[Federal Register Volume 88, Number 98 (Monday, May 22, 2023)]
[Rules and Regulations]
[Pages 32623-32625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-10310]


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

SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AH92


Small Business Lending Company Application Process

AGENCY: U.S. Small Business Administration.

ACTION: Notification.

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

SUMMARY: The purpose of this notificaton is to announce that SBA's 
Office of Capital Access (OCA) is opening the application period for 
new Small Business Lending Companies (SBLC) licenses from June 1, 2023, 
to July 31, 2023, and share the process by which interested entities 
may apply. SBA is not accepting applications for Community Advantage 
SBLCs (CA SBLCs) at this time; however, qualified entities may apply 
under the Community Advantage pilot authority until September 30, 2023.

DATES: This document is effective on June 1, 2023. SBA will accept 
applications for new SBLC licenses from June 1, 2023, to July 31, 2023.
    Comment Date: Comments must be received on or before June 21, 2023.

ADDRESSES: You may submit comments, identified by SBA docket number 
SBA-2023-0006, by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov/. 
Follow the instructions for submitting comments.
     Mail: Jihoon Kim, Office of Financial Program Operations, 
U.S. Small Business Administration, 409 Third Street SW, Washington, DC 
20416.
     Hand Delivery/Courier: 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 Jihoon Kim, Office of Financial Program 
Operations, 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: Jihoon Kim, Director, Office of 
Financial Program Operations (OFPO), Office of Capital Access, Small 
Business Administration, at 202-205-6024 or [email protected]. The 
phone number above may also be reached by individuals who are deaf or 
hard of hearing, or who have speech disabilities, through the Federal 
Communications Commission's TTY-Based Telecommunications Relay Service 
teletype service at 711.

SUPPLEMENTARY INFORMATION: 

I. Background Information

    On April 12, 2023, SBA published the Final Rule on Small Business 
Lending Company (SBLC) Moratorium Rescission and Removal of the 
Requirement for a Loan Authorization (88 FR 21890, effective May 12, 
2023). Through that rule, SBA lifted the self-imposed moratorium on 
licensing new SBLCs and established the plan to approve three SBLCs in 
the first year following implementation. An SBLC, as defined in 13 CFR 
120.10, is a non-depository lending institution authorized by SBA to 
make loans pursuant to section 7(a) of the Small Business Act and loans 
to Intermediaries in SBA's Microloan program. An SBLC is:
     Supervised and examined solely by SBA at the federal 
level, although the entity may be subject to state supervision;
     Subject to additional SBA Loan Program Requirements, as 
defined in 13 CFR 120.10, including but not limited to regulations 
specific to SBLCs regarding formation, capitalization, and enforcement 
actions; and
     Subject to all other 7(a) Loan Program Requirements 
including but not limited to, those specific to origination, servicing, 
and liquidation.
    This SBLC moratorium was put in place in 1982, prior to access to 
modern digital tools that enhance oversight and mitigate risk. For 41 
years, SBA has overseen the application and approval process 
approximately 60 times for the transfer of the existing SBLC licenses 
including determining the capability and experience of the acquiring 
entity's leadership; the financial capacity to make, service, and 
liquidate loans; and the safety and soundness of its portfolio. This 
ensures compliance with SBA's regulatory requirements and origination 
of loans based on standards consistent with similarly sized commercial 
loans made by other lenders.
    As stated above, the purpose of this notification is to announce 
that SBA's Office of Capital Access is opening the application period 
for new Small Business Lending Companies (SBLC) licenses. SBA is also 
maintaining the process for purchasing one of the existing lending 
authorities from a current SBLC in accordance with 13 CFR 120.468.
    Although SBA is not accepting applications for Community Advantage 
SBLCs (CA SBLCs) in this open period, SBA will continue to accept 
applications for new lenders in SBA's Community Advantage (CA) Pilot 
Program through the end of the CA Pilot Program, which will sunset on 
September 30, 2023. Entities that are interested in applying to become 
a CA Pilot lender should follow the application instructions in the 
Community Advantage Participant Guide, version 7, effective May 31, 
2022. In accordance with SBA Information Notice 5000-846918, Community 
Advantage Small Business Lending Company Conversion, effective May 1, 
2023, SBA will continue to work with all CA Pilot lenders to transition 
them to CA SBLCs.

