[Federal Register Volume 84, Number 120 (Friday, June 21, 2019)]
[Proposed Rules]
[Pages 29092-29102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12631]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 84, No. 120 / Friday, June 21, 2019 /
Proposed Rules
[[Page 29092]]
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 120 and 134
RIN 3245-AH05
Implementation of the Small Business 7(a) Lending Oversight
Reform Act of 2018
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: On June 21, 2018, Congress enacted the Small Business 7(a)
Lending Oversight Reform Act of 2018, (``Act''). The purpose of the
legislation was to increase the Small Business Administration's
(``SBA'' or ``Agency'') oversight capabilities and to ensure the
integrity of the 7(a) Loan Program. The Act contains several new and
strengthened authorities. Section 3 of the Act requires SBA to
promulgate regulations to implement certain of the Act's provisions.
SBA is proposing this rule to implement the Act and to update the
Agency's regulations on supervision of all lenders participating in
SBA's business loan programs.
DATES: SBA must receive comments to the proposed rule on or before
August 20, 2019.
ADDRESSES: You may submit comments, identified by RIN: 3245-AH05, by
any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Bethany Shana, Office of Credit Risk Management,
Office of Capital Access, Small Business Administration, 409 Third
Street SW, Washington, DC 20416.
Hand Delivery/Courier: Bethany Shana, Office of Credit
Risk Management, Office of Capital Access, Small Business
Administration, 409 Third Street SW, Washington, DC 20416.
SBA will post all comments on https://www.regulations.gov. If you
wish to submit confidential business information (``CBI''), as defined
in the User Notice at https://www.regulations.gov, please submit the
information to Office of Credit Risk Management, Office of Capital
Access, Small Business Administration, 409 Third Street SW, Washington,
DC 20416. You are requested to 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 on whether it will publish the information.
FOR FURTHER INFORMATION CONTACT: Bethany Shana, Office of Credit Risk
Management, Office of Capital Access, Small Business Administration,
409 3rd Street SW, Washington, DC 20416; telephone: (202) 205-6402;
email: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background and History
SBA is authorized under Sections 7(a) and 7(m) of the Small
Business Act and Title V of the Small Business Investment Act of 1958
to conduct small business loan programs. 15 U.S.C. 636(a) and (m) and
695 et seq. SBA's business loan programs provide critical access to
credit for America's small businesses, bridging the lending gap that
exists in the market for our nation's smallest companies. Along with
the authority to offer government guarantees, Congress provided SBA the
authority to supervise lenders participating in these programs. 15
U.S.C. 634, 636, 650, and 697.
Growth in SBA 7(a) lending prompted Congress to undertake a
thorough examination of the tools available at SBA to ensure that
comprehensive oversight is accomplished.\1\ Following that review,
Congress enacted the Small Business 7(a) Lending Oversight Reform Act
of 2018, Public Law 115-189 (June 21, 2018) (the ``Act''). The Act
strengthened SBA's 7(a) Lender supervision authorities and the office
charged with that responsibility, SBA's Office of Credit Risk
Management (``OCRM''). The legislation codified SBA's authority to take
informal enforcement actions against 7(a) Lenders, which currently
includes, for example, supervisory letters, Board of Directors
(``Board'') resolutions, and agreements. It also codified SBA's broad
authority to take formal enforcement actions against 7(a) Lenders.
Those actions currently include, but are not limited to, portfolio
guaranty dollar limits, delegated authority suspensions, program
suspensions, and program revocations. To further strengthen 7(a) Loan
Program supervision, the Act provided authority for SBA to assess civil
monetary penalties (``CMPs'') against 7(a) Lenders. The Act also
provided several other provisions that support SBA's ability to perform
effective 7(a) Loan Program supervision.
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\1\ H. Rep. No. 115-655 at 6 (2018).
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SBA's lender oversight regulations are codified in 13 CFR part 120,
subpart I (13 CFR 120.1000 through 120.1600). The recent legislation
required SBA to promulgate regulations to implement certain provisions
in the Act. Accordingly, SBA is publishing this notice of proposed
rulemaking to implement the legislation and is also proposing to update
its lender oversight regulations. The updates would include technical
corrections and clarifications to better inform lenders and to
strengthen enforcement. In keeping with the purpose of the Act to
increase SBA's oversight capabilities to ensure the integrity of the
business loan programs while protecting taxpayer dollars, and because
SBA's 7(a) oversight framework is generally interwoven with that of the
504 Loan Program and Microloan Program, SBA is proposing to extend some
of the updates to Certified Development Companies (``CDCs'') in the 504
Loan Program and Microloan Intermediaries (``Intermediaries'') in the
Microloan Program. A summary of key aspects of the proposed rule and a
section-by-section analysis follows.
II. Summary of Key Aspects of the Proposal
The following is a summary of key provisions in the proposed rule.
For a more detailed discussion of the proposal and each regulation, see
the section-by-section analysis.
A. Codification of Informal Enforcement Tools (7(a) Lenders).
Public Law 115-189 requires SBA to incorporate into SBA regulations
SBA's informal enforcement tools for 7(a) Lenders. Such enforcement
tools or actions currently include, for example, supervisory letters
and agreements (e.g., voluntary withdrawal agreements and voluntary
agreements for immediate suspension of secondary market sales).
[[Page 29093]]
Proposed Sec. 120.1300 would set forth SBA's proposed regulation on
informal enforcement actions for 7(a) Lenders. It would identify the
key informal enforcement actions that SBA may undertake. While most of
the actions listed are not new and are currently in SBA's Standard
Operating Procedure (``SOP'') 50 53, Lender Supervision and
Enforcement,\2\ the proposed rule includes a few changes to the list as
further discussed in the section-by-section analysis. Proposed Sec.
120.1300 would also include the circumstances that SBA would consider
in choosing to take informal action instead of formal action. The
circumstances proposed would be largely the same as those that are
currently in SOP 50 53.
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\2\ Available at https://www.sba.gov/document/sop-50-53-lender-supervision-and-enforcement.
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B. Civil Monetary Penalties (7(a) Lenders). Congress reviewed the
types of actions that SBA could take and found that ``missing from
OCRM's toolbox is the ability to apply a civil monetary penalty''
against all 7(a) Lenders.\3\ Congress, therefore, established in the
legislation general authority to impose civil monetary penalties
(``CMPs'') against 7(a) Lenders. This authority is in addition to the
limited authority that Congress granted SBA in 2004 to assess CMPs
against SBA Supervised Lenders for reporting failures.\4\ The general
authority granted by the new legislation authorizes SBA to assess CMPs
against a 7(a) Lender of up to $250,000. Proposed Sec. 120.1500(b)(2)
would set forth SBA's general authority to impose CMPs against 7(a)
Lenders. Under the proposed regulation, CMPs would be assessed in an
amount not to exceed the maximum published in the Federal Register from
time to time, to allow for annual inflation adjustments as required by
section 701 of the Federal Civil Penalties Inflation Adjustment Act
Improvements Act of 2015, Public Law 114-74 (November 2, 2015).\5\
Assessment of CMPs would assist in protecting the integrity of the 7(a)
Loan Program.
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\3\ H. Rep. No. 115-655 at 14 (2018).
\4\ See, 15 U.S.C. 650(j).
\5\ CMP maximums for SBA Supervised Lender reporting failures
also would be published in the Federal Register to allow for the
required annual inflation adjustments. See proposed Sec.
120.1500(c)(4).
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C. OHA Appeals (7(a) Lenders). The new legislation also provided
7(a) Lenders the ability to appeal most enforcement actions to either
Federal district court or SBA's Office of Hearings and Appeals
(``OHA''). This provision is contained in proposed Sec. Sec.
120.1300(c) and 120.1600(a)(5). SBA's decision on the informal or
formal enforcement action would remain in effect pending resolution of
the appeal, which is consistent with the effect of appeals of secondary
market suspension or revocation actions under current Sec. 120.660.
The proposed rule would also amend affected provisions in 13 CFR
134.102 and 134.205. Any further revision to part 134, if needed, would
be contained in a separate rulemaking.
