Express Loan Programs; Affiliation Standards
| Published date | 10 February 2020 |
| Citation | 85 FR 7622 |
| Record Number | 2020-02128 |
| Section | Rules and Regulations |
| Court | Small Business Administration |
Federal Register, Volume 85 Issue 27 (Monday, February 10, 2020)
[Federal Register Volume 85, Number 27 (Monday, February 10, 2020)]
[Rules and Regulations]
[Pages 7622-7652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02128]
[[Page 7621]]
Vol. 85
Monday,
No. 27
February 10, 2020
Part IISmall Business Administration-----------------------------------------------------------------------13 CFR Part 103, 120 and 121 Express Loan Programs; Affiliation Standards; Interim Final Rule
Federal Register / Vol. 85 , No. 27 / Monday, February 10, 2020 /
Rules and Regulations
[[Page 7622]]
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SMALL BUSINESS ADMINISTRATION
13 CFR Parts 103, 120, and 121
RIN 3245-AG74
Express Loan Programs; Affiliation Standards
AGENCY: U.S. Small Business Administration.
ACTION: Interim final rule; request for comments.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is
amending various regulations governing its business loan programs,
including the SBA Express and Export Express Loan Programs and the
Microloan and Development Company (504) loan programs. SBA previously
published a Notice of Proposed Rulemaking addressing all of the topics
and issues covered by this interim final rule and received extensive
comments from the public. 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. In addition, the rule will
become effective in 30 days but compliance with two of the regulatory
changes will not be required until October 1, 2020.
DATES:
Effective date: This rule is effective March 11, 2020.
Compliance date: The compliance date for Sec. Sec. 103.5(b) and
120.221(a) is October 1, 2020.
Comment date: Comments on this rule must be received on or before
April 10, 2020.
ADDRESSES: You may submit comments, identified by RIN 3245-AG74, by any
of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments (Regulations.Gov
Docket: SBA-2018-0009).
Mail: Rosemarie Drake, Office of Financial Assistance,
Office of Capital Access, Small Business Administration, 409 Third
Street SW, Washington, DC 20416.
Hand Delivery/Courier: Rosemarie Drake, Office of
Financial Assistance, Office of Capital Access, Small Business
Administration, 409 Third Street SW, Washington, DC 20416.
SBA will post all comments on www.regulations.gov. If you wish to
submit confidential business information (CBI) as defined in the User
Notice at www.regulations.gov, please submit the information to
Rosemarie Drake, Office of Financial Assistance, Office of Capital
Access, 409 Third Street SW, Washington, DC 20416. 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: Dianna L. Seaborn, Director, Office of
Financial Assistance, Office of Capital Access, Small Business
Administration, 409 Third Street SW, Washington, DC 20416; telephone:
(202) 205-3645; email: [email protected].
SUPPLEMENTARY INFORMATION:
I. Background Information
The SBA programs affected by this interim final rule are:
1. The 7(a) Loan Program authorized pursuant to Section 7(a) of the
Small Business Act (the Act) (15 U.S.C. 636(a));
2. The Business Disaster Loan Programs (collectively, Economic
Injury Disaster Loans, Military Reservist Economic Injury Disaster
Loans, and Physical Disaster Business Loans) authorized pursuant to
Section 7(b) of the Act (15 U.S.C. 636(b));
3. The Microloan Program authorized pursuant to Section 7(m) of the
Act (15 U.S.C. 636(m));
4. The Intermediary Lending Pilot (ILP) Program authorized pursuant
to Section 7(l) of the Act (15 U.S.C. 636(l));
5. The Surety Bond Guarantee Program authorized pursuant to Part B
of Title IV of the Small Business Investment Act of 1958 (15 U.S.C.
694b et seq.); and
6. The Development Company Program (the 504 Loan Program)
authorized pursuant to Title V of the Small Business Investment Act of
1958 (15 U.S.C. 695 et seq.). (In this interim final rule, the 7(a),
Microloan, ILP, and 504 Loan Programs are collectively referred to as
the Business Loan Programs.)
On September 28, 2018, SBA published a proposed rule with request
for comments in the Federal Register to incorporate the requirements
related to the SBA Express and Export Express Loan Programs; add a
regulation pertaining to the 7(a) and Development Company (504) loan
programs regarding when the owners of a small business Applicant are
required to inject excess liquid assets into the project; amend certain
regulations setting forth the affiliation principles applicable to SBA
financial assistance programs; limit certain fees payable by loan
Applicants to amounts deemed reasonable by SBA; clarify the
responsibility of a Lender for the contingent liabilities associated
with 7(a) loans purchased from the Federal Deposit Insurance
Corporation; and, finally, amend certain regulations governing the use
of microloan grant funds by Microloan Intermediaries and the maximum
maturity of a microloan. (83 FR 49001) The original comment period was
scheduled to end November 27, 2018. On November 16, 2018, SBA announced
an extension of the public comment period for an additional 15 business
days to December 18, 2018. (83 FR 57693)
II. Summary of Comments
During the public comment period, 4,251 comments were submitted,
142 of which were duplicate submissions, meaning an identical comment
submitted multiple times by the same commenter.
The comments submitted came from 17 Congressional representatives
or State government offices, 48 trade associations or non-profit
organizations, 64 Certified Development Companies (CDCs), 86 Agents or
Lender Service Providers (LSPs), 259 banks and non-bank lenders, SBA's
Office of Advocacy, and 3,635 individuals. The Agency's responses to
the Office of Advocacy's comments are included in section III.C below.
The majority of the regulatory changes proposed by SBA, including
but not limited to incorporating SBA Express and Export Express Loan
Program Requirements, modifying certain regulations concerning the
Microloan Program, and technical corrections or conforming amendments,
were supported by the commenters with either no opposition or
recommendation for minor modifications.
While there were a significant number of comments in opposition to
the proposed changes to limit fees that Lenders and Agents may charge
small business Applicants in connection with an SBA-guaranteed loan,
SBA notes that most of these comments were generated through a single
website through which interested parties could submit a public comment
to SBA ``with one click.'' This website's electronic mechanism auto-
generated a rotating boilerplate comment letter and submitted the
comment letter on behalf of the individual who simply had to provide a
name, street address, zip code, phone number, and email address.
Approximately 54 percent of the total comments received by SBA were
comprised of these auto-generated boilerplate comments, and more than
90 percent of the comments received on the proposed changes to the
regulations
[[Page 7623]]
concerning fees that Agents may charge Applicants in connection with
SBA-guaranteed loans were comprised of these auto-generated boilerplate
comments. The website promoting these auto-generated comments was
created by a coalition made up of small business-focused lenders,
facilitators, and associations working with small businesses and
entrepreneurs. As discussed more fully in the Section-by-Section
Analysis below, the information contained on the coalition's website
and communicated on their social media platforms contained significant
inaccuracies regarding both the current and proposed SBA rules
regarding Agent fees. SBA considered this misinformation by the
coalition when reviewing the comments received.
SBA received a large number of comments on the proposed changes to
the affiliation principles applicable to the financial assistance
programs set out in Sec. 121.301(f). The majority of these comments
were in response to the proposed changes to Sec. 121.301(f)(4), which
would expand the ``identity of interest'' basis for affiliation to
include businesses with common investments and businesses that are
economically dependent. Many commenters who opposed these proposed
changes expressed concern that the changes would negatively impact
poultry farmers and other agricultural producers.
SBA also received comments from 75 individuals or entities
expressing general concerns unassociated with any specific section of
the proposed regulations. One concern, expressed by 58 commenters, was
related to the determination that the rule is not a ``significant''
regulatory action for the purposes of Executive Order 12866. Since the
end of the public comment period, the Office of Management and Budget
has changed the designation of the rule to ``significant.'' In this
interim final rule, SBA has amended the Regulatory Impact Analysis and
Regulatory Flexibility Analysis to reflect the change in designation.
SBA also received 54 recommendations for the Agency to consider
requesting a statutory amendment to increase the maximum size of SBA
Express loans from $350,000 to $500,000. SBA included a request in the
President's fiscal year 2020 budget to increase the maximum SBA Express
loan amount to $1,000,000 and agrees that an increase in the maximum
loan size is needed.
SBA received 13 comments that generally opposed the proposed rule
as a whole, but none provided specific reasons or explanation for why
the proposed regulations should not be put into place.
Finally, SBA received two comments related to general 7(a) Loan
Program policy that were not related to any regulation included in the
proposed modifications. SBA will consider those comments when updating
future program guidance.
SBA has addressed in detail the comments received on specific
proposed regulatory changes within the appropriate Section-by-Section
analysis below.
III. Section-by-Section Analysis of Comments and Changes
A. Business Loan Programs
1. SBA Express and Export Express Loan Programs
Section 120.441 SBA Express and Export Express Loan Programs
SBA proposed to add a regulation providing general descriptions of
the SBA Express and Export Express Loan Programs.
SBA received 60 comments on this proposed change. Fifty-nine of the
comments supported this proposed change with a recommendation that SBA
amend this section and other relevant subsections to clarify that SBA's
general Loan Program Requirements apply to SBA Express and Export
Express loans, except when such requirements are inconsistent with
other requirements or guidance provided in SBA Loan Program
Requirements specific to SBA Express or Export Express. SBA believes
that this recommendation has already been addressed in the regulatory
language proposed in Sec. 120.441(a) and (b), which applies to the
associated regulations in Sec. Sec. 120.442 through 120.447. It is
repetitive and unnecessary to include this statement in all subsequent
related sections.
One commenter expressed concern that SBA granting Lenders
unilateral authority to process SBA Express and Export Express loans
could ``disproportionately affect'' women and minority business owners
because the proposed regulations do not appear to incorporate necessary
safeguards against ``stifled growth in urban communities and
sustainability for women and other minority businesses within these
communities.'' The commenter did not provide any evidence to support
his or her concern. SBA does not agree that delegating loan making
authority to lenders disproportionately affects women or minority
business owners. The SBA Express and Export Express Programs began
operating as pilot programs in 1995 and 1998, respectively, and were
made permanent in 2004 and 2010, respectively. As explained in the
description of the programs being added as Sec. 120.441, both programs
were designed for Lenders to process loans exclusively under delegated
authority and Congress has authorized SBA to permit qualified Lenders
to make SBA Express and Export Express loans using, to the maximum
extent practicable, their own processes, analyses, and documentation.
SBA is adopting the regulation as proposed.
Section 120.442 Process To Obtain or Renew SBA Express or Export
Express Authority
SBA proposed adding a regulation that sets forth the criteria and
process to obtain or renew SBA Express or Export Express authority.
SBA received 57 comments on this proposed change. All commenters
supported the addition of the regulation. SBA is adopting the
regulation as proposed.
Section 120.443 SBA Express and Export Express Loan Processing
Requirements
SBA proposed adding a regulation that sets forth the requirements
for loan processing under the SBA Express and Export Express loan
programs.
SBA received 59 comments on this proposed change. All commenters
supported the addition of the regulation. SBA is adopting the
regulation as proposed with one modification.
An additional eligibility requirement applicable to Export Express,
which has been a part of the Export Express Program since it was
established and which is currently set out in SBA's Standard Operating
Procedures 50 10, Lender and Development Company Loan Programs, as
amended from time to time (SOP 50 10), was inadvertently omitted from
the proposed rule. This additional eligibility requirement states that,
in addition to the eligibility requirements for all 7(a) loans,
Applicants for Export Express loans must have been in operation,
although not necessarily in exporting, for at least 12 full months.
However, Applicants that have been in operation for less than 12 months
are eligible if the Lender determines that the Applicant's key
personnel have clearly demonstrated export expertise and substantial
previous successful business experience, and the Lender processes the
Export Express loan using conventional commercial loan underwriting
procedures and does not rely solely on credit scoring or credit
[[Page 7624]]
matrices to approve the loan.\1\ The Export Express Lender must
document that the Applicant's key personnel have the requisite
experience in exporting. The Export Working Capital Program, which
Export Express was based on, has a similar requirement set out in Sec.
120.341.
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\1\ Non-bank Lenders that do not have a conventional loan
portfolio must submit their underwriting procedures to the Office of
Credit Risk Management for written approval prior to making an
Export Express loan.
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As one of the stated purposes of the proposed rule was to
``incorporate into the regulations governing the 7(a) Loan Program the
requirements specifically applicable to the SBA Express and Export
Express Loan Programs in order to provide additional clarity for SBA
Express and Export Express Lenders,'' SBA is modifying Sec. 120.443 to
include the additional eligibility requirement applicable to Export
Express which was inadvertently omitted in the proposed rule. SBA is
adding a new paragraph (b) to incorporate the requirement. SBA is
redesignating the remaining paragraphs as (c) through (f).
Section 120.444 Eligible Uses of SBA Express and Export Express Loan
Proceeds
SBA proposed adding a regulation to identify the eligible uses of
loan proceeds for SBA Express and Export Express loans.
SBA received 59 comments on this proposed change. Fifty-seven
commenters supported the addition of the regulation. One SBA Lender
commented in opposition to Sec. 120.444(b)(4) which states, ``Export
Express Lenders are responsible for ensuring that U.S. companies are
authorized to conduct business with the Persons and countries to which
the Borrower will be exporting.'' This Lender believes this requirement
to be unnecessary and burdensome and instead recommends a risk-based
approach, such as having the customer sign an attestation as to the
licensing requirements for lower-risk transactions or, for higher-risk
transactions, requiring customers to provide a copy of the license(s)
or a letter from an export attorney as to why a license is not
required. This requirement has always been part of the Export Express
Program and, pursuant to the current procedure in SOP 50 10, Export
Express Lenders can satisfy this requirement by checking the Ex-Im Bank
Country Limitation Schedule and, for certain types of Export Express
loans, the Department of Treasury's Office of Foreign Assets Control
(OFAC) sanctions list. SBA is not expanding this requirement and,
therefore, the Agency does not agree that this regulation as proposed
will cause any undue burden on Export Express Lenders.
Another Lender expressed concern that while the summary of the
proposed change in the preamble to the proposed rule references the SBA
Express Lender's responsibility to ``take reasonable steps to ensure
and document that the loan proceeds are used exclusively for business-
related purchases,'' there is no regulatory language proposed in Sec.
120.444 that describes this requirement. The Lender objected to the
language in the preamble, claiming that it would be impractical for the
Lender to fulfill any such proposed responsibility
``postdisbursement.'' In addition, the Lender stated that during the
loan application and documentation processes, the Applicant already
attests that all funds will be exclusively used for business-related
purposes. This responsibility is an existing requirement for all
Lenders making 7(a) loans, including SBA Express Lenders on SBA Express
loans, pursuant to Sec. Sec. 120.120 and 120.130. SBA's SOP 50 10,
Subpart B, Chapter 7 clearly outlines the acceptable documentation with
which Lenders may document disbursement. The Lender's responsibility as
described in the preamble of the proposed rule references this existing
requirement, which SBA is not expanding and, therefore, the Agency does
not agree with the commenter's objections.
SBA is adopting the regulation as proposed with two minor technical
clarifications to Sec. 120.444(b)(3) to replace ``overseas
operations'' with ``operations outside of the United States'' and to
replace ``U.S.'' with ``United States.''
Section 120.445 Terms and Conditions of SBA Express and Export Express
Loans
SBA proposed to add a new regulation to identify those terms and
conditions of SBA Express and Export Express loans that are unique to
these two programs, including maximum loan amounts and guaranty
percentages, maturities, interest rates, collateral and insurance
requirements, allowable fees, and requirements concerning loan
increases.
SBA received 59 comments on this proposed regulation, with 57
commenters supporting the addition of the regulation. One individual
opposed the provision in Sec. 120.445(g) that prohibits SBA Express
and Export Express Lenders from selling the guaranteed portion of an
SBA Express or Export Express revolving line of credit on the secondary
market. This commenter argued that any product that has ended its draw
period and is in principal and interest repayment should be able to be
sold on the secondary market, regardless of delivery method or whether
the loan is a line of credit. SBA's existing Loan Program Requirements
for all 7(a) loans, including SBA Express and Export Express loans,
prohibit revolving loans or line of credit facilities to be sold on the
secondary market. SBA appreciates the opinion expressed by this
commenter but is not electing to modify this Loan Program Requirement.
One SBA Lender objected to the proposed change to require SBA
Express and Export Express Lenders to comply with the same rules that
apply to all other 7(a) Lenders with respect to the fees that may be
collected from an Applicant or Borrower on SBA Express and Export
Express loans. This Lender stated that it does not charge an
``application fee'' in connection with its SBA-guaranteed loans;
rather, it charges a ``loan fee.'' Further, this Lender asserted that,
if it ``will be required to document `packaging fees' and process the
related paperwork and transmittal [to SBA's Fiscal and Transfer
Agent]'' then the Lender will likely have to increase the fees it
charges to Applicants and the Lender's ``delivery process efficiency
will be impaired.'' This Lender appears to have misunderstood the
proposed changes regarding fees, as well as the current requirements
concerning disclosure of fees.
As stated in the preamble to the proposed rule, SBA proposed
changes to the fees a Lender is permitted to collect from an Applicant
in order to simplify the rules regarding such fees. SBA stated that,
regardless of what the fee is called (e.g., a packaging fee, an
application fee, etc.), the Lender would be permitted to charge an
Applicant a fee up to a certain amount, depending on the loan amount.
