[Federal Register Volume 83, Number 189 (Friday, September 28, 2018)]
[Proposed Rules]
[Pages 49001-49017]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20869]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 103, 120 and 121

RIN 3245-AG74


Express Loan Programs; Affiliation Standards

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
proposing to amend various regulations governing its business loan 
programs, including the SBA Express and Export Express Loan Programs 
and the Microloan and Development Company (504) loan programs.

DATES: SBA must receive comments to the proposed rule on or before 
November 27, 2018.

ADDRESSES: You may submit comments, identified by RIN: 3245-AG74, by 
any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Kimberly Chuday or Thomas Heou, Office of Financial 
Assistance, Office of Capital Access, Small Business Administration, 
409 Third Street SW, Washington, DC 20416.
     Hand Delivery/Courier: Kimberly Chuday or Thomas Heou, 
Office of Financial Assistance, Office of Capital Access, 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 
Kimberly Chuday or Thomas Heou, Office of Financial Assistance, Office 
of Capital Access, 409 Third Street SW, Washington, DC 20416. 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: Robert Carpenter, Acting Chief, 7(a) 
Program and Policy Branch, Office of Financial Assistance, Office of 
Capital Access, Small Business Administration, 409 Third Street SW, 
Washington, DC 20416; telephone: (202) 205-7654; email://[email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

    The SBA Express Loan Program (SBA Express) is established in 
section 7(a)(31) of the Small Business Act (the Act) (15 U.S.C. 
636(a)(31)). Under SBA Express, designated Lenders (SBA Express 
Lenders) are permitted to use, to the maximum extent practicable, their 
own analyses, procedures, and documentation in making, closing, 
servicing, and liquidating SBA Express loans. They also have reduced 
requirements for submitting documentation to SBA and obtaining the 
Agency's prior approval. These loan analyses, procedures, and 
documentation must meet prudent lending standards; be consistent with 
those the Lenders use for their similarly-sized, non-SBA guaranteed 
commercial loans; and conform to all requirements imposed upon Lenders 
generally and SBA Express Lenders in particular by Loan Program 
Requirements (as defined in 13 CFR 120.10), as such requirements are 
issued and revised by SBA from time to time, unless specifically 
identified by SBA as inapplicable to SBA Express loans. In exchange for 
the increased authority and autonomy provided under the SBA Express 
Program, SBA Express Lenders agree to accept a maximum guaranty of 50 
percent.
    The Export Express Loan Program (Export Express) is established in 
section 7(a)(34) of the Act (15 U.S.C. 636(a)(34)). This program is 
designed to help SBA meet the export financing needs of small 
businesses. Although it is a separate program, Export Express is 
generally subject to the same loan processing, making, closing, 
servicing, and liquidation requirements as well as the same interest 
rates and applicable fees as SBA Express. However, Export Express loans 
have a higher maximum loan amount than is available under SBA Express, 
and a maximum guaranty percentage of 75 or 90 percent, depending on the 
amount of the Export Express loan.

A. Proposed Amendments

    This proposed rule would:
    1. Incorporate into the regulations governing the 7(a) Loan Program 
the requirements specifically applicable to the SBA Express and Export 
Express Loan Programs in order to provide additional clarity for SBA 
Express and Export Express Lenders;
    2. Add a new regulation to require certain owners of the small 
business Applicant to inject excess liquid assets into the business to 
reduce the amount of SBA-guaranteed funds that otherwise would be 
needed;

[[Page 49002]]

    3. Revise the regulations concerning allowable fees for the 7(a) 
Loan Program to limit the fees payable by the small business Applicant 
and to clarify what SBA considers reasonable with respect to such fees;
    4. Amend the regulation that explains the Agency's policy governing 
SBA-guaranteed loans to qualified employee trusts to require that all 
such applications be processed under non-delegated procedures;
    5. Incorporate a change to implement SBA's long-standing policy 
regarding the responsibility of a Lender for the contingent liabilities 
(including repairs and denials) for Lenders purchasing 7(a) loans from 
the Federal Deposit Insurance Corporation (FDIC) (as receiver, 
conservator, or other liquidator of a failed insured depository 
institution), whether such loans are acquired through a loan sale where 
SBA has not already purchased the guaranty or through a whole bank 
transfer;
    6. Revise the regulations governing the use of microloan grant 
funds by Microloan Intermediaries and extend the maximum maturity of a 
microloan;
    7. Modify the affiliation principles applicable to SBA's financial 
assistance programs to include additional circumstances when a small 
business Applicant will be deemed to be affiliated with another entity 
for purposes of determining the small business Applicant's size;
    8. Amend the regulation identifying when the size status of an 
Applicant for financial assistance is determined with respect to 
applications under the SBA Express and Export Express Loan Programs; 
and
    9. Make technical corrections to the regulation identifying 
prohibited fees in the 7(a) Loan Program and the regulation discussing 
the application for the Accredited Lenders Program (ALP) in the 504 
Loan Program, as well as conforming amendments to two existing 
regulations for consistency with the proposed regulations governing SBA 
Express and Export Express, and a conforming amendment to one existing 
regulation for consistency with the proposed changes to the allowable 
fees that may be charged in connection with a 7(a) loan.

B. Affected Programs

    The SBA programs affected by this proposed rule are:
    1. The 7(a) Loan Program authorized pursuant to Section 7(a) of the 
Act (15 U.S.C. 636(a));
    2. The Business Disaster Loan Programs (collectively, the Economic 
Injury Disaster Loans, Military Reservist Economic Injury Disaster 
Loans, and Physical Disaster Business Loans) authorized pursuant to 
Section 7(b) of the Act;
    3. The Microloan Program authorized pursuant to Section 7(m) of the 
Act (15 U.S.C. 636(m));
    4. The Intermediary Lending Pilot (ILP) Program authorized pursuant 
to Section 7(l) of the Act (15 U.S.C. 636(l));
    5. The Surety Bond Guarantee Program authorized pursuant to Part B 
of Title IV of the Small Business Investment Act of 1958 (15 U.S.C. 
694b et seq.); and
    6. The Development Company Program (the 504 Loan Program) 
authorized pursuant to Title V of the Small Business Investment Act of 
1958 (15 U.S.C. 695 et seq.).

(The 7(a), Microloan, ILP, and 504 Loan Programs are collectively 
referred to as the Business Loan Programs.)

    The Agency requests comments on all aspects of the regulatory 
revisions in this proposed rule and on any related issues affecting the 
Business Loan, Surety Bond Guarantee, and Business Disaster Loan 
Programs.

II. Summary of Proposed Changes

A. Business Loan Programs

1. SBA Express and Export Express Loan Programs
Sections 120.441 through 120.447 SBA Express and Export Express Loan 
Programs
    SBA proposes adding a new undesignated center heading entitled 
``SBA Express and Export Express Loan Programs'' and several new 
regulations that describe the two loan programs and the specific 
requirements applicable to them, as described more fully below. These 
proposed regulations are drafted based on the current statutory limits 
applicable to the SBA Express and Export Express Loan Programs. In the 
event that the SBA Express or Export Express statutory loan limits are 
increased by Congress, SBA will revise the regulations, including 
making necessary changes to mitigate any additional risk associated 
with an increase in loan size.
    Section 120.441 SBA Express and Export Express Loan Programs. SBA 
proposes adding a regulation providing general descriptions of the SBA 
Express and Export Express Loan Programs.
    Section 120.442 Process to obtain or renew SBA Express or Export 
Express authority. SBA proposes adding a regulation that sets forth the 
criteria and process to obtain or renew SBA Express or Export Express 
authority. In evaluating an existing 7(a) Lender's application for SBA 
Express or Export Express authority, SBA will consider the delegated 
authority criteria and follow the procedures set forth in Sec.  
120.440. Lending institutions that do not currently participate with 
SBA may apply to be SBA Express and/or Export Express Lenders, but must 
become 7(a) Lenders in order to participate in SBA Express and/or 
Export Express. Such institutions may request SBA 7(a) lending and SBA 
Express and/or Export Express authority simultaneously. In evaluating 
such institutions, in addition to the criteria set forth in Sec. Sec.  
120.410 (requirements for all participating Lenders) and 120.440 
(delegated authority criteria), SBA will consider whether the 
institution has acceptable experience making small commercial loans, 
and whether its employees have received appropriate training on SBA's 
policies and procedures. Currently, SBA considers a Lender to have 
acceptable experience making small commercial loans when the Lender has 
at least 20 commercial loans of $350,000 or less with acceptable 
performance.
    As set forth in Sec.  120.440, the decision to grant SBA Express or 
Export Express authority will be made by the appropriate SBA official 
in accordance with Delegations of Authority, and is final. If SBA 
Express or Export Express authority is approved, SBA will provide the 
Lender with the appropriate supplemental guarantee agreement, which the 
Lender must execute and return to SBA before the Lender's SBA Express 
or Export Express authority will become effective.
    In renewing a Lender's SBA Express or Export Express authority and 
determining the term of the renewal, SBA will consider the criteria and 
follow the process set forth in Sec.  120.440. Currently, in renewing a 
Lender's Export Express authority, SBA also will consider whether the 
Export Express Lender can effectively process, make, close, service, 
and liquidate Export Express loans; has received a major substantive 
objection regarding renewal from the Field Office(s) covering the 
territory where the Lender generates significant numbers of Export 
Express loans; and has received acceptable review results on the Export 
Express portion of any SBA-administered Lender reviews. In this rule, 
SBA proposes to incorporate the additional considerations identified 
above for Export Express authority, but modify them to apply to both 
SBA Express and Export Express authority. Thus, in addition to the 
criteria set out in Sec.  120.440, SBA also would consider whether the 
Lender can effectively process, make, close, service, and liquidate SBA 
Express or Export Express

[[Page 49003]]

loans, as applicable; has received a major substantive objection 
regarding renewal from the Field Office(s) covering the territory where 
the Lender generates significant numbers of SBA Express or Export 
Express loans, as applicable; and has received acceptable review 
results on the SBA Express or Export Express portion, as applicable, of 
any SBA-administered Lender reviews.
    SBA may approve a Lender's initial application for authority to 
participate in SBA Express or Export Express for a maximum term of two 
years. SBA may approve a lesser term or limit a Lender's maximum SBA 
Express or Export Express loan volume if, in SBA's sole discretion, a 
Lender's qualifications, performance, experience with SBA lending, or 
other factors so warrant (e.g., Lenders with little or no experience 
with SBA lending).
    SBA is proposing to include in the regulations that the Agency may 
renew a Lender's authority to participate in SBA Express for a maximum 
term of three years if, in SBA's sole discretion, a Lender's 
qualifications, performance, SBA experience, or other factors so 
warrant. Although renewals of other types of delegated authority (e.g., 
Preferred Lender Program (PLP)) are for a maximum term of two years, 
SBA is proposing a longer renewal term for Lenders participating in SBA 
Express because SBA Express Lenders have accepted more of the risk in 
their SBA Express loans than other SBA Lenders, including Export 
Express Lenders.
    SBA may renew a Lender's authority to participate in Export Express 
for a maximum term of two years. SBA may approve a shorter renewal term 
or limit a Lender's maximum SBA Express or Export Express loan volume 
if, in SBA's sole discretion, a Lender's qualifications, performance, 
experience with SBA lending, or other factors so warrant.
    SBA is proposing a conforming amendment to the delegated authority 
criteria regulation at Sec.  120.440(c) to clarify that a Lender's 
authority to participate in SBA Express may be renewed for a maximum 
term of three years. In addition, SBA is proposing some technical 
corrections to Sec.  120.440(c).
    Section 120.443 SBA Express and Export Express loan processing 
requirements. SBA proposes adding a regulation that sets forth the 
requirements for loan processing under the SBA Express and Export 
Express loan programs. The regulations applicable to all Business Loans 
in Subparts A and B of Part 120, and 7(a) Loans specifically, govern 
the making of SBA Express and Export Express loans, unless specifically 
identified by SBA as inapplicable. For example, the same types of 
businesses that are ineligible for 7(a) loans under Sec.  120.110 also 
are ineligible for SBA Express and Export Express loans. SBA Express 
and Export Express Lenders must follow all 7(a) eligibility 
requirements and maintain appropriate documentation supporting their 
eligibility determination in the loan file.
    Certain types of loans and loan programs are not eligible for 
processing under a Lender's delegated authority (including under a 
Lender's SBA Express or Export Express authority), as described in 
SBA's Standard Operating Procedure (SOP) 50 10 (Lender and Development 
Company Loan Programs). These loans currently include, but are not 
limited to: Special purpose loans (e.g., Disabled Assistance Loans, 
loans to Employee Stock Ownership Plans or equivalent trusts, Pollution 
Control Loans, or CAPLines); a loan that would reduce an SBA Express or 
Export Express Lender's existing credit exposure for a single Borrower, 
including its affiliates as defined in 13 CFR 121.301(f); a loan to a 
business that has an outstanding 7(a) loan where the Applicant is 
unable to certify that the loan is current at the time the SBA Express 
or Export Express Lender approves the SBA Express or Export Express 
loan; a loan that would have as its primary collateral real estate or 
personal property that will not meet SBA's environmental requirements; 
and complex loan structures or eligibility situations.
    For all other loans, SBA has authorized SBA Express and Export 
Express Lenders to make the credit decision without prior SBA review 
(i.e., using the Lender's delegated authority). As with all 7(a) loans, 
Lenders must not make an SBA-guaranteed loan that would be available on 
reasonable terms from either the Lender itself or another non-federal 
source without an SBA guaranty. In addition, the Lender's credit 
analysis must demonstrate that there is reasonable assurance of 
repayment. SBA Express and Export Express Lenders must use appropriate 
and prudent credit analysis processes and procedures that are generally 
accepted in the commercial lending industry and consistent with those 
used for their similarly-sized, non-SBA guaranteed commercial loans. As 
part of their prudent credit analysis, SBA Express and Export Express 
Lenders may use a business credit scoring model (such a model cannot 
rely solely on consumer credit scores) to assess the credit history of 
the Applicant and/or repayment ability if they do so for their 
similarly-sized, non-SBA guaranteed commercial loans. If used, the 
business credit scoring results must be documented in each loan file 
and available for SBA review. Lenders that do not use credit scoring 
for their similarly-sized, non-SBA guaranteed commercial loans may not 
use credit scoring for SBA Express or Export Express. Although Small 
Business Lending Companies (SBLCs), as defined in Sec.  120.10, do not 
make non-SBA guaranteed loans, SBA has determined that they may use 
credit scoring as part of their prudent credit analysis for their SBA 
Express or Export Express loans.
    All SBA Express and Export Express Lenders must validate (and 
document) with appropriate statistical methodologies that their credit 
analysis procedures are predictive of loan performance, and they must 
provide that documentation to SBA upon request. SOP 50 10 includes the 
requirement that SBLCs provide credit scoring model validation to SBA 
for review and approval on an annual basis.
    The credit decision, including for example, how much to factor in a 
past bankruptcy and whether to require an equity injection (outside of 
any injection of excess personal resources under the proposed new Sec.  
120.102, as discussed below), is left to the business judgment of the 
SBA Express or Export Express Lender. Also, if the SBA Express or 
Export Express Lender requires an equity injection and, as part of its 
standard processes for its similarly-sized, non-SBA guaranteed loans 
verifies the equity injection, it must do so for its SBA Express or 
Export Express loans. SBLCs must follow the written policies and 
procedures that have been reviewed by SBA. While the credit decision is 
left to the business judgment of the SBA Express or Export Express 
Lender, early loan defaults will be reviewed by SBA pursuant to SOP 50 
57 (7(a) Loan Servicing and Liquidation).
    SBA Express and Export Express Lenders are responsible for all loan 
decisions, including eligibility for 7(a) loans (including size), 
creditworthiness and compliance with all Loan Program Requirements (as 
defined in Sec.  120.10). SBA Express and Export Express Lenders also 
are responsible for confirming that all loan closing decisions are 
correct and that they have complied with all requirements of law and 
Loan Program Requirements.
    SBA Express and Export Express Lenders must ensure all required 
forms are obtained and are complete and properly executed. Appropriate 
documentation must be maintained in the Lender's loan file, including

