[Federal Register Volume 68, Number 167 (Thursday, August 28, 2003)]
[Rules and Regulations]
[Pages 51677-51680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22012]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AE68


Business Loans and Development Company Loans

AGENCY: Small Business Administration (SBA).

ACTION: Direct final rule.

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SUMMARY: Statutory amendments to the Small Business Act require changes 
to SBA rules concerning maximum loan guaranty and gross loan amounts, 
percentages of financing which can be guaranteed by SBA, guarantee fees 
paid by lenders, real estate occupancy rules, and borrower subsidy 
recoupment fees. This direct final rule implements the statutory 
provisions.

DATES: This rule is effective October 14, 2003 without further action, 
unless adverse comment is received by September 29, 2003. If an adverse 
comment is received, SBA will publish a timely withdrawal of the rule 
in the Federal Register.

ADDRESSES: Written comments should be sent to LeAnn Oliver, Deputy 
Associate Administrator for Financial Assistance, Office of Financial 
Assistance, Small Business Administration, 409 Third Street SW., 
Washington, DC 20416. Comments also may be sent by e-mail to 
[email protected] or submitted electronically at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Charles W. Thomas, Acting Director, 
Office of Loan Programs, Office of Financial Assistance, (202) 205-
6656, [email protected].

SUPPLEMENTARY INFORMATION: The Small Business Reauthorization Act of 
2000, Pub. L. 106-554, Appendix I--H.R. 3667, Titles II-III, 114 Stat. 
2763A-681 to 689 (2000 Act) became effective on December 21, 2000. The 
Veterans Entrepreneurship and Small Business Development Act of 1999, 
Public Law 106-50, 113 Stat. 236, became effective August 17, 1999 
(Veterans' Act). This direct final rule is necessary to amend SBA 
regulations to incorporate certain legislative changes made by the 2000 
Act and the Veterans' Act.
    Previously, SBA was authorized to guarantee no more than 80 percent 
of a loan if the gross amount of the loan was $100,000 or less, and no 
more than 75 percent of a loan over that amount. Section 202 of the 
2000 Act amends the 7(a) business loan program by authorizing SBA to 
guarantee up to 85 percent of a loan if the gross amount of the loan is 
no more than $150,000. Under the 2000 Act, the maximum SBA guaranty on 
a loan greater than $150,000 is 75 percent except as otherwise 
authorized by law. To reflect these changes, SBA is amending Sec.  
120.210 of the regulations.
    Section 203 of the 2000 Act increases the maximum amount that SBA 
may guarantee to a single borrower from $750,000 to $1 million. Section 
203 provides that the gross amount of any one SBA guaranteed loan 
cannot exceed $2 million. Previously, there was no limit on the maximum 
gross loan amount. SBA is amending Sec.  120.151 of its regulations to 
implement these changes.
    Section 205 of the 2000 Act imposes a subsidy recoupment fee on 
some borrowers with respect to certain SBA 7(a) guaranteed loans. A 
subsidy recoupment fee applies if a prepaid loan has a maturity of 15 
years or more, the prepayment is voluntary, the amount of prepayment in 
the aggregate in any 12 month period is more than 25 percent of the 
outstanding balance of the loan in that period, and the prepayment is 
made within the first three years of the initial disbursement of the 
loan proceeds. The subsidy recoupment fee is paid to SBA and applies to 
the full amount of the prepayment, not just to the guaranteed portion 
of the prepayment, as follows: if a borrower prepays during the first 
year after initial disbursement, the prepayment charge is 5 percent of 
the amount of the prepayment; if a borrower prepays during the second 
year after initial disbursement, the prepayment charge is 3 percent of 
the amount of the prepayment; and if a borrower prepays during the 
third year after initial disbursement, the prepayment charge is 1 
percent of the amount of the prepayment. SBA is adding a new Sec.  
120.223 to its regulations to reflect this statutory amendment.
    Section 206 of the 2000 Act simplifies the calculation of the 
guaranty fee payable to SBA by a participating lender. This provision 
continues to allow a lender to pass this fee on to the borrower. Under 
the new simplified calculation for all loans with a maturity of over 12 
months, if the total loan amount is $150,000 or less, a lender must pay 
a guaranty fee equal to 2 percent of the SBA guaranteed portion, 
however, the lender may retain 25 percent of the fee. In addition, for 
all loans with a maturity of over 12 months, if the total loan amount 
is more than $150,000, but not more than $700,000, a lender must pay a 
guaranty fee of 3 percent of the SBA guaranteed portion, and if the 
total amount is more than $700,000, a lender must pay a guaranty

