[Federal Register Volume 89, Number 190 (Tuesday, October 1, 2024)]
[Rules and Regulations]
[Pages 79734-79741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22040]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AI15
504 Debt Refinancing
AGENCY: U.S. Small Business Administration.
ACTION: Direct final rule.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is
amending regulations governing SBA's 504 Loan Program for debt
refinancing with expansion and debt refinancing without expansion with
this direct final rule. The changes will streamline the loan
application process, expand eligibility criteria for small businesses
borrowers, and make minor corrections. The amendments include: removing
the 50% cap on debt refinance without expansion to conform with current
legislation; raising the loan to value requirement on debt refinancing
without expansion projects that include other business expenses to 90%
and eliminating the cap on Eligible Business Expenses; aligning the
``substantially all'' standard for 504 debt refinancing with expansion
so it is consistent with the debt refinancing without expansion
standard of 75%; eliminating the 10% substantial benefit test on 504
debt refinancing with expansion and 504 debt refinancing without
expansion on refinancing other government debt; and allowing certain
``other secured debt'' to be included as an Eligible Business Expense.
DATES: The direct final rule is effective November 15, 2024. SBA must
receive comments on this direct final rule on or before October 31,
2024. If adverse comment is received, SBA will publish a timely
withdrawal of the rule in the Federal Register.
ADDRESSES: You may submit comments, identified by RIN 3245-AI15,
through the Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
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 via 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 whether it will publish
the information.
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 100 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
[[Page 79735]]
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).
On July 29, 2021, SBA published in the Federal Register an interim
final rule implementing 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, which revised the
conditions and requirements for refinancing 504 loan debt (``Debt
Refinancing in the 504 Loan Program interim final rule'' or ``interim
final rule''). 86 FR 40775 (July 29, 2021). SBA subsequently issued a
final rule on October 12, 2023, finalizing the interim final rule and
implementation of section 328 of the Economic Aid Act (``Debt
Refinancing in the 504 Loan Program final rule'' or ``final rule''). 88
FR 70580 (October 12, 2023).
With the prior rulemaking the Agency included statutorily required
mandatory changes to the 504 loan program, with one omission, as the
statutory change limiting the loan dollar volume of 504 refinancing
loans without expansion to 50% of the CDC's prior portfolio, as
required by section 328(a)(2)(A) of the Economic Aid Act, was not
included. In addition, during the prior rulemaking the National
Associate of Development Companies (NADCO), a 504 Loan Program trade
association, along with many of its member CDCs, requested additional
changes to the 504 loan program. Since these changes went beyond those
mandated by the Economic Aid Act, they were not implemented at the time
since the Agency's objective was to implement the statutory changes
directly and expeditiously without variation. Some of the changes
recommended by the trade association required careful consideration by
each impacted SBA office, had the potential for risk shifting in the
504 portfolio, had a potential impact on other SBA programs such as the
7(a) program, or had a potential for impact on the 504 subsidy rate and
consequently were held for future rule making. The comments were
nonetheless consistent with lender round table feedback from three
major lender conferences.
Commenters, requested that SBA: increase eligibility for 504 debt
refinance with expansion and 504 debt refinance without expansion;
update the eligibility standards for more flexibility; remove
requirements that are not required by statute and which create an
additional barrier to debt restructuring and relief for 504 small
business borrowers; raise the loan to value requirement on debt
refinancing without expansion projects; align the ``substantially all''
standard for 504 debt refinancing with expansion with the 504 debt
refinancing without expansion standard; and eliminate the 10%
substantial benefit test on 504 debt refinancing with expansion and 504
debt refinancing without expansion on refinancing other government
debt.
