504 Debt Refinancing, 79734-79741 [2024-22040]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 89, Number 190 (Tuesday, October 1, 2024)]
[Rules and Regulations]
[Pages 79734-79741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22040]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AI15


504 Debt Refinancing

AGENCY: U.S. Small Business Administration.

ACTION: Direct final rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
amending regulations governing SBA's 504 Loan Program for debt 
refinancing with expansion and debt refinancing without expansion with 
this direct final rule. The changes will streamline the loan 
application process, expand eligibility criteria for small businesses 
borrowers, and make minor corrections. The amendments include: removing 
the 50% cap on debt refinance without expansion to conform with current 
legislation; raising the loan to value requirement on debt refinancing 
without expansion projects that include other business expenses to 90% 
and eliminating the cap on Eligible Business Expenses; aligning the 
``substantially all'' standard for 504 debt refinancing with expansion 
so it is consistent with the debt refinancing without expansion 
standard of 75%; eliminating the 10% substantial benefit test on 504 
debt refinancing with expansion and 504 debt refinancing without 
expansion on refinancing other government debt; and allowing certain 
``other secured debt'' to be included as an Eligible Business Expense.

DATES: The direct final rule is effective November 15, 2024. SBA must 
receive comments on this direct final rule on or before October 31, 
2024. If adverse comment is received, SBA will publish a timely 
withdrawal of the rule in the Federal Register.

ADDRESSES: You may submit comments, identified by RIN 3245-AI15, 
through the Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
    SBA will post all comments on https://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at https://www.regulations.gov, please submit the 
information via email to [email protected]. Highlight the 
information that you consider to be CBI and explain why you believe SBA 
should hold this information as confidential. SBA will review the 
information and make the final determination whether it will publish 
the information.

FOR FURTHER INFORMATION CONTACT: Gregorius Suryadi, Senior Financial 
and Loan Specialist, 504 Program Branch, Office of Financial 
Assistance, Small Business Administration, 409 3rd Street SW, 
Washington, DC 20416; telephone: (202) 205-6806; email: 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

    The 504 Loan Program is an SBA financing program authorized under 
title V of the Small Business Investment Act of 1958, 15 U.S.C. 695 et 
seq. The core mission of the 504 Loan Program is to provide long-term 
financing to small businesses for the purchase or improvement of land, 
buildings, and major equipment, in an effort to facilitate the creation 
or retention of jobs and local economic development. Under the 504 Loan 
Program, loans are made to small business applicants by Certified 
Development Companies (``CDCs''), which are certified and regulated by 
SBA to promote economic development within their community. In general, 
a project in the 504 Loan Program (a ``504 Project'') includes: A loan 
obtained from a private sector lender with a senior lien covering at 
least 50 percent of the project cost; a loan obtained from a CDC (a 
``504 Loan'') with a junior lien covering up to 40 percent of the total 
cost (backed by a 100 percent SBA-guaranteed debenture); and a 
contribution from the Borrower of at least 10 percent equity.
    In addition, the 504 Loan Program may be used to refinance debt 
under two options authorized under section 502(7)(B) and (C) of the 
Small Business Investment Act of 1958. First, if a 504 Project involves 
the expansion of the small business, any amount of existing 
indebtedness that does not exceed 100 percent of the project cost of 
the expansion may be refinanced and added to the project's cost (Debt 
Refinancing with Expansion) under the conditions set forth in section 
502(7)(B) and the implementing regulations. See 13 CFR 120.882(e) and 
(f). Second, debt

[[Page 79735]]

