[Federal Register Volume 74, Number 209 (Friday, October 30, 2009)]
[Rules and Regulations]
[Pages 56087-56098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-26211]



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  Federal Register / Vol. 74, No. 209 / Friday, October 30, 2009 / 
Rules and Regulations  

[[Page 56087]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AF90


The American Recovery and Reinvestment Act of 2009: Secondary 
Market First Lien Position 504 Loan Pool Guarantee

AGENCY: U.S. Small Business Administration.

ACTION: Interim final rule with request for comments.

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

SUMMARY: This interim final rule implements Section 503 of the American 
Recovery and Reinvestment Act of 2009 (Recovery Act), which establishes 
a secondary market for the first mortgage loan that is a component of a 
financing made under the 504 program. The Recovery Act authorizes SBA 
to establish a program to provide a guarantee for pools comprised of 
portions of these first mortgage loans that will back certificates to 
be sold to investors.

DATES: Effective Date: This rule is effective October 30, 2009.
    Comment Date: Comments must be received on or before January 28, 
2010.
    Applicability Date: Subpart J of Part 120 is applicable to all 
eligible First Lien Position 504 Loans financing a Project in 
conjunction with a 504 loan by a CDC funded by a debenture that was 
sold on or after February 17, 2009.

ADDRESSES: You may submit comments, identified by RIN: 3245-AF90, by 
any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: James W. Hammersley, Deputy Assistant Administrator, 
Office of Policy and Strategic Planning, Small Business Administration, 
409 Third Street, SW., Washington, DC 20416.
     Hand Delivery/Courier: James W. Hammersley, Deputy 
Assistant Administrator, Office of Policy and Strategic Planning, 409 
Third Street, SW., Washington, DC 20416.
    SBA will post all comments on www.regulations.gov. If you wish to 
submit confidential business information (CBI) as defined in the User 
Notice at www.regulations.gov, please submit the information to James 
W. Hammersley, Deputy Assistant Administrator, Office of Policy and 
Strategic Planning, 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: James W. Hammersley, Deputy Assistant 
Administrator, Office of Policy and Strategic Planning, at 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

    The American Recovery and Reinvestment Act of 2009 (Recovery Act), 
Public Law 111-5, was enacted on February 17, 2009, to, among other 
things, promote economic recovery by preserving and creating jobs, and 
assisting those most impacted by the severe economic conditions facing 
the nation. The U.S. Small Business Administration is one of several 
agencies that will play a role in achieving these goals.
    As authorized by the Recovery Act, this rule will establish a 
temporary secondary market guarantee program for pools comprised of 
first mortgage loans made under SBA's 504 program. The 504 program 
provides long-term, fixed rate financing to small businesses for 
expansion or modernization, primarily of real estate (including land 
and new building construction, existing building purchases or 
renovation, and machinery and equipment). Financing is delivered 
through Certified Development Companies (CDCs), which are private 
primarily nonprofit entities established pursuant to the 504 program to 
contribute to the economic development of their communities. In a 
typical 504 program project, a lender (First Lien Position 504 Lender) 
provides a loan for 50 percent or more of the Project costs (the First 
Lien Position 504 Loan), the CDC provides a loan for up to 40% of the 
Project costs (the 504 loan) funded through the sale of a debenture 
that is fully guaranteed by SBA, and the small business receiving the 
financing contributes at least 10 percent of the Project costs. The CDC 
obtains the funds to make the 504 loan by issuing a debenture that is 
guaranteed by SBA (CDC Debenture). The small business must meet 
eligibility requirements for SBA financial assistance, and a project 
generally must create or retain at least one job for every $65,000 
guaranteed by SBA. First Lien Position 504 Lenders, small business 
borrowers, and CDCs in the 504 program are required to pay various fees 
to offset the costs of the program. Regulations implementing the 504 
program are in Subpart H of Part 120 of SBA's regulations. (13 CFR Part 
120, Subpart H).
    Over the years, the development of secondary markets for 504 loans 
facilitated the capacity of CDCs to originate such loans and small 
businesses to apply for them. By selling loans to investors via the 
secondary markets, among other benefits, lenders can receive additional 
funds, or liquidity, which can enable them to make more loans. Sellers, 
broker-dealers, and other secondary market participants make profits 
from the premiums that investors pay for the securities, through 
various fees, and through servicing the loans over time. There is a 
secondary market for CDC Debentures and another secondary market for 
the First Lien Position 504 Loans. Due to the disruption in the credit 
markets, there has been a significant decline in secondary market 
activity relating to First Lien Position 504 Loans. Section 503 of the 
Recovery Act provides authority to SBA to assist the secondary market 
for the First Lien Position 504 Loans by allowing the SBA Administrator 
to establish a secondary market guarantee for pools of First Lien 
Position 504 Loans to sell to third-party investors. The authority 
terminates on February 16, 2011, which is two years after enactment. 
First Lien Position 504 Loans are eligible to be part of a pooling if, 
among other things, the debenture funding the associated loan by a CDC 
was sold on or after February 17, 2009.

[[Page 56088]]

II. Section-by-Section Analysis of New Subpart J of Part 120

    The defined terms in subpart J include:
    504 financing. The loans made to a small business to fund a Project 
under the SBA's development company loan program authorized by Title V 
of the Small Business Investment Act of 1958.
    Affiliate. A person or entity SBA determines to be an affiliate of 
a Program Participant pursuant to the application of the principles and 
guidelines set forth in section 121.103 of this Title.
    Certified Development Company or CDC. An entity as defined in 
section 120.10 of this Part.
    Central Servicing Agent or CSA. The entity serving as SBA's central 
servicing agent for the Program.
    Current. That no scheduled payment owed by an Obligor pursuant to a 
Pool Note is over 29 days past due.
    First Lien Position 504 Loan. The financing provided by the First 
Lien Position 504 lender that is part of the 504 project financing.
    First Lien Position 504 Loan Pool Guarantee Agreement. The 
agreement, in the form approved by SBA, wherein entities agree to 
participate in the forming of a Pool under the Program, available at 
http://www.sba.gov/aboutsba/sbaprograms/elending/index.html.
    Guide. The SBA First Lien Position 504 Loan Pooling Program Guide 
published by SBA which provides information applicable to the Program 
including, among other things, requirements relating to the formation 
of a Pool, available at http://www.sba.gov/aboutsba/sbaprograms/elending/index.html.
    Liquidation Proceeds. Cash, including insurance proceeds, proceeds 
of any foreclosed-on property disposition, revenues received with 
respect to the conservation and disposition of a foreclosed-on property 
or repossessed collateral, including any real property securing the 
Pool Loan, consisting of a commercial property or residential property 
and any improvements thereon, and any other amounts received in 
connection with the liquidation of the Pool Loan, whether through 
Seller's sale, foreclosure sale, any offset or workout, or otherwise.
    Loan Interest. The right to receive the owned portion of the 
principal balance of the Pool Loan together with interest thereon at a 
per annum rate in effect from time to time in accordance with the First 
Lien Position 504 Loan Pool Guarantee Agreement.
    Maturity. The maturity of the Loan Interest in the Pool that has 
the longest remaining term of any Loan Interest in the Pool. The 
maturity will change from time to time due to prepayment or default on 
Loan Interests in the Pool.
    Obligor. The obligor(s) under a Pool Note.
    Ongoing Guarantee Fee. An annual fee collected monthly and based on 
the percentage of the Pool Loan that is in the pool, pursuant to 
section 503(C)(3)(B)(ii) of the Recovery Act, to result in a cost of 
the loan guarantee of zero as determined under the Federal Credit 
Reform Act of 1990, as amended. The funds generated by the fee serve as 
a reserve to pay for program losses. The fee will be published in a 
Notice by SBA prior to the commencement of the program.
    Pool. The aggregate of Loan Interests formed into a single pool by 
the Pool Originator in accordance with the Program. The Pool is 
comprised of an unguaranteed portion and an SBA-guaranteed portion. The 
unguaranteed portion of the Pool backs the Pool Originator Receipt, and 
cannot be sold to Pool Investors. The SBA-guaranteed portion of the 
Pool backs the Pool Certificates which may be sold to Pool Investors. 
The Seller's Loan Interest is not included in the Pool.
    Pool Assembler. An entity that meets the qualifications set forth 
in section 120.630 of this Part and has been approved as such by 
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    Pool Certificate. The document representing a beneficial fractional 
interest in the SBA-guaranteed portion of a Pool.
    Pooled. When one or more Loan Interests in a Pool Loan has been put 
into a Pool.
    Pooling. The transfer of one or more Loan Interests in a Pool Loan 
into a Pool.
    Pool Investor. An entity which holds a Pool Certificate in 
accordance with Program Rules and Regulations.
    Pool Loan. A loan that meets the Program eligibility requirements 
set forth in section 120.1704 of this subpart J and has been pooled.
    Pool Loan Receivables. Pool Loan payments, prepayments, or 
collections made in connection with the Pool Loan by the Obligor 
pursuant to Pool Note or any other Pool Loan documents or agreements, 
or by another person or entity made on behalf of any such Pool Loan 
obligor, and Liquidation Proceeds.
    Pool Note. The document evidencing a Pool Loan.
    Pool Originator. An entity approved by SBA to pool Loan Interests 
under the Program.
    Pool Originator Receipt. The document evidencing the Pool 
Originator's retained ownership in a Pool it has formed under the 
Program.
    Premier Certified Lenders Program. The program defined in section 
120.845 of this Part.
    Program. The program authorized by section 503 of the American 
Recovery and Reinvestment Act of 2009.
    Program Participant. An entity that executes the First Lien 
Position 504 Loan Pool Guarantee Agreement as Seller, Pool Originator, 
or Pool Investor, and any successors or assignees thereof.
    Program Participant Associate. (i) An officer, director, key 
employee, or holder of 20 percent or more of the value of a Program 
Participant's stock or debt instruments, or (ii) any individual in 
which one or more individuals referred to in clause (i) of this 
definition, or a spouse, or child, or sibling, or the spouse of any 
such individual, owns or controls at least 20 percent.
    Program Preference. Any arrangement giving the Seller, or a Program 
Associate or Affiliate of Seller, a preference or benefit of proportion 
greater than its Loan Interest as compared to Pool Originator, Pool 
Investor, or SBA relating to the making, servicing, or liquidation of 
the Pool Loan with respect to such things as repayment, collateral, 
guarantees, control, maintenance of a compensating balance, purchase of 
a certificate of deposit or acceptance of a separate or companion loan, 
without SBA's consent. Seller's agreement to grant a Pool Loan's 
Obligor a deferment in return for receiving more collateral on a 
different loan owned by Seller is an example of a preference.
    Program Rules and Regulations. This subpart J, as may be amended 
from time to time by SBA, the Program Regulations, available at http://www.sba.gov/aboutsba/sbaprograms/elending/index.html, the First Lien 
Position 504 Loan Pool Guarantee Agreement, available at http://www.sba.gov/aboutsba/sbaprograms/elending/index.html, any other Program 
agreements signed by a Program Participant, if applicable, the Guide, 
available at http://www.sba.gov/aboutsba/sbaprograms/elending/index.html, the Recovery Act available at Recovery.gov, and the 
provisions of subpart H governing Third Party Loans and Third Party 
Lenders available at http://www.sba.gov/aboutsba/sbaprograms/elending/index.html.
    Project. A project as defined by section 120.802 of this Part.
    SBA. The United States Small Business Administration, an agency of 
the United States Government.
    Seller. An entity that has sold a Pool Loan to a Pool Originator to 
be Pooled.