Congress' long-established policy is that SBA stimulate and
supplement the flow of long-term loan funds which small business
concerns need for the sound financing of their business operations and
for their growth, expansion, and modernization, including with the
refinancing of existing loan debt. 15 U.S.C. 661. Businesses are facing
increasing operating costs due to inflation, global supply chain
challenges, and increases in building costs and supplies which are
above pre-pandemic levels. The impact of multiple Federal Reserve
interest rate increases \1\ from March 2022 to February 2024 has
prompted a request for expedient SBA action on behalf of small business
borrowers. The 504 loan program has a long-term fixed interest rate for
40% of the project to help small businesses refinance conventional
loans or government based programs, which are generally based on a
variable rate. This results in significant cost savings for the small
business borrower and assists small businesses with managing costs by
providing a predictable expense with a fixed interest rate.
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\1\ Since March 2022, the Federal Reserve has increased its
benchmark short-term interest rate from near zero to a 23-year high
of 5.25% to 5.5% to tame inflation. The Federal Reserve raised rates
on March 17, 2022, by 25 basis points, on May 5, 2022, by 50 basis
points, in July, July, September, and November each time by 75 basis
point with each reset, then on December 14, 2022, by 50 basis
points, in February, March, May and July 2023 by 25 basis points
with each reset.
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Further, as the interim final rule was released July 29, 2021, and
as the final rule was released October 12, 2023, SBA could not have
anticipated the impact on policy of the Federal Reserve interest rate
policy during the prior rulemaking. Since the publication of the Debt
Refinancing in the 504 Loan Program final rule, SBA's Office of
Financial Assistance (OFA) has received input on the impact of the
rising interest rate environment on 504 debt refinancing. For example,
SBA received feedback on the difficulty of SBA applicants in meeting
the 10% substantial benefit test to borrowers, and CDCs have asked for
a revision of this standard as it was not required in statute and was
adopted through regulations.
As described in the section-by-section analysis below, SBA is
issuing this direct final rule to correct the omission described above
and to implement changes to 504 debt refinancing in response to public
comments provided during the prior rulemaking and industry input both
before and following the prior rulemaking.
II. Justification for Direct Final Rule
In general, SBA publishes a rule for public comment before issuing
a final rule, in accordance with the Administrative Procedure Act. 5
U.S.C. 553. The Administrative Procedure Act provides an exception to
this standard rulemaking process, however, when an agency finds good
cause to adopt a rule without prior public participation. 5 U.S.C.
553(b)(3)(B). The good cause requirement is satisfied when prior public
participation is impracticable, unnecessary, or contrary to the public
interest. SBA is publishing this rule as a direct final rule because
public participation is unnecessary. SBA views this as a non-
controversial administrative action because all technical corrections
and updates are consistent with public comments received throughout the
previous rulemaking process. This rule will be effective on the date
shown in the DATES section unless SBA receives significant adverse
comment on or before the deadline for comments. Significant adverse
comments are comments that provide strong justifications why the rule
should not be adopted or for changing the rule. SBA does not expect to
receive any significant adverse comments because these technical
corrections and updates are consistent with broad stakeholder comments
received during the prior previous rulemaking process. Further, because
some of the changes in this rule are prescribed by statute, SBA does
not expect significant adverse comments.
If SBA receives significant adverse comment, SBA will publish a
document in the Federal Register withdrawing this rule before the
effective date. If SBA receives no significant adverse comments, the
rule will be effective 45 days after publication without further
notice.
III. Section-by-Section Analysis
A. Delete 13 CFR 120.882(g)(10) To Remove the 50% Cap for Debt
Refinancing Without Expansion in Alignment With the Economic Aid Act
Subsequent to the publication of the Debt Refinancing in the 504
Loan Program final rule SBA identified a drafting omission that must be
corrected
[[Page 79736]]
to ensure the corresponding regulation aligns with the Economic Aid
Act. Section 328(a) of the Economic Aid Act had repealed section 521(a)
of title V of division E of the Consolidated Appropriations Act of
2016. Section 521(a), in part, limited a CDC's financings so that in
any fiscal year no more than 50 percent of the CDC's financings were
for debt refinancing not involving expansion, a requirement implemented
by SBA regulations at 13 CFR 120.882(g)(10). Consequently, the Debt
Refinancing in the 504 Loan Program final rule should have deleted the
regulation at 13 CFR 120.882(g)(10).
