[Federal Register Volume 73, Number 239 (Thursday, December 11, 2008)]
[Rules and Regulations]
[Pages 75498-75527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-29197]
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Part II
Small Business Administration
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13 CFR Part 120
Lender Oversight Program; Final Rule
Federal Register / Vol. 73, No. 239 / Thursday, December 11, 2008 /
Rules and Regulations
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AE14
Lender Oversight Program
AGENCY: Small Business Administration (SBA).
ACTION: Interim Final Rule with request for comments.
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SUMMARY: This interim final rule incorporates SBA's risk-based lender
oversight program into SBA regulations. Specifically, the rule codifies
in SBA regulations SBA's process of risk-based oversight including:
Accounting and reporting requirements; off-site reviews/monitoring; on-
site reviews and examinations; and capital adequacy requirements. It
also codifies SBA Supervised Lender regulation and updates SBA's
business loan program regulations to specify program standards.
Finally, the rule lists the types of, grounds for, and procedures
governing SBA enforcement actions against 7(a) Lenders, Certified
Development Companies, Microloan Intermediaries, and Non-Lending
Technical Assistance Providers within consolidated enforcement
regulations. SBA previously published a Notice of Proposed Rulemaking
(NPRM) addressing all of the topics and issues covered by this interim
final rule. SBA has already allowed for public comment, reviewed the
comments and made changes accordingly. SBA is publishing this rule
interim final rather than proceeding to a final rule, however, in order
to provide the public with an additional opportunity to comment and to
allow for any necessary adjustments as the industry moves through the
economic cycle.
DATES: Effective Date: January 12, 2009.
Comment Date: Comments must be received on or before March 11,
2009.
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 Rusche, 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 discretion, of whether the
information is CBI and, therefore, will be published or not.
FOR FURTHER INFORMATION CONTACT: Linda Rusche, Supervisory Financial
Analyst, at (816) 426.4860 or [email protected], or Bryan Hooper,
Director, Office of Credit Risk Management, at (202) 205.3049 or
[email protected].
SUPPLEMENTARY INFORMATION:
I. Background Information
SBA Mission and Lender Oversight
In 1953, Congress established the Small Business Administration.
The SBA's mission is to aid, counsel, and assist America's small
businesses. Central to the mission is the intention that SBA assists
America's small businesses' access to capital to start, continue
operations and grow. SBA assists small businesses' access to credit
through numerous finance programs, including but not limited to the
section 7(a) guaranty loan program, the section 504 Certified
Development Company debenture program, and SBA's Microloan Intermediary
program authorized under 15 U.S.C. 636 and 15 U.S.C. 697a. In each of
these programs Lenders/Intermediaries partner with SBA to provide
America's small businesses with needed access to capital to support our
nation's economy. In partnering, SBA delegates to many Lenders the
authority to originate, service, and liquidate SBA guaranteed loans.
Today approximately 4,500 7(a) Lenders, Certified Development
Companies (CDCs) and Intermediaries participate in SBA lending
programs. These Lenders hold approximately $67 billion in 7(a) and 504
loans outstanding. As the SBA portfolio grows and SBA places increasing
responsibility on Lenders, SBA must have the necessary controls to
ensure that SBA Lenders' SBA operations are well managed and to avoid
undue losses. Such controls provide for the long-term health of the
business loan programs and sustain our ability to meet our statutory
mission to assist small businesses in obtaining access to capital.
Central to the establishment of lender oversight controls are their
incorporation in SBA rules and regulations. Therefore, on October 31,
2007, SBA published in the Federal Register SBA's Proposed Lender
Oversight Program rule. (72 FR 61751) The proposed rule was
comprehensive, covering 7(a) program, 504 program, and Microloan
program monitoring and enforcement and also included updates to
business loan program regulations consistent with the oversight
program. On December 20, 2007, SBA published a notice extending the
comment period for the proposed rule to February 29, 2008 allowing the
public additional time to provide feedback. (72 FR 72264) Finally, in
April 2008, SBA held public meetings on the proposed rule in eight
cities nationwide to obtain a fuller understanding of the proposed rule
comments. Those cities included: San Francisco, CA; Los Angeles, CA;
Boston, MA; Philadelphia, PA; Atlanta, GA; Dallas, TX; Kansas City, MO;
and Chicago, IL.
II. Comments Received and Changes Made
SBA received approximately 220 comments on the proposed
regulations. One hundred and eighty-seven comments were from SBA
Lenders, including approximately 100 comments from 7(a) Lenders, 80
comments from CDCs, six comments from SBA Supervised Lenders, and one
comment from a Microloan Intermediary. SBA also received approximately
20 comments from non-Lenders, including five comments from trade
organizations and several comments from legal and accounting
professionals, consultants, and state government organizations. The
remaining comments were anonymous.
Overall, both the written and oral comments were supportive of
lender oversight. Commenters affirmed their support for lender
oversight and recognized SBA's ``substantial progress'' in the audit
and review process areas. Commenters agreed that many of the provisions
of the proposed rule were indeed necessary. Comment discussions on
individual regulations within the rule tended to be concentrated on
certain specific topics (e.g., the Single Audit Act, specificity on
what constitutes ``satisfactory SBA performance'', CDC annual report
submissions, Risk Rating System implementation, and administrative
appeals).
[[Page 75499]]
SBA appreciated the comments received and has incorporated many
comment suggestions into this interim final rule. Among the provisions
where SBA either adopted suggestions or made revisions are provisions
on the Single Audit Act, criteria for satisfactory SBA performance, CDC
annual report submissions, and Risk Rating System implementation.
Comments pertaining to specific provisions are summarized below, along
with any changes made to those provisions. Provisions not included in
this analysis did not receive significant comments or, in most cases,
received no comments; therefore they are adopted as proposed. A
detailed discussion of the significant comments and changes made by
section follows.
Multiple sections--Agency Discretion. The proposed rule included
several references to SBA's ``sole discretion'' in Agency
determinations. Approximately 130 commenters objected to this
terminology. It is not uncommon for SBA to provide the public notice in
its regulations as to those matters that involve some degree of Agency
judgment. Some commenters were concerned that these references to
``discretion'' or ``sole discretion'' implied that the Agency could
make determinations not subject to any form of review. That is simply
not the case. While courts will often defer to an agency when it takes
actions involving the use of agency discretion, such actions may not be
arbitrary or capricious. Nevertheless, in finalizing these regulations,
SBA deleted the reference to ``sole'' before discretion. SBA deleted
the language because we do not believe that it imparted to the Agency
any meaningful distinction than regular Agency discretion.
Multiple sections--Satisfactory SBA Performance. Approximately 125
commenters requested that SBA provide information on the factors it
expects to consider in addition to the Risk Rating when evaluating
satisfactory SBA performance. As stated in the preamble in the Notice
of Proposed Rulemaking published October 31, 2007, 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. In response to the
comments, SBA has incorporated these examples of other factors in the
interim final rule.
These same commenters also requested that SBA provide the relative
weight of the factors it will consider when evaluating satisfactory SBA
performance. SBA has considered these comments, but cannot publish the
relative weights of the Risk Rating and any other factors it may
consider in determining satisfactory SBA performance. Satisfactory SBA
performance is not determined by using any arithmetic function. The
weight attributed to any factor in evaluating a Lender's SBA
performance may vary depending on the particular circumstances, and as
a result may need to be determined on a case by case basis. However,
SBA does plan to provide additional guidance in its Standard Operating
Procedures (SOPs). In the public meetings, SBA requested comments
regarding the consideration of contribution toward SBA mission in the
determination of satisfactory SBA performance; however, no substantive
comments were received. Similarly, the Agency requests comments in this
interim final rule regarding how to best consider contribution toward
SBA mission in the determination of SBA performance.
Section 120.10--Definitions. In the interim final rule, SBA has
added a definition of ``Lender Oversight Committee,'' made a technical
change to the definition of ``Less Than Acceptable Risk Rating'' and
has revised the definition for Non-Federally Regulated Lender to more
closely conform to the definition in section 3(r) of the Small Business
Act. (15 U.S.C. 632) SBA has also added a definition of ``Person,''
which had previously been defined with reference to Sec. 145.985 or
its successor regulation. Section 145.985 was removed from Title 13 of
the Code of Federal Regulations effective September 18, 2007, and now
appears in the government-wide non-procurement debarment and suspension
regulations at 2 CFR Parts 180 and 2700. Rather than reference a
definition outside of 13 CFR, SBA determined to incorporate the
definition of ``Person'' within Sec. 120.10.
