[Federal Register Volume 76, Number 33 (Thursday, February 17, 2011)]
[Rules and Regulations]
[Pages 9213-9219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3470]
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Rules and Regulations
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Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 /
Rules and Regulations
[[Page 9213]]
SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AG17
Small Business Jobs Act: 504 Loan Program Debt Refinancing
AGENCY: U.S. Small Business Administration.
ACTION: Interim final rule with request for comments.
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SUMMARY: This interim final rule implements section 1122 of the Small
Business Jobs Act of 2010 (Jobs Act), which authorizes projects
approved for financing under Title V of the Small Business Investment
Act to include the refinancing of qualified debt. This interim final
rule revises the existing 504 Loan Program rules to make them
consistent with section 1122 of the Jobs Act.
DATES: Effective Date: This rule is effective February 17, 2011.
Comment Date: Comments must be received on or before May 18, 2011.
ADDRESSES: You may submit comments, identified by RIN 3245-AG17, by any
of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Andrew B. McConnell Jr., Small Business Administration,
Office of Financial Assistance, 409 Third Street, SW., 8th Floor,
Washington, DC 20416.
Hand Delivery/Courier: Andrew B. McConnell Jr., Small Business
Administration, Office of Financial Assistance, 409 Third Street, SW.,
8th Floor, 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 Andrew B. McConnell, Jr., 409 Third Street, SW.,
Washington, DC 20416, or send an e-mail to [email protected].
Highlight the information that you consider to be CBI and explain why
you believe SBA should hold this information as confidential. SBA will
review the information and make the final determination whether it will
publish the information.
FOR FURTHER INFORMATION CONTACT: Andrew B. McConnell, Jr. at
[email protected] or 202-205-7238.
SUPPLEMENTARY INFORMATION:
I. Background Information
The 504 Loan Program is a long-term financing tool for economic
development that provides small businesses with long-term, fixed-rate
financing to help acquire major fixed assets for expansion or
modernization. A Certified Development Company (CDC) is typically a
private, nonprofit corporation set up to contribute to the economic
development of its community. CDCs work with SBA and private sector
lenders to provide financing to small businesses under the 504 Loan
Program. In general, a 504 project includes: A loan obtained from a
private sector lender with a senior lien covering at least 50 percent
of the project cost; a loan obtained from a CDC with a junior lien
covering up to 40 percent of the total cost (backed by a 100 percent
SBA-guaranteed debenture); and a contribution from the Borrower of at
least 10 percent equity.
The Small Business Jobs Act of 2010 (Jobs Act), Public Law 111-240,
124 Stat. 2504, enacted on September 27, 2010, temporarily expands the
ability of a small business to use the 504 Loan Program to refinance
certain qualifying existing debt. The expanded authority is available
for two years only. Prior to the Jobs Act, in a typical 504 project
with a refinancing component, the borrower was required to use a
significant portion of the loan proceeds for expansion of the business.
See 13 CFR 120.882(e). The temporary Jobs Act program authorizes the
use of the 504 Loan Program for the refinancing of debt where there is
no expansion of the small business concern.
SBA is aware that there is a substantial amount of small business
commercial first mortgage debt that was incurred 3-5 years ago that is
maturing, typically through balloon mortgages, and in need of
refinancing. In addition, credit availability for small businesses has
decreased during the recent economic turmoil, and there may not be
sufficient conventional lending capacity to handle this wave of
refinancing. Further, real estate values have declined significantly in
many parts of the country in recent years, which will make it more
difficult for small businesses to refinance their maturing mortgages in
the conventional market. By helping small businesses refinance current
mortgages and lock in lower, long-term interest rates, this temporary
Jobs Act program will help to provide the assistance needed by small
businesses to avoid liquidation or foreclosure and improve their
prospects for survival. It will also help to stabilize the commercial
real estate market, as well as encourage lenders to increase lending by
improving the health of their portfolios.
SBA has determined that this refinancing program will initially
apply only to loans maturing on or before December 31, 2012 in order to
assist those small businesses most in need with the limited resources
available. SBA will publish a Notice in the Federal Register extending
this date based on SBA's assessment of any change in available
resources and market conditions. In addition, SBA will monitor the use
of the program capacity of SBA and the CDC industry to handle the
demand for this program and market conditions to determine whether SBA
should also allow a debt to be refinanced if it is not maturing within
the set timeframe but the refinancing would provide a ``substantial
benefit'' to the Borrower. If SBA determines to allow such refinancing
based on the ``substantial benefit'' criteria, SBA will announce such
determination through a Notice published in the Federal Register, and
will apply 13 CFR 120.882(e)(5) in implementing it.
