[Federal Register Volume 61, Number 19 (Monday, January 29, 1996)]
[Rules and Regulations]
[Pages 2679-2682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1350]



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SMALL BUSINESS ADMINISTRATION
13 CFR Part 103


Standards for Conducting Business With SBA

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: In response to President Clinton's regulatory review 
directive, the Small Business Administration has completed a page-by-
page and line-by-line review of its regulations. As a result, SBA is 
streamlining its regulations by eliminating many rules and simplifying 
and improving those that remain. This final rule reorganizes and 
streamlines the entire Part 103, which covers the standards one must 
meet to conduct business with SBA. It makes the standards clearer and 
more understandable to those who are regulated, and easier for SBA to 
enforce.

EFFECTIVE DATE: This rule is effective February 28, 1996.

FOR FURTHER INFORMATION CONTACT: Michael Dowd, Director, Office of Loan 
Programs, at (202) 205-6490.

SUPPLEMENTARY INFORMATION: Title 13 CFR Part 103 contains SBA's 
policies governing the standards for suspending 

[[Page 2680]]
or revoking the privileges of persons who conduct business with SBA on 
behalf of applicants or lenders. This final rule reorganizes and 
streamlines Part 103, making it easier to understand and enforce. It 
changes the title of the Part to ``Standards for Conducting Business 
with SBA'' to describe more clearly the scope of the regulations. The 
sections stating the statutory provisions underlying the Part and its 
purpose--103.13 and 103.13-1--are eliminated as unnecessary. The rule 
renumbers the sections that remain: present Secs. 103.13-2 through 
103.13-6 would become Secs. 103.1-103.5. The final rule clarifies the 
existing definition of agents who appear before SBA on behalf of 
applicants for assistance, adds definitions for ``packagers'', ``lender 
service providers,'' and ``referral agents'', and provides that these 
categories of agents are specifically covered by SBA's requirements 
governing conduct of business. It also amends, in certain respects, and 
adds greater specificity to the definition of ``good cause'' for which 
the Administrator may revoke or suspend the privilege for conducting 
business with SBA. It adds provisions prescribing the use and form of 
lender service provider agreements which must contain certain 
provisions regarding services to be provided and compensation, 
including a prohibition on secondary market premium sharing. In 
addition to these substantive changes, the final rule is written in 
clearer, more straightforward language than the present Part.
    The proposed rule was published on November 24, 1995 at 60 FR 
57980. A total of 26 commenters, virtually all Certified Development 
Companies, contacted SBA during the comment period with suggestions and 
observations about the proposed rule. All commenters expressed at least 
some level of concern about the proposal. In general, these concerns 
were based on the breadth of the proposed rule.
    A majority of the commenters offered negative observations about 
the scope of the definitions in section 103.1. Most of these comments 
focused on subsections (a) and (b) and criticized the definitions of 
the terms ``agent'' and ``conduct business with SBA.'' Many of these 
commenters were particularly concerned about the definitions in light 
of SBA's expressed intention (in the preamble to the proposed rule) to 
register and train agents, and to require under section 103.5 that all 
agents execute and provide to SBA a compensation agreement.
    The final rule addresses this concern by clarifying that only those 
persons or entities conducting business with SBA--those who actually 
prepare or submit on behalf of an applicant an application for 
assistance and those contractors who provide services to participants 
in SBA's business loan program pursuant to written agreements with 
those participants--will be considered ``agents''. SBA does not intend 
to regulate persons or entities, such as real estate appraisers and 
environmental specialists, who simply supply information that is used 
in the preparation of an application.
    Fourteen commenters criticized section 103.4, which defines ``good 
cause'' for suspension or revocation of the privilege to conduct 
business with SBA. In general, the comments about section 103.4 
criticized terms such as ``unethical activity'' and ``reasonable fees'' 
as too broad and vague. More specifically, three commenters complained 
that persons and entities should be allowed under subsection 103.4(d) 
to use the words ``Small Business Administration'' or ``SBA'' in 
advertising. Four commenters felt that the ``two master'' prohibition 
in subsection 103.4(g) should be clarified.
    SBA intends to provide guidelines in its Standard Operating 
Procedures (SOP) for what will constitute ``unethical activity'' and 
``reasonable fees.'' The final rule states that persons may use the 
words ``Small Business Administration'' or ``SBA'' in advertisements if 
the advertisement does not imply endorsement or sponsorship by SBA. The 
final rule continues to prohibit the use of the SBA seal or symbol in 
advertisements. The ``two master'' rule and the exceptions to it have 
been substantially altered in the final rule. The two master rule will 
now only apply when a person or entity acts as both a lender service 
provider or referral agent and packager for an applicant on the same 
business loan and receives compensation for such activity from both the 
lender and applicant. The two exceptions stated in the proposed rule 
have therefore been deleted and replaced by only one: cases in which a 
referral agent also acts as a packager and is compensated by both the 
lender for referral agent activities and the applicant for packaging 
activities.
    Finally, 14 commenters noted problems with section 103.5, which 
governs the regulation of an agent's fees and provision of services. 
These complaints related directly to many of the same commenters' 
concerns about the scope of the definition of ``agent'' in section 
103.1. The changes in the definition of ``agent'' discussed above 
address this problem. Several commenters questioned SBA's ability to 
review all compensation agreements for reasonableness. Section 103.5 
does not require such a review and SBA does not intend to evaluate each 
compensation agreement for reasonableness; it will only undertake a 
review if an applicant requests that it do so. Two commenters also 
noted that use of the terms ``compensation agreement'' and ``lender 
service provider agreement'' should be made consistent in subsections 
103.5 (a) and (b). The final rule has been amended to make clear the 
distinction between the terms and the intended treatment of each type 
of agreement.
    As noted above and in the preamble to the proposed rule, SBA 
intends to require all packagers and lender service providers to 
register with SBA for purposes of keeping track of who is performing 
such activities on behalf of applicants for assistance or lenders. SBA 
will provide training for anyone or any entity that wishes to represent 
applicants for SBA assistance or provide services to lenders. The 
development of these initiatives will take place over the next fiscal 
year, in consultation with representatives of the affected industries. 
To the extent that they require modifications of this final rule, such 
modifications will be made in later rulemakings.