D. Microloan Intermediary Enforcement (Intermediaries). Under SBA's
Microloan Program, SBA makes direct loans to Intermediaries, the
proceeds of which are used to fund loans to small business microloan
borrowers. The lending arrangement between SBA and the Intermediary is
memorialized in a Loan Authorization and Agreement, Promissory Note,
Security Agreement, and related documents. SBA can take action against
an Intermediary under the Promissory Note and against SBA's collateral
for defaults, including but not limited to, non-compliance with SBA
loan program requirements. SBA also makes grants to Intermediaries and
can take action against Intermediaries under applicable grant law. In
addition, SBA may take formal enforcement action against Intermediaries
under Sec. 120.1540. The grounds for formal enforcement action against
Intermediaries are set forth in 13 CFR 120.1425. The proposed rule
would clarify Sec. 120.1425 by regrouping some of the grounds and
specifying other grounds consistent with those applicable to 7(a)
Lenders and CDCs (together, ``SBA Lenders''). It would also clarify
Sec. 120.1540, which covers types of formal enforcement actions
against Intermediaries. In particular, the proposed Sec. 120.1540
update would specify that SBA can undertake immediate suspension
against an Intermediary, which may include but is not limited to the
authority to make, service, liquidate, and/or litigate SBA microloans
and to freeze an Intermediary's Microloan Revolving Fund and Loan Loss
Reserve Fund accounts. It would also clarify that program revocations
may include portfolio surrender. In addition, the proposed rule would
remove a few provisions that are covered elsewhere for Intermediaries.
E. Credit Elsewhere (SBA Lenders). Congress in the new legislation
sought to update and modernize SBA's ``foundational test'' of
eligibility (i.e., that the small business applicant cannot obtain the
credit elsewhere on reasonable terms without the government
guaranty).\6\ Congress, therefore, codified in the legislation a new
definition of credit elsewhere, clarifying many of the factors utilized
in the definition. The new definition of credit elsewhere realigns the
test to ensure it is based on a borrower's ability to obtain credit,
rather than a lender's ability to offer credit. The proposed rule would
update 13 CFR 120.101 to conform the section to changes in the
definition of credit elsewhere contained in the new legislation.
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\6\ H. Rep. No. 115-655 at 15 (2018).
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F. Other Technical Amendments, Updates, and Clarifications (SBA
Lenders and Intermediaries). The proposed rule would contain other
technical amendments, updates, and clarifications: for example, the 13
CFR 120.10 definition for ``Federal Financial Institution Regulator''
would be updated to delete reference to the Office of Thrift
Supervision as this agency has been abolished and merged into the
Office of the Comptroller of the Currency and other Federal banking
agencies. 12 U.S.C. 5412 and 5413. The definition for ``Loan Program
Requirements'' would be clarified to apply to Intermediaries. In
addition, SBA would delete reference to Non-lending Technical
Assistance Providers (``NTAPs'') throughout SBA's oversight
regulations, as SBA has not issued technical assistance grants to NTAPs
in many years and technical assistance grants are currently made to
Intermediaries. SBA would also clarify in Sec. 120.1000 that risk-
based oversight includes monitoring. In addition, SBA would update and
clarify proposed Sec. 120.1400(c)(9) to better inform SBA Lenders that
their failure to properly oversee the activity of their respective
Agents increases SBA's financial risk. Supervisory concern with lender
failure to effectively monitor third-party activities has been
increasing as financial institutions rely more heavily on third-party
assistance.
III. Section-by-Section Analysis
A. Section 120.10--Definitions. Proposed Sec. 120.10 would update
the definition of ``Federal Financial Institution Regulator'' to
reflect elimination of the Office of Thrift Supervision. SBA would also
update the definition of the ``Lender Oversight Committee'' to
reference that membership and duties are derived from the Small
Business Act, that the committee meets quarterly, and that it votes on
formal enforcement action recommendations. In addition, SBA would
clarify that the term ``Loan Program Requirements'' may also be
referred to as ``SBA Loan Program Requirements'', would include Federal
Register notices and applicable government-wide regulations in the
[[Page 29094]]
definition, and would extend the definition to Intermediaries.
B. Section 120.101--Credit Not Available Elsewhere. One of the
primary goals of the new legislation is to ensure that the credit
elsewhere test is being applied correctly and consistently by lenders
and that it is being appropriately verified by SBA.\7\ The proposed
rule would codify in SBA's credit elsewhere regulation the new
definition for credit elsewhere as contained in the legislation. Under
Sec. 120.101 as proposed, credit elsewhere would mean that credit is
unavailable to the small business applicant on reasonable terms and
conditions from non-Federal, non-State, and non-local government
sources without SBA assistance, taking into consideration factors
associated with conventional lending practices, including: (i) The
business industry of the loan applicant; (ii) whether the loan
applicant has been in operation 2 years or less; (iii) the adequacy of
collateral available to secure the loan; (iv) the loan term necessary
to reasonably assure repayment of the loan from business cash flow; and
(v) any other factor relating to the particular loan application that
cannot be overcome except through obtaining a Federal loan guarantee
under prudent lending standards. Examples of ``other factors relating
to the particular loan application'' may include, but would not be
limited to, management experience, leverage ratio, global cashflow,
loan size relative to the age of the business, or the personal
resources of the owners of the business, and must be specifically
explained and documented with relevant supporting documentation in the
lender's credit memorandum. Section 120.101 as revised would continue
to apply to all SBA Lenders, including CDCs.
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\7\ S. Rep. No. 115-265 at 3 (2018).
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C. Section 120.180--Compliance with Loan Program Requirements.
Sections 3 and 4 of the Act provide that SBA is to oversee compliance
with SBA Loan Program Requirements, including credit elsewhere. SBA is
proposing revisions to 13 CFR 120.180 to facilitate this oversight. The
revisions would codify in Sec. 120.180 SBA's requirement that SBA
Lenders maintain documentation to support that Loan Program
Requirements, which would include credit elsewhere (as applicable),
have been satisfied. SBA examines these documents during reviews and
exams. This documentation would facilitate prudent lending and is a
practice that all prudent lenders already undertake. The proposed rule
would also clarify that Intermediaries, in addition to 7(a) Lenders and
CDCs, are expected to comply with Loan Program Requirements and are
covered by this regulation.
D. Section 120.1000--Risk-Based Lender Oversight; Sec. 120.1010--
SBA Access to SBA Lender and Intermediary Files; Sec. 120.1015--Risk
Rating System; Sec. 120.1025--Monitoring; Sec. 120.1050--Reviews and
Examinations; and Sec. 120.1051--Frequency of Reviews and Exams. The
proposed rule would update these sections to remove references to
NTAPs, as SBA has not issued technical assistance grants to NTAPs in
many years. Technical assistance in the Microloan Program is being
administered directly by Intermediaries.
E. Section 120.1055--Review and Examination Results. The Act
provides that a 7(a) Lender's response to an exam or review is due no
later than 45 business days after receiving the report from SBA.
Currently, 13 CFR 120.1055 provides 7(a) Lenders, CDCs, and
Intermediaries 30 calendar days to respond. Legislative history
indicates that this provision was intended to extend the response
timeframe. Proposed Sec. 120.1055 would revise the timeframe from 30
calendar days to 45 calendar days. The revision would extend the time
consistent with the statute and would be based on calendar days for
ease of calculation. If a lender needs additional time, the lender may
request the time and SBA could authorize it, as warranted. The proposed
rule would clarify when a lender receives a report for purposes of this
regulation (i.e., it is considered received on the date it is emailed
to the last known email address for the SBA Lender or Intermediary,
unless the SBA Lender or Intermediary can provide compelling evidence
that it was received on a different date). Proposed revisions to Sec.
120.1055 would also codify SBA's 90-day timeframe for lenders to
implement corrective actions. The proposed rule would include
flexibility to allow for a longer or shorter timeframe, as warranted.
Codification would provide lenders notice in addition to that contained
in the report transmittal letter and would strengthen compliance and
consistency. The proposed rule would also clarify that the response
must address (in addition to findings and corrective actions) SBA
recommendations, if any. In addition, proposed Sec. 120.1055 would be
updated to remove reference to NTAPs.
F. Section 120.1060--Confidentiality of Reports, Risk Ratings and
Related Confidential Information. The proposed rule would update this
section to remove references to NTAPs, as SBA has not issued technical
assistance grants to NTAPs in many years. Technical assistance in the
Microloan Program is being administered directly by Intermediaries.