refinancing is available for a 504 Project that does not involve the 
expansion of the small business under the requirements set forth in 
section 502(7)(C) and 13 CFR 120.882(g) (Debt Refinancing without 
Expansion).
    On July 29, 2021, SBA published in the Federal Register an interim 
final rule implementing section 328(a) of the Economic Aid to Hard-Hit 
Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), 
enacted December 27, 2020, Public Law 116-260, which revised the 
conditions and requirements for refinancing 504 loan debt (``Debt 
Refinancing in the 504 Loan Program interim final rule'' or ``interim 
final rule''). 86 FR 40775 (July 29, 2021). SBA subsequently issued a 
final rule on October 12, 2023, finalizing the interim final rule and 
implementation of section 328 of the Economic Aid Act (``Debt 
Refinancing in the 504 Loan Program final rule'' or ``final rule''). 88 
FR 70580 (October 12, 2023).
    With the prior rulemaking the Agency included statutorily required 
mandatory changes to the 504 loan program, with one omission, as the 
statutory change limiting the loan dollar volume of 504 refinancing 
loans without expansion to 50% of the CDC's prior portfolio, as 
required by section 328(a)(2)(A) of the Economic Aid Act, was not 
included. In addition, during the prior rulemaking the National 
Associate of Development Companies (NADCO), a 504 Loan Program trade 
association, along with many of its member CDCs, requested additional 
changes to the 504 loan program. Since these changes went beyond those 
mandated by the Economic Aid Act, they were not implemented at the time 
since the Agency's objective was to implement the statutory changes 
directly and expeditiously without variation. Some of the changes 
recommended by the trade association required careful consideration by 
each impacted SBA office, had the potential for risk shifting in the 
504 portfolio, had a potential impact on other SBA programs such as the 
7(a) program, or had a potential for impact on the 504 subsidy rate and 
consequently were held for future rule making. The comments were 
nonetheless consistent with lender round table feedback from three 
major lender conferences.
    Commenters, requested that SBA: increase eligibility for 504 debt 
refinance with expansion and 504 debt refinance without expansion; 
update the eligibility standards for more flexibility; remove 
requirements that are not required by statute and which create an 
additional barrier to debt restructuring and relief for 504 small 
business borrowers; raise the loan to value requirement on debt 
refinancing without expansion projects; align the ``substantially all'' 
standard for 504 debt refinancing with expansion with the 504 debt 
refinancing without expansion standard; and eliminate the 10% 
substantial benefit test on 504 debt refinancing with expansion and 504 
debt refinancing without expansion on refinancing other government 
debt.
    Congress' long-established policy is that SBA stimulate and 
supplement the flow of long-term loan funds which small business 
concerns need for the sound financing of their business operations and 
for their growth, expansion, and modernization, including with the 
refinancing of existing loan debt. 15 U.S.C. 661. Businesses are facing 
increasing operating costs due to inflation, global supply chain 
challenges, and increases in building costs and supplies which are 
above pre-pandemic levels. The impact of multiple Federal Reserve 
interest rate increases \1\ from March 2022 to February 2024 has 
prompted a request for expedient SBA action on behalf of small business 
borrowers. The 504 loan program has a long-term fixed interest rate for 
40% of the project to help small businesses refinance conventional 
loans or government based programs, which are generally based on a 
variable rate. This results in significant cost savings for the small 
business borrower and assists small businesses with managing costs by 
providing a predictable expense with a fixed interest rate.
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    \1\ Since March 2022, the Federal Reserve has increased its 
benchmark short-term interest rate from near zero to a 23-year high 
of 5.25% to 5.5% to tame inflation. The Federal Reserve raised rates 
on March 17, 2022, by 25 basis points, on May 5, 2022, by 50 basis 
points, in July, July, September, and November each time by 75 basis 
point with each reset, then on December 14, 2022, by 50 basis 
points, in February, March, May and July 2023 by 25 basis points 
with each reset.
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    Further, as the interim final rule was released July 29, 2021, and 
as the final rule was released October 12, 2023, SBA could not have 
anticipated the impact on policy of the Federal Reserve interest rate 
policy during the prior rulemaking. Since the publication of the Debt 
Refinancing in the 504 Loan Program final rule, SBA's Office of 
Financial Assistance (OFA) has received input on the impact of the 
rising interest rate environment on 504 debt refinancing. For example, 
SBA received feedback on the difficulty of SBA applicants in meeting 
the 10% substantial benefit test to borrowers, and CDCs have asked for 
a revision of this standard as it was not required in statute and was 
adopted through regulations.
    As described in the section-by-section analysis below, SBA is 
issuing this direct final rule to correct the omission described above 
and to implement changes to 504 debt refinancing in response to public 
comments provided during the prior rulemaking and industry input both 
before and following the prior rulemaking.

II. Justification for Direct Final Rule

    In general, SBA publishes a rule for public comment before issuing 
a final rule, in accordance with the Administrative Procedure Act. 5 
U.S.C. 553. The Administrative Procedure Act provides an exception to 
this standard rulemaking process, however, when an agency finds good 
cause to adopt a rule without prior public participation. 5 U.S.C. 
553(b)(3)(B). The good cause requirement is satisfied when prior public 
participation is impracticable, unnecessary, or contrary to the public 
interest. SBA is publishing this rule as a direct final rule because 
public participation is unnecessary. SBA views this as a non-
controversial administrative action because all technical corrections 
and updates are consistent with public comments received throughout the 
previous rulemaking process. This rule will be effective on the date 
shown in the DATES section unless SBA receives significant adverse 
comment on or before the deadline for comments. Significant adverse 
comments are comments that provide strong justifications why the rule 
should not be adopted or for changing the rule. SBA does not expect to 
receive any significant adverse comments because these technical 
corrections and updates are consistent with broad stakeholder comments 
received during the prior previous rulemaking process. Further, because 
some of the changes in this rule are prescribed by statute, SBA does 
not expect significant adverse comments.
    If SBA receives significant adverse comment, SBA will publish a 
document in the Federal Register withdrawing this rule before the 
effective date. If SBA receives no significant adverse comments, the 
rule will be effective 45 days after publication without further 
notice.