[[Page 51678]]

fee equal to 3.5 percent of the SBA guaranteed portion. (This rule does 
not change guaranty fees payable or timing of fee payment for loans 
with maturities for 12 months or less.) SBA is revising Sec.  120.220 
to implement these provisions, and will replace the chart currently in 
the regulations with text. (SBA notes that legislation enacted after 
the 2000 Act lowered the guarantee fees for some 7(a) loans for the 
two-year period beginning October 1, 2002. This temporary reduction in 
the guarantee fee will be reflected in regulations to be published at a 
later date.)
    Section 207 of the 2000 Act added section 7(a)(28) to the Small 
Business Act with respect to the ability of a borrower in the 7(a) 
business loan program to lease out a portion of a building constructed 
with the proceeds of a guaranteed loan. Borrowers under the 7(a) 
business loan program will now be treated the same as borrowers under 
SBA's 504 program, established under Title V of the Small Business 
Investment Act (SBI Act). Specifically, when the use of proceeds is for 
new construction, section 7(a)(28) allows a 7(a) borrower to 
permanently lease to one or more tenants not more than 20 percent of 
any property constructed with the proceeds of a 7(a) guaranteed loan, 
if the borrower permanently occupies and uses not less than 60 percent 
of the total space at the outset. This provision is substantially 
similar to section 502(5) of the SBI Act, which is applicable to the 
504 program.
    To reflect this statutory change, SBA is revising Sec.  120.131 of 
its regulations to cover the leasing of space in new and existing 
buildings in both the 7(a) and 504 programs, under the terms permitted 
by sections 7(a)(28) and 502(5). All the leasing options permitted by 
the current Sec.  120.131(a) (which reflects leasing options under 
sections 502(4) and 502(5) of the SBI Act) would be permitted under 
revised Sec.  120.131(a) and will be available in both the 7(a) and 504 
programs.
    Section 120.131(a) is being revised to cover the construction of a 
new building financed with 7(a) or 504 financing. A borrower would be 
authorized to permanently lease up to 20 percent of the space to one or 
more tenants if it permanently occupies and uses no less than 60 
percent of the rentable property. It would have to plan to permanently 
occupy and use within three years some of the remaining space not 
immediately occupied and not permanently leased and to plan to 
permanently use and occupy within ten years all of the remaining space 
not permanently leased. All the leasing options permitted by the 
current Sec.  120.131(a), which now reflects section 502(4) of the SBI 
Act, will continue to be available under the revised Sec.  120.131(a). 
Therefore, the language in the current regulations for Sec.  120.131(a) 
is being replaced by language that describes sections 7(a)(28) and 
502(5) only.
    Section 120.131(b) is revised to emphasize that this regulation 
applies to both the 7(a) and 504 loan programs and it deletes the cross 
reference to section 120.870(c).
    Section 209 of the 2000 Act allows the SBA guaranteed portions of 
export working capital loans to be sold in the secondary market. The 
provision accomplishes this by eliminating, for export working capital 
program (EWCP) loans only, the requirement that a loan be fully 
disbursed before it can be sold in the secondary market. Any other SBA 
guaranteed loan made under the 7(a) business loan program still must be 
fully disbursed before a lender can sell the guaranteed portion in the 
secondary market. SBA is amending Sec.  120.613(b) to reflect this 
statutory change. Other provisions concerning EWCP loans remain the 
same.
    Section 306 of the 2000 Act amends Section 508 of the SBI Act (15 
U.S.C. 697e), which relates to Premier Certified Lenders Program 
(PCLP). Section 306 requires that, if upon default in repayment, SBA 
acquires a loan guaranteed under this section (a PCLP loan) and 
identifies such loan for inclusion in a bulk asset sale of defaulted or 
repurchased loans or other financings, it shall give prior notice to 
any CDC which has a contingent liability under this section. Currently, 
only a Premier CDC under the PCLP has a contingent liability with 
respect to a 504 loan even if SBA's loss is not caused by the Premier 
CDC's negligence, fraud, or misrepresentation. Thus, SBA is adding a 
new Sec.  120.540(f) to make clear that SBA is required to give notice 
only to a Premier CDC which has a contingent liability with respect to 
a PCLP loan SBA intends to include in a bulk asset sale.
    Section 306 requires that SBA give notice to the Premier CDC as 
soon as possible after the financing is identified for sale, but not 
less than 90 days before the date SBA first makes any records on such 
financing available for examination by prospective purchasers prior to 
such loan being offered in a package of loans for bulk sale. SBA is 
adding this requirement in new Sec.  120.540(f).

