[Federal Register Volume 85, Number 8 (Monday, January 13, 2020)]
[Proposed Rules]
[Pages 1783-1793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28500]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AH04
SBA Supervised Lenders Application Process
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The U.S. Small Business Administration (SBA) is proposing to
update the regulations applicable to Small Business Lending Companies
(SBLCs) and state-regulated lenders (Non-Federally Regulated Lenders
(NFRLs)) in order to improve efficiencies and potentially reduce costs
related to the application and review process. The rule proposes to
establish a comprehensive application and review process for SBLC and
NFRL applicants (collectively referred to as SBA Supervised Lenders),
including for transactions involving a change of ownership or control,
and to clarify and incorporate into the regulations the factors SBA
considers in its evaluation of an application. The rule also proposes
to address SBA's requirements for the minimum amount of capital needed
to be maintained by SBA Supervised Lenders, some of which have not been
updated since 1996.
DATES: SBA must receive comments on this proposed rule on or before
March 13, 2020.
ADDRESSES: You may submit comments, identified by RIN 3245-AH04, by any
of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Bethany J. Shana, Office of Credit Risk Management,
Office of Capital Access, Small Business Administration, 409 Third
Street SW, Washington, DC 20416.
Hand Delivery/Courier: Bethany J. Shana, Office of Credit
Risk Management, Office of Capital Access, Small Business
Administration, 409 Third Street SW, Washington, DC 20416.
SBA will post all comments on http://www.regulations.gov. If you
wish to submit confidential business information (CBI) as defined in
the User Notice at http://www.regulations.gov, please submit the
information to Bethany J. Shana, Office of Credit Risk Management,
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: Susan E. Streich, Director, Office of
Credit Risk Management, Office of Capital Access, Small Business
Administration, 409 3rd Street SW, Washington, DC 20416; email address:
[email protected].
SUPPLEMENTARY INFORMATION:
I. Background Information
The 7(a) Loan Program is a business loan program authorized by
section 7(a) of the Small Business Act (15 U.S.C. 636(a)) and is
governed primarily by the regulations in part 120 of Title 13 of the
Code of Federal Regulations (CFR). The core mission of the 7(a) Loan
Program is to provide SBA-guaranteed financial assistance to small
businesses that lack access to capital on reasonable terms and
conditions in order to support our nation's economy.
Under the 7(a) Loan Program, a lender (Lender) participates with
SBA by making loans directly to eligible small businesses and SBA
guarantees a portion of each loan made by Lenders in the program. The
Lender is responsible for funding and servicing the loan and must
comply with SBA's Loan Program Requirements (as defined in 13 CFR
120.10) throughout the life of the loan. SBA may delegate to a Lender
the authority to approve small business loans made under the 7(a) Loan
Program. The Lender may also sell the guaranteed portion of a 7(a) loan
in SBA's secondary market and, in certain circumstances, may securitize
or sell a participating interest in the unguaranteed portion of a 7(a)
loan. In the event that a borrower defaults on a 7(a) loan, the Lender
must conduct the liquidation efforts and, if applicable, litigation
efforts in accordance with SBA Loan Program Requirements. The Lender
and SBA share in the loss, if any, in accordance with their respective
interests in the loan.
Most Lenders participating in the 7(a) Loan Program are depository
institutions that have a primary Federal regulator (e.g., the Federal
Deposit Insurance Corporation (FDIC), the Office of the Comptroller of
the Currency (OCC), the National Credit Union Administration (NCUA))
that oversees the Lender's lending activities. SBA also has the
statutory authority under section 7(a)(17) of the Small Business Act to
authorize non-federally regulated entities to make 7(a) loans,
including entities that have state-regulators. Under this authority,
SBA has authorized SBA Supervised Lenders to make loans in the 7(a)
Loan Program. SBA Supervised Lenders are defined in 13 CFR 120.10 to
include SBLCs and NFRLs, and are subject to SBA regulation, oversight
and enforcement, including the imposition of civil monetary penalties.
SBLCs, as defined in 13 CFR 120.10, are non-depository lending
institutions that are authorized only to make loans pursuant to section
7(a) of the Small Business Act and loans to Intermediaries in SBA's
Microloan
[[Page 1784]]
program. SBLCs are regulated, supervised and examined solely by SBA,
except for the subset of SBLCs defined as Other Regulated SBLCs in 13
CFR 120.10. In January of 1982, SBA imposed a moratorium on issuing
additional SBA lending authorities (referred to as SBLC Licenses) to
SBLCs. Today, there are fourteen (14) SBLCs with full authority to make
7(a) loans up to the maximum loan amount (currently $5 million).\1\ An
entity may purchase one of the fourteen SBLC Licenses from an existing
SBLC with SBA's prior written approval.
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\1\ SBA waived certain regulations for the purpose of permitting
mission-oriented lenders to participate in SBA's Community Advantage
Pilot Program (referred to as CA Lenders), a pilot program within
the 7(a) Loan Program. Each CA Lender is identified as either an
SBLC or NFRL, depending on whether the lender is subject to
regulation by a state. CA Lenders are limited to making loans in the
CA Pilot Program, which generally requires a CA Lender to make loans
to underserved markets (e.g., low-to-moderate income communities,
rural areas, opportunity zones, veteran-owned businesses) and in an
amount not to exceed $250,000. The CA Pilot Program is governed by
all regulations applicable to the 7(a) Loan Program generally and to
SBA Supervised Lenders specifically unless waived or modified in the
Federal Register Notices published in connection with the CA Pilot
Program. SBA is not proposing to apply the changes in this proposed
rule to the CA Pilot Program. For more information about the CA
Pilot Program please refer to the CA Participant Guide, Version 5.0
(October 1, 2018), available at https://www.sba.gov/document/support-community-advantage-participant-guide.
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NFRLs, as defined in 13 CFR 120.10, are business concerns that are
subject to regulation, supervision and oversight by a state regulator
that must be satisfactory to SBA. By definition, an NFRL's lending
activities are not regulated by a Federal Financial Institution
Regulator (as defined in 13 CFR 120.10). Typically, NFRLs are organized
as state licensed Business and Industrial Development Companies
(BIDCOs), but may also include other types of state-regulated lending
institutions, such as non-profit corporations or financial institutions
without Federal deposit insurance or share insurance protection.
To become an SBA Supervised Lender, a prospective applicant must be
qualified as determined by SBA in its sole discretion. Applicants must
meet, inter alia, the participation criteria and ethical requirements
for all Lenders set forth in the regulations at 13 CFR 120.140 and
120.410, the regulations specific to SBA Supervised Lenders (13 CFR
120.460 through 120.465) and, if applicable, the regulations specific
to SBLCs (13 CFR 120.470 through 120.490). An entity interested in
becoming an SBA Supervised Lender must submit an application to SBA
containing the information specified in SBA's Standard Operating
Procedures 50 10, Lender and Development Company Loan Programs, as
amended from time to time (SOP 50 10).\2\
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\2\ The current version of the SOP is the 50 10 5(K), effective
April 1, 2019. The application requirements can be found in this SOP
in Subpart A, Chapter 1, Paragraph II.C.2 with respect to NFRLs and
Subpart A, Chapter 2, Paragraph II with respect to SBLCs. The SOP is
available at https://www.sba.gov/document/sop-50-10-5-lender-development-company-loan-programs.
