[Federal Register Volume 74, Number 127 (Monday, July 6, 2009)]
[Notices]
[Pages 32006-32010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-15856]


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SMALL BUSINESS ADMINISTRATION


Dealer Floor Plan Pilot Initiative

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

ACTION: Notice and request for comments.

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SUMMARY: SBA is introducing a guaranty loan pilot initiative to make 
available 7(a) loan guaranties for lines of credit that provide floor 
plan financing to support that sector of the Nation's retail community 
that traditionally requires floor plan financing in order to acquire 
titleable inventory. SBA is creating this pilot initiative to help 
address the significant decline in the number of lenders that have 
provided the majority of this type of financing in recent years. In the 
automobile industry, this often included affiliates of the 
manufacturers themselves. Under the Dealer Floor Plan Pilot Initiative, 
which will be available through September 30, 2010, SBA will guarantee 
up to 75 percent of a floor plan line of credit between $500,000 and 
$2,000,000 to eligible dealers of titleable assets, including but not 
limited to automobiles, motorcycles, boats (including boat trailers), 
recreational vehicles and manufactured housing (mobile homes).

DATES: Effective Date: The Dealer Floor Plan Pilot Initiative will be 
effective on July 1, 2009, and will remain in effect through September 
30, 2010. SBA will begin accepting applications on July 1, 2009 and 
begin reviewing and approving applications the week of July 6, 2009.
    Comment Date: Comments must be received on or before August 5, 
2009.

ADDRESSES: You may submit comments, identified by SBA docket number 
SBA-2009-0009 by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Dealer Floor Plan Pilot Initiative Comments--Office 
of Financial Assistance, U.S. Small Business Administration, 409 Third 
Street, SW., Suite 8300, Washington, DC 20416.
     Hand Delivery/Courier: Grady Hedgespeth, Director, Office 
of Financial Assistance, U.S. Small Business Administration, 409 Third 
Street, SW., Washington, DC 20416.
    SBA will post all comments on http://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at http://www.regulations.gov, please submit the 
information to Grady Hedgespeth, Director, Office of Financial 
Assistance, U.S. Small Business Administration, 409 Third Street, SW., 
Washington, DC 20416, or send an e-mail to 
[email protected]. Highlight the information that you 
consider to be CBI and explain why you believe SBA should hold this 
information as confidential. SBA will review the information and make 
the final determination whether it will publish the information.

FOR FURTHER INFORMATION CONTACT: Sloan Coleman, Office of Financial 
Assistance, U.S. Small Business Administration, 409 Third Street, SW., 
Washington, DC 20416; (202) 205-7737; [email protected].

SUPPLEMENTARY INFORMATION: 

[[Page 32007]]