[[Page 56089]]

    Seller's Pool Loan. The Pool Loan sold to a Pool Originator 
pursuant to the First Lien Position 504 Loan Pool Guarantee Agreement.
    Seller Receipt. The document that evidences a Seller's retained 
Loan Interest in a Pool Loan.
    Servicing Retention Amount. The amount of a Pool Loan interest 
payment retained by Seller for servicing the Pool Loan that is payable 
and calculated pursuant to the First Lien Position 504 Loan Pool 
Guarantee Agreement. This approach is customary for loans sold in the 
secondary market.
    Weighted Average Interest Rate. The dollar-weighted average 
interest rate of a Pool Certificate calculated by multiplying the 
interest rate of each Loan Interest in the Pool by the ratio of that 
Loan Interest's current outstanding principal in the SBA-guaranteed 
portion of the Pool (that is, the portion of the Pool Loan backing the 
Pool Certificates) to the current aggregate or outstanding principal of 
each Loan Interest in the SBA-guaranteed portion of the Pool, and 
adding the sum of the resulting products. The Pool Certificate interest 
rate will fluctuate over the life of the Pool as defaults, prepayments 
and normal repayments applicable to a Pooled Loan Interest occurs.
    Weighted Average Maturity. The weighted average maturity of a Pool 
Certificate is a dollar weighted average maturity that is calculated by 
multiplying the remaining term, in months, of each Loan Interest in a 
Pool by the ratio of that Loan Interest's current outstanding pooled 
principal to the current aggregate outstanding pooled principal of all 
Loan Interests in the Pool, and adding the sum of the resulting 
products. The weighted average maturity of a Pool Certificate will 
fluctuate over the life of the Pool as Loan Interest defaults, 
prepayments and normal Loan Interest repayments occur.
    An important term defined in subpart J is ``Loan Interest''. A Loan 
Interest is the right to receive the owned portion of the principal 
balance of a loan together with interest thereon at a per annum rate in 
effect from time to time in accordance with the applicable program 
agreement. Under the program, the pooling process results in a First 
Lien Position 504 Loan being split into three separate parts, or Loan 
Interests. One Loan Interest will be held by a Seller that will be 
equal to 15% or more of the Pool Loan and will be evidenced by a 
document issued by the Central Servicing Agent (CSA) called a Seller 
Receipt. The Seller's Loan Interest will not be part of the Pool, and 
is not guaranteed under this program. A second Loan Interest will be 
held by a Pool Originator in an unguaranteed portion of a Pool that 
will be equal to 5% or more of the aggregate of each Loan Interest in 
the Pool, and will be evidenced by a Pool Originator Receipt. A third 
Loan Interest will be put into the pool and be fully guaranteed by SBA, 
and will back Pool Certificates sold to Pool Investors. The part of the 
pool of Loan Interests backing a Pool Originator Receipt is referred to 
as the unguaranteed portion of the Pool. The part of the pool of Loan 
Interests backing a Pool Certificate is referred to as the SBA-
guaranteed portion of the Pool.
    Under the Program, in connection with the forming of a particular 
pool, it is possible for the Seller and Pool Originator to be the same 
entity; however, a Seller or a Pool Originator cannot be a Pool 
Investor for that pool. In such a case, the entity pooling a Pool Loan 
it made or acquired prior to the pooling would execute the First Lien 
Position 504 Loan Pool Guarantee Agreement as Seller, the party 
responsible for servicing the Pool Loan and retaining at least a 15% 
Loan Interest in the Pool Loan, and as Pool Originator, the party 
placing 85% or less of the Loan Interest in the Pool Loan into the Pool 
(with at least 5% of the Loan Interest in the Pool Loan going into the 
unguaranteed portion of the Pool). In such a scenario, a single entity 
(the Pool Originator) would hold 20% or more of the Loan Interest in a 
Pool Loan that is unguaranteed, cannot be sold to Pool Investors, and 
must be serviced pursuant to the Program Rules and Regulations.
    Section 120.1701 describes the purpose of this temporary Program. 
The purpose of the Program is to provide a federal guarantee for Pools 
of First Lien Position 504 Loans to facilitate the sale of such loans 
and increase the liquidity of the lenders holding the loans so that the 
lenders can use the sale proceeds to fund more such loans.
    Section 120.1702 discusses the SBA fee for guaranteeing a portion 
of the pool, which is called the Ongoing Guarantee Fee. The Ongoing 
Guarantee Fee is collected from program participants and is used to pay 
program losses.
    Section 120.1703 establishes the qualifications applicable to 
becoming a Pool Originator under the Program. An entity applying to 
become a Pool Originator must send an application to SBA certifying 
that it is an approved Pool Assembler pursuant to subpart F of this 
Title or it: (1) Is regulated by the appropriate agency as defined in 
section 3(a)(34)(G) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(34)(G)); (2) meets all financial and other applicable 
requirements of its regulatory authority and the Government Securities 
Act of 1986, as amended (Pub. L. 99-571, 100 Stat. 3208); (3) has the 
financial capability to originate acceptable pools consisting of 
eligible Pool Loans in sufficient quantity to support the issuance of 
Pool Certificates; and (4) is in good standing with the SBA (as the SBA 
determines), Office of the Comptroller of the Currency (OCC) if it is a 
national bank, the Federal Deposit Insurance Corporation if it is a 
bank not regulated by the OCC, the Financial Institutions Regulatory 
Authority, if it is a member, the National Credit Union Administration 
if it is a credit union, and (5) for any Pool Originator that is an SBA 
Lender, that the SBA Lender has satisfactory SBA performance, as 
determined by SBA in its sole discretion.
    Section 120.1704 establishes which loans are eligible to be part of 
a pooling under the Program. It states, among other things, that 
eligible Pool Loans must: (1) Be Current and have been Current for the 
six-month period immediately prior to the date the Pool is formed or 
for the life of the Pool Loan, whichever time period is shorter; (2) 
have been closed and serviced in accordance with Program Rules and 
Regulations; (3) be part of a completed 504 financing, funded by a CDC 
debenture, which means that the Pool Loan must be fully disbursed, and 
that the debenture funding the CDC loan must have been sold on or after 
February 17, 2009; and (4) not be (i) to a business deriving more than 
one-third of its gross annual revenue from legal gambling activities; 
(ii) to a casino, gambling establishment, or casino hotel; (iii) for 
financing the acquisition, construction or renovation of an aquarium, 
zoo, golf course, or swimming pool; or (iv) to a business covered by a 
six-digit North American Industry Classification System (NAICS) code 
for casinos--713210 (``Casinos (Except Casino Hotels)''); casino 
hotels--721120 (``Casino Hotels''); other gambling institutions--713290 
(``Other Gambling Industries''); golf courses--713910 (``Golf Courses 
and Country Clubs''); or aquariums and zoos--712130 (``Zoos and 
Botanical Gardens''). The restrictions on the business activities 
identified in (i) through (iv) above arise from the fact that the 
guaranty on the pool is established in the Recovery Act. The Recovery 
Act provides that these types of businesses may not receive any 
assistance provided directly or indirectly by the Act.
    A Pool Originator must identify and submit to SBA for review Pool 
Loans to