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II. Summary of Proposed Changes
In this proposed rule, SBA aims to enhance the application and
review process for organizations seeking to participate as an SBA
Supervised Lender in the 7(a) Loan Program and to mitigate the risk
inherent in their participation in the program. The proposed changes
would improve efficiencies associated with applications submitted to
SBA by prospective SBLCs and NFRLs, including transactions involving a
change of ownership or control, without compromising performance or
increasing risk to the 7(a) Loan Program.
This rule also proposes to incorporate into the regulations the
factors SBA considers in its evaluation of an SBA Supervised Lender
application, including an assessment of the applicant's capitalization,
organizational structure, the risk associated with its business plan,
the professional qualifications and the historical loan performance
record of the applicant and its management team (including key
employees), the prior history or involvement of the Applicant or its
management team (including key employees) with any SBA program, and
other relevant information obtained by SBA through due diligence.
Typically, SBA Supervised Lenders are non-depository institutions,
and, as such, rely on secondary market loan sales, warehouse lines of
credit, participations or securitizations to support their lending
operations. These activities, by their nature, create additional risk
to SBA. Many of the changes in this proposed rule, including changes
related to the safety and soundness and the lending activities of SBA
Supervised Lenders (e.g., capital maintenance requirements), seek to
mitigate the increased risk associated with the operations of SBA
Supervised Lenders.
III. Section-by-Section Analysis of Proposed Changes
SBA proposes to amend the following sections in 13 CFR part 120:
A. Substantive Changes
1. Section 120.460 What are SBA's additional requirements for SBA
Supervised Lenders?
SBA proposes to add new paragraphs (c) and (d) to Sec. 120.460.
Paragraph (c) would incorporate into the regulations a requirement that
NFRLs must employ qualified full-time professional management, as is
currently required of SBLCs. This new paragraph would clarify the
meaning of qualified full-time professional management for SBA
Supervised Lenders to include, at a minimum, the employment of a chief
executive officer or equivalent to manage daily operations, a chief
credit/risk officer, and at least one other full-time employee
qualified by training and experience to carry out the SBA Supervised
Lender's business plan. Existing SBA Supervised Lenders would not be
required to comply with the new regulatory definition of qualified
full-time professional management unless, after the effective date of a
final rulemaking, they make or acquire any 7(a) loans or engage in a
transaction that constitutes a change of ownership or control of the
SBA Supervised Lender. Based on the quarterly condition reports and the
annual reports that are required to be submitted to the Agency by SBA
Supervised Lenders (including audited financial statements), most SBA
Supervised Lenders already comply with the proposed new definition of
qualified full-time professional management. SBA believes this proposed
rule represents the minimum level of oversight and responsibility
necessary for a lender receiving the benefit of SBA loan guarantees.
SBA is proposing to add a new paragraph (d) to limit an NFRL's
lending area for 7(a) loan originations to the state in which the
NFRL's primary state regulator is located. A number of NFRLs
participating in the 7(a) Loan Program currently have limitations
imposed by state law or by their state regulator that restrict their
lending activities to the state in which their primary state regulator
is located. In recent years, however, certain state regulators have
permitted NFRLs to expand their business plan and lending area to make
loans outside of the state or even nationwide. SBA is concerned that
state regulators may not have sufficient resources or capacity to
adequately supervise, regulate and examine NFRLs with a business plan
to make or acquire 7(a) loans outside of their state, and SBA does not
have the resources necessary to fill in the gaps in oversight and
enforcement.
[[Page 1785]]
SBA has also found that many NFRLs lack the experience and
expertise necessary to manage the risks associated with multistate
lending, such as the financial risks inherent in the servicing and
liquidation of 7(a) loans in other state jurisdictions. With the
exception of two NFRLs, approximately 90% of the lending by NFRLs
within the 7(a) Loan Program is done within the state where the NFRL's
primary state regulator is located. In an effort to manage the risks
associated with NFRLs participating in the 7(a) Loan Program, SBA
proposes to incorporate a new paragraph (d) to limit the lending area
of NFRLs (with respect to 7(a) loans only) to the state in which their
primary state regulator is located, except that an NFRL's lending area
may include a local trade area that is contiguous to such state (e.g.,
a city or metropolitan statistical area that is bisected by a state
line) if the NFRL receives SBA's prior written approval. This is
consistent with the general understanding that state-regulated lenders
focus on economic development in their state and local communities.
Existing NFRLs would not be subject to this requirement unless, after
the effective date of a final rulemaking, they make or acquire any 7(a)
loans or engage in a transaction that constitutes a change of ownership
or control of the NFRL. For further discussion on the impact of this
proposed rule see the initial regulatory flexibility analysis (IRFA)
below.
2. Section 120.462 What are SBA's additional requirements on
capital maintenance for SBA Supervised Lenders?
SBA is authorized to supervise the safety and soundness of NFRLs
and regulate their lending activities pursuant to section 23(a) of the
Small Business Act. See 15 U.S.C. 650(a). Currently, NFRLs must
maintain the minimum amount of capital established by their state
regulator to meet SBA's regulatory requirements for capital
maintenance. See 13 CFR 120.462(d). SBA has determined, however, that
the minimum level of capital established by an NFRL's state regulator
may not be sufficient to manage the credit risk associated with an
NFRL's lending operation or the potential loss to SBA due to an NFRL's
financial failure.\3\ This rule proposes to amend the regulations to
require NFRLs to maintain a baseline minimum amount of capital
necessary for participation in the 7(a) Loan Program. The proposed
minimum amount of capital that an NFRL would need to maintain would be
equal to the higher of (1) the minimum amount of capital required by
the NFRL's state regulator, or (2) $2,500,000. Existing NFRLs that have
capital amounts less than the proposed minimum would have three years
after the effective date of a final rulemaking to reach the new minimum
capital amount. An NFRL that does not meet the new minimum capital
requirement by the end of the three-year period could remain in the
program but would not be permitted to make or acquire 7(a) loans after
such date, until it satisfies the requirement. In addition, the new
minimum capital requirement would apply immediately in the event of a
change of ownership or control of an NFRL during the three-year time
frame.
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\3\ In 2017, a state licensed lender participating as an NFRL in
the 7(a) Loan Program was put into liquidation by order of its state
regulator and under the supervision of a state court. After
approximately two years, the appointed liquidator sold the lender's
assets. The events leading up to the lender's liquidation indicate
that although the lender was in compliance with the minimum capital
required by its state regulator, the NFRL did not have a sufficient
amount of capital to manage the credit risk associated with its 7(a)
lending activities. Because the NFRL did not maintain a sufficient
amount of capital SBA was put in a position to sustain a loss at the
time of the lender's financial failure.
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SBA believes that most NFRLs already comply with this requirement
\4\ and that it represents the baseline minimum level of capital
necessary for an NFRL to maintain while making loans with the benefit
of SBA loan guarantees. The proposed new minimum level of capital is
equal to one-half the amount of minimum capital proposed for SBLCs in
this rulemaking (see Section III.A.6 below), consistent with SBA's
intent in this proposed rule to limit 7(a) loan making by NFRLs to the
state in which their primary state regulator is located (as opposed to
nationwide for SBLCs).
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\4\ Of the twenty-one NFRLs that are participating in the 7(a)
Loan Program, three do not currently meet the proposed new minimum
capital requirement of $2.5 million based on information submitted
to SBA periodically in quarterly condition reports or annual
reports. See 13 CFR 120.464.
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3. Section 120.466 SBA Supervised Lender application.
SBA proposes to add a new Sec. 120.466 to incorporate into the
regulations a new application and review process for prospective SBA
Supervised Lenders. SBA proposes to evaluate applications through an
initial review and, if warranted, a final review.
