[Federal Register Volume 72, Number 210 (Wednesday, October 31, 2007)]
[Proposed Rules]
[Pages 61752-61785]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-20932]



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Part III





Small Business Administration





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13 CFR Part 120



Lender Oversight Program; Proposed Rule

  Federal Register / Vol. 72, No. 210 / Wednesday, October 31, 2007 / 
Proposed Rules  

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AE14


Lender Oversight Program

AGENCY: Small Business Administration (SBA).

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: SBA is proposing a rule to incorporate SBA's risk-based lender 
oversight program into SBA regulations. Specifically, the proposed rule 
would establish the role and responsibilities of SBA's Office of Credit 
Risk Management within a new subpart of the business loan regulations. 
It would codify in SBA regulations SBA's process of risk-based 
oversight including: (i) Accounting and reporting requirements; (ii) 
off-site reviews/monitoring; (iii) on-site reviews and examinations; 
and iv) capital adequacy requirements. The proposed rule would also 
list the types of, grounds for, and procedures governing SBA 
enforcement actions within consolidated enforcement regulations for all 
7(a) Lenders, Certified Development Companies, Microloan 
Intermediaries, and Non-Lending Technical Assistance Providers. This 
rule is necessary to provide coordinated and effective oversight of 
financial institutions that originate and manage SBA guaranteed loans.

DATES: Comments must be received on or before December 31, 2007.

ADDRESSES: You may submit comments, identified by [RIN number 3245-
AE14] by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Bryan Hooper, Director for Office of Credit Risk 
Management, U.S. Small Business Administration, 409 3rd Street, SW., 
8th Floor, Washington, DC 20416.
     Hand Delivery/Courier: Bryan Hooper, Director for Office 
of Credit Risk Management, U.S. Small Business Administration, 409 3rd 
Street, SW., 8th Floor, Washington, DC 20416.

    All comments will be posted on http://www.Regulations.gov. If you 
wish to include within your comment, confidential business information 
(CBI) as defined in the Privacy and Use Notice/User Notice at http://
www.Regulations.gov and you do not want that information disclosed, you 
must submit the comment by either Mail or Hand Delivery and you must 
address the comment to the attention of Linda RU.S.C.he, Supervisory 
Financial Analyst, Office of Credit Risk Management. In the submission, 
you must highlight the information that you consider is CBI and explain 
why you believe this information should be held confidential. SBA will 
make a final determination, in its sole discretion, of whether the 
information is CBI and, therefore, will not be published or not.

FOR FURTHER INFORMATION CONTACT: Linda RU.S.C.he, Supervisory Financial 
Analyst, at (816) 426.4860, or Bryan Hooper, Director, Office of Credit 
Risk Management, (202) 205.3049.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Statutory

    Section 7(a) of the Small Business Act (the Act), 15 U.S.C. 636, 
authorizes SBA to guarantee loans made by Lenders (7a Lenders) to 
eligible small businesses. Under Section 504 of the Small Business 
Investment Act, 15 U.S.C. 697a, SBA guarantees Certified Development 
Company (CDC) debentures. Section 7(m) of the Act authorizes SBA to 
make direct loans to Microloan Intermediaries, who use proceeds to make 
loans to very small businesses, and also authorizes SBA to make 
technical assistance grants to non-lending technical assistance 
providers (NTAPs). 15 U.S.C. 636(m). With this authority to offer 
government guarantees and related grants, Congress has also provided 
SBA with authority to support appropriate Lender, CDC, Microloan 
Intermediary, and NTAP supervision. 15 U.S.C. 650; 15 U.S.C. 634 note, 
citing Public Law 104-208, Division D, Title I, Sec.  103(h); 15 U.S.C. 
634(b)(14); 15 U.S.C. 634(b)(7); 15 U.S.C. 636(a)(31); 15 U.S.C. 
687(f); 15 U.S.C. 696(3)(A); 15 U.S.C. 697(a)(2); 15 U.S.C. 697e(c)(8); 
and 15 U.S.C. 634(b)(6).
    The provisions cited include both direct and indirect authority to 
supervise, regulate, and examine Small Business Lending Companies 
(SBLCs) and Non-Federally Regulated Lenders (NFRLs). 15 U.S.C. 650; 15 
U.S.C. 634(b)(14); 15 U.S.C. 636(a)(31); and 15 U.S.C. 634(b)(6) and 
(7). The cites also include both direct and indirect provisions that, 
together, authorize SBA oversight of and reviews of the SBA operations 
of other 7(a) Lenders (including national banks and other federally 
regulated financial institutions), CDCs, Microloan Intermediaries, and 
NTAPs. 15 U.S.C. 634 note, citing Public Law 104-208, Division D, Title 
I, Sec.  103(h); 15 U.S.C. 634(b)(14); 15 U.S.C. 634(b)(6) and (7); 15 
U.S.C. 636(a)(31); 15 U.S.C. Sec.  687(f); 15 U.S.C. 696(3)(A); 15 
U.S.C. 697(a)(2); and 15 U.S.C. 697e(c)(8).

B. History

    Currently, there are over 5,000 7(a) Lenders and CDC s (together, 
SBA Lenders) authorized to make SBA-guaranteed loans and issue SBA-
guaranteed debentures. These SBA Lenders hold approximately $60 billion 
of 7(a) and 504 loans outstanding (in gross dollars). SBA has delegated 
increasingly more authority to its SBA Lenders such that the number of 
loans originated under delegated authority has grown from approximately 
20% of SBA's loan volume in 1992 to over 75% of SBA's loan volume as of 
2006. As SBA continues to place more responsibility and independence on 
its SBA Lenders, SBA must have the necessary controls to ensure that 
SBA Lenders' SBA operations are well-managed and avoid unnecessary 
losses. A comprehensive oversight process provides this control for the 
Agency.
    Prior to 1999, SBA's risk management, lender monitoring, and lender 
oversight activities were conducted by SBA's Office of Financial 
Assistance (OFA) and SBA's District Offices, which were also 
responsible for developing and promoting the Agency's business loan 
programs. With the increase in lending authority given to SBA Lenders 
and lending volume, SBA needed a separate division to perform risk 
management and lender oversight.
    Therefore, in 1999 SBA established the Office of Lender Oversight 
(OLO) for the primary purpose of ensuring the ``consistent and 
appropriate supervision of SBA's lending partners.'' At the time it was 
initially established, OLO's major responsibilities were defined as: 
``evaluating existing oversight regulations, policies and procedures 
and promulgating new ones where appropriate; monitoring changes in the 
accounting, banking and financial industries, and recommending 
appropriate modification of SBA oversight policy; coordinating all 
headquarters and field office activities with respect to Lender 
reviews; [and] evaluating new programs and changes to existing programs 
to assess their risk potential * * *'' The head of the office, the 
Associate Administrator for OLO, was to serve as a member of SBA's Risk 
Management Committee and a key member of the group developing and 
implementing the Agency's lender monitoring and oversight system.
    Subsequent to its establishment, OLO assumed responsibility for 
conducting ``safety and soundness'' examinations of the SBLCs and 
compliance reviews for Preferred Lenders Program (PLP) Lenders. OLO 
then began developing a risk-based review process for all SBA

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Lenders. OLO, in 2003, developed and implemented a Loan and Lender 
Monitoring System (L/LMS). In late 2004, Congress provided SBA specific 
supervision and enforcement authorities over SBLCs and NFRLs (together, 
SBA Supervised Lenders). In April 2005, SBA published Delegations of 
Authority that delineated the responsibilities of OLO and a new Lender 
Oversight Committee (LOC) consistent with new authorities. 70 FR 21262 
(April 25, 2005). On May 5, 2007, SBA published a final rule governing 
7(a) Lender review/examination fees. 72 FR 25189. On May 16, 2007 OLO 
published a final rule on SBA's Lender Risk Rating System. 72 FR 27611. 
Also, in May 2007, SBA reorganized and renamed the office to the Office 
of Credit Risk Management (OCRM). Most recently, SBA has reviewed the 
Agency's current oversight regulations and is now proposing this rule 
to incorporate OCRM's new authorities and SBA's risk-based lender 
oversight program into SBA's regulations. A discussion of the proposed 
rule, consisting of an overview and key provisions, follows.

II. Proposal

A. Overview

    The proposed rule would incorporate SBA's risk management/lender 
oversight program into SBA's business loan program regulations by: (i) 
Adding risk management definitions to Part 120 (13 CFR 120.10); (ii) 
incorporating risk management/lender oversight metrics and tools into 
program participation criteria and requirements (13 CFR 120.410, 
120.424, 120.433, 120.434, 120.451, 120.710, 120.812, 120.820, 120.826, 
120.830, 120.839, and 120.841); (iii) updating provisions to include 
key OCRM Delegations of Authority (13 CFR 120.451, 120.461, 120.702, 
120.710, and 120.845); and (iv) consolidating loan program oversight 
and enforcement regulations into subpart I, designated Risk-Based 
Lender Oversight. (See below chart on Regulations Relocated). Subpart I 
would cover the role and responsibilities of OCRM, the Risk Rating 
System, off-site reviews/monitoring, on-site reviews and examinations, 
and enforcement actions against SBA Lenders, Microloan Intermediaries, 
and NTAPs.

                     Chart of Regulations Relocated
------------------------------------------------------------------------
                               Regulation subject    Proposed regulatory
 Current regulatory citation         matter               citation
------------------------------------------------------------------------
Sec.   120.414..............  SBA access to 7(a)    Sec.   120.1010.
                               Lender files.
Sec.   120.415..............  7(a) program--        Sec.   120.1400
                               Suspension or         (grounds).
                               revocation of        Sec.   120.1500
                               eligibility to        (types of
                               participate.          enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.442..............  Suspension or         Sec.   120.1400
                               revocation of CLP     (grounds).
                               status.              Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.454..............  PLP performance       Sec.   120.1000(a)
                               review.               (Risk-Based Lender
                                                     Oversight).
                                                    Sec.   120.1025 (off-
                                                     site reviews/
                                                     monitoring).
                                                    Sec.   120.1050 (on-
                                                     site reviews and
                                                     examinations).
Sec.   120.455..............  Suspensions or        Sec.   120.1400
                               revocations of PLP    (grounds).
                               status.              Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.470(b)(3)........  Minimum SBLC capital  Sec.   120.471
                               requirement.          (minimum capital
                                                     requirement).
                                                    Sec.   120.472
                                                     (higher individual
                                                     minimum capital
                                                     requirement).
                                                    Sec.   120.473
                                                     (procedures for
                                                     higher individual
                                                     minimum capital
                                                     requirement).
Sec.   120.470(b)(4)........  SBLC capital          Sec.   120.462(d).
                               impairment.
Sec.   120.470(b)(5)........  SBLC issuance of      Sec.   120.471(d).
                               securities.
Sec.   120.470(b)(6)........  SBLC voluntary        Sec.   120.471(c).
                               capital reduction.
Sec.   120.470(b)(7)........  SBLC reserve for      Sec.   120.463(e).
                               losses.
Sec.   120.470(b)(8)........  SBLC internal         Sec.   120.460(b).
                               controls.
Sec.   120.470(b)(9)........  SBLC dual control...  Sec.   120.470(d).
Sec.   120.470(b)(10).......  SBLC fidelity         Sec.   120.470(e).
                               insurance.
Sec.   120.470(b)(11).......  SBLC common control.  Sec.   120.470(f).
Sec.   120.470(b)(12).......  SBLC management.....  Sec.   120.470(g).
Sec.   120.470(b)(13).......  SBLC borrowed funds.  Sec.   120.470(h).
Sec.   120.471..............  SBLC recordkeeping    Sec.   120.461.
                               and retention
                               requirements.
Sec.   120.473..............  SBLC change of        Sec.   120.475.
                               control.
Sec.   120.474..............  SBLC prohibited       Sec.   120.476.
                               financing.
Sec.   120.475..............  SBLC Audits.........  Sec.   120.490.
Sec.   120.476..............  SBLC suspension and   Sec.   120.1400
                               revocation.           (grounds).
                                                    Sec.   120.1500
                                                     (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.716..............  Microloan             Sec.   120.1425
                               Intermediary and      (grounds).
                               NTAP suspension and  Sec.   120.1540
                               revocation.           (types of
                                                     enforcement
                                                     actions).
                                                    Sec.   120.1600
                                                     (enforcement
                                                     procedures).
Sec.   120.853..............  CDC reviews.........  Sec.   120.1000,
                                                     Sec.   120.1050.
Sec.   120.854..............  CDC grounds for       Sec.   120.1400
                               taking enforcement    (grounds).
                               action.
Sec.   120.855..............  CDC types of          Sec.   120.1500
                               enforcement actions.  (types of
                                                     enforcement
                                                     actions).
Sec.   120.856..............  CDC enforcement       Sec.   120.1600
                               procedures.           (enforcement
                                                     procedures).
------------------------------------------------------------------------
Chart: This chart is intended to serve as a reference tool for locating
  regulatory provisions repositioned under the proposed rule. In some
  instances, the relocation involves simply moving text from one
  regulatory section to another. In other instances, SBA is proposing
  substantive changes with the move.


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B. Key Provisions

    The following is a discussion of key provisions of the proposed 
rule. They are as follows: (i) SBA Supervised Lender regulation; (ii) 
capital regulation; (iii) incorporation of a risk rating system; (iv) 
the addition of the CDC Single Audit Act provision; (v) the 
codification of the risk-based on-site review and examination program; 
and (vi) the coordination and development of enforcement policies and 
procedures. These key provisions are highlighted because they generally 
cover more than one regulation within the proposed rule. In addition, 
their discussion will provide a useful background for regulation 
review.
1. SBA Supervised Lender Regulation
    Public Law 108-447, Division K, Title I (December 2004) effectively 
created a new category of SBA Lender--an SBA Supervised Lender. SBA 
Supervised Lenders consist of SBLCs and NFRLs. P.L 108-447 generally 
treated these 7(a) Lenders the same for purposes of regulation, 
supervision, and enforcement. Accordingly, SBA has drafted a group of 
regulations applicable to SBA Supervised Lenders in general (Sec. Sec.  
120.460-120.465). The SBA Supervised Lender regulations would cover for 
example; internal controls, record retention, accounting and reporting, 
and capital adequacy. Many of these new regulations governing SBA 
Supervised Lenders, especially those related to capital, are similar to 
that of either the Federal Deposit Insurance Corporation; the Federal 
Reserve Board; the Office of the Comptroller of the Currency; the 
Office of Thrift Supervision; the National Credit Union Administration; 
or the Farm Credit Administration (each a Federal Financial Institution 
Regulator).
2. Capital Regulation
    Essential to the success of a government guaranteed loan program is 
the financial strength of its lenders. Capital is a common metric for 
measuring financial strength. The proposed rule would incorporate 
capital more fully into the 7(a) program. Specifically, the proposed 
rule would explicitly make having sufficient permanent capital a 
requirement for 7(a) program participation (Sec.  120.410(a)). For 7(a) 
Lenders with a Federal Financial Institution Regulator, meeting capital 
requirements for an adequately capitalized financial institution would 
be considered sufficient permanent capital to support SBA lending 
activities. For SBA Supervised Lenders, adequate capital would mean 
meeting its minimum capital requirement (For an SBLC--this would mean 
meeting SBA's Sec.  120.471 minimum or Sec.  120.472 higher individual 
minimum capital requirement, as applicable. For an NFRL--this would 
mean meeting the minimum capital requirement set by its state of 
incorporation regulator). While the proposed rule does not revise the 
minimum capital requirement for all SBLCs, SBA is considering updating 
this requirement. SBA seeks comments as to the appropriate minimum 
capital requirement for SBLCs.
    In addition to an SBLC minimum capital requirement, the proposed 
regulations would allow SBA to set a higher individual minimum capital 
requirement for an SBLC, where appropriate. (Sec.  120.472). SBA would 
set such a higher minimum capital requirement after consideration of 
certain risk-related factors described in proposed Sec.  120.472 and 
pursuant to procedures contained in proposed Sec.  120.473. The 
proposed rule would also require SBA Supervised Lenders to maintain a 
minimum capital adequacy plan (Sec.  120.462(b)), and to quarterly 
certify as to compliance with minimum capital requirements. (Sec.  
120.462(c)). Capital impairment would be redefined under the proposed 
rule for SBA Supervised Lenders, as failing to meet its applicable 
minimum capital requirement. (Sec.  120.462(d)). Under the proposed 
rule, if an SBA Supervised Lender fails to meet its minimum capital 
requirement (i.e., is capitally impaired), it must file with SBA a 
capital restoration plan (Sec.  120.462(e)) and then timely implement 
the approved plan. SBA could take enforcement action under the proposed 
enforcement regulations (Sec. Sec.  120.1400-1600) against an SBA 
Supervised Lender that fails to submit a capital restoration plan that 
is acceptable to SBA or fails to implement, in any material respect, 
its capital restoration plan in a timely manner. The proposed capital 
regulations contain provisions similar to those maintained by some 
Federal Financial Institution Regulators.
3. Incorporation of a Risk Rating System
    With the assistance of private industry leaders in predictive 
modeling and risk rating systems, SBA has developed an SBA Lender Risk 
Rating System. The proposed SBA Lender Risk Rating System was published 
for comment in the Federal Register at 71 FR 25624 (May 1, 2006). On 
May 16, 2007 OLO published the final rule on SBA's Lender Risk Rating 
System. 72 FR 27611. The SBA Lender Risk Rating System is an internal 
tool for assessing the risk of each SBA Lender's SBA loan operations on 
a uniform basis within its program and for identifying those 
institutions whose SBA loan operations and portfolio require additional 
SBA monitoring or other action. Under the SBA Lender Risk Rating 
System, SBA assigns each SBA Lender a composite rating of one to five 
based on certain portfolio performance factors which may be overridden 
in some cases due to SBA Lender specific factors that may be indicative 
of a higher or lower level of risk. SBA would generally consider an SBA 
assigned Risk Rating (Risk Rating) of either one, two, or three on a 
scale of one to five to be an ``Acceptable Risk Rating''. A ``Less Than 
Acceptable Risk Rating'' would be an SBA assigned Risk Rating of four 
or five. (Sec.  120.10 and Sec.  120.1015). SBA may revise the scale 
for SBA Risk Ratings and related definitions as the program develops. 
Any such changes would be published in the Federal Register for notice 
and comment. SBA plans to develop a risk rating system for Microloan 
Intermediaries and NTAPs and will provide notice before implementation 
of this system.
    SBA has incorporated the SBA Lender Risk Rating System into its on-
site risk-based reviews and examinations as set forth in SOP 51-00 
governing on-site SBA Lender reviews and examinations. The proposed 
rule would incorporate the SBA Lender Risk Rating System and its 
definitions into SBA's loan program regulations. Risk Ratings would be 
considered in determining whether an SBA Lender (and, in the future, a 
Microloan Intermediary, or NTAP) has satisfactory SBA performance for 
purposes of continued participation in the 7(a), 504, Microloan, or 
NTAP programs (including the delegated authority programs) under 
proposed amendments to: Sec. Sec.  120.410 (requirements for 7(a) 
Lenders); 120.424 (securitization requirements); 120.433 (sales and 
sales of participating interests); 120.434 (pledges of SBA loans); 
120.451 (PLP Program); 120.812 (Extensions of CDC probationary periods 
and permanent CDC status); 120.820 (requirements for CDC certifications 
and operation); 120.839 (outside area of operation loan approval); and 
120.841 (ALP status). SBA would also consider a Risk Rating before 
approving a Microloan Intermediary's reduction in its loan loss reserve 
fund (LLRF) under proposed amendments to Sec.  120.710. Under proposed 
Sec.  120.1051, SBA would consider an SBA Lender's, Intermediary's, or 
NTAP's Risk Rating in determining frequency of on-site reviews/
examinations.

[[Page 61755]]

    Under proposed rule Sec.  120.1400(c)(9), a repeated Less Than 
Acceptable Risk Rating (particularly in conjunction with other grounds) 
may evidence increased financial risk to SBA to warrant consideration 
of taking formal enforcement action. A repeated Less Than Acceptable 
Risk Rating may also be evidence of an SBA Lender not performing 
underwriting, closing, disbursing, servicing, liquidation, or 
litigation in a commercially reasonable and prudent manner under 
proposed Sec.  120.1400(c)(4). SBA expects to consider additional 
factors (e.g., on-site review/examination assessment, corrective 
actions implemented, and contribution toward SBA mission) before taking 
formal enforcement action on these Risk Rating grounds. Finally, a 
repeated Less Than Acceptable Risk Rating could be support for SBA not 
renewing program or delegated authorities.
    The incorporation of the Risk Rating System into the regulations is 
consistent with SBA's movement away from considering only the lagging 
indicators of our portfolio benchmark performance measures and towards 
integration of more current and sophisticated performance measurement 
systems developed by private sector leaders.
4. Single Audit Act Provisions
    The proposed rule incorporates Single Audit Act requirements into 
SBA's 504 program regulations. The Single Audit Act (31 U.S.C. 7501-
7507) requires Non-Federal entities, such as non-profit CDCs, that 
expend a total of $500,000 or more of federal awards (e.g. loan 
guarantees) in any fiscal year (including amounts outstanding), to have 
a single audit performed for such fiscal year. The audit must be 
conducted by an independent auditor in accordance with generally 
accepted government auditing standards. The Single Audit Act may also 
require, under certain circumstances, the Non-Federal entity to monitor 
the subrecipients' use of federal awards through site visits, limited 
scope audits, and other means. By including reference to the Single 
Audit Act in SBA regulations, SBA would not intend to extend coverage 
of the Single Audit Act to those CDCs for which the Single Audit Act 
does not apply. Therefore, for example, if a CDC does not meet the 
$500,000 federal award minimum, then the Single Audit Act compliance 
requirement would not apply. However, SBA estimates that virtually all 
active CDCs are covered by the Single Audit Act. SBA also would intend 
to consider CDC compliance with the Single Audit Act, including any 
future amendments to it, as a requirement for participation in the 504 
program and, accordingly would monitor CDC compliance with Single Audit 
Act requirements.
5. Review and Examination Program
    SBA has developed a coordinated risk-based SBA Lender review and 
examination program. SBA regulations need to reflect the updated 
coordinated risk-based review/examination approach. The proposed rule 
would remove current regulatory provisions governing on-site reviews 
and examinations within SBA's loan program regulations (Sec. Sec.  
120.414, 120.454, 120.470, 120.853) and consolidate them within subpart 
I on Risk-Based Lender Oversight. Under the proposed regulations, SBA 
Lenders could now look in one location for consistent regulatory 
guidance on on-site reviews and examinations. In addition, the proposed 
rule would extend such guidance beyond regulatory authorization for 
reviews and examinations. Specifically, the proposed rule would include 
provisions for off-site reviews and monitoring, on-site review and 
examination evaluative components, the frequency of on-site reviews and 
examinations, review and examination reports, and expected responses, 
including, as applicable, corrective actions and capital restoration 
plans. As to the proposed regulation's on-site reviews, if an SBA 
Lender is to be examined by a Federal Financial Institution Regulator 
in the same general timeframe, SBA would try to mutually coordinate the 
timing of the SBA operation review and the supervisor's examination to 
minimize any burden. Finally, the proposed rule also would include 
Microloan Intermediaries and NTAPs in the review regulations, and would 
harmonize the review process between for-profit 7(a) Lenders and non-
profit CDCs, since SBA's partial guaranty of credit risk on individual 
loans for each program is similar.
6. Enforcement Policies and Procedures
    SBA has consolidated within subpart I, the Agency's enforcement 
regulations for SBA Lenders, Microloan Intermediaries, and NTAPs. The 
consolidation would facilitate coordinated enforcement policies. It 
would allow all SBA Lenders, Microloan Intermediaries, and NTAPs to 
look in one place for such regulatory guidance. Finally, consolidation 
within subpart I should provide for greater consistency in taking 
formal enforcement actions.
    SBA has modeled its proposed enforcement provisions after SBA's CDC 
enforcement regulations. Like the current CDC enforcement regulations, 
subpart I's enforcement provisions would consist primarily of three 
main enforcement regulations. The first, proposed Sec.  120.1400, would 
cover grounds for enforcement actions. The second, proposed Sec.  
120.1500, would list types of formal enforcement actions. The third, 
proposed Sec.  120.1600, would set forth the procedures governing each 
type of formal enforcement action. Within each of these proposed 
regulations, the subsections are generally broken down into provisions 
that apply to all SBA Lenders; additional provisions that apply only to 
7(a) Lenders; additional provisions that apply only to SBA Supervised 
Lenders; additional provisions that apply only to SBLCs; and additional 
provisions that apply only to CDCs.
    Enforcement grounds and formal enforcement actions for Microloan 
Intermediaries and NTAPs would be contained in separate regulations 
within the enforcement series, as there was less overlap with these 
participants.

