[Federal Register Volume 74, Number 222 (Thursday, November 19, 2009)]
[Rules and Regulations]
[Pages 59891-59902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-27743]



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  Federal Register / Vol. 74, No. 222 / Thursday, November 19, 2009 / 
Rules and Regulations  

[[Page 59891]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AF95


American Recovery and Reinvestment Act: Loan Program for 
Systemically Important SBA Secondary Market Broker-Dealers

AGENCY: U.S. Small Business Administration.

ACTION: Interim final rule with request for comments.

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SUMMARY: This interim final rule implements certain provisions of the 
American Recovery and Reinvestment Act of 2009 (``Recovery Act''). This 
interim final rule implements Section 509 of the Recovery Act which 
establishes the Secondary Market Lending Authority within SBA to make 
loans to systemically important SBA Secondary Market broker-dealers to 
finance the purchase of the government guaranteed portion of loans 
originated, underwritten and closed under the Small Business Act and 
the purchase of pools of guaranteed portions of such loans.

DATES: Effective Date: This rule is effective November 19, 2009.
    Comment Date: Comments must be received on or before February 17, 
2010.

ADDRESSES: You may submit comments, identified by RIN: 3245-AF95 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, U.S. 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, 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 James W. Hammersley, Deputy Assistant Administrator, 
Office of Policy and Strategic Planning, 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: 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 111-05, 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 (``SBA'') is 
one of several agencies that will play a role in achieving these goals.
    As authorized by the Recovery Act, this rule will establish the 
Secondary Market Lending Authority and a direct loan program for 
systemically important secondary market broker-dealers to assist with 
the financing of the guaranteed portion of loans originated, 
underwritten and closed under the Small Business Act. Recipients of 
these direct loans must use the proceeds to purchase guaranteed 
portions of 7(a) loans from participating lenders, Guaranteed Interest 
Certificates from Registered Holders and Guaranteed Pool Certificates 
from Registered Holders. The cost of the loan charged to systemically 
important secondary market broker-dealers will be the combination of 
the interest rate referenced in 13 CFR 120.1830(e), a fee estimate to 
cover the probability of default, and the ongoing fee as defined in 13 
CFR 120.1830(i).
    When SBA Lenders sell guaranteed portions of 7(a) loans to broker-
dealers through the SBA Secondary Market Program, these transactions 
enable SBA Lenders to obtain funds to make additional small business 
loans. While this market has generally recovered to pre-recession 
levels, offering direct loans to systemically important broker-dealers 
will provide an important backstop to ensure continued liquidity for 
the secondary market broker-dealers, which creates a market for SBA 
Lenders to monetize SBA guaranteed loans and use the proceeds to make 
new loans to small businesses. The Recovery Act requires SBA to consult 
with the Board of Governors of the Federal Reserve and the Secretary of 
the Treasury to establish a process to designate a particular broker-
dealer as systemically important. SBA has determined that in order to 
be designated as systemically important, a broker-dealer must be a Pool 
Assembler in the existing SBA Secondary Market Program as defined in 
subpart F, Sec.  120.600 of Chapter 13 of the Code of Federal 
Regulations. Pool Assemblers that are determined to be systemically 
important secondary market broker-dealers must be in good standing with 
the SBA and also satisfy the requirements of subpart F, Sec.  120.630 
of Chapter 13 of the Code of Federal Regulations. In addition, SBA will 
initially use historical Pool Assembler Secondary Market activity, to 
determine which Pool Assemblers are vital to the continued operation of 
the SBA Secondary Market and therefore should be designated 
systemically important broker-dealers. On a quarterly basis SBA will 
review Pool Assembler Secondary Market activity and may designate 
additional broker-dealers as systemically important to the SBA 
Secondary Market.
    To ensure that this program operates in compliance with Federal 
credit program policy, as promulgated by OMB Circular No. A-129, SBA is 
implementing a ``credit elsewhere'' test for this program. Therefore, 
to qualify for a direct loan under this section, a Systemically 
Important SBA Secondary Market Broker-Dealer (``SISMBD'') must also 
demonstrate that it does not have access to credit on reasonable terms

[[Page 59892]]

when it is applying to SBA for a loan. A SISMBD may demonstrate the 
lack of credit on reasonable terms by providing term sheets offered to 
it by potential lenders or by providing a narrative describing the 
steps taken by the applicant to obtain credit. This information will be 
reviewed by SBA as part of the credit review process for a SISMBD Loan 
Application. SBA will review the loan terms available to a SISMBD 
relative to the credit offered to similar companies in the prevailing 
market to determine if the terms being offered are reasonable.

II. Section by Section Analysis of New Subpart K of Part 120

    Section 120.1800 sets forth the defined terms used in Subpart K. 
The defined terms in Subpart K include:
    Administrator. The Administrator of the U.S. Small Business 
Administration.
    Authority. The Secondary Market Lending Authority defined herein.
    Certificate. The document the FTA issues representing a beneficial 
fractional interest in a Pool (Pool Certificate) of Section 7(a) 
guaranteed portions, or an undivided interest in the entire guaranteed 
portion of an individual 7(a) guaranteed loan (Individual Certificate).
    Collateral (or Collateral for an SISMBD Loan). All Guaranteed 
Portions and Certificates (and proceeds thereof) that are purchased 
with SISMBD Loan proceeds, collateral assignments of the SBA Form 1086 
(Secondary Market Participation Agreement) or SBA Form 1088 (Form of 
Detached Assignment for U.S. Small Business Administration Loan Pool or 
Guaranteed Interest Certificate) for all Guaranteed Portions and 
Certificates purchased with SISMBD Loan proceeds, agreement for Lender/
FTA payment of amounts due under the Guaranteed Portions and 
Certificates, and any other asset that is pledged to secure an SISMBD 
Loan.
    Commitment Letter. The document or documents containing the terms 
and conditions, including the total dollar limit, under which SBA 
agrees to lend money for a specific period of time to a Systemically 
Important SBA Secondary Market Broker-Dealer defined in Section 
120.1810 and pursuant to Section 509 of the American Recovery and 
Reinvestment Act of 2009.
    FTA. SBA's fiscal and transfer agent.
    Guaranteed Portion. That portion of a SBA 7(a) loan sold in an SBA 
Secondary Market transaction. This guaranteed portion of a 7(a) loan 
once sold is certificated, carries a guarantee backed by the full faith 
and credit of the United States and bestows upon the Registered Holder 
the right to receive payments.
    Individual Certificate. The instrument representing a beneficial 
interest in the entire guaranteed portion of an individual 7(a) loan 
sold in the SBA Secondary Market. It is backed by the full faith and 
credit of the United States.
    Loan Advance Request Form. The form approved by SBA wherein an 
SISMBD requests a specific dollar advance under the SISMBD's loan 
agreement that will be used to purchase certain guaranteed portions or 
Certificates. This amount, when added to the balance outstanding of the 
SISMBD's existing SISMBD Loan, must be equal to or less than the loan 
amount. SBA will advance the lesser of the principal balance or the 
price paid for a Guaranteed Portion or a Certificate.
    Loan Agreements. Collectively, any loan agreement executed between 
SBA and the SISMBD that contains the basic terms and conditions which 
control the SISMBD Loan, together with any notes, security 
documentation, custodial agreement, and any other ancillary 
documentation executed in connection therewith, including by reference, 
the regulations and other documents referenced in the regulations.
    On-going Subsidy Fee. An annual fee collected monthly, based on the 
outstanding SISMBD Loan balance, pursuant to section 509(F) of the 
Recovery Act, to result in a cost of the direct loan of zero, as 
determined under the Federal Credit Reform Act of 1990, as amended. The 
funds generated by the fee serve as a reserve for program losses. The 
fee will be published in a notice by SBA prior to the commencement of 
the Program and from time to time thereafter. SBA will communicate the 
On-going Subsidy Fee to the systemically important broker-dealers.
    Pool Assembler. A financial institution that is authorized by SBA 
to: (1) Organize and package Pools by acquiring SBA guaranteed portions 
of 7(a) loans from Lenders or Certificates from Registered Holders; (2) 
resell fractional interests in the Pools to Registered Holders; and (3) 
direct the FTA to issue Certificates.
    Pool Certificate (or Guaranteed Pool Certificate). The instrument 
representing a beneficial fractional interest in a Pool of SBA 
guaranteed portions of 7(a) loans. Pool Certificates carry a timely 
payment guarantee which is backed by the full faith and credit of the 
United States.
    Pool. The aggregate of SBA Section 7(a) guaranteed portions of 
loans formed into a single pool by the Pool Assembler in accordance 
with the SBA Secondary Market laws, regulations and Program Guide.
    Premium. Any amount in excess of the principal balance of a 
Guaranteed Portion or of a Certificate balance. Program. The program 
authorized by Section 509 of the American Recovery and Reinvestment Act 
of 2009.
    Registered Holder. The Certificate owner listed in the FTA's 
records.
    SBA. The United States Small Business Administration, an agency of 
the United States Government.
    SBA Secondary Market. Consists of the sale of Certificates, 
representing either the entire guaranteed portion of an individual 7(a) 
guaranteed loan or an undivided interest in a Pool consisting of the 
SBA guaranteed portions of a number of 7(a) guaranteed loans. 
Transactions involving interests in Pools or the sale of individual 
guaranteed portions of loans are governed by the contracts entered into 
by the parties, SBA's Secondary Market Program Guide, and Subpart F of 
Chapter 13 of the Code of Federal Regulations.
    Secondary Market Lending Authority. The office established under 
Section 509(c) of the American Recovery and Reinvestment Act of 2009 to 
provide loans to systemically important SBA Secondary Market broker-
dealers to be used for the purpose of financing the inventory of the 
government guaranteed portion of loans, originated, underwritten and 
closed under the Small Business Act or pools of such loans.
    SISMBD. Systemically Important Secondary Market Broker-Dealer, as 
defined in Section 120.1810 of Chapter 13 of the Code of Federal 
Regulations.
    SISMBD Loan. A direct loan made by SBA to a Systemically Important 
SBA Secondary Market Broker-Dealer to assist with the financing of the 
purchase and sale of the Guaranteed Portion of loans originated, 
underwritten and closed under Section 7(a) of the Small Business Act. 
Recipients of an SISMBD Loan must use the proceeds for the sole purpose 
of purchasing guaranteed portions of 7(a) loans from SBA Lenders or 
Certificates from Registered Holders.
    SISMBD Loan Application. The application, in the form approved by 
SBA wherein an SISMBD applies for an SISMBD Loan.
    Section 120.1801 describes the Program purpose for the Secondary 
Market Lending Authority. The purpose of the Program is for SBA to 
temporarily make direct loans to broker-dealers to ensure the continued 
operation of the SBA Secondary Market for small business loans 
guaranteed by SBA during the current economic environment. Such broker-
dealers are referred to in the Recovery Act as