[[Page 56090]]

businesses with NAICS code 713940 covering Fitness and Recreational 
Sports Centers, as this category includes both swimming pools, which 
are not eligible for assistance under the Recovery Act, and other types 
of fitness and recreational centers which may be eligible for Recovery 
Act assistance. Section 1604 of the Recovery Act states that none of 
the funds appropriated or otherwise made available in the Act may be 
used by any State or local government, or any private entity, for any 
casino or other gambling establishment, aquarium, zoo, golf course or 
swimming pool. SBA may not guarantee a pool that contains a Pool Loan 
made to a business primarily engaged in any such activities or to a 
business that used the loan funds to acquire, construct, renovate or 
for another purpose that included the restricted uses.
    Section 120.1705 establishes requirements relating to Pool 
formation. It states that only an entity approved by SBA to be a Pool 
Originator under the Program and that continues to qualify to be a Pool 
Originator pursuant to subpart J may initiate the formation of a Pool. 
The Pool's characteristics must meet the parameters set forth in the 
Guide created by SBA for this Program, which may be adjusted based on 
market conditions and program experience. A revised version of the 
Guide will be published in the Federal Register to reflect any such 
changes.
    Section 120.1706 establishes a Pool Originator's required retained 
interest in each Pool it forms under the program. It states that the 
Pool Originator must retain an ownership interest in any such Pool 
equal to at least 5% of the aggregate of the total outstanding 
principal balance of each Pool Loan with a Loan Interest in the pool as 
calculated at the time of pool formation. At Pool formation, the CSA 
will issue the Pool Originator a Pool Originator Receipt evidencing the 
Pool Originator's retained interest in the Pool. The Pool Originator 
may not sell, pledge, participate, hypothecate, or otherwise transfer 
its Pool Originator Receipt or any interest therein for the life of the 
Pool.
    Section 120.1707 establishes a Seller's required retained interest 
in the Pool Loan it sells to the Pool Originator at the time of Pool 
formation under the program, and states that the Seller must retain a 
15% or greater Loan Interest in such loan. At pool formation, the CSA 
will issue the Seller a Seller Receipt evidencing the Seller's retained 
ownership in the Pool Loan. With SBA's written permission, the Seller 
may sell the Seller Receipt and Servicing Retention Amount in whole, 
but not in part, to a single entity at one time. The Seller may not 
sell less than 100% of the Seller Receipt and Servicing Retention 
Amount and may not sell a participation interest in any portion of the 
loan. In addition, in order to complete the sale, Seller must have the 
purchaser of its rights to the Pool Loan execute the First Lien 
Position 504 Loan Pool Guarantee Agreement as Seller and deliver the 
executed original to the CSA.
    Section 120.1708 establishes the characteristics of Pool 
Certificates. It states, among other things, that: (1) A Pool 
Certificate represents a fractional beneficial interest in a Pool; (2) 
it is self-liquidating by payments on Loan Interests in the Pool; (3) 
the CSA prepares the Pool Certificate; (4) SBA must approve the form 
and terms of the Pool Certificate; and (5) it must be registered with 
the CSA.
    Section 120.1709 discusses how a Pool Certificate can be 
transferred. It establishes, that, in order for the transfer of a Pool 
Certificate to be effective, the CSA must reflect the transfer on its 
records. It also establishes the content of the applicable transmittal 
letter relating to the transfer and that the transfer costs due to the 
CSA must be paid prior to transfer. It also states that such transfers 
must comply with Article 8 of the Uniform Commercial Code (UCC) of the 
State of New York. (Because each Pool Certificate will be an 
immobilized certificate held in New York and ownership transfers will 
occur as outlined in Article 8 of the UCC, Article 8 of the UCC of the 
State of New York applies.)
    Section 120.1710 establishes the CSA responsibilities related to 
the central servicing of the Program. It states that the CSA must: (1) 
Issue a Seller Receipt to the Seller, a Pool Originator Receipt to the 
Pool Originator, and a Pool Certificate to each Pool Investor; (2) 
forward all Loan Receivables it receives to pay the Servicing Retention 
Amount, Ongoing Guarantee Fee, Seller Receipt, Pool Originator Receipt, 
Pool Certificates, and any other applicable payment in accordance with 
Program Rules and Regulations; (3) maintain a registry of Pool 
Investors and other information as SBA requires; (4) register all Pool 
Certificates; and (5) provide SBA with a list, by Pool, of each Loan 
Interest with an underlying note that is 60 days or more in arrears on 
a monthly basis.
    Section 120.1711 establishes the conditions pursuant to which a 
Participant's participation privileges may be suspended or terminated 
by SBA and a Participant's right to appeal such suspension or 
termination. It states that SBA may, by following the procedures set 
forth in the section, suspend or terminate the privilege of a 
Participant, and/or any Associate or Affiliate of the Participant, to 
sell, purchase, broker, or deal in loans, Loan Interests, or Pool 
Certificates under the program if any such Participant or its Associate 
or Affiliate has:
    (1) Failed to comply materially with any requirement imposed by 
Program Rules and Requirements, or (2) making a material false 
statement or failure to disclose a material fact to SBA. Section 
120.1711 also establishes additional grounds for the suspension or 
termination of a Pool Originator which are related to the Pool 
Originator's fitness to form Pools.
    Section 120.1712 establishes that Seller's responsibilities with 
respect to Seller's Pool Loan shall remain in effect for the life of 
such loan unless SBA provides written notice to the contrary.
    Section 120.1713 establishes the standards applicable to Seller's 
origination of Seller's Pool Loan. It states that the Seller is 
responsible for having made and closed Seller's Pool Loan in a 
commercially reasonable manner, consistent with prudent lending 
standards, and in accordance with any applicable Program Rules and 
Regulations.
    Section 120.1714 establishes the standards and requirements 
applicable to Seller's servicing of Seller's Pool Loan. It states that 
the Seller must service Seller's Pool Loan, subject to section 120.1718 
of this subpart J, in a commercially reasonable manner, consistent with 
prudent lending standards, and in accordance with applicable Program 
Rules and Regulations.
    Section 120.1715 establishes the standards and requirements 
applicable to Seller's liquidation of Seller's Pool Loan. It states 
that, subject to 120.1718 of the subpart, the Seller must liquidate and 
conduct debt collection litigation for Seller's Pool Loan in a prompt, 
cost-effective and commercially reasonable manner, consistent with 
prudent lending standards, in accordance with applicable Program Rules 
and Regulations, and with SBA approval of either a liquidation or 
litigation plan or any amendment of such a plan, if applicable.
    Section 120.1716 establishes the servicing actions by Seller which 
need SBA's prior approval. It states that Seller shall not, without 
prior written consent of SBA, take the following actions with respect 
to Seller's Pool Loan: (1) Make or consent to any substantial 
alteration in the terms (``substantial'' includes, but is not

[[Page 56091]]

