[Federal Register Volume 76, Number 34 (Friday, February 18, 2011)]
[Notices]
[Pages 9626-9629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3758]


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SMALL BUSINESS ADMINISTRATION

[Docket No. SBA 2011-0003]


Community Advantage Pilot Program

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

ACTION: Notice and request for comments.

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SUMMARY: SBA is introducing a new pilot loan program called ``Community 
Advantage'' to provide 7(a) loan guaranties to small businesses in 
underserved markets, including Veterans and members of the military 
community. The Community Advantage Pilot Program will allow mission 
oriented lenders, primarily non-profit financial intermediaries that 
are focused on economic development in underserved markets, access to 
7(a) loan guaranties for loans of $250,000 or less.

DATES: Effective Date: The Community Advantage Pilot Program will be 
effective on February 15, 2011, and will remain in effect through March 
15, 2014. SBA will begin accepting applications from lenders for 
participation in the Community Advantage Pilot Program February 15, 
2011.
    Comment Date: Comments must be received on or before April 19, 
2011.

ADDRESSES: You may submit comments, identified by SBA docket number 
SBA- 2011-0003 by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Community Advantage Pilot Program Comments--Office 
of Financial Assistance, U.S. Small Business Administration, 409 Third 
Street, SW., Suite 8300, Washington, DC 20416.
     Hand Delivery/Courier: Grady B. Hedgespeth, Director, 
Office of Financial Assistance, U.S. Small Business Administration, 409 
Third Street, SW., Washington, DC 20416.
    SBA will post all comments on  http://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at http://www.regulations.gov, please submit the 
information to Grady B. Hedgespeth, Director, Office of Financial 
Assistance, U.S. Small Business Administration, 409 Third Street, SW., 
Washington, DC 20416, or send an e-mail to [email protected]. 
Highlight the information that you consider to be CBI and explain why 
you believe SBA should hold this information as confidential. SBA will 
review the information and make the final determination whether it will 
publish the information.

FOR FURTHER INFORMATION CONTACT: Grady B. Hedgespeth, Director, Office 
of Financial Assistance, U.S. Small Business Administration, 409 Third 
Street, SW., Washington, DC 20416; (202) 205-7562; 
[email protected].

SUPPLEMENTARY INFORMATION: SBA is implementing a new pilot loan program 
called Community Advantage (CA) to provide 7(a) loan guaranties to 
small businesses located in underserved markets and to veterans and 
other members of the military community. This new pilot program will 
replace the current Community Express Pilot Loan Program, which has 
been extended through April 30, 2011. (75 FR 80561, December 22, 2010) 
No new Community Express Pilot Loan Program loans will be approved 
after that date.

1. Background

    The Community Express Pilot Loan Program was created over 11 years 
ago and combined the delegated and expedited SBA Express processing 
flexibility with a requirement that

[[Page 9627]]

Community Express borrowers be provided with management and technical 
assistance (M&TA). The M&TA was intended to mitigate risks and to 
provide support for offering the higher 7(a) guaranty levels as opposed 
to the 50% guaranty on SBA Express products. Because Community Express 
was a pilot program it was statutorily limited to no more than 10% of 
the number of 7(a) guaranteed loans in any given fiscal year.
    The Community Express product has resulted in loans to new 
businesses, minority-owned businesses and other underserved sectors; 
however, it has consistently ranked as SBA's highest loss product, even 
when controlling for loan size, and it has never had widespread 
acceptance by SBA lenders or good geographical dispersion. Throughout 
its history, Community Express has had significantly higher default 
rates (almost 40% of loans defaulted in certain cohort years) compared 
with other similarly sized 7(a) loans, which also resulted in higher 
net losses because most Community Express loans are unsecured. In 
addition, the difficulty of coordinating and ensuring efficient access 
to quality management and technical assistance to borrowers resulted in 
large lenders abandoning the product a few years after its creation. 
Many commercial lenders may not have been willing or able to meet SBA's 
technical assistance delivery and reporting requirements because the 
provision and reporting of management and technical assistance is not 
normally part of their lending model. Eventually, less than 5% of SBA's 
active lenders were using the product and most of the activity was 
concentrated in a handful of lenders (three lenders comprised 
approximately 85% of the Community Express loan volume in recent years, 
one of which has been taken over by the FDIC and is no longer in 
operation).
    For the reasons discussed above, SBA is replacing Community Express 
with the new Community Advantage Pilot Program designed to reach 
underserved markets more efficiently and effectively and at a lower 
cost to the taxpayer.