The interim final rule also includes a provision requiring the
Borrower to pay a supplemental annual guarantee fee, in addition to the
existing annual guarantee fee, to cover the additional cost
attributable to the refinancing program under the Jobs Act. SBA has
determined that the total annual guarantee fee assessed for loans
approved for refinancing during Fiscal Year 2011 will be 1.043%
annually on
[[Page 9214]]
the unpaid principal balance of the debenture. If necessary, SBA will
publish, at least sixty days before the beginning of the new Fiscal
Year, a Notice in the Federal Register of any change in the fee for
loans approved during Fiscal Year 2012. This fee will be assessed and
collected in the same manner as the current annual SBA guarantee fee
under 13 CFR 120.971(d)(2).
SBA has also determined that the loan structure for the Refinancing
Project will be the same as in the 504 program generally, with the
Third Party Lender contributing at least 50% of the fair market value
of the fixed assets serving as collateral for the refinancing, the 504
loan contributing no more than 40% of such fair market value, and the
Borrower contributing at least 10% of such fair market value.
Consistent with current regulations, SBA will only require a 10%
injection by the Borrower when the fixed asset serving as collateral is
a limited or special purpose building because the higher contribution
amounts (15% or 20% injection) apply only when these types of buildings
are being acquired, constructed, expanded or converted. See 13 CFR
120.910(a)(2). In this case, the sole purpose of the loan is
refinancing existing debt and, thus, no further contribution will be
required of the Borrower.
SBA will permit the equity, if any, in the Eligible Fixed Asset
securing the loan being refinanced to be counted toward the Borrower's
10% contribution, provided it is supported by the independent appraisal
of the fair market value of that asset. In addition, if the fair market
value of the Eligible Fixed Asset exceeds the existing debt but the
Borrower does not have 10% equity in the asset, SBA will permit the
equity in any other fixed assets that are acceptable to SBA to serve as
collateral for the Refinancing Project and to be counted toward the
Borrower's 10% contribution, provided that there is an independent
appraisal of the fair market value of the additional asset(s). As
discussed in the previous paragraph, the Third Party Loan and the 504
loan will not exceed 90% of the fair market value of all of the fixed
assets serving as collateral for the Refinancing Project.
In the event that the outstanding principal balance on the existing
loan is more than 90% of the current fair market value of the Eligible
Fixed Assets securing the loan being refinanced, SBA will also permit
the Borrower to contribute the equity in other fixed assets acceptable
to SBA as collateral to increase the amount of the Refinancing Project,
provided that there is an independent appraisal of the fair market
value of the additional asset(s). Again, the Third Party Loan and the
504 loan will not exceed 90% of the fair market value of all of the
fixed assets serving as collateral for the Refinancing Project.
In addition, the Jobs Act defines ``qualified debt'' to mean
indebtedness ``the proceeds of which were used to acquire an eligible
fixed asset''. SBA believes that it is consistent with this definition
to allow a debt to be refinanced where substantially all of the
proceeds of that debt were used to acquire an eligible fixed asset. By
``substantially all'', SBA means ``almost all'' or ``nearly all'' of
the proceeds, and a Borrower will satisfy this standard where it used
at least 85% of the proceeds of the existing debt to acquire an
Eligible Fixed Asset. The remaining 15% of the proceeds must also have
been incurred for the benefit of the small business. In implementing
these requirements, SBA will require the Borrower to certify that the
existing debt satisfies these requirements, and will require the Third
Party Lender to certify that it has no reason to believe that the
existing debt does not satisfy these requirements. In addition, SBA may
require, on a random basis, for a borrower and/or lender to submit
additional documentation supporting the substantially all assertion.
SBA is also amending 13 CFR 120.882(e)(1) to incorporate this criteria,
and to make the existing debt refinancing program involving expansions
consistent with this new debt refinancing program.
The Jobs Act also authorizes the Agency to provide financing under
this debt refinancing program ``to be used solely for the payment of
business expenses.'' The statute requires that the application for the
financing of business expenses include a specific description of the
expenses for which the additional financing is requested and an
itemization of the amount of each expense. The statute expressly
prohibits the borrower from using any part of the financing under this
clause for non-business purposes. SBA will need time to implement this
provision for the financing of business expenses. New controls will
need to be developed to ensure that these funds are used in accordance
with the statute, without requiring a burdensome level of detailed
justification of expenditures. As the procedures for this portion of
the legislation will be new to the CDCs and require the development of
additional procedures for SBA staff, SBA is requesting input from
interested parties regarding the level of detail that SBA should
require to meet the statutory mandate that all proceeds be used for
business purposes. The aim is a balance between excessive controls and
ensuring that a business owner does not knowingly or unknowingly use
the loan proceeds for personal purposes. With the immediate need for
refinancing, the Agency is proceeding with this interim final rule to
implement the refinancing component while continuing to consider the
most efficient and effective manner in which to implement the business
expense component of this new program. The Agency invites comments from
interested parties on how best to and whether to implement this
provision.
