[Federal Register Volume 72, Number 210 (Wednesday, October 31, 2007)]
[Proposed Rules]
[Pages 61752-61785]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-20932]
[[Page 61751]]
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Part III
Small Business Administration
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13 CFR Part 120
Lender Oversight Program; Proposed Rule
Federal Register / Vol. 72, No. 210 / Wednesday, October 31, 2007 /
Proposed Rules
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AE14
Lender Oversight Program
AGENCY: Small Business Administration (SBA).
ACTION: Notice of Proposed Rulemaking.
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SUMMARY: SBA is proposing a rule to incorporate SBA's risk-based lender
oversight program into SBA regulations. Specifically, the proposed rule
would establish the role and responsibilities of SBA's Office of Credit
Risk Management within a new subpart of the business loan regulations.
It would codify in SBA regulations SBA's process of risk-based
oversight including: (i) Accounting and reporting requirements; (ii)
off-site reviews/monitoring; (iii) on-site reviews and examinations;
and iv) capital adequacy requirements. The proposed rule would also
list the types of, grounds for, and procedures governing SBA
enforcement actions within consolidated enforcement regulations for all
7(a) Lenders, Certified Development Companies, Microloan
Intermediaries, and Non-Lending Technical Assistance Providers. This
rule is necessary to provide coordinated and effective oversight of
financial institutions that originate and manage SBA guaranteed loans.
DATES: Comments must be received on or before December 31, 2007.
ADDRESSES: You may submit comments, identified by [RIN number 3245-
AE14] by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Bryan Hooper, Director for Office of Credit Risk
Management, U.S. Small Business Administration, 409 3rd Street, SW.,
8th Floor, Washington, DC 20416.
Hand Delivery/Courier: Bryan Hooper, Director for Office
of Credit Risk Management, U.S. Small Business Administration, 409 3rd
Street, SW., 8th Floor, Washington, DC 20416.
All comments will be posted on http://www.Regulations.gov. If you
wish to include within your comment, confidential business information
(CBI) as defined in the Privacy and Use Notice/User Notice at http://
www.Regulations.gov and you do not want that information disclosed, you
must submit the comment by either Mail or Hand Delivery and you must
address the comment to the attention of Linda RU.S.C.he, Supervisory
Financial Analyst, Office of Credit Risk Management. In the submission,
you must highlight the information that you consider is CBI and explain
why you believe this information should be held confidential. SBA will
make a final determination, in its sole discretion, of whether the
information is CBI and, therefore, will not be published or not.
FOR FURTHER INFORMATION CONTACT: Linda RU.S.C.he, Supervisory Financial
Analyst, at (816) 426.4860, or Bryan Hooper, Director, Office of Credit
Risk Management, (202) 205.3049.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory
Section 7(a) of the Small Business Act (the Act), 15 U.S.C. 636,
authorizes SBA to guarantee loans made by Lenders (7a Lenders) to
eligible small businesses. Under Section 504 of the Small Business
Investment Act, 15 U.S.C. 697a, SBA guarantees Certified Development
Company (CDC) debentures. Section 7(m) of the Act authorizes SBA to
make direct loans to Microloan Intermediaries, who use proceeds to make
loans to very small businesses, and also authorizes SBA to make
technical assistance grants to non-lending technical assistance
providers (NTAPs). 15 U.S.C. 636(m). With this authority to offer
government guarantees and related grants, Congress has also provided
SBA with authority to support appropriate Lender, CDC, Microloan
Intermediary, and NTAP supervision. 15 U.S.C. 650; 15 U.S.C. 634 note,
citing Public Law 104-208, Division D, Title I, Sec. 103(h); 15 U.S.C.
634(b)(14); 15 U.S.C. 634(b)(7); 15 U.S.C. 636(a)(31); 15 U.S.C.
687(f); 15 U.S.C. 696(3)(A); 15 U.S.C. 697(a)(2); 15 U.S.C. 697e(c)(8);
and 15 U.S.C. 634(b)(6).
The provisions cited include both direct and indirect authority to
supervise, regulate, and examine Small Business Lending Companies
(SBLCs) and Non-Federally Regulated Lenders (NFRLs). 15 U.S.C. 650; 15
U.S.C. 634(b)(14); 15 U.S.C. 636(a)(31); and 15 U.S.C. 634(b)(6) and
(7). The cites also include both direct and indirect provisions that,
together, authorize SBA oversight of and reviews of the SBA operations
of other 7(a) Lenders (including national banks and other federally
regulated financial institutions), CDCs, Microloan Intermediaries, and
NTAPs. 15 U.S.C. 634 note, citing Public Law 104-208, Division D, Title
I, Sec. 103(h); 15 U.S.C. 634(b)(14); 15 U.S.C. 634(b)(6) and (7); 15
U.S.C. 636(a)(31); 15 U.S.C. Sec. 687(f); 15 U.S.C. 696(3)(A); 15
U.S.C. 697(a)(2); and 15 U.S.C. 697e(c)(8).
B. History
Currently, there are over 5,000 7(a) Lenders and CDC s (together,
SBA Lenders) authorized to make SBA-guaranteed loans and issue SBA-
guaranteed debentures. These SBA Lenders hold approximately $60 billion
of 7(a) and 504 loans outstanding (in gross dollars). SBA has delegated
increasingly more authority to its SBA Lenders such that the number of
loans originated under delegated authority has grown from approximately
20% of SBA's loan volume in 1992 to over 75% of SBA's loan volume as of
2006. As SBA continues to place more responsibility and independence on
its SBA Lenders, SBA must have the necessary controls to ensure that
SBA Lenders' SBA operations are well-managed and avoid unnecessary
losses. A comprehensive oversight process provides this control for the
Agency.
Prior to 1999, SBA's risk management, lender monitoring, and lender
oversight activities were conducted by SBA's Office of Financial
Assistance (OFA) and SBA's District Offices, which were also
responsible for developing and promoting the Agency's business loan
programs. With the increase in lending authority given to SBA Lenders
and lending volume, SBA needed a separate division to perform risk
management and lender oversight.
Therefore, in 1999 SBA established the Office of Lender Oversight
(OLO) for the primary purpose of ensuring the ``consistent and
appropriate supervision of SBA's lending partners.'' At the time it was
initially established, OLO's major responsibilities were defined as:
``evaluating existing oversight regulations, policies and procedures
and promulgating new ones where appropriate; monitoring changes in the
accounting, banking and financial industries, and recommending
appropriate modification of SBA oversight policy; coordinating all
headquarters and field office activities with respect to Lender
reviews; [and] evaluating new programs and changes to existing programs
to assess their risk potential * * *'' The head of the office, the
Associate Administrator for OLO, was to serve as a member of SBA's Risk
Management Committee and a key member of the group developing and
implementing the Agency's lender monitoring and oversight system.
Subsequent to its establishment, OLO assumed responsibility for
conducting ``safety and soundness'' examinations of the SBLCs and
compliance reviews for Preferred Lenders Program (PLP) Lenders. OLO
then began developing a risk-based review process for all SBA
[[Page 61753]]
Lenders. OLO, in 2003, developed and implemented a Loan and Lender
Monitoring System (L/LMS). In late 2004, Congress provided SBA specific
supervision and enforcement authorities over SBLCs and NFRLs (together,
SBA Supervised Lenders). In April 2005, SBA published Delegations of
Authority that delineated the responsibilities of OLO and a new Lender
Oversight Committee (LOC) consistent with new authorities. 70 FR 21262
(April 25, 2005). On May 5, 2007, SBA published a final rule governing
7(a) Lender review/examination fees. 72 FR 25189. On May 16, 2007 OLO
published a final rule on SBA's Lender Risk Rating System. 72 FR 27611.
Also, in May 2007, SBA reorganized and renamed the office to the Office
of Credit Risk Management (OCRM). Most recently, SBA has reviewed the
Agency's current oversight regulations and is now proposing this rule
to incorporate OCRM's new authorities and SBA's risk-based lender
oversight program into SBA's regulations. A discussion of the proposed
rule, consisting of an overview and key provisions, follows.
II. Proposal
A. Overview
The proposed rule would incorporate SBA's risk management/lender
oversight program into SBA's business loan program regulations by: (i)
Adding risk management definitions to Part 120 (13 CFR 120.10); (ii)
incorporating risk management/lender oversight metrics and tools into
program participation criteria and requirements (13 CFR 120.410,
120.424, 120.433, 120.434, 120.451, 120.710, 120.812, 120.820, 120.826,
120.830, 120.839, and 120.841); (iii) updating provisions to include
key OCRM Delegations of Authority (13 CFR 120.451, 120.461, 120.702,
120.710, and 120.845); and (iv) consolidating loan program oversight
and enforcement regulations into subpart I, designated Risk-Based
Lender Oversight. (See below chart on Regulations Relocated). Subpart I
would cover the role and responsibilities of OCRM, the Risk Rating
System, off-site reviews/monitoring, on-site reviews and examinations,
and enforcement actions against SBA Lenders, Microloan Intermediaries,
and NTAPs.
Chart of Regulations Relocated
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Regulation subject Proposed regulatory
Current regulatory citation matter citation
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Sec. 120.414.............. SBA access to 7(a) Sec. 120.1010.
Lender files.
Sec. 120.415.............. 7(a) program-- Sec. 120.1400
Suspension or (grounds).
revocation of Sec. 120.1500
eligibility to (types of
participate. enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.442.............. Suspension or Sec. 120.1400
revocation of CLP (grounds).
status. Sec. 120.1500
(types of
enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.454.............. PLP performance Sec. 120.1000(a)
review. (Risk-Based Lender
Oversight).
Sec. 120.1025 (off-
site reviews/
monitoring).
Sec. 120.1050 (on-
site reviews and
examinations).
Sec. 120.455.............. Suspensions or Sec. 120.1400
revocations of PLP (grounds).
status. Sec. 120.1500
(types of
enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.470(b)(3)........ Minimum SBLC capital Sec. 120.471
requirement. (minimum capital
requirement).
Sec. 120.472
(higher individual
minimum capital
requirement).
Sec. 120.473
(procedures for
higher individual
minimum capital
requirement).
Sec. 120.470(b)(4)........ SBLC capital Sec. 120.462(d).
impairment.
Sec. 120.470(b)(5)........ SBLC issuance of Sec. 120.471(d).
securities.
Sec. 120.470(b)(6)........ SBLC voluntary Sec. 120.471(c).
capital reduction.
Sec. 120.470(b)(7)........ SBLC reserve for Sec. 120.463(e).
losses.
Sec. 120.470(b)(8)........ SBLC internal Sec. 120.460(b).
controls.
Sec. 120.470(b)(9)........ SBLC dual control... Sec. 120.470(d).
Sec. 120.470(b)(10)....... SBLC fidelity Sec. 120.470(e).
insurance.
Sec. 120.470(b)(11)....... SBLC common control. Sec. 120.470(f).
Sec. 120.470(b)(12)....... SBLC management..... Sec. 120.470(g).
Sec. 120.470(b)(13)....... SBLC borrowed funds. Sec. 120.470(h).
Sec. 120.471.............. SBLC recordkeeping Sec. 120.461.
and retention
requirements.
Sec. 120.473.............. SBLC change of Sec. 120.475.
control.
Sec. 120.474.............. SBLC prohibited Sec. 120.476.
financing.
Sec. 120.475.............. SBLC Audits......... Sec. 120.490.
Sec. 120.476.............. SBLC suspension and Sec. 120.1400
revocation. (grounds).
Sec. 120.1500
(types of
enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.716.............. Microloan Sec. 120.1425
Intermediary and (grounds).
NTAP suspension and Sec. 120.1540
revocation. (types of
enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.853.............. CDC reviews......... Sec. 120.1000,
Sec. 120.1050.
Sec. 120.854.............. CDC grounds for Sec. 120.1400
taking enforcement (grounds).
action.
Sec. 120.855.............. CDC types of Sec. 120.1500
enforcement actions. (types of
enforcement
actions).
Sec. 120.856.............. CDC enforcement Sec. 120.1600
procedures. (enforcement
procedures).
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Chart: This chart is intended to serve as a reference tool for locating
regulatory provisions repositioned under the proposed rule. In some
instances, the relocation involves simply moving text from one
regulatory section to another. In other instances, SBA is proposing
substantive changes with the move.
[[Page 61754]]
B. Key Provisions
The following is a discussion of key provisions of the proposed
rule. They are as follows: (i) SBA Supervised Lender regulation; (ii)
capital regulation; (iii) incorporation of a risk rating system; (iv)
the addition of the CDC Single Audit Act provision; (v) the
codification of the risk-based on-site review and examination program;
and (vi) the coordination and development of enforcement policies and
procedures. These key provisions are highlighted because they generally
cover more than one regulation within the proposed rule. In addition,
their discussion will provide a useful background for regulation
review.
1. SBA Supervised Lender Regulation
Public Law 108-447, Division K, Title I (December 2004) effectively
created a new category of SBA Lender--an SBA Supervised Lender. SBA
Supervised Lenders consist of SBLCs and NFRLs. P.L 108-447 generally
treated these 7(a) Lenders the same for purposes of regulation,
supervision, and enforcement. Accordingly, SBA has drafted a group of
regulations applicable to SBA Supervised Lenders in general (Sec. Sec.
120.460-120.465). The SBA Supervised Lender regulations would cover for
example; internal controls, record retention, accounting and reporting,
and capital adequacy. Many of these new regulations governing SBA
Supervised Lenders, especially those related to capital, are similar to
that of either the Federal Deposit Insurance Corporation; the Federal
Reserve Board; the Office of the Comptroller of the Currency; the
Office of Thrift Supervision; the National Credit Union Administration;
or the Farm Credit Administration (each a Federal Financial Institution
Regulator).
2. Capital Regulation
Essential to the success of a government guaranteed loan program is
the financial strength of its lenders. Capital is a common metric for
measuring financial strength. The proposed rule would incorporate
capital more fully into the 7(a) program. Specifically, the proposed
rule would explicitly make having sufficient permanent capital a
requirement for 7(a) program participation (Sec. 120.410(a)). For 7(a)
Lenders with a Federal Financial Institution Regulator, meeting capital
requirements for an adequately capitalized financial institution would
be considered sufficient permanent capital to support SBA lending
activities. For SBA Supervised Lenders, adequate capital would mean
meeting its minimum capital requirement (For an SBLC--this would mean
meeting SBA's Sec. 120.471 minimum or Sec. 120.472 higher individual
minimum capital requirement, as applicable. For an NFRL--this would
mean meeting the minimum capital requirement set by its state of
incorporation regulator). While the proposed rule does not revise the
minimum capital requirement for all SBLCs, SBA is considering updating
this requirement. SBA seeks comments as to the appropriate minimum
capital requirement for SBLCs.
In addition to an SBLC minimum capital requirement, the proposed
regulations would allow SBA to set a higher individual minimum capital
requirement for an SBLC, where appropriate. (Sec. 120.472). SBA would
set such a higher minimum capital requirement after consideration of
certain risk-related factors described in proposed Sec. 120.472 and
pursuant to procedures contained in proposed Sec. 120.473. The
proposed rule would also require SBA Supervised Lenders to maintain a
minimum capital adequacy plan (Sec. 120.462(b)), and to quarterly
certify as to compliance with minimum capital requirements. (Sec.
120.462(c)). Capital impairment would be redefined under the proposed
rule for SBA Supervised Lenders, as failing to meet its applicable
minimum capital requirement. (Sec. 120.462(d)). Under the proposed
rule, if an SBA Supervised Lender fails to meet its minimum capital
requirement (i.e., is capitally impaired), it must file with SBA a
capital restoration plan (Sec. 120.462(e)) and then timely implement
the approved plan. SBA could take enforcement action under the proposed
enforcement regulations (Sec. Sec. 120.1400-1600) against an SBA
Supervised Lender that fails to submit a capital restoration plan that
is acceptable to SBA or fails to implement, in any material respect,
its capital restoration plan in a timely manner. The proposed capital
regulations contain provisions similar to those maintained by some
Federal Financial Institution Regulators.
3. Incorporation of a Risk Rating System
With the assistance of private industry leaders in predictive
modeling and risk rating systems, SBA has developed an SBA Lender Risk
Rating System. The proposed SBA Lender Risk Rating System was published
for comment in the Federal Register at 71 FR 25624 (May 1, 2006). On
May 16, 2007 OLO published the final rule on SBA's Lender Risk Rating
System. 72 FR 27611. The SBA Lender Risk Rating System is an internal
tool for assessing the risk of each SBA Lender's SBA loan operations on
a uniform basis within its program and for identifying those
institutions whose SBA loan operations and portfolio require additional
SBA monitoring or other action. Under the SBA Lender Risk Rating
System, SBA assigns each SBA Lender a composite rating of one to five
based on certain portfolio performance factors which may be overridden
in some cases due to SBA Lender specific factors that may be indicative
of a higher or lower level of risk. SBA would generally consider an SBA
assigned Risk Rating (Risk Rating) of either one, two, or three on a
scale of one to five to be an ``Acceptable Risk Rating''. A ``Less Than
Acceptable Risk Rating'' would be an SBA assigned Risk Rating of four
or five. (Sec. 120.10 and Sec. 120.1015). SBA may revise the scale
for SBA Risk Ratings and related definitions as the program develops.
Any such changes would be published in the Federal Register for notice
and comment. SBA plans to develop a risk rating system for Microloan
Intermediaries and NTAPs and will provide notice before implementation
of this system.
SBA has incorporated the SBA Lender Risk Rating System into its on-
site risk-based reviews and examinations as set forth in SOP 51-00
governing on-site SBA Lender reviews and examinations. The proposed
rule would incorporate the SBA Lender Risk Rating System and its
definitions into SBA's loan program regulations. Risk Ratings would be
considered in determining whether an SBA Lender (and, in the future, a
Microloan Intermediary, or NTAP) has satisfactory SBA performance for
purposes of continued participation in the 7(a), 504, Microloan, or
NTAP programs (including the delegated authority programs) under
proposed amendments to: Sec. Sec. 120.410 (requirements for 7(a)
Lenders); 120.424 (securitization requirements); 120.433 (sales and
sales of participating interests); 120.434 (pledges of SBA loans);
120.451 (PLP Program); 120.812 (Extensions of CDC probationary periods
and permanent CDC status); 120.820 (requirements for CDC certifications
and operation); 120.839 (outside area of operation loan approval); and
120.841 (ALP status). SBA would also consider a Risk Rating before
approving a Microloan Intermediary's reduction in its loan loss reserve
fund (LLRF) under proposed amendments to Sec. 120.710. Under proposed
Sec. 120.1051, SBA would consider an SBA Lender's, Intermediary's, or
NTAP's Risk Rating in determining frequency of on-site reviews/
examinations.
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Under proposed rule Sec. 120.1400(c)(9), a repeated Less Than
Acceptable Risk Rating (particularly in conjunction with other grounds)
may evidence increased financial risk to SBA to warrant consideration
of taking formal enforcement action. A repeated Less Than Acceptable
Risk Rating may also be evidence of an SBA Lender not performing
underwriting, closing, disbursing, servicing, liquidation, or
litigation in a commercially reasonable and prudent manner under
proposed Sec. 120.1400(c)(4). SBA expects to consider additional
factors (e.g., on-site review/examination assessment, corrective
actions implemented, and contribution toward SBA mission) before taking
formal enforcement action on these Risk Rating grounds. Finally, a
repeated Less Than Acceptable Risk Rating could be support for SBA not
renewing program or delegated authorities.
The incorporation of the Risk Rating System into the regulations is
consistent with SBA's movement away from considering only the lagging
indicators of our portfolio benchmark performance measures and towards
integration of more current and sophisticated performance measurement
systems developed by private sector leaders.
4. Single Audit Act Provisions
The proposed rule incorporates Single Audit Act requirements into
SBA's 504 program regulations. The Single Audit Act (31 U.S.C. 7501-
7507) requires Non-Federal entities, such as non-profit CDCs, that
expend a total of $500,000 or more of federal awards (e.g. loan
guarantees) in any fiscal year (including amounts outstanding), to have
a single audit performed for such fiscal year. The audit must be
conducted by an independent auditor in accordance with generally
accepted government auditing standards. The Single Audit Act may also
require, under certain circumstances, the Non-Federal entity to monitor
the subrecipients' use of federal awards through site visits, limited
scope audits, and other means. By including reference to the Single
Audit Act in SBA regulations, SBA would not intend to extend coverage
of the Single Audit Act to those CDCs for which the Single Audit Act
does not apply. Therefore, for example, if a CDC does not meet the
$500,000 federal award minimum, then the Single Audit Act compliance
requirement would not apply. However, SBA estimates that virtually all
active CDCs are covered by the Single Audit Act. SBA also would intend
to consider CDC compliance with the Single Audit Act, including any
future amendments to it, as a requirement for participation in the 504
program and, accordingly would monitor CDC compliance with Single Audit
Act requirements.
5. Review and Examination Program
SBA has developed a coordinated risk-based SBA Lender review and
examination program. SBA regulations need to reflect the updated
coordinated risk-based review/examination approach. The proposed rule
would remove current regulatory provisions governing on-site reviews
and examinations within SBA's loan program regulations (Sec. Sec.
120.414, 120.454, 120.470, 120.853) and consolidate them within subpart
I on Risk-Based Lender Oversight. Under the proposed regulations, SBA
Lenders could now look in one location for consistent regulatory
guidance on on-site reviews and examinations. In addition, the proposed
rule would extend such guidance beyond regulatory authorization for
reviews and examinations. Specifically, the proposed rule would include
provisions for off-site reviews and monitoring, on-site review and
examination evaluative components, the frequency of on-site reviews and
examinations, review and examination reports, and expected responses,
including, as applicable, corrective actions and capital restoration
plans. As to the proposed regulation's on-site reviews, if an SBA
Lender is to be examined by a Federal Financial Institution Regulator
in the same general timeframe, SBA would try to mutually coordinate the
timing of the SBA operation review and the supervisor's examination to
minimize any burden. Finally, the proposed rule also would include
Microloan Intermediaries and NTAPs in the review regulations, and would
harmonize the review process between for-profit 7(a) Lenders and non-
profit CDCs, since SBA's partial guaranty of credit risk on individual
loans for each program is similar.
6. Enforcement Policies and Procedures
SBA has consolidated within subpart I, the Agency's enforcement
regulations for SBA Lenders, Microloan Intermediaries, and NTAPs. The
consolidation would facilitate coordinated enforcement policies. It
would allow all SBA Lenders, Microloan Intermediaries, and NTAPs to
look in one place for such regulatory guidance. Finally, consolidation
within subpart I should provide for greater consistency in taking
formal enforcement actions.
SBA has modeled its proposed enforcement provisions after SBA's CDC
enforcement regulations. Like the current CDC enforcement regulations,
subpart I's enforcement provisions would consist primarily of three
main enforcement regulations. The first, proposed Sec. 120.1400, would
cover grounds for enforcement actions. The second, proposed Sec.
120.1500, would list types of formal enforcement actions. The third,
proposed Sec. 120.1600, would set forth the procedures governing each
type of formal enforcement action. Within each of these proposed
regulations, the subsections are generally broken down into provisions
that apply to all SBA Lenders; additional provisions that apply only to
7(a) Lenders; additional provisions that apply only to SBA Supervised
Lenders; additional provisions that apply only to SBLCs; and additional
provisions that apply only to CDCs.
Enforcement grounds and formal enforcement actions for Microloan
Intermediaries and NTAPs would be contained in separate regulations
within the enforcement series, as there was less overlap with these
participants.
III. Section-by-Section Analysis
Section 120.10--Definitions. SBA proposes to add ten new
definitions to this section primarily for purposes of risk management/
lender oversight and enforcement. The new definitions would help to
clarify categories of SBA Lenders and related parties referenced in the
proposed regulations. Definitions would be added for 7(a) Lender, SBA
Lender, Small Business Lending Company (SBLC), Non-Federally Regulated
Lender (NFRL), SBA Supervised Lender, Other Regulated SBLC, Federal
Financial Institutions Regulator, and Management Official. SBA would
also add Risk Rating definitions that would describe an SBA Risk Rating
and the key rating categories of Acceptable and Less Than Acceptable.
Section 120.410--Requirements for all participating Lenders. Under
the proposed rule, the requirement in section 120.410(a) that a 7(a)
Lender have the continuing ability to evaluate, process, close,
disburse, service, liquidate, (and litigate) loans would be more
specifically defined to include (but not be limited to) (i) holding
sufficient permanent capital (For Lenders with Federal Financial
Institution Regulators, that would entail being ``adequately
capitalized.'' For SBLCs, that would entail meeting its SBA minimum
capital requirement. For NFRLs, that would entail meeting the minimum
capital requirement of its state of incorporation) and (ii) having
satisfactory SBA performance. SBA is more specifically defining the
[[Page 61756]]
continuing ability provision to include adequate capital and
satisfactory SBA performance because sufficient capital and
satisfactory performance sustain a 7(a) Lender's ability to evaluate,
process, close, disburse, service, liquidate, and litigate loans.
In determining satisfactory SBA performance, SBA would consider a
Lender's Risk Rating, among other factors. The other factors SBA
anticipates considering may include on-site review/examination
assessments, historical performance measures (like default rate,
purchase rate and loss rate), loan volume to the extent that it impacts
performance measures, other performance related measurements and
information, and contribution toward SBA mission.
Subsection (a) would also be revised to specify the requirement
that a 7(a) Lender have the ability to litigate loans. This is
consistent with SBA's policy on 7(a) Lender litigation of SBA Loans.
