[Federal Register Volume 87, Number 83 (Friday, April 29, 2022)]
[Rules and Regulations]
[Pages 25398-25402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-09162]


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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 120 and 121

[Docket No. SBA-2022-0003]


Community Advantage Pilot Program

AGENCY: Small Business Administration.

ACTION: Notification of changes to Community Advantage Pilot Program, 
impact on regulations, and request for comments.

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SUMMARY: The Small Business Administration (SBA) continues to refine 
and improve the design of the Community Advantage (CA) Pilot Program. 
SBA is issuing this document to revise the CA Pilot Program 
requirements to encourage increased lending in historically underserved 
markets.

DATES: The changes identified in this document take effect May 31, 
2022. Comment date: Comments must be received on or before May 31, 
2022.

ADDRESSES: You may submit comments, identified by SBA docket number 
SBA- 2022-0003, by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Darrel Eddingfield, Office of Financial Assistance, 
U.S. Small Business Administration, 409 Third Street SW, Washington, DC 
20416.
    SBA will post all comments on https://www.regulations.gov.
    If you wish to submit confidential business information (CBI) as 
defined in the User Notice at https://www.regulations.gov, please 
submit the information to Darrel Eddingfield, Office of Financial 
Assistance, U.S. Small Business Administration, 409 Third Street SW, 
Washington, DC 20416, or send an email to [email protected]. 
Highlight the information that you consider to be CBI and explain why 
you believe SBA should hold this information as confidential. SBA will 
review the information and make the final determination as to whether 
it will publish the information.

FOR FURTHER INFORMATION CONTACT: Darrel Eddingfield, Office of 
Financial

[[Page 25399]]

Assistance, U.S. Small Business Administration, 409 Third Street SW, 
Washington, DC 20416; telephone: (202) 516-6676; email: 
[email protected].

SUPPLEMENTARY INFORMATION: 

1. Background

    SBA has the authority to suspend, modify, or waive certain 
regulations in establishing and testing pilot loan initiatives under 13 
CFR 120.3. On February 18, 2011, SBA issued a notice and request for 
comments introducing the CA Pilot Program (76 FR 9626), which was 
created to meet the credit needs of small businesses in underserved 
markets. In that notice, SBA modified or waived as appropriate certain 
regulations which otherwise apply to 7(a) loans for the CA Pilot 
Program.
    Subsequent notices revised the CA Pilot Program to improve the 
program experience for participants, improve CA Lenders' ability to 
deliver capital to underserved markets, and appropriately manage risk 
to the Agency. These notices were issued on the following dates: 
September 12, 2011 (76 FR 56262), February 8, 2012 (77 FR 6619), 
November 9, 2012 (77 FR 67433), December 28, 2015 (80 FR 80872), 
September 12, 2018 (83 FR 46237), March 2, 2020 (85 FR 12369), and July 
15, 2020 (85 FR 42964). On April 1, 2022 (87 FR 19165), SBA issued a 
notice extending the CA Pilot Program until September 30, 2024 and 
lifting the moratorium previously imposed on SBA accepting new CA 
Lender applications.

2. Comments

    Although the changes take effect May 31, 2022, comments are 
solicited from interested members of the public on all aspects of the 
CA Pilot Program. Comments must be submitted on or before the deadline 
for comments listed in the DATES section. SBA will consider these 
comments and the need for making any future revisions to the CA Pilot 
Program.

3. Changes to the CA Pilot Program

    Under 13 CFR 120.3, SBA has the authority to test new programs or 
ideas in pilot programs that are limited in size and duration to 
protect SBA from undue risk of loss. Testing new ideas in a limited 
pilot program provides SBA with an opportunity to collect data to 
determine which ideas most effectively accomplish the intended goals 
and can be introduced as permanent rule changes versus other ideas that 
can be quickly terminated when data indicates they produce poor 
results. SBA has determined there is a gap in funding to underserved 
markets and in small dollar loans. Because the CA Pilot Program is 
specifically focused on making small loans in underserved markets, SBA 
is using its authority under 13 CFR 120.3 to implement the following 
modifications to determine their effectiveness in expanding capital to 
underserved markets and increasing small dollar loans.

