[Federal Register Volume 68, Number 130 (Tuesday, July 8, 2003)]
[Proposed Rules]
[Pages 40553-40573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16862]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AE41


Development Company Loan (504) Program Changes

AGENCY: U.S. Small Business Administration (SBA).

ACTION: Proposed rule.

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SUMMARY: In response to an Advanced Notice of Proposed Rulemaking 
(``ANPRM'') published by the U.S. Small Business Administration 
(``SBA'' or ``the Agency'') on December 6, 2002, SBA solicited comments 
on the Certified Development Company (``CDC'') Loan Program (the ``CDC 
Program'' or the ``504 Program''). Based on the comments received and 
due to SBA's desire to improve 504 Program delivery to small 
businesses, SBA proposes to amend the regulations governing the 504 
Program.
    The most significant regulations that SBA proposes to change are 
those governing a CDC's area of operations; a CDC's organizational 
structure; the requirements for a new CDC or a CDC requesting to expand 
its territory; the ``adequately served'' standard; and whether a CDC 
may participate in other SBA loan programs. Also, to allow for greater 
delegation of authority to CDCs, the proposed rule includes expanded 
sections on the Accredited Lender Program (``ALP''), the Premier 
Certified Lender Program (``PCLP'') and a simplification and 
clarification of the

[[Page 40554]]

enforcement provisions for CDCs. In addition, SBA proposes to increase 
the ``job opportunity average'' and to permit CDCs to approve more 
projects that do not meet the job creation criteria but do meet other 
statutory goals. The proposed amendments also clarify the regulations 
governing fees that a small business may and may not be charged.

DATES: Comments must be received on or before August 7, 2003.

ADDRESSES: Address written comments to James E. Rivera, Associate 
Administrator for Financial Assistance, U.S. Small Business 
Administration, 409 Third Street, SW., 8th Floor, Washington, DC 20416. 
You also may submit comments via e-mail to [email protected]. You also 
may submit comments electronically to http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Gail H. Hepler, Chief, 504 Loan Policy 
Branch, (202) 205-7530.

SUPPLEMENTARY INFORMATION: 

Statutory Basis of the 504 Program

    The 504 Program, Title V of the Small Business Investment Act 
(``Act''), 15 U.S.C. 695, was established by Public Law 85-699 on 
August 21, 1958. A ``development company'' was defined as an enterprise 
formed for the purpose of furthering economic development of its 
community and environs, and with authority to promote and assist the 
growth and development of small business concerns in the areas covered 
by their operations. The law further stated that a local development 
company is a corporation chartered under any applicable State 
corporation law to operate in a specified area within a State and be 
composed of and controlled by persons residing or doing business in the 
locality. The program was amended in 1980 due to changing business 
conditions for small businesses. During the late 1970s and early 1980s, 
the prime interest rate and unemployment rate reached historically high 
levels. It was generally believed that long-term, fixed-rate money was 
not available at a reasonable cost to small businesses because of these 
high prevailing rates and that this was hindering job creation. 
Congress enacted section 503 of the Act in 1980. The 503 and 504 
Programs were intended to provide long-term, fixed-rate financing to 
small businesses at favorable terms that were unavailable in the 
commercial marketplace. Congress specified in the Act that this program 
``foster economic development and create or preserve job opportunities 
in both urban and rural areas by providing long-term financing for 
small business concerns * * *'' The statute authorizes SBA to guarantee 
debentures backing long-term, fixed-asset loans (``504 Loans'') made by 
CDCs. It also authorizes SBA to pool the guarantees and sell interests 
in the pools to investors.

Rulemaking History

    On December 6, 2002, SBA published the ANPRM to solicit comments on 
the 504 Program. SBA posed specific questions requesting comments on a 
wide range of topics including the overall 504 Program's effectiveness; 
CDC organizational structure; ways to increase the 504 Program's 
geographic coverage to ensure that all small businesses have access to 
long-term fixed-rate financing; 504 loan and debenture structure; CDC 
performance requirements; operational and logistical issues; economic 
development; and CDC participation in other SBA programs. SBA received 
more than 1,900 responses from lenders, borrowers, government and 
community organizations, and CDCs.

Discussion of Comments Received in Response to ANPRM

    In response to the questions in the ANPRM as to whether the need 
for the 504 Program still exists, the overwhelming majority of 
commenters supported the continued need for the program. The comments 
included approximately 600 letters from banks and other lenders and 590 
letters from 504 Program borrowers. A national lender explained as 
follows:

    Nationally, we rely on the 504 Loan Program in many of our 
markets because conventional real estate financing offers numerous 
obstacles to small business financing including the following: loan-
to-value of 75% or less--more cash out of pocket for the borrower, 
20-30% down-payment requirements, shorter amortization periods, 
ineligibility of special purpose (use) properties, balloon payments, 
exposure to short-term interest rates, multiple loan and pricing 
covenants and financial reporting requirements. For our customers 
the 504 Loan Program continues to be the most viable alternative to 
conventional small business loan products.

Emphasizing program benefits from the perspective of the lender, a 
banker stated:

    There are a number of unique benefits for our bank and our 
borrowers when we participate in the 504 loan program. It allows us 
to continue to serve the banking needs of our small business 
customers while mitigating a degree of risk that always accompanies 
small business lending * * *. The 504 allows them to get a long-
term, fixed rate financing through support from the government 
guaranty. With our bank in a first lien position with typically a 
50% loan-to-value ratio, our collateral risk is substantially 
reduced. The program also allows us to fund projects too large for 
our lending limit. There is also an active secondary market for 504 
first mortgage loans. Most importantly, 504 enables us to meet 
customer credit needs and retain our business customer's primary 
banking relationship * * *. The CDC's expertise and working 
relationship with the SBA means that we save valuable lender time 
and expense by the CDC handling the application paperwork required 
for a government loan. The CDC is truly the program expert and 
monitors the changing rules, regulations and procedures for the 504 
loan program * * *'' Additionally, the 504 loan program has 
strengthened our small business community by allowing companies to 
grow and expand. We are heroes in the eyes of our small business 
borrowers and we like being able to keep our customers happy while 
maintaining our loan portfolio at a manageable risk level.

Another response from a bank added the following:
    The program also allows us to fund projects too large for our 
lending limit. Additionally, we can limit our exposure to certain 
industries * * * There is also an active secondary market for 504 
first mortgage loans, so we can meet our board's liquidity 
requirements and, in turn, make even more small business loans.

    Addressing the question of compatibility of the 504 Program with 
the loan programs authorized by section 7(a) of the Small Business Act, 
15 U.S.C. 632 et seq. (``7(a) Program''), a lender stated:

    The 504 Program, along with the 7(a) program and a (state) 
working capital loan program, work to complement each other in our 
market. The 504 fits quite well in its market niche of providing 
long-term fixed-rate financing to larger companies for plant and 
major equipment purchases. It is appropriately targeted to reach 
those companies in their growth cycle to create jobs, expand the tax 
base, and improve their communities. Both the 7(a) and State 
programs target, for the most part, smaller credits to provide 
working capital and financing for smaller equipment purchases. The 
7(a) program is also frequently used for real estate purchases where 
a variable rate loan is preferred, because of the lack of a 
prepayment penalty, or where job creation is not the purpose or the 
targeted outcome. Taken together, along with some specialized 
private sector programs, the needs of small businesses are, for the 
most part, being met in our market and filling a void in 
conventional lending.

    Regarding the 504 program's contribution to the economic 
development of communities, a typical comment follows:

    The 504 Program is critical in all economic cycles but of 
greatest significance in today's economy. The ability of a small 
business to buy needed equipment and real estate to grow while 
preserving capital to fund expansion and job growth is crucial in

[[Page 40555]]

today's economy. No other program provides these benefits to small 
businesses * * * By virtue of its structure, providing a financing 
package that requires participation of a private sector lender, 
federal resources are leveraged. The program has always been 
available, regardless of economic cycle, and provides a high level 
of security to the participating private sector lender. This 
security is even more critical in a down economy and may mean the 
difference between financing with 504 or no financing available.

    Other economic development benefits to the local communities from 
the CDC Program in addition to the long-term, fixed-rate financing are 
mentioned by many writers. One writer stated that:

    To the extent that there are surplus reserves or revenues, they 
should be employed to accomplish our primary objective, the 504 
Program, either through increased marketing in our existing area of 
operations or in a new, underserved market. Secondarily, surpluses 
should be utilized for needed local economic development activities. 
We believe that was the intent, resulting in a separate CDC program 
and industry in the first place.

Another writer echoed the larger economic development goals of CDCs:

    The 504 program has been the genesis for the creation of many 
other forms of local economic development and job creation. Unlike 
commercial lenders who distribute profits to shareholders, CDCs 
invariably invest, either directly or through affiliated companies, 
into their areas of operations. This was the basis for congressional 
creation of the 504 Program. 504 Program revenues have led to 
creation of new local revolving loan funds, economic development 
grant programs, job training programs, micro-loan programs, and many 
other small business assistance programs provided by CDCs. All of 
these programs are targeted at the intent of Congress: job creation 
in local communities.

    There also was overwhelmingly negative response from banks, 504 
borrowers, and CDCs to the questions about permitting a CDC to 
establish a 7(a) lender or permitting a 7(a) lender to establish a CDC. 
One writer explained that:

    The Development Company Loan program * * * was created by 
Congress to be an economic development tool, and measured the 
success by jobs. The 7(a) program was created by Congress to assist 
small businesses with capital not available from other resources, or 
the ``lender of last resort.'' The 7(a) loan program may and 
probably does create jobs * * *

but no economic development goal is required for a 7(a) loan to be 
approved. Another writer summarized his opposition as follows:

    7a lenders, due to their for-profit structure, have 
significantly different goals and objectives that are often in 
conflict with the economic development goals of the non-profit CDC 
industry. The independence of CDCs is critical to the maintenance of 
their unique economic and community development mission * * *. The 
primary objective of the development company must be of benefit to 
the community as measured by increased employment, payroll, business 
volume, and corresponding factors rather than monetary profits to 
its shareholders * * * *. CDCs help to create a level playing field 
between large and small banks by providing expertise to small and 
rural banks that cannot afford in-house SBA lending departments.

Another writer adds that:

    CDCs should build strength with adequate capital reserves just 
like any good business. We certainly expect it of our borrowers. To 
the extent that there are surplus reserves or revenues, they should 
be employed to accomplish our primary objective, the 504 Program, 
either through increased marketing in our existing area of 
operations or in a new, underserved market. Secondarily, surpluses 
should be utilized for needed local economic development activities. 
We believe that was the intent, resulting in a separate CDC program 
and industry in the first place * * *. Not only is the 7(a) program 
not economic development, a conflict could occur as a result of such 
an affiliation.

    In summary, the comments supported the continuation of the 504 
Program. The comments also suggested some policy changes to the 504 
Program to permit increased access to capital for small businesses. The 
most frequently suggested changes dealt with the structure of CDCs, 
including their designated areas of operations. These suggestions 
included liberalizing the rules governing a CDC's membership 
requirements, changing the definition of a CDC's area of operations, 
and changing the definition of when a county is adequately served by 
existing CDCs. The comments also supported the distinct economic 
development aspect of the 504 Program by overwhelmingly opposing a 
CDC's investing in or being affiliated with a 7(a) lender.

Overview of Proposed Changes to the 504 Regulations

    SBA believes the proposed regulatory changes will improve 504 
Program delivery to small business customers by increasing customer 
choice of service; increase third party lender choice of CDCs; 
facilitate the formation of new CDCs; facilitate the expansion of 
existing CDCs; and increase the number of CDCs able to take advantage 
of special initiatives for rural areas. By allowing market-driven 
forces to determine availability of 504 Program service, small 
businesses will have greater opportunity to negotiate the best total 
financing package including fees, as well as receive increased service 
by CDCs. In addition, the 504 Program will be more responsive to 
changes in market conditions.
    To allow for greater delegation of authority to CDCs, this proposed 
rule includes expanded sections on the ALP and the PCLP. This proposed 
rule also simplifies and clarifies the enforcement provisions for CDCs. 
In addition, SBA proposes to amend the ``job opportunity average,'' 
which will permit CDCs to approve more projects that do not meet the 
job creation criteria but do meet other statutory goals such as 
increasing manufacturers' productivity and competitiveness through re-
tooling, robotics or modernization. Proposed amendments also clarify 
the regulations governing fees that a small business may and may not be 
charged. The regulations covered by the proposed rule are 13 CFR, 
subpart A, Sec.  120.102 and Sec.  120.140, and subpart H, Sec. Sec.  
120.800 through 120.984.
    The 504 Program from 1986 to 2002 has created or retained more than 
1.5 million jobs, averaging approximately $13,600 of debenture per job. 
However, the 504 Program has not used all of its available budgetary 
authority for many years. The 504 Program's authorization level for 
fiscal year 2002, for example, was $4.5 billion compared to the total 
approval level of $2.5 billion.
    SBA has decided to take steps to increase the availability of the 
long-term, fixed-rate financing offered by the 504 Program that is 
vital for our nation's small business community. This proposed rule 
begins this process by establishing the State in which a CDC is 
incorporated as the CDC's minimum area of operations. Currently, each 
CDC is assigned a specific, local area, typically several counties. 
Only one CDC per State is permitted to be a statewide CDC. In some 
cases, there are geographic areas that do not have CDC coverage. 
Although CDCs' areas of operations often overlap, SBA believes that 
establishing statewide areas of operations for all CDCs will increase 
the availability of 504 Program assistance to small businesses. SBA 
also believes that it is empowering the CDCs' boards to determine what 
is the optimal area of operations within the State for the CDC to 
market and service effectively.
    Next, SBA is proposing to eliminate the ``adequately served'' 
standard. Currently, a county meets the standard of ``adequately 
served'' when the CDC that includes the county in its area of 
operations averages at least one 504 loan approval in that county per 
100,000 population per year averaged over two years. In such cases, the 
county is unavailable both to an existing CDC applying to expand its 
operations to include that county, and to a new CDC

[[Page 40556]]

applying to include that county in its proposed area of operations. In 
addition, the regulations currently do not permit a new CDC, or a CDC 
applying to expand its area of operations, to apply for a particular 
county if that county has become part of another CDC's area of 
operations within the previous 24 months. Eliminating this standard 
will encourage new CDC applications and expansion applications from 
existing CDCs. SBA is proposing to allow the marketplace to determine 
the maximum number of CDCs that can co-exist within a State. With these 
changes SBA anticipates that small businesses, as well as lenders, will 
have greater choice in and access to capital.
    To facilitate these changes, SBA is proposing to streamline a CDC's 
organizational structure by modifying the CDCs' general membership 
requirements. Currently, a CDC is required to have a general membership 
that covers the CDC's entire area of operations. In the proposed rule, 
SBA would no longer require that a CDC's membership cover the entire 
area of operations, but rather would require that the CDC's members 
each actively support economic development within all or some portion 
of the CDC's area of operations. The CDC's board of directors would 
make the decision on how widely disbursed the CDC's general membership 
needs to be to meet the objective of local economic development. SBA 
also is proposing to modify the regulations governing contracting for 
staff to facilitate a CDC's contracting for ``back office'' work with a 
contractor located outside of the CDC's area of operations. SBA 
believes that this will permit certain economies of scale by providing 
additional sources of expertise in 504 packaging, processing, servicing 
and liquidation.
    For CDCs that apply to cross State lines as a multi-state CDC, the 
CDC also will be able to determine the maximum geographic coverage its 
general membership in the new State needs to be. Also for multi-state 
CDCs, SBA is proposing to relax the requirements for board 
representation from the new State by eliminating the current 
requirement that at least three of the CDC's board members must come 
from the new State. In addition, SBA is proposing to allow a CDC that 
currently has ALP or PCLP authority in its State of incorporation to 
use that authority in its expanded area. To ensure that only those CDCs 
with demonstrated strong underwriting are permitted to expand beyond 
their State of incorporation, SBA is clarifying the requirement that 
the expanding CDC must meet SBA's portfolio performance benchmarks. 
Taken together, SBA believes that these changes in a CDC's area of 
operations, elimination of the concept of ``adequately served,'' 
elimination of the requirement that a CDC's membership cover the entire 
area of operations, the clarification regarding contracting, and the 
changes in the expansion requirements for CDCs will result in the 504 
Program becoming more relevant in today's dynamic financial services 
marketplace.
    SBA agrees with the opinion of the majority of writers that the 504 
Program should remain separate from the 7(a) Program. The proposed rule 
introduces a new regulation that prohibits a CDC from investing in or 
being affiliated with a 7(a) lender.
    The concept of permitting a CDC to invest in a Small Business 
Investment Company (``SBIC'') generally was supported by the 
commenters. Many writers viewed such an investment as economic 
development as long as the SBIC and the CDC were not affiliates. 
However, SBA's current regulations prohibit a CDC from owning an equity 
interest in a business that has received or is applying to receive SBA 
financing (Sec.  120.140). Since SBICs typically have an ownership 
interest in the businesses that they assist, a CDC that has invested in 
an SBIC also would have an ownership interest in the small business 
receiving financing from the SBIC and could potentially violate this 
regulation by providing financing directly to that small business. In 
addition, SBA's regulations state that a CDC must operate in its Area 
of Operations. SBA interprets this requirement to apply to all CDC 
activities that use funds generated from the 504 Program. In light of 
these concerns, at this time SBA proposes to prohibit a CDC from 
investing in an SBIC. The proposed rule would not require a CDC with an 
existing investment in an SBIC to liquidate such investment.