G. Section 120.1300--Informal Enforcement Actions--7(a) Lenders.
The proposed rule would create a new section, Sec. 120.1300, to codify
SBA's informal enforcement actions for 7(a) Lenders as required by the
Act. Proposed new Sec. 120.1300 would include a list of informal
enforcement actions. The proposed list would be similar to that
currently contained in SOP 50 53, with the addition of mandatory
training and the removal of the headquarters meeting. SBA believes
mandatory training would be a good addition to its informal tools, one
that could assist lenders to efficiently and effectively resolve
deficiencies and compliance issues. While SBA has found that a
headquarters meeting can be a very effective oversight tool, such
meetings are generally conducted during (and more aligned with) the
earlier supervision phases of Monitoring or Increased Supervision.
Accordingly, the proposed regulation on informal enforcement actions
would not include a headquarters meeting. If this change becomes final,
SBA would amend SOP 50 53 to move headquarters meetings to the
Monitoring/Increased Supervision chapters. In addition, proposed Sec.
120.1300 would describe the types of informal enforcement actions
listed. Finally, it would discuss the circumstances in which SBA is
likely to take informal enforcement action (e.g., when problems are
narrow in scope, are correctible, and SBA is confident of the 7(a)
Lender's Board and management commitment and ability to correct such
problems; where violations are less frequent or less severe but still
warrant enforcement; or while SBA more fully assesses risk). These
proposed circumstances are, for the most part, set forth in SBA's
current procedures. Finally, Sec. 120.1300 would implement the new
legislation providing that 7(a) Lenders could appeal informal
enforcement actions to Federal district court or OHA. The informal
enforcement action would remain in effect pending resolution of the
appeal, if any. SBA would not be precluded from taking other action,
including but not limited to, a formal enforcement action under Sec.
120.1500, or as other otherwise authorized by law, while the appeal is
pending.
H. Section 120.1400--Grounds for Enforcement Actions--SBA Lenders.
Section 120.1400 sets forth the grounds
[[Page 29095]]
for SBA's enforcement actions for SBA Lenders. The proposed rule would
amend 13 CFR 120.1400 to implement several provisions of the new
legislation and to provide clarifications. First, the proposed rule
would amend Sec. 120.1400(b) to explicitly state, and thereby formally
recognize, that Sec. 120.1400 grounds extend to both informal and
formal enforcement actions. Second, in accordance with the new
legislation, the proposed rule would state that SBA would consider the
severity or frequency of a violation in determining the type of
enforcement action to take. Third, Sec. 120.1400(c)(6) would clarify
that an action ``detrimental to an SBA program'' means an action
detrimental to ``the integrity or reputation of'' an SBA program.
Further, the proposed rule would also clarify paragraph (c)(9) to
further inform the public that SBA considers an SBA Lender's failure to
properly oversee Agent activity to be an example of SBA Lender action/
inaction that increases SBA's financial risk. While Agents can be
helpful in assisting SBA Lenders in making, servicing, liquidating, and
litigating SBA loans, an SBA Lender must prudently oversee third-party
activity.\8\ SBA's policy of lender responsibility for third-party
activity is neither new to the program nor unusual for regulated
lenders. For purposes of this section, the term ``Agent'' means all
parties included in the definition of ``Agent'' in 13 CFR part 103 that
assist the 7(a) Lender or CDC with making, servicing, liquidating, or
litigating their SBA business loans (e.g., lender service providers,
consultants, brokers/referral agents).
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\8\ In accordance with SOP 50 10 5 (K), Subpart A, Chpt. 1,
Para. II.E.1.i, SBA expects lenders to exercise due diligence and
oversight of their third-party vendors (e.g., Lender Service
Providers and other loan agents), including having written policies
governing such relationships and monitoring the performance of their
vendors. SBA will review such due diligence when conducting lender
oversight activities.
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SBA would also clarify paragraphs (c)(11) and (12) of this section,
which cover grounds for immediate suspension of delegated authority and
program authority. Currently, these paragraphs provide for immediate
action where it is needed to prevent significant impairment of the 7(a)
or 504 Loan Program. The proposed rule would revise these paragraphs to
better define the applicable circumstances. The proposed paragraph
would state that SBA may take such immediate action upon a
determination that: (i) One of the grounds in ``(c)'' or ``(f)'' of
that section, as applicable, exists; and (ii) immediate action is
needed to protect the interests of the Federal Government (such as
where there is risk of immediate harm or loss, a significant program
integrity concern, or clear evidence of conduct indicating a lack of
business integrity). Situations that may warrant immediate suspension
may include, but are not limited to, where there are significant
findings relating to the SBA Lender's determination of eligibility
(e.g., credit elsewhere, etc.) or on the credit review, underwriting,
approval, loan servicing and/or liquidation process; evidence of fraud;
significant concerns as to the SBA Lender's financial condition,
capital levels, or solvency; or where an SBA Lender is no longer
licensed or lacks staff capable of making, servicing, or liquidating
loans, as determined by SBA in its discretion. In addition, the
revisions to paragraphs (d)(1)(iii) and (d)(3)(i) and (ii) would
clarify that an SBA Supervised Lender's violation of ``the Small
Business Act'' or ``SBA regulations'' is a violation of ``Loan Program
Requirements''. This is consistent with SBA's use of this term in Sec.
120.1400(c)(2) on noncompliance as a ground for enforcement action
against SBA Lenders. In conjunction with this conforming change, SBA
proposes deleting the word ``agreement'' from paragraph (d)(1)(iv) as
it would be redundant with paragraph (d)(1)(iii) as revised.
I. Section 120.1425--Grounds for Enforcement Actions--
Intermediaries Participating in the Microloan Program. The proposed
rule would update Sec. 120.1425 to remove references to NTAPs.
Paragraph (c)(1) and (c)(2)(vii) on violations of law and Loan Program
Requirements would be clarified and harmonized with the corresponding
provision for SBA Lenders. In addition, SBA would reorder some of the
grounds within the regulation and provide for more logical grouping.
SBA would also add an additional performance-related ground for
enforcement action: A failure to ``[m]aintain the financial ability to
sustain the Intermediary's operations (including, but not limited to,
adequate capital), as determined by SBA''. Maintenance of financial
condition is important to an Intermediary's ability to continue to make
small business loans and repay its Promissory Note(s) to SBA.
Consistent with equivalent provisions for SBA Lenders, SBA would add
two general grounds to the Microloan Program regulations: (i) Failure
to take corrective actions and (ii) engaging in uncooperative or
detrimental behavior; as well as a specific ground for immediate
suspension of Intermediaries. Finally, SBA would add a catch-all
provision, paragraph (c)(7), for other grounds otherwise authorized by
law.
J. Section 120.1500--Types of Formal Enforcement Actions--SBA
Lenders. Proposed revisions to Sec. 120.1500 would implement the new
legislative provision on civil monetary penalties as an enforcement
tool for 7(a) Lenders. CMPs create a monetary incentive for 7(a)
Lenders to comply with SBA Loan Program Requirements. This tool could
be particularly effective as a deterrent against financial related non-
compliance (e.g., nonpayment or delay in payment of amounts owed to SBA
for borrower payments, recoveries received, or fees owed). CMPs may
also be warranted in certain critical circumstances (e.g., where there
is violation of an order, directive, or agreement, or fraud). SBA might
also use CMPs where there are reporting failures or delays (other than
those provided for in 13 CFR 120.465). These examples are not all
inclusive. The proposed provision would include a list of
considerations for SBA in determining whether and in what amount to
assess a CMP. Those considerations are the same as those in 13 CFR
120.465(b) governing CMPs for reporting failures against SBA Supervised
Lenders. The considerations/factors would include, but are not limited
to, the following: The gravity (e.g., severity and frequency) of the
violation; history of violations; financial resources and good faith of
the 7(a) Lender; and such other factors as justice may require. The
list of considerations is also very similar to those in the CMP
structures of other Federal agencies, including regulators with broad
authority, such as the Office of Comptroller of the Currency and the
Federal Deposit Insurance Corporation, as well as regulators with a
narrower purview over loan guarantee programs, such as the Department
of Housing and Urban Development's Mortgagee Review Board. SBA
assessment of CMPs, as with SBA's other enforcement tools, would help
to protect the integrity of the 7(a) Loan Program. In addition to the
incorporation of CMPs, proposed Sec. 120.1500 would reference the
Lender Oversight Committee's role in formal enforcement actions, with
their responsibilities set forth in Delegations of Authority and as
authorized by the Act. Finally, Sec. 120.1500 would include a
technical amendment to include the term ``formal'' before ``enforcement
action'' to distinguish the section from new Sec. 120.1300 on informal
enforcement actions.
