13 CFR part 120 (Business Loans; annual edition 2025)
Summary
This is the 1–1–25 Edition of 13 CFR part 120, SBA's business loan regulations. Its table of contents covers eligible uses of proceeds and restrictions on them, ethical requirements for participants, SBA's lending criteria, the statutory limit on total loans to a borrower and loan conditions. It also lists requirements imposed under other laws, among them flood insurance, earthquake hazards and coastal barrier islands.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“13 CFR part 120 (Business Loans; annual edition 2025).”
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§§ 119.2–119.20 13 CFR Ch. I (1–1–25 Edition)
may be used; advise potential appli- USES OF PROCEEDS
cants regarding the process for obtain- 120.120 What are eligible uses of proceeds?
ing, completing, and submitting an ap- 120.130 Restrictions on uses of proceeds.
plication packet; and provide informa- 120.131 Leasing part of new construction or
tion regarding application deadlines existing building to another business.
and any additional limitations, special ETHICAL REQUIREMENTS
rules, procedures, and restrictions
which SBA may deem advisable. 120.140 What ethical requirements apply to
participants?
(c) SBA will evaluate applications for
PRIME awards in accordance with the CREDIT CRITERIA FOR SBA LOANS
stated statutory goals of the program 120.150 What are SBA’s lending criteria?
and the specific criteria described in 120.151 What is the statutory limit for total
the relevant funding announcement. loans to a Borrower?
(d) In administering the PRIME pro- 120.160 Loan conditions.
gram, SBA will require recipients to
REQUIREMENTS IMPOSED UNDER OTHER LAWS
provide reports in accordance with the AND ORDERS
subject matter areas and schedule iden-
tified in the terms and conditions of 120.170 Flood insurance.
120.171 Compliance with child support obli-
their awards. In addition, SBA may, as gations.
it deems appropriate, make site visits 120.172 Flood-plain and wetlands manage-
to recipients’ premises and review all ment.
applicable documentation and records. 120.174 Earthquake hazards.
120.175 Coastal barrier islands.
[85 FR 62951, Oct. 6, 2020] 120.176 Compliance with other laws.
§§ 119.2–119.20 [Reserved] APPLICABILITY AND ENFORCEABILITY OF LOAN
PROGRAM REQUIREMENTS
PART 120—BUSINESS LOANS 120.180 Compliance with Loan Program Re-
quirements.
GENERAL DESCRIPTIONS OF SBA’S BUSINESS 120.181 Status of Lenders and CDCs.
LOAN PROGRAMS
LOAN APPLICATIONS
Sec. 120.190 Where does an applicant apply for a
120.1 Which loan programs does this part loan?
cover? 120.191 The contents of a business loan ap-
120.2 Descriptions of the business loan pro- plication.
grams. 120.192 Approval or denial.
120.3 Pilot programs. 120.193 Reconsideration after denial.
120.4 Severability.
COMPUTERIZED SBA FORMS
DEFINITIONS
120.194 [Reserved]
120.10 Definitions.
REPORTING
Subpart A—Policies Applying to All 120.195 Disclosure of fees.
Business Loans 120.197 Notifying SBA’s Office of Inspector
General of suspected fraud.
ELIGIBILITY REQUIREMENTS
120.100 What are the basic eligibility re- Subpart B—Policies Specific to 7(a) Loans
quirements for all applicants for SBA
business loans? BONDING REQUIREMENTS
120.101 Credit not available elsewhere. 120.200 What bonding requirements exist
120.102 [Reserved] during construction?
120.104 Are businesses financed by SBICs el-
igible? LIMITATIONS ON USE OF PROCEEDS
120.105 Special consideration for veterans. 120.201 Refinancing unsecured or under-
secured loans.
INELIGIBLE BUSINESSES AND ELIGIBLE PASSIVE 120.202 Loans for changes of ownership.
COMPANIES
MATURITIES; INTEREST RATES; LOAN AND
120.110 What businesses are ineligible for
GUARANTEE AMOUNTS
SBA business loans?
120.111 What conditions must an Eligible 120.210 What percentage of a loan may SBA
Passive Company satisfy? guarantee?
252
Small Business Administration Pt. 120
120.211 What limits are there on the 120.351 Definitions.
amounts of direct loans? 120.352 Use of proceeds.
120.212 What limits are there on loan matu- 120.353 Eligibility.
rities? 120.354 Creditworthiness.
120.213 What fixed interest rates may a
Lender charge? VETERANS LOAN PROGRAM
120.214 What conditions apply for variable 120.360 Which veterans are eligible?
interest rates? 120.361 Other conditions of eligibility.
FEES FOR GUARANTEED LOANS LOANS TO PARTICIPANTS IN THE 8(a) PROGRAM
120.220 Fees that Lender pays SBA. 120.375 Policy.
120.221 Fees and expenses that the Lender 120.376 Special requirements.
may collect from a loan applicant or Bor- 120.377 Use of proceeds.
rower.
120.222 Prohibition on sharing premiums for CAPLINES PROGRAM
secondary market sales. 120.390 Revolving credit.
120.223 Subsidy recoupment fee payable to
SBA by Borrower. BUILDERS LOAN PROGRAM
120.391 What is the Builders Loan Program?
Subpart C—Special Purpose Loans 120.392 Who may apply?
120.300 Statutory authority. 120.393 Are there special application re-
quirements?
DISABLED ASSISTANCE LOAN PROGRAM (DAL) 120.394 What are the eligible uses of pro-
ceeds?
120.310 What assistance is available for the 120.395 What is SBA’s collateral position?
disabled? 120.396 What is the term of the loan?
120.311 Definitions. 120.397 Are there any special restrictions?
120.312 DAL–1 use of proceeds and other pro-
gram conditions. AMERICA’S RECOVERY CAPITAL (BUSINESS STA-
120.313 DAL–2 use of proceeds and other pro- BILIZATION) LOAN PROGRAM—ARC LOAN
gram conditions. PROGRAM
120.314 Resolving doubts about credit-
120.398 America’s Recovery Capital (ARC)
worthiness.
Loan Program.
120.315 Interest rate and loan limit.
BUSINESSES OWNED BY LOW INCOME Subpart D—Lenders
INDIVIDUALS
120.400 Loan Guarantee Agreements.
120.320 Policy.
PARTICIPATION CRITERIA
ENERGY CONSERVATION 120.410 Requirements for all participating
120.330 Who is eligible for an energy con- Lenders.
servation loan? 120.411 Preferences.
120.331 What devices or techniques are eligi- 120.412 Other services Lenders may provide
ble for a loan? Borrowers.
120.332 What are the eligible uses of pro- 120.413 Advertisement of relationship with
ceeds? SBA.
120.333 Are there any special credit criteria?
PARTICIPATING LENDER FINANCINGS
EXPORT WORKING CAPITAL PROGRAM (EWCP) 120.420 Definitions.
120.340 What is the Export Working Capital 120.421 Which Lenders may securitize?
Program? 120.422 Are all securitizations subject to
120.341 Who is eligible? this subpart?
120.342 What are eligible uses of proceeds? 120.423 Which 7(a) loans may a Lender
120.343 Collateral. securitize?
120.344 Unique requirements of the EWCP. 120.424 What are the basic conditions a
Lender must meet to securitize?
INTERNATIONAL TRADE LOANS 120.425 What are the minimum elements
that SBA will require before consenting
120.345 Policy. to a securitization?
120.346 Eligibility. 120.426 What action will SBA take if a
120.347 Use of proceeds. securitizer transfers the subordinated
120.348 Amount of guarantee. tranche prior to the termination of the
120.349 Collateral. holding period?
120.427 Will SBA approve a securitization
QUALIFIED EMPLOYEE TRUSTS (ESOP)
application from a capital impaired
120.350 Policy. Securitizer?
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Pt. 120 13 CFR Ch. I (1–1–25 Edition)
120.428 What happens to a securitizer’s Subpart E—Servicing, Liquidation and Debt
other PLP responsibilities if SBA sus- Collection Litigation of 7(a) and 504 Loans
pends its PLP approval privilege?
SBA’S PURCHASE OF A GUARANTEED PORTION
OTHER CONVEYANCES
120.520 Purchase of 7(a) loan guarantees.
120.430 What conveyances are covered by 120.521 What interest rate applies after SBA
§§ 120.430 through 120.435? purchases its guaranteed portion?
120.431 Which Lenders may sell, sell partici-
120.522 Payment of accrued interest to the
pations in, or pledge 7(a) loans?
Lender or Registered Holder when SBA
120.432 Under what circumstances does this
purchases the guaranteed portion.
subpart permit sales of, or sales of par-
120.523 What is the ‘‘earliest uncured pay-
ticipating interests in, 7(a) loans?
ment default’’?
120.433 What are SBA’s other requirements
for sales and sales of participating inter- 120.524 When is SBA released from liability
ests? on its guarantee?
120.434 What are SBA’s requirements for 120.530 Deferment of payment.
loan pledges? 120.531 Extension of maturity.
120.435 Which loan pledges do not require 120.535 Standards for Lender and CDC loan
notice to or consent by SBA? servicing, loan liquidation and debt col-
lection litigation.
DELEGATED AUTHORITY CRITERIA 120.536 Servicing and liquidation actions
that require the prior written consent of
120.440 How does a 7(a) Lender obtain dele-
SBA.
gated authority?
120.441–120.447 [Reserved] 120.540 Liquidation and litigation plans.
120.541 Time for approval by SBA.
PREFERRED LENDERS PROGRAM (PLP) 120.542 Payment by SBA of legal fees and
other expenses.
120.450 What is the Preferred Lenders Pro-
120.545 What are SBA’s policies concerning
gram?
the liquidation of collateral and the sale
120.451 [Reserved]
of business loans and physical disaster
120.452 What are the requirements of PLP
assistance loans, physical disaster busi-
loan processing?
ness loans and economic injury disaster
SBA SUPERVISED LENDERS loans?
120.546 Loan asset sales.
120.460 What are SBA’s additional require-
ments for SBA Supervised Lenders? HOMESTEAD PROTECTION FOR FARMERS
120.461 What are SBA’s additional require-
ments for SBA Supervised Lenders con- 120.550 What is homestead protection for
cerning records? farmers?
120.462 What are SBA’s additional require- 120.551 Who is eligible for homestead pro-
ments on capital maintenance for SBA tection?
Supervised Lenders? 120.552 Lease.
120.463 Regulatory accounting—What are 120.553 Appeal.
SBA’s regulatory accounting require- 120.554 Conflict of laws.
ments for SBA Supervised Lenders?
120.464 Reports to SBA. Subpart F—Secondary Market
120.465 Civil penalty for late submission of
FISCAL AND TRANSFER AGENT (FTA)
required reports.
120.466 SBA Supervised Lender application. 120.600 Definitions.
120.467 Evaluation of SBA Supervised Lend- 120.601 SBA Secondary Market.
er applicants.
120.468 Change of ownership or control re- CERTIFICATES
quirements for SBA Supervised Lenders. 120.610 Form and terms of Certificates.
SMALL BUSINESS LENDING COMPANIES (SBLC) 120.611 Pools backing Pool Certificates.
120.612 Loans eligible to back Certificates.
120.470 What are SBA’s additional require- 120.613 Secondary Participation Guarantee
ments for SBLCs? Agreement.
120.471 What are the minimum capital re-
quirements for SBLCs? THE SBA GUARANTEE OF A CERTIFICATE
120.472 Higher individual minimum capital
requirement. 120.620 SBA guarantee of a Pool Certificate.
120.473 Procedures for determining indi- 120.621 SBA guarantee of an Individual Cer-
vidual minimum capital requirement. tificate.
120.474 Relation to other actions. POOL ASSEMBLERS
120.475 [Reserved]
120.476 Prohibited financing. 120.630 Qualifications to be a Pool Assem-
120.490 Audits. bler.
254
Small Business Administration Pt. 120
120.631 Suspension or termination of Pool REQUIREMENTS FOR CDC CERTIFICATION AND
Assembler. OPERATION
MISCELLANEOUS PROVISIONS 120.816 CDC non-profit status and good
standing.
120.640 Administration of the Pool and Indi- 120.818 Applicability to existing for-profit
vidual Certificates. CDCs.
120.641 Disclosure to purchasers. 120.820 CDC Affiliation.
120.642 Requirements before the FTA issues 120.821 CDC Area of Operations.
Pool Certificates. 120.823 CDC Board of Directors.
120.643 Requirements before the FTA issues 120.824 Professional management and staff,
Individual Certificates. and contracts for services.
120.644 Transfers of Certificates. 120.825 Financial ability to operate.
120.645 Redemption of Certificates. 120.826 Basic requirements for operating a
120.650 Registration duties of FTA in Sec- CDC.
ondary Market. 120.827 Other services a CDC may provide to
120.651 Claim to FTA by Registered Holder small businesses.
to replace Certificate. 120.828 Minimum level of 504 loan activity
120.652 FTA fees. and restrictions on portfolio concentra-
SUSPENSION OR REVOCATION OF PARTICIPANT tions.
IN SECONDARY MARKET
120.829 Job Opportunity average a CDC
must maintain.
120.660 Suspension or revocation. 120.830 Reports a CDC must submit.
Subpart G—Microloan Program EXTENDING A CDC’S AREA OF OPERATIONS
120.700 What is the Microloan Program? 120.835 Application to expand an Area of Op-
120.701 Definitions. erations.
120.702 Are there limitations on who can be 120.837 SBA decision on application for a
an Intermediary or on where an Inter- new CDC or for an existing CDC to ex-
mediary may operate? pand Area of Operations.
120.703 How does an organization apply to 120.839 Case-by-case application to make a
become an Intermediary? 504 loan outside of a CDC’s Area of Oper-
120.704 How are applications evaluated? ation.
120.705 What is a Specialized Intermediary?
ACCREDITED LENDERS PROGRAM (ALP)
120.706 What are the terms and conditions
of an SBA loan to an intermediary? 120.840 Accredited Lenders Program (ALP).
120.707 What conditions apply to loans by 120.841 Qualifications for the ALP.
Intermediaries to Microloan borrowers? 120.842 ALP Express Loans.
120.708 What is the Intermediary’s financial
contribution? PREMIER CERTIFIED LENDERS PROGRAM
120.709 What is the Microloan Revolving 120.845 Premier Certified Lenders Program
Fund? (PCLP).
120.710 What is the Loan Loss Reserve 120.846 Requirements for maintaining and
Fund? renewing PCLP status.
120.711 What rules govern Intermediaries? 120.847 Requirements for the Loan Loss Re-
120.712 How does an Intermediary get a serve Fund (LLRF).
grant to assist Microloan borrowers? 120.848 Requirements for 504 loan proc-
120.713 Does SBA provide technical assist- essing, closing, servicing, liquidating,
ance to Intermediaries? and litigating by PCLP CDCs.
120.714–120.715 [Reserved]
120.716 What is the minimum number of OTHER CDC REQUIREMENTS
loans an Intermediary must make each
Federal fiscal year? 120.851 CDC ethical requirements.
120.852 [Reserved]
Subpart H—Development Company Loan 120.853 Inspector General audits of CDCs.
120.857 Voluntary transfer and surrender of
Program (504) CDC certification.
120.800 [Reserved]
PROJECT ECONOMIC DEVELOPMENT GOALS
120.801 How a 504 Project is financed.
120.802 Definitions. 120.860 Required objectives.
120.861 Job creation or retention.
CERTIFICATION PROCEDURES TO BECOME A CDC 120.862 Other economic development objec-
120.810 Applications for certification as a tives.
CDC.
LEASING POLICIES SPECIFIC TO 504 LOANS
120.812 Probationary period for newly cer-
tified CDCs. 120.870 Leasing Project Property.
255
Pt. 120 13 CFR Ch. I (1–1–25 Edition)
120.871 Leasing part of Project Property to SERVICING
another business.
120.970 Servicing of 504 loans and Deben-
LOAN-MAKING POLICIES SPECIFIC TO 504 LOANS tures.
120.880 Basic eligibility requirements. FEES
120.881 Ineligible Projects for 504 loans.
120.971 Allowable fees paid by Borrower.
120.882 Eligible Project costs for 504 loans.
120.972 Third Party Lender participation fee
120.883 Eligible administrative costs for 504
and CDC fee.
loans.
120.884 Ineligible costs for 504 loans. AUTHORITY OF CDCS TO PERFORM LIQUIDA-
TION AND DEBT COLLECTION LITIGATION
INTERIM FINANCING
120.975 CDC Liquidation of loans and debt
120.890 Source of interim financing.
120.891 Certifications of disbursement and collection litigation.
completion. ENFORCEABILITY OF 501, 502 AND 503 LOANS
120.892 Certifications of no adverse change. AND OTHER LAWS
PERMANENT FINANCING 120.990 501, 502 and 503 loans.
120.900 Sources of permanent financing. 120.991 Effect of other laws.
THE BORROWER’S CONTRIBUTION Subpart I—Risk-Based Lender Oversight
120.910 Borrower contributions. SUPERVISION
120.911 Land contributions.
120.912 Borrowed contributions. 120.1000 Risk-Based Lender Oversight.
120.913 Limitations on any contributions by 120.1005 Bureau of PCLP Oversight.
a Licensee. 120.1010 SBA access to SBA Lender and
Intermediary files.
THIRD PARTY LOANS 120.1015 Risk Rating System.
120.1025 Monitoring.
120.920 Required participation by the Third 120.1050 Reviews and examinations.
Party Lender. 120.1051 Frequency of reviews and examina-
120.921 Terms of Third Party loans. tions.
120.922 Pre-existing debt on the Project 120.1055 Review and examination results.
Property. 120.1060 Confidentiality of Reports, Risk
120.923 Policies on subordination. Ratings, and related Confidential Infor-
120.925 [Reserved] mation.
120.926 Referral fee. 120.1070 SBA Lender oversight fees
504 LOANS AND DEBENTURES ENFORCEMENT ACTIONS
120.930 Amount. 120.1300 Informal enforcement actions—7(a)
120.931 504 Lending limits. Lenders.
120.932 Interest rate. 120.1400 Grounds for enforcement actions—
120.933 Maturity. SBA Lenders.
120.934 Collateral. 120.1425 Grounds for formal enforcement ac-
120.935 Deposit from the Borrower that a tions—Intermediaries participating in
CDC may require. the Microloan Program.
120.937 Assumption. 120.1500 Types of formal enforcement ac-
120.938 Default. tions—SBA Lenders.
120.939 Borrower prohibition. 120.1510 Other Regulated SBLCs.
120.940 Prepayment of the 504 loan or De- 120.1511 Certification and other reporting
benture. and notification requirements for Other
120.941 Certificates. Regulated SBLCs.
DEBENTURE SALES AND SERVICE AGENTS 120.1540 Types of formal enforcement ac-
tions—Intermediaries participating in
120.950 SBA and CDC must appoint agents. the Microloan Program.
120.951 Selling agent. 120.1600 General procedures for formal en-
120.952 Fiscal agent. forcement actions against SBA Lenders,
120.953 Trustee. SBA Supervised Lenders, Other Regu-
120.954 Central Servicing Agent. lated SBLCs, Management Officials,
120.955 Agent bonds and records. Other Persons, and Intermediaries.
120.956 Suspension or revocation of brokers
and dealers. Subpart J—Establishment of SBA Sec-
CLOSINGS ondary Market Guarantee Program for
First Lien Position 504 Loan Pools
120.960 Responsibility for closing.
120.961 Construction escrow accounts. 120.1700 Definitions used in subpart J.
256
Small Business Administration § 120.2
120.1701 Program purpose. (‘‘Title V’’). These three programs con-
120.1702 Program fee. stitute the business loan programs of
120.1703 Qualifications to be a Pool Origi- the SBA.
nator.
