Implementation of the Small Business 7(a) Lending Oversight Reform Act of 2018, 14772-14784 [2020-04663]
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Federal Register / Vol. 85, No. 51 / Monday, March 16, 2020 / Rules and Regulations
behalf of a person or entity other than
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knowingly or willfully falsifies,
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(3) Whistleblower protection. In
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affected by this rule.
[FR Doc. 2020–04640 Filed 3–13–20; 8:45 am]
BILLING CODE 6450–01–P
FEDERAL RESERVE SYSTEM
[Regulations Y and LL; Docket No. R–1662]
RIN 7100–AF 49
Control and Divestiture Proceedings
Correction
In rule document 2020–03398,
appearing on pages 12398 through
12430 in the issue of Monday, March 2,
2020 make the following correction.
[Corrected]
On page 12426, in the first column, in
Subpart A, in instruction 6, on the
second line, ‘‘(e), (r)(2), and (tt)’’ should
read ‘‘(e) and (r)(2) and adding
paragraph (tt)’’.
[FR Doc. C1–2020–03398 Filed 3–13–20; 8:45 am]
BILLING CODE 1300–01–D
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13 CFR Parts 120 and 134
RIN 3245–AH05
Implementation of the Small Business
7(a) Lending Oversight Reform Act of
2018
U.S. Small Business
Administration.
ACTION: Final rule.
AGENCY:
The Small Business
Administration (‘‘SBA’’ or ‘‘Agency’’) is
amending its business loan program
regulations to implement the Small
Business 7(a) Lending Oversight Reform
Act of 2018 (‘‘Act’’) and make other
amendments that will strengthen SBA’s
lender oversight and ensure the integrity
of the business loan programs. The key
amendments in this rule codify SBA’s
informal enforcement actions, new civil
monetary penalties and certain appeal
rights for 7(a) Lenders, clarify certain
enforcement actions for Microloan
Intermediaries, and adopt statutory
changes to the credit elsewhere test. The
rule also makes other technical
amendments, updates, and conforming
changes including clarifying oversight
and enforcement related definitions.
DATES: This rule is effective April 15,
2020.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Bethany Shana, Office of Credit Risk
Management, Office of Capital Access,
Small Business Administration, 409 3rd
Street SW, Washington, DC 20416;
telephone: (202) 205–6402; email:
Bethany.Shana@sba.gov.
SUPPLEMENTARY INFORMATION:
I. Background
12 CFR Parts 225 and 238
§ 238.2
SMALL BUSINESS ADMINISTRATION
SBA is authorized under sections 7(a)
and 7(m) of the Small Business Act and
title V of the Small Business Investment
Act of 1958 (the ‘‘SBI Act’’) to conduct
small business loan programs. 15 U.S.C.
636(a) and (m) and 695 et seq. For
purposes of this rule, SBA’s business
loan programs consist of the 7(a) Loan
Program, the Microloan Program, and
the Development Company Loan
Program (‘‘504 Loan Program’’). These
programs provide critical access to
credit for America’s small businesses,
bridging the lending gap that exists in
the market for our nation’s smallest
companies. Along with the authority to
offer government guarantees, Congress
provided SBA the authority to supervise
lenders participating in these programs.
15 U.S.C. 634, 636, 650, and 697.
Growth in lending in the 7(a) Loan
Program prompted Congress to
undertake a thorough examination of
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the tools available at SBA to ensure that
comprehensive oversight is
accomplished. Following that review,
Congress enacted the Small Business
7(a) Lending Oversight Reform Act of
2018, Public Law 115–189 (June 21,
2018) (the ‘‘Act’’). The Act strengthened
SBA’s 7(a) Lender, Certified
Development Company (‘‘CDC’’), and
Microloan Intermediary
(‘‘Intermediary’’) supervision authorities
and the office charged with that
responsibility, SBA’s Office of Credit
Risk Management (‘‘OCRM’’).
The Act required SBA to promulgate
regulations to implement certain of its
provisions. Accordingly, on June 21,
2019, SBA published a notice of
proposed rulemaking to implement the
legislation by proposing updates to its
lender oversight and related regulations,
as codified in parts 120 and 134 of title
13 of the Code of Federal Regulations
(‘‘CFR’’). 84 FR 29092. The proposed
updates also included technical
corrections and clarifications to better
inform lenders and to strengthen
enforcement. Because some provisions
in the legislation covered ‘‘any Lending
Partner or Intermediary participant . . .
in a lending program of . . . [SBA’s]
Office of Capital Access’’ and because
SBA’s 7(a) oversight framework is
generally interwoven with that of the
504 Loan Program and the Microloan
Program, SBA proposed to extend
certain specific updates to CDCs and
Intermediaries. The comment period for
the proposed rule closed on August 20,
2019.
II. Summary of Comments
The Agency received 43 comments.
Sixteen comments were submitted by or
on behalf of 7(a) Lenders. Twenty-one
comments were submitted by or on
behalf of CDCs (this group includes 4
CDCs that are also Intermediaries and/
or Community Advantage (‘‘CA’’)
Lenders). In addition, SBA received
comments from two trade associations,
one law firm, and three anonymous
commenters.
Many comments were supportive of
the proposed rule and SBA’s efforts to
preserve the integrity of the business
loan programs. These comments also
expressed appreciation of the Agency’s
efforts to improve oversight. The
comments included some suggestions
for the rule, including amendments to
proposed provisions that commenters
contended were not or did not appear to
be consistent with the language of the
statute or its intent. Some commenters,
primarily CDCs, generally opposed the
rule but made few specific comments or
suggestions. SBA appreciates all
comments received and has
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incorporated many of the suggestions
into the final rule. The following is a
section-by-section analysis 1 of the final
rule including section-specific
comments received and changes made.
III. Section-by-Section Analysis With
Discussion of Comments Received
A. Section 120.10—Definitions. SBA
proposed to update three definitions in
§ 120.10. First, SBA proposed to update
the definition of ‘‘Federal Financial
Institution Regulator’’ by deleting the
reference to the Office of Thrift
Supervision (‘‘OTS’’) as OTS has been
abolished and merged into the Office of
the Comptroller of the Currency
(‘‘OCC’’) and other banking agencies.
SBA received no comments on this
update and is adopting the change to the
definition as proposed.
Second, SBA proposed to revise the
definition of ‘‘Lender Oversight
Committee’’ (‘‘LOC’’) to state that LOC
membership and duties are derived
from the Small Business Act; that the
LOC meets quarterly; and that it votes
on formal enforcement action
recommendations.
Eighteen commenters 2 stated that the
proposed definition ‘‘provides only an
abridgement of the LOC definition as
provided in the statute.’’ The
commenters suggested that SBA provide
a more complete enumeration of LOC
duties in this definitional section of part
120. SBA notes that the LOC’s duties
can be found in section 48 of the Small
Business Act and in SBA’s Delegations
of Authority 12–G for lender oversight
and enforcement activities at 79 FR
56842, 56844 (September 23, 2014), as
updated by 83 FR 48681, 48682
(September 26, 2018). Nevertheless,
SBA has considered this request and has
expanded the final rule definition to
specifically include the significant LOC
duties as well as a reference to the
specific statutory provision enumerating
the LOC duties. A complete listing of
the LOC’s statutory duties and its
membership, however, can be found in
the Lender Oversight Delegations of
Authority as referenced above.
In § 120.10, SBA also proposed to
clarify the term ‘‘Loan Program
Requirements.’’ Specifically, the
proposed rule provided that this term
may also be referred to as ‘‘SBA Loan
Program Requirements’’ and that it
includes Federal Register notices and
1 For additional details on each proposed rule
section, see 84 FR 29092 (June 21, 2019).
2 The 18 commenters consisted mostly of a trade
association and 7(a) Lenders that ‘‘fully agree[d]
with and support[ed]’’ the trade association’s
comments. References to 18 commenters later in
this Section-by-Section Analysis refer to the same
group of 18 commenters.
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applicable government-wide
regulations. In addition, SBA proposed
to make the definition applicable to
Intermediaries.
In response to the proposal, eighteen
commenters requested that SBA exclude
‘‘official SBA notices,’’ ‘‘forms,’’ and
‘‘agreements’’ from the definition of
Loan Program Requirements.
Commenters stated it was their
understanding that the intent of
Congress was to assure that performance
requirements being imposed on lenders
would be only those imposed by statute
or those formally and publicly
announced by SBA in regulations, SOPs
or Policy Notices. SBA notes that
official SBA notices, forms, and
agreements have long been a part of
SBA’s regulatory definition of Loan
Program Requirements and are an
integral part of SBA supervision. SBA
did not propose any changes to that
portion of the definition. Official SBA
notices (i.e., SBA Policy, Procedural,
and Information Notices) and SBA
business loan forms are available to the
public on SBA’s website. In addition,
the Small Business Act, SBI Act, and
SBA regulations formally and
specifically provide for the use of
agreements in SBA’s loan programs (see
15 U.S.C. 636, 650(d), and 696 and 13
CFR 120.400, 120.440, 120.434, 120.474,
120.613). Accordingly, SBA is finalizing
the definition of ‘‘Loan Program
Requirements’’ as proposed.
B. Section 120.101—Credit not
Available Elsewhere. One of the primary
goals of the Act was to ensure that the
‘‘Credit Elsewhere Test’’ is being
applied correctly and consistently by
lenders and that it is being
appropriately verified by SBA. Proposed
§ 120.101 codified the new definition
for credit elsewhere as contained in the
legislation. Under § 120.101 as
proposed, credit elsewhere means that
credit is unavailable to the small
business applicant on reasonable terms
and conditions from non-Federal, nonState, and non-local government sources
without SBA assistance, taking into
consideration the factors associated
with conventional lending practices
enumerated in the statute.
7(a) Lender commenters generally
concurred with proposed § 120.101,
with some slight amendments.
Specifically, commenters requested that
the regulation state that the credit
elsewhere requirement is statutorily
mandated to make clear that the
requirement is imposed by statute. The
credit elsewhere requirement is found
in 15 U.S.C. 636(a)(1)(A) and 697(b)(2);
however, SBA does not believe it is
necessary to revise the regulation to
include the specific statutory cites.
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The proposed rule listed the five
statutory factors for determining credit
elsewhere. SBA received no comments
specific to factors 1–3. The fourth factor
provided for consideration of the loan
term necessary to reasonably assure
repayment from business cash flow.
Eighteen commenters requested that the
section specifically allow either
‘‘actual’’ or ‘‘projected’’ cashflow of the
business, as referenced in the statute.
SBA agrees with this comment and is
adding the clarifying language to the
final regulation.
The fifth factor is a catch-all provision
to cover ‘‘other factors’’ relating to a
particular credit application. The
preamble to the proposed rule provided
examples of the ‘‘other factors’’ that
SBA Lenders should consider for the
credit elsewhere determination. The
examples included management
experience, leverage ratio, global
cashflow, loan size relative to the age of
the business, or personal resources of
the owners of the business. The
preamble stated that the other factors
must be specifically explained and
documented with relevant supporting
documentation in the lender’s credit
memorandum.3 Eighteen commenters
requested that SBA include the ‘‘other
factors’’ identified in the preamble to
the proposed rule, as well as other
examples, in future versions of SBA’s
Standard Operating Procedures
(‘‘SOPs’’) to provide guidance to lenders
on the interpretation of the regulatory
provision.4 SBA agrees with this
comment. SBA will incorporate a list of
‘‘other factors’’ and other relevant
examples for credit elsewhere in the
relevant SOPs.
Approximately twenty-four
commenters requested that SBA not
apply the credit elsewhere provision (or
any of the other provisions in the
proposed rule) to CDCs. These
commenters claimed that ‘‘extending
provisions of [the Act] to the 504
program [including the credit elsewhere
provision] has no basis in law . . . .’’
SBA does not agree, and believes that
there is ample support for applying the
credit elsewhere provision to the 504
3 SOP 50 10 provides that the SBA Lender’s credit
memorandum includes substantiation that credit is
not available elsewhere by discussing acceptable
factors that demonstrate an identifiable weakness in
the credit. The specific reasons why the Applicant
does not meet the lender’s conventional loan policy
requirements are to be included in the credit
memorandum.
4 The commenters’ request to include the other
factors in future SOPs was made ‘‘subject to’’
comments on the personal resources test made on
the proposed rule for the Express Loan Programs;
Affiliations Standards (Express rule). SBA has
addressed comments on the personal resources test
in the interim final rule published on February 10,
2020 at 85 FR 7622.
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Loan Program. The § 120.101 credit
elsewhere provision has been a
longstanding feature of the 504 Loan
Program in SBA regulations for many
years and dates back to at least 1986.
See 13 CFR 108.8(a) ‘‘Borrower
Requirements and Prohibitions’’ (1987).
There is also statutory support for
applying this provision to the 504 Loan
Program. Section 503(b)(2) of the SBI
Act provides that ‘‘[n]o guaranty may be
made with respect to any debenture
under subsection (a) unless . . . .
Necessary funds for making such loans
are not available to such company from
private sources on reasonable terms.’’ In
addition, section 503(a) of the SBI Act
authorizes SBA to guarantee 504
program debentures ‘‘on such terms and
conditions as the Administration may
by regulation determine to be
appropriate.’’ Further, section 308(f) of
the SBI Act states that ‘‘[i]n the
performance of, and with respect to the
functions, powers, and duties vested by
this Act,5 the Administrator and the
Administration shall (in addition to any
authority otherwise vested by this Act)
have the functions, powers, and duties
set forth in the Small Business Act . . .
.’’ Finally, SBA’s Congressional
oversight committee is well aware of
and has acknowledged the credit
elsewhere requirement as an eligibility
standard for small businesses in the 504
Loan Program. For example, in her
hearing memo, dated December 10,
2019, to Members of the House Small
Business Committee Subcommittee on
Investigations, Oversight, and
Regulations, Chairwoman Judy Chu
stated that, ‘‘In order to qualify for a 504
loan, a business must: . . . demonstrate
the need for the desired credit and that
the funds are not available from
alternative sources, including personal
resources of the principals; and be
certified by a lender that the desired
credit is unavailable to the applicant on
reasonable terms and conditions from
nonfederal sources without SBA
assistance.’’ 6 Consequently, it is wellestablished that the credit elsewhere
requirement applies to the 504 Loan
Program.
In addition, the commenters argued
that economic development and job
requirements, not credit elsewhere,
properly govern when a business or
project is eligible for the 504 Loan
Program. SBA agrees that the program
has important economic development
and job creation objectives; however, it
5 The functions, powers, and duties include the
authority to make such rules and regulations as the
agency deems necessary to carry out the authority
vested in the agency. 15 U.S.C. 634(b)(6).
6 https://smallbusiness.house.gov/uploadedfiles/
12-10-19_hearing_memo.pdf.
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is also important that SBA not use
taxpayer dollars to finance those loans
that can be financed by the private
sector on reasonable terms and
conditions.
These commenters also opposed the
application of other provisions of the
Act to CDCs, arguing that the process,
title, and content of the Act make it
clear that the statute is for the 7(a)
program only.7 Contrary to that
statement, SBA notes that the opening
provision of the legislation, which
statutorily established the Office of
Credit Risk Management, granted the
office the authority to supervise ‘‘any
Lending Partner or Intermediary
participant . . . in a lending program of
the Office of Capital Access . . . .’’ As
CDCs are a Lending Partner in a lending
program of the Office of Capital Access,
SBA is not persuaded by this argument.
Two 7(a) Lenders commented that the
credit elsewhere requirement will be
difficult to comply with because lenders
cannot know what terms and conditions
competitors offer. As stated above,
credit elsewhere is a statutory
requirement that requires the
consideration of several factors. Based
on these factors, an institution can make
a reasonable determination as to
whether an Applicant has credit
available without a government
guaranty. The key here, for purposes of
compliance, is that each lender
documents in its credit memorandum
its reasonable consideration of the
factors relevant to the particular
application and that the lender makes
that documentation available for SBA
review.
In light of the statutory and regulatory
authorities cited above and the wellestablished history of the credit
elsewhere regulation as applicable to
both programs, SBA believes it is
reasonable to apply the amendments to
the credit elsewhere regulations, and
certain other sections as noted within
the final rule, to the 504 Loan Program.
Accordingly, SBA is finalizing the
section as proposed with the change to
the fourth factor discussed above.
C. Section 120.180—Compliance with
Loan Program Requirements. Sections 3
and 4 of the Act provide that SBA is to
oversee lender compliance with SBA
Loan Program Requirements, including
credit elsewhere. SBA proposed changes
to § 120.180 to facilitate that oversight.
The rule proposed to codify SBA’s
current requirement that SBA Lenders
maintain documentation to support that
7 The commenters also noted that the legislation
made no change to the Small Business Investment
Act of 1958, the primary governing statute for the
504 Loan Program.
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Loan Program Requirements, including
those regarding credit elsewhere, have
been met. SBA examines these
documents during reviews and exams.
This documentation facilitates prudent
lending, and maintaining records is a
practice that all prudent lenders already
undertake. The proposed amendments
to § 120.180 also clarified that
Intermediaries, in addition to 7(a)
Lenders and CDCs, are expected to
comply with Loan Program
Requirements.
SBA received no comments on
proposed § 120.180 and is adopting the
section as proposed.
D. Section 120.1000—Risk-Based
Lender Oversight; § 120.1010—SBA
Access to SBA Lender and Intermediary
Files; § 120.1015—Risk Rating System;
§ 120.1025—Monitoring; § 120.1050—
Reviews and Examinations; and
§ 120.1051—Frequency of Reviews and
Examinations. SBA proposed updating
these sections to remove references to
Non-lending Technical Assistance
Providers (‘‘NTAPs’’), as SBA has not
issued technical assistance grants to
NTAPs in many years. Technical
assistance in the Microloan Program is
being administered directly by
Intermediaries. SBA received no
comments on the proposed changes to
these sections. SBA is, therefore,
adopting the changes to these sections
as proposed.
E. Section 120.1055—Review and
Examination Results. Section 120.1055
covers SBA review and examination
reports, corrective actions and plans,
lender required responses, and lender
implementation of corrective actions.
SBA proposed to extend the timeframe
for a lender or Intermediary to respond
to a review/examination report from 30
to 45 calendar days. Eighteen
commenters requested that SBA modify
the general timeframe for a lender or
Intermediary to respond from 45
calendar days to 45 business days.
Commenters stated that ‘‘business’’ days
was more in-line with the statute and
requested that the additional time be
provided to better enable lenders to
respond to reports. SBA agrees with the
requested modification of the general
timeframe and is revising the section
accordingly.
The commenters also noted that
though the proposed rule allows SBA to
establish a different time period for a
lender to respond, the rule did not
specify whether the time period could
be shorter or longer. This is true. SBA
did not so specify because the statute
gives SBA needed flexibility to either
extend or shorten the response
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timeframe on a case-by-case basis.8 SBA
has decided to retain this flexibility but
is clarifying in the final rule that SBA
may extend or shorten the timeframe.
For example, SBA may extend the
timeframe when a lender’s management
is in transition or until after a lender
attends a required Headquarters meeting
on its significant findings and corrective
actions. Alternatively, SBA may shorten
the timeframe if, for example, the
deficiencies are few in number but so
significant that delay could cause losses
to SBA or the lender. This might occur
if a lender, using delegated authority, is
making ineligible loans.
