SBA Supervised Lenders Application Process, 78205-78215 [2020-26307]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 85, Number 234 (Friday, December 4, 2020)]
[Rules and Regulations]
[Pages 78205-78215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26307]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AH04


SBA Supervised Lenders Application Process

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
amending the regulations applicable to Small Business Lending Companies 
(SBLCs) and state-regulated lenders (Non-Federally Regulated Lenders 
(NFRLs) (collectively referred to as SBA Supervised Lenders). The key 
amendments to the regulations include a new application and review 
process for SBA Supervised Lenders, including for transactions 
involving a change of ownership or control. Other amendments to the 
regulations include updating the minimum capital maintenance 
requirements, clarifying the factors SBA will consider in its 
evaluation of an SBA Supervised Lender application and limiting the 
7(a) lending area for NFRLs.

DATES: This rule is effective January 4, 2021.

FOR FURTHER INFORMATION CONTACT: Paul Kirwin, Chief, SBA Supervised 
Lender Oversight Team, Office of Credit Risk Management, Office of 
Capital Access, U.S. Small Business Administration, 409 3rd Street SW, 
Washington, DC 20416; telephone: (202) 205-7261; email: 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

    The 7(a) Loan Program is a business loan program authorized by 
section 7(a) of the Small Business Act (15 U.S.C. 636(a)) and is 
governed primarily by the regulations in part 120 of title 13 of the 
Code of Federal Regulations (CFR). The core mission of the 7(a) Loan 
Program is to provide SBA-guaranteed financial assistance to small 
businesses that lack access to capital on reasonable terms and 
conditions to support our nation's economy.
    Most Lenders participating in the 7(a) Loan Program are depository 
institutions that have a primary Federal Financial Institution 
Regulator (as defined in 13 CFR 120.10) that oversees the Lender's 
lending activities. SBA has statutory authority under section 7(a)(17) 
of the Small Business Act to authorize non-federally regulated entities 
to make 7(a) loans, including entities that have state regulators. 
Under this authority, SBA has authorized SBA Supervised Lenders to make 
loans in the 7(a) Loan Program. SBA Supervised Lenders are defined in 
13 CFR 120.10 to include SBLCs and NFRLs, and are subject to 
regulation, oversight, and enforcement by SBA.
    SBLCs are non-depository lending institutions that are authorized 
only to make loans pursuant to section 7(a) of the Small Business Act 
and loans to Intermediaries in SBA's Microloan program. SBLCs are 
regulated, supervised, and examined solely by SBA, except for the 
subset of SBLCs defined as Other Regulated SBLCs in 13 CFR 120.10. SBA 
imposed a moratorium on issuing additional SBA lending

[[Page 78206]]

authorities (referred to as SBLC Licenses) to SBLCs in 1982. Currently, 
there are fourteen (14) SBLCs with the authority to make 7(a) loans up 
to the maximum loan amount allowed under the Small Business Act.\1\ An 
entity may purchase one of the fourteen (14) SBLC Licenses from an 
existing SBLC with SBA's prior written approval.
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    \1\ SBA waived certain regulations for the purpose of permitting 
mission-oriented lenders to participate in SBA's Community Advantage 
Pilot Program (referred to as CA Lenders), a pilot program within 
the 7(a) Loan Program. Each CA Lender is identified as either an 
SBLC or NFRL, depending on whether the lender is subject to 
regulation by a state. CA Lenders are limited to making loans in the 
CA Pilot Program, which generally requires a CA Lender to make loans 
to underserved markets (e.g., low-to-moderate income communities, 
rural areas, opportunity zones, veteran-owned businesses) and in an 
amount not to exceed $250,000. The CA Pilot Program is governed by 
all regulations applicable to the 7(a) Loan Program generally and to 
SBA Supervised Lenders specifically unless waived or modified in the 
Federal Register Notices published in connection with the CA Pilot 
Program. As indicated in the proposed rule, the revisions in this 
final rule do not apply to the CA Pilot Program. For more 
information about the CA Pilot Program please refer to the CA 
Participant Guide, Version 6.0 (June 15, 2020), available at https://www.sba.gov/document/support-community-advantage-participant-guide.
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    NFRLs are business concerns that are subject to regulation, 
supervision and oversight by a state regulator that must be 
satisfactory to SBA. By definition, an NFRL's lending activities are 
not regulated by a Federal Financial Institution Regulator. NFRLs are 
typically organized as state licensed Business and Industrial 
Development Companies (BIDCOs) and may include other types of state-
regulated lending institutions, such as non-profit corporations or 
financial institutions without Federal deposit insurance or share 
insurance protection.\2\
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    \2\ This final rule does not apply to NFRLs authorized to make 
Paycheck Protection Program (PPP) loans under SBA Form 3507. For 
more information about PPP please refer to the information available 
on SBA's website at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.
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    To become an SBA Supervised Lender, an applicant must be qualified 
as determined by SBA in its sole discretion. An entity interested in 
becoming an SBA Supervised Lender must submit an application to SBA 
containing the information specified in SBA's Standard Operating 
Procedures 50 10, Lender and Development Company Loan Programs, as 
amended from time to time (SOP 50 10).\3\
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    \3\ The current version of the SOP is 50 10 6, effective October 
1, 2020. The application requirements can be found in this SOP in 
Part 1, Section A, Chapter 1, Paragraph A.2 with respect to NFRLs 
and Part 1, Section A, Chapter 2, Paragraph B with respect to SBLCs. 
The SOP is available at https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs-0.
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    On January 13, 2020, SBA published a proposed rule with a request 
for comments in the Federal Register to amend the regulations related 
to the SBA Supervised Lender application and review process and to 
mitigate certain risks inherent in their participation in the 7(a) Loan 
Program. 85 FR 1783 (January 13, 2020). The proposed changes were 
designed to: Improve efficiencies related to the SBA Supervised Lender 
application and review process, including for a change of ownership or 
control transaction (as defined in Sec.  120.468); incorporate into the 
regulations the factors SBA will consider in its evaluation of an 
application; and mitigate the increased risk associated with the 
lending operations of SBA Supervised Lenders by updating their minimum 
capital maintenance requirements and establishing a 7(a) lending area 
for NFRLs.

II. Summary of Comments

    SBA received 19 comments on the proposed rule. Seven comments were 
submitted by or on behalf of SBLCs. Three comments were submitted by or 
on behalf of NFRLs. Three comments were submitted by or on behalf of 
state regulators. SBA also received comments from two trade 
associations, two law firms, and two individuals.
    The comments were generally supportive of the proposed application 
and review process with some suggested changes to shorten the waiting 
period for entities seeking to reapply to become an SBA Supervised 
Lender. Commenters generally agreed with SBA's proposed definition of 
qualified full-time professional management with minor changes. The 
commenters were also generally in favor of the changes to the minimum 
capital maintenance requirements with some proposed changes. A majority 
of the commenters were opposed to SBA limiting the 7(a) lending area 
for NFRLs to the state in which their primary state regulator is 
located. Commenters also requested some technical changes to the 
proposed regulation related to SBA's evaluation of applications and the 
requirements for change of ownership or control transactions. Finally, 
there were several responses to SBA's request for comments on whether 
SBA should modify the contribution that servicing rights assets may 
have on an SBA Supervised Lender's capital maintenance requirement.
    SBA appreciates the comments received and has incorporated many of 
the suggested changes into the final rule. SBA has addressed the 
comments to the proposed regulatory changes within the section-by-
section analysis below.

