Small Business Lending Company (SBLC) Moratorium Rescission and Removal of the Requirement for a Loan Authorization, 21890-21900 [2023-07181]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 88, Number 70 (Wednesday, April 12, 2023)]
[Rules and Regulations]
[Pages 21890-21900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-07181]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AH92


Small Business Lending Company (SBLC) Moratorium Rescission and 
Removal of the Requirement for a Loan Authorization

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 its business loan program regulations to lift the moratorium 
on licensing new Small Business Lending Companies (SBLCs) and add a new 
type of lending entity called a Community Advantage SBLC. SBA is also 
removing the requirement for a Loan Authorization in the 7(a) and 504 
Loan Programs.

DATES: This rule is effective May 12, 2023.

FOR FURTHER INFORMATION CONTACT: Dianna Seaborn, Director, Office of 
Financial Assistance, Office of Capital Access, Small Business 
Administration, at (202) 205-3645 or [email protected]. The phone 
number above may also be reached by individuals who are deaf or hard of 
hearing, or who have speech disabilities, through the Federal 
Communications Commission's TTY-Based Telecommunications Relay Service 
teletype service at 711.

SUPPLEMENTARY INFORMATION:

I. Background Information

    The mission of SBA is to ``aid, counsel, assist, and protect . . . 
the interests of small business concerns in order to preserve free 
competitive enterprise . . . and to maintain and strengthen the overall 
economy of our nation.'' 15 U.S.C. 631(a). SBA accomplishes this 
mission, in part, through programs that bridge the financing gap in the 
private market. One such program is the 7(a) Loan Program authorized by 
section 7(a) of the Small Business Act (15 U.S.C. 636(a)), which 
supports our nation's economy by providing SBA-guaranteed loans to 
small businesses that lack adequate access to capital on reasonable 
terms and conditions.
    Section 7(a)(17) of the Small Business Act states that SBA shall 
authorize lending institutions and other entities, in addition to 
banks, to make 7(a) loans. To this end, SBA has authorized Small 
Business Lending Companies (SBLCs) as defined in 13 CFR 120.10 to 
participate in the 7(a) Loan Program. SBLCs are non-depository lending 
institutions authorized by SBA only to make loans pursuant to section 
7(a) of the Small Business Act and loans to Intermediaries in SBA's 
Microloan program. Under current regulations, SBLCs may not be 
affiliated with another SBA Lender, including 7(a) Lenders or Certified 
Development Companies (CDCs) that participate in SBA's CDC/504 Loan 
Program. SBLCs are subject to all regulations pertaining to 7(a) loans 
and Loan Program Requirements (as defined in 13 CFR 120.10) regarding 
origination, servicing, and liquidation. Unlike the majority of 7(a) 
Lenders, which are Federally-regulated depository institutions, SBLCs 
are regulated, supervised, and examined solely by SBA. As SBA-regulated 
entities, SBLCs are subject to specific regulations and policies 
regarding formation, capitalization, and enforcement actions.
    On August 17, 1981, SBA published a proposed rule (46 FR 41523) to, 
among other things, impose a moratorium on licensing new SBLCs. 
Subsequently, on January 4, 1982, SBA published a final rule (47 FR 9) 
repealing its authority to approve additional SBLCs as participating 
lenders. Since then, the number of SBLC Licenses has remained unchanged 
at 14. To become an SBLC under current regulations, an entity must 
acquire one of the existing 14 SBLC Licenses from an entity that is 
willing to sell its SBLC License and exit the 7(a) Loan Program.
    On February 18, 2011, SBA created the Community Advantage (CA) 
Pilot

[[Page 21891]]

Program to provide 7(a) loans in underserved markets through mission-
oriented lenders focused on economic development (76 FR 9626). SBA 
waived the moratorium on the licensing of new SBLCs to allow 
organizations that met the definition of an SBLC but that did not have 
an SBLC License to participate in the CA Pilot Program as CA Lenders. 
The CA Pilot Program was recently extended until September 30, 2024 (87 
FR 19165). SBA is also removing the requirement for a Loan 
Authorization and will instead rely on the use of the terms and 
conditions of the loan application as submitted by the SBA Lender into 
E-Tran. These terms and conditions will reflect the agreement between 
the Borrower, the SBA Lender and SBA providing the terms and conditions 
under which SBA will guarantee a business loan to the Borrower, subject 
to the Lender's compliance with all applicable Loan Program 
Requirements.
    On November 7, 2022, SBA published a notice of proposed rulemaking 
with a request for comments in the Federal Register to lift the 
moratorium on licensing new SBLCs, to add a new type of entity called a 
Mission-Based SBLC, and to remove the requirement for a Loan 
Authorization. 87 FR 66963 (November 7, 2022). This final rule 
implements the proposed revisions put forth for public comment in the 
November 7, 2022 proposed rule, amended as indicated below.

II. Summary of Comments

    SBA received 169 comments on the proposed rule. Of these, 11 
comments were submitted by trade groups and 85 comments were received 
from lenders, nonprofit organizations, or individuals. The remaining 73 
comments were submitted anonymously. SBA received comments from six 
trade groups, six lenders or employees of lenders, and two comments 
from individuals or businesses objecting to the confluence of the 
proposed changes in the notice of proposed rulemaking in the Federal 
Register (87 FR 64724 October 26, 2022) to streamline and modernize the 
7(a) Loan Program and 504 Loan Program regulations (Affiliation 
Proposed Rule), the notice of proposed rulemaking published in the 
Federal Register (87 FR 66964 November 7, 2022) to lift the moratorium 
on licensing new SBLCs, to add a new type of entity called a Mission-
Based SBLC, and to remove the requirement for a Loan Authorization 
(SBLC Proposed Rule), and SBA's announcement of a revision to the 
Standard Operating Procedures (SOP) 50 10, Lender and Development 
Company Loan Programs. The comments stated the confluence of these 
revisions are problematic as proposed because SBA would immediately 
invite additional non-federally regulated entities to participate as 
7(a) Lenders without first testing whether the streamlining of 
provisions such as lending criteria and hazard insurance will have an 
adverse effect on SBA's loan portfolio. One trade group requested that 
the Administrator temporarily withdraw both proposed rules.

Comments on SBLC Changes

    SBA received 119 comments on SBA's proposal to remove the 
moratorium on licensing new SBLCs and create a new type of SBLC called 
a Mission-Based SBLC. As discussed in the section-by-section analysis 
below, SBA has determined that the new name for mission-based SBLCs 
will be Community Advantage SBLCs. Thirteen comments expressed support 
and 106 comments expressed opposition or suggested modifications to 
SBA's proposed amendments. The comments covered a range of topics that 
can be grouped into 9 topics.

Comments Topic 1

    Comments stated the proposed rules do not adequately address how 
current CA Lenders would transition into becoming Community Advantage 
SBLCs. On May 11, 2023, as determined by the Administration, SBA will 
grandfather current CA Lenders in accordance with section 120.420(e) 
that participated in the CA Pilot Program to be licensed as 7(a) 
Community Advantage SBLCs.
    Some comments pointed out that current CA Lenders may operate on a 
for-profit basis, which is incompatible with SBA's proposal that new 
Community Advantage SBLCs operate as nonprofit organizations. This and 
other comments regarding CA Lenders are addressed in the section-by-
section analysis below.