III. Section-by-Section Analysis

    Section 120.10--Definitions. SBA proposes to add ten new 
definitions to this section primarily for purposes of risk management/
lender oversight and enforcement. The new definitions would help to 
clarify categories of SBA Lenders and related parties referenced in the 
proposed regulations. Definitions would be added for 7(a) Lender, SBA 
Lender, Small Business Lending Company (SBLC), Non-Federally Regulated 
Lender (NFRL), SBA Supervised Lender, Other Regulated SBLC, Federal 
Financial Institutions Regulator, and Management Official. SBA would 
also add Risk Rating definitions that would describe an SBA Risk Rating 
and the key rating categories of Acceptable and Less Than Acceptable.
    Section 120.410--Requirements for all participating Lenders. Under 
the proposed rule, the requirement in section 120.410(a) that a 7(a) 
Lender have the continuing ability to evaluate, process, close, 
disburse, service, liquidate, (and litigate) loans would be more 
specifically defined to include (but not be limited to) (i) holding 
sufficient permanent capital (For Lenders with Federal Financial 
Institution Regulators, that would entail being ``adequately 
capitalized.'' For SBLCs, that would entail meeting its SBA minimum 
capital requirement. For NFRLs, that would entail meeting the minimum 
capital requirement of its state of incorporation) and (ii) having 
satisfactory SBA performance. SBA is more specifically defining the

[[Page 61756]]

continuing ability provision to include adequate capital and 
satisfactory SBA performance because sufficient capital and 
satisfactory performance sustain a 7(a) Lender's ability to evaluate, 
process, close, disburse, service, liquidate, and litigate loans.
    In determining satisfactory SBA performance, SBA would consider a 
Lender's Risk Rating, among other factors. The other factors SBA 
anticipates considering may include on-site review/examination 
assessments, historical performance measures (like default rate, 
purchase rate and loss rate), loan volume to the extent that it impacts 
performance measures, other performance related measurements and 
information, and contribution toward SBA mission.
    Subsection (a) would also be revised to specify the requirement 
that a 7(a) Lender have the ability to litigate loans. This is 
consistent with SBA's policy on 7(a) Lender litigation of SBA Loans.
    In addition, the OCRM proposed rule would further define SBA's 
requirements to participate in the 7(a) program by adding the following 
7(a) Lender requirements: (i) Good standing (as generally defined under 
Sec.  120.420(f) and with a Lender's state banking regulator and/or 
Federal Financial Institution Regulator, as applicable); (ii) safe and 
sound condition; and (iii) use of commercially reasonable lending 
policies, procedures, and standards employed by prudent lenders. For 
SBA Supervised Lenders, safe and sound condition would be determined by 
SBA. For other 7(a) Lenders, SBA would look to a 7(a) Lender's Federal 
Financial Institution Regulator or state banking regulator, as 
applicable, to ensure safe and sound condition.
    Finally, subsection (d) would be clarified to provide that a 7(a) 
Lender must be supervised and examined by either a Federal Financial 
Institution Regulator, a state banking regulator (satisfactory to SBA) 
or SBA. SBA is clarifying this provision to make clear that a 7(a) 
Lender participating in SBA's program must be supervised and examined 
by a banking regulator, satisfactory to SBA. The clarifications and 
revisions proposed for Sec.  120.410 are intended to minimize losses in 
the 7(a) program.
    Sections 120.420(f)--Participating lender financings, definition of 
``Good Standing''; 120.425(c)(2)--Reinstatement of securitizer PLP 
status; and 120.426--Actions SBA would take if SBA securitizer 
transfers tranche prior to holding period. SBA proposes to change the 
determining authority in these provisions from the Securitization 
Committee to the more recently established Lender Oversight Committee 
(LOC). Proposed changes to Sec.  120.420(f) would also specify the 
LOC's discretion in reviewing an SBA Lender's good-standing in certain 
circumstances involving investigations, indictments, convictions, and 
judgments, to be consistent with the LOC's discretion set forth in 
120.420(f)(4). Finally, SBA proposes to add the words ``In general'' to 
its ``good-standing'' definition to underscore the discretionary nature 
of the ``good-standing'' determination.
    Sections 120.424--What are the basic conditions a Lender must meet 
to securitize; 120.433--What are SBA's other requirements for sales and 
sales of participating interests; and 120.434--What are SBA's 
requirements for loan pledges? SBA is revising the requirements in 
these sections to more explicitly reference the ``good standing'' 
definition in Sec.  120.420(f). SBA is also proposing to add the 
requirement that 7(a) Lenders have satisfactory SBA performance as 
determined by SBA and that Risk Ratings would be considered among other 
factors in determining satisfactory SBA performance. SBA expects to 
consider among the other factors, on-site review/examination 
assessments, historical performance measures like default rate, 
purchase rate and loss rate, other performance-related measures and 
information, and contribution toward SBA mission. This change would 
incorporate SBA's Risk Rating System within SBA's securitization and 
other conveyance regulations.
    Section 120.435--Which loan pledges do not require notice to or 
consent by SBA? SBA proposes to update the cross-reference to ``Sec.  
120.434(e)'' within this section consistent with proposed revisions to 
Sec.  120.434.
    Section 120.451--How does a Lender become a PLP Lender? SBA is 
proposing to amend Sec.  120.451 to add satisfactory SBA performance to 
those items SBA would consider in approving PLP status. Subsection (e) 
on PLP recertification would also be amended to include SBA performance 
(including contribution to SBA mission), a Lender's Risk Rating, 
examination and review results, and other risk-related factors in the 
recertification decision. Section 120.451 would also be amended to 
provide that the recertification decision would be made by the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority. Also, SBA proposes to delete current 
subsections (c) and (f) to conform to existing Agency policy as 
published in Notice 5000-989 dated May 2, 2006 governing PLP 
territories. Finally, these additions incorporate lender oversight and 
related performance metrics and OCRM's Delegations of Authority into 
PLP program participation determinations.
    Section 120.460--What are SBA's additional requirements for SBA 
Supervised Lenders? SBA is proposing a new Sec.  120.460 entitled 
``What are SBA's additional requirements for SBA Supervised Lenders?'' 
In addition to complying with SBA's requirements for 7(a) Lenders, an 
SBA Supervised Lender would be required to meet additional requirements 
set forth in Sec.  120.460 and the sections that follow. Under Sec.  
120.460, SBA would require an SBA Supervised Lender to adopt an 
internal control policy that would provide adequate direction for 
establishing effective control over and accountability for operations, 
programs, and resources. An SBA Supervised Lender that is required to 
maintain an adequate internal control program may be more likely to 
self-identify and self-correct operational deficiencies. Proposed Sec.  
120.460 is similar to a Federal Financial Institution Regulator 
internal control provision in Title 12 of the Code of Federal 
Regulations.
    Section 120.461--What are SBA's additional requirements for filing 
SBA Supervised Lender reports with SBA and for record retention? This 
proposed regulation would require that SBA Supervised Lender specific 
reports be filed with the appropriate Office of Capital Access official 
in accordance with Delegations of Authority. This is consistent with 
current Delegations of Authority. This section would also extend the 
recordkeeping requirements for SBLCs to NFRLs. Record retention is 
required for SBA to be able to perform safety and soundness 
examinations or Lender reviews and to monitor that SBLC licensing 
requirements are maintained. Finally, this proposed section would newly 
specify certain time periods for retrieving certain documents (i.e., 1 
day for documents that must be immediately retrievable and 15 days for 
originals of documents that are stored electronically). Consequently, 
an SBA Supervised Lender must be able to produce needed records when 
required, and within a reasonable period of time, as defined here.
    Section 120.462--What are SBA's additional requirements on capital 
maintenance for SBA Supervised Lenders? A financial institution is 
expected to maintain capital commensurate with its existing and 
potential risk exposure and the ability of management to identify, 
measure, monitor, and control exposures. Given this, many SBA 
Supervised Lenders do,

[[Page 61757]]

and should be expected to, maintain capital levels above specified 
minimums. Therefore, SBA is proposing a new Sec.  120.462 which would 
guide SBA Supervised Lenders to maintain their own capital adequacy 
goals and plans, typically at a level above SBA's minimum. The 
provision would also provide guidance as to factors an SBA Supervised 
Lender should consider in determining the total amount of capital 
needed to assure the SBA Supervised Lender's continued financial 
viability and to provide for any necessary growth.
    Given the importance of maintaining adequate capital, the proposed 
rule would further require that all SBA Supervised Lenders, within 45 
days of the end of each fiscal quarter, furnish SBA with a calculation 
of its compliance with its minimum regulatory capital requirement. 
Under proposed Sec.  120.462(c), SBA would require the SBA Supervised 
Lender's chief financial officer to certify the calculation as correct.
    Section 120.462 would extend to NFRLs SBA's requirement to timely 
notify SBA in writing of capital impairment. Under proposed Sec.  
120.462(d), SBA would redefine capital impairment as any failure by an 
SBA Supervised Lender to meet its minimum capital requirements. SBA is 
proposing this revision to provide SBA early notice of a Supervised 
Lender's deteriorating capital position below required minimums. Unless 
otherwise waived by SBA in writing, an SBA Supervised Lender would be 
prohibited from presenting any loans to SBA for guarantee until the 
capital impairment is cured.
    Finally, the proposed rule would require an SBA Supervised Lender 
that fails to meet its minimum capital requirement to submit a capital 
restoration plan. Proposed subsection (e) would detail the plan 
content, how SBA would respond, amendments to the capital plan, and 
consequences of failure to: (i) Submit an acceptable plan within the 
required timeframe or (ii) implement in any material respect an 
approved capital restoration plan within the plan timeframe.
    Section 120.463--Regulatory accounting. To facilitate accurate and 
reliable financial reporting, the proposed rule contains a new Sec.  
120.463 on regulatory accounting. The proposed regulation would require 
that an SBA Supervised Lender's (i) books and records be kept on an 
accrual basis in accordance with Generally Accepted Accounting 
Principles (GAAP) as supplemented by Regulatory Accounting Principles 
(RAP) and (ii) financial statements be audited annually in accordance 
with generally accepted auditing standards by an independent certified 
public accountant experienced in auditing financial institutions.
    Proposed subsection (d) would require an SBA Supervised Lender that 
discharges its auditor to notify SBA within ten days of discharge and 
provide SBA with the name, address, and telephone number of the 
discharged auditor. If the discharge involved a dispute over the 
financial statements, the SBA Supervised Lender would also have to 
provide additional information, including but not limited to, a 
detailed reason for the discharge and the effect of each party's 
position on the financial statements.
    Proposed subsection (e) would extend the SBLC requirement for 
maintenance of an allowance for losses on loans to NFRLs. Under 
proposed Sec.  120.463(e), an SBA Supervised Lender would be required 
to maintain documentation of its loan loss allowance calculations and 
analysis in sufficient detail to permit the SBA to review assumptions 
used and their application. SBA would also require, under subsection 
(e) that the unguaranteed portions of loans identified as uncollectible 
be charged off promptly. If the portion determined to be uncollectible 
by the SBA Supervised Lender would differ from that determined by its 
auditors or the SBA, the SBA Supervised Lender would be required to 
charge-off such amount as the SBA may direct. Each SBA Supervised 
Lender would also be required to classify loans as nonaccrual or 
formally restructured in accordance with stated guidelines. Under the 
proposed subsection, if one loan to a given borrower would be 
classified as nonaccrual or formally restructured, all loans to that 
borrower would be required to be so classified unless the SBA 
Supervised Lender could document that the loans have independent 
sources of repayment.
    Finally, Sec.  120.463, subsection (f), would require that SBA 
Supervised Lenders account for loan sales transactions and the 
valuation of loan servicing rights in accordance with GAAP. At the end 
of each quarter, assumptions used in the valuation would be reviewed by 
the SBA Supervised Lender for reasonableness in the existing 
environment. In evaluating the assumptions, the SBA Supervised Lender 
would be required to give particular attention to interest rate and 
repayment rate assumptions. Assumptions considered no longer reasonable 
would be required to be modified and reflected in the valuation and 
would have to be documented and supported by a market analysis. Under 
subsection (f), SBA could require an SBA Supervised Lender to use 
industry averages for the valuation of servicing rights, in lieu of any 
other assumptions found unacceptable by SBA.
    Section 120.464--Reports to SBA. Proposed Sec.  120.464 would 
extend to NFRLs, SBA's current SBLC reporting requirements covering 
audited financial statements, administrative and legal proceedings, 
reports to stockholders, summaries of changes (in organization and 
financing), stock pledges, and other reports, as listed in current 
Sec.  120.472.
    Proposed Sec.  120.464 would also clarify current reporting 
requirements by, for example, detailing required statements to 
accompany the Annual Report (audited financial statements); inserting 
filing time requirements where presently not stated (Stockholder Report 
and Report of Changes); detailing the form and format of financial 
reporting (e.g. for Annual Reports, Quarterly Condition Reports, and 
Reporting of Changes--to be in accord with GAAP, include footnotes, and 
utilize accrual accounting), and specifying that any legal or 
administrative proceedings must be included in other required reporting 
(e.g., Annual Report, Quarterly Condition Report, any Capital plan 
report, etc.) until such matter is resolved.
    Proposed Sec.  120.464 would also introduce two additional SBA 
Supervised Lender reports: (i) The Quarterly Condition Report and (ii) 
the Reports of Changes in Financial Condition. SBA Supervised Lenders 
would report quarterly financial status in Quarterly Condition Reports. 
The Quarterly Condition Report under proposed Sec.  120.464 would 
contain quarterly financial statements that could be internally 
prepared and which would likely include the required certification of 
compliance with capital requirements under proposed Sec.  120.462(c). 
Reports of Changes in Financial Condition would report material changes 
in an SBA Supervised Lender's financial condition (such as 
unanticipated reductions in asset values due to unanticipated events 
such as natural disasters or uninsured hazard loss). Generally, SBA 
would require the SBA Supervised Lender to file the Report of Changes 
in Financial Condition within 10 days of becoming aware of such a 
material financial change, except in cases of capital impairment which 
would be 30 days from the month-end in which the impairment occurred, 
in accordance with proposed Sec.  120.462(d), as clearly specified in 
the Regulation language. These two financial reports would result in 
timelier financial reporting.

[[Page 61758]]

    Subsection (c) would require that SBA Supervised Lenders certify 
each report of financial condition (e.g., the Quarterly Condition 
Report, the Changes in Financial Condition Report and the Annual 
Report) as having been prepared in accordance with applicable 
regulations and instructions and to be a true, accurate, and complete 
representation of the SBA Supervised Lender's financial condition and 
performance. Accurate financial reporting is essential to an 
institution's safety and soundness. Reliable financial reports are 
necessary for an SBA Supervised Lender to raise capital. They provide 
data to stockholders and potential investors on the company's financial 
position and results of operations. Such information is critical to 
effective market discipline. Accurate financial information also 
enables management to effectively manage the institution's risks and 
make sound business decisions. Further, the compilation and submission 
of accurate financial information on a regular basis in a consistent 
format allows SBA to perform more timely and effective risk-based 
supervision to support examination functions, off-site monitoring, 
assessments of an institution's capital adequacy and financial 
strength, and comparisons between SBA Supervised Lenders.
    Finally, proposed Sec.  120.464 would provide for a waiver 
provision for any reporting requirement for good cause. Good cause may 
include, but is not limited to, where an SBA Supervised Lender has a 
relatively small SBA loan portfolio, consistently-acceptable Risk 
Ratings, portfolio performance that exceeds SBA's portfolio or peer 
group averages, etc. This waiver would be determined by SBA, in its 
sole discretion. In making this determination based on portfolio size, 
SBA expects to consider the value of the report to SBA given the size 
of SBA Supervised Lender's SBA loan portfolio and relative to other SBA 
Supervised Lender's portfolios individually and in the aggregate and 
other risk related factors. Authority for such actions will be in 
accordance with SBA's Delegations of Authority.
    Section 120.465--Civil penalty for late submission of required 
reports. Congress recognized the importance of reporting to effective 
oversight and legislated civil monetary penalties of up to $5,000 per 
day for SBA Supervised Lenders that fail to meet reporting requirements 
(15 U.S.C. 650(j)). Proposed Sec.  120.465 would codify in SBA 
regulations the statutory civil monetary penalties. The proposed 
regulation would provide that penalties would automatically accrue from 
the report due date until the SBA Supervised Lender submits a complete 
report. If a submitted report is not complete, it would be deemed not 
filed for purposes of civil monetary penalty assessment. Under the 
proposed rule, if SBA discovers after the due date (e.g., during an 
examination) that the report was submitted only in part or was not 
filed, penalties would be assessed dating back to the original due 
date. Finally, proposed Sec.  120.465 would provide procedures for 
requesting: (i) Due date extension and waiver of automatic penalty up 
to a new due date, (ii) reduction or exemption from the automatic 
penalty, and (iii) reconsideration of SBA decisions on extensions and 
reductions/exemptions and would include factors that would be 
considered in the SBA approval (e.g. determination of reasonable cause 
such as natural disaster or other conditions beyond the control of 
management, that failure was not due to willful neglect, demonstration 
of modified internal procedures to comply with reporting in the future, 
etc.). SBA seeks comments on the factors SBA would consider as 
discussed in the proposed rule.
    Section 120.470--What is an SBLC? As part of the rewrite of the 
SBLC regulations, SBA is proposing to amend the title and certain 
content of current Sec.  120.470. Under the proposed rule, the subject 
matter in several provisions of Sec.  120.470 would be moved elsewhere 
in Part 120 (See Chart of Regulations Relocated in the Proposal section 
of the preamble) and some remaining provisions would be updated, 
reorganized, or expanded. Updates would include, for example: The 
addition of limited liability companies and limited partnerships as 
allowable business structures; an increase to $2 million for required 
Fidelity Bond insurance; incorporation of new definitions of 7(a) 
Lender and Intermediary into subsection (a)(2) on lending requirements; 
a statement on SBA's policy on capitalization with borrowed funds. The 
Fidelity Bond increase would update the insurance requirements 
consistent with the current maximum loan amount that SBA can guarantee. 
SBA would expand guidance, in particular, on SBA's policy against 
capitalization with borrowed funds. Borrowed funds may result in a 
weaker capital position of the SBLC due to the potential for required 
repayment. SBA would also expand guidance in the proposed subsection on 
common control--providing terms and definitions, requirements for 
divestitures, and a clearer statement on common control and 
presumptions.
    Section 120.471, 120.472, 120.473, and 120.474--SBLC minimum 
capital requirements. SBA sets SBLC capital standards pursuant to 15 
U.S.C. 650(a)(2) and 15 U.S.C. 634(b)(7) in conjunction with 15 U.S.C. 
636. Proposed Sec. Sec.  120.471 through 120.474 would govern SBLC 
minimum capital standards. Proposed Sec.  120.471 would state SBA's 
baseline minimum capital standard for SBLCs. Under proposed Sec.  
120.471, the baseline would remain at the current level stated in Sec.  
120.470(b)(3). However, SBA is considering revising the baseline 
minimum capital standard and seeks comments on the appropriate minimum 
capital level.
    Proposed Sec.  120.471 would provide more detailed guidance on 
those items that SBA would include in calculating an SBLC's capital 
under the capital requirement. The capital calculation would generally 
consist of the following items: (i) Common stock; (ii) preferred stock 
that is non-cumulative as to dividends and does not have a maturity; 
(iii) additional paid-in-capital for stock in excess of the par value; 
(iv) retained earnings; and (v) for limited liability companies and 
limited partnerships, those capital contributions that are not subject 
to repayment at any specific time, are not subject to withdrawal and 
have no cumulative priority return. The inclusion of retained earnings 
and limitations on preferred stock in the proposed rule is consistent 
with Federal Financial Institution Regulator policies.
    In some cases, SBA may determine that the baseline minimum capital 
formula may not be sufficient to support the risk associated with a 
particular SBLC's portfolio. Consequently, proposed Sec.  120.472 would 
provide that SBA may require a higher individual minimum capital 
requirement for an SBLC. Proposed Sec.  120.472 would provide examples 
of risk-related factors that SBA might consider in making that 
determination. An SBLC individual minimum capital requirement would be 
established pursuant to procedures set forth in proposed Sec.  120.473 
or through written agreement or a cease and desist proceeding as stated 
in proposed Sec.  120.474. The proposed individual minimum capital 
requirement procedures are similar to those provided by some Federal 
Financial Institution Regulators.
    Finally, the SBLC capital regulations would include a change in 
policy for approving issuances of securities (currently in Sec.  
120.470(b)(5) and proposed in Sec.  120.471(d)). The proposed 
provisions would delete the last part of

[[Page 61759]]

current Sec.  120.470(b)(5). This deletion would have the effect of 
making it a requirement for an SBLC to obtain prior written approval 
for issuances of common stock, including issuances for cash or direct 
obligations of or obligations fully guaranteed as to principal and 
interest by the United States government. This is consistent in general 
with SBA's policy of prior approval for other types of financings (e.g. 
warehouse lines, participations, and securitizations). For further 
information on proposed rule capital provisions see the Capital 
Regulation provision in the Proposal section of the preamble.
    Section 120.475--Change of ownership or control. SBA proposes to 
relocate current Sec.  120.473 governing change of ownership and 
control for SBLCs to Sec.  120.475. In addition, the proposed rule 
would shift approval authority from the D/FA to the appropriate Office 
of Capital Access official in accordance with Delegations of Authority 
to reflect changes in internal agency procedure. Further, if a transfer 
of ownership or control is subject to approval of any State or Federal 
chartering, licensing, or other regulatory authority, copies of any 
documents filed with such authority would also have to be transmitted 
to the appropriate Office of Capital Access official in accordance with 
Delegations of Authority.
    Section 120.630--Qualifications to be a Pool Assembler. SBA 
proposes to add an additional requirement applicable only to SBA 
Lenders. Specifically, SBA would require SBA Lenders seeking to become 
a Pool Assembler to have satisfactory SBA performance, as determined by 
SBA. SBA would consider an SBA Lender's Risk Rating, among other 
factors, in determining satisfactory SBA performance. The other factors 
that SBA anticipates considering may include on-site review/examination 
assessments, historical performance measures (e.g., default rate, 
purchase rate, and loss rate), loan volume to the extent that it 
impacts performance measures, and other performance related 
measurements and information. SBA considers these factors as relevant 
to the expected performance of a Pool Assembler. SBA is revising this 
regulation to incorporate SBA loan program performance for SBA Lenders/
pool assemblers into pool assembler eligibility criteria.
    Section 120.702--Limitations on where an Intermediary may operate? 
Current Sec.  120.702 provides that Microloan Intermediaries may 
operate in only one state unless SBA determines that it would be in the 
best interests of the small business community for it to operate across 
state lines. The proposed rule would shift approval authority for 
expansions from the D/FA to the appropriate Office of Capital Access 
official in accordance with Delegations of Authority to reflect changes 
in internal agency procedure.
    Section 120.710(c) and (d)--Microloan Intermediary Loan Loss 
Reserve Fund (LLRF) approval authority. SBA proposes amending Sec.  
120.710(c) and (d) to shift approval authority for a reduction in the 
LLFR calculation from the D/FA to the appropriate Office of Capital 
Access official in accordance with Delegations of Authority. This 
revision would reflect changes in internal agency procedure.
    Sections 120.710(e)(1), 120.812, 120.820, 120.839, and 120.841--
Microloan Intermediary LLRF reduction and selected CDC authority 
criteria. SBA proposes amending Sec. Sec.  120.710(e)(1) (Microloan 
Intermediary reduction of LLRF); 120.812 (Extension of CDC probationary 
periods and permanent CDC status); 120.820 (Requirements for CDC 
certification and operation); 120.839 (Outside area of operation loan 
approval); and 120.841 (ALP status), to incorporate that SBA would 
consider an Intermediary's or SBA Lender's performance (which will 
include its Risk Rating, among other factors) in making determinations 
under these regulations. SBA expects to consider in determining 
satisfactory SBA performance on-site review assessments; historical 
performance measures; loan volume to the extent that it impacts 
performance measures; other performance related measurements and 
information, and contribution toward SBA mission. Proposed Sec.  
120.841(c) (ALP status) would also add the requirement that an ALP CDC 
must have a risk-based review assessment of ``acceptable'' or 
``acceptable with corrective actions required'' to be considered for 
ALP status.
    Section 120.826--Basic requirements for operating a CDC. The 
proposed rule adds to Sec.  120.826 internal control requirements 
similar to those proposed for SBA Supervised Lenders. Under the 
proposed rule, a CDC would be required to adopt an internal control 
policy to include maintenance of a loan review program, in conjunction 
with its SBA-guaranteed debenture financings. In addition, a CDC would 
have to have its financial statements annually audited by an 
independent certified public accountant since this would establish 
consistency in application of GAAP (a requirement) for CDC audits. 
Proposed Sec.  120.826 would also incorporate the Single Audit Act 
requirements into SBA's 504 program regulations.
    Section 120.830--Reports a CDC must submit. SBA is proposing an 
amended Sec.  120.830 to clarify the current annual report requirement 
by detailing the statements that must be included.
    Section 120.845(b)--PCLP status. Section 120.845(b) would be 
revised to provide that final determinations under this section would 
be made by the appropriate Office of Capital Access official in 
accordance with Delegations of Authority. This proposed revision would 
reflect changes in internal agency procedure.
    Section 120.853--Oversight and evaluation of CDCs. Section 120.853 
currently covers both SBA reviews and Inspector General audits of CDCs. 
The proposed rule would move the CDC review portion of the regulation 
to subpart I--Lender Oversight (proposed Sec.  Sec.  120.1000 and 
120.1050--On-site Reviews and Examinations). The proposed rule would 
retitle Sec.  120.853 ``Inspector General Audits of CDCs'' consistent 
with the revised subject matter.
    Section 120.956--Suspension or revocation of brokers and dealers. 
The proposed rule would revise Sec.  120.956 to provide that the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority (rather than the D/FA) would be responsible 
for suspensions and revocations of broker/dealer participation in the 
Secondary Market. This is consistent with SBA's Delegations of 
Authority for oversight and enforcement responsibilities. In addition, 
the proposed rule deletes the last sentence on suspension of appeal 
rights.
    Subpart I--Risk-Based Lender Oversight. SBA is significantly 
enhancing subpart I in Part 120 introduced on May 4, 2007 with SBA's 
published final rule on its Lender oversight fees. 72 FR 25194. The 
enhancements would consolidate SBA's supervision and enforcement 
authorities for SBA Lenders, Microloan Intermediaries and NTAPs. This 
consolidation would facilitate more coordinated and effective lender 
oversight.
    Section 120.1000--Risk management/Lender oversight. SBA is 
proposing a new Sec.  120.1000 entitled ``Risk management/Lender 
oversight'' that would describe lender oversight functions and the 
financial institutions supervised under the subpart.
    Section 120.1005--Bureau of PCLP Oversight. In Public Law 108-232 
(May 28, 2004), the ``Premier Certified Lenders Program Improvement Act 
of 2004'', Congress established two