Thus, whether this Lender calls the fee an ``application fee'' or a
``loan fee,'' as long as the fee charged does not exceed the maximum
set forth in Sec. 120.221(a), the Lender would be permitted to charge
the fee. Further, while the proposed rule did not change the
requirement that, if the Lender charges an Applicant a fee for
assistance with obtaining an SBA-guaranteed loan, the Lender must
disclose the fee on SBA Form 159, the proposed rule did eliminate the
current requirement that the Lender itemize fees over $2,500. Thus, if
this Lender charges a ``loan fee'' it would need to disclose the fee on
SBA Form 159, but it would not be required to itemize the fee or
[[Page 7625]]
provide supporting documentation. Finally, the requirement to submit
the completed SBA Form 159 to SBA's Fiscal and Transfer Agent after
there has been an initial disbursement on the loan is a current
requirement applicable to all 7(a) Lenders, including SBA Express and
Export Express Lenders. SBA disagrees with the Lender's contention that
the proposed change will increase the burden on SBA Express and Export
Express Lenders and is adopting as proposed the change to require SBA
Express and Export Express Lenders to comply with the same rules that
apply to all other 7(a) Lenders with respect to the fees that may be
collected from an Applicant or Borrower.
With respect to interest rates, SBA stated in the proposed rule
that SBA Express and Export Express Lenders may charge up to 4.5
percent over the prime rate on loans over $50,000 and up to 6.5 percent
over the prime rate for loans of $50,000 or less, regardless of the
maturity of the loan, and did not distinguish between fixed or variable
interest rate loans. Since the publication of the proposed rule, SBA
published a document in the Federal Register revising the maximum
allowable fixed interest rate for 7(a) loans under 13 CFR 120.213. (83
FR 55478, November 6, 2018) In that Federal Register document, SBA set
the maximum allowable fixed interest rates for SBA Express and Export
Express loans at the same levels as the maximum fixed interest rates
allowable for 7(a) loans generally.
Consequently, SBA is modifying Sec. 120.445(d) to differentiate
between fixed and variable rate loans and to provide that the maximum
allowable fixed interest rate for SBA Express and Export Express loans
is the same as the maximum fixed interest rate allowable for 7(a) loans
generally as set forth in 13 CFR 120.213. SBA is adopting the remainder
of the regulation as proposed.
Section 120.446 SBA Express and Export Express Loan Closing, Servicing,
Liquidation, and Litigation Requirements
SBA proposed to add a new regulation providing that SBA Express and
Export Express Lenders must close, service, liquidate, and litigate
their SBA Express and Export Express loans using the same documentation
and procedures they use for their similarly-sized, non-SBA guaranteed
commercial loans, which must comply with law, prudent lending
practices, and Loan Program Requirements. Additionally, the proposed
regulation provided that SBA Express and Export Express Lenders must
comply with the loan servicing and liquidation responsibilities set
forth for 7(a) Lenders in 13 CFR part 120, subpart E, and other Loan
Program Requirements. The proposed regulation also described the
circumstances under which SBA will honor the guaranty on SBA Express
and Export Express loans.
SBA received 59 comments on this proposed regulation, all of which
supported its incorporation into the regulations. SBA is adopting the
regulation as proposed.
Section 120.447 Oversight of SBA Express and Export Express Lenders
SBA proposed to add a new regulation explaining that SBA Express
and Export Express Lenders are subject to the same risk-based lender
oversight as other 7(a) Lenders, including supervision and enforcement
provisions, in accordance with 13 CFR part 120, subpart I.
SBA received 57 comments on this proposed regulation, all of which
supported its incorporation into the regulations. SBA is adopting the
regulation as proposed with one minor technical clarification to insert
``other'' before ``7(a) Lenders'' and a minor edit to the section
heading.
2. Credit Elsewhere and the Personal Resources of Owners of the Small
Business Applicant
Section 120.102 Funds Not Available From Alternative Sources, Including
the Personal Resources of Owners
To aid SBA Lenders in determining whether an Applicant has access
to ``credit elsewhere,'' SBA proposed to reinstitute a ``personal
resources test.'' The personal resources test provides SBA Lenders
(i.e., both 7(a) Lenders and CDCs) with a bright-line test to analyze
the resources of individuals and entities that own 20 percent or more
of the Applicant business in order to determine if any of the owners
have liquid assets available that can provide some or all of the
desired financing. When an owner of 20 percent or more has liquid
assets that exceed stated thresholds, SBA proposed to require an
injection of cash from any such owner to reduce the SBA loan amount.
SBA proposed specific thresholds setting the required injection of such
owners' excess liquid assets based on the size of the total financing
package (defined for the purposes of this section as any SBA loans and
any other financing, including loans from any other source, requested
by the Applicant business at or about the same time). As set forth in
SOP 50 10, SBA considers ``at or about the same time'' to mean loans
approved within 90 days of each other.
SBA received 200 comments on this proposed change. Of these
comments, 135 expressed concern with this change, including 103 SBA
Lenders, 18 individuals, 9 trade associations, 4 Agents, and SBA's
Office of Advocacy.
There were a few main concerns expressed by these commenters. Some
argued that the personal resources test and required equity injection
of excess personal liquid assets should not apply to the 504 Loan
Program because Congress already requires an equity injection for 504
loans and because 504 loans are statutorily required to create jobs;
therefore, these small businesses need liquidity to meet these
objectives. Another concern expressed by many commenters was that
compliance with the proposed regulation would be onerous and burdensome
for SBA Lenders. Lastly, commenters expressed concern that the personal
resources test may limit the resources available to a small business
owner in the event of an unforeseen emergency or may eliminate
potential borrowers from seeking SBA financing altogether due to
owners' aversion to additional equity injections.
SBA disagrees with the argument that the personal resources test
should not apply to the 504 Loan Program. Regardless of other program-
specific requirements, SBA's statutory responsibility for both
financial assistance programs includes ensuring that loans are not made
if the Applicant has access to funds from private sources or elsewhere
on reasonable terms. Subsequent to SBA's removal of the personal
resources test from the regulations in 2014 (79 FR 15641), many SBA
Lenders expressed confusion as to how to adequately determine whether a
small business has access to credit elsewhere based on personal liquid
assets. During SBA Lender reviews, SBA has identified inconsistent and
irregular applications of this assessment when the determination was
left to the SBA Lender's discretion, including approval of loans to
businesses with principals that maintained extremely high levels of
personal liquid assets. Reinstatement of the personal resources test
will eliminate the ambiguity of the credit elsewhere determination and
provide SBA Lenders the certainty they have sought in recent years.
With respect to the job creation or retention requirements in the 504
Loan Program, in November 2018, SBA increased the dollar amounts used
in calculating the number of jobs that must be created or retained,
thereby making it easier for 504 loans to satisfy the statutory job
creation requirement. In addition, SBA designated additional areas for
application of the higher portfolio
[[Page 7626]]
average. (83 FR 55224, November 2, 2018) Thus, SBA already has taken
steps to facilitate compliance with the job creation requirements in
the 504 Loan Program. Further, while SBA recognizes that the
requirement of additional equity injections in the proposed rule may be
unattractive to some potential borrowers, SBA proposed to increase the
thresholds set forth in the 2014 personal resources test to allow for
greater personal liquidity to be maintained by owners.
Sixty-five commenters supported reinstatement of the personal
resources test with suggested modifications. The commenters included 53
SBA Lenders, 5 Agents, 3 individuals, 3 trade associations, and 1
member of Congress. While these commenters supported reinstatement,
many recommended that the personal liquidity thresholds be modified,
especially for smaller loans. Commenters also recommended that SBA more
clearly define what assets are considered ``liquid'' and provide
further explanation or additional examples of the extraordinary
circumstances that may qualify as an exception to the injection
requirement. Additionally, some commenters requested that SBA modify
the test to be based on the SBA loan amount, rather than the total
financing package, and to apply the test only to individual persons and
not entities. Two commenters suggested that SBA consider allowing an
alternative to requiring the owner to inject excess liquid assets by
allowing the owner to instead pledge the liquid assets as collateral
for the loan.
After considering the comments received on this change, SBA has
reevaluated the personal liquidity threshold for smaller loans and
agrees to modify the limits to ensure that Applicants applying for
smaller loans are not adversely affected. SBA is adopting the
regulation as proposed for loans greater than $350,000; however, based
on the comments received, SBA is increasing the liquidity that 20
percent or more owners may retain for loans of $350,000 or less. When
the total financing package (i.e., any SBA loans and any other
financing, including loans from any other source, requested by the
Applicant business at or about the same time, as defined in SOP 50 10)
is $350,000 or less, each 20 percent owner of the Applicant must inject
any liquid assets that are in excess of two times the total financing
package, or $500,000, whichever is greater. (The proposed rule would
have required injection of any liquid assets that were in excess of one
and three-quarter times the total financing package, or $200,000,
whichever was greater.) SBA also is modifying the regulatory text to
provide that SBA will reexamine the thresholds periodically and, if
adjustments are necessary, SBA may modify the thresholds through
rulemaking from time to time based on nationally-recognized economic
indicators.
SBA is adopting the proposed definition of ``liquid assets,'' with
a modification to exclude the cash value of life insurance policies
from the definition. The Agency will provide additional examples as to
what will or will not be considered ``liquid assets'' in SOP 50 10. SBA
will continue to base the personal resources test on the total
financing package, but is adding language to clarify that the phrase
``at or about the same time'' has the meaning set forth in SBA Loan
Program Requirements. (As noted above, SOP 50 10 sets forth that SBA
considers ``at or about the same time'' to mean loans approved within
90 days of each other.) SBA, in its sole discretion, may permit
exceptions to the required injection of an owner's excess liquid assets
only in extraordinary circumstances, such as when the excess funds are
needed for immediate medical expenses of a family member.
3. Permissible Fees That a Lender or Agent May Collect From an
Applicant or Borrower in Connection With an SBA-Guaranteed Loan
Section 120.221 Fees and Expenses That the Lender May Collect From an
Applicant or Borrower
SBA proposed revisions to paragraphs (a) and (b) of this section.
SBA proposed to amend Sec. 120.221(a) to limit the total fees an
Applicant can be charged by a Lender for assistance with obtaining an
SBA-guaranteed loan. Regardless of what the fee is called (e.g., a
packaging fee, application fee, etc.), the Lender would be permitted to
collect a fee from the Applicant of no more than $2,500 for a loan up
to and including $350,000, and no more than $5,000 for a loan over
$350,000. With the exception of necessary out-of-pocket costs, such as
filing or recording fees permitted in Sec. 120.221(c) and legal fees
that are charged on an hourly basis permitted in Sec. 120.221(e), this
is the only fee that a Lender may collect directly or indirectly from
an Applicant for assistance with obtaining an SBA-guaranteed loan.
SBA received 294 comments on this proposed change. Of these
comments, 215 (73 percent) were comprised of 7 different auto-generated
templates submitted by individuals and SBA Lenders. Each template
varied slightly in wording; however, all template comments opposed the
proposed changes and expressed concern that limiting the fees an SBA
Lender may charge to an Applicant will hurt small businesses by forcing
Lenders to leave the market for smaller loans of $350,000 or less.
SBA received 17 other non-automated comments expressing similar
concern: 9 from SBA Lenders; 4 from individuals; 3 from trade
associations; and 1 from an Agent. Many of these comments echoed the
sentiment that the fee limits, specifically for loans of $350,000 or
less, were set too low.
The remaining 62 comments received on this proposed change
supported SBA's proposal to clarify the fees that Lenders can charge
7(a) loan Applicants, with modification. These commenters included 52
SBA Lenders, 4 trade associations, 4 Agents, and 2 individuals. While
these commenters generally supported the proposed change, they
recommended that SBA consider increasing the fee that a Lender may
charge an Applicant for a loan of $350,000 or less.
SBA has considered these comments and agrees to increase the
maximum permissible fee a Lender may charge an Applicant for a loan of
$350,000 or less. Regardless of what the fee is called (e.g., a
packaging fee, application fee, etc.), the Lender will be permitted to
collect a fee from the Applicant that is no more than $3,000 for a loan
up to and including $350,000 and no more than $5,000 for a loan over
$350,000.
Based on the comments and SBA's observations during lender reviews,
SBA considers the revised fees to be reasonable for the services
provided by a Lender to an Applicant for assistance with obtaining an
SBA-guaranteed loan. SBA will monitor these fee levels and, if
adjustments are necessary, SBA may revise these amounts from time to
time through rulemaking.
SBA received several comments on proposed Sec. 120.221 suggesting
that SBA modify the circumstances under which SBA may require a Lender
to refund excess fee amounts. SBA considered these comments and is
modifying the regulatory text to specifically state that SBA may
require a Lender to refund any amount charged to an Applicant in excess
of what is permitted by SBA in this regulation.
In addition, in accordance with longstanding Agency policy, the
Lender may not split a loan into two loans for the purpose of charging
an additional fee to an Applicant. Even if there is a legitimate
business need for the Applicant's loan request to be split into two
loans (e.g., a term loan and a line of credit), the Lender may only
charge the Applicant one fee within the
[[Page 7627]]
maximums set forth above, based on the combined loan amounts. However,
it is not SBA's intention to restrict a Lender from charging a new fee
if an Applicant subsequently returns to the Lender to apply for a new
loan for a different project or purpose. SBA will provide additional
guidance in SOP 50 10 as necessary.
If the Lender charges the Applicant a fee for assistance with
obtaining an SBA-guaranteed loan, the Lender must disclose the fee to
the Applicant and SBA by completing the Compensation Agreement (SBA
Form 159) in accordance with Sec. 103.5 and the procedures set forth
in SOP 50 10. However, the Lender will no longer be required to itemize
the fees charged to the Applicant.
SBA recognizes that some Lenders may need to revise their policies,
procedures or documentation in order to comply with the new limits on
fees in Sec. 120.221(a). In order to minimize the impact of the change
on affected Lenders, SBA is not requiring compliance with revised Sec.
120.221(a) until October 1, 2020. Until that time, Lenders are to
continue to comply with the requirements in Sec. 120.221(a) as
published in the 2019 edition of the Code of Federal Regulations, and
the guidance in SOP 50 10 5(K). However, considering the benefits that
the new fee limits offer, SBA expects that many Lenders will want to
comply with them before October 1, 2020. They are permitted to do so.
SBA recommends that these Lenders document in each loan file their
decision to use the new fee limits.
SBA also proposed to amend Sec. 120.221(b) to permit extraordinary
servicing fees in excess of 2 percent per year for Export Working
Capital Program (EWCP) loans and Working Capital CAPLines that are
disbursed based on a Borrowing Base Certificate. In these programs, the
fees charged would need to be reasonable and prudent based on the level
of extraordinary effort required and could not be higher than the fees
charged on the Lender's similarly-sized, non-SBA guaranteed commercial
loans.
SBA received 54 comments on this proposed change. All comments
supported the amendment to allow different extraordinary servicing fees
to be charged in connection with EWCP loans and Working Capital
CAPLines that are disbursed based on a Borrowing Base Certificate.
However, one commenter noted that the regulatory language proposed
makes no mention of the extraordinary servicing fees permissible for
other 7(a) loans that may be allowed in certain cases, such as
construction. This commenter recommended that SBA clearly identify that
extraordinary servicing fees previously allowed are not impacted by the
rule change.
SBA appreciates this comment and agrees that the proposed
regulatory language inadvertently omitted the current language in the
regulation. It was not SBA's intent to eliminate the permissible
extraordinary servicing fees previously allowed in appropriate
circumstances for certain 7(a) loans. SBA is adopting the amendment to
the regulation and is correcting the inadvertent error that would have
eliminated the current language in the regulation.
Section 103.4 What is ``good cause'' for suspension or revocation?
SBA proposed to eliminate the limited exception to the ``two master
prohibition'' currently contained in Sec. 103.4(g). This exception
currently applies when an Agent acts as a Packager and is compensated
by the Applicant for packaging services, and the same Agent also acts
as a Referral Agent and is compensated by the Lender for those
activities in connection with the same loan application. SBA's proposed
elimination of this exception would prevent an Agent, including an LSP,
from providing services to both the Applicant and the SBA Lender and
being compensated by both parties in connection with the same loan
application. SBA also proposed to revise the remaining text of Sec.
103.4(g) for clarity and to use the defined term ``SBA Lender'' in the
revised regulation to clarify that it applies to both 7(a) Lenders and
CDCs.
SBA received 987 comments on this proposal. Of these comments, 915
were auto-generated comments submitted by individuals (i.e., 93 percent
of all comments received on this issue). The comments were comprised of
11 templates which varied slightly in wording; however, all template
comments opposed the proposed changes and expressed the concern that
eliminating an Agent's ability to serve both the SBA Lender and the
Applicant would restrict a small business's access to capital,
specifically for loans under $350,000. The commenters asserted that the
changes proposed in this section and Sec. 103.5 would force Agents out
of the market for loans under $350,000 and, according to these
commenters, without Agents, small businesses would have no other way to
gain access to affordable credit from an SBA Lender.
SBA strongly disagrees with the claims and underlying assumptions
made by these commenters. Applicants are in no way obligated or
expected to engage a third party or pay for assistance in order to
obtain an SBA-guaranteed loan. For those Applicants who would like
assistance in applying for a loan, SBA provides several options for
free and low-cost assistance through our resource partners, including
Small Business Development Centers, Women's Business Centers, Veteran's
Business Outreach Centers, United States Export Assistance Centers,
SCORE Business Mentors, Lender Match, and local SBA District Offices,
which are accessible nationwide. Over the course of five fiscal years
(FY2013-FY2017), only 2.78 percent of total approved 7(a) loans
reported utilizing an Agent (other than the participating Lender) to
provide assistance to an Applicant for a fee. Therefore, SBA disagrees
with the claim that small businesses will not be able to obtain SBA
loans, or that SBA Lenders will not be willing to make such SBA loans,
if the proposed changes to Sec. 103.4 are made final.
SBA received only 12 other comments opposing the proposed change: 4
from associations representing bankers or small business owners; 3 from
SBA Lenders; 3 from Agents; 1 from a Member of Congress; and 1 from an
individual. These comments aligned with the sentiments of the auto-
generated comments, also claiming that the elimination of the limited
exception to the ``two master'' rule would lead to a reduction in small
SBA loans and would negatively impact both the small businesses seeking
SBA loans and the economic interests of the Agents that serve them.
