[Federal Register Volume 88, Number 192 (Thursday, October 5, 2023)]
[Rules and Regulations]
[Pages 69003-69008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-22185]



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 Rules and Regulations
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  Federal Register / Vol. 88, No. 192 / Thursday, October 5, 2023 / 
Rules and Regulations  

[[Page 69003]]



SMALL BUSINESS ADMINISTRATION

[Docket No. SBA-2023-0011]

13 CFR Part 120


Community Advantage Pilot Program

AGENCY: U.S. Small Business Administration.

ACTION: Notification.

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

SUMMARY: The Small Business Administration (``SBA'' or ``Agency'') is 
sunsetting the Community Advantage Pilot Program effective October 31, 
2023.

DATES: The changes identified in this document take effect October 31, 
2023.

ADDRESSES: You may submit comments, identified by SBA docket number 
SBA-2023-0011, by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov/. 
Follow the instructions for submitting comments.
     Mail: Dianna Seaborn, Office of Financial Assistance, U.S. 
Small Business Administration, 409 Third Street SW, Washington, DC 
20416.
     Hand Delivery/Courier: Dianna Seaborn, 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 Dianna Seaborn, 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: Dianna Seaborn, Office of Financial 
Assistance, Small Business Administration, at (202) 205-3645 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:

1. Background

    As part of its efforts to increase the number of SBA-guaranteed 
7(a) loans made to small businesses in underserved markets, on February 
18, 2011, SBA issued a notice and request for comments introducing the 
Community Advantage (CA) Pilot Program (76 FR 9626). That notice 
provided an overview of the CA Pilot Program requirements and, pursuant 
to the authority provided to SBA under 13 CFR 120.3 to suspend, modify, 
or waive certain regulations in establishing and testing pilot loan 
initiatives, SBA modified or waived as appropriate certain regulations 
which otherwise apply to 7(a) loans for the CA Pilot Program.
    Subsequent notices made changes to the CA Pilot Program to improve 
the program experience for participants, improve their ability to 
deliver capital to underserved markets, and appropriately manage risk 
to the Agency. These notices were issued on the following dates: 
February 18, 2011 (76 FR 9626), 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), and March 2, 
2020 (85 FR 12369). In the notice published September 12, 2018 (the 
``September 2018 Notice''), SBA extended the pilot program to September 
30, 2022, and implemented a temporary moratorium on the acceptance of 
new Community Advantage Pilot Lender Participation Applications (CA 
Pilot Lender Applications) effective October 1, 2018, among other 
changes to the CA Pilot Program. On April 29, 2022, notice 87 FR 25398 
announced SBA's intention to extend the CA Pilot Program through 
September 30, 2024, and to remove the temporary moratorium on the 
acceptance of new CA Lender Applications.
    After evaluating the impact of the CA Pilot Program, 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 (SBLC Rule), 88 FR 21890. In the SBLC Rule, SBA lifted 
the moratorium on licensing new SBLCs and created a new type of SBLC 
called a Community Advantage Small Business Lending Company (CA SBLC). 
The SBLC Rule also provided for the grandfathering of current CA Pilot 
Lenders to be licensed as CA SBLCs with permanent 7(a) lending 
authority. This means when SBA authorizes a CA SBLC license for a CA 
Pilot Lender, the CA Pilot Lender will no longer be making 7(a) loans 
in a temporary pilot program but will instead be making regular 7(a) 
loans under a CA SBLC license in the 7(a) program.
    On May 1, 2023, SBA published Information Notice 5000-846918, 
Community Advantage Small Business Lending Company Conversion, to 
announce that effective May 12, 2023, SBA's Office of Credit Risk 
Management (OCRM) initiated a program to enable current CA Pilot 
Lenders to become CA SBLCs. This notice also communicated to Lenders 
that SBA intended to sunset the CA Pilot Program on September 30, 2023.
    SBA issued a notice and request for comments on May 22, 2023, 88 FR 
32623, SBLC Application Process, to announce that SBA's Office of 
Capital Access (OCA) opened the application period for new SBLC 
licenses from June 1, 2023, to July 31, 2023, and shared the process by 
which interested entities may apply. SBA also announced in this notice 
that the CA Pilot Program will sunset on September 30, 2023.

2. CA Pilot Program Will Sunset October 31, 2023

    As described above, SBA has previously announced on two separate 
occasions that the CA Pilot Program will sunset on September 30, 2023. 
The purpose of this notice is to provide a third and final public 
notice of the CA Pilot Program's termination. Although the previous 
notices announced the termination of the CA Pilot Program on September 
30, 2023, the termination date has been extended and will now be 
October 31, 2023.