SBA has included in this direct final rule the correction and is
removing 50% cap for debt refinancing without expansion to align with
the Economic Aid Act, thereby removing the current inconsistency
between Agency regulations and the statute. This change will provide
certainty to CDCs that their debt refinancing loans are no longer
capped at 50% of the total dollar amount of the CDC's 504 loans
approved, thereby increasing debt refinancing opportunities for small
business concerns.
B. Update 13 CFR 120.882(g)(6) To Increase the Percentage of Qualified
Debt in Projects Including Eligible Business Expenses From 85% to 90%
and Remove the 20% Cap on Eligible Businesses Expenses
Currently, if an application for a 504 debt refinancing without
expansion project includes a request to finance Eligible Business
Expenses (as described in 13 CFR 120.882(g)(6)(ii)), the portion of the
refinancing project provided by the 504 loan and the third party loan
may be no more than 85% of the fair market value of the fixed assets
that will serve as collateral and the Borrower may receive no more than
20% of the fair market value of the eligible fixed assets securing the
debt to be refinanced for Eligible Business Expenses. SBA is removing
these restrictions in regulation in order to expand eligibility for
more small businesses to access debt refinancing under the 504 loan
program. SBA will review comments received in response to this direct
final rule and will consider further policy changes are needed.
C. Adding Consistency to the Standard for ``Substantially All'' Between
Refinancing Without Expansion and Refinancing With Expansion
Under current regulations, one of the conditions of a 504 debt
refinancing with expansion project is that substantially all (85% or
more) of the proceeds of the indebtedness were used to acquire land,
including a building situated on that land, to construct a building on
that land, or to purchase equipment. The previous 504 debt refinancing
rulemaking modified the 504 debt refinancing without expansion
``substantially all'' standard in the Qualified Debt definition by
lowering the threshold from 85% to 75%. The effect was that this
lowered standard only applied to 504 debt refinancing without expansion
because the term ``Qualified Debt'' is only used in the context of 504
debt refinancing without expansion and not 504 debt refinancing with
expansion.
SBA received input from NADCO and during lender round tables that
this inconsistency of 75% for 504 debt refinancing without expansion
and 85% for 504 debt refinancing with expansion is confusing and that
it would be helpful to have a consistent standard between the debt
refinancing with expansion and debt refinancing without expansion
options for CDCs, third party lenders, and small businesses seeking 504
loan program assistance. Based on public comments received, SBA is
making the ``substantially all'' standard consistent between the two
programs by revising Sec. 120.882(e)(1) to lower the ``substantially
all'' standard from 85% to 75% for 504 debt refinancing with expansion.
SBA will review comments received in response to this direct final rule
and will consider further policy changes are needed to further expand
the standard.
D. Allowing Other Secured Debt To Be Included as an Eligible Business
Expense
Under current regulations, a debt refinancing without expansion
project may include a request to finance eligible business expenses,
which are limited to the operating expenses of the business. Debt is
generally not included as an eligible business expense, except for
certain types of unsecured debt. On occasion SBA Applicants have debt
that has been secured by the same Eligible Fixed Assets securing the
qualified debt that is the subject of the 504 debt refinancing project
(``Other Secured Debt''). Under current regulations Other Secured Debt
may not be part of the 504 debt refinancing project. As a result, the
borrower, even with 504 financing, may be subject to debt and liens
that are not in the best risk portfolio interest of the Agency.
Including Other Secured Debt as an Eligible Business Expense is in
alignment with 504 loan program goals, and the flexibility to include
Other Secured Debt would further assist the small business in
restructuring its outstanding debt. Even so, SBA will not consider
Other Secured Debt that was incurred for capital expenditures as an
Eligible Business Expense because such expenditures are not the day-to-
day expenses of a business and SBA does not believe Congress intended
that such expenditures be included as an Eligible Business Expense.
Further, while a secured business line of credit may be an Eligible
Business Expense, such Other Secured Debt will only be eligible as part
of a 504 debt refinance without expansion financing provided any
existing liens are subordinated to the 504 loan.