III. Section-by-Section Analysis

A. Delete 13 CFR 120.882(g)(10) To Remove the 50% Cap for Debt 
Refinancing Without Expansion in Alignment With the Economic Aid Act

    Subsequent to the publication of the Debt Refinancing in the 504 
Loan Program final rule SBA identified a drafting omission that must be 
corrected

[[Page 79736]]

to ensure the corresponding regulation aligns with the Economic Aid 
Act. Section 328(a) of the Economic Aid Act had repealed section 521(a) 
of title V of division E of the Consolidated Appropriations Act of 
2016. Section 521(a), in part, limited a CDC's financings so that in 
any fiscal year no more than 50 percent of the CDC's financings were 
for debt refinancing not involving expansion, a requirement implemented 
by SBA regulations at 13 CFR 120.882(g)(10). Consequently, the Debt 
Refinancing in the 504 Loan Program final rule should have deleted the 
regulation at 13 CFR 120.882(g)(10).
    SBA has included in this direct final rule the correction and is 
removing 50% cap for debt refinancing without expansion to align with 
the Economic Aid Act, thereby removing the current inconsistency 
between Agency regulations and the statute. This change will provide 
certainty to CDCs that their debt refinancing loans are no longer 
capped at 50% of the total dollar amount of the CDC's 504 loans 
approved, thereby increasing debt refinancing opportunities for small 
business concerns.

B. Update 13 CFR 120.882(g)(6) To Increase the Percentage of Qualified 
Debt in Projects Including Eligible Business Expenses From 85% to 90% 
and Remove the 20% Cap on Eligible Businesses Expenses

    Currently, if an application for a 504 debt refinancing without 
expansion project includes a request to finance Eligible Business 
Expenses (as described in 13 CFR 120.882(g)(6)(ii)), the portion of the 
refinancing project provided by the 504 loan and the third party loan 
may be no more than 85% of the fair market value of the fixed assets 
that will serve as collateral and the Borrower may receive no more than 
20% of the fair market value of the eligible fixed assets securing the 
debt to be refinanced for Eligible Business Expenses. SBA is removing 
these restrictions in regulation in order to expand eligibility for 
more small businesses to access debt refinancing under the 504 loan 
program. SBA will review comments received in response to this direct 
final rule and will consider further policy changes are needed.

C. Adding Consistency to the Standard for ``Substantially All'' Between 
Refinancing Without Expansion and Refinancing With Expansion

    Under current regulations, one of the conditions of a 504 debt 
refinancing with expansion project is that substantially all (85% or 
more) of the proceeds of the indebtedness were used to acquire land, 
including a building situated on that land, to construct a building on 
that land, or to purchase equipment. The previous 504 debt refinancing 
rulemaking modified the 504 debt refinancing without expansion 
``substantially all'' standard in the Qualified Debt definition by 
lowering the threshold from 85% to 75%. The effect was that this 
lowered standard only applied to 504 debt refinancing without expansion 
because the term ``Qualified Debt'' is only used in the context of 504 
debt refinancing without expansion and not 504 debt refinancing with 
expansion.
    SBA received input from NADCO and during lender round tables that 
this inconsistency of 75% for 504 debt refinancing without expansion 
and 85% for 504 debt refinancing with expansion is confusing and that 
it would be helpful to have a consistent standard between the debt 
refinancing with expansion and debt refinancing without expansion 
options for CDCs, third party lenders, and small businesses seeking 504 
loan program assistance. Based on public comments received, SBA is 
making the ``substantially all'' standard consistent between the two 
programs by revising Sec.  120.882(e)(1) to lower the ``substantially 
all'' standard from 85% to 75% for 504 debt refinancing with expansion. 
SBA will review comments received in response to this direct final rule 
and will consider further policy changes are needed to further expand 
the standard.

D. Allowing Other Secured Debt To Be Included as an Eligible Business 
Expense

    Under current regulations, a debt refinancing without expansion 
project may include a request to finance eligible business expenses, 
which are limited to the operating expenses of the business. Debt is 
generally not included as an eligible business expense, except for 
certain types of unsecured debt. On occasion SBA Applicants have debt 
that has been secured by the same Eligible Fixed Assets securing the 
qualified debt that is the subject of the 504 debt refinancing project 
(``Other Secured Debt''). Under current regulations Other Secured Debt 
may not be part of the 504 debt refinancing project. As a result, the 
borrower, even with 504 financing, may be subject to debt and liens 
that are not in the best risk portfolio interest of the Agency. 
Including Other Secured Debt as an Eligible Business Expense is in 
alignment with 504 loan program goals, and the flexibility to include 
Other Secured Debt would further assist the small business in 
restructuring its outstanding debt. Even so, SBA will not consider 
Other Secured Debt that was incurred for capital expenditures as an 
Eligible Business Expense because such expenditures are not the day-to-
day expenses of a business and SBA does not believe Congress intended 
that such expenditures be included as an Eligible Business Expense. 
Further, while a secured business line of credit may be an Eligible 
Business Expense, such Other Secured Debt will only be eligible as part 
of a 504 debt refinance without expansion financing provided any 
existing liens are subordinated to the 504 loan.

