[Federal Register Volume 66, Number 143 (Wednesday, July 25, 2001)]
[Rules and Regulations]
[Pages 38528-38531]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-18365]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 123

RIN 3245-AE45


Military Reservist Economic Injury Disaster Loans

AGENCY: Small Business Administration (SBA).

ACTION: Final rule.

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SUMMARY: The Small Business Administration (SBA) is finalizing its 
regulations implementing a new program authorized by the Veterans 
Entrepreneurship and Small Business Development Act of 1999. Under this 
new program, SBA will make a low interest, fixed rate loan available to 
a small business employing a military reservist if the reservist is 
called up to active military duty during a period of military conflict, 
and he or she is an essential employee critical to the success of the 
business' daily operation whose call-up has caused or will cause the 
business substantial economic injury.

DATES: This rule is effective August 24, 2001.

FOR FURTHER INFORMATION CONTACT: Herbert Mitchell, Associate 
Administrator, Office of Disaster Assistance, 202-205-6734.

SUPPLEMENTARY INFORMATION: With this rule, SBA finalizes its proposed 
regulation implementing the Military Reservist Economic Injury Disaster 
Loan Program (program) by adding a new sub-part F to our Disaster Loan 
Program regulations. The final rule will clarify the program's 
requirements, application and loan approval process.
    The Military Reservist Economic Injury Disaster Loan Program was 
authorized by Public Law 106-50, enacted on August 17, 1999. The 
program will allow SBA to make economic injury disaster loans (EIDL) to 
small businesses employing military reservists if those employees are 
called up to active duty during a period of military conflict (call-up) 
and those employees are essential to the success of the small 
businesses' daily operations.
    On July 13, 2000, SBA published a proposed rule in the Federal 
Register requesting public comments on our proposals for implementing 
the Military Reservist Economic Injury Disaster Loan Program (65 FR 
43261). SBA received no comments on the proposed rule during the 30-day 
public comment period and therefore, is finalizing the proposed rule 
without substantive change. SBA did make a few minor textual and 
grammatical changes to clarify the meaning of several provisions.
    Under the final rule, to qualify for the Military Reservist EIDL, a 
business will be required to show that the call-up of an essential 
employee has caused or will cause the business substantial economic 
injury. The interest rate for a Military Reservist EIDL will be the 
same as for other EIDL assistance. SBA calculates interest rates 
quarterly. At the present time the statutory interest rate may not 
exceed 4 percent. The interest rate in effect at the time the Military 
Reservist EIDL application is filed will be the fixed rate for the 
entire term of the loan.
    Section 123.500 contains program definitions conforming with those 
in Public Law 106-50. SBA deleted ``affiliate'' from the definition of 
principal owner. SBA believes the interests of the Military Reservist 
EIDL program are sufficiently protected if SBA includes any person or 
entity owning 20 percent or more of the business in its eligibility 
determination.
    Section 123.501 sets out the program eligibility requirements 
including a reference to an ``eligible small business as defined in 13 
CFR Part 121.'' While Public Law 106-50 describes an eligible or 
``qualified borrower'' as a small business that ``employs'' an eligible 
reservist, Congress' intent was that this program also include 
assistance to a small business sole proprietor who is an essential 
employee. See S. Rep. No. 254, 106th Cong., 1st Sess. 4 (1999). 
Therefore, SBA will include such a category in the program eligibility 
requirements. In addition, this section includes the legislative 
requirement that the program apply only to military

[[Page 38529]]