III. Section-by-Section Analysis of Comments and Changes

A. SBA Supervised Lenders

1. Section 120.460 What are SBA's additional requirements for SBA 
Supervised Lenders?
    SBA proposed to add two new paragraphs to Sec.  120.460. Proposed 
paragraph (c) required all SBA Supervised Lenders to employ qualified 
full-time professional management, as is currently required for SBLCs. 
This proposed regulation also clarified the meaning of full-time 
professional management to include, at a minimum, the employment of a 
chief executive officer or equivalent to manage daily operations, a 
chief credit/risk officer, and at least one other full-time employee 
qualified by training and experience to carry out the SBA Supervised 
Lender's business plan. In addition, proposed paragraph (c) included a 
requirement that an SBA Supervised Lender must sustain a sufficient 
level of 7(a) lending activity in its area of operation.
    Overall commenters supported proposed Sec.  120.460(c). A few 
commenters suggested that SBA should allow SBA Supervised Lenders to 
fulfill the full-time professional management requirement by using 
shared employees from affiliate organizations. One commenter suggested 
SBA should eliminate the requirement for a third full-time employee.
    SBA recognizes that SBA Supervised Lenders may have different 
staffing levels depending on the size of their 7(a) loan portfolios. 
However, SBA maintains its policy position that SBA Supervised Lenders 
must have a minimum level of internal oversight to independently manage 
their 7(a) lending operations. SBA considered the comments received and 
has revised the rule to permit SBA Supervised Lenders to meet the 
qualified full-time professional management requirement by having two 
full-time senior officers (i.e., CEO and CCO/CRO), and one part-time 
employee (which may be a shared employee of the lender's affiliates). 
Existing SBA Supervised Lenders will not be required to comply with 
this regulatory definition of qualified full-time professional 
management unless, after the effective date of this final rule, the SBA 
Supervised Lender makes or acquires any 7(a) loans or engages in a 
transaction that constitutes a change of ownership or control.
    SBA received six comments in support of the requirement in 
paragraph

[[Page 78207]]

(c) for each SBA Supervised Lender to maintain a sufficient level of 
lending activity in its area of operation. Most commenters requested 
that SBA clarify in the final rule the meaning of a ``sufficient'' 
level of lending activity. SBA considered these comments and has 
determined that a sufficient level of lending activity for SBA 
Supervised Lenders means obtaining at least four 7(a) loan approvals 
during two consecutive fiscal years. This is modeled on the minimum 
level of loan activity that SBA currently requires for Certified 
Development Companies in the 504 loan program. See 13 CFR 120.828. 
Existing SBA Supervised Lenders will not be required to comply with the 
7(a) lending activity requirement unless, after the effective date of 
this final rule, the SBA Supervised Lender makes or acquires any 7(a) 
loans or engages in a transaction that constitutes a change of 
ownership or control.
    Second, proposed new paragraph (d) limited an NFRL's 7(a) lending 
area to the state in which its primary state regulator is located. 
Overall, commenters were opposed to this part of the proposed rule. 
Some commenters argued that a limitation on the 7(a) lending area for 
NFRLs could have an impact on their business plans. Five commenters 
suggested that SBA should allow NFRLs previously engaged in nationwide 
7(a) lending to continue such lending activities. One commenter 
supported the 7(a) lending area restriction for NFRLs, but suggested 
that SBA provide a 1-year transition period to allow NFRLs to adjust 
their future 7(a) lending activities.
    As stated in the proposed rule, approximately 90 percent of all 
7(a) loan approvals obtained by NFRLs during the last 3 fiscal years 
were for 7(a) loans to be made in the state where the NFRL's primary 
state regulator was located. Additionally, the final rule does not 
limit or restrict in any way an NFRL's ability to make other types of 
non-SBA loans to borrowers on a nationwide basis. While SBA understands 
that some state regulators may not object to nationwide 7(a) lending 
for NFRLs, state regulators do not bear the same financial risk that 
SBA assumes as the guarantor of 7(a) loans.\4\ Moreover, while state 
regulators may generally oversee NFRLs within their borders for safety 
and soundness, SBA bears the responsibility of ensuring participating 
lenders comply with SBA Loan Program Requirements (as defined in 13 CFR 
120.10). When SBA placed a moratorium on approving additional SBLCs in 
1982, it did so to reduce the administrative resources needed to 
prudently regulate and oversee non-depository lenders with a nationwide 
7(a) lending platform. SBA does not have the administrative resources 
needed to oversee NFRLs with a nationwide 7(a) lending platform in 
addition to the 14 SBLCs it currently regulates. In addition, proposed 
Sec.  120.460(d) is consistent with state statutes placing geographic 
limits on lending activity overseen by state regulators, as well as a 
general understanding that NFRLs are expected to focus on economic 
development in their state and local communities.
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    \4\ SBA's guaranty on regular 7(a) loans ranges from 50% to 90% 
of the loan amount. Under the PPP, SBA's guaranty is 100% of the 
loan amount.
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    SBA carefully considered the comments received on proposed Sec.  
120.460(d) and does not agree with the commenters' objections. In order 
to manage the Agency's limited administrative resources and the 
increased risk to SBA associated with NFRLs participating in the 7(a) 
Loan Program, the final rule establishes a 7(a) lending area for NFRLs 
limited to the state in which their primary state regulator is located. 
SBA will provide an exception such that an NFRL's lending area may 
include a local trade area that is contiguous to such state (e.g., a 
city or metropolitan statistical area that is bisected by a state line) 
with SBA's prior written approval. SBA also is adopting a commenter's 
suggestion that NFRLs that are currently engaged in 7(a) lending 
outside of the state in which their primary regulator is located should 
not be subject to the 7(a) lending area limitation until 1 year after 
the effective date of the final rule. SBA will apply this rule 
immediately, however, to all new NFRLs and to any NFRL that engages in 
and/or is seeking approval of a change of ownership or control 
transaction. The 1-year grace period will allow the few NFRLs that may 
be affected by this rule to adjust their future 7(a) lending 
activities. SBA encourages existing or prospective NFRLs interested in 
making 7(a) loans on a nationwide basis to acquire one of the fourteen 
SBLC licenses that become available from time to time.
    For further discussion of the impact of this provision, see the 
final regulatory flexibility analysis (FRFA) below.
2. Section 120.462 What are SBA's additional requirements on capital 
maintenance for SBA Supervised Lenders?
    SBA proposed to amend the regulations to require NFRLs to maintain 
a baseline minimum amount of capital necessary for participation in the 
7(a) Loan Program. The proposed rule established a minimum amount of 
capital equal to the higher of (1) the minimum amount of capital 
required by the NFRL's state regulator, or (2) $2,500,000. Commenters 
were generally supportive of the proposal. A few commenters indicated 
that the $2.5 million capital amount was too high, and SBA should 
instead allow the minimum capital requirement to be based on the size 
of the NFRL's loan portfolio. Other commenters suggested that the $2.5 
million capital amount was too low and encouraged SBA to raise the 
minimum capital requirement for NFRLs to be at the same level as SBLCs 
(i.e., $5 million).
    SBA must ensure that NFRLs have a minimum level of capital 
necessary to manage the credit risk associated with their 7(a) lending 
operations. SBA disagrees with the comments suggesting that the amount 
should be increased or decreased and is moving forward with the rule as 
proposed. As SBA proposed, NFRLs will have 3 years after the effective 
date of this final rule to reach the new minimum capital amount. In 
addition, an NFRL that does not meet the new minimum capital 
requirement by the end of the 3-year period may remain in the 7(a) Loan 
Program but will not be permitted to make or acquire 7(a) loans after 
such date until it satisfies the minimum capital requirement. The 
minimum capital requirement will also apply immediately to new NFRLs 
and in the event of a change of ownership or control of an NFRL 
occurring and/or approved after the effective date of this final rule.
3. Section 120.466 SBA Supervised Lender Application
    SBA proposed to add a new Sec.  120.466 to codify a new application 
and review process for entities seeking to become an SBA Supervised 
Lender. SBA proposed to evaluate applications through an initial review 
and, if warranted, a final review.
    The initial review requires an SBA Supervised Lender applicant to 
submit a written plan (known as a Lender Assessment Plan (LAP)). The 
LAP contains key information that would enable SBA to reach a 
preliminary assessment about the qualifications of an applicant 
expeditiously. An LAP review includes an initial assessment of the 
applicant's business plan, capitalization, and professional management 
team. SBA could also require an interview with the Office of Capital 
Access. If SBA were to notify an applicant that it may not proceed to 
the final review phase, the proposed rule