Section-by-Section Analysis

    SBA proposes to add a definition of ``SOP'' to Sec.  120.102, the 
definitions section applicable to the entire part 120.
    SBA proposes to amend Sec.  120.140 to delete references to 
Associate Development Companies (``ADC'') (see discussion of Sec.  
120.850).
    SBA proposed to change the headings for Sec.  120.800 and Sec.  
120.801 to make their format consistent with the other section headings 
in subpart H.
    SBA proposed some changes to the definitions in Sec.  120.802. The 
definition of ``Area of Operations'' would be modified to add that the 
minimum area of operations for a CDC is the State in which the CDC is 
incorporated. This change would permit more access to capital as well 
as choices for small businesses. In response to the ANPRM, several 
commentors suggested that a CDC's area of operations be SBA district-
wide. However, SBA agrees with the reasoning of one commentor regarding 
the district-wide proposal:

    (The district-wide proposal) presents two problems. First, it 
would not eliminate some current monopolies.* * * Secondly, it 
produces something of a double standard. In some 41 states, all CDCs 
would be statewide by virtue of the fact that there is only one 
district office in each of those states. That leaves 9 states 
requiring special regulations and monitoring by the SBA. The 
statewide CDC proposal eliminates these problems and provides a 
single, national standard and is therefore preferable.

The definition of ``Local Economic Area'' would be revised slightly to 
make it consistent with the revised, statewide ``Area of Operations'' 
definition. In addition, the definition for ``Associate Development 
Company'' would be deleted. This change is discussed in the analysis of 
revisions proposed for Sec.  120.850. Other regulations in subpart H of 
part 120 use the terms ``Designated Attorney,'' ``Lead SBA Office'' and 
``Priority CDC.'' For clarification, this proposed rule would add 
definitions for those terms.
    In Sec.  120.810, application for certification as a CDC, SBA is 
proposing changes to the policies governing new CDC applications to 
reflect the change in the definition of a CDC's ``Area of Operations'' 
to a minimum of statewide. Additionally, it deletes the current 
restrictions that permit existing CDCs to exclude geographic areas from 
being considered for a new CDC. SBA is permitting the marketplace to 
determine the optimum number of CDCs that may be supported.
    Because of these changes and in order to streamline the application 
process, SBA would delete Sec.  120.811, public notice of CDC 
certification application, which requires public notice as well as 
direct notice to existing CDCs. SBA believes the application process, 
SBA oversight, and the marketplace will be enough to ensure that the 
process will lead to improved economic development. This proposed rule 
would add a clarification that an applicant CDC must demonstrate 
financial capability to meet the upfront costs of the program until the 
CDC's operations meet the breakeven point. This is to ensure that the 
CDC will be staffed sufficiently to meet the requirements of marketing, 
processing, closing, and servicing 504 Loans.
     Section 120.812, probationary period for newly certified CDCs, 
proposes revisions that would clarify how SBA

[[Page 40557]]

will process a CDC's petition for permanent CDC status, and that the 
probationary period commences on the date of certification. Also SBA 
proposes to delete all references to ADCs in connection with the 
proposed elimination of the ADC program (see discussion of Sec.  
120.850).
    In Sec.  120.820, CDC non-profit status, SBA proposes to describe 
what SBA means by the term ``good standing.'' While this is a term SBA 
has used over the years in administering the 504 Program, SBA has not 
fully defined it previously. Following discussions between SBA program 
officials and the CDC industry, SBA proposes several criteria that 
constitute good standing for the 504 Program. SBA intends to apply the 
term generally to all CDCs.
    Section 120.821, CDC Area of Operations, would be revised to delete 
the limitation of one statewide CDC since all CDCs' areas of operations 
will be at least statewide (see discussion of definition of ``Area of 
Operations'' in Sec.  120.802).
    Section 120.822, CDC membership, would be revised to streamline CDC 
membership qualifications by deleting the requirement that a CDC's 
membership must be representative of its entire area of operations. 
Currently, a CDC must have representation from each of the four groups 
(i.e., government organizations, financial institutions, community 
organizations, and businesses) for its entire area of operations. With 
this change, SBA still would require that each of the four groups be 
represented in the membership, but would no longer require that such 
members represent the entire area of operations. It will be up to the 
CDC's board to determine how broadly-based geographically the 
membership needs to be to meet the CDC's economic development 
objectives. The CDC's board may choose to have a membership that 
represents only a county, or some counties, while another CDC's board 
may choose to have a membership that represents the entire State.
    In addition, SBA would clarify the intent of the regulation by 
adding that a CDC must not use its employees and staff to meet the 
membership requirements. The membership requirement is designed to be 
filled by local community leaders volunteering to assist in providing 
economic development in their communities through the formation of a 
CDC. The membership elects the CDC's board from among its members. The 
board, in turn, hires paid professional staff to operate the CDC on a 
daily basis. SBA also proposes to eliminate the requirement that SBA 
pre-approve the CDC's members representing government organizations, 
and to add small business development companies (``SBDCs'') and another 
type of community organization that may be a source of members for a 
CDC.
    Section 120.824, professional management and staff, would be 
revised to delete the provision that describes the circumstances under 
which a rural CDC with insufficient loan volume may be managed by 
another CDC located in the same area of operations. This provision has 
not been used and appears to be unnecessary. In addition, the proposed 
change would clarify the requirements regarding CDC staff provided 
under contract including deleting the requirement that a contractor 
must live or do business in the CDC's area of operations. SBA believes 
that a CDC may wish to contract for certain services, such as ``back 
office'' staff support, with individuals or organizations that are 
outside of the CDC's area of operations.
    Section 120.826, basic requirements for operating a CDC, would be 
slightly reworded for clarity. The responsibilities currently described 
in Sec.  120.827(a) would be moved to this section because SBA 
considers them to be basic requirements for operating a CDC. In 
addition, SBA proposes to clarify that all CDCs must comply with all of 
the 504 Program requirements imposed by statute, regulation, SOP, 
policy and procedural notice, loan authorization, debenture, or any 
agreement between SBA and the CDC, some of which is currently in Sec.  
120.827(a).
    Section 120.827, other services a CDC may provide to small 
businesses, would be revised to focus this section only on, and clarify 
what is meant by, ``other services'' that a CDC may provide to a small 
business, as well as describe the regulations to which the CDC will be 
subject if it does provide such other services.
    Section 120.828, minimum level of 504 loan activity and 
restrictions on portfolio concentrations, would be reworded to clarify 
the minimum level of 504 loan activity a CDC must maintain. In 
addition, this section would cover the requirement concerning portfolio 
concentrations currently contained in Sec.  120.827(a) and the heading 
to the section would be revised accordingly.
    Section 120.829, job opportunity average a CDC must maintain, would 
modify the job opportunity average a CDC must maintain by changing it 
to an amount specified by SBA by means of a notice published in the 
Federal Register. Currently, the average is preventing many CDCs from 
accepting 504 loan applications from small businesses for loans that 
would not create jobs but would meet other statutory 504 Program 
objectives, such as loans to increase business efficiency through 
technology. In addition, the present ratio has been in effect since 
1990 and does not take into account the inflationary factors in the 
cost of land, real estate acquisition, construction, and machinery and 
equipment since that time. Finally, SBA is proposing to clarify that a 
new CDC is permitted two years from the date it is certified to meet 
the job portfolio requirement.
    Section 120.830, reports a CDC must submit, would be revised to 
change the submission requirement for CDC annual reports from 90 days 
to 120 days after the end of the CDC's fiscal year to permit CDCs more 
time to provide financial statements with the required level of review. 
This proposed rule also clarifies the requirement by adding that the 
annual report must include financial statements of any affiliate or 
subsidiary of the CDC. In addition, it would add some clarifying 
language regarding the submission requirements for changes to directors 
or staff.
    Section 120.835, application to expand an area of operations, would 
be revised. Most of the applications SBA receives are for expansions of 
a CDC's area of operations within its State of incorporation. The 
expansion request usually is for several counties in which there 
currently are one or more CDCs that include those counties in their 
areas of operations. Since the proposed rule gives all CDCs a minimum 
area of operations of the State in which they are incorporated, and 
since SBA is allowing the marketplace to determine the optimum number 
of CDCs, much of the current regulatory language is no longer required 
(refer to Sec.  120.802 and Sec.  120.810 for further discussion). SBA 
proposes that the only applications for expansion that it would 
consider would be when the CDC requests to expand beyond its State of 
incorporation. In this section, SBA also proposes to add the 
requirement that such applicants must be ALP-qualified. There are two 
reasons for this. The first is to limit expansions beyond State lines 
to only those CDCs who have met certain volume, closing, and portfolio 
quality standards. The second is to reflect the proposed change in the 
regulations governing multi-state expansions that would permit a CDC to 
use in the expanded area any unilateral authority it has already 
received in its State of incorporation (see discussion of proposed 
changes to Sec.  120.837). To further streamline the application

[[Page 40558]]

process, SBA is proposing to delete the requirement that a multi-state 
CDC have at least three members from each State on its board. SBA 
believes that the general membership requirements (see Sec.  120.822) 
and loan committee requirements (see Sec.  120.823) for the State into 
which it is expanding are sufficient to demonstrate the CDC's 
commitment to local economic development in that State. Additionally, 
SBA is proposing to delete the requirement for public notice and for 
direct notice to all other CDCs in the proposed area of operations 
since SBA is permitting the marketplace to determine the optimum number 
of CDCs that can be supported.
    Section 120.836, public notice, and opportunity for response, would 
be deleted. SBA believes that the requirement would not be needed for 
the same reasons discussed in Sec.  120.811.
    Section 120.837, SBA decision on application for a new CDC or for 
an existing CDC to expand an area of operations, proposes to streamline 
the process by changing the paragraph on a multi-state CDC to permit 
any unilateral authority that a CDC has in its State of incorporation 
to be carried over into the additional State in which it is approved to 
operate as a multi-state CDC and clarifying SBA's decision process.
    Section 120.838, expiration of existing, temporary expansions, was 
a short-term regulation to manage the conversion of existing temporary 
expansions into permanent expansions by March 1, 1996. Because of the 
changes proposed to the rules covering areas of operation, SBA believes 
this section is no longer required and proposes its removal.
    Section 120.839, case-by-case extensions, proposes to give a 
district office the authority to make a decision concerning whether SBA 
will allow a CDC to make a 504 Loan outside of its area of operations, 
and by adding as a new basis for such decision the situation in which a 
State may not have a CDC. (For example, currently Alaska has no CDC.) 
In addition, SBA is proposing to delete the exception that would 
require the Associate Administrator for Financial Assistance (``AA/
FA'') to approve because the exception has never been used and SBA's 
experience indicates that it is unnecessary.
    In section 120.840, accredited lenders program, SBA proposes to 
substantially revise this section to describe the ALP, the benefits a 
CDC will receive through the ALP, how to apply for the ALP, and how SBA 
will process the application.
    In new Sec.  120.841, SBA proposes to establish more detailed 
qualifications for the ALP. The standards will be consistent with 
section 507 of the Act and coordinate with eligibility requirements for 
CDC participation in the PCLP (see Sec.  120.845 discussion below). 
These changes will make it easier for SBA to provide consistent and 
objective evaluation of a CDC application to participate in the ALP.
    Section 120.845, premier certified lenders program, would be 
revised. The PCLP is now a permanent program pursuant to section 508 of 
the Act. SBA proposes to add considerably more detail to Sec.  120.845 
and move some of its revised and expanded provisions to new Sec. Sec.  
120.846-120.848. Since CDCs participating in the PCLP must be approved 
to participate under the ALP or be ``ALP qualified,'' SBA proposes to 
add some of the PCLP requirements to Sec.  120.841.
    The PCLP is designed to take advantage of the proven loan 
processing and servicing skills of SBA's most proficient and most 
active CDCs. It is a relatively new program (started in 1994 as a pilot 
program) with a somewhat limited operating history. Because SBA 
transfers substantial additional authority to CDCs, the PCLP carries 
potentially significant risk to SBA and the 504 Program. Therefore, SBA 
intends to closely monitor and control its implementation and 
expansion. As a result, SBA will continue to work with the CDC industry 
to develop and publish enhanced operating policies and procedures as 
experience with the PCLP develops. While SBA intends to transfer as 
much authority and responsibility to PCLP CDCs as reasonably prudent, 
the extent of that delegation will continue to be refined over time. 
These refinements likely will address such issues as the type of 504 
Loans eligible for the PCLP, the amount of prior SBA review applicable 
to each loan, program participation criteria, and other factors.
    For example, while SBA believes that the PCLP may be most 
appropriately applied to routine 504 Loans and that particularly 
complex or problematic loans may need to be processed through standard 
504 Program procedures, SBA will continue to study and analyze this 
issue and develop further guidance as appropriate. With respect to 
SBA's prior review of a 504 Loan at the loan approval stage, SBA is 
interested in limiting/minimizing its involvement in reviewing 504 
Loans. While initially SBA expects to continue to review loan 
eligibility while delegating virtually all credit decisions to PCLP 
CDCs, SBA will consider expanding or reducing that authority as 
warranted by the results of the program.
    Participation in the PCLP, pursuant to section 508(b) of the Act, 
is limited to those CDCs that are active in the 504 Program; are in 
good standing with SBA; have demonstrated the ability to properly 
analyze, close and service 504 Loans; and have been active as ALP CDCs. 
Section 508(b)(2)(A) of the Act allows SBA to waive the requirement for 
those non-ALP CDCs that meet the ALP participation criteria. However, 
rather than developing a waiver process, SBA proposes incorporating the 
ALP participation criteria into the PCLP participation criteria (see 
Sec.  120.845(c)(1)).
    Based on the guidance in the statute, and following extensive 
discussion with the CDC industry, SBA developed more specific factors 
to be used in evaluating a CDC's level of activity; ability to properly 
analyze, close, service and liquidate 504 Loans; and good standing. 
Each factor represents a major and essential CDC function, and each 
carries significant risk to SBA and the 504 Program. Because SBA 
delegates substantial authority and autonomy to PCLP CDCs, it considers 
each factor important, and a substantive deficiency in any one may 
preclude participation in the PCLP. SBA will use information from 
onsite compliance reviews, operational reviews and other program 
management and oversight activities, including the review of 504 loan 
applications to SBA, to make the determination regarding eligibility 
for PCLP status.
    Congress, SBA and the CDC industry recognize that the success of 
the PCLP is highly dependent on the extent to which PCLP CDCs are 
familiar with SBA's credit and eligibility standards and its loan 
processing, closing, servicing and liquidation policies and procedures. 
These policies and procedures are highly complex and require processing 
a substantial volume of 504 Loans over an extended period of time to 
remain proficient. Also, SBA needs access to a significant number of a 
CDC's loans to evaluate its proficiency. SBA notes that the ALP 
requires that its participants must have processed at least 20 504 
Loans in the most recent three years (see proposed Sec.  120.841(b). 
When considering the minimum 504 Loan volume requirement for 
participation in the PCLP, SBA considered the concern of smaller and 
rural CDCs that a high minimum 504 Loan volume requirement could 
exclude them from being a PCLP CDC. SBA discussed those concerns with 
the CDC industry and concluded that proficiency in 504 Loan policies 
and procedures can only be developed and maintained from regularly 
processing a significant