[[Page 59893]]

Systemically Important SBA Secondary Market Broker-Dealers.
    Section 120.1802 explains how a broker-dealer may participate in 
the SISMBD Loan Program. In order to obtain a loan, a broker-dealer 
must be a Pool Assembler in SBA's Secondary Market Program and have 
been designated as systemically important to the continued operation of 
the SBA Secondary Market Program. A Pool Assembler with an SISMBD 
designation must also submit a written loan application, execute the 
required loan documents and satisfy all other SBA requirements.
    Section 120.1810 defines a systemically important SBA Secondary 
Market broker-dealer as a Pool Assembler that has routinely engaged in 
the purchase and sale of the Guaranteed Portion of 7(a) loans or pools 
of Guaranteed Portions originated, underwritten and closed under the 
Small Business Act.
    Section 120.1820 describes the eligibility requirements for an SBA 
designation as a systemically important SBA Secondary Market broker-
dealer. To be eligible a broker-dealer must be a Pool Assembler; 
satisfy all of the requirements of Section 120.630 of Subpart F of this 
Title; have not been suspended or terminated by SBA; not be currently 
the subject of or eligible for an SBA suspension or termination 
procedure; engaged in a specific dollar volume of SBA Secondary Market 
purchases of Guaranteed Portions from SBA Lenders and Certificates from 
Registered Holders, and have sold a specific percentage of the total 
dollar volume of sales of Pools in the SBA Secondary Market during the 
same timeframe. On a quarterly basis SBA will review Pool Assembler 
Secondary Market activity and may designate additional broker-dealers 
as systemically important to the SBA Secondary Market.
    Section 120.1821 provides that SBA will notify each systemically 
important SBA Secondary Market broker-dealer in writing of its 
designation.
    Section 120.1822 describes the initial SISMBD Loan application 
process. All loan requests must be submitted to SBA in writing 
accompanied by a statement of the loan amount that is being requested, 
financial statements dated within 120 days of the application including 
a copy of its most recent outside audit report, a balance sheet, an 
income and expense statement and a schedule of its secured debt 
obligations, applicant's IRS tax identification number, information 
demonstrating that credit is not available to the applicant on 
reasonable terms from private sources and any other information 
demonstrating the applicant is creditworthy and has the resources to 
repay the loan. SBA will review the terms available to a SISMBD 
relative to the credit offered to similar companies in the prevailing 
market to determine if the terms being offered are reasonable.
    Section 120.1823 explains that prior to approving an SISMBD Loan 
request or advance request application, SBA will consider the 
creditworthiness of the applicant. Specific evidence that an applicant 
is not creditworthy includes but is not limited to: Insolvency as 
defined in the Bankruptcy Code, failure to adhere to the terms of a 
previous SISMBD Loan or advance request, excessive dependence on 
borrowed funds, violations of the SBA Secondary Market rules, 
regulations or procedures, the effect any affiliates of the SISMBD may 
have on the ultimate repayment ability of the SISMBD or any other 
relevant factor indicating a less than satisfactory condition or lack 
of repayment ability.
    The presence of one or more of these characteristics will not 
necessarily mean that an SISMBD is not creditworthy but may cause the 
partial or complete denial of an SISMBD Loan application.
    Section 120.1824 describes the SBA process to notify applicants 
that an SISMBD Loan request or a request for an advance under a 
revolving SISMBD Loan has been approved or denied. If a loan request is 
approved, the SISMBD will receive a Commitment Letter containing the 
loan terms and conditions. If a loan request or an advance request is 
denied, the SISMBD will receive a written statement from SBA including 
reasons for the denial.
    Section 120.1825 specifies the process for reconsideration of an 
SISMBD Loan or advance request denial decision. An applicant may 
request reconsideration of a denied loan request or advance request 
within 30 days of receipt of a denial notice. All requests for 
reconsideration must be submitted to the Director of the Secondary 
Market Lending Authority. To prevail, the applicant must demonstrate 
that it has overcome all reasons for the loan request denial. If the 
reconsideration is denied, a second and final reconsideration may be 
considered by the Chief Financial Officer.
    Section 120.1830 explains that SISMBD Loans will be revolving lines 
of credit that are collateralized by the Collateral with full recourse 
against the borrower. SISMBDs will obtain disbursements under the loan 
by requesting advances when needed to purchase Guaranteed Portions from 
SBA Lenders or Certificates from Registered Holders. The section also 
describes the basic terms and conditions of an SISMBD Loan. The 
Recovery Act provides there is no statutory limit to the maximum loan 
size for a loan to an SISMBD, subject to the discretion of the 
Administrator. SBA will establish a revolving line of credit loan limit 
when the SISMBD initially applies for a loan based on the SISMBD's 
purchases in the SBA Secondary Market during the immediately prior 
twelve month period. The total dollar limit on the revolving line of 
credit will be a minimum of $10,000,000 and no greater than seventy-
five percent (75%) of the total dollar amount of SISMBD's purchases in 
the SBA Secondary Market during the twelve (12) month period of time 
immediately prior to the loan application, without the written 
permission of the Director of the Secondary Market Lending Authority. 
As security for repayment of an SISMBD Loan, the SISMBD must pledge to 
SBA all Guaranteed Portions and all Certificates that it purchases with 
the SISMBD Loan proceeds and grant SBA a first lien security interest 
in the Guaranteed Portions and the Certificates. The SISMBD will assign 
to SBA all borrower payments on the Guaranteed Portions that back the 
Certificates that are pledged as collateral for the SISMBD Loan. 
Interest on SISMBD Loans shall not exceed the Federal Funds target rate 
as established by the Federal Reserve Board of Governors plus 25 basis 
points. If for any reason an SISMBD is unable to make payment to SBA 
when due, SBA may, among other things, accelerate the maturity date of 
the SISMBD Loan and demand payment in full. An SISMBD Loan maturity 
date must be no later than February 16, 2013. The On-going Subsidy Fee 
for an SISMBD Loan is the amount necessary to allow this program to 
operate at a zero subsidy based on the rules implementing the Federal 
Credit Reform Act of 1990. SBA will communicate the On-going Subsidy 
Fee to each of the systemically important broker-dealers.
    Section 120.1831 explains that there is no limit to the frequency 
with which an SISMBD may borrow under the Secondary Market Loan Program 
unless the Administrator determines that doing so would create an undue 
risk of loss to SBA or the United States. In order to mitigate the risk 
of loss, SBA has determined that an SISMBD may request an unlimited 
number of loans or advances up to the total dollar limit stated in the 
Commitment Letter. SISMBD Loans will be structured as a

