[Federal Register Volume 72, Number 86 (Friday, May 4, 2007)]
[Rules and Regulations]
[Pages 25189-25194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-8516]



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  Federal Register / Vol. 72, No. 86 / Friday, May 4, 2007 / Rules and 
Regulations  

[[Page 25189]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN Number 3245 AF49


Business Loan Program; Lender Examination and Review Fees

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule implements a recent amendment to the Small 
Business Act authorizing the Small Business Administration (SBA) to 
assess fees to Lenders participating in SBA's 7(a) loan guarantee 
program (Lenders) to cover the costs of examinations, reviews, and 
other Lender oversight activities. The rule describes the methodology 
for fee assessment. Lenders will pay the actual costs to SBA of the on-
site examinations and reviews, and will be allocated off-site review/
monitoring costs based on each Lender's proportionate share of loan 
dollars that SBA has guaranteed in the SBA portfolio. The rule also 
describes the billing and payment processes.

DATES: This rule is effective June 4, 2007.

FOR FURTHER INFORMATION CONTACT: Bryan Hooper, Director, Office of 
Lender Oversight, U.S. Small Business Administration, 409 Third Street, 
SW., Washington, DC 20416, (202) 205-3049.

SUPPLEMENTARY INFORMATION:

I. Background Information

    Section 7(a) of the Small Business Act, 15 U.S.C. 636(a), 
authorizes SBA to guarantee loans made by Lenders to eligible small 
businesses. Currently, there are nearly 5,000 Lenders authorized to 
make such SBA guaranteed loans that have outstanding 7(a) loans. SBA 
conducts off-site reviews/monitoring and on-site exams/reviews of these 
Lenders to ensure they are processing loans in accordance with 
prescribed standards and to minimize losses. Section 5(b)(14) of the 
Small Business Act (15 U.S.C. 634(b)(14)), authorizes SBA to require 
these Lenders to pay fees to cover ``the costs of [the] examinations, 
reviews, and other Lender oversight activities.'' Congress granted SBA 
this new fee authority under section 131 of Division K of Public Law 
108-447, enacted December 8, 2004. Examination and review costs 
primarily consist of contractor charges for assistance with (i) on-site 
examinations; (ii) on-site reviews; and (iii) off-site reviews/
monitoring activities.
    On September 5, 2006, SBA published a proposed rule seeking 
comments by October 5, 2006 on its proposal implementing SBA's 
statutory exam/review fee authority. 71 FR 52296. SBA published a 
subsequent notice extending the comment period for the proposed Lender 
review fee to November 9, 2006. 71 FR 59411. The primary purpose of the 
fee is to cover the costs that SBA currently absorbs for on-site Lender 
examinations and reviews and off-site review and monitoring activities. 
On-site and off-site review and monitoring activities are performed to 
ensure that Lenders are processing, servicing, and liquidating loans in 
accordance with prescribed SBA standards. By ensuring that Lenders are 
performing their SBA-required responsibilities in accordance with 
prescribed standards, SBA reduces the costs of the 7(a) program and its 
risk of losses from the program.
    Under this rule, Lenders will be charged fees for two distinct 
oversight activities performed by SBA with the assistance of 
contractors. First, Lenders receiving an on-site review or examination 
by SBA's review and examination contractors will be charged for the 
contractors' actual review or examination cost. This cost will be 
charged to the Lender by SBA after completion of the review or 
examination for payment according to the terms of the invoice. SBA 
plans to review only those Lenders with a total outstanding 7(a) 
portfolio of more than $10 million in SBA guaranteed dollars, although 
it reserves the right to review Lenders with smaller portfolios if SBA 
determines in its discretion that circumstances warrant. Second, all 
Lenders will be charged a fee for contractor costs associated with 
SBA's off-site review/monitoring activities. The fee will be based upon 
each Lender's pro-rata share of the total outstanding 7(a) portfolio, 
measured by SBA guaranteed dollars. Each Lender's off-site review fee 
will be determined using that Lender's outstanding guaranteed dollars, 
relative to that of SBA's outstanding guaranteed portfolio, as of 
September 30 of each year. Guaranteed dollars outstanding includes 
guarantees of both loans held by the Lender and loans sold into the 
secondary market, securitized, or for which a Lender has sold a 
participating interest. It also includes loans that have been purchased 
by SBA but have not yet been charged-off. SBA may waive the off-site 
review/monitoring fee when SBA determines that it is not cost effective 
to collect the fee. Currently, SBA expects to waive the off-site 
review/monitoring fee for Lenders with a fee of less than $200.
    The rule also authorizes SBA to charge a fee to cover the costs of 
the additional expenses that SBA incurs in carrying out Lender 
oversight activities (for example, the salaries and travel expenses of 
SBA employees and equipment expenses that are directly related to 
carrying out Lender oversight activities). However, SBA does not plan 
at this time to charge Lenders for these costs. A discussion of the 
comments received and considered and a section by section analysis 
follows.