120.1704 Pool Loans eligible for Pooling.
120.1705 Pool formation requirements.
§ 120.2 Descriptions of the business
120.1706 Pool Originator’s retained interest
loan programs.
in Pool. (a) 7(a) loans. (1) 7(a) loans provide fi-
120.1707 Seller’s retained Loan Interest. nancing for general business purposes
120.1708 Pool Certificates. and may be:
120.1709 Transfers of Pool Certificates.
120.1710 Central servicing of the Program. (i) A direct loan by SBA;
120.1711 Suspension or termination of Pro- (ii) An immediate participation loan
gram participation privileges. by a Lender and SBA; or
120.1712 Seller responsibilities with respect (iii) A guaranteed loan (deferred par-
to Seller’s Pool Loan. ticipation) by which SBA guarantees a
120.1713 Seller’s Pool Loan origination. portion of a loan made by a Lender.
120.1714 Seller’s Pool Loan servicing.
120.1715 Seller’s Pool Loan liquidation. (2) A guaranteed loan is initiated by
120.1716 Required SBA approval of servicing a Lender agreeing to make an SBA
actions. guaranteed loan to a small business
120.1717 Seller’s Pool Loan deferments. and applying to SBA for SBA’s guar-
120.1718 SBA’s right to assume Seller’s re- antee under a blanket guarantee agree-
sponsibilities. ment (participation agreement) be-
120.1719 SBA’s right to recover from Seller. tween SBA and the Lender. If SBA
120.1720 SBA’s right to review Pool Loan
documents.
agrees to guarantee (authorizes) a por-
120.1721 SBA’s right to investigate. tion of the loan, the Lender funds and
120.1722 SBA’s offset rights. services the loan. If the small business
120.1723 Pool Loan receivables received by defaults on the loan, SBA’s guarantee
Seller. requires SBA to purchase its portion of
120.1724 Servicing and liquidation expenses. the outstanding balance, upon demand
120.1725 No Program Preference by Seller or by the Lender and subject to specific
Pool Originator. conditions. Regulations specific to 7(a)
120.1726 Pool Certificates a Seller cannot
purchase.
loans are found in subpart B of this
part.
AUTHORITY: 15 U.S.C. 634(b) (6), (b) (7), (b) (b) Microloans. SBA makes loans and
(14), (h), and note, 636(a), (h) and (m), 650,
loan guarantees to non-profit Inter-
687(f), 696(3) and (7), and 697(a) and (e); sec.
521, Pub. L. 114–113, 129 Stat. 2242; sec. 328(a), mediaries that make short-term loans
Pub. L. 116–260, 134 Stat. 1182. up to $50,000 to eligible small busi-
nesses for general business purposes,
SOURCE: 61 FR 3235, Jan. 31, 1996, unless
except payment of personal debts. SBA
otherwise noted.
also makes grants to Intermediaries
EDITORIAL NOTE: Nomenclature changes to for use in providing management as-
part 120 appear at 72 FR 50039, Aug. 30, 2007. sistance and counseling to small busi-
nesses. Regulations specific to these
GENERAL DESCRIPTIONS OF SBA’S
loans are found in subpart G of this
BUSINESS LOAN PROGRAMS
part.
§ 120.1 Which loan programs does this (c) 504 loans. Projects involving 504
part cover? loans require long-term fixed-asset fi-
This part regulates SBA’s financial nancing for small businesses. A Cer-
assistance to small businesses under its tified Development Company (CDC)
general business loan programs (‘‘7(a) provides the final portion of this fi-
loans’’) authorized by section 7(a) of nancing with a 504 loan made from the
the Small Business Act (‘‘the Act’’), 15 proceeds of a Debenture issued by the
U.S.C. 636(a), its microloan demonstra- CDC, guaranteed 100 percent by SBA
tion loan program (‘‘Microloans’’) au- (with the full faith and credit of the
thorized by section 7(m) of the Act, 15 United States), and sold to investors.
U.S.C. 636(m), and its development The regulations specific to these loans
company program (‘‘504 loans’’) author- are found in subpart H of this part.
ized by Title V of the Small Business [61 FR 3235, Jan. 31, 1996, as amended at 76
Investment Act, 15 U.S.C. 695 to 697f FR 63545, Oct. 12, 2011]
257
§ 120.3 13 CFR Ch. I (1–1–25 Edition)
§ 120.3 Pilot programs. (i) An officer, director, owner of more
than 20 percent of the equity, or key
The Administrator of SBA may from
employee of the small business;
time to time suspend, modify, or waive
(ii) Any entity in which one or more
rules for a limited period of time to individuals referred to in paragraphs
test new programs or ideas. The Ad- (2)(i) of this definition owns or controls
ministrator shall publish a document at least 20 percent; and
in the FEDERAL REGISTER explaining (iii) Any individual or entity in con-
the reasons for these actions. trol of or controlled by the small busi-
ness (except a Small Business Invest-
§ 120.4 Severability.
ment Company (‘‘SBIC’’) licensed by
Any provision of this part held to be SBA).
invalid or unenforceable as applied to (3) For purposes of this definition,
any person, entity, or circumstance the time during which an Associate re-
shall be construed so as to continue to lationship exists commences six
give the maximum effect to such provi- months before the following dates and
sion as permitted by law, including as continues as long as the certification,
applied to persons or entities not simi- participation agreement, or loan is
larly situated or to dissimilar cir- outstanding:
cumstances, unless such holding is that (i) For a CDC, the date of certifi-
the provision of this part is invalid and cation by SBA;
unenforceable in all circumstances, in (ii) For a Lender, the date of applica-
which event the provision shall be sev- tion for a loan guarantee on behalf of
erable from the remainder of this part an applicant; or
and shall not affect the remainder (iii) For a small business, the date of
thereof. the loan application to SBA, the CDC,
[89 FR 34101, Apr. 30, 2024]
the Intermediary, or the Lender.
Authorized CDC Liquidator is a CDC in
DEFINITIONS good standing with authority under the
Act and SBA regulations to conduct
§ 120.10 Definitions. liquidation and certain debt collection
litigation in connection with 504 loans,
The following terms have the same as authorized by § 120.975.
meaning wherever they are used in this Borrower is the obligor of an SBA
part. Defined terms are capitalized business loan.
wherever they appear. Certified Development Company
Acceptable Risk Rating is an SBA-as- (‘‘CDC’’) is an entity authorized by
signed Risk Rating, currently defined SBA to deliver 504 financing to small
by SBA as ‘‘1’’, ‘‘2’’ or ‘‘3’’ on a scale of businesses.
1 to 5, which represents an acceptable Close Relative is a spouse; a parent; or
level of risk as determined by SBA, and a child or sibling, or the spouse of any
which may be revised by SBA from such person.
time to time as published in the FED- Community Advantage Small Business
ERAL REGISTER through notice and Lending Company (Community Advan-
comment. tage SBLC) is a type of SBLC that is a
Associate. (1) An Associate of a Lend- nonprofit lending institution licensed
er or CDC is: and authorized by SBA to make loans
(i) An officer, director, key employee, pursuant to section 7(a) of the Small
or holder of 20 percent or more of the Business Act. Note: This includes
value of the Lender’s or CDC’s stock or former Community Advantage Pilot
debt instruments, or an agent involved Lenders that were grandfathered in at
in the loan process; or the time Community Advantage SBLC
(ii) Any entity in which one or more licenses were authorized regardless of
individuals referred to in paragraphs their profit or nonprofit status. SBA
(1)(i) of this definition or a Close Rel- accepts applications for Community
ative of any such individual owns or Advantage SBLCs from time to time as
controls at least 20 percent. published in the FEDERAL REGISTER.
(2) An Associate of a small business Eligible Passive Company is a small en-
is: tity or trust which does not engage in
258
Small Business Administration § 120.10
regular and continuous business activ- to which the Lender or CDC is subject;
ity, which leases real or personal prop- SBA Standard Operating Procedures
erty to an Operating Company for use (SOPs); FEDERAL REGISTER notices; and
in the Operating Company’s business, official SBA notices and forms applica-
and which complies with the conditions ble to the 7(a) Loan Program, 504 Loan
set forth in § 120.111. Program or Microloan Program, as
Federal Financial Institution Regulator such requirements are issued and re-
is the Federal banking regulator of a vised by SBA from time to time. For
7(a) Lender and may include the Fed- CDCs, this term also includes require-
eral Deposit Insurance Corporation, ments imposed by Debentures, as that
the Federal Reserve Board, the Office term is defined in § 120.802. For Inter-
of the Comptroller of the Currency, the mediaries, this term also includes re-
National Credit Union Administration, quirements imposed by promissory
and the Farm Credit Administration. notes, collateral documents, and grant
Intermediary is the entity in the agreements.
Microloan program that receives SBA Management Official is an officer, di-
financial assistance and makes loans to rector, general partner, manager, em-
small businesses in amounts up to ployee participating in management,
$50,000. agent or other participant in the man-
Lender or 7(a) Lender is an institution agement of the affairs of the SBA Su-
that has executed a participation pervised Lender’s activities under the
agreement with SBA under the guaran- 7(a) program.
teed loan program. Non-Federally Regulated Lender
Lender Oversight Committee (LOC) is a (NFRL) is a business concern that is
committee established within SBA by authorized by the SBA to make loans
legislation, which meets at least quar- under section 7(a) and is subject to reg-
terly, and which has the membership ulation by a state but whose lending
and duties set forth in section 48 of the
activities are not regulated by a Fed-
Small Business Act as further outlined
eral Financial Institution Regulator.
in Delegations of Authority published
Operating Company is an eligible
in the FEDERAL REGISTER. The LOC’s
duties include, but are not limited to, small business actively involved in
reviewing (in an advisory capacity) any conducting business operations now or
lender oversight, portfolio risk man- about to be located on real property
agement, or program integrity matters owned by an Eligible Passive Company,
brought by the Director of the Office of or using or about to use in its business
Credit Risk Management (D/OCRM), operations personal property owned by
and voting on formal enforcement ac- an Eligible Passive Company.
tion recommendations. Other Regulated SBLC is a Small
Less Than Acceptable Risk Rating is an Business Lending Company whose SBA
SBA-assigned Risk Rating, currently operations receive regular safety and
defined by SBA as ‘‘4’’ or ‘‘5’’ on a scale soundness examinations by a state
of 1 to 5, which represents a higher banking regulator or a Federal Finan-
level of risk as determined by SBA, and cial Institution Regulator, and which
which may be revised by SBA from meets the requirements set forth in
time to time as published in the FED- § 120.1511.
ERAL REGISTER through notice and Person is any individual, corporation,
comment. partnership, association, unit of gov-
Loan Instruments are the note, instru- ernment, or legal entity, however orga-
ments of hypothecation, and all other nized.
agreements and documents related to a Preference is any arrangement giving
loan. a Lender or a CDC a preferred position
Loan Program Requirements or SBA compared to SBA relating to the mak-
Loan Program Requirements are require- ing, servicing, or liquidation of a busi-
ments imposed upon Lenders, CDCs, or ness loan with respect to such things as
Intermediaries by statute; SBA and ap- repayment, collateral, guarantees, con-
plicable government-wide regulations; trol, maintenance of a compensating
any agreement the Lender, CDC, or balance, purchase of a Certificate of de-
Intermediary has executed with SBA or posit or acceptance of a separate or
259
§ 120.100 13 CFR Ch. I (1–1–25 Edition)
companion loan, without SBA’s con- Subpart A—Policies Applying to
sent. All Business Loans
Rentable Property is the total square
footage of all buildings or facilities ELIGIBILITY REQUIREMENTS
used for business operations.
Risk Rating is an SBA internal com- § 120.100 What are the basic eligibility
posite rating assigned to individual requirements for all applicants for
SBA business loans?
SBA Lenders and Intermediaries that
reflects the risk associated with the To be eligible for an SBA business
SBA Lender’s or Intermediary’s port- loan, a small business applicant must:
folio of SBA loans. Risk Ratings cur- (a) Be an operating business (except
rently range from one to five, with one for loans to Eligible Passive Compa-
representing the least risk and five rep- nies);
resenting the most risk, and may be re- (b) Be organized for profit;
vised by SBA from time to time as pub- (c) Be located in the United States;
lished in the FEDERAL REGISTER (d) Be small under the size require-
through notice and comment. ments of part 121 of this chapter (in-
Rural Area is a political subdivision cluding affiliates). See subpart H of
or unincorporated area in a non-metro- this part for the size standards of part
politan county (as defined by the De- 121 of this chapter which apply only to
partment of Agriculture), or, if in a 504 loans; and
metropolitan county, any such subdivi- (e) Be able to demonstrate a need for
sion or area with a resident population the desired credit.
under 20,000 which is designated by
SBA as rural. § 120.101 Credit not available else-
where.
SBA Lender is a 7(a) Lender or a CDC.
This term includes SBA Supervised SBA provides business loan assist-
Lenders. ance only to applicants for whom the
SBA Supervised Lender is a 7(a) Lend- desired credit is not otherwise avail-
er that is either a Small Business able on reasonable terms from non-
Lending Company or a NFRL. Federal, non-State, and non-local gov-
Service Provider is an entity that con- ernment sources. Accordingly, SBA re-
tracts with a Lender or CDC to perform quires the Lender or CDC to certify or
management, marketing, legal or other otherwise show that the desired credit
is unavailable to the applicant on rea-
services.
sonable terms and conditions from non-
Small Business Lending Company Federal, non-State, and non-local gov-
(SBLC) is a non-depository lending in- ernment sources without SBA assist-
stitution that is SBA-licensed and is ance, taking into consideration factors
authorized by SBA to make loans pur- associated with conventional lending
suant to section 7(a) of the Small Busi- practices, including: The business in-
ness Act and loans to Intermediaries in dustry of the loan applicant; whether
SBA’s Microloan program. SBA accepts the loan applicant has been in oper-
applications for SBLCs from time to ation two years or less; the adequacy of
time as published in the FEDERAL REG- collateral available to secure the loan;
ISTER. the loan term necessary to reasonably
SOPs are SBA Standard Operating assure repayment of the loan from ac-
Procedures, as issued and revised by tual or projected business cash flow;
SBA from time to time. SOPs are pub- and any other factor relating to the
licly available on SBA’s Web site at particular loan application that cannot
http://www.sba.gov in the online library. be overcome except through obtaining
a Federal loan guarantee under pru-
[61 FR 3235, Jan. 31, 1996, as amended at 64
FR 2117, Jan. 13, 1999; 68 FR 57980, Oct. 7, 2003;
dent lending standards. Submission of
72 FR 18360, Apr. 12, 2007; 73 FR 75510, Dec. 11, an application to SBA by a Lender or
2008; 76 FR 63545, Oct. 12, 2011; 85 FR 7647, CDC constitutes certification by the
Feb. 10, 2020; 85 FR 14780, Mar. 16, 2020; 85 FR Lender or CDC that it has examined
80588, Dec. 14, 2020; 87 FR 38908, June 30, 2022; the availability of credit to the appli-
88 FR 21899, Apr. 12, 2023] cant, has based its certification upon
260
Small Business Administration § 120.110
that examination, and has substan- quired or improved with the loan pro-
tiation in its file to support the certifi- ceeds (except Eligible Passive Compa-
cation. nies under § 120.111);
[61 FR 3235, Jan. 31, 1996, as amended at 85 (d) Life insurance companies;
FR 14780, Mar. 16, 2020] (e) Businesses located in a foreign
country (businesses in the U.S. owned
§ 120.102 [Reserved] by aliens may qualify);
(f) Pyramid sale distribution plans;
§ 120.104 Are businesses financed by (g) Businesses deriving more than
SBICs eligible?
one-third of gross annual revenue from
SBA may make or guarantee loans to legal gambling activities;
a business financed by an SBIC if (h) Businesses engaged in any activ-
SBA’s collateral position will be supe- ity that is illegal under Federal, State,
rior to that of the SBIC. SBA may also or local law;
make or guarantee a loan to an other- (i) Private clubs and businesses
wise eligible small business which tem- which limit the number of member-
porarily is owned or controlled by an ships for reasons other than capacity;
SBIC under the regulations in part 107 (j) Government-owned entities (ex-
of this chapter. SBA neither guaran- cept for businesses owned or controlled
tees SBIC loans nor makes loans joint- by a Native American tribe);
ly with SBICs. (k)–(l) [Reserved]
§ 120.105 Special consideration for vet- (m) Loan packagers earning more
erans. than one third of their gross annual
revenue from packaging SBA loans;
SBA will give special consideration
(n) Businesses with an Associate who
to a small business owned by a veteran
is currently incarcerated, serving a
or, if the veteran chooses not to apply,
sentence of imprisonment imposed
to a business owned or controlled by
upon adjudication of guilty, or is under
one of the veteran’s dependents. If the
indictment for a felony or any crime
veteran is deceased or permanently dis-
involving or relating to financial mis-
abled, SBA will give special consider-
conduct or a false statement;
ation to one survivor or dependent.
SBA will process the application of a (o) Businesses in which the Lender or
business owned or controlled by a vet- CDC, or any of its Associates owns an
eran or dependent promptly, resolve equity interest;
close questions in the applicant’s favor, (p) Businesses which:
and pay particular attention to max- (1) Present live performances of a
imum loan maturity. For SBA loans, a prurient sexual nature; or
veteran is a person honorably dis- (2) Derive directly or indirectly more
charged from active military service. than de minimis gross revenue through
the sale of products or services, or the
INELIGIBLE BUSINESSES AND ELIGIBLE presentation of any depictions or dis-
PASSIVE COMPANIES plays, of a prurient sexual nature;
(q) Unless waived by SBA for good
§ 120.110 What businesses are ineli- cause, businesses that have previously
gible for SBA business loans? defaulted on a Federal loan or Feder-
The following types of businesses are ally assisted financing, resulting in the
ineligible: Federal government or any of its agen-
(a) Non-profit businesses (for-profit cies or Departments sustaining a loss
subsidiaries are eligible); in any of its programs, and businesses
(b) Financial businesses primarily owned or controlled by an applicant or
engaged in the business of lending, any of its Associates which previously
such as banks, finance companies, and owned, operated, or controlled a busi-
factors (pawn shops, although engaged ness which defaulted on a Federal loan
in lending, may qualify in some cir- (or guaranteed a loan which was de-
cumstances); faulted) and caused the Federal govern-
(c) Passive businesses owned by de- ment or any of its agencies or Depart-
velopers and landlords that do not ac- ments to sustain a loss in any of its
tively use or occupy the assets ac- programs. For purposes of this section,
261
§ 120.111 13 CFR Ch. I (1–1–25 Edition)
a compromise agreement shall also be under the appropriate size standards in
considered a loss; part 121 of this chapter;
(r) Businesses primarily engaged in (3) The lease between the Eligible
political or lobbying activities; and Passive Company and the Operating
(s) Speculative businesses (such as oil Company must be in writing and must
wildcatting). be subordinate to SBA’s mortgage,
[61 FR 3235, Jan. 31, 1996, as amended at 82 trust deed lien, or security interest on
FR 39502, Aug. 21, 2017; 87 FR 38908, June 30, the property. The Eligible Passive
2022; 89 FR 34101, Apr. 30, 2024] Company (as landlord) must furnish as
collateral for the loan an assignment of
§ 120.111 What conditions must an Eli- all rents paid under the lease. The rent
gible Passive Company satisfy? or lease payments cannot exceed the
An Eligible Passive Company must amount necessary to make the loan
use loan proceeds only to acquire or payment to the lender, and an addi-
lease, and/or improve or renovate, real tional amount to cover the Eligible
or personal property (including eligible Passive Company’s direct expenses of
refinancing), that it leases to one or holding the property, such as mainte-
more Operating Companies for con- nance, insurance and property taxes;
ducting the Operating Company’s busi- (4) The lease between the Eligible
ness, or to finance a change of owner- Passive Company and the Operating
ship between the existing owners of the Company, including options to renew
Eligible Passive Company. When the exercisable solely by the Operating
Operating Company is a co-borrower on Company, must have a remaining term
the loan, loan proceeds also may be at least equal to the term of the loan;
used by the Operating Company for (5) The Operating Company must be a
working capital and/or the purchase of guarantor or co-borrower with the Eli-
other assets, including intangible as- gible Passive Company. In a 7(a) loan
sets, for the Operating Company’s use that includes working capital and/or
as provided in paragraph (a)(5) of this the purchase of other assets, including
section. (References to Operating Com- intangible assets, for the Operating
pany in paragraphs (a) and (b) of this Company’s use, the Operating Com-
section mean each Operating Com- pany must be a co-borrower.
pany.) In the 504 loan program, if the (6) Each holder of an ownership inter-
Eligible Passive Company owns assets est constituting at least 20 percent of
in addition to the real estate or other either the Eligible Passive Company or
eligible long-term fixed assets, loan the Operating Company must guar-
proceeds may not be used to finance a antee the loan. The trustee shall exe-
change of ownership between existing cute the guaranty on behalf of any
owners of the Eligible Passive Com- trust. When deemed necessary for cred-
pany unless the additional assets it or other reasons, SBA or, for a loan
owned by the Eligible Passive Company processed under an SBA Lender’s dele-
are directly related to the real estate gated authority, the SBA Lender may
or other eligible long-term fixed assets, require other appropriate individuals
the amount attributable to the addi- or entities to provide full or limited
tional assets is de minimis, and the ad- guarantees of the loan without regard
ditional assets are excluded from the to the percentage of their ownership
Project financing. Any ownership interests, if any.
structure or legal form may qualify as (b) Additional conditions that apply to
an Eligible Passive Company. trusts. The eligibility status of the
(a) Conditions that apply to all legal trustor will determine trust eligibility.
forms: All donors to the trust will be deemed
(1) The Operating Company must be to have trustor status for eligibility
an eligible small business, and the pro- purposes. A trust qualifying as an Eli-
posed use of the proceeds must be an gible Passive Company may engage in
eligible use if the Operating Company other activities as authorized by its
were obtaining the financing directly; trust agreement. The trustee must
(2) The Eligible Passive Company warrant and certify that the trust will
(with the exception of a trust) and the not be revoked or substantially amend-
Operating Company each must be small ed for the term of the loan without the
262
Small Business Administration § 120.130
consent of SBA. The trustor must guar- loan proceeds may be applied for work-
antee the loan. For purposes of this ing capital and/or the purchase of other
section, the trustee shall certify to assets, including intangible assets, for
SBA that: use by the Operating Company).