[[Page 49004]]

adequate information to support the eligibility of the Applicant and 
the loan.
    Section 120.444 Eligible uses of SBA Express and Export Express 
loan proceeds. SBA is proposing to add a regulation to identify the 
eligible uses of loan proceeds for SBA Express and Export Express 
loans. Under SBA Express, loan proceeds must be used exclusively for 
eligible business-related purposes, as described in 13 CFR 120.120 and 
120.130, which set forth the eligible uses of loan proceeds for 7(a) 
loans. In addition, it is the SBA Express Lender's responsibility to 
take reasonable steps to ensure and document that the loan proceeds are 
used exclusively for business-related purposes.
    Notwithstanding 13 CFR 120.130(c), revolving lines of credit are 
eligible for SBA Express, subject to certain conditions related to 
maturities and disbursement as set forth in SOP 50 10. Currently, SBA 
Express revolving loans have a maximum maturity of 10 years and must be 
structured with a term-out period that is not less than the draw 
period, with no draws permitted during the term-out period. For 
example, an SBA Express loan can have an eight year maturity with a two 
year draw period and a term-out period of six years. Conversely, a loan 
with an eight year maturity cannot have a draw period of six years and 
term-out period of two years. Further, as set forth in 13 CFR part 120, 
subpart F, revolving loans cannot be sold on the secondary market. (SBA 
is proposing a conforming amendment to Sec.  120.130(c) (``Restrictions 
on uses of proceeds'') to include a reference to this new Sec.  120.444 
to clarify that revolving lines of credit are an eligible use of 7(a) 
loan proceeds under SBA Express and Export Express.)
    SBA Express and Export Express Lenders may refinance certain 
outstanding debts with SBA Express or Export Express loans, under the 
conditions set forth in SOP 50 10. An SBA Express Lender may refinance 
an existing non-SBA guaranteed loan held by another lender with an SBA 
Express loan if the Lender determines that the existing debt no longer 
meets the needs of the Applicant and, for certain types of debt, the 
new loan will provide a 10 percent improvement in the debt service 
coverage ratio. An SBA Express Lender may refinance its own non-SBA 
guaranteed debt, provided that: (1) The Lender determines that the 
existing debt no longer meets the needs of the Applicant; (2) the new 
loan will provide a 10 percent improvement in the debt service coverage 
ratio (for certain types of loans as explained in SOP 50 10); (3) the 
debt to be refinanced is, and has been, current for the past 36 months 
(``current'' means no required payment has been more than 29 days past 
due); and (4) the Lender's credit exposure to the Applicant will not be 
reduced. Existing SBA-guaranteed loans may not be refinanced under SBA 
Express, unless: (1) The transaction is the purchase of an existing 
business that has an existing SBA loan that is not with the requesting 
SBA Express Lender; or (2) the Applicant needs additional financing and 
the existing Lender is unable or unwilling to increase the existing SBA 
loan or make a second loan, and (3) the new loan will provide a 10 
percent improvement in debt service coverage. An SBA Express Lender may 
not refinance its own existing SBA-guaranteed debt under SBA Express.
    Export Express loans must be used for an export development 
activity, which is defined in section 7(a)(34)(A)(i) of the Act and 
includes the following:
    (1) Obtaining a Standby Letter of Credit when required as a bid 
bond, performance bond, or advance payment guarantee;
    (2) Participation in a trade show that takes place outside the 
United States;
    (3) Translation of product brochures or catalogues for use in 
markets outside the United States;
    (4) Obtaining a general line of credit for export purposes;
    (5) Performing a service contract for buyers located outside the 
United States;
    (6) Obtaining transaction-specific financing associated with 
completing export orders;
    (7) Purchasing real estate or equipment to be used in the 
production of goods or services for export;
    (8) Providing term loans and other financing to enable a small 
business concern, including an export trading company and an export 
management company, to develop a market outside the United States; and
    (9) Acquiring, constructing, renovating, modernizing, improving or 
expanding a production facility or equipment to be used in the United 
States in the production of goods or services for export.
    As noted above, Export Express loans may be used to refinance 
certain outstanding debts, under the conditions set forth in SOP 50 10. 
Specifically, Export Express loans may be used to refinance existing 
non-SBA guaranteed debt, whether held by another lender or by the 
Export Express Lender, if the Export Express Lender follows the 
guidance for refinancing under SBA Express and verifies and documents 
that the new loan will be used to finance an export development 
activity. Export Express loans may be used to refinance an existing 
Export Express loan held by another Export Express Lender only if the 
original Export Express Lender is unable or unwilling to increase or 
make a second Export Express loan, which must be documented in the loan 
file. An Export Express Lender may not refinance one of its own Export 
Express loans with a new Export Express loan.
    Export Express loans may not be used to finance overseas 
operations, except for the marketing and/or distribution of products/
services exported from the United States.
    Export Express Lenders are responsible for ensuring that U.S. 
companies are authorized to conduct business with the Persons and 
countries to which the Borrower will be exporting. Specific guidance as 
to how Export Express Lenders will be expected to do so will be 
included in SOP 50 10.
    Specific documentation requirements related to the use of proceeds 
for Export Express loans are described more fully in SOP 50 10.
    Section 120.445 Terms and conditions of SBA Express and Export 
Express loans. While generally the terms and conditions applicable to 
7(a) loans also apply to SBA Express and Export Express loans, there 
are some differences. SBA is proposing to add a new regulation to 
identify those terms and conditions of SBA Express and Export Express 
loans that are unique to these two programs, including maximum loan 
amounts and guaranty percentages, maturities, interest rates, 
collateral and insurance requirements, allowable fees and requirements 
concerning loan increases. With respect to the maximum loan amounts, 
the proposed rule refers to the maximum loan amount for each program as 
set forth in the applicable section of the Small Business Act (sections 
7(a)(31)(D) and 7(a)(34)(C)(i), respectively). Currently, the maximum 
loan amount for SBA Express is $350,000 and the maximum loan amount for 
Export Express is $500,000.
    With respect to collateral, currently, for loans of $25,000 or 
less, SBA Express and Export Express Lenders are not required to take 
collateral to secure the loan. For loans over $25,000, SBA Express and 
Export Express Lenders must, to the maximum extent practicable, follow 
the written collateral policies and procedures that they have 
established and implemented for their similarly-sized, non-SBA 
guaranteed commercial loans, except for Export Express lines of credit 
over $25,000 used to support the issuance of a

[[Page 49005]]

