[Federal Register Volume 76, Number 33 (Thursday, February 17, 2011)]
[Rules and Regulations]
[Pages 9213-9219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3470]



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  Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / 
Rules and Regulations  

[[Page 9213]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AG17


Small Business Jobs Act: 504 Loan Program Debt Refinancing

AGENCY: U.S. Small Business Administration.

ACTION: Interim final rule with request for comments.

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

SUMMARY: This interim final rule implements section 1122 of the Small 
Business Jobs Act of 2010 (Jobs Act), which authorizes projects 
approved for financing under Title V of the Small Business Investment 
Act to include the refinancing of qualified debt. This interim final 
rule revises the existing 504 Loan Program rules to make them 
consistent with section 1122 of the Jobs Act.

DATES: Effective Date: This rule is effective February 17, 2011.
    Comment Date: Comments must be received on or before May 18, 2011.

ADDRESSES: You may submit comments, identified by RIN 3245-AG17, by any 
of the following methods:
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments.
    Mail: Andrew B. McConnell Jr., Small Business Administration, 
Office of Financial Assistance, 409 Third Street, SW., 8th Floor, 
Washington, DC 20416.
    Hand Delivery/Courier: Andrew B. McConnell Jr., Small Business 
Administration, Office of Financial Assistance, 409 Third Street, SW., 
8th Floor, 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 Andrew B. McConnell, Jr., 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: Andrew B. McConnell, Jr. at 
[email protected] or 202-205-7238.

SUPPLEMENTARY INFORMATION: 

I. Background Information

    The 504 Loan Program is a long-term financing tool for economic 
development that provides small businesses with long-term, fixed-rate 
financing to help acquire major fixed assets for expansion or 
modernization. A Certified Development Company (CDC) is typically a 
private, nonprofit corporation set up to contribute to the economic 
development of its community. CDCs work with SBA and private sector 
lenders to provide financing to small businesses under the 504 Loan 
Program. In general, a 504 project includes: A loan obtained from a 
private sector lender with a senior lien covering at least 50 percent 
of the project cost; a loan obtained from a CDC with a junior lien 
covering up to 40 percent of the total cost (backed by a 100 percent 
SBA-guaranteed debenture); and a contribution from the Borrower of at 
least 10 percent equity.
    The Small Business Jobs Act of 2010 (Jobs Act), Public Law 111-240, 
124 Stat. 2504, enacted on September 27, 2010, temporarily expands the 
ability of a small business to use the 504 Loan Program to refinance 
certain qualifying existing debt. The expanded authority is available 
for two years only. Prior to the Jobs Act, in a typical 504 project 
with a refinancing component, the borrower was required to use a 
significant portion of the loan proceeds for expansion of the business. 
See 13 CFR 120.882(e). The temporary Jobs Act program authorizes the 
use of the 504 Loan Program for the refinancing of debt where there is 
no expansion of the small business concern.
    SBA is aware that there is a substantial amount of small business 
commercial first mortgage debt that was incurred 3-5 years ago that is 
maturing, typically through balloon mortgages, and in need of 
refinancing. In addition, credit availability for small businesses has 
decreased during the recent economic turmoil, and there may not be 
sufficient conventional lending capacity to handle this wave of 
refinancing. Further, real estate values have declined significantly in 
many parts of the country in recent years, which will make it more 
difficult for small businesses to refinance their maturing mortgages in 
the conventional market. By helping small businesses refinance current 
mortgages and lock in lower, long-term interest rates, this temporary 
Jobs Act program will help to provide the assistance needed by small 
businesses to avoid liquidation or foreclosure and improve their 
prospects for survival. It will also help to stabilize the commercial 
real estate market, as well as encourage lenders to increase lending by 
improving the health of their portfolios.
    SBA has determined that this refinancing program will initially 
apply only to loans maturing on or before December 31, 2012 in order to 
assist those small businesses most in need with the limited resources 
available. SBA will publish a Notice in the Federal Register extending 
this date based on SBA's assessment of any change in available 
resources and market conditions. In addition, SBA will monitor the use 
of the program capacity of SBA and the CDC industry to handle the 
demand for this program and market conditions to determine whether SBA 
should also allow a debt to be refinanced if it is not maturing within 
the set timeframe but the refinancing would provide a ``substantial 
benefit'' to the Borrower. If SBA determines to allow such refinancing 
based on the ``substantial benefit'' criteria, SBA will announce such 
determination through a Notice published in the Federal Register, and 
will apply 13 CFR 120.882(e)(5) in implementing it.
    The interim final rule also includes a provision requiring the 
Borrower to pay a supplemental annual guarantee fee, in addition to the 
existing annual guarantee fee, to cover the additional cost 
attributable to the refinancing program under the Jobs Act. SBA has 
determined that the total annual guarantee fee assessed for loans 
approved for refinancing during Fiscal Year 2011 will be 1.043% 
annually on