E. Revising 13 CFR 120.882(e)(5) and (g)(3)(iii) the Substantial 
Benefit Test for Government Guaranteed Debt for 504 Refinancing With 
and Without Expansion To Remove the 10% Standard

    Under current regulations at 13 CFR 120.882(e)(5) and (g)(3)(iii), 
504 debt refinancing must provide a ``substantial benefit'' to the 
borrower. For purposes of 504 debt refinancing a ``substantial 
benefit'' means that the portion of the new installment amount 
attributable to the debt being refinanced must be at least 10 percent 
less than the existing installment amount. In its public comments for 
the prior rulemaking, NADCO noted that because of the high interest 
rate environment and the large number of interest rate increases in 
recent year, the 10% substantial benefit test is overly burdensome for 
the 504 small business borrower. NADCO requested that SBA remove this 
test to provide the small business borrower the maximum opportunity to 
respond to market conditions.
    SBA's concerns about portfolio risk for both the 504 and 7(a) 
programs led SBA to adopt the 10% substantial benefit test for the 504 
loan program to provide parity with the 7(a) program's 10% substantial 
benefit test. There are substantial differences, however, between the 
programs that would obviate the necessity to anchor the 504 loan 
program to the 7(a) loan program's 10% substantial benefit test. For 
example, SBA's motivation for adopting a 10% substantial benefit test 
in 7(a) stemmed from the concern with using limited 7(a) program 
authority for refinancing, especially for other 7(a) loans already 
considered to be on reasonable terms, and the concern over the risk of 
considerable 7(a) secondary market distortions. Meanwhile, the 504 Loan 
Program has ample authority for debt refinancing and adding 
restrictions on 504 refinancing at the same level of 7(a) refinancing 
restrictions would be overly burdensome on the 504 small business 
borrower. The result is that

[[Page 79737]]

many small businesses are prevented from refinancing into a more 
favorable longer term fixed-rate product and must remain with their 
variable rate loan in a rising rate environment.
    SBA is therefore revising 13 CFR 120.882(e)(5) and (g)(3)(iii) to 
remove the 10% substantial benefit test for both debt refinancing with 
expansion and debt refinancing without expansion, while maintaining the 
requirement that the 504 small business borrowers must have documented 
benefit in the restructuring of debt.

Review Act (5 U.S.C. 801-808), Paperwork Reduction Act (44 U.S.C., Ch. 
35), and the Regulatory Flexibility Act (5 U.S.C. 601-612)

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
rule does not constitutes a ``significant regulatory action'' for 
purposes of Executive Orders 12866. This direct final rule implements 
specific statutory provisions in section 328(a)(2)(A) and implements 
additional changes to debt refinancing in SBA's 504 loan program.
    As shown in Tables 1A and 1B below, during the five-year period 
spanning fiscal year (FY) 2018 and FY 2024 (year-to-date (YTD) through 
May), a total of 47,252 504 loans were approved for a total gross 
approval amount as of May 31, 2024, of $43,003,577,000. In addition, 
during the past six fiscal years, SBA approved an average of 235 debt 
refinance with expansion loans per year with an average annual dollar 
volume of $305,542,333 and approved an average of 441 debt refinance 
without expansion loans per year with an average annual dollar volume 
of $470,209,333. In 2020, the Economic Aid Act increased the amount of 
existing indebtedness eligible for a debt refinance with expansion 
project from 50 percent of the project cost to 100 percent of the 
project cost which appears to have impacted loan size. The tables are 
arranged in order to convey the data while staying within the margin 
parameters of the Federal Register notice guidelines and are an update 
to the data provided in the 504 Debt Refinancing final rule published 
October 12, 2023. As this direct final rule, in part, is intended to 
correct drafting errors and provide eligibility clarifications in the 
prior final rule, SBA has updated data on through May 31, 2024, and 
included data reported through September 30, 2023 (last full fiscal 
year), in the final rule.