(1) The trustee has authority to act; (c) A Borrower may use 7(a) loan pro-
(2) The trust has the authority to ceeds for refinancing certain out-
borrow funds, pledge trust assets, and standing debts.
lease the property to the Operating
Company; [61 FR 3235, Jan. 31, 1996, as amended at 77
(3) The trustee has provided accurate, FR 19533, Apr. 2, 2012; 88 FR 21899, Apr. 12,
pertinent language from the trust 2023]
agreement confirming the above; and
§ 120.130 Restrictions on uses of pro-
(4) The trustee has provided and will
ceeds.
continue to provide SBA with a true
and complete list of all trustors and SBA will not authorize nor may a
donors. Borrower use loan proceeds for the fol-
lowing purposes (including the replace-
[61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1,
1996, as amended at 64 FR 2117, Jan. 13, 1999; ment of funds used for any such pur-
77 FR 19533, Apr. 2, 2012; 82 FR 39502, Aug. 21, pose):
2017; 87 FR 38908, June 30, 2022] (a) Payments, distributions, or loans
to Associates of the applicant (except
USES OF PROCEEDS for ordinary compensation for services
§ 120.120 What are eligible uses of pro- rendered or to facilitate changes of
ceeds? ownership in accordance with § 120.202);
(b) Refinancing a debt owed to a
A small business must use an SBA
Small Business Investment Company
business loan for sound business pur-
poses. (‘‘SBIC’’) or a New Markets Venture
(a) A Borrower may use loan proceeds Capital Company (‘‘NMVCC’’);
from any SBA loan to: (c) Floor plan financing or other re-
(1) Acquire land (by purchase or volving line of credit, except under
lease); § 120.340 or § 120.390;
(2) Improve a site (e.g., grading, (d) Investments in real or personal
streets, parking lots, landscaping), in- property acquired and held primarily
cluding up to 5 percent for community for sale, lease, or investment (except
improvements such as curbs and side- for a loan to an Eligible Passive Com-
walks; pany or to a small contractor under
(3) Purchase one or more existing § 120.310);
buildings; (e) The applicant may not use any of
(4) Convert, expand or renovate one the proceeds to pay past-due Federal,
or more existing buildings; state, or local payroll taxes, sales
(5) Construct one or more new build- taxes, or other similar taxes that are
ings; and/or required to be collected by the appli-
(6) Acquire (by purchase or lease) and cant and held in trust on behalf of a
install fixed assets (for a 504 loan, these
Federal, state, or local government en-
assets must have a useful life of at
tity.
least 10 years and be at a fixed loca-
tion, although short-term financing for (f) A purpose which does not benefit
equipment, furniture, and furnishings the small business; or
may be permitted where essential to (g) Any use restricted by §§ 120.201
and a minor portion of the 504 Project). and 120.884 (specific to 7(a) loans and
(b) A Borrower may also use 7(a) and 504 loans respectively).
microloan proceeds for: [61 FR 3235, Jan. 31, 1996, as amended at 76
(1) Inventory; FR 9218, Feb. 17, 2011; 76 FR 63545, Oct. 12,
(2) Supplies; 2011; 82 FR 39502, Aug. 21, 2017; 85 FR 7648,
(3) Raw materials; and Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020; 88 FR
(4) Working capital (if the Operating 21085, Apr. 10, 2023]
Company is a co-borrower with the Eli-
gible Passive Company, part of the
263
§ 120.131 13 CFR Ch. I (1–1–25 Edition)
§ 120.131 Leasing part of new con- (b) Have a real or apparent conflict of
struction or existing building to an- interest with a small business with
other business. which it is dealing (including any of its
(a) If the SBA financing (whether 7(a) Associates or an Associate’s Close Rel-
or 504) is for the construction of a new atives) or SBA;
building, a Borrower may permanently (c) Own an equity interest in a busi-
lease up to 20 percent of the Rentable ness that has received or is applying to
Property to one or more tenants if the receive SBA financing (during the term
Borrower permanently occupies and of the loan or within 6 months prior to
uses no less than 60 percent of the the loan application);
Rentable Property, and plans to perma- (d) Be incarcerated, on parole, or on
nently occupy and use within three probation;
years some of the remaining space not (e) Knowingly misrepresent or make
immediately occupied and not perma- a false statement to SBA;
nently leased and plans to permanently (f) Engage in conduct reflecting a
occupy and use within ten years all of lack of business integrity or honesty;
the remaining space not permanently (g) Be a convicted felon, or have an
leased. If the Borrower is an Eligible adverse final civil judgment (in a case
Passive Company which leases 100 per- involving fraud, breach of trust, or
cent of the new building’s space to one other conduct) that would cause the
or more Operating Companies, the Op- public to question the Participant’s
erating Company, or Operating Compa- business integrity, taking into consid-
nies together, must follow the same eration such factors as the magnitude,
rules set forth in this paragraph. repetition, harm caused, and remote-
(b) If the SBA financing (whether 7(a) ness in time of the activity or activi-
or 504) is for the acquisition, renova- ties in question;
tion, or reconstruction of an existing (h) Accept funding from any source
building, the Borrower may perma- that restricts, prioritizes, or conditions
nently lease up to 49 percent of the the types of small businesses that the
Rentable Property if the Borrower per- Participant may assist under an SBA
manently occupies and uses no less program or that imposes any condi-
than 51 percent of the Rentable Prop- tions or requirements upon recipients
erty. If the Borrower is an Eligible Pas- of SBA assistance inconsistent with
sive Company which leases 100 percent SBA’s loan programs or regulations;
of the space of the existing building to (i) Fail to disclose to SBA all rela-
one or more Operating Companies, the tionships between the small business
Operating Company, or Operating Com- and its Associates (including Close Rel-
panies together, must follow the same atives of Associates), the Participant,
rules set forth in this paragraph. and/or the lenders financing the
Project of which it is aware or should
[68 FR 51679, Aug. 28, 2003] be aware;
(j) Fail to disclose to SBA whether
ETHICAL REQUIREMENTS the loan will:
(1) Reduce the exposure of a Partici-
§ 120.140 What ethical requirements pant or an Associate of a Participant
apply to participants?
in a position to sustain a loss;
Lenders, Intermediaries, and CDCs (2) Directly or indirectly finance the
(in this section, collectively referred to purchase of real estate, personal prop-
as ‘‘Participants’’), must act ethically erty or services (including insurance)
and exhibit good character. Ethical in- from the Participant or an Associate of
discretion of an Associate of a Partici- the Participant;
pant or a member of a CDC will be at- (3) Repay or refinance a debt due a
tributed to the Participant. A Partici- Participant or an Associate of a Partic-
pant must promptly notify SBA if it ipant; or
obtains information concerning the un- (4) Require the small business, or an
ethical behavior of an Associate. The Associate (including Close Relatives of
following are examples of such uneth- Associates), to invest in the Partici-
ical behavior. A Participant may not: pant (except for institutions which re-
(a) Self-deal; quire an investment from all members
264
Small Business Administration § 120.171
as a condition of membership, such as § 120.160 Loan conditions.
a Production Credit Association); The following requirements are nor-
(k) Issue a real estate forward com- mally required by SBA for all business
mitment to a builder or developer; or loans:
(l) Engage in any activity which (a) Personal guarantees. Holders of at
taints its objective judgment in evalu- least a 20 percent ownership interest
ating the loan. generally must guarantee the loan.
When deemed necessary for credit or
[61 FR 3235, Jan. 31, 1996, as amended at 68
FR 57980, Oct. 7, 2003]
other reasons, SBA or, for a loan proc-
essed under an SBA Lender’s delegated
CREDIT CRITERIA FOR SBA LOANS authority, the SBA Lender, may re-
quire other appropriate individuals or
§ 120.150 What are SBA’s lending cri- entities to provide full or limited guar-
teria? antees of the loan without regard to
the percentage of their ownership in-
The applicant (including an Oper- terests, if any.
ating Company) must be creditworthy. (b) Appraisals. SBA may require pro-
Loans must be so sound as to reason- fessional appraisals of the applicant’s
ably assure repayment. Lenders and and principals’ assets, a survey, or a
CDCs must use appropriate and pru- feasibility study.
dent generally acceptable commercial (c) Hazard Insurance. SBA requires
credit analysis processes and proce- hazard insurance for 7(a) loans greater
dures consistent with those used for than $500,000 and for 504 projects great-
their similarly-sized, non-SBA guaran- er than $500,000, on all collateral.
teed commercial loans. Lenders, CDCs, [61 FR 3235, Jan. 31, 1996, as amended at 82
and SBA may use a business credit FR 39502, Aug. 21, 2017; 88 FR 21085, Apr. 10,
scoring model. When approving direct 2023]
or guaranteed loans, Lenders, CDCs,
and SBA may consider (as applicable) REQUIREMENTS IMPOSED UNDER OTHER
the following criteria: credit score or LAWS AND ORDERS
credit history of the applicant (and the
§ 120.170 Flood insurance.
Operating Company, if applicable), its
Associates and any guarantors; the Under the Flood Disaster Protection
earnings or cashflow of applicant; or Act of 1973 (Sec. 205(b) of Pub. L. 93–234;
where applicable any equity or collat- 87 Stat. 983 (42 U.S.C. 4000 et seq.)), a
eral of the applicant. loan recipient must obtain flood insur-
ance if any building (including mobile
[88 FR 21085, Apr. 10, 2023] homes), machinery, or equipment ac-
quired, installed, improved, con-
§ 120.151 What is the statutory limit structed, or renovated with the pro-
for total loans to a Borrower? ceeds of SBA financial assistance is lo-
The aggregate amount of the SBA cated in a special flood hazard area.
portions of all loans to a single Bor- The requirement applies also to any in-
rower, including the Borrower’s affili- ventory (business loan program), fix-
ates as defined in § 121.301(f) of this tures or furnishings contained or to be
chapter, must not exceed a guaranty contained in the building. Mobile
amount of $3,750,000, except as other- homes on a foundation are buildings.
wise authorized by statute for a spe- SBA, Lenders, CDCs, and Inter-
mediaries must notify Borrowers that
cific program. The maximum loan
flood insurance must be maintained.
amount for any one 7(a) loan is
$5,000,000. The amount of any loan re- § 120.171 Compliance with child sup-
ceived by an Eligible Passive Company port obligations.
applies to the loan limit of both the El- Any holder of 50% or more of the
igible Passive Company and the Oper- ownership interest in the recipient of
ating Company. an SBA loan must certify that he or
[61 FR 3235, Jan. 31, 1996, as amended at 68 she is not more than 60 days delinquent
FR 51680, Aug. 28, 2003; 76 FR 63546, Oct. 12, on any obligation to pay child support
2011; 81 FR 41428, June 27, 2016] arising under:
265
§ 120.172 13 CFR Ch. I (1–1–25 Edition)
(a) An administrative order; an existing building, the construction
(b) A court order; must conform with the ‘‘National
(c) A repayment agreement between Earthquake Hazards Reduction Pro-
the holder and a custodial parent; or gram (‘‘NEHRP’’) Recommended Provi-
(d) A repayment agreement between sions for the Development of Seismic
the holder and a State agency pro- Regulations for New Buildings’’ (which
viding child support enforcement serv- can be obtained from the Federal
ices. Emergency Management Agency, Pub-
lications Office, Washington, DC) or a
§ 120.172 Flood-plain and wetlands
management. code identified by SBA as being sub-
stantially equivalent.
(a) All loans must conform to re-
quirements of Executive Orders 11988, § 120.175 Coastal barrier islands.
‘‘Flood Plain Management’’ (3 CFR,
1977 Comp., p. 117) and 11990, ‘‘Protec- SBA and Intermediaries may not
tion of Wetlands’’ (3 CFR, 1977 Comp., make or guarantee any loan within the
p. 121). Lenders, Intermediaries, CDCs, Coastal Barrier Resource System.
and SBA must comply with require-
ments applicable to them. Applicants § 120.176 Compliance with other laws.
must show: All SBA loans are subject to all ap-
(1) Whether the location for which fi- plicable laws, including (without limi-
nancial assistance is proposed is in a tation) the civil rights laws (see parts
floodplain or wetland; 112, 113, 117 and 136 of this chapter),
(2) If it is in a floodplain, that the as- prohibiting discrimination on the
sistance is in compliance with local grounds of race, color, national origin,
land use plans; and religion, sex, marital status, disability
(3) That any necessary construction or age. SBA requests agreements or
or use permits will be issued. evidence to support or document com-
(b) Generally, there is an 8-step deci- pliance with these laws, including re-
sion making process with respect to: ports required by applicable statutes or
(1) Construction or acquisition of
the regulations in this chapter.
anything, other than a building;
(2) Repair and restoration equal to APPLICABILITY AND ENFORCEABILITY OF
more than 50% of the market value of LOAN PROGRAM REQUIREMENTS
a building; or
(3) Replacement of destroyed struc- § 120.180 Compliance with Loan Pro-
tures. gram Requirements.
(c) SBA may determine for the fol-
lowing types of actions, on a case-by- SBA Lenders and Intermediaries
case basis, that the full 8-step process must comply and maintain familiarity
is not warranted and that only the first with Loan Program Requirements for
step (determining if a proposed action the 7(a) Loan Program, 504 Loan Pro-
is in the base floodplain) need be com- gram, and the Microloan Program, as
pleted: applicable, and as such requirements
(1) Actions located outside the base are revised from time to time. Loan
floodplain; Program Requirements in effect at the
(2) Repairs, other than to buildings, time that an SBA Lender or Inter-
that are less than 50% of the market mediary takes an action in connection
value; with a particular loan govern that spe-
(3) Replacement of building contents, cific action. For example, although
materials, and equipment; loan closing requirements in effect
(4) Hazard mitigation measures; when an SBA Lender closes a loan will
(5) Working capital loans; or govern the closing actions, an SBA
(6) SBA loan assistance of $1,500,000 Lender’s liquidation actions on the
or less. same loan are subject to the liquida-
tion requirements in effect at the time
§ 120.174 Earthquake hazards. that a liquidation action is taken. An
When loan proceeds are used to con- SBA Lender or Intermediary must
struct a new building or an addition to maintain sufficient documentation to
266
Small Business Administration § 120.197
demonstrate that Loan Program Re- § 120.193 Reconsideration after denial.
quirements have been satisfied.
An applicant or recipient of a busi-
[85 FR 14781, Mar. 16, 2020] ness loan may request reconsideration
of a denied loan or loan modification
§ 120.181 Status of Lenders and CDCs. request within 6 months of denial. Ap-
Lenders, CDCs and their contractors plicants denied due to a size deter-
are independent contractors that are mination can appeal that determina-
responsible for their own actions with tion under part 121 of this chapter. All
respect to a 7(a) or 504 loan. SBA has others must be submitted to the office
no responsibility or liability for any that denied the original request. To
claim by a borrower, guarantor or prevail, the applicant must dem-
other party alleging injury as a result onstrate that it has overcome all le-
of any allegedly wrongful action taken gitimate reasons for denial. Six months
by a Lender, CDC or an employee, after denial, a new application is re-
agent, or contractor of a Lender or quired. If the reconsideration is denied,
CDC. a second and final reconsideration may
be considered by the Director, Office of
[72 FR 18360, Apr. 12, 2007]
Financial Assistance (D/FA) or des-
LOAN APPLICATIONS ignee(s), whose decision is final. The
SBA Administrator, solely within the
§ 120.190 Where does an applicant Administrator’s discretion, may choose
apply for a loan? to review the matter and make the
final decision. Such discretionary au-
An applicant for a business loan
thority of the Administrator does not
should apply to:
create additional rights of appeal on
(a) A Lender for a guaranteed or im-
the part of an applicant not otherwise
mediate participation loan;
specified in SBA regulations.
(b) A CDC for a 504 loan;
(c) An Intermediary for a Microloan; [61 FR 3235, Jan. 31, 1996, as amended at 88
or FR 21085, Apr. 10, 2023]
(d) SBA for a direct loan.
COMPUTERIZED SBA FORMS
§ 120.191 The contents of a business
loan application. § 120.194 [Reserved]
For most business loans, SBA re- REPORTING
quires that an application for a busi-
ness loan contain, among other things, § 120.195 Disclosure of fees.
a description of the history and nature An Applicant for a business loan
of the business, the amount and pur- must identify to SBA the name of each
pose of the loan, the collateral offered Agent as defined in part 103 of this
for the loan, current financial state- chapter that helped the applicant ob-
ments, historical financial statements tain the loan, describing the services
(or tax returns if appropriate) for the performed, and disclosing the amount
past three years, IRS tax verification, of each fee paid or to be paid by the ap-
and a business plan, when applicable. plicant to the Agent in conjunction
Personal histories and financial state- with the performance of those services.
ments will be required from principals
of the applicant (and the Operating § 120.197 Notifying SBA’s Office of In-
Company, if applicable). spector General of suspected fraud.
§ 120.192 Approval or denial. Lenders, CDCs, Borrowers, and others
must notify the SBA Office of Inspec-
Applicants receive notice of approval tor General of any information which
or denial by the Lender, CDC, Inter- indicates that fraud may have occurred
mediary, or SBA, as appropriate. No- in connection with a 7(a) or 504 loan.
tice of denial will include the reasons. Send the notification to the Assistant
[61 FR 3235, Jan. 31, 1996, as amended at 88 Inspector General for Investigations,
FR 21899, Apr. 12, 2023] Office of Inspector General, U.S. Small
267
§ 120.200 13 CFR Ch. I (1–1–25 Edition)
Business Administration, 409 3rd § 120.211 What limits are there on the
Street, SW., Washington, DC 20416. amounts of direct loans?
[72 FR 18360, Apr. 12, 2007] (a) The statutory limit for direct
loans made under the authority of sec-
Subpart B—Policies Specific to tion 7(a)(1)-(19) of the Small Business
Act is $350,000. SBA has established an
7(a) Loans
administrative limit of $150,000 for di-
BONDING REQUIREMENTS rect loans. The D/FA may authorize ac-
ceptance of an application up to the
§ 120.200 What bonding requirements statutory limit.
exist during construction? (b) The statutory limit for direct
On 7(a) loans which finance construc- loans made under the authority of sec-
tion, the Borrower must supply a 100 tion 7(a)(20) is $750,000. SBA has estab-
percent payment and performance bond lished an administrative limit of
and builder’s risk insurance, unless $150,000. The Associate Administrator
waived by SBA. for Business Development may author-
ize the acceptance of an application
LIMITATIONS ON USE OF PROCEEDS that exceeds the administrative limit.
