[Federal Register Volume 85, Number 27 (Monday, February 10, 2020)]
[Rules and Regulations]
[Pages 7622-7652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02128]



[[Page 7621]]

Vol. 85

Monday,

No. 27

February 10, 2020

Part II





Small Business Administration





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





13 CFR Part 103, 120 and 121





 Express Loan Programs; Affiliation Standards; Interim Final Rule

  Federal Register / Vol. 85 , No. 27 / Monday, February 10, 2020 / 
Rules and Regulations  

[[Page 7622]]


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

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: Interim final rule; request for comments.

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

SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
amending 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. SBA previously 
published a Notice of Proposed Rulemaking addressing all of the topics 
and issues covered by this interim final rule and received extensive 
comments from the public. SBA is publishing this rule interim final 
rather than proceeding to a final rule in order to provide the public 
with an additional opportunity to comment. In addition, the rule will 
become effective in 30 days but compliance with two of the regulatory 
changes will not be required until October 1, 2020.

DATES: 
    Effective date: This rule is effective March 11, 2020.
    Compliance date: The compliance date for Sec. Sec.  103.5(b) and 
120.221(a) is October 1, 2020.
    Comment date: Comments on this rule must be received on or before 
April 10, 2020.

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 (Regulations.Gov 
Docket: SBA-2018-0009).
     Mail: Rosemarie Drake, Office of Financial Assistance, 
Office of Capital Access, Small Business Administration, 409 Third 
Street SW, Washington, DC 20416.
     Hand Delivery/Courier: Rosemarie Drake, 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 
Rosemarie Drake, 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: Dianna L. Seaborn, Director, Office of 
Financial Assistance, Office of Capital Access, Small Business 
Administration, 409 Third Street SW, Washington, DC 20416; telephone: 
(202) 205-3645; email: [email protected].

SUPPLEMENTARY INFORMATION: 

I. Background Information

    The SBA programs affected by this interim final rule are:
    1. The 7(a) Loan Program authorized pursuant to Section 7(a) of the 
Small Business Act (the Act) (15 U.S.C. 636(a));
    2. The Business Disaster Loan Programs (collectively, Economic 
Injury Disaster Loans, Military Reservist Economic Injury Disaster 
Loans, and Physical Disaster Business Loans) authorized pursuant to 
Section 7(b) of the Act (15 U.S.C. 636(b));
    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.). (In this interim final rule, the 7(a), 
Microloan, ILP, and 504 Loan Programs are collectively referred to as 
the Business Loan Programs.)
    On September 28, 2018, SBA published a proposed rule with request 
for comments in the Federal Register to incorporate the requirements 
related to the SBA Express and Export Express Loan Programs; add a 
regulation pertaining to the 7(a) and Development Company (504) loan 
programs regarding when the owners of a small business Applicant are 
required to inject excess liquid assets into the project; amend certain 
regulations setting forth the affiliation principles applicable to SBA 
financial assistance programs; limit certain fees payable by loan 
Applicants to amounts deemed reasonable by SBA; clarify the 
responsibility of a Lender for the contingent liabilities associated 
with 7(a) loans purchased from the Federal Deposit Insurance 
Corporation; and, finally, amend certain regulations governing the use 
of microloan grant funds by Microloan Intermediaries and the maximum 
maturity of a microloan. (83 FR 49001) The original comment period was 
scheduled to end November 27, 2018. On November 16, 2018, SBA announced 
an extension of the public comment period for an additional 15 business 
days to December 18, 2018. (83 FR 57693)

II. Summary of Comments

    During the public comment period, 4,251 comments were submitted, 
142 of which were duplicate submissions, meaning an identical comment 
submitted multiple times by the same commenter.
    The comments submitted came from 17 Congressional representatives 
or State government offices, 48 trade associations or non-profit 
organizations, 64 Certified Development Companies (CDCs), 86 Agents or 
Lender Service Providers (LSPs), 259 banks and non-bank lenders, SBA's 
Office of Advocacy, and 3,635 individuals. The Agency's responses to 
the Office of Advocacy's comments are included in section III.C below.
    The majority of the regulatory changes proposed by SBA, including 
but not limited to incorporating SBA Express and Export Express Loan 
Program Requirements, modifying certain regulations concerning the 
Microloan Program, and technical corrections or conforming amendments, 
were supported by the commenters with either no opposition or 
recommendation for minor modifications.
    While there were a significant number of comments in opposition to 
the proposed changes to limit fees that Lenders and Agents may charge 
small business Applicants in connection with an SBA-guaranteed loan, 
SBA notes that most of these comments were generated through a single 
website through which interested parties could submit a public comment 
to SBA ``with one click.'' This website's electronic mechanism auto-
generated a rotating boilerplate comment letter and submitted the 
comment letter on behalf of the individual who simply had to provide a 
name, street address, zip code, phone number, and email address. 
Approximately 54 percent of the total comments received by SBA were 
comprised of these auto-generated boilerplate comments, and more than 
90 percent of the comments received on the proposed changes to the 
regulations

[[Page 7623]]

concerning fees that Agents may charge Applicants in connection with 
SBA-guaranteed loans were comprised of these auto-generated boilerplate 
comments. The website promoting these auto-generated comments was 
created by a coalition made up of small business-focused lenders, 
facilitators, and associations working with small businesses and 
entrepreneurs. As discussed more fully in the Section-by-Section 
Analysis below, the information contained on the coalition's website 
and communicated on their social media platforms contained significant 
inaccuracies regarding both the current and proposed SBA rules 
regarding Agent fees. SBA considered this misinformation by the 
coalition when reviewing the comments received.
    SBA received a large number of comments on the proposed changes to 
the affiliation principles applicable to the financial assistance 
programs set out in Sec.  121.301(f). The majority of these comments 
were in response to the proposed changes to Sec.  121.301(f)(4), which 
would expand the ``identity of interest'' basis for affiliation to 
include businesses with common investments and businesses that are 
economically dependent. Many commenters who opposed these proposed 
changes expressed concern that the changes would negatively impact 
poultry farmers and other agricultural producers.
    SBA also received comments from 75 individuals or entities 
expressing general concerns unassociated with any specific section of 
the proposed regulations. One concern, expressed by 58 commenters, was 
related to the determination that the rule is not a ``significant'' 
regulatory action for the purposes of Executive Order 12866. Since the 
end of the public comment period, the Office of Management and Budget 
has changed the designation of the rule to ``significant.'' In this 
interim final rule, SBA has amended the Regulatory Impact Analysis and 
Regulatory Flexibility Analysis to reflect the change in designation.
    SBA also received 54 recommendations for the Agency to consider 
requesting a statutory amendment to increase the maximum size of SBA 
Express loans from $350,000 to $500,000. SBA included a request in the 
President's fiscal year 2020 budget to increase the maximum SBA Express 
loan amount to $1,000,000 and agrees that an increase in the maximum 
loan size is needed.
    SBA received 13 comments that generally opposed the proposed rule 
as a whole, but none provided specific reasons or explanation for why 
the proposed regulations should not be put into place.
    Finally, SBA received two comments related to general 7(a) Loan 
Program policy that were not related to any regulation included in the 
proposed modifications. SBA will consider those comments when updating 
future program guidance.
    SBA has addressed in detail the comments received on specific 
proposed regulatory changes within the appropriate Section-by-Section 
analysis below.

III. Section-by-Section Analysis of Comments and Changes

A. Business Loan Programs

1. SBA Express and Export Express Loan Programs
Section 120.441 SBA Express and Export Express Loan Programs
    SBA proposed to add a regulation providing general descriptions of 
the SBA Express and Export Express Loan Programs.
    SBA received 60 comments on this proposed change. Fifty-nine of the 
comments supported this proposed change with a recommendation that SBA 
amend this section and other relevant subsections to clarify that SBA's 
general Loan Program Requirements apply to SBA Express and Export 
Express loans, except when such requirements are inconsistent with 
other requirements or guidance provided in SBA Loan Program 
Requirements specific to SBA Express or Export Express. SBA believes 
that this recommendation has already been addressed in the regulatory 
language proposed in Sec.  120.441(a) and (b), which applies to the 
associated regulations in Sec. Sec.  120.442 through 120.447. It is 
repetitive and unnecessary to include this statement in all subsequent 
related sections.
    One commenter expressed concern that SBA granting Lenders 
unilateral authority to process SBA Express and Export Express loans 
could ``disproportionately affect'' women and minority business owners 
because the proposed regulations do not appear to incorporate necessary 
safeguards against ``stifled growth in urban communities and 
sustainability for women and other minority businesses within these 
communities.'' The commenter did not provide any evidence to support 
his or her concern. SBA does not agree that delegating loan making 
authority to lenders disproportionately affects women or minority 
business owners. The SBA Express and Export Express Programs began 
operating as pilot programs in 1995 and 1998, respectively, and were 
made permanent in 2004 and 2010, respectively. As explained in the 
description of the programs being added as Sec.  120.441, both programs 
were designed for Lenders to process loans exclusively under delegated 
authority and Congress has authorized SBA to permit qualified Lenders 
to make SBA Express and Export Express loans using, to the maximum 
extent practicable, their own processes, analyses, and documentation.
    SBA is adopting the regulation as proposed.
Section 120.442 Process To Obtain or Renew SBA Express or Export 
Express Authority
    SBA proposed adding a regulation that sets forth the criteria and 
process to obtain or renew SBA Express or Export Express authority.
    SBA received 57 comments on this proposed change. All commenters 
supported the addition of the regulation. SBA is adopting the 
regulation as proposed.
Section 120.443 SBA Express and Export Express Loan Processing 
Requirements
    SBA proposed adding a regulation that sets forth the requirements 
for loan processing under the SBA Express and Export Express loan 
programs.
    SBA received 59 comments on this proposed change. All commenters 
supported the addition of the regulation. SBA is adopting the 
regulation as proposed with one modification.
    An additional eligibility requirement applicable to Export Express, 
which has been a part of the Export Express Program since it was 
established and which is currently set out in SBA's Standard Operating 
Procedures 50 10, Lender and Development Company Loan Programs, as 
amended from time to time (SOP 50 10), was inadvertently omitted from 
the proposed rule. This additional eligibility requirement states that, 
in addition to the eligibility requirements for all 7(a) loans, 
Applicants for Export Express loans must have been in operation, 
although not necessarily in exporting, for at least 12 full months. 
However, Applicants that have been in operation for less than 12 months 
are eligible if the Lender determines that the Applicant's key 
personnel have clearly demonstrated export expertise and substantial 
previous successful business experience, and the Lender processes the 
Export Express loan using conventional commercial loan underwriting 
procedures and does not rely solely on credit scoring or credit

[[Page 7624]]

matrices to approve the loan.\1\ The Export Express Lender must 
document that the Applicant's key personnel have the requisite 
experience in exporting. The Export Working Capital Program, which 
Export Express was based on, has a similar requirement set out in Sec.  
120.341.
---------------------------------------------------------------------------

    \1\ Non-bank Lenders that do not have a conventional loan 
portfolio must submit their underwriting procedures to the Office of 
Credit Risk Management for written approval prior to making an 
Export Express loan.
---------------------------------------------------------------------------

    As one of the stated purposes of the proposed rule was to 
``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,'' SBA is modifying Sec.  120.443 to 
include the additional eligibility requirement applicable to Export 
Express which was inadvertently omitted in the proposed rule. SBA is 
adding a new paragraph (b) to incorporate the requirement. SBA is 
redesignating the remaining paragraphs as (c) through (f).
Section 120.444 Eligible Uses of SBA Express and Export Express Loan 
Proceeds
    SBA proposed adding a regulation to identify the eligible uses of 
loan proceeds for SBA Express and Export Express loans.
    SBA received 59 comments on this proposed change. Fifty-seven 
commenters supported the addition of the regulation. One SBA Lender 
commented in opposition to Sec.  120.444(b)(4) which 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.'' This Lender believes this requirement 
to be unnecessary and burdensome and instead recommends a risk-based 
approach, such as having the customer sign an attestation as to the 
licensing requirements for lower-risk transactions or, for higher-risk 
transactions, requiring customers to provide a copy of the license(s) 
or a letter from an export attorney as to why a license is not 
required. This requirement has always been part of the Export Express 
Program and, pursuant to the current procedure in SOP 50 10, Export 
Express Lenders can satisfy this requirement by checking the Ex-Im Bank 
Country Limitation Schedule and, for certain types of Export Express 
loans, the Department of Treasury's Office of Foreign Assets Control 
(OFAC) sanctions list. SBA is not expanding this requirement and, 
therefore, the Agency does not agree that this regulation as proposed 
will cause any undue burden on Export Express Lenders.
    Another Lender expressed concern that while the summary of the 
proposed change in the preamble to the proposed rule references the SBA 
Express Lender's responsibility to ``take reasonable steps to ensure 
and document that the loan proceeds are used exclusively for business-
related purchases,'' there is no regulatory language proposed in Sec.  
120.444 that describes this requirement. The Lender objected to the 
language in the preamble, claiming that it would be impractical for the 
Lender to fulfill any such proposed responsibility 
``postdisbursement.'' In addition, the Lender stated that during the 
loan application and documentation processes, the Applicant already 
attests that all funds will be exclusively used for business-related 
purposes. This responsibility is an existing requirement for all 
Lenders making 7(a) loans, including SBA Express Lenders on SBA Express 
loans, pursuant to Sec. Sec.  120.120 and 120.130. SBA's SOP 50 10, 
Subpart B, Chapter 7 clearly outlines the acceptable documentation with 
which Lenders may document disbursement. The Lender's responsibility as 
described in the preamble of the proposed rule references this existing 
requirement, which SBA is not expanding and, therefore, the Agency does 
not agree with the commenter's objections.
    SBA is adopting the regulation as proposed with two minor technical 
clarifications to Sec.  120.444(b)(3) to replace ``overseas 
operations'' with ``operations outside of the United States'' and to 
replace ``U.S.'' with ``United States.''
Section 120.445 Terms and Conditions of SBA Express and Export Express 
Loans
    SBA proposed 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.
    SBA received 59 comments on this proposed regulation, with 57 
commenters supporting the addition of the regulation. One individual 
opposed the provision in Sec.  120.445(g) that prohibits SBA Express 
and Export Express Lenders from selling the guaranteed portion of an 
SBA Express or Export Express revolving line of credit on the secondary 
market. This commenter argued that any product that has ended its draw 
period and is in principal and interest repayment should be able to be 
sold on the secondary market, regardless of delivery method or whether 
the loan is a line of credit. SBA's existing Loan Program Requirements 
for all 7(a) loans, including SBA Express and Export Express loans, 
prohibit revolving loans or line of credit facilities to be sold on the 
secondary market. SBA appreciates the opinion expressed by this 
commenter but is not electing to modify this Loan Program Requirement.
    One SBA Lender objected to the proposed change 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. This Lender stated that it does not charge an 
``application fee'' in connection with its SBA-guaranteed loans; 
rather, it charges a ``loan fee.'' Further, this Lender asserted that, 
if it ``will be required to document `packaging fees' and process the 
related paperwork and transmittal [to SBA's Fiscal and Transfer 
Agent]'' then the Lender will likely have to increase the fees it 
charges to Applicants and the Lender's ``delivery process efficiency 
will be impaired.'' This Lender appears to have misunderstood the 
proposed changes regarding fees, as well as the current requirements 
concerning disclosure of fees.
    As stated in the preamble to the proposed rule, SBA proposed 
changes to the fees a Lender is permitted to collect from an Applicant 
in order to simplify the rules regarding such fees. SBA stated that, 
regardless of what the fee is called (e.g., a packaging fee, an 
application fee, etc.), the Lender would be permitted to charge an 
Applicant a fee up to a certain amount, depending on the loan amount. 
Thus, whether this Lender calls the fee an ``application fee'' or a 
``loan fee,'' as long as the fee charged does not exceed the maximum 
set forth in Sec.  120.221(a), the Lender would be permitted to charge 
the fee. Further, while the proposed rule did not change the 
requirement that, if the Lender charges an Applicant a fee for 
assistance with obtaining an SBA-guaranteed loan, the Lender must 
disclose the fee on SBA Form 159, the proposed rule did eliminate the 
current requirement that the Lender itemize fees over $2,500. Thus, if 
this Lender charges a ``loan fee'' it would need to disclose the fee on 
SBA Form 159, but it would not be required to itemize the fee or