[[Page 61760]]

alternative loss reserve pilot programs for certain Premier Certified 
Lenders (PCLP CDCs) loan loss reserve funds (LLRF). The public law also 
established the Bureau of PCLP Oversight in SBA to carry out such 
functions as the Administrator designates towards implementing the 
pilot programs. On May 26, 2006, SBA published a proposed rule 
governing the LLRF pilot programs. See, 71 FR 30323. Under the 
published proposed regulations, the Bureau of PCLP Oversight (Bureau) 
would approve the independent auditor that a pilot participant would 
engage to calculate its required LLRF. The Bureau would also review and 
make a determination as to a pilot participant's process for analyzing 
the risk of loss associated with the pilot participant's outstanding 
PCLP debentures (and the underlying loans) and the sufficiency of the 
LLRF. SBA anticipates publishing a final PCLP rule in the future.
    Proposed Sec.  120.1005 as contained in today's proposed lender 
oversight rule would include the Bureau of PCLP Oversight within 
subpart I, SBA's consolidated lender oversight regulations. Proposed 
Sec.  120.1005 would provide that the Bureau monitor the capitalization 
of PCLP CDC pilot participants' LLRFs, and perform other related 
functions. SBA may expand Bureau functions in the future consistent 
with SBA's statutory authority.
    Section 120.1010--SBA access to SBA Lender, Microloan Intermediary, 
and NTAP files. Proposed Sec.  120.1010 governs SBA access to SBA 
Lender, Microloan Intermediary, and NTAP files. SBA is relocating its 
current file access regulation from Sec.  120.414 and expanding this 
codification of authority to explicitly include CDCs, Microloan 
Intermediaries, and NTAPs. This provision is intended to facilitate 
lender oversight.
    Section 120.1015--Risk Rating System. SBA is proposing a new Sec.  
120.1015 entitled ``Risk Rating System.'' Under proposed Sec.  
120.1015, SBA could assign a Risk Rating to all SBA Lenders, Microloan 
Intermediaries, and NTAPs on a periodic basis (currently quarterly for 
SBA Lenders). This SBA Risk Rating process is detailed separately in 
final Federal Register notice at 72 FR 27320 (May 16, 2007). Risk 
Ratings range from one to five, with one indicating the least risk and 
five the most risk to SBA. OCRM would, from time to time, define the 
numeric definitions of acceptable and unacceptable levels of risk. For 
additional discussion of the Risk Rating System within this proposed 
rule, see the Proposal section of the preamble.
    Section 120.1025--Off-site reviews/monitoring. SBA is proposing a 
new Sec.  120.1025 entitled ``Off-site reviews/monitoring''. Under 
proposed Sec.  120.1025, SBA may conduct off-site reviews/monitoring of 
all SBA Lenders, Microloan Intermediaries, and NTAPs, including SBA 
Lender self-assessments and other targeted off-site reviews as defined 
by SBA. Currently, SBA conducts off-site SBA Lender reviews on at least 
a quarterly basis using SBA's Loan and Lender Monitoring System (L/
LMS). The L/LMS off-site review is SBA's primary method of monitoring 
all of SBA's 5000-plus SBA Lenders. For lower volume SBA Lenders, it 
may be the sole method of SBA review. L/LMS off-site reviews/monitoring 
are also used in conjunction with SBA Lender onsite reviews/exams and 
self-assessments (e.g. for purposes of planning and prioritization of 
exams/reviews/assessments and for evaluating performance).
    Under proposed Sec.  120.1025, SBA could require an SBA Lender, 
Microloan Intermediary, or NTAP to perform a self-assessment. This 
would be analogous to an AICPA Agreed Upon Procedures Engagement. For 
lower volume SBA Lenders, Microloan Intermediaries, and NTAPs, a self-
assessment could consist of a self-evaluation as to SBA performance or 
compliance with certain SBA requirements. Generally, SBA would consider 
requiring a self-assessment to confirm corrective actions implemented 
or in lieu of a targeted or limited scope review. SBA expects to 
provide additional guidance on self-assessments in its SOPs.
    Finally, SBA may also perform targeted off-site reviews and 
monitoring (e.g., performance comparison to SBA portfolio and peer 
averages, error rates in 1502 reporting, trend analysis, etc.). Off-
site reviews/monitoring mechanisms like L/LMS, self-assessments, and 
other targeted off-site reviews are a timely and cost effective means 
of overseeing and monitoring the SBA performance and compliance of SBA 
Lenders, Microloan Intermediaries, and NTAPs.
    Section 120.1050--On-site reviews and examinations. Proposed Sec.  
120.1050--``On-site reviews and examinations'' would codify in one 
place within SBA regulations SBA's authority to conduct examinations of 
SBA Supervised Lenders and reviews of the SBA operations of SBA 
Lenders. The proposed section would also describe the examination and 
review components that SBA would likely evaluate. For SBA Supervised 
Lender safety and soundness examinations, SBA would examine capital 
adequacy; asset quality; management quality; earnings; liquidity; 
compliance with laws, regulations, rules, SOPs, and SBA agreements; and 
such other risk related factors as SBA may identify from time to time. 
SBA's safety and soundness examinations are similar in scope to those 
conducted by the Federal Financial Institution Regulators. For SBA 
operational reviews, SBA would review the SBA portfolio performance; 
SBA operations management; credit administration; compliance with laws, 
regulations, rules, SOPs, and SBA agreements; and such other risk 
related factors as SBA identifies from time to time. These components 
have been identified by SBA as most useful in assessing lender 
performance and risk to the loan program. Section 120.1050 would also 
provide for SBA reviews of Microloan Intermediaries and NTAPs. Finally 
it would provide SBA with the flexibility to perform other reviews and 
examinations, as SBA determines necessary. These could include targeted 
or limited scope reviews/examinations (e.g., ad hoc reviews/
examinations, additional monitoring activities, special performance 
assessments). Targeted and limited scope reviews/examinations would 
provide for a more efficient and less burdensome means of supervision 
of specific deficiencies.
    Section 120.1051--Frequency of on-site Lender reviews and 
examinations. Proposed Sec.  120.1051 provides that SBA would perform 
on-site reviews and examinations on a periodic basis. Currently, SBA 
plans on conducting such reviews and examinations on a 12 to 24 month 
cycle, depending on the risk characteristics of the SBA Lender, 
Microloan Intermediary, or NTAP. The proposed regulation would also 
list some risk-related factors that SBA would consider in determining 
review/examination frequency. They would include (but would not be 
limited to): (i) Off-site review/monitoring results (e.g. Risk Rating); 
(ii) SBA portfolio size; (iii) prior findings; (iv) responsiveness to 
correcting past deficiencies; and v) such other risk-related factors as 
determined by SBA.
    Section 120.1055--Review and examination results. Under the 
proposed rule, SBA would provide SBA Lenders, Microloan Intermediaries, 
and NTAPs a copy of their report of examination or review (Report). The 
Report would contain findings, conclusions, corrective actions and/or 
recommendations. The proposed regulation requires each director of an 
SBA Supervised Lender and manager of the SBA Operations of SBA Lenders, 
Microloan Intermediaries, and NTAPs to review the Report. If such 
senior

[[Page 61761]]

management review the Report consistent with their responsibilities, it 
is more likely that the SBA Lender, Microloan Intermediary, and NTAP 
would commit to and make corrective actions. Proposed Sec.  120.1055, 
would also provide procedures for responding in writing to SBA Reports 
along with the consequences of failure to submit or implement 
responses, corrective actions, and capital restoration plans.
    Section 120.1060--Confidentiality of Reports, Risk Ratings, and 
related Confidential Information. Proposed Sec.  120.1060 would provide 
that Reports and other SBA prepared review or examination related 
documents are the property of SBA. It would also provide that Reports, 
Risk Ratings and related Confidential Information (including SBA Lender 
portal information) would be privileged and confidential. The term 
``Confidential Information'' is defined in the SBA Lender Information 
Portal, and by notice issued from time to time. Currently, it is 
defined as ``all lender-related information contained in the Portal 
including `Lender Results', except for the `Past 12 Month Actual 
Purchase Rate' and the `Past 12 Month Actual Charge-Off Rate'.'' Under 
the proposed rule, SBA Lenders, Microloan Intermediaries, and NTAPs 
would be required to restrict access to the Report, the Risk Rating, 
and the Confidential Information to certain ``permitted parties'' as 
defined in this proposed regulation and to those for whom access is 
required by applicable law or legal process. For example, if it is 
determined that such law or legal process requires disclosure to a 
Federal Financial Institution Regulator, then this proposed regulation 
would not preclude that access. SBA Lenders, Microloan Intermediaries 
and NTAPs would be prohibited from otherwise disclosing Report, Risk 
Rating, and Confidential Information in full or in part in any manner 
without SBA's prior written permission. The confidentiality requirement 
is reflective of the principles underlying the bank examiners 
privilege--it provides for more open dialogue between regulators and 
financial institutions, intending to lead to more cooperative and 
expeditious identification and resolution of institution issues. For 
more discussion on the confidentiality and limitations on disclosure 
see SBA Lender Risk Rating System final notice, 72 FR 27611 (May 16, 
2007).
    Section 120.1400--Grounds for enforcement actions--SBA Lenders. The 
proposed rule would consolidate existing SBA enforcement authorities 
for SBA Lenders with new authorities, most of which are outlined in 15 
U.S.C. 650 et seq. The SBA enforcement action provisions of the 
proposed rule would begin with a new Sec.  120.1400 that would provide 
a listing of grounds that may trigger enforcement action. Proposed 
Sec.  120.1400 lists first those grounds that, in general, could 
trigger enforcement actions, then those grounds that are specific to 
certain enforcement actions, most of which are specific to certain 
types of institutions (e.g., SBA Supervised Lenders).
    Grounds for enforcement actions would not be limited to violations 
of the regulations as stated in proposed subsection (a). SBA is 
authorized to bring enforcement actions for breaches of terms and 
conditions in the SBA Form 750 Loan and Guaranty Agreement and all 
other agreements jointly executed by the SBA Lender and SBA.
    The grounds, as proposed, are primarily derived from current 
regulations or directly from the Act. For example, the grounds would 
include: Failure to maintain eligibility requirements; failure to 
comply materially with any requirement imposed by statute, regulation, 
SOP, policy or procedural notice, or any agreement; making a material 
false statement; and not performing underwriting, closing, disbursing, 
servicing, liquidation, or litigation in a commercially reasonable and 
prudent manner with respect to the applicable loan program (e.g., 7(a) 
or 504). A repeated Less Than Acceptable Risk Rating would be included 
in enforcement action grounds indirectly through subsections (c)(4) and 
(c)(9). Subsection (c)(4) would provide that a repeated Less Than 
Acceptable Risk Rating or on-site review/examination assessment could 
be evidence to support a determination that the SBA Lender was not 
performing underwriting, closing, disbursing, servicing, liquidation, 
litigation or other actions in a commercially reasonable and prudent 
manner. Subsection (c)(9) would provide that SBA may take enforcement 
action if SBA determines there is increased financial risk (for 
example--if SBA Lender has a repeated Less Than Acceptable Risk Rating 
or if an officer, key employee, or loan agent involved with SBA loans 
for an SBA Lender is indicted for a felony or on fraud charges). SBA 
expects to consider additional factors (e.g., on-site review/
examination assessment or corrective action implemented) before taking 
formal enforcement actions on Risk Rating grounds. For CDCs, in 
particular, the Risk Rating and review assessment would replace the 
indirect role of the portfolio benchmarks under current Sec.  
120.854(a)(4).
    Proposed paragraphs (11) and (12) would provide the grounds for 
immediate suspension of loan program activities for SBA Lenders except 
SBA Supervised Lenders, as well as the grounds for immediate suspension 
of delegated authorities for all SBA Lenders. The basis for such action 
would be a determination by SBA that one or more of the grounds in 
subsection (c) exist and, that immediate action is needed to prevent 
the risk of significant loss to SBA or to prevent significant 
impairment of the 7(a) or 504 programs.
    Proposed subsections (d) and (e) would incorporate the statutory 
grounds for certain SBA Supervised Lender and SBLC enforcement actions 
under 15 U.S.C. 650 et seq. Among those are grounds specific to SBA 
Supervised Lenders (excluding Other Regulated SBLCs under proposed 
Sec.  Sec.  120.1510 and 120.1511) for suspensions and revocations of 
SBA program authority. Subsection (f) would list additional grounds 
specific to CDCs and, for PCLP CDCs, includes failure to establish and 
maintain a LLRF in accordance with SBA regulations.
    Section 120.1425--Grounds--Intermediaries participating in the 
Microloan program and NTAPs. Proposed Sec.  120.1425 would incorporate 
grounds for enforcement actions against Microloan Intermediaries and 
NTAPs contained in current Sec.  120.716 into subpart I. In addition, 
the proposed regulation would provide that a repeated Less Than 
Acceptable Risk Rating or an indictment for a felony or on fraud 
charges of an officer, key employee, or loan agent involved with SBA 
loans or the SBA program for a Microloan Intermediary or NTAP could be 
evidence of SBA's increased financial or program risk, and as such, 
also serve as grounds for formal enforcement action. However, it would 
not automatically mean that SBA would take formal enforcement action 
under proposed Sec.  120.1540. In addition, SBA expects to consider 
additional factors (e.g. on-site review/examination assessment or 
corrective actions implemented) before taking formal enforcement 
action.
    Section 120.1500--Enforcement actions--SBA Lenders. SBA is 
proposing a new Sec.  120.1500 entitled ``Enforcement Actions--SBA 
Lenders'' that lists the formal enforcement actions that SBA may take 
against an SBA Lender. These provisions generally would be listed in a 
graduated manner within each SBA Lender category. New to this formal 
list is (i) imposition of

[[Page 61762]]

portfolio guarantee dollar limit, (ii) suspension and/or revocation of 
Secondary Market activity; and (iii) the new statutory SBA Supervised 
Lender enforcement actions. SBA added the portfolio guarantee limit as 
a means of limiting SBA's risk exposure for a particular SBA Lender. 
SBA included suspension/revocation of a 7(a) Lender's authority to sell 
or purchase loans in the Secondary Market in its list of formal 
graduated actions also as a means of limiting an SBA Lender's risk 
exposure to SBA and the Secondary Market. The suspension and revocation 
of individual lending functions would facilitate SBA taking more 
targeted measures to address isolated but significant functional 
deficiencies.
    The capital directive is within the SBLC enforcement actions. Under 
proposed subsection (d)(1), SBA may order a capitally impaired SBLC (or 
SBLC operating in an imprudent manner) to meet its capital requirement, 
submit and adhere to a capital restoration plan, and obtain SBA 
approval before taking certain actions, as detailed.
    Sections 120.1510 and 120.1511--Other Regulated SBLCs. Proposed 
Sec.  Sec.  120.1510 and 1511 would address the rare instance where an 
SBLC itself is directly examined by a Federal Financial Institution 
Regulator or State banking regulator. Under such circumstances, the 
``Other Regulated SBLC'' would be exempt from the statutory enforcement 
provisions specific to SBA Supervised Lenders as granted in Sec.  23 of 
the Act, 15 U.S.C. 650 [except those for SBLCs only in subsections (b) 
and (c)]. SBA, instead, would rely on a Federal Financial Institution 
Regulator's or state banking regulator's safety and soundness 
examination conducted directly on the SBLC and their follow-up to 
address safety and soundness issues.
    To obtain the designation of Other Regulated SBLC, the SBLC would 
have to certify, under proposed Sec.  120.1511, that it is directly 
examined and regulated by a Federal Financial Institution Regulator or 
state banking regulator. The elements of this certification are 
detailed in the Regulation. This certification would have to be 
submitted in writing within 60 days of the effective date of the final 
rule or within 60 days of the date the SBLC becomes directly examined 
and directly regulated by such regulator. The SBLC would have to 
identify the Federal Financial Institution or state banking regulator 
performing the examinations on it directly and provide information on 
the most recent safety and soundness examination. An Other Regulated 
SBLC would also be required to notify SBA in writing each time such a 
safety and soundness examination of the SBLC itself took place and 
report the interaction, to the extent allowed by law.
    Proposed Sec.  120.1511(g) would provide that, in the event an SBLC 
fails to timely comply with the necessary certification and reporting 
requirements, then the Sec.  120.1510 exemption would not apply and SBA 
would exercise its statutory authority to supervise the safety and 
soundness of the SBLC and may take the statutory SBA Supervised Lender 
enforcement actions, as necessary, to protect the financial interests 
of the 7(a) program.
    While an Other Regulated SBLC would be expected to comply with SBLC 
requirements, as set forth for example in proposed Sec.  Sec.  120.470 
(SBLC general licensing requirements), 120.471-474 (SBLC minimum 
capital requirements), 120.475 (SBLC change of control), 120.476 (SBLC 
prohibited financing), 120.460 (internal controls), 120.461 (document 
retention), 120.463 (regulatory accounting), 120.464 (reports), and 
120.490 (IG audits), it would only be subject to SBA Lender risk-based 
reviews and enforcement provisions and not the statutory SBA Supervised 
Lender supervision and enforcement provisions, except those that are 
SBLC licensing specific (i.e., capital directive and civil action).
    Section 120.1540--Enforcement actions--Intermediaries participating 
in the Microloan program and NTAPs. Proposed Sec.  120.1540 would 
incorporate formal enforcement actions against Microloan Intermediaries 
and NTAPs set forth in current Sec.  120.716 into subpart I.
    Section 120.1600--General procedures for enforcement actions--SBA 
Lenders, Management Officials, Other Persons, Intermediaries, and 
NTAPs. Proposed Sec.  120.1600 would largely adopt the enforcement 
procedures for CDCs currently contained in Sec.  120.856 and extend 
them, in general, to all SBA Lenders, Microloan Intermediaries and 
NTAPs. Proposed procedures would include a notice of enforcement 
action; opportunity to object; notice of final Agency decisions; and a 
provision on appeals directly to federal district court. Additions/
changes to the general provision include, but are not limited to, a 
provision to make clear that request for clarification of notice for 
additional time to respond must be received by the same deadline for 
objection; responses and such requests must be submitted to the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority; and appeals of the final Agency decision 
would no longer be filed with SBA's OHA but would be filed in the 
appropriate Federal district court. Proposed Sec.  120.1600 would also 
set forth procedures for certain SBA Supervised Lender, Management 
Official, or Other Person enforcement actions as prescribed by statute. 
This would include enforcement procedures specific to SBA Supervised 
Lenders (excluding Other Regulated SBLCs under proposed Sec.  Sec.  
120.1510 and 120.1511) for suspensions and revocations of SBA program 
authority. The additional procedures in subsection ``c'' for SBLC 
capital directive would generally follow similar provisions of other 
Federal Financial Institution Regulators.

IV. Comments Request

    Readers are encouraged to review closely each section of the 
proposed rule in conjunction with current regulations to fully 
comprehend the extent of the rule and its changes. SBA 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 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 rule constitutes a 
``significant regulatory action'' under Executive Order 12866 thus 
requiring a Regulatory Impact Analysis, as set forth below.

A. Regulatory Objective of the Proposal

    SBA is proposing a rule to incorporate SBA's risk-based lender 
oversight program into SBA regulations. Specifically, the proposed rule 
would establish the role and responsibilities of SBA's Office of Credit 
Risk Management within subpart I to 13 CFR Part 120. It would codify in 
13 CFR SBA's process of risk-based oversight including: (i) Accounting 
and reporting requirements; (ii) off-site reviews/monitoring; (iii) on-
site reviews and examinations; and (iv) capital adequacy requirements. 
The proposed rule would also list the types of, grounds for, and 
procedures governing SBA enforcement actions within consolidated 
enforcement regulations for all 7(a) Lenders, CDCs, Microloan 
Intermediaries, and NTAPs. This rule is necessary to provide 
coordinated and effective oversight of financial institutions that 
originate and manage SBA guaranteed loans.

[[Page 61763]]

    These regulatory changes would improve SBA's oversight and 
management of the 7(a), 504, Microloan and NTAP programs. SBA believes 
that there are no viable alternatives to these changes that would 
produce similar positive results without imposing an additional burden 
on the SBA or the public.

B. Baseline Costs

1. Baseline Costs for 7(a) Lenders (Excluding SBA Supervised Lenders)
    All 7(a) Lenders are currently required to be supervised and 
examined by a state or Federal regulatory authority, satisfactory to 
SBA. This is a cost already borne by these 7(a) Lenders. In addition, 
these 7(a) Lenders are subject to SBA's supervisory and enforcement 
provisions contained in the business programs portion of Part 120. The 
estimated annual baseline costs to the Federal government for 7(a) 
Lenders' oversight is provided for in the existing OCRM infrastructure.
2. Baseline Costs for SBLCs
    Each SBLC is currently required to submit audited financial 
statements within three months after the close of each fiscal year and 
interim financial reporting when requested by SBA. SBA also currently 
requires that SBLCs submit a report on any legal or administrative 
proceeding, by or against the SBLC, or against an officer, director or 
employee of the SBLC for an alleged breach of official duty; copies of 
any report furnished to its stockholders; a summary of any changes in 
the SBLC's organization or financing; notice of capital impairment; and 
such other reports as SBA may require from time to time by written 
directive. The collection of the information and reports referenced 
here is largely already maintained by the SBLCs for operational and 
financing purposes. It is estimated that preparation and submission of 
this information takes about 80 hours annually for each SBLC. The hour 
burden is an SBA estimate based on inquiries made to selected SBLCs. 
The estimate of the total annual cost burden is based on an average 
annual outside audit fee of $8,000 per respondent, plus an additional 
$2,000 per respondent for staff involvement in the independent audit 
engagement and SBA reporting (approximately 15 hours of CFO time at a 
$100 hourly rate plus 15 hours of administrative profession time at a 
$30 hourly rate, rounded). This total cost burden is estimated at 
$140,000 for 14 SBLCs. SBA has reduced this figure by $20,000 to 
$120,000 to adjust for reduced costs for smaller SBLCs. The estimated 
annual cost to the Federal government for this information collection 
is approximately 8 hours of Financial Analyst time at $55 per hour, or 
$6,160 annually for all 14 SBLCs. Any additional estimated indirect 
annual cost to the Federal government for oversight of these SBLCs is 
provided for in the existing OCRM infrastructure.
3. Baseline Costs for NFRLs
    No direct costs are currently incurred by NFRLs for SBA oversight 
and related functions discussed in this proposed rule. The estimated 
annual cost to the Federal government for oversight of these NFRLs is 
provided for in the existing OCRM infrastructure.
4. Baseline Costs for CDCs
    Each CDC is currently required to submit to SBA an annual report 
within 180 days of the fiscal year end, including financial statements 
of the CDC and any affiliates or subsidiaries and such interim reports 
as SBA may require. The collection of the information and reports 
referenced here is largely already maintained by the CDCs for 
operational purposes. SBA has estimated that preparation and submission 
of this information takes approximately 28 hours annually for each CDC, 
at an average cost of $30 per hour for staff compilation, which 
computes to a cost of $840 per CDC, and a total of 7,560 hours for all 
CDCs. This total cost burden is $226,800 (7,560 hours x $30) for the 
approximately 270 CDCs. The estimated annual cost to the Federal 
government for this information collection is approximately 1 hour of 
financial analyst time per CDC or 270 hours total for all CDCs, at a 
cost of $55 per hour. Estimated annual Federal cost burden therefore is 
estimated at $14,850 (270 hours x $55). The remaining estimated annual 
cost to the Federal government for oversight of CDCs is provided for in 
the existing OCRM infrastructure.
5. Baseline Costs for Microloan Intermediaries and NTAPs
    Microloan Intermediaries and NTAPs currently incur no direct costs 
for oversight and related functions as discussed in this proposed rule. 
The estimated annual cost to the Federal government for oversight of 
these Microloan Intermediaries and NTAPs is currently provided for in 
the existing OFA infrastructure.