[[Page 40559]]

number of 504 Loans. In addition, one of the main purposes of the PCLP 
was to improve the efficiency and expedite the loan processing of 
higher volume CDCs, which were being disproportionately impacted by the 
longer turn-around time in SBA's district offices. Also, for low volume 
CDCs, any potential efficiency benefits from participating in the PCLP 
would more than likely be offset by the cost and effort required to 
develop and maintain the high level of 504 Loan proficiency required in 
a staff that rarely processes an SBA 504 Loan. (About half of all CDCs 
process less than six 504 Loan applications per year.) After 
considering these issues, SBA proposes to require that ALP and PCLP 
applicants must have received approval for at least twenty 504 Loans in 
the most recent three years and have a portfolio of at least 30 active 
504 Loans. (SBA proposes to define an ``active'' 504 Loan as a loan 
that was approved and closed by the CDC and has a status of either 
current, delinquent, or in liquidation.)
    To assist in determining the proficiency of a PCLP applicant to 
effectively process and administer 504 Loans, SBA proposes that SBA 
conducted oversight reviews of a PCLP applicant must have found the 
applicant to be at least generally in compliance with SBA's 
regulations, policies and procedures. In addition, SBA will need to 
assess the applicant's current proficiency, so these reviews must be 
relatively recent (within the past 12 months). While SBA has policy and 
procedural guidance in place generally requiring annual SBA oversight 
review, CDCs may occasionally request a postponement of those reviews. 
Applicants to the PCLP must recognize the need for current SBA review 
data and coordinate with their Lead SBA Office to ensure that the CDC 
is available and prepared for any required oversight reviews.
    SBA has developed comprehensive management information systems to 
timely track and analyze the performance of a CDC's 504 Loan portfolio. 
As a result of an extensive examination and analysis of these 
performance data, SBA has determined that portfolio currency, 
delinquency, default, liquidation and loss rates are important measures 
of the quality of a CDC's portfolio and the effectiveness and diligence 
of its loan analysis, closing and servicing. Therefore, SBA has 
established benchmarks for each of these measures, which the large 
majority of CDCs regularly achieve. SBA proposes that PCLP applicants 
must meet SBA's established portfolio benchmarks.
    SBA and the CDC industry recognize that the training and experience 
of the PCLP applicant's staff are critical determinants of the quality 
and effectiveness of its 504 Loan program administration as well as its 
diligence in applying SBA's 504 Loan credit and eligibility standards. 
As a result, the CDC industry has developed appropriate credit, 
packaging, loan closing and loan servicing training programs, which the 
staff of many CDCs attend. As a result, SBA proposes that the principal 
staff of PCLP applicants possess adequate 504 Loan training and 
experience.
    Under the PCLP, SBA delegates authority and a certain level of 
autonomy to PCLP CDCs to process, close and service 504 Loans with only 
limited prior SBA review. As a result, SBA proposes that applicants to 
the PCLP must demonstrate a particularly thorough understanding of and 
an applied diligence to SBA's 504 Loan credit and eligibility standards 
and its 504 Loan processing, closing and servicing policies and 
procedures. A failure to consistently apply appropriate credit analyses 
and standards and loan processing, closing and servicing policies or 
procedures exposes SBA and the taxpayer to excessive risk of loss and 
negatively impacts the availability of SBA financing to the small 
business community. A CDC's failure to adequately apply SBA's 504 Loan 
eligibility standards could result in 504 Loan approvals to small 
businesses that are expressly prohibited by statute or regulation from 
receiving SBA loans.
    Section 508(b)(2)(A) requires that PCLP CDCs be in good standing 
with SBA. SBA interprets that requirement to mean both in good standing 
with the State in which the CDC is incorporated (as discussed in Sec.  
120.820), and in compliance with the 504 Program requirements imposed 
by statute, regulation, SOP, policy and procedural notice, loan 
authorization, debenture, or any agreement between SBA and the CDC. 
Under the PCLP, due to the higher level of authority delegated to the 
PCLP CDCs and the potential risk to the Agency, SBA expects a 
significantly higher level of compliance with both of these 
requirements by PCLP CDCs, with only very rare deviation. SBA sees a 
similar distinction between non-PCLP CDCs generally meeting SBA's five 
established portfolio benchmarks versus virtually absolute compliance 
by PCLP CDCs with those benchmarks.
    The Lead SBA Office would consider the CDC's initial application to 
the PCLP, and will forward the application package, including a 
recommendation regarding the applicant's qualifications, to SBA's PCLP 
Processing Center, which then will forward the package with its 
recommendation to the AA/FA for final action. PCLP applicants are 
expected to coordinate with their Lead SBA Office early in their 
consideration of the PCLP to realistically assess its requirements and 
their prospects for admission. When officially applying for the PCLP, 
an applicant will need to provide certain essential information and 
documentation to assist SBA in ascertaining its qualifications, 
including a resolution from its Boards of Directors; resumes on key 
staff for 504 Loan processing, servicing, liquidation, and litigation; 
documentation of any required insurance; and information about the 
qualifications of its closing attorney. While SBA will generally confer 
PCLP status for a period of two years, under some conditions (such as 
borderline performance benchmarks, certain compliance review 
deficiencies, etc.) SBA may determine that a lesser period is 
appropriate.
    Section 120.846, requirements for maintaining and renewing PCLP 
status, would be added. Pursuant to section 508(b)(3) of the Act, in 
order to retain its PCLP status, a PCLP CDC must continue to meet the 
eligibility requirements of the PCLP, as proposed in Sec.  120.845. 
While level of activity is one of those criteria, section 508(i) of the 
Act requires that PCLP CDCs establish a goal of processing a minimum of 
50 percent of their 504 Loan applications using PCLP procedures. SBA 
considered establishing a requirement that PCLP CDCs process at least 
30 percent of their 504 Loans using PCLP procedures immediately after 
becoming a PCLP CDC and gradually increasing that requirement as the 
PCLP CDCs matures. However, following discussions with the CDC 
industry, SBA determined that immediately establishing such an absolute 
minimum could discourage participation in what is a developing program 
with a variety of relatively new concepts and procedures. Nevertheless, 
SBA recognizes that the legislation authorizing PCLP mandates that PCLP 
CDCs be active CDC lenders and establish a goal of processing a minimum 
of 50 percent of their 504 Loans using PCLP procedures. As a result, 
while SBA still expects PCLP CDCs to process a substantial proportion 
of their 504 Loans using PCLP procedures and strive to reach their 50 
percent goal as mandated by statute, SBA will not immediately require 
an absolute minimum. Thus, as the PCLP matures, SBA intends to publish 
procedural guidance gradually

[[Page 40560]]

incorporating and increasing the minimum number and percent of 504 
Loans that PCLP CDCs must process using PCLP procedures.
    Due to the delegation of authority under the PCLP, and the 
associated risk of loss, SBA expects PCLP CDCs to develop, implement 
and actively monitor effective internal control systems and processes 
that will ensure continued conformance with the requirements of the 
PCLP. These systems should provide PCLP CDCs with early information on 
their performance. SBA also has developed management control systems to 
monitor individual PCLP CDCs, specifically the portfolio benchmark data 
and the management oversight reviews, and SBA provides this information 
to PCLP CDCs. With these internal and external control systems, SBA 
expects PCLP CDCs to constantly monitor their performance as a CDC and 
as a PCLP CDC and to be in a position to take appropriate and timely 
corrective action when necessary. Due to the risk inherent in the 
delegation of authority under the PCLP, SBA will move to timely 
suspend, terminate or decline to renew the PCLP status of PCLP CDCs 
that do not comply with the requirements of the PCLP. Significant 
problems with respect to liquidation and litigation activities by 
either a PCLP CDC or its contractor may, at SBA's option, also lead to 
suspension, termination, or the non-renewal of PCLP status. In 
egregious cases of a PCLP CDC's failure to comply with PCLP 
requirements, SBA also can issue an immediate suspension, under the 
proposed rule. In recommending a suspension or termination from the 
PCLP, SBA proposes to provide timely written notice to the PCLP CDC of 
its intention and the basis for the recommendation. The proposed 
regulations also delineate a PCLP CDC's appeal rights and reapplication 
time frames.
    Section 120.847, requirements for the loan loss reserve fund, would 
be added. To mitigate some of the potential risk of delegating 
additional authority to PCLP CDCs, pursuant to section 508(c)(1) of the 
Act, PCLP CDCs must establish and make deposits to a Loan Loss Reserve 
Fund (``LLRF''). The LLRF is a restricted account established for the 
purpose of accumulating deposits and limiting withdrawals to those SBA 
specifically authorizes. The PCLP CDC may use the deposits to reimburse 
SBA for 10 percent of any loss sustained by SBA as a result of a 
default in the payment of principal or interest on a debenture issued 
by the PCLP CDC using PCLP procedures (``PCLP debenture''). Pursuant to 
section 508(c)(3) of the Act, the LLRF must be composed of: (1) 
Segregated deposit accounts at one or more federally insured depository 
institutions subject to a collateral assignment to SBA; (2) irrevocable 
letters of credit in favor of SBA; or (3) some combination of the 
above. Due to the characteristics and cost of letters of credit, and in 
consultation with the CDC industry, SBA has determined that letters of 
credit do not currently represent a feasible option for PCLP CDCs. 
Consequently, SBA is not addressing letters of credit in this proposed 
rule. However, SBA will continue to explore this option with the CDC 
industry, and will promulgate regulations addressing letters of credit 
to the extent this becomes a feasible option.
    Pursuant to section 508(b)(2)(c) of the Act, PCLP CDCs must 
reimburse SBA for 10 percent of any loss SBA incurs in connection with 
a default on a PCLP debenture and the regulation proposes what is to be 
included in SBA's loss. The statute and proposed rule also require that 
the LLRF maintain a deposit equal to one percent of the original 
principal amount of each PCLP debenture.
    The LLRF must be a deposit account with a federally insured 
depository institution selected by the PCLP CDC. Following discussions 
with the CDC industry, SBA is aware that alternative accounts and 
financial instruments may offer greater returns on the LLRF. However, 
the Act restricts LLRFs to federally insured depository institutions 
and that language as well as other applicable law greatly limit the 
investment alternatives. This proposed regulation elaborates on what 
constitutes a deposit account acceptable to SBA. Also, to simplify the 
administration of the LLRF, this proposed regulation would allow PCLP 
CDCs to pool loss reserves in a single segregated account. SBA 
generally does not anticipate that PCLP CDCs will incur significant 
fees in connection with their LLRFs, although PCLP CDCs will need to be 
mindful of breakage fees, should they place funds into certificates of 
deposit (``CDs''). This proposed regulation goes on to make clear that 
the PCLP CDC will be responsible for any fees, costs and expenses 
incurred in connection with the LLRF.
    Pursuant to section 508(c)(3) of the Act, any LLRF established by a 
PCLP CDC must be subject to a collateral assignment in favor of, and in 
a format acceptable to, SBA. Accordingly, a PCLP CDC must give SBA a 
first priority perfected security interest in each LLRF. The PCLP CDC 
must grant the security interest pursuant to a security agreement 
between the PCLP CDC and SBA, and the security interest must be subject 
to a control agreement between SBA, the PCLP CDC, and the applicable 
depository institution. The control agreement will include provisions 
requiring a depository institution to follow instructions from SBA 
regarding withdrawals without further consent from the PCLP CDC. The 
laws governing security interests in deposit accounts are complex, vary 
by jurisdiction and are undergoing change. Therefore, when establishing 
a LLRF, a PCLP CDC must coordinate with the Lead SBA Office to develop, 
execute and deliver the required documentation. SBA field counsel will 
have a model control agreement, which they may need to modify to meet 
local legal requirements. This proposed rule provides that the CDC must 
provide to the Lead SBA office a fully executed original copy of the 
security and control agreements which the Lead SBA Office will retain 
in its files. All associated documents must meet SBA requirements and 
occasional changes may be necessary. If a depository institution will 
not enter into or modify a control agreement or violates the terms of 
any such agreement, the PCLP CDC cannot maintain a LLRF with that 
institution.
    Pursuant to section 508(c)(4) of the Act, PCLP CDCs are allowed to 
make required deposits to the LLRF associated with each loan in as many 
as three deposits, but specifies the minimum amount and timing of those 
deposits. This proposed rule sets forth the amount and timing of those 
deposits.
    Due to its management control and oversight responsibilities, SBA 
must ensure that LLRFs (1) are properly established, (2) contain the 
required reserve amounts and (3) are appropriately administered and 
controlled. Periodic reporting by PCLP CDCs to SBA on the amount of 
funds maintained in LLRFs is critical to ensuring that LLRFs are 
properly established and maintained. However, while LLRFs must contain 
deposits equal to one percent of each PCLP debenture, the deposits 
associated with each PCLP debenture may be made in as many as three 
installments. Also, during the normal course of a PCLP CDC's 
operations, LLRFs will be subject to a variety of other deposits and 
withdrawals (e.g., withdrawals associated with loans paid in full and 
defaults). As a result, reporting and reconciling LLRFs might become 
quite complex. SBA is concerned with the potential burden such 
reporting could represent to PCLP CDCs. SBA continues to work with the 
CDC industry to