In § 120.1055 SBA also proposed to
clarify when a lender is considered to
have received a report for purposes of
the regulation (i.e., the report is
considered received on the date it is
emailed to the last known email address
for the lender or Intermediary, unless
the lender or Intermediary can provide
compelling evidence that it was
received on a different date). Eighteen
commenters had no objection to SBA’s
proposal that lender’s date of receipt be
the date it was emailed to the last
known email address. These
commenters, however, recommended
that the regulation be amended to also
require that reports be sent by mail or
other delivery service to the head of the
lender institution (or other party
deemed appropriate by SBA) at its last
known business address. They made
this suggestion as they believe that the
gravity of the oversight report requires
a more formal transmission of the report
to the lender. SBA has considered the
comment and has determined not to
include the commenters’ suggested
change. While in some cases it may be
helpful to also send the report by mail
or other delivery service, such
duplicative effort may not be justified in
all cases. For example, where a review
report conveys an assessment of
‘‘Acceptable’’, it may not be necessary
or appropriate to incur additional costs
to duplicate delivery by mail. SBA will
use judgment and discretion in making
the determination on a case-by-case
basis.
The eighteen commenters also
requested that SBA amend the
regulation to include the statutory
timeframe for SBA to issue a review/
examination report. The statute
provides, in general, that SBA will
8 The statute states that if a response to a review
report is requested, SBA is to require the lender to
submit responses to the Administrator ‘‘not later
than’’ 45 business days after the date the lender
receives the report (i.e., 45 business days is the
outside limit); however, the Administrator ‘‘may
extend the time frame’’ as he/she determines
necessary. 15 U.S.C. 657t(d)(2).
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deliver a written review report not later
than 60 business days after the date a
review is concluded or, if SBA expects
to submit the report after the end of the
60-day period, the Agency will notify
the 7(a) Lender of the expected date of
submission and the reason for the delay.
The commenters requested this addition
citing a historical lack of timeliness on
behalf of the Agency in issuing review
reports and because, without timely
information regarding perceived
violations, lenders questioned whether
they would be able to correct their
performance and begin to take steps
necessary to mitigate potential risk to
the Agency. While the commenters
stated that OCRM is committed to, and
has made good progress in, getting
reports out more timely, they believe it
is imperative to amend the rule to
include this provision. SBA agrees to
make this addition and is incorporating
the general timeframe into the final
regulation.
Finally, SBA proposed to revise
§ 120.1055 to clarify that a response
must address recommendations in
addition to findings and corrective
actions; to delete reference to NTAPs;
and to codify SBA’s 90-day timeframe
for lenders and Intermediaries to
implement corrective actions. The
proposed 90-day timeframe included
flexibility for a shorter or longer period,
as warranted. SBA received no
comments specific to these proposed
changes. SBA is adopting these
amendments to § 120.1055 as proposed.
F. Section 120.1060—Confidentiality
of Reports, Risk Ratings and Related
Confidential Information. SBA proposed
to update § 120.1060 to remove
references to NTAPs for the reasons
explained in paragraph III.D. above.
SBA received no comments on this
proposed change. SBA is adopting
§ 120.1060 as proposed.
G. Section 120.1300—Informal
Enforcement Actions. The Act required
SBA to codify its informal enforcement
actions for 7(a) Lenders into regulations.
Accordingly, SBA proposed a new
§ 120.1300 on informal enforcement
actions for 7(a) Lenders. Under the
proposed regulation, informal actions
would consist of, for example, a
commitment letter, mandatory training,
and an agreement between SBA and the
7(a) Lender. In addition to listing the
types and descriptions of informal
enforcement actions, the proposed rule
discussed the circumstances that may
lead SBA to take such actions (e.g.,
when problems are narrow in scope and
are correctible, and SBA is confident of
the 7(a) Lender’s Board and
management commitment and ability to
correct such problems; where violations
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are less frequent or less severe but still
warrant enforcement; or while SBA
more fully assesses risk). The
circumstances that SBA proposed are,
for the most part, set forth in SBA’s
current SOPs.
The Act also provided that 7(a)
Lenders could appeal informal
enforcement actions to Federal district
court or to SBA’s Office of Hearings and
Appeals (‘‘OHA’’). Under proposed
§ 120.1300, a 7(a) Lender would have 20
calendar days to appeal. The proposed
rule further provided that an informal
enforcement action would remain in
effect pending resolution of the appeal,
if any, and that SBA would not be
precluded from taking other action,
including but not limited to, a formal
enforcement action under § 120.1500, or
as otherwise authorized by law, while
the appeal was pending.
Eighteen commenters recommended
that § 120.1300 specifically state that the
Director of the Office of Credit Risk
Management (the ‘‘D/OCRM’’) (as
opposed to ‘‘SBA’’) takes informal
enforcement actions. The commenters
requesting this change cited statutory
language that authorizes the D/OCRM to
take these actions. SBA has considered
the request and has adopted it in the
final rule. The Act provides that the D/
OCRM is authorized to take informal
enforcement actions and does not
restrict the D/OCRM’s authority to
delegate this authority. The final
regulation, therefore, states that the D/
OCRM may undertake informal
enforcement actions but does not
restrict delegation.
The eighteen commenters also
opposed the 20-day appeal time
proposed for informal enforcement
actions. The commenters requested 45
business days instead, ‘‘to allow
sufficient time for the lender to assess
its situation, hire counsel, and decide
on an appropriate strategy.’’ The
commenters also suggested that the
SBA’s ability to address risks identified
during a review would not be adversely
impacted by the extended timeframe to
request an appeal because the
enforcement action would remain in
effect pending resolution of the appeal
and SBA could pursue formal
enforcement action. SBA has considered
the request and will retain the 20-day
appeal timeframe contained in the
proposed rule because these are
informal enforcement actions consisting
mostly of voluntary agreements and
required training designed to bring
lenders into compliance and reduce
lender and SBA risk of losses. In
addition, informal enforcement actions
(e.g., supervisory letters and required
training) are generally informative and
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corrective in nature, non-public, and
less likely to impose a significant
burden or have a negative effect on a
7(a) Lender. SBA also notes that the 20day timeframe is the same timeframe
that Congress afforded SBA Supervised
Lenders for appeals of enforcement
actions under section 23(f) of the Small
Business Act. Moreover, it provides a
longer appeal time than the 14-day
appeal timeframe that the banking
agencies provide to financial
institutions for appeals relating to the
immediate issuance of certain final
directives and orders under 12 CFR
6.21(a)(2) and 30.5(a)(2) (OCC); 12 CFR
308.201(a)(2) and 308.304(a)(2) (Federal
Deposit Insurance Corporation); and 12
CFR 263.202(a)(2) and 263.304(a)(2)
(Federal Reserve Board).
SBA received no other comments on
proposed § 120.1300. Accordingly, SBA
is adopting the section as proposed with
the change discussed above.
H. Section 120.1400—Grounds for
Enforcement Actions—SBA Lenders.
Section 120.1400 sets forth the grounds
for SBA’s enforcement actions for SBA
Lenders. SBA proposed amendments to
13 CFR 120.1400 to implement several
provisions of the new legislation and to
provide clarifications. First, the rule
proposed to amend § 120.1400(b) to
explicitly state, and thereby formally
recognize, that § 120.1400 grounds
extend to both informal and formal
enforcement actions. Second, in
accordance with the new legislation, the
proposed regulation stated that SBA
would consider the severity or
frequency of a violation in determining
the type of enforcement action to take.
Third, § 120.1400(c)(6), as proposed,
clarified that an action ‘‘detrimental to
an SBA program’’ means an action
detrimental to ‘‘the integrity or
reputation of’’ an SBA program. Fourth,
SBA proposed clarifying paragraph
(c)(9) to further inform the public that
SBA considers an SBA Lender’s failure
to properly oversee Agent activity to be
an example of SBA Lender action/
inaction that increases SBA’s financial
risk. While Agents can be helpful in
assisting SBA Lenders in making,
servicing, liquidating, and litigating
SBA loans, an SBA Lender must
exercise due diligence and prudently
oversee third-party activity. SBA’s
policy of holding lenders responsible for
third-party activity is neither new to the
program nor unusual for regulated
lenders. In fact, the Federal Financial
Institution Regulators generally expect a
financial institution to conduct robust,
comprehensive, and appropriately
documented due diligence and ongoing
risk management of each of the
institution’s third-party service
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providers that support critical activities.
A financial institution’s risk
management process may include, for
example, assessing the quantity of risk
posed to the institution by use of the
third-party service provider and the
ability of the institution to monitor and
control risk; contract structuring and
review; ongoing benchmarking of
service provider performance; and
monitoring the third party’s actions on
behalf of the bank for compliance with
applicable laws and regulations.9 For
purposes of this section, the term
‘‘Agent’’ means all parties included in
the definition of ‘‘Agent’’ in 13 CFR part
103 that assist the 7(a) Lender or CDC
with making, servicing, liquidating, or
litigating their SBA business loans (e.g.,
lender service providers, consultants,
brokers/referral agents).
SBA also proposed clarifying
paragraphs (c)(11) and (12) of this
section, which cover grounds for
immediate suspension of delegated
authority and program authority,
respectively. SBA proposed revising
these paragraphs to better define the
circumstances in which SBA would
seek an immediate suspension. The
proposed paragraphs stated that SBA
may take such immediate action upon a
determination that: (i) One of the
grounds in paragraph (c) or (f) of that
section, as applicable, exists; and (ii)
immediate action is needed to protect
the interests of the Federal Government
(such as where there is risk of
immediate harm or loss, a significant
program integrity concern, or clear
evidence of conduct indicating a lack of
business integrity). Situations that may
warrant immediate suspension may
include, but are not limited to, where
there are significant findings relating to
the SBA Lender’s determination of
eligibility (e.g., credit elsewhere, etc.) or
on the credit review, or the
underwriting, approval, loan servicing
and/or liquidation processes; evidence
of fraud; significant concerns as to the
SBA Lender’s financial condition,
capital levels, or solvency; or where an
SBA Lender is no longer licensed or
lacks staff capable of making, servicing,
or liquidating loans, as determined by
SBA in its discretion. In addition, SBA
proposed revisions to paragraphs
(d)(1)(iii) and (d)(3)(i) and (ii) to clarify
that an SBA Supervised Lender’s
violation of ‘‘the Small Business Act’’ or
‘‘SBA regulations’’ is a violation of
9 OCC Bulletin 2017–21 (June 2017), Third-Party
Relationships: Frequently Asked Questions to
Supplement OCC Bulletin 2013–29. See also, FDIC
Financial Institution Letter, FIL–19–2019,
Technology Service Provider Contracts (April 2,
2019) and FIL–44–2008, Third-Party Risk Guidance
for Managing Third-Party Risk (June 6, 2008).
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‘‘Loan Program Requirements’’ 10
consistent with SBA’s use of this term
in § 120.1400(c)(2). In conjunction with
this conforming change, SBA proposed
deleting the word ‘‘agreement’’ from
paragraph (d)(1)(iv) as it is redundant
with paragraph (d)(1)(iii) as revised.
SBA received no comments on
§ 120.1400 and is adopting the
amendments as proposed.
I. Section 120.1425—Grounds for
Formal Enforcement Actions—
Intermediaries Participating in the
Microloan Program. SBA proposed that
§ 120.1425 be updated to remove
references to NTAPs. SBA also proposed
that paragraphs (c)(1) and (c)(2)(vii) on
violations of law and Loan Program
Requirements be clarified and
harmonized with the corresponding
provision for SBA Lenders. In addition,
the rule proposed to reorder and
establish a more logical grouping of the
grounds for enforcement. SBA also
proposed an additional performancerelated ground for enforcement action:
A failure to ‘‘[m]aintain the financial
ability to sustain the Intermediary’s
operations (including, but not limited
to, adequate capital), as determined by
SBA.’’ Consistent with equivalent
provisions for SBA Lenders, the
proposal added three general grounds to
the Microloan Program regulations: (i)
Failure to take corrective actions; (ii)
engaging in uncooperative or
detrimental behavior; and (iii) action or
inaction that SBA determines may
increase SBA’s financial or program
risk, as well as a specific ground for
immediate suspension of
Intermediaries. Finally, SBA proposed a
catch-all provision, paragraph (c)(7), for
other grounds otherwise authorized by
law.
SBA received one comment on
§ 120.1425. The commenter objected to
SBA’s proposal to include an
Intermediary’s failure to maintain the
financial ability to sustain its operations
(e.g., maintain adequate capital) as a
ground for enforcement action. The
commenter contended that the
provision can have a broad
interpretation. The commenter also
stated that Intermediaries operate under
vastly different business models than
traditional 7(a) Lenders and that most
have a business model requiring them to
raise 10% to 40% of operational funds
on a yearly basis. The commenter
requested that SBA recognize these
differences in the regulatory language.
SBA recognizes that Intermediaries, as
non-profit community lenders, may
operate very differently than traditional
10 Also
known as ‘‘SBA Loan Program
Requirements’’.
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7(a) Lenders and that some
Intermediaries may plan to raise 10% to
40% of their operational funds yearly.
However, all Intermediaries must
maintain finances sufficient to sustain
operations and repay the SBA
Promissory Note(s). SBA must evaluate
the financial health of Intermediaries as
part of its oversight responsibilities.
SBA evaluates whether an Intermediary
has sufficient financial strength to
sustain its Microloan operations by
examining an Intermediary’s financial
information and related metrics, such as
amount of unrestricted net assets and
changes in net assets year over year.
Through this evaluation, SBA may be
able to identify any negative trends
early so that it can work with the
Intermediary to maintain the ability to
successfully operate its Microloan
program. This provision is necessary to
protect the integrity of the Microloan
program. Accordingly, SBA is adopting
the regulation in the final rule as
proposed.
J. Section 120.1500—Types of Formal
Enforcement Actions—SBA Lenders.
SBA proposed in § 120.1500 several
technical amendments and other
changes to implement the Act.
Technical changes included the
addition of the term ‘‘formal’’ before
‘‘enforcement action’’ to distinguish this
section from the proposed new
§ 120.1300 on informal enforcement
actions. Proposed substantive revisions
to implement the new legislation within
§ 120.1500 centered on incorporation of
civil monetary penalties (‘‘CMPs’’) as a
7(a) Lender enforcement tool.11 CMPs
create a monetary incentive for 7(a)
Lenders to comply with SBA Loan
Program Requirements. This tool can be
particularly effective as a deterrent
against financial related noncompliance (e.g., Lender nonpayment or
late payment of amounts it owes to SBA
for borrower payments, recoveries
received, denials of liability, SBA loan
purchase repairs, or fees owed). CMPs
may also be warranted in certain critical
circumstances (e.g., where there is a
violation of an order, directive, or
agreement, or where there is fraud). SBA
might also use CMPs where there are
reporting failures or delays (e.g., for
failure to timely submit complete
purchase packages following SBA
Secondary Market purchase). These
examples are not all inclusive. The
proposed provision included a list of
considerations for SBA in determining
whether and in what amount to assess
a CMP. The considerations are the same
11 Prior to the enactment of the Act, SBA’s CMP
authority was limited to certain reporting violations
against SBA Supervised Lenders. 15 U.S.C. 650(j).
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14777
as those in 13 CFR 120.465(b) governing
CMPs for reporting failures by SBA
Supervised Lenders. Specifically, the
considerations/factors include, but are
not limited to, the following: The
gravity (e.g., severity and frequency) of
the violation; history of violations;
financial resources and good faith of the
7(a) Lender; and such other matters as
justice may require. The list of
considerations is also very similar to
those in the CMP structures of other
Federal agencies (e.g., the OCC, the
Federal Deposit Insurance Corporation,
and the Department of Housing and
Urban Development’s Mortgagee Review
Board). SBA assessment of CMPs, as
with SBA’s other enforcement tools,
helps to protect the integrity of the 7(a)
Loan Program. In addition to the
incorporation of CMPs, proposed
§ 120.1500 referenced the LOC’s role in
formal enforcement actions, with its
responsibilities set forth in Delegations
of Authority and as authorized by the
Act.
Eighteen commenters recommended
that § 120.1500 state specifically that the
D/OCRM (as opposed to ‘‘SBA’’) takes
formal enforcement actions with the
approval of the LOC. The commenters
requested this change given statutory
language that specifically authorizes the
D/OCRM to take these actions. SBA has
considered the request and agrees to
specify that the D/OCRM will take these
actions for the same reasons as set forth
above in the discussion of § 120.1300.12
The final regulation, therefore, states
that the D/OCRM may undertake formal
enforcement action, but does not restrict
delegation.
The eighteen commenters also
recommended that the section be
amended to reference the ‘‘$250,000
penalty maximum’’ provided for by
Congress in the new legislation, with
the further provision that this maximum
may be amended from time to time by
notice published in the Federal
Register. SBA makes annual
adjustments to its civil penalty amounts
in accordance with section 701 of the
Federal Civil Penalties Inflation
Adjustment Act Improvements Act of
2015.13 SBA agrees with this
recommendation to state the maximum
starting point for the penalty under the
statute and is incorporating this change.
12 It is noted that the final rule retains the
language ‘‘with the involvement of the LOC . . .’’
rather than the requested language of ‘‘with the
approval of the LOC’’. This is because the LOC does
not approve all formal enforcement actions. Certain
actions against SBA Supervised Lenders under
section 23 of the Small Business Act are
recommended by the LOC and approved by the
Administrator.
13 Public Law 114–74 (November 2, 2015).
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SBA is finalizing the proposal with the
two revisions described above.
K. Section 120.1540—Types of Formal
Enforcement Actions—Intermediaries
Participating in the Microloan Program.
Proposed § 120.1540, like proposed
§ 120.1500, included a technical
amendment to include the term
‘‘formal’’ before ‘‘enforcement action’’ to
distinguish the actions under this
section from informal enforcement
actions for Intermediaries, which are set
forth in SOP 50 53, ‘‘Lender Supervision
and Enforcement.’’ SBA also proposed
to update § 120.1540 to delete references
to NTAPs. In addition, SBA proposed
revisions to the provision on suspension
and pre-revocation sanctions to more
closely conform the section to the
suspension provision in § 120.1500 for
SBA Lenders. Specifically, proposed
§ 120.1540 provided that suspension
may include, but is not limited to,
suspension of the authority to make,
service, liquidate, and/or litigate SBA
microloans. It also provided that it may
include a freeze on an Intermediary’s
Microloan Revolving Fund (‘‘MRF’’) and
Loan Loss Reserve Fund (‘‘LLRF’’)
accounts. Finally, proposed § 120.1540
specified that SBA may undertake an
‘‘immediate’’ suspension action (i.e., a
suspension that is effective
immediately), and that revocation
actions may include a portfolio
surrender.
One commenter recommended that
§ 120.1540 state specifically that the D/
OCRM (as opposed to ‘‘SBA’’) take
formal enforcement actions. SBA has
considered the request and has adopted
it in the final rule (with a clarification
that the D/OCRM takes that action with
the involvement of the LOC, as
appropriate) for the same reasons as set
forth above in the discussion of
§ 120.1300. The final regulation does
not restrict delegation. SBA received no
other comments on § 120.1540. SBA is
adopting the remainder of the regulation
as proposed.
L. Section 120.1600—General
procedures for formal enforcement
actions against SBA Lenders, SBA
Supervised Lenders, Other Regulated
SBLCs, Management Officials, Other
Persons, and Intermediaries. Proposed
changes to § 120.1600 included a
technical amendment to add the term
‘‘formal’’ before enforcement action in
this section. It also included a technical
amendment that referenced alternate
procedures under law, including but not
limited to, those under current
§ 120.465 governing procedures for
assessing CMPs against SBA Supervised
Lenders for reporting failures. SBA also
proposed to update § 120.1600 to
remove NTAPs from the regulation. In
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addition, the section proposed
provisions to implement the new
legislation on enforcement action
appeals. Specifically, 7(a) Lenders could
appeal most formal enforcement actions
to OHA or proceed directly to the
appropriate Federal district court. (The
proposed rule excluded those formal
enforcement actions against SBA
Supervised Lenders under
§§ 120.1500(c) and (d) and 120.465
because the statutory provisions at 15
U.S.C. 650 provide for separate
procedures, which are covered in
§§ 120.1600(b) or (c) and 120.465.)