In addition, the OCRM proposed rule would further define SBA's
requirements to participate in the 7(a) program by adding the following
7(a) Lender requirements: (i) Good standing (as generally defined under
Sec. 120.420(f) and with a Lender's state banking regulator and/or
Federal Financial Institution Regulator, as applicable); (ii) safe and
sound condition; and (iii) use of commercially reasonable lending
policies, procedures, and standards employed by prudent lenders. For
SBA Supervised Lenders, safe and sound condition would be determined by
SBA. For other 7(a) Lenders, SBA would look to a 7(a) Lender's Federal
Financial Institution Regulator or state banking regulator, as
applicable, to ensure safe and sound condition.
Finally, subsection (d) would be clarified to provide that a 7(a)
Lender must be supervised and examined by either a Federal Financial
Institution Regulator, a state banking regulator (satisfactory to SBA)
or SBA. SBA is clarifying this provision to make clear that a 7(a)
Lender participating in SBA's program must be supervised and examined
by a banking regulator, satisfactory to SBA. The clarifications and
revisions proposed for Sec. 120.410 are intended to minimize losses in
the 7(a) program.
Sections 120.420(f)--Participating lender financings, definition of
``Good Standing''; 120.425(c)(2)--Reinstatement of securitizer PLP
status; and 120.426--Actions SBA would take if SBA securitizer
transfers tranche prior to holding period. SBA proposes to change the
determining authority in these provisions from the Securitization
Committee to the more recently established Lender Oversight Committee
(LOC). Proposed changes to Sec. 120.420(f) would also specify the
LOC's discretion in reviewing an SBA Lender's good-standing in certain
circumstances involving investigations, indictments, convictions, and
judgments, to be consistent with the LOC's discretion set forth in
120.420(f)(4). Finally, SBA proposes to add the words ``In general'' to
its ``good-standing'' definition to underscore the discretionary nature
of the ``good-standing'' determination.
Sections 120.424--What are the basic conditions a Lender must meet
to securitize; 120.433--What are SBA's other requirements for sales and
sales of participating interests; and 120.434--What are SBA's
requirements for loan pledges? SBA is revising the requirements in
these sections to more explicitly reference the ``good standing''
definition in Sec. 120.420(f). SBA is also proposing to add the
requirement that 7(a) Lenders have satisfactory SBA performance as
determined by SBA and that Risk Ratings would be considered among other
factors in determining satisfactory SBA performance. SBA expects to
consider among the other factors, on-site review/examination
assessments, historical performance measures like default rate,
purchase rate and loss rate, other performance-related measures and
information, and contribution toward SBA mission. This change would
incorporate SBA's Risk Rating System within SBA's securitization and
other conveyance regulations.
Section 120.435--Which loan pledges do not require notice to or
consent by SBA? SBA proposes to update the cross-reference to ``Sec.
120.434(e)'' within this section consistent with proposed revisions to
Sec. 120.434.
Section 120.451--How does a Lender become a PLP Lender? SBA is
proposing to amend Sec. 120.451 to add satisfactory SBA performance to
those items SBA would consider in approving PLP status. Subsection (e)
on PLP recertification would also be amended to include SBA performance
(including contribution to SBA mission), a Lender's Risk Rating,
examination and review results, and other risk-related factors in the
recertification decision. Section 120.451 would also be amended to
provide that the recertification decision would be made by the
appropriate Office of Capital Access official in accordance with
Delegations of Authority. Also, SBA proposes to delete current
subsections (c) and (f) to conform to existing Agency policy as
published in Notice 5000-989 dated May 2, 2006 governing PLP
territories. Finally, these additions incorporate lender oversight and
related performance metrics and OCRM's Delegations of Authority into
PLP program participation determinations.
Section 120.460--What are SBA's additional requirements for SBA
Supervised Lenders? SBA is proposing a new Sec. 120.460 entitled
``What are SBA's additional requirements for SBA Supervised Lenders?''
In addition to complying with SBA's requirements for 7(a) Lenders, an
SBA Supervised Lender would be required to meet additional requirements
set forth in Sec. 120.460 and the sections that follow. Under Sec.
120.460, SBA would require an SBA Supervised Lender to adopt an
internal control policy that would provide adequate direction for
establishing effective control over and accountability for operations,
programs, and resources. An SBA Supervised Lender that is required to
maintain an adequate internal control program may be more likely to
self-identify and self-correct operational deficiencies. Proposed Sec.
120.460 is similar to a Federal Financial Institution Regulator
internal control provision in Title 12 of the Code of Federal
Regulations.
Section 120.461--What are SBA's additional requirements for filing
SBA Supervised Lender reports with SBA and for record retention? This
proposed regulation would require that SBA Supervised Lender specific
reports be filed with the appropriate Office of Capital Access official
in accordance with Delegations of Authority. This is consistent with
current Delegations of Authority. This section would also extend the
recordkeeping requirements for SBLCs to NFRLs. Record retention is
required for SBA to be able to perform safety and soundness
examinations or Lender reviews and to monitor that SBLC licensing
requirements are maintained. Finally, this proposed section would newly
specify certain time periods for retrieving certain documents (i.e., 1
day for documents that must be immediately retrievable and 15 days for
originals of documents that are stored electronically). Consequently,
an SBA Supervised Lender must be able to produce needed records when
required, and within a reasonable period of time, as defined here.
Section 120.462--What are SBA's additional requirements on capital
maintenance for SBA Supervised Lenders? A financial institution is
expected to maintain capital commensurate with its existing and
potential risk exposure and the ability of management to identify,
measure, monitor, and control exposures. Given this, many SBA
Supervised Lenders do,
[[Page 61757]]
and should be expected to, maintain capital levels above specified
minimums. Therefore, SBA is proposing a new Sec. 120.462 which would
guide SBA Supervised Lenders to maintain their own capital adequacy
goals and plans, typically at a level above SBA's minimum. The
provision would also provide guidance as to factors an SBA Supervised
Lender should consider in determining the total amount of capital
needed to assure the SBA Supervised Lender's continued financial
viability and to provide for any necessary growth.
Given the importance of maintaining adequate capital, the proposed
rule would further require that all SBA Supervised Lenders, within 45
days of the end of each fiscal quarter, furnish SBA with a calculation
of its compliance with its minimum regulatory capital requirement.
Under proposed Sec. 120.462(c), SBA would require the SBA Supervised
Lender's chief financial officer to certify the calculation as correct.
Section 120.462 would extend to NFRLs SBA's requirement to timely
notify SBA in writing of capital impairment. Under proposed Sec.
120.462(d), SBA would redefine capital impairment as any failure by an
SBA Supervised Lender to meet its minimum capital requirements. SBA is
proposing this revision to provide SBA early notice of a Supervised
Lender's deteriorating capital position below required minimums. Unless
otherwise waived by SBA in writing, an SBA Supervised Lender would be
prohibited from presenting any loans to SBA for guarantee until the
capital impairment is cured.
Finally, the proposed rule would require an SBA Supervised Lender
that fails to meet its minimum capital requirement to submit a capital
restoration plan. Proposed subsection (e) would detail the plan
content, how SBA would respond, amendments to the capital plan, and
consequences of failure to: (i) Submit an acceptable plan within the
required timeframe or (ii) implement in any material respect an
approved capital restoration plan within the plan timeframe.
Section 120.463--Regulatory accounting. To facilitate accurate and
reliable financial reporting, the proposed rule contains a new Sec.
120.463 on regulatory accounting. The proposed regulation would require
that an SBA Supervised Lender's (i) books and records be kept on an
accrual basis in accordance with Generally Accepted Accounting
Principles (GAAP) as supplemented by Regulatory Accounting Principles
(RAP) and (ii) financial statements be audited annually in accordance
with generally accepted auditing standards by an independent certified
public accountant experienced in auditing financial institutions.
Proposed subsection (d) would require an SBA Supervised Lender that
discharges its auditor to notify SBA within ten days of discharge and
provide SBA with the name, address, and telephone number of the
discharged auditor. If the discharge involved a dispute over the
financial statements, the SBA Supervised Lender would also have to
provide additional information, including but not limited to, a
detailed reason for the discharge and the effect of each party's
position on the financial statements.
Proposed subsection (e) would extend the SBLC requirement for
maintenance of an allowance for losses on loans to NFRLs. Under
proposed Sec. 120.463(e), an SBA Supervised Lender would be required
to maintain documentation of its loan loss allowance calculations and
analysis in sufficient detail to permit the SBA to review assumptions
used and their application. SBA would also require, under subsection
(e) that the unguaranteed portions of loans identified as uncollectible
be charged off promptly. If the portion determined to be uncollectible
by the SBA Supervised Lender would differ from that determined by its
auditors or the SBA, the SBA Supervised Lender would be required to
charge-off such amount as the SBA may direct. Each SBA Supervised
Lender would also be required to classify loans as nonaccrual or
formally restructured in accordance with stated guidelines. Under the
proposed subsection, if one loan to a given borrower would be
classified as nonaccrual or formally restructured, all loans to that
borrower would be required to be so classified unless the SBA
Supervised Lender could document that the loans have independent
sources of repayment.
Finally, Sec. 120.463, subsection (f), would require that SBA
Supervised Lenders account for loan sales transactions and the
valuation of loan servicing rights in accordance with GAAP. At the end
of each quarter, assumptions used in the valuation would be reviewed by
the SBA Supervised Lender for reasonableness in the existing
environment. In evaluating the assumptions, the SBA Supervised Lender
would be required to give particular attention to interest rate and
repayment rate assumptions. Assumptions considered no longer reasonable
would be required to be modified and reflected in the valuation and
would have to be documented and supported by a market analysis. Under
subsection (f), SBA could require an SBA Supervised Lender to use
industry averages for the valuation of servicing rights, in lieu of any
other assumptions found unacceptable by SBA.
Section 120.464--Reports to SBA. Proposed Sec. 120.464 would
extend to NFRLs, SBA's current SBLC reporting requirements covering
audited financial statements, administrative and legal proceedings,
reports to stockholders, summaries of changes (in organization and
financing), stock pledges, and other reports, as listed in current
Sec. 120.472.
Proposed Sec. 120.464 would also clarify current reporting
requirements by, for example, detailing required statements to
accompany the Annual Report (audited financial statements); inserting
filing time requirements where presently not stated (Stockholder Report
and Report of Changes); detailing the form and format of financial
reporting (e.g. for Annual Reports, Quarterly Condition Reports, and
Reporting of Changes--to be in accord with GAAP, include footnotes, and
utilize accrual accounting), and specifying that any legal or
administrative proceedings must be included in other required reporting
(e.g., Annual Report, Quarterly Condition Report, any Capital plan
report, etc.) until such matter is resolved.
Proposed Sec. 120.464 would also introduce two additional SBA
Supervised Lender reports: (i) The Quarterly Condition Report and (ii)
the Reports of Changes in Financial Condition. SBA Supervised Lenders
would report quarterly financial status in Quarterly Condition Reports.
The Quarterly Condition Report under proposed Sec. 120.464 would
contain quarterly financial statements that could be internally
prepared and which would likely include the required certification of
compliance with capital requirements under proposed Sec. 120.462(c).
Reports of Changes in Financial Condition would report material changes
in an SBA Supervised Lender's financial condition (such as
unanticipated reductions in asset values due to unanticipated events
such as natural disasters or uninsured hazard loss). Generally, SBA
would require the SBA Supervised Lender to file the Report of Changes
in Financial Condition within 10 days of becoming aware of such a
material financial change, except in cases of capital impairment which
would be 30 days from the month-end in which the impairment occurred,
in accordance with proposed Sec. 120.462(d), as clearly specified in
the Regulation language. These two financial reports would result in
timelier financial reporting.
[[Page 61758]]
Subsection (c) would require that SBA Supervised Lenders certify
each report of financial condition (e.g., the Quarterly Condition
Report, the Changes in Financial Condition Report and the Annual
Report) as having been prepared in accordance with applicable
regulations and instructions and to be a true, accurate, and complete
representation of the SBA Supervised Lender's financial condition and
performance. Accurate financial reporting is essential to an
institution's safety and soundness. Reliable financial reports are
necessary for an SBA Supervised Lender to raise capital. They provide
data to stockholders and potential investors on the company's financial
position and results of operations. Such information is critical to
effective market discipline. Accurate financial information also
enables management to effectively manage the institution's risks and
make sound business decisions. Further, the compilation and submission
of accurate financial information on a regular basis in a consistent
format allows SBA to perform more timely and effective risk-based
supervision to support examination functions, off-site monitoring,
assessments of an institution's capital adequacy and financial
strength, and comparisons between SBA Supervised Lenders.
Finally, proposed Sec. 120.464 would provide for a waiver
provision for any reporting requirement for good cause. Good cause may
include, but is not limited to, where an SBA Supervised Lender has a
relatively small SBA loan portfolio, consistently-acceptable Risk
Ratings, portfolio performance that exceeds SBA's portfolio or peer
group averages, etc. This waiver would be determined by SBA, in its
sole discretion. In making this determination based on portfolio size,
SBA expects to consider the value of the report to SBA given the size
of SBA Supervised Lender's SBA loan portfolio and relative to other SBA
Supervised Lender's portfolios individually and in the aggregate and
other risk related factors. Authority for such actions will be in
accordance with SBA's Delegations of Authority.
Section 120.465--Civil penalty for late submission of required
reports. Congress recognized the importance of reporting to effective
oversight and legislated civil monetary penalties of up to $5,000 per
day for SBA Supervised Lenders that fail to meet reporting requirements
(15 U.S.C. 650(j)). Proposed Sec. 120.465 would codify in SBA
regulations the statutory civil monetary penalties. The proposed
regulation would provide that penalties would automatically accrue from
the report due date until the SBA Supervised Lender submits a complete
report. If a submitted report is not complete, it would be deemed not
filed for purposes of civil monetary penalty assessment. Under the
proposed rule, if SBA discovers after the due date (e.g., during an
examination) that the report was submitted only in part or was not
filed, penalties would be assessed dating back to the original due
date. Finally, proposed Sec. 120.465 would provide procedures for
requesting: (i) Due date extension and waiver of automatic penalty up
to a new due date, (ii) reduction or exemption from the automatic
penalty, and (iii) reconsideration of SBA decisions on extensions and
reductions/exemptions and would include factors that would be
considered in the SBA approval (e.g. determination of reasonable cause
such as natural disaster or other conditions beyond the control of
management, that failure was not due to willful neglect, demonstration
of modified internal procedures to comply with reporting in the future,
etc.). SBA seeks comments on the factors SBA would consider as
discussed in the proposed rule.
Section 120.470--What is an SBLC? As part of the rewrite of the
SBLC regulations, SBA is proposing to amend the title and certain
content of current Sec. 120.470. Under the proposed rule, the subject
matter in several provisions of Sec. 120.470 would be moved elsewhere
in Part 120 (See Chart of Regulations Relocated in the Proposal section
of the preamble) and some remaining provisions would be updated,
reorganized, or expanded. Updates would include, for example: The
addition of limited liability companies and limited partnerships as
allowable business structures; an increase to $2 million for required
Fidelity Bond insurance; incorporation of new definitions of 7(a)
Lender and Intermediary into subsection (a)(2) on lending requirements;
a statement on SBA's policy on capitalization with borrowed funds. The
Fidelity Bond increase would update the insurance requirements
consistent with the current maximum loan amount that SBA can guarantee.
SBA would expand guidance, in particular, on SBA's policy against
capitalization with borrowed funds. Borrowed funds may result in a
weaker capital position of the SBLC due to the potential for required
repayment. SBA would also expand guidance in the proposed subsection on
common control--providing terms and definitions, requirements for
divestitures, and a clearer statement on common control and
presumptions.
Section 120.471, 120.472, 120.473, and 120.474--SBLC minimum
capital requirements. SBA sets SBLC capital standards pursuant to 15
U.S.C. 650(a)(2) and 15 U.S.C. 634(b)(7) in conjunction with 15 U.S.C.
636. Proposed Sec. Sec. 120.471 through 120.474 would govern SBLC
minimum capital standards. Proposed Sec. 120.471 would state SBA's
baseline minimum capital standard for SBLCs. Under proposed Sec.
120.471, the baseline would remain at the current level stated in Sec.
120.470(b)(3). However, SBA is considering revising the baseline
minimum capital standard and seeks comments on the appropriate minimum
capital level.
Proposed Sec. 120.471 would provide more detailed guidance on
those items that SBA would include in calculating an SBLC's capital
under the capital requirement. The capital calculation would generally
consist of the following items: (i) Common stock; (ii) preferred stock
that is non-cumulative as to dividends and does not have a maturity;
(iii) additional paid-in-capital for stock in excess of the par value;
(iv) retained earnings; and (v) for limited liability companies and
limited partnerships, those capital contributions that are not subject
to repayment at any specific time, are not subject to withdrawal and
have no cumulative priority return. The inclusion of retained earnings
and limitations on preferred stock in the proposed rule is consistent
with Federal Financial Institution Regulator policies.
In some cases, SBA may determine that the baseline minimum capital
formula may not be sufficient to support the risk associated with a
particular SBLC's portfolio. Consequently, proposed Sec. 120.472 would
provide that SBA may require a higher individual minimum capital
requirement for an SBLC. Proposed Sec. 120.472 would provide examples
of risk-related factors that SBA might consider in making that
determination. An SBLC individual minimum capital requirement would be
established pursuant to procedures set forth in proposed Sec. 120.473
or through written agreement or a cease and desist proceeding as stated
in proposed Sec. 120.474. The proposed individual minimum capital
requirement procedures are similar to those provided by some Federal
Financial Institution Regulators.
Finally, the SBLC capital regulations would include a change in
policy for approving issuances of securities (currently in Sec.
120.470(b)(5) and proposed in Sec. 120.471(d)). The proposed
provisions would delete the last part of
[[Page 61759]]
current Sec. 120.470(b)(5). This deletion would have the effect of
making it a requirement for an SBLC to obtain prior written approval
for issuances of common stock, including issuances for cash or direct
obligations of or obligations fully guaranteed as to principal and
interest by the United States government. This is consistent in general
with SBA's policy of prior approval for other types of financings (e.g.
warehouse lines, participations, and securitizations). For further
information on proposed rule capital provisions see the Capital
Regulation provision in the Proposal section of the preamble.
Section 120.475--Change of ownership or control. SBA proposes to
relocate current Sec. 120.473 governing change of ownership and
control for SBLCs to Sec. 120.475. In addition, the proposed rule
would shift approval authority from the D/FA to the appropriate Office
of Capital Access official in accordance with Delegations of Authority
to reflect changes in internal agency procedure. Further, if a transfer
of ownership or control is subject to approval of any State or Federal
chartering, licensing, or other regulatory authority, copies of any
documents filed with such authority would also have to be transmitted
to the appropriate Office of Capital Access official in accordance with
Delegations of Authority.
Section 120.630--Qualifications to be a Pool Assembler. SBA
proposes to add an additional requirement applicable only to SBA
Lenders. Specifically, SBA would require SBA Lenders seeking to become
a Pool Assembler to have satisfactory SBA performance, as determined by
SBA. SBA would consider an SBA Lender's Risk Rating, among other
factors, in determining satisfactory SBA performance. The other factors
that SBA anticipates considering may include on-site review/examination
assessments, historical performance measures (e.g., default rate,
purchase rate, and loss rate), loan volume to the extent that it
impacts performance measures, and other performance related
measurements and information. SBA considers these factors as relevant
to the expected performance of a Pool Assembler. SBA is revising this
regulation to incorporate SBA loan program performance for SBA Lenders/
pool assemblers into pool assembler eligibility criteria.
Section 120.702--Limitations on where an Intermediary may operate?
Current Sec. 120.702 provides that Microloan Intermediaries may
operate in only one state unless SBA determines that it would be in the
best interests of the small business community for it to operate across
state lines. The proposed rule would shift approval authority for
expansions from the D/FA to the appropriate Office of Capital Access
official in accordance with Delegations of Authority to reflect changes
in internal agency procedure.
Section 120.710(c) and (d)--Microloan Intermediary Loan Loss
Reserve Fund (LLRF) approval authority. SBA proposes amending Sec.
120.710(c) and (d) to shift approval authority for a reduction in the
LLFR calculation from the D/FA to the appropriate Office of Capital
Access official in accordance with Delegations of Authority. This
revision would reflect changes in internal agency procedure.
Sections 120.710(e)(1), 120.812, 120.820, 120.839, and 120.841--
Microloan Intermediary LLRF reduction and selected CDC authority
criteria. SBA proposes amending Sec. Sec. 120.710(e)(1) (Microloan
Intermediary reduction of LLRF); 120.812 (Extension of CDC probationary
periods and permanent CDC status); 120.820 (Requirements for CDC
certification and operation); 120.839 (Outside area of operation loan
approval); and 120.841 (ALP status), to incorporate that SBA would
consider an Intermediary's or SBA Lender's performance (which will
include its Risk Rating, among other factors) in making determinations
under these regulations. SBA expects to consider in determining
satisfactory SBA performance on-site review assessments; historical
performance measures; loan volume to the extent that it impacts
performance measures; other performance related measurements and
information, and contribution toward SBA mission. Proposed Sec.
120.841(c) (ALP status) would also add the requirement that an ALP CDC
must have a risk-based review assessment of ``acceptable'' or
``acceptable with corrective actions required'' to be considered for
ALP status.
Section 120.826--Basic requirements for operating a CDC. The
proposed rule adds to Sec. 120.826 internal control requirements
similar to those proposed for SBA Supervised Lenders. Under the
proposed rule, a CDC would be required to adopt an internal control
policy to include maintenance of a loan review program, in conjunction
with its SBA-guaranteed debenture financings. In addition, a CDC would
have to have its financial statements annually audited by an
independent certified public accountant since this would establish
consistency in application of GAAP (a requirement) for CDC audits.
Proposed Sec. 120.826 would also incorporate the Single Audit Act
requirements into SBA's 504 program regulations.
Section 120.830--Reports a CDC must submit. SBA is proposing an
amended Sec. 120.830 to clarify the current annual report requirement
by detailing the statements that must be included.
Section 120.845(b)--PCLP status. Section 120.845(b) would be
revised to provide that final determinations under this section would
be made by the appropriate Office of Capital Access official in
accordance with Delegations of Authority. This proposed revision would
reflect changes in internal agency procedure.
Section 120.853--Oversight and evaluation of CDCs. Section 120.853
currently covers both SBA reviews and Inspector General audits of CDCs.
The proposed rule would move the CDC review portion of the regulation
to subpart I--Lender Oversight (proposed Sec. Sec. 120.1000 and
120.1050--On-site Reviews and Examinations). The proposed rule would
retitle Sec. 120.853 ``Inspector General Audits of CDCs'' consistent
with the revised subject matter.
Section 120.956--Suspension or revocation of brokers and dealers.
The proposed rule would revise Sec. 120.956 to provide that the
appropriate Office of Capital Access official in accordance with
Delegations of Authority (rather than the D/FA) would be responsible
for suspensions and revocations of broker/dealer participation in the
Secondary Market. This is consistent with SBA's Delegations of
Authority for oversight and enforcement responsibilities. In addition,
the proposed rule deletes the last sentence on suspension of appeal
rights.
Subpart I--Risk-Based Lender Oversight. SBA is significantly
enhancing subpart I in Part 120 introduced on May 4, 2007 with SBA's
published final rule on its Lender oversight fees. 72 FR 25194. The
enhancements would consolidate SBA's supervision and enforcement
authorities for SBA Lenders, Microloan Intermediaries and NTAPs. This
consolidation would facilitate more coordinated and effective lender
oversight.
Section 120.1000--Risk management/Lender oversight. SBA is
proposing a new Sec. 120.1000 entitled ``Risk management/Lender
oversight'' that would describe lender oversight functions and the
financial institutions supervised under the subpart.
Section 120.1005--Bureau of PCLP Oversight. In Public Law 108-232
(May 28, 2004), the ``Premier Certified Lenders Program Improvement Act
of 2004'', Congress established two
[[Page 61760]]
alternative loss reserve pilot programs for certain Premier Certified
Lenders (PCLP CDCs) loan loss reserve funds (LLRF). The public law also
established the Bureau of PCLP Oversight in SBA to carry out such
functions as the Administrator designates towards implementing the
pilot programs. On May 26, 2006, SBA published a proposed rule
governing the LLRF pilot programs. See, 71 FR 30323. Under the
published proposed regulations, the Bureau of PCLP Oversight (Bureau)
would approve the independent auditor that a pilot participant would
engage to calculate its required LLRF. The Bureau would also review and
make a determination as to a pilot participant's process for analyzing
the risk of loss associated with the pilot participant's outstanding
PCLP debentures (and the underlying loans) and the sufficiency of the
LLRF. SBA anticipates publishing a final PCLP rule in the future.
Proposed Sec. 120.1005 as contained in today's proposed lender
oversight rule would include the Bureau of PCLP Oversight within
subpart I, SBA's consolidated lender oversight regulations. Proposed
Sec. 120.1005 would provide that the Bureau monitor the capitalization
of PCLP CDC pilot participants' LLRFs, and perform other related
functions. SBA may expand Bureau functions in the future consistent
with SBA's statutory authority.
Section 120.1010--SBA access to SBA Lender, Microloan Intermediary,
and NTAP files. Proposed Sec. 120.1010 governs SBA access to SBA
Lender, Microloan Intermediary, and NTAP files. SBA is relocating its
current file access regulation from Sec. 120.414 and expanding this
codification of authority to explicitly include CDCs, Microloan
Intermediaries, and NTAPs. This provision is intended to facilitate
lender oversight.
