[Federal Register Volume 77, Number 218 (Friday, November 9, 2012)]
[Notices]
[Pages 67433-67435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27334]


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SMALL BUSINESS ADMINISTRATION


Community Advantage Pilot Program

AGENCY: U.S. Small Business Administration.

ACTION: Notice of extension of and changes to Community Advantage Pilot 
Program and request for comments.

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SUMMARY: The Community Advantage (``CA'') Pilot Program is a pilot 
program to increase SBA-guaranteed loans to small businesses in 
underserved areas. SBA continues to refine and improve the design of 
the Community Advantage Pilot Program. To support SBA's commitment to 
expanding access to capital for small businesses and entrepreneurs in 
underserved markets, SBA is issuing this Notice to extend the term of 
the CA Pilot Program, to modify the loan loss reserve requirements for 
CA loans, and to revise other program requirements, including certain 
of the regulatory waivers.

DATES: Effective Date: The changes to the CA Pilot Program identified 
in this Notice will be effective November 9, 2012, and the CA Pilot 
Program will remain in effect until March 15, 2017.
    Comment Date: Comments must be received on or before January 8, 
2013.

ADDRESSES: You may submit comments, identified by SBA docket number 
SBA-2012-0016 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 www.regulations.gov. If you wish to 
submit confidential business information (CBI) as defined in the User 
Notice at www.regulations.gov, please submit the information to Grady 
B. Hedgespeth, Director, Office of Financial Assistance, U.S. Small 
Business Administration, 409 Third Street SW., Washington, DC 20416, or 
send an email 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]. For information regarding revisions to the 
loan loss reserve requirements, contact Brent Ciurlino, Director, 
Office of Credit Risk Management, U.S. Small Business Administration, 
409 Third Street SW., Washington DC 20416; (202) 205-6538; 
[email protected].

SUPPLEMENTARY INFORMATION:

1. Background

    On February 18, 2011, SBA issued a notice and request for comments 
introducing the CA Pilot Program (76 FR 9626). The CA Pilot Program was 
introduced to increase the number of SBA-guaranteed loans made to small 
businesses in underserved markets. The February 18, 2011 notice 
provided an overview of the CA Pilot Program requirements and, 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, SBA modified or waived as appropriate certain regulations 
which otherwise apply to 7(a) loans for the CA Pilot Program. On 
September 12, 2011, SBA issued a second notice modifying certain of 
those regulatory waivers in order to permit Community Advantage Lenders 
(``CA Lenders'') to pledge loans made under the CA Pilot Program (``CA 
loans'') as collateral for certain lender financings approved by SBA. 
(76 FR 56262).
    SBA continues to refine and improve the design of the CA Pilot 
Program and, on February 8, 2012, SBA issued a third notice revising 
certain program requirements in order to, among other things, change 
the maximum allowable interest rate for CA loans and permit CA Lenders 
to contract with Lender Service Providers. (77 FR 6619). To further 
support SBA's commitment to expanding access to capital for small 
businesses and entrepreneurs in underserved markets, SBA is issuing 
this fourth notice to further revise program requirements as described 
more fully below.

2. Comments

    Although the extension of and changes to the CA Pilot Program will 
be effective November 9, 2012, comments are solicited from interested 
members of the public on all aspects of the CA Pilot Program. Comments 
must be submitted on or before the deadline for comments listed in the 
DATES section. The SBA will consider these comments and the

[[Page 67434]]

need for making any revisions as a result of these comments.

3. Changes to the Community Advantage Pilot Program

Extension of the CA Pilot Program

    The CA Pilot Program is currently set to expire on March 15, 2014. 
It was anticipated that this would be sufficient time to evaluate 
whether the CA Pilot Program was succeeding in expanding access to 
capital to small businesses in underserved markets and for SBA to 
determine whether to take the necessary steps to make the program 
permanent. In response to comments received from prospective applicants 
to the CA Pilot Program, SBA has made significant program modifications 
to increase the overall interest and participation in the program. 
However, CA Lenders have not had enough time to allow the program to 
gain the traction necessary to adequately measure whether the goals of 
the CA Pilot Program are being met. For these reasons and due to the 
significant investment in time and resources that is necessary to 
become a CA Lender, SBA is extending the CA Pilot Program through March 
15, 2017.