(c) The statutory limit on SBA’s por-
§ 120.201 Refinancing unsecured or tion of an immediate participation
undersecured loans. loan is $350,000. The administrative
A Borrower may not use 7(a) loan limit is the lesser of 75 percent of the
proceeds to pay any creditor in a posi- loan or $150,000. The D/FA may author-
tion to sustain a loss causing a shift to ize exceptions to the administrative
SBA of all or part of a potential loss limit up to $350,000.
from an existing debt.
[61 FR 3235, Jan. 31, 1996, as amended at 74
FR 45753, Sept. 4, 2009]
§ 120.202 Loans for changes of owner-
ship.
§ 120.212 What limits are there on loan
A Borrower may use 7(a) loan pro- maturities?
ceeds to purchase a portion of or the The term of a loan shall be:
entirety of an owner’s interest in a (a) The shortest appropriate term,
business, or a portion of or the entirety depending upon the Borrower’s ability
of a business itself. to repay;
[88 FR 21086, Apr. 10, 2023] (b) Ten years or less, unless it fi-
nances or refinances real estate or
MATURITIES; INTEREST RATES; LOAN equipment with a useful life exceeding
AND GUARANTEE AMOUNTS ten years. The term for a loan to fi-
nance equipment and/or leasehold im-
§ 120.210 What percentage of a loan provements may include an additional
may SBA guarantee?
reasonable period, not to exceed 12
SBA’s guarantee percentage must months, when necessary to complete
not exceed the applicable percentage the installation of the equipment and/
established in section 7(a) of the Act. or complete the leasehold improve-
The maximum allowable guarantee ments.
percentage on a loan will be deter- (c) A maximum of 25 years, including
mined by the loan amount. Loans of extensions. (A portion of a loan used to
$150,000 or less may receive a maximum acquire or improve real property may
guaranty of 85 percent. Loans more have a term of 25 years plus an addi-
than $150,000 may receive a maximum tional period needed to complete the
guaranty of 75 percent, except as other- construction or improvements.)
wise authorized by law.
[61 FR 3235, Jan. 31, 1996, as amended at 87
[61 FR 3235, Jan. 31, 1996, as amended at 68 FR 38908, June 30, 2022]
FR 51680, Aug. 28, 2003; 76 FR 63546, Oct. 12,
2011]
268
Small Business Administration § 120.220
§ 120.213 What fixed interest rates may (2) For all 7(a) loans of more than
a Lender charge? $50,000 and up to and including $250,000,
(a) Fixed Rates for Guaranteed Loans. the maximum interest rate shall not
A loan may have a reasonable fixed in- exceed six (6.0) percentage points over
terest rate. SBA periodically publishes the base rate;
the maximum allowable rate in the (3) For all 7(a) loans of more than
FEDERAL REGISTER. $250,000 and up to and including
(b) Direct loans. A statutory formula $350,000, the maximum interest rate
based on the cost of money to the Fed- shall not exceed four and a half (4.5)
eral government determines the inter- percentage points over the base rate;
est rate on direct loans. SBA publishes and
the rate periodically in the FEDERAL (4) For all 7(a) loans of more than
REGISTER. $350,000, the maximum interest rate
shall not exceed three (3.0) percentage
§ 120.214 What conditions apply for points over the base rate.
variable interest rates? (e) Amortization. Initial amortization
A Lender may use a variable rate of of principal and interest may be recom-
interest for guaranteed loans under the puted and reassessed as interest rates
following conditions: fluctuate, as directed by SBA. With
(a) Frequency. The first change may prior approval of SBA, the Lender may
occur on the first calendar day of the use certain other amortization meth-
month following initial disbursement, ods, except that SBA does not allow
using the base rate (see paragraph (c) balloon payments.
of this section) in effect on the first [61 FR 3235, Jan. 31, 1996, as amended at 73
business day of the month. After that, FR 67101, Nov. 13, 2008; 87 FR 38908, June 30,
changes may occur no more often than 2022]
monthly.
(b) Range of fluctuation. The amount FEES FOR GUARANTEED LOANS
of fluctuation shall be equal to the
movement in the base rate. The dif- § 120.220 Fees that Lender pays SBA.
ference between the initial rate and the A Lender must pay a guaranty fee to
ceiling rate may be no greater than the SBA for each loan it makes. If the
difference between the initial rate and guarantee fee is not paid, SBA may ter-
the floor rate. minate the guarantee. Acceptance of
(c) Base rate. The base rate will be the guaranty fee by SBA does not
one of the following: the prime rate or waive any right of SBA arising from a
the Optional Peg Rate. The prime rate Lender’s negligence, misconduct or
will be that which is in effect on the violation of any provision of these reg-
first business day of the month, as ulations or the guaranty agreement or
printed in a national financial news- other loan documents.
paper published each business day. SBA (a) Amount of guaranty fee—(1) In gen-
may from time to time permit the use eral. Except to the extent paragraph
of alternative base rate options that (a)(2) of this section applies, for a loan
are widely adopted for small business with a maturity of twelve (12) months
commercial lending and will publish or less, the guarantee fee which the
notice of such alternative options in Lender must pay to SBA is one-quarter
the FEDERAL REGISTER. SBA publishes (1⁄4) of one percent of the guaranteed
the Optional Peg Rate quarterly in the portion of the loan. For a loan with a
FEDERAL REGISTER. maturity of more than twelve (12)
(d) Maximum Allowable Variable Inter- months, the guarantee fee is payable as
est Rates. The maximum allowable vari- follows:
able interest rates are set forth below, (i) Not more than 2 percent of the
with the initial maximum allowable guaranteed portion of a loan if the
rate for the loan determined as of the total amount of the loan is not more
date SBA receives the loan application: than $150,000;
(1) For all 7(a) loans of $50,000 and (ii) Not more than 3 percent of the
less, the interest rate shall not exceed guaranteed portion of a loan if the
six and a half (6.5) percentage points total amount of the loan is more than
over the base rate; $150,000 but not more than $700,000;
269
§ 120.221 13 CFR Ch. I (1–1–25 Edition)
(iii) Except as provided in paragraph (12) months, SBA will refund the guar-
(a)(1)(iv) of this section, not more than anty fee if the Lender has not made
3.5 percent of the guaranteed portion of any disbursement and the lender re-
a loan if the total amount of the loan quests in writing the refund and can-
is more than $700,000; and cellation of the SBA guaranty.
(iv) An additional 0.25 percent of the (d) Lender’s retention of portion of
guaranteed portion of a loan if the guaranty fee. With respect to a loan
total amount of the loan is more than with a maturity of more than twelve
$1,000,000. (12) months, where the total loan
(2) For loans approved October 1, 2002, amount is no more than $150,000 Lender
through September 30, 2004. For a loan may retain not more than 25 percent of
with a maturity of twelve (12) months the guaranty fee.
or less, the guarantee fee which the (e) If the guarantee fee is not paid,
Lender must pay to SBA is one-quarter SBA may terminate the guarantee. The
(1⁄4) of one percent of the guaranteed Borrower may use working capital loan
portion of the loan. For a loan with a proceeds to reimburse the Lender for
maturity of more than twelve (12) the guarantee fee. Acceptance of the
months, the guarantee fee is: guarantee fee by SBA shall not waive
(i) 1 percent of the guaranteed por- any right of SBA arising from the
tion of the loan if the total loan Lender’s misconduct or violation of
amount is not more than $150,000, any provision of this part, the guar-
(ii) 2.5 percent of the guaranteed por- antee agreement or other loan docu-
tion of a loan if the total loan amount ments.
is more than $150,000, but not more (f) Lender’s annual service fee payable
than $700,000, and to SBA—(1) In general. Except to the ex-
(iii) 3.5 percent of the guaranteed tent paragraph (f)(2) of this section ap-
portion if the total loan amount is plies, the lender shall pay SBA an an-
more than $700,000. nual service fee in an amount not to
(3) For loans approved under section exceed 0.55 percent of the outstanding
7(a)(31) of the Small Business Act (SBA balance of the guaranteed portion of
Express loans) to veterans and/or the each loan. The service fee cannot be
spouse of a veteran. SBA will not collect charged to the Borrower. SBA may in-
a guarantee fee in connection with a stitute a late fee charge for delinquent
loan made under section 7(a)(31) of the payments of the annual service fee to
Small Business Act to a business cover administrative costs associated
owned and controlled by a veteran or with collecting delinquent fees.
the spouse of a veteran. (2) For loans approved from October 1,
(b) When the guaranty fee is payable. 2002, through September 30, 2004. The
For a loan with a maturity of twelve lender shall pay SBA an annual service
(12) months or less, the Lender must fee equal to 0.25 percent of the out-
pay the guaranty fee to SBA electroni- standing balance of the guaranteed
cally within 10 business days after re- portion of each loan. The service fee
ceiving SBA loan approval. The Lender cannot be charged to the Borrower.
may only charge the Borrower for the SBA may institute a late fee charge for
fee after the Lender pays the guaranty delinquent payments of the annual
fee. For a loan with a maturity in ex- service fee to cover administrative
cess of twelve (12) months, the Lender costs associated with collecting delin-
must pay the guaranty fee to SBA elec- quent fees.
tronically within 90 days after SBA
[61 FR 3235, Jan. 31, 1996; 61 FR 11471, Mar. 20,
gives its loan approval. The Lender 1996, as amended at 68 FR 51680, Aug. 28, 2003;
may charge the Borrower the fee after 68 FR 56554, Oct. 1, 2003; 76 FR 63546, Oct. 12,
the Lender has made the first disburse- 2011; 82 FR 39502, Aug. 21, 2017; 87 FR 38908,
ment of the loan. The Borrower may June 30, 2022; 88 FR 21899, Apr. 12, 2023]
use the loan proceeds to pay the guar-
anty fee. However, the first disburse- § 120.221 Fees and expenses that the
ment must not be made solely or pri- Lender may collect from a loan ap-
marily to pay the guaranty fee. plicant or Borrower.
(c) Refund of guaranty fee. For a loan Unless otherwise allowed by SBA
with a maturity of more than twelve Loan Program Requirements, the
270
Small Business Administration § 120.300
Lender may charge and collect from (1) Loan has a maturity of 15 years or
the applicant or Borrower only the fol- more.
lowing fees and expenses: (2) Borrower makes a voluntary pre-
(a) Service and packaging fees. The payment (or several prepayments in
Lender may charge an applicant rea- the aggregate) during any one of the
sonable fees (customary for similar first three successive 12 month periods
Lenders in the geographic area where following the first disbursement of the
the loan is being made) for packaging loan. Prepayment is defined as a pay-
and other services. The Lender must ment of principal in excess of the
advise the applicant in writing that the amount due according to the amortiza-
applicant is not required to obtain or tion schedule.
pay for unwanted services. The appli- (3) The prepayment (or several pre-
cant is responsible for deciding wheth- payments in the aggregate) is more
er fees are reasonable. SBA may review
than 25 percent of the highest out-
these fees at any time. Lender must re-
standing principal balance of the loan
fund any such fee considered unreason-
in any one of the first three successive
able by SBA.
12 month periods following the first
(b) Extraordinary servicing. Subject to
disbursement.
prior written SBA approval, if all or
part of a loan will have extraordinary (b) When all the conditions above
servicing needs, the Lender may charge exist, the following subsidy
the applicant a service fee not to ex- recoupment fees apply:
ceed 2 percent per year on the out- (1) If the prepayment is made during
standing balance of the part requiring the first 12 month period after first dis-
special servicing. bursement, the charge is 5 percent of
(c) Out-of-pocket expenses. The Lender the total amount of all prepayments
may collect from the applicant nec- made during such period;
essary out-of-pocket expenses such as (2) If the prepayment is made during
filing or recording fees. the second 12 month period after first
(d) Late payment fee. The Lender may disbursement, the charge is 3 percent
charge the Borrower a late payment fee of the total amount of all prepayments
not to exceed 5 percent of the regular made during that period; and
loan payment. (3) If the prepayment is made during
(e) Legal services. Lender may charge the third 12 month period after first
the Borrower for legal services ren- disbursement, the charge is 1 percent
dered on an hourly basis. of the total amount of all prepayments
[61 FR 3235, Jan. 31, 1996, as amended at 82 made during that period.
FR 39503, Aug. 21, 2017; 85 FR 7648, Feb. 10, [68 FR 51680, Aug. 28, 2003]
2020; 85 FR 80588, Dec. 14, 2020]
§ 120.222 Prohibition on sharing pre- Subpart C—Special Purpose Loans
miums for secondary market sales.
§ 120.300 Statutory authority.
The Lender or its Associates may not
share any premium received from the Congress has authorized several spe-
sale of an SBA guaranteed loan in the cial purpose programs in various sub-
secondary market with a Service Pro- sections of section 7(a) of the Act. Gen-
vider, packager, or other loan-referral erally, 7(a) loan policies, eligibility re-
source. quirements and credit criteria enumer-
ated in subpart B of this part apply to
[82 FR 39503, Aug. 21, 2017, as amended at 85
FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, these programs. The sections of this
2020; 87 FR 38908, June 30, 2022] subpart prescribe the special condi-
tions applying to each special purpose
§ 120.223 Subsidy recoupment fee pay- program. As with other business loans,
able to SBA by Borrower. special purpose loans are available
(a) The subsidy recoupment fee is only to the extent funded by annual ap-
payable to SBA when: propriations.
271
§ 120.310 13 CFR Ch. I (1–1–25 Edition)
DISABLED ASSISTANCE LOAN PROGRAM management, training, education, and
(DAL) housing of disabled workers).
(c) SBA does not consider a DAL–1
§ 120.310 What assistance is available organization to have a conflict of inter-
for the disabled? est if one or more of its Associates is
Section 7(a)(10) of the Act authorizes an Associate of the Lender.
SBA to guarantee or make direct loans
to the disabled. SBA distinguishes two § 120.313 DAL–2 use of proceeds and
kinds of assistance: other program conditions.
(a) DAL–1. DAL–1 Financial Assist- (a) The DAL–2 loan proceeds may be
ance is available to non-profit public or used for any 7(a) loan purposes.
private organizations for disabled indi- (b) An applicant may use DAL–2 loan
viduals that employ such individuals; proceeds to acquire an eligible small
or business without complying with the
(b) DAL–2. DAL–2 Financial Assist- change of ownership conditions in
ance is available to: § 120.202.
(1) Small businesses wholly owned by (c) A DAL–2 applicant must submit
disabled individuals; and evidence from a physician, psychia-
(2) Disabled individuals to establish, trist, or other qualified professional as
acquire, or operate a small business. to the permanent nature of the dis-
§ 120.311 Definitions. ability and the limitation it places on
the applicant.
(a) Organization for the disabled means
one which: § 120.314 Resolving doubts about cred-
(1) Is organized under federal or state itworthiness.
law to operate in the interest of dis-
For the purpose of the DAL Program,
abled individuals;
SBA shall resolve doubts concerning
(2) Is non-profit;
the creditworthiness of an applicant in
(3) Employs disabled individuals for
favor of the applicant. However, the ap-
seventy-five percent of the time needed
plicant must present satisfactory evi-
to produce commodities or services for
dence of repayment ability. Personal
sale; and
guarantees of Associates are not re-
(4) Complies with occupational and
quired for purposes of DAL–1 financial
safety standards prescribed by the De-
assistance.
partment of Labor.
(b) Disabled individual means a person § 120.315 Interest rate and loan limit.
who has a permanent physical, mental
or emotional impairment, defect, ail- The interest rate on direct DAL
ment, disease or disability which lim- loans is three percent. There is an ad-
its the type of employment for which ministrative limit of $150,000 on a di-
the person would otherwise be quali- rect DAL loan.
fied.
BUSINESSES OWNED BY LOW INCOME
§ 120.312 DAL–1 use of proceeds and INDIVIDUALS
other program conditions.
§ 120.320 Policy.
(a) DAL–1 applicants must submit ap-
propriate documents to establish pro- Section 7(a)(11) of the Act authorizes
gram eligibility. SBA to guarantee or make direct loans
(b) Generally, applicants may use to establish, preserve or strengthen
loan proceeds for any 7(a) loan pur- small business concerns:
poses. Loan proceeds may not be used: (a) Located in an area having high
(1) To purchase or construct facilities unemployment according to the De-
if construction grants and mortgage partment of Labor;
assistance are available from another (b) Located in an area in which a
Federal source; or high percentage of individuals have a
(2) For supportive services (expenses low income inadequate to satisfy basic
incurred by a DAL–1 organization to family needs; and
subsidize wages of low producers, (c) More than 50 percent owned by
health and rehabilitation services, low income individuals.
272
Small Business Administration § 120.342
ENERGY CONSERVATION for entering or expanding in the energy
conservation market.
§ 120.330 Who is eligible for an energy
conservation loan? § 120.333 Are there any special credit
criteria?
SBA may make or guarantee loans to
assist a small business to design, engi- In addition to regular credit evalua-
neer, manufacture, distribute, market, tion criteria, SBA shall weigh the
install, or service energy devices or greater risk associated with energy
techniques designed to conserve the projects. SBA shall consider such fac-
Nation’s energy resources. tors as quality of the product or serv-
ice, technical qualifications of the ap-
§ 120.331 What devices or techniques plicant’s management, sales projec-
are eligible for a loan? tions, and financial status.
Eligible energy conservation devices
EXPORT WORKING CAPITAL PROGRAM
or techniques include:
(EWCP)
(a) Solar thermal equipment;
(b) Photovoltaic cells and related § 120.340 What is the Export Working
equipment; Capital Program?
(c) A product or service which in- Under the EWCP, SBA guarantees
creases the energy efficiency of exist- short-term working capital loans made
ing equipment, methods of operation or by participating lenders to exporters
systems which use fossil fuels, and (section 7(a)(14) of the Act). Loan ma-
which is on the Energy Conservation turities may be for up to three years
Measures list of the Secretary of En- with annual renewals. Proceeds can be
ergy; used only to finance export trans-
(d) Equipment producing energy from actions. Loans can be for single or mul-
wood, biological waste, grain or other tiple export transactions. An export
biomass energy sources; transaction is the production and pay-
(e) Equipment for cogeneration of en- ment associated with a sale of goods or
ergy, district heating or production of services to a foreign buyer. The max-
energy from industrial waste; imum loan amount for any one EWCP
(f) Hydroelectric power equipment; loan is $5,000,000. EWCP loans shall re-
(g) Wind energy conversion equip- ceive a guaranty of 90 percent, not to
ment; and exceed $4,500,000.
(h) Engineering, architectural, con- [61 FR 3235, Jan. 31, 1996, as amended at 76
sulting, or other professional services FR 63546, Oct. 12, 2011]
necessary or appropriate for any of the
devices or techniques in paragraphs (a) § 120.341 Who is eligible?
through (g) of this section. In addition to the eligibility criteria
§ 120.332 What are the eligible uses of applicable to all 7(a) loans, an appli-
proceeds? cant must be in business for one full
year at the time of application, but not
(a) Acquire property. The Borrower necessarily in the exporting business.
may use the loan proceeds to acquire SBA may waive this requirement if the
land necessary for imminent plant con- applicant has sufficient export trade
struction, buildings, machinery, equip- experience or other managerial experi-
ment, furniture, fixtures, facilities, ence.
supplies, and material needed to ac-
complish any of the eligible program § 120.342 What are eligible uses of pro-
purposes in § 120.330. ceeds?
(b) Research and development. Up to Loan proceeds may be used:
30% of loan proceeds may be used for (a) To acquire inventory;
research and development: (b) To pay the manufacturing costs of
(1) Of an existing product or service; goods for export;
or (c) To purchase goods or services for
(2) A new product or service. export;
(c) Working capital. The Borrower (d) To support standby letters of
may use proceeds for working capital credit;
273
§ 120.343 13 CFR Ch. I (1–1–25 Edition)
(e) For pre-shipment working capital; § 120.347 Use of proceeds.
and
The Borrower may use loan proceeds
(f) For post-shipment foreign ac-
to acquire, construct, renovate, mod-
counts receivable financing.
ernize, improve, or expand facilities
§ 120.343 Collateral. and equipment to be used in the United
States to produce goods or services in-
A Borrower must give SBA a first se- volved in international trade, and to
curity interest sufficient to cover 100 develop and penetrate foreign markets.
percent of the EWCP loan amount The Borrower may also use proceeds in
(such as insured accounts receivable or the refinancing of existing indebted-
letters of credit). Collateral must be lo-
ness that is not structured with reason-
cated in the United States, its terri-
able terms and conditions, including
tories or possessions.
any debt that qualifies for refinancing
§ 120.344 Unique requirements of the under 7(a) Loan Program Require-
EWCP. ments, and to provide working capital.