[[Page 40561]]

develop and test efficient and effective reporting procedures, and will 
publish appropriate procedural guidance as those procedures are 
finalized.
    SBA proposes to allow PCLP CDCs to withdraw any funds from the 
LLRFs that exceed required minimums, at SBA's discretion. The proposed 
Sec.  120.847(g) provides that requests for withdrawals must be 
forwarded to the Lead SBA Office, which will check the balances to 
ensure the required minimums are maintained and authorize withdrawals 
as appropriate.
    Proposed Sec.  120.847(h) would provide that when a PCLP CDC has 
submitted a liquidation wrap-up report to SBA, or SBA otherwise has 
determined that all reasonable collection efforts have been exhausted, 
the Lead SBA Office will calculate the SBA's loss and notify the PCLP 
CDC of the amount of any reimbursement obligation and provide 
appropriate supporting documentation. The proposed role sets forth 
procedures so that PCLP CDCs may appeal any problems or disagreements 
regarding the calculation of SBA's loss.
    Proposed Sec.  120.847(i) would require PCLP CDCs to reimburse SBA 
for 10 percent of any loss and states that the reimbursement may come 
from the LLRF or from other funds provided by the PCLP CDC. There could 
also be instances where a PCLP CDC would not have sufficient funds in 
its LLRF to reimburse SBA for 10 percent of SBA's loss, and the 
regulation proposes to provide the PCLP CDC a reasonable period of time 
after SBA demand to reimburse the Agency.
    Pursuant to section 508(c)(5), the proposed regulations would also 
require that should a PCLP CDC's LLRF drop below the required minimum, 
the PCLP CDC must replenish the LLRF within 30 days of the time that it 
realizes this deficiency or of a notice from SBA that the LLRF is 
deficient. Thus, if a depository institution offsets from any LLRFs 
maintained with the institution any amounts owing by the PCLP CDC to 
it, the PCLP CDC must replenish the LLRF to the full amount then 
required within 30 days.
    Section 120.848, requirements of PCLP loan processing, closing, 
servicing, liquidating and litigating, would be added. SBA believes 
that the PCLP can be most prudently implemented and expanded if SBA 
focuses, at least initially, on expediting the processing of routine 
CDC loan applications under the PCLP and handling complex or 
problematic eligibility issues using standard 504 Loan procedures. 
However, SBA will continue to study and analyze this issue and develop 
further guidance as the PCLP progresses.
    Pursuant to Sec.  508(e) of the Act, PCLP CDCs are permitted to 
approve, authorize, and close 504 Loans, subject to standards 
established by SBA. Proposed Sec.  120.848 provides additional guidance 
and notes that all 504 Program requirements apply to 504 Loans 
processed by PCLP CDCs. PCLP CDCs are specifically authorized to 
determine a 504 Loan applicant's credit-worthiness and are permitted to 
establish the terms and conditions under which the loan will be made. 
The PCLP CDC also will be authorized to take other processing actions 
as may be delegated by SBA to PCLP CDCs. However, because SBA's 
management control and oversight responsibilities require a systematic 
review of a PCLP CDC's 504 loan processing proficiency, SBA must 
periodically review the processing actions of PCLP CDCs to ensure the 
PCLP CDC is using appropriate and reasonable procedures. PCLP CDCs are 
thus expected to retain in their loan files copies of all documents 
associated with their processing actions. SBA may occasionally review 
these documents on site or request that they be forwarded to SBA for 
review. If SBA identifies significant problems or deviations from SBA's 
504 Program requirements, SBA will take appropriate corrective action, 
including possible removal from the PCLP.
    The proposed rule also would require the authorized PCLP CDC 
official to sign all required documents and forward them to SBA's 
designated loan processing center for assignment of a loan number, 
subject to the availability of funds.
    The PCLP CDC then would be expected to take appropriate action to 
close the loan and to prepare the closing documents for the 
corresponding debenture its closing counsel must issue an opinion 
stating the legal sufficiency of all closing documents, that all 
documentation has been obtained to comply with the loan terms and 
conditions established by the PCLP CDC and that the loan closing 
complies with all legal requirements and all 504 Program requirements 
for the PCLP. These actions are complex and will require the opinion of 
a qualified loan closing counsel. SBA counsel will close the PCLP 
debenture.
    Pursuant to section 508(e) of the Act, SBA may delegate to PCLP 
CDCs responsibility for servicing 504 Loans, subject to terms and 
conditions as established by SBA. To enhance the efficiency of the 
PCLP, SBA intends to delegate most routine servicing actions to PCLP 
CDCs. However, SBA retains management oversight responsibility for the 
effectiveness of the PCLP. Therefore, SBA will continue to monitor the 
quality and effectiveness of PCLP CDC servicing activities through 
onsite reviews and other evaluation activities. As a result, should 
significant problems develop, or when it substantially benefits SBA or 
the PCLP CDC, SBA may elect to handle some or all servicing actions 
associated with a particular 504 Loan or a particular PCLP CDC 
portfolio. However, SBA anticipates such actions to be rare and 
unusual. In delegating servicing authority to PCLP CDCs, SBA proposes 
that PCLP CDCs must use prudent and commercially reasonable standards 
and practices, as well as comply with all 504 Program requirements.
    SBA is proposing to delete Sec. Sec.  120.850-120.852, concerning 
ADCs, and to eliminate the ADC designation. First, SBA is seeking to 
eliminate redundancy in the regulations. One aspect of the ADC program 
was that it established requirements for organizations to qualify to 
contract with CDCs for 504-related services. However, Sec.  120.824 
permits CDCs to contract for 504-related services and governs such 
contracts. Second, these regulations established one of the grounds 
(not meeting the minimum required level of 504 Loan approval activity) 
for removing a CDC from the 504 Program. In the proposed rule, all 
grounds for taking enforcement action against a CDC would be combined 
under one regulation, Sec.  120.854.
    Section 120.855, CDC ethical requirements, would be redesignated as 
Sec.  120.851, and reworded to clarify its meaning and to remove the 
reference to ADCs (see Sec.  120.850 discussion).
    Proposed new Sec.  120.852 would prohibit a CDC from investing in 
or being affiliated with a 7(a) lender or an SBIC, which SBA believes 
will help to avoid apparent conflicts of interest and serve the 
economic development mission of the CDC. The proposed rule would not 
require a CDC with an existing investment in an SBIC to liquidate such 
investment. As part of the ANPRM, SBA asked the question whether SBA 
should permit a CDC to establish a 7(a) lender or permit a 7(a) lender 
to establish a CDC. The overwhelming response was that two programs 
should remain separate.
    Proposed new Sec.  120.853 is identical to existing Sec.  120.973 
except that it would eliminate references to ADCs.
    Proposed new Sec.  120.854, grounds for taking enforcement action 
against a CDC, Sec.  120.855, types of enforcement actions, and Sec.  
120.856, enforcement procedures, would consolidate existing

[[Page 40562]]

Sec.  120.852 and Sec. Sec.  120.982-120.984 and would clarify the 
grounds required for SBA enforcement actions against CDCs as well as 
SBA's and CDCs' rights and responsibilities in such actions. Section 
120.981, voluntary transfer and surrender of CDC certification, would 
be redesignated as Sec.  120.857 to move it under the new heading.
    Section 120.861, job creation or retention, is revised (see 
discussion of proposed revisions to Sec.  120.829 for a description of 
the changes to the job requirement criteria). The change in the 
criteria will be published in a Federal Register notice from time to 
time.
    Section 120.862, other economic development objective, includes two 
technical changes. The first is the Agency-wide replacement of ``SIC'' 
codes with ``NAICS'' codes when identifying the types of small 
businesses eligible to receive SBA assistance. The second is to correct 
the cross-reference to the regulation that describes a minority for 
purposes of the public policy goal of assisting minority-owned 
businesses. The proposed changes also reflect the statutory changes to 
section 501(d) of the Act, which added women-owned and veteran-owned 
businesses to the public policy goals.
    Section 120.870, leasing project property, would eliminate 
references to 504 project property being leased by the CDC to the 
borrower.
    Section 120.880, basic eligibility requirements, proposes 
simplifying changes by replacing the actual size standards with a 
cross-reference to the size standard regulation. As the size standard 
regulations change, so will this regulation without requiring it to be 
re-written.
    Section 120.882, eligible project costs for 504 loans, proposes 
clarifying eligible costs that may be included in 504 project costs.
    Section 120.883, eligible administrative costs for 504 loans, 
proposes changes clarifying eligible administrative costs that may be 
paid from the proceeds of the 504 Loan and debenture.
    Section 120.892 would be revised to require a 504 loan borrower to 
provide to the CDC current financial statements within 120 days of 504 
loan closing, instead of within 90 days.
    SBA proposes to change the headings of Sec. Sec.  120.900 and 
120.910 to make their form consistent with the other section headings 
in subpart H.
    Section 120.911, land contributions, proposes to make a technical 
correction to the regulation by deleting the reference to CDCs. CDCs do 
not contribute land for a 504 loan.
    Section 120.913, limitations on any SBIC contributions, proposes 
changes to clarify the heading, and to add a cross-reference and 
clarify the section.
    Section 120.923, policies on subordination, proposes changing the 
section heading and consolidating existing Sec. Sec.  120.923 and 
120.924.
    Section 120.925, preferences, proposes adding a cross-reference to 
another SBA regulation governing preferences.
    Section 120.926, referral fee, proposes modifying the language by 
adding ``reasonable'' in describing the referral fee that a CDC may 
charge a third party lender. The proposed changes also emphasize that 
neither the lender nor the CDC can charge this fee to the borrower.
    Section 120.930, amount, proposes eliminating the requirement that 
SBA must approve 504 loans between $25,000 and $50,000 on an exception 
basis. SBA does not believe that it ever has declined such a request.
    Section 120.931, 504 lending limits, proposes increasing the dollar 
amounts to reflect the changes to section 502(2) of the Act that became 
effective December 21, 2000.
    Section 120.933, maturity, proposes creating flexibility in 
debenture maturities. This will permit SBA to consider other maturities 
besides 10 and 20 years at some future date.
    Section 120.934, collateral, proposes clarifying the paragraph by 
rearranging and re-wording the sentences.
    Section 120.935, deposit, proposes changing the heading.
    SBA proposes to delete section 120.936, subordination to CDC. SBA 
believes that this regulation is a holdover from the former 501 and 502 
programs. SBA knows of no instance when a CDC has requested a 
subordination on its 504 Loans.
    Section 120.960, responsibility for closing, proposes clarifying 
language that describes the circumstances under which SBA can decline 
to close a debenture or cancel its guarantee of the debenture prior to 
sale.
    Section 120.970, servicing of 504 loans and debentures, proposes 
clarifying language regarding a CDC's responsibility in servicing a 504 
loan.
    Section 120.971, allowable fees paid by borrower, proposes 
clarifying language regarding the loan closing fees that a CDC may 
charge.
    Section 120.972, third party lender participation fee and CDC fee, 
proposes revising the heading, deleting the language ``from the Third 
Party Lender'' from paragraph (a), and slightly clarifying paragraph 
(b). SBA accepts the third party lender participation fee from the 
third party lender, the 504 borrower, or the CDC.
    SBA proposes to remove Sec. Sec.  120.980-120.984.

Specific Comments Requested

    SBA is considering reordering the entire subpart H, and SBA invites 
comments specifically responding to this proposal. SBA is considering 
whether renumbering the regulations within subpart H would better 
highlight the purposes of the 504 Program and the requirements 
pertaining to 504 Loans. SBA is considering reordering the sections 
into the following topic areas in the following new order:

Purpose
How a 504 project is financed
Definitions
Project economic development goals
Loan-making policies specific to 504 loans
Leasing policies specific to 504 loans
Interim financing
Permanent financing
Borrower's contribution
Third party loans 504 loans and debentures
Fees
504 loan and debenture closings
Servicing
Debenture sales and service agents
CDC requirements
Accredited lenders program (ALP)
Premier certified lenders program (PCLP)
Other CDC requirements
SBA oversight of CDCs
CDC transfer, suspension, and revocation
Enforceability of 501, 502, and 503 loan and other laws

SBA would be interested in comments concerning whether renumbering the 
sections using this scheme would enhance the organization of the 
Subpart enough to outweigh any confusion it might create in the CDC 
industry and among borrowers, borrower counsel, and CDC counsel. SBA 
also would be interested in any other re-ordering proposals commenters 
may have.
    SBA also generally invites comment on all aspects of this proposed 
rule, including the underlying policies. SBA may rely on its own 
expertise in promulgating the final rule. Submitted comments will be 
available to any person or entity upon request.

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)

    Executive Order 13132: For the purposes of Executive Order 13132, 
SBA determined that this proposed rule has no federalism implications 
warranting preparation of a federalism assessment.
    Executive Order 12866: The Office of Management and Budget (OMB) 
has

[[Page 40563]]

determined that this proposed rule constitutes a significant regulatory 
action under Executive Order 12866. SBA believes there is a need for 
this regulatory action for the reasons stated in the preamble to this 
proposed rule. SBA believes the proposed regulatory changes will 
improve 504 Program delivery to small business customers by increasing 
customer choice of service; increase third party lender choice of CDCs; 
facilitate the formation of new CDCs; facilitate the expansion of 
existing CDCs; and increase the number of CDCs able to take advantage 
of special initiatives for rural areas. By allowing market-driven 
forces to determine availability of 504 Program service, small business 
will have greater opportunity to negotiate the best total financing 
package, including fees, as well as receive increased service by CDCs. 
In addition, the 504 Program will be more responsive to changes in 
market conditions. SBA believes that there are no viable alternatives 
to these changes that would produce similar positive results without 
imposing an additional burden on SBA or the public. However, SBA 
requests comment from members of the public who believe there are 
viable alternatives that would achieve the same objectives with no 
greater burden.
    In FY2002, OMB developed the Program Assessment Rating Tool (PART) 
to establish a systematic, consistent process for rating the 
performance of programs across the federal government. The 504 Program 
was evaluated under the PART criteria in FY2002. The PART review 
revealed that SBA needs to increase the availability of CDCs within the 
504 Program to improve customer access to loans. Additionally, 
increasing the availability of CDCs will enable borrowers to determine 
which of SBA's loan programs best meet their needs. SBA expects that 
this proposed rule will address this recommendation of OMB.
    SBA does not have sufficient data to establish a baseline in order 
to measure the costs and benefits of this proposed rule on the affected 
public. However, SBA has data on the cost to SBA of the 504 Program. In 
FY2002, the cost of the 504 Program to SBA was approximately $15 
million. The majority of the cost of the Program, 82% or $12.6 million, 
was for the cost of the field office staff support that reviewed and 
approved loan applications and conducted marketing and outreach to 
generate new loans. The cost of the 504 Program to SBA also includes 
the cost of reviewing and analyzing CDC requests to expand their areas 
of operations by SBA's field office and Headquarters staff. SBA would 
expect this cost to decline substantially as a result of this proposed 
rule because it permits all CDCs to operate at least throughout their 
State of incorporation. Other data on the program can be found at 
www.sba.gov. SBA requests data from the public that would enable SBA to 
determine existing regulatory costs of the program to the public and 
changed costs and benefits as a result of the proposed rule.
    Regulatory Flexibility Act: This proposed rule directly affects all 
CDCs, of which there are approximately 270. SBA has determined that 
CDCs fall under the size standard for NAICS 522298, All Other 
Nondepository Credit Intermediation. The size standard is $6 million in 
average annual receipts. SBA estimates that at least 95 percent of the 
CDCs do not exceed this size standard and are therefore considered 
small entities by this definition. Thus, SBA has determined that this 
proposed rule will have an impact on a substantial number of small 
entities. However, SBA has determined that such impact will not be 
significant.
    The effect of the proposed rule will be to ``level the playing 
field'' by allowing CDCs more flexibility to choose the optimal area of 
operations within their State of incorporation. Currently, each CDC has 
a specific area of operations that is approved by SBA. The typical area 
of operations is several counties within the CDC's State of 
incorporation. If a CDC wishes to apply to expand into neighboring 
counties, it can only do so if those counties are available. Currently, 
a county is available to a new CDC or a CDC requesting to expand its 
area of operations if the CDC(s) that include that county in its area 
of operations is not meeting a threshold of one 504 approval per year 
per 100,000 population averaged over two years. If the existing CDC is 
meeting this threshold of activity, both an applicant wishing to become 
a CDC and a CDC wishing to expand its area of operations is barred from 
including that county in their request. The proposed rule levels the 
playing field by eliminating this threshold and by permitting all CDCs 
to operate anywhere in their State of incorporation. SBA believes that 
some CDCs will choose to continue to operate in those counties they 
presently operate in while others will choose to expand their market 
area into neighboring counties or throughout the State. It has been 
SBA's experience with CDCs that are permitted to compete with other 
CDCs in the same market area, that the market of eligible 504 Loan 
projects itself expands, resulting in a benefit for the affected CDCs 
as well as a benefit to small business borrowers.
    This proposed rule will also permit new CDCs the opportunity to 
market in areas that may produce more 504 loans sooner. This in turn 
will permit the new CDC to reach a breakeven point sooner in its 
operations and continue to meet the required 504 activity of two 504 
approvals per year. Currently it is estimated that it takes a CDC at 
least two years at a cost of $200,000 or more to reach the 504 activity 
level where the 504 fee income covers the CDC's expenses. SBA believes 
that smaller, rural CDCs will derive a similar benefit by having a 
greater opportunity to meet the required 504 loan activity level. Since 
1993, SBA has had to revoke certifications from more than 100 CDCs and 
transfer their 504 loan portfolios and fees to other, active CDCs due 
to their failure to meet the required 504 activity level of two 504 
loan approvals per year averaged over two years. Most of these CDCs 
have been located in rural areas where there are a limited number of 
potential 504 Loan projects. This proposed rule will enable those 
small, rural CDCs the opportunity to expand their market area by doing 
projects in more populous areas, resulting in their more easily meeting 
the 504 loan activity level. At the same time those CDCs that currently 
have exclusive areas that include populous urban areas resulting in 
substantial 504 loan activity may seek to expand their market areas 
into the less lucrative rural areas. The expected result is that future 
504 borrowers will benefit from an increase in choice among CDCs.
    In addition, SBA expects the impact of the proposed rule will be a 
reduction in the overall paperwork burden for CDCs since CDCs will no 
longer have to apply to SBA to expand their area of operations within 
their State of incorporation. SBA received and approved approximately 
11 expansion requests during 2002. All were for CDCs requesting 
expansions into neighboring counties within the CDC's State of 
incorporation. The burden hours for a new CDC or a CDC wishing to 
expand to complete an application is estimated to be 10 hours. None of 
the applications for an expansion would have been necessary under the 
proposed rule. In addition, applicants requesting to become CDCs also 
will be permitted to establish their optimal area of operations within 
their State of incorporation without being excluded from areas that 
currently have one or more CDCs. SBA receives one or two applications 
to become a CDC per year. The burden hours for an application will be 
reduced by approximately one hour due to the changes in the general