[[Page 7625]]

provide supporting documentation. Finally, the requirement to submit 
the completed SBA Form 159 to SBA's Fiscal and Transfer Agent after 
there has been an initial disbursement on the loan is a current 
requirement applicable to all 7(a) Lenders, including SBA Express and 
Export Express Lenders. SBA disagrees with the Lender's contention that 
the proposed change will increase the burden on SBA Express and Export 
Express Lenders and is adopting as proposed the change 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.
    With respect to interest rates, SBA stated in the proposed rule 
that SBA Express and Export Express Lenders may charge up to 4.5 
percent over the prime rate on loans over $50,000 and up to 6.5 percent 
over the prime rate for loans of $50,000 or less, regardless of the 
maturity of the loan, and did not distinguish between fixed or variable 
interest rate loans. Since the publication of the proposed rule, SBA 
published a document in the Federal Register revising the maximum 
allowable fixed interest rate for 7(a) loans under 13 CFR 120.213. (83 
FR 55478, November 6, 2018) In that Federal Register document, SBA set 
the maximum allowable fixed interest rates for SBA Express and Export 
Express loans at the same levels as the maximum fixed interest rates 
allowable for 7(a) loans generally.
    Consequently, SBA is modifying Sec.  120.445(d) to differentiate 
between fixed and variable rate loans and to provide that the maximum 
allowable fixed interest rate for SBA Express and Export Express loans 
is the same as the maximum fixed interest rate allowable for 7(a) loans 
generally as set forth in 13 CFR 120.213. SBA is adopting the remainder 
of the regulation as proposed.
Section 120.446 SBA Express and Export Express Loan Closing, Servicing, 
Liquidation, and Litigation Requirements
    SBA proposed 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 provided 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. The proposed regulation also described the 
circumstances under which SBA will honor the guaranty on SBA Express 
and Export Express loans.
    SBA received 59 comments on this proposed regulation, all of which 
supported its incorporation into the regulations. SBA is adopting the 
regulation as proposed.
Section 120.447 Oversight of SBA Express and Export Express Lenders
    SBA proposed to add a new regulation explaining that SBA Express 
and Export Express Lenders are subject to the same risk-based lender 
oversight as other 7(a) Lenders, including supervision and enforcement 
provisions, in accordance with 13 CFR part 120, subpart I.
    SBA received 57 comments on this proposed regulation, all of which 
supported its incorporation into the regulations. SBA is adopting the 
regulation as proposed with one minor technical clarification to insert 
``other'' before ``7(a) Lenders'' and a minor edit to the section 
heading.
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
    To aid SBA Lenders in determining whether an Applicant has access 
to ``credit elsewhere,'' SBA proposed to reinstitute a ``personal 
resources test.'' The personal resources test provides SBA Lenders 
(i.e., both 7(a) Lenders and CDCs) with a bright-line test 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. When an owner of 20 percent or more has liquid 
assets that exceed stated thresholds, SBA proposed to require an 
injection of cash from any such owner to reduce the SBA loan amount. 
SBA proposed specific thresholds setting the required injection of such 
owners' excess liquid assets based on the size of the total financing 
package (defined for the purposes of this section as any SBA loans and 
any other financing, including loans from any other source, requested 
by the Applicant business at or about the same time). As set forth in 
SOP 50 10, SBA considers ``at or about the same time'' to mean loans 
approved within 90 days of each other.
    SBA received 200 comments on this proposed change. Of these 
comments, 135 expressed concern with this change, including 103 SBA 
Lenders, 18 individuals, 9 trade associations, 4 Agents, and SBA's 
Office of Advocacy.
    There were a few main concerns expressed by these commenters. Some 
argued that the personal resources test and required equity injection 
of excess personal liquid assets should not apply to the 504 Loan 
Program because Congress already requires an equity injection for 504 
loans and because 504 loans are statutorily required to create jobs; 
therefore, these small businesses need liquidity to meet these 
objectives. Another concern expressed by many commenters was that 
compliance with the proposed regulation would be onerous and burdensome 
for SBA Lenders. Lastly, commenters expressed concern that the personal 
resources test may limit the resources available to a small business 
owner in the event of an unforeseen emergency or may eliminate 
potential borrowers from seeking SBA financing altogether due to 
owners' aversion to additional equity injections.
    SBA disagrees with the argument that the personal resources test 
should not apply to the 504 Loan Program. Regardless of other program-
specific requirements, SBA's statutory responsibility for both 
financial assistance programs includes ensuring that loans are not made 
if the Applicant has access to funds from private sources or elsewhere 
on reasonable terms. Subsequent to SBA's removal of the personal 
resources test from the regulations in 2014 (79 FR 15641), many SBA 
Lenders expressed confusion as to how to adequately determine whether a 
small business has access to credit elsewhere based on personal liquid 
assets. During SBA Lender reviews, SBA has identified inconsistent and 
irregular applications of this assessment when the determination was 
left to the SBA Lender's discretion, including approval of loans to 
businesses with principals that maintained extremely high levels of 
personal liquid assets. Reinstatement of the personal resources test 
will eliminate the ambiguity of the credit elsewhere determination and 
provide SBA Lenders the certainty they have sought in recent years. 
With respect to the job creation or retention requirements in the 504 
Loan Program, in November 2018, SBA increased the dollar amounts used 
in calculating the number of jobs that must be created or retained, 
thereby making it easier for 504 loans to satisfy the statutory job 
creation requirement. In addition, SBA designated additional areas for 
application of the higher portfolio

[[Page 7626]]

average. (83 FR 55224, November 2, 2018) Thus, SBA already has taken 
steps to facilitate compliance with the job creation requirements in 
the 504 Loan Program. Further, while SBA recognizes that the 
requirement of additional equity injections in the proposed rule may be 
unattractive to some potential borrowers, SBA proposed to increase the 
thresholds set forth in the 2014 personal resources test to allow for 
greater personal liquidity to be maintained by owners.
    Sixty-five commenters supported reinstatement of the personal 
resources test with suggested modifications. The commenters included 53 
SBA Lenders, 5 Agents, 3 individuals, 3 trade associations, and 1 
member of Congress. While these commenters supported reinstatement, 
many recommended that the personal liquidity thresholds be modified, 
especially for smaller loans. Commenters also recommended that SBA more 
clearly define what assets are considered ``liquid'' and provide 
further explanation or additional examples of the extraordinary 
circumstances that may qualify as an exception to the injection 
requirement. Additionally, some commenters requested that SBA modify 
the test to be based on the SBA loan amount, rather than the total 
financing package, and to apply the test only to individual persons and 
not entities. Two commenters suggested that SBA consider allowing an 
alternative to requiring the owner to inject excess liquid assets by 
allowing the owner to instead pledge the liquid assets as collateral 
for the loan.
    After considering the comments received on this change, SBA has 
reevaluated the personal liquidity threshold for smaller loans and 
agrees to modify the limits to ensure that Applicants applying for 
smaller loans are not adversely affected. SBA is adopting the 
regulation as proposed for loans greater than $350,000; however, based 
on the comments received, SBA is increasing the liquidity that 20 
percent or more owners may retain for loans of $350,000 or less. 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, as defined in SOP 50 10) 
is $350,000 or less, each 20 percent owner of the Applicant must inject 
any liquid assets that are in excess of two times the total financing 
package, or $500,000, whichever is greater. (The proposed rule would 
have required injection of any liquid assets that were in excess of one 
and three-quarter times the total financing package, or $200,000, 
whichever was greater.) SBA also is modifying the regulatory text to 
provide that SBA will reexamine the thresholds periodically and, if 
adjustments are necessary, SBA may modify the thresholds through 
rulemaking from time to time based on nationally-recognized economic 
indicators.
    SBA is adopting the proposed definition of ``liquid assets,'' with 
a modification to exclude the cash value of life insurance policies 
from the definition. The Agency will provide additional examples as to 
what will or will not be considered ``liquid assets'' in SOP 50 10. SBA 
will continue to base the personal resources test on the total 
financing package, but is adding language to clarify that the phrase 
``at or about the same time'' has the meaning set forth in SBA Loan 
Program Requirements. (As noted above, SOP 50 10 sets forth that SBA 
considers ``at or about the same time'' to mean loans approved within 
90 days of each other.) 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 immediate medical expenses of a family member.
3. Permissible Fees That a Lender or Agent May Collect From an 
Applicant or Borrower in Connection With an SBA-Guaranteed Loan
Section 120.221 Fees and Expenses That the Lender May Collect From an 
Applicant or Borrower
    SBA proposed revisions to paragraphs (a) and (b) of this section. 
SBA proposed to amend Sec.  120.221(a) to limit the total fees an 
Applicant can be charged by a Lender for assistance with 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 of 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) and legal fees 
that are charged on an hourly basis permitted in Sec.  120.221(e), this 
is the only fee that a Lender may collect directly or indirectly from 
an Applicant for assistance with obtaining an SBA-guaranteed loan.
    SBA received 294 comments on this proposed change. Of these 
comments, 215 (73 percent) were comprised of 7 different auto-generated 
templates submitted by individuals and SBA Lenders. Each template 
varied slightly in wording; however, all template comments opposed the 
proposed changes and expressed concern that limiting the fees an SBA 
Lender may charge to an Applicant will hurt small businesses by forcing 
Lenders to leave the market for smaller loans of $350,000 or less.
    SBA received 17 other non-automated comments expressing similar 
concern: 9 from SBA Lenders; 4 from individuals; 3 from trade 
associations; and 1 from an Agent. Many of these comments echoed the 
sentiment that the fee limits, specifically for loans of $350,000 or 
less, were set too low.
    The remaining 62 comments received on this proposed change 
supported SBA's proposal to clarify the fees that Lenders can charge 
7(a) loan Applicants, with modification. These commenters included 52 
SBA Lenders, 4 trade associations, 4 Agents, and 2 individuals. While 
these commenters generally supported the proposed change, they 
recommended that SBA consider increasing the fee that a Lender may 
charge an Applicant for a loan of $350,000 or less.
    SBA has considered these comments and agrees to increase the 
maximum permissible fee a Lender may charge an Applicant for a loan of 
$350,000 or less. Regardless of what the fee is called (e.g., a 
packaging fee, application fee, etc.), the Lender will be permitted to 
collect a fee from the Applicant that is no more than $3,000 for a loan 
up to and including $350,000 and no more than $5,000 for a loan over 
$350,000.
    Based on the comments and SBA's observations during lender reviews, 
SBA considers the revised 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 fee levels and, if 
adjustments are necessary, SBA may revise these amounts from time to 
time through rulemaking.
    SBA received several comments on proposed Sec.  120.221 suggesting 
that SBA modify the circumstances under which SBA may require a Lender 
to refund excess fee amounts. SBA considered these comments and is 
modifying the regulatory text to specifically state that SBA may 
require a Lender to refund any amount charged to an Applicant in excess 
of what is permitted by SBA in this regulation.
    In addition, in accordance with longstanding Agency policy, the 
Lender may not split a loan into two loans for the purpose of charging 
an additional fee to an Applicant. Even if there is a 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

[[Page 7627]]

maximums set forth above, based on the combined loan amounts. However, 
it is not SBA's intention to restrict a Lender from charging a new fee 
if an Applicant subsequently returns to the Lender to apply for a new 
loan for a different project or purpose. SBA will provide additional 
guidance in SOP 50 10 as necessary.
    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 Sec.  103.5 and the procedures set forth 
in SOP 50 10. However, the Lender will no longer be required to itemize 
the fees charged to the Applicant.
    SBA recognizes that some Lenders may need to revise their policies, 
procedures or documentation in order to comply with the new limits on 
fees in Sec.  120.221(a). In order to minimize the impact of the change 
on affected Lenders, SBA is not requiring compliance with revised Sec.  
120.221(a) until October 1, 2020. Until that time, Lenders are to 
continue to comply with the requirements in Sec.  120.221(a) as 
published in the 2019 edition of the Code of Federal Regulations, and 
the guidance in SOP 50 10 5(K). However, considering the benefits that 
the new fee limits offer, SBA expects that many Lenders will want to 
comply with them before October 1, 2020. They are permitted to do so. 
SBA recommends that these Lenders document in each loan file their 
decision to use the new fee limits.
    SBA also proposed to amend Sec.  120.221(b) to permit extraordinary 
servicing fees in excess of 2 percent per year 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 would need to be reasonable and prudent based on the level 
of extraordinary effort required and could not be higher than the fees 
charged on the Lender's similarly-sized, non-SBA guaranteed commercial 
loans.
    SBA received 54 comments on this proposed change. All comments 
supported the amendment to allow different extraordinary servicing fees 
to be charged in connection with EWCP loans and Working Capital 
CAPLines that are disbursed based on a Borrowing Base Certificate. 
However, one commenter noted that the regulatory language proposed 
makes no mention of the extraordinary servicing fees permissible for 
other 7(a) loans that may be allowed in certain cases, such as 
construction. This commenter recommended that SBA clearly identify that 
extraordinary servicing fees previously allowed are not impacted by the 
rule change.
    SBA appreciates this comment and agrees that the proposed 
regulatory language inadvertently omitted the current language in the 
regulation. It was not SBA's intent to eliminate the permissible 
extraordinary servicing fees previously allowed in appropriate 
circumstances for certain 7(a) loans. SBA is adopting the amendment to 
the regulation and is correcting the inadvertent error that would have 
eliminated the current language in the regulation.
Section 103.4 What is ``good cause'' for suspension or revocation?
    SBA proposed to eliminate the limited exception to the ``two master 
prohibition'' currently contained in Sec.  103.4(g). This exception 
currently applies 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's proposed 
elimination of this exception would 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 also proposed to revise the remaining text of Sec.  
103.4(g) for clarity and to use the defined term ``SBA Lender'' in the 
revised regulation to clarify that it applies to both 7(a) Lenders and 
CDCs.
    SBA received 987 comments on this proposal. Of these comments, 915 
were auto-generated comments submitted by individuals (i.e., 93 percent 
of all comments received on this issue). The comments were comprised of 
11 templates which varied slightly in wording; however, all template 
comments opposed the proposed changes and expressed the concern that 
eliminating an Agent's ability to serve both the SBA Lender and the 
Applicant would restrict a small business's access to capital, 
specifically for loans under $350,000. The commenters asserted that the 
changes proposed in this section and Sec.  103.5 would force Agents out 
of the market for loans under $350,000 and, according to these 
commenters, without Agents, small businesses would have no other way to 
gain access to affordable credit from an SBA Lender.
    SBA strongly disagrees with the claims and underlying assumptions 
made by these commenters. Applicants are in no way obligated or 
expected to engage a third party or pay for assistance in order to 
obtain an SBA-guaranteed loan. For those Applicants who would like 
assistance in applying for a loan, SBA provides several options for 
free and low-cost assistance through our resource partners, including 
Small Business Development Centers, Women's Business Centers, Veteran's 
Business Outreach Centers, United States Export Assistance Centers, 
SCORE Business Mentors, Lender Match, and local SBA District Offices, 
which are accessible nationwide. Over the course of five fiscal years 
(FY2013-FY2017), only 2.78 percent of total approved 7(a) loans 
reported utilizing an Agent (other than the participating Lender) to 
provide assistance to an Applicant for a fee. Therefore, SBA disagrees 
with the claim that small businesses will not be able to obtain SBA 
loans, or that SBA Lenders will not be willing to make such SBA loans, 
if the proposed changes to Sec.  103.4 are made final.
    SBA received only 12 other comments opposing the proposed change: 4 
from associations representing bankers or small business owners; 3 from 
SBA Lenders; 3 from Agents; 1 from a Member of Congress; and 1 from an 
individual. These comments aligned with the sentiments of the auto-
generated comments, also claiming that the elimination of the limited 
exception to the ``two master'' rule would lead to a reduction in small 
SBA loans and would negatively impact both the small businesses seeking 
SBA loans and the economic interests of the Agents that serve them.
    Five individuals commented that the proposed changes to Sec.  103.4 
would eliminate SBA-guaranteed lending to small business poultry 
farmers. SBA believes these comments were misdirected and intended to 
be made instead on the proposed affiliation regulations and has 
included these comments in that discussion later in the Section-by-
Section Analysis.
    The remaining 55 commenters (47 bank and non-bank lenders, 5 
Agents, 2 individuals, and 1 trade association representing government-
guaranteed lenders) supported the proposal, with some providing 
recommendations for improvement. The recommendations for improvement 
included: Allowing specific and nominal fees to be charged by an Agent 
to both the Lender and the Applicant; requiring more transparent 
disclosure of Agent involvement on SBA forms; and defining the terms 
``Agent'' and ``Associate'' more clearly.
    After consideration of the comments received on the proposed change 
to

[[Page 7628]]

Sec.  103.4(g), SBA continues to believe that 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, which 
SBA believes should not be permitted under SBA regulations. Therefore, 
SBA is adopting the proposal to eliminate the limited exception to the 
``two master'' prohibition. No Agent, including an LSP, may provide 
services to both the Applicant and the SBA Lender and be compensated by 
both parties in connection with the same loan application.
    One commenter, a trade association representing hundreds of 
government-guaranteed Lenders and other members of the SBA lending 
community, including Agents, recommended that the regulation include a 
provision clarifying that ``agent'' includes any ``associates'' of the 
Agent. This would make clear that, for example, an Agent cannot use a 
separate (but related) entity to circumvent the two master prohibition. 
SBA agrees that this recommendation is consistent with the intent of 
the proposed rule and is modifying the regulatory text to add the 
clarification. For additional clarity, SBA is using the term 
``Affiliate'' of an agent (as defined in Sec.  121.103), rather than 
``associate.'' Further, SBA is adopting the proposal to use the defined 
term ``SBA Lender'' in the revised regulation to clarify that this rule 
applies to both 7(a) Lenders and CDCs.
    In addition, based on the comments received, SBA reviewed the 
definitions in Sec.  103.1 to determine if further clarification of the 
defined terms is necessary. The rules governing Agents in part 103, 
including the definitions within Sec.  103.1, were last modified in 
1996. Since that time, the number of Agents, including LSPs, as well as 
their involvement in SBA loan making has increased dramatically. 
According to Lenders' reporting of fees charged to an Applicant in 
connection with obtaining a 7(a) loan, and other information gathered 
by the Office of Credit Risk Management (OCRM) during lender oversight 
reviews, the number of loans where an Agent was reported to have been 
used has increased by an average of 49 percent each year from FY2013 to 
FY2017 (although the total reported number of such loans is only 2.78 
percent of total approved 7(a) loans for such period). Further, 
advancements in technology have resulted in Agents charging fees for 
services to both Applicants and SBA Lenders that could not have been 
considered at the time these rules were last revised. Based on the 
foregoing, SBA agrees with the commenters that the definitions in part 
103 need clarification as to whom SBA considers to be an Agent.
    Therefore, in this interim final rule, SBA is clarifying the 
definitions of the various categories of Agents, including LSPs, 
Packagers, and Referral Agents for purposes of the business loan 
programs.\2\
---------------------------------------------------------------------------

    \2\ The clarifications being made to the definitions in Sec.  
103.1 do not affect the use of the terms ``packager, agent, or 
representative'' in Sec.  124.4, regarding the 8(a) Business 
Development Program.
---------------------------------------------------------------------------