[[Page 78208]]

provided that the applicant must wait nine months from the date of such 
notification before reapplying by submitting a new LAP.
    Overall commenters were supportive of the proposed rule. SBA 
received six comments suggesting the 9-month waiting period was too 
long and should be shortened to 3 months. SBA considered these comments 
and has agreed to shorten the waiting period from 9 months to 6 months 
to address the commenters' concerns. SBA believes that 3 months is too 
short a period to allow an applicant to make meaningful improvements in 
its circumstances.
    The final review, as proposed under Sec.  120.466(b), requires an 
SBA Supervised Lender applicant to submit a complete application to 
SBA. The complete application updates the information disclosed in the 
LAP and provides SBA with additional information for review, such as 
the applicant's organizational documents, operational plan, credit 
policies, internal control policies, loan risk rating system, capital 
adequacy plan, proposed credit facilities (if any), organizational 
chart, audited financial statements, bank statements, legal opinions 
and any other necessary documentation as further described in official 
SBA policies and procedures.\5\ After completion of the final review, 
SBA issues a final decision to approve or deny the application. If an 
SBA Supervised Lender's application is denied, the proposed rule 
required an applicant to wait 18 months before it may submit a new LAP 
and restart the application process. The Agency received a number of 
comments requesting that SBA shorten this 18-month time period. SBA 
considered these comments and has agreed to shorten the time period 
from 18 months to 12 months. SBA believes a 1 year waiting period will 
allow the applicant to address material deficiencies and for meaningful 
and sustained improvement in its application.
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    \5\ The information required to be submitted in a complete 
application is not set forth in SBA's regulation but will continue 
to be in SBA's official policies and procedures. See SOP 50 10.
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    Lastly, under proposed Sec.  120.466(c), an entity seeking to 
become an NFRL is required to have at least one year of current 
operating and relevant commercial lending experience (by the entity 
itself) before the entity may submit an application to become an SBA 
Supervised Lender. SBA did not receive comments on this portion of the 
proposed rule and will include paragraph (c) in the final rule, with 
the clarification that it is the applicant that must have the requisite 
experience.
4. Section 120.467 Evaluation of SBA Supervised Lender Applicants
    SBA proposed to add a new Sec.  120.467 to incorporate into the 
regulations the factors SBA will consider in evaluating an SBA 
Supervised Lender applicant. SBA's evaluation will include a review of, 
among other things, the applicant's business plan, capitalization, 
operational plan, organizational structure, management qualifications, 
the historical performance of the loans originated by the applicant or 
attributable to its management team, the applicant's financial 
projections and liquidity, and prior history or involvement of the 
applicant or its management team (including key employees) with any SBA 
guaranteed lending program or any other Federal or state lending 
program. SBA also reviews the results of background investigations 
(e.g., through SBA Form 1081) and other information obtained through 
due diligence and reference checks. Under the proposed rule SBA may 
also prohibit individuals or entities from participating as an officer, 
director, manager, owner or key employee of an SBA Supervised Lender 
applicant.
    Commenters were generally in support of the proposed rule. SBA 
received four comments to proposed paragraph (b)(1) suggesting that it 
be revised to reflect that the individuals or entities that SBA may 
prohibit from serving as an officer, director, manager, owner or key 
employee of an SBA Supervised Lender are those that have ``materially'' 
failed to comply with SBA Loan Program Requirements. SBA has agreed to 
revise Sec.  120.467(b)(1) by adding ``materially'' to this paragraph 
in the final rule.
5. Section 120.468 Change of Ownership or Control Requirements for SBA 
Supervised Lenders
    SBA proposed to move the regulation applicable to a change of 
ownership or control of an SBLC (Sec.  120.475) to a new Sec.  120.468 
with certain modifications. The purpose of this change is to 
incorporate into the regulations the Agency's current policy 
requirement and practice that all SBA Supervised Lenders, including 
NFRLs, must obtain SBA written approval prior to any change of 
ownership or control.
    Section 120.468(a) in the proposed rule clarified that SBA 
Supervised Lenders must receive SBA prior written approval before 
entering into a definitive agreement regarding a change of ownership or 
control. SBA received approximately 11 comments on this proposed rule. 
The commenters were opposed to the requirement to obtain SBA prior 
written approval before entering into a definitive agreement for a 
change of ownership or control. Most commenters requested that SBA 
either strike this provision from the rule or require a change of 
ownership or control to be ``conditioned'' upon receipt of SBA 
approval.
    SBA disagrees with these comments. SBA is seeking to eliminate the 
time and expense associated with SBA Supervised Lenders entering into 
agreements for a change of ownership or control only to have SBA deny 
their requests months later after conducting a thorough review of the 
applications. Allowing SBA Supervised Lenders to enter into an 
agreement upfront (without prior SBA approval) would cause unnecessary 
time and expense to be expended by the parties in some cases and could 
unfairly raise expectations. The final rule retains the requirement 
that any SBA Supervised Lenders seeking to continue in the 7(a) Loan 
Program must obtain SBA's prior written approval before entering into 
an agreement for a change of ownership or control. To avoid confusion 
as to the meaning of a ``definitive'' agreement, SBA has removed the 
term and is clarifying that the limitation applies even if such 
agreement is conditioned on SBA approval. However, an SBA Supervised 
Lender may enter into a non-binding letter of intent regarding a 
prospective change of ownership or control, provided that such letter 
is reported to SBA within 30 calendar days. SBA removed the cross 
reference to Sec.  120.464(a)(5) in the final rule in response to 
comments received.
    Section 120.468(b) of the proposed rule clarified that if the 
approval of any state or Federal authority is required for an SBA 
Supervised Lender's change of ownership or control, such approval is 
required in addition to SBA's prior written approval. SBA did not 
receive any comments on this part of the proposed rule and will adopt 
the text in the final rule as proposed.
    Section 120.468(c) of the proposed rule incorporated SBA's current 
policy that a new application must be submitted to SBA in connection 
with a change of ownership or control of an SBA Supervised Lender. SBA 
did not receive any comments on this part of the proposed rule and will 
adopt the text in the final rule as proposed.
    Section 120.468(d) of the proposed rule provided that SBA 
Supervised Lenders would have an opportunity to voluntarily surrender 
their SBA lending authority (i.e., the SBLC License or the NFRL lending 
authority) and withdraw from the 7(a) Loan Program with SBA's prior 
written approval. As proposed, a