Five individuals commented that the proposed changes to Sec. 103.4
would eliminate SBA-guaranteed lending to small business poultry
farmers. SBA believes these comments were misdirected and intended to
be made instead on the proposed affiliation regulations and has
included these comments in that discussion later in the Section-by-
Section Analysis.
The remaining 55 commenters (47 bank and non-bank lenders, 5
Agents, 2 individuals, and 1 trade association representing government-
guaranteed lenders) supported the proposal, with some providing
recommendations for improvement. The recommendations for improvement
included: Allowing specific and nominal fees to be charged by an Agent
to both the Lender and the Applicant; requiring more transparent
disclosure of Agent involvement on SBA forms; and defining the terms
``Agent'' and ``Associate'' more clearly.
After consideration of the comments received on the proposed change
to
[[Page 7628]]
Sec. 103.4(g), SBA continues to believe that there is, at a minimum,
an appearance of a conflict of interest when an Agent represents both
the Applicant and the SBA Lender on the same loan application, which
SBA believes should not be permitted under SBA regulations. Therefore,
SBA is adopting the proposal to eliminate the limited exception to the
``two master'' prohibition. No Agent, including an LSP, may provide
services to both the Applicant and the SBA Lender and be compensated by
both parties in connection with the same loan application.
One commenter, a trade association representing hundreds of
government-guaranteed Lenders and other members of the SBA lending
community, including Agents, recommended that the regulation include a
provision clarifying that ``agent'' includes any ``associates'' of the
Agent. This would make clear that, for example, an Agent cannot use a
separate (but related) entity to circumvent the two master prohibition.
SBA agrees that this recommendation is consistent with the intent of
the proposed rule and is modifying the regulatory text to add the
clarification. For additional clarity, SBA is using the term
``Affiliate'' of an agent (as defined in Sec. 121.103), rather than
``associate.'' Further, SBA is adopting the proposal to use the defined
term ``SBA Lender'' in the revised regulation to clarify that this rule
applies to both 7(a) Lenders and CDCs.
In addition, based on the comments received, SBA reviewed the
definitions in Sec. 103.1 to determine if further clarification of the
defined terms is necessary. The rules governing Agents in part 103,
including the definitions within Sec. 103.1, were last modified in
1996. Since that time, the number of Agents, including LSPs, as well as
their involvement in SBA loan making has increased dramatically.
According to Lenders' reporting of fees charged to an Applicant in
connection with obtaining a 7(a) loan, and other information gathered
by the Office of Credit Risk Management (OCRM) during lender oversight
reviews, the number of loans where an Agent was reported to have been
used has increased by an average of 49 percent each year from FY2013 to
FY2017 (although the total reported number of such loans is only 2.78
percent of total approved 7(a) loans for such period). Further,
advancements in technology have resulted in Agents charging fees for
services to both Applicants and SBA Lenders that could not have been
considered at the time these rules were last revised. Based on the
foregoing, SBA agrees with the commenters that the definitions in part
103 need clarification as to whom SBA considers to be an Agent.
Therefore, in this interim final rule, SBA is clarifying the
definitions of the various categories of Agents, including LSPs,
Packagers, and Referral Agents for purposes of the business loan
programs.\2\
---------------------------------------------------------------------------
\2\ The clarifications being made to the definitions in Sec.
103.1 do not affect the use of the terms ``packager, agent, or
representative'' in Sec. 124.4, regarding the 8(a) Business
Development Program.
---------------------------------------------------------------------------
Specifically, SBA is moving the definitions of LSP, Packager, and
Referral Agent into Sec. 103.1(a) (the definition of ``Agent''), which
will clarify that these are different types of Agents for purposes of
the business loan programs. In addition, in the definition of the term
``Agent'' in Sec. 103.1(a), SBA is replacing the term ``person'' with
``individual or entity,'' consistent with the longstanding
understanding of that term.
In the definition of LSP, SBA is simplifying the language
describing the services that an LSP provides to a Lender. An LSP
``assists the Lender with originating, disbursing, servicing,
liquidating, or litigating SBA loans.'' To further clarify that the LSP
may only assist the Lender (and not make decisions on behalf of the
Lender), SBA is including in the definition a statement that the Lender
bears full responsibility for all aspects of its SBA loan operation,
including, but not limited to, approvals, closings, disbursements,
servicing actions, and due diligence. This description of the Lender's
responsibility over all aspects of its SBA loan operation is
longstanding SBA policy that has been included in SBA's SOP 50 10. SBA
is incorporating this important concept into the definition of an LSP
to further clarify the relationship between an LSP and Lender.
SBA also is clarifying in the definition that LSPs may only receive
compensation from the Lender and such compensation may not be passed on
to the Applicant or paid out of SBA-guaranteed loan proceeds. This
conforms the definition of LSP to the proposed change to Sec. 103.5(c)
discussed below. This also is consistent with longstanding SBA policy
regarding LSPs.
Further, SBA is making a conforming change to the definition of
``Packager'' to clarify that, going forward, the term will apply only
to those Agents who provide packaging services to Applicants. SBA's SOP
50 10 defines ``packaging services'' as ``assisting the Applicant with
completing one or more applications, preparing a business plan, cash
flow projections, and other documents related to the application.''
(SOP 50 10 5, Subpart B, Chapter 3, Paragraph VI.) Accordingly, SBA is
clarifying that Packagers may only be compensated by the Applicant (as
opposed to the Applicant or the Lender as in the current regulation).
Agents that provide ``loan packaging services'' to Lenders are
considered to be LSPs, not Packagers. This is because, based on OCRM's
observations during lender oversight reviews, when an Agent provides
``loan packaging services'' for the Lender, the services provided
typically include underwriting and assisting the Lender with its
analysis of the application. Because this type of Agent is assisting
the Lender with originating loans, it is considered to be an LSP.
SBA also is modifying the definition of ``Referral Agent'' by
changing the term to ``Loan Broker'' in order to more closely align
with the terminology used in the industry. In addition, consistent with
the change to the two master prohibition in Sec. 103.4(g) discussed
above, SBA is using the term ``SBA Lender'' to clarify that the defined
term ``Loan Broker'' applies to both 7(a) Lenders and CDCs. The revised
definition of Loan Broker will include a statement that a Loan Broker
may be employed and compensated by either the Applicant or the SBA
Lender, but not both. (The current definition of ``Referral Agent''
includes a similar statement.)
As a result, an Agent may be both a Loan Broker and a Packager for
the Applicant; however, under the two master prohibition in Sec.
103.4(g), an Agent that is a Packager for the Applicant may not also
serve as a Loan Broker for the SBA Lender. In addition, SBA is
clarifying in the definition that compensation paid to a Loan Broker
from an SBA Lender cannot be passed on to the Applicant or paid out of
SBA-guaranteed loan or debenture proceeds. Again, this is consistent
with longstanding policy that an SBA Lender may not pass on to the
Applicant any fees paid by an SBA Lender to an Agent the SBA Lender has
employed in connection with an SBA-guaranteed loan.
The above described clarifications to the definitions related to
Agents in Sec. 103.1 also will assist Agents and SBA Lenders in
properly identifying Agents and their services when completing SBA Form
159 and will provide the transparency requested by commenters.
During the course of lender oversight reviews, OCRM has found
arrangements between Agents and Lenders where the Agent and/or Lender
assert that the
[[Page 7629]]
Agent is not an LSP (and, therefore, not subject to the requirements
that an LSP Agreement be reviewed by SBA and the prohibition on sharing
secondary market premiums). In some instances, although these Agents
state they are providing ``packaging'' and/or ``referral services'' to
the Applicant and being paid out of the guaranteed loan proceeds, the
Agent actually is operating under a written contract with the Lender to
package and refer Applicants that meet the Lender's internal credit
policies and is providing a fully underwritten loan application to the
Lender. In other instances, the ``packaging'' services the Agent is
providing are actually underwriting functions for the Lender (e.g., the
Agent is pulling credit reports/credit scores, obtaining IRS tax
transcripts, providing financial ratios and analyses, analyzing
applicant eligibility). In still other instances, the services are
provided by the Agent to the Lender through a software platform and are
called ``technology services'' or a ``technology license,'' but the
``technology'' is performing underwriting functions for the Lender.
One Agent asserted in its comment letter that it serves only as a
referral and packaging agent for Applicants and that it does not
perform any Lender functions on behalf of the bank. This Agent stated
that it charges the Applicant a packaging fee of 2 percent of the loan
amount and a referral fee of 2 percent of the loan amount. This Agent
also stated that it licenses a software platform to banks to assist
them with evaluating and processing SBA loans of $350,000 or less and
that, as a technology licensor, the Agent does not perform any Lender
functions on behalf of the bank. SBA disagrees with this
characterization. Regardless of whether the assistance is provided
through technology or otherwise, SBA believes that an Agent who is
assisting a Lender with evaluating and processing loans is assisting
the Lender with originating loans and, therefore, meets the definition
of an LSP.
SBA intends to provide additional guidance on the circumstances
under which SBA considers an individual or entity to be an Agent in SOP
50 10. However, in response to comments requesting additional clarity
in this rulemaking, SBA is providing the following example of
individuals or entities that SBA considers to be Agents and, more
specifically, when SBA considers an Agent to be working for an SBA
Lender (such Agents cannot also provide services to the Applicant on
the same loan application):
An individual or entity engaged by an SBA Lender to
provide services that include interaction with the Applicant, either
in-person or through the use of technology, to request or obtain
eligibility and/or financial information that will be provided to the
SBA Lender for the purposes of obtaining Federal financial assistance.
This includes Agents who perform any pre-qualification review based on
SBA's eligibility and credit criteria or the SBA Lender's internal
policies prior to submitting the Applicant's information to the SBA
Lender. This also includes Agents who provide to the SBA Lender an
underwritten application, whether through the use of technology or
otherwise. In all such cases, the Agent is providing services to the
SBA Lender and, therefore, may not also provide services to the
Applicant in connection with the same loan.
Further, when determining whether an Agent is considered to be an
LSP for the Lender (and therefore required to enter into a written
agreement with the Lender, among other requirements), the degree to
which a Lender relies on a Loan Broker to generate loan originations
may be considered. Again, SBA will provide additional guidance in SOP
50 10.
SBA also intends to include guidance in SOP 50 10 as to when
certain entities will not be considered by the Agency to be Agents,
such as:
Entities that license software or software platforms to
SBA Lenders solely for the purpose of performing administrative
functions (not including any underwriting functions), such as
generating SBA-required forms; and
Entities that develop systems or lending platforms to
automate the SBA Lender's internal loan decision making process for the
SBA Lender's use in determining an Applicant's eligibility or
creditworthiness.
Finally, in response to public comments asking for clarity in the
definitions of ``Agent'' and ``Associates,'' SBA also is clarifying the
definition of ``Associate'' of a Lender or CDC in Sec. 120.10. The
current definition of an Associate of a Lender or CDC includes, among
others, ``an agent involved in the loan process.'' In order to provide
more clarity for SBA Lenders and their Associates, SBA is modifying
this definition to capitalize the term ``Agent'' and add a
parenthetical to clarify that ``an Agent involved in the loan process''
means an Agent, as that term is defined in 13 CFR 103.1. This is
consistent with SBA's longstanding interpretation of the definition of
Associate in Sec. 120.10.
Some Agents may need to make adjustments to conform to the
definitions of the various types of Agents, as clarified in this
interim final rule. For example, some Agents may need to enter into LSP
agreements with the Lenders they provide services to, and the agreement
must be submitted to SBA for review in accordance with Sec. 103.5.
(SBA's SOP 50 10 provides guidance related to the content of LSP
agreements and the process to submit the agreement for SBA's review.)
While Agents will not be permitted to provide assistance to both the
Applicant and the SBA Lender in connection with the same loan beginning
on the effective date of this interim final rule, SBA will permit
Agents and Lenders a period of 120 days from the date of publication of
this interim final rule in order to enter into an LSP agreement that
has been reviewed by SBA. SBA will work with Agents and Lenders to help
them meet that deadline.
Section 103.5 How does SBA regulate an Agent's fees and provision of
service?
SBA proposed to revise paragraphs (b) and (c) of this regulation.
Section 103.5(b) contains the requirement for all Agents to disclose to
SBA the compensation received for services provided to an Applicant and
requires that fees charged must be considered reasonable by SBA. In an
effort to clarify what SBA considers reasonable compensation for
services provided to an Applicant by an Agent or Agents and to prevent
Applicants from being overcharged by Agents, SBA proposed to amend this
section to limit the total fees that one or more Agents may charge an
Applicant for assistance with obtaining an SBA-guaranteed loan. SBA
proposed the following limitations on the fees that an Agent (or
Agents) may charge an Applicant:
For loans up to and including $350,000: A maximum of up to
2.5 percent of the loan amount, or $7,000, whichever is less;
For loans $350,001-$1,000,000: A maximum of up to 2
percent of the loan amount, or $15,000, whichever is less; and
For loans over $1,000,000: A maximum of up to 1.5 percent
of the loan amount, or $30,000, whichever is less.
SBA received 2,441 comments on this proposal. Similar to the
comments received on Sec. 103.4, 2,343 of these comments were
comprised of 26 auto-generated templates (96 percent of the comments
received on this issue). Of these comments, 2,242 were submitted by
individuals, 70 by Agents, 30 by SBA Lenders, and 1 by a banking
association.
[[Page 7630]]
Each template varied slightly in wording; however, all template
comments opposed the proposed changes and expressed concern that
limiting the fees an Agent may charge to an Applicant will restrict a
small business's access to capital, specifically for loans under
$350,000.
SBA received 35 non-automated comments that expressed a similar
concern with this proposal: 14 from individuals; 7 from SBA Lenders; 6
from associations representing commercial lenders; 5 from Agents; 2
from Members of Congress; and 1 from SBA's Office of Advocacy. These
comments expressed concern that the proposed fee limits are set below
market rates and, with these caps in place, it would not be
economically feasible for Agents to continue to assist small businesses
with loans under $350,000, which would in turn force small businesses
to predatory lenders with no other way to gain access to affordable
credit from an SBA Lender. These commenters requested that the
permitted fee structure remain at the current limits, which as stated
in the Summary of Comments above has been inaccurately interpreted by
the coalition that created a website to facilitate the auto-generated
comments, as well as by many Agents who charge Applicants multiple fees
of up to 2 percent of the loan amount for each fee in connection with
the same loan application.
The coalition website incorrectly states that SBA currently caps
fees an Agent may charge an Applicant at 2 percent for ``Referral'' and
2 percent for ``Packaging'' services, for a total of 4 percent of the
loan amount, for loans between $50,000 and $1,000,000. SBA's current
policy regarding fees for loan packaging and other services (including
referral fees paid by the Applicant) is that the fees must be
reasonable and customary and must be for services actually performed; a
standard or flat fee is not acceptable; and for fees charged based on a
percentage of the loan amount, the fee may not exceed 2 percent of the
loan amount for loans between $50,000 and $1,000,000. While some have
apparently interpreted SBA's current policy to permit multiple fees
exceeding, in the aggregate, the maximum fee amount, SBA does not
permit an Applicant to be charged multiple fees, with each fee
permitted to be up to the maximum of 2 percent of the loan amount. If
an Agent performs multiple services for an Applicant in connection with
a loan application between $50,000 and $1,000,000 (e.g., packaging and
referral services), the total amount the Agent can charge the Applicant
for all services may not exceed 2 percent of the loan amount.
Five individuals commented that the proposed changes to Sec. 103.5
would eliminate SBA-guaranteed lending to small business poultry
farmers. SBA believes these comments were misdirected and intended to
be made on the proposed affiliation regulations and has included the
comments in that discussion later in the Section-by-Section Analysis.
The remaining 59 commenters (50 SBA Lenders, 4 Agents, 3
individuals, and 2 trade associations) supported the proposal with
recommended modifications. The main recommendation presented to SBA was
to increase the maximum fee limit for loans under $350,000.
Once again, SBA strongly disagrees with the commenters' claims that
these proposed fee limits will eliminate access to capital for small
businesses seeking small SBA loans. SBA developed the proposed fee
limits based on Lender-reported data and other information gathered by
OCRM during lender oversight reviews in fiscal years 2013 through 2017.
In that period, 288,398 7(a) loans were guaranteed. Of the total 7(a)
loans guaranteed, only 8,025 loans, or 2.78 percent of total 7(a) loans
guaranteed, reported using an Agent (other than the participating
Lender) to provide assistance to the Applicant in securing the loan.
Therefore, it is a very small portion of the SBA loan portfolio that
will be affected by limits imposed on Agents.
When conducting lender oversight activities, OCRM has found that
many SBA Lenders receive findings of non-compliance related to Agent
and Lender fees charged to an Applicant. Typically, these findings
involve the failure to submit the SBA Form 159 to SBA's Fiscal Transfer
Agent in a timely manner, failure to complete SBA Form 159 correctly
and/or completely, charging the Applicant for services provided to the
SBA Lender by an LSP, or charging the Applicant fees that are not
permitted (e.g., for underwriting of the loan). Further, as noted
above, many public commenters, including Agents, incorrectly interpret
SBA's current fee rules. This demonstrates the lack of clarity of the
existing rules governing permissible fees and the need for
simplification. SBA believes it can address any confusion among SBA
Lenders and Agents by providing a bright-line test for what is
considered ``reasonable'' by the Agency. As discussed more fully below
in the Regulatory Impact Analysis, providing this bright-line test will
reduce the burden on SBA Lenders and Agents with respect to the time it
takes to review fees and determine whether they are permissible and
reasonable.
Based on the foregoing, the Agency reaffirms its decision to set
specific limitations on the fees that an Agent or Agents may charge an
Applicant for assistance with obtaining an SBA-guaranteed loan.