K. Section 120.1540--Types of Formal Enforcement Actions--
Intermediaries. The proposed rule would update
[[Page 29096]]
Sec. 120.1540 to delete references to NTAPs. It would also include a
technical amendment to include the term ``formal'' before ``enforcement
action'' to distinguish the actions under this section from informal
enforcement actions for Intermediaries set forth in SOP 50 53. The
proposed regulation would revise the provision on suspension and pre-
revocation sanctions to more closely conform with the suspension
provision for SBA Lenders. Specifically, proposed Sec. 120.1540 would
provide that suspension may include, but is not limited to, suspension
of the authority to make, service, liquidate, and/or litigate SBA
microloans. It may also include a freeze on an Intermediary's Microloan
Revolving Fund (``MRF'') and Loan Loss Reserve Fund (``LLRF'')
accounts. Finally, proposed Sec. 120.1540 would specify that SBA may
undertake an ``immediate'' suspension action \9\ (i.e., a suspension
that is effective immediately), and that revocation actions may include
a portfolio surrender.
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\9\ Intermediary suspensions, like those for SBA Lenders, may be
``proposed'' or ``immediate''.
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L. Section 120.1600--General Procedures for Formal Enforcement
Actions Against SBA Lenders, SBA Supervised Lenders, Other Regulated
SBLCs, Management Officials, Other Persons, and Intermediaries.
Proposed changes to Sec. 120.1600 would include a technical amendment
to add the term ``formal'' before enforcement action in this section.
It would also include a technical amendment that references alternate
procedures under law, including but not limited to, those under current
Sec. 120.465 governing procedures for assessing CMPs against SBA
Supervised Lenders for reporting failures. Section 120.1600 would be
updated further to remove NTAPs from the regulation. In addition, the
proposed rule would implement new legislation on enforcement action
appeals. Specifically, 7(a) Lenders could appeal most formal
enforcement actions to OHA or proceed directly to the appropriate
Federal district court. Excluded are those formal enforcement actions
against SBA Supervised Lenders under Sec. Sec. 120.1500(c) and (d) and
120.465 because the statutory provisions in 15 U.S.C. 650 provide for
separate procedures, which are covered in Sec. 120.1600(b) or (c) and
Sec. 120.465. Any available OHA appeal would have to be submitted
within 20 calendar days of the decision. The enforcement action would
remain in effect pending resolution of any appeal.
M. Section 134.102--Jurisdiction of OHA. The proposed rule would
amend Sec. 134.102(d), which is currently reserved, to provide OHA
jurisdiction to hear appeals of enforcement actions against 7(a)
Lenders, as contemplated by the new legislation. Such jurisdiction does
not include appeals for certain actions against SBA Supervised Lenders
under Sec. 120.1600(b) or (c) and Sec. 120.465 (including, but not
limited to, Cease and Desist Orders, Suspensions, and Revocations) as
those procedures are provided for separately in 15 U.S.C. 650 as
discussed above.
N. Section 134.205--The appeal file, confidential information, and
protective orders. Title 13 CFR 134.205 governs the appeal file,
confidential information, and protective orders when an action is
appealed to OHA. Paragraph (c) lists types of information in the appeal
file that are exempt from public access. The exempt information
includes, but is not limited to, sensitive, confidential and other
exempt information. The proposed rule would add to the list of exempt
information, documents and related information covered under 13 CFR
120.1060.
Compliance With Executive Orders 12866, 13563, 12988, 13132, 13771, the
Paperwork Reduction Act (44 U.S.C. Chapter 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. In the interest of transparency,
however, SBA has drafted a Regulatory Impact Analysis for the public's
information in the next section. This is not a major rule under the
Congressional Review Act, 5 U.S.C. 801, et seq.
Regulatory Impact Analysis
1. Is there a need for this regulatory action?
Public Law 115-189, the Small Business 7(a) Lending Oversight
Reform Act of 2018, requires that SBA issue regulations to carry out
certain provisions contained therein. This rule includes proposed
regulations that would implement the Act. In addition, the rule would
update and clarify certain lender oversight regulations (e.g., remove
reference to NTAPs and include some clarifications to better inform the
public). The proposed lender oversight rule would strengthen SBA
supervision of SBA Lenders, especially 7(a) Lenders, and protect the
integrity of SBA's business loan programs.
2. What are the potential benefits and costs of this regulatory action?
The benefits of the proposed rule would be improved lender
oversight that could help reduce unnecessary losses for SBA, SBA
Lenders, and Intermediaries. With effective supervision, lenders are
provided feedback to assist them in complying with SBA Loan Program
Requirements and to promote prudent lending. The updates and
clarifications in this proposed rule are intended to reduce
uncertainties in order to help avoid unnecessary costs.
SBA does not anticipate any additional costs or impact on the
subsidy to operate the business loan programs under the proposed rule.
Most of the revisions codify current practices. Further, the Agency
also does not, apart from the civil monetary penalties, expect
additional costs to lenders from the provisions that implement the
legislation. Regarding the CMPs for 7(a) Lenders, the CMPs are
statutorily authorized and limited to $250,000, subject to annual
adjustments in accordance with section 701 of the Federal Civil
Penalties Inflation Adjustment Act Improvements Act of 2015, Public Law
114-74 (November 2, 2015). SBA anticipates that 7(a) Lenders will take
corrective actions expeditiously, and as a result, few CMPs may need to
be administered. SBA does not anticipate any additional costs from the
technical corrections or clarifications as these specify actions that
lenders should already be taking (e.g., implementing corrective actions
required within the requisite 90 days, adequately training staff,
maintaining loan file documentation consistent with prudent lending,
and adhering to all other SBA requirements).
3. What alternatives have been considered?
Since the proposed rule would primarily implement statutory
provisions, the Agency is somewhat limited in its alternatives.
Regarding CMPs for 7(a) Lenders, the Agency researched the CMP
structures of other agencies, including the banking agencies and other
Federal guaranteed loan programs. We found that these CMP structures
are typically very complex and may be tiered due to detailed statutory
schemes, with the potential for maximum CMPs that are several times
larger than SBA's. This is very different from the general CMP
authority that Congress provided to SBA. Therefore, SBA did not opt for
a complex cumbersome structure. SBA, however, included in its proposal
[[Page 29097]]
factors similar to those in the banking agencies' CMP regulations, the
Department of Housing and Urban Development's CMP regulations,\10\ and
current Sec. 120.465 that allow for consideration of the facts and
circumstances of the underlying activity. Under the proposed rule, SBA
would consider the following factors in determining whether and in what
amount SBA would assess CMPs against 7(a) Lenders: The gravity (e.g.,
severity and frequency) of the violations; history of violations;
financial resources and good faith of the 7(a) Lender; and such other
factors as justice may require. The Agency will also consider
alternatives proposed in public comments and suggestions on how SBA can
otherwise implement the statutory provisions responsibly without
compromising the improvements to supervision intended by the
legislation.
---------------------------------------------------------------------------
\10\ See, 24 CFR 30.80.
---------------------------------------------------------------------------
Executive Order 13563
Executive Order 13563 supplements and reaffirms the principles and
requirements of Executive Order 12866, including providing the public
notice and an opportunity to comment on regulatory changes. Consistent
with the requirements of that executive order, a description of the
need for this regulatory action and the benefits and costs associated
with this action--including distributional impacts--if any, are
contained above in the Regulatory Impact Analysis provided for
Executive Order 12866. The Agency has participated in public forums and
meetings that have included outreach to hundreds of its lending
partners to seek valuable insight and suggestions for the program.