[[Page 59894]]

revolving line of credit with a borrowing base.
    Section 120.1832 states that there is no minimum or maximum loan 
advance amount for an SISMBD Loan. Because availability under the 
SISMBD Loan is capped as set forth in 120.1830, the amount of any loan 
advance cannot exceed the available credit under the SISMBD Loan.
    Section 120.1833 explains when an SISMBD may request an increase in 
the loan amount. SBA will consider a request for an increase in an 
SISMBD Loan amount if the applicant can show the increase is essential 
to its continued participation in the SBA Secondary Market. Applicants 
must request a loan increase by submitting an application to the 
Director of the Secondary Market Lending Authority by January 31, 2011.
    Section 120.1834 discusses the SBA fee that covers any projected 
Program losses as required under the Federal Credit Reform Act of 1990. 
This fee is required to fund a reserve to fully cover estimated Program 
losses, as required under section 509(F) of the Recovery Act, and 
consistent with the Federal Credit Reform Act of 1990, as amended. The 
fee is called the On-going Subsidy Fee.
    Section 120.1840 discusses the allowable uses of proceeds of an 
SISMBD Loan. It implements the Recovery Act requirement that SISMBD 
Loan proceeds must be used solely to purchase the Guaranteed Portion 
from SBA Lenders, Individual Certificates or Pool Certificates. SBA 
will not advance more than the purchase price of the Guaranteed 
Portions or the Certificate. Thus, if the Guaranteed Portion or 
Certificates are purchased at a discount to the principal balance, SBA 
will not advance more than the purchase price. SBA will not finance the 
purchase of Guaranteed Portions or Certificates unless the Guaranteed 
Portions or Certificates carry an interest rate equal to or greater 
than the interest rate payable to SBA under the SISMBD Loan. SISMBD 
Loan proceeds shall not be used to purchase any Premium portion of a 
purchase price that is paid to a selling SBA Lender or Registered 
Holder or any other individual or entity. SISMBD Loan proceeds shall 
not be used to refinance existing debt of the SISMBD, finance existing 
inventory of the SISMBD, or for any purpose other than as set forth in 
this Section.
    Section 120.1850 discusses how SBA will hold the collateral for an 
SISMBD Loan. SBA or its authorized agent will physically hold all 
Collateral and will obtain a first lien security interest in all 
Certificates pledged as collateral. Pursuant to the Recovery Act, SBA 
or its expressly authorized agent shall maintain all collateral for 
SISMBD Loans in a custodial account. Certificates held as collateral 
must be in paper, not book entry form.
    Section 120.1860 describes the loan disbursement process. When an 
SISMBD requires an advance from its SISMBD Loan to fund a secondary 
market purchase, it will submit a written request for an advance to the 
FTA along with the SBA Form 1086 or 1088 for processing. The FTA will 
notify SBA that a particular SISMBD requests an advance of a certain 
amount on a specific settlement date to purchase a Guaranteed Portion, 
Individual Certificate, or Pool Certificate. Disbursement to the FTA is 
contingent upon receipt by SBA, the FTA or SBA's settlement agent or 
custodian of the Guaranteed Portions or Certificates being purchased 
and any other Collateral required by SBA and verification of the 
required first lien position. On the settlement date for the secondary 
market transaction, SBA will wire funds to the FTA. FTA will use loan 
proceeds and any Premium payment from SISMBD to pay the SBA Lender or 
Registered Holder the purchase price. SBA will not advance more than 
the purchase price of the loan or Certificate if the loan or 
Certificate is purchased at a discount to the principal balance. Upon 
settlement the FTA, SBA, SBA's settlement agent and the administrator 
of the custodial account will register the loan advance and collateral 
pledge on their respective books and records.
    Section 120.1870 establishes that SISMBDs must utilize their own 
funds or other borrowed funds to cover any Premium paid for a 
Guaranteed Portion or a Certificate. The SISMBD must send Premium 
payments to the FTA on the settlement date. The FTA will forward 
Premium payments to the SBA Lender or Registered Holder along with the 
funds borrowed from SBA for the Certificate being purchased. In this 
program, ``Premium'' is defined as any amount in excess of the 
principal balance of a Guaranteed Portion or of a Pool Certificate 
balance.
    Section 120.1880 describes the SISMBD Loan repayment mechanism. 
Payments on any Guaranteed Portion or Certificate that is purchased 
with SISMBD Loan proceeds will be assigned to SBA and used to repay the 
SISMBD Loan. These payments are collected by the FTA. The FTA will 
forward such payments to SBA. In addition, when the SISMBD forms a Pool 
with Certificates pledged as Collateral for an SISMBD Loan or transfers 
a pledged Certificate, all proceeds, including the principal and 
accrued interest balance of the SISMBD Loan associated with the pledged 
Certificates must be repaid to SBA as payment on the SISMBD Loan before 
SBA will release any Collateral and terminate its security interest 
therein. In this program, ``Premium'' is defined as any amount in 
excess of the principal balance of a Guaranteed Portion or of a Pool 
Certificate balance.
    Section 120.1881 explains how payments on the Collateral are 
allocated between the SISMBD borrower and repayment of the SISMBD Loan. 
Unless otherwise provided in the Loan Agreements for a particular 
SISMBD Loan, any payment on Collateral is assigned to SBA and must be 
used to repay the SISMBD Loan.
    Section 120.1882 explains what happens if funds to make required 
loan payments are not generated from the Collateral. The SISMBD is 
responsible for all interest and principal payments on an SISMBD Loan. 
If SBA does not receive full and timely remittances from the Collateral 
or an SISMBD borrower, it may enforce its rights against the SISMBD 
borrower and the Collateral as set forth in the Loan Agreements, 
related documents, and applicable law. An SISMBD will have a 30-day 
grace period during which to make a supplemental payment if remittances 
from the Collateral are not sufficient to cover the SISMBD Loan 
payments when they are due. After the grace period, if the loan remains 
delinquent, SBA may enforce its rights to the Collateral and against 
the SISMBD.
    Section 120.1890 establishes the maximum maturity for SISMBD Loans. 
The maximum maturity for all SISMBD Loans will be determined by SBA but 
must be no later than February 16, 2013. If the maturity of the 
Collateral is shorter than the maturity of the SISMBD Loan, the SISMBD 
Loan will be due and payable upon payment in full of the Collateral. If 
the SISMBD Loan has a balance on its maturity date, the SISMBD must pay 
the loan in full and obtain possession of the Collateral, or SBA will 
exercise its rights as described in 120.1830(g) and 120.1882(a).
    Section 120.1891 explains what happens if an SISMBD is ineligible 
to receive an SISMBD Loan or an advance. If an SISMBD that has received 
funds from an SISMBD Loan is found to be ineligible for the loan or is 
found to have knowingly breached a representation, the SISMBD must 
repay the loan in full upon demand by SBA or SBA will exercise its 
rights as described in 120.1830(g).
    Section 120.1892 explains what happens if an SISMBD does not use 
SISMBD Loan funds for a statutorily

[[Page 59895]]

mandated purpose. If the Administrator finds that an SISMBD has used 
loan proceeds for any purpose other than to finance the inventory of 
the government guaranteed portion of loans originated, underwritten, 
and closed under Section 7(a) of the Small Business Act or Pools of 
such loans, the Administrator shall demand immediate repayment of any 
outstanding loans to the SISMBD; prohibit the SISMBD, its affiliates, 
or any future corporate manifestation of the SISMBD from using the SBA 
Secondary Market Lending Authority; report to Congress the identity of 
any borrower found by the Administrator to have misused funds made 
available under the Secondary Market Loan Program; and take any other 
actions the Administrator, in consultation with the Attorney General of 
the United States, deems appropriate.
    Section 120.1893 describes the SISMBD Loan recipient's 
responsibilities to collect, maintain and report certain information to 
SBA or other authorized governmental authorities upon request. SISMBD 
Loan recipients will also have reporting requirements related to 
section 1512 of the Recovery Act. SBA will provide additional separate 
guidance on the Recovery Act reporting requirements.
    Section 120.1900 explains the last date on which SBA may approve an 
SISMBD Loan is February 16, 2011 and the date by which all outstanding 
SISMBD Loans must be paid in full, which is February 16, 2013. All 
SISMBD Loan requests must be received by the Director of the Secondary 
Market Lending Authority by January 31, 2011.