limited to, any changes to the principal amount or interest rate); (2) 
accelerate the maturity; (3) sue; or (4) waive or release any claim. 
Guidance on other servicing actions, some of which may need prior SBA 
approval, is provided in the Guide.
    Section 120.1717 establishes when a Seller may defer payments on 
Seller's Pool Loan without SBA's prior approval. It states that, 
without the prior written consent of SBA, Seller, at the request of 
Obligor, may grant one deferment of Obligor's scheduled payments for a 
continuous period not to exceed three months of past or future 
installments. Seller shall immediately notify CSA of any payment 
deferment and that notification shall include (1) the SBA Pool Loan 
Number, (ii) the Obligor's name, (iii) the terms of such deferment, 
(iv) the date Obligor is to resume payment and (v) reconfirmation of 
the basis of interest calculation (e.g. 30/360 or Actual Days/365).
    Section 120.1718 establishes SBA's right to assume Seller's 
responsibilities with respect to Seller's Pool Loan. It states that SBA 
may, in its sole discretion, undertake the servicing, liquidation and/
or litigation of Seller's Pool Loan at any time and, in such event, 
Seller must take any steps necessary to facilitate the assumption by 
SBA of such responsibilities, which can be transferred by SBA at its 
discretion to a contractor, agent or other entity.
    Section 120.1719 establishes when SBA is entitled to recover from 
Seller monies paid by SBA under the Program. It establishes that SBA is 
entitled to recover from Seller any monies paid on SBA's guarantee of a 
Pool Certificate backed in part by Seller's Pool Loan, plus interest, 
if SBA in its sole discretion determines that any of the following 
events has occurred:
    (1) Seller's improper action or inaction has put SBA at risk;
    (2) Seller has failed to disclose a material fact to SBA regarding 
a Seller's Pool Loan in a timely manner;
    (3) Seller has misrepresented a material fact to SBA regarding 
Seller's Pool Loan;
    (4) Seller has failed to comply materially with section 120.1720 of 
this subpart;
    (5) SBA has received a written request from Seller to terminate the 
SBA's guarantee on the Loan Interest in Seller's Pool Loan;
    (6) Seller has failed to comply materially with Program Rules and 
Regulations; or
    (7) Seller has failed to make, close, service or liquidate Seller's 
Pool Loan in a prudent manner.
    Section 120.1720 establishes SBA's right to review Seller's Pool 
Loan documents. It establishes that, in the event that SBA purchases a 
Loan Interest in Seller's Pool Loan, Seller must provide to SBA copies 
of the Pool Loan collateral documents, Pool Loan underwriting 
documents, and any other documents SBA may require in writing within 30 
calendar days of a written request from SBA (which SBA will review in 
connection with its efforts to determine if Seller is obligated to 
reimburse SBA pursuant to this subpart). A Seller's failure to provide 
the requested documentation may constitute a material failure to comply 
with the Program Rules and Regulations and may lead to an action for 
recovery under 120.1719. SBA will also evaluate a Seller's continued 
participation in the Program and may restrict further sales under the 
Program until SBA determines that the Seller has provided sufficient 
documentation.
    Section 120.1721 establishes a Seller's responsibility to 
facilitate an SBA investigation into whether Seller is responsible for 
reimbursing SBA for a loss incurred by it under the program due to 
Seller's improper actions. It establishes that SBA may undertake such 
investigation as it deems necessary to determine whether it is entitled 
to seek recovery from the Seller and that the Seller agrees to take 
whatever actions are necessary to facilitate such investigation.
    Section 120.1722 establishes SBA's offset rights with respect to 
Seller. It states SBA shall have the right to offset any amount owed by 
Lender to SBA, including, without limitation, an offset against CSA's 
obligation to pay Lender pursuant to any Section 504 First Mortgage 
Loan Pool Guarantee Agreement.
    Section 120.1723 establishes when Seller must forward Pool Loan 
Receivables to CSA. It states that any loan receivables received by 
Seller in connection with obligations under Seller's Pool Loan must be 
forwarded by Seller to CSA within two business days of receipt of 
collected funds. Pool Loan Receivables include Liquidation Proceeds.
    Section 120.1724 discusses how ordinary servicing and liquidation 
expenses incurred by Seller are recoverable from SBA and the applicable 
Pool Originator and Pool Investors. It establishes that all ordinary 
and reasonable expenses of servicing, and liquidating Seller's Pool 
Loan shall be paid by, or be recoverable from, Obligor, and that all 
such ordinary and reasonable expenses incurred by Seller or SBA which 
are not recoverable from Obligor shall be shared ratably by Seller, 
SBA, and the Pool Originator pursuant to the applicable percentages set 
forth in the First Lien Position 504 Loan Pool Guarantee Agreement.
    Section 120.1725 states that a Seller and the Pool Originator must 
not establish a Program Preference, which is defined in 13 CFR 120.10.
    Section 120.1726 discusses the Pool Certificates a Seller must not 
purchase. It establishes that neither a Seller, nor any of its Program 
Associates or Affiliates, may purchase a Pool Certificate that is 
backed by a Loan Interest in a Pool Loan that the Seller, or any of its 
Program Associates or Affiliates, originated or owned, and, in the 
event such purchase occurs, SBA's guarantee shall not be in effect with 
respect to any such Pool Certificate.

III. Justification for Publication as Interim Final Rule

    In general, before issuing a final rule, SBA publishes the rule for 
public comment in accordance with the Administrative Procedure Act 
(APA), 5 U.S.C. 553. The APA provides an exception from the general 
rule where the agency finds good cause to omit public participation. 5 
U.S.C. 553(c)(3)(B). The good cause requirement is satisfied when prior 
public participation can be shown to be impracticable, unnecessary, or 
contrary to the public interest. Under such circumstances, an agency 
may publish an interim final rule without soliciting public comment.
    In enacting the good cause exception to standard rulemaking 
procedures, Congress recognized that emergency situations arise where 
an agency must issue a rule without public participation. The current 
turmoil in the financial markets is having a negative impact on the 
availability of financing for small businesses. SBA finds that good 
cause exits to publish this rule as an interim final rule in light of 
the urgent need to help small businesses sustain and survive during 
this economic downturn. Advance solicitation of comments for this 
rulemaking would be impracticable, contrary to the public interest, and 
would harm those small businesses that need immediate access to 
capital.
    In addition, the Recovery Act mandates that the SBA issue emergency 
regulations to implement Section 503 and establish the Secondary Market 
Guaranty Authority. The Recovery Act also specifically exempts any such 
regulations from the notice and comment requirement of the APA.
    Although this rule is being published as an interim final rule, 
comments are

[[Page 56092]]

solicited from interested members of the public. These comments must be 
submitted on or before 90 days from the date of publication. The SBA 
will consider these comments and the need for making any amendments as 
a result of these comments.

IV. Justification for Immediate Effective Date

    The APA requires that ``publication or service of a substantive 
rule shall be made not less than 30 days before its effective date, 
except * * * as otherwise provided by the agency for good cause found 
and published with the rule.'' 5 U.S.C. 553(d)(3).
    The purpose of this provision is to provide interested and affected 
members of the public sufficient time to adjust their behavior before 
the rule takes effect. In light of the current economic downturn and 
the sharp reduction in commercial lending, it is essential to 
accelerate the availability of additional 504 financing for small 
businesses by implementing this rule immediately. In addition, the 
program has a limited life, so it is important to make the program 
effective in a timely manner.
    SBA finds that that there is good cause for making this rule 
effective immediately instead of observing the 30-day period between 
publication and effective date. Delaying implementation of the rule 
would have a serious adverse impact on the nation's small businesses.

Compliance With Executive Orders 12866, 12988, 13175 and 13132, the 
Paperwork Reduction Act (44 U.S.C., Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-612) Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
rule constitutes a significant regulatory action for purposes of 
Executive Order 12866.

Executive Order 12988

    This action meets applicable standards set forth in sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have preemptive effect, and has retroactive effect only to the extent 
that interests in loans made prior to the effective date of this 
rulemaking may be eligible to be sold and pooled in accordance with 
this rule.

Executive Order 13132

    This rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government, as specified in the Executive Order. As 
such it does not warrant the preparation of a Federalism Assessment.

Paperwork Reduction Act

    The SBA has determined that this rule imposes new reporting and 
recordkeeping requirements under the Paperwork Reduction Act, 44 U.S.C. 
Chapter 35. Because the Recovery Act requires SBA to issue emergency 
regulations, the agency has submitted a request to the Office of 
Management and Budget (OMB) for review and approval of the resulting 
collection of information under the OMB emergency processing procedures 
regulation, 5 CFR 1320.13. This information collection consists of the 
forms that the respondents described below, will be required to submit 
to SBA in order to provide the information necessary to participate in 
the SBA Secondary Market Guarantee Program for First Lien Position 504 
Loan Pools.
    The title, description and number of respondents, the estimated 
annual cost and hour burdens imposed on the respondents, as a result of 
this collection of information, are outlined below. SBA invites 
comments on this new information collection, particularly on: (1) 
Whether the proposed collection of information is necessary for the 
proper performance of SBA's functions, including whether the 
information will have a practical utility; (2) the accuracy of SBA's 
estimate of the burden of the proposed collection of information; (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.
    1. Form Title and Purpose: SBA Form 2401: First Lien Position 504 
Loan Pool Guarantee Agreement. This is the primary agreement to be 
executed by all parties to each secondary market pool security 
transaction. It sets out the terms and conditions under which sellers 
will exchange portions of first lien position 504 loans in exchange for 
proceeds from a Pool Certificate.
    Description and Estimated Number of Respondents: Approximately 50 
Sellers and Pool Originators as those terms are defined in this rule.
    Estimated Number of Responses: 9,000.
    Frequency of Response: once per each project (response) financed.
    Total Estimated Hour Burden: 27,000 based on an estimated 3 hours 
per response.
    Total Estimated Hourly Cost to Respondents: The cost to the 
government estimated to be approximately $308,250.00 annually. Each 
request for guaranty is estimated to require .5 hours of a contractor's 
time at $50 per hour, times 9,000 pool applications or $225,000.00. SBA 
would also incur approximately $83,250.00 including .25 hour per 
application from a GS-13 staff analyst (GS-13 at $37 per hour) for 
verifying the terms of the agreement with the underlying documentation.
    2. Form Title and Purpose: SBA Form 2404: Application to Become a 
Pool Originator under the SBA Secondary Market Guarantee Program for 
First Lien Position 504 Pools. It sets out the information necessary 
for SBA to make a determination on the application for participation in 
the program.
    Description and Estimated Number of Respondents: 15 broker dealers 
who are interested in becoming Pool Originators.
    Estimated Number of Responses (applications): 15.
    Frequency of Response: one time submission--per application.
    Total Estimated Hour Burden: 150 hours based on an estimated time 
of 10 hours per application.
    Total Estimated Hourly Cost to Respondents: This form will likely 
be completed by an attorney (in house or outside counsel). Their 
estimated average annual salary is $100,000.00. Their hourly rate is 
calculated to be about $48.08. It is estimated that it will cost 
respondents $480.80 per response.
    3. Form Title and Purpose: SBA Form 2403: Application for Pool of 
First Lien Position 504 Loan Interests. This form will provide SBA with 
details concerning each of the first lien position 504 loans the Pool 
Originator proposes to put into a loan pool.
    Description and Estimated Number of Respondents: 15 Pool 
Originators.
    Estimated Number of Responses (loan pools): 475.
    Frequency of Response: Once per pool assembled.
    Total Estimated Hour Burden: 1,425 hours based on the estimated 
time of 3 hours per response.
    Total Estimated Hourly Cost to Respondents: The cost to the 
government is estimated to be approximately $17,812.00 annually. Each 
request for guaranty is estimated to require .5 hours of a contractor's 
time at $50 per hour, times 475 pool applications or $17,812.00. SBA 
would