Compliance With Executive Orders 12612, 12778, and 12866, the 
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), and the Paperwork 
Reduction Act (44 U.S.C. Ch. 35)

    SBA certifies that this rule involves internal administrative 
procedures and is not a significant rule within the meaning of 
Executive Order 12866 and will not have a significant economic impact 
on a substantial number of small entities within the meaning of the 
Regulatory Flexibility Act, 5 U.S.C. 601, et seq. It is not likely to 
have an annual economic effect of $100 million or more, result in a 
major increase in costs or prices, or have a significant adverse effect 
on competition or the United States economy.
    For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA 
certifies that this rule contains no new reporting or recordkeeping 
requirements.
    For purposes of Executive Order 12612, SBA certifies that this rule 
does not have any federalism implications warranting the preparation of 
a Federalism Assessment.
    For purposes of Executive Order 12778, SBA certifies that this rule 
is drafted, to the extent practicable, in accordance with the standards 
set forth in Section 2 of that Order. 

[[Page 2681]]


List of Subjects in 13 CFR Part 103

    Administrative practice and procedure.

    Accordingly, pursuant to the authority set forth in sections 5 and 
13 of the Small Business Act, 15 U.S.C. 634 and 642, SBA hereby revises 
part 103 of Title 13, Code of Federal Regulations (CFR), to read as 
follows:

PART 103--STANDARDS FOR CONDUCTING BUSINESS WITH SBA

103.1  Key definitions.
103.2  Who may conduct business with SBA?
103.3  May SBA suspend or revoke an Agent's privilege?
103.4  What is ``good cause'' for suspension or revocation?
103.5  How does SBA regulate an Agent's fees and provision of 
service?

    Authority: Secs. 5, 13, 72 Stat. 385, 394 (15 U.S.C. 634, 642).


Sec. 103.1  Key definitions.

    (a) Agent means an authorized representative, including an 
attorney, accountant, consultant, packager, lender service provider, or 
any other person representing an applicant or participant by conducting 
business with SBA.
    (b) The term conduct business with SBA means:
    (1) Preparing or submitting on behalf of an applicant an 
application for financial assistance of any kind, assistance from the 
Investment Division of SBA, or assistance in procurement and technical 
matters;
    (2) Preparing or processing on behalf of a lender or a participant 
in any of SBA's programs an application for federal financial 
assistance;
    (3) Participating with or communicating in any way with officers or 
employees of SBA on an applicant's, participant's, or lender's behalf;
    (4) Acting as a lender service provider; and
    (5) Such other activity as SBA reasonably shall determine.
    (c) Applicant means any person, firm, concern, corporation, 
partnership, cooperative or other business enterprise applying for any 
type of assistance from SBA.
    (d) Lender Service Provider means an Agent who carries out lender 
functions in originating, disbursing, servicing, or liquidating a 
specific SBA business loan or loan portfolio for compensation from the 
lender. SBA determines whether or not one is a ``Lender Service 
Provider'' on a loan-by-loan basis.
    (e) Packager means an Agent who is employed and compensated by an 
Applicant or lender to prepare the Applicant's application for 
financial assistance from SBA. SBA determines whether or not one is a 
``Packager'' on a loan-by-loan basis.
    (f) Referral Agent means a person or entity who identifies and 
refers an Applicant to a lender or a lender to an Applicant. The 
Referral Agent may be employed and compensated by either an Applicant 
or a lender.
    (g) Participant means a person or entity that is participating in 
any of the financial, investment, or business development programs 
authorized by the Small Business Act or Small Business Investment Act 
of 1958.


Sec. 103.2  Who may conduct business with SBA?