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 first 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 exists 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 SBA issue emergency 
regulations and 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 solicited from interested members of the public. These 
comments must be submitted on or before 90 days from the date of 
publication. 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 financing for broker-dealers vital to the continued 
operation of the SBA Secondary Market by reason of their purchase and 
sale of the government Guaranteed Portion of loans, or pools of loans, 
originated, underwritten and closed under the Small Business Act. In 
addition, the program has a limited life, so it is important to make 
the program effective in a timely manner.
    SBA finds 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, 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 retroactive or preemptive effect.
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
    SBA has determined that this rule imposes additional 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 a collection of 
information under the OMB emergency processing procedures regulation, 5 
CFR 1320.13. Respondents will be required to provide to SBA the 
information necessary to participate in the SBA SISMBD Loan program and 
enable the Agency to assess, among other things, a broker-dealer's 
creditworthiness and resources available to repay the loan; its 
inability to obtain credit on reasonable terms from private sources; 
recent audited financial statements; external audit reports; and 
schedule of outstanding debt obligations. The SISMBD Loan applicants 
will also be required to submit quarterly and annual reports. The 
quarterly report will contain information on the SISMBD's SBA Secondary 
Market activity, loan usage and updated financial statements. The 
annual reports will include audited financial statements, and address 
the

[[Page 59896]]

SISMBDs' SBA Secondary Market activities, including the number of 
Guaranteed Portions they have purchased from SBA lenders and 
Certificates they have purchased from Registered Holders, as well as 
those Guaranteed Portions and Certificates they have purchased using 
SISMBD Loan proceeds.
    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 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 collections 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.
    Please send comments by the closing date for comment for this 
interim final rule to SBA Desk Officer, Office of Management and 
Budget, Office of Information and Regulatory Affairs, 725 17th Street, 
NW., Washington, DC 20503 and to James W. Hammersley, Deputy Assistant 
Administrator, Office of Policy and Strategic Planning, Small Business 
Administration, 409 Third Street, SW., Washington, DC 20416.
    Title: Systemically Important Secondary Market Broker-Dealer Data 
Collection.
    OMB Control Number: To be determined; new collection.
    Description and Estimated Number of Respondents: Respondents are 
SBA Loan Pool Assemblers that are determined to be systemically 
important. SBA estimates that there will no more than eight (8) firms 
affected by these rules.
    (a) Application for SISMBD Loan or increase in the loan amount.
    Frequency and Estimated Number of Responses: There will be a total 
of one application per SISMBD. In addition, it is estimated that there 
will a total of 4 requests for a loan increase per year. Total 
estimated responses, 12.
    Estimated Time per Response: It is estimated each SISMBD will need 
approximately 20 hours to complete the application including gathering 
and compiling the supporting documents, for a total annual estimate of 
240 hours. Total estimated annual hours, 32.
    Estimated Hourly Cost to Respondents: Although actual secondary 
market transactions will be conducted by the broker-dealers, this 
information collection will likely be completed by bond trading 
associates. Their estimated average annual salary is $40,000.00. Their 
hourly rate is calculated to be about $20.00. It is estimated that it 
will cost about $400.00 per response, or an annual total of $4,800.
    (b) Request for an advance under a SISMBD Loan.
    Frequency and Estimated Number of Responses: There will be a total 
of four advances per SISMBD per year.
    Estimated Time per Response: It is estimated each SISMBD will need 
approximately 1 hour to complete the request for an advance including 
gathering and compiling the supporting documents, for a total annual 
estimate of 32 hours.
    Estimated Hourly Cost to Respondents: Although actual secondary 
market transactions will be conducted by the broker-dealers, this 
information collection will likely be completed by bond trading 
associates. Their estimated average annual salary is $40,000.00. Their 
hourly rate is calculated to be about $20.00. It is estimated that it 
will cost about $20.00 per response, or an annual total of $640.00.
    (c) Secondary Market Activity Report
    Frequency and Estimated Number of Responses: Reports are due from 
each SISMBD quarterly, for an annual total of 32 reports from all 
SISMBDs.
    Estimated Time per Response: 2 hours per report, for an annual 
total of 64 hours.
    Estimated Hourly Cost to Respondents: It is anticipated that most 
of this reporting would be automatically generated and submitted by 
bond trading associates. Their estimated average annual salary is 
$40,000.00. Their hourly rate is calculated to be about $20.00. It is 
estimated that it will cost respondents $40.00 per reporting, for an 
annual total of $1,280 for all SISMBDs.
    (d) Annual Report
    Frequency and Estimated Number of Responses: One report is due from 
each SISMBD annually.
    Estimated Time per Response: 3 hours for an annual total of 24 
hours.
    Estimated Hourly Cost: It is assumed that the recipient's annual 
audited financial statements would be done regardless of this reporting 
requirement and that the respondent would be simply sending in a copy. 
It is anticipated that most of the burden hours would be used in 
preparing the recertification and the annual activity report. These 
remittances would be performed by the bond trading assistances. Their 
estimated average annual salary is $40,000.00. Their hourly rate is 
calculated to be about $20.00. It is estimated that it will cost all 
respondents an annual total of $480.
    Total Annual Hour Burden for Collection: 360.
    Total Cost Burden for Collection: $7,200.00.
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 is revised to read as follows:

    Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note, 
636(a), (h) and (m), 650, 687(f), 696(3), and 697(a) and (e); Public 
Law 111-5, 123 Stat. 115.


0
2. Add a new Subpart K to read as follows:
Subpart K--Establishment of an SBA Direct Loan Program for Systemically 
Important Secondary Market Broker-Dealers (SISMBD Loan Program)
Sec.
120.1800 Definitions used in Subpart K.
120.1801 Program purpose.
120.1802 How does a broker-dealer participate in the SISMBD Loan 
Program?
120.1810 What is a Systemically Important SBA Secondary Market 
Broker-Dealer (SISMBD)?
120.1820 What are the basic eligibility requirements for SBA 
designation as a Systemically Important Secondary Market Broker-
Dealer?
120.1821 What is the process to obtain designation as a Systemically 
Important Secondary Market Broker-Dealer?
120.1822 What is the process to apply for an SISMBD Loan.

[[Page 59897]]

120.1823 Creditworthiness.
120.1824 How will an SISMBD receive notice of an approval or denial 
of a loan or a request for an advance under an SISMBD Loan?
120.1825 May an SISMBD request reconsideration after denial?
120.1830 What are the terms and conditions of an SBA loan to an 
SISMBD?
120.1831 Is there a limit to the number of SISMBD Loans or advances 
that an SISMBD may request from SBA?
120.1832 What is the minimum and maximum SISMBD Loan advance amount?
120.1833 May an SISMBD request an increase in the loan amount?
120.1834 What fees are associated with an SISMBD Loan?
120.1840 What are the allowable uses of proceeds of an SISMBD Loan?
120.1850 Will the Collateral be held by SBA?
120.1860 How will the SISMBD Loan be disbursed?
120.1870 How does the SISMBD provide funds for the Premium?
120.1880 How will the loan be repaid?
120.1881 How are payments on the Collateral allocated between the 
SISMBD borrower and repayment of the SISMBD Loan?
120.1882 What happens if funds to make required loan payments are 
not generated from the Collateral?
120.1890 What is the maturity on an SISMBD Loan from SBA?
120.1891 What happens if an SISMBD is ineligible to receive an 
SISMBD Loan or an advance?
120.1892 What happens if an SISMBD does not use SISMBD Loan funds 
for a statutorily mandated purpose?
120.1893 Data collections and reporting.
120.1900 When does the Secondary Market Lending Authority Program 
end?


