[Federal Register Volume 64, Number 8 (Wednesday, January 13, 1999)]
[Rules and Regulations]
[Pages 2115-2119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-559]



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  Federal Register / Vol. 64, No. 8 / Wednesday, January 13, 1999 / 
Rules and Regulations  

[[Page 2115]]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120


Business Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Final rule.

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SUMMARY: This final rule implements Pub. L. 104-208, enacted on 
September 30, 1996, and Pub. L. 105-135, enacted on December 2, 1997, 
with respect to SBA financing in the 504 program, and clarifies 
existing regulations applicable to the 504 program and, in some cases, 
to the 7(a) program. In the 504 program, the final rule allows more 
than one business to qualify for SBA financing for a specific 504 
Project; allows a 504 Borrower to lease long term up to 20 percent of 
the rentable space in a 504 Project; describes how much a Borrower must 
contribute to a 504 Project under certain circumstances; modifies 
allowable fees paid by the Borrower, Third Party Lender, and Certified 
Development Company (CDC); and allows certain fees incurred by a CDC in 
the closing of a 504 loan, up to $2,500 per closing, to be eligible 
administrative costs.

DATE: This rule is effective on January 13, 1999.

FOR FURTHER INFORMATION CONTACT: Michael J. Dowd, 202-205-6660.

SUPPLEMENTARY INFORMATION: On May 5, 1998, SBA published in the Federal 
Register (63 FR 24753), proposed regulations which would implement 
Public Law 105-135, the ``Small Business Reauthorization Act of 1997'' 
(1997 legislation), enacted on December 2, 1997, and Public Law 104-208 
(1996 legislation), enacted on September 30, 1996, that amended the 
Small Business Investment Act of 1958 (15 U.S.C. Sec. 601 et seq.) 
(Act). SBA received responses from three commenters and will address 
each one. SBA published in the Federal Register on August 13, 1998, (63 
FR 43330) a notice to reopen the comment period, with respect to 7(a) 
loans, on the proposed rule's change to 13 CFR section 120.111 on 
Eligible Passive Companies. SBA received one comment from a trade 
association representing a large number of 7(a) lenders and we will 
respond to that comment. These final regulations implement the 
amendments required by the 1996 legislation and some of the amendments 
required under the 1997 legislation, and make other changes.

Change Affecting the 7(a) and 504 Programs.

    The 1997 legislation authorizes SBA to provide financial assistance 
to more than one identifiable small business for a qualified 504 
project.
     SBA is amending Section 120.10 to add the definition of 
Rentable Property previously included in the text of Section 
120.131(a).
     SBA is amending Section 120.111 with respect to Eligible 
Passive Companies to make that rule consistent with the 1997 
legislation. Current Section 120.111 allows SBA to assist an Eligible 
Passive Company to use loan proceeds to acquire property for lease to 
an Operating Company. SBA is amending Section 120.111 to authorize SBA 
to provide financing to an Eligible Passive Company that uses the loan 
proceeds to lease property to multiple unrelated Operating Companies. 
This change makes the Eligible Passive Company provision consistent 
with the change to Section 120.801 discussed in the next paragraph. SBA 
is also adding a parenthetical to make it clear that references to 
Operating Company throughout the subsections of section 120.111 mean 
each Operating Company if there are multiple Operating Companies. This 
change applies to loans under SBA's 7(a) and 504 programs.
     SBA is making a technical amendment to Section 121.131, 
which covers leasing a part of new construction or existing buildings 
to a third party. The amendment changes references to an Operating 
Company to multiple Operating Companies to conform Section 121.131 to 
the 1997 legislation and to the revised regulation Sections 120.111 and 
120.801. SBA also revised the text of Section 120.131(a) and (b) by 
using the new defined term ``Rentable Property'' throughout the section 
and by making them more understandable and consistent. Two commenters 
interpreted the changes to Section 120.111 to allow multiple Operating 
Companies to join together to meet the occupancy requirements of 
Section 120.131(b), allowing them to lease up to 33 percent for new 
construction and 49 percent for an existing building. SBA agrees with 
the commenters' interpretation since the indented effect of this change 
is for the multiple operating companies to be in a position similar to 
that of a single operating company and, as such, each Operating Company 
must be a co-borrower or guarantor of the entire loan.