a. Modification of 13 CFR 120.410 and 120.440 for Participation in and 
Use of Delegated Authority in the CA Pilot Program

    To close the gap in funding for small businesses in underserved 
markets by expediting loan decisions for small dollar loans, SBA is 
modifying the regulations at 13 CFR 120.410 and 120.440, using the term 
modify as contemplated under 13 CFR 120.3, for lender participation in 
the CA Pilot Program and the conditions under which SBA will grant 
delegated authority to CA Lenders to make CA loans without prior SBA 
review of eligibility or creditworthiness. Subject to SBA's review and 
prior approval, SBA may authorize certain CA Lenders to make CA 
revolving lines of credit. Until receiving written authorization from 
SBA, CA Lenders will not be permitted to approve revolving lines of 
credit, under either delegated or non-delegated authority.
    New lenders: A lender that is not an existing CA Lender as of April 
1, 2022, must be approved by SBA to participate in the CA Pilot Program 
before it can begin making CA loans. A new lender applying to 
participate as a CA Lender must demonstrate at the time of its 
application that it currently has at least 20 similarly-sized 
commercial or business loans in its portfolio. This level of experience 
is necessary because SBA will be granting delegated authority if the 
Lender is approved to participate in the pilot.
    Existing CA Lenders that have delegated authority: These CA Lenders 
do not have to take any action and may begin using the procedures in 
the updated CA Participant Guide when it is published.
    Existing CA Lenders that do not have delegated authority as of 
April 1, 2022: Notwithstanding the new authorities stated above, these 
CA Lenders must continue to submit loan applications through the Loan 
Guaranty Processing Center (LGPC) using nondelegated authority until 
that time as they qualify for and are approved for delegated authority. 
For these CA Lenders, SBA will grant delegated authority under the 
rules that were in effect at the time the CA Lender was approved to 
participate in the CA Pilot Program. Alternatively, a CA Lender may 
apply for delegated authority at any time if it can demonstrate that it 
currently has at least 20 similarly-sized commercial or business loans 
in its portfolio, which may include its CA loans.

b. Modification of 13 CFR 120.150 Relating to Lending Criteria

    SBA is modifying the regulation at 13 CFR 120.150, using the term 
modify as contemplated under 13 CFR 120.3, which describes the lending 
criteria that SBA and participating lenders must consider when 
underwriting SBA-guaranteed loans. CA Lenders must ensure the Applicant 
(including an Operating Company) is creditworthy and loans are so sound 
as to reasonably assure repayment. CA Lenders must use appropriate and 
prudent generally acceptable commercial credit analysis processes and 
procedures consistent with those used for their similarly-sized, non-
SBA guaranteed commercial loans. When approving CA loans, CA Lenders 
may consider any of the following criteria: Credit score or credit 
history of the Applicant (and the Operating Company, if applicable), 
its Associates and any guarantors; the earnings or cashflow of 
Applicant; or where applicable any equity or collateral of the 
Applicant.
    Additionally, CA Lenders may use a business credit scoring model. 
CA Lenders may use the FICO[supreg] Small Business Scoring Service\SM\ 
Score (SBSS) credit scoring model used in SBA's 7(a) Small Loan Program 
or other credit scoring models. If a CA Lender uses a credit scoring 
model other than SBSS, the CA Lender must validate the model, document 
with appropriate statistical methodologies that their credit analysis 
procedures are predictive of loan performance and must provide that 
documentation to SBA upon request and during lender oversight reviews. 
Credit scoring models could incorporate, for example, the earnings and 
cashflow of an Applicant, equity, or collateral, in which case those 
factors would not necessarily be separately considered by a CA Lender 
unless otherwise specified by SBA Loan Program Requirements as defined 
in 13 CFR 120.10 (e.g., where SBA requires an equity injection for 
certain project financing). SBA will continue to require new CA Lender 
Applicants to submit their credit policies at the time of application.
    The use of credit scoring models will not replace the requirement 
for CA Lenders to comply with other SBA Loan Program Requirements, for 
example, ensuring the project meets program

