[Federal Register Volume 61, Number 231 (Friday, November 29, 1996)]
[Proposed Rules]
[Pages 60649-60650]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30507]
=======================================================================
-----------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
Business Loan Policy; Sale of Unguaranteed Portion of Loan
AGENCY: Small Business Administration.
ACTION: Advance notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: Pursuant to Section 7(a) of the Small Business Act (Act) 15
U.S.C. 636(a), the Small Business Administration (SBA) guarantees up to
90 percent of certain loans made by banks or other lending
institutions. We are soliciting comments on how to proceed with a
proposed rule which would permit participating lenders to transfer,
under specific conditions, the unguaranteed portions of these loans.
DATES: Comments must be received on or before December 30, 1996.
ADDRESSES: Mail comments to: John Cox, Associate Administrator for
Financial Assistance, U.S. Small Business Administration, 409 Third
Street, SW, Washington, D.C. 20416, Room 8200.
[[Page 60650]]
FOR FURTHER INFORMATION CONTACT: John Cox, AA/Financial Assistance,
(202) 205-6490.
SUPPLEMENTARY INFORMATION:
Background
Section 7(a) of the Act authorizes SBA to guarantee loans made by
banks or other lending institutions. Since Section 7(a) limits the
amount of the SBA guarantee, each loan has an unguaranteed portion. The
specific statutory provision under which the loan is made determines
the size of the unguaranteed portion.
By limiting the SBA guarantee, Congress intended lenders to retain
a tangible economic interest sufficient to make sure they are diligent
in making, servicing and liquidating loans. This tangible economic
interest must be reasonably commensurate with the unguaranteed portion
of such loans.
In most instances, SBA requires lenders to retain at least a part
of the unguaranteed portion of each guaranteed loan. Under prescribed
procedures, it will allow the transfer by some lenders of the
unguaranteed portions of loans and the pledge by other lenders of the
notes evidencing SBA guaranteed loans. In these instances, it allows
the transfer or pledge with prior written consent to facilitate
financing transactions beneficial to those lenders. (See 13 CFR S
120.420 and paragraph 12 (a) of Blanket Guaranty Agreements, SBA Form
750)
SBA's regulations currently permit only nondepository lenders to
transfer the entire unguaranteed portions of SBA guaranteed loans for
financing purposes. Section 103(e) of the recently enacted Small
Business Program Improvement Act of 1996, P.L. 104-208, requires that
SBA now either promulgate a regulation that applies uniformly to both
depository and nondepository lenders or prohibit the practice with
respect to nondepository lenders after March 31, 1997. Since we prefer
to issue a uniform rule, we propose to revise our regulations to give
all SBA lenders clear guidance on when and how they can transfer or
pledge the unguaranteed portion of SBA loans.
SBA's Present Regulations
Currently our regulations on the sale of the unguaranteed portions
of SBA guaranteed loans apply only to nondepository lenders.
Nondepository lenders include:
(1) Small Business Lending Companies, which are licensed and
regulated by SBA (See 13 CFR S 120.470),
(2) Business and Industrial Development Companies, which are
chartered under state statutes,
(3) Insurance companies, and
(4) Other nondepository lenders with which SBA has entered into
blanket guaranty agreements.
SBA can deny a lender's request to sell unguaranteed portions if it
does not comply with SBA lending regulations and/or any other
applicable State or Federal statutory or regulatory requirement.
Although the necessary documents for such financing arrangements
will differ from case to case, we try to accommodate any reasonable
proposal. However, lenders must satisfy certain conditions before we
will consent, in writing, to any proposal.
Under the regulations, only a party agreeable to us is permitted to
hold the notes evidencing SBA guaranteed loans. Normally, we require
the lender or our agent to retain custody of such notes.
As a pre-condition to our written consent to any financing
transaction, SBA requires that all parties execute a written agreement
protecting SBA's interest as the guarantor of the major portion of the
notes. Any such agreement must:
(1) Indicate how the notes will be held and safeguarded,
(2) Acknowledge our interest in the notes, and
(3) Reflect the agreement of all relevant parties to uphold the
Small Business Act, the regulations promulgated thereunder, and our
guarantee contract.
We have developed a format for the agreement for parties who want to
proceed under the regulations.
Finally, under these regulations, we will only grant our prior
written consent if participating lenders retain a tangible economic
interest in the loans reasonably commensurate with the unguaranteed
portions. In the case of a pledge, the lender must retain all of the
economic interest in the actual unguaranteed portions. In the case of a
transfer, a participating lender must show that it remains sufficiently
at risk economically for the unguaranteed portion. The retained risk
need not be met by retaining a reserve which equals the unguaranteed
portions as long as the participating lender bears the ultimate risk of
loss on the unguaranteed portions. The regulations cite a number of
non-exclusive means which a lender may use, singly or in combination,
to demonstrate risk retention.
Solicitation of Comments
We are asking for the public to comment on how to implement the
Congressional mandate in Section 103(e) of Public Law 104-208. We are
not wedded to our present regulations or procedures, but recognize the
need for uniformity and predictability to accommodate both the expected
demand from our lenders and the need to protect the safety and
soundness of our guaranteed loan program. Commenters are requested to
address some or all of the following questions:
1. How should lenders demonstrate a retained tangible economic
interest in a guaranteed loan? Should lenders be required to retain an
unguaranteed portion and/or reserve within the financing transactions?
What level of retention and/or reserve is adequate to protect the
safety and soundness of SBA's business loan program?
2. Should we permit financing transactions on a periodic scheduled
basis or should lenders be permitted to submit transactions whenever
they want?
3. Should we permit multiple lenders to ``pool'' transactions in
one multi-party transaction? If so, how should this be regulated?
4. Should we use third party resources to help process the
contemplated transactions? If so, what types of third parties? Who
should bear the costs associated with using third parties?
Although commenters should not restrict their comments to the above
issues, responses geared to these issues will be helpful.
Dated: November 22, 1996.
Ginger Ehn Lew,
Deputy Administrator.
[FR Doc. 96-30507 Filed 11-27-96; 8:45 am]
BILLING CODE 8025-01-P