[Federal Register Volume 66, Number 220 (Wednesday, November 14, 2001)]
[Rules and Regulations]
[Pages 56985-56989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28371]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AE68


Business Loans and Development Company Loans

AGENCY: Small Business Administration (SBA).

ACTION: Direct final rule.

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SUMMARY: Recently enacted statutory amendments require changes to SBA 
rules concerning loan guaranty and loan amounts, minimum guaranteed 
dollar amount of 7(a) loans, percentages of

[[Page 56986]]

financing which can be guaranteed by SBA, guarantee fees paid by 
lenders, real estate occupancy rules, and borrower prepayment 
penalties. This direct final rule conforms SBA rules to the statutory 
provisions.

DATES: This rule is effective December 31, 2001 without further action, 
unless adverse comment is received by December 14, 2001. If adverse 
comment is received, SBA will publish a timely withdrawal of the rule 
in the Federal Register.

ADDRESSES: Send written comments to LeAnn Oliver, Deputy Associate 
Administrator for Financial Assistance, Office of Financial Assistance, 
Small Business Administration, 409 Third Street, SW, Washington, DC 
20416.

FOR FURTHER INFORMATION CONTACT: James W. Hammersley, Director, Office 
of Loan Programs, Office of Financial Assistance, (202) 205-6490.