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

    This rule will not have substantial direct effects on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Therefore, for the purposes of Executive Order 
13132, SBA determines that this direct final rule has no federalism 
implications warranting preparation of a federalism assessment.
    The Office of Management and Budget (OMB) has determined that this 
rule does not constitute a ``significant regulatory action'' under 
section 3(f) of Executive Order 12866.
    SBA has determined that this direct final rule does not impose 
additional reporting or recordkeeping requirements under the Paperwork 
Reduction Act, 44 U.S.C., chapter 35.
    This rule meets applicable standards set forth in sections 3(a) and 
3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. This rule also will 
not have retroactive or preemptive effect.
    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601, requires 
administrative agencies to consider the effect of their actions on 
small entities, including small businesses, small non-profit 
enterprises, and small local governments. Pursuant to the RFA, when an 
agency issues a rulemaking, the agency must prepare a regulatory 
flexibility analysis which describes the impact of the rule on small 
entities. However, section 605 of the RFA allows an agency to certify a 
rule, in lieu of preparing an analysis, if the rulemaking is not 
expected to have a significant economic impact on a substantial number 
of small entities. If the head of the agency makes such a 
certification, that certification must be published along with a 
statement providing the factual basis for such certification. Within 
the meaning of RFA, SBA certifies that this rule will not have a 
significant economic impact on a substantial number of small entities. 
The factual basis for that certification is provided below.
    Section 202 of the Act raises SBA's guaranty from 75 percent for 
loans of $100,000 or less to 85 percent for loans of $150,000 or less, 
which is intended to reduce lender risk and reduce lender cost for 
providing small business loans and thus increase the availability of

[[Page 51679]]