[[Page 9214]]

the unpaid principal balance of the debenture. If necessary, SBA will 
publish, at least sixty days before the beginning of the new Fiscal 
Year, a Notice in the Federal Register of any change in the fee for 
loans approved during Fiscal Year 2012. This fee will be assessed and 
collected in the same manner as the current annual SBA guarantee fee 
under 13 CFR 120.971(d)(2).
    SBA has also determined that the loan structure for the Refinancing 
Project will be the same as in the 504 program generally, with the 
Third Party Lender contributing at least 50% of the fair market value 
of the fixed assets serving as collateral for the refinancing, the 504 
loan contributing no more than 40% of such fair market value, and the 
Borrower contributing at least 10% of such fair market value. 
Consistent with current regulations, SBA will only require a 10% 
injection by the Borrower when the fixed asset serving as collateral is 
a limited or special purpose building because the higher contribution 
amounts (15% or 20% injection) apply only when these types of buildings 
are being acquired, constructed, expanded or converted. See 13 CFR 
120.910(a)(2). In this case, the sole purpose of the loan is 
refinancing existing debt and, thus, no further contribution will be 
required of the Borrower.
    SBA will permit the equity, if any, in the Eligible Fixed Asset 
securing the loan being refinanced to be counted toward the Borrower's 
10% contribution, provided it is supported by the independent appraisal 
of the fair market value of that asset. In addition, if the fair market 
value of the Eligible Fixed Asset exceeds the existing debt but the 
Borrower does not have 10% equity in the asset, SBA will permit the 
equity in any other fixed assets that are acceptable to SBA to serve as 
collateral for the Refinancing Project and to be counted toward the 
Borrower's 10% contribution, provided that there is an independent 
appraisal of the fair market value of the additional asset(s). As 
discussed in the previous paragraph, the Third Party Loan and the 504 
loan will not exceed 90% of the fair market value of all of the fixed 
assets serving as collateral for the Refinancing Project.
    In the event that the outstanding principal balance on the existing 
loan is more than 90% of the current fair market value of the Eligible 
Fixed Assets securing the loan being refinanced, SBA will also permit 
the Borrower to contribute the equity in other fixed assets acceptable 
to SBA as collateral to increase the amount of the Refinancing Project, 
provided that there is an independent appraisal of the fair market 
value of the additional asset(s). Again, the Third Party Loan and the 
504 loan will not exceed 90% of the fair market value of all of the 
fixed assets serving as collateral for the Refinancing Project.
    In addition, the Jobs Act defines ``qualified debt'' to mean 
indebtedness ``the proceeds of which were used to acquire an eligible 
fixed asset''. SBA believes that it is consistent with this definition 
to allow a debt to be refinanced where substantially all of the 
proceeds of that debt were used to acquire an eligible fixed asset. By 
``substantially all'', SBA means ``almost all'' or ``nearly all'' of 
the proceeds, and a Borrower will satisfy this standard where it used 
at least 85% of the proceeds of the existing debt to acquire an 
Eligible Fixed Asset. The remaining 15% of the proceeds must also have 
been incurred for the benefit of the small business. In implementing 
these requirements, SBA will require the Borrower to certify that the 
existing debt satisfies these requirements, and will require the Third 
Party Lender to certify that it has no reason to believe that the 
existing debt does not satisfy these requirements. In addition, SBA may 
require, on a random basis, for a borrower and/or lender to submit 