Finally, SBA proposed that any 7(a)
Lender appeal to OHA be submitted
within 20 calendar days of the final
agency decision. As proposed, the
enforcement action would remain in
effect pending resolution of any appeal.
Eighteen commenters requested a 45business day timeframe for appeals. The
commenters requested 45 business days
‘‘to allow sufficient time for the lender
to assess its situation, hire counsel, and
decide on an appropriate strategy for its
appeal.’’ SBA proposed a 20-day
timeframe because it is the same appeals
timeframe that Congress afforded SBA
Supervised Lenders under section 23(f)
of the Small Business Act. While SBA
continues to believe that the 20 calendar
days proposed is reasonable, SBA has
decided to extend the timeframe to 30
calendar days. Thirty calendar days
provide for additional time for a party
to appeal than what was proposed, yet
appropriately limits risk and allows
SBA to carry out its oversight
responsibilities in a judicious manner.
SBA also believes that 30 days is
reasonable, because at the time a 7(a)
Lender would be required to file an
appeal, the 7(a) Lender would have gone
through the process associated with a
notice of proposed enforcement action
or immediate suspension and should be
knowledgeable of the issues and
equipped with the information
necessary to file an appeal. Accordingly,
the final rule provides that 7(a) Lenders
have 30 calendar days to appeal to
OHA. As indicated above, the final rule
also clarifies that it is the final agency
decision on a formal enforcement action
(as opposed to a notice of proposed
enforcement action or immediate
suspension 14) that is appealable under
SBA regulations. SBA received no other
comments on this section. Therefore,
14 Under 13 CFR 120.1600(a)(2)(ii), an SBA
Lender or Intermediary receiving a notice of
proposed enforcement action or immediate
suspension must first exhaust the administrative
remedy of filing a written objection to preserve its
objection for an appeal.
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SBA is adopting the remainder of this
section as proposed.
M. Section 134.102—Jurisdiction of
OHA. SBA proposed to amend
§ 134.102(d), which is currently
reserved, to provide OHA jurisdiction to
hear appeals on enforcement actions
against 7(a) Lenders, as contemplated by
the Act. Such jurisdiction does not
include appeals for certain actions
against SBA Supervised Lenders under
§ 120.1500(c) and (d) or § 120.465
(including, but not limited to, Cease and
Desist Orders, Suspensions, and
Revocations). Procedures for those
actions are provided for separately in 15
U.S.C. 650 and 13 CFR 120.1600(b) and
(c) and 120.465 as discussed above. SBA
received no comments specific to
§ 134.102 jurisdiction. Therefore, SBA is
adopting the regulation as proposed,
with revisions to clarify that it is the
final agency decision on a formal
enforcement action (as opposed to a
notice of proposed enforcement action
or immediate suspension) that may be
appealable.
N. Section 134.205—The appeal file,
confidential information, and protective
orders. Section 134.205 governs the
appeal file, confidential information,
and protective orders when an action is
appealed to OHA. Paragraph (c) lists
types of information in the appeal file
that are exempt from public access. The
exempt information includes, but is not
limited to, sensitive, confidential and
other exempt information. SBA
proposed to add to the list of exempt
information, ‘‘documents and
information covered under § 120.1060 of
this title’’. SBA received no comments
on this section. SBA is adopting the
section as proposed.
O. Part 134—Further Revisions. The
proposed rule stated that any further
revision to part 134, if needed, would be
contained in a separate rulemaking.
Eighteen commenters contended that in
order to appropriately implement the
statutory provision giving lenders the
right to appeal enforcement actions to
either the appropriate Federal district
court or to SBA’s OHA, it is
recommended that SBA immediately
begin the process to promulgate
regulations to implement the statutory
OHA appeal process. The commenters
further claimed that additional
regulations are necessary to provide
guidance and to clarify the logistics of
the OHA appeal process. SBA has
considered the comments and
determined that, at this time, the appeal
provisions in §§ 120.1600 and 134.102,
along with OHA’s general rules of
practice contained in 13 CFR 134.201
through 134.229, provide a sufficient
framework for the appeal process for
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7(a) Lenders. If SBA determines that
there is a need for further amendment,
SBA will promulgate regulations.
Compliance With Executive Orders
12866, 13563, 12988, 13132, 13771, the
Paperwork Reduction Act (44 U.S.C.
chapter 35) and the Regulatory
Flexibility Act (5 U.S.C. 601–612).
Executive Order 12866
This final rule implements a proposed
rule that the Office of Management and
Budget (OMB) determined was not a
‘‘significant’’ regulatory action for the
purposes of Executive Order 12866.
Although it was not required, in the
interest of transparency SBA included a
Regulatory Impact Analysis (‘‘RIA’’) in
the proposed rule. See 84 FR 29092,
29096 (June 21, 2019). The nonsignificant designation has not changed
for this final rule; it is therefore
unnecessary to reiterate the RIA. This is
also not a major rule under the
Congressional Review Act, 5 U.S.C. 801
et seq.
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Executive Order 13563
Executive Order 13563 supplements
and reaffirms the principles and
requirements of Executive Order 12866,
including providing the public notice
and an opportunity to comment on
regulatory changes. During 2019, the
Agency participated in 16 public forums
and meetings that included outreach to
hundreds of its lending partners from
which it gained valuable insight for the
program. These forums included, but
were not limited to, the National
Association of Government Guaranteed
Lenders Technical and Annual
Conferences; the National Association
for Development Companies
Conference; the Southeast Regional
Lenders’ Conference; the America East
Lenders Conference; the Florida
Association of Government Guaranteed
Lenders’ Conference, the Great Lakes
Lenders’ Conference; and the MidAmerica Lenders’ Conference. Feedback
received during these events, in
addition to the comments in response to
the proposed rule, helped to inform the
final regulations.
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 final
rule will not have substantial, direct
effects on the States, on the relationship
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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
final rule has no federalism implications
warranting preparation of a federalism
assessment.
Executive Order 13771
This final rule is not subject to
Executive Order 13771 because the rule
is not significant under Executive Order
12866.
Paperwork Reduction Act, 44 U.S.C.,
chapter 35
SBA has determined that this final
rule will not impose additional
recordkeeping or reporting requirements
under the Paperwork Reduction Act
(‘‘PRA’’). The only provision relating to
recordkeeping is the revision to
§ 120.180, in which SBA clarifies that
SBA Lenders and Intermediaries must
maintain documentation to support
compliance with SBA Loan Program
Requirements. Recordkeeping
requirements associated with this
provision are covered by currently
approved information collections for
SBA’s business loan programs,
including but not limited to, collections
under OMB Control Numbers 3245–
0071, Application for Section 504 Loan
(SBA Forms 1244 and 2450); 3245–
0074, Certified Development Company
(CDC) Annual Report Guide (SBA Form
1253); 3245–0080 and 0178, Statement
of Personal History (SBA Forms 1081
and 912); 3245–0131, Transaction
Report on Loans Serviced by Lender
(SBA Form 172); 3245–0132, Lender’s
Transcript of Account (SBA Form 1149);
3245–0201, Compensation Agreement
(SBA Form 159); 3245–0346, PCLP
Quarterly Loan Loss Reserve Report and
PCLP Guarantee Request (SBA Forms
2233 and 2234 Parts A, B, and C); 3245–
0348, Borrower Information Form (SBA
Form 1919), Lenders Application for
Guaranty (SBA Form 1920), Religious
Eligibility Worksheet (SBA Form 1971),
7(a) Loan Post Approval Action
Checklist (SBA Form 2237); 3245–0352,
Microloan Program Electronic Reporting
System (MPERS) (MPERsystem); and
3245–0365, SBA Lender, Microloan
Intermediary and NTAP Reporting
Requirements. Prudent lenders should
already be maintaining such
documentation.
Regulatory Flexibility Act, 5 U.S.C. 601–
612
When an agency issues a proposed
rulemaking, the Regulatory Flexibility
Act (‘‘RFA’’), 5 U.S.C. 601–612, requires
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the agency to ‘‘prepare and make
available for public comment an initial
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 rulemaking is not expected to have
a significant economic impact on a
substantial number of small entities.
In the proposed rule, SBA certified
that the rulemaking would not have a
significant economic impact on a
substantial number of small entities.
SBA invited comment from the public
on that certification. SBA received one
short comment specific to economic
impact. That comment, however,
primarily addressed 7(a) program
requirements in general rather than
those contained in the proposed rule.
No other comments were received on
that topic.
The changes to current regulations in
the final rule would generally fall into
one of two categories: (i) Technical
amendments/clarifications, or (ii)
codifications of the new legislation or
existing practices. Examples of the
technical amendments and clarifications
include the change to: The definition for
Federal Financial Institution Regulator
in § 120.10 to delete reference to the
Office of Thrift Supervision, which was
merged into other Federal banking
agencies; the removal of references to
NTAPs in §§ 120.1000, 120.1010,
120.1015, 120.1025, 120.1050, 120.1051,
120.1055, 120.1060, 120.1425, 120.1540,
and 120.1600 as SBA has not issued
technical assistance grants to NTAPs in
many years and such assistance is being
administered directly by Microloan
Intermediaries; and the incorporation
into § 120.180 of the current
requirement that Intermediaries must
comply with the Microloan Program
requirements.
Although the technical corrections/
clarifications portion of the final rule
might affect some of the approximately
3,500 7(a) Lenders (approximately 2000
of which are small); 209 CDCs (all of
which are small); and 147 Microloan
Intermediaries (all of which are small),
SBA does not believe the technical
corrections and clarifications in the
final rule will have a significant
economic impact on those small
entities. Rather, the clarifications to
some extent might reduce the burdens
by better informing SBA Lenders and
Intermediaries of how the Agency may
apply a regulation or requirement. As
such, SBA Lenders and Intermediaries
may potentially avoid the need to spend
extra time and resources interpreting the
regulations.
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The second category consists of
regulatory changes that codify or
implement the new legislation or
existing practices. Examples of the
regulatory changes that codify or
implement the new legislation include:
The incorporation of the new statutory
definition for credit elsewhere in
§ 120.101; the revision to the timeframe
from 30 calendar days to 45 business
days for an SBA Lender or Intermediary
to respond to findings and corrective
actions in § 120.1055; the inclusion of
an OHA appeal for a 7(a) Lender
enforcement action in §§ 120.1300,
120.1600, and 134.102; and the addition
of CMPs for a 7(a) Lender in
§ 120.1500(b). Examples of regulatory
changes that codify current practices
and procedures include: The addition of
a timeframe (90 days) for
implementation of corrective actions in
§ 120.1055; the inclusion of voluntary
agreements and Board Resolutions as
informal enforcement actions in
§ 120.1300; and the adoption of the
same grounds for informal as formal
enforcement actions for an SBA Lender
in § 120.1400.
While a few of the codifying
provisions might have the potential of a
significant economic impact, SBA does
not expect them to impact a substantial
number of small businesses. In
particular, SBA does not consider the
changes to the enforcement regulations,
including the incorporation of a CMP
for 7(a) Lenders in § 120.1500(b), to be
burdensome to a substantial number of
small lenders. This is because SBA has
historically taken only a small number
of enforcement actions, in part because
the Agency initially seeks to educate
and work with SBA Lenders and
Intermediaries using graduated
processes for the entity to reduce risk
and come into compliance before taking
any enforcement action. Specifically,
SBA educates SBA Lenders and
Intermediaries on SBA Loan Program
Requirements through notices, webinar
and teleconference training venues, and
at conferences. In addition, when SBA
identifies risk or noncompliance
through monitoring or reviews, SBA
generally seeks to work with the SBA
Lender or Intermediary through the
corrective action process or increased
supervision to address SBA concerns.
As a result, most SBA Lenders and
Intermediaries come into compliance
and avoid facing enforcement actions.
SBA generally takes enforcement action
only when the entity cannot sufficiently
reduce risk, cannot correct serious
noncompliance, or does not have the
willingness or ability to correct. In FY
2019, SBA took five enforcement or
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other related actions against SBA
Lenders and Intermediaries, which is
not a substantial number.
One of the final rule changes to SBA’s
current enforcement regulations is the
implementation of the statutory
authority to charge a CMP. The CMP
provisions are applicable only to 7(a)
Lenders and by statute can be assessed
in an enforcement action up to
$250,000. The CMP provisions in the
final rule provide flexibility to allow
SBA to take into account factors,
including the financial resources of a
7(a) Lender (especially for small
lenders), in determining whether and in
what amount to assess a CMP. SBA
believes that the CMP provisions will
not have a significant economic impact
on a substantial number of small 7(a)
Lenders, as most 7(a) Lenders generally
comply with SBA Loan Program
Requirements and given that only five
enforcement or other related actions
were taken against 7(a) Lenders in
FY2019. In FY 2020, SBA does not
anticipate that it will need to assess
CMPs with any frequency. Further,
given the flexibility in determining the
amount of the penalty, even if imposed,
the proposed penalty could be assessed
in an amount much less than $250,000.
For the reasons stated above, SBA
certifies that this final action will not
have a significant economic impact on
a substantial number of small entities.
List of Subjects
13 CFR Part 120
Community development, Loan
programs—business, Small businesses.
13 CFR Part 134
Appeal procedures, Confidential
business information.
For the reasons stated in the
preamble, SBA is amending 13 CFR
parts 120 and 134 as follows:
PART 120—BUSINESS LOANS
1. The authority citation for part 120
continues to read as follows:
regulator of a 7(a) Lender and may
include the Federal Deposit Insurance
Corporation, the Federal Reserve Board,
the Office of the Comptroller of the
Currency, the National Credit Union
Administration, and the Farm Credit
Administration.
*
*
*
*
*
Lender Oversight Committee (LOC) is
a committee established within SBA by
legislation, which meets at least
quarterly, and which has the
membership and duties set forth in
section 48 of the Small Business Act as
further outlined in Delegations of
Authority published in the Federal
Register. The LOC’s duties include, but
are not limited to, reviewing (in an
advisory capacity) any lender oversight,
portfolio risk management, or program
integrity matters brought by the Director
of the Office of Credit Risk Management
(D/OCRM), and voting on formal
enforcement action recommendations.
*
*
*
*
*
Loan Program Requirements or SBA
Loan Program Requirements are
requirements imposed upon Lenders,
CDCs, or Intermediaries by statute; SBA
and applicable government-wide
regulations; any agreement the Lender,
CDC, or Intermediary has executed with
SBA; SBA Standard Operating
Procedures (SOPs); Federal Register
notices; official SBA notices and forms
applicable to the 7(a) Loan Program, 504
Loan Program or Microloan Program;
and loan authorizations, as such
requirements are issued and revised by
SBA from time to time. For CDCs, this
term also includes requirements
imposed by Debentures, as that term is
defined in § 120.802. For Intermediaries,
this term also includes requirements
imposed by promissory notes, collateral
documents, and grant agreements.
*
*
*
*
*
■ 3. Amend § 120.101 by revising the
first and second sentences 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.
2. Amend § 120.10 by revising the
definitions for ‘‘Federal Financial
Institution Regulator’’, ‘‘Lender
Oversight Committee’’, and ‘‘Loan
Program Requirements’’ to read as
follows:
■
§ 120.10
Definitions.
*
*
*
*
*
Federal Financial Institution
Regulator is the Federal banking
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§ 120.101
Credit not available elsewhere.
SBA provides business loan
assistance only to applicants for whom
the desired credit is not otherwise
available on reasonable terms from nonFederal, non-State, and non-local
government sources. Accordingly, SBA
requires the Lender or CDC to certify or
otherwise show that the desired credit
is unavailable to the applicant on
reasonable terms and conditions from
non-Federal, non-State, and non-local
government sources without SBA
assistance, taking into consideration
factors associated with conventional
lending practices, including: The
business industry of the loan applicant;
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whether the loan applicant has been in
operation two years or less; the
adequacy of collateral available to
secure the loan; the loan term necessary
to reasonably assure repayment of the
loan from actual or projected business
cash flow; and any other factor relating
to the particular loan application that
cannot be overcome except through
obtaining a Federal loan guarantee
under prudent lending standards. * * *
■ 4. Revise § 120.180 to read as follows:
§ 120.180 Compliance with Loan Program
Requirements.
SBA Lenders and Intermediaries must
comply and maintain familiarity with
Loan Program Requirements for the 7(a)
Loan Program, 504 Loan Program, and
the Microloan Program, as applicable,
and as such requirements are revised
from time to time. Loan Program
Requirements in effect at the time that
an SBA Lender or Intermediary takes an
action in connection with a particular
loan govern that specific action. For
example, although loan closing
requirements in effect when an SBA
Lender closes a loan will govern the
closing actions, an SBA Lender’s
liquidation actions on the same loan are
subject to the liquidation requirements
in effect at the time that a liquidation
action is taken. An SBA Lender or
Intermediary must maintain sufficient
documentation to demonstrate that Loan
Program Requirements have been
satisfied.
■ 5. Revise § 120.1000 to read as
follows:
§ 120.1000
Risk-Based Lender Oversight.
(a) Risk-Based Lender Oversight. SBA
monitors, supervises, examines,
regulates, and enforces laws against
SBA Supervised Lenders and the SBA
operations of SBA Lenders and
Intermediaries.
(b) Scope. Most rules and standards
set forth in this subpart apply to SBA
Lenders as well as Intermediaries;
however, SBA has separate regulations
for enforcement grounds and formal
enforcement actions for Intermediaries
at §§ 120.1425 and 120.1540.
§ 120.1010
[Amended]
6. Amend § 120.1010 by removing the
phrase ‘‘SBA Lender, Intermediary, and
NTAP’’ wherever it appears and adding
in its place the phrase ‘‘SBA Lender and
Intermediary’’.
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■
§ 120.1015
[Amended]
7. Amend § 120.1015(a) by removing
the phrase ‘‘SBA Lenders,
Intermediaries, and NTAPs’’ and adding
in its place the phrase ‘‘SBA Lenders
and Intermediaries’’.
■
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8. Revise § 120.1025 to read as
follows:
■
§ 120.1025
Monitoring.
SBA may conduct monitoring of SBA
Lenders and Intermediaries including,
but not limited to, SBA Lenders’ or
Intermediaries’ self-assessments.
§ 120.1050
[Amended]
9. Amend § 120.1050(c) by removing
the phrase ‘‘and NTAPs’’ wherever it
appears.
■ 10. In § 120.1051, revise the first
sentence of the introductory text and
paragraph (a) to read as follows:
■
§ 120.1051 Frequency of reviews and
examinations.
SBA may conduct reviews and
examinations of SBA Lenders and
Intermediaries on a periodic basis.
* * *
(a) Results of monitoring, including
an SBA Lender’s or Intermediary’s Risk
Rating;
*
*
*
*
*
■ 11. Amend § 120.1055 by:
■ a. Revising paragraphs (a) and (b); and
■ b. In paragraph (d):
■ i. Removing the phrase ‘‘SBA Lender,
Intermediary, or NTAP’’ wherever it
appears and adding in its place the
phrase ‘‘SBA Lender or Intermediary’’;
■ ii. Removing ‘‘Subpart I’’ and adding
in its place ‘‘this subpart’’; and
■ iii. Removing the reference
‘‘§ 120.1500 through § 120.1540’’
wherever it appears and adding in its
place the phrase ‘‘this subpart’’.
The revisions to read as follows:
§ 120.1055
results.
Review and examination
(a) Written Reports. SBA will provide
an SBA Lender and Intermediary a copy
of SBA’s written report prepared as a
result of the SBA Lender or
Intermediary review or examination
(‘‘Report’’). SBA will provide the Report
generally within 60 business days
following SBA’s conclusion of the
review/examination unless SBA notifies
the SBA Lender or Intermediary of a
later date and the reason for the delay.