(a) An applicant must submit cash [61 FR 3235, Jan. 31, 1996, as amended at 76
flow projections to support the need for FR 63546, Oct. 12, 2011]
the loan and the ability to repay. After
the loan is made, the loan recipient § 120.348 Amount of guarantee.
must submit continual progress re- The maximum loan amount for any
ports. one International Trade (IT) loan is
(b) SBA does not limit the amount of $5,000,000. IT loans may receive a max-
extraordinary servicing fees, as ref- imum guaranty of 90 percent or
erenced in § 120.221(b), under the EWCP. $4,500,000, except that the maximum
(c) SBA does not prescribe the inter- guaranty amount for any working cap-
est rates for the EWCP, but will mon- ital component of an IT loan is limited
itor these rates for reasonableness. to $4,000,000. To the extent that the
[61 FR 3235, Jan. 31, 1996, as amended at 85 Borrower has a separate EWCP loan or
FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, any other 7(a) loan for working capital,
2020] the guaranty amount for the other
loan is counted against the $4,000,000
INTERNATIONAL TRADE LOANS guaranty limit for the IT loan.
§ 120.345 Policy. [76 FR 63546, Oct. 12, 2011]
Section 7(a)(16) of the Act authorizes § 120.349 Collateral.
SBA to guarantee loans to small busi-
nesses that are: Each IT loan must be secured either
(a) Engaged or preparing to engage in by a first lien position or first mort-
international trade; or gage on the property or equipment fi-
(b) Adversely affected by import nanced by the IT loan or on other as-
competition. sets of the Borrower, except that an IT
loan may be secured by a second lien
§ 120.346 Eligibility. position on the property or equipment
(a) An applicant must establish that: financed by the IT loan or on other as-
(1) The loan proceeds will signifi- sets of the Borrower, if the SBA deter-
cantly expand an existing export mar- mines the second lien position provides
ket or develop new export markets; or adequate assurance of the payment of
(2) The applicant business is ad- the IT loan.
versely affected by import competi- [76 FR 63546, Oct. 12, 2011]
tion; and
(3) The loan will improve the appli- QUALIFIED EMPLOYEE TRUSTS (ESOP)
cant’s competitive position.
(b) The applicant must have a busi- § 120.350 Policy.
ness plan reasonably supporting its Section 7(a)(15) of the Act authorizes
projected export sales. SBA to guarantee a loan to a:
[61 FR 3235, Jan. 31, 1996, as amended at 76 (a) Qualified employee trust
FR 63546, Oct. 12, 2011] (‘‘ESOP’’) to:
274
Small Business Administration § 120.376
(1) Help finance the growth of its em- (b) The small business must provide
ployer’s small business; or adequate collateral.
(2) Purchase ownership or voting con-
trol of the employer; and a § 120.354 Creditworthiness.
(b) Small business concern, if the In determining repayment ability,
proceeds from the loan are only used to SBA shall not consider the personal as-
make a loan to a qualified employee sets of the employee-owners of the
trust that results in the qualified em- trust. SBA shall consider the earnings
ployee trust owning at least 51 percent history and projected future earnings
of the small business concern. of the employer small business. SBA
[87 FR 38908, June 30, 2022] may consider the business and manage-
ment experience of the employee-own-
§ 120.351 Definitions. ers.
All terms specific to ESOPs have the VETERANS LOAN PROGRAM
same definition for purposes of this
section as in the Internal Revenue § 120.360 Which veterans are eligible?
Service (IRS) Code (title 26 of the
SBA may guarantee or make direct
United States Code) or regulations (26
loans to a small business 51 percent
CFR chapter I).
owned by one or more of the following
§ 120.352 Use of proceeds. eligible veterans:
(a) Vietnam-era veterans who served
Loan proceeds may be used for:
for a period of more than 180 days be-
(a) Qualified employee trust. A quali-
tween August 5, 1964, and May 7, 1975,
fied employee trust may use loan pro-
and were discharged other than dishon-
ceeds for two purposes:
orably;
(1) Qualified employer securities. A
(b) Disabled veterans of any era with
qualified employee trust may relend
a minimum compensable disability of
loan proceeds to the employer by pur-
30 percent; or
chasing qualified employer securities.
(c) A veteran of any era who was dis-
The small business concern may use
charged for disability.
these funds for any general 7(a) pur-
pose. § 120.361 Other conditions of eligi-
(2) Control of employer. A qualified bility.
employee trust may use loan proceeds
(a) Management and daily operations
to purchase a controlling interest (51
of the business must be directed by one
percent) in the employer. Ownership
or more of the veteran owners whose
and control must vest in the trust by
veteran status was used to qualify for
the time the loan is repaid.
the loan.
(b) Small business concern. A small
(b) This direct loan program is avail-
business concern may only use loan
able only if private sector financing
proceeds to make a loan to a qualified
and guaranteed loans are not available.
employee trust that results in the
(c) A veteran may qualify only once
qualified employee trust owning at
for this program on a direct loan basis.
least 51 percent of the small business
concern. LOANS TO PARTICIPANTS IN THE 8(a)
[87 FR 38908, June 30, 2022] PROGRAM
§ 120.353 Eligibility. § 120.375 Policy.
SBA may assist a qualified employee Section 7(a)(20) of the Act authorizes
trust (or equivalent trust) that meets SBA to provide direct (unilaterally or
the requirements and conditions for an together with Lenders) or guaranteed
ESOP prescribed in all applicable IRS, loans to firms participating in the 8(a)
Treasury and Department of Labor Program.
(DOL) regulations. In addition, the fol-
lowing conditions apply: § 120.376 Special requirements.
(a) The small business must provide The following special conditions
the funds needed by the trust to repay apply (otherwise, 7(a) loan eligibility
the loan; and criteria apply):
275
§ 120.377 13 CFR Ch. I (1–1–25 Edition)
(a) The Associate Administrator for against financing investment property.
Business Development may waive the ‘‘Construct’’ and ‘‘rehabilitate’’ mean
direct loan administrative ceiling of only work done on-site to the struc-
$150,000, and raise it to $750,000. ture, utility connections and land-
(b) The SBA portion of a guaranteed scaping.
loan must not exceed $750,000.
(c) The interest rate on a guaranteed § 120.392 Who may apply?
loan shall be the same as on 7(a) guar- A construction contractor or home-
anteed business loans. The interest builder with a past history of profit-
rate on a direct loan shall be one per- able construction or rehabilitation
cent less than on a regular direct loan. projects of comparable type and size
(d) For a direct loan or SBA’s portion may apply. An applicant may sub-
of an immediate participation loan, contract the work. Subcontracts in ex-
SBA shall subordinate its security in- cess of $25,000 may require 100 percent
terest on all collateral to other debt of payment and performance bonds.
the applicant.
§ 120.393 Are there special application
[61 FR 3235, Jan. 31, 1996, as amended at 74 requirements?
FR 45753, Sept. 4, 2009]
(a) An applicant must submit docu-
§ 120.377 Use of proceeds. mentation from:
The loan proceeds shall not be used (1) A mortgage lender indicating that
for debt refinancing. Only a manufac- permanent mortgage money is avail-
turing concern may use loan proceeds able to qualified purchasers to buy
for working capital. such properties;
(2) A real estate broker indicating
CAPLINES PROGRAM that a market exists for the proposed
building and that it will be compatible
§ 120.390 Revolving credit. with its neighborhood; and
(a) CapLines finances eligible small (3) An architect, appraiser or engi-
businesses’ short-term, revolving and neer agreeing to make inspections and
non-revolving working-capital needs. certifications to support interim dis-
SBA regulations governing the 7(a) bursements.
loan program govern business loans (b) The Borrower may substitute a
made under this program. The max- letter from a qualified Lender for one
imum guaranteed amount and the max- or more of the letters.
imum loan amount are the same under
§ 120.394 What are the eligible uses of
CapLines as other 7(a) loans, as stated proceeds?
in § 120.151.
(b) CapLines proceeds can be used to A Borrower must use the loan pro-
finance the cyclical, recurring, or other ceeds solely to acquire, construct or
identifiable short-term operating cap- substantially rehabilitate an indi-
ital needs of small businesses. Proceeds vidual residential or commercial build-
can be used to create current assets or ing for sale. ‘‘Substantial’’ means reha-
used to provide financing against the bilitation expenses of more than one-
current assets that already exist. third of the purchase price or fair mar-
ket value at the time of the applica-
[61 FR 3235, Jan. 31, 1996, as amended at 76 tion. A Borrower may use up to 33 per-
FR 63546, Oct. 12, 2011]
cent of the proceeds to acquire land,
BUILDERS LOAN PROGRAM and up to 5 percent for community im-
provements such as curbs and side-
§ 120.391 What is the Builders Loan walks.
Program?
[61 FR 3235, Jan. 31, 1996, as amended at 82
Under section 7(a)(9) of the Act, SBA FR 39503, Aug. 21, 2017]
may make or guarantee loans to fi-
nance small general contractors to § 120.395 What is SBA’s collateral posi-
construct or rehabilitate residential or tion?
commercial property for resale. This SBA will require a lien on the build-
program provides an exception under ing which must be in no less than a
specified conditions to the general rule second position.
276
Small Business Administration § 120.398
§ 120.396 What is the term of the loan? determine eligibility in accordance
The loan must not exceed sixty (60) with the statutory restriction on as-
months plus the estimated time to sistance to swimming pools.
complete construction or rehabilita- (2) Going Concern is a small business
tion. concern actively engaging in business
with the expectation of indefinite con-
§ 120.397 Are there any special restric- tinuance.
tions? (3) Qualifying Small Business Loan is a
The borrower must not use loan pro- loan previously made to an Eligible
ceeds to purchase vacant land for pos- Borrower for any of the purposes set
sible future construction or to operate forth in § 120.120 and not for any of the
or hold rental property for future reha- purposes set forth in § 120.130 or
bilitation. SBA may allow rental of the 120.160(d). Qualifying Small Business
property only if the rental will improve Loans may include credit card obliga-
the ability to sell the property. The tions, capital leases for major equip-
sale must be a legitimate change of ment and vehicles, notes payable to
ownership. vendors or suppliers, loans in the first
lien position made by commercial lend-
AMERICA’S RECOVERY CAPITAL (BUSI- ers in connection with the Develop-
NESS STABILIZATION) LOAN PROGRAM— ment Company Loan Program (504),
ARC LOAN PROGRAM home equity loans used to finance busi-
ness operations, other loans to small
§ 120.398 America’s Recovery Capital
(ARC) Loan Program. businesses made without an SBA guar-
anty, and loans made by or with an
(a) Purpose. The purpose of the ARC SBA guaranty on or after February 17,
Loan Program is to enable SBA to 2009. Loans made or guaranteed by SBA
guarantee certain loans to viable small before February 17, 2009 are not Quali-
businesses that are experiencing imme- fying Small Business Loans for the
diate financial hardship. Loans made purposes of the ARC Loan Program. A
under this loan program are referred to Qualifying Small Business Loan may
as ARC Loans and are subject to the not be used as the basis for more than
requirements set forth in this Part for one ARC Loan but ARC Loans may be
7(a) loans except as noted in this sec- used to pay multiple Qualifying Small
tion. Business Loans.
(b) Definitions. (1) (i) Eligible Borrower
(4) Viable small business is a small
is a small business concern as defined
business that is a Going Concern but
in Section 3 of the Small Business Act
which is having difficulty making peri-
and § 120.100. Eligible Borrower does not
odic payments of principal and interest
include:
(A) Ineligible small businesses as on Qualifying Small Business Loan(s)
listed in § 120.110; and and/or meeting operating expenses of
(B) Small business concerns with the the business although it can reason-
following primary industry North ably demonstrate its projected contin-
American Industry Classification Sys- ued operation for a reasonable period
tem (NAICS) codes: beyond the six month period of pay-
(1) 713210 (Casinos (Except Casino Ho- ment assistance with an ARC Loan.
tels)); (c) Period of program. The ARC Loan
(2) 721120 (Casino Hotels); Program is authorized through Sep-
(3) 713290 (Other Gambling Indus- tember 30, 2010, or until appropriated
tries); funds are exhausted, whichever is soon-
(4) 713910 (Golf Courses and Country er.
Clubs); and (d) Use of proceeds. Loans made under
(5) 712130 (Zoos and Botanical Gar- the ARC Loan Program are for the sole
dens). purpose of making periodic payments
(ii) Applications submitted by small of principal and interest (including de-
business concerns with a primary in- fault interest), in full or in part, for up
dustry NAICS code of 713940 (Fitness to six (6) months, on one or more exist-
and Recreational Sports Centers) will ing Qualifying Small Business Loans.
be identified and reviewed by SBA to ARC Loan proceeds cannot be used to
277
§ 120.398 13 CFR Ch. I (1–1–25 Edition)
make payments on loans made or guar- (g) Personal guarantees. Holders of at
anteed by SBA prior to February 17, least a 20 percent ownership interest in
2009. the borrower generally must guarantee
(e) Loan terms. (1) Guaranty percent- the ARC Loan.
age. ARC Loans are 100% guaranteed by (h) Collateral. SBA requires each lend-
SBA. er to follow the collateral policies and
(2) Maximum loan size. An ARC Loan procedures that it has established and
may not exceed $35,000. implemented for similarly-sized non-
(3) Interest rate. The interest rate for SBA guaranteed commercial loans. The
ARC Loans will be published by SBA in lender’s collateral policies must be
the FEDERAL REGISTER. commercially reasonable and prudent.
(4) Loan maturity. An ARC Loan may Lenders will certify that the collateral
be made with a maturity of up to six policies applied to the ARC Loan meet
and one-half years. this standard. Lenders may charge bor-
(5) Disbursement period. The disburse- rowers the direct cost of securing and
ment period for an ARC Loan is up to liquidating collateral for ARC Loans.
six consecutive months. SBA will reimburse Lenders for the di-
(6) Loan payments. rect cost of liquidating collateral that
(i) Borrower’s payments. The borrower are not reimbursed by the borrower in
will be responsible for all principal the event of default. Reimbursement of
payments. the direct costs of liquidation by SBA
(ii) Payment of interest by SBA. SBA to the Lender is limited to the amount
will make periodic interest payments of the recovery received on the ARC
to the lender on ARC Loans. Interest Loan.
will accrue only until the date 120 days (i) Credit criteria. To be approved for
after the earliest uncured payment de- an ARC Loan, the applicant must be a
fault on the ARC Loan. However, the creditworthy small business with a rea-
amount paid by SBA on a defaulted sonable expectation of repayment, tak-
ARC Loan, when it honors its guar- ing into consideration the following:
antee, will be adjusted to reconcile for (1) Character, reputation, and credit
any overpayments or underpayments of history of the applicant (and the Oper-
interest previously paid to the Lender. ating Company, if applicable) and its
Interim adjustments to interest paid Associates;
by SBA to lenders may be made during (2) Experience and depth of manage-
the term of the ARC Loan and interest ment;
payments due the Lender will be ad- (3) Strength of the business;
justed to accommodate the interim in- (4) Past earnings, current earnings,
terest adjustments. and projected cash flow; and
(iii) Deferral period. No principal re- (5) Ability to repay the loan with
payment is required during the dis- earnings from the business.
bursement period or for 12 months fol- (j) Statement of hardship. In addition
lowing the final loan disbursement. to the certifications required for 7(a)
(iv) Repayment period. The borrower loans generally, ARC Loan recipients
will be required to pay the loan prin- must submit a statement certifying
cipal over five years beginning in the that they are experiencing immediate
13th month following the final loan dis- financial hardship and provide docu-
bursement. The ARC Loan balance will mentation to support the certification.
be fully amortized over the five year (k) Loan application. The provisions
repayment period. Balloon payments of § 120.191 do not apply for ARC Loans.
may not be required by lenders. The A lender making an ARC Loan will pro-
borrower may prepay all or a portion of vide an application with information
the principal during the life of the loan on the small business that includes the
without penalty. nature and history of the business, cur-
(f) Number of ARC Loans per small rent and historical financial state-
business. No small business may obtain ments (or tax returns), and other infor-
more than one ARC Loan, but the pro- mation that SBA may require.
ceeds of the ARC loan may be used to (l) Preferences and refinancing. A lend-
pay more than one Qualifying Small er may make an ARC Loan to an Eligi-
Business Loan. ble Borrower that intends to use the
278
Small Business Administration § 120.400
proceeds of the ARC Loan to make sistent with prudent lending standards
periodic payments of principal and in- and in accordance with SBA Loan Pro-
terest on a Qualifying Small Business gram Requirements as defined in Sec-
Loan that is owned or serviced by that tion 120.10. Loans with de minimis
same lender. The provisions of §§ 120.10, value may, at the Lender’s request and
120.536(a)(2) and 120.925 with regard to with SBA’s approval, be liquidated by
Preference for repayments without SBA or its agent(s). Significant liq-
prior SBA approval do not apply to uidation actions taken on ARC Loans
ARC Loans. The provisions of § 120.201 must be documented. The reimburse-
restricting refinancing also do not ment of liquidation related fees by SBA
apply to ARC Loans. to the Lender is limited to the amount
(m) Loan fees. Neither the lender nor of the recovery on the ARC Loan.
SBA shall impose any fees or direct (q) Purchase requests. Any purchase
costs on a borrower of an ARC Loan, request to SBA to honor its guaranty
except that lenders may charge bor- on a defaulted ARC Loan shall be made
rowers for the direct costs of securing by the originating lender. Lenders may
and liquidating collateral for the ARC request SBA to purchase an ARC Loan
Loan. Fees include, but are not limited when there has been an uncured pay-
to, points, bonus points, prepayment ment default exceeding 60 days or when
penalties, brokerage fees, fees for proc- the borrower has declared bankruptcy.
essing, origination, or application, and SBA requires Lenders to submit loans
out of pocket expenses (other than the for purchase no later than 120 days
direct costs of securing and liquidating after the earliest uncured payment de-
collateral). SBA will not impose any fault on the ARC Loan. Additionally,
fees on a lender making an ARC Loan. SBA may honor its guarantee and re-
(n) Lender reporting. Lenders shall re- quire a Lender to submit an ARC Loan
port on its ARC Loans in accordance for purchase at any time. Except as
with requirements established by SBA noted above, the Lender is required to
from time to time for 7a loans and complete all recovery actions on the
loans made under the American Recov- ARC Loan after purchase.
ery and Reinvestment Act of 2009. (r) Prohibition on secondary market
(o) Loan servicing. Each originating sales and loan participations. A lender
lender shall service all of its ARC may not sell an ARC loan into the sec-
Loans in accordance with the existing ondary market nor may a lender par-
practices and procedures that the ticipate a portion of an ARC loan with
Lender uses for its non-SBA guaran- another lender.
teed commercial loans. In all cir- (s) Loan volume. SBA reserves the
cumstances, such practices and proce- right to allocate loan volume under the
dures must be commercially reasonable ARC Loan Program among Lenders (as
and consistent with prudent lending defined in § 120.10).
standards and in accordance with SBA (t) Delegated authority. SBA may
Loan Program Requirements as defined allow lenders to use their delegated au-
in § 120.10. SBA’s prior written consent thority to process ARC Loans.
is required for servicing actions that (u) Personal resources test. The per-
may have significant exposure implica- sonal resources test provisions of
tions for SBA. SBA may require writ- § 120.102 do not apply to ARC Loans.
ten notice of other servicing actions it (v) Statutory loan limit. The provisions
considers necessary for portfolio man- of § 120.151 do not apply to ARC Loans.
agement purposes.