[[Page 69004]]

3. Program Evaluation

    On April 1, 2022, SBA published a Notice in the Federal Register 
to, among other things, extend the term of the CA Pilot Program. In 
this notice, SBA stated that it will evaluate the CA Pilot Program to 
determine whether it should be made permanent, with evaluation criteria 
including, but not limited to, whether the pilot is achieving its 
objective(s), impact on job creation and retention, impact on business 
creation and/or business expansion, whether the costs (including 
losses) of the pilot are within an acceptable range, and portfolio 
performance as it relates to other 7(a) programs. SBA's program 
evaluation, found that the record on both job creation and retention 
and business creation and expansion, as discussed in this analysis, is 
unclear. While administrative and subsidy costs to SBA of the pilot 
program are unknown, indicators, such as hours spent on counseling and 
the riskiness of CA loans, are consistent with higher costs in both 
categories. Portfolio measures such as early loan problem rates, 
default rates, and Small Business Risk Portfolio (SBPS) Scores compare 
unfavorably with other 7(a) programs.
    CA Pilot Program evaluation results:
    A. General Community Advantage characteristics.
    B. Increased access to credit for small businesses in underserved 
markets.
    C. How have CA Pilot Lenders provided management and technical 
assistance to CA Pilot Program borrowers.
    D. CA Pilot Program and job creation/retention and business 
creation/retention.
    E. Are CA Pilot Program costs in an acceptable range?
    F. How does CA Pilot Program portfolio performance relate to other 
7(a) programs?

A. General Community Advantage Characteristics

    As Table 1 indicates, the number of CA Pilot Lenders that made 
loans in a fiscal year has ranged from 22 in its first full year to a 
high of 75 in 2018 and 2019. Unique CA Pilot Lenders in the period of 
the program's existence number 121. CA Pilot Lenders have made a total 
of 8,248 loans to businesses totaling over $1.1 billion over the life 
of the program. Average loan size on an annual basis has ranged from 
$124,665 in 2014 to $176,937 in 2023, for a mean annual average of 
$140,728. In percentage terms, the annual averages have ranged from 89 
percent of the mean annual average in 2014 to 26 percent above that 
mean for the first five months of 2023.

                                     Table 1--CA Loans, Lenders, and Amounts
----------------------------------------------------------------------------------------------------------------
                                                           Number of  CA
                Year                    Number of  CA      pilot lenders      Average amount     Volume of  CA
                                            loans         that made a loan     of CA loans           loans
----------------------------------------------------------------------------------------------------------------
2011................................                 15                  5            142,853          2,142,800
2012................................                188                 22            134,260         25,240,900
2013................................                273                 34            139,926         38,199,800
2014................................                453                 46            124,665         56,473,500
2015................................                828                 64            125,019        103,516,100
2016................................                988                 69            124,671        123,175,000
2017................................              1,043                 74            131,923        137,595,500
2018................................              1,118                 75            140,903        157,529,200
2019................................                947                 75            141,302        133,813,400
2020................................                538                 67            141,663         76,214,700
2021................................                565                 64            146,609         82,834,100
2022................................                717                 63            158,995        113,999,400
2023................................                575                 53            176,937        101,739,000
                                     ---------------------------------------------------------------------------
    Total...........................              8,248  .................  .................      1,152,473,400
----------------------------------------------------------------------------------------------------------------