Changes Affecting the 504 Program

    The 1996 and 1997 legislation require SBA to amend its regulations. 
In addition, SBA is announcing other program changes.
     Section 502 of the Act authorizes SBA to provide financial 
assistance to a small business through a CDC to acquire, construct, 
convert, or expand its plant facility as a 504 Project under section 
504 of the Act. SBA interpreted the statute to allow the Agency to 
assist only one identifiable business for any particular project. In 
response to the 1997 legislation, SBA is amending Section 120.801 of 
its regulations to allow CDCs to assist two ore more unrelated small 
businesses for any qualified 504 Project.
     The 1996 legislation amended the Act regarding the amount 
of the Borrower's contribution to a 504 Project financing. SBA is 
amending Section 120.910 of its regulations to comply with the 
legislation. The regulation requires the Borrower to contribute at 
least 15 percent of the total cost of the 504 Project if (i) the 
Borrower (or Operating Company or Companies if the Borrower is an 
Eligible Passive Company) has been in business for two years or less, 
(ii) or if the Project is the acquisition, construction, conversion or 
expansion of a limited or single purpose building. The Borrower must 
contribute at least 20 percent of the total cost of the Project if both 
conditions exist. The only comment received concerning this amendment 
agreed with the proposed rule.
     The 1996 legislation requires that a Third Party Lender 
finance at least 50 percent of a Project's cost if the Borrower's 
contribution is made under either condition described above for

[[Page 2116]]

Section 120.910. One commenter disagreed with the statute. 
Nevertheless, SBA must comply with the legislation and is amending 
Section 120.920 to implement this change.
     The 1997 legislation amended the Act to permit a 504 
Borrower to lease long term no more than 20 percent of a new 504 
Project if the Borrower immediately occupies at least 60 percent of the 
property. To comply with the 1997 legislation, SBA proposed to amend 
Section 120.870 of its regulations to authorize a Borrower to lease 
long term no more than 20 percent of the rentable space in a 504 
Project to third parties if the Borrower occupies at least 60 percent 
of the rentable space with plans to occupy the remaining rentable space 
within three years. A commenter suggested that SBA apply the same 
schedule to the occupancy of the remainder of the space as Section 
120.831(a) now applies to the occupancy of the portion of the space in 
a new building. SBA concurs with that suggestion and in the final rule 
allows the Borrower to lease long term no more than 20 percent of the 
rentable space in a 504 Project to one or more tenants if (i) the 
Borrower immediately occupies at least 60 percent of the rentable 
space, (ii) plans to occupy within 3 years some of the remaining space 
not immediately occupied or leased long term, and (iii) plans to occupy 
within 10 years all of the remaining space not leased long term. This 
change will allow a business to build in a good location without having 
to show that it will use all of the space immediately.
     Section 120.862(b) sets forth specific public policy goals 
a CDC may use to qualify a 504 Project or support an increased amount 
of 504 financing. Section 120.862(b)(3) lists expanding Minority 
Enterprise development as one of the public policy goals. SBA is 
amending Section 120.862(b)(3) to tell the reader the section in SBA's 
regulation designating the minority groups to which the subsection 
applies. Section 120.862(b)(7) lists as one of the public policy goals 
the assistance of businesses affected by Federal budget reductions. SBA 
is amending Section 120.862(b)(7) to clarify that the public policy 
goal is to assist any eligible small business in an area affected by 
such reductions, not only to assist those businesses that can show that 
budget reductions adversely affected them. Therefore, if Federal budget 
reductions adversely affected a geographic area, SBA can assist a 
business located in or moving to that area without showing that the 
reductions affected the particular business.
     The 1996 legislation requires SBA to charge the Borrower a 
fee of up to 0.9375 percent on the unpaid principal balance of the loan 
as determined at five-year anniversary intervals. SBA is amending 
Section 120.971 of its regulations to implement this change. In 
addition, Section 120.971(a)(3) raises the minimum servicing fee from 
.5 percent to .625 percent.
     SBA is inserting a new Section 120.972 in its regulations 
to implement the 1996 legislation that requires SBA to collect (i) a 
one-time fee, equal to 50 basis points, of a Third Party Lender's 
participation in a Project when the Third Party Lender holds a senior 
credit position to that of SBA, and (ii) an annual fee from each CDC 
equal to 0.125 percent of the outstanding principal balance of any 
Debenture guaranteed by SBA after September 30, 1996. The CDC must pay 
this fee from the servicing fees collected by the CDC and not from 
additional fees imposed on the Borrower.
     Currently, under Section 120.921(d), any future advance by 
a Third Party Lender greater than the outstanding balance and accrued 
interest must be subordinated to the CDC/SBA lien unless the future 
advance is to collect payments, maintain collateral or protect the 
Third Party Lender's lien position on the Third Party Loan. At times, 
SBA has been unable to realize the full benefit of its lien position, 
despite its regulations requiring that future advances be subordinate 
to the CDC/SBA lien. If a Third Party Lender wants to make additional 
capital available to a 504 Borrower, it easily can do so through 
another loan. SBA is revising subsection (d) to state that the Third 
Party Loan cannot be open-ended as to the amount, and after completion 
of the 504 Project, a Third Party Lender may only make a future advance 
under the Third Party Loan to collect amounts due on the Third Party 
Loan note, maintain collateral or protect its lien.
     SBA also has been unable to realize the full benefit of 
its lien position because of prepayment penalties, late fees, and 
escalated interest after default due under the Third Party Loan. 
Accordingly, SBA is adding a new subsection (e) to Section 120.921 that 
states that the Third Party Lender's lien is subordinate to the CDC/SBA 
lien regarding prepayment penalties, late fees and escalated interest 
after default due under the Third Party lien.
     When a small business defaults on a Third Party Loan, SBA 
may choose to assume the obligations of the Borrower. The 1996 
legislation amended the Act to ensure that when SBA assumes such 
obligation for Projects approved after September 30, 1996, it only will 
pay the interest rate on the note in effect immediately before the date 
of the Borrower's default. SBA is renumbering present subsection (e) of 
Section 120.921 of its regulations as subsection (f) and SBA is 
revising it to state that SBA only will pay the interest rate in effect 
immediately before the date of the Borrower's default regarding a 
Project approved after September 30, 1996.
     SBA is amending Section 120.802 to clarify the definition 
of a Third Party Loan, and Section 120.801(c)(3) to reflect that 
definition.
     Currently, Section 120.870(c)(1) of SBA's regulations 
requires the term of a lease of the Project premises to be at least 
equal to the term of the Debenture. However, this may not be necessary 
if the Project is not a structure, but consists only of machinery and 
equipment. Therefore, SBA is deleting machinery and equipment from the 
definition to clarify that the length of a lease for machinery and 
equipment is a credit issue.