Section 120.451--PLP Status Approvals. The proposed rule provided
that PLP status approvals and renewals would be made by the appropriate
official in the Office of Capital Access in accordance with SBA's
published Delegations of Authority. Some commenters requested that such
approvals be made by the Director of Financial Assistance with input
from the Director in the Office of Credit Risk Management and that the
regulations include a specific statement to that effect. The foregoing
is a matter of agency organization, procedure, and practice and as such
it is appropriate for inclusion in the Agency's published Delegations
of Authority. To include such specificity in the regulations would
unduly limit the Administrator's flexibility to manage internal agency
procedures. Therefore, SBA is adopting Sec. 120.451 as it was
proposed.
Sections 120.460-120.465--SBA Supervised Lender Regulation.
Approximately 70 commenters supported greater regulatory oversight for
SBA Supervised Lenders in general. However, a few commenters requested
that SBA reduce the reporting requirements in proposed Sec. 120.464.
SBA must have access to certain information to properly supervise SBA
Supervised Lenders, and the reports required in this rule provide SBA
with the needed information. SBA does understand the need to minimize
Lender costs where appropriate. Consequently, the proposed rule
provided for a waiver of certain reporting requirements for good cause.
In addition, SBA will work to try to reduce the burden by coordinating
with other bank regulators and by working with Lenders to accept
electronic transmissions of the information to be collected. SBA thus
specifically requests comments on how to further reduce such reporting
requirements without sacrificing proper oversight.
Section 120.463(b)--Regulatory accounting for SBA Supervised
Lenders. The interim final rule includes a technical correction in
Sec. 120.463(b). Specifically, SBA has clarified that SBA Supervised
Lenders that are non-public companies must adhere to generally accepted
auditing standards adopted by the American Institute of Certified
Public Accountants (AICPA), and SBA Supervised Lenders that are public
companies must adhere to the standards adopted by the Public Company
Accounting Oversight Board (PCAOB). The PCAOB was established by the
Sarbanes-Oxley Act of 2002.
Section 120.472--Higher Individual Capital Requirement. SBA
received approximately 65 comments supporting the proposed capital
requirements for Small Business Lending Companies (SBLCs). Section
120.472, based on current regulations of a Federal Financial
Institution Regulator, contains six specific factors that SBA would
consider in determining whether an SBA Supervised Lender should have a
higher capital requirement. The commenters also suggested, however,
that some of the factors that SBA listed in Sec. 120.472 may be overly
broad and vague. In particular, two factors were cited by commenters as
broad or vague: management views of senior management, and other risk
related factors. SBA does not agree. Examples of ``management views of
senior
[[Page 75500]]
management'' and ``other risk related factors'' would include, for
example, public announcements by management regarding the net equity
value of the SBA Supervised Lender or the writedown of the value of the
SBA Supervised Lender's assets. SBA expects to provide further guidance
on the factors in the SOPs.
Several commenters also suggested that the Lender Oversight
Committee (LOC) rather than the Associate Administrator of Capital
Access make the determination as to whether to require additional
capital. The provision in proposed Sec. 120.472 is consistent with
statutory authority, which limits delegation of authority to issue a
capital directive to the Associate Deputy Administrator level, retitled
as the Associate Administrator level. Because it is consistent with the
statute, SBA is adopting the provision as proposed.
Section 120.826--CDC Basic Requirements. SBA received a large
number of comments on proposed Sec. 120.826, which governs basic
requirements for operating a CDC. As detailed below, comments focused
mainly on subparts (b), (c), and (e): internal control requirements,
annual audited financial statements, and Single Audit Act requirements.
Section 120.826(b)--CDC Internal Control Policy. Section 120.826(b)
requires each CDC's board of directors to adopt an internal control
policy. The majority of commenters recognized the need for internal
control requirements generally, but approximately 45 commenters
requested that SBA consider the size and organizational structure of
CDCs when reviewing compliance, particularly compliance with separation
of duties requirements. Some commenters stated that SBA's proposed
internal control requirements were comparable to those of a commercial
lending institution; they expressed concern that the requirements would
be excessive given the generally smaller size of CDCs. In addition,
several CDCs requested that SBA provide a sample internal control
policy. SBA recognizes that CDCs vary in size and sophistication, and
thus expects that CDCs' levels of internal controls will vary
accordingly. We believe that the proposed rule allows for such
flexibility. Consequently, the provision will be adopted in this
interim final rule as proposed. Nevertheless, SBA will work with
representatives of the CDC industry to identify resources to assist
CDCs in developing internal controls appropriate for their various
sizes and structures.
Section 120.826(c)--CDC Annual Report Submission. In Sec.
120.826(c), SBA proposed requiring all CDCs to submit annual audited
financial statements. Current SBA policy does not require audited
financial statements from CDCs with 504 loan portfolios of less than
$20 million outstanding. Approximately 40 commenters suggested that the
level of risk by CDCs with small portfolios did not justify the
increase in costs associated with an annual audit. SBA has considered
these comments and has decided to keep the audit requirement at the
current level but retain the proposed rule's requirement for the
qualifications of the accountant as specified in Sec. 120.826(d).
Accordingly, the interim final rule has been revised to state that CDCs
with portfolios of $20 million or more in outstanding 504 loans submit
audited annual financial statements, and that CDCs with portfolios of
less than $20 million submit annual financial statements reviewed by an
independent CPA.
Section 120.826(e)--Single Audit Act. SBA received approximately 70
comments from CDCs concerning proposed Sec. 120.826(e), which would
have required not-for-profit CDCs to comply with the audit requirements
contained in the Single Audit Act (31 U.S.C. 7501 et seq.) and OMB
Circular A-133, ``Audits of States, Local Governments, and Non-Profit
Organizations.'' Commenters were overwhelmingly opposed to this
provision. Commenters argued that the Single Audit Act should not be
applicable to CDCs given the unique nature of the program funding, that
the audit would be duplicative of SBA's on-site CDC reviews, and that
the requirement would impose significant increases in annual audit
costs. CDCs also anticipated difficulty in procuring auditors qualified
to perform Single Audit Act audits, particularly for CDCs located in
rural areas.
SBA consulted with OMB throughout the comment period concerning the
applicability of the Single Audit Act to CDCs. OMB is responsible for
providing interpretations of Single Audit Act policy requirements
(stated in OMB Circular A-133), and assistance to Federal agencies to
ensure uniform, effective, and efficient implementation of the Single
Audit Act. In light of the more than 25 year successful history of the
CDC program, the unique nature of the program funding and the CDCs'
administrative and financial role in it, and the comprehensive
oversight SBA currently performs on CDCs for program compliance and
results, OMB and SBA have determined that the Single Audit Act does not
apply to the CDC program. SBA's current oversight includes: Annual CDC
financial reporting, quarterly off-site monitoring of all CDCs'
portfolio performance and risk, more detailed on-site reviews of all
larger CDCs and certain smaller CDCs identified as high-risk,
corrective action plans for SBA findings from on-site reviews, and
regular program reviews on CDC status and program compliance. This
determination applies only to SBA's CDC program; CDCs that participate
in other Federal programs may still be subject to the Single Audit Act
as a result of their activities in those programs. Because the Single
Audit Act does not apply to SBA's CDC program, proposed Sec.
120.826(e) is deleted in the interim final rule.