Sec.  120.1800  Definitions used in subpart K.

    (a) Administrator. The Administrator of the U.S. Small Business 
Administration.
    (b) Authority. The Secondary Market Lending Authority defined 
herein.
    (c) Certificate. The document the FTA issues representing a 
beneficial fractional interest in a Pool (Pool Certificate), or an 
undivided interest in the entire guaranteed portion of an individual 
7(a) guaranteed loan (Individual Certificate).
    (d) Collateral (or Collateral for a SISMBD Loan). All Guaranteed 
Portions and Certificates (and proceeds thereof) that are purchased 
with SISMBD Loan proceeds, collateral assignments of the SBA Form 1086 
(Secondary Market Participation Agreement) or SBA Form 1088 (Form of 
Detached Assignment for U.S. Small Business Administration Loan Pool or 
Guaranteed Interest Certificate) for all Guaranteed Portions and 
Certificates purchased with SISMBD Loan proceeds, the agreement for 
Lender/FTA payment of amounts due under the Guaranteed Portions and 
Certificates, and any other asset that is pledged to secure an SISMBD 
Loan.
    (e) Commitment Letter. The document or documents containing the 
terms and conditions under which SBA agrees to lend money for a 
specific period of time to a Systemically Important SBA Secondary 
Market Broker-Dealer defined in Section 120.1810 of Subpart K and 
pursuant to Section 509 of the American Recovery and Reinvestment Act 
of 2009.
    (f) FTA. SBA's fiscal and transfer agent.
    (g) Guaranteed Portion. That portion of an SBA 7(a) loan sold in an 
SBA Secondary Market transaction. This guaranteed portion of a 7(a) 
loan once sold is certificated, carries a guarantee backed by the full 
faith and credit of the United States and bestows upon the Registered 
Holder the right to receive payments.
    (h) Individual Certificate. The instrument representing a 
beneficial interest in the Guaranteed Portion of an individual 7(a) 
loan sold in the SBA Secondary Market Program and carries a guarantee 
which is backed by the full faith and credit of the United States.
    (i) Loan Advance Request Form. The form approved by SBA wherein an 
SISMBD requests a specific dollar amount that will be used to purchase 
certain guaranteed portions or Certificates. This amount, when added to 
the balance outstanding of the SISMBD's existing SISMBD Loan, must be 
equal to or less than the SISMBD loan amount.
    (j) Loan Agreements. Collectively, any loan agreement executed 
between SBA and the SISMBD that contains the basic terms and conditions 
which control the SISMBD Loan, together with any notes, security 
documentation, custodial agreement, and any other ancillary 
documentation executed in connection therewith, including by reference, 
the regulations and other documents referenced in the regulations.
    (k) On-going Subsidy Fee. An annual fee collected monthly, based on 
the outstanding SISMBD loan balance, pursuant to section 509(F) of the 
Recovery Act, to result in a cost of the direct loan of zero, as 
determined under the Federal Credit Reform Act of 1990, as amended. 
These funds generated by the fee serve as a reserve for program losses. 
The fee will be published in a notice by SBA prior to the commencement 
of the Program and from time to time thereafter. SBA will communicate 
the SBA On-going Subsidy Fee to the systemically important broker-
dealers.
    (l) Pool Assembler. A financial institution that is authorized by 
SBA to:
    (1) Organize and package Pools by acquiring SBA guaranteed portions 
of 7(a) loans from Lenders or Individual Certificates from Registered 
Holders;
    (2) Resell fractional interests in the Pools to Registered Holders; 
and
    (3) Direct the FTA to issue Certificates.
    (m) Pool Certificate. The instrument representing a beneficial 
fractional interest in a Pool of SBA guaranteed portions of 7(a) loans. 
Pool Certificates are backed by the SBA guaranteed portions of 7(a) 
loans comprising a Pool and carry a timely payment guarantee which is 
backed by the full faith and credit of the United States.
    (n) Pool. The aggregate of SBA guaranteed portions of loans formed 
into a single pool by the Pool Assembler in accordance with the SBA 
Secondary Market laws, regulations and Program Guide.
    (o) Premium. Any amount in excess of the principal balance of a 
Guaranteed Portion or of a Certificate balance.
    (p) Program. The program authorized by Section 509 of the American 
Recovery and Reinvestment Act of 2009.
    (q) Registered Holder. The Certificate owner listed in the FTA's 
records.
    (r) SBA. The United States Small Business Administration, an agency 
of the United States Government.
    (s) SBA Secondary Market. Consists of the sale of Certificates, 
representing either the entire guaranteed portion of an individual 7(a) 
guaranteed loan or an undivided interest in a Pool consisting of the 
SBA guaranteed portions of a number of 7(a) guaranteed loans. 
Transactions involving interests in Pools or the sale of individual 
guaranteed portions of loans are governed by the contracts entered into 
by the parties, SBA's Secondary Market Program Guide, and Subpart F of 
Chapter 13 of the Code of Federal Regulations.
    (t) Secondary Market Lending Authority. The office established 
under Section 509(c) of the American Recovery and Reinvestment Act of 
2009 to provide loans to systemically important SBA Secondary Market 
broker-dealers to be used for the purpose of financing the inventory of 
the government guaranteed portion of loans originated, underwritten and 
closed under the Small Business Act or pools of such loans.
    (u) SISMBD. Systemically Important SBA Secondary Market Broker-
Dealer, as defined in Section 120.1810 of this Subpart K of Chapter 13 
of the Code of Federal Regulations.

[[Page 59898]]

    (v) SISMBD Loan Application. The application, in the form approved 
by SBA, wherein an SISMBD applies for an SISMBD Loan.
    (w) SISMBD Loan. A direct loan made by SBA to a Systemically 
Important SBA Secondary Market Broker-Dealer to assist with the 
financing of the purchase and sale of Guaranteed Portion of loans 
originated, underwritten and closed under Section 7(a) of the Small 
Business Act. Recipients of an SISMBD loan must use the proceeds for 
the sole purpose of purchasing Guaranteed Portions of 7(a) loans from 
SBA Lenders and Individual Certificates or Pool Certificates from 
Registered Holders.
    (x) On-going Subsidy Fee. An annual fee collected monthly, based on 
the outstanding SISMBD loan balance, pursuant to section 509(F) of the 
Recovery Act, to result in a cost of the direct loan of zero, as 
determined under the Federal Credit Reform Act of 1990, as amended. The 
funds generated by this fee serve as a reserve for program losses. The 
fee will be published in a notice by SBA prior to the commencement of 
the Program and from time to time thereafter.


Sec.  120.1801  Program purpose.

    Section 509 of the American Recovery and Reinvestment Act of 2009 
(Recovery Act) authorizes SBA to temporarily make direct loans to 
broker-dealers to ensure the continued operation of the SBA Secondary 
Market for 7(a) small business loans guaranteed by SBA. Such broker-
dealers are referred to in the Recovery Act as Systemically Important 
SBA Secondary Market Broker-Dealers.


Sec.  120.1802  How does a broker-dealer participate in the SISMBD Loan 
Program?

    A Pool Assembler must meet the eligibility requirements in Sec.  
120.1820, submit an SISMBD Loan Application to SBA that includes the 
information specified in Sec.  120.1822, obtain a written loan 
commitment from SBA, execute, among other documents, Loan Agreements, 
and satisfy all other SBA requirements. The Loan Agreements provide 
further details on the requirements that apply to an SISMBD seeking an 
SISMBD Loan.


Sec.  120.1810  What is a Systemically Important SBA Secondary Market 
Broker-Dealer (SISMBD)?