C. Potential Benefits and Costs of the Proposed Rule

1. Potential Benefits and Costs of the Proposed Rule to all SBA 
Lenders, Microloan Intermediaries and NTAPs
    The proposed rule would benefit SBA Lenders, Microloan 
Intermediaries, and NTAPs by generally consolidating oversight 
authority and responsibility within one SBA office, OCRM. These 
institutions would also benefit from knowledge of established and 
further defined programmatic standards, enforcement grounds, ranges of 
enforcement actions and procedures for supervision and enforcement 
actions as set forth in the proposed rule. They may further benefit 
from performance feedback to the extent it can assist them in improving 
their SBA operations and minimizing losses.
    While there are specific benefit and costs issues for specific 
categories of lenders as detailed below, all SBA Lenders, Microloan 
Intermediaries and NTAPS will incur some relatively minimal costs 
related to the proposed rule's incorporation of review/exam reporting 
(e.g., self-assessments and related reporting, corrective action 
plans). Self-assessments and review/exam reporting are a timely and 
cost effective means of overseeing and monitoring the SBA performance 
and compliance of SBA Lenders, Microloan Intermediaries and NTAPs.
2. Potential Benefits and Costs of the Proposed Rule to 7(a) Lenders 
(Other Than SBLCs and Other NFRLs)
    No additional direct costs are projected to be incurred by 7(a) 
Lenders for oversight as contained in the proposed regulations. No 
additional reporting or direct costs are projected to be incurred by 
7(a) Lenders with the rule's implementation.
3. Potential Benefits and Costs of the Proposed Rule to SBLCs
    The proposed rule would provide for more developed internal control 
requirements and adoption of a formal capital plan. It would also 
require filing of (i) quarterly condition reports (including financial 
statements); (ii) reports of changes in financial condition; (iii) 
notice of change of auditor; (iv) capital restoration plans; and (v) 
Other Regulated SBLC Reports, with certifications as to accuracy or 
compliance (including capital compliance) as applicable. Because 
internal controls, formal capital plans, and quarterly financial 
statements are likely already maintained by the SBLCs for operational 
purposes, SBA estimates little or no additional cost for these new

[[Page 61764]]

requirements. It is estimated that preparation and submission of all 
the additional reports and the new recordkeeping would take 
approximately 3 hours annually of additional CFO time at a $100 hourly 
cost, plus 3 hours annually of additional administrative professional 
time at a $30 hourly cost. Therefore, the total additional cost burden 
would be $5,460 ($390 x 14) for 14 SBLCs.
4. Potential Benefits and Costs of the Proposed Rule to NFRLs
    The proposed rule would require each NFRL to submit an annual 
report, including audited financial statements within three months 
after the close of each fiscal year. The proposed rule would further 
require that all audited financial report filings be prepared in 
accordance with GAAP, and include an opinion from the independent 
accounting firm engaged in the audit. It would also require NFRLs to 
submit: (i) a report on any legal or administrative proceeding, by or 
against the NFRL, or against an officer, director or employee of the 
NFRL for an alleged breach of official duty; (ii) copies of any report/
publications furnished to its stockholders; (iii) summaries of changes 
in the NFRL's organization or financial structure, personnel and 
eligibility; (iv) notice of capital impairment; (v) quarterly condition 
reports; (vi) changes in financial condition reports; (vii) 
recapitalization plans; and (viii) notice of changes in auditors and 
such other reports as SBA may require from time to time by written 
directive--with certifications as to accuracy and compliance (including 
capital compliance), as applicable. The proposed rule would also 
require adoption of a developed internal control policy, records 
maintenance, and adoption of a formal capital plan. Much of the 
collection of the information and reports referenced here, as well as 
the requirements for internal control, records retention and adoption 
of a formal capital plan are likely information already maintained by 
the NFRLs for operational, and in some instances financing, purposes. 
SBA estimates preparation and submission costs consistent with that of 
the baseline for the SBLCs, at 80 hours of external auditor time at 
$100 hourly rate, plus an additional $2,000 per NFRL for staff 
involvement in the independent audit engagement (approximately 15 hours 
of CFO time at a $100 hourly rate plus 15 hours of administrative 
profession time at a $30 hourly rate, rounded) for a total of $10,000 
per NFRL. SBA estimates additional reporting and recordkeeping 
requirements to the NFRLs (that which would be new to SBLCs as well) at 
3 hours of additional CFO time at a $100 hourly rate plus 3 hours of 
additional administrative professional time at a $30 hourly rate ($390 
per NFRL). Since there are no current baseline costs to NFRLs, the 
total additional cost burden for this proposed rule for the 58 NFRLs 
(as of May 2007) would potentially be $602,620 ($10,390 x 58 NFRLs).
5. Potential Benefits and Costs of the Proposed Rule to CDCs
    The proposed rule would require each CDC to submit an annual 
report, including audited financial statements within three months 
after the close of each fiscal year and interim financial reporting 
when requested by SBA. All audited financial report filings would be 
required to include an opinion from the independent accounting firm 
engaged in the audit. The proposed rule would also require enhanced 
internal control requirements. The collection of the information 
referenced here, including the annual audited financial statements, as 
well as the requirements for internal control would include 
information, policies and procedures likely already maintained by many 
of the CDCs for operational purposes. The hour burden is an SBA 
estimate based on inquiries made to selected CDCs. It is estimated that 
preparation and submission of this information would take approximately 
40 (auditor) hours annually for each CDC, at an average cost of 
approximately $4,000 ($100 per hour for CPA-credentialed auditor) 
average outside audit fee, plus internal staff time of 4 hours at the 
administrative professional rate of $30 per hour ($120 per CDC). This 
is in lieu of existing Baseline Costs for CDCs outlined in paragraph 4 
of Section B. Baseline Costs. The total cost would be $1,112,400 
($4,120 x 270 CDCs). The total additional cost burden would be $885,600 
($1,112,400-$226,800 baseline) for the 270 CDCs for this proposed rule. 
We note, however, that this number may be dramatically reduced because 
many CDCs are already required to maintain audited financial statements 
and internal control programs under The Single Audit Act requirements.
6. Potential Benefits and Costs of the Proposed Rule to Microloan 
Intermediaries and NTAPs
    No additional direct costs are projected to be incurred by 
Microloan Intermediaries and NTAPs for lender oversight and related 
functions in this proposed rule. No additional costs would be incurred 
by Intermediaries due to the implementation of this rule, since general 
oversight, suspension or revocation already exists in Sec.  120.716 and 
is replaced by consolidated oversight within subpart I, and no 
additional reporting is required by this proposed rule.
7. Potential Benefits and Costs for SBA and the Federal Government
    Benefits to SBA include improved administration of the lender 
oversight process through general consolidation of oversight authority 
within OCRM. SBA would also benefit from having more timely and 
complete operations information, including financial information for 
SBA Supervised Lenders and CDCs. In addition, the Agency would benefit 
from further defined standards, enforcement grounds, ranges of 
enforcement actions and procedures for supervision and enforcement 
actions for all SBA Lenders, Microloan Intermediaries and NTAPs. 
Finally, the rules' additional requirements and lender oversight 
provisions would provide improved and more timely lender monitoring to 
ultimately further minimize the risks of losses in SBA's loan programs.
    For 7(a) Lender specific sections, no additional reporting from 
these lenders is required by the proposed rule, and therefore no 
additional direct costs for assessment of any such reporting would be 
incurred by SBA for provisions related to oversight functions in this 
proposed rule.
    For SBLCs, we estimate the proposed rule would require an 
additional 3 hours financial analyst time at a $55 hourly rate to the 
Federal government for each SBLC or 42 hours overall (3 x 14 SBLCs) for 
an additional annual cost of $2,310 to the Federal government.
    For NFRLs, the estimated annual cost to the Federal government 
would be approximately 8 hours financial analyst time at a $55 hourly 
rate. Therefore, estimated annual cost to the Federal government 
related to oversight of all 58 NFRLs in accordance with this proposed 
rule would be 688 hours for $25,520.
    For CDCs, the estimated cost to the Federal government would be for 
additional information collected approximated at 1 hour financial 
analyst time for each CDC at a $55 hourly rate. The total additional 
cost would be $14,850 (1 hr x 270 x $55). In lieu of existing baseline 
cost of $14,850 (1 hr per CDC), the total cost would be $29,700.
    For Microloan Intermediaries and NTAPs, no additional direct costs 
to SBA would be incurred for the lender oversight functions and related 
provisions in this proposed rule.

[[Page 61765]]

    Any additional indirect cost to the Federal government for 
oversight of the SBA Lenders, Microloan Intermediaries, and NTAPs under 
this proposed rule would be covered by the already-existing OCRM infra-
structure.
8. Cost Basis
    For purposes of this proposal, CPA and CFO salary rates used were 
based on information published by the American Institute of Certified 
Public Accountants (AICPA) for CPA-credentialed individuals (external 
auditor or internal CFO) estimated at $100. The salary rates for 
administrative professionals were based on information published by the 
International Association of Administrative Professionals. Internal SBA 
financial analyst time was estimated at GS-14 step 5 level of $99,203 
plus 24.8% benefits allocation, or approximately $55 per hour.
    SBA is requesting comments from the public on any monetized, 
quantitative or qualitative costs of SBA Lenders, Microloan 
Intermediary, or NTAP compliance with this proposed rule. Please send 
comments to the SBA official referenced in the ADDRESSES section of the 
preamble.

D. Alternatives

    SBA believes that this proposed rule is SBA's best available means 
for achieving its regulatory objective of incorporating coordinated 
risk-based supervision and enforcement into SBA regulations and 
implementing the provisions of Public Law 108-447 and SBA's Delegation 
of Authority for lender oversight. SBA is requesting comments from the 
public on any potentially effective and reasonably feasible alternative 
to this proposed rule as it applies to SBA Lenders, Microloan 
Intermediaries, and NTAPs and the costs and benefits of those 
alternatives.
    Executive Order 13132: For the purposes of Executive Order 13132, 
the SBA determined that this rule has no federalism implications 
warranting preparation of a federalism assessment.
    Executive Order 12988: For the purposes of Executive Order 12988, 
Civil Justice Reform, SBA has determined that this proposed rule is 
crafted, to the extent practicable, in accordance with the standards 
set forth in Sec. Sec.  3(a) and 3(b)(2), to minimize litigation, 
eliminate ambiguity, and reduce burden. The proposed regulations would 
provide for rights of appeal to SBA Lenders, Microloan Intermediaries, 
and NTAPs in the event they are aggrieved by an Agency decision, 
thereby limiting the possibility of litigation by these entities. This 
proposed rule would not have retroactive or pre-emptive effect.
    Regulatory Flexibility Act: This proposed rule directly affects all 
SBA Lenders, Microloan Intermediaries, and NTAPs. There are 
approximately 5,000 7(a) Lenders, 270 CDCs, 250 Microloan 
Intermediaries, and there were 11 NTAPs participating with SBA funding 
when NTAPs were last funded. SBA has determined that CDCs, Microloan 
Intermediaries, and the 14 SBLCs fall under the size standard for NAICS 
522298, All other Nondepository Credit Intermediation. The size 
standard for NAICS 522298 is $6.5 million or less in average annual 
receipts. There are approximately 58 NFRLs, most of which fall in NAICS 
522298 (the rest fall into NAICS 522110, Commercial Banking). The 
remaining 7(a) Lenders fall under the size standard for NAICS 522110, 
Commercial Banking. The size standard for NAICS 522110 is assets of 
$165 million or less. The NTAPs fall under the size standard for NAICS 
541990, All Other Professional, Scientific and Technical Services. The 
size Standard for NAICS 541611 is $6.5 million or less in average 
annual receipts.
    SBA estimates that over 95 percent of the CDCs and Microloan 
Intermediaries do not exceed the applicable size standard and are, 
therefore, considered small entities by this definition. Approximately 
half of all of the 7(a) Lenders exceed the small business size standard 
set for NAICS 522110. Thus, SBA has determined that this proposed rule 
would have an impact on a substantial number of small entities. 
However, for the reasons explained following, SBA does not believe that 
the proposed rule will have a significant economic impact on those 
entities.
    The proposed rule would contain several different sections. For 
clarity, SBA has analyzed the economic impact by section, as follows:
    A. Proposed Reporting Requirements for SBA Supervised Lenders and 
CDCs: There are 14 Small Business Lending Companies (SBLCs) and 
approximately 58 NFRLs that are authorized to make 7(a) loans. The 
majority of the NFRLs are nondepository commercial Lenders. Most of the 
NFRLs are classified under NAICS 522298, which has a small business 
size standard of $6.5 million or less in annual revenues. The remaining 
NFRLs are classified under NAICS 522110, Commercial Banking, which has 
a small business size standard of $165 million or less in assets.
    Current regulations require SBLCs to submit their audited financial 
statements to SBA within three months after the close of their fiscal 
year. Financial statement submission allows SBA to perform a size 
determination on SBLCs with a reasonable degree of accuracy. Based on 
submitted financial statement, of the twelve active SBLCs, four exceed 
the small business size standard for NAICS 522298.
    Presently, there is no requirement that NFRLs submit financial 
statements to SBA. Therefore, SBA does not have the information to 
determine current average annual receipts. To estimate the size of the 
NFRLs, SBA reviewed a sample of the financial statements that NFRLs had 
submitted to SBA when they first applied for authorization to make 7(a) 
loans. Based on a review of those financial statements, we estimate 
that two-thirds of the NFRLs are small. Based on the financial data in 
the NFRL applications and up-to-date financial data supplied by SBLCs 
to SBA, SBA believes that the proposed rule would impact a substantial 
number of these small entities, but not constitute a significant 
economic impact, as detailed below.
    The proposed rule, which defines ``SBA Supervised Lenders'' as 
NFRLs and SBLCs, requires these Lenders to provide SBA with the 
following information: (1) Annual audited financial statements, (2) 
quarterly condition reports, (3) copies of any legal and administrative 
proceedings by or against the SBA Supervised Lender, (4) copies of any 
report furnished to its stockholders, (5) reports of changes in the SBA 
Supervised Lender's organization or financing, (6) reports of changes 
in the SBA Supervised Lender's financial condition, (7) notice of 
change in auditors, (8) notice of capital impairment, (9) capital 
restoration plans, (10) Other Regulated SBLC reports, (11) other 
reports (that SBA may require from time to time) and (12) 
certifications of compliance with capital requirement. Several of these 
are already required of SBLCs. The proposed rule would also provide for 
record retention requirements and recordkeeping of a capital adequacy 
plan.
    As is mentioned above, SBLCs are already required to submit audited 
annual financial statements to SBA. It has been SBA's experience that 
SBLCs and NFRLs also prepare quarterly financial statements on a 
regular basis for their own internal management purposes, and SBA 
believes that most of the NFRLs also prepare audited annual financial 
statements for their internal management purposes. The proposed rule 
would require both NFRLs and SBLCs to provide the SBA with copies of 
their financial statements on a quarterly basis and would expand the 
requirement for annual audited

[[Page 61766]]

financial statements submitted to SBA to include NFRLs. Existing 
regulations also require SBLCs to maintain compliance with SBA capital 
requirements. The proposed rule would expand the number of firms 
subject to SBA's capital regulation by making NFRLs subject to certain 
capital regulations. The proposed rule would also require SBA 
Supervised Lenders to provide SBA with a quarterly certification that 
they are in compliance with the SBA capital requirement. A certificate 
of compliance with SBA capital regulations would normally be prepared 
by a financial institution's chief financial officer or someone from 
his staff under the proposed rule. SBA believes that it would take no 
more than one hour per quarter to prepare and certify. The 
certification could accompany quarterly condition reporting. In 
accordance with the American Institute of Public Accountants published 
surveys, the salary and benefits rate for a CPA-credentialed individual 
is estimated at $100 per hour. This computes to an estimated annual 
cost of $400 to cover the CFO's time. We estimate that the 
administrative staff work involved in preparing the submission 
materials would take no more than one hour for those quarters not 
covered by the Annual Report. According to a recent survey published by 
the International Association of Administrative Professionals, the 
salary estimate is $30 per hour. This calculates to an annual expense 
of $120 per year. The combined annual expense that SBA Supervised 
Lenders would incur in order to comply with this reporting would be on 
average $520 ($400 + $120). SBA does not believe that an additional 
$520 cost annually constitutes significant economic impact on any of 
these firms, which can routinely engage in financings in the million 
dollar range. Therefore, SBA certifies that this aspect of the proposed 
rule would not have a significant economic impact on a substantial 
number of small entities.
    Current regulations require that SBLCs submit copies of the 
following to SBA: (1) Any legal and administrative proceedings by or 
against them, (2) any reports it furnishes to its stockholders, and (3) 
summaries of changes in the SBLCs organization and financing, (4) 
notice of capital impairment, and (5) such other report it is required 
by SBA to furnish on a specific matter. The proposed rule would extend 
to NFRLs these ad hoc reporting requirements. SBA believes this data is 
likely already collected and that similar documents are already 
prepared by the NFRLs. The proposal only requires the NFRLs to submit 
the documents to SBA. Because these are documents that are likely 
already in the possession of the NFRLs, SBA does not believe that the 
NFRLs would incur any significant costs to comply with the proposal. 
SBA, therefore, certifies that this aspect of the proposed rule would 
not have a significant economic impact on a substantial number of small 
entities. However, SBA requests data from the public that would enable 
SBA to determine any additional costs as a result of the proposed rule 
to require reporting of these items.
    The new reporting and recordkeeping requirements in the proposed 
rule for SBA Supervised Lenders that have not yet been discussed would 
occur on an ad hoc basis (e.g. change in financial condition). They 
generally would be triggered by exceptional circumstances. Thus given 
their ad hoc and exceptional nature, they would not likely have a 
significant economic impact on a substantial number of small entities.
    The proposed rule would require all CDC financial statements that 
are filed with the CDC annual report submission to be audited. 
Currently, under OMB approved information collection number 3245-0074, 
SBA only requires CDCs with a 504 loan portfolio balance of $20 million 
dollars or more to have the financial statements of be audited. (See 
SBA Form 1253.) For CDCs with a 504 loan portfolio balance of less than 
$20 million dollars, the financial statements currently need only be 
reviewed by an independent CPA and be prepared in accordance with GAAP. 
SBA is extending the audit requirement to all CDCs to facilitate a 
better assessment of the performance and financial strength of all 
CDCs. In addition, this requirement is part of SBA's incorporation of 
Single Audit Act requirements into its regulations. SBA estimates that 
at least 70 of the 270 CDCs already maintain audited financial 
statements, SBA also estimates that the cost of auditing the financial 
statements beyond the current review requirement for the estimated 
remaining 200 is approximately $4,000 per CDC (based upon an average 
additional 40 hours x $100 per hour of auditor time). This $4,000 
annually is not an excessive cost for CDCs, all of which can routinely 
engage in financings in the million dollar range. Based on this, SBA 
certifies that the extension of this requirement would not likely have 
a significant economic impact on a substantial number of small 
entities.
    B. Capital Adequacy: Only SBLCs are presently subject to the 
minimum capital requirements currently found in 13 CFR 120.470. The 
proposed rule would require SBLCs quarterly compliance with its minimum 
capital requirement. It would also require that NFRLs provide the SBA 
with a quarterly certification that they are in compliance with their 
state regulator's minimum capital requirement. In addition, the 
proposed rule would broaden the existing definition of capital, making 
it more consistent with that of other Federal Financial Institution 
Regulators, by allowing SBA Supervised Lenders to count retained 
earnings towards their regulatory capital requirement. SBA asserts that 
broadening the types of capital that are eligible towards the SBA 
capital requirements would have no adverse financial impact on small 
Lenders. In fact, allowing retained earnings to count toward an SBA 
Supervised Lender's regulatory capital would allow those SBLCs with 
significant retained earnings on their balance sheet to increase the 
size of their 7(a) portfolio without necessitating any additional 
injection of permanent capital. SBA, therefore, certifies that this 
aspect of the rule will not have a significant economic impact on a 
substantial number of small entities.
    C. Enforcement Provisions: The proposed rule would list the types 
of, grounds for, and procedures governing SBA enforcement actions 
within consolidated enforcement regulations for all SBA Lenders, 
Microloan Intermediaries, and NTAPs. The general enforcement provisions 
for SBA Lenders, Microloan Intermediaries, and NTAPs follow, for the 
most part, the same format that was established for the CDC program. 
The enforcement provisions for SBA Supervised Lender specific and SBLC 
specific actions follow recent legislation codified at 15 U.S.C. 650 
et. seq. Because SBA anticipates that enforcement actions would occur 
on an exception basis, SBA does not anticipate that these provisions 
would 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, therefore, certifies that the proposed rule would 
not have a significant impact on a substantial number of small 
entities.
    D. Bureau of PCLP Oversight: SBA proposes to establish the Bureau 
of PCLP Oversight in accordance with statutory guidance to address 
undercapitalization in the LLRFs of Premier Certified Lenders (PCLP 
CDCs). Of the approximately 270 CDCs, less than 20 of them have PCLP 
authority. These are generally the larger CDCs, with portfolios which 
have a total outstanding portfolio balance of $5.1

[[Page 61767]]

billion. SBA, therefore, certifies that the proposed rule Bureau of 
PCLP Oversight provision would not have a significant impact on a 
substantial number of small entities.
    Paperwork Reduction Act: SBA has determined that this proposed rule 
would impose additional reporting and recordkeeping requirements under 
the Paperwork Reduction Act, 44 U.S.C. Chapter 35. Specifically, SBA 
would revise OMB approved information collection number 3245-0077 to 
include NFRLs in SBA's current reporting requirements for SBLCs. SBA 
would also revise 3245-0077 to add four reporting requirements for all 
SBA Supervised Lenders and one reporting requirement just for SBLCs. In 
addition, the proposed rule would also revise OMB approved information 
collection number 3245-0074 to extend to all CDCs a certain requirement 
in reporting that applied only to CDCs with 504 loan portfolio balances 
of $20 million or more. Finally, the proposed rule would add a review/
examination reporting requirement.
    Under the proposed rule, NFRLs, like SBLCs, would have to file (i) 
Annual Reports (including audited financial statements); (ii) Reports 
of Administrative and Legal Proceedings; (iii) Stockholder Reports; 
(iv) Reports of Changes (in organization and financing); (v) notice of 
capital impairment; and (vi) other reports as required by SBA. The new 
reporting requirements would mean that both NFRLs and SBLCs would also 
have to file: (i) Quarterly Condition Reports (including certain 
certifications); (ii) Reports of Changes in Financial Condition (also 
including certain certifications); (iii) notice of a change in 
auditors; and (iv) Capital Restoration Plans, where applicable. In 
addition, SBLCs eligible to be exempt from the SBLC supervision and 
enforcement statutory provisions would have to report on direct 
examination activity and regulation by Federal Financial Institution 
Regulators or state banking regulators under proposed Sec.  Sec.  
120.1510 and 1511. Also, under the proposed rule, all CDC (not just 
CDCs with a 504 loan portfolio of $20 million dollars or more) would be 
required to have their annual financial statements that they submit to 
SBA, to be audited. Finally, the proposed rule would provide for self-
assessments and corrective action plans, as applicable, for SBA 
Lenders, Microloan Intermediaries and NTAPs.
    This proposed rule would also extend SBLC recordkeeping 
requirements to NFRLs in proposed Sec.  120.461 and would add a new 
recordkeeping requirement for all SBA Supervised Lenders. Specifically 
NFRLs, like SBLCs, would be required to retain a permanent record of 
certain substantiating documents for the financial statements and 
reports submitted to SBA. Such documents would include corporate 
charters and bylaws, applications for eligibility determination, 
capital stock certificates or stubs, general and subsidiary ledgers and 
journals, stock ledgers, stock transfer registers, and all minute 
books. The proposed rule would also require NFRLs, like SBLCs, to 
retain all documents and materials related to or supporting an SBA 
loan, such as applications for financing, participation and escrow 
accounts, and financing instruments, for a period of 6 years following 
final disposition of the loan. Many NFRLs may already retain much of 
this information for other purposes.
    Under the proposed rule, the new recordkeeping requirement would 
apply to SBA Supervised Lenders. In particular, SBA Supervised Lenders 
would be required to maintain a capital adequacy plan. Under proposed 
Sec.  120.462, the capital adequacy plan would detail Board of Director 
approved capital adequacy goals towards maintaining the financial 
institution's financial strength.
    The titles, descriptions of respondents and the information 
collections are discussed below. In addition, SBA has provided an 
estimate of the annual reporting and recordkeeping burdens.
    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 would 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 Bryan Hooper, Associate Administrator for 
Lender Oversight, Small Business Administration, 409 Third Street, SW., 
Washington, DC 20416.

I. SBA Supervised Lender Reporting and Recordkeeping Requirements

    The following authorities, description of respondents, statement of 
needs and purposes, and estimated hourly cost to respondents is 
applicable to the reports and recordkeeping to be included in revision 
to OMB approved information collection number 3245-0077 for SBA 
Supervised Lenders.
    Authority: SBA is authorized pursuant to 15 U.S.C. 650(a) and 15 
U.S.C. 634(b)(7) to collect this information associated with examining 
the safety and soundness of SBA Supervised Lenders.
    Description of Respondents: The respondents for the below listed 
information collections would consist of all SBA Supervised Lenders. 
Currently there are approximately 100 (14 SBLCs and 58 NFRLs).
    Statement of Needs and Purposes: The reports and recordkeeping 
requirements would facilitate safety and soundness examinations and 
appropriate supervision of SBA's licensed SBLCs and NFRLs. Annual and 
interim financial information would be analyzed by program management 
to timely assess SBA Supervised Lenders' financial strength, as well as 
compliance, with relevant program regulations (e.g., capital and SBLC 
licensing regulations). Other reporting requirements would update 
program management on the operational status of the SBA Supervised 
Lender and timely notify SBA of (i) changes in structure, personnel, 
auditors, and financial condition and (ii) potential financial 
exposure. Informed, SBA as supervisor and guarantor of 50 to 85% of an 
SBA Supervised Lender's portfolio, could intervene (where appropriate) 
to protect the interests of the United States.
    Estimated Cost to Respondents: SBA estimates a cost of $10,390 per 
SBA Supervised Lender (or approximately $748,080 for all SBA Supervised 
Lenders; 14 SBLCs and 58 NFRLs) to comply with the below listed 
information collections. The $10,390 per SBA Supervised Lender includes 
$8,000 for the annual report audit (80 hours x $100 per hour) plus 
$2,390 for staff time to support the information collections 
(approximately 18 hours CFO time @ $100 per hour and 18 hours staff 
time @ $30 per hour). The hourly estimates are based on an informal 
survey of SBA Supervised Lenders. While a few of the information 
collections, like the annual and quarterly condition reports are 
required, most are ad hoc and occur on an exception basis. The hourly 
costs are derived from salary and benefit rate

[[Page 61768]]

surveys of the AICPA and International Association of Administrative 
Professionals. This $628,080 increase from the current OMB approved 
collection is mainly attributable to the extension of the information 
collection to the 58 NFRLs, and SBA also believes that this number will 
be dramatically reduced to the extent that many or some of the NFRLs 
already maintain this information for other purposes.
    Below is a listing of those reports and recordkeeping requirements 
that would be included in the revision to OMB approved information 
collection number 3245-0077.

A. Annual Audit Report [No SBA Form Number]

    Summary: The Annual Audited Report would primarily consist of an 
SBA Supervised Lender's annual audited financial statements. The Annual 
Report would be due to SBA within three months after the SBA Supervised 
Lender's fiscal year end.

B. Legal and Administrative Proceedings [No SBA Form Number]

    Summary: Under proposed Sec.  120.464(a)(3), each SBA Supervised 
Lender would submit a report of any legal or administrative proceeding, 
by or against the SBA Supervised Lender, or against any officer, 
director or employee of the SBA Supervised Lender for an alleged breach 
of official duty.

C. Stockholder Report [No SBA Form Number]

    Summary: Under proposed Sec.  120.464(a)(4), all SBA Supervised 
Lenders would be required to submit to SBA copies of any report or 
publications concerning financial operations furnished to its 
stockholders.

D. Report of Changes [No SBA Form Number]

    Summary: Under the proposed Sec.  120.464(a)(5), all SBA Supervised 
Lenders would be required to submit a copy of any changes in the SBA 
Supervised Lender's organization or financing (e.g., change in type of 
organization, acquisition by or change of parent, change in primary 
financing entity, etc.).

E. Notice of Capital Impairment [No SBA Form Number]

    Summary: Proposed Sec.  120.462(d) would require all SBA Supervised 
Lenders to provide SBA prompt written notice of capital impairment.

F. Other Reports [No SBA Form Number]

    Summary: Proposed rule Sec.  120.464(a)(5) would require all SBA 
Supervised Lenders to submit such other reports as SBA may from time to 
time require by written directive.

G. Quarterly Condition Report and Certifications [No SBA Form Number]

    Summary: Under proposed Sec.  120.464(a)(2), all SBA Supervised 
Lenders would be required to submit a Quarterly Condition Report to SBA 
within 45 days following the end of each calendar quarter. The content 
of the Quarterly Condition Report would include the SBA Supervised 
Lender's interim financial statements, which may be internally 
prepared. SBA Supervised Lenders would be required to apply uniform 
definitions to categories of nonperforming loans and recovery amounts 
on liquidated loans within the reports. The Quarterly Condition Report 
would also contain a certification by the SBA Supervised Lender as to 
compliance with laws, completeness, and accuracy and may contain a 
certification as to capital requirement compliance.

H. Changes in Financial Condition Report [No SBA Form Number]

    Summary: Proposed Sec.  120.464(a)(6) would require SBA Supervised 
Lenders to file with SBA a report on any material change in financial 
condition within ten days after management becomes aware of the 
changes, except when reporting capital impairment under proposed Sec.  
120.462(d).

I. Notice of Change in Auditor [No SBA Form Number]

    Summary: Proposed Sec.  120.463(d) would require SBA Supervised 
Lenders to notify SBA in writing if it discharged or changed auditors.