standby letter of credit. Export Express lines of credit over $25,000 
used to support the issuance of a standby letter of credit must have 
collateral (cash, cash equivalent or project) that will provide 
coverage for at least 25% of the issued standby letter of credit 
amount.
    SBA proposes to incorporate these collateral requirements into new 
Sec.  120.445(e), with the exception of the dollar thresholds. Rather 
than include the current thresholds in the proposed rule, SBA is 
proposing to include language in the regulation giving the Agency the 
ability to establish a threshold below which SBA Express and Export 
Express Lenders will not be required to take collateral to secure an 
SBA Express or Export Express loan. The threshold would be described 
more fully in SOP 50 10. This will provide the Agency with the 
flexibility to adjust the threshold if necessary.
    Additionally, this proposed regulation provides that SBA Express 
and Export Express Lenders may sell the guaranteed portions of SBA 
Express and Export Express term loans on the secondary market in 
accordance with 13 CFR subpart F, but may not sell the guaranteed 
portions of SBA Express or Export Express revolving lines of credit on 
the secondary market.
    SBA Express and Export Express Lenders must pay the same fees to 
SBA that all 7(a) Lenders pay, which are identified in Sec.  120.220. 
The fees and expenses that 7(a) Lenders may collect from an Applicant 
or Borrower are set forth in the regulation at Sec.  120.221. 
Currently, with the exception of renewal fees, SBA Express and Export 
Express Lenders may charge an Applicant or Borrower on an SBA Express 
or Export Express loan the same types of fees they charge on their 
similarly-sized, non-SBA guaranteed commercial loans, provided that the 
fees are directly related to the service provided and are reasonable 
and customary for the services performed. The fees charged on SBA 
Express or Export Express loans may not be higher than those charged on 
the Lender's similarly-sized, non-SBA guaranteed commercial loans. In 
this rule, SBA proposes to require SBA Express and Export Express 
Lenders to comply with the same rules that apply to all other 7(a) 
Lenders with respect to the fees that may be collected from an 
Applicant or Borrower on SBA Express and Export Express loans. As noted 
above, the regulation at Sec.  120.221 sets forth the fees and expenses 
that 7(a) Lenders may collect from an Applicant or Borrower. In 
addition, 13 CFR part 103 of the regulations governs Agents, including 
their fees and provision of services. As discussed more fully in 
Section 3 below, SBA is proposing changes to Sec. Sec.  120.221, 
103.4(g), and 103.5 with respect to the fees that may be collected from 
an Applicant or Borrower by a 7(a) Lender or Agent. These changes will 
be applicable to all 7(a) loans, including SBA Express and Export 
Express loans.
    Consistent with SBA Loan Program Requirements, if an SBA Express or 
Export Express Lender requests that SBA honor its guaranty, the Agency 
will not purchase any portion of the loan balance that consists of fees 
charged to the borrower, with the exception of the SBA guaranty fee. 
Also, as set forth in Sec.  120.222, SBA Express and Export Express 
Lenders and their Associates are prohibited from sharing any premium 
received from the sale of an SBA guaranteed loan in the secondary 
market with a Service Provider, packager, or other loan-referral 
source. Lenders may be subject to enforcement or other appropriate 
action, including suspension or revocation of their privilege to sell 
loans in the secondary market, in the event of a violation of this 
prohibition.
    Because SBA will require SBA Express and Export Express Lenders to 
comply with the same rules that apply to all other 7(a) Lenders with 
respect to the fees and expenses that may be collected from an 
Applicant or Borrower in connection with an SBA-guaranteed loan 
(including SBA Express and Export Express loans), SBA is not including 
language regarding fees in proposed Sec.  120.445.
    Section 120.446 SBA Express and Export Express loan closing, 
servicing, liquidation, and litigation requirements. SBA proposes to 
add a new regulation providing that SBA Express and Export Express 
Lenders must close, service, liquidate, and litigate their SBA Express 
and Export Express loans using the same documentation and procedures 
they use for their similarly-sized, non-SBA guaranteed commercial 
loans, which must comply with law, prudent lending practices, and Loan 
Program Requirements. Additionally, the proposed regulation provides 
that SBA Express and Export Express Lenders must comply with the loan 
servicing and liquidation responsibilities set forth for 7(a) Lenders 
in 13 CFR part 120, subpart E and other Loan Program Requirements. 
Additional guidance on loan closing, servicing, liquidation and 
litigation is provided in SOPs 50 10 and 50 57.
    The proposed regulation also describes the circumstances under 
which SBA will honor the guaranty on SBA Express and Export Express 
Loans. As is true for 7(a) loans generally, SBA will purchase the 
guaranteed portion of an SBA Express or Export Express loan in 
accordance with Sec.  120.520 and other Loan Program Requirements, in 
particular SOP 50 57. In accordance with Sec.  120.520(a)(1), for loans 
approved on or after May 14, 2007, unless the Borrower filed for 
bankruptcy, the SBA Express or Export Express Lender may request that 
SBA honor the guaranty on the loan if there is an uncured payment 
default of more than 60 days and the Lender has liquidated the business 
personal property collateral securing the defaulted loan. In accordance 
with Sec.  120.520(a)(2) and SOP 50 57, for loans approved before May 
14, 2007, an SBA Express Lender must liquidate all collateral for the 
loan and pursue all cost-effective means of recovery to collect the 
debt before the Lender can request that SBA honor its guaranty. For 
Export Express loans, however, the Lender does not have to liquidate 
all of the collateral and pursue all cost-effective means of recovery 
prior to requesting that SBA honor its guaranty if the outstanding 
principal balance is $50,000 or less or there is protracted litigation 
or other circumstances that will extend the liquidation process. It is 
important to note that, while non-financial default provisions are 
allowed under SBA Express and Export Express under certain conditions 
set forth in SOP 50 10, an SBA Express or Export Express Lender may not 
request purchase of the guaranty based solely on a violation of a non-
financial default provision.
    SBA will be released of its liability on an SBA Express or Export 
Express loan guaranty in accordance with Sec.  120.524.
    Section 120.447 Lender oversight of SBA Express and Export Express 
Lenders. SBA proposes to add a new regulation explaining that SBA 
Express and Export Express Lenders are subject to the same risk-based 
lender oversight as 7(a) Lenders, including supervision and enforcement 
provisions, in accordance with 13 CFR part 120, subpart I. Additional 
guidance concerning Lender supervision and enforcement is provided in 
SOPs 50 53 (Lender Supervision and Enforcement) and 51 00 (On-Site 
Lender Reviews/Examinations).
2. Credit Elsewhere and the Personal Resources of Owners of the Small 
Business Applicant
    Section 120.102 Funds not available from alternative sources, 
including the personal resources of owners. Effective April 21, 2014, 
SBA removed Sec.  120.102 from the regulations, thereby eliminating 
what was commonly known as the ``personal resources test'' from the

[[Page 49006]]

requirements to determine eligibility for the Business Loan Programs. 
This regulation required certain owners of the Applicant business to 
inject personal liquid assets into the business to reduce the amount of 
SBA-guaranteed funds that would otherwise be needed. The Agency 
eliminated this requirement in 2014 because it was concerned, at that 
time, that even borrowers whose principals had significant personal 
resources may have been unable to obtain long-term fixed asset 
financing from private sources at reasonable rates. The Agency also 
questioned whether the existence of personal resources directly 
correlated to the ability to obtain commercial credit on reasonable 
terms. In addition, the Agency determined that financing more robust 
borrowers in the program would offset some of the risks to SBA. 
However, SBA is now concerned that borrowers with large amounts of 
personal assets are receiving government-backed loans. In order to 
ensure that SBA financial assistance is provided only to those small 
businesses that are unable to obtain credit from alternative sources 
without a government guaranty, including the personal resources of the 
owners of the small business, SBA proposes to reinstitute a personal 
resources test.
    SBA proposes to add a regulation that would require SBA Lenders 
(i.e., both 7(a) Lenders and Certified Development Companies (CDCs)) to 
analyze the resources of individuals and entities that own 20 percent 
or more of the Applicant business in order to determine if any of the 
owners have liquid assets available that can provide some or all of the 
desired financing. (The resources of an owner who is an individual 
include the resources of the owner's spouse and minor children.) When 
an owner of 20 percent or more has liquid assets that exceed stated 
thresholds, SBA is proposing to require an injection of cash from any 
such owner to reduce the SBA loan amount. Specifically, when the total 
financing package (i.e., any SBA loans and any other financing, 
including loans from any other source, requested by the Applicant 
business at or about the same time):
    (1) Is $350,000 or less, each 20 percent owner of the Applicant 
must inject any liquid assets that are in excess of one and three-
quarter times the total financing package, or $200,000, whichever is 
greater;
    (2) Is between $350,001 and $1,000,000, each 20 percent owner of 
the Applicant must inject any liquid assets that are in excess of one 
and one-half times the total financing package, or $1,000,000, 
whichever is greater;
    (3) Exceeds $1,000,000, each 20 percent owner of the Applicant must 
inject any liquid assets that are in excess of one times the total 
financing package, or $2,500,000, whichever is greater.
    SBA, in its sole discretion, may permit exceptions to the required 
injection of an owner's excess liquid assets only in extraordinary 
circumstances, such as when the excess funds are needed for medical 
expenses of a family member or education/college expenses for children.
3. Permissible Fees That a Lender or Agent May Collect From an 
Applicant or Borrower in Connection With a 7(a) Loan Application.
    The regulations governing permissible fees a Lender may collect 
from a loan Applicant or Borrower in connection with an SBA-guaranteed 
loan are set forth in Sec.  120.221. In addition, the regulations 
governing Agents, including their fees and provision of services, are 
set forth in 13 CFR part 103. Based on feedback obtained when 
conducting lender oversight activities and the numerous questions SBA 
receives concerning permissible fees, it is apparent that there is a 
significant amount of confusion surrounding who may charge an Applicant 
fees in connection with an SBA-guaranteed loan, what fees may be 
charged to the Applicant, what fees may be charged to the Lender, and 
what is a ``reasonable fee.'' In addition, in many cases, Applicants 
are being charged multiple fees by multiple providers (e.g., the Lender 
and a third party), on the same loan. On numerous occasions, SBA has 
had to require that a Lender or Agent refund amounts to an Applicant or 
Borrower that the Agency deemed were unreasonable or prohibited.
    The regulations governing Agents, including their fees and 
provision of services to either an Applicant or a Lender are set forth 
in Part 103, not in Part 120 of the regulations. The regulations in 
Part 103 provide key definitions, including but not limited to Agents, 
Lender Service Providers, Packagers and Referral Agents. (See Sec.  
103.1.) The definition of a Referral Agent in Sec.  103.1(f) states 
that a Referral Agent may be compensated by either an Applicant or a 
Lender. Thus, Agents are permitted to charge an Applicant a referral 
fee, while Lenders are not. In addition, while SBA permits Lenders to 
engage with Lender Service Providers (LSPs) (as defined in Sec.  
103.1(d)) to assist the Lender with lender functions in connection with 
SBA-guaranteed loans, the cost of the LSP services may not be charged 
to the Applicant or Borrower. (See Sec.  103.5(c).) To further 
complicate matters, the regulation at Sec.  103.4(g) states that a 
Lender Service Provider may not act as both a Lender Service Provider 
or Referral Agent and a Packager for an Applicant on the same SBA 
business loan and receive compensation for such activity from both the 
Applicant and Lender. However, that regulation provides a limited 
exception to this ``two master'' prohibition when an Agent acts as a 
Packager and is compensated by the Applicant for packaging services, 
and the same Agent also acts as a Referral Agent and is compensated by 
the Lender for referral activities in connection with the same loan 
application, provided the packaging services are disclosed to the 
Lender and the referral services are disclosed to the Applicant.
    In order to simplify who may charge fees to the Applicant and/or 
the Lender, and to limit the total amount of fees that an Applicant may 
be charged in order to obtain an SBA-guaranteed loan, SBA proposes to 
revise certain portions of the regulations at Sec. Sec.  120.221, 
103.4, and 103.5.
    Section 120.221 Fees and expenses which the Lender may collect from 
a loan Applicant or Borrower. Currently, Sec.  120.221(a) permits a 
Lender to charge an Applicant reasonable fees (customary for similar 
Lenders in the geographic area where the loan is being made) for 
packaging and other services. Under the current regulation, SBA permits 
Lenders to charge an Applicant a reasonable fee to assist the Applicant 
with the preparation of the application and supporting materials. 
However, SBA does not permit Lenders (or their Associates) to charge an 
Applicant a commitment, broker, referral, or similar fee.
    SBA proposes to amend Sec.  120.221(a) to limit the total fees an 
Applicant can be charged by a Lender for assistance in obtaining an 
SBA-guaranteed loan. Regardless of what the fee is called (e.g., a 
packaging fee, application fee, etc.), the Lender would be permitted to 
collect a fee from the Applicant that is no more than $2,500 for a loan 
up to and including $350,000 and no more than $5,000 for a loan over 
$350,000. With the exception of necessary out-of-pocket costs, such as 
filing or recording fees permitted in Sec.  120.221(c), this is the 
only fee that a Lender may collect directly or indirectly from an 
Applicant for assistance with obtaining an SBA-guaranteed loan. In 
addition, the Lender may not split a loan into two loans for the 
purpose of charging an additional fee to an Applicant. If there is a

[[Page 49007]]

