[Federal Register Volume 64, Number 93 (Friday, May 14, 1999)]
[Rules and Regulations]
[Pages 26273-26275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12100]


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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 the Small Business Reauthorization 
Act of 1997, enacted on December 2, 1997, with respect to SBA financing 
in the pilot Premier Certified Lenders Program (PCLP). The final rule 
extends the authority of a Certified Development Company (CDC) 
participating in the PCLP (Premier CDC).

DATES: This rule is effective on May 14, 1999.

FOR FURTHER INFORMATION CONTACT: LeAnn M. Oliver, 202-205-6490.

SUPPLEMENTARY INFORMATION: On May 5, 1998 (63 FR 24739), SBA published 
in the Federal Register an interim final rule in order to implement 
Pub. L. 105-135, the ``Small Business Reauthorization Act of 1997'' 
(1997 legislation), enacted on December 2, 1997, which amends Section 
504 of the Small Business Investment Act of 1958 (15 U.S.C. 661-697f) 
(Act). SBA promulgated the regulation in interim final rule form to 
enable qualified CDCs to participate in the PCLP Program as soon as 
possible. SBA received 4 timely comments on its interim final rule. 
These comments addressed several issues, each of which is discussed 
below.
    The 1997 legislation established a goal of the PCLP to have each 
Premier CDC process 50% of its loans made under Section 504 of the Act 
(``504 loans'') under PCLP procedures. Two commenters suggested that 
SBA make it clear in the regulation that it is a goal and not a 
requirement. The commenters noted that SBA stated in an internal 
procedural notice that a Premier CDC was ``required'' to process 50% of 
its 504 loans under PCLP rather than correctly stating that the 50% 
level is a goal. SBA agrees with the commenters but believes that the 
issue should be addressed in a new procedural notice and not in SBA 
regulations.
    One commenter suggested that we substitute the term ``loan'' in 
place of ``financing'' in several places in the rule. The commenter 
noted that in certain other sections of SBA regulations the term 
``financing'' or ``504 financing'' refers to the combination of the CDC 
loan, the Third Party Lender's loan, and the Borrower's equity 
injection and not just the CDC loan. In order to eliminate any possible 
confusion, SBA will use the term ``loan'' or ``PCLP loan'' in place of 
``financing'' throughout this preamble and the final rule.
    One commenter objected to SBA's requirement in the interim final 
rule that a letter of credit comprising any portion of a Premier CDC's 
loss reserve must have a term ``equal to or longer than the term of the 
financings it secures''. The commenter stated that: ``While I 
understand that the intent of this provision is to protect SBA from 
excessive exposure or loss, I believe that this requirement is not 
commercially reasonable and that it imposes an unnecessary burden on 
both the CDC and ultimately the borrowing small business concerns.'' 
The commenter suggested that SBA amend the requirement so that each 
letter of credit supporting a PCLP loan (1) has a term of at least one 
year and (2) provides for at least 90 days prior written notice to SBA 
and the Premier CDC if the issuer intends to decline issuing a letter 
of credit on substantially similar terms for another term. While SBA 
has considered the commenter's suggestion, SBA believes that it is 
inappropriate to develop and implement regulations for the program that 
do not fully protect SBA from undue exposure to risk of non-
reimbursement resulting from a mismatch in maturity of a PCLP loan and 
the period a letter of credit providing protection is outstanding. SBA 
will continue to require that a letter of credit have a term equal to 
or longer than the maturity of the PCLP loan which triggered the 
requirement for

[[Page 26274]]