[[Page 78209]]

voluntary surrender requires an SBA Supervised Lender to (i) transfer 
its entire loan portfolio to one or more Lenders acceptable to SBA, and 
(ii) enter into a withdrawal agreement. One commenter suggested that if 
a transferee for an SBA Supervised Lender's 7(a) loan portfolio could 
not be found, the final rule should be clarified so that SBA may take 
over the servicing of the SBA Supervised Lender's 7(a) loan portfolio. 
SBA agrees with this comment and has revised the final rule such that 
SBA may, in its sole discretion, elect to take over the servicing of an 
SBA Supervised Lender's 7(a) loan portfolio upon the voluntary 
surrender of its SBA lending authority. If SBA elects to take over 
servicing, the SBA Lender must assign the 7(a) loan documents to SBA 
and provide any needed assistance to allow SBA to take over servicing. 
SBA may use contractors to perform these actions. See 13 CFR 
120.535(d).
6. Section 120.471 What are the minimum capital requirements for SBLCs?
    SBA proposed to amend Sec.  120.471(a) to increase the minimum 
capital requirement for SBLCs. As stated in the proposed rule, the 
minimum capital amount for SBLCs has not been updated since 1996. SBA 
believes the current minimum capital (of at least $1,000,000) is 
insufficient to assure an SBLC's continued financial viability or to 
provide for any necessary growth. As stated in the proposed rule, the 
maximum 7(a) loan amount has increased from $1,000,000 in 1996 to 
$5,000,000 as of the date of the proposed rule.\6\ As a result, SBA has 
determined that a corresponding change to increase the minimum capital 
requirements for SBLCs is necessary at this time.
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    \6\ In addition, the Coronavirus Aid, Relief, and Economic 
Security Act (CARES Act) (Pub. L. 116-136), permits participating 
lenders to make section 7(a) loans up to a maximum amount of $10 
million under the PPP.
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    Under the proposed rule, SBLCs must maintain a minimum amount of 
capital equal to unencumbered paid-in capital and paid-in surplus of at 
least $5 million, or 10 percent of the aggregate of the SBLC's share of 
all outstanding loans, whichever is greater. Most of the 14 SBLCs have 
capital in excess of the minimum capital proposed under Sec.  
120.471(a). SBA also included a provision in the proposed rule 
providing SBLCs with 3 years after the effective date of the final rule 
to reach the new minimum capital amount. However, the proposed minimum 
capital amount would apply immediately in the event of a change of 
ownership or control of an SBLC occurring and/or approved after the 
effective date of this final rule.
    Five commenters supported the proposed rule and two commenters were 
opposed. Commenters also encouraged SBA to modify the definition of 
regulatory capital so that SBA Supervised Lenders would not need to 
maintain capital against the full amount of the unguaranteed portion of 
7(a) loans sold into securitizations. Three commenters also expressed 
some concerns about the proposed increase in capital for non-profit 
SBLCs and suggested that these entities should be permitted to use 
``restricted'' capital toward their minimum capital requirement.
    SBA considered the comments and is moving forward with the proposed 
rule as drafted. SBA disagrees that SBLCs should only be required to 
maintain capital against the risk retention portion of their 7(a) loan 
securitizations as opposed to the full amount of the unguaranteed 
portion of 7(a) loans sold into securitizations. SBA requires non-
depository institutions (including SBA Supervised Lenders) that engage 
in securitization transactions to maintain capital in accordance with 
Sec.  120.425(a). This regulation applies a capital charge against all 
assets of the securitizer including the balance outstanding on the 
unguaranteed portion of the securitizer's 7(a) loans, as well as 
including those unguaranteed interests in any securitization pool. SBA 
did not propose any revisions to Sec.  120.425(a) in the proposed rule.
    SBA also does not agree with the suggestion that non-profit SBLCs 
should be permitted to include ``restricted'' capital in their minimum 
capital calculation. An SBLC's capital must be ``unencumbered'' and 
available to absorb potential losses from its lending activities, 
including those associated with its entire 7(a) loan portfolio. 
Restricted capital does not meet this requirement. SBA will not permit 
non-profit SBLCs to include restricted capital towards their minimum 
capital calculation.
    Finally, SBA will continue to study whether changes to the 
definition of capital under Sec.  120.471(b) should be modified to 
account for the valuation of servicing rights assets. Most of the 
comments received suggested that SBA should allow SBLCs to receive full 
credit for the value of their servicing rights towards their minimum 
capital requirement. If SBA determines there is a need for further 
changes, SBA will promulgate regulations or provide additional guidance 
on this issue.

B. Technical Changes

1. Section 120.410 Requirements for All Participating Lenders
    SBA proposed a conforming technical change to Sec.  120.410(a)(1) 
to reflect the new minimum capital requirements for SBA Supervised 
Lenders. SBA did not receive any comments on this proposed technical 
change and incorporated the proposed text into the final rule.
2. Section 120.470 What are SBA's additional requirements for SBLCs?
    SBA proposed a conforming technical change to remove Sec.  
120.470(g) ``Management'' and redesignate paragraph (h) as paragraph 
(g). No comments were received, and SBA is adopting the change in this 
final rule. The management requirement for SBLCs is addressed in new 
Sec.  120.460(c).
3. Section 120.475 Change of Ownership or Control
    SBA proposed a conforming technical change to remove and reserve 
Sec.  120.475. No comments were received, and SBA is adopting the 
change in this final rule. The text of Sec.  120.475 is incorporated 
into Sec.  120.468.

