individuals, 9 trade associations, 4
Agents, and SBA’s Office of Advocacy.
There were a few main concerns
expressed by these commenters. Some
argued that the personal resources test
and required equity injection of excess
personal liquid assets should not apply
to the 504 Loan Program because
Congress already requires an equity
injection for 504 loans and because 504
loans are statutorily required to create
jobs; therefore, these small businesses
need liquidity to meet these objectives.
Another concern expressed by many
commenters was that compliance with
the proposed regulation would be
onerous and burdensome for SBA
Lenders. Lastly, commenters expressed
concern that the personal resources test
may limit the resources available to a
small business owner in the event of an
unforeseen emergency or may eliminate
potential borrowers from seeking SBA
financing altogether due to owners’
aversion to additional equity injections.
SBA disagrees with the argument that
the personal resources test should not
apply to the 504 Loan Program.
Regardless of other program-specific
requirements, SBA’s statutory
responsibility for both financial
assistance programs includes ensuring
that loans are not made if the Applicant
has access to funds from private sources
or elsewhere on reasonable terms.
Subsequent to SBA’s removal of the
personal resources test from the
regulations in 2014 (79 FR 15641), many
SBA Lenders expressed confusion as to
how to adequately determine whether a
small business has access to credit
elsewhere based on personal liquid
assets. During SBA Lender reviews, SBA
has identified inconsistent and irregular
applications of this assessment when
the determination was left to the SBA
Lender’s discretion, including approval
of loans to businesses with principals
that maintained extremely high levels of
personal liquid assets. Reinstatement of
the personal resources test will
eliminate the ambiguity of the credit
elsewhere determination and provide
SBA Lenders the certainty they have
sought in recent years. With respect to
the job creation or retention
requirements in the 504 Loan Program,
in November 2018, SBA increased the
dollar amounts used in calculating the
number of jobs that must be created or
retained, thereby making it easier for
504 loans to satisfy the statutory job
creation requirement. In addition, SBA
designated additional areas for
application of the higher portfolio
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average. (83 FR 55224, November 2,
2018) Thus, SBA already has taken steps
to facilitate compliance with the job
creation requirements in the 504 Loan
Program. Further, while SBA recognizes
that the requirement of additional
equity injections in the proposed rule
may be unattractive to some potential
borrowers, SBA proposed to increase
the thresholds set forth in the 2014
personal resources test to allow for
greater personal liquidity to be
maintained by owners.
Sixty-five commenters supported
reinstatement of the personal resources
test with suggested modifications. The
commenters included 53 SBA Lenders,
5 Agents, 3 individuals, 3 trade
associations, and 1 member of Congress.
While these commenters supported
reinstatement, many recommended that
the personal liquidity thresholds be
modified, especially for smaller loans.
Commenters also recommended that
SBA more clearly define what assets are
considered ‘‘liquid’’ and provide further
explanation or additional examples of
the extraordinary circumstances that
may qualify as an exception to the
injection requirement. Additionally,
some commenters requested that SBA
modify the test to be based on the SBA
loan amount, rather than the total
financing package, and to apply the test
only to individual persons and not
entities. Two commenters suggested that
SBA consider allowing an alternative to
requiring the owner to inject excess
liquid assets by allowing the owner to
instead pledge the liquid assets as
collateral for the loan.
After considering the comments
received on this change, SBA has
reevaluated the personal liquidity
threshold for smaller loans and agrees to
modify the limits to ensure that
Applicants applying for smaller loans
are not adversely affected. SBA is
adopting the regulation as proposed for
loans greater than $350,000; however,
based on the comments received, SBA is
increasing the liquidity that 20 percent
or more owners may retain for loans of
$350,000 or less. When the total
financing package (i.e., any SBA loans
and any other financing, including loans
from any other source, requested by the
Applicant business at or about the same
time, as defined in SOP 50 10) is
$350,000 or less, each 20 percent owner
of the Applicant must inject any liquid
assets that are in excess of two times the
total financing package, or $500,000,
whichever is greater. (The proposed rule
would have required injection of any
liquid assets that were in excess of one
and three-quarter times the total
financing package, or $200,000,
whichever was greater.) SBA also is
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modifying the regulatory text to provide
that SBA will reexamine the thresholds
periodically and, if adjustments are
necessary, SBA may modify the
thresholds through rulemaking from
time to time based on nationallyrecognized economic indicators.
SBA is adopting the proposed
definition of ‘‘liquid assets,’’ with a
modification to exclude the cash value
of life insurance policies from the
definition. The Agency will provide
additional examples as to what will or
will not be considered ‘‘liquid assets’’ in
SOP 50 10. SBA will continue to base
the personal resources test on the total
financing package, but is adding
language to clarify that the phrase ‘‘at or
about the same time’’ has the meaning
set forth in SBA Loan Program
Requirements. (As noted above, SOP 50
10 sets forth that SBA considers ‘‘at or
about the same time’’ to mean loans
approved within 90 days of each other.)
SBA, in its sole discretion, may permit
exceptions to the required injection of
an owner’s excess liquid assets only in
extraordinary circumstances, such as
when the excess funds are needed for
immediate medical expenses of a family
member.
3. Permissible Fees That a Lender or
Agent May Collect From an Applicant
or Borrower in Connection With an
SBA-Guaranteed Loan
Section 120.221 Fees and Expenses
That the Lender May Collect From an
Applicant or Borrower
SBA proposed revisions to paragraphs
(a) and (b) of this section. SBA proposed
to amend § 120.221(a) to limit the total
fees an Applicant can be charged by a
Lender for assistance with obtaining an
SBA-guaranteed loan. Regardless of
what the fee is called (e.g., a packaging
fee, application fee, etc.), the Lender
would be permitted to collect a fee from
the Applicant of no more than $2,500
for a loan up to and including $350,000,
and no more than $5,000 for a loan over
$350,000. With the exception of
necessary out-of-pocket costs, such as
filing or recording fees permitted in
§ 120.221(c) and legal fees that are
charged on an hourly basis permitted in
§ 120.221(e), this is the only fee that a
Lender may collect directly or indirectly
from an Applicant for assistance with
obtaining an SBA-guaranteed loan.
SBA received 294 comments on this
proposed change. Of these comments,
215 (73 percent) were comprised of 7
different auto-generated templates
submitted by individuals and SBA
Lenders. Each template varied slightly
in wording; however, all template
comments opposed the proposed
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changes and expressed concern that
limiting the fees an SBA Lender may
charge to an Applicant will hurt small
businesses by forcing Lenders to leave
the market for smaller loans of $350,000
or less.
SBA received 17 other non-automated
comments expressing similar concern: 9
from SBA Lenders; 4 from individuals;
3 from trade associations; and 1 from an
Agent. Many of these comments echoed
the sentiment that the fee limits,
specifically for loans of $350,000 or less,
were set too low.
The remaining 62 comments received
on this proposed change supported
SBA’s proposal to clarify the fees that
Lenders can charge 7(a) loan
Applicants, with modification. These
commenters included 52 SBA Lenders,
4 trade associations, 4 Agents, and 2
individuals. While these commenters
generally supported the proposed
change, they recommended that SBA
consider increasing the fee that a Lender
may charge an Applicant for a loan of
$350,000 or less.
SBA has considered these comments
and agrees to increase the maximum
permissible fee a Lender may charge an
Applicant for a loan of $350,000 or less.
Regardless of what the fee is called (e.g.,
a packaging fee, application fee, etc.),
the Lender will be permitted to collect
a fee from the Applicant that is no more
than $3,000 for a loan up to and
including $350,000 and no more than
$5,000 for a loan over $350,000.
Based on the comments and SBA’s
observations during lender reviews,
SBA considers the revised fees to be
reasonable for the services provided by
a Lender to an Applicant for assistance
with obtaining an SBA-guaranteed loan.
SBA will monitor these fee levels and,
if adjustments are necessary, SBA may
revise these amounts from time to time
through rulemaking.
SBA received several comments on
proposed § 120.221 suggesting that SBA
modify the circumstances under which
SBA may require a Lender to refund
excess fee amounts. SBA considered
these comments and is modifying the
regulatory text to specifically state that
SBA may require a Lender to refund any
amount charged to an Applicant in
excess of what is permitted by SBA in
this regulation.
In addition, in accordance with
longstanding Agency policy, the Lender
may not split a loan into two loans for
the purpose of charging an additional
fee to an Applicant. Even if there is a
legitimate business need for the
Applicant’s loan request to be split into
two loans (e.g., a term loan and a line
of credit), the Lender may only charge
the Applicant one fee within the
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maximums set forth above, based on the
combined loan amounts. However, it is
not SBA’s intention to restrict a Lender
from charging a new fee if an Applicant
subsequently returns to the Lender to
apply for a new loan for a different
project or purpose. SBA will provide
additional guidance in SOP 50 10 as
necessary.
If the Lender charges the Applicant a
fee for assistance with obtaining an
SBA-guaranteed loan, the Lender must
disclose the fee to the Applicant and
SBA by completing the Compensation
Agreement (SBA Form 159) in
accordance with § 103.5 and the
procedures set forth in SOP 50 10.
However, the Lender will no longer be
required to itemize the fees charged to
the Applicant.
SBA recognizes that some Lenders
may need to revise their policies,
procedures or documentation in order to
comply with the new limits on fees in
§ 120.221(a). In order to minimize the
impact of the change on affected
Lenders, SBA is not requiring
compliance with revised § 120.221(a)
until October 1, 2020. Until that time,
Lenders are to continue to comply with
the requirements in § 120.221(a) as
published in the 2019 edition of the
Code of Federal Regulations, and the
guidance in SOP 50 10 5(K). However,
considering the benefits that the new fee
limits offer, SBA expects that many
Lenders will want to comply with them
before October 1, 2020. They are
permitted to do so. SBA recommends
that these Lenders document in each
loan file their decision to use the new
fee limits.
SBA also proposed to amend
§ 120.221(b) to permit extraordinary
servicing fees in excess of 2 percent per
year for Export Working Capital
Program (EWCP) loans and Working
Capital CAPLines that are disbursed
based on a Borrowing Base Certificate.
In these programs, the fees charged
would need to be reasonable and
prudent based on the level of
extraordinary effort required and could
not be higher than the fees charged on
the Lender’s similarly-sized, non-SBA
guaranteed commercial loans.
SBA received 54 comments on this
proposed change. All comments
supported the amendment to allow
different extraordinary servicing fees to
be charged in connection with EWCP
loans and Working Capital CAPLines
that are disbursed based on a Borrowing
Base Certificate. However, one
commenter noted that the regulatory
language proposed makes no mention of
the extraordinary servicing fees
permissible for other 7(a) loans that may
be allowed in certain cases, such as
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construction. This commenter
recommended that SBA clearly identify
that extraordinary servicing fees
previously allowed are not impacted by
the rule change.
SBA appreciates this comment and
agrees that the proposed regulatory
language inadvertently omitted the
current language in the regulation. It
was not SBA’s intent to eliminate the
permissible extraordinary servicing fees
previously allowed in appropriate
circumstances for certain 7(a) loans.
SBA is adopting the amendment to the
regulation and is correcting the
inadvertent error that would have
eliminated the current language in the
regulation.
Section 103.4 What is ‘‘good cause’’
for suspension or revocation?
SBA proposed to eliminate the
limited exception to the ‘‘two master
prohibition’’ currently contained in
§ 103.4(g). This exception currently
applies when an Agent acts as a
Packager and is compensated by the
Applicant for packaging services, and
the same Agent also acts as a Referral
Agent and is compensated by the
Lender for those activities in connection
with the same loan application. SBA’s
proposed elimination of this exception
would prevent an Agent, including an
LSP, from providing services to both the
Applicant and the SBA Lender and
being compensated by both parties in
connection with the same loan
application. SBA also proposed to revise
the remaining text of § 103.4(g) for
clarity and to use the defined term
‘‘SBA Lender’’ in the revised regulation
to clarify that it applies to both 7(a)
Lenders and CDCs.
SBA received 987 comments on this
proposal. Of these comments, 915 were
auto-generated comments submitted by
individuals (i.e., 93 percent of all
comments received on this issue). The
comments were comprised of 11
templates which varied slightly in
wording; however, all template
comments opposed the proposed
changes and expressed the concern that
eliminating an Agent’s ability to serve
both the SBA Lender and the Applicant
would restrict a small business’s access
to capital, specifically for loans under
$350,000. The commenters asserted that
the changes proposed in this section
and § 103.5 would force Agents out of
the market for loans under $350,000
and, according to these commenters,
without Agents, small businesses would
have no other way to gain access to
affordable credit from an SBA Lender.
SBA strongly disagrees with the
claims and underlying assumptions
made by these commenters. Applicants
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7627
are in no way obligated or expected to
engage a third party or pay for
assistance in order to obtain an SBAguaranteed loan. For those Applicants
who would like assistance in applying
for a loan, SBA provides several options
for free and low-cost assistance through
our resource partners, including Small
Business Development Centers,
Women’s Business Centers, Veteran’s
Business Outreach Centers, United
States Export Assistance Centers,
SCORE Business Mentors, Lender
Match, and local SBA District Offices,
which are accessible nationwide. Over
the course of five fiscal years (FY2013–
FY2017), only 2.78 percent of total
approved 7(a) loans reported utilizing
an Agent (other than the participating
Lender) to provide assistance to an
Applicant for a fee. Therefore, SBA
disagrees with the claim that small
businesses will not be able to obtain
SBA loans, or that SBA Lenders will not
be willing to make such SBA loans, if
the proposed changes to § 103.4 are
made final.
SBA received only 12 other comments
opposing the proposed change: 4 from
associations representing bankers or
small business owners; 3 from SBA
Lenders; 3 from Agents; 1 from a
Member of Congress; and 1 from an
individual. These comments aligned
with the sentiments of the autogenerated comments, also claiming that
the elimination of the limited exception
to the ‘‘two master’’ rule would lead to
a reduction in small SBA loans and
would negatively impact both the small
businesses seeking SBA loans and the
economic interests of the Agents that
serve them.
Five individuals commented that the
proposed changes to § 103.4 would
eliminate SBA-guaranteed lending to
small business poultry farmers. SBA
believes these comments were
misdirected and intended to be made
instead on the proposed affiliation
regulations and has included these
comments in that discussion later in the
Section-by-Section Analysis.
The remaining 55 commenters (47
bank and non-bank lenders, 5 Agents, 2
individuals, and 1 trade association
representing government-guaranteed
lenders) supported the proposal, with
some providing recommendations for
improvement. The recommendations for
improvement included: Allowing
specific and nominal fees to be charged
by an Agent to both the Lender and the
Applicant; requiring more transparent
disclosure of Agent involvement on
SBA forms; and defining the terms
‘‘Agent’’ and ‘‘Associate’’ more clearly.
After consideration of the comments
received on the proposed change to
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§ 103.4(g), SBA continues to believe that
there is, at a minimum, an appearance
of a conflict of interest when an Agent
represents both the Applicant and the
SBA Lender on the same loan
application, which SBA believes should
not be permitted under SBA regulations.
Therefore, SBA is adopting the proposal
to eliminate the limited exception to the
‘‘two master’’ prohibition. No Agent,
including an LSP, may provide services
to both the Applicant and the SBA
Lender and be compensated by both
parties in connection with the same
loan application.
One commenter, a trade association
representing hundreds of governmentguaranteed Lenders and other members
of the SBA lending community,
including Agents, recommended that
the regulation include a provision
clarifying that ‘‘agent’’ includes any
‘‘associates’’ of the Agent. This would
make clear that, for example, an Agent
cannot use a separate (but related) entity
to circumvent the two master
prohibition. SBA agrees that this
recommendation is consistent with the
intent of the proposed rule and is
modifying the regulatory text to add the
clarification. For additional clarity, SBA
is using the term ‘‘Affiliate’’ of an agent
(as defined in § 121.103), rather than
‘‘associate.’’ Further, SBA is adopting
the proposal to use the defined term
‘‘SBA Lender’’ in the revised regulation
to clarify that this rule applies to both
7(a) Lenders and CDCs.
In addition, based on the comments
received, SBA reviewed the definitions
in § 103.1 to determine if further
clarification of the defined terms is
necessary. The rules governing Agents
in part 103, including the definitions
within § 103.1, were last modified in
1996. Since that time, the number of
Agents, including LSPs, as well as their
involvement in SBA loan making has
increased dramatically. According to
Lenders’ reporting of fees charged to an
Applicant in connection with obtaining
a 7(a) loan, and other information
gathered by the Office of Credit Risk
Management (OCRM) during lender
oversight reviews, the number of loans
where an Agent was reported to have
been used has increased by an average
of 49 percent each year from FY2013 to
FY2017 (although the total reported
number of such loans is only 2.78
percent of total approved 7(a) loans for
such period). Further, advancements in
technology have resulted in Agents
charging fees for services to both
Applicants and SBA Lenders that could
not have been considered at the time
these rules were last revised. Based on
the foregoing, SBA agrees with the
commenters that the definitions in part
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103 need clarification as to whom SBA
considers to be an Agent.
Therefore, in this interim final rule,
SBA is clarifying the definitions of the
various categories of Agents, including
LSPs, Packagers, and Referral Agents for
purposes of the business loan
programs.2
Specifically, SBA is moving the
definitions of LSP, Packager, and
Referral Agent into § 103.1(a) (the
definition of ‘‘Agent’’), which will
clarify that these are different types of
Agents for purposes of the business loan
programs. In addition, in the definition
of the term ‘‘Agent’’ in § 103.1(a), SBA
is replacing the term ‘‘person’’ with
‘‘individual or entity,’’ consistent with
the longstanding understanding of that
term.
In the definition of LSP, SBA is
simplifying the language describing the
services that an LSP provides to a
Lender. An LSP ‘‘assists the Lender with
originating, disbursing, servicing,
liquidating, or litigating SBA loans.’’ To
further clarify that the LSP may only
assist the Lender (and not make
decisions on behalf of the Lender), SBA
is including in the definition a
statement that the Lender bears full
responsibility for all aspects of its SBA
loan operation, including, but not
limited to, approvals, closings,
disbursements, servicing actions, and
due diligence. This description of the
Lender’s responsibility over all aspects
of its SBA loan operation is
longstanding SBA policy that has been
included in SBA’s SOP 50 10. SBA is
incorporating this important concept
into the definition of an LSP to further
clarify the relationship between an LSP
and Lender.
SBA also is clarifying in the definition
that LSPs may only receive
compensation from the Lender and such
compensation may not be passed on to
the Applicant or paid out of SBAguaranteed loan proceeds. This
conforms the definition of LSP to the
proposed change to § 103.5(c) discussed
below. This also is consistent with
longstanding SBA policy regarding
LSPs.
Further, SBA is making a conforming
change to the definition of ‘‘Packager’’
to clarify that, going forward, the term
will apply only to those Agents who
provide packaging services to
Applicants. SBA’s SOP 50 10 defines
‘‘packaging services’’ as ‘‘assisting the
Applicant with completing one or more
applications, preparing a business plan,
2 The clarifications being made to the definitions
in § 103.1 do not affect the use of the terms
‘‘packager, agent, or representative’’ in § 124.4,
regarding the 8(a) Business Development Program.
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cash flow projections, and other
documents related to the application.’’
(SOP 50 10 5, Subpart B, Chapter 3,
Paragraph VI.) Accordingly, SBA is
clarifying that Packagers may only be
compensated by the Applicant (as
opposed to the Applicant or the Lender
as in the current regulation). Agents that
provide ‘‘loan packaging services’’ to
Lenders are considered to be LSPs, not
Packagers. This is because, based on
OCRM’s observations during lender
oversight reviews, when an Agent
provides ‘‘loan packaging services’’ for
the Lender, the services provided
typically include underwriting and
assisting the Lender with its analysis of
the application. Because this type of
Agent is assisting the Lender with
originating loans, it is considered to be
an LSP.
SBA also is modifying the definition
of ‘‘Referral Agent’’ by changing the
term to ‘‘Loan Broker’’ in order to more
closely align with the terminology used
in the industry. In addition, consistent
with the change to the two master
prohibition in § 103.4(g) discussed
above, SBA is using the term ‘‘SBA
Lender’’ to clarify that the defined term
‘‘Loan Broker’’ applies to both 7(a)
Lenders and CDCs. The revised
definition of Loan Broker will include a
statement that a Loan Broker may be
employed and compensated by either
the Applicant or the SBA Lender, but
not both. (The current definition of
‘‘Referral Agent’’ includes a similar
statement.)
As a result, an Agent may be both a
Loan Broker and a Packager for the
Applicant; however, under the two
master prohibition in § 103.4(g), an
Agent that is a Packager for the
Applicant may not also serve as a Loan
Broker for the SBA Lender. In addition,
SBA is clarifying in the definition that
compensation paid to a Loan Broker
from an SBA Lender cannot be passed
on to the Applicant or paid out of SBAguaranteed loan or debenture proceeds.
Again, this is consistent with
longstanding policy that an SBA Lender
may not pass on to the Applicant any
fees paid by an SBA Lender to an Agent
the SBA Lender has employed in
connection with an SBA-guaranteed
loan.
The above described clarifications to
the definitions related to Agents in
§ 103.1 also will assist Agents and SBA
Lenders in properly identifying Agents
and their services when completing
SBA Form 159 and will provide the
transparency requested by commenters.
During the course of lender oversight
reviews, OCRM has found arrangements
between Agents and Lenders where the
Agent and/or Lender assert that the
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Agent is not an LSP (and, therefore, not
subject to the requirements that an LSP
Agreement be reviewed by SBA and the
prohibition on sharing secondary
market premiums). In some instances,
although these Agents state they are
providing ‘‘packaging’’ and/or ‘‘referral
services’’ to the Applicant and being
paid out of the guaranteed loan
proceeds, the Agent actually is
operating under a written contract with
the Lender to package and refer
Applicants that meet the Lender’s
internal credit policies and is providing
a fully underwritten loan application to
the Lender. In other instances, the
‘‘packaging’’ services the Agent is
providing are actually underwriting
functions for the Lender (e.g., the Agent
is pulling credit reports/credit scores,
obtaining IRS tax transcripts, providing
financial ratios and analyses, analyzing
applicant eligibility). In still other
instances, the services are provided by
the Agent to the Lender through a
software platform and are called
‘‘technology services’’ or a ‘‘technology
license,’’ but the ‘‘technology’’ is
performing underwriting functions for
the Lender.
One Agent asserted in its comment
letter that it serves only as a referral and
packaging agent for Applicants and that
it does not perform any Lender
functions on behalf of the bank. This
Agent stated that it charges the
Applicant a packaging fee of 2 percent
of the loan amount and a referral fee of
2 percent of the loan amount. This
Agent also stated that it licenses a
software platform to banks to assist
them with evaluating and processing
SBA loans of $350,000 or less and that,
as a technology licensor, the Agent does
not perform any Lender functions on
behalf of the bank. SBA disagrees with
this characterization. Regardless of
whether the assistance is provided
through technology or otherwise, SBA
believes that an Agent who is assisting
a Lender with evaluating and processing
loans is assisting the Lender with
originating loans and, therefore, meets
the definition of an LSP.
SBA intends to provide additional
guidance on the circumstances under
which SBA considers an individual or
entity to be an Agent in SOP 50 10.
However, in response to comments
requesting additional clarity in this
rulemaking, SBA is providing the
following example of individuals or
entities that SBA considers to be Agents
and, more specifically, when SBA
considers an Agent to be working for an
SBA Lender (such Agents cannot also
provide services to the Applicant on the
same loan application):
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• An individual or entity engaged by
an SBA Lender to provide services that
include interaction with the Applicant,
either in-person or through the use of
technology, to request or obtain
eligibility and/or financial information
that will be provided to the SBA Lender
for the purposes of obtaining Federal
financial assistance. This includes
Agents who perform any prequalification review based on SBA’s
eligibility and credit criteria or the SBA
Lender’s internal policies prior to
submitting the Applicant’s information
to the SBA Lender. This also includes
Agents who provide to the SBA Lender
an underwritten application, whether
through the use of technology or
otherwise. In all such cases, the Agent
is providing services to the SBA Lender
and, therefore, may not also provide
services to the Applicant in connection
with the same loan.
Further, when determining whether
an Agent is considered to be an LSP for
the Lender (and therefore required to
enter into a written agreement with the
Lender, among other requirements), the
degree to which a Lender relies on a
Loan Broker to generate loan
originations may be considered. Again,
SBA will provide additional guidance in
SOP 50 10.
SBA also intends to include guidance
in SOP 50 10 as to when certain entities
will not be considered by the Agency to
be Agents, such as:
• Entities that license software or
software platforms to SBA Lenders
solely for the purpose of performing
administrative functions (not including
any underwriting functions), such as
generating SBA-required forms; and
• Entities that develop systems or
lending platforms to automate the SBA
Lender’s internal loan decision making
process for the SBA Lender’s use in
determining an Applicant’s eligibility or
creditworthiness.
Finally, in response to public
comments asking for clarity in the
definitions of ‘‘Agent’’ and
‘‘Associates,’’ SBA also is clarifying the
definition of ‘‘Associate’’ of a Lender or
CDC in § 120.10. The current definition
of an Associate of a Lender or CDC
includes, among others, ‘‘an agent
involved in the loan process.’’ In order
to provide more clarity for SBA Lenders
and their Associates, SBA is modifying
this definition to capitalize the term
‘‘Agent’’ and add a parenthetical to
clarify that ‘‘an Agent involved in the
loan process’’ means an Agent, as that
term is defined in 13 CFR 103.1. This
is consistent with SBA’s longstanding
interpretation of the definition of
Associate in § 120.10.
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Some Agents may need to make
adjustments to conform to the
definitions of the various types of
Agents, as clarified in this interim final
rule. For example, some Agents may
need to enter into LSP agreements with
the Lenders they provide services to,
and the agreement must be submitted to
SBA for review in accordance with
§ 103.5. (SBA’s SOP 50 10 provides
guidance related to the content of LSP
agreements and the process to submit
the agreement for SBA’s review.) While
Agents will not be permitted to provide
assistance to both the Applicant and the
SBA Lender in connection with the
same loan beginning on the effective
date of this interim final rule, SBA will
permit Agents and Lenders a period of
120 days from the date of publication of
this interim final rule in order to enter
into an LSP agreement that has been
reviewed by SBA. SBA will work with
Agents and Lenders to help them meet
that deadline.
Section 103.5 How does SBA regulate
an Agent’s fees and provision of service?
SBA proposed to revise paragraphs (b)
and (c) of this regulation. Section
103.5(b) contains the requirement for all
Agents to disclose to SBA the
compensation received for services
provided to an Applicant and requires
that fees charged must be considered
reasonable by SBA. In an effort to clarify
what SBA considers reasonable
compensation for services provided to
an Applicant by an Agent or Agents and
to prevent Applicants from being
overcharged by Agents, SBA proposed
to amend this section to limit the total
fees that one or more Agents may charge
an Applicant for assistance with
obtaining an SBA-guaranteed loan. SBA
proposed the following limitations on
the fees that an Agent (or Agents) may
charge an Applicant:
• For loans up to and including
$350,000: A maximum of up to 2.5
percent of the loan amount, or $7,000,
whichever is less;
• For loans $350,001–$1,000,000: A
maximum of up to 2 percent of the loan
amount, or $15,000, whichever is less;
and
• For loans over $1,000,000: A
maximum of up to 1.5 percent of the
loan amount, or $30,000, whichever is
less.
SBA received 2,441 comments on this
proposal. Similar to the comments
received on § 103.4, 2,343 of these
comments were comprised of 26 autogenerated templates (96 percent of the
comments received on this issue). Of
these comments, 2,242 were submitted
by individuals, 70 by Agents, 30 by SBA
Lenders, and 1 by a banking association.
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Each template varied slightly in
wording; however, all template
comments opposed the proposed
changes and expressed concern that
limiting the fees an Agent may charge to
an Applicant will restrict a small
business’s access to capital, specifically
for loans under $350,000.
SBA received 35 non-automated
comments that expressed a similar
concern with this proposal: 14 from
individuals; 7 from SBA Lenders; 6 from
associations representing commercial
lenders; 5 from Agents; 2 from Members
of Congress; and 1 from SBA’s Office of
Advocacy. These comments expressed
concern that the proposed fee limits are
set below market rates and, with these
caps in place, it would not be
economically feasible for Agents to
continue to assist small businesses with
loans under $350,000, which would in
turn force small businesses to predatory
lenders with no other way to gain access
to affordable credit from an SBA Lender.
These commenters requested that the
permitted fee structure remain at the
current limits, which as stated in the
Summary of Comments above has been
inaccurately interpreted by the coalition
that created a website to facilitate the
auto-generated comments, as well as by
many Agents who charge Applicants
multiple fees of up to 2 percent of the
loan amount for each fee in connection
with the same loan application.
The coalition website incorrectly
states that SBA currently caps fees an
Agent may charge an Applicant at 2
percent for ‘‘Referral’’ and 2 percent for
‘‘Packaging’’ services, for a total of 4
percent of the loan amount, for loans
between $50,000 and $1,000,000. SBA’s
current policy regarding fees for loan
packaging and other services (including
referral fees paid by the Applicant) is
that the fees must be reasonable and
customary and must be for services
actually performed; a standard or flat fee
is not acceptable; and for fees charged
based on a percentage of the loan
amount, the fee may not exceed 2
percent of the loan amount for loans
between $50,000 and $1,000,000. While
some have apparently interpreted SBA’s
current policy to permit multiple fees
exceeding, in the aggregate, the
maximum fee amount, SBA does not
permit an Applicant to be charged
multiple fees, with each fee permitted to
be up to the maximum of 2 percent of
the loan amount. If an Agent performs
multiple services for an Applicant in
connection with a loan application
between $50,000 and $1,000,000 (e.g.,
packaging and referral services), the
total amount the Agent can charge the
Applicant for all services may not
exceed 2 percent of the loan amount.
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Five individuals commented that the
proposed changes to § 103.5 would
eliminate SBA-guaranteed lending to
small business poultry farmers. SBA
believes these comments were
misdirected and intended to be made on
the proposed affiliation regulations and
has included the comments in that
discussion later in the Section-bySection Analysis.
The remaining 59 commenters (50
SBA Lenders, 4 Agents, 3 individuals,
and 2 trade associations) supported the
proposal with recommended
modifications. The main
recommendation presented to SBA was
to increase the maximum fee limit for
loans under $350,000.
Once again, SBA strongly disagrees
with the commenters’ claims that these
proposed fee limits will eliminate
access to capital for small businesses
seeking small SBA loans. SBA
developed the proposed fee limits based
on Lender-reported data and other
information gathered by OCRM during
lender oversight reviews in fiscal years
2013 through 2017. In that period,
288,398 7(a) loans were guaranteed. Of
the total 7(a) loans guaranteed, only
8,025 loans, or 2.78 percent of total 7(a)
loans guaranteed, reported using an
Agent (other than the participating
Lender) to provide assistance to the
Applicant in securing the loan.
Therefore, it is a very small portion of
the SBA loan portfolio that will be
affected by limits imposed on Agents.
When conducting lender oversight
activities, OCRM has found that many
SBA Lenders receive findings of noncompliance related to Agent and Lender
fees charged to an Applicant. Typically,
these findings involve the failure to
submit the SBA Form 159 to SBA’s
Fiscal Transfer Agent in a timely
manner, failure to complete SBA Form
159 correctly and/or completely,
charging the Applicant for services
provided to the SBA Lender by an LSP,
or charging the Applicant fees that are
not permitted (e.g., for underwriting of
the loan). Further, as noted above, many
public commenters, including Agents,
incorrectly interpret SBA’s current fee
rules. This demonstrates the lack of
clarity of the existing rules governing
permissible fees and the need for
simplification. SBA believes it can
address any confusion among SBA
Lenders and Agents by providing a
bright-line test for what is considered
‘‘reasonable’’ by the Agency. As
discussed more fully below in the
Regulatory Impact Analysis, providing
this bright-line test will reduce the
burden on SBA Lenders and Agents
with respect to the time it takes to
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review fees and determine whether they
are permissible and reasonable.
Based on the foregoing, the Agency
reaffirms its decision to set specific
limitations on the fees that an Agent or
Agents may charge an Applicant for
assistance with obtaining an SBAguaranteed loan. However, in an effort
to avoid unintended consequences for
loans of $350,000 or less, SBA is
increasing the maximum amount an
Agent or Agents may charge an
Applicant for those loans. In addition,
in order to prevent fees from loans over
$350,000 and up to $500,000 from
having a lower maximum permissible
fee than loans of $350,000 or less, SBA
also is revising the lower two ranges.
Thus, in this interim final rule, the
maximum amount an Agent or Agents
may charge an Applicant for assistance
with obtaining an SBA-guaranteed loan
is as follows:
• For loans up to and including
$500,000: A maximum of 3.5 percent of
the loan amount, or $10,000, whichever
is less;
• For loans $500,001–$1,000,000: A
maximum of 2 percent of the loan
amount, or $15,000, whichever is less;
and
• For loans over $1,000,000: A
maximum of 1.5 percent of the loan
amount, or $30,000, whichever is less.
According to SBA’s analysis of all
loans guaranteed by SBA during FY2013
through FY2017, only 1% of the loans
reported fees charged to an Applicant by
an Agent (other than the participating
Lender) that were in excess of the
revised maximums in this interim final
rule. It is important to note that all of
the fees charged by Agents that were in
excess of the revised limits in this
interim final rule also were in excess of
the current permitted fees, and were
therefore not in compliance with
current SBA policy.
SBA received several comments
suggesting SBA modify the
circumstances under which SBA may
require an Agent to refund any excess
fee amount to the Applicant. SBA
considered these comments and is
modifying the regulatory text to clearly
state that SBA may require an Agent to
refund any amount charged to an
Applicant in excess of what is permitted
by SBA in § 103.5. SBA will monitor
these fee levels and, if adjustments are
necessary, SBA may revise these
amounts from time to time through
rulemaking.
Because SBA’s primary concern is to
minimize the cost for a small business
Applicant to obtain an SBA-guaranteed
loan, these fee limitations will not apply
when an SBA Lender pays fees to an
Agent for services in connection with an
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SBA-guaranteed loan; however, SBA
Lenders are reminded that such fees
may not be passed on to the Applicant
either directly or indirectly and such
fees may not be paid out of SBAguaranteed loan or debenture proceeds.
Also, SBA reiterates that if an Agent
provides more than one service (e.g.,
packaging and referral services) to an
Applicant, only one fee is permitted for
all services performed by the Agent.
Further, if more than one Agent (e.g., a
Packager and a Loan Broker/Referral
Agent) provides assistance to the
Applicant in obtaining the loan, the
total amount of all fees that the
Applicant is required to pay must not
exceed the maximum allowable fee set
by SBA. (However, a fee charged to the
Applicant by the Lender in accordance
with § 120.221(a) will not be counted
toward the maximum allowable fee for
an Agent or Agents.) These maximum
limits apply regardless of whether the
Agent’s fee is based on a percentage of
the loan amount or on an hourly basis.
If an Agent or Agents charge an
Applicant fees in connection with
obtaining an SBA-guaranteed loan, the
Agent(s) must disclose the fees to SBA
by completing a Compensation
Agreement (SBA Form 159) in
accordance with the regulation at
§ 103.5 and must provide supporting
documentation as set forth in SOP 50
10.
SBA recognizes that some Agents may
need to revise their business practices or
documentation in order to comply with
the new limits on fees in § 103.5(b). In
order to minimize the impact of the
change on affected Agents, SBA is not
requiring compliance with revised
§ 103.5(b) until October 1, 2020. Until
that time, Agents are to continue to
comply with the requirements in
§ 103.5(b) as published in the 2019
edition of the Code of Federal
Regulations, and the guidance in SOP
50 10 5(K). However, considering the
benefits that the new fee limits offer,
SBA expects that many Agents will
want to comply with them before
October 1, 2020. They are permitted to
do so. SBA recommends that these
Agents document their decision to use
the new fee limits when reporting the
fees on SBA Form 159.
In § 103.5(c), SBA proposed to remove
the word ‘‘directly’’ from the last
sentence to clarify that compensation
paid by the SBA Lender to an LSP may
not be charged to the Applicant, either
directly or indirectly.
SBA received two comments on this
proposed change, both from SBA
Lenders. Both SBA Lenders expressed
concern over the removal of the word
‘‘directly’’ and believed that it could
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lead to SBA inaccurately determining
fees are indirectly being passed on to
the borrower either as part of the
interest rate or if, for example, the SBA
Lender charges the Applicant a
packaging fee.
SBA sets parameters on both the
maximum allowable interest rate and
permissible fees SBA Lenders may
charge an Applicant. As long as the SBA
Lender does not charge the Applicant
beyond what is permitted, SBA would
not consider that fees are being passed
on to the Applicant through these
means. SBA is adopting the
modification to § 103.5(c) as proposed.
4. Loans to Qualified Employee Trusts
Section 120.350
Policy
The regulations governing SBAguaranteed loans to qualified employee
trusts or ‘‘Employee Stock Ownership
Plans’’ (ESOPs) are set forth in
§§ 120.350 through 120.354. Because of
the complex nature of these
transactions, SBA proposed to amend
§ 120.350 to require such applications
be processed only on a non-delegated
basis.
SBA received 78 comments on this
proposal. One comment supported the
proposed change. The rest of the
comments expressed concern with the
amendment as proposed. The concerns
center around two positions. The first
position is that delegated Lenders
should be permitted to process ESOP
loans under their delegated authority, in
line with the spirit of the policy enacted
by Congress in Section 862 of the John
S. McCain National Defense
Authorization Act for Fiscal Year 2019
(Pub. L. 115–232) (NDAA FY19), which
charges SBA with promoting enhanced
employee ownership of small
businesses by maximizing their ability
to affordably access capital. This
position was expressed by 22
commenters, including 10 trade
associations, 8 individuals, 3 members
of Congress, and 1 SBA Lender.
The second position was whether
SBA’s decision to require ESOP loans to
be processed on a non-delegated basis
could be addressed in SBA’s SOP 50 10,
rather than be incorporated into the
regulation. This position was expressed
by 55 commenters, including 46 SBA
Lenders, 5 Agents, 2 trade associations,
and 2 individuals.
SBA considered the comments and
the statutory text of the NDAA FY19.
The legislation provides the
Administrator with the discretion to
permit loans to qualified employee
trusts and cooperatives to be processed
under a Lender’s delegated authority.
SBA maintains its position that these
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transactions are complex in nature and,
for the time being, should continue to be
processed on a non-delegated basis, as
current procedures direct. SBA agrees,
however, to eliminate the proposed
regulatory change requiring SBAguaranteed loans to a qualified
employee trust to be processed under
non-delegated procedures. SBA will
maintain the specific processing
instruction that ESOP loans must be
processed on a non-delegated basis in
SOP 50 10 and will monitor the activity
of ESOP loans during the initial
implementation period of the revised
statutory requirements in order to
ensure compliance with Loan Program
Requirements for such loans.
SBA is, however, making a technical
amendment to both § 120.350, Policy,
and § 120.352, Use of Proceeds, to
incorporate the statutory change made
in the NDAA that permits SBA to
guarantee a loan to the small business
concern (rather than the qualified
employee trust), if the proceeds from the
loan are used only to make a loan to a
qualified employee trust that results in
the qualified employee trust owning at
least 51 percent of the small business
concern. SBA is making this technical
amendment in order to ensure that the
regulations are not inconsistent with the
statute and to provide clarity to SBA
Lenders and SBA employees with
respect to guaranteed loans involving
ESOPs. Additional guidance governing
these loans will be provided in SOP 50
10.
5. A Lender’s Responsibility When
Purchasing 7(a) Loans From the FDIC as
Receiver, Conservator, or Other
Liquidator of a Failed Financial
Institution
Section 120.432 Under what
circumstances does this subpart permit
sales of, or sales of participating
interests in, 7(a) loans?
SBA proposed modifying § 120.432(a)
to implement its longstanding policy of
holding Assuming Institutions and
investors responsible for the contingent
liabilities (including repairs and
denials) associated with 7(a) loans
originated by failed insured depository
institutions, whether the 7(a) loans are
purchased by a Lender through a
Federal Deposit Insurance Corporation
(FDIC) loan sale or transferred to an
Assuming Institution through a whole
bank transfer.
SBA received three comments on this
proposed change. One SBA Lender
commented in support of the
modification. The other two
commenters, one banking association
representative and one SBA Lender,
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objected to the proposed modification,
stating that as drafted the proposed
change may preclude the Agency from
entering into agreements with the FDIC
to affirm the validity of the guaranties
at the time of such loan sale or whole
bank transfer. According to both
commenters, the proposed change
would create a perception in the minds
of qualified purchasers that a large
number of guaranties will be denied,
thus creating a disincentive for qualified
SBA Lenders to enter into such
transactions.
SBA proposed this modification to
ensure consistent treatment of all
portfolio loan transfers whether through
voluntary bank mergers or asset sales, or
through FDIC-led portfolio transfers
following the failure of a Lender. SBA
is modifying the regulatory language to
include a statement that clarifies the
applicability of the paragraph and the
ability for the Agency to agree otherwise
in writing (i.e., to affirm the validity of
the guaranties). SBA also is modifying
the regulatory language to remove the
specific reference to the FDIC and make
it applicable to all 7(a) loans purchased
from any Federal or state banking
regulator, any receiver, or any
conservator.
6. Microloan Program
Section 120.707 What conditions
apply to loans by Intermediaries to
Microloan borrowers?
SBA proposed to revise the regulation
at § 120.707(b) to increase the maximum
maturity of a loan from an Intermediary
to a Microloan borrower from 6 years to
7 years. SBA received two comments
supporting this change. SBA is
amending this section as proposed.
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Section 120.712 How does an
Intermediary get a grant to assist
Microloan borrowers?