However, in an effort to avoid unintended consequences for loans of
$350,000 or less, SBA is increasing the maximum amount an Agent or
Agents may charge an Applicant for those loans. In addition, in order
to prevent fees from loans over $350,000 and up to $500,000 from having
a lower maximum permissible fee than loans of $350,000 or less, SBA
also is revising the lower two ranges. Thus, in this interim final
rule, the maximum amount an Agent or Agents may charge an Applicant for
assistance with obtaining an SBA-guaranteed loan is as follows:
For loans up to and including $500,000: A maximum of 3.5
percent of the loan amount, or $10,000, whichever is less;
For loans $500,001-$1,000,000: A maximum of 2 percent of
the loan amount, or $15,000, whichever is less; and
For loans over $1,000,000: A maximum of 1.5 percent of the
loan amount, or $30,000, whichever is less.
According to SBA's analysis of all loans guaranteed by SBA during
FY2013 through FY2017, only 1% of the loans reported fees charged to an
Applicant by an Agent (other than the participating Lender) that were
in excess of the revised maximums in this interim final rule. It is
important to note that all of the fees charged by Agents that were in
excess of the revised limits in this interim final rule also were in
excess of the current permitted fees, and were therefore not in
compliance with current SBA policy.
SBA received several comments suggesting SBA modify the
circumstances under which SBA may require an Agent to refund any excess
fee amount to the Applicant. SBA considered these comments and is
modifying the regulatory text to clearly state that SBA may require an
Agent to refund any amount charged to an Applicant in excess of what is
permitted by SBA in Sec. 103.5. SBA will monitor these fee levels and,
if adjustments are necessary, SBA may revise these amounts from time to
time through rulemaking.
Because SBA's primary concern is to minimize the cost for a small
business Applicant to obtain an SBA-guaranteed loan, these fee
limitations will not apply when an SBA Lender pays fees to an Agent for
services in connection with an
[[Page 7631]]
SBA-guaranteed loan; however, SBA Lenders are reminded that such fees
may not be passed on to the Applicant either directly or indirectly and
such fees may not be paid out of SBA-guaranteed loan or debenture
proceeds. Also, SBA reiterates that if an Agent provides more than one
service (e.g., packaging and referral services) to an Applicant, only
one fee is permitted for all services performed by the Agent. Further,
if more than one Agent (e.g., a Packager and a Loan Broker/Referral
Agent) provides assistance to the Applicant in obtaining the loan, the
total amount of all fees that the Applicant is required to pay must not
exceed the maximum allowable fee set by SBA. (However, a fee charged to
the Applicant by the Lender in accordance with Sec. 120.221(a) will
not be counted toward the maximum allowable fee for an Agent or
Agents.) These maximum limits apply regardless of whether the Agent's
fee is based on a percentage of the loan amount or on an hourly basis.
If an Agent or Agents charge an Applicant fees in connection with
obtaining an SBA-guaranteed loan, the Agent(s) must disclose the fees
to SBA by completing a Compensation Agreement (SBA Form 159) in
accordance with the regulation at Sec. 103.5 and must provide
supporting documentation as set forth in SOP 50 10.
SBA recognizes that some Agents may need to revise their business
practices or documentation in order to comply with the new limits on
fees in Sec. 103.5(b). In order to minimize the impact of the change
on affected Agents, SBA is not requiring compliance with revised Sec.
103.5(b) until October 1, 2020. Until that time, Agents are to continue
to comply with the requirements in Sec. 103.5(b) as published in the
2019 edition of the Code of Federal Regulations, and the guidance in
SOP 50 10 5(K). However, considering the benefits that the new fee
limits offer, SBA expects that many Agents will want to comply with
them before October 1, 2020. They are permitted to do so. SBA
recommends that these Agents document their decision to use the new fee
limits when reporting the fees on SBA Form 159.
In Sec. 103.5(c), SBA proposed to remove the word ``directly''
from the last sentence to clarify that compensation paid by the SBA
Lender to an LSP may not be charged to the Applicant, either directly
or indirectly.
SBA received two comments on this proposed change, both from SBA
Lenders. Both SBA Lenders expressed concern over the removal of the
word ``directly'' and believed that it could lead to SBA inaccurately
determining fees are indirectly being passed on to the borrower either
as part of the interest rate or if, for example, the SBA Lender charges
the Applicant a packaging fee.
SBA sets parameters on both the maximum allowable interest rate and
permissible fees SBA Lenders may charge an Applicant. As long as the
SBA Lender does not charge the Applicant beyond what is permitted, SBA
would not consider that fees are being passed on to the Applicant
through these means. SBA is adopting the modification to Sec. 103.5(c)
as proposed.
4. Loans to Qualified Employee Trusts
Section 120.350 Policy
The regulations governing SBA-guaranteed loans to qualified
employee trusts or ``Employee Stock Ownership Plans'' (ESOPs) are set
forth in Sec. Sec. 120.350 through 120.354. Because of the complex
nature of these transactions, SBA proposed to amend Sec. 120.350 to
require such applications be processed only on a non-delegated basis.
SBA received 78 comments on this proposal. One comment supported
the proposed change. The rest of the comments expressed concern with
the amendment as proposed. The concerns center around two positions.
The first position is that delegated Lenders should be permitted to
process ESOP loans under their delegated authority, in line with the
spirit of the policy enacted by Congress in Section 862 of the John S.
McCain National Defense Authorization Act for Fiscal Year 2019 (Pub. L.
115-232) (NDAA FY19), which charges SBA with promoting enhanced
employee ownership of small businesses by maximizing their ability to
affordably access capital. This position was expressed by 22
commenters, including 10 trade associations, 8 individuals, 3 members
of Congress, and 1 SBA Lender.
The second position was whether SBA's decision to require ESOP
loans to be processed on a non-delegated basis could be addressed in
SBA's SOP 50 10, rather than be incorporated into the regulation. This
position was expressed by 55 commenters, including 46 SBA Lenders, 5
Agents, 2 trade associations, and 2 individuals.
SBA considered the comments and the statutory text of the NDAA
FY19. The legislation provides the Administrator with the discretion to
permit loans to qualified employee trusts and cooperatives to be
processed under a Lender's delegated authority. SBA maintains its
position that these transactions are complex in nature and, for the
time being, should continue to be processed on a non-delegated basis,
as current procedures direct. SBA agrees, however, to eliminate the
proposed regulatory change requiring SBA-guaranteed loans to a
qualified employee trust to be processed under non-delegated
procedures. SBA will maintain the specific processing instruction that
ESOP loans must be processed on a non-delegated basis in SOP 50 10 and
will monitor the activity of ESOP loans during the initial
implementation period of the revised statutory requirements in order to
ensure compliance with Loan Program Requirements for such loans.
SBA is, however, making a technical amendment to both Sec.
120.350, Policy, and Sec. 120.352, Use of Proceeds, to incorporate the
statutory change made in the NDAA that permits SBA to guarantee a loan
to the small business concern (rather than the qualified employee
trust), if the proceeds from the loan are used only to make a loan to a
qualified employee trust that results in the qualified employee trust
owning at least 51 percent of the small business concern. SBA is making
this technical amendment in order to ensure that the regulations are
not inconsistent with the statute and to provide clarity to SBA Lenders
and SBA employees with respect to guaranteed loans involving ESOPs.
Additional guidance governing these loans will be provided in SOP 50
10.
5. A Lender's Responsibility When Purchasing 7(a) Loans From the FDIC
as Receiver, Conservator, or Other Liquidator of a Failed Financial
Institution
Section 120.432 Under what circumstances does this subpart permit sales
of, or sales of participating interests in, 7(a) loans?
SBA proposed modifying Sec. 120.432(a) to implement its
longstanding policy of holding Assuming Institutions and investors
responsible for the contingent liabilities (including repairs and
denials) associated with 7(a) loans originated by failed insured
depository institutions, whether the 7(a) loans are purchased by a
Lender through a Federal Deposit Insurance Corporation (FDIC) loan sale
or transferred to an Assuming Institution through a whole bank
transfer.
SBA received three comments on this proposed change. One SBA Lender
commented in support of the modification. The other two commenters, one
banking association representative and one SBA Lender,
[[Page 7632]]
objected to the proposed modification, stating that as drafted the
proposed change may preclude the Agency from entering into agreements
with the FDIC to affirm the validity of the guaranties at the time of
such loan sale or whole bank transfer. According to both commenters,
the proposed change would create a perception in the minds of qualified
purchasers that a large number of guaranties will be denied, thus
creating a disincentive for qualified SBA Lenders to enter into such
transactions.
SBA proposed this modification to ensure consistent treatment of
all portfolio loan transfers whether through voluntary bank mergers or
asset sales, or through FDIC-led portfolio transfers following the
failure of a Lender. SBA is modifying the regulatory language to
include a statement that clarifies the applicability of the paragraph
and the ability for the Agency to agree otherwise in writing (i.e., to
affirm the validity of the guaranties). SBA also is modifying the
regulatory language to remove the specific reference to the FDIC and
make it applicable to all 7(a) loans purchased from any Federal or
state banking regulator, any receiver, or any conservator.
6. Microloan Program
Section 120.707 What conditions apply to loans by Intermediaries to
Microloan borrowers?
SBA proposed to revise the regulation at Sec. 120.707(b) to
increase the maximum maturity of a loan from an Intermediary to a
Microloan borrower from 6 years to 7 years. SBA received two comments
supporting this change. SBA is amending this section as proposed.
Section 120.712 How does an Intermediary get a grant to assist
Microloan borrowers?
In Sec. 120.712(b), SBA proposed to incorporate a recent statutory
change to the percentage of grant funds that may be used by the
Intermediary for marketing, managerial, and technical assistance to
prospective Microloan borrowers. In Sec. 120.712(d), SBA proposed to
incorporate a recent statutory change to the percentage of grant funds
the Intermediary may use to contract with third parties to provide
technical assistance to Microloan borrowers. SBA received one comment
in support of each respective change. SBA is amending this section as
proposed.
7. Technical Corrections and Conforming Amendments
Section 120.130 Restrictions on Uses of Proceeds
SBA proposed a conforming amendment to Sec. 120.130 to include a
reference to the proposed Sec. 120.444 (Eligible uses of SBA Express
and Export Express loan proceeds) to clarify that revolving lines of
credit are an eligible use of 7(a) loan proceeds under SBA Express and
Export Express. SBA did not receive any comments on this proposal. SBA
is adopting the amendment as proposed.
Section 120.222 Prohibition on Sharing Premiums for Secondary Market
Sales
SBA proposed a technical correction to Sec. 120.222 to remove an
extra word (``in'') that was inserted in error. SBA did not receive any
comments on this proposal. SBA is adopting the rule as proposed.
Section 120.344 Unique Requirements of the EWCP
SBA proposed a conforming amendment to Sec. 120.344(b) to ensure
that the extraordinary servicing fees charged on EWCP loans, as
permitted by the revised Sec. 120.221(b), are reasonable and prudent.
SBA received 53 comments on this section, all in support of the
proposed change. SBA is adopting the amendment as proposed.
Section 120.440 How does a Lender obtain delegated authority?
SBA proposed several technical corrections and a conforming
amendment to the delegated authority criteria regulation at Sec.
120.440(c) to clarify that a Lender's authority to participate in SBA
Express may be renewed for a maximum term of 3 years.
SBA received 54 comments on this proposed change, 1 of which
opposed the proposed change and recommended that the SBA Express
renewal period remain a 2-year renewal period to remain consistent with
other delegated authority renewal periods and to ensure efficient SBA
oversight over delegated authorities. While the other 53 commenters
expressed a similar concern that an increase in renewal period may
conflict with the maximum 2-year renewal period allowed for general
delegated authority, they supported the proposal with modification. In
order to address this concern, these 53 commenters requested that SBA
provide additional information on how delegated authority renewals will
be processed when a Lender holds both SBA Express authority and
Preferred Lenders Program (PLP) authority.
SBA considered the comments received and is adopting the amendment
as proposed. As a point of clarification, the amendment to this
regulation will permit SBA to grant a longer term for renewals of SBA
Express authority, not to exceed three (3) years. SBA may continue to
grant shorter renewals and SBA's OCRM will coordinate with those
Lenders concerned with maintaining alignment of their SBA Express
renewal periods with any other delegated authorities they may hold. SBA
will provide additional information on how delegated authority renewals
will be processed when a Lender holds SBA Express authority and other
delegated authority (e.g., PLP, Export Express) in SOP 50 10.
Section 120.840 Accredited Lenders Program (ALP)
SBA proposed a technical correction to Sec. 120.840 to replace the
reference in this section to the Director, Office of Financial
Assistance with ``appropriate SBA official in accordance with
Delegations of Authority.''
SBA received 68 comments on this proposed change. All of these
comments recommended that SBA also revise the ALP application
requirements outlined in this section under Sec. 120.840(b) to reflect
the modernized application submission process, which will allow CDCs to
submit ALP applications electronically into the Corporate Governance
Repository, rather than apply to the Lead SBA Office.
SBA appreciates the recommendation and agrees to make both the
correction proposed by SBA and the revision recommended through public
comment in order to reflect SBA's current ALP application process.
B. Affiliation Principles for the Business Loan, Business Disaster
Loan, and Surety Bond Guarantee Programs
Section 121.301 What size standards and affiliation principles are
applicable to financial assistance programs?
The proposed Sec. 121.301(f) expanded the ``identity of interest''
regulation to include affiliation between individuals or firms that
have identical or substantially identical business or economic
interests (individuals or firms with common investments, or firms that
are economically dependent through contractual or other relationships).
This was how the identity-of-interest affiliation rule operated prior
to the 2016 rule change that limited such affiliation to ``close
relatives.'' (81 FR
[[Page 7633]]
41423, June 27, 2016) SBA's proposal was intended to return SBA's
identity-of-interest affiliation rule closer to the pre-2016 rule. SBA
received 1,137 comments on this proposed identity-of-interest
regulation. Of those, 52 comments supported the rule as proposed, 4
supported the rule with some modifications, and the remainder opposed
the rule as written. Most of the comments opposed either the rule
change in general or the specific economic-dependence ground of
affiliation in Sec. 121.301(f)(4)(iv).
Close relatives. Businesses that are owned by family members may be
affiliated under SBA's longstanding close-relatives rule. In 2016, SBA
clarified that the rule applies where family members have overlapping
business interests and are operating in the same geographic area. In
the proposed rule, SBA retained the identity-of-interest ground for
affiliation based on close relatives, but moved it to paragraph
(f)(4)(ii). SBA is adopting paragraph (f)(4)(ii) of the rule as
proposed.
Common Investments. The proposed rule provided that SBA would find
affiliation based on common investments under the identity-of-interest
rule when multiple entities are owned by the same individuals or firms,
and the entities owned by such investors conduct business with each
other or share resources. In order to find an identity of interest
between investors, the common investments would need to be substantial,
either in number of investments or total value. Under the proposed
rule, SBA would consider businesses to be affiliated based on common
investments only if they conduct business with each other, or share
resources, equipment, locations or employees; or provide loan
guaranties or other financial or managerial support to each other. One
comment criticized the proposed common investments rule as being better
addressed through SBA's program eligibility rules and another comment
criticized the proposal as vague.
In response to comments, SBA is limiting the application of
affiliation under common investments to firms that operate in the same
or related industry. Thus, firms that operate in different, unrelated
industries would not be subject to common-investment affiliation.
Additionally, in this common-investments ground of affiliation and
several others that follow, SBA adopts a reasonableness standard for
reviewing affiliation determinations made by SBA Lenders. SBA
acknowledges that some SBA Lenders may have limited experience in
applying some of SBA's more complicated affiliation standards. Thus, in
instances in which SBA reviews an SBA Lender's determination that there
is no affiliation under the common investments rule, SBA will not
overturn the SBA Lender's determination if the SBA Lender's
determination was reasonable at the time that the SBA Lender made it,
given the information that the SBA Lender had available. For example,
if the SBA Lender reasonably determined that two firms with common
investors with substantial ownership interests were not affiliated
because, even though the firms shared employees and locations, the
firms were in what the SBA Lender deemed to be unrelated industries,
SBA will accept that determination even if SBA would have found the
industries to be related if presented with the same facts. SBA's
reasonableness standard takes into account that the SBA Lender's
determination might not be the same as SBA's, but still would be
consistent with the regulation as long as it was reasonable. SBA
believes using this standard will provide SBA Lenders with the ability
to make a prudent lending decision without concern that their decision,
if reasonable, will be second-guessed. SBA Lenders are reminded that
they must document their analysis and determination in each loan file.
Economic Dependence. The proposed rule provided that, if a small
business Applicant derived more than 85 percent of its revenue from
another business over the previous three fiscal years, SBA would find
that the small business Applicant is economically dependent on the
other business and, therefore, that the two businesses are affiliated.
SBA proposed that the rule would include an exception for a firm that
has been in business for a short amount of time and has a plan to
lessen its dependence on the other concern. In response to comments,
SBA is replacing the exception for a firm that has been in business for
a short amount of time with two different exceptions in the interim
final rule.
The comments raised the issue that economic-dependence affiliation
would apply where a seller limited its sales to one buyer because of
circumstances unrelated to control. Such circumstances might include
situations where, though the terms of its relationship with its single
buyer do not restrict selling to other customers, the seller does not
have sufficient inventory to do so. For example, the buyer might have
several locations or lines of business, and the seller could be selling
to multiple locations or business lines under the buyer's control but
is not restricted from selling to other customers. As another example,
the seller could be selling exclusively to the Federal Government
either through a prime contract or subcontract. Under SBA affiliation
principles, affiliation applies only where there is control or the
power to control. Therefore, SBA is creating an exception to the
economic-dependence rule for contracts that do not restrict the concern
in question from selling the same type of products or services to
another purchaser. This exception avoids applying the rule to
situations where the seller's product only has one buyer or where the
seller chooses to sell only to one buyer. This exception replaces the
exception in the proposed rule for newly created businesses that have a
plan to lessen their dependence on the other concern, which SBA
concluded would be too easily circumvented and was not practical to
apply in the loan programs.