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

Executive Order 12866

    This rule finalizes 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. OMB did not change the non-
significant designation for this final rule, and therefore, SBA has not 
prepared a Regulatory Impact Analysis. This is not a major rule under 
the Congressional Review Act, 5 U.S.C. 801 et seq.

Executive Order 13563

    This executive order supplements and reaffirms the principles and 
requirements in Executive Order 12866, including the requirement to 
provide the public with an opportunity to participate in the regulatory 
process. SBA Supervised Lenders have been involved in the 7(a) Loan 
Program for over 35 years. Over the years, the Agency has received 
feedback from SBA Supervised Lender applicants and program 
participants, including valuable insight and suggestions for 
improvements to the application and review process. This feedback from 
SBA Supervised Lenders, together with the comments in response to the 
proposed rule, has shaped this final rule.

[[Page 78210]]

Executive Order 13771

    This final rule is not subject to Executive Order 13771 regulatory 
action because the rule is not significant under Executive Order 12866.

Executive Order 12988

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

Executive Order 13132

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

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

    SBA has determined that this final rule imposes a new reporting 
requirement under the Paperwork Reduction Act (PRA). Specifically, the 
final rule requires SBA Supervised Lenders to submit a written Lender 
Assessment Plan (LAP) for SBA to conduct an initial review of the 
applicant. In addition, the final rule codifies a requirement for 
applicants to submit a complete application in order for SBA to 
determine whether the applicant has the qualifications necessary to 
participate in the 7(a) Loan Program as an SBA Supervised Lender. As 
discussed above, this requirement is currently described in SBA's 
official policies and procedures. In addition to these two 
requirements, the applicant will submit the same forms as other Lenders 
that apply to participate in the 7(a) Loan Program, including the SBA 
Form 1081, Statement of Personal History (OMB Control number 3245-
0080).
    The title, summary of the information collections, description of 
respondents, and an estimate of the related reporting burdens are 
discussed below. Additional information related to these requirements 
is included in the Regulatory Flexibility Act discussion in this rule. 
SBA did not receive comments on the new information collections in the 
proposed rule.
    Title of Collection: SBA Supervised Lender Application and Review.
    OMB Control Number: New Collection.
    (a) Lender Assessment Plan.
    The final rule requires organizations seeking to become an SBA 
Supervised Lender (or seeking SBA approval of a change of ownership or 
control) to submit a LAP to SBA. The LAP includes the legal name and 
contact information of the applicant, a written business plan, current 
and projected financial statements and other important information 
about the applicant and its management team (including key employees).
    Need and Purpose: The LAP is necessary for SBA to conduct an 
initial review of an applicant seeking to become an SBA Supervised 
Lender (or seeking SBA approval of a change of ownership or control). 
The LAP provides SBA with key information that would enable SBA to 
reach a preliminary assessment about the qualifications of an applicant 
more efficiently. This initial review phase will assist SBA in 
identifying incomplete applications and unqualified applicants much 
earlier in the application review process.
    Description and Estimated Number of Respondents: Pursuant to 
proposed Sec.  120.466(a), the information in the LAP will be collected 
from each organization seeking to become an SBA Supervised Lender (or 
seeking SBA approval of a change of ownership or control). SBA 
estimates that it will likely receive no more than four LAPs each year.
    Total Estimated Response Time: It is estimated that each applicant 
would need approximately 35 hours to prepare and submit the LAP for an 
estimated total of 140 hours annually.
    (b) SBA Supervised Lender Application.
    If an applicant seeking to become an SBA Supervised Lender (or 
seeking SBA approval of a change of ownership or control) is authorized 
by SBA to proceed to the final review phase, the applicant will be 
required to submit a complete application.
    Need and Purpose: The information submitted with this application 
is necessary for SBA to reach a final decision regarding whether the 
applicant has the qualifications necessary to participate in the 7(a) 
Loan Program. The complete application requires an SBA Supervised 
Lender applicant to provide additional detail about the information 
previously disclosed to SBA in the LAP and will include new information 
about the applicant's proposed operation and lending activities as a 
participant in the 7(a) Loan Program. As stated above, these 
application requirements are not new since they are currently set out 
in SBA's official policies and procedures. Under those policies and 
procedures, an organization applying to become an SBA Supervised Lender 
(or seeking SBA approval of a change of ownership or control) is 
required to, among other things, submit documentation in support of its 
organizational structure, internal control policies, operational plan, 
proposed credit policies, loan risk rating system, proposed secondary 
market activities, capital adequacy plan, audited financial statements 
and other information (e.g., certifications and legal opinions) 
necessary for SBA to evaluate the qualifications of the applicant. See 
SOP 50 10. Although SBA estimates that the requirements will only apply 
to approximately four organizations each year, now that SBA is 
codifying the application requirements in this final rule, under the 
PRA the requirements are deemed to impact ten or more respondents; 
therefore, SBA has also requested OMB approval of this application in 
compliance with the PRA procedures.
    Description and Estimated Number of Respondents: The information in 
the complete application will be collected from organizations that are 
seeking to become an SBA Supervised Lender and have successfully 
reached the final review phase. Based on current experience, SBA 
estimates that it will likely receive no more than four complete 
applications each year.
    Total Estimated Response Time: It is estimated that each applicant 
would need approximately 50 hours to prepare and submit a complete 
application, for an estimated total of 200 hours annually.

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

    Under the Regulatory Flexibility Act (RFA), this final rule may 
have an impact on a substantial number of small entities that 
participate as SBA Supervised Lenders in the 7(a) Loan Program. 
Immediately below, SBA sets forth a final regulatory flexibility 
analysis (FRFA) examining the impact of the final rule in accordance 
with 5 U.S.C. 603. The FRFA addresses (1) the reasons, objectives and 
legal basis for this rule; (2) a description of the kind and number of 
small entities that may be affected; (3) the projected reporting, 
recordkeeping and other compliance requirements; (4) whether there are 
any Federal rules that may duplicate, overlap, or conflict with this 
rule; and (5) whether there are any significant alternatives to this 
rule.