II. Comments Received and Considered

    With approximately 5,000 individual Lenders, SBA received only 56 
comments on the proposed Lender review fee. Forty-nine of the comments 
were from 7(a) Lenders other than Small Business Lending Companies 
(SBLCs), and three comments were from SBLCs. Three comments were from 
trade organizations, and one comment came from a regulatory 
organization. Comments generally covered the following areas: (i) The 
fee levels were excessive; (ii) there was no incentive to control 
costs; (iii) the fee could drive small Lenders out of the program; (iv) 
use of other regulators or SBA staff to perform the reviews; (v) the 
manner and methodology used for the reviews and review fees (generally 
concerning the off-site review fee); and (vi) other comments.

[[Page 25190]]

Fee Levels

    Some commenters asserted that the overall fees described in the 
proposed notice were generally excessive. A few commenters stated that 
the off-site fees were excessive and other commenters expressed that 
the on-site review or examination fees were too high.
    SBA awards the contracts for the reviews and examinations in 
accordance with Federal procurement statutes and regulations, and makes 
the awards to those contractors that can best meet the program's needs 
while at the same time obtaining the best value for the Government. 
Further, SBA and its contractors work together to minimize costs 
whenever possible. For example, SBA may direct the on-site review or 
examination contractor to reduce its loan review sample sizes for SBA 
Supervised Lenders with small portfolios or no current lending 
activity. With respect to the cost of the on-site examinations, as we 
noted in the proposed rule, SBA's costs compare favorably to the 
assessments performed by other Federal regulators, which are similar in 
size and scope to SBA's examinations. For example, the Comptroller of 
the Currency's current annual assessment on a bank with $1 billion in 
assets is approximately $232,000, and the Office of Thrift Supervision 
assesses the same size institution approximately $215,682, whereas the 
annualized cost for an SBA Supervised Lender on a 24 month exam cycle 
with $1 billion in outstanding loan balances (with 71% of that 
portfolio guaranteed by SBA) would average $132,830. With respect to 
the off-site review fee, we note that the average size of an 
outstanding 7(a) loan is approximately $110,000 in SBA guaranteed 
dollars. The current off-site review fee is estimated to be $73 per 
million in outstanding guarantee dollars. Therefore, for the off-site 
review, the average outstanding 7(a) loan would cost the Lender an 
additional $8 per year, which SBA does not believe to be an 
unreasonable burden for Lenders.
    Consequently, SBA believes that both the off-site and on-site cost-
based fees are reflective of the market for such services and are fair 
and reasonable.