the Premier CDC to contribute to the loss reserve.
    The comments SBA received regarding the terms of letters of credit 
contributed to the loss reserve made it clear to SBA that it should 
clarify what SBA would do if an issuer of a letter of credit did not 
remain ``well capitalized'' throughout the term of the letter of credit 
it has issued. The interim final rule stated that an issuer of a letter 
of credit must be well-capitalized (as that term is defined in 
regulations of the Federal Deposit Insurance Corporation, as amended 
(12 CFR 325.103)), but did not say what SBA would do if the issuer 
became insolvent or otherwise failed to remain well-capitalized during 
the term of the letter of credit. Accordingly, the final rule expressly 
states that SBA may require an additional loss reserve contribution by 
a Premier CDC if an issuer of a contributed letter of credit fails to 
remain well-capitalized.
    The last sentence of Sec. 120.845 (c) (1) of the interim final rule 
stated that ``A loss reserve irrevocable letter of credit must * * * '' 
and then listed conditions applicable to the letters of credit. To 
clarify that all letters of credit contributed to the loss reserve must 
be irrevocable and that the listed conditions apply to all letters of 
credit, SBA moved the term ``irrevocable'' from the introductory phrase 
of that sentence and explicitly made it condition (iii).
    A commenter requested clarification regarding the requirement to 
replenish withdrawn loss reserve assets with contributions ``equal to 
or greater than the amount of the assets withdrawn.'' The PCLP 
regulations require Premier CDCs to contribute 1% of each PCLP loan to 
the loss reserve. If there is a default on a PCLP loan, the Premier CDC 
must pay to SBA 10% of any loss, after recoveries, incurred by SBA as a 
result of the default by the Premier CDC on the Debenture issued under 
PCLP (the Premier CDC's ``Exposure''). The commenter suggested that the 
proper minimum amount a Premier CDC must replenish to the loss reserve 
is the amount realized from the loss reserve less the 1% the Premier 
CDC contributed to the loss reserve when it made the PCLP loan that 
defaulted. SBA understands the logic underlying the request but 
declines to make the change because the 1997 legislation explicitly 
requires Premier CDCs to reimburse at least what has been withdrawn.
    The 1997 legislation permitted a Premier CDC to contribute letters 
of credit to its loss reserve. The legislation required the letters of 
credit to be assigned to SBA. It did not state how the Premier CDC 
should do so, for either loss reserve deposits or letters of credit. 
Commenters generally requested more guidance with respect to the loss 
reserve. In order to provide such guidance, SBA decided to clarify ``in 
a manner acceptable to SBA'' and state expressly in the final rule how 
a Premier CDC will ``assign'' its deposits and letters of credit to 
SBA. Accordingly, the final rule states, to secure its obligations to 
SBA under PCLP, a Premier CDC must grant SBA a first priority perfected 
security interest in any segregated funds comprising any portion of a 
Premier CDC's loss reserve. Since the letter of credit would be used as 
credit support for the Premier CDC's obligations to SBA, SBA normally 
would be the direct beneficiary of the letter of credit, rather than 
the assignee of a letter of credit naming the Premier CDC as 
beneficiary. Therefore, SBA has decided to require ``assignment'' of 
any letter of credit to SBA by having the Premier CDC directly name SBA 
as the beneficiary of the letter of credit.
    A Premier CDC commenter questioned whether this final rule would 
apply to Premier CDCs already participating in the PCLP pilot, and 
whether their original agreements with SBA and SBA regulations in 
effect when they first entered the PCLP pilot would apply after 
promulgation of this final rule. This final rule applies to all Premier 
CDCs. This final rule supersedes all prior regulations applicable to 
the PCLP pilot. If any provision in any agreement between a Premier CDC 
and SBA relating to the PCLP pilot is inconsistent with any provision 
of this final rule, the provision of this final rule will govern. If 
SBA develops a new form of agreement for Premier CDCs, all Premier CDCs 
will have to enter that agreement, which then would govern all 
subsequent transactions under the PCLP pilot.
    Finally, a commenter wanted to know what happens to a Premier CDC's 
loss reserve account if SBA suspends or removes the Premier CDC from 
the PCLP. SBA plans to release an SBA Procedural Notice to address the 
issue.

Compliance With Executive Orders 12612, 12988, 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 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 does 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 4,000 504 loans. Currently there are 
approximately 300 CDCs, less than 25 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, only half of the 
CDCs would be affected by this rule. Thus the changes to the PCLP 
implementing the 1997 legislation do not constitute a significant 
impact on a substantial number of small businesses.
    SBA certifies that this final rule does not impose any additional 
reporting or record-keeping 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 12988, SBA certifies that this 
final rule is drafted, to the extent practicable, to accord with the 
standards set forth in section 3 of that Order.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Reporting and recordkeeping requirements, 
Small businesses.

    Accordingly, pursuant to authority contained in section 5(b)(6) of 
the Small Business Act (15 U.S.C. 634(b)(6)), SBA amends part 120, 
chapter I, 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. Revise Sec. 120.845 to read as follows:


Sec. 120.845  Premier Certified Lenders Program (PCLP).