Section 120.1015--Risk Rating System. SBA is proposing a new Sec.
120.1015 entitled ``Risk Rating System.'' Under proposed Sec.
120.1015, SBA could assign a Risk Rating to all SBA Lenders, Microloan
Intermediaries, and NTAPs on a periodic basis (currently quarterly for
SBA Lenders). This SBA Risk Rating process is detailed separately in
final Federal Register notice at 72 FR 27320 (May 16, 2007). Risk
Ratings range from one to five, with one indicating the least risk and
five the most risk to SBA. OCRM would, from time to time, define the
numeric definitions of acceptable and unacceptable levels of risk. For
additional discussion of the Risk Rating System within this proposed
rule, see the Proposal section of the preamble.
Section 120.1025--Off-site reviews/monitoring. SBA is proposing a
new Sec. 120.1025 entitled ``Off-site reviews/monitoring''. Under
proposed Sec. 120.1025, SBA may conduct off-site reviews/monitoring of
all SBA Lenders, Microloan Intermediaries, and NTAPs, including SBA
Lender self-assessments and other targeted off-site reviews as defined
by SBA. Currently, SBA conducts off-site SBA Lender reviews on at least
a quarterly basis using SBA's Loan and Lender Monitoring System (L/
LMS). The L/LMS off-site review is SBA's primary method of monitoring
all of SBA's 5000-plus SBA Lenders. For lower volume SBA Lenders, it
may be the sole method of SBA review. L/LMS off-site reviews/monitoring
are also used in conjunction with SBA Lender onsite reviews/exams and
self-assessments (e.g. for purposes of planning and prioritization of
exams/reviews/assessments and for evaluating performance).
Under proposed Sec. 120.1025, SBA could require an SBA Lender,
Microloan Intermediary, or NTAP to perform a self-assessment. This
would be analogous to an AICPA Agreed Upon Procedures Engagement. For
lower volume SBA Lenders, Microloan Intermediaries, and NTAPs, a self-
assessment could consist of a self-evaluation as to SBA performance or
compliance with certain SBA requirements. Generally, SBA would consider
requiring a self-assessment to confirm corrective actions implemented
or in lieu of a targeted or limited scope review. SBA expects to
provide additional guidance on self-assessments in its SOPs.
Finally, SBA may also perform targeted off-site reviews and
monitoring (e.g., performance comparison to SBA portfolio and peer
averages, error rates in 1502 reporting, trend analysis, etc.). Off-
site reviews/monitoring mechanisms like L/LMS, self-assessments, and
other targeted off-site reviews are a timely and cost effective means
of overseeing and monitoring the SBA performance and compliance of SBA
Lenders, Microloan Intermediaries, and NTAPs.
Section 120.1050--On-site reviews and examinations. Proposed Sec.
120.1050--``On-site reviews and examinations'' would codify in one
place within SBA regulations SBA's authority to conduct examinations of
SBA Supervised Lenders and reviews of the SBA operations of SBA
Lenders. The proposed section would also describe the examination and
review components that SBA would likely evaluate. For SBA Supervised
Lender safety and soundness examinations, SBA would examine capital
adequacy; asset quality; management quality; earnings; liquidity;
compliance with laws, regulations, rules, SOPs, and SBA agreements; and
such other risk related factors as SBA may identify from time to time.
SBA's safety and soundness examinations are similar in scope to those
conducted by the Federal Financial Institution Regulators. For SBA
operational reviews, SBA would review the SBA portfolio performance;
SBA operations management; credit administration; compliance with laws,
regulations, rules, SOPs, and SBA agreements; and such other risk
related factors as SBA identifies from time to time. These components
have been identified by SBA as most useful in assessing lender
performance and risk to the loan program. Section 120.1050 would also
provide for SBA reviews of Microloan Intermediaries and NTAPs. Finally
it would provide SBA with the flexibility to perform other reviews and
examinations, as SBA determines necessary. These could include targeted
or limited scope reviews/examinations (e.g., ad hoc reviews/
examinations, additional monitoring activities, special performance
assessments). Targeted and limited scope reviews/examinations would
provide for a more efficient and less burdensome means of supervision
of specific deficiencies.
Section 120.1051--Frequency of on-site Lender reviews and
examinations. Proposed Sec. 120.1051 provides that SBA would perform
on-site reviews and examinations on a periodic basis. Currently, SBA
plans on conducting such reviews and examinations on a 12 to 24 month
cycle, depending on the risk characteristics of the SBA Lender,
Microloan Intermediary, or NTAP. The proposed regulation would also
list some risk-related factors that SBA would consider in determining
review/examination frequency. They would include (but would not be
limited to): (i) Off-site review/monitoring results (e.g. Risk Rating);
(ii) SBA portfolio size; (iii) prior findings; (iv) responsiveness to
correcting past deficiencies; and v) such other risk-related factors as
determined by SBA.
Section 120.1055--Review and examination results. Under the
proposed rule, SBA would provide SBA Lenders, Microloan Intermediaries,
and NTAPs a copy of their report of examination or review (Report). The
Report would contain findings, conclusions, corrective actions and/or
recommendations. The proposed regulation requires each director of an
SBA Supervised Lender and manager of the SBA Operations of SBA Lenders,
Microloan Intermediaries, and NTAPs to review the Report. If such
senior
[[Page 61761]]
management review the Report consistent with their responsibilities, it
is more likely that the SBA Lender, Microloan Intermediary, and NTAP
would commit to and make corrective actions. Proposed Sec. 120.1055,
would also provide procedures for responding in writing to SBA Reports
along with the consequences of failure to submit or implement
responses, corrective actions, and capital restoration plans.
Section 120.1060--Confidentiality of Reports, Risk Ratings, and
related Confidential Information. Proposed Sec. 120.1060 would provide
that Reports and other SBA prepared review or examination related
documents are the property of SBA. It would also provide that Reports,
Risk Ratings and related Confidential Information (including SBA Lender
portal information) would be privileged and confidential. The term
``Confidential Information'' is defined in the SBA Lender Information
Portal, and by notice issued from time to time. Currently, it is
defined as ``all lender-related information contained in the Portal
including `Lender Results', except for the `Past 12 Month Actual
Purchase Rate' and the `Past 12 Month Actual Charge-Off Rate'.'' Under
the proposed rule, SBA Lenders, Microloan Intermediaries, and NTAPs
would be required to restrict access to the Report, the Risk Rating,
and the Confidential Information to certain ``permitted parties'' as
defined in this proposed regulation and to those for whom access is
required by applicable law or legal process. For example, if it is
determined that such law or legal process requires disclosure to a
Federal Financial Institution Regulator, then this proposed regulation
would not preclude that access. SBA Lenders, Microloan Intermediaries
and NTAPs would be prohibited from otherwise disclosing Report, Risk
Rating, and Confidential Information in full or in part in any manner
without SBA's prior written permission. The confidentiality requirement
is reflective of the principles underlying the bank examiners
privilege--it provides for more open dialogue between regulators and
financial institutions, intending to lead to more cooperative and
expeditious identification and resolution of institution issues. For
more discussion on the confidentiality and limitations on disclosure
see SBA Lender Risk Rating System final notice, 72 FR 27611 (May 16,
2007).
Section 120.1400--Grounds for enforcement actions--SBA Lenders. The
proposed rule would consolidate existing SBA enforcement authorities
for SBA Lenders with new authorities, most of which are outlined in 15
U.S.C. 650 et seq. The SBA enforcement action provisions of the
proposed rule would begin with a new Sec. 120.1400 that would provide
a listing of grounds that may trigger enforcement action. Proposed
Sec. 120.1400 lists first those grounds that, in general, could
trigger enforcement actions, then those grounds that are specific to
certain enforcement actions, most of which are specific to certain
types of institutions (e.g., SBA Supervised Lenders).
Grounds for enforcement actions would not be limited to violations
of the regulations as stated in proposed subsection (a). SBA is
authorized to bring enforcement actions for breaches of terms and
conditions in the SBA Form 750 Loan and Guaranty Agreement and all
other agreements jointly executed by the SBA Lender and SBA.
The grounds, as proposed, are primarily derived from current
regulations or directly from the Act. For example, the grounds would
include: Failure to maintain eligibility requirements; failure to
comply materially with any requirement imposed by statute, regulation,
SOP, policy or procedural notice, or any agreement; making a material
false statement; and not performing underwriting, closing, disbursing,
servicing, liquidation, or litigation in a commercially reasonable and
prudent manner with respect to the applicable loan program (e.g., 7(a)
or 504). A repeated Less Than Acceptable Risk Rating would be included
in enforcement action grounds indirectly through subsections (c)(4) and
(c)(9). Subsection (c)(4) would provide that a repeated Less Than
Acceptable Risk Rating or on-site review/examination assessment could
be evidence to support a determination that the SBA Lender was not
performing underwriting, closing, disbursing, servicing, liquidation,
litigation or other actions in a commercially reasonable and prudent
manner. Subsection (c)(9) would provide that SBA may take enforcement
action if SBA determines there is increased financial risk (for
example--if SBA Lender has a repeated Less Than Acceptable Risk Rating
or if an officer, key employee, or loan agent involved with SBA loans
for an SBA Lender is indicted for a felony or on fraud charges). SBA
expects to consider additional factors (e.g., on-site review/
examination assessment or corrective action implemented) before taking
formal enforcement actions on Risk Rating grounds. For CDCs, in
particular, the Risk Rating and review assessment would replace the
indirect role of the portfolio benchmarks under current Sec.
120.854(a)(4).
Proposed paragraphs (11) and (12) would provide the grounds for
immediate suspension of loan program activities for SBA Lenders except
SBA Supervised Lenders, as well as the grounds for immediate suspension
of delegated authorities for all SBA Lenders. The basis for such action
would be a determination by SBA that one or more of the grounds in
subsection (c) exist and, that immediate action is needed to prevent
the risk of significant loss to SBA or to prevent significant
impairment of the 7(a) or 504 programs.
Proposed subsections (d) and (e) would incorporate the statutory
grounds for certain SBA Supervised Lender and SBLC enforcement actions
under 15 U.S.C. 650 et seq. Among those are grounds specific to SBA
Supervised Lenders (excluding Other Regulated SBLCs under proposed
Sec. Sec. 120.1510 and 120.1511) for suspensions and revocations of
SBA program authority. Subsection (f) would list additional grounds
specific to CDCs and, for PCLP CDCs, includes failure to establish and
maintain a LLRF in accordance with SBA regulations.
Section 120.1425--Grounds--Intermediaries participating in the
Microloan program and NTAPs. Proposed Sec. 120.1425 would incorporate
grounds for enforcement actions against Microloan Intermediaries and
NTAPs contained in current Sec. 120.716 into subpart I. In addition,
the proposed regulation would provide that a repeated Less Than
Acceptable Risk Rating or an indictment for a felony or on fraud
charges of an officer, key employee, or loan agent involved with SBA
loans or the SBA program for a Microloan Intermediary or NTAP could be
evidence of SBA's increased financial or program risk, and as such,
also serve as grounds for formal enforcement action. However, it would
not automatically mean that SBA would take formal enforcement action
under proposed Sec. 120.1540. In addition, SBA expects to consider
additional factors (e.g. on-site review/examination assessment or
corrective actions implemented) before taking formal enforcement
action.
Section 120.1500--Enforcement actions--SBA Lenders. SBA is
proposing a new Sec. 120.1500 entitled ``Enforcement Actions--SBA
Lenders'' that lists the formal enforcement actions that SBA may take
against an SBA Lender. These provisions generally would be listed in a
graduated manner within each SBA Lender category. New to this formal
list is (i) imposition of
[[Page 61762]]
portfolio guarantee dollar limit, (ii) suspension and/or revocation of
Secondary Market activity; and (iii) the new statutory SBA Supervised
Lender enforcement actions. SBA added the portfolio guarantee limit as
a means of limiting SBA's risk exposure for a particular SBA Lender.
SBA included suspension/revocation of a 7(a) Lender's authority to sell
or purchase loans in the Secondary Market in its list of formal
graduated actions also as a means of limiting an SBA Lender's risk
exposure to SBA and the Secondary Market. The suspension and revocation
of individual lending functions would facilitate SBA taking more
targeted measures to address isolated but significant functional
deficiencies.
The capital directive is within the SBLC enforcement actions. Under
proposed subsection (d)(1), SBA may order a capitally impaired SBLC (or
SBLC operating in an imprudent manner) to meet its capital requirement,
submit and adhere to a capital restoration plan, and obtain SBA
approval before taking certain actions, as detailed.
Sections 120.1510 and 120.1511--Other Regulated SBLCs. Proposed
Sec. Sec. 120.1510 and 1511 would address the rare instance where an
SBLC itself is directly examined by a Federal Financial Institution
Regulator or State banking regulator. Under such circumstances, the
``Other Regulated SBLC'' would be exempt from the statutory enforcement
provisions specific to SBA Supervised Lenders as granted in Sec. 23 of
the Act, 15 U.S.C. 650 [except those for SBLCs only in subsections (b)
and (c)]. SBA, instead, would rely on a Federal Financial Institution
Regulator's or state banking regulator's safety and soundness
examination conducted directly on the SBLC and their follow-up to
address safety and soundness issues.
To obtain the designation of Other Regulated SBLC, the SBLC would
have to certify, under proposed Sec. 120.1511, that it is directly
examined and regulated by a Federal Financial Institution Regulator or
state banking regulator. The elements of this certification are
detailed in the Regulation. This certification would have to be
submitted in writing within 60 days of the effective date of the final
rule or within 60 days of the date the SBLC becomes directly examined
and directly regulated by such regulator. The SBLC would have to
identify the Federal Financial Institution or state banking regulator
performing the examinations on it directly and provide information on
the most recent safety and soundness examination. An Other Regulated
SBLC would also be required to notify SBA in writing each time such a
safety and soundness examination of the SBLC itself took place and
report the interaction, to the extent allowed by law.
Proposed Sec. 120.1511(g) would provide that, in the event an SBLC
fails to timely comply with the necessary certification and reporting
requirements, then the Sec. 120.1510 exemption would not apply and SBA
would exercise its statutory authority to supervise the safety and
soundness of the SBLC and may take the statutory SBA Supervised Lender
enforcement actions, as necessary, to protect the financial interests
of the 7(a) program.
While an Other Regulated SBLC would be expected to comply with SBLC
requirements, as set forth for example in proposed Sec. Sec. 120.470
(SBLC general licensing requirements), 120.471-474 (SBLC minimum
capital requirements), 120.475 (SBLC change of control), 120.476 (SBLC
prohibited financing), 120.460 (internal controls), 120.461 (document
retention), 120.463 (regulatory accounting), 120.464 (reports), and
120.490 (IG audits), it would only be subject to SBA Lender risk-based
reviews and enforcement provisions and not the statutory SBA Supervised
Lender supervision and enforcement provisions, except those that are
SBLC licensing specific (i.e., capital directive and civil action).
Section 120.1540--Enforcement actions--Intermediaries participating
in the Microloan program and NTAPs. Proposed Sec. 120.1540 would
incorporate formal enforcement actions against Microloan Intermediaries
and NTAPs set forth in current Sec. 120.716 into subpart I.
Section 120.1600--General procedures for enforcement actions--SBA
Lenders, Management Officials, Other Persons, Intermediaries, and
NTAPs. Proposed Sec. 120.1600 would largely adopt the enforcement
procedures for CDCs currently contained in Sec. 120.856 and extend
them, in general, to all SBA Lenders, Microloan Intermediaries and
NTAPs. Proposed procedures would include a notice of enforcement
action; opportunity to object; notice of final Agency decisions; and a
provision on appeals directly to federal district court. Additions/
changes to the general provision include, but are not limited to, a
provision to make clear that request for clarification of notice for
additional time to respond must be received by the same deadline for
objection; responses and such requests must be submitted to the
appropriate Office of Capital Access official in accordance with
Delegations of Authority; and appeals of the final Agency decision
would no longer be filed with SBA's OHA but would be filed in the
appropriate Federal district court. Proposed Sec. 120.1600 would also
set forth procedures for certain SBA Supervised Lender, Management
Official, or Other Person enforcement actions as prescribed by statute.
This would include enforcement procedures specific to SBA Supervised
Lenders (excluding Other Regulated SBLCs under proposed Sec. Sec.
120.1510 and 120.1511) for suspensions and revocations of SBA program
authority. The additional procedures in subsection ``c'' for SBLC
capital directive would generally follow similar provisions of other
Federal Financial Institution Regulators.
IV. Comments Request
Readers are encouraged to review closely each section of the
proposed rule in conjunction with current regulations to fully
comprehend the extent of the rule and its changes. SBA invites comment
on all aspects of this proposed rule, including the underlying
policies. SBA may rely on its own expertise in promulgating the final
rule. Submitted comments will be available to any person or entity upon
request.
Compliance with Executive Orders 12866, 12988, and 13132, the
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork
Reduction Act (44 U.S.C., Ch. 35) Executive Order 12866: The Office of
Management and Budget has determined that this rule constitutes a
``significant regulatory action'' under Executive Order 12866 thus
requiring a Regulatory Impact Analysis, as set forth below.
A. Regulatory Objective of the Proposal
SBA is proposing a rule to incorporate SBA's risk-based lender
oversight program into SBA regulations. Specifically, the proposed rule
would establish the role and responsibilities of SBA's Office of Credit
Risk Management within subpart I to 13 CFR Part 120. It would codify in
13 CFR SBA's process of risk-based oversight including: (i) Accounting
and reporting requirements; (ii) off-site reviews/monitoring; (iii) on-
site reviews and examinations; and (iv) capital adequacy requirements.
The proposed rule would also list the types of, grounds for, and
procedures governing SBA enforcement actions within consolidated
enforcement regulations for all 7(a) Lenders, CDCs, Microloan
Intermediaries, and NTAPs. This rule is necessary to provide
coordinated and effective oversight of financial institutions that
originate and manage SBA guaranteed loans.
[[Page 61763]]
These regulatory changes would improve SBA's oversight and
management of the 7(a), 504, Microloan and NTAP programs. SBA believes
that there are no viable alternatives to these changes that would
produce similar positive results without imposing an additional burden
on the SBA or the public.
B. Baseline Costs
1. Baseline Costs for 7(a) Lenders (Excluding SBA Supervised Lenders)
All 7(a) Lenders are currently required to be supervised and
examined by a state or Federal regulatory authority, satisfactory to
SBA. This is a cost already borne by these 7(a) Lenders. In addition,
these 7(a) Lenders are subject to SBA's supervisory and enforcement
provisions contained in the business programs portion of Part 120. The
estimated annual baseline costs to the Federal government for 7(a)
Lenders' oversight is provided for in the existing OCRM infrastructure.
2. Baseline Costs for SBLCs
Each SBLC is currently required to submit audited financial
statements within three months after the close of each fiscal year and
interim financial reporting when requested by SBA. SBA also currently
requires that SBLCs submit a report on any legal or administrative
proceeding, by or against the SBLC, or against an officer, director or
employee of the SBLC for an alleged breach of official duty; copies of
any report furnished to its stockholders; a summary of any changes in
the SBLC's organization or financing; notice of capital impairment; and
such other reports as SBA may require from time to time by written
directive. The collection of the information and reports referenced
here is largely already maintained by the SBLCs for operational and
financing purposes. It is estimated that preparation and submission of
this information takes about 80 hours annually for each SBLC. The hour
burden is an SBA estimate based on inquiries made to selected SBLCs.
The estimate of the total annual cost burden is based on an average
annual outside audit fee of $8,000 per respondent, plus an additional
$2,000 per respondent for staff involvement in the independent audit
engagement and SBA reporting (approximately 15 hours of CFO time at a
$100 hourly rate plus 15 hours of administrative profession time at a
$30 hourly rate, rounded). This total cost burden is estimated at
$140,000 for 14 SBLCs. SBA has reduced this figure by $20,000 to
$120,000 to adjust for reduced costs for smaller SBLCs. The estimated
annual cost to the Federal government for this information collection
is approximately 8 hours of Financial Analyst time at $55 per hour, or
$6,160 annually for all 14 SBLCs. Any additional estimated indirect
annual cost to the Federal government for oversight of these SBLCs is
provided for in the existing OCRM infrastructure.
3. Baseline Costs for NFRLs
No direct costs are currently incurred by NFRLs for SBA oversight
and related functions discussed in this proposed rule. The estimated
annual cost to the Federal government for oversight of these NFRLs is
provided for in the existing OCRM infrastructure.
4. Baseline Costs for CDCs
Each CDC is currently required to submit to SBA an annual report
within 180 days of the fiscal year end, including financial statements
of the CDC and any affiliates or subsidiaries and such interim reports
as SBA may require. The collection of the information and reports
referenced here is largely already maintained by the CDCs for
operational purposes. SBA has estimated that preparation and submission
of this information takes approximately 28 hours annually for each CDC,
at an average cost of $30 per hour for staff compilation, which
computes to a cost of $840 per CDC, and a total of 7,560 hours for all
CDCs. This total cost burden is $226,800 (7,560 hours x $30) for the
approximately 270 CDCs. The estimated annual cost to the Federal
government for this information collection is approximately 1 hour of
financial analyst time per CDC or 270 hours total for all CDCs, at a
cost of $55 per hour. Estimated annual Federal cost burden therefore is
estimated at $14,850 (270 hours x $55). The remaining estimated annual
cost to the Federal government for oversight of CDCs is provided for in
the existing OCRM infrastructure.
5. Baseline Costs for Microloan Intermediaries and NTAPs
Microloan Intermediaries and NTAPs currently incur no direct costs
for oversight and related functions as discussed in this proposed rule.
The estimated annual cost to the Federal government for oversight of
these Microloan Intermediaries and NTAPs is currently provided for in
the existing OFA infrastructure.
C. Potential Benefits and Costs of the Proposed Rule
1. Potential Benefits and Costs of the Proposed Rule to all SBA
Lenders, Microloan Intermediaries and NTAPs
The proposed rule would benefit SBA Lenders, Microloan
Intermediaries, and NTAPs by generally consolidating oversight
authority and responsibility within one SBA office, OCRM. These
institutions would also benefit from knowledge of established and
further defined programmatic standards, enforcement grounds, ranges of
enforcement actions and procedures for supervision and enforcement
actions as set forth in the proposed rule. They may further benefit
from performance feedback to the extent it can assist them in improving
their SBA operations and minimizing losses.
While there are specific benefit and costs issues for specific
categories of lenders as detailed below, all SBA Lenders, Microloan
Intermediaries and NTAPS will incur some relatively minimal costs
related to the proposed rule's incorporation of review/exam reporting
(e.g., self-assessments and related reporting, corrective action
plans). Self-assessments and review/exam reporting are a timely and
cost effective means of overseeing and monitoring the SBA performance
and compliance of SBA Lenders, Microloan Intermediaries and NTAPs.
2. Potential Benefits and Costs of the Proposed Rule to 7(a) Lenders
(Other Than SBLCs and Other NFRLs)
No additional direct costs are projected to be incurred by 7(a)
Lenders for oversight as contained in the proposed regulations. No
additional reporting or direct costs are projected to be incurred by
7(a) Lenders with the rule's implementation.
3. Potential Benefits and Costs of the Proposed Rule to SBLCs
The proposed rule would provide for more developed internal control
requirements and adoption of a formal capital plan. It would also
require filing of (i) quarterly condition reports (including financial
statements); (ii) reports of changes in financial condition; (iii)
notice of change of auditor; (iv) capital restoration plans; and (v)
Other Regulated SBLC Reports, with certifications as to accuracy or
compliance (including capital compliance) as applicable. Because
internal controls, formal capital plans, and quarterly financial
statements are likely already maintained by the SBLCs for operational
purposes, SBA estimates little or no additional cost for these new
[[Page 61764]]
requirements. It is estimated that preparation and submission of all
the additional reports and the new recordkeeping would take
approximately 3 hours annually of additional CFO time at a $100 hourly
cost, plus 3 hours annually of additional administrative professional
time at a $30 hourly cost. Therefore, the total additional cost burden
would be $5,460 ($390 x 14) for 14 SBLCs.
4. Potential Benefits and Costs of the Proposed Rule to NFRLs
The proposed rule would require each NFRL to submit an annual
report, including audited financial statements within three months
after the close of each fiscal year. The proposed rule would further
require that all audited financial report filings be prepared in
accordance with GAAP, and include an opinion from the independent
accounting firm engaged in the audit. It would also require NFRLs to
submit: (i) a report on any legal or administrative proceeding, by or
against the NFRL, or against an officer, director or employee of the
NFRL for an alleged breach of official duty; (ii) copies of any report/
publications furnished to its stockholders; (iii) summaries of changes
in the NFRL's organization or financial structure, personnel and
eligibility; (iv) notice of capital impairment; (v) quarterly condition
reports; (vi) changes in financial condition reports; (vii)
recapitalization plans; and (viii) notice of changes in auditors and
such other reports as SBA may require from time to time by written
directive--with certifications as to accuracy and compliance (including
capital compliance), as applicable. The proposed rule would also
require adoption of a developed internal control policy, records
maintenance, and adoption of a formal capital plan. Much of the
collection of the information and reports referenced here, as well as
the requirements for internal control, records retention and adoption
of a formal capital plan are likely information already maintained by
the NFRLs for operational, and in some instances financing, purposes.
SBA estimates preparation and submission costs consistent with that of
the baseline for the SBLCs, at 80 hours of external auditor time at
$100 hourly rate, plus an additional $2,000 per NFRL for staff
involvement in the independent audit engagement (approximately 15 hours
of CFO time at a $100 hourly rate plus 15 hours of administrative
profession time at a $30 hourly rate, rounded) for a total of $10,000
per NFRL. SBA estimates additional reporting and recordkeeping
requirements to the NFRLs (that which would be new to SBLCs as well) at
3 hours of additional CFO time at a $100 hourly rate plus 3 hours of
additional administrative professional time at a $30 hourly rate ($390
per NFRL). Since there are no current baseline costs to NFRLs, the
total additional cost burden for this proposed rule for the 58 NFRLs
(as of May 2007) would potentially be $602,620 ($10,390 x 58 NFRLs).
5. Potential Benefits and Costs of the Proposed Rule to CDCs
The proposed rule would require each CDC to submit an annual
report, including audited financial statements within three months
after the close of each fiscal year and interim financial reporting
when requested by SBA. All audited financial report filings would be
required to include an opinion from the independent accounting firm
engaged in the audit. The proposed rule would also require enhanced
internal control requirements. The collection of the information
referenced here, including the annual audited financial statements, as
well as the requirements for internal control would include
information, policies and procedures likely already maintained by many
of the CDCs for operational purposes. The hour burden is an SBA
estimate based on inquiries made to selected CDCs. It is estimated that
preparation and submission of this information would take approximately
40 (auditor) hours annually for each CDC, at an average cost of
approximately $4,000 ($100 per hour for CPA-credentialed auditor)
average outside audit fee, plus internal staff time of 4 hours at the
administrative professional rate of $30 per hour ($120 per CDC). This
is in lieu of existing Baseline Costs for CDCs outlined in paragraph 4
of Section B. Baseline Costs. The total cost would be $1,112,400
($4,120 x 270 CDCs). The total additional cost burden would be $885,600
($1,112,400-$226,800 baseline) for the 270 CDCs for this proposed rule.
We note, however, that this number may be dramatically reduced because
many CDCs are already required to maintain audited financial statements
and internal control programs under The Single Audit Act requirements.
6. Potential Benefits and Costs of the Proposed Rule to Microloan
Intermediaries and NTAPs
No additional direct costs are projected to be incurred by
Microloan Intermediaries and NTAPs for lender oversight and related
functions in this proposed rule. No additional costs would be incurred
by Intermediaries due to the implementation of this rule, since general
oversight, suspension or revocation already exists in Sec. 120.716 and
is replaced by consolidated oversight within subpart I, and no
additional reporting is required by this proposed rule.
7. Potential Benefits and Costs for SBA and the Federal Government
Benefits to SBA include improved administration of the lender
oversight process through general consolidation of oversight authority
within OCRM. SBA would also benefit from having more timely and
complete operations information, including financial information for
SBA Supervised Lenders and CDCs. In addition, the Agency would benefit
from further defined standards, enforcement grounds, ranges of
enforcement actions and procedures for supervision and enforcement
actions for all SBA Lenders, Microloan Intermediaries and NTAPs.
Finally, the rules' additional requirements and lender oversight
provisions would provide improved and more timely lender monitoring to
ultimately further minimize the risks of losses in SBA's loan programs.
For 7(a) Lender specific sections, no additional reporting from
these lenders is required by the proposed rule, and therefore no
additional direct costs for assessment of any such reporting would be
incurred by SBA for provisions related to oversight functions in this
proposed rule.
For SBLCs, we estimate the proposed rule would require an
additional 3 hours financial analyst time at a $55 hourly rate to the
Federal government for each SBLC or 42 hours overall (3 x 14 SBLCs) for
an additional annual cost of $2,310 to the Federal government.
For NFRLs, the estimated annual cost to the Federal government
would be approximately 8 hours financial analyst time at a $55 hourly
rate. Therefore, estimated annual cost to the Federal government
related to oversight of all 58 NFRLs in accordance with this proposed
rule would be 688 hours for $25,520.
For CDCs, the estimated cost to the Federal government would be for
additional information collected approximated at 1 hour financial
analyst time for each CDC at a $55 hourly rate. The total additional
cost would be $14,850 (1 hr x 270 x $55). In lieu of existing baseline
cost of $14,850 (1 hr per CDC), the total cost would be $29,700.
For Microloan Intermediaries and NTAPs, no additional direct costs
to SBA would be incurred for the lender oversight functions and related
provisions in this proposed rule.
[[Page 61765]]
Any additional indirect cost to the Federal government for
oversight of the SBA Lenders, Microloan Intermediaries, and NTAPs under
this proposed rule would be covered by the already-existing OCRM infra-
structure.
8. Cost Basis
For purposes of this proposal, CPA and CFO salary rates used were
based on information published by the American Institute of Certified
Public Accountants (AICPA) for CPA-credentialed individuals (external
auditor or internal CFO) estimated at $100. The salary rates for
administrative professionals were based on information published by the
International Association of Administrative Professionals. Internal SBA
financial analyst time was estimated at GS-14 step 5 level of $99,203
plus 24.8% benefits allocation, or approximately $55 per hour.
SBA is requesting comments from the public on any monetized,
quantitative or qualitative costs of SBA Lenders, Microloan
Intermediary, or NTAP compliance with this proposed rule. Please send
comments to the SBA official referenced in the ADDRESSES section of the
preamble.
D. Alternatives
SBA believes that this proposed rule is SBA's best available means
for achieving its regulatory objective of incorporating coordinated
risk-based supervision and enforcement into SBA regulations and
implementing the provisions of Public Law 108-447 and SBA's Delegation
of Authority for lender oversight. SBA is requesting comments from the
public on any potentially effective and reasonably feasible alternative
to this proposed rule as it applies to SBA Lenders, Microloan
Intermediaries, and NTAPs and the costs and benefits of those
alternatives.
Executive Order 13132: For the purposes of Executive Order 13132,
the SBA determined that this rule has no federalism implications
warranting preparation of a federalism assessment.
Executive Order 12988: For the purposes of Executive Order 12988,
Civil Justice Reform, SBA has determined that this proposed rule is
crafted, to the extent practicable, in accordance with the standards
set forth in Sec. Sec. 3(a) and 3(b)(2), to minimize litigation,
eliminate ambiguity, and reduce burden. The proposed regulations would
provide for rights of appeal to SBA Lenders, Microloan Intermediaries,
and NTAPs in the event they are aggrieved by an Agency decision,
thereby limiting the possibility of litigation by these entities. This
proposed rule would not have retroactive or pre-emptive effect.
Regulatory Flexibility Act: This proposed rule directly affects all
SBA Lenders, Microloan Intermediaries, and NTAPs. There are
approximately 5,000 7(a) Lenders, 270 CDCs, 250 Microloan
Intermediaries, and there were 11 NTAPs participating with SBA funding
when NTAPs were last funded. SBA has determined that CDCs, Microloan
Intermediaries, and the 14 SBLCs fall under the size standard for NAICS
522298, All other Nondepository Credit Intermediation. The size
standard for NAICS 522298 is $6.5 million or less in average annual
receipts. There are approximately 58 NFRLs, most of which fall in NAICS
522298 (the rest fall into NAICS 522110, Commercial Banking). The
remaining 7(a) Lenders fall under the size standard for NAICS 522110,
Commercial Banking. The size standard for NAICS 522110 is assets of
$165 million or less. The NTAPs fall under the size standard for NAICS
541990, All Other Professional, Scientific and Technical Services. The
size Standard for NAICS 541611 is $6.5 million or less in average
annual receipts.
SBA estimates that over 95 percent of the CDCs and Microloan
Intermediaries do not exceed the applicable size standard and are,
therefore, considered small entities by this definition. Approximately
half of all of the 7(a) Lenders exceed the small business size standard
set for NAICS 522110. Thus, SBA has determined that this proposed rule
would have an impact on a substantial number of small entities.
However, for the reasons explained following, SBA does not believe that
the proposed rule will have a significant economic impact on those
entities.
The proposed rule would contain several different sections. For
clarity, SBA has analyzed the economic impact by section, as follows:
A. Proposed Reporting Requirements for SBA Supervised Lenders and
CDCs: There are 14 Small Business Lending Companies (SBLCs) and
approximately 58 NFRLs that are authorized to make 7(a) loans. The
majority of the NFRLs are nondepository commercial Lenders. Most of the
NFRLs are classified under NAICS 522298, which has a small business
size standard of $6.5 million or less in annual revenues. The remaining
NFRLs are classified under NAICS 522110, Commercial Banking, which has
a small business size standard of $165 million or less in assets.
Current regulations require SBLCs to submit their audited financial
statements to SBA within three months after the close of their fiscal
year. Financial statement submission allows SBA to perform a size
determination on SBLCs with a reasonable degree of accuracy. Based on
submitted financial statement, of the twelve active SBLCs, four exceed
the small business size standard for NAICS 522298.
Presently, there is no requirement that NFRLs submit financial
statements to SBA. Therefore, SBA does not have the information to
determine current average annual receipts. To estimate the size of the
NFRLs, SBA reviewed a sample of the financial statements that NFRLs had
submitted to SBA when they first applied for authorization to make 7(a)
loans. Based on a review of those financial statements, we estimate
that two-thirds of the NFRLs are small. Based on the financial data in
the NFRL applications and up-to-date financial data supplied by SBLCs
to SBA, SBA believes that the proposed rule would impact a substantial
number of these small entities, but not constitute a significant
economic impact, as detailed below.
The proposed rule, which defines ``SBA Supervised Lenders'' as
NFRLs and SBLCs, requires these Lenders to provide SBA with the
following information: (1) Annual audited financial statements, (2)
quarterly condition reports, (3) copies of any legal and administrative
proceedings by or against the SBA Supervised Lender, (4) copies of any
report furnished to its stockholders, (5) reports of changes in the SBA
Supervised Lender's organization or financing, (6) reports of changes
in the SBA Supervised Lender's financial condition, (7) notice of
change in auditors, (8) notice of capital impairment, (9) capital
restoration plans, (10) Other Regulated SBLC reports, (11) other
reports (that SBA may require from time to time) and (12)
certifications of compliance with capital requirement. Several of these
are already required of SBLCs. The proposed rule would also provide for
record retention requirements and recordkeeping of a capital adequacy
plan.
As is mentioned above, SBLCs are already required to submit audited
annual financial statements to SBA. It has been SBA's experience that
SBLCs and NFRLs also prepare quarterly financial statements on a
regular basis for their own internal management purposes, and SBA
believes that most of the NFRLs also prepare audited annual financial
statements for their internal management purposes. The proposed rule
would require both NFRLs and SBLCs to provide the SBA with copies of
their financial statements on a quarterly basis and would expand the
requirement for annual audited
[[Page 61766]]
financial statements submitted to SBA to include NFRLs. Existing
regulations also require SBLCs to maintain compliance with SBA capital
requirements. The proposed rule would expand the number of firms
subject to SBA's capital regulation by making NFRLs subject to certain
capital regulations. The proposed rule would also require SBA
Supervised Lenders to provide SBA with a quarterly certification that
they are in compliance with the SBA capital requirement. A certificate
of compliance with SBA capital regulations would normally be prepared
by a financial institution's chief financial officer or someone from
his staff under the proposed rule. SBA believes that it would take no
more than one hour per quarter to prepare and certify. The
certification could accompany quarterly condition reporting. In
accordance with the American Institute of Public Accountants published
surveys, the salary and benefits rate for a CPA-credentialed individual
is estimated at $100 per hour. This computes to an estimated annual
cost of $400 to cover the CFO's time. We estimate that the
administrative staff work involved in preparing the submission
materials would take no more than one hour for those quarters not
covered by the Annual Report. According to a recent survey published by
the International Association of Administrative Professionals, the
salary estimate is $30 per hour. This calculates to an annual expense
of $120 per year. The combined annual expense that SBA Supervised
Lenders would incur in order to comply with this reporting would be on
average $520 ($400 + $120). SBA does not believe that an additional
$520 cost annually constitutes significant economic impact on any of
these firms, which can routinely engage in financings in the million
dollar range. Therefore, SBA certifies that this aspect of the proposed
rule would not have a significant economic impact on a substantial
number of small entities.
Current regulations require that SBLCs submit copies of the
following to SBA: (1) Any legal and administrative proceedings by or
against them, (2) any reports it furnishes to its stockholders, and (3)
summaries of changes in the SBLCs organization and financing, (4)
notice of capital impairment, and (5) such other report it is required
by SBA to furnish on a specific matter. The proposed rule would extend
to NFRLs these ad hoc reporting requirements. SBA believes this data is
likely already collected and that similar documents are already
prepared by the NFRLs. The proposal only requires the NFRLs to submit
the documents to SBA. Because these are documents that are likely
already in the possession of the NFRLs, SBA does not believe that the
NFRLs would incur any significant costs to comply with the proposal.
SBA, therefore, certifies that this aspect of the proposed rule would
not have a significant economic impact on a substantial number of small
entities. However, SBA requests data from the public that would enable
SBA to determine any additional costs as a result of the proposed rule
to require reporting of these items.
The new reporting and recordkeeping requirements in the proposed
rule for SBA Supervised Lenders that have not yet been discussed would
occur on an ad hoc basis (e.g. change in financial condition). They
generally would be triggered by exceptional circumstances. Thus given
their ad hoc and exceptional nature, they would not likely have a
significant economic impact on a substantial number of small entities.
The proposed rule would require all CDC financial statements that
are filed with the CDC annual report submission to be audited.
Currently, under OMB approved information collection number 3245-0074,
SBA only requires CDCs with a 504 loan portfolio balance of $20 million
dollars or more to have the financial statements of be audited. (See
SBA Form 1253.) For CDCs with a 504 loan portfolio balance of less than
$20 million dollars, the financial statements currently need only be
reviewed by an independent CPA and be prepared in accordance with GAAP.
SBA is extending the audit requirement to all CDCs to facilitate a
better assessment of the performance and financial strength of all
CDCs. In addition, this requirement is part of SBA's incorporation of
Single Audit Act requirements into its regulations. SBA estimates that
at least 70 of the 270 CDCs already maintain audited financial
statements, SBA also estimates that the cost of auditing the financial
statements beyond the current review requirement for the estimated
remaining 200 is approximately $4,000 per CDC (based upon an average
additional 40 hours x $100 per hour of auditor time). This $4,000
annually is not an excessive cost for CDCs, all of which can routinely
engage in financings in the million dollar range. Based on this, SBA
certifies that the extension of this requirement would not likely have
a significant economic impact on a substantial number of small
entities.
B. Capital Adequacy: Only SBLCs are presently subject to the
minimum capital requirements currently found in 13 CFR 120.470. The
proposed rule would require SBLCs quarterly compliance with its minimum
capital requirement. It would also require that NFRLs provide the SBA
with a quarterly certification that they are in compliance with their
state regulator's minimum capital requirement. In addition, the
proposed rule would broaden the existing definition of capital, making
it more consistent with that of other Federal Financial Institution
Regulators, by allowing SBA Supervised Lenders to count retained
earnings towards their regulatory capital requirement. SBA asserts that
broadening the types of capital that are eligible towards the SBA
capital requirements would have no adverse financial impact on small
Lenders. In fact, allowing retained earnings to count toward an SBA
Supervised Lender's regulatory capital would allow those SBLCs with
significant retained earnings on their balance sheet to increase the
size of their 7(a) portfolio without necessitating any additional
injection of permanent capital. SBA, therefore, certifies that this
aspect of the rule will not have a significant economic impact on a
substantial number of small entities.
C. Enforcement Provisions: The proposed rule would list the types
of, grounds for, and procedures governing SBA enforcement actions
within consolidated enforcement regulations for all SBA Lenders,
Microloan Intermediaries, and NTAPs. The general enforcement provisions
for SBA Lenders, Microloan Intermediaries, and NTAPs follow, for the
most part, the same format that was established for the CDC program.
The enforcement provisions for SBA Supervised Lender specific and SBLC
specific actions follow recent legislation codified at 15 U.S.C. 650
et. seq. Because SBA anticipates that enforcement actions would occur
on an exception basis, SBA does not anticipate that these provisions
would have a significant economic impact on a substantial number of
small entities within the meaning of the Regulatory Flexibility Act, 5
U.S.C. 601-612. SBA, therefore, certifies that the proposed rule would
not have a significant impact on a substantial number of small
entities.
D. Bureau of PCLP Oversight: SBA proposes to establish the Bureau
of PCLP Oversight in accordance with statutory guidance to address
undercapitalization in the LLRFs of Premier Certified Lenders (PCLP
CDCs). Of the approximately 270 CDCs, less than 20 of them have PCLP
authority. These are generally the larger CDCs, with portfolios which
have a total outstanding portfolio balance of $5.1
[[Page 61767]]
billion. SBA, therefore, certifies that the proposed rule Bureau of
PCLP Oversight provision would not have a significant impact on a
substantial number of small entities.
Paperwork Reduction Act: SBA has determined that this proposed rule
would impose additional reporting and recordkeeping requirements under
the Paperwork Reduction Act, 44 U.S.C. Chapter 35. Specifically, SBA
would revise OMB approved information collection number 3245-0077 to
include NFRLs in SBA's current reporting requirements for SBLCs. SBA
would also revise 3245-0077 to add four reporting requirements for all
SBA Supervised Lenders and one reporting requirement just for SBLCs. In
addition, the proposed rule would also revise OMB approved information
collection number 3245-0074 to extend to all CDCs a certain requirement
in reporting that applied only to CDCs with 504 loan portfolio balances
of $20 million or more. Finally, the proposed rule would add a review/
examination reporting requirement.
Under the proposed rule, NFRLs, like SBLCs, would have to file (i)
Annual Reports (including audited financial statements); (ii) Reports
of Administrative and Legal Proceedings; (iii) Stockholder Reports;
(iv) Reports of Changes (in organization and financing); (v) notice of
capital impairment; and (vi) other reports as required by SBA. The new
reporting requirements would mean that both NFRLs and SBLCs would also
have to file: (i) Quarterly Condition Reports (including certain
certifications); (ii) Reports of Changes in Financial Condition (also
including certain certifications); (iii) notice of a change in
auditors; and (iv) Capital Restoration Plans, where applicable. In
addition, SBLCs eligible to be exempt from the SBLC supervision and
enforcement statutory provisions would have to report on direct
examination activity and regulation by Federal Financial Institution
Regulators or state banking regulators under proposed Sec. Sec.
120.1510 and 1511. Also, under the proposed rule, all CDC (not just
CDCs with a 504 loan portfolio of $20 million dollars or more) would be
required to have their annual financial statements that they submit to
SBA, to be audited. Finally, the proposed rule would provide for self-
assessments and corrective action plans, as applicable, for SBA
Lenders, Microloan Intermediaries and NTAPs.
This proposed rule would also extend SBLC recordkeeping
requirements to NFRLs in proposed Sec. 120.461 and would add a new
recordkeeping requirement for all SBA Supervised Lenders. Specifically
NFRLs, like SBLCs, would be required to retain a permanent record of
certain substantiating documents for the financial statements and
reports submitted to SBA. Such documents would include corporate
charters and bylaws, applications for eligibility determination,
capital stock certificates or stubs, general and subsidiary ledgers and
journals, stock ledgers, stock transfer registers, and all minute
books. The proposed rule would also require NFRLs, like SBLCs, to
retain all documents and materials related to or supporting an SBA
loan, such as applications for financing, participation and escrow
accounts, and financing instruments, for a period of 6 years following
final disposition of the loan. Many NFRLs may already retain much of
this information for other purposes.
Under the proposed rule, the new recordkeeping requirement would
apply to SBA Supervised Lenders. In particular, SBA Supervised Lenders
would be required to maintain a capital adequacy plan. Under proposed
Sec. 120.462, the capital adequacy plan would detail Board of Director
approved capital adequacy goals towards maintaining the financial
institution's financial strength.
The titles, descriptions of respondents and the information
collections are discussed below. In addition, SBA has provided an
estimate of the annual reporting and recordkeeping burdens.
SBA invites comments on: (1) Whether the proposed collection of
information is necessary for the proper performance of SBA's functions,
including whether the information would have a practical utility; (2)
the accuracy of SBA's estimate of the burden of the proposed
collections of information, including the validity of the methodology
and assumptions used; (3) ways to enhance the quality, utility, and
clarity of the information to be collected; and (4) ways to minimize
the burden of the collection of information on respondents, including
through the use of automated collection techniques, when appropriate,
and other forms of information technology.
Please send comments by the closing date for comment for this
proposed rule to David Rostker, Office of Management and Budget, Office
of Information and Regulatory Affairs, 725 17th Street, NW.,
Washington, DC 20503 and to Bryan Hooper, Associate Administrator for
Lender Oversight, Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416.
I. SBA Supervised Lender Reporting and Recordkeeping Requirements
The following authorities, description of respondents, statement of
needs and purposes, and estimated hourly cost to respondents is
applicable to the reports and recordkeeping to be included in revision
to OMB approved information collection number 3245-0077 for SBA
Supervised Lenders.
Authority: SBA is authorized pursuant to 15 U.S.C. 650(a) and 15
U.S.C. 634(b)(7) to collect this information associated with examining
the safety and soundness of SBA Supervised Lenders.
Description of Respondents: The respondents for the below listed
information collections would consist of all SBA Supervised Lenders.
Currently there are approximately 100 (14 SBLCs and 58 NFRLs).
Statement of Needs and Purposes: The reports and recordkeeping
requirements would facilitate safety and soundness examinations and
appropriate supervision of SBA's licensed SBLCs and NFRLs. Annual and
interim financial information would be analyzed by program management
to timely assess SBA Supervised Lenders' financial strength, as well as
compliance, with relevant program regulations (e.g., capital and SBLC
licensing regulations). Other reporting requirements would update
program management on the operational status of the SBA Supervised
Lender and timely notify SBA of (i) changes in structure, personnel,
auditors, and financial condition and (ii) potential financial
exposure. Informed, SBA as supervisor and guarantor of 50 to 85% of an
SBA Supervised Lender's portfolio, could intervene (where appropriate)
to protect the interests of the United States.
Estimated Cost to Respondents: SBA estimates a cost of $10,390 per
SBA Supervised Lender (or approximately $748,080 for all SBA Supervised
Lenders; 14 SBLCs and 58 NFRLs) to comply with the below listed
information collections. The $10,390 per SBA Supervised Lender includes
$8,000 for the annual report audit (80 hours x $100 per hour) plus
$2,390 for staff time to support the information collections
(approximately 18 hours CFO time @ $100 per hour and 18 hours staff
time @ $30 per hour). The hourly estimates are based on an informal
survey of SBA Supervised Lenders. While a few of the information
collections, like the annual and quarterly condition reports are
required, most are ad hoc and occur on an exception basis. The hourly
costs are derived from salary and benefit rate
[[Page 61768]]
surveys of the AICPA and International Association of Administrative
Professionals. This $628,080 increase from the current OMB approved
collection is mainly attributable to the extension of the information
collection to the 58 NFRLs, and SBA also believes that this number will
be dramatically reduced to the extent that many or some of the NFRLs
already maintain this information for other purposes.
Below is a listing of those reports and recordkeeping requirements
that would be included in the revision to OMB approved information
collection number 3245-0077.
A. Annual Audit Report [No SBA Form Number]
Summary: The Annual Audited Report would primarily consist of an
SBA Supervised Lender's annual audited financial statements. The Annual
Report would be due to SBA within three months after the SBA Supervised
Lender's fiscal year end.
B. Legal and Administrative Proceedings [No SBA Form Number]
Summary: Under proposed Sec. 120.464(a)(3), each SBA Supervised
Lender would submit a report of any legal or administrative proceeding,
by or against the SBA Supervised Lender, or against any officer,
director or employee of the SBA Supervised Lender for an alleged breach
of official duty.
C. Stockholder Report [No SBA Form Number]
Summary: Under proposed Sec. 120.464(a)(4), all SBA Supervised
Lenders would be required to submit to SBA copies of any report or
publications concerning financial operations furnished to its
stockholders.
D. Report of Changes [No SBA Form Number]
Summary: Under the proposed Sec. 120.464(a)(5), all SBA Supervised
Lenders would be required to submit a copy of any changes in the SBA
Supervised Lender's organization or financing (e.g., change in type of
organization, acquisition by or change of parent, change in primary
financing entity, etc.).
E. Notice of Capital Impairment [No SBA Form Number]
Summary: Proposed Sec. 120.462(d) would require all SBA Supervised
Lenders to provide SBA prompt written notice of capital impairment.
F. Other Reports [No SBA Form Number]
Summary: Proposed rule Sec. 120.464(a)(5) would require all SBA
Supervised Lenders to submit such other reports as SBA may from time to
time require by written directive.
G. Quarterly Condition Report and Certifications [No SBA Form Number]
Summary: Under proposed Sec. 120.464(a)(2), all SBA Supervised
Lenders would be required to submit a Quarterly Condition Report to SBA
within 45 days following the end of each calendar quarter. The content
of the Quarterly Condition Report would include the SBA Supervised
Lender's interim financial statements, which may be internally
prepared. SBA Supervised Lenders would be required to apply uniform
definitions to categories of nonperforming loans and recovery amounts
on liquidated loans within the reports. The Quarterly Condition Report
would also contain a certification by the SBA Supervised Lender as to
compliance with laws, completeness, and accuracy and may contain a
certification as to capital requirement compliance.
H. Changes in Financial Condition Report [No SBA Form Number]
Summary: Proposed Sec. 120.464(a)(6) would require SBA Supervised
Lenders to file with SBA a report on any material change in financial
condition within ten days after management becomes aware of the
changes, except when reporting capital impairment under proposed Sec.
120.462(d).