In § 120.712(b), SBA proposed to
incorporate a recent statutory change to
the percentage of grant funds that may
be used by the Intermediary for
marketing, managerial, and technical
assistance to prospective Microloan
borrowers. In § 120.712(d), SBA
proposed to incorporate a recent
statutory change to the percentage of
grant funds the Intermediary may use to
contract with third parties to provide
technical assistance to Microloan
borrowers. SBA received one comment
in support of each respective change.
SBA is amending this section as
proposed.
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7. Technical Corrections and
Conforming Amendments
Section 120.130 Restrictions on Uses
of Proceeds
SBA proposed a conforming
amendment to § 120.130 to include a
reference to the proposed § 120.444
(Eligible uses of SBA Express and
Export Express loan proceeds) to clarify
that revolving lines of credit are an
eligible use of 7(a) loan proceeds under
SBA Express and Export Express. SBA
did not receive any comments on this
proposal. SBA is adopting the
amendment as proposed.
Section 120.222 Prohibition on
Sharing Premiums for Secondary Market
Sales
SBA proposed a technical correction
to § 120.222 to remove an extra word
(‘‘in’’) that was inserted in error. SBA
did not receive any comments on this
proposal. SBA is adopting the rule as
proposed.
Section 120.344 Unique Requirements
of the EWCP
SBA proposed a conforming
amendment to § 120.344(b) to ensure
that the extraordinary servicing fees
charged on EWCP loans, as permitted by
the revised § 120.221(b), are reasonable
and prudent.
SBA received 53 comments on this
section, all in support of the proposed
change. SBA is adopting the amendment
as proposed.
Section 120.440 How does a Lender
obtain delegated authority?
SBA proposed several technical
corrections and a conforming
amendment to the delegated authority
criteria regulation at § 120.440(c) to
clarify that a Lender’s authority to
participate in SBA Express may be
renewed for a maximum term of 3 years.
SBA received 54 comments on this
proposed change, 1 of which opposed
the proposed change and recommended
that the SBA Express renewal period
remain a 2-year renewal period to
remain consistent with other delegated
authority renewal periods and to ensure
efficient SBA oversight over delegated
authorities. While the other 53
commenters expressed a similar concern
that an increase in renewal period may
conflict with the maximum 2-year
renewal period allowed for general
delegated authority, they supported the
proposal with modification. In order to
address this concern, these 53
commenters requested that SBA provide
additional information on how
delegated authority renewals will be
processed when a Lender holds both
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SBA Express authority and Preferred
Lenders Program (PLP) authority.
SBA considered the comments
received and is adopting the
amendment as proposed. As a point of
clarification, the amendment to this
regulation will permit SBA to grant a
longer term for renewals of SBA Express
authority, not to exceed three (3) years.
SBA may continue to grant shorter
renewals and SBA’s OCRM will
coordinate with those Lenders
concerned with maintaining alignment
of their SBA Express renewal periods
with any other delegated authorities
they may hold. SBA will provide
additional information on how
delegated authority renewals will be
processed when a Lender holds SBA
Express authority and other delegated
authority (e.g., PLP, Export Express) in
SOP 50 10.
Section 120.840
Program (ALP)
Accredited Lenders
SBA proposed a technical correction
to § 120.840 to replace the reference in
this section to the Director, Office of
Financial Assistance with ‘‘appropriate
SBA official in accordance with
Delegations of Authority.’’
SBA received 68 comments on this
proposed change. All of these comments
recommended that SBA also revise the
ALP application requirements outlined
in this section under § 120.840(b) to
reflect the modernized application
submission process, which will allow
CDCs to submit ALP applications
electronically into the Corporate
Governance Repository, rather than
apply to the Lead SBA Office.
SBA appreciates the recommendation
and agrees to make both the correction
proposed by SBA and the revision
recommended through public comment
in order to reflect SBA’s current ALP
application process.
B. Affiliation Principles for the Business
Loan, Business Disaster Loan, and
Surety Bond Guarantee Programs
Section 121.301 What size standards
and affiliation principles are applicable
to financial assistance programs?
The proposed § 121.301(f) expanded
the ‘‘identity of interest’’ regulation to
include affiliation between individuals
or firms that have identical or
substantially identical business or
economic interests (individuals or firms
with common investments, or firms that
are economically dependent through
contractual or other relationships). This
was how the identity-of-interest
affiliation rule operated prior to the
2016 rule change that limited such
affiliation to ‘‘close relatives.’’ (81 FR
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41423, June 27, 2016) SBA’s proposal
was intended to return SBA’s identityof-interest affiliation rule closer to the
pre-2016 rule. SBA received 1,137
comments on this proposed identity-ofinterest regulation. Of those, 52
comments supported the rule as
proposed, 4 supported the rule with
some modifications, and the remainder
opposed the rule as written. Most of the
comments opposed either the rule
change in general or the specific
economic-dependence ground of
affiliation in § 121.301(f)(4)(iv).
Close relatives. Businesses that are
owned by family members may be
affiliated under SBA’s longstanding
close-relatives rule. In 2016, SBA
clarified that the rule applies where
family members have overlapping
business interests and are operating in
the same geographic area. In the
proposed rule, SBA retained the
identity-of-interest ground for affiliation
based on close relatives, but moved it to
paragraph (f)(4)(ii). SBA is adopting
paragraph (f)(4)(ii) of the rule as
proposed.
Common Investments. The proposed
rule provided that SBA would find
affiliation based on common
investments under the identity-ofinterest rule when multiple entities are
owned by the same individuals or firms,
and the entities owned by such
investors conduct business with each
other or share resources. In order to find
an identity of interest between
investors, the common investments
would need to be substantial, either in
number of investments or total value.
Under the proposed rule, SBA would
consider businesses to be affiliated
based on common investments only if
they conduct business with each other,
or share resources, equipment, locations
or employees; or provide loan
guaranties or other financial or
managerial support to each other. One
comment criticized the proposed
common investments rule as being
better addressed through SBA’s program
eligibility rules and another comment
criticized the proposal as vague.
In response to comments, SBA is
limiting the application of affiliation
under common investments to firms
that operate in the same or related
industry. Thus, firms that operate in
different, unrelated industries would
not be subject to common-investment
affiliation.
Additionally, in this commoninvestments ground of affiliation and
several others that follow, SBA adopts a
reasonableness standard for reviewing
affiliation determinations made by SBA
Lenders. SBA acknowledges that some
SBA Lenders may have limited
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experience in applying some of SBA’s
more complicated affiliation standards.
Thus, in instances in which SBA
reviews an SBA Lender’s determination
that there is no affiliation under the
common investments rule, SBA will not
overturn the SBA Lender’s
determination if the SBA Lender’s
determination was reasonable at the
time that the SBA Lender made it, given
the information that the SBA Lender
had available. For example, if the SBA
Lender reasonably determined that two
firms with common investors with
substantial ownership interests were not
affiliated because, even though the firms
shared employees and locations, the
firms were in what the SBA Lender
deemed to be unrelated industries, SBA
will accept that determination even if
SBA would have found the industries to
be related if presented with the same
facts. SBA’s reasonableness standard
takes into account that the SBA Lender’s
determination might not be the same as
SBA’s, but still would be consistent
with the regulation as long as it was
reasonable. SBA believes using this
standard will provide SBA Lenders with
the ability to make a prudent lending
decision without concern that their
decision, if reasonable, will be secondguessed. SBA Lenders are reminded that
they must document their analysis and
determination in each loan file.
Economic Dependence. The proposed
rule provided that, if a small business
Applicant derived more than 85 percent
of its revenue from another business
over the previous three fiscal years, SBA
would find that the small business
Applicant is economically dependent
on the other business and, therefore,
that the two businesses are affiliated.
SBA proposed that the rule would
include an exception for a firm that has
been in business for a short amount of
time and has a plan to lessen its
dependence on the other concern. In
response to comments, SBA is replacing
the exception for a firm that has been in
business for a short amount of time with
two different exceptions in the interim
final rule.
The comments raised the issue that
economic-dependence affiliation would
apply where a seller limited its sales to
one buyer because of circumstances
unrelated to control. Such
circumstances might include situations
where, though the terms of its
relationship with its single buyer do not
restrict selling to other customers, the
seller does not have sufficient inventory
to do so. For example, the buyer might
have several locations or lines of
business, and the seller could be selling
to multiple locations or business lines
under the buyer’s control but is not
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7633
restricted from selling to other
customers. As another example, the
seller could be selling exclusively to the
Federal Government either through a
prime contract or subcontract. Under
SBA affiliation principles, affiliation
applies only where there is control or
the power to control. Therefore, SBA is
creating an exception to the economicdependence rule for contracts that do
not restrict the concern in question from
selling the same type of products or
services to another purchaser. This
exception avoids applying the rule to
situations where the seller’s product
only has one buyer or where the seller
chooses to sell only to one buyer. This
exception replaces the exception in the
proposed rule for newly created
businesses that have a plan to lessen
their dependence on the other concern,
which SBA concluded would be too
easily circumvented and was not
practical to apply in the loan programs.
Many comments expressed concern
over how economic-dependence
affiliation would apply to an agreement
between a poultry farmer and a large
poultry producer (integrator) and
whether most poultry farmers would be
considered ineligible for SBA financial
assistance under the provisions of the
proposed rule. SBA’s proposal was not
intended to eliminate lending to poultry
and other farmers in the Business Loan
Programs. The Small Business Act
authorizes SBA to make non-disaster
business loans to farming and
agricultural related industries and SBA
understands the need for SBA financial
assistance to small businesses in those
industries. SBA also recognizes,
however, that integrator agreements
generally restrict the poultry farmer
from raising another producer’s chicks
on the same farm and therefore would
not qualify for the first exception
described above. Accordingly, SBA is
creating a second exception to address
this circumstance and others where the
first exception does not apply.
Under this second exception, an SBA
Lender or other party may request SBA
to review a contractual relationship
where one firm derived more than 85
percent of its receipts over the previous
three fiscal years from the other firm,
and the contract restricts the seller from
selling the same type of products or
services to another purchaser. For
businesses that have been in operation
for less than 1 year, the 85 percent
threshold will be applied based on the
Applicant’s business plan and projected
revenues. For businesses that have been
in operation for at least 1 year, but less
than 3 years, the threshold will be
applied based on the receipts for the
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period the business has been in
operation.
In assessing whether economicdependence affiliation exists, SBA will
review the contract to determine
whether, notwithstanding the
concentration of sales and the
restriction, the buyer does not have
control or the power to control the
seller. In determining control under
these circumstances, SBA will consider
the volume of sales that the contract
covers, the contract’s termination
provisions, the risk that the concern in
question bears under the contract, the
concern’s right to profit from its efforts,
the rationale for restrictions that the
contract places on the small business,
and other factors. SBA is making
available for public comment on its
website guidance on the types of
provisions that establish control or do
not establish control for purposes of this
provision, and the process for
requesting SBA review of a contract.
The guidance can be found at https://
www.sba.gov/offices/headquarters/oca/
spotlight. If SBA finds no control, SBA
will determine that there is no
affiliation between the two concerns
under the economic-dependence rule.
Even where SBA finds no economicdependence affiliation, SBA Lenders are
reminded that they still must ensure
that the applicant business meets all
other eligibility criteria and they must
make a credit determination. SBA will
accept comments on the guidance
during the 60-day comment period for
this interim final rule.
Newly Organized Concerns. In order
to create greater uniformity among
SBA’s various affiliation rules, SBA
proposed to add to § 121.301(f) a newly
organized concern rule, similar to the
one which had applied to the Business
Loan Programs prior to the 2016 rule
change. Under the proposed newly
organized concern rule, a newly
organized spin-off company may be
found affiliated with the original
company where all of the following four
conditions are met: (1) Former or
current officers, directors, principal
stockholders, managing members,
general partners, or key employees of
one concern organize a new concern; (2)
the new concern is in the same or
related industry or field of operation; (3)
the individuals who organized the new
concern serve as the new concern’s
officers, directors, principal
stockholders, managing members,
general partners, or key employees; and
(4) the original concern is furnishing or
will furnish the new concern with
contracts, financial or technical
assistance, indemnification on bid or
performance bonds, and/or other
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facilities, whether for a fee or otherwise.
The proposed rule defined a key
employee to be an employee who,
because of his or her position in the
concern, has a critical influence in or
substantive control over the operations
or management of the concern. The
proposed rule further defined a ‘‘newly
organized’’ concern to be one that has
been actively operating continuously for
two years or less. The proposed newly
organized concern basis of affiliation
would be a rebuttable presumption that
may be rebutted if there is a clear line
of fracture between the new concern
and the other firm.
SBA received 130 comments on this
proposed regulation. Three commenters,
consisting of two SBA Lenders and one
non-profit organization, were supportive
of the proposed rule. The remaining 127
commenters expressed concern with the
proposed regulation. Commenters
observed that the newly organized
concern rule included several undefined
terms and could hamper a new firm’s
ability to recruit employees. SBA agrees
that it can provide greater clarity with
respect to the undefined terms and can
simplify the rule to make it easier to
apply and to ensure that recruitment or
hiring efforts are not adversely affected
by the rule. In the interim final rule, in
response to the comments, SBA is
replacing the term ‘‘principal
stockholders’’ with the term ‘‘owners of
a 20 percent interest or greater’’ (in
conditions number (1) and (3) above).
SBA also is replacing the term ‘‘key
employees’’ with ‘‘persons hired to
manage day-to-day operations’’ in the
list of affected individuals in the
original concern (in condition number
(1) above), and is deleting the term ‘‘key
employee’’ from the list of affected
individuals in the new concern (in
condition number (3) above). Therefore,
a new firm can hire anyone, including
a former owner or key employee of
another firm, as an employee without
the employee causing affiliation under
the newly organized concern rule. Due
to these changes, SBA is eliminating the
definition of ‘‘key employee’’ from the
regulatory text, as it is no longer
necessary.
SBA also is revising the interim final
rule with respect to the benefits that
flow from the original concern to the
new concern (in condition number (4)
above). Rather than applying the newly
organized concern rule based on
whether the original concern is
furnishing or will furnish the new
concern with contracts, financial or
technical assistance, indemnification on
bid or performance bonds, and/or other
facilities, whether for a fee or otherwise,
SBA is revising the regulatory text so
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that the newly organized concern rule
only applies when direct monetary
benefits flow from the new concern to
the original concern. It is not SBA’s
intent to apply the rule where the
original concern does not receive direct
monetary benefits from the new
concern. Examples of direct monetary
benefits would include profit or revenue
sharing agreements or royalty payments.
Further, SBA will not consider the
referral of business without
compensation to constitute ‘‘direct
monetary benefits.’’ In addition, in the
definition of a new concern, SBA is
deleting the term ‘‘continuously,’’
because that term might cause confusion
for businesses that operate on a seasonal
or intermittent basis.
Finally, in the newly organized
concern ground of affiliation, SBA
adopts a reasonableness standard for
reviewing affiliation determinations
made by SBA Lenders. In instances in
which SBA reviews an SBA Lender’s
initial determination that there is no
affiliation under the newly organized
concern rule, SBA will not overturn the
SBA Lender’s determination if it was
reasonable at the time it was made,
given the information that the SBA
Lender had available. For example, if
the SBA Lender reasonably determined
that the new firm’s owners were
corporate officers of another firm, but
that the benefits flowing from the new
firm to the other firm are not direct
monetary benefits, SBA will accept the
determination even if SBA would have
found the benefits to be direct monetary
benefits if presented with the same
facts. SBA’s reasonableness standard
takes into account that the SBA Lender’s
determination might not be the same as
SBA’s, but still would be consistent
with the regulation as long as it was
reasonable. SBA believes using this
standard will provide SBA Lenders with
the ability to make a prudent lending
decision without concern that their
decision, if reasonable, will be secondguessed. SBA Lenders are reminded that
they must document their analysis and
determination in each loan file.
Totality of the Circumstances. The
proposed rule added a new paragraph
(f)(6) to § 121.301 to explain that, when
making affiliation determinations, SBA
would consider the totality of the
circumstances, and may find affiliation
even though no single factor is sufficient
to constitute affiliation. The totality of
the circumstances criterion for
determining affiliation was removed
from the regulations in 2016. At that
time, SBA stated that, generally,
examples of when this criterion was
used involved negative control or
control through management
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agreements. Thus, in 2016, SBA
provided additional specific guidance in
§ 121.301(f)(1) and (3) to address
negative control and control through
management agreements. However, SBA
now believes that there are other
examples of when affiliation may be
present but not covered by the specific
affiliation rules and, therefore, proposed
to reinstate the totality of the
circumstances criterion. In proposing to
reinsert the criterion in the regulations,
SBA provided two examples of where
the totality of the circumstances test
would result in a finding of affiliation.
SBA received 146 comments on this
proposed change. Four commenters,
comprised of three individuals and one
non-profit organization, expressed
support of the proposal. These
comments expressed the same opinion,
that it is critical for SBA to consider the
totality of the circumstances in
determining affiliation, specifically with
respect to contracts and agreements
between poultry farmers/growers and
poultry integrators.
The remaining 142 comments were
submitted by 117 SBA Lenders, 10
individuals, 8 Agents, and 7 trade
associations. These comments expressed
concern that the totality of the
circumstances test could result in
arbitrary and unpredictable application
of SBA’s affiliation rules. SBA believes
that this overstates the potential reach of
the totality of the circumstances rule.
The rule is merely an application of the
general principle that affiliation is
caused by control or the power to
control of one firm by another, or
common control of multiple firms.
There may be instances of control that
are not covered by the specific grounds
of affiliation, and the totality of the
circumstances test merely states that
those instances are not exempt from
affiliation analysis. For example, the
relationship between a recording artist
and a record company might cause
affiliation if the record company has
exclusive rights over the recording artist
and closely controls the activities of the
recording artist, but none of the specific
grounds of affiliation would reach that
relationship necessarily. As another
example, a firm’s operating agreement
might require that the firm obtain
approval from a third party prior to
making certain decisions that typically
are made independently by firms in that
industry in the ordinary course of
business. This approval requirement
might grant the third party control over
the firm and could result in affiliation
under the totality of the circumstances,
even though none of the specific
grounds of affiliation might apply. The
totality of the circumstances test should
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not reach routine and typical business
relationships, however.
In order to address concerns raised by
the commenters, SBA is modifying the
regulatory language to provide that,
when applying the totality of the
circumstances test, SBA may consider
all connections between the Applicant
business and a possible affiliate and, if
no single factor is sufficient to
constitute affiliation, SBA may
determine on a case-by-case basis that
affiliation exists when there is ‘‘clear
and convincing evidence’’ based on the
totality of the circumstances. Further, as
with the common investments rule and
the newly organized concern rule, SBA
is adopting a reasonableness standard
for reviewing affiliation determinations
made by SBA Lenders under the totality
of the circumstances rule. For the
totality of the circumstances rule, SBA
will not overturn the SBA Lender’s
determination if it was reasonable at the
time it was made, given the information
that the SBA Lender had available. For
example, if the SBA Lender reasonably
determined that a firm whose day-today operations required the approval of
a minority owner in some situations was
not affiliated with the minority owner,
SBA will accept that determination even
if SBA would have found the firm and
the minority owner to be affiliated in
the first instance. SBA Lenders are
reminded that they must document their
analysis and determination in each loan
file.
121.301(f)(7) Affiliation Based on
Franchise Agreements
SBA proposed to revise this paragraph
to clarify that the term ‘‘franchise’’ has
the meaning given by the Federal Trade
Commission (FTC) in its definition of
‘‘franchise’’ as set forth in 16 CFR part
436. SBA proposed to cross-reference
the FTC definition of ‘‘franchise’’ in the
regulation to clarify that the regulation
applies to all agreements or
relationships, whatever they may be
called, that meet the FTC definition of
a franchise. All such agreements would
be referred to in the regulation as
‘‘franchise agreements’’ and the parties
to such agreements will be referred to as
‘‘franchisor’’ and ‘‘franchisee.’’ Further,
SBA proposed to add to this regulation
a statement that SBA will maintain a
publicly available centralized list of
franchise and other similar agreements
that are eligible for SBA financial
assistance, consistent with SBA’s
current policy and procedure.
SBA received 125 comments on this
proposed change, all of which
supported the proposal. Two of the 125
commenters also recommended that
SBA expand paragraph (7) to define the
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7635
relationship between poultry or swine
farmers and their integrators. In
addition, these 2 commenters suggested
that, in order to expedite the approval
process, SBA should maintain a
centralized list of integrator agreements
in the same manner as franchise
agreements. SBA appreciates the
recommendation, but is not going to
expand the principle of affiliation based
on franchise or license agreements to
include integrator agreements or
maintain a separate centralized list of
agreements between poultry or swine
farmers and their integrators at this
time. SBA has discussed how the
relationships between poultry or swine
farmers and their integrators will be
reviewed in the section above on
economic-dependence affiliation. SBA
is adopting paragraph (7) as proposed.
Section 121.302 When does SBA
determine the size status of an
applicant?
SBA proposed to incorporate the SBA
Express and Export Express programs
into this regulation to clarify that, with
respect to applications for financial
assistance under these programs, size is
determined as of the date of approval of
the loan by the SBA Express or Export
Express Lender. SBA did not receive
any comments on this proposal. SBA is
adopting the regulation as proposed.
C. Agency Responses to the Office of
Advocacy’s Comments on the Proposed
Rule
1. Proposed Fee Caps
SBA’s Office of Advocacy expressed
concern that, although the proposed fee
caps will reduce the fees that small
businesses pay to obtain a loan, some
members of the public believe that the
proposed caps will hurt small banks and
possibly eliminate the incentives to
facilitate small SBA loans that small
businesses need. Advocacy also
expressed concern that SBA is
attempting to address a problem that is
being created by a few bad actors, and
that in doing so SBA may discourage the
facilitation and use of SBA’s products.
SBA does not agree that the proposed
fee limits will hurt small SBA Lenders,
as the Agency believes the changes in
these rules will simplify the rules
regarding fees and will reduce the
burden on all SBA Lenders, including
small SBA Lenders. (For additional
discussion of the estimated reduction in
the burden on SBA Lenders, see the
discussion in the Regulatory Impact
Analysis and Regulatory Flexibility Act
sections below.) Further, as Advocacy
acknowledges in its comment letter, in
approximately 96 percent of the loans
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guaranteed during FY2013–FY2017,
Applicants were charged fees (by
Lenders and Agents) that were less than
the maximum fees in the proposed rule.
As discussed earlier in the Section-bySection Analysis, in consideration of the
comments received and in order to
ensure there are no unintended
consequences for smaller loans, SBA
has increased the maximum fees that
both Lenders and Agents will be
permitted to charge Applicants in
connection with smaller loans. When
the revised fee limits for smaller loans
in the interim final rule are taken into
consideration, the percentage of loans
guaranteed in FY2013–FY2017 with fees
less than the permitted maximums
increases to nearly 99%.
In addition, recognizing that some
SBA Lenders and Agents, including
LSPs, may need to revise their practices,
policies, procedures, or documentation
to comply with revised § 103.5(b) or
§ 120.221(a), SBA is not requiring
compliance with those provisions until
October 1, 2020. As discussed more
fully in the Regulatory Flexibility Act
section of this interim final rule, SBA
believes the extended period for SBA
Lenders and Agents to comply with
those sections of the interim final rule
will help to minimize any potential
adverse effects on small SBA Lenders
and Agents. Further, with the
modifications to the maximum
permitted fees made in this interim final
rule and the extended time period for
compliance, the Agency believes it has
addressed any concern that small SBA
Lenders will be unable to find Agents to
assist them with facilitating SBAguaranteed loans. Finally, as noted
earlier in the Section-by-Section
Analysis, SBA provides several options
for free or low-cost assistance through
its resource partners, which are
accessible nationwide.
2. The Personal Resources Test
The Office of Advocacy expressed
concern that the proposed reinstatement
of a personal resources test will limit
the resources available to a small
business owner in the event of an
emergency. Additionally, Advocacy
expressed concern that the proposed
personal resources test would eliminate
potential borrowers and be difficult to
include in the current underwriting
practices of small financial institutions.
Advocacy encouraged SBA to consider
a contribution level that will allow
small businesses to have a buffer in the
event of unforeseen circumstances.
After considering the comments
received on this change, SBA has
reevaluated the personal liquidity
threshold for smaller loans and agrees to
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modify the limits to ensure that
Applicants applying for smaller loans
are not adversely affected.
In this interim final rule, SBA has
increased the threshold for loans of
$350,000 or less to allow the owners of
the small business Applicant to retain
more personal liquidity. SBA also is
modifying the regulatory text to provide
that SBA will reexamine the thresholds
periodically and, if adjustments are
necessary, SBA may modify the
thresholds through rulemaking from
time to time based on nationallyrecognized economic indicators. Also,
the regulation will provide SBA with
the ability to permit exceptions to the
required injection of an owner’s excess
liquid assets in extraordinary
circumstances, such as when the excess
funds are needed for immediate medical
expenses of a family member. With
respect to Advocacy’s concern that
small financial institutions will have
difficulty implementing this change, as
discussed in the Regulatory Impact
Analysis below, SBA believes that
providing a bright-line test will assist
SBA Lenders in analyzing the resources
of individuals and entities that own 20
percent or more of the Applicant
business in order to determine if any of
the owners have liquid assets available
that can provide some or all of the
desired financing. This bright-line test
will reduce the burden on SBA Lenders
when making this critical eligibility
determination. In addition, SBA notes
that a personal resources test was in
SBA’s regulations until 2014, so SBA
Lenders have experience applying such
a test and should not have difficulty
implementing this change.
3. Affiliation
The Office of Advocacy expressed
concern that the affiliation sections of
the proposed rule may be vague and
confusing to small entities. In addition,
Advocacy expressed concern that the
proposed changes may be problematic
in small rural communities that rely on
contracts with large companies/
integrators to buy agricultural goods.
Advocacy encouraged SBA to clarify the
proposed changes.
As discussed more fully in section
III.B. above, in this interim final rule,
SBA has clarified several of the
proposed changes, including the
common-investments affiliation rule,
the economic-dependence affiliation
rule, the newly organized concern
affiliation rule, and the totality of the
circumstances affiliation rule.
Specifically, in order to ensure there
would be no adverse impact on rural
areas or small agricultural businesses,
SBA added a second exception to the
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economic-dependence affiliation rule
for businesses operating under contracts
that restrict the seller from selling the
same type of products or services to
another purchaser. Under this second
exception, an SBA Lender or other party
may request SBA to review the
contractual relationship between the
large company/integrator and the small
business Applicant to determine
whether affiliation exists.
4. Additional Outreach
The Office of Advocacy encouraged
SBA to perform additional business
outreach with the industries that may be
impacted by the proposed rule to
determine the best way to implement
changes that will achieve SBA’s goals
without being unduly burdensome. As
discussed more fully in the Regulatory
Impact Analysis and Regulatory
Flexibility Analysis below, SBA
believes it has received sufficient input
and feedback from program participants
and other stakeholders to implement the
proposed changes, with the
modifications identified in this Sectionby-Section Analysis, in a manner that
will reduce the burden on those
participants and stakeholders and
provide meaningful benefits to small
business Applicants. Nevertheless, SBA
is publishing this rule interim final
rather than proceeding to a final rule in
order to provide the public with an
additional opportunity to comment. See
Justification for Interim Final Rule
below. SBA will consider comments
submitted during the 60-day comment
period and address them in a Final
Rule.
D. Severability
The provisions of this interim final
rule are separate and severable from one
another. If any provision is stayed or is
held to be invalid or unenforceable by
its terms, or as applied to any person or
circumstance, it is SBA’s intention that
the remaining provisions of the interim
final rule will remain in effect.
Justification for Interim Final Rule
SBA finds that good cause exists to
publish this rule as an interim final rule.
As discussed above, SBA previously
published a Notice of Proposed
Rulemaking (NPRM) addressing all of
the topics and issues covered by this
interim final rule. SBA has already
allowed for public comment (including
an extension of the original comment
period), reviewed the comments, and
made changes accordingly. SBA has
determined that the changes made in
this rule are a logical outgrowth of the
proposed rule and the comments
received on the proposed rule.
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Procedurally, SBA could therefore issue
a final rule; however, SBA is publishing
this rule interim final rather than
proceeding to a final rule in order to
provide the public with an additional
opportunity to comment. Although not
legally required, the additional
opportunity to comment on the interim
final rule is desirable given the level of
interest in the proposed changes and the
recommendation by the Office of
Advocacy for additional outreach to
affected parties.
SBA invites public comment on this
interim final rule and will consider
amendments to the rule based on
comments submitted during the 60-day
comment period. SBA will address any
comments through the publication of a
Final Rule.
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
As referenced above, the Office of
Management and Budget (OMB) has
determined that this interim final rule is
a ‘‘significant’’ rulemaking for the
purposes of Executive Order 12866.
Accordingly, the next section contains
SBA’s Regulatory Impact Analysis.
However, this is not a major rule under
the Congressional Review Act, 5 U.S.C.
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Regulatory Impact Analysis
1. Is there a need for this regulatory
action?
The primary objective of this interim
final rule is to incorporate into the
regulations governing the 7(a) Loan
Program the requirements specifically
applicable to the SBA Express and
Export Express Loan Programs in order
to provide additional clarity for SBA
Express and Export Express Lenders.
Congress has authorized SBA to permit
qualified lenders to make SBA Express
and Export Express loans using, to the
maximum extent practicable, their own
analyses, procedures, and
documentation. It is necessary to
provide clear and succinct regulatory
guidance for Lenders to encourage
participation in extending these smaller
dollar loans, and to enable these
Lenders to extend credit with
confidence in their ability to rely on
payment by SBA of the guaranty, if
necessary.
The Small Business 7(a) Lending
Oversight Reform Act of 2018 (Pub. L.
115–189) was signed into law on June
21, 2018. As part of this legislation,
Congress has authorized the Agency to
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direct the methods by which Lenders
determine whether a borrower is able to
obtain credit elsewhere. SBA is
implementing that legislation in a
separate rulemaking, but in this interim
final rule SBA is reinstating a personal
resources test in an effort to provide
clear direction to SBA Lenders for
analyzing whether a borrower has credit
available elsewhere on reasonable terms
from non-Federal, non-state, non-local,
or alternative sources. Many SBA
Lenders expressed confusion and sought
guidance from SBA on how to
adequately determine whether a small
business had access to credit elsewhere
based on personal liquid assets. This
interim final rule will provide a brightline test to assist SBA Lenders in
analyzing the resources of individuals
and entities that own 20 percent or more
of the Applicant business in order to
determine if any of the owners have
liquid assets available that can provide
some or all of the desired financing.
The statutory changes in the
Consolidated Appropriations Act of
2018 (Pub. L. 115–141) regarding the
Microloan Program require amendments
to existing regulations for the percentage
of grant funds that may be used by the
Microloan Intermediary for marketing,
managerial, and technical assistance to
prospective Microloan borrowers.
Existing regulations must be revised as
proposed to reflect the statutory
changes.
Further, the Agency believes it needs
to streamline Loan Program
Requirements and reduce regulatory
burdens to facilitate robust participation
in the business loan programs that assist
small U.S. businesses, particularly those
small businesses in underserved
markets. For that reason, SBA has
modified regulatory provisions related
to allowable fees that a Lender or an
Agent may collect from an Applicant for
financial assistance. It is clear to the
Agency, based on results from reviews
conducted by OCRM, public comments
received in response to the proposed
rule, and technical assistance requests
received by SBA from SBA Lenders and
Agents, that confusion is widespread
across the industry regarding what fees
Agents and Lenders may charge to an
Applicant. In this interim final rule,
SBA is simplifying the regulations
applicable to Agents, as well as the fees
that Agents and Lenders may charge to
Applicants for assistance with obtaining
an SBA-guaranteed loan, in order to
provide more clarity to the industry.
The interim final rule also revises the
affiliation principles applicable to the
Business Loan, Disaster Loan, and
Surety Bond Guarantee Programs in
order to simplify and clarify the
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7637
determination of eligibility of a business
as a small concern and to ensure that
only small independently owned and
operated businesses benefit from SBA’s
small business financial assistance
programs.
SBA does not expect the proposed
changes to change loan volume
significantly. Overall program
participation is driven by broad
economic activity, making it difficult to
attribute increased or decreased loan
volume to a particular cause. The
overriding public policy objective of the
rule changes is the creation of economic
efficiencies and compliance in program
participation. The codification of the
rules for delivering SBA Express and
Export Express loans will provide
Lenders with confidence as the
requirements will be found in regulation
as opposed to Agency procedural
guidance. The inclusion of the SBA
Express and Export Express guidance
may positively impact small loan
volume.
SBA expects that the additional
detailed clarity on the requirements for
program delivery in the subject areas of
this rule would increase understanding
for program users, decrease time spent
qualifying small business Applicants,
and result in a reduction of overall cost
to participants.
The interim final rule changes for the
codification of the SBA Express and
Export Express Loan Program
Requirements and for the Personal
Resources Test impact the Lenders
directly, and would not be considered a
transfer to or from Applicants as the
Lender currently bears responsibility for
determining eligibility. The interim
final rule changes relative to Lender and
Agent fees reduce or limit the fees a
small business Applicant may expend to
gain access to the loan guarantee
programs, which benefits the Applicant.
This also potentially transfers an
economic benefit between Lenders and
Agents because Lenders, given the
authority to charge an SBA-controlled
fee to Applicants, may choose to
provide application services through
either internal lending staff or
outsourced Agents. In either case the
Lender’s decision is driven by cost
effectiveness and efficiency.
The interim final rule changes for
affiliation determinations provides
detailed guidance for the Lender
charged with determining the size of a
small business Applicant. This
currently is and will continue to be the
responsibility of the Lender, who will
benefit from the time savings in making
the eligibility determination. The
benefits further transfer or inure to the
Applicant via streamlined loan
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processing. SBA believes that the
interim final rule presents the optimum
net benefit to the overall affected
population of small entities (i.e., small
business Applicants, small Lenders, and
small Agents). For instance, receipt and
consideration of the public comments
prompted SBA to adopt a more generous
fee structure than was originally
proposed.
Baseline Scenario
The interim final rule will provide
clear and streamlined guidance to loan
program participants. In order to
estimate the net economic impact of this
interim final rule on stakeholders, an
approximation of the change in behavior
of Applicants, SBA Lenders, and Agents
is needed. The effects of the interim
final rule are estimated relative to a
baseline, and where the regulatory
changes are required by statutory
requirements, the analysis uses a prestatutory baseline to determine impact
in the analysis. The baseline represents
the state of SBA’s financial assistance
programs in the absence of this final
regulatory action.
Based on lender oversight reviews by
SBA’s OCRM, fees charged to
Applicants by Agents have increased
dramatically in the past few years
(although the total reported number of
loans that reported using an Agent is
only 2.78 percent of total approved 7(a)
loans over a five year period) and some
Applicants have been charged fees by
Lenders and Agents that are not
permissible under SBA’s current Loan
Program Requirements. In addition,
OCRM has observed that there is
confusion by both Lenders and Agents
as to who can charge fees to an
Applicant, for which services, and how
much can be charged. In the absence of
this final regulatory action, the cost of
financial assistance may continue to rise
for those loan Applicants who opt to use
the services of Agents, including
Packagers and other similar providers,
despite free and low-cost assistance and
resources made available by SBA. The
costs incurred by OCRM when
conducting lender oversight reviews
involving issues related to fees also
would continue to rise, with some of
those costs being passed on to Lenders.
In addition, many SBA Lenders
struggle with making the determination
of credit elsewhere and identifying
when an Applicant’s owners have
excess personal liquidity that could
affect their eligibility for SBA financial
assistance. SBA has identified some
examples of loans made to businesses
with owners who have extremely high
amounts of personal liquid assets.
Without this final regulatory action,
SBA Lenders and small businesses may
continue to take advantage of
government/taxpayer funded financial
assistance programs and SBA Lenders
may continue to erroneously make loans
to businesses that do not meet SBA’s
lending criteria.
Finally, under the current affiliation
rules, some businesses have been
considered to be small when they
should have been combined as affiliates
and may, in fact, be large. This has
allowed some businesses that are not
considered ‘‘small businesses’’ to
receive SBA financial assistance. SBA’s
Office of Inspector General (OIG)
published a report in March 2018 on
SBA 7(a) Loans Made to Poultry
Farmers and recommended that the
Agency review the arrangements
between integrators and growers and
establish and implement controls, such
as supplemental guidance, to ensure
that SBA loan specialists and lenders
make appropriate affiliation
determinations. SBA reviewed its
regulations and determined that the
regulations should be modified to
clarify the meaning of affiliation in the
context of contractual relationships, so
that only independently owned and
operated small businesses continue to
receive SBA financial assistance. In the
absence of this final regulatory action,
this needed clarification will not be
provided.
2. What are the potential benefits and
costs of this regulatory action?
Benefits to SBA Lenders, Applicants,
and Agents
The greatest benefit from this interim
final rule to all program participants,
including SBA Lenders, Applicants, and
Agents, is clear regulatory guidance and
bright-line tests to increase efficiency.
SBA anticipates that incorporating the
SBA Express and Export Express Loan
Programs into the regulations governing
the 7(a) Loan Program may result in an
increase in the number of participating
Lenders and loans in both programs,
which would mean increased access to
capital for small businesses. SBA
Lenders will be provided with brightline tests for making certain
determinations about eligibility which
will eliminate the ambiguity and
uncertainty that has hindered some SBA
Lenders in recent years. Reinstating the
personal resources test, in particular,
will aid SBA Lenders in making the
determination of an Applicant’s access
to credit elsewhere, which will increase
efficiencies and reduce the efforts
currently required by the Agency to
provide assistance due to the
subjectivity of the analysis in the prior
rule. SBA Lenders will be more
confident in their loan making with a
better understanding of SBA’s
expectations. SBA estimates that the
reinstatement of the personal resources
test at section § 120.102 will save SBA
Lenders a total of approximately 67,000
hours annually, monetized to
$2,456,890 per year.
TABLE 1—ESTIMATED ANNUAL BENEFIT TO SBA LENDERS FROM PERSONAL RESOURCES TEST
Number of
expected
occurrences
per year
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Outcomes
Average time
saved per
occurrence
(hours)
Increased efficiency in determining credit elsewhere ..
67,000
1–2
Estimated Annual Benefit ......................................
........................
........................
Total benefit
67,000–134,000 hours, $2,456,890–$4,913,780.
67,000–134,000 hours, $2,456,890–$4,913,780.1
1 SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine an Applicant’s access to credit
elsewhere. SBA calculated the average of the timeframes provided to estimate the range of time the personal resources test will save SBA Lenders, on average, in their analysis. Since each loan is required to address an Applicant’s access to credit elsewhere, the number of expected occurrences per year was estimated by using the average number of 7(a) and 504 loans guaranteed in the most recent five fiscal years (2014–
2018), according to SBA’s 7(a) and 504 loan data reports. The number of expected occurrences per year was multiplied by the average time
saved per occurrence to estimate the total hourly benefit. The cost benefit was estimated by multiplying the hours saved by the mean hourly
wage for a loan officer, as reported by the U.S. Department of Labor’s Bureau of Labor Statistics as of May 2018 ($36.67).
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The clear limitations on fees an Agent
or Lender may charge to an Applicant
leave no question as to what fees SBA
considers to be reasonable. Further, the
revisions to the definitions of Agents
and Associates of Lenders and CDCs
also will provide clarity as to whom
SBA considers an Agent and what
services the different types of Agents
may perform and be compensated for by
the Applicant or the SBA Lender. This
will save SBA Lenders and Agents time
in making these determinations for each
loan. In addition, 7(a) Lenders will no
longer be required to itemize fees
charged to Applicants when the amount
7639
is over $2,500, which also will save
these Lenders time. Applicants will
benefit from protection against
impermissible or unreasonable costs for
assistance with obtaining an SBAguaranteed loan and may become more
aware of the free and low-cost resources
provided by the Agency.
TABLE 2—ESTIMATED ANNUAL BENEFIT TO SBA LENDERS AND AGENTS FROM FEE LIMITS
Number of
expected
occurrences
per year
Outcomes
Average time
saved per
occurrence
(hours)
Total benefit
Increased efficiency for SBA Lenders when determining permissibility and reasonableness of fees.
Increased efficiency for Agents determining permissibility and reasonableness of fees.
Increased efficiency for 7(a) Lenders no longer required to itemize fees.
67,000
0.5–1
33,500–67,000 hours, $1,228,445–$2,456,890.
1,605
0.5–1
803–1,605 hours, $29,446–$58,855.
60,951
0.5–1
30,476–60,951 hours, $1,117,555–$2,235,073.
Estimated Annual Benefit ......................................
........................
........................
64,779–129,556 hours, $2,375,446–$4,750,818.2
2 SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine the reasonableness and permissibility of all fees charged to an Applicant for assistance with obtaining an SBA-guaranteed loan. SBA calculated the average of the timeframes
provided to estimate the range of time SBA Lenders will save, on average, in determining permissible and reasonable fees with the bright-line
tests included in this interim final rule, which SBA estimates would be the same for an Agent. The number of expected occurrences per year for
SBA Lenders is estimated based on the average number of 7(a) and 504 loans guaranteed in the most recent five fiscal years (2014–2018), according to SBA’s 7(a) and 504 loan data reports. The total number of guaranteed loans is used, versus the number of loans identified to have
charged fees as discussed in the preamble of this rule, because SBA Lenders must review every loan application to determine whether any fees
were charged to an Applicant and, if so, whether the fees are permissible and reasonable. Because Agents are not involved in every SBA-guaranteed loan, the number of expected occurrences per year for Agents is estimated based on averaging the total number of loans identified to
have used an Agent (other than the participating Lender) in fiscal years 2013–2017. The number of expected occurrences per year for 7(a)
Lenders no longer being required to itemize fees is based on the average number of 7(a) loans guaranteed over the most recent five fiscal
years. The number of expected occurrences per year for each outcome was multiplied by the average time saved per occurrence to estimate the
total hourly benefit. The cost benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as reported by the
U.S. Department of Labor’s Bureau of Labor Statistics as of May 2018 ($36.67).