Many comments expressed concern over how economic-dependence
affiliation would apply to an agreement between a poultry farmer and a
large poultry producer (integrator) and whether most poultry farmers
would be considered ineligible for SBA financial assistance under the
provisions of the proposed rule. SBA's proposal was not intended to
eliminate lending to poultry and other farmers in the Business Loan
Programs. The Small Business Act authorizes SBA to make non-disaster
business loans to farming and agricultural related industries and SBA
understands the need for SBA financial assistance to small businesses
in those industries. SBA also recognizes, however, that integrator
agreements generally restrict the poultry farmer from raising another
producer's chicks on the same farm and therefore would not qualify for
the first exception described above. Accordingly, SBA is creating a
second exception to address this circumstance and others where the
first exception does not apply.
Under this second exception, an SBA Lender or other party may
request SBA to review a contractual relationship where one firm derived
more than 85 percent of its receipts over the previous three fiscal
years from the other firm, and the contract restricts the seller from
selling the same type of products or services to another purchaser. For
businesses that have been in operation for less than 1 year, the 85
percent threshold will be applied based on the Applicant's business
plan and projected revenues. For businesses that have been in operation
for at least 1 year, but less than 3 years, the threshold will be
applied based on the receipts for the
[[Page 7634]]
period the business has been in operation.
In assessing whether economic-dependence affiliation exists, SBA
will review the contract to determine whether, notwithstanding the
concentration of sales and the restriction, the buyer does not have
control or the power to control the seller. In determining control
under these circumstances, SBA will consider the volume of sales that
the contract covers, the contract's termination provisions, the risk
that the concern in question bears under the contract, the concern's
right to profit from its efforts, the rationale for restrictions that
the contract places on the small business, and other factors. SBA is
making available for public comment on its website guidance on the
types of provisions that establish control or do not establish control
for purposes of this provision, and the process for requesting SBA
review of a contract. The guidance can be found at https://www.sba.gov/offices/headquarters/oca/spotlight. If SBA finds no control, SBA will
determine that there is no affiliation between the two concerns under
the economic-dependence rule. Even where SBA finds no economic-
dependence affiliation, SBA Lenders are reminded that they still must
ensure that the applicant business meets all other eligibility criteria
and they must make a credit determination. SBA will accept comments on
the guidance during the 60-day comment period for this interim final
rule.
Newly Organized Concerns. In order to create greater uniformity
among SBA's various affiliation rules, SBA proposed to add to Sec.
[thinsp]121.301(f) a newly organized concern rule, similar to the one
which had applied to the Business Loan Programs prior to the 2016 rule
change. Under the proposed newly organized concern rule, a newly
organized spin-off company may be found affiliated with the original
company where all of the following four conditions are met: (1) Former
or current officers, directors, principal stockholders, managing
members, general partners, or key employees of one concern organize a
new concern; (2) the new concern is in the same or related industry or
field of operation; (3) the individuals who organized the new concern
serve as the new concern's officers, directors, principal stockholders,
managing members, general partners, or key employees; and (4) the
original concern is furnishing or will furnish the new concern with
contracts, financial or technical assistance, indemnification on bid or
performance bonds, and/or other facilities, whether for a fee or
otherwise. The proposed rule defined a key employee to be an employee
who, because of his or her position in the concern, has a critical
influence in or substantive control over the operations or management
of the concern. The proposed rule further defined a ``newly organized''
concern to be one that has been actively operating continuously for two
years or less. The proposed newly organized concern basis of
affiliation would be a rebuttable presumption that may be rebutted if
there is a clear line of fracture between the new concern and the other
firm.
SBA received 130 comments on this proposed regulation. Three
commenters, consisting of two SBA Lenders and one non-profit
organization, were supportive of the proposed rule. The remaining 127
commenters expressed concern with the proposed regulation. Commenters
observed that the newly organized concern rule included several
undefined terms and could hamper a new firm's ability to recruit
employees. SBA agrees that it can provide greater clarity with respect
to the undefined terms and can simplify the rule to make it easier to
apply and to ensure that recruitment or hiring efforts are not
adversely affected by the rule. In the interim final rule, in response
to the comments, SBA is replacing the term ``principal stockholders''
with the term ``owners of a 20 percent interest or greater'' (in
conditions number (1) and (3) above). SBA also is replacing the term
``key employees'' with ``persons hired to manage day-to-day
operations'' in the list of affected individuals in the original
concern (in condition number (1) above), and is deleting the term ``key
employee'' from the list of affected individuals in the new concern (in
condition number (3) above). Therefore, a new firm can hire anyone,
including a former owner or key employee of another firm, as an
employee without the employee causing affiliation under the newly
organized concern rule. Due to these changes, SBA is eliminating the
definition of ``key employee'' from the regulatory text, as it is no
longer necessary.
SBA also is revising the interim final rule with respect to the
benefits that flow from the original concern to the new concern (in
condition number (4) above). Rather than applying the newly organized
concern rule based on whether the original concern is furnishing or
will furnish the new concern with contracts, financial or technical
assistance, indemnification on bid or performance bonds, and/or other
facilities, whether for a fee or otherwise, SBA is revising the
regulatory text so that the newly organized concern rule only applies
when direct monetary benefits flow from the new concern to the original
concern. It is not SBA's intent to apply the rule where the original
concern does not receive direct monetary benefits from the new concern.
Examples of direct monetary benefits would include profit or revenue
sharing agreements or royalty payments. Further, SBA will not consider
the referral of business without compensation to constitute ``direct
monetary benefits.'' In addition, in the definition of a new concern,
SBA is deleting the term ``continuously,'' because that term might
cause confusion for businesses that operate on a seasonal or
intermittent basis.
Finally, in the newly organized concern ground of affiliation, SBA
adopts a reasonableness standard for reviewing affiliation
determinations made by SBA Lenders. In instances in which SBA reviews
an SBA Lender's initial determination that there is no affiliation
under the newly organized concern rule, SBA will not overturn the SBA
Lender's determination if it was reasonable at the time it was made,
given the information that the SBA Lender had available. For example,
if the SBA Lender reasonably determined that the new firm's owners were
corporate officers of another firm, but that the benefits flowing from
the new firm to the other firm are not direct monetary benefits, SBA
will accept the determination even if SBA would have found the benefits
to be direct monetary benefits if presented with the same facts. SBA's
reasonableness standard takes into account that the SBA Lender's
determination might not be the same as SBA's, but still would be
consistent with the regulation as long as it was reasonable. SBA
believes using this standard will provide SBA Lenders with the ability
to make a prudent lending decision without concern that their decision,
if reasonable, will be second-guessed. SBA Lenders are reminded that
they must document their analysis and determination in each loan file.
Totality of the Circumstances. The proposed rule added a new
paragraph (f)(6) to Sec. 121.301 to explain that, when making
affiliation determinations, SBA would consider the totality of the
circumstances, and may find affiliation even though no single factor is
sufficient to constitute affiliation. The totality of the circumstances
criterion for determining affiliation was removed from the regulations
in 2016. At that time, SBA stated that, generally, examples of when
this criterion was used involved negative control or control through
management
[[Page 7635]]
agreements. Thus, in 2016, SBA provided additional specific guidance in
Sec. 121.301(f)(1) and (3) to address negative control and control
through management agreements. However, SBA now believes that there are
other examples of when affiliation may be present but not covered by
the specific affiliation rules and, therefore, proposed to reinstate
the totality of the circumstances criterion. In proposing to reinsert
the criterion in the regulations, SBA provided two examples of where
the totality of the circumstances test would result in a finding of
affiliation.
SBA received 146 comments on this proposed change. Four commenters,
comprised of three individuals and one non-profit organization,
expressed support of the proposal. These comments expressed the same
opinion, that it is critical for SBA to consider the totality of the
circumstances in determining affiliation, specifically with respect to
contracts and agreements between poultry farmers/growers and poultry
integrators.
The remaining 142 comments were submitted by 117 SBA Lenders, 10
individuals, 8 Agents, and 7 trade associations. These comments
expressed concern that the totality of the circumstances test could
result in arbitrary and unpredictable application of SBA's affiliation
rules. SBA believes that this overstates the potential reach of the
totality of the circumstances rule. The rule is merely an application
of the general principle that affiliation is caused by control or the
power to control of one firm by another, or common control of multiple
firms. There may be instances of control that are not covered by the
specific grounds of affiliation, and the totality of the circumstances
test merely states that those instances are not exempt from affiliation
analysis. For example, the relationship between a recording artist and
a record company might cause affiliation if the record company has
exclusive rights over the recording artist and closely controls the
activities of the recording artist, but none of the specific grounds of
affiliation would reach that relationship necessarily. As another
example, a firm's operating agreement might require that the firm
obtain approval from a third party prior to making certain decisions
that typically are made independently by firms in that industry in the
ordinary course of business. This approval requirement might grant the
third party control over the firm and could result in affiliation under
the totality of the circumstances, even though none of the specific
grounds of affiliation might apply. The totality of the circumstances
test should not reach routine and typical business relationships,
however.
In order to address concerns raised by the commenters, SBA is
modifying the regulatory language to provide that, when applying the
totality of the circumstances test, SBA may consider all connections
between the Applicant business and a possible affiliate and, if no
single factor is sufficient to constitute affiliation, SBA may
determine on a case-by-case basis that affiliation exists when there is
``clear and convincing evidence'' based on the totality of the
circumstances. Further, as with the common investments rule and the
newly organized concern rule, SBA is adopting a reasonableness standard
for reviewing affiliation determinations made by SBA Lenders under the
totality of the circumstances rule. For the totality of the
circumstances rule, SBA will not overturn the SBA Lender's
determination if it was reasonable at the time it was made, given the
information that the SBA Lender had available. For example, if the SBA
Lender reasonably determined that a firm whose day-to-day operations
required the approval of a minority owner in some situations was not
affiliated with the minority owner, SBA will accept that determination
even if SBA would have found the firm and the minority owner to be
affiliated in the first instance. SBA Lenders are reminded that they
must document their analysis and determination in each loan file.
121.301(f)(7) Affiliation Based on Franchise Agreements
SBA proposed to revise this paragraph to clarify that the term
``franchise'' has the meaning given by the Federal Trade Commission
(FTC) in its definition of ``franchise'' as set forth in 16 CFR part
436. SBA proposed to cross-reference the FTC definition of
``franchise'' in the regulation to clarify that the regulation applies
to all agreements or relationships, whatever they may be called, that
meet the FTC definition of a franchise. All such agreements would be
referred to in the regulation as ``franchise agreements'' and the
parties to such agreements will be referred to as ``franchisor'' and
``franchisee.'' Further, SBA proposed to add to this regulation a
statement that SBA will maintain a publicly available centralized list
of franchise and other similar agreements that are eligible for SBA
financial assistance, consistent with SBA's current policy and
procedure.
SBA received 125 comments on this proposed change, all of which
supported the proposal. Two of the 125 commenters also recommended that
SBA expand paragraph (7) to define the relationship between poultry or
swine farmers and their integrators. In addition, these 2 commenters
suggested that, in order to expedite the approval process, SBA should
maintain a centralized list of integrator agreements in the same manner
as franchise agreements. SBA appreciates the recommendation, but is not
going to expand the principle of affiliation based on franchise or
license agreements to include integrator agreements or maintain a
separate centralized list of agreements between poultry or swine
farmers and their integrators at this time. SBA has discussed how the
relationships between poultry or swine farmers and their integrators
will be reviewed in the section above on economic-dependence
affiliation. SBA is adopting paragraph (7) as proposed.
Section 121.302 When does SBA determine the size status of an
applicant?
SBA proposed to incorporate the SBA Express and Export Express
programs into this regulation to clarify that, with respect to
applications for financial assistance under these programs, size is
determined as of the date of approval of the loan by the SBA Express or
Export Express Lender. SBA did not receive any comments on this
proposal. SBA is adopting the regulation as proposed.
C. Agency Responses to the Office of Advocacy's Comments on the
Proposed Rule
1. Proposed Fee Caps
SBA's Office of Advocacy expressed concern that, although the
proposed fee caps will reduce the fees that small businesses pay to
obtain a loan, some members of the public believe that the proposed
caps will hurt small banks and possibly eliminate the incentives to
facilitate small SBA loans that small businesses need. Advocacy also
expressed concern that SBA is attempting to address a problem that is
being created by a few bad actors, and that in doing so SBA may
discourage the facilitation and use of SBA's products. SBA does not
agree that the proposed fee limits will hurt small SBA Lenders, as the
Agency believes the changes in these rules will simplify the rules
regarding fees and will reduce the burden on all SBA Lenders, including
small SBA Lenders. (For additional discussion of the estimated
reduction in the burden on SBA Lenders, see the discussion in the
Regulatory Impact Analysis and Regulatory Flexibility Act sections
below.) Further, as Advocacy acknowledges in its comment letter, in
approximately 96 percent of the loans
[[Page 7636]]
guaranteed during FY2013-FY2017, Applicants were charged fees (by
Lenders and Agents) that were less than the maximum fees in the
proposed rule. As discussed earlier in the Section-by-Section Analysis,
in consideration of the comments received and in order to ensure there
are no unintended consequences for smaller loans, SBA has increased the
maximum fees that both Lenders and Agents will be permitted to charge
Applicants in connection with smaller loans. When the revised fee
limits for smaller loans in the interim final rule are taken into
consideration, the percentage of loans guaranteed in FY2013-FY2017 with
fees less than the permitted maximums increases to nearly 99%.
In addition, recognizing that some SBA Lenders and Agents,
including LSPs, may need to revise their practices, policies,
procedures, or documentation to comply with revised Sec. 103.5(b) or
Sec. 120.221(a), SBA is not requiring compliance with those provisions
until October 1, 2020. As discussed more fully in the Regulatory
Flexibility Act section of this interim final rule, SBA believes the
extended period for SBA Lenders and Agents to comply with those
sections of the interim final rule will help to minimize any potential
adverse effects on small SBA Lenders and Agents. Further, with the
modifications to the maximum permitted fees made in this interim final
rule and the extended time period for compliance, the Agency believes
it has addressed any concern that small SBA Lenders will be unable to
find Agents to assist them with facilitating SBA-guaranteed loans.
Finally, as noted earlier in the Section-by-Section Analysis, SBA
provides several options for free or low-cost assistance through its
resource partners, which are accessible nationwide.
2. The Personal Resources Test
The Office of Advocacy expressed concern that the proposed
reinstatement of a personal resources test will limit the resources
available to a small business owner in the event of an emergency.
Additionally, Advocacy expressed concern that the proposed personal
resources test would eliminate potential borrowers and be difficult to
include in the current underwriting practices of small financial
institutions. Advocacy encouraged SBA to consider a contribution level
that will allow small businesses to have a buffer in the event of
unforeseen circumstances. After considering the comments received on
this change, SBA has reevaluated the personal liquidity threshold for
smaller loans and agrees to modify the limits to ensure that Applicants
applying for smaller loans are not adversely affected.
In this interim final rule, SBA has increased the threshold for
loans of $350,000 or less to allow the owners of the small business
Applicant to retain more personal liquidity. SBA also is modifying the
regulatory text to provide that SBA will reexamine the thresholds
periodically and, if adjustments are necessary, SBA may modify the
thresholds through rulemaking from time to time based on nationally-
recognized economic indicators. Also, the regulation will provide SBA
with the ability to permit exceptions to the required injection of an
owner's excess liquid assets in extraordinary circumstances, such as
when the excess funds are needed for immediate medical expenses of a
family member. With respect to Advocacy's concern that small financial
institutions will have difficulty implementing this change, as
discussed in the Regulatory Impact Analysis below, SBA believes that
providing a bright-line test will assist SBA Lenders in analyzing the
resources of individuals and entities that own 20 percent or more of
the Applicant business in order to determine if any of the owners have
liquid assets available that can provide some or all of the desired
financing. This bright-line test will reduce the burden on SBA Lenders
when making this critical eligibility determination. In addition, SBA
notes that a personal resources test was in SBA's regulations until
2014, so SBA Lenders have experience applying such a test and should
not have difficulty implementing this change.
3. Affiliation
The Office of Advocacy expressed concern that the affiliation
sections of the proposed rule may be vague and confusing to small
entities. In addition, Advocacy expressed concern that the proposed
changes may be problematic in small rural communities that rely on
contracts with large companies/integrators to buy agricultural goods.
Advocacy encouraged SBA to clarify the proposed changes.
As discussed more fully in section III.B. above, in this interim
final rule, SBA has clarified several of the proposed changes,
including the common-investments affiliation rule, the economic-
dependence affiliation rule, the newly organized concern affiliation
rule, and the totality of the circumstances affiliation rule.
Specifically, in order to ensure there would be no adverse impact on
rural areas or small agricultural businesses, SBA added a second
exception to the economic-dependence affiliation rule for businesses
operating under contracts that restrict the seller from selling the
same type of products or services to another purchaser. Under this
second exception, an SBA Lender or other party may request SBA to
review the contractual relationship between the large company/
integrator and the small business Applicant to determine whether
affiliation exists.
4. Additional Outreach
The Office of Advocacy encouraged SBA to perform additional
business outreach with the industries that may be impacted by the
proposed rule to determine the best way to implement changes that will
achieve SBA's goals without being unduly burdensome. As discussed more
fully in the Regulatory Impact Analysis and Regulatory Flexibility
Analysis below, SBA believes it has received sufficient input and
feedback from program participants and other stakeholders to implement
the proposed changes, with the modifications identified in this
Section-by-Section Analysis, in a manner that will reduce the burden on
those participants and stakeholders and provide meaningful benefits to
small business Applicants. Nevertheless, 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. See
Justification for Interim Final Rule below. SBA will consider comments
submitted during the 60-day comment period and address them in a Final
Rule.