[[Page 40564]]

membership requirements that will allow an applicant more flexibility 
in meeting this requirement. SBA asserts that the economic impact of 
the reduction in paperwork, if any, will be minimal to small entities.
    Finally, it has been SBA's experience that the more CDCs that 
market the 504 program in a particular area, the higher the 504 Loan 
volume in that area. SBA believes that this is due to the additional 
marketing initiatives by the CDCs which creates an increased awareness 
of the 504 Program among the local lending community and improves their 
willingness to participate because they have a choice. SBA also 
believes having multiple CDCs in the area improves the service provided 
by the CDCs, which also makes the 504 Program more useful to the 
commercial banking community. As more and more bankers successfully use 
the program, they discuss it and provide information about it to other 
bankers which increases the impact of the marketing efforts of the 
CDCs. A similar phenomenon occurred in the banking industry. Over the 
years, bankers participating in SBA's 7(a) program have always been 
willing to come to bankers' meetings to describe their activity with 
other bankers. They do this because they recognize that as more people 
are aware of the program, the size of the market will increase. They 
may not have as high a percentage of the market but will have a smaller 
percentage of a bigger market resulting in more overall loan activity 
for the lender.
    Accordingly, SBA hereby determines that this 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. 
SBA invites comment from members of the public who believe there will 
be a significant economic impact on a substantial number of small 
entities.
    Paperwork Reduction Act: SBA has determined that this proposed rule 
imposes additional reporting or recordkeeping requirements under the 
Paperwork Reduction Act, 44 U.S.C. chapter 35. This collection of 
information relates to two different reporting requirements: (1) The 
PCLP application and (2) the PCLP Loan Loss Reserve Fund reporting 
requirements. We include below an estimate of the time necessary to 
review the instructions, search data, fill in the forms, and gather, 
maintain and report the required data.
    SBA invites comments on: (1) Whether the proposed collection of 
information is necessary for the proper performance of SBA's functions, 
including whether the information will have a practical utility; (2) 
the accuracy of SBA's estimate of the burden of the proposed 
collections of information, including the validity of the methodology 
and assumptions used; (3) ways to enhance the quality, utility, and 
clarity of the information to be collected; and (4) ways to minimize 
the burden of the collection of information on respondents, including 
through the use of automated collection techniques, when appropriate, 
and other forms of information technology.
    Please send comments by the closing date for comment for this 
proposed rule to David Rostker, Office of Management and Budget, Office 
of Information and Regulatory Affairs, 725 17th Street, NW., 
Washington, DC 20503 and to LeAnn Oliver, Deputy Associate 
Administrator for Financial Assistance, Office of Financial Assistance, 
Small Business Administration, 409 Third Street, SW., Washington, DC 
20416.

A. Application

    Title: CDC Checklist for Submitting PCLP Guarantee Requests (Part 
A); Supplemental Information for PCLP Processing (Part B); Eligibility 
Information Required for PCLP Submissions (Part C); How to Apply for a 
PCLP Number from SBA (instructions); and Instructions for 
``Supplemental Information for PCLP Processing'' (No SBA form no. yet) 
(An application for OMB clearance is being submitted under separate 
cover.)
    Summary: The PCLP application form is designed for PCLP CDCs. Under 
PCLP, the CDC is delegated the authority to (1) determine whether the 
proposed borrower poses an acceptable credit risk and (2) limiting 
SBA's determination of eligibility to a checklist filled in by the CDC. 
The other forms that make a complete PCLP application package are data 
collection forms to enable SBA to enter descriptive information about 
the borrower into SBA's database, and two pages of ``Application for 
Section 504 Loan,'' SBA Form 1244 (OMB Approval No. 3245-0071) that 
include information about the borrower as well as the signature page 
regarding CDC Agreements and Certifications.
    Need and Purpose: Under standard SBA 504 Loan processing, SBA 
extensively analyzes the financing proposal and supporting 
documentation such as personal and business financial statements, cash 
flow projections and documentation to support an eligibility 
determination. These activities are designed to control and limit the 
risk associated with the 504 Program and SBA's guaranty, but they do 
require significant SBA resources. The time between submission of the 
504 application to SBA and SBA making a decision to approve or deny the 
application can be several days to several weeks. If the loan defaults, 
SBA assumes 100 percent of the cost associated with the purchase of the 
debenture as well as costs associated with collection and liquidation 
activities. Under the PCLP, the CDC makes the credit decision regarding 
the application and submits an abbreviated eligibility checklist for 
SBA's review to determine eligibility. The time between submission of 
an application by the PCLP CDC and SBA making a decision is generally 
an hour or less. In exchange for this quick turn-around time by SBA, 
the PCLP CDC assumes 10 percent of any loss to SBA on any loan 
processed under the PCLP.
    Description of Respondents: CDCs that qualify as PCLP CDCs. There 
are approximately 270 CDCs. Of those, 26 CDCs are PCLP CDCs. The number 
of PCLP CDCs has remained relatively static for several years. In FY 
2002, 14 percent of the number of loans and 15 percent of the approved 
dollars were processed PCLP. For fiscal year 2003, year-to-date 
(through May 9, 2003), the percentage has dropped to 12 percent in the 
number of loans and 12 percent of the approved dollars.
    SBA estimates the burden of this collection of information as 
follows: A PCLP CDC will complete these forms for each PCLP loan it 
processes. SBA estimates that the time needed to complete this 
collection is 45 minutes. SBA estimates that the cost to complete this 
collection will be approximately $20 per hour due to the clerical 
nature of most of the completion. Total estimated aggregated burden per 
annum is estimated to be approximately 700 hours per annum costing an 
aggregated $14,000 per year.

B. LLRF Compliance Information

    Title: LLRF Compliance Information (No SBA Form Number)
    Summary: The LLRF compliance information will document the PCLP 
CDC's meeting of the LLRF deposit requirements.
    Need and Purpose: Proposed Sec.  120.847(f) of SBA regulations 
states that each PCLP CDC must periodically report to SBA the amounts 
in its LLRF in a form that will readily facilitate reconciliation of 
the amounts maintained in its LLRF with the amounts required. This will 
require the PCLP CDC to keep track of the face amount of each PCLP 
debenture and then determine and record the amount

[[Page 40565]]

that must be contributed into its LLRF. Pursuant to the proposed 
regulations (Sec.  120.847(e)) the PCLP CDC has several deadlines 
related to when those contributions relating to each PCLP debenture 
must be made. There are three relevant deadlines for each PCLP 
debenture. The PCLP CDC must also keep track of its contributions to 
the LLRF.
    Description of Respondents: There are approximately 270 CDCs. Of 
those, there are approximately 26 PCLP CDCs, or less than 10 percent of 
all CDCs.
    SBA estimates the burden of this collection of information as 
follows: one hour per PCLP debenture. PCLP debenture volume will vary 
significantly among participants. We expect that few PCLP CDCs will 
issue more than 50 PCLP debentures annually. That would mean an 
aggregate burden of no more than 50 hours per year. SBA estimates that 
the added cost would be minimal, because existing PCLP CDC support 
staff and ordinary bank records will cover the labor costs. At an 
estimate of $10 per hour, the reporting requirements would not likely 
exceed $500 per year for any PCLP CDC.
    Executive Order 12988: For purposes of Executive Order 12988, SBA 
determines that this proposed rule is drafted, to the extent 
practicable, to accord with the standards set forth in paragraph 3 of 
that Order.

List of Subjects in 13 CFR Part 120

    Loan Programs--business, Reporting and recordkeeping requirements, 
Small business.

    For the reasons set forth in the preamble, SBA 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), 636(a) and (h), 696(3) and 
697(a)(2).

    2. Amend Sec.  120.10 by adding a definition of ``SOP'' to read as 
follows:


Sec.  120.10  Definitions.

* * * * *
    SOPs are SBA Standard Operating Procedures, as issued and revised 
by SBA from time to time.

Subpart A--Policies Applying to All Business Loans

    2. Revise the first sentence of the introductory text of Sec.  
120.140 to read as follows:


Sec.  120.140  What ethical requirements apply to participants?

    Lenders, Intermediaries, and CDCs (in this section, collectively 
referred to as ``Participants''), must act ethically and exhibit good 
character. * * *

Subpart H--Development Copmpany Loan Program (504)

    3. Revise the heading of Sec.  120.800 to read as follows:


Sec.  120.800  The purpose of the 504 program.

    4. Revise the heading of Sec.  120.801 to read as follows:


Sec.  120.801  How a 504 Project is financed.

    5. Amend Sec.  120.802 by removing the definition of ``Associate 
Development Company''; revising the definition of ``Area of 
Operations''; adding definitions of ``Designated Attorney'', ``Lead SBA 
Office'', ``Priority CDC'', and revising the first sentence of the 
definition of ``Local Economic Area'', to read as follows:


Sec.  120.802  Definitions.

* * * * *
    Area of Operations is the geographic area where SBA has approved a 
CDC's request to provide 504 program services to small businesses on a 
permanent basis. The minimum Area of Operations is the State in which 
the CDC is incorporated.
* * * * *
    Designated Attorney is the CDC closing attorney that SBA has 
approved to close loans under an expedited closing process for a 
Priority CDC.
* * * * *
    Lead SBA Office is the SBA District Office designated by SBA as the 
primary liaison between SBA and a CDC and with responsibility for 
managing SBA's relationship with that CDC.
* * * * *
    Local Economic Area is an area, as determined by SBA, that is in a 
State other than the State in which an existing CDC (or an applicant 
applying to become a CDC) is incorporated, is contiguous to the CDC's 
existing Area of Operations (or the applicant's proposed Area of 
Operations) of its State of incorporation, and is a part of a local 
trade area that is contiguous to the CDC's Area of Operations (or 
applicant's proposed Area of Operations) of its State of incorporation. 
* * *
    Priority CDC is a CDC certified to participate on a permanent basis 
in the 504 program (see Sec.  120.812) that SBA has approved to 
participate in an expedited 504 loan and Debenture closing process.
* * * * *
    6. Revise Sec.  120.810 to read as follows:


Sec.  120.810  Applications for certification as a CDC.

    (a) An applicant for certification as a CDC must apply to the SBA 
District Office serving the jurisdiction in which the applicant has or 
proposes to locate its headquarters (see Sec.  101.103 of this 
chapter).
    (b) The applicant must apply for an Area of Operations. The 
applicant's proposed Area of Operations must include the entire State 
in which the applicant is incorporated, and may include Local Economic 
Areas. An applicant may not apply to cover an area as a Multi-State 
CDC.
    (c) The applicant must demonstrate that it satisfies the CDC 
certification and operational requirements in Sec. Sec.  120.820, and 
Sec.  120.822 through 120.824. The applicant also must include an 
operating budget, approved by the applicant's Board of Directors, which 
demonstrates the required financial ability (as described in Sec.  
120.825), and a plan to meet CDC operational requirements (without 
specializing in a particular industry) in Sec.  120.821, and Sec. Sec.  
120.826 through 120.830.
    (d) The District Office will forward the application and its 
recommendation to the AA/FA, who will make the final decision. SBA will 
notify the CDC in writing of its decision, and, if the petition is 
declined, the reasons for the decision. The procedures of Sec. Sec.  
120.855 through 120.857 do not apply to the denial of an application.


Sec.  120.811  [Removed]

    7. Remove Sec.  120.811.
    8. Revise Sec.  120.812 to read as follows:


Sec.  120.812  Probationary period for newly certified CDCs.

    (a) Newly certified CDCs will be on probation for a period of two 
years from the date of certification, at the end of which the CDC must 
petition the Lead SBA Office for:
    (1) Permanent CDC status; or
    (2) A single, one-year extension of probation.
    (b) SBA will consider the failure to file a petition before the end 
of the probationary period as a withdrawal from the 504 program. If the 
CDC elects withdrawal, SBA will direct the CDC to transfer all funded 
and/or approved loans to another CDC, SBA, or another servicer approved 
by SBA.
    (c) The Lead SBA Office will send the petition and its 
recommendation to the AA/FA, who will make the final decision. SBA will 
determine permanent CDC status or an extension of probation, in part, 
based upon the

[[Page 40566]]

CDC's compliance with the certification and operational requirements in 
Sec. Sec.  120.820 through 120.830.
    (d) SBA will notify the CDC in writing of its decision, and, if the 
petition is declined, the reasons for the decision. The procedures of 
Sec. Sec.  120.855 through 120.857 do not apply to a denial of a 
petition for permanent CDC status.
    9. Revise Sec.  120.820 to read as follows:


Sec.  120.820  CDC non-profit status and good standing.

    A CDC must be a non-profit corporation, except that for-profit CDCs 
certified by SBA prior to January 1, 1987 may retain their 
certifications. An SBIC may not become a CDC. A CDC must be in good 
standing based upon the following criteria:
    (a) In good standing in the State in which the CDC is incorporated 
and any other State in which the CDC conducts business.
    (b) In compliance with all laws, including taxation requirements, 
in the State in which the CDC is incorporated and any other State in 
which the CDC conducts business.
    10. Revise Sec.  120.821 to read as follows:


Sec.  120.821  CDC Area of Operations.

