[Federal Register Volume 62, Number 63 (Wednesday, April 2, 1997)]
[Rules and Regulations]
[Pages 15601-15602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8416]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
Business Loan Programs
AGENCY: Small Business Administration.
ACTION: Interim final rule.
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SUMMARY: The U.S. Small Business Administration (SBA) is modifying its
rules regarding the financing and securitization of the unguaranteed
portion of loans it guarantees under Section 7(a) of the Small Business
Act. Present SBA regulations allow only non-depository lenders to
engage in these practices (13 CFR 120.420, revised as of March 1,
1996). This interim rule will permit both depository and non-depository
lenders to pledge or sell the unguaranteed portions of SBA guaranteed
loans.
During the pendency of this interim final rule, subject to
compliance with all other aspects of the interim final rule, SBA
expects to give favorable review to any transaction which complies with
the retainage requirements described in the notice of proposed
rulemaking relevant to financing and securitization which appeared in
the Federal Register on February 26, 1997. If SBA is presented with a
transaction which is not structured in a manner consistent with such
retainage requirements, SBA will need to assure itself as to safety and
soundness considerations and compliance with the interim rule before
giving its approval.
DATES: Effective: April 2, 1997.
Comments must be submitted on or before May 2, 1997.
ADDRESSES: Please mail all comments to Jane Palsgrove Butler, Acting
Associate Administrator for Financial Assistance, U.S. Small Business
Administration, 409 Third Street, SW, Room 8200, Washington, D.C.
20416.
FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Acting Deputy
Associate Administrator for Financial Assistance, (202) 205-7505.
SUPPLEMENTARY INFORMATION: Over the past several years, the average SBA
guarantee under its guaranteed business loan program (program) has
decreased from nearly 90% to approximately 75%. This 150% increase in
lender exposure requires lenders participating in the program to commit
substantially more of their own capital in order to support their
dollar volume of SBA guaranteed loans. In 1992, SBA promulgated
regulations that permitted non-depository lenders participating in the
program to pledge or sell the unguaranteed portions of SBA guaranteed
loans, thereby permitting them to fund unguaranteed portions of SBA
guaranteed loans with the proceeds of loans or securities offerings
(securitizations). (See 13 CFR Sec. 120.420, revised as of March 1,
1996.)
Since that time, bank (depository) participants have asked SBA to
modify its regulations to provide them the same ability to offset the
increase in commitment of capital needed for them to continue
participation in the program. These lenders have told SBA that, in many
cases, it is more efficient to raise funds through a pledge or
securitization than to attract additional deposits.
Congress has now recognized the need to permit all participants in
the program to have a level playing field in raising capital needed to
fund the increased requirement for unguaranteed portions. Therefore,
recent legislation prohibits the sale of unguaranteed portions under
SBA's present regulations after March 31, 1997, unless SBA develops
regulations permitting all participating lenders to sell the
unguaranteed portions of their SBA guaranteed loans. See Sec. 103(e) of
Public Law 104-408, Oct. 1, 1996, which directs SBA to promulgate a
final regulation ``that applies uniformly to both depository
institutions and other lenders * * * setting forth the terms and
conditions under which such sales can be permitted, including
maintenance of appropriate reserve requirements and other safeguards to
protect the safety and soundness of the program.''
On November 29, 1996, SBA published an advance notice of proposed
rulemaking which requested the views of interested parties on how this
statutory requirement might be satisfied. 61 FR 60649, Nov. 29, 1996.
SBA received nine responses, including one response which had four
signatories. The comments addressed several questions posed in the
advance notice of proposed rulemaking regarding how the statutory
mandate should be satisfied.
On February 26, 1997, at 62 FR 8640, SBA published a notice of
proposed rulemaking on this subject. The proposed rulemaking took the
comments on the advance notice of proposed rulemaking fully into
consideration. The public was given 30 days to comment on the proposal.
As of March 21, 1997, SBA had not received any comments from the public
in response to the proposed rulemaking.
SBA recognizes the complexity of the issues surrounding the various
means for implementing the statutory mandate. It is clear that
additional time will be necessary to develop a full spectrum of comment
on the notice of proposed rulemaking. It is SBA's desire to have the
broadest possible public involvement in this rulemaking. At the same
time, SBA does not wish to penalize any lender seeking to conduct a
pledging or sale transaction after March 31, 1997.
Under these circumstances, SBA has decided to extend, for an
additional 30 days, the comment period on its proposed rule. Pending
its review of all comments received and its issuance of a final rule on
the subject, SBA also will promulgate an interim final rule which will
allow all lenders in the program to proceed with securitizations,
subject to prior SBA approval on a case by case basis. In this regard,
SBA will extend to all of its lenders, on an interim basis, an existing
regulation which previously has been applicable only to non-depository
lenders. This will afford SBA the opportunity to obtain further public
comment, to consider how best to implement the statutory directive that
a new rule be finalized, and to permit interim transactions to go
forward on a basis consistent with safety and soundness in the program.