conflicts occurring or ending on or after March 24, 1999.
    Under Sec. 123.502 of this rule, a small business will not be 
eligible to apply for a Military Reservist EIDL if it is an enterprise 
included in any of the categories described in Secs. 123.101, 123.201, 
and 123.301. These sections include general ineligibility categories 
applying to all EIDL assistance. For example, a business will not be 
eligible if a principal owner of the business had been convicted, 
during the year preceding its application for a Military Reservist 
EIDL, of a felony during and in connection with a riot or civil 
disorder. For another example, a business will not be eligible if it is 
an agricultural enterprise as defined in Sec. 123.201 of this part. SBA 
revised the text of Sec. 123.502(n) to make it consistent with the text 
in Sec. 123.301(g), under which a business is ineligible for assistance 
if teaching, instructing, counseling, or indoctrinating religion or 
religious beliefs is its principal activity, not merely one of several 
business activities.
    Under Sec. 123.503 of this rule, a business cannot apply for a 
Military Reservist EIDL in anticipation of a call-up to active duty. It 
can only apply during a period beginning on the date the essential 
employee receives a call-up order and ending 90 days after the date the 
employee is discharged or released from active duty. The call-up of the 
essential employee will be the event that triggers SBA's assistance 
under this program.
    Under Sec. 123.504, the business must submit a copy of the 
reservist's call-up orders to show compliance with the statutory 
requirements described above. Also under this section, as a part of the 
application, the business owner must certify that the reservist is an 
essential employee, and must detail the employee's duties and 
responsibilities. In addition, the employee must indicate in writing 
whether he or she concurs with such assessment. The application must 
also support a determination by SBA that the essential employee's 
absence will result in substantial economic injury to the business.
    SBA recognizes that the owner of a small business may be an 
essential employee of that business and may be called up and start 
active duty before applying for a Military Reservist EIDL. Accordingly, 
SBA will accept a program application from a representative of the 
reservist if that representative has power of attorney to act on the 
behalf of the reservist for such matters.
    SBA offers this program, in part, to support individuals who choose 
to serve the United States as military reservists. These individuals 
should not be put in a position where a call to military service 
jeopardizes their employment situation. Therefore, under this rule, SBA 
will require that the business offer the essential employee the same or 
similar job upon return from active duty.
    SBA changed the text of Sec. 123.506 from the proposed rule to 
clarify that the amount an eligible small business may borrow from SBA 
is equal to the economic injury suffered or likely to be suffered by 
the applicant until normal operations resume because of the absence of 
the essential employee. The maximum amount an applicant may borrow is 
$1,500,000, regardless of the number of essential employees called to 
active duty. The measure of economic injury is the amount necessary to 
meet the business's obligations as they mature, pay its ordinary and 
necessary expenses, and enable it to market, produce or provide 
products or services ordinarily marketed, produced, or provided by the 
business, which cannot be done as a result of the essential employee's 
active military service. It may not include amounts the business, 
together with its affiliates and principal owners, could provide 
without undue hardship. SBA may consider waiving this loan limit if it 
determines that the conditions identified in Sec. 123.507 are 
satisfied.
    Under Sec. 123.509, this rule sets forth prohibitions on the use of 
loan proceeds. For example, EIDL funds could not be used to:
    (1) Refinance debt which the business incurred before the call up 
of the essential employee;
    (2) Make payments on loans owned by SBA or another federal agency 
or a Small Business Investment Company licensed under the Small 
Business Investment Act;
    (3) Pay any obligations resulting from a tax penalty or any non-tax 
criminal fine, or penalty for non-compliance with a law, regulation, or 
order of a federal, state, regional, or local agency or similar matter;
    (4) Repair physical damage; or
    (5) Pay dividends or other disbursements to owners, partners, 
officers or stockholders, except for reasonable remuneration directly 
related to their performance of services for the business.

Compliance With Executive Orders 12866, 12988, 13132, the 
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork 
Reduction Act (44 U.S.C. ch. 35)