Finally, by modifying the principles
of affiliation, the Agency and SBA
Lenders will be better able to uphold the
Agency’s statutory obligation to provide
financial assistance only to businesses
determined to be small. Further, SBA
Lenders will be provided with
assistance from the Agency in making
determinations of affiliation for
businesses with certain types of
contractual relationships, such as
poultry farmers, which will provide
additional needed clarity with regard to
affiliation in the financial assistance
programs.
TABLE 3—ESTIMATED ANNUAL BENEFIT TO SBA LENDERS AND SURETIES FROM MODIFIED PRINCIPLES OF AFFILIATION
Number of
expected
occurrences
per year
Outcomes
Average time
saved per
occurrence
(hours)
Increased efficiency in determining affiliation ..............
77,000
2–4
Estimated Annual Benefit ......................................
........................
........................
Total benefit
154,000–308,000 hours, $5,647,180–$11,294,360.
154,000–308,000 hours, $5,647,180–$11,294,360.3
3 SBA
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arrived at this estimate by inquiring with various Lenders as to the average time required to determine affiliation. SBA calculated the average of the timeframes provided to estimate the range of time SBA Lenders will save, on average, in determining affiliation with the guidance
provided in this interim final rule. Since an affiliation determination must be made for each application for SBA financial assistance, the number of
expected occurrences per year for SBA Lenders and Sureties was estimated by using the average number of 7(a) and 504 loans and the average number of Bid and Final Bonds guaranteed during the most recent five fiscal years (2014–2018), according to SBA’s 7(a) and 504 loan data
reports and information on surety bonds entered into SBA’s Capital Access Finance System. The total number of expected occurrences for loans
and surety bonds per year was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The cost benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as reported by the U.S. Department of Labor’s Bureau of
Labor Statistics as of May 2018 ($36.67).
SBA expects these benefits to be
realized immediately upon enactment of
the interim final rule and should remain
the same each year thereafter, subject to
changes in number of loans and hourly
rates.
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Benefits to SBA
Like the program participants, SBA
will benefit from the clear regulatory
guidance and bright-line tests included
in this interim final rule, especially
when performing lender oversight
activities. OCRM will realize increased
efficiencies in conducting loan file
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reviews of SBA Lenders. With the
reinstatement of the personal resources
test, clear limitations on fees an Agent
or Lender may charge to an Applicant,
revised definitions of Agents and
Associates of Lenders and CDCs, and
simplified affiliation principles, SBA
has removed the subjectivity of a
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Lender’s assessment of these issues,
which will improve SBA Lenders’
compliance and will allow OCRM to
develop more efficient methods of
testing SBA Lenders’ compliance. In
addition, the removal of the requirement
that a Lender itemize fees charged to an
Applicant when the fee is over $2,500,
also will reduce the burden on OCRM
of reviewing these additional
documents.
TABLE 4—ESTIMATED ANNUAL BENEFIT TO SBA FROM INTERIM FINAL RULE
Number of
expected
occurrences
per year
Outcomes
Average time
saved per
occurrence
(hours)
Total benefit
Increased efficiency in reviewing credit elsewhere assessment.
Increased efficiency in reviewing fees charged to Applicants.
Increased efficiency in reviewing Lender’s affiliation
determination.
2,000
0.25–0.5
500–1,000 hours, $18,375–$36,750.
1,300
0.5–1
650–1,300 hours, $23,888–$47,775.
2,000
0.25–0.5
500–1,000 hours, $18,375–$36,750.
Estimated Annual Benefit ......................................
........................
........................
1,650–3,300 hours, $60,638–$121,275.4
4 SBA developed this estimated annual benefit based on an estimate from OCRM on the range of time that the guidance and bright-line tests
included in the interim final rule will save a Financial Analyst, on average, in reviewing each relevant element of an SBA Lender’s analysis during
OCRM-conducted loan file reviews. The number of expected occurrences per year is based on the approximately 2,000 loan files reviewed by
OCRM annually. The SBA Lender is required to address credit elsewhere and affiliation on every loan, but fees are not charged in connection
with every loan. OCRM estimates that in approximately 65 percent of the 2,000 loans reviewed annually, OCRM identifies an issue related to
fees charged to Applicants by SBA Lenders and/or Agents, including underreporting, inaccurate reporting, or impermissible fees. The number of
expected occurrences per year for each outcome was multiplied by the average time saved per occurrence to estimate the total hourly benefit.
The cost estimate was obtained by multiplying the hourly rate of a GS–13, Step 1 ($36.75 per hour) by the number of expected occurrences per
year and the average time saved per occurrence.
SBA expects these benefits to be
realized immediately upon enactment of
the rule and should remain the same
each year thereafter, subject to changes
in the number of loan files reviewed and
hourly rates.
Costs
Costs to SBA Lenders, Applicants, and
Agents
For purposes of this Regulatory
Impact Analysis (RIA), the only costs to
program participants and relevant
stakeholders necessary to comply with
the interim final rule are administrative
costs. Administrative costs considered
include estimations on reading and
interpreting the regulation, developing
and revising internal policies and
procedures, and training. It is noted that
program participants are presumed to
incur such administrative costs
continuously in order to maintain
familiarity with SBA Loan Program
Requirements, as required by 13 CFR
120.180, and to remain in good standing
with SBA as defined in 13 CFR
120.420(f). The Table below shows the
administrative costs SBA has estimated
that are attributable to this specific rule,
which are expected to occur mainly in
the first year of implementation,
decrease by half in the second year, and
be eliminated by the third year.
TABLE 5—ESTIMATES OF ADMINISTRATIVE COMPLIANCE COSTS TO SBA LENDERS AND AGENTS
Amount
of time
required
(hours)
Read and interpret the regulation ..............
Develop or Revise Internal Policies and
Procedures.
Training .......................................................
Estimated First Year Administrative
Costs.
Value of
time
Frequency
for first
year
Number of
SBA lenders/
agents
affected
Total cost
2–3
5–7
$36.67
36.67
5–7
5–6
3,500
3,500
35,000–73,500 hours, $1,283,450–$2,695,245.
87,500–147,000 hours, $3,208,625–$5,390,490.
5–8
36.67
10–12
3,500
175,000–336,000 hours, $6,417,250–$12,321,120.
........................
........................
........................
........................
297,500–556,500 hours, $10,909,325–
$20,406,855. 5
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5 SBA developed the estimate for the administrative costs in the first year of the interim final rule based on the approximate number of active SBA Lenders and
Agents. Although approximately 4,500 Lenders have executed agreements to participate as a 7(a) Lender, over the past two fiscal years, the average number of active Lenders has totaled only 1,958. (A 7(a) Lender is considered to be ‘‘active’’ if it has approved at least one 7(a) loan in that fiscal year.) SBA estimates that only
those Lenders actively participating in the program will actually be affected by the costs of this interim final rule since the estimated costs are strictly administrative.
The number of SBA Lenders and Agents affected includes approximately 2,474 active SBA Lenders (including approximately 2,061 active 7(a) Lenders, 213 CDCs,
135 Microloan Intermediaries, 33 ILP Intermediaries, and 32 Sureties), plus approximately 1,018 Agents identified as having conducted business with SBA during fiscal years 2013–2017, rounded up to the next hundred to account for trade associations, and other resource partners. SBA estimates that on average between 5–7
employees at each SBA Lending institution or Agent entity may spend between 2–3 hours each reading and interpreting the rule in the first year and that these employees are compensated at the mean hourly wage for a loan officer, as reported by the U.S. Department of Labor’s Bureau of Labor Statistics ($36.67). SBA also
estimates that 5–6 employees on average may be involved in developing or revising the internal policies of the respective program participant and would likely spend
between 5–7 hours updating policies specifically related to this interim final rule. Finally, SBA estimates that between 10–12 employees on average for each program
participant would spend between 5–8 hours on training related to updates and modifications made by this interim final rule. Applicants are not included as an entity
affected by the administrative costs of the rule, as the Applicant relies on the SBA Lender or third-party Agent to inform them of SBA policy and procedure.
Costs to SBA
There are no additional costs to the
Agency required to achieve the
outcomes of the rule. The administrative
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costs considered for the loan program
participants, including reading and
interpreting the regulation, developing
and revising internal policies and
procedures, and training are already
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inherent requirements of SBA
employees and therefore, the
publication of this interim final rule has
no additional bearing on the
responsibilities of relevant SBA
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employees involved in the Agency’s
loan programs. Further, SBA does not
anticipate any additional costs related to
implementing the second exception to
the economic-dependence affiliation
rule because the Agency expects to
absorb any costs related to reviewing
integrator agreements by using existing
SBA employees to conduct the reviews.
Transfers
SBA has also identified a transfer of
costs, due to the limits on permissible
fees charged to an Applicant by Agents
and Lenders, as well as the prohibition
against Agents providing services to
both an Applicant and an SBA Lender
in connection with the same SBA loan
application, which was previously
permitted under limited circumstances.
These limitations will provide a cost
savings to Applicants; however, the
Agency acknowledges that this savings
to the Applicant will result in a cost
(‘‘transfer’’) to the small number of
Agents and Lenders that reported
charging fees in excess of the limits
imposed by this interim final rule. (As
discussed in the Regulatory Flexibility
Act section below, the excess fees
charged by this small number of Agents
and Lenders also are in excess of the
current limits on fees and are therefore
not in compliance with current SBA
Loan Program Requirements.)
TABLE 6—ESTIMATED TRANSFERS OF COSTS
Number of
expected
occurrences
per year
Outcomes
Average
money
saved per
occurrence
Total transfer
Elimination of fees exceeding set limits ......................................................................................
746
$2,380.75
$1,776,042.63
Estimated Annual Transfer ..........................................................................................................
........................
........................
6 1,776,042.63
6 SBA arrived at this estimate based on the total number of loans guaranteed between FY2013 and FY2017 that reported fees charged to an
Applicant by an Agent or Lender over the limits imposed in this interim final rule and the total amount that those loans exceeded the imposed
limit for each threshold.
Below is a table showing an
estimation of the total costs and benefits
of the rule over three years:
TABLE 7—ESTIMATED UNDISCOUNTED BENEFITS AND COSTS SCHEDULE
Benefits
Costs
Year 1
Year 1
Low estimate
High estimate
Low estimate
High estimate
267,429 hours ................................
$9,806,754 .....................................
534,856 hours ...............................
$19,613,433 ..................................
297,500 hours ...............................
$10,909,325 ..................................
Year 2
267,429 hours ................................
$9,806,754 .....................................
Year 2
534,856 hours ...............................
$19,613,433 ..................................
148,750 hours ...............................
$5,454,662.50 ...............................
Year 3
267,429 hours ................................
$9,806,754 .....................................
556,500 hours.
$20,406,855.
278,250 hours.
$10,203,427.50.
Year 3
534,856 hours ...............................
$19,613,433 ..................................
Below is a table showing the
annualized values of the estimated costs
0 hours ..........................................
$0 ..................................................
0 hours.
$0.
and cost savings, as of 2016, over an
infinite horizon.
TABLE 8—ANNUALIZED VALUES AS OF 2016 OVER AN INFINITE HORIZON
Primary estimate
3% Discount rate
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Low
estimate
7% Discount rate
High
estimate
Low
estimate
High
estimate
Annualized Cost Savings .................................................................................
Annualized Costs .............................................................................................
$9,806,751
485,479
$19,613,433
908,132
$9,806,754
1,077,116
$19,613,433
2,014,841
Annualized Net Cost Savings ..........................................................................
9,321,272
18,705,301
8,729,638
17,598,592
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3. What are the alternatives to this
interim final rule?
SBA considered various alternatives
to proceeding with the preferred option
of promulgating this interim final rule.
The first and most stringent alternative
would be to adopt the rule as proposed.
SBA chose not to pursue this option due
to the concerns expressed by the
industry and general public. Many
commenters expressed concern that
parts of the proposed rule may cause
unintended consequences that would
make it more difficult for Applicants
seeking SBA loans of $350,000 or less.
Specifically, these commenters referred
to the limits set for the fees Agents and
Lenders may charge to an Applicant for
loans of this size, and the maximum
amount of personal liquidity that
owners of 20 percent or more of such
Applicants may retain, rather than inject
into the project as additional equity in
accordance with the proposed personal
resources test. Also, several commenters
expressed concern that the proposed
changes to the principles of affiliation
may render certain industries, like
poultry farmers, ineligible for SBA
financial assistance. Due to all of these
concerns expressed by commenters,
SBA has modified the interim final rule
in several respects, including increasing
the amount of personal liquidity that
owners of 20 percent or more of a small
business Applicant may retain,
increasing the fees that a Lender or an
Agent may charge a small business
Applicant for assistance with obtaining
an SBA-guaranteed loan of $350,000 or
less, and revising the principles of
affiliation to prevent any unintended
consequences for certain industries,
such as farmers. SBA also has provided
an extended period for Lenders and
Agents to comply with the fee
provisions in §§ 103.5(b) and 120.221(a).
If the rule were finalized as proposed,
the personal liquidity limits would have
been more restrictive than the limits in
the interim final rule. Under the interim
final rule, fewer individuals will be
required to inject excess liquid assets for
small loans, which is a change (or
transfer) that favors small business
Applicants.
The original proposed rule included
fee limitations for Lenders of $2,500 for
loans up to and including $350,000; and
$5,000 for loans over $350,000. Per the
comments received and based on the
costs to deliver small dollar loans, the
interim final rule increases the fee
limitation for loans up to and including
$350,000 to $3,000. This change will not
significantly transfer benefits or costs
for the following reasons: (1) Increased
use by Applicants of SBA’s no cost
Lender Match to connect them to SBA
Lenders; (2) increased development by
SBA Lenders of in-house electronic
application systems to better manage
service and costs; and (3) continued
innovation in the use of scoring and
other data. All of these evolving
technological improvements expand
user options and level the playing field
for services and costs.
If the rule were finalized as originally
proposed, the change to limit fees
Lenders may charge Applicants on
small loans would have impacted 2,944
loans from Lenders who exceeded the
$2,500 proposed cap on loans
guaranteed between FY2013 and
FY2017. By increasing the permissible
fee from $2,500 to $3,000 on loans of
$350,000 and less in the interim final
rule, the number of loans where the
Lender fee exceeded the cap was
reduced to 1,731, resulting in lower
economic impact to Lenders making
small dollar loans.
Table 9 demonstrates the estimated
reduction in the number of loans and
dollars considered in excess of the
Lender fee limitation as a result of
increasing the proposed Lender fee
limitation from $2,500 to $3,000 for
loans of $350,000 or less.
TABLE 9—COMPARISON OF THE ESTIMATED IMPACT OF THE LIMITATION ON THE FEE PAID BY THE APPLICANT TO THE
LENDER IN THE PROPOSED RULE VS. THE INTERIM FINAL RULE *
Proposed rule
Loans with Excessive Lender Fees .............................................................................................
Dollars in Excess of Fee Limits ...................................................................................................
Average Amount in Excess of Fee Limit per Loan .....................................................................
2,944
$5,813,734
$1,974.77
Interim final
rule
1,731
$3,419,091
$1,975.21
Difference
(1,213)
($2,394,653)
* As the fee limitation for loans over $350,000 did not change, this table only includes those loans where Lenders charged fees in excess of
the fee limitations on loans of $350,000 or less.
SBA originally proposed limiting total
fees that an Agent(s) can charge an
Applicant to a maximum of 2.5 percent
of the loan amount or $7,000, whichever
is less, for loans up to and including
$350,000; a maximum of 2 percent or
$15,000, whichever is less, for loans
over $350,000 up to and including
$1,000,000; and a maximum of 1.5
percent or $30,000, whichever is less,
for loans over $1,000,000. As a result of
the comments received and to limit the
impact of the interim final rule on small
Agents, SBA increased the limitations
and thresholds for total fees that an
Agent(s) may charge an Applicant to a
maximum of 3.5 percent or $10,000,
whichever is less, for loans up to
$500,000; a maximum of 2 percent or
$15,000, whichever is less, for loans of
$500,001 to $1,000,000; and 1.5 percent
or $30,000, whichever is less, for loans
over $1,000,000.
The changes in the interim final rule
result in the total number of loans in
excess of the fee limitations being
reduced from 3,060 to 2,729 and the
total dollars in excess of the fee
limitations being reduced from
$7,217,868 to $2,688,406. Table 10
demonstrates the estimated reduction in
the number of loans and dollars
considered in excess of the Agent fee
limitation as a result of increasing the
proposed fee limitation.
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TABLE 10—COMPARISON OF THE ESTIMATED IMPACT OF THE LIMITATION ON THE FEE PAID BY THE APPLICANT OR THE
LENDER TO AN AGENT(S) IN THE PROPOSED RULE VS. THE INTERIM FINAL RULE FOR LOANS OF $1,000,000 AND LESS **
Proposed rule
Loans with Excessive Agent Fees ..............................................................................................
Dollars in Excess of Fee Limits ...................................................................................................
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3,060
$7,217,868
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10FER2
Interim final
rule
2,729
$2,688,406
Difference
(331)
($4,529,462)
Federal Register / Vol. 85, No. 27 / Monday, February 10, 2020 / Rules and Regulations
7643
TABLE 10—COMPARISON OF THE ESTIMATED IMPACT OF THE LIMITATION ON THE FEE PAID BY THE APPLICANT OR THE
LENDER TO AN AGENT(S) IN THE PROPOSED RULE VS. THE INTERIM FINAL RULE FOR LOANS OF $1,000,000 AND
LESS **—Continued
Proposed rule
Average Amount in Excess of the Fee Limit per Loan ...............................................................
$2,359
Interim final
rule
Difference
$985
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** As no changes were made to the Agent fee limitation for loans over $1,000,000 from the proposed rule to the interim final rule, the loans
over $1,000,000 with excessive Agent fees were not included in this table.
The second, less stringent alternative
considered was to make no regulatory
change but strictly enforce existing SBA
Loan Program Requirements. Of the
major issues commented upon, SBA has
existing mechanisms to enforce
compliance with the credit elsewhere
test, the fees Lenders and Agents are
permitted to charge an Applicant,
including when Lenders or Agents must
refund amounts deemed unreasonable
by SBA, and proper application of the
affiliation principles applicable to the
business loan programs. For example,
with regard to fees charged to an
Applicant, SBA has the authority to
require fees deemed unreasonable by
SBA to be refunded to a Borrower by a
Lender or an Agent. In addition, SBA’s
OCRM can cite SBA Lenders during
lender oversight reviews and take
enforcement action against the SBA
Lender, when appropriate. Further, SBA
may suspend or revoke an Agent’s
privilege to conduct business with SBA.
With regard to determining eligibility of
an Applicant based on affiliation and
credit available elsewhere, SBA may
decline to approve applications that do
not meet SBA Loan Program
Requirements or, for loans made under
a Lender’s delegated authority, SBA
may deny liability on the guaranty if the
Lender did not make an acceptable
determination for 7(a) loans or, for 504
loans, decline to close the loan,
potentially at considerable expense to
the small business Applicant. However,
this option does not resolve the
confusion that SBA Lenders and Agents
have on current policy and procedure
and would require an additional
investment in Agency resources to rely
on OCRM or the loan processing or
guaranty purchase centers to rectify
non-compliance after the fact. SBA has
determined that it is more beneficial to
all parties involved to provide clarity to
these rules so that SBA Lenders and
Agents can better understand and
comply with SBA’s Loan Program
Requirements.
In consideration of the alternatives
described above, SBA has determined
that the most preferable option is to
enact the rule with several
modifications. The interim final rule
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will, among other things, provide brightline tests and clear guidance for SBA
Lenders to determine what fees SBA
considers to be reasonable and
permissible and how to properly
analyze an Applicant’s personal
liquidity as part of the analysis on credit
available elsewhere. The interim final
rule also will clarify the principles of
affiliation to ensure that SBA financial
assistance is not being provided to
businesses that are not actually small
due to affiliation with larger
corporations, while ensuring that
certain industries are not adversely
impacted. Finally, the interim final rule
will make minor corrections and
updates to Loan Program Requirements
to enhance program use.
Executive Order 13563
A description of the need for this
regulatory action and benefits and costs
associated with this action, including
possible distributional impacts that
relate to Executive Order 13563, are
included above in the Regulatory Impact
Analysis under Executive Order 12866.
The Business Loan Programs operate
through the Agency’s lending partners,
which are 7(a) Lenders for the 7(a) Loan
Program, Intermediaries for the
Microloan Program and ILP Program,
and Third Party Lenders and CDCs for
the 504 Loan Program. SBA’s SBG
Program operates through Surety Bond
Companies. SBA’s Business Disaster
Loan Programs are delivered directly by
SBA, without the use of any
intermediaries. The Agency held two
public forums in the summer of 2018 to
engage with stakeholders related to
poultry lending. With respect to the 7(a)
and 504 Loan Programs generally, SBA
also met with trade association board
members and program participants at
industry conferences in the Fall of 2018
through Spring of 2019, which allowed
it to reach representatives of trade
associations and hundreds of its lending
partners, from which it gained valuable
insight regarding the loan programs. The
Agency’s outreach efforts to engage
stakeholders before proposing this rule
was extensive and concluded with the
extended comment period.
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Executive Order 13771
This interim final rule is considered
an E.O. 13771 deregulatory action. SBA
is estimating $12,633,634 in annualized
savings for this rule using a 7%
discount rate in perpetuity in 2016
dollars. In addition, SBA estimates the
present value of savings for this rule in
perpetuity to be $180,480,486. Details
on the breakdown of the estimated cost
savings of this interim final rule can be
found in the rule’s economic analysis.
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 rule
will not have substantial, direct effects
on the States, on the relationship
between the national government and
the States, or on the distribution of
power and responsibilities among the
various levels of government. Therefore,
for the purposes of Executive Order
13132, SBA has determined that this
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 interim
final rule will impose additional
reporting or recordkeeping requirements
under the Paperwork Reduction Act
(PRA). Applicants for SBA Express and
Export Express loans, as well as SBA
Express and Export Express Lenders,
use the same forms as all other 7(a)
loans in order to apply for an SBAguaranteed loan. These forms include:
SBA Form 1919, Borrower Information
Form; SBA Form 1920, Lender’s
Application for Guaranty; SBA Form
1971, Religious Eligibility Worksheet
(for those businesses that may have a
religious aspect); and SBA Form 2237
(to request modifications to an approved
loan). These forms are all OMBapproved forms under OMB Control
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number 3245–0348 and, as discussed
below, some of the forms will need to
be revised based on the changes in this
interim final rule.
SBA Form 1920, Lender’s Application
for Guaranty; SBA Form 2450,
Eligibility Information Required for 504
Submission (Non-PCLP) (OMB Control
number 3245–0071); and SBA Form
2234 (Part C), Eligibility Information
Required for 504 Submission (PCLP)
(OMB Control number 3245–0346) will
need to be revised due to the new
regulation at § 120.102, which will
require SBA Lenders to analyze the
personal resources of certain owners of
the Applicant business to determine if
they have liquid assets that can provide
some or all of the desired financing. The
change will have a de minimis impact
on SBA Lenders since reviewing the
personal resources of the applicant
business and its owners is already part
of the analysis SBA Lenders currently
conduct in determining an Applicant’s
eligibility for SBA financial assistance
under the requirement to ensure that the
Applicant does not have access to credit
elsewhere on reasonable terms from
non-Federal sources.
The interim final rule also makes
changes that require revisions to SBA
Form 159, Fee Disclosure and
Compensation Agreement (OMB Control
number 3245–0201), which is used to
collect information from SBA Lenders
and Agents on the fees that they charge
to Applicants for assistance with
obtaining an SBA-guaranteed loan. SBA
Form 159 is also used to collect
information from SBA Lenders on
referral fees that it pays to Loan Brokers
(also known as Referral Agents) in
connection with an SBA-guaranteed
loan. The specific revisions to SBA
Form 159 would implement the changes
to §§ 120.221, 103.4(g), and 103.5 that
limit the amount and types of fees that
may be charged to an Applicant. The
revisions to SBA Form 159 will reduce
the estimated hour burden for 7(a)
Lenders because, under the interim final
rule, they will only be required to
disclose the amount charged up to the
permissible limit on SBA Form 159, but
will no longer have to itemize fees
charged to Applicants, which is
currently required for fees over $2,500.
The revisions will have no material
effect on the reporting burden for
Agents. They will continue to report on
all fees imposed on Applicants and
provide supporting documentation for
fees over $2,500 as they do now.
The changes to SBA Forms 1920,
2450, 2234 (Part C), and 159 will be
submitted to OMB as part of a broader,
comprehensive revision of the forms
that is not affected by this interim final
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rule but is part of the Agency’s efforts
to streamline and simplify the
information collected from Applicants
and SBA Lenders.
Finally, this rule puts into the
regulations the existing requirement for
SBLCs to submit to SBA for review and
approval on an annual basis the
validation of any credit scoring model
they are using in connection with SBA
Express and Export Express loans. This
reporting requirement is included in
OMB-approved collection, SBA Lender
Reporting Requirements (OMB
Approval Number 3245–0365). This
information collection was submitted to
OMB for renewal in September 2018
and the renewal was approved by OMB
in April 2019. The new expiration date
is April 30, 2022. The regulatory change
does not impact that requirement; it
merely codifies the requirement in the
regulation instead of the SOP.
Regulatory Flexibility Act, 5 U.S.C. 601–
612
When an agency issues a rulemaking,
the Regulatory Flexibility Act (RFA), 5
U.S.C. 601–612, requires the agency to
‘‘prepare and make available for public
comment a final regulatory analysis’’
which will ‘‘describe the impact of the
proposed rule on small entities.’’
Section 605 of the RFA allows an
agency to certify a rule, in lieu of
preparing an analysis, if the proposed
rulemaking is not expected to have a
significant economic impact on a
substantial number of small entities.
Small entities likely to be affected by
this rule include small SBA Lenders and
small Agents who assist small business
Applicants with obtaining SBAguaranteed financing. SBA Lenders are
comprised of 7(a) Lenders, CDCs,
Microloan Intermediaries, ILP
Intermediaries, and Sureties that
participate in the SBG Program. Based
on SBA’s size standards, SBA has
determined that approximately 2,000 of
the approximately 4,500 7(a) Lenders
are small, all of the approximately 213
CDCs are small, all of the approximately
135 Microloan Intermediaries are small,
all of the approximately 33 ILP
Intermediaries are small, and 12 of the
approximately 32 Sureties that
participate in the SBG Program are
small.
SBA does not track or collect
information on entities or individuals
serving as Agents, Packagers, or Lender
Service Providers with regard to the
NAICS codes or classification of those
entities. Services provided to assist an
Applicant in obtaining SBA-guaranteed
financing may be performed by several
different types of entities ranging from
individuals who may assist with
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Fmt 4701
Sfmt 4700
packaging a loan application or assisting
the Applicant with finding an SBA
Lender, to entities formed for the
purpose of providing such assistance, to
attorneys or Certified Public
Accountants. All of these different types
of individuals or entities providing
assistance to Applicants in connection
with obtaining an SBA-guaranteed loan
may be classified under numerous
different NAICS codes. SBA considered
NAICS codes that may apply to these
entities for the purpose of estimating the
number of small entities affected by this
interim final rule. One possible
classification includes 522310 for
‘‘Mortgage and Nonmortgage Loan
Brokers,’’ which is described as being
comprised of ‘‘establishments primarily
engaged in arranging loans by bringing
borrowers and lenders together on a
commission or fee basis.’’ The size
standard for this classification is $7.5
million in annual receipts and
according to the U.S. Census Bureau’s
2012 Statistics of U.S. Businesses
(SUSB),3 6,817 entities classified by this
NAICS code are considered small by
SBA’s size standards. SBA also
considered 522390 for ‘‘Other Activities
Related to Credit Intermediation,’’
which is described as being comprised
of ‘‘establishments primarily engaged in
facilitating credit intermediation (except
mortgage and loan brokerage; and
financial transactions processing,
reserve, and clearinghouse activities)’’
because ‘‘loan servicing’’ is included as
an illustrative example of this NAICS
code. However, based upon the other
examples provided, which include
check cashing services, money order
issuance services, and payday lending
services, SBA does not believe that
NAICS code 522390 is applicable to the
Agents affected by this rule. Because
there are no limitations as to what type
of entity may be engaged by an
Applicant for assistance with obtaining
SBA financing, it is not reasonable to
estimate the number of affected entities
based on NAICS codes, as the number
of entities included in these
classifications would far exceed the
number of entities that actually conduct
business with SBA and would not
provide a realistic portrayal of the
population of small entities affected by
this rule.
As an alternative to estimating the
number of entities affected based on
NAICS codes, SBA reviewed the
Lender-reported data and other
3 Because SBA’s size standard for most NAICS
codes is based on annual receipts and U.S. Census
Bureau SUSB data by enterprise receipt size is only
collected every five years, 2012 is the most recent
Census data available for use.
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information gathered by OCRM during
lender oversight reviews in fiscal years
2013 through 2017, which also was used
to develop the fee limits in this interim
final rulemaking. Within the 8,025 loans
reported to have used an Agent (other
than the participating Lender) to
provide assistance to the Applicant in
securing the loan during that time
period, SBA identified 753 unique
Agents based on their DUNS Number or
street address. Since SBA has no means
of knowing the average annual receipts
of these entities, SBA will
conservatively estimate that the majority
or 80 percent of the 753 entities are
small. SBA has also identified
approximately 265 entities who have
submitted LSP Agreements for review
by SBA. Like the Agents, including
Packagers, SBA does not capture the
NAICS classification of these LSPs and
therefore is unable to estimate their
annual receipts and the number of
which that would be considered small.
Therefore, as indicated above with
Agents, SBA will conservatively
estimate that the majority or 80 percent
of LSPs are small. For purposes of the
RFA, SBA estimates that approximately
814 (80 percent of 1,018) small entities
serving as Agents and LSPs will be
affected by this interim final rule for a
total of approximately 3,207 small
entities including all small SBA
Lenders, Agents, and LSPs.
As described more fully in the RIA
above, SBA has determined that the
only costs to program participants and
relevant stakeholders necessary to
comply with the interim final rule are
administrative costs. Administrative
costs considered include estimations on
reading and interpreting the regulation,
developing and revising internal
policies and procedures, and training.
To reiterate, although these costs are
estimated here for the purposes of the
Regulatory Flexibility Act, it is
important to note that, regardless of new
rulemaking, program participants are
presumed to incur administrative costs
related to reading and interpreting SBA
Loan Program Requirements, revising
and updating internal policies, and
training staff continuously in order to
maintain familiarity with SBA Loan
Program Requirements, as required by
13 CFR 120.180, and to remain in good
standing with SBA as defined in 13 CFR
120.420(f).
The RIA also identifies an estimated
transfer of costs due to the limits on
permissible fees charged to an
Applicant by Agents and Lenders, as
well as the prohibition against an Agent
providing services to both an Applicant
and an SBA Lender in connection with
the same SBA loan application, which
was previously permitted under limited
circumstances. These limitations have
been put in place in order to protect
small business Applicants from fees
deemed unreasonable by SBA and will
provide a cost savings to small business
Applicants. However, the Agency
acknowledges that this savings to the
Applicant will result in a potential loss
of revenue to the small number of
Agents and Lenders that reported
charging fees in excess of the limits
imposed by this interim final rule that
are considered to be small entities. As
noted previously in Section III.C. above,
approximately one percent of the loans
guaranteed during fiscal years 2013–
2017 reported fees charged to the
Applicant by Lenders and Agents in
excess of the revised maximum fees
permitted in this interim final rule.
Based on SBA’s analysis of the fees
reported on loans guaranteed during
that time frame, SBA estimates that 213
small entities (83 small Lenders and 130
small Agents) 4 reported charging fees in
excess of the limits imposed in this
interim final rule. This represents only
8 percent of the 7(a) Lenders and Agents
7645
that SBA has identified as small (2,000
7(a) Lenders and 602 Agents). Thus,
only 8 percent of small Lenders and
small Agents may experience reduced
revenue as a result of this interim final
rule. It is important to note that, while
some small entities may experience
reduced revenue, the fees that were
being charged by these small entities
were not in compliance with current
SBA policy. Additionally, the reduced
revenue will be offset at least in part by
the estimated savings the small entities
will experience due to increased
efficiency in determining the
permissibility and reasonableness of the
fees charged.
To estimate the average annualized
cost per small entity, SBA annualized
the sum of all administrative costs plus
the estimated potential loss of revenue
(e.g., the total transfer amount of
$1,776,042.63) identified in the RIA
over a 10-year period. (See Table 6 in
the RIA.) The estimated total annualized
costs over 10 years at a 7 percent
discount rate range from a low estimate
of $2,773,295.70 to a high estimate of
$4,331,035. Dividing the total estimated
annualized costs by the 3,207 estimated
small entities affected, the annualized
cost per entity is estimated to be
between approximately $864.76 and
$1,350.49. Although SBA is unable to
ascertain the NAICS codes of all types
of entities considered to be Agents, SBA
used data from the 2012 U.S. Census
Bureau’s SUSB for NAICS code 522310
for Mortgage and Nonmortgage Loan
Brokers as an example to examine the
annualized compliance cost as a
percentage of annual receipts for small
entities classified by this NAICS code.
For the purposes of this estimation, SBA
has averaged the high and low estimates
of the annualized cost for a mid-point
total of $388 per entity.
MORTGAGE AND NONMORTGAGE LOAN BROKERS (NAICS 522310)
[$7.5 Million Size Standard]
Average
annual
receipts
jbell on DSKJLSW7X2PROD with RULES2
Firm size (by receipts)
All Firms ...............................................................................
Small Firms ..........................................................................
<100K ...................................................................................
100K–$499,999 ....................................................................
500,000–$999,999 ...............................................................
$1,000,000–$2,499,999 .......................................................
$2,500,000–$4,999,999 .......................................................
4 Based on SBA’s analysis of the loans guaranteed
during FY2013–FY2017, 83 Lenders and 162 Agents
reported charging the Applicant a fee in excess of
the limits imposed in this interim final rule.
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Annualized
cost per
firm
$1,005,967
549,802
48,038
250,730
693,276
1,482,997
3,244,231
$388
388
388
388
388
388
388
Although SBA recognizes that more than 50 percent
of 7(a) Lenders are not small, for purposes of the
RFA, SBA is assuming that all 83 Lenders are small.
As noted above, SBA estimates that 80 percent of
PO 00000
Frm 00025
Fmt 4701
Sfmt 4700
Number of
firms
7,007
6,817
1,533
3,233
1,042
721
216
Percent
of small
firms
N/A
100
22
47
15
12
3
Revenue
test *
(percent)
0.0
0.1
0.8
0.2
0.1
0.0
0.0
Agents are small; therefore, SBA is estimating that
130 of the 162 Agents that reported charging fees
in excess of the limits in this interim final rule are
small.
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MORTGAGE AND NONMORTGAGE LOAN BROKERS (NAICS 522310)—Continued
[$7.5 Million Size Standard]
Average
annual
receipts
Firm size (by receipts)
$5,000,000–$7,499,999 .......................................................
Annualized
cost per
firm
5,157,764
Number of
firms
388
72
Percent
of small
firms
Revenue
test *
(percent)
1
0.0
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* Annualized compliance costs as a percentage of annual receipts.
SBA has determined that the
annualized cost of this rule per entity
will not have a significant economic
impact on a substantial number of small
entities. First, the average annualized
cost in the example above is not a
significant percentage of each entity’s
average annual revenue for any size firm
considered to be small. It is also noted
that these annualized costs will be offset
by annualized benefits ranging from a
low estimate of $9,806,754 to a high
estimate of $19,613,433 (or
approximately $3,056–$6,116 per
entity). See the RIA above for more
information on the net annualized costs
and benefits. Second, the number of
small entities affected is not substantial.
As stated above, SBA estimates that
from FY2013 through FY2017 213 small
entities (83 small Lenders and 130 small
Agents) reported charging fees in excess
of the limits imposed in this interim
final rule. This represents only 8
percent of the 7(a) Lenders and Agents
that SBA has estimated are small. SBA
does not consider 83 small Lenders to
be a substantial number when compared
to the overall number of small Lenders,
which is approximately 2,000. With
respect to small Agents, SBA does not
consider 130 Agents to be a substantial
number when compared to the overall
number of small Agents. While SBA
used 602 as an estimate of the number
of small Agents, SBA believes the actual
number of small entities acting as
Agents in connection with the SBA loan
programs is most likely much larger
when taking into consideration the
attorneys, accountants, business
consultants and others that act as
Agents. As SBA noted above, the NAICS
Code for Mortgage and Nonmortgage
Loan Brokers used in the above example
is only one of numerous NAICS codes
under which Agents may be classified.
Many different types of individuals and
entities, including attorneys,
accountants, and business consultants,
act as Agents and assist Applicants in
obtaining SBA-guaranteed loans. Thus,
SBA believes that the actual universe of
small Agents may be considerably larger
than 602. When all of the potentially
relevant NAICS codes are considered,
SBA believes that the number of small
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17:48 Feb 07, 2020
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entities affected by this rule would be
even smaller than the 8% noted above.
Despite the fact that SBA determined
that the proposed rulemaking would not
have a significant economic impact on
a substantial number of small entities,
SBA made modifications to certain
elements of this interim final rule based
on comments received during the
proposed rule’s public comment period.
These modifications aimed to relieve a
perceived disparity for small SBA loans
of $350,000 or less, which according to
public commenters, most frequently
require the assistance of an Agent. For
example, SBA originally proposed
certain limitations to fees that Agents
could charge to an Applicant for
assistance in obtaining an SBA loan.
Public commenters asserted that these
fee limitations would force Agents out
of the market and reduce access to
capital for small businesses. Although
SBA disagrees with the assertion that
the proposed limits on fees would have
disproportionately impacted access to
these smaller loans, in the interim final
rule, SBA increased the permitted fee an
Agent or Agents may charge an
Applicant for assistance with obtaining
a loan of $350,000 or less from 2.5
percent of the loan amount or $7,000,
whichever is less, to 3.5 percent of the
loan amount or $10,000, whichever is
less. That revision represents an
increase of approximately 40 percent in
the permitted fees for smaller loans
when compared to the proposed rule,
and a significant increase in the fees
permitted under SBA’s current Loan
Program Requirements. In addition,
SBA adjusted the lower two loan
amount ranges, to ensure that the
maximum fee permitted on loans over
$350,000 up to and including $500,000
would not be lower than the maximum
fee permitted for loans of $350,000 or
less. Also, in the interim final rule, SBA
increased the fee a Lender may charge
an Applicant for assistance with
obtaining a loan of $350,000 or less from
$2,500 to $3,000, an increase of 20
percent over the proposed limit. By
having a bright-line test for what SBA
considers reasonable compensation for
services provided to an Applicant by an
Agent and a Lender, Lenders and Agents
will, in fact, save time and costs in
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analyzing and documenting that fees
charged to the Applicant are reasonable.
In an effort to minimize any potential
costs or revenue losses that may be
experienced by the 213 small Lenders
and Agents that reported charging fees
in excess of the revised limits in this
interim final rule, SBA is giving all SBA
Lenders and Agents additional time—
until October 1, 2020—to comply with
revised §§ 103.5(b) and 120.221(a).
Thus, these entities will have had two
years from the date of publication of the
proposed rule in September 2018 to
prepare for changes to the fee structure.
Additionally, SBA is allowing a period
of 120 days for Agents to make any
adjustments to conform to the clarified
definitions of the types of Agents in
§ 103.1 (e.g., Agents that may need to
enter into LSP agreements with Lenders
they provide services to).
Similarly, in accordance with SBA
Loan Program Requirements, SBA
Lenders must analyze the ability of the
small business Applicant to obtain
credit from non-Federal sources,
including the personal resources of
individuals and entities that own 20
percent or more of the Applicant
business. SBA proposed thresholds,
based on the size of the total financing
package, to assist the SBA Lender in
determining the amount of excess
personal liquid assets of 20 percent or
more owners of the small business
Applicant. Personal liquid assets
exceeding the stated thresholds must be
injected into the project to reduce the
SBA loan amount. Public commenters
recommended that the personal
liquidity thresholds be modified,
especially for smaller loans. SBA
reevaluated the personal liquidity
threshold for smaller loans and agreed
to modify the limits to ensure that
Applicants applying for smaller loans
are not adversely affected. The interim
final rule reinstates a bright-line test for
SBA Lenders to appropriately consider
the personal resources of the owners of
the Applicant, which will save SBA
Lenders time in their analysis.
SBA believes that this interim final
rule encompasses best practice guidance
that aligns with the Agency’s mission to
increase access to capital for small
businesses and facilitate American job
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preservation and creation by providing
bright-line tests to assist program
participants in understanding the Loan
Program Requirements and by removing
unnecessary regulatory requirements.
For the aforementioned reasons, SBA
has determined that this interim final
rule will not have a significant
economic impact on a substantial
number of small entities.
List of Subjects
13 CFR Part 103
Administrative practice and
procedure.
13 CFR Part 120
Community development,
Environmental protection, Equal
employment opportunity, Exports, Loan
programs—business, Reporting and
recordkeeping requirements, Small
businesses.
13 CFR Part 121
Loan programs—business, Reporting
and recordkeeping requirements, Small
businesses.
For the reasons stated in the
preamble, SBA is amending 13 CFR
parts 103, 120, and 121 as follows:
PART 103—STANDARDS FOR
CONDUCTING BUSINESS WITH SBA
1. The authority citation for part 103
is revised to read as follows:
■
Authority: 15 U.S.C. 634, 642.
2. Amend § 103.1 by:
a. Revising paragraph (a); and
b. Removing paragraphs (d), (e), and
(f) and redesignating paragraph (g) as
paragraph (d).
