[Federal Register Volume 60, Number 13 (Friday, January 20, 1995)]
[Rules and Regulations]
[Pages 4073-4074]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1502]



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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: Final rule.

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SUMMARY: This rule provides an exception to the requirement that third 
party financing for a certified development company project derived 
from the seller of the property being financed must be subordinate to 
the financing provided by the development company. It provides that if 
a regulated financial institution is providing the third party 
financing and is also the seller of the real estate being financed the 
requirement for such subordination may be waived at SBA's option. A 
condition for such waiver is 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). Also, as a condition of such waiver, an 
independent appraisal of the value of the property prepared by or under 
the control of the SBA or the participating Certified Development 
Company (CDC) is required, in order to insure that no conflict of 
interest will arise. This rule will grant small businesses receiving 
assistance under the SBA's certified development company program 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.

EFFECTIVE DATE: January 20, 1995.

FOR FURTHER INFORMATION CONTACT: LeAnn M. Oliver, Acting Director, 
Office of Rural Affairs & Economic Development, Small Business 
Administration, (202) 205-6485.

SUPPLEMENTARY INFORMATION: On March 18, 1994, SBA published in the 
Federal Register a proposed regulation amending 13 CFR 108.503-8(b)(2). 
That regulation requires that all seller financing be subordinated to 
SBA backed financing made under the SBA's development company loan 
program (59 FR 12864). SBA proposed to waive this restriction if the 
property being financed was classified as ``other real estate owned'' 
(OREO) which was owned by a financial institution which was financing 
the development company project in conjunction with SBA backed 
financing. SBA received five comments which favored the proposed rule, 
one which opposed the change and one which addressed the issue of SBA 
adopting a general policy regarding real estate appraisals. Comments in 
support of the rule were from the trade associations representing the 
CDCs and independent bankers. They noted that existing lender 
regulations preclude a lender owning OREO from subordinating its 
financing if it is the seller of that property. The one comment against 
the rule expressed concern about lenders having the opportunity for 
self-dealing under the proposal.
    SBA is adopting the proposal as published with one change. In 
response to the one concern expressed in the comments, SBA is requiring 
in this final rule that an independent appraisal of the property be 
prepared under the guidance of the CDC or SBA as a condition to 
granting a waiver under the final rule.
    By this final rule, 13 CFR 108.503-8(b)(2) is amended to provide an 
exception to the current restriction which provides that where any part 
of the permanent financing for a development company project is 
supplied by the seller of the property on which the project is located, 
such financing must be subordinate to the development company 
financing. This rule permits a waiver of the general rule if the 
institution is the seller of property classified as ``other real estate 
owned'', and 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 property which will serve as collateral for the 503/
504 loan is sufficient to support the loan.
    Regulated financial institutions have increased their portfolios of 
``OREO'' as a result of regulations issued pursuant to the Financial 
Institutions Reform Recovery and Enforcement Act (FIRREA) and the 
Federal Deposit Insurance Corporation Improvement Act (FDICIA). The 
regulations governing 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. These regulations encourage lenders and appraisers to value 
such property at a value which should lead to relatively quick sales. 
This has resulted in the availability of very favorable real estate 
sales by those lenders with the ability to meet regulated loan-to-value 
ratios and other currently stringent credit requirements of the 
lenders. However, loan-to-value [[Page 4074]] ratios can not be met by 
lenders in possession of OREO property which is financed under the 
development company program if the lender/seller is required to take a 
second lien. This rule grants small businesses utilizing the 
development company program equal access to opportunities to acquire 
OREO 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 that on a case by case basis no conflict of 
interest arises from the application of this rule.

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

    For purposes of the Regulatory Flexibility Act, 5 U.S.C. 601 et 
seq., SBA certifies that this final rule will not have a significant 
economic impact on a substantial number of small entities.
    SBA certifies that this final rule will not constitute a 
significant regulatory action for purposes of Executive Order 12866, 
since the change will not result in an annual economic effect of $100 
million or more.
    SBA certifies that this final rule will not have Federalism 
implications warranting the preparation of a Federalism Assessment in 
accordance with Executive Order 12612.
    SBA certifies that this final rule will not impose new reporting or 
recordkeeping requirements which would be subject to the Paperwork 
Reduction Act, 44 U.S.C. Ch. 35.
    SBA certifies that this final rule is drafted, to the extent 
practicable, in accordance with the standards set forth in Section 2 of 
Executive Order 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.

    Accordingly, pursuant to the authority contained in section 5(b)(6) 
of the Small Business Act (15 U.S.C. 634(b)(6)), SBA is amending 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, provided that if the property is 
classified as ``other real estate owned'' by a national bank or other 
Federally regulated lender, and 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, SBA 
may waive the requirement for a subordinate position.
* * * * *
    Dated: December 23, 1994.
Philip Lader,
Administrator.
[FR Doc. 95-1502 Filed 1-19-95; 8:45 am]
BILLING CODE 8025-01-M