    A CDC must operate only within its designated Area of Operations 
approved by SBA except as provided in Sec.  120.839.
    11. Revise Sec.  120.822 to read as follows:


Sec.  120.822  CDC membership.

    (a) CDC Membership. A CDC must have at lease 25 members (or 
stockholders for for-profit CDCs approved prior to January 1, 1987). 
The CDC membership must meet annually. No person or entity can own or 
control more than 10 percent of the CDC's voting membership (or stock). 
No employee or staff of the CDC can qualify as a member of the CDC for 
the purpose of meeting the membership requirements. The CDC membership 
must include representatives from all the groups listed in paragraph 
(b) of this section.
    (b) Membership groups. Members must be responsible for actively 
supporting economic development in the Area of Operations and must be 
from one of the following groups:
    (1) Government organizations responsible for economic development 
in the Area of Operations;
    (2) Financial institutions that provide commercial long term fixed 
asset financing in the Area of Operations;
    (3) Community organizations dedicated to economic development in 
the Area of Operations such as chambers of commerce, foundations, trade 
associations, colleges, universities, or small business development 
centers (as defined in section 21(a)(1) of the Act, 15 U.S.C. 
648(a)(1)); and
    (4) Businesses in the Area of Operations.
    (c) A CDC that is incorporated in one State and is operating as a 
Multi-State CDC in another State must meet the membership requirements 
for each State.
    12. Amend Sec.  120.824 by revising the second sentence in the 
introductory text and paragraph (a) to read as follows:


Sec.  120.824  Professional management and staff.

    * * * CDCs may obtain, under written contract, management, 
marketing, packaging, processing, closing, servicing or liquidation 
services provided by qualified individuals and entities under the 
following circumstances:
    (a) The CDC must have at least one salaried professional employee 
that is employed directly (not a contractor or an Associate of a 
contractor) full-time to manage the CDC. The CDC manager must be hired 
by the CDC's board of directors and subject to termination only by the 
board. A CDC may petition SBA to waive the requirement of the manager 
being employed directly if another non-profit entity that has the 
economic development of the CDC's Area of Operations as one of its 
principal activities will contribute the management of the CDC. The 
management contributed by the other entity also may work on and operate 
that entity's economic development programs, but must be available to 
small businesses interested in the 504 program and to 504 loan 
borrowers during regular business hours.
* * * * *
    13. Revise Sec.  120.826 to read as follows:


Sec.  120.826  Basic requirements for operating a CDC.

    A CDC must operate in accordance with all 504 program requirements 
imposed by statute, regulation, SOPs, SBA policy and procedural 
notices, loan authorizations, Debentures, and agreements between the 
CDC and SBA. In its Area of Operations, a CDC must market the 504 
program, package and process 504 loan applications, close and service 
504 loans, and if authorized by SBA, liquidate and litigate 504 loans. 
It must supply to SBA current and accurate information about all 
certification and operational requirements, and maintain the records 
and submit the reports required by SBA.
    14. Revise Sec.  120.827 to read as follows:


Sec.  120.827  Other services a CDC may provide to small businesses.

    A CDC may provide a small business with assistance unrelated to the 
504 loan program as long as the CDC does not make such assistance a 
condition of the CDC accepting from that small business an application 
for a 504 loan. An example of other services a CDC may provide is 
assisting a small business in applying for a 7(a) loan (as described in 
Sec.  120.2). A CDC is subject to part 103 of this chapter when 
providing such assistance.
    15. Revise Sec.  120.828 to read as follows:


Sec.  120.828  Minimum level of 504 loan activity and restrictions on 
portfolio concentrations.

    (a) A CDC is required to receive SBA approval of at least four 504 
loan approvals during two consecutive fiscal years.
    (b) A CDC's 504 loan portfolio must be diversified by business 
sector.
    16. Amend Sec.  120.829 by revising paragraph (a) to read as 
follows:


Sec.  120.829  Job Opportunity average a CDC must maintain.

    (a) A CDC's portfolio must maintain a minimum average of one Job 
Opportunity per an amount of 504 loan funding that will be specified by 
SBA from time to time in a Federal Register notice. Such Job 
Opportunity average remains in effect until changed by subsequent 
Federal Register publication. A CDC is permitted two years from its 
certification date to meet this average.
* * * * *
    17. Revise paragraphs (a) and (b) of, and add a new paragraph (g) 
to, Sec.  120.830 to read as follows:


Sec.  120.830  Reports a CDC must submit.

* * * * *
    (a) An annual report within 120 days after the end of the CDC's 
fiscal year (to include financial statements of the CDC and any 
affiliates or subsidiaries of the CDC), and such interim reports as SBA 
may require;
    (b) For each new associate and staff, a Statement of Personal 
History (for use by non-bank lenders and CDCs) and other information 
required by SBA;
* * * * *
    (g) Other reports as required by SBA.
    18. Revise Sec.  120.835 to read as follows:

[[Page 40567]]

Sec.  120.835  Application to expand an Area of Operations.

    (a) General. A CDC that has been certified to participate in the 
504 program may apply to expand its Area of Operations if it meets all 
requirements to be an Accredited Lender Program (ALP) CDC, as set forth 
in Sec.  120.840(c), and demonstrates that it can competently fulfill 
its 504 program responsibilities in the proposed area.
    (b) Local Economic Area Expansion. A CDC seeking to expand its Area 
of Operations into a Local Economic Area must apply in writing to the 
Lead SBA Office.
    (c) Multi-State CDC Expansion. A CDC seeking to become a Multi-
State CDC must apply to the SBA District Office that services the area 
within each State where the CDC intends to locate its principal office 
for that State. A CDC may apply to be a Multi-State CDC only if:
    (1) The State the CDC seeks to expand into is contiguous to the 
State of the CDC's incorporation;
    (2) The CDC demonstrates that its membership meets the requirements 
in Sec.  120.822 separately for its State of incorporation and for each 
additional State in which it seeks to operate as a Multi-State CDC; and
    (3) The CDC has a loan committee meeting the requirements of Sec.  
120.823.


Sec.  120.836  [Removed]

    19. Remove Sec.  120.836.
    20. Amend Sec.  120.837 by revising paragraph (b) and adding a new 
paragraph (c) to read as follows:


Sec.  120.837  SBA decision on application to become a Multi-State CDC.

* * * * *
    (b) SBA will notify the CDC of its decision in writing, and if the 
application is denied for some, or all, of the requested states, the 
reasons for its decision. The procedures set forth in Sec. Sec.  
120.855 through 120.857 will not apply to the denial of a Multi-State 
application.
    (c) If a CDC is approved to operate as a Multi-State CDC, the CDC's 
ALP, PCLP, or Priority CDC authority will carry over into every 
additional State in which it is approved to operate as a Multi-State 
CDC.


Sec.  120.838  [Removed]

    21. Remove Sec.  120.838.
    22. Revise Sec.  120.839 to read as follows:


Sec.  120.839  Case-by-case application to make a 504 loan outside of a 
CDC's Area of Operations.

    A CDC may apply to make a 504 loan for a Project outside its Area 
of Operations to the District Office serving the area in which the 
Project will be located. The applicant CDC must demonstrate that it can 
adequately fulfill its 504 program responsibilities for the 504 loan. 
The District Office may approve the application if:
    (a) The applicant CDC has previously assisted the business to 
obtain a 504 loan; or
    (b) The existing CDC or CDCs serving the area agree to permit the 
applicant CDC to make the 504 loan; or
    (c) There is no CDC within the Area of Operations.
    23. Revise Sec.  120.840 to read as follows:


Sec.  120.840  Accredited Lenders Program (ALP).

    (a) General. Under the ALP program, SBA designates qualified CDCs 
as ALP CDCs, gives them increased authority to process, close, and 
service 504 loans, and provides expedited processing of loan approval 
and servicing actions.
    (b) Application. A CDC must apply for ALP status to the Lead SBA 
Office. The Lead SBA Office will send its recommendation and the 
application to the AA/FA for final decision.
    (c) Eligibility. In order for a CDC to be eligible to receive ALP 
status, its application must show that it meets the criteria set forth 
in Sec.  120.841.
    (d) Additional application requirements. The CDC's application must 
include the following:
    (1) Certified copy of the CDC's Board of Directors' resolution 
authorizing the application for ALP status.
    (2) Summary of the experience of each of the CDC's loan processing, 
closing, and servicing staff members with significant authority.
    (3) Name, address, and summary of experience of Designated 
Attorney.
    (4) Documentation of any SBA required insurance.
    (5) Any other documentation required by SBA.
    (e) Term of ALP designation. SBA generally will designate a CDC as 
an ALP CDC for a two-year period. SBA may renew the designation for an 
additional two-year period if the CDC continues to meet the ALP program 
eligibility requirements. The procedures of Sec. Sec.  120.855 through 
120.857 do not apply to the non-renewal of ALP status.
    (f) SBA approval or decline decision. SBA will notify the CDC in 
writing of an approval or decline of either an ALP application or of an 
ALP renewal. If the SBA approves the CDC's application, the ALP CDC may 
exercise its ALP authority in its entire Area of Operations. If an 
application or renewal is declined, SBA will notify the CDC of the 
reasons for the decision.
    24. Add a new Sec.  120.841 to read as follows:


Sec.  120.841  Qualifications for the ALP.

    An applicant for ALP status must show that it meets the following 
criteria:
    (a) CDC staff experience. Key staff must have at least two years of 
experience processing and servicing 504 loans prior to the date of the 
application.
    (b) Number of 504 loans approved and size of portfolio. SBA must 
have approved at least 20 504 loan applications by the CDC in the most 
recent three years, and the CDC must have a portfolio of at least 30 
active 504 loans. (An ``active'' 504 loan is a loan that was approved 
and closed by the CDC and has a status of either current, delinquent, 
or in liquidation.)
    (c) Current reviews in compliance. SBA-conducted oversight reviews 
must be current (within past 12 months) for applicants for ALP status, 
and these reviews must have found the CDC to be in compliance with 504 
program requirements imposed by statute, regulation, SOPs, policy and 
procedural notices, loan authorizations, Debentures, and agreements 
between the CDC and SBA.
    (d) Adequate performance on SBA portfolio benchmarks. SBA's CDC 
portfolio benchmarks are important measures of the quality of a CDC's 
portfolio and the effectiveness of its loan analysis, closing and 
servicing. At the time of the CDC's application for ALP status the 
CDC's portfolio must meet SBA's established portfolio benchmarks.
    (e) Staff experience. The CDC's principal loan officers must have 
three full years of 504 loan processing, closing and servicing 
experience or two years experience plus satisfactory completion of the 
CDC industry's approved credit, packaging, loan closing and loan 
servicing training programs.
    (f) Record of compliance with 504 program requirements. The CDC 
must have a record of conforming to SBA's policies and procedures and 
of satisfactorily underwriting, closing and servicing 504 loans, 
including:
    (1) Submission of satisfactory 504 loan analyses and applications, 
and all required, and properly completed, loan documents.
    (2) Careful and thorough analysis and screening of all 504 loan 
applications for conformance with SBA credit and eligibility standards.
    (3) Proper and diligent completion of required 504 loan closing 
documents and compliance with SBA 504 loan closing policies and 
procedures.

[[Page 40568]]

    (4) Compliance with SBA loan servicing policies and procedures.
    (5) Compliance with the certification and operational requirements 
as set forth in Sec. Sec.  120.820-120.830.
    (6) Submission of timely, complete and acceptable annual reports.
    (7) Compliance with CDC ethical requirements (see Sec.  120.851).
    (g) Priority CDC. The CDC must be a Priority CDC with a Designated 
Attorney and SBA required insurance.
    (h) Record of Cooperation. The CDC must have a record of effective 
communication and a cooperative relationship with all SBA offices 
including district offices and SBA's loan processing and servicing 
centers.
    25. Revise Sec.  120.845 and add new Sec. Sec.  120.846-120.848 to 
read as follows:


Sec.  120.845  Premier Certified Lenders Program (PCLP).

    (a) General. Under the PCLP, SBA designates qualified CDCs as PCLP 
CDCs and delegates to them increased authority to process, close, 
service, and liquidate 504 loans. SBA also may give PCLP CDCs increased 
authority to litigate 504 loans.
    (b) Application. A CDC must apply for PCLP status to the Lead SBA 
Office. The Lead SBA Office will send its written recommendation and 
the application to SBA's PCLP Loan Processing Center, which will review 
these materials and forward them with a recommendation to the AA/FA for 
final decision.
    (c) Eligibility. In order for a CDC to be eligible to receive PCLP 
status, its application must show that it meets the following criteria:
    (1) The CDC must be an ALP CDC in compliance with 504 program 
requirements imposed by statute, regulation, SOP, policy and procedural 
notices, Debentures, loan authorizations, and any agreement between SBA 
and the CDC or meet the criteria to be an ALP CDC set forth in 
Sec. Sec.  120.841(a)-(h).
    (2) The CDC can adequately comply with SBA liquidation and 
litigation requirements.
    (d) Additional application requirements. The application must 
include the following:
    (1) Certified copy of the CDC's Board of Directors' resolution 
authorizing the application for PCLP status.
    (2) Summary of the experience of each of the CDC's loan processing, 
closing, servicing and liquidation staff members with significant 
authority.
    (3) Name, address and summary of experience of Designated Attorney.
    (4) Documentation of any SBA required insurance.
    (5) Any other documentation required by SBA.
    (e) Term of designation. If approved, SBA generally will confer 
PCLP status for a period of two years. However, if SBA deems it 
appropriate, it may confer PCLP status for a period of less than two 
years.
    (f) Area of Operations for PCLP CDCs. If the SBA approves the CDC's 
application, the PCLP CDC may exercise its PCLP authority in its entire 
Area of Operations.
    (g) SBA approval or decline decision. SBA will notify the CDC in 
writing of an approval or decline of a PCLP application. If an 
application is declined, SBA will notify the CDC of the reasons for the 
decision.


Sec.  120.846  Requirements for maintaining and renewing PCLP status.

    (a) To maintain its status as a PCLP CDC, a CDC must continue to:
    (1) Meet the PCLP eligibility requirements in Sec.  120.845 .
    (2) Timely conform with all requirements and deadlines set forth in 
SBA's regulations and policy and procedural guidance concerning 
properly establishing, funding and reporting a PCLP Loan Loss Reserve 
Fund (LLRF).
    (3) Substantially comply with all 504 program requirements imposed 
by statute, regulation, SOPs, policy and procedural notices, loan 
authorizations, Debentures, and agreements between the CDC and SBA.
    (4) Remain an active CDC.
    (5) In accordance with statutory requirements set forth in 508(i) 
of Title V, 15 U.S.C. 697e(i), establish a goal of processing at least 
50 percent of its 504 loans using PCLP procedures.
    (b) SBA will notify the PCLP CDC in writing of a renewal or non-
renewal of PCLP status. If PCLP status is not renewed, SBA will notify 
the CDC of the reasons for the decision. The procedures of Sec. Sec.  
120.855 through 120.857 do not apply to the non-renewal of PCLP status.


Sec.  120.847  Requirements for the Loan Loss Reserve Fund (LLRF).