    The SBA has established a pilot program (``Program'') to designate 
a number of CDCs as Premier Certified Lenders (''Premier CDCs''), and 
to authorize them to approve, close, service, foreclose, litigate, and 
liquidate 504 loans subject to SBA regulations, procedures, and 
policies. A Premier CDC's authority to approve loans under the Program 
is subject to SBA's determination that the loan and Borrower meet SBA's 
eligibility requirements.
    (a) PCLP Loan Approvals. A Premier CDC notifies SBA of its approval 
of a

[[Page 26275]]

PCLP loan by submitting appropriate documentation to SBA's loan 
processing center. SBA will notify the Premier CDC of the SBA loan 
number (if it does not identify a problem with eligibility, and funds 
are available).
    (b) Premier CDC Exposure. A Premier CDC must reimburse SBA for 10% 
of any loss (including attorney's fees and litigation costs and 
expenses) incurred by SBA as a result of a default by the Premier CDC 
on a Debenture issued under the PCLP (``Exposure'').
    (c) Loss Reserve. A Premier CDC must establish a loss reserve to 
provide funds to pay its Exposure to SBA.
    (1) Assets. (i) A Premier CDC's loss reserve must be composed of 
any combination of:
    (A) Segregated funds on deposit in one or more federally insured 
depository institutions in which the Premier CDC has granted to SBA, in 
a manner acceptable to SBA, a first priority perfected security 
interest to secure the Premier CDC's obligations to SBA under the PCLP; 
or
    (B) Irrevocable letters of credit.
    (ii) SBA must be named as the beneficiary of all letters of credit. 
A Premier CDC's loss reserve deposits in an institution may exceed the 
institution's insured amount, but only if the institution is ``well-
capitalized'' as defined in regulations of the Federal Deposit 
Insurance Corporation, as amended (12 CFR 325.103) (``well capitalized 
bank'').
    (iii) A loss reserve letter of credit must:
    (A) Be issued by a well-capitalized bank;
    (B) Have a term equal to or longer than the maturity of the PCLP 
loan which triggered the requirement for the Premier CDC to contribute 
to the loss reserve;
    (C) Be irrevocable;
    (D) Be otherwise acceptable to the SBA;
    (E) Have an issuer who remains well-capitalized throughout the term 
of the letter of credit, or SBA may require an additional loss reserve 
contribution by the contributing Premier CDC.
    (2) Contributions. A Premier CDC's loss reserve must total 1 
percent of the Debentures it issues under the PCLP Program. A Premier 
CDC must contribute 50 percent of the required loss reserve 
attributable to each PCLP loan when the Debenture it issues to fund the 
PCLP loan is closed, 25 percent within 1 year after the Debenture is 
closed, and 25 percent within 2 years after the Debenture is closed.
    (3) Reimbursement. SBA determines a Premier CDC's Exposure on a 
loan and withdraws the amount necessary to cover the Exposure. If, 
after full use of any assets in the loss reserve, there are not enough 
loss reserve assets to cover a Premier CDC's Exposure, the Premier CDC 
must pay SBA any difference between the Exposure and the loss reserve 
assets withdrawn by SBA to cover the Exposure within 45 days of a 
demand for payment by SBA.
    (4) Replenishment. If SBA withdraws assets from the loss reserve to 
cover a Premier CDC's Exposure, the Premier CDC must replace the 
withdrawn loss reserve assets within 30 days of the withdrawal with 
contributions equal to or greater than the amount of the assets 
withdrawn.
    (5). Withdrawal. A Premier CDC may withdraw loss reserve assets 
attributable to any repaid Debenture upon written approval by SBA.
    (d) Review. SBA will review a Premier CDC's PCLP loans annually.
    (e) Suspension and revocation. The AA/FA may suspend or revoke a 
CDC's Premier designation upon written notice stating the reasons for 
the suspension or revocation at least 10 business days prior to the 
effective date of the suspension or revocation. Reasons for suspension 
or revocation may include loan performance unacceptable to SBA, failure 
to meet loss reserve or eligibility criteria, or violations of 
applicable statutes, regulations, or published SBA policies and 
procedures. A Premier CDC may appeal the suspension or revocation made 
under this section pursuant to the procedures set forth in part 134 of 
this chapter. The action of the AA/FA shall remain in effect pending 
resolution of the appeal.
    (f) Applications. A CDC may obtain information concerning this 
pilot program from the Office of Program Development in the Office of 
Financial Assistance at SBA's Headquarters. A CDC may submit its 
application to the SBA field office in which it is most active. The SBA 
field office will send the application with its recommendation to the 
AA/FA for a final decision.
    (g) Acceptance into Program. When determining a CDC's application, 
SBA will consider the CDC's ability to work with the local SBA office 
and the quality of past performance.
    (h) Program period. The PCLP pilot program ends on October 1, 2000.

    Dated: May 5, 1999.
Aida Alvarez,
Administrator.
[FR Doc. 99-12100 Filed 5-13-99; 8:45 am]
BILLING CODE 8025-01-P