[Federal Register Volume 88, Number 196 (Thursday, October 12, 2023)]
[Rules and Regulations]
[Pages 70580-70586]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-22169]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 120

RIN 3245-AH78


Debt Refinancing in the 504 Loan Program

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: SBA is adopting with changes the interim final rule published 
in the Federal Register on July 29, 2021. That interim final rule 
implemented section 328 of the Economic Aid to Hard-Hit Small 
Businesses, Nonprofits, and Venues Act, which modified the requirements 
for refinancing debt in the 504 Loan Program, as set forth in section 
521(a) of title V of division E of the Consolidated Appropriations Act, 
2016 and section 502(7) of the Small Business Investment Act of 1958. 
The modifications included: increasing the amount of existing 
indebtedness that may be refinanced for 504 debt refinancing involving 
expansions; and for 504 debt refinancing not involving expansions, 
removing two limitations on the program, reinstating an alternate job 
retention standard for the refinancing project, revising the definition 
of qualified debt, and removing the prohibition against Certified 
Development Companies (CDCs) participating in the Premier Certified 
Lenders Program using their delegated authority to make these loans.

DATES: The effective date of this final rule is November 13, 2023.

FOR FURTHER INFORMATION CONTACT: Gregorius Suryadi, Senior Financial 
and Loan Specialist, 504 Program Branch, Office of Financial 
Assistance, Small Business Administration, 409 3rd Street SW, 
Washington, DC 20416; telephone: (202) 205-6806; email: 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

    The 504 Loan Program is an SBA financing program authorized under 
title V of the Small Business Investment Act of 1958, 15 U.S.C. 695 et 
seq. The core mission of the 504 Loan Program is to provide long-term 
financing to small businesses for the purchase or improvement of land, 
buildings, and major equipment, in an effort to facilitate the creation 
or retention of jobs and local economic development. Under the 504 Loan 
Program, loans are made to small business applicants by Certified 
Development Companies (``CDCs''), which are certified and regulated by 
SBA to promote economic development within their community. In general, 
a project in the 504 Loan Program (a ``504 Project'') includes: a loan 
obtained from a private sector lender with a senior lien covering at 
least 50 percent of the project cost; a loan obtained from a CDC (a 
``504 Loan'') with a junior lien covering up to 40 percent of the total 
cost (backed by a 100 percent SBA-guaranteed debenture); and a 
contribution from the Borrower of at least 10 percent equity.
    In addition, the 504 Loan Program may be used to refinance debt 
under two options authorized under section 502(7)(B) and (C) of the 
Small Business Investment Act of 1958. First, if a 504 Project involves 
the expansion of the small business, any amount of existing 
indebtedness that does not exceed 50 percent of the project cost of the 
expansion may be refinanced and added to the project's cost (Debt 
Refinancing with Expansion) under the conditions set forth in section 
502(7)(B) and the implementing regulations. See 13 CFR 120.882(e) and 
(f). Second, debt refinancing is available for a 504 Project that does 
not involve the expansion of the small business under the requirements 
set forth in section 502(7)(C) and 13 CFR 120.882(g) (Debt Refinancing 
without Expansion).

[[Page 70581]]

    Section 328(a) of the Economic Aid to Hard-Hit Small Businesses, 
Nonprofits, and Venues Act (Economic Aid Act), enacted December 27, 
2020, Public Law 116-260, revised the conditions and requirements for 
refinancing debt in the 504 Loan Program as follows:
    (1) With respect to Debt Refinancing with Expansion, 13 CFR 
120.882(e), the Economic Aid Act increased the amount of existing 
indebtedness that may be refinanced as part of a 504 Project from not 
more than 50 percent of the project cost of the expansion to not more 
than 100 percent of the project cost;
    (2) With respect to Debt Refinancing without Expansion, 13 CFR 
120.882(g), the Economic Aid Act:
    (a) Eliminated the condition that this program shall only be in 
effect in any fiscal year during which the cost to the Federal 
Government of making guarantees under 13 CFR 120.882(g) and under the 
504 Loan Program is zero;
    (b) Eliminated the requirement that a CDC limit its financing under 
the 504 Loan Program so that, during any Federal fiscal year, new 
financings under 13 CFR 120.882(g) do not exceed 50% of the dollars the 
CDC loaned under the 504 Loan Program, including under 13 CFR 
120.882(g), during the previous fiscal year, unless otherwise waived;
    (c) Eliminated the prohibition against Premier Certified Lender 
Program (PCLP) CDCs using delegated authority to approve loan 
applications for Debt Refinancing without Expansion;
    (d) Reinstated an alternate job retention standard that was 
previously removed from the Debt Refinancing without Expansion Program 
by section 521 of division E of the Consolidated Appropriations Act, 
2016 (2016 Consolidated Appropriations Act), enacted on December 18, 
2015, Public Law 114-113;
    (e) Revised the definition of ``qualified debt'' to mean debt that 
was incurred not less than six months before the date of application 
instead of two years before the date of application;
    (f) Removed from the definition of ``qualified debt'' condition 
that the debt not be subject to a guarantee by a Federal agency; and
    (g) Eliminated from the definition of ``qualified debt'' the 
requirement that the borrower be current on all payments for not less 
than one year before the date of the application for refinancing.
    As described in the section-by-section analysis below, SBA is 
issuing this final rule to adopt the previously published interim final 
rule and to conform the current rules to the requirements of the 
Economic Aid Act.