    Specifically, SBA is moving the definitions of LSP, Packager, and 
Referral Agent into Sec.  103.1(a) (the definition of ``Agent''), which 
will clarify that these are different types of Agents for purposes of 
the business loan programs. In addition, in the definition of the term 
``Agent'' in Sec.  103.1(a), SBA is replacing the term ``person'' with 
``individual or entity,'' consistent with the longstanding 
understanding of that term.
    In the definition of LSP, SBA is simplifying the language 
describing the services that an LSP provides to a Lender. An LSP 
``assists the Lender with originating, disbursing, servicing, 
liquidating, or litigating SBA loans.'' To further clarify that the LSP 
may only assist the Lender (and not make decisions on behalf of the 
Lender), SBA is including in the definition a statement that the Lender 
bears full responsibility for all aspects of its SBA loan operation, 
including, but not limited to, approvals, closings, disbursements, 
servicing actions, and due diligence. This description of the Lender's 
responsibility over all aspects of its SBA loan operation is 
longstanding SBA policy that has been included in SBA's SOP 50 10. SBA 
is incorporating this important concept into the definition of an LSP 
to further clarify the relationship between an LSP and Lender.
    SBA also is clarifying in the definition that LSPs may only receive 
compensation from the Lender and such compensation may not be passed on 
to the Applicant or paid out of SBA-guaranteed loan proceeds. This 
conforms the definition of LSP to the proposed change to Sec.  103.5(c) 
discussed below. This also is consistent with longstanding SBA policy 
regarding LSPs.
    Further, SBA is making a conforming change to the definition of 
``Packager'' to clarify that, going forward, the term will apply only 
to those Agents who provide packaging services to Applicants. SBA's SOP 
50 10 defines ``packaging services'' as ``assisting the Applicant with 
completing one or more applications, preparing a business plan, cash 
flow projections, and other documents related to the application.'' 
(SOP 50 10 5, Subpart B, Chapter 3, Paragraph VI.) Accordingly, SBA is 
clarifying that Packagers may only be compensated by the Applicant (as 
opposed to the Applicant or the Lender as in the current regulation). 
Agents that provide ``loan packaging services'' to Lenders are 
considered to be LSPs, not Packagers. This is because, based on OCRM's 
observations during lender oversight reviews, when an Agent provides 
``loan packaging services'' for the Lender, the services provided 
typically include underwriting and assisting the Lender with its 
analysis of the application. Because this type of Agent is assisting 
the Lender with originating loans, it is considered to be an LSP.
    SBA also is modifying the definition of ``Referral Agent'' by 
changing the term to ``Loan Broker'' in order to more closely align 
with the terminology used in the industry. In addition, consistent with 
the change to the two master prohibition in Sec.  103.4(g) discussed 
above, SBA is using the term ``SBA Lender'' to clarify that the defined 
term ``Loan Broker'' applies to both 7(a) Lenders and CDCs. The revised 
definition of Loan Broker will include a statement that a Loan Broker 
may be employed and compensated by either the Applicant or the SBA 
Lender, but not both. (The current definition of ``Referral Agent'' 
includes a similar statement.)
    As a result, an Agent may be both a Loan Broker and a Packager for 
the Applicant; however, under the two master prohibition in Sec.  
103.4(g), an Agent that is a Packager for the Applicant may not also 
serve as a Loan Broker for the SBA Lender. In addition, SBA is 
clarifying in the definition that compensation paid to a Loan Broker 
from an SBA Lender cannot be passed on to the Applicant or paid out of 
SBA-guaranteed loan or debenture proceeds. Again, this is consistent 
with longstanding policy that an SBA Lender may not pass on to the 
Applicant any fees paid by an SBA Lender to an Agent the SBA Lender has 
employed in connection with an SBA-guaranteed loan.
    The above described clarifications to the definitions related to 
Agents in Sec.  103.1 also will assist Agents and SBA Lenders in 
properly identifying Agents and their services when completing SBA Form 
159 and will provide the transparency requested by commenters.
    During the course of lender oversight reviews, OCRM has found 
arrangements between Agents and Lenders where the Agent and/or Lender 
assert that the

[[Page 7629]]

Agent is not an LSP (and, therefore, not subject to the requirements 
that an LSP Agreement be reviewed by SBA and the prohibition on sharing 
secondary market premiums). In some instances, although these Agents 
state they are providing ``packaging'' and/or ``referral services'' to 
the Applicant and being paid out of the guaranteed loan proceeds, the 
Agent actually is operating under a written contract with the Lender to 
package and refer Applicants that meet the Lender's internal credit 
policies and is providing a fully underwritten loan application to the 
Lender. In other instances, the ``packaging'' services the Agent is 
providing are actually underwriting functions for the Lender (e.g., the 
Agent is pulling credit reports/credit scores, obtaining IRS tax 
transcripts, providing financial ratios and analyses, analyzing 
applicant eligibility). In still other instances, the services are 
provided by the Agent to the Lender through a software platform and are 
called ``technology services'' or a ``technology license,'' but the 
``technology'' is performing underwriting functions for the Lender.
    One Agent asserted in its comment letter that it serves only as a 
referral and packaging agent for Applicants and that it does not 
perform any Lender functions on behalf of the bank. This Agent stated 
that it charges the Applicant a packaging fee of 2 percent of the loan 
amount and a referral fee of 2 percent of the loan amount. This Agent 
also stated that it licenses a software platform to banks to assist 
them with evaluating and processing SBA loans of $350,000 or less and 
that, as a technology licensor, the Agent does not perform any Lender 
functions on behalf of the bank. SBA disagrees with this 
characterization. Regardless of whether the assistance is provided 
through technology or otherwise, SBA believes that an Agent who is 
assisting a Lender with evaluating and processing loans is assisting 
the Lender with originating loans and, therefore, meets the definition 
of an LSP.
    SBA intends to provide additional guidance on the circumstances 
under which SBA considers an individual or entity to be an Agent in SOP 
50 10. However, in response to comments requesting additional clarity 
in this rulemaking, SBA is providing the following example of 
individuals or entities that SBA considers to be Agents and, more 
specifically, when SBA considers an Agent to be working for an SBA 
Lender (such Agents cannot also provide services to the Applicant on 
the same loan application):
     An individual or entity engaged by an SBA Lender to 
provide services that include interaction with the Applicant, either 
in-person or through the use of technology, to request or obtain 
eligibility and/or financial information that will be provided to the 
SBA Lender for the purposes of obtaining Federal financial assistance. 
This includes Agents who perform any pre-qualification review based on 
SBA's eligibility and credit criteria or the SBA Lender's internal 
policies prior to submitting the Applicant's information to the SBA 
Lender. This also includes Agents who provide to the SBA Lender an 
underwritten application, whether through the use of technology or 
otherwise. In all such cases, the Agent is providing services to the 
SBA Lender and, therefore, may not also provide services to the 
Applicant in connection with the same loan.
    Further, when determining whether an Agent is considered to be an 
LSP for the Lender (and therefore required to enter into a written 
agreement with the Lender, among other requirements), the degree to 
which a Lender relies on a Loan Broker to generate loan originations 
may be considered. Again, SBA will provide additional guidance in SOP 
50 10.
    SBA also intends to include guidance in SOP 50 10 as to when 
certain entities will not be considered by the Agency to be Agents, 
such as:
     Entities that license software or software platforms to 
SBA Lenders solely for the purpose of performing administrative 
functions (not including any underwriting functions), such as 
generating SBA-required forms; and
     Entities that develop systems or lending platforms to 
automate the SBA Lender's internal loan decision making process for the 
SBA Lender's use in determining an Applicant's eligibility or 
creditworthiness.
    Finally, in response to public comments asking for clarity in the 
definitions of ``Agent'' and ``Associates,'' SBA also is clarifying the 
definition of ``Associate'' of a Lender or CDC in Sec.  120.10. The 
current definition of an Associate of a Lender or CDC includes, among 
others, ``an agent involved in the loan process.'' In order to provide 
more clarity for SBA Lenders and their Associates, SBA is modifying 
this definition to capitalize the term ``Agent'' and add a 
parenthetical to clarify that ``an Agent involved in the loan process'' 
means an Agent, as that term is defined in 13 CFR 103.1. This is 
consistent with SBA's longstanding interpretation of the definition of 
Associate in Sec.  120.10.
    Some Agents may need to make adjustments to conform to the 
definitions of the various types of Agents, as clarified in this 
interim final rule. For example, some Agents may need to enter into LSP 
agreements with the Lenders they provide services to, and the agreement 
must be submitted to SBA for review in accordance with Sec.  103.5. 
(SBA's SOP 50 10 provides guidance related to the content of LSP 
agreements and the process to submit the agreement for SBA's review.) 
While Agents will not be permitted to provide assistance to both the 
Applicant and the SBA Lender in connection with the same loan beginning 
on the effective date of this interim final rule, SBA will permit 
Agents and Lenders a period of 120 days from the date of publication of 
this interim final rule in order to enter into an LSP agreement that 
has been reviewed by SBA. SBA will work with Agents and Lenders to help 
them meet that deadline.
Section 103.5 How does SBA regulate an Agent's fees and provision of 
service?
    SBA proposed to revise paragraphs (b) and (c) of this regulation. 
Section 103.5(b) contains 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 compensation for 
services provided to an Applicant by an Agent or Agents and to prevent 
Applicants from being overcharged by Agents, SBA proposed to amend this 
section to limit the total fees that one or more Agents may charge an 
Applicant for assistance with obtaining an SBA-guaranteed loan. SBA 
proposed the following limitations on the fees that an Agent (or 
Agents) may charge an Applicant:
     For loans up to and including $350,000: A maximum of up to 
2.5 percent of the loan amount, or $7,000, whichever is less;
     For loans $350,001-$1,000,000: A maximum of up to 2 
percent of the loan amount, or $15,000, whichever is less; and
     For loans over $1,000,000: A maximum of up to 1.5 percent 
of the loan amount, or $30,000, whichever is less.
    SBA received 2,441 comments on this proposal. Similar to the 
comments received on Sec.  103.4, 2,343 of these comments were 
comprised of 26 auto-generated templates (96 percent of the comments 
received on this issue). Of these comments, 2,242 were submitted by 
individuals, 70 by Agents, 30 by SBA Lenders, and 1 by a banking 
association.

[[Page 7630]]

Each template varied slightly in wording; however, all template 
comments opposed the proposed changes and expressed concern that 
limiting the fees an Agent may charge to an Applicant will restrict a 
small business's access to capital, specifically for loans under 
$350,000.
    SBA received 35 non-automated comments that expressed a similar 
concern with this proposal: 14 from individuals; 7 from SBA Lenders; 6 
from associations representing commercial lenders; 5 from Agents; 2 
from Members of Congress; and 1 from SBA's Office of Advocacy. These 
comments expressed concern that the proposed fee limits are set below 
market rates and, with these caps in place, it would not be 
economically feasible for Agents to continue to assist small businesses 
with loans under $350,000, which would in turn force small businesses 
to predatory lenders with no other way to gain access to affordable 
credit from an SBA Lender. These commenters requested that the 
permitted fee structure remain at the current limits, which as stated 
in the Summary of Comments above has been inaccurately interpreted by 
the coalition that created a website to facilitate the auto-generated 
comments, as well as by many Agents who charge Applicants multiple fees 
of up to 2 percent of the loan amount for each fee in connection with 
the same loan application.
    The coalition website incorrectly states that SBA currently caps 
fees an Agent may charge an Applicant at 2 percent for ``Referral'' and 
2 percent for ``Packaging'' services, for a total of 4 percent of the 
loan amount, for loans between $50,000 and $1,000,000. SBA's current 
policy regarding fees for loan packaging and other services (including 
referral fees paid by the Applicant) is that the fees must be 
reasonable and customary and must be for services actually performed; a 
standard or flat fee is not acceptable; and for fees charged based on a 
percentage of the loan amount, the fee may not exceed 2 percent of the 
loan amount for loans between $50,000 and $1,000,000. While some have 
apparently interpreted SBA's current policy to permit multiple fees 
exceeding, in the aggregate, the maximum fee amount, SBA does not 
permit an Applicant to be charged multiple fees, with each fee 
permitted to be up to the maximum of 2 percent of the loan amount. If 
an Agent performs multiple services for an Applicant in connection with 
a loan application between $50,000 and $1,000,000 (e.g., packaging and 
referral services), the total amount the Agent can charge the Applicant 
for all services may not exceed 2 percent of the loan amount.
    Five individuals commented that the proposed changes to Sec.  103.5 
would eliminate SBA-guaranteed lending to small business poultry 
farmers. SBA believes these comments were misdirected and intended to 
be made on the proposed affiliation regulations and has included the 
comments in that discussion later in the Section-by-Section Analysis.
    The remaining 59 commenters (50 SBA Lenders, 4 Agents, 3 
individuals, and 2 trade associations) supported the proposal with 
recommended modifications. The main recommendation presented to SBA was 
to increase the maximum fee limit for loans under $350,000.
    Once again, SBA strongly disagrees with the commenters' claims that 
these proposed fee limits will eliminate access to capital for small 
businesses seeking small SBA loans. SBA developed the proposed fee 
limits based on Lender-reported data and other information gathered by 
OCRM during lender oversight reviews in fiscal years 2013 through 2017. 
In that period, 288,398 7(a) loans were guaranteed. Of the total 7(a) 
loans guaranteed, only 8,025 loans, or 2.78 percent of total 7(a) loans 
guaranteed, reported using an Agent (other than the participating 
Lender) to provide assistance to the Applicant in securing the loan. 
Therefore, it is a very small portion of the SBA loan portfolio that 
will be affected by limits imposed on Agents.
    When conducting lender oversight activities, OCRM has found that 
many SBA Lenders receive findings of non-compliance related to Agent 
and Lender fees charged to an Applicant. Typically, these findings 
involve the failure to submit the SBA Form 159 to SBA's Fiscal Transfer 
Agent in a timely manner, failure to complete SBA Form 159 correctly 
and/or completely, charging the Applicant for services provided to the 
SBA Lender by an LSP, or charging the Applicant fees that are not 
permitted (e.g., for underwriting of the loan). Further, as noted 
above, many public commenters, including Agents, incorrectly interpret 
SBA's current fee rules. This demonstrates the lack of clarity of the 
existing rules governing permissible fees and the need for 
simplification. SBA believes it can address any confusion among SBA 
Lenders and Agents by providing a bright-line test for what is 
considered ``reasonable'' by the Agency. As discussed more fully below 
in the Regulatory Impact Analysis, providing this bright-line test will 
reduce the burden on SBA Lenders and Agents with respect to the time it 
takes to review fees and determine whether they are permissible and 
reasonable.
    Based on the foregoing, the Agency reaffirms its decision to set 
specific limitations on the fees that an Agent or Agents may charge an 
Applicant for assistance with obtaining an SBA-guaranteed loan. 
However, in an effort to avoid unintended consequences for loans of 
$350,000 or less, SBA is increasing the maximum amount an Agent or 
Agents may charge an Applicant for those loans. In addition, in order 
to prevent fees from loans over $350,000 and up to $500,000 from having 
a lower maximum permissible fee than loans of $350,000 or less, SBA 
also is revising the lower two ranges. Thus, in this interim final 
rule, the maximum amount an Agent or Agents may charge an Applicant for 
assistance with obtaining an SBA-guaranteed loan is as follows:
     For loans up to and including $500,000: A maximum of 3.5 
percent of the loan amount, or $10,000, whichever is less;
     For loans $500,001-$1,000,000: A maximum of 2 percent of 
the loan amount, or $15,000, whichever is less; and
     For loans over $1,000,000: A maximum of 1.5 percent of the 
loan amount, or $30,000, whichever is less.
    According to SBA's analysis of all loans guaranteed by SBA during 
FY2013 through FY2017, only 1% of the loans reported fees charged to an 
Applicant by an Agent (other than the participating Lender) that were 
in excess of the revised maximums in this interim final rule. It is 
important to note that all of the fees charged by Agents that were in 
excess of the revised limits in this interim final rule also were in 
excess of the current permitted fees, and were therefore not in 
compliance with current SBA policy.
    SBA received several comments suggesting SBA modify the 
circumstances under which SBA may require an Agent to refund any excess 
fee amount to the Applicant. SBA considered these comments and is 
modifying the regulatory text to clearly state that SBA may require an 
Agent to refund any amount charged to an Applicant in excess of what is 
permitted by SBA in Sec.  103.5. SBA will monitor these fee levels and, 
if adjustments are necessary, SBA may revise these amounts from time to 
time through rulemaking.
    Because SBA's primary concern is to minimize the cost for a small 
business Applicant to obtain an SBA-guaranteed loan, these fee 
limitations will not apply when an SBA Lender pays fees to an Agent for 
services in connection with an

[[Page 7631]]

SBA-guaranteed loan; however, SBA Lenders are reminded that such fees 
may not be passed on to the Applicant either directly or indirectly and 
such fees may not be paid out of SBA-guaranteed loan or debenture 
proceeds. Also, SBA reiterates that if an Agent provides more than one 
service (e.g., packaging and referral services) to an Applicant, only 
one fee is permitted for all services performed by the Agent. Further, 
if more than one Agent (e.g., a Packager and a Loan Broker/Referral 
Agent) provides assistance to the Applicant in obtaining the loan, the 
total amount of all fees that the Applicant is required to pay must not 
exceed the maximum allowable fee set by SBA. (However, a fee charged to 
the Applicant by the Lender in accordance with Sec.  120.221(a) will 
not be counted toward the maximum allowable fee for an Agent or 
Agents.) These maximum limits apply regardless of whether the Agent's 
fee is based on a percentage of the loan amount or on an hourly basis.
    If an Agent or Agents charge an Applicant fees in connection with 
obtaining an SBA-guaranteed loan, the Agent(s) 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.
    SBA recognizes that some Agents may need to revise their business 
practices or documentation in order to comply with the new limits on 
fees in Sec.  103.5(b). In order to minimize the impact of the change 
on affected Agents, SBA is not requiring compliance with revised Sec.  
103.5(b) until October 1, 2020. Until that time, Agents are to continue 
to comply with the requirements in Sec.  103.5(b) as published in the 
2019 edition of the Code of Federal Regulations, and the guidance in 
SOP 50 10 5(K). However, considering the benefits that the new fee 
limits offer, SBA expects that many Agents will want to comply with 
them before October 1, 2020. They are permitted to do so. SBA 
recommends that these Agents document their decision to use the new fee 
limits when reporting the fees on SBA Form 159.
    In Sec.  103.5(c), SBA proposed to remove the word ``directly'' 
from the last sentence to clarify that compensation paid by the SBA 
Lender to an LSP may not be charged to the Applicant, either directly 
or indirectly.
    SBA received two comments on this proposed change, both from SBA 
Lenders. Both SBA Lenders expressed concern over the removal of the 
word ``directly'' and believed that it could lead to SBA inaccurately 
determining fees are indirectly being passed on to the borrower either 
as part of the interest rate or if, for example, the SBA Lender charges 
the Applicant a packaging fee.
    SBA sets parameters on both the maximum allowable interest rate and 
permissible fees SBA Lenders may charge an Applicant. As long as the 
SBA Lender does not charge the Applicant beyond what is permitted, SBA 
would not consider that fees are being passed on to the Applicant 
through these means. SBA is adopting the modification to Sec.  103.5(c) 
as proposed.
4. Loans to Qualified Employee Trusts
Section 120.350 Policy
    The regulations governing SBA-guaranteed loans to qualified 
employee trusts or ``Employee Stock Ownership Plans'' (ESOPs) are set 
forth in Sec. Sec.  120.350 through 120.354. Because of the complex 
nature of these transactions, SBA proposed to amend Sec.  120.350 to 
require such applications be processed only on a non-delegated basis.
    SBA received 78 comments on this proposal. One comment supported 
the proposed change. The rest of the comments expressed concern with 
the amendment as proposed. The concerns center around two positions. 
The first position is that delegated Lenders should be permitted to 
process ESOP loans under their delegated authority, in line with the 
spirit of the policy enacted by Congress in Section 862 of the John S. 
McCain National Defense Authorization Act for Fiscal Year 2019 (Pub. L. 
115-232) (NDAA FY19), which charges SBA with promoting enhanced 
employee ownership of small businesses by maximizing their ability to 
affordably access capital. This position was expressed by 22 
commenters, including 10 trade associations, 8 individuals, 3 members 
of Congress, and 1 SBA Lender.
    The second position was whether SBA's decision to require ESOP 
loans to be processed on a non-delegated basis could be addressed in 
SBA's SOP 50 10, rather than be incorporated into the regulation. This 
position was expressed by 55 commenters, including 46 SBA Lenders, 5 
Agents, 2 trade associations, and 2 individuals.
    SBA considered the comments and the statutory text of the NDAA 
FY19. The legislation provides the Administrator with the discretion to 
permit loans to qualified employee trusts and cooperatives to be 
processed under a Lender's delegated authority. SBA maintains its 
position that these transactions are complex in nature and, for the 
time being, should continue to be processed on a non-delegated basis, 
as current procedures direct. SBA agrees, however, to eliminate the 
proposed regulatory change requiring SBA-guaranteed loans to a 
qualified employee trust to be processed under non-delegated 
procedures. SBA will maintain the specific processing instruction that 
ESOP loans must be processed on a non-delegated basis in SOP 50 10 and 
will monitor the activity of ESOP loans during the initial 
implementation period of the revised statutory requirements in order to 
ensure compliance with Loan Program Requirements for such loans.
    SBA is, however, making a technical amendment to both Sec.  
120.350, Policy, and Sec.  120.352, Use of Proceeds, to incorporate the 
statutory change made in the NDAA that permits SBA to guarantee a loan 
to the small business concern (rather than the qualified employee 
trust), if the proceeds from the loan are used only to make a loan to a 
qualified employee trust that results in the qualified employee trust 
owning at least 51 percent of the small business concern. SBA is making 
this technical amendment in order to ensure that the regulations are 
not inconsistent with the statute and to provide clarity to SBA Lenders 
and SBA employees with respect to guaranteed loans involving ESOPs. 
Additional guidance governing these loans will be provided in SOP 50 
10.
5. A Lender's Responsibility When Purchasing 7(a) Loans From the FDIC 
as Receiver, Conservator, or Other Liquidator of a Failed Financial 
Institution
Section 120.432 Under what circumstances does this subpart permit sales 
of, or sales of participating interests in, 7(a) loans?
    SBA proposed modifying Sec.  120.432(a) to implement its 
longstanding 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 a Federal Deposit Insurance Corporation (FDIC) loan sale 
or transferred to an Assuming Institution through a whole bank 
transfer.
    SBA received three comments on this proposed change. One SBA Lender 
commented in support of the modification. The other two commenters, one 
banking association representative and one SBA Lender,