The revision reads as follows:
■
■
■
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§ 103.1
Jkt 250001
*
*
*
*
*
(g) Acting as an Agent (including a
Lender Service Provider) for an SBA
Lender and an Applicant on the same
SBA business loan and receiving
compensation from both the Applicant
and SBA Lender. For purposes of this
paragraph (g), the actions of an Agent
include the actions of the Agent’s
Affiliates, as defined in § 121.103 of this
chapter.
*
*
*
*
*
■ 4. Amend § 103.5 by revising
paragraph (b) and the last sentence of
paragraph (c) to read as follows:
*
Key definitions.
17:48 Feb 07, 2020
§ 103.4 What is ‘‘good cause’’ for
suspension or revocation?
§ 103.5 How does SBA regulate an Agent’s
fees and provision of service?
(a) Agent means an authorized
representative, including an attorney,
accountant, consultant, packager, lender
service provider, or any other individual
or entity representing an Applicant or
Participant by conducting business with
SBA. For purposes of SBA’s business
loan programs, the term Agent includes
but is not limited to:
(1) Lender Service Provider: an Agent
who assists the Lender with originating,
disbursing, servicing, liquidating, or
litigating SBA loans. The Lender bears
full responsibility for all aspects of its
SBA loan operation, including, but not
limited to, approvals, closings,
disbursements, servicing actions, and
due diligence. Lender Service Providers
may only receive compensation from
the Lender and such compensation may
not be passed on to the Applicant or
paid out of SBA-guaranteed loan
proceeds.
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(2) Packager: An Agent who prepares
the Applicant’s application for financial
assistance and is employed and
compensated by the Applicant.
(3) Loan Broker (also known as
Referral Agent): an Agent who, on a
specific transaction, either assists the
Applicant in finding an SBA Lender
that will be willing to make a loan to the
Applicant or assists the SBA Lender in
finding an Applicant. A Loan Broker
may be employed and compensated by
either the Applicant or the SBA Lender
(but not both). Compensation paid to a
Loan Broker by an SBA Lender may not
be passed on to the Applicant and may
not be paid out of SBA-guaranteed loan
or debenture proceeds.
*
*
*
*
*
■ 3. Amend § 103.4 by revising
paragraph (g) to read as follows:
*
*
*
*
(b) Total compensation charged by an
Agent or Agents to an Applicant for
services rendered in connection with
obtaining an SBA-guaranteed loan must
be reasonable. In cases where an Agent
or Agents charge any fee to an Applicant
in excess of those specified in this part,
the Agent(s) must reduce the charge and
refund to the Applicant any amount in
excess of the fee permitted by SBA. SBA
considers the following amounts to be
reasonable for the total compensation
that an Applicant can be charged by one
or more Agents:
(1) For loans up to and including
$500,000: A maximum of 3.5 percent of
the loan amount, or $10,000, whichever
is less;
(2) For loans $500,001–$1,000,000: A
maximum of 2 percent of the loan
amount, or $15,000, whichever is less;
and
(3) For loans over $1,000,000: A
maximum of 1.5 percent of the loan
amount, or $30,000, whichever is less.
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(c) * * * However, such
compensation may not be charged to an
Applicant or Borrower.
PART 120—BUSINESS LOANS
5. The authority citation for 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), and
note, 650, 657t, and note, 657u, and note,
687(f), 696(3) and (7), and note, and 697(a)
and (e), and note.
6. Amend § 120.10 by revising
paragraph (1)(i) of the defined term
‘‘Associate’’ to read as follows:
■
§ 120.10
Definitions.
*
*
*
*
*
Associate. (1) * * *
(i) An officer, director, key employee,
or holder of 20 percent or more of the
value of the Lender’s or CDC’s stock or
debt instruments, or an Agent (as
defined in § 103.1 of this chapter)
involved in the loan process; or
*
*
*
*
*
■ 7. Add § 120.102 to read as follows:
§ 120.102 Funds not available from
alternative sources, including the personal
resources of owners.
(a) An Applicant for a business loan
must show that the desired funds are
not available from the resources of any
individual or entity owning 20 percent
or more of the Applicant. SBA will
require the use of liquid assets from any
such owner as an injection to reduce the
SBA loan amount when that owner’s
liquid assets exceed the amounts
specified in paragraphs (a)(1) through
(3) of this section. SBA will reexamine
the thresholds periodically and, if
adjustments are necessary based on
nationally-recognized economic
indicators, SBA may modify the
thresholds from time to time through
rulemaking. When the total financing
package (i.e., any SBA loans and any
other financing, including loans from
any other source, requested by the
Applicant business at or about the same
time, as defined in Loan Program
Requirements (see § 120.10)):
(1) Is $350,000 or less, each 20
percent owner of the Applicant must
inject any liquid assets that are in excess
of two times the total financing package,
or $500,000, whichever is greater;
(2) Is between $350,001 and
$1,000,000, each 20 percent owner of
the Applicant must inject any liquid
assets that are in excess of one and onehalf times the total financing package, or
$1,000,000, whichever is greater; or
(3) Exceeds $1,000,000, each 20
percent owner of the Applicant must
inject any liquid assets that are in excess
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of one times the total financing package,
or $2,500,000, whichever is greater.
(b) Any liquid assets in excess of the
applicable amount set forth in
paragraph (a) of this section must be
used to reduce the SBA loan amount.
These funds must be injected prior to
the disbursement of the proceeds of any
SBA financing. In extraordinary
circumstances, SBA may, in its sole
discretion, permit exceptions to the
required injection of an owner’s excess
liquid assets.
(c) For purposes of this section,
‘‘liquid assets’’ means cash or cash
equivalents, including savings accounts,
CDs, stocks, bonds, or other similar
assets. Equity in real estate holdings, the
cash value of life insurance policies,
and other fixed assets are not to be
considered liquid assets. In addition,
the liquid assets of any 20 percent
owner who is an individual include the
liquid assets of the owner’s spouse and
any minor children.
(d) SBA Lenders must document their
analysis and determination in the loan
file.
■ 8. Amend § 120.130 by revising
paragraph (c) to read as follows:
§ 120.130 Restrictions on uses of
proceeds.
*
*
*
*
(c) Floor plan financing or other
revolving line of credit, except under
§ 120.340, § 120.390, or § 120.444;
*
*
*
*
*
■ 9. Amend § 120.221 by:
■ a. Revising the section heading and
paragraph (a); and
■ b. Adding a sentence at the end of
paragraph (b).
The revisions and addition read as
follows:
§ 120.221 Fees and expenses that the
Lender may collect from an Applicant or
Borrower.
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*
*
*
*
(a) Fees that can be collected from the
Applicant for assistance in obtaining a
loan. The Lender may collect a fee from
an Applicant (as defined in § 103.1 of
this chapter) for assistance with
obtaining an SBA-guaranteed loan. The
fee may not exceed $3,000 for a loan up
to and including $350,000 and may not
exceed $5,000 for a loan over $350,000.
The Lender must advise the Applicant
in writing that the Applicant is not
required to obtain or pay for unwanted
services. In cases where the Lender
charges any fees to the Applicant in
excess of those specified in this part, the
Lender must reduce the charge and
refund to the Applicant any amount in
excess of the permitted fee. If the Lender
charges the Applicant a fee for
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§ 120.222
[Amended]
10. Amend § 120.222 by removing the
word ‘‘in’’ before the words ‘‘any
premium received’’.
■
§ 120.344
[Amended]
11. Amend § 120.344(b) by removing
the period at the end of the paragraph
and adding in its place ‘‘, provided the
fees are reasonable and prudent.’’
■ 12. Revise § 120.350 to read as
follows:
■
§ 120.350
*
*
assistance with obtaining an SBAguaranteed loan, the fee must be
disclosed to SBA in accordance with
§ 103.5 of this chapter and documented
in accordance with Loan Program
Requirements.
(b) * * * For certain revolving lines
of credit made under § 120.390 and on
Export Working Capital Program loans
(as allowed under § 120.344(b)), subject
to SBA’s prior written approval, the
Lender may charge extraordinary
servicing fees in excess of 2 percent per
year on the outstanding balance of the
part requiring special servicing,
provided the fees are reasonable and
prudent.
*
*
*
*
*
Policy.
Section 7(a)(15) of the Act authorizes
SBA to guarantee a loan to a:
(a) Qualified employee trust (‘‘ESOP’’)
to:
(1) Help finance the growth of its
employer’s small business; or
(2) Purchase ownership or voting
control of the employer; and a
(b) Small business concern, if the
proceeds from the loan are only used to
make a loan to a qualified employee
trust that results in the qualified
employee trust owning at least 51
percent of the small business concern.
■ 13. Revise § 120.352 to read as
follows:
§ 120.352
Use of proceeds.
Loan proceeds may be used for:
(a) Qualified employee trust. A
qualified employee trust may use loan
proceeds for two purposes:
(1) Qualified employer securities. A
qualified employee trust may relend
loan proceeds to the employer by
purchasing qualified employer
securities. The small business concern
may use these funds for any general 7(a)
purpose.
(2) Control of employer. A qualified
employee trust may use loan proceeds
to purchase a controlling interest (51
percent) in the employer. Ownership
and control must vest in the trust by the
time the loan is repaid.
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(b) Small business concern. A small
business concern may only use loan
proceeds to make a loan to a qualified
employee trust that results in the
qualified employee trust owning at least
51 percent of the small business
concern.
■ 14. Amend § 120.432 by adding a
sentence at the end of paragraph (a) to
read as follows:
§ 120.432 Under what circumstances does
this subpart permit sales of, or sales of
participating interests in, 7(a) loans?
(a) * * * This paragraph (a) applies to
all 7(a) loans purchased from any
Federal or state banking regulator, any
receiver, or any conservator, unless SBA
agrees otherwise in writing.
*
*
*
*
*
■ 15. Amend § 120.440 by revising
paragraph (c) to read as follows:
§ 120.440 How does a 7(a) Lender obtain
delegated authority?
*
*
*
*
*
(c) If delegated authority is approved
or renewed, Lender must execute a
supplemental guarantee agreement,
which will specify a term not to exceed
two years. As provided in
§ 120.442(c)(2)(i), when SBA renews a
Lender’s authority to participate in SBA
Express, SBA may grant a longer term,
but not to exceed three years. For
approval or renewal of any delegated
authority, SBA may grant shortened
approvals or renewals based on risk or
any of the other delegated authority
criteria. Lenders with less than three
years of SBA lending experience will be
limited to an initial term of one year or
less.
■ 16. Add an undesignated center
heading and §§ 120.441 through 120.447
to read as follows:
SBA Express and Export Express Loan
Programs
Sec.
120.441 SBA Express and Export Express
Loan Programs.
120.442 Process to obtain or renew SBA
Express or Export Express authority.
120.443 SBA Express and Export Express
loan processing requirements.
120.444 Eligible uses of SBA Express and
Export Express loan proceeds.
120.445 Terms and conditions of SBA
Express and Export Express loans.
120.446 SBA Express and Export Express
loan closing, servicing, liquidation, and
litigation requirements.
120.447 Oversight of SBA Express and
Export Express Lenders.
§ 120.441 SBA Express and Export
Express Loan Programs.
(a) SBA Express. Under the SBA
Express Loan Program (SBA Express),
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designated Lenders (SBA Express
Lenders) process, close, service, and
liquidate SBA-guaranteed 7(a) loans
using their own loan analyses,
procedures, and documentation to the
maximum extent practicable, with
reduced requirements for submitting
documentation to, and prior approval
by, SBA. These loan analyses,
procedures, and documentation must
meet prudent lending standards; be
consistent with those an SBA Express
Lender uses for its similarly-sized, nonSBA guaranteed commercial loans; and
conform to all requirements imposed
upon Lenders generally and SBA
Express Lenders in particular by Loan
Program Requirements, as such
requirements are issued and revised by
SBA from time to time, unless
specifically identified by SBA as
inapplicable to SBA Express loans. In
return for the expanded authority and
autonomy provided by the program,
SBA Express Lenders agree to accept a
maximum SBA guaranty of 50 percent
of the SBA Express loan amount.
(b) Export Express. The Export
Express Loan Program (Export Express)
is designed to help current and
prospective small exporters. It is subject
to the same loan processing, making,
closing, servicing, and liquidation
requirements, as well as the same
interest rates and applicable fees, as
SBA Express, except as otherwise
provided in Loan Program
Requirements.
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§ 120.442 Process to obtain or renew SBA
Express or Export Express authority.
The decision to grant or renew SBA
Express or Export Express authority will
be made by the appropriate SBA official
in accordance with Delegations of
Authority and is final. If SBA Express or
Export Express authority is approved or
renewed, the Lender must execute a
supplemental guarantee agreement
before the Lender’s SBA Express or
Export Express authority will become
effective.
(a) Criteria and process for initial
approval of SBA Express or Export
Express authority. A Lender that wishes
to participate in SBA Express or Export
Express must submit a written request
to SBA.
(1) Existing 7(a) Lenders. In evaluating
an existing 7(a) Lender’s application for
SBA Express or Export Express
authority, SBA will consider the criteria
and follow the procedures set forth in
§ 120.440.
(2) Lending institutions that do not
currently participate with SBA. Lending
institutions that do not currently
participate with SBA must become 7(a)
Lenders to participate in SBA Express
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and/or Export Express. Such institutions
may request SBA 7(a) lending and SBA
Express and/or Export Express authority
simultaneously. In evaluating such
institutions, in addition to the criteria
set forth in §§ 120.410 and 120.440, SBA
will consider whether the institution:
(i) Has acceptable experience with
small commercial loans, including an
acceptable number of performing small
commercial loans outstanding at its
most recent fiscal year end; and
(ii) Has received appropriate training
on SBA’s policies and procedures.
(b) Criteria and process for renewal of
SBA Express or Export Express
authority. In renewing a Lender’s SBA
Express or Export Express authority and
determining the term of the renewal,
SBA will consider the criteria and
follow the process set forth in § 120.440
and also will consider whether the
Lender:
(1) Can effectively process, make,
close, service, and liquidate SBA
Express or Export Express loans, as
applicable;
(2) Has received a major substantive
objection regarding renewal from the
Field Office(s) covering the territory
where the Lender generates significant
numbers of SBA Express or Export
Express loans, as applicable; and
(3) Has received acceptable review
results on the SBA Express or Export
Express portion, as applicable, of any
SBA-administered Lender reviews.
(c) Term—(1) Initial approval. SBA
may approve a Lender’s authority to
participate in SBA Express or Export
Express for a maximum term of two
years. SBA may approve a shorter term
or limit a Lender’s maximum SBA
Express or Export Express loan volume
if, in SBA’s sole discretion, a Lender’s
qualifications, performance, experience
with SBA lending, or other factors so
warrant.
(2) Renewal—(i) SBA Express. SBA
may renew a Lender’s authority to
participate in SBA Express for two years
or, in SBA’s sole discretion, a maximum
of three years if a Lender’s
qualifications, performance, experience
with SBA lending, or other factors so
warrant.
(ii) Export Express. SBA may renew a
Lender’s authority to participate in
Export Express for a maximum term of
two years.
(iii) Shorter term or loan volume limit.
SBA may renew a Lender’s authority to
participate in SBA Express or Export
Express for a shorter term or limit a
Lender’s maximum SBA Express or
Export Express loan volume if, in SBA’s
sole discretion, a Lender’s
qualifications, performance, experience
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7649
with SBA lending, or other factors so
warrant.
§ 120.443 SBA Express and Export
Express loan processing requirements.
(a) SBA Express and Export Express
loans are subject to all of the
requirements set forth in subparts A and
B of this part, unless such requirements
are specifically identified by SBA as
inapplicable.
(b) In addition to the eligibility
criteria applicable to all 7(a) loans, an
Export Express Applicant must have
been in business for at least 12 full
months at the time of application, but
not necessarily in the exporting
business, unless the Lender determines
that the Applicant’s key personnel have
clearly demonstrated export expertise
and substantial previous successful
business experience and the Lender
processes the Export Express loan using
conventional commercial loan
underwriting procedures and does not
rely solely on credit scoring or credit
matrices to approve the loan.
(c) Certain types of loans and loan
programs are not eligible for SBA
Express or Export Express, as detailed in
official SBA policy and procedures,
including but not limited to:
(1) A loan that would reduce the
Lender’s existing credit exposure to a
single Borrower, including its affiliates
as defined in § 121.301(f) of this
chapter;
(2) A loan to a business that has an
outstanding 7(a) loan where the
Applicant is unable to certify that the
loan is current at the time of approval
of the SBA Express or Export Express
loan;
(3) A loan that would have as its
primary collateral real estate or personal
property that does not meet SBA’s
environmental requirements; and
(4) Complex loan structures or
eligibility situations.
(d) SBA has authorized SBA Express
and Export Express Lenders to make the
credit decision without prior SBA
review. Lenders must not make an SBAguaranteed loan that would be available
on reasonable terms from either the
Lender itself or another source without
an SBA guaranty in accordance with
§ 120.101. The credit analysis must
demonstrate that there is reasonable
assurance of repayment. SBA Express
and Export Express Lenders must use
appropriate and prudent credit analysis
processes and procedures that are
generally accepted in the commercial
lending industry and are consistent with
those used for their similarly-sized, nonSBA guaranteed commercial loans. As
part of their prudent credit analysis,
SBA Express and Export Express
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Lenders may use a business credit
scoring model (such a model cannot rely
solely on consumer credit scores) to
assess the credit history of the
Applicant and/or repayment ability if
they do so for their similarly-sized, nonSBA guaranteed commercial loans. SBA
Express and Export Express Lenders
must validate (and document) with
appropriate statistical methodologies
that their credit analysis procedures are
predictive of loan performance, and
they must provide that documentation
to SBA upon request. SBLCs must
provide such credit scoring model
validation and documentation to SBA
for review and approval on an annual
basis.
(e) SBA Express and Export Express
Lenders are responsible for all loan
decisions, including eligibility for 7(a)
loans (including size), creditworthiness,
and compliance with Loan Program
Requirements. SBA Express and Export
Express Lenders also are responsible for
confirming that all loan closing
decisions are correct and that they have
complied with all requirements of law
and Loan Program Requirements.
(f) SBA Express and Export Express
Lenders must ensure all required forms
are obtained and are complete and
properly executed. Appropriate
documentation must be maintained in
the Lender’s loan file, including
adequate information to support the
eligibility of the Applicant and the loan.
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§ 120.444 Eligible uses of SBA Express
and Export Express loan proceeds.
(a) SBA Express. (1) SBA Express loan
proceeds must be used exclusively for
eligible business-related purposes, as
described in §§ 120.120 and 120.130.
(2) Revolving lines of credit are
eligible for SBA Express, provided they
comply with official SBA policy and
procedures.
(b) Export Express. (1) Export Express
loans must be used for an export
development activity, which includes
the following:
(i) Obtaining a Standby Letter of
Credit when required as a bid bond,
performance bond, or advance payment
guarantee;
(ii) Participation in a trade show that
takes place outside the United States;
(iii) Translation of product brochures
or catalogues for use in markets outside
the United States;
(iv) Obtaining a general line of credit
for export purposes;
(v) Performing a service contract for
buyers located outside the United
States;
(vi) Obtaining transaction-specific
financing associated with completing
export orders;
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(vii) Purchasing real estate or
equipment to be used in the production
of goods or services for export;
(viii) Providing term loans and other
financing to enable a small business
concern, including an export trading
company and an export management
company, to develop a market outside
the United States; and
(ix) Acquiring, constructing,
renovating, modernizing, improving or
expanding a production facility or
equipment to be used in the United
States in the production of goods or
services for export.
(2) Revolving lines of credit for export
purposes are eligible for Export Express,
provided they comply with official SBA
policy and procedures.
(3) Export Express loans may not be
used to finance operations outside of the
United States, except for the marketing
and/or distribution of products/services
exported from the United States.
(4) Export Express Lenders are
responsible for ensuring that U.S.
companies are authorized to conduct
business with the Persons and countries
to which the Borrower will be
exporting.
(c) Debt refinancing. An SBA Express
or Export Express Lender may use loan
proceeds to refinance certain
outstanding debts, subject to official
SBA policy and procedures. However,
an SBA Express or Export Express
Lender may not refinance its own
existing SBA-guaranteed debt under
SBA Express or Export Express.
§ 120.445 Terms and conditions of SBA
Express and Export Express loans.
SBA Express and Export Express
loans are subject to the same terms and
conditions as other 7(a) loans except as
set forth in this section:
(a) Maximum loan amount and
maximum aggregate loan amount—(1)
SBA Express. The maximum loan
amount for an SBA Express loan is set
forth in section 7(a)(31) of the Small
Business Act. The aggregate amount of
all outstanding SBA Express loans to a
single Borrower, including the
Borrower’s affiliates as defined in
§ 121.301(f) of this chapter, must not
exceed the statutory maximum.
(2) Export Express. The maximum
loan amount for an Export Express loan
is set forth in section 7(a)(34) of the
Small Business Act. The aggregate
amount of all outstanding Export
Express loans to a single Borrower,
including the Borrower’s affiliates as
defined in § 121.301(f) of this chapter,
must not exceed the statutory
maximum.
(b) Maximum SBA guarantee—(1)
SBA Express. The maximum SBA
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guarantee on an SBA Express loan is 50
percent of the SBA Express loan
amount. In addition, the guaranteed
amount of all SBA Express loans to a
single Borrower, including the
Borrower’s affiliates, counts toward the
maximum guaranty amount as described
in § 120.151.
(2) Export Express. The maximum
SBA guarantee on an Export Express
loan of $350,000 or less is 90 percent,
and for a loan over $350,000 is 75
percent, of the Export Express loan
amount. In addition, the guaranteed
amount of all Export Express loans to a
single Borrower, including the
Borrower’s affiliates, counts toward the
maximum guaranty amount as described
in § 120.151.
(c) Maturity—(1) SBA Express. SBA
Express loans must have a stated
maturity and the maximum maturities
are the same as any other 7(a) loan,
except that revolving SBA Express loans
are limited to a maximum of 10 years,
as described more fully in official SBA
policy and procedures.
(2) Export Express. Export Express
loans must have a stated maturity and
the maximum maturities are the same as
any other 7(a) loan, except that
revolving Export Express loans are
limited to a maximum maturity of 7
years, as described more fully in official
SBA policy and procedures.
(d) Interest rates. (1) For fixed interest
rate loans, SBA Express and Export
Express Lenders may charge a
reasonable fixed interest rate in
accordance with § 120.213.
(2) For variable interest rate loans:
(i) SBA Express and Export Express
Lenders may charge up to 4.5 percent
over the prime rate on loans over
$50,000 and up to 6.5 percent over the
prime rate for loans of $50,000 or less,
regardless of the maturity of the loan.
The prime rate will be that which is in
effect on the first business day of the
month, as printed in a national financial
newspaper published each business
day.
(ii) SBA Express and Export Express
Lenders are not required to use the base
rate identified in § 120.214(c). SBA
Express and Export Express Lenders
may use the same base rate of interest
they use on their similarly-sized, nonSBA guaranteed commercial loans, as
well as their established change
intervals, payment accruals, and other
interest rate terms. However, the interest
rate must never exceed the maximum
allowable interest rate stated in
paragraph (d)(2)(i) of this section.
Additionally, the loan may be sold on
the Secondary Market only if the base
rate is one of the base rates allowed in
§ 120.214(c).
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(3) The amount of interest SBA will
pay to a Lender following default of an
SBA Express or Export Express loan is
capped at the maximum interest rates
for the standard 7(a) loan program set
forth in §§ 120.213 through 120.215.
(e) Collateral. (1) With the exception
of paragraphs (e)(2) and (3) of this
section, to the maximum extent
practicable, SBA Express and Export
Express Lenders must follow the same
collateral policies and procedures that
they have established and implemented
for their similarly-sized, non-SBA
guaranteed commercial loans, including
those concerning identification of
collateral. Such policies and procedures
must be commercially reasonable and
prudent.
(2) SBA may establish a threshold
below which SBA Express and Export
Express Lenders will not be required to
take collateral to secure an SBA Express
or Export Express loan. If established,
such a threshold will be described more
fully in official SBA policy and
procedures.
(3) Export Express lines of credit over
$25,000 used to support the issuance of
a standby letter of credit must have
collateral (cash, cash equivalent, or
project) that will provide coverage for at
least 25 percent of the issued standby
letter of credit amount.
(f) Insurance. SBA Express and Export
Express Lenders must follow the same
insurance policies they have established
and implemented for their similarlysized, non-SBA guaranteed commercial
loans.
(g) Sale on the Secondary Market.
SBA Express and Export Express
Lenders may sell the guaranteed portion
of an SBA Express or Export Express
term loan on the Secondary Market
under the policies and procedures
described in subpart F of this part. SBA
Express or Export Express Lenders may
not sell the guaranteed portion of an
SBA Express or Export Express
revolving line of credit on the
Secondary Market.
(h) Loan increases. With SBA’s prior
written consent, an SBA Express or
Export Express Lender may increase an
SBA Express or Export Express loan
based on the needs of the Borrower and
its credit situation, as further specified
in Loan Program Requirements.
§ 120.446 SBA Express and Export
Express loan closing, servicing, liquidation,
and litigation requirements.
(a) Closing. Except as set forth in this
paragraph (a), SBA Express and Export
Express Lenders must close their SBA
Express and Export Express loans using
the same documentation and procedures
that they use for their similarly-sized,
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non-SBA guaranteed commercial loans.
Such documentation and procedures
must comply with law, prudent lending
practices, and Loan Program
Requirements. When closing an SBA
Express or Export Express loan, the
Lender must require the Borrower to
execute a promissory note that is legally
enforceable and assignable. Before the
first disbursement of any SBA Express
or Export Express loan proceeds, the
Lender must obtain all required
collateral, including obtaining valid and
enforceable security interests in such
collateral, and also must meet all other
required pre-closing loan conditions as
set forth in official SBA policy and
procedures.
(b) Servicing, liquidation, and
litigation. Servicing, liquidation, and
litigation responsibilities for SBA
Express and Export Express Lenders are
set forth in subpart E of this part.
(c) SBA’s purchase of the guaranteed
portion of an SBA Express or Export
Express loan—(1) When SBA will
purchase. SBA will purchase the
guaranteed portion of an SBA Express or
Export Express loan in accordance with
§ 120.520 and official SBA policy and
procedures. An SBA Express or Export
Express Lender may not request
purchase of the guaranty based solely on
a violation of a non-financial default
provision.
(2) Amount that SBA will pay upon
purchase—(i) SBA Express. SBA will
pay a maximum of 50 percent of the
total principal balance of the SBA
Express loan outstanding after
liquidation, plus up to 120 days of
accrued interest at the rate in effect at
the time of the earliest uncured default
(if liquidation proceeds collected by the
SBA Express Lender were insufficient
for the Lender to recover a full 120 days
of interest).
(ii) Export Express. SBA will pay a
maximum of 75 or 90 percent (as
applicable) of the total principal balance
of the Export Express loan outstanding
after liquidation, plus up to 120 days of
interest at the rate in effect at the time
of the earliest uncured default (if
liquidation proceeds collected by the
Export Express Lender were insufficient
for the Lender to recover a full 120 days
of interest).
(3) Release of SBA liability under its
guarantee. SBA will be released from its
liability to purchase the guaranteed
portion of an SBA Express or Export
Express loan, either in whole or in part,
in SBA’s sole discretion, under any of
the circumstances described in
§ 120.524.
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7651
§ 120.447 Oversight of SBA Express and
Export Express Lenders.
SBA Express and Export Express
Lenders are subject to the same riskbased lender oversight as other 7(a)
Lenders, including the supervision and
enforcement provisions, in accordance
with subpart I of this part.
§ 120.707
[Amended]
17. Amend the last sentence of
§ 120.707(b) by removing the word ‘‘six’’
and adding in its place the word
‘‘seven’’.
■ 18. Amend § 120.712 by:
■ a. Revising paragraph (b)(1); and
■ b. In paragraph (d), removing the
number ‘‘25’’ and adding in its place the
number ‘‘50’’.
The revision reads as follows:
■
§ 120.712 How does an Intermediary get a
grant to assist Microloan borrowers?
*
*
*
*
*
(b) * * *
(1) Up to 50 percent of the grant funds
may be used to provide information and
technical assistance to prospective
Microloan borrowers; provided,
however, that no more than 5 percent of
the grant funds may be used to market
or advertise the products and services of
the Microloan Intermediary directly
related to the Microloan Program; and
*
*
*
*
*
■ 19. Amend § 120.840 by revising
paragraph (b) to read as follows:
§ 120.840
(ALP).
Accredited Lenders Program
*
*
*
*
*
(b) Application. A CDC must apply for
ALP status by submitting an application
in accordance with SBA’s Standard
Operating Procedure 50 10, available at
https://www.sba.gov. A final decision
will be made by the appropriate SBA
official in accordance with Delegations
of Authority.
*
*
*
*
*
PART 121—SMALL BUSINESS SIZE
REGULATIONS
20. The authority citation for part 121
continues to read as follows:
■
Authority: 15 U.S.C. 632, 634(b)(6), 662,
and 649a(9).
21. Amend § 121.301 by:
a. Revising paragraph (f)(4);
b. Redesignating paragraphs (f)(5)
through (7) as paragraphs (f)(7) through
(9), respectively;
■ c. Adding new paragraphs (f)(5) and
(6) and revising newly redesignated
paragraph (f)(7).
The revisions and additions to read as
follows:
■
■
■
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§ 121.301 What size standards and
affiliation principles are applicable to
financial assistance programs?
*
*
*
*
(f) * * *
(4) Affiliation based on identity of
interest—(i) General. Affiliation may
arise among two or more individuals or
firms with an identity of interest.
Individuals or firms that have identical
or substantially identical business or
economic interests (such as close
relatives, individuals or firms with
common investments, or firms that are
economically dependent through
contractual or other relationships) may
be treated as one party with such
interests aggregated. Where SBA
determines that such interests should be
aggregated, an individual or firm may
rebut that determination with evidence
showing that the interests deemed to be
one are in fact separate.
(ii) Close relatives. Affiliation arises
when there is an identity of interest
between close relatives, as defined in
§ 120.10 of this chapter, with identical
or substantially identical business or
economic interests (such as where the
close relatives operate concerns in the
same or similar industry in the same
geographic area).
(iii) Common investments. Affiliation
arises through common investments
where the same individuals or firms
together own a substantial portion of
multiple concerns in the same or related
industry, and such concerns conduct
business with each other, or share
resources, equipment, locations, or
employees with one another, or provide
loan guaranties or other financial or
managerial support to each other.
However, where an SBA Lender has
made a determination of no affiliation
under this ground, SBA will not
overturn that determination as long as it
was reasonable when made given the
information available to the SBA Lender
at the time.
(iv) Economic dependence. Affiliation
based upon economic dependence may
arise when a concern derived more than
85 percent of its receipts over the
previous three fiscal years from a
contractual relationship with another
concern, unless:
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(A) The contract (or contracts) does
not restrict the concern in question from
selling the same type of products or
services to another purchaser; or
(B) SBA agrees that the terms of the
contract (or contracts) do not provide
the purchaser with control or the power
to control the seller.
(5) Affiliation based on the newly
organized concern rule in this
paragraph (f)(5). Affiliation may arise
where current or former officers,
directors, owners of a 20 percent
interest or greater, managing members,
or persons hired to manage day-to-day
operations of one concern organize a
new concern in the same or related
industry or field of operation, and serve
as the new concern’s officers, directors,
owners of a 20 percent interest or
greater, or managing members, and there
are direct monetary benefits flowing
from the new concern to the original
concern. A concern may rebut such an
affiliation determination by
demonstrating a clear line of fracture
between the two concerns. A concern
will be considered ‘‘new’’ for the
purpose of this paragraph (f)(5) if it has
been actively operating for two years or
less. However, where an SBA Lender
has made a determination of no
affiliation under this ground, SBA will
not overturn that determination as long
as it was reasonable when made given
the information available to the SBA
Lender at the time.
(6) Affiliation based on totality of the
circumstances. In determining whether
affiliation exists, SBA may consider all
connections between the concern and a
possible affiliate. Even though no single
factor is sufficient to constitute
affiliation, SBA may find affiliation on
a case-by-case basis where there is clear
and convincing evidence based on the
totality of the circumstances. However,
where an SBA Lender has made a
determination of no affiliation, SBA will
not overturn that determination as long
as it was reasonable when made given
the information available to the SBA
Lender at the time.
(7) Affiliation based on franchise
agreements. (i) The restraints imposed
on a franchisee by its franchise
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agreement generally will not be
considered in determining whether the
franchisor is affiliated with an applicant
franchisee provided the applicant
franchisee has the right to profit from its
efforts and bears the risk of loss
commensurate with ownership. SBA
will only consider the franchise
agreements of the applicant concern.
SBA will maintain a centralized list of
franchise and other similar agreements
that are eligible for SBA financial
assistance, which will identify any
additional documentation necessary to
resolve any eligibility or affiliation
issues between the franchisor and the
small business applicant.
(ii) For purposes of this section,
‘‘franchise’’ means any continuing
commercial relationship or
arrangement, whatever it may be called,
that meets the Federal Trade
Commission definition of ‘‘franchise’’ in
16 CFR part 436.
*
*
*
*
*
22. Amend § 121.302 by revising
paragraphs (a) and (b) to read as follows:
■
§ 121.302 When does SBA determine the
size status of an applicant?
(a) The size status of an applicant for
SBA financial assistance is determined
as of the date the application for
financial assistance is accepted for
processing by SBA, except for
applications under the Preferred
Lenders Program (PLP), the SBA
Express Loan Program (SBA Express),
the Export Express Loan Program
(Export Express), the Disaster Loan
Program, the SBIC Program, and the
New Markets Venture Capital (NMVC)
Program.
(b) For PLP, SBA Express, and Export
Express, size is determined as of the
date of approval of the loan by the
Lender.
*
*
*
*
*
Dated: January 29, 2020.
Jovita Carranza,
Administrator.
[FR Doc. 2020–02128 Filed 2–7–20; 8:45 am]
BILLING CODE 8025–01–P
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]]>Agencies
[Federal Register Volume 85, Number 27 (Monday, February 10, 2020)]
[Rules and Regulations]
[Pages 7622-7652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02128]
[[Page 7621]]
Vol. 85
Monday,
No. 27
February 10, 2020
Part II
Small Business Administration
-----------------------------------------------------------------------
13 CFR Part 103, 120 and 121
Express Loan Programs; Affiliation Standards; Interim Final Rule
Federal Register / Vol. 85 , No. 27 / Monday, February 10, 2020 /
Rules and Regulations
[[Page 7622]]
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 103, 120, and 121
RIN 3245-AG74
Express Loan Programs; Affiliation Standards
AGENCY: U.S. Small Business Administration.
ACTION: Interim final rule; request for comments.
-----------------------------------------------------------------------
SUMMARY: The U.S. Small Business Administration (SBA or Agency) is
amending various regulations governing its business loan programs,
including the SBA Express and Export Express Loan Programs and the
Microloan and Development Company (504) loan programs. SBA previously
published a Notice of Proposed Rulemaking addressing all of the topics
and issues covered by this interim final rule and received extensive
comments from the public. SBA is publishing this rule interim final
rather than proceeding to a final rule in order to provide the public
with an additional opportunity to comment. In addition, the rule will
become effective in 30 days but compliance with two of the regulatory
changes will not be required until October 1, 2020.
DATES:
Effective date: This rule is effective March 11, 2020.
Compliance date: The compliance date for Sec. Sec. 103.5(b) and
120.221(a) is October 1, 2020.
Comment date: Comments on this rule must be received on or before
April 10, 2020.
ADDRESSES: You may submit comments, identified by RIN 3245-AG74, by any
of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments (Regulations.Gov
Docket: SBA-2018-0009).
Mail: Rosemarie Drake, Office of Financial Assistance,
Office of Capital Access, Small Business Administration, 409 Third
Street SW, Washington, DC 20416.
Hand Delivery/Courier: Rosemarie Drake, Office of
Financial Assistance, Office of Capital Access, Small Business
Administration, 409 Third Street SW, Washington, DC 20416.
SBA will post all comments on www.regulations.gov. If you wish to
submit confidential business information (CBI) as defined in the User
Notice at www.regulations.gov, please submit the information to
Rosemarie Drake, Office of Financial Assistance, 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: Dianna L. Seaborn, Director, Office of
Financial Assistance, Office of Capital Access, Small Business
Administration, 409 Third Street SW, Washington, DC 20416; telephone:
(202) 205-3645; email: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background Information
The SBA programs affected by this interim final rule are:
1. The 7(a) Loan Program authorized pursuant to Section 7(a) of the
Small Business Act (the Act) (15 U.S.C. 636(a));
2. The Business Disaster Loan Programs (collectively, Economic
Injury Disaster Loans, Military Reservist Economic Injury Disaster
Loans, and Physical Disaster Business Loans) authorized pursuant to
Section 7(b) of the Act (15 U.S.C. 636(b));
3. The Microloan Program authorized pursuant to Section 7(m) of the
Act (15 U.S.C. 636(m));
4. The Intermediary Lending Pilot (ILP) Program authorized pursuant
to Section 7(l) of the Act (15 U.S.C. 636(l));
5. The Surety Bond Guarantee Program authorized pursuant to Part B
of Title IV of the Small Business Investment Act of 1958 (15 U.S.C.
694b et seq.); and
6. The Development Company Program (the 504 Loan Program)
authorized pursuant to Title V of the Small Business Investment Act of
1958 (15 U.S.C. 695 et seq.). (In this interim final rule, the 7(a),
Microloan, ILP, and 504 Loan Programs are collectively referred to as
the Business Loan Programs.)
On September 28, 2018, SBA published a proposed rule with request
for comments in the Federal Register to incorporate the requirements
related to the SBA Express and Export Express Loan Programs; add a
regulation pertaining to the 7(a) and Development Company (504) loan
programs regarding when the owners of a small business Applicant are
required to inject excess liquid assets into the project; amend certain
regulations setting forth the affiliation principles applicable to SBA
financial assistance programs; limit certain fees payable by loan
Applicants to amounts deemed reasonable by SBA; clarify the
responsibility of a Lender for the contingent liabilities associated
with 7(a) loans purchased from the Federal Deposit Insurance
Corporation; and, finally, amend certain regulations governing the use
of microloan grant funds by Microloan Intermediaries and the maximum
maturity of a microloan. (83 FR 49001) The original comment period was
scheduled to end November 27, 2018. On November 16, 2018, SBA announced
an extension of the public comment period for an additional 15 business
days to December 18, 2018. (83 FR 57693)
II. Summary of Comments
During the public comment period, 4,251 comments were submitted,
142 of which were duplicate submissions, meaning an identical comment
submitted multiple times by the same commenter.
The comments submitted came from 17 Congressional representatives
or State government offices, 48 trade associations or non-profit
organizations, 64 Certified Development Companies (CDCs), 86 Agents or
Lender Service Providers (LSPs), 259 banks and non-bank lenders, SBA's
Office of Advocacy, and 3,635 individuals. The Agency's responses to
the Office of Advocacy's comments are included in section III.C below.
The majority of the regulatory changes proposed by SBA, including
but not limited to incorporating SBA Express and Export Express Loan
Program Requirements, modifying certain regulations concerning the
Microloan Program, and technical corrections or conforming amendments,
were supported by the commenters with either no opposition or
recommendation for minor modifications.
While there were a significant number of comments in opposition to
the proposed changes to limit fees that Lenders and Agents may charge
small business Applicants in connection with an SBA-guaranteed loan,
SBA notes that most of these comments were generated through a single
website through which interested parties could submit a public comment
to SBA ``with one click.'' This website's electronic mechanism auto-
generated a rotating boilerplate comment letter and submitted the
comment letter on behalf of the individual who simply had to provide a
name, street address, zip code, phone number, and email address.
Approximately 54 percent of the total comments received by SBA were
comprised of these auto-generated boilerplate comments, and more than
90 percent of the comments received on the proposed changes to the
regulations
[[Page 7623]]
concerning fees that Agents may charge Applicants in connection with
SBA-guaranteed loans were comprised of these auto-generated boilerplate
comments. The website promoting these auto-generated comments was
created by a coalition made up of small business-focused lenders,
facilitators, and associations working with small businesses and
entrepreneurs. As discussed more fully in the Section-by-Section
Analysis below, the information contained on the coalition's website
and communicated on their social media platforms contained significant
inaccuracies regarding both the current and proposed SBA rules
regarding Agent fees. SBA considered this misinformation by the
coalition when reviewing the comments received.
SBA received a large number of comments on the proposed changes to
the affiliation principles applicable to the financial assistance
programs set out in Sec. 121.301(f). The majority of these comments
were in response to the proposed changes to Sec. 121.301(f)(4), which
would expand the ``identity of interest'' basis for affiliation to
include businesses with common investments and businesses that are
economically dependent. Many commenters who opposed these proposed
changes expressed concern that the changes would negatively impact
poultry farmers and other agricultural producers.
SBA also received comments from 75 individuals or entities
expressing general concerns unassociated with any specific section of
the proposed regulations. One concern, expressed by 58 commenters, was
related to the determination that the rule is not a ``significant''
regulatory action for the purposes of Executive Order 12866. Since the
end of the public comment period, the Office of Management and Budget
has changed the designation of the rule to ``significant.'' In this
interim final rule, SBA has amended the Regulatory Impact Analysis and
Regulatory Flexibility Analysis to reflect the change in designation.
SBA also received 54 recommendations for the Agency to consider
requesting a statutory amendment to increase the maximum size of SBA
Express loans from $350,000 to $500,000. SBA included a request in the
President's fiscal year 2020 budget to increase the maximum SBA Express
loan amount to $1,000,000 and agrees that an increase in the maximum
loan size is needed.
SBA received 13 comments that generally opposed the proposed rule
as a whole, but none provided specific reasons or explanation for why
the proposed regulations should not be put into place.
Finally, SBA received two comments related to general 7(a) Loan
Program policy that were not related to any regulation included in the
proposed modifications. SBA will consider those comments when updating
future program guidance.
