Business loans: Certified development companies; fees limitation,

[Federal Register: April 2, 1999 (Volume 64, Number 63)]

[Proposed Rules]

[Page 15942-15944]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr02ap99-13]

SMALL BUSINESS ADMINISTRATION

13 CFR part 120

Business Loan Program

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

SUMMARY: SBA proposes to limit the fees that a Certified Development Company (CDC) can charge a Borrower or Third Party Lender in connection with the processing of a 504 financing to the 1.5 percent processing fee currently authorized by SBA regulations. SBA invites comment on this proposed change and the policies underlying the change.

DATES: Submit comments on or before May 3, 1999.

ADDRESSES: Comments should be mailed to Jane Palsgrove Butler, Associate Administrator for Financial Assistance, Small Business Administration, 409 Third Street, SW, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Michael J. Dowd, 202-205-6660.

SUPPLEMENTARY INFORMATION: SBA proposes to delete Sec. 120.926 (13 CFR 120.926) and amend Sec. 120.971 (13 CFR 120.971) of its regulations. The proposed amendments would clarify SBA's policy prohibiting a CDC from charging a Borrower more than 1.5 percent of the net debenture proceeds for all services related to processing a 504 financing. SBA invites comment on this policy. In addition, SBA proposes to amend its regulations to prohibit a CDC from charging a Third Party Lender for any services related to the processing or packaging of a 504 financing. SBA also invites comment on this proposed policy change.

Before March 1, 1996, the fees that SBA permitted a CDC to charge a Borrower for services related to a 504 financing were contained in SBA's regulations, 13 CFR 108.503-6. In addition to a fee from the Borrower of up to 1.5 percent of the net debenture proceeds to cover CDC costs for loan packaging, processing, and non-legal staff functions, the regulations permitted a CDC to charge the Borrower or Third-Party Lender an additional fee of up to 1.5 percent of the third party financing for services actually rendered by the CDC under a written agreement.

On December 15, 1995, in response to directives from the President for Federal agencies to streamline their regulations, SBA published proposed regulations (60 FR 64356) which consolidated parts 108, 116, 120, 122, and 131 of its regulations into a revised part 120. Former Sec. 108.503-6 (except paragraph (c)) became Sec. 120.971 in the proposed regulations under the heading ``Post-closing fees paid by Borrower.'' Proposed Sec. 120.971 listed the fees that a CDC could charge a Borrower in connection with a 504 financing. Paragraph 108.503-6(c) became paragraph 120.961(b) in the proposed regulations. Proposed paragraph 120.961(b) allowed CDCs to charge a ``finder's fee'' which either the Borrower or Third Party Lender could pay.

On January 31, 1996, SBA published final regulations in the Federal Register with an effective date of March 1, 1996 (61 FR 3226) (the ``new regulations''). The heading of Sec. 120.971 was changed to ``Allowable fees paid by Borrower,'' but in all other respects remained as proposed. Proposed paragraph 120.961(b) became Sec. 120.926 in the new regulations. It allowed CDCs to charge only the Third Party Lender, and allowed a CDC to receive that fee from the Third Party Lender if the CDC secured the lender for the Borrower under a written contract. Section 120.926 of the new regulations, specifically prohibited a CDC from obtaining that fee directly from the Borrower.

SBA now proposes to prohibit a CDC from charging a Borrower or a Third Party Lender a referral fee or any other fee related to processing or packaging a 504 financing other than the 1.5 percent processing fee a CDC may charge a Borrower pursuant to Sec. 120.971, whatever the CDC may call the fee. Specifically named as prohibited are application fees, finder's fees, referral fees, packaging fees, and additional fees of any kind (``Additional Fees''),

[[Page 15943]]

although the proposed rule makes clear that this prohibition applies to any fee the CDC might charge to the Borrower, regardless of what it would be called.

SBA intends that Borrowers not pay Additional Fees either directly or indirectly. SBA believes that Third Party Lenders sometimes pass Additional Fees on to Borrowers in the form of higher interest rates, points, or other charges. SBA considers it good public policy to prohibit a CDC from directly charging a Borrower Additional Fees, or from charging a Third Party Lender Additional Fees which may get passed along to a Borrower, because SBA believes a finder's fee or referral fee is not necessary since there is an established Third Party Lender community readily available to potential 504 borrowers and CDCs.

When the program first began in 1980, it was sometimes difficult for CDCs to locate Third Party Lenders willing to participate in a new program. So, SBA permitted CDCs to charge Additional Fees under former Sec. 108.503-6(c) for services rendered in connection with obtaining a Third Party Loan. Today most CDCs have developed working relationships with one or more lender(s) who regularly participate in 504 financings. In fact, in many instances, the Borrower goes first to a Third Party Lender who refers the Borrower to the CDC. On most other occasions, a CDC refers a Borrower to a Third Party Lender that has participated with the CDC in previous 504 financings; or rarely, a CDC will use a packager to obtain a Third Party Lender. However this Third Party financing is placed, SBA no longer believes that the effort necessary to get a Third Party Lender justifies allowing a CDC to charge a small business Borrower Additional Fees.

