[Federal Register: July 6, 2009 (Volume 74, Number 127)]
[Notices]
[Page 32006-32010]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jy09-123]
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SMALL BUSINESS ADMINISTRATION
Dealer Floor Plan Pilot Initiative
AGENCY: U.S. Small Business Administration (SBA).
ACTION: Notice and request for comments.
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SUMMARY: SBA is introducing a guaranty loan pilot initiative to make
available 7(a) loan guaranties for lines of credit that provide floor
plan financing to support that sector of the Nation's retail community
that traditionally requires floor plan financing in order to acquire
titleable inventory. SBA is creating this pilot initiative to help
address the significant decline in the number of lenders that have
provided the majority of this type of financing in recent years. In the
automobile industry, this often included affiliates of the
manufacturers themselves. Under the Dealer Floor Plan Pilot Initiative,
which will be available through September 30, 2010, SBA will guarantee
up to 75 percent of a floor plan line of credit between $500,000 and
$2,000,000 to eligible dealers of titleable assets, including but not
limited to automobiles, motorcycles, boats (including boat trailers),
recreational vehicles and manufactured housing (mobile homes).
DATES: Effective Date: The Dealer Floor Plan Pilot Initiative will be
effective on July 1, 2009, and will remain in effect through September
30, 2010. SBA will begin accepting applications on July 1, 2009 and
begin reviewing and approving applications the week of July 6, 2009.
Comment Date: Comments must be received on or before August 5,
2009.
ADDRESSES: You may submit comments, identified by SBA docket number
SBA-2009-0009 by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Dealer Floor Plan Pilot Initiative Comments--Office
of Financial Assistance, U.S. Small Business Administration, 409 Third
Street, SW., Suite 8300, Washington, DC 20416.
Hand Delivery/Courier: Grady Hedgespeth, Director, Office
of Financial Assistance, U.S. Small Business Administration, 409 Third
Street, SW., Washington, DC 20416.
SBA will post all comments on http://www.regulations.gov. If you
wish to submit confidential business information (CBI) as defined in
the User Notice at http://www.regulations.gov, please submit the
information to Grady Hedgespeth, Director, Office of Financial
Assistance, U.S. Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416, or send an e-mail to
dealerfloorplancomments@sba.gov. Highlight the information that you
consider to be CBI and explain why you believe SBA should hold this
information as confidential. SBA will review the information and make
the final determination whether it will publish the information.
FOR FURTHER INFORMATION CONTACT: Sloan Coleman, Office of Financial
Assistance, U.S. Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416; (202) 205-7737; w.coleman@sba.gov.
SUPPLEMENTARY INFORMATION:
[[Page 32007]]
1. Background Information
America's financial crisis has created adverse conditions that are
affecting small businesses, including reduced liquidity in the lending
system, a reluctance of many lenders to extend new loans, tightened
credit standards and weaker finances at small businesses. This has been
especially true in the area of the financing of dealer floor plans for
automobiles, motorcycles, boats, recreational vehicles and similar
titled vehicles. In the case of the estimated $100 billion in auto
floor plan lending, for example, the big three U.S. auto manufacturers,
which previously provided roughly one-third of the lending, have
stopped accepting new requests for floor plan financing. Banks are not
able to meet the remaining financing needs and four major lenders
representing approximately $2 billion of the market have recently
issued 90-120 day closing notices to their dealers with existing
financing. The National Automobile Dealers Association (NADA) estimates
that 30% of its membership (or approximately 5,000 dealers) have
inventories less than $2 million and could thus be potential
beneficiaries of a new SBA offering.
In addition, these retailers have been especially hard hit by the
recent financial difficulties of several manufacturers coupled with a
fall off in sales and longer cycle times for their inventory turnover.
When the shortage of available financing is coupled with the decline in
sales, even relatively strong dealers who could normally weather the
current recession are facing challenges. This, in turn, has a serious
deleterious affect on local communities as these dealers are often
critical contributors to local economies and civic institutions.
On February 17, 2009, the President signed the American Recovery
and Reinvestment Act of 2009 (the ``Recovery Act'') (Pub. L. 111-5, 123
Stat. 115) to promote economic recovery by preserving and creating
jobs, and to assist those most affected by the severe economic
conditions facing the nation. The SBA received funding and authority
through the Recovery Act to modify existing loan programs and establish
new loan programs to significantly stimulate small business lending.