Comments Topic 2

    Comments stated that licensing additional regular SBLCs and new 
Community Advantage SBLCs will increase risk to SBA that will in turn 
increase subsidy costs to SBA and will negatively impact SBA lenders 
and borrowers, perhaps in the form of higher fees to lenders and 
borrowers or lower program authority. Some comments speculated that new 
SBLC licenses may be awarded to financial technology (fintech) lenders 
and point to reports that in the Paycheck Protection Program (PPP), 
some fintech lenders were associated with fraud. However, SBLCs are 
defined as non-depository lending institutions, which is not synonymous 
with the term fintech. SBA has for many years provided oversite to non-
depository entities participating in the SBA business loan programs. 
This includes SBLCs, non-federally regulated lenders (NFRLs), 504 
Certified Development Companies (CDCs), and Microloan Intermediaries. 
In fact, most all lending institutions incorporate the use of financial 
technology in their delivery of loans and other financial products. SBA 
received comments supporting the proposed revisions with these comments 
stating that PPP lending has different statutory requirements that were 
enacted in response to an immediate need for capital to prevent a 
collapse of the small business economy during a worldwide pandemic, and 
that it is not a fair comparison to equate fraud in PPP with potential 
fraud in the regular 7(a) loan program, which has well-established and 
robust operating policies and procedures that have proven successful at 
protecting the integrity of the program.

Comments Topic 3

    Comments expressed concern that SBA will not be able to adequately 
provide oversight and servicing for SBA lenders. As SBA discussed at 
length in the proposed rule, SBA conducted in depth assessments to 
ensure it has capacity to provide oversight and servicing to SBA's 
entire portfolio of lenders, including any potential additional SBLCs. 
As a result of these assessments, SBA stated in the proposed rule that 
it will license, service, and provide oversight to three new regular 
SBLCs. It should be noted that since January 1982 when SBA imposed the 
moratorium on licensing new SBLCs, that there have been more than 60 
different holders of the 14 authorized SBLC licenses. SBA has 
successfully overseen transition and operation of various 
organizational structures of SBLC entities.

Comments Topic 4

    Comments allege that the proposed revisions will not increase 
lending to underserved markets because SBA is not proposing to impose 
any lending requirements to underserved markets on regular SBLCs, and 
because SBA has been too vague as to how it will define and identify 
capital market gaps for new Community Advantage SBLCs. However, SBA 
received several comments in support of licensing new nonbank lenders, 
with some of these comments stating that non-bank lenders offer a more 
flexible and alternative avenue to capital compared to

[[Page 21892]]

traditional banking institutions, and that these lenders mainly focus 
on smaller loan amounts that are not considered a priority in the 
traditional banking system. One comment in support of the proposed 
revisions referenced a recent working paper published by the Federal 
Reserve Bank of Philadelphia that presents preliminary research being 
circulated for discussion purposes that states that fintech small 
business lending platforms made loans in more zip codes with higher 
business bankruptcy filings and higher unemployment rates. Fintech 
platforms' internal credit scores were able to predict future loan 
performance more accurately than the traditional approach to credit 
scoring. Overall, the research found that fintech lenders have a 
potential to create a more inclusive financial system, allowing small 
businesses that were less likely to receive credit through traditional 
lenders to access credit and to do so at lower cost.\1\ SBA's history 
with the CA Pilot Program indicates that as Community Advantage SBLCs 
these CA lenders will continue to commit resources to reaching 
communities with capital market gaps.
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    \1\ Federal Reserve Bank of Philadelphia Working Papers, 
Cornelli, G, Frost, J., Gambacorta, L., Jagtiani, J., April 21, 
2022, ``The Impact of Fintech Lending on Credit Access for U.S. 
Small Businesses'' at https://www.philadelphiafed.org/the-economy/banking-and-financial-markets/the-impact-of-fintech-lending-on-credit-access-for-us-small-businesses.
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Comments Topic 5

    Comments expressed concern that the proposed revisions will create 
an uneven playing field between federally regulated lenders and SBLCs/
Community Advantage SBLCs. The comments focus on the idea that 
federally regulated lenders are held to a higher standard by their 
federal regulators than SBA imposes on SBLCs. However, SBA has and will 
continue to require that SBA Supervised Lenders and CDCs, including 
SBLCs and Community Advantage SBLCs, submit their credit policies for 
review by SBA as part of the application to become an SBA Lender. SBA 
seeks to ensure that each lender authorized to participate in the 
program has policies that demonstrate reasonable and prudent credit 
standards that adequately address SBA's Loan Program Requirements. SBA 
also reviews lender credit policies during lender oversight and when 
lenders propose changes to their policies or practices in accordance 
with Loan Program Requirements as defined in 13 CFR 120.10. Further, 
SBA Supervised Lenders must use the approved policies and procedures to 
satisfy underwriting criteria for similarly-sized, non-SBA guaranteed 
commercial loans, where reference is made in Loan Program Requirements.

Comments Topic 6

    Comments expressed concern over the proposed capital requirements 
for Community Advantage SBLCs. Some comments stated that SBA should set 
a minimum threshold for capitalization of all Community Advantage 
SBLCs. However, as SBA indicated in the proposed rule, SBA will examine 
each lender applicant on an individual basis to determine the capital 
requirements best suited to minimize risk while not burdening smaller 
lenders with unnecessarily large capital requirements. However, SBA 
agrees that further steps should be taken to address risk mitigation 
for Community Advantage SBLCs. SBA will require Community Advantage 
SBLCs to maintain a loan loss reserve account as discussed more fully 
in the section-by-section analysis below for section 120.471.
    Additionally, regarding SBA's proposal to set minimum lender 
capital amounts at the discretion of the Administrator in consultation 
with SBA's Associate Administrator for SBA's Office of Capital Access 
(AA/OCA), SBA received comments expressing concern that placing the 
decision at the level of political appointees may lead to the 
politicization of the program. SBA disagrees with this concern because 
political appointees determine the Agency's goals and direction, and 
across the federal government, political appointees have the authority 
to make and review final determinations as informed by career 
employees. In response, the final rule expands the decision-making 
authority in this case so that the Administrator and the AA/OCA may 
delegate their decision-making authority to designees.

Comments Topic 7

    Comments challenged SBA's assumptions in the proposed rule. A trade 
group requested that SBA provide information regarding how it 
determined that allowing decisions regarding the determination of 
capital requirements for Community Advantage SBLCs to be made on a 
case-by-case basis is consistent with existing statute. Section 23 of 
the Small Business Act, Supervisory and Enforcement Authority for Small 
Business Lending Companies, requires the SBA Administrator to, among 
other things, ``issue regulations outlining the conditions under which 
the Administrator may determine the level of capital . . .'' That 
language clearly allows the Administrator the discretion to establish 
the ``conditions under which'' the required level of capital would be 
determined for SBLCs. SBA is abiding by this statutory requirement 
through this rulemaking in revisions to Sec.  120.471.
    Some comments challenged the assumptions made in the proposed rule, 
doubting SBA's estimates that a newly licensed SBLC would make 425 
loans over the next 4 years because the commenters believe it likely 
that some or all of the new regular SBLCs would be fintechs that may 
have the capacity to approve a significantly higher number of loans 
than is estimated. SBA stands by its estimate that a new SBLC has the 
potential to increase 7(a) lending by approximately 425 loans per year 
over the next four years, because the estimate was derived from actual 
historical performance of new SBA 7(a) Lenders over a four-year period 
of fiscal years 2018 through 2022.

Comments Topic 8

    Comments stated the proposed rule was too vague or did not provide 
enough information. For example, commenters stated that SBA should 
publish the application and evaluation processes for new applicants for 
SBLC licenses in the regulations. SBA disagrees with this approach 
because it would be overly restrictive. Instead, the proposed approach 
allows SBA the flexibility to respond to unique challenges such as 
pandemics, recessions, issues faced by specific industry sectors, etc.