The initial review, as proposed under Sec. 120.466(a), would
require an SBA Supervised Lender applicant to submit a written plan
(known as a Lender Assessment Plan (LAP)). The LAP would allow SBA to
more effectively review key elements of an application and reach a
preliminary assessment about the qualifications of an applicant more
quickly and efficiently. SBA recognizes that the current SBA Supervised
Lender application process can be costly for the applicant and
represents an inefficient use of SBA's time and limited resources.
An initial review phase would assist SBA in identifying incomplete
applications and unqualified applicants much earlier in the review
process. The initial review will include an initial assessment of the
applicant's business plan, capitalization and professional management
team (including key employees). As part of this initial review, SBA may
also require an in-person interview between the applicant and
appropriate employees of the Office of Capital Access. The interview
will serve as an opportunity for the applicant to explain the
information provided in its LAP and answer any preliminary questions
posed by SBA. During the initial review phase, SBA may also contact
listed and unlisted references and verify the accuracy of the
information provided in the LAP.
If SBA determines, based on the information provided in the LAP and
in the in-person interview (if required), that the applicant may
proceed to the final review phase, it will notify the applicant in
writing. Notification by SBA that the applicant may proceed to final
review does not mean that the applicant will be favorably assessed or
approved by SBA to participate as an SBA Supervised Lender in the 7(a)
Loan Program. If SBA notifies an applicant in writing that it may not
proceed to the final review, the applicant may not submit a new LAP
until nine months from the date of such notification. This nine month
time period should allow sufficient time for the applicant to address
any issues identified by SBA during the initial review phase without
overburdening SBA with premature resubmissions. SBA will determine
whether a LAP submitted during this nine month time period is being
submitted by the same applicant.
The final review, as proposed under Sec. 120.466(b), would require
each SBA Supervised Lender applicant to submit a complete application
as further described in official SBA policies and procedures.\5\ A
complete application would update the information disclosed in the LAP
and would provide additional information for SBA's review, such as the
applicant's organizational documents, operational plan, credit
policies, internal control
[[Page 1786]]
policies, loan risk rating system, capital adequacy plan, proposed
credit facilities, organizational chart, audited financial statements,
bank statements, legal opinions and other necessary documentation.
After completion of the final review, SBA (the Director, Office of
Financial Assistance, in consultation with the Director, Office of
Credit Risk Management) will issue a final decision to approve or deny
the application. SBA believes the proposed new application and review
process will provide greater clarity and transparency, will expedite
SBA's review of applications, and may be less burdensome for applicants
and on SBA's limited administrative resources.
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\5\ The information required to be submitted in a complete
application would not be set forth in SBA's regulation but would
continue to be in SBA's official policies and procedures. See SOP 50
10.
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SBA recognizes that in some instances an SBA Supervised Lender
applicant may be able to cure certain deficiencies in its application
over a period of time, such as raising additional capital to support
its business plan, adding more experienced members to its management
team, or demonstrating to SBA a longer track record of successful loan
making performance. This proposed rule provides that if an SBA
Supervised Lender's application is denied, the applicant may submit a
new LAP and restart the application process anytime after 18 months
from the date of denial. SBA believes this 18 month time period is
necessary to avoid resubmissions from declined applicants before
sufficient time has elapsed for meaningful changes to occur and to be
reflected in an SBA Supervised Lender application.
Lastly, under Sec. 120.466(c), SBA is proposing to require an
entity seeking to become an NFRL to have at least one year of current
operating and relevant commercial lending experience before the entity
may submit an application to become an SBA Supervised Lender. The
requirement of having at least one year of experience is consistent
with the standards that have been established for other SBA business
loan programs, such as the Microloan Program, where entities are
required to have at least one year of prior experience in order to be
eligible to participate in the program as an Intermediary.
4. Section 120.467 Evaluation of SBA Supervised Lender applicants.
SBA proposes to add a new Sec. 120.467 to incorporate into the
regulations the factors that SBA currently considers in evaluating an
SBA Supervised Lender applicant. SBA's evaluation includes a review of,
among other things, the applicant's business plan, organizational
structure, operational plan, management qualifications, the historical
performance of the loans originated by the applicant or attributable to
its management team, the applicant's capitalization, financial
projections and liquidity, and prior history or involvement of the
applicant or its management team (including key employees) with any SBA
guaranteed lending program or any other Federal or state lending
program. In addition, SBA reviews the results of background
investigations (e.g., through SBA Form 1081) and other information
obtained through due diligence, such as reference checks.
In addition, this proposed rule makes it clear that SBA may
prohibit individuals or entities from participating as an officer,
director, manager, owner or key employee of an applicant if such
individual or entity: (1) Has a previous record of failing to comply
with SBA Loan Program Requirements; (2) previously participated in a
material way with any past or present SBA Lender or Intermediary that
failed to maintain satisfactory SBA performance; (3) previously
defaulted on any Federal loan or Federally assisted financing that
resulted in the Federal Government or any of its agencies or
departments sustaining a loss in any of its programs; or (4) ever
failed to pay when due any debt or obligation, including any amounts in
dispute, to the Federal Government or guaranteed by the Federal
Government (including but not limited to taxes or business or student
loans). These provisions are consistent with SBA's current policies in
evaluating an SBA Supervised Lender applicant.
5. Section 120.468 Change of ownership or control requirements for
SBA Supervised Lenders.
SBA proposes to move the regulation applicable to a change of
ownership or control of an SBLC (Sec. 120.475) to a new Sec. 120.468
with certain modifications. The purpose of this change is to
incorporate into the regulations the current policy requirement that
all SBA Supervised Lenders, including NFRLs, must obtain SBA approval
prior to any change of ownership or control. This proposed rule
provides clarification as to what would be considered a change of
ownership or control, including any series of transfers that, in the
aggregate over an 18 month period, transfers 10 percent or more of an
SBA Supervised Lender's stock or ownership interests. This rule also
seeks to add a new paragraph (a)(5) to clarify that the definition of a
change of ownership or control includes any transaction or event that
results in any change in the possession (direct or indirect) of the
right to control, or the power to direct or cause the direction of, the
management or policies of an SBA Supervised Lender. The rule also
clarifies that SBA Supervised Lenders must receive SBA prior written
approval before entering into any definitive agreement regarding a
change of ownership or control.
This rule also proposes to incorporate into the regulations as
Sec. 120.468(c) the current policy that a new application (as
described above in new Sec. 120.466) must be submitted to SBA in
connection with a change of ownership or control of an SBA Supervised
Lender.
In addition, this proposed rule would add a new paragraph (d) to
provide an SBA Supervised Lender with the opportunity to voluntarily
surrender its SBA lending authority (i.e., its SBLC License or its NFRL
lending authority) and withdraw from the 7(a) Loan Program with SBA's
prior written approval. This would provide SBA Supervised Lenders with
a path to exit the 7(a) Loan Program in an efficient and organized
manner. As proposed, a voluntary surrender would require an SBA
Supervised Lender to (i) transfer its entire loan portfolio to one or
more Lenders acceptable to SBA, and (ii) enter into a withdrawal
agreement. The purpose of the withdrawal agreement is to resolve any
outstanding issues between the SBA Supervised Lender and SBA, including
any outstanding monetary liabilities.
6. Section 120.471 What are the minimum capital requirements for
SBLCs?
SBA proposes to amend Sec. 120.471(a) to increase the minimum
capital requirement for SBLCs, which has not been updated since 1996.