The Report may contain findings,
conclusions, corrective actions, and
recommendations. Each director (or
manager, in the absence of a Board of
Directors) of the SBA Lender or
Intermediary, in keeping with his or her
responsibilities, must become fully
informed regarding the contents of the
Report.
(b) Response to review and
examination Reports. SBA Lenders and
Intermediaries must respond to Report
findings, recommendations, and
corrective actions, if any, in writing to
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SBA and, if requested, submit proposed
corrective actions and/or a capital
restoration plan. An SBA Lender or
Intermediary must respond within 45
business days from the date the Report
is received unless SBA notifies the SBA
Lender or Intermediary in writing that
the response, proposed corrective
actions or capital restoration plan is to
be filed within a different time period
(either shortened or extended in SBA’s
discretion). The SBA Lender or
Intermediary response must address
each finding, recommendation, and
corrective action. In proposing a
corrective action or capital restoration
plan, the SBA Lender or Intermediary
must detail the steps it will take to
correct the finding(s); the time within
which each step will be taken; the
timeframe for accomplishing the entire
corrective action plan; and the person(s)
or department at the SBA Lender or
Intermediary charged with carrying out
the corrective action or capital
restoration plan, as applicable. In
addition, SBA Lenders and
Intermediaries must implement
corrective actions within 90 calendar
days from the date the Report or SBA’s
letter requiring corrective action is
received, unless SBA provides written
notice of another timeframe. For
purposes of this paragraph (b), a Report
will be deemed to have been received
on the date it was emailed to the last
known email address of the SBA Lender
or Intermediary unless the SBA Lender
or Intermediary can provide compelling
evidence to the contrary.
*
*
*
*
*
§ 120.1060
[Amended]
12. Amend § 120.1060 by:
a. Removing the phrase ‘‘SBA Lender,
Intermediary, or NTAP’’ wherever it
appears and adding in its place the
phrase ‘‘SBA Lender or Intermediary’’;
■ b. Removing the phrase ‘‘SBA Lender,
Intermediary, and NTAP’’ wherever it
appears and adding in its place the
phrase ‘‘SBA Lender and Intermediary’’;
■ c. Removing the phrase ‘‘SBA
Lenders, Intermediaries, and NTAPs’’
and adding in its place the phrase ‘‘SBA
Lenders and Intermediaries’’; and
■ d. Removing the phrase ‘‘SBA
Lender’s, Intermediary’s, or NTAP’s’’
and adding in its place the phrase ‘‘SBA
Lender’s or Intermediary’s’’.
■ 13. Add § 120.1300 immediately
following the undesignated center
heading ‘‘Enforcement Actions’’ to read
as follows:
■
■
§ 120.1300 Informal enforcement actions—
7(a) Lenders.
(a) Upon a determination that the
grounds in § 120.1400 exist, the D/
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OCRM may undertake, in his/her
discretion, one or more of the informal
enforcement actions listed in this
section and is not restricted from
delegating as appropriate. SBA will
consider the severity or frequency of the
violation or action triggering the ground
and the circumstances in determining
whether and what type of informal
action to take. Circumstances that may
lead to SBA taking informal
enforcement action rather than formal
enforcement action include, for
example, when problems are narrow in
scope and are correctible and SBA is
confident of a 7(a) Lender’s Board of
Directors (‘‘Board’’) and management
commitment and ability to correct;
where violations are less frequent or less
severe but warrant enforcement; or
while more fully assessing risk.
(b) Informal enforcement actions
include, but are not limited to:
(1) An SBA supervisory letter. The
letter may discuss serious or persistent
supervisory concerns, as determined by
SBA, and expected corrective action by
the 7(a) Lender. Supervisory letters
include, for example, Notices of
Material Non-Compliance;
(2) Mandatory training. SBA may
require a 7(a) Lender to complete
training to address certain findings,
weaknesses, and deficiencies;
(3) A commitment letter or Board
resolution. SBA may require a 7(a)
Lender to submit a commitment letter or
Board resolution, satisfactory to SBA,
signed by the 7(a) Lender’s Board on
behalf of the entity that may:
(i) Include specific written
commitments to take corrective actions
in response to the 7(a) Lender’s
acknowledged deficiencies;
(ii) Identify the person(s) responsible
for taking the corrective action; and
(iii) Set forth the timeframe for taking
the corrective action. The document
may be drafted by SBA or the 7(a)
Lender;
(4) Agreements. SBA may request that
a 7(a) Lender enter into a written
agreement with, and drafted by, SBA to
address and correct identified
weaknesses and/or limit or mitigate risk.
The agreement may provide, for
example, that a 7(a) Lender take certain
actions or refrain from certain actions;
and
(5) Other informal enforcement
actions. Others as SBA determines
appropriate on a case by case basis.
(c) A 7(a) Lender may appeal informal
enforcement actions to the appropriate
Federal district court or SBA’s Office of
Hearings and Appeals (OHA) within 20
calendar days of the date of the
decision, and in the event of an OHA
appeal, OHA will issue its decision in
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accordance with part 134 of this title.
The enforcement action will remain in
effect pending resolution of the appeal,
if any. SBA is not precluded from taking
one or more formal enforcement actions
under § 120.1500, or as otherwise
authorized by law, while an appeal of
an informal enforcement action is
pending.
■ 14. Amend § 120.1400 by:
■ a. Revising the first sentence and
adding a sixth sentence in paragraph (b);
■ b. Revising the first sentence in
paragraph (c)(6) and paragraph (c)(9);
■ c. Removing the word ‘‘and’’ at the
end of paragraph (c)(10); and
■ d. Revising paragraphs (c)(11) and
(12), (d)(1)(iii) and (iv), and (d)(3)(i) and
(ii).
The revisions read as follows:
§ 120.1400 Grounds for enforcement
actions—SBA Lenders.
*
*
*
*
*
(b) Scope. SBA may undertake one or
more of the enforcement actions listed
in §§ 120.1300 and 120.1500, or as
otherwise authorized by law, if SBA
determines that the grounds applicable
to the enforcement action exist. * * *
SBA considers the severity or frequency
of a violation in determining whether to
take an enforcement action and the type
of enforcement action to take.
(c) * * *
(6) Engaging in a pattern of
uncooperative behavior or taking an
action that SBA determines is
detrimental to the integrity or reputation
of an SBA program, that undermines
management or administration of a
program, or that is not consistent with
standards of good conduct. * * *
(9) Any other reason that SBA
determines may increase SBA’s
financial risk (for example, repeated
Less Than Acceptable Risk Ratings
(generally in conjunction with other
indicators of increased financial risk);
failure to properly oversee Agent
activity (‘‘Agent’’ as defined in part 103
of this title); or, indictment on felony or
fraud charges of an officer, key
employee, or loan agent involved with
SBA loans for the SBA Lender);
*
*
*
*
*
(11) For immediate suspension of all
SBA Lenders from delegated
authorities—upon a determination by
SBA that:
(i) One or more of the grounds in
paragraph (c) or (f) of this section, as
applicable, exists; and
(ii) Immediate action is needed to
protect the interests of the Federal
Government (such as where there is risk
of immediate harm or loss, a significant
program integrity concern, or clear
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evidence of conduct indicating a lack of
business integrity); and
(12) For immediate suspension of all
SBA Lenders (except SBA Supervised
Lenders, which are covered under
paragraph (d)(2) of this section) from the
authority to participate in the SBA loan
program, including the authority to
make, service, liquidate, or litigate 7(a)
or 504 loans—upon a determination by
SBA that:
(i) One or more of the grounds in
paragraph (c) or (f) of this section, as
applicable, exists; and
(ii) Immediate action is needed to
protect the interests of the Federal
Government (such as where there is risk
of immediate harm or loss, a significant
program integrity concern, or clear
evidence of conduct indicating a lack of
business integrity).
(d) * * *
(1) * * *
(iii) A willful or repeated violation of
SBA Loan Program Requirements; or
(iv) A willful or repeated violation of
any condition imposed by SBA with
respect to any application or request
with SBA; or
*
*
*
*
*
(3) * * *
(i) A violation of SBA Loan Program
Requirements; or
(ii) Where an SBA Supervised Lender
or Other Person engages in or is about
to engage in any acts or practices that
will violate SBA Loan Program
Requirements.
*
*
*
*
*
■ 15. Amend § 120.1425 by:
■ a. Revising the section heading and
paragraphs (a) and (b);
■ b. In paragraph (c) introductory text:
■ i. Removing the dash after the
paragraph heading and adding a period
in its place; and
■ ii. Removing the phrase ‘‘Intermediary
or NTAP’’ wherever it appears and
adding in its place the phrase
‘‘Intermediary’’;
■ c. Revising paragraph (c)(1);
■ d. Removing the phrase
‘‘Intermediaries and NTAPs’’ and
adding in its place the phrase
‘‘Intermediaries’’ in paragraph (c)(2)(i);
■ e. Revising paragraphs (c)(2)(vii) and
(viii);
■ f. Adding paragraphs (c)(2)(ix) and (x)
and (c)(3) through (7);
■ g. Removing paragraphs (d) and (e).
The revisions and additions read as
follows:
§ 120.1425 Grounds for formal
enforcement actions—Intermediaries
participating in the Microloan Program.
(a) Agreement. By participating in the
SBA Microloan Program, Intermediaries
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automatically agree to the terms,
conditions, and remedies in this part as
if fully set forth in their participation
agreement and all other agreements
jointly executed by the Intermediary
and SBA.
(b) Scope. SBA may undertake one or
more of the formal enforcement actions
listed in § 120.1540, or as otherwise
authorized by law, if SBA determines
that any of the grounds listed in
paragraph (c) of this section exist.
(c) * * *
(1) Failure to comply materially with
any requirement imposed by Loan
Program Requirements;
(2) * * *
(vii) Maintain a staff trained in
Microloan Program issues and Loan
Program Requirements;
(viii) Maintain the financial ability to
sustain the Intermediary’s operations
(including, but not limited to, adequate
capital), as determined by SBA;
(ix) Satisfactorily provide in-house
technical assistance to Microloan
borrowers and prospective Microloan
borrowers; or
(x) Close and fund the required
number of microloans per year under
§ 120.716;
(3) Failure within the time period
specified to correct an underwriting,
closing, disbursing, servicing,
liquidation, litigation, or reporting
deficiency, or failure in any material
respect to take other corrective action,
after receiving notice from SBA of a
deficiency and the need to take
corrective action;
(4) Engaging in a pattern of
uncooperative behavior or taking an
action that SBA determines is
detrimental to the integrity or reputation
of the Microloan Program, that
undermines management or
administration of the program, or that is
not consistent with standards of good
conduct. Prior to issuing a notice of a
proposed formal enforcement action or
immediate suspension under § 120.1540
based upon the grounds discussed in
this paragraph (c)(4), SBA must send
prior written notice to the Intermediary
explaining why the Intermediary’s
actions were uncooperative, detrimental
to the program, undermined SBA’s
management of the program, or were not
consistent with standards of good
conduct. The prior notice must also
state that the Intermediary’s actions
could give rise to a specified formal
enforcement action, and provide the
Intermediary with a reasonable time to
cure the deficiency before any further
action is taken;
(5) Any other reason that SBA
determines may increase SBA’s
financial or program risk (for example,
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16:35 Mar 13, 2020
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repeated Less Than Acceptable Risk
Ratings (generally in conjunction with
other indicators of increased risk) or
indictment on felony or fraud charges of
an officer, key employee, or loan agent
involved with SBA programs for the
Intermediary);
(6) For immediate suspension of an
Intermediary—upon a determination by
SBA that:
(i) One or more of the grounds in
paragraph (c) of this section exists; and
(ii) Immediate action is needed to
protect the interests of the Federal
Government (such as where there is risk
of immediate harm or loss, a significant
program integrity concern, or clear
evidence of conduct indicating a lack of
business integrity); and
(7) As otherwise authorized by law.
■ 16. Amend § 120.1500 by revising the
section heading, the introductory text,
paragraph (a) heading, paragraph (b),
paragraph (c) introductory text heading,
paragraph (c)(4), paragraph (d)
introductory text heading, and
paragraph (e) introductory text heading
to read as follows:
§ 120.1500 Types of formal enforcement
actions—SBA Lenders.
Upon a determination that the
grounds set forth in § 120.1400 exist, the
D/OCRM may undertake, in his/her
discretion (and with the involvement of
the LOC as appropriate and consistent
with its assigned responsibilities), one
or more of the following formal
enforcement actions for each of the
types of SBA Lender listed, and is not
restricted from delegating as
appropriate. SBA will consider the
severity or frequency of the violation or
action and the circumstances triggering
the ground in determining whether and
what type of enforcement action to take.
SBA will take formal enforcement
action in accordance with procedures
set forth in § 120.1600. If formal
enforcement action is taken under this
section and the SBA Lender fails to
implement required corrective action in
any material respect within the required
timeframe in response to the formal
enforcement action, the D/OCRM may
take further enforcement action, as
authorized by law. SBA’s decision to
take a formal enforcement action will
not, by itself, invalidate a guaranty
previously provided by SBA.
(a) Formal enforcement actions for all
SBA Lenders. * * *
(b) Formal enforcement actions
specific to 7(a) Lenders. In addition to
those formal enforcement actions
applicable to all SBA Lenders, SBA may
take the following actions:
(1) Secondary market suspension or
revocation (other than temporary
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Fmt 4700
Sfmt 4700
14783
suspension and revocation under
§ 120.660). SBA may suspend or revoke
a 7(a) Lender’s authority to sell or
purchase loans or certificates in the
Secondary Market; or
(2) Civil monetary penalty (other than
SBA Supervised Lender civil monetary
penalty under § 120.465). SBA may
assess a civil monetary penalty against
a 7(a) Lender. The civil monetary
penalty will be in an amount not to
exceed the maximum published in the
Federal Register from time to time,
which will be $250,000 plus any
increases required under law. In
determining whether to assess a civil
monetary penalty and, if so, in what
amount, SBA may consider, for
example, the following: The gravity
(e.g., severity and frequency) of the
violation; the history of previous
violations; the financial resources and
good faith of the 7(a) Lender; and any
other matters as justice may require.
(c) Formal enforcement actions
specific to SBA Supervised Lenders and
Other Persons (except Other Regulated
SBLCs). * * *
(4) Civil monetary penalties for report
filing failure under § 120.465. SBA may
seek civil penalties, in accordance with
§ 120.465, against an SBA Supervised
Lender that fails to file any regular or
special report by its due date as
specified by regulation or SBA written
directive.
(d) Formal enforcement actions
specific to SBLCs. * * *
(e) Formal enforcement actions
specific to CDCs. * * *
17. Revise § 120.1540 to read as
follows:
§ 120.1540 Types of formal enforcement
actions—Intermediaries participating in the
Microloan Program.
Upon a determination that any ground
set out in § 120.1425 exists, the D/
OCRM may undertake, in his/her
discretion (and with the involvement of
the LOC as appropriate and consistent
with its assigned responsibilities), one
or more of the following formal
enforcement actions against an
Intermediary, and is not restricted from
delegating as appropriate:
(a) Suspension. SBA may suspend an
Intermediary’s authority to participate
in the Microloan Program, which may
include, but is not limited to, the
authority to make, service, liquidate,
and/or litigate SBA microloans, and the
imposition of a freeze on the
Intermediary’s MRF and LLRF accounts.
(b) Immediate suspension. SBA may
suspend, effective immediately, an
Intermediary’s authority to participate
in the Microloan Program, which may
include, but is not limited to, the
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Federal Register / Vol. 85, No. 51 / Monday, March 16, 2020 / Rules and Regulations
authority to make, service, liquidate,
and/or litigate SBA microloans, and the
imposition of an immediate freeze on
the Intermediary’s MRF and LLRF
accounts. Section 120.1425(c)(6) sets
forth the grounds for SBA Microloan
Program immediate suspension of an
Intermediary.
(c) Revocation. SBA may revoke an
Intermediary’s authority to participate
in the Microloan Program which may
include, but is not limited to:
(1) Removal from the program;
(2) Liquidation of the Intermediary’s
MRF and LLRF accounts by SBA, and
application of the liquidated funds to
any outstanding balance owed to SBA;
(3) Payment of outstanding debt to
SBA by the Intermediary;
(4) Forfeiture or repayment of any
unused grant funds by the Intermediary;
(5) Debarment of the organization
from receipt of Federal funds until loan
and grant repayments are met; and
(6) Surrender of possession of
Intermediary’s SBA microloan portfolio
to SBA, with the microloan portfolio
and all associated rights transferred on
a permanent basis to SBA, in
accordance with SBA’s rights as a
secured creditor.
(d) Other actions. Such other actions
available under law.
■ 18. Amend § 120.1600 by:
■ a. Revising the section heading;
■ b. Removing the phrase ‘‘SBA Lender,
Intermediary, or NTAP’’ wherever it
appears and adding in its place the
phrase ‘‘SBA Lender or Intermediary’’;
■ c. Removing the phrase ‘‘SBA Lender,
Intermediary, or NTAP’s’’ wherever it
appears and adding in its place the
phrase ‘‘SBA Lender’s or
Intermediary’s’’;
■ d. Revising the introductory text to
paragraph (a);
■ e. Adding the word ‘‘formal’’ before
the word ‘‘enforcement’’ wherever it
appears in paragraphs (a)(1) through (4);
■ f. Removing the phrase ‘‘SBA Lender,
Intermediary, NTAP or SBA,’’ and
adding in its place the phrase ‘‘SBA
Lender, Intermediary, or SBA,’’ in
paragraph (a)(1)(ii);
■ g. Removing the phrase ‘‘final
decision’’ wherever it appears and
adding in its place the phrase ‘‘final
agency decision’’ in paragraphs (a)(2)
through (4);
■ h. Removing the phrase ‘‘SBA Lender,
Intermediary, NTAP or other parties’’
and adding in its place the phrase ‘‘SBA
Lender, Intermediary or other parties’’
in paragraph (a)(3)(iii);
■ i. Revising the headings for
paragraphs (a)(3) and (4) and paragraph
(a)(5); and
■ j. Adding the word ‘‘formal’’ before
the word ‘‘enforcement’’ in the headings
for paragraphs (b) and (c).
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The revisions read as follows:
§ 120.1600 General procedures for formal
enforcement actions against SBA Lenders,
SBA Supervised Lenders, Other Regulated
SBLCs, Management Officials, Other
Persons, and Intermediaries.
(a) In general. Except as otherwise set
forth for the formal enforcement actions
listed in paragraphs (a)(6), (b), and (c) of
this section and in § 120.465, SBA will
follow the procedures listed in this
section.
*
*
*
*
*
(3) SBA’s notice of final agency
decision on a formal enforcement action
where an SBA Lender or Intermediary
filed objection to the proposed action or
immediate suspension. * * *
(4) SBA’s notice of final agency
decision on a formal enforcement action
where no filed objection or untimely
objection not considered. * * *
(5) Appeals. An SBA Lender or
Intermediary may appeal the final
agency decision to the appropriate
Federal district court. Alternatively, 7(a)
Lenders may appeal such decisions
(except for decisions against SBA
Supervised Lenders that are covered by
procedures in § 120.1600(b) or (c) or
§ 120.465) to SBA’s Office of Hearings
and Appeals (‘‘OHA’’) within 30
calendar days of the date of the
decision, and in the event of such an
appeal, OHA will issue its decision in
accordance with part 134 of this title.
The enforcement action will remain in
effect pending resolution of the appeal,
if any.
*
*
*
*
*
PART 134—RULES OF PROCEDURE
GOVERNING CASES BEFORE THE
OFFICE OF HEARINGS AND APPEALS
19. The authority citation for part 134
is revised to read as follows:
■
Authority: 5 U.S.C. 504; 15 U.S.C. 632,
634(b)(6), 634(i), 637(a), 648(l), 656(i), 657t,
and 687(c); 38 U.S.C. 8127(f); E.O. 12549, 51
FR 6370, 3 CFR, 1986 Comp., p. 189.