Comments Topic 9

    Comments expressed concern that existing SBLCs will be devalued by 
the licensing of new SBLCs/Community Advantage SBLCs. However, SBA also 
received comments in support of expanding the number of SBLCs. These 
comments pointed out that by imposing a moratorium on licensing new 
SBLCs and by restricting the total number of SBLCs to 14 for the last 
40 years, SBA has created an oligopoly over the $36 billion a year 
lending market for the existing SBLCs, which unfairly restricts 
competition. These comments point out that expanding the number of SBLC 
licenses will increase competition and encourage innovation, which 
benefits the small business.

Comments on Removing the Definition of ``Authorization''

    SBA received 80 comments on removing the definition of 
Authorization and removing reference

[[Page 21893]]

to an Authorization from its regulations. The comments were nearly 
universally opposed to removing the word Authorization, with three 
comments supporting the proposal and the rest opposing the proposal or 
requesting modifications. Most comments that opposed the proposal 
expressed the concern that the Authorization is the document that 
clearly defines the agreement between the lender and SBA for each 
transaction and is beneficial in communicating requirements to the 
borrower, lenders, and SBA. Other comments stated the Authorization 
serves as a reference document for the life of the loan. Some comments 
stated borrowers will not know the terms they are agreeing to without 
an Authorization. Several comments stated that lenders rely on the 
Authorization as a template or checklist to ensure the lender's 
compliance with Loan Program Requirements, with one comment stating the 
Authorization is the gold standard for commercial lending. Several 
comments stated the Authorization is a roadmap for all closing 
processes and should not be eliminated without a cohesive and 
comprehensive replacement. Many comments suggested that if SBA 
eliminates the Authorization, SBA should develop an alternative 
document that serves the same purpose but is easier to use. However, as 
explained in the proposed rule, although SBA is eliminating the word 
Authorization as a defined term in its regulations, SBA will continue 
to require and provide a means for memorializing each loan's terms and 
conditions and will provide further guidance for the procedures of 
providing the loan terms and conditions to SBA in Loan Program 
Requirements. In practice, SBA's E-Tran system currently enables users 
to download a printable document with corresponding fields executed by 
the lender, including uses of proceeds and collateral. This rule 
finalizes the proposed changes to remove the word Authorization from 
SBA's regulations will enable SBA to eliminate duplication of data 
entry and will save lenders and SBA time. For the reasons stated above, 
SBA is moving forward as proposed.

III. Section-by-Section Analysis

SBLC Moratorium Recission

Section 120.10--Definitions
    SBA has determined that certain markets where there are capital 
market gaps continue to struggle to obtain financing on non-predatory 
terms. Therefore, SBA is lifting the moratorium on licensing new Small 
Business Lending Companies (SBLC) and creating a new type of SBLC to 
help bridge this financing gap.
    SBA proposed to add a new definition for Mission-Based SBLC as a 
specific type of SBLC that is a nonprofit organization that will be 
licensed to make 7(a) loans. SBA proposed to call this new type of SBLC 
a Mission-Based SBLC; however as discussed below, SBA will instead call 
this new type of SBLC a Community Advantage SBLC.
    SBA believes Community Advantage SBLCs will increase access to 
capital in their respective communities. SBA proposed Community 
Advantage SBLCs to be nonprofit entities because nonprofit lending 
organizations often serve communities with capital market gaps SBA 
intends to fill. Adding Community Advantage SBLCs to the possible types 
of 7(a) Lenders will also allow existing CA Lenders an opportunity to 
participate in the 7(a) Loan Program on a non-temporary basis as a 
Community Advantage SBLC while continuing to meet the needs of 
underserved communities. When SBA authorizes an additional Community 
Advantage SBLC License to a CA Lender, the CA Lender will transition 
from making 7(a) loans in a temporary pilot program to instead making 
loans under the 7(a) loan program without an expiration date associated 
with their participation. SBA received many comments that SBA should 
make the CA Pilot Program permanent. However, the nature of a pilot 
program is that it is a temporary program. SBA will instead provide a 
process to allow current CA Lenders to transition into Community 
Advantage SBLCs. Such guidance will be set forth in upcoming Loan 
Program Requirements. SBA determined that CA Lenders were a potential 
group of lenders already making loans in underserved markets, that 
would be able to meet the purpose of mission-based SBLCs, therefore SBA 
will refer to the new type of SBLCs as Community Advantage SBLCs rather 
than Mission-Based SBLCs.
    To accomplish the goal of expanding capital opportunities and 
allowing Community Advantage SBLCs and regular SBLCs to increase the 
availability of 7(a) loans to small businesses, SBA will remove the 
moratorium on licensing new SBLCs. Current section 120.10 definition of 
Small Business Lending Company (SBLC) states that SBA has imposed a 
moratorium on licensing new SBLCs since January 1982, and the number of 
licenses for SBLCs has remained at 14 ever since. SBA is finalizing the 
proposed definition to remove the statement that SBA has imposed a 
moratorium on licensing new SBLCs. Not only will this allow SBA to 
license Community Advantage SBLCs, but it will allow SBA to increase 
the number of regular SBLCs as well. SBA plans to issue notices in the 
Federal Register with information regarding the SBLC license 
application processes.
Section 120.466--SBA Supervised Lender Application
    Current section 120.466, paragraph (a)(6), states that in 
connection with any application to become an SBLC, the applicant must 
include a letter agreement from the existing SBLC stating that the SBLC 
is seeking to transfer its lending authority. SBA proposed to revise 
this section because the lifting of the moratorium on new SBLC Licenses 
will no longer require that an applicant show that an existing lender 
is transferring its authority. However, as SBA proposed to accept 
applications for new SBLCs from time to time in section 120.10, there 
may be periods when new SBLC Licenses are not being issued and existing 
Licenses will be acquired and transferred. Therefore, SBA proposed to 
revise this section to state that an applicant to become an SBLC must 
show a letter agreement from an existing SBLC if it is acquiring an 
existing License. For the reasons stated above, SBA is moving forward 
as proposed.
Section 120.470--What are SBA's additional requirements for SBLCs?
    SBA proposed to revise Sec.  120.470 to reference and include 
additional requirements for Community Advantage SBLCs. As a type of 
SBLC, except where otherwise explicitly mentioned in regulations, all 
requirements imposed on SBLCs and SBA Supervised Lenders will apply to 
Community Advantage SBLCs as well.
    Several comments said that the existing requirement in paragraph 
(a) that states an SBLC may only make 7(a) loans or loans to 
Intermediaries is unnecessarily restrictive and is incompatible with 
the business models of some current CA lenders that are Community 
Development Financial Institutions (CDFI) or SBA CDCs. They further 
commented that this would also prevent such entities from applying in 
the future to become an SBLC or a Community Advantage SBLC because 
those entities may also conduct other business activities, including 
loanmaking. SBA agrees with this concern and will revise paragraph (a) 
by removing the word ``only'' to make it clear that SBLCs and Community 
Advantage SBLCs may participate in other lines of business in addition 
to

[[Page 21894]]