In addition, the Jobs Act includes a provision that states that
``if the appraised value of the eligible fixed assets serving as
collateral for the financing is less than the amount equal to 125
percent of the amount of the financing, the borrower may provide
additional cash or other collateral to eliminate any deficiency''. The
Agency is continuing to review the scope of this provision and how it
should be implemented, and invites comments from interested parties on
this provision.
Further, SBA has determined that, with the limited resources
available for this refinancing program, it will not at this time
refinance Third Party Loans that are already part of an existing 504
Project. These Third Party Lenders have already benefitted from having
access to subordinated debt provided by the Federal government, and
also have other tools to assist borrowers that are experiencing
financial difficulties, such as deferments in loan payments and workout
plans. SBA will continue to consider the option of allowing the
refinancing of existing Third Party Loans, and invites comments from
interested parties on this issue.
This debt refinancing program is available for the refinancing of
same institution debt which, similar to the definition for debt
refinancing involving expansions in 13 CFR 120.882(e)(8), is defined as
any debt of the CDC or the Third Party Lender that are providing funds
for the refinancing, or the debt of affiliates of either. To protect
the program from incurring unnecessary losses in the refinancing of
same institution debt, and in accordance with 13 CFR 120.884(b), a CDC
may not use 504 loan proceeds to pay any creditor in a position to
sustain a loss causing a shift to SBA of all or part of a potential
loss from an existing debt. SBA will require the CDC and the Third
Party Lender to make certifications with respect to this standard for
same institution debt. Whether there is a shift
[[Page 9215]]
to SBA of a potential loss should be determined by assessing the
potential loss to SBA associated with the Refinancing Project (e.g.,
the business is experiencing a significant threat to its viability or
existence although the business is current on its outstanding debt). In
addition, SBA will require a refinancing involving same institution
debt to supply a full transcript of the loan payment history instead of
only one year. The Jobs Act also provides that this refinancing program
is not available to any loan that is subject to a guarantee by a
Federal agency, which includes 7(a) loans. SBA also reminds lenders and
CDCs that the refinancing of the existing debt must meet the ``credit
elsewhere'' criteria currently applicable to the 504 Program. See 13
CFR 120.101. SBA will require the Third Party Lender to certify that it
would not refinance the qualified debt without the assistance made
available under this rule. In addition, to avoid a conflict of
interest, or the appearance of a conflict of interest, in connection
with the refinancing of debts owed to investment companies, SBA is
amending 13 CFR 120.130(b) to prohibit the use of loan proceeds for the
refinancing of a debt owed to a New Markets Venture Capital Company.
Finally, the authority provided by the Jobs Act is available for
loan applications received by SBA on or after the effective date of
this rulemaking and approved by SBA through September 27, 2012.
II. Section-by-Section Analysis
Section 120.130(b). To avoid conflicts of interest, or the
appearance of conflicts of interest, in connection with the refinancing
of debts owed to investment companies, SBA is amending this provision
to prohibit the use of loan proceeds for the refinancing of a debt owed
to a New Markets Venture Capital Company.
Section 120.882(e)(1). SBA is amending this provision to make the
existing debt refinancing program involving expansions consistent with
the new paragraph (g). As amended, this provision will allow debt
refinancing involving expansions where substantially all (85% or more)
of the proceeds of the indebtedness had been used to acquire Eligible
Fixed Assets, and the remaining 15% of the proceeds had been incurred
for the benefit of the small business concern.
Section 120.882(g). Under current regulations, SBA may only provide
refinancing under the 504 Loan Program when the refinancing is provided
in conjunction with an expansion by the small business. The Jobs Act
temporarily authorizes refinancing without an expansion. SBA is adding
a new paragraph (g) to Sec. 120.882 to implement this new authority
for refinancing existing eligible debt under the 504 loan program. This
new paragraph sets forth the terms and conditions under which non-
expansion refinancing will be permitted in the 504 program. For
example, it:
(1) Provides that the financing provided by the Third Party Loan
and the 504 loan may be no more than 90% of the fair market value of
the fixed assets that will serve as collateral for the Refinancing
Project, as established by an independent appraisal, but in no event
may exceed the outstanding principal balance of the qualified debt;
(2) Provides that the Borrower pays an annual guarantee fee to
cover the full cost attributable to the refinancing program. SBA has
determined that the amount of this guarantee fee for loans approved
during Fiscal Year 2011 is 1.043% annually on the unpaid principal
balance of the debenture. If SBA determines that the fee must be
changed to cover the costs for loans approved during Fiscal Year 2012,
SBA will publish a Notice of the change in the Federal Register;
(3) Incorporates the definition of ``qualified debt'' set forth in
the Jobs Act and includes several new defined terms, including
``Refinancing Project'';
(4) Incorporates the alternate job retention goal set forth in the
Jobs Act for Borrowers that do not meet the job creation and retention
goals under Sec. Sec. 501(d) and (e) of the Small Business Investment
Act. Under this alternate job retention goal, the Agency may provide a
504 loan in an amount that is not more than the product obtained by
multiplying the number of employees of the borrower by $65,000. An