1. Background Information

    America's financial crisis has created adverse conditions that are 
affecting small businesses, including reduced liquidity in the lending 
system, a reluctance of many lenders to extend new loans, tightened 
credit standards and weaker finances at small businesses. This has been 
especially true in the area of the financing of dealer floor plans for 
automobiles, motorcycles, boats, recreational vehicles and similar 
titled vehicles. In the case of the estimated $100 billion in auto 
floor plan lending, for example, the big three U.S. auto manufacturers, 
which previously provided roughly one-third of the lending, have 
stopped accepting new requests for floor plan financing. Banks are not 
able to meet the remaining financing needs and four major lenders 
representing approximately $2 billion of the market have recently 
issued 90-120 day closing notices to their dealers with existing 
financing. The National Automobile Dealers Association (NADA) estimates 
that 30% of its membership (or approximately 5,000 dealers) have 
inventories less than $2 million and could thus be potential 
beneficiaries of a new SBA offering.
    In addition, these retailers have been especially hard hit by the 
recent financial difficulties of several manufacturers coupled with a 
fall off in sales and longer cycle times for their inventory turnover. 
When the shortage of available financing is coupled with the decline in 
sales, even relatively strong dealers who could normally weather the 
current recession are facing challenges. This, in turn, has a serious 
deleterious affect on local communities as these dealers are often 
critical contributors to local economies and civic institutions.
    On February 17, 2009, the President signed the American Recovery 
and Reinvestment Act of 2009 (the ``Recovery Act'') (Pub. L. 111-5, 123 
Stat. 115) to promote economic recovery by preserving and creating 
jobs, and to assist those most affected by the severe economic 
conditions facing the nation. The SBA received funding and authority 
through the Recovery Act to modify existing loan programs and establish 
new loan programs to significantly stimulate small business lending.
    Current SBA regulations and policy prohibit dealer floor plan 
financing; however, it is not statutorily prohibited. In the early 
history of SBA lending, the Agency had a role in the underwriting and 
servicing of most, if not all, of its loan portfolio. The Agency 
historically did not make or guarantee floor plan financing 
arrangements because such credit was deemed to be widely available from 
conventional sources and because the Agency did not have the 
capabilities to maintain servicing for such lines of credit in the 
event it was called upon to service the loan.
    With requirements now in place for the lender to perform most 
servicing functions, even after a default and guaranty purchase, and 
because there is evidence that there are a diminishing number of 
lenders willing to provide floor plan financing to smaller dealers, the 
historic reasons for the restrictions against floor plan financing have 
become less of a concern, particularly in the current economic climate. 
In addition, SBA believes that in this recession it is appropriate to 
ensure that guaranties are available for the widest possible types of 
small business financial assistance, including the guaranty of floor 
plan lines of credit, while maintaining risk within prudent levels.
    The SBA has always been able to guarantee loans made to eligible 
small businesses that utilize floor plan financing in order to help 
them acquire or repair their facility, purchase machinery and equipment 
used in their operation, or provide working capital. Dealers needing 
floor plan financing had to obtain it separately without SBA support. 
By adding the ability to guarantee floor plan lines through this pilot 
program, SBA will enable its lending partners to be in a better 
position to offer a full array of financing to those businesses that 
need such financing arrangements during the current economic 
environment.
    This pilot initiative is intended to complement the provisions of 
the Recovery Act and is, therefore, set to expire on September 30, 
2010. When the initial pilot phase is concluded, SBA will evaluate the 
initiative to determine if the pilot will be extended, certain aspects 
made a permanent part of SBA's lending programs, or terminated. A key 
determinate in that review will be the extent to which floor plan 
financing is available from the private market, and whether there is a 
sufficient need for further government support.
    Loans approved under this pilot initiative will qualify for the 
borrower fee eliminations implemented on March 16, 2009 under the 
temporary authority provided in section 501 of the Recovery Act, while 
funds for fee eliminations are available. Funds available for fee 
relief under the Recovery Act may be exhausted prior to the expiration 
date of the pilot (September 30, 2010). Loans approved under this 
pilot, however, will not be subject to the higher guaranty provisions 
of section 502 of the Recovery Act. SBA is limiting the guaranty 
percentage to the maximum allowed in the Small Business Act as opposed 
to the higher guaranty percentage allowed temporarily under the 
Recovery Act in part to ensure that the data collected during the pilot 
phase provides a meaningful basis for which to determine if the pilot 
should be extended, made a permanent part of SBA's lending programs, or 
terminated. In addition, SBA is limiting the maximum guaranty 
percentage to 75 percent so that the pilot will be neutral from a 
credit subsidy standpoint and therefore not require an additional 
appropriation of subsidy cost, as required under the Federal Credit 
Reform Act (2 U.S.C. 661-661f).

2. Comments

    The intent of the Dealer Floor Plan Pilot Initiative is to 
complement SBA's other efforts under the Recovery Act to ensure credit 
is available to America's small businesses. Although the pilot 
initiative and this Notice are effective immediately, comments are 
solicited from interested members of the public on all aspects of the 
Notice including the formal guidance set forth in the section below. 
These comments must be submitted on or before August 5, 2009. The SBA 
will consider these comments and the need for making any revisions as a 
result of these comments.