Subpart J issued under 38 U.S.C.
8127(f)(8)(B).
Subpart K issued under 38 U.S.C.
8127(f)(8)(A).
20. Amend § 134.102 by adding
paragraph (d) to read as follows:
■
§ 134.102
Jurisdiction of OHA.
*
*
*
*
*
(d) 7(a) Lender appeals from informal
enforcement actions and final agency
decisions on 7(a) Lender formal
enforcement actions, and any other
appeal that is specifically authorized by
part 120 of this title, but not including
appeals of actions against SBA
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Frm 00052
Fmt 4700
Sfmt 4700
Supervised Lenders under § 120.1600(b)
or (c) or under § 120.465;
*
*
*
*
*
■ 21. Amend § 134.205 by revising
paragraph (c) to read as follows:
§ 134.205 The appeal file, confidential
information, and protective orders.
*
*
*
*
*
(c) Public access. Except for
confidential business and financial
information; source selection sensitive
information; income tax returns;
documents and information covered
under § 120.1060 of this title; and other
exempt information, the appeal file is
available to the public pursuant to the
Freedom of Information Act (FOIA), 5
U.S.C. 552.
*
*
*
*
*
Jovita Carranza,
Administrator.
[FR Doc. 2020–04663 Filed 3–13–20; 8:45 am]
BILLING CODE P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2019–0979; Product
Identifier 2019–NM–182–AD; Amendment
39–19868; AD 2020–05–18]
RIN 2120–AA64
Airworthiness Directives; Airbus SAS
Airplanes
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Final rule.
AGENCY:
The FAA is adopting a new
airworthiness directive (AD) for certain
Airbus SAS Model A350–941 and –1041
airplanes. This AD was prompted by a
report of incorrectly engaged lock
washer tabs of the main landing gear
(MLG) forward pintle bearing (FPB) at
the forward face of the trunnion block.
This AD requires detailed inspections of
the left-hand (LH) and right-hand (RH)
side MLG FPB nuts and lock washer
tabs, and depending on findings,
accomplishment of repetitive detailed
inspections or corrective actions, as
specified in a European Union Aviation
Safety Agency (EASA) AD, which is
incorporated by reference. The FAA is
issuing this AD to address the unsafe
condition on these products.
DATES: This AD is effective April 20,
2020.
The Director of the Federal Register
approved the incorporation by reference
SUMMARY:
E:\FR\FM\16MRR1.SGM
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Agencies
[Federal Register Volume 85, Number 51 (Monday, March 16, 2020)]
[Rules and Regulations]
[Pages 14772-14784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04663]
=======================================================================
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 120 and 134
RIN 3245-AH05
Implementation of the Small Business 7(a) Lending Oversight
Reform Act of 2018
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Small Business Administration (``SBA'' or ``Agency'') is
amending its business loan program regulations to implement the Small
Business 7(a) Lending Oversight Reform Act of 2018 (``Act'') and make
other amendments that will strengthen SBA's lender oversight and ensure
the integrity of the business loan programs. The key amendments in this
rule codify SBA's informal enforcement actions, new civil monetary
penalties and certain appeal rights for 7(a) Lenders, clarify certain
enforcement actions for Microloan Intermediaries, and adopt statutory
changes to the credit elsewhere test. The rule also makes other
technical amendments, updates, and conforming changes including
clarifying oversight and enforcement related definitions.
DATES: This rule is effective April 15, 2020.
FOR FURTHER INFORMATION CONTACT: Bethany Shana, Office of Credit Risk
Management, Office of Capital Access, Small Business Administration,
409 3rd Street SW, Washington, DC 20416; telephone: (202) 205-6402;
email: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
SBA is authorized under sections 7(a) and 7(m) of the Small
Business Act and title V of the Small Business Investment Act of 1958
(the ``SBI Act'') to conduct small business loan programs. 15 U.S.C.
636(a) and (m) and 695 et seq. For purposes of this rule, SBA's
business loan programs consist of the 7(a) Loan Program, the Microloan
Program, and the Development Company Loan Program (``504 Loan
Program''). These programs provide critical access to credit for
America's small businesses, bridging the lending gap that exists in the
market for our nation's smallest companies. Along with the authority to
offer government guarantees, Congress provided SBA the authority to
supervise lenders participating in these programs. 15 U.S.C. 634, 636,
650, and 697.
Growth in lending in the 7(a) Loan Program prompted Congress to
undertake a thorough examination of
[[Page 14773]]
the tools available at SBA to ensure that comprehensive oversight is
accomplished. Following that review, Congress enacted the Small
Business 7(a) Lending Oversight Reform Act of 2018, Public Law 115-189
(June 21, 2018) (the ``Act''). The Act strengthened SBA's 7(a) Lender,
Certified Development Company (``CDC''), and Microloan Intermediary
(``Intermediary'') supervision authorities and the office charged with
that responsibility, SBA's Office of Credit Risk Management (``OCRM'').
The Act required SBA to promulgate regulations to implement certain
of its provisions. Accordingly, on June 21, 2019, SBA published a
notice of proposed rulemaking to implement the legislation by proposing
updates to its lender oversight and related regulations, as codified in
parts 120 and 134 of title 13 of the Code of Federal Regulations
(``CFR''). 84 FR 29092. The proposed updates also included technical
corrections and clarifications to better inform lenders and to
strengthen enforcement. Because some provisions in the legislation
covered ``any Lending Partner or Intermediary participant . . . in a
lending program of . . . [SBA's] Office of Capital Access'' and because
SBA's 7(a) oversight framework is generally interwoven with that of the
504 Loan Program and the Microloan Program, SBA proposed to extend
certain specific updates to CDCs and Intermediaries. The comment period
for the proposed rule closed on August 20, 2019.
II. Summary of Comments
The Agency received 43 comments. Sixteen comments were submitted by
or on behalf of 7(a) Lenders. Twenty-one comments were submitted by or
on behalf of CDCs (this group includes 4 CDCs that are also
Intermediaries and/or Community Advantage (``CA'') Lenders). In
addition, SBA received comments from two trade associations, one law
firm, and three anonymous commenters.
Many comments were supportive of the proposed rule and SBA's
efforts to preserve the integrity of the business loan programs. These
comments also expressed appreciation of the Agency's efforts to improve
oversight. The comments included some suggestions for the rule,
including amendments to proposed provisions that commenters contended
were not or did not appear to be consistent with the language of the
statute or its intent. Some commenters, primarily CDCs, generally
opposed the rule but made few specific comments or suggestions. SBA
appreciates all comments received and has incorporated many of the
suggestions into the final rule. The following is a section-by-section
analysis \1\ of the final rule including section-specific comments
received and changes made.
---------------------------------------------------------------------------
\1\ For additional details on each proposed rule section, see 84
FR 29092 (June 21, 2019).
---------------------------------------------------------------------------
III. Section-by-Section Analysis With Discussion of Comments Received
A. Section 120.10--Definitions. SBA proposed to update three
definitions in Sec. 120.10. First, SBA proposed to update the
definition of ``Federal Financial Institution Regulator'' by deleting
the reference to the Office of Thrift Supervision (``OTS'') as OTS has
been abolished and merged into the Office of the Comptroller of the
Currency (``OCC'') and other banking agencies. SBA received no comments
on this update and is adopting the change to the definition as
proposed.
Second, SBA proposed to revise the definition of ``Lender Oversight
Committee'' (``LOC'') to state that LOC membership and duties are
derived from the Small Business Act; that the LOC meets quarterly; and
that it votes on formal enforcement action recommendations.
Eighteen commenters \2\ stated that the proposed definition
``provides only an abridgement of the LOC definition as provided in the
statute.'' The commenters suggested that SBA provide a more complete
enumeration of LOC duties in this definitional section of part 120. SBA
notes that the LOC's duties can be found in section 48 of the Small
Business Act and in SBA's Delegations of Authority 12-G for lender
oversight and enforcement activities at 79 FR 56842, 56844 (September
23, 2014), as updated by 83 FR 48681, 48682 (September 26, 2018).
Nevertheless, SBA has considered this request and has expanded the
final rule definition to specifically include the significant LOC
duties as well as a reference to the specific statutory provision
enumerating the LOC duties. A complete listing of the LOC's statutory
duties and its membership, however, can be found in the Lender
Oversight Delegations of Authority as referenced above.
---------------------------------------------------------------------------
\2\ The 18 commenters consisted mostly of a trade association
and 7(a) Lenders that ``fully agree[d] with and support[ed]'' the
trade association's comments. References to 18 commenters later in
this Section-by-Section Analysis refer to the same group of 18
commenters.
---------------------------------------------------------------------------
In Sec. 120.10, SBA also proposed to clarify the term ``Loan
Program Requirements.'' Specifically, the proposed rule provided that
this term may also be referred to as ``SBA Loan Program Requirements''
and that it includes Federal Register notices and applicable
government-wide regulations. In addition, SBA proposed to make the
definition applicable to Intermediaries.
In response to the proposal, eighteen commenters requested that SBA
exclude ``official SBA notices,'' ``forms,'' and ``agreements'' from
the definition of Loan Program Requirements. Commenters stated it was
their understanding that the intent of Congress was to assure that
performance requirements being imposed on lenders would be only those
imposed by statute or those formally and publicly announced by SBA in
regulations, SOPs or Policy Notices. SBA notes that official SBA
notices, forms, and agreements have long been a part of SBA's
regulatory definition of Loan Program Requirements and are an integral
part of SBA supervision. SBA did not propose any changes to that
portion of the definition. Official SBA notices (i.e., SBA Policy,
Procedural, and Information Notices) and SBA business loan forms are
available to the public on SBA's website. In addition, the Small
Business Act, SBI Act, and SBA regulations formally and specifically
provide for the use of agreements in SBA's loan programs (see 15 U.S.C.
636, 650(d), and 696 and 13 CFR 120.400, 120.440, 120.434, 120.474,
120.613). Accordingly, SBA is finalizing the definition of ``Loan
Program Requirements'' as proposed.
B. Section 120.101--Credit not Available Elsewhere. One of the
primary goals of the Act was to ensure that the ``Credit Elsewhere
Test'' is being applied correctly and consistently by lenders and that
it is being appropriately verified by SBA. Proposed Sec. 120.101
codified the new definition for credit elsewhere as contained in the
legislation. Under Sec. 120.101 as proposed, credit elsewhere means
that credit is unavailable to the small business applicant on
reasonable terms and conditions from non-Federal, non-State, and non-
local government sources without SBA assistance, taking into
consideration the factors associated with conventional lending
practices enumerated in the statute.
7(a) Lender commenters generally concurred with proposed Sec.
120.101, with some slight amendments. Specifically, commenters
requested that the regulation state that the credit elsewhere
requirement is statutorily mandated to make clear that the requirement
is imposed by statute. The credit elsewhere requirement is found in 15
U.S.C. 636(a)(1)(A) and 697(b)(2); however, SBA does not believe it is
necessary to revise the regulation to include the specific statutory
cites.
[[Page 14774]]
The proposed rule listed the five statutory factors for determining
credit elsewhere. SBA received no comments specific to factors 1-3. The
fourth factor provided for consideration of the loan term necessary to
reasonably assure repayment from business cash flow. Eighteen
commenters requested that the section specifically allow either
``actual'' or ``projected'' cashflow of the business, as referenced in
the statute. SBA agrees with this comment and is adding the clarifying
language to the final regulation.
The fifth factor is a catch-all provision to cover ``other
factors'' relating to a particular credit application. The preamble to
the proposed rule provided examples of the ``other factors'' that SBA
Lenders should consider for the credit elsewhere determination. The
examples included management experience, leverage ratio, global
cashflow, loan size relative to the age of the business, or personal
resources of the owners of the business. The preamble stated that the
other factors must be specifically explained and documented with
relevant supporting documentation in the lender's credit memorandum.\3\
Eighteen commenters requested that SBA include the ``other factors''
identified in the preamble to the proposed rule, as well as other
examples, in future versions of SBA's Standard Operating Procedures
(``SOPs'') to provide guidance to lenders on the interpretation of the
regulatory provision.\4\ SBA agrees with this comment. SBA will
incorporate a list of ``other factors'' and other relevant examples for
credit elsewhere in the relevant SOPs.
---------------------------------------------------------------------------
\3\ SOP 50 10 provides that the SBA Lender's credit memorandum
includes substantiation that credit is not available elsewhere by
discussing acceptable factors that demonstrate an identifiable
weakness in the credit. The specific reasons why the Applicant does
not meet the lender's conventional loan policy requirements are to
be included in the credit memorandum.
\4\ The commenters' request to include the other factors in
future SOPs was made ``subject to'' comments on the personal
resources test made on the proposed rule for the Express Loan
Programs; Affiliations Standards (Express rule). SBA has addressed
comments on the personal resources test in the interim final rule
published on February 10, 2020 at 85 FR 7622.
---------------------------------------------------------------------------
Approximately twenty-four commenters requested that SBA not apply
the credit elsewhere provision (or any of the other provisions in the
proposed rule) to CDCs. These commenters claimed that ``extending
provisions of [the Act] to the 504 program [including the credit
elsewhere provision] has no basis in law . . . .'' SBA does not agree,
and believes that there is ample support for applying the credit
elsewhere provision to the 504 Loan Program. The Sec. 120.101 credit
elsewhere provision has been a longstanding feature of the 504 Loan
Program in SBA regulations for many years and dates back to at least
1986. See 13 CFR 108.8(a) ``Borrower Requirements and Prohibitions''
(1987). There is also statutory support for applying this provision to
the 504 Loan Program. Section 503(b)(2) of the SBI Act provides that
``[n]o guaranty may be made with respect to any debenture under
subsection (a) unless . . . . Necessary funds for making such loans are
not available to such company from private sources on reasonable
terms.'' In addition, section 503(a) of the SBI Act authorizes SBA to
guarantee 504 program debentures ``on such terms and conditions as the
Administration may by regulation determine to be appropriate.''
Further, section 308(f) of the SBI Act states that ``[i]n the
performance of, and with respect to the functions, powers, and duties
vested by this Act,\5\ the Administrator and the Administration shall
(in addition to any authority otherwise vested by this Act) have the
functions, powers, and duties set forth in the Small Business Act . . .
.'' Finally, SBA's Congressional oversight committee is well aware of
and has acknowledged the credit elsewhere requirement as an eligibility
standard for small businesses in the 504 Loan Program. For example, in
her hearing memo, dated December 10, 2019, to Members of the House
Small Business Committee Subcommittee on Investigations, Oversight, and
Regulations, Chairwoman Judy Chu stated that, ``In order to qualify for
a 504 loan, a business must: . . . demonstrate the need for the desired
credit and that the funds are not available from alternative sources,
including personal resources of the principals; and be certified by a
lender that the desired credit is unavailable to the applicant on
reasonable terms and conditions from nonfederal sources without SBA
assistance.'' \6\ Consequently, it is well-established that the credit
elsewhere requirement applies to the 504 Loan Program.
---------------------------------------------------------------------------
\5\ The functions, powers, and duties include the authority to
make such rules and regulations as the agency deems necessary to
carry out the authority vested in the agency. 15 U.S.C. 634(b)(6).
\6\ https://smallbusiness.house.gov/uploadedfiles/12-10-19_hearing_memo.pdf.
---------------------------------------------------------------------------
In addition, the commenters argued that economic development and
job requirements, not credit elsewhere, properly govern when a business
or project is eligible for the 504 Loan Program. SBA agrees that the
program has important economic development and job creation objectives;
however, it is also important that SBA not use taxpayer dollars to
finance those loans that can be financed by the private sector on
reasonable terms and conditions.
These commenters also opposed the application of other provisions
of the Act to CDCs, arguing that the process, title, and content of the
Act make it clear that the statute is for the 7(a) program only.\7\
Contrary to that statement, SBA notes that the opening provision of the
legislation, which statutorily established the Office of Credit Risk
Management, granted the office the authority to supervise ``any Lending
Partner or Intermediary participant . . . in a lending program of the
Office of Capital Access . . . .'' As CDCs are a Lending Partner in a
lending program of the Office of Capital Access, SBA is not persuaded
by this argument.
---------------------------------------------------------------------------
\7\ The commenters also noted that the legislation made no
change to the Small Business Investment Act of 1958, the primary
governing statute for the 504 Loan Program.
---------------------------------------------------------------------------
Two 7(a) Lenders commented that the credit elsewhere requirement
will be difficult to comply with because lenders cannot know what terms
and conditions competitors offer. As stated above, credit elsewhere is
a statutory requirement that requires the consideration of several
factors. Based on these factors, an institution can make a reasonable
determination as to whether an Applicant has credit available without a
government guaranty. The key here, for purposes of compliance, is that
each lender documents in its credit memorandum its reasonable
consideration of the factors relevant to the particular application and
that the lender makes that documentation available for SBA review.
In light of the statutory and regulatory authorities cited above
and the well-established history of the credit elsewhere regulation as
applicable to both programs, SBA believes it is reasonable to apply the
amendments to the credit elsewhere regulations, and certain other
sections as noted within the final rule, to the 504 Loan Program.
Accordingly, SBA is finalizing the section as proposed with the change
to the fourth factor discussed above.
C. Section 120.180--Compliance with Loan Program Requirements.
Sections 3 and 4 of the Act provide that SBA is to oversee lender
compliance with SBA Loan Program Requirements, including credit
elsewhere. SBA proposed changes to Sec. 120.180 to facilitate that
oversight. The rule proposed to codify SBA's current requirement that
SBA Lenders maintain documentation to support that
[[Page 14775]]
Loan Program Requirements, including those regarding credit elsewhere,
have been met. SBA examines these documents during reviews and exams.
This documentation facilitates prudent lending, and maintaining records
is a practice that all prudent lenders already undertake. The proposed
amendments to Sec. 120.180 also clarified that Intermediaries, in
addition to 7(a) Lenders and CDCs, are expected to comply with Loan
Program Requirements.
SBA received no comments on proposed Sec. 120.180 and is adopting
the section as proposed.
D. Section 120.1000--Risk-Based Lender Oversight; Sec. 120.1010--
SBA Access to SBA Lender and Intermediary Files; Sec. 120.1015--Risk
Rating System; Sec. 120.1025--Monitoring; Sec. 120.1050--Reviews and
Examinations; and Sec. 120.1051--Frequency of Reviews and
Examinations. SBA proposed updating these sections to remove references
to Non-lending Technical Assistance Providers (``NTAPs''), as SBA has
not issued technical assistance grants to NTAPs in many years.
Technical assistance in the Microloan Program is being administered
directly by Intermediaries. SBA received no comments on the proposed
changes to these sections. SBA is, therefore, adopting the changes to
these sections as proposed.
E. Section 120.1055--Review and Examination Results. Section
120.1055 covers SBA review and examination reports, corrective actions
and plans, lender required responses, and lender implementation of
corrective actions. SBA proposed to extend the timeframe for a lender
or Intermediary to respond to a review/examination report from 30 to 45
calendar days. Eighteen commenters requested that SBA modify the
general timeframe for a lender or Intermediary to respond from 45
calendar days to 45 business days. Commenters stated that ``business''
days was more in-line with the statute and requested that the
additional time be provided to better enable lenders to respond to
reports. SBA agrees with the requested modification of the general
timeframe and is revising the section accordingly.
The commenters also noted that though the proposed rule allows SBA
to establish a different time period for a lender to respond, the rule
did not specify whether the time period could be shorter or longer.
This is true. SBA did not so specify because the statute gives SBA
needed flexibility to either extend or shorten the response timeframe
on a case-by-case basis.\8\ SBA has decided to retain this flexibility
but is clarifying in the final rule that SBA may extend or shorten the
timeframe.