additional documentation supporting the substantially all assertion. 
SBA is also amending 13 CFR 120.882(e)(1) to incorporate this criteria, 
and to make the existing debt refinancing program involving expansions 
consistent with this new debt refinancing program.
    The Jobs Act also authorizes the Agency to provide financing under 
this debt refinancing program ``to be used solely for the payment of 
business expenses.'' The statute requires that the application for the 
financing of business expenses include a specific description of the 
expenses for which the additional financing is requested and an 
itemization of the amount of each expense. The statute expressly 
prohibits the borrower from using any part of the financing under this 
clause for non-business purposes. SBA will need time to implement this 
provision for the financing of business expenses. New controls will 
need to be developed to ensure that these funds are used in accordance 
with the statute, without requiring a burdensome level of detailed 
justification of expenditures. As the procedures for this portion of 
the legislation will be new to the CDCs and require the development of 
additional procedures for SBA staff, SBA is requesting input from 
interested parties regarding the level of detail that SBA should 
require to meet the statutory mandate that all proceeds be used for 
business purposes. The aim is a balance between excessive controls and 
ensuring that a business owner does not knowingly or unknowingly use 
the loan proceeds for personal purposes. With the immediate need for 
refinancing, the Agency is proceeding with this interim final rule to 
implement the refinancing component while continuing to consider the 
most efficient and effective manner in which to implement the business 
expense component of this new program. The Agency invites comments from 
interested parties on how best to and whether to implement this 
provision.
    In addition, the Jobs Act includes a provision that states that 
``if the appraised value of the eligible fixed assets serving as 
collateral for the financing is less than the amount equal to 125 
percent of the amount of the financing, the borrower may provide 
additional cash or other collateral to eliminate any deficiency''. The 
Agency is continuing to review the scope of this provision and how it 
should be implemented, and invites comments from interested parties on 
this provision.
    Further, SBA has determined that, with the limited resources 
available for this refinancing program, it will not at this time 
refinance Third Party Loans that are already part of an existing 504 
Project. These Third Party Lenders have already benefitted from having 
access to subordinated debt provided by the Federal government, and 
also have other tools to assist borrowers that are experiencing 
financial difficulties, such as deferments in loan payments and workout 
plans. SBA will continue to consider the option of allowing the 
refinancing of existing Third Party Loans, and invites comments from 
interested parties on this issue.
    This debt refinancing program is available for the refinancing of 
same institution debt which, similar to the definition for debt 
refinancing involving expansions in 13 CFR 120.882(e)(8), is defined as 
any debt of the CDC or the Third Party Lender that are providing funds 
for the refinancing, or the debt of affiliates of either. To protect 
the program from incurring unnecessary losses in the refinancing of 
same institution debt, and in accordance with 13 CFR 120.884(b), a CDC 
may not use 504 loan proceeds to pay any creditor in a position to 
sustain a loss causing a shift to SBA of all or part of a potential 
loss from an existing debt. SBA will require the CDC and the Third 
Party Lender to make certifications with respect to this standard for 
same institution debt. Whether there is a shift