[[Page 78211]]

1. What are the reasons, objectives and legal basis for the rule?
    The rule is designed to improve efficiencies and enhance the 
application and review process for organizations seeking to participate 
in the 7(a) Loan Program as SBA Supervised Lenders. The objective is to 
provide a process for a more efficient and effective evaluation of the 
qualifications of applicants seeking to become SBA Supervised Lenders. 
The new application and review process will provide greater clarity and 
transparency to applicants and would expedite SBA's review, which may 
potentially reduce costs on applicants and on SBA's limited 
administrative resources.
    The rule also raises the minimum capital requirement that SBA 
Supervised Lenders must maintain to assure their continued financial 
viability and to provide for any necessary growth. The minimum capital 
requirement for SBA Supervised Lenders has not been updated by SBA for 
more than 23 years. The Agency has determined that the regulations 
addressing minimum capital must be amended to correspond with the more 
than 500 percent increase in the maximum 7(a) loan amount that Congress 
has authorized by statute over the last twenty-three years.
    The rule also limits the 7(a) lending area for NFRLs to the state 
in which their primary regulator is located, except that an NFRL may 
request SBA's prior written approval to make 7(a) loans in a local 
trade area that is contiguous to such state (e.g., a city or 
metropolitan statistical area that is bisected by a state line). Most 
NFRLs participating in the 7(a) Loan Program already limit their 
lending activities to the state in which their primary state regulator 
is located. In recent years, some state regulators have permitted NFRLs 
to make loans outside of their state or even nationwide. The expansion 
of an NFRL's 7(a) lending area increases risk to SBA and the Agency 
does not have the additional administrative resources to adequately 
supervise, regulate and examine NFRLs that operate outside of their 
state. This part of the final rule is also consistent with the general 
understanding that state-regulated lenders (such as BIDCOs) are 
licensed under specific state laws to focus primarily on economic 
development in their respective state and local communities. Based on 
the comments received, SBA has agreed to provide existing NFRLs that 
SBA has approved for 7(a) lending outside of the state in which their 
primary regulator is located with an additional one-year grace period 
to allow them to adjust their future 7(a) lending activities.
    SBA is authorized to supervise the safety and soundness of SBA 
Supervised Lenders and may regulate their 7(a) lending activities 
pursuant to section 23(a) of the Small Business Act. 15 U.S.C. 650(a), 
see also 15 U.S.C. 634(b)(7). SBA has the authority to promulgate 
rules, regulations and requirements for the 7(a) Loan Program. 15 
U.S.C. 634(b)(6).
2. What are SBA's description and estimate of the number of small 
entities to which the rule will apply?
    SBA Supervised Lenders affected by this rule comprise a unique 
class of 36 non-depository lenders that may only participate in the 
7(a) Loan Program and make 7(a) loans if authorized by SBA. This final 
rule will be applicable to all SBA Supervised Lenders (other than 
lenders participating as CA Lenders in the CA Pilot Program and lenders 
authorized to make PPP loans under SBA Form 3507). SBA estimates that 
approximately 88 percent of SBA Supervised Lenders are considered small 
entities based on NAICS sector code 52 (Finance and Insurance) and 
industry code 52298 (All Other Non-depository Credit Intermediation) 
and have annual receipts of less than $38.5 million. This estimate of 
32 small SBA Supervised Lenders is based in part on information 
contained in the quarterly condition reports and the annual reports 
that are required to be submitted to SBA by such lenders.
3. What are the projected reporting, recordkeeping, and other 
compliance requirements of the rule and an estimate of the classes of 
small entities which will be subject to the requirements?
    The final rule imposes a new reporting requirement for 
organizations seeking to become an SBA Supervised Lender (or seeking 
SBA approval of a change of ownership or control). The final rule 
codifies an existing requirement that applicants submit a complete 
application for SBA to determine whether an organization has the 
qualifications necessary to participate in the 7(a) Loan Program as an 
SBA Supervised Lender.
    The LAP includes key information about an organization that will 
allow SBA to reach a preliminary assessment about the qualifications of 
an applicant more efficiently. SBA estimates it will receive 
approximately four LAPs each year. SBA estimates that it will take 
approximately 35 hours for an organization to prepare an LAP at a cost 
of $3,838 per LAP. Based on SBA's experience with similar data 
collections, we expect an organization that submits a LAP will need to 
employ the services of a financial manager and an administrative 
assistant when preparing an LAP for submission to SBA.\7\
---------------------------------------------------------------------------

    \7\ The cost estimate for the LAP is based on hourly job 
position wages published by the U.S. Department of Labor's Bureau of 
Labor Statistics for 2019 and increased by 100% to account for 
benefits and overhead. The cost breakdown is as follows: Financial 
Manager (30 hours times an hourly rate of $124.90) plus 
Administrative Assistant (5 hours times an hourly rate of $36.24) 
equals $3,838.
---------------------------------------------------------------------------

    If an organization is authorized by SBA to proceed to the final 
review phase, a complete application must be submitted to SBA. As 
mentioned above, the application requirements for SBA Supervised 
Lenders are not new and are currently set forth in SBA's official 
policies and procedures. See SOP 50 10 6, Part 1, Section A, Chapter 1, 
Paragraph A.2 for NFRLs and Part 1, Section A, Chapter 2, Paragraph B 
for SBLCs. SBA estimates that it will receive approximately four 
complete applications each year. SBA estimates that it will take 
approximately 50 hours for an organization to prepare a complete 
application at a cost of $5,207 per application. Based on SBA's 
experience with similar data collections, an organization applying to 
become an SBA Supervised Lender would typically employ the services of 
a financial manager, an accountant, an attorney and an administrative 
assistant when preparing a complete application for submission to 
SBA.\8\ SBA did not receive comments on whether the number of hours 
estimated to prepare a complete application is appropriate or on the 
services they employ to complete the application.
---------------------------------------------------------------------------

    \8\ The cost estimate for a complete application is based on 
hourly job position wages published by the U.S. Department of 
Labor's Bureau of Labor Statistics for 2019 and increased by 100% to 
account for benefits and overhead. The cost breakdown is as follows: 
Financial Manager (30 hours times an hourly rate of $124.90) plus 
Accountant (10 hours times an hourly rate of $68.80) plus Attorney 
(5 hours times an hourly rate of $118.22) plus Administrative 
Assistant (5 hours times an hourly rate of $36.24) equals $5,207.
---------------------------------------------------------------------------

    SBA anticipates that there will be some costs for SBA Supervised 
Lenders related to the new minimum capital requirement under the rule. 
This rule establishes a new minimum capital requirement for SBLCs and 
NFRLs of at least $5 million and $2.5 million, respectively. Based on 
information provided to SBA by SBA Supervised Lenders in quarterly 
condition reports, 11 of the 14 SBLCs (i.e., 79 percent) have at least 
$3.7 million in capital (and of those 11 SBLCs, 11 have more than $5 
million in capital). In addition, 19 of the 22 NFRLs (i.e., 86 percent) 
have more than $2.5 million in capital.