7(a) lending or making loans to Intermediaries.
    SBA proposed to revise paragraph (b) to require Community Advantage 
SBLCs to be nonprofit organizations without imposing similar 
requirements on regular SBLCs. As discussed above, some comments 
expressed concern that current CA Lenders may operate on a for-profit 
basis. Any Community Advantage Pilot Program lender will be permitted 
to hold a Community Advantage SBLC license regardless of their profit 
or nonprofit structure. New Community Advantage SBLC applicants that 
did not participate as a Community Advantage Pilot Program lender are 
required to have nonprofit status to qualify.
    SBA received multiple comments regarding the costs that lending 
entities may encounter when they become Community Advantage SBLCs. SBA 
agrees with these concerns, and in an effort to reduce some ongoing 
costs for these lenders, SBA will revise the requirement at paragraph 
(e) for fidelity insurance. The current requirement for fidelity 
insurance is that an SBLC must maintain a Brokers Blanket Bond, 
Standard Form 14, or Finance Companies Blanket Bond, Standard Form 15, 
or such other form of coverage as SBA may approve, in a minimum amount 
of $2,000,000 executed by a surety holding a certificate of authority 
from the Secretary of the Treasury pursuant to 31 U.S.C. 9304-9308. SBA 
has determined this requirement may be overly burdensome for Community 
Advantage SBLCs to bear; therefore, SBA will provide an exception to 
this requirement to state that SBA's Administrator, in consultation 
with SBA's Associate Administrator for the Office of Capital Access 
(AA/OCA) or their designee(s), at their discretion, will determine the 
appropriate coverage levels for Community Advantage SBLCs as published 
in Loan Program Requirements.
    SBA also proposed to add a new paragraph (h) to describe the 
requirements Community Advantage SBLCs must meet. However, SBA has 
determined that it will not go forward with a new paragraph (h) as 
proposed and instead, SBA's Administrator, in consultation with SBA's 
Associate Administrator for the Office of Capital Access (AA/OCA) or 
their designee(s), at their discretion, will determine the specific 
market requirements, if any, that apply to Community Advantage SBLCs in 
Loan Program Requirements.
Section 120.471--What are the minimum capital requirements for SBLCs?
    Current Sec.  120.471, paragraph (a)(1) addresses minimum capital 
requirements for SBLCs and states that 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. SBA proposed to revise this 
paragraph by adding a new paragraph (a)(4) that will state that a 
Community Advantage SBLC must maintain a minimum amount of capital at 
the discretion of the Administrator, in consultation with SBA's 
Associate Administrator for SBA's Office of Capital Access (AA/OCA), or 
their designee(s) to ensure sufficient risk protection for SBA and 
lenders while not burdening smaller lenders with large capital 
requirements. This proposal allows SBA to license Community Advantage 
SBLCs that are nonprofit lenders when these entities would otherwise 
not be able to meet SBA's minimum capital requirements.
    SBA received comments that SBA should consider requiring a minimum 
loan loss reserve requirement for Community Advantage SBLCs. Given 
SBA's determination to create flexibility in minimum capital 
requirements for lenders participating in the Community Advantage Pilot 
program, SBA agrees with these comments regarding loan loss reserves 
and will require Community Advantage SBLCs to maintain a loan loss 
reserve account as determined at the discretion of the Administrator, 
in consultation with SBA's Associate Administrator for SBA's Office of 
Capital Access (AA/OCA), or their designee(s) in Loan Program 
Requirements
Section 120.820--CDC Affiliation
    Current section 120.820 limits the entities with which CDCs may be 
affiliated. SBA proposed to add a new paragraph (g), which states 
notwithstanding paragraphs (b), (c), and (e), a CDC may be affiliated 
with a Community Advantage SBLC. This revision will allow CDCs to form 
the required entity whose purpose is to make 7(a) loans as a Community 
Advantage SBLC. Additionally, SBA will provide language stating that 
CDCs that are also CA Lenders as of the effective date of this rule may 
be licensed as Community Advantage SBLCs without having to form a 
separate entity to participate in 7(a) loanmaking.

Removal of Requirement for Loan Authorization

Section 120.10--Definitions
    SBA proposed to remove the regulatory definition for Authorization. 
SBA will continue to rely on the SBA Form 750, which is a written 
agreement executed by all participating lenders requiring that those 
same lenders comply with all statutes and regulations. The removal of 
the regulatory definition for Authorization will not change SBA's 
ongoing practice of providing specific written instructions regarding 
documentation of an SBA loan's terms and conditions in SBA's Loan 
Program Requirements. For loan accounting purposes, SBA Lenders will 
continue, as they do today, to electronically submit their request for 
a loan guaranty authorization from the Agency's loan accounting system 
of record--E-Tran.
    SBA proposed to amend the definition of Loan Instruments to remove 
the word Authorization. The amended definition will state that Loan 
Instruments are the note, instruments of hypothecation, and all other 
agreements and documents related to a loan.
    SBA proposed to amend the definition of Loan Program Requirements 
or SBA Loan Program Requirements to remove the word Authorization. The 
amended definition will state that 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 or to which the Lender or CDC is subject; SBA 
Standard Operating Procedures (SOPs); Federal Register notices; and 
official SBA notices and forms applicable to the 7(a) Loan Program, 504 
Loan Program or Microloan Program; 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.
Section 120.120--What are eligible uses of proceeds?
    Current Sec.  120.120 states that a small business must use an SBA 
business loan for sound business purposes, and the uses of proceeds are 
prescribed in each

[[Page 21895]]