II. SBLC Requirements

    SBLCs must comply with SBA's requirements for SBA Lenders, SBA 
Supervised Lenders, and the additional requirements presented in 13 CFR 
part 120, subpart D, Sec. Sec.  120.470 through 490 specifically for 
SBLCs.
    SBLCs must:
    1. Submit to the D/OCRM via [email protected] for review their 
credit policy that demonstrates compliance with Title 13 of the CFR and 
SBA's Standard Operating Procedures (SOPs) for origination, servicing, 
and liquidation of 7(a) loans, and which must be acceptable to SBA in 
its discretion.
    2. Submit to the D/OCRM via [email protected] for review and 
approval annual validation, with

[[Page 32624]]

supporting documentation and methodologies demonstrating that any 
scoring model used by the SBLC is predictive of loan performance.
    3. Each SBLC's Board of directors must adopt and fully implement an 
internal control policy that provides adequate direction to the 
institution for effective control over and accountability for 
operations, programs, and resources. The Board-adopted internal control 
policy must, at a minimum, comply with 13 CFR 120.460. For example:
    a. The internal control policy implemented must ensure satisfactory 
monitoring and management of the SBA loan portfolio, including but not 
limited to, providing for a periodic loan review function to be 
performed at least annually by a person who is not directly or 
indirectly responsible for loan making or by outside contractors.
    b. It must include a list of monthly reports provided by the SBLC's 
management for Board review to support adequate Board oversight.
    c. It must provide for internal controls for loan making, servicing 
and liquidation.
    d. It must provide for a risk rating system to risk classify SBA 
loan assets satisfactory to SBA.
    e. Internal control policies and procedures must include provisions 
to ensure compliance with SBA's Loan Program Requirements on 
eligibility.
    f. Internal control policies and procedures must include provisions 
to ensure the SBLC exercises due diligence and prudent oversight of its 
third-party vendors, including Lender Service Providers (LSP) and other 
loan Agents. Such policies and procedures should include, but not be 
limited to, monitoring performance of loans referred by an Agent or 
where an Agent provided assistance.
    g. SBLCs must provide documentation demonstrating that the internal 
control policies and procedures are fully implemented and followed.
    4. SBLCs must adhere to their internal policies and procedures for 
originating, closing, servicing, and, when necessary, liquidating SBA 
loans. When SBA procedures require Lenders to follow their own policies 
and procedures on their similarly-sized, non-SBA guaranteed loans, 
SBLCs must follow the written policies and procedures that have been 
reviewed by SBA.
    5. An SBLC may not make a loan to an Applicant that has received 
assistance from an affiliated Small Business Investment Company (SBIC). 
(13 CFR 120.476)

III. Process To Acquire an SBLC License

    Per SBA regulations, to acquire an SBLC license, including a CA 
SBLC license, an entity must (1) purchase one of the existing lending 
authorities from a current SBLC or CA SBLC; or (2) apply for a new SBLC 
license or CA SBLC license when SBA opens an application period for new 
SBLC and/or CA SBLC licenses.