3. Dealer Floor Plan Pilot Initiative

Overview

    Under the Dealer Floor Plan Pilot Initiative, SBA is implementing a 
7(a) loan guaranty product targeted to retail dealers of titleable 
assets, including but not limited to automobiles, motorcycles, boats 
(including boat trailers), recreational vehicles and manufactured 
housing (mobile homes).

Eligibility

    In addition to standard 7(a) eligibility requirements, the 
eligibility of applicants for a floor plan line of credit guaranteed 
under the Dealer Floor Plan Pilot Initiative will be limited to retail 
dealers of titleable inventory (both new and used) that require 
licensing and/or registration by a State authority after acquisition. 
Eligible small businesses include, but are not limited to, dealers of 
automobiles, motorcycles, boats (including boat trailers), recreational 
vehicles and manufactured housing (mobile homes).
    SBA size regulations, including those pertaining to affiliation set 
out in 13 CFR Part 121, apply to the Dealer Floor Plan Pilot 
Initiative. These regulations

[[Page 32008]]

include the recently added alternative 7(a) size standard as published 
in the Federal Register on May 5, 2009 (74 FR 20577).

Loan Amount, Maximum Guaranty Percentage and Maturity

    Loans under the Dealer Floor Plan Pilot Initiative will have a 
minimum loan amount of $500,000 and a maximum loan amount outstanding 
at any one time of $2,000,000.
    The maximum guaranty percentage will be up to 75 percent of the 
outstanding loan. As noted above, the increased guaranty percentage of 
up to 90 percent allowed under section 502 of the Recovery Act will not 
be available for loans approved under this pilot initiative.
    The maximum maturity on lines of credit approved under this pilot 
initiative will be limited to five (5) years.

Use of Proceeds and Repayment

    Floor plan lines of credit guaranteed by SBA will be revolving 
lines of credit. The proceeds must be used either for the acquisition 
of titleable inventory for retail sales or to refinance existing floor 
plan lines of credit with another lender. Repayment of these lines will 
occur as the acquired inventory is sold. Proceeds may not be used for 
any other purpose, including to refinance any existing same-institution 
floor plan line of credit.

Interest Rates

    The maximum interest rates for loans under the Dealer Floor Plan 
Pilot Initiative are the same as those allowed under SBA regulations at 
13 CFR 120.213-120.214 for the 7(a) program.

Collateral

    Collateral must include a first perfected security interest in all 
titleable inventory acquired with any portion of the proceeds from the 
SBA-guaranteed floor plan line of credit. The floor plan line of credit 
which SBA guarantees does not have to be the sole floor plan line. 
However, if more than one floor plan line exists to any one business, 
then the inventory supported by each line is to be separately accounted 
for and the sale proceeds (or at least the percentage of the sale 
proceeds equal to the percentage of the cost financed under the line) 
of any inventory acquired with any portion of the floor plan line 
guaranteed by SBA must be used to reduce the balance on that line. In 
addition, dealers with multiple floor plan lines for multiple product 
lines (manufacturers or new/used) with multiple floor plan creditors 
will be required to have appropriate delineated inter-creditor 
agreements to enable proper security interest perfection.