These forums include, but are not limited to, the National Association
of Government Guaranteed Lenders Technical Conference; the Southeast
Regional Lenders' Conference; and the Mid-America Lenders' Conference.
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 would
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, 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.
Executive Order 13771
This proposed rule is not expected to be an Executive Order 13771
regulatory action because this proposed rule is not significant under
Executive Order 12866.
Paperwork Reduction Act, 44 U.S.C., Ch. 35
SBA has determined that this proposed rule would not impose
additional recordkeeping or reporting requirements under the Paperwork
Reduction Act (PRA). The only provision relating to recordkeeping is
the proposed revision to Sec. 120.180, in which SBA would clarify that
SBA Lenders and Intermediaries must maintain documentation to support
compliance with SBA Loan Program Requirements. Recordkeeping and
reporting associated with this provision would be covered by currently
approved information collections for SBA's business loan programs,
including but not limited to, collections under OMB Control Numbers
3245-0071, Application for section 504 Loan (SBA Forms 1244 and 2450);
3245-0074, Certified Development Company (CDC) Annual Report Guide (SBA
Form 1253); 3245-0080 and 0178, Statement of Personal History (SBA
Forms 1081 and 912); 3245-0131, Transaction Report on Loans Serviced by
Lender (SBA Form 172); 3245-0132, Lender's Transcript of Account (SBA
Form 1149); 3245-0201, Compensation Agreement (SBA Form 159); 3245-
0346, PCLP Quarterly Loan Loss Reserve Report and PCLP Guarantee
Request (SBA Forms 2233 and 2234 A, B, and C); 3245-0348, Borrower
Information Form (SBA Form 1919), Lenders Application for Guaranty (SBA
Form 1920), Religious Eligibility Worksheet (SBA Form 1971), 7(a) Loan
Post Approval Action Checklist (SBA Form 2237); 3245-0352, Microloan
Program Electronic Reporting System (MPERS) (MPERsystem); and 3245-
0365, SBA Lender, Microloan Intermediary and NTAP Reporting
Requirements. Prudent lenders should already be maintaining such
documentation.
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.
The changes in the proposed rule would generally fall into one of
two categories: (i) Technical amendments/clarifications or (ii)
codifications of the new legislation or existing practices. Examples of
the technical amendments and clarifications would include the proposed
change to: The Sec. 120.10 definition for Federal Financial
Institution Regulator to delete reference to the Office of Thrift
Supervision, which was merged into other Federal banking agencies; the
proposed removal of references to NTAPs in 120.1000, 120.1010,
120.1015, 120.1025, 120.1050, 120.1051, 120.1055, 120.1060, 120.1425,
120.1540, and 120.1600 as SBA has not issued technical assistance
grants to NTAPs in many years and such assistance is being administered
directly by Microloan Intermediaries; and the proposed incorporation
into Sec. 120.180 of the current requirement that Intermediaries must
comply with the Microloan Program requirements.
Although the technical corrections/clarifications portion of the
proposed rule might affect some of the approximately 3,500 7(a) Lenders
(approximately 2,000 of which are small); 213 CDCs (all of which are
small); and 147 Microloan Intermediaries (all of which are small), SBA
does not believe it would have a significant economic impact on those
small entities. Rather, the clarifications to some extent might even
reduce the burdens by better informing SBA Lenders and Intermediaries
of how the Agency may apply a regulation or requirement. As such, SBA
Lenders and Intermediaries may potentially avoid the need to spend
extra time and resources interpreting the regulations.
The second category consists of regulation changes in the rule that
would codify or implement the new legislation or existing practices.
Examples of the regulations and their changes that would codify or
implement the new legislation include: The Sec. 120.101 incorporation
of the new statutory definition for credit elsewhere; the Sec.
120.1055 revision to the timeframe from 30 to 45 days for an SBA Lender
or Intermediary to respond to findings and corrective actions; the
Sec. Sec. 120.1300, 120.1600, and 134.102 inclusion of an OHA appeal
for a 7(a) Lender enforcement action; and the
[[Page 29098]]
Sec. 120.1500(b) addition of CMPs for a 7(a) Lender. Examples of
regulations and their changes that would codify current practices and
procedures include: The Sec. 120.1055 (90 day) addition of a timeframe
for implementation of corrective actions; the Sec. 120.1300 inclusion
of voluntary agreements and Board Resolutions as informal enforcement
actions; and the application in Sec. 120.1400 of the same grounds for
informal as formal enforcement actions for an SBA Lender.
While a few of the codifying provisions might have the potential of
a significant economic impact, SBA does not expect that it would impact
a substantial number of small businesses. In particular, SBA does not
anticipate that any changes to the enforcement regulations, including
the incorporation of a CMP for 7(a) Lenders in proposed Sec.
120.1500(b), would be burdensome to a substantial number of small
lenders. This is because SBA has historically taken only a small number
of enforcement actions. The Agency seeks to educate and work with SBA
Lenders and Intermediaries using graduated processes for the entity to
reduce risk and come into compliance. Specifically, SBA educates SBA
Lenders and Intermediaries on SBA Loan Program Requirements through
notices, webinar and teleconference training venues, and at
conferences. When SBA identifies risk or noncompliance through
monitoring or reviews, SBA generally seeks to work with the SBA Lender
or Intermediary through the corrective action process or increased
supervision to address SBA concerns. As a result, most SBA Lenders and
Intermediaries come into compliance and avoid facing enforcement
actions.
SBA generally takes enforcement action only when the entity cannot
sufficiently reduce risk, cannot correct serious noncompliance, or
where the entity does not have the willingness or ability to correct.
In FY 2018, SBA took nine enforcement actions against SBA Lenders and
Intermediaries, which is not a substantial number.
One of the proposed rule changes to SBA's enforcement regulations
would be the CMP provisions. The CMP provisions would be applicable
only to 7(a) Lenders and by statute could be assessed in an enforcement
action up to $250,000. As proposed, the CMP provisions would provide
flexibility to allow SBA to take into account factors, including the
financial resources of a 7(a) Lender (especially for small lenders), in
determining whether and in what amount to assess a CMP.
SBA believes these provisions would not have a significant impact
on a substantial number of small 7(a) Lenders, as most 7(a) Lenders
generally comply with SBA Loan Program Requirements. In fact, only five
enforcement actions in FY 2018 were taken against 7(a) Lenders.
Therefore, we do not anticipate that SBA would need to assess CMPs with
any frequency. Further, given the flexibility in determining the amount
of the penalty, even if imposed, the proposed penalty could be assessed
in an amount much less than $250,000.
For the reasons stated above, SBA certifies that this action would
not have a significant economic impact on a substantial number of small
entities. SBA invites comment from members of the public.
List of Subjects.
13 CFR Part 120
Community development, Loan programs--business, Small businesses.
13 CFR Part 134
Appeal Procedures, Confidential business information.
For the reasons stated in the preamble, SBA proposes to amend 13
CFR parts 120 and 134 as follows:
PART 120--BUSINESS LOANS
0
1. The authority citation for part 120 is revised to read as follows:
Authority: 15 U.S.C. 634(b) (6), (b) (7), (b) (14), (h), and
note, 636(a), (h) and (m), and note, 650, 657t, and note, 657u, and
note, 687(f), 696(3) and (7), and note, and 697(a) and (e); and
note.
0
2. Amend Sec. 120.10 by revising the definitions for ``Federal
Financial Institution Regulator'', ``Lender Oversight Committee'', and
``Loan Program Requirements'' to read as follows:
Sec. 120.10 Definitions.
* * * * *
Federal Financial Institution Regulator is the Federal banking
regulator of a 7(a) Lender and may include the Federal Deposit
Insurance Corporation, the Federal Reserve Board, the Office of the
Comptroller of the Currency, the National Credit Union Administration,
and the Farm Credit Administration.
* * * * *
Lender Oversight Committee (``LOC'') is a committee established
within SBA by legislation, which meets at least quarterly, and which
has the membership and duties set forth in the Small Business Act as
further outlined in Delegations of Authority published in the Federal
Register. The LOC's duties include, but are not limited to, reviewing
and voting on formal enforcement action recommendations.