    A systemically important SBA Secondary Market broker-dealer as a 
Pool Assembler that has routinely engaged in the purchase and sale of 
the Guaranteed Portion of 7(a) loans or pools of Guaranteed Portions 
originated, underwritten and closed under the Small Business Act.


Sec.  120.1820  What are the basic eligibility requirements for SBA 
designation as a Systemically Important Secondary Market Broker-Dealer?

    (a) To be eligible for an SBA designation as an SISMBD a broker-
dealer must:
    (1) Be a Pool Assembler as defined in Subpart F Section 120.600 of 
this Part 120;
    (2) Satisfy all of the requirements of Section 120.630 this Part 
120;
    (3) Have not been suspended or terminated, and not be currently the 
subject of or eligible for an SBA suspension or termination procedure; 
and
    (4) Have engaged in a specific dollar volume of SBA Secondary 
Market purchases of Guaranteed Portions from SBA Lenders and 
Certificates from Registered Holders and have sold a specific 
percentage of the total dollar volume of sales of Pools in the SBA 
Secondary Market during the same timeframe.
    (b) Pool Assemblers that are unable to meet the requirements in 
paragrapgh (a) of this section at the commencement of the Program may 
qualify at a later date. On a quarterly basis SBA will review Pool 
Assembler Secondary Market activity and may designate additional 
broker-dealers as systemically important to the SBA Secondary Market.


Sec.  120.1821  What is the process to obtain designation as a 
Systemically Important Secondary Market Broker-Dealer?

    (a) SBA will determine which Pool Assemblers are Systemically 
Important SBA Secondary Market Broker-Dealers (SISMBDs) and will notify 
each in writing.
    (b) Once a Pool Assembler has been designated as an SISMBD, the 
designation will remain valid until February 16, 2011. After 
designation as an SISMBD, the Pool Assembler may apply for an SISMBD 
Loan following the procedures set forth in 120.1822 herein.


Sec.  120.1822  What is the process to apply for an SISMBD Loan?

    (a) To apply for an SISMBD Loan, an SISMBD must submit an SISMBD 
Loan Application to the Director of the Secondary Market Lending 
Authority.
    (b) The SISMBD Loan Application contains the following information:
    (1) Information demonstrating the applicant is creditworthy and has 
the resources to repay the loan;
    (2) A statement of the amount requested;
    (3) Applicant's IRS tax identification number;
    (4) A copy of applicant's most recent financial statements dated 
within 120 days of the application that was prepared by an accountant, 
including a copy of its most recent outside audit report, a balance 
sheet, an income and expense statement and a schedule of its secured 
debt obligations; and
    (5) A narrative describing the efforts undertaken by the firm to 
obtain credit on reasonable terms from private sources. This narrative 
must include name of the institution and a contact person for each 
lender contacted and should also include term sheets provided by 
potential lenders.


Sec.  120.1823  Creditworthiness.

    (a) Prior to approval of any SISMBD Loan Application or any advance 
under an SISMBD Loan, SBA shall consider the creditworthiness of the 
SISMBD. The SISMBD must be creditworthy in order to be approved for an 
SISMBD Loan or any advance under an SISMBD Loan.
    (b) Specific evidence of a lack of creditworthiness includes but is 
not limited to: Insolvency as defined in the Bankruptcy Code, failure 
to adhere to the terms of a previous SISMBD Loan, excessive dependence 
on borrowed funds, violations of the SBA Secondary Market rules, 
regulations and procedures, the effect any affiliates of the SISMBD may 
have on the ultimate repayment ability of the SISMBD, or any other 
relevant factor indicating a less than satisfactory condition or lack 
of repayment ability. The presence of one or more of these 
characteristics will not necessarily mean that an SISMBD is not 
creditworthy but may cause the partial or complete denial of a SISMBD 
Loan application.


Sec.  120.1824  How will an SISMBD receive notice of an approval or 
denial of a loan or request for an advance under an SISMBD Loan?

    (a) Applicants will receive notice of approval or denial of an 
SISMBD Loan or a request for an advance under such loan by SBA through 
written correspondence.
    (b) If a loan request is approved, SBA will issue a Commitment 
Letter.
    (c) Notice of a denial will include the specific reasons for the 
decision.
    (d) SBA reserves the right to reject any request for a loan or an 
advance, in whole or in part, in its sole discretion.


Sec.  120.1825  May an SISMBD request reconsideration after denial?

    (a) An applicant may request reconsideration of a denied loan 
request or a denied request for an advance within 30 days of receipt of 
a denial notice. All requests for reconsideration must be submitted to 
the Director of the Secondary Market Lending Authority. To prevail, the 
applicant must present

[[Page 59899]]

written information to demonstrate that it has overcome all reasons for 
the denial of a loan request or advance request. After 30 days from 
receipt of a denial notice, a new loan application or advance request, 
as appropriate, is required.
    (b) If the application is denied a second time, a second and final 
request for reconsideration may be submitted to the SBA Chief Financial 
Officer. The request must give specific reasons why the decline action 
should be reversed. All requests must be received within 30 days of the 
decline action.
    (c) The decision of the SBA Chief Financial Officer is final.


Sec.  120.1830  What are the terms and conditions of an SBA loan to an 
SISMBD?

    (a) Loan structure. Credit extensions under the SISMBD Loan Program 
will be in the form of revolving lines of credit loans that are fully 
collateralized by Guaranteed Portions and Certificates but with full 
recourse against the borrower. SISMBDs will obtain funds under the 
SISMBD Loan by requesting advances when needed to purchase Guaranteed 
Portions from SBA Lenders or Certificates from Registered Holders.
    (b) Loan amount. There is no statutory limit to the maximum loan 
size for a loan to a SISMBD, subject to the discretion of the 
Administrator. SBA has determined that the minimum loan size will be 
$10,000,000 and the maximum size of a SISMBD Loan at the time of loan 
approval will be equal to seventy-five percent (75%) of the total 
dollar amount of an SISMBD's purchases in the SBA Secondary Market 
during the twelve (12) month period of time immediately prior to SISMBD 
Loan Application receipt. The Director of the Secondary Market Lending 
Authority may approve a higher SISMBD Loan amount if he/she determines 
that additional lending capacity is essential to the continued 
participation of the SISMBD in the SBA Secondary Market in accordance 
with 120.1833(a).
    (c) Repayment terms. The monthly payments of principal and interest 
on the Certificates that are pledged as collateral for the SISMBD Loan, 
any partial or full prepayments on such collateral, and any SBA Lender 
purchases of defaulted loans will be assigned by the SISMBD to SBA and 
will be paid by the Lender into a segregated account at the FTA under 
SBA's ownership and control and applied to the SISMBD Loan. All 
proceeds from the sale of any pledged Collateral as described in Sec.  
120.1880(b) in this Subpart K must be paid by the purchaser to SBA or 
its agent to reduce the loan balance before any collateral is released. 
To the extent that SBA is required to make a payment on its guaranty of 
a Certificate, SBA will reduce the SISMBD Loan balance by the amount of 
the guaranty payment.
    (d) Prepayments. SISMBD Loans will be pre-payable in whole or in 
part at the option of the borrower.
    (e) Interest rate. SISMBD Loans shall have variable interest rates 
not to exceed the Federal Funds target rate as established by the 
Federal Reserve Board of Governors plus 25 basis points. The first 
change may occur on the first calendar day of the month following the 
initial disbursement using the base rate of the Federal Funds rate 
established by the Federal Reserve Board of Governors in effect on the 
first business day of that month. After the initial interest rate 
change, changes may occur no more often than monthly on the first 
calendar day of each month.
    (f) Collateral. All SISMBD Loans must be fully collateralized. As 
security for repayment of an SISMBD Loan, the SISMBD must pledge to SBA 
all Guaranteed Portions and Certificates (and the proceeds thereof) 
that it purchases with the SISMBD Loan proceeds and must grant SBA a 
first lien security interest in the Guaranteed Portions and 
Certificates (and the proceeds thereof). Additionally, the SISMBD must 
provide SBA with a collateral assignment, of the SBA Form 1086 
(Secondary Market Participation Agreement) or SBA Form 1088 (Form of 
Detached Assignment for U.S. Small Business Administration Loan Pool or 
Guaranteed Interest Certificate) for all Guaranteed Portions and 
Certificates purchased with SISMBD Loan proceeds. The SISMBD must also 
assign to SBA the payment of amounts due under the Guaranteed Portions 
and Certificates. All collateral documents must be executed and 
recorded and the first lien position verified before SBA will disburse 
funds under the SISMBD Loan. Substitution of collateral during the term 
of the loan generally will not be allowed. The SISMBD may not grant any 
junior security interests in the Collateral during the term of the 
SISMBD Loan.
    (g) Default. If for any reason an SISMBD is unable to make payment 
to SBA when due or any other event of default as described in the Loan 
Agreements occurs, SBA may, among other things, terminate availability 
under the SISMBD Loan, accelerate the SISMBD Loan, demand payment in 
full, and avail itself of any and all rights and remedies available 
under the Loan Agreements or otherwise available under the law.
    (h) Term. The SISMBD may continue to seek advances under an 
approved and fully documented SISMBD Loan until January 31, 2011. An 
SISMBD Loan maturity date must not exceed February 16, 2013.
    (i) On-going subsidy fee. An annual fee will be collected monthly, 
based on the outstanding SISMBD Loan balance, pursuant to section 
509(F) of the Recovery Act, to result in a cost of the direct loan of 
zero, as determined under the Federal Credit Reform Act of 1990, as 
amended. The funds generated by the fee serve as a reserve for program 
losses. The fee will be published in a notice by SBA prior to the 
commencement of the Program and from time to time thereafter. SBA will 
communicate the Ongoing Subsidy Fee to the systemically important 
broker-dealers.
    (j) Closing and execution of loan documents. Prior to the 
expiration of the Commitment Letter, SBA will schedule a closing on the 
SISMBD Loan. At closing, the SISMBD will be required to execute Loan 
Agreements, including but not limited to, a loan agreement, promissory 
note, security agreement, custodial agreement and other documents as 
required in SBA's sole discretion.
    (k) Review prior to advances. Prior to approving an advance request 
under an SISMBD Loan, SBA will require the SISMBD to represent and 
warrant that:
    (1) There has been no material adverse change in the SISMBD's 
financial condition, ownership structure or control persons or the 
overall nature of business since the approval of the SISMBD's loan 
application and
    (2) The SISMBD is not subject to any regulatory action and is not 
under civil or criminal investigation. SBA may conduct a review or 
require the SISMBD to provide information to verify the representations 
and warranties.