loan's Authorization. The section goes on to describe the various ways 
in which a borrower may use SBA loan proceeds. SBA proposes to amend 
this section to remove the sentence that states ``The uses of proceeds 
are prescribed in each loan's Authorization.'' SBA already captures the 
uses of proceeds of the SBA-guaranteed loan through the loan 
application data and conditions the SBA Lender enters into ETRAN; 
therefore, it is not necessary to include the information in a separate 
Authorization. For the reasons stated above, SBA is moving forward with 
the rule as proposed.
Section 120.192--Approval or Denial
    Current section 120.192 states that Applicants receive notice of 
approval or denial by the Lender, CDC, Intermediary, or SBA, as 
appropriate. Notice of denial will include the reasons. If a loan is 
approved, an Authorization will be issued. SBA proposed to amend Sec.  
120.192 to remove the sentence that states ``If a loan is approved, an 
Authorization will be issued.'' SBA's current practice is to review an 
Authorization and issue an SBA Loan Number when the Authorization is 
considered satisfactory to SBA. SBA considers the issuance of the loan 
number to indicate loan approval by SBA. The proposed rule to no longer 
require an Authorization will only slightly modify the current process. 
Under the proposed rule, SBA will indicate loan approval by issuing a 
loan number. For the reasons stated above, SBA is moving forward with 
the rule as proposed.
Section 120.220--Fees That Lender Pays SBA
    Section 120.220 states the requirements for the fees that 7(a) Loan 
Program Lenders pay SBA. The introductory text of Sec.  120.220 states 
in part ``Acceptance of the guaranty fee by SBA does not waive any 
right of SBA arising from a Lender's negligence, misconduct or 
violation of any provision of these regulations, the guaranty 
agreement, or the loan authorization.'' For the reasons stated above, 
SBA proposed to remove the reference to the loan Authorization so that 
the sentence states ``Acceptance of the guaranty fee by SBA does not 
waive any right of SBA arising from a Lender's negligence, misconduct 
or violation of any provision of these regulations, or the guaranty 
agreement.
    Current Sec.  120.220(e) states in part ``Acceptance of the 
guarantee fee by SBA shall not waive any right of SBA arising from the 
[7(a)] Lender's misconduct or violation of any provision of this part, 
the guarantee agreement, the Authorization, or other loan documents.'' 
For the reasons stated above, SBA proposed to remove the reference to 
the loan Authorization so the revised Sec.  120.220(e) will state 
``Acceptance of the guarantee fee by SBA shall not waive any right of 
SBA arising from the [7(a)] Lender's misconduct or violation of any 
provision of this part, the guarantee agreement, or other loan 
documents. For the reasons stated above, SBA is moving forward with the 
rule as proposed.
Section 120.801--How a 504 Project Is Financed
    Current Sec.  120.801(a) applies to the 504 Loan Program and states 
``One or more small businesses may apply for 504 financing through a 
CDC serving the area where the 504 Project is located. SBA issues an 
Authorization if it agrees to guarantee part of the funding for a 
Project.'' For the reasons stated above, SBA proposed to remove the 
sentence that references the Authorization, and SBA is moving forward 
with the rule as proposed.
Section 120.842--ALP Express Loans
    Current Sec.  120.842(b)(4) states the requirements for submission 
of loan documents for 504 Loan Program ALP Express loans and states in 
part ``If approved, SBA will notify the ALP CDC of the loan number 
assigned to the loan and provide the CDC with a signed copy of the Loan 
Authorization.'' SBA's current practice is to review an Authorization 
and issue a loan number when the Authorization is considered 
satisfactory to SBA. Under the proposed rule, SBA will indicate loan 
approval by issuing a loan number. Therefore, SBA proposed to remove 
the reference to the Loan Authorization so the sentence will state ``If 
approved, SBA will notify the ALP CDC of the loan number assigned to 
the loan.''
    Current Sec.  120.842(b)(5) states the requirements for loan and 
debenture closing for 504 Loan Program ALP Express loans and states 
``After receiving notification of the loan number from SBA, the ALP CDC 
is responsible for properly undertaking all actions necessary to close 
the ALP Express Loan and Debenture in accordance with the expedited 
loan closing procedures applicable to a Priority CDC and with Sec.  
120.960.'' For the reasons stated above, SBA proposed to remove the 
reference to the Loan Authorization so that section 120.842(b)(5) will 
state ``After receiving notification of the loan number, the ALP CDC is 
responsible for properly undertaking all actions necessary to close the 
ALP Express Loan and Debenture in accordance with the expedited loan 
closing procedures applicable to a Priority CDC and with Sec.  
120.960.'' For the reasons stated above, SBA is moving forward with the 
rule as proposed.
Section 120.921--Terms of Third Party Loans
    Current Sec.  120.921(a) states the requirements for the loan 
maturity of the 504 Loan Program Third Party Lender loan. Section 
120.921(a) provides that Third Party Loans have loan maturity 
requirements. A 504 loan for a 10 year loan term must have at least a 7 
year Third Party Loan and similarly, a 504 loan for 20 years must have 
at least 10 years for the Third Party Loan. Additionally, overall loan 
maturities must be recalculated if there is more than one Third Party 
Loan. However, a balloon payment must be justified in the Loan 
Authorization. For the reasons stated above, SBA proposed to remove the 
last sentence in section 120.921(a) in its entirety so that balloon 
payments need not be identified in the Loan Authorization. For the 
reasons stated above, SBA is moving forward with the rule as proposed.
Section 120.960--Responsibility for Closing
    Current Sec.  120.960(c)(1) states that SBA may, within its sole 
discretion, decline to close a 504 Loan Program Debenture; direct the 
transfer of the 504 loan to another CDC; or cancel its guarantee of the 
Debenture, prior to sale, if the CDC has failed to comply materially 
with any requirement imposed by statute, regulation, SOP, policy and 
procedural notice, any agreement the CDC has executed with SBA, or the 
terms of a Debenture or loan authorization. For the reasons stated 
above, SBA proposed to remove the reference to the loan Authorization, 
and SBA is moving forward with the rule as proposed.
Section 120.971--Allowable Fees Paid by Borrower
    Section 120.971 states the requirements for the allowable fees that 
a 504 Loan Program Certified Development Company (CDC) may charge the 
Borrower in connection with a 504 loan and Debenture. Section 
120.971(a)(1) describes the Processing fee and states at what point in 
the processing of 504 loan a fee is earned and may be collected by the 
CDC as the time Authorization is issued. For the reasons stated above, 
SBA proposed to remove the reference to the

[[Page 21896]]

Authorization for the Debenture and to instead refer to the issuance of 
the loan number so that the amended section 120.971(a)(1) will provide 
that this fee will be considered earned and collected when the loan 
number is issued by SBA. For the reasons stated above, SBA is moving 
forward with the rule as proposed.

Compliance With Executive Orders 12866, 12988, 13132, and 13563, the 
Paperwork Reduction Act (44 U.S.C., Ch. 35), the Congressional Review 
Act (5 U.S.C. 801-808), and the Regulatory Flexibility Act (5 U.S.C. 
601-612)

Executive Order 12866

    The Office of Management and Budget has determined that this rule 
is a ``significant regulatory action'' under Executive Order 12866. SBA 
performed a comprehensive Regulatory Impact Analysis in the proposed 
rule for the public's information. SBA does not anticipate any of the 
changes made in this final rule will substantially change any of the 
assumptions necessary for the analysis. Therefore, the final Regulatory 
Impact Analysis is unchanged and is synopsized below. Each section 
begins with a core question.
A. Regulatory Objective of the Proposal
    Is there a need for this regulatory action?
    SBA performed a comprehensive cost benefit analysis in the proposed 
rule. SBA does not anticipate any of the changes made in this final 
rule will substantially change any of the assumptions necessary for the 
analysis; therefore, the cost benefit analysis remains unchanged and is 
synopsized below.
1. SBLC Moratorium Rescission
    Access to capital is one of the primary factors indicating whether 
a small business will startup, grow, and survive.
    SBA's existing loan programs serve an important role in credit 
markets for small businesses by providing financing to businesses that 
do not have credit available elsewhere from conventional sources on 
reasonable terms. SBA believes that increasing the number of 
nontraditional lenders will result in the expansion of business 
opportunities and the creation of more jobs in underserved communities.
    SBA's CA Pilot Program, which currently expires September 30, 2024, 
was specifically created to increase access to capital to small 
businesses located in underserved markets. SBA has learned that CA 
Lenders are able to routinely make at least 60 percent of their loans 
to small businesses located in underserved markets; therefore, SBA is 
onboarding more lenders to participate in 7(a) lending to increase the 
number of mission-based lenders that use the program. Licensing new 
SBLCs and Community Advantage SBLCs will provide a path for successful 
CA Lenders to become participants in the 7(a) Loan Program long-term. 
In addition, many non-traditional lenders participated in SBA's 
Paycheck Protection Program (PPP), which provided billions of dollars 
to small businesses during the economic upheaval caused by the COVID-19 
pandemic. Based on the success of the PPP, removing the moratorium on 
licensing new SBLCs and Community Advantage SBLCs opens opportunities 
for more non-traditional lenders to participate in the 7(a) Loan 
Program, providing additional sources of capital to America's small 
businesses.
2. Removal of the Requirement for a Loan Authorization
    SBA's current policy of requiring a separate Loan Authorization 
document that contains the loan terms and conditions in addition to the 
loan terms and conditions that the SBA Lender also submits to SBA with 
its guaranty application is cumbersome, outdated, and duplicative. SBA 
is revising its regulations to eliminate the duplication of effort and 
opportunity for a mismatch of information between multiple sources of 
the loan terms and conditions. The official source of all terms and 
conditions (including any modifications) under which SBA has agreed to 
provide a guaranty will be maintained in SBA's E-Tran system.
B. Benefits and Costs of the Rule
    What are the potential benefits and costs of this regulatory 
action?
1. SBLC Moratorium Rescission
    SBA anticipates minor additional costs or impact on the subsidy to 
operate the 7(a) Loan Program in the first 5 years under these proposed 
regulations resulting from an anticipated modest increase in 7(a) loan 
activity due to additional SBLCs, as newly established SBLCs take up to 
five years to reach the current lending activity sustained by 
established SBLC license holders. SBA has confirmed that there will be 
no subsidy impact in FY 2024.
    The existing 14 licensed SBLCs each approve an average of 125 loans 
per year. SBA anticipates new SBLCs will require a ramp-up period over 
the course of their first several years after they are licensed to 
reach this level of 7(a) lending activity. Over the course of the past 
four fiscal years, the majority of new 7(a) lenders have made between 1 
and 26 7(a) loans in their first year of activity, with the average 
number of loans from each new 7(a) lender of less than three loans in 
their first year of 7(a) loan activity. Over the fiscal years 2018 
through 2021, there were three new SBLC's that acquired SBLC Licenses, 
and those new SBLCs approved a total of 40 7(a) loans in their first 
years of operation, for an average of approximately 13 7(a) loans for 
each SBLC in their first year. Based on loan volume for other new 7(a) 
lenders between FY 2018 and FY 2021, SBA anticipates new SBLCs, 
including Community Advantage SBLCs, to make approximately eight 7(a) 
loans in their first year after they become fully operational because 
of the targeted markets of Community Advantage SBLCs. The three new 
SBLCs have the potential to increase 7(a) lending by the approximately 
425 loans per year over the next four years.\2\
---------------------------------------------------------------------------