example of how this alternate job retention goal is calculated is
included in the rule;
(5) Provides that, in accordance with the Jobs Act, the authority
to approve the refinancing is not delegated to the PCLP CDCs;
(6) Provides that refinancing will be initially available only for
those loans that mature on or before December 31, 2012, unless SBA
publishes a Notice in the Federal Register to extend the timeframe. In
addition, depending on the program capacity of SBA and the CDC industry
to handle the demand for this program and market conditions, SBA may in
the future also permit a debt to be refinanced if it would provide a
substantial benefit to the Borrower, as defined and in accordance with
13 CFR 120.882(e)(5). In such case, SBA will publish a Notice of this
change in the Federal Register;
(7) Provides that the loan must be disbursed within 6 months after
loan approval, unless the Director for Financial Assistance or his
designee determines, upon request, that a longer disbursement period is
appropriate for good cause. SBA expects disbursement extensions to be
rare, and includes this time limitation on disbursements to ensure that
funds not used in a timely manner may be made available to other small
businesses during this limited two-year program;
(8) Provides that, consistent with 504 Loan Program requirements,
the funding for the Refinancing Project must come from three sources
based on the current fair market value of the fixed assets serving as
collateral for the Refinancing Project, including not less than 50%
from the Third Party Lender, not less than 10% from the Borrower, and
not more than 40% from the 504 loan;
(9) Prohibits same institution debt refinanced under this program
from being sold in the secondary market as part of a pool guaranteed
under subpart J of part 120 of 13 CFR; and
(10) Identifies eligible project costs which may be paid with the
proceeds of the refinancing.
Section 120.884. SBA amends Sec. 120.884(a) to include this new
authority as an additional exception to the general prohibition against
using proceeds of the 504 loan for debt refinancing.
III. Justification for Publication as Interim Final Rule
In general, before issuing a final rule, SBA publishes the rule for
public comment in accordance with the Administrative Procedure Act
(APA), 5 U.S.C. 553. The APA provides an exception to this standard
rulemaking process where the agency finds good cause to adopt a rule
without prior public participation. 5 U.S.C. 553(c)(3)(B). The good
cause requirement is satisfied when prior public participation can be
shown to be impracticable, unnecessary, or contrary to the public
interest. Under such circumstances, an agency may publish an interim
final rule without soliciting public comment.
In enacting the good cause exception to standard rulemaking
procedures, Congress recognized that emergency situations arise where
an agency must issue a rule without public participation. The current
turmoil in the financial markets is having a negative impact on the
availability of financing for small businesses. SBA finds that good
cause exists to publish this rule as an interim final rule in light of
the urgent need to help small businesses
[[Page 9216]]
sustain and survive during this economic downturn and the short-term
nature of this new authority. This new refinancing authority will offer
a significant opportunity for businesses, allowing them to restructure
existing debt into new 504 financings that will help secure the
financial stability of their businesses which will, in turn, help them
to survive and save jobs. It also has the potential to quickly free up
critical capital for small business owners across the country, allowing
them to continue to operate and potentially expand and add jobs. This
new authority is only available until September 27, 2012 and would have
less impact if delayed until notice and comment rulemaking could be
completed. Advance solicitation of comments for this rulemaking would
be contrary to the public interest because it would harm those small
businesses that need immediate access to capital. However, SBA did hold
a public forum in Boston, Massachusetts on November 17, 2010, in which
more than 120 persons participated in person or by phone offering their
suggestions on how the Agency should implement section 1122 of the Jobs
Act.
Although this rule is being published as an interim final rule,
comments are solicited from interested members of the public. These
comments must be submitted on or before the deadline for comments
stated in this rule. The SBA will consider these comments and the need
for making any amendments as a result of these comments.
IV. Justification for Immediate Effective Date
The APA requires that ``publication or service of a substantive
rule shall be made not less than 30 days before its effective date,
except * * * as otherwise provided by the agency for good cause found
and published with the rule.'' 5 U.S.C. 553(d)(3). The purpose of this
provision is to provide interested and affected members of the public
sufficient time to adjust their behavior before the rule takes effect.
As this rule is implementing new authority that expands the 504
Program's current authority to refinance debt and does not restrict
current behavior, there is no need for the public to adjust its
behavior before the rule takes effect. Furthermore, any delay in the
effective date would deny small businesses immediate access to credit,
and an immediate effective date will maximize the rule's value to small
businesses and its effect on the economy. SBA therefore finds that
there is good cause for making this rule effective immediately instead
of observing the 30-day period between publication and effective date.
Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork
Reduction Act (44 U.S.C., Ch. 35), and the Regulatory Flexibility Act
(5 U.S.C. 601-612).
Executive Order 12866
The Office of Management and Budget has determined that this rule
constitutes a ``significant regulatory action'' under Executive Order
12866 thus requiring Regulatory Impact Analysis as set forth below.