[[Page 7632]]

objected to the proposed modification, stating that as drafted the 
proposed change may preclude the Agency from entering into agreements 
with the FDIC to affirm the validity of the guaranties at the time of 
such loan sale or whole bank transfer. According to both commenters, 
the proposed change would create a perception in the minds of qualified 
purchasers that a large number of guaranties will be denied, thus 
creating a disincentive for qualified SBA Lenders to enter into such 
transactions.
    SBA proposed this modification to ensure consistent treatment of 
all portfolio loan transfers whether through voluntary bank mergers or 
asset sales, or through FDIC-led portfolio transfers following the 
failure of a Lender. SBA is modifying the regulatory language to 
include a statement that clarifies the applicability of the paragraph 
and the ability for the Agency to agree otherwise in writing (i.e., to 
affirm the validity of the guaranties). SBA also is modifying the 
regulatory language to remove the specific reference to the FDIC and 
make it applicable to all 7(a) loans purchased from any Federal or 
state banking regulator, any receiver, or any conservator.
6. Microloan Program
Section 120.707 What conditions apply to loans by Intermediaries to 
Microloan borrowers?
    SBA proposed 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 6 years to 7 years. SBA received two comments 
supporting this change. SBA is amending this section as proposed.
Section 120.712 How does an Intermediary get a grant to assist 
Microloan borrowers?
    In Sec.  120.712(b), SBA proposed to incorporate a recent statutory 
change to the percentage of grant funds that may be used by the 
Intermediary for marketing, managerial, and technical assistance to 
prospective Microloan borrowers. In Sec.  120.712(d), SBA proposed to 
incorporate a 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. SBA received one comment 
in support of each respective change. SBA is amending this section as 
proposed.
7. Technical Corrections and Conforming Amendments
Section 120.130 Restrictions on Uses of Proceeds
    SBA proposed a conforming amendment to Sec.  120.130 to include a 
reference to the proposed Sec.  120.444 (Eligible uses of SBA Express 
and Export Express loan proceeds) to clarify that revolving lines of 
credit are an eligible use of 7(a) loan proceeds under SBA Express and 
Export Express. SBA did not receive any comments on this proposal. SBA 
is adopting the amendment as proposed.
Section 120.222 Prohibition on Sharing Premiums for Secondary Market 
Sales
    SBA proposed a technical correction to Sec.  120.222 to remove an 
extra word (``in'') that was inserted in error. SBA did not receive any 
comments on this proposal. SBA is adopting the rule as proposed.
Section 120.344 Unique Requirements of the EWCP
    SBA proposed a conforming amendment to Sec.  120.344(b) to ensure 
that the extraordinary servicing fees charged on EWCP loans, as 
permitted by the revised Sec.  120.221(b), are reasonable and prudent.
    SBA received 53 comments on this section, all in support of the 
proposed change. SBA is adopting the amendment as proposed.
Section 120.440 How does a Lender obtain delegated authority?
    SBA proposed several technical corrections and 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 3 years.
    SBA received 54 comments on this proposed change, 1 of which 
opposed the proposed change and recommended that the SBA Express 
renewal period remain a 2-year renewal period to remain consistent with 
other delegated authority renewal periods and to ensure efficient SBA 
oversight over delegated authorities. While the other 53 commenters 
expressed a similar concern that an increase in renewal period may 
conflict with the maximum 2-year renewal period allowed for general 
delegated authority, they supported the proposal with modification. In 
order to address this concern, these 53 commenters requested that SBA 
provide additional information on how delegated authority renewals will 
be processed when a Lender holds both SBA Express authority and 
Preferred Lenders Program (PLP) authority.
    SBA considered the comments received and is adopting the amendment 
as proposed. As a point of clarification, the amendment to this 
regulation will permit SBA to grant a longer term for renewals of SBA 
Express authority, not to exceed three (3) years. SBA may continue to 
grant shorter renewals and SBA's OCRM will coordinate with those 
Lenders concerned with maintaining alignment of their SBA Express 
renewal periods with any other delegated authorities they may hold. SBA 
will provide additional information on how delegated authority renewals 
will be processed when a Lender holds SBA Express authority and other 
delegated authority (e.g., PLP, Export Express) in SOP 50 10.
Section 120.840 Accredited Lenders Program (ALP)
    SBA proposed a technical correction to Sec.  120.840 to replace the 
reference in this section to the Director, Office of Financial 
Assistance with ``appropriate SBA official in accordance with 
Delegations of Authority.''
    SBA received 68 comments on this proposed change. All of these 
comments recommended that SBA also revise the ALP application 
requirements outlined in this section under Sec.  120.840(b) to reflect 
the modernized application submission process, which will allow CDCs to 
submit ALP applications electronically into the Corporate Governance 
Repository, rather than apply to the Lead SBA Office.
    SBA appreciates the recommendation and agrees to make both the 
correction proposed by SBA and the revision recommended through public 
comment in order to reflect SBA's current ALP application process.

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?
    The proposed Sec.  121.301(f) expanded the ``identity of interest'' 
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). 
This was how the identity-of-interest affiliation rule operated prior 
to the 2016 rule change that limited such affiliation to ``close 
relatives.'' (81 FR

[[Page 7633]]

41423, June 27, 2016) SBA's proposal was intended to return SBA's 
identity-of-interest affiliation rule closer to the pre-2016 rule. SBA 
received 1,137 comments on this proposed identity-of-interest 
regulation. Of those, 52 comments supported the rule as proposed, 4 
supported the rule with some modifications, and the remainder opposed 
the rule as written. Most of the comments opposed either the rule 
change in general or the specific economic-dependence ground of 
affiliation in Sec.  121.301(f)(4)(iv).
    Close relatives. Businesses that are owned by family members may be 
affiliated under SBA's longstanding close-relatives rule. In 2016, SBA 
clarified that the rule applies where family members have overlapping 
business interests and are operating in the same geographic area. In 
the proposed rule, SBA retained the identity-of-interest ground for 
affiliation based on close relatives, but moved it to paragraph 
(f)(4)(ii). SBA is adopting paragraph (f)(4)(ii) of the rule as 
proposed.
    Common Investments. The proposed rule provided that 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. 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. One 
comment criticized the proposed common investments rule as being better 
addressed through SBA's program eligibility rules and another comment 
criticized the proposal as vague.
    In response to comments, SBA is limiting the application of 
affiliation under common investments to firms that operate in the same 
or related industry. Thus, firms that operate in different, unrelated 
industries would not be subject to common-investment affiliation.
    Additionally, in this common-investments ground of affiliation and 
several others that follow, SBA adopts a reasonableness standard for 
reviewing affiliation determinations made by SBA Lenders. SBA 
acknowledges that some SBA Lenders may have limited experience in 
applying some of SBA's more complicated affiliation standards. Thus, in 
instances in which SBA reviews an SBA Lender's determination that there 
is no affiliation under the common investments rule, SBA will not 
overturn the SBA Lender's determination if the SBA Lender's 
determination was reasonable at the time that the SBA Lender made it, 
given the information that the SBA Lender had available. For example, 
if the SBA Lender reasonably determined that two firms with common 
investors with substantial ownership interests were not affiliated 
because, even though the firms shared employees and locations, the 
firms were in what the SBA Lender deemed to be unrelated industries, 
SBA will accept that determination even if SBA would have found the 
industries to be related if presented with the same facts. SBA's 
reasonableness standard takes into account that the SBA Lender's 
determination might not be the same as SBA's, but still would be 
consistent with the regulation as long as it was reasonable. SBA 
believes using this standard will provide SBA Lenders with the ability 
to make a prudent lending decision without concern that their decision, 
if reasonable, will be second-guessed. SBA Lenders are reminded that 
they must document their analysis and determination in each loan file.
    Economic Dependence. The proposed rule provided that, if a small 
business Applicant derived more than 85 percent 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. 
SBA proposed that the rule would include an exception for a firm that 
has been in business for a short amount of time and has a plan to 
lessen its dependence on the other concern. In response to comments, 
SBA is replacing the exception for a firm that has been in business for 
a short amount of time with two different exceptions in the interim 
final rule.
    The comments raised the issue that economic-dependence affiliation 
would apply where a seller limited its sales to one buyer because of 
circumstances unrelated to control. Such circumstances might include 
situations where, though the terms of its relationship with its single 
buyer do not restrict selling to other customers, the seller does not 
have sufficient inventory to do so. For example, the buyer might have 
several locations or lines of business, and the seller could be selling 
to multiple locations or business lines under the buyer's control but 
is not restricted from selling to other customers. As another example, 
the seller could be selling exclusively to the Federal Government 
either through a prime contract or subcontract. Under SBA affiliation 
principles, affiliation applies only where there is control or the 
power to control. Therefore, SBA is creating an exception to the 
economic-dependence rule for contracts that do not restrict the concern 
in question from selling the same type of products or services to 
another purchaser. This exception avoids applying the rule to 
situations where the seller's product only has one buyer or where the 
seller chooses to sell only to one buyer. This exception replaces the 
exception in the proposed rule for newly created businesses that have a 
plan to lessen their dependence on the other concern, which SBA 
concluded would be too easily circumvented and was not practical to 
apply in the loan programs.
    Many comments expressed concern over how economic-dependence 
affiliation would apply to an agreement between a poultry farmer and a 
large poultry producer (integrator) and whether most poultry farmers 
would be considered ineligible for SBA financial assistance under the 
provisions of the proposed rule. SBA's proposal was not intended to 
eliminate lending to poultry and other farmers in the Business Loan 
Programs. The Small Business Act authorizes SBA to make non-disaster 
business loans to farming and agricultural related industries and SBA 
understands the need for SBA financial assistance to small businesses 
in those industries. SBA also recognizes, however, that integrator 
agreements generally restrict the poultry farmer from raising another 
producer's chicks on the same farm and therefore would not qualify for 
the first exception described above. Accordingly, SBA is creating a 
second exception to address this circumstance and others where the 
first exception does not apply.
    Under this second exception, an SBA Lender or other party may 
request SBA to review a contractual relationship where one firm derived 
more than 85 percent of its receipts over the previous three fiscal 
years from the other firm, and the contract restricts the seller from 
selling the same type of products or services to another purchaser. For 
businesses that have been in operation for less than 1 year, the 85 
percent threshold will be applied based on the Applicant's business 
plan and projected revenues. For businesses that have been in operation 
for at least 1 year, but less than 3 years, the threshold will be 
applied based on the receipts for the

[[Page 7634]]

period the business has been in operation.
    In assessing whether economic-dependence affiliation exists, SBA 
will review the contract to determine whether, notwithstanding the 
concentration of sales and the restriction, the buyer does not have 
control or the power to control the seller. In determining control 
under these circumstances, SBA will consider the volume of sales that 
the contract covers, the contract's termination provisions, the risk 
that the concern in question bears under the contract, the concern's 
right to profit from its efforts, the rationale for restrictions that 
the contract places on the small business, and other factors. SBA is 
making available for public comment on its website guidance on the 
types of provisions that establish control or do not establish control 
for purposes of this provision, and the process for requesting SBA 
review of a contract. The guidance can be found at https://www.sba.gov/offices/headquarters/oca/spotlight. If SBA finds no control, SBA will 
determine that there is no affiliation between the two concerns under 
the economic-dependence rule. Even where SBA finds no economic-
dependence affiliation, SBA Lenders are reminded that they still must 
ensure that the applicant business meets all other eligibility criteria 
and they must make a credit determination. SBA will accept comments on 
the guidance during the 60-day comment period for this interim final 
rule.
    Newly Organized Concerns. In order to create greater uniformity 
among SBA's various affiliation rules, SBA proposed to add to Sec.  
[thinsp]121.301(f) a newly organized concern rule, similar to the one 
which had applied to the Business Loan Programs prior to the 2016 rule 
change. 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 four 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 defined 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 defined 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.
    SBA received 130 comments on this proposed regulation. Three 
commenters, consisting of two SBA Lenders and one non-profit 
organization, were supportive of the proposed rule. The remaining 127 
commenters expressed concern with the proposed regulation. Commenters 
observed that the newly organized concern rule included several 
undefined terms and could hamper a new firm's ability to recruit 
employees. SBA agrees that it can provide greater clarity with respect 
to the undefined terms and can simplify the rule to make it easier to 
apply and to ensure that recruitment or hiring efforts are not 
adversely affected by the rule. In the interim final rule, in response 
to the comments, SBA is replacing the term ``principal stockholders'' 
with the term ``owners of a 20 percent interest or greater'' (in 
conditions number (1) and (3) above). SBA also is replacing the term 
``key employees'' with ``persons hired to manage day-to-day 
operations'' in the list of affected individuals in the original 
concern (in condition number (1) above), and is deleting the term ``key 
employee'' from the list of affected individuals in the new concern (in 
condition number (3) above). Therefore, a new firm can hire anyone, 
including a former owner or key employee of another firm, as an 
employee without the employee causing affiliation under the newly 
organized concern rule. Due to these changes, SBA is eliminating the 
definition of ``key employee'' from the regulatory text, as it is no 
longer necessary.
    SBA also is revising the interim final rule with respect to the 
benefits that flow from the original concern to the new concern (in 
condition number (4) above). Rather than applying the newly organized 
concern rule based on whether 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, SBA is revising the 
regulatory text so that the newly organized concern rule only applies 
when direct monetary benefits flow from the new concern to the original 
concern. It is not SBA's intent to apply the rule where the original 
concern does not receive direct monetary benefits from the new concern. 
Examples of direct monetary benefits would include profit or revenue 
sharing agreements or royalty payments. Further, SBA will not consider 
the referral of business without compensation to constitute ``direct 
monetary benefits.'' In addition, in the definition of a new concern, 
SBA is deleting the term ``continuously,'' because that term might 
cause confusion for businesses that operate on a seasonal or 
intermittent basis.
    Finally, in the newly organized concern ground of affiliation, SBA 
adopts a reasonableness standard for reviewing affiliation 
determinations made by SBA Lenders. In instances in which SBA reviews 
an SBA Lender's initial determination that there is no affiliation 
under the newly organized concern rule, SBA will not overturn the SBA 
Lender's determination if it was reasonable at the time it was made, 
given the information that the SBA Lender had available. For example, 
if the SBA Lender reasonably determined that the new firm's owners were 
corporate officers of another firm, but that the benefits flowing from 
the new firm to the other firm are not direct monetary benefits, SBA 
will accept the determination even if SBA would have found the benefits 
to be direct monetary benefits if presented with the same facts. SBA's 
reasonableness standard takes into account that the SBA Lender's 
determination might not be the same as SBA's, but still would be 
consistent with the regulation as long as it was reasonable. SBA 
believes using this standard will provide SBA Lenders with the ability 
to make a prudent lending decision without concern that their decision, 
if reasonable, will be second-guessed. SBA Lenders are reminded that 
they must document their analysis and determination in each loan file.
    Totality of the Circumstances. The proposed rule added a new 
paragraph (f)(6) to Sec.  121.301 to explain that, when making 
affiliation determinations, SBA would 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 from the regulations 
in 2016. At that time, SBA stated that, generally, examples of when 
this criterion was used involved negative control or control through 
management