SBA has determined that the current minimum capital requirement that an
SBLC must maintain (i.e., the greater of $1 million or 10 percent of
the aggregate of its share of all outstanding loans) is insufficient to
assure an SBLC's continued financial viability or provide for any
necessary growth. In 1996, the maximum 7(a) loan amount was $1,000,000.
The maximum 7(a) loan amount has increased several times since then,
the last time occurring in September of 2010. Section 1111 of the Small
Business Jobs Act of 2010 (SBJA), Pub. L. 111-240, 124 Stat. 2504,
which was enacted on September 27, 2010, permanently increased the
maximum guaranteed portion and the maximum loan amount for 7(a) loans.
Under the SBJA, the maximum 7(a) loan amount was increased from $2
million to $5 million and the maximum 7(a) loan guaranteed portion was
increased to the
[[Page 1787]]
current amount of $3,750,000.\6\ No corresponding changes were made by
SBA to increase the minimum capital requirements for SBA Supervised
Lenders either at that time or in connection with any of the prior
increases in the maximum 7(a) loan amount that have occurred since
1996.
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\6\ For International Trade and Export Working Capital loans the
maximum 7(a) loan amount is $5 million, and the maximum 7(a) loan
guaranteed portion is $4.5 million. See 15 U.S.C. 636(a)(2)(D) and
(E); 15 U.S.C. 636(a)(3)(B); and 15 U.S.C. 636(a)(14)(B)(i).
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This proposed rule would adopt a new minimum capital requirement
for SBLCs equal to unencumbered paid-in capital and paid-in surplus of
at least $5 million, or ten percent of the aggregate of its share of
all outstanding loans, whichever is greater. Most of the existing SBLCs
have capital in amounts well in excess of the minimum amount required
by current Sec. 120.471(a). The proposed change would again ensure
that no SBLC has minimum capital in an amount less than the size of a
single 7(a) loan permitted in the program. See 15 U.S.C. 636(a)(3)(A).
An existing SBLC that has capital in an amount less than the proposed
minimum would have three years after the effective date of a final
rulemaking to reach the new minimum capital amount, after which it
would be permitted to remain in the program but would not be permitted
to make or acquire 7(a) loans until such time as the minimum capital
requirement was satisfied. The new minimum capital requirement would
apply immediately, however, in the event of a change of ownership or
control of an SBLC.
SBA is proposing to amend Sec. 120.471(b) to expand the definition
of capital to include ``unrestricted net assets'' for non-profit
corporations. In recent years, SBA has seen an increase in the interest
of non-profit corporations seeking to become an SBLC; however, the
definition of capital has not been updated to reflect that an SBLC may
be organized as either a for-profit or non-profit corporation. This
proposed change would address that issue.
Finally, SBA is considering whether it should make any additional
changes to the definition of capital under Sec. 120.471(b). Capital
currently consists only of the following: Common stock, preferred stock
(non-cumulative and with no maturity date), additional paid-in capital
(representing amounts paid for stock in excess of par value), retained
earnings, and capital contributions to limited liability companies and
limited partnerships that are not subject to repayment or withdrawal
and have no cumulative priority return. In recent years, SBA has become
concerned that retained earnings can include amounts, such as the
estimated value of loan servicing rights, that may not be as reliable
as paid-in capital. Specifically, SBA is concerned that the valuation
of servicing rights assets is based on assumptions such as prepayment
speeds and loan default rates that are subject to change. SBA is
seeking to determine whether, and in what amount, servicing rights
should contribute to an SBA Supervised Lender's required minimum
capital, and to ensure that there is a consistent understanding of the
appropriate treatment of servicing rights by SBA Supervised Lenders.
SBA is soliciting comments from the public on the current definition of
capital (as defined in Sec. 120.471(b)) and whether it should be
modified to limit any contribution that servicing rights may have
towards an SBA Supervised Lender's minimum capital requirement.
Alternative options could include, for purposes of the minimum capital
calculation: (1) Limiting the percentage of retained earnings that are
permitted to be comprised of the value of servicing rights, or (2)
limiting the percentage of servicing rights that are permitted to be
included in retained earnings.
B. Technical Changes
1. Section 120.410 Requirements for all participating Lenders.
SBA proposes a conforming technical change to Sec. 120.410(a)(1)
to reflect the new minimum capital requirements for SBA Supervised
Lenders.
2. Section 120.470 What are SBA's additional requirements for
SBLCs?
SBA proposes a conforming technical change to remove Sec.
120.470(g) ``Management'' and redesignate paragraph (h) as paragraph
(g). A new regulatory definition of qualified full-time professional
management for SBA Supervised Lenders will be incorporated into
proposed new Sec. 120.460(c) as described above in Section III.A.1.
3. Section 120.475 Change of ownership or control.
SBA proposes a conforming technical change to remove and reserve
Sec. 120.475. The current text of Sec. 120.475 will be incorporated
with modifications into proposed new Sec. 120.468 as described above
in Section III.A.5.
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 12866
The Office of Management and Budget (OMB) has determined that this
proposed rule is not a ``significant'' regulatory action for the
purposes of Executive Order 12866, and therefore, SBA has not prepared
a Regulatory Impact Analysis. This is not a major rule under the
Congressional Review Act, 5 U.S.C. 801 et seq.
Executive Order 13563
This executive order supplements and reaffirms the principles and
requirements in Executive Order 12866, including the requirement to
provide the public with an opportunity to participate in the regulatory
process. SBA Supervised Lenders have been involved in the 7(a) Loan
Program for over 35 years. Over the years, the Agency has received
feedback from many SBA Supervised Lender applicants and program
participants including valuable insight and suggestions for
improvements to the application and review process.
Executive Order 13771
This proposed rule is not expected to be an Executive Order 13771
regulatory action because this proposed rule is not significant under
Executive Order 12866.
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 proposed rule would 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
proposed 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 proposed rule would impose a new
[[Page 1788]]
reporting and/or recordkeeping requirement under the Paperwork
Reduction Act (PRA). Specifically, the proposed rule would require SBA
Supervised Lenders to submit a written Lender Assessment Plan (LAP) in
order for SBA to conduct an initial review of the applicant. In
addition, this rule also proposes to codify a requirement for
applicants to submit a complete application in order for SBA to
determine whether the applicant has the qualifications necessary to
participate in the 7(a) Loan Program as an SBA Supervised Lender. As
discussed above, this requirement is currently described in SBA's
official policies and procedures.
The applicant will also use some of the same forms as other Lenders
that apply to participate in the 7(a) Loan Program, including the SBA
Form 1081, Statement of Personal History. SBA Form 1081 is an OMB-
approved form under OMB Control number 3245-0080.
The title, summary of the new information collection, description
of respondents, and an estimate of the reporting burden related to this
collection are discussed below.
Title of Collection: SBA Supervised Lender Application and Review.
OMB Control Number: New Collection.
(a) Description: Lender Assessment Plan.
The proposed rule would require organizations seeking to become an
SBA Supervised Lender (or seeking SBA approval of a change of ownership
or control) to submit a LAP to SBA. The LAP includes the legal name and
contact information of the applicant, a written business plan, current
and projected financial statements and other important information
about the applicant and its management team (including key employees).
Need and Purpose: A LAP is necessary for SBA to conduct an initial
review of an applicant seeking to become an SBA Supervised Lender (or
seeking SBA approval of a change of ownership or control). The LAP
provides SBA with key elements of an application so that SBA can reach
a preliminary assessment about the qualifications of an applicant more
efficiently. This initial review phase will assist SBA in identifying
incomplete applications and unqualified applicants much earlier in the
application review process.