J. Capital Restoration Plan [No SBA Form Number]

    Summary: Proposed Sec.  120.462(e) would require an SBA Supervised 
Lender to file a written capital restoration plan with SBA generally 
within 45 days of the date the SBA Supervised Lender receives or is 
deemed to have received notice that it has not met its minimum capital 
requirement.

K. Other Regulated SBLC Report [No SBA Form Number]

    Summary: Proposed Sec.  Sec.  120.1510 and 120.1511 would require 
an SBLC that is directly examined by a Federal Financial Institution 
Regulator or State banking regulator to certify to SBA in writing the 
extent to which its lending activities are subject to such regulation. 
It would also require such an Other Regulated SBLC to report to SBA on 
its interactions with its Federal Financial Institution Regulator or 
State banking regulator to the extent allowed by law.

L. Records Retention, In General

    Summary: Proposed Sec.  120.461(b) and (c) require SBA Supervised 
Lenders to maintain and preserve certain records with immediate 
availability of specific documents (e.g. general and subsidiary 
ledgers, general journals, bylaws, stock transfer ledgers). The 
provision provides for electronic preservation, if the original is 
available for retrieval within a reasonable period.

M. Capital Adequacy Plan

    Summary: Proposed Sec.  120.462 would require SBA Supervised 
Lenders' Board of Directors to determine capital adequacy goals and to 
establish, adopt, and maintain a capital plan.

II. CDC Reporting Requirements

    The following corresponds to the revisions to OMB approved 
information collection number 3245-0074, CDC Annual Report Guide.
    Authority: SBA is authorized to collect this information under 15 
U.S.C. 687(f).
    Description of Respondents: The respondents would consist of all 
CDCs. Currently, there are approximately 270.
    Estimated Cost to Respondents: SBA estimates a cost of $4,120 per 
CDC (or approximately $1,112,400 for all CDCs) to comply with the 
information collection as revised. The $4,120 cost per CDC includes 
$4,000 for the elevated audit requirement (40 hours x $100 per hour for 
auditors) plus an additional $120 for staff time (4 hours CDC staff 
time @ $30 per hour) working with the auditors. The hourly costs are 
derived from a salary and benefit rate survey of the International 
Association of Administrative Professionals. This $885,600 increase in 
total cost to all CDCs would be attributable to the cost of requiring 
audited financial statements. However, SBA believes the cost is likely 
much less, since many of these CDCs likely already maintain audited 
financial statements.
    Summary: Proposed Sec.  120.826 would be revised to require that 
each CDC have financial statements audited annually by an independent 
CPA. This change would extend to all CDCs the requirement that 
financial statements be audited currently only required for CDCs with a 
504 loan portfolio balance of $20 million dollars or more.

[[Page 61769]]

    Need and Purpose: Collection of annual audited financial statements 
is critical to allowing SBA to assess accurately CDCs' financial 
strength and for the purpose of lender oversight.

III. SBA Lender, Microloan Intermediary, and NTAP Reporting 
Requirements

    The following authorities, description of respondents, statement of 
needs and purposes and estimated hourly cost to respondents are 
applicable to the review/examination reporting requirements for SBA 
Lenders, Microloan Intermediaries, and NTAPs.

A. Self-Assessment

    Authority: SBA is authorized to collect self-assessment information 
under 15 U.S.C. 634(b)(7) and 15 U.S.C. 650.
    Description of Respondents: The respondents would consist of SBA 
Lenders, Microloan Intermediaries, and NTAPS.
    Estimated Cost to Respondents: SBA estimates a cost of $430 per SBA 
Lender, Microloan Intermediary, or NTAP or $8,600 for all those 
required during a year to submit a self-assessment certification or 
self-assessment report. SBA estimates requiring 20 self-assessments a 
year. This cost would consist of $30 for administrative staff to 
prepare the self-assessment certification or report (one hour x $30 
hour) and $400 for CFO composition time (four hours x $100 per hour). 
The hourly estimates are based on an informal survey of SBA Lenders by 
OCRM financial analysts.
    Summary: Proposed Section 120.1025 would provide that ``SBA may 
conduct off-site reviews and monitoring * * * including SBA Lenders', 
Intermediaries', or NTAPs' self-assessments.''
    Need and Purpose: Generally, SBA would consider requiring a self-
assessment to confirm corrective actions implemented or in lieu of 
targeted or limited scope reviews. Self-assessments are a cost 
effective means of overseeing and monitoring the SBA performance and 
compliance of SBA Lenders, Micro-loan Intermediaries, and NTAPs.

B. Corrective Action Plan

    Authority: SBA is authorized to collect this information under 15 
U.S.C. 634(b)(7) and 15 U.S.C. 650.
    Description of Respondents: The respondents would consist of SBA 
Lenders, Microloan Intermediaries, and NTAPs that receive an onsite 
review or examination assessment of acceptable with corrective action 
or less than acceptable, or as otherwise required by SBA.
    Estimated Cost to Respondents: SBA estimates a cost of $430 per SBA 
Lender, Microloan Intermediary, or NTAP or $64,500 for all those 
required during a year to submit a corrective action plan. SBA 
estimates requiring 150 corrective actions a year. This number may be 
dramatically reduced as SBA Lenders, Microloan Intermediaries, and 
NTAPs improve SBA program operations. The cost would consist of $30 for 
administrative staff to prepare the corrective action plan (one hour x 
$30 per hour) and $400 for CFO composition time (four hours x $100 per 
hour). The hourly estimates are based on an informal survey of SBA 
Lenders by OCRM financial analysts.
    Summary: Proposed Section 120.1055 would provide that SBA Lenders, 
Microloan Intermediaries, and NTAPs must submit proposed corrective 
action plans, if requested.
    Need and Purpose: The reports would facilitate corrective action to 
address SBA Lender, Microloan Intermediary, or NTAP deficiencies 
identified generally during reviews and examinations.

Proposal

List of Subjects in 13 CFR Part 120

    Loan Programs--business, Small businesses.

    For the reasons set forth above, SBA proposes to amend 13 CFR part 
120 as follows:

PART 120--BUSINESS LOANS

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

    Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note, 
636(a), (h) and (m), 650, 687(f), 696(3), and 697(a) and (e).

    2. Amend Sec.  120.10 by adding new definitions ``Acceptable Risk 
Rating'', ``Federal Financial Institutions Regulator'', ``Less Than 
Acceptable Risk Rating'', ``Management Official'', ``Non-Federally 
Regulated Lender'', ``Other Regulated SBLC'', ``Risk Rating'', ``SBA 
Lender'', ``SBA Supervised Lender'', and ``Small Business Lending 
Company'', and revising the definition for ``Lender'' to read as 
follows:


Sec.  120.10  Definitions.

* * * * *
    Acceptable Risk Rating is an SBA-assigned Risk Rating, currently 
defined by SBA as ``1'', ``2'' or ``3'' on a scale of 1 to 5, which 
represents an acceptable level of risk as determined by SBA, and which 
may be revised by SBA from time to time as published in the Federal 
Register through notice and comment.
* * * * *
    Federal Financial Institution Regulator is the federal banking 
regulator of a 7(a) Lender and may include the Federal Deposit 
Insurance Corporation, the Federal Reserve Board, the Office of the 
Comptroller of the Currency, the Office of Thrift Supervision, the 
National Credit Union Administration, and the Farm Credit 
Administration.
* * * * *
    Lender or 7(a) Lender is an institution that has executed a 
participation agreement with SBA under the guaranteed loan program.
    Less Than Acceptable Risk Rating is an SBA-assigned Risk Rating, 
currently defined by SBA as ``4'' or ``5'' on a scale of 1 to 5, which 
represents an unacceptable level of risk as determined by SBA, and 
which may be revised by SBA from time to time as published in the 
Federal Register through notice and comment.
* * * * *
    Management Official is an officer, director, general partner, 
manager, employee participating in management, agent or other 
participant in the management of the affairs of the SBA Supervised 
Lender's activities under the 7(a) program.
    Non-Federally Regulated Lender (NFRL) is a business concern that is 
authorized by the SBA to make loans under section 7(a) and is subject 
to regulation by a state but whose lending activities are not subject 
to regulation by a Federal Financial Institution Regulator.
* * * * *
    Other Regulated SBLC is a Small Business Lending Company whose SBA 
operations receive regular safety and soundness examinations by a state 
banking regulator or a Federal Financial Institution Regulator, and 
which meets the requirements set forth in Sec.  120.1511.
* * * * *
    Risk Rating is an SBA internal composite rating assigned to 
individual SBA Lenders, Intermediaries, or NTAPs that reflects the risk 
associated with the SBA Lender's or Intermediary's portfolio of SBA 
loans or with the NTAP. Risk Ratings currently range from one to five, 
with one representing the least risk and five representing the most 
risk, and may be revised by SBA from time to time as published in the 
Federal Register through notice and comment.
* * * * *

[[Page 61770]]

    SBA Lender is a 7(a) Lender or a CDC. This term includes SBA 
Supervised Lenders.
    SBA Supervised Lender is a 7(a) Lender that is either (1) a Small 
Business Lending Company or (2) a NFRL.
* * * * *
    Small Business Lending Company (SBLC) is a nondepository lending 
institution that is SBA licensed and is authorized by SBA to only make 
loans pursuant to section 7(a) of the Small Business Act and loans to 
Intermediaries in SBA's Microloan program. SBA has imposed a moratorium 
on licensing new SBLCs since January 1982.
* * * * *
    3. Amend Sec.  120.410 by revising paragraphs (a), (d) and (e) and 
adding a new paragraph (f) to read as follows:


Sec.  120.410  Requirements for all participating Lenders.

* * * * *
    (a) Have a continuing ability to evaluate, process, close, 
disburse, service, liquidate and litigate small business loans 
including, but not limited to:
    (1) Holding sufficient permanent capital to support SBA lending 
activities (for SBA Lenders with a Federal Financial Institution 
Regulator, meeting capital requirements for an adequately capitalized 
financial institution is considered sufficient permanent capital to 
support SBA lending activities; for SBLCs, meeting its SBA minimum 
capital requirement; and for NFRLs meeting its state minimum capital 
requirement); and
    (2) Maintaining satisfactory SBA performance, as determined by SBA 
in its sole discretion. The 7(a) Lender's Risk Rating, among other 
factors, will be considered in determining satisfactory SBA 
performance;
* * * * *
    (d) Be supervised and examined by either:
    (1) A Federal Financial Institution Regulator,
    (2) A state banking regulator satisfactory to SBA, or
    (3) SBA;
    (e) Be in good standing with SBA as defined in Sec.  120.420(f) 
(and determined by SBA in its sole discretion) and, as applicable, with 
an SBA Lender's state regulator or Federal Financial Institution 
Regulator; and
    (f) Operate in a safe and sound condition using commercially 
reasonable lending policies, procedures, and standards employed by 
prudent Lenders.
    4. Remove the undesignated center heading immediately preceding 
Sec.  120.414.


Sec.  120.414  [Removed]

    5. Remove Sec.  120.414


Sec.  120.415  [Removed]

    6. Remove Sec.  120.415.
    7. In Sec.  120.420, revise paragraph (f) introductory text and 
paragraphs (f)(3) and (4) to read as follows:


Sec.  120.420  Definitions.

* * * * *
    (f) Good Standing--In general, a Lender is in ``good standing'' 
with SBA if it: * * *
    (3) Is not under investigation or indictment for, or has not been 
convicted of, or had a judgment entered against it for felony or fraud, 
or charges relating to a breach of trust or violation of a law or 
regulation protecting the integrity of business transactions or 
relationships, unless the Lender Oversight Committee has determined 
that good-standing exists despite the existence of such factors.
    (4) Does not have any officer or employee who has been under 
investigation or indictment for, or has been convicted of or had a 
judgment entered against him for, a felony or fraud, or charges 
relating to a breach of trust or violation of a law or regulation 
protecting the integrity of business transactions or relationships, 
unless the Lender Oversight Committee has determined that good standing 
exists despite the existence of such person.
* * * * *
    8. Amend Sec.  120.424 by revising paragraph (a), redesignating 
paragraphs (b), (c), (d), and (e) as (c), (d), (e), and (f), and adding 
new paragraph (b) to read as follows:


Sec.  120.424  What are the basic conditions a Lender must meet to 
securitize?

* * * * *
    (a) Be in good standing with SBA as defined in Sec.  120.420(f) of 
this chapter and determined by SBA in its sole discretion;
    (b) Have satisfactory SBA performance as determined by SBA, in its 
sole discretion. The Lender's Risk Rating, among other factors, will be 
considered in determining satisfactory SBA performance;
* * * * *


Sec.  120.425  [Amended]

    9. Amend Sec.  120.425(c)(2) by removing ``SBA Securitization 
Committee'' and add in its place ``Lender Oversight Committee'' in the 
fourth sentence.


Sec.  120.426  [Amended]

    10. Amend Sec.  120.426 by removing ``SBA Securitization 
Committee'' and add in its place ``Lender Oversight Committee'' in the 
second sentence.
    11. Amend Sec.  120.433 by revising paragraph (a), redesignating 
paragraph (b) as (c), and adding a new paragraph (b) to read as 
follows:


Sec.  120.433  What are the SBA's other requirements for sales and 
sales of participating interests?

* * * * *
    (a) The Lender must be in good standing with SBA as defined in 
Sec.  120.420(f) and determined by SBA in its sole discretion;
    (b) the Lender has satisfactory SBA performance, as determined by 
SBA in its sole discretion. The Lender's Risk Rating, among other 
factors, will be considered in determining satisfactory SBA 
performance; and
* * * * *
    12. Amend Sec.  120.434 by revising paragraph (b), redesignating 
paragraphs (c), (d), (e), (f), and (g) as (d), (e), (f), (g), and (h), 
and adding a new paragraph (c) to read as follows:


Sec.  120.434  What are SBA's requirements for loan pledges?

* * * * *
    (b) The Lender must be in good standing with SBA as defined in 
Sec.  120.420(f) and determined by SBA in its sole discretion;
    (c) The Lender has satisfactory SBA performance, as determined by 
SBA, in its sole discretion. The Lender's Risk Rating, among other 
factors, will be considered in determining satisfactory SBA 
performance;
* * * * *
    13. Revise Sec.  120.435 introductory text to read as follows:


Sec.  120.435  Which loan pledges do not require notice to or consent 
by SBA?

    Notwithstanding the provisions of Sec.  120.434(e), 7(a) loans may 
be pledged for the following purposes without notice to or consent by 
SBA:
* * * * *


Sec.  120.442  [Removed]

    14. Remove Sec.  120.442
    15. Amend Sec.  120.451 by revising the last sentence in paragraph 
(a), revising paragraph (b)(3), removing paragraph (c), redesignating 
paragraph (d) as (c), redesignating paragraph (e) as (d) and revising 
its last sentence, and adding a new paragraph (e) to read as follows:


Sec.  120.451  How does a Lender become a PLP Lender?

    (a) * * * The SBA field office will forward its recommendation to 
an SBA

[[Page 61771]]

centralized loan processing center which will submit its recommendation 
and supporting documentation to the appropriate Office of Capital 
Access official in accordance with Delegations of Authority for final 
decision.
    (b) * * *
    (3) Has satisfactory SBA performance, as determined by SBA in its 
sole discretion. The Lender's Risk Rating, among other factors, will be 
considered in determining satisfactory SBA performance.
    (c) * * *
    (d) * * * The recertification decision is made by the appropriate 
Office of Capital Access official in accordance with Delegations of 
Authority and is final.
    (e) When a PLP lender's Supplemental Guaranty Agreement expires, 
SBA may recertify the Lender as a PLP Lender for an additional term not 
to exceed two years. Prior to recertification, SBA will review a PLP 
Lender's loans, policies, procedures, SBA performance, Risk Rating, 
review or examination results, and other risk related information as 
determined by SBA.
* * * * *


Sec.  120.454  [Removed]

    16. Remove Sec.  120.454


Sec.  120.455  [Removed]

    17. Remove Sec.  120.455
    18. Add new undesignated center heading before Sec.  120.460 to 
read as follows:

SBA Supervised Lenders

    19. Add new Sec.  120.460 to read as follows:


Sec.  120.460  What are SBA's additional requirements for SBA 
Supervised Lenders?

    (a) In general. In addition to complying with SBA's requirements 
for SBA Lenders, an SBA Supervised Lender must meet the additional 
requirements set forth in this regulation and the SBA Supervised Lender 
regulations that follow.
    (b) Operations and internal controls. Each SBA Supervised Lender's 
board of directors (or management, if the SBA Supervised Lender is a 
division of another `company and does not have its own board of 
directors) must adopt an internal control policy which provides 
adequate direction to the institution in establishing effective control 
over and accountability for operations, programs, and resources. The 
internal control policy must, at a minimum:
    (1) Direct management to assign responsibility for the internal 
control function (covering financial, credit, credit review, 
collateral, and administrative matters) to an officer or officers of 
the SBA Supervised Lender;
    (2) Adopt and set forth procedures for maintenance and periodic 
review of the internal control function; and
    (3) Direct the operation of a program to review and assess the SBA 
Supervised Lender's assets. The asset review program policies must 
specify the following:
    (i) Loan, loan-related asset, and appraisal review standards, 
including standards for scope of selection for review (of any such 
loan, loan-related asset or appraisal) and standards for work papers 
and supporting documentation;
    (ii) Asset quality classification standards consistent with the 
standardized classification systems used by the Federal Financial 
Institution Regulators;
    (iii) Specific internal control requirements for SBA Supervised 
Lender's major asset categories (cash and investment securities), 
lending, and the issuance of debt;
    (iv) Specific internal control requirements for the SBA Supervised 
Lender's oversight of Lender Service Providers; and
    (v) Standards for training to implement the asset review program.
    20. Add new Sec.  120.461 to read as follows:


Sec.  120.461  What are SBA's additional requirements for SBA 
Supervised Lenders concerning records?

    (a) Report filing. All SBA Supervised Lender-specific reports 
(including all SBLC-only reports) must be filed with the appropriate 
Office of Capital Access official in accordance with Delegations of 
Authority.
    (b) Maintenance of records. An SBA Supervised Lender must maintain 
at its principal business office accurate and current financial 
records, including books of accounts, minutes of stockholder, 
directors, and executive committee meetings, and all documents and 
supporting materials relating to the SBA Supervised Lender's 
transactions. However, securities held by a custodian pursuant to a 
written agreement must be exempt from this requirement.
    (c) Permanent preservation of records. An SBA Supervised Lender 
must permanently preserve in a manner permitting immediate (one 
business day) retrieval the following documentation for the financial 
statements and other reports required by Sec.  120.464 (and the 
accompanying certified public accountant's opinion):
    (1) All general and subsidiary ledgers (or other records) 
reflecting asset, liability, capital stock and additional paid-in 
capital, income, and expense accounts;
    (2) All general and special journals (or other records forming the 
basis for entries in such ledgers); and
    (3) The corporate charter, bylaws, application for determination of 
eligibility to participate with SBA, and all minutes books, capital 
stock certificates or stubs, stock ledgers, and stock transfer 
registers.
    (d) Other preservation of records. An SBA Supervised Lender must 
preserve for at least 6 years following final disposition of each 
individual SBA loan:
    (1) All applications for financing;
    (2) Lending, participation, and escrow agreements;
    (3) Financing instruments; and
    (4) All other documents and supporting material relating to such 
loans, including correspondence.
    (e) Electronic preservation. Records and other documents referred 
to in this section may be preserved electronically if the original is 
available for retrieval within 15 working days.
    21. Add new Sec.  120.462 to read as follows:


Sec.  120.462  What are SBA's additional requirements on capital 
maintenance for SBA Supervised Lenders?

    (a) Capital adequacy. The board of directors (or management, if the 
SBA Supervised Lender is a division of another company and does not 
have its own board of directors) of each SBA Supervised Lender must 
determine capital adequacy goals; that is, the total amount of capital 
needed to assure the SBA Supervised Lender's continued financial 
viability and provide for any necessary growth. The minimum standards 
set in Sec.  120.471 for SBLCs and those established by state 
regulators for NFRLs are not to be adopted as the ideal capital level 
for a given SBA Supervised Lender. Rather, the minimum standards are to 
serve as minimum levels of capital that each SBA Supervised Lender must 
maintain to protect against the credit risk and other general risks 
inherent in its operation.
    (b) Capital plan. The board of directors of each SBA Supervised 
Lender must establish, adopt, and maintain a formal written capital 
plan. The plan must include any interim capital targets that are 
necessary to achieve the SBA Supervised Lender's capital adequacy goals 
as well as the minimum capital standards. The plan must address any 
projected dividend goals, equity retirements, or any other anticipated 
action that may decrease the SBA Supervised Lender's capital. The

[[Page 61772]]

plan must set forth the circumstances in which capital retirements 
(e.g., dividends, distributions of capital or purchase of treasury 
stock) can occur. In addition to factors described above that must be 
considered in meeting the minimum standards, the board of directors 
must also address the following factors in developing the SBA 
Supervised Lender's capital adequacy plan:
    (1) Management capability;
    (2) Quality of operating policies, procedures, and internal 
controls;
    (3) Quality and quantity of earnings;
    (4) Asset quality and the adequacy of the allowance for loan losses 
within the loan portfolio;
    (5) Sufficiency of liquidity; and
    (6) Any other risk-oriented activities or conditions that warrant 
additional capital (e.g., portfolio growth rate).
    An SBA Supervised Lender must keep its capital plan current, 
updating it at least annually or more often as operating conditions may 
warrant.
    (c) Certification of compliance. Within 45 days of the end of each 
fiscal quarter, each SBA Supervised Lender must furnish the SBA with a 
calculation of capital and certification of compliance with its minimum 
capital requirement as set forth in Sec.  Sec.  120.471, 120.472, or 
120.474, as applicable, for SBLCs and as established by state 
regulators for NFRLs. The SBA Supervised Lender's chief financial 
officer must certify the calculation to be correct. The quarterly 
calculation and certification of compliance may be included in the SBA 
Supervised Lender's Quarterly Condition Report.
    (d) Capital impairment. An SBA Supervised Lender must meet its 
minimum regulatory capital requirement and avoid capital impairment. 
Capital impairment exists if an SBA Supervised Lender fails to meet its 
minimum regulatory capital requirement under Sec. Sec.  120.471, 
120.472, and 120.474 for SBLCs or as established by state regulators 
for NFRLs. An SBA Supervised Lender must provide the appropriate Office 
of Capital Access official in accordance with Delegations of Authority 
written notice of any failure to meet its minimum capital requirement 
within 30 calendar days of the month-end in which the impairment 
occurred. Unless otherwise waived by the appropriate Office of Capital 
Access official in accordance with Delegations of Authority in writing, 
an SBA Supervised Lender may not present any loans to SBA for guarantee 
until the impairment is cured. SBA may waive the presentment 
prohibition for good cause as determined by SBA in its discretion. In 
the case of differences in calculating capital or capital requirements 
between the SBA Supervised Lender and SBA, SBA's calculations will 
prevail until differences between the two calculations are resolved.
    (e) Capital restoration plan--(1) Filing requirement. An SBA 
Supervised Lender must file a written capital restoration plan with SBA 
within 45 days of the date that the SBA Supervised Lender provides 
notice to SBA under paragraph (d) of this section above or receives 
notice from SBA (whichever is earlier) that the SBA Supervised Lender 
has not met its minimum capital requirement, unless SBA notifies the 
SBA Supervised Lender in writing that the plan is to be filed within a 
different time period.
    (2) Plan content. An SBA Supervised Lender must detail the steps it 
will take to meet its minimum capital requirement; the time within 
which each step will be taken; the timeframe for accomplishing the 
entire capital restoration; and the person or department at the SBA 
Supervised Lender charged with carrying out the capital restoration 
plan.
    (3) SBA response. SBA will provide written notice of whether the 
capital restoration plan is approved or not or whether SBA will seek 
additional information. If the capital restoration plan is not approved 
by SBA, the SBA Supervised Lender will submit a revised capital 
restoration plan within the timeframe specified by SBA.
    (4) Amendment of capital restoration plan. An SBA Supervised Lender 
that has submitted an approved capital restoration plan may, after 
prior written notice to and approval by SBA, amend the plan to reflect 
a change in circumstance. Until such time as a proposed amendment has 
been approved, the SBA Supervised Lender must implement the capital 
restoration plan as approved prior to the proposed amendment.
    (5) Failure. If an SBA Supervised Lender fails to submit a capital 
restoration plan that is acceptable to SBA within its sole discretion 
within the required timeframe, or fails to implement, in any material 
respect as determined by SBA in its sole discretion, its SBA approved 
capital restoration plan within the plan timeframe, SBA may undertake 
enforcement actions under Sec.  120.1500.
    22. Add new Sec.  120.463 to read as follows:


Sec.  120.463 Regulatory  accounting--What are SBA's regulatory 
accounting requirements for SBA Supervised Lenders?