Cost Control

    Many of the commenters raised concerns as to future efforts to 
control the costs of SBA's oversight activities. These commenters 
contended that SBA has little incentive to control costs if oversight 
costs are passed along to Lenders, and that SBA should consult with 
Lenders before increasing any of the review fees. In addition, several 
commenters were concerned that SBA would pass along to the Lenders the 
Agency's costs associated with Lender oversight.
    SBA does not believe that the Lender fee structure will result in 
reduced efforts by SBA to minimize costs. For each of the contracts 
under which the examinations and reviews are conducted, SBA ensures 
that the contract cost is fair and reasonable in accordance with 
applicable law. In addition, SBA currently controls costs in general 
through fixed price contracts, contract monitoring and, as noted above, 
through coordinating the work with the contractors to minimize costs. 
For example, SBA works to control the costs of the on-site review 
primarily through a fixed-price contract, which currently ranges from 
$21,000 to $26,000 per review. The only variable rate component is for 
travel to and from the Lender's site, and these expenses are carefully 
evaluated for reasonableness by Office of Lender Oversight staff as 
part of the invoicing process. SBA also works closely with the Farm 
Credit Administration, its current contractor for on-site examinations, 
to control examination costs for SBLCs. For example, SBA and Farm 
Credit Administration have worked to ensure that the sample size of 
loans reviewed during the examination process is reflective of the 
SBLC's portfolio size. Finally, most of SBA's costs associated with the 
off-site reviews/monitoring are also fixed. These fixed costs minimize 
the potential for increased costs, and help ensure that costs will 
remain controlled during the life of the contracts (on-site reviews and 
off-site reviews/monitoring). As the contracts or agreements are re-
competed or renewed, as appropriate, SBA will continue to consider cost 
as one of several important considerations in determining which offers 
or proposed agreements provide the best value to the government.
    SBA also believes that Lender concerns with respect to SBA charging 
a fee to cover its own internal costs are misplaced. As noted in the 
proposed rule, the statute upon which the rule is based authorizes the 
Agency to charge a fee to cover the Agency's internal Lender oversight 
costs. However, it is not the Agency's intention to charge a fee to 
cover such costs at the present time. Should SBA later decide to 
include charges for other Lender oversight activities, SBA will provide 
Lenders a notice describing the costs to be included in the fee.
    Many commenters suggested that SBA should establish a maximum 
charge for oversight activity fees and consult with Lenders before 
increasing the fees. As noted above, SBA minimizes the fees through 
competitive bidding processes, and by working with its contractors to 
reduce costs where possible (while still maintaining strong risk 
management capabilities). Therefore, SBA believes there is no need to 
establish a maximum fee threshold and, with respect to the comment on 
consultation, SBA will continue its practice of consulting with its 
Lenders through informal discussions and contacts.

Impact on Small Lenders

    Many commenters asserted that the fee might force smaller Lenders 
out of SBA lending due to increased costs, damaging SBA's lending 
program. SBA believes that the fee will not have such an impact. First, 
we believe that the financial impact of the review fees themselves will 
be relatively minimal on most 7(a) Lenders, especially small Lenders. 
Since on-site reviews will generally only be performed on Lenders with 
SBA portfolios of at least $10 million in SBA guaranteed dollars, the 
overwhelming majority of Lenders will not be subject to on-site 
reviews, and will thus not be impacted by the on-site review cost. Of 
the approximately 5,000 SBA 7(a) Lenders, only about 350, or about 7 
percent of all Lenders, have portfolios of greater than $10 million, 
and these Lenders hold about 84% of the outstanding SBA guaranteed 
dollars. In addition, it is SBA's expectation that on-site reviews 
would be normally performed approximately every two years and, thus, 
Lenders will not be bearing an annual on-site review cost. Off-site 
reviews will be performed on all 7(a) Lenders; however, the fee is 
relatively small for Lenders with lesser portfolios. The proposed rule 
stated that the cost for off-site reviews was expected to be 
approximately $82 for every $1 million SBA guaranteed dollars held by a 
Lender. SBA has revised its fee estimate and, due to several factors, 
we now estimate the cost of off-site reviews/monitoring to be 
approximately $73 for every $1 million in SBA guaranteed dollars. Thus, 
for a Lender with $10 million in SBA guaranteed loan dollars, the off-
site review fee at this time would be $730. We do not believe this to 
be an unduly burdensome fee upon Lenders.
    Second, we note that many Lenders in the 7(a) program are local 
community banks. A major role of these banks is to be a source of funds 
within the community, and to lend those funds to small business 
borrowers in need of those funds to pursue their dreams and 
opportunities. Since SBA is a ``credit

[[Page 25191]]