Section 120.830--CDC Annual Report Deadline. SBA received
approximately 75 comments regarding proposed Sec. 120.830(a), which
would have required each CDC to submit its annual report to SBA within
90 days after the end of the CDC's fiscal year. Commenters were
unanimously opposed to this proposed provision, and recommended that
SBA keep the current report submission deadline of 180 days. Some
commenters stated that accelerating the report submission deadline
would create a financial hardship, particularly for smaller rural CDCs
with limited access to auditors. Other commenters noted that some CDCs
have a lengthy and complex audit process because they are part of
larger organizations, such as councils of governments. Numerous CDCs
stated that their fiscal year ends in September, which is a very busy
time for CPA firms. Finally, many commenters noted that SBA had a 90
day reporting deadline prior to 2003, when the deadline was extended to
180 days in order to permit CDCs more time to provide financial
statements with the required level of review. SBA has considered these
comments, and has decided not to adopt proposed Sec. 120.830(a); the
CDC annual report submission deadline will remain unchanged at 180
days. In addition, Sec. 120.830(a) has been revised to reflect the
different reporting requirements for audited and reviewed financial
statements.
Section 120.1005--Bureau of PCLP Oversight. Section 120.1005, which
establishes the Bureau of PCLP Oversight, received a large amount of
support from commenters. SBA received approximately 50 comments in
favor of the proposed provision. In addition, approximately 55
commenters suggested that the Bureau of PCLP Oversight conduct random
audits of loans submitted by PCLP CDCs to ensure compliance with SBA
policies and regulations, particularly environmental and appraisal
report documentation
[[Page 75501]]
requirements. SBA has reviewed these comments and is considering
conducting audits of PCLP CDC loans through the Bureau of PCLP
Oversight or otherwise. Section 120.1005 is adopted as proposed.
Section 120.1015--Risk Rating System. SBA received approximately
170 comments on proposed Sec. 120.1015, which incorporates SBA's Risk
Rating System into the loan program regulations. Commenters questioned
the incorporation of the Risk Rating System into SBA's regulations at
this time, citing concerns regarding the effectiveness and
appropriateness of using this sophisticated tool developed by private
sector leaders to evaluate business loan portfolios. Many commenters
also noted that the Risk Rating System has not yet been through an
entire economic cycle. In addition, approximately 100 commenters
requested that SBA obtain third-party validation of the Risk Rating
System.
These commenters also objected to incorporation of the Risk Rating
System into certain specific provisions of the proposed regulations.
Multiple proposed provisions contained the requirement that a Lender
have or maintain ``satisfactory SBA performance,'' which SBA proposed
to determine by considering the Lender's Risk Rating, among other
factors. Specifically, SBA proposed to incorporate ``satisfactory SBA
performance,'' and thus the Risk Rating, in the following proposed
provisions: Sec. 120.410(a), Requirements for all participating
Lenders; Sec. 120.424(b), What are the basic conditions a Lender must
meet to securitize?; Sec. 120.433(b), What are the SBA's other
requirements for sales and sales of participating interests?; Sec.
120.434(c), What are SBA's requirements for loan pledges?; Sec.
120.451(b)(3), How does a Lender become a PLP Lender?; Sec.
120.630(a)(5), Qualifications to be a Pool Assembler; Sec.
120.710(e)(1), What must an Intermediary demonstrate to get a reduction
in Loan Loss Reserve Fund?; Sec. 120.812(c), Probationary period for
newly certified CDCs; Sec. 120.820(c), CDC non-profit status and good
standing; Sec. 120.839, Case-by-case application to make a 504 loan
outside of a CDC's Area of Operations; and Sec. 120.841(c),
Qualifications for the ALP.
SBA has considered these comments. We believe, however, that the
Risk Rating System is a reasonable internal tool for assessing
portfolio risk, because it incorporates past, present, and future
predictive performance to rate Lenders' relative risk to SBA and
provides SBA with a comprehensive risk management tool previously
unavailable to the Agency. The Risk Rating System was developed with
the assistance of Dun & Bradstreet and Fair Isaac, private industry
leaders in predictive modeling and risk rating systems. These companies
have performed annual validation testing at both the loan and Lender
level since 2004. In addition to the validation testing, SBA has
provided to Lenders and trade groups data demonstrating the correlation
between the Risk Ratings and portfolio risk factors in various
presentations given between May and September, 2008. We note that SBA
may amend the Risk Rating System from time to time. Any such amendments
will be published in the Federal Register. We also note that a Lender's
Risk Rating will be used in combination with other factors when
evaluating satisfactory SBA performance and that SBA does not expect
that the Risk Rating would be the sole basis for taking enforcement
action. The relevant provisions of this interim final rule have been
revised to reflect this expectation. Conversely, a good Risk Rating
does not preclude SBA from taking actions based on other factors or
grounds. Therefore, SBA is adopting Sec. 120.1015 as proposed.
Section 120.1050--On-Site Review/Exam Responses. SBA received seven
comments on Sec. 120.1050, which describes SBA's on-site examinations
of SBA Supervised Lenders and on-site reviews of the SBA operations of
SBA Lenders. Two commenters stated that SBA on-site reviews are
duplicative of the safety and soundness reviews already conducted by
Federal regulators. One of these commenters stated that its Federal
financial regulator examines the Lender's SBA portfolio for safety and
soundness, although the regulator does not look at compliance with SBA
program regulations and policies. SBA has considered these comments,
but believes that its on-site reviews and examinations are a critical
component of Lender oversight, and are necessary to ensure the
continued integrity of SBA's lending programs. SBA notes that other
Federal credit guaranty agencies perform similar reviews of their
lenders and the management of the agencies' guaranteed loan portfolios.
Furthermore, to SBA's knowledge, the Federal financial regulators do
not perform an equivalent review of SBA loan portfolios during safety
and soundness reviews. SBA will, however, continue to make efforts to
coordinate its oversight with other bank regulators. If SBA is able to
leverage the efforts of Federal bank regulators in the future, it could
lead to a more streamlined review by SBA. Therefore Sec. 120.1050
remains unchanged from the proposed regulation.
Section 120.1060--Confidentiality of Reports, Risk Ratings and
Related Confidential Information. SBA received approximately 50
comments on Sec. 120.1060, SBAs confidentiality provision for Risk
Ratings, review and examination reports, and other related confidential
information. Although all of the commenters supported confidentiality
requirements generally, some commenters thought that the requirements
in proposed Sec. 120.1060 were too restrictive. These commenters
recommended modifying Sec. 120.1060 to allow Lenders to share
``general information'' on their review and examination results with
other Lenders and trade organizations in order to develop industry best
practices. SBA has considered these comments and recognizes the
commenters' desire to develop best practices. SBA believes, however,
that allowing Lenders to share ``general'' review and examination
report information is too indefinite a standard, and would increase the
risk that confidential information would be disclosed to the public.
Alternatively, SBA will seek to share best practices with trade
organizations and Lenders using aggregate information obtained from
Lender review and examination reports. Therefore, Sec. 120.1060 is
adopted as proposed.
Section 120.1400--Grounds for Enforcement Actions--SBA Lenders. SBA
received comments on several provisions of proposed Sec. 120.1400,
which details the grounds for enforcement actions against SBA Lenders;
these comments are detailed below.
Section 120.1400(a)--Grounds for enforcement actions--Agreement.
Some commenters objected to 120.1400(a) because it references Form 750,
the SBA Loan Guaranty Agreement. These commenters argued that the
Agreement is out of date and, therefore, should not be referenced. SBA
disagrees with the comment that the form should not be referenced. The
Form 750 contains the Lender's agreement to participate in SBA programs
in accordance with program rules and regulations, and every 7(a) Lender
has executed a Form 750.
Section 120.1400(b)--Grounds for enforcement actions--Scope.
Approximately 85 commenters requested that Sec. 120.1400(b), which
defines the scope of the regulation, be clarified. In response to the
comments, SBA has revised subsection (b) for clarity.
Section 120.1400(c)--Grounds for enforcement actions--Grounds in
[[Page 75502]]
General. Subsection (c) lists twelve enforcement grounds that generally
apply to all SBA Lenders. Some commenters were concerned that the
enforcement grounds did not provide a degree of certainty regarding
which enforcement grounds would trigger particular enforcement actions.
SBA believes that enforcement actions will depend upon the particular
facts and circumstances of individual cases; therefore SBA cannot be
constrained to a one size fits all approach to application of
enforcement actions. However, SBA does plan on providing additional
enforcement action guidance through SBA's SOPs.
SBA also received approximately 90 comments on Sec.