    (a) Books and records. The books and records of an SBA Supervised 
Lender must be kept on an accrual basis in accordance with Generally 
Accepted Accounting Principles (GAAP) as promulgated by the Financial 
Accounting Standards Board (FASB), supplemented by Regulatory 
Accounting Principles (RAP) as identified by SBA in Policy, Procedural 
or Information Notices, from time to time.
    (b) Annual audit. Each SBA Supervised Lender must have its 
financial statements audited annually by a certified public accountant 
experienced in auditing financial institutions. The audit must be 
performed in accordance with generally accepted auditing standards as 
adopted by the Auditing Standards Board of the American Institute of 
Certified Public Accountants (AICPA). Annually, the auditor must issue 
an audit report with an opinion as to the fairness of the SBA 
Supervised Lender's financial statements and their compliance with 
GAAP.
    (c) Auditor qualifications. The audit shall be conducted by an 
independent public accountant who:
    (1) Is registered or licensed to practice as a certified public 
accountant, and is in good standing, under the laws of the state or 
other political subdivision of the United States in which the SBA 
Supervised Lender's principal office is located;
    (2) Agrees in the engagement letter with the SBA Supervised Lender 
to provide the SBA with access to and copies of any work papers, 
policies, and procedures relating to the services performed;
    (3) (i) Is in compliance with the AICPA Code of Professional 
Conduct; and
    (ii) Meets the independence requirements and interpretations of the 
Securities and Exchange Commission and its staff;
    (4) Has received a peer review or is enrolled in a peer review 
program, that meets AICPA guidelines; and
    (5) Is otherwise acceptable to SBA.
    (d) Change of auditor. If an SBA Supervised Lender discharges or 
changes its auditor, it must notify SBA in writing within ten days of 
the occurrence. Such notification must provide:
    (1) The name, address, and telephone number of the discharged 
auditor; and
    (2) If the discharge/change involved a dispute over the financial 
statements, a reasonably detailed statement of all the

[[Page 61773]]

reasons for the discharge or change. This statement must set out the 
issue in dispute, the position of the auditor, the position of the SBA 
Supervised Lender, and the effect of each position on the balance sheet 
and income statement of the SBA Supervised Lender.
    (e) Specific accounting requirements. (1) Each SBA Supervised 
Lender must maintain an allowance for losses on loans and other assets 
that is sufficient to absorb all probable and estimated losses that may 
reasonably be expected based on the SBA Supervised Lender's historical 
performance and reasonably-anticipated events. Each SBA Supervised 
Lender must maintain documentation of its loan loss allowance 
calculations and analysis in sufficient detail to permit the SBA to 
understand the assumptions used and the application of those 
assumptions to the assets of the SBA Supervised Lender.
    (2) The unguaranteed portions of loans determined to be 
uncollectible must be charged-off promptly. If the portion determined 
to be uncollectible by the SBA Supervised Lender is different from the 
amount determined by its auditors or the SBA, the SBA Supervised Lender 
must charge-off such amount as the SBA may direct.
    (3) Each SBA Supervised Lender must classify loans as:
    (i) ``Nonaccrual'', if any portion of the principal or interest is 
determined to be uncollectible and
    (ii) ``Formally restructured,'' if the loan meets the ``troubled 
debt restructuring'' definition set forth in FASB Statement of 
Financial Accounting Standards No. 15, Accounting by Debtors and 
Creditors for Troubled Debt Restructurings.
    (4) When one loan to a borrower is classified as nonaccrual or 
formally restructured, all loans to that borrower must be so classified 
unless the SBA Supervised Lender can document that the loans have 
independent sources of repayment.
    (f) Valuing loan servicing rights and residual interests. Each SBA 
Supervised Lender must account for loan sales transactions and the 
valuation of loan servicing rights in accordance with GAAP. At the end 
of each quarter, the SBA Supervised Lender must review for 
reasonableness the existing environmental assumptions used in the 
valuation. Particular attention must be given to interest rate and 
repayment rate assumptions. Assumptions considered no longer reasonable 
must be modified and modifications must be reflected in the valuation 
and must be documented and supported by a market analysis. Work papers 
reflecting the analysis of assumptions and any resulting adjustment in 
the valuation must be maintained for SBA review in accordance with 
Sec.  120.461. SBA may require a SBA Supervised Lender to use industry 
averages for the valuation of servicing rights.
    23. Add new Sec.  120.464 to read as follows:


Sec.  120.464  Reports to SBA.

    (a) An SBA Supervised Lender must submit the following to SBA:
    (1) Annual Report. Within three months after the close of each 
fiscal year, each SBA Supervised Lender must submit to SBA two copies 
of an annual report including audited financial statements as prepared 
by a certified public accountant in accordance with Sec.  120.463. 
Specifically, the annual report must, at a minimum, include the 
following:
    (i) Audited balance sheet;
    (ii) Audited statement of income and expense;
    (iii) Audited reconciliation of capital accounts;
    (iv) Audited source and application of funds;
    (v) Such footnotes as are necessary to an understanding of the 
report;
    (vi) Auditor's letter to management on internal control weaknesses; 
and
    (vii) The auditor's report.
    (2) Quarterly Condition Reports. By the 45th calendar day following 
the end of each calendar quarter, each SBA Supervised Lender must 
submit a Quarterly Condition Report in a form and content as the SBA 
may prescribe from time to time. At a minimum, the Quarterly Condition 
Report must include the SBA Supervised Lender's quarterly financial 
statements, which may be internally prepared. The SBA Supervised Lender 
must apply uniform definitions to categories of nonperforming loans and 
include recovery amounts on liquidated loans. SBA may, on a case-by-
case basis, depending on an SBA Supervised Lender's size and the 
quality of its assets, adjust the requirements for content and 
frequency of filing Quarterly Condition Reports.
    (3) Legal and Administrative Proceeding Report. Each SBA Supervised 
Lender must report any legal or administrative proceeding by or against 
the SBA Supervised Lender, or against any officer, director or employee 
of the SBA Supervised Lender for an alleged breach of official duty, 
within ten business days after initiating or learning of the 
proceeding, and also must notify the SBA of the terms of any settlement 
or final judgment. The SBA Supervised Lender must include such 
information in any reporting required under other provisions of SBA 
regulations.
    (4) Stockholder Reports. Each SBA Supervised Lender must submit to 
SBA a copy of any report furnished to its stockholders in any manner, 
within 30 calendar days after submission to stockholders, including any 
prospectus, letter, or other document, concerning the financial 
operations or condition of the SBA Supervised Lender.
    (5) Reports of Changes. Each SBA Supervised Lender must submit to 
SBA a summary of any changes in the SBA Supervised Lender's 
organization or financing (within 30 calendar days of the change), such 
as:
    (i) Any change in its name, address or telephone number;
    (ii) Any change in its charter, bylaws, or its officers or 
directors (to be accompanied by a statement of personal history on the 
form approved by SBA);
    (iii) Any change in capitalization, including such types of change 
as are identified in these regulations;
    (iv) Any changes affecting an SBA Supervised Lender's eligibility 
to continue to participate as an SBA Supervised Lender; and
    (v) Notice of any pledge of stock (within 30 calendar days of the 
transaction) if 10 percent or more of the stock is pledged by any 
person (or group of persons acting in concert) as collateral for 
indebtedness.
    (6) Report of Changes in Financial Condition. In addition to other 
reports required under these regulations, each SBA Supervised Lender 
must submit a report to SBA on any material change in financial 
condition. The SBA Supervised Lender must submit such report promptly 
but no later than ten days after its management becomes aware of such 
change (except as provided for in Sec.  120.462(d)). Failure to 
promptly notify SBA concerning a material change in financial condition 
may lead to enforcement action.
    (7) Other Reports. Each SBA Supervised Lender must submit such 
other reports as SBA from time to time may in writing require.
    (b) Preparing financial reports for filing. Each SBA Supervised 
Lender must prepare financial reports:
    (1) In accordance with all applicable laws, regulations, 
procedures, standards, and such instructions and specifications and in 
such form and media format as may be prescribed by SBA from time to 
time;
    (2) On an accrual basis, in accordance with GAAP principles and 
such other accounting requirements, standards, and procedures as may be 
prescribed by the SBA from time to time;

[[Page 61774]]

    (3) that contain all applicable footnotes in accordance with GAAP 
principles, one of which includes a brief analysis of how the SBA 
Supervised Lender complies with SBA's capital regulations, as 
applicable; and
    (4) in such manner as to facilitate the reconciliation of these 
reports with the books and records of the SBA Supervised Lender.
    (c) Responsibility for assuring the accuracy of filed financial 
reports. Each financial report filed with SBA must be certified as 
having been prepared in accordance with all applicable regulations, 
SOPs, notices, and instructions and to be a true, accurate, and 
complete representation of the financial condition and financial 
performance of the SBA Supervised Lender to which it applies. The 
reports must be certified by the officer of the reporting SBA 
Supervised Lender named for that purpose by action of the institution's 
board of directors. If the institution's board of directors has not 
acted to name an officer to certify the correctness of its reports of 
financial condition and financial performance, then the reports must be 
certified by the president or chief executive officer of the reporting 
SBA Supervised Lender.
    (d) Waiver. The appropriate Office of Capital Access official in 
accordance with Delegations of Authority may in his/her sole discretion 
waive any Sec.  120.464 reporting requirement for SBA Supervised 
Lenders for good cause (including, but not limited to, where an SBA 
Supervised Lender has a relatively small SBA loan portfolio), as 
determined by SBA. SBA Supervised Lenders must request the waiver in 
writing and include all supporting reasons and documentation. The 
waiver decision of the appropriate Office of Capital Access official in 
accordance with Delegations of Authority is final.
    24. Add new Sec.  120.465 to read as follows:


Sec.  120.465  Civil penalty for late submission of required reports.

    (a) Obligation to submit required reports by applicable due dates. 
SBA Supervised Lenders must submit complete reports by the due dates 
described in the regulations or as directed in writing by SBA. SBA 
considers any report that an SBA Supervised Lender sends to SBA by the 
applicable due date but that is submitted only in part, to have not 
been submitted by the applicable due date. SBA also considers any 
report that is postmarked by the due date to be submitted by the due 
date.
    (b) Amount of civil penalty. For each day past the due date for 
such report, the SBA Supervised Lender must pay to SBA a civil penalty 
of not more than $5,000 per day per report. Such civil penalty 
continues to accrue until and including the date upon which SBA 
Supervised Lender submits the complete report. In determining the 
amount of the civil penalty to be assessed, SBA may consider the 
financial resources and good faith of the SBA Supervised Lender, the 
gravity of the violation, the history of previous violations and any 
such other matters as justice may require.
    (c) Notification of amount of civil penalty. SBA will notify the 
SBA Supervised Lender in writing of the amount of civil penalties 
imposed either upon receiving the required complete report or at such 
other time as SBA determines. SBA Supervised Lender must pay this 
amount to SBA within 30 days of the date of SBA's written demand.
    (d) Identification during examination. SBA may also impose on an 
SBA Supervised Lender a civil penalty as described in this section if 
SBA discovers, during an examination pursuant to subpart I of this Part 
120 or otherwise, that SBA Supervised Lender did not submit a required 
report by the due date.
    (e) Extensions of submission due dates. (1) SBA Supervised Lender 
may request in writing to SBA that SBA extend its report due date. The 
request must reference the report and its due date, state the 
reasonable cause for extension, and assert how much additional time is 
needed in order to submit a complete report. SBA will advise SBA 
Supervised Lender in writing as to whether it approved or denied the 
extension request. If SBA determines that there is reasonable cause to 
grant an extension and it is not due to willful neglect, SBA will 
establish a new due date. Such determination as to willful neglect and 
reasonable cause is in SBA's sole discretion. SBA will consider the 
following factors in determining willful neglect:
    (i) Whether SBA Supervised Lender failed to file required reports 
for more than two reporting periods and
    (ii) If SBA provided SBA Supervised Lender notice of the failure to 
file and SBA Supervised Lender failed to respond or failed to provide a 
reasonable explanation for the filing failure in its response.
    (2) If SBA disapproves the extension, the due date remains the 
same. The civil penalty accrues regardless of whether SBA Supervised 
Lender files an extension request. If SBA approves the extension, SBA 
will waive the civil penalty that has accrued so far for that 
particular report. However, a new civil penalty will accrue if SBA 
Supervised Lender does not submit a complete report by the new due date 
established by SBA.
    (f) Requests for reduction or exemption. (1) An SBA Supervised 
Lender may request a reduction or exemption from the civil penalty in 
writing to SBA. The request must reference the required report, its due 
date and the amount sought for reduction, and state in detail the 
reasons for the reduction. SBA will consider the following factors:
    (i) Whether there is reasonable cause for failure to file timely 
and it was not due to willful neglect;
    (ii) Whether SBA Supervised Lender has demonstrated to SBA's 
satisfaction that it has modified its internal procedures to comply 
with reporting requirements in the future; or
    (iii) Whether SBA Supervised Lender has demonstrated to SBA's 
satisfaction, based on financial information fully disclosed together 
with its request, that it would have difficulty paying the civil 
penalty assessed.
    (2) SBA must also determine that a reduction or exemption is not 
inconsistent with the public interest or the protection of SBA.
    (3) SBA may in writing approve the exemption, reduce the civil 
penalty, or deny the exemption.
    (4) If SBA grants the reduction request or denies the reduction or 
exemption, SBA Supervised Lender must pay the amount owed within 30 
days of the letter date. Civil penalties will accrue while the request 
is pending.
    (g) Reconsideration of decisions. An SBA Supervised Lender may 
request in writing to the Associate Administrator for Capital Access 
(AA/CA) to reconsider its request for extension, reduction, or 
exemption. The reconsideration request must be received by SBA within 
30 days of the date of the letter denying the SBA Supervised Lender of 
any such request. SBA will not consider untimely requests. SBA 
Supervised Lender must include any additional information or 
documentation to support its reconsideration request. SBA will issue a 
written decision on the reconsideration request. The decision is a 
final agency decision. If on reconsideration, a civil penalty remains 
due, SBA Supervised Lender must pay to SBA the civil penalty within 30 
days of the written decision or as otherwise directed. Civil penalties 
will continue to accrue while the reconsideration request is pending.

[[Page 61775]]

    (h) Other enforcement actions. SBA may seek additional remedies for 
failure to timely file reports as authorized by law.
    (i) Exception for affiliate of SBLC. Such civil penalties do not 
apply to any affiliate of an SBLC that procures at least 10% of its 
annual purchasing requirements from small manufacturers.
    25. Revise Sec.  120.470 to read as follows:


Sec.  120.470  What are SBA's additional requirements for SBLCs?

    In addition to complying with SBA's requirements for SBA Lenders 
and SBA Supervised Lenders, an SBLC must meet the requirements 
contained in this regulation and the SBLC regulations that follow.
    (a) Lending. An SBLC may only make:
    (1) Loans under section 7(a) (except section 7(a)(13) of the Act in 
participation with SBA); and/or
    (2) SBA guaranteed loans to Intermediaries (see subpart G of this 
part). Such loans are subject to the same conditions as guaranteed 
loans made to Intermediaries by 7(a) Lenders.
    (b) Business structure. An SBLC must be a corporation (profit or 
non-profit) or a limited liability company or limited partnership.
    (c) Written agreement. An SBLC must sign a written agreement with 
SBA.
    (d) Dual control. An SBLC must maintain dual control over 
disbursement of funds and withdrawal of securities.
    (1) An SBLC may disburse funds only by checks or wire transfers 
authorized by signatures of two or more officers covered by the SBLC's 
fidelity bond, except that checks in an amount of $1,000 or less may be 
signed by one bonded officer, provided that such action is permitted 
under the SBLC's fidelity bond.
    (2) There must be two or more bonded officers, or one bonded 
officer and a bonded employee to open safe deposit boxes or withdraw 
securities from safekeeping. The SBLC must furnish to each depository 
bank, custodian, or entity providing safe deposit boxes a certified 
copy of the resolution implementing control procedures.
    (e) Fidelity insurance. An SBLC must maintain a Brokers Blanket 
Bond, Standard Form 14, or Finance Companies Blanket Bond, Standard 
Form 15, or such other form of coverage as SBA may approve, in a 
minimum amount of $2,000,000 executed by a surety holding a certificate 
of authority from the Secretary of the Treasury pursuant to 31 U.S.C. 
9304-9308.
    (f) Common control. (1) An SBLC must not control, be controlled by, 
or be under common control with another SBLC.
    (2) In the case of a purchase of an SBLC by an organization that 
already owns an SBLC, the purchasing entity will have six months to 
submit a plan to SBA for the divestiture of one of the SBLCs. All 
divestiture plans must be approved by SBA and SBA may withhold approval 
in its sole discretion. Divestiture of the SBLC must occur within one 
year of purchase date.
    (3) Without prior written SBA approval, an Associate of one SBLC 
must not be an Associate of another SBLC or of any entity which 
directly or indirectly controls, or is under common control with, 
another SBLC.
    (4) For purposes of this regulation, common control means a 
condition where two or more SBLCs, either through ownership, 
management, contract, or otherwise, are under the Control of one group 
or Person (as defined in Sec.  145.985 of this chapter or successor 
regulation). Two or more SBLCs are presumed to be under common control 
if they are Affiliates of each other by reason of common ownership or 
common officers, directors, or general partners.
    (5) ``Affiliate'' has the meaning set forth in Sec.  121.103 of 
this chapter.
    (6) ``Control'' means the possession, direct or indirect, of the 
power to direct or cause the direction of the management and policies 
of an SBLC or other concern, whether through the ownership of voting 
securities, by contract, or otherwise. The common control presumption 
may be rebutted by evidence satisfactory to SBA.
    (g) Management. An SBLC must employ full time professional 
management.
    (h) Borrowed funds. In general, an SBLC may not be capitalized with 
borrowed funds. Shareholders owning 10 percent or more of any class of 
its stock must not use personally-borrowed funds to purchase the stock 
unless the net worth of the shareholder is at least twice the amount 
borrowed or unless the shareholder receives SBA's prior written 
approval for a lower ratio.
    26. Revise Sec.  120.471 to read as follows:


Sec.  120.471  What are the minimum capital requirements for SBLCs?

    (a) Minimum capital requirements. Each SBLC must maintain, at a 
minimum, unencumbered paid-in capital and paid-in surplus of at least 
$1,000,000, or ten percent of the aggregate of its share of all 
outstanding loans, whichever is more.
    (b) Composition of capital. For purposes of complying with 
paragraph (a) of this section, capital consists only of one or more of 
the following:
    (1) Common stock;
    (2) Preferred stock that is noncumulative as to dividends and does 
not have a maturity date;
    (3) Additional paid-in capital representing amounts paid for stock 
in excess of the par value;
    (4) Retained earnings of the business; and/or
    (5) For limited liability companies and limited partnerships, 
capital contributions must not be subject to repayment at any specific 
time, must not be subject to withdrawal and must have no cumulative 
priority return.
    (c) Voluntary capital reduction. Without prior written SBA 
approval, an SBLC must not voluntarily reduce its capital, or 
repurchase and hold more than 2 percent of any class or combination of 
classes of its stock.
    (d) Issuance of securities. Without prior written SBA approval, an 
SBLC must not issue any securities (including stock options and debt 
securities) except stock dividends.
    27. Revise Sec.  120.472 to read as follows:


Sec.  120.472  Higher individual minimum capital requirement.

    The Associate Administrator for Capital Access (AA/CA) may require, 
under Sec.  120.473(d), an SBLC to maintain a higher level of capital, 
if the AA/CA determines, in his/her sole discretion, that the SBLC's 
level of capital is potentially inadequate to protect the SBA from loss 
due to the financial failure of the SBLC. The factors to be considered 
in the determination will vary in each case and may include, for 
example:
    (a) Specific conditions or circumstances pertaining to the SBLC;
    (b) Exigency of those circumstances or potential problems;
    (c) Overall condition, management strength, and future prospects of 
the SBLC and, if applicable, its parent or affiliates;
    (d) The SBLC's liquidity and existing capital level, and the 
performance of its SBA loan portfolio;
    (e) The management views of the SBLC's directors and senior 
management; and
    (f) Other risk-related factors, as determined by SBA.


Sec.  120.476  [Removed]

    28. Remove Sec.  120.476.

[[Page 61776]]

Sec. Sec.  120.473, 120.474, and 120.475  [Redesignated as Sec. Sec.  
120.475, 120.476, and 120.490]

    29. Redesignate Sec. Sec.  120.473, 120.474, and 120.475 as 
Sec. Sec.  120.475, 120.476, and 120.490, respectively.
    30. In newly redesignated Sec.  120.475, revise the second sentence 
of paragraph (a) introductory text and revise paragraph (b) to read as 
follows:


Sec.  120.475  Change of ownership or control.

    (a) * * * An SBLC must request approval of any such change from the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority.* * *
    (b) If transfer of ownership or control is subject to the approval 
of any State or Federal chartering, licensing, or other regulatory 
authority, copies of any documents filed with such authority must, at 
the same time, be transmitted to the appropriate Office of Capital 
Access official in accordance with Delegations of Authority.
    31. Add new Sec.  120.473 to read as follows:


Sec.  120.473  Procedures for determining individual minimum capital 
requirement.

    (a) Notice. When SBA determines that an individual minimum capital 
requirement above that set forth in this subpart or other legal 
authority is necessary or appropriate for a particular SBLC, SBA will 
notify the SBLC in writing of the proposed individual minimum capital 
requirement, the date by which it should be reached and will provide an 
explanation of why the requirement proposed is considered necessary or 
appropriate.
    (b) SBLC response. The SBLC may respond to the notice. The response 
should include any matters which the SBLC would have SBA consider in 
deciding whether individual minimum capital requirements should be 
established for the SBLC, what those capital requirements should be, 
and, if applicable, when they should be achieved. The response must be 
in writing and delivered to the AA/CA within 30 days after the date on 
which the SBLC received the notice. SBA may shorten the time for 
response when, in the opinion of SBA, the condition of the SBLC so 
warrants, provided that the SBLC is informed promptly of the new time 
period, or the SBLC consents to the shortening of its response time. In 
its discretion, SBA may extend the time period for good cause.
    (c) Failure to respond. An SBLC that does not respond within 30 
days or such other time period as may be specified by SBA will have 
waived any objections to the proposed minimum capital requirement and 
the deadline for its achievement. Failure to respond will also 
constitute consent to the individual minimum capital requirement.
    (d) Decision. After the close of the SBLC's response period, the 
AA/CA will decide, based on a review of SBA reasons for proposing the 
individual minimum capital requirement, the SBLC's response, and other 
information concerning the SBLC, whether the individual minimum capital 
requirement should be established for the SBLC and, if so, the 
requirement and the date it will become effective. The SBLC will be 
notified of the decision in writing. The notice will include an 
explanation of the decision; except for a decision not to establish an 
individual minimum capital requirement for the SBLC.
    (e) Submission of plan. The decision may require the SBLC to 
develop and submit to SBA, within a time period specified, an 
acceptable plan to reach the individual minimum capital requirement by 
the date required.
    (f) Change in circumstances. If, after SBA's decision in paragraph 
(d) of this section, there is a change in the circumstances affecting 
the SBLC's capital adequacy or its ability to reach the required 
individual minimum capital requirement by the specified date, either 
the SBLC or the AA/CA may propose to the other a change in (i) the 
individual minimum capital requirement for the SBLC, (ii) the date when 
the individual minimum must be achieved, and/or (iii) the SBLC's plan 
(if applicable). The AA/CA may decline to consider proposals that are 
not based on a significant change in circumstances or are repetitive or 
frivolous. Pending a decision by the AA/CA on reconsideration, SBA's 
original decision and any plan required under that decision will 
continue in full force and effect.
    31. Add new Sec.  120.474 to read as follows:


Sec.  120.474  Relation to other actions.

    In lieu of, or in addition to, the procedures in this subpart, the 
individual minimum capital requirement for an SBLC may be established 
or revised through a written agreement or cease and desist proceedings 
under Subpart I of this Part.
    32. Amend Sec.  120.630 by adding paragraph (a)(5) to read as 
follows:


Sec.  120.630  Qualifications to be a Pool Assembler.

    (a) * * *
    (5) For any pool assembler that is an SBA Lender, that the SBA 
Lender has satisfactory SBA performance, as determined by SBA in its 
sole discretion. The Lender's Risk Rating, among other factors, will be 
considered in determining satisfactory SBA performance.
* * * * *
    33. Revise Sec.  120.702(b) to read as follows:


Sec.  120.702  Are there limitations on who can be an Intermediary or 
on where an Intermediary may operate?

* * * * *
    (b) Limitation to one state. An Intermediary may not operate in 
more than one state unless the appropriate Office of Capital Access 
official in accordance with Delegations of Authority determines that it 
would be in the best interests of the small business community for it 
to operate across state lines.
    34. Amend Sec.  120.710 by revising paragraphs (c), (d), the 
introductory text of paragraph (e) and paragraph (e)(1) to read as 
follows:


Sec.  120.710  What is the Loan Loss Reserve Fund?

* * * * *
    (c) SBA review of Loan Loss Reserve Fund. After an Intermediary has 
been in the Microloan program for five years, it may request SBA's 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority to reduce the percentage of its Portfolio 
which it must maintain in its LLRF to an amount equal to the actual 
average loan loss rate during the preceding five-year period. Upon 
receipt of such request, he/she will review the Intermediary's annual 
loss rate for the most recent five-year period preceding the request.
    (d) Reduction of Loan Loss Reserve Fund. The appropriate Office of 
Capital Access official in accordance with Delegations of Authority has 
the authority to reduce the percentage of an Intermediary's Portfolio 
that it must maintain in its LLRF to an amount equal to the actual 
average loan loss rate during the preceding five-year period. The 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority cannot reduce the LLRF to less than ten 
percent of the Portfolio.
    (e) What must an Intermediary demonstrate to get a reduction in 
Loan Loss Reserve Fund? To receive a reduction in its LLRF, an 
Intermediary must:
    (1) Have satisfactory SBA performance, as determined by SBA in its 
sole discretion. The Intermediary's Risk Rating, among other factors, 
will be considered in determining satisfactory SBA performance; and
* * * * *

[[Page 61777]]

Sec.  120.716  [Removed]

    35. Remove Sec.  120.716.
    36. Amend Sec.  120.812 to add a new sentence at the end of 
paragraph (c) to read as follows:


Sec.  120.812  Probationary period for newly certified CDCs.

* * * * *
    (c) * * * To be considered for permanent CDC status or an extension 
of probation, the CDC must have satisfactory SBA performance, as 
determined by SBA in its sole discretion. The CDC's Risk Rating, among 
other factors, will be considered in determining satisfactory SBA 
performance.
* * * * *
    37. Amend Sec.  120.820 to add a new paragraph (c) to read as 
follows:


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

* * * * *
    (c) Must have satisfactory SBA performance, as determined by SBA in 
its sole discretion. The CDC's Risk Rating, among other factors, will 
be considered in determining satisfactory SBA performance.
    38. Revise Sec.  120.826 as follows:


Sec.  120.826  Basic requirements for operating a CDC.