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\8\ The statute states that if a response to a review report is
requested, SBA is to require the lender to submit responses to the
Administrator ``not later than'' 45 business days after the date the
lender receives the report (i.e., 45 business days is the outside
limit); however, the Administrator ``may extend the time frame'' as
he/she determines necessary. 15 U.S.C. 657t(d)(2).
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For example, SBA may extend the timeframe when a lender's
management is in transition or until after a lender attends a required
Headquarters meeting on its significant findings and corrective
actions. Alternatively, SBA may shorten the timeframe if, for example,
the deficiencies are few in number but so significant that delay could
cause losses to SBA or the lender. This might occur if a lender, using
delegated authority, is making ineligible loans.
In Sec. 120.1055 SBA also proposed to clarify when a lender is
considered to have received a report for purposes of the regulation
(i.e., the report is considered received on the date it is emailed to
the last known email address for the lender or Intermediary, unless the
lender or Intermediary can provide compelling evidence that it was
received on a different date). Eighteen commenters had no objection to
SBA's proposal that lender's date of receipt be the date it was emailed
to the last known email address. These commenters, however, recommended
that the regulation be amended to also require that reports be sent by
mail or other delivery service to the head of the lender institution
(or other party deemed appropriate by SBA) at its last known business
address. They made this suggestion as they believe that the gravity of
the oversight report requires a more formal transmission of the report
to the lender. SBA has considered the comment and has determined not to
include the commenters' suggested change. While in some cases it may be
helpful to also send the report by mail or other delivery service, such
duplicative effort may not be justified in all cases. For example,
where a review report conveys an assessment of ``Acceptable'', it may
not be necessary or appropriate to incur additional costs to duplicate
delivery by mail. SBA will use judgment and discretion in making the
determination on a case-by-case basis.
The eighteen commenters also requested that SBA amend the
regulation to include the statutory timeframe for SBA to issue a
review/examination report. The statute provides, in general, that SBA
will deliver a written review report not later than 60 business days
after the date a review is concluded or, if SBA expects to submit the
report after the end of the 60-day period, the Agency will notify the
7(a) Lender of the expected date of submission and the reason for the
delay. The commenters requested this addition citing a historical lack
of timeliness on behalf of the Agency in issuing review reports and
because, without timely information regarding perceived violations,
lenders questioned whether they would be able to correct their
performance and begin to take steps necessary to mitigate potential
risk to the Agency. While the commenters stated that OCRM is committed
to, and has made good progress in, getting reports out more timely,
they believe it is imperative to amend the rule to include this
provision. SBA agrees to make this addition and is incorporating the
general timeframe into the final regulation.
Finally, SBA proposed to revise Sec. 120.1055 to clarify that a
response must address recommendations in addition to findings and
corrective actions; to delete reference to NTAPs; and to codify SBA's
90-day timeframe for lenders and Intermediaries to implement corrective
actions. The proposed 90-day timeframe included flexibility for a
shorter or longer period, as warranted. SBA received no comments
specific to these proposed changes. SBA is adopting these amendments to
Sec. 120.1055 as proposed.
F. Section 120.1060--Confidentiality of Reports, Risk Ratings and
Related Confidential Information. SBA proposed to update Sec. 120.1060
to remove references to NTAPs for the reasons explained in paragraph
III.D. above. SBA received no comments on this proposed change. SBA is
adopting Sec. 120.1060 as proposed.
G. Section 120.1300--Informal Enforcement Actions. The Act required
SBA to codify its informal enforcement actions for 7(a) Lenders into
regulations. Accordingly, SBA proposed a new Sec. 120.1300 on informal
enforcement actions for 7(a) Lenders. Under the proposed regulation,
informal actions would consist of, for example, a commitment letter,
mandatory training, and an agreement between SBA and the 7(a) Lender.
In addition to listing the types and descriptions of informal
enforcement actions, the proposed rule discussed the circumstances that
may lead SBA to take such actions (e.g., when problems are narrow in
scope and are correctible, and SBA is confident of the 7(a) Lender's
Board and management commitment and ability to correct such problems;
where violations
[[Page 14776]]
are less frequent or less severe but still warrant enforcement; or
while SBA more fully assesses risk). The circumstances that SBA
proposed are, for the most part, set forth in SBA's current SOPs.
The Act also provided that 7(a) Lenders could appeal informal
enforcement actions to Federal district court or to SBA's Office of
Hearings and Appeals (``OHA''). Under proposed Sec. 120.1300, a 7(a)
Lender would have 20 calendar days to appeal. The proposed rule further
provided that an informal enforcement action would remain in effect
pending resolution of the appeal, if any, and that SBA would not be
precluded from taking other action, including but not limited to, a
formal enforcement action under Sec. 120.1500, or as otherwise
authorized by law, while the appeal was pending.
Eighteen commenters recommended that Sec. 120.1300 specifically
state that the Director of the Office of Credit Risk Management (the
``D/OCRM'') (as opposed to ``SBA'') takes informal enforcement actions.
The commenters requesting this change cited statutory language that
authorizes the D/OCRM to take these actions. SBA has considered the
request and has adopted it in the final rule. The Act provides that the
D/OCRM is authorized to take informal enforcement actions and does not
restrict the D/OCRM's authority to delegate this authority. The final
regulation, therefore, states that the D/OCRM may undertake informal
enforcement actions but does not restrict delegation.
The eighteen commenters also opposed the 20-day appeal time
proposed for informal enforcement actions. The commenters requested 45
business days instead, ``to allow sufficient time for the lender to
assess its situation, hire counsel, and decide on an appropriate
strategy.'' The commenters also suggested that the SBA's ability to
address risks identified during a review would not be adversely
impacted by the extended timeframe to request an appeal because the
enforcement action would remain in effect pending resolution of the
appeal and SBA could pursue formal enforcement action. SBA has
considered the request and will retain the 20-day appeal timeframe
contained in the proposed rule because these are informal enforcement
actions consisting mostly of voluntary agreements and required training
designed to bring lenders into compliance and reduce lender and SBA
risk of losses. In addition, informal enforcement actions (e.g.,
supervisory letters and required training) are generally informative
and corrective in nature, non-public, and less likely to impose a
significant burden or have a negative effect on a 7(a) Lender. SBA also
notes that the 20-day timeframe is the same timeframe that Congress
afforded SBA Supervised Lenders for appeals of enforcement actions
under section 23(f) of the Small Business Act. Moreover, it provides a
longer appeal time than the 14-day appeal timeframe that the banking
agencies provide to financial institutions for appeals relating to the
immediate issuance of certain final directives and orders under 12 CFR
6.21(a)(2) and 30.5(a)(2) (OCC); 12 CFR 308.201(a)(2) and 308.304(a)(2)
(Federal Deposit Insurance Corporation); and 12 CFR 263.202(a)(2) and
263.304(a)(2) (Federal Reserve Board).
SBA received no other comments on proposed Sec. 120.1300.
Accordingly, SBA is adopting the section as proposed with the change
discussed above.
H. Section 120.1400--Grounds for Enforcement Actions--SBA Lenders.
Section 120.1400 sets forth the grounds for SBA's enforcement actions
for SBA Lenders. SBA proposed amendments to 13 CFR 120.1400 to
implement several provisions of the new legislation and to provide
clarifications. First, the rule proposed to amend Sec. 120.1400(b) to
explicitly state, and thereby formally recognize, that Sec. 120.1400
grounds extend to both informal and formal enforcement actions. Second,
in accordance with the new legislation, the proposed regulation stated
that SBA would consider the severity or frequency of a violation in
determining the type of enforcement action to take. Third, Sec.
120.1400(c)(6), as proposed, clarified that an action ``detrimental to
an SBA program'' means an action detrimental to ``the integrity or
reputation of'' an SBA program. Fourth, SBA proposed clarifying
paragraph (c)(9) to further inform the public that SBA considers an SBA
Lender's failure to properly oversee Agent activity to be an example of
SBA Lender action/inaction that increases SBA's financial risk. While
Agents can be helpful in assisting SBA Lenders in making, servicing,
liquidating, and litigating SBA loans, an SBA Lender must exercise due
diligence and prudently oversee third-party activity. SBA's policy of
holding lenders responsible for third-party activity is neither new to
the program nor unusual for regulated lenders. In fact, the Federal
Financial Institution Regulators generally expect a financial
institution to conduct robust, comprehensive, and appropriately
documented due diligence and ongoing risk management of each of the
institution's third-party service providers that support critical
activities. A financial institution's risk management process may
include, for example, assessing the quantity of risk posed to the
institution by use of the third-party service provider and the ability
of the institution to monitor and control risk; contract structuring
and review; ongoing benchmarking of service provider performance; and
monitoring the third party's actions on behalf of the bank for
compliance with applicable laws and regulations.\9\ For purposes of
this section, the term ``Agent'' means all parties included in the
definition of ``Agent'' in 13 CFR part 103 that assist the 7(a) Lender
or CDC with making, servicing, liquidating, or litigating their SBA
business loans (e.g., lender service providers, consultants, brokers/
referral agents).
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\9\ OCC Bulletin 2017-21 (June 2017), Third-Party Relationships:
Frequently Asked Questions to Supplement OCC Bulletin 2013-29. See
also, FDIC Financial Institution Letter, FIL-19-2019, Technology
Service Provider Contracts (April 2, 2019) and FIL-44-2008, Third-
Party Risk Guidance for Managing Third-Party Risk (June 6, 2008).
---------------------------------------------------------------------------
SBA also proposed clarifying paragraphs (c)(11) and (12) of this
section, which cover grounds for immediate suspension of delegated
authority and program authority, respectively. SBA proposed revising
these paragraphs to better define the circumstances in which SBA would
seek an immediate suspension. The proposed paragraphs stated that SBA
may take such immediate action upon a determination that: (i) One of
the grounds in paragraph (c) or (f) of that section, as applicable,
exists; and (ii) immediate action is needed to protect the interests of
the Federal Government (such as where there is risk of immediate harm
or loss, a significant program integrity concern, or clear evidence of
conduct indicating a lack of business integrity). Situations that may
warrant immediate suspension may include, but are not limited to, where
there are significant findings relating to the SBA Lender's
determination of eligibility (e.g., credit elsewhere, etc.) or on the
credit review, or the underwriting, approval, loan servicing and/or
liquidation processes; evidence of fraud; significant concerns as to
the SBA Lender's financial condition, capital levels, or solvency; or
where an SBA Lender is no longer licensed or lacks staff capable of
making, servicing, or liquidating loans, as determined by SBA in its
discretion. In addition, SBA proposed revisions to paragraphs
(d)(1)(iii) and (d)(3)(i) and (ii) to clarify that an SBA Supervised
Lender's violation of ``the Small Business Act'' or ``SBA regulations''
is a violation of
[[Page 14777]]
``Loan Program Requirements'' \10\ consistent with SBA's use of this
term in Sec. 120.1400(c)(2). In conjunction with this conforming
change, SBA proposed deleting the word ``agreement'' from paragraph
(d)(1)(iv) as it is redundant with paragraph (d)(1)(iii) as revised.
---------------------------------------------------------------------------
\10\ Also known as ``SBA Loan Program Requirements''.
---------------------------------------------------------------------------
SBA received no comments on Sec. 120.1400 and is adopting the
amendments as proposed.
I. Section 120.1425--Grounds for Formal Enforcement Actions--
Intermediaries Participating in the Microloan Program. SBA proposed
that Sec. 120.1425 be updated to remove references to NTAPs. SBA also
proposed that paragraphs (c)(1) and (c)(2)(vii) on violations of law
and Loan Program Requirements be clarified and harmonized with the
corresponding provision for SBA Lenders. In addition, the rule proposed
to reorder and establish a more logical grouping of the grounds for
enforcement. SBA also proposed an additional performance-related ground
for enforcement action: A failure to ``[m]aintain the financial ability
to sustain the Intermediary's operations (including, but not limited
to, adequate capital), as determined by SBA.'' Consistent with
equivalent provisions for SBA Lenders, the proposal added three general
grounds to the Microloan Program regulations: (i) Failure to take
corrective actions; (ii) engaging in uncooperative or detrimental
behavior; and (iii) action or inaction that SBA determines may increase
SBA's financial or program risk, as well as a specific ground for
immediate suspension of Intermediaries. Finally, SBA proposed a catch-
all provision, paragraph (c)(7), for other grounds otherwise authorized
by law.
SBA received one comment on Sec. 120.1425. The commenter objected
to SBA's proposal to include an Intermediary's failure to maintain the
financial ability to sustain its operations (e.g., maintain adequate
capital) as a ground for enforcement action. The commenter contended
that the provision can have a broad interpretation. The commenter also
stated that Intermediaries operate under vastly different business
models than traditional 7(a) Lenders and that most have a business
model requiring them to raise 10% to 40% of operational funds on a
yearly basis. The commenter requested that SBA recognize these
differences in the regulatory language.
SBA recognizes that Intermediaries, as non-profit community
lenders, may operate very differently than traditional 7(a) Lenders and
that some Intermediaries may plan to raise 10% to 40% of their
operational funds yearly. However, all Intermediaries must maintain
finances sufficient to sustain operations and repay the SBA Promissory
Note(s). SBA must evaluate the financial health of Intermediaries as
part of its oversight responsibilities. SBA evaluates whether an
Intermediary has sufficient financial strength to sustain its Microloan
operations by examining an Intermediary's financial information and
related metrics, such as amount of unrestricted net assets and changes
in net assets year over year. Through this evaluation, SBA may be able
to identify any negative trends early so that it can work with the
Intermediary to maintain the ability to successfully operate its
Microloan program. This provision is necessary to protect the integrity
of the Microloan program. Accordingly, SBA is adopting the regulation
in the final rule as proposed.
J. Section 120.1500--Types of Formal Enforcement Actions--SBA
Lenders. SBA proposed in Sec. 120.1500 several technical amendments
and other changes to implement the Act. Technical changes included the
addition of the term ``formal'' before ``enforcement action'' to
distinguish this section from the proposed new Sec. 120.1300 on
informal enforcement actions. Proposed substantive revisions to
implement the new legislation within Sec. 120.1500 centered on
incorporation of civil monetary penalties (``CMPs'') as a 7(a) Lender
enforcement tool.\11\ CMPs create a monetary incentive for 7(a) Lenders
to comply with SBA Loan Program Requirements. This tool can be
particularly effective as a deterrent against financial related non-
compliance (e.g., Lender nonpayment or late payment of amounts it owes
to SBA for borrower payments, recoveries received, denials of
liability, SBA loan purchase repairs, or fees owed). CMPs may also be
warranted in certain critical circumstances (e.g., where there is a
violation of an order, directive, or agreement, or where there is
fraud). SBA might also use CMPs where there are reporting failures or
delays (e.g., for failure to timely submit complete purchase packages
following SBA Secondary Market purchase). These examples are not all
inclusive. The proposed provision included a list of considerations for
SBA in determining whether and in what amount to assess a CMP. The
considerations are the same as those in 13 CFR 120.465(b) governing
CMPs for reporting failures by SBA Supervised Lenders. Specifically,
the considerations/factors include, but are not limited to, the
following: The gravity (e.g., severity and frequency) of the violation;
history of violations; financial resources and good faith of the 7(a)
Lender; and such other matters as justice may require. The list of
considerations is also very similar to those in the CMP structures of
other Federal agencies (e.g., the OCC, the Federal Deposit Insurance
Corporation, and the Department of Housing and Urban Development's
Mortgagee Review Board). SBA assessment of CMPs, as with SBA's other
enforcement tools, helps to protect the integrity of the 7(a) Loan
Program. In addition to the incorporation of CMPs, proposed Sec.
120.1500 referenced the LOC's role in formal enforcement actions, with
its responsibilities set forth in Delegations of Authority and as
authorized by the Act.
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\11\ Prior to the enactment of the Act, SBA's CMP authority was
limited to certain reporting violations against SBA Supervised
Lenders. 15 U.S.C. 650(j).
---------------------------------------------------------------------------
Eighteen commenters recommended that Sec. 120.1500 state
specifically that the D/OCRM (as opposed to ``SBA'') takes formal
enforcement actions with the approval of the LOC. The commenters
requested this change given statutory language that specifically
authorizes the D/OCRM to take these actions. SBA has considered the
request and agrees to specify that the D/OCRM will take these actions
for the same reasons as set forth above in the discussion of Sec.
120.1300.\12\ The final regulation, therefore, states that the D/OCRM
may undertake formal enforcement action, but does not restrict
delegation.
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\12\ It is noted that the final rule retains the language ``with
the involvement of the LOC . . .'' rather than the requested
language of ``with the approval of the LOC''. This is because the
LOC does not approve all formal enforcement actions. Certain actions
against SBA Supervised Lenders under section 23 of the Small
Business Act are recommended by the LOC and approved by the
Administrator.
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The eighteen commenters also recommended that the section be
amended to reference the ``$250,000 penalty maximum'' provided for by
Congress in the new legislation, with the further provision that this
maximum may be amended from time to time by notice published in the
Federal Register. SBA makes annual adjustments to its civil penalty
amounts in accordance with section 701 of the Federal Civil Penalties
Inflation Adjustment Act Improvements Act of 2015.\13\ SBA agrees with
this recommendation to state the maximum starting point for the penalty
under the statute and is incorporating this change.
[[Page 14778]]
SBA is finalizing the proposal with the two revisions described above.
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\13\ Public Law 114-74 (November 2, 2015).
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K. Section 120.1540--Types of Formal Enforcement Actions--
Intermediaries Participating in the Microloan Program. Proposed Sec.
120.1540, like proposed Sec. 120.1500, included a technical amendment
to include the term ``formal'' before ``enforcement action'' to
distinguish the actions under this section from informal enforcement
actions for Intermediaries, which are set forth in SOP 50 53, ``Lender
Supervision and Enforcement.'' SBA also proposed to update Sec.
120.1540 to delete references to NTAPs. In addition, SBA proposed
revisions to the provision on suspension and pre-revocation sanctions
to more closely conform the section to the suspension provision in
Sec. 120.1500 for SBA Lenders. Specifically, proposed Sec. 120.1540
provided that suspension may include, but is not limited to, suspension
of the authority to make, service, liquidate, and/or litigate SBA
microloans. It also provided that it may include a freeze on an
Intermediary's Microloan Revolving Fund (``MRF'') and Loan Loss Reserve
Fund (``LLRF'') accounts. Finally, proposed Sec. 120.1540 specified
that SBA may undertake an ``immediate'' suspension action (i.e., a
suspension that is effective immediately), and that revocation actions
may include a portfolio surrender.
One commenter recommended that Sec. 120.1540 state specifically
that the D/OCRM (as opposed to ``SBA'') take formal enforcement
actions. SBA has considered the request and has adopted it in the final
rule (with a clarification that the D/OCRM takes that action with the
involvement of the LOC, as appropriate) for the same reasons as set
forth above in the discussion of Sec. 120.1300. The final regulation
does not restrict delegation. SBA received no other comments on Sec.
120.1540. SBA is adopting the remainder of the regulation as proposed.
L. Section 120.1600--General procedures for formal enforcement
actions against SBA Lenders, SBA Supervised Lenders, Other Regulated
SBLCs, Management Officials, Other Persons, and Intermediaries.
Proposed changes to Sec. 120.1600 included a technical amendment to
add the term ``formal'' before enforcement action in this section. It
also included a technical amendment that referenced alternate
procedures under law, including but not limited to, those under current
Sec. 120.465 governing procedures for assessing CMPs against SBA
Supervised Lenders for reporting failures. SBA also proposed to update
Sec. 120.1600 to remove NTAPs from the regulation. In addition, the
section proposed provisions to implement the new legislation on
enforcement action appeals. Specifically, 7(a) Lenders could appeal
most formal enforcement actions to OHA or proceed directly to the
appropriate Federal district court. (The proposed rule excluded those
formal enforcement actions against SBA Supervised Lenders under
Sec. Sec. 120.1500(c) and (d) and 120.465 because the statutory
provisions at 15 U.S.C. 650 provide for separate procedures, which are
covered in Sec. Sec. 120.1600(b) or (c) and 120.465.) Finally, SBA
proposed that any 7(a) Lender appeal to OHA be submitted within 20
calendar days of the final agency decision. As proposed, the
enforcement action would remain in effect pending resolution of any
appeal.