[74 FR 27247, June 9, 2009]
(p) Liquidations. Each Lender shall be
responsible for liquidating any de-
faulted ARC Loan originated by the Subpart D—Lenders
Lender. ARC Loans will be liquidated
in accordance with the existing prac- § 120.400 Loan Guarantee Agreements.
tices and procedures that the Lender SBA may enter into a Loan Guar-
uses for its non-SBA guaranteed com- antee Agreement with a Lender to
mercial loans. In all circumstances, make deferred participation (guaran-
such practices and procedures must be teed) loans. Such an agreement does
commercially reasonable and con- not obligate SBA to participate in any
279
§ 120.410 13 CFR Ch. I (1–1–25 Edition)
specific proposed loan that a Lender (2) A state banking regulator satis-
may submit. The existence of a Loan factory to SBA, or
Guarantee Agreement does not limit (3) SBA;
SBA’s rights to deny a specific loan or (e) Be in good standing with SBA, as
establish general policies. See also defined in § 120.420(f) (and determined
§ 120.440(c) concerning Supplemental by SBA in its discretion), and, as appli-
Guarantee Agreements. cable, with its state regulator and be
[61 FR 3235, Jan. 31, 1996, as amended at 82 considered Satisfactory by its Federal
FR 39503, Aug. 21, 2017] Financial Institution Regulator (as de-
termined by SBA and based on, for ex-
PARTICIPATION CRITERIA ample, information in published orders/
agreements and call reports); and
§ 120.410 Requirements for all partici-
pating Lenders. (f) Operate in a safe and sound condi-
tion using commercially reasonable
A Lender must: lending policies, procedures, and stand-
(a) Have a continuing ability to ards employed by prudent Lenders.
evaluate, process, close, disburse, serv-
ice, liquidate and litigate small busi- [61 FR 3235, Jan. 31, 1996, as amended at 62
ness loans including, but not limited FR 302, Jan. 3, 1997; 73 FR 75510, Dec. 11, 2008;
to: 82 FR 39503, Aug. 21, 2017; 85 FR 78213, Dec. 4,
2020]
(1) Holding sufficient permanent cap-
ital to support SBA lending activities § 120.411 Preferences.
(for SBA Lenders with a Federal Finan-
cial Institution Regulator, meeting An agreement to participate under
capital requirements for an adequately the Act may not establish any Pref-
capitalized financial institution is con- erences in favor of the Lender.
sidered sufficient permanent capital to
support SBA lending activities; and for § 120.412 Other services Lenders may
SBLCs and NFRLs, meeting their re- provide Borrowers.
spective minimum capital require- Subject to § 120.140 Lenders, their As-
ment); and sociates or the designees of either may
(2) Maintaining satisfactory SBA per- provide services to and contract for
formance, as determined by SBA in its goods with a Borrower only after full
discretion. The 7(a) Lender’s Risk Rat- disbursement of the loan to the small
ing, among other factors, will be con- business or to an account not con-
sidered in determining satisfactory trolled by the Lender, its Associate, or
SBA performance. Other factors may the designee. A Lender, an Associate,
include, but are not limited to, review/ or a designee providing such services
examination assessments, historical must do so under a written contract
performance measures (like default
with the small business, based on time
rate, purchase rate and loss rate), loan
and hourly charges, and must maintain
volume to the extent that it impacts
performance measures, and other per- time and billing records for examina-
formance related measurements and tion by SBA. Fees cannot exceed those
information (such as contribution to- charged by established professional
ward SBA mission); consultants providing similar services.
(b) Be open to the public for the mak- See also § 120.195.
ing of such loans (not be a financing
§ 120.413 Advertisement of relation-
subsidiary, engaged primarily in fi- ship with SBA.
nancing the operations of an affiliate);
(c) Have continuing good character A Lender may refer in its advertising
and reputation, and otherwise meet to its participation with SBA. The ad-
and maintain the ethical requirements vertising may not:
of § 120.140 (a) State or imply that the Lender, or
(d) Be supervised and examined by ei- any of its Borrowers, has or will re-
ther: ceive preferential treatment from SBA;
(1) A Federal Financial Institution (b) Be false or misleading; or
Regulator, (c) Make use of SBA’s seal.
280
Small Business Administration § 120.420
PARTICIPATING LENDER FINANCINGS (4) Does not have any officer or em-
ployee who has been under investiga-
SOURCE: Sections 120.420 through 120.428 ap- tion or indictment for, or has been con-
pear at 64 FR 6507, Feb. 10, 1999, unless other- victed of or had a judgment entered
wise noted. against him for, a felony or fraud, or
charges relating to a breach of trust or
§ 120.420 Definitions.
violation of a law or regulation pro-
(a) 7(a) Loans—All references to 7(a) tecting the integrity of business trans-
loans under this subpart include loans actions or relationships, unless the
made under section 7(a) of the Small Lender Oversight Committee has deter-
Business Act (15 U.S.C. 631 et seq.) and mined that good standing exists de-
loans made under section 502 of the spite the existence of such person.
Small Business Investment Act (15 (f) Initial Currency Rate—The Initial
U.S.C. 661 et seq.), both of which may be Currency Rate (ICR) is the securitizer’s
securitized under this subpart. benchmark Currency Rate. SBA will
(b) Benchmark Number—The max- calculate the securitizer’s ICR as of the
imum number of percentage points end of the calendar quarter imme-
that a securitizer’s Currency Rate can diately prior to the first securitization
decrease without triggering the PLP completed after April 12, 1999. This cal-
suspension provision set forth in culation will include all 7(a) loans
§ 120.425. SBA will publish the Bench- which are outstanding and were ap-
mark Number in the FEDERAL REG- proved in any fiscal year prior to SBA’s
ISTER.
current fiscal year. Each quarter, SBA
(c) Currency Rate—A securitizer’s will compare each securitizer’s Cur-
‘‘Currency Rate’’ is the dollar balance
rency Rate to its ICR.
of its 7(a) guaranteed loans that are
(g) Initial Currency Rate Percentage—
less than 30 days past due divided by
The Initial Currency Rate Percentage
the dollar balance of its portfolio of
7(a) guaranteed loans outstanding, as (ICRP) measures the relationship be-
calculated quarterly by SBA, excluding tween a securitizer’s Initial Currency
loans approved in SBA’s current fiscal Rate and the SBA 7(a) loan portfolio
year. Currency Rate at the time of the first
(d) Currency Rate Percentage—The re- securitization after April 12, 1999. The
lationship between the securitizer’s ICRP is calculated by dividing the
Currency Rate and the SBA 7(a) loan securitizer’s Currency Rate by the SBA
portfolio Currency Rate as calculated 7(a) loan portfolio Currency Rate. SBA
by dividing the securitizer’s Currency will calculate the securitizer’s ICRP as
Rate by the SBA 7(a) loan portfolio of the end of the calendar quarter im-
Currency Rate. mediately prior to the first
(e) Good Standing—In general, a Lend- securitization completed after April 12,
er is in ‘‘good standing’’ with SBA if it: 1999.
(1) Is in compliance with all applica- (h) Loss Rate—A securitizer’s ‘‘loss
ble: rate,’’ as calculated by SBA, is the ag-
(i) Laws and regulations; gregate principal amount of the
(ii) Policies; and securitizer’s 7(a) loans determined
(iii) Procedures; uncollectible by SBA for the most re-
(2) Is in good financial condition as cent 10-year period, excluding SBA’s
determined by SBA; current fiscal year activity, divided by
(3) Is not under investigation or in- the aggregate original principal
dictment for, or has not been convicted amount of 7(a) loans disbursed by the
of, or had a judgment entered against securitizer during that period.
it for felony or fraud, or charges relat- (i) Nondepository Institution—A ‘‘non-
ing to a breach of trust or violation of depository institution’’ is a Small
a law or regulation protecting the in- Business Lending Company (‘‘SBLC’’)
tegrity of business transactions or re- regulated by SBA or a Business and In-
lationships, unless the Lender Over- dustrial Development Company
sight Committee has determined that (‘‘BIDCO’’) or other nondepository in-
good standing exists despite the exist- stitution participating in SBA’s 7(a)
ence of such factors. program.
281
§ 120.421 13 CFR Ch. I (1–1–25 Edition)
(j) Securitization—A ‘‘securitization’’ (such as contribution toward SBA mis-
is the pooling and sale of the sion);
unguaranteed portion of SBA guaran- (c) Use a securitization structure
teed loans to a trust, special purpose which is satisfactory to SBA;
vehicle, or other mechanism, and the (d) Use documents acceptable to
issuance of securities backed by those SBA, including SBA’s model multi-
loans to investors in either a private party agreement, as amended from
placement or public offering. time to time;
(e) Obtain SBA’s written consent,
[64 FR 6507, Feb. 10, 1999, as amended at 73
FR 75511, Dec. 11, 2008; 87 FR 38909, June 30, which it may withhold in its sole dis-
2022] cretion, prior to executing a commit-
ment to securitize; and
§ 120.421 Which Lenders may (f) Cause the original notes to be
securitize? stored at the FTA, as defined in
All SBA participating Lenders may § 120.600, and other loan documents to
securitize subject to SBA’s approval. be stored with a party approved by
SBA.
§ 120.422 Are all securitizations sub-
[64 FR 6507, Feb. 10, 1999, as amended at 73
ject to this subpart?
FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21,
All securitizations are subject to this 2017]
subpart. Until additional regulations
are promulgated, SBA will consider § 120.425 What are the minimum ele-
securitizations involving multiple ments that SBA will require before
Lenders on a case by case basis, using consenting to a securitization?
the conditions in § 120.425 as a starting A securitizer must comply with the
point. SBA will consider following three conditions:
securitizations by affiliates as single (a) Capital Requirement—All
Lender securitizations for purposes of securitizers must be considered to be
this subpart. ‘‘well capitalized’’ by their regulator.
SBA will consider a depository institu-
§ 120.423 Which 7(a) loans may a Lend- tion to be in compliance with this sec-
er securitize? tion if it meets the definition of ‘‘well
A Lender may only securitize 7(a) capitalized’’ used by its bank regu-
loans that will be fully disbursed with- lator. SBA’s capital requirement does
in 90 days of the securitization’s clos- not change the requirements that
ing date. If the amount of a fully dis- banks already meet. For nondepository
bursed loan increases after a institutions, SBA, as the regulator,
securitization settles, the Lender must will consider a non-depository institu-
retain the increased amount. tion to be ‘‘well capitalized’’ if it main-
tains a minimum unencumbered paid
§ 120.424 What are the basic conditions in capital and paid in surplus equal to
a Lender must meet to securitize? at least 10 percent of its assets, exclud-
To securitize, a Lender must: ing the guaranteed portion of 7(a)
(a) Be in good standing with SBA as loans. The capital charge applies to the
defined in § 120.420(f) of this chapter and remaining balance outstanding on the
determined by SBA in its discretion; unguaranteed portion of the
(b) Have satisfactory SBA perform- securitizer’s 7(a) loans in its portfolio
ance, as determined by SBA in its dis- and in any securitization pools. Each
cretion. The Lender’s Risk Rating, nondepository institution must submit
among other factors, will be considered annual audited financial statements
in determining satisfactory SBA per- demonstrating that it has met SBA’s
formance. Other factors may include, capital requirement.
but are not limited to, review/examina- (b) Subordinated Tranche—A
tion assessments, historical perform- securitizer or its wholly owned sub-
ance measures (like default rate, pur- sidiary must retain a tranche of the se-
chase rate and loss rate), loan volume curities issued in the securitization
to the extent that it impacts perform- (subordinated tranche) equal to the
ance measures, and other performance greater of two times the securitizer’s
related measurements and information Loss Rate or 2 percent of the principal
282
Small Business Administration § 120.426
balance outstanding at the time of improved its Currency Rate to above
securitization of the unguaranteed por- its ICR less the Benchmark Number; or
tion of the loans in the securitization. (ii) its Currency Rate Percentage is ei-
This tranche must be subordinate to ther the same or greater than its ICRP.
all other securities issued in the (2) Reinstatement: The suspension will
securitization including other subordi- remain in effect until the securitizer
nated tranches. The securitizer or its meets either the condition in para-
wholly owned subsidiary may not sell, graph (c)(1)(i) or (c)(1)(ii) of this sec-
pledge, transfer, assign, sell participa- tion. If the securitizer meets either
tions in, or otherwise convey the sub- condition by the end of the 3-month pe-
ordinated tranche during the first 6 riod, notifies SBA with acceptable doc-
years after the closing date of the umentation, and SBA agrees, SBA will
securitization. The securities evidenc- reinstate the securitizer. If the
ing the subordinated tranche must bear securitizer cannot meet either condi-
a legend stating that the securities tion, the suspension will remain in ef-
may not be sold until 6 years after the fect. The securitizer may then petition
issue date. SBA’s Securitization Com- the Lender Oversight Committee (Com-
mittee may modify the formula for de- mittee) for reinstatement. The Com-
termining the tranche size for a mittee will review the reinstatement
securitizer creating a securitization petition and determine if the
from a pool of loans located in a region securitizer’s PLP approval privilege
affected by a severe economic down- and securitization status should be re-
turn if the Securitization Committee instated. The Committee may consider
concludes that enforcing this section the economic conditions in the
might exacerbate the adverse economic securitizer’s market area, the
conditions in the region. SBA will securitizer’s efforts to improve its Cur-
work with the securitizer to verify the rency Rate, and the quality of the
accuracy of the data used to make the securitizer’s 7(a) loan packages and
Loss Rate calculation. servicing. The Committee will consider
(c) PLP Privilege Suspension. only one petition by a securitizer per
(1) Suspension: If a securitizer’s Cur- quarter.
rency Rate declines, SBA may suspend (3) The Benchmark Number. SBA will
the securitizer’s PLP unilateral loan monitor the Benchmark Number. If
approval privileges (PLP approval economic conditions or policy consid-
privileges) if the decline from the erations warrant, SBA may modify the
securitizer’s ICR is more than the Benchmark Number to protect the
Benchmark Number as published in the safety and soundness of the 7(a) pro-
FEDERAL REGISTER from time to time gram.
and the securitizer’s Currency Rate (4) Data. SBA will calculate Currency
Percentage is less than its ICRP. The Rate and Currency Rate Percentages
securitizer will first be placed on pro- quarterly from financial information
bation for one quarter. If, at the end of that securitizers provide. SBA will
the probationary quarter the work with a securitizer to verify the
securitizer has not met either of the accuracy of the data used to make the
following conditions in paragraph Currency Rate calculation.
(c)(1)(i) or (c)(1)(ii) of this section, SBA [64 FR 6508, Feb. 10, 1999, as amended at 65
will suspend the securitizer’s PLP ap- FR 49481, Aug. 14, 2000; 73 FR 75511, Dec. 11,
proval privileges and will not approve 2008]
additional securitization requests from
that securitizer. SBA will provide writ- § 120.426 What action will SBA take if
ten notice at least 10 days prior to the a securitizer transfers the subordi-
effective date of suspension. The sus- nated tranche prior to the termi-
pension will last a minimum of 3 nation of the holding period?
months. During the suspension period, If a securitizer transfers the subordi-
the securitizer must use Certified nated tranche prior to the termination
Lender or Regular Procedures to proc- of the holding period, SBA will suspend
ess 7(a) loan applications. The prohibi- immediately the securitizer’s ability to
tion will end if, at the end of the proba- make new 7(a) loans. The securitizer
tionary quarter: (i) the securitizer has will have 30 calendar days to submit an
283
§ 120.427 13 CFR Ch. I (1–1–25 Edition)
explanation to Lender Oversight Com- § 120.432 Under what circumstances
mittee (‘‘Committee’’). The Committee does this subpart permit sales of, or
will have 30 calendar days to review sales of participating interests in,
the explanation and determine whether 7(a) loans?
to lift the suspension. If an explanation (a) A Lender may sell all of its inter-
is not received within 30 calendar days est in a 7(a) loan to another Lender op-
or the explanation is not satisfactory erating under a current Loan Guar-
to the Committee, SBA may transfer antee Agreement (SBA Form 750)
the servicing of the applicable (‘‘participating Lender’’), with SBA’s
securitized loans, including the prior written consent, which SBA may
securitizers’ servicing fee on the guar- withhold in its sole discretion. A Lend-
anteed and unguaranteed portions and er may not sell any of its interest in a
the premium protection fee on the 7(a) loan to a nonparticipating Lender.
guaranteed portion, to another SBA The purchasing Lender must take pos-
participating Lender. session of the promissory note and
other loan documents, and service the
[64 FR 6507, Feb. 10, 1999, as amended at 73
FR 75511, Dec. 11, 2008] sold 7(a) loan. The purchasing Lender
purchases the loan subject to SBA’s ex-
§ 120.427 Will SBA approve a isting rights including its right to deny
securitization application from a liability on its guarantee as provided
capital impaired Securitizer? in § 120.524. After purchase, the pur-
If a securitizer does not maintain the chased loan will be subject to the pur-
level of capital required by this sub- chasing Lender’s Loan Guarantee
part, SBA will not approve a Agreement. This paragraph (a) applies
securitization application from that to all 7(a) loans purchased from any
securitizer. Federal or state banking regulator,
any receiver, or any conservator, un-
§ 120.428 What happens to a less SBA agrees otherwise in writing.
securitizer’s other PLP responsibil- This paragraph (a) applies to all 7(a)
ities if SBA suspends its PLP ap- loans purchased from any Federal or
proval privilege? state banking regulator, any receiver,
The securitizer must continue to or any conservator, unless SBA agrees
service and liquidate loans according otherwise in writing.
to its PLP Supplemental Agreement. (b) A Lender may sell, or sell a par-
ticipating interest in, a part of a 7(a)
OTHER CONVEYANCES loan to another participating Lender.
If the Lender retains ownership of a
SOURCE: Sections 120.430 through 120.435 ap- part of the unguaranteed portion of the
pear at 64 FR 6509, 6510, Feb. 10, 1999, unless loan equal to at least 10 percent of the
otherwise noted. outstanding principal balance of the
loan, the Lender must give SBA prior
§ 120.430 What conveyances are cov- written notice of the transaction, and
ered by §§ 120.430 through 120.435? the Lender must continue to hold the
Sections 120.430 through 120.435 cover note and service the loan. If a Lender
all other transactions in which a Lend- retains ownership of a part of the
er sells, sells a participating interest unguaranteed portion of the loan equal
in, or pledges an SBA guaranteed loan to less than 10 percent of the out-
other than for the purpose of standing principal balance of the loan,
securitizing and other than convey- the Lender must obtain SBA’s prior
ances covered under Subpart F, Sec- written consent to the transaction,
ondary Market, of this part. which consent SBA may withhold in its
sole discretion. The Lender must con-
§ 120.431 Which Lenders may sell, sell tinue to hold the note and other loan
participations in, or pledge 7(a) documents, and service the loan unless
loans? SBA otherwise agrees in its sole discre-
All Lenders may sell, sell participa- tion.
tions in, or pledge 7(a) loans in accord- (c) For purposes of determining the
ance with this subpart. percentage of ownership a Lender has
284
Small Business Administration § 120.435
retained, SBA will not consider a Lend- performance measures (like default
er to be the owner of the part of a loan rate, purchase rate and loss rate), loan
in which it has sold a participating in- volume to the extent that it impacts
terest. performance measures, and other per-
[64 FR 6509, 6510, Feb. 10, 1999, as amended at formance related measurements and
85 FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, information (such as contribution to-
2020; 87 FR 38909, June 30, 2022] ward SBA mission);
(d) All loan documents must be satis-
§ 120.433 What are SBA’s other re-
quirements for sales and sales of factory to SBA and must include a
participating interests? multi-party agreement among SBA,
Lender, the pledgee, FTA and such
SBA requires the following:
(a) The Lender must be in good other parties as SBA determines are
standing with SBA as defined in necessary;
§ 120.420(f) and determined by SBA in (e) The Lender must use the proceeds
its discretion; of the loan secured by the 7(a) loans
(b) The Lender has satisfactory SBA only for financing 7(a) loans and for
performance, as determined by SBA in costs and expenses directly connected
its discretion. The Lender’s Risk Rat- with the borrowing for which the loans
ing, among other factors, will be con- are pledged;
sidered in determining satisfactory (f) The Lender must remain the
SBA performance. Other factors may servicer of the loans and retain posses-
include, but are not limited to, review/ sion of all loan documents other than
examination assessments, historical the original promissory notes;
performance measures (like default (g) The Lender must deposit the
rate, purchase rate and loss rate), loan original promissory notes at the FTA;
volume to the extent that it impacts and
performance measures, and other per-
(h) The Lender must retain an eco-
formance related measurements and
nomic interest in and the ultimate risk
information (such as contribution to-
of loss on the unguaranteed portion of
ward SBA mission); and
(c) In transactions requiring SBA’s the loans.
consent, all documentation must be [64 FR 6507, Feb. 10, 1999, as amended at 73
satisfactory to SBA, including, if SBA FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21,
determines it to be necessary, a multi- 2017]
party agreement.