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

    On July 29, 2021, SBA published in the Federal Register an interim 
final rule implementing section 328(a) of the Economic Aid Act. 86 FR 
40775. Although effective immediately, the interim final rule included 
a request for comments seeking input from the public. The comment 
period for the interim final rule was open from July 29, 2021, until 
October 8, 2021. SBA received 79 comments of which many were 
duplicative. Of the unique comments received, two were from national 
trade associations, 68 were from Certified Development Companies, one 
(1) was from a bank, one (1) from a private industry, and four (4) from 
individuals. This section includes a description of the comments 
received and is organized by the rules being revised. SBA received 
comments from a national trade association and 63 CDCs recommending 
changes beyond the scope of this rule that will not be addressed in 
this final rule.

III. Section-by-Section Analysis

    Section 120.882(e). In the interim final rule SBA revised this 
provision by increasing the amount of existing indebtedness that may be 
refinanced to no more than 100 percent of the project cost (from 50 
percent of the project cost) to conform with the amendments to section 
502(7)(B) of the Small Business Investment Act made by section 
328(a)(2)(A) of the Economic Aid Act. SBA did not receive any comments 
on this change and is adopting this change as set forth in the interim 
final rule.
    Section 120.882(g)(3). In the interim final rule SBA removed the 
requirement that the approval of a Refinancing Project is subject to 
the requirement that the cost to the Federal Government of making 
guarantees under 13 CFR 120.882(g) and under the 504 Loan Program is 
zero during the fiscal year in which the guarantee is made in 
accordance with section 328(a)(1) of the Economic Aid Act, which 
repealed this statutory requirement set forth in the 2016 Consolidated 
Appropriations Act.
    In its place SBA inserted a provision that set forth the conditions 
and requirements that apply to the refinancing of a loan that is 
subject to a guarantee by a Federal agency or department. As indicated 
above, the Economic Aid Act removed the prohibition against refinancing 
a loan that is subject to a guarantee by a Federal agency or 
department. Although these loans may now be refinanced if the 
refinancing project does not involve expansion, the loan must comply 
with the following conditions and requirements:
    (1) for an existing 504 loan, either both the Third Party Loan and 
the 504 loan must be refinanced, or the Third Party Loan must have been 
paid in full; and
    (2) for an existing 7(a) loan, the CDC must verify in writing that 
the present lender is either unwilling or unable to modify the current 
payment schedule. In addition, in the case of same institution debt, if 
the Third Party Lender or the CDC affiliate as authorized under 13 CFR 
120.820 is the 7(a) lender, the loan will be eligible for 504 
refinancing only if the lender is unable to modify the terms of the 
existing loan because a secondary market investor will not agree to 
modified terms.
    (3) the refinancing of any federally-guaranteed loan must provide a 
substantial benefit to the borrower. ``Substantial benefit'' means that 
the portion of the new installment amount attributable to the debt 
being refinanced must be at least 10 percent less than the existing 
installment amount(s). Prepayment penalties (including any subsidy 
recoupment fee), financing fees, and other financing costs must be 
added to the amount being refinanced in calculating the percentage 
reduction in the new installment payment. The portion of the new 
installment amount attributable to Eligible Business Expenses will not 
need to be included in this calculation. The rule allows the Director, 
Office of Financial Assistance (D/FA) or designee, to approve an 
exception to the 10 percent reduction requirement for good cause and 
does not allow PCLP CDCs to use their delegated authority to approve a 
loan requiring this exception.
    SBA received 66 comments on this rule change, of which 50 supported 
the rule change with modifications. There were no comments opposing the 
rule change.
    A national trade association and its member CDCs requested that SBA 
not include in regulation any conditions or requirements that restrict 
or limit the ability to refinance a loan that is subject to a guarantee 
by a Federal agency or department as no such conditions or restriction 
exists in statute or in the Economic Aid Act (EAA) update.
    The national trade association and its member CDCs also recommended 
that SBA remove the requirement that CDCs obtain written verification 
of the existing 7(a) lender's inability or unwillingness to modify the 
current payment schedule as a requirement to allowing the refinance of 
an existing 7(a) loan. The national trade association