[[Page 56093]]

not be involved in the pool creation process and any review of the 
documents would have be done simultaneously with the review of First 
Lien Position 504 Loan Pool Guarantee Agreement and would not incur any 
expanses other than the cost for the contractor to perform the related 
duties.
    4. Form Title and Purpose: SBA Form 2402: Form of Detached 
Assignment For U.S. Small Business Administration Guaranteed First Lien 
Position 504 Loan Pool Certificate. This form will be used to collect 
information concerning the transfer of Pool Certificates for the 
benefit of investors.
    Description and Estimated Number of Respondents: 250 potential 
investors and broker dealers who will participate in the program 
established by this rule.
    Estimated Number of Responses (loan pools): 3,000.
    Frequency of Response: Once for each pool.
    Total Estimated Hour Burden: 4,500 based on an estimated time of 
1.5 hours per response.
    Estimated Hourly Cost to Respondents: The cost to the government 
estimated to be approximately $37,500.00 annually. Each request for 
guaranty is estimated to require .25 hours of a contractor's time at 
$50 per hour, times 3,000 pool certificate transfer applications or 
$37,500.00. SBA would not be involved in the transfer transaction and 
would not incur any expenses other than the cost for the contractor to 
perform the related duties.

Regulatory Flexibility Act

    Because this rule is an interim final rule, there is no requirement 
for SBA to prepare a Regulatory Flexibility Act (RFA) analysis. The RFA 
requires administrative agencies to consider the effect of their 
actions on small entities, small non-profit businesses, and small local 
governments. Pursuant to the RFA, when an agency issues a rule, the 
agency must prepare analysis that describes whether the impact of the 
rule will have a significant economic impact on a substantial number of 
small entities. However, the RFA requires such analysis only where 
notice and comment rulemaking is required.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses.


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

PART 120--BUSINESS LOANS

0
1. The authority for 13 CFR part 120 continues 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); Pub. 
L. 111-5, 123 Stat. 115.


0
2. Add a new subpart J to read as follows:

Subpart J--Establishment of SBA Secondary Market Guarantee Program 
for First Lien Position 504 Loan Pools

Sec.
120.1700 Definitions used in subpart J.
120.1701 Program purpose.
120.1702 Program fee.
120.1703 Qualifications to be a Pool Originator.
120.1704 Pool Loans eligible for pooling.
120.1705 Pool formation requirements.
120.1706 Pool Originator's retained interest in Pool.
120.1707 Seller's retained Loan Interest.
120.1708 Pool Certificates.
120.1709 Transfers of Pool Certificates.
120.1710 Central servicing of the Program.
120.1711 Suspension or termination of Program participation 
privileges.
120.1712 Seller responsibilities with respect to Seller's Pool Loan.
120.1713 Seller's Pool Loan origination.
120.1714 Seller's Pool Loan servicing.
120.1715 Seller's Pool Loan liquidation.
120.1716 Required SBA approval of servicing actions.
120.1717 Seller's Pool Loan deferments.
120.1718 SBA's right to assume Seller's responsibilities.
120.1719 SBA's right to recover from Seller.
120.1720 SBA's right to review Pool Loan documents.
120.1721 SBA's right to investigate.
120.1722 SBA's offset rights.
120.1723 Pool Loan receivables by Seller.
120.1724 Servicing and liquidation expenses.
120.1725 No Program Preference by Seller or Pool Originator.
120.1726 Pool Certificates a Seller cannot purchase.


Sec.  120.1700  Definitions used in subpart J.

    504 financing. The loans made to a small business to fund a Project 
under the SBA's development company loan program authorized by Title V 
of the Small Business Investment Act of 1958.
    Affiliate. A person or entity SBA determines to be an affiliate of 
a Program Participant pursuant to the application of the principles and 
guidelines set forth in Sec.  121.103 of this Title.
    Central Servicing Agent or CSA. The entity serving as SBA's central 
servicing agent for the Program.
    Certified Development Company or CDC. An entity that meets the 
definition of a Certified Development Company as defined in Sec.  
120.10 of this Part.
    Current. That no scheduled payment owed by an Obligor pursuant to a 
Pool Note is over 29 days past due.
    First Lien Position 504 Loan. The financing provided by the First 
Lien Position 504 lender that is part of the 504 project financing.
    First Lien Position 504 Loan Pool Guarantee Agreement. The 
agreement, in the form approved by SBA, wherein entities agree to 
participate in the forming of a Pool under the Program, available at 
http://www.sba.gov/aboutsba/sbaprograms/elending/index.html/.
    Guide. The First Lien Position 504 Loan Pooling Program Guide 
published by SBA which provides information applicable to the Program 
including, among other things, requirements relating to the formation 
of a Pool, available at http://www.sba.gov/aboutsba/sbaprograms/elending/index.html/.
    Liquidation Proceeds. Cash, including insurance proceeds, proceeds 
of any foreclosed-on property disposition, revenues received with 
respect to the conservation and disposition of a foreclosed-on property 
or repossessed collateral, including any real property securing the 
Pool Loan, consisting of a commercial property or residential property 
and any improvements thereon, and any other amounts received in 
connection with the liquidation of the Pool Loan, whether through 
Seller's sale, foreclosure sale, any offset or workout, or otherwise.
    Loan Interest. The right to receive the owned portion of the 
principal balance of the Pool Loan together with interest thereon at a 
per annum rate in effect from time to time in accordance with the First 
Lien Position 504 Loan Pool Guarantee Agreement.
    Maturity. The maturity of the Loan Interest in the Pool that has 
the longest remaining term of any Loan Interest in the Pool. The 
maturity will change from time to time due to prepayment or default on 
Loan Interests in the Pool.
    Ongoing Guarantee Fee. An annual fee collected monthly and based on 
the percentage of the Pool Loan amount, pursuant to section 
503(C)(3)(B)(ii) of the Recovery Act, to result in a cost of the loan 
guarantee of zero as determined under the Federal Credit Reform Act of 
1990, as amended. The funds generated by the fee serve as a reserve to 
pay for program losses.
    Obligor. The obligor(s) under a Pool Note.
    Pool. The aggregate of Loan Interests formed into a single pool by 
the Pool Originator in accordance with the Program. The Pool is 
comprised of an unguaranteed portion and an SBA-

[[Page 56094]]