[[Page 7635]]

agreements. Thus, in 2016, SBA provided additional specific guidance in 
Sec.  121.301(f)(1) and (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 but not covered by 
the specific affiliation rules and, therefore, proposed to reinstate 
the totality of the circumstances criterion. In proposing to reinsert 
the criterion in the regulations, SBA provided two examples of where 
the totality of the circumstances test would result in a finding of 
affiliation.
    SBA received 146 comments on this proposed change. Four commenters, 
comprised of three individuals and one non-profit organization, 
expressed support of the proposal. These comments expressed the same 
opinion, that it is critical for SBA to consider the totality of the 
circumstances in determining affiliation, specifically with respect to 
contracts and agreements between poultry farmers/growers and poultry 
integrators.
    The remaining 142 comments were submitted by 117 SBA Lenders, 10 
individuals, 8 Agents, and 7 trade associations. These comments 
expressed concern that the totality of the circumstances test could 
result in arbitrary and unpredictable application of SBA's affiliation 
rules. SBA believes that this overstates the potential reach of the 
totality of the circumstances rule. The rule is merely an application 
of the general principle that affiliation is caused by control or the 
power to control of one firm by another, or common control of multiple 
firms. There may be instances of control that are not covered by the 
specific grounds of affiliation, and the totality of the circumstances 
test merely states that those instances are not exempt from affiliation 
analysis. For example, the relationship between a recording artist and 
a record company might cause affiliation if the record company has 
exclusive rights over the recording artist and closely controls the 
activities of the recording artist, but none of the specific grounds of 
affiliation would reach that relationship necessarily. As another 
example, a firm's operating agreement might require that the firm 
obtain approval from a third party prior to making certain decisions 
that typically are made independently by firms in that industry in the 
ordinary course of business. This approval requirement might grant the 
third party control over the firm and could result in affiliation under 
the totality of the circumstances, even though none of the specific 
grounds of affiliation might apply. The totality of the circumstances 
test should not reach routine and typical business relationships, 
however.
    In order to address concerns raised by the commenters, SBA is 
modifying the regulatory language to provide that, when applying the 
totality of the circumstances test, SBA may consider all connections 
between the Applicant business and a possible affiliate and, if no 
single factor is sufficient to constitute affiliation, SBA may 
determine on a case-by-case basis that affiliation exists when there is 
``clear and convincing evidence'' based on the totality of the 
circumstances. Further, as with the common investments rule and the 
newly organized concern rule, SBA is adopting a reasonableness standard 
for reviewing affiliation determinations made by SBA Lenders under the 
totality of the circumstances rule. For the totality of the 
circumstances rule, SBA will not overturn the SBA Lender's 
determination if it was reasonable at the time it was made, given the 
information that the SBA Lender had available. For example, if the SBA 
Lender reasonably determined that a firm whose day-to-day operations 
required the approval of a minority owner in some situations was not 
affiliated with the minority owner, SBA will accept that determination 
even if SBA would have found the firm and the minority owner to be 
affiliated in the first instance. SBA Lenders are reminded that they 
must document their analysis and determination in each loan file.
121.301(f)(7) Affiliation Based on Franchise Agreements
    SBA proposed to revise this paragraph 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 part 
436. SBA proposed 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 would 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 proposed to add to this regulation a 
statement that SBA will maintain a publicly available centralized list 
of franchise and other similar agreements that are eligible for SBA 
financial assistance, consistent with SBA's current policy and 
procedure.
    SBA received 125 comments on this proposed change, all of which 
supported the proposal. Two of the 125 commenters also recommended that 
SBA expand paragraph (7) to define the relationship between poultry or 
swine farmers and their integrators. In addition, these 2 commenters 
suggested that, in order to expedite the approval process, SBA should 
maintain a centralized list of integrator agreements in the same manner 
as franchise agreements. SBA appreciates the recommendation, but is not 
going to expand the principle of affiliation based on franchise or 
license agreements to include integrator agreements or maintain a 
separate centralized list of agreements between poultry or swine 
farmers and their integrators at this time. SBA has discussed how the 
relationships between poultry or swine farmers and their integrators 
will be reviewed in the section above on economic-dependence 
affiliation. SBA is adopting paragraph (7) as proposed.
Section 121.302 When does SBA determine the size status of an 
applicant?
    SBA proposed 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. SBA did not receive any comments on this 
proposal. SBA is adopting the regulation as proposed.

C. Agency Responses to the Office of Advocacy's Comments on the 
Proposed Rule

1. Proposed Fee Caps
    SBA's Office of Advocacy expressed concern that, although the 
proposed fee caps will reduce the fees that small businesses pay to 
obtain a loan, some members of the public believe that the proposed 
caps will hurt small banks and possibly eliminate the incentives to 
facilitate small SBA loans that small businesses need. Advocacy also 
expressed concern that SBA is attempting to address a problem that is 
being created by a few bad actors, and that in doing so SBA may 
discourage the facilitation and use of SBA's products. SBA does not 
agree that the proposed fee limits will hurt small SBA Lenders, as the 
Agency believes the changes in these rules will simplify the rules 
regarding fees and will reduce the burden on all SBA Lenders, including 
small SBA Lenders. (For additional discussion of the estimated 
reduction in the burden on SBA Lenders, see the discussion in the 
Regulatory Impact Analysis and Regulatory Flexibility Act sections 
below.) Further, as Advocacy acknowledges in its comment letter, in 
approximately 96 percent of the loans

[[Page 7636]]

guaranteed during FY2013-FY2017, Applicants were charged fees (by 
Lenders and Agents) that were less than the maximum fees in the 
proposed rule. As discussed earlier in the Section-by-Section Analysis, 
in consideration of the comments received and in order to ensure there 
are no unintended consequences for smaller loans, SBA has increased the 
maximum fees that both Lenders and Agents will be permitted to charge 
Applicants in connection with smaller loans. When the revised fee 
limits for smaller loans in the interim final rule are taken into 
consideration, the percentage of loans guaranteed in FY2013-FY2017 with 
fees less than the permitted maximums increases to nearly 99%.
    In addition, recognizing that some SBA Lenders and Agents, 
including LSPs, may need to revise their practices, policies, 
procedures, or documentation to comply with revised Sec.  103.5(b) or 
Sec.  120.221(a), SBA is not requiring compliance with those provisions 
until October 1, 2020. As discussed more fully in the Regulatory 
Flexibility Act section of this interim final rule, SBA believes the 
extended period for SBA Lenders and Agents to comply with those 
sections of the interim final rule will help to minimize any potential 
adverse effects on small SBA Lenders and Agents. Further, with the 
modifications to the maximum permitted fees made in this interim final 
rule and the extended time period for compliance, the Agency believes 
it has addressed any concern that small SBA Lenders will be unable to 
find Agents to assist them with facilitating SBA-guaranteed loans. 
Finally, as noted earlier in the Section-by-Section Analysis, SBA 
provides several options for free or low-cost assistance through its 
resource partners, which are accessible nationwide.
2. The Personal Resources Test
    The Office of Advocacy expressed concern that the proposed 
reinstatement of a personal resources test will limit the resources 
available to a small business owner in the event of an emergency. 
Additionally, Advocacy expressed concern that the proposed personal 
resources test would eliminate potential borrowers and be difficult to 
include in the current underwriting practices of small financial 
institutions. Advocacy encouraged SBA to consider a contribution level 
that will allow small businesses to have a buffer in the event of 
unforeseen circumstances. After considering the comments received on 
this change, SBA has reevaluated the personal liquidity threshold for 
smaller loans and agrees to modify the limits to ensure that Applicants 
applying for smaller loans are not adversely affected.
    In this interim final rule, SBA has increased the threshold for 
loans of $350,000 or less to allow the owners of the small business 
Applicant to retain more personal liquidity. SBA also is modifying the 
regulatory text to provide that SBA will reexamine the thresholds 
periodically and, if adjustments are necessary, SBA may modify the 
thresholds through rulemaking from time to time based on nationally-
recognized economic indicators. Also, the regulation will provide SBA 
with the ability to permit exceptions to the required injection of an 
owner's excess liquid assets in extraordinary circumstances, such as 
when the excess funds are needed for immediate medical expenses of a 
family member. With respect to Advocacy's concern that small financial 
institutions will have difficulty implementing this change, as 
discussed in the Regulatory Impact Analysis below, SBA believes that 
providing a bright-line test will assist SBA Lenders in analyzing 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. This bright-line test will reduce the burden on SBA Lenders 
when making this critical eligibility determination. In addition, SBA 
notes that a personal resources test was in SBA's regulations until 
2014, so SBA Lenders have experience applying such a test and should 
not have difficulty implementing this change.
3. Affiliation
    The Office of Advocacy expressed concern that the affiliation 
sections of the proposed rule may be vague and confusing to small 
entities. In addition, Advocacy expressed concern that the proposed 
changes may be problematic in small rural communities that rely on 
contracts with large companies/integrators to buy agricultural goods. 
Advocacy encouraged SBA to clarify the proposed changes.
    As discussed more fully in section III.B. above, in this interim 
final rule, SBA has clarified several of the proposed changes, 
including the common-investments affiliation rule, the economic-
dependence affiliation rule, the newly organized concern affiliation 
rule, and the totality of the circumstances affiliation rule. 
Specifically, in order to ensure there would be no adverse impact on 
rural areas or small agricultural businesses, SBA added a second 
exception to the economic-dependence affiliation rule for businesses 
operating under contracts that restrict the seller from selling the 
same type of products or services to another purchaser. Under this 
second exception, an SBA Lender or other party may request SBA to 
review the contractual relationship between the large company/
integrator and the small business Applicant to determine whether 
affiliation exists.
4. Additional Outreach
    The Office of Advocacy encouraged SBA to perform additional 
business outreach with the industries that may be impacted by the 
proposed rule to determine the best way to implement changes that will 
achieve SBA's goals without being unduly burdensome. As discussed more 
fully in the Regulatory Impact Analysis and Regulatory Flexibility 
Analysis below, SBA believes it has received sufficient input and 
feedback from program participants and other stakeholders to implement 
the proposed changes, with the modifications identified in this 
Section-by-Section Analysis, in a manner that will reduce the burden on 
those participants and stakeholders and provide meaningful benefits to 
small business Applicants. Nevertheless, SBA is publishing this rule 
interim final rather than proceeding to a final rule in order to 
provide the public with an additional opportunity to comment. See 
Justification for Interim Final Rule below. SBA will consider comments 
submitted during the 60-day comment period and address them in a Final 
Rule.

D. Severability

    The provisions of this interim final rule are separate and 
severable from one another. If any provision is stayed or is held to be 
invalid or unenforceable by its terms, or as applied to any person or 
circumstance, it is SBA's intention that the remaining provisions of 
the interim final rule will remain in effect.
Justification for Interim Final Rule
    SBA finds that good cause exists to publish this rule as an interim 
final rule. As discussed above, SBA previously published a Notice of 
Proposed Rulemaking (NPRM) addressing all of the topics and issues 
covered by this interim final rule. SBA has already allowed for public 
comment (including an extension of the original comment period), 
reviewed the comments, and made changes accordingly. SBA has determined 
that the changes made in this rule are a logical outgrowth of the 
proposed rule and the comments received on the proposed rule.

[[Page 7637]]

Procedurally, SBA could therefore issue a final rule; however, SBA is 
publishing this rule interim final rather than proceeding to a final 
rule in order to provide the public with an additional opportunity to 
comment. Although not legally required, the additional opportunity to 
comment on the interim final rule is desirable given the level of 
interest in the proposed changes and the recommendation by the Office 
of Advocacy for additional outreach to affected parties.
    SBA invites public comment on this interim final rule and will 
consider amendments to the rule based on comments submitted during the 
60-day comment period. SBA will address any comments through the 
publication of a Final Rule.

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

Executive Order 12866

    As referenced above, the Office of Management and Budget (OMB) has 
determined that this interim final rule is a ``significant'' rulemaking 
for the purposes of Executive Order 12866. Accordingly, the next 
section contains SBA's Regulatory Impact Analysis. However, 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 primary objective of this interim final rule is to 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. 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 (Pub. 
L. 115-189) 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 is implementing that legislation in a separate 
rulemaking, but in this interim final rule SBA is reinstating a 
personal resources test in an effort to provide clear direction to SBA 
Lenders for analyzing whether a borrower has credit available elsewhere 
on reasonable terms from non-Federal, non-state, non-local, or 
alternative sources. Many SBA Lenders expressed confusion and sought 
guidance from SBA on how to adequately determine whether a small 
business had access to credit elsewhere based on personal liquid 
assets. This interim final rule will provide a bright-line test to 
assist SBA Lenders in analyzing 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 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 Loan Program 
Requirements and reduce regulatory burdens to facilitate robust 
participation in the business loan programs that assist small U.S. 
businesses, particularly those small businesses in underserved markets. 
For that reason, SBA has modified regulatory provisions related to 
allowable fees that a Lender or an Agent may collect from an Applicant 
for financial assistance. It is clear to the Agency, based on results 
from reviews conducted by OCRM, public comments received in response to 
the proposed rule, and technical assistance requests received by SBA 
from SBA Lenders and Agents, that confusion is widespread across the 
industry regarding what fees Agents and Lenders may charge to an 
Applicant. In this interim final rule, SBA is simplifying the 
regulations applicable to Agents, as well as the fees that Agents and 
Lenders may charge to Applicants for assistance with obtaining an SBA-
guaranteed loan, in order to provide more clarity to the industry.
    The interim final rule also revises the affiliation principles 
applicable to the Business Loan, Disaster Loan, and Surety Bond 
Guarantee Programs in order to simplify and clarify the determination 
of eligibility of a business as a small concern and to ensure that only 
small independently owned and operated businesses benefit from SBA's 
small business financial assistance programs.
    SBA does not expect the proposed changes to change loan volume 
significantly. Overall program participation is driven by broad 
economic activity, making it difficult to attribute increased or 
decreased loan volume to a particular cause. The overriding public 
policy objective of the rule changes is the creation of economic 
efficiencies and compliance in program participation. The codification 
of the rules for delivering SBA Express and Export Express loans will 
provide Lenders with confidence as the requirements will be found in 
regulation as opposed to Agency procedural guidance. The inclusion of 
the SBA Express and Export Express guidance may positively impact small 
loan volume.
    SBA expects that the additional detailed clarity on the 
requirements for program delivery in the subject areas of this rule 
would increase understanding for program users, decrease time spent 
qualifying small business Applicants, and result in a reduction of 
overall cost to participants.
    The interim final rule changes for the codification of the SBA 
Express and Export Express Loan Program Requirements and for the 
Personal Resources Test impact the Lenders directly, and would not be 
considered a transfer to or from Applicants as the Lender currently 
bears responsibility for determining eligibility. The interim final 
rule changes relative to Lender and Agent fees reduce or limit the fees 
a small business Applicant may expend to gain access to the loan 
guarantee programs, which benefits the Applicant. This also potentially 
transfers an economic benefit between Lenders and Agents because 
Lenders, given the authority to charge an SBA-controlled fee to 
Applicants, may choose to provide application services through either 
internal lending staff or outsourced Agents. In either case the 
Lender's decision is driven by cost effectiveness and efficiency.
    The interim final rule changes for affiliation determinations 
provides detailed guidance for the Lender charged with determining the 
size of a small business Applicant. This currently is and will continue 
to be the responsibility of the Lender, who will benefit from the time 
savings in making the eligibility determination. The benefits further 
transfer or inure to the Applicant via streamlined loan

[[Page 7638]]

processing. SBA believes that the interim final rule presents the 
optimum net benefit to the overall affected population of small 
entities (i.e., small business Applicants, small Lenders, and small 
Agents). For instance, receipt and consideration of the public comments 
prompted SBA to adopt a more generous fee structure than was originally 
proposed.
Baseline Scenario
    The interim final rule will provide clear and streamlined guidance 
to loan program participants. In order to estimate the net economic 
impact of this interim final rule on stakeholders, an approximation of 
the change in behavior of Applicants, SBA Lenders, and Agents is 
needed. The effects of the interim final rule are estimated relative to 
a baseline, and where the regulatory changes are required by statutory 
requirements, the analysis uses a pre-statutory baseline to determine 
impact in the analysis. The baseline represents the state of SBA's 
financial assistance programs in the absence of this final regulatory 
action.
    Based on lender oversight reviews by SBA's OCRM, fees charged to 
Applicants by Agents have increased dramatically in the past few years 
(although the total reported number of loans that reported using an 
Agent is only 2.78 percent of total approved 7(a) loans over a five 
year period) and some Applicants have been charged fees by Lenders and 
Agents that are not permissible under SBA's current Loan Program 
Requirements. In addition, OCRM has observed that there is confusion by 
both Lenders and Agents as to who can charge fees to an Applicant, for 
which services, and how much can be charged. In the absence of this 
final regulatory action, the cost of financial assistance may continue 
to rise for those loan Applicants who opt to use the services of 
Agents, including Packagers and other similar providers, despite free 
and low-cost assistance and resources made available by SBA. The costs 
incurred by OCRM when conducting lender oversight reviews involving 
issues related to fees also would continue to rise, with some of those 
costs being passed on to Lenders.
    In addition, many SBA Lenders struggle with making the 
determination of credit elsewhere and identifying when an Applicant's 
owners have excess personal liquidity that could affect their 
eligibility for SBA financial assistance. SBA has identified some 
examples of loans made to businesses with owners who have extremely 
high amounts of personal liquid assets. Without this final regulatory 
action, SBA Lenders and small businesses may continue to take advantage 
of government/taxpayer funded financial assistance programs and SBA 
Lenders may continue to erroneously make loans to businesses that do 
not meet SBA's lending criteria.
    Finally, under the current affiliation rules, some businesses have 
been considered to be small when they should have been combined as 
affiliates and may, in fact, be large. This has allowed some businesses 
that are not considered ``small businesses'' to receive SBA financial 
assistance. SBA's Office of Inspector General (OIG) published a report 
in March 2018 on SBA 7(a) Loans Made to Poultry Farmers and recommended 
that the Agency review the arrangements between integrators and growers 
and establish and implement controls, such as supplemental guidance, to 
ensure that SBA loan specialists and lenders make appropriate 
affiliation determinations. SBA reviewed its regulations and determined 
that the regulations should be modified to clarify the meaning of 
affiliation in the context of contractual relationships, so that only 
independently owned and operated small businesses continue to receive 
SBA financial assistance. In the absence of this final regulatory 
action, this needed clarification will not be provided.
2. What are the potential benefits and costs of this regulatory action?
Benefits to SBA Lenders, Applicants, and Agents
    The greatest benefit from this interim final rule to all program 
participants, including SBA Lenders, Applicants, and Agents, is clear 
regulatory guidance and bright-line tests to increase efficiency. SBA 
anticipates that incorporating the SBA Express and Export Express Loan 
Programs into the regulations governing the 7(a) Loan Program may 
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 Lenders will be provided with bright-line tests 
for making certain determinations about eligibility which will 
eliminate the ambiguity and uncertainty that has hindered some SBA 
Lenders in recent years. Reinstating the personal resources test, in 
particular, will aid SBA Lenders in making the determination of an 
Applicant's access to credit elsewhere, which will increase 
efficiencies and reduce the efforts currently required by the Agency to 
provide assistance due to the subjectivity of the analysis in the prior 
rule. SBA Lenders will be more confident in their loan making with a 
better understanding of SBA's expectations. SBA estimates that the 
reinstatement of the personal resources test at section Sec.  120.102 
will save SBA Lenders a total of approximately 67,000 hours annually, 
monetized to $2,456,890 per year.