Allowable Fees

    The SBA guaranty fee and the lender's annual servicing fee (SBA 
``On-Going Guaranty Fee'') set forth in 13 CFR 120.220 apply to loans 
approved under this pilot initiative. As noted above, loans approved 
under the Dealer Floor Plan Pilot Initiative are eligible for the 
borrower fee elimination implemented under the temporary authority 
provided in section 501 of the Recovery Act, to the extent such 
appropriations for the cost of fee reductions remain available.
    For loans approved under this pilot initiative, lenders may charge 
the borrower the same fees allowed under SBA's 7(a) loan program with 
the exception of the extraordinary servicing fee. For loans approved 
under this pilot initiative, SBA will allow lenders to charge an 
extraordinary servicing fee that is higher than the 2 percent allowed 
by Agency regulations at 13 CFR 120.221(b) provided that the fee 
charged is reasonable and prudent based on the level of extraordinary 
effort required to adequately service the floor plan line. In addition, 
if the lender currently provides floor plan financing to its customers, 
the lender may not charge higher fees for its SBA-guaranteed floor plan 
lines of credit than it charges for its similarly-sized, non-SBA 
guaranteed floor plan lines of credit. SBA's guaranty does not extend 
to extraordinary servicing fees and, at time of guaranty purchase, SBA 
will not pay any portion of such fees.

Maximum Advance Rates

    Lenders will be allowed a maximum advance rate of 90% on new 
automobile inventory and 80% on all other inventory for purposes of 
establishing the maximum SBA guaranty. Lenders may establish an advance 
rate higher than this; however, the maximum SBA guaranty will be no 
more than 75% of 90% for new automobile inventory or 75% of 80% for all 
other inventory. For example, if a lender has an advance rate of 100% 
for all inventory, the maximum SBA guaranty will be 67.5% for new 
automobile inventory and 60% for all other inventory financed by the 
lender. The lender will need to identify the advance rate and calculate 
the maximum allowable guaranty percentage for each loan on the Lender's 
Application for Guaranty (SBA Form 4-I). (The SBA Form 4-I can be found 
at http://www.sba.gov/tools/Forms/smallbusinessforms/fsforms/index.html.)

Secondary Market and Participating Lender Financings or Other 
Conveyances

    SBA loan guaranties made under this pilot initiative may not be 
sold under Agency regulations at 13 CFR Part 120, Subpart F--Secondary 
Market. In addition, SBA loan guaranties approved under this pilot 
initiative may not be included in any participating lender financings 
or other conveyances, including securitizations, participations and 
pledges, as described in Agency regulations at 13 CFR 120.420 through 
120.435.

Eligible Lenders

    All SBA lenders with an executed Loan Guaranty Agreement (SBA Form 
750) may participate in this pilot initiative. Lenders participating in 
the pilot initiative must have designated personnel who are responsible 
for making and servicing floor plan lines of credit. In addition, if a 
lender has less than $15 million in floor plan lines of credit in its 
current portfolio or has been making floor plan lines of credit for 
less than 5 years (``Less Experienced Floor Plan Lenders''), the lender 
may only approve lines under the pilot initiative to customers with 
which it has a banking relationship that existed prior to the effective 
date of this pilot initiative and must submit all Dealer Floor Plan 
applications to the Standard 7(a) Loan Guaranty Processing Center 
(LGPC) for approval over the life of the pilot. It will be the 
responsibility of the lender to document the existing relationship with 
the borrower in the credit memorandum, which will be required to be 
submitted to SBA as part of any guaranty purchase request.
    Lenders with existing floor plan financing operations must 
administer their SBA-guaranteed floor plan financing operation in 
conformance with the existing policies and procedures used for their 
similarly-sized, non-SBA guaranteed floor plan lines, including risk 
management policies and procedures. Lenders who have not participated 
in floor plan financing must develop policies and procedures specific 
to floor plan financing, including risk management policies and 
procedures.
    When developing policies and procedures specific to floor plan 
financing, lenders may follow guidance provided by their primary 
Federal regulator or, if none is available, lenders may follow the 
guidance on floor plan financing provided by the Office of the 
Comptroller of the Currency (OCC) in Section 210 of its Examiner's 
Handbook. (The OCC Examiner's Handbook can be

