[Federal Register Volume 83, Number 56 (Thursday, March 22, 2018)]
[Proposed Rules]
[Pages 12506-12508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05787]


=======================================================================
-----------------------------------------------------------------------

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AG16


Small Business Size Standards; Alternative Size Standard for 
7(a), 504, and Disaster Loan Programs

AGENCY: U.S. Small Business Administration.

ACTION: Advance notice of proposed rulemaking.

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

SUMMARY: SBA is seeking public input to assist in establishing a 
permanent alternative size standard for its 7(a) and 504 Loan Programs. 
SBA also invites suggestions on sources of relevant data and 
information that SBA should evaluate in developing a permanent 
alternative size standard and assessing its impact. Finally, SBA also 
seeks input from interested parties on a potential proposal to apply 
the permanent alternative size standard as an alternative to using 
industry based size standards for small business applicants under its 
Economic Injury Disaster Loan (``EIDL'') Program.

DATES: SBA must receive comments to this ANPRM on or before May 21, 
2018.

ADDRESSES: You may submit comments, identified by RIN 3245-AG16 by one 
of the following methods: (1) Federal eRulemaking Portal: 
www.regulations.gov, following the instructions for submitting 
comments; or (2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., 
Chief, Office of Size Standards, 409 Third Street SW, Mail Code 6530, 
Washington, DC 20416.
    SBA will post all comments to this ANPRM on www.regulations.gov. If 
you wish to submit confidential business information (CBI) as defined 
in the User Notice at www.regulations.gov, you must submit such 
information either by mail to the U.S. Small Business Administration, 
Khem R. Sharma, Ph.D., Chief, Office of Size Standards, 409 Third 
Street SW, Mail Code 6530, Washington, DC 20416, or by 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 your information and determine whether it 
will make the information public. Requests to redact or remove posted 
comments cannot be honored and the request to redact/remove posted 
comments will be posted as a new comment.

FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Office of Size 
Standards, by phone at (202) 205-7189 or by email at 
[email protected].

SUPPLEMENTARY INFORMATION: SBA establishes small business size 
definitions, commonly known as ``size standards,'' for private sector 
industries in the United States to determine eligibility for Federal 
small business assistance programs, including the SBA's 7(a) and 504 
Loan Programs (``Business Loan Programs''). These size standards are 
established by 6-digit North American Industry Classification System 
(NAICS) industry, typically based either on average annual receipts or 
on average number of employees. SBA uses financial assets and refining 
capacity to measure the size of a few specialized industries. See, 13 
CFR part 121, Small Business Size Regulations.
    On September 27, 2010, the Small Business Jobs Act of 2010 (``Jobs 
Act'') was enacted (Pub. L. 111-240). Section 1116 of the Jobs Act 
added a new Section 3(a)(5) to the Small Business Act that directed SBA 
to establish an alternative size standard using maximum tangible net 
worth and average net income for applicants of the SBA's Business Loan 
Programs. The Jobs Act also established for applicants for the SBA's 
Business Loan Programs a temporary alternative size standard of not 
more than $15 million in tangible net worth and of not more than $5 
million in the average net income after Federal income taxes (excluding 
any carry-over losses) of the applicant for the 2 full fiscal years 
before the date of the application (referred to as ``Interim Rule''), 
and it provided that this temporary statutory alternative size standard 
would remain in effect until such time as SBA established a new 
alternative size standard for the Business Loan Programs through 
rulemaking. 15 U.S.C. 632(a)(5). Prior to that, SBA had a lower 
permanent regulatory alternative size standard that applied to the 504 
Loan Program, and temporarily applied, for the period beginning on May 
5, 2009 and ending on September 30, 2010, to the 7(a) Loan Program. 13 
CFR 120.301(b)(2).
    On September 29, 2010, SBA issued Information Notice 5000-1175 
(available at https://www.sba.gov/sites/default/files/files/bank_5000-1175_0.pdf) providing that, effective September 27, 2010, the new 
statutory temporary alternative size standard applied to its Business 
Loan Programs, thereby replacing and superseding the lower existing 
alternative size standard of $8.5 million in tangible net worth and $3 
million in average net income, set forth in 13 CFR 121.301(b)(2). The 
Information Notice further stated that the new statutory alternative 
size standard would remain in effect until such time as SBA established 
a permanent alternative size standard for the Business Loan Programs 
through rulemaking. The Information Notice also stated that SBA's 
disaster loan program, surety bond guarantee program, small business 
investment company program, and small business development and 
contracting programs, as well as other federal programs utilizing SBA's 
industry based size standards were not affected by the temporary 
statutory alternative size standard, and the current standards for 
those programs in 13 CFR part 121 remained in effect.
    Because of the difficulty of obtaining relevant data, SBA has not 
yet established a new permanent tangible net worth and net income based 
alternative size standard for its Business Loan Programs, so the Agency 
continues to use the temporary statutory