SBA has addressed in detail the comments received on specific
proposed regulatory changes within the appropriate Section-by-Section
analysis below.
III. Section-by-Section Analysis of Comments and Changes
A. Business Loan Programs
1. SBA Express and Export Express Loan Programs
Section 120.441 SBA Express and Export Express Loan Programs
SBA proposed to add a regulation providing general descriptions of
the SBA Express and Export Express Loan Programs.
SBA received 60 comments on this proposed change. Fifty-nine of the
comments supported this proposed change with a recommendation that SBA
amend this section and other relevant subsections to clarify that SBA's
general Loan Program Requirements apply to SBA Express and Export
Express loans, except when such requirements are inconsistent with
other requirements or guidance provided in SBA Loan Program
Requirements specific to SBA Express or Export Express. SBA believes
that this recommendation has already been addressed in the regulatory
language proposed in Sec. 120.441(a) and (b), which applies to the
associated regulations in Sec. Sec. 120.442 through 120.447. It is
repetitive and unnecessary to include this statement in all subsequent
related sections.
One commenter expressed concern that SBA granting Lenders
unilateral authority to process SBA Express and Export Express loans
could ``disproportionately affect'' women and minority business owners
because the proposed regulations do not appear to incorporate necessary
safeguards against ``stifled growth in urban communities and
sustainability for women and other minority businesses within these
communities.'' The commenter did not provide any evidence to support
his or her concern. SBA does not agree that delegating loan making
authority to lenders disproportionately affects women or minority
business owners. The SBA Express and Export Express Programs began
operating as pilot programs in 1995 and 1998, respectively, and were
made permanent in 2004 and 2010, respectively. As explained in the
description of the programs being added as Sec. 120.441, both programs
were designed for Lenders to process loans exclusively under delegated
authority and Congress has authorized SBA to permit qualified Lenders
to make SBA Express and Export Express loans using, to the maximum
extent practicable, their own processes, analyses, and documentation.
SBA is adopting the regulation as proposed.
Section 120.442 Process To Obtain or Renew SBA Express or Export
Express Authority
SBA proposed adding a regulation that sets forth the criteria and
process to obtain or renew SBA Express or Export Express authority.
SBA received 57 comments on this proposed change. All commenters
supported the addition of the regulation. SBA is adopting the
regulation as proposed.
Section 120.443 SBA Express and Export Express Loan Processing
Requirements
SBA proposed adding a regulation that sets forth the requirements
for loan processing under the SBA Express and Export Express loan
programs.
SBA received 59 comments on this proposed change. All commenters
supported the addition of the regulation. SBA is adopting the
regulation as proposed with one modification.
An additional eligibility requirement applicable to Export Express,
which has been a part of the Export Express Program since it was
established and which is currently set out in SBA's Standard Operating
Procedures 50 10, Lender and Development Company Loan Programs, as
amended from time to time (SOP 50 10), was inadvertently omitted from
the proposed rule. This additional eligibility requirement states that,
in addition to the eligibility requirements for all 7(a) loans,
Applicants for Export Express loans must have been in operation,
although not necessarily in exporting, for at least 12 full months.
However, Applicants that have been in operation for less than 12 months
are eligible if the Lender determines that the Applicant's key
personnel have clearly demonstrated export expertise and substantial
previous successful business experience, and the Lender processes the
Export Express loan using conventional commercial loan underwriting
procedures and does not rely solely on credit scoring or credit
[[Page 7624]]
matrices to approve the loan.\1\ The Export Express Lender must
document that the Applicant's key personnel have the requisite
experience in exporting. The Export Working Capital Program, which
Export Express was based on, has a similar requirement set out in Sec.
120.341.
---------------------------------------------------------------------------
\1\ Non-bank Lenders that do not have a conventional loan
portfolio must submit their underwriting procedures to the Office of
Credit Risk Management for written approval prior to making an
Export Express loan.
---------------------------------------------------------------------------
As one of the stated purposes of the proposed rule was to
``incorporate into the regulations governing the 7(a) Loan Program the
requirements specifically applicable to the SBA Express and Export
Express Loan Programs in order to provide additional clarity for SBA
Express and Export Express Lenders,'' SBA is modifying Sec. 120.443 to
include the additional eligibility requirement applicable to Export
Express which was inadvertently omitted in the proposed rule. SBA is
adding a new paragraph (b) to incorporate the requirement. SBA is
redesignating the remaining paragraphs as (c) through (f).
Section 120.444 Eligible Uses of SBA Express and Export Express Loan
Proceeds
SBA proposed adding a regulation to identify the eligible uses of
loan proceeds for SBA Express and Export Express loans.
SBA received 59 comments on this proposed change. Fifty-seven
commenters supported the addition of the regulation. One SBA Lender
commented in opposition to Sec. 120.444(b)(4) which states, ``Export
Express Lenders are responsible for ensuring that U.S. companies are
authorized to conduct business with the Persons and countries to which
the Borrower will be exporting.'' This Lender believes this requirement
to be unnecessary and burdensome and instead recommends a risk-based
approach, such as having the customer sign an attestation as to the
licensing requirements for lower-risk transactions or, for higher-risk
transactions, requiring customers to provide a copy of the license(s)
or a letter from an export attorney as to why a license is not
required. This requirement has always been part of the Export Express
Program and, pursuant to the current procedure in SOP 50 10, Export
Express Lenders can satisfy this requirement by checking the Ex-Im Bank
Country Limitation Schedule and, for certain types of Export Express
loans, the Department of Treasury's Office of Foreign Assets Control
(OFAC) sanctions list. SBA is not expanding this requirement and,
therefore, the Agency does not agree that this regulation as proposed
will cause any undue burden on Export Express Lenders.
Another Lender expressed concern that while the summary of the
proposed change in the preamble to the proposed rule references the SBA
Express Lender's responsibility to ``take reasonable steps to ensure
and document that the loan proceeds are used exclusively for business-
related purchases,'' there is no regulatory language proposed in Sec.
120.444 that describes this requirement. The Lender objected to the
language in the preamble, claiming that it would be impractical for the
Lender to fulfill any such proposed responsibility
``postdisbursement.'' In addition, the Lender stated that during the
loan application and documentation processes, the Applicant already
attests that all funds will be exclusively used for business-related
purposes. This responsibility is an existing requirement for all
Lenders making 7(a) loans, including SBA Express Lenders on SBA Express
loans, pursuant to Sec. Sec. 120.120 and 120.130. SBA's SOP 50 10,
Subpart B, Chapter 7 clearly outlines the acceptable documentation with
which Lenders may document disbursement. The Lender's responsibility as
described in the preamble of the proposed rule references this existing
requirement, which SBA is not expanding and, therefore, the Agency does
not agree with the commenter's objections.
SBA is adopting the regulation as proposed with two minor technical
clarifications to Sec. 120.444(b)(3) to replace ``overseas
operations'' with ``operations outside of the United States'' and to
replace ``U.S.'' with ``United States.''
Section 120.445 Terms and Conditions of SBA Express and Export Express
Loans
SBA proposed to add a new regulation to identify those terms and
conditions of SBA Express and Export Express loans that are unique to
these two programs, including maximum loan amounts and guaranty
percentages, maturities, interest rates, collateral and insurance
requirements, allowable fees, and requirements concerning loan
increases.
SBA received 59 comments on this proposed regulation, with 57
commenters supporting the addition of the regulation. One individual
opposed the provision in Sec. 120.445(g) that prohibits SBA Express
and Export Express Lenders from selling the guaranteed portion of an
SBA Express or Export Express revolving line of credit on the secondary
market. This commenter argued that any product that has ended its draw
period and is in principal and interest repayment should be able to be
sold on the secondary market, regardless of delivery method or whether
the loan is a line of credit. SBA's existing Loan Program Requirements
for all 7(a) loans, including SBA Express and Export Express loans,
prohibit revolving loans or line of credit facilities to be sold on the
secondary market. SBA appreciates the opinion expressed by this
commenter but is not electing to modify this Loan Program Requirement.
One SBA Lender objected to the proposed change to require SBA
Express and Export Express Lenders to comply with the same rules that
apply to all other 7(a) Lenders with respect to the fees that may be
collected from an Applicant or Borrower on SBA Express and Export
Express loans. This Lender stated that it does not charge an
``application fee'' in connection with its SBA-guaranteed loans;
rather, it charges a ``loan fee.'' Further, this Lender asserted that,
if it ``will be required to document `packaging fees' and process the
related paperwork and transmittal [to SBA's Fiscal and Transfer
Agent]'' then the Lender will likely have to increase the fees it
charges to Applicants and the Lender's ``delivery process efficiency
will be impaired.'' This Lender appears to have misunderstood the
proposed changes regarding fees, as well as the current requirements
concerning disclosure of fees.
As stated in the preamble to the proposed rule, SBA proposed
changes to the fees a Lender is permitted to collect from an Applicant
in order to simplify the rules regarding such fees. SBA stated that,
regardless of what the fee is called (e.g., a packaging fee, an
application fee, etc.), the Lender would be permitted to charge an
Applicant a fee up to a certain amount, depending on the loan amount.
Thus, whether this Lender calls the fee an ``application fee'' or a
``loan fee,'' as long as the fee charged does not exceed the maximum
set forth in Sec. 120.221(a), the Lender would be permitted to charge
the fee. Further, while the proposed rule did not change the
requirement that, if the Lender charges an Applicant a fee for
assistance with obtaining an SBA-guaranteed loan, the Lender must
disclose the fee on SBA Form 159, the proposed rule did eliminate the
current requirement that the Lender itemize fees over $2,500. Thus, if
this Lender charges a ``loan fee'' it would need to disclose the fee on
SBA Form 159, but it would not be required to itemize the fee or
[[Page 7625]]
provide supporting documentation. Finally, the requirement to submit
the completed SBA Form 159 to SBA's Fiscal and Transfer Agent after
there has been an initial disbursement on the loan is a current
requirement applicable to all 7(a) Lenders, including SBA Express and
Export Express Lenders. SBA disagrees with the Lender's contention that
the proposed change will increase the burden on SBA Express and Export
Express Lenders and is adopting as proposed the change to require SBA
Express and Export Express Lenders to comply with the same rules that
apply to all other 7(a) Lenders with respect to the fees that may be
collected from an Applicant or Borrower.
With respect to interest rates, SBA stated in the proposed rule
that SBA Express and Export Express Lenders may charge up to 4.5
percent over the prime rate on loans over $50,000 and up to 6.5 percent
over the prime rate for loans of $50,000 or less, regardless of the
maturity of the loan, and did not distinguish between fixed or variable
interest rate loans. Since the publication of the proposed rule, SBA
published a document in the Federal Register revising the maximum
allowable fixed interest rate for 7(a) loans under 13 CFR 120.213. (83
FR 55478, November 6, 2018) In that Federal Register document, SBA set
the maximum allowable fixed interest rates for SBA Express and Export
Express loans at the same levels as the maximum fixed interest rates
allowable for 7(a) loans generally.
Consequently, SBA is modifying Sec. 120.445(d) to differentiate
between fixed and variable rate loans and to provide that the maximum
allowable fixed interest rate for SBA Express and Export Express loans
is the same as the maximum fixed interest rate allowable for 7(a) loans
generally as set forth in 13 CFR 120.213. SBA is adopting the remainder
of the regulation as proposed.
Section 120.446 SBA Express and Export Express Loan Closing, Servicing,
Liquidation, and Litigation Requirements
SBA proposed to add a new regulation providing that SBA Express and
Export Express Lenders must close, service, liquidate, and litigate
their SBA Express and Export Express loans using the same documentation
and procedures they use for their similarly-sized, non-SBA guaranteed
commercial loans, which must comply with law, prudent lending
practices, and Loan Program Requirements. Additionally, the proposed
regulation provided that SBA Express and Export Express Lenders must
comply with the loan servicing and liquidation responsibilities set
forth for 7(a) Lenders in 13 CFR part 120, subpart E, and other Loan
Program Requirements. The proposed regulation also described the
circumstances under which SBA will honor the guaranty on SBA Express
and Export Express loans.
SBA received 59 comments on this proposed regulation, all of which
supported its incorporation into the regulations. SBA is adopting the
regulation as proposed.
Section 120.447 Oversight of SBA Express and Export Express Lenders
SBA proposed to add a new regulation explaining that SBA Express
and Export Express Lenders are subject to the same risk-based lender
oversight as other 7(a) Lenders, including supervision and enforcement
provisions, in accordance with 13 CFR part 120, subpart I.
SBA received 57 comments on this proposed regulation, all of which
supported its incorporation into the regulations. SBA is adopting the
regulation as proposed with one minor technical clarification to insert
``other'' before ``7(a) Lenders'' and a minor edit to the section
heading.
2. Credit Elsewhere and the Personal Resources of Owners of the Small
Business Applicant
Section 120.102 Funds Not Available From Alternative Sources, Including
the Personal Resources of Owners
To aid SBA Lenders in determining whether an Applicant has access
to ``credit elsewhere,'' SBA proposed to reinstitute a ``personal
resources test.'' The personal resources test provides SBA Lenders
(i.e., both 7(a) Lenders and CDCs) with a bright-line test to analyze
the resources of individuals and entities that own 20 percent or more
of the Applicant business in order to determine if any of the owners
have liquid assets available that can provide some or all of the
desired financing. When an owner of 20 percent or more has liquid
assets that exceed stated thresholds, SBA proposed to require an
injection of cash from any such owner to reduce the SBA loan amount.
SBA proposed specific thresholds setting the required injection of such
owners' excess liquid assets based on the size of the total financing
package (defined for the purposes of this section as any SBA loans and
any other financing, including loans from any other source, requested
by the Applicant business at or about the same time). As set forth in
SOP 50 10, SBA considers ``at or about the same time'' to mean loans
approved within 90 days of each other.
SBA received 200 comments on this proposed change. Of these
comments, 135 expressed concern with this change, including 103 SBA
Lenders, 18 individuals, 9 trade associations, 4 Agents, and SBA's
Office of Advocacy.
There were a few main concerns expressed by these commenters. Some
argued that the personal resources test and required equity injection
of excess personal liquid assets should not apply to the 504 Loan
Program because Congress already requires an equity injection for 504
loans and because 504 loans are statutorily required to create jobs;
therefore, these small businesses need liquidity to meet these
objectives. Another concern expressed by many commenters was that
compliance with the proposed regulation would be onerous and burdensome
for SBA Lenders. Lastly, commenters expressed concern that the personal
resources test may limit the resources available to a small business
owner in the event of an unforeseen emergency or may eliminate
potential borrowers from seeking SBA financing altogether due to
owners' aversion to additional equity injections.
SBA disagrees with the argument that the personal resources test
should not apply to the 504 Loan Program. Regardless of other program-
specific requirements, SBA's statutory responsibility for both
financial assistance programs includes ensuring that loans are not made
if the Applicant has access to funds from private sources or elsewhere
on reasonable terms. Subsequent to SBA's removal of the personal
resources test from the regulations in 2014 (79 FR 15641), many SBA
Lenders expressed confusion as to how to adequately determine whether a
small business has access to credit elsewhere based on personal liquid
assets. During SBA Lender reviews, SBA has identified inconsistent and
irregular applications of this assessment when the determination was
left to the SBA Lender's discretion, including approval of loans to
businesses with principals that maintained extremely high levels of
personal liquid assets. Reinstatement of the personal resources test
will eliminate the ambiguity of the credit elsewhere determination and
provide SBA Lenders the certainty they have sought in recent years.
With respect to the job creation or retention requirements in the 504
Loan Program, in November 2018, SBA increased the dollar amounts used
in calculating the number of jobs that must be created or retained,
thereby making it easier for 504 loans to satisfy the statutory job
creation requirement. In addition, SBA designated additional areas for
application of the higher portfolio
[[Page 7626]]
average. (83 FR 55224, November 2, 2018) Thus, SBA already has taken
steps to facilitate compliance with the job creation requirements in
the 504 Loan Program. Further, while SBA recognizes that the
requirement of additional equity injections in the proposed rule may be
unattractive to some potential borrowers, SBA proposed to increase the
thresholds set forth in the 2014 personal resources test to allow for
greater personal liquidity to be maintained by owners.
Sixty-five commenters supported reinstatement of the personal
resources test with suggested modifications. The commenters included 53
SBA Lenders, 5 Agents, 3 individuals, 3 trade associations, and 1
member of Congress. While these commenters supported reinstatement,
many recommended that the personal liquidity thresholds be modified,
especially for smaller loans. Commenters also recommended that SBA more
clearly define what assets are considered ``liquid'' and provide
further explanation or additional examples of the extraordinary
circumstances that may qualify as an exception to the injection
requirement. Additionally, some commenters requested that SBA modify
the test to be based on the SBA loan amount, rather than the total
financing package, and to apply the test only to individual persons and
not entities. Two commenters suggested that SBA consider allowing an
alternative to requiring the owner to inject excess liquid assets by
allowing the owner to instead pledge the liquid assets as collateral
for the loan.
After considering the comments received on this change, SBA has
reevaluated the personal liquidity threshold for smaller loans and
agrees to modify the limits to ensure that Applicants applying for
smaller loans are not adversely affected. SBA is adopting the
regulation as proposed for loans greater than $350,000; however, based
on the comments received, SBA is increasing the liquidity that 20
percent or more owners may retain for loans of $350,000 or less. When
the total financing package (i.e., any SBA loans and any other
financing, including loans from any other source, requested by the
Applicant business at or about the same time, as defined in SOP 50 10)
is $350,000 or less, each 20 percent owner of the Applicant must inject
any liquid assets that are in excess of two times the total financing
package, or $500,000, whichever is greater. (The proposed rule would
have required injection of any liquid assets that were in excess of one
and three-quarter times the total financing package, or $200,000,
whichever was greater.) SBA also is modifying the regulatory text to
provide that SBA will reexamine the thresholds periodically and, if
adjustments are necessary, SBA may modify the thresholds through
rulemaking from time to time based on nationally-recognized economic
indicators.
SBA is adopting the proposed definition of ``liquid assets,'' with
a modification to exclude the cash value of life insurance policies
from the definition. The Agency will provide additional examples as to
what will or will not be considered ``liquid assets'' in SOP 50 10. SBA
will continue to base the personal resources test on the total
financing package, but is adding language to clarify that the phrase
``at or about the same time'' has the meaning set forth in SBA Loan
Program Requirements. (As noted above, SOP 50 10 sets forth that SBA
considers ``at or about the same time'' to mean loans approved within
90 days of each other.) SBA, in its sole discretion, may permit
exceptions to the required injection of an owner's excess liquid assets
only in extraordinary circumstances, such as when the excess funds are
needed for immediate medical expenses of a family member.
3. Permissible Fees That a Lender or Agent May Collect From an
Applicant or Borrower in Connection With an SBA-Guaranteed Loan
Section 120.221 Fees and Expenses That the Lender May Collect From an
Applicant or Borrower
SBA proposed revisions to paragraphs (a) and (b) of this section.
SBA proposed to amend Sec. 120.221(a) to limit the total fees an
Applicant can be charged by a Lender for assistance with obtaining an
SBA-guaranteed loan. Regardless of what the fee is called (e.g., a
packaging fee, application fee, etc.), the Lender would be permitted to
collect a fee from the Applicant of no more than $2,500 for a loan up
to and including $350,000, and no more than $5,000 for a loan over
$350,000. With the exception of necessary out-of-pocket costs, such as
filing or recording fees permitted in Sec. 120.221(c) and legal fees
that are charged on an hourly basis permitted in Sec. 120.221(e), this
is the only fee that a Lender may collect directly or indirectly from
an Applicant for assistance with obtaining an SBA-guaranteed loan.
SBA received 294 comments on this proposed change. Of these
comments, 215 (73 percent) were comprised of 7 different auto-generated
templates submitted by individuals and SBA Lenders. Each template
varied slightly in wording; however, all template comments opposed the
proposed changes and expressed concern that limiting the fees an SBA
Lender may charge to an Applicant will hurt small businesses by forcing
Lenders to leave the market for smaller loans of $350,000 or less.
SBA received 17 other non-automated comments expressing similar
concern: 9 from SBA Lenders; 4 from individuals; 3 from trade
associations; and 1 from an Agent. Many of these comments echoed the
sentiment that the fee limits, specifically for loans of $350,000 or
less, were set too low.
The remaining 62 comments received on this proposed change
supported SBA's proposal to clarify the fees that Lenders can charge
7(a) loan Applicants, with modification. These commenters included 52
SBA Lenders, 4 trade associations, 4 Agents, and 2 individuals. While
these commenters generally supported the proposed change, they
recommended that SBA consider increasing the fee that a Lender may
charge an Applicant for a loan of $350,000 or less.
SBA has considered these comments and agrees to increase the
maximum permissible fee a Lender may charge an Applicant for a loan of
$350,000 or less. Regardless of what the fee is called (e.g., a
packaging fee, application fee, etc.), the Lender will be permitted to
collect a fee from the Applicant that is no more than $3,000 for a loan
up to and including $350,000 and no more than $5,000 for a loan over
$350,000.
Based on the comments and SBA's observations during lender reviews,
SBA considers the revised fees to be reasonable for the services
provided by a Lender to an Applicant for assistance with obtaining an
SBA-guaranteed loan. SBA will monitor these fee levels and, if
adjustments are necessary, SBA may revise these amounts from time to
time through rulemaking.
SBA received several comments on proposed Sec. 120.221 suggesting
that SBA modify the circumstances under which SBA may require a Lender
to refund excess fee amounts. SBA considered these comments and is
modifying the regulatory text to specifically state that SBA may
require a Lender to refund any amount charged to an Applicant in excess
of what is permitted by SBA in this regulation.
In addition, in accordance with longstanding Agency policy, the
Lender may not split a loan into two loans for the purpose of charging
an additional fee to an Applicant. Even if there is a legitimate
business need for the Applicant's loan request to be split into two
loans (e.g., a term loan and a line of credit), the Lender may only
charge the Applicant one fee within the
[[Page 7627]]
maximums set forth above, based on the combined loan amounts. However,
it is not SBA's intention to restrict a Lender from charging a new fee
if an Applicant subsequently returns to the Lender to apply for a new
loan for a different project or purpose. SBA will provide additional
guidance in SOP 50 10 as necessary.
If the Lender charges the Applicant a fee for assistance with
obtaining an SBA-guaranteed loan, the Lender must disclose the fee to
the Applicant and SBA by completing the Compensation Agreement (SBA
Form 159) in accordance with Sec. 103.5 and the procedures set forth
in SOP 50 10. However, the Lender will no longer be required to itemize
the fees charged to the Applicant.
SBA recognizes that some Lenders may need to revise their policies,
procedures or documentation in order to comply with the new limits on
fees in Sec. 120.221(a). In order to minimize the impact of the change
on affected Lenders, SBA is not requiring compliance with revised Sec.
120.221(a) until October 1, 2020. Until that time, Lenders are to
continue to comply with the requirements in Sec. 120.221(a) as
published in the 2019 edition of the Code of Federal Regulations, and
the guidance in SOP 50 10 5(K). However, considering the benefits that
the new fee limits offer, SBA expects that many Lenders will want to
comply with them before October 1, 2020. They are permitted to do so.
SBA recommends that these Lenders document in each loan file their
decision to use the new fee limits.
SBA also proposed to amend Sec. 120.221(b) to permit extraordinary
servicing fees in excess of 2 percent per year for Export Working
Capital Program (EWCP) loans and Working Capital CAPLines that are
disbursed based on a Borrowing Base Certificate. In these programs, the
fees charged would need to be reasonable and prudent based on the level
of extraordinary effort required and could not be higher than the fees
charged on the Lender's similarly-sized, non-SBA guaranteed commercial
loans.
SBA received 54 comments on this proposed change. All comments
supported the amendment to allow different extraordinary servicing fees
to be charged in connection with EWCP loans and Working Capital
CAPLines that are disbursed based on a Borrowing Base Certificate.
However, one commenter noted that the regulatory language proposed
makes no mention of the extraordinary servicing fees permissible for
other 7(a) loans that may be allowed in certain cases, such as
construction. This commenter recommended that SBA clearly identify that
extraordinary servicing fees previously allowed are not impacted by the
rule change.
SBA appreciates this comment and agrees that the proposed
regulatory language inadvertently omitted the current language in the
regulation. It was not SBA's intent to eliminate the permissible
extraordinary servicing fees previously allowed in appropriate
circumstances for certain 7(a) loans. SBA is adopting the amendment to
the regulation and is correcting the inadvertent error that would have
eliminated the current language in the regulation.
Section 103.4 What is ``good cause'' for suspension or revocation?
SBA proposed to eliminate the limited exception to the ``two master
prohibition'' currently contained in Sec. 103.4(g). This exception
currently applies when an Agent acts as a Packager and is compensated
by the Applicant for packaging services, and the same Agent also acts
as a Referral Agent and is compensated by the Lender for those
activities in connection with the same loan application. SBA's proposed
elimination of this exception would prevent an Agent, including an LSP,
from providing services to both the Applicant and the SBA Lender and
being compensated by both parties in connection with the same loan
application. SBA also proposed to revise the remaining text of Sec.
103.4(g) for clarity and to use the defined term ``SBA Lender'' in the
revised regulation to clarify that it applies to both 7(a) Lenders and
CDCs.
SBA received 987 comments on this proposal. Of these comments, 915
were auto-generated comments submitted by individuals (i.e., 93 percent
of all comments received on this issue). The comments were comprised of
11 templates which varied slightly in wording; however, all template
comments opposed the proposed changes and expressed the concern that
eliminating an Agent's ability to serve both the SBA Lender and the
Applicant would restrict a small business's access to capital,
specifically for loans under $350,000. The commenters asserted that the
changes proposed in this section and Sec. 103.5 would force Agents out
of the market for loans under $350,000 and, according to these
commenters, without Agents, small businesses would have no other way to
gain access to affordable credit from an SBA Lender.
SBA strongly disagrees with the claims and underlying assumptions
made by these commenters. Applicants are in no way obligated or
expected to engage a third party or pay for assistance in order to
obtain an SBA-guaranteed loan. For those Applicants who would like
assistance in applying for a loan, SBA provides several options for
free and low-cost assistance through our resource partners, including
Small Business Development Centers, Women's Business Centers, Veteran's
Business Outreach Centers, United States Export Assistance Centers,
SCORE Business Mentors, Lender Match, and local SBA District Offices,
which are accessible nationwide. Over the course of five fiscal years
(FY2013-FY2017), only 2.78 percent of total approved 7(a) loans
reported utilizing an Agent (other than the participating Lender) to
provide assistance to an Applicant for a fee. Therefore, SBA disagrees
with the claim that small businesses will not be able to obtain SBA
loans, or that SBA Lenders will not be willing to make such SBA loans,
if the proposed changes to Sec. 103.4 are made final.
SBA received only 12 other comments opposing the proposed change: 4
from associations representing bankers or small business owners; 3 from
SBA Lenders; 3 from Agents; 1 from a Member of Congress; and 1 from an
individual. These comments aligned with the sentiments of the auto-
generated comments, also claiming that the elimination of the limited
exception to the ``two master'' rule would lead to a reduction in small
SBA loans and would negatively impact both the small businesses seeking
SBA loans and the economic interests of the Agents that serve them.
Five individuals commented that the proposed changes to Sec. 103.4
would eliminate SBA-guaranteed lending to small business poultry
farmers. SBA believes these comments were misdirected and intended to
be made instead on the proposed affiliation regulations and has
included these comments in that discussion later in the Section-by-
Section Analysis.
The remaining 55 commenters (47 bank and non-bank lenders, 5
Agents, 2 individuals, and 1 trade association representing government-
guaranteed lenders) supported the proposal, with some providing
recommendations for improvement. The recommendations for improvement
included: Allowing specific and nominal fees to be charged by an Agent
to both the Lender and the Applicant; requiring more transparent
disclosure of Agent involvement on SBA forms; and defining the terms
``Agent'' and ``Associate'' more clearly.
After consideration of the comments received on the proposed change
to
[[Page 7628]]
Sec. 103.4(g), SBA continues to believe that there is, at a minimum,
an appearance of a conflict of interest when an Agent represents both
the Applicant and the SBA Lender on the same loan application, which
SBA believes should not be permitted under SBA regulations. Therefore,
SBA is adopting the proposal to eliminate the limited exception to the
``two master'' prohibition. No Agent, including an LSP, may provide
services to both the Applicant and the SBA Lender and be compensated by
both parties in connection with the same loan application.
One commenter, a trade association representing hundreds of
government-guaranteed Lenders and other members of the SBA lending
community, including Agents, recommended that the regulation include a
provision clarifying that ``agent'' includes any ``associates'' of the
Agent. This would make clear that, for example, an Agent cannot use a
separate (but related) entity to circumvent the two master prohibition.
SBA agrees that this recommendation is consistent with the intent of
the proposed rule and is modifying the regulatory text to add the
clarification. For additional clarity, SBA is using the term
``Affiliate'' of an agent (as defined in Sec. 121.103), rather than
``associate.'' Further, SBA is adopting the proposal to use the defined
term ``SBA Lender'' in the revised regulation to clarify that this rule
applies to both 7(a) Lenders and CDCs.
In addition, based on the comments received, SBA reviewed the
definitions in Sec. 103.1 to determine if further clarification of the
defined terms is necessary. The rules governing Agents in part 103,
including the definitions within Sec. 103.1, were last modified in
1996. Since that time, the number of Agents, including LSPs, as well as
their involvement in SBA loan making has increased dramatically.
According to Lenders' reporting of fees charged to an Applicant in
connection with obtaining a 7(a) loan, and other information gathered
by the Office of Credit Risk Management (OCRM) during lender oversight
reviews, the number of loans where an Agent was reported to have been
used has increased by an average of 49 percent each year from FY2013 to
FY2017 (although the total reported number of such loans is only 2.78
percent of total approved 7(a) loans for such period). Further,
advancements in technology have resulted in Agents charging fees for
services to both Applicants and SBA Lenders that could not have been
considered at the time these rules were last revised. Based on the
foregoing, SBA agrees with the commenters that the definitions in part
103 need clarification as to whom SBA considers to be an Agent.
Therefore, in this interim final rule, SBA is clarifying the
definitions of the various categories of Agents, including LSPs,
Packagers, and Referral Agents for purposes of the business loan
programs.\2\
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\2\ The clarifications being made to the definitions in Sec.
103.1 do not affect the use of the terms ``packager, agent, or
representative'' in Sec. 124.4, regarding the 8(a) Business
Development Program.
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Specifically, SBA is moving the definitions of LSP, Packager, and
Referral Agent into Sec. 103.1(a) (the definition of ``Agent''), which
will clarify that these are different types of Agents for purposes of
the business loan programs. In addition, in the definition of the term
``Agent'' in Sec. 103.1(a), SBA is replacing the term ``person'' with
``individual or entity,'' consistent with the longstanding
understanding of that term.
In the definition of LSP, SBA is simplifying the language
describing the services that an LSP provides to a Lender. An LSP
``assists the Lender with originating, disbursing, servicing,
liquidating, or litigating SBA loans.'' To further clarify that the LSP
may only assist the Lender (and not make decisions on behalf of the
Lender), SBA is including in the definition a statement that the Lender
bears full responsibility for all aspects of its SBA loan operation,
including, but not limited to, approvals, closings, disbursements,
servicing actions, and due diligence. This description of the Lender's
responsibility over all aspects of its SBA loan operation is
longstanding SBA policy that has been included in SBA's SOP 50 10. SBA
is incorporating this important concept into the definition of an LSP
to further clarify the relationship between an LSP and Lender.
SBA also is clarifying in the definition that LSPs may only receive
compensation from the Lender and such compensation may not be passed on
to the Applicant or paid out of SBA-guaranteed loan proceeds. This
conforms the definition of LSP to the proposed change to Sec. 103.5(c)
discussed below. This also is consistent with longstanding SBA policy
regarding LSPs.
Further, SBA is making a conforming change to the definition of
``Packager'' to clarify that, going forward, the term will apply only
to those Agents who provide packaging services to Applicants. SBA's SOP
50 10 defines ``packaging services'' as ``assisting the Applicant with
completing one or more applications, preparing a business plan, cash
flow projections, and other documents related to the application.''
(SOP 50 10 5, Subpart B, Chapter 3, Paragraph VI.) Accordingly, SBA is
clarifying that Packagers may only be compensated by the Applicant (as
opposed to the Applicant or the Lender as in the current regulation).
Agents that provide ``loan packaging services'' to Lenders are
considered to be LSPs, not Packagers. This is because, based on OCRM's
observations during lender oversight reviews, when an Agent provides
``loan packaging services'' for the Lender, the services provided
typically include underwriting and assisting the Lender with its
analysis of the application. Because this type of Agent is assisting
the Lender with originating loans, it is considered to be an LSP.
SBA also is modifying the definition of ``Referral Agent'' by
changing the term to ``Loan Broker'' in order to more closely align
with the terminology used in the industry. In addition, consistent with
the change to the two master prohibition in Sec. 103.4(g) discussed
above, SBA is using the term ``SBA Lender'' to clarify that the defined
term ``Loan Broker'' applies to both 7(a) Lenders and CDCs. The revised
definition of Loan Broker will include a statement that a Loan Broker
may be employed and compensated by either the Applicant or the SBA
Lender, but not both. (The current definition of ``Referral Agent''
includes a similar statement.)
As a result, an Agent may be both a Loan Broker and a Packager for
the Applicant; however, under the two master prohibition in Sec.
103.4(g), an Agent that is a Packager for the Applicant may not also
serve as a Loan Broker for the SBA Lender. In addition, SBA is
clarifying in the definition that compensation paid to a Loan Broker
from an SBA Lender cannot be passed on to the Applicant or paid out of
SBA-guaranteed loan or debenture proceeds. Again, this is consistent
with longstanding policy that an SBA Lender may not pass on to the
Applicant any fees paid by an SBA Lender to an Agent the SBA Lender has
employed in connection with an SBA-guaranteed loan.
The above described clarifications to the definitions related to
Agents in Sec. 103.1 also will assist Agents and SBA Lenders in
properly identifying Agents and their services when completing SBA Form
159 and will provide the transparency requested by commenters.
During the course of lender oversight reviews, OCRM has found
arrangements between Agents and Lenders where the Agent and/or Lender
assert that the
[[Page 7629]]
Agent is not an LSP (and, therefore, not subject to the requirements
that an LSP Agreement be reviewed by SBA and the prohibition on sharing
secondary market premiums). In some instances, although these Agents
state they are providing ``packaging'' and/or ``referral services'' to
the Applicant and being paid out of the guaranteed loan proceeds, the
Agent actually is operating under a written contract with the Lender to
package and refer Applicants that meet the Lender's internal credit
policies and is providing a fully underwritten loan application to the
Lender. In other instances, the ``packaging'' services the Agent is
providing are actually underwriting functions for the Lender (e.g., the
Agent is pulling credit reports/credit scores, obtaining IRS tax
transcripts, providing financial ratios and analyses, analyzing
applicant eligibility). In still other instances, the services are
provided by the Agent to the Lender through a software platform and are
called ``technology services'' or a ``technology license,'' but the
``technology'' is performing underwriting functions for the Lender.
One Agent asserted in its comment letter that it serves only as a
referral and packaging agent for Applicants and that it does not
perform any Lender functions on behalf of the bank. This Agent stated
that it charges the Applicant a packaging fee of 2 percent of the loan
amount and a referral fee of 2 percent of the loan amount. This Agent
also stated that it licenses a software platform to banks to assist
them with evaluating and processing SBA loans of $350,000 or less and
that, as a technology licensor, the Agent does not perform any Lender
functions on behalf of the bank. SBA disagrees with this
characterization. Regardless of whether the assistance is provided
through technology or otherwise, SBA believes that an Agent who is
assisting a Lender with evaluating and processing loans is assisting
the Lender with originating loans and, therefore, meets the definition
of an LSP.
SBA intends to provide additional guidance on the circumstances
under which SBA considers an individual or entity to be an Agent in SOP
50 10. However, in response to comments requesting additional clarity
in this rulemaking, SBA is providing the following example of
individuals or entities that SBA considers to be Agents and, more
specifically, when SBA considers an Agent to be working for an SBA
Lender (such Agents cannot also provide services to the Applicant on
the same loan application):
An individual or entity engaged by an SBA Lender to
provide services that include interaction with the Applicant, either
in-person or through the use of technology, to request or obtain
eligibility and/or financial information that will be provided to the
SBA Lender for the purposes of obtaining Federal financial assistance.
This includes Agents who perform any pre-qualification review based on
SBA's eligibility and credit criteria or the SBA Lender's internal
policies prior to submitting the Applicant's information to the SBA
Lender. This also includes Agents who provide to the SBA Lender an
underwritten application, whether through the use of technology or
otherwise. In all such cases, the Agent is providing services to the
SBA Lender and, therefore, may not also provide services to the
Applicant in connection with the same loan.
Further, when determining whether an Agent is considered to be an
LSP for the Lender (and therefore required to enter into a written
agreement with the Lender, among other requirements), the degree to
which a Lender relies on a Loan Broker to generate loan originations
may be considered. Again, SBA will provide additional guidance in SOP
50 10.
SBA also intends to include guidance in SOP 50 10 as to when
certain entities will not be considered by the Agency to be Agents,
such as:
Entities that license software or software platforms to
SBA Lenders solely for the purpose of performing administrative
functions (not including any underwriting functions), such as
generating SBA-required forms; and
Entities that develop systems or lending platforms to
automate the SBA Lender's internal loan decision making process for the
SBA Lender's use in determining an Applicant's eligibility or
creditworthiness.
Finally, in response to public comments asking for clarity in the
definitions of ``Agent'' and ``Associates,'' SBA also is clarifying the
definition of ``Associate'' of a Lender or CDC in Sec. 120.10. The
current definition of an Associate of a Lender or CDC includes, among
others, ``an agent involved in the loan process.'' In order to provide
more clarity for SBA Lenders and their Associates, SBA is modifying
this definition to capitalize the term ``Agent'' and add a
parenthetical to clarify that ``an Agent involved in the loan process''
means an Agent, as that term is defined in 13 CFR 103.1. This is
consistent with SBA's longstanding interpretation of the definition of
Associate in Sec. 120.10.
Some Agents may need to make adjustments to conform to the
definitions of the various types of Agents, as clarified in this
interim final rule. For example, some Agents may need to enter into LSP
agreements with the Lenders they provide services to, and the agreement
must be submitted to SBA for review in accordance with Sec. 103.5.
(SBA's SOP 50 10 provides guidance related to the content of LSP
agreements and the process to submit the agreement for SBA's review.)
While Agents will not be permitted to provide assistance to both the
Applicant and the SBA Lender in connection with the same loan beginning
on the effective date of this interim final rule, SBA will permit
Agents and Lenders a period of 120 days from the date of publication of
this interim final rule in order to enter into an LSP agreement that
has been reviewed by SBA. SBA will work with Agents and Lenders to help
them meet that deadline.
Section 103.5 How does SBA regulate an Agent's fees and provision of
service?
SBA proposed to revise paragraphs (b) and (c) of this regulation.
Section 103.5(b) contains the requirement for all Agents to disclose to
SBA the compensation received for services provided to an Applicant and
requires that fees charged must be considered reasonable by SBA. In an
effort to clarify what SBA considers reasonable compensation for
services provided to an Applicant by an Agent or Agents and to prevent
Applicants from being overcharged by Agents, SBA proposed to amend this
section to limit the total fees that one or more Agents may charge an
Applicant for assistance with obtaining an SBA-guaranteed loan. SBA
proposed the following limitations on the fees that an Agent (or
Agents) may charge an Applicant:
For loans up to and including $350,000: A maximum of up to
2.5 percent of the loan amount, or $7,000, whichever is less;
For loans $350,001-$1,000,000: A maximum of up to 2
percent of the loan amount, or $15,000, whichever is less; and
For loans over $1,000,000: A maximum of up to 1.5 percent
of the loan amount, or $30,000, whichever is less.
SBA received 2,441 comments on this proposal. Similar to the
comments received on Sec. 103.4, 2,343 of these comments were
comprised of 26 auto-generated templates (96 percent of the comments
received on this issue). Of these comments, 2,242 were submitted by
individuals, 70 by Agents, 30 by SBA Lenders, and 1 by a banking
association.
[[Page 7630]]
Each template varied slightly in wording; however, all template
comments opposed the proposed changes and expressed concern that
limiting the fees an Agent may charge to an Applicant will restrict a
small business's access to capital, specifically for loans under
$350,000.
SBA received 35 non-automated comments that expressed a similar
concern with this proposal: 14 from individuals; 7 from SBA Lenders; 6
from associations representing commercial lenders; 5 from Agents; 2
from Members of Congress; and 1 from SBA's Office of Advocacy. These
comments expressed concern that the proposed fee limits are set below
market rates and, with these caps in place, it would not be
economically feasible for Agents to continue to assist small businesses
with loans under $350,000, which would in turn force small businesses
to predatory lenders with no other way to gain access to affordable
credit from an SBA Lender. These commenters requested that the
permitted fee structure remain at the current limits, which as stated
in the Summary of Comments above has been inaccurately interpreted by
the coalition that created a website to facilitate the auto-generated
comments, as well as by many Agents who charge Applicants multiple fees
of up to 2 percent of the loan amount for each fee in connection with
the same loan application.
The coalition website incorrectly states that SBA currently caps
fees an Agent may charge an Applicant at 2 percent for ``Referral'' and
2 percent for ``Packaging'' services, for a total of 4 percent of the
loan amount, for loans between $50,000 and $1,000,000. SBA's current
policy regarding fees for loan packaging and other services (including
referral fees paid by the Applicant) is that the fees must be
reasonable and customary and must be for services actually performed; a
standard or flat fee is not acceptable; and for fees charged based on a
percentage of the loan amount, the fee may not exceed 2 percent of the
loan amount for loans between $50,000 and $1,000,000. While some have
apparently interpreted SBA's current policy to permit multiple fees
exceeding, in the aggregate, the maximum fee amount, SBA does not
permit an Applicant to be charged multiple fees, with each fee
permitted to be up to the maximum of 2 percent of the loan amount. If
an Agent performs multiple services for an Applicant in connection with
a loan application between $50,000 and $1,000,000 (e.g., packaging and
referral services), the total amount the Agent can charge the Applicant
for all services may not exceed 2 percent of the loan amount.