120.1400(c)(4), which describes failure to lend in a commercially
reasonable and prudent manner, evidence of which may include, but is
not limited to, the SBA Lender having a repeated Less Than Acceptable
Risk Rating or an on-site review/examination assessment which is Less
Than Acceptable. Commenters requested that SBA specify how many low
Risk Ratings a Lender could be assigned before it would be subject to
an enforcement action. Commenters also stated that an enforcement
action should not be taken based solely on a single Less Than
Acceptable on-site review/examination assessment. SBA has considered
these comments. The Less Than Acceptable Risk Ratings or on-site
review/examination assessments reflect the particular facts and
circumstances of individual cases. Sometimes the risk can be addressed
solely through Lender corrective actions; sometimes other action must
be taken. SBA must have the flexibility to take actions appropriate to
the particular risk evidenced by Less Than Acceptable Risk Ratings and/
or on-site review/assessments. Therefore, SBA is reluctant to set a
specific number of low risk ratings or Less Than Acceptable on-site
assessments to trigger enforcement action. However, as noted above, SBA
does not anticipate using the Risk Rating System as the sole basis for
taking enforcement actions against SBA Lenders, and has modified Sec.
120.1400(c)(4) accordingly.
These same commenters also opposed the use of ``repeated Less Than
Acceptable Risk Ratings'' as a possible enforcement ground in Sec.
120.1400(c)(9). SBA has considered these comments, and Sec.
120.1400(c)(9) has also been modified to conform to the change in Sec.
120.1400(c)(4).
Finally, SBA received approximately 90 comments on proposed Sec.
120.1400(c)(6), which gives SBA authority to take possible enforcement
action if it determines that a Lender is ``engaging in a pattern of
uncooperative behavior'' or taking an action that is ``detrimental to
an SBA program, that undermines management or administration of a
program, or that is not consistent with standards of good conduct.''
This language was based on current language in the CDC regulations.
Commenters stated that this provision is overly broad, and requested
that SBA give examples of the types of behavior that might trigger an
enforcement action under this provision. One commenter also requested
that, prior to taking enforcement action against a Lender, SBA provide
notice to the Lender explaining why the Lender's actions were
uncooperative, detrimental to the program, undermined SBA's management
of the program, or were not consistent with standards of good conduct
prior to enforcement. In response, SBA is providing examples of the
types of behavior that may trigger this provision. Those behaviors
include, but are not limited to, refusal to implement actions to
correct material weaknesses found in on-site reviews/assessments, and
failure to carry out an approved plan to correct material weaknesses
identified in an on-site review/assessment before a new on-site review/
assessment is conducted. As for the additional notice, SBA has added
language to the interim final rule providing such notice prior to
enforcement.
Section 120.1400(d)(5)--Grounds for enforcement actions--Grounds
required for certain enforcement actions against SBA Supervised Lenders
(except Other Regulated SBLCs) or, as applicable, Other Persons--For
transfer of loan portfolio. SBA has made a clarification to Sec.
120.1400(d)(5)(i) consistent with statutory authority. 15 U.S.C.
650(i). Specifically, we revised the ``and'' in subparagraph ``i'' to
read as an ``or''.
Section 120.1425(c)(2)--Grounds for enforcement actions--
Intermediaries participating in the Microloan Program and NTAPs--
Grounds in general. Section 120.1425(c)(2)(viii) has been modified to
conform with the changes in Sec. 120.1400(c)(4) and (9) and reflect
that SBA does not anticipate using the Risk Rating System as the sole
basis for taking enforcement actions against Intermediaries or NTAPs.
Section 120.1500(a)(1)--Portfolio Guaranty Dollar Limit. SBA
received several comments requesting clarification of Sec.
120.1500(a)(1), SBA's proposed portfolio guaranty dollar limit
enforcement action. The commenters requested that SBA clarify whether
the guaranty limit applies to the total dollars of SBA loans or
debentures guaranteed for an SBA Lender, or whether it restricts the
maximum dollar amount on individual loans or debentures a Lender may
make. SBA intended Sec. 120.1500(a)(1) to apply only to the total
dollars of SBA loans or debentures guaranteed for an SBA Lender. SBA is
adopting Sec. 120.1500(a)(1) as proposed.
Section 120.1500(a)(3)--Continuing Guaranty. Approximately 80
commenters supported Sec. 120.1500(a)(3), which provides that the
suspension or revocation of a Lender from an SBA program will not
invalidate a guaranty previously provided by SBA. These commenters
further recommended that this provision be moved to the introductory
paragraph to Sec. 120.1500, so as to apply to all enforcement actions,
not just non-immediate suspensions or revocation. SBA has considered
these comments, and agrees that the provisions should apply to all
enforcement actions. We have therefore moved the provision to the
beginning of the text, and clarified that an enforcement action, by
itself, would not invalidate a guaranty previously provided by SBA.
Section 120.1500(b)--Secondary Market Suspension. SBA received
approximately 90 comments opposing secondary market suspension as an
available enforcement action. As stated in the proposed rule preamble,
SBA is including this enforcement provision as a means of limiting an
SBA Lender's risk exposure to SBA and the Secondary Market. Commenters
contended that many Lenders are reliant on access to the Secondary
Market in order to continue their 7(a) lending activities, and that
such a suspension or revocation ``is tantamount to a program suspension
or termination.'' Many commenters also questioned the need for SBA to
provide additional protection to the Secondary Market, because
``purchasers in the Secondary Market conduct extensive due diligence.''
Finally, numerous commenters questioned SBA's need to protect itself
from an SBA Lender's risk exposure, noting that the Agency has ``very
little risk of loss'' because Lenders are ultimately responsible for
their loans if SBA determines the need to repair or deny liability.
SBA has considered these comments, and recognizes that suspension
or revocation of authority to sell or purchase loans or certificates in
the Secondary Market could have very serious implications for certain
7(a) Lenders. Nonetheless, SBA has a responsibility to protect the
integrity of the Secondary Market, whose operation is contingent upon
SBA's full faith and
[[Page 75503]]
credit guaranty. SBA must also mitigate the risk to the Agency. SBA
disagrees with the contention that the Agency has little risk of loss
due to the Lender's responsibility to SBA in the case of a repair or
denial of liability. If SBA has previously honored its guaranty to a
holder in the Secondary Market, SBA is subject to risk that it will not
be able to recoup funds from the SBA Lender, particularly if the SBA
Lender is insolvent. Furthermore, for some SBA Lenders, Secondary
Market Suspension may be preferable as an alternative to suspension or
revocation of the SBA Lender's authority to participate in the SBA
program. Therefore, Sec. 120.1500(b) is adopted in the interim final
rule as proposed.
Section 120.1600 (a)(3)--Enforcement Procedures--SBA Timeframes.
Approximately 90 commenters requested that SBA give a definitive time
period for rendering a decision in enforcement actions in order to
allow the affected Lender to plan its SBA operations with some degree
of certainty. The majority of these commenters recommended that SBA
adopt a 60-day response time. Commenters also requested that SBA adopt
an Agency response deadline of 30 days instead of the 90-day deadline
proposed by SBA on immediate suspensions.
SBA recognizes the need for SBA Lenders, Intermediaries, and NTAPs
(non-lending technical assistance providers) to plan their future SBA
operations with certainty. SBA also recognizes the need for the Agency
to provide an expeditious response, particularly when an immediate
suspension has been put into effect. But SBA must balance this against
the time needed to make the appropriate decision. SBA will make every
effort to issue final enforcement decisions as quickly as possible and
has decided to adopt a 30-day deadline (unless SBA provides notice that
it requires additional time) for the final decision in the case of an
immediate suspension and a 90-day deadline (unless SBA provides notice
that it requires additional time) for final decisions for all other
enforcement actions. We note that consideration of additional
information (e.g., information provided by the Lender subsequent to
objection) may extend the deadline accordingly.
Section 120.1600(a)(5)--Enforcement Procedures--Administrative
Appeals Process for SBA Lenders, Intermediaries, and NTAPs. In general,
proposed Sec. 120.1600(a)(5) provided SBA Lenders, Intermediaries, and
NTAPs streamlined enforcement appeal rights direct to Federal district
court rather than requiring that Lenders first go through SBA's
administrative appeals process. Many commenters requested that SBA
incorporate an administrative appeals process within SBA's enforcement
procedures framework citing cost concerns.