[[Page 9215]]

to SBA of a potential loss should be determined by assessing the 
potential loss to SBA associated with the Refinancing Project (e.g., 
the business is experiencing a significant threat to its viability or 
existence although the business is current on its outstanding debt). In 
addition, SBA will require a refinancing involving same institution 
debt to supply a full transcript of the loan payment history instead of 
only one year. The Jobs Act also provides that this refinancing program 
is not available to any loan that is subject to a guarantee by a 
Federal agency, which includes 7(a) loans. SBA also reminds lenders and 
CDCs that the refinancing of the existing debt must meet the ``credit 
elsewhere'' criteria currently applicable to the 504 Program. See 13 
CFR 120.101. SBA will require the Third Party Lender to certify that it 
would not refinance the qualified debt without the assistance made 
available under this rule. In addition, to avoid a conflict of 
interest, or the appearance of a conflict of interest, in connection 
with the refinancing of debts owed to investment companies, SBA is 
amending 13 CFR 120.130(b) to prohibit the use of loan proceeds for the 
refinancing of a debt owed to a New Markets Venture Capital Company.
    Finally, the authority provided by the Jobs Act is available for 
loan applications received by SBA on or after the effective date of 
this rulemaking and approved by SBA through September 27, 2012.

II. Section-by-Section Analysis

    Section 120.130(b). To avoid conflicts of interest, or the 
appearance of conflicts of interest, in connection with the refinancing 
of debts owed to investment companies, SBA is amending this provision 
to prohibit the use of loan proceeds for the refinancing of a debt owed 
to a New Markets Venture Capital Company.
    Section 120.882(e)(1). SBA is amending this provision to make the 
existing debt refinancing program involving expansions consistent with 
the new paragraph (g). As amended, this provision will allow debt 
refinancing involving expansions where substantially all (85% or more) 
of the proceeds of the indebtedness had been used to acquire Eligible 
Fixed Assets, and the remaining 15% of the proceeds had been incurred 
for the benefit of the small business concern.
    Section 120.882(g). Under current regulations, SBA may only provide 
refinancing under the 504 Loan Program when the refinancing is provided 
in conjunction with an expansion by the small business. The Jobs Act 
temporarily authorizes refinancing without an expansion. SBA is adding 
a new paragraph (g) to Sec.  120.882 to implement this new authority 
for refinancing existing eligible debt under the 504 loan program. This 
new paragraph sets forth the terms and conditions under which non-
expansion refinancing will be permitted in the 504 program. For 
example, it:
    (1) Provides that the financing provided by the Third Party Loan 
and the 504 loan may be no more than 90% of the fair market value of 
the fixed assets that will serve as collateral for the Refinancing 
Project, as established by an independent appraisal, but in no event 
may exceed the outstanding principal balance of the qualified debt;
    (2) Provides that the Borrower pays an annual guarantee fee to 
cover the full cost attributable to the refinancing program. SBA has 
determined that the amount of this guarantee fee for loans approved 
during Fiscal Year 2011 is 1.043% annually on the unpaid principal 
balance of the debenture. If SBA determines that the fee must be 
changed to cover the costs for loans approved during Fiscal Year 2012, 
SBA will publish a Notice of the change in the Federal Register;
    (3) Incorporates the definition of ``qualified debt'' set forth in 
the Jobs Act and includes several new defined terms, including 
``Refinancing Project'';
    (4) Incorporates the alternate job retention goal set forth in the 
Jobs Act for Borrowers that do not meet the job creation and retention 
goals under Sec. Sec.  501(d) and (e) of the Small Business Investment 
Act. Under this alternate job retention goal, the Agency may provide a 
504 loan in an amount that is not more than the product obtained by 
multiplying the number of employees of the borrower by $65,000. An 
example of how this alternate job retention goal is calculated is 
included in the rule;
    (5) Provides that, in accordance with the Jobs Act, the authority 
to approve the refinancing is not delegated to the PCLP CDCs;
    (6) Provides that refinancing will be initially available only for 
those loans that mature on or before December 31, 2012, unless SBA 
publishes a Notice in the Federal Register to extend the timeframe. In 
addition, depending on the program capacity of SBA and the CDC industry 
to handle the demand for this program and market conditions, SBA may in 
the future also permit a debt to be refinanced if it would provide a 
substantial benefit to the Borrower, as defined and in accordance with 
13 CFR 120.882(e)(5). In such case, SBA will publish a Notice of this 
change in the Federal Register;
    (7) Provides that the loan must be disbursed within 6 months after 
loan approval, unless the Director for Financial Assistance or his 
designee determines, upon request, that a longer disbursement period is 
appropriate for good cause. SBA expects disbursement extensions to be 
rare, and includes this time limitation on disbursements to ensure that 
funds not used in a timely manner may be made available to other small 
businesses during this limited two-year program;
    (8) Provides that, consistent with 504 Loan Program requirements, 
the funding for the Refinancing Project must come from three sources 
based on the current fair market value of the fixed assets serving as 
collateral for the Refinancing Project, including not less than 50% 
from the Third Party Lender, not less than 10% from the Borrower, and 
not more than 40% from the 504 loan;
    (9) Prohibits same institution debt refinanced under this program 
from being sold in the secondary market as part of a pool guaranteed 
under subpart J of part 120 of 13 CFR; and
    (10) Identifies eligible project costs which may be paid with the 
proceeds of the refinancing.
    Section 120.884. SBA amends Sec.  120.884(a) to include this new 
authority as an additional exception to the general prohibition against 
using proceeds of the 504 loan for debt refinancing.

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 to this standard 
rulemaking process where the agency finds good cause to adopt a rule 
without prior 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 exists to publish this rule as an interim final rule in light of 
the urgent need to help small businesses

[[Page 9216]]