[[Page 12507]]

alternative size standard (referred to in the Jobs Act as the ``Interim 
Rule'') to determine eligibility for a small business concern under 
SBA's Business Loan Programs, in addition to using the industry based 
size standards. Under the Interim Rule, a Business Loan Program 
applicant is eligible either under its industry based size standard or 
if it meets the temporary statutory alternative size standard of $15 
million in tangible net worth and $5 million in average net income.
    SBA is statutorily authorized to provide access to capital to small 
businesses that do not have credit available elsewhere from non-Federal 
sources on reasonable terms and conditions. Aiming to expand credit 
opportunities for small businesses under the distressed credit 
conditions in the aftermath of the 2007-2009 Great Recession, Congress, 
through the Jobs Act, temporarily increased by statute the level of the 
existing regulatory alternative size standard for the Business Loan 
Programs by raising the maximum thresholds of tangible net worth from 
$8.5 million to $15 million and of average net income from $3 million 
to $5 million, and it provided that the temporary statutory alternative 
size standard would remain in effect for the Business Loan Programs 
until such time as SBA established a new permanent alternative size 
standard.
    A review of SBA's internal data on its Business Loan Programs shows 
that the temporary statutory alternative size standard may have enabled 
some small businesses that were not otherwise eligible under their 
industry based size standards to receive 7(a) or 504 Loans (``Business 
Loans''). However, SBA's internal data systems for its Business Loan 
Programs lack the necessary detailed electronic data that would allow 
for an assessment of the exact impact of the Interim Rule on small 
business loan applicants. Since the Agency's electronic systems only 
include data regarding the number of employees and the NAICS industry 
for loan applicants, but not data regarding average annual receipts, 
tangible net worth or average net income, SBA is not easily able to 
calculate the exact number of businesses that qualified under the 
temporary statutory alternative size standard that otherwise could not 
have qualified under their industry based size standards. Similarly, 
due to electronic data limitations, SBA cannot easily identify 
industries or industry sectors in which the temporary statutory 
alternative size standard helped small businesses the most or the least 
in accessing SBA Business Loans.
    Again, due to the lack of relevant electronic data, SBA is also not 
in a position to determine whether the Interim Rule is appropriate 
under the current economic environment or needs to be modified when SBA 
establishes a permanent alternative size standard.
    In an effort to establish a permanent alternative size standard for 
its Business Loan Programs as mandated by the Jobs Act, SBA has taken 
steps to gather the information and data necessary to develop an 
analysis to support the creation of a new permanent alternative size 
standard based on tangible net worth and average net income. However, 
the Economic Census data that SBA examines to establish the industry 
based size standards does not contain information on tangible net worth 
or average net income by industry. Furthermore, while SBA collects and 
maintains limited relevant electronic data on applicants for its 
Business Loan Programs (such as the number of employees for each loan 
recipient, but not average annual receipts, tangible net worth, or 
average net income), SBA's electronic internal data does not show 
whether an applicant for its Business Loan Programs was determined to 
be eligible under its industry based size standard or under the 
alternative size standard. Similarly, the electronic data does not 
include information on the numbers or amounts of loan approvals that 
were issued under the industry based size standard or under the 
temporary statutory alternative size standard.
    As such, the only electronic data on size for small business 
applicants approved for loans through the SBA's Business Loan Programs 
available for review are the number of employees and the NAICS 
industry. In an effort to estimate the percentage of loans that were 
approved under the temporary statutory alternative size standard, SBA 
examined its electronic internal data on its Business Loan Programs for 
the three most recent fiscal years (FY 2015 through FY 2017). For this 
analysis, SBA converted industry based receipts-based size standards to 
the equivalent number of employees using the receipts-to-employees 
ratios from the special tabulations of the 2012 Economic Census (http://www.census.gov/econ/census/). If the data showed that the number of 
employees of a loan recipient exceeded its industry based employee size 
standard (or employee equivalents in the case of receipts-based size 
standards), SBA deemed for the purposes of this analysis that the loan 
was approved under the temporary statutory alternative size standard. 
Conversely, if the loan recipient's number of employees was equal to or 
less than the industry based size standard, it was deemed for the 
purposes of this analysis that the loan could have been approved under 
the industry based size standard.
    Based on the results obtained from this analysis, SBA estimates 
that about 1.3% of the 207,161 total loan approvals issued during FY 
2015-2017 went to firms that exceeded their industry based size 
standard, thereby implying that these firms were most likely qualified 
only under the temporary statutory alternative size standard. SBA 
estimates the total value of these loans to be $3.1 billion, or 3.6% of 
$86.9 billion in total loans approved during that period. Such a small 
percentage of loan approvals issued to firms that exceeded their 
industry size standard (1.3%) suggests that a vast majority of small 
businesses receiving loans through SBA's Business Loan Programs would 
have qualified under their industry based size standards and would not 
be impacted significantly by a modification, if any, to the Interim 
Rule.
    Although useful, the analyzed data is selective in that it includes 
only those firms that were approved for and received an SBA Business 
Loan, but not those that applied and were not approved nor those 
interested in applying in the future. This data does not allow SBA to 
accurately determine the broader impact of a change to the Interim 
Rule, nor does it provide the Agency with a robust source of 
information from which a new permanent alternative size standard can be 
developed. Furthermore, while SBA has approximated the percentage of 
all loan approvals issued to small businesses that qualified only under 
the Interim Rule, it is not possible to determine the precise impact 
because the available electronic data lacks tangible net worth and 
average net income data for the impacted population of small 
businesses. Data on tangible net worth and average net income for the 
impacted businesses, if available from other sources, may reveal 
additional insights into the results of SBA's analysis of FY 2015-2017 
loan data.
    Additionally, SBA is statutorily authorized to make direct loans 
under the EIDL Program to small businesses that do not have credit 
available elsewhere and that have suffered a substantial economic 
injury as a result of a disaster. 15 U.S.C. 636(b)(2). Historically, 
the size standards applicable to small business concerns that apply for 
loans under the EIDL Program have been the same industry based size 
standards applicable to small