SUPPLEMENTARY INFORMATION: The Small Business Reauthorization Act of 
2000, Pub. L. 106-554, Tit. II-III, 114 Stat. 2763A-681 to -689 (2000 
Act) became effective on December 21, 2000. This direct final rule is 
necessary to amend SBA regulations to incorporate the legislative 
changes.
    Previously, SBA was authorized to guarantee no more than 80% of a 
loan if the gross amount of the loan was $100,000 or less, and no more 
than 70% of a loan over that amount. Section 202 of the 2000 Act amends 
the 7(a) business loan program by authorizing SBA to guarantee up to 
85% of a loan if the gross amount of the loan is no more than $150,000. 
Under the 2000 Act, the maximum SBA guaranty on a loan greater than 
$150,000 is 75%. To reflect these changes, SBA is amending Sec. 120.210 
of the regulations.
    Section 203 of the 2000 Act increases the maximum amount that SBA 
may guarantee to a single borrower from $750,000 to $1 million. Section 
203 provides that the gross amount of any SBA guaranteed loan can not 
exceed $2 million. Previously, there was no limit on the maximum gross 
loan amount. SBA is amending Sec. 120.151 of its regulations to 
implement these changes.
    Section 205 of the 2000 Act imposes a prepayment penalty on some 
borrowers with respect to certain SBA 7(a) guaranteed loans. A 
prepayment penalty applies if a prepaid loan has a maturity of not less 
than 15 years, the prepayment is voluntary, the amount of prepayment in 
the aggregate in any calendar year is more than 25% of the outstanding 
balance of the loan, and the prepayment is made within the first three 
years of the initial disbursement of the loan proceeds. The prepayment 
penalty is paid to SBA and applies to the full amount of the 
prepayment, not only to the guaranteed portion of the prepayment, as 
follows: if a borrower prepays during the first year after initial 
disbursement, the prepayment charge is 5% of the amount of the 
prepayment; if a borrower prepays during the second year after initial 
disbursement, the prepayment charge is 3% of the amount of the 
prepayment; and if a borrower prepays during the third year after 
initial disbursement, the prepayment charge is 1% of the amount of the 
prepayment. SBA is adding a new Sec. 120.223 to its regulations to 
reflect this statutory amendment.
    Section 206 of the 2000 Act simplifies the calculation of the 
guaranty fee payable to SBA by a participating lender. This provision 
does not change the ability of a lender to pass this fee on to the 
borrower. Under the new simplified calculation: for all loans with a 
maturity of over 12 months, if the total loan amount is $150,000 or 
less, a lender must pay a guaranty fee equal to 2% of the SBA 
guaranteed portion, however, the lender may retain 25% of the fee (50 
basis points). In addition, for all loans with a maturity of over 12 
months, if the total loan amount is more than $150,000, but not more 
than $700,000, a lender must pay a guaranty fee of 3% of the SBA 
guaranteed portion, and if the total amount is more than $700,000, a 
lender must pay a guaranty fee equal to 3.5% of the SBA guaranteed 
portion. SBA is revising Sec. 120.220 to implement these provisions in 
narrative form replacing the current chart.
    Section 207 of the 2000 Act added section 7(a)(28) to the Small 
Business Act with respect to the ability of a borrower in the 7(a) 
business loan program to lease out a portion of a building constructed 
with the proceeds of a guaranteed loan. Borrowers under the 7(a) 
business loan program will now be treated the same as borrowers under 
SBA's 504 program, established under sections 501 through 510 of the 
Small Business Investment Act (SBI Act). Specifically, when the use of 
proceeds is for new construction, section 7(a)(28) allows a 7(a) 
borrower to permanently lease to one or more tenants not more than 20 
percent of any property constructed with the proceeds of a 7(a) 
guaranteed loan, if the borrower permanently occupies and uses not less 
than 60 percent of the total space at the outset.
    To reflect this statutory change, SBA is revising section 120.131 
of its regulations to cover the leasing of space in new and existing 
buildings in both the 7(a) and 504 programs. This direct final rule 
incorporates sections 502(4) and 502(5) of the SBI Act, section 
7(a)(28) of the Small Business Act, and existing sections 120.131 and 
120.870(c) of SBA's regulations. Under each of the subsections to 
section 120.131, if a borrower is an eligible passive company which 
leases 100 percent of the space to one or more operating companies, the 
operating company, or operating companies together, must follow the 
rules set forth in the respective subsection. As a result, SBA is 
revising section 120.870(c), which formerly provided leasing rules only 
for the 504 program, so that it merely references section 120.131.
    Section 120.131(a), as revised, would permit a borrower to use SBA 
financing to construct a new building if it planned to use no less than 
67 percent of the space. It could lease out 33 percent of the building 
if it planned to occupy and use within three years some of the space 
leased short term and use within ten years all of the space leased 
short term.
    Section 120.131(b), as revised, would cover the construction of a 
new building financed with 7(a) or 504 financing. A borrower would be 
authorized to lease long term up to 20 percent of the space to one or 
more tenants if it permanently occupies and uses no less than 60 
percent of the space. It would have to plan to permanently occupy and 
use within three years some of the remaining space not immediately 
occupied and not leased long term, and to plan to use within ten years 
all of the remaining space not leased long term.
    Section 120.131(c), as revised, would apply if SBA financing under 
the 7(a) or 504 program would be used for the acquisition, renovation 
or reconstruction of an existing building. A borrower would be 
authorized to lease up to forty-nine percent of the space long term if 
it permanently occupies and uses no less than fifty-one percent of the 
space.
    Section 209 of the 2000 Act allows the SBA guaranteed portions of 
export working capital loans to be sold in the secondary market. The 
provision accomplishes this by eliminating, for export working capital 
program (EWCP) loans only, the requirement that a loan be fully 
disbursed before it can be sold in the secondary market. Any other SBA 
guaranteed loan made under the agency's 7(a) business loan program 
still must be fully disbursed before a lender can sell the guaranteed 
portion in the secondary market. In making this change for EWCP loans, 
Congress recognized the uniqueness of the revolving feature of such 
loans. SBA is amending Sec. 120.613(b) to reflect only this statutory 
change. Other provisions

[[Page 56987]]