                          Table 1A--504 Refinancing Lending Activity From 2018 to 2021
                          [Note: Table 1B on next page contains 2022 through YTD FY 24]
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             504 Cohort                      2018               2019               2020               2021
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Total Number of 504 Loans...........              5,874              6,099              7,119              9,676
Total Dollar Volume of 504 Loans         $4,753,644,000     $4,958,552,000     $5,826,885,000     $8,218,105,540
 Approved...........................
Number of 504 Debt Refinancing with                 181                181                236                301
 Expansion..........................
Dollar Volume of 504 Debt                  $212,098,000       $192,968,000       $296,392,000       $389,801,000
 Refinancing with Expansion.........
Number of 504 Debt Refinancing                      181                166                386                693
 Without Expansion..................
Dollar Volume of 504 Debt                  $154,062,000       $154,842,000       $370,160,000       $709,020,000
 Refinancing Without Expansion......
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                   Table 1B--504 Refinancing Lending Activity From 2022 to YTD 2024 (May 31st)
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                                                                         FY 2024 YTD (as of   Totals FY 2019-YTD
           504 Cohort                   2022                2023                May)              FY24 (May)
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Total Number of 504 Loans......               9,254               5,924               3,306               47,252
Total Dollar Volume of 504           $9,207,996,290      $6,419,378,000      $3,619,017,000      $43,003,577,000
 Loans Approved................
Number of 504 Debt Refinancing                  336                 176                  96                1,507
 with Expansion................
Dollar Volume of 504 Debt              $454,568,000        $287,427,000        $156,938,000       $1,990,192,000
 Refinancing with Expansion....
Number of 504 Debt Refinancing                  829                 392                 286                2,933
 Without Expansion.............
Dollar Volume of 504 Debt              $959,897,000        $473,275,000        $333,791,000       $3,155,047,000
 Refinancing Without Expansion.
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    Prior to the change increasing the amount of existing indebtedness 
eligible for a debt refinance with expansion project from 50 percent of 
the project cost to 100 percent of the project cost, of the debt 
refinance with expansion loans, only 16 refinanced a debt that equaled 
50 percent of the expansion costs. If these borrowers had been able to 
refinance 100 percent of the expansion costs instead of 50 percent, and 
assuming that all these borrowers did so, these borrowers would have 
been able to borrow $15 million more over five years, or about $3 
million more annually. Since the passage of the Economic Aid Act, there 
have been 4,312 refinancing 504 loans approved of which 1,507 were debt 
refinancing with expansion and 2,933 were debt refinancing without 
expansion. In dollars approved, this is a combined amount of 504 
refinancing loans totaling $5,145,239,0000 of which $1,990,192,000 was 
for refinancing with expansion and $3,155,047,000 was for refinancing 
without expansion.

                  Table 2A--504 Loan Activity by Cohort Years August to July 2018 to July 2021
                           [Note: Table 2B below contains July 2021 through YTD FY 24]
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                        Cohorts                            Aug'18-Jul'19      Aug'19-Jul'20      Aug'20-Jul'21
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Total Number of 504 Loans..............................              6,153              6,836              9,572
Total Dollar Volume of 504 Loans Approved..............     $5,063,078,000     $5,575,249,000     $7,934,192,540
Number of 504 Debt Refi With Expansion.................                183                243                295
Dollar Volume of 504 Debt Refi With Expansion..........       $191,786,000       $309,027,000       $362,039,000
Number of 504 Debt Refi Without Expansion..............                160                302                 66

[[Page 79738]]

 
Dollar Volume of 504 Debt Refi Without Expansion.......       $157,880,000       $295,396,000       $601,831,000
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              Table 2B--504 Loan Activity by Cohort Years August to July 2021 to YTD 2024 (May) \1\
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                        Cohorts                            Aug'21-Jul'22      Aug'22-Jul'23      Aug'23-May 24
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Total Number of 504 Loans..............................              9,392              6,253              4,312
Total Dollar Volume of 504 Loans Approved..............     $9,248,887,290     $6,624,952,000     $4,745,370,000
Number of 504 Debt Refi With Expansion.................                332                183                135
Dollar Volume of 504 Debt Refi With Expansion..........       $446,975,000       $305,619,000       $207,621,000
Number of 504 Debt Refi Without Expansion..............                934                388                383
Dollar Volume of 504 Debt Refi Without Expansion.......     $1,057,386,000       $432,638,000       $475,326,000
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\1\ As shown in Tables 2A and 2B, 504 Loan Activity by Cohort Years August to July 2018 to YTD 2024 (Feb), Data
  as of 9/15/2023, total dollar volume is lifetime gross approval amount including increases.