Current SBA regulations and policy prohibit dealer floor plan
financing; however, it is not statutorily prohibited. In the early
history of SBA lending, the Agency had a role in the underwriting and
servicing of most, if not all, of its loan portfolio. The Agency
historically did not make or guarantee floor plan financing
arrangements because such credit was deemed to be widely available from
conventional sources and because the Agency did not have the
capabilities to maintain servicing for such lines of credit in the
event it was called upon to service the loan.
With requirements now in place for the lender to perform most
servicing functions, even after a default and guaranty purchase, and
because there is evidence that there are a diminishing number of
lenders willing to provide floor plan financing to smaller dealers, the
historic reasons for the restrictions against floor plan financing have
become less of a concern, particularly in the current economic climate.
In addition, SBA believes that in this recession it is appropriate to
ensure that guaranties are available for the widest possible types of
small business financial assistance, including the guaranty of floor
plan lines of credit, while maintaining risk within prudent levels.
The SBA has always been able to guarantee loans made to eligible
small businesses that utilize floor plan financing in order to help
them acquire or repair their facility, purchase machinery and equipment
used in their operation, or provide working capital. Dealers needing
floor plan financing had to obtain it separately without SBA support.
By adding the ability to guarantee floor plan lines through this pilot
program, SBA will enable its lending partners to be in a better
position to offer a full array of financing to those businesses that
need such financing arrangements during the current economic
environment.
This pilot initiative is intended to complement the provisions of
the Recovery Act and is, therefore, set to expire on September 30,
2010. When the initial pilot phase is concluded, SBA will evaluate the
initiative to determine if the pilot will be extended, certain aspects
made a permanent part of SBA's lending programs, or terminated. A key
determinate in that review will be the extent to which floor plan
financing is available from the private market, and whether there is a
sufficient need for further government support.
Loans approved under this pilot initiative will qualify for the
borrower fee eliminations implemented on March 16, 2009 under the
temporary authority provided in section 501 of the Recovery Act, while
funds for fee eliminations are available. Funds available for fee
relief under the Recovery Act may be exhausted prior to the expiration
date of the pilot (September 30, 2010). Loans approved under this
pilot, however, will not be subject to the higher guaranty provisions
of section 502 of the Recovery Act. SBA is limiting the guaranty
percentage to the maximum allowed in the Small Business Act as opposed
to the higher guaranty percentage allowed temporarily under the
Recovery Act in part to ensure that the data collected during the pilot
phase provides a meaningful basis for which to determine if the pilot
should be extended, made a permanent part of SBA's lending programs, or
terminated. In addition, SBA is limiting the maximum guaranty
percentage to 75 percent so that the pilot will be neutral from a
credit subsidy standpoint and therefore not require an additional
appropriation of subsidy cost, as required under the Federal Credit
Reform Act (2 U.S.C. 661-661f).
2. Comments
The intent of the Dealer Floor Plan Pilot Initiative is to
complement SBA's other efforts under the Recovery Act to ensure credit
is available to America's small businesses. Although the pilot
initiative and this Notice are effective immediately, comments are
solicited from interested members of the public on all aspects of the
Notice including the formal guidance set forth in the section below.
These comments must be submitted on or before August 5, 2009. The SBA
will consider these comments and the need for making any revisions as a
result of these comments.
3. Dealer Floor Plan Pilot Initiative
Overview
Under the Dealer Floor Plan Pilot Initiative, SBA is implementing a
7(a) loan guaranty product targeted to retail dealers of titleable
assets, including but not limited to automobiles, motorcycles, boats
(including boat trailers), recreational vehicles and manufactured
housing (mobile homes).
Eligibility
In addition to standard 7(a) eligibility requirements, the
eligibility of applicants for a floor plan line of credit guaranteed
under the Dealer Floor Plan Pilot Initiative will be limited to retail
dealers of titleable inventory (both new and used) that require
licensing and/or registration by a State authority after acquisition.
Eligible small businesses include, but are not limited to, dealers of
automobiles, motorcycles, boats (including boat trailers), recreational
vehicles and manufactured housing (mobile homes).
SBA size regulations, including those pertaining to affiliation set
out in 13 CFR Part 121, apply to the Dealer Floor Plan Pilot
Initiative. These regulations
[[Page 32008]]
include the recently added alternative 7(a) size standard as published
in the Federal Register on May 5, 2009 (74 FR 20577).
Loan Amount, Maximum Guaranty Percentage and Maturity
Loans under the Dealer Floor Plan Pilot Initiative will have a
minimum loan amount of $500,000 and a maximum loan amount outstanding
at any one time of $2,000,000.