Five individuals commented that the proposed changes to Sec. 103.5
would eliminate SBA-guaranteed lending to small business poultry
farmers. SBA believes these comments were misdirected and intended to
be made on the proposed affiliation regulations and has included the
comments in that discussion later in the Section-by-Section Analysis.
The remaining 59 commenters (50 SBA Lenders, 4 Agents, 3
individuals, and 2 trade associations) supported the proposal with
recommended modifications. The main recommendation presented to SBA was
to increase the maximum fee limit for loans under $350,000.
Once again, SBA strongly disagrees with the commenters' claims that
these proposed fee limits will eliminate access to capital for small
businesses seeking small SBA loans. SBA developed the proposed fee
limits based on Lender-reported data and other information gathered by
OCRM during lender oversight reviews in fiscal years 2013 through 2017.
In that period, 288,398 7(a) loans were guaranteed. Of the total 7(a)
loans guaranteed, only 8,025 loans, or 2.78 percent of total 7(a) loans
guaranteed, reported using an Agent (other than the participating
Lender) to provide assistance to the Applicant in securing the loan.
Therefore, it is a very small portion of the SBA loan portfolio that
will be affected by limits imposed on Agents.
When conducting lender oversight activities, OCRM has found that
many SBA Lenders receive findings of non-compliance related to Agent
and Lender fees charged to an Applicant. Typically, these findings
involve the failure to submit the SBA Form 159 to SBA's Fiscal Transfer
Agent in a timely manner, failure to complete SBA Form 159 correctly
and/or completely, charging the Applicant for services provided to the
SBA Lender by an LSP, or charging the Applicant fees that are not
permitted (e.g., for underwriting of the loan). Further, as noted
above, many public commenters, including Agents, incorrectly interpret
SBA's current fee rules. This demonstrates the lack of clarity of the
existing rules governing permissible fees and the need for
simplification. SBA believes it can address any confusion among SBA
Lenders and Agents by providing a bright-line test for what is
considered ``reasonable'' by the Agency. As discussed more fully below
in the Regulatory Impact Analysis, providing this bright-line test will
reduce the burden on SBA Lenders and Agents with respect to the time it
takes to review fees and determine whether they are permissible and
reasonable.
Based on the foregoing, the Agency reaffirms its decision to set
specific limitations on the fees that an Agent or Agents may charge an
Applicant for assistance with obtaining an SBA-guaranteed loan.
However, in an effort to avoid unintended consequences for loans of
$350,000 or less, SBA is increasing the maximum amount an Agent or
Agents may charge an Applicant for those loans. In addition, in order
to prevent fees from loans over $350,000 and up to $500,000 from having
a lower maximum permissible fee than loans of $350,000 or less, SBA
also is revising the lower two ranges. Thus, in this interim final
rule, the maximum amount an Agent or Agents may charge an Applicant for
assistance with obtaining an SBA-guaranteed loan is as follows:
For loans up to and including $500,000: A maximum of 3.5
percent of the loan amount, or $10,000, whichever is less;
For loans $500,001-$1,000,000: A maximum of 2 percent of
the loan amount, or $15,000, whichever is less; and
For loans over $1,000,000: A maximum of 1.5 percent of the
loan amount, or $30,000, whichever is less.
According to SBA's analysis of all loans guaranteed by SBA during
FY2013 through FY2017, only 1% of the loans reported fees charged to an
Applicant by an Agent (other than the participating Lender) that were
in excess of the revised maximums in this interim final rule. It is
important to note that all of the fees charged by Agents that were in
excess of the revised limits in this interim final rule also were in
excess of the current permitted fees, and were therefore not in
compliance with current SBA policy.
SBA received several comments suggesting SBA modify the
circumstances under which SBA may require an Agent to refund any excess
fee amount to the Applicant. SBA considered these comments and is
modifying the regulatory text to clearly state that SBA may require an
Agent to refund any amount charged to an Applicant in excess of what is
permitted by SBA in Sec. 103.5. SBA will monitor these fee levels and,
if adjustments are necessary, SBA may revise these amounts from time to
time through rulemaking.
Because SBA's primary concern is to minimize the cost for a small
business Applicant to obtain an SBA-guaranteed loan, these fee
limitations will not apply when an SBA Lender pays fees to an Agent for
services in connection with an
[[Page 7631]]
SBA-guaranteed loan; however, SBA Lenders are reminded that such fees
may not be passed on to the Applicant either directly or indirectly and
such fees may not be paid out of SBA-guaranteed loan or debenture
proceeds. Also, SBA reiterates that if an Agent provides more than one
service (e.g., packaging and referral services) to an Applicant, only
one fee is permitted for all services performed by the Agent. Further,
if more than one Agent (e.g., a Packager and a Loan Broker/Referral
Agent) provides assistance to the Applicant in obtaining the loan, the
total amount of all fees that the Applicant is required to pay must not
exceed the maximum allowable fee set by SBA. (However, a fee charged to
the Applicant by the Lender in accordance with Sec. 120.221(a) will
not be counted toward the maximum allowable fee for an Agent or
Agents.) These maximum limits apply regardless of whether the Agent's
fee is based on a percentage of the loan amount or on an hourly basis.
If an Agent or Agents charge an Applicant fees in connection with
obtaining an SBA-guaranteed loan, the Agent(s) must disclose the fees
to SBA by completing a Compensation Agreement (SBA Form 159) in
accordance with the regulation at Sec. 103.5 and must provide
supporting documentation as set forth in SOP 50 10.
SBA recognizes that some Agents may need to revise their business
practices or documentation in order to comply with the new limits on
fees in Sec. 103.5(b). In order to minimize the impact of the change
on affected Agents, SBA is not requiring compliance with revised Sec.
103.5(b) until October 1, 2020. Until that time, Agents are to continue
to comply with the requirements in Sec. 103.5(b) as published in the
2019 edition of the Code of Federal Regulations, and the guidance in
SOP 50 10 5(K). However, considering the benefits that the new fee
limits offer, SBA expects that many Agents will want to comply with
them before October 1, 2020. They are permitted to do so. SBA
recommends that these Agents document their decision to use the new fee
limits when reporting the fees on SBA Form 159.
In Sec. 103.5(c), SBA proposed to remove the word ``directly''
from the last sentence to clarify that compensation paid by the SBA
Lender to an LSP may not be charged to the Applicant, either directly
or indirectly.
SBA received two comments on this proposed change, both from SBA
Lenders. Both SBA Lenders expressed concern over the removal of the
word ``directly'' and believed that it could lead to SBA inaccurately
determining fees are indirectly being passed on to the borrower either
as part of the interest rate or if, for example, the SBA Lender charges
the Applicant a packaging fee.
SBA sets parameters on both the maximum allowable interest rate and
permissible fees SBA Lenders may charge an Applicant. As long as the
SBA Lender does not charge the Applicant beyond what is permitted, SBA
would not consider that fees are being passed on to the Applicant
through these means. SBA is adopting the modification to Sec. 103.5(c)
as proposed.
4. Loans to Qualified Employee Trusts
Section 120.350 Policy
The regulations governing SBA-guaranteed loans to qualified
employee trusts or ``Employee Stock Ownership Plans'' (ESOPs) are set
forth in Sec. Sec. 120.350 through 120.354. Because of the complex
nature of these transactions, SBA proposed to amend Sec. 120.350 to
require such applications be processed only on a non-delegated basis.
SBA received 78 comments on this proposal. One comment supported
the proposed change. The rest of the comments expressed concern with
the amendment as proposed. The concerns center around two positions.
The first position is that delegated Lenders should be permitted to
process ESOP loans under their delegated authority, in line with the
spirit of the policy enacted by Congress in Section 862 of the John S.
McCain National Defense Authorization Act for Fiscal Year 2019 (Pub. L.
115-232) (NDAA FY19), which charges SBA with promoting enhanced
employee ownership of small businesses by maximizing their ability to
affordably access capital. This position was expressed by 22
commenters, including 10 trade associations, 8 individuals, 3 members
of Congress, and 1 SBA Lender.
The second position was whether SBA's decision to require ESOP
loans to be processed on a non-delegated basis could be addressed in
SBA's SOP 50 10, rather than be incorporated into the regulation. This
position was expressed by 55 commenters, including 46 SBA Lenders, 5
Agents, 2 trade associations, and 2 individuals.
SBA considered the comments and the statutory text of the NDAA
FY19. The legislation provides the Administrator with the discretion to
permit loans to qualified employee trusts and cooperatives to be
processed under a Lender's delegated authority. SBA maintains its
position that these transactions are complex in nature and, for the
time being, should continue to be processed on a non-delegated basis,
as current procedures direct. SBA agrees, however, to eliminate the
proposed regulatory change requiring SBA-guaranteed loans to a
qualified employee trust to be processed under non-delegated
procedures. SBA will maintain the specific processing instruction that
ESOP loans must be processed on a non-delegated basis in SOP 50 10 and
will monitor the activity of ESOP loans during the initial
implementation period of the revised statutory requirements in order to
ensure compliance with Loan Program Requirements for such loans.
SBA is, however, making a technical amendment to both Sec.
120.350, Policy, and Sec. 120.352, Use of Proceeds, to incorporate the
statutory change made in the NDAA that permits SBA to guarantee a loan
to the small business concern (rather than the qualified employee
trust), if the proceeds from the loan are used only to make a loan to a
qualified employee trust that results in the qualified employee trust
owning at least 51 percent of the small business concern. SBA is making
this technical amendment in order to ensure that the regulations are
not inconsistent with the statute and to provide clarity to SBA Lenders
and SBA employees with respect to guaranteed loans involving ESOPs.
Additional guidance governing these loans will be provided in SOP 50
10.
5. A Lender's Responsibility When Purchasing 7(a) Loans From the FDIC
as Receiver, Conservator, or Other Liquidator of a Failed Financial
Institution
Section 120.432 Under what circumstances does this subpart permit sales
of, or sales of participating interests in, 7(a) loans?
SBA proposed modifying Sec. 120.432(a) to implement its
longstanding policy of holding Assuming Institutions and investors
responsible for the contingent liabilities (including repairs and
denials) associated with 7(a) loans originated by failed insured
depository institutions, whether the 7(a) loans are purchased by a
Lender through a Federal Deposit Insurance Corporation (FDIC) loan sale
or transferred to an Assuming Institution through a whole bank
transfer.
SBA received three comments on this proposed change. One SBA Lender
commented in support of the modification. The other two commenters, one
banking association representative and one SBA Lender,
[[Page 7632]]
objected to the proposed modification, stating that as drafted the
proposed change may preclude the Agency from entering into agreements
with the FDIC to affirm the validity of the guaranties at the time of
such loan sale or whole bank transfer. According to both commenters,
the proposed change would create a perception in the minds of qualified
purchasers that a large number of guaranties will be denied, thus
creating a disincentive for qualified SBA Lenders to enter into such
transactions.
SBA proposed this modification to ensure consistent treatment of
all portfolio loan transfers whether through voluntary bank mergers or
asset sales, or through FDIC-led portfolio transfers following the
failure of a Lender. SBA is modifying the regulatory language to
include a statement that clarifies the applicability of the paragraph
and the ability for the Agency to agree otherwise in writing (i.e., to
affirm the validity of the guaranties). SBA also is modifying the
regulatory language to remove the specific reference to the FDIC and
make it applicable to all 7(a) loans purchased from any Federal or
state banking regulator, any receiver, or any conservator.
6. Microloan Program
Section 120.707 What conditions apply to loans by Intermediaries to
Microloan borrowers?
SBA proposed to revise the regulation at Sec. 120.707(b) to
increase the maximum maturity of a loan from an Intermediary to a
Microloan borrower from 6 years to 7 years. SBA received two comments
supporting this change. SBA is amending this section as proposed.
Section 120.712 How does an Intermediary get a grant to assist
Microloan borrowers?
In Sec. 120.712(b), SBA proposed to incorporate a recent statutory
change to the percentage of grant funds that may be used by the
Intermediary for marketing, managerial, and technical assistance to
prospective Microloan borrowers. In Sec. 120.712(d), SBA proposed to
incorporate a recent statutory change to the percentage of grant funds
the Intermediary may use to contract with third parties to provide
technical assistance to Microloan borrowers. SBA received one comment
in support of each respective change. SBA is amending this section as
proposed.
7. Technical Corrections and Conforming Amendments
Section 120.130 Restrictions on Uses of Proceeds
SBA proposed a conforming amendment to Sec. 120.130 to include a
reference to the proposed Sec. 120.444 (Eligible uses of SBA Express
and Export Express loan proceeds) to clarify that revolving lines of
credit are an eligible use of 7(a) loan proceeds under SBA Express and
Export Express. SBA did not receive any comments on this proposal. SBA
is adopting the amendment as proposed.
Section 120.222 Prohibition on Sharing Premiums for Secondary Market
Sales
SBA proposed a technical correction to Sec. 120.222 to remove an
extra word (``in'') that was inserted in error. SBA did not receive any
comments on this proposal. SBA is adopting the rule as proposed.
Section 120.344 Unique Requirements of the EWCP
SBA proposed a conforming amendment to Sec. 120.344(b) to ensure
that the extraordinary servicing fees charged on EWCP loans, as
permitted by the revised Sec. 120.221(b), are reasonable and prudent.
SBA received 53 comments on this section, all in support of the
proposed change. SBA is adopting the amendment as proposed.
Section 120.440 How does a Lender obtain delegated authority?
SBA proposed several technical corrections and a conforming
amendment to the delegated authority criteria regulation at Sec.
120.440(c) to clarify that a Lender's authority to participate in SBA
Express may be renewed for a maximum term of 3 years.
SBA received 54 comments on this proposed change, 1 of which
opposed the proposed change and recommended that the SBA Express
renewal period remain a 2-year renewal period to remain consistent with
other delegated authority renewal periods and to ensure efficient SBA
oversight over delegated authorities. While the other 53 commenters
expressed a similar concern that an increase in renewal period may
conflict with the maximum 2-year renewal period allowed for general
delegated authority, they supported the proposal with modification. In
order to address this concern, these 53 commenters requested that SBA
provide additional information on how delegated authority renewals will
be processed when a Lender holds both SBA Express authority and
Preferred Lenders Program (PLP) authority.
SBA considered the comments received and is adopting the amendment
as proposed. As a point of clarification, the amendment to this
regulation will permit SBA to grant a longer term for renewals of SBA
Express authority, not to exceed three (3) years. SBA may continue to
grant shorter renewals and SBA's OCRM will coordinate with those
Lenders concerned with maintaining alignment of their SBA Express
renewal periods with any other delegated authorities they may hold. SBA
will provide additional information on how delegated authority renewals
will be processed when a Lender holds SBA Express authority and other
delegated authority (e.g., PLP, Export Express) in SOP 50 10.
Section 120.840 Accredited Lenders Program (ALP)
SBA proposed a technical correction to Sec. 120.840 to replace the
reference in this section to the Director, Office of Financial
Assistance with ``appropriate SBA official in accordance with
Delegations of Authority.''
SBA received 68 comments on this proposed change. All of these
comments recommended that SBA also revise the ALP application
requirements outlined in this section under Sec. 120.840(b) to reflect
the modernized application submission process, which will allow CDCs to
submit ALP applications electronically into the Corporate Governance
Repository, rather than apply to the Lead SBA Office.
SBA appreciates the recommendation and agrees to make both the
correction proposed by SBA and the revision recommended through public
comment in order to reflect SBA's current ALP application process.
B. Affiliation Principles for the Business Loan, Business Disaster
Loan, and Surety Bond Guarantee Programs
Section 121.301 What size standards and affiliation principles are
applicable to financial assistance programs?
The proposed Sec. 121.301(f) expanded the ``identity of interest''
regulation to include affiliation between individuals or firms that
have identical or substantially identical business or economic
interests (individuals or firms with common investments, or firms that
are economically dependent through contractual or other relationships).
This was how the identity-of-interest affiliation rule operated prior
to the 2016 rule change that limited such affiliation to ``close
relatives.'' (81 FR
[[Page 7633]]
41423, June 27, 2016) SBA's proposal was intended to return SBA's
identity-of-interest affiliation rule closer to the pre-2016 rule. SBA
received 1,137 comments on this proposed identity-of-interest
regulation. Of those, 52 comments supported the rule as proposed, 4
supported the rule with some modifications, and the remainder opposed
the rule as written. Most of the comments opposed either the rule
change in general or the specific economic-dependence ground of
affiliation in Sec. 121.301(f)(4)(iv).
Close relatives. Businesses that are owned by family members may be
affiliated under SBA's longstanding close-relatives rule. In 2016, SBA
clarified that the rule applies where family members have overlapping
business interests and are operating in the same geographic area. In
the proposed rule, SBA retained the identity-of-interest ground for
affiliation based on close relatives, but moved it to paragraph
(f)(4)(ii). SBA is adopting paragraph (f)(4)(ii) of the rule as
proposed.
Common Investments. The proposed rule provided that SBA would find
affiliation based on common investments under the identity-of-interest
rule when multiple entities are owned by the same individuals or firms,
and the entities owned by such investors conduct business with each
other or share resources. In order to find an identity of interest
between investors, the common investments would need to be substantial,
either in number of investments or total value. Under the proposed
rule, SBA would consider businesses to be affiliated based on common
investments only if they conduct business with each other, or share
resources, equipment, locations or employees; or provide loan
guaranties or other financial or managerial support to each other. One
comment criticized the proposed common investments rule as being better
addressed through SBA's program eligibility rules and another comment
criticized the proposal as vague.
In response to comments, SBA is limiting the application of
affiliation under common investments to firms that operate in the same
or related industry. Thus, firms that operate in different, unrelated
industries would not be subject to common-investment affiliation.
Additionally, in this common-investments ground of affiliation and
several others that follow, SBA adopts a reasonableness standard for
reviewing affiliation determinations made by SBA Lenders. SBA
acknowledges that some SBA Lenders may have limited experience in
applying some of SBA's more complicated affiliation standards. Thus, in
instances in which SBA reviews an SBA Lender's determination that there
is no affiliation under the common investments rule, SBA will not
overturn the SBA Lender's determination if the SBA Lender's
determination was reasonable at the time that the SBA Lender made it,
given the information that the SBA Lender had available. For example,
if the SBA Lender reasonably determined that two firms with common
investors with substantial ownership interests were not affiliated
because, even though the firms shared employees and locations, the
firms were in what the SBA Lender deemed to be unrelated industries,
SBA will accept that determination even if SBA would have found the
industries to be related if presented with the same facts. SBA's
reasonableness standard takes into account that the SBA Lender's
determination might not be the same as SBA's, but still would be
consistent with the regulation as long as it was reasonable. SBA
believes using this standard will provide SBA Lenders with the ability
to make a prudent lending decision without concern that their decision,
if reasonable, will be second-guessed. SBA Lenders are reminded that
they must document their analysis and determination in each loan file.
Economic Dependence. The proposed rule provided that, if a small
business Applicant derived more than 85 percent of its revenue from
another business over the previous three fiscal years, SBA would find
that the small business Applicant is economically dependent on the
other business and, therefore, that the two businesses are affiliated.
SBA proposed that the rule would include an exception for a firm that
has been in business for a short amount of time and has a plan to
lessen its dependence on the other concern. In response to comments,
SBA is replacing the exception for a firm that has been in business for
a short amount of time with two different exceptions in the interim
final rule.
The comments raised the issue that economic-dependence affiliation
would apply where a seller limited its sales to one buyer because of
circumstances unrelated to control. Such circumstances might include
situations where, though the terms of its relationship with its single
buyer do not restrict selling to other customers, the seller does not
have sufficient inventory to do so. For example, the buyer might have
several locations or lines of business, and the seller could be selling
to multiple locations or business lines under the buyer's control but
is not restricted from selling to other customers. As another example,
the seller could be selling exclusively to the Federal Government
either through a prime contract or subcontract. Under SBA affiliation
principles, affiliation applies only where there is control or the
power to control. Therefore, SBA is creating an exception to the
economic-dependence rule for contracts that do not restrict the concern
in question from selling the same type of products or services to
another purchaser. This exception avoids applying the rule to
situations where the seller's product only has one buyer or where the
seller chooses to sell only to one buyer. This exception replaces the
exception in the proposed rule for newly created businesses that have a
plan to lessen their dependence on the other concern, which SBA
concluded would be too easily circumvented and was not practical to
apply in the loan programs.
Many comments expressed concern over how economic-dependence
affiliation would apply to an agreement between a poultry farmer and a
large poultry producer (integrator) and whether most poultry farmers
would be considered ineligible for SBA financial assistance under the
provisions of the proposed rule. SBA's proposal was not intended to
eliminate lending to poultry and other farmers in the Business Loan
Programs. The Small Business Act authorizes SBA to make non-disaster
business loans to farming and agricultural related industries and SBA
understands the need for SBA financial assistance to small businesses
in those industries. SBA also recognizes, however, that integrator
agreements generally restrict the poultry farmer from raising another
producer's chicks on the same farm and therefore would not qualify for
the first exception described above. Accordingly, SBA is creating a
second exception to address this circumstance and others where the
first exception does not apply.
Under this second exception, an SBA Lender or other party may
request SBA to review a contractual relationship where one firm derived
more than 85 percent of its receipts over the previous three fiscal
years from the other firm, and the contract restricts the seller from
selling the same type of products or services to another purchaser. For
businesses that have been in operation for less than 1 year, the 85
percent threshold will be applied based on the Applicant's business
plan and projected revenues. For businesses that have been in operation
for at least 1 year, but less than 3 years, the threshold will be
applied based on the receipts for the
[[Page 7634]]
period the business has been in operation.
In assessing whether economic-dependence affiliation exists, SBA
will review the contract to determine whether, notwithstanding the
concentration of sales and the restriction, the buyer does not have
control or the power to control the seller. In determining control
under these circumstances, SBA will consider the volume of sales that
the contract covers, the contract's termination provisions, the risk
that the concern in question bears under the contract, the concern's
right to profit from its efforts, the rationale for restrictions that
the contract places on the small business, and other factors. SBA is
making available for public comment on its website guidance on the
types of provisions that establish control or do not establish control
for purposes of this provision, and the process for requesting SBA
review of a contract. The guidance can be found at https://www.sba.gov/offices/headquarters/oca/spotlight. If SBA finds no control, SBA will
determine that there is no affiliation between the two concerns under
the economic-dependence rule. Even where SBA finds no economic-
dependence affiliation, SBA Lenders are reminded that they still must
ensure that the applicant business meets all other eligibility criteria
and they must make a credit determination. SBA will accept comments on
the guidance during the 60-day comment period for this interim final
rule.
Newly Organized Concerns. In order to create greater uniformity
among SBA's various affiliation rules, SBA proposed to add to Sec.
[thinsp]121.301(f) a newly organized concern rule, similar to the one
which had applied to the Business Loan Programs prior to the 2016 rule
change. Under the proposed newly organized concern rule, a newly
organized spin-off company may be found affiliated with the original
company where all of the following four conditions are met: (1) Former
or current officers, directors, principal stockholders, managing
members, general partners, or key employees of one concern organize a
new concern; (2) the new concern is in the same or related industry or
field of operation; (3) the individuals who organized the new concern
serve as the new concern's officers, directors, principal stockholders,
managing members, general partners, or key employees; and (4) the
original concern is furnishing or will furnish the new concern with
contracts, financial or technical assistance, indemnification on bid or
performance bonds, and/or other facilities, whether for a fee or
otherwise. The proposed rule defined a key employee to be an employee
who, because of his or her position in the concern, has a critical
influence in or substantive control over the operations or management
of the concern. The proposed rule further defined a ``newly organized''
concern to be one that has been actively operating continuously for two
years or less. The proposed newly organized concern basis of
affiliation would be a rebuttable presumption that may be rebutted if
there is a clear line of fracture between the new concern and the other
firm.
SBA received 130 comments on this proposed regulation. Three
commenters, consisting of two SBA Lenders and one non-profit
organization, were supportive of the proposed rule. The remaining 127
commenters expressed concern with the proposed regulation. Commenters
observed that the newly organized concern rule included several
undefined terms and could hamper a new firm's ability to recruit
employees. SBA agrees that it can provide greater clarity with respect
to the undefined terms and can simplify the rule to make it easier to
apply and to ensure that recruitment or hiring efforts are not
adversely affected by the rule. In the interim final rule, in response
to the comments, SBA is replacing the term ``principal stockholders''
with the term ``owners of a 20 percent interest or greater'' (in
conditions number (1) and (3) above). SBA also is replacing the term
``key employees'' with ``persons hired to manage day-to-day
operations'' in the list of affected individuals in the original
concern (in condition number (1) above), and is deleting the term ``key
employee'' from the list of affected individuals in the new concern (in
condition number (3) above). Therefore, a new firm can hire anyone,
including a former owner or key employee of another firm, as an
employee without the employee causing affiliation under the newly
organized concern rule. Due to these changes, SBA is eliminating the
definition of ``key employee'' from the regulatory text, as it is no
longer necessary.
SBA also is revising the interim final rule with respect to the
benefits that flow from the original concern to the new concern (in
condition number (4) above). Rather than applying the newly organized
concern rule based on whether the original concern is furnishing or
will furnish the new concern with contracts, financial or technical
assistance, indemnification on bid or performance bonds, and/or other
facilities, whether for a fee or otherwise, SBA is revising the
regulatory text so that the newly organized concern rule only applies
when direct monetary benefits flow from the new concern to the original
concern. It is not SBA's intent to apply the rule where the original
concern does not receive direct monetary benefits from the new concern.
Examples of direct monetary benefits would include profit or revenue
sharing agreements or royalty payments. Further, SBA will not consider
the referral of business without compensation to constitute ``direct
monetary benefits.'' In addition, in the definition of a new concern,
SBA is deleting the term ``continuously,'' because that term might
cause confusion for businesses that operate on a seasonal or
intermittent basis.
Finally, in the newly organized concern ground of affiliation, SBA
adopts a reasonableness standard for reviewing affiliation
determinations made by SBA Lenders. In instances in which SBA reviews
an SBA Lender's initial determination that there is no affiliation
under the newly organized concern rule, SBA will not overturn the SBA
Lender's determination if it was reasonable at the time it was made,
given the information that the SBA Lender had available. For example,
if the SBA Lender reasonably determined that the new firm's owners were
corporate officers of another firm, but that the benefits flowing from
the new firm to the other firm are not direct monetary benefits, SBA
will accept the determination even if SBA would have found the benefits
to be direct monetary benefits if presented with the same facts. SBA's
reasonableness standard takes into account that the SBA Lender's
determination might not be the same as SBA's, but still would be
consistent with the regulation as long as it was reasonable. SBA
believes using this standard will provide SBA Lenders with the ability
to make a prudent lending decision without concern that their decision,
if reasonable, will be second-guessed. SBA Lenders are reminded that
they must document their analysis and determination in each loan file.
Totality of the Circumstances. The proposed rule added a new
paragraph (f)(6) to Sec. 121.301 to explain that, when making
affiliation determinations, SBA would consider the totality of the
circumstances, and may find affiliation even though no single factor is
sufficient to constitute affiliation. The totality of the circumstances
criterion for determining affiliation was removed from the regulations
in 2016. At that time, SBA stated that, generally, examples of when
this criterion was used involved negative control or control through
management
[[Page 7635]]
agreements. Thus, in 2016, SBA provided additional specific guidance in
Sec. 121.301(f)(1) and (3) to address negative control and control
through management agreements. However, SBA now believes that there are
other examples of when affiliation may be present but not covered by
the specific affiliation rules and, therefore, proposed to reinstate
the totality of the circumstances criterion. In proposing to reinsert
the criterion in the regulations, SBA provided two examples of where
the totality of the circumstances test would result in a finding of
affiliation.
SBA received 146 comments on this proposed change. Four commenters,
comprised of three individuals and one non-profit organization,
expressed support of the proposal. These comments expressed the same
opinion, that it is critical for SBA to consider the totality of the
circumstances in determining affiliation, specifically with respect to
contracts and agreements between poultry farmers/growers and poultry
integrators.
The remaining 142 comments were submitted by 117 SBA Lenders, 10
individuals, 8 Agents, and 7 trade associations. These comments
expressed concern that the totality of the circumstances test could
result in arbitrary and unpredictable application of SBA's affiliation
rules. SBA believes that this overstates the potential reach of the
totality of the circumstances rule. The rule is merely an application
of the general principle that affiliation is caused by control or the
power to control of one firm by another, or common control of multiple
firms. There may be instances of control that are not covered by the
specific grounds of affiliation, and the totality of the circumstances
test merely states that those instances are not exempt from affiliation
analysis. For example, the relationship between a recording artist and
a record company might cause affiliation if the record company has
exclusive rights over the recording artist and closely controls the
activities of the recording artist, but none of the specific grounds of
affiliation would reach that relationship necessarily. As another
example, a firm's operating agreement might require that the firm
obtain approval from a third party prior to making certain decisions
that typically are made independently by firms in that industry in the
ordinary course of business. This approval requirement might grant the
third party control over the firm and could result in affiliation under
the totality of the circumstances, even though none of the specific
grounds of affiliation might apply. The totality of the circumstances
test should not reach routine and typical business relationships,
however.
In order to address concerns raised by the commenters, SBA is
modifying the regulatory language to provide that, when applying the
totality of the circumstances test, SBA may consider all connections
between the Applicant business and a possible affiliate and, if no
single factor is sufficient to constitute affiliation, SBA may
determine on a case-by-case basis that affiliation exists when there is
``clear and convincing evidence'' based on the totality of the
circumstances. Further, as with the common investments rule and the
newly organized concern rule, SBA is adopting a reasonableness standard
for reviewing affiliation determinations made by SBA Lenders under the
totality of the circumstances rule. For the totality of the
circumstances rule, SBA will not overturn the SBA Lender's
determination if it was reasonable at the time it was made, given the
information that the SBA Lender had available. For example, if the SBA
Lender reasonably determined that a firm whose day-to-day operations
required the approval of a minority owner in some situations was not
affiliated with the minority owner, SBA will accept that determination
even if SBA would have found the firm and the minority owner to be
affiliated in the first instance. SBA Lenders are reminded that they
must document their analysis and determination in each loan file.
121.301(f)(7) Affiliation Based on Franchise Agreements
SBA proposed to revise this paragraph to clarify that the term
``franchise'' has the meaning given by the Federal Trade Commission
(FTC) in its definition of ``franchise'' as set forth in 16 CFR part
436. SBA proposed to cross-reference the FTC definition of
``franchise'' in the regulation to clarify that the regulation applies
to all agreements or relationships, whatever they may be called, that
meet the FTC definition of a franchise. All such agreements would be
referred to in the regulation as ``franchise agreements'' and the
parties to such agreements will be referred to as ``franchisor'' and
``franchisee.'' Further, SBA proposed to add to this regulation a
statement that SBA will maintain a publicly available centralized list
of franchise and other similar agreements that are eligible for SBA
financial assistance, consistent with SBA's current policy and
procedure.
SBA received 125 comments on this proposed change, all of which
supported the proposal. Two of the 125 commenters also recommended that
SBA expand paragraph (7) to define the relationship between poultry or
swine farmers and their integrators. In addition, these 2 commenters
suggested that, in order to expedite the approval process, SBA should
maintain a centralized list of integrator agreements in the same manner
as franchise agreements. SBA appreciates the recommendation, but is not
going to expand the principle of affiliation based on franchise or
license agreements to include integrator agreements or maintain a
separate centralized list of agreements between poultry or swine
farmers and their integrators at this time. SBA has discussed how the
relationships between poultry or swine farmers and their integrators
will be reviewed in the section above on economic-dependence
affiliation. SBA is adopting paragraph (7) as proposed.
Section 121.302 When does SBA determine the size status of an
applicant?
SBA proposed to incorporate the SBA Express and Export Express
programs into this regulation to clarify that, with respect to
applications for financial assistance under these programs, size is
determined as of the date of approval of the loan by the SBA Express or
Export Express Lender. SBA did not receive any comments on this
proposal. SBA is adopting the regulation as proposed.
C. Agency Responses to the Office of Advocacy's Comments on the
Proposed Rule
1. Proposed Fee Caps
SBA's Office of Advocacy expressed concern that, although the
proposed fee caps will reduce the fees that small businesses pay to
obtain a loan, some members of the public believe that the proposed
caps will hurt small banks and possibly eliminate the incentives to
facilitate small SBA loans that small businesses need. Advocacy also
expressed concern that SBA is attempting to address a problem that is
being created by a few bad actors, and that in doing so SBA may
discourage the facilitation and use of SBA's products. SBA does not
agree that the proposed fee limits will hurt small SBA Lenders, as the
Agency believes the changes in these rules will simplify the rules
regarding fees and will reduce the burden on all SBA Lenders, including
small SBA Lenders. (For additional discussion of the estimated
reduction in the burden on SBA Lenders, see the discussion in the
Regulatory Impact Analysis and Regulatory Flexibility Act sections
below.) Further, as Advocacy acknowledges in its comment letter, in
approximately 96 percent of the loans
[[Page 7636]]
guaranteed during FY2013-FY2017, Applicants were charged fees (by
Lenders and Agents) that were less than the maximum fees in the
proposed rule. As discussed earlier in the Section-by-Section Analysis,
in consideration of the comments received and in order to ensure there
are no unintended consequences for smaller loans, SBA has increased the
maximum fees that both Lenders and Agents will be permitted to charge
Applicants in connection with smaller loans. When the revised fee
limits for smaller loans in the interim final rule are taken into
consideration, the percentage of loans guaranteed in FY2013-FY2017 with
fees less than the permitted maximums increases to nearly 99%.
In addition, recognizing that some SBA Lenders and Agents,
including LSPs, may need to revise their practices, policies,
procedures, or documentation to comply with revised Sec. 103.5(b) or
Sec. 120.221(a), SBA is not requiring compliance with those provisions
until October 1, 2020. As discussed more fully in the Regulatory
Flexibility Act section of this interim final rule, SBA believes the
extended period for SBA Lenders and Agents to comply with those
sections of the interim final rule will help to minimize any potential
adverse effects on small SBA Lenders and Agents. Further, with the
modifications to the maximum permitted fees made in this interim final
rule and the extended time period for compliance, the Agency believes
it has addressed any concern that small SBA Lenders will be unable to
find Agents to assist them with facilitating SBA-guaranteed loans.
Finally, as noted earlier in the Section-by-Section Analysis, SBA
provides several options for free or low-cost assistance through its
resource partners, which are accessible nationwide.
2. The Personal Resources Test
The Office of Advocacy expressed concern that the proposed
reinstatement of a personal resources test will limit the resources
available to a small business owner in the event of an emergency.
Additionally, Advocacy expressed concern that the proposed personal
resources test would eliminate potential borrowers and be difficult to
include in the current underwriting practices of small financial
institutions. Advocacy encouraged SBA to consider a contribution level
that will allow small businesses to have a buffer in the event of
unforeseen circumstances. After considering the comments received on
this change, SBA has reevaluated the personal liquidity threshold for
smaller loans and agrees to modify the limits to ensure that Applicants
applying for smaller loans are not adversely affected.
In this interim final rule, SBA has increased the threshold for
loans of $350,000 or less to allow the owners of the small business
Applicant to retain more personal liquidity. SBA also is modifying the
regulatory text to provide that SBA will reexamine the thresholds
periodically and, if adjustments are necessary, SBA may modify the
thresholds through rulemaking from time to time based on nationally-
recognized economic indicators. Also, the regulation will provide SBA
with the ability to permit exceptions to the required injection of an
owner's excess liquid assets in extraordinary circumstances, such as
when the excess funds are needed for immediate medical expenses of a
family member. With respect to Advocacy's concern that small financial
institutions will have difficulty implementing this change, as
discussed in the Regulatory Impact Analysis below, SBA believes that
providing a bright-line test will assist SBA Lenders in analyzing the
resources of individuals and entities that own 20 percent or more of
the Applicant business in order to determine if any of the owners have
liquid assets available that can provide some or all of the desired
financing. This bright-line test will reduce the burden on SBA Lenders
when making this critical eligibility determination. In addition, SBA
notes that a personal resources test was in SBA's regulations until
2014, so SBA Lenders have experience applying such a test and should
not have difficulty implementing this change.
3. Affiliation
The Office of Advocacy expressed concern that the affiliation
sections of the proposed rule may be vague and confusing to small
entities. In addition, Advocacy expressed concern that the proposed
changes may be problematic in small rural communities that rely on
contracts with large companies/integrators to buy agricultural goods.
Advocacy encouraged SBA to clarify the proposed changes.
As discussed more fully in section III.B. above, in this interim
final rule, SBA has clarified several of the proposed changes,
including the common-investments affiliation rule, the economic-
dependence affiliation rule, the newly organized concern affiliation
rule, and the totality of the circumstances affiliation rule.
Specifically, in order to ensure there would be no adverse impact on
rural areas or small agricultural businesses, SBA added a second
exception to the economic-dependence affiliation rule for businesses
operating under contracts that restrict the seller from selling the
same type of products or services to another purchaser. Under this
second exception, an SBA Lender or other party may request SBA to
review the contractual relationship between the large company/
integrator and the small business Applicant to determine whether
affiliation exists.
4. Additional Outreach
The Office of Advocacy encouraged SBA to perform additional
business outreach with the industries that may be impacted by the
proposed rule to determine the best way to implement changes that will
achieve SBA's goals without being unduly burdensome. As discussed more
fully in the Regulatory Impact Analysis and Regulatory Flexibility
Analysis below, SBA believes it has received sufficient input and
feedback from program participants and other stakeholders to implement
the proposed changes, with the modifications identified in this
Section-by-Section Analysis, in a manner that will reduce the burden on
those participants and stakeholders and provide meaningful benefits to
small business Applicants. Nevertheless, SBA is publishing this rule
interim final rather than proceeding to a final rule in order to
provide the public with an additional opportunity to comment. See
Justification for Interim Final Rule below. SBA will consider comments
submitted during the 60-day comment period and address them in a Final
Rule.
D. Severability
The provisions of this interim final rule are separate and
severable from one another. If any provision is stayed or is held to be
invalid or unenforceable by its terms, or as applied to any person or
circumstance, it is SBA's intention that the remaining provisions of
the interim final rule will remain in effect.
Justification for Interim Final Rule
SBA finds that good cause exists to publish this rule as an interim
final rule. As discussed above, SBA previously published a Notice of
Proposed Rulemaking (NPRM) addressing all of the topics and issues
covered by this interim final rule. SBA has already allowed for public
comment (including an extension of the original comment period),
reviewed the comments, and made changes accordingly. SBA has determined
that the changes made in this rule are a logical outgrowth of the
proposed rule and the comments received on the proposed rule.
[[Page 7637]]
Procedurally, SBA could therefore issue a final rule; however, SBA is
publishing this rule interim final rather than proceeding to a final
rule in order to provide the public with an additional opportunity to
comment. Although not legally required, the additional opportunity to
comment on the interim final rule is desirable given the level of
interest in the proposed changes and the recommendation by the Office
of Advocacy for additional outreach to affected parties.
SBA invites public comment on this interim final rule and will
consider amendments to the rule based on comments submitted during the
60-day comment period. SBA will address any comments through the
publication of a Final Rule.
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
As referenced above, the Office of Management and Budget (OMB) has
determined that this interim final rule is a ``significant'' rulemaking
for the purposes of Executive Order 12866. Accordingly, the next
section contains SBA's Regulatory Impact Analysis. However, this is not
a major rule under the Congressional Review Act, 5 U.S.C. 800.
Regulatory Impact Analysis
1. Is there a need for this regulatory action?
The primary objective of this interim final rule is to incorporate
into the regulations governing the 7(a) Loan Program the requirements
specifically applicable to the SBA Express and Export Express Loan
Programs in order to provide additional clarity for SBA Express and
Export Express Lenders. Congress has authorized SBA to permit qualified
lenders to make SBA Express and Export Express loans using, to the
maximum extent practicable, their own analyses, procedures, and
documentation. It is necessary to provide clear and succinct regulatory
guidance for Lenders to encourage participation in extending these
smaller dollar loans, and to enable these Lenders to extend credit with
confidence in their ability to rely on payment by SBA of the guaranty,
if necessary.
The Small Business 7(a) Lending Oversight Reform Act of 2018 (Pub.
L. 115-189) was signed into law on June 21, 2018. As part of this
legislation, Congress has authorized the Agency to direct the methods
by which Lenders determine whether a borrower is able to obtain credit
elsewhere. SBA is implementing that legislation in a separate
rulemaking, but in this interim final rule SBA is reinstating a
personal resources test in an effort to provide clear direction to SBA
Lenders for analyzing whether a borrower has credit available elsewhere
on reasonable terms from non-Federal, non-state, non-local, or
alternative sources. Many SBA Lenders expressed confusion and sought
guidance from SBA on how to adequately determine whether a small
business had access to credit elsewhere based on personal liquid
assets. This interim final rule will provide a bright-line test to
assist SBA Lenders in analyzing the resources of individuals and
entities that own 20 percent or more of the Applicant business in order
to determine if any of the owners have liquid assets available that can
provide some or all of the desired financing.
The statutory changes in the Consolidated Appropriations Act of
2018 (Pub. L. 115-141) regarding the Microloan Program require
amendments to existing regulations for the percentage of grant funds
that may be used by the Microloan Intermediary for marketing,
managerial, and technical assistance to prospective Microloan
borrowers. Existing regulations must be revised as proposed to reflect
the statutory changes.
Further, the Agency believes it needs to streamline Loan Program
Requirements and reduce regulatory burdens to facilitate robust
participation in the business loan programs that assist small U.S.
businesses, particularly those small businesses in underserved markets.