A. Regulatory Objective of the Interim Final Rule
The objective of the debt refinance program authorized by the Jobs
Act interim final rule is to expand the 504 loan program to include a
refinancing component that does not involve small business expansion.
This is a two-year program that is authorized through September 27,
2012. The interim final rule will promote better understanding of
Agency requirements by CDCs, lenders, and small business borrowers.
B. Baseline Costs
As this is an addition to the existing 504 program, there is no
historical cost data for this new program component for comparison or
projections. Similar costs may be assumed based on the historical costs
for the 504 loan program, as the application for the Jobs Act 504
refinance program is expected to be almost identical to the existing
application and eligibility checklist for the existing 504 loan
program. The costs to CDCs will vary between ASM (Abridged Submission
Method) CDCs and non-ASM (non Abridged Submission method) CDCs, as loan
packages from ASM CDCs have an abridged list of required documents to
submit. Based on historical ASM and non-ASM submissions, SBA
anticipates that 68% of 504 debt refinance loan volume will be ASM loan
packages and 32% will be non-ASM loan packages.
SBA anticipates that 21,300 refinance loans will be processed, of
which 14,484, or 68%, are estimated to be submitted by ASM CDCs and
6,816, or 32%, are estimated to be submitted by non-ASM CDCs.
Based on the length of time SBA takes to review and process 504
applications, SBA is estimated to take an average of 8.4 hours to
review and respond to ASM applications and 8.7 hours to review and
respond to non-ASM applications.
C. Potential Benefits and Costs of the Interim Final Rule
(a) Potential Benefits and Costs to Lenders
The interim final rule would improve access to capital for
businesses with the need to refinance but that will not be expanding
their business. The cost differential between an application for the
regular 504 program and the Jobs Act 504 debt refinance program
application and checklist are negligible.
The ability to refinance debt will improve the small businesses
cash flow, improve their financial ability to operate, improve the
long-term viability of the small business, and facilitate job
retention. Another potential benefit is the reduction in the number of
loan servicing actions due to deferments or catch-up plans and reducing
the likelihood that the business might be overcome by its indebtedness
burden which could result in liquidation. Fewer servicing actions would
potentially reduce the cost to CDCs and reduce the number of
delinquent, deferments, default and liquidation cases. These changes
would reduce the costs of loan servicing and liquidation processes for
lenders as well.
SBA does not know of any specific additional costs that would be
imposed on CDCs or lenders as a result of this interim final rule. SBA
is requesting comments from the public on any monetized, quantitative
or qualitative costs of CDC and Lender compliance with this rule.
Please send comments to the SBA official referenced in the Addresses
section of the preamble.
(b) Potential Benefits and Costs to CDCs and Borrowers
As provided by the Jobs Act, the interim final rule contains a
provision that temporarily expands the ability of a small business to
use the Section 504 Certified Development Company Loan program to
refinance certain qualifying existing debt. To implement this new
program, CDCs will package 504 debt refinance loan applications and
service these loans for small business borrowers. For Borrowers, the
cost benefit of lower interest rates and improved financial terms would
significantly outweigh the costs of preparing the Jobs Act 504 debt
refinance application and checklist in order to apply for the
assistance provided by the program.
CDCs would benefit from increased loan volume due to the Jobs Act
504 debt refinance project. This new program will meet a new market
demand for 504 debt refinancing for projects that do not involve
expansion.
[[Page 9217]]
This will increase CDC income from packaging, processing, servicing and
closing income as a result of the program, which would far outweigh any
burdens associated with the preparation and submission to SBA of 504
debt refinance loan applications. As CDCs are delivering the 504
program, the increased cost to provide the SBA 504 debt refinance
program will be negligible when compared to the substantial increase in
CDC revenue.
SBA expects that CDCs and Borrowers would incur some additional
costs as a result of this interim final rule. Due to the increased risk
of 504 debt refinance applications as compared to the current 504
program, and in accordance with the Jobs Act, a supplemental subsidy
fee of 29.4 basis points, or .294%, will be imposed on Borrowers to
cover the additional cost attributable to the refinancing of qualified
debt.
The costs to CDCs will vary between ASM (Abridged Submission
Method) CDCs and non-ASM (non Abridged Submission method) CDCs, as loan
packages from ASM CDCs have an abridged list of required documents to
submit. Based on historical ASM and non-ASM submissions, SBA
anticipates that 68% of 504 debt refinance loan volume will be ASM loan
packages and 32% will be non-ASM loan packages.
SBA anticipates that CDCs would likely submit to the Agency for
approval an estimated 21,300 504 debt refinance applications over the
two-year period of the program. This is a significant increase of the
SBA program current 8,500 annual 504 loan application volume.
For ASM CDCs, SBA estimates that the average time for completion of
each application would consist of 8.4 hours at an average cost of $45
per hour. Therefore, the annual costs of submitting 504 debt refinance
applications under the interim final rule would be 14,484 loan
applications x 8.4 hours for an estimated cost of $45/hour for a two-
year total of $5,474,952.