I. Notice of Change in Auditor [No SBA Form Number]
Summary: Proposed Sec. 120.463(d) would require SBA Supervised
Lenders to notify SBA in writing if it discharged or changed auditors.
J. Capital Restoration Plan [No SBA Form Number]
Summary: Proposed Sec. 120.462(e) would require an SBA Supervised
Lender to file a written capital restoration plan with SBA generally
within 45 days of the date the SBA Supervised Lender receives or is
deemed to have received notice that it has not met its minimum capital
requirement.
K. Other Regulated SBLC Report [No SBA Form Number]
Summary: Proposed Sec. Sec. 120.1510 and 120.1511 would require
an SBLC that is directly examined by a Federal Financial Institution
Regulator or State banking regulator to certify to SBA in writing the
extent to which its lending activities are subject to such regulation.
It would also require such an Other Regulated SBLC to report to SBA on
its interactions with its Federal Financial Institution Regulator or
State banking regulator to the extent allowed by law.
L. Records Retention, In General
Summary: Proposed Sec. 120.461(b) and (c) require SBA Supervised
Lenders to maintain and preserve certain records with immediate
availability of specific documents (e.g. general and subsidiary
ledgers, general journals, bylaws, stock transfer ledgers). The
provision provides for electronic preservation, if the original is
available for retrieval within a reasonable period.
M. Capital Adequacy Plan
Summary: Proposed Sec. 120.462 would require SBA Supervised
Lenders' Board of Directors to determine capital adequacy goals and to
establish, adopt, and maintain a capital plan.
II. CDC Reporting Requirements
The following corresponds to the revisions to OMB approved
information collection number 3245-0074, CDC Annual Report Guide.
Authority: SBA is authorized to collect this information under 15
U.S.C. 687(f).
Description of Respondents: The respondents would consist of all
CDCs. Currently, there are approximately 270.
Estimated Cost to Respondents: SBA estimates a cost of $4,120 per
CDC (or approximately $1,112,400 for all CDCs) to comply with the
information collection as revised. The $4,120 cost per CDC includes
$4,000 for the elevated audit requirement (40 hours x $100 per hour for
auditors) plus an additional $120 for staff time (4 hours CDC staff
time @ $30 per hour) working with the auditors. The hourly costs are
derived from a salary and benefit rate survey of the International
Association of Administrative Professionals. This $885,600 increase in
total cost to all CDCs would be attributable to the cost of requiring
audited financial statements. However, SBA believes the cost is likely
much less, since many of these CDCs likely already maintain audited
financial statements.
Summary: Proposed Sec. 120.826 would be revised to require that
each CDC have financial statements audited annually by an independent
CPA. This change would extend to all CDCs the requirement that
financial statements be audited currently only required for CDCs with a
504 loan portfolio balance of $20 million dollars or more.
[[Page 61769]]
Need and Purpose: Collection of annual audited financial statements
is critical to allowing SBA to assess accurately CDCs' financial
strength and for the purpose of lender oversight.
III. SBA Lender, Microloan Intermediary, and NTAP Reporting
Requirements
The following authorities, description of respondents, statement of
needs and purposes and estimated hourly cost to respondents are
applicable to the review/examination reporting requirements for SBA
Lenders, Microloan Intermediaries, and NTAPs.
A. Self-Assessment
Authority: SBA is authorized to collect self-assessment information
under 15 U.S.C. 634(b)(7) and 15 U.S.C. 650.
Description of Respondents: The respondents would consist of SBA
Lenders, Microloan Intermediaries, and NTAPS.
Estimated Cost to Respondents: SBA estimates a cost of $430 per SBA
Lender, Microloan Intermediary, or NTAP or $8,600 for all those
required during a year to submit a self-assessment certification or
self-assessment report. SBA estimates requiring 20 self-assessments a
year. This cost would consist of $30 for administrative staff to
prepare the self-assessment certification or report (one hour x $30
hour) and $400 for CFO composition time (four hours x $100 per hour).
The hourly estimates are based on an informal survey of SBA Lenders by
OCRM financial analysts.
Summary: Proposed Section 120.1025 would provide that ``SBA may
conduct off-site reviews and monitoring * * * including SBA Lenders',
Intermediaries', or NTAPs' self-assessments.''
Need and Purpose: Generally, SBA would consider requiring a self-
assessment to confirm corrective actions implemented or in lieu of
targeted or limited scope reviews. Self-assessments are a cost
effective means of overseeing and monitoring the SBA performance and
compliance of SBA Lenders, Micro-loan Intermediaries, and NTAPs.
B. Corrective Action Plan
Authority: SBA is authorized to collect this information under 15
U.S.C. 634(b)(7) and 15 U.S.C. 650.
Description of Respondents: The respondents would consist of SBA
Lenders, Microloan Intermediaries, and NTAPs that receive an onsite
review or examination assessment of acceptable with corrective action
or less than acceptable, or as otherwise required by SBA.
Estimated Cost to Respondents: SBA estimates a cost of $430 per SBA
Lender, Microloan Intermediary, or NTAP or $64,500 for all those
required during a year to submit a corrective action plan. SBA
estimates requiring 150 corrective actions a year. This number may be
dramatically reduced as SBA Lenders, Microloan Intermediaries, and
NTAPs improve SBA program operations. The cost would consist of $30 for
administrative staff to prepare the corrective action plan (one hour x
$30 per hour) and $400 for CFO composition time (four hours x $100 per
hour). The hourly estimates are based on an informal survey of SBA
Lenders by OCRM financial analysts.
Summary: Proposed Section 120.1055 would provide that SBA Lenders,
Microloan Intermediaries, and NTAPs must submit proposed corrective
action plans, if requested.
Need and Purpose: The reports would facilitate corrective action to
address SBA Lender, Microloan Intermediary, or NTAP deficiencies
identified generally during reviews and examinations.
Proposal
List of Subjects in 13 CFR Part 120
Loan Programs--business, Small businesses.
For the reasons set forth above, SBA proposes to amend 13 CFR part
120 as follows:
PART 120--BUSINESS LOANS
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 697(a) and (e).
2. Amend Sec. 120.10 by adding new definitions ``Acceptable Risk
Rating'', ``Federal Financial Institutions Regulator'', ``Less Than
Acceptable Risk Rating'', ``Management Official'', ``Non-Federally
Regulated Lender'', ``Other Regulated SBLC'', ``Risk Rating'', ``SBA
Lender'', ``SBA Supervised Lender'', and ``Small Business Lending
Company'', and revising the definition for ``Lender'' to read as
follows:
Sec. 120.10 Definitions.
* * * * *
Acceptable Risk Rating is an SBA-assigned Risk Rating, currently
defined by SBA as ``1'', ``2'' or ``3'' on a scale of 1 to 5, which
represents an acceptable level of risk as determined by SBA, and which
may be revised by SBA from time to time as published in the Federal
Register through notice and comment.
* * * * *
Federal Financial Institution Regulator is the federal banking
regulator of a 7(a) Lender and may include the Federal Deposit
Insurance Corporation, the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Office of Thrift Supervision, the
National Credit Union Administration, and the Farm Credit
Administration.
* * * * *
Lender or 7(a) Lender is an institution that has executed a
participation agreement with SBA under the guaranteed loan program.
Less Than Acceptable Risk Rating is an SBA-assigned Risk Rating,
currently defined by SBA as ``4'' or ``5'' on a scale of 1 to 5, which
represents an unacceptable level of risk as determined by SBA, and
which may be revised by SBA from time to time as published in the
Federal Register through notice and comment.
* * * * *
Management Official is an officer, director, general partner,
manager, employee participating in management, agent or other
participant in the management of the affairs of the SBA Supervised
Lender's activities under the 7(a) program.
Non-Federally Regulated Lender (NFRL) is a business concern that is
authorized by the SBA to make loans under section 7(a) and is subject
to regulation by a state but whose lending activities are not subject
to regulation by a Federal Financial Institution Regulator.
* * * * *
Other Regulated SBLC is a Small Business Lending Company whose SBA
operations receive regular safety and soundness examinations by a state
banking regulator or a Federal Financial Institution Regulator, and
which meets the requirements set forth in Sec. 120.1511.
* * * * *
Risk Rating is an SBA internal composite rating assigned to
individual SBA Lenders, Intermediaries, or NTAPs that reflects the risk
associated with the SBA Lender's or Intermediary's portfolio of SBA
loans or with the NTAP. Risk Ratings currently range from one to five,
with one representing the least risk and five representing the most
risk, and may be revised by SBA from time to time as published in the
Federal Register through notice and comment.
* * * * *
[[Page 61770]]
SBA Lender is a 7(a) Lender or a CDC. This term includes SBA
Supervised Lenders.
SBA Supervised Lender is a 7(a) Lender that is either (1) a Small
Business Lending Company or (2) a NFRL.
* * * * *
Small Business Lending Company (SBLC) is a nondepository lending
institution that is SBA licensed and is authorized by SBA to only make
loans pursuant to section 7(a) of the Small Business Act and loans to
Intermediaries in SBA's Microloan program. SBA has imposed a moratorium
on licensing new SBLCs since January 1982.
* * * * *
3. Amend Sec. 120.410 by revising paragraphs (a), (d) and (e) and
adding a new paragraph (f) to read as follows:
Sec. 120.410 Requirements for all participating Lenders.
* * * * *
(a) Have a continuing ability to evaluate, process, close,
disburse, service, liquidate and litigate small business loans
including, but not limited to:
(1) Holding sufficient permanent capital to support SBA lending
activities (for SBA Lenders with a Federal Financial Institution
Regulator, meeting capital requirements for an adequately capitalized
financial institution is considered sufficient permanent capital to
support SBA lending activities; for SBLCs, meeting its SBA minimum
capital requirement; and for NFRLs meeting its state minimum capital
requirement); and
(2) Maintaining satisfactory SBA performance, as determined by SBA
in its sole discretion. The 7(a) Lender's Risk Rating, among other
factors, will be considered in determining satisfactory SBA
performance;
* * * * *
(d) Be supervised and examined by either:
(1) A Federal Financial Institution Regulator,
(2) A state banking regulator satisfactory to SBA, or
(3) SBA;
(e) Be in good standing with SBA as defined in Sec. 120.420(f)
(and determined by SBA in its sole discretion) and, as applicable, with
an SBA Lender's state regulator or Federal Financial Institution
Regulator; and
(f) Operate in a safe and sound condition using commercially
reasonable lending policies, procedures, and standards employed by
prudent Lenders.
4. Remove the undesignated center heading immediately preceding
Sec. 120.414.
Sec. 120.414 [Removed]
5. Remove Sec. 120.414
Sec. 120.415 [Removed]
6. Remove Sec. 120.415.
7. In Sec. 120.420, revise paragraph (f) introductory text and
paragraphs (f)(3) and (4) to read as follows:
Sec. 120.420 Definitions.
* * * * *
(f) Good Standing--In general, a Lender is in ``good standing''
with SBA if it: * * *
(3) Is not under investigation or indictment for, or has not been
convicted of, or had a judgment entered against it for felony or fraud,
or charges relating to a breach of trust or violation of a law or
regulation protecting the integrity of business transactions or
relationships, unless the Lender Oversight Committee has determined
that good-standing exists despite the existence of such factors.
(4) Does not have any officer or employee who has been under
investigation or indictment for, or has been convicted of or had a
judgment entered against him for, a felony or fraud, or charges
relating to a breach of trust or violation of a law or regulation
protecting the integrity of business transactions or relationships,
unless the Lender Oversight Committee has determined that good standing
exists despite the existence of such person.
* * * * *
8. Amend Sec. 120.424 by revising paragraph (a), redesignating
paragraphs (b), (c), (d), and (e) as (c), (d), (e), and (f), and adding
new paragraph (b) to read as follows:
Sec. 120.424 What are the basic conditions a Lender must meet to
securitize?
* * * * *
(a) Be in good standing with SBA as defined in Sec. 120.420(f) of
this chapter and determined by SBA in its sole discretion;
(b) Have satisfactory SBA performance as determined by SBA, in its
sole discretion. The Lender's Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance;
* * * * *
Sec. 120.425 [Amended]
9. Amend Sec. 120.425(c)(2) by removing ``SBA Securitization
Committee'' and add in its place ``Lender Oversight Committee'' in the
fourth sentence.
Sec. 120.426 [Amended]
10. Amend Sec. 120.426 by removing ``SBA Securitization
Committee'' and add in its place ``Lender Oversight Committee'' in the
second sentence.
11. Amend Sec. 120.433 by revising paragraph (a), redesignating
paragraph (b) as (c), and adding a new paragraph (b) to read as
follows:
Sec. 120.433 What are the SBA's other requirements for sales and
sales of participating interests?
* * * * *
(a) The Lender must be in good standing with SBA as defined in
Sec. 120.420(f) and determined by SBA in its sole discretion;
(b) the Lender has satisfactory SBA performance, as determined by
SBA in its sole discretion. The Lender's Risk Rating, among other
factors, will be considered in determining satisfactory SBA
performance; and
* * * * *
12. Amend Sec. 120.434 by revising paragraph (b), redesignating
paragraphs (c), (d), (e), (f), and (g) as (d), (e), (f), (g), and (h),
and adding a new paragraph (c) to read as follows:
Sec. 120.434 What are SBA's requirements for loan pledges?
* * * * *
(b) The Lender must be in good standing with SBA as defined in
Sec. 120.420(f) and determined by SBA in its sole discretion;
(c) The Lender has satisfactory SBA performance, as determined by
SBA, in its sole discretion. The Lender's Risk Rating, among other
factors, will be considered in determining satisfactory SBA
performance;
* * * * *
13. Revise Sec. 120.435 introductory text to read as follows:
Sec. 120.435 Which loan pledges do not require notice to or consent
by SBA?
Notwithstanding the provisions of Sec. 120.434(e), 7(a) loans may
be pledged for the following purposes without notice to or consent by
SBA:
* * * * *
Sec. 120.442 [Removed]
14. Remove Sec. 120.442
15. Amend Sec. 120.451 by revising the last sentence in paragraph
(a), revising paragraph (b)(3), removing paragraph (c), redesignating
paragraph (d) as (c), redesignating paragraph (e) as (d) and revising
its last sentence, and adding a new paragraph (e) to read as follows:
Sec. 120.451 How does a Lender become a PLP Lender?
(a) * * * The SBA field office will forward its recommendation to
an SBA
[[Page 61771]]
centralized loan processing center which will submit its recommendation
and supporting documentation to the appropriate Office of Capital
Access official in accordance with Delegations of Authority for final
decision.
(b) * * *
(3) Has satisfactory SBA performance, as determined by SBA in its
sole discretion. The Lender's Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance.
(c) * * *
(d) * * * The recertification decision is made by the appropriate
Office of Capital Access official in accordance with Delegations of
Authority and is final.
(e) When a PLP lender's Supplemental Guaranty Agreement expires,
SBA may recertify the Lender as a PLP Lender for an additional term not
to exceed two years. Prior to recertification, SBA will review a PLP
Lender's loans, policies, procedures, SBA performance, Risk Rating,
review or examination results, and other risk related information as
determined by SBA.
* * * * *
Sec. 120.454 [Removed]
16. Remove Sec. 120.454
Sec. 120.455 [Removed]
17. Remove Sec. 120.455
18. Add new undesignated center heading before Sec. 120.460 to
read as follows:
SBA Supervised Lenders
19. Add new Sec. 120.460 to read as follows:
Sec. 120.460 What are SBA's additional requirements for SBA
Supervised Lenders?
(a) In general. In addition to complying with SBA's requirements
for SBA Lenders, an SBA Supervised Lender must meet the additional
requirements set forth in this regulation and the SBA Supervised Lender
regulations that follow.
(b) Operations and internal controls. Each SBA Supervised Lender's
board of directors (or management, if the SBA Supervised Lender is a
division of another `company and does not have its own board of
directors) must adopt an internal control policy which provides
adequate direction to the institution in establishing effective control
over and accountability for operations, programs, and resources. The
internal control policy must, at a minimum:
(1) Direct management to assign responsibility for the internal
control function (covering financial, credit, credit review,
collateral, and administrative matters) to an officer or officers of
the SBA Supervised Lender;
(2) Adopt and set forth procedures for maintenance and periodic
review of the internal control function; and
(3) Direct the operation of a program to review and assess the SBA
Supervised Lender's assets. The asset review program policies must
specify the following:
(i) Loan, loan-related asset, and appraisal review standards,
including standards for scope of selection for review (of any such
loan, loan-related asset or appraisal) and standards for work papers
and supporting documentation;
(ii) Asset quality classification standards consistent with the
standardized classification systems used by the Federal Financial
Institution Regulators;
(iii) Specific internal control requirements for SBA Supervised
Lender's major asset categories (cash and investment securities),
lending, and the issuance of debt;
(iv) Specific internal control requirements for the SBA Supervised
Lender's oversight of Lender Service Providers; and
(v) Standards for training to implement the asset review program.
20. Add new Sec. 120.461 to read as follows:
Sec. 120.461 What are SBA's additional requirements for SBA
Supervised Lenders concerning records?
(a) Report filing. All SBA Supervised Lender-specific reports
(including all SBLC-only reports) must be filed with the appropriate
Office of Capital Access official in accordance with Delegations of
Authority.
(b) Maintenance of records. An SBA Supervised Lender must maintain
at its principal business office accurate and current financial
records, including books of accounts, minutes of stockholder,
directors, and executive committee meetings, and all documents and
supporting materials relating to the SBA Supervised Lender's
transactions. However, securities held by a custodian pursuant to a
written agreement must be exempt from this requirement.
(c) Permanent preservation of records. An SBA Supervised Lender
must permanently preserve in a manner permitting immediate (one
business day) retrieval the following documentation for the financial
statements and other reports required by Sec. 120.464 (and the
accompanying certified public accountant's opinion):
(1) All general and subsidiary ledgers (or other records)
reflecting asset, liability, capital stock and additional paid-in
capital, income, and expense accounts;
(2) All general and special journals (or other records forming the
basis for entries in such ledgers); and
(3) The corporate charter, bylaws, application for determination of
eligibility to participate with SBA, and all minutes books, capital
stock certificates or stubs, stock ledgers, and stock transfer
registers.
(d) Other preservation of records. An SBA Supervised Lender must
preserve for at least 6 years following final disposition of each
individual SBA loan:
(1) All applications for financing;
(2) Lending, participation, and escrow agreements;
(3) Financing instruments; and
(4) All other documents and supporting material relating to such
loans, including correspondence.
(e) Electronic preservation. Records and other documents referred
to in this section may be preserved electronically if the original is
available for retrieval within 15 working days.
21. Add new Sec. 120.462 to read as follows:
Sec. 120.462 What are SBA's additional requirements on capital
maintenance for SBA Supervised Lenders?
(a) Capital adequacy. The board of directors (or management, if the
SBA Supervised Lender is a division of another company and does not
have its own board of directors) of each SBA Supervised Lender must
determine capital adequacy goals; that is, the total amount of capital
needed to assure the SBA Supervised Lender's continued financial
viability and provide for any necessary growth. The minimum standards
set in Sec. 120.471 for SBLCs and those established by state
regulators for NFRLs are not to be adopted as the ideal capital level
for a given SBA Supervised Lender. Rather, the minimum standards are to
serve as minimum levels of capital that each SBA Supervised Lender must
maintain to protect against the credit risk and other general risks
inherent in its operation.
(b) Capital plan. The board of directors of each SBA Supervised
Lender must establish, adopt, and maintain a formal written capital
plan. The plan must include any interim capital targets that are
necessary to achieve the SBA Supervised Lender's capital adequacy goals
as well as the minimum capital standards. The plan must address any
projected dividend goals, equity retirements, or any other anticipated
action that may decrease the SBA Supervised Lender's capital. The
[[Page 61772]]
plan must set forth the circumstances in which capital retirements
(e.g., dividends, distributions of capital or purchase of treasury
stock) can occur. In addition to factors described above that must be
considered in meeting the minimum standards, the board of directors
must also address the following factors in developing the SBA
Supervised Lender's capital adequacy plan:
(1) Management capability;
(2) Quality of operating policies, procedures, and internal
controls;
(3) Quality and quantity of earnings;
(4) Asset quality and the adequacy of the allowance for loan losses
within the loan portfolio;
(5) Sufficiency of liquidity; and
(6) Any other risk-oriented activities or conditions that warrant
additional capital (e.g., portfolio growth rate).
An SBA Supervised Lender must keep its capital plan current,
updating it at least annually or more often as operating conditions may
warrant.
(c) Certification of compliance. Within 45 days of the end of each
fiscal quarter, each SBA Supervised Lender must furnish the SBA with a
calculation of capital and certification of compliance with its minimum
capital requirement as set forth in Sec. Sec. 120.471, 120.472, or
120.474, as applicable, for SBLCs and as established by state
regulators for NFRLs. The SBA Supervised Lender's chief financial
officer must certify the calculation to be correct. The quarterly
calculation and certification of compliance may be included in the SBA
Supervised Lender's Quarterly Condition Report.
(d) Capital impairment. An SBA Supervised Lender must meet its
minimum regulatory capital requirement and avoid capital impairment.
Capital impairment exists if an SBA Supervised Lender fails to meet its
minimum regulatory capital requirement under Sec. Sec. 120.471,
120.472, and 120.474 for SBLCs or as established by state regulators
for NFRLs. An SBA Supervised Lender must provide the appropriate Office
of Capital Access official in accordance with Delegations of Authority
written notice of any failure to meet its minimum capital requirement
within 30 calendar days of the month-end in which the impairment
occurred. Unless otherwise waived by the appropriate Office of Capital
Access official in accordance with Delegations of Authority in writing,
an SBA Supervised Lender may not present any loans to SBA for guarantee
until the impairment is cured. SBA may waive the presentment
prohibition for good cause as determined by SBA in its discretion. In
the case of differences in calculating capital or capital requirements
between the SBA Supervised Lender and SBA, SBA's calculations will
prevail until differences between the two calculations are resolved.
(e) Capital restoration plan--(1) Filing requirement. An SBA
Supervised Lender must file a written capital restoration plan with SBA
within 45 days of the date that the SBA Supervised Lender provides
notice to SBA under paragraph (d) of this section above or receives
notice from SBA (whichever is earlier) that the SBA Supervised Lender
has not met its minimum capital requirement, unless SBA notifies the
SBA Supervised Lender in writing that the plan is to be filed within a
different time period.
(2) Plan content. An SBA Supervised Lender must detail the steps it
will take to meet its minimum capital requirement; the time within
which each step will be taken; the timeframe for accomplishing the
entire capital restoration; and the person or department at the SBA
Supervised Lender charged with carrying out the capital restoration
plan.
(3) SBA response. SBA will provide written notice of whether the
capital restoration plan is approved or not or whether SBA will seek
additional information. If the capital restoration plan is not approved
by SBA, the SBA Supervised Lender will submit a revised capital
restoration plan within the timeframe specified by SBA.
(4) Amendment of capital restoration plan. An SBA Supervised Lender
that has submitted an approved capital restoration plan may, after
prior written notice to and approval by SBA, amend the plan to reflect
a change in circumstance. Until such time as a proposed amendment has
been approved, the SBA Supervised Lender must implement the capital
restoration plan as approved prior to the proposed amendment.
(5) Failure. If an SBA Supervised Lender fails to submit a capital
restoration plan that is acceptable to SBA within its sole discretion
within the required timeframe, or fails to implement, in any material
respect as determined by SBA in its sole discretion, its SBA approved
capital restoration plan within the plan timeframe, SBA may undertake
enforcement actions under Sec. 120.1500.
22. Add new Sec. 120.463 to read as follows:
Sec. 120.463 Regulatory accounting--What are SBA's regulatory
accounting requirements for SBA Supervised Lenders?
(a) Books and records. The books and records of an SBA Supervised
Lender must be kept on an accrual basis in accordance with Generally
Accepted Accounting Principles (GAAP) as promulgated by the Financial
Accounting Standards Board (FASB), supplemented by Regulatory
Accounting Principles (RAP) as identified by SBA in Policy, Procedural
or Information Notices, from time to time.
(b) Annual audit. Each SBA Supervised Lender must have its
financial statements audited annually by a certified public accountant
experienced in auditing financial institutions. The audit must be
performed in accordance with generally accepted auditing standards as
adopted by the Auditing Standards Board of the American Institute of
Certified Public Accountants (AICPA). Annually, the auditor must issue
an audit report with an opinion as to the fairness of the SBA
Supervised Lender's financial statements and their compliance with
GAAP.
(c) Auditor qualifications. The audit shall be conducted by an
independent public accountant who:
(1) Is registered or licensed to practice as a certified public
accountant, and is in good standing, under the laws of the state or
other political subdivision of the United States in which the SBA
Supervised Lender's principal office is located;
(2) Agrees in the engagement letter with the SBA Supervised Lender
to provide the SBA with access to and copies of any work papers,
policies, and procedures relating to the services performed;
(3) (i) Is in compliance with the AICPA Code of Professional
Conduct; and
(ii) Meets the independence requirements and interpretations of the
Securities and Exchange Commission and its staff;
(4) Has received a peer review or is enrolled in a peer review
program, that meets AICPA guidelines; and
(5) Is otherwise acceptable to SBA.
(d) Change of auditor. If an SBA Supervised Lender discharges or
changes its auditor, it must notify SBA in writing within ten days of
the occurrence. Such notification must provide:
(1) The name, address, and telephone number of the discharged
auditor; and
(2) If the discharge/change involved a dispute over the financial
statements, a reasonably detailed statement of all the
[[Page 61773]]
reasons for the discharge or change. This statement must set out the
issue in dispute, the position of the auditor, the position of the SBA
Supervised Lender, and the effect of each position on the balance sheet
and income statement of the SBA Supervised Lender.