    \2\ This estimate is from the average number of 7(a) loans each 
year based on the 1,694 new 7(a) loans approved by all new 7(a) 
Lenders in the four-year period of fiscal year 2018 through fiscal 
year 2022.
---------------------------------------------------------------------------

    SBA will grandfather current CA Lenders in accordance with section 
120.420(e) that participated in the CA Pilot Program to be licensed as 
7(a) Community Advantage SBLCs. When SBA authorizes a Community 
Advantage SBLC License to a CA Lender, the CA Lender will transition 
from making 7(a) loans in a temporary pilot program to instead making 
7(a) loans under a non-temporary license in the regular 7(a) program. 
This means a CA Lender transitioning to a Community Advantage SBLC will 
pose no additional burden nor increase the total number of entities 
overseen and supervised by SBA or the cost to SBA.
    SBA is authorized \3\ to charge a fee for conducting oversight 
activities, including safety and soundness examinations of SBA-
Supervised Lenders. All entities applying to participate as an SBLC 
(including a Community Advantage SBLC) will undergo an initial safety 
and soundness examination at the time of application. SBA estimates the 
fee for completing the initial safety and soundness examination will be 
a minimum of $10,000 per applicant. The fees charged by SBA for 
conducting oversight activities support the oversight and examination 
activities.
---------------------------------------------------------------------------

    \3\ See section 23(a) of the Small Business Act. 15 U.S.C. 
650(a), 15 U.S.C. 634(b)(6), (7), (14), and 13 CFR 120.1070.
---------------------------------------------------------------------------

    The ongoing oversight fees imposed on the new SBLCs, including 
Community Advantage SBLCs, will be

[[Page 21897]]

consistent with the oversight fees for the 7(a) Loan Program published 
by OCRM and consistent with the oversight fees, for example, that 
Community Advantage SBLCs have been responsible for over the duration 
of the Community Advantage Pilot Program.\4\ In general, OCRM conducts 
safety and soundness exams on SBLCs at least once every two years. 
Additionally, SBA conducts targeted reviews of loan files, among other 
reviews, in between regularly scheduled safety and soundness exams. The 
total biennial cost of these risk-based exams/reviews is currently 
approximately $50,000 to $150,000 per institution, with review costs 
correlated to the size of the SBLC's loan portfolio. Exam/review fees 
are usually invoiced following a review/exam.
---------------------------------------------------------------------------

    \4\ SBA Information Notice 5000-828947, FY 2022 Updated Fee 
Schedule for SBA Oversight of 7(a) Lenders, March 3, 2022. (https://www.sba.gov/document/information-notice-5000-828947-fy-2022-updated-fee-schedule-sba-oversight-7a-lenders).
---------------------------------------------------------------------------

    In addition to the review/exam fees charged, SBA charges an annual 
oversight fee that covers the costs of monitoring, Other Lender 
Oversight Activities, and Delegated Authority Reviews (the latter as 
applicable). SBA charges 7(a) Lenders a fee annually for monitoring, 
including the quarterly off-site/monitoring reviews conducted through 
the Loan and Lender Monitoring System (L/LMS). SBA's annual oversight 
fee also includes costs related to Other Lender Oversight Activities 
(e.g., technical assistance and analytics, a portion of OCRM salaries 
for 7(a) Lender oversight activities, supervision and enforcement 
activities, and similar costs to support SBA's lender oversight 
program). In addition, the annual oversight fee includes a fee for 
Delegated Authority Lender Reviews, as applicable. The annual oversight 
fee is based on SBA's costs. The annual fee for monitoring (e.g., L/LMS 
and subscription services), Other Lender Oversight Activities, and 
Delegated Authority Reviews is assessed annually based on each 7(a) 
Lender's portion of the total dollar amount of 7(a) guarantees in SBA's 
portfolio or, as applicable, the relevant portfolio segment the 
activity covers. For FY 2022, the annual oversight fee ranged from $161 
to $174 (the latter for Delegated Authority SBA Supervised Lenders) for 
every $1 million in 7(a) guaranteed dollars a 7(a) Lender has 
outstanding (exclusive of Paycheck Protection Program (PPP) loans). For 
a more detailed discussion on Lender Oversight Fees, see SOP 50 53 2, 
Chpt. 5 (eff. Jan. 1, 2021); SBA Information Notice 5000-828947, FY 
2022 Updated Fee Schedule for SBA Oversight of 7(a) Lenders, March 3, 
2022. (https://www.sba.gov/document/information-notice-5000-828947-fy-2022-updated-fee-schedule-sba-oversight-7a-lenders) and SOP 50 10 6, 
Part 1, Section A, Chpt 1, Para. D. Lifting the moratorium on licensing 
new SBLCs and authorizing Community Advantage SBLCs will benefit the 
approximately 51% of small employer firms that do not have their 
financing needs met,\5\ either because they did not receive all the 
financing for which they applied, or because they did not apply due to 
a variety of reasons, including the belief they would be turned down.
---------------------------------------------------------------------------

    \5\ Ibid, page 11.
---------------------------------------------------------------------------

    The proposed revisions may have a negative impact to the 14 
existing SBLCs by destabilizing the value of their licenses due to 
increased competition and issuance of new SBLC Licenses. The value of 
SBLC Licenses may periodically fluctuate based on whether SBA is or is 
not accepting applications for new SBLCs and entities interested in the 
program must acquire existing SBLC License.
    As previously stated above, the primary function of the Community 
Advantage Pilot Program was to waive the moratorium on issuing new SBLC 
licenses to lenders who would not ordinarily qualify to be a 7(a) 
lender. Therefore, by creating a new type of Community Advantage SBLC, 
SBA will ensure that all existing Community Advantage Pilot Program 
participants will become 7(a) lenders without an expiration date 
associated with their participation. The Community Advantage Pilot 
Program participants have been important 7(a) lenders, increasing 
capital to small business by originating loans consistent with 7(a) 
Loan Program Requirements. As a pilot, the temporary Community 
Advantage Program will sunset. SBA has concluded that the Community 
Advantage Pilot Program demonstrated its benefits. By grandfathering in 
all existing Community Advantage Pilot Program lenders to be Community 
Advantage SBLCs, the benefits of mission-oriented lenders utilizing the 
7(a) loan to extend credit across the country will become a regular 
feature of SBA lending. Finally, by authorizing the SBA Administrator, 
Associate Administrator for the Office of Capital Access (AA/OCA), or a 
designee(s) to determine appropriate capital requirements, loan loss 
reserve requirements, fidelity insurance levels and create parity in 
oversight fees, the current Community Advantage Pilot Program 
participants will not experience material changes in the transition to 
Community Advantage SBLCs. Accordingly, the SBA pilot program spanning 
three different Executive Branch Administrations will sunset, with the 
result being an acknowledgement that these previously ineligible 
mission-oriented lenders will be able to participate in 7(a) lending, 
or may apply to become 7(a) lenders, to increase access to capital for 
America's small businesses.
C. What alternatives have been considered?
1. SBLC Moratorium Rescission
    SBA considered leaving the regulations unchanged and relying upon 
the CA Pilot Program to address the needs of access to capital in 
underserved markets; however, the CA Pilot Program will sunset on 
September 30, 2024, and SBA intends for Community Advantage SBLCs to be 
a solution that provides greater certainty for lenders.
    SBA also considered requiring Community Advantage SBLCs to meet the 
$5 million capitalization requirements currently in place for all SBLC 
license holders; however, SBA determined many of these lending entities 
would be unable to qualify for SBA's program based on such a 
requirement.
2. Removal of the Requirement for a Loan Authorization
    SBA considered leaving the requirements for the Loan Authorization 
intact. However, SBA Lenders struggle under the burden of the existing 
lengthy Loan Authorization, and they continue to request relief from 
this requirement. In the interest of reducing duplicative effort and 
making better use of existing technology and processes, SBA determined 
it is in the interest of SBA and SBA Lenders to revise the requirement 
for a Loan Authorization as proposed.
    SBA also considered facilitating electronic entry of the Loan 
Authorization for the subject SBA loans. However, electronic entry of 
the Loan Authorization form would not address the duplicative effort 
resulting from subsequent entry in E-Tran. Therefore, this would also 
not be a viable alternative.