Fidelity Insurance Requirement

    When a CA Lender is approved to participate in the CA Pilot Program 
it is 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 are 
SBA Supervised Lenders, as that term is defined in 13 CFR 120.10, and 
are subject to all regulations applicable to such lenders unless 
specifically waived or modified in the regulatory waiver section of the 
notices identified above.
    Agency regulations at 13 CFR 120.470(e) require an SBLC to 
``maintain a Brokers Blanket Bond, Standard Form 14, or Financing 
Companies Blanket Bond, Standard Form 15, or such other form of 
coverage as SBA may approve, in a minimum amount of $2,000,000 executed 
by a surety holding a certificate of authority from the Secretary of 
the Treasury pursuant to 31 U.S.C. 9304-9308.'' SBA believes that this 
amount of coverage is unnecessary for most CA Lenders because the 
maximum amount of any one CA loan (currently $250,000) is significantly 
less than the maximum amount of any one 7(a) loan (currently 
$5,000,000). Therefore, SBA is modifying the regulation at 13 CFR 
120.470(e) to reduce the minimum amount of coverage to $500,000 for CA 
Lenders identified as SBLCs with outstanding SBA guarantee exposure of 
$20 million or less. CA Lenders with outstanding SBA guarantee exposure 
of more than $20 million must maintain fidelity insurance coverage in a 
minimum amount of $2,000,000. SBLCs that are not CA Lenders must comply 
with the insurance requirement in the regulation.

Secondary Market Access

    SBA is revising the approval process concerning secondary market 
access for CA Lenders. In the February 8, 2012 notice SBA modified the 
requirements for CA Lenders to sell loans in the secondary market by 
allowing CA Lenders to request authority ``either at the time of 
application or after one year of participation.'' (77 FR 6619). SBA is 
revising this requirement to allow a CA Lender to request access to the 
secondary market with its application to participate in the CA Pilot or 
at any time thereafter. If authority is not awarded as a result of the 
first request, the CA Lender should resolve any weakness or deficiency 
indicated as reasons for rejection for secondary market authority 
before submitting a request for reconsideration.