SBA has considered these comments and considered the possibility of
incorporating an administrative appeals process for enforcement
decisions, including to the Office of Hearings and Appeals (OHA).
However, SBA has concluded that a direct appeal to Federal district
court will, on balance, be a more efficient and cost-effective process
for Lenders to utilize. For example, Lenders would be able to seek
immediate injunctive relief from the Federal district courts, whereas
OHA does not have the authority to issue injunctive relief. The Lender
could lose valuable time and incur greater expense if it had to pursue
its appeal through OHA before it could seek injunctive relief from the
Federal courts. In reaching its conclusion, SBA has also considered the
fact that SBA's enforcement decision will have been based on multiple
levels of administrative review, including in most cases the
independent Lender Oversight Committee. In addition, the extensive due
process provisions of Section 1600 include notice and an opportunity to
object.
Section 120.1600(b)--Enforcement Procedures--Administrative Appeals
Process for SBA Supervised Lenders, Management Officials and Other
Persons. SBA has made technical changes to Sec. 120.1600(b)(1)(i) and
(b)(3)(i) to clarify that administrative hearings under these
subparagraphs, which are specifically required by the Small Business
Act, will be conducted by SBA's Office of Hearings and Appeals in
accordance with 15 U.S.C. 650 and applicable sections of Part 134 of
SBA regulations.
III. Chart of Regulations Relocated
Some of the regulations promulgated in this interim final rule were
relocated from other sections within Part 120. 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. See below chart of regulations relocated.
Chart of Regulations Relocated
------------------------------------------------------------------------
Regulation subject Proposed regulatory
Current regulatory citation matter citation
------------------------------------------------------------------------
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.
[[Page 75504]]
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,
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).
------------------------------------------------------------------------
IV. Justification for Interim Final Rule
SBA finds that good cause exists to publish this rule as an interim
final rule. As discussed above, SBA previously published a Notice of
Proposed Rulemaking (NPRM) addressing all of the topics and issues
covered by this interim final rule. SBA has already allowed for public
comment, reviewed the comments and made changes accordingly. SBA has
determined that the changes made in this rule are a logical outgrowth
of the proposed rule and the comments received on the proposed rule.
Procedurally, SBA could therefore issue a final rule; however, SBA is
publishing this rule interim final rather than proceeding to a final
rule in order to provide the public with an additional opportunity to
comment.
SBA has a statutory obligation to implement a Lender Oversight
Program and it is critically important during the current financial
crisis that a proper oversight program is in place. Any delay in
promulgation could be prejudicial to the integrity of the program and
could potentially result in additional losses to the American
taxpayers. SBA is requesting additional public comments in order to
further shape the program. Publishing this rule as interim final allows
for any needed adjustments as the industry moves through the economic
cycle.
SBA invites comments from all interested members of the public.
These comments must be received on or before the close of the comment
period noted in the DATES section of this interim final rule. SBA may
then consider these comments in making any necessary revisions to these
regulations.
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
This rule incorporates SBA's risk-based lender oversight program
into SBA regulations. Specifically, the rule codifies 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 rule also
consolidates and lists the types of, grounds for, and procedures
governing SBA enforcement actions within Subpart I. This rule is a
necessary first step to provide coordinated and effective oversight of
financial institutions that originate and manage SBA guaranteed loans.
These regulatory changes will 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, excluding SBA Supervised 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
[[Page 75505]]
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. During the comment
period, one comment was received questioning whether the Baseline Costs
for SBLCs were estimated too low. However, no information was provided
regarding which specific component(s) of the estimate were of concern.
SBA considers the information it received directly from selected SBLCs
during development of the rule to be most applicable; therefore, the
SBLC baseline costs estimate remains unchanged from the proposed rule.
3. Baseline Costs for NFRLs
No direct costs are currently incurred by NFRLs for SBA oversight
and related functions discussed in this 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 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. Benefits and Costs of the Rule
1. Benefits and Costs of the Proposed Rule to all SBA Lenders,
Microloan Intermediaries and NTAPs
The rule benefits SBA Lenders, Microloan Intermediaries, and NTAPs
by generally consolidating oversight authority and responsibility
within one SBA office, OCRM. These institutions 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 rule. They
further benefit from performance feedback to the extent it assists 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 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. Benefits and Costs of the Rule to 7(a) Lenders (Other Than SBLCs and
NFRLs)
No additional direct costs will be incurred by 7(a) Lenders for
oversight as contained in the rule. No additional reporting or direct
costs will be incurred by 7(a) Lenders with the rule's implementation.
SBA received approximately 90 comments requesting that SBA include
cost estimates of appealing proposed enforcement actions to a Federal
district court rather than SBA's Office of Hearings and Appeals (OHA).
The Agency does not currently have data that would enable it to provide
a reasonably accurate estimate of Lenders' costs for appealing such
actions through the judicial process. SBA is also unable to extrapolate
from data on the costs of appealing to OHA because although that
process is currently available, the process has been used rather
infrequently and any such extrapolation would be unreliable. SBA is
willing to consider comments from Lenders that would enable the agency
to obtain the relevant costs data.
SBA also received one request for estimates of the costs that could
be incurred in connection with possible enforcement actions included in
Sec. 120.1500 of the interim final rule. SBA is unable to estimate the
cost of appealing or responding to potential enforcement actions SBA
might take, because the type of enforcement action and steps necessary
to correct a deficiency will vary based on the specific deficiency and
characteristics and situation of the particular Lender. SBA is willing
to consider comments from Lenders that would enable the agency to
obtain the relevant costs data.
3. Benefits and Costs of the Rule to SBLCs
The rule provides for more developed internal control requirements
and adoption of a formal capital plan. It requires 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, there is little or no
additional cost for these new requirements. Preparation and submission
of all the additional reports and the new recordkeeping takes
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
is $5,460 ($390 x 14) for 14 SBLCs.
4. Benefits and Costs of the Rule to NFRLs
The rule requires each NFRL to submit an annual report, including
[[Page 75506]]
audited financial statements within three months after the close of
each fiscal year. The rule further requires that all audited financial
report filings are prepared in accordance with Generally Accepted
Accounting Principles (GAAP), and include an opinion from the
independent accounting firm engaged in the audit. It also requires
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 rule requires
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 information likely already maintained by the NFRLs for
operational, and in some instances financing, purposes. Preparation and
submission costs are 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. Additional reporting
and recordkeeping requirements to the NFRLs (that which would be new to
SBLCs as well) are 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 rule for the
58 NFRLs is $602,620 ($10,390 x 58 NFRLs).
5. Benefits and Costs of the Rule to CDCs
Approximately 70 commenters requested that SBA include an estimate
for the cost of CDCs' compliance with the Single Audit Act
requirements. SBA and OMB have determined that the Single Audit Act
does not apply to SBA's 504 program; therefore, cost estimates of
Single Audit Act compliance are unnecessary.
SBA also received several comments from CDCs requesting estimates
of the costs of implementing the internal control requirements
contained in Sec. 120.826(b). Because most CDCs likely already
maintain internal controls for operational purposes, and because the
interim final rule allows for flexibility in the internal control
structure of CDCs with varying size and sophistication, SBA estimates
little or no additional cost for the requirements.
SBA did not adopt the proposed 90-day annual report filing deadline
or the proposed requirement that all CDCs obtain audited financial
statements in the interim final rule; therefore, the rule does not
implement any significant changes to CDC operations or management.
Thus, there are no additional costs of the rule and no substantive
alteration of Baseline Costs for CDCs outlined in paragraph 4 of
section B.
6. Benefits and Costs of the Rule to Microloan Intermediaries and NTAPs
No additional direct costs are incurred by Microloan Intermediaries
and NTAPs for lender oversight and related functions in this rule,
because no additional reporting is required. Furthermore, general
oversight, suspension and revocation already existed in former Sec.
120.716 and remains the same when relocated within subpart I, and no
additional reporting is required by this rule.