2. Comments

    Although the new Community Advantage Pilot Program will be 
effective February 15, 2011, comments are solicited from interested 
members of the public on all aspects of the new pilot program. These 
comments must be submitted on or before the deadline for comments 
listed in the DATES section. The SBA will consider these comments and 
the need for making any revisions as a result of these comments.

3. Community Advantage Pilot Program

Overview

    The Community Advantage Pilot Program (CA Pilot Program) will allow 
mission oriented lenders, primarily non-profit financial intermediaries 
that are focused on economic development in underserved markets, access 
to 7(a) loan guaranties for loans of $250,000 or less. For purposes of 
the CA Pilot Program, the underserved markets will include: (1) Low-to-
Moderate Income (LMI) communities (while not a specific requirement, CA 
Lenders are encouraged to serve low and very-low income communities); 
(2) Empowerment Zones and Enterprise Communities; (3) HUBZones; (4) New 
businesses, e.g., firms in business for no more than two years; (5) 
Businesses eligible for Patriot Express, including Veteran-owned 
businesses; and (6) Firms where more than 50% of their full time 
workforce is low-income or resides in LMI census tracts.
    The CA Pilot Program will be effective February 15, 2011 and will 
continue through March 15, 2014.
    Key features of the new CA Pilot Program are set forth below. More 
detailed guidance on the CA Pilot will be provided in a participant 
guide (``Community Advantage Participant Guide'') that will be 
available on SBA's Web site at http://www.sba.gov.

Eligible Lenders

    The long experience of Community Express indicates that the 
participating lenders have not been able to lend successfully in these 
target markets and maintain acceptable losses. SBA believes that an 
alternate distribution channel, of community-based, mission lenders, 
will mitigate the risks associated with lending in these markets, 
reduce losses, deploy more capital and enhance access to capital for a 
number of underserved groups. In this pilot, SBA will leverage three 
historically successful programs of mission-based lending. During the 
pilot, Community Advantage will only be open to: (1) Community 
Development Financial Institutions (CDFIs) certified by the U.S. 
Treasury, but that do not have a Federal financial regulator; (2) SBA 
Certified Development Companies (CDCs); and (3) SBA Microlenders.
    Any lender who is already participating in SBA's 7(a) program, as 
evidenced by an executed Loan Guaranty Agreement (SBA Form 750), is not 
eligible to participate in the CA Pilot Program, but should continue to 
use the 7(a) loan program in that lender's current capacity. Other 
lenders that are not eligible for the CA Pilot Program but are eligible 
for the 7(a) loan program are encouraged to apply to participate in the 
7(a) loan program by contacting their local SBA Field Office. The local 
SBA Field Office may be found at http://www.sba.gov/local.

Process To Become a CA Lender

    Eligible organizations will apply to SBA for approval to 
participate in the CA Pilot Program. The application will be available 
on SBA's Web site at:  http://archive.sba.gov/tools/Forms/SBApartnerforms/index.html. A lender's application to participate in 
the CA Pilot Program also should indicate whether or not the lender 
wishes to apply to sell CA loans in SBA's secondary market.
    The application will be evaluated and a decision made for 
participation in the CA Pilot Program. As part of this evaluation, a 
determination as to whether the lender may be granted ``delegated 
authority'' for the CA Pilot Program and whether the lender may 
participate in the secondary market, if applicable, also will be made. 
If an applicant is approved to participate, it will be designated a 
Community Advantage Lending Company (CA Lender). Also, if approved to 
participate in the CA Pilot Program, the lender will not be able to 
make 7(a) loans other than through the pilot.
    Each CA Lender will be identified as either a Small Business 
Lending Company (SBLC) or a Non-Federally Regulated Lender (NFRL), 
depending on whether the lender is subject to regulation by a State. 
Accordingly, all CA Lenders will be SBA Supervised Lenders, as that 
term is defined in 13 CFR 120.10, and will be subject to all 
regulations applicable to such lenders unless specifically waived or 
modified in the regulatory waiver section of this Notice.
    Approval to participate in the CA Pilot Program will be for the 
three year period of the pilot. If the CA Pilot Program is not 
extended, each CA Lender will be required to continue to service and 
liquidate its CA loans in accordance with the terms of the pilot, but 
will not be able to make any new CA loans. If the CA Pilot Program is 
extended or made permanent, each CA Lender's authority to participate 
will be renewed based on the CA Lender's compliance with the program 
requirements, including the requirement to make 60% of their loans to 
small businesses in the CA underserved markets.