guaranteed portion. The unguaranteed portion of the Pool backs the Pool 
Originator Receipt, and cannot be sold to Pool Investors. The SBA-
guaranteed portion of the Pool backs the Pool Certificates sold to Pool 
Investors. The Seller's Loan Interest is not included in the Pool.
    Pool Assembler. An entity that meets the qualifications of a Pool 
Assembler as set forth in section 120.630 of this Part and has been 
approved as such by SBA.
    Pool Certificate. The document representing a beneficial fractional 
interest in the SBA-guaranteed portion of a Pool.
    Pooled. When one or more Loan Interests in a Pool Loan has been put 
into a Pool.
    Pooling. The transfer of one or more Loan Interests in a Pool Loan 
into a Pool.
    Pool Investor. An entity which holds a Pool Certificate in 
accordance with Program Rules and Regulations.
    Pool Loan. A loan that meets the Program eligibility requirements 
as set forth in Sec.  120.1704 of this subpart J and has been pooled.
    Pool Loan Receivables. Pool Loan payments, prepayments, or 
collections made in connection with the Pool Loan by the Obligor 
pursuant to Pool Note or any other Pool Loan documents or agreements, 
or by another person or entity made on behalf of any such Pool Loan 
obligor, and Liquidation Proceeds.
    Pool Note. The document evidencing a Pool Loan.
    Pool Originator. An entity approved by SBA to pool Loan Interests 
under the Program.
    Pool Originator Receipt. The document evidencing the Pool 
Originator's retained ownership in a Pool it has formed under the 
Program.
    Premier Certified Lenders Program. The program defined in Sec.  
120.845 of this Part.
    Program. The program authorized by section 503 of the American 
Recovery and Reinvestment Act of 2009.
    Program Participant. An entity that executes the First Lien 
Position 504 Loan Pool Guarantee Agreement as Seller, Pool Originator, 
or Pool Investor, and any successors or assignees thereof.
    Program Participant Associate. (1) An officer, director, key 
employee, or holder of 20 percent or more of the value of a Program 
Participant's stock or debt instruments, or (2) Any individual in which 
one or more individuals referred to in paragraph (1) of this 
definition, or a spouse, or child, or sibling, or the spouse of any 
such individual, owns or controls at least 20 percent.
    Program Preference. Any arrangement giving the Seller, Pool 
Originator, or a Program Associate or Affiliate of Seller or Pool 
Originator, a preference or benefit of proportion greater than its Loan 
Interest as compared to Pool Originator, Pool Investor, or SBA relating 
to the making, servicing, or liquidation of the Loan with respect to 
such things as repayment, collateral, guarantees, control, maintenance 
of a compensating balance, purchase of a certificate of deposit or 
acceptance of a separate or companion loan, without SBA's consent. 
Seller's agreement to grant a Pool Loan's Obligor a deferment in return 
for receiving more collateral on a different loan owned by Seller is an 
example of a preference.
    Program Rules and Regulations. This subpart J, as may be amended 
from time to time by SBA (the Program Regulations), the First Lien 
Position 504 Loan Pool Guarantee Agreement, any other Program 
agreements signed by a Program Participant, if applicable, the Guide, 
the Recovery Act, and the provisions of subpart H governing Third Party 
Loans and Third Party Lenders.
    Project. A project as defined by Sec.  120.802 of the Part.
    SBA. The United States Small Business Administration, an agency of 
the United States Government.
    Seller. An entity that has sold a Pool Loan to a Pool Originator to 
be Pooled and any successor entity that has executed the First Lien 
Position 504 Loan Pool Guaranty Agreement pursuant to Sec.  120.1707.
    Seller's Pool Loan. The Pool Loan sold to a Pool Originator 
pursuant to the First Lien Position 504 Loan Pool Guarantee Agreement.
    Seller Receipt. The document that evidences a Seller's Loan 
Interest.
    Servicing Retention Amount. The amount of a Pool Loan interest 
payment retained by Seller for servicing the Pool Loan that is payable 
and calculated pursuant to the First Lien Position 504 Loan Pool 
Guarantee Agreement.
    Weighted Average Interest Rate. The dollar-weighted average 
interest rate of a Pool Certificate calculated by multiplying the 
interest rate of each Loan Interest in the Pool by the ratio of that 
Loan Interest's current outstanding principal in the SBA-guaranteed 
portion of the Pool (that is, the portion of the Pool Loan backing the 
Pool Certificates) to the current aggregate or outstanding principal of 
each Loan Interest in the SBA-guaranteed portion of the Pool, and 
adding the sum of the resulting products. The Pool Certificate interest 
rate will fluctuate over the life of the Pool as defaults, prepayments 
and normal repayments applicable to Loan Interests in the Pool occur.
    Weighted Average Maturity. The weighted average maturity of a Pool 
Certificate is a dollar weighted average maturity that is calculated by 
multiplying the remaining term, in months, of each Loan Interest in a 
Pool by the ratio of that Loan Interest's current outstanding pooled 
principal to the current aggregate outstanding pooled principal of all 
Loan Interests in the Pool, and adding the sum of the resulting 
products. The weighted average maturity of a Pool Certificate will 
fluctuate over the life of the Pool as Loan Interest defaults, 
prepayments and normal Loan Interest repayments occur.


Sec.  120.1701  Program purpose.

    As authorized by the American Recovery and Reinvestment Act of 2009 
(Recovery Act), SBA establishes the Program to authorize an entity to 
apply for SBA's guarantee of Pools comprised of portions of First Lien 
Position 504 Loans backing Pool Certificates to be sold to Pool 
Investors. The purpose of the Program is to temporarily provide a 
federal guarantee for Pools of First Lien Position 504 Loans to 
facilitate the sale of such loans and increase the liquidity of the 
lenders holding the loans so that the lenders can use the sale proceeds 
to fund more such loans. The Program's authorization expires on 
February 17, 2011 and the Administrator may guarantee not more than 
$3,000,000,000 of pools under this authority pursuant to section 
503(c)(B)(iii) of the Recovery Act.


Sec.  120.1702  Program fee.

    Ongoing Guarantee Fee. The Ongoing Guarantee Fee is payable to SBA, 
and it is calculated and payable monthly from the amounts received in 
respect of interest on Loan Interests in the SBA-guaranteed portion of 
a Pool. This amount is set forth in the First Lien Position 504 Loan 
Pool Guarantee Agreement. This fee is used to pay program losses.


Sec.  120.1703  Qualifications to be a Pool Originator.

    (a) Application to become Pool Originator. The application to 
become a Pool Originator is available from the SBA and can be found on 
SBA's website. In order to qualify as a Pool Originator, an entity must 
send the application to the SBA and certify that it is a Pool Assembler 
or it:
    (1) Is regulated by the appropriate agency as defined in section 
3(a)(34)(G) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(34)(G));
    (2) Meets all financial and other applicable requirements of its 
regulatory

[[Page 56095]]

authority and the Government Securities Act of 1986, as amended (Pub. 
L. 99-571, 100 Stat. 3208);
    (3) Has the financial capability to originate acceptable pools 
consisting of eligible First Lien Position 504 Loans in sufficient 
quantity to support the issuance of Pool Certificates;
    (4) Is in good standing with SBA (as the SBA determines), the 
Office of the Comptroller of the Currency (OCC) if it is a national 
bank, the Federal Deposit Insurance Corporation if it is a bank not 
regulated by the OCC, the Financial Institutions Regulatory Authority, 
if it is a member, the National Credit Union Administration if it is a 
credit union; and
    (5) for any Pool Originator that is an SBA Lender, that the SBA 
Lender has satisfactory SBA performance, as determined by SBA in its 
sole discretion.
    (b) Approval by SBA. An entity may not submit applications to form 
Pools to the CSA until SBA has approved its application to become a 
Pool Originator.
    (c) Conduct of business by Pool Originator. An entity continues to 
qualify as a Pool Originator so long as it:
    (1) Meets the eligibility standards in paragraph (a) of this 
section;
    (2) Conducts its business in accordance with SBA regulations and 
accepted securities or banking industry practices, ethics, and 
standards;
    (3) Maintains its books and records in accordance with generally 
accepted accounting principles or in accordance with the guidelines of 
the regulatory body governing its activities; and
    (4) Has not been suspended or terminated from the Program by SBA.


Sec.  120.1704  Pool Loans eligible for Pooling.

    (a) General Pool Loan eligibility requirements. For a First Lien 
Position 504 Loan to be eligible for Pooling it must:
    (1) Be a loan that is:
    (i) A Third Party Loan as defined in Sec.  120.801(c)(3);
    (ii) Made by a private sector lender acceptable to SBA in its sole 
discretion; and
    (iii) Secured by a first lien on the Project Property as defined in 
Sec.  120.801 of this chapter;
    (2) Be part of a 504 financing that is comprised of only one Third 
Party Loan and one CDC 504 loan; the CDC 504 loan must be funded by a 
Debenture that was been sold on or after February 17, 2009;
    (3) Be Current and have been Current for the six-month-period 
immediately prior to the date the Pool is formed or for the life of the 
Pool Loan, whichever time period is shorter;
    (4) Have been made and closed in a commercially reasonable manner, 
consistent with prudent lending standards;
    (5) Be part of a completed 504 financing, funded by a 504 
debenture, which means that the Pool Loan must be fully disbursed and 
the debenture funding the related loan by a CDC must have been sold on 
or after February 17, 2009; and
    (6) Not be:
    (i) To a business deriving more than one-third of its gross annual 
revenue from legal gambling activities;
    (ii) To a casino, gambling establishment, or casino hotel;
    (iii) For financing the acquisition, construction or renovation of 
an aquarium, zoo, golf course, or swimming pool; or
    (iv) To a business covered by a six-digit North American Industry 
Classification System (NAICS) code for casinos--713210 (``Casinos 
(Except Casino Hotels)''); casino hotels--721120 (``Casino Hotels''); 
other gambling institutions--713290 (``Other Gambling Industries''); 
golf courses--713910 (``Golf Courses and Country Clubs''); or aquariums 
and zoos--712130 (``Zoos and Botanical Gardens'').
    (b) SBA review of a Pool Loan prior to pool formation. SBA has the 
right to review any Pool Loan before a Loan Interest in it is added to 
a Pool, and SBA may prohibit the Pool's formation as proposed based on 
SBA's review in SBA's sole discretion. In the event SBA decides to 
review Pool Loan documents related to a Loan Interest prior to the 
requested Pool formation, that Loan Interest may not be added to the 
Pool until SBA reviews and approves the Pool Loan for such purpose. 
Copies of Pool Loan documents related to underwriting and origination, 
and any other Pool Loan-related documents SBA may, in its sole 
discretion, request to review in writing, must be sent to SBA's 
Sacramento Pool Loan Processing Center. The Pool Originator must 
identify and SBA must review Pool Loan documents before a Loan Interest 
is added to a Pool if:
    (1) The Pool Loan is to a business within NAICS code 713940 
covering Fitness and Recreational Sports Centers; (If SBA determines 
that a Pool Loan has had any of its proceeds used for any of the 
restricted purposes listed above, the Pool Loan will be prohibited from 
being part of a Pool.)
    (2) The Pool Loan was part of a 504 financing involving a 504 loan 
that was processed under SBA's Premier Certified Lenders Program; or
    (3) The Project the Pool Loan financed included the refinancing of 
existing debt owed to the Seller or Third Party Lender (not including 
interim financing associated with the Project).