Changes to CDC Closing Fees

    Section 120.883 sets forth administrative costs that may be paid 
with the proceeds of a loan funded by a 504 Debenture rather than out 
of the Borrower's own resources. Section 120.971 sets forth the fees 
that a CDC may charge the Borrower.
    Throughout the history of the 504 program, most of the services 
required to prepare 504 loan documents and close a 504 loan have been 
performed for CDCs, at CDC cost, by legal counsel, paralegals, and CDC 
staff. The CDC has then charged its Borrower a fee at closing to 
reimburse the CDC for these expenses (``CDC Closing Fee''). Although 
this CDC Closing Fee reimburses the CDC for its own lawyers' expenses, 
the Borrower is not considered to be paying a legal fee, since CDC 
counsel does not represent the Borrower. The Borrower pays separately 
the legal fees of its legal counsel.
    Under the 504 program, loan proceeds may be used to pay eligible 
Project costs and eligible administrative costs. Eligible Project costs 
are costs directly attributable to the Project including professional 
fees necessary for Project services such as architecture, engineering, 
and environmental studies. The Borrower's legal fees for Project-
related matters such as zoning, title searches and recording fees, as 
well as interest and points on the interim construction loan, are 
eligible Project costs. The Borrower's legal fees

[[Page 2117]]