                  Table 1--Estimated Annual Benefit to SBA Lenders From Personal Resources Test
----------------------------------------------------------------------------------------------------------------
                                                Number of     Average time
                                                expected        saved per
                  Outcomes                     occurrences     occurrence               Total benefit
                                                per year         (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in determining credit           67,000             1-2  67,000-134,000 hours, $2,456,890-
 elsewhere.                                                                   $4,913,780.
                                            --------------------------------------------------------------------
    Estimated Annual Benefit...............  ..............  ..............  67,000-134,000 hours, $2,456,890-
                                                                              $4,913,780.\1\
----------------------------------------------------------------------------------------------------------------
\1\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
  an Applicant's access to credit elsewhere. SBA calculated the average of the timeframes provided to estimate
  the range of time the personal resources test will save SBA Lenders, on average, in their analysis. Since each
  loan is required to address an Applicant's access to credit elsewhere, the number of expected occurrences per
  year was estimated by using the average number of 7(a) and 504 loans guaranteed in the most recent five fiscal
  years (2014-2018), according to SBA's 7(a) and 504 loan data reports. The number of expected occurrences per
  year was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The cost
  benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as reported
  by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).


[[Page 7639]]

    The clear limitations on fees an Agent or Lender may charge to an 
Applicant leave no question as to what fees SBA considers to be 
reasonable. Further, the revisions to the definitions of Agents and 
Associates of Lenders and CDCs also will provide clarity as to whom SBA 
considers an Agent and what services the different types of Agents may 
perform and be compensated for by the Applicant or the SBA Lender. This 
will save SBA Lenders and Agents time in making these determinations 
for each loan. In addition, 7(a) Lenders will no longer be required to 
itemize fees charged to Applicants when the amount is over $2,500, 
which also will save these Lenders time. Applicants will benefit from 
protection against impermissible or unreasonable costs for assistance 
with obtaining an SBA-guaranteed loan and may become more aware of the 
free and low-cost resources provided by the Agency.

                   Table 2--Estimated Annual Benefit to SBA Lenders and Agents From Fee Limits
----------------------------------------------------------------------------------------------------------------
                                                Number of     Average time
                                                expected        saved per
                  Outcomes                     occurrences     occurrence               Total benefit
                                                per year         (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency for SBA Lenders when            67,000           0.5-1  33,500-67,000 hours, $1,228,445-
 determining permissibility and                                               $2,456,890.
 reasonableness of fees.
Increased efficiency for Agents determining           1,605           0.5-1  803-1,605 hours, $29,446-$58,855.
 permissibility and reasonableness of fees.
Increased efficiency for 7(a) Lenders no             60,951           0.5-1  30,476-60,951 hours, $1,117,555-
 longer required to itemize fees.                                             $2,235,073.
                                            --------------------------------------------------------------------
    Estimated Annual Benefit...............  ..............  ..............  64,779-129,556 hours, $2,375,446-
                                                                              $4,750,818.\2\
----------------------------------------------------------------------------------------------------------------
\2\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
  the reasonableness and permissibility of all fees charged to an Applicant for assistance with obtaining an SBA-
  guaranteed loan. SBA calculated the average of the timeframes provided to estimate the range of time SBA
  Lenders will save, on average, in determining permissible and reasonable fees with the bright-line tests
  included in this interim final rule, which SBA estimates would be the same for an Agent. The number of
  expected occurrences per year for SBA Lenders is estimated based on the average number of 7(a) and 504 loans
  guaranteed in the most recent five fiscal years (2014-2018), according to SBA's 7(a) and 504 loan data
  reports. The total number of guaranteed loans is used, versus the number of loans identified to have charged
  fees as discussed in the preamble of this rule, because SBA Lenders must review every loan application to
  determine whether any fees were charged to an Applicant and, if so, whether the fees are permissible and
  reasonable. Because Agents are not involved in every SBA-guaranteed loan, the number of expected occurrences
  per year for Agents is estimated based on averaging the total number of loans identified to have used an Agent
  (other than the participating Lender) in fiscal years 2013-2017. The number of expected occurrences per year
  for 7(a) Lenders no longer being required to itemize fees is based on the average number of 7(a) loans
  guaranteed over the most recent five fiscal years. The number of expected occurrences per year for each
  outcome was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The cost
  benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as reported
  by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).

    Finally, by modifying the principles of affiliation, the Agency and 
SBA Lenders will be better able to uphold the Agency's statutory 
obligation to provide financial assistance only to businesses 
determined to be small. Further, SBA Lenders will be provided with 
assistance from the Agency in making determinations of affiliation for 
businesses with certain types of contractual relationships, such as 
poultry farmers, which will provide additional needed clarity with 
regard to affiliation in the financial assistance programs.

      Table 3--Estimated Annual Benefit to SBA Lenders and Sureties From Modified Principles of Affiliation
----------------------------------------------------------------------------------------------------------------
                                                Number of     Average time
                                                expected        saved per
                  Outcomes                     occurrences     occurrence               Total benefit
                                                per year         (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in determining                  77,000             2-4  154,000-308,000 hours, $5,647,180-
 affiliation.                                                                 $11,294,360.
                                            --------------------------------------------------------------------
    Estimated Annual Benefit...............  ..............  ..............  154,000-308,000 hours, $5,647,180-
                                                                              $11,294,360.\3\
----------------------------------------------------------------------------------------------------------------
\3\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
  affiliation. SBA calculated the average of the timeframes provided to estimate the range of time SBA Lenders
  will save, on average, in determining affiliation with the guidance provided in this interim final rule. Since
  an affiliation determination must be made for each application for SBA financial assistance, the number of
  expected occurrences per year for SBA Lenders and Sureties was estimated by using the average number of 7(a)
  and 504 loans and the average number of Bid and Final Bonds guaranteed during the most recent five fiscal
  years (2014-2018), according to SBA's 7(a) and 504 loan data reports and information on surety bonds entered
  into SBA's Capital Access Finance System. The total number of expected occurrences for loans and surety bonds
  per year was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The
  cost benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as
  reported by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).

    SBA expects these benefits to be realized immediately upon 
enactment of the interim final rule and should remain the same each 
year thereafter, subject to changes in number of loans and hourly 
rates.
Benefits to SBA
    Like the program participants, SBA will benefit from the clear 
regulatory guidance and bright-line tests included in this interim 
final rule, especially when performing lender oversight activities. 
OCRM will realize increased efficiencies in conducting loan file 
reviews of SBA Lenders. With the reinstatement of the personal 
resources test, clear limitations on fees an Agent or Lender may charge 
to an Applicant, revised definitions of Agents and Associates of 
Lenders and CDCs, and simplified affiliation principles, SBA has 
removed the subjectivity of a

[[Page 7640]]

Lender's assessment of these issues, which will improve SBA Lenders' 
compliance and will allow OCRM to develop more efficient methods of 
testing SBA Lenders' compliance. In addition, the removal of the 
requirement that a Lender itemize fees charged to an Applicant when the 
fee is over $2,500, also will reduce the burden on OCRM of reviewing 
these additional documents.

                        Table 4--Estimated Annual Benefit to SBA From Interim Final Rule
----------------------------------------------------------------------------------------------------------------
                                                Number of     Average time
                                                expected        saved per
                  Outcomes                     occurrences     occurrence               Total benefit
                                                per year         (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in reviewing credit              2,000        0.25-0.5  500-1,000 hours, $18,375-$36,750.
 elsewhere assessment.
Increased efficiency in reviewing fees                1,300           0.5-1  650-1,300 hours, $23,888-$47,775.
 charged to Applicants.
Increased efficiency in reviewing Lender's            2,000        0.25-0.5  500-1,000 hours, $18,375-$36,750.
 affiliation determination.
                                            --------------------------------------------------------------------
    Estimated Annual Benefit...............  ..............  ..............  1,650-3,300 hours, $60,638-
                                                                              $121,275.\4\
----------------------------------------------------------------------------------------------------------------
\4\ SBA developed this estimated annual benefit based on an estimate from OCRM on the range of time that the
  guidance and bright-line tests included in the interim final rule will save a Financial Analyst, on average,
  in reviewing each relevant element of an SBA Lender's analysis during OCRM-conducted loan file reviews. The
  number of expected occurrences per year is based on the approximately 2,000 loan files reviewed by OCRM
  annually. The SBA Lender is required to address credit elsewhere and affiliation on every loan, but fees are
  not charged in connection with every loan. OCRM estimates that in approximately 65 percent of the 2,000 loans
  reviewed annually, OCRM identifies an issue related to fees charged to Applicants by SBA Lenders and/or
  Agents, including underreporting, inaccurate reporting, or impermissible fees. The number of expected
  occurrences per year for each outcome was multiplied by the average time saved per occurrence to estimate the
  total hourly benefit. The cost estimate was obtained by multiplying the hourly rate of a GS-13, Step 1 ($36.75
  per hour) by the number of expected occurrences per year and the average time saved per occurrence.

    SBA expects these benefits to be realized immediately upon 
enactment of the rule and should remain the same each year thereafter, 
subject to changes in the number of loan files reviewed and hourly 
rates.
Costs
Costs to SBA Lenders, Applicants, and Agents
    For purposes of this Regulatory Impact Analysis (RIA), the only 
costs to program participants and relevant stakeholders necessary to 
comply with the interim final rule are administrative costs. 
Administrative costs considered include estimations on reading and 
interpreting the regulation, developing and revising internal policies 
and procedures, and training. It is noted that program participants are 
presumed to incur such administrative costs continuously in order to 
maintain familiarity with SBA Loan Program Requirements, as required by 
13 CFR 120.180, and to remain in good standing with SBA as defined in 
13 CFR 120.420(f). The Table below shows the administrative costs SBA 
has estimated that are attributable to this specific rule, which are 
expected to occur mainly in the first year of implementation, decrease 
by half in the second year, and be eliminated by the third year.

                 Table 5--Estimates of Administrative Compliance Costs to SBA Lenders and Agents
----------------------------------------------------------------------------------------------------------------
                                                                                Number of  SBA
                                  Amount  of                    Frequency  for     lenders/
                                time  required  Value of  time    first  year       agents         Total cost
                                    (hours)                                        affected
----------------------------------------------------------------------------------------------------------------
Read and interpret the                     2-3          $36.67             5-7           3,500  35,000-73,500
 regulation.                                                                                     hours,
                                                                                                 $1,283,450-$2,6
                                                                                                 95,245.
Develop or Revise Internal                 5-7           36.67             5-6           3,500  87,500-147,000
 Policies and Procedures.                                                                        hours,
                                                                                                 $3,208,625-$5,3
                                                                                                 90,490.
Training......................             5-8           36.67           10-12           3,500  175,000-336,000
                                                                                                 hours,
                                                                                                 $6,417,250-$12,
                                                                                                 321,120.
                                                                                               -----------------
    Estimated First Year        ..............  ..............  ..............  ..............  297,500-556,500
     Administrative Costs.                                                                       hours,
                                                                                                 $10,909,325-$20
                                                                                                 ,406,855. \5\
----------------------------------------------------------------------------------------------------------------
\5\ SBA developed the estimate for the administrative costs in the first year of the interim final rule based on
  the approximate number of active SBA Lenders and Agents. Although approximately 4,500 Lenders have executed
  agreements to participate as a 7(a) Lender, over the past two fiscal years, the average number of active
  Lenders has totaled only 1,958. (A 7(a) Lender is considered to be ``active'' if it has approved at least one
  7(a) loan in that fiscal year.) SBA estimates that only those Lenders actively participating in the program
  will actually be affected by the costs of this interim final rule since the estimated costs are strictly
  administrative. The number of SBA Lenders and Agents affected includes approximately 2,474 active SBA Lenders
  (including approximately 2,061 active 7(a) Lenders, 213 CDCs, 135 Microloan Intermediaries, 33 ILP
  Intermediaries, and 32 Sureties), plus approximately 1,018 Agents identified as having conducted business with
  SBA during fiscal years 2013-2017, rounded up to the next hundred to account for trade associations, and other
  resource partners. SBA estimates that on average between 5-7 employees at each SBA Lending institution or
  Agent entity may spend between 2-3 hours each reading and interpreting the rule in the first year and that
  these employees are compensated at the mean hourly wage for a loan officer, as reported by the U.S. Department
  of Labor's Bureau of Labor Statistics ($36.67). SBA also estimates that 5-6 employees on average may be
  involved in developing or revising the internal policies of the respective program participant and would
  likely spend between 5-7 hours updating policies specifically related to this interim final rule. Finally, SBA
  estimates that between 10-12 employees on average for each program participant would spend between 5-8 hours
  on training related to updates and modifications made by this interim final rule. Applicants are not included
  as an entity affected by the administrative costs of the rule, as the Applicant relies on the SBA Lender or
  third-party Agent to inform them of SBA policy and procedure.

Costs to SBA
    There are no additional costs to the Agency required to achieve the 
outcomes of the rule. The administrative costs considered for the loan 
program participants, including reading and interpreting the 
regulation, developing and revising internal policies and procedures, 
and training are already inherent requirements of SBA employees and 
therefore, the publication of this interim final rule has no additional 
bearing on the responsibilities of relevant SBA

[[Page 7641]]

employees involved in the Agency's loan programs. Further, SBA does not 
anticipate any additional costs related to implementing the second 
exception to the economic-dependence affiliation rule because the 
Agency expects to absorb any costs related to reviewing integrator 
agreements by using existing SBA employees to conduct the reviews.
Transfers
    SBA has also identified a transfer of costs, due to the limits on 
permissible fees charged to an Applicant by Agents and Lenders, as well 
as the prohibition against Agents providing services to both an 
Applicant and an SBA Lender in connection with the same SBA loan 
application, which was previously permitted under limited 
circumstances. These limitations will provide a cost savings to 
Applicants; however, the Agency acknowledges that this savings to the 
Applicant will result in a cost (``transfer'') to the small number of 
Agents and Lenders that reported charging fees in excess of the limits 
imposed by this interim final rule. (As discussed in the Regulatory 
Flexibility Act section below, the excess fees charged by this small 
number of Agents and Lenders also are in excess of the current limits 
on fees and are therefore not in compliance with current SBA Loan 
Program Requirements.)

                                      Table 6--Estimated Transfers of Costs
----------------------------------------------------------------------------------------------------------------
                                                                     Number of
                                                                     expected     Average  money
                            Outcomes                                occurrences      saved per    Total transfer
                                                                     per year       occurrence
----------------------------------------------------------------------------------------------------------------
Elimination of fees exceeding set limits........................             746       $2,380.75   $1,776,042.63
                                                                                                 ---------------
Estimated Annual Transfer.......................................  ..............  ..............             \6\
                                                                                                    1,776,042.63
----------------------------------------------------------------------------------------------------------------
\6\ SBA arrived at this estimate based on the total number of loans guaranteed between FY2013 and FY2017 that
  reported fees charged to an Applicant by an Agent or Lender over the limits imposed in this interim final rule
  and the total amount that those loans exceeded the imposed limit for each threshold.

    Below is a table showing an estimation of the total costs and 
benefits of the rule over three years:

                           Table 7--Estimated Undiscounted Benefits and Costs Schedule
----------------------------------------------------------------------------------------------------------------
                           Benefits                                                   Costs
----------------------------------------------------------------------------------------------------------------
                            Year 1                                                   Year 1
----------------------------------------------------------------------------------------------------------------
             Low estimate                   High estimate             Low estimate            High estimate
----------------------------------------------------------------------------------------------------------------
267,429 hours........................  534,856 hours..........  297,500 hours..........  556,500 hours.
$9,806,754...........................  $19,613,433............  $10,909,325............  $20,406,855.
----------------------------------------------------------------------------------------------------------------
Year 2                                                      Year 2
----------------------------------------------------------------------------------------------------------------
267,429 hours........................  534,856 hours..........  148,750 hours..........  278,250 hours.
$9,806,754...........................  $19,613,433............  $5,454,662.50..........  $10,203,427.50.
----------------------------------------------------------------------------------------------------------------
Year 3                                                      Year 3
----------------------------------------------------------------------------------------------------------------
267,429 hours........................  534,856 hours..........  0 hours................  0 hours.
$9,806,754...........................  $19,613,433............  $0.....................  $0.
----------------------------------------------------------------------------------------------------------------

    Below is a table showing the annualized values of the estimated 
costs and cost savings, as of 2016, over an infinite horizon.

                         Table 8--Annualized Values as of 2016 Over an Infinite Horizon
----------------------------------------------------------------------------------------------------------------
                                                                         Primary estimate
                                                 ---------------------------------------------------------------
                                                         3% Discount rate                7% Discount rate
                                                 ---------------------------------------------------------------
                                                   Low  estimate  High  estimate   Low estimate    High estimate
----------------------------------------------------------------------------------------------------------------
Annualized Cost Savings.........................      $9,806,751     $19,613,433      $9,806,754     $19,613,433
Annualized Costs................................         485,479         908,132       1,077,116       2,014,841
                                                 ---------------------------------------------------------------
Annualized Net Cost Savings.....................       9,321,272      18,705,301       8,729,638      17,598,592
----------------------------------------------------------------------------------------------------------------


[[Page 7642]]

3. What are the alternatives to this interim final rule?
    SBA considered various alternatives to proceeding with the 
preferred option of promulgating this interim final rule. The first and 
most stringent alternative would be to adopt the rule as proposed. SBA 
chose not to pursue this option due to the concerns expressed by the 
industry and general public. Many commenters expressed concern that 
parts of the proposed rule may cause unintended consequences that would 
make it more difficult for Applicants seeking SBA loans of $350,000 or 
less. Specifically, these commenters referred to the limits set for the 
fees Agents and Lenders may charge to an Applicant for loans of this 
size, and the maximum amount of personal liquidity that owners of 20 
percent or more of such Applicants may retain, rather than inject into 
the project as additional equity in accordance with the proposed 
personal resources test. Also, several commenters expressed concern 
that the proposed changes to the principles of affiliation may render 
certain industries, like poultry farmers, ineligible for SBA financial 
assistance. Due to all of these concerns expressed by commenters, SBA 
has modified the interim final rule in several respects, including 
increasing the amount of personal liquidity that owners of 20 percent 
or more of a small business Applicant may retain, increasing the fees 
that a Lender or an Agent may charge a small business Applicant for 
assistance with obtaining an SBA-guaranteed loan of $350,000 or less, 
and revising the principles of affiliation to prevent any unintended 
consequences for certain industries, such as farmers. SBA also has 
provided an extended period for Lenders and Agents to comply with the 
fee provisions in Sec. Sec.  103.5(b) and 120.221(a).
    If the rule were finalized as proposed, the personal liquidity 
limits would have been more restrictive than the limits in the interim 
final rule. Under the interim final rule, fewer individuals will be 
required to inject excess liquid assets for small loans, which is a 
change (or transfer) that favors small business Applicants.
    The original proposed rule included fee limitations for Lenders of 
$2,500 for loans up to and including $350,000; and $5,000 for loans 
over $350,000. Per the comments received and based on the costs to 
deliver small dollar loans, the interim final rule increases the fee 
limitation for loans up to and including $350,000 to $3,000. This 
change will not significantly transfer benefits or costs for the 
following reasons: (1) Increased use by Applicants of SBA's no cost 
Lender Match to connect them to SBA Lenders; (2) increased development 
by SBA Lenders of in-house electronic application systems to better 
manage service and costs; and (3) continued innovation in the use of 
scoring and other data. All of these evolving technological 
improvements expand user options and level the playing field for 
services and costs.
    If the rule were finalized as originally proposed, the change to 
limit fees Lenders may charge Applicants on small loans would have 
impacted 2,944 loans from Lenders who exceeded the $2,500 proposed cap 
on loans guaranteed between FY2013 and FY2017. By increasing the 
permissible fee from $2,500 to $3,000 on loans of $350,000 and less in 
the interim final rule, the number of loans where the Lender fee 
exceeded the cap was reduced to 1,731, resulting in lower economic 
impact to Lenders making small dollar loans.
    Table 9 demonstrates the estimated reduction in the number of loans 
and dollars considered in excess of the Lender fee limitation as a 
result of increasing the proposed Lender fee limitation from $2,500 to 
$3,000 for loans of $350,000 or less.