Eighteen commenters requested a 45-business day timeframe for
appeals. The commenters requested 45 business days ``to allow
sufficient time for the lender to assess its situation, hire counsel,
and decide on an appropriate strategy for its appeal.'' SBA proposed a
20-day timeframe because it is the same appeals timeframe that Congress
afforded SBA Supervised Lenders under section 23(f) of the Small
Business Act. While SBA continues to believe that the 20 calendar days
proposed is reasonable, SBA has decided to extend the timeframe to 30
calendar days. Thirty calendar days provide for additional time for a
party to appeal than what was proposed, yet appropriately limits risk
and allows SBA to carry out its oversight responsibilities in a
judicious manner. SBA also believes that 30 days is reasonable, because
at the time a 7(a) Lender would be required to file an appeal, the 7(a)
Lender would have gone through the process associated with a notice of
proposed enforcement action or immediate suspension and should be
knowledgeable of the issues and equipped with the information necessary
to file an appeal. Accordingly, the final rule provides that 7(a)
Lenders have 30 calendar days to appeal to OHA. As indicated above, the
final rule also clarifies that it is the final agency decision on a
formal enforcement action (as opposed to a notice of proposed
enforcement action or immediate suspension \14\) that is appealable
under SBA regulations. SBA received no other comments on this section.
Therefore, SBA is adopting the remainder of this section as proposed.
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\14\ Under 13 CFR 120.1600(a)(2)(ii), an SBA Lender or
Intermediary receiving a notice of proposed enforcement action or
immediate suspension must first exhaust the administrative remedy of
filing a written objection to preserve its objection for an appeal.
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M. Section 134.102--Jurisdiction of OHA. SBA proposed to amend
Sec. 134.102(d), which is currently reserved, to provide OHA
jurisdiction to hear appeals on enforcement actions against 7(a)
Lenders, as contemplated by the Act. Such jurisdiction does not include
appeals for certain actions against SBA Supervised Lenders under Sec.
120.1500(c) and (d) or Sec. 120.465 (including, but not limited to,
Cease and Desist Orders, Suspensions, and Revocations). Procedures for
those actions are provided for separately in 15 U.S.C. 650 and 13 CFR
120.1600(b) and (c) and 120.465 as discussed above. SBA received no
comments specific to Sec. 134.102 jurisdiction. Therefore, SBA is
adopting the regulation as proposed, with revisions to clarify that it
is the final agency decision on a formal enforcement action (as opposed
to a notice of proposed enforcement action or immediate suspension)
that may be appealable.
N. Section 134.205--The appeal file, confidential information, and
protective orders. Section 134.205 governs the appeal file,
confidential information, and protective orders when an action is
appealed to OHA. Paragraph (c) lists types of information in the appeal
file that are exempt from public access. The exempt information
includes, but is not limited to, sensitive, confidential and other
exempt information. SBA proposed to add to the list of exempt
information, ``documents and information covered under Sec. 120.1060
of this title''. SBA received no comments on this section. SBA is
adopting the section as proposed.
O. Part 134--Further Revisions. The proposed rule stated that any
further revision to part 134, if needed, would be contained in a
separate rulemaking. Eighteen commenters contended that in order to
appropriately implement the statutory provision giving lenders the
right to appeal enforcement actions to either the appropriate Federal
district court or to SBA's OHA, it is recommended that SBA immediately
begin the process to promulgate regulations to implement the statutory
OHA appeal process. The commenters further claimed that additional
regulations are necessary to provide guidance and to clarify the
logistics of the OHA appeal process. SBA has considered the comments
and determined that, at this time, the appeal provisions in Sec. Sec.
120.1600 and 134.102, along with OHA's general rules of practice
contained in 13 CFR 134.201 through 134.229, provide a sufficient
framework for the appeal process for
[[Page 14779]]
7(a) Lenders. If SBA determines that there is a need for further
amendment, SBA will promulgate regulations.
Compliance With Executive Orders 12866, 13563, 12988, 13132, 13771, the
Paperwork Reduction Act (44 U.S.C. chapter 35) and the Regulatory
Flexibility Act (5 U.S.C. 601-612).
Executive Order 12866
This final rule implements a proposed rule that the Office of
Management and Budget (OMB) determined was not a ``significant''
regulatory action for the purposes of Executive Order 12866. Although
it was not required, in the interest of transparency SBA included a
Regulatory Impact Analysis (``RIA'') in the proposed rule. See 84 FR
29092, 29096 (June 21, 2019). The non-significant designation has not
changed for this final rule; it is therefore unnecessary to reiterate
the RIA. This is also not a major rule under the Congressional Review
Act, 5 U.S.C. 801 et seq.
Executive Order 13563
Executive Order 13563 supplements and reaffirms the principles and
requirements of Executive Order 12866, including providing the public
notice and an opportunity to comment on regulatory changes. During
2019, the Agency participated in 16 public forums and meetings that
included outreach to hundreds of its lending partners from which it
gained valuable insight for the program. These forums included, but
were not limited to, the National Association of Government Guaranteed
Lenders Technical and Annual Conferences; the National Association for
Development Companies Conference; the Southeast Regional Lenders'
Conference; the America East Lenders Conference; the Florida
Association of Government Guaranteed Lenders' Conference, the Great
Lakes Lenders' Conference; and the Mid-America Lenders' Conference.
Feedback received during these events, in addition to the comments in
response to the proposed rule, helped to inform the final regulations.
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 final 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
final rule has no federalism implications warranting preparation of a
federalism assessment.
Executive Order 13771
This final rule is not subject to Executive Order 13771 because the
rule is not significant under Executive Order 12866.
Paperwork Reduction Act, 44 U.S.C., chapter 35
SBA has determined that this final rule will not impose additional
recordkeeping or reporting requirements under the Paperwork Reduction
Act (``PRA''). The only provision relating to recordkeeping is the
revision to Sec. 120.180, in which SBA clarifies that SBA Lenders and
Intermediaries must maintain documentation to support compliance with
SBA Loan Program Requirements. Recordkeeping requirements associated
with this provision are covered by currently approved information
collections for SBA's business loan programs, including but not limited
to, collections under OMB Control Numbers 3245-0071, Application for
Section 504 Loan (SBA Forms 1244 and 2450); 3245-0074, Certified
Development Company (CDC) Annual Report Guide (SBA Form 1253); 3245-
0080 and 0178, Statement of Personal History (SBA Forms 1081 and 912);
3245-0131, Transaction Report on Loans Serviced by Lender (SBA Form
172); 3245-0132, Lender's Transcript of Account (SBA Form 1149); 3245-
0201, Compensation Agreement (SBA Form 159); 3245-0346, PCLP Quarterly
Loan Loss Reserve Report and PCLP Guarantee Request (SBA Forms 2233 and
2234 Parts A, B, and C); 3245-0348, Borrower Information Form (SBA Form
1919), Lenders Application for Guaranty (SBA Form 1920), Religious
Eligibility Worksheet (SBA Form 1971), 7(a) Loan Post Approval Action
Checklist (SBA Form 2237); 3245-0352, Microloan Program Electronic
Reporting System (MPERS) (MPERsystem); and 3245-0365, SBA Lender,
Microloan Intermediary and NTAP Reporting Requirements. Prudent lenders
should already be maintaining such documentation.
Regulatory Flexibility Act, 5 U.S.C. 601-612
When an agency issues a proposed rulemaking, the Regulatory
Flexibility Act (``RFA''), 5 U.S.C. 601-612, requires the agency to
``prepare and make available for public comment an initial 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 rulemaking is not
expected to have a significant economic impact on a substantial number
of small entities.
In the proposed rule, SBA certified that the rulemaking would not
have a significant economic impact on a substantial number of small
entities. SBA invited comment from the public on that certification.
SBA received one short comment specific to economic impact. That
comment, however, primarily addressed 7(a) program requirements in
general rather than those contained in the proposed rule. No other
comments were received on that topic.
The changes to current regulations in the final rule would
generally fall into one of two categories: (i) Technical amendments/
clarifications, or (ii) codifications of the new legislation or
existing practices. Examples of the technical amendments and
clarifications include the change to: The definition for Federal
Financial Institution Regulator in Sec. 120.10 to delete reference to
the Office of Thrift Supervision, which was merged into other Federal
banking agencies; the removal of references to NTAPs in Sec. Sec.
120.1000, 120.1010, 120.1015, 120.1025, 120.1050, 120.1051, 120.1055,
120.1060, 120.1425, 120.1540, and 120.1600 as SBA has not issued
technical assistance grants to NTAPs in many years and such assistance
is being administered directly by Microloan Intermediaries; and the
incorporation into Sec. 120.180 of the current requirement that
Intermediaries must comply with the Microloan Program requirements.
Although the technical corrections/clarifications portion of the
final rule might affect some of the approximately 3,500 7(a) Lenders
(approximately 2000 of which are small); 209 CDCs (all of which are
small); and 147 Microloan Intermediaries (all of which are small), SBA
does not believe the technical corrections and clarifications in the
final rule will have a significant economic impact on those small
entities. Rather, the clarifications to some extent might reduce the
burdens by better informing SBA Lenders and Intermediaries of how the
Agency may apply a regulation or requirement. As such, SBA Lenders and
Intermediaries may potentially avoid the need to spend extra time and
resources interpreting the regulations.
[[Page 14780]]
The second category consists of regulatory changes that codify or
implement the new legislation or existing practices. Examples of the
regulatory changes that codify or implement the new legislation
include: The incorporation of the new statutory definition for credit
elsewhere in Sec. 120.101; the revision to the timeframe from 30
calendar days to 45 business days for an SBA Lender or Intermediary to
respond to findings and corrective actions in Sec. 120.1055; the
inclusion of an OHA appeal for a 7(a) Lender enforcement action in
Sec. Sec. 120.1300, 120.1600, and 134.102; and the addition of CMPs
for a 7(a) Lender in Sec. 120.1500(b). Examples of regulatory changes
that codify current practices and procedures include: The addition of a
timeframe (90 days) for implementation of corrective actions in Sec.
120.1055; the inclusion of voluntary agreements and Board Resolutions
as informal enforcement actions in Sec. 120.1300; and the adoption of
the same grounds for informal as formal enforcement actions for an SBA
Lender in Sec. 120.1400.
While a few of the codifying provisions might have the potential of
a significant economic impact, SBA does not expect them to impact a
substantial number of small businesses. In particular, SBA does not
consider the changes to the enforcement regulations, including the
incorporation of a CMP for 7(a) Lenders in Sec. 120.1500(b), to be
burdensome to a substantial number of small lenders. This is because
SBA has historically taken only a small number of enforcement actions,
in part because the Agency initially seeks to educate and work with SBA
Lenders and Intermediaries using graduated processes for the entity to
reduce risk and come into compliance before taking any enforcement
action. Specifically, SBA educates SBA Lenders and Intermediaries on
SBA Loan Program Requirements through notices, webinar and
teleconference training venues, and at conferences. In addition, when
SBA identifies risk or noncompliance through monitoring or reviews, SBA
generally seeks to work with the SBA Lender or Intermediary through the
corrective action process or increased supervision to address SBA
concerns. As a result, most SBA Lenders and Intermediaries come into
compliance and avoid facing enforcement actions. SBA generally takes
enforcement action only when the entity cannot sufficiently reduce
risk, cannot correct serious noncompliance, or does not have the
willingness or ability to correct. In FY 2019, SBA took five
enforcement or other related actions against SBA Lenders and
Intermediaries, which is not a substantial number.
One of the final rule changes to SBA's current enforcement
regulations is the implementation of the statutory authority to charge
a CMP. The CMP provisions are applicable only to 7(a) Lenders and by
statute can be assessed in an enforcement action up to $250,000. The
CMP provisions in the final rule provide flexibility to allow SBA to
take into account factors, including the financial resources of a 7(a)
Lender (especially for small lenders), in determining whether and in
what amount to assess a CMP. SBA believes that the CMP provisions will
not have a significant economic impact on a substantial number of small
7(a) Lenders, as most 7(a) Lenders generally comply with SBA Loan
Program Requirements and given that only five enforcement or other
related actions were taken against 7(a) Lenders in FY2019. In FY 2020,
SBA does not anticipate that it will need to assess CMPs with any
frequency. Further, given the flexibility in determining the amount of
the penalty, even if imposed, the proposed penalty could be assessed in
an amount much less than $250,000.
For the reasons stated above, SBA certifies that this final action
will not have a significant economic impact on a substantial number of
small entities.
List of Subjects
13 CFR Part 120
Community development, Loan programs--business, Small businesses.
13 CFR Part 134
Appeal procedures, Confidential business information.
For the reasons stated in the preamble, SBA is amending 13 CFR
parts 120 and 134 as follows:
PART 120--BUSINESS LOANS
0
1. The authority citation for part 120 continues to read as follows:
Authority: 15 U.S.C. 634(b) (6), (b) (7), (b) (14), (h), and
note, 636(a), (h) and (m), 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
2. Amend Sec. 120.10 by revising the definitions for ``Federal
Financial Institution Regulator'', ``Lender Oversight Committee'', and
``Loan Program Requirements'' to read as follows:
Sec. 120.10 Definitions.
* * * * *
Federal Financial Institution Regulator is the Federal banking
regulator of a 7(a) Lender and may include the Federal Deposit
Insurance Corporation, the Federal Reserve Board, the Office of the
Comptroller of the Currency, the National Credit Union Administration,
and the Farm Credit Administration.
* * * * *
Lender Oversight Committee (LOC) is a committee established within
SBA by legislation, which meets at least quarterly, and which has the
membership and duties set forth in section 48 of the Small Business Act
as further outlined in Delegations of Authority published in the
Federal Register. The LOC's duties include, but are not limited to,
reviewing (in an advisory capacity) any lender oversight, portfolio
risk management, or program integrity matters brought by the Director
of the Office of Credit Risk Management (D/OCRM), and voting on formal
enforcement action recommendations.
* * * * *
Loan Program Requirements or SBA Loan Program Requirements are
requirements imposed upon Lenders, CDCs, or Intermediaries by statute;
SBA and applicable government-wide regulations; any agreement the
Lender, CDC, or Intermediary has executed with SBA; SBA Standard
Operating Procedures (SOPs); Federal Register notices; official SBA
notices and forms applicable to the 7(a) Loan Program, 504 Loan Program
or Microloan Program; and loan authorizations, as such requirements are
issued and revised by SBA from time to time. For CDCs, this term also
includes requirements imposed by Debentures, as that term is defined in
Sec. 120.802. For Intermediaries, this term also includes requirements
imposed by promissory notes, collateral documents, and grant
agreements.
* * * * *
0
3. Amend Sec. 120.101 by revising the first and second sentences to
read as follows:
Sec. 120.101 Credit not available elsewhere.
SBA provides business loan assistance only to applicants for whom
the desired credit is not otherwise available on reasonable terms from
non-Federal, non-State, and non-local government sources. Accordingly,
SBA requires the Lender or CDC to certify or otherwise show that the
desired credit is unavailable to the applicant on reasonable terms and
conditions from non-Federal, non-State, and non-local government
sources without SBA assistance, taking into consideration factors
associated with conventional lending practices, including: The business
industry of the loan applicant;
[[Page 14781]]
whether the loan applicant has been in operation two years or less; the
adequacy of collateral available to secure the loan; the loan term
necessary to reasonably assure repayment of the loan from actual or
projected business cash flow; and any other factor relating to the
particular loan application that cannot be overcome except through
obtaining a Federal loan guarantee under prudent lending standards. * *
*
0
4. Revise Sec. 120.180 to read as follows:
Sec. 120.180 Compliance with Loan Program Requirements.
SBA Lenders and Intermediaries must comply and maintain familiarity
with Loan Program Requirements for the 7(a) Loan Program, 504 Loan
Program, and the Microloan Program, as applicable, and as such
requirements are revised from time to time. Loan Program Requirements
in effect at the time that an SBA Lender or Intermediary takes an
action in connection with a particular loan govern that specific
action. For example, although loan closing requirements in effect when
an SBA Lender closes a loan will govern the closing actions, an SBA
Lender's liquidation actions on the same loan are subject to the
liquidation requirements in effect at the time that a liquidation
action is taken. An SBA Lender or Intermediary must maintain sufficient
documentation to demonstrate that Loan Program Requirements have been
satisfied.
0
5. Revise Sec. 120.1000 to read as follows:
Sec. 120.1000 Risk-Based Lender Oversight.
(a) Risk-Based Lender Oversight. SBA monitors, supervises,
examines, regulates, and enforces laws against SBA Supervised Lenders
and the SBA operations of SBA Lenders and Intermediaries.
(b) Scope. Most rules and standards set forth in this subpart apply
to SBA Lenders as well as Intermediaries; however, SBA has separate
regulations for enforcement grounds and formal enforcement actions for
Intermediaries at Sec. Sec. 120.1425 and 120.1540.
Sec. 120.1010 [Amended]
0
6. Amend Sec. 120.1010 by removing the phrase ``SBA Lender,
Intermediary, and NTAP'' wherever it appears and adding in its place
the phrase ``SBA Lender and Intermediary''.
Sec. 120.1015 [Amended]
0
7. Amend Sec. 120.1015(a) by removing the phrase ``SBA Lenders,
Intermediaries, and NTAPs'' and adding in its place the phrase ``SBA
Lenders and Intermediaries''.
0
8. Revise Sec. 120.1025 to read as follows:
Sec. 120.1025 Monitoring.
SBA may conduct monitoring of SBA Lenders and Intermediaries
including, but not limited to, SBA Lenders' or Intermediaries' self-
assessments.
Sec. 120.1050 [Amended]
0
9. Amend Sec. 120.1050(c) by removing the phrase ``and NTAPs''
wherever it appears.
0
10. In Sec. 120.1051, revise the first sentence of the introductory
text and paragraph (a) to read as follows:
Sec. 120.1051 Frequency of reviews and examinations.
SBA may conduct reviews and examinations of SBA Lenders and
Intermediaries on a periodic basis. * * *
(a) Results of monitoring, including an SBA Lender's or
Intermediary's Risk Rating;
* * * * *
0
11. Amend Sec. 120.1055 by:
0
a. Revising paragraphs (a) and (b); and
0
b. In paragraph (d):
0
i. Removing the phrase ``SBA Lender, Intermediary, or NTAP'' wherever
it appears and adding in its place the phrase ``SBA Lender or
Intermediary'';
0
ii. Removing ``Subpart I'' and adding in its place ``this subpart'';
and
0
iii. Removing the reference ``Sec. 120.1500 through Sec. 120.1540''
wherever it appears and adding in its place the phrase ``this
subpart''.
The revisions to read as follows:
Sec. 120.1055 Review and examination results.
(a) Written Reports. SBA will provide an SBA Lender and
Intermediary a copy of SBA's written report prepared as a result of the
SBA Lender or Intermediary review or examination (``Report''). SBA will
provide the Report generally within 60 business days following SBA's
conclusion of the review/examination unless SBA notifies the SBA Lender
or Intermediary of a later date and the reason for the delay. The
Report may contain findings, conclusions, corrective actions, and
recommendations. Each director (or manager, in the absence of a Board
of Directors) of the SBA Lender or Intermediary, in keeping with his or
her responsibilities, must become fully informed regarding the contents
of the Report.