financing to the small business community. SBA estimates that for FY 
2000, it approved approximately 6,300 loans between $100,000 and 
$150,000. For FY 2002, SBA estimates that it approved approximately 
7,600 loans between $100,000 and $150,000. This represents an increase 
of approximately 1,300 additional SBA loans between $100,000 and 
$150,000 in FY 2002 compared to FY 2000. This compares to a total of 
about 52,000 loans SBA approved in FY 2002. (The SBA estimates that 
annually about 3 percent of its 7(a) loans go to an existing SBA 
borrower--For example, SBA may approve a term loan and a separate 
working capital loan to the same borrower--Thus, the actual number of 
small businesses receiving an SBA loan in a given year will be about 
50,000 businesses.)
    Section 203 of the Act raises the maximum amount the SBA may 
guarantee to a single borrower from $750,000 to $1 million, which will 
allow SBA and its lending partners to provide additional small business 
financing, particularly to growing small businesses and to businesses 
located in more costly, higher growth areas of the country. In FY 2002, 
the first full year during which SBA could guaranty loans up to $1 
million, about 2,000 small businesses benefited from SBA's expanded 
guaranty authority. Section 203 also limits the maximum size of an SBA 
loan to $2 million, where formerly there was no maximum. However, 
historically the Agency has approved very few loans over $2 million, 
generally less than 20 per year. But, with continuing limitations to 
SBA 7(a) loan authority due to budget constraints, the 7(a) authority 
that would have been used by these 20 or so larger SBA borrowers can 
now be channeled to smaller borrowers. Thus, while annually about 20 or 
so larger borrowers will no longer have access to SBA financing due to 
this limitation, the Agency estimates that with an average SBA loan 
size of approximately $163,000, about 370 other small business 
borrowers will receive SBA financing that would not otherwise be 
available.
    Section 205 imposes a subsidy recoupment fee on SBA borrowers that 
pre-pay longer term loans. This recoupment fee was instituted to ensure 
SBA loan subsidy costs are not distorted and effectively increased due 
to the pre-payment of longer term loans by SBA borrowers, which could 
reduce the overall availability of SBA financing to the small business 
community as a whole. SBA's analysis of management information data 
indicates that approximately 80 SBA loans were pre-paid in FY 2002 and 
subject to the subsidy recoupment fee. This compares to a total of 
approximately 52,000 SBA loans approved during FY 2002.
    Section 206 modifies, simplifies and, in many cases, reduces the 
fees that the SBA charges lenders for SBA's guaranty, which the lenders 
usually pass on to the borrowers. It also establishes a guaranty fee of 
3.5 percent for loans over $700,000, the majority of which are loans 
made under SBA's new authority (under section 203 above) to approve 
guaranties up to $1 million. The simplification and modification of the 
fee structure was intended to reduce the administrative complexity of 
SBA loan programs and reduce the administrative costs associated with 
an SBA loan, thereby encouraging lenders to make more SBA loans. 
Section 206 also revised and reduced the cost of SBA's guaranty for 
some SBA loans. In FY 2002, under the revised fee structure about 
17,000 SBA borrowers paid lower guaranty fees (from several hundred to 
over $1,000 less), about 33,000 borrowers paid the same, and about 
3,000 borrowers paid slight guaranty fees. As a result of these and 
other program changes, SBA approved about 8,000 additional loans in FY 
2002 compared to FY 2000. The SBA also estimates that in FY 2002 about 
2,500 small businesses were approved for an SBA guaranty between 
$700,000 and $1 million and were thus impacted by the 3.5 percent 
guaranty that applies to these loans. However, these loans were 
approved for small businesses that, without the SBA guaranty, would not 
have had access to financing. As a result, they benefited economically 
from the availability of these loans, which was in part made possible 
by the 3.5 percent guaranty fee.
    Section 207 allows borrowers under the 7(a) business loan program 
to lease out a portion of a building constructed with the proceeds of 
an SBA guaranteed loan, which provides additional flexibility to some 
borrowers and enhances their longer term prospects for success. SBA's 
analysis indicates that of the approximately 52,000 loans approved 
during FY 2002, only about 100 small businesses took advantage of this 
increased flexibility.
    Section 209 allows the SBA guaranteed portions of export working 
capital loans to be sold in the secondary market, which is expected to 
improve lender liquidity and encourage lenders to provide additional 
financing to small business exporters. From an analysis of its 
management information data, the Agency estimates that about 370 small 
businesses benefited from SBA guaranteed export working capital loans 
in FY 2002, which is about the same number of small businesses that 
received export working capital loans in FY 2000. The SBA estimates 
about 60 of those loans were sold on the secondary market.
    Section 306 requires that SBA provide no less than 90 days notice 
to Premier Certified Lenders (PCL) of its intent to include PCL loans 
in a bulk sale of SBA loans. About 30 CDCs currently participate in the 
PCL program, through which about 780 loans were approved in FY 2002. 
However, SBA has not as yet included any PCL loans in bulk asset sales 
and currently has no plans to do so.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses.

0
For the reasons set forth in the preamble, amend part 120 of title 13 
of Code of Federal Regulations as follows:
0
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).


0
2. Revise Sec.  120.131 to read as follows:


Sec.  120.131  Leasing part of new construction or existing building to 
another business.