Description and Estimated Number of Respondents: Pursuant to
proposed Sec. 120.466(a), the information in the LAP will be collected
from each organization seeking to become an SBA Supervised Lender (or
seeking SBA approval of a change of ownership or control). SBA
estimates that it will likely receive no more than four LAPs each year.
Total Estimated Response Time: It is estimated that each applicant
would need approximately 35 hours to prepare and submit the proposed
LAP for an estimated total of 140 hours annually.
(b) Description: SBA Supervised Lender Application.
If an applicant seeking to become an SBA Supervised Lender (or
seeking SBA approval of a change of ownership or control) is authorized
by SBA to proceed to the final review phase, the applicant will be
required to submit a complete application in order for SBA to determine
whether the applicant has the qualifications necessary to participate
in the 7(a) Loan Program.
Need and Purpose: The information submitted with the collection is
necessary for SBA to reach a final decision regarding an applicant
seeking to become an SBA Supervised Lender (or seeking SBA approval of
a change of ownership or control). The complete application requires an
SBA Supervised Lender applicant to provide more detail about the
information previously disclosed to SBA in the LAP and will include
additional information about the applicant's proposed operation and
lending activities as a participant in the 7(a) Loan Program. As stated
above, the application requirements are not new since they are
currently set out in SBA's official policies and procedures. Under
those policies and procedures, an organization applying to become an
SBA Supervised Lender (or seeking SBA approval of a change of ownership
or control) is required to, among other things, submit documentation in
support of its organizational structure, internal control policies,
operational plan, proposed credit policies, loan risk rating system,
proposed secondary market activities, capital adequacy plan, audited
financial statements and other information (e.g., certifications and
legal opinions) necessary for SBA to evaluate the qualifications of the
applicant. See SOP 50 10. Although the requirements currently apply to
about four organizations each year, now that SBA is proposing to codify
the application requirements in its regulations, under the PRA it is
deemed to impact ten or more respondents; therefore, SBA must now
obtain OMB approval in compliance with the PRA procedures.
Description and Estimated Number of Respondents: The information in
the complete application will be collected from organizations that are
seeking to become an SBA Supervised Lender and have successfully
reached the final review phase. Based on current experience, SBA
estimates that it will likely receive no more than four complete
applications each year.
Total Estimated Response Time: It is estimated that each applicant
would need approximately 50 hours to prepare and submit a complete
application, for an estimated total of 200 hours annually.
SBA invites comments on: (1) Whether this collection of information
is necessary for the proper performance of SBA's functions, including
whether the information will have a practical utility; (2) the accuracy
of SBA's estimate of the time for preparing and completing the
collection of information, including the validity of the methodology
and assumptions used; (3) ways to enhance the quality, utility, and
clarity of the information to be collected; and (4) ways to minimize
the burden of the collection of information on respondents, including
through the use of automated collection techniques, when appropriate,
and other forms of information technology.
Regulatory Flexibility Act, 5 U.S.C. 601-612
Under the Regulatory Flexibility Act (RFA), this proposed rule, if
adopted, may have an impact on a substantial number of small entities
that participate as SBA Supervised Lenders in the 7(a) Loan Program.
Immediately below, SBA sets forth an initial regulatory flexibility
analysis (IRFA) examining the impact of the proposed rule in accordance
with section 603, Title 5, of the United States Code. The IRFA
addresses (1) the reasons, objectives and legal basis for this proposed
rule; (2) a description of the kind and number of small entities that
may be affected; (3) the projected reporting, recordkeeping and other
compliance requirements; (4) whether there are any Federal rules that
may duplicate, overlap, or conflict with this proposed rule; and (5)
whether there are any significant alternatives to this proposed rule.
1. What are the reasons, objectives and legal basis for the rule?
The proposed rule is designed to improve efficiencies and enhance
the application and review process for organizations seeking to
participate in the 7(a) Loan Program as SBA Supervised Lenders by
conducting an initial review (LAP) and, if warranted, a final review
(complete application). The objective is to provide a process for a
more efficient and effective evaluation of the qualifications of
applicants seeking to become SBA Supervised Lenders. The new
application and review process would provide greater clarity and
transparency to applicants
[[Page 1789]]
and would expedite SBA's review, which will potentially reduce costs on
applicants and on SBA's limited administrative resources.
The proposed rule also seeks to raise the minimum capital
requirement that SBA Supervised Lenders must maintain in order to
assure their continued financial viability and to provide for any
necessary growth. The minimum capital requirement for SBA Supervised
Lenders has not been updated by SBA for more than twenty-three years.
The Agency has determined that the regulations addressing minimum
capital must be amended to correspond with the 500% increase in the
maximum 7(a) loan amount ($1 million to $5 million) that Congress has
authorized by statute over the last twenty-three years.
The proposed rule also limits the 7(a) lending area for NFRLs to
the state in which their primary regulator is located, except that an
NFRL may request SBA's prior written approval to make 7(a) loans in a
local trade area that is contiguous to such state (e.g., a city or
metropolitan statistical area that is bisected by a state line). Most
NFRLs participating in the 7(a) Loan Program already limit their
lending activities to the state in which their primary state regulator
is located. In recent years, some state regulators have permitted NFRLs
to make loans outside of their state or even nationwide. The expansion
of an NFRL's 7(a) lending area increases risk to SBA and the Agency is
concerned that some state regulators do not have the resources and the
capacity to adequately supervise, regulate and examine non-depository
lenders that operate outside of their state. In addition, state laws
that apply to state-regulated lenders do not address the different
conditions associated with lending in other states or nationwide. This
part of the proposed rule is also consistent with the general
understanding that state-regulated lenders (such as BIDCOs) are
licensed under specific state laws to focus primarily on economic
development in their respective state and local communities.
SBA is authorized to supervise the safety and soundness of SBA
Supervised Lenders and may regulate their 7(a) lending activities
pursuant to section 23(a) of the Small Business Act. 15 U.S.C. 650(a),
see also 15 U.S.C. 634(b)(7). SBA has the authority to promulgate
rules, regulations and requirements for the 7(a) Loan Program. 15
U.S.C. 634(b)(6).
2. What are SBA's description and estimate of the number of small
entities to which the rule will apply?
SBA Supervised Lenders comprise a unique class of 35 non-depository
lenders that may only participate in the 7(a) Loan Program and make
7(a) loans if authorized by SBA. If the proposed rule is adopted in its
current form, the rule would be applicable to all SBA Supervised
Lenders (other than lenders participating as CA Lenders in the CA Pilot
Program). SBA estimates that approximately 88 percent of SBA Supervised
Lenders are considered small entities based on NAICS sector code 52
(finance and insurance) and industry code 52298 (All Other Non-
depository Credit Intermediation) and have annual receipts of less than
$38.5 million. This estimate of 31 small SBA Supervised Lenders is
based on information contained in the quarterly condition reports and
the annual reports that are required to be submitted to SBA by such
lenders.
3. What are the projected reporting, recordkeeping, and other
compliance requirements of the rule and an estimate of the classes of
small entities which will be subject to the requirements?
The proposed rule would impose a new reporting and/or recordkeeping
requirement for organizations seeking to become an SBA Supervised
Lender (or seeking SBA approval of a change of ownership or control).
The proposed rule seeks to codify an existing requirement that
applicants submit a complete application in order for SBA to determine
whether an organization has the qualifications necessary to participate
in the 7(a) Loan Program as an SBA Supervised Lender.