Sec.  120.1705  Pool formation requirements.

    (a) Initiation of Pool formation. Only an entity approved by SBA to 
be a Pool Originator under the Program that continues to qualify to be 
a Pool Originator pursuant to this subpart may initiate the formation 
of a Pool. The Pool Originator creates the Pool subject to Program 
Rules and Regulations, including the parameters set forth in the Guide, 
and SBA approval.
    (b) Adjustment of Pool requirements. SBA may adjust the Pool 
characteristics periodically based on program experience and market 
conditions and will publish a revised version of the Guide in the 
Federal Register to implement such adjustments. Any such adjustments 
shall not affect Pools formed prior to the adjustment.
    (c) When the Pool Originator is the Seller. When a Pool Originator 
proposes to form a Pool involving a Pool Loan it owns, it must execute 
the First Lien Position 504 Loan Pool Guarantee Agreement as Pool 
Originator and as Seller and, consequently, will be subject to all 
applicable Program Rules and Regulations pertaining to both roles.
    (d) When the Pool Originator does not own the Pool Loan. When a 
Pool Originator proposes to form a Pool involving a Pool Loan it does 
not own, it must purchase the Loan Interest it proposes to pool from a 
Seller that owns the whole Pool Loan and that has the servicing rights. 
The Pool Originator must purchase the Loan Interest and take it into 
inventory or settle the purchase of the Loan Interest through the CSA 
concurrently with the formation of the Pool. The entity selling the 
Loan Interest to the Pool Originator must execute the First Lien 
Position 504 Loan Pool Guarantee Agreement as Seller and, consequently, 
will be subject to all applicable Program Rules and Regulations 
pertaining to a Seller. The Pool Originator must also execute the First 
Lien Position 504 Loan Pool Guaranty Agreement.
    (e) What CSA must receive prior to Pool formation. Before the CSA 
may carry out its responsibilities relating to the formation of a Pool, 
it must receive:
    (1) From the Pool Originator: A properly completed First Lien 
Position 504 Loan Pool application form, First Lien Position 504 Loan 
Guarantee Agreement, and any other documentation which SBA may require, 
if applicable; and
    (2) All cost reimbursement due and payable to the CSA prior to Pool 
formation owed by the Participants

[[Page 56096]]

participating in the formation of the Pool.


Sec.  120.1706  Pool Originator's retained interest in Pool.

    The Pool Originator must retain an ownership interest in any Pool 
it has formed that is equal to at least 5% of the aggregate of the 
total outstanding principal balance of each Pool Loan with a Loan 
Interest in the Pool as calculated at the time of Pool formation. Such 
interest will decline with Loan Interest payments, prepayments, 
defaults and any other early termination. At Pool formation, the CSA 
will issue the Pool Originator a Pool Originator Receipt evidencing the 
Pool Originator's retained interest in the Pool. The Pool Originator 
may not sell, pledge, participate, or otherwise transfer its Pool 
Originator Receipt or any interest therein for the life of the Pool.


Sec.  120.1707  Seller's retained Loan Interest.

    The Seller must retain a 15% or greater Loan Interest in each of 
its loans included in a Pool. At Pool formation, the CSA will issue the 
Seller a Seller Receipt evidencing the Seller's retained ownership in 
the Pool Loan. With SBA's written permission, the Seller may sell the 
Seller Receipt and Servicing Retention Amount in whole, but not in 
part, to a single entity at one time. The Seller may not sell less than 
100% of the Seller Receipt and Servicing Retention Amount, and may not 
sell a participation interest in any portion of any of its Pooled 
loans. In addition, in order to complete such sale, Seller must have 
the purchaser of its rights to the Pool Loan execute the First Lien 
Position 504 Loan Pool Guarantee Agreement as Seller and deliver the 
executed original to the CSA.


Sec.  120.1708  Pool Certificates.

    (a) SBA Guarantee of Pool Certificates. SBA guarantees to a Pool 
Investor the timely payment of principal and interest installments and 
any prepayment or other recovery of principal to which the Pool 
Investor is entitled. If an Obligor misses a scheduled payment pursuant 
to the terms of the Pool Note underlying a Loan Interest backing a Pool 
Certificate, SBA, through the CSA, will make advances to maintain the 
schedule of interest and principal payments to the Pool Investor. If 
SBA makes such payments, it is subrogated fully to the rights satisfied 
by such payment.
    (b) SBA guarantee backed by full faith and credit. SBA's guarantee 
of the Pool Certificate is backed by the full faith and credit of the 
United States.
    (c) SBA purchase of a Loan Interest. SBA will determine whether to 
purchase a Loan Interest backing a Pool Certificate with an underlying 
Pool Note that is 60 days or more in arrears. SBA reserves the right to 
purchase a Loan Interest from a Pool at any time.
    (d) Self-liquidating. A Pool Certificate represents a fractional 
beneficial interest in a Pool that is self-liquidating by Pool Loan 
Receivables and/or SBA Loan Interest payment or redemption.
    (e) Pool Certificate form. The CSA prepares the Pool Certificate. 
SBA must approve the form and terms of the Pool Certificate.
    (f) Pool Certificate registration. A Pool Certificate must be 
registered with the CSA.
    (g) Face amount of Pool Certificate. The face amount of a Pool 
Certificate cannot be less than a minimum amount as specified in the 
Guide, and the dollar amount of Pool Certificates must be in increments 
which SBA will specify in the Guide (except for one Pool Certificate 
for each Pool). SBA may change these requirements based upon an 
analysis of market conditions and program experience, and will publish 
any such change in the Federal Register.
    (h) Basis of payment for Pool Certificates. All payments on a Pool 
Certificate are due pursuant to terms, conditions, and percentages set 
forth or referenced therein and are based on the unpaid principal 
balance of the Pool represented by the Pool Certificate. Any Pool Loan 
Receivables applicable to a Loan Interest in the SBA-guaranteed portion 
of a Pool will be passed through to the appropriate Pool Investors with 
the regularly scheduled payments to such Pool Investors.
    (i) Pool Certificate interest rate. A Pool Certificate must have a 
Weighted Average Interest Rate.
    (j) Pool Certificate maturity. A Pool Certificate must have a 
Maturity and a Weighted Average Maturity.
    (k) Early Pool Certificate redemption. SBA, or the CSA on behalf of 
SBA, may redeem a Pool Certificate prior to its Maturity because of 
Obligor prepayment and/or SBA purchase of all Loan Interests in the 
Pool backing the Pool Certificate.


Sec.  120.1709  Transfers of Pool Certificates.

    (a) Transfer of Pool Certificates. A Pool Certificate is 
transferable. A transfer of a Pool Certificate must comply with Article 
8 of the Uniform Commercial Code of the State of New York. The seller 
may use any form of assignment acceptable to SBA and the CSA. The CSA 
may refuse to issue a Pool Certificate until it is satisfied that the 
documents of transfer are complete.
    (b) Transfer on CSA records. In order for the transfer of a Pool 
Certificate to be effective, the CSA must reflect the transfer on its 
records.
    (c) Contents of letter of transmittal for Pool Certificate. A 
letter of transmittal must accompany each Pool Certificate which a Pool 
Investor submits to the CSA for transfer. The Pool Investor must supply 
the following information in the letter:
    (1) Pool number;
    (2) Pool Certificate number;
    (3) Name of purchaser of Pool Certificate;
    (4) Address and tax identification number of the purchaser;
    (5) Name, e-mail address and telephone number of the person 
handling or facilitating the transfer; and
    (6) Instructions for the delivery of the new Pool Certificate.
    (d) CSA transfer cost recovery. At the same time a Pool Investor 
submits a letter of transmittal for a Pool Certificate pursuant to this 
section, it must send to the CSA sufficient funds to cover its cost for 
this service. The CSA will supply the transfer information to the Pool 
Investor.


Sec.  120.1710  Central servicing of the Program.

    (a) Pool Certificates and Receipts issued at Pool formation. As 
part of its role as Central Servicing Agent for the Pool, at Pool 
formation, CSA issues a Seller Receipt to the Seller, a Pool Originator 
Receipt to the Pool Originator, and a Pool Certificate to each Pool 
Investor.
    (b) CSA fiscal transfer responsibilities. All Pool Loan Receivables 
on a Pool Loan received by the CSA must be forwarded by it to pay the 
Servicing Retention Amount, Ongoing Guarantee Fee, Seller Receipt, Pool 
Originator Receipt, Pool Certificates, any SBA-purchased Loan Interest, 
and any other payment applicable to the Pooling of such Pooled Loan, in 
accordance with Program Rules and Regulations.
    (c) Administration of the Pool Certificates. CSA must administer 
each Pool Certificate. It shall maintain a registry of Pool Investors 
and other information as SBA requires. CSA registers all Pool 
Certificates. This means it issues, transfers title to, and redeems 
them. It shall maintain a registry of Pool Investors and other 
information as SBA requires. In fulfilling its obligation to keep the 
central registry current, the CSA may, with SBA's approval, obtain any 
necessary information from the parties involved in the Program.
    (d) CSA Monthly Report. CSA must provide SBA with a list, by Pool, 
of each

[[Page 56097]]

Loan Interest with an underlying Pool Note that is 60 days or more in 
arrears on a monthly basis.