    (a) General. PCLP CDCs must establish and maintain a LLRF (or 
multiple accounts which together constitute one LLRF) which complies 
with paragraphs (b) through (g) of this section. A PCLP CDC must use 
the LLRF to reimburse the SBA for 10 percent of any loss sustained by 
SBA as a result of a default in the payment of principal or interest on 
a Debenture it issued under the PCLP (``PCLP Debenture''). A CDC that 
is participating in the PCLP as of January 1, 2004, and a CDC that has 
participated in the PCLP in the past but which does not have PCLP 
status as of that date, must establish a LLRF within 30 days of that 
date to cover potential losses for all 504 loans made in connection 
with PCLP Debentures that remain outstanding as of that date. A CDC 
that receives PCLP status after that date must establish and maintain a 
LLRF prior to closing any 504 loans processed under its PCLP status. 
The LLRF is the accumulation of deposits that a PCLP CDC must establish 
and maintain for each PCLP Debenture that it issues. PCLP CDCs must 
coordinate with their Lead SBA Office to ensure that the LLRF is 
properly established, that all necessary documentation is executed and 
delivered by all parties in a timely fashion, and that all required 
deposits are made.
    (b) PCLP CDC Exposure and LLRF deposit requirements. A PCLP CDC's 
``Exposure'' is defined as its reimbursement obligation to SBA with 
respect to default in the payment of any PCLP Debenture. The amount of 
a PCLP CDC's Exposure is 10 percent of any loss (including attorney's 
fees; litigation costs; and care of collateral, appraisal and other 
liquidation costs and expenses) sustained by SBA as a result of a 
default in the payment of principal or interest on a PCLP Debenture. 
For each PCLP Debenture a PCLP CDC issues, it must establish and 
maintain an LLRF equal to one percent of the original principal amount 
(the face amount) of the PCLP Debenture. The amount the PCLP CDC must 
maintain in the LLRF for each PCLP Debenture remains the same even as 
the principal balance of the PCLP Debenture is paid down over time.
    (c) Establishing a LLRF. The LLRF must be a deposit account (or 
accounts) with a federally insured depository institution selected by 
the PCLP CDC. A ``deposit account'' is a demand, time, savings, or 
passbook account, including a certificate of deposit (CD) which is 
either uncertificated or, if certificated, non-transferable. A 
``deposit account'' is not an investment account and must not contain 
securities or other investment properties. A deposit account may 
contain only cash and CDs credited to that account. A PCLP CDC may pool 
its deposits for multiple PCLP Debentures in a single account in one 
institution. The LLRF must be segregated from the PCLP CDC's other 
operating accounts. The PCLP CDC is responsible for all fees, costs and 
expenses incurred in connection with establishing, managing and 
maintaining the LLRF, including fees associated with transferring funds 
or early withdrawal of CDs, and related income tax expenses.
    (d) Creating and perfecting a security interest in a LLRF. A PCLP 
CDC must

[[Page 40569]]

give SBA a first priority, perfected security interest in the LLRF to 
secure the PCLP CDC's obligation to reimburse SBA for the PCLP CDC's 
Exposure under all of its outstanding PCLP Debentures. (If a PCLP CDC's 
LLRF is comprised of multiple deposit accounts, it must give SBA this 
security interest with respect to each such account.) The PCLP CDC must 
grant to SBA the security interest in the LLRF pursuant to a security 
agreement between the PCLP CDC and SBA, and a control agreement between 
the PCLP CDC, SBA, and the applicable depository institution. The 
control agreement must include provisions requiring the depository 
institution to follow SBA instructions regarding withdrawal from the 
account without a requirement for obtaining further consent from the 
PCLP CDC, and must restrict the PCLP CDC's ability to make withdrawals 
from the account without SBA consent. When establishing the LLRF, a 
PCLP CDC must coordinate with its Lead SBA Office to execute and 
deliver the required documentation. The PCLP CDC must provide to the 
Lead SBA Office a fully executed original of the security and control 
agreements. All documents must be satisfactory to SBA in both form and 
substance.
    (e) Schedule for contributions to a LLRF. The PCLP CDC must 
contribute to the LLRF the required deposits for each PCLP Debenture in 
accordance with the following schedule:
    (1) At least 50 percent of the required deposits to the LLRF on or 
about the date that it issues the PCLP Debenture.
    (2) At least an additional 25 percent of the required deposits to 
the LLRF no later than one year after it issues the PCLP Debenture.
    (3) Any remainder of the required deposits to the LLRF no later 
than two years after it issues the PCLP Debenture.
    (f) LLRF reporting requirements. Each PCLP CDC must periodically 
report to SBA the amount in the LLRF in a form that will readily 
facilitate reconciliation of the amount maintained in the LLRF with the 
amount required to meet a PCLP CDC's Exposure for its entire portfolio 
of PCLP Debentures.
    (g) Withdrawal of excess funds. Interest and other funds in the 
LLRF that exceed the required minimums as set forth in paragraph (b) of 
this section, within the time frames set forth in paragraph (e) of this 
section, accrue to the benefit of the PCLP CDC. PCLP CDCs are 
authorized to withdraw excess funds, including interest, from the LLRF 
if such funds exceed the required minimums set forth in paragraph (b) 
of this section. The PCLP CDC must forward requests for withdrawals to 
the Lead SBA Office, which will verify the existence and amount of 
excess funds and notify the financial institution to transfer the 
excess funds to the PCLP CDC.
    (h) Determining SBA loss. When a PCLP CDC has concluded the 
liquidation of a defaulted 504 loan made with the proceeds of a PCLP 
Debenture and has submitted a liquidation wrap-up report to SBA, or 
when SBA otherwise determines that the PCLP CDC has exhausted all 
reasonable collection efforts with respect to that 504 loan, SBA will 
determine the amount of the loss to SBA. SBA will notify the PCLP CDC 
of the amount of its reimbursement obligation to SBA (if any) and will 
explain how SBA calculated the loss.
    (1) If the PCLP CDC agrees with SBA's calculations of the loss, it 
must reimburse SBA for ten percent of the amount of that loss no later 
than 30 days after SBA's notification to the PCLP CDC of the CDC's 
reimbursement obligation.
    (2) If the PCLP CDC disputes SBA's calculations, it must reimburse 
SBA for ten percent of any loss amount that is not in dispute no later 
than 30 days after SBA's notification to the PCLP CDC of the CDC's 
reimbursement obligation. No later than 30 days after SBA's 
notification, the PCLP CDC may submit to the AA/FA or his or her 
delegate a written appeal of any disagreement regarding the calculation 
of SBA's loss. The PCLP CDC must include with that appeal an 
explanation of its reasons for the disagreement. Upon the AA/FA's final 
decision as to the disputed amount of the loss, the PCLP CDC must 
promptly reimburse SBA for ten percent of that amount.
    (i) Reimbursing SBA for loss. A PCLP CDC may use funds in the LLRF 
or other funds to reimburse SBA for the PCLP CDC's Exposure on a 
defaulted PCLP Debenture. If a PCLP CDC does not satisfy the entire 
reimbursement obligation within 30 days after SBA's notification to the 
PCLP CDC's of its reimbursement obligation, SBA may cause funds in the 
LLRF to be transferred to SBA in order to cover the PCLP CDC's 
Exposure, unless the PCLP CDC has filed an appeal under paragraph 
(h)(2) of this section. If the PCLP CDC has filed such an appeal, SBA 
may cause such a transfer of funds to SBA 30 days after the AA/FA's or 
his or her delegate's decision. If the LLRF does not contain sufficient 
funds to reimburse SBA for any unpaid Exposure with respect to any PCLP 
Debenture, the PCLP CDC must pay SBA the difference within 30 days 
after demand for payment by SBA.
    (j) Insufficient funding of LLRF. A PCLP CDC must diligently 
monitor the LLRF to ensure that it contains sufficient funds to cover 
its Exposure for its entire portfolio of PCLP Debentures. If, at any 
time, the LLRF does not contain sufficient funds, the PCLP CDC must, 
within 30 days of the earlier of the date it becomes aware of this 
deficiency or the date it receives notification from SBA of this 
deficiency, make additional contributions to the LLRF to make up this 
difference.


Sec.  120.848  Requirements for 504 loan processing, closing, 
servicing, liquidating, and litigating by PCLP CDCs.

    (a) General. In processing, closing, servicing, liquidating and 
litigating 504 loans under the PCLP (``PCLP Loans''), the PCLP CDC must 
comply with 504 program requirements imposed by statute, regulation, 
SOPs, policy and procedural notices, loan authorizations, Debentures, 
and agreements between the CDC and SBA and in accordance with prudent 
and commercially reasonable lending standards.
    (b) Documentation of decision making. For each PCLP Loan, the PCLP 
CDC must document in its files the basis for its decisions with respect 
to loan processing, closing, servicing, liquidating, and litigating.
    (c) Processing requirements. SBA expects PCLP CDCs to handle most 
504 loan processing situations, although SBA may require that the PCLP 
CDC process 504 loans involving complex or problematic eligibility 
issues through the Lead SBA Office using standard 504 loan processing 
procedures. The PCLP CDC is responsible for properly determining 
borrower creditworthiness and establishing the terms and conditions 
under which the PCLP Loan will be made. The PCLP CDC also is 
responsible for properly undertaking such other processing actions as 
SBA may delegate to the PCLP CDC.
    (d) Submission of loan documents. A PCLP CDC must notify SBA of its 
approval of a 504 loan by submitting to SBA's PCLP Loan Processing 
Center all documentation required by SBA, including SBA's PCLP 
eligibility checklist, signed by an authorized representative of the 
PCLP CDC. The PCLP Loan Processing Center will review these documents 
to determine whether the PCLP CDC has identified any problems with the 
PCLP Loan approval, and whether SBA funds are available for the PCLP 
Loan. If appropriate, the PCLP Processing Center will notify the PCLP 
CDC of the loan number assigned to the loan.
    (e) Loan and Debenture closing. After receiving notification from 
SBA PCLP

[[Page 40570]]

Loan Processing Center, the PCLP CDC is responsible for properly 
undertaking all actions necessary to close the PCLP Loan and Debenture 
in accordance with the expedited loan closing procedures applicable to 
a Priority CDC and with Sec.  120.960.
    (f) Servicing, liquidation and litigation responsibilities. The 
PCLP CDC generally must service, liquidate and litigate its entire 
portfolio of PCLP Loans, although SBA may in certain circumstances 
elect to handle such duties with respect to a particular PCLP Loan or 
Loans.
    (g) Making a 504 loan previously considered by another CDC. A PCLP 
CDC also may utilize its PCLP status to process a 504 loan application 
from an applicant whose application was declined or rejected by another 
CDC operating in that same Area of Operations, if the applicant is 
located within that area and as long as SBA has not previously declined 
that applicant's 504 loan application. This may include the processing 
of a 504 loan application from an applicant that has withdrawn its 
application from another CDC.
    26. Revise Sec.  120.850 to read as follows:


Sec.  120.850  Expiration of Associate Development Company designation.

    The designation of Associate Development Company (ADC) will cease 
to exist on January 1, 2004. After that date, former ADCs may continue 
to contract with CDCs as Lender Service Providers (see part 103 of this 
chapter) or to perform other services.
    27. Add new undesignated center heading before Sec.  120.851 to 
read as follows:

Other CDC Requirements

    28. Revise Sec.  120.851 to read as follows:


Sec.  120.851  CDC ethical requirements.

    CDCs and their Associates must act ethically and exhibit good 
character. They must meet all of the ethical requirements of Sec.  
120.140. In addition, they are subject to the following:
    (a) Any benefit flowing to a CDC's Associate or his or her employer 
from activities as an Associate must be merely incidental (this 
requirement does not prevent an Associate or an Associate's employer 
from providing interim financing as described in Sec.  120.890 or Third 
Party Loans as described in Sec.  120.920, as long as such activity 
does not violate Sec.  120.140); and
    (b) A CDC's Associate may not be an officer, director, or manager 
of more than one CDC.
    29. Revise Sec.  120.852 to read as follows:


Sec.  120.852  Restrictions regarding CDC participation in the Small 
Business Investment Company (SBIC) program and the 7(a) loan program.

    (a) 7(a) loan program. A CDC must not invest in or be an Affiliate 
of a Lender participating in the 7(a) loan program described in Sec.  
120.2(a). (For a definition of Affiliation, refer to Sec.  121.103 of 
this chapter.)
    (b) SBIC program. A CDC must not directly or indirectly invest in a 
Licensee (as defined in Sec.  107.50 of this Title) licensed by SBA 
under the SBIC program authorized in Part A of Title III of the Small 
Business Investment Act, 15 U.S.C. 681 et seq.
    30. Add a new undesignated center heading immediately preceding new 
Sec.  120.853 to read as follows:

SBA Oversight

    31. Redesignate Sec.  120.973 as Sec.  120.853 and revise 
redesignated Sec.  120.853 to read as follows:


Sec.  120.853  Oversight and evaluation of CDCs.

    SBA may conduct an operational review of a CDC. The SBA Office of 
Inspector General may also conduct, supervise or coordinate audits 
pursuant to the Inspector General Act. The CDC must cooperate and make 
its staff, records, and facilities available.
    32. Add a new undesignated center heading immediately preceding new 
Sec.  120.854 to read as follows:

SBA Enforcement Actions


Sec.  120.855  [Removed]

    33. Remove Sec.  120.855.
    33a. Add Sec. Sec.  120.854-120.856 to read as follows:


Sec.  120.854  Grounds for taking enforcement action against a CDC.

    The AA/FA or his or her authorized delegate may undertake one or 
more of the enforcement actions set forth in Sec.  120.855 with respect 
to a CDC, based upon a determination that one or more of the following 
grounds exist:
    (a) The CDC has failed to receive SBA approval for at least four 
504 loans during two consecutive fiscal years;
    (b) The CDC has failed to comply materially with any requirement 
imposed by statute, regulation, SOP, policy and procedural notice, any 
agreement the CDC has executed with SBA, or the terms of a Debenture or 
loan authorization.
    (c) The CDC has made a material false statement or has failed to 
disclose a material fact to SBA:
    (1) With respect to a 504 loan;
    (2) In applying to SBA for authority to participate in the 504 
program or for any change in the CDC's participation in the 504 
program; or
    (3) In any report or other disclosure of information that SBA 
requires.
    (d) The CDC is not performing underwriting, closing, servicing, 
liquidation, litigation, or other actions with respect to 504 loans in 
a commercially reasonable or prudent manner. Supporting evidence may 
include but is not limited to failure to meet one or more of the 
portfolio benchmarks.
    (e) The CDC fails to correct an underwriting, closing, servicing, 
liquidation, litigation, or reporting deficiency, or fails to take 
other corrective action, after receiving notice from SBA of a 
deficiency or the need to take corrective action, within the time 
period specified in SBA's notice of deficiency.
    (f) The CDC has engaged in a pattern of uncooperative behavior or 
taken an action that SBA determines is deleterious to the 504 program, 
that undermines SBA's management and administration of the 504 program, 
or that is not consistent with standards of good conduct.


Sec.  120.855  Types of enforcement actions.