The LAP includes key information about an organization that would
allow SBA to reach a preliminary assessment about the qualifications of
an applicant more efficiently. SBA estimates it would receive
approximately four LAPs each year. SBA estimates that it would take
approximately 35 hours for an organization to prepare a LAP at a cost
of $2,870 per LAP. Based on SBA's experience with similar data
collections, we expect an organization that submits a LAP would need to
employ the services of a financial manager and an administrative
assistant when preparing a LAP for submission to SBA.\7\ SBA
specifically requests comments on whether the number of hours estimated
to prepare a LAP is appropriate.
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\7\ The cost estimate for the LAP is based on hourly job
position wages published by the U.S. Department of Labor's Bureau of
Labor Statistics for 2018 and increased by 30% to account for
benefits. The cost breakdown is as follows: Financial Manager (30
hours times an hourly rate of $91.77) plus Administrative Assistant
(5 hours times an hourly rate of $23.43) equals $2,870.
---------------------------------------------------------------------------
If an organization is authorized by SBA to proceed to the final
review phase, a complete application must be submitted to SBA. As
mentioned above, the application requirements for SBA Supervised
Lenders are not new and are currently set forth in SBA's official
policies and procedures. See SOP 50 10 5(K), Subpart A, Chapter 1,
Paragraph II.C.2 for NFRLs and Subpart A, Chapter 2, Paragraph II for
SBLCs. SBA estimates that it will receive approximately four complete
applications each year. SBA estimates that it would take approximately
50 hours for an organization to prepare a complete application at a
cost of $3,813 per application. Based on SBA's experience with similar
data collections, an organization applying to become an SBA Supervised
Lender would typically employ the services of a financial manager, an
accountant, an attorney and an administrative assistant when preparing
a complete application for submission to SBA.\8\ SBA specifically
requests comments on whether the number of hours estimated to prepare a
complete application is appropriate.
---------------------------------------------------------------------------
\8\ The cost estimate for a complete application is based on
hourly job position wages published by the U.S. Department of
Labor's Bureau of Labor Statistics for 2018 and increased by 30% to
account for benefits. The cost breakdown is as follows: Financial
Manager (30 hours times an hourly rate of $91.77) plus Accountant
(10 hours times an hourly rate of $49.26) plus Attorney (5 hours
times an hourly rate of $90.14) plus Administrative Assistant (5
hours times an hourly rate of $23.43) equals $3,813.
---------------------------------------------------------------------------
SBA anticipates that there would be some costs related to the new
minimum capital requirement under the proposed rule for SBA Supervised
Lenders. This proposed rule establishes a new minimum capital
requirement for SBLCs and NFRLs of at least $5 million and $2.5
million, respectively. Based on information provided to SBA by SBA
Supervised Lenders in quarterly condition reports, 11 of the 14 SBLCs
(i.e., 79%) have at least $4.75 million in capital (and of those 11
SBLCs, nine have more than $5 million in capital). In addition, 18 of
the 21 NFRLs (i.e., 86%) have more than $2.5 million in capital.
SBA has determined that there are eight small entities that would
be impacted by the new capital requirements in the proposed rule. In
other words, eight of the 35 SBA Supervised Lenders that are considered
small entities would need to increase their capital to reach the new
minimum capital requirement of either $2.5 million or $5 million (as
applicable). The estimated amount of capital that would need to be
raised by these small entities ranges between $240,000 and
[[Page 1790]]
$3,580,000. SBA estimates that this proposed rule may have a
significant economic impact on six of the 35 SBA Supervised Lenders
(i.e., 17%), each of which is considered a small entity. As noted
above, all existing SBA Supervised Lenders would have three years from
the effective date of a final rulemaking to comply with this part of
the proposed rule (other than for transactions involving a change of
ownership or control of an SBA Supervised Lender).
SBA estimates that the cost of raising capital for SBA Supervised
Lenders is approximately 9.8% of the amount of equity capital raised
based on the Capital Asset Pricing Model (CAPM). The CAPM is one of the
most widely used pricing models by financial professionals and
considered the preferred method to estimate the cost of equity capital.
See Duff & Phelps 2019 Valuation Handbook--U.S. Industry Cost of
Capital (data through June 30, 2019).\9\ SBA estimates that the total
cost of raising new equity capital for the eight SBA Supervised Lenders
based on the requirements of the proposed rule would range in amount
from approximately $23,000 to $350,000.\10\ However, the cost is
mitigated by the fact that under the proposed rule SBA Supervised
Lenders would have three years to increase their capital. Thus, the
maximum amount that it would cost an existing SBA Supervised Lender to
reach the new minimum capital requirement would be approximately
$117,000 per year for three consecutive years.\11\
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\9\ The 2019 Valuation Handbook--U.S. Industry Cost of Capital
published by Duff & Phelps provides cost of capital estimates for
approximately 170 industries identified by Standard Industrial
Classification codes (SIC). For purposes of estimating the cost of
raising equity capital for SBA Supervised Lenders, SBA used SIC code
61--non-depository credit institutions, which includes 21 companies
that are engaged primarily in extending credit in the form of loans
(but are not engaged in deposit banking). SBA compared the estimated
cost of raising capital cited above with other sources and found the
data to be similar.
\10\ The estimated cost to raise $240,000 or $3.58 million in
equity capital would be as follows: $240,000 times 9.8% equals
$23,000; $3.58 million times 9.8% equals $350,000.
\11\ It should be noted that some existing SBA Supervised
Lenders may decide to increase their capital by retaining earnings
instead of raising new equity capital, which would reduce the cost
of this proposed rule.
---------------------------------------------------------------------------
SBA determined that a three year time frame was a sufficient amount
of time for SBA Supervised Lenders to increase their capital. The three
year time period is also consistent with SBA's existing requirements
that SBA Supervised Lender applicants must have a detailed business and
operations plan that includes three years of projected loan activity,
secondary market activity and financial statements. See SOP 50 10. SBA
specifically requests comments on whether SBA Supervised Lenders should
have three years to comply with the new minimum capital requirements
under this proposed rule or should be required to comply sooner.
The proposed rule also seeks to limit the 7(a) lending area for
NFRLs to the state in which their primary state regulator is located,
except that it may include a local trade area that is contiguous to
such state (such as a city or metropolitan statistical area bisected by
a state line). There are currently 21 NFRLs participating in the 7(a)
Loan Program. During the last three fiscal years, two NFRLs (each of
which is considered a small entity) requested loan authorizations to
make the majority of their 7(a) loans outside of the state in which
their primary state regulator is located. With the exception of these
two NFRLs, approximately 90% of the lending within the 7(a) Loan
Program during the last three fiscal years was done in the state where
the NFRL's primary state regulator is located. Approximately 79% of all
7(a) loan approvals obtained by NFRLs during the last three fiscal
years were for loans to be made to small businesses located within
their own state. This part of the proposed rule would not impact a
substantial number of small entities. It is important to note that this
proposed rule will not impose any restrictions regarding an NFRL's non-
7(a) lending activities. Therefore, the proposed rule would not have
any impact on an NFRL's ability to generate business by making other
types of loans (e.g., conventional loans) outside of their own state.
In summary, SBA estimates that the total cost to a particular SBA
Supervised Lender associated with this proposed rule (including the
costs related to data collection) will range from zero to $356,683,
substantially all of which relates to the cost of raising capital and
may be spread over a three year time period.
4. What are the relevant Federal rules which may duplicate, overlap
or conflict with the rule?
We are not aware of any Federal rules that duplicate, overlap or
conflict with this rule. SBA's SOP 50 10 will have to be amended to
conform to portions of this rule, which will be done separately.