* * * * *
Loan Program Requirements or SBA Loan Program Requirements are
requirements imposed upon Lenders, CDCs, or Intermediaries by statute;
SBA and applicable government-wide regulations; any agreement the
Lender, CDC, or Intermediary has executed with SBA; SBA SOPs; Federal
Register notices; official SBA notices and forms applicable to the 7(a)
Loan Program, 504 Loan Program or Microloan Program; and loan
authorizations, as such requirements are issued and revised by SBA from
time to time. For CDCs, this term also includes requirements imposed by
Debentures, as that term is defined in Sec. 120.802. For
Intermediaries, this term also includes requirements imposed by
promissory notes, collateral documents, and grant agreements.
* * * * *
0
3. Amend Sec. 120.101 by revising the first and second sentences to
read as follows:
Sec. 120.101 Credit not available elsewhere.
SBA provides business loan assistance only to applicants for whom
the desired credit is not otherwise available on reasonable terms from
non-Federal, non-State, and non-local government sources. SBA requires
the Lender or CDC to certify or otherwise show that the desired credit
is unavailable to the applicant on reasonable terms and conditions from
non-Federal, non-State, and non-local government sources without SBA
assistance, taking into consideration factors associated with
conventional lending practices, including: The business industry of the
loan applicant; whether the loan applicant has been in operation two
years or less; the adequacy of collateral available to secure the loan;
the loan term necessary to reasonably assure repayment of the loan from
business cash flow; and any other factor relating to the particular
loan application that cannot be overcome except through obtaining a
Federal loan guarantee under prudent lending standards. * * *
0
4. Revise Sec. 120.180 to read as follows:
Sec. 120.180 Compliance with Loan Program Requirements.
SBA Lenders and Intermediaries must comply and maintain familiarity
with Loan Program Requirements for the 7(a) Loan Program, 504 Loan
Program, and the Microloan Program, as applicable, and as such
requirements are revised from time to time. Loan Program Requirements
in effect at the time that
[[Page 29099]]
an SBA Lender or Intermediary takes an action in connection with a
particular loan govern that specific action. For example, although loan
closing requirements in effect when an SBA Lender closes a loan will
govern the closing actions, an SBA Lender's liquidation actions on the
same loan are subject to the liquidation requirements in effect at the
time that a liquidation action is taken. An SBA Lender or Intermediary
must maintain sufficient documentation to demonstrate that Loan Program
Requirements have been satisfied.
0
5. Revise Sec. 120.1000 to read as follows:
Sec. 120.1000 Risk-Based Lender Oversight.
(a) Risk-Based Lender Oversight. SBA monitors, supervises,
examines, regulates, and enforces laws against, SBA Supervised Lenders
and the SBA operations of SBA Lenders and Intermediaries.
(b) Scope. Most rules and standards set forth in this subpart apply
to SBA Lenders as well as Intermediaries; however, SBA has separate
regulations for enforcement grounds and formal enforcement actions for
Intermediaries at Sec. Sec. 120.1425 and 120.1540.
Sec. 120.1010 [Amended]
0
6. Amend Sec. 120.1010 by removing the phrase ``SBA Lender,
Intermediary, and NTAP'' and adding in its place the phrase ``SBA
Lender and Intermediary''.
Sec. 120.1015 [Amended]
0
7. Amend Sec. 120.1015 by removing the phrase ``SBA Lenders,
Intermediaries, and NTAPs'' wherever it appears and adding in its place
the phrase ``SBA Lenders and Intermediaries''.
0
8. Revise Sec. 120.1025 to read as follows:
Sec. 120.1025 Monitoring.
SBA may conduct monitoring of SBA Lenders and Intermediaries
including, but not limited to, SBA Lenders' or Intermediaries' self-
assessments.
Sec. 120.1050 [Amended]
0
9. In Sec. 120.1050(c), remove the phrase ``and NTAPs'' wherever it
appears.
0
10. In Sec. 120.1051, revise the first sentence of the introductory
text and paragraph (a) to read as follows:
Sec. 120.1051 Frequency of reviews and examinations.
SBA may conduct reviews and examinations of SBA Lenders and
Intermediaries on a periodic basis. * * *
(a) Results of monitoring, including an SBA Lender's or
Intermediary's Risk Rating;
* * * * *
0
11. Amend Sec. 120.1055 by:
0
a. Revising paragraphs (a) and (b); and
0
b. In paragraph (d):
0
i. Removing the phrase ``SBA Lender, Intermediary, or NTAP'' wherever
it appears and adding in its place the phrase ``SBA Lender or
Intermediary'';
0
ii. Removing ``Subpart I'' and adding in its place ``this subpart'';
and
0
iii. Removing the reference ``Sec. 120.1500 through Sec. 120.1540''
wherever it appears and adding in its place the phrase ``this
subpart''.
The revisions to read as follows:
Sec. 120.1055 Review and examination results.
(a) Written Reports. SBA will provide an SBA Lender and
Intermediary a copy of SBA's written report prepared as a result of the
SBA Lender or Intermediary review or examination (``Report''). The
Report may contain findings, conclusions, corrective actions and
recommendations. Each director (or manager, in the absence of a Board
of Directors) of the SBA Lender or Intermediary, in keeping with his or
her responsibilities, must become fully informed regarding the contents
of the Report.
(b) Response to review and examination Reports. SBA Lenders and
Intermediaries must respond to Report findings, recommendations, and
corrective actions, if any, in writing to SBA and, if requested, submit
proposed corrective actions and/or a capital restoration plan. An SBA
Lender or Intermediary must respond within 45 calendar days from the
date the Report is received unless SBA notifies the SBA Lender or
Intermediary in writing that the response, proposed corrective actions
or capital restoration plan is to be filed within a different time
period. The SBA Lender or Intermediary response must address each
finding, recommendation, and corrective action. In proposing a
corrective action or capital restoration plan, the SBA Lender or
Intermediary must detail: The steps it will take to correct the
finding(s); the time within which each step will be taken; the
timeframe for accomplishing the entire corrective action plan; and the
person(s) or department at the SBA Lender or Intermediary charged with
carrying out the corrective action or capital restoration plan, as
applicable. In addition, SBA Lenders and Intermediaries must implement
corrective actions within 90 calendar days from the date the Report or
SBA's letter requiring corrective action is received, unless SBA
provides written notice of another timeframe. For purposes of this
paragraph, a Report will be deemed to have been received on the date it
was emailed to the last known email address of the SBA Lender or
Intermediary unless the SBA Lender or Intermediary can provide
compelling evidence to the contrary.
* * * * *
Sec. 120.1060 [Amended]
0
12. Amend Sec. 120.1060 by:
0
i. Removing the phrase ``SBA Lender, Intermediary, and NTAP'' wherever
it appears and adding in its place the phrase ``SBA Lender and
Intermediary'';
0
ii. Removing the phrase ``SBA Lenders, Intermediaries, and NTAPs'' and
adding in its place the phrase ``SBA Lenders and Intermediaries'';
0
iii. Removing the phrase ``SBA Lender's, Intermediary's, or NTAP's''
and adding in its place the phrase ``SBA Lender's or Intermediary's'';
0
iv. Removing the phrase ``SBA Lender, Intermediary, or NTAP'' and
adding in its place the phrase ``SBA Lender or Intermediary''.
0
13. Add Sec. 120.1300 immediately following the undesignated center
heading ``Enforcement Actions'' to read as follows:
Sec. 120.1300 Informal enforcement actions--7(a) Lenders.
(a) Upon a determination that the grounds in Sec. 120.1400 exist,
SBA may undertake, in SBA's discretion, one or more of the informal
enforcement actions listed in this section. SBA will consider the
severity or frequency of the violation or action triggering the ground
and the circumstances in determining whether and what type of informal
action to take. Circumstances that may lead to SBA taking informal
enforcement action rather than formal enforcement action include, for
example, when problems are narrow in scope and are correctible and SBA
is confident of a 7(a) Lender's Board of Directors (``Board'') and
management commitment and ability to correct; where violations are less
frequent or less severe but warrant enforcement; or while more fully
assessing risk.