For that reason, SBA has modified regulatory provisions related to
allowable fees that a Lender or an Agent may collect from an Applicant
for financial assistance. It is clear to the Agency, based on results
from reviews conducted by OCRM, public comments received in response to
the proposed rule, and technical assistance requests received by SBA
from SBA Lenders and Agents, that confusion is widespread across the
industry regarding what fees Agents and Lenders may charge to an
Applicant. In this interim final rule, SBA is simplifying the
regulations applicable to Agents, as well as the fees that Agents and
Lenders may charge to Applicants for assistance with obtaining an SBA-
guaranteed loan, in order to provide more clarity to the industry.
The interim final rule also revises the affiliation principles
applicable to the Business Loan, Disaster Loan, and Surety Bond
Guarantee Programs in order to simplify and clarify the determination
of eligibility of a business as a small concern and to ensure that only
small independently owned and operated businesses benefit from SBA's
small business financial assistance programs.
SBA does not expect the proposed changes to change loan volume
significantly. Overall program participation is driven by broad
economic activity, making it difficult to attribute increased or
decreased loan volume to a particular cause. The overriding public
policy objective of the rule changes is the creation of economic
efficiencies and compliance in program participation. The codification
of the rules for delivering SBA Express and Export Express loans will
provide Lenders with confidence as the requirements will be found in
regulation as opposed to Agency procedural guidance. The inclusion of
the SBA Express and Export Express guidance may positively impact small
loan volume.
SBA expects that the additional detailed clarity on the
requirements for program delivery in the subject areas of this rule
would increase understanding for program users, decrease time spent
qualifying small business Applicants, and result in a reduction of
overall cost to participants.
The interim final rule changes for the codification of the SBA
Express and Export Express Loan Program Requirements and for the
Personal Resources Test impact the Lenders directly, and would not be
considered a transfer to or from Applicants as the Lender currently
bears responsibility for determining eligibility. The interim final
rule changes relative to Lender and Agent fees reduce or limit the fees
a small business Applicant may expend to gain access to the loan
guarantee programs, which benefits the Applicant. This also potentially
transfers an economic benefit between Lenders and Agents because
Lenders, given the authority to charge an SBA-controlled fee to
Applicants, may choose to provide application services through either
internal lending staff or outsourced Agents. In either case the
Lender's decision is driven by cost effectiveness and efficiency.
The interim final rule changes for affiliation determinations
provides detailed guidance for the Lender charged with determining the
size of a small business Applicant. This currently is and will continue
to be the responsibility of the Lender, who will benefit from the time
savings in making the eligibility determination. The benefits further
transfer or inure to the Applicant via streamlined loan
[[Page 7638]]
processing. SBA believes that the interim final rule presents the
optimum net benefit to the overall affected population of small
entities (i.e., small business Applicants, small Lenders, and small
Agents). For instance, receipt and consideration of the public comments
prompted SBA to adopt a more generous fee structure than was originally
proposed.
Baseline Scenario
The interim final rule will provide clear and streamlined guidance
to loan program participants. In order to estimate the net economic
impact of this interim final rule on stakeholders, an approximation of
the change in behavior of Applicants, SBA Lenders, and Agents is
needed. The effects of the interim final rule are estimated relative to
a baseline, and where the regulatory changes are required by statutory
requirements, the analysis uses a pre-statutory baseline to determine
impact in the analysis. The baseline represents the state of SBA's
financial assistance programs in the absence of this final regulatory
action.
Based on lender oversight reviews by SBA's OCRM, fees charged to
Applicants by Agents have increased dramatically in the past few years
(although the total reported number of loans that reported using an
Agent is only 2.78 percent of total approved 7(a) loans over a five
year period) and some Applicants have been charged fees by Lenders and
Agents that are not permissible under SBA's current Loan Program
Requirements. In addition, OCRM has observed that there is confusion by
both Lenders and Agents as to who can charge fees to an Applicant, for
which services, and how much can be charged. In the absence of this
final regulatory action, the cost of financial assistance may continue
to rise for those loan Applicants who opt to use the services of
Agents, including Packagers and other similar providers, despite free
and low-cost assistance and resources made available by SBA. The costs
incurred by OCRM when conducting lender oversight reviews involving
issues related to fees also would continue to rise, with some of those
costs being passed on to Lenders.
In addition, many SBA Lenders struggle with making the
determination of credit elsewhere and identifying when an Applicant's
owners have excess personal liquidity that could affect their
eligibility for SBA financial assistance. SBA has identified some
examples of loans made to businesses with owners who have extremely
high amounts of personal liquid assets. Without this final regulatory
action, SBA Lenders and small businesses may continue to take advantage
of government/taxpayer funded financial assistance programs and SBA
Lenders may continue to erroneously make loans to businesses that do
not meet SBA's lending criteria.
Finally, under the current affiliation rules, some businesses have
been considered to be small when they should have been combined as
affiliates and may, in fact, be large. This has allowed some businesses
that are not considered ``small businesses'' to receive SBA financial
assistance. SBA's Office of Inspector General (OIG) published a report
in March 2018 on SBA 7(a) Loans Made to Poultry Farmers and recommended
that the Agency review the arrangements between integrators and growers
and establish and implement controls, such as supplemental guidance, to
ensure that SBA loan specialists and lenders make appropriate
affiliation determinations. SBA reviewed its regulations and determined
that the regulations should be modified to clarify the meaning of
affiliation in the context of contractual relationships, so that only
independently owned and operated small businesses continue to receive
SBA financial assistance. In the absence of this final regulatory
action, this needed clarification will not be provided.
2. What are the potential benefits and costs of this regulatory action?
Benefits to SBA Lenders, Applicants, and Agents
The greatest benefit from this interim final rule to all program
participants, including SBA Lenders, Applicants, and Agents, is clear
regulatory guidance and bright-line tests to increase efficiency. SBA
anticipates that incorporating the SBA Express and Export Express Loan
Programs into the regulations governing the 7(a) Loan Program may
result in an increase in the number of participating Lenders and loans
in both programs, which would mean increased access to capital for
small businesses. SBA Lenders will be provided with bright-line tests
for making certain determinations about eligibility which will
eliminate the ambiguity and uncertainty that has hindered some SBA
Lenders in recent years. Reinstating the personal resources test, in
particular, will aid SBA Lenders in making the determination of an
Applicant's access to credit elsewhere, which will increase
efficiencies and reduce the efforts currently required by the Agency to
provide assistance due to the subjectivity of the analysis in the prior
rule. SBA Lenders will be more confident in their loan making with a
better understanding of SBA's expectations. SBA estimates that the
reinstatement of the personal resources test at section Sec. 120.102
will save SBA Lenders a total of approximately 67,000 hours annually,
monetized to $2,456,890 per year.
Table 1--Estimated Annual Benefit to SBA Lenders From Personal Resources Test
----------------------------------------------------------------------------------------------------------------
Number of Average time
expected saved per
Outcomes occurrences occurrence Total benefit
per year (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in determining credit 67,000 1-2 67,000-134,000 hours, $2,456,890-
elsewhere. $4,913,780.
--------------------------------------------------------------------
Estimated Annual Benefit............... .............. .............. 67,000-134,000 hours, $2,456,890-
$4,913,780.\1\
----------------------------------------------------------------------------------------------------------------
\1\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
an Applicant's access to credit elsewhere. SBA calculated the average of the timeframes provided to estimate
the range of time the personal resources test will save SBA Lenders, on average, in their analysis. Since each
loan is required to address an Applicant's access to credit elsewhere, the number of expected occurrences per
year was estimated by using the average number of 7(a) and 504 loans guaranteed in the most recent five fiscal
years (2014-2018), according to SBA's 7(a) and 504 loan data reports. The number of expected occurrences per
year was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The cost
benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as reported
by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).
[[Page 7639]]
The clear limitations on fees an Agent or Lender may charge to an
Applicant leave no question as to what fees SBA considers to be
reasonable. Further, the revisions to the definitions of Agents and
Associates of Lenders and CDCs also will provide clarity as to whom SBA
considers an Agent and what services the different types of Agents may
perform and be compensated for by the Applicant or the SBA Lender. This
will save SBA Lenders and Agents time in making these determinations
for each loan. In addition, 7(a) Lenders will no longer be required to
itemize fees charged to Applicants when the amount is over $2,500,
which also will save these Lenders time. Applicants will benefit from
protection against impermissible or unreasonable costs for assistance
with obtaining an SBA-guaranteed loan and may become more aware of the
free and low-cost resources provided by the Agency.
Table 2--Estimated Annual Benefit to SBA Lenders and Agents From Fee Limits
----------------------------------------------------------------------------------------------------------------
Number of Average time
expected saved per
Outcomes occurrences occurrence Total benefit
per year (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency for SBA Lenders when 67,000 0.5-1 33,500-67,000 hours, $1,228,445-
determining permissibility and $2,456,890.
reasonableness of fees.
Increased efficiency for Agents determining 1,605 0.5-1 803-1,605 hours, $29,446-$58,855.
permissibility and reasonableness of fees.
Increased efficiency for 7(a) Lenders no 60,951 0.5-1 30,476-60,951 hours, $1,117,555-
longer required to itemize fees. $2,235,073.
--------------------------------------------------------------------
Estimated Annual Benefit............... .............. .............. 64,779-129,556 hours, $2,375,446-
$4,750,818.\2\
----------------------------------------------------------------------------------------------------------------
\2\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
the reasonableness and permissibility of all fees charged to an Applicant for assistance with obtaining an SBA-
guaranteed loan. SBA calculated the average of the timeframes provided to estimate the range of time SBA
Lenders will save, on average, in determining permissible and reasonable fees with the bright-line tests
included in this interim final rule, which SBA estimates would be the same for an Agent. The number of
expected occurrences per year for SBA Lenders is estimated based on the average number of 7(a) and 504 loans
guaranteed in the most recent five fiscal years (2014-2018), according to SBA's 7(a) and 504 loan data
reports. The total number of guaranteed loans is used, versus the number of loans identified to have charged
fees as discussed in the preamble of this rule, because SBA Lenders must review every loan application to
determine whether any fees were charged to an Applicant and, if so, whether the fees are permissible and
reasonable. Because Agents are not involved in every SBA-guaranteed loan, the number of expected occurrences
per year for Agents is estimated based on averaging the total number of loans identified to have used an Agent
(other than the participating Lender) in fiscal years 2013-2017. The number of expected occurrences per year
for 7(a) Lenders no longer being required to itemize fees is based on the average number of 7(a) loans
guaranteed over the most recent five fiscal years. The number of expected occurrences per year for each
outcome was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The cost
benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as reported
by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).
Finally, by modifying the principles of affiliation, the Agency and
SBA Lenders will be better able to uphold the Agency's statutory
obligation to provide financial assistance only to businesses
determined to be small. Further, SBA Lenders will be provided with
assistance from the Agency in making determinations of affiliation for
businesses with certain types of contractual relationships, such as
poultry farmers, which will provide additional needed clarity with
regard to affiliation in the financial assistance programs.
Table 3--Estimated Annual Benefit to SBA Lenders and Sureties From Modified Principles of Affiliation
----------------------------------------------------------------------------------------------------------------
Number of Average time
expected saved per
Outcomes occurrences occurrence Total benefit
per year (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in determining 77,000 2-4 154,000-308,000 hours, $5,647,180-
affiliation. $11,294,360.
--------------------------------------------------------------------
Estimated Annual Benefit............... .............. .............. 154,000-308,000 hours, $5,647,180-
$11,294,360.\3\
----------------------------------------------------------------------------------------------------------------
\3\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
affiliation. SBA calculated the average of the timeframes provided to estimate the range of time SBA Lenders
will save, on average, in determining affiliation with the guidance provided in this interim final rule. Since
an affiliation determination must be made for each application for SBA financial assistance, the number of
expected occurrences per year for SBA Lenders and Sureties was estimated by using the average number of 7(a)
and 504 loans and the average number of Bid and Final Bonds guaranteed during the most recent five fiscal
years (2014-2018), according to SBA's 7(a) and 504 loan data reports and information on surety bonds entered
into SBA's Capital Access Finance System. The total number of expected occurrences for loans and surety bonds
per year was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The
cost benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as
reported by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).
SBA expects these benefits to be realized immediately upon
enactment of the interim final rule and should remain the same each
year thereafter, subject to changes in number of loans and hourly
rates.
Benefits to SBA
Like the program participants, SBA will benefit from the clear
regulatory guidance and bright-line tests included in this interim
final rule, especially when performing lender oversight activities.
OCRM will realize increased efficiencies in conducting loan file
reviews of SBA Lenders. With the reinstatement of the personal
resources test, clear limitations on fees an Agent or Lender may charge
to an Applicant, revised definitions of Agents and Associates of
Lenders and CDCs, and simplified affiliation principles, SBA has
removed the subjectivity of a
[[Page 7640]]
Lender's assessment of these issues, which will improve SBA Lenders'
compliance and will allow OCRM to develop more efficient methods of
testing SBA Lenders' compliance. In addition, the removal of the
requirement that a Lender itemize fees charged to an Applicant when the
fee is over $2,500, also will reduce the burden on OCRM of reviewing
these additional documents.
Table 4--Estimated Annual Benefit to SBA From Interim Final Rule
----------------------------------------------------------------------------------------------------------------
Number of Average time
expected saved per
Outcomes occurrences occurrence Total benefit
per year (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in reviewing credit 2,000 0.25-0.5 500-1,000 hours, $18,375-$36,750.
elsewhere assessment.
Increased efficiency in reviewing fees 1,300 0.5-1 650-1,300 hours, $23,888-$47,775.
charged to Applicants.
Increased efficiency in reviewing Lender's 2,000 0.25-0.5 500-1,000 hours, $18,375-$36,750.
affiliation determination.
--------------------------------------------------------------------
Estimated Annual Benefit............... .............. .............. 1,650-3,300 hours, $60,638-
$121,275.\4\
----------------------------------------------------------------------------------------------------------------
\4\ SBA developed this estimated annual benefit based on an estimate from OCRM on the range of time that the
guidance and bright-line tests included in the interim final rule will save a Financial Analyst, on average,
in reviewing each relevant element of an SBA Lender's analysis during OCRM-conducted loan file reviews. The
number of expected occurrences per year is based on the approximately 2,000 loan files reviewed by OCRM
annually. The SBA Lender is required to address credit elsewhere and affiliation on every loan, but fees are
not charged in connection with every loan. OCRM estimates that in approximately 65 percent of the 2,000 loans
reviewed annually, OCRM identifies an issue related to fees charged to Applicants by SBA Lenders and/or
Agents, including underreporting, inaccurate reporting, or impermissible fees. The number of expected
occurrences per year for each outcome was multiplied by the average time saved per occurrence to estimate the
total hourly benefit. The cost estimate was obtained by multiplying the hourly rate of a GS-13, Step 1 ($36.75
per hour) by the number of expected occurrences per year and the average time saved per occurrence.
SBA expects these benefits to be realized immediately upon
enactment of the rule and should remain the same each year thereafter,
subject to changes in the number of loan files reviewed and hourly
rates.
Costs
Costs to SBA Lenders, Applicants, and Agents
For purposes of this Regulatory Impact Analysis (RIA), the only
costs to program participants and relevant stakeholders necessary to
comply with the interim final rule are administrative costs.
Administrative costs considered include estimations on reading and
interpreting the regulation, developing and revising internal policies
and procedures, and training. It is noted that program participants are
presumed to incur such administrative costs continuously in order to
maintain familiarity with SBA Loan Program Requirements, as required by
13 CFR 120.180, and to remain in good standing with SBA as defined in
13 CFR 120.420(f). The Table below shows the administrative costs SBA
has estimated that are attributable to this specific rule, which are
expected to occur mainly in the first year of implementation, decrease
by half in the second year, and be eliminated by the third year.
Table 5--Estimates of Administrative Compliance Costs to SBA Lenders and Agents
----------------------------------------------------------------------------------------------------------------
Number of SBA
Amount of Frequency for lenders/
time required Value of time first year agents Total cost
(hours) affected
----------------------------------------------------------------------------------------------------------------
Read and interpret the 2-3 $36.67 5-7 3,500 35,000-73,500
regulation. hours,
$1,283,450-$2,6
95,245.
Develop or Revise Internal 5-7 36.67 5-6 3,500 87,500-147,000
Policies and Procedures. hours,
$3,208,625-$5,3
90,490.
Training...................... 5-8 36.67 10-12 3,500 175,000-336,000
hours,
$6,417,250-$12,
321,120.
-----------------
Estimated First Year .............. .............. .............. .............. 297,500-556,500
Administrative Costs. hours,
$10,909,325-$20
,406,855. \5\
----------------------------------------------------------------------------------------------------------------
\5\ SBA developed the estimate for the administrative costs in the first year of the interim final rule based on
the approximate number of active SBA Lenders and Agents. Although approximately 4,500 Lenders have executed
agreements to participate as a 7(a) Lender, over the past two fiscal years, the average number of active
Lenders has totaled only 1,958. (A 7(a) Lender is considered to be ``active'' if it has approved at least one
7(a) loan in that fiscal year.) SBA estimates that only those Lenders actively participating in the program
will actually be affected by the costs of this interim final rule since the estimated costs are strictly
administrative. The number of SBA Lenders and Agents affected includes approximately 2,474 active SBA Lenders
(including approximately 2,061 active 7(a) Lenders, 213 CDCs, 135 Microloan Intermediaries, 33 ILP
Intermediaries, and 32 Sureties), plus approximately 1,018 Agents identified as having conducted business with
SBA during fiscal years 2013-2017, rounded up to the next hundred to account for trade associations, and other
resource partners. SBA estimates that on average between 5-7 employees at each SBA Lending institution or
Agent entity may spend between 2-3 hours each reading and interpreting the rule in the first year and that
these employees are compensated at the mean hourly wage for a loan officer, as reported by the U.S. Department
of Labor's Bureau of Labor Statistics ($36.67). SBA also estimates that 5-6 employees on average may be
involved in developing or revising the internal policies of the respective program participant and would
likely spend between 5-7 hours updating policies specifically related to this interim final rule. Finally, SBA
estimates that between 10-12 employees on average for each program participant would spend between 5-8 hours
on training related to updates and modifications made by this interim final rule. Applicants are not included
as an entity affected by the administrative costs of the rule, as the Applicant relies on the SBA Lender or
third-party Agent to inform them of SBA policy and procedure.
Costs to SBA
There are no additional costs to the Agency required to achieve the
outcomes of the rule. The administrative costs considered for the loan
program participants, including reading and interpreting the
regulation, developing and revising internal policies and procedures,
and training are already inherent requirements of SBA employees and
therefore, the publication of this interim final rule has no additional
bearing on the responsibilities of relevant SBA
[[Page 7641]]
employees involved in the Agency's loan programs. Further, SBA does not
anticipate any additional costs related to implementing the second
exception to the economic-dependence affiliation rule because the
Agency expects to absorb any costs related to reviewing integrator
agreements by using existing SBA employees to conduct the reviews.
Transfers
SBA has also identified a transfer of costs, due to the limits on
permissible fees charged to an Applicant by Agents and Lenders, as well
as the prohibition against Agents providing services to both an
Applicant and an SBA Lender in connection with the same SBA loan
application, which was previously permitted under limited
circumstances. These limitations will provide a cost savings to
Applicants; however, the Agency acknowledges that this savings to the
Applicant will result in a cost (``transfer'') to the small number of
Agents and Lenders that reported charging fees in excess of the limits
imposed by this interim final rule. (As discussed in the Regulatory
Flexibility Act section below, the excess fees charged by this small
number of Agents and Lenders also are in excess of the current limits
on fees and are therefore not in compliance with current SBA Loan
Program Requirements.)
Table 6--Estimated Transfers of Costs
----------------------------------------------------------------------------------------------------------------
Number of
expected Average money
Outcomes occurrences saved per Total transfer
per year occurrence
----------------------------------------------------------------------------------------------------------------
Elimination of fees exceeding set limits........................ 746 $2,380.75 $1,776,042.63
---------------
Estimated Annual Transfer....................................... .............. .............. \6\
1,776,042.63
----------------------------------------------------------------------------------------------------------------
\6\ SBA arrived at this estimate based on the total number of loans guaranteed between FY2013 and FY2017 that
reported fees charged to an Applicant by an Agent or Lender over the limits imposed in this interim final rule
and the total amount that those loans exceeded the imposed limit for each threshold.
Below is a table showing an estimation of the total costs and
benefits of the rule over three years:
Table 7--Estimated Undiscounted Benefits and Costs Schedule
----------------------------------------------------------------------------------------------------------------
Benefits Costs
----------------------------------------------------------------------------------------------------------------
Year 1 Year 1
----------------------------------------------------------------------------------------------------------------
Low estimate High estimate Low estimate High estimate
----------------------------------------------------------------------------------------------------------------
267,429 hours........................ 534,856 hours.......... 297,500 hours.......... 556,500 hours.
$9,806,754........................... $19,613,433............ $10,909,325............ $20,406,855.
----------------------------------------------------------------------------------------------------------------
Year 2 Year 2
----------------------------------------------------------------------------------------------------------------
267,429 hours........................ 534,856 hours.......... 148,750 hours.......... 278,250 hours.
$9,806,754........................... $19,613,433............ $5,454,662.50.......... $10,203,427.50.
----------------------------------------------------------------------------------------------------------------
Year 3 Year 3
----------------------------------------------------------------------------------------------------------------
267,429 hours........................ 534,856 hours.......... 0 hours................ 0 hours.
$9,806,754........................... $19,613,433............ $0..................... $0.
----------------------------------------------------------------------------------------------------------------
Below is a table showing the annualized values of the estimated
costs and cost savings, as of 2016, over an infinite horizon.
Table 8--Annualized Values as of 2016 Over an Infinite Horizon
----------------------------------------------------------------------------------------------------------------
Primary estimate
---------------------------------------------------------------
3% Discount rate 7% Discount rate
---------------------------------------------------------------
Low estimate High estimate Low estimate High estimate
----------------------------------------------------------------------------------------------------------------
Annualized Cost Savings......................... $9,806,751 $19,613,433 $9,806,754 $19,613,433
Annualized Costs................................ 485,479 908,132 1,077,116 2,014,841
---------------------------------------------------------------
Annualized Net Cost Savings..................... 9,321,272 18,705,301 8,729,638 17,598,592
----------------------------------------------------------------------------------------------------------------
[[Page 7642]]
3. What are the alternatives to this interim final rule?
SBA considered various alternatives to proceeding with the
preferred option of promulgating this interim final rule. The first and
most stringent alternative would be to adopt the rule as proposed. SBA
chose not to pursue this option due to the concerns expressed by the
industry and general public. Many commenters expressed concern that
parts of the proposed rule may cause unintended consequences that would
make it more difficult for Applicants seeking SBA loans of $350,000 or
less. Specifically, these commenters referred to the limits set for the
fees Agents and Lenders may charge to an Applicant for loans of this
size, and the maximum amount of personal liquidity that owners of 20
percent or more of such Applicants may retain, rather than inject into
the project as additional equity in accordance with the proposed
personal resources test. Also, several commenters expressed concern
that the proposed changes to the principles of affiliation may render
certain industries, like poultry farmers, ineligible for SBA financial
assistance. Due to all of these concerns expressed by commenters, SBA
has modified the interim final rule in several respects, including
increasing the amount of personal liquidity that owners of 20 percent
or more of a small business Applicant may retain, increasing the fees
that a Lender or an Agent may charge a small business Applicant for
assistance with obtaining an SBA-guaranteed loan of $350,000 or less,
and revising the principles of affiliation to prevent any unintended
consequences for certain industries, such as farmers. SBA also has
provided an extended period for Lenders and Agents to comply with the
fee provisions in Sec. Sec. 103.5(b) and 120.221(a).
If the rule were finalized as proposed, the personal liquidity
limits would have been more restrictive than the limits in the interim
final rule. Under the interim final rule, fewer individuals will be
required to inject excess liquid assets for small loans, which is a
change (or transfer) that favors small business Applicants.
The original proposed rule included fee limitations for Lenders of
$2,500 for loans up to and including $350,000; and $5,000 for loans
over $350,000. Per the comments received and based on the costs to
deliver small dollar loans, the interim final rule increases the fee
limitation for loans up to and including $350,000 to $3,000. This
change will not significantly transfer benefits or costs for the
following reasons: (1) Increased use by Applicants of SBA's no cost
Lender Match to connect them to SBA Lenders; (2) increased development
by SBA Lenders of in-house electronic application systems to better
manage service and costs; and (3) continued innovation in the use of
scoring and other data. All of these evolving technological
improvements expand user options and level the playing field for
services and costs.
If the rule were finalized as originally proposed, the change to
limit fees Lenders may charge Applicants on small loans would have
impacted 2,944 loans from Lenders who exceeded the $2,500 proposed cap
on loans guaranteed between FY2013 and FY2017. By increasing the
permissible fee from $2,500 to $3,000 on loans of $350,000 and less in
the interim final rule, the number of loans where the Lender fee
exceeded the cap was reduced to 1,731, resulting in lower economic
impact to Lenders making small dollar loans.
Table 9 demonstrates the estimated reduction in the number of loans
and dollars considered in excess of the Lender fee limitation as a
result of increasing the proposed Lender fee limitation from $2,500 to
$3,000 for loans of $350,000 or less.
Table 9--Comparison of the Estimated Impact of the Limitation on the Fee Paid by the Applicant to the Lender in
the Proposed Rule vs. the Interim Final Rule *
----------------------------------------------------------------------------------------------------------------
Interim final
Proposed rule rule Difference
----------------------------------------------------------------------------------------------------------------
Loans with Excessive Lender Fees................................ 2,944 1,731 (1,213)
Dollars in Excess of Fee Limits................................. $5,813,734 $3,419,091 ($2,394,653)
Average Amount in Excess of Fee Limit per Loan.................. $1,974.77 $1,975.21
----------------------------------------------------------------------------------------------------------------
* As the fee limitation for loans over $350,000 did not change, this table only includes those loans where
Lenders charged fees in excess of the fee limitations on loans of $350,000 or less.
SBA originally proposed limiting total fees that an Agent(s) can
charge an Applicant to a maximum of 2.5 percent of the loan amount or
$7,000, whichever is less, for loans up to and including $350,000; a
maximum of 2 percent or $15,000, whichever is less, for loans over
$350,000 up to and including $1,000,000; and a maximum of 1.5 percent
or $30,000, whichever is less, for loans over $1,000,000. As a result
of the comments received and to limit the impact of the interim final
rule on small Agents, SBA increased the limitations and thresholds for
total fees that an Agent(s) may charge an Applicant to a maximum of 3.5
percent or $10,000, whichever is less, for loans up to $500,000; a
maximum of 2 percent or $15,000, whichever is less, for loans of
$500,001 to $1,000,000; and 1.5 percent or $30,000, whichever is less,
for loans over $1,000,000.
The changes in the interim final rule result in the total number of
loans in excess of the fee limitations being reduced from 3,060 to
2,729 and the total dollars in excess of the fee limitations being
reduced from $7,217,868 to $2,688,406. Table 10 demonstrates the
estimated reduction in the number of loans and dollars considered in
excess of the Agent fee limitation as a result of increasing the
proposed fee limitation.
Table 10--Comparison of the Estimated Impact of the Limitation on the Fee Paid by the Applicant or the Lender to
an Agent(s) in the Proposed Rule vs. the Interim Final Rule for Loans of $1,000,000 and Less **
----------------------------------------------------------------------------------------------------------------
Interim final
Proposed rule rule Difference
----------------------------------------------------------------------------------------------------------------
Loans with Excessive Agent Fees................................. 3,060 2,729 (331)
Dollars in Excess of Fee Limits................................. $7,217,868 $2,688,406 ($4,529,462)
[[Page 7643]]
Average Amount in Excess of the Fee Limit per Loan.............. $2,359 $985
----------------------------------------------------------------------------------------------------------------
** As no changes were made to the Agent fee limitation for loans over $1,000,000 from the proposed rule to the
interim final rule, the loans over $1,000,000 with excessive Agent fees were not included in this table.
The second, less stringent alternative considered was to make no
regulatory change but strictly enforce existing SBA Loan Program
Requirements. Of the major issues commented upon, SBA has existing
mechanisms to enforce compliance with the credit elsewhere test, the
fees Lenders and Agents are permitted to charge an Applicant, including
when Lenders or Agents must refund amounts deemed unreasonable by SBA,
and proper application of the affiliation principles applicable to the
business loan programs. For example, with regard to fees charged to an
Applicant, SBA has the authority to require fees deemed unreasonable by
SBA to be refunded to a Borrower by a Lender or an Agent. In addition,
SBA's OCRM can cite SBA Lenders during lender oversight reviews and
take enforcement action against the SBA Lender, when appropriate.
Further, SBA may suspend or revoke an Agent's privilege to conduct
business with SBA. With regard to determining eligibility of an
Applicant based on affiliation and credit available elsewhere, SBA may
decline to approve applications that do not meet SBA Loan Program
Requirements or, for loans made under a Lender's delegated authority,
SBA may deny liability on the guaranty if the Lender did not make an
acceptable determination for 7(a) loans or, for 504 loans, decline to
close the loan, potentially at considerable expense to the small
business Applicant. However, this option does not resolve the confusion
that SBA Lenders and Agents have on current policy and procedure and
would require an additional investment in Agency resources to rely on
OCRM or the loan processing or guaranty purchase centers to rectify
non-compliance after the fact. SBA has determined that it is more
beneficial to all parties involved to provide clarity to these rules so
that SBA Lenders and Agents can better understand and comply with SBA's
Loan Program Requirements.
In consideration of the alternatives described above, SBA has
determined that the most preferable option is to enact the rule with
several modifications. The interim final rule will, among other things,
provide bright-line tests and clear guidance for SBA Lenders to
determine what fees SBA considers to be reasonable and permissible and
how to properly analyze an Applicant's personal liquidity as part of
the analysis on credit available elsewhere. The interim final rule also
will clarify the principles of affiliation to ensure that SBA financial
assistance is not being provided to businesses that are not actually
small due to affiliation with larger corporations, while ensuring that
certain industries are not adversely impacted. Finally, the interim
final rule will make minor corrections and updates to Loan Program
Requirements to enhance program use.
Executive Order 13563
A description of the need for this regulatory action and benefits
and costs associated with this action, including possible
distributional impacts that relate to Executive Order 13563, are
included above in the Regulatory Impact Analysis under Executive Order
12866.
The Business Loan Programs operate through the Agency's lending
partners, which are 7(a) Lenders for the 7(a) Loan Program,
Intermediaries for the Microloan Program and ILP Program, and Third
Party Lenders and CDCs for the 504 Loan Program. SBA's SBG Program
operates through Surety Bond Companies. SBA's Business Disaster Loan
Programs are delivered directly by SBA, without the use of any
intermediaries. The Agency held two public forums in the summer of 2018
to engage with stakeholders related to poultry lending. With respect to
the 7(a) and 504 Loan Programs generally, SBA also met with trade
association board members and program participants at industry
conferences in the Fall of 2018 through Spring of 2019, which allowed
it to reach representatives of trade associations and hundreds of its
lending partners, from which it gained valuable insight regarding the
loan programs. The Agency's outreach efforts to engage stakeholders
before proposing this rule was extensive and concluded with the
extended comment period.
Executive Order 13771
This interim final rule is considered an E.O. 13771 deregulatory
action. SBA is estimating $12,633,634 in annualized savings for this
rule using a 7% discount rate in perpetuity in 2016 dollars. In
addition, SBA estimates the present value of savings for this rule in
perpetuity to be $180,480,486. Details on the breakdown of the
estimated cost savings of this interim final rule can be found in the
rule's economic analysis.
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 rule will not have substantial, direct
effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Therefore, for
the purposes of Executive Order 13132, SBA has determined that this
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 interim final rule will impose
additional reporting or recordkeeping requirements under the Paperwork
Reduction Act (PRA). Applicants for SBA Express and Export Express
loans, as well as SBA Express and Export Express Lenders, use the same
forms as all other 7(a) loans in order to apply for an SBA-guaranteed
loan. These forms include: SBA Form 1919, Borrower Information Form;
SBA Form 1920, Lender's Application for Guaranty; SBA Form 1971,
Religious Eligibility Worksheet (for those businesses that may have a
religious aspect); and SBA Form 2237 (to request modifications to an
approved loan). These forms are all OMB-approved forms under OMB
Control
[[Page 7644]]
number 3245-0348 and, as discussed below, some of the forms will need
to be revised based on the changes in this interim final rule.
SBA Form 1920, Lender's Application for Guaranty; SBA Form 2450,
Eligibility Information Required for 504 Submission (Non-PCLP) (OMB
Control number 3245-0071); and SBA Form 2234 (Part C), Eligibility
Information Required for 504 Submission (PCLP) (OMB Control number
3245-0346) will need to be revised due to the new regulation at Sec.
120.102, which will require SBA Lenders to analyze the personal
resources of certain owners of the Applicant business to determine if
they have liquid assets that can provide some or all of the desired
financing. The change will have a de minimis impact on SBA Lenders
since reviewing the personal resources of the applicant business and
its owners is already part of the analysis SBA Lenders currently
conduct in determining an Applicant's eligibility for SBA financial
assistance under the requirement to ensure that the Applicant does not
have access to credit elsewhere on reasonable terms from non-Federal
sources.
The interim final rule also makes changes that require revisions to
SBA Form 159, Fee Disclosure and Compensation Agreement (OMB Control
number 3245-0201), which is used to collect information from SBA
Lenders and Agents on the fees that they charge to Applicants for
assistance with obtaining an SBA-guaranteed loan. SBA Form 159 is also
used to collect information from SBA Lenders on referral fees that it
pays to Loan Brokers (also known as Referral Agents) in connection with
an SBA-guaranteed loan. The specific revisions to SBA Form 159 would
implement the changes to Sec. Sec. 120.221, 103.4(g), and 103.5 that
limit the amount and types of fees that may be charged to an Applicant.
The revisions to SBA Form 159 will reduce the estimated hour burden for
7(a) Lenders because, under the interim final rule, they will only be
required to disclose the amount charged up to the permissible limit on
SBA Form 159, but will no longer have to itemize fees charged to
Applicants, which is currently required for fees over $2,500. The
revisions will have no material effect on the reporting burden for
Agents. They will continue to report on all fees imposed on Applicants
and provide supporting documentation for fees over $2,500 as they do
now.
The changes to SBA Forms 1920, 2450, 2234 (Part C), and 159 will be
submitted to OMB as part of a broader, comprehensive revision of the
forms that is not affected by this interim final rule but is part of
the Agency's efforts to streamline and simplify the information
collected from Applicants and SBA Lenders.
Finally, this rule puts into the regulations the existing
requirement for SBLCs to submit to SBA for review and approval on an
annual basis the validation of any credit scoring model they are using
in connection with SBA Express and Export Express loans. This reporting
requirement is included in OMB-approved collection, SBA Lender
Reporting Requirements (OMB Approval Number 3245-0365). This
information collection was submitted to OMB for renewal in September
2018 and the renewal was approved by OMB in April 2019. The new
expiration date is April 30, 2022. The regulatory change does not
impact that requirement; it merely codifies the requirement in the
regulation instead of the SOP.
Regulatory Flexibility Act, 5 U.S.C. 601-612
When an agency issues a rulemaking, the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601-612, requires the agency to ``prepare and make
available for public comment a final regulatory analysis'' which will
``describe the impact of the proposed rule on small entities.'' Section
605 of the RFA allows an agency to certify a rule, in lieu of preparing
an analysis, if the proposed rulemaking is not expected to have a
significant economic impact on a substantial number of small entities.
Small entities likely to be affected by this rule include small SBA
Lenders and small Agents who assist small business Applicants with
obtaining SBA-guaranteed financing. SBA Lenders are comprised of 7(a)
Lenders, CDCs, Microloan Intermediaries, ILP Intermediaries, and
Sureties that participate in the SBG Program. Based on SBA's size
standards, SBA has determined that approximately 2,000 of the
approximately 4,500 7(a) Lenders are small, all of the approximately
213 CDCs are small, all of the approximately 135 Microloan
Intermediaries are small, all of the approximately 33 ILP
Intermediaries are small, and 12 of the approximately 32 Sureties that
participate in the SBG Program are small.
SBA does not track or collect information on entities or
individuals serving as Agents, Packagers, or Lender Service Providers
with regard to the NAICS codes or classification of those entities.
Services provided to assist an Applicant in obtaining SBA-guaranteed
financing may be performed by several different types of entities
ranging from individuals who may assist with packaging a loan
application or assisting the Applicant with finding an SBA Lender, to
entities formed for the purpose of providing such assistance, to
attorneys or Certified Public Accountants. All of these different types
of individuals or entities providing assistance to Applicants in
connection with obtaining an SBA-guaranteed loan may be classified
under numerous different NAICS codes. SBA considered NAICS codes that
may apply to these entities for the purpose of estimating the number of
small entities affected by this interim final rule. One possible
classification includes 522310 for ``Mortgage and Nonmortgage Loan
Brokers,'' which is described as being comprised of ``establishments
primarily engaged in arranging loans by bringing borrowers and lenders
together on a commission or fee basis.'' The size standard for this
classification is $7.5 million in annual receipts and according to the
U.S. Census Bureau's 2012 Statistics of U.S. Businesses (SUSB),\3\
6,817 entities classified by this NAICS code are considered small by
SBA's size standards. SBA also considered 522390 for ``Other Activities
Related to Credit Intermediation,'' which is described as being
comprised of ``establishments primarily engaged in facilitating credit
intermediation (except mortgage and loan brokerage; and financial
transactions processing, reserve, and clearinghouse activities)''
because ``loan servicing'' is included as an illustrative example of
this NAICS code. However, based upon the other examples provided, which
include check cashing services, money order issuance services, and
payday lending services, SBA does not believe that NAICS code 522390 is
applicable to the Agents affected by this rule. Because there are no
limitations as to what type of entity may be engaged by an Applicant
for assistance with obtaining SBA financing, it is not reasonable to
estimate the number of affected entities based on NAICS codes, as the
number of entities included in these classifications would far exceed
the number of entities that actually conduct business with SBA and
would not provide a realistic portrayal of the population of small
entities affected by this rule.
---------------------------------------------------------------------------
\3\ Because SBA's size standard for most NAICS codes is based on
annual receipts and U.S. Census Bureau SUSB data by enterprise
receipt size is only collected every five years, 2012 is the most
recent Census data available for use.
---------------------------------------------------------------------------
As an alternative to estimating the number of entities affected
based on NAICS codes, SBA reviewed the Lender-reported data and other
[[Page 7645]]
information gathered by OCRM during lender oversight reviews in fiscal
years 2013 through 2017, which also was used to develop the fee limits
in this interim final rulemaking. Within the 8,025 loans reported to
have used an Agent (other than the participating Lender) to provide
assistance to the Applicant in securing the loan during that time
period, SBA identified 753 unique Agents based on their DUNS Number or
street address. Since SBA has no means of knowing the average annual
receipts of these entities, SBA will conservatively estimate that the
majority or 80 percent of the 753 entities are small. SBA has also
identified approximately 265 entities who have submitted LSP Agreements
for review by SBA. Like the Agents, including Packagers, SBA does not
capture the NAICS classification of these LSPs and therefore is unable
to estimate their annual receipts and the number of which that would be
considered small. Therefore, as indicated above with Agents, SBA will
conservatively estimate that the majority or 80 percent of LSPs are
small. For purposes of the RFA, SBA estimates that approximately 814
(80 percent of 1,018) small entities serving as Agents and LSPs will be
affected by this interim final rule for a total of approximately 3,207
small entities including all small SBA Lenders, Agents, and LSPs.
As described more fully in the RIA above, SBA has determined that
the only costs to program participants and relevant stakeholders
necessary to comply with the interim final rule are administrative
costs. Administrative costs considered include estimations on reading
and interpreting the regulation, developing and revising internal
policies and procedures, and training. To reiterate, although these
costs are estimated here for the purposes of the Regulatory Flexibility
Act, it is important to note that, regardless of new rulemaking,
program participants are presumed to incur administrative costs related
to reading and interpreting SBA Loan Program Requirements, revising and
updating internal policies, and training staff continuously in order to
maintain familiarity with SBA Loan Program Requirements, as required by
13 CFR 120.180, and to remain in good standing with SBA as defined in
13 CFR 120.420(f).
The RIA also identifies an estimated transfer of costs due to the
limits on permissible fees charged to an Applicant by Agents and
Lenders, as well as the prohibition against an Agent providing services
to both an Applicant and an SBA Lender in connection with the same SBA
loan application, which was previously permitted under limited
circumstances. These limitations have been put in place in order to
protect small business Applicants from fees deemed unreasonable by SBA
and will provide a cost savings to small business Applicants. However,
the Agency acknowledges that this savings to the Applicant will result
in a potential loss of revenue to the small number of Agents and
Lenders that reported charging fees in excess of the limits imposed by
this interim final rule that are considered to be small entities. As
noted previously in Section III.C. above, approximately one percent of
the loans guaranteed during fiscal years 2013-2017 reported fees
charged to the Applicant by Lenders and Agents in excess of the revised
maximum fees permitted in this interim final rule. Based on SBA's
analysis of the fees reported on loans guaranteed during that time
frame, SBA estimates that 213 small entities (83 small Lenders and 130
small Agents) \4\ reported charging fees in excess of the limits
imposed in this interim final rule. This represents only 8 percent of
the 7(a) Lenders and Agents that SBA has identified as small (2,000
7(a) Lenders and 602 Agents). Thus, only 8 percent of small Lenders and
small Agents may experience reduced revenue as a result of this interim
final rule. It is important to note that, while some small entities may
experience reduced revenue, the fees that were being charged by these
small entities were not in compliance with current SBA policy.
Additionally, the reduced revenue will be offset at least in part by
the estimated savings the small entities will experience due to
increased efficiency in determining the permissibility and
reasonableness of the fees charged.