    The Office of Management and Budget (OMB) reviewed this rule as a 
``significant'' regulatory action under Executive Order 12866.
    SBA has determined that the 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. 601-612. From 
October 1997 to October 1999, only 19,592 military reservists were 
called up for active duty. This figure averages just under 10,000 call-
ups per year. Further, 52 percent of the non-farm workforce of this 
country is employed by businesses that employ 500 or fewer persons. 
Applying this percentage to the average number of call-ups for the past 
years indicates that 5,200 of the call-ups affected non-farm businesses 
with less than 500 employees. Of this figure, SBA estimates that 30 
percent of these individuals may be essential employees. This results 
in an estimate of approximately 1,590 businesses that could be affected 
by this proposed rule. SBA does not believe that this is a substantial 
number of small businesses. Furthermore, SBA has taken steps to 
simplify the loan documentation process for small business owners and 
permits small business owners to self-certify the designation of 
essential employees. These steps will substantially reduce any economic 
impact on small business owners applying for assistance.
    For the purposes of the Paperwork Reduction Act, 44 U.S.C. ch. 35, 
SBA has submitted the Military Reservist Economic Injury Disaster Loan 
Program Loan Application (application) to OMB for review. SBA received 
no comments from the public regarding the proposed application. The 
application will allow small businesses to apply for Military Reservist 
EIDLs and will provide SBA with the information necessary to evaluate 
applicants. The application will request such information as name, 
address, type of business, management information, organization type, 
name of essential employee who is a military reservist employed by the 
small business, explanation of the designation of the employee as 
``essential'' and financial information to permit SBA to determine 
repayment ability.
    An applicant will complete an application each time it applies for 
a Military Reservist Economic Injury Disaster Loan. SBA estimates that 
the time necessary to complete an application for the Military 
Reservist Economic Injury Disaster Loan Program will average 2 hours.
    In addition, SBA will collect ordinary and usual financial 
statements before making subsequent loan disbursements under the 
Military Reservist EIDL

[[Page 38530]]

Program (see Sec. 123.511). This information will allow SBA to assess 
the continued need for disbursements under this program.
    For purposes of Executive Order 13132, SBA has determined that this 
rule has no federalism implications.
    For purposes of Executive Order 12988, SBA certifies that this rule 
is drafted, to the extent practicable, to be in accordance with the 
standards set forth in section 3 of that Order.

List of Subjects in 13 CFR Part 123

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

    For the reasons stated in the preamble, SBA amends 13 CFR part 123 
as follows:

PART 123--DISASTER LOAN PROGRAM

    1. The authority citation for part 123 is revised to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6), 636(b), 636(c) and 636(f); Pub. 
L. 102-395, 106 Stat. 1828, 1864; and Pub. L. 103-75, 107 Stat. 739, 
Pub. L. 106-50, 113 Stat. 245.


    2. In part 123 designate the existing centercheadings as subpart A 
through subpart E, respectively, and add new subpart F to read as 
follows:

Subpart F--Military Reservist Economic Injury Disaster Loans

* * * * *
Sec.
123.500  Definitions.
123.501  When is your business eligible to apply for a Military 
Reservist Economic Injury Disaster Loan (EIDL)?
123.502  When is your business ineligible to apply for a Military 
Reservist EIDL?
123.503  When can you apply for a Military Reservist EIDL?
123.504  How do you apply for a Military Reservist EIDL?
123.505  What if you are both an essential employee and the owner of 
the small business and you started active duty before applying for a 
Military Reservist EIDL?
123.506  How much can you borrow under the Military Reservist EIDL 
Program?
123.507  Under what circumstances will SBA consider waiving the $1.5 
million loan limit?
123.508  How can you use Military Reservist EIDL funds?
123.509  What can't you use Military Reservist EIDL funds for?
123.510  What if you don't use your Military Reservist EIDL funds as 
authorized?
123.511  How will SBA disburse Military Reservist EIDL funds?
123.512  What is the interest rate on a Military Reservist EIDL?

Subpart F--Military Reservist Economic Injury Disaster Loans


Sec. 123.500  Definitions.

    The following terms have the same meaning wherever they are used in 
this subpart:
    (a) Essential employee is an individual (whether or not an owner of 
a small business) whose managerial or technical expertise is critical 
to the successful day-to-day operations of a small business.
    (b) Military reservist is a member of a reserve component of the 
Armed Forces ordered to active duty during a period of military 
conflict.
    (c) Period of military conflict means:
    (1) A period of war declared by the Congress,
    (2) A period of national emergency declared by the Congress or by 
the President, or
    (3) A period of contingency operation, as defined in 10 U.S.C. 
101(a).
    (d) Principal owner is a person or entity which owns 20 percent or 
more of the small business.
    (e) Substantial economic injury means an economic harm to the small 
business such that it cannot:
    (1) Meet its obligations as they mature,
    (2) Pay its ordinary and necessary operating expenses, or
    (3) Market, produce or provide a product or service ordinarily 
marketed, produced or provided by the business. Loss of anticipated 
profits or a drop in sales is not considered substantial economic 
injury for this purpose.