    (a) If the SBA financing (whether 7(a) or 504) is for the 
construction of a new building, a Borrower may permanently lease up to 
20 percent of the Rentable Property to one or more tenants if the 
Borrower permanently occupies and uses no less than 60 percent of the 
Rentable Property, and plans to permanently occupy and use within three 
years some of the remaining space not immediately occupied and not 
permanently leased and plans to permanently occupy and use within ten 
years all of the remaining space not permanently leased. If the 
Borrower is an Eligible Passive Company which leases 100 percent of the 
new building's space to one or more Operating Companies, the Operating 
Company, or Operating Companies together, must follow the same rules 
set forth in this paragraph.
    (b) If the SBA financing (whether 7(a) or 504) is for the 
acquisition, renovation, or reconstruction of an existing building, the 
Borrower may permanently lease up to 49 percent of the Rentable 
Property if the Borrower permanently occupies and uses no less than 51 
percent of the Rentable Property. If the Borrower is an Eligible 
Passive Company which leases 100 percent of the space of the existing 
building to one or more Operating Companies, the Operating Company, or

[[Page 51680]]

Operating Companies together, must follow the same rules set forth in 
this paragraph.

0
3. Remove the first sentence of Sec.  120.151 and add in its place two 
new sentences to read as follows:


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

    The aggregate amount of the SBA portions of all loans to a single 
Borrower, including the Borrower's affiliates as defined in Sec.  
121.103 of this chapter, must not exceed a guaranty amount of 
$1,000,000, except as otherwise authorized by statute for a specific 
program. The maximum loan amount for any one 7(a) loan is $2,000,000. * 
* *

0
4. Revise the third and fourth sentences of Sec.  120.210 to read as 
follows:


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

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

0
5. Amend Sec.  120.220 by adding introductory text, revising paragraph 
(a), redesignating paragraphs (b) and (c) as (e) and (f), and adding 
new paragraphs (b), (c), and (d) to read as follows:


Sec.  120.220  Fees that Lender pays SBA.

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

0
6. Add new Sec.  120.223 to read as follows:


Sec.  120.223  Subsidy recoupment fee payable to SBA by Borrower.

    (a) The subsidy recoupment fee is payable to SBA when:
    (1) Loan has a maturity of 15 years or more.
    (2) Borrower makes a voluntary prepayment (or several prepayments 
in the aggregate) during any one of the first three successive 12 month 
periods following the first disbursement of the loan. Prepayment is 
defined as a payment of principal in excess of the amount due according 
to the amortization schedule.
    (3) The prepayment (or several prepayments in the aggregate) is 
more than 25 percent of the highest outstanding principal balance of 
the loan in any one of the first three successive 12 month periods 
following the first disbursement.
    (b) When all the conditions above exist, the following subsidy 
recoupment fees apply:
    (1) If the prepayment is made during the first 12 month period 
after first disbursement, the charge is 5 percent of the total amount 
of all prepayments made during such period;
    (2) If the prepayment is made during the second 12 month period 
after first disbursement, the charge is 3 percent of the total amount 
of all prepayments made during that period; and
    (3) If the prepayment is made during the third 12 month period 
after first disbursement, the charge is 1 percent of the total amount 
of all prepayments made during that period.

0
7. Add a new Sec.  120.540(f) to read as follows:


Sec.  120.540  What are SBA's policies concerning the liquidation of 
collateral and the sale of business loans and physical disaster 
assistance loans, physical disaster business loans and economic injury 
disaster loans?

* * * * *
    (f) Notice. If upon default in repayment, SBA acquires a Premier 
Certified Lenders Program (PCLP) loan and identifies such loan for 
inclusion in a bulk asset sale of defaulted or repurchased loans or 
other financings, SBA must give prior notice to any Premier Certified 
Lenders (``Premier CDC'') which has a contingent liability with respect 
to the PCLP loan. SBA must give the notice to the Premier CDC as soon 
as possible after the loan is identified for inclusion in such sale, 
but not less than 90 days before the date SBA first makes any records 
on such loan available for examination by prospective purchasers prior 
to such loan being offered in a package of loans for bulk sale.

0
8. Revise Sec.  120.613(b) to read as follows:


Sec.  120.613  Secondary Participation Guarantee Agreement.

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

    Dated: August 19, 2003.
Hector V. Barreto,
Administrator.
[FR Doc. 03-22012 Filed 8-27-03; 8:45 am]
BILLING CODE 8025-01-P