E. Revising 13 CFR 120.882(e)(5) and (g)(3)(iii) the Substantial
Benefit Test for Government Guaranteed Debt for 504 Refinancing With
and Without Expansion To Remove the 10% Standard
Under current regulations at 13 CFR 120.882(e)(5) and (g)(3)(iii),
504 debt refinancing must provide a ``substantial benefit'' to the
borrower. For purposes of 504 debt refinancing a ``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. In its public comments for
the prior rulemaking, NADCO noted that because of the high interest
rate environment and the large number of interest rate increases in
recent year, the 10% substantial benefit test is overly burdensome for
the 504 small business borrower. NADCO requested that SBA remove this
test to provide the small business borrower the maximum opportunity to
respond to market conditions.
SBA's concerns about portfolio risk for both the 504 and 7(a)
programs led SBA to adopt the 10% substantial benefit test for the 504
loan program to provide parity with the 7(a) program's 10% substantial
benefit test. There are substantial differences, however, between the
programs that would obviate the necessity to anchor the 504 loan
program to the 7(a) loan program's 10% substantial benefit test. For
example, SBA's motivation for adopting a 10% substantial benefit test
in 7(a) stemmed from the concern with using limited 7(a) program
authority for refinancing, especially for other 7(a) loans already
considered to be on reasonable terms, and the concern over the risk of
considerable 7(a) secondary market distortions. Meanwhile, the 504 Loan
Program has ample authority for debt refinancing and adding
restrictions on 504 refinancing at the same level of 7(a) refinancing
restrictions would be overly burdensome on the 504 small business
borrower. The result is that
[[Page 79737]]
many small businesses are prevented from refinancing into a more
favorable longer term fixed-rate product and must remain with their
variable rate loan in a rising rate environment.
SBA is therefore revising 13 CFR 120.882(e)(5) and (g)(3)(iii) to
remove the 10% substantial benefit test for both debt refinancing with
expansion and debt refinancing without expansion, while maintaining the
requirement that the 504 small business borrowers must have documented
benefit in the restructuring of debt.
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 Order 12866
The Office of Management and Budget (OMB) has determined that this
rule does not constitutes a ``significant regulatory action'' for
purposes of Executive Orders 12866. This direct final rule implements
specific statutory provisions in section 328(a)(2)(A) and implements
additional changes to debt refinancing in SBA's 504 loan program.
As shown in Tables 1A and 1B below, during the five-year period
spanning fiscal year (FY) 2018 and FY 2024 (year-to-date (YTD) through
May), a total of 47,252 504 loans were approved for a total gross
approval amount as of May 31, 2024, of $43,003,577,000. In addition,
during the past six fiscal years, SBA approved an average of 235 debt
refinance with expansion loans per year with an average annual dollar
volume of $305,542,333 and approved an average of 441 debt refinance
without expansion loans per year with an average annual dollar volume
of $470,209,333. In 2020, the Economic Aid Act increased the amount of
existing indebtedness eligible for a debt refinance with expansion
project from 50 percent of the project cost to 100 percent of the
project cost which appears to have impacted loan size. The tables are
arranged in order to convey the data while staying within the margin
parameters of the Federal Register notice guidelines and are an update
to the data provided in the 504 Debt Refinancing final rule published
October 12, 2023. As this direct final rule, in part, is intended to
correct drafting errors and provide eligibility clarifications in the
prior final rule, SBA has updated data on through May 31, 2024, and
included data reported through September 30, 2023 (last full fiscal
year), in the final rule.
Table 1A--504 Refinancing Lending Activity From 2018 to 2021
[Note: Table 1B on next page contains 2022 through YTD FY 24]
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504 Cohort 2018 2019 2020 2021
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Total Number of 504 Loans........... 5,874 6,099 7,119 9,676
Total Dollar Volume of 504 Loans $4,753,644,000 $4,958,552,000 $5,826,885,000 $8,218,105,540
Approved...........................