legitimate business need for the Applicant's loan request to be split 
into two loans (e.g., a term loan and a line of credit), the Lender may 
only charge the Applicant one fee within the maximums set forth above, 
based on the combined loan amounts. For example, if the Applicant needs 
a $2 million term loan to purchase real estate and a building and a 
$350,000 line of credit for working capital, the Lender may charge one 
fee for both loans not to exceed $5,000.
    SBA considers these fees to be reasonable for the services provided 
by a Lender to an Applicant for assistance with obtaining an SBA-
guaranteed loan. SBA will monitor these fees and, if adjustments are 
necessary, SBA may revise these amounts from time to time.
    If the Lender charges the Applicant a fee for assistance with 
obtaining an SBA-guaranteed loan, the Lender must disclose the fee to 
the Applicant and SBA by completing the Compensation Agreement (SBA 
Form 159) in accordance with the regulation at Sec.  103.5 and the 
procedures set forth in SOP 50 10.
    SBA also proposes to amend Sec.  120.221(b) to permit extraordinary 
servicing fees in excess of 2 percent for Export Working Capital 
Program (EWCP) loans and Working Capital CAPLines that are disbursed 
based on a Borrowing Base Certificate. In these programs, the fees 
charged must be reasonable and prudent based on the level of 
extraordinary effort required, and cannot be higher than the fees 
charged on the Lender's similarly-sized, non-SBA guaranteed commercial 
loans. In addition, the fees charged cannot exceed the actual cost of 
the extra service provided. (SBA is proposing a conforming amendment to 
Sec.  120.344(b) to ensure extraordinary servicing fees charged on EWCP 
loans are reasonable and prudent.)
    The remaining sections of Sec.  120.221 (sections (c) through (e)) 
remain unchanged. Thus, in appropriate circumstances as set forth in 
current Sec. Sec.  120.221(c) through (e) and further clarified in SOP 
50 10, a Lender may charge an Applicant or Borrower out of pocket 
expenses, a late payment fee, and for legal services charged on an 
hourly basis.
    Section 103.4 What is ``good cause'' for suspension or revocation? 
As noted above, the regulation at Sec.  103.4(g) currently permits a 
limited exception to the ``two master'' prohibition when an Agent acts 
as a Packager and is compensated by the Applicant for packaging 
services, and the same Agent also acts as a Referral Agent and is 
compensated by the Lender for those activities in connection with the 
same loan application. SBA believes there is, at a minimum, an 
appearance of a conflict of interest when an Agent represents both the 
Applicant and the SBA Lender on the same loan application. In addition, 
the definition of an ``Associate'' of a SBA Lender set forth in Sec.  
120.10 includes ``an agent involved in the loan process.'' Therefore, 
an LSP or Referral Agent acting on behalf of the SBA Lender meets the 
definition of an Associate of the SBA Lender and is prohibited under 
current Loan Program Requirements from charging the Applicant certain 
fees or expenses in connection with an SBA-guaranteed loan. Further, 
when conducting Lender oversight activities, SBA has observed numerous 
instances where Applicants have been erroneously charged for services 
that were provided for the SBA Lender, not the Applicant. In order to 
prevent any conflicts of interest from arising and to ensure the 
Applicants are not improperly charged for services provided to the SBA 
Lender, SBA proposes to eliminate the limited exception to the ``two 
master prohibition'' and prevent an Agent, including an LSP, from 
providing services to both the Applicant and the SBA Lender and being 
compensated by both parties in connection with the same loan 
application. SBA proposes to use the defined term ``SBA Lender'' in the 
revised regulation to clarify that it applies to both 7(a) Lenders and 
CDCs. SBA also proposes to revise the remaining text of Sec.  103.4(g) 
for clarity.
    Section 103.5 How does SBA regulate an Agent's fees and provision 
of service? The regulation at Sec.  103.5 sets forth, among other 
things, the requirement for all Agents to disclose to SBA the 
compensation received for services provided to an Applicant and 
requires that fees charged must be considered reasonable by SBA. In an 
effort to clarify what SBA considers reasonable and to prevent 
Applicants from being overcharged by Agents, SBA proposes to amend this 
section to limit the total fees that an Agent may charge an Applicant 
in connection with obtaining an SBA-guaranteed loan.
    SBA proposes the following limitations on the fees that an Agent 
may charge an Applicant:
    (1) For loans up to and including $350,000: A maximum of up to 2.5% 
of the loan amount, or $7,000, whichever is less;
    (2) For loans $350,001-$1,000,000: A maximum of up to 2% of the 
loan amount, or $15,000, whichever is less; and
    (3) For loans over $1,000,000: A maximum of up to 1.5% of the loan 
amount, or $30,000, whichever is less.
    If an Agent provides more than one service (e.g., packaging and 
referral services), only one fee would be permitted for all services 
performed by the Agent. Further, if more than one Agent (e.g., a 
Packager and a Referral Agent) provides assistance to the Applicant in 
obtaining the loan, the amount of all fees that the Applicant may be 
required to pay would be combined to meet the maximum allowable fee set 
by SBA. (However, a fee charged to the Applicant by the Lender in 
accordance with proposed Sec.  120.221(a) will not be counted toward 
the maximum allowable fee for an Agent or Agents.) These maximum limits 
would apply regardless of whether the Agent's fee is based on a 
percentage of the loan amount or on an hourly basis.
    SBA considers these fees to be reasonable for the services provided 
by an Agent or Agents to an Applicant in connection with obtaining an 
SBA-guaranteed loan. SBA will monitor these fees and, if adjustments 
are necessary, SBA may revise these amounts from time to time by 
publishing a notice with request for comments in the Federal Register.
    If an Agent or Agents charge an Applicant fees in connection with 
obtaining an SBA-guaranteed loan, the Agent or Agents must disclose the 
fees to SBA by completing a Compensation Agreement (SBA Form 159) in 
accordance with the regulation at Sec.  103.5 and must provide 
supporting documentation as set forth in SOP 50 10.
    Additionally, SBA proposes to remove the word ``directly'' from the 
last sentence of Sec.  103.5(c) to clarify that compensation paid by 
the Lender to a Lender Service Provider may not be charged to 
Applicants, either directly or indirectly.
4. Loans to Qualified Employee Trusts
    The regulations governing SBA-guaranteed loans to qualified 
employee trusts or ``ESOPs'' are set forth in Sec. Sec.  120.350 
through 120.354. Currently, the regulation at Sec.  120.350 describes 
the Agency's policy concerning such loans and states that SBA is 
authorized under section 7(a)(15) of the Act to provide guaranteed 
loans to ESOPs to help finance the growth of the employer small 
business or to purchase ownership or voting control of the employer. 
Because of the complex nature of these transactions, SBA is proposing 
to amend the regulation at Sec.  120.350 to require such applications 
to

[[Page 49008]]

be processed only on a non-delegated basis.
5. A Lender's Responsibility When Purchasing 7(a) Loans From the FDIC 
as Receiver, Conservator, or Other Liquidator of a Failed Financial 
Institution
    Generally, when the FDIC takes over a failed insured depository 
institution, it sells the 7(a) loan assets of the institution to either 
an Assuming Institution (through a purchase and assumption transaction) 
or to an investor in one or more FDIC loan sales. SBA has a long-
standing policy of holding Assuming Institutions and investors 
responsible for the contingent liabilities (including repairs and 
denials) associated with 7(a) loans originated by failed insured 
depository institutions, whether the 7(a) loans are purchased by a 
Lender through an FDIC loan sale where SBA has not already purchased 
the guaranty or to an Assuming Institution through a whole bank 
transfer.
    Under Sec.  120.432(a), for 7(a) loan sales that do not involve the 
FDIC (i.e., the sale of a Lender's entire interest in a 7(a) loan to 
another Lender), SBA holds a purchasing Lender responsible for the 
contingent liabilities associated with the 7(a) loans acquired (even if 
the guaranteed portion of the loan has already been sold on the 
secondary market). SBA is proposing to amend the regulation at Sec.  
120.432(a) to implement its long-established policy for 7(a) loans 
acquired by Lenders from the FDIC (as receiver, conservator, or other 
liquidator of a failed insured depository institution).
6. Microloan Program
    Section 120.707 What conditions apply to loans by Intermediaries to 
Microloan borrowers? In order to provide more flexibility for the 
Microloan borrower, SBA proposes to revise the regulation at Sec.  
120.707(b) to increase the maximum maturity of a loan from an 
Intermediary to a Microloan borrower from six years to seven years. 
This change would allow for a longer repayment period for these small 
loans.
    Section 120.712 How does an Intermediary get a grant to assist 
Microloan borrowers? SBA proposes to revise the regulation at Sec.  
120.712(b) to incorporate recent statutory changes to the percentage of 
grant funds that may be used by the Intermediary for marketing, 
managerial, and technical assistance to prospective Microloan borrowers 
from 25 percent to 50 percent. The balance of grant funds must be used 
to provide technical assistance to actual borrowers (i.e., small 
businesses that have received loan funds from the Intermediary). In 
Sec.  120.712(d), SBA proposes to incorporate an identical recent 
statutory change to the percentage of grant funds the Intermediary may 
use to contract with third parties to provide technical assistance to 
Microloan borrowers. In addition, SBA proposes to revise Sec.  
120.712(b) to limit the amount of grant funds that an Intermediary may 
use to market or advertise the Microloan program to prospective 
borrowers to no more than 5 percent of the amount of the grant. None of 
the grant funds may be used by the Intermediary to market or advertise 
its non-SBA products or services. Furthermore, in accordance with the 
Office of Management and Budget guidance for grants and agreements set 
forth in 2 CFR 200.403 and 200.404, the amount of grant funds used by 
the Intermediary to market or advertise the Microloan program to 
prospective borrowers must be reasonable.
7. Technical Corrections
    Section 120.222 Prohibition on sharing premiums for secondary 
market sales. SBA proposes a technical correction to Sec.  120.222 to 
remove an extra word (``in'') that was inserted in error.
    Section 120.840 Accredited Lenders Program (ALP). In Sec.  
120.840(b), SBA is proposing to replace the reference to the Director, 
Office of Financial Assistance with ``appropriate SBA official in 
accordance with Delegations of Authority.''

B. Affiliation Principles for the Business Loan, Business Disaster 
Loan, and Surety Bond Guarantee Programs

    Section 121.301 What size standards and affiliation principles are 
applicable to financial assistance programs? SBA proposes to amend the 
affiliation principles applicable to Applicants for assistance in the 
financial assistance programs set forth in Sec.  121.301(f). 
Specifically, SBA proposes to expand the principle of affiliation 
arising from ``identity of interest'' to include common investments and 
economic dependence through contractual or other relationships between 
any two or more individuals or businesses, reinstate the ``newly 
organized concern'' rule, reinstate the ``totality of the 
circumstances'' analysis when determining affiliation between an 
Applicant for financial assistance and other entities, and clarify 
affiliation based on a franchise or license agreement.
    Currently, the regulation at Sec.  121.301(f)(4) defines 
affiliation based on ``identity of interest'' for the Business Loan, 
Business Disaster Loan, and Surety Bond Guarantee Programs as arising 
only when there are ``close relatives'' with identical or substantially 
identical business or economic interests (such as where the close 
relatives operate concerns in the same or similar industry in the same 
geographic area). Prior to 2016, this regulation also defined 
affiliation to include identity of interest based on other grounds, 
including common investments or economic dependence among other parties 
(not just close relatives). The current regulation also differs from 
the principles of affiliation SBA uses for all its other programs, all 
of which include common investments and economic dependence as grounds 
for affiliation. By limiting the regulation to close relatives only, 
SBA has allowed businesses that are economically dependent on one 
another to be treated as independent businesses (i.e., not affiliated) 
for the purposes of the programs referenced in this paragraph. SBA has 
also allowed individuals with multiple common investments to have their 
ownership interests be considered separately in the Business Loan 
Programs, whereas other SBA programs would find those individuals to 
have an identity of interest. SBA believes the 2016 regulatory change 
should be reversed in order to better reflect the controlling effect of 
an identity of interest through common investments or economic 
dependence and to conform more closely to other SBA programs. 
Accordingly, SBA is now proposing to expand this regulation to include 
affiliation between individuals or firms that have identical or 
substantially identical business or economic interests (individuals or 
firms with common investments, or firms that are economically dependent 
through contractual or other relationships).
    Under the proposed rule, SBA would find affiliation based on common 
investments under the identity of interest rule when multiple entities 
are owned by the same individuals or firms, and the entities owned by 
such investors conduct business with each other or share resources. In 
order to find an identity of interest between investors, the common 
investments would need to be substantial, either in number of 
investments or total value. As an example, in the Size Appeal of W. 
Harris, Government Services Contractor, Inc., SBA No. SIZ-5717 (2016), 
SBA found two individuals to have an identity of interest based on 
common

[[Page 49009]]