associated with the closing are not eligible Project costs.
    Eligible administrative costs are amounts the Borrower pays for 
services connected with closing, but not directly attributable to the 
Project itself. These include SBA's guarantee fee, the CDC's processing 
fee, and 504 closing agent fees. The Borrower's legal fees associated 
with the closing are not eligible administrative costs. Until March 1, 
1996, the CDC Closing Fee was an eligible administrative cost, and, by 
regulation, the Borrower could pay this fee out of 504 loan proceeds up 
to a maximum of $2,500. Since then SBA has not recognized the CDC 
Closing Fee as an eligible administrative cost, and the Borrower must 
reimburse the CDC out of its own resources.
    CDCs, Borrowers, and SBA share a common interest in minimizing 
legal fees to reduce costs to the Borrower. During the period before 
March 1, 1996, some in the 504 industry felt that SBA's regulation 
influenced the market rate for legal fees and other miscellaneous 
expenses associated with 504 Closings. They argued that attorney fees 
charged to CDCs by CDC counsel were artificially high because the CDC 
Closing Fee was an eligible administrative cost financed out of the 
loan proceeds. They further argued that the reference in the regulation 
to a $2,500 limitation established a minimum base for the attorney 
fees.
    SBA received 15 comments concerning these issues during the comment 
period following publication of proposed rule changes on December 15, 
1995. Most of them supported keeping the CDC Closing Fee as an eligible 
administrative cost. SBA believed, however, that the marketplace should 
determine the legal expenses associated with the 504 Closing and that 
there was some merit in the argument that the eligibility of the CDC 
Closing Fee as an administrative cost resulted in higher attorney fees. 
Despite the opposition expressed in most of the comments, SBA decided 
to exclude the CDC Closing Fee from eligible administrative costs and 
eliminated the $2,500 reference in its final rule dated January 31, 
1996.
    SBA expected that these regulatory changes would reduce attorney 
fees. It also anticipated downward competitive pressure on such fees as 
more attorneys became designated to perform expedited 504 loan 
closings.
    CDCs have been closing loans under the new rules for over two 
years. Approximately 140 attorneys are enrolled as designated closing 
attorneys and more than 50 percent of all 504 loans close under the 
expedited process. Yet fees associated with 504 closings charged to 
CDCs by CDC counsel do not appear to have decreased.
    Legislation enacted since the rule became effective has imposed 
additional fees upon Borrowers. Industry representatives indicate that 
the combination of increased fees and the inability to pay CDC Closing 
Fees out of the Debenture proceeds has reduced small businesses access 
to the 504 program. Because the fees now are not eligible 
administrative costs, they must be paid by Borrowers from other 
resources. Not all Borrowers can afford to pay these costs without use 
of the Debenture proceeds.
    To assist small businesses, SBA is amending Section 120.883 to make 
CDC Closing Fees eligible administrative costs up to a maximum of 
$2,500 per Closing. To conform Section 120.884, which lists ineligible 
costs for 504 loans, to the change in Section 120.883, SBA is deleting 
the reference to closing legal fees in Section 120.884.
    SBA received one comment asking SBA to clarify that $2,500 is not 
the maximum CDC closing fee that a CDC may charge, but only the maximum 
amount that may be paid out of the debenture proceeds as an eligible 
administrative cost. SBA believes the text of Section 120.883 is clear, 
and declines to make any change in the proposed rule. Under Section 
120.971(a)(2), a CDC may charge a borrower a reasonable CDC closing 
fee. Under Section 120.883, up to $2,500 is eligible to be paid out of 
the debenture proceeds.

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 final rule does not constitute a 
significant rule within the meaning of Executive Order 12866, since it 
is not likely to have an annual effect on the economy of $100 million 
or more, result in a major increase in costs or prices, or have a 
significant adverse effect on competition or the U.S. economy.
    SBA certifies that this final rule 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. Last 
year, SBA made approximately four thousand 504 loans. Currently there 
are approximately 300 CDCs, less than 15 of which are Premier CDCs. 
While the 1997 legislation removes the limit on the number of CDCs that 
can become Premier CDCs, SBA anticipates that, at most, this Rule will 
affect only half of the CDCs. Thus, the changes to the program in the 
final rule, including the changes to the Closing Fee provisions and the 
changes implementing P.L. 104-208 and P.L. 105-135 will not have a 
significant impact on a substantial number of small businesses.
    SBA certifies that this final rule does not impose any additional 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C. chapter 35.
    For purposes of Executive Order 12612, SBA certifies that this 
final rule has no federalism implications warranting preparation of a 
Federalism Assessment.
    For purposes of Executive Order 12778, SBA certifies that this 
final rule is drafted, to the extent practicable, to follow with the 
standards set forth in section 2 of that Order.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses.
    For the reasons set forth in the preamble, SBA amends 13 CFR part 
120 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. In Sec. 120.10, add a new definition as follows:


Sec. 120.10  Definitions.

* * * * *
    Rentable Property is the total square footage of all buildings or 
facilities used for business operations.
* * * * *
    3. Amend Sec. 120.111 by revising the first sentence to read as 
follows:


Sec. 120.111  What conditions must an Eligible Passive Company satisfy?

    An Eligible Passive Company must use loan proceeds to acquire or 
lease, and/or improve or renovate, real or personal property (including 
eligible refinancing), that it leases to one or more Operating 
Companies for conducting the Operating Company's business (references 
to Operating Company in paragraphs (a) and (b) of this section mean 
each Operating Company).
* * * * *
    4. Revise Sec. 120.131 to read as follows:


Sec. 120.131  Leasing part of new construction or existing building to 
another business.