[[Page 12508]]

business applicants for the Business Loan Programs. See, 13 CFR 
123.300(b). Although the temporary statutory alternative size standard 
established by the Jobs Act does not apply to the EIDL Program, SBA is 
considering applying the new permanent alternative size standard 
established for the Business Loan Programs to the EIDL Program as an 
alternative to industry based size standards.

Request for Comments

    Against the above backdrop, in this ANPRM, SBA seeks comment on the 
following issues.
    1. SBA seeks comment on whether or not the level of the temporary 
statutory alternative size standard under the Interim Rule (i.e., $15 
million in tangible net worth and $5 million in average net income) is 
appropriate under the current credit environment and as a new permanent 
alternative size standard. Commenters in support of the level in the 
Interim Rule should provide justification, along with supporting data 
and analysis to support their position. Similarly, commenters who 
believe the level established in the Interim Rule is not appropriate as 
a permanent alternative size standard should suggest, along with 
supporting data and analysis, a different alternative size standard 
which they believe would be more appropriate. The suggested alternative 
size standard must be based on tangible net worth and average net 
income as required by section 3(a)(5) of the Small Business Act. 15 
U.S.C. 632(a)(5).
    2. SBA seeks comment on the impact of using an alternative size 
standard on small businesses seeking loans through its Business Loan 
Programs. Specifically, SBA welcomes information on industries/sectors 
where small businesses benefit the most or do not benefit at all from 
the use of an alternative size standard. Similarly, SBA is also looking 
for data on the number of businesses approved for SBA's Business Loans 
under the temporary statutory alternative size standard that otherwise 
could not have been approved under their industry based size standards.
    3. SBA invites suggestions on sources of relevant data and 
information, especially tangible net worth and average net income of 
applicants to SBA's Business Loan Programs, that SBA can evaluate to 
assess the impact of the Interim Rule on small businesses and use in 
developing a new permanent alternative size standard and in estimating 
the impact of the new permanent alternative size standard.
    4. SBA invites comments from interested parties on the proposal to 
apply the same new permanent alternative size standard established for 
the Business Loan Programs to the EIDL Program as an alternative to 
industry based size standards.
    5. SBA also seeks comment on how the Interim Rule has affected the 
processes used by lenders participating in the Business Loan Programs 
and what effects a permanent alternative size standard would have on 
application processes and processing times.
    6. SBA invites comment on the effects of the Interim Rule on 
conventional small business lending. Specifically, SBA welcomes input 
on whether, and to what extent, if any, SBA Business Loans approved 
under the Interim Rule have substituted for or displaced directly or 
indirectly conventional small business lending, or whether such SBA 
Business Loans played more of a supplementary role in conventional 
small business lending activity.

    Dated: March 14, 2018.
Linda E. McMahon,
Administrator.
[FR Doc. 2018-05787 Filed 3-21-18; 8:45 am]
 BILLING CODE 8025-01-P