    A CDC must operate in accordance with the following requirements:
    (a) In general. CDCs must meet all 504 Loan Program Requirements. 
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 all 
reports required by SBA.
    (b) Operations and internal controls. Each CDC's board of directors 
must adopt an internal control policy which provides adequate direction 
to the institution for effective control over and accountability for 
operations, programs, and resources. The board adopted internal control 
policy must, at a minimum:
    (1) Direct management to assign the responsibility for the internal 
control function (covering financial, credit, credit review, 
collateral, and administrative matters) to an officer or officers of 
the CDC;
    (2) Adopt and set forth procedures for maintenance and periodic 
review of the internal control function;
    (3) Direct the operation of a program to review and assess the 
CDC's 504-related loans. For the 504 review program, the internal 
control policies must specify the following:
    (i) Loan, loan-related collateral, and appraisal review standards, 
including standards for scope of selection (for review of any such 
loan, loan-related collateral or appraisal) and standards for work 
papers and supporting documentation;
    (ii) Loan quality classification standards consistent with the 
standardized classification systems used by the Federal Financial 
Institution Regulators;
    (iii) Specific control requirements for the CDC's oversight of 
Lender Service Providers; and
    (iv) Standards for training to implement the loan review program; 
and
    (4) Address other control requirements as may be established by 
SBA.
    (c) Annual Audited Financial Statements. Each CDC must have its 
financial statements audited annually by a certified public accountant 
that is independent and experienced in auditing financial institutions. 
The audit must be performed in accordance with generally accepted 
auditing standards as adopted by the Auditing Standards Board of the 
American Institute of Certified Public Accountants (AICPA). The auditor 
must be independent, as defined by the AICPA, of the CDC. Annually, the 
auditor must issue an opinion as to the fairness of the CDC's financial 
statements and their compliance with GAAS.
    (d) Auditor qualifications. The audit must be conducted by an 
independent certified public accountant who:
    (1) Is registered or licensed to practice as a public accountant, 
and is in good standing, under the laws of the state or other political 
subdivision of the United States in which the CDC's principal office is 
located;
    (2) Agrees in the engagement letter with the CDC to provide the SBA 
with access to and copies of any work papers, policies, and procedures 
relating to the services performed;
    (3)(i) Is in compliance with the AICPA Code of Professional 
Conduct; and
    (ii) Meets the independence requirements and interpretations of the 
Securities and Exchange Commission and its staff;
    (4) Has received a peer review or is enrolled in a peer review 
program that meets AICPA guidelines; and
    (5) Is otherwise acceptable to SBA.
    (e) Single Audit Act requirements for not-for-profit CDCs. Not-for-
profit CDCs that are subject to the Single Audit Act Amendments of 1996 
(31 U.S.C. 7501-7507) (the Single Audit Act) must comply with the audit 
requirements contained in the Single Audit Act and revised OMB Circular 
A-133, Audits of States, Local Governments, and Non-Profit 
Organizations. To the extent that any of such audit requirements 
conflict with SBA's regulations, the Single Audit Act and OMB Circular 
A-133 requirements control.
    39. Amend Sec.  120.830 to revise paragraph (a) to read as follows:


Sec.  120.830  Reports a CDC must submit.

* * * * *
    (a) An annual report within three months after the end of the CDC's 
fiscal year (to include audited financial statements of the CDC and any 
affiliates or subsidiaries of the CDC prepared in accordance with Sec.  
120.826(c) and (d)), and such interim reports as SBA may require. The 
financial statements must, at a minimum, include the following:
    (1) Audited balance sheet;
    (2) Audited statement of income (or receipts) and expense;
    (3) Audited statement of source and application of funds;
    (4) Such footnotes as are necessary to an understanding of the 
report;
    (5) Auditor's letter to management on internal control weaknesses; 
and
    (6) The auditor's report.
* * * * *
    40. Amend Sec.  120.839 to add two new sentences after the second 
sentence in the introductory text to read as follows:


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

    * * * In addition, the CDC must have satisfactory SBA performance, 
as determined by SBA in its sole discretion. The CDC's Risk Rating, 
among other factors, will be considered in determining satisfactory SBA 
performance. * * *
* * * * *
    41. Revise Sec.  120.841(c) to read as follows:


Sec.  120.841  Qualifications for the ALP.

* * * * *
    (c) CDC reviews. CDC reviews conducted by SBA must be current 
(within the last 24 months, if applicable) for applicants for ALP 
status. The CDC must have received a review assessment of either 
``acceptable'' or ``acceptable with corrective actions required''. In 
addition, the CDC must have satisfactory SBA performance, as determined 
by SBA in its sole discretion. The CDC's Risk Rating, among other 
factors, will be considered

[[Page 61778]]

in determining satisfactory SBA performance.
* * * * *
    42. Revise Sec.  120.845(b) to read as follows:


Sec.  120.845  Premier Certified Lenders Program (PCLP).

* * * * *
    (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. The PCLP Loan 
Processing Center will review these materials and forward them to the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority for final determination.
* * * * *
    43. Remove the undesignated center heading before Sec.  120.853.
    44. Revise the heading for Sec.  120.853 to read as set forth below 
and remove the first sentence of the section.


Sec.  120.853  Inspector General audits of CDCs.

    45. Remove the undesignated center heading before Sec.  120.854.


Sec.  120.854  [Removed]

    46. Remove Sec.  120.854.


Sec.  120.855  [Removed]

    47. Remove Sec.  120.855.


Sec.  120.856  [Removed]

    48. Remove Sec.  120.856.
    49. Revise Sec.  120.956 to read as follows:


Sec.  120.956  Suspension or revocation of brokers and dealers.

    The appropriate Office of Capital Access official in accordance 
with Delegations of Authority may suspend or revoke the privilege of 
any broker or dealer to participate in the sale or marketing of 
Debentures and Certificates for actions or conduct bearing negatively 
on the broker's fitness to participate in the securities market. SBA 
must give the broker or dealer written notice, stating the reasons, at 
least 10 business days prior to the effective date of the suspension or 
revocation. A broker or dealer may appeal the suspension or revocation 
made under this section pursuant to the procedures set forth in part 
134 of this chapter. The action of this official will remain in effect 
pending resolution of the appeal.
    50. Revise the heading to subpart I and add an undesignated center 
heading and Sec. Sec.  120.1000, 120.1005, 120.1010, 120.1015, 
120.1025, 120.1050, 120.1051, 120.1055, and 120.1060 to read as 
follows:
Subpart I--Risk-Based Lender Oversight

Supervision

Sec.
120.1000 Risk-Based Lender Oversight.
120.1005 Bureau of PCLP Oversight.
120.1010 SBA access to SBA Lender, Intermediary, and NTAP files.
120.1015 Risk Rating System.
120.1025 Off-site reviews and monitoring.
120.1050 On-site reviews and examinations.
120.1051 Frequency of on-site reviews and examinations.
120.1055 Review and examination results.
120.1060 Confidentiality of Reports, Risk Ratings, and related 
Confidential Information.

Subpart I--Risk-Based Lender Oversight

Supervision


Sec.  120.1000  Risk-Based Lender Oversight.

    (a) Risk-Based Lender Oversight. SBA supervises, examines, and 
regulates, and enforces laws against, SBA Supervised Lenders and the 
SBA operations of SBA Lenders, Intermediaries, and NTAPs.
    (b) Scope. Most rules and standards set forth in this subpart apply 
to SBA Lenders as well as Intermediaries and NTAPs. However, SBA has 
separate regulations for enforcement grounds and enforcement actions 
for Intermediaries and NTAPs at Sec.  120.1425 and Sec.  120.1540.


Sec.  120.1005  Bureau of PCLP Oversight.

    SBA's Bureau of PCLP Oversight within OCRM, monitors the 
capitalization of PCLP CDC pilot participants' LLRFs and performs other 
related functions.


Sec.  120.1010  SBA access to SBA Lender, Intermediary, and NTAP files.

    An SBA Lender, Intermediary, and NTAP must allow SBA's authorized 
representatives, including representatives authorized by the SBA 
Inspector General, during normal business hours, access to its files to 
review, inspect, and copy all records and documents, relating to SBA 
guaranteed loans or as requested for SBA oversight.


Sec.  120.1015  Risk Rating System.

    (a) Risk Rating. SBA may assign a Risk Rating to all SBA Lenders, 
Intermediaries, and NTAPs on a periodic basis. Risk Ratings are based 
on certain risk-related portfolio performance factors as set forth in 
notices or SBA's SOPs and as published from time to time.
    (b) Rating categories. Risk Ratings fall into one of two broad 
categories: Acceptable Risk Ratings or Less Than Acceptable Risk 
Ratings.


Sec.  120.1025  Off-site reviews and monitoring.

    SBA may conduct off-site reviews and monitoring of SBA Lenders, 
Intermediaries, and NTAPs, including SBA Lenders', Intermediaries' or 
NTAPs' self-assessments.


Sec.  120.1050  On-site reviews and examinations.

    (a) On-site reviews. SBA may conduct on-site reviews of the SBA 
loan operations of SBA Lenders. The on-site review may include, but is 
not limited to, an evaluation of the following:
    (1) Portfolio performance;
    (2) SBA operations management;
    (3) Credit administration; and
    (4) Compliance with Loan Program Requirements.
    (b) On-site examinations. SBA may conduct safety and soundness 
examinations of SBA Supervised Lenders, except SBA will not conduct 
safety and soundness examinations of Other Regulated SBLCs under 
Sec. Sec.  120.1510 and 1511. The on-site safety and soundness 
examination may include, but is not limited to, an evaluation of:
    (1) Capital adequacy;
    (2) Asset quality (including credit administration and allowance 
for loan losses);
    (3) Management quality (including internal controls, loan portfolio 
management, and asset/liability management);
    (4) Earnings;
    (5) Liquidity;
    (6) Compliance with Loan Program Requirements
    (c) On-site reviews/examinations of Intermediaries and NTAPs. SBA 
may perform on-site reviews or examinations of Intermediaries and 
NTAPs.
    (d) Other on-site reviews or examinations. SBA may perform other 
on-site reviews/examinations as needed as determined by SBA in its sole 
discretion.


Sec.  120.1051  Frequency of on-site reviews and examinations.

    SBA may conduct on-site reviews and examinations of SBA Lenders, 
Intermediaries, and NTAPs on a periodic basis. SBA may consider, but is 
not limited to, the following factors in determining frequency:
    (a) Off-site review/monitoring results, including an SBA Lender's, 
Intermediary's or NTAP's Risk Rating;
    (b) SBA loan portfolio size;
    (c) Previous review or examination findings;
    (d) Responsiveness in correcting deficiencies noted in prior 
reviews or examinations; and

[[Page 61779]]

    (e) Such other risk-related information as SBA, in its sole 
discretion, determines to be appropriate.


Sec.  120.1055  Review and examination results.

    (a) Written Reports. SBA will provide an SBA Lender, Intermediary, 
and NTAP a copy of SBA's written report prepared as a result of the SBA 
Lender review or examination (``Report''). The Report may contain 
findings, conclusions, corrective actions and recommendations. Each 
director (or manager, in the absence of a Board of Directors) of the 
SBA Lender, Intermediary, and NTAP, in keeping with his or her 
responsibilities, must become fully informed regarding the contents of 
the Report.
    (b) Response to review and examination Reports. SBA Lenders, 
Intermediaries, and NTAPs must respond to Report findings and 
corrective actions, if any, in writing to SBA and, if requested, submit 
proposed corrective actions and/or a capital restoration plan. An SBA 
Lender, Intermediary, or NTAP must respond within 30 days from the 
Report date unless SBA notifies the SBA Lender, Intermediary, or NTAP 
in writing that the response, proposed corrective actions or capital 
restoration plan is to be filed within a different time period. The SBA 
Lender, Intermediary, or NTAP response must address each finding and 
corrective action. In proposing a corrective action or capital 
restoration plan, SBA Lender, Intermediary, or NTAP must detail: The 
steps it will take to correct the finding deficiency; the time within 
which each step will be taken; the timeframe for accomplishing the 
entire corrective action; and the person(s) or department at the SBA 
Lender, Intermediary, or NTAP charged with carrying out the corrective 
actions or capital restoration plan, as applicable.
    (c) SBA response. SBA will provide written notice of whether the 
response and, if applicable, any corrective action or capital 
restoration plan, is approved, or whether SBA will seek additional 
information or require other action.
    (d) Failure to respond or to submit or implement an acceptable 
plan. If an SBA Lender, Intermediary, or NTAP fails to respond in 
writing to SBA, respond timely to SBA, or provide a response acceptable 
to SBA within SBA's sole discretion, or respond to all findings and 
required corrective actions in a Report, then SBA may take enforcement 
action under Subpart I. If an SBA Lender, Intermediary, or NTAP that is 
requested to submit a corrective action plan or capital restoration 
plan to SBA fails to do so in writing; fails to submit timely such plan 
to SBA; or fails to submit a plan acceptable to SBA within SBA's sole 
discretion, then SBA may take enforcement action under Sec.  120.1500 
et. seq. If an SBA Lender, Intermediary, or NTAP fails to implement in 
any material respect a corrective action or capital restoration plan 
within the required timeframe, then SBA may undertake enforcement 
action under Sec.  120.1500 et. seq.


Sec.  120.1060  Confidentiality of Reports, Risk Ratings and related 
Confidential Information.

    (a) In general. Reports and other SBA prepared review or 
examination related documents are the property of SBA and are loaned to 
an SBA Lender, Intermediary, or NTAP for its confidential use only. The 
Reports, Risk Ratings, and related Confidential Information are 
privileged and confidential as more fully explained in paragraph (b) of 
this section. The Report, Risk Rating, and Confidential Information 
must not be relied upon for any purpose other than SBA's Lender 
oversight and SBA's portfolio management purposes. An SBA Lender, 
Intermediary, or NTAP must not make any representations concerning the 
Report (including its findings, conclusions, and recommendations), the 
Risk Rating, or the Confidential Information. For purposes of this 
regulation, Report means the review or examination report and related 
documents. For purposes of this regulation, Confidential Information is 
defined in the SBA Lender information portal and by notice issued from 
time to time. Access to the lender information portal may be obtained 
by contacting the OCRM.
    (b) Disclosure prohibition. Each SBA Lender, Intermediary, and NTAP 
is prohibited from disclosing its Report, Risk Rating, and Confidential 
Information, in full or in part, in any manner, without SBA's prior 
written permission. An SBA Lender, Intermediary, and NTAP may use the 
Report, Risk Rating, and Confidential Information for confidential use 
within its own immediate corporate organization. SBA Lenders, 
Intermediaries, and NTAPs must restrict access to their Report, Risk 
Rating and Confidential Information to those of its officers and 
employees who have a legitimate need to know such information for the 
purpose of assisting them in improving the SBA Lender's, 
Intermediary's, or NTAP's SBA program operations in conjunction with 
SBA's Lender Oversight Program and SBA's portfolio management (for 
purposes of this regulation, each referred to as a ``permitted 
party''), and to those for whom SBA has approved access by prior 
written consent, and to those for whom access is required by applicable 
law or legal process. If such law or process requires SBA Lender, 
Intermediary, or NTAP to disclose the Report, Risk Rating, or 
Confidential Information to any person other than a permitted party, 
SBA Lender, Intermediary, or NTAP will promptly notify SBA and SBA's 
Information Provider in writing so that SBA and the Information 
Provider have, within their sole discretion, the opportunity to seek 
appropriate relief such as an injunction or protective order prior to 
disclosure. For purposes of this regulation, ``Information Provider'' 
means any contractor that provides SBA with the Risk Rating. SBA 
Lender, Intermediary, and NTAP must ensure that each permitted party is 
aware of these regulatory requirements and must ensure that each such 
permitted party abides by them. Any disclosure of the Report, Risk 
Rating, or Confidential Information other than as permitted by this 
regulation may result in appropriate action as authorized by law. An 
SBA Lender, Intermediary, and NTAP will indemnify and hold harmless SBA 
of the Risk Rating or Confidential Information from and against any and 
all claims, demands, suits, actions, and liabilities to any degree 
based upon or resulting from the unauthorized use or disclosure of the 
Report, Risk Rating, or Confidential Information. Information Provider 
contact information is available from the Office of Capital Access.
    51. In subpart I, add an undesignated center heading and Sec. Sec.  
120.1400, 120.1425, 120.1500, 120.1510, 120.1511, 120.1540, and 
120.1600 to read as follows:

Subpart I--Risk-Based Lender Oversight

* * * * *

Enforcement Actions

Sec.
120.1400 Grounds for enforcement actions--SBA Lenders.
120.1425 Grounds for enforcement actions--Intermediaries 
participating in the Microloan Program and NTAPs.
120.1500 Enforcement actions--SBA Lenders.
120.1510 Other Regulated SBLCs.
120.1511 Certification and other reporting and notification 
requirements for Other Regulated SBLCs.
120.1540 Enforcement actions--Intermediaries participating in the 
Microloan Program and NTAPs.

[[Page 61780]]

120.1600 General procedures for enforcement actions against SBA 
Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management 
Officials, Other Persons, Intermediaries, and NTAPs.

Enforcement Actions


Sec.  120.1400  Grounds for enforcement actions--SBA Lenders.

    (a) Agreement. By making SBA 7(a) guaranteed loans or 504 loans, 
SBA Lenders automatically agree to the terms, conditions, and remedies 
in Loan Program Requirements, as promulgated or issued from time to 
time and as if fully set forth in the SBA Form 750, Loan Guaranty 
Agreement or other applicable participation, guaranty, or supplemental 
agreement.
    (b) Scope. SBA may undertake one or more of the enforcement actions 
listed in Sec.  120.1500 or as otherwise authorized by law, if SBA 
determines that the grounds applicable to the enforcement action exist. 
In general, the grounds listed in paragraph (c) of this section may 
trigger enforcement actions against any SBA Lender. However, certain 
enforcement actions against SBA Supervised Lenders, as set forth in 
paragraphs (d) and (e) of this section, require the existence of 
certain grounds, and paragraph (f) of this section lists two additional 
grounds for taking enforcement action against CDCs. Below is a listing 
of the grounds that trigger enforcement actions against each type of 
SBA Lender.
    (c) Grounds in general. Except as provided in paragraphs (d) and 
(e) of this section, the grounds that may trigger an enforcement action 
against any SBA Lender (regardless of its Risk Rating) include:
    (1) Failure to maintain eligibility requirements for specific SBA 
programs and delegated authorities, including but not limited to: 7(a), 
PLP, SBAExpress, Community Express, 504, ALP, PCLP, the alternative 
loss reserve pilot program and any pilot loan program;
    (2) Failure to comply materially with any requirement imposed by 
Loan Program Requirements;
    (3) Making a material false statement or failure to disclose a 
material fact to SBA (A material fact is any fact which is necessary to 
make a statement not misleading in light of the circumstances under 
which the statement was made.);
    (4) Not performing underwriting, closing, disbursing, servicing, 
liquidation, litigation or other actions in a commercially reasonable 
and prudent manner for 7(a) or 504 loans, respectively, as applicable. 
Evidence of such performance or actions may include, but is not limited 
to, the SBA Lender having a repeated Risk Rating or an on-site review/
examination assessment which is Less Than Acceptable;
    (5) Failure within time period specified to correct an 
underwriting, closing, disbursing, servicing, liquidation, litigation, 
or reporting deficiency, or failure in any material respect to take 
other corrective action, after receiving notice from SBA of a 
deficiency and the need to take corrective action;
    (6) Engaging in a pattern of uncooperative behavior or taking an 
action that SBA determines is detrimental to an SBA program, that 
undermines management or administration of a program, or that is not 
consistent with standards of good conduct;
    (7) Repeated failure to correct continuing deficiencies;
    (8) Unauthorized disclosure of Reports, Risk Rating, or 
Confidential Information;
    (9) Any other reason that SBA determines may increase SBA's 
financial risk (for example, repeated Less Than Acceptable Risk Ratings 
or indictment on felony or fraud charges of an officer, key employee, 
or loan agent involved with SBA loans for the SBA Lender);
    (10) As otherwise authorized by law; or
    (11) For immediate suspension of all SBA Lenders from delegated 
authorities--upon a determination by SBA that one or more of the 
grounds in paragraph (c) or paragraph (f) of this section, as 
applicable, exist and, that immediate action is needed to prevent 
significant impairment of the integrity of the 7(a) or 504 loan 
program.
    (12) For immediate suspension of all SBA Lenders except SBA 
Supervised Lenders from the authority to participate in the SBA loan 
program, including the authority to make, service, liquidate, or 
litigate 7(a) or 504 loans--upon a determination by SBA that one or 
more of the grounds in paragraph (c) or paragraph (f) of this section, 
as applicable, exist and, that immediate action is needed to prevent 
significant impairment of the integrity of the 7(a) or 504 loan 
program.
    (d) Grounds required for certain enforcement actions against SBA 
Supervised Lenders (except Other Regulated SBLCs) or as applicable, 
Other Persons. For purposes of Subpart I, Other Person means a 
Management Official, attorney, accountant, appraiser, Lender Service 
Provider or other individual involved in the SBA Supervised Lender's 
operations. For the below listed SBA Supervised Lender enforcement 
actions, the grounds that are required to take the enforcement action 
are:
    (1) For SBA program suspensions and revocations--
    (i) False statements knowingly made in any required written 
submission to SBA; or
    (ii) An omission of a material fact from any written submission 
required by SBA; or
    (iii) A willful or repeated violation of the Small Business Act 
(the Act) or SBA regulations; or
    (iv) A willful or repeated violation of any condition imposed by 
SBA with respect to any application, request, or agreement with SBA; or
    (v) A violation of any cease and desist order of SBA.
    (2) For SBA program immediate suspension--SBA may suspend an SBA 
Supervised Lender, effective immediately, if in addition to meeting the 
grounds set forth in paragraph (d)(1) of this section, the 
Administrator (or the Deputy Administrator, only if the Administrator 
is unavailable to take such action) finds extraordinary circumstances 
and takes such action in order to protect the financial or legal 
position of the United States.
    (3) For cease and desist orders--
    (i) A violation of the Act or SBA regulations, or
    (ii) Where an SBA Supervised Lender or Other Person engages in or 
is about to engage in any acts or practices that will violate the Act 
or SBA's regulations.
    (4) For an emergency cease and desist order--
    (i) Where grounds for cease and desist order are met,
    (ii) The Administrator (or the Deputy Administrator, only if the 
Administrator is unavailable to take such action) finds extraordinary 
circumstances, and
    (iii) In order to protect the financial or legal position of the 
United States.
    (5) For transfer of Loan portfolio--
    (i) Where a court has appointed a receiver and
    (ii) The SBA Supervised Lender is either not in compliance with 
capital requirements or is insolvent. An SBA Supervised Lender is 
insolvent within the meaning of this provision when all of its capital, 
surplus, and undivided profits are absorbed in funding losses and the 
remaining assets are not sufficient to pay and discharge its contracts, 
debts, and other obligations as they come due.
    (6) For transfer of servicing activity--
    (i) Where grounds for transfer of Loan portfolio are met or

[[Page 61781]]

    (ii) Where the SBA Supervised Lender is otherwise operating in an 
unsafe and unsound condition.
    (7) For order to remove Management Official--where, in the opinion 
of the Administrator or his/her delegatee, the Management Official--
    (i) Willfully and knowingly committed a substantial violation of 
the Act, SBA regulation, a final cease and desist order, or any 
agreement by the Management Official or the SBA Supervised Lender under 
the Act or SBA regulations, or
    (ii) Willfully and knowingly committed a substantial breach of a 
fiduciary duty of that person as a Management Official and the 
violation or breach of fiduciary duty is one involving personal 
dishonesty on the part of such Management Official, or
    (iii) The Management Official is convicted of a felony involving 
dishonesty or breach of trust and the conviction is no longer subject 
to further judicial review (excludes writ of habeas corpus).
    (8) For order to suspend or prohibit participation of Management 
Official (interim measure pending removal)--where SBA is undertaking 
enforcement action of removal of a Management Official.
    (9) For order to suspend or prohibit participation of Management 
Official due to criminal charges--where the Management Official is 
charged in any information, indictment or complaint authorized by a 
United States attorney with a felony involving dishonesty or breach of 
trust.
    (e) Grounds required for certain enforcement actions against SBLCs 
and Other Regulated SBLCs.
    (1) Capital directive. If the AA/CA determines that an SBLC is 
capitally impaired or is otherwise being operated in an imprudent 
manner, the AA/CA may, in addition to any other action authorized by 
law, issue a directive to the SBLC to increase capital consistent with 
Sec.  120.1500(d)(1).
    (2) Civil action for termination. If an SBLC violates the Act or 
SBA regulations, SBA may institute a civil action to terminate SBLC 
rights, privileges, and the franchise under Sec.  120.1500(d)(2).
    (f) Additional grounds specific to CDCs. In addition to the grounds 
set forth in paragraphs (b) and (c) of this section, SBA may take 
enforcement action against a CDC for:
    (1) Failure to receive SBA approval for at least four 504 loans 
during the last two consecutive fiscal years, or
    (2) For PCLP CDCs, failure to establish or maintain a LLRF as 
required by the PCLP.


Sec.  120.1425  Grounds for enforcement actions--Intermediaries 
participating in the Microloan Program and NTAPs.

    (a) Agreement. By participating in the SBA Microloan or NTAP 
program, Intermediaries and NTAPs automatically agree to the terms, 
conditions, and remedies in this Part 120 as if fully set forth in 
their participation agreement and all other agreements jointly executed 
by the Intermediary or NTAP and SBA.
    (b) Scope. SBA may undertake one or more of the enforcement actions 
listed in Sec.  120.1540, or as otherwise authorized by law, if SBA 
determines that any of the grounds listed in paragraphs (c) through (e) 
of this section exist.
    (c) Grounds in general. For any Intermediary or NTAP, grounds that 
may trigger enforcement action against the Intermediary or NTAP 
(regardless of its Risk Rating) include:
    (1) Violation of any laws, regulations, or policies of the program; 
or
    (2) Failure to meet any one of the following performance standards:
    (i) Coverage of the service territory assigned by SBA, including 
honoring SBA's determined boundaries of neighboring intermediaries and 
NTAPs;
    (ii) Fulfill reporting requirements;
    (iii) Manage program funds and matching funds in a satisfactory and 
financially sound manner;
    (iv) Communicate and file reports within six months after beginning 
participation in program;
    (v) Maintain a currency rate of 85% or more for the Intermediary's 
SBA Microloan portfolio (that is, loans that are no more than 30 days 
late in scheduled payments);
    (vi) Maintain a default rate in the Intermediary's Microloan 
portfolio of 15% or less of the cumulative dollars loaned under the 
program;
    (vii) Maintain a staff trained in Microloan program issues and 
requirements; or
    (viii) Any other reason that SBA determines may increase SBA's 
financial or program risk (for example, repeated Less Than Acceptable 
Risk Ratings or indictment on felony or fraud charges of an officer, 
key employee, or loan agent involved with SBA programs for the 
Intermediary or NTAP).
    (d) Additional grounds specific to Intermediaries. In addition to 
the grounds set forth in paragraph (c) of this section, SBA may take 
enforcement action against an Intermediary for:
    (1) Failure to satisfactorily provide in-house technical assistance 
to Microloan clients and prospective Microloan clients; or
    (2) Failure to close and fund a minimum of four Microloans 
annually.
    (e) Additional grounds specific to NTAPs. In addition to grounds 
set forth in paragraph (c) of this section, SBA may take enforcement 
action against an NTAP for failure to show that, for every 30 clients 
for which the NTAP provided technical assistance, at least one client 
received a loan from the private sector.