[[Page 70582]]

asked that the ability to refinance an existing 7(a) loan be unfettered 
and guided by what is in the best interest of the borrower.
    Another national trade association proposed safeguards of 
increasing the substantial benefit requirement for both 7(a) and 504 
programs, which include, but are not limited to, the SBA issuing 
specific guidance on the underwriting for both programs. In addition, 
to protect the borrower from paying additional and significant fees, 
the national trade association recommended the SBA limit fees for new 
504 loans. SBA feels that increasing the substantial benefit 
requirement as requested in a rising interest rate environment would 
not be in the best interest of the small business borrower.
    Based on the public comments received, SBA is revising this rule to 
remove the requirement that CDCs and 7(a) lenders be given the 
opportunity to modify existing debt. Instead, SBA is transferring the 
burden of contacting the CDC or 7(a) lender whose debt is being 
refinanced from the borrower to the CDC that will be packaging the 504 
loan for the borrower. The revised rule requires the CDC to notify in 
writing (by email or letter) the existing CDC or 7(a) lender to advise 
them in advance when a government guaranteed loan is being refinanced.
    Section 120.882(g)(11). In the interim final rule SBA removed the 
section that states PCLP CDCs may not use delegated authority to 
approve refinancing under 13 CFR 120.882(g), in accordance with section 
328(a) of the Economic Aid Act, which removed this statutory 
prohibition. In its place, the interim final rule stated that PCLP CDCs 
may not approve the refinancing of same institution debt under their 
delegated authority and must submit the loan to SBA for approval. This 
requirement is consistent with SBA's long-standing policy of 
prohibiting its participating lenders from using their delegated 
authority to approve the financing of same institution debt due to the 
potential conflict of interest and the risk of the 504 loan proceeds 
being used to shift to SBA a potential loss from the existing debt. SBA 
did not receive any comments on this change and is adopting this change 
as set forth in the interim final rule.
    Section 120.882(g)(15). In the interim final rule SBA redesignated 
paragraph (g)(15), Definitions, as paragraph (g)(16), and added a new 
paragraph (g)(15) to set forth the alternate job retention standard 
that was reinstated by section 328(a) of the Economic Aid Act. Under 
this alternate job retention standard, for a Refinancing Project under 
13 CFR 120.882(g) the debt does not need to meet the job creation or 
other economic development objectives set forth in 13 CFR 120.861 or 
120.862, provided that the 504 loan does not exceed the product 
obtained by multiplying the number of employees of the borrower by 
$75,000. On May 11, 2023, SBA published in the Federal Register a 
notice announcing an increase to the job creation or retention 
standards for the 504 Loan Program to reflect increases in the Consumer 
Price Index (CPI) for All Urban Consumers. 88 FR 30379. This included 
increasing the amount per Job Opportunity that a 504 Loan Project must 
create or retain from $75,000 to $90,000. Accordingly, the amount set 
forth in 13 CFR 120.882(g)(15) is adjusted from $75,000 to $90,000.
    The alternate job retention standard provides that the number of 
employees of a borrower is equal to the sum of:
    (1) the number of full-time employees of the borrower on the date 
on which the borrower applies for a loan under this subparagraph; and
    (2) the product obtained by multiplying:
    (a) the number of part-time employees of the borrower on the date 
on which the borrower applies for a loan under this subparagraph, by
    (b) the quotient obtained by dividing the average number of hours 
each part-time employee of the borrower works each week by 40.
    An example of how this standard is calculated is included in the 
text of the rule.
    SBA did not receive any comments on this adjustment. The final rule 
adopts the interim final rule with one change, namely an increase in 
the amount per Job Opportunity that a 504 Loan Project must create from 
$75,000 to $90,000 as per SBA's announcement in the Federal Register on 
May 11, 2023.
    Section 120.882(g)(16). As stated above, SBA redesignated paragraph 
(g)(15), Definitions, as paragraph (g)(16) and made five changes to the 
definition of ``Qualified debt''. First, paragraph (i) of the 
definition of ``Qualified debt'' (redesignated as paragraph (A)) 
previously required that the debt must not have been incurred less than 
two years before the date of the application for refinancing. However, 
section 328(a) of the Economic Aid Act shortened this period to six 
months before the date of the application for refinancing. Accordingly, 
SBA revised this paragraph by replacing two years with six months.
    Second, paragraph (i) of the definition of ``Qualified debt'' 
(redesignated as paragraph (A)) previously allowed a loan that was 
refinanced within the two years before the date of application (the 
most recent loan) to be deemed incurred not less than two years before 
the date of the application provided that the effect of the most recent 
loan was to extend the maturity date without advancing any additional 
proceeds. With the minimum age of the qualified debt shortened from two 
years to six months, SBA believed that it was no longer necessary to 
address this situation and therefore SBA removed the second and third 
sentences of paragraph (i) (redesignated as paragraph (A)).
    Third, paragraph (ii) of the definition of ``Qualified debt'' 
previously excluded debt that was subject to a guarantee by a Federal 
agency or department. As stated above, section 328(a) of the Economic 
Aid Act removed this statutory exclusion and SBA consequently removed 
this paragraph and renumbered the remaining paragraphs accordingly. The 
conditions and requirements that apply to the refinancing of a loan 
that is subject to a Federal guarantee are set forth in paragraph 
(g)(3).
    Fourth, paragraph (vi) of the definition of ``Qualified debt'' 
previously excluded a Third Party Loan that is part of an existing 504 
Project. However, under the new paragraph (g)(3), an existing 504 loan 
may be refinanced when both the Third Party Loan and the 504 loan are 
being refinanced. Accordingly, SBA revised this paragraph, which was 
redesignated as paragraph (E), to incorporate this exception to the 
general prohibition against a qualified debt including a Third Party 
Loan.
    Fifth, paragraph (vii) of the definition of ``Qualified debt'' 
previously reflected the statutory requirement that, for the debt to 
qualify for refinancing, the applicant had to be current on all 
payments due for not less than one year preceding the date of 
application. Because section 328(a) of the Economic Aid Act removed 
this requirement from section 502(7)(C) of the Small Business 
Investment Act, SBA removed this paragraph from the regulations. In 
accordance with prudent lending standards, SBA expects CDCs to consider 
whether the applicant is current on all payments due, and the 
applicant's history of delinquency, in its credit analysis. SBA did not 
receive any comments on these specific revisions and is adopting the 
revisions as set forth in the interim final rule.
    SBA did however receive comments from a national trade association 
and its member CDCs requesting that SBA lower the Qualified debt 
definition's standard of ``substantially all (85% or