D. Severability
The provisions of this interim final rule are separate and
severable from one another. If any provision is stayed or is held to be
invalid or unenforceable by its terms, or as applied to any person or
circumstance, it is SBA's intention that the remaining provisions of
the interim final rule will remain in effect.
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 (including an extension of the original comment period),
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.
[[Page 7637]]
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. Although not legally required, the additional opportunity to
comment on the interim final rule is desirable given the level of
interest in the proposed changes and the recommendation by the Office
of Advocacy for additional outreach to affected parties.
SBA invites public comment on this interim final rule and will
consider amendments to the rule based on comments submitted during the
60-day comment period. SBA will address any comments through the
publication of a Final Rule.
Compliance With Executive Orders 12866, 13563, 13771, 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 112866
As referenced above, the Office of Management and Budget (OMB) has
determined that this interim final rule is a ``significant'' rulemaking
for the purposes of Executive Order 12866. Accordingly, the next
section contains SBA's Regulatory Impact Analysis. However, this is not
a major rule under the Congressional Review Act, 5 U.S.C. 800.
Regulatory Impact Analysis
1. Is there a need for this regulatory action?
The primary objective of this interim final rule is to incorporate
into the regulations governing the 7(a) Loan Program the requirements
specifically applicable to the SBA Express and Export Express Loan
Programs in order to provide additional clarity for SBA Express and
Export Express Lenders. Congress has authorized SBA to permit qualified
lenders to make SBA Express and Export Express loans using, to the
maximum extent practicable, their own analyses, procedures, and
documentation. It is necessary to provide clear and succinct regulatory
guidance for Lenders to encourage participation in extending these
smaller dollar loans, and to enable these Lenders to extend credit with
confidence in their ability to rely on payment by SBA of the guaranty,
if necessary.
The Small Business 7(a) Lending Oversight Reform Act of 2018 (Pub.
L. 115-189) was signed into law on June 21, 2018. As part of this
legislation, Congress has authorized the Agency to direct the methods
by which Lenders determine whether a borrower is able to obtain credit
elsewhere. SBA is implementing that legislation in a separate
rulemaking, but in this interim final rule SBA is reinstating a
personal resources test in an effort to provide clear direction to SBA
Lenders for analyzing whether a borrower has credit available elsewhere
on reasonable terms from non-Federal, non-state, non-local, or
alternative sources. Many SBA Lenders expressed confusion and sought
guidance from SBA on how to adequately determine whether a small
business had access to credit elsewhere based on personal liquid
assets. This interim final rule will provide a bright-line test to
assist SBA Lenders in analyzing the resources of individuals and
entities that own 20 percent or more of the Applicant business in order
to determine if any of the owners have liquid assets available that can
provide some or all of the desired financing.
The statutory changes in the Consolidated Appropriations Act of
2018 (Pub. L. 115-141) regarding the Microloan Program require
amendments to existing regulations for the percentage of grant funds
that may be used by the Microloan Intermediary for marketing,
managerial, and technical assistance to prospective Microloan
borrowers. Existing regulations must be revised as proposed to reflect
the statutory changes.
Further, the Agency believes it needs to streamline Loan Program
Requirements and reduce regulatory burdens to facilitate robust
participation in the business loan programs that assist small U.S.
businesses, particularly those small businesses in underserved markets.
For that reason, SBA has modified regulatory provisions related to
allowable fees that a Lender or an Agent may collect from an Applicant
for financial assistance. It is clear to the Agency, based on results
from reviews conducted by OCRM, public comments received in response to
the proposed rule, and technical assistance requests received by SBA
from SBA Lenders and Agents, that confusion is widespread across the
industry regarding what fees Agents and Lenders may charge to an
Applicant. In this interim final rule, SBA is simplifying the
regulations applicable to Agents, as well as the fees that Agents and
Lenders may charge to Applicants for assistance with obtaining an SBA-
guaranteed loan, in order to provide more clarity to the industry.
The interim final rule also revises the affiliation principles
applicable to the Business Loan, Disaster Loan, and Surety Bond
Guarantee Programs in order to simplify and clarify the determination
of eligibility of a business as a small concern and to ensure that only
small independently owned and operated businesses benefit from SBA's
small business financial assistance programs.
SBA does not expect the proposed changes to change loan volume
significantly. Overall program participation is driven by broad
economic activity, making it difficult to attribute increased or
decreased loan volume to a particular cause. The overriding public
policy objective of the rule changes is the creation of economic
efficiencies and compliance in program participation. The codification
of the rules for delivering SBA Express and Export Express loans will
provide Lenders with confidence as the requirements will be found in
regulation as opposed to Agency procedural guidance. The inclusion of
the SBA Express and Export Express guidance may positively impact small
loan volume.
SBA expects that the additional detailed clarity on the
requirements for program delivery in the subject areas of this rule
would increase understanding for program users, decrease time spent
qualifying small business Applicants, and result in a reduction of
overall cost to participants.
The interim final rule changes for the codification of the SBA
Express and Export Express Loan Program Requirements and for the
Personal Resources Test impact the Lenders directly, and would not be
considered a transfer to or from Applicants as the Lender currently
bears responsibility for determining eligibility. The interim final
rule changes relative to Lender and Agent fees reduce or limit the fees
a small business Applicant may expend to gain access to the loan
guarantee programs, which benefits the Applicant. This also potentially
transfers an economic benefit between Lenders and Agents because
Lenders, given the authority to charge an SBA-controlled fee to
Applicants, may choose to provide application services through either
internal lending staff or outsourced Agents. In either case the
Lender's decision is driven by cost effectiveness and efficiency.
The interim final rule changes for affiliation determinations
provides detailed guidance for the Lender charged with determining the
size of a small business Applicant. This currently is and will continue
to be the responsibility of the Lender, who will benefit from the time
savings in making the eligibility determination. The benefits further
transfer or inure to the Applicant via streamlined loan
[[Page 7638]]
processing. SBA believes that the interim final rule presents the
optimum net benefit to the overall affected population of small
entities (i.e., small business Applicants, small Lenders, and small
Agents). For instance, receipt and consideration of the public comments
prompted SBA to adopt a more generous fee structure than was originally
proposed.
Baseline Scenario
The interim final rule will provide clear and streamlined guidance
to loan program participants. In order to estimate the net economic
impact of this interim final rule on stakeholders, an approximation of
the change in behavior of Applicants, SBA Lenders, and Agents is
needed. The effects of the interim final rule are estimated relative to
a baseline, and where the regulatory changes are required by statutory
requirements, the analysis uses a pre-statutory baseline to determine
impact in the analysis. The baseline represents the state of SBA's
financial assistance programs in the absence of this final regulatory
action.
Based on lender oversight reviews by SBA's OCRM, fees charged to
Applicants by Agents have increased dramatically in the past few years
(although the total reported number of loans that reported using an
Agent is only 2.78 percent of total approved 7(a) loans over a five
year period) and some Applicants have been charged fees by Lenders and
Agents that are not permissible under SBA's current Loan Program
Requirements. In addition, OCRM has observed that there is confusion by
both Lenders and Agents as to who can charge fees to an Applicant, for
which services, and how much can be charged. In the absence of this
final regulatory action, the cost of financial assistance may continue
to rise for those loan Applicants who opt to use the services of
Agents, including Packagers and other similar providers, despite free
and low-cost assistance and resources made available by SBA. The costs
incurred by OCRM when conducting lender oversight reviews involving
issues related to fees also would continue to rise, with some of those
costs being passed on to Lenders.
In addition, many SBA Lenders struggle with making the
determination of credit elsewhere and identifying when an Applicant's
owners have excess personal liquidity that could affect their
eligibility for SBA financial assistance. SBA has identified some
examples of loans made to businesses with owners who have extremely
high amounts of personal liquid assets. Without this final regulatory
action, SBA Lenders and small businesses may continue to take advantage
of government/taxpayer funded financial assistance programs and SBA
Lenders may continue to erroneously make loans to businesses that do
not meet SBA's lending criteria.
Finally, under the current affiliation rules, some businesses have
been considered to be small when they should have been combined as
affiliates and may, in fact, be large. This has allowed some businesses
that are not considered ``small businesses'' to receive SBA financial
assistance. SBA's Office of Inspector General (OIG) published a report
in March 2018 on SBA 7(a) Loans Made to Poultry Farmers and recommended
that the Agency review the arrangements between integrators and growers
and establish and implement controls, such as supplemental guidance, to
ensure that SBA loan specialists and lenders make appropriate
affiliation determinations. SBA reviewed its regulations and determined
that the regulations should be modified to clarify the meaning of
affiliation in the context of contractual relationships, so that only
independently owned and operated small businesses continue to receive
SBA financial assistance. In the absence of this final regulatory
action, this needed clarification will not be provided.
2. What are the potential benefits and costs of this regulatory action?
Benefits to SBA Lenders, Applicants, and Agents
The greatest benefit from this interim final rule to all program
participants, including SBA Lenders, Applicants, and Agents, is clear
regulatory guidance and bright-line tests to increase efficiency. SBA
anticipates that incorporating the SBA Express and Export Express Loan
Programs into the regulations governing the 7(a) Loan Program may
result in an increase in the number of participating Lenders and loans
in both programs, which would mean increased access to capital for
small businesses. SBA Lenders will be provided with bright-line tests
for making certain determinations about eligibility which will
eliminate the ambiguity and uncertainty that has hindered some SBA
Lenders in recent years. Reinstating the personal resources test, in
particular, will aid SBA Lenders in making the determination of an
Applicant's access to credit elsewhere, which will increase
efficiencies and reduce the efforts currently required by the Agency to
provide assistance due to the subjectivity of the analysis in the prior
rule. SBA Lenders will be more confident in their loan making with a
better understanding of SBA's expectations. SBA estimates that the
reinstatement of the personal resources test at section Sec. 120.102
will save SBA Lenders a total of approximately 67,000 hours annually,
monetized to $2,456,890 per year.
Table 1--Estimated Annual Benefit to SBA Lenders From Personal Resources Test
----------------------------------------------------------------------------------------------------------------
Number of Average time
expected saved per
Outcomes occurrences occurrence Total benefit
per year (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in determining credit 67,000 1-2 67,000-134,000 hours, $2,456,890-
elsewhere. $4,913,780.
--------------------------------------------------------------------
Estimated Annual Benefit............... .............. .............. 67,000-134,000 hours, $2,456,890-
$4,913,780.\1\
----------------------------------------------------------------------------------------------------------------
\1\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
an Applicant's access to credit elsewhere. SBA calculated the average of the timeframes provided to estimate
the range of time the personal resources test will save SBA Lenders, on average, in their analysis. Since each
loan is required to address an Applicant's access to credit elsewhere, the number of expected occurrences per
year was estimated by using the average number of 7(a) and 504 loans guaranteed in the most recent five fiscal
years (2014-2018), according to SBA's 7(a) and 504 loan data reports. The number of expected occurrences per
year was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The cost
benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as reported
by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).
[[Page 7639]]
The clear limitations on fees an Agent or Lender may charge to an
Applicant leave no question as to what fees SBA considers to be
reasonable. Further, the revisions to the definitions of Agents and
Associates of Lenders and CDCs also will provide clarity as to whom SBA
considers an Agent and what services the different types of Agents may
perform and be compensated for by the Applicant or the SBA Lender. This
will save SBA Lenders and Agents time in making these determinations
for each loan. In addition, 7(a) Lenders will no longer be required to
itemize fees charged to Applicants when the amount is over $2,500,
which also will save these Lenders time. Applicants will benefit from
protection against impermissible or unreasonable costs for assistance
with obtaining an SBA-guaranteed loan and may become more aware of the
free and low-cost resources provided by the Agency.
Table 2--Estimated Annual Benefit to SBA Lenders and Agents From Fee Limits
----------------------------------------------------------------------------------------------------------------
Number of Average time
expected saved per
Outcomes occurrences occurrence Total benefit
per year (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency for SBA Lenders when 67,000 0.5-1 33,500-67,000 hours, $1,228,445-
determining permissibility and $2,456,890.
reasonableness of fees.
Increased efficiency for Agents determining 1,605 0.5-1 803-1,605 hours, $29,446-$58,855.
permissibility and reasonableness of fees.
Increased efficiency for 7(a) Lenders no 60,951 0.5-1 30,476-60,951 hours, $1,117,555-
longer required to itemize fees. $2,235,073.
--------------------------------------------------------------------
Estimated Annual Benefit............... .............. .............. 64,779-129,556 hours, $2,375,446-
$4,750,818.\2\
----------------------------------------------------------------------------------------------------------------
\2\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
the reasonableness and permissibility of all fees charged to an Applicant for assistance with obtaining an SBA-
guaranteed loan. SBA calculated the average of the timeframes provided to estimate the range of time SBA
Lenders will save, on average, in determining permissible and reasonable fees with the bright-line tests
included in this interim final rule, which SBA estimates would be the same for an Agent. The number of
expected occurrences per year for SBA Lenders is estimated based on the average number of 7(a) and 504 loans
guaranteed in the most recent five fiscal years (2014-2018), according to SBA's 7(a) and 504 loan data
reports. The total number of guaranteed loans is used, versus the number of loans identified to have charged
fees as discussed in the preamble of this rule, because SBA Lenders must review every loan application to
determine whether any fees were charged to an Applicant and, if so, whether the fees are permissible and
reasonable. Because Agents are not involved in every SBA-guaranteed loan, the number of expected occurrences
per year for Agents is estimated based on averaging the total number of loans identified to have used an Agent
(other than the participating Lender) in fiscal years 2013-2017. The number of expected occurrences per year
for 7(a) Lenders no longer being required to itemize fees is based on the average number of 7(a) loans
guaranteed over the most recent five fiscal years. The number of expected occurrences per year for each
outcome was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The cost
benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as reported
by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).
Finally, by modifying the principles of affiliation, the Agency and
SBA Lenders will be better able to uphold the Agency's statutory
obligation to provide financial assistance only to businesses
determined to be small. Further, SBA Lenders will be provided with
assistance from the Agency in making determinations of affiliation for
businesses with certain types of contractual relationships, such as
poultry farmers, which will provide additional needed clarity with
regard to affiliation in the financial assistance programs.
Table 3--Estimated Annual Benefit to SBA Lenders and Sureties From Modified Principles of Affiliation
----------------------------------------------------------------------------------------------------------------
Number of Average time
expected saved per
Outcomes occurrences occurrence Total benefit
per year (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in determining 77,000 2-4 154,000-308,000 hours, $5,647,180-
affiliation. $11,294,360.
--------------------------------------------------------------------
Estimated Annual Benefit............... .............. .............. 154,000-308,000 hours, $5,647,180-
$11,294,360.\3\
----------------------------------------------------------------------------------------------------------------
\3\ SBA arrived at this estimate by inquiring with various Lenders as to the average time required to determine
affiliation. SBA calculated the average of the timeframes provided to estimate the range of time SBA Lenders
will save, on average, in determining affiliation with the guidance provided in this interim final rule. Since
an affiliation determination must be made for each application for SBA financial assistance, the number of
expected occurrences per year for SBA Lenders and Sureties was estimated by using the average number of 7(a)
and 504 loans and the average number of Bid and Final Bonds guaranteed during the most recent five fiscal
years (2014-2018), according to SBA's 7(a) and 504 loan data reports and information on surety bonds entered
into SBA's Capital Access Finance System. The total number of expected occurrences for loans and surety bonds
per year was multiplied by the average time saved per occurrence to estimate the total hourly benefit. The
cost benefit was estimated by multiplying the hours saved by the mean hourly wage for a loan officer, as
reported by the U.S. Department of Labor's Bureau of Labor Statistics as of May 2018 ($36.67).
SBA expects these benefits to be realized immediately upon
enactment of the interim final rule and should remain the same each
year thereafter, subject to changes in number of loans and hourly
rates.
Benefits to SBA
Like the program participants, SBA will benefit from the clear
regulatory guidance and bright-line tests included in this interim
final rule, especially when performing lender oversight activities.
OCRM will realize increased efficiencies in conducting loan file
reviews of SBA Lenders. With the reinstatement of the personal
resources test, clear limitations on fees an Agent or Lender may charge
to an Applicant, revised definitions of Agents and Associates of
Lenders and CDCs, and simplified affiliation principles, SBA has
removed the subjectivity of a
[[Page 7640]]
Lender's assessment of these issues, which will improve SBA Lenders'
compliance and will allow OCRM to develop more efficient methods of
testing SBA Lenders' compliance. In addition, the removal of the
requirement that a Lender itemize fees charged to an Applicant when the
fee is over $2,500, also will reduce the burden on OCRM of reviewing
these additional documents.
Table 4--Estimated Annual Benefit to SBA From Interim Final Rule
----------------------------------------------------------------------------------------------------------------
Number of Average time
expected saved per
Outcomes occurrences occurrence Total benefit
per year (hours)
----------------------------------------------------------------------------------------------------------------
Increased efficiency in reviewing credit 2,000 0.25-0.5 500-1,000 hours, $18,375-$36,750.
elsewhere assessment.
Increased efficiency in reviewing fees 1,300 0.5-1 650-1,300 hours, $23,888-$47,775.
charged to Applicants.
Increased efficiency in reviewing Lender's 2,000 0.25-0.5 500-1,000 hours, $18,375-$36,750.
affiliation determination.