sustain and survive during this economic downturn and the short-term 
nature of this new authority. This new refinancing authority will offer 
a significant opportunity for businesses, allowing them to restructure 
existing debt into new 504 financings that will help secure the 
financial stability of their businesses which will, in turn, help them 
to survive and save jobs. It also has the potential to quickly free up 
critical capital for small business owners across the country, allowing 
them to continue to operate and potentially expand and add jobs. This 
new authority is only available until September 27, 2012 and would have 
less impact if delayed until notice and comment rulemaking could be 
completed. Advance solicitation of comments for this rulemaking would 
be contrary to the public interest because it would harm those small 
businesses that need immediate access to capital. However, SBA did hold 
a public forum in Boston, Massachusetts on November 17, 2010, in which 
more than 120 persons participated in person or by phone offering their 
suggestions on how the Agency should implement section 1122 of the Jobs 
Act.
    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 the deadline for comments 
stated in this rule. 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. 
As this rule is implementing new authority that expands the 504 
Program's current authority to refinance debt and does not restrict 
current behavior, there is no need for the public to adjust its 
behavior before the rule takes effect. Furthermore, any delay in the 
effective date would deny small businesses immediate access to credit, 
and an immediate effective date will maximize the rule's value to small 
businesses and its effect on the economy. SBA therefore finds that 
there is good cause for making this rule effective immediately instead 
of observing the 30-day period between publication and effective date. 
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 has determined that this rule 
constitutes a ``significant regulatory action'' under Executive Order 
12866 thus requiring Regulatory Impact Analysis as set forth below.
A. Regulatory Objective of the Interim Final Rule
    The objective of the debt refinance program authorized by the Jobs 
Act interim final rule is to expand the 504 loan program to include a 
refinancing component that does not involve small business expansion. 
This is a two-year program that is authorized through September 27, 
2012. The interim final rule will promote better understanding of 
Agency requirements by CDCs, lenders, and small business borrowers.
B. Baseline Costs
    As this is an addition to the existing 504 program, there is no 
historical cost data for this new program component for comparison or 
projections. Similar costs may be assumed based on the historical costs 
for the 504 loan program, as the application for the Jobs Act 504 
refinance program is expected to be almost identical to the existing 
application and eligibility checklist for the existing 504 loan 
program. The costs to CDCs will vary between ASM (Abridged Submission 
Method) CDCs and non-ASM (non Abridged Submission method) CDCs, as loan 
packages from ASM CDCs have an abridged list of required documents to 
submit. Based on historical ASM and non-ASM submissions, SBA 
anticipates that 68% of 504 debt refinance loan volume will be ASM loan 
packages and 32% will be non-ASM loan packages.
    SBA anticipates that 21,300 refinance loans will be processed, of 
which 14,484, or 68%, are estimated to be submitted by ASM CDCs and 
6,816, or 32%, are estimated to be submitted by non-ASM CDCs.
    Based on the length of time SBA takes to review and process 504 
applications, SBA is estimated to take an average of 8.4 hours to 
review and respond to ASM applications and 8.7 hours to review and 
respond to non-ASM applications.
C. Potential Benefits and Costs of the Interim Final Rule
(a) Potential Benefits and Costs to Lenders
    The interim final rule would improve access to capital for 
businesses with the need to refinance but that will not be expanding 
their business. The cost differential between an application for the 
regular 504 program and the Jobs Act 504 debt refinance program 
application and checklist are negligible.
    The ability to refinance debt will improve the small businesses 
cash flow, improve their financial ability to operate, improve the 
long-term viability of the small business, and facilitate job 
retention. Another potential benefit is the reduction in the number of 
loan servicing actions due to deferments or catch-up plans and reducing 
the likelihood that the business might be overcome by its indebtedness 
burden which could result in liquidation. Fewer servicing actions would 
potentially reduce the cost to CDCs and reduce the number of 
delinquent, deferments, default and liquidation cases. These changes 
would reduce the costs of loan servicing and liquidation processes for 
lenders as well.
    SBA does not know of any specific additional costs that would be 
imposed on CDCs or lenders as a result of this interim final rule. SBA 
is requesting comments from the public on any monetized, quantitative 
or qualitative costs of CDC and Lender compliance with this rule. 
Please send comments to the SBA official referenced in the Addresses 
section of the preamble.
(b) Potential Benefits and Costs to CDCs and Borrowers
    As provided by the Jobs Act, the interim final rule contains a 
provision that temporarily expands the ability of a small business to 
use the Section 504 Certified Development Company Loan program to 
refinance certain qualifying existing debt. To implement this new 
program, CDCs will package 504 debt refinance loan applications and 
service these loans for small business borrowers. For Borrowers, the 
cost benefit of lower interest rates and improved financial terms would 
significantly outweigh the costs of preparing the Jobs Act 504 debt 
refinance application and checklist in order to apply for the 
assistance provided by the program.
    CDCs would benefit from increased loan volume due to the Jobs Act 
504 debt refinance project. This new program will meet a new market 
demand for 504 debt refinancing for projects that do not involve 
expansion.

[[Page 9217]]