investments where they each owned 50% of one firm, and split the 
ownership of a second firm on a 55%/45% basis. While there were only 
two common investments, based on the fact that the two individuals' 
combined ownership of the two firms was 100%, their common investments 
were deemed to be substantial in value. Because of the substantial 
common investments, the two firms were affiliated with each other and 
with a firm wholly owned by one of the individuals. The proposed rule 
adopts the standard in W. Harris with the following modification: Under 
the proposed rule, SBA would consider businesses to be affiliated based 
on common investments only if they conduct business with each other, or 
share resources, equipment, locations or employees; or provide loan 
guaranties or other financial or managerial support to each other.
    As a hypothetical example, ABC Company is owned by four unrelated 
individuals: Ann owns 60% of the business; Barbara owns 15%; Charlie 
owns 15%; and David owns 10%. ABC Company applies for a 504 loan to 
acquire land and build a hotel. XYZ Company is owned by the same four 
unrelated individuals, but in different ownership percentages: Ann owns 
10% of the business; Barbara owns 60%; Charlie owns 15%; and David owns 
15%. XYZ Company, a management company, applies for a 7(a) loan for 
working capital. DEF Company also is owned by the same four unrelated 
individuals in different ownership percentages, but with a new member 
as well: Ann owns 5% of the business; Barbara owns 10%; Charlie owns 
55%; David owns 15%; and Ella owns 15%. DEF Company applies for a 504 
loan to acquire land and build a hotel. XYZ Company has agreements with 
ABC Company and DEF Company to manage both of the hotels. Under the 
proposed rule, SBA will consider Ann, Barbara, Charlie and David to 
have an identity of interest because of their substantial common 
investments in the three companies, and the fact that XYZ Company 
manages the hotels owned by ABC Company and DEF Company. Any firm in 
which Ann, Barbara, Charlie, or David individually or collectively own 
more than 50% also will be considered affiliated with ABC Company, XYZ 
Company, and DEF Company, if the business owned by Ann, Barbara, 
Charlie, or David conducts business or shares resources with, or 
provides financial or managerial support to, any of the co-owned firms. 
Any other businesses in which Ella may have an ownership interest, 
however, will not be considered affiliated because Ella only has a 
small ownership percentage in DEF Company.
    Also under the proposed identity of interest rule, if a small 
business Applicant derived more than 85% of its revenue from another 
business over the previous three fiscal years, SBA would find that the 
small business Applicant is economically dependent on the other 
business and, therefore, that the two businesses are affiliated. For 
example, Company A manufactures tires and has a contract with Company B 
to supply the vast majority of Company B's tires. The sales to Company 
B accounted for 86%-88% of Company A's revenues over the previous three 
fiscal years. Under the proposed rule, Company A would be economically 
dependent on Company B and the two businesses would be deemed 
affiliated. The proposed rule departs from SBA's other programs in 
using a higher threshold of 85% of the Applicant's revenues to 
establish economic dependence, rather than 70%. SBA believes the higher 
threshold is more appropriate to establish affiliation in the programs 
discussed in this Section II.B. As in SBA's other programs, this basis 
of affiliation would include an exception for a business that is new or 
a start-up. New or start-up businesses may only have a few customers or 
obtained a few contracts, and do not have as many partners and clients 
as established businesses. In order to be eligible for the exception 
for new or start-up businesses, these businesses would need to have a 
plan to diversify and become less dependent on one entity. For example, 
in the matter of Size Appeal of Argus And Black, Inc., SBA No. SIZ-
5204, 2011 WL 1168302 (February 22, 2011), the SBA Office of Hearings 
and Appeals held that where a small business has only recently begun 
operations either initially or after a period of dormancy, and is 
dependent upon its alleged affiliate for only one small contract of 
short duration, which by itself could not sustain a business, a finding 
of economic dependence is not warranted.
    SBA recognizes that, if the proposed identity of interest rule is 
adopted as final, SBA Lenders may need assistance in applying the rule 
to certain agricultural business relationships or agreements. In 
particular, the agreement between a poultry farmer and a large poultry 
producer (integrator) may be critical to the determination of whether 
the farmer is an independent small business but, due to the complexity 
of the typical integrator agreement, SBA Lenders may be uncertain as to 
the correct outcome of the affiliation analysis for such a business 
relationship. SBA is considering reviewing these agreements and making 
the affiliation determination itself so that SBA Lenders will not be 
reluctant to make loans to small poultry farmers operating under such 
agreements. SBA will provide further information on this in the final 
rule, if necessary.
    Additionally, SBA proposes to add the newly organized concern rule 
to Sec.  121.301(f), which will create uniformity among SBA's various 
affiliation rules. The newly organized concern rule applied to the 
Business Loan Programs prior to the 2016 rule change, but was removed 
at SBA's own initiative. Under the proposed newly organized concern 
rule, a newly organized spin-off company may be found affiliated with 
the original company where all of the following conditions are met: (1) 
Former or current officers, directors, principal stockholders, managing 
members, general partners, or key employees of one concern organize a 
new concern; (2) the new concern is in the same or related industry or 
field of operation; (3) the individuals who organized the new concern 
serve as the new concern's officers, directors, principal stockholders, 
managing members, general partners, or key employees; and (4) the 
original concern is furnishing or will furnish the new concern with 
contracts, financial or technical assistance, indemnification on bid or 
performance bonds, and/or other facilities, whether for a fee or 
otherwise. The proposed rule would define a key employee to be an 
employee who, because of his or her position in the concern, has a 
critical influence in or substantive control over the operations or 
management of the concern. The proposed rule further defines a ``newly 
organized'' concern to be one that has been actively operating 
continuously for two years or less. The proposed newly organized 
concern basis of affiliation would be a rebuttable presumption that may 
be rebutted if there is a clear line of fracture between the new 
concern and the other firm.
    Finally, SBA proposes to amend Sec.  121.301(f) by adding a new 
paragraph 6 to explain that, when making affiliation determinations, 
SBA will consider the totality of the circumstances, and may find 
affiliation even though no single factor is sufficient to constitute 
affiliation. The totality of the circumstances criterion for 
determining affiliation was removed in 2016 in response to comments 
received on the proposed revisions to the affiliation rules. Commenters 
requested that SBA either eliminate the criterion

[[Page 49010]]

or provide examples of when it would be used. SBA stated that, 
generally, examples of when this criterion was used involved negative 
control or control through management agreements. Rather than include 
examples in the rule, SBA provided additional specific guidance in 
Sec. Sec.  121.301(f)(1) and (f)(3) to address negative control and 
control through management agreements. However, SBA now believes that 
there are other examples of when affiliation may be present and, 
therefore, is reinstating the totality of the circumstances criterion.
    Examples of affiliation between small businesses based on the 
totality of the circumstances include:
    (1) SBA found a newly established firm to be affiliated with the 
firm owned by its 40% owner where both firms were construction 
companies; they had similar names (Specialized Services, Inc. and 
Specialized Veterans, LLC); the 40% owner provided a $300,000 initial 
capital contribution compared to the 60% owner's $1,000 contribution; 
the majority owner was previously the Chief Operating Officer of the 
affiliate; the majority owner had no construction experience; and the 
affiliate provided indemnification to the firm's surety. (Size Appeal 
of Specialized Veterans, LLC, SBA No. SIZ-5138 (2010).)
    (2) SBA found a newly established firm to be affiliated with its 
minority owner, an entity in the same line of business, where the other 
owners were previously key employees of the affiliate; the affiliate 
provided guarantees for the firm's financing and required the firm to 
seek the affiliate's approval before undertaking long-term commitments; 
the affiliate supplied the firm with machines and equipment for free; 
the affiliate promised the firm a large amount of business; and the 
sales the firm made to the affiliate accounted for the vast majority, 
86%-88%, of its revenues. (Size Appeal of Pointe Precision, LLC, SBA 
No. SIZ-4466 (2001).)
    SBA notes that a business found affiliated under the totality of 
the circumstances test (or any other ground of affiliation) in the 
Business Loan Programs may challenge the determination by requesting a 
formal size determination from SBA's Office of Government Contracting 
in accordance with 13 CFR 121.1001(b)(1)(i). A business can appeal a 
formal size determination to SBA's Office of Hearings and Appeals in 
accordance with 13 CFR 121.1101.
    Finally, SBA proposes to revise Sec.  121.301(f)(5) to clarify that 
the term ``franchise'' has the meaning given by the Federal Trade 
Commission (FTC) in its definition of ``franchise'' as set forth in 16 
CFR 436. SBA proposes to cross reference the FTC definition of 
``franchise'' in the regulation to clarify that the regulation applies 
to all agreements or relationships, whatever they may be called, that 
meet the FTC definition of a franchise. All such agreements will be 
referred to in the regulation as ``franchise agreements'' and the 
parties to such agreements will be referred to as ``franchisor'' and 
``franchisee.'' Further, SBA proposes to add to this regulation a 
statement that SBA will maintain a centralized list of franchise and 
other similar agreements that are eligible for SBA financial 
assistance. SBA will make this centralized list available to SBA 
Lenders and the public. The proposed changes discussed in this 
paragraph are consistent with SBA's current policy and procedure.
    Although not included in the regulations, SBA is providing below a 
description of the franchise procedures currently in effect for lending 
to franchisees in the Business Loan Programs. As of January 1, 2018, 
SBA created the SBA Franchise Directory (the ``Directory'') of all 
franchise and other brands reviewed by SBA that are eligible for SBA 
financial assistance. The Directory only includes business models that 
SBA determines are eligible under SBA's affiliation rules and other 
eligibility criteria. If the Applicant's brand meets the FTC definition 
of a franchise, it must be on the Directory in order to obtain SBA 
financing. (To help minimize confusion over brands that may appear to 
be franchises but that do not meet the FTC definition, SBA includes 
such brands on the Directory at their request if they are eligible in 
all other respects.) SBA Lenders are able to rely on the Directory and 
no longer need to review franchise or other brand documentation for 
affiliation or eligibility.
    The Directory will continue to be maintained on SBA's website at 
www.sba.gov. It will contain the following information:
    (1) Whether the brand meets the FTC definition of a franchise;
    (2) The SBA Franchise Identifier Code, if applicable (a code will 
only be issued if the agreement meets the FTC definition of a 
franchise);
    (3) Whether an addendum is needed in order to resolve any 
affiliation issues as a result of provisions in the franchise agreement 
and, if so, whether the franchisor will use the SBA Addendum to 
Franchise Agreement (SBA Form 2462) or an SBA Negotiated Addendum (with 
respect to an SBA Negotiated Addendum, the Directory will reference the 
addendum most recently negotiated with SBA, which will not be earlier 
than 2015); and
    (4) Whether there are additional issues the Lender must consider 
with respect to the brand (e.g., documentation that the business will 
be open to all, review of any third party management agreement to 
ensure Applicant is not a passive business or affiliated with the 
management company).
    For applications involving a franchise or similar relationship that 
meets the FTC definition of a franchise, before submitting the 
application to SBA for non-delegated processing or approving the loan 
under the SBA Lender's delegated authority, the SBA Lender must check 
the Directory to determine if it includes the Applicant's brand. If the 
Applicant's brand is on the Directory, the SBA Lender may proceed with 
submitting the application to SBA for non-delegated processing, or 
approving the loan under its delegated authority. If the Applicant's 
brand is not on the Directory, the SBA Lender cannot submit the 
application to SBA for non-delegated processing, or approve the loan 
under its delegated authority. (See, SOP 50 10 for a full discussion of 
the procedures for processing franchise loans.)
    Section 121.302 When does SBA determine the size status of an 
applicant? SBA proposes to incorporate the SBA Express and Export 
Express programs into this regulation to clarify that, with respect to 
applications for financial assistance under these programs, size is 
determined as of the date of approval of the loan by the SBA Express or 
Export Express Lender.

Compliance With Executive Orders 12866, 12988, 13132, 13563, and 13771, 
the Paperwork Reduction Act (44 U.S.C., Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-612).

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is not a ``significant'' regulatory action for the 
purposes of Executive Order 12866. However, SBA has drafted a 
Regulatory Impact Analysis in the next section. This is not a major 
rule under the Congressional Review Act, 5 U.S.C. 800.

Regulatory Impact Analysis

1. Is there a need for this regulatory action?
    The Agency believes it is necessary to provide regulatory guidance 
for SBA Express and Export Express loans, which are authorized by 
statute. Current

[[Page 49011]]

regulatory guidance provides an extensive framework for the delivery of 
SBA's 7(a) guaranteed loans through participating private sector 
lenders. However, currently there are not regulations identifying the 
specific Loan Program Requirements applicable to SBA Express and Export 
Express. Congress has authorized SBA to permit qualified lenders to 
make SBA Express and Export Express loans using, to the maximum extent 
practicable, their own analyses, procedures, and documentation. It is 
necessary to provide clear and succinct regulatory guidance for lenders 
to encourage participation in extending these smaller dollar loans, and 
to enable these lenders to extend credit with confidence in their 
ability to rely on payment by SBA of the guaranty if necessary.
    The Small Business 7(a) Lending Oversight Reform Act of 2018 was 
signed into law on June 21, 2018. As part of this legislation, Congress 
has authorized the Agency to direct the methods by which Lenders 
determine whether a borrower is able to obtain credit elsewhere. SBA 
will be implementing that legislation in a separate rulemaking, but in 
this rule SBA proposes to reinstate a personal resources test in an 
effort to provide clear direction to SBA Lenders when analyzing whether 
a borrower has credit available elsewhere on reasonable terms from non-
Federal or alternative sources.
    The statutory changes in the Consolidated Appropriations Act of 
2018 (Pub. L. 115-141) regarding the Microloan Program require 
amendments to existing regulations for the percentage of grant funds 
that may be used by the Microloan Intermediary for marketing, 
managerial, and technical assistance to prospective Microloan 
borrowers. Existing regulations must be revised as proposed to reflect 
the statutory changes.
    Further, the Agency believes it needs to streamline and reduce 
regulatory burdens to facilitate robust participation in the business 
loan programs that assist small and underserved U.S. businesses. For 
that reason, SBA is proposing the changes to the regulatory provisions 
related to allowable fees that a Lender or Agent may collect from an 
Applicant for financial assistance. The proposed changes are needed to 
simplify the regulations regarding fees that may be collected from an 
Applicant. The proposal would establish clear limits on the amount of 
fees that may be charged by a Lender and/or an Agent. In addition, the 
proposed changes to the affiliation principles applicable to the 
Business Loan, Disaster Loan, and Surety Bond Guarantee Programs are 
needed in order to simplify and clarify the determination of 
eligibility of a business as a small concern.
2. What are the potential benefits and costs of this regulatory action?
    SBA does not anticipate any additional costs or impact on the 
subsidy to operate the business loan programs under these proposed 
regulations. SBA anticipates that providing clear regulatory guidance 
for the SBA Express and Export Express Loan Programs will result in an 
increase in the number of participating lenders and loans in both 
programs, which would mean increased access to capital for small 
businesses. SBA does not anticipate any additional cost from the 
addition of the SBA Express and Export Express regulations because both 
programs have been in use and performing for over 5 years. 
Additionally, portfolio performance of both programs, including 
prepayment, default and recovery behaviors is already being captured in 
the 7(a) program's annual subsidy calculation.
    In return for the additional autonomy and authority granted under 
SBA Express, Lenders who participate in the SBA Express program agree 
to receive a maximum guaranty of 50% on loans of $350,000 or less. The 
ability for SBA Express Lenders to use the same forms, procedures and 
policies that they already follow for their similarly-sized, non-SBA 
guaranteed commercial loans removes an additional layer of documents 
and permits a lender to move more quickly to a decision and funding of 
small dollar small business loans. This reduces the time and costs, as 
well as the paperwork involved in making these smaller loans (up to 
$350,000 for SBA Express and up to $500,000 for Export Express).
    The Export Express Loan Program provides lenders with a maximum 
guaranty of 90% for loans of $350,000 or less and 75% for loans over 
$350,000 up to $500,000, as well as the authority to use their own 
forms, procedures and policies to the maximum extent possible. As with 
SBA Express, the increased autonomy and authority reduces redundancy in 
documentation, time and costs associated with underwriting smaller 
export loans.
    Cost to deliver is an important consideration for lenders when 
assessing the benefits of participating with SBA programs. Streamlined 
rules result in increased lender participation, particularly for 
community banks, credit unions and other mission-based lenders who 
generally serve more rural communities and underserved populations with 
smaller dollar loans. While SBA does not have specific statistics, cost 
savings to the lender generally trickle down to the small business 
Applicant. Further, providing plain language regulatory guidance for 
the SBA Express and Export Express Loan Programs will reduce improper 
payment risk for lenders and SBA by ensuring that lenders are fully 
informed and understand the program requirements.
3. What alternatives have been considered?
    SBA has provided guidance on the SBA Express and Export Express 
Loan Programs in SOP 50 10, Lender and Development Company Programs, 
SOP 50 57, 7(a) Loan Servicing and Liquidation, SOP 50 53, Lender 
Supervision and Enforcement, and 51 00, On-Site Reviews and 
Examinations, and official Agency notices. The Agency recognizes, 
however, that regulations are important for the proper implementation 
of the two programs.

Executive Order 13563

    This executive order supplements and reaffirms the principles and 
requirements in E.O. 12866, including the requirement to provide the 
public with an opportunity to participate in the regulatory process. In 
compliance with the executive order, a description of the need for this 
regulatory action and benefits and costs associated with this action, 
including possible distributional impacts are included above in the 
Regulatory Impact Analysis. The Agency has participated in public 
forums and meetings, which have included outreach to many of its 
program participants to seek valuable insight, guidance, and 
suggestions for program reform. Some of the proposed changes in this 
rule are a direct result of the feedback SBA has received from program 
participants.

Executive Order 13771

    This proposed rule is not expected to be an E.O. 13771 regulatory 
action because this proposed rule is not significant under E.O. 12866.

Executive Order 12988

    This action meets applicable standards set forth in Sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.

Executive Order 13132

    SBA has determined that this proposed rule would not have 
substantial, direct effects on the States,

[[Page 49012]]

on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Therefore, for the purposes of Executive Order 
13132, SBA has determined that this proposed rule has no federalism 
implications warranting preparation of a federalism assessment.

Paperwork Reduction Act, 44 U.S.C., Ch. 35

    SBA has determined that this proposed rule would impose additional 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act (PRA). Applicants for SBA Express and Export Express loans, as well 
as SBA Express and Export Express Lenders, use the same forms as all 
other 7(a) loans in order to apply for an SBA guaranteed loan. These 
forms include: SBA Form 1919, Borrower Information Form; SBA Form 1920, 
Lender's Application for Guaranty; SBA Form 1971, Religious Eligibility 
Worksheet (for those businesses that may have a religious aspect); and 
SBA Form 2237 (to request modifications to an approved loan). These 
forms are all OMB-approved forms under OMB Control number 3245-0348. 
SBA Form 1920 would need to be revised due to the proposed new 
regulation at Sec.  120.102, which would require Lenders to analyze the 
personal resources of certain owners of the Applicant business to 
determine if they have liquid assets that can provide some or all of 
the desired financing. The change would have a de minimis impact on 
Lenders since the personal resource analysis is already part of the 
credit analysis Lenders currently conduct in determining an Applicant's 
eligibility for SBA financial assistance. SBA Form 1920 is completed by 
the Lender, not by the Applicant.
    The rule also proposes changes that would require revisions to SBA 
Form 159, Fee Disclosure and Compensation Agreement (OMB Control number 
3245-0201), which is used to collect information from Lenders and 
Agents on the fees that they charge to Applicants for assistance with 
obtaining an SBA-guaranteed loan. SBA Form 159 is also used to collect 
information from Lenders on referral fees that it pays to Referral 
Agents in connection with an SBA-guaranteed loan. The specific proposed 
revisions to SBA Form 159 would implement the proposed changes to 
Sec. Sec.  120.221, 103.4(g), and 103.5 that limit the amount and types 
of fees that may be charged to an Applicant. The proposed revisions to 
SBA Form 159 would reduce the hour burden for Lenders because they will 
no longer have to itemize the fees charged to Applicants in excess of 
$2,500, but merely disclose the amount charged. The revisions would 
have no material effect on the reporting burden for Agents. They will 
continue to report on all fees imposed on Applicants as they do now. 
The proposed changes to SBA Forms 1920 and 159 will be submitted to OMB 
as part of a broader, comprehensive revision of the forms that is not 
affected by this proposed rule, but is part of the Agency's efforts to 
streamline and simplify the information collected from Applicants and 
Lenders. SBA will make it clear in the final rule that the specific 
revisions affected by this proposed rule will not take effect until the 
rule is finalized. SBA invites comments on the proposed changes to the 
underlying regulations that would impact these forms by the deadline 
for comments noted in the DATES section.
    Finally, this proposed rule proposes to put into the regulations 
the existing requirement for SBLCs to submit to SBA for review and 
approval on an annual basis the validation of any credit scoring model 
they are using in connection with SBA Express and Export Express loans. 
This reporting requirement will be included in OMB-approved collection, 
SBA Lender Reporting Requirements (OMB Approval Number 3245-0365). This 
information collection expires September 30, 2018 and will be submitted 
to OMB for renewal prior to that date. The proposed regulatory change 
does not impact that requirement; it merely codifies the requirement in 
the regulation instead of the SOP.

Regulatory Flexibility Act, 5 U.S.C. 601-612

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (RFA), 5 U.S.C. 601-612, requires the agency to 
``prepare and make available for public comment an initial regulatory 
analysis'' which will ``describe the impact of the proposed rule on 
small entities.'' Section 605 of the RFA allows an agency to certify a 
rule, in lieu of preparing an analysis, if the proposed rulemaking is 
not expected to have a significant economic impact on a substantial 
number of small entities. Although the rulemaking will impact all of 
the approximately 4,500 7(a) Lenders, all of the approximately 214 
CDCs, all of the approximately 146 Microloan Intermediaries, all of the 
approximately 33 ILP Intermediaries, and all of the approximately 32 
Sureties that participate in the SBG Program, SBA does not believe the 
impact will be significant because this proposal modifies existing 
regulations and procedures to provide bright-line guidance.
    SBA has determined that by proposing a limit to fees that a Lender 
or an Agent may charge to a small business Applicant or Borrower for 
SBA 7(a) loans, small business borrowers will be protected from 
incurring excessive expense to obtain a loan. SBA issued guaranties on 
288,398 7(a) loans from fiscal year 2013 through fiscal year 2017. Fees 
charged to the Borrower or Applicant for packaging or other services 
were disclosed on 21% of the total 7(a) loans approved in that period. 
Applicants or Borrowers were charged fees that exceed the limits 
proposed in this rulemaking on 3.8% of total 7(a) loans approved.
    Based on the analysis above, SBA has determined that the proposed 
fee limits will not cause undue financial burden to the Lenders or 
Agents. Having this bright-line test, Lenders, Borrowers, and Agents 
will, in fact, save time and costs in analyzing and documenting that 
fees charged to the Applicant are reasonable.
    SBA's proposal to reinstate a personal resources test will have no 
impact, either directly or indirectly, to Applicants for 7(a) or 504 
loans. Currently, the regulation (13 CFR 120.101) and program guidance 
require SBA Lenders to analyze the ability of the business to obtain 
credit from non-federal sources, including the personal resources of 
individuals and entities that own 20 percent or more of the Applicant 
business. The proposed change reinstates a bright-line test for SBA 
Lenders to appropriately consider the personal resources of the 
principals.
    SBA's proposal to presume affiliation between a small business 
Applicant and another business from which the Applicant has derived 
more than 85% of its revenue over the previous three fiscal years 
includes an exception for new or start-up businesses. The exception 
will require the new or start-up Applicant to prepare a diversification 
plan demonstrating how it plans to become less dependent on any single 
source of income. This requirement to create a diversification plan may 
create an additional regulatory burden on those Applicants eligible for 
the exception. However, SBA considers this impact to be de minimis to 
the overall cost and time burden of the Applicant in preparing an 
application and business plan.
    SBA believes that this proposed rule encompasses best practice 
guidance that aligns with the Agency's mission to increase access to 
capital for small businesses and facilitate American job preservation 
and creation with the

[[Page 49013]]

removal of unnecessary regulatory requirements. For these reasons, SBA 
has determined that there is no significant economic impact on a 
substantial number of small entities. SBA invites comment from members 
of the public who believe there will be a significant impact on 
sureties, microloan intermediaries, participant lenders, CDCs, or small 
businesses.

List of Subjects

13 CFR Part 103

    Administrative practice and procedure.

13 CFR Part 120

    Community development, Environmental protection, Equal employment 
opportunity, Exports, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.

13 CFR Part 121

    Loan programs--business, Reporting and recordkeeping requirements, 
Small businesses.

    For the reasons stated in the preamble, SBA proposes to amend 13 
CFR parts 103, 120 and 121 as follows:

PART 103--STANDARDS FOR CONDUCTING BUSINESS WITH SBA

0
1. The authority citation for part 103 is revised to read as follows:

    Authority:  15 U.S.C. 634, 642.

0
2. Amend Sec.  103.4 by revising paragraph (g) to read as follows:


Sec.  103.4  What is ``good cause'' for suspension or revocation?

* * * * *
    (g) Acting as an Agent (including a Lender Service Provider) for an 
SBA Lender and an Applicant on the same SBA business loan and receiving 
compensation from both the Applicant and SBA Lender.
* * * * *
0
3. Amend Sec.  103.5 by revising paragraph (b) and the last sentence of 
paragraph (c) to read as follows:


Sec.  103.5  How does SBA regulate an Agent's fees and provision of 
service?

* * * * *
    (b) Total compensation charged by an Agent or Agents to an 
Applicant for services rendered in connection with obtaining an SBA-
guaranteed loan must be reasonable. In cases where the compensation 
exceeds the amount SBA deems reasonable, the Agent(s) must reduce the 
charge and refund to the Applicant any sum in excess of the amount SBA 
deems reasonable. SBA considers the following amounts to be reasonable 
for the total compensation that an Applicant can be charged by an Agent 
or Agents:
    (1) For loans up to and including $350,000: A maximum of up to 2.5% 
of the loan amount, or $7,000, whichever is less;
    (2) For loans $350,001-$1,000,000: A maximum of up to 2% of the 
loan amount, or $15,000, whichever is less; and
    (3) For loans over $1,000,000: A maximum of up to 1.5% of the loan 
amount, or $30,000, whichever is less.
    (c) * * * However, such compensation may not be charged to an 
Applicant or Borrower.

PART 120--BUSINESS LOANS

0
4. The authority citation for part 120 continues 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); Pub. 
L. 111-5, 123 Stat. 115; Pub. L. 111-240, 124 Stat. 2504.

0
5. Add Sec.  120.102 to read as follows:


Sec.  120.102  Funds not available from alternative sources, including 
the personal resources of owners.

    (a) An Applicant for a business loan must show that the desired 
funds are not available from the resources of any individual or entity 
owning 20 percent or more of the Applicant. SBA will require the use of 
liquid assets from any such owner as an injection to reduce the SBA 
loan amount when that owner's liquid assets exceed the amounts 
specified in paragraphs (a)(1) through (3) of this section. When the 
total financing package (i.e., any SBA loans and any other financing, 
including loans from any other source, requested by the Applicant 
business at or about the same time):
    (1) Is $350,000 or less, each 20 percent owner of the Applicant 
must inject any liquid assets that are in excess of one and three-
quarter times the total financing package, or $200,000, whichever is 
greater;
    (2) Is between $350,001 and $1,000,000, each 20 percent owner of 
the Applicant must inject any liquid assets that are in excess of one 
and one-half times the total financing package, or $1,000,000, 
whichever is greater;
    (3) Exceeds $1,000,000, each 20 percent owner of the Applicant must 
inject any liquid assets that are in excess of one times the total 
financing package, or $2,500,000, whichever is greater.
    (b) Any liquid assets in excess of the applicable amount set forth 
in paragraph (a) of this section must be used to reduce the SBA loan 
amount. These funds must be injected prior to the disbursement of the 
proceeds of any SBA financing. In extraordinary circumstances, SBA may, 
in its sole discretion, permit exceptions to the required injection of 
an owner's excess liquid assets.
    (c) For purposes of this section, ``liquid assets'' means cash or 
cash equivalents, including savings accounts, CDs, stocks, bonds, or 
other similar assets. Equity in real estate holdings and other fixed 
assets are not to be considered liquid assets. In addition, the liquid 
assets of any 20 percent owner who is an individual include the liquid 
assets of the owner's spouse and any minor children.
    (d) SBA Lenders must document their analysis and determination in 
the loan file.
0
6. Amend Sec.  120.130 by revising paragraph (c) to read as follows:


Sec.  120.130  Restrictions on uses of proceeds.