Loan Loss Reserve Requirements

    CA Lenders are required to create and maintain a separate Loan Loss 
Reserve Account (LLRA) to cover potential losses arising from defaulted 
CA loans. In the February 18, 2011 Federal Register Notice introducing 
the CA Pilot Program (76 FR 9626), SBA required all CA Lenders to 
create and maintain the LLRA with a reserve amount equal to 15 percent 
of the outstanding amount of the unguaranteed portion of a CA Lender's 
CA loan portfolio. This level of loan loss reserve was based on the SBA 
Microloan Program's loan loss reserve requirements. Upon further 
review, however, SBA believes that the Microloan Program is not an 
appropriate comparison for the CA Pilot Program because the maximum 
loan size in the Microloan Program is $50,000, compared to a maximum 
loan size of $250,000 permitted in the CA Pilot Program. The United 
States Department of Agriculture's (USDA's) Intermediary Relending 
Program for loans in underserved rural areas, which has a maximum loan 
size of $250,000, requires a 6% cash reserve. (7 CFR 4274.332(b)(3)). 
SBA's Intermediary Lending Pilot Program, which has a maximum loan size 
of $200,000, requires a 5% cash reserve. (13 CFR 109.350). In addition, 
larger commercial lenders that provide warehouse lines of credit to 
non-profit, mission-oriented lenders for loans to small businesses 
typically require a reserve rate of 5% for their riskier credits. 
Finally, CA Lenders must also establish an additional reserve for the 
guaranteed portion of loans sold into the secondary market because 
secondary market loan sales create a direct risk to SBA. The total cash 
reserve required for CA Lenders needs to be at a level that does not 
provide a significant disincentive for CA Lenders to participate in the 
program. Therefore, SBA is revising the reserve requirement to permit 
CA Lenders to fund and maintain the LLRA with an amount equal to 5% of 
the outstanding amount of the unguaranteed portion of the CA Lender's 
CA loan portfolio. CA Lenders must deposit this required reserve amount 
in the LLRA no later than 45 days after the date of each CA loan 
disbursement. In order to ensure that the 5% reserve is adequate for 
each individual CA Lender, OCRM will review asset quality for each CA 
Lender as a part of the quarterly review process. This will include 
reviewing current delinquency and default rates, current and projected 
purchase rates, and risk rating for each lender. OCRM will also review 
compliance with the cash reserve requirements, including examination of 
bank statements to ensure that the reserve is adequately funded. OCRM 
reserves the right to increase this level in its discretion. The 
additional reserve requirement for loans sold on the secondary market 
is described in the next paragraph.
    On February 8, 2012, SBA published a notice in the Federal Register 
that made changes to certain CA Pilot Program requirements, including 
among other things the requirements surrounding access to the secondary 
market for CA Lenders. (77 FR 6619). In that Federal Register notice, 
SBA stated that CA Lenders granted access to the secondary market must 
have additional reserves and must complete additional training in 
secondary market activities and requirements before initiating 
secondary market sales. The February 8, 2011 notice did not, however, 
state what the additional reserve requirement would be for CA Lenders 
with secondary market authority. With this Notice, SBA is establishing 
an additional reserve requirement of 3% of the outstanding amount of 
the guaranteed portion of each CA loan sold in the secondary market. 
This level of additional reserve is based upon the dollar rate of 
repairs and denials for all 7(a) loans purchased over the last two 
calendar years (2.75%). Because CA Lenders are generally inexperienced 
7(a) lenders, the rate is set more conservatively. CA Lenders must 
deposit the required reserve amount

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covering the guaranteed portion of the CA loan in the LLRA no later 
than 10 days after the CA loan has been sold in the secondary market. 
In addition, to address the concern that a CA Lender with an 
unacceptable purchase rate might use secondary market sales to 
significantly expand its CA loan portfolio, SBA is modifying its 
regulation at 13 CFR 120.660 for the duration of the pilot program, to 
allow the Director, Office of Credit Risk Management, discretion to 
suspend secondary market authority for any CA Lender based on the risk 
characteristics or performance of the CA Lender's portfolio.
    The 5% loan loss reserve amount for the unguaranteed portion of CA 
loans and the 3% loan loss reserve amount for the guaranteed portion of 
CA loans sold in the secondary market may be kept in the same 
segregated bank account and must be carried as a restricted reserve on 
the CA Lender's balance sheet for use in meeting obligations the CA 
Lender has to cover losses from their CA lending activity including but 
not limited to defaults and guarantee repairs, denials, withdrawals or 
cancelations. This reserve may be used to repay SBA in the event of a 
repair or denial. If the CA Lender chooses to use the reserve to repay 
SBA, the CA Lender must ensure that the reserve is replenished to the 
required level within 45 days. All other requirements regarding the 
creation and maintenance of the LLRA stated in the February 18, 2011 
notice and all subsequent notices remain unchanged. Failure to maintain 
the loan loss reserve account as required may result in removal from 
the CA Pilot Program, the imposition of additional controls or reserve 
amounts, and/or other action permitted by SBA regulation or otherwise 
by law. Based on the risk characteristics or performance of a CA 
Lender, OCRM in its discretion may require additional amounts to be 
included in the LLRA or may suspend secondary market privileges.