§ 120.435 Which loan pledges do not re-
[64 FR 6507, Feb. 10, 1999, as amended at 73
quire notice to or consent by SBA?
FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21,
2017] (a) Notwithstanding the provisions of
§ 120.434(e), 7(a) loans may be pledged
§ 120.434 What are SBA’s requirements for the following purposes without no-
for loan pledges?
tice to or consent by SBA:
(a) Except as set forth in § 120.435, (1) Treasury tax and loan accounts;
SBA must give its prior written con- (2) The deposit of public funds;
sent to all pledges of any portion of a
(3) Uninvested trust funds;
7(a) loan, which consent SBA may
withhold in its sole discretion; (4) Borrowings from a Federal Re-
(b) The Lender must be in good serve Bank; or
standing with SBA as defined in (5) Advances by a Federal Home Loan
§ 120.420(f) and determined by SBA in Bank.
its discretion; (b) For purposes of the Paycheck
(c) The Lender has satisfactory SBA Protection Program (PPP), the other
performance, as determined by SBA in provisions of § 120.434 shall also not
its discretion. The Lender’s Risk Rat- apply to PPP loans pledged under para-
ing, among other factors, will be con- graph (a)(4) or (5) of this section.
sidered in determining satisfactory
[85 FR 21752, Apr. 20, 2020]
SBA performance. Other factors may
include, but are not limited to, review/
examination assessments, historical
285
§ 120.440 13 CFR Ch. I (1–1–25 Edition)
DELEGATED AUTHORITY CRITERIA ess, close, service, and liquidate SBA
guaranteed loans with reduced require-
§ 120.440 How does a 7(a) Lender ob- ments for documentation to and prior
tain delegated authority? approval by SBA.
(a) In making its decision to grant or
renew a delegated authority, SBA con- § 120.451 [Reserved]
siders whether the Lender, as deter-
mined by SBA in its discretion: § 120.452 What are the requirements of
PLP loan processing?
(1) Has the continuing ability to
evaluate, process, close, disburse, serv- (a) Subparts A and B of this part gov-
ice, liquidate and litigate SBA loans. ern the making of PLP loans, except
This includes the ability to develop and for the following:
analyze complete loan packages. SBA (1) Certain types of businesses, loans,
may consider the experience and capa- and loan programs are not eligible for
bility of Lender’s management and PLP, as detailed in published SBA pol-
staff. icy and procedures.
(2) Has satisfactory SBA performance (2) A Lender may not make a PLP
(as defined in § 120.410(a)(2)); business loan which reduces its exist-
(3) Is in compliance with SBA Loan ing credit exposure for any Borrower,
Program Requirements (e.g., Form 1502 except in cases where an interim
reporting, timely payment of all fees to loan(s) has been made for other than
SBA); real estate construction purposes to
(4) Has completed to SBA’s satisfac- the Borrower which was approved by
tion all required corrective actions; the Lender within 90 days of receipt of
(5) Whether Lender is subject to any the issuance fo a subsequent PLP loan
enforcement action, order or agree- number.
ment with a regulator or the presence (3) SBA will not guarantee more than
of other regulatory concerns as deter- the specified statutory percentage of
mined by SBA; and any PLP loan.
(6) Whether Lender exhibits other (b) A PLP Lender notifies SBA of its
risk factors (e.g., has rapid growth; low approval of a PLP loan by submitting
SBA activity; SBA loan volume; Lend- to SBA’s loan processing center appro-
er, an officer or director is under inves- priate documentation signed by two of
tigation or indictment). the PLP’s authorized representatives.
(b) Delegated authority decisions are SBA will attach the SBA guarantee
made by the appropriate SBA official and notify the PLP Lender of the SBA
in accordance with Delegations of Au- loan number (if it does not identify a
thority, and are final. problem with eligibility, and funds are
(c) If delegated authority is approved available).
or renewed, Lender must execute a (c) The PLP Lender is responsible for
Supplemental Guarantee Agreement, all PLP loan decisions regarding eligi-
which will specify a term not to exceed bility (including size) and creditworthi-
two years. SBA may grant shortened ness. The PLP Lender is also respon-
renewals based on risk or any of the sible for confirming that all PLP loan
other delegated authority criteria. closing decisions are correct, and that
Lenders with less than 3 years of SBA it has complied with all requirements
lending experience will be limited to a of law and SBA regulations.
term of 1 year or less.
SBA SUPERVISED LENDERS
[82 FR 39503, Aug. 21, 2017, as amended at 85
FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, § 120.460 What are SBA’s additional re-
2020] quirements for SBA Supervised
Lenders?
§ 120.441–§ 120.447 [Reserved]
(a) In general. In addition to com-
PREFERRED LENDERS PROGRAM (PLP) plying with SBA’s requirements for
SBA Lenders, an SBA Supervised Lend-
§ 120.450 What is the Preferred Lend- er must meet the additional require-
ers Program? ments set forth in this regulation and
Under the Preferred Lenders Pro- the SBA Supervised Lender regulations
gram (PLP), designated Lenders proc- that follow.
286
Small Business Administration § 120.461
(b) Operations and internal controls. fied by training and experience to
Each SBA Supervised Lender’s board of carry out its business plan. An SBA Su-
directors (or management, if the SBA pervised Lender is expected to sustain
Supervised Lender is a division of an- a sufficient level of lending activity in
other company and does not have its its lending area, which means obtain-
own board of directors) must adopt an ing at least four 7(a) loan approvals
internal control policy which provides during two consecutive fiscal years.
adequate direction to the institution in This paragraph only applies to SBA Su-
establishing effective control over and pervised Lenders that make or acquire
accountability for operations, pro- a 7(a) loan after January 4, 2021, or to
grams, and resources. The internal con- any SBA Supervised Lender approved
trol policy must, at a minimum: after such date, including in the event
(1) Direct management to assign re- of a change of ownership or control of
sponsibility for the internal control an SBA Supervised Lender.
function (covering financial, credit,
(d) An NFRL may only make or ac-
credit review, collateral, and adminis-
quire 7(a) loans in the state in which
trative matters) to an officer or offi-
cers of the SBA Supervised Lender; its primary state regulator is located,
(2) Adopt and set forth procedures for except that an NFRL’s lending area
maintenance and periodic review of the may include a local trade area that is
internal control function; and contiguous to such state (e.g., a city or
(3) Direct the operation of a program metropolitan statistical area that is bi-
to review and assess the SBA Super- sected by a state line) if the NFRL re-
vised Lender’s assets. The asset review ceives SBA’s prior written approval.
program policies must specify the fol- This paragraph applies to all NFRLs on
lowing: or after January 4, 2021, including in
(i) Loan, loan-related asset, and ap- the event of approval of a new NFRL or
praisal review standards, including a change of ownership or control of an
standards for scope of selection for re- NFRL; provided however, that if SBA
view (of any such loan, loan-related has approved any NFRL to make 7(a)
asset or appraisal) and standards for loans out of their state, then this para-
work papers and supporting docu- graph will apply on or after January 4,
mentation; 2022.
(ii) Asset quality classification
[73 FR 75512, Dec. 11, 2008, as amended at 85
standards consistent with the stand- FR 78213, Dec. 4, 2020]
ardized classification systems used by
the Federal Financial Institution Reg- § 120.461 What are SBA’s additional re-
ulators; quirements for SBA Supervised
(iii) Specific internal control require- Lenders concerning records?
ments for the SBA Supervised Lender’s
(a) Report filing. All SBA Supervised
major asset categories (cash and in-
Lender-specific reports (including all
vestment securities), lending, and the
issuance of debt; SBLC-only reports) must be filed with
(iv) Specific internal control require- the appropriate Office of Capital Ac-
ments for the SBA Supervised Lender’s cess official in accordance with Delega-
oversight of Lender Service Providers; tions of Authority.
and (b) Maintenance of records. An SBA
(v) Standards for training to imple- Supervised Lender must maintain at
ment the asset review program. its principal business office accurate
(c) An SBA Supervised Lender must and current financial records, includ-
have qualified full-time professional ing books of accounts, minutes of
management including, but not limited stockholder, directors, and executive
to, a chief executive officer or the committee meetings, and all docu-
equivalent to manage daily operations, ments and supporting materials relat-
and a chief credit/risk officer. An SBA ing to the SBA Supervised Lender’s
Supervised Lender must also have at transactions. However, securities held
least one other part-time professional by a custodian pursuant to a written
employee (which may be a shared em- agreement are exempt from this re-
ployee of the lender’s affiliates) quali- quirement.
287
§ 120.462 13 CFR Ch. I (1–1–25 Edition)
(c) Permanent preservation of records. must comply with the minimum cap-
An SBA Supervised Lender must per- ital requirements for NFRLs that were
manently preserve in a manner permit- in effect on January 3, 2021.
ting immediate (one business day) re- (2) For SBLCs. For information on
trieval the following documentation minimum capital requirements for
for the financial statements and other SBLCs, see § 120.471.
reports required by § 120.464 (and the (b) Capital adequacy. The board of di-
accompanying certified public account- rectors (or management, if the SBA
ant’s opinion): Supervised Lender is a division of an-
(1) All general and subsidiary ledgers other company and does not have its
(or other records) reflecting asset, li- own board of directors) of each SBA
ability, capital stock and additional Supervised Lender must determine
paid-in capital, income, and expense capital adequacy goals; that is, the
accounts; total amount of capital needed to as-
(2) All general and special journals sure the SBA Supervised Lender’s con-
(or other records forming the basis for tinued financial viability and provide
entries in such ledgers); and for any necessary growth. The min-
(3) The corporate charter, bylaws, ap- imum standards set in § 120.471 for
plication for determination of eligi- SBLCs and those established in
bility to participate with SBA, and all § 120.462(a)(1) for NFRLs are not to be
minutes books, capital stock certifi- adopted as the ideal capital level for a
cates or stubs, stock ledgers, and stock given SBA Supervised Lender. Rather,
transfer registers. the minimum standards are to serve as
(d) Other preservation of records. An minimum levels of capital that each
SBA Supervised Lender must preserve SBA Supervised Lender must maintain
for at least 6 years following final dis- to protect against the credit risk and
position of each individual SBA loan: other general risks inherent in its op-
(1) All applications for financing; eration.
(2) Lending, participation, and es- (c) Capital plan. (1) The board of di-
crow agreements; rectors of each SBA Supervised Lender
(3) Financing instruments; and must establish, adopt, and maintain a
(4) All other documents and sup- formal written capital plan. The plan
porting material relating to such must include any interim capital tar-
loans, including correspondence. gets that are necessary to achieve the
(e) Electronic preservation. Records SBA Supervised Lender’s capital ade-
and other documents referred to in this quacy goals as well as the minimum
section may be preserved electroni- capital standards. The plan must ad-
cally if the original is available for re- dress any projected dividend goals, eq-
trieval within 15 working days. uity retirements, or any other antici-
[73 FR 75512, Dec. 11, 2008] pated action that may decrease the
SBA Supervised Lender’s capital. The
§ 120.462 What are SBA’s additional re- plan must set forth the circumstances
quirements on capital maintenance in which capital retirements (e.g., divi-
for SBA Supervised Lenders? dends, distributions of capital or pur-
(a) Minimum capital requirements—(1) chase of treasury stock) can occur. In
For NFRLs. (i) Beginning on January 4, addition to factors described above
2024, each NFRL that makes or ac- that must be considered in meeting the
quires a 7(a) loan must maintain the minimum standards, the board of direc-
minimum capital required by its state tors must also address the following
regulator, or $2,500,000, whichever is factors in developing the SBA Super-
greater. vised Lender’s capital adequacy plan:
(ii) Any NFRL approved on or after (i) Management capability;
January 4, 2021, including in the event (ii) Quality of operating policies, pro-
of a change of ownership or control, cedures, and internal controls;
must maintain the minimum capital (iii) Quality and quantity of earn-
requirement set forth in paragraph ings;
(a)(1)(i) of this section. (iv) Asset quality and the adequacy
(iii) Unless subject to paragraph of the allowance for loan losses within
(a)(1)(i) or (ii) of this section, an NFRL the loan portfolio;
288
Small Business Administration § 120.462
(v) Sufficiency of liquidity; and must file a written capital restoration
(vi) Any other risk-oriented activi- plan with SBA within 45 days of the
ties or conditions that warrant addi- date that the SBA Supervised Lender
tional capital (e.g., portfolio growth provides notice to SBA under para-
rate). graph (d) of this section or receives no-
(2) An SBA Supervised Lender must tice from SBA (whichever is earlier)
keep its capital plan current, updating that the SBA Supervised Lender has
it at least annually or more often as not met its minimum capital require-
operating conditions may warrant. ment, unless SBA notifies the SBA Su-
(d) Certification of compliance. Within pervised Lender in writing that the
45 days of the end of each fiscal quar- plan is to be filed within a different
ter, each SBA Supervised Lender must
time period.
furnish the SBA with a calculation of
capital and certification of compliance (2) Plan content. An SBA Supervised
with its minimum capital requirement Lender must detail the steps it will
as set forth in §§ 120.471, 120.472, or take to meet its minimum capital re-
120.474, as applicable, for SBLCs and as quirement; the time within which each
established in § 120.462(a)(1) for NFRLs. step will be taken; the timeframe for
The SBA Supervised Lender’s chief fi- accomplishing the entire capital res-
nancial officer must certify the cal- toration; and the person or department
culation to be correct. The quarterly at the SBA Supervised Lender charged
calculation and certification of compli- with carrying out the capital restora-
ance may be included in the SBA Su- tion plan.
pervised Lender’s Quarterly Condition (3) SBA response. SBA will provide
Report. written notice of whether the capital
(e) Capital impairment. An SBA Super- restoration plan is approved or not or
vised Lender must meet its minimum whether SBA will seek additional in-
regulatory capital requirement and formation. If the capital restoration
avoid capital impairment. Capital im- plan is not approved by SBA, the SBA
pairment exists if an SBA Supervised Supervised Lender will submit a re-
Lender fails to meet its minimum reg- vised capital restoration plan within
ulatory capital requirement under the timeframe specified by SBA.
§§ 120.471, 120.472, and 120.474 for SBLCs
(4) Amendment of capital restoration
or as established in § 120.462(a)(1) for
NFRLs. An SBA Supervised Lender plan. An SBA Supervised Lender that
must provide the appropriate Office of has submitted an approved capital res-
Capital Access official in accordance toration plan may, after prior written
with Delegations of Authority written notice to and approval by SBA, amend
notice of any failure to meet its min- the plan to reflect a change in cir-
imum capital requirement within 30 cumstance. Until such time as a pro-
calendar days of the month-end in posed amendment has been approved,
which the impairment occurred. Unless the SBA Supervised Lender must im-
otherwise waived by the appropriate plement the capital restoration plan as
Office of Capital Access official in ac- approved prior to the proposed amend-
cordance with Delegations of Author- ment.
ity in writing, an SBA Supervised (5) Failure. If an SBA Supervised
Lender may not present any loans to Lender fails to submit a capital res-
SBA for guaranty until the impairment toration plan that is acceptable to SBA
is cured. SBA may waive the present- within its discretion within the re-
ment prohibition for good cause as de- quired timeframe, or fails to imple-
termined by SBA in its discretion. In ment, in any material respect as deter-
the case of differences in calculating mined by SBA in its discretion, its
capital or capital requirements be- SBA approved capital restoration plan
tween the SBA Supervised Lender and within the plan timeframe, SBA may
SBA, SBA’s calculations will prevail
undertake enforcement actions under
until differences between the two cal-
§ 120.1500.
culations are resolved.
(f) Capital restoration plan— (1) Filing [73 FR 75512, Dec. 11, 2008, as amended at 85
requirement. An SBA Supervised Lender FR 78213, Dec. 4, 2020]
289
§ 120.463 13 CFR Ch. I (1–1–25 Edition)
§ 120.463 Regulatory accounting— (5) Is otherwise acceptable to SBA.
What are SBA’s regulatory account- (d) Change of auditor. If an SBA Su-
ing requirements for SBA Super- pervised Lender discharges or changes
vised Lenders? its auditor, it must notify SBA in writ-
(a) Books and records. The books and ing within ten days of the occurrence.
records of an SBA Supervised Lender Such notification must provide:
must be kept on an accrual basis in ac- (1) The name, address, and telephone
cordance with Generally Accepted Ac- number of the discharged auditor; and
counting Principles (GAAP) as promul- (2) If the discharge/change involved a
gated by the Financial Accounting dispute over the financial statements,
Standards Board (FASB), supplemented a reasonably detailed statement of all
by Regulatory Accounting Principles the reasons for the discharge or
(RAP) as identified by SBA in Policy, change. This statement must set out
Procedural or Information Notices, the issue in dispute, the position of the
from time to time. auditor, the position of the SBA Super-
(b) Annual audit. Each SBA Super- vised Lender, and the effect of each po-
vised Lender must have its financial sition on the balance sheet and income
statements audited annually by a cer- statement of the SBA Supervised Lend-
tified public accountant experienced in er.
auditing financial institutions. The (e) Specific accounting requirements. (1)
audit must be performed in accordance Each SBA Supervised Lender must
with generally accepted auditing maintain an allowance for losses on
standards as adopted by the Auditing loans and other assets that is sufficient
Standards Board of the American Insti- to absorb all probable and estimated
tute of Certified Public Accountants losses that may reasonably be expected
(AICPA) for non-public companies and based on the SBA Supervised Lender’s
by the Public Company Accounting historical performance and reasonably-
Oversight Board (PCAOB) for public anticipated events. Each SBA Super-
companies. Annually, the auditor must vised Lender must maintain docu-
issue an audit report with an opinion mentation of its loan loss allowance
as to the fairness of the SBA Super- calculations and analysis in sufficient
vised Lender’s financial statements detail to permit the SBA to understand
and their compliance with GAAP. the assumptions used and the applica-
(c) Auditor qualifications. The audit tion of those assumptions to the assets
shall be conducted by an independent of the SBA Supervised Lender.
certified public accountant who: (2) The unguaranteed portions of
(1) Is registered or licensed to prac- loans determined to be uncollectible
tice as a certified public accountant, must be charged-off promptly. If the
and is in good standing, under the laws portion determined to be uncollectible
of the state or other political subdivi- by the SBA Supervised Lender is dif-
sion of the United States in which the ferent from the amount determined by
SBA Supervised Lender’s principal of- its auditors or the SBA, the SBA Su-
fice is located; pervised Lender must charge-off such
(2) Agrees in the engagement letter amount as the SBA may direct.
with the SBA Supervised Lender to (3) Each SBA Supervised Lender
provide the SBA with access to and must classify loans as:
copies of any work papers, policies, and (i) ‘‘Nonaccrual,’’ if any portion of
procedures relating to the services per- the principal or interest is determined
formed; to be uncollectible and
(3)(i) Is in compliance with the (ii) ‘‘Formally restructured,’’ if the
AICPA Code of Professional Conduct; loan meets the ‘‘troubled debt restruc-
and turing’’ definition set forth in FASB
(ii) Meets the independence require- Statement of Financial Accounting
ments and interpretations of the Secu- Standards No. 15, Accounting by Debt-
rities and Exchange Commission and ors and Creditors for Troubled Debt
its staff; Restructurings.