(e) Specific accounting requirements. (1) Each SBA Supervised
Lender must maintain an allowance for losses on loans and other assets
that is sufficient to absorb all probable and estimated losses that may
reasonably be expected based on the SBA Supervised Lender's historical
performance and reasonably-anticipated events. Each SBA Supervised
Lender must maintain documentation of its loan loss allowance
calculations and analysis in sufficient detail to permit the SBA to
understand the assumptions used and the application of those
assumptions to the assets of the SBA Supervised Lender.
(2) The unguaranteed portions of loans determined to be
uncollectible must be charged-off promptly. If the portion determined
to be uncollectible by the SBA Supervised Lender is different from the
amount determined by its auditors or the SBA, the SBA Supervised Lender
must charge-off such amount as the SBA may direct.
(3) Each SBA Supervised Lender must classify loans as:
(i) ``Nonaccrual'', if any portion of the principal or interest is
determined to be uncollectible and
(ii) ``Formally restructured,'' if the loan meets the ``troubled
debt restructuring'' definition set forth in FASB Statement of
Financial Accounting Standards No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings.
(4) When one loan to a borrower is classified as nonaccrual or
formally restructured, all loans to that borrower must be so classified
unless the SBA Supervised Lender can document that the loans have
independent sources of repayment.
(f) Valuing loan servicing rights and residual interests. Each SBA
Supervised Lender must account for loan sales transactions and the
valuation of loan servicing rights in accordance with GAAP. At the end
of each quarter, the SBA Supervised Lender must review for
reasonableness the existing environmental assumptions used in the
valuation. Particular attention must be given to interest rate and
repayment rate assumptions. Assumptions considered no longer reasonable
must be modified and modifications must be reflected in the valuation
and must be documented and supported by a market analysis. Work papers
reflecting the analysis of assumptions and any resulting adjustment in
the valuation must be maintained for SBA review in accordance with
Sec. 120.461. SBA may require a SBA Supervised Lender to use industry
averages for the valuation of servicing rights.
23. Add new Sec. 120.464 to read as follows:
Sec. 120.464 Reports to SBA.
(a) An SBA Supervised Lender must submit the following to SBA:
(1) Annual Report. Within three months after the close of each
fiscal year, each SBA Supervised Lender must submit to SBA two copies
of an annual report including audited financial statements as prepared
by a certified public accountant in accordance with Sec. 120.463.
Specifically, the annual report must, at a minimum, include the
following:
(i) Audited balance sheet;
(ii) Audited statement of income and expense;
(iii) Audited reconciliation of capital accounts;
(iv) Audited source and application of funds;
(v) Such footnotes as are necessary to an understanding of the
report;
(vi) Auditor's letter to management on internal control weaknesses;
and
(vii) The auditor's report.
(2) Quarterly Condition Reports. By the 45th calendar day following
the end of each calendar quarter, each SBA Supervised Lender must
submit a Quarterly Condition Report in a form and content as the SBA
may prescribe from time to time. At a minimum, the Quarterly Condition
Report must include the SBA Supervised Lender's quarterly financial
statements, which may be internally prepared. The SBA Supervised Lender
must apply uniform definitions to categories of nonperforming loans and
include recovery amounts on liquidated loans. SBA may, on a case-by-
case basis, depending on an SBA Supervised Lender's size and the
quality of its assets, adjust the requirements for content and
frequency of filing Quarterly Condition Reports.
(3) Legal and Administrative Proceeding Report. Each SBA Supervised
Lender must report any legal or administrative proceeding by or against
the SBA Supervised Lender, or against any officer, director or employee
of the SBA Supervised Lender for an alleged breach of official duty,
within ten business days after initiating or learning of the
proceeding, and also must notify the SBA of the terms of any settlement
or final judgment. The SBA Supervised Lender must include such
information in any reporting required under other provisions of SBA
regulations.
(4) Stockholder Reports. Each SBA Supervised Lender must submit to
SBA a copy of any report furnished to its stockholders in any manner,
within 30 calendar days after submission to stockholders, including any
prospectus, letter, or other document, concerning the financial
operations or condition of the SBA Supervised Lender.
(5) Reports of Changes. Each SBA Supervised Lender must submit to
SBA a summary of any changes in the SBA Supervised Lender's
organization or financing (within 30 calendar days of the change), such
as:
(i) Any change in its name, address or telephone number;
(ii) Any change in its charter, bylaws, or its officers or
directors (to be accompanied by a statement of personal history on the
form approved by SBA);
(iii) Any change in capitalization, including such types of change
as are identified in these regulations;
(iv) Any changes affecting an SBA Supervised Lender's eligibility
to continue to participate as an SBA Supervised Lender; and
(v) Notice of any pledge of stock (within 30 calendar days of the
transaction) if 10 percent or more of the stock is pledged by any
person (or group of persons acting in concert) as collateral for
indebtedness.
(6) Report of Changes in Financial Condition. In addition to other
reports required under these regulations, each SBA Supervised Lender
must submit a report to SBA on any material change in financial
condition. The SBA Supervised Lender must submit such report promptly
but no later than ten days after its management becomes aware of such
change (except as provided for in Sec. 120.462(d)). Failure to
promptly notify SBA concerning a material change in financial condition
may lead to enforcement action.
(7) Other Reports. Each SBA Supervised Lender must submit such
other reports as SBA from time to time may in writing require.
(b) Preparing financial reports for filing. Each SBA Supervised
Lender must prepare financial reports:
(1) In accordance with all applicable laws, regulations,
procedures, standards, and such instructions and specifications and in
such form and media format as may be prescribed by SBA from time to
time;
(2) On an accrual basis, in accordance with GAAP principles and
such other accounting requirements, standards, and procedures as may be
prescribed by the SBA from time to time;
[[Page 61774]]
(3) that contain all applicable footnotes in accordance with GAAP
principles, one of which includes a brief analysis of how the SBA
Supervised Lender complies with SBA's capital regulations, as
applicable; and
(4) in such manner as to facilitate the reconciliation of these
reports with the books and records of the SBA Supervised Lender.
(c) Responsibility for assuring the accuracy of filed financial
reports. Each financial report filed with SBA must be certified as
having been prepared in accordance with all applicable regulations,
SOPs, notices, and instructions and to be a true, accurate, and
complete representation of the financial condition and financial
performance of the SBA Supervised Lender to which it applies. The
reports must be certified by the officer of the reporting SBA
Supervised Lender named for that purpose by action of the institution's
board of directors. If the institution's board of directors has not
acted to name an officer to certify the correctness of its reports of
financial condition and financial performance, then the reports must be
certified by the president or chief executive officer of the reporting
SBA Supervised Lender.
(d) Waiver. The appropriate Office of Capital Access official in
accordance with Delegations of Authority may in his/her sole discretion
waive any Sec. 120.464 reporting requirement for SBA Supervised
Lenders for good cause (including, but not limited to, where an SBA
Supervised Lender has a relatively small SBA loan portfolio), as
determined by SBA. SBA Supervised Lenders must request the waiver in
writing and include all supporting reasons and documentation. The
waiver decision of the appropriate Office of Capital Access official in
accordance with Delegations of Authority is final.
24. Add new Sec. 120.465 to read as follows:
Sec. 120.465 Civil penalty for late submission of required reports.
(a) Obligation to submit required reports by applicable due dates.
SBA Supervised Lenders must submit complete reports by the due dates
described in the regulations or as directed in writing by SBA. SBA
considers any report that an SBA Supervised Lender sends to SBA by the
applicable due date but that is submitted only in part, to have not
been submitted by the applicable due date. SBA also considers any
report that is postmarked by the due date to be submitted by the due
date.
(b) Amount of civil penalty. For each day past the due date for
such report, the SBA Supervised Lender must pay to SBA a civil penalty
of not more than $5,000 per day per report. Such civil penalty
continues to accrue until and including the date upon which SBA
Supervised Lender submits the complete report. In determining the
amount of the civil penalty to be assessed, SBA may consider the
financial resources and good faith of the SBA Supervised Lender, the
gravity of the violation, the history of previous violations and any
such other matters as justice may require.
(c) Notification of amount of civil penalty. SBA will notify the
SBA Supervised Lender in writing of the amount of civil penalties
imposed either upon receiving the required complete report or at such
other time as SBA determines. SBA Supervised Lender must pay this
amount to SBA within 30 days of the date of SBA's written demand.
(d) Identification during examination. SBA may also impose on an
SBA Supervised Lender a civil penalty as described in this section if
SBA discovers, during an examination pursuant to subpart I of this Part
120 or otherwise, that SBA Supervised Lender did not submit a required
report by the due date.
(e) Extensions of submission due dates. (1) SBA Supervised Lender
may request in writing to SBA that SBA extend its report due date. The
request must reference the report and its due date, state the
reasonable cause for extension, and assert how much additional time is
needed in order to submit a complete report. SBA will advise SBA
Supervised Lender in writing as to whether it approved or denied the
extension request. If SBA determines that there is reasonable cause to
grant an extension and it is not due to willful neglect, SBA will
establish a new due date. Such determination as to willful neglect and
reasonable cause is in SBA's sole discretion. SBA will consider the
following factors in determining willful neglect:
(i) Whether SBA Supervised Lender failed to file required reports
for more than two reporting periods and
(ii) If SBA provided SBA Supervised Lender notice of the failure to
file and SBA Supervised Lender failed to respond or failed to provide a
reasonable explanation for the filing failure in its response.
(2) If SBA disapproves the extension, the due date remains the
same. The civil penalty accrues regardless of whether SBA Supervised
Lender files an extension request. If SBA approves the extension, SBA
will waive the civil penalty that has accrued so far for that
particular report. However, a new civil penalty will accrue if SBA
Supervised Lender does not submit a complete report by the new due date
established by SBA.
(f) Requests for reduction or exemption. (1) An SBA Supervised
Lender may request a reduction or exemption from the civil penalty in
writing to SBA. The request must reference the required report, its due
date and the amount sought for reduction, and state in detail the
reasons for the reduction. SBA will consider the following factors:
(i) Whether there is reasonable cause for failure to file timely
and it was not due to willful neglect;
(ii) Whether SBA Supervised Lender has demonstrated to SBA's
satisfaction that it has modified its internal procedures to comply
with reporting requirements in the future; or
(iii) Whether SBA Supervised Lender has demonstrated to SBA's
satisfaction, based on financial information fully disclosed together
with its request, that it would have difficulty paying the civil
penalty assessed.
(2) SBA must also determine that a reduction or exemption is not
inconsistent with the public interest or the protection of SBA.
(3) SBA may in writing approve the exemption, reduce the civil
penalty, or deny the exemption.
(4) If SBA grants the reduction request or denies the reduction or
exemption, SBA Supervised Lender must pay the amount owed within 30
days of the letter date. Civil penalties will accrue while the request
is pending.
(g) Reconsideration of decisions. An SBA Supervised Lender may
request in writing to the Associate Administrator for Capital Access
(AA/CA) to reconsider its request for extension, reduction, or
exemption. The reconsideration request must be received by SBA within
30 days of the date of the letter denying the SBA Supervised Lender of
any such request. SBA will not consider untimely requests. SBA
Supervised Lender must include any additional information or
documentation to support its reconsideration request. SBA will issue a
written decision on the reconsideration request. The decision is a
final agency decision. If on reconsideration, a civil penalty remains
due, SBA Supervised Lender must pay to SBA the civil penalty within 30
days of the written decision or as otherwise directed. Civil penalties
will continue to accrue while the reconsideration request is pending.
[[Page 61775]]
(h) Other enforcement actions. SBA may seek additional remedies for
failure to timely file reports as authorized by law.
(i) Exception for affiliate of SBLC. Such civil penalties do not
apply to any affiliate of an SBLC that procures at least 10% of its
annual purchasing requirements from small manufacturers.
25. Revise Sec. 120.470 to read as follows:
Sec. 120.470 What are SBA's additional requirements for SBLCs?
In addition to complying with SBA's requirements for SBA Lenders
and SBA Supervised Lenders, an SBLC must meet the requirements
contained in this regulation and the SBLC regulations that follow.
(a) Lending. An SBLC may only make:
(1) Loans under section 7(a) (except section 7(a)(13) of the Act in
participation with SBA); and/or
(2) SBA guaranteed loans to Intermediaries (see subpart G of this
part). Such loans are subject to the same conditions as guaranteed
loans made to Intermediaries by 7(a) Lenders.
(b) Business structure. An SBLC must be a corporation (profit or
non-profit) or a limited liability company or limited partnership.
(c) Written agreement. An SBLC must sign a written agreement with
SBA.
(d) Dual control. An SBLC must maintain dual control over
disbursement of funds and withdrawal of securities.
(1) An SBLC may disburse funds only by checks or wire transfers
authorized by signatures of two or more officers covered by the SBLC's
fidelity bond, except that checks in an amount of $1,000 or less may be
signed by one bonded officer, provided that such action is permitted
under the SBLC's fidelity bond.
(2) There must be two or more bonded officers, or one bonded
officer and a bonded employee to open safe deposit boxes or withdraw
securities from safekeeping. The SBLC must furnish to each depository
bank, custodian, or entity providing safe deposit boxes a certified
copy of the resolution implementing control procedures.
(e) Fidelity insurance. An SBLC must maintain a Brokers Blanket
Bond, Standard Form 14, or Finance Companies Blanket Bond, Standard
Form 15, or such other form of coverage as SBA may approve, in a
minimum amount of $2,000,000 executed by a surety holding a certificate
of authority from the Secretary of the Treasury pursuant to 31 U.S.C.
9304-9308.
(f) Common control. (1) An SBLC must not control, be controlled by,
or be under common control with another SBLC.
(2) In the case of a purchase of an SBLC by an organization that
already owns an SBLC, the purchasing entity will have six months to
submit a plan to SBA for the divestiture of one of the SBLCs. All
divestiture plans must be approved by SBA and SBA may withhold approval
in its sole discretion. Divestiture of the SBLC must occur within one
year of purchase date.
(3) Without prior written SBA approval, an Associate of one SBLC
must not be an Associate of another SBLC or of any entity which
directly or indirectly controls, or is under common control with,
another SBLC.
(4) For purposes of this regulation, common control means a
condition where two or more SBLCs, either through ownership,
management, contract, or otherwise, are under the Control of one group
or Person (as defined in Sec. 145.985 of this chapter or successor
regulation). Two or more SBLCs are presumed to be under common control
if they are Affiliates of each other by reason of common ownership or
common officers, directors, or general partners.
(5) ``Affiliate'' has the meaning set forth in Sec. 121.103 of
this chapter.
(6) ``Control'' means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies
of an SBLC or other concern, whether through the ownership of voting
securities, by contract, or otherwise. The common control presumption
may be rebutted by evidence satisfactory to SBA.
(g) Management. An SBLC must employ full time professional
management.
(h) Borrowed funds. In general, an SBLC may not be capitalized with
borrowed funds. Shareholders owning 10 percent or more of any class of
its stock must not use personally-borrowed funds to purchase the stock
unless the net worth of the shareholder is at least twice the amount
borrowed or unless the shareholder receives SBA's prior written
approval for a lower ratio.
26. Revise Sec. 120.471 to read as follows:
Sec. 120.471 What are the minimum capital requirements for SBLCs?
(a) Minimum capital requirements. Each SBLC must maintain, at a
minimum, unencumbered paid-in capital and paid-in surplus of at least
$1,000,000, or ten percent of the aggregate of its share of all
outstanding loans, whichever is more.
(b) Composition of capital. For purposes of complying with
paragraph (a) of this section, capital consists only of one or more of
the following:
(1) Common stock;
(2) Preferred stock that is noncumulative as to dividends and does
not have a maturity date;
(3) Additional paid-in capital representing amounts paid for stock
in excess of the par value;
(4) Retained earnings of the business; and/or
(5) For limited liability companies and limited partnerships,
capital contributions must not be subject to repayment at any specific
time, must not be subject to withdrawal and must have no cumulative
priority return.
(c) Voluntary capital reduction. Without prior written SBA
approval, an SBLC must not voluntarily reduce its capital, or
repurchase and hold more than 2 percent of any class or combination of
classes of its stock.
(d) Issuance of securities. Without prior written SBA approval, an
SBLC must not issue any securities (including stock options and debt
securities) except stock dividends.
27. Revise Sec. 120.472 to read as follows:
Sec. 120.472 Higher individual minimum capital requirement.
The Associate Administrator for Capital Access (AA/CA) may require,
under Sec. 120.473(d), an SBLC to maintain a higher level of capital,
if the AA/CA determines, in his/her sole discretion, that the SBLC's
level of capital is potentially inadequate to protect the SBA from loss
due to the financial failure of the SBLC. The factors to be considered
in the determination will vary in each case and may include, for
example:
(a) Specific conditions or circumstances pertaining to the SBLC;
(b) Exigency of those circumstances or potential problems;
(c) Overall condition, management strength, and future prospects of
the SBLC and, if applicable, its parent or affiliates;
(d) The SBLC's liquidity and existing capital level, and the
performance of its SBA loan portfolio;
(e) The management views of the SBLC's directors and senior
management; and
(f) Other risk-related factors, as determined by SBA.
Sec. 120.476 [Removed]
28. Remove Sec. 120.476.
[[Page 61776]]
Sec. Sec. 120.473, 120.474, and 120.475 [Redesignated as Sec. Sec.
120.475, 120.476, and 120.490]
29. Redesignate Sec. Sec. 120.473, 120.474, and 120.475 as
Sec. Sec. 120.475, 120.476, and 120.490, respectively.
30. In newly redesignated Sec. 120.475, revise the second sentence
of paragraph (a) introductory text and revise paragraph (b) to read as
follows:
Sec. 120.475 Change of ownership or control.
(a) * * * An SBLC must request approval of any such change from the
appropriate Office of Capital Access official in accordance with
Delegations of Authority.* * *
(b) If transfer of ownership or control is subject to the approval
of any State or Federal chartering, licensing, or other regulatory
authority, copies of any documents filed with such authority must, at
the same time, be transmitted to the appropriate Office of Capital
Access official in accordance with Delegations of Authority.
31. Add new Sec. 120.473 to read as follows:
Sec. 120.473 Procedures for determining individual minimum capital
requirement.
(a) Notice. When SBA determines that an individual minimum capital
requirement above that set forth in this subpart or other legal
authority is necessary or appropriate for a particular SBLC, SBA will
notify the SBLC in writing of the proposed individual minimum capital
requirement, the date by which it should be reached and will provide an
explanation of why the requirement proposed is considered necessary or
appropriate.
(b) SBLC response. The SBLC may respond to the notice. The response
should include any matters which the SBLC would have SBA consider in
deciding whether individual minimum capital requirements should be
established for the SBLC, what those capital requirements should be,
and, if applicable, when they should be achieved. The response must be
in writing and delivered to the AA/CA within 30 days after the date on
which the SBLC received the notice. SBA may shorten the time for
response when, in the opinion of SBA, the condition of the SBLC so
warrants, provided that the SBLC is informed promptly of the new time
period, or the SBLC consents to the shortening of its response time. In
its discretion, SBA may extend the time period for good cause.
(c) Failure to respond. An SBLC that does not respond within 30
days or such other time period as may be specified by SBA will have
waived any objections to the proposed minimum capital requirement and
the deadline for its achievement. Failure to respond will also
constitute consent to the individual minimum capital requirement.
(d) Decision. After the close of the SBLC's response period, the
AA/CA will decide, based on a review of SBA reasons for proposing the
individual minimum capital requirement, the SBLC's response, and other
information concerning the SBLC, whether the individual minimum capital
requirement should be established for the SBLC and, if so, the
requirement and the date it will become effective. The SBLC will be
notified of the decision in writing. The notice will include an
explanation of the decision; except for a decision not to establish an
individual minimum capital requirement for the SBLC.
(e) Submission of plan. The decision may require the SBLC to
develop and submit to SBA, within a time period specified, an
acceptable plan to reach the individual minimum capital requirement by
the date required.
(f) Change in circumstances. If, after SBA's decision in paragraph
(d) of this section, there is a change in the circumstances affecting
the SBLC's capital adequacy or its ability to reach the required
individual minimum capital requirement by the specified date, either
the SBLC or the AA/CA may propose to the other a change in (i) the
individual minimum capital requirement for the SBLC, (ii) the date when
the individual minimum must be achieved, and/or (iii) the SBLC's plan
(if applicable). The AA/CA may decline to consider proposals that are
not based on a significant change in circumstances or are repetitive or
frivolous. Pending a decision by the AA/CA on reconsideration, SBA's
original decision and any plan required under that decision will
continue in full force and effect.
31. Add new Sec. 120.474 to read as follows:
Sec. 120.474 Relation to other actions.
In lieu of, or in addition to, the procedures in this subpart, the
individual minimum capital requirement for an SBLC may be established
or revised through a written agreement or cease and desist proceedings
under Subpart I of this Part.
32. Amend Sec. 120.630 by adding paragraph (a)(5) to read as
follows:
Sec. 120.630 Qualifications to be a Pool Assembler.
(a) * * *
(5) For any pool assembler that is an SBA Lender, that the SBA
Lender has satisfactory SBA performance, as determined by SBA in its
sole discretion. The Lender's Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance.
* * * * *
33. Revise Sec. 120.702(b) to read as follows:
Sec. 120.702 Are there limitations on who can be an Intermediary or
on where an Intermediary may operate?
* * * * *
(b) Limitation to one state. An Intermediary may not operate in
more than one state unless the appropriate Office of Capital Access
official in accordance with Delegations of Authority determines that it
would be in the best interests of the small business community for it
to operate across state lines.
34. Amend Sec. 120.710 by revising paragraphs (c), (d), the
introductory text of paragraph (e) and paragraph (e)(1) to read as
follows:
Sec. 120.710 What is the Loan Loss Reserve Fund?
* * * * *
(c) SBA review of Loan Loss Reserve Fund. After an Intermediary has
been in the Microloan program for five years, it may request SBA's
appropriate Office of Capital Access official in accordance with
Delegations of Authority to reduce the percentage of its Portfolio
which it must maintain in its LLRF to an amount equal to the actual
average loan loss rate during the preceding five-year period. Upon
receipt of such request, he/she will review the Intermediary's annual
loss rate for the most recent five-year period preceding the request.
(d) Reduction of Loan Loss Reserve Fund. The appropriate Office of
Capital Access official in accordance with Delegations of Authority has
the authority to reduce the percentage of an Intermediary's Portfolio
that it must maintain in its LLRF to an amount equal to the actual
average loan loss rate during the preceding five-year period. The
appropriate Office of Capital Access official in accordance with
Delegations of Authority cannot reduce the LLRF to less than ten
percent of the Portfolio.
(e) What must an Intermediary demonstrate to get a reduction in
Loan Loss Reserve Fund? To receive a reduction in its LLRF, an
Intermediary must:
(1) Have satisfactory SBA performance, as determined by SBA in its
sole discretion. The Intermediary's Risk Rating, among other factors,
will be considered in determining satisfactory SBA performance; and
* * * * *
[[Page 61777]]
Sec. 120.716 [Removed]
35. Remove Sec. 120.716.
36. Amend Sec. 120.812 to add a new sentence at the end of
paragraph (c) to read as follows:
Sec. 120.812 Probationary period for newly certified CDCs.
* * * * *
(c) * * * To be considered for permanent CDC status or an extension
of probation, the CDC must have satisfactory SBA performance, as
determined by SBA in its sole discretion. The CDC's Risk Rating, among
other factors, will be considered in determining satisfactory SBA
performance.
* * * * *
37. Amend Sec. 120.820 to add a new paragraph (c) to read as
follows:
Sec. 120.820 CDC non-profit status and good standing.
* * * * *
(c) Must have satisfactory SBA performance, as determined by SBA in
its sole discretion. The CDC's Risk Rating, among other factors, will
be considered in determining satisfactory SBA performance.
38. Revise Sec. 120.826 as follows:
Sec. 120.826 Basic requirements for operating a CDC.
A CDC must operate in accordance with the following requirements:
(a) In general. CDCs must meet all 504 Loan Program Requirements.
In its Area of Operations, a CDC must market the 504 program, package
and process 504 loan applications, close and service 504 loans, and if
authorized by SBA, liquidate and litigate 504 loans. It must supply to
SBA current and accurate information about all certification and
operational requirements, and maintain the records and submit all
reports required by SBA.
(b) Operations and internal controls. Each CDC's board of directors
must adopt an internal control policy which provides adequate direction
to the institution for effective control over and accountability for
operations, programs, and resources. The board adopted internal control
policy must, at a minimum:
(1) Direct management to assign the responsibility for the internal
control function (covering financial, credit, credit review,
collateral, and administrative matters) to an officer or officers of
the CDC;
(2) Adopt and set forth procedures for maintenance and periodic
review of the internal control function;
(3) Direct the operation of a program to review and assess the
CDC's 504-related loans. For the 504 review program, the internal
control policies must specify the following:
(i) Loan, loan-related collateral, and appraisal review standards,
including standards for scope of selection (for review of any such
loan, loan-related collateral or appraisal) and standards for work
papers and supporting documentation;
(ii) Loan quality classification standards consistent with the
standardized classification systems used by the Federal Financial
Institution Regulators;
(iii) Specific control requirements for the CDC's oversight of
Lender Service Providers; and
(iv) Standards for training to implement the loan review program;
and
(4) Address other control requirements as may be established by
SBA.