[[Page 9628]]

Reserve Requirement

    CA Lenders are required to create a Loan Loss Reserve Account 
(LLRA) to cover potential losses arising from defaulted loans. The 
reserve fund is to cover both losses from the unguaranteed portion of 
defaulted loans as well as possible repairs and denials associated with 
SBA's guaranty on the defaulted loan. The LLRA must be maintained 
separate from other reserve accounts the CA Lender may maintain and it 
must be deposited in a Federally insured demand, savings or certificate 
of deposit account in an amount, to the extent practicable, not in 
excess of the maximum insured amount. The LLRA cannot be commingled 
with any other loan loss reserve fund of the CA Lender, its parent or 
related entities. The LLRA must equal 15 percent of the outstanding 
amount of the unguaranteed portion of a CA Lender's CA loan portfolio 
including loans sold in the secondary market. The CA Lender must 
reconcile the LLRA and, if necessary, add funds to the LLRA on a 
monthly basis to ensure the appropriate amount is maintained. The CA 
Lender's audited financial statements must include an assessment of the 
lender's compliance with loan loss reserve account requirements for the 
CA Pilot Program. Failure to maintain the loan loss reserve account as 
required may result in removal from the CA Loan Program and/or the 
imposition of additional controls or reserve amounts. SBA in its 
discretion may require additional amounts to be included in the LLRA 
based on the risk characteristics and performance of the CA Lender. SBA 
microloan intermediaries may not use their SBA intermediary loan to 
fund the reserve for CA loans (nor may they use it to fund CA loans).
    In connection with the reserve requirement, SBA particularly would 
like to solicit comments regarding any implications this, or other 
pilot requirements, might have on State-chartered pilot participants in 
regards to Federalism, as expressed in Executive Order 13132, 
Federalism. The Executive Order requires SBA to have a process to 
ensure meaningful and timely input by State and local officials in the 
development of policies that have substantial direct effects on the 
States, the relationship between the Federal Government and the States, 
or on the distribution of power and responsibilities among the various 
levels of government. Since the pilot reserve requirement is for 
participants agreeing to be in the pilot, SBA believes that it can work 
in concert with any existing State loan loss reserve requirements. We 
are also interested in comments discussing this and any other issues 
arising from this pilot that might have implications for State-
chartered institutions.

CA Loans

    The loan terms and conditions of CA loans are the same as standard 
7(a) loans with the following exceptions: (1) The maximum loan amount 
is $250,000; (2) the maximum allowable interest rate is prime + 4%; and 
(3) revolving loans are not allowed in the CA Pilot. While management 
and technical assistance (M&TA) is not required for each CA loan, it is 
encouraged and, if any has been provided prior to the application for 
loan guaranty, information concerning the M&TA will be identified on 
the application. Although not every CA loan must be made to a small 
business in the underserved markets identified above, CA Lenders will 
be required to demonstrate annually that 60% of their CA loans have 
been made to such small businesses. SBA Microlenders may not use their 
SBA intermediary loan to fund either the CA loan or the required loan 
loss reserve account for CA loans.
    All CA borrowers must meet the eligibility requirements of standard 
7(a) loans, as set forth in 13 CFR part 120 and Standard Operating 
Procedure (SOP) 50 10 5(C), Subpart B, Chapter 2. CA Lenders are to 
follow the credit underwriting procedures for the Small/Rural Lender 
Advantage (S/RLA) loan program as set forth in SOP 50 10 5(C), Subpart 
B, Chapter 4. Additionally, CA Lenders are to follow the collateral and 
environmental requirements applicable to standard 7(a) loans, which 
also are set forth in SOP 50 10 5(C), Subpart B, Chapter 4. (The SOP 50 
10 5(C) can be found on SBA's Web site at: http://archive.sba.gov/tools/resourcelibrary/sops/index.html.) SBA Microlenders may not use 
their SBA intermediary loan to fund CA loans. CA loans may not be used 
to refinance loans made by or guaranteed by the Department of 
Agriculture or loans made by SBA microlenders using their SBA 
intermediary loan.

Allowable Fees

    The SBA guaranty fee and the lender's annual service fee set forth 
in 13 CFR 120.220 apply to loans approved under the CA Pilot Program 
and CA Lenders may charge the borrower the same fees allowed under 
SBA's standard 7(a) loan program as set forth in 13 CFR 120.221 and 
120.222.