Sec.  120.1500  Enforcement actions--SBA Lenders.

    Upon a determination that the grounds set forth in Sec.  120.1400 
exist, SBA may undertake, in SBA's sole discretion, one or more of the 
following enforcement actions for each of the types of SBA Lenders 
listed. SBA will take such action in accordance with procedures set 
forth in Sec.  120.1600. If enforcement action is taken under this 
section and the SBA Lender fails to implement required corrective 
action in any material respect within the required timeframe in 
response to the enforcement action, SBA may take further enforcement 
action, as authorized by law.
    (a) Enforcement actions for all SBA Lenders--(1) Imposition of 
portfolio guarantee dollar limit. SBA may limit the maximum dollar 
amount that SBA will guaranty on the SBA Lender's SBA loans or 
debentures.
    (2) Suspension or revocation of delegated authority. SBA may 
suspend or revoke an SBA Lender's delegated authority (including, but 
not limited to PLP, SBA Express, or PCLP delegated authorities).
    (3) Suspension or revocation from SBA program. SBA may suspend or 
revoke an SBA Lender's authority to participate in the SBA loan 
program, including the authority to make, service, liquidate, or 
litigate 7(a) or 504 loans. Section 120.1400(d)(1) sets forth the 
grounds for SBA program suspension or revocation of an SBA Supervised 
Lender (except Other Regulated SBLCs). The grounds for SBA program 
suspension or revocation for all other SBA Lenders are set forth in 
Sec.  120.1400(c) and, as applicable, paragraph (f) of Sec.  120.1400. 
A suspension or revocation will not invalidate a guarantee previously 
provided by SBA.
    (4) Immediate suspension. SBA may suspend, effective immediately, 
an SBA Lender's delegated authority or authority to participate in the 
SBA loan program, or the authority to make, service, liquidate, or 
litigate 7(a) or 504 loans. Section 120.1400(d)(2) sets forth the 
grounds for SBA program immediate suspension of an SBA Supervised 
Lender (except Other Regulated SBLCs). The grounds for SBA program 
immediate suspension for all other SBA Lenders and the grounds for 
immediate

[[Page 61782]]

suspension of delegated authority for all SBA Lenders are set forth in 
Sec.  120.1400(c)(11) and Sec.  120.1400(c)(12).
    (5) Debarment. In accordance with Part 145 or successor regulation 
of this Chapter, SBA may take any necessary action to debar a person, 
as defined in Part 145, including but not be limited to an officer, a 
director, a general partner, a manager, an employee, an agent or other 
participant in the affairs of an SBA Lender's SBA operations.
    (6) Other actions available under law. SBA may take all other 
enforcement actions against SBA Lenders available under law.
    (b) Enforcement actions specific to 7(a) Lenders. In addition to 
those enforcement actions applicable to all SBA Lenders, SBA may 
suspend or revoke a 7(a) Lender's authority to sell or purchase loans 
or certificates in the Secondary Market.
    (c) Enforcement actions specific to SBA Supervised Lenders and 
Other Persons (except Other Regulated SBLCs). In addition to those 
enforcement actions listed in paragraphs (a) and (b) of this section, 
SBA may take any one or more of the following enforcement actions 
specific to SBA Supervised Lenders and as applicable, Other Persons:
    (1) Cease and desist order. SBA may issue a cease and desist order 
against the SBA Supervised Lender or Other Person. The Cease and Desist 
order may either require the SBA Supervised Lender or the Other Person 
to take a specific action, or to refrain from a specific action. The 
Cease and Desist Order may be issued as effective immediately (or as a 
proposal for Order). SBA may include in the cease and desist order the 
suspension of authority to lend.
    (2) Remove Management Official. SBA may issue an order to remove a 
Management Official from office. SBA may suspend a Management Official 
from office or prohibit a Management Official from participating in 
management of the SBA Supervised Lender or in reviewing, approving, 
closing, servicing, liquidating or litigating any 7(a) loan, or any 
other activities of the SBA Supervised Lender while the removal 
proceeding is pending in order to protect an SBA Supervised Lender or 
the interests of SBA or the United States.
    (3) Initiate request for appointment of receiver. The SBA may make 
application to a district court to take exclusive jurisdiction of an 
SBA Supervised Lender and appoint a trustee or receiver to hold or 
administer or liquidate the SBA Supervised Lender's assets under 
direction of the court. The receiver may take possession of the 
portfolio of 7(a) loans and sell such loans to a third party, and/or 
take possession of servicing activities of 7(a) loans and sell such 
servicing rights to a third party.
    (4) Civil monetary penalties for report filing failure. SBA may 
seek civil penalties, in accordance with Sec.  120.465, of not more 
than $5,000 a day against an SBA Supervised Lender that fails to file 
any regular or special report by its due date as specified by 
regulation or SBA written directive.
    (d) Enforcement actions specific to SBLCs. In addition to those 
supervisory actions listed in paragraphs (a), (b), and (c) of this 
section, SBA may take the following enforcement actions specific to 
SBLCs.
    (1) Capital directive. The AA/CA may issue a capital directive upon 
a determination that the grounds in Sec.  120.1400(e)(1) exist. A 
directive may order the SBLC to:
    (i) Achieve its minimum capital requirement applicable to it by a 
specified date;
    (ii) Adhere to a previously submitted capital restoration plan 
(provided under Sec.  120.462 or Sec.  120.1055) to achieve the 
applicable capital requirement;
    (iii) Submit and adhere to a capital restoration plan acceptable to 
SBA describing the means and time schedule by which the SBLC will 
achieve the applicable capital requirement (The SBLC must provide its 
capital restoration plan within 30 days from the date of the SBA order 
unless SBA notifies the SBLC that the plan is to be filed within a 
different time period. SBA may perform an on-site examination 
(generally within 90 days after the restoration plan is submitted) to 
verify the implementation of the plan and verify that the SBLC meets 
minimum capital requirements.);
    (iv) Refrain from taking certain actions without obtaining SBA's 
prior written approval (Such actions may include but are not limited 
to: Paying any dividend; retiring any equity; maintaining a rate of 
growth that causes further deterioration in the capital percentage; 
securitizing any unguaranteed portion of its 7(a) loans; or selling 
participations in any of its 7(a) loans); or
    (v) Undertake a combination of any of these or similar actions.
    (2) Civil action for termination. SBA may institute a civil action 
to terminate the rights, privileges, and franchises of an SBLC.
    (e) Enforcement actions specific to CDCs. In addition to those 
enforcement actions listed in paragraph (a) of this section, SBA may 
take any one or more of the following enforcement actions specific to 
CDCs:
    (1) Require the CDC to transfer part or all of its existing 504 
loan portfolio and/or part 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; or
    (2) Instruct the Central Servicing Agent to withhold payment of 
servicing, late and/or other fee(s) to the CDC.


Sec.  120.1510  Other Regulated SBLCs.

    Other Regulated SBLCs are exempt from Sec. Sec.  120.465, 
120.1050(b), 120.1400(d), 120.1500(c), and 120.1600(b). This exemption 
is not intended to preclude SBA from seeking any other remedy 
authorized by law or equity.


Sec.  120.1511  Certification and other reporting and notification 
requirements for Other Regulated SBLCs.

    (a) Certification. An SBLC seeking Other Regulated SBLC status must 
certify to SBA in writing that its lending activities are subject to 
regulation by a Federal Financial Institution Regulator or state 
banking regulator. This certification must be executed by the chair of 
the board of directors of the SBLC and submitted to SBA either:
    (1) Within 60 calendar days of the effective date of this section 
or
    (2) If the SBLC becomes subject to regulation by a Federal 
Financial Institution Regulator or state banking regulator after the 
effective date of this section for any reason (e.g. license transfers), 
within 60 days of the date that the SBLC becomes directly examined and 
directly regulated by such regulator.
    (b) Contents of Certification. This certification must include:
    (1) The identity of the Federal Financial Institution Regulator or 
state banking regulator that regulates the lending activities of the 
SBLC;
    (2) A statement that the Federal Financial Institution Regulator or 
state banking regulator identified in paragraph (b)(1) of this section 
regularly conducts safety and soundness examinations on the SBLC itself 
and not only on the SBLC's parent company or affiliate, if any; and
    (3) The date of the most recent safety and soundness examination 
conducted on the SBLC by the Federal Financial Institution Regulator or 
state banking regulator. To qualify as an Other Regulated SBLC, the 
SBLC must have received this examination within the past 3 years of the 
date of certification.
    (c) Notification of examination. An Other Regulated SBLC must 
notify SBA

[[Page 61783]]

in writing each time a Federal Financial Institution Regulator or state 
banking regulator conducts a safety and soundness examination, and this 
notification must be submitted to SBA within 30 calendar days of the 
SBLC receiving the results of the examination. To retain its status as 
an Other Regulated SBLC, the Other Regulated SBLC must receive such 
examination, and provide the written notification to SBA, at least once 
every two years following initial certification.
    (d) Report. An Other Regulated SBLC must report in writing to SBA 
on its interactions with other Federal Financial Institution Regulators 
or state banking regulator (e.g., the results of the safety and 
soundness examinations and any order issued against the Other Regulated 
SBLC), to the extent allowed by law.
    (e) Notification of change in status. If, for any reason, an Other 
Regulated SBLC becomes no longer subject to regulation by a Federal 
Financial Institution Regulator or state banking regulator, the Other 
Regulated SBLC must immediately notify SBA in writing, and the 
exemption provided in Sec.  120.1510 will immediately no longer apply.
    (f) Extension of timeframes. SBA may in its sole discretion extend 
any timeframe imposed on the SBLC under this section if the SBLC can 
show good cause for any delay in meeting the time requirement. The SBLC 
may appeal this decision to the AA/CA.
    (g) Failure to satisfy requirements. In the event that an SBLC 
fails to satisfy the requirements set forth in paragraphs (a), (b), and 
(c) of this section, then the exemption provided in Sec.  120.1510 will 
not apply to the SBLC.


Sec.  120.1540  Enforcement actions--Intermediaries participating in 
the Microloan Program and NTAPs.

    Upon a determination that any ground set out in Sec.  120.1425 
exists, the SBA may take in its sole discretion, one or more of the 
following enforcement actions against an Intermediary or NTAP:
    (a) Suspension or pre-revocation sanctions which may include, but 
are not limited to:
    (1) Accelerated reporting requirements;
    (2) Accelerated loan repayment requirements for outstanding program 
debt to SBA, as applicable;
    (3) Imposition of a temporary lending moratorium, as applicable; or
    (4) Imposition of a temporary training moratorium.
    (b) Revocation of authority to participate in the Microloan program 
which will include:
    (1) Removal from the program;
    (2) Liquidation of Intermediary's Microloan Revolving Fund and Loan 
Loss Reserve Fund accounts by SBA, and application of the liquidated 
funds to any outstanding balance owed to SBA;
    (3) Payment of outstanding debt to SBA by the Intermediary;
    (4) Forfeiture or repayment of any unused grant funds by the 
Intermediary or NTAP;
    (5) Debarment of the organization from receipt of federal funds 
until loan and grant repayments are met; or
    (6) Taking such other actions available under law.


Sec.  120.1600  General procedures for enforcement actions against SBA 
Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management 
Officials, Other Persons, Intermediaries, and NTAPs.

    (a) In general. Except as otherwise set forth for the enforcement 
actions listed in paragraphs (b) and (c) of this section, SBA will 
follow the procedures listed below.
    (1) SBA's notice of enforcement action. (i) When undertaking an 
immediate suspension under Sec.  120.1500(a)(4), or prior to 
undertaking an enforcement action set forth in Sec.  120.1500(a), (b), 
and (e) and Sec.  120.1540, SBA will issue a written notice to the 
affected SBA Lender, Intermediary, or NTAP identifying the proposed 
enforcement action or notifying it of an immediate suspension. The 
notice will set forth in reasonable detail the underlying facts and 
reasons for the proposed action or immediate suspension. If the notice 
is for a proposed or immediate suspension, SBA will also state the 
scope and term of the proposed or immediate suspension.
    (ii) If a proposed enforcement action or immediate suspension is 
based upon information obtained from a third party other than the SBA 
Lender, Intermediary, and NTAP or SBA, SBA's notice of proposed action 
or immediate suspension will provide copies of documentation received 
from such third party, or the name of the third party in case of oral 
information, unless SBA determines that there are compelling reasons 
not to provide such information. If compelling reasons exist, SBA will 
provide a summary of the information it received to the SBA Lender, 
Intermediary, or NTAP.
    (2) SBA Lender, Intermediary, or NTAP's opportunity to object. (i) 
An SBA Lender, Intermediary, or NTAP that desires to contest a proposed 
enforcement action or an immediate suspension must file, within 30 
calendar days of its receipt of the notice or within some other term 
established by SBA in its notice, a written objection with the 
appropriate Office of Capital Access official in accordance with 
Delegations of Authority or other SBA official identified in the 
notice. Notice will be presumed to have been received within five days 
of the date of the notice unless the SBA Lender, Intermediary, or NTAP 
can provide compelling evidence to the contrary.
    (ii) The objection must set forth in detail all grounds known to 
the SBA Lender, Intermediary, or NTAP to contest the proposed action or 
immediate suspension and all mitigating factors, and must include 
documentation that the SBA Lender, Intermediary, or NTAP believes is 
most supportive of its objection. An SBA Lender, Intermediary, or NTAP 
must exhaust this administrative remedy in order to preserve its 
objection to a proposed enforcement action or an immediate suspension.
    (iii) If an SBA Lender, Intermediary, or NTAP can show legitimate 
reasons as determined by SBA in SBA's sole discretion why it does not 
understand the reasons given by SBA in its notice of the action, the 
SBA Lender, Intermediary, or NTAP may request and receive clarification 
from the Agency. SBA will provide the requested clarification in 
writing to the SBA Lender, Intermediary, or NTAP or notify the SBA 
Lender, Intermediary, or NTAP in writing that SBA has determined that 
SBA Lender's reasons as presented were not legitimate and that such 
clarification is not necessary. SBA, in its sole discretion, will 
further advise in writing whether the SBA Lender, Intermediary, or NTAP 
may have additional time to present its objection to the notice. 
Requests for clarification must be made to the appropriate Office of 
Capital Access official in accordance with Delegations of Authority in 
writing and received by SBA within the 30-day timeframe or the 
timeframe given by the notice for response.
    (iv) An SBA Lender, Intermediary, or NTAP may request additional 
time to respond to SBA's notice if it can show that there are 
compelling reasons why it is not able to respond within the 30-day 
timeframe or timeframe given by the notice for response. If such 
requests are submitted to the Agency, SBA may, in its sole discretion, 
provide the SBA Lender, Intermediary, or NTAP with additional time to 
respond to the notice of proposed action or immediate suspension. 
Requests for additional time to respond must be made to the appropriate 
Office of Capital Access official in accordance with Delegations

[[Page 61784]]

of Authority or other official identified in the notice in writing and 
received by SBA within the 30-day timeframe or the timeframe given by 
the notice for response.
    (v) Prior to the issuance of a final decision by SBA, if an SBA 
Lender, Intermediary, or NTAP can show that there is newly discovered 
material evidence which, despite the SBA Lender, Intermediary, or 
NTAP's exercise of due diligence, could not have been discovered within 
the timeframe given by SBA to respond to a notice, or that there are 
compelling reasons beyond the SBA Lender, Intermediary, or NTAP's 
control as to why it was not able to present a material fact or 
argument to SBA, and that the SBA Lender, Intermediary, or NTAP has 
been prejudiced by not being able to present such information, the SBA 
Lender, Intermediary, or NTAP may submit such information to SBA and 
request that the Agency consider such information in its final 
decision.
    (3) SBA's notice of final agency decision where SBA Lender, 
Intermediary, or NTAP filed objection to the proposed action or 
immediate suspension. (i) If the affected SBA Lender, Intermediary, or 
NTAP files a timely written objection to a proposed enforcement action 
other than an immediate suspension in accordance with this section, SBA 
must issue a written notice of final decision to the affected SBA 
Lender, Intermediary, or NTAP advising whether SBA is undertaking the 
proposed enforcement action and setting forth the grounds for the 
decision. SBA will issue such a notice of final decision whenever it 
deems appropriate.
    (ii) If the affected SBA Lender, Intermediary, or NTAP files a 
timely written objection to a notice of immediate suspension, SBA must 
issue a written notice of final decision to the affected SBA Lender, 
Intermediary, or NTAP within 90 days of receiving the SBA Lender, 
Intermediary, or NTAP's objection advising whether SBA is continuing 
with the immediate suspension. If the SBA Lender, Intermediary, or NTAP 
submits additional information to SBA (under paragraph (a)(2)(v) of 
this section) after submitting its objection but before SBA issues its 
final decision, SBA must issue its final decision within 90 days of 
receiving such information.
    (iii) Prior to issuing a notice of decision, SBA in its sole 
discretion can request additional information from the affected SBA 
Lender, Intermediary, NTAP 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 final decision pursuant to this paragraph.
    (4) SBA's notice of final agency decision where no objection filed 
or untimely objection not considered. If SBA chooses not to consider an 
untimely objection or if the affected SBA Lender, Intermediary, or NTAP 
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, SBA 
must issue a written notice of final decision to the affected SBA 
Lender, Intermediary, or NTAP that SBA is undertaking one or more of 
the proposed enforcement actions against the SBA Lender, Intermediary, 
or NTAP or that SBA will continue to pursue an immediate suspension of 
the SBA Lender, Intermediary, or NTAP. Such a notice of final decision 
need not state any grounds for the action other than to reference the 
SBA Lender, Intermediary, or NTAP's failure to file a timely objection, 
and represents the final agency decision.
    (5) Appeals. SBA Lender, Intermediary, and NTAP may appeal the 
final agency decision only in the appropriate federal district court.
    (b) Procedures for certain enforcement actions against SBA 
Supervised Lenders (except Other Regulated SBLCs) and, where 
applicable, Management Officials and Other Persons--(1) Suspension and 
revocation actions and cease and desist orders. If SBA seeks to suspend 
or revoke loan program authority (including the authority to make, 
service, liquidate, or litigate SBA loans), or issue a cease and desist 
order to an SBA Supervised Lender or, as applicable, Other Person, SBA 
will follow the procedures below in lieu of those in paragraph (a) of 
this section.
    (i) Show cause order and hearing. The Administrator will serve upon 
the SBA Supervised Lender or Other Person an order to show cause why an 
order suspending or revoking the authority or why a cease and desist 
order should not be issued. The show cause order will contain a 
statement of the matters of fact and law asserted by SBA, as well as 
the legal authority and jurisdiction under which an administrative 
hearing will be held, and will set forth the place and time of the 
administrative hearing. The hearing will be conducted by an 
administrative law judge in accordance with 5 U.S.C. 554-557.
    (ii) Witnesses. The party calling witnesses will pay the witnesses 
the same fees and mileage paid witnesses for their appearance in U.S. 
courts.
    (iii) Administrator finding and order issuance. If after the 
administrative hearing, or the SBA Supervised Lender's or Other 
Person's waiver of the administrative hearing, the Administrator 
determines that the order should be issued, the Administrator will 
issue an order to suspend or revoke authority or a cease and desist 
order, as applicable. The order will include a statement of findings, 
the grounds and reasons, and will specify the order's effective date. 
SBA will serve the order on the SBA Supervised Lender or Other Person. 
The Administrator may delegate the power to issue a cease and desist 
order or to suspend or revoke loan program authority only if the 
Administrator is unavailable and only to the Deputy Administrator.
    (iv) Judicial review. The order issuance constitutes a final agency 
action. The SBA Supervised Lender or Other Person will have 20 days 
from the order issuance date to file an appeal in the appropriate 
federal district court.
    (2) Immediate suspension or immediate cease and desist order. If 
SBA undertakes an immediate suspension of authority to participate in 
the 7(a) loan program or immediate cease and desist order against an 
SBA Supervised Lender or, as applicable, Other Person, SBA will within 
two business days follow the procedures set forth in paragraph (b)(1) 
of this section.
    (3) Removal of Management Official. If SBA undertakes the removal 
of a Management Official of an SBA Supervised Lender, SBA will follow 
the procedures below in lieu of those in paragraph (a) of this section.
    (i) Notice and hearing. SBA will serve upon the Management Official 
and the SBA Supervised Lender written notice of intention to remove 
that includes a statement of the facts constituting the grounds and the 
date, time, and place for an administrative hearing. The administrative 
hearing will be held between 30 and 60 days from the date notice is 
served, unless an earlier or later date is set at the request of the 
Management Official for good cause shown or at the request of the 
Attorney General. Failure of the Management Official to appear at the 
administrative hearing will constitute consent to the removal order. 
SBA will serve on the SBA Supervised Lender a copy of each notice that 
is served on a Management Official,
    (ii) Suspension from office or prohibition in participation, 
pending removal. The suspension or prohibition will take effect upon 
service of intention to remove the Management Official or such 
subsequent time as the Administrator or his/her delegate deems

[[Page 61785]]

appropriate and serves notice. It will remain in effect pending the 
completion of the administrative proceedings to remove and until such 
time as either SBA dismisses the charges in the removal notice or, if 
an order to remove or prohibit participation is issued, until the 
effective date of an order to remove or prohibit. In the case of 
suspension or prohibition following criminal charges, it may remain in 
effect until the information, indictment, or complaint is finally 
disposed of, or until the suspension is terminated by SBA or by order 
of a district court. A Management Official may appeal to the 
appropriate federal district court for a stay of the suspension or 
prohibition pending completion of the administrative hearing not later 
than 10 days from the suspension or prohibition's effective date.
    (iii) Decision. SBA may issue the order of removal if the 
Management Official consents or is convicted of the criminal charges 
and the judgment is not subject to further judicial review (not 
including writ of habeas corpus), or if upon a record of a hearing, SBA 
finds that any of the notice grounds have been established. After the 
hearing, in the latter case, and within 30 days after SBA has notified 
the parties that the case has been submitted for final decision, SBA 
will render a decision (which includes findings of fact upon which the 
decision is predicated) and issue and serve an order upon each party to 
the proceeding. The decision will constitute final agency action.
    (iv) Effective date and judicial review. The removal order will 
take effect 30 days after date of service upon the SBA Supervised 
Lender and the Management Official except i) in case of consent which 
will be effective at the time specified in the order or ii) in case of 
removal for conviction on criminal charges the order will be effective 
upon removal order service on the SBA Supervised Lender and the 
Management Official. The order will remain effective and enforceable, 
except to the extent it is stayed, modified, terminated, or set aside 
by the Administrator or a reviewing court. The adversely affected party 
will have 20 days from the order issuance date to seek judicial review 
in the appropriate federal district court.
    (4) Receiverships, transfer of assets and servicing activities. If 
SBA undertakes the appointment of a receiver for, or the transfer of 
assets or servicing rights of, an SBA Supervised Lender, SBA will 
follow the applicable procedures in 15 U.S.C. 650.
    (5) Civil penalties for report filing failure. If SBA seeks to 
impose civil penalties against an SBA Supervised Lender for failure to 
file a report in accordance with SBA regulations or written directives, 
SBA will follow the procedures set forth for enforcement actions in 
Sec.  120.465.
    (c) Additional procedures for certain enforcement actions against 
SBLCs. Capital directive--(1) Notice of intent to issue capital 
directive. SBA will notify an SBLC in writing of its intention to issue 
a directive. The notice will state:
    (i) Reasons for issuance of the directive and
    (ii) The proposed contents of the directive.
    (2) Response to notice. An SBLC may respond to the notice by 
stating why a capital directive should not be issued and/or by 
proposing alternative contents for the capital directive or seeking 
other appropriate relief. The response must include any information, 
mitigating circumstances, documentation, or other relevant evidence 
that supports its position. The response may include a plan for 
achieving the minimum capital requirement applicable to the SBLC. The 
response must be in writing and delivered to the SBA within 30 days 
after the date on which the SBLC received the notice. In its 
discretion, SBA may extend the time period for good cause. SBA may 
shorten the 30-day time period:
    (i) When, in the opinion of SBA, the condition of the SBLC so 
requires, provided that the SBLC will be informed promptly of the new 
time period;
    (ii) With the consent of the SBLC; or
    (iii) When the SBLC already has advised SBA that it cannot or will 
not achieve its applicable minimum capital requirement.
    Failure to respond within 30 days or such other time period as may 
be specified by SBA will constitute a waiver of any objections to the 
proposed capital directive.
    (3) Decision. After the closing date of the SBLC's response period, 
or receipt of the SBLC's response, if earlier, SBA may seek additional 
information or clarification of the response. Thereafter, SBA will 
determine whether or not to issue a capital directive, and if one is to 
be issued, whether it should be as originally proposed or in modified 
form.
    (4) Issuance of a capital directive. (i) A capital directive will 
be served by delivery to the SBLC. It will include, or be accompanied 
by, a statement of reasons for its issuance.
    (ii) A capital directive is effective immediately upon its receipt 
by the SBLC, or upon such later date as may be specified therein, and 
will remain effective and enforceable until it is stayed, modified, or 
terminated by SBA.
    (5) Reconsideration based on change in circumstances. Upon a change 
in circumstances, an SBLC may request SBA to reconsider the terms of 
its capital directive or may propose changes in the plan to achieve the 
SBLC's applicable minimum capital requirement. SBA also may take such 
action on its own initiative. SBA may decline to consider requests or 
proposals that are not based on a significant change in circumstances 
or are repetitive or frivolous. Pending a decision on reconsideration, 
the capital directive and plan will continue in full force and effect.
    (6) Relation to other administrative actions. A capital directive 
may be issued in addition to, or in lieu of, any other action 
authorized by law, including cease and desist proceedings. SBA also 
may, in its discretion, take any action authorized by law, in lieu of a 
capital directive, in response to an SBLC's failure to achieve or 
maintain the applicable minimum capital requirement.
    (7) Appeals. The capital directive constitutes a final agency 
action. An SBLC may appeal the final agency decision only in the 
appropriate federal district court.

    Dated: October 18, 2007.
Steven C. Preston,
Administrator.
 [FR Doc. E7-20932 Filed 10-30-07; 8:45 am]
BILLING CODE 8025-01-P