    This direct final rule is necessary to implement the Economic Aid 
Act in full and provide economic relief to small businesses still 
adversely impacted by COVID-19. SBA anticipates that making these 
changes to the 504 debt refinancing programs will continue to result in 
benefits to small businesses by providing greater flexibility to 
restructure debt.
    To assess the impact of the interim final rule, SBA evaluated 504 
loan activity (including the number of loans and dollar volume of both 
debt refinance with expansion and debt refinance without expansion) 
between August 2018 and May 2024. Because the interim final rule was 
published on July 29, 2021, with immediate effectiveness, the first 
full month during which the modifications to 504 debt refinancing were 
available was August 2021, with August 2021 through July 2022 being the 
first 12-month period during which the modifications to 504 debt 
refinancing were available to 504 applicants. SBA divided the data into 
five cohorts of 12 months each, with the first cohort beginning in 
August 2018 and the last cohort beginning February 2024. See Tables 2A 
and 2B.
    As an appropriate baseline for evaluation of the impacts of the 
direct final rule that would be made permanent in this rule, SBA 
considers the state of 504 lending for debt refinance with expansion 
and without expansion before July 2021. SBA examines the 12-month 
periods from August 1, 2018, through July 31, 2019, to the period from 
August 1, 2022, to July 31, 2023, noting that external influences from 
the pandemic and from payments made on behalf of borrowers by SBA under 
section 1112 of the Coronavirus Aid Recovery, and Economic Security Act 
(section 1112 payments) that ended in September 2021 occurred. The 
section 1112 payments required SBA to make principal and interest 
payments on 504 loans for certain periods of time depending on the when 
the 504 loan was approved, which would have made a 504 loan an 
attractive option for small businesses and consequently would have 
increased 504 loan volume. Further, interest rates on 504 loans in 
these two periods differ, from a range of approximately 4.0 to 5.0 
percent in the earlier period to rates up to 7.0 percent in the later 
period, as do rates on alternatives to 504 loans. These changes mean 
that lending total volume by fiscal year comparisons may not be 
appropriate for assessment of impact. The current direct final rule is 
a drafting correction update for the previous final rule with the 
estimates of activity updated accordingly. The chart below also 
provided in the current rulemaking below shows these percentages for 
five August-July cohorts prior to the final rule published October 12, 
2023. It is still current as the July 2024 data is not yet available.

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                                      2018-19         2019-20         2020-21         2021-22         2022-23
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Dollar Volume of 504 Debt Refi              3.79            5.54            4.56            4.83            4.61
 with Expansion as Percentage of
 Dollar Volume of Total 504
 Loans..........................
Dollar Volume of 504 Debt Refi              3.12            5.30            7.59           11.43            6.53
 without Expansion as Percentage
 of Dollar Volume of Total 504
 Loans..........................
----------------------------------------------------------------------------------------------------------------

    As indicated in the chart, the percentages of 504 debt refinancing 
loans with and without expansion are in the recent period returning to 
the levels seen prior to the publication of the interim final rule in 
July 2021. For debt refinancing without expansion, the August 2020-July 
2021 period was elevated, and the August 2021-July 2022 cohort was an 
outlier, but the next 12 months settled to a percentage that was at a 
level consistent with the periods before the interim final rule and not 
indicative of a significant impact. These two cohorts with higher 504 
debt refinancing percentages occurred during the pandemic and were 
covered, at least in part, by section 1112 payments. The 12-month 
percentages of 504 debt refinancing with expansion did not vary widely.
    The interim final rule increased the amounts on 504 debt 
refinancing with and without expansion. Aggregate 504 lending over the 
period in question ranged from approximately $5 billion to almost $9.25 
billion, with total 504 lending in the latest 12-month cohort at about 
$6.6 billion. Even in the unlikely scenario of the prior rulemaking was 
the sole cause of an increase in total 504 lending from the low volume 
in the examined period of $5 billion (in 2018-19) to the latest 12-
month total of $6.6 billion, the incremental impact, as indicated by 
changes in the percentage of total lending accounted for by each, is 
under $100 million.

[[Page 79739]]

Executive Order 13563

    Executive Order 13563, Improving Regulation and Regulatory Review 
(January 18, 2011), requires agencies to adopt regulations through a 
process that involves public participation, and to the extent feasible, 
base regulations on the open exchange of information and perspectives 
from affected stakeholders and the public as a whole. SBA has developed 
this rule in a manner consistent with these requirements, and the 
public will have the opportunity to provide comments following the 
publication of this rule.

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.

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 13175

    This final rule does not have tribal implications under Executive 
Order 13175, Consultation and Coordination with Indian Tribal 
Governments, because it does not have a substantial direct effect on 
one or more Indian tribes, on the relationship between the Federal 
Government and Indian tribes, or on the distribution of power and 
responsibilities between the Federal Government and Indian tribes.

Congressional Review Act (5 U.S.C. 801-808)

    Subtitle E of the Small Business Regulatory Enforcement Fairness 
Act of 1996, also known as the Congressional Review Act, 5 U.S.C. 801 
et seq., 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 rulemaking and other required information to the U.S. 
Senate, the U.S. House of Representatives, and the Comptroller General 
of the United States. This rulemaking has been reviewed and determined 
not to meet the criteria set forth in 5 U.S.C. 804(2).

Paperwork Reduction Act

    In order to implement the Economic Aid Act, SBA determined that it 
was necessary to modify SBA Form 1244, Application for Section 504 
Loans, which is currently approved under OMB Control Number 3245-0071, 
to conform the form to the revised requirements for debt refinancing 
loans. The changes did not add any new burdens for the respondents, 
rather, in some instances, the revisions will result in reduced burden 
as applicants and CDCs no longer have to submit certain information.
    (a) SBA will need to revise Form 1244 page 9 to add ``Other Secured 
Debt'' as a line item in the sources and uses document.
    (b) SBA will need to revise Form 1244 Exhibit instructions in 
standard operating procedure (SOP) 50 10 7.1 to require a 75% 
substantial benefit for refinancing with expansion to match the last 
form change for refinancing with expansion. This revision did not 
change the information the CDC is required to collect, only the form 
instructions. No further changes are necessary.