 Table 9--Comparison of the Estimated Impact of the Limitation on the Fee Paid by the Applicant to the Lender in
                                 the Proposed Rule vs. the Interim Final Rule *
----------------------------------------------------------------------------------------------------------------
                                                                                   Interim final
                                                                   Proposed rule       rule         Difference
----------------------------------------------------------------------------------------------------------------
Loans with Excessive Lender Fees................................           2,944           1,731         (1,213)
Dollars in Excess of Fee Limits.................................      $5,813,734      $3,419,091    ($2,394,653)
Average Amount in Excess of Fee Limit per Loan..................       $1,974.77       $1,975.21
----------------------------------------------------------------------------------------------------------------
* As the fee limitation for loans over $350,000 did not change, this table only includes those loans where
  Lenders charged fees in excess of the fee limitations on loans of $350,000 or less.

    SBA originally proposed limiting total fees that an Agent(s) can 
charge an Applicant to a maximum of 2.5 percent of the loan amount or 
$7,000, whichever is less, for loans up to and including $350,000; a 
maximum of 2 percent or $15,000, whichever is less, for loans over 
$350,000 up to and including $1,000,000; and a maximum of 1.5 percent 
or $30,000, whichever is less, for loans over $1,000,000. As a result 
of the comments received and to limit the impact of the interim final 
rule on small Agents, SBA increased the limitations and thresholds for 
total fees that an Agent(s) may charge an Applicant to a maximum of 3.5 
percent or $10,000, whichever is less, for loans up to $500,000; a 
maximum of 2 percent or $15,000, whichever is less, for loans of 
$500,001 to $1,000,000; and 1.5 percent or $30,000, whichever is less, 
for loans over $1,000,000.
    The changes in the interim final rule result in the total number of 
loans in excess of the fee limitations being reduced from 3,060 to 
2,729 and the total dollars in excess of the fee limitations being 
reduced from $7,217,868 to $2,688,406. Table 10 demonstrates the 
estimated reduction in the number of loans and dollars considered in 
excess of the Agent fee limitation as a result of increasing the 
proposed fee limitation.

Table 10--Comparison of the Estimated Impact of the Limitation on the Fee Paid by the Applicant or the Lender to
         an Agent(s) in the Proposed Rule vs. the Interim Final Rule for Loans of $1,000,000 and Less **
----------------------------------------------------------------------------------------------------------------
                                                                                   Interim final
                                                                   Proposed rule       rule         Difference
----------------------------------------------------------------------------------------------------------------
Loans with Excessive Agent Fees.................................           3,060           2,729           (331)
Dollars in Excess of Fee Limits.................................      $7,217,868      $2,688,406    ($4,529,462)

[[Page 7643]]

 
Average Amount in Excess of the Fee Limit per Loan..............          $2,359            $985
----------------------------------------------------------------------------------------------------------------
** As no changes were made to the Agent fee limitation for loans over $1,000,000 from the proposed rule to the
  interim final rule, the loans over $1,000,000 with excessive Agent fees were not included in this table.

    The second, less stringent alternative considered was to make no 
regulatory change but strictly enforce existing SBA Loan Program 
Requirements. Of the major issues commented upon, SBA has existing 
mechanisms to enforce compliance with the credit elsewhere test, the 
fees Lenders and Agents are permitted to charge an Applicant, including 
when Lenders or Agents must refund amounts deemed unreasonable by SBA, 
and proper application of the affiliation principles applicable to the 
business loan programs. For example, with regard to fees charged to an 
Applicant, SBA has the authority to require fees deemed unreasonable by 
SBA to be refunded to a Borrower by a Lender or an Agent. In addition, 
SBA's OCRM can cite SBA Lenders during lender oversight reviews and 
take enforcement action against the SBA Lender, when appropriate. 
Further, SBA may suspend or revoke an Agent's privilege to conduct 
business with SBA. With regard to determining eligibility of an 
Applicant based on affiliation and credit available elsewhere, SBA may 
decline to approve applications that do not meet SBA Loan Program 
Requirements or, for loans made under a Lender's delegated authority, 
SBA may deny liability on the guaranty if the Lender did not make an 
acceptable determination for 7(a) loans or, for 504 loans, decline to 
close the loan, potentially at considerable expense to the small 
business Applicant. However, this option does not resolve the confusion 
that SBA Lenders and Agents have on current policy and procedure and 
would require an additional investment in Agency resources to rely on 
OCRM or the loan processing or guaranty purchase centers to rectify 
non-compliance after the fact. SBA has determined that it is more 
beneficial to all parties involved to provide clarity to these rules so 
that SBA Lenders and Agents can better understand and comply with SBA's 
Loan Program Requirements.
    In consideration of the alternatives described above, SBA has 
determined that the most preferable option is to enact the rule with 
several modifications. The interim final rule will, among other things, 
provide bright-line tests and clear guidance for SBA Lenders to 
determine what fees SBA considers to be reasonable and permissible and 
how to properly analyze an Applicant's personal liquidity as part of 
the analysis on credit available elsewhere. The interim final rule also 
will clarify the principles of affiliation to ensure that SBA financial 
assistance is not being provided to businesses that are not actually 
small due to affiliation with larger corporations, while ensuring that 
certain industries are not adversely impacted. Finally, the interim 
final rule will make minor corrections and updates to Loan Program 
Requirements to enhance program use.

Executive Order 13563

    A description of the need for this regulatory action and benefits 
and costs associated with this action, including possible 
distributional impacts that relate to Executive Order 13563, are 
included above in the Regulatory Impact Analysis under Executive Order 
12866.
    The Business Loan Programs operate through the Agency's lending 
partners, which are 7(a) Lenders for the 7(a) Loan Program, 
Intermediaries for the Microloan Program and ILP Program, and Third 
Party Lenders and CDCs for the 504 Loan Program. SBA's SBG Program 
operates through Surety Bond Companies. SBA's Business Disaster Loan 
Programs are delivered directly by SBA, without the use of any 
intermediaries. The Agency held two public forums in the summer of 2018 
to engage with stakeholders related to poultry lending. With respect to 
the 7(a) and 504 Loan Programs generally, SBA also met with trade 
association board members and program participants at industry 
conferences in the Fall of 2018 through Spring of 2019, which allowed 
it to reach representatives of trade associations and hundreds of its 
lending partners, from which it gained valuable insight regarding the 
loan programs. The Agency's outreach efforts to engage stakeholders 
before proposing this rule was extensive and concluded with the 
extended comment period.

Executive Order 13771

    This interim final rule is considered an E.O. 13771 deregulatory 
action. SBA is estimating $12,633,634 in annualized savings for this 
rule using a 7% discount rate in perpetuity in 2016 dollars. In 
addition, SBA estimates the present value of savings for this rule in 
perpetuity to be $180,480,486. Details on the breakdown of the 
estimated cost savings of this interim final rule can be found in the 
rule's economic analysis.

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 rule will 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 
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 interim final rule will 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

[[Page 7644]]

number 3245-0348 and, as discussed below, some of the forms will need 
to be revised based on the changes in this interim final rule.
    SBA Form 1920, Lender's Application for Guaranty; SBA Form 2450, 
Eligibility Information Required for 504 Submission (Non-PCLP) (OMB 
Control number 3245-0071); and SBA Form 2234 (Part C), Eligibility 
Information Required for 504 Submission (PCLP) (OMB Control number 
3245-0346) will need to be revised due to the new regulation at Sec.  
120.102, which will require SBA 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 will have a de minimis impact on SBA Lenders 
since reviewing the personal resources of the applicant business and 
its owners is already part of the analysis SBA Lenders currently 
conduct in determining an Applicant's eligibility for SBA financial 
assistance under the requirement to ensure that the Applicant does not 
have access to credit elsewhere on reasonable terms from non-Federal 
sources.
    The interim final rule also makes changes that require revisions to 
SBA Form 159, Fee Disclosure and Compensation Agreement (OMB Control 
number 3245-0201), which is used to collect information from SBA 
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 SBA Lenders on referral fees that it 
pays to Loan Brokers (also known as Referral Agents) in connection with 
an SBA-guaranteed loan. The specific revisions to SBA Form 159 would 
implement the 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 revisions to SBA Form 159 will reduce the estimated hour burden for 
7(a) Lenders because, under the interim final rule, they will only be 
required to disclose the amount charged up to the permissible limit on 
SBA Form 159, but will no longer have to itemize fees charged to 
Applicants, which is currently required for fees over $2,500. The 
revisions will have no material effect on the reporting burden for 
Agents. They will continue to report on all fees imposed on Applicants 
and provide supporting documentation for fees over $2,500 as they do 
now.
    The changes to SBA Forms 1920, 2450, 2234 (Part C), and 159 will be 
submitted to OMB as part of a broader, comprehensive revision of the 
forms that is not affected by this interim final rule but is part of 
the Agency's efforts to streamline and simplify the information 
collected from Applicants and SBA Lenders.
    Finally, this rule puts 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 is included in OMB-approved collection, SBA Lender 
Reporting Requirements (OMB Approval Number 3245-0365). This 
information collection was submitted to OMB for renewal in September 
2018 and the renewal was approved by OMB in April 2019. The new 
expiration date is April 30, 2022. The 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, the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601-612, requires the agency to ``prepare and make 
available for public comment a final 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.
    Small entities likely to be affected by this rule include small SBA 
Lenders and small Agents who assist small business Applicants with 
obtaining SBA-guaranteed financing. SBA Lenders are comprised of 7(a) 
Lenders, CDCs, Microloan Intermediaries, ILP Intermediaries, and 
Sureties that participate in the SBG Program. Based on SBA's size 
standards, SBA has determined that approximately 2,000 of the 
approximately 4,500 7(a) Lenders are small, all of the approximately 
213 CDCs are small, all of the approximately 135 Microloan 
Intermediaries are small, all of the approximately 33 ILP 
Intermediaries are small, and 12 of the approximately 32 Sureties that 
participate in the SBG Program are small.
    SBA does not track or collect information on entities or 
individuals serving as Agents, Packagers, or Lender Service Providers 
with regard to the NAICS codes or classification of those entities. 
Services provided to assist an Applicant in obtaining SBA-guaranteed 
financing may be performed by several different types of entities 
ranging from individuals who may assist with packaging a loan 
application or assisting the Applicant with finding an SBA Lender, to 
entities formed for the purpose of providing such assistance, to 
attorneys or Certified Public Accountants. All of these different types 
of individuals or entities providing assistance to Applicants in 
connection with obtaining an SBA-guaranteed loan may be classified 
under numerous different NAICS codes. SBA considered NAICS codes that 
may apply to these entities for the purpose of estimating the number of 
small entities affected by this interim final rule. One possible 
classification includes 522310 for ``Mortgage and Nonmortgage Loan 
Brokers,'' which is described as being comprised of ``establishments 
primarily engaged in arranging loans by bringing borrowers and lenders 
together on a commission or fee basis.'' The size standard for this 
classification is $7.5 million in annual receipts and according to the 
U.S. Census Bureau's 2012 Statistics of U.S. Businesses (SUSB),\3\ 
6,817 entities classified by this NAICS code are considered small by 
SBA's size standards. SBA also considered 522390 for ``Other Activities 
Related to Credit Intermediation,'' which is described as being 
comprised of ``establishments primarily engaged in facilitating credit 
intermediation (except mortgage and loan brokerage; and financial 
transactions processing, reserve, and clearinghouse activities)'' 
because ``loan servicing'' is included as an illustrative example of 
this NAICS code. However, based upon the other examples provided, which 
include check cashing services, money order issuance services, and 
payday lending services, SBA does not believe that NAICS code 522390 is 
applicable to the Agents affected by this rule. Because there are no 
limitations as to what type of entity may be engaged by an Applicant 
for assistance with obtaining SBA financing, it is not reasonable to 
estimate the number of affected entities based on NAICS codes, as the 
number of entities included in these classifications would far exceed 
the number of entities that actually conduct business with SBA and 
would not provide a realistic portrayal of the population of small 
entities affected by this rule.
---------------------------------------------------------------------------

    \3\ Because SBA's size standard for most NAICS codes is based on 
annual receipts and U.S. Census Bureau SUSB data by enterprise 
receipt size is only collected every five years, 2012 is the most 
recent Census data available for use.
---------------------------------------------------------------------------

    As an alternative to estimating the number of entities affected 
based on NAICS codes, SBA reviewed the Lender-reported data and other

[[Page 7645]]

information gathered by OCRM during lender oversight reviews in fiscal 
years 2013 through 2017, which also was used to develop the fee limits 
in this interim final rulemaking. Within the 8,025 loans reported to 
have used an Agent (other than the participating Lender) to provide 
assistance to the Applicant in securing the loan during that time 
period, SBA identified 753 unique Agents based on their DUNS Number or 
street address. Since SBA has no means of knowing the average annual 
receipts of these entities, SBA will conservatively estimate that the 
majority or 80 percent of the 753 entities are small. SBA has also 
identified approximately 265 entities who have submitted LSP Agreements 
for review by SBA. Like the Agents, including Packagers, SBA does not 
capture the NAICS classification of these LSPs and therefore is unable 
to estimate their annual receipts and the number of which that would be 
considered small. Therefore, as indicated above with Agents, SBA will 
conservatively estimate that the majority or 80 percent of LSPs are 
small. For purposes of the RFA, SBA estimates that approximately 814 
(80 percent of 1,018) small entities serving as Agents and LSPs will be 
affected by this interim final rule for a total of approximately 3,207 
small entities including all small SBA Lenders, Agents, and LSPs.
    As described more fully in the RIA above, SBA has determined that 
the only costs to program participants and relevant stakeholders 
necessary to comply with the interim final rule are administrative 
costs. Administrative costs considered include estimations on reading 
and interpreting the regulation, developing and revising internal 
policies and procedures, and training. To reiterate, although these 
costs are estimated here for the purposes of the Regulatory Flexibility 
Act, it is important to note that, regardless of new rulemaking, 
program participants are presumed to incur administrative costs related 
to reading and interpreting SBA Loan Program Requirements, revising and 
updating internal policies, and training staff continuously in order to 
maintain familiarity with SBA Loan Program Requirements, as required by 
13 CFR 120.180, and to remain in good standing with SBA as defined in 
13 CFR 120.420(f).
    The RIA also identifies an estimated transfer of costs due to the 
limits on permissible fees charged to an Applicant by Agents and 
Lenders, as well as the prohibition against an Agent providing services 
to both an Applicant and an SBA Lender in connection with the same SBA 
loan application, which was previously permitted under limited 
circumstances. These limitations have been put in place in order to 
protect small business Applicants from fees deemed unreasonable by SBA 
and will provide a cost savings to small business Applicants. However, 
the Agency acknowledges that this savings to the Applicant will result 
in a potential loss of revenue to the small number of Agents and 
Lenders that reported charging fees in excess of the limits imposed by 
this interim final rule that are considered to be small entities. As 
noted previously in Section III.C. above, approximately one percent of 
the loans guaranteed during fiscal years 2013-2017 reported fees 
charged to the Applicant by Lenders and Agents in excess of the revised 
maximum fees permitted in this interim final rule. Based on SBA's 
analysis of the fees reported on loans guaranteed during that time 
frame, SBA estimates that 213 small entities (83 small Lenders and 130 
small Agents) \4\ reported charging fees in excess of the limits 
imposed in this interim final rule. This represents only 8 percent of 
the 7(a) Lenders and Agents that SBA has identified as small (2,000 
7(a) Lenders and 602 Agents). Thus, only 8 percent of small Lenders and 
small Agents may experience reduced revenue as a result of this interim 
final rule. It is important to note that, while some small entities may 
experience reduced revenue, the fees that were being charged by these 
small entities were not in compliance with current SBA policy. 
Additionally, the reduced revenue will be offset at least in part by 
the estimated savings the small entities will experience due to 
increased efficiency in determining the permissibility and 
reasonableness of the fees charged.
---------------------------------------------------------------------------

    \4\ Based on SBA's analysis of the loans guaranteed during 
FY2013-FY2017, 83 Lenders and 162 Agents reported charging the 
Applicant a fee in excess of the limits imposed in this interim 
final rule. Although SBA recognizes that more than 50 percent of 
7(a) Lenders are not small, for purposes of the RFA, SBA is assuming 
that all 83 Lenders are small. As noted above, SBA estimates that 80 
percent of Agents are small; therefore, SBA is estimating that 130 
of the 162 Agents that reported charging fees in excess of the 
limits in this interim final rule are small.
---------------------------------------------------------------------------

    To estimate the average annualized cost per small entity, SBA 
annualized the sum of all administrative costs plus the estimated 
potential loss of revenue (e.g., the total transfer amount of 
$1,776,042.63) identified in the RIA over a 10-year period. (See Table 
6 in the RIA.) The estimated total annualized costs over 10 years at a 
7 percent discount rate range from a low estimate of $2,773,295.70 to a 
high estimate of $4,331,035. Dividing the total estimated annualized 
costs by the 3,207 estimated small entities affected, the annualized 
cost per entity is estimated to be between approximately $864.76 and 
$1,350.49. Although SBA is unable to ascertain the NAICS codes of all 
types of entities considered to be Agents, SBA used data from the 2012 
U.S. Census Bureau's SUSB for NAICS code 522310 for Mortgage and 
Nonmortgage Loan Brokers as an example to examine the annualized 
compliance cost as a percentage of annual receipts for small entities 
classified by this NAICS code. For the purposes of this estimation, SBA 
has averaged the high and low estimates of the annualized cost for a 
mid-point total of $388 per entity.