Secondary Market and Participating Lender Financings or Other 
Conveyances

    Qualified CA Lenders will be allowed to sell SBA loan guaranties 
made under the CA Pilot Program on the secondary market provided they 
comply with Agency regulations at 13 CFR part 120, subpart F--Secondary 
Market.
    SBA loan guaranties approved under the CA Pilot Program, however, 
may not be included in any participating lender financings or other 
conveyances, including securitizations, participations and pledges.

Application Forms and Authorization

    CA Lenders will utilize the application forms required for the S/
RLA process, as set forth in SOP 50 10 5(C), Subpart B, Chapter 6. More 
specific guidance on the application forms, including the addendum for 
CA loans to identify any management and technical assistance the 
applicant may have received, will be provided in the Community 
Advantage Participant Guide, which will be available on SBA's Web site.
    In addition, the CA Lender will be required to execute an SBA 
Authorization (``Authorization'') for each CA loan. The Authorization 
is SBA's written agreement between the SBA and the CA Lender providing 
the terms and conditions under which SBA will guarantee a business 
loan. For further guidance on the Authorization, see SOP 50 10 5(C), 
Subpart B, Chapter 5.
    CA Lenders are to follow the loan closing and disbursement 
requirements set forth in SOP 50 10 5(C), Subpart B, Chapter 7.
    CA Lenders must follow the servicing and liquidation requirements 
set forth in 13 CFR 120.535 and 120.536 and SOPs 50 50 and 50 51. (SOPs 
50 50 and 50 51 can be found at http://archive.sba.gov/tools/resourcelibrary/sops/index.html.)

Guaranty Purchase

    Under the CA Pilot Program, loans will be subject to SBA's 
requirements regarding purchase of its guaranty as set forth in 13 CFR 
120.520 through 120.524 and Chapters 22 & 23 of SOP 50 51 3.

Reporting Requirements

    CA Lenders will be required to submit annual reports demonstrating 
compliance with their business plan and showing that 60% of CA loans 
have been made to small businesses in the CA underserved markets 
identified above.
    Additionally, CA Lenders will be required to submit quarterly 
reports,

[[Page 9629]]

including balance sheet, LLRA levels and income statements.
    CA Lenders will be required to report on the status of their CA 
loans on SBA Form 1502 in accordance with SOP 50 10 5(C), Subpart B, 
Chapter 8. (SBA Form 1502 can be found at http://www.colsonservices.com/main/f_n_r_main.shtml.)
    In addition, CA Lenders will be required to comply with the 
reporting requirements in 13 CFR 120.464.

Lender Oversight

    CA Lender oversight procedures shall follow the requirements set 
forth in 13 CFR Part 120--Subpart I and SOPs 50 53 (Lender Supervision 
and Enforcement) and 51 00 (On-Site Lender Reviews and Examinations). 
(The SOPs can be found at: http://archive.sba.gov/tools/resourcelibrary/sops/index.html.) CA Lenders will be monitored both for 
performance and other risk characteristics as well as for compliance 
with the requirements of the CA Pilot Program. The CA Lender must 
maintain compliance with its business plan and the requirement that 60% 
of the lender's CA loans have been made to small businesses in the 
underserved markets, along with other program requirements.
    Office of Credit Risk Management (OCRM) off-site monitoring will be 
conducted using the Loan and Lender Monitoring System (L/LMS). L/LMS 
details historical, current and projected performance data for each 
individual lender. As noted above, CA Lenders will be required to 
submit both Quarterly Reports and Annual Reports. Lender review/
examination cycles will vary based upon the underlying risk their SBA 
portfolio poses. Lender reviews/examinations will follow the 
requirements set forth in 13 CFR 120.1025 through 120.1060 and SOP 51 
00.
    OCRM will conduct desk reviews, targeted reviews, on-site reviews, 
expanded on-site reviews and/or examinations based on the lender's 
level of activity, performance metrics, risk rating and other risk 
characteristics. All participating lenders will receive an examination 
or a review after the first year of operation. CA lenders will pay the 
costs of such reviews and/or examinations and, if assessed by SBA, 
other lender oversight activities, as set forth in 13 CFR 120.1070.
    CA Lenders also will be subject to 13 CFR 120.1400 through 120.1600 
and the provisions of SOP 50 53 concerning supervision and enforcement.