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

    When an agency issues a rulemaking, the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601-612, requires the agency to ``prepare and make 
available for public comment an initial regulatory analysis'' which 
will ``describe the impact of the proposed rule on small entities.'' 
The RFA requires such analysis only where notice and comment rulemaking 
are required. As discussed above, SBA has found good cause that notice 
and public procedure are impracticable, unnecessary, or contrary to the 
public interest. Accordingly, SBA is not required to conduct a 
regulatory flexibility analysis and is publishing this rule as a direct 
final rule without advance notice and public comment. Further, section 
605 of the RFA allows an agency to certify a rule, in lieu of preparing 
an analysis, if the proposed rulemaking is not expected to have a 
significant economic impact on a substantial number of small entities. 
SBA is nonetheless providing the following abbreviated analysis.
    The changes in this direct final rule would, in part, be a drafting 
correction to 13 CFR 120.882. While there will be minor changes to SBA 
Form 1244, and the burden hours to the small business concern and the 
Certified Development Company will remain the same. There are no 
anticipated additional compliance costs. Furthermore, SBA does not 
anticipate that the additional changes to the Eligible Project costs 
for 504 loans regulations would have a significant impact to a 
substantial number of small businesses. This is because only a small 
percentage of each year's 504 loans involve debt refinancing without 
expansion. Each loan represents a unique small business borrower 
because these borrowers are only eligible to refinance their debt once 
in a fiscal year with the 504 Loan Program, and therefore do not have 
multiple 504 debt refinancing without expansion loans in any given 
year. Based on the average number of 504 loans from FY 2021-2023, only 
13% involved debt refinancing without expansion. Specifically, in 
FY2021, out of 9,676 loans, 693 loans or 7% were for debt refinancing 
without expansion. In FY 2022, this figure was 829 out of 9,254 or 9% 
504 loans, while in FY 2023, 1,005 out of 4,451 or 23% of 504 loans 
were for debt refinancing without expansion. While the percentage of 
the 504 loan portfolio involving debt refinancing without expansion 
increased by 20% from FY 2021 to 2023, this increase was due in part to 
section 1112 payments, and in part to a rapidly increasing interest 
rate environment. Because section 1112 payments have sunset, SBA 
believes that the 504 debt refinancing without expansion volume will 
return to the pre-section 1112 level of less than 10% of small 
entities. As such, SBA concludes that the rule will not impact a 
substantial number of small entities.
    While the economic implications of the direct final rule are small 
and the data do not reveal a significant economic impact on a 
substantial number of small entities, SBA anticipates a refinancing 
growth rate more in alignment with pre-pandemic levels, with some 
adjustment to the economic impact because the final rule will expand 
program eligibility. In its final rule issued October 12, 2023, SBA 
analyzed potential growth scenarios of up to 30% growth in the 504 loan 
program, and even using this impact model (actual growth has never 
exceeded 15% in any prior fiscal year) the total of 504 debt refinance 
without expansion projects as a percentage of either number of loans or 
dollar volume of loans is not estimated to exceed 16% of the overall 
portfolio. As this is a direct final rule update to correct drafting 
issues with the previous final rule, the data provided at that time is 
still relevant. When this percentage is applied to the estimated number 
of

[[Page 79740]]

loans (small businesses impacted), this would result in less than 1,100 
small businesses impacted. SBA estimates that the average monthly 
savings for small businesses that refinance their existing loans 
through the 504 loan program would be between $7,000 to $8,300 per 
month, with a total estimated savings over the life of the loan of 
between $202,000 to $227,000. SBA determined this estimate based on the 
historical average of a 504 debt refinancing without expansion loan 
averaging $1,000,000 for each small business applicant. SBA used the 
504 June 2024 interest rates to calculate both the monthly and total 
loan savings to each small business concern. The lower end of the 
$202,000 to $227.0000 range reflects the economic impact if a small 
business concern refinanced for 20 years, while the higher end reflects 
the economic impact of a small business concern refinanced for 25 
years. Small business concerns do not use 10 year 504 loans for debt 
refinancing without expansion, as their goal is to lower their payments 
by not only taking advantage of the 504 loan program's fixed interest 
rate, but also the longer 20 and 25-year loan terms available.

List of Subjects in 13 CFR Part 120

    Business loan programs, Reporting and recordkeeping requirements, 
Small businesses.