Number of 504 Debt Refinancing with 181 181 236 301
Expansion..........................
Dollar Volume of 504 Debt $212,098,000 $192,968,000 $296,392,000 $389,801,000
Refinancing with Expansion.........
Number of 504 Debt Refinancing 181 166 386 693
Without Expansion..................
Dollar Volume of 504 Debt $154,062,000 $154,842,000 $370,160,000 $709,020,000
Refinancing Without Expansion......
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Table 1B--504 Refinancing Lending Activity From 2022 to YTD 2024 (May 31st)
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FY 2024 YTD (as of Totals FY 2019-YTD
504 Cohort 2022 2023 May) FY24 (May)
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Total Number of 504 Loans...... 9,254 5,924 3,306 47,252
Total Dollar Volume of 504 $9,207,996,290 $6,419,378,000 $3,619,017,000 $43,003,577,000
Loans Approved................
Number of 504 Debt Refinancing 336 176 96 1,507
with Expansion................
Dollar Volume of 504 Debt $454,568,000 $287,427,000 $156,938,000 $1,990,192,000
Refinancing with Expansion....
Number of 504 Debt Refinancing 829 392 286 2,933
Without Expansion.............
Dollar Volume of 504 Debt $959,897,000 $473,275,000 $333,791,000 $3,155,047,000
Refinancing Without Expansion.
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Prior to the change increasing the amount of existing indebtedness
eligible for a debt refinance with expansion project from 50 percent of
the project cost to 100 percent of the project cost, 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, there
have been 4,312 refinancing 504 loans approved of which 1,507 were debt
refinancing with expansion and 2,933 were debt refinancing without
expansion. In dollars approved, this is a combined amount of 504
refinancing loans totaling $5,145,239,0000 of which $1,990,192,000 was
for refinancing with expansion and $3,155,047,000 was for refinancing
without expansion.
Table 2A--504 Loan Activity by Cohort Years August to July 2018 to July 2021
[Note: Table 2B below contains July 2021 through YTD FY 24]
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Cohorts Aug'18-Jul'19 Aug'19-Jul'20 Aug'20-Jul'21
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Total Number of 504 Loans.............................. 6,153 6,836 9,572
Total Dollar Volume of 504 Loans Approved.............. $5,063,078,000 $5,575,249,000 $7,934,192,540
Number of 504 Debt Refi With Expansion................. 183 243 295
Dollar Volume of 504 Debt Refi With Expansion.......... $191,786,000 $309,027,000 $362,039,000
Number of 504 Debt Refi Without Expansion.............. 160 302 66
[[Page 79738]]
Dollar Volume of 504 Debt Refi Without Expansion....... $157,880,000 $295,396,000 $601,831,000
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Table 2B--504 Loan Activity by Cohort Years August to July 2021 to YTD 2024 (May) \1\
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Cohorts Aug'21-Jul'22 Aug'22-Jul'23 Aug'23-May 24
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Total Number of 504 Loans.............................. 9,392 6,253 4,312
Total Dollar Volume of 504 Loans Approved.............. $9,248,887,290 $6,624,952,000 $4,745,370,000
Number of 504 Debt Refi With Expansion................. 332 183 135
Dollar Volume of 504 Debt Refi With Expansion.......... $446,975,000 $305,619,000 $207,621,000
Number of 504 Debt Refi Without Expansion.............. 934 388 383
Dollar Volume of 504 Debt Refi Without Expansion....... $1,057,386,000 $432,638,000 $475,326,000
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\1\ As shown in Tables 2A and 2B, 504 Loan Activity by Cohort Years August to July 2018 to YTD 2024 (Feb), Data
as of 9/15/2023, total dollar volume is lifetime gross approval amount including increases.
This direct final rule is necessary to implement the Economic Aid
Act in full and provide economic relief to small businesses still
adversely impacted by COVID-19. SBA anticipates that making these
changes to the 504 debt refinancing programs will continue to result in
benefits to 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 expansion and debt refinance without expansion)
between August 2018 and May 2024. 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 February 2024. See Tables 2A
and 2B.