(c) Annual Audited Financial Statements. Each CDC must have its
financial statements audited annually by a certified public accountant
that is independent and experienced in auditing financial institutions.
The audit must be performed in accordance with generally accepted
auditing standards as adopted by the Auditing Standards Board of the
American Institute of Certified Public Accountants (AICPA). The auditor
must be independent, as defined by the AICPA, of the CDC. Annually, the
auditor must issue an opinion as to the fairness of the CDC's financial
statements and their compliance with GAAS.
(d) Auditor qualifications. The audit must be conducted by an
independent certified public accountant who:
(1) Is registered or licensed to practice as a public accountant,
and is in good standing, under the laws of the state or other political
subdivision of the United States in which the CDC's principal office is
located;
(2) Agrees in the engagement letter with the CDC to provide the SBA
with access to and copies of any work papers, policies, and procedures
relating to the services performed;
(3)(i) Is in compliance with the AICPA Code of Professional
Conduct; and
(ii) Meets the independence requirements and interpretations of the
Securities and Exchange Commission and its staff;
(4) Has received a peer review or is enrolled in a peer review
program that meets AICPA guidelines; and
(5) Is otherwise acceptable to SBA.
(e) Single Audit Act requirements for not-for-profit CDCs. Not-for-
profit CDCs that are subject to the Single Audit Act Amendments of 1996
(31 U.S.C. 7501-7507) (the Single Audit Act) must comply with the audit
requirements contained in the Single Audit Act and revised OMB Circular
A-133, Audits of States, Local Governments, and Non-Profit
Organizations. To the extent that any of such audit requirements
conflict with SBA's regulations, the Single Audit Act and OMB Circular
A-133 requirements control.
39. Amend Sec. 120.830 to revise paragraph (a) to read as follows:
Sec. 120.830 Reports a CDC must submit.
* * * * *
(a) An annual report within three months after the end of the CDC's
fiscal year (to include audited financial statements of the CDC and any
affiliates or subsidiaries of the CDC prepared in accordance with Sec.
120.826(c) and (d)), and such interim reports as SBA may require. The
financial statements must, at a minimum, include the following:
(1) Audited balance sheet;
(2) Audited statement of income (or receipts) and expense;
(3) Audited statement of source and application of funds;
(4) Such footnotes as are necessary to an understanding of the
report;
(5) Auditor's letter to management on internal control weaknesses;
and
(6) The auditor's report.
* * * * *
40. Amend Sec. 120.839 to add two new sentences after the second
sentence in the introductory text to read as follows:
Sec. 120.839 Case-by-case application to make a 504 loan outside of a
CDC's Area of Operations.
* * * In addition, the CDC must have satisfactory SBA performance,
as determined by SBA in its sole discretion. The CDC's Risk Rating,
among other factors, will be considered in determining satisfactory SBA
performance. * * *
* * * * *
41. Revise Sec. 120.841(c) to read as follows:
Sec. 120.841 Qualifications for the ALP.
* * * * *
(c) CDC reviews. CDC reviews conducted by SBA must be current
(within the last 24 months, if applicable) for applicants for ALP
status. The CDC must have received a review assessment of either
``acceptable'' or ``acceptable with corrective actions required''. In
addition, the CDC must have satisfactory SBA performance, as determined
by SBA in its sole discretion. The CDC's Risk Rating, among other
factors, will be considered
[[Page 61778]]
in determining satisfactory SBA performance.
* * * * *
42. Revise Sec. 120.845(b) to read as follows:
Sec. 120.845 Premier Certified Lenders Program (PCLP).
* * * * *
(b) Application. A CDC must apply for PCLP status to the Lead SBA
Office. The Lead SBA Office will send its written recommendation and
the application to SBA's PCLP Loan Processing Center. The PCLP Loan
Processing Center will review these materials and forward them to the
appropriate Office of Capital Access official in accordance with
Delegations of Authority for final determination.
* * * * *
43. Remove the undesignated center heading before Sec. 120.853.
44. Revise the heading for Sec. 120.853 to read as set forth below
and remove the first sentence of the section.
Sec. 120.853 Inspector General audits of CDCs.
45. Remove the undesignated center heading before Sec. 120.854.
Sec. 120.854 [Removed]
46. Remove Sec. 120.854.
Sec. 120.855 [Removed]
47. Remove Sec. 120.855.
Sec. 120.856 [Removed]
48. Remove Sec. 120.856.
49. Revise Sec. 120.956 to read as follows:
Sec. 120.956 Suspension or revocation of brokers and dealers.
The appropriate Office of Capital Access official in accordance
with Delegations of Authority may suspend or revoke the privilege of
any broker or dealer to participate in the sale or marketing of
Debentures and Certificates for actions or conduct bearing negatively
on the broker's fitness to participate in the securities market. SBA
must give the broker or dealer written notice, stating the reasons, at
least 10 business days prior to the effective date of the suspension or
revocation. A broker or dealer may appeal the suspension or revocation
made under this section pursuant to the procedures set forth in part
134 of this chapter. The action of this official will remain in effect
pending resolution of the appeal.
50. Revise the heading to subpart I and add an undesignated center
heading and Sec. Sec. 120.1000, 120.1005, 120.1010, 120.1015,
120.1025, 120.1050, 120.1051, 120.1055, and 120.1060 to read as
follows:
Subpart I--Risk-Based Lender Oversight
Supervision
Sec.
120.1000 Risk-Based Lender Oversight.
120.1005 Bureau of PCLP Oversight.
120.1010 SBA access to SBA Lender, Intermediary, and NTAP files.
120.1015 Risk Rating System.
120.1025 Off-site reviews and monitoring.
120.1050 On-site reviews and examinations.
120.1051 Frequency of on-site reviews and examinations.
120.1055 Review and examination results.
120.1060 Confidentiality of Reports, Risk Ratings, and related
Confidential Information.
Subpart I--Risk-Based Lender Oversight
Supervision
Sec. 120.1000 Risk-Based Lender Oversight.
(a) Risk-Based Lender Oversight. SBA supervises, examines, and
regulates, and enforces laws against, SBA Supervised Lenders and the
SBA operations of SBA Lenders, Intermediaries, and NTAPs.
(b) Scope. Most rules and standards set forth in this subpart apply
to SBA Lenders as well as Intermediaries and NTAPs. However, SBA has
separate regulations for enforcement grounds and enforcement actions
for Intermediaries and NTAPs at Sec. 120.1425 and Sec. 120.1540.
Sec. 120.1005 Bureau of PCLP Oversight.
SBA's Bureau of PCLP Oversight within OCRM, monitors the
capitalization of PCLP CDC pilot participants' LLRFs and performs other
related functions.
Sec. 120.1010 SBA access to SBA Lender, Intermediary, and NTAP files.
An SBA Lender, Intermediary, and NTAP must allow SBA's authorized
representatives, including representatives authorized by the SBA
Inspector General, during normal business hours, access to its files to
review, inspect, and copy all records and documents, relating to SBA
guaranteed loans or as requested for SBA oversight.
Sec. 120.1015 Risk Rating System.
(a) Risk Rating. SBA may assign a Risk Rating to all SBA Lenders,
Intermediaries, and NTAPs on a periodic basis. Risk Ratings are based
on certain risk-related portfolio performance factors as set forth in
notices or SBA's SOPs and as published from time to time.
(b) Rating categories. Risk Ratings fall into one of two broad
categories: Acceptable Risk Ratings or Less Than Acceptable Risk
Ratings.
Sec. 120.1025 Off-site reviews and monitoring.
SBA may conduct off-site reviews and monitoring of SBA Lenders,
Intermediaries, and NTAPs, including SBA Lenders', Intermediaries' or
NTAPs' self-assessments.
Sec. 120.1050 On-site reviews and examinations.
(a) On-site reviews. SBA may conduct on-site reviews of the SBA
loan operations of SBA Lenders. The on-site review may include, but is
not limited to, an evaluation of the following:
(1) Portfolio performance;
(2) SBA operations management;
(3) Credit administration; and
(4) Compliance with Loan Program Requirements.
(b) On-site examinations. SBA may conduct safety and soundness
examinations of SBA Supervised Lenders, except SBA will not conduct
safety and soundness examinations of Other Regulated SBLCs under
Sec. Sec. 120.1510 and 1511. The on-site safety and soundness
examination may include, but is not limited to, an evaluation of:
(1) Capital adequacy;
(2) Asset quality (including credit administration and allowance
for loan losses);
(3) Management quality (including internal controls, loan portfolio
management, and asset/liability management);
(4) Earnings;
(5) Liquidity;
(6) Compliance with Loan Program Requirements
(c) On-site reviews/examinations of Intermediaries and NTAPs. SBA
may perform on-site reviews or examinations of Intermediaries and
NTAPs.
(d) Other on-site reviews or examinations. SBA may perform other
on-site reviews/examinations as needed as determined by SBA in its sole
discretion.
Sec. 120.1051 Frequency of on-site reviews and examinations.
SBA may conduct on-site reviews and examinations of SBA Lenders,
Intermediaries, and NTAPs on a periodic basis. SBA may consider, but is
not limited to, the following factors in determining frequency:
(a) Off-site review/monitoring results, including an SBA Lender's,
Intermediary's or NTAP's Risk Rating;
(b) SBA loan portfolio size;
(c) Previous review or examination findings;
(d) Responsiveness in correcting deficiencies noted in prior
reviews or examinations; and
[[Page 61779]]
(e) Such other risk-related information as SBA, in its sole
discretion, determines to be appropriate.
Sec. 120.1055 Review and examination results.
(a) Written Reports. SBA will provide an SBA Lender, Intermediary,
and NTAP a copy of SBA's written report prepared as a result of the SBA
Lender review or examination (``Report''). The Report may contain
findings, conclusions, corrective actions and recommendations. Each
director (or manager, in the absence of a Board of Directors) of the
SBA Lender, Intermediary, and NTAP, in keeping with his or her
responsibilities, must become fully informed regarding the contents of
the Report.
(b) Response to review and examination Reports. SBA Lenders,
Intermediaries, and NTAPs must respond to Report findings and
corrective actions, if any, in writing to SBA and, if requested, submit
proposed corrective actions and/or a capital restoration plan. An SBA
Lender, Intermediary, or NTAP must respond within 30 days from the
Report date unless SBA notifies the SBA Lender, Intermediary, or NTAP
in writing that the response, proposed corrective actions or capital
restoration plan is to be filed within a different time period. The SBA
Lender, Intermediary, or NTAP response must address each finding and
corrective action. In proposing a corrective action or capital
restoration plan, SBA Lender, Intermediary, or NTAP must detail: The
steps it will take to correct the finding deficiency; the time within
which each step will be taken; the timeframe for accomplishing the
entire corrective action; and the person(s) or department at the SBA
Lender, Intermediary, or NTAP charged with carrying out the corrective
actions or capital restoration plan, as applicable.
(c) SBA response. SBA will provide written notice of whether the
response and, if applicable, any corrective action or capital
restoration plan, is approved, or whether SBA will seek additional
information or require other action.
(d) Failure to respond or to submit or implement an acceptable
plan. If an SBA Lender, Intermediary, or NTAP fails to respond in
writing to SBA, respond timely to SBA, or provide a response acceptable
to SBA within SBA's sole discretion, or respond to all findings and
required corrective actions in a Report, then SBA may take enforcement
action under Subpart I. If an SBA Lender, Intermediary, or NTAP that is
requested to submit a corrective action plan or capital restoration
plan to SBA fails to do so in writing; fails to submit timely such plan
to SBA; or fails to submit a plan acceptable to SBA within SBA's sole
discretion, then SBA may take enforcement action under Sec. 120.1500
et. seq. If an SBA Lender, Intermediary, or NTAP fails to implement in
any material respect a corrective action or capital restoration plan
within the required timeframe, then SBA may undertake enforcement
action under Sec. 120.1500 et. seq.
Sec. 120.1060 Confidentiality of Reports, Risk Ratings and related
Confidential Information.
(a) In general. Reports and other SBA prepared review or
examination related documents are the property of SBA and are loaned to
an SBA Lender, Intermediary, or NTAP for its confidential use only. The
Reports, Risk Ratings, and related Confidential Information are
privileged and confidential as more fully explained in paragraph (b) of
this section. The Report, Risk Rating, and Confidential Information
must not be relied upon for any purpose other than SBA's Lender
oversight and SBA's portfolio management purposes. An SBA Lender,
Intermediary, or NTAP must not make any representations concerning the
Report (including its findings, conclusions, and recommendations), the
Risk Rating, or the Confidential Information. For purposes of this
regulation, Report means the review or examination report and related
documents. For purposes of this regulation, Confidential Information is
defined in the SBA Lender information portal and by notice issued from
time to time. Access to the lender information portal may be obtained
by contacting the OCRM.
(b) Disclosure prohibition. Each SBA Lender, Intermediary, and NTAP
is prohibited from disclosing its Report, Risk Rating, and Confidential
Information, in full or in part, in any manner, without SBA's prior
written permission. An SBA Lender, Intermediary, and NTAP may use the
Report, Risk Rating, and Confidential Information for confidential use
within its own immediate corporate organization. SBA Lenders,
Intermediaries, and NTAPs must restrict access to their Report, Risk
Rating and Confidential Information to those of its officers and
employees who have a legitimate need to know such information for the
purpose of assisting them in improving the SBA Lender's,
Intermediary's, or NTAP's SBA program operations in conjunction with
SBA's Lender Oversight Program and SBA's portfolio management (for
purposes of this regulation, each referred to as a ``permitted
party''), and to those for whom SBA has approved access by prior
written consent, and to those for whom access is required by applicable
law or legal process. If such law or process requires SBA Lender,
Intermediary, or NTAP to disclose the Report, Risk Rating, or
Confidential Information to any person other than a permitted party,
SBA Lender, Intermediary, or NTAP will promptly notify SBA and SBA's
Information Provider in writing so that SBA and the Information
Provider have, within their sole discretion, the opportunity to seek
appropriate relief such as an injunction or protective order prior to
disclosure. For purposes of this regulation, ``Information Provider''
means any contractor that provides SBA with the Risk Rating. SBA
Lender, Intermediary, and NTAP must ensure that each permitted party is
aware of these regulatory requirements and must ensure that each such
permitted party abides by them. Any disclosure of the Report, Risk
Rating, or Confidential Information other than as permitted by this
regulation may result in appropriate action as authorized by law. An
SBA Lender, Intermediary, and NTAP will indemnify and hold harmless SBA
of the Risk Rating or Confidential Information from and against any and
all claims, demands, suits, actions, and liabilities to any degree
based upon or resulting from the unauthorized use or disclosure of the
Report, Risk Rating, or Confidential Information. Information Provider
contact information is available from the Office of Capital Access.
51. In subpart I, add an undesignated center heading and Sec. Sec.
120.1400, 120.1425, 120.1500, 120.1510, 120.1511, 120.1540, and
120.1600 to read as follows:
Subpart I--Risk-Based Lender Oversight
* * * * *
Enforcement Actions
Sec.
120.1400 Grounds for enforcement actions--SBA Lenders.
120.1425 Grounds for enforcement actions--Intermediaries
participating in the Microloan Program and NTAPs.
120.1500 Enforcement actions--SBA Lenders.
120.1510 Other Regulated SBLCs.
120.1511 Certification and other reporting and notification
requirements for Other Regulated SBLCs.
120.1540 Enforcement actions--Intermediaries participating in the
Microloan Program and NTAPs.
[[Page 61780]]
120.1600 General procedures for enforcement actions against SBA
Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management
Officials, Other Persons, Intermediaries, and NTAPs.
Enforcement Actions
Sec. 120.1400 Grounds for enforcement actions--SBA Lenders.
(a) Agreement. By making SBA 7(a) guaranteed loans or 504 loans,
SBA Lenders automatically agree to the terms, conditions, and remedies
in Loan Program Requirements, as promulgated or issued from time to
time and as if fully set forth in the SBA Form 750, Loan Guaranty
Agreement or other applicable participation, guaranty, or supplemental
agreement.
(b) Scope. SBA may undertake one or more of the enforcement actions
listed in Sec. 120.1500 or as otherwise authorized by law, if SBA
determines that the grounds applicable to the enforcement action exist.
In general, the grounds listed in paragraph (c) of this section may
trigger enforcement actions against any SBA Lender. However, certain
enforcement actions against SBA Supervised Lenders, as set forth in
paragraphs (d) and (e) of this section, require the existence of
certain grounds, and paragraph (f) of this section lists two additional
grounds for taking enforcement action against CDCs. Below is a listing
of the grounds that trigger enforcement actions against each type of
SBA Lender.
(c) Grounds in general. Except as provided in paragraphs (d) and
(e) of this section, the grounds that may trigger an enforcement action
against any SBA Lender (regardless of its Risk Rating) include:
(1) Failure to maintain eligibility requirements for specific SBA
programs and delegated authorities, including but not limited to: 7(a),
PLP, SBAExpress, Community Express, 504, ALP, PCLP, the alternative
loss reserve pilot program and any pilot loan program;
(2) Failure to comply materially with any requirement imposed by
Loan Program Requirements;
(3) Making a material false statement or failure to disclose a
material fact to SBA (A material fact is any fact which is necessary to
make a statement not misleading in light of the circumstances under
which the statement was made.);
(4) Not performing underwriting, closing, disbursing, servicing,
liquidation, litigation or other actions in a commercially reasonable
and prudent manner for 7(a) or 504 loans, respectively, as applicable.
Evidence of such performance or actions may include, but is not limited
to, the SBA Lender having a repeated Risk Rating or an on-site review/
examination assessment which is Less Than Acceptable;
(5) Failure within time period specified to correct an
underwriting, closing, disbursing, servicing, liquidation, litigation,
or reporting deficiency, or failure in any material respect to take
other corrective action, after receiving notice from SBA of a
deficiency and the need to take corrective action;
(6) Engaging in a pattern of uncooperative behavior or taking an
action that SBA determines is detrimental to an SBA program, that
undermines management or administration of a program, or that is not
consistent with standards of good conduct;
(7) Repeated failure to correct continuing deficiencies;
(8) Unauthorized disclosure of Reports, Risk Rating, or
Confidential Information;
(9) Any other reason that SBA determines may increase SBA's
financial risk (for example, repeated Less Than Acceptable Risk Ratings
or indictment on felony or fraud charges of an officer, key employee,
or loan agent involved with SBA loans for the SBA Lender);
(10) As otherwise authorized by law; or
(11) For immediate suspension of all SBA Lenders from delegated
authorities--upon a determination by SBA that one or more of the
grounds in paragraph (c) or paragraph (f) of this section, as
applicable, exist and, that immediate action is needed to prevent
significant impairment of the integrity of the 7(a) or 504 loan
program.
(12) For immediate suspension of all SBA Lenders except SBA
Supervised Lenders from the authority to participate in the SBA loan
program, including the authority to make, service, liquidate, or
litigate 7(a) or 504 loans--upon a determination by SBA that one or
more of the grounds in paragraph (c) or paragraph (f) of this section,
as applicable, exist and, that immediate action is needed to prevent
significant impairment of the integrity of the 7(a) or 504 loan
program.
(d) Grounds required for certain enforcement actions against SBA
Supervised Lenders (except Other Regulated SBLCs) or as applicable,
Other Persons. For purposes of Subpart I, Other Person means a
Management Official, attorney, accountant, appraiser, Lender Service
Provider or other individual involved in the SBA Supervised Lender's
operations. For the below listed SBA Supervised Lender enforcement
actions, the grounds that are required to take the enforcement action
are:
(1) For SBA program suspensions and revocations--
(i) False statements knowingly made in any required written
submission to SBA; or
(ii) An omission of a material fact from any written submission
required by SBA; or
(iii) A willful or repeated violation of the Small Business Act
(the Act) or SBA regulations; or
(iv) A willful or repeated violation of any condition imposed by
SBA with respect to any application, request, or agreement with SBA; or
(v) A violation of any cease and desist order of SBA.
(2) For SBA program immediate suspension--SBA may suspend an SBA
Supervised Lender, effective immediately, if in addition to meeting the
grounds set forth in paragraph (d)(1) of this section, the
Administrator (or the Deputy Administrator, only if the Administrator
is unavailable to take such action) finds extraordinary circumstances
and takes such action in order to protect the financial or legal
position of the United States.
(3) For cease and desist orders--
(i) A violation of the Act or SBA regulations, or
(ii) Where an SBA Supervised Lender or Other Person engages in or
is about to engage in any acts or practices that will violate the Act
or SBA's regulations.
(4) For an emergency cease and desist order--
(i) Where grounds for cease and desist order are met,
(ii) The Administrator (or the Deputy Administrator, only if the
Administrator is unavailable to take such action) finds extraordinary
circumstances, and
(iii) In order to protect the financial or legal position of the
United States.
(5) For transfer of Loan portfolio--
(i) Where a court has appointed a receiver and
(ii) The SBA Supervised Lender is either not in compliance with
capital requirements or is insolvent. An SBA Supervised Lender is
insolvent within the meaning of this provision when all of its capital,
surplus, and undivided profits are absorbed in funding losses and the
remaining assets are not sufficient to pay and discharge its contracts,
debts, and other obligations as they come due.
(6) For transfer of servicing activity--
(i) Where grounds for transfer of Loan portfolio are met or
[[Page 61781]]
(ii) Where the SBA Supervised Lender is otherwise operating in an
unsafe and unsound condition.
(7) For order to remove Management Official--where, in the opinion
of the Administrator or his/her delegatee, the Management Official--
(i) Willfully and knowingly committed a substantial violation of
the Act, SBA regulation, a final cease and desist order, or any
agreement by the Management Official or the SBA Supervised Lender under
the Act or SBA regulations, or
(ii) Willfully and knowingly committed a substantial breach of a
fiduciary duty of that person as a Management Official and the
violation or breach of fiduciary duty is one involving personal
dishonesty on the part of such Management Official, or
(iii) The Management Official is convicted of a felony involving
dishonesty or breach of trust and the conviction is no longer subject
to further judicial review (excludes writ of habeas corpus).
(8) For order to suspend or prohibit participation of Management
Official (interim measure pending removal)--where SBA is undertaking
enforcement action of removal of a Management Official.
(9) For order to suspend or prohibit participation of Management
Official due to criminal charges--where the Management Official is
charged in any information, indictment or complaint authorized by a
United States attorney with a felony involving dishonesty or breach of
trust.
(e) Grounds required for certain enforcement actions against SBLCs
and Other Regulated SBLCs.
(1) Capital directive. If the AA/CA determines that an SBLC is
capitally impaired or is otherwise being operated in an imprudent
manner, the AA/CA may, in addition to any other action authorized by
law, issue a directive to the SBLC to increase capital consistent with
Sec. 120.1500(d)(1).
(2) Civil action for termination. If an SBLC violates the Act or
SBA regulations, SBA may institute a civil action to terminate SBLC
rights, privileges, and the franchise under Sec. 120.1500(d)(2).
(f) Additional grounds specific to CDCs. In addition to the grounds
set forth in paragraphs (b) and (c) of this section, SBA may take
enforcement action against a CDC for:
(1) Failure to receive SBA approval for at least four 504 loans
during the last two consecutive fiscal years, or
(2) For PCLP CDCs, failure to establish or maintain a LLRF as
required by the PCLP.
Sec. 120.1425 Grounds for enforcement actions--Intermediaries
participating in the Microloan Program and NTAPs.
(a) Agreement. By participating in the SBA Microloan or NTAP
program, Intermediaries and NTAPs automatically agree to the terms,
conditions, and remedies in this Part 120 as if fully set forth in
their participation agreement and all other agreements jointly executed
by the Intermediary or NTAP and SBA.
(b) Scope. SBA may undertake one or more of the enforcement actions
listed in Sec. 120.1540, or as otherwise authorized by law, if SBA
determines that any of the grounds listed in paragraphs (c) through (e)
of this section exist.
(c) Grounds in general. For any Intermediary or NTAP, grounds that
may trigger enforcement action against the Intermediary or NTAP
(regardless of its Risk Rating) include:
(1) Violation of any laws, regulations, or policies of the program;
or
(2) Failure to meet any one of the following performance standards:
(i) Coverage of the service territory assigned by SBA, including
honoring SBA's determined boundaries of neighboring intermediaries and
NTAPs;
(ii) Fulfill reporting requirements;
(iii) Manage program funds and matching funds in a satisfactory and
financially sound manner;
(iv) Communicate and file reports within six months after beginning
participation in program;
(v) Maintain a currency rate of 85% or more for the Intermediary's
SBA Microloan portfolio (that is, loans that are no more than 30 days
late in scheduled payments);
(vi) Maintain a default rate in the Intermediary's Microloan
portfolio of 15% or less of the cumulative dollars loaned under the
program;
(vii) Maintain a staff trained in Microloan program issues and
requirements; or
(viii) Any other reason that SBA determines may increase SBA's
financial or program risk (for example, repeated Less Than Acceptable
Risk Ratings or indictment on felony or fraud charges of an officer,
key employee, or loan agent involved with SBA programs for the
Intermediary or NTAP).
(d) Additional grounds specific to Intermediaries. In addition to
the grounds set forth in paragraph (c) of this section, SBA may take
enforcement action against an Intermediary for:
(1) Failure to satisfactorily provide in-house technical assistance
to Microloan clients and prospective Microloan clients; or
(2) Failure to close and fund a minimum of four Microloans
annually.
(e) Additional grounds specific to NTAPs. In addition to grounds
set forth in paragraph (c) of this section, SBA may take enforcement
action against an NTAP for failure to show that, for every 30 clients
for which the NTAP provided technical assistance, at least one client
received a loan from the private sector.