SBA believes the compensation for any actions a CDC performs in connection with the origination and processing of a 504 financing is adequately covered by the 1.5 percent processing fee permitted to be paid by a Borrower pursuant to Sec. 120.971(a)(1). A 504 financing includes the CDC loan, Third Party Loan, and Borrower injection (see 13 CFR 120.801). A CDC cannot process a 504 financing unless there is a qualified Third Party Lender. The participation of a Third Party Lender is an integral part of a CDC's processing of a 504 financing. Without it, a 504 financing cannot occur. SBA concludes that a CDC should not receive an Additional Fee of any kind for any actions related to obtaining a Third Party Lender, or processing the Third Party Loan, because the fee a CDC receives under Sec. 120.971(a)(1) covers those actions. Whether a Borrower pays an Additional Fee directly to a CDC or indirectly to a Third Party Lender in the form of higher interest rates, points, or other charges, the Borrower is essentially paying twice for the same services--the processing of its 504 financing. SBA believes that the fee a CDC may charge under Sec. 120.971(a)(1) is the all-inclusive processing fee for a CDC and that this fee covers any services performed by the CDC related to the processing of a 504 financing.

SBA emphasizes that the proposed regulatory amendments would prevent a CDC from charging a Borrower or Third Party Lender any fees related to processing or packaging a 504 financing other than the 1.5 percent processing fee a CDC may charge a Borrower pursuant to Sec. 120.971. For example, a CDC would not be able to receive fees from a Borrower or Third Party Lender for (1) referring a Borrower to a Third Party Lender (or the reverse); (2) referring a Borrower to a packager; or (3) helping to process the Third Party Loan.

Since it is proposing to prohibit Additional Fees, SBA proposes to delete Sec. 120.926 in its entirety. As was the case prior to March 1, 1996, all fees which a CDC would be able to charge with respect to a 504 financing would be found in one section of SBA's regulations, Sec. 120.971. SBA proposes to change the heading of Sec. 120.971 to ``Fees Which a CDC May Charge,'' and to add the word ``only'' to Sec. 120.971(a) to make clear that a CDC may charge a Borrower only the fees enumerated in that paragraph.

SBA invites comments on any aspect of these proposed regulations and on the underlying policies as discussed in this preamble. Specifically, SBA invites comment on (but not limited to) the following issues:

1. Whether the fees now permitted to be charged to the borrower, 1.5 percent of the net debenture proceeds, is adequate compensation for processing a 504 financing.

2. Whether a CDC should be able to charge either a Borrower or a Third Party Lender Additional Fees when the fees are clearly itemized and the fees are for special and non-routine work performed in connection with obtaining a Third Party Lender or processing a Third Party Loan.

3. Whether there is any need for a CDC to receive an Additional Fee for its efforts relating to the Third Party Loan in specific situations, such as in urban and rural areas, or with respect to the CDC's efforts to increase the number of loans to New Market small businesses.

4. Whether SBA should establish separate fee limitations depending on whether the CDC is a for-profit or a not-for-profit entity.

   Compliance With Executive Orders 12612, 12778, and 12866, the Regulatory Flexibility Act (5 U.S.C. 601-612) and the Paperwork Reduction Act (44 U.S.C. Ch. 35)

   SBA certifies that this proposed rule does not constitute a significant rule within the meaning of Executive Order 12866, since it is not likely to have an annual effect on the economy of $100 million or more, result in a major increase in costs or prices, or have a significant adverse effect on competition or the U.S. economy.

   SBA certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612. Last year, SBA made approximately four thousand 504 loans. Currently there are approximately 270 CDCs.

   SBA certifies that this proposed rule does not impose any additional reporting or recordkeeping requirements under the Paperwork Reduction Act, 44 U.S.C., chapter 35.

   For purposes of Executive Order 12778, SBA certifies that this proposed rule is drafted, to the extent practicable, to accord with the standards set forth in paragraph 2 of that Order.

   List of Subjects in 13 CFR part 120

   Loan programs--business, Small Businesses.

   For the reasons stated in the preamble, the Small Business Administration proposes to amend 13 CFR part 120 as follows:

   PART 120--BUSINESS LOANS

1. The authority citation for part 120 continues to read as follows:

   Authority: 15 U.S.C. 634(b)(6) and 636(a) and (h).

   Sec. 120.926 [Remove]

2. Remove Sec. 120.926.

3. Amend Sec. 120.971 to revise the heading, to revise paragraph (a), to redesignate paragraphs (b), (c), (d), and (e) as paragraphs (c), (d), (e), and (f), respectively, and to add new paragraph (b) as follows:

   Sec. 120.971 Fees a CDC may charge.

   (a) Fees a CDC may charge a Borrower. A CDC may charge only the following fees to a Borrower: * * * * *

   (b) Fees a CDC may charge a Third Party Lender. None. * * * * *

   [[Page 15944]]

   Dated: March 24, 1999. Aida Alvarez, Administrator.

   [FR Doc. 99-8148Filed4-1-99; 8:45 am]

   BILLING CODE 8025-01-P