elsewhere'' program--i.e., recipients of 7(a) loans have not been able 
to obtain credit on reasonable terms from any other source--the banks 
are not willing to serve these customers without the SBA Guarantee. We 
believe that Banks--particularly local banks that must serve their 
community--will continue to offer SBA guaranteed loans to borrowers 
unable to obtain financing on such reasonable terms elsewhere.
    Finally, SBA believes that the off-site reviews and monitoring and 
additional on-site reviews that the fee will sustain will dramatically 
improve the Agency's risk management of the 7(a) program. Off-site 
reviews/monitoring will enable SBA to quickly and continually spot 
Lenders with poorly performing portfolios and work with those Lenders 
to turn around their performance. Regular on-site reviews will allow 
SBA to ensure that its highest risk 7(a) Lenders are meeting their 
program obligations and complying with Agency origination, 
underwriting, servicing, and liquidation requirements. Expanding the 
number of on-site reviews will enable SBA to educate more Lenders on 
the correct origination, servicing and liquidation procedures for 
Agency loans. By doing so, it is SBA's expectation that more Lenders 
will comply with Agency guidelines, cutting the Agency's processing 
times and possibly reducing program losses. These benefits would reduce 
SBA's costs, which may be passed along to its lending partners and 
borrowers through reductions in other fees and ultimately improve the 
7(a) program.
    In the proposed rule, SBA indicated that it might establish a 
minimum fee threshold (below which it would waive the off-site fee) if 
it believed that collection costs would be high relative to the fee 
collected. SBA has determined that, currently, it will be cost 
effective to the Agency to waive the off-site review fee for Lenders 
with a total fee of less than $200 in lieu of incurring the cost 
associated with collecting these smaller fees. By setting this 
threshold, SBA estimates it will eliminate the fee for approximately 
4,050 Lenders, while still collecting approximately 93 percent of the 
off-site review costs. SBA reserves the right to adjust this threshold 
from time to time in its sole discretion, and will periodically review 
the cost of collecting the off-site fee to determine if the threshold 
should be adjusted or eliminated. For example, if technological 
improvements reduce the cost of collections, SBA may reduce or 
eliminate the threshold at which it waives the fee. Such changes would 
be made through an SBA Notice. All Lenders owing more than the 
threshold amount will be required to pay the entire fee. It is 
important to note that the paying Lenders will not be paying more 
because the smaller fees are being waived for some Lenders; rather, SBA 
will absorb those costs.
    As a result, SBA believes the review fees will not have a 
detrimental effect upon the 7(a) program. Furthermore, the Agency 
believes that the size of the fee is not an undue burden on smaller 
Lenders, and that the establishment of a fee waiver threshold will 
further reduce the impact on smaller Lenders. Therefore, we do not 
believe that the imposition of the fee will cause smaller Lenders to 
leave the 7(a) program.

Reviews by Other Regulators or SBA Staff

    Several commenters suggested that it might be more efficient for 
SBA to have others perform on-site reviews. Most recommended using 
staff from financial regulators, while one proposed using local SBA 
staff to perform the reviews, and another expressed concern with SBA 
finalizing the rule before attempting to coordinate the reviews with 
state and federal regulators who have primary supervisory authority 
over the Lenders.
    SBA believes that financial regulators generally do not have 
significant knowledge of SBA's 7(a) loan program; we would be concerned 
about a lack of consistency in the reviews performed. Thus, it could be 
difficult to rely on review results as a component of our Lender 
monitoring process, particularly when comparing review results between 
peers. In addition, by controlling reviews through dedicated 
contractors, we have maximum flexibility to move resources where 
immediately needed to timely address most pressing risk issues to SBA.
    It is also not feasible for local SBA staff to perform the on-site 
reviews. Local SBA staff is dedicated to program development and 
outreach which, by being separate from the Lender oversight functions, 
avoids the appearance of any conflict between the two. In addition, the 
Agency does not currently have staff with the training and experience 
necessary to perform risk-based reviews or safety and soundness 
examinations.