(b) Response to review and examination Reports. SBA Lenders and
Intermediaries must respond to Report findings, recommendations, and
corrective actions, if any, in writing to SBA and, if requested, submit
proposed corrective actions and/or a capital restoration plan. An SBA
Lender or Intermediary must respond within 45 business days from the
date the Report is received unless SBA notifies the SBA Lender or
Intermediary in writing that the response, proposed corrective actions
or capital restoration plan is to be filed within a different time
period (either shortened or extended in SBA's discretion). The SBA
Lender or Intermediary response must address each finding,
recommendation, and corrective action. In proposing a corrective action
or capital restoration plan, the SBA Lender or Intermediary must detail
the steps it will take to correct the finding(s); the time within which
each step will be taken; the timeframe for accomplishing the entire
corrective action plan; and the person(s) or department at the SBA
Lender or Intermediary charged with carrying out the corrective action
or capital restoration plan, as applicable. In addition, SBA Lenders
and Intermediaries must implement corrective actions within 90 calendar
days from the date the Report or SBA's letter requiring corrective
action is received, unless SBA provides written notice of another
timeframe. For purposes of this paragraph (b), a Report will be deemed
to have been received on the date it was emailed to the last known
email address of the SBA Lender or Intermediary unless the SBA Lender
or Intermediary can provide compelling evidence to the contrary.
* * * * *
Sec. 120.1060 [Amended]
0
12. Amend Sec. 120.1060 by:
0
a. Removing the phrase ``SBA Lender, Intermediary, or NTAP'' wherever
it appears and adding in its place the phrase ``SBA Lender or
Intermediary'';
0
b. Removing the phrase ``SBA Lender, Intermediary, and NTAP'' wherever
it appears and adding in its place the phrase ``SBA Lender and
Intermediary'';
0
c. Removing the phrase ``SBA Lenders, Intermediaries, and NTAPs'' and
adding in its place the phrase ``SBA Lenders and Intermediaries''; and
0
d. Removing the phrase ``SBA Lender's, Intermediary's, or NTAP's'' and
adding in its place the phrase ``SBA Lender's or Intermediary's''.
0
13. Add Sec. 120.1300 immediately following the undesignated center
heading ``Enforcement Actions'' to read as follows:
Sec. 120.1300 Informal enforcement actions--7(a) Lenders.
(a) Upon a determination that the grounds in Sec. 120.1400 exist,
the D/
[[Page 14782]]
OCRM may undertake, in his/her discretion, one or more of the informal
enforcement actions listed in this section and is not restricted from
delegating as appropriate. SBA will consider the severity or frequency
of the violation or action triggering the ground and the circumstances
in determining whether and what type of informal action to take.
Circumstances that may lead to SBA taking informal enforcement action
rather than formal enforcement action include, for example, when
problems are narrow in scope and are correctible and SBA is confident
of a 7(a) Lender's Board of Directors (``Board'') and management
commitment and ability to correct; where violations are less frequent
or less severe but warrant enforcement; or while more fully assessing
risk.
(b) Informal enforcement actions include, but are not limited to:
(1) An SBA supervisory letter. The letter may discuss serious or
persistent supervisory concerns, as determined by SBA, and expected
corrective action by the 7(a) Lender. Supervisory letters include, for
example, Notices of Material Non-Compliance;
(2) Mandatory training. SBA may require a 7(a) Lender to complete
training to address certain findings, weaknesses, and deficiencies;
(3) A commitment letter or Board resolution. SBA may require a 7(a)
Lender to submit a commitment letter or Board resolution, satisfactory
to SBA, signed by the 7(a) Lender's Board on behalf of the entity that
may:
(i) Include specific written commitments to take corrective actions
in response to the 7(a) Lender's acknowledged deficiencies;
(ii) Identify the person(s) responsible for taking the corrective
action; and
(iii) Set forth the timeframe for taking the corrective action. The
document may be drafted by SBA or the 7(a) Lender;
(4) Agreements. SBA may request that a 7(a) Lender enter into a
written agreement with, and drafted by, SBA to address and correct
identified weaknesses and/or limit or mitigate risk. The agreement may
provide, for example, that a 7(a) Lender take certain actions or
refrain from certain actions; and
(5) Other informal enforcement actions. Others as SBA determines
appropriate on a case by case basis.
(c) A 7(a) Lender may appeal informal enforcement actions to the
appropriate Federal district court or SBA's Office of Hearings and
Appeals (OHA) within 20 calendar days of the date of the decision, and
in the event of an OHA appeal, OHA will issue its decision in
accordance with part 134 of this title. The enforcement action will
remain in effect pending resolution of the appeal, if any. SBA is not
precluded from taking one or more formal enforcement actions under
Sec. 120.1500, or as otherwise authorized by law, while an appeal of
an informal enforcement action is pending.
0
14. Amend Sec. 120.1400 by:
0
a. Revising the first sentence and adding a sixth sentence in paragraph
(b);
0
b. Revising the first sentence in paragraph (c)(6) and paragraph
(c)(9);
0
c. Removing the word ``and'' at the end of paragraph (c)(10); and
0
d. Revising paragraphs (c)(11) and (12), (d)(1)(iii) and (iv), and
(d)(3)(i) and (ii).
The revisions read as follows:
Sec. 120.1400 Grounds for enforcement actions--SBA Lenders.
* * * * *
(b) Scope. SBA may undertake one or more of the enforcement actions
listed in Sec. Sec. 120.1300 and 120.1500, or as otherwise authorized
by law, if SBA determines that the grounds applicable to the
enforcement action exist. * * * SBA considers the severity or frequency
of a violation in determining whether to take an enforcement action and
the type of enforcement action to take.
(c) * * *
(6) Engaging in a pattern of uncooperative behavior or taking an
action that SBA determines is detrimental to the integrity or
reputation of an SBA program, that undermines management or
administration of a program, or that is not consistent with standards
of good conduct. * * *
(9) Any other reason that SBA determines may increase SBA's
financial risk (for example, repeated Less Than Acceptable Risk Ratings
(generally in conjunction with other indicators of increased financial
risk); failure to properly oversee Agent activity (``Agent'' as defined
in part 103 of this title); or, indictment on felony or fraud charges
of an officer, key employee, or loan agent involved with SBA loans for
the SBA Lender);
* * * * *
(11) For immediate suspension of all SBA Lenders from delegated
authorities--upon a determination by SBA that:
(i) One or more of the grounds in paragraph (c) or (f) of this
section, as applicable, exists; and
(ii) Immediate action is needed to protect the interests of the
Federal Government (such as where there is risk of immediate harm or
loss, a significant program integrity concern, or clear evidence of
conduct indicating a lack of business integrity); and
(12) For immediate suspension of all SBA Lenders (except SBA
Supervised Lenders, which are covered under paragraph (d)(2) of this
section) from the authority to participate in the SBA loan program,
including the authority to make, service, liquidate, or litigate 7(a)
or 504 loans--upon a determination by SBA that:
(i) One or more of the grounds in paragraph (c) or (f) of this
section, as applicable, exists; and
(ii) Immediate action is needed to protect the interests of the
Federal Government (such as where there is risk of immediate harm or
loss, a significant program integrity concern, or clear evidence of
conduct indicating a lack of business integrity).
(d) * * *
(1) * * *
(iii) A willful or repeated violation of SBA Loan Program
Requirements; or
(iv) A willful or repeated violation of any condition imposed by
SBA with respect to any application or request with SBA; or
* * * * *
(3) * * *
(i) A violation of SBA Loan Program Requirements; or
(ii) Where an SBA Supervised Lender or Other Person engages in or
is about to engage in any acts or practices that will violate SBA Loan
Program Requirements.
* * * * *
0
15. Amend Sec. 120.1425 by:
0
a. Revising the section heading and paragraphs (a) and (b);
0
b. In paragraph (c) introductory text:
0
i. Removing the dash after the paragraph heading and adding a period in
its place; and
0
ii. Removing the phrase ``Intermediary or NTAP'' wherever it appears
and adding in its place the phrase ``Intermediary'';
0
c. Revising paragraph (c)(1);
0
d. Removing the phrase ``Intermediaries and NTAPs'' and adding in its
place the phrase ``Intermediaries'' in paragraph (c)(2)(i);
0
e. Revising paragraphs (c)(2)(vii) and (viii);
0
f. Adding paragraphs (c)(2)(ix) and (x) and (c)(3) through (7);
0
g. Removing paragraphs (d) and (e).
The revisions and additions read as follows:
Sec. 120.1425 Grounds for formal enforcement actions--Intermediaries
participating in the Microloan Program.
(a) Agreement. By participating in the SBA Microloan Program,
Intermediaries
[[Page 14783]]
automatically agree to the terms, conditions, and remedies in this part
as if fully set forth in their participation agreement and all other
agreements jointly executed by the Intermediary and SBA.
(b) Scope. SBA may undertake one or more of the formal enforcement
actions listed in Sec. 120.1540, or as otherwise authorized by law, if
SBA determines that any of the grounds listed in paragraph (c) of this
section exist.
(c) * * *
(1) Failure to comply materially with any requirement imposed by
Loan Program Requirements;
(2) * * *
(vii) Maintain a staff trained in Microloan Program issues and Loan
Program Requirements;
(viii) Maintain the financial ability to sustain the Intermediary's
operations (including, but not limited to, adequate capital), as
determined by SBA;
(ix) Satisfactorily provide in-house technical assistance to
Microloan borrowers and prospective Microloan borrowers; or
(x) Close and fund the required number of microloans per year under
Sec. 120.716;
(3) Failure within the time period specified to correct an
underwriting, closing, disbursing, servicing, liquidation, litigation,
or reporting deficiency, or failure in any material respect to take
other corrective action, after receiving notice from SBA of a
deficiency and the need to take corrective action;
(4) Engaging in a pattern of uncooperative behavior or taking an
action that SBA determines is detrimental to the integrity or
reputation of the Microloan Program, that undermines management or
administration of the program, or that is not consistent with standards
of good conduct. Prior to issuing a notice of a proposed formal
enforcement action or immediate suspension under Sec. 120.1540 based
upon the grounds discussed in this paragraph (c)(4), SBA must send
prior written notice to the Intermediary explaining why the
Intermediary's actions were uncooperative, detrimental to the program,
undermined SBA's management of the program, or were not consistent with
standards of good conduct. The prior notice must also state that the
Intermediary's actions could give rise to a specified formal
enforcement action, and provide the Intermediary with a reasonable time
to cure the deficiency before any further action is taken;
(5) Any other reason that SBA determines may increase SBA's
financial or program risk (for example, repeated Less Than Acceptable
Risk Ratings (generally in conjunction with other indicators of
increased risk) or indictment on felony or fraud charges of an officer,
key employee, or loan agent involved with SBA programs for the
Intermediary);
(6) For immediate suspension of an Intermediary--upon a
determination by SBA that:
(i) One or more of the grounds in paragraph (c) of this section
exists; and
(ii) Immediate action is needed to protect the interests of the
Federal Government (such as where there is risk of immediate harm or
loss, a significant program integrity concern, or clear evidence of
conduct indicating a lack of business integrity); and
(7) As otherwise authorized by law.
0
16. Amend Sec. 120.1500 by revising the section heading, the
introductory text, paragraph (a) heading, paragraph (b), paragraph (c)
introductory text heading, paragraph (c)(4), paragraph (d) introductory
text heading, and paragraph (e) introductory text heading to read as
follows:
Sec. 120.1500 Types of formal enforcement actions--SBA Lenders.
Upon a determination that the grounds set forth in Sec. 120.1400
exist, the D/OCRM may undertake, in his/her discretion (and with the
involvement of the LOC as appropriate and consistent with its assigned
responsibilities), one or more of the following formal enforcement
actions for each of the types of SBA Lender listed, and is not
restricted from delegating as appropriate. SBA will consider the
severity or frequency of the violation or action and the circumstances
triggering the ground in determining whether and what type of
enforcement action to take. SBA will take formal enforcement action in
accordance with procedures set forth in Sec. 120.1600. If formal
enforcement action is taken under this section and the SBA Lender fails
to implement required corrective action in any material respect within
the required timeframe in response to the formal enforcement action,
the D/OCRM may take further enforcement action, as authorized by law.
SBA's decision to take a formal enforcement action will not, by itself,
invalidate a guaranty previously provided by SBA.
(a) Formal enforcement actions for all SBA Lenders. * * *
(b) Formal enforcement actions specific to 7(a) Lenders. In
addition to those formal enforcement actions applicable to all SBA
Lenders, SBA may take the following actions:
(1) Secondary market suspension or revocation (other than temporary
suspension and revocation under Sec. 120.660). SBA may suspend or
revoke a 7(a) Lender's authority to sell or purchase loans or
certificates in the Secondary Market; or
(2) Civil monetary penalty (other than SBA Supervised Lender civil
monetary penalty under Sec. 120.465). SBA may assess a civil monetary
penalty against a 7(a) Lender. The civil monetary penalty will be in an
amount not to exceed the maximum published in the Federal Register from
time to time, which will be $250,000 plus any increases required under
law. In determining whether to assess a civil monetary penalty and, if
so, in what amount, SBA may consider, for example, the following: The
gravity (e.g., severity and frequency) of the violation; the history of
previous violations; the financial resources and good faith of the 7(a)
Lender; and any other matters as justice may require.
(c) Formal enforcement actions specific to SBA Supervised Lenders
and Other Persons (except Other Regulated SBLCs). * * *
(4) Civil monetary penalties for report filing failure under Sec.
120.465. SBA may seek civil penalties, in accordance with Sec.
120.465, against an SBA Supervised Lender that fails to file any
regular or special report by its due date as specified by regulation or
SBA written directive.
(d) Formal enforcement actions specific to SBLCs. * * *
(e) Formal enforcement actions specific to CDCs. * * *
17. Revise Sec. 120.1540 to read as follows:
Sec. 120.1540 Types of formal enforcement actions--Intermediaries
participating in the Microloan Program.
Upon a determination that any ground set out in Sec. 120.1425
exists, the D/OCRM may undertake, in his/her discretion (and with the
involvement of the LOC as appropriate and consistent with its assigned
responsibilities), one or more of the following formal enforcement
actions against an Intermediary, and is not restricted from delegating
as appropriate:
(a) Suspension. SBA may suspend an Intermediary's authority to
participate in the Microloan Program, which may include, but is not
limited to, the authority to make, service, liquidate, and/or litigate
SBA microloans, and the imposition of a freeze on the Intermediary's
MRF and LLRF accounts.
(b) Immediate suspension. SBA may suspend, effective immediately,
an Intermediary's authority to participate in the Microloan Program,
which may include, but is not limited to, the
[[Page 14784]]
authority to make, service, liquidate, and/or litigate SBA microloans,
and the imposition of an immediate freeze on the Intermediary's MRF and
LLRF accounts. Section 120.1425(c)(6) sets forth the grounds for SBA
Microloan Program immediate suspension of an Intermediary.
(c) Revocation. SBA may revoke an Intermediary's authority to
participate in the Microloan Program which may include, but is not
limited to:
(1) Removal from the program;
(2) Liquidation of the Intermediary's MRF and LLRF accounts by SBA,
and application of the liquidated funds to any outstanding balance owed
to SBA;
(3) Payment of outstanding debt to SBA by the Intermediary;
(4) Forfeiture or repayment of any unused grant funds by the
Intermediary;
(5) Debarment of the organization from receipt of Federal funds
until loan and grant repayments are met; and
(6) Surrender of possession of Intermediary's SBA microloan
portfolio to SBA, with the microloan portfolio and all associated
rights transferred on a permanent basis to SBA, in accordance with
SBA's rights as a secured creditor.
(d) Other actions. Such other actions available under law.
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18. Amend Sec. 120.1600 by:
0
a. Revising the section heading;
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b. Removing the phrase ``SBA Lender, Intermediary, or NTAP'' wherever
it appears and adding in its place the phrase ``SBA Lender or
Intermediary'';
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c. Removing the phrase ``SBA Lender, Intermediary, or NTAP's'' wherever
it appears and adding in its place the phrase ``SBA Lender's or
Intermediary's'';
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d. Revising the introductory text to paragraph (a);
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e. Adding the word ``formal'' before the word ``enforcement'' wherever
it appears in paragraphs (a)(1) through (4);
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f. Removing the phrase ``SBA Lender, Intermediary, NTAP or SBA,'' and
adding in its place the phrase ``SBA Lender, Intermediary, or SBA,'' in
paragraph (a)(1)(ii);
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g. Removing the phrase ``final decision'' wherever it appears and
adding in its place the phrase ``final agency decision'' in paragraphs
(a)(2) through (4);
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h. Removing the phrase ``SBA Lender, Intermediary, NTAP or other
parties'' and adding in its place the phrase ``SBA Lender, Intermediary
or other parties'' in paragraph (a)(3)(iii);
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i. Revising the headings for paragraphs (a)(3) and (4) and paragraph
(a)(5); and
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j. Adding the word ``formal'' before the word ``enforcement'' in the
headings for paragraphs (b) and (c).
The revisions read as follows:
Sec. 120.1600 General procedures for formal enforcement actions
against SBA Lenders, SBA Supervised Lenders, Other Regulated SBLCs,
Management Officials, Other Persons, and Intermediaries.
(a) In general. Except as otherwise set forth for the formal
enforcement actions listed in paragraphs (a)(6), (b), and (c) of this
section and in Sec. 120.465, SBA will follow the procedures listed in
this section.
* * * * *
(3) SBA's notice of final agency decision on a formal enforcement
action where an SBA Lender or Intermediary filed objection to the
proposed action or immediate suspension. * * *
(4) SBA's notice of final agency decision on a formal enforcement
action where no filed objection or untimely objection not considered. *
* *
(5) Appeals. An SBA Lender or Intermediary may appeal the final
agency decision to the appropriate Federal district court.
Alternatively, 7(a) Lenders may appeal such decisions (except for
decisions against SBA Supervised Lenders that are covered by procedures
in Sec. 120.1600(b) or (c) or Sec. 120.465) to SBA's Office of
Hearings and Appeals (``OHA'') within 30 calendar days of the date of
the decision, and in the event of such an appeal, OHA will issue its
decision in accordance with part 134 of this title. The enforcement
action will remain in effect pending resolution of the appeal, if any.
* * * * *
PART 134--RULES OF PROCEDURE GOVERNING CASES BEFORE THE OFFICE OF
HEARINGS AND APPEALS
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19. The authority citation for part 134 is revised to read as follows:
Authority: 5 U.S.C. 504; 15 U.S.C. 632, 634(b)(6), 634(i),
637(a), 648(l), 656(i), 657t, and 687(c); 38 U.S.C. 8127(f); E.O.
12549, 51 FR 6370, 3 CFR, 1986 Comp., p. 189.
Subpart J issued under 38 U.S.C. 8127(f)(8)(B).
Subpart K issued under 38 U.S.C. 8127(f)(8)(A).
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20. Amend Sec. 134.102 by adding paragraph (d) to read as follows:
Sec. 134.102 Jurisdiction of OHA.
* * * * *
(d) 7(a) Lender appeals from informal enforcement actions and final
agency decisions on 7(a) Lender formal enforcement actions, and any
other appeal that is specifically authorized by part 120 of this title,
but not including appeals of actions against SBA Supervised Lenders
under Sec. 120.1600(b) or (c) or under Sec. 120.465;
* * * * *
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21. Amend Sec. 134.205 by revising paragraph (c) to read as follows:
Sec. 134.205 The appeal file, confidential information, and
protective orders.
* * * * *
(c) Public access. Except for confidential business and financial
information; source selection sensitive information; income tax
returns; documents and information covered under Sec. 120.1060 of this
title; and other exempt information, the appeal file is available to
the public pursuant to the Freedom of Information Act (FOIA), 5 U.S.C.
552.
* * * * *
Jovita Carranza,
Administrator.
[FR Doc. 2020-04663 Filed 3-13-20; 8:45 am]
BILLING CODE P