For Non-ASM CDCs, SBA estimates that the average time for
completion of each application would consist of 8.7 hours at an average
cost of $35 per hour. Therefore, the annual costs of submitting 504
debt refinance applications under the interim final rule would be 6,816
loan applications x 8.7 hours for an estimated cost of $45/hour for a
two-year for non-ASM debt refinance applications of $2,668,464. The
total estimated annual costs for ASM and non-ASM applications combined
would be $8,143,416 for the two-year period of the Jobs Act.
For the CDCs, there are duplication and shipping costs associated
with loan submission. Based on historical cost information for the 504
program, the copying and shipping costs using ASM ranges from $15-$50
per loan package and for non-ASM $25-$60 per loan package. This
variance in costs depends on the complexity of the loan application and
whether the application is submitted through the ASM or non-ASM Method.
SBA is requesting comments from the public on any monetized,
quantitative or qualitative costs of CDCs compliance with this rule.
Please send comments to the SBA official referenced in the ADDRESSES
section of the preamble.
(c) Potential Benefits and Costs for SBA and the Federal Government
The interim final rule would benefit SBA because it would enable
the Agency to increase access to capital to small business borrowers to
refinance debt without expansion during the temporary period of this
debt refinancing program. This would result in the submission of an
estimated 21,300 504 debt refinance applications.
In order to carry out this new program, SBA will hire 50 additional
staff for the Sacramento Loan Processing Center at an average cost of
$92,000 per staff member per year, or an annual estimated salary total
of $4,600,000 or a 2 year total of $9,200,000.
As indicated above, SBA anticipates that 21,300 refinance loans
will be processed, of which 14,484, or 68%, are estimated to be
submitted by ASM CDCs and 6,816, or 32%, are estimated to be submitted
by non-ASM CDCs.
Based on the length of time SBA takes to review and process 504
applications, SBA is estimated to take an average of 8.4 hours to
review and respond to ASM applications and 8.7 hours to review and
respond to non-ASM applications. For ASM applications, this equates to
8.4 hours at $45 hour x 14,484 applications for an estimated cost of
$5,474,952 for ASM refinance loan application for the two-year program
period. For non-ASM applications, this equates to 8.7 hours at $45 hour
for an estimated cost x 6,816 for a total annual estimated cost of
$2,668,464 for non-ASM refinance loan application. SBA estimates the
combined cost of reviewing ASM and non-ASM applications to be
$8,143,416 for the two year period of the Jobs Act.
Furthermore, the Agency must hire two full-time staff for lender
oversight at an average cost of $135,000 per year or a total of
$540,000 for the two-year period of the Jobs Act. In addition, contract
dollars of $105,000 per year, or $210,000 for the two-year period of
the Jobs Act, will be utilized to assist with analysis and oversight.
The total estimate cost of oversight of the 504 debt refinance program
for the two-year period of the Jobs Act is estimated at $750,000.
D. Alternatives to Interim Final Rule
This interim final rule is SBA's best available means for achieving
its regulatory objective of implementing the Jobs Act debt refinance
program authorized by Public Law 111-240, 124 Stat. 2504, enacted on
September 27, 2010. SBA is requesting comments from the public on any
potentially effective and reasonably feasible alternative to this rule
as it applies to CDCs and Lenders and the costs and benefits of those
alternatives. Please send comments to the SBA official in the ADDRESSES
section of the preamble.
SBA has not identified any reasonable alternative to this interim
final rule to implement this new debt refinancing authority.
Executive Order 12988
This action meets applicable standards set forth in sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have preemptive effect or retroactive effect.
Executive Order 13132
This rule does not have federalism implications as defined in
Executive Order 13132. It will not have substantial direct effects on
the States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government, as specified in the Executive Order. As
such it does not warrant the preparation of a Federalism Assessment.
Executive Order 13563
To the extent practicable given the need to make this temporary, 2-
year refinance program operational expeditiously in order to assist as
many small businesses as possible, this rule was developed in keeping
with the intent of this Executive Order. SBA solicited suggestions and
comments on how best to implement the Jobs Act from the affected
stakeholders and the public as a whole. SBA provided notice of a public
forum in the Federal Register, which was held in Boston, Massachusetts
on November 17, 2010. More than 100 persons attended in person or by
phone and 23 individuals provided testimony. In addition, SBA announced
a Web site and solicited comments for a 30 day period. The final
[[Page 9218]]
structure of the program was significantly shaped by those comments,
especially the decision to keep the same basic 504 financing structure
for same institution debt refinancing as for a new institution
refinancing another lender's debt.