Executive Order 12988

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

[[Page 21898]]

Executive Order 13132

    This rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government, as specified in the Executive Order. As 
such it does not warrant the preparation of a Federalism Assessment.

Executive Order 13563

    A description of the need for this regulatory action and benefits 
and costs associated with this action, including possible 
distributional impacts that relate to Executive Order 13563, are 
included above in the Regulatory Impact Analysis under Executive Order 
12866.

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

    The portions of the proposed rule on the SBLC moratorium rescission 
would require SBA Form 2498, ``SBA Supervised Lender Assessment Plan,'' 
to be revised to edit the requirement that an applicant to become an 
SBLC must include a letter from an existing SBLC evidencing intent to 
transfer lending authority to conform with revisions to 13 CFR 120.466. 
The portion of this rule on removing the requirement for a Loan 
Authorization is not subject to the Paperwork Reduction Act because the 
Loan Authorization is not an information collection. SBA will submit 
revisions of this form to OMB and publish notice at a later date.

Congressional Review Act, 5 U.S.C. Ch. 8

    Subtitle E of the Small Business Regulatory Enforcement Fairness 
Act of 1996, also known as the Congressional Review Act or CRA, 
generally provides that before a rule may take effect, the agency 
promulgating the rule must submit a rule report, which includes a copy 
of the rule, to each House of the Congress and to the Comptroller 
General of the United States. SBA will submit a report containing this 
rule and other required information to the U.S. Senate, the U.S. House 
of Representatives, and the Comptroller General of the United States. A 
major rule under the CRA cannot take effect until 60 days after it is 
published in the Federal Register. The Office of Information and 
Regulatory Affairs has determined that this rule is not a ``major 
rule'' as defined by 5 U.S.C. 804(2). Therefore, this rule is not 
subject to the 60-day restriction.

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

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (RFA), 5 U.S.C. 601-612, requires the agency to 
``prepare and make available for public comment a final regulatory 
analysis'' which will ``describe the impact of the final rule on small 
entities.'' For the reasons stated below, SBA certifies that this 
rulemaking will not have a significant economic impact on a substantial 
number of small entities.
    Of the 182 new 7(a) Lenders onboarded since FY 2018, only four were 
new SBLCs that acquired an SBLC License after receiving SBA's approval 
for the SBLC License transfer. SBA does not require SBLCs to provide 
SBA with the financial statements of the SBLC parent company, if 
applicable, or affiliates; therefore, SBA is not able to determine 
whether the SBLCs are small businesses in accordance with SBA size 
standards. SBA anticipates approving three SBLCs, in the full first 
year after this proposed rule becomes effective.
    Because some SBLC applicants may be considered small businesses per 
size standards in 13 CFR 121.201,\6\ SBA must address the cost of 
preparing and submitting an SBLC application to SBA. The 2021 annual 
revenues (including revenues of any Parent Company) for the 13 active 
SBLCs (one inactive SBLC is in the process of transferring their 
license and their 2021 revenues were not available) range from a low of 
$5.1 million to a high of $910.8 million, with average annual revenues 
of $81.3 million per SBLC. These revenues are well above the SBA small 
business size standard of $41.5 million in annual revenues for the 
North American Industry Classification System (NAICS) industry 522298, 
``All Other Nondepository Credit Intermediation'' average revenue 
threshold to be considered a ``small business'', which includes revenue 
from affiliates such as parent companies. SBA does not require an SBLC 
to be a small business in order to participate as a 7(a) Lender, 
therefore SBA does not review the SBLC applicant for size when 
evaluating an SBLC application. SBA also does not collect financial 
information on any SBLC affiliates, which would be necessary to make a 
size determination for an SBLC; therefore, it is not feasible for SBA 
to determine if any of the SBLCs are small businesses.
---------------------------------------------------------------------------

    \6\ Based on the Size Standard for NAICS Code 522298, All Other 
Nondepository Credit Intermediation, of $41.5 million gross revenues 
averaged over the last five years--13 CFR 121.201 https://www.ecfr.gov/current/title-13/chapter-I/part-121/subpart-A/subject-group-ECFRf12a11421b08a31/section-121.201.
---------------------------------------------------------------------------

    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. SBA also anticipates a minor 
increase of additional 7(a) loan approvals each year based on the 
approximately three new SBLC and Community Advantage SBLC lenders per 
year.
    The cost estimate for an SBLC applicant to complete an SBA SBLC 
application is based on the estimated time to complete the application 
multiplied by the median hourly wage by job position wages published by 
the U.S. Department of Labor's Bureau of Labor Statistics for 2021 \7\ 
and increased by 100% to account for overhead benefit costs. The cost 
breakdown is as follows: Financial Manager (30 hours times an hourly 
rate of $63.32 plus overhead and benefit costs of $63.32 per hour = 
$3,799.20); plus Accountant (10 hours times an hourly rate of $37.14, 
plus overhead and benefit costs of $37.14 per hour = $742.80); plus 
Lawyers (5 hours times an hourly rate of $61.54, plus overhead and 
benefit costs of $61.54 per hour = $615.40); plus Administrative 
Assistant (5 hours times an hourly rate of $19.08, plus overhead and 
benefit costs of $19.08 per hour = $190.80); for a total anticipated 
cost to complete the SBLC application for each SBLC applicant of 
$5,348. As stated elsewhere, SBA estimates the fee for completing the 
initial safety and soundness examination will be a minimum of $10,000 
per applicant, which would increase the cost burden for each of the 
three SBLC applicants to $15,348.
---------------------------------------------------------------------------

    \7\ https://www.bls.gov/oes/current/oes_nat.htm.
---------------------------------------------------------------------------

    SBA believes the one-time estimated cost burden of $15,348 does not 
represent a significant economic impact to a potential SBLC applicant 
in comparison to the average annual revenue of existing SBLCs of $81.3 
million per SBLC.

List of Subjects in 13 CFR Part 120

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

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

[[Page 21899]]

PART 120--BUSINESS LOANS

0
1. The authority citation 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, 636m, 650, 657t, and note, 657u, and 
note, 687(f), 696(3), and (7), and note, 697, 697a and e, and note; 
Pub. L. 116-260, 134 Stat. 1182.