concerning export working capital loans remain the same.
    Section 302 of the 2000 Act adds ``women-owned business 
development'' to the statutory list of public policy goals of the 504 
program. SBA interprets women-owned business development to mean 
assisting small businesses owned and controlled by women. This 
interpretation is consistent with SBA's statutory authority to assist 
small businesses owned and controlled by women as set forth in section 
29 of the Small Business Act (15 U.S.C. 656). Section 3(n) of the Small 
Business Act (15 U.S.C. 632(q)) defines a business ``owned and 
controlled by women.'' SBA is amending the public policy goals in 
Sec. 120.862(b) to reflect this change.
    SBA is changing the reference to ``Minority Business Development 
(see Sec. 124.105(b) for minority groups that qualify for this 
description)'' in Sec. 120.862(b) to ``socially and economically 
disadvantaged persons as defined in Secs. 124.103-124.104 of these 
regulations.'' SBA no longer defines ``minority'' in its regulations, 
but instead references ``socially and economically disadvantaged 
persons'' in Sec. 124.103 of its regulations. When Congress used the 
term ``minority'' in section 501(d)(3)(C) of the SBI Act (15 U.S.C. 
695(d)(3)(C)), SBA equates that to ``socially and economically 
disadvantaged persons'' and that is the term SBA uses in 
Sec. 120.862(b)(3). The cross-reference to Secs. 124.103-.104 will 
provide the public a definition of ``socially and economically 
disadvantaged.'' SBA is amending the public policy goals in 
Sec. 120.862(b) to reflect this change. This is consistent with 
Sec. 124.101 of SBA's regulations which requires a small business to be 
``unconditionally owned and controlled'' by one or more socially and 
economically disadvantaged individuals.
    The Veterans Entrepreneurship and Small Business Development Act of 
1999, Pub. L. 106-50, 113 Stat. 236 (August 17, 1999) added ``expansion 
of small business concerns owned and controlled by veterans as defined 
in Section 3(q) of the Small Business Act (15 U.S.C. 632(q)) especially 
service-disabled veterans, as defined in such section 3(q).'' 
Accordingly, SBA is adding businesses owned and controlled by veterans 
(especially service-disabled veterans) to the public policy goal set 
forth in Sec. 120.862(b)(3) in order to comply with this 1999 statute.
    Section 303 of the 2000 Act increases the maximum amount the SBA 
may guarantee to a single identifiable small business concern borrower 
under the 504 program from $750,000 to $1 million. The provision also 
increases from $1 million to $1.3 million the maximum amount of loans 
that meet the criteria of 15 U.S.C. 695(d)(3), expressed as the public 
policy goals provided in proposed Sec. 120.862(b). SBA is making these 
changes in Sec. 120.931.
    Section 305 of the 2000 Act makes permanent the Premier Certified 
Lenders Program (PCLP), formerly a pilot program. SBA is amending 
Sec. 120.845 to reflect this statutory change. SBA will issue a 
proposed rule in the near future setting forth requirements for CDCs 
desiring to participate in PCLP.
    Section 306 of the 2000 Act amends Section 508 of the SBI Act (15 
U.S.C. 697e), which relates to SBA's Premier Certified Lenders Program 
(PCLP). Section 306 requires that, if upon default in repayment, SBA 
acquires a loan guaranteed under this section (a PCLP loan) and 
identifies such loan for inclusion in a bulk asset sale of defaulted or 
repurchased loans or other financings, it shall give prior notice to 
any CDC which has a contingent liability under this section. Under SBA 
regulations, only a Premier CDC can make a PCLP loan and its contingent 
liability relates to its responsibility to reimburse SBA for 10 percent 
of any loss SBA incurs with respect to the PCLP loan. Thus, SBA makes 
clear in Sec. 120.545(f) that section 306 only requires SBA to give 
notice to a Premier CDC which has a contingent liability with respect 
to a PCLP loan SBA intends to include in a bulk asset sale.
    Section 306 requires that SBA give notice to the Premier CDC as 
soon as possible after the financing is identified, but not less than 
90 days before the date SBA first makes any records on such financing 
available for examination by prospective purchasers prior to its 
offering in a package of loans for bulk sale. SBA is adding a new 
Sec. 120.545(f) adding this requirement.

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

    This regulation will not have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. Therefore, for the purposes of Executive 
Order 13132, SBA determines that this direct final rule has no 
federalism implications warranting preparation of a federalism 
assessment.
    The Office of Management and Budget (OMB) has determined that this 
rule does not constitute a ``significant regulatory action'' under 
section 3(f) of Executive Order 12866.
    This action meets applicable standards set forth in sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.
    SBA has determined that this direct 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. 
Most of the provisions of the rule simply conform the rule to statutory 
provisions amending the SBA 7(a) and CDC lending programs. This rule 
imposes no new requirements on these small entities.
    SBA has determined that this direct final rule does not impose 
additional reporting or recordkeeping requirements under the Paperwork 
Reduction Act, 44 U.S.C., chapter 35.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses.

    For the reasons set forth above, SBA is amending 13 CFR part 120 as 
follows:
    1. The authority citation for part 120 continues to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6), 636(a) and (h), 696(3), and 
697(a)(2).