[[Page 25400]]

eligibility requirements, adequate controls on disbursements are in 
place, providing accurate descriptions of uses of proceeds, and 
documenting that credit is not available elsewhere.

c. Modification of 13 CFR 120.110(n) for the Community Advantage Pilot 
Program

    SBA is modifying the regulation at 13 CFR 120.110(n), using the 
term modify as contemplated under 13 CFR 120.3, to remove restrictions 
that make ineligible any business with an Associate who is 
incarcerated, on probation, on parole, or has been indicted for a 
felony or a crime of moral turpitude. CA Lenders may continue to 
conduct background checks and make risk-based lending decisions in 
accordance with their own policies. SBA is making this change to 
address concerns regarding equitable access under SBA programs and 
economic opportunities for these individuals. There are roughly as many 
Americans with criminal records as with college degrees,\1\ and the 
criminal justice system disproportionally entangles Americans of color. 
Individuals with prior convictions often have difficulty finding jobs, 
many experience discrimination, others lack technical skillsets for the 
modern workforce, and all face 29,000 employment-related legal 
restrictions (e.g., inability to acquire licenses).\2\ Entrepreneurship 
may offer this population a strong alternative, but many formerly 
incarcerated individuals have little access to the credit necessary to 
start a business.
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    \1\ Just Facts: As Many Americans Have Criminal Records as 
College Diplomas. Brennan Center for Justice.
    \2\ The Price We Pay: Economic Costs of Barriers to Employment 
for Former Prisoners and People Convicted of Felonies. Center For 
Economic And Policy Research, June 16, 2016.
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d. Modification of 13 CFR 120.151 To Increase Maximum Allowable CA Loan 
Size From $250,000 to $350,000

    When SBA introduced the CA Pilot Program, it modified the maximum 
loan amount for 7(a) loans in 13 CFR 120.151 to establish a maximum CA 
loan size of $250,000. In this document, SBA is again modifying 13 CFR 
120.151, using the term modify as contemplated under 13 CFR 120.3, to 
increase the maximum CA loan size to $350,000 to align with the current 
definition of a small loan as used in the regular 7(a) program. While 
still considered small dollar loans, the larger loan amount limit will 
allow Applicants to make necessary investments to start new businesses 
such as the purchase of commercial real estate, machinery and 
equipment, and inventory.

e. Modification of 13 CFR 120.221(a) To Revise Maximum Allowable Fees a 
CA Lender May Charge

    Currently, 13 CFR 120.221(a) permits Lenders to charge an Applicant 
a reasonable fee to assist the Applicant with the preparation of the 
application and supporting materials. However, SBA does not permit 
Lenders to charge an Applicant a commitment, broker, referral, or 
similar fee. SBA SOP 50 10 provides guidance on allowable fees and 
compensation all Lenders, including CA Lenders, may charge an 
Applicant. In a notice published on September 12, 2018 (83 FR 46237), 
SBA modified 13 CFR 120.221(a) to limit the fees that a CA Lender or 
Agent is permitted to collect from the Applicant to no more than 
$2,500.
    SBA determined the limits on fees may negatively affect CA Lenders' 
willingness to make loans under the CA Pilot Program. Therefore, SBA is 
modifying the allowable fee structure to offset costs that may prevent 
CA lenders from making more loans, especially small loans under 
$50,000. One of the ways SBA 7(a) Lenders are permitted to charge a fee 
for packaging and other services is based on a percentage of the loan 
amount, which is 3 percent for loans of $50,000 and less, and 2 percent 
for larger loans. This allows a 7(a) Lender to charge a fee of up to 
$7,000 for a $350,000 7(a) loan where the CA Lender is currently 
permitted to charge a fee of up to $2,500 for all CA loans.
    For these reasons, SBA is again modifying 13 CFR 120.221(a), using 
the term modify as contemplated under 13 CFR 120.3, and revising the 
method of calculating the maximum fee a CA Lender may charge the 
Applicant for packaging and other services as follows:
    i. For CA loans up to $5,000: Fee may not exceed 10 percent of the 
loan amount;
    ii. For CA loans greater than $5,000 and up to and including 
$10,000: Fee may not exceed $500;
    iii. For CA loans greater than $10,000 up to and including $50,000: 
Fee may not exceed 5 percent of the loan amount or $1,750, whichever is 
less; and
    iv. For CA loans greater than $50,000: Fee may not exceed 2.5 
percent or $1,750, whichever is greater.
    Except for necessary out-of-pocket costs such as filing or 
recording fees permitted in Sec.  120.221(c), this is the only fee or 
compensation a CA Lender may directly or indirectly collect from an 
Applicant for assistance with obtaining a CA loan. In addition, the CA 
Lender may not split a loan into two loans for the purpose of charging 
an additional fee to an Applicant. Any fees the CA Lender or any Agent 
charges an Applicant must be disclosed to the Applicant and SBA by 
completion of the SBA Form 159, ``Fee Disclosure Form and Compensation 
Agreement,'' and the CA Lender must electronically submit a copy of the 
executed form and any supporting documentation through SBA's Capital 
Access Financial System (CAFS). SBA's Office of Credit Risk Management 
(OCRM) tracks fees and compensation Lenders and Agents collect from 
Applicants and Borrowers to allow SBA to monitor and track the actual 
costs to Borrowers in obtaining SBA-guaranteed loans.
    SBA considers the revised fee structure to be reasonable. SBA will 
continue to monitor this fee structure and may revise this amount by 
publishing a notice with request for comment in the Federal Register.