[[Page 70583]]

more)'' to a ``majority'' standard of 51% or more to increase access to 
and utilization of 504 debt refinancing. SBA agrees that a decrease to 
the ``substantially all'' standard would increase refinancing 
opportunities for small businesses. Neither the Small Business Act nor 
the Small Business Investment Act define or test for ``substantially 
all.'' The 85% ``substantially all'' standard in paragraph (g) was 
established with regulations implementing section 1122 of the Small 
Business Jobs Act of 2010. 76 FR 9213. SBA is modifying the 
``substantially all'' definition to 75% from 85% with the remainder 
being adjusted to 25% from 15%. SBA has determined that ``substantially 
all'' is not 51%.
    Finally, the phrase ``Same institution debt'' was previously used 
with Debt Refinancing without Expansion only in reference to the Third 
Party Loan, see 13 CFR 120.882(g)(13), and, thus, the definition of 
``same institution debt'' referenced only the Third Party Lender. With 
the requirement in 13 CFR 120.882(g)(11) that PCLP CDCs cannot use 
their delegated authority to approve the refinancing of same 
institution debt in the Debt Refinancing without Expansion program, SBA 
revised the definition of ``Same institution debt'' to also mean the 
debt of the CDC (or its affiliates) that is providing funds for the 
refinancing. SBA did not receive any comments on this change and is 
adopting this change as set forth in the interim final rule.
    Section 120.883(e). SBA currently allows certain administrative 
costs that are not part of Project costs to be paid with the proceeds 
of the 504 loan and the Debenture. 13 CFR 120.882. This includes CDC 
Closing Fees up to a maximum of $2,500. 13 CFR 120.882(e).
    Since the publication of the interim final rule SBA conducted a 
series of roundtable discussions with CDCs and lenders at annual and 
regional events. In alignment with the adjustment with jobs created/
retained due to the CPI, SBA received multiple comments during the 
regional roundtables for an inflation adjustment also to update Sec.  
120.883, Eligible administrative costs for 504 loans, in paragraph (e) 
which currently limits of the amount of CDC closing fees allowed to be 
included in 504 financing portion of a project to be capped at $2,500. 
In alignment with these changes and in an attempt to keep the limit of 
CDC closing costs relevant to administrative costs, SBA is proposing an 
increase to the legal fees. According to the public comments, this cap 
does not reflect current administrative costs and creates a burden on 
the borrower to pay for closing expenses from its own account. In the 
final rule, SBA increases the amount from $2,500 to $10,000.