(4) Has received a peer review or is (4) When one loan to a borrower is
enrolled in a peer review program, that classified as nonaccrual or formally re-
meets AICPA guidelines; and structured, all loans to that borrower
290
Small Business Administration § 120.464
must be so classified unless the SBA terly Condition Report in a form and
Supervised Lender can document that content as the SBA may prescribe from
the loans have independent sources of time to time. At a minimum, the Quar-
repayment. terly Condition Report must include
(f) Valuing loan servicing rights and re- the SBA Supervised Lender’s quarterly
sidual interests. Each SBA Supervised financial statements, which may be in-
Lender must account for loan sales ternally prepared. The SBA Supervised
transactions and the valuation of loan Lender must apply uniform definitions
servicing rights in accordance with
to categories of nonperforming loans
GAAP. At the end of each quarter, the
and include recovery amounts on liq-
SBA Supervised Lender must review
for reasonableness the existing envi- uidated loans. SBA may, on a case-by-
ronmental assumptions used in the case basis, depending on an SBA Super-
valuation. Particular attention must vised Lender’s size and the quality of
be given to interest rate and repay- its assets, adjust the requirements for
ment rate assumptions. Assumptions content and frequency of filing Quar-
considered no longer reasonable must terly Condition Reports.
be modified and modifications must be (3) Legal and Administrative Proceeding
reflected in the valuation and must be Report. Each SBA Supervised Lender
documented and supported by a market must report any legal or administra-
analysis. Work papers reflecting the tive proceeding by or against the SBA
analysis of assumptions and any result- Supervised Lender, or against any offi-
ing adjustment in the valuation must cer, director or employee of the SBA
be maintained for SBA review in ac- Supervised Lender for an alleged
cordance with § 120.461. SBA may re- breach of official duty, within ten busi-
quire an SBA Supervised Lender to use ness days after initiating or learning of
industry averages for the valuation of the proceeding, and also must notify
servicing rights.
the SBA of the terms of any settlement
[73 FR 75513, Dec. 11, 2008] or final judgment. The SBA Supervised
Lender must include such information
§ 120.464 Reports to SBA.
in any reporting required under other
(a) An SBA Supervised Lender must provisions of SBA regulations.
submit the following to SBA: (4) Stockholder Reports. Each SBA Su-
(1) Annual Report. Within three pervised Lender must submit to SBA a
months after the close of each fiscal copy of any report furnished to its
year, each SBA Supervised Lender stockholders in any manner, within 30
must submit to SBA two copies of an
calendar days after submission to
annual report including audited finan-
stockholders, including any prospectus,
cial statements as prepared by a cer-
tified public accountant in accordance letter, or other document, concerning
with § 120.463. Specifically, the annual the financial operations or condition of
report must, at a minimum, include the SBA Supervised Lender.
the following: (5) Reports of Changes. Each SBA Su-
(i) Audited balance sheet; pervised Lender must submit to SBA a
(ii) Audited statement of income and summary of any changes in the SBA
expense; Supervised Lender’s organization or fi-
(iii) Audited reconciliation of capital nancing (within 30 calendar days of the
accounts; change), such as:
(iv) Audited source and application of (i) Any change in its name, address
funds; or telephone number;
(v) Such footnotes as are necessary (ii) Any change in its charter, by-
to an understanding of the report; laws, or its officers or directors (to be
(vi) Auditor’s letter to management accompanied by a statement of per-
on internal control weaknesses; and
sonal history on the form approved by
(vii) The auditor’s report.
SBA);
(2) Quarterly Condition Reports. By the
45th calendar day following the end of (iii) Any change in capitalization, in-
each calendar quarter, each SBA Su- cluding such types of change as are
pervised Lender must submit a Quar- identified in this part 120;
291
§ 120.465 13 CFR Ch. I (1–1–25 Edition)
(iv) Any changes affecting an SBA plete representation of the financial
Supervised Lender’s eligibility to con- condition and financial performance of
tinue to participate as an SBA Super- the SBA Supervised Lender to which it
vised Lender; and applies. The reports must be certified
(v) Notice of any pledge of stock by the officer of the reporting SBA Su-
(within 30 calendar days of the trans- pervised Lender named for that pur-
action) if 10 percent or more of the pose by action of the institution’s
stock is pledged by any person (or board of directors. If the institution’s
group of persons acting in concert) as board of directors has not acted to
collateral for indebtedness. name an officer to certify the correct-
(6) Report of Changes in Financial Con- ness of its reports of financial condi-
dition. In addition to other reports re- tion and financial performance, then
quired under this part 120, each SBA the reports must be certified by the
Supervised Lender must submit a re- president or chief executive officer of
port to SBA on any material change in the reporting SBA Supervised Lender.
financial condition. The SBA Super- (d) Waiver. The appropriate Office of
vised Lender must submit such report Capital Access official in accordance
promptly, but no later than ten days with Delegations of Authority may in
after its management becomes aware his/her discretion waive any § 120.464 re-
of such change (except as provided for porting requirement for SBA Super-
in § 120.462(d)). Failure to promptly no- vised Lenders for good cause (includ-
tify SBA concerning a material change ing, but not limited to, where an SBA
in financial condition may lead to en- Supervised Lender has a relatively
forcement action. small SBA loan portfolio), as deter-
(7) Other Reports. Each SBA Super- mined by SBA. SBA Supervised Lend-
vised Lender must submit such other ers must request the waiver in writing
reports as SBA from time to time may and include all supporting reasons and
in writing require. documentation. The waiver decision of
(b) Preparing financial reports for fil- the appropriate Office of Capital Ac-
ing. Each SBA Supervised Lender must cess official in accordance with Delega-
prepare financial reports: tions of Authority is final.
(1) In accordance with all applicable [73 FR 75514, Dec. 11, 2008]
laws, regulations, procedures, stand-
ards, and such instructions and speci- § 120.465 Civil penalty for late submis-
fications and in such form and media sion of required reports.
format as may be prescribed by SBA (a) Obligation to submit required reports
from time to time; by applicable due dates. SBA Supervised
(2) On an accrual basis, in accordance Lenders must submit complete reports
with GAAP principles and such other by the due dates described in the regu-
accounting requirements, standards, lations or as directed in writing by
and procedures as may be prescribed by SBA. SBA considers any report that an
the SBA from time to time; SBA Supervised Lender sends to SBA
(3) That contain all applicable foot- by the applicable due date but that is
notes in accordance with GAAP prin- submitted only in part, to have not
cipals, one of which includes a brief been submitted by the applicable due
analysis of how the SBA Supervised date. SBA also considers any report
Lender complies with SBA’s capital that is postmarked by the due date to
regulations, as applicable; and be submitted by the due date.
(4) In such manner as to facilitate (b) Amount of civil penalty. For each
the reconciliation of these reports with day past the due date for such report,
the books and records of the SBA Su- the SBA Supervised Lender must pay
pervised Lender. to SBA a civil penalty of not more
(c) Responsibility for assuring the accu- than $8,058 per day per report. Such
racy of filed financial reports. Each fi- civil penalty continues to accrue until
nancial report filed with SBA must be and including the date upon which SBA
certified as having been prepared in ac- Supervised Lender submits the com-
cordance with all applicable regula- plete report. In determining the
tions, SOPs, notices, and instructions amount of the civil penalty to be as-
and to be a true, accurate, and com- sessed, SBA may consider the financial
292
Small Business Administration § 120.465
resources and good faith of the SBA proves the extension, SBA will waive
Supervised Lender, the gravity of the the civil penalty that has accrued so
violation, the history of previous viola- far for that particular report. However,
tions and any such other matters as a new civil penalty will accrue if the
justice may require. SBA Supervised Lender does not sub-
(c) Notification of amount of civil pen- mit a complete report by the new due
alty. SBA will notify the SBA Super- date established by SBA.
vised Lender in writing of the amount (f) Requests for reduction or exemption.
of civil penalties imposed either upon (1) An SBA Supervised Lender may re-
receiving the required complete report quest a reduction or exemption from
or at such other time as SBA deter- the civil penalty in writing to SBA.
mines. The SBA Supervised Lender The request must reference the re-
must pay this amount to SBA within 30 quired report, its due date and the
days of the date of SBA’s written de- amount sought for reduction, and state
mand. in detail the reasons for the reduction.
(d) Identification during examination. SBA will consider the following fac-
SBA may also impose on an SBA Su- tors:
pervised Lender a civil penalty as de- (i) Whether there is reasonable cause
scribed in this section if SBA discovers, for failure to file timely and it was not
during an examination pursuant to due to willful neglect;
subpart I of this Part 120 or otherwise, (ii) Whether the SBA Supervised
that the SBA Supervised Lender did Lender has demonstrated to SBA’s sat-
not submit a required report by the due isfaction that it has modified its inter-
date. nal procedures to comply with report-
(e) Extensions of submission due dates. ing requirements in the future; and
(1) An SBA Supervised Lender may re- (iii) Whether the SBA Supervised
quest in writing to SBA that SBA ex- Lender has demonstrated to SBA’s sat-
tend its report due date. The request isfaction, based on financial informa-
must reference the report and its due tion fully disclosed together with its
date, state the reasonable cause for ex- request, that it would have difficulty
tension, and assert how much addi- paying the civil penalty assessed.
tional time is needed in order to sub- (2) SBA must also determine that a
mit a complete report. SBA will advise reduction or exemption is not incon-
SBA Supervised Lender in writing as to sistent with the public interest or the
whether it approved or denied the ex- protection of SBA.
tension request. If SBA determines (3) SBA may in writing approve the
that there is reasonable cause to grant exemption, reduce the civil penalty, or
an extension and it is not due to willful deny the exemption.
neglect, SBA will establish a new due (4) If SBA grants the reduction re-
date. Such determination as to willful quest or denies the reduction or exemp-
neglect and reasonable cause is in tion, the SBA Supervised Lender must
SBA’s discretion. SBA will consider the pay the amount owed within 30 days of
following factors in determining willful the letter date. Civil penalties will ac-
neglect: crue while the request is pending.
(i) Whether the SBA Supervised (g) Reconsideration of decisions. An
Lender failed to file required reports SBA Supervised Lender may request in
for more than two reporting periods writing to the Associate Administrator
and for Capital Access (AA/CA) to recon-
(ii) If SBA provided the SBA Super- sider its request for extension, reduc-
vised Lender notice of the failure to tion, or exemption. The reconsider-
file and the SBA Supervised Lender ation request must be received by SBA
failed to respond or failed to provide a within 30 days of the date of the letter
reasonable explanation for the filing denying the SBA Supervised Lender’s
failure in its response. original request. SBA will not consider
(2) If SBA disapproves the extension, untimely requests. The SBA Super-
the due date remains the same. The vised Lender must include any addi-
civil penalty accrues regardless of tional information or documentation
whether the SBA Supervised Lender to support its reconsideration request.
files an extension request. If SBA ap- SBA will issue a written decision on
293
§ 120.466 13 CFR Ch. I (1–1–25 Edition)
the reconsideration request. The deci- (1) The legal name, address, tele-
sion is a final agency decision. If on re- phone number and email address of the
consideration, a civil penalty remains applicant;
due, the SBA Supervised Lender must (2) Business plan, detailing the appli-
pay to SBA the civil penalty within 30 cant’s proposed lending area and the
days of the written decision or as oth- volume of loan activity projected over
erwise directed. Civil penalties will the next 3 years (supported by current
continue to accrue while the reconsid- and projected balance sheets, income
eration request is pending. statements and statements of cash
(h) Other enforcement actions. SBA flows);
may seek additional remedies for fail- (3) Capitalization (current and pro-
posed), including the form of organiza-
ure to timely file reports as authorized
tion and the identification of all debt
by law.
and classes of equity capital and pro-
(i) Exception for affiliate of SBLC. posed funding amounts, including any
Civil penalties under this section do rights or preferences accorded to such
not apply to any affiliate of an SBLC interests (e.g., voting rights, redemp-
that procures at least 10% of its annual tion rights and rights of convertibility)
purchasing requirements from small and any conditions for the transfer,
manufacturers. sale or assignment of such interests;
[73 FR 75515, Dec. 11, 2008, as amended at 81 (4) A list of all members of the appli-
FR 31491, May 19, 2016; 82 FR 9969, Feb. 9, cant’s management team, including
2017; 83 FR 7363, Feb. 21, 2018; 84 FR 12061, the applicant’s officers, directors, man-
Apr. 1, 2019; 85 FR 13727, Mar. 10, 2020; 86 FR agers and key employees, as well as the
52957, Sept. 24, 2021; 87 FR 28758, May 11, 2022; applicant’s owners, Associates (as de-
88 FR 50005, Aug. 1, 2023; 89 FR 48134, June 5, fined in § 120.10) and Affiliates (as de-
2024] fined in § 121.103 of this chapter);
(5) A written summary of the profes-
§ 120.466 SBA Supervised Lender ap- sional experience (including any prior
plication. experience with any SBA program) of
An entity seeking to participate as the applicant’s management team (in-
an SBA Supervised Lender must apply cluding key employees);
to SBA. SBA evaluates SBA Supervised (6) In connection with any applica-
Lender applicants through an initial tion to acquire an existing SBLC Li-
review and final review, as follows: cense, the applicant must include a let-
(a) Initial review. SBA Supervised ter agreement signed by an authorized
Lender applicants must submit a writ- official of the SBLC whose License is
ten plan containing information about to be acquired certifying that the
the organization and its current and SBLC is seeking to transfer its SBA
proposed lending activities (‘‘Lender lending authority to the applicant;
Assessment Plan’’). After SBA’s review (7) If approval of any state or Federal
chartering, licensing or other regu-
of the Lender Assessment Plan, the Of-
latory authority is required, copies of
fice of Capital Access may require an
any licenses issued by or documents
interview with the applicant and its
filed with such authority.
management team. SBA will deter- (b) Final review. Each applicant that
mine, in its sole discretion, whether an receives notice from SBA in writing
applicant may proceed to the final re- that it may proceed to the final review
view. If SBA determines that an appli- must submit a complete application to
cant may not proceed to the final re- SBA within 90 calendar days. The ap-
view, the applicant must wait at least plication requirements for SBA Super-
6 months before it may submit a new vised Lenders are set forth in official
Lender Assessment Plan. Each appli- SBA policy and procedures. An incom-
cant must demonstrate to SBA’s satis- plete application submitted to SBA
faction that it meets the ethical re- will not be processed and will be re-
quirements and the participation cri- turned to the applicant. SBA may, in
teria set forth in 13 CFR 120.140 and its sole discretion, approve or deny any
120.410. The Lender Assessment Plan SBA Supervised Lender application.
must include the following items: The decision to approve or deny an
294
Small Business Administration § 120.468
SBA Supervised Lender application is a financial performance, financial
final agency decision. If an SBA Super- strength, liquidity, the soundness of its
vised Lender application is denied by financial projections and underlying
SBA or if a complete application is not assumptions, loan underwriting proc-
timely submitted, the applicant may ess, operations plan and the history of
not submit a new Lender Assessment compliance of the applicant and its
Plan and restart the application proc- management team (including key em-
ess until 12 months from the date of de- ployees) with SBA Loan Program Re-
nial or the date a complete application quirements.
was due to SBA, as applicable. (4) Whether the NFRL’s state regu-
(c) NFRL operating and lending experi- lator and the state statute or regula-
ence requirement. For an entity seeking tions governing the NFRL’s operations,
to become an NFRL, evidence of at including but not limited to those per-
least 1 year of current operating and taining to audit, examination, super-
relevant commercial lending experi- vision, enforcement and information
ence by the entity must be provided. sharing, are satisfactory to SBA in its
[85 FR 78213, Dec. 4, 2020, as amended at 88 sole discretion.
FR 21899, Apr. 12, 2023] (5) For changes of ownership or con-
trol, in addition to the factors listed in
§ 120.467 Evaluation of SBA Super- paragraphs (a)(1) through (4) of this
vised Lender applicants. section, SBA will consider whether the
(a) SBA will evaluate an SBA Super- applicant’s plan for the resolution of
vised Lender applicant based on infor- any outstanding monetary liabilities
mation from, among other sources, the to SBA, including repairs and denials
Lender Assessment Plan, an interview and civil monetary penalties, is accept-
with the applicant’s management team able to SBA in its sole discretion.
(if required), the application and any (b) SBA may prohibit any individual
other documentation submitted by the or entity from participating as an offi-
applicant, the results of background in- cer, director, manager, owner or key
vestigations, public record searches employee of the applicant if such indi-
and due diligence conducted by SBA or vidual or entity:
other Federal or state agencies. SBA’s (1) Has a previous record of failing to
evaluation will consider factors such as materially comply with SBA Loan Pro-
the following: gram Requirements;
(1) Professional qualifications of its (2) Previously participated in a mate-
management team (including key em- rial way with any past or present SBA
ployees), including demonstrated com- Lender or Intermediary that failed to
mercial lending experience, business maintain satisfactory SBA perform-
reputation, adherence to legal and eth- ance;
ical standards, track record in making (3) Previously defaulted on any Fed-
and monitoring business loans, and eral loan or Federally assisted financ-
prior history, if any, working as an of- ing that resulted in the Federal Gov-
ficer, manager, director or key em- ernment or any of its agencies or de-
ployee of a lender involved in any SBA partments sustaining a loss in any of
program or any other Federal or state its programs; or
lending program. (4) Ever failed to pay when due any
(2) Historical performance measures debt or obligation, including any
of loans originated by the applicant or amounts in dispute, to the Federal
attributable to its management team Government or guaranteed by the Fed-
(including key employees), including eral Government (including but not
loan default rates, purchase rates and limited to taxes or business or student
loss rates, measured in both percentage loans).
terms and in comparison to appro- [85 FR 78214, Dec. 4, 2020]
priate industry benchmarks, review/ex-
amination assessments and other per- § 120.468 Change of ownership or con-
formance measures. trol requirements for SBA Super-
(3) The applicant’s capitalization, or- vised Lenders.
ganizational structure, business plan (a) SBA prior approval required. Any
(including any risk factors), projected change of ownership or control of an
295
§ 120.470 13 CFR Ch. I (1–1–25 Edition)
SBA Supervised Lender without SBA’s transmitted to the appropriate SBA of-
prior written approval is prohibited. ficial in accordance with the prevailing
Prior to entering into any agreement, Delegations of Authority. The approval
other than a non-binding letter of in- of any state or Federal authority will
tent, for a change of ownership or con- be required in addition to SBA’s prior
trol, SBA Supervised Lenders must re- written approval.
ceive SBA’s prior written approval (c) Application requirements for
from the appropriate SBA official in changes of ownership or control. An ap-
accordance with the prevailing Delega- plicant must submit a Lender Assess-
tions of Authority. An SBA Supervised ment Plan and a new application in ac-
Lender may not register proposed new cordance with § 120.466 for any change
owners on its books and records or per- of ownership or control. If a proposed
mit them to participate in any manner change of ownership is for less than 50
in the conduct of the SBA Supervised percent of the ownership interests in
Lender’s affairs unless approved in an SBA Supervised Lender, SBA may,
writing by SBA. Any type of non-bind- in its sole discretion, limit the require-
ing letter of intent regarding a pro- ments of the Lender Assessment Plan
spective change of ownership or control or the complete application as set forth
must be reported to SBA within 30 cal- in official SBA policy and procedures.
endar days. A change of ownership or (d) Voluntary surrender of SBA lending
control includes the following: authority. An SBA Supervised Lender
(1) Any transfer(s) (direct or indirect) may voluntarily surrender its SBA
of 10 percent or more of any class of lending authority (including its SBLC
the SBA Supervised Lender’s stock or license or NFRL lending authority, as
ownership interests (or series of trans- applicable) and withdraw as a partici-
fers which, in the aggregate over an 18 pating Lender with SBA’s prior written
month period, equals 10 percent or approval. The SBA Supervised Lender
more), or any agreement providing for must agree to transfer its entire 7(a)
such transfer; loan portfolio to one or more Lenders
(2) Any transfer(s) (direct or indirect) acceptable to SBA in accordance with
that could result in the beneficial own- § 120.432(a), and enter into a withdrawal
ership by any person or group of per- agreement to resolve any outstanding
sons acting in concert of 10 percent or issues, including any outstanding mon-
more of any class of the SBA Super- etary liabilities, to SBA’s satisfaction.
vised Lender’s stock or ownership in- SBA may, in its sole discretion, take
terests, or any agreement providing for over the servicing of an SBA Super-
such transfer(s); vised Lender’s 7(a) loan portfolio in ac-
(3) Any merger, consolidation, or re- cordance with § 120.535(d) upon the vol-
organization; untary surrender of its SBA lending
(4) Any other transaction or agree- authority.
ment that transfers control of an SBA [85 FR 78214, Dec. 4, 2020]
Supervised Lender; or
(5) Any other transaction or event SMALL BUSINESS LENDING COMPANIES
that results in any change in the pos- (SBLC)
session (direct or indirect) of the right
to control, or the power to direct or § 120.470 What are SBA’s additional re-
cause the direction of, the management quirements for SBLCs?
or policies of an SBA Supervