[Federal Register Volume 64, Number 63 (Friday, April 2, 1999)]
[Proposed Rules]
[Pages 15942-15944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8148]


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SMALL BUSINESS ADMINISTRATION

13 CFR part 120


Business Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

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SUMMARY: SBA proposes to limit the fees that a Certified Development 
Company (CDC) can charge a Borrower or Third Party Lender in connection 
with the processing of a 504 financing to the 1.5 percent processing 
fee currently authorized by SBA regulations. SBA invites comment on 
this proposed change and the policies underlying the change.

DATES: Submit comments on or before May 3, 1999.

ADDRESSES: Comments should be mailed to Jane Palsgrove Butler, 
Associate Administrator for Financial Assistance, Small Business 
Administration, 409 Third Street, SW, Washington, DC 20416.

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

SUPPLEMENTARY INFORMATION: SBA proposes to delete Sec. 120.926 (13 CFR 
120.926) and amend Sec. 120.971 (13 CFR 120.971) of its regulations. 
The proposed amendments would clarify SBA's policy prohibiting a CDC 
from charging a Borrower more than 1.5 percent of the net debenture 
proceeds for all services related to processing a 504 financing. SBA 
invites comment on this policy. In addition, SBA proposes to amend its 
regulations to prohibit a CDC from charging a Third Party Lender for 
any services related to the processing or packaging of a 504 financing. 
SBA also invites comment on this proposed policy change.
    Before March 1, 1996, the fees that SBA permitted a CDC to charge a 
Borrower for services related to a 504 financing were contained in 
SBA's regulations, 13 CFR 108.503-6. In addition to a fee from the 
Borrower of up to 1.5 percent of the net debenture proceeds to cover 
CDC costs for loan packaging, processing, and non-legal staff 
functions, the regulations permitted a CDC to charge the Borrower or 
Third-Party Lender an additional fee of up to 1.5 percent of the third 
party financing for services actually rendered by the CDC under a 
written agreement.
    On December 15, 1995, in response to directives from the President 
for Federal agencies to streamline their regulations, SBA published 
proposed regulations (60 FR 64356) which consolidated parts 108, 116, 
120, 122, and 131 of its regulations into a revised part 120. Former 
Sec. 108.503-6 (except paragraph (c)) became Sec. 120.971 in the 
proposed regulations under the heading ``Post-closing fees paid by 
Borrower.'' Proposed Sec. 120.971 listed the fees that a CDC could 
charge a Borrower in connection with a 504 financing. Paragraph 
108.503-6(c) became paragraph 120.961(b) in the proposed regulations. 
Proposed paragraph 120.961(b) allowed CDCs to charge a ``finder's fee'' 
which either the Borrower or Third Party Lender could pay.
    On January 31, 1996, SBA published final regulations in the Federal 
Register with an effective date of March 1, 1996 (61 FR 3226) (the 
``new regulations''). The heading of Sec. 120.971 was changed to 
``Allowable fees paid by Borrower,'' but in all other respects remained 
as proposed. Proposed paragraph 120.961(b) became Sec. 120.926 in the 
new regulations. It allowed CDCs to charge only the Third Party Lender, 
and allowed a CDC to receive that fee from the Third Party Lender if 
the CDC secured the lender for the Borrower under a written contract. 
Section 120.926 of the new regulations, specifically prohibited a CDC 
from obtaining that fee directly from the Borrower.
    SBA now proposes to prohibit a CDC from charging a Borrower or a 
Third Party Lender a referral fee or any other fee related to 
processing or packaging a 504 financing other than the 1.5 percent 
processing fee a CDC may charge a Borrower pursuant to Sec. 120.971, 
whatever the CDC may call the fee. Specifically named as prohibited are 
application fees, finder's fees, referral fees, packaging fees, and 
additional fees of any kind (``Additional Fees''),

[[Page 15943]]