                              Mortgage and Nonmortgage Loan Brokers (NAICS 522310)
                                          [$7.5 Million Size Standard]
----------------------------------------------------------------------------------------------------------------
                                      Average
     Firm size (by receipts)          annual        Annualized       Number of      Percent  of    Revenue  test
                                     receipts     cost per  firm       firms       small  firms    *  (percent)
----------------------------------------------------------------------------------------------------------------
All Firms.......................      $1,005,967            $388           7,007             N/A             0.0
Small Firms.....................         549,802             388           6,817             100             0.1
<100K...........................          48,038             388           1,533              22             0.8
100K-$499,999...................         250,730             388           3,233              47             0.2
500,000-$999,999................         693,276             388           1,042              15             0.1
$1,000,000-$2,499,999...........       1,482,997             388             721              12             0.0
$2,500,000-$4,999,999...........       3,244,231             388             216               3             0.0

[[Page 7646]]

 
$5,000,000-$7,499,999...........       5,157,764             388              72               1             0.0
----------------------------------------------------------------------------------------------------------------
* Annualized compliance costs as a percentage of annual receipts.

    SBA has determined that the annualized cost of this rule per entity 
will not have a significant economic impact on a substantial number of 
small entities. First, the average annualized cost in the example above 
is not a significant percentage of each entity's average annual revenue 
for any size firm considered to be small. It is also noted that these 
annualized costs will be offset by annualized benefits ranging from a 
low estimate of $9,806,754 to a high estimate of $19,613,433 (or 
approximately $3,056-$6,116 per entity). See the RIA above for more 
information on the net annualized costs and benefits. Second, the 
number of small entities affected is not substantial. As stated above, 
SBA estimates that from FY2013 through FY2017 213 small entities (83 
small Lenders and 130 small Agents) reported charging fees in excess of 
the limits imposed in this interim final rule. This represents only 8 
percent of the 7(a) Lenders and Agents that SBA has estimated are 
small. SBA does not consider 83 small Lenders to be a substantial 
number when compared to the overall number of small Lenders, which is 
approximately 2,000. With respect to small Agents, SBA does not 
consider 130 Agents to be a substantial number when compared to the 
overall number of small Agents. While SBA used 602 as an estimate of 
the number of small Agents, SBA believes the actual number of small 
entities acting as Agents in connection with the SBA loan programs is 
most likely much larger when taking into consideration the attorneys, 
accountants, business consultants and others that act as Agents. As SBA 
noted above, the NAICS Code for Mortgage and Nonmortgage Loan Brokers 
used in the above example is only one of numerous NAICS codes under 
which Agents may be classified. Many different types of individuals and 
entities, including attorneys, accountants, and business consultants, 
act as Agents and assist Applicants in obtaining SBA-guaranteed loans. 
Thus, SBA believes that the actual universe of small Agents may be 
considerably larger than 602. When all of the potentially relevant 
NAICS codes are considered, SBA believes that the number of small 
entities affected by this rule would be even smaller than the 8% noted 
above.
    Despite the fact that SBA determined that the proposed rulemaking 
would not have a significant economic impact on a substantial number of 
small entities, SBA made modifications to certain elements of this 
interim final rule based on comments received during the proposed 
rule's public comment period. These modifications aimed to relieve a 
perceived disparity for small SBA loans of $350,000 or less, which 
according to public commenters, most frequently require the assistance 
of an Agent. For example, SBA originally proposed certain limitations 
to fees that Agents could charge to an Applicant for assistance in 
obtaining an SBA loan. Public commenters asserted that these fee 
limitations would force Agents out of the market and reduce access to 
capital for small businesses. Although SBA disagrees with the assertion 
that the proposed limits on fees would have disproportionately impacted 
access to these smaller loans, in the interim final rule, SBA increased 
the permitted fee an Agent or Agents may charge an Applicant for 
assistance with obtaining a loan of $350,000 or less from 2.5 percent 
of the loan amount or $7,000, whichever is less, to 3.5 percent of the 
loan amount or $10,000, whichever is less. That revision represents an 
increase of approximately 40 percent in the permitted fees for smaller 
loans when compared to the proposed rule, and a significant increase in 
the fees permitted under SBA's current Loan Program Requirements. In 
addition, SBA adjusted the lower two loan amount ranges, to ensure that 
the maximum fee permitted on loans over $350,000 up to and including 
$500,000 would not be lower than the maximum fee permitted for loans of 
$350,000 or less. Also, in the interim final rule, SBA increased the 
fee a Lender may charge an Applicant for assistance with obtaining a 
loan of $350,000 or less from $2,500 to $3,000, an increase of 20 
percent over the proposed limit. By having a bright-line test for what 
SBA considers reasonable compensation for services provided to an 
Applicant by an Agent and a Lender, Lenders and Agents will, in fact, 
save time and costs in analyzing and documenting that fees charged to 
the Applicant are reasonable.
    In an effort to minimize any potential costs or revenue losses that 
may be experienced by the 213 small Lenders and Agents that reported 
charging fees in excess of the revised limits in this interim final 
rule, SBA is giving all SBA Lenders and Agents additional time--until 
October 1, 2020--to comply with revised Sec. Sec.  103.5(b) and 
120.221(a). Thus, these entities will have had two years from the date 
of publication of the proposed rule in September 2018 to prepare for 
changes to the fee structure. Additionally, SBA is allowing a period of 
120 days for Agents to make any adjustments to conform to the clarified 
definitions of the types of Agents in Sec.  103.1 (e.g., Agents that 
may need to enter into LSP agreements with Lenders they provide 
services to).
    Similarly, in accordance with SBA Loan Program Requirements, SBA 
Lenders must analyze the ability of the small business Applicant 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. SBA proposed thresholds, based on the size of 
the total financing package, to assist the SBA Lender in determining 
the amount of excess personal liquid assets of 20 percent or more 
owners of the small business Applicant. Personal liquid assets 
exceeding the stated thresholds must be injected into the project to 
reduce the SBA loan amount. Public commenters recommended that the 
personal liquidity thresholds be modified, especially for smaller 
loans. SBA reevaluated the personal liquidity threshold for smaller 
loans and agreed to modify the limits to ensure that Applicants 
applying for smaller loans are not adversely affected. The interim 
final rule reinstates a bright-line test for SBA Lenders to 
appropriately consider the personal resources of the owners of the 
Applicant, which will save SBA Lenders time in their analysis.
    SBA believes that this interim final rule encompasses best practice 
guidance that aligns with the Agency's mission to increase access to 
capital for small businesses and facilitate American job

[[Page 7647]]

preservation and creation by providing bright-line tests to assist 
program participants in understanding the Loan Program Requirements and 
by removing unnecessary regulatory requirements. For the aforementioned 
reasons, SBA has determined that this interim final rule will not have 
a significant economic impact on a substantial number of small 
entities.

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 is amending 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.  103.1 by:
0
a. Revising paragraph (a); and
0
b. Removing paragraphs (d), (e), and (f) and redesignating paragraph 
(g) as paragraph (d).
    The revision reads as follows:


Sec.  103.1  Key definitions.

    (a) Agent means an authorized representative, including an 
attorney, accountant, consultant, packager, lender service provider, or 
any other individual or entity representing an Applicant or Participant 
by conducting business with SBA. For purposes of SBA's business loan 
programs, the term Agent includes but is not limited to:
    (1) Lender Service Provider: an Agent who assists the Lender with 
originating, disbursing, servicing, liquidating, or litigating SBA 
loans. The Lender bears full responsibility for all aspects of its SBA 
loan operation, including, but not limited to, approvals, closings, 
disbursements, servicing actions, and due diligence. Lender Service 
Providers may only receive compensation from the Lender and such 
compensation may not be passed on to the Applicant or paid out of SBA-
guaranteed loan proceeds.
    (2) Packager: An Agent who prepares the Applicant's application for 
financial assistance and is employed and compensated by the Applicant.
    (3) Loan Broker (also known as Referral Agent): an Agent who, on a 
specific transaction, either assists the Applicant in finding an SBA 
Lender that will be willing to make a loan to the Applicant or assists 
the SBA Lender in finding an Applicant. A Loan Broker may be employed 
and compensated by either the Applicant or the SBA Lender (but not 
both). Compensation paid to a Loan Broker by an SBA Lender may not be 
passed on to the Applicant and may not be paid out of SBA-guaranteed 
loan or debenture proceeds.
* * * * *

0
3. 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. For purposes of 
this paragraph (g), the actions of an Agent include the actions of the 
Agent's Affiliates, as defined in Sec.  121.103 of this chapter.
* * * * *

0
4. 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 an Agent or Agents 
charge any fee to an Applicant in excess of those specified in this 
part, the Agent(s) must reduce the charge and refund to the Applicant 
any amount in excess of the fee permitted by SBA. SBA considers the 
following amounts to be reasonable for the total compensation that an 
Applicant can be charged by one or more Agents:
    (1) For loans up to and including $500,000: A maximum of 3.5 
percent of the loan amount, or $10,000, whichever is less;
    (2) For loans $500,001-$1,000,000: A maximum of 2 percent of the 
loan amount, or $15,000, whichever is less; and
    (3) For loans over $1,000,000: A maximum of 1.5 percent 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
5. 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
6. Amend Sec.  120.10 by revising paragraph (1)(i) of the defined term 
``Associate'' to read as follows:


Sec.  120.10  Definitions.

* * * * *
    Associate. (1) * * *
    (i) An officer, director, key employee, or holder of 20 percent or 
more of the value of the Lender's or CDC's stock or debt instruments, 
or an Agent (as defined in Sec.  103.1 of this chapter) involved in the 
loan process; or
* * * * *

0
7. 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. SBA will 
reexamine the thresholds periodically and, if adjustments are necessary 
based on nationally-recognized economic indicators, SBA may modify the 
thresholds from time to time through rulemaking. 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, as defined in Loan Program 
Requirements (see Sec.  120.10)):
    (1) Is $350,000 or less, each 20 percent owner of the Applicant 
must inject any liquid assets that are in excess of two times the total 
financing package, or $500,000, 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; or
    (3) Exceeds $1,000,000, each 20 percent owner of the Applicant must 
inject any liquid assets that are in excess

[[Page 7648]]

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, the cash value of 
life insurance policies, 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
8. 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
9. Amend Sec.  120.221 by:
0
a. Revising the section heading and paragraph (a); and
0
b. Adding a sentence at the end of paragraph (b).
    The revisions and addition 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 (as 
defined in Sec.  103.1 of this chapter) for assistance with obtaining 
an SBA-guaranteed loan. The fee may not exceed $3,000 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 Lender charges any fees to the Applicant in excess of 
those specified in this part, the Lender must reduce the charge and 
refund to the Applicant any amount in excess of the permitted fee. 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 of this chapter and documented in accordance with Loan 
Program Requirements.
    (b) * * * 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)), subject to SBA's prior written approval, the Lender 
may charge extraordinary servicing fees in excess of 2 percent per year 
on the outstanding balance of the part requiring special servicing, 
provided the fees are reasonable and prudent.
* * * * *


Sec.  120.222  [Amended]

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


Sec.  120.344  [Amended]

0
11. Amend Sec.  120.344(b) by removing the period at the end of the 
paragraph and adding in its place ``, provided the fees are reasonable 
and prudent.''

0
12. Revise Sec.  120.350 to read as follows:


Sec.  120.350  Policy.

    Section 7(a)(15) of the Act authorizes SBA to guarantee a loan to 
a:
    (a) Qualified employee trust (``ESOP'') to:
    (1) Help finance the growth of its employer's small business; or
    (2) Purchase ownership or voting control of the employer; and a
    (b) Small business concern, if the proceeds from the loan are only 
used to make a loan to a qualified employee trust that results in the 
qualified employee trust owning at least 51 percent of the small 
business concern.

0
13. Revise Sec.  120.352 to read as follows:


Sec.  120.352  Use of proceeds.

    Loan proceeds may be used for:
    (a) Qualified employee trust. A qualified employee trust may use 
loan proceeds for two purposes:
    (1) Qualified employer securities. A qualified employee trust may 
relend loan proceeds to the employer by purchasing qualified employer 
securities. The small business concern may use these funds for any 
general 7(a) purpose.
    (2) Control of employer. A qualified employee trust may use loan 
proceeds to purchase a controlling interest (51 percent) in the 
employer. Ownership and control must vest in the trust by the time the 
loan is repaid.
    (b) Small business concern. A small business concern may only use 
loan proceeds to make a loan to a qualified employee trust that results 
in the qualified employee trust owning at least 51 percent of the small 
business concern.

0
14. 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 (a) applies to all 7(a) loans purchased 
from any Federal or state banking regulator, any receiver, or any 
conservator, unless SBA agrees otherwise in writing.
* * * * *

0
15. 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
16. Add an undesignated center heading and Sec. Sec.  120.441 through 
120.447 to read as follows:

SBA Express and Export Express Loan Programs

Sec.
120.441 SBA Express and Export Express Loan Programs.
120.442 Process to obtain or renew SBA Express or Export Express 
authority.
120.443 SBA Express and Export Express loan processing requirements.
120.444 Eligible uses of SBA Express and Export Express loan 
proceeds.
120.445 Terms and conditions of SBA Express and Export Express 
loans.
120.446 SBA Express and Export Express loan closing, servicing, 
liquidation, and litigation requirements.
120.447 Oversight of SBA Express and Export Express Lenders.


Sec.  120.441  SBA Express and Export Express Loan Programs.

    (a) SBA Express. Under the SBA Express Loan Program (SBA Express),

[[Page 7649]]

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 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) Shorter term or loan volume limit. 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) In addition to the eligibility criteria applicable to all 7(a) 
loans, an Export Express Applicant must have been in business for at 
least 12 full months at the time of application, but not necessarily in 
the exporting business, unless the Lender determines that the 
Applicant's key personnel have clearly demonstrated export expertise 
and substantial previous successful business experience and the Lender 
processes the Export Express loan using conventional commercial loan 
underwriting procedures and does not rely solely on credit scoring or 
credit matrices to approve the loan.
    (c) 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 does not meet SBA's environmental requirements; 
and
    (4) Complex loan structures or eligibility situations.
    (d) 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 
in accordance with Sec.  120.101. 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

[[Page 7650]]

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.
    (e) 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.
    (f) 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 operations 
outside of the United States, except for the marketing and/or 
distribution of products/services exported from the United States.
    (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) Debt refinancing. 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) 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) of this chapter, 
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) 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) of this chapter, 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 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) For fixed interest rate loans, SBA Express 
and Export Express Lenders may charge a reasonable fixed interest rate 
in accordance with Sec.  120.213.
    (2) For variable interest rate loans:
    (i) SBA Express and Export Express Lenders may charge up to 4.5 
percent over the prime rate on loans over $50,000 and up to 6.5 percent 
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.
    (ii) 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)(2)(i) 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).

[[Page 7651]]

    (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 (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. If established, 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 
percent of the issued standby letter of credit amount.
    (f) Insurance. SBA Express and Export Express Lenders must follow 
the same insurance 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 (a), 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) When SBA will purchase. 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) Amount that 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, plus up to 120 days of 
accrued 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, plus 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  Oversight of SBA Express and Export Express Lenders.

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


Sec.  120.707  [Amended]

0
17. Amend the last sentence of Sec.  120.707(b) by removing the word 
``six'' and adding in its place the word ``seven''.

0
18. Amend Sec.  120.712 by:
0
a. Revising paragraph (b)(1); and
0
b. In paragraph (d), removing the number ``25'' and adding in its place 
the number ``50''.
    The revision reads 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
* * * * *

0
19. Amend Sec.  120.840 by revising paragraph (b) to read as follows:


Sec.  120.840  Accredited Lenders Program (ALP).

* * * * *
    (b) Application. A CDC must apply for ALP status by submitting an 
application in accordance with SBA's Standard Operating Procedure 50 
10, available at http://www.sba.gov. A final decision will be made by 
the appropriate SBA official in accordance with Delegations of 
Authority.
* * * * *

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
20. 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
21. Amend Sec.  121.301 by:
0
a. Revising paragraph (f)(4);
0
b. Redesignating paragraphs (f)(5) through (7) as paragraphs (f)(7) 
through (9), respectively;
0
c. Adding new paragraphs (f)(5) and (6) and revising newly redesignated 
paragraph (f)(7).
    The revisions and additions to read as follows:

[[Page 7652]]

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

* * * * *
    (f) * * *
    (4) Affiliation based on identity of interest--(i) General. 
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) Close relatives. 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) Common investments. Affiliation arises through common 
investments where the same individuals or firms together own a 
substantial portion of multiple concerns in the same or related 
industry, and such concerns conduct business with each other, or share 
resources, equipment, locations, or employees with one another, or 
provide loan guaranties or other financial or managerial support to 
each other. However, where an SBA Lender has made a determination of no 
affiliation under this ground, SBA will not overturn that determination 
as long as it was reasonable when made given the information available 
to the SBA Lender at the time.
    (iv) Economic dependence. Affiliation based upon economic 
dependence may arise when a concern derived more than 85 percent of its 
receipts over the previous three fiscal years from a contractual 
relationship with another concern, unless:
    (A) The contract (or contracts) does not restrict the concern in 
question from selling the same type of products or services to another 
purchaser; or
    (B) SBA agrees that the terms of the contract (or contracts) do not 
provide the purchaser with control or the power to control the seller.
    (5) Affiliation based on the newly organized concern rule in this 
paragraph (f)(5). Affiliation may arise where current or former 
officers, directors, owners of a 20 percent interest or greater, 
managing members, or persons hired to manage day-to-day operations 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, 
owners of a 20 percent interest or greater, or managing members, and 
there are direct monetary benefits flowing from the new concern to the 
original concern. A concern may rebut such an affiliation determination 
by demonstrating a clear line of fracture between the two concerns. A 
concern will be considered ``new'' for the purpose of this paragraph 
(f)(5) if it has been actively operating for two years or less. 
However, where an SBA Lender has made a determination of no affiliation 
under this ground, SBA will not overturn that determination as long as 
it was reasonable when made given the information available to the SBA 
Lender at the time.
    (6) Affiliation based on totality of the circumstances. In 
determining whether affiliation exists, SBA may consider all 
connections between the concern and a possible affiliate. Even though 
no single factor is sufficient to constitute affiliation, SBA may find 
affiliation on a case-by-case basis where there is clear and convincing 
evidence based on the totality of the circumstances. However, where an 
SBA Lender has made a determination of no affiliation, SBA will not 
overturn that determination as long as it was reasonable when made 
given the information available to the SBA Lender at the time.
    (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 part 436.
* * * * *

0
22. 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: January 29, 2020.
Jovita Carranza,
Administrator.
[FR Doc. 2020-02128 Filed 2-7-20; 8:45 am]
 BILLING CODE 8025-01-P