This will increase CDC income from packaging, processing, servicing and 
closing income as a result of the program, which would far outweigh any 
burdens associated with the preparation and submission to SBA of 504 
debt refinance loan applications. As CDCs are delivering the 504 
program, the increased cost to provide the SBA 504 debt refinance 
program will be negligible when compared to the substantial increase in 
CDC revenue.
    SBA expects that CDCs and Borrowers would incur some additional 
costs as a result of this interim final rule. Due to the increased risk 
of 504 debt refinance applications as compared to the current 504 
program, and in accordance with the Jobs Act, a supplemental subsidy 
fee of 29.4 basis points, or .294%, will be imposed on Borrowers to 
cover the additional cost attributable to the refinancing of qualified 
debt.
    The costs to CDCs will vary between ASM (Abridged Submission 
Method) CDCs and non-ASM (non Abridged Submission method) CDCs, as loan 
packages from ASM CDCs have an abridged list of required documents to 
submit. Based on historical ASM and non-ASM submissions, SBA 
anticipates that 68% of 504 debt refinance loan volume will be ASM loan 
packages and 32% will be non-ASM loan packages.
    SBA anticipates that CDCs would likely submit to the Agency for 
approval an estimated 21,300 504 debt refinance applications over the 
two-year period of the program. This is a significant increase of the 
SBA program current 8,500 annual 504 loan application volume.
    For ASM CDCs, SBA estimates that the average time for completion of 
each application would consist of 8.4 hours at an average cost of $45 
per hour. Therefore, the annual costs of submitting 504 debt refinance 
applications under the interim final rule would be 14,484 loan 
applications x 8.4 hours for an estimated cost of $45/hour for a two-
year total of $5,474,952.
    For Non-ASM CDCs, SBA estimates that the average time for 
completion of each application would consist of 8.7 hours at an average 
cost of $35 per hour. Therefore, the annual costs of submitting 504 
debt refinance applications under the interim final rule would be 6,816 
loan applications x 8.7 hours for an estimated cost of $45/hour for a 
two-year for non-ASM debt refinance applications of $2,668,464. The 
total estimated annual costs for ASM and non-ASM applications combined 
would be $8,143,416 for the two-year period of the Jobs Act.
    For the CDCs, there are duplication and shipping costs associated 
with loan submission. Based on historical cost information for the 504 
program, the copying and shipping costs using ASM ranges from $15-$50 
per loan package and for non-ASM $25-$60 per loan package. This 
variance in costs depends on the complexity of the loan application and 
whether the application is submitted through the ASM or non-ASM Method.
    SBA is requesting comments from the public on any monetized, 
quantitative or qualitative costs of CDCs compliance with this rule. 
Please send comments to the SBA official referenced in the ADDRESSES 
section of the preamble.
(c) Potential Benefits and Costs for SBA and the Federal Government
    The interim final rule would benefit SBA because it would enable 
the Agency to increase access to capital to small business borrowers to 
refinance debt without expansion during the temporary period of this 
debt refinancing program. This would result in the submission of an 
estimated 21,300 504 debt refinance applications.
    In order to carry out this new program, SBA will hire 50 additional 
staff for the Sacramento Loan Processing Center at an average cost of 
$92,000 per staff member per year, or an annual estimated salary total 
of $4,600,000 or a 2 year total of $9,200,000.
    As indicated above, SBA anticipates that 21,300 refinance loans 
will be processed, of which 14,484, or 68%, are estimated to be 
submitted by ASM CDCs and 6,816, or 32%, are estimated to be submitted 
by non-ASM CDCs.
    Based on the length of time SBA takes to review and process 504 
applications, SBA is estimated to take an average of 8.4 hours to 
review and respond to ASM applications and 8.7 hours to review and 
respond to non-ASM applications. For ASM applications, this equates to 
8.4 hours at $45 hour x 14,484 applications for an estimated cost of 
$5,474,952 for ASM refinance loan application for the two-year program 
period. For non-ASM applications, this equates to 8.7 hours at $45 hour 
for an estimated cost x 6,816 for a total annual estimated cost of 
$2,668,464 for non-ASM refinance loan application. SBA estimates the 
combined cost of reviewing ASM and non-ASM applications to be 
$8,143,416 for the two year period of the Jobs Act.
    Furthermore, the Agency must hire two full-time staff for lender 
oversight at an average cost of $135,000 per year or a total of 
$540,000 for the two-year period of the Jobs Act. In addition, contract 
dollars of $105,000 per year, or $210,000 for the two-year period of 
the Jobs Act, will be utilized to assist with analysis and oversight. 
The total estimate cost of oversight of the 504 debt refinance program 
for the two-year period of the Jobs Act is estimated at $750,000.
D. Alternatives to Interim Final Rule
    This interim final rule is SBA's best available means for achieving 
its regulatory objective of implementing the Jobs Act debt refinance 
program authorized by Public Law 111-240, 124 Stat. 2504, enacted on 
September 27, 2010. SBA is requesting comments from the public on any 
potentially effective and reasonably feasible alternative to this rule 
as it applies to CDCs and Lenders and the costs and benefits of those 
alternatives. Please send comments to the SBA official in the ADDRESSES 
section of the preamble.
    SBA has not identified any reasonable alternative to this interim 
final rule to implement this new debt refinancing authority.

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 or retroactive 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.

Executive Order 13563

    To the extent practicable given the need to make this temporary, 2-
year refinance program operational expeditiously in order to assist as 
many small businesses as possible, this rule was developed in keeping 
with the intent of this Executive Order. SBA solicited suggestions and 
comments on how best to implement the Jobs Act from the affected 
stakeholders and the public as a whole. SBA provided notice of a public 
forum in the Federal Register, which was held in Boston, Massachusetts 
on November 17, 2010. More than 100 persons attended in person or by 
phone and 23 individuals provided testimony. In addition, SBA announced 
a Web site and solicited comments for a 30 day period. The final