    (a) Enforcement. Upon a determination that one or more of the 
grounds set forth in Sec.  120.854 exist, the AA/FA or his or her 
authorized delegate may undertake, in SBA's sole discretion, one or 
more of the following enforcement actions:
    (1) Suspend or terminate the CDC's authority to participate in the 
504 program or to participate as an ALP CDC or PCLP CDC, or in any 
pilot or program within the 504 program established by SBA. Any such 
suspension will be for a term determined by SBA in its sole discretion.
    (2) Suspend or terminate the CDC's authority to perform 
underwriting, closing, servicing, liquidation, or litigation on one or 
more 504 loans or to perform any other function in connection with the 
504 program. Any such suspension will be for a term determined by SBA 
in its sole discretion.
    (3) Require the CDC to transfer some or all of its existing 504 
loan portfolio and/or some or all of its pending 504 loan applications, 
to SBA, another CDC, or any other entity designated by SBA. Any such 
transfer may be on a temporary or permanent basis, in SBA's sole 
discretion.
    (4) Instruct the CSA to withhold payment of servicing, late and/or 
other fee(s) to the CDC and, if SBA has experienced financial loss as a 
result of the CDC's failure to comply with any

[[Page 40571]]

SBA requirement or of the CDC's imprudent or commercially unreasonable 
action, direct the CSA to submit all or some of such payments to SBA to 
compensate for any such loss.
    (b) Immediate suspension. If SBA determines that one or more 
grounds set forth in Sec.  120.854 exist and further determines that 
immediate action is necessary to prevent the risk of significant loss 
to SBA or to prevent significant impairment of the integrity of the 504 
program, the AA/FA may issue a written notice of immediate suspension 
to a CDC, suspending all or certain activities of a CDC pertaining to 
the 504 program, and such suspension will be effective as of the date 
of the notice. Any such suspension will be for a term determined by SBA 
in its sole discretion. SBA may combine a notice of immediate 
suspension with any enforcement action set forth in paragraph (a) of 
this section.


Sec.  120.856  Enforcement procedures.

    (a) SBA's notice to CDC of enforcement action. Prior to undertaking 
an enforcement action set forth in Sec.  120.855(a), the AA/FA or his 
or her authorized delegate must issue a written notice to the affected 
CDC identifying the proposed enforcement action, setting forth the 
reasons for the proposed action and, if a suspension also is proposed, 
stating the term of the proposed suspension.
    (b) SBA's notice to CDC of immediate suspension. If the AA/FA or 
his or her authorized delegate undertakes an immediate suspension 
pursuant to Sec.  120.855(b), he or she must issue a written notice to 
the affected CDC identifying the scope and term of the suspension, and 
setting forth the reasons for the proposed action.
    (c) CDC's opportunity to object. A CDC that desires to contest a 
proposed enforcement action or an immediate suspension must file, 
within 30 calendar days of the notice or within some other term 
established by SBA in its notice, a written objection with the AA/FA or 
other SBA official identified in the notice. The objection must set 
forth in detail all grounds known to the CDC to contest the proposed 
action or immediate suspension and all mitigating factors, and must 
include documentation that the CDC believes is most supportive of its 
objection. A CDC must exhaust this administrative remedy in order to 
preserve its objection to a proposed enforcement action or an immediate 
suspension.
    (d) SBA's decision on CDC's objection to proposed action. If the 
affected CDC files a timely written objection to a proposed enforcement 
action or immediate suspension, the AA/FA or his or her authorized 
delegate must issue a notice of decision to the affected CDC advising 
whether SBA is undertaking the proposed enforcement action or 
continuing the immediate suspension. If SBA is undertaking the 
enforcement action or continuing the immediate suspension, the notice 
of decision must set forth the grounds for the decision. SBA will issue 
a notice of decision whenever it deems appropriate. Prior to issuing a 
notice of decision, SBA in its sole discretion can request additional 
information from the affected CDC or other parties and conduct any 
other investigation it deems appropriate. If SBA determines, in its 
sole discretion, to consider an untimely objection, it must issue a 
notice of decision pursuant to this paragraph (d).
    (e) SBA's notice of final agency decision. If SBA chooses not to 
consider an untimely objection or if the affected CDC fails to file a 
written objection to a proposed enforcement action or an immediate 
suspension, and if SBA continues to believe that such proposed 
enforcement action or immediate suspension is appropriate, the AA/FA or 
his or her authorized delegate must issue a notice of decision to the 
affected CDC that SBA is undertaking one or more of the proposed 
enforcement actions against the CDC or that SBA will continue to pursue 
an immediate suspension of the CDC. Such a notice of decision need not 
state any grounds for the action other than to reference the CDC's 
failure to file a timely objection, and represents the final agency 
decision. If the affected CDC fails to file a written objection to an 
immediate suspension, SBA need not issue any further notice to the CDC.
    (f) Appeal to OHA. A CDC may appeal from an SBA notice of decision 
issued pursuant to paragraphs (d) and/or (e) of this section, to the 
SBA Office of Hearings and Appeals (OHA). The rules and procedures set 
forth in part 134 of this chapter will govern such appeals. OHA must 
limit its review to a determination of whether SBA's decision was 
arbitrary, capricious or contrary to law, or without procedure required 
by law, in accordance with the legal precedent established under 5 
U.S.C. 706(2)(A) or 5 U.S.C. 706(2)(D). OHA must limit its review to 
the record that the AA/FA or his or her authorized delegate, and any 
other SBA officials directly involved with the decision, considered in 
making the final decision. OHA must not consider any argument, fact or 
other information presented by the affected CDC, unless the CDC 
previously submitted that information to SBA in or with the affected 
CDC's objection or in response to a request for information from SBA. A 
decision by OHA is the final agency decision.


Sec.  120.857  Voluntary transfer and surrender of CDC certification. 
[Redesignated from Sec.  120.981]

    33b. Redesignate Sec.  120.981 as Sec.  120.857.
    34. Revise Sec.  120.861 to read as follows:


Sec.  120.861  Job creation or retention.

    A Project must create or retain one Job Opportunity per an amount 
of 504 loan funding that will be specified by SBA from time to time in 
a Federal Register notice. Such Job Opportunity average remains in 
effect until changed by subsequent Federal Register publication.
    35. Amend Sec.  120.862 as follows:
    a. By revising the parenthetical at the end of paragraph (a)(4);
    b. By revising paragraph (b)(2);
    c. By redesignating paragraphs (b)(3) through (b)(7) as (b)(5) 
through (b)(9);
    d. By adding new paragraphs (b)(3) and (b)(4); and
    e. By revising redesignated paragraph (b)(5). The revisions and 
additions read as follows:


Sec.  120.862  Other economic development objectives.

* * * * *
    (a) * * *
    (4) * * * (North American Industry Classification System (NAICS), 
Sectors 31-33); or
* * * * *
    (b) * * *
    (2) Expansion of exports;
    (3) Expansion of small businesses owned and controlled by women as 
defined in section 29(a)(3) of the Act, 15 U.S.C. 656(a)(3);
    (4) Expansion of small businesses owned and controlled by veterans 
(especially service-disabled veterans) as defined in section 3(q) of 
the Act, 15 U.S.C. 632(q);
    (5) Expansion of minority enterprise development (see Sec.  
124.103(b) of this chapter for minority groups who qualify for this 
description);
* * * * *
    36. Amend Sec.  120.870 as follows:
    a. By removing paragraph (b);
    b. By redesignating paragraph (c) as paragraph (b); and
    c. By revising paragraph (a) to read as follows:


Sec.  120.870  Leasing Project Property.

    (a) A Borrower may use the proceeds of a 504 loan to acquire, 
construct, or modify buildings and improvements,

[[Page 40572]]

and/or to purchase and install machinery and equipment located on land 
leased to the Borrower by an unrelated lessor if:
* * * * *
    37. Revise the heading of Sec.  120.871 to read as follows:


Sec.  120.871  Leasing part of Project Property to another business.

    38. Amend Sec.  120.880 by revising paragraph (b) to read as 
follows:


Sec.  120.880  Basic eligibility requirements.

* * * * *
    (b) Together with its Affiliates, meet one of the size standards 
set forth in Sec.  121.301(b) of this chapter.
    39. Revise paragraph (c) of Sec.  120.882 to read as follows:


Sec.  120.882  Eligible Project costs for 504 loans.

* * * * *
    (c) Professional fees directly attributable and essential to the 
Project, such as title insurance, opinion of title, architectural and 
engineering costs, appraisals, environmental studies, hazard and flood 
insurance, recording fees, and legal fees related to zoning, permits, 
or platting (see Sec.  120.971(a)(2) for limitations on legal fees 
associated with 504 loan and Debenture closing); and
* * * * *
    40. Revise paragraph (d) of Sec.  120.883 to read as follows:


Sec.  120.883  Eligible administrative costs for 504 loans.

* * * * *
    (d) Borrower's out-of-pocket costs associated with 504 loan and 
Debenture closing other than legal fees (for example, certifications 
and the copying costs associated with them, overnight delivery, 
postage, and messenger services) but not to include fees and costs 
described in Sec.  120.882(c);
* * * * *
    41. Amend Sec.  120.892(b) by revising the phrase ``90 days'' to 
read ``120 days''.
    42. Revise the heading of Sec.  120.900 to read as follows:


Sec.  120.900  Sources of permanent financing.

    43. Revise the heading of Sec.  120.910 to read as follows:


Sec.  120.910  Borrower contributions.

    44. Revise Sec.  120.911 to read as follows:


Sec.  120.911  Land contributions.

    The Borrower's contribution may be land (including buildings, 
structures and other site improvements which will be part of the 
Project Property) previously acquired by the Borrower.
    45. Revise Sec.  120.913 to read as follows:


Sec.  120.913  Limitations on any contributions by a Licensee.

    Subject to part 107 of this chapter, a Licensee may provide 
financing for all or part of the Borrower's contribution to the 
Project. SBA will consider Licensee funds to be derived from Federal 
sources if the Licensee has Leverage (as defined in Sec.  107.50 of 
this chapter). If the Licensee does not have Leverage, SBA will 
consider the investment to be from private funds. Licensee financing 
must be subordinated to the 504 loan and must not be repaid at a faster 
rate than the Debenture. (Refer to Sec.  120.930(a) for additional 
limitations.)
    46. Amend Sec.  120.923 by revising the heading and redesignating 
Sec.  120.924 as paragraph (c) of Sec.  120.923 to read as follows:


Sec.  120.923  Policies on subordination.

* * * * *
    47. Revise Sec.  120.925 by adding a parenthetical at the end to 
read as follows:


Sec.  120.925  Preference.

    * * * (See Sec.  120.10 for a definition of Preference.)
    48. Revise Sec.  120.926 to read as follows:


Sec.  120.926  Referral fee.

    The CDC can receive a reasonable referral fee from the Third Party 
Lender if the CDC secured the Third Party Lender for the Borrower under 
a written contract between the CDC and the Third Party Lender. Both the 
CDC and the Third Party Lender are prohibited from charging this fee to 
the Borrower. If a CDC charges a referral fee, the CDC will be 
construed as a Referral Agent under part 103 of this chapter.
    49. Revise paragraph (b) of Sec.  120.930 to read as follows:


Sec.  120.930  Amount.

* * * * *
    (b) A 504 loan must not be less than $25,000.
* * * * *
    50. Revise Sec.  120.931 to read as follows:


Sec.  120.931 504  lending limits.

    The outstanding balance of all SBA financial assistance to a 
Borrower and its affiliates under the 504 program covered by this part 
must not exceed $1,000,000 (or $1,300,000 if one or more of the public 
policy goals enumerated in Sec.  120.862(b) applies to the Project).
    51. Revise Sec.  120.933 to read as follows:


Sec.  120.933  Maturity.

    From time to time, SBA will publish in the Federal Register the 
available maturities for a 504 loan and the Debenture that funds it. 
Such available maturities remain in effect until changed by subsequent 
Federal Register publication.
    52. Revise Sec.  120.934 to read as follows:


Sec.  120.934  Collateral.

    The CDC usually takes a second lien position on the Project 
Property to secure the 504 loan. Sometimes additional collateral is 
required. (In rare circumstances, SBA may permit other collateral 
substituted for Project Property.) All collateral must be insured 
against such hazards and risks as SBA may require, with provisions for 
notice to SBA and the CDC in the event of impending lapse of coverage.
    53. Revise the heading of Sec.  120.935 to read as follows:


Sec.  120.935  Deposit from the Borrower that a CDC may require.


Sec.  120.936  [Removed]

    54. Remove Sec.  120.936.
    55. Revise Sec.  120.960 to read as follows:


Sec.  120.960  Responsibility for closing.

    (a) The CDC is responsible for the 504 loan closing.
    (b) The Debenture closing is the joint responsibility of the CDC 
and SBA.
    (c) SBA may, within its sole discretion, decline to close the 
Debenture; direct the transfer of the 504 loan to another CDC; or 
cancel its guarantee of the Debenture, prior to sale, if any of the 
following occur:
    (1) The CDC has failed to comply with any requirement imposed by 
statute, regulation, SOP, policy and procedural notice, any agreement 
the CDC has executed with SBA, or the terms of a Debenture or loan 
authorization.
    (2) The CDC has failed to make or close the 504 loan or prepare the 
Debenture closing in a prudent or commercially reasonable manner.
    (3) The CDC's improper action or inaction places SBA at risk.
    (4) The CDC has failed to use required SBA forms or electronic 
versions of those forms.
    (5) The CDC, Third Party Lender or Borrower has failed to timely 
disclose to SBA a material fact regarding the Project or 504 loan.
    (6) The CDC, Third Party Lender or Borrower has misrepresented a 
material fact to SBA regarding the Project or 504 loan.

[[Page 40573]]

    (7) SBA determines that there has been a material adverse change, 
such as deterioration in the Borrower's financial condition, since the 
504 loan was approved, or that approving the closing of the Debenture 
will put SBA at unacceptable financial risk.
    56. Revise the undesignated center heading immediately preceding 
Sec.  120.970 to read as follows:

Servicing

    57. Revise Sec.  120.970 to read as follows:


Sec.  120.970  Servicing of 504 loans and Debentures.

    (a) In servicing 504 loans, CDCs must comply with 504 program 
requirements imposed by statute, regulation, SOPs, policy and 
procedural notices, loan authorizations, Debentures, and agreements 
between the CDC and SBA, and in accordance with prudent and 
commercially reasonable lending standards.
    (b) The CDC is responsible for routine servicing including receipt 
and review of the Borrower's or Operating Company's financial 
statements on an annual or more frequent basis and monitoring the 
status of the Borrower and 504 loan collateral.
    (c) The CDC is responsible for assuring that the Borrower makes all 
required insurance premium payments, pays all taxes when due, and files 
renewals and extension of security interests on collateral for the 504 
loan, as required.
    (d) The CDC must timely respond to Borrower requests for loan 
modifications.
    (e) For any 504 loan that is more than three months past due, the 
CDC must promptly request that SBA purchase the Debenture unless the 
504 loan has an SBA-approved deferment or is in compliance with an SBA-
approved plan to allow the Borrower to catch up on delinquent loan 
payments.
    (f) The CDC must cooperate with SBA to cure defaults and initiate 
workouts.
    (g) SBA may negotiate agreements with CDCs to liquidate 504 loans.
    58. Add a new undesignated center heading immediately preceding 
Sec.  120.971 to read as follows:

Fees

    59. Revise paragraphs (a) intoductory text, and (a)(2) of Sec.  
120.971 to read as follows:


Sec.  120.971  Allowable fees paid by Borrower.

    (a) CDC fees. The fees a CDC may charge the Borrower in connection 
with a 504 loan and Debenture are limited to the following:
* * * * *
    (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). 
Some closing costs may be funded out of the Debenture proceeds (see 
Sec.  120.883 for limitations);
* * * * *
    60. Revise Sec.  120.972 to read as follows:


Sec.  120.972  Third Party Lender participation fee and CDC fee.

    (a) Participation fee. For loans approved by SBA after September 
30, 1996, SBA must collect a one-time fee equal to 50 basis points on 
the Third Party Lender's participation in a Project when the Third 
Party Lender occupies a senior credit position to SBA in the Project.
    (b) CDC 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 Borrower.
    61. Remove the undesignated center heading immediately preceding 
Sec.  120.980 and Sec. Sec.  120.980, 120.982 through 120.984.

    Dated: June 27, 2003.
Hector V. Barreto,
Administrator.
[FR Doc. 03-16862 Filed 7-7-03; 8:45 am]
BILLING CODE 8025-01-U