As an appropriate baseline for evaluation of the impacts of the
direct 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 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 by fiscal year comparisons may not be
appropriate for assessment of impact. The current direct final rule is
a drafting correction update for the previous final rule with the
estimates of activity updated accordingly. The chart below also
provided in the current rulemaking below shows these percentages for
five August-July cohorts prior to the final rule published October 12,
2023. It is still current as the July 2024 data is not yet available.
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2018-19 2019-20 2020-21 2021-22 2022-23
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Dollar Volume of 504 Debt Refi 3.79 5.54 4.56 4.83 4.61
with Expansion as Percentage of
Dollar Volume of Total 504
Loans..........................
Dollar Volume of 504 Debt Refi 3.12 5.30 7.59 11.43 6.53
without Expansion as Percentage
of Dollar Volume of Total 504
Loans..........................
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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 was at a
level consistent with the periods before the interim final rule and not
indicative of a significant impact. These two cohorts with higher 504
debt refinancing percentages occurred 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 prior rulemaking was
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.
[[Page 79739]]
Executive Order 13563
Executive Order 13563, Improving Regulation and Regulatory Review
(January 18, 2011), requires agencies to adopt regulations through a
process that involves public participation, and to the extent feasible,
base regulations on the open exchange of information and perspectives
from affected stakeholders and the public as a whole. SBA has developed
this rule in a manner consistent with these requirements, and the
public will have the opportunity to provide comments following the
publication of this rule.
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.
Executive Order 13175
This final rule does not have tribal implications under Executive
Order 13175, Consultation and Coordination with Indian Tribal
Governments, because it does not have a substantial direct effect on
one or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.
Congressional Review Act (5 U.S.C. 801-808)
Subtitle E of the Small Business Regulatory Enforcement Fairness
Act of 1996, also known as the Congressional Review Act, 5 U.S.C. 801
et seq., generally provides that before a rule may take effect, the
agency promulgating the rule must submit a rule report, which includes
a copy of the rule, to each House of the Congress and to the
Comptroller General of the United States. SBA will submit a report
containing this rulemaking and other required information to the U.S.
Senate, the U.S. House of Representatives, and the Comptroller General
of the United States. This rulemaking has been reviewed and determined
not to meet the criteria set forth in 5 U.S.C. 804(2).
Paperwork Reduction Act
In order to implement the Economic Aid 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) SBA will need to revise Form 1244 page 9 to add ``Other Secured
Debt'' as a line item in the sources and uses document.
(b) SBA will need to revise Form 1244 Exhibit instructions in
standard operating procedure (SOP) 50 10 7.1 to require a 75%
substantial benefit for refinancing with expansion to match the last
form change for refinancing with expansion. This revision did not
change the information the CDC is required to collect, only the form
instructions. No further changes are necessary.
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.''
The RFA requires such analysis only where notice and comment rulemaking
are required. As discussed above, SBA has found good cause that notice
and public procedure are impracticable, unnecessary, or contrary to the
public interest. Accordingly, SBA is not required to conduct a
regulatory flexibility analysis and is publishing this rule as a direct
final rule without advance notice and public comment. Further, 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.
SBA is nonetheless providing the following abbreviated analysis.
The changes in this direct final rule would, in part, be a drafting
correction to 13 CFR 120.882. While there will be minor 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 the additional 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
FY2021, 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
section 1112 payments, and in part to a rapidly increasing interest
rate environment. 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 direct 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. In its final rule issued October 12, 2023, 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. As this is a direct final rule update to correct drafting
issues with the previous final rule, the data provided at that time is
still relevant. When this percentage is applied to the estimated number
of
[[Page 79740]]
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 $202,000 to $227,000. 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 June 2024 interest rates to calculate both the monthly and total
loan savings to each small business concern. The lower end of the
$202,000 to $227.0000 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.
List of Subjects in 13 CFR Part 120
Business loan programs, Reporting and recordkeeping requirements,
Small businesses.