Regulatory Waivers

    Pursuant to the authority provided to SBA under 13 CFR 120.3 to 
suspend, modify or waive certain regulations in establishing and 
testing pilot loan initiatives for a limited period of time, SBA will 
modify or waive as appropriate the following regulations, which 
otherwise apply to 7(a) loans, for the CA Pilot Program only: (1) 13 
CFR 120.10, which defines various terms applicable to the 7(a) loan 
program, including the term ``Small Business Lending Company'' and 
which states that SBA has imposed a moratorium on licensing new SBLCs 
since January 1982, is being waived only to allow organizations that 
meet the definition of an SBLC but that do not currently have an SBLC 
license to participate in the CA Pilot Program; (2) 13 CFR 120.151, 
which states the statutory limit for total loans to a borrower and the 
maximum loan amount for a 7(a) loan, is being modified because the 
maximum loan amount under the CA Pilot Program is $250,000; (3) 13 CFR 
120.213, 120.214 and 120.215, which set the maximum interest rates 
lenders may charge on standard 7(a) loans, are being waived as the 
maximum allowable interest rate for CA loans will be prime + 4%; (4) 13 
CFR 120.420 through 120.435, which govern participant lender financings 
and other conveyances, including securitizations, participations and 
pledges, are being waived as CA Lenders will not be allowed to include 
CA loans in participant lender financings or other conveyances, 
including securitizations, participations and pledges; (5) 13 CFR 
120.452, which describes the requirements for PLP loan processing, is 
being modified because CA Lenders with delegated authority will be 
required to comply with these requirements even though they will not be 
PLP lenders; (6) 13 CFR 120.462, which describes the additional 
requirements on capital maintenance SBA requires for SBA Supervised 
Lenders, is being waived as CA Lenders will not be subject to these 
requirements because CA Lenders will be required to maintain a separate 
Loan Loss Reserve Account for their CA loans; (7) 13 CFR 120.463(a), 
which describes the regulatory accounting requirements for SBA 
Supervised Lenders is being modified as CA Lenders will not be required 
to keep their books and records on an accrual basis; (8) 13 CFR 
120.463(e)(1), which requires SBA Supervised Lenders to maintain loan 
loss allowances, is being waived because CA Lenders will be required to 
maintain a separate Loan Loss Reserve Account as described previously 
in this notice to cover losses on their CA loan portfolio; (9) 13 CFR 
120.470(a), which states that an SBLC may only make loans under section 
7(a) of the Small Business Act or loans to Intermediaries under the 
Microloan program, is being waived because a CA Lender may only make 
loans under the CA Pilot Program; (10) 13 CFR 120.471(a) and (b), which 
describe the minimum capital requirements for SBLCs and the composition 
of the capital, are being waived as CA Lenders will not be subject to 
these requirements because CA Lenders will be required to maintain a 
separate Loan Loss Reserve Account for their CA loans and because CA 
Lenders are generally non-profit organizations with less capitalization 
and SBA will evaluate their capital base as part of the CA Lender 
approval process; and (11) 13 CFR 120.852(a), which prohibits a CDC 
from investing in or being an affiliate of a lender participating in 
the 7(a) loan program, is being waived in order to allow CDCs or their 
affiliates to participate in the CA Pilot Program.
    SBA is particularly interested in comments discussing the 
regulatory accounting requirements for CA Lenders.
    All provisions of the Small Business Act applicable to the 7(a) 
loan program apply to loans made under this pilot. Unless waived or 
modified by this Notice, all regulations applicable to the 7(a) loan 
program apply to loans made under this pilot. All standard operating 
procedures applicable to the 7(a) loan program that are not superseded 
by any provision of this Notice or the Community Advantage Participant 
Guide apply to loans made under this pilot.
    CA Lenders must use prudent lending practices in the making, 
servicing and liquidating of CA loans and must comply with all SBA Loan 
Program Requirements.
    SBA has provided more detailed guidance in the form of a 
participant guide which is available on SBA's Web site, http://www.sba.gov. SBA may also provide additional guidance, if needed, 
through SBA notices, which will also be published on SBA's Web site, 
http://www.sba.gov.
    Questions on the CA Pilot Program may be directed to the Lender 
Relations Specialist in the local SBA district office. The local SBA 
district office may be found at http://www.sba.gov/local.

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

Karen G. Mills,
Administrator.
[FR Doc. 2011-3758 Filed 2-17-11; 8:45 am]
BILLING CODE 8025-01-P