5. What alternatives will allow the Agency to accomplish its
regulatory objectives while minimizing the impact on small entities?
The Agency originally considered imposing the new minimum capital
requirements for SBA Supervised Lenders immediately due to the risk
associated with their lending operations. SBA recognized, however, that
providing a three year period of time for SBA Supervised Lenders to
increase their capital would be less burdensome on lenders and their
operational plans. SBA took into consideration that some lenders may
need time to plan their capital raising efforts and negotiate favorable
terms and conditions for increasing their capital. The proposed three
year time period will provide SBA Supervised Lenders with a sufficient
amount of time to raise new equity capital and an opportunity to
increase capital by retaining earnings (which will reduce the estimated
overall cost of raising such capital).
SBA believes many of the proposed changes in this rule would
benefit small entities interested in becoming an SBA Supervised Lender
by clarifying areas in the application process where there was
confusion and to make the process more transparent. This rule would
also allow SBA to evaluate the qualifications of new applicants more
efficiently and make well-informed decisions on SBA Supervised Lender
applications. SBA believes this proposed rule encompasses best practice
guidance that aligns with the Agency's mission to increase access to
capital for small businesses and facilitate American job preservation
and creation.
List of Subjects in 13 CFR Part 120
Community development, Equal employment opportunity, Loan
programs--business, Reporting and recordkeeping requirements, Small
businesses.
For the reasons stated in the preamble, SBA proposes to amend 13
CFR part 120 as follows:
PART 120--BUSINESS LOANS
0
1. The authority for 13 CFR part 120 continues to read as follows:
Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h), and note,
636(a), (h) and (m), 650, 687(f), 696(3) and (7), and 697(a) and
(e); Pub. L. 111-5, 123 Stat. 115, Pub. L. 111-240, 124 Stat. 2504.
Sec. 120.410 [Amended]
0
2. Amend Sec. 120.410(a)(1) by removing the phrase ``for SBLCs,
meeting its SBA minimum capital requirement; and for NFRLs, meeting its
state minimum capital requirement); and'' and adding in its place the
phrase ``and for SBLCs and NFRLs, meeting their respective minimum
capital requirement); and''.
0
3. Amend Sec. 120.460 by adding paragraphs (c) and (d) to read as
follows:
[[Page 1791]]
Sec. 120.460 What are SBA's additional requirements for SBA
Supervised Lenders?
* * * * *
(c) An SBA Supervised Lender must have qualified full-time
professional management including, but not limited to, a chief
executive officer or the equivalent to manage daily operations, and a
chief credit/risk officer. An SBA Supervised Lender must also have at
least one other full-time professional employee qualified by training
and experience to carry out its business plan. An SBA Supervised Lender
is expected to sustain a sufficient level of lending activity in its
lending area. This paragraph only applies to SBA Supervised Lenders
that make or acquire a 7(a) loan after [EFFECTIVE DATE OF THE FINAL
RULE], or to any SBA Supervised Lender approved after such date,
including in the event of a change of ownership or control.
(d) An NFRL may only make or acquire 7(a) loans in the state in
which its primary state regulator is located, except that an NFRL's
lending area may include a local trade area that is contiguous to such
state (e.g., a city or metropolitan statistical area that is bisected
by a state line) if the NFRL receives SBA's prior written approval.
This paragraph (d) only applies to NFRLs that make or acquire a 7(a)
loan after [EFFECTIVE DATE OF THE FINAL RULE], or to any NFRL approved
after such date, including in the event of a change of ownership or
control.
0
4. Amend Sec. 120.462 by:
0
a. Removing the phrase ``by state regulators'' wherever it appears and
adding in its place the phrase ``in Sec. 120.462(a)(1)'';
0
b. Redesignating paragraphs (a) through (e) as paragraphs (b) through
(f); and
0
c. Adding a new paragraph (a).
The addition to read as follows:
Sec. 120.462 What are SBA's additional requirements on capital
maintenance for SBA Supervised Lenders?
(a) Minimum capital requirements--(1) For NFRLs. (i) Beginning on
or after [DATE THREE YEARS FROM THE EFFECTIVE DATE OF THE FINAL RULE],
each NFRL that makes or acquires a 7(a) loan must maintain the minimum
capital required by its state regulator, or $2,500,000, whichever is
greater.
(ii) Any NFRL approved on or after [EFFECTIVE DATE OF THE FINAL
RULE], including in the event of a change of ownership or control, must
maintain the minimum capital requirement set forth in paragraph
(a)(1)(i) of this section.
(iii) Unless subject to paragraph (a)(1)(i) or (ii) of this
section, an NFRL must comply with the minimum capital requirements for
NFRLs that were in effect on [DATE ONE DAY PRIOR TO THE EFFECTIVE DATE
OF THE FINAL RULE].
(2) For SBLCs. For information on minimum capital requirements for
SBLCs, see Sec. 120.471.
* * * * *
0
5. Add Sec. 120.466 to read as follows:
Sec. 120.466 SBA Supervised Lender application.
An entity seeking to participate as an SBA Supervised Lender must
apply to SBA. SBA evaluates SBA Supervised Lender applicants through an
initial review and final review, as follows:
(a) Initial review. SBA Supervised Lender applicants must submit a
written plan containing information about the organization and its
current and proposed lending activities (``Lender Assessment Plan'').
After SBA's review of the Lender Assessment Plan, the Office of Capital
Access may require an interview with the applicant and its management
team. SBA will determine, in its sole discretion, whether an applicant
may proceed to the final review. If SBA determines that an applicant
may not proceed to the final review, the applicant must wait at least
nine months before it may submit a new Lender Assessment Plan. Each
applicant must demonstrate to SBA's satisfaction that it meets the
ethical requirements and the participation criteria set forth in 13 CFR
120.140 and 120.410. The Lender Assessment Plan must include the
following items:
(1) The legal name, address, telephone number and email address of
the applicant;
(2) Business plan, detailing the applicant's proposed lending area
and the volume of loan activity projected over the next three years
(supported by current and projected balance sheets, income statements
and statements of cash flows);
(3) Capitalization (current and proposed), including the form of
organization and the identification of all debt and classes of equity
capital and proposed funding amounts, including any rights or
preferences accorded to such interests (e.g., voting rights, redemption
rights and rights of convertibility) and any conditions for the
transfer, sale or assignment of such interests;
(4) A list of all members of the applicant's management team,
including the applicant's officers, directors, managers and key
employees, as well as the applicant's owners, Associates (as defined in
Sec. 120.10) and Affiliates (as defined in Sec. 121.103 of this
chapter);
(5) A written summary of the professional experience (including any
prior experience with any SBA program) of the applicant's management
team (including key employees);
(6) In connection with any application to become an SBLC, the
applicant must include a letter agreement signed by an authorized
official of an existing SBLC certifying that the SBLC is seeking to
transfer its SBA lending authority to the applicant; and
(7) If approval of any state or Federal chartering, licensing or
other regulatory authority is required, copies of any licenses issued
by or documents filed with such authority.
(b) Final review. Each applicant that receives notice from SBA in
writing that it may proceed to the final review must submit a complete
application to SBA within 90 calendar days. The application
requirements for SBA Supervised Lenders are set forth in official SBA
policy and procedures. An incomplete application submitted to SBA will
not be processed and will be returned to the applicant. SBA may, in its
sole discretion, approve or deny any SBA Supervised Lender application.
The decision to approve or deny an SBA Supervised Lender application is
a final agency decision. If an SBA Supervised Lender application is
denied by SBA or if a complete application is not timely submitted, the
applicant may not submit a new Lender Assessment Plan and restart the
application process until 18 months from the date of denial or the date
a complete application was due to SBA, as applicable.
