[Federal Register Volume 59, Number 53 (Friday, March 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6344]


[[Page Unknown]]

[Federal Register: March 18, 1994]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 108

 

Loans to State and Local Development Companies; Seller Financing 
by Regulated Lenders

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

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SUMMARY: This proposed rule would provide eligibility for a 503 project 
in which a regulated financial institution is providing the third party 
financing and is also the seller of the real estate being financed. A 
condition of eligibility would be that the real estate being sold was 
previously acquired by the institution as ``other real estate owned'' 
(OREO) as defined by the Financial Institutions Reform Recovery and 
Enforcement Act (FIRREA) and the Federal Deposit Insurance Corporation 
Improvement Act (FDICIA). Until now, the rule has been that where any 
part of the permanent financing is supplied by the seller of the 
property for the project, such financing must be subordinate to the 
503/504 loan. This proposed rule change would not require a regulated 
financial institution to take a subordinate position because the 
institution is the seller under certain prescribed conditions. An 
independent appraisal of the value of the property would be required, 
with the appraisal prepared by or under the control of the SBA or the 
participating Certified Development Company (CDC). This proposed rule 
change will grant small businesses an opportunity to purchase OREO 
which is being made available to purchasers with sufficient financial 
strength to meet the lenders' credit requirements under FIRREA and 
FDICIA.

DATES: Comments must be submitted on or before April 18, 1994.

ADDRESSES: Comments should be sent to Allan S. Mandel, Director, Office 
of Rural Affairs & Economic Development, small Business Administration, 
409 3rd Street SW., suite 8300, Washington, DC, 20416.

FOR FURTHER INFORMATION CONTACT:Allan S. Mandel, Director, Office of 
Rural Affairs & Economic Development, Small Business Administration, 
(202) 205-6485.

SUPPLEMENTARY INFORMATION: By this proposed rule, 13 CFR 108.503-
8(b)(2) would be amended to provide an exception to the restriction 
currently set forth in the paragraph which provides that where any part 
of the permanent financing for a development company project is 
supplied by the seller of the property for the project, such financing 
must be subordinate to the 503/504 loan. This proposed rule change 
would not require a regulated financial institution to take a 
subordinate position if the institution is the seller, and if an 
independent appraisal of the value of the property prepared by or under 
the control of the SBA or a CDC demonstrates that the value of the 
collateral for the 503/504 loan is sufficient to support the loan.
    Regulated financial institutions have increased their portfolios of 
``other real estate owned'' (OREO) as a result of increased regulation 
pursuant to the Financial Institutions Reform Recovery and Enforcement 
Act (FIRREA) and the Federal Deposit Insurance Corporation Improvement 
Act (FDICIA). The regulations for the lending institutions require that 
they have the OREO property recorded on their books at a fair market 
value based on an appraisal prepared in conformance with state or 
Federal appraisal standards. The lender regulations encourage lenders 
and appraisers to value the property at a value which should lead to a 
relatively quick sale.
    This has resulted in very favorable real estate sales to those with 
the ability to meet regulated loan-to-value ratios and other currently 
stringent credit requirements of the lenders. However, loan-to-value 
ratios can not be met by lenders in possession of OREO property who 
wish to sell it to purchasers availing themselves of the 503/504 
program when the lender takes a second lien as required under the 
current SBA regulation. This proposed rule is necessary to grant small 
businesses equal access to opportunities to acquire real estate at 
favorable rates and terms from such lending institutions.
    The existing rule was adopted to insure that the combination of a 
seller's price and terms of financing reflected a fair market 
transaction. Changes in lender regulations resulting from the FIRREA 
and the FDICIA and the independent fair market appraisals will protect 
small business borrowers and the government against the risk of over-
valuation of the OREO property. Additionally, SBA field offices will be 
provided guidance to insure on a case by case basis that there is no 
other potential conflict of interest.

Compliance With Executive Orders 12612, 12778, and 12866, the 
Regulatory Flexibility Act and the Paperwork Reduction Act

Executive Order 12866 and Regulatory Flexibility Act

    SBA certifies that this proposed rule, if adopted, would not be a 
significant regulatory action for purposes of Executive Order 12866 
and, for purposes of the Regulatory Flexibility Act, 5 U.S.C. 601 et 
seq., would not have a significant economic impact on a substantial 
number of small entities, for the following reasons:
    1. It would not result in an annual economic effect of $100 million 
or more or adversely affect in a material way the economy, a sector or 
the economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities.
    2. It would not create a serious inconsistency or otherwise 
interfere with an action taken or planned by another agency.
    3. It would not materially alter the budgetary impact of 
entitlements, grants, user fees, or loan programs or the rights and 
obligations of recipients thereof.
    4. It would not raise novel legal or policy issues arising out of 
legal mandates, the President's priorities, or the principles set forth 
in E.O. 12866

Executive Order 12612

    SBA certifies that this rule, if adopted, would have no Federalism 
implications warranting the preparation of a Federalism Assessment in 
accordance with Executive Order 12612.

Paperwork Reduction Act

    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
hereby certifies that this proposed rule, if adopted, would impose no 
new reporting or recordkeeping requirements.

Executive Order 12778

    SBA certifies that this proposed rule is drafted, the extent 
practicable, in accordance with the standards set forth in Section 2 of 
E.O. 12778.

(Catalog of Federal Domestic Assistance 59.036 Certified Development 
Company Loans (503 Loans); 59.041 Certified Development Company 
Loans (504 Loans).

List of Subjects in 13 CFR Part 108

    Loan programs/business, Small businesses.

    For the reasons set forth above, SBA proposes to amend part 108 of 
title 13 of the Code of Federal Regulations as follows:

PART 108--[AMENDED]

    1. The authority citation for part 108 continues to read as 
follows:

    Authority: 15 U.S.C. 687(c), 695, 696, 697a, 697b, 697c.

    2. Section 108.503-8(b)(2) is revised to read as follows:


Sec. 108.503-8  Third-party financing.

* * * * *
    (b) Terms of third-party financing. * * *
    (2) Where the seller of property for the project supplies any part 
of the permanent financing of such project, such financing shall be 
subordinate to the 503 loan, except that if the property is classified 
as ``other real estate owned'' by a national bank or other Federally 
regulated lender, SBA may permit the lender to have a superior lien 
position if an independent appraisal prepared by or under control of 
the SBA or the participating 503 company demonstrates that the property 
is of sufficient value to support the 503 loan.
* * * * *
    Dated: January 30, 1994.
Erskine B. Bowles,
Administrator.
[FR Doc. 94-6344 Filed 3-17-94; 8:45 am]
BILLING CODE 8025-01-M