Review Fee Methodology

    SBA received a number of comments on the manner and methodology 
that SBA proposed for assessing the review fees. These comments 
concerned: (i) The frequency of the off-site review process, (ii) using 
a different approach to determine the off-site review fee, and (iii) 
applying the fee to loans already in Lenders' portfolios.
    Many commenters raised concerns about the frequency of the off-site 
reviews. Some expressed that reviewing and updating Lender risk ratings 
on a quarterly basis was too frequent, while others suggested that the 
frequency of the risk ratings be tied to each Lender's relative risk--
less risky Lenders being subject to updated risk ratings less often 
than riskier Lenders.
    All lenders Risk Rating are updated on a quarterly base. Quarterly 
updating allows SBA to better monitor both individual Lender and 
portfolio-wide performance trends. Portfolio performance may change 
dramatically from quarter to quarter. Therefore, quarterly reviews may 
detect changes that threaten the 7(a) program sooner than reviews 
performed less frequently. The quarterly comparison enables SBA to 
regularly identify those Lenders with the greatest risk and to review 
them timely and more closely.
    Because the risk rating system was designed to compare each 
Lender's risk to SBA relative to its peers, it is essential to perform 
a risk rating on all Lenders each review cycle. If the Agency did not 
compare the performance of all Lenders in a peer group, Lenders would 
not be accurately rated for relative risk. For example, if SBA only 
risk rated the worst performing Lenders in each peer group (removing 
the best performing Lenders from the analysis), the relatively better 
performing Lenders in this higher risk subset would appear to be 
performing better than they are because they would only be compared to 
even higher risk Lenders rather than both higher and lower risk 
Lenders. In addition, under the risk rating system, individual Lender 
ratings may rise or fall every quarter, as each Lender's performance 
becomes relatively more or less risky. Unless all Lenders are risk 
rated each quarter, SBA will be unable to detect positive or negative 
performance trends.
    Several commenters requested that SBA consider adding a minimum fee 
component to the cost allocation methodology for the off-site review 
fee. These commenters suggested that SBA should charge each Lender a 
minimum fee, and then allocate the remainder of the cost to Lenders 
based upon the size of their 7(a) loan portfolios. The commenters 
reasoned that since at least a minimal level of contractual off-site 
review work is performed on each Lender, all Lenders should pay at 
least a minimal fee. However, some commenters supported SBA's proposal 
to provide a waiver or exemption of the fee for small volume lenders.

[[Page 25192]]

    SBA has decided against charging a minimum fee. Charging a minimum 
fee for lower volume Lenders would run counter to SBA's determination 
to absorb those costs that are not cost effective to collect and 
equitably assess the remaining cost to higher volume lenders. This 
comment also appears to be based on the erroneous assumption that the 
Lenders who pay the fee will be subsidizing the Lenders who will have 
the fees waived. The paying Lenders will not be subsidizing the non-
paying Lenders because SBA currently plans to absorb the costs of the 
waived fees. In addition, a minimum fee allocation methodology may 
result in a disproportionate distribution of the review costs relative 
to each Lender's participation level.
    Several commenters suggested that SBA consider revising the formula 
upon which to base the off-site review fee. Rather than base the fee on 
portfolio size in SBA guaranteed dollars outstanding, commenters 
proposed that the fee be based upon such factors as the number of loans 
outstanding, average size of the loans in each Lenders' portfolio, 
historical portfolio performance, annual origination volume, and Lender 
risk ratings. The Agency believes that SBA guaranteed dollars 
outstanding is the factor most directly related to risk because it is a 
direct measure of the Agency's maximum risk exposure should SBA be 
forced to honor its loan guarantees.
    A few commenters objected to SBA applying the off-site review fee 
to loans originated before the fee rule effective date. The commenters 
suggested that SBA should only apply the off-site fee to loans 
originated after this rule's effective date, to enable Lenders to price 
the cost of the fee into their loan. This suggestion, however, does not 
consider that SBA's off-site monitoring approach takes into account a 
Lender's entire 7(a) portfolio when risk rating a Lender's portfolio. 
All of the loans in each Lender's portfolio are monitored as part of 
SBA's risk management process, and all of the loans are included in the 
portfolio analysis that SBA uses to determine which Lenders may present 
an unreasonable level of risk to SBA. To exclude earlier originated 
loans and their dollar risk from the analysis would present an 
incomplete picture of the portfolio's risk to SBA. Further, such a 
measure would have an unfair effect between Lenders: One Lender with a 
portfolio of $10 million in SBA guaranteed dollars originated prior to 
the effective date would not be subject to the off-site review fee for 
the entire life of that portfolio, while another Lender with the same 
size portfolio of loans all originating after the effective date would 
be subject to the fee. In sum, this suggestion fails to consider that 
all loans, including currently outstanding loans, represent some level 
of risk to SBA and must be monitored.