(c) NFRL operating and lending experience requirement. For an
entity seeking to become an NFRL, evidence of at least one year of
current operating and relevant commercial lending experience must be
provided.
0
6. Add Sec. 120.467 to read as follows:
Sec. 120.467 Evaluation of SBA Supervised Lender applicants.
(a) SBA will evaluate an SBA Supervised Lender applicant based on
information from, among other sources, the Lender Assessment Plan, an
interview with the applicant's management team (if required), the
application and any other documentation submitted by the applicant, the
results of background investigations, public record searches and due
diligence conducted by SBA or other Federal or state agencies. SBA's
evaluation will consider factors such as the following:
(1) Professional qualifications of its management team (including
key employees), including demonstrated commercial lending experience,
[[Page 1792]]
business reputation, adherence to legal and ethical standards, track
record in making and monitoring business loans, and prior history, if
any, working as an officer, manager, director or key employee of a
lender involved in any SBA program or any other Federal or state
lending program.
(2) Historical performance measures of loans originated by the
applicant or attributable to its management team (including key
employees), including loan default rates, purchase rates and loss
rates, measured in both percentage terms and in comparison to
appropriate industry benchmarks, review/examination assessments and
other performance measures.
(3) The applicant's capitalization, organizational structure,
business plan (including any risk factors), projected financial
performance, financial strength, liquidity, the soundness of its
financial projections and underlying assumptions, loan underwriting
process, operations plan and the history of compliance of the applicant
and its management team (including key employees) with SBA Loan Program
Requirements.
(4) Whether the NFRL's state regulator and the state statute or
regulations governing the NFRL's operations, including but not limited
to those pertaining to audit, examination, supervision, enforcement and
information sharing, are satisfactory to SBA in its sole discretion.
(5) For changes of ownership or control, in addition to the factors
listed in paragraphs (a)(1) through (4) of this section, SBA will
consider whether the applicant's plan for the resolution of any
outstanding monetary liabilities to SBA, including repairs and denials
and civil monetary penalties, is acceptable to SBA in its sole
discretion.
(b) SBA may prohibit any individual or entity from participating as
an officer, director, manager, owner or key employee of the applicant
if such individual or entity:
(1) Has a previous record of failing to comply with SBA Loan
Program Requirements;
(2) Previously participated in a material way with any past or
present SBA Lender or Intermediary that failed to maintain satisfactory
SBA performance;
(3) Previously defaulted on any Federal loan or Federally assisted
financing that resulted in the Federal Government or any of its
agencies or departments sustaining a loss in any of its programs; or
(4) Ever failed to pay when due any debt or obligation, including
any amounts in dispute, to the Federal Government or guaranteed by the
Federal Government (including but not limited to taxes or business or
student loans).
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7. Add Sec. 120.468 to read as follows:
Sec. 120.468 Change of ownership or control requirements for SBA
Supervised Lenders.
(a) SBA prior approval required. Any change of ownership or control
of an SBA Supervised Lender without SBA's prior written approval is
prohibited. Prior to entering into any definitive agreement for a
change of ownership or control, SBA Supervised Lenders must receive
SBA's prior written approval from the appropriate SBA official in
accordance with Delegations of Authority. An SBA Supervised Lender may
not register proposed new owners on its books and records or permit
them to participate in any manner in the conduct of the SBA Supervised
Lender's affairs unless approved in writing by SBA. Any type of
agreement or letter of intent regarding a prospective change of
ownership or control must be reported to SBA within 30 calendar days as
required by Sec. 120.464(a)(5). A change of ownership or control
includes the following:
(1) Any transfer(s) (direct or indirect) of 10 percent or more of
any class of the SBA Supervised Lender's stock or ownership interests
(or series of transfers which, in the aggregate over an 18 month
period, equals 10 percent or more), or any agreement providing for such
transfer;
(2) Any transfer(s) (direct or indirect) that could result in the
beneficial ownership by any person or group of persons acting in
concert of 10 percent or more of any class of the SBA Supervised
Lender's stock or ownership interests, or any agreement providing for
such transfer(s);
(3) Any merger, consolidation, or reorganization;
(4) Any other transaction or agreement that transfers control of an
SBA Supervised Lender; or
(5) Any other transaction or event that results in any change in
the possession (direct or indirect) of the right to control, or the
power to direct or cause the direction of, the management or policies
of an SBA Supervised Lender, whether through the ownership of voting
securities, by contract or otherwise.
(b) Approval required by other regulatory authorities. If a change
of ownership or control of an SBA Supervised Lender is subject to the
approval of any state or Federal chartering, licensing or other
regulatory authority, copies of any documents filed with such authority
must, at the same time, be transmitted to the appropriate SBA official
in accordance with Delegations of Authority. The approval of any state
or Federal authority will be required in addition to SBA's prior
written approval.
(c) Application requirements for changes of ownership or control.
An applicant must submit a Lender Assessment Plan and a new application
in accordance with Sec. 120.466 for any change of ownership or
control. If a proposed change of ownership is for less than 50% of the
ownership interests in an SBA Supervised Lender, SBA may, in its sole
discretion, limit the requirements of the Lender Assessment Plan or the
complete application as set forth in official SBA policy and
procedures.
(d) Voluntary surrender of SBA lending authority. An SBA Supervised
Lender may voluntarily surrender its SBA lending authority (including
its SBLC license, as applicable) and withdraw as a participating Lender
with SBA's prior written approval. The SBA Supervised Lender must agree
to transfer its entire 7(a) loan portfolio to one or more Lenders
acceptable to SBA in accordance with Sec. 120.432(a), and enter into a
withdrawal agreement to resolve any outstanding issues, including any
outstanding monetary liabilities, to SBA's satisfaction.
Sec. 120.470 [Amended]
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8. Amend Sec. 120.470 by removing paragraph (g) and redesignating
paragraph (h) as paragraph (g).
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9. Amend Sec. 120.471 by:
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a. Revising paragraph (a);
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b. Redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4)
through (6) respectively; and
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c. Adding new paragraph (b)(3).
The revision and addition to read as follows:
Sec. 120.471 What are the minimum capital requirements for SBLCs?
(a) Minimum capital requirements. (1) Beginning on or after [DATE
THREE YEARS FROM THE EFFECTIVE DATE OF THE FINAL RULE], each SBLC that
makes or acquires a 7(a) loan must maintain, at a minimum, unencumbered
paid-in capital and paid-in surplus of at least $5,000,000, or ten
percent of the aggregate of its share of all outstanding loans,
whichever is greater.
(2) Any SBLC approved on or after [EFFECTIVE DATE OF THE FINAL
RULE], including in the event of a change of ownership or control, must
maintain the minimum capital requirement set forth in paragraph (a)(1)
of this section.
(3) Unless subject to paragraph (a)(1) or (2) of this section, an
SBLC must
[[Page 1793]]
comply with the minimum capital requirements that were in effect on
[DATE ONE DAY PRIOR TO THE EFFECTIVE DATE OF THE FINAL RULE].
(b) * * *
(3) Unrestricted net assets (for non-profit corporations);
* * * * *
Sec. 120.475 [Removed and Reserved]
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10. Remove and reserve Sec. 120.475.
Dated: December 31, 2019.
Christopher Pilkerton,
Acting Administrator.
[FR Doc. 2019-28500 Filed 1-10-20; 8:45 am]
BILLING CODE 8025-01-P