Refinancing of SBA Microloans

    Currently, CA loans may not be used to refinance loans made by 
Microloan Intermediaries in SBA's Microloan Program. Because of the 
natural synergies that exist between the SBA Microloan Program and the 
CA Pilot Program, a number of CA Lenders have asked SBA to reconsider 
this prohibition. The CA Pilot Program was designed as a complement to 
the SBA Microloan Program, especially when small business borrowers' 
capital needs exceed the Microloan Program's $50,000 maximum loan 
limit. Allowing CA Lenders to refinance their SBA microloans or those 
of other Microloan Intermediaries into CA loans will not only free up 
microloan program resources to make more small dollar loans, but also 
will make both programs more attractive and thereby maximize lender 
participation and capital availability to underserved markets. Analysis 
indicates that this can be done without any significant additional risk 
to the 7(a) program. Loan performance data from the 7(a) loan program, 
(for loans less than $250,000) over the last 10 years show virtually 
identical cumulative default rates for loans that went to former micro 
borrowers versus similarly-sized 7(a) loans that went to other 
borrowers (a 0.2 percent difference). Therefore, SBA is revising its 
policy to permit CA loans to be used to refinance loans made by SBA 
Microlenders subject to the policies and procedures governing debt 
refinancing for 7(a) loans as set forth in SBA Loan Program 
Requirements and the CA Participant Guide. As such, the refinancing of 
same-institution debt cannot be processed on a delegated basis and must 
be submitted to the Standard 7(a) Loan Guaranty Processing Center. SBA 
will monitor the CA Pilot Program portfolio to ensure that such 
refinancings are in the best interest of the affected borrowers.

Financial Reports

    SBA regulations at 13 CFR 120.464(b)(2) require an SBA Supervised 
Lender to prepare financial reports on an accrual basis. In the 
February 18, 2011 notice, however, SBA modified 13 CFR 120.463(a) to 
eliminate the requirement for CA Lenders to keep their books and 
records on an accrual basis. In order to be consistent with that 
modification, SBA is waiving 13 CFR 120.464(b)(2) for purposes of the 
CA Pilot Program.

CA Associate

    The CA Pilot Program was originated under the basic premise that 
mission-based lenders are the optimal distribution tool to get capital 
to small businesses in underserved markets. While this premise remains 
true, SBA has recognized that there are many mission-based 
organizations that do not have the capacity to become CA Lenders but 
can nevertheless provide referral services to CA Lenders. Linking 
higher capacity CA Lenders with these other mission-based organizations 
should increase the flow of capital to small businesses in underserved 
markets. Current SBA regulations at 13 CFR part 103 and SBA's Standard 
Operating Procedure (SOP) 50 10 5(E) set forth the Agency's policy and 
procedures governing Referral Agents and apply with equal force and 
effect to organizations acting as agents for CA Lenders on CA loans. 
Mission-based organizations providing referral services to one or more 
CA Lenders may be referred to as ``Community Advantage Associates'' 
(``CA Associates'') for the purpose of the CA program and are subject 
to all of the same requirements as other agents. SBA may place 
additional reporting requirements on CA Lenders that utilize CA 
Associates.

Guarantee Purchase

    Guarantee purchase requests for CA loans will be processed in SBA's 
Commercial Loan Servicing Centers (CLSCs) in Little Rock, AR and 
Fresno, CA. The CLSCs, which process similarly-sized loans, have a 
greater capacity to receive and process additional guarantee purchase 
requests than the National Guaranty Purchase Center, which processes 
the larger and more complex standard 7(a) guarantee purchase requests.

General Information

    These changes are limited to the CA Pilot Program only. All other 
SBA guidelines and regulatory waivers related to the CA Pilot Program 
remain unchanged.
    SBA has provided more detailed guidance in the form of a 
Participant Guide which has been updated and is available on SBA's Web 
site at http://www.sba.gov. SBA may provide additional guidance, 
through SBA notices, which may also be published on SBA's Web site at 
http://www.sba.gov/category/lender-navigation/forms-notices-sops/notices. Questions regarding 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/about-offices-list/2.

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

    Dated: October 15, 2012.
Karen G. Mills,
Administrator.
[FR Doc. 2012-27334 Filed 11-8-12; 8:45 am]
BILLING CODE 8025-01-P