    (a) If you are an Applicant, a Participant, a partner of an 
Applicant or Participant partnership, or serve as an officer of an 
Applicant, Participant corporation, or limited liability company, you 
may conduct business with SBA without a representative.
    (b) If you are an Agent, you may conduct business with SBA on 
behalf of an Applicant, Participant or lender, unless representation is 
otherwise prohibited by law or the regulations in this part or any 
other part in this chapter. For example, persons debarred under the SBA 
or Government-wide debarment regulations may not conduct business with 
SBA. SBA may request that any Agent supply written evidence of his or 
her authority to act on behalf of an Applicant, Participant, or lender 
as a condition of revealing any information about the Applicant's, 
Participant's, or lender's current or prior dealings with SBA.


Sec. 103.3  May SBA suspend or revoke an Agent's privilege?

    The Administrator of SBA or designee may, for good cause, suspend 
or revoke the privilege of any Agent to conduct business with SBA. Part 
134 of this chapter states the procedures for appealing the decision to 
suspend or revoke the privilege. The suspension or revocation remains 
in effect during the pendency of any administrative proceedings under 
Part 134 of this chapter.


Sec. 103.4  What is ``good cause'' for suspension or revocation?

    Any unlawful or unethical activity is good cause for suspension or 
revocation of the privilege to conduct business. This includes:
    (a) Attempting to influence any employee of SBA or a lender, by 
gifts, bribes or other unlawful or unethical activity, with respect to 
any matter involving SBA assistance.
    (b) Soliciting for the provision of services to an Applicant by 
another entity when there is an undisclosed business relationship 
between the two parties.
    (c) Violating ethical guidelines which govern the profession or 
business of the Agent or which are published at any time by SBA.
    (d) Implying or stating that the work to be performed for an 
Applicant will include use of political or other special influence with 
SBA. Examples include indicating that the entity is affiliated with or 
paid, endorsed or employed by SBA, advertising using the words Small 
Business Administration or SBA in a manner that implies SBA's 
endorsement or sponsorship, use of SBA's seal or symbol, and giving a 
``guaranty'' to an Applicant that the application will be approved.
    (e) Charging or proposing to charge any fee that does not bear a 
necessary and reasonable relationship to the services actually rendered 
or expenses actually incurred in connection with a matter before SBA or 
which is materially inconsistent with the provisions of an applicable 
compensation agreement or Lender Service Provider agreement. A fee 
based solely on a percentage of a loan or guarantee amount can be 
reasonable, depending on the circumstances of a case and the services 
actually rendered.
    (f) Engaging in any conduct indicating a lack of business integrity 
or business honesty, including debarment, criminal conviction, or civil 
judgment within the last seven years for fraud, embezzlement, theft, 
forgery, bribery, falsification or destruction of records, false 
statements, conspiracy, receiving stolen property, false claims, or 
obstruction of justice.
    (g) Acting as both a Lender Service Provider or Referral Agent and 
a Packager for an Applicant on the same SBA business loan and receiving 
compensation for such activity from both the Applicant and lender. A 
limited exception to this ``two master'' prohibition exists when an 
Agent acts as a Packager and is compensated by the Applicant for 
packaging services; also acts as a Referral Agent and is compensated by 
the lender for those activities; discloses the referral activities to 
the Applicant; and discloses the packaging activities to the lender.
    (h) Violating materially the terms of any compensation agreement or 
Lender Service Provider agreement provided for in Sec. 103.5.
    (i) Violating or assisting in the violation of any SBA regulations, 
policies, or procedures of which the Applicant has been made aware. 

[[Page 2682]]



Sec. 103.5  How does SBA regulate an Agent's fees and provision of 
service?

    (a) Any Applicant, Agent, or Packager must execute and provide to 
SBA a compensation agreement, and any Lender Service Provider must 
execute and provide to SBA a Lender Service Provider agreement. Each 
agreement governs the compensation charged for services rendered or to 
be rendered to the Applicant or lender in any matter involving SBA 
assistance. SBA provides the form of compensation agreement and a 
suggested form of Lender Service Provider agreement to be used by 
Agents.
    (b) Compensation agreements must provide that in cases where SBA 
deems the compensation unreasonable, the Agent or Packager must: reduce 
the charge to an amount SBA deems reasonable, refund any sum in excess 
of the amount SBA deems reasonable to the Applicant, and refrain from 
charging or collecting, directly or indirectly, from the Applicant an 
amount in excess of the amount SBA deems reasonable.
    (c) Each Lender Service Provider must enter into a written 
agreement with each lender for whom it acts in that capacity. SBA will 
review all such agreements. Such agreements need not contain each and 
every provision found in the SBA's suggested form of agreement. 
However, each agreement must indicate that both parties agree not to 
engage in any sharing of secondary market premiums, that the services 
to be provided are accurately described, and that the agreement is 
otherwise consistent with SBA requirements. Subject to the prohibition 
on splitting premiums, lenders have reasonable discretion in setting 
compensation for Lender Service Providers. However, such compensation 
may not be directly charged to an Applicant or borrower.

    Dated: January 22, 1996.
John T. Spotila,
Acting Administrator.
[FR Doc. 96-1350 Filed 1-26-96; 8:45 am]
BILLING CODE 8025-01-P