although the proposed rule makes clear that this prohibition applies to 
any fee the CDC might charge to the Borrower, regardless of what it 
would be called.
    SBA intends that Borrowers not pay Additional Fees either directly 
or indirectly. SBA believes that Third Party Lenders sometimes pass 
Additional Fees on to Borrowers in the form of higher interest rates, 
points, or other charges. SBA considers it good public policy to 
prohibit a CDC from directly charging a Borrower Additional Fees, or 
from charging a Third Party Lender Additional Fees which may get passed 
along to a Borrower, because SBA believes a finder's fee or referral 
fee is not necessary since there is an established Third Party Lender 
community readily available to potential 504 borrowers and CDCs.
    When the program first began in 1980, it was sometimes difficult 
for CDCs to locate Third Party Lenders willing to participate in a new 
program. So, SBA permitted CDCs to charge Additional Fees under former 
Sec. 108.503-6(c) for services rendered in connection with obtaining a 
Third Party Loan. Today most CDCs have developed working relationships 
with one or more lender(s) who regularly participate in 504 financings. 
In fact, in many instances, the Borrower goes first to a Third Party 
Lender who refers the Borrower to the CDC. On most other occasions, a 
CDC refers a Borrower to a Third Party Lender that has participated 
with the CDC in previous 504 financings; or rarely, a CDC will use a 
packager to obtain a Third Party Lender. However this Third Party 
financing is placed, SBA no longer believes that the effort necessary 
to get a Third Party Lender justifies allowing a CDC to charge a small 
business Borrower Additional Fees.
    SBA believes the compensation for any actions a CDC performs in 
connection with the origination and processing of a 504 financing is 
adequately covered by the 1.5 percent processing fee permitted to be 
paid by a Borrower pursuant to Sec. 120.971(a)(1). A 504 financing 
includes the CDC loan, Third Party Loan, and Borrower injection (see 13 
CFR 120.801). A CDC cannot process a 504 financing unless there is a 
qualified Third Party Lender. The participation of a Third Party Lender 
is an integral part of a CDC's processing of a 504 financing. Without 
it, a 504 financing cannot occur. SBA concludes that a CDC should not 
receive an Additional Fee of any kind for any actions related to 
obtaining a Third Party Lender, or processing the Third Party Loan, 
because the fee a CDC receives under Sec. 120.971(a)(1) covers those 
actions. Whether a Borrower pays an Additional Fee directly to a CDC or 
indirectly to a Third Party Lender in the form of higher interest 
rates, points, or other charges, the Borrower is essentially paying 
twice for the same services--the processing of its 504 financing. SBA 
believes that the fee a CDC may charge under Sec. 120.971(a)(1) is the 
all-inclusive processing fee for a CDC and that this fee covers any 
services performed by the CDC related to the processing of a 504 
financing.
    SBA emphasizes that the proposed regulatory amendments would 
prevent a CDC from charging a Borrower or Third Party Lender any fees 
related to processing or packaging a 504 financing other than the 1.5 
percent processing fee a CDC may charge a Borrower pursuant to 
Sec. 120.971. For example, a CDC would not be able to receive fees from 
a Borrower or Third Party Lender for (1) referring a Borrower to a 
Third Party Lender (or the reverse); (2) referring a Borrower to a 
packager; or (3) helping to process the Third Party Loan.
    Since it is proposing to prohibit Additional Fees, SBA proposes to 
delete Sec. 120.926 in its entirety. As was the case prior to March 1, 
1996, all fees which a CDC would be able to charge with respect to a 
504 financing would be found in one section of SBA's regulations, 
Sec. 120.971. SBA proposes to change the heading of Sec. 120.971 to 
``Fees Which a CDC May Charge,'' and to add the word ``only'' to 
Sec. 120.971(a) to make clear that a CDC may charge a Borrower only the 
fees enumerated in that paragraph.
    SBA invites comments on any aspect of these proposed regulations 
and on the underlying policies as discussed in this preamble. 
Specifically, SBA invites comment on (but not limited to) the following 
issues:
    1. Whether the fees now permitted to be charged to the borrower, 
1.5 percent of the net debenture proceeds, is adequate compensation for 
processing a 504 financing.
    2. Whether a CDC should be able to charge either a Borrower or a 
Third Party Lender Additional Fees when the fees are clearly itemized 
and the fees are for special and non-routine work performed in 
connection with obtaining a Third Party Lender or processing a Third 
Party Loan.
    3. Whether there is any need for a CDC to receive an Additional Fee 
for its efforts relating to the Third Party Loan in specific 
situations, such as in urban and rural areas, or with respect to the 
CDC's efforts to increase the number of loans to New Market small 
businesses.
    4. Whether SBA should establish separate fee limitations depending 
on whether the CDC is a for-profit or a not-for-profit entity.

Compliance With Executive Orders 12612, 12778, and 12866, the 
Regulatory Flexibility Act (5 U.S.C. 601-612) and the Paperwork 
Reduction Act (44 U.S.C. Ch. 35)

    SBA certifies that this proposed 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 proposed 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. 601-612. Last year, 
SBA made approximately four thousand 504 loans. Currently there are 
approximately 270 CDCs.
    SBA certifies that this proposed 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 12778, SBA certifies that this 
proposed rule is drafted, to the extent practicable, to accord with the 
standards set forth in paragraph 2 of that Order.

List of Subjects in 13 CFR part 120

    Loan programs--business, Small Businesses.

    For the reasons stated in the preamble, the Small Business 
Administration proposes to amend 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).


Sec. 120.926   [Remove]

    2. Remove Sec. 120.926.
    3. Amend Sec. 120.971 to revise the heading, to revise paragraph 
(a), to redesignate paragraphs (b), (c), (d), and (e) as paragraphs 
(c), (d), (e), and (f), respectively, and to add new paragraph (b) as 
follows:


Sec. 120.971  Fees a CDC may charge.

    (a) Fees a CDC may charge a Borrower. A CDC may charge only the 
following fees to a Borrower:
* * * * *
    (b) Fees a CDC may charge a Third Party Lender. None.
* * * * *

[[Page 15944]]

    Dated: March 24, 1999.
Aida Alvarez,
Administrator.
[FR Doc. 99-8148 Filed 4-1-99; 8:45 am]
BILLING CODE 8025-01-P