Compliance With Executive Orders 12866, 12988, 13132, and 13563, the 
Congressional Review Act (5 U.S.C. 801-808), Paperwork Reduction Act 
(44 U.S.C., Ch. 35), and the Regulatory Flexibility Act (5 U.S.C. 601-
612)

Executive Orders 12866 and 13563

    The Office of Management and Budget (OMB) has determined that this 
rule constitutes a ``significant regulatory action'' for purposes of 
Executive Orders 12866 and 13563. SBA, however, is proceeding under the 
emergency provision at Executive Order 12866, section 6(a)(3)(D), based 
on the need to move expeditiously to mitigate the current conditions 
arising from the COVID-19 pandemic.
    As shown in Table 1 below, during the five-year period spanning 
fiscal year (FY) 2018 and FY 2022, a total of 38,022 504 loans were 
approved for a total gross approval amount as of September 30, 2022, of 
$32,965,182,830. In addition, during this five-year period, SBA 
approved 247 debt refinance with expansion loans on average per year 
with an average annual dollar volume of $309,165,400, and approved 451 
debt refinance without expansion loans on average per year with an 
average annual dollar volume of $469,596. The Economic Aid Act passage 
increased the debt refinance with expansion from 50 percent of a 
project to 100 percent of a project. Prior to this change, of the debt 
refinance with expansion loans, only 16 refinanced a debt that equaled 
50 percent of the expansion costs; if these borrowers had been able to 
refinance 100 percent of the expansion costs instead of 50 percent, and 
assuming that all these borrowers did so, these borrowers would have 
been able to borrow $15 million more over five years, or about $3 
million more annually. Since the passage of the Economic Aid Act, and 
the issuance of the interim final rule, there have been 746 504 loan 
refinancing with expansion projects approved for a total of 
$1,030,563,000 approved. This legislative change has expanded the 
access to capital to small business for expansion projects that also 
need debt refinancing.

                                                       Table 1--504 Loan Activity FY 2018-FY 2022
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                                                        FY 2018          FY 2019          FY 2020          FY 2021          FY 2022          FY 2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Number of 504 Loans.........................            5,874            6,099            7,119            9,676            9,254            3,844
Total Dollar Volume of 504 Loans Approved.........   $4,753,644,000   $4,958,552,000   $5,826,885,000   $8,218,105,540   $9,207,996,290   $3,533,163,000
Number of 504 Debt Refi With Expansion............              181              181              236              301              336              109
Dollar Volume of 504 Debt Refi With Expansion.....     $212,098,000     $192,968,000     $296,392,000     $389,801,000     $454,568,000     $186,194,000
Number of 504 Debt Refi Without Expansion.........              181              166              386              693              829              249
Dollar Volume of 504 Debt Refi Without Expansion..     $154,062,000     $154,842,000     $370,160,000     $709,020,000     $959,897,000     $270,151,000
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                                           Table 2--504 Loan Activity by Defined Cohort August 2018-July 2023
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                                                                     Aug' 18-Jul' 19  Aug' 19-Jul' 20  Aug' 20-Jul' 21  Aug' 21-Jul' 22  Aug' 22-Jul' 23
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Number of 504 Loans..........................................            6,153            6,836            9,572            9,392            6,253
Total Dollar Volume of 504 Loans Approved..........................   $5,063,078,000   $5,575,249,000   $7,934,192,540   $9,248,887,290   $6,624,952,000
Number of 504 Debt Refi With Expansion.............................              183              243              295              332              183
Dollar Volume of 504 Debt Refi With Expansion......................     $191,786,000     $309,027,000     $362,039,000     $446,975,000     $305,619,000
Number of 504 Debt Refi Without Expansion..........................              160              302               66              934              388
Dollar Volume of 504 Debt Refi Without Expansion...................     $157,880,000     $295,396,000     $601,831,000   $1,057,386,000     $432,638,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Data as of 9/15/2023, total dollar volume is lifetime gross 
approval amount including increases.
    This rule was necessary to implement the Economic Aid Act and 
provide economic relief to small businesses adversely impacted by 
COVID-19. SBA anticipates that finalizing these changes to the 504 debt 
refinancing programs will continue to result in benefits to

[[Page 70584]]

small businesses by providing greater flexibility to restructure debt.
    To assess the impact of the interim final rule, SBA evaluated 504 
loan activity (including the number of loans and dollar volume of both 
debt refinance with and without expansion) between August 2018 and July 
2023. Because the interim final rule was published on July 29, 2021, 
with immediate effectiveness, the first full month during which the 
modifications to 504 debt refinancing were available was August 2021, 
with August 2021 through July 2022 being the first 12-month period 
during which the modifications to 504 debt refinancing were available 
to 504 applicants. SBA divided the data into five cohorts of 12 months 
each, with the first cohort beginning in August 2018 and the last 
cohort beginning August 2023. See Table 2.
    As an appropriate baseline for evaluation of the impacts of the 
interim final rule that would be made permanent in this rule, SBA 
considers the state of 504 lending for debt refinance with expansion 
and without expansion before July 2021. SBA examines the 12-month 
periods from August 1, 2018, through July 31, 2019, to the period from 
August 1, 2022, to July 31, 2023, noting that external influences from 
the pandemic and from the payments made on behalf of borrowers by SBA 
under section 1112 of the Coronavirus Aid Recovery, and Economic 
Security Act (Section 1112 Payments) that ended in September 2021 
occurred. The Section 1112 Payments required SBA to make principal and 
interest payments on 504 loans for certain periods of time depending on 
the when the 504 loan was approved, which would have made a 504 loan an 
attractive option for small businesses and consequently would have 
increased 504 loan volume. Further, interest rates on 504 loans in 
these two periods differ, from a range of approximately 4.0 to 5.0 
percent in the earlier period to rates up to 7.0 percent in the later 
period, as do rates on alternatives to 504 loans. These changes mean 
that lending total volume comparisons may not be appropriate for 
assessment of impact. Because the major changes in the interim final 
rule were the increases in the amounts of existing indebtedness that 
may be refinanced for both 504 debt involving expansions and 504 debt 
not involving expansions, SBA examined the percentages of 504 lending 
that were for these two types of debt refinancing. The chart below 
shows these percentages for five August-July cohorts.