--------------------------------------------------------------------
Estimated Annual Benefit............... .............. .............. 1,650-3,300 hours, $60,638-
$121,275.\4\
----------------------------------------------------------------------------------------------------------------
\4\ SBA developed this estimated annual benefit based on an estimate from OCRM on the range of time that the
guidance and bright-line tests included in the interim final rule will save a Financial Analyst, on average,
in reviewing each relevant element of an SBA Lender's analysis during OCRM-conducted loan file reviews. The
number of expected occurrences per year is based on the approximately 2,000 loan files reviewed by OCRM
annually. The SBA Lender is required to address credit elsewhere and affiliation on every loan, but fees are
not charged in connection with every loan. OCRM estimates that in approximately 65 percent of the 2,000 loans
reviewed annually, OCRM identifies an issue related to fees charged to Applicants by SBA Lenders and/or
Agents, including underreporting, inaccurate reporting, or impermissible fees. The number of expected
occurrences per year for each outcome was multiplied by the average time saved per occurrence to estimate the
total hourly benefit. The cost estimate was obtained by multiplying the hourly rate of a GS-13, Step 1 ($36.75
per hour) by the number of expected occurrences per year and the average time saved per occurrence.
SBA expects these benefits to be realized immediately upon
enactment of the rule and should remain the same each year thereafter,
subject to changes in the number of loan files reviewed and hourly
rates.
Costs
Costs to SBA Lenders, Applicants, and Agents
For purposes of this Regulatory Impact Analysis (RIA), the only
costs to program participants and relevant stakeholders necessary to
comply with the interim final rule are administrative costs.
Administrative costs considered include estimations on reading and
interpreting the regulation, developing and revising internal policies
and procedures, and training. It is noted that program participants are
presumed to incur such administrative costs continuously in order to
maintain familiarity with SBA Loan Program Requirements, as required by
13 CFR 120.180, and to remain in good standing with SBA as defined in
13 CFR 120.420(f). The Table below shows the administrative costs SBA
has estimated that are attributable to this specific rule, which are
expected to occur mainly in the first year of implementation, decrease
by half in the second year, and be eliminated by the third year.
Table 5--Estimates of Administrative Compliance Costs to SBA Lenders and Agents
----------------------------------------------------------------------------------------------------------------
Number of SBA
Amount of Frequency for lenders/
time required Value of time first year agents Total cost
(hours) affected
----------------------------------------------------------------------------------------------------------------
Read and interpret the 2-3 $36.67 5-7 3,500 35,000-73,500
regulation. hours,
$1,283,450-$2,6
95,245.
Develop or Revise Internal 5-7 36.67 5-6 3,500 87,500-147,000
Policies and Procedures. hours,
$3,208,625-$5,3
90,490.
Training...................... 5-8 36.67 10-12 3,500 175,000-336,000
hours,
$6,417,250-$12,
321,120.
-----------------
Estimated First Year .............. .............. .............. .............. 297,500-556,500
Administrative Costs. hours,
$10,909,325-$20
,406,855. \5\
----------------------------------------------------------------------------------------------------------------
\5\ SBA developed the estimate for the administrative costs in the first year of the interim final rule based on
the approximate number of active SBA Lenders and Agents. Although approximately 4,500 Lenders have executed
agreements to participate as a 7(a) Lender, over the past two fiscal years, the average number of active
Lenders has totaled only 1,958. (A 7(a) Lender is considered to be ``active'' if it has approved at least one
7(a) loan in that fiscal year.) SBA estimates that only those Lenders actively participating in the program
will actually be affected by the costs of this interim final rule since the estimated costs are strictly
administrative. The number of SBA Lenders and Agents affected includes approximately 2,474 active SBA Lenders
(including approximately 2,061 active 7(a) Lenders, 213 CDCs, 135 Microloan Intermediaries, 33 ILP
Intermediaries, and 32 Sureties), plus approximately 1,018 Agents identified as having conducted business with
SBA during fiscal years 2013-2017, rounded up to the next hundred to account for trade associations, and other
resource partners. SBA estimates that on average between 5-7 employees at each SBA Lending institution or
Agent entity may spend between 2-3 hours each reading and interpreting the rule in the first year and that
these employees are compensated at the mean hourly wage for a loan officer, as reported by the U.S. Department
of Labor's Bureau of Labor Statistics ($36.67). SBA also estimates that 5-6 employees on average may be
involved in developing or revising the internal policies of the respective program participant and would
likely spend between 5-7 hours updating policies specifically related to this interim final rule. Finally, SBA
estimates that between 10-12 employees on average for each program participant would spend between 5-8 hours
on training related to updates and modifications made by this interim final rule. Applicants are not included
as an entity affected by the administrative costs of the rule, as the Applicant relies on the SBA Lender or
third-party Agent to inform them of SBA policy and procedure.
Costs to SBA
There are no additional costs to the Agency required to achieve the
outcomes of the rule. The administrative costs considered for the loan
program participants, including reading and interpreting the
regulation, developing and revising internal policies and procedures,
and training are already inherent requirements of SBA employees and
therefore, the publication of this interim final rule has no additional
bearing on the responsibilities of relevant SBA
[[Page 7641]]
employees involved in the Agency's loan programs. Further, SBA does not
anticipate any additional costs related to implementing the second
exception to the economic-dependence affiliation rule because the
Agency expects to absorb any costs related to reviewing integrator
agreements by using existing SBA employees to conduct the reviews.
Transfers
SBA has also identified a transfer of costs, due to the limits on
permissible fees charged to an Applicant by Agents and Lenders, as well
as the prohibition against Agents providing services to both an
Applicant and an SBA Lender in connection with the same SBA loan
application, which was previously permitted under limited
circumstances. These limitations will provide a cost savings to
Applicants; however, the Agency acknowledges that this savings to the
Applicant will result in a cost (``transfer'') to the small number of
Agents and Lenders that reported charging fees in excess of the limits
imposed by this interim final rule. (As discussed in the Regulatory
Flexibility Act section below, the excess fees charged by this small
number of Agents and Lenders also are in excess of the current limits
on fees and are therefore not in compliance with current SBA Loan
Program Requirements.)
Table 6--Estimated Transfers of Costs
----------------------------------------------------------------------------------------------------------------
Number of
expected Average money
Outcomes occurrences saved per Total transfer
per year occurrence
----------------------------------------------------------------------------------------------------------------
Elimination of fees exceeding set limits........................ 746 $2,380.75 $1,776,042.63
---------------
Estimated Annual Transfer....................................... .............. .............. \6\
1,776,042.63
----------------------------------------------------------------------------------------------------------------
\6\ SBA arrived at this estimate based on the total number of loans guaranteed between FY2013 and FY2017 that
reported fees charged to an Applicant by an Agent or Lender over the limits imposed in this interim final rule
and the total amount that those loans exceeded the imposed limit for each threshold.
Below is a table showing an estimation of the total costs and
benefits of the rule over three years:
Table 7--Estimated Undiscounted Benefits and Costs Schedule
----------------------------------------------------------------------------------------------------------------
Benefits Costs
----------------------------------------------------------------------------------------------------------------
Year 1 Year 1
----------------------------------------------------------------------------------------------------------------
Low estimate High estimate Low estimate High estimate
----------------------------------------------------------------------------------------------------------------
267,429 hours........................ 534,856 hours.......... 297,500 hours.......... 556,500 hours.
$9,806,754........................... $19,613,433............ $10,909,325............ $20,406,855.
----------------------------------------------------------------------------------------------------------------
Year 2 Year 2
----------------------------------------------------------------------------------------------------------------
267,429 hours........................ 534,856 hours.......... 148,750 hours.......... 278,250 hours.
$9,806,754........................... $19,613,433............ $5,454,662.50.......... $10,203,427.50.
----------------------------------------------------------------------------------------------------------------
Year 3 Year 3
----------------------------------------------------------------------------------------------------------------
267,429 hours........................ 534,856 hours.......... 0 hours................ 0 hours.
$9,806,754........................... $19,613,433............ $0..................... $0.
----------------------------------------------------------------------------------------------------------------
Below is a table showing the annualized values of the estimated
costs and cost savings, as of 2016, over an infinite horizon.
Table 8--Annualized Values as of 2016 Over an Infinite Horizon
----------------------------------------------------------------------------------------------------------------
Primary estimate
---------------------------------------------------------------
3% Discount rate 7% Discount rate
---------------------------------------------------------------
Low estimate High estimate Low estimate High estimate
----------------------------------------------------------------------------------------------------------------
Annualized Cost Savings......................... $9,806,751 $19,613,433 $9,806,754 $19,613,433
Annualized Costs................................ 485,479 908,132 1,077,116 2,014,841
---------------------------------------------------------------
Annualized Net Cost Savings..................... 9,321,272 18,705,301 8,729,638 17,598,592
----------------------------------------------------------------------------------------------------------------
[[Page 7642]]
3. What are the alternatives to this interim final rule?
SBA considered various alternatives to proceeding with the
preferred option of promulgating this interim final rule. The first and
most stringent alternative would be to adopt the rule as proposed. SBA
chose not to pursue this option due to the concerns expressed by the
industry and general public. Many commenters expressed concern that
parts of the proposed rule may cause unintended consequences that would
make it more difficult for Applicants seeking SBA loans of $350,000 or
less. Specifically, these commenters referred to the limits set for the
fees Agents and Lenders may charge to an Applicant for loans of this
size, and the maximum amount of personal liquidity that owners of 20
percent or more of such Applicants may retain, rather than inject into
the project as additional equity in accordance with the proposed
personal resources test. Also, several commenters expressed concern
that the proposed changes to the principles of affiliation may render
certain industries, like poultry farmers, ineligible for SBA financial
assistance. Due to all of these concerns expressed by commenters, SBA
has modified the interim final rule in several respects, including
increasing the amount of personal liquidity that owners of 20 percent
or more of a small business Applicant may retain, increasing the fees
that a Lender or an Agent may charge a small business Applicant for
assistance with obtaining an SBA-guaranteed loan of $350,000 or less,
and revising the principles of affiliation to prevent any unintended
consequences for certain industries, such as farmers. SBA also has
provided an extended period for Lenders and Agents to comply with the
fee provisions in Sec. Sec. 103.5(b) and 120.221(a).
If the rule were finalized as proposed, the personal liquidity
limits would have been more restrictive than the limits in the interim
final rule. Under the interim final rule, fewer individuals will be
required to inject excess liquid assets for small loans, which is a
change (or transfer) that favors small business Applicants.
The original proposed rule included fee limitations for Lenders of
$2,500 for loans up to and including $350,000; and $5,000 for loans
over $350,000. Per the comments received and based on the costs to
deliver small dollar loans, the interim final rule increases the fee
limitation for loans up to and including $350,000 to $3,000. This
change will not significantly transfer benefits or costs for the
following reasons: (1) Increased use by Applicants of SBA's no cost
Lender Match to connect them to SBA Lenders; (2) increased development
by SBA Lenders of in-house electronic application systems to better
manage service and costs; and (3) continued innovation in the use of
scoring and other data. All of these evolving technological
improvements expand user options and level the playing field for
services and costs.
If the rule were finalized as originally proposed, the change to
limit fees Lenders may charge Applicants on small loans would have
impacted 2,944 loans from Lenders who exceeded the $2,500 proposed cap
on loans guaranteed between FY2013 and FY2017. By increasing the
permissible fee from $2,500 to $3,000 on loans of $350,000 and less in
the interim final rule, the number of loans where the Lender fee
exceeded the cap was reduced to 1,731, resulting in lower economic
impact to Lenders making small dollar loans.
Table 9 demonstrates the estimated reduction in the number of loans
and dollars considered in excess of the Lender fee limitation as a
result of increasing the proposed Lender fee limitation from $2,500 to
$3,000 for loans of $350,000 or less.
Table 9--Comparison of the Estimated Impact of the Limitation on the Fee Paid by the Applicant to the Lender in
the Proposed Rule vs. the Interim Final Rule *
----------------------------------------------------------------------------------------------------------------
Interim final
Proposed rule rule Difference
----------------------------------------------------------------------------------------------------------------
Loans with Excessive Lender Fees................................ 2,944 1,731 (1,213)
Dollars in Excess of Fee Limits................................. $5,813,734 $3,419,091 ($2,394,653)
Average Amount in Excess of Fee Limit per Loan.................. $1,974.77 $1,975.21
----------------------------------------------------------------------------------------------------------------
* As the fee limitation for loans over $350,000 did not change, this table only includes those loans where
Lenders charged fees in excess of the fee limitations on loans of $350,000 or less.
SBA originally proposed limiting total fees that an Agent(s) can
charge an Applicant to a maximum of 2.5 percent of the loan amount or
$7,000, whichever is less, for loans up to and including $350,000; a
maximum of 2 percent or $15,000, whichever is less, for loans over
$350,000 up to and including $1,000,000; and a maximum of 1.5 percent
or $30,000, whichever is less, for loans over $1,000,000. As a result
of the comments received and to limit the impact of the interim final
rule on small Agents, SBA increased the limitations and thresholds for
total fees that an Agent(s) may charge an Applicant to a maximum of 3.5
percent or $10,000, whichever is less, for loans up to $500,000; a
maximum of 2 percent or $15,000, whichever is less, for loans of
$500,001 to $1,000,000; and 1.5 percent or $30,000, whichever is less,
for loans over $1,000,000.
The changes in the interim final rule result in the total number of
loans in excess of the fee limitations being reduced from 3,060 to
2,729 and the total dollars in excess of the fee limitations being
reduced from $7,217,868 to $2,688,406. Table 10 demonstrates the
estimated reduction in the number of loans and dollars considered in
excess of the Agent fee limitation as a result of increasing the
proposed fee limitation.
Table 10--Comparison of the Estimated Impact of the Limitation on the Fee Paid by the Applicant or the Lender to
an Agent(s) in the Proposed Rule vs. the Interim Final Rule for Loans of $1,000,000 and Less **
----------------------------------------------------------------------------------------------------------------
Interim final
Proposed rule rule Difference
----------------------------------------------------------------------------------------------------------------
Loans with Excessive Agent Fees................................. 3,060 2,729 (331)
Dollars in Excess of Fee Limits................................. $7,217,868 $2,688,406 ($4,529,462)
[[Page 7643]]
Average Amount in Excess of the Fee Limit per Loan.............. $2,359 $985
----------------------------------------------------------------------------------------------------------------
** As no changes were made to the Agent fee limitation for loans over $1,000,000 from the proposed rule to the
interim final rule, the loans over $1,000,000 with excessive Agent fees were not included in this table.
The second, less stringent alternative considered was to make no
regulatory change but strictly enforce existing SBA Loan Program
Requirements. Of the major issues commented upon, SBA has existing
mechanisms to enforce compliance with the credit elsewhere test, the
fees Lenders and Agents are permitted to charge an Applicant, including
when Lenders or Agents must refund amounts deemed unreasonable by SBA,
and proper application of the affiliation principles applicable to the
business loan programs. For example, with regard to fees charged to an
Applicant, SBA has the authority to require fees deemed unreasonable by
SBA to be refunded to a Borrower by a Lender or an Agent. In addition,
SBA's OCRM can cite SBA Lenders during lender oversight reviews and
take enforcement action against the SBA Lender, when appropriate.
Further, SBA may suspend or revoke an Agent's privilege to conduct
business with SBA. With regard to determining eligibility of an
Applicant based on affiliation and credit available elsewhere, SBA may
decline to approve applications that do not meet SBA Loan Program
Requirements or, for loans made under a Lender's delegated authority,
SBA may deny liability on the guaranty if the Lender did not make an
acceptable determination for 7(a) loans or, for 504 loans, decline to
close the loan, potentially at considerable expense to the small
business Applicant. However, this option does not resolve the confusion
that SBA Lenders and Agents have on current policy and procedure and
would require an additional investment in Agency resources to rely on
OCRM or the loan processing or guaranty purchase centers to rectify
non-compliance after the fact. SBA has determined that it is more
beneficial to all parties involved to provide clarity to these rules so
that SBA Lenders and Agents can better understand and comply with SBA's
Loan Program Requirements.
In consideration of the alternatives described above, SBA has
determined that the most preferable option is to enact the rule with
several modifications. The interim final rule will, among other things,
provide bright-line tests and clear guidance for SBA Lenders to
determine what fees SBA considers to be reasonable and permissible and
how to properly analyze an Applicant's personal liquidity as part of
the analysis on credit available elsewhere. The interim final rule also
will clarify the principles of affiliation to ensure that SBA financial
assistance is not being provided to businesses that are not actually
small due to affiliation with larger corporations, while ensuring that
certain industries are not adversely impacted. Finally, the interim
final rule will make minor corrections and updates to Loan Program
Requirements to enhance program use.
Executive Order 113563
A description of the need for this regulatory action and benefits
and costs associated with this action, including possible
distributional impacts that relate to Executive Order 13563, are
included above in the Regulatory Impact Analysis under Executive Order
12866.
The Business Loan Programs operate through the Agency's lending
partners, which are 7(a) Lenders for the 7(a) Loan Program,
Intermediaries for the Microloan Program and ILP Program, and Third
Party Lenders and CDCs for the 504 Loan Program. SBA's SBG Program
operates through Surety Bond Companies. SBA's Business Disaster Loan
Programs are delivered directly by SBA, without the use of any
intermediaries. The Agency held two public forums in the summer of 2018
to engage with stakeholders related to poultry lending. With respect to
the 7(a) and 504 Loan Programs generally, SBA also met with trade
association board members and program participants at industry
conferences in the Fall of 2018 through Spring of 2019, which allowed
it to reach representatives of trade associations and hundreds of its
lending partners, from which it gained valuable insight regarding the
loan programs. The Agency's outreach efforts to engage stakeholders
before proposing this rule was extensive and concluded with the
extended comment period.
Executive Order 13771
This interim final rule is considered an E.O. 13771 deregulatory
action. SBA is estimating $12,633,634 in annualized savings for this
rule using a 7% discount rate in perpetuity in 2016 dollars. In
addition, SBA estimates the present value of savings for this rule in
perpetuity to be $180,480,486. Details on the breakdown of the
estimated cost savings of this interim final rule can be found in the
rule's economic analysis.