(b) Informal enforcement actions include, but are not limited to:
(1) An SBA supervisory letter. The letter may discuss serious or
persistent supervisory concerns, as determined by SBA, and expected
corrective action by the 7(a) Lender. Supervisory letters include, for
example, Notices of Material Non-Compliance;
(2) Mandatory training. SBA may require a 7(a) Lender to complete
[[Page 29100]]
training to address certain findings, weaknesses, and deficiencies;
(3) A commitment letter or Board resolution. SBA may require a 7(a)
Lender to submit a commitment letter or Board resolution, satisfactory
to SBA, signed by the 7(a) Lender's Board on behalf of the entity that
may:
(i) Include specific written commitments to take corrective actions
in response to the 7(a) Lender's acknowledged deficiencies;
(ii) Identify the person(s) responsible for taking the corrective
action; and
(iii) Set forth the timeframe for taking the corrective action. The
document may be drafted by SBA or the 7(a) Lender;
(4) Agreements. SBA may request that a 7(a) Lender enter into a
written agreement with, and drafted by, SBA to address and correct
identified weaknesses and/or limit or mitigate risk. The agreement may
provide, for example, that a 7(a) Lender take certain actions or
refrain from certain actions; and
(5) Other informal enforcement actions. Others as SBA determines
appropriate on a case by case basis.
(c) A 7(a) Lender may appeal informal enforcement actions to the
appropriate Federal district court or SBA's Office of Hearings and
Appeals (OHA) within 20 calendar days of the date of the decision, and
in the event of an OHA appeal, OHA will issue its decision in
accordance with part 134 of this title. The enforcement action will
remain in effect pending resolution of the appeal, if any. SBA is not
precluded from taking one or more formal enforcement actions under
Sec. 120.1500, or as otherwise authorized by law, while an appeal of
an informal enforcement action is pending.
0
14. Amend Sec. 120.1400 by revising the first sentence and adding a
sixth sentence in paragraph (b) and revising the first sentence in
paragraph (c)(6) and paragraphs (c)(9), (11), and (12), (d)(1)(iii) and
(iv), and (d)(3)(i) and (ii) to read as follows:
Sec. 120.1400 Grounds for enforcement actions--SBA Lenders.
* * * * *
(b) Scope. SBA may undertake one or more of the enforcement actions
listed in Sec. Sec. 120.1300 and 120.1500, or as otherwise authorized
by law, if SBA determines that the grounds applicable to the
enforcement action exist. * * * SBA considers the severity or frequency
of a violation in determining whether to take an enforcement action and
the type of enforcement action to take.
(c) * * *
(6) Engaging in a pattern of uncooperative behavior or taking an
action that SBA determines is detrimental to the integrity or
reputation of an SBA program, that undermines management or
administration of a program, or that is not consistent with standards
of good conduct. * * *
* * * * *
(9) Any other reason that SBA determines may increase SBA's
financial risk (for example, repeated Less Than Acceptable Risk Ratings
(generally in conjunction with other indicators of increased financial
risk); failure to properly oversee Agent activity (``Agent'' as defined
in part 103 of this title); or, indictment on felony or fraud charges
of an officer, key employee, or loan agent involved with SBA loans for
the SBA Lender);
* * * * *
(11) For immediate suspension of all SBA Lenders from delegated
authorities--upon a determination by SBA that:
(i) One or more of the grounds in paragraph (c) or (f) of this
section, as applicable, exists; and
(ii) Immediate action is needed to protect the interests of the
Federal Government (such as where there is risk of immediate harm or
loss, a significant program integrity concern, or clear evidence of
conduct indicating a lack of business integrity).
(12) For immediate suspension of all SBA Lenders (except SBA
Supervised Lenders, which are covered under Sec. 120.1400(d)(2)) from
the authority to participate in the SBA loan program, including the
authority to make, service, liquidate, or litigate 7(a) or 504 loans--
upon a determination by SBA that:
(i) One or more of the grounds in paragraph (c) or (f) of this
section, as applicable, exists; and
(ii) Immediate action is needed to protect the interests of the
Federal Government (such as where there is risk of immediate harm or
loss, a significant program integrity concern, or clear evidence of
conduct indicating a lack of business integrity).
(d) * * *
(1) * * *
(iii) A willful or repeated violation of SBA Loan Program
Requirements; or
(iv) A willful or repeated violation of any condition imposed by
SBA with respect to any application or request with SBA; or
* * * * *
(3) * * *
(i) A violation of SBA Loan Program Requirements; or
(ii) Where an SBA Supervised Lender or Other Person engages in or
is about to engage in any acts or practices that will violate SBA Loan
Program Requirements.
* * * * *
0
15. Amend Sec. 120.1425 by:
0
a. Revising the section heading and paragraphs (a), and (b);
0
b. In paragraph (c) introductory text:
0
i. Removing the dash after the paragraph heading and adding a period in
its place; and
0
ii. Removing the phrase ``Intermediary or NTAP'' wherever it appears
and adding in its place the phrase ``Intermediary'';
0
c. Revising paragraph (c)(1);
0
d. Removing the phrase ``Intermediaries and NTAPs'' and adding in its
place the phrase ``Intermediaries'' in paragraph (c)(2)(i);
0
e. Revising paragraphs (c)(2)(vii) and (viii);
0
f. Adding paragraphs (c)(2)(ix) and (x) and (c)(3) through (7);
0
g. Removing paragraphs (d) and (e).
The revisions and additions read as follows:
Sec. 120.1425 Grounds for formal enforcement actions--Intermediaries
participating in the Microloan Program.
(a) Agreement. By participating in the SBA Microloan Program,
Intermediaries automatically agree to the terms, conditions, and
remedies in this part as if fully set forth in their participation
agreement and all other agreements jointly executed by the Intermediary
and SBA.
(b) Scope. SBA may undertake one or more of the formal enforcement
actions listed in Sec. 120.1540, or as otherwise authorized by law, if
SBA determines that any of the grounds listed in paragraph (c) of this
section exist.
(c) * * *
(1) Failure to comply materially with any requirement imposed by
Loan Program Requirements;
(2) * * *
(vii) Maintain a staff trained in Microloan Program issues and Loan
Program Requirements;
(viii) Maintain the financial ability to sustain the Intermediary's
operations (including, but not limited to, adequate capital), as
determined by SBA;
(ix) Satisfactorily provide in-house technical assistance to
Microloan borrowers and prospective Microloan borrowers; or
(x) Close and fund the required number of microloans per year under
Sec. 120.716;
(3) Failure within the time period specified to correct an
underwriting, closing, disbursing, servicing, liquidation, litigation,
or reporting deficiency, or failure in any material
[[Page 29101]]
respect to take other corrective action, after receiving notice from
SBA of a deficiency and the need to take corrective action;
(4) Engaging in a pattern of uncooperative behavior or taking an
action that SBA determines is detrimental to the integrity or
reputation of the Microloan Program, that undermines management or
administration of the program, or that is not consistent with standards
of good conduct. Prior to issuing a notice of a proposed formal
enforcement action or immediate suspension under Sec. 120.1540 based
upon the grounds discussed in this paragraph, SBA must send prior
written notice to the Intermediary explaining why the Intermediary's
actions were uncooperative, detrimental to the program, undermined
SBA's management of the program, or were not consistent with standards
of good conduct. The prior notice must also state that the
Intermediary's actions could give rise to a specified formal
enforcement action, and provide the Intermediary with a reasonable time
to cure the deficiency before any further action is taken;
(5) Any other reason that SBA determines may increase SBA's
financial or program risk (for example, repeated Less Than Acceptable
Risk Ratings (generally in conjunction with other indicators of
increased risk) or indictment on felony or fraud charges of an officer,
key employee, or loan agent involved with SBA programs for the
Intermediary);
(6) For immediate suspension of an Intermediary--upon a
determination by SBA that:
(i) One or more of the grounds in paragraph (c) of this section
exists; and
(ii) Immediate action is needed to protect the interests of the
Federal Government (such as where there is risk of immediate harm or
loss, a significant program integrity concern, or clear evidence of
conduct indicating a lack of business integrity); and
(7) As otherwise authorized by law.
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16. Amend Sec. 120.1500 by revising the section heading, the
introductory text, paragraph (a) heading, paragraph (b), paragraph (c)
introductory text heading, paragraph (c)(4), paragraph (d) introductory
text heading, and paragraph (e) introductory text heading to read as
follows:
Sec. 120.1500 Types of formal enforcement actions--SBA Lenders.
