[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
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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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.
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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
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Number of CA
Year Number of CA pilot lenders Average amount Volume of CA
loans that made a loan of CA loans loans
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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
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Total........................... 8,248 ................. ................. 1,152,473,400
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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
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Percent of
State CA loans
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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
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Table 3--CA Loans to Borrowers in Underserved Markets
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Borrower was women- Borrower was Borrower was
Year Number of CA owned small veteran-owned minority-owned
loans businesses small business small businesses
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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
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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
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Percent of loans
Assistance type Loan count receiving
assistance type
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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
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[[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
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Percent of loans
receiving
Assistance type Assistance hours Loan count assistance mode
and hours
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Group Training............................ 5+ Hours..................... 429 15.08
Group Training............................ 3-5 Hours.................... 119 4.18
Group Training............................ Less Than 3 Hours............ 322 11.32
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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
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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
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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
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Total Web-based Tutorials............. ............................. 906 31.86
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[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
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Year Jobs created Jobs retained Total jobs
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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
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Total.............................................. 32,640 26,897 59,487
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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
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Number of CA Percentage of CA
Year Number of CA loans to new loans to new
loans businesses businesses
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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
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Total.............................................. 8,248 4,766 57.78
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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