[[Page 32009]]

found at http://www.occ.treas.gov/handbook/floorplan1.pdf.) At a 
minimum, the policies and procedures of all lenders participating in 
this pilot initiative must address the following: (1) The personnel who 
will be responsible for making and servicing floor plan loans; (2) the 
collateral monitoring procedures, which must include floor checks 
(physical inventories) conducted at least monthly and on a random 
surprise basis; (3) a requirement that the borrower provide to the 
lender copies of its monthly manufacturer's dealership financial 
statement (for dealers of new inventory) or monthly financial 
statements (for dealers of used inventory) no later than 7 days after 
the end of the previous month; (4) the procedures in place to ensure 
prompt payment on the line upon the sale of inventory; (5) all policies 
and procedures specific to liquidation that are unique to floor plan 
financing; and (6) the fees the lender will charge to service these 
loans. Lenders may use contracted services and/or available software 
programs to assist with monitoring and tracking the collateral.

Application Forms and Authorization

    Each lender participating in the pilot initiative must submit its 
first application under the pilot following Standard 7(a) procedures to 
the LGPC. SBA will begin accepting applications under the Dealer Floor 
Plan Pilot Initiative on July 1, 2009 and will begin reviewing and 
approving the applications the week of July 6, 2009.
    After the initial application submitted under the pilot initiative 
is approved by the LGPC, lenders may submit applications for loan 
guaranties under the Dealer Floor Plan Pilot Initiative through 
Standard 7(a), Certified Lender Program (CLP) or Preferred Lender 
Program (PLP) processing methods using the existing SBA forms 
applicable to the processing method, except for Less Experienced Floor 
Plan Lenders. These lenders will continue to submit their floor plan 
applications to the LGPC for the life of the pilot. In order to submit 
an application for guaranty under this pilot initiative through PLP 
procedures, PLP lenders must ensure that the application for a floor 
plan line of credit meets the requirements for delegated processing as 
well as the requirements specified in this Notice. SBA will issue 
instructions for lenders on how to complete existing SBA application 
forms to include floor plan lines of credit.
    SBA will incorporate into the Standard 7(a) Authorization 
Boilerplate applicable provisions related to floor plan financing.
    In addition to SBA's existing servicing and liquidation 
requirements as set forth in Agency regulations and Standard Operating 
Procedures (SOPs) 50 50 and 50 51, lenders will be required to service 
any floor plan line of credit guaranteed by SBA with the requirement 
that as any item of inventory acquired with the line is sold the 
proceeds from the sale (or at least the percentage of the sale proceeds 
equal to the percentage of the cost financed under the line) must be 
submitted to the lender to reduce the balance on the line pursuant to 
the sold inventory item. (SOPs 50 50 and 50 51 can be found at http://www.sba.gov/tools/resourcelibrary/sops/index.html.)
    Lenders will be required to periodically report on disbursement and 
collection activity in addition to their 1502 reporting, to allow SBA 
to conform to accounting and budgeting requirements under credit 
reform, as well as to evaluate and monitor portfolio performance. SBA 
will provide further information on this additional reporting 
requirement in the coming weeks.

Guaranty Purchase

    In addition to the standard purchase documentation required by SBA, 
with any guaranty purchase request under the pilot initiative lenders 
will be required to provide copies of the floor check reports and the 
monthly manufacturer's dealership financial statements (for dealers of 
new inventory) or monthly financial statements (for dealers of used 
inventory) for the twelve (12) months prior to default. Also, as stated 
above, Less Experienced Floor Plan Lenders may only approve lines under 
the pilot initiative to customers with which it has a banking 
relationship that existed prior to the effective date of this pilot 
initiative. It will be the responsibility of the lender to document the 
existing relationship with the borrower in the credit memorandum, which 
will be required to be submitted to SBA as part of any guaranty 
purchase request. Further, as part of the guaranty purchase review, SBA 
will review the lender's policies and procedures specific to floor plan 
financing and the lender's compliance with those policies and 
procedures. In addition to the grounds set forth in 13 CFR 120.524, the 
lender's failure to comply with its policies and procedures or the 
terms and procedures set forth in this Federal Register notice may 
result in denial of SBA's guaranty on the loan, in full or in part.