By adhering as closely as possible to the procedures and conditions
of SBA's existing permanent 504 refinancing program, any burden that
this rule may have imposed on the affected stakeholders is lessened. In
addition, SBA adopted a new procedure with this rule that specifically
addresses concerns that were raised in public comments regarding the
burden that has been imposed in the permanent 504 refinancing program
by requiring lenders and borrowers to document that all of the proceeds
of the debt being refinanced was used for eligible collateral. As
indicated by the stakeholders, this requirement is especially difficult
if a property has been refinanced more than once or if the initial
lender had been acquired by another lender. In practice, the process
was costly and time consuming for the borrower, lender and SBA
personnel and, upon review, it rarely led to significant amounts being
excluded from the refinancing. In this rule, SBA has adopted a more
practical, less costly approach that relies on borrower and lender
certifications, subject to random sampling to verify the amounts being
refinanced. In addition, the rule allows the refinancing if
substantially all of the proceeds of the debt being refinanced was used
for eligible collateral. This rule will make that change to the
permanent refinance program as well as this temporary one.
Paperwork Reduction Act
The SBA has determined that this rule imposes no additional
reporting and recordkeeping requirements under the Paperwork Reduction
Act, 44 U.S.C. Chapter 35.
Regulatory Flexibility Act
Because this rule is an interim final rule, there is no requirement
for SBA to prepare a Regulatory Flexibility Act (RFA) analysis. The RFA
requires administrative agencies to consider the effect of their
actions on small entities, including small non-profit businesses, and
small local governments. Pursuant to the RFA, when an agency issues a
rule, the agency must prepare an analysis that describes whether the
impact of the rule will have a significant economic impact on a
substantial number of these small entities. However, the RFA requires
such analysis only where notice and comment rulemaking is required. As
discussed above, SBA has determined that there is good cause to publish
this rule without soliciting public comment. This rule is, therefore,
exempt from the RFA requirements.
List of Subjects in 13 CFR Part 120
Loan programs--business, Small businesses.
For the reasons stated in the preamble, SBA amends 13 CFR part 120
as follows:
PART 120--BUSINESS LOANS
0
1. The authority for 13 CFR 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); Public
Law 111-5, 123 Stat. 115, Public Law 111-240, 124 Stat. 2504.
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2. Amend Sec. 120.130 by revising paragraph (b) to read as follows:
Sec. 120.130 Restrictions on uses of proceeds.
* * * * *
(b) Refinancing a debt owed to a Small Business Investment Company
(``SBIC'') or a New Markets Venture Capital Company (``NMVCC'');
* * * * *
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3. Amend Sec. 120.882 by revising paragraph (e)(1) and adding new
paragraph (g) to read as follows:
Sec. 120.882 Eligible Project costs for 504 loans.
* * * * *
(e) * * *
(1) Substantially all (85% or more) of the proceeds of the
indebtedness were used to acquire land, including a building situated
thereon, to construct a building thereon, or to purchase equipment. The
assets acquired must be eligible for financing under the 504 loan
program;
* * * * *
(g) For applications received on or after February 17, 2011 and
approved by SBA no later than September 27, 2012, SBA may approve a
Refinancing Project of a qualified debt subject to the following
conditions and requirements:
(1) The Refinancing Project does not involve the expansion of a
small business;
(2) The applicant for the refinancing available under this
paragraph (g) has been in operation for all of the 2 year period ending
on the date of application;
(3) The qualified debt will mature on or before December 31, 2012,
unless such date is extended by SBA, based on its assessment of
available resources and market conditions, in a Notice published in the
Federal Register. Based on available resources and market conditions,
SBA may allow other debt to be refinanced if the refinancing would
provide a substantial benefit to the Borrower in accordance with Sec.
120.882(e)(5). If SBA determines to allow such refinancing based on the
substantial benefit criteria, SBA will publish a Notice in the Federal
Register of this determination;
(4) In addition to the annual guarantee fee assessed under Sec.