----------------------------------------------------------------------------------------------------------------
                                                  2018-19 %    2019-20 %    2020-21 %    2021-22 %    2022-23 %
----------------------------------------------------------------------------------------------------------------
Dollar Volume of 504 Debt Refi with Expansion           3.79         5.54         4.56         4.83         4.61
 as Percentage of Dollar Volume of Total 504
 Loans.........................................
Dollar Volume of 504 Debt Refi without                  3.12         5.30         7.59        11.43         6.53
 Expansion as Percentage of Dollar Volume of
 Total 504 Loans...............................
----------------------------------------------------------------------------------------------------------------

    As indicated in the chart, the percentages of 504 debt refinancing 
loans with and without expansion are in the recent period returning to 
the levels seen prior to the publication of the interim final rule in 
July 2021. For debt refinancing without expansion, the August 2020-July 
2021 period was elevated and the August 2021-July 2022 cohort was an 
outlier, but the next 12 months settled to a percentage that at a level 
consistent with the periods before the interim final rule and not 
indicative of a significant impact. These two cohorts with higher 
percentages were during the pandemic and were covered, at least in 
part, by Section 1112 Payments. The 12-month percentages of 504 debt 
refinancing with expansion did not vary widely.
    The interim final rule increased the amounts on 504 debt 
refinancing with and without expansion. Aggregate 504 lending over the 
period in question ranged from approximately $5 billion to almost $9.25 
billion, with total 504 lending in the latest 12-month cohort at about 
$6.6 billion. Even in the unlikely scenario of the interim final rule 
as the sole cause of an increase in total 504 lending from the low 
volume in the examined period of $5 billion (in 2018-19) to the latest 
12-month total of $6.6 billion, the incremental impact, as indicated by 
changes in the percentage of total lending accounted for by each, is 
under $100 million.

Congressional Review Act

    OMB's Office of Information and Regulatory Affairs has determined 
that this rule is not a major rule under Subtitle E of the Small 
Business Regulatory Enforcement Fairness Act of 1996 (also known as the 
Congressional Review Act), 5 U.S.C. 804(2). Per the above cost benefit 
analysis, the annual effect on the economy is less than $100 million.

Executive Order 12988

    This action meets applicable standards set forth in sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have preemptive effect or retroactive effect.

Executive Order 13132

    This rule does not have federalism implications as defined in 
Executive Order 13132. It will not have substantial direct effects on 
the States, on the relationship between the National Government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government, as specified in the Executive order. As 
such it does not warrant the preparation of a Federalism Assessment.

Paperwork Reduction Act

    In order to implement the Act, SBA determined that it was necessary 
to modify SBA Form 1244, Application for Section 504 Loans, which is 
currently approved under OMB Control Number 3245-0071, to conform the 
form to the revised requirements for debt refinancing loans. The 
changes did not add any new burdens for the respondents, rather, in 
some instances, the revisions will result in reduced burden as 
applicants and CDCs no longer have to submit certain information.
    (a) The information collection previously required PCLP CDCs to 
process all applications for debt refinancing without expansion through 
the Sacramento Loan Processing Center (SLPC) and not through the PCLP 
CDC's delegated authority. As discussed above, this requirement was 
removed by the Economic Aid Act and, accordingly, SBA removed the 
requirement from the information collection when the interim final rule 
(IFR) was released in 2021. The final rule would result in no further 
changes. This revision did not change the information the PCLP CDC is 
required to collect, only how the application is processed. In 
addition, consistent with the changes made by the

[[Page 70585]]