Lender Oversight

    As part of its ongoing lender oversight activities, SBA's Office of 
Credit Risk Management (OCRM) will review the lender's policies and 
procedures specific to floor plan financing, including risk management 
policies and procedures, and the lender's compliance with those 
policies and procedures. Upon receipt of a lender's initial application 
under the pilot initiative, the Standard 7(a) LGPC will notify OCRM who 
will request a copy of the lender's policies and procedures governing 
floor plan financing as an initial step in its oversight of this pilot 
initiative. In addition, once a lender has processed 15 loans under 
this pilot initiative, the Office of Financial Assistance will alert 
OCRM to that fact for possible additional lender oversight, such as an 
off-site review of the lender's SBA-guaranteed floor plan portfolio 
and/or inclusion of the lender's floor plan loans in a targeted review 
or as part of the lender's next scheduled on-site review.
    Pursuant to the authority provided to SBA under 13 CFR 120.3 to 
waive certain regulations in establishing and testing pilot loan 
initiatives for a limited period of time, SBA will waive the following 
regulations, which otherwise apply to 7(a) loans, for loans made under 
the Dealer Floor Plan Pilot Initiative only: (1) 13 CFR 120.130(c), 
which prohibits floor plan financing or other revolving lines of credit 
as an allowable use of proceeds, is waived so this type of financing 
can be guaranteed by SBA under the Dealer Floor Plan Pilot Initiative; 
(2) 13 CFR 120.221(b), which limits extraordinary servicing fees to 2% 
of the outstanding balance on an annual basis, is being waived so 
lenders can charge more than 2% on loans approved under this pilot 
initiative as long as the fees are not higher than those charged on the 
lender's similarly-sized, non-SBA guaranteed floor plan lines of credit 
and as long as the fees are reasonable and prudent based on the level 
of extraordinary effort required to adequately service the floor plan 
line; (3) 13 CFR 120.390, the regulation that covers all Revolving 
Credit other than EWCP loans, is waived so the Dealer Floor Plan Pilot 
Initiative can be carried out without having these loans classified as 
CAPLines loans; (4) 13 CFR Part 120, Subpart F--Secondary Market, is 
being waived because loans approved under the Dealer Floor Plan Pilot 
Initiative cannot be sold on the secondary market; and (5) 13 CFR 
120.420 through 120.435 are being waived because loans approved under

[[Page 32010]]

the Dealer Floor Plan pilot initiative cannot be included in any 
participating lender financings or other conveyances, including 
securitizations, participations and pledges.
    All other provisions of the Small Business Act applicable to the 
7(a) program and the regulations promulgated thereunder that are not 
superseded by any provision of this Notice will continue to apply to 
loans made under this pilot initiative.
    Lenders must use prudent lending practices in the making and 
servicing of SBA-guaranteed floor plan lines of credit and must comply 
with all SBA Loan Program Requirements that are not superseded by any 
provisions of this Notice.
    In accordance with section 7(a)(25) of the Small Business Act (15 
U.S.C. 636), loans approved under this pilot initiative are limited to 
not more than 10 percent of the total number of 7(a) loans approved in 
any fiscal year.
    SBA may provide further guidance, if needed, through SBA notices 
published on SBA's Web site, http://www.sba.gov.
    Questions on the Dealer Floor Plan Pilot Initiative may be directed 
to the Lender Relations Specialist in the local SBA district office. 
The local SBA district office may be found at http://www.sba.gov/localresources/index.html.

    Authority: 15 U.S.C. 636(a)(25) and 13 CFR 120.3.

Grady B. Hedgespeth,
Director, Office of Financial Assistance.
[FR Doc. E9-15856 Filed 6-30-09; 4:15 pm]
BILLING CODE 8025-01-P