    2. 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 financing (whether 7(a) or 504) is for the 
construction of a new building, a Borrower may lease short term up to 
33 percent of the Rentable Property to one or more tenants if the 
Borrower permanently occupies and uses no less than 67 percent of the 
Rentable Property, plans to permanently occupy and use within three 
years some of the space leased short term and plans to permanently 
occupy and use within ten years all of the space leased short term. If 
the Borrower is an Eligible Passive Company which leases 100 percent of 
new building's space to one or more Operating Companies, the Operating 
Company, or Operating Companies together, must follow the same rules 
set forth in this paragraph.
    (b) If the SBA financing (whether 7(a) or 504) is for the 
construction of a new building, a Borrower may lease long term up to 20 
percent of the Rentable Property to one or more tenants if the

[[Page 56988]]

Borrower permanently occupies and uses no less than 60 percent of the 
Rentable Property, plans to permanently occupy and use within three 
years some of the remaining space not immediately occupied and not 
leased long term, and plans to permanently occupy and use within ten 
years all of the remaining space not leased long term. If the Borrower 
is an Eligible Passive Company which leases 100 percent of the new 
building's space to one or more Operating Companies, the Operating 
Company, or Operating Companies together, must follow the same rules 
set forth in this paragraph.
    (c) If the SBA financing (whether 7(a) or 504) is for 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 permanently occupies and uses no less than 51 percent 
of the Rentable Property. If the Borrower is an Eligible Passive 
Company which leases 100 percent of the space of the existing building 
to one or more Operating Companies, the Operating Company, or Operating 
Companies together, must follow the same rules set forth in this 
paragraph.

    3. Remove the first sentence of Sec. 120.151 and all in its place 
two new sentences to read as follows:


Sec. 120.151  What is the statutory limit for total loans to a 
Borrower?

    The aggregate amount of the SBA portions of all loans to a single 
Borrower, including the Borrower's affiliates as defined in 
Sec. 121.103 of this chapter, must not exceed a guaranty amount of 
$1,000,000, except as otherwise authorized by statute for a specific 
program. SBA is authorized to guarantee portions of loans with a gross 
loan amount of $2,000,000 or less.
* * * * *

    4. Revise the third and fourth sentences of Sec. 120.210 to read as 
follows:


Sec. 120.210  What percentage of a loan may SBA guarantee?

* * * * *
    Effective December 21, 2000, loans up to $150,000 may receive a 
maximum guaranty of 85 percent. Loans more than $150,000 may receive a 
maximum guaranty of 75 percent, except as otherwise authorized by law.

    5. Amend Sec. 120.220 by adding an introductory paragraph, 
redesignating paragraphs (b) and (c) as (e) and (f), removing the chart 
in paragraph (a), revising paragraph (a), and adding new paragraphs 
(b), (c), and (d) to read as follows:


Sec. 120.220  Fees that Lender pays SBA.