[[Page 9218]]

structure of the program was significantly shaped by those comments, 
especially the decision to keep the same basic 504 financing structure 
for same institution debt refinancing as for a new institution 
refinancing another lender's debt.
    By adhering as closely as possible to the procedures and conditions 
of SBA's existing permanent 504 refinancing program, any burden that 
this rule may have imposed on the affected stakeholders is lessened. In 
addition, SBA adopted a new procedure with this rule that specifically 
addresses concerns that were raised in public comments regarding the 
burden that has been imposed in the permanent 504 refinancing program 
by requiring lenders and borrowers to document that all of the proceeds 
of the debt being refinanced was used for eligible collateral. As 
indicated by the stakeholders, this requirement is especially difficult 
if a property has been refinanced more than once or if the initial 
lender had been acquired by another lender. In practice, the process 
was costly and time consuming for the borrower, lender and SBA 
personnel and, upon review, it rarely led to significant amounts being 
excluded from the refinancing. In this rule, SBA has adopted a more 
practical, less costly approach that relies on borrower and lender 
certifications, subject to random sampling to verify the amounts being 
refinanced. In addition, the rule allows the refinancing if 
substantially all of the proceeds of the debt being refinanced was used 
for eligible collateral. This rule will make that change to the 
permanent refinance program as well as this temporary one.

Paperwork Reduction Act

    The SBA has determined that this rule imposes no additional 
reporting and recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C. Chapter 35.

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, including small non-profit businesses, and 
small local governments. Pursuant to the RFA, when an agency issues a 
rule, the agency must prepare an analysis that describes whether the 
impact of the rule will have a significant economic impact on a 
substantial number of these small entities. However, the RFA requires 
such analysis only where notice and comment rulemaking is required. As 
discussed above, SBA has determined that there is good cause to publish 
this rule without soliciting public comment. This rule is, therefore, 
exempt from the RFA requirements.

List of Subjects in 13 CFR Part 120

    Loan programs--business, Small businesses.

    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, Public Law 111-240, 124 Stat. 2504.


0
2. Amend Sec.  120.130 by revising paragraph (b) to read as follows:


Sec.  120.130  Restrictions on uses of proceeds.

* * * * *
    (b) Refinancing a debt owed to a Small Business Investment Company 
(``SBIC'') or a New Markets Venture Capital Company (``NMVCC'');
* * * * *

0
3. Amend Sec.  120.882 by revising paragraph (e)(1) and adding new 
paragraph (g) to read as follows:


Sec.  120.882  Eligible Project costs for 504 loans.

* * * * *
    (e) * * *
    (1) Substantially all (85% or more) of the proceeds of the 
indebtedness were used to acquire land, including a building situated 
thereon, to construct a building thereon, or to purchase equipment. The 
assets acquired must be eligible for financing under the 504 loan 
program;
* * * * *
    (g) For applications received on or after February 17, 2011 and 
approved by SBA no later than September 27, 2012, SBA may approve a 
Refinancing Project of a qualified debt subject to the following 
conditions and requirements:
    (1) The Refinancing Project does not involve the expansion of a 
small business;
    (2) The applicant for the refinancing available under this 
paragraph (g) has been in operation for all of the 2 year period ending 
on the date of application;
    (3) The qualified debt will mature on or before December 31, 2012, 
unless such date is extended by SBA, based on its assessment of 
available resources and market conditions, in a Notice published in the 
Federal Register. Based on available resources and market conditions, 
SBA may allow other debt to be refinanced if the refinancing would 
provide a substantial benefit to the Borrower in accordance with Sec.  
120.882(e)(5). If SBA determines to allow such refinancing based on the 
substantial benefit criteria, SBA will publish a Notice in the Federal 
Register of this determination;
    (4) In addition to the annual guarantee fee assessed under Sec.  
120.971(d)(2), Borrower must pay SBA a supplemental annual guarantee 
fee to cover the additional cost attributable to the refinancing. For 
loans approved during Fiscal Year 2011, this supplemental annual 
guarantee fee will be 0.294%. For loans approved during Fiscal Year 
2011, the annual guarantee fee assessed under Sec.  120.971(d)(2) and 
the supplemental annual guarantee fee will total 1.043% on the unpaid 
principal balance of the debenture. If the total amount of the 
guarantee fee changes for loans approved during Fiscal Year 2012, SBA 
will publish a Notice of the change in the Federal Register;
    (5) The funding for the Refinancing Project must come from three 
sources based on the current fair market value of the fixed assets 
serving as collateral for the Refinancing Project, including not less 
than 50% from the Third Party Lender, not less than 10% from the 
Borrower (excluding administrative costs), and not more than 40% from 
the 504 loan. In addition to a cash contribution, the Borrower's 10% 
contribution may be satisfied as set forth in Sec.  120.910 or by the 
equity in any other fixed assets that are acceptable to SBA as 
collateral for the Refinancing Project, provided that there is an 
independent appraisal of the fair market value of the asset;
    (6) The portion of the Refinancing Project provided by the 504 loan 
and the Third Party Loan may be no more than 90% of the fair market 
value of the fixed assets that will serve as collateral, but in no 
event may it exceed the outstanding principal balance of the qualified 
debt;
    (7) If the qualified debt is not fully satisfied by the funding 
provided by the Refinancing Project, the lender of the qualified debt 
must take one of the following actions, or some combination thereof, to 
address the deficiency:
    (i) Forgiveness of all or part of the deficiency;
    (ii) Acceptance of payment by the Borrower, or
    (iii) Acceptance of a Note executed by the Borrower for the 
balance, or any portion of the balance. Such Note must