0
2. Amend Sec.  120.10 by:
0
a. Removing the definition for ``Authorization'';
0
b. Adding a definition for ``Community Advantage Small Business Lending 
Company (COMMUNITY ADVANTAGE SBLC)'' in alphabetical order; and
0
c. Revising the definitions for ``Loan Instruments'', ``Loan Program 
Requirements or SBA Loan Program requirements'' and ``Small Business 
Lending Company (SBLC)''.

    The revisions and addition read as follows:


Sec.  120.10  Definitions

* * * * *
    Community Advantage Small Business Lending Company (Community 
Advantage SBLC) is a type of SBLC that is a nonprofit lending 
institution licensed and authorized by SBA to make loans pursuant to 
section 7(a) of the Small Business Act. Note: This includes former 
Community Advantage Pilot Lenders that were grandfathered in at the 
time Community Advantage SBLC licenses were authorized regardless of 
their profit or nonprofit status. SBA accepts applications for 
Community Advantage SBLCs from time to time as published in the Federal 
Register.
* * * * *
    Loan Instruments are the note, instruments of hypothecation, and 
all other agreements and documents related to a loan.
    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 or to which the 
Lender or CDC is subject; SBA Standard Operating Procedures (SOPs); 
Federal Register notices; and official SBA notices and forms applicable 
to the 7(a) Loan Program, 504 Loan Program or Microloan Program, 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.
* * * * *
    Small Business Lending Company (SBLC) is a non-depository lending 
institution that is SBA-licensed and is authorized by SBA to make loans 
pursuant to section 7(a) of the Small Business Act and loans to 
Intermediaries in SBA's Microloan program. SBA accepts applications for 
SBLCs from time to time as published in the Federal Register.
* * * * *


Sec.  120.120  [Amended]

0
3. Amend Sec.  120.120 introductory text by removing the last sentence.


Sec.  120.192  [Amended]

0
4. Amend Sec.  120.192 by removing the last sentence.

0
5. Amend Sec.  120.220 by revising the last sentence of the 
introductory text and the last sentence of paragraph (e) to read as 
follows:


Sec.  120.220  Fees that Lender pays SBA.

    * * * Acceptance of the guaranty fee by SBA does not waive any 
right of SBA arising from a Lender's negligence, misconduct or 
violation of any provision of these regulations or the guaranty 
agreement or other loan documents.
* * * * *
    (e) * * * Acceptance of the guarantee fee by SBA shall not waive 
any right of SBA arising from the Lender's misconduct or violation of 
any provision of this part, the guarantee agreement or other loan 
documents.
* * * * *

0
6. Amend Sec.  120.466 by revising paragraph (a)(6) to read as follows:


Sec. Sec.  120.466  SBA Supervised Lender application.

* * * * *
    (a) * * *
    (6) In connection with any application to acquire an existing SBLC 
License, the applicant must include a letter agreement signed by an 
authorized official of the SBLC whose License is to be acquired 
certifying that the SBLC is seeking to transfer its SBA lending 
authority to the applicant;
* * * * *

0
7. Amend Sec.  120.470 by revising the introductory text, paragraph (a) 
introductory text, and paragraphs (b) and (e) to read as follows:


Sec. Sec.  120.470  What are SBA's additional requirements for SBLCs?

    In addition to complying with SBA's requirements for SBA Lenders 
and SBA Supervised Lenders, an SBLC (including a Community Advantage 
SBLC) must meet the requirements contained in this regulation and the 
SBLC regulations that follow.
    (a) Lending. An SBLC or Community Advantage SBLC may make:
* * * * *
    (b) Business structure. An SBLC must be a corporation (profit or 
nonprofit) or a limited liability company or limited partnership, 
except for a Community Advantage SBLC, which must either be a nonprofit 
corporation or have been a Community Advantage Pilot Program 
participant.
* * * * *
    (e) Fidelity insurance. An SBLC, except for a Community Advantage 
SBLC, must maintain a Brokers Blanket Bond, Standard Form 14, or 
Finance Companies Blanket Bond, Standard Form 15, or such other form of 
coverage as SBA may approve, in a minimum amount of $2,000,000 executed 
by a surety holding a certificate of authority from the Secretary of 
the Treasury pursuant to 31 U.S.C. 9304-9308. SBA's Administrator, in 
consultation with SBA's Associate Administrator for the Office of 
Capital Access (AA/OCA), or their designee(s), at their discretion, 
will determine the appropriate bond coverage levels for Community 
Advantage SBLCs as published in Loan Program Requirements.
* * * * *

0
8. Amend Sec.  120.471 by adding paragraphs (a)(4) and (5) to read as 
follows:


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

    (a) * * *
    (4) A Community Advantage SBLC must maintain a minimum amount of 
capital as determined at the discretion of the Administrator in 
consultation with SBA's Associate Administrator for the Office of 
Capital Access (AA/OCA), or their designee(s). The minimum capital 
amount as published in Loan Program Requirements will ensure sufficient 
risk protection for SBA and lenders while not burdening smaller lenders 
with large capital requirements.
    (5) Community Advantage SBLCs must maintain a loan loss reserve 
account as determined at the discretion of the Administrator in 
consultation with SBA's Associate Administrator for the Office of 
Capital Access (AA/OCA), or their designee(s) as published in Loan 
Program Requirements.
* * * * *

0
9. Amend Sec.  120.801 by revising the last sentence of paragraph (a) 
to read as follows:

[[Page 21900]]

Sec. Sec.  120.801  How a 504 Project is financed.

    (a) * * * SBA issues a loan number if it agrees to guarantee part 
of the funding for a Project.
* * * * *

0
10. Amend Sec.  120.820 by adding paragraph (g) to read as follows:


Sec. Sec.  120.820  CDC Affiliation.

* * * * *
    (g) Notwithstanding paragraphs (b), (c), and (e) of this section, a 
CDC may be affiliated with a Community Advantage SBLC. Additionally, 
CDCs that are also Community Advantage Pilot Program Lenders as of May 
11, 2023 may be licensed as Community Advantage SBLCs.

0
11. Amend Sec.  120.842 by revising the last sentence of paragraph 
(b)(4) and the last sentence of paragraph (b)(5) to read as follows:


Sec. Sec.  120.842  ALP Express Loans.

* * * * *
    (b) * * *
    (4) * * * If approved, SBA will notify the ALP CDC of the loan 
number assigned to the loan.
    (5) * * * After receiving notification of the loan number from SBA, 
the ALP CDC is responsible for properly undertaking all actions 
necessary to close the ALP Express Loan and Debenture in accordance 
with the expedited loan closing procedures applicable to a Priority CDC 
and with Sec.  120.960, and in compliance with all applicable Loan 
Program Requirements.
* * * * *


Sec. Sec.  120.921  [Amended]

0
12. Amend Sec.  120.921 by removing the last sentence in paragraph (a).
0
13. Amend Sec.  120.960 by revising paragraph (c)(1) to read as 
follows:


Sec. Sec.  120.960  Responsibility for closing.

* * * * *
    (c) * * *
    (1) The CDC has failed to comply materially with any Loan Program 
Requirement as defined in Sec.  120.10;
* * * * *

0
14. Amend Sec.  120.971 by revising paragraph (a)(1) to read as 
follows:


Sec. Sec.  120.971  Allowable fees paid by Borrower.

    (a) * * *
    (1) Processing fee. The CDC may charge up to 1.5 percent of the net 
Debenture proceeds to process the financing. Two-thirds of this fee 
will be considered earned and may be collected by the CDC when the loan 
number is issued by SBA. The portion of the processing fee paid by the 
Borrower may be reimbursed from the Debenture proceeds;

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2023-07181 Filed 4-11-23; 8:45 am]
BILLING CODE 8026-09-P