Other Miscellaneous Comments

    One commenter requested that SBA exclude loans purchased by SBA, 
but not yet charged-off by SBA, from the off-site review fee 
calculation. SBA includes purchased loans in its off-site monitoring 
efforts to help assist its purchase centers in tracking charge-off and 
recovery data. SBA believes the cost associated with purchased loans 
will be minimal since the Agency has made a concentrated effort to 
reduce charge-off time.
    One commenter suggested that SBA limit the number of on-site 
reviews performed on individual Lenders to a maximum of one review 
every two years. SBA intends to perform an on-site review approximately 
every other year on SBA's larger 7(a) Lenders. However, SBA must 
reserve the right to review or examine these Lenders more frequently 
(and review smaller Lenders) if it determines that particular Lenders 
present an unacceptably high level of risk to SBA. It is possible that 
Lenders may be subject to multiple on-site reviews within a two-year 
cycle when there are significant weaknesses uncovered during an earlier 
review that must be corrected in order to reduce SBA's risk. However, 
SBA may also determine that Lenders with poor portfolio performance, as 
measured by their off-site Lender risk rating and performance factors, 
should be subject to a follow up review. Such decisions will be made in 
SBA's sole discretion.
    Finally, two commenters asserted that it was unreasonable to expect 
Lenders to pay the review fee within the 30 day time period. SBA 
believes that the response time is sufficient for payments to be made. 
We note that some federal financial institution regulators allow even 
less time for payment of assessment fees. However, if a Lender has an 
extraordinary situation and cannot timely make payment, it should 
contact the Office of Lender Oversight in writing to request additional 
time. The final rule provides that SBA may waive or abate the 
collection of interest, charges and/or penalties for delinquent 
payments if circumstances warrant.
    SBA has carefully reviewed the comments received and adopts the 
rule as proposed with three minor changes. Specifically, SBA has 
deleted a cite reference to a current enforcement regulation as SBA may 
in the future propose the relocation and revision of SBA's enforcement 
regulations, has added specific authority for SBA to waive the off-site 
review fee when it determines that it is not cost effective to collect 
the fee, and has clarified that Lenders will be required to pay a fee 
to cover other lender oversight activities only if SBA assesses such a 
fee.

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

Executive Order 12866

    The Office of Management and Budget has determined that this final 
rule constitutes a significant regulatory action under Executive Order 
12866 thus requiring a Regulatory Impact Analysis. We provided such an 
analysis in the proposed rule published on September 5, 2006. In that 
analysis, SBA stated that, as it delegates more authority to its 
Lenders, there is a need for better and more comprehensive Lender 
oversight, which SBA has developed through the off-site (L/LMS) and on-
site reviews and examinations. The rule implements the recent amendment 
to the Small Business Act authorizing SBA to assess Lenders fees to 
cover the costs of those examinations or reviews. The costs of these 
oversight activities primarily consist of contractor charges for 
assistance in carrying out the reviews and examinations. In its 
analysis, SBA noted that the benefits of the proposed fees for Lenders 
include that the costs of on-site examinations or reviews are allocated 
directly to those Lenders for whom the costs are incurred, and that the 
costs of L/LMS would be allocated according to each Lender's 
participation level as measured by SBA guaranteed dollars. Besides 
allocating its review and monitoring costs to its Lenders, SBA will 
benefit through the relative ease of administering the assessment 
process. The analysis indicates that SBA considered alternatives to the 
L/LMS cost allocation plan, but that an allocation based on dollars at 
risk, rather than for example the number of loans, is better related to 
risk and, therefore, the most equitable.
    SBA received several comments on costs and alternatives. SBA 
addressed these comments in the comments section of the preamble. For 
example, some commenters suggested that the proposed fee was excessive. 
SBA's examination and review costs primarily consist of contractor 
charges and contracts are awarded in accordance with Federal 
procurement statutes and regulations, while providing best value

[[Page 25193]]