Sec. 123.501  When is your business eligible to apply for a Military 
Reservist Economic Injury Disaster Loan?

    Your business is eligible to apply for a Military Reservist EIDL 
if:
    (a) It is a small business as defined in 13 CFR part 121,
    (b) The owner of the business is a military reservist and an 
essential employee or the business employs a military reservist who is 
an essential employee,
    (c) The essential employee has been called-up to active military 
duty during a period of military conflict existing on or after March 
24, 1999, and
    (d) The business has suffered or is likely to suffer substantial 
economic injury as a result of the absence of the essential employee.


Sec. 123.502  When is your business ineligible to apply for a Military 
Reservist EIDL?

    Your business is ineligible for a Military Reservist EIDL if it, 
together with its affiliates, is subject to any of the following 
conditions:
    (a) Any of your business' principal owners has been convicted, 
during the past year, of a felony during and in connection with a riot 
or civil disorder;
    (b) You have assumed the risk associated with employing the 
military reservist, as determined by SBA (for example, hiring the 
``essential employee'' after the employee has received call-up orders 
or been notified that they are imminent);
    (c) Any of your business' principal owners is presently 
incarcerated, or on probation or parole following conviction of a 
serious criminal offense;
    (d) Your business is an agricultural enterprise. Agricultural 
enterprise means a business primarily engaged in the production of food 
and fiber, ranching and raising of livestock, aquaculture and all other 
farming and agriculture-related industries. (See 13 CFR 121.107, ``How 
does SBA determine a concern's primary industry?'') Sometimes a 
business is engaged in both agricultural and non-agricultural business 
activities. If the primary business activity of the business is not an 
agricultural enterprise, it may apply for a Military Reservist EIDL, 
but loan proceeds may not be used, directly or indirectly, for the 
benefit of the agricultural enterprises;
    (e) Your business is engaged in any illegal activity;
    (f) Your business is a government owned entity (except for a 
business owned or controlled by a Native American tribe);
    (g) Your business presents live performances of a prurient sexual 
nature or derives directly or indirectly more than an insignificant 
gross revenue through the sale of products or services, or through the 
presentation of any depictions or displays, of a prurient sexual 
nature;
    (h) Your business is engaged in lending, multi-level sales 
distribution, speculation, or investment (except for real estate 
investment with property held for commercial rental);
    (i) Your business is a non-profit or charitable concern;
    (j) Your business is a consumer or marketing cooperative;
    (k) Your business is not a small business concern;
    (l) Your business derives more than one-third of its gross annual 
revenue from legal gambling activities;
    (m) Your business is a loan packager which earns more than one-
third of its gross annual revenue from packaging SBA loans;
    (n) Your business' principal activity is teaching, instructing, 
counseling, or indoctrinating religion or religious

[[Page 38531]]

beliefs, whether in a religious or secular setting; or
    (o) Your business' principal activity is political or lobbying 
activities.


Sec. 123.503  When can you apply for a Military Reservist EIDL?

    Your small business can apply for a Military Reservist EIDL any 
time beginning on the date your essential employee receives official 
call-up orders and ending 90 days after the date the essential employee 
is discharged or released from active duty.


Sec. 123.504  How do you apply for a Military Reservist EIDL?

    To apply for a Military Reservist EIDL you must complete a SBA 
Military Reservist EIDL application package (SBA Form 5R and supporting 
documentation can be obtained through SBA's Disaster Area Office) 
including:
    (a) A copy of the essential employee's official call-up orders for 
active duty showing the date of call up, and if known, the date of 
release from active duty;
    (b) A statement from the business owner that the reservist is 
essential to the successful day-to-day operations of the business 
(detailing the employee's duties and responsibilities and explaining 
why these duties and responsibilities can't be completed in the 
essential employee's absence);
    (c) A certification by the essential employee supporting that he or 
she concurs with the business owner's statement as described in 
paragraph (b) of this section;
    (d) A written explanation and financial estimate of how the call-up 
of the essential employee has or will result in economic injury to your 
business;
    (e) The steps your business is taking to alleviate the economic 
injury; and
    (f) The business owners' certification that the essential employee 
will be offered the same or a similar job upon the employee's return 
from active duty.