7. 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 also benefits from having more timely and complete
operations information, including financial information for SBA
Supervised Lenders. In addition, the Agency benefits from further
consolidated standards, enforcement grounds, ranges of enforcement
actions and procedures for supervision and enforcement actions for many
SBA Lenders, Microloan Intermediaries and NTAPs. Finally, the rule's
additional requirements and lender oversight provisions 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 rule, and therefore no additional
direct costs for assessment of any such reporting are incurred by SBA
for provisions related to oversight functions in this proposed rule.
For SBLCs, the rule requires 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 rule requires an additional 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 rule is 464 hours for $25,520.
For CDCs, baseline costs remain unchanged for the Federal
government. Baseline costs remain $14,850 (1 hr per CDC).
For Microloan Intermediaries and NTAPs, no additional direct costs
to SBA are incurred for the lender oversight functions and related
provisions in this rule.
Any additional indirect costs to the Federal government for
oversight of the SBA Lenders, Microloan Intermediaries, and NTAPs under
this rule are covered by the already-existing OCRM infra-structure.
8. Cost Basis
For purposes of this rule, CPA and CFO salary rates used are based
on information published by the AICPA for CPA-credentialed individuals
(external auditor or internal CFO) estimated at $100. The salary rates
for administrative professionals are based on information published by
the International Association of Administrative Professionals. Internal
SBA financial analyst time is estimated at GS-14 step 5 level of
$99,203 plus 24.8% benefits allocation, or approximately $55 per hour.
D. Alternatives
SBA believes that this 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 believes that there are no other potentially
effective and reasonably feasible alternatives to this rule as it
applies to SBA Lenders, Microloan Intermediaries, and NTAPs.
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.
[[Page 75507]]
Executive Order 12988: For the purposes of Executive Order 12988,
Civil Justice Reform, SBA has determined that this 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. This rule does not have retroactive or
pre-emptive effect.
Regulatory Flexibility Act: This rule directly affects all SBA
Lenders, Microloan Intermediaries, and NTAPs. There are approximately
4,500 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 $7 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 $175 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 541990 is $7 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 rule will have
an impact on a substantial number of small entities. However, for the
reasons explained following, SBA does not believe that the rule will
have a significant economic impact on those entities.
The rule contains 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 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 $7 million or less
in annual revenues. The remaining NFRLs are classified under NAICS
522110, Commercial Banking, which has a small business size standard of
$175 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 statements, 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 rule impacts a substantial number of
these small entities, but does not constitute a significant economic
impact, as detailed below.
The 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 rule also provides 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 rule requires
both NFRLs and SBLCs to provide the SBA with copies of their financial
statements on a quarterly basis and expands the requirement for annual
audited financial statements submitted to SBA to include NFRLs.
Existing regulations also require SBLCs to maintain compliance with SBA
capital requirements. The rule expands the number of firms subject to
SBA's capital regulation by making NFRLs subject to certain capital
regulations. The rule also requires 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 or her staff under the
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.
SBA has estimated 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 is 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 rule does 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, (3)
summaries of changes in the SBLCs organization and financing, (4)
notice of capital impairment, and (5) such other reports it is required
by SBA to furnish on a specific matter. The rule extends to NFRLs these
ad hoc reporting
[[Page 75508]]
requirements. SBA believes this data is likely already collected and
that similar documents are already prepared by the NFRLs. The rule 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 rule. SBA, therefore, certifies that this aspect of the
rule does not have a significant economic impact on a substantial
number of small entities.
The new reporting and recordkeeping requirements in the rule for
SBA Supervised Lenders that have not yet been discussed 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 do not have a significant economic impact on a
substantial number of small entities.
The rule does not require any new financial or other reporting from
CDCs. SBA certifies that this aspect of the rule does not 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
rule requires quarterly compliance by SBLCs with their respective
minimum capital requirements. It also requires 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
rule broadens 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
has no adverse financial impact on small Lenders. In fact, allowing
retained earnings to count toward an SBA Supervised Lender's regulatory
capital allows 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 does not have a
significant economic impact on a substantial number of small entities.
C. Enforcement Provisions: The rule consolidates and lists the
types of, grounds for, and procedures governing SBA enforcement actions
within consolidated enforcement regulations for all SBA Lenders,
Microloan Intermediaries, and NTAPs. The enforcement provisions
specific to 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 will 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 rule does not have a significant impact
on a substantial number of small entities.
D. Bureau of PCLP Oversight: The Bureau of PCLP Oversight has been
established in accordance with statutory guidance to address the LLRFs
of Premier Certified Lenders (PCLP CDCs). Of the approximately 270
CDCs, approximately 25 of them have PCLP authority. These are generally
the larger CDCs, with portfolios which have a total outstanding
portfolio balance of $7.9 billion. SBA, therefore, certifies that the
rule's Bureau of PCLP Oversight provision does not have a significant
impact on a substantial number of small entities.
Paperwork Reduction Act: SBA has determined that this rule imposes
additional reporting and recordkeeping requirements under the Paperwork
Reduction Act, 44 U.S.C. Chapter 35. Specifically, SBA is revising OMB
approved information collection number 3245-0077 to include NFRLs in
SBA's current reporting requirements for SBLCs. SBA is also revising
3245-0077 to add four reporting requirements for all SBA Supervised
Lenders and one reporting requirement just for SBLCs. Finally, the rule
adds a review/examination reporting requirement.
SBA received several comments from the public on the information
collections added by this rule, including several on the costs of
complying with the new or expanded reporting requirements. SBA's
responses to these comments are discussed in detail in the comment
section of the preamble, and in the Executive Order 12866 regulatory
impact analysis section. As a result of comments received, SBA has
modified the proposed reporting requirements. Specifically, SBA will
not require all CDCs to submit annual audited financial statements;
rather, this requirement will continue to apply to only those CDCs with
a loan portfolio balance of $20 million or more. All other proposed
collections of information are adopted as proposed and have been
submitted to OMB for final review and approval. The titles, authority,
descriptions of respondents, descriptions of each information
collection, needs and purposes for the collections, and the estimated
annual cost and hour burdens imposed on Lenders as a result of these
collections are outlined below.
I. SBA Supervised Lender Reporting and Recordkeeping Requirements
OMB approved information collection number 3245-0077, Reports to
SBA: Provisions of 13 CFR 120, is revised to include these additional
reporting and recordkeeping requirements 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 consist of all SBA
Supervised Lenders. Currently there are approximately 75 such Lenders--
(14 SBLCs and 58 NFRLs).
Statement of Needs and Purposes: The reports and recordkeeping
requirements facilitate safety and soundness examinations and
appropriate supervision of SBA's licensed SBLCs and NFRLs. Annual and
interim financial information is 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 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, can intervene (where appropriate) to protect the
interests of the United States.
Estimated Cost to Respondents: SBA estimated a cost of $10,340 per
SBA Supervised Lender (or approximately $744,480 for all SBA Supervised
Lenders) to comply with the below listed information collections. The
$10,340 per SBA Supervised Lender includes $8,000 for the annual report
audit (80 hours x $100 per hour) plus $2,340 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,
[[Page 75509]]
most are ad hoc and occur on an exception basis. The hourly costs are
derived from salary and benefit rate surveys of the AICPA and
International Association of Administrative Professionals. This
$624,480 increase from the current OMB approved collection is mainly
attributable to the extension of the information collection to the 58
NFRLs; 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.
Description of Reporting and Recordkeeping Requirements
A. Annual Audit Report [No SBA Form Number]
Summary: The Annual Audited Report primarily consists of an SBA
Supervised Lender's annual audited financial statements. The Annual
Report is 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 submits 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 Sec. 120.464(a)(4), all SBA Supervised Lenders are
required to submit to SBA copies of any report or publications
concerning financial operations furnished to their stockholders.
D. Report of Changes [No SBA Form Number]
Summary: Under Sec. 120.464(a)(5), all SBA Supervised Lenders are
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: Section 120.462(d) requires all SBA Supervised Lenders to
provide SBA prompt written notice of capital impairment.
F. Other Reports [No SBA Form Number]
Summary: Section 120.464(a)(7) requires 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 Sec. 120.464(a)(2), all SBA Supervised Lenders are
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 includes the SBA Supervised Lender's interim
financial statements, which may be internally prepared. SBA Supervised
Lenders are required to apply uniform definitions to categories of
nonperforming loans and recovery amounts on liquidated loans within the
reports. The Quarterly Condition Report also contains a certification
by the SBA Supervised Lender as to compliance with laws, completeness,
and accuracy and may contain the certification as to capital
requirement compliance.