The maximum guaranty percentage will be up to 75 percent of the
outstanding loan. As noted above, the increased guaranty percentage of
up to 90 percent allowed under section 502 of the Recovery Act will not
be available for loans approved under this pilot initiative.
The maximum maturity on lines of credit approved under this pilot
initiative will be limited to five (5) years.
Use of Proceeds and Repayment
Floor plan lines of credit guaranteed by SBA will be revolving
lines of credit. The proceeds must be used either for the acquisition
of titleable inventory for retail sales or to refinance existing floor
plan lines of credit with another lender. Repayment of these lines will
occur as the acquired inventory is sold. Proceeds may not be used for
any other purpose, including to refinance any existing same-institution
floor plan line of credit.
Interest Rates
The maximum interest rates for loans under the Dealer Floor Plan
Pilot Initiative are the same as those allowed under SBA regulations at
13 CFR 120.213-120.214 for the 7(a) program.
Collateral
Collateral must include a first perfected security interest in all
titleable inventory acquired with any portion of the proceeds from the
SBA-guaranteed floor plan line of credit. The floor plan line of credit
which SBA guarantees does not have to be the sole floor plan line.
However, if more than one floor plan line exists to any one business,
then the inventory supported by each line is to be separately accounted
for and the sale proceeds (or at least the percentage of the sale
proceeds equal to the percentage of the cost financed under the line)
of any inventory acquired with any portion of the floor plan line
guaranteed by SBA must be used to reduce the balance on that line. In
addition, dealers with multiple floor plan lines for multiple product
lines (manufacturers or new/used) with multiple floor plan creditors
will be required to have appropriate delineated inter-creditor
agreements to enable proper security interest perfection.
Allowable Fees
The SBA guaranty fee and the lender's annual servicing fee (SBA
``On-Going Guaranty Fee'') set forth in 13 CFR 120.220 apply to loans
approved under this pilot initiative. As noted above, loans approved
under the Dealer Floor Plan Pilot Initiative are eligible for the
borrower fee elimination implemented under the temporary authority
provided in section 501 of the Recovery Act, to the extent such
appropriations for the cost of fee reductions remain available.
For loans approved under this pilot initiative, lenders may charge
the borrower the same fees allowed under SBA's 7(a) loan program with
the exception of the extraordinary servicing fee. For loans approved
under this pilot initiative, SBA will allow lenders to charge an
extraordinary servicing fee that is higher than the 2 percent allowed
by Agency regulations at 13 CFR 120.221(b) provided that the fee
charged is reasonable and prudent based on the level of extraordinary
effort required to adequately service the floor plan line. In addition,
if the lender currently provides floor plan financing to its customers,
the lender may not charge higher fees for its SBA-guaranteed floor plan
lines of credit than it charges for its similarly-sized, non-SBA
guaranteed floor plan lines of credit. SBA's guaranty does not extend
to extraordinary servicing fees and, at time of guaranty purchase, SBA
will not pay any portion of such fees.
Maximum Advance Rates
Lenders will be allowed a maximum advance rate of 90% on new
automobile inventory and 80% on all other inventory for purposes of
establishing the maximum SBA guaranty. Lenders may establish an advance
rate higher than this; however, the maximum SBA guaranty will be no
more than 75% of 90% for new automobile inventory or 75% of 80% for all
other inventory. For example, if a lender has an advance rate of 100%
for all inventory, the maximum SBA guaranty will be 67.5% for new
automobile inventory and 60% for all other inventory financed by the
lender. The lender will need to identify the advance rate and calculate
the maximum allowable guaranty percentage for each loan on the Lender's
Application for Guaranty (SBA Form 4-I). (The SBA Form 4-I can be found
at http://www.sba.gov/tools/Forms/smallbusinessforms/fsforms/
index.html.)
Secondary Market and Participating Lender Financings or Other
Conveyances
SBA loan guaranties made under this pilot initiative may not be
sold under Agency regulations at 13 CFR Part 120, Subpart F--Secondary
Market. In addition, SBA loan guaranties approved under this pilot
initiative may not be included in any participating lender financings
or other conveyances, including securitizations, participations and
pledges, as described in Agency regulations at 13 CFR 120.420 through
120.435.