    (a) If the SBA business loan involves the construction of a new 
building, a

[[Page 2118]]

Borrower may lease up to 33 percent of the Rentable Property for a 
short term to any third party if reasonable growth projections show 
that the Borrower will need additional space within three years. If the 
Borrower is an Eligible Passive Company leasing 100 percent of the 
Project space to one or more Operating Company, the Operating Company, 
or Operating Companies together, may sublease up to 33 percent of the 
Rentable Property to a third party under the same conditions. (See 
Sec. 120.870(c) for an exception with respect to 504 Projects.)
    (b) If the SBA business loan involves the acquisition, renovation, 
or reconstruction of an existing building, the Borrower may lease up to 
49 percent of the Rentable Property long term. If the Borrower is an 
Eligible Passive Company leasing 100 percent of the Project space to 
one or more Operating Companies, the Operating Company, or Operating 
Companies together may sublease up to 49 percent of its Rentable 
Property to a third party under the same conditions. (For 504 loans, 
see Sec. 120.871).
    5. Amend section 120.801 to revise the first sentence of paragraph 
(a) and paragraph (c)(3) to read as follows:


Sec. 120.801  How is a 504 Project financed?

    (a) One or more small businesses may apply for 504 financing 
through a CDC serving the area where the 504 Project is located.* * *
* * * * *
    (c)* * *
    (3) A Third Party Loan comprising the balance of the financing, 
collateralized by a first lien on the Project property (see 
Sec. 120.920).
* * * * *
    6. Amend Sec. 120.802 to revise the definition of Third Party Loan 
to read as follows:


Sec. 120.802  Definitions.

* * * * *
    Third Party Loan is a loan from a commercial or private lender, 
investor, or Federal (non-SBA), State or local government source that 
is part of the Project financing.
* * * * *
    7. Amend Sec. 120.862 to revise the parenthetical clause in 
paragraph (b)(3), and to revise paragraph (b)(7), to read as follows:


Sec. 120.862  Other economic development objectives.

* * * * *
    (b) Public Policy goals: * * *
    (3) * * * (See Sec. 124.105(b) for minority groups who qualify for 
this description.)
* * * * *
    (7) Assisting businesses in or moving to areas affected by Federal 
budget reductions, including base closings, either because of the loss 
of Federal contracts or the reduction in revenues in the area due to a 
decreased Federal presence.
    8. Amend Sec. 120.870 to revise paragraph (a)(1), and add a new 
paragraph (c), to read as follows:


Sec. 120.870  Leasing Project Property.

    (a) * * *
    (1) The remaining term of the lease, including options to renew, 
exercisable only by the lessee, equals or exceeds the term of the 
Debenture;
* * * * *
    (c) If the Project is for new construction, the Borrower may lease 
long term up to 20 percent of the Rentable Property in the Project to 
one or more tenants if the Borrower immediately occupies at least 60 
percent of the Rentable Property, plans to occupy within three years 
some of the remaining space not immediately occupied and not leased 
long term, and plans to occupy all of the remaining space not leased 
long term within ten years.
    9. Revise Sec. 120.883 to read as follows:


Sec. 120.883  Eligible administrative costs for 504 loans.

    The following administrative costs are not part of Project costs, 
but may be paid with the proceeds of the 504 loan and the Debenture 
(see Sec. 120.971):
    (a) SBA guarantee fee;
    (b) Funding fee (to cover the cost of a public issuance of 
securities and the Trustee);
    (c) CDC processing fee;
    (d) Borrower's out-of-pocket costs associated with the closing of 
the 504 loan (other than legal fees);
    (e) CDC Closing Fee (see Sec. 120.971(a)(2)) up to a maximum of 
$2,500; and
    (f) Underwriters' fee.


Sec. 120.884  [Amended]

    10. Amend Sec. 120.884 to remove paragraph (e).
    11. Revise Sec. 120.910 to read as follows:


Sec. 120.910  How much must the Borrower contribute?