H. Changes in Financial Condition Report [No SBA Form Number]
Summary: Section 120.464(a)(6) requires 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: Section 120.463(d) requires SBA Supervised Lenders to
notify SBA in writing if they discharge or change auditors.
J. Capital Restoration Plan [No SBA Form Number]
Summary: Section 120.462(e) requires 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: Sections 120.1510 and 120.1511 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 also requires
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: Section 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: Section 120.462 requires SBA Supervised Lenders' Board of
Directors to determine capital adequacy goals and to establish, adopt,
and maintain a capital plan.
II. SBA Lender, Microloan Intermediary, and NTAP Reporting Requirements
These are new reporting and recordkeeping requirements.
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 are SBA Lenders,
Microloan Intermediaries, and NTAPS.
Need and Purpose: Section 120.1025 of this rule provides that ``SBA
may conduct off-site reviews and monitoring * * * including SBA
Lenders', Intermediaries', or NTAPs' self-assessments.'' Generally, SBA
will 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, 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.
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.
[[Page 75510]]
Description of Respondents: The respondents consist of SBA Lenders,
Microloan Intermediaries, and NTAPs that receive an onsite review or
examination assessment of Acceptable With Corrective Actions Required
or Less Than Acceptable, or as otherwise required by SBA.
Need and Purpose: Section 120.1055 provides that SBA Lenders,
Microloan Intermediaries, and NTAPs must submit proposed corrective
action plans, if requested. The reports facilitate corrective action to
address SBA Lender, Microloan Intermediary, or NTAP deficiencies
identified generally during reviews and examinations.
List of Subjects in 13 CFR Part 120
Loan programs--business, Small businesses.
0
For the reasons set forth above, SBA amends 13 CFR part 120 as follows:
PART 120--BUSINESS LOANS
0
1. The authority citation for part 120 is revised to read as follows:
Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note,
636(a), (h) and (m), 650, 687(f), 696(3), and 697(a) and (e).
0
2. Amend Sec. 120.10 by adding new definitions ``Acceptable Risk
Rating'', ``Federal Financial Institution Regulator'', ``Lender
Oversight Committee'', ``Less Than Acceptable Risk Rating'',
``Management Official'', ``Non-Federally Regulated Lender'', ``Other
Regulated SBLC'', ``Person'', ``Risk Rating'', ``SBA Lender'', ``SBA
Supervised Lender'', and ``Small Business Lending Company'' in
alphabetical order, and removing the definition for ``Lender'' and
adding in its place a definition of ``Lender or 7(a) 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.
Lender Oversight Committee is a committee within SBA, with
responsibilities as outlined in Delegations of Authority, as published
in the Federal Register.
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 a higher 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 regulated
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.
Person is any individual, corporation, partnership, association,
unit of government, or legal entity, however organized.
* * * * *
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.
* * * * *
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 a Small
Business Lending Company or 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.
* * * * *
0
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 discretion. The 7(a) Lender's Risk Rating, among other factors,
will be considered in determining satisfactory SBA performance. Other
factors may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission);
* * * * *
(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 discretion) and, as applicable, with an
SBA Lender's state regulator and 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.
[[Page 75511]]
0
4. Remove the undesignated center heading immediately preceding Sec.
120.414.
Sec. 120.414 [Removed]
0
5. Remove Sec. 120.414.
Sec. 120.415 [Removed]
0
6. Remove Sec. 120.415.
0
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.
* * * * *
0
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 discretion;
(b) Have satisfactory SBA performance, as determined by SBA in its
discretion. The Lender's Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other factors
may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission);
* * * * *
Sec. 120.425 [Amended]
0
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]
0
10. Amend Sec. 120.426 by removing ``SBA's Securitization Committee''
and add in its place ``Lender Oversight Committee'' in the second
sentence.
0
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 discretion;
(b) The Lender has satisfactory SBA performance, as determined by
SBA in its discretion. The Lender's Risk Rating, among other factors,
will be considered in determining satisfactory SBA performance. Other
factors may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission); and
* * * * *
0
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 discretion;
(c) The Lender has satisfactory SBA performance, as determined by
SBA in its discretion. The Lender's Risk Rating, among other factors,
will be considered in determining satisfactory SBA performance. Other
factors may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission);
* * * * *
0
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]
0
14. Remove Sec. 120.442.
0
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 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
discretion. The Lender's Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other factors
may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission).
* * * * *
(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
[[Page 75512]]
related information as determined by SBA.
* * * * *
Sec. 120.454 [Removed]
0
16. Remove Sec. 120.454.
Sec. 120.455 [Removed]
0
17. Remove Sec. 120.455.
0
18. Add new undesignated center heading before Sec. 120.460 to read as
follows:
SBA Supervised Lenders
0
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 the 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.
0
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 are 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.
0
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. (1) 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 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:
(i) Management capability;
(ii) Quality of operating policies, procedures, and internal
controls;
(iii) Quality and quantity of earnings;
(iv) Asset quality and the adequacy of the allowance for loan
losses within the loan portfolio;
(v) Sufficiency of liquidity; and
(vi) Any other risk-oriented activities or conditions that warrant
additional capital (e.g., portfolio growth rate).
(2) 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
[[Page 75513]]
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 guaranty
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 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 discretion within
the required timeframe, or fails to implement, in any material respect
as determined by SBA in its discretion, its SBA approved capital
restoration plan within the plan timeframe, SBA may undertake
enforcement actions under Sec. 120.1500.
0
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) for non-public companies and by
the Public Company Accounting Oversight Board (PCAOB) for public
companies. 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 certified 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 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
[[Page 75514]]
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 an SBA Supervised Lender to use industry
averages for the valuation of servicing rights.
0
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 this part 120;
(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 this part 120, 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;
(3) That contain all applicable footnotes in accordance with GAAP
principals, 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,
[[Page 75515]]
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 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.
0
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. The 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 the SBA Supervised Lender did not submit a
required report by the due date.
(e) Extensions of submission due dates. (1) An 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 discretion. SBA will consider the
following factors in determining willful neglect:
(i) Whether the SBA Supervised Lender failed to file required
reports for more than two reporting periods and
(ii) If SBA provided the SBA Supervised Lender notice of the
failure to file and the 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 the 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 the
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 the SBA Supervised Lender has demonstrated to SBA's
satisfaction that it has modified its internal procedures to comply
with reporting requirements in the future; and
(iii) Whether the 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, the 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's
original request. SBA will not consider untimely requests. The 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, the 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.
(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. Civil penalties under this
section do not apply to any affiliate of an SBLC that procures at least
10% of its annual purchasing requirements from small manufacturers.
0
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
[[Page 75516]]
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 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 paragraph (f) of this section, 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. 120.10 of this chapter). 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.
0
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.
0
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 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]
0
28. Remove Sec. 120.476.
Sec. Sec. 120.473, 120.474, and 120.475 [Redesignated as Sec. Sec.
120.475, 120.476, and 120.490]
0
29. Redesignate Sec. Sec. 120.473, 120.474, and 120.475 as Sec. Sec.
120.475, 120.476, and 120.490, respectively.
0
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.
0
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
[[Page 75517]]
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 the
individual minimum capital requirement for the SBLC, the date when the
individual minimum must be achieved, and/or 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.
0
32. 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.
0
33. 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
discretion. The Lender's Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other factors
may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission).
* * * * *
0
34. 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.
* * * * *
0
35. 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
discretion. The Intermediary's Risk Rating, among other factors, will
be considered in determining satisfactory SBA performance. Other
factors may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission); and
* * * * *
Sec. 120.716 [Removed]
0
36. Remove Sec. 120.716.
0
37. Amend Sec. 120.812 to add three new sentences 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
[[Page 75518]]
satisfactory SBA performance, as determined by SBA in its discretion.
The CDC's Risk Rating, among other factors, will be considered in
determining satisfactory SBA performance. Other factors may include,
but are not limited to, 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, and other performance related measurements and information
(such as contribution toward SBA mission).