[[Page 78212]]

    SBA has determined that there are seven small entities that will be 
impacted by the new capital requirements in the rule. In other words, 7 
of the 36 SBA Supervised Lenders that are considered small entities 
will need to increase their capital to reach the new minimum capital 
requirement of either $2.5 million or $5 million (as applicable). SBA 
estimates the amount of capital that would need to be raised by these 
small entities currently ranges between $1,270,000 and $3,580,000. SBA 
estimates that this rule may have a significant economic impact on 6 of 
the 36 SBA Supervised Lenders (i.e., 17 percent), each of which is 
considered a small entity. As noted above, all existing SBA Supervised 
Lenders will have 3 years from the effective date of a final rulemaking 
to comply with this part of the rule (other than for transactions 
involving a change of ownership or control of an SBA Supervised 
Lender).
    SBA estimates that the cost of raising capital for SBA Supervised 
Lenders is approximately 9.8 percent of the amount of equity capital 
raised based on the Capital Asset Pricing Model (CAPM). The CAPM is one 
of the most widely used pricing models by financial professionals and 
considered the preferred method to estimate the cost of equity capital. 
See Duff & Phelps 2019 Valuation Handbook--U.S. Industry Cost of 
Capital (data through June 30, 2019).\9\ SBA estimates that the total 
cost of raising new equity capital for the seven SBA Supervised Lenders 
based on the requirements of the rule would range in amount from 
approximately $124,000 to $350,000.\10\ However, the cost is mitigated 
by the fact that under the rule SBA Supervised Lenders will have 3 
years to increase their capital. Thus, the maximum amount that it would 
cost an existing SBA Supervised Lender to reach the new minimum capital 
requirement would be approximately $117,000 per year for 3 consecutive 
years.\11\
---------------------------------------------------------------------------

    \9\ The 2019 Valuation Handbook--U.S. Industry Cost of Capital 
published by Duff & Phelps provides cost of capital estimates for 
approximately 170 industries identified by Standard Industrial 
Classification codes (SIC). For purposes of estimating the cost of 
raising equity capital for SBA Supervised Lenders, SBA used SIC code 
61--non-depository credit institutions, which includes 21 companies 
that are engaged primarily in extending credit in the form of loans 
(but are not engaged in deposit banking). SBA compared the estimated 
cost of raising capital cited above with other sources and found the 
data to be similar.
    \10\ The estimated cost to raise $1.27 million or $3.58 million 
in equity capital would be as follows: $1,270,000 times 9.8% equals 
$124,000; $3.58 million times 9.8% equals $350,000.
    \11\ It should be noted that some existing SBA Supervised 
Lenders may decide to increase their capital by retaining earnings 
instead of raising new equity capital, which would reduce the cost 
of this rule.
---------------------------------------------------------------------------

    SBA determined that a 3-year time frame was a sufficient amount of 
time for SBA Supervised Lenders to increase their capital. SBA 
specifically requested comments on whether SBA Supervised Lenders 
should have 3 years to comply with the new minimum capital requirements 
under the proposed rule or should be required to comply sooner. The 
majority of the commenters were generally supportive of at least a 3-
year time frame to meet the new minimum capital requirement.
    The rule also limits the 7(a) lending area for NFRLs to the state 
in which their primary state regulator is located, except that with SBA 
approval it may include a local trade area that is contiguous to such 
state (such as a city or metropolitan statistical area bisected by a 
state line). There are currently 22 NFRLs participating in the 7(a) 
Loan Program. During the last 3 fiscal years, 2 NFRLs (each of which is 
considered a small entity) requested loan authorizations to make the 
majority of their 7(a) loans outside of the state in which their 
primary state regulator is located. Except for these two NFRLs, 
approximately 90 percent of the lending within the 7(a) Loan Program 
during the last 3 fiscal years was done in the state where the NFRL's 
primary state regulator is located. Approximately 79 percent of all 
7(a) loan approvals obtained by NFRLs during the last 3 fiscal years 
were for loans to be made to small businesses located within their own 
state. This part of the rule will not impact a substantial number of 
small entities. It is important to note that this final rule will not 
impose any restrictions regarding an NFRL's non-7(a) lending 
activities. Therefore, the final rule will not have any impact on an 
NFRL's ability to generate business by making other types of non-SBA 
loans outside of its own state.
    Most commenters did not support the limitation on 7(a) lending 
areas for NFRLs. SBA considered the comments received and has agreed to 
allow existing NFRLs one additional year to adjust to this portion of 
the rule. Therefore, NFRLs currently engaged in 7(a) lending outside of 
the state in which their primary regulator is located may continue to 
make 7(a) loans on a nationwide basis (if permitted by their primary 
state-regulator) for 1 year from the effective date of this final rule. 
This additional one-year grace period will not apply to new 
applications from NFRLs, including those that have engaged in and/or 
are seeking approval of a change of ownership or control.
    In summary, SBA estimates that the total cost to a particular SBA 
Supervised Lender associated with this rule (including the costs 
related to data collection) will range from zero to $356,683, 
substantially all of which relates to the cost of raising capital and 
may be spread over a 3-year time period.
4. What are the relevant Federal rules which may duplicate, overlap, or 
conflict with the rule?
    We are not aware of any Federal rules that duplicate, overlap or 
conflict with this rule. SBA's SOP 50 10 will have to be amended to 
conform to portions of this rule, which will be done separately.
5. What alternatives will allow the Agency to accomplish its regulatory 
objectives while minimizing the impact on small entities?
    The Agency originally considered imposing the new minimum capital 
requirements for SBA Supervised Lenders immediately due to the risk 
associated with their lending operations. SBA recognized, however, that 
providing a 3-year period for SBA Supervised Lenders to increase their 
capital would be less burdensome on lenders and their operational 
plans. SBA took into consideration that some lenders may need time to 
plan their capital raising efforts and negotiate favorable terms and 
conditions for increasing their capital. The 3-year time period will 
provide SBA Supervised Lenders with a sufficient amount of time to 
raise new equity capital and an opportunity to increase capital by 
retaining earnings (which will reduce the estimated overall cost of 
raising such capital).
    SBA believes many of the changes in this rule will benefit small 
entities interested in becoming an SBA Supervised Lender by clarifying 
areas in the application process where there was confusion and to make 
the process more transparent. This rule will also allow SBA to evaluate 
the qualifications of new applicants (including for change of ownership 
or control transactions) more efficiently and make well-informed 
decisions on SBA Supervised Lender applications. SBA believes this rule 
encompasses best practice guidance that aligns with the Agency's 
mission to increase access to capital for small businesses and 
facilitate American job preservation and creation.

List of Subjects in 13 CFR Part 120

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


[[Page 78213]]


    For the reasons stated in the preamble, SBA is amending 13 CFR part 
120 as follows:

PART 120--BUSINESS LOANS

0
1. The authority for 13 CFR part 120 continues to read as follows:

    Authority:  15 U.S.C. 634(b) (6), (b) (7), (b) (14), (h), and 
note, 636(a), (h) and (m), and note, 650, 657t, and note, 657u, and 
note, 687(f), 696(3) and (7), and note, and 697(a) and (e), and 
note.


Sec.  120.410  [Amended]

0
2. Amend Sec.  120.410 in paragraph (a)(1) by removing the phrase ``for 
SBLCs, meeting its SBA minimum capital requirement; and for NFRLs, 
meeting its state minimum capital requirement); and'', and adding in 
its place the phrase, ``and for SBLCs and NFRLs, meeting their 
respective minimum capital requirement); and''.