Eligible Lenders
All SBA lenders with an executed Loan Guaranty Agreement (SBA Form
750) may participate in this pilot initiative. Lenders participating in
the pilot initiative must have designated personnel who are responsible
for making and servicing floor plan lines of credit. In addition, if a
lender has less than $15 million in floor plan lines of credit in its
current portfolio or has been making floor plan lines of credit for
less than 5 years (``Less Experienced Floor Plan Lenders''), the lender
may only approve lines under the pilot initiative to customers with
which it has a banking relationship that existed prior to the effective
date of this pilot initiative and must submit all Dealer Floor Plan
applications to the Standard 7(a) Loan Guaranty Processing Center
(LGPC) for approval over the life of the pilot. It will be the
responsibility of the lender to document the existing relationship with
the borrower in the credit memorandum, which will be required to be
submitted to SBA as part of any guaranty purchase request.
Lenders with existing floor plan financing operations must
administer their SBA-guaranteed floor plan financing operation in
conformance with the existing policies and procedures used for their
similarly-sized, non-SBA guaranteed floor plan lines, including risk
management policies and procedures. Lenders who have not participated
in floor plan financing must develop policies and procedures specific
to floor plan financing, including risk management policies and
procedures.
When developing policies and procedures specific to floor plan
financing, lenders may follow guidance provided by their primary
Federal regulator or, if none is available, lenders may follow the
guidance on floor plan financing provided by the Office of the
Comptroller of the Currency (OCC) in Section 210 of its Examiner's
Handbook. (The OCC Examiner's Handbook can be
[[Page 32009]]
found at http://www.occ.treas.gov/handbook/floorplan1.pdf.) At a
minimum, the policies and procedures of all lenders participating in
this pilot initiative must address the following: (1) The personnel who
will be responsible for making and servicing floor plan loans; (2) the
collateral monitoring procedures, which must include floor checks
(physical inventories) conducted at least monthly and on a random
surprise basis; (3) a requirement that the borrower provide to the
lender copies of its monthly manufacturer's dealership financial
statement (for dealers of new inventory) or monthly financial
statements (for dealers of used inventory) no later than 7 days after
the end of the previous month; (4) the procedures in place to ensure
prompt payment on the line upon the sale of inventory; (5) all policies
and procedures specific to liquidation that are unique to floor plan
financing; and (6) the fees the lender will charge to service these
loans. Lenders may use contracted services and/or available software
programs to assist with monitoring and tracking the collateral.
Application Forms and Authorization
Each lender participating in the pilot initiative must submit its
first application under the pilot following Standard 7(a) procedures to
the LGPC. SBA will begin accepting applications under the Dealer Floor
Plan Pilot Initiative on July 1, 2009 and will begin reviewing and
approving the applications the week of July 6, 2009.
After the initial application submitted under the pilot initiative
is approved by the LGPC, lenders may submit applications for loan
guaranties under the Dealer Floor Plan Pilot Initiative through
Standard 7(a), Certified Lender Program (CLP) or Preferred Lender
Program (PLP) processing methods using the existing SBA forms
applicable to the processing method, except for Less Experienced Floor
Plan Lenders. These lenders will continue to submit their floor plan
applications to the LGPC for the life of the pilot. In order to submit
an application for guaranty under this pilot initiative through PLP
procedures, PLP lenders must ensure that the application for a floor
plan line of credit meets the requirements for delegated processing as
well as the requirements specified in this Notice. SBA will issue
instructions for lenders on how to complete existing SBA application
forms to include floor plan lines of credit.
SBA will incorporate into the Standard 7(a) Authorization
Boilerplate applicable provisions related to floor plan financing.
In addition to SBA's existing servicing and liquidation
requirements as set forth in Agency regulations and Standard Operating
Procedures (SOPs) 50 50 and 50 51, lenders will be required to service
any floor plan line of credit guaranteed by SBA with the requirement
that as any item of inventory acquired with the line is sold the
proceeds from the sale (or at least the percentage of the sale proceeds
equal to the percentage of the cost financed under the line) must be
submitted to the lender to reduce the balance on the line pursuant to
the sold inventory item. (SOPs 50 50 and 50 51 can be found at http://
www.sba.gov/tools/resourcelibrary/sops/index.html.)
Lenders will be required to periodically report on disbursement and
collection activity in addition to their 1502 reporting, to allow SBA
to conform to accounting and budgeting requirements under credit
reform, as well as to evaluate and monitor portfolio performance. SBA
will provide further information on this additional reporting
requirement in the coming weeks.