    (a) The Borrower must contribute to the Project cash (or property 
acceptable to SBA obtained with the cash) or land (that is part of the 
Project Property), in an amount equal to the following percentage of 
the Project cost, excluding administrative costs:
    (1) At least 15 percent, if the Borrower (or Operating Company if 
the Borrower is an Eligible Passive Company) has operated for two years 
or less;
    (2) At least 15 percent, if the Project involves the acquisition, 
construction, conversion, or expansion of a limited or single purpose 
building or structure;
    (3) At least 20 percent, if the Project involves conditions 
described in paragraphs (a)(1) and (2) of this section; or
    (4) At least 10 percent, in all other circumstances.
    (b) The source of the contribution may be a CDC or any other source 
except an SBA business loan program (see Sec. 120.913 for SBIC 
exception).
    12. Revise Sec. 120.920 to read as follows:


Sec. 120.920  Required participation by the Third Party Lender.

    (a) Amount of Third Party Loans. A Project financing must include 
one or more Third Party Loans totaling at least as much as the 504 
loan. However, the Third Party Loans must total at least 50 percent of 
the total cost of the Project if:
    (1) The Borrower (or Operating Company, if the Borrower is an 
Eligible Passive Company) has operated for two years or less, or
    (2) The Project is for the acquisition, construction, conversion or 
expansion of a limited or single purpose asset.
    (b) Third Party Loan collateral. Third Party Loans usually are 
collateralized by a first lien on the Project property. The SBA cannot 
guarantee these loans.
    13. Amend Sec. 120.921 to revise paragraphs (d) and (e) and 
redesignate them as (e) and (f), respectively, and add a new paragraph 
(d), to read as follows:


Sec. 120.921  Terms of Third Party loans.

* * * * *
    (d) Future advances. The Third Party Loan must not be open-ended. 
After completion of the Project, the Third Party Lender may not make 
future advances under the Third Party Loan except expenditures to 
collect amounts due the Third Party Loan notes, maintain collateral and 
protect the Third Party Lender's lien position on the Third Party Loan.
    (e) Subordination. The Third Party Lender's lien will be 
subordinate to the CDC/SBA lien regarding any prepayment penalties, 
late fees, other default charges, and escalated interest after default 
due under the Third Party Loan.
    (f) Escalation upon default. A Third-Party Lender may not escalate 
the rate of interest upon default to a rate greater

[[Page 2119]]

than the maximum rate set forth in paragraph (b) of this section. 
Regarding any Project that SBA approved after September 30, 1996, SBA 
will only pay the interest rate on the note in effect before the date 
of the Borrower's default.
    14. Amend Sec. 120.971 by revising the first sentence and removing 
the second sentence of paragraph (a)(2), and by revising paragraphs 
(a)(3) and (d)(2) to read as follows:


Sec. 120.971  Allowable Fees paid by Borrower.

    (a) * * *
    (2) Closing fee. The CDC may charge a reasonable closing fee 
sufficient to reimburse it for the expenses of its in-house or outside 
legal counsel, and other miscellaneous closing costs (CDC Closing Fee). 
* * *
    (3) Servicing fee. The CDC will charge a monthly servicing fee of 
at least 0.625 percent per annum and no more than 2 percent per annum 
on the unpaid balance of the loan as determined at five-year 
anniversary intervals. A servicing fee greater than 1.5 percent in a 
rural area and 1 percent everywhere else requires SBA's prior written 
approval, based on evidence of substantial need. The servicing fee may 
be paid only from loan payments received. The fees may be accrued 
without interest and collected from the CSA when the payments are made.
* * * * *
    (d) * * *
    (2) For loans approved by SBA after September 30, 1996, SBA charges 
a fee of not more than 0.9375 percent annually on the unpaid principal 
balance of the loan as determined at five-year anniversary intervals.
* * * * *
    15. Redesignate Sec. 120.972 as Sec. 120.973, and add a new 
Sec. 120.972 to read as follows:


Sec. 120.972  Third Party Lender participation fee and Development 
Company fee.

    (a) Participation fee. For loans approved by SBA after September 
30, 1996, SBA must collect a one-time fee from the Third Party Lender 
equal to 50 basis points on its total participation in a Project when 
the Third Party Lender occupies a senior credit position to SBA in the 
project.
    (b) Development company fee. For loans approved by SBA after 
September 30, 1996, SBA must collect an annual fee from the CDC equal 
to 0.125 percent of the outstanding principal balance of the debenture. 
The fee must be paid from the servicing fees collected by the CDC and 
cannot be paid from any additional fees imposed on the Borrowers.

    Dated: December 23, 1998.
Aida Alvarez,
Administrator.
[FR Doc. 99-559 Filed 1-12-99; 8:45 am]
BILLING CODE 8025-01-P