(1) Purchase Existing SBLC Licenses, Including CA SBLC Licenses

    SBA does not participate in facilitating the transfer of an SBLC's 
SBA lending authority. Private party negotiations culminate in a 
definitive purchase and sale agreement which includes the terms and 
conditions related to the transfer of the SBA lending authority. This 
agreement must include provisions which condition the transfer upon the 
prior written approval of the SBA.
    SBA's prior written approval is required per 13 CFR 120.468 for any 
proposed transaction or event that results in a change in ownership or 
control by any entity or person(s) not previously approved by SBA. 
Control as defined in this paragraph means the possession, direct or 
indirect, or the power to direct or cause the direction of the 
management or policies of an SBLC, whether through the ownership of 
voting securities, by contract, or otherwise.
    To obtain written approval, the selling SBLC must send a written 
request or notice of intent to transfer to the [email protected]. The 
written request should include:
    a. The name and address of the acquiring concern; and
    b. The primary name and contact information for the acquiring 
concern's contact.
    The purchasing entity must submit an SBLC Application, as outlined 
below, for SBA's prior written consent with respect to any change of 
ownership or control transaction as specified in 13 CFR 120.468. The 
purchasing entity must also file a request for transfer with 
[email protected].
    For change of control transactions, the Lender will need to reapply 
for any delegated authorities separately.
    If the proposed change of ownership is for less than a majority 
interest, SBA may in its sole discretion limit the items required from 
the Lender in the SBLC Application, as outlined below, to support a 
request for prior written SBA consent.

(2) New SBLC Application Process, Including CA SBLCs

    SBA will issue notices in the Federal Register with information 
regarding the SBLC license application processes, including important 
timelines and procedures. Applicants must complete and submit an SBLC 
Application, as outlined below, during designated application periods.

IV. SBLC Application

    The entity applying for a new SBLC license must submit an executed 
electronic scanned copy (in pdf format) to [email protected] addressing 
each of the elements set forth below (``SBLC Application''). The SBLC 
Application must be complete and organized in tabular format. The 
application must include:
    1. The Legal name, address, telephone, and email address of the 
proposed SBLC;
    2. Identification of the form of organization of the proposed SBLC 
along with file-stamped copies of the concern's certificate of 
incorporation, certificate of formation or certificate of limited 
partnership (as applicable), and a copy of the concern's corporate 
bylaws, limited liability company operating agreement, or limited 
partnership agreement (as applicable);
    3. Identification of the proposed SBLC's capitalization including 
the form of ownership, the identification of all classes of equity 
capital and proposed funding amounts, rights and preferences accorded 
to each class of stock or members interest (including voting rights, 
redemption rights, and rights of convertibility) and conditions for 
transfer, sale, or assignment of these interests;
    4. The proposed SBLC's geographic area of operation;
    5. Identification of all officers, directors, managing partners, 
managing members, and Key Employee(s) of the proposed SBLC, which 
includes senior managers, members of loan committees, and individuals 
who have a meaningful participation in the direction of the operations, 
policies, or financial decisions of the proposed SBLC), and all other 
individuals or entities that propose to hold an equity interest of at 
least 10% of the economic interest in any class of stock or ownership 
interest in the proposed SBLC (such identification should include a 
discussion of any prior SBA experience);
    a. An organization chart showing the relationship of the proposed 
SBLC with all related Associates (see Appendix 3, Definitions) and 
affiliates within the organization;

[[Page 32625]]