SBA is convinced that it can review any transactions which take
place during the interim period in a manner sufficient to protect such
safety and soundness. It should be noted that all pledging or sale
transactions which have taken place since 1992 have been
[[Page 15602]]
carefully reviewed by SBA personnel. SBA has ensured that language
adequate to protect its interest has been built into the documentation
for all of these transactions and that the transactions themselves do
not add undue risk to the program. It will employ similar procedures in
reviewing any transactions taking place during the pendency of the
interim rule.
While interested in receiving extensive comments on its proposed
rule, SBA still believes that it sets out a reasonable approach to
approving sales of the unguaranteed portions of SBA loans. Accordingly,
subject to compliance with all other aspects of the interim rule, SBA
expects to give favorable review to any interim period transaction
which complies with the retainage requirements described in the notice
of proposed rulemaking. If it is presented with a transaction which is
not structured in a manner consistent with such retainage requirements,
SBA will need to assure itself as to safety and soundness
considerations and compliance with the interim rule before giving its
approval.
As expressed in both the advance notice and the notice of proposed
rulemaking, SBA is concerned that there are multiple issues which need
to be fully explored before this extremely complex matter is finally
resolved. It is SBA's expectation that the public will comment on the
substance of both the advance notice and the proposed rule during the
pendency of this interim final rule, and that such comment will serve
as the basis for a new final rule to be published shortly after the
extended comment period closes.
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 interim final rule does not constitute 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 believes this rule is not likely to have an annual
economic effect of $100 million or more, but requests comment from the
public on its perception of the costs and benefits associated with this
rule to enable it to decide whether to prepare a cost benefit analysis
in conjunction with the final rule. SBA believes that the rule will not
result in a major increase in costs or prices, or have a significant
adverse effect on competition or the United States economy.
The rule is consistent with the mandate of section 103(e) of Public
Law 104-208 that it set forth terms and conditions under which sales
for the purpose of securitization can be permitted, including the
maintenance of appropriate reserve requirements and other safeguards to
protect the safety and soundness of the program. SBA believes that the
reserve requirements and other safeguards built into the rule satisfy
this concern. For the reasons set forth above, SBA believes that the
rule will help SBA lenders support an increased volume of SBA lending.
Finally, the rule has no negative impact on State, local, or tribal
governments.
For purposes of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, SBA
certifies that this final rule contains no new reporting or record
keeping requirements.
For purposes of Executive Order 12612, SBA certifies that this rule
has no 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.
List of Subjects in 13 CFR Part 120
Business loans.
For the reasons set forth above, SBA amends Part 120 of Title 13,
Code of Federal Regulations, as follows:
PART 120--BUSINESS LOANS
1. The authority citation for part 120 continues to read as
follows:
Authority: 15 U.S.C. 634(b)(6) and 636 (a) and (h).
2. Section 120.420 is revised to read as follows:
Sec. 120.420 Financings by participating lenders.
(a) A Lender may pledge the notes evidencing SBA guaranteed loans
or sell the unguaranteed portions of such loans if SBA, notwithstanding
the provisions of Sec. 120.453(c), in its sole discretion, gives its
prior written consent. The Lender must be secure financially and have a
history of compliance with SBA's regulations and any other applicable
state or Federal statutory and regulatory requirements.
(b) The Lender, SBA, and any third party involved in the
transaction, as determined by SBA in its sole discretion, must enter
into a written agreement satisfactory to SBA acknowledging SBA's
interest as guarantor of the subject loans and accepting that all
relevant third parties agree to recognize and uphold those interests
under the Act, this part, and the contractual provisions of SBA's Loan
Guarantee Agreement. In any such agreement, the parties must agree to
the following conditions:
(1) The Lender, SBA, or third party custodian agreeable to SBA,
will hold all pertinent Loan Instruments, and the Lender will
continue to service the loans after the pledge or transfer is made;
and
(2) The Lender must retain an economic risk in and bear the
ultimate risk of loss on the unguaranteed portions. This must be
demonstrated to SBA's satisfaction by establishing a sufficient
reserve fund at the time of sale of the unguaranteed portions and,
in the case of pledging notes, by retaining all of the economic
interest in the unguaranteed portion of any loan which a note
evidences.
(c) The Lender may not use SBA guaranteed loans or the collateral
supporting such loans as collateral for any borrowing not related to
financing of the guaranteed or unguaranteed portion of SBA loans.
Dated: March 26, 1997.
Ginger Ehn Lew,
Acting Administrator.
[FR Doc. 97-8416 Filed 4-1-97; 8:45 am]
BILLING CODE 8025-01-P