for the Government. Consequently, SBA believes that both the off-site 
and on-site cost-based fees are reflective of the market for such 
services and are fair and reasonable. Some commenters also suggested 
that the fees would be prohibitive for small Lenders. As stated in the 
comments section, these fees will be waived for Lenders with small 
portfolios. The reviews may ultimately lead to greater compliance with 
Agency guidelines and less program losses, which may be passed along to 
Lenders through reductions in other fees. Therefore, SBA does not 
believe that the fees will force small Lenders out of SBA lending.
    SBA received several comments recommending alternatives. For 
example, SBA received suggestions that the Agency consider setting 
minimum and maximum fee levels; tie review fees to risk ratings; and 
utilize other bank regulators for SBA program on-site reviews. The 
comment on minimum fees appears to be based on the erroneous assumption 
that the Lenders who pay the fees will be subsidizing the Lenders who 
will have the fees waived. Also, charging a minimum fee for lower 
volume Lenders would run counter to SBA's determination to absorb those 
costs that are not cost effective to collect. As to setting a maximum 
fee, SBA minimizes the fees through competitive bidding processes, 
through fixed price contracts and by working with its contractors to 
reduce costs where possible. Therefore, SBA believes there is no need 
to establish a minimum or a maximum fee threshold. Some commenters 
suggested that SBA should tie review fees to risk ratings. Risk Rating 
trends are indirectly incorporated into the fee methodology to the 
extent that better ratings could translate into less frequent on-site 
examinations and reviews. Another alternative suggested was that SBA 
utilize the other bank regulators for SBA program on-site reviews. SBA 
believes that utilizing the other bank regulators to perform SBA's 
reviews would cause concern about a lack of consistency in the reviews 
performed. Thus, it could be difficult to rely on review results as a 
component of our Lender monitoring process, particularly when comparing 
review results between peers. Therefore, SBA did not accept this 
alternative. For a more detailed discussion on the costs and 
alternatives, see the main text of the preamble.

Executive Order 12988

    This final rule meets applicable standards set forth in Sec. Sec.  
3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to 
minimize litigation, eliminate ambiguity, and reduce burden. This final 
rule will not have retroactive or pre-emptive effect.

Executive Order 13132

    This final rule will not have substantial direct effects on the 
States, on the relationship between the Federal 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 has determined that this final rule has no federalism 
implications warranting preparation of a federalism assessment.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612, requires 
the Agency to ``publish a final regulatory flexibility analysis'' which 
will ``describe the impact of the final rule on small entities.'' 5 
U.S.C. 604(a). 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. Although this rulemaking may affect a substantial 
number of small entities, for the reasons stated below, SBA does not 
believe that this rule will have a significant economic impact on a 
substantial number of small entities.
    This rule implements Small Business Act Sec.  5(b)(14), which 
authorizes SBA to require 7(a) Lenders to pay examination and review 
fees. These fees are to be available to fund the costs of examinations, 
reviews, and other Lender oversight activities.
    The review fees will apply to all 7(a) Lenders with outstanding SBA 
guaranteed loan balances. Nearly 5,000 Lenders are currently 
participating in the 7(a) program, of which 11 are active SBLC Lenders. 
SBA has determined that SBLCs are classified under the size standard 
for NAICS 522298. Three of the 11 active SBLCs are below the $6.5 
million in average annual receipts and are deemed small business 
concerns. Nearly all of the remaining 7(a) Lenders are covered under 
NAICS 522110 for commercial banks and other depository financial 
institutions. About 3,000 of the Lenders in this classification have 
less than $165 million in assets and are deemed small business 
concerns. (Note: with the waiver to any Lender with less than $200 in 
fees, SBA calculates that only approximately 300 Lenders that are 
classified as small will be affected.)
    The final rule will not have a significant economic impact on a 
substantial number of the 3,000 Lenders covered under NAICS 522110. 
Most of these Lenders have very small SBA portfolios and will only be 
subject to fees for the off-site reviews/monitoring. The annual fee, if 
assessed for all 3,000 small Lenders, for 98 percent of these Lenders 
will be less than $945, the cost of a one year subscription to the 
``American Banker'' magazine. SBA plans to waive the fees when it is 
not cost-effective to bill and collect. At this time, SBA has 
determined to waive the off-site fee for all Lenders with a fee of less 
than $200. That determination may be revised periodically to reflect 
changes in SBA's costs. SBA estimates that the annual fee will be 
waived for approximately 2700 small Lenders. For approximately 250 
small Lenders, the annual fee will be between $200 and $1,000. The 
largest of the approximately 50 remaining Lenders classified as small 
business concerns has over $100 million in outstanding SBA guarantees. 
The largest annualized fee for a Lender classified as small, which will 
cover the cost of the bi-annual on-site review plus annual off-site 
monitoring cost, is estimated at $21,288. The estimated annualized fee 
of the on-site exam plus the annual off-site monitoring cost fee for 
the three SBLCs classified as small business concerns would range from 
$28,160 to $42,000.
    Moreover, since SBA will calculate and bill for the fee, there will 
be virtually no recordkeeping or other compliance requirements of the 
rule. There are also no relevant Federal rules governing fees for the 
7(a) program which may duplicate, overlap or conflict with the final 
rule. SBA certified this rulemaking at the proposed rule stage. SBA did 
not receive any comments on SBA's certification. However, SBA received 
comments from small lenders about the fee. In reviewing the comments 
SBA has determined that those lenders will not be affected by the fee 
implementation. Since, the SBA has decided to waive the off-site review 
fee for lenders with a total fee of less than $200, in lieu of 
incurring the cost associated with collecting these smaller fees. 
Accordingly, the Administrator of SBA hereby certifies to the Chief 
Counsel of Advocacy that this final rule will not have a significant 
economic impact on a substantial number of small entities.