Sec. 120.1500 Enforcement actions--SBA Lenders.
Upon a determination that the grounds set forth in Sec. 120.1400
exist, SBA may undertake, in SBA's sole discretion, one or more of the
following enforcement actions for each of the types of SBA Lenders
listed. SBA will take such action in accordance with procedures set
forth in Sec. 120.1600. If enforcement action is taken under this
section and the SBA Lender fails to implement required corrective
action in any material respect within the required timeframe in
response to the enforcement action, SBA may take further enforcement
action, as authorized by law.
(a) Enforcement actions for all SBA Lenders--(1) Imposition of
portfolio guarantee dollar limit. SBA may limit the maximum dollar
amount that SBA will guaranty on the SBA Lender's SBA loans or
debentures.
(2) Suspension or revocation of delegated authority. SBA may
suspend or revoke an SBA Lender's delegated authority (including, but
not limited to PLP, SBA Express, or PCLP delegated authorities).
(3) Suspension or revocation from SBA program. SBA may suspend or
revoke an SBA Lender's authority to participate in the SBA loan
program, including the authority to make, service, liquidate, or
litigate 7(a) or 504 loans. Section 120.1400(d)(1) sets forth the
grounds for SBA program suspension or revocation of an SBA Supervised
Lender (except Other Regulated SBLCs). The grounds for SBA program
suspension or revocation for all other SBA Lenders are set forth in
Sec. 120.1400(c) and, as applicable, paragraph (f) of Sec. 120.1400.
A suspension or revocation will not invalidate a guarantee previously
provided by SBA.
(4) Immediate suspension. SBA may suspend, effective immediately,
an SBA Lender's delegated authority or authority to participate in the
SBA loan program, or the authority to make, service, liquidate, or
litigate 7(a) or 504 loans. Section 120.1400(d)(2) sets forth the
grounds for SBA program immediate suspension of an SBA Supervised
Lender (except Other Regulated SBLCs). The grounds for SBA program
immediate suspension for all other SBA Lenders and the grounds for
immediate
[[Page 61782]]
suspension of delegated authority for all SBA Lenders are set forth in
Sec. 120.1400(c)(11) and Sec. 120.1400(c)(12).
(5) Debarment. In accordance with Part 145 or successor regulation
of this Chapter, SBA may take any necessary action to debar a person,
as defined in Part 145, including but not be limited to an officer, a
director, a general partner, a manager, an employee, an agent or other
participant in the affairs of an SBA Lender's SBA operations.
(6) Other actions available under law. SBA may take all other
enforcement actions against SBA Lenders available under law.
(b) Enforcement actions specific to 7(a) Lenders. In addition to
those enforcement actions applicable to all SBA Lenders, SBA may
suspend or revoke a 7(a) Lender's authority to sell or purchase loans
or certificates in the Secondary Market.
(c) Enforcement actions specific to SBA Supervised Lenders and
Other Persons (except Other Regulated SBLCs). In addition to those
enforcement actions listed in paragraphs (a) and (b) of this section,
SBA may take any one or more of the following enforcement actions
specific to SBA Supervised Lenders and as applicable, Other Persons:
(1) Cease and desist order. SBA may issue a cease and desist order
against the SBA Supervised Lender or Other Person. The Cease and Desist
order may either require the SBA Supervised Lender or the Other Person
to take a specific action, or to refrain from a specific action. The
Cease and Desist Order may be issued as effective immediately (or as a
proposal for Order). SBA may include in the cease and desist order the
suspension of authority to lend.
(2) Remove Management Official. SBA may issue an order to remove a
Management Official from office. SBA may suspend a Management Official
from office or prohibit a Management Official from participating in
management of the SBA Supervised Lender or in reviewing, approving,
closing, servicing, liquidating or litigating any 7(a) loan, or any
other activities of the SBA Supervised Lender while the removal
proceeding is pending in order to protect an SBA Supervised Lender or
the interests of SBA or the United States.
(3) Initiate request for appointment of receiver. The SBA may make
application to a district court to take exclusive jurisdiction of an
SBA Supervised Lender and appoint a trustee or receiver to hold or
administer or liquidate the SBA Supervised Lender's assets under
direction of the court. The receiver may take possession of the
portfolio of 7(a) loans and sell such loans to a third party, and/or
take possession of servicing activities of 7(a) loans and sell such
servicing rights to a third party.
(4) Civil monetary penalties for report filing failure. SBA may
seek civil penalties, in accordance with Sec. 120.465, of not more
than $5,000 a day against an SBA Supervised Lender that fails to file
any regular or special report by its due date as specified by
regulation or SBA written directive.
(d) Enforcement actions specific to SBLCs. In addition to those
supervisory actions listed in paragraphs (a), (b), and (c) of this
section, SBA may take the following enforcement actions specific to
SBLCs.
(1) Capital directive. The AA/CA may issue a capital directive upon
a determination that the grounds in Sec. 120.1400(e)(1) exist. A
directive may order the SBLC to:
(i) Achieve its minimum capital requirement applicable to it by a
specified date;
(ii) Adhere to a previously submitted capital restoration plan
(provided under Sec. 120.462 or Sec. 120.1055) to achieve the
applicable capital requirement;
(iii) Submit and adhere to a capital restoration plan acceptable to
SBA describing the means and time schedule by which the SBLC will
achieve the applicable capital requirement (The SBLC must provide its
capital restoration plan within 30 days from the date of the SBA order
unless SBA notifies the SBLC that the plan is to be filed within a
different time period. SBA may perform an on-site examination
(generally within 90 days after the restoration plan is submitted) to
verify the implementation of the plan and verify that the SBLC meets
minimum capital requirements.);
(iv) Refrain from taking certain actions without obtaining SBA's
prior written approval (Such actions may include but are not limited
to: Paying any dividend; retiring any equity; maintaining a rate of
growth that causes further deterioration in the capital percentage;
securitizing any unguaranteed portion of its 7(a) loans; or selling
participations in any of its 7(a) loans); or
(v) Undertake a combination of any of these or similar actions.
(2) Civil action for termination. SBA may institute a civil action
to terminate the rights, privileges, and franchises of an SBLC.
(e) Enforcement actions specific to CDCs. In addition to those
enforcement actions listed in paragraph (a) of this section, SBA may
take any one or more of the following enforcement actions specific to
CDCs:
(1) Require the CDC to transfer part or all of its existing 504
loan portfolio and/or part or all of its pending 504 loan applications
to SBA, another CDC, or any other entity designated by SBA. Any such
transfer may be on a temporary or permanent basis, in SBA's sole
discretion; or
(2) Instruct the Central Servicing Agent to withhold payment of
servicing, late and/or other fee(s) to the CDC.
Sec. 120.1510 Other Regulated SBLCs.
Other Regulated SBLCs are exempt from Sec. Sec. 120.465,
120.1050(b), 120.1400(d), 120.1500(c), and 120.1600(b). This exemption
is not intended to preclude SBA from seeking any other remedy
authorized by law or equity.
Sec. 120.1511 Certification and other reporting and notification
requirements for Other Regulated SBLCs.
(a) Certification. An SBLC seeking Other Regulated SBLC status must
certify to SBA in writing that its lending activities are subject to
regulation by a Federal Financial Institution Regulator or state
banking regulator. This certification must be executed by the chair of
the board of directors of the SBLC and submitted to SBA either:
(1) Within 60 calendar days of the effective date of this section
or
(2) If the SBLC becomes subject to regulation by a Federal
Financial Institution Regulator or state banking regulator after the
effective date of this section for any reason (e.g. license transfers),
within 60 days of the date that the SBLC becomes directly examined and
directly regulated by such regulator.
(b) Contents of Certification. This certification must include:
(1) The identity of the Federal Financial Institution Regulator or
state banking regulator that regulates the lending activities of the
SBLC;
(2) A statement that the Federal Financial Institution Regulator or
state banking regulator identified in paragraph (b)(1) of this section
regularly conducts safety and soundness examinations on the SBLC itself
and not only on the SBLC's parent company or affiliate, if any; and
(3) The date of the most recent safety and soundness examination
conducted on the SBLC by the Federal Financial Institution Regulator or
state banking regulator. To qualify as an Other Regulated SBLC, the
SBLC must have received this examination within the past 3 years of the
date of certification.
(c) Notification of examination. An Other Regulated SBLC must
notify SBA
[[Page 61783]]
in writing each time a Federal Financial Institution Regulator or state
banking regulator conducts a safety and soundness examination, and this
notification must be submitted to SBA within 30 calendar days of the
SBLC receiving the results of the examination. To retain its status as
an Other Regulated SBLC, the Other Regulated SBLC must receive such
examination, and provide the written notification to SBA, at least once
every two years following initial certification.
(d) Report. An Other Regulated SBLC must report in writing to SBA
on its interactions with other Federal Financial Institution Regulators
or state banking regulator (e.g., the results of the safety and
soundness examinations and any order issued against the Other Regulated
SBLC), to the extent allowed by law.
(e) Notification of change in status. If, for any reason, an Other
Regulated SBLC becomes no longer subject to regulation by a Federal
Financial Institution Regulator or state banking regulator, the Other
Regulated SBLC must immediately notify SBA in writing, and the
exemption provided in Sec. 120.1510 will immediately no longer apply.
(f) Extension of timeframes. SBA may in its sole discretion extend
any timeframe imposed on the SBLC under this section if the SBLC can
show good cause for any delay in meeting the time requirement. The SBLC
may appeal this decision to the AA/CA.
(g) Failure to satisfy requirements. In the event that an SBLC
fails to satisfy the requirements set forth in paragraphs (a), (b), and
(c) of this section, then the exemption provided in Sec. 120.1510 will
not apply to the SBLC.
Sec. 120.1540 Enforcement actions--Intermediaries participating in
the Microloan Program and NTAPs.
Upon a determination that any ground set out in Sec. 120.1425
exists, the SBA may take in its sole discretion, one or more of the
following enforcement actions against an Intermediary or NTAP:
(a) Suspension or pre-revocation sanctions which may include, but
are not limited to:
(1) Accelerated reporting requirements;
(2) Accelerated loan repayment requirements for outstanding program
debt to SBA, as applicable;
(3) Imposition of a temporary lending moratorium, as applicable; or
(4) Imposition of a temporary training moratorium.
(b) Revocation of authority to participate in the Microloan program
which will include:
(1) Removal from the program;
(2) Liquidation of Intermediary's Microloan Revolving Fund and Loan
Loss Reserve Fund accounts by SBA, and application of the liquidated
funds to any outstanding balance owed to SBA;
(3) Payment of outstanding debt to SBA by the Intermediary;
(4) Forfeiture or repayment of any unused grant funds by the
Intermediary or NTAP;
(5) Debarment of the organization from receipt of federal funds
until loan and grant repayments are met; or
(6) Taking such other actions available under law.
Sec. 120.1600 General procedures for enforcement actions against SBA
Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management
Officials, Other Persons, Intermediaries, and NTAPs.
(a) In general. Except as otherwise set forth for the enforcement
actions listed in paragraphs (b) and (c) of this section, SBA will
follow the procedures listed below.
(1) SBA's notice of enforcement action. (i) When undertaking an
immediate suspension under Sec. 120.1500(a)(4), or prior to
undertaking an enforcement action set forth in Sec. 120.1500(a), (b),
and (e) and Sec. 120.1540, SBA will issue a written notice to the
affected SBA Lender, Intermediary, or NTAP identifying the proposed
enforcement action or notifying it of an immediate suspension. The
notice will set forth in reasonable detail the underlying facts and
reasons for the proposed action or immediate suspension. If the notice
is for a proposed or immediate suspension, SBA will also state the
scope and term of the proposed or immediate suspension.
(ii) If a proposed enforcement action or immediate suspension is
based upon information obtained from a third party other than the SBA
Lender, Intermediary, and NTAP or SBA, SBA's notice of proposed action
or immediate suspension will provide copies of documentation received
from such third party, or the name of the third party in case of oral
information, unless SBA determines that there are compelling reasons
not to provide such information. If compelling reasons exist, SBA will
provide a summary of the information it received to the SBA Lender,
Intermediary, or NTAP.
(2) SBA Lender, Intermediary, or NTAP's opportunity to object. (i)
An SBA Lender, Intermediary, or NTAP that desires to contest a proposed
enforcement action or an immediate suspension must file, within 30
calendar days of its receipt of the notice or within some other term
established by SBA in its notice, a written objection with the
appropriate Office of Capital Access official in accordance with
Delegations of Authority or other SBA official identified in the
notice. Notice will be presumed to have been received within five days
of the date of the notice unless the SBA Lender, Intermediary, or NTAP
can provide compelling evidence to the contrary.
(ii) The objection must set forth in detail all grounds known to
the SBA Lender, Intermediary, or NTAP to contest the proposed action or
immediate suspension and all mitigating factors, and must include
documentation that the SBA Lender, Intermediary, or NTAP believes is
most supportive of its objection. An SBA Lender, Intermediary, or NTAP
must exhaust this administrative remedy in order to preserve its
objection to a proposed enforcement action or an immediate suspension.
(iii) If an SBA Lender, Intermediary, or NTAP can show legitimate
reasons as determined by SBA in SBA's sole discretion why it does not
understand the reasons given by SBA in its notice of the action, the
SBA Lender, Intermediary, or NTAP may request and receive clarification
from the Agency. SBA will provide the requested clarification in
writing to the SBA Lender, Intermediary, or NTAP or notify the SBA
Lender, Intermediary, or NTAP in writing that SBA has determined that
SBA Lender's reasons as presented were not legitimate and that such
clarification is not necessary. SBA, in its sole discretion, will
further advise in writing whether the SBA Lender, Intermediary, or NTAP
may have additional time to present its objection to the notice.
Requests for clarification must be made to the appropriate Office of
Capital Access official in accordance with Delegations of Authority in
writing and received by SBA within the 30-day timeframe or the
timeframe given by the notice for response.
(iv) An SBA Lender, Intermediary, or NTAP may request additional
time to respond to SBA's notice if it can show that there are
compelling reasons why it is not able to respond within the 30-day
timeframe or timeframe given by the notice for response. If such
requests are submitted to the Agency, SBA may, in its sole discretion,
provide the SBA Lender, Intermediary, or NTAP with additional time to
respond to the notice of proposed action or immediate suspension.
Requests for additional time to respond must be made to the appropriate
Office of Capital Access official in accordance with Delegations
[[Page 61784]]
of Authority or other official identified in the notice in writing and
received by SBA within the 30-day timeframe or the timeframe given by
the notice for response.
(v) Prior to the issuance of a final decision by SBA, if an SBA
Lender, Intermediary, or NTAP can show that there is newly discovered
material evidence which, despite the SBA Lender, Intermediary, or
NTAP's exercise of due diligence, could not have been discovered within
the timeframe given by SBA to respond to a notice, or that there are
compelling reasons beyond the SBA Lender, Intermediary, or NTAP's
control as to why it was not able to present a material fact or
argument to SBA, and that the SBA Lender, Intermediary, or NTAP has
been prejudiced by not being able to present such information, the SBA
Lender, Intermediary, or NTAP may submit such information to SBA and
request that the Agency consider such information in its final
decision.
(3) SBA's notice of final agency decision where SBA Lender,
Intermediary, or NTAP filed objection to the proposed action or
immediate suspension. (i) If the affected SBA Lender, Intermediary, or
NTAP files a timely written objection to a proposed enforcement action
other than an immediate suspension in accordance with this section, SBA
must issue a written notice of final decision to the affected SBA
Lender, Intermediary, or NTAP advising whether SBA is undertaking the
proposed enforcement action and setting forth the grounds for the
decision. SBA will issue such a notice of final decision whenever it
deems appropriate.
(ii) If the affected SBA Lender, Intermediary, or NTAP files a
timely written objection to a notice of immediate suspension, SBA must
issue a written notice of final decision to the affected SBA Lender,
Intermediary, or NTAP within 90 days of receiving the SBA Lender,
Intermediary, or NTAP's objection advising whether SBA is continuing
with the immediate suspension. If the SBA Lender, Intermediary, or NTAP
submits additional information to SBA (under paragraph (a)(2)(v) of
this section) after submitting its objection but before SBA issues its
final decision, SBA must issue its final decision within 90 days of
receiving such information.
(iii) Prior to issuing a notice of decision, SBA in its sole
discretion can request additional information from the affected SBA
Lender, Intermediary, NTAP or other parties and conduct any other
investigation it deems appropriate. If SBA determines, in its sole
discretion, to consider an untimely objection, it must issue a notice
of final decision pursuant to this paragraph.
(4) SBA's notice of final agency decision where no objection filed
or untimely objection not considered. If SBA chooses not to consider an
untimely objection or if the affected SBA Lender, Intermediary, or NTAP
fails to file a written objection to a proposed enforcement action or
an immediate suspension, and if SBA continues to believe that such
proposed enforcement action or immediate suspension is appropriate, SBA
must issue a written notice of final decision to the affected SBA
Lender, Intermediary, or NTAP that SBA is undertaking one or more of
the proposed enforcement actions against the SBA Lender, Intermediary,
or NTAP or that SBA will continue to pursue an immediate suspension of
the SBA Lender, Intermediary, or NTAP. Such a notice of final decision
need not state any grounds for the action other than to reference the
SBA Lender, Intermediary, or NTAP's failure to file a timely objection,
and represents the final agency decision.
(5) Appeals. SBA Lender, Intermediary, and NTAP may appeal the
final agency decision only in the appropriate federal district court.
(b) Procedures for certain enforcement actions against SBA
Supervised Lenders (except Other Regulated SBLCs) and, where
applicable, Management Officials and Other Persons--(1) Suspension and
revocation actions and cease and desist orders. If SBA seeks to suspend
or revoke loan program authority (including the authority to make,
service, liquidate, or litigate SBA loans), or issue a cease and desist
order to an SBA Supervised Lender or, as applicable, Other Person, SBA
will follow the procedures below in lieu of those in paragraph (a) of
this section.
(i) Show cause order and hearing. The Administrator will serve upon
the SBA Supervised Lender or Other Person an order to show cause why an
order suspending or revoking the authority or why a cease and desist
order should not be issued. The show cause order will contain a
statement of the matters of fact and law asserted by SBA, as well as
the legal authority and jurisdiction under which an administrative
hearing will be held, and will set forth the place and time of the
administrative hearing. The hearing will be conducted by an
administrative law judge in accordance with 5 U.S.C. 554-557.
(ii) Witnesses. The party calling witnesses will pay the witnesses
the same fees and mileage paid witnesses for their appearance in U.S.
courts.
(iii) Administrator finding and order issuance. If after the
administrative hearing, or the SBA Supervised Lender's or Other
Person's waiver of the administrative hearing, the Administrator
determines that the order should be issued, the Administrator will
issue an order to suspend or revoke authority or a cease and desist
order, as applicable. The order will include a statement of findings,
the grounds and reasons, and will specify the order's effective date.
SBA will serve the order on the SBA Supervised Lender or Other Person.
The Administrator may delegate the power to issue a cease and desist
order or to suspend or revoke loan program authority only if the
Administrator is unavailable and only to the Deputy Administrator.
(iv) Judicial review. The order issuance constitutes a final agency
action. The SBA Supervised Lender or Other Person will have 20 days
from the order issuance date to file an appeal in the appropriate
federal district court.
(2) Immediate suspension or immediate cease and desist order. If
SBA undertakes an immediate suspension of authority to participate in
the 7(a) loan program or immediate cease and desist order against an
SBA Supervised Lender or, as applicable, Other Person, SBA will within
two business days follow the procedures set forth in paragraph (b)(1)
of this section.
(3) Removal of Management Official. If SBA undertakes the removal
of a Management Official of an SBA Supervised Lender, SBA will follow
the procedures below in lieu of those in paragraph (a) of this section.
(i) Notice and hearing. SBA will serve upon the Management Official
and the SBA Supervised Lender written notice of intention to remove
that includes a statement of the facts constituting the grounds and the
date, time, and place for an administrative hearing. The administrative
hearing will be held between 30 and 60 days from the date notice is
served, unless an earlier or later date is set at the request of the
Management Official for good cause shown or at the request of the
Attorney General. Failure of the Management Official to appear at the
administrative hearing will constitute consent to the removal order.
SBA will serve on the SBA Supervised Lender a copy of each notice that
is served on a Management Official,
(ii) Suspension from office or prohibition in participation,
pending removal. The suspension or prohibition will take effect upon
service of intention to remove the Management Official or such
subsequent time as the Administrator or his/her delegate deems
[[Page 61785]]
appropriate and serves notice. It will remain in effect pending the
completion of the administrative proceedings to remove and until such
time as either SBA dismisses the charges in the removal notice or, if
an order to remove or prohibit participation is issued, until the
effective date of an order to remove or prohibit. In the case of
suspension or prohibition following criminal charges, it may remain in
effect until the information, indictment, or complaint is finally
disposed of, or until the suspension is terminated by SBA or by order
of a district court. A Management Official may appeal to the
appropriate federal district court for a stay of the suspension or
prohibition pending completion of the administrative hearing not later
than 10 days from the suspension or prohibition's effective date.
(iii) Decision. SBA may issue the order of removal if the
Management Official consents or is convicted of the criminal charges
and the judgment is not subject to further judicial review (not
including writ of habeas corpus), or if upon a record of a hearing, SBA
finds that any of the notice grounds have been established. After the
hearing, in the latter case, and within 30 days after SBA has notified
the parties that the case has been submitted for final decision, SBA
will render a decision (which includes findings of fact upon which the
decision is predicated) and issue and serve an order upon each party to
the proceeding. The decision will constitute final agency action.
(iv) Effective date and judicial review. The removal order will
take effect 30 days after date of service upon the SBA Supervised
Lender and the Management Official except i) in case of consent which
will be effective at the time specified in the order or ii) in case of
removal for conviction on criminal charges the order will be effective
upon removal order service on the SBA Supervised Lender and the
Management Official. The order will remain effective and enforceable,
except to the extent it is stayed, modified, terminated, or set aside
by the Administrator or a reviewing court. The adversely affected party
will have 20 days from the order issuance date to seek judicial review
in the appropriate federal district court.
(4) Receiverships, transfer of assets and servicing activities. If
SBA undertakes the appointment of a receiver for, or the transfer of
assets or servicing rights of, an SBA Supervised Lender, SBA will
follow the applicable procedures in 15 U.S.C. 650.
(5) Civil penalties for report filing failure. If SBA seeks to
impose civil penalties against an SBA Supervised Lender for failure to
file a report in accordance with SBA regulations or written directives,
SBA will follow the procedures set forth for enforcement actions in
Sec. 120.465.
(c) Additional procedures for certain enforcement actions against
SBLCs. Capital directive--(1) Notice of intent to issue capital
directive. SBA will notify an SBLC in writing of its intention to issue
a directive. The notice will state:
(i) Reasons for issuance of the directive and
(ii) The proposed contents of the directive.
(2) Response to notice. An SBLC may respond to the notice by
stating why a capital directive should not be issued and/or by
proposing alternative contents for the capital directive or seeking
other appropriate relief. The response must include any information,
mitigating circumstances, documentation, or other relevant evidence
that supports its position. The response may include a plan for
achieving the minimum capital requirement applicable to the SBLC. The
response must be in writing and delivered to the SBA within 30 days
after the date on which the SBLC received the notice. In its
discretion, SBA may extend the time period for good cause. SBA may
shorten the 30-day time period:
(i) When, in the opinion of SBA, the condition of the SBLC so
requires, provided that the SBLC will be informed promptly of the new
time period;
(ii) With the consent of the SBLC; or
(iii) When the SBLC already has advised SBA that it cannot or will
not achieve its applicable minimum capital requirement.
Failure to respond within 30 days or such other time period as may
be specified by SBA will constitute a waiver of any objections to the
proposed capital directive.
(3) Decision. After the closing date of the SBLC's response period,
or receipt of the SBLC's response, if earlier, SBA may seek additional
information or clarification of the response. Thereafter, SBA will
determine whether or not to issue a capital directive, and if one is to
be issued, whether it should be as originally proposed or in modified
form.
(4) Issuance of a capital directive. (i) A capital directive will
be served by delivery to the SBLC. It will include, or be accompanied
by, a statement of reasons for its issuance.
(ii) A capital directive is effective immediately upon its receipt
by the SBLC, or upon such later date as may be specified therein, and
will remain effective and enforceable until it is stayed, modified, or
terminated by SBA.
(5) Reconsideration based on change in circumstances. Upon a change
in circumstances, an SBLC may request SBA to reconsider the terms of
its capital directive or may propose changes in the plan to achieve the
SBLC's applicable minimum capital requirement. SBA also may take such
action on its own initiative. SBA may decline to consider requests or
proposals that are not based on a significant change in circumstances
or are repetitive or frivolous. Pending a decision on reconsideration,
the capital directive and plan will continue in full force and effect.
(6) Relation to other administrative actions. A capital directive
may be issued in addition to, or in lieu of, any other action
authorized by law, including cease and desist proceedings. SBA also
may, in its discretion, take any action authorized by law, in lieu of a
capital directive, in response to an SBLC's failure to achieve or
maintain the applicable minimum capital requirement.
(7) Appeals. The capital directive constitutes a final agency
action. An SBLC may appeal the final agency decision only in the
appropriate federal district court.
Dated: October 18, 2007.
Steven C. Preston,
Administrator.
[FR Doc. E7-20932 Filed 10-30-07; 8:45 am]
BILLING CODE 8025-01-P