Sec. 123.505  What if you are both an essential employee and the owner 
of the small business and you started active duty before applying for a 
Military Reservist EIDL?

    If you are both an essential employee and the owner of the small 
business and you started active duty before applying for an Military 
Reservist EIDL, a person who has a power of attorney with the authority 
to borrow and make other related commitments on your behalf, may 
complete and submit the EIDL loan application package for you.


Sec. 123.506  How much can you borrow under the Military Reservist EIDL 
Program?

    You can borrow an amount equal to the substantial economic injury 
you have suffered or are likely to suffer until normal operations 
resume as a result of the absence of one or more essential employees 
called to active duty, up to a maximum of $1.5 million


Sec. 123.507  Under what circumstances will SBA consider waiving the 
$1.5 million loan limit?

    SBA will consider waiving the $1.5 million dollar limit if you can 
certify to the following conditions and SBA approves of such 
certification based on the information supplied in your application:
    (a) Your small business is a major source of employment. A major 
source of employment:
    (1) Employs 10 percent or more of the work force within the 
commuting area of the geographically identifiable community (no larger 
than a county) in which the business employing the essential employee 
is located, provided that the commuting area does not extend more than 
50 miles from such community; or
    (2) Employs 5 percent of the work force in an industry within such 
commuting area and, if the small business is a non-manufacturing small 
business, employs no less than 50 employees in the same commuting area, 
or if the small business is a manufacturing small business, employs no 
less than 150 employees in the commuting area; or
    (3) Employs no less than 250 employees within such commuting area;
    (b) Your small business is in imminent danger of going out of 
business as a result of one or more essential employees being called up 
to active duty during a period of military conflict, and a loan in 
excess of $1.5 million is necessary to reopen or keep open the small 
business; and
    (c) Your small business has used all reasonably available funds 
from the small business, its affiliates, its principal owners and all 
available credit elsewhere to alleviate the small business' economic 
injury. Credit elsewhere means financing from non-Federal sources on 
reasonable terms given your available cash flow and disposable assets 
which SBA believes your small business, its affiliates and principal 
owners could obtain.


Sec. 123.508  How can you use Military Reservist EIDL funds?

    Your small business can use Military Reservist EIDL to:
    (a) Meet obligations as they mature,
    (b) Pay ordinary and necessary operating expenses, or
    (c) Enable the business to market, produce or provide products or 
services ordinarily marketed, produced, or provided by the business, 
which cannot be done as a result of the essential employee's military 
call-up.


Sec. 123.509  What can't you use Military Reservist EIDL funds for?

    Your small business can not use Military Reservist EIDL funds for 
purposes described in Sec. 123.303(b) (See Sec. 123.303, `` How can my 
business spend my economic injury disaster loan?'').


Sec. 123.510  What if you don't use your Military Reservist EIDL funds 
as authorized?

    If your small business does not use Military Reservist EIDL funds 
as authorized by Sec. 123.508, then Sec. 123.9 applies (See Sec. 123.9, 
``What happens if I don't use loan proceeds for the intended 
purpose?'').


Sec. 123.511  How will SBA disburse Military Reservist EIDL funds?

    SBA will disburse your funds in quarterly installments (unless 
otherwise specified in your loan authorization agreement) based on a 
continued need as demonstrated by comparative financial information. On 
or about 30 days before your scheduled fund disbursement, SBA will 
request ordinary and usual financial statements (including balance 
sheets and profit and loss statements). Based on this information, SBA 
will assess your continued need for disbursements under this program. 
Upon making such assessment, SBA will notify you of the status of 
future disbursements.


Sec. 123.512  What is the interest rate on a Military Reservist EIDL?

    The interest rate on a Military Reservist EIDL will be 4 percent 
per annum or less. SBA will publish the interest rate quarterly in the 
Federal Register.

    Dated: April 17, 2001.
John Whitmore,
Acting Administrator.
[FR Doc. 01-18365 Filed 7-24-01; 8:45 am]
BILLING CODE 8025-01-U