* * * * *
0
38. 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 discretion. The CDC's Risk Rating, among other factors, will be
considered in determining satisfactory SBA performance. Other factors
may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission).
0
39. Revise Sec. 120.826 to read 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/Reviewed Financial Statements. Each CDC with a
504 loan portfolio balance of $20 million or more (as calculated by
SBA) 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 GAAP. For CDCs with a 504 portfolio balance of less than $20
million (as calculated by SBA), the CDC's annual financial statements
submitted to SBA must be reviewed by an independent CPA in accordance
with GAAP.
(d) Auditor qualifications. The audit or review 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.
0
40. 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 one hundred-eighty days after the end
of the CDC's fiscal year (to include audited or reviewed financial
statements of the CDC, as applicable, 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.
(1) The audited financial statements must, at a minimum, include
the following:
(i) Audited balance sheet;
(ii) Audited statement of income (or receipts) and expense;
(iii) Audited statement of source and application of funds;
(iv) Such footnotes as are necessary to an understanding of the
financial statements;
(v) Auditor's letter to management on internal control weaknesses;
and
(vi) The auditor's report.
(2) The reviewed financial statements must, at a minimum, include
the following:
(i) Balance sheet;
(ii) Statement of income (or receipts) and expense;
(iii) Statement of source and application of funds;
(iv) Such footnotes as are necessary to an understanding of the
financial statements; and
(v) The accountant's review report.
* * * * *
0
41. Amend Sec. 120.839 to add three 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 discretion. The CDC's Risk Rating, among
other factors, will be considered in determining satisfactory SBA
performance. Other factors may include, but are not limited to, on-site
review/examination assessments, historical
[[Page 75519]]
performance measures (like default rate, purchase rate and loss rate),
loan volume to the extent that it impacts performance measures, and
other performance related measurements and information (such as
contribution toward SBA mission). * * *
* * * * *
0
42. 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 discretion. The CDC's Risk Rating, among other factors,
will be considered in determining satisfactory SBA performance. Other
factors may include, but are not limited to, 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, and other performance related measurements and
information (such as contribution toward SBA mission);
* * * * *
0
43. 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.
* * * * *
0
44. Remove the undesignated center heading before Sec. 120.853.
0
45. 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.
* * * * *
0
46. Remove the undesignated center heading before Sec. 120.854.
Sec. 120.854 [Removed]
0
47. Remove Sec. 120.854.
Sec. 120.855 [Removed]
0
48. Remove Sec. 120.855.
Sec. 120.856 [Removed]
0
49. Remove Sec. 120.856.
0
50. 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.
0
51. 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
[[Page 75520]]
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; and
(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
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
(e) Such other risk-related information as SBA, in its 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, the SBA Lender, Intermediary, or NTAP must detail:
The steps it will take to correct the finding(s); the time within which
each step will be taken; the timeframe for accomplishing the entire
corrective action plan; and the person(s) or department at the SBA
Lender, Intermediary, or NTAP charged with carrying out the corrective
action 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 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
discretion, then SBA may take enforcement action under Sec. 120.1500
through Sec. 120.1540. 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 through Sec. 120.1540.
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 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. Each 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
[[Page 75521]]
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 from and against any and all claims, demands,
suits, actions, and liabilities to any degree based upon or resulting
from any unauthorized use or disclosure of the Report, Risk Rating, or
Confidential Information. Information Provider contact information is
available from the Office of Capital Access.
0
52. 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 Types of enforcement actions--SBA Lenders.
120.1510 Other Regulated SBLCs.
120.1511 Certification and other reporting and notification
requirements for Other Regulated SBLCs.
120.1540 Types of enforcement actions--Intermediaries participating
in the Microloan Program and NTAPs.
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.
Paragraphs (c) through (e) of this section list the grounds that
trigger enforcement actions against each type of SBA Lender. In
general, the grounds listed in paragraph (c) apply to all SBA Lenders.
However, certain enforcement actions against SBA Supervised Lenders
require the existence of certain grounds, as set forth in paragraphs
(d) and (e). In addition, paragraph (f) of this section lists two
additional grounds for taking enforcement action against CDCs that do
not apply to other SBA Lenders.
(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, 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 Less Than Acceptable Risk Rating
(generally in conjunction with other evidence) or an on-site review/
examination assessment which is Less Than Acceptable;
(5) Failure within the 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. Prior to issuing a notice of
a proposed enforcement action or immediate suspension under Sec.
120.1500 based upon this paragraph, SBA must send prior written notice
to the SBA Lender explaining why the SBA Lender's actions were
uncooperative, detrimental to the program, undermined SBA's management
of the program, or were not consistent with standards of good conduct.
The prior notice must also state that the SBA Lender's actions could
give rise to a specified enforcement action, and provide the SBA Lender
with a reasonable time to cure the deficiency before any further action
is taken;
(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
(generally in conjunction with other indicators of increased financial
risk) 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; and
(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
[[Page 75522]]
(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; or
(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
(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 (generally in conjunction with other indicators of
increased risk) 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
[[Page 75523]]
technical assistance, at least one client received a loan from the
private sector.
Sec. 120.1500 Types of enforcement actions--SBA Lenders.
Upon a determination that the grounds set forth in Sec. 120.1400
exist, SBA may undertake, in SBA's 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. SBA's decision to take an enforcement
action will not, by itself, invalidate a guaranty previously provided
by SBA.
(a) Enforcement actions for all SBA Lenders. (1) Imposition of
portfolio guaranty dollar limit. SBA may limit the maximum dollar
amount that SBA will guarantee 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.
(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 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 2 CFR Parts 180 and 2700, SBA may
take any necessary action to debar a Person, as defined in Sec.
120.10, including but not 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
[[Page 75524]]
any other entity designated by SBA. Any such transfer may be on a
temporary or permanent basis, in SBA's 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 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 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 Types of 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 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, 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
[[Page 75525]]
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 discretion why it does not
understand the reasons given by SBA in its notice of the action, the
Agency will provide clarification. 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 such clarification is not necessary. SBA, in its
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 the response timeframe given by the notice. If such
requests are submitted to the Agency, SBA may, in its 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 in writing to the
appropriate Office of Capital Access official in accordance with
Delegations of Authority or other official identified in the notice and
received by SBA within the 30 day timeframe or the response timeframe
given by the notice.
(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 decision within 90 days of
either receiving the objection or from when additional information is
provided under paragraph (a)(2)(v) or (a)(3)(iii) of this section,
whichever is later, unless SBA provides notice that it requires
additional time.
(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 30 days of receiving the objection
advising whether SBA is continuing with the immediate suspension,
unless SBA provides notice that it requires additional time. If the SBA
Lender, Intermediary, or NTAP submits additional information to SBA
(under paragraph (a)(2)(v) or (a)(3)(iii) of this section) after
submitting its objection but before SBA issues its final decision, SBA
must issue its final decision within 30 days of receiving such
information, unless SBA provides notice that it requires additional
time.
(iii) Prior to issuing a notice of decision, SBA in its 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 discretion, to consider
an untimely objection, it must issue a notice of final decision
pursuant to this paragraph (a)(3).
(4) SBA's notice of final agency decision where no filed objection
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 an immediate suspension of the SBA Lender,
Intermediary, or NTAP will continue. 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. An SBA Lender, Intermediary, or 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, 15 U.S.C.
650, and applicable sections of part 134 of this chapter. The
Administrative Law Judge will issue a recommended decision based on the
record.
(ii) Witnesses. The party calling witnesses will pay the witness
the same fees and mileage paid witnesses for their appearance in U.S.
courts.
[[Page 75526]]
(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 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. The hearing will be conducted in accordance with 5
U.S.C. 554-557, 15 U.S.C. 650 and applicable sections of part 134 of
this chapter. 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
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 in case of consent which will
be effective at the time specified in the order or 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
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 directive,
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. (i) 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:
(A) 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;
(B) With the consent of the SBLC; or
(C) When the SBLC already has advised SBA that it cannot or will
not achieve its applicable minimum capital requirement.
(ii) 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
[[Page 75527]]
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.
Sandy K. Baruah,
Acting Administrator.
[FR Doc. E8-29197 Filed 12-10-08; 8:45 am]
BILLING CODE 8025-01-P