Paperwork Reduction Act

    SBA has determined that this final rule does not impose additional 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C. Chapter 35.

[[Page 25194]]

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses.


0
For the reasons discussed in the preamble, SBA amends 13 CFR part 120 
to read as follows:

PART 120--BUSINESS LOANS

0
1. The authority citation for part 120 is revised to read as follows:

    Authority: 15 U.S.C. 634(b)(6), 634(b)(7), 634(b)(14), 
633(b)(3), 636(a) and (h), 650, and 696(3) and 697(a)(2).


0
2. Revise Sec.  120.454 to read as follows:


Sec.  120.454  PLP Performance Review.

    SBA may review the performance of a PLP Lender.


0
3. Add a new Subpart I to read as follows:

Subpart I--Lender Oversight


Sec.  120.1070  Lender oversight fees.

    Lenders are required to pay to SBA fees to cover costs of 
examinations and reviews and, if assessed by SBA, other Lender 
oversight activities.
    (a) Fee components: The fees may cover the following:
    (1) On-Site Examinations. The costs of conducting on-site safety 
and soundness examinations of an SBA-Supervised Lender, including any 
expenses that are incurred in relation to the examination. For the 
purposes of this paragraph, the term ``SBA-Supervised Lender'' means a 
Small Business Lending Company or a Non-Federally Regulated Lender.
    (2) On-Site Reviews. The costs of conducting an on-site review of a 
Lender, including any expenses that are incurred in relation to the 
review.
    (3) Off-Site Reviews/Monitoring. The costs of conducting off-site 
reviews/monitoring of a Lender, including any expenses that are 
incurred in relation to the review/monitoring activities. SBA will 
assess this charge based on each Lender's portion of the total dollar 
amount of SBA guarantees in SBA's portfolio. SBA may waive the 
assessment of this fee for all Lenders owing less than a threshold 
amount below which SBA determines that it is not cost effective to 
collect the fee.
    (4) Other Lender Oversight Activities. The costs of additional 
expenses that SBA incurs in carrying out Lender oversight activities 
(for example, the salaries and travel expenses of SBA employees and 
equipment expenses that are directly related to carrying out Lender 
oversight activities). This charge will be based on each Lender's 
portion of the total dollar amount of SBA guarantees in SBA's 
portfolio.
    (b) Billing Process. For the on-site examinations or reviews 
conducted under (a)(1) and (a)(2) above, SBA will bill each Lender for 
the amount owed following completion of the examination or review. For 
the off-site reviews/monitoring conducted under (a)(3) above and the 
other Lender oversight expenses incurred under (a)(4) above, SBA will 
bill each Lender for the amount owed on an annual basis. SBA will state 
in the bill the date by which payment is due SBA and the approved 
payment method(s). The payment due date will be no less than 30 
calendar days from the bill date.
    (c) Delinquent Payment and Late-Payment Charges. Payments that are 
not received by the due date specified in the bill shall be considered 
delinquent. SBA will charge interest, and other applicable charges and 
penalties, on delinquent payments, as authorized by 31 U.S.C. 3717. SBA 
may waive or abate the collection of interest, charges and/or penalties 
if circumstances warrant. In addition, a Lender's failure to pay any of 
the fee components described in this section, or to pay interest, 
charges and penalties that have been charged, may result in a decision 
to suspend or revoke a participant's eligibility or to limit a 
participant's delegated authority.

    Dated: March 23, 2007.
Steven C. Preston,
Administrator.
[FR Doc. E7-8516 Filed 5-3-07; 8:45 am]
BILLING CODE 8025-01-P