0
3. Amend Sec.  120.460 by adding paragraphs (c) and (d) to read as 
follows:


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

* * * * *
    (c) An SBA Supervised Lender must have qualified full-time 
professional management including, but not limited to, a chief 
executive officer or the equivalent to manage daily operations, and a 
chief credit/risk officer. An SBA Supervised Lender must also have at 
least one other part-time professional employee (which may be a shared 
employee of the lender's affiliates) qualified by training and 
experience to carry out its business plan. An SBA Supervised Lender is 
expected to sustain a sufficient level of lending activity in its 
lending area, which means obtaining at least four 7(a) loan approvals 
during two consecutive fiscal years. This paragraph only applies to SBA 
Supervised Lenders that make or acquire a 7(a) loan after January 4, 
2021, or to any SBA Supervised Lender approved after such date, 
including in the event of a change of ownership or control of an SBA 
Supervised Lender.
    (d) An NFRL may only make or acquire 7(a) loans in the state in 
which its primary state regulator is located, except that an NFRL's 
lending area may include a local trade area that is contiguous to such 
state (e.g., a city or metropolitan statistical area that is bisected 
by a state line) if the NFRL receives SBA's prior written approval. 
This paragraph applies to all NFRLs on or after January 4, 2021, 
including in the event of approval of a new NFRL or a change of 
ownership or control of an NFRL; provided however, that if SBA has 
approved any NFRL to make 7(a) loans out of their state, then this 
paragraph will apply on or after January 4, 2022.

0
4. Amend Sec.  120.462 by:
0
a. Removing the phrase ``by state regulators'' wherever it appears and 
adding in its place the phrase ``in Sec.  120.462(a)(1)'';
0
b. Redesignating paragraphs (a) through (e) as paragraphs (b) through 
(f); and
0
c. Adding a new paragraph (a).
    The addition reads as follows:


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

    (a) Minimum capital requirements--(1) For NFRLs. (i) Beginning on 
January 4, 2024, each NFRL that makes or acquires a 7(a) loan must 
maintain the minimum capital required by its state regulator, or 
$2,500,000, whichever is greater.
    (ii) Any NFRL approved on or after January 4, 2021, including in 
the event of a change of ownership or control, must maintain the 
minimum capital requirement set forth in paragraph (a)(1)(i) of this 
section.
    (iii) Unless subject to paragraph (a)(1)(i) or (ii) of this 
section, an NFRL must comply with the minimum capital requirements for 
NFRLs that were in effect on January 3, 2021.
    (2) For SBLCs. For information on minimum capital requirements for 
SBLCs, see Sec.  120.471.
* * * * *

0
5. Add Sec.  120.466 to read as follows:


Sec.  120.466   SBA Supervised Lender application.

    An entity seeking to participate as an SBA Supervised Lender must 
apply to SBA. SBA evaluates SBA Supervised Lender applicants through an 
initial review and final review, as follows:
    (a) Initial review. SBA Supervised Lender applicants must submit a 
written plan containing information about the organization and its 
current and proposed lending activities (``Lender Assessment Plan''). 
After SBA's review of the Lender Assessment Plan, the Office of Capital 
Access may require an interview with the applicant and its management 
team. SBA will determine, in its sole discretion, whether an applicant 
may proceed to the final review. If SBA determines that an applicant 
may not proceed to the final review, the applicant must wait at least 6 
months before it may submit a new Lender Assessment Plan. Each 
applicant must demonstrate to SBA's satisfaction that it meets the 
ethical requirements and the participation criteria set forth in 13 CFR 
120.140 and 120.410. The Lender Assessment Plan must include the 
following items:
    (1) The legal name, address, telephone number and email address of 
the applicant;
    (2) Business plan, detailing the applicant's proposed lending area 
and the volume of loan activity projected over the next 3 years 
(supported by current and projected balance sheets, income statements 
and statements of cash flows);
    (3) Capitalization (current and proposed), including the form of 
organization and the identification of all debt and classes of equity 
capital and proposed funding amounts, including any rights or 
preferences accorded to such interests (e.g., voting rights, redemption 
rights and rights of convertibility) and any conditions for the 
transfer, sale or assignment of such interests;
    (4) A list of all members of the applicant's management team, 
including the applicant's officers, directors, managers and key 
employees, as well as the applicant's owners, Associates (as defined in 
Sec.  120.10) and Affiliates (as defined in Sec.  121.103 of this 
chapter);
    (5) A written summary of the professional experience (including any 
prior experience with any SBA program) of the applicant's management 
team (including key employees);
    (6) In connection with any application to become an SBLC, the 
applicant must include a letter agreement signed by an authorized 
official of an existing SBLC certifying that the SBLC is seeking to 
transfer its SBA lending authority to the applicant; and
    (7) If approval of any state or Federal chartering, licensing or 
other regulatory authority is required, copies of any licenses issued 
by or documents filed with such authority.
    (b) Final review. Each applicant that receives notice from SBA in 
writing that it may proceed to the final review must submit a complete 
application to SBA within 90 calendar days. The application 
requirements for SBA Supervised Lenders are set forth in official SBA 
policy and procedures. An incomplete application submitted to SBA will 
not be processed and will be returned to the applicant. SBA may, in its 
sole discretion, approve or deny any SBA Supervised Lender application. 
The decision to approve or deny an SBA Supervised Lender application is 
a final agency decision. If an SBA Supervised Lender application is 
denied by SBA or if a complete application is not timely submitted, the 
applicant may not submit a new Lender Assessment Plan and restart the 
application process until 12 months from the date of denial or the

[[Page 78214]]

date a complete application was due to SBA, as applicable.
    (c) NFRL operating and lending experience requirement. For an 
entity seeking to become an NFRL, evidence of at least 1 year of 
current operating and relevant commercial lending experience by the 
entity must be provided.

0
6. Add Sec.  120.467 to read as follows:


Sec.  120.467  Evaluation of SBA Supervised Lender applicants.

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

0
7. Add Sec.  120.468 to read as follows:


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

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

[[Page 78215]]

servicing of an SBA Supervised Lender's 7(a) loan portfolio in 
accordance with Sec.  120.535(d) upon the voluntary surrender of its 
SBA lending authority.


Sec.  120.470  [Amended]

0
8. Amend Sec.  120.470 by removing paragraph (g) and redesignating 
paragraph (h) as paragraph (g).

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


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

    (a) Minimum capital requirements. (1) Beginning on January 4, 2024, 
each SBLC that makes or acquires a 7(a) loan must maintain, at a 
minimum, unencumbered paid-in capital and paid-in surplus of at least 
$5,000,000, or 10 percent of the aggregate of its share of all 
outstanding loans, whichever is greater.
    (2) Any SBLC approved on or after January 4, 2021, including in the 
event of a change of ownership or control, must maintain the minimum 
capital requirement set forth in paragraph (a)(1) of this section.
    (3) Unless subject to paragraph (a)(1) or (2) of this section, an 
SBLC must comply with the minimum capital requirements that were in 
effect on January 3, 2021.
    (b) * * *
    (3) Unrestricted net assets (for non-profit corporations);
* * * * *


Sec.  120.475  [Removed and Reserved]

0
10. Remove and reserve Sec.  120.475.

Jovita Carranza,
Administrator.
[FR Doc. 2020-26307 Filed 12-3-20; 8:45 am]
BILLING CODE P