Accordingly, for the reasons stated in the preamble, SBA amends 13
CFR part 120 as follows:
PART 120--BUSINESS LOANS
0
1. The authority citation for 13 CFR part 120 continues 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 by:
0
a. Revising paragraphs (e)(1) and (5), (g)(3)(iii), and (g)(6);
0
b. Removing and reserving paragraph (g)(10); and
0
c. In paragraph (g)(16), adding the definitions of ``Eligible Business
Expenses,'' ``Operating Expenses,'' and ``Other Secured Debt'' in
alphabetical order.
The revisions and additions read as follows:
Sec. 120.882 Eligible Project costs for 504 loans.
* * * * *
(e) * * *
(1) Substantially all (75% or more) of the proceeds of the
indebtedness were used to acquire land, including a building situated
thereon, to construct a building thereon, or to purchase equipment. The
assets acquired must be eligible for financing under the 504 loan
program. If the acquisition, construction, or purchase of the asset was
originally financed through a commercial loan that would have satisfied
the ``substantially all'' requirement and that was subsequently
refinanced one or more times, with the current commercial loan being
the most recent refinancing, the current commercial loan will be deemed
to satisfy this paragraph (e)(1).
* * * * *
(5) The financing will provide a substantial benefit to the
borrower when prepayment penalties, financing fees, and other financing
costs are accounted for. For purposes of this paragraph (e)(5),
substantial benefit means that the portion of the new installment
amount attributable to the debt being refinanced must be less than the
existing installment amount(s). Prepayment penalties, financing fees,
and other financing costs must also be added to the amount being
refinanced in calculating the percentage reduction in the new
installment payment. Exceptions to the 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 this exception.
* * * * *
(g) * * *
(3) * * *
(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 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)(16) of this section) is not included in this
calculation. Exceptions to the reduction requirement may be approved by
the 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).
* * * * *
(6)(i) The portion of the Refinancing Project provided by the 504
loan and the Third Party Loan may be no more than 90% of the fair
market value of the fixed assets that will serve as collateral.
(ii) The Borrower's application may include a request to finance
Eligible Business Expenses as part of the Refinancing Project if the
amount of cash funds that will be provided for the Refinancing Project
exceeds the amount to be paid to the lender of the qualified debt. The
Borrower's application must include a specific description of the
Eligible Business Expenses for which the financing is requested and an
itemization of the amount of each expense. Any debt for Operating
Expenses of the business that was incurred with a credit card or a
business line of credit may be included if the credit card or business
line of credit is issued in the name of the small business and the
Applicant certifies that the debt being refinanced was incurred
exclusively for business related purposes. Loan proceeds must not be
used to refinance any personal expenses. Both the CDC and the Borrower
must certify in the application that the funds will be used to cover
Eligible Business Expenses. Borrower must, upon request, substantiate
the use of the funds provided for business expenses through, for
example, bank statements, invoices marked ``paid,'' cleared checks, or
any other documents that demonstrate that a business obligation was
satisfied with the funds provided.
* * * * *
(16) * * *
Eligible Business Expenses are payments of the business for either
Operating Expenses or Other Secured Debt.
* * * * *
Operating Expenses are expenses of the business that were incurred
but not paid prior to the date of the 504 application or that will
become due for payment within 18 months after the date of application.
Examples include salaries, rent, utilities, inventory, and other
expenses of the business that are not capital expenditures.
Other Secured Debt is debt incurred prior to the 504 loan
application that has been secured by the same Eligible Fixed Assets
securing the qualified debt and incurred for the benefit of the
Borrower and/or Operating Company. Other Secured Debt does not include
debt incurred for the purposes of capital expenditures, and any
existing liens must be released or subordinated to the
[[Page 79741]]
amount of the debt being refinanced by the 504 loan.
* * * * *
Isabella Casillas Guzman,
Administrator.
[FR Doc. 2024-22040 Filed 9-30-24; 8:45 am]
BILLING CODE 8026-09-P