Guaranty Purchase
In addition to the standard purchase documentation required by SBA,
with any guaranty purchase request under the pilot initiative lenders
will be required to provide copies of the floor check reports and the
monthly manufacturer's dealership financial statements (for dealers of
new inventory) or monthly financial statements (for dealers of used
inventory) for the twelve (12) months prior to default. Also, as stated
above, Less Experienced Floor Plan Lenders may only approve lines under
the pilot initiative to customers with which it has a banking
relationship that existed prior to the effective date of this pilot
initiative. It will be the responsibility of the lender to document the
existing relationship with the borrower in the credit memorandum, which
will be required to be submitted to SBA as part of any guaranty
purchase request. Further, as part of the guaranty purchase review, SBA
will review the lender's policies and procedures specific to floor plan
financing and the lender's compliance with those policies and
procedures. In addition to the grounds set forth in 13 CFR 120.524, the
lender's failure to comply with its policies and procedures or the
terms and procedures set forth in this Federal Register notice may
result in denial of SBA's guaranty on the loan, in full or in part.
Lender Oversight
As part of its ongoing lender oversight activities, SBA's Office of
Credit Risk Management (OCRM) will review the lender's policies and
procedures specific to floor plan financing, including risk management
policies and procedures, and the lender's compliance with those
policies and procedures. Upon receipt of a lender's initial application
under the pilot initiative, the Standard 7(a) LGPC will notify OCRM who
will request a copy of the lender's policies and procedures governing
floor plan financing as an initial step in its oversight of this pilot
initiative. In addition, once a lender has processed 15 loans under
this pilot initiative, the Office of Financial Assistance will alert
OCRM to that fact for possible additional lender oversight, such as an
off-site review of the lender's SBA-guaranteed floor plan portfolio
and/or inclusion of the lender's floor plan loans in a targeted review
or as part of the lender's next scheduled on-site review.
Pursuant to the authority provided to SBA under 13 CFR 120.3 to
waive certain regulations in establishing and testing pilot loan
initiatives for a limited period of time, SBA will waive the following
regulations, which otherwise apply to 7(a) loans, for loans made under
the Dealer Floor Plan Pilot Initiative only: (1) 13 CFR 120.130(c),
which prohibits floor plan financing or other revolving lines of credit
as an allowable use of proceeds, is waived so this type of financing
can be guaranteed by SBA under the Dealer Floor Plan Pilot Initiative;
(2) 13 CFR 120.221(b), which limits extraordinary servicing fees to 2%
of the outstanding balance on an annual basis, is being waived so
lenders can charge more than 2% on loans approved under this pilot
initiative as long as the fees are not higher than those charged on the
lender's similarly-sized, non-SBA guaranteed floor plan lines of credit
and as long as the fees are reasonable and prudent based on the level
of extraordinary effort required to adequately service the floor plan
line; (3) 13 CFR 120.390, the regulation that covers all Revolving
Credit other than EWCP loans, is waived so the Dealer Floor Plan Pilot
Initiative can be carried out without having these loans classified as
CAPLines loans; (4) 13 CFR Part 120, Subpart F--Secondary Market, is
being waived because loans approved under the Dealer Floor Plan Pilot
Initiative cannot be sold on the secondary market; and (5) 13 CFR
120.420 through 120.435 are being waived because loans approved under
[[Page 32010]]
the Dealer Floor Plan pilot initiative cannot be included in any
participating lender financings or other conveyances, including
securitizations, participations and pledges.
All other provisions of the Small Business Act applicable to the
7(a) program and the regulations promulgated thereunder that are not
superseded by any provision of this Notice will continue to apply to
loans made under this pilot initiative.
Lenders must use prudent lending practices in the making and
servicing of SBA-guaranteed floor plan lines of credit and must comply
with all SBA Loan Program Requirements that are not superseded by any
provisions of this Notice.
In accordance with section 7(a)(25) of the Small Business Act (15
U.S.C. 636), loans approved under this pilot initiative are limited to
not more than 10 percent of the total number of 7(a) loans approved in
any fiscal year.
SBA may provide further guidance, if needed, through SBA notices
published on SBA's Web site, http://www.sba.gov.
Questions on the Dealer Floor Plan Pilot Initiative may be directed
to the Lender Relations Specialist in the local SBA district office.
The local SBA district office may be found at http://www.sba.gov/
localresources/index.html.
Authority: 15 U.S.C. 636(a)(25) and 13 CFR 120.3.
Grady B. Hedgespeth,
Director, Office of Financial Assistance.
[FR Doc. E9-15856 Filed 6-30-09; 4:15 pm]
BILLING CODE 8025-01-P