IFR, SBA added two questions to clarify that, for debt refinancing 
without expansion, PCLP CDCs must process applications through the SLPC 
when the application involves the refinancing of same institution debt 
or, in cases involving the refinancing of federally-guaranteed debt, 
the CDC is requesting an exception to the requirement that the new 
installment payment be at least 10% less than the existing installment 
amount. No further changes are necessary.
    (b) With respect to the question regarding whether the Applicant 
creates or retains the required number of jobs per debenture amount, an 
option has been added for the Applicant to indicate whether the project 
is eligible under the 504 debt refinance alternate job standard 
reinstated by the Economic Aid Act.
    (c) Of the exhibits that are required, Exhibit 20 required that if 
the debt had been refinanced within two years of the date of 
application, non-PCLP CDCs had to submit with the application (and PCLP 
CDCs had to retain in the loan file) copies of the current debt and 
lien instruments as well as copies of the debt and lien instruments for 
the debt that was replaced by the current debt. With the minimum age of 
the qualified debt shortened from two years to six months by the 
Economic Aid Act, SBA revised the form to remove the requirement that 
these debt and lien instruments be included as part of Exhibit 20.
    In addition to the changes resulting from this rule, SBA made the 
following technical corrections and clarifying changes to Form 1244: 
(1) SBA corrected the description of which exhibits the CDC must retain 
and which the CDC must submit with the loan application; (2) SBA added 
a separate entry to facilitate disclosure of the use of refinancing 
proceeds involving land purchases only (the previous format of ``Land/
Building'' did not clearly indicate how information is to be reported); 
and (3) under the list of economic development objectives met by the 
project, SBA added references to ``base closures'' and ``minority-owned 
business''.

Regulatory Flexibility Act, 5 U.S.C. 601-612

    When an agency issues a rulemaking, the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601-612, requires the agency to ``prepare and make 
available for public comment an initial regulatory analysis'' which 
will ``describe the impact of the proposed rule on small entities.'' 
Section 605 of the RFA allows an agency to certify a rule, in lieu of 
preparing an analysis, if the proposed rulemaking is not expected to 
have a significant economic impact on a substantial number of small 
entities.
    The changes in the final rule are a codification of new legislation 
and will involve changes to regulations at 13 CFR 120.882, however 
there will be no changes to SBA Form 1244, and the burden hours to the 
small business concern and the Certified Development Company will 
remain the same. There are no anticipated additional compliance costs. 
Furthermore, SBA does not anticipate that any changes to the Eligible 
Project costs for 504 loans regulations would have a significant impact 
to a substantial number of small businesses. This is because only a 
small percentage of each year's 504 loans involve debt refinancing 
without expansion. Each loan represents a unique small business 
borrower because these borrowers are only eligible to refinance their 
debt once in a fiscal year with the 504 Loan Program, and therefore do 
not have multiple 504 debt refinancing without expansion loans in any 
given year. Based on the average number of 504 loans from FY 2021-2023, 
only 13% involved debt refinancing without expansion. Specifically, in 
FY 2021, out of 9,676 loans, 693 loans or 7% were for debt refinancing 
without expansion. In FY 2022, this figure was 829 out of 9,254 or 9% 
504 loans, while in FY 2023, 1,005 out of 4,451 or 23% of 504 loans 
were for debt refinancing without expansion. While the percentage of 
the 504 loan portfolio involving debt refinancing without expansion 
increased by 20% from FY 2021 to 2023, this increase was due in part to 
the Section 1112 Payments, and in part to a rapidly increasing interest 
rate environment. The Section 1112 Payments have sunset and SBA 
anticipates some adjustment due to the continued interest rate 
increases planned by the Federal Reserve. Because Section 1112 Payments 
have sunset, SBA believes that the 504 debt refinancing without 
expansion volume will return to the pre-section 1112 level of less than 
10% of small entities. As such, SBA concludes that the rule will not 
impact a substantial number of small entities.
    While the economic implications of the final rule are small and the 
data do not reveal a significant economic impact on a substantial 
number of small entities, SBA anticipates a refinancing growth rate 
more in alignment with pre-pandemic levels, with some adjustment to the 
economic impact because the final rule will expand program eligibility. 
SBA analyzed potential growth scenarios of up to 30% growth in the 504 
loan program, and even using this impact model (actual growth has never 
exceeded 15% in any prior fiscal year) the total of 504 debt refinance 
without expansion projects as a percentage of either number of loans or 
dollar volume of loans is not estimated to exceed 16% of the overall 
portfolio. When this percentage is applied to the estimated number of 
loans (small businesses impacted), this would result in less than 1,100 
small businesses impacted. SBA estimates that the average monthly 
savings for small businesses that refinance their existing loans 
through the 504 loan program would be between $7,000 to $8,300 per 
month, with a total estimated savings over the life of the loan of 
between $180,000 to $205,000. SBA determined this estimate based on the 
historical average of a 504 debt refinancing without expansion loan 
averaging $1,000,000 for each small business applicant. SBA used the 
504 July 2023 interest rates to calculate both the monthly and total 
loan savings to each small business concern. The lower end of the 
$180,000 to $205,000 range reflects the economic impact if a small 
business concern refinanced for 20 years, while the higher end reflects 
the economic impact of a small business concern refinanced for 25 
years. Small business concerns do not use 10 year 504 loans for debt 
refinancing without expansion, as their goal is to lower their payments 
by not only taking advantage of the 504 loan program's fixed interest 
rate, but also the longer 20 and 25-year loan terms available.
    For the reasons stated above, SBA certifies that this action would 
not have a significant economic impact on a substantial number of small 
entities.