[[Page 9219]]

be subordinate to the 504 loan if the Note and the 504 loan are secured 
by any of the same collateral. The Note is subject to any other 
restrictions that SBA may establish to protect its creditor position, 
including standby requirements;
    (8) The Third Party Lender must have a first lien position, and the 
504 loan must have a second lien position, on all Eligible Fixed Assets 
securing the Refinancing Project. Any other lien must be junior in 
priority to these lien positions. For other fixed assets serving as 
collateral for the Refinancing Project, the lien positions of the Third 
Party Lender and the 504 loan may be junior to any existing liens 
acceptable to SBA;
    (9) Eligible Project costs which may be paid with the proceeds of 
the 504 loan are the amount used to refinance the qualified debt and 
other costs under Sec.  120.882(c) and (d) and eligible administrative 
costs under Sec.  120.883;
    (10) Notwithstanding Sec.  120.860, a debt may be refinanced under 
this paragraph (g) if it does not meet the job creation or other 
economic development objectives set forth in Sec.  120.861 or Sec.  
120.862. In such case, the 504 loan may not exceed the product obtained 
by multiplying the number of employees of the Borrower by $65,000. The 
number of employees of the Borrower is equal to the sum of:
    (i) The number of full-time employees of Borrower on the date of 
application, and
    (ii) The product obtained by multiplying:
    (A) The number of part-time employees of the Borrower on the date 
of application; by
    (B) The quotient obtained by dividing the average number of hours 
each part time employee of the Borrower works each week by 40.

    Example: 30 full-time employees and 35 part-time employees 
working 20 hours per week is calculated as follows: 30 + (35 x (20/
40)) = 47.5. The maximum amount of the 504 loan would be 47.5 
multiplied by $65,000, or $3,087,500.

    (11) The authority to approve the refinancing under this paragraph 
(g) is not delegated to PCLP CDCs;
    (12) The 504 loans approved under this paragraph (g) must be 
disbursed within 6 months after loan approval. The Director, Office of 
Financial Assistance, or his or her designee may approve any request 
for extension of the disbursement period for good cause;
    (13) The Third Party Loan may not be sold on the secondary market 
as a part of a pool guaranteed under subpart J of this part 120 when 
the debt being refinanced is same institution debt;
    (14) The Third Party Lender must certify that it would not 
refinance the qualified debt except for the assistance provided under 
this paragraph (g);
    (15) Definitions. For the purposes of this paragraph (g), the terms 
below are defined as follows:
    Date of application refers to the date the 504 loan application is 
received by SBA.
    Eligible Fixed Assets are one or more long-term fixed assets, such 
as land, buildings, machinery, and equipment, acquired, constructed or 
improved by a small business for use in its business operations.
    Fair market value refers to the current appraised value of an asset 
that is established by an independent appraiser in accordance with the 
standards established by SBA in its SOPs.
    Qualified debt is a commercial loan:
    (i) That was incurred not less than 2 years before the date of the 
application for the refinancing available under this paragraph (g);
    (ii) That is not subject to a guarantee by a Federal agency or 
department;
    (iii) Substantially all (85% or more) of which was for the 
acquisition of Eligible Fixed Assets;
    (iv) That was for the benefit of the small business concern;
    (v) That is collateralized by Eligible Fixed Assets;
    (vi) That is not a Third Party Loan that is part of an existing 504 
Project; and
    (vii) For which the applicant for the refinancing available under 
this paragraph (g) has been current on all payments due for not less 
than 1 year preceding the date of application. For the purposes of this 
subparagraph (vi), ``current on all payments due'' means that no 
payment scheduled to be made during the one year period was either 
deferred or more than 30 days past due. Any delinquency in payment of 
the loan to be refinanced after approval and before debenture funding 
must be reported to SBA as an adverse change.
    Refinancing Project means the fair market value of the Eligible 
Fixed Asset(s) securing the qualified debt and any other fixed assets 
acceptable to SBA.
    Same institution debt means any debt of the Third Party Lender that 
is providing funds for the refinancing, or of its affiliates.

0
4. Amend Sec.  120.884 by revising paragraph (a) to read as follows:


Sec.  120.884  Ineligible costs for 504 loans.

* * * * *
    (a) Debt refinancing (other than interim financing), except as 
provided in Sec.  120.882(e) and (g).
* * * * *

    Dated: February 10, 2011.
Karen G. Mills,
Administrator.
[FR Doc. 2011-3470 Filed 2-16-11; 8:45 am]
BILLING CODE 8025-01-P