120.971(d)(2), Borrower must pay SBA a supplemental annual guarantee
fee to cover the additional cost attributable to the refinancing. For
loans approved during Fiscal Year 2011, this supplemental annual
guarantee fee will be 0.294%. For loans approved during Fiscal Year
2011, the annual guarantee fee assessed under Sec. 120.971(d)(2) and
the supplemental annual guarantee fee will total 1.043% on the unpaid
principal balance of the debenture. If the total amount of the
guarantee fee changes for loans approved during Fiscal Year 2012, SBA
will publish a Notice of the change in the Federal Register;
(5) The funding for the Refinancing Project must come from three
sources based on the current fair market value of the fixed assets
serving as collateral for the Refinancing Project, including not less
than 50% from the Third Party Lender, not less than 10% from the
Borrower (excluding administrative costs), and not more than 40% from
the 504 loan. In addition to a cash contribution, the Borrower's 10%
contribution may be satisfied as set forth in Sec. 120.910 or by the
equity in any other fixed assets that are acceptable to SBA as
collateral for the Refinancing Project, provided that there is an
independent appraisal of the fair market value of the asset;
(6) The portion of the Refinancing Project provided by the 504 loan
and the Third Party Loan may be no more than 90% of the fair market
value of the fixed assets that will serve as collateral, but in no
event may it exceed the outstanding principal balance of the qualified
debt;
(7) If the qualified debt is not fully satisfied by the funding
provided by the Refinancing Project, the lender of the qualified debt
must take one of the following actions, or some combination thereof, to
address the deficiency:
(i) Forgiveness of all or part of the deficiency;
(ii) Acceptance of payment by the Borrower, or
(iii) Acceptance of a Note executed by the Borrower for the
balance, or any portion of the balance. Such Note must
[[Page 9219]]
be subordinate to the 504 loan if the Note and the 504 loan are secured
by any of the same collateral. The Note is subject to any other
restrictions that SBA may establish to protect its creditor position,
including standby requirements;
(8) The Third Party Lender must have a first lien position, and the
504 loan must have a second lien position, on all Eligible Fixed Assets
securing the Refinancing Project. Any other lien must be junior in
priority to these lien positions. For other fixed assets serving as
collateral for the Refinancing Project, the lien positions of the Third
Party Lender and the 504 loan may be junior to any existing liens
acceptable to SBA;
(9) Eligible Project costs which may be paid with the proceeds of
the 504 loan are the amount used to refinance the qualified debt and
other costs under Sec. 120.882(c) and (d) and eligible administrative
costs under Sec. 120.883;
(10) Notwithstanding Sec. 120.860, a debt may be refinanced under
this paragraph (g) if it does not meet the job creation or other
economic development objectives set forth in Sec. 120.861 or Sec.
120.862. In such case, the 504 loan may not exceed the product obtained
by multiplying the number of employees of the Borrower by $65,000. The
number of employees of the Borrower is equal to the sum of:
(i) The number of full-time employees of Borrower on the date of
application, and
(ii) The product obtained by multiplying:
(A) The number of part-time employees of the Borrower on the date
of application; by
(B) The quotient obtained by dividing the average number of hours
each part time employee of the Borrower works each week by 40.
Example: 30 full-time employees and 35 part-time employees
working 20 hours per week is calculated as follows: 30 + (35 x (20/
40)) = 47.5. The maximum amount of the 504 loan would be 47.5
multiplied by $65,000, or $3,087,500.
(11) The authority to approve the refinancing under this paragraph
(g) is not delegated to PCLP CDCs;
(12) The 504 loans approved under this paragraph (g) must be
disbursed within 6 months after loan approval. The Director, Office of
Financial Assistance, or his or her designee may approve any request
for extension of the disbursement period for good cause;
(13) The Third Party Loan may not be sold on the secondary market
as a part of a pool guaranteed under subpart J of this part 120 when
the debt being refinanced is same institution debt;
(14) The Third Party Lender must certify that it would not
refinance the qualified debt except for the assistance provided under
this paragraph (g);
(15) Definitions. For the purposes of this paragraph (g), the terms
below are defined as follows:
Date of application refers to the date the 504 loan application is
received by SBA.
Eligible Fixed Assets are one or more long-term fixed assets, such
as land, buildings, machinery, and equipment, acquired, constructed or
improved by a small business for use in its business operations.
Fair market value refers to the current appraised value of an asset
that is established by an independent appraiser in accordance with the
standards established by SBA in its SOPs.
Qualified debt is a commercial loan:
(i) That was incurred not less than 2 years before the date of the
application for the refinancing available under this paragraph (g);
(ii) That is not subject to a guarantee by a Federal agency or
department;
(iii) Substantially all (85% or more) of which was for the
acquisition of Eligible Fixed Assets;
(iv) That was for the benefit of the small business concern;
(v) That is collateralized by Eligible Fixed Assets;
(vi) That is not a Third Party Loan that is part of an existing 504
Project; and
(vii) For which the applicant for the refinancing available under
this paragraph (g) has been current on all payments due for not less
than 1 year preceding the date of application. For the purposes of this
subparagraph (vi), ``current on all payments due'' means that no
payment scheduled to be made during the one year period was either
deferred or more than 30 days past due. Any delinquency in payment of
the loan to be refinanced after approval and before debenture funding
must be reported to SBA as an adverse change.
Refinancing Project means the fair market value of the Eligible
Fixed Asset(s) securing the qualified debt and any other fixed assets
acceptable to SBA.
Same institution debt means any debt of the Third Party Lender that
is providing funds for the refinancing, or of its affiliates.
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4. Amend Sec. 120.884 by revising paragraph (a) to read as follows:
Sec. 120.884 Ineligible costs for 504 loans.
* * * * *
(a) Debt refinancing (other than interim financing), except as
provided in Sec. 120.882(e) and (g).
* * * * *
Dated: February 10, 2011.
Karen G. Mills,
Administrator.
[FR Doc. 2011-3470 Filed 2-16-11; 8:45 am]
BILLING CODE 8025-01-P