Upon a determination that the grounds set forth in Sec. 120.1400
exist, SBA may undertake, in SBA's discretion (and with the involvement
of the Lender Oversight Committee as appropriate and consistent with
its assigned responsibilities), one or more of the following formal
enforcement actions for each of the types of SBA Lender listed. SBA
will consider the severity or frequency of the violation or action and
the circumstances triggering the ground in determining whether and what
type of enforcement action to take. SBA will take formal enforcement
action in accordance with procedures set forth in Sec. 120.1600. If
formal enforcement action is taken under this section and the SBA
Lender fails to implement required corrective action in any material
respect within the required timeframe in response to the formal
enforcement action, SBA may take further enforcement action, as
authorized by law. SBA's decision to take a formal enforcement action
will not, by itself, invalidate a guaranty previously provided by SBA.
(a) Formal enforcement actions for all SBA Lenders. * * *
(b) Formal enforcement actions specific to 7(a) Lenders. In
addition to those formal enforcement actions applicable to all SBA
Lenders, SBA may take the following actions:
(1) Secondary market suspension or revocation (other than temporary
suspension and revocation under Sec. 120.660). SBA may suspend or
revoke a 7(a) Lender's authority to sell or purchase loans or
certificates in the Secondary Market; or
(2) Civil monetary penalty (other than SBA Supervised Lender civil
monetary penalty under Sec. 120.465). SBA may assess a civil monetary
penalty against a 7(a) Lender. The civil monetary penalty will be in an
amount not to exceed the maximum published in the Federal Register from
time to time. In determining whether to assess a civil monetary penalty
and, if so, in what amount, SBA may consider, for example, the
following: The gravity (e.g., severity and frequency) of the violation;
the history of previous violations; the financial resources and good
faith of the 7(a) Lender; and any other matters as justice may require.
(c) Formal enforcement actions specific to SBA Supervised Lenders
and Other Persons (except Other Regulated SBLCs). * * *
(4) Civil monetary penalties for report filing failure under Sec.
120.465. SBA may seek civil penalties, in accordance with Sec.
120.465, against an SBA Supervised Lender that fails to file any
regular or special report by its due date as specified by regulation or
SBA written directive.
(d) Formal enforcement actions specific to SBLCs. * * *
(e) Formal enforcement actions specific to CDCs. * * *
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17. Revise Sec. 120.1540 to read as follows:
Sec. 120.1540 Types of formal enforcement actions--Intermediaries
participating in the Microloan Program.
Upon a determination that any ground set out in Sec. 120.1425
exists, the SBA may take, in its discretion, one or more of the
following formal enforcement actions against an Intermediary:
(a) Suspension. SBA may suspend an Intermediary's authority to
participate in the Microloan Program, which may include, but is not
limited to, the authority to make, service, liquidate, and/or litigate
SBA microloans, and the imposition of a freeze on the Intermediary's
MRF and LLRF accounts.
(b) Immediate suspension. SBA may suspend, effective immediately,
an Intermediary's authority to participate in the Microloan Program,
which may include, but is not limited to, the authority to make,
service, liquidate, and/or litigate SBA microloans, and the imposition
of an immediate freeze on the Intermediary's MRF and LLRF accounts.
Section 120.1425(c)(6) sets forth the grounds for SBA Microloan Program
immediate suspension of an Intermediary.
(c) Revocation. SBA may revoke an Intermediary's authority to
participate in the Microloan Program which may include, but is not
limited to:
(1) Removal from the program;
(2) Liquidation of the Intermediary's MRF and LLRF accounts by SBA,
and application of the liquidated funds to any outstanding balance owed
to SBA;
(3) Payment of outstanding debt to SBA by the Intermediary;
(4) Forfeiture or repayment of any unused grant funds by the
Intermediary;
(5) Debarment of the organization from receipt of Federal funds
until loan and grant repayments are met; and
(6) Surrender of possession of Intermediary's SBA microloan
portfolio to SBA, with the microloan portfolio and all associated
rights transferred on a permanent basis to SBA, in accordance with
SBA's rights as a secured creditor.
(d) Other actions. Such other actions available under law.
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18. Amend Sec. 120.1600 by:
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a. Removing the phrase ``SBA Lender, Intermediary, or NTAP'' wherever
it appears and adding in its place the phrase ``SBA Lender or
Intermediary'';
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b. Removing the phrase ``SBA Lender, Intermediary, or NTAP's'' wherever
it appears and adding in its place the phrase ``SBA Lender's or
Intermediary's'';
[[Page 29102]]
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c. Revising the section heading and introductory text to paragraph (a);
0
d. Adding the word ``formal'' before the word ``enforcement'' wherever
it appears in paragraphs (a)(1) through (4).
0
e. Removing the phrase ``SBA Lender, Intermediary, NTAP or SBA,'' and
adding in its place the phrase ``SBA Lender, Intermediary, or SBA,'' in
paragraph (a)(1)(ii);
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f. Removing the phrase ``final decision'' wherever it appears and
adding in its place the phrase ``final agency decision'' in paragraphs
(a)(2) through (4);
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g. Revising the headings for paragraphs (a)(3) and (4) and paragraph
(a)(5); and
0
h. Adding the word ``formal'' before the word ``enforcement'' in the
headings for paragraphs (b) and (c).
The revisions read as follows:
Sec. 120.1600 General procedures for formal enforcement actions
against SBA Lenders, SBA Supervised Lenders, Other Regulated SBLCs,
Management Officials, Other Persons, and Intermediaries.
(a) In general. Except as otherwise set forth for the formal
enforcement actions listed in paragraphs (a)(6), (b), and (c) of this
section and in Sec. 120.465, SBA will follow the procedures listed in
this section.
* * * * *
(3) SBA's notice of final agency decision on a formal enforcement
action where an SBA Lender or Intermediary filed objection to the
proposed action or immediate suspension. * * *
(4) SBA's notice of final agency decision on a formal enforcement
action where no filed objection or untimely objection not considered. *
* *
(5) Appeals. An SBA Lender or Intermediary may appeal the final
agency decision to the appropriate Federal district court.
Alternatively, 7(a) Lenders may appeal such actions (except for actions
against SBA Supervised Lenders that are covered by procedures in Sec.
120.1600(b) or (c) or Sec. 120.465), to SBA's Office of Hearings and
Appeals (``OHA'') within 20 calendar days of the date of the decision,
and in the event of such an appeal, OHA will issue its decision in
accordance with part 134 of this title. The enforcement action will
remain in effect pending resolution of the appeal, if any.
* * * * *
PART 134--RULES OF PROCEDURE GOVERNING CASES BEFORE THE OFFICE OF
HEARINGS AND APPEALS
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19. The authority citation for part 134 is revised to read as follows:
Authority: 5 U.S.C. 504; 15 U.S.C. 632, 634(b)(6), 634(i),
637(a), 648(l), 656(i), 657t, and 687(c); 38 U.S.C. 8127(f); E.O.
12549, 51 FR 6370, 3 CFR, 1986 Comp., p. 189.
Subpart J issued under 38 U.S.C. 8127(f)(8)(B).
Subpart K issued under 38 U.S.C. 8127(f)(8)(A).
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20. Amend Sec. 134.102 by adding paragraph (d) to read as follows:
Sec. 134.102 Jurisdiction of OHA.
* * * * *
(d) Appeals from informal and formal enforcement actions against
7(a) Lenders, and any other appeal that is specifically authorized by
part 120 of this title, but not including appeals of actions against
SBA Supervised Lenders under Sec. 120.1600(b) or (c) or under Sec.
120.465;
* * * * *
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21. Amend Sec. 134.205 by revising paragraph (c) to read as follows:
Sec. 134.205 The appeal file, confidential information, and
protective orders.
* * * * *
(c) Public access. Except for confidential business and financial
information; source selection sensitive information; income tax
returns; documents and information covered under Sec. 120.1060 of this
title; and other exempt information, the appeal file is available to
the public pursuant to the Freedom of Information Act (FOIA), 5 U.S.C.
552.
* * * * *
Christopher Pilkerton,
Acting Administrator.
[FR Doc. 2019-12631 Filed 6-20-19; 8:45 am]
BILLING CODE 8025-01-P