---------------------------------------------------------------------------
\4\ Based on SBA's analysis of the loans guaranteed during
FY2013-FY2017, 83 Lenders and 162 Agents reported charging the
Applicant a fee in excess of the limits imposed in this interim
final rule. Although SBA recognizes that more than 50 percent of
7(a) Lenders are not small, for purposes of the RFA, SBA is assuming
that all 83 Lenders are small. As noted above, SBA estimates that 80
percent of Agents are small; therefore, SBA is estimating that 130
of the 162 Agents that reported charging fees in excess of the
limits in this interim final rule are small.
---------------------------------------------------------------------------
To estimate the average annualized cost per small entity, SBA
annualized the sum of all administrative costs plus the estimated
potential loss of revenue (e.g., the total transfer amount of
$1,776,042.63) identified in the RIA over a 10-year period. (See Table
6 in the RIA.) The estimated total annualized costs over 10 years at a
7 percent discount rate range from a low estimate of $2,773,295.70 to a
high estimate of $4,331,035. Dividing the total estimated annualized
costs by the 3,207 estimated small entities affected, the annualized
cost per entity is estimated to be between approximately $864.76 and
$1,350.49. Although SBA is unable to ascertain the NAICS codes of all
types of entities considered to be Agents, SBA used data from the 2012
U.S. Census Bureau's SUSB for NAICS code 522310 for Mortgage and
Nonmortgage Loan Brokers as an example to examine the annualized
compliance cost as a percentage of annual receipts for small entities
classified by this NAICS code. For the purposes of this estimation, SBA
has averaged the high and low estimates of the annualized cost for a
mid-point total of $388 per entity.
Mortgage and Nonmortgage Loan Brokers (NAICS 522310)
[$7.5 Million Size Standard]
----------------------------------------------------------------------------------------------------------------
Average
Firm size (by receipts) annual Annualized Number of Percent of Revenue test
receipts cost per firm firms small firms * (percent)
----------------------------------------------------------------------------------------------------------------
All Firms....................... $1,005,967 $388 7,007 N/A 0.0
Small Firms..................... 549,802 388 6,817 100 0.1
<100K........................... 48,038 388 1,533 22 0.8
100K-$499,999................... 250,730 388 3,233 47 0.2
500,000-$999,999................ 693,276 388 1,042 15 0.1
$1,000,000-$2,499,999........... 1,482,997 388 721 12 0.0
$2,500,000-$4,999,999........... 3,244,231 388 216 3 0.0
[[Page 7646]]
$5,000,000-$7,499,999........... 5,157,764 388 72 1 0.0
----------------------------------------------------------------------------------------------------------------
* Annualized compliance costs as a percentage of annual receipts.
SBA has determined that the annualized cost of this rule per entity
will not have a significant economic impact on a substantial number of
small entities. First, the average annualized cost in the example above
is not a significant percentage of each entity's average annual revenue
for any size firm considered to be small. It is also noted that these
annualized costs will be offset by annualized benefits ranging from a
low estimate of $9,806,754 to a high estimate of $19,613,433 (or
approximately $3,056-$6,116 per entity). See the RIA above for more
information on the net annualized costs and benefits. Second, the
number of small entities affected is not substantial. As stated above,
SBA estimates that from FY2013 through FY2017 213 small entities (83
small Lenders and 130 small Agents) reported charging fees in excess of
the limits imposed in this interim final rule. This represents only 8
percent of the 7(a) Lenders and Agents that SBA has estimated are
small. SBA does not consider 83 small Lenders to be a substantial
number when compared to the overall number of small Lenders, which is
approximately 2,000. With respect to small Agents, SBA does not
consider 130 Agents to be a substantial number when compared to the
overall number of small Agents. While SBA used 602 as an estimate of
the number of small Agents, SBA believes the actual number of small
entities acting as Agents in connection with the SBA loan programs is
most likely much larger when taking into consideration the attorneys,
accountants, business consultants and others that act as Agents. As SBA
noted above, the NAICS Code for Mortgage and Nonmortgage Loan Brokers
used in the above example is only one of numerous NAICS codes under
which Agents may be classified. Many different types of individuals and
entities, including attorneys, accountants, and business consultants,
act as Agents and assist Applicants in obtaining SBA-guaranteed loans.
Thus, SBA believes that the actual universe of small Agents may be
considerably larger than 602. When all of the potentially relevant
NAICS codes are considered, SBA believes that the number of small
entities affected by this rule would be even smaller than the 8% noted
above.
Despite the fact that SBA determined that the proposed rulemaking
would not have a significant economic impact on a substantial number of
small entities, SBA made modifications to certain elements of this
interim final rule based on comments received during the proposed
rule's public comment period. These modifications aimed to relieve a
perceived disparity for small SBA loans of $350,000 or less, which
according to public commenters, most frequently require the assistance
of an Agent. For example, SBA originally proposed certain limitations
to fees that Agents could charge to an Applicant for assistance in
obtaining an SBA loan. Public commenters asserted that these fee
limitations would force Agents out of the market and reduce access to
capital for small businesses. Although SBA disagrees with the assertion
that the proposed limits on fees would have disproportionately impacted
access to these smaller loans, in the interim final rule, SBA increased
the permitted fee an Agent or Agents may charge an Applicant for
assistance with obtaining a loan of $350,000 or less from 2.5 percent
of the loan amount or $7,000, whichever is less, to 3.5 percent of the
loan amount or $10,000, whichever is less. That revision represents an
increase of approximately 40 percent in the permitted fees for smaller
loans when compared to the proposed rule, and a significant increase in
the fees permitted under SBA's current Loan Program Requirements. In
addition, SBA adjusted the lower two loan amount ranges, to ensure that
the maximum fee permitted on loans over $350,000 up to and including
$500,000 would not be lower than the maximum fee permitted for loans of
$350,000 or less. Also, in the interim final rule, SBA increased the
fee a Lender may charge an Applicant for assistance with obtaining a
loan of $350,000 or less from $2,500 to $3,000, an increase of 20
percent over the proposed limit. By having a bright-line test for what
SBA considers reasonable compensation for services provided to an
Applicant by an Agent and a Lender, Lenders and Agents will, in fact,
save time and costs in analyzing and documenting that fees charged to
the Applicant are reasonable.
In an effort to minimize any potential costs or revenue losses that
may be experienced by the 213 small Lenders and Agents that reported
charging fees in excess of the revised limits in this interim final
rule, SBA is giving all SBA Lenders and Agents additional time--until
October 1, 2020--to comply with revised Sec. Sec. 103.5(b) and
120.221(a). Thus, these entities will have had two years from the date
of publication of the proposed rule in September 2018 to prepare for
changes to the fee structure. Additionally, SBA is allowing a period of
120 days for Agents to make any adjustments to conform to the clarified
definitions of the types of Agents in Sec. 103.1 (e.g., Agents that
may need to enter into LSP agreements with Lenders they provide
services to).
Similarly, in accordance with SBA Loan Program Requirements, SBA
Lenders must analyze the ability of the small business Applicant to
obtain credit from non-Federal sources, including the personal
resources of individuals and entities that own 20 percent or more of
the Applicant business. SBA proposed thresholds, based on the size of
the total financing package, to assist the SBA Lender in determining
the amount of excess personal liquid assets of 20 percent or more
owners of the small business Applicant. Personal liquid assets
exceeding the stated thresholds must be injected into the project to
reduce the SBA loan amount. Public commenters recommended that the
personal liquidity thresholds be modified, especially for smaller
loans. SBA reevaluated the personal liquidity threshold for smaller
loans and agreed to modify the limits to ensure that Applicants
applying for smaller loans are not adversely affected. The interim
final rule reinstates a bright-line test for SBA Lenders to
appropriately consider the personal resources of the owners of the
Applicant, which will save SBA Lenders time in their analysis.
SBA believes that this interim final rule encompasses best practice
guidance that aligns with the Agency's mission to increase access to
capital for small businesses and facilitate American job
[[Page 7647]]
preservation and creation by providing bright-line tests to assist
program participants in understanding the Loan Program Requirements and
by removing unnecessary regulatory requirements. For the aforementioned
reasons, SBA has determined that this interim final rule will not have
a significant economic impact on a substantial number of small
entities.
List of Subjects
13 CFR Part 103
Administrative practice and procedure.
13 CFR Part 120
Community development, Environmental protection, Equal employment
opportunity, Exports, Loan programs--business, Reporting and
recordkeeping requirements, Small businesses.
13 CFR Part 121
Loan programs--business, Reporting and recordkeeping requirements,
Small businesses.
For the reasons stated in the preamble, SBA is amending 13 CFR
parts 103, 120, and 121 as follows:
PART 103--STANDARDS FOR CONDUCTING BUSINESS WITH SBA
0
1. The authority citation for part 103 is revised to read as follows:
Authority: 15 U.S.C. 634, 642.
0
2. Amend Sec. 103.1 by:
0
a. Revising paragraph (a); and
0
b. Removing paragraphs (d), (e), and (f) and redesignating paragraph
(g) as paragraph (d).
The revision reads as follows:
Sec. 103.1 Key definitions.
(a) Agent means an authorized representative, including an
attorney, accountant, consultant, packager, lender service provider, or
any other individual or entity representing an Applicant or Participant
by conducting business with SBA. For purposes of SBA's business loan
programs, the term Agent includes but is not limited to:
(1) Lender Service Provider: an Agent who assists the Lender with
originating, disbursing, servicing, liquidating, or litigating SBA
loans. The Lender bears full responsibility for all aspects of its SBA
loan operation, including, but not limited to, approvals, closings,
disbursements, servicing actions, and due diligence. Lender Service
Providers may only receive compensation from the Lender and such
compensation may not be passed on to the Applicant or paid out of SBA-
guaranteed loan proceeds.
(2) Packager: An Agent who prepares the Applicant's application for
financial assistance and is employed and compensated by the Applicant.
(3) Loan Broker (also known as Referral Agent): an Agent who, on a
specific transaction, either assists the Applicant in finding an SBA
Lender that will be willing to make a loan to the Applicant or assists
the SBA Lender in finding an Applicant. A Loan Broker may be employed
and compensated by either the Applicant or the SBA Lender (but not
both). Compensation paid to a Loan Broker by an SBA Lender may not be
passed on to the Applicant and may not be paid out of SBA-guaranteed
loan or debenture proceeds.
* * * * *
0
3. Amend Sec. 103.4 by revising paragraph (g) to read as follows:
Sec. 103.4 What is ``good cause'' for suspension or revocation?
* * * * *
(g) Acting as an Agent (including a Lender Service Provider) for an
SBA Lender and an Applicant on the same SBA business loan and receiving
compensation from both the Applicant and SBA Lender. For purposes of
this paragraph (g), the actions of an Agent include the actions of the
Agent's Affiliates, as defined in Sec. 121.103 of this chapter.
* * * * *
0
4. Amend Sec. 103.5 by revising paragraph (b) and the last sentence of
paragraph (c) to read as follows:
Sec. 103.5 How does SBA regulate an Agent's fees and provision of
service?
* * * * *
(b) Total compensation charged by an Agent or Agents to an
Applicant for services rendered in connection with obtaining an SBA-
guaranteed loan must be reasonable. In cases where an Agent or Agents
charge any fee to an Applicant in excess of those specified in this
part, the Agent(s) must reduce the charge and refund to the Applicant
any amount in excess of the fee permitted by SBA. SBA considers the
following amounts to be reasonable for the total compensation that an
Applicant can be charged by one or more Agents:
(1) For loans up to and including $500,000: A maximum of 3.5
percent of the loan amount, or $10,000, whichever is less;
(2) For loans $500,001-$1,000,000: A maximum of 2 percent of the
loan amount, or $15,000, whichever is less; and
(3) For loans over $1,000,000: A maximum of 1.5 percent of the loan
amount, or $30,000, whichever is less.
(c) * * * However, such compensation may not be charged to an
Applicant or Borrower.
PART 120--BUSINESS LOANS
0
5. The authority citation for 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), and note, 650, 657t, and note, 657u, and
note, 687(f), 696(3) and (7), and note, and 697(a) and (e), and
note.
0
6. Amend Sec. 120.10 by revising paragraph (1)(i) of the defined term
``Associate'' to read as follows:
Sec. 120.10 Definitions.
* * * * *
Associate. (1) * * *
(i) An officer, director, key employee, or holder of 20 percent or
more of the value of the Lender's or CDC's stock or debt instruments,
or an Agent (as defined in Sec. 103.1 of this chapter) involved in the
loan process; or
* * * * *
0
7. Add Sec. 120.102 to read as follows:
Sec. 120.102 Funds not available from alternative sources, including
the personal resources of owners.
(a) An Applicant for a business loan must show that the desired
funds are not available from the resources of any individual or entity
owning 20 percent or more of the Applicant. SBA will require the use of
liquid assets from any such owner as an injection to reduce the SBA
loan amount when that owner's liquid assets exceed the amounts
specified in paragraphs (a)(1) through (3) of this section. SBA will
reexamine the thresholds periodically and, if adjustments are necessary
based on nationally-recognized economic indicators, SBA may modify the
thresholds from time to time through rulemaking. When the total
financing package (i.e., any SBA loans and any other financing,
including loans from any other source, requested by the Applicant
business at or about the same time, as defined in Loan Program
Requirements (see Sec. 120.10)):
(1) Is $350,000 or less, each 20 percent owner of the Applicant
must inject any liquid assets that are in excess of two times the total
financing package, or $500,000, whichever is greater;
(2) Is between $350,001 and $1,000,000, each 20 percent owner of
the Applicant must inject any liquid assets that are in excess of one
and one-half times the total financing package, or $1,000,000,
whichever is greater; or
(3) Exceeds $1,000,000, each 20 percent owner of the Applicant must
inject any liquid assets that are in excess
[[Page 7648]]
of one times the total financing package, or $2,500,000, whichever is
greater.
(b) Any liquid assets in excess of the applicable amount set forth
in paragraph (a) of this section must be used to reduce the SBA loan
amount. These funds must be injected prior to the disbursement of the
proceeds of any SBA financing. In extraordinary circumstances, SBA may,
in its sole discretion, permit exceptions to the required injection of
an owner's excess liquid assets.
(c) For purposes of this section, ``liquid assets'' means cash or
cash equivalents, including savings accounts, CDs, stocks, bonds, or
other similar assets. Equity in real estate holdings, the cash value of
life insurance policies, and other fixed assets are not to be
considered liquid assets. In addition, the liquid assets of any 20
percent owner who is an individual include the liquid assets of the
owner's spouse and any minor children.
(d) SBA Lenders must document their analysis and determination in
the loan file.
0
8. Amend Sec. 120.130 by revising paragraph (c) to read as follows:
Sec. 120.130 Restrictions on uses of proceeds.
* * * * *
(c) Floor plan financing or other revolving line of credit, except
under Sec. 120.340, Sec. 120.390, or Sec. 120.444;
* * * * *
0
9. Amend Sec. 120.221 by:
0
a. Revising the section heading and paragraph (a); and
0
b. Adding a sentence at the end of paragraph (b).
The revisions and addition read as follows:
Sec. 120.221 Fees and expenses that the Lender may collect from an
Applicant or Borrower.
* * * * *
(a) Fees that can be collected from the Applicant for assistance in
obtaining a loan. The Lender may collect a fee from an Applicant (as
defined in Sec. 103.1 of this chapter) for assistance with obtaining
an SBA-guaranteed loan. The fee may not exceed $3,000 for a loan up to
and including $350,000 and may not exceed $5,000 for a loan over
$350,000. The Lender must advise the Applicant in writing that the
Applicant is not required to obtain or pay for unwanted services. In
cases where the Lender charges any fees to the Applicant in excess of
those specified in this part, the Lender must reduce the charge and
refund to the Applicant any amount in excess of the permitted fee. If
the Lender charges the Applicant a fee for assistance with obtaining an
SBA-guaranteed loan, the fee must be disclosed to SBA in accordance
with Sec. 103.5 of this chapter and documented in accordance with Loan
Program Requirements.
(b) * * * For certain revolving lines of credit made under Sec.
120.390 and on Export Working Capital Program loans (as allowed under
Sec. 120.344(b)), subject to SBA's prior written approval, the Lender
may charge extraordinary servicing fees in excess of 2 percent per year
on the outstanding balance of the part requiring special servicing,
provided the fees are reasonable and prudent.
* * * * *
Sec. 120.222 [Amended]
0
10. Amend Sec. 120.222 by removing the word ``in'' before the words
``any premium received''.
Sec. 120.344 [Amended]
0
11. Amend Sec. 120.344(b) by removing the period at the end of the
paragraph and adding in its place ``, provided the fees are reasonable
and prudent.''
0
12. Revise Sec. 120.350 to read as follows:
Sec. 120.350 Policy.
Section 7(a)(15) of the Act authorizes SBA to guarantee a loan to
a:
(a) Qualified employee trust (``ESOP'') to:
(1) Help finance the growth of its employer's small business; or
(2) Purchase ownership or voting control of the employer; and a
(b) Small business concern, if the proceeds from the loan are only
used to make a loan to a qualified employee trust that results in the
qualified employee trust owning at least 51 percent of the small
business concern.
0
13. Revise Sec. 120.352 to read as follows:
Sec. 120.352 Use of proceeds.
Loan proceeds may be used for:
(a) Qualified employee trust. A qualified employee trust may use
loan proceeds for two purposes:
(1) Qualified employer securities. A qualified employee trust may
relend loan proceeds to the employer by purchasing qualified employer
securities. The small business concern may use these funds for any
general 7(a) purpose.
(2) Control of employer. A qualified employee trust may use loan
proceeds to purchase a controlling interest (51 percent) in the
employer. Ownership and control must vest in the trust by the time the
loan is repaid.
(b) Small business concern. A small business concern may only use
loan proceeds to make a loan to a qualified employee trust that results
in the qualified employee trust owning at least 51 percent of the small
business concern.
0
14. Amend Sec. 120.432 by adding a sentence at the end of paragraph
(a) to read as follows:
Sec. 120.432 Under what circumstances does this subpart permit sales
of, or sales of participating interests in, 7(a) loans?
(a) * * * This paragraph (a) applies to all 7(a) loans purchased
from any Federal or state banking regulator, any receiver, or any
conservator, unless SBA agrees otherwise in writing.
* * * * *
0
15. Amend Sec. 120.440 by revising paragraph (c) to read as follows:
Sec. 120.440 How does a 7(a) Lender obtain delegated authority?
* * * * *
(c) If delegated authority is approved or renewed, Lender must
execute a supplemental guarantee agreement, which will specify a term
not to exceed two years. As provided in Sec. 120.442(c)(2)(i), when
SBA renews a Lender's authority to participate in SBA Express, SBA may
grant a longer term, but not to exceed three years. For approval or
renewal of any delegated authority, SBA may grant shortened approvals
or renewals based on risk or any of the other delegated authority
criteria. Lenders with less than three years of SBA lending experience
will be limited to an initial term of one year or less.
0
16. Add an undesignated center heading and Sec. Sec. 120.441 through
120.447 to read as follows:
SBA Express and Export Express Loan Programs
Sec.
120.441 SBA Express and Export Express Loan Programs.
120.442 Process to obtain or renew SBA Express or Export Express
authority.
120.443 SBA Express and Export Express loan processing requirements.
120.444 Eligible uses of SBA Express and Export Express loan
proceeds.
120.445 Terms and conditions of SBA Express and Export Express
loans.
120.446 SBA Express and Export Express loan closing, servicing,
liquidation, and litigation requirements.
120.447 Oversight of SBA Express and Export Express Lenders.
Sec. 120.441 SBA Express and Export Express Loan Programs.
(a) SBA Express. Under the SBA Express Loan Program (SBA Express),
[[Page 7649]]
designated Lenders (SBA Express Lenders) process, close, service, and
liquidate SBA-guaranteed 7(a) loans using their own loan analyses,
procedures, and documentation to the maximum extent practicable, with
reduced requirements for submitting documentation to, and prior
approval by, SBA. These loan analyses, procedures, and documentation
must meet prudent lending standards; be consistent with those an SBA
Express Lender uses for its similarly-sized, non-SBA guaranteed
commercial loans; and conform to all requirements imposed upon Lenders
generally and SBA Express Lenders in particular by Loan Program
Requirements, as such requirements are issued and revised by SBA from
time to time, unless specifically identified by SBA as inapplicable to
SBA Express loans. In return for the expanded authority and autonomy
provided by the program, SBA Express Lenders agree to accept a maximum
SBA guaranty of 50 percent of the SBA Express loan amount.
(b) Export Express. The Export Express Loan Program (Export
Express) is designed to help current and prospective small exporters.
It is subject to the same loan processing, making, closing, servicing,
and liquidation requirements, as well as the same interest rates and
applicable fees, as SBA Express, except as otherwise provided in Loan
Program Requirements.
Sec. 120.442 Process to obtain or renew SBA Express or Export Express
authority.
The decision to grant or renew SBA Express or Export Express
authority will be made by the appropriate SBA official in accordance
with Delegations of Authority and is final. If SBA Express or Export
Express authority is approved or renewed, the Lender must execute a
supplemental guarantee agreement before the Lender's SBA Express or
Export Express authority will become effective.
(a) Criteria and process for initial approval of SBA Express or
Export Express authority. A Lender that wishes to participate in SBA
Express or Export Express must submit a written request to SBA.
(1) Existing 7(a) Lenders. In evaluating an existing 7(a) Lender's
application for SBA Express or Export Express authority, SBA will
consider the criteria and follow the procedures set forth in Sec.
120.440.
(2) Lending institutions that do not currently participate with
SBA. Lending institutions that do not currently participate with SBA
must become 7(a) Lenders to participate in SBA Express and/or Export
Express. Such institutions may request SBA 7(a) lending and SBA Express
and/or Export Express authority simultaneously. In evaluating such
institutions, in addition to the criteria set forth in Sec. Sec.
120.410 and 120.440, SBA will consider whether the institution:
(i) Has acceptable experience with small commercial loans,
including an acceptable number of performing small commercial loans
outstanding at its most recent fiscal year end; and
(ii) Has received appropriate training on SBA's policies and
procedures.
(b) Criteria and process for renewal of SBA Express or Export
Express authority. In renewing a Lender's SBA Express or Export Express
authority and determining the term of the renewal, SBA will consider
the criteria and follow the process set forth in Sec. 120.440 and also
will consider whether the Lender:
(1) Can effectively process, make, close, service, and liquidate
SBA Express or Export Express loans, as applicable;
(2) Has received a major substantive objection regarding renewal
from the Field Office(s) covering the territory where the Lender
generates significant numbers of SBA Express or Export Express loans,
as applicable; and
(3) Has received acceptable review results on the SBA Express or
Export Express portion, as applicable, of any SBA-administered Lender
reviews.
(c) Term--(1) Initial approval. SBA may approve a Lender's
authority to participate in SBA Express or Export Express for a maximum
term of two years. SBA may approve a shorter term or limit a Lender's
maximum SBA Express or Export Express loan volume if, in SBA's sole
discretion, a Lender's qualifications, performance, experience with SBA
lending, or other factors so warrant.
(2) Renewal--(i) SBA Express. SBA may renew a Lender's authority to
participate in SBA Express for two years or, in SBA's sole discretion,
a maximum of three years if a Lender's qualifications, performance,
experience with SBA lending, or other factors so warrant.
(ii) Export Express. SBA may renew a Lender's authority to
participate in Export Express for a maximum term of two years.
(iii) Shorter term or loan volume limit. SBA may renew a Lender's
authority to participate in SBA Express or Export Express for a shorter
term or limit a Lender's maximum SBA Express or Export Express loan
volume if, in SBA's sole discretion, a Lender's qualifications,
performance, experience with SBA lending, or other factors so warrant.
Sec. 120.443 SBA Express and Export Express loan processing
requirements.
(a) SBA Express and Export Express loans are subject to all of the
requirements set forth in subparts A and B of this part, unless such
requirements are specifically identified by SBA as inapplicable.
(b) In addition to the eligibility criteria applicable to all 7(a)
loans, an Export Express Applicant must have been in business for at
least 12 full months at the time of application, but not necessarily in
the exporting business, unless the Lender determines that the
Applicant's key personnel have clearly demonstrated export expertise
and substantial previous successful business experience and the Lender
processes the Export Express loan using conventional commercial loan
underwriting procedures and does not rely solely on credit scoring or
credit matrices to approve the loan.
(c) Certain types of loans and loan programs are not eligible for
SBA Express or Export Express, as detailed in official SBA policy and
procedures, including but not limited to:
(1) A loan that would reduce the Lender's existing credit exposure
to a single Borrower, including its affiliates as defined in Sec.
121.301(f) of this chapter;
(2) A loan to a business that has an outstanding 7(a) loan where
the Applicant is unable to certify that the loan is current at the time
of approval of the SBA Express or Export Express loan;
(3) A loan that would have as its primary collateral real estate or
personal property that does not meet SBA's environmental requirements;
and
(4) Complex loan structures or eligibility situations.
(d) SBA has authorized SBA Express and Export Express Lenders to
make the credit decision without prior SBA review. Lenders must not
make an SBA-guaranteed loan that would be available on reasonable terms
from either the Lender itself or another source without an SBA guaranty
in accordance with Sec. 120.101. The credit analysis must demonstrate
that there is reasonable assurance of repayment. SBA Express and Export
Express Lenders must use appropriate and prudent credit analysis
processes and procedures that are generally accepted in the commercial
lending industry and are consistent with those used for their
similarly-sized, non-SBA guaranteed commercial loans. As part of their
prudent credit analysis, SBA Express and Export Express
[[Page 7650]]
Lenders may use a business credit scoring model (such a model cannot
rely solely on consumer credit scores) to assess the credit history of
the Applicant and/or repayment ability if they do so for their
similarly-sized, non-SBA guaranteed commercial loans. SBA Express and
Export Express Lenders must validate (and document) with appropriate
statistical methodologies that their credit analysis procedures are
predictive of loan performance, and they must provide that
documentation to SBA upon request. SBLCs must provide such credit
scoring model validation and documentation to SBA for review and
approval on an annual basis.
(e) SBA Express and Export Express Lenders are responsible for all
loan decisions, including eligibility for 7(a) loans (including size),
creditworthiness, and compliance with Loan Program Requirements. SBA
Express and Export Express Lenders also are responsible for confirming
that all loan closing decisions are correct and that they have complied
with all requirements of law and Loan Program Requirements.
(f) SBA Express and Export Express Lenders must ensure all required
forms are obtained and are complete and properly executed. Appropriate
documentation must be maintained in the Lender's loan file, including
adequate information to support the eligibility of the Applicant and
the loan.
Sec. 120.444 Eligible uses of SBA Express and Export Express loan
proceeds.
(a) SBA Express. (1) SBA Express loan proceeds must be used
exclusively for eligible business-related purposes, as described in
Sec. Sec. 120.120 and 120.130.
(2) Revolving lines of credit are eligible for SBA Express,
provided they comply with official SBA policy and procedures.
(b) Export Express. (1) Export Express loans must be used for an
export development activity, which includes the following:
(i) Obtaining a Standby Letter of Credit when required as a bid
bond, performance bond, or advance payment guarantee;
(ii) Participation in a trade show that takes place outside the
United States;
(iii) Translation of product brochures or catalogues for use in
markets outside the United States;
(iv) Obtaining a general line of credit for export purposes;
(v) Performing a service contract for buyers located outside the
United States;
(vi) Obtaining transaction-specific financing associated with
completing export orders;
(vii) Purchasing real estate or equipment to be used in the
production of goods or services for export;
(viii) Providing term loans and other financing to enable a small
business concern, including an export trading company and an export
management company, to develop a market outside the United States; and
(ix) Acquiring, constructing, renovating, modernizing, improving or
expanding a production facility or equipment to be used in the United
States in the production of goods or services for export.
(2) Revolving lines of credit for export purposes are eligible for
Export Express, provided they comply with official SBA policy and
procedures.
(3) Export Express loans may not be used to finance operations
outside of the United States, except for the marketing and/or
distribution of products/services exported from the United States.
(4) Export Express Lenders are responsible for ensuring that U.S.
companies are authorized to conduct business with the Persons and
countries to which the Borrower will be exporting.
(c) Debt refinancing. An SBA Express or Export Express Lender may
use loan proceeds to refinance certain outstanding debts, subject to
official SBA policy and procedures. However, an SBA Express or Export
Express Lender may not refinance its own existing SBA-guaranteed debt
under SBA Express or Export Express.
Sec. 120.445 Terms and conditions of SBA Express and Export Express
loans.
SBA Express and Export Express loans are subject to the same terms
and conditions as other 7(a) loans except as set forth in this section:
(a) Maximum loan amount and maximum aggregate loan amount--(1) SBA
Express. The maximum loan amount for an SBA Express loan is set forth
in section 7(a)(31) of the Small Business Act. The aggregate amount of
all outstanding SBA Express loans to a single Borrower, including the
Borrower's affiliates as defined in Sec. 121.301(f) of this chapter,
must not exceed the statutory maximum.
(2) Export Express. The maximum loan amount for an Export Express
loan is set forth in section 7(a)(34) of the Small Business Act. The
aggregate amount of all outstanding Export Express loans to a single
Borrower, including the Borrower's affiliates as defined in Sec.
121.301(f) of this chapter, must not exceed the statutory maximum.
(b) Maximum SBA guarantee--(1) SBA Express. The maximum SBA
guarantee on an SBA Express loan is 50 percent of the SBA Express loan
amount. In addition, the guaranteed amount of all SBA Express loans to
a single Borrower, including the Borrower's affiliates, counts toward
the maximum guaranty amount as described in Sec. 120.151.
(2) Export Express. The maximum SBA guarantee on an Export Express
loan of $350,000 or less is 90 percent, and for a loan over $350,000 is
75 percent, of the Export Express loan amount. In addition, the
guaranteed amount of all Export Express loans to a single Borrower,
including the Borrower's affiliates, counts toward the maximum guaranty
amount as described in Sec. 120.151.
(c) Maturity--(1) SBA Express. SBA Express loans must have a stated
maturity and the maximum maturities are the same as any other 7(a)
loan, except that revolving SBA Express loans are limited to a maximum
of 10 years, as described more fully in official SBA policy and
procedures.
(2) Export Express. Export Express loans must have a stated
maturity and the maximum maturities are the same as any other 7(a)
loan, except that revolving Export Express loans are limited to a
maximum maturity of 7 years, as described more fully in official SBA
policy and procedures.
(d) Interest rates. (1) For fixed interest rate loans, SBA Express
and Export Express Lenders may charge a reasonable fixed interest rate
in accordance with Sec. 120.213.
(2) For variable interest rate loans:
(i) SBA Express and Export Express Lenders may charge up to 4.5
percent over the prime rate on loans over $50,000 and up to 6.5 percent
over the prime rate for loans of $50,000 or less, regardless of the
maturity of the loan. The prime rate will be that which is in effect on
the first business day of the month, as printed in a national financial
newspaper published each business day.
(ii) SBA Express and Export Express Lenders are not required to use
the base rate identified in Sec. 120.214(c). SBA Express and Export
Express Lenders may use the same base rate of interest they use on
their similarly-sized, non-SBA guaranteed commercial loans, as well as
their established change intervals, payment accruals, and other
interest rate terms. However, the interest rate must never exceed the
maximum allowable interest rate stated in paragraph (d)(2)(i) of this
section. Additionally, the loan may be sold on the Secondary Market
only if the base rate is one of the base rates allowed in Sec.
120.214(c).
[[Page 7651]]
(3) The amount of interest SBA will pay to a Lender following
default of an SBA Express or Export Express loan is capped at the
maximum interest rates for the standard 7(a) loan program set forth in
Sec. Sec. 120.213 through 120.215.
(e) Collateral. (1) With the exception of paragraphs (e)(2) and (3)
of this section, to the maximum extent practicable, SBA Express and
Export Express Lenders must follow the same collateral policies and
procedures that they have established and implemented for their
similarly-sized, non-SBA guaranteed commercial loans, including those
concerning identification of collateral. Such policies and procedures
must be commercially reasonable and prudent.
(2) SBA may establish a threshold below which SBA Express and
Export Express Lenders will not be required to take collateral to
secure an SBA Express or Export Express loan. If established, such a
threshold will be described more fully in official SBA policy and
procedures.
(3) Export Express lines of credit over $25,000 used to support the
issuance of a standby letter of credit must have collateral (cash, cash
equivalent, or project) that will provide coverage for at least 25
percent of the issued standby letter of credit amount.
(f) Insurance. SBA Express and Export Express Lenders must follow
the same insurance policies they have established and implemented for
their similarly-sized, non-SBA guaranteed commercial loans.
(g) Sale on the Secondary Market. SBA Express and Export Express
Lenders may sell the guaranteed portion of an SBA Express or Export
Express term loan on the Secondary Market under the policies and
procedures described in subpart F of this part. SBA Express or Export
Express Lenders may not sell the guaranteed portion of an SBA Express
or Export Express revolving line of credit on the Secondary Market.
(h) Loan increases. With SBA's prior written consent, an SBA
Express or Export Express Lender may increase an SBA Express or Export
Express loan based on the needs of the Borrower and its credit
situation, as further specified in Loan Program Requirements.
Sec. 120.446 SBA Express and Export Express loan closing, servicing,
liquidation, and litigation requirements.
(a) Closing. Except as set forth in this paragraph (a), SBA Express
and Export Express Lenders must close their SBA Express and Export
Express loans using the same documentation and procedures that they use
for their similarly-sized, non-SBA guaranteed commercial loans. Such
documentation and procedures must comply with law, prudent lending
practices, and Loan Program Requirements. When closing an SBA Express
or Export Express loan, the Lender must require the Borrower to execute
a promissory note that is legally enforceable and assignable. Before
the first disbursement of any SBA Express or Export Express loan
proceeds, the Lender must obtain all required collateral, including
obtaining valid and enforceable security interests in such collateral,
and also must meet all other required pre-closing loan conditions as
set forth in official SBA policy and procedures.
(b) Servicing, liquidation, and litigation. Servicing, liquidation,
and litigation responsibilities for SBA Express and Export Express
Lenders are set forth in subpart E of this part.
(c) SBA's purchase of the guaranteed portion of an SBA Express or
Export Express loan--(1) When SBA will purchase. SBA will purchase the
guaranteed portion of an SBA Express or Export Express loan in
accordance with Sec. 120.520 and official SBA policy and procedures.
An SBA Express or Export Express Lender may not request purchase of the
guaranty based solely on a violation of a non-financial default
provision.
(2) Amount that SBA will pay upon purchase--(i) SBA Express. SBA
will pay a maximum of 50 percent of the total principal balance of the
SBA Express loan outstanding after liquidation, plus up to 120 days of
accrued interest at the rate in effect at the time of the earliest
uncured default (if liquidation proceeds collected by the SBA Express
Lender were insufficient for the Lender to recover a full 120 days of
interest).
(ii) Export Express. SBA will pay a maximum of 75 or 90 percent (as
applicable) of the total principal balance of the Export Express loan
outstanding after liquidation, plus up to 120 days of interest at the
rate in effect at the time of the earliest uncured default (if
liquidation proceeds collected by the Export Express Lender were
insufficient for the Lender to recover a full 120 days of interest).
(3) Release of SBA liability under its guarantee. SBA will be
released from its liability to purchase the guaranteed portion of an
SBA Express or Export Express loan, either in whole or in part, in
SBA's sole discretion, under any of the circumstances described in
Sec. 120.524.
Sec. 120.447 Oversight of SBA Express and Export Express Lenders.
SBA Express and Export Express Lenders are subject to the same
risk-based lender oversight as other 7(a) Lenders, including the
supervision and enforcement provisions, in accordance with subpart I of
this part.
Sec. 120.707 [Amended]
0
17. Amend the last sentence of Sec. 120.707(b) by removing the word
``six'' and adding in its place the word ``seven''.
0
18. Amend Sec. 120.712 by:
0
a. Revising paragraph (b)(1); and
0
b. In paragraph (d), removing the number ``25'' and adding in its place
the number ``50''.
The revision reads as follows:
Sec. 120.712 How does an Intermediary get a grant to assist Microloan
borrowers?
* * * * *
(b) * * *
(1) Up to 50 percent of the grant funds may be used to provide
information and technical assistance to prospective Microloan
borrowers; provided, however, that no more than 5 percent of the grant
funds may be used to market or advertise the products and services of
the Microloan Intermediary directly related to the Microloan Program;
and
* * * * *
0
19. Amend Sec. 120.840 by revising paragraph (b) to read as follows:
Sec. 120.840 Accredited Lenders Program (ALP).
* * * * *
(b) Application. A CDC must apply for ALP status by submitting an
application in accordance with SBA's Standard Operating Procedure 50
10, available at https://www.sba.gov. A final decision will be made by
the appropriate SBA official in accordance with Delegations of
Authority.
* * * * *
PART 121--SMALL BUSINESS SIZE REGULATIONS
0
20. The authority citation for part 121 continues to read as follows:
Authority: 15 U.S.C. 632, 634(b)(6), 662, and 649a(9).
0
21. Amend Sec. 121.301 by:
0
a. Revising paragraph (f)(4);
0
b. Redesignating paragraphs (f)(5) through (7) as paragraphs (f)(7)
through (9), respectively;
0
c. Adding new paragraphs (f)(5) and (6) and revising newly redesignated
paragraph (f)(7).
The revisions and additions to read as follows:
[[Page 7652]]
Sec. 121.301 What size standards and affiliation principles are
applicable to financial assistance programs?
* * * * *
(f) * * *
(4) Affiliation based on identity of interest--(i) General.
Affiliation may arise among two or more individuals or firms with an
identity of interest. Individuals or firms that have identical or
substantially identical business or economic interests (such as close
relatives, individuals or firms with common investments, or firms that
are economically dependent through contractual or other relationships)
may be treated as one party with such interests aggregated. Where SBA
determines that such interests should be aggregated, an individual or
firm may rebut that determination with evidence showing that the
interests deemed to be one are in fact separate.
(ii) Close relatives. Affiliation arises when there is an identity
of interest between close relatives, as defined in Sec. 120.10 of this
chapter, with identical or substantially identical business or economic
interests (such as where the close relatives operate concerns in the
same or similar industry in the same geographic area).
(iii) Common investments. Affiliation arises through common
investments where the same individuals or firms together own a
substantial portion of multiple concerns in the same or related
industry, and such concerns conduct business with each other, or share
resources, equipment, locations, or employees with one another, or
provide loan guaranties or other financial or managerial support to
each other. However, where an SBA Lender has made a determination of no
affiliation under this ground, SBA will not overturn that determination
as long as it was reasonable when made given the information available
to the SBA Lender at the time.
(iv) Economic dependence. Affiliation based upon economic
dependence may arise when a concern derived more than 85 percent of its
receipts over the previous three fiscal years from a contractual
relationship with another concern, unless:
(A) The contract (or contracts) does not restrict the concern in
question from selling the same type of products or services to another
purchaser; or
(B) SBA agrees that the terms of the contract (or contracts) do not
provide the purchaser with control or the power to control the seller.
(5) Affiliation based on the newly organized concern rule in this
paragraph (f)(5). Affiliation may arise where current or former
officers, directors, owners of a 20 percent interest or greater,
managing members, or persons hired to manage day-to-day operations of
one concern organize a new concern in the same or related industry or
field of operation, and serve as the new concern's officers, directors,
owners of a 20 percent interest or greater, or managing members, and
there are direct monetary benefits flowing from the new concern to the
original concern. A concern may rebut such an affiliation determination
by demonstrating a clear line of fracture between the two concerns. A
concern will be considered ``new'' for the purpose of this paragraph
(f)(5) if it has been actively operating for two years or less.
However, where an SBA Lender has made a determination of no affiliation
under this ground, SBA will not overturn that determination as long as
it was reasonable when made given the information available to the SBA
Lender at the time.
(6) Affiliation based on totality of the circumstances. In
determining whether affiliation exists, SBA may consider all
connections between the concern and a possible affiliate. Even though
no single factor is sufficient to constitute affiliation, SBA may find
affiliation on a case-by-case basis where there is clear and convincing
evidence based on the totality of the circumstances. However, where an
SBA Lender has made a determination of no affiliation, SBA will not
overturn that determination as long as it was reasonable when made
given the information available to the SBA Lender at the time.
(7) Affiliation based on franchise agreements. (i) The restraints
imposed on a franchisee by its franchise agreement generally will not
be considered in determining whether the franchisor is affiliated with
an applicant franchisee provided the applicant franchisee has the right
to profit from its efforts and bears the risk of loss commensurate with
ownership. SBA will only consider the franchise agreements of the
applicant concern. SBA will maintain a centralized list of franchise
and other similar agreements that are eligible for SBA financial
assistance, which will identify any additional documentation necessary
to resolve any eligibility or affiliation issues between the franchisor
and the small business applicant.
(ii) For purposes of this section, ``franchise'' means any
continuing commercial relationship or arrangement, whatever it may be
called, that meets the Federal Trade Commission definition of
``franchise'' in 16 CFR part 436.
* * * * *
0
22. Amend Sec. 121.302 by revising paragraphs (a) and (b) to read as
follows:
Sec. 121.302 When does SBA determine the size status of an applicant?
(a) The size status of an applicant for SBA financial assistance is
determined as of the date the application for financial assistance is
accepted for processing by SBA, except for applications under the
Preferred Lenders Program (PLP), the SBA Express Loan Program (SBA
Express), the Export Express Loan Program (Export Express), the
Disaster Loan Program, the SBIC Program, and the New Markets Venture
Capital (NMVC) Program.
(b) For PLP, SBA Express, and Export Express, size is determined as
of the date of approval of the loan by the Lender.
* * * * *
Dated: January 29, 2020.
Jovita Carranza,
Administrator.
[FR Doc. 2020-02128 Filed 2-7-20; 8:45 am]
BILLING CODE 8025-01-P