f. Modification of 13 CFR 120.213, 120.214, and 120.215 To Revise 
Maximum Allowable Interest Rates a CA Lender May Charge

    When SBA announced the CA Pilot Program and again in a subsequent 
notice, it modified the regulations at 13 CFR 120.213, 120.214, and 
120.215 in order to permit CA Lenders to charge up to Prime plus 6 
percent on loans of any size. (See, 79 FR 9626, February 18, 2011, and 
77 FR 6619, February 8, 2012.) To incentivize CA Lenders to make more 
smaller dollar loans, SBA is again revising the regulations at 13 CFR 
120.213, 120.214, and 120.215, using the term modify as contemplated 
under 13 CFR 120.3, by setting the maximum interest rates that CA 
Lenders may charge. For CA loans approved on or after the effective 
date of this document, CA Lenders may charge, for loans up to $50,000, 
Prime plus 6.5 percent; for loans greater than $50,000 up to and 
including $250,000, Prime plus 6 percent; for loans greater than 
$250,000 up to and including $350,000, Prime plus 4.5 percent.

g. Revise Collateral Requirements for CA Loans

    SBA is making the following changes to collateral requirements to 
increase the speed with which CA Lenders may make small loans while 
also decreasing costs to the CA Lender and Borrower. Personal and/or 
corporate guaranties must still be obtained in accordance with 13 CFR 
120.160(a) and SOP 50 10.
    Loans $50,000 or less: CA Lenders currently are required to follow 
the guidance on collateral provided in the CA Participant Guide and in 
SBA SOP 50 10, which states that for loans of $25,000 or less, the CA 
Lender is not required to take collateral. For CA loans

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approved on or after the effective date of this document, SBA will not 
require CA Lenders to take collateral on loans of $50,000 or less.
    Loans greater than $50,000: SBA currently requires that for CA 
loans over $50,000, the CA Lender must follow the collateral policies 
and procedures it has established and implemented for its similarly-
sized, non-SBA-guaranteed commercial loans; however, at a minimum, the 
CA Lender must require as collateral a first lien on all assets 
financed with the CA loan proceeds. The CA Lender is also required to 
take a lien on all the Borrower's fixed assets, including real estate, 
up to the point the CA loan is ``fully secured'' in accordance with the 
collateral valuations provided in SOP 50 10 6, Part 2, Section B, 
Chapter 1. Upon the effective date of this document, SBA will require 
the CA Lender to take real estate as collateral only if one of the 
following conditions are met:
    i. The real estate is being acquired with the CA loan proceeds; or
    ii. The CA loan proceeds will finance improvements to real estate 
owned by the Borrower or its Associates; or
    iii. The CA loan proceeds will refinance debt originally used to 
acquire, or improve the real estate owned by the Borrower or its 
Associates.