List of Subjects in 13 CFR Part 120

    Loan programs-business, Reporting and recordkeeping requirements, 
Small businesses.

    Accordingly, the interim rule amending 13 CFR part 120, which was 
published at 86 FR 40775 on July 29, 2021, is adopted as final with the 
following changes:

PART 120--BUSINESS LOANS

0
1. The authority citation for part 120 is revised to read as follows:

    Authority: 15 U.S.C. 634(b) (6), (b) (7), (b) (14), (h), and 
note, 636(a), (h) and (m), 650, 687(f), 696(3) and (7), and 697(a) 
and (e); sec. 521, Pub. L. 114-113, 129 Stat. 2242; sec. 328(a), 
Pub. L. 116-260, 134 Stat. 1182.


0
2. Amend Sec.  120.882 as follows:
0
a. Revise paragraphs (g)(3) and (15); and

[[Page 70586]]

0
b. In paragraph (g)(16), in paragraph (B) of the definition of 
Qualified debt, remove ``85%'', ``120.131 and 120.870(b)'', and 
``120.131(b)'' and add in their places ``75%'', ``Sec. Sec.  120.131 
and 120.870(b)'', and ``Sec.  120.131(b)'', respectively.
    The revisions read as follows:


Sec.  120.882  Eligible Project costs for 504 loans.

* * * * *
    (g) * * *
    (3) A loan that is subject to a guarantee by a Federal agency or 
department may be refinanced under the following conditions and 
requirements:
    (i) An existing 504 loan may be refinanced if both the Third Party 
Loan and the 504 Loan are being refinanced or the Third Party Loan has 
been paid in full. If the 504 Loan being refinanced received approval 
through another CDC, the CDC working on the current refinancing must 
provide advance notice to the other CDC in writing (by email or 
letter).
    (ii) An existing 7(a) loan may be refinanced if the CDC notifies 
the 7(a) lender in advance in writing (by email or letter).
    (iii) The refinancing will provide a substantial benefit to the 
borrower. For purposes of this paragraph (g)(3)(iii), ``substantial 
benefit'' means that the portion of the new installment amount 
attributable to the debt being refinanced must be at least 10 percent 
less than the existing installment amount(s). Prepayment penalties 
(including subsidy recoupment fees), financing fees, and other 
financing costs must be added to the amount being refinanced in 
calculating the percentage reduction in the new installment payment, 
but the portion of the new installment amount attributable to Eligible 
Business Expenses (as described in paragraph (g)(6)(ii) of this 
section) is not included in this calculation. Exceptions to the 10 
percent reduction requirement may be approved by the Director, Office 
of Financial Assistance (D/FA) or designee for good cause. PCLP CDCs 
may not use their delegated authority to approve a loan requiring the 
exception in this paragraph (g)(3)(iii).
* * * * *
    (15) Notwithstanding Sec.  120.860, a debt may be refinanced under 
this paragraph (g) if it does not meet the job creation or other 
economic development objectives set forth in Sec.  120.861 or Sec.  
120.862. In such case, the 504 loan may not exceed the product obtained 
by multiplying the number of employees of the Borrower by $90,000. The 
number of employees of the Borrower is equal to the sum of:
    (i) The number of full-time employees of the Borrower on the date 
of the application; and
    (ii) The product obtained by multiplying:
    (A) The number of part-time employees of the Borrower on the date 
of the application; by
    (B) The quotient obtained by dividing the average number of hours 
each part-time employee of the Borrower works each week by 40.
    Example 1 to paragraph (g)(15): 30 full-time employees and 35 part-
time employees working 20 hours per week is calculated as follows: 30 + 
(35 x (20/40)) = 47.5. The maximum amount of the 504 loan would be 47.5 
multiplied by $90,000, or $4,275,000.
* * * * *

0
3. Amend Sec.  120.883 by revising paragraph (e) to read as follows:


Sec.  120.883  Eligible administrative costs for 504 loans.

* * * * *
    (e) CDC Closing Fee (see Sec.  120.971(a)(2)) up to a maximum of 
$10,000; and
* * * * *

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2023-22169 Filed 10-11-23; 8:45 am]
BILLING CODE 8026-09-P