B. Increased Access

    The purpose of the CA Pilot Program is to promote lending by 
mission-oriented lenders, primarily non-profit financial intermediaries 
that operate in underserved markets. SBA assessed the performance of 
this objective by examining the number of new Lenders in the 7(a) 
market enabled by this pilot program and the amount of CA loans made to 
borrowers in underserved markets, which includes veteran-owned and 
women-owned businesses, loans to new businesses, and businesses in 
rural areas.
    Over the period of CA Pilot Program, 121 unique CA Pilot Lenders 
have made CA loans. Of the CA loans, 30.98 percent were made to small 
businesses owned by women, 7.84 percent to veteran-owned small 
businesses, and 36.58 percent to small businesses owned by racial and 
ethnic minorities, with 11.00 percent of the CA loans going to small 
businesses with owners of undetermined ethnicity. Further, 12.25 
percent of loans went to small businesses located in rural areas, with 
rural location defined in accordance with 13 CFR 120.10 as a political 
subdivision or unincorporated area in a non-metropolitan county (as 
defined by the Department of Agriculture), or, if in a metropolitan 
county, any such subdivision or area with a resident population under 
20,000 which is designated by SBA as rural. For 7(a) loans other than 
CA loans, the numbers were 17.56 percent for small businesses owned by 
women, 18.10 percent for veteran-owned small businesses, 25.48 percent 
to small businesses owned by racial and ethnic minorities,15.47 percent 
going to small businesses with owners of undetermined ethnicity, and 
18.10 percent for rural small businesses. For underserved borrowers, 
the picture of access has been mixed. Table 2 shows numbers of loans to 
women-owned small businesses, veteran-owned small businesses, and 
minority owned small businesses. The numbers may double-count some 
categories, such as businesses that qualify for two or all three 
categories.
    A measure of increased access is the geographic distribution of the 
number of CA loans in Table 2. Two states--California and Texas--with a 
combined total of just over 20 percent of the US population, account 
for over 40 percent of the number of CA loans made. This imbalance 
could indicate an uneven distribution of the lending activity, or it 
could indicate that there are more

[[Page 69005]]

borrowers in the underserved category living in these two states.

                Table 2--Percentage of CA Loans by State
------------------------------------------------------------------------
                                                              Percent of
                            State                              CA loans
------------------------------------------------------------------------
California..................................................       30.80
Texas.......................................................       10.90
Ohio........................................................        6.46
New York....................................................        5.60
New Jersey..................................................        4.27
Wisconsin...................................................        4.11
North Carolina..............................................        4.00
Arizona.....................................................        3.95
Florida.....................................................        3.04
Georgia.....................................................        2.16
Colorado....................................................        2.15
Michigan....................................................        1.98
Illinois....................................................        1.65
Indiana.....................................................        1.64
Nevada......................................................        1.19
All others..................................................       16.11
------------------------------------------------------------------------


                              Table 3--CA Loans to Borrowers in Underserved Markets
----------------------------------------------------------------------------------------------------------------
                                                       Borrower was women-    Borrower was       Borrower was
               Year                    Number of CA        owned small       veteran-owned      minority-owned
                                          loans            businesses        small business    small businesses
----------------------------------------------------------------------------------------------------------------
2011..............................                 15                   4                  0                   2
2012..............................                188                  43                  9                  32
2013..............................                273                  77                 15                  73
2014..............................                453                 116                 21                 151
2015..............................                828                 249                 61                 293
2016..............................                988                 317                 69                 324
2017..............................              1,043                 308                 92                 350
2018..............................              1,118                 331                110                 418
2019..............................                947                 307                 88                 355
2020..............................                538                 153                 47                 190
2021..............................                565                 180                 35                 233
2022..............................                717                 260                 58                 321
2023..............................                575                 210                 42                 275
----------------------------------------------------------------------------------------------------------------

    As shown in Table 3, the number of veteran-owned small business 
loans has not risen above 10 percent of the number of CA loans in any 
year of the pilot program. Women-owned businesses have received between 
26 percent and 36 percent of CA loans and minority-owned businesses 
have received a quarter of the loans since FY 2013 and over 40 percent 
in the post-pandemic years.

C. Management and Technical Assistance

    Data gathered from the addendum to SBA Form 1919, ``Borrower 
Information Form'', submitted by lenders to SBA, indicate that 
borrowers have requested management and technical assistance over the 
period of the pilot program on 2,968 unique CA loans, or 35.98 percent 
of the loans. The addendum did not separate SBA-provided training from 
that provided by CA Pilot Lenders. The most common assistance type was 
Financing/Capital followed by Business Plan assistance. Some loans 
involved multiple types of assistance and these two categories were 
both involved in over half of the loans.

                     Table 4--CA Assistance by Type
------------------------------------------------------------------------
                                                       Percent of loans
         Assistance type               Loan count          receiving
                                                        assistance type
------------------------------------------------------------------------
Financing/Capital................              1,860               62.67
Business Plan....................              1,561               52.59
Start-up Assistance..............              1,122               37.80
Cash Flow Management.............                960               32.35
Business Accounting/Budget.......                828               27.90
Marketing/Sales..................                696               23.45
Managing Business................                694               23.38
Legal Issues.....................                308               10.38
Tax Planning.....................                277                9.33
Customer Relations...............                265                8.93
Human Resources/Employees........                242                8.15
Other............................                230                7.75
Technology Computers.............                176                5.93
Buy/Sell Business................                165                5.56
eCommerce........................                152                5.12
Franchising......................                119                4.01
Government Contracting...........                113                3.81
International Trade..............                 27                0.91
------------------------------------------------------------------------


[[Page 69006]]

    Modes of delivery included group training, one-on-one counseling, 
telephone counseling, and web-based tutorials. One-on-one counseling 
was the most frequently employed mode, with over 80 percent of loans 
benefiting from this type of counseling and with over 36 percent of 
loans involving 5 or more hours. A borrower may have used more than one 
mode of delivery. Telephone Counseling was the second most common mode 
of delivery.