Sec.  120.1831  Is there a limit to the number of SISMBD Loans or 
advances that an SISMBD may request from SBA?

    No, there is no limit to the frequency in which an SISMBD may 
borrow under the Secondary Market Loan Program unless the Administrator 
determines that doing so would create an undue risk of loss to SBA or 
the United States. In order to mitigate the risk of loss, SBA has 
determined that an SISMBD may request an unlimited number of loans or 
advances as long as the balance outstanding on the SISMBD Loan does not 
exceed the total dollar limit stated in the Commitment Letter. SISMBD 
Loans will be structured as a revolving line of credit.

[[Page 59900]]

Sec.  120.1832  What is the minimum and maximum SISMBD Loan advance 
amount?

    There is no minimum or maximum loan advance amount. Because 
availability under the SISMBD Loan is capped as set forth in 120.1830, 
the amount of any loan advance cannot exceed the available credit 
identified in the Commitment Letter.


Sec.  120.1833  May an SISMBD request an increase in the loan amount?

    (a) SBA will consider a request for an increase in the maximum 
amount of an SISMBD Loan as identified in the Commitment Letter if the 
applicant can show the increase is essential to its continued 
participation in the SBA Secondary Market.
    (b) Applicants must request a loan increase by submitting an 
application to the Director of the Secondary Market Lending Authority 
by January 31, 2011.


Sec.  120.1834  What fees are associated with an SISMBD Loan?

    The borrower must pay to SBA an On-going Subsidy Fee which will 
cover SBA's subsidy costs associated with the SISMBD Loan Program.


Sec.  120.1840  What are the allowable uses of proceeds of an SISMBD 
Loan?

    (a) The SISMBD must use loan proceeds solely to purchase Guaranteed 
Portions from SBA Lenders, Individual Certificates or Pool Certificates 
from Pool Assemblers or Registered Holders.
    (b) SBA will not advance more than the purchase price of the 
Guaranteed Portions or the Certificate. Thus, if the Guaranteed Portion 
or Certificates are purchased at a discount to the principal balance, 
SBA will not advance more than the purchase price.
    (c) SBA will not finance the purchase of Guaranteed Portions or 
Certificates unless the Guaranteed Portions or Certificates carry an 
interest rate equal to or greater than the interest rate payable to SBA 
under the SISMBD Loan.
    (d) The SISMBD Loan proceeds shall not be used to purchase any 
Premium portion of a purchase price that is paid to a selling SBA 
Lender, Registered Holder, or any other individual or entity.
    (e) SISMBD Loan proceeds shall not be used to refinance existing 
debt of the SISMBD, finance existing inventory of the SISMBD, or for 
any purpose other than as set forth in this Section.


Sec.  120.1850  Will the Collateral be held by SBA?

    Yes, SBA or its expressly authorized agent will take physical 
possession of all Collateral. SBA or its expressly authorized agent 
shall maintain all Collateral for SISMBD Loans in a custodial account. 
Certificates held as Collateral must be in paper, not book entry form.


Sec.  120.1860  How will the SISMBD Loan be disbursed?

    (a) Loan proceeds will be disbursed to the FTA by SBA to be applied 
to the purchase price for the Guaranteed Portions or Certificates being 
purchased by the SISMBD. Disbursement to the FTA is contingent upon 
receipt by SBA, the FTA or SBA's settlement agent or custodian of the 
Guaranteed Portions or Certificates being purchased and any other 
Collateral required by SBA and verification of the required first lien 
position. SBA will advance the principal amount or the purchase price 
of the Guaranteed Portion or the Certificate, whichever is less. Thus, 
if the loan is purchased at a discount to the principal balance, SBA 
will not advance more than the purchase price.
    (b) Provided an SISMBD has executed all required loan documents, 
when an SISMBD requests an advance under its SISMBD Loan, it will 
submit a written Loan Advance Request Form to the FTA and SBA along 
with the SBA Form 1086 or 1088 for processing. The FTA will notify SBA 
that a particular SISMBD requests an advance of a certain amount of 
funds on a specific settlement date to purchase: a Guaranteed Portion 
which will be evidenced by an Individual Certificate, a Pool 
Certificate, or an existing Individual Certificate. Provided that the 
SISMBD has met all of the terms and conditions of the Loan Agreements, 
related documents, and these regulations, and is not in default under 
the loan documents, on the settlement date for the SBA Secondary Market 
transaction, SBA will wire the funds to the FTA. The FTA will use loan 
proceeds and any Premium payment from the SISMBD to pay the SBA Lender 
or Registered Holder the purchase price.
    (c) The SISMBD must identify the SBA Lender or Registered Holder 
expected to deliver to SBA or its settlement agent the Guaranteed 
Portions or Certificates that are being purchased with SISMBD Loan 
proceeds, and upon delivery the Guaranteed Portions or Certificates 
will become Collateral for the SISMBD Loan.
    (d) On the SBA Secondary Market transaction settlement date, the 
SBA Lender or Registered Holder will deliver the purchased Guaranteed 
Portion or Certificate to the FTA or SBA's settlement agent. The FTA or 
SBA's settlement agent will use loan proceeds and any Premium payment 
from SISMBD to pay the SBA Lender or the Registered Holder the purchase 
price upon delivery of all Guaranteed Portions or Certificates that 
collateralize the SISMBD Loan to the FTA or SBA's settlement agent and 
the Guaranteed Portions or Certificates will be placed in a custodial 
account.
    (e) Upon settlement the FTA, SBA, SBA's settlement agent and the 
administrator of the custodial account will register the loan advance 
and collateral pledge on their respective books and records.


Sec.  120.1870  How does the SISMBD provide funds for the Premium?