h. Modification of 13 CFR 120.130(c) To Allow Certain CA Lenders To 
Provide Revolving Lines of Credit

    Under the existing CA Pilot Program, CA Lenders are not authorized 
to make revolving lines of credit. To improve access to working capital 
in underserved markets, SBA is modifying the regulation at 13 CFR 
120.130(c), using the term modify as contemplated under 13 CFR 120.3, 
which currently prohibits a borrower from using loan proceeds for floor 
plan financing or other revolving line of credit, except under the 
Export Working Capital Program or the CAPLines Program. Subject to 
SBA's review and prior approval, SBA may authorize certain CA Lenders 
to make CA revolving lines of credit. Until receiving written 
authorization from SBA, CA Lenders will not be permitted to approve 
revolving lines of credit, under either delegated or non-delegated 
authority.

i. Modification of 13 CFR 120.160(c) To Revise the Requirement for 
Hazard Insurance for CA Loans

    As set forth in 13 CFR 120.160(c), SBA currently requires hazard 
insurance on all collateral and does not distinguish this requirement 
by loan size. SBA determined that the hazard insurance requirement is 
particularly burdensome and costly for businesses seeking small dollar 
loans. Therefore, SBA is modifying the regulation at 13 CFR 120.160(c), 
using the term modify as contemplated under 13 CFR 120.3, to permit CA 
Lenders to follow the hazard insurance policies and procedures they 
have established and implemented for their similarly-sized, non-SBA-
guaranteed commercial loans.
    CA Lenders must continue ensuring that Borrowers obtain flood 
insurance per 13 CFR 120.170 when required under the Flood Disaster 
Protection Act of 1973 (42 U.S.C. 4000 et seq.).

j. Modification of 13 CFR 121.301(f) To Modify the Affiliation 
Principles for Applicants for CA Loans

    Currently, 13 CFR 121.301 states the size standards and affiliation 
principles that are applicable to SBA's financial assistance programs. 
Paragraph (f) details how affiliation principles are applied for the 
7(a) Loan Program, among others. This paragraph has seven sub-
paragraphs, each of which details a separate affiliation principle that 
must be applied to the applicant and other entities to determine 
whether the entities are affiliated. The determination of affiliation 
is necessary to ensure that an applicant is ``small'' for purposes of 
eligibility for SBA financial assistance and to ensure that the 
applicant (including affiliates) does not exceed the maximum guaranty 
amount available. The seven sub-paragraphs consider: (1) Affiliation 
based on ownership, including the principal of control of one entity 
over another; (2) affiliation arising under stock options, convertible 
securities, and agreements to merge, including the principal of control 
of one entity over another; (3) affiliation based on management, 
including the principal of control of one entity over another; (4) 
affiliation based on identity of interest between close relatives; (5) 
affiliation based on franchise and license agreements, including the 
principal of control of one entity over another; (6) determining the 
concern's size; and (7) exceptions to affiliation.
    Participating CA Lenders and the public have requested 
simplification of the affiliation rules for SBA's financial assistance 
programs, and recent Congressional actions have streamlined the 
affiliation rules for certain circumstances. For example, certain 
temporary COVID-19 pandemic relief programs enacted by Congress 
streamlined SBA's financial assistance affiliation requirements to 
speed relief to small businesses in hard-hit industries. For example, 
the CARES Act created the Paycheck Protection Program (PPP), which is a 
temporary 7(a) Loan Program, and for that program, Congress waived 
affiliation requirements for businesses operating under North American 
Industry Classification System (NAICS) Code 72 (Accommodations and Food 
Services), for small businesses operating under a franchise agreement 
listed on SBA's Franchise Directory, and for small businesses that were 
financed by a Small Business Investment Company (SBIC).
    Drawing on the successful experience of affiliation streamlining 
under the temporary pandemic relief programs and mindful of CA Lender 
and public comments requesting affiliation streamlining for the CA 
Pilot Program, SBA is modifying the regulation at 13 CFR 121.301(f), 
using the term modify as contemplated under 13 CFR 120.3, for 
Applicants for CA loans to simplify the program requirements, 
streamline the application process for CA loans, and facilitate the 
review of such applications. SBA is specifically removing the principal 
of control of one entity over another when determining affiliation 
because the concept of control has proven particularly burdensome for 
applicants and lenders to understand and implement.
    Accordingly, for purposes of the CA Pilot Program, CA Lenders will 
apply the following principles of affiliation to Applicants for CA 
loans:
     Affiliation. Any of the circumstances described below 
establishes affiliation for applicants of the CA Pilot Program:
    1. Ownership.
    i. Considering what the applicant or applicant's owners own.
    A. Entities the Applicant owns. An applicant is affiliated with 
another business entity where the applicant owns more than 50 percent 
of another business.
    B. Entities owned by owners of the applicant. An applicant is 
affiliated with another business entity where no single individual or 
entity owns more than 50 percent of the applicant,
    1. An owner of 20 percent or more of the applicant owns more than 
50 percent of the other business entity, and
    2. The applicant operates in the same 3-digit NAICS subsector as 
the other business entity.
    ii. Considering who owns the applicant.
    A. An applicant is affiliated with another business entity where 
the other business entity owns more than 50 percent of the applicant.
    B. An applicant is affiliated with another business entity where no 
single