                            Table 5--Modes of Delivery for Assistance to CA Borrowers
----------------------------------------------------------------------------------------------------------------
                                                                                               Percent of loans
                                                                                                   receiving
              Assistance type                      Assistance hours            Loan count       assistance mode
                                                                                                   and hours
----------------------------------------------------------------------------------------------------------------
Group Training............................  5+ Hours.....................                429               15.08
Group Training............................  3-5 Hours....................                119                4.18
Group Training............................  Less Than 3 Hours............                322               11.32
                                           ---------------------------------------------------------------------
    Total Group Training..................  .............................                870               30.59
One-on-one Counseling.....................  5+ Hours.....................              1,037               36.46
One-on-one Counseling.....................  3-5 Hours....................                604               21.24
One-on-one Counseling.....................  Less Than 3 Hours............                645               22.68
                                           ---------------------------------------------------------------------
    Total One-on-one Counseling...........  .............................              2.286               80.38
Telephone Counseling......................  5+ Hours.....................                649               22.82
Telephone Counseling......................  3-5 Hours....................                529               18.60
Telephone Counseling......................  Less Than 3 Hours............                607               21.34
                                           ---------------------------------------------------------------------
    Total Telephone Counseling............  .............................              1,785               62.76
Web-based Tutorials.......................  5+ Hours.....................                340               11.95
Web-based Tutorials.......................  3-5 Hours....................                208                7.31
Web-based Tutorials.......................  Less Than 3 Hours............                358               12.59
                                           ---------------------------------------------------------------------
    Total Web-based Tutorials.............  .............................                906               31.86
----------------------------------------------------------------------------------------------------------------

                                                                                              [GRAPHIC] [TIFF OMITTED] TR05OC23.065
                                                                                              
D. CA Pilot Program and Job Creation/Retention and Business Creation/
Retention

    Jobs created plus jobs retained over the life of CA Pilot Program 
total 59,487. This number represents 0.81 percent of the overall 7(a) 
portfolio of jobs. CA lending represents 0.39 percent of total 7(a) 
dollars approved; therefore, CA Pilot Program appears to be performing 
better than average when considering the number of jobs created and 
retained relative to dollars in loans. However, comparison with other 
7(a) loan delivery methods, which have different equity and other loan 
criteria and, hence, lower lending risk, as discussed below, is not 
insightful. In Table 6, jobs created represent 54.87 percent or most of 
the total jobs in the CA portfolio. For comparison, jobs created 
represent 33.84 percent of the SBA Express loan jobs, while jobs 
retained account for the remainder.

                           Table 6--CA Pilot Program Jobs Created and Retained by Year
----------------------------------------------------------------------------------------------------------------
                          Year                              Jobs created      Jobs retained        Total jobs
----------------------------------------------------------------------------------------------------------------
2011...................................................                 61                122                183
2012...................................................                763                936              1,649
2013...................................................              1,015              1,085              2,100

[[Page 69007]]

 
2014...................................................              1,563              1,473              3,036
2015...................................................              3,588              3,106              6,694
2016...................................................              3,834              2,861              6,695
2017...................................................              4,298              3,632              7,930
2018...................................................              4,886              4,437              9,323
2019...................................................              3,707              2,736              6,443
2020...................................................              1,703              1,878              3,581
2021...................................................              2,068              1,334              3,402
2022...................................................              2,723              1,631              4,354
2023...................................................              2,431              1,666              4,097
                                                        --------------------------------------------------------
    Total..............................................             32,640             26,897             59,487
----------------------------------------------------------------------------------------------------------------

    Over the term of CA Pilot Program's activities, 57.78 percent of CA 
loans have been to new businesses, defined as in operations for 2 years 
or less. The percentage of CA loans going to new businesses has 
generally increased over the life of the program, as shown in Table 7.