* * * * *
    (c) Floor plan financing or other revolving line of credit, except 
under Sec.  120.340, Sec.  120.390, or Sec.  120.444;
* * * * *
0
7. Amend Sec.  120.221 by revising the section heading and paragraphs 
(a) and (b) to read as follows:


Sec.  120.221  Fees and expenses that the Lender may collect from an 
Applicant or Borrower.

* * * * *
    (a) Fees that can be collected from the Applicant for assistance in 
obtaining a loan. The Lender may collect a fee from an Applicant for 
assistance with obtaining an SBA-guaranteed loan. The fee may not 
exceed $2,500 for a loan up to and including $350,000 and may not 
exceed $5,000 for a loan over $350,000. The Lender must advise the 
Applicant in writing that the Applicant is not required to obtain or 
pay for unwanted services. In cases where the compensation exceeds what 
SBA deems reasonable, the Lender must reduce the charge and refund to 
the Applicant any amount in excess of what SBA deems reasonable. If the 
Lender charges the Applicant a fee for assistance with obtaining an 
SBA-guaranteed loan, the fee must be disclosed to SBA in accordance 
with Sec.  103.5 and documented in accordance with Loan Program 
Requirements.
    (b) Extraordinary servicing. Subject to prior written SBA approval, 
if all or part of a loan will have extraordinary servicing needs, the 
Lender may charge extraordinary servicing fees in excess of 2 percent 
per year on the outstanding

[[Page 49014]]

balance of the part requiring special servicing for certain revolving 
lines of credit made under Sec.  120.390 and on Export Working Capital 
Program loans (as allowed under Sec.  120.344(b)), provided the fees 
are reasonable and prudent.
* * * * *


Sec.  120.222  [Amended]

0
8. Amend Sec.  120.222 by removing the word ``in'' before the words 
``any premium received''.


Sec.  120.344  [Amended]

0
9. Amend Sec.  120.344(b) by removing the period at the end of the 
paragraph and adding ``, provided the fees are reasonable and 
prudent.''
0
10. Revise Sec.  120.350 to read as follows:


Sec.  120.350  Policy.

    (a) Section 7(a)(15) of the Act authorizes SBA to guarantee a loan 
to a qualified employee trust (``ESOP'') to:
    (1) Help finance the growth of the employer small business; or
    (2) Purchase ownership or voting control of the employer.
    (b) Applications for SBA-guaranteed loans to a qualified employee 
trust may not be processed under a Lender's delegated authority.
0
11. Amend Sec.  120.432 by adding a sentence at the end of paragraph 
(a) to read as follows:


Sec.  120.432  Under what circumstances does this subpart permit sales 
of, or sales of participating interests in, 7(a) loans?

    (a) * * * This paragraph applies to all 7(a) loans purchased from 
the FDIC (as receiver, conservator, or other liquidator of a failed 
insured depository institution), whether through a loan sale where SBA 
has not already purchased the guarantee or through a whole bank 
transfer.
* * * * *
0
12. Amend Sec.  120.440 by revising paragraph (c) to read as follows:


Sec.  120.440   How does a 7(a) Lender obtain delegated authority?

* * * * *
    (c) If delegated authority is approved or renewed, Lender must 
execute a supplemental guarantee agreement, which will specify a term 
not to exceed two years. As provided in Sec.  120.442(c)(2)(i), when 
SBA renews a Lender's authority to participate in SBA Express, SBA may 
grant a longer term, but not to exceed three years. For approval or 
renewal of any delegated authority, SBA may grant shortened approvals 
or renewals based on risk or any of the other delegated authority 
criteria. Lenders with less than three years of SBA lending experience 
will be limited to an initial term of one year or less.
0
13. Add a new undesignated center heading after Sec.  120.440 to read 
as follows:
    ``SBA EXPRESS AND EXPORT EXPRESS LOAN PROGRAMS''.
0
14. Add Sec. Sec.  120.441 through 120.447 to read as follows:


Sec.  120.441   SBA Express and Export Express Loan Programs.

    (a) SBA Express. Under the SBA Express Loan Program (SBA Express), 
designated Lenders (SBA Express Lenders) process, close, service, and 
liquidate SBA-guaranteed 7(a) loans using their own loan analyses, 
procedures, and documentation to the maximum extent practicable, with 
reduced requirements for submitting documentation to, and prior 
approval by, SBA. These loan analyses, procedures, and documentation 
must meet prudent lending standards; be consistent with those an SBA 
Express Lender uses for its similarly-sized, non-SBA guaranteed 
commercial loans; and conform to all requirements imposed upon Lenders 
generally and SBA Express Lenders in particular by Loan Program 
Requirements, as such requirements are issued and revised by SBA from 
time to time, unless specifically identified by SBA as inapplicable to 
SBA Express loans. In return for the expanded authority and autonomy 
provided by the program, SBA Express Lenders agree to accept a maximum 
SBA guaranty of 50 percent of the SBA Express loan amount.
    (b) Export Express. The Export Express Loan Program (Export 
Express) is designed to help current and prospective small exporters. 
It is subject to the same loan processing, making, closing, servicing, 
and liquidation requirements, as well as the same interest rates and 
applicable fees, as SBA Express, except as otherwise provided in Loan 
Program Requirements.


Sec.  120.442   Process to obtain or renew SBA Express or Export 
Express authority.

    The decision to grant or renew SBA Express or Export Express 
authority will be made by the appropriate SBA official in accordance 
with Delegations of Authority, and is final. If SBA Express or Export 
Express authority is approved or renewed, the Lender must execute a 
supplemental guarantee agreement before the Lender's SBA Express or 
Export Express authority will become effective.
    (a) Criteria and process for initial approval of SBA Express or 
Export Express authority. A Lender that wishes to participate in SBA 
Express or Export Express must submit a written request to SBA.
    (1) Existing 7(a) Lenders. In evaluating an existing 7(a) Lender's 
application for SBA Express or Export Express authority, SBA will 
consider the criteria and follow the procedures set forth in Sec.  
120.440.
    (2) Lending institutions that do not currently participate with 
SBA. Lending institutions that do not currently participate with SBA 
must become 7(a) Lenders to participate in SBA Express and/or Export 
Express. Such institutions may request SBA 7(a) lending and SBA Express 
and/or Export Express authority simultaneously. In evaluating such 
institutions, in addition to the criteria set forth in Sec. Sec.  
120.410 and 120.440, SBA will consider whether the institution:
    (i) Has acceptable experience with small commercial loans, 
including an acceptable number of performing small commercial loans 
outstanding at its most recent fiscal year end; and
    (ii) Has received appropriate training on SBA's policies and 
procedures.
    (b) Criteria and process for renewal of SBA Express or Export 
Express authority. In renewing a Lender's SBA Express or Export Express 
authority and determining the term of the renewal, SBA will consider 
the criteria and follow the process set forth in Sec.  120.440 and also 
will consider whether the Lender:
    (1) Can effectively process, make, close, service, and liquidate 
SBA Express or Export Express loans, as applicable;
    (2) Has received a major substantive objection regarding renewal 
from the Field Office(s) covering the territory where the Lender 
generates significant numbers of SBA Express or Export Express loans, 
as applicable; and
    (3) Has received acceptable review results on the SBA Express or 
Export Express portion, as applicable, of any SBA-administered Lender 
reviews.
    (c) Term.--(1) Initial Approval. SBA may approve a Lender's 
authority to participate in SBA Express or Export Express for a maximum 
term of two years. SBA may approve a shorter term or limit a Lender's 
maximum SBA Express or Export Express loan volume if, in SBA's sole 
discretion, a Lender's qualifications, performance, experience with SBA 
lending, or other factors so warrant.
    (2) Renewal.--(i) SBA Express. SBA may renew a Lender's authority 
to participate in SBA Express for two years or, in SBA's sole 
discretion, a maximum of three years if a Lender's qualifications, 
performance, experience

[[Page 49015]]

with SBA lending, or other factors so warrant.
    (ii) Export Express. SBA may renew a Lender's authority to 
participate in Export Express for a maximum term of two years.
    (iii) SBA may renew a Lender's authority to participate in SBA 
Express or Export Express for a shorter term or limit a Lender's 
maximum SBA Express or Export Express loan volume if, in SBA's sole 
discretion, a Lender's qualifications, performance, experience with SBA 
lending, or other factors so warrant.


Sec.  120.443   SBA Express and Export Express loan processing 
requirements.

    (a) SBA Express and Export Express loans are subject to all of the 
requirements set forth in Subparts A and B of this part, unless such 
requirements are specifically identified by SBA as inapplicable.
    (b) Certain types of loans and loan programs are not eligible for 
SBA Express or Export Express, as detailed in official SBA policy and 
procedures, including but not limited to:
    (1) A loan that would reduce the Lender's existing credit exposure 
to a single Borrower, including its affiliates as defined in Sec.  
121.301(f) of this chapter;
    (2) A loan to a business that has an outstanding 7(a) loan where 
the Applicant is unable to certify that the loan is current at the time 
of approval of the SBA Express or Export Express loan;
    (3) A loan that would have as its primary collateral real estate or 
personal property that do not meet SBA's environmental requirements; 
and
    (4) Complex loan structures or eligibility situations.
    (c) SBA has authorized SBA Express and Export Express Lenders to 
make the credit decision without prior SBA review. Lenders must not 
make an SBA guaranteed loan that would be available on reasonable terms 
from either the Lender itself or another source without an SBA 
guaranty. The credit analysis must demonstrate that there is reasonable 
assurance of repayment. SBA Express and Export Express Lenders must use 
appropriate and prudent credit analysis processes and procedures that 
are generally accepted in the commercial lending industry and are 
consistent with those used for their similarly-sized, non-SBA 
guaranteed commercial loans. As part of their prudent credit analysis, 
SBA Express and Export Express Lenders may use a business credit 
scoring model (such a model cannot rely solely on consumer credit 
scores) to assess the credit history of the Applicant and/or repayment 
ability if they do so for their similarly-sized, non-SBA guaranteed 
commercial loans. SBA Express and Export Express Lenders must validate 
(and document) with appropriate statistical methodologies that their 
credit analysis procedures are predictive of loan performance, and they 
must provide that documentation to SBA upon request. SBLCs must provide 
such credit scoring model validation and documentation to SBA for 
review and approval on an annual basis.
    (d) SBA Express and Export Express Lenders are responsible for all 
loan decisions, including eligibility for 7(a) loans (including size), 
creditworthiness and compliance with Loan Program Requirements. SBA 
Express and Export Express Lenders also are responsible for confirming 
that all loan closing decisions are correct and that they have complied 
with all requirements of law and Loan Program Requirements.
    (e) SBA Express and Export Express Lenders must ensure all required 
forms are obtained and are complete and properly executed. Appropriate 
documentation must be maintained in the Lender's loan file, including 
adequate information to support the eligibility of the Applicant and 
the loan.


Sec.  120.444   Eligible uses of SBA Express and Export Express loan 
proceeds.

    (a) SBA Express.--(1) SBA Express loan proceeds must be used 
exclusively for eligible business-related purposes, as described in 
Sec. Sec.  120.120 and 120.130.
    (2) Revolving lines of credit are eligible for SBA Express, 
provided they comply with official SBA policy and procedures.
    (b) Export Express. (1) Export Express loans must be used for an 
export development activity, which includes the following:
    (i) Obtaining a Standby Letter of Credit when required as a bid 
bond, performance bond, or advance payment guarantee;
    (ii) Participation in a trade show that takes place outside the 
United States;
    (iii) Translation of product brochures or catalogues for use in 
markets outside the United States;
    (iv) Obtaining a general line of credit for export purposes;
    (v) Performing a service contract for buyers located outside the 
United States;
    (vi) Obtaining transaction-specific financing associated with 
completing export orders;
    (vii) Purchasing real estate or equipment to be used in the 
production of goods or services for export;
    (viii) Providing term loans and other financing to enable a small 
business concern, including an export trading company and an export 
management company, to develop a market outside the United States; and
    (ix) Acquiring, constructing, renovating, modernizing, improving or 
expanding a production facility or equipment to be used in the United 
States in the production of goods or services for export.
    (2) Revolving lines of credit for export purposes are eligible for 
Export Express, provided they comply with official SBA policy and 
procedures.
    (3) Export Express loans may not be used to finance overseas 
operations, except for the marketing and/or distribution of products/
services exported from the U.S.
    (4) Export Express Lenders are responsible for ensuring that U.S. 
companies are authorized to conduct business with the Persons and 
countries to which the Borrower will be exporting.
    (c) An SBA Express or Export Express Lender may use loan proceeds 
to refinance certain outstanding debts, subject to official SBA policy 
and procedures. However, an SBA Express or Export Express Lender may 
not refinance its own existing SBA-guaranteed debt under SBA Express or 
Export Express.


Sec.  120.445   Terms and conditions of SBA Express and Export Express 
loans.