    A Lender must pay a guaranty fee to SBA for each loan it makes. 
Payment of the guaranty fee by the Lender when due to SBA is a 
prerequisite for SBA's guaranty. Nonpayment of a guaranty fee relieves 
SBA of liability in the event of loan default. Acceptance of the 
guaranty fee by SBA does not waive any right of SBA arising from a 
Lender's negligence, misconduct or violation of any provision of this 
part, the guaranty agreement, or the loan authorization.
    (a) Amount of guaranty fee. For a loan with a maturity of twelve 
(12) months or less, the guaranty fee which the Lender must pay to SBA 
is one-quarter (\1/4\) of one percent of the guaranteed portion of the 
loan. For a loan with a maturity of more than twelve (12) months, the 
guaranty fee is:
    (1) 2 percent of the guaranteed portion of the loan if the total 
amount of the loan is not more than $150,000,
    (2) 3 percent of the guaranteed portion of a loan if the total 
amount is more than $150,000 but not more than $700,000, and
    (3) 3.5 percent of the guaranteed portion of a loan if the total 
amount is more than $700,000.
    (b) When the guaranty fee is payable. For a loan with a maturity of 
twelve (12) months or less, the Lender must pay the guaranty fee to SBA 
with its application for a guaranty. The Lender may charge the Borrower 
for the fee when the loan is approved by SBA. For a loan with a 
maturity in excess of twelve (12) months, the lender must pay the 
guaranty fee to SBA within 90 days after SBA gives its loan approval. 
The Lender may charge the Borrower for the fee after the Lender has 
made the first disbursement of the loan. The Borrower may use the loan 
proceeds to pay the guaranty fee. However, the first disbursement must 
not be made solely or primarily to pay the guaranty fee.
    (c) Refund of guaranty fee. For a loan with a maturity of twelve 
(12) months or less, SBA will refund the guaranty fee if the loan 
application is withdrawn prior to approval by SBA; if the SBA declines 
to guarantee the loan; or if SBA changes the Lender's loan terms and 
then approves the loan, but SBA's modified terms are unacceptable to 
the Lender. In that case, the Lender must request a refund in writing 
within 30 calendar days of SBA's approval. For a loan with a maturity 
of more than twelve (12) months, SBA will refund the guaranty fee if 
the Lender has not made any disbursement and the lender requests in 
writing the refund and cancellation of the SBA guaranty.
    (d) Lender's retention of portion of guaranty fee. With respect to 
a loan with a maturity of more than twelve (12) months, where the total 
loan amount is no more than $150,000, a Lender may retain not more than 
25 percent of the guaranty fee (50 basis points).
* * * * *

    6. Add a new Sec. 120.223 to subpart B to read as follows:


Sec. 120.223  Prepayment penalty fee payable to SBA by Borrower.

    With respect to an SBA guaranteed loan which has a maturity of not 
less than 15 years, when, during the first three years after the first 
disbursement of a loan, borrower makes a voluntary prepayment (or 
several prepayments in the aggregate) in any calendar year which is 
more than 25 percent of the outstanding balance of the loan, the 
following prepayment penalty fees apply:
    (a) If the prepayment is made during the first year after first 
disbursement, the charge is 5% of the total amount of the prepayment;
    (b) If the prepayment is made during the second year after first 
disbursement, the charge is 3 percent of the total amount of the 
prepayment; and
    (c) If the prepayment is made during the third year after first 
disbursement, the charge is 1 percent of the total amount of the 
prepayment.

    7. Revise Sec. 120.613(b) to read as follows:


Sec. 120.613  Secondary Participation Guarantee Agreement.

* * * * *
    (b) Except for export working capital loans, disburse to the 
Borrower the full amount of the loan; and
* * * * *

    8. Revise the first sentence of the introductory paragraph of 
Sec. 120.845 and remove paragraph (h) to read as follows:


Sec. 120.845  Premier Certified Lenders Program (PCLP).

    The SBA may designate a CDC a Premier Certified Lender (``Premier 
CDC''), and authorize it to approve, close, service, foreclose, 
litigate, and liquidate 504 loans subject to SBA regulations, 
procedures, and policies. * * *
* * * * *

    9. Revise Sec. 120.862(b)(3) to read as follows:


Sec. 120.862  Other economic development objectives.

* * * * *
    (b) * * *
    (3) Expansion of small businesses owned and controlled by women, 
socially and economically

[[Page 56989]]

disadvantaged persons as defined in Secs. 124.103 and 124.104 of this 
chapter, or veterans (especially service-disabled veterans) as defined 
in the Small Business Act (15 U.S.C. 632 (q)); * * *

    10. Revise Sec. 120.870(c) to read as follows:


Sec. 120.870  Leasing Project Property

* * * * *
    (c) The leasing requirements for business loans in Sec. 120.131 
apply to 504 loans.

    11. Revise Sec. 120.931 to read as follows:


Sec. 120.931  What is the statutory limit for total loans to a 
Borrower?

    The outstanding balance of all SBA financial assistance to a single 
Borrower, including the Borrower's affiliates as defined in 
Sec. 121.103 of this chapter, must not exceed $1,000,000 ($1,300,000 if 
one or more of the public policy goals enumerated in Sec. 120.862(b) 
applies to the project) except as otherwise authorized by statute for a 
specific program.

    Dated: November 5, 2001.
Hector V. Barreto,
Administrator.
[FR Doc. 01-28371 Filed 11-13-01; 8:45 am]
BILLING CODE 8025-01-P