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 retroactive or preemptive effect.
Executive Order 13132
SBA has determined that this rule 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. Therefore, for
the purposes of Executive Order 13132, SBA has determined that this
rule has no federalism implications warranting preparation of a
federalism assessment.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
SBA has determined that this interim final rule will impose
additional reporting or recordkeeping requirements under the Paperwork
Reduction Act (PRA). Applicants for SBA Express and Export Express
loans, as well as SBA Express and Export Express Lenders, use the same
forms as all other 7(a) loans in order to apply for an SBA-guaranteed
loan. These forms include: SBA Form 1919, Borrower Information Form;
SBA Form 1920, Lender's Application for Guaranty; SBA Form 1971,
Religious Eligibility Worksheet (for those businesses that may have a
religious aspect); and SBA Form 2237 (to request modifications to an
approved loan). These forms are all OMB-approved forms under OMB
Control
[[Page 7644]]
number 3245-0348 and, as discussed below, some of the forms will need
to be revised based on the changes in this interim final rule.
SBA Form 1920, Lender's Application for Guaranty; SBA Form 2450,
Eligibility Information Required for 504 Submission (Non-PCLP) (OMB
Control number 3245-0071); and SBA Form 2234 (Part C), Eligibility
Information Required for 504 Submission (PCLP) (OMB Control number
3245-0346) will need to be revised due to the new regulation at Sec.
120.102, which will require SBA Lenders to analyze the personal
resources of certain owners of the Applicant business to determine if
they have liquid assets that can provide some or all of the desired
financing. The change will have a de minimis impact on SBA Lenders
since reviewing the personal resources of the applicant business and
its owners is already part of the analysis SBA Lenders currently
conduct in determining an Applicant's eligibility for SBA financial
assistance under the requirement to ensure that the Applicant does not
have access to credit elsewhere on reasonable terms from non-Federal
sources.
The interim final rule also makes changes that require revisions to
SBA Form 159, Fee Disclosure and Compensation Agreement (OMB Control
number 3245-0201), which is used to collect information from SBA
Lenders and Agents on the fees that they charge to Applicants for
assistance with obtaining an SBA-guaranteed loan. SBA Form 159 is also
used to collect information from SBA Lenders on referral fees that it
pays to Loan Brokers (also known as Referral Agents) in connection with
an SBA-guaranteed loan. The specific revisions to SBA Form 159 would
implement the changes to Sec. Sec. 120.221, 103.4(g), and 103.5 that
limit the amount and types of fees that may be charged to an Applicant.
The revisions to SBA Form 159 will reduce the estimated hour burden for
7(a) Lenders because, under the interim final rule, they will only be
required to disclose the amount charged up to the permissible limit on
SBA Form 159, but will no longer have to itemize fees charged to
Applicants, which is currently required for fees over $2,500. The
revisions will have no material effect on the reporting burden for
Agents. They will continue to report on all fees imposed on Applicants
and provide supporting documentation for fees over $2,500 as they do
now.
The changes to SBA Forms 1920, 2450, 2234 (Part C), and 159 will be
submitted to OMB as part of a broader, comprehensive revision of the
forms that is not affected by this interim final rule but is part of
the Agency's efforts to streamline and simplify the information
collected from Applicants and SBA Lenders.
Finally, this rule puts into the regulations the existing
requirement for SBLCs to submit to SBA for review and approval on an
annual basis the validation of any credit scoring model they are using
in connection with SBA Express and Export Express loans. This reporting
requirement is included in OMB-approved collection, SBA Lender
Reporting Requirements (OMB Approval Number 3245-0365). This
information collection was submitted to OMB for renewal in September
2018 and the renewal was approved by OMB in April 2019. The new
expiration date is April 30, 2022. The regulatory change does not
impact that requirement; it merely codifies the requirement in the
regulation instead of the SOP.
Regulatory Flexibility Act, 5 U.S.C. 601-612
When an agency issues a rulemaking, the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601-612, requires the agency to ``prepare and make
available for public comment a final regulatory analysis'' which will
``describe the impact of the proposed rule on small entities.'' Section
605 of the RFA allows an agency to certify a rule, in lieu of preparing
an analysis, if the proposed rulemaking is not expected to have a
significant economic impact on a substantial number of small entities.
Small entities likely to be affected by this rule include small SBA
Lenders and small Agents who assist small business Applicants with
obtaining SBA-guaranteed financing. SBA Lenders are comprised of 7(a)
Lenders, CDCs, Microloan Intermediaries, ILP Intermediaries, and
Sureties that participate in the SBG Program. Based on SBA's size
standards, SBA has determined that approximately 2,000 of the
approximately 4,500 7(a) Lenders are small, all of the approximately
213 CDCs are small, all of the approximately 135 Microloan
Intermediaries are small, all of the approximately 33 ILP
Intermediaries are small, and 12 of the approximately 32 Sureties that
participate in the SBG Program are small.
SBA does not track or collect information on entities or
individuals serving as Agents, Packagers, or Lender Service Providers
with regard to the NAICS codes or classification of those entities.
Services provided to assist an Applicant in obtaining SBA-guaranteed
financing may be performed by several different types of entities
ranging from individuals who may assist with packaging a loan
application or assisting the Applicant with finding an SBA Lender, to
entities formed for the purpose of providing such assistance, to
attorneys or Certified Public Accountants. All of these different types
of individuals or entities providing assistance to Applicants in
connection with obtaining an SBA-guaranteed loan may be classified
under numerous different NAICS codes. SBA considered NAICS codes that
may apply to these entities for the purpose of estimating the number of
small entities affected by this interim final rule. One possible
classification includes 522310 for ``Mortgage and Nonmortgage Loan
Brokers,'' which is described as being comprised of ``establishments
primarily engaged in arranging loans by bringing borrowers and lenders
together on a commission or fee basis.'' The size standard for this
classification is $7.5 million in annual receipts and according to the
U.S. Census Bureau's 2012 Statistics of U.S. Businesses (SUSB),\3\
6,817 entities classified by this NAICS code are considered small by
SBA's size standards. SBA also considered 522390 for ``Other Activities
Related to Credit Intermediation,'' which is described as being
comprised of ``establishments primarily engaged in facilitating credit
intermediation (except mortgage and loan brokerage; and financial
transactions processing, reserve, and clearinghouse activities)''
because ``loan servicing'' is included as an illustrative example of
this NAICS code. However, based upon the other examples provided, which
include check cashing services, money order issuance services, and
payday lending services, SBA does not believe that NAICS code 522390 is
applicable to the Agents affected by this rule. Because there are no
limitations as to what type of entity may be engaged by an Applicant
for assistance with obtaining SBA financing, it is not reasonable to
estimate the number of affected entities based on NAICS codes, as the
number of entities included in these classifications would far exceed
the number of entities that actually conduct business with SBA and
would not provide a realistic portrayal of the population of small
entities affected by this rule.
---------------------------------------------------------------------------
\3\ Because SBA's size standard for most NAICS codes is based on
annual receipts and U.S. Census Bureau SUSB data by enterprise
receipt size is only collected every five years, 2012 is the most
recent Census data available for use.
---------------------------------------------------------------------------
As an alternative to estimating the number of entities affected
based on NAICS codes, SBA reviewed the Lender-reported data and other
[[Page 7645]]
information gathered by OCRM during lender oversight reviews in fiscal
years 2013 through 2017, which also was used to develop the fee limits
in this interim final rulemaking. Within the 8,025 loans reported to
have used an Agent (other than the participating Lender) to provide
assistance to the Applicant in securing the loan during that time
period, SBA identified 753 unique Agents based on their DUNS Number or
street address. Since SBA has no means of knowing the average annual
receipts of these entities, SBA will conservatively estimate that the
majority or 80 percent of the 753 entities are small. SBA has also
identified approximately 265 entities who have submitted LSP Agreements
for review by SBA. Like the Agents, including Packagers, SBA does not
capture the NAICS classification of these LSPs and therefore is unable
to estimate their annual receipts and the number of which that would be
considered small. Therefore, as indicated above with Agents, SBA will
conservatively estimate that the majority or 80 percent of LSPs are
small. For purposes of the RFA, SBA estimates that approximately 814
(80 percent of 1,018) small entities serving as Agents and LSPs will be
affected by this interim final rule for a total of approximately 3,207
small entities including all small SBA Lenders, Agents, and LSPs.
As described more fully in the RIA above, SBA has determined that
the only costs to program participants and relevant stakeholders
necessary to comply with the interim final rule are administrative
costs. Administrative costs considered include estimations on reading
and interpreting the regulation, developing and revising internal
policies and procedures, and training. To reiterate, although these
costs are estimated here for the purposes of the Regulatory Flexibility
Act, it is important to note that, regardless of new rulemaking,
program participants are presumed to incur administrative costs related
to reading and interpreting SBA Loan Program Requirements, revising and
updating internal policies, and training staff continuously in order to
maintain familiarity with SBA Loan Program Requirements, as required by
13 CFR 120.180, and to remain in good standing with SBA as defined in
13 CFR 120.420(f).
The RIA also identifies an estimated transfer of costs due to the
limits on permissible fees charged to an Applicant by Agents and
Lenders, as well as the prohibition against an Agent providing services
to both an Applicant and an SBA Lender in connection with the same SBA
loan application, which was previously permitted under limited
circumstances. These limitations have been put in place in order to
protect small business Applicants from fees deemed unreasonable by SBA
and will provide a cost savings to small business Applicants. However,
the Agency acknowledges that this savings to the Applicant will result
in a potential loss of revenue to the small number of Agents and
Lenders that reported charging fees in excess of the limits imposed by
this interim final rule that are considered to be small entities. As
noted previously in Section III.C. above, approximately one percent of
the loans guaranteed during fiscal years 2013-2017 reported fees
charged to the Applicant by Lenders and Agents in excess of the revised
maximum fees permitted in this interim final rule. Based on SBA's
analysis of the fees reported on loans guaranteed during that time
frame, SBA estimates that 213 small entities (83 small Lenders and 130
small Agents) \4\ reported charging fees in excess of the limits
imposed in this interim final rule. This represents only 8 percent of
the 7(a) Lenders and Agents that SBA has identified as small (2,000
7(a) Lenders and 602 Agents). Thus, only 8 percent of small Lenders and
small Agents may experience reduced revenue as a result of this interim
final rule. It is important to note that, while some small entities may
experience reduced revenue, the fees that were being charged by these
small entities were not in compliance with current SBA policy.
Additionally, the reduced revenue will be offset at least in part by
the estimated savings the small entities will experience due to
increased efficiency in determining the permissibility and
reasonableness of the fees charged.
---------------------------------------------------------------------------
\4\ Based on SBA's analysis of the loans guaranteed during
FY2013-FY2017, 83 Lenders and 162 Agents reported charging the
Applicant a fee in excess of the limits imposed in this interim
final rule. Although SBA recognizes that more than 50 percent of
7(a) Lenders are not small, for purposes of the RFA, SBA is assuming
that all 83 Lenders are small. As noted above, SBA estimates that 80
percent of Agents are small; therefore, SBA is estimating that 130
of the 162 Agents that reported charging fees in excess of the
limits in this interim final rule are small.
---------------------------------------------------------------------------
To estimate the average annualized cost per small entity, SBA
annualized the sum of all administrative costs plus the estimated
potential loss of revenue (e.g., the total transfer amount of
$1,776,042.63) identified in the RIA over a 10-year period. (See Table
6 in the RIA.) The estimated total annualized costs over 10 years at a
7 percent discount rate range from a low estimate of $2,773,295.70 to a
high estimate of $4,331,035. Dividing the total estimated annualized
costs by the 3,207 estimated small entities affected, the annualized
cost per entity is estimated to be between approximately $864.76 and
$1,350.49. Although SBA is unable to ascertain the NAICS codes of all
types of entities considered to be Agents, SBA used data from the 2012
U.S. Census Bureau's SUSB for NAICS code 522310 for Mortgage and
Nonmortgage Loan Brokers as an example to examine the annualized
compliance cost as a percentage of annual receipts for small entities
classified by this NAICS code. For the purposes of this estimation, SBA
has averaged the high and low estimates of the annualized cost for a
mid-point total of $388 per entity.
Mortgage and Nonmortgage Loan Brokers (NAICS 522310)
[$7.5 Million Size Standard]
----------------------------------------------------------------------------------------------------------------
Average
Firm size (by receipts) annual Annualized Number of Percent of Revenue test
receipts cost per firm firms small firms * (percent)
----------------------------------------------------------------------------------------------------------------
All Firms....................... $1,005,967 $388 7,007 N/A 0.0
Small Firms..................... 549,802 388 6,817 100 0.1
http://www.sba.gov. A final decision will be made by
the appropriate SBA official in accordance with Delegations of
Authority.
* * * * *
PART 121--SMALL BUSINESS SIZE REGULATIONS
0
20. The authority citation for part 121 continues to read as follows:
Authority: 15 U.S.C. 632, 634(b)(6), 662, and 649a(9).
0
21. Amend Sec. 121.301 by:
0
a. Revising paragraph (f)(4);
0
b. Redesignating paragraphs (f)(5) through (7) as paragraphs (f)(7)
through (9), respectively;
0
c. Adding new paragraphs (f)(5) and (6) and revising newly redesignated
paragraph (f)(7).
The revisions and additions to read as follows:
[[Page 7652]]
Sec. 121.301 What size standards and affiliation principles are
applicable to financial assistance programs?
* * * * *
(f) * * *
(4) Affiliation based on identity of interest--(i) General.
Affiliation may arise among two or more individuals or firms with an
identity of interest. Individuals or firms that have identical or
substantially identical business or economic interests (such as close
relatives, individuals or firms with common investments, or firms that
are economically dependent through contractual or other relationships)
may be treated as one party with such interests aggregated. Where SBA
determines that such interests should be aggregated, an individual or
firm may rebut that determination with evidence showing that the
interests deemed to be one are in fact separate.
(ii) Close relatives. Affiliation arises when there is an identity
of interest between close relatives, as defined in Sec. 120.10 of this
chapter, with identical or substantially identical business or economic
interests (such as where the close relatives operate concerns in the
same or similar industry in the same geographic area).
(iii) Common investments. Affiliation arises through common
investments where the same individuals or firms together own a
substantial portion of multiple concerns in the same or related
industry, and such concerns conduct business with each other, or share
resources, equipment, locations, or employees with one another, or
provide loan guaranties or other financial or managerial support to
each other. However, where an SBA Lender has made a determination of no
affiliation under this ground, SBA will not overturn that determination
as long as it was reasonable when made given the information available
to the SBA Lender at the time.
(iv) Economic dependence. Affiliation based upon economic
dependence may arise when a concern derived more than 85 percent of its
receipts over the previous three fiscal years from a contractual
relationship with another concern, unless:
(A) The contract (or contracts) does not restrict the concern in
question from selling the same type of products or services to another
purchaser; or
(B) SBA agrees that the terms of the contract (or contracts) do not
provide the purchaser with control or the power to control the seller.
(5) Affiliation based on the newly organized concern rule in this
paragraph (f)(5). Affiliation may arise where current or former
officers, directors, owners of a 20 percent interest or greater,
managing members, or persons hired to manage day-to-day operations of
one concern organize a new concern in the same or related industry or
field of operation, and serve as the new concern's officers, directors,
owners of a 20 percent interest or greater, or managing members, and
there are direct monetary benefits flowing from the new concern to the
original concern. A concern may rebut such an affiliation determination
by demonstrating a clear line of fracture between the two concerns. A
concern will be considered ``new'' for the purpose of this paragraph
(f)(5) if it has been actively operating for two years or less.
However, where an SBA Lender has made a determination of no affiliation
under this ground, SBA will not overturn that determination as long as
it was reasonable when made given the information available to the SBA
Lender at the time.
(6) Affiliation based on totality of the circumstances. In
determining whether affiliation exists, SBA may consider all
connections between the concern and a possible affiliate. Even though
no single factor is sufficient to constitute affiliation, SBA may find
affiliation on a case-by-case basis where there is clear and convincing
evidence based on the totality of the circumstances. However, where an
SBA Lender has made a determination of no affiliation, SBA will not
overturn that determination as long as it was reasonable when made
given the information available to the SBA Lender at the time.
(7) Affiliation based on franchise agreements. (i) The restraints
imposed on a franchisee by its franchise agreement generally will not
be considered in determining whether the franchisor is affiliated with
an applicant franchisee provided the applicant franchisee has the right
to profit from its efforts and bears the risk of loss commensurate with
ownership. SBA will only consider the franchise agreements of the
applicant concern. SBA will maintain a centralized list of franchise
and other similar agreements that are eligible for SBA financial
assistance, which will identify any additional documentation necessary
to resolve any eligibility or affiliation issues between the franchisor
and the small business applicant.
(ii) For purposes of this section, ``franchise'' means any
continuing commercial relationship or arrangement, whatever it may be
called, that meets the Federal Trade Commission definition of
``franchise'' in 16 CFR part 436.
* * * * *
0
22. Amend Sec. 121.302 by revising paragraphs (a) and (b) to read as
follows:
Sec. 121.302 When does SBA determine the size status of an applicant?
(a) The size status of an applicant for SBA financial assistance is
determined as of the date the application for financial assistance is
accepted for processing by SBA, except for applications under the
Preferred Lenders Program (PLP), the SBA Express Loan Program (SBA
Express), the Export Express Loan Program (Export Express), the
Disaster Loan Program, the SBIC Program, and the New Markets Venture
Capital (NMVC) Program.
(b) For PLP, SBA Express, and Export Express, size is determined as
of the date of approval of the loan by the Lender.
* * * * *
Dated: January 29, 2020.
Jovita Carranza,
Administrator.
[FR Doc. 2020-02128 Filed 2-7-20; 8:45 am]
BILLING CODE 8025-01-P