    Accordingly, for the reasons stated in the preamble, SBA amends 13 
CFR part 120 as follows:

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), 650, 687(f), 696(3) and (7), and 697(a) 
and (e); sec. 521, Pub. L. 114-113, 129 Stat. 2242; sec. 328(a), 
Pub. L. 116-260, 134 Stat. 1182.


0
2. Amend Sec.  120.882 by:
0
a. Revising paragraphs (e)(1) and (5), (g)(3)(iii), and (g)(6);
0
b. Removing and reserving paragraph (g)(10); and
0
c. In paragraph (g)(16), adding the definitions of ``Eligible Business 
Expenses,'' ``Operating Expenses,'' and ``Other Secured Debt'' in 
alphabetical order.
    The revisions and additions read as follows:


Sec.  120.882   Eligible Project costs for 504 loans.

* * * * *
    (e) * * *
    (1) Substantially all (75% or more) of the proceeds of the 
indebtedness were used to acquire land, including a building situated 
thereon, to construct a building thereon, or to purchase equipment. The 
assets acquired must be eligible for financing under the 504 loan 
program. If the acquisition, construction, or purchase of the asset was 
originally financed through a commercial loan that would have satisfied 
the ``substantially all'' requirement and that was subsequently 
refinanced one or more times, with the current commercial loan being 
the most recent refinancing, the current commercial loan will be deemed 
to satisfy this paragraph (e)(1).
* * * * *
    (5) The financing will provide a substantial benefit to the 
borrower when prepayment penalties, financing fees, and other financing 
costs are accounted for. For purposes of this paragraph (e)(5), 
substantial benefit means that the portion of the new installment 
amount attributable to the debt being refinanced must be less than the 
existing installment amount(s). Prepayment penalties, financing fees, 
and other financing costs must also be added to the amount being 
refinanced in calculating the percentage reduction in the new 
installment payment. Exceptions to the reduction requirement may be 
approved by the Director, Office of Financial Assistance (D/FA) or 
designee for good cause. PCLP CDCs may not use their delegated 
authority to approve a loan requiring this exception.
* * * * *
    (g) * * *
    (3) * * *
    (iii) The refinancing will provide a substantial benefit to the 
Borrower. For purposes of this paragraph (g)(3)(iii), substantial 
benefit means that the portion of the new installment amount 
attributable to the debt being refinanced must be less than the 
existing installment amount(s). Prepayment penalties (including subsidy 
recoupment fees), financing fees, and other financing costs must be 
added to the amount being refinanced in calculating the percentage 
reduction in the new installment payment, but the portion of the new 
installment amount attributable to Eligible Business Expenses (as 
described in paragraph (g)(16) of this section) is not included in this 
calculation. Exceptions to the reduction requirement may be approved by 
the D/FA or designee for good cause. PCLP CDCs may not use their 
delegated authority to approve a loan requiring the exception in this 
paragraph (g)(3)(iii).
* * * * *
    (6)(i) The portion of the Refinancing Project provided by the 504 
loan and the Third Party Loan may be no more than 90% of the fair 
market value of the fixed assets that will serve as collateral.
    (ii) The Borrower's application may include a request to finance 
Eligible Business Expenses as part of the Refinancing Project if the 
amount of cash funds that will be provided for the Refinancing Project 
exceeds the amount to be paid to the lender of the qualified debt. The 
Borrower's application must include a specific description of the 
Eligible Business Expenses for which the financing is requested and an 
itemization of the amount of each expense. Any debt for Operating 
Expenses of the business that was incurred with a credit card or a 
business line of credit may be included if the credit card or business 
line of credit is issued in the name of the small business and the 
Applicant certifies that the debt being refinanced was incurred 
exclusively for business related purposes. Loan proceeds must not be 
used to refinance any personal expenses. Both the CDC and the Borrower 
must certify in the application that the funds will be used to cover 
Eligible Business Expenses. Borrower must, upon request, substantiate 
the use of the funds provided for business expenses through, for 
example, bank statements, invoices marked ``paid,'' cleared checks, or 
any other documents that demonstrate that a business obligation was 
satisfied with the funds provided.
* * * * *
    (16) * * *
    Eligible Business Expenses are payments of the business for either 
Operating Expenses or Other Secured Debt.
* * * * *
    Operating Expenses are expenses of the business that were incurred 
but not paid prior to the date of the 504 application or that will 
become due for payment within 18 months after the date of application. 
Examples include salaries, rent, utilities, inventory, and other 
expenses of the business that are not capital expenditures.
    Other Secured Debt is debt incurred prior to the 504 loan 
application that has been secured by the same Eligible Fixed Assets 
securing the qualified debt and incurred for the benefit of the 
Borrower and/or Operating Company. Other Secured Debt does not include 
debt incurred for the purposes of capital expenditures, and any 
existing liens must be released or subordinated to the

[[Page 79741]]

amount of the debt being refinanced by the 504 loan.
* * * * *

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2024-22040 Filed 9-30-24; 8:45 am]
BILLING CODE 8026-09-P