    SBA Express and Export Express loans are subject to the same terms 
and conditions as other 7(a) loans except as set forth in this section:
    (a) Maximum loan amount and maximum aggregate loan amount.
    (1) SBA Express. The maximum loan amount for an SBA Express loan is 
set forth in section 7(a)(31)(D) of the Small Business Act. The 
aggregate amount of all outstanding SBA Express loans to a single 
Borrower, including the Borrower's affiliates as defined in Sec.  
121.301(f) must not exceed the statutory maximum.
    (2) Export Express. The maximum loan amount for an Export Express 
loan is set forth in section 7(a)(34)(C)(i) of the Small Business Act. 
The aggregate amount of all outstanding Export Express loans to a 
single Borrower, including the Borrower's affiliates as defined in 
Sec.  121.301(f), must not exceed the statutory maximum.
    (b) Maximum SBA guarantee.--(1) SBA Express. The maximum SBA 
guarantee on an SBA Express loan is 50 percent of the SBA Express loan 
amount. In addition, the guaranteed amount of all SBA Express loans to 
a single Borrower, including the Borrower's affiliates, counts toward 
the

[[Page 49016]]

maximum guaranty amount as described in Sec.  120.151.
    (2) Export Express. The maximum SBA guarantee on an Export Express 
loan of $350,000 or less is 90 percent and for a loan over $350,000 is 
75 percent of the Export Express loan amount. In addition, the 
guaranteed amount of all Export Express loans to a single Borrower, 
including the Borrower's affiliates, counts toward the maximum guaranty 
amount as described in Sec.  120.151.
    (c) Maturity.--(1) SBA Express. SBA Express loans must have a 
stated maturity and the maximum maturities are the same as any other 
7(a) loan, except that revolving SBA Express loans are limited to a 
maximum of 10 years, as described more fully in official SBA policy and 
procedures.
    (2) Export Express. Export Express loans must have a stated 
maturity and the maximum maturities are the same as any other 7(a) 
loan, except that revolving Export Express loans are limited to a 
maximum maturity of 7 years, as described more fully in official SBA 
policy and procedures.
    (d) Interest rates.--(1) SBA Express and Export Express Lenders may 
charge up to 4.5% over the prime rate on loans over $50,000 and up to 
6.5% over the prime rate for loans of $50,000 or less, regardless of 
the maturity of the loan. The prime rate will be that which is in 
effect on the first business day of the month, as printed in a national 
financial newspaper published each business day.
    (2) For variable interest rate loans, SBA Express and Export 
Express Lenders are not required to use the base rate identified in 
Sec.  120.214(c). SBA Express and Export Express Lenders may use the 
same base rate of interest they use on their similarly-sized, non-SBA 
guaranteed commercial loans, as well as their established change 
intervals, payment accruals, and other interest rate terms. However, 
the interest rate must never exceed the maximum allowable interest rate 
stated in paragraph (d)(1) of this section. Additionally, the loan may 
be sold on the Secondary Market only if the base rate is one of the 
base rates allowed in Sec.  120.214(c).
    (3) The amount of interest SBA will pay to a Lender following 
default of an SBA Express or Export Express loan is capped at the 
maximum interest rates for the standard 7(a) loan program set forth in 
Sec. Sec.  120.213 through 120.215.
    (e) Collateral.--(1) With the exception of paragraphs (e)(2) and 
(e)(3) of this section, to the maximum extent practicable, SBA Express 
and Export Express Lenders must follow the same collateral policies and 
procedures that they have established and implemented for their 
similarly-sized, non-SBA guaranteed commercial loans, including those 
concerning identification of collateral. Such policies and procedures 
must be commercially reasonable and prudent.
    (2) SBA may establish a threshold below which SBA Express and 
Export Express Lenders will not be required to take collateral to 
secure an SBA Express or Export Express loan. Such a threshold will be 
described more fully in official SBA policy and procedures.
    (3) Export Express lines of credit over $25,000 used to support the 
issuance of a standby letter of credit must have collateral (cash, cash 
equivalent or project) that will provide coverage for at least 25% of 
the issued standby letter of credit amount.
    (f) Insurance. SBA Express and Export Express Lenders must follow 
the same policies they have established and implemented for their 
similarly-sized, non-SBA guaranteed commercial loans.
    (g) Sale on the secondary market. SBA Express and Export Express 
Lenders may sell the guaranteed portion of an SBA Express or Export 
Express term loan on the secondary market under the policies and 
procedures described in Subpart F of this part. SBA Express or Export 
Express Lenders may not sell the guaranteed portion of an SBA Express 
or Export Express revolving line of credit on the secondary market.
    (h) Loan increases. With SBA's prior written consent, an SBA 
Express or Export Express Lender may increase an SBA Express or Export 
Express loan based on the needs of the Borrower and its credit 
situation, as further specified in Loan Program Requirements.


Sec.  120.446   SBA Express and Export Express loan closing, servicing, 
liquidation and litigation requirements.

    (a) Closing. Except as set forth in this paragraph, SBA Express and 
Export Express Lenders must close their SBA Express and Export Express 
loans using the same documentation and procedures that they use for 
their similarly-sized, non-SBA guaranteed commercial loans. Such 
documentation and procedures must comply with law, prudent lending 
practices, and Loan Program Requirements. When closing an SBA Express 
or Export Express loan, the Lender must require the Borrower to execute 
a promissory note that is legally enforceable and assignable. Before 
the first disbursement of any SBA Express or Export Express loan 
proceeds, the Lender must obtain all required collateral, including 
obtaining valid and enforceable security interests in such collateral, 
and also must meet all other required pre-closing loan conditions as 
set forth in official SBA policy and procedures.
    (b) Servicing, Liquidation, and Litigation. Servicing, liquidation, 
and litigation responsibilities for SBA Express and Export Express 
Lenders are set forth in Subpart E of this Part.
    (c) SBA's purchase of the guaranteed portion of an SBA Express or 
Export Express loan. (1) SBA will purchase the guaranteed portion of an 
SBA Express or Export Express loan in accordance with Sec.  120.520 and 
official SBA policy and procedures. An SBA Express or Export Express 
Lender may not request purchase of the guaranty based solely on a 
violation of a non-financial default provision.
    (2) How much SBA will pay upon purchase?--(i) SBA Express. SBA will 
pay a maximum of 50 percent of the total principal balance of the SBA 
Express loan outstanding after liquidation, including up to 120 days of 
interest at the rate in effect at the time of the earliest uncured 
default (if liquidation proceeds collected by the SBA Express Lender 
were insufficient for the Lender to recover a full 120 days of 
interest).
    (ii) Export Express. SBA will pay a maximum of 75 or 90 percent (as 
applicable) of the total principal balance of the Export Express loan 
outstanding after liquidation, including up to 120 days of interest at 
the rate in effect at the time of the earliest uncured default (if 
liquidation proceeds collected by the Export Express Lender were 
insufficient for the Lender to recover a full 120 days of interest).
    (3) Release of SBA liability under its guarantee. SBA will be 
released from its liability to purchase the guaranteed portion of an 
SBA Express or Export Express loan, either in whole or in part, in 
SBA's sole discretion, under any of the circumstances described in 
Sec.  120.524.


Sec.  120.447   Lender oversight of SBA Express and Export Express 
Lenders.

    SBA Express and Export Express Lenders are subject to the same 
risk-based lender oversight as 7(a) Lenders, including the supervision 
and enforcement provisions, in accordance with Subpart I of this Part.


Sec.  120.707   [Amended]

0
15. Amend the last sentence of Sec.  120.707(b) by removing the word 
``six'' and add in its place ``seven''.
0
16. Amend Sec.  120.712 as follows:
0
a. Revise paragraph (b)(1); and
0
b. In paragraph (d) remove the number ``25'' and add in its place the 
number ``50''.

[[Page 49017]]

    The revision and addition read as follows:


Sec.  120.712   How does an Intermediary get a grant to assist 
Microloan borrowers?

* * * * *
    (b) * * *
    (1) Up to 50 percent of the grant funds may be used to provide 
information and technical assistance to prospective Microloan 
borrowers; provided, however, that no more than 5 percent of the grant 
funds may be used to market or advertise the products and services of 
the Microloan Intermediary directly related to the Microloan Program; 
and
* * * * *


Sec.  120.840   [Amended]

0
17. Amend Sec.  120.840 by removing the term ``D/FA'' from the second 
sentence of paragraph (b) and adding in its place the phrase 
``appropriate SBA official in accordance with Delegations of 
Authority''.

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
18. The authority citation for Part 121 continues to read as follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 662, and 649a(9).

0
19. Amend Sec.  121.301 by:
0
a. Revising paragraph (f)(4);
0
b. Redesignating paragraphs (f)(5), (f)(6), and (f)(7) as paragraphs 
(f)(7), (f)(8), and (f)(9) respectively;
0
c. Adding new paragraphs (f)(5) and (f)(6) and revising the 
redesignated (f)(7).
    The revisions and additions read as follows:


Sec.  121.301   What size standards and affiliation principles are 
applicable to financial assistance programs?

* * * * *
    (f) * * *
    (4) Affiliation based on identity of interest. (i) Affiliation may 
arise among two or more individuals or firms with an identity of 
interest. Individuals or firms that have identical or substantially 
identical business or economic interests (such as close relatives, 
individuals or firms with common investments, or firms that are 
economically dependent through contractual or other relationships) may 
be treated as one party with such interests aggregated. Where SBA 
determines that such interests should be aggregated, an individual or 
firm may rebut that determination with evidence showing that the 
interests deemed to be one are in fact separate.
    (ii) Affiliation arises when there is an identity of interest 
between close relatives, as defined in Sec.  120.10 of this chapter, 
with identical or substantially identical business or economic 
interests (such as where the close relatives operate concerns in the 
same or similar industry in the same geographic area).
    (iii) Affiliation arises through common investments where the same 
individuals or firms together own a substantial portion of multiple 
concerns, and concerns owned by such investors conduct business with 
each other (such as subcontracts or joint ventures), or share 
resources, equipment, locations or employees with one another, or 
provide loan guaranties or other financial or managerial support to 
each other.
    (iv) SBA will find affiliation based upon economic dependence if 
the concern in question derived more than 85% of its receipts from 
another concern over the previous three fiscal years, unless the 
concern has been in business for a short amount of time and has a plan 
to lessen its dependence on the other concern.
    (5) Affiliation based on the newly organized concern rule. 
Affiliation may arise where current or former officers, directors, 
principal stockholders, managing members, or key employees of one 
concern organize a new concern in the same or related industry or field 
of operation, and serve as the new concern's officers, directors, 
principal stockholders, managing members, or key employees, and the 
original concern is furnishing or will furnish the new concern with 
contracts, financial or technical assistance, indemnification on bid or 
performance bonds, and/or other facilities, whether for a fee or 
otherwise. A concern may rebut such an affiliation determination by 
demonstrating a clear line of fracture between the two concerns. For 
the purpose of this rule, a ``key employee'' is an employee who, 
because of his/her position in the concern, has a critical influence in 
or substantive control over the operations or management of the 
concern. A concern will be considered ``new'' for the purpose of this 
rule if it has been actively operating continuously for two years or 
less.
    (6) Affiliation based on totality of the circumstances. In 
determining whether affiliation exists, SBA will consider the totality 
of the circumstances, and may find affiliation even though no single 
factor is sufficient to constitute affiliation.
    (7) Affiliation based on franchise agreements. (i) The restraints 
imposed on a franchisee by its franchise agreement generally will not 
be considered in determining whether the franchisor is affiliated with 
an applicant franchisee provided the applicant franchisee has the right 
to profit from its efforts and bears the risk of loss commensurate with 
ownership. SBA will only consider the franchise agreements of the 
applicant concern. SBA will maintain a centralized list of franchise 
and other similar agreements that are eligible for SBA financial 
assistance, which will identify any additional documentation necessary 
to resolve any eligibility or affiliation issues between the franchisor 
and the small business applicant.
    (ii) For purposes of this section, ``franchise'' means any 
continuing commercial relationship or arrangement, whatever it may be 
called, that meets the Federal Trade Commission definition of 
``franchise'' in 16 CFR 436.
* * * * *
0
20. Amend Sec.  121.302 by revising paragraphs (a) and (b) to read as 
follows:


Sec.  121.302   When does SBA determine the size status of an 
applicant?

    (a) The size status of an applicant for SBA financial assistance is 
determined as of the date the application for financial assistance is 
accepted for processing by SBA, except for applications under the 
Preferred Lenders Program (PLP), the SBA Express Loan Program (SBA 
Express), the Export Express Loan Program (Export Express), the 
Disaster Loan Program, the SBIC Program, and the New Markets Venture 
Capital (NMVC) Program.
    (b) For PLP, SBA Express, and Export Express, size is determined as 
of the date of approval of the loan by the Lender.
* * * * *

    Dated: September 18, 2018.
Linda E. McMahon,
Administrator.
[FR Doc. 2018-20869 Filed 9-27-18; 8:45 am]
 BILLING CODE 8025-01-P