Sec.  120.1711  Suspension or termination of Program participation 
privileges.

    (a) Participant suspension or termination. The SBA may suspend or 
terminate the privilege of a Participant, and/or any Associate or 
Affiliate of the Participant, to sell, purchase, broker, or deal in 
Pool Loans, Loan Interests, or Pool Certificates under the Program if 
any such Participant or its Associate or Affiliate has:
    (1) Failed to comply materially with any requirement imposed by the 
Program Rules and Regulations or other SBA rules and regulations; or
    (2) Made a material false statement or failed to disclose a 
material fact to SBA.
    (b) Additional rules for suspension or termination of Pool 
Originator. In addition to the conditions set forth in paragraph (a) 
above, SBA may also suspend or terminate the Program participation 
privileges of a Pool Originator if the Pool Originator (and/or its 
Associates):
    (1) Does not comply with any of the requirements in 120.1703(a) or 
(c);
    (2) Has been revoked or suspended it from engaging in the 
securities business by its supervisory agency, or is under 
investigation for a practice which SBA considers, in its sole 
discretion, to be relevant to its fitness to participate in the 
Program;
    (3) Has been indicted or otherwise formally charged with, or 
convicted of, a felony, or a misdemeanor which, in SBA's sole 
discretion, bears on its fitness to participate in the Program;
    (4) Has received an adverse civil judgment that it has committed a 
breach of trust or a violation of a law or regulation protecting the 
integrity of business transactions or relationships; or
    (5) Has been suspended or terminated as a Pool Assembler under 
120.631.
    (c) Suspension procedures. SBA may undertake suspension or 
enforcement actions under this section using the procedures set forth 
in Sec.  120.1600(a).


Sec.  120.1712  Seller responsibilities with respect to Seller's Pool 
Loan.

    Seller shall remain obligated for servicing and liquidating 
Seller's Pool Loan until the Pool Loan is repaid in full unless SBA 
provides written approval or notice to the contrary.


Sec.  120.1713  Seller's Pool Loan origination.

    SBA is entitled to recover from the Seller losses incurred by SBA 
on its guarantee of a Pool if such losses resulted because Seller's 
Pool Loan was not made and closed in a commercially reasonable manner, 
consistent with prudent lending standards, and in accordance with any 
applicable Program Rules and Regulations.


Sec.  120.1714  Seller's Pool Loan servicing.

    Subject to Sec.  120.1718 of this subpart J, the Seller must 
service Seller's Pool Loan in a commercially reasonable manner, 
consistent with prudent lending standards, and in accordance with 
applicable Program Rules and Regulations. The Seller receives the 
Servicing Retention Amount for servicing the Seller's Pool Loan.


Sec.  120.1715  Seller's Pool Loan liquidation.

    Subject to Sec.  120.1718 of this subpart J, the Seller must 
liquidate and conduct debt collection litigation for Seller's Pool Loan 
in a prompt, cost-effective and commercially reasonable manner, 
consistent with prudent lending standards, in accordance with 
applicable Program Rules and Regulations, and with SBA approval of a 
liquidation plan and any litigation plan, and any amendment of either 
such a plan, if applicable.


Sec.  120.1716  Required SBA approval of servicing actions.

    Seller shall not, without prior written consent of SBA, take the 
following actions with respect to Seller's Pool Loan:
    (a) Make or consent to any substantial alteration in the terms 
(``substantial'' includes, but is not limited to, any changes to the 
principal amount or interest rate);
    (b) Accelerate the maturity;
    (c) Sue; or
    (d) Waive or release any claim. Guidance on other servicing 
actions, some of which may need prior SBA approval, is provided in the 
Guide.


Sec.  120.1717  Seller's Pool Loan deferments.

    Without the prior written consent of SBA, Seller, at the request of 
Obligor, may grant one deferment of Obligor's scheduled payments for a 
continuous period not to exceed three months of past or future 
installments. Seller shall immediately notify CSA of any payment 
deferment and that notification shall include:
    (a) The SBA Pool Loan number;
    (b) The Obligor's name;
    (c) The terms of such deferment;
    (d) The date Obligor is to resume payment; and
    (e) Reconfirmation of the basis of interest calculation (e.g. 30/
360 or Actual Days/365).


Sec.  120.1718  SBA's right to assume Seller's responsibilities.

    SBA may, in its sole discretion, undertake the servicing, 
liquidation and/or litigation of Seller's Pool Loan at any time and, in 
such event, Seller must take any steps necessary to facilitate the 
assumption by SBA of such responsibilities, which can be transferred by 
SBA at its discretion to a contractor, agent or other entity, and such 
steps shall include, among other things, providing or assigning to SBA 
any documents requested by SBA within 15 calendar days of Seller's 
receipt of such request. SBA will notify the Obligor of the change in 
servicing.


Sec.  120.1719  SBA's right to recover from Seller.

    SBA is entitled to recover from Seller any monies paid on SBA's 
guarantee of a Pool Certificate backed in part by Seller's Pool Loan, 
plus interest, if SBA in its sole discretion determines that any of the 
following events has occurred:
    (a) Seller's improper action or inaction has put SBA at risk;
    (b) Seller has failed to disclose a material fact to SBA regarding 
a Seller's Pool Loan in a timely manner;
    (c) Seller has misrepresented a material fact to SBA regarding 
Seller's Pool Loan;
    (d) Seller has failed to comply materially with Sec.  120.1720 of 
this subpart;
    (e) SBA has received a written request from Seller to terminate the 
SBA's guarantee on the Loan Interest in Seller's Pool Loan;
    (f) Seller has failed to comply materially with Program Rules and 
Regulations; or
    (g) Seller has failed to make, close, service or liquidate Seller's 
Pool Loan in a prudent manner.


Sec.  120.1720  SBA's right to review Pool Loan documents.

    In the event that SBA purchases a Loan Interest in Seller's Pool 
Loan, Seller must provide to SBA copies of the Pool Loan collateral 
documents, Pool Loan underwriting documents, and any other documents 
SBA may require in writing within 15 calendar days of a written request 
from SBA (which SBA will review in connection with its efforts to 
determine if Seller is obligated to reimburse SBA pursuant to this 
subpart). A Seller's failure to provide the requested documentation may 
constitute a material failure to comply with the Program Rules and 
Regulations and may lead to an action for recovery under Sec.  
120.1719. SBA will also evaluate a Seller's continued

[[Page 56098]]

participation in the Program and may restrict further sales under the 
Program until SBA determines that the Seller has provided sufficient 
documentation.


Sec.  120.1721  SBA's right to investigate.

    SBA may undertake such investigation as it deems necessary to 
determine whether it is entitled to seek recovery from the Seller and 
Seller agrees to take whatever actions are necessary to facilitate such 
investigation.


Sec.  120.1722  SBA's offset rights.

    SBA shall have the right to offset any amount owed by Lender to 
SBA, including, without limitation, an offset against CSA's obligation 
to pay Lender pursuant to any Section 504 First Mortgage Loan Pool 
Guarantee Agreement.


Sec.  120.1723  Pool Loan receivables received by Seller.

    Any Pool Loan Receivables received by Seller in connection with 
obligations under Seller's Pool Loan must be forwarded by Seller to CSA 
within two business days of receipt of collected funds.


Sec.  120.1724  Servicing and liquidation expenses.

    All ordinary and reasonable expenses of servicing and liquidating 
Seller's Pool Loan shall be paid by, or be recoverable from, Obligor, 
and all such ordinary and reasonable expenses incurred by Seller or SBA 
which are not recoverable from Obligor shall be shared ratably by 
Seller, SBA, and the Pool Originator pursuant to the applicable 
percentages set forth in the First Lien Position 504 Loan Pool 
Guarantee Agreement.


Sec.  120.1725  No Program Preference by Seller or Pool Originator.

    The Seller and the Pool Originator must not establish a Program 
Preference, which is defined in 13 CFR 120.10.


Sec.  120.1726  Pool Certificates a Seller cannot purchase.

    Neither a Seller, nor any of its Program Associates or Affiliates, 
may purchase a Pool Certificate that is backed by a Loan Interest in a 
Pool Loan that the Seller, or any of its Program Associates or 
Affiliates, originated or owned, and, in the event such purchase 
occurs, SBA's guarantee shall not be in effect with respect to any such 
Pool Certificate.

    Dated: October 26, 2009.
Karen G. Mills,
Administrator.
[FR Doc. E9-26211 Filed 10-28-09; 11:15 am]
BILLING CODE 8025-01-P