                                    Table 7--CA Loans to New Small Businesses
----------------------------------------------------------------------------------------------------------------
                                                                               Number of CA     Percentage of CA
                          Year                              Number of CA       loans to new       loans to new
                                                               loans            businesses         businesses
----------------------------------------------------------------------------------------------------------------
2011...................................................                 15                  7              46.67
2012...................................................                188                 89              47.34
2013...................................................                273                134              49.08
2014...................................................                453                239              52.76
2015...................................................                828                423              51.09
2016...................................................                988                487              49.29
2017...................................................              1,043                580              55.61
2018...................................................              1,118                658              58.86
2019...................................................                947                576              60.82
2020...................................................                538                304              56.51
2021...................................................                565                394              69.73
2022...................................................                717                501              69.87
2023...................................................                575                374              65.04
                                                        --------------------------------------------------------
    Total..............................................              8,248              4,766              57.78
----------------------------------------------------------------------------------------------------------------

E. CA Pilot Program Costs

    SBA does not disaggregate 7(a) administrative or subsidy costs. 
Therefore, the agency cannot determine if these costs are in an 
acceptable range. As the following section indicates, loans in the CA 
Pilot Program have characteristics that are consistent with higher 
administrative and subsidy costs. Specifically, the early problem loan 
rate for CA loans has been and remains significantly higher than for 
other 7(a) loans, including other small loans, and the SBPS Score for 
CA loans has remained in the high-risk range during the entire 
existence of the CA Pilot Program.

F. CA Pilot Program Portfolio Performance

    A standard metric for loan portfolio performance is the early 
problem loan rate. This rate is the percentage of the gross amount of 
loans that have been in place for 36 months or less that have had 
either a deferred, delinquent (60 or more days past due), liquidated, 
purchased, or charged off status within 18 months of disbursement. SBA 
defines the threshold for higher risk loans as 4 percent or higher. For 
CA loans, the early problem loan rate has been above 4 percent since 
the first quarter of FY 2014 and has more than doubled to 8 percent in 
FY 2016. This increase is on pace with CA Pilot Program's expansion 
(see Table 1). Since FY 2016, the early problem loan rate has not 
dropped below 7 percent, and the average of annual early problem loan 
rates over the life of CA Pilot Program through the second quarter of 
FY 2023 is 8.28 percent. For comparison, the early problem loan rate 
for the entire 7(a) portfolio over the same period is 2.61 percent and 
for non-CA Pilot Program 7(a) loans of $250,000 or less, the rate is 
3.10 percent. SBA compared CA Pilot Program loans with non-CA Pilot 
Program 7(a) loans of $250,000 or less because for the duration of the 
CA Pilot Program (until May 2023), the maximum loan amount for a CA 
Pilot Program loan was $250,000. Default rates for CA loans have also 
been higher. Quarterly default rates over a five-year period from March 
2013 to March 2018 average 2.07 percent for CA loans, compared to 0.76 
percent for the 7(a) portfolio. The averages for non-CA Pilot Program 
7(a) loans of $250,000 or less and non-CA Pilot Programs 7(a) loans to 
underserved markets of $250,000 or less were 1.04 percent and 1.15 
percent, respectively.
    Another metric for comparison is the Small Business Risk Portfolio 
Solution (SBPS) Score, which assesses the likelihood of debt 
delinquency in the next 12 to 24 months. A higher measurement means 
lower risk of debt delinquency, with a score of below 180 defined as 
high risk. At the end of Q2 in FY 2023, the SBPS Score for CA loans was 
170.94, well below the overall 7(a) score of 203.51 and below the score 
of 182.27 for non-CA Pilot Program 7(a) loans of $250,000 or less. The 
SBPS

[[Page 69008]]

Score for CA loans has never broken the 180 threshold score over the 
period of CA Pilot Program. In contrast, the SBPS Score for the 7(a) 
portfolio has not fallen below 180 for over the period of CA Pilot 
Program. SBPS Scores have averaged 172.62 for CA loans over the time of 
the pilot program, 180.2 for 7(a) loans of $250,000 or less, and 191.09 
for the 7(a) portfolio over the same period.

4. General Information

    Questions regarding the CA Pilot Program may be directed to the 
local SBA district office. The local SBA district office may be found 
at http://www.sba.gov/about-offices-list/2.

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

Isabella Guzman,
Administrator.
[FR Doc. 2023-22185 Filed 10-4-23; 8:45 am]
BILLING CODE 8026-09-P