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individual or entity owns more than 50 percent of the applicant,
    1. The other business entity owns 20 percent or more of the 
applicant, and
    2. The other business entity operates in the same 3-digit NAICS 
subsector as the applicant.
    2. Stock options, convertible securities, and agreements to merge.
    i. SBA considers stock options, convertible securities, and 
agreements to merge (including agreements in principle) to have a 
present effect on the ownership of the entity. SBA treats such options, 
convertible securities, and agreements as though the rights granted 
have been exercised.
    ii. Agreements to open or continue negotiations towards the 
possibility of a merger or a sale of stock at some later date are not 
considered ``agreements in principle'' and are thus not given present 
effect.
    iii. Options, convertible securities, and agreements that are 
subject to conditions precedent which are incapable of fulfillment, 
speculative, conjectural, or unenforceable under state or Federal law, 
or where the probability of the transaction (or exercise of the rights) 
occurring is shown to be extremely remote, are not given present 
effect.
    iv. SBA will not give present effect to individuals', concerns', or 
other entities' ability to divest all or part of their ownership 
interest in order to avoid a finding of affiliation.
    3. Determining the concern's size. In determining the concern's 
size, SBA counts the receipts, employees (Sec.  121.201), or the 
alternate size standard (if applicable) of the concern whose size is at 
issue and all of its domestic and foreign affiliates, regardless of 
whether the affiliates are organized for profit.
    4. Exceptions to affiliation. For exceptions to affiliation, see 13 
CFR 121.103(b). Additional guidance will be provided in the updated CA 
Participant Guide.

4. General Information

    The changes in this document are limited to the CA Pilot Program 
only. All other SBA guidelines and regulatory modifications related to 
the CA Pilot Program remain unchanged. The regulatory modifications 
described in this document are authorized by 13 CFR 120.3, which 
provides that the SBA Administrator may suspend, modify, or waive rules 
for a limited period to test new programs or ideas. These modifications 
apply only to loans made under the CA Pilot Program, which expires 
September 30, 2024.
    SBA has provided more detailed guidance in the form of a CA 
Participant Guide that is being updated to reflect these changes and 
will be available on SBA's website at https://www.sba.gov. SBA may 
provide additional guidance, through SBA notices, which may also be 
published on SBA's website at https://www.sba.gov/category/lender-navigation/forms-notices-sops/notices. Questions regarding the CA Pilot 
Program may be directed to the Lender Relations Specialist in the local 
SBA district office. The local SBA district office may be found at 
https://www.sba.gov/about-offices-list/2.

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

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2022-09162 Filed 4-28-22; 8:45 am]
BILLING CODE 8026-03-P