    b. All individuals or entities identified in this paragraph must 
submit an executed SBA Form 1081 and either a Form FD-258 (fingerprint 
card) or Electronic Fingerprint Submission. SBA Form 1081 and the Form 
FD-258 or Electronic Fingerprint Submission must be signed and dated 
within 90 days of submission to SBA.
    c. A director or Key Employee of the lender organization is only 
required to submit either Form FD-258 (fingerprint card) or Electronic 
Fingerprint.
    d. Submission if the director or Key Employee answered 
affirmatively to questions 10a, 10b, 10c, 11a and/or 11b on the SBA 
Form 1081. For SBLCs, proof of fidelity insurance coverage as detailed 
in 13 CFR 120.470(e).
    6. A comprehensive business plan that details:
    a. The nature of proposed operations, including the organizational 
units involved in sourcing, evaluating, underwriting, closing, 
disbursing servicing, and liquidating small business loans in the 
organization;
    b. The identification of all sources of capital used to finance 
lending operations;
    c. An operations plan detailing the nature of the Lender's proposed 
loan activity, the volume of activity projected over the first 3 years 
as an SBA Lender, projected balance sheets, income statements and 
statement of cash flows of the Lender, with alternative profit and loss 
scenarios based on run rates equivalent to 70% and 50% of projected 
loan activity, the type and projected amount of financing needed to 
support its lending plan, along with a discussion of Lender's proposed 
wind-down plan in the event the Lender decides to leave the program;
    d. A detailed analysis of the Lender's projected secondary market 
activities during the first 3 years of operation, including a 
sensitivity analysis of the effect any changes in premium from the sale 
of the guaranteed portion of 7(a) loans in SBA's secondary market may 
have on the Lender's prospective earnings. The analysis must also 
include a description of the Lender's plans (if any) to securitize or 
sell participations in the unguaranteed portion of 7(a) loans; and
    e. If the Lender intends to acquire any 7(a) loans, a written plan 
detailing the extent of this acquisition activity in its operating 
plan, and how the Lender will manage the transition of the 7(a) loan 
portfolio;
    7. All documents associated with any type of external financing 
expected to be undertaken by the proposed SBLC;
    8. A written statement from an authorized official of the acquiring 
concern certifying that the SBLC will not be primarily engaged in 
financing the operations of an Affiliate as defined in 13 CFR 121.103.
    9. The most recent audited financial statements of the acquiring 
concern if it has been in operation for more than 1 year, or the 
audited financial statements of the acquiring concern's parent company.
    10. A certified copy of a Board, limited partners, or members 
resolution specifying the individual(s) or official(s) granted the 
authority by the organization to submit this SBLC application;
    11. A certification by the proposed SBLC that it is in full 
compliance with all Federal, State, and local laws;
    12. A written legal opinion of independent counsel (``Independent 
Counsel'' is counsel that is not an Associate of the lender), 
satisfactory to SBA that addresses whether the proposed SBLC:
    a. Is duly formed, organized, and validly existing in good standing 
under the laws of the State of its organization, and is in full 
compliance with all Federal, State, and local laws in connection with 
the formation and organization of the proposed SBLC; and
    b. Has the power, legal right, and authority to enter into the sale 
transaction.

V. Evaluation Process

    SBA reserves the right to deny any entity applying for or proposing 
to acquire an SBLC's SBA lending authority, in its sole discretion. In 
addition to SBA's evaluation of the elements required in the SBLC 
Application, SBA may consider risk factors in its evaluation. These 
factors include, but are not limited to:
     The lending policies of the proposed SBLC, including those 
for non-SBA loans, and their alignment with SBA's mission;
     Historical performance measures (such as default, purchase 
and loss rate);
     Whether the applicant is subject to any legal proceedings, 
enforcement action, order or agreement with a regulator or the presence 
of other related concerns;
     Other performance data associated with the acquiring 
concern or its senior management team, along with other relevant 
information (such as SBA-observed gaps in small business lending not 
served by the existing 7(a) Lender population, including small-dollar 
lending and loans to underserved populations); and
     Affiliation with lenders or lender service providers 
previously sanctioned by SBA.
    In the review process, SBA will not consider the following factors 
in its review:
     Timing of application submission, so long as the 
application is submitted within an open application period.
    Once received, the Director, Office of Financial Program Operations 
(D/OFPO), in consultation with the Director, Office of Credit Risk 
Management (D/OCRM), Director, Office of Financial Assistance (D/OFA), 
Director, Office of Performance and System Management (D/OPSM), and the 
Deputy Associate Administrator of the Office of Capital Access or 
designee, makes the final determination on the application.
    SBA will notify all applicants whether they have been approved. If 
approved, written notification will be provided to the applicant. 
Included with this letter will be SBA Form 750 for execution and return 
to SBA.

VI. Timeline

    The SBLC application period is open as of Thursday, June 1, 2023, 
and SBA will continue accepting applications through 11:59 p.m. Eastern 
time on Monday, July 31, 2023. After such period, SBA will close the 
application period, review and process all applications in accordance 
with the instructions provided above, and award up to three SBLC 
licenses. SBA anticipates issuing the new SBLC licenses in fall of 
2023.

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2023-10310 Filed 5-19-23; 8:45 am]
BILLING CODE 8026-09-P