    If the SISMBD is paying a Premium for a Guaranteed Portion, an 
Individual Certificate or a Pool Certificate, it must use its own funds 
or other borrowed funds to cover the Premium. The SISMBD must send 
Premium payments to the FTA on or before the settlement date. The FTA 
will forward Premium payments to the selling SBA Lender or Registered 
Holder along with the SISMBD Loan funds. In this program, ``Premium'' 
is defined as any amount in excess of the principal balance of a 
Guaranteed Portion or of a Certificate balance.


Sec.  120.1880  How will the loan be repaid?

    (a)The monthly payments of principal and interest, any partial or 
full repayments, and any Lender purchases of defaulted loans on 
Certificates that have been pledged as collateral to secure an SISMBD 
Loan will be assigned by the SISMBD and will be paid by the Lender into 
a segregated account at the FTA under SBA's ownership and control. The 
FTA will forward such payments to SBA or its loan servicing agent as 
directed by SBA. The payments will be used to repay the SISMBD Loan.
    (b) When the SISMBD forms a Pool with Certificates pledged as 
Collateral for an SISMBD Loan or transfers a pledged Certificate, all 
proceeds, including the principal and accrued interest balance of the 
SISMBD Loan associated with the pledged Certificates, must be repaid to 
SBA as payment on the SISMBD Loan before SBA will approve the transfer, 
release any Collateral and terminate its security interest therein. SBA 
will not approve any transfers of Guaranteed Portions or Certificates 
at less than the par value or the original purchase price of the 
specific Guaranteed Portion or Certificate.
    (c) To the extent that SBA is required to make a payment on its 
guaranty of a Certificate, SBA will reduce the SISMBD Loan balance.

[[Page 59901]]

    (d) If the SISMBD Loan has a balance when a payment is required or 
when the SISMBD Loan matures, the SISMBD may make any required payment, 
pay the loan in full if it has matured and obtain possession of the 
Collateral, or SBA may exercise its rights under the Loan Agreements 
which may include terminating availability under the loan, accelerating 
the loan and demanding full repayment from the SISMBD, and selling all 
Collateral. The proceeds from the sale of the Collateral will be used 
to repay the SISMBD Loan and the SISMBD will be responsible for any 
remaining unpaid loan deficiency balance.


Sec.  120.1881  How are payments on the Collateral allocated between 
the SISMBD borrower and repayment of the SISMBD Loan?

    Unless otherwise provided in the Loan Agreements for a particular 
SISMBD Loan, any payment on Collateral must be assigned to SBA and must 
be used to repay the SISMBD Loan.


Sec.  120.1882  What happens if funds to make required loan payments 
are not generated from the Collateral?

    (a) The SISMBD is responsible for all principal and interest 
payments on an SISMBD Loan. If SBA does not receive full and timely 
remittances from the Collateral or the SISMBD borrower, SBA may enforce 
its rights against the SISMBD and the Collateral as set forth in the 
Loan Agreements, related documents and applicable law.
    (b) An SISMBD will have a 30 day grace period during which to make 
a supplemental payment if remittances from the Collateral are not 
sufficient to cover the SISMBD Loan payments when they are due. After 
the grace period, if the loan remains delinquent, SBA may enforce its 
rights as set forth in paragraph (a) of this section.


Sec.  120.1890  What is the maturity on a SISMBD Loan from SBA?

    The maximum maturity for an SISMBD Loan will be determined by SBA 
but must be no later than February 16, 2013. If the maturity of the 
Collateral is shorter than the maturity of the SISMBD Loan, the SISMBD 
Loan will be due and payable upon payment in full of the Collateral. If 
the SISMBD Loan has a balance on its maturity date, the SISMBD must pay 
the loan in full or SBA will exercise any or all of its rights as 
described in Sec.  120.1830(g) or Sec.  120.1882(a).


Sec.  120.1891  What happens if an SISMBD is ineligible to receive an 
SISMBD Loan or an advance?

    If an SISMBD that has received funds from an SISMBD Loan or an 
advance is found to be ineligible for the loan or any advance under the 
loan or is found to have knowingly breached a representation, the 
SISMBD must immediately repay the loan in full upon demand by SBA or 
SBA will exercise its rights as described in Sec.  120.1830(g).


Sec.  120.1892  What happens if an SISMBD does not use SISMBD Loan 
funds for a statutorily mandated purpose?

    If the Administrator finds that an SISMBD has used loan proceeds 
for any purpose other than to finance the inventory of the government 
guaranteed portion of loans originated, underwritten, and closed under 
Section 7(a) of the Small Business Act or Pools of such loans, the 
Administrator shall:
    (a) Demand immediate repayment of any outstanding loans to the 
SISMBD;
    (b) Prohibit the SISMBD, its affiliates, or any future corporate 
manifestation of the SISMBD from using the SBA Secondary Market Lending 
Authority;
    (c) Report to Congress the identity of any borrower found by the 
Administrator to have misused funds made available under the Secondary 
Market Loan Program; and
    (d) Take any other actions the Administrator, in consultation with 
the Attorney General of the United States, deems appropriate.


Sec.  120.1893  Data collections and reporting.

    (a) Data--general. A recipient of an SISMBD Loan shall maintain 
such records as may be prescribed by SBA to:
    (1) Disclose the manner in which an SISMBD Loan is used;
    (2) Determine:
    (i) The total outstanding loan amount;
    (ii) The total amount repaid on the loan;
    (iii) The aggregate value of assets held as collateral for the 
SISMBD Loan; and
    (iv) The amount of any defaults or delinquencies that occurred on 
the loan;
    (3) Demonstrate compliance with the requirements of this part; and
    (4) Evaluate the impact of the SISMBD Loan Program on its SBA 
Secondary Market activity.
    (b) Access to records. An SISMBD Loan recipient must submit such 
financial and SBA Secondary Market activity reports, records, 
statements, and documents at such times, in such forms, and accompanied 
by such reporting data, as required by SBA, the SBA Office of the 
Inspector General, or other authorized government personnel upon 
request or upon a request by their duly authorized representatives to 
ensure compliance with the requirements of this Subpart and to evaluate 
the impact of the SISMBD Loan Program. SBA or other authorized 
government personnel and their duly authorized representatives, shall 
have full and free access to SISMBD offices and facilities and all 
books, documents, records, and financial statements relating to the use 
of SISMBD Loan proceeds during normal business hours and may copy such 
documents as they deem appropriate.
    (c) Retention of records. A recipient of an SISMBD Loan shall 
comply with all SBA mandated record retention requirements.
    (d) Review. (1) At least annually, SBA will review the SBA 
Secondary Market activity of an SISMBD Loan recipient.
    (2) A loan recipient shall submit a report of SBA Secondary Market 
activity, SISMBD Loan usage and updated financial statements within 45 
days after the end of each calendar quarter, or within some other 
period after the end of each calendar quarter as may be agreed to in 
the Loan Agreements with information requested by SBA.
    (3) A recipient shall submit a report within 60 days after the end 
of each
    Federal fiscal year, or by such alternative deadline as may be 
agreed to in the Loan Agreements or as required by the Recovery Act on: 
information on the number of Guaranteed Portions it purchased from SBA 
Lenders; information describing the manner in which SISMBD Loan 
proceeds were used. SBA will use such information to verify that loan 
proceeds were used in a manner consistent with the Loan Agreements, the 
Recovery Act and these regulations; certification that an SISMBD 
continues to meet the eligibility requirements described in Section 
120.1820 of this Subpart; and its most recent audited financial 
statements prepared by an independent certified public accountant. Such 
statements shall cover the operations of the recipient's most recently 
completed fiscal year.
    (4) SBA may make reports described in paragraph (d)(2) and (d)(3) 
of this section available for public inspection.
    (e) Reporting requirements. SISMBD Loan recipients will have 
reporting requirements related to section 1512 of the Recovery Act. SBA 
will provide additional separate guidance on the Recovery Act reporting 
requirements.


Sec.  120.1900  When does the Secondary Market Lending Authority 
Program end?

    The last date on which a loan under this program can be approved is

[[Page 59902]]

February 16, 2011, unless Congress extends the SISMBD Loan Program. All 
loan applications must be received at SBA no later than January 31, 
2011. Loans must be paid in full by no later than February 16, 2013.

Karen G. Mills,
Administrator.
[FR Doc. E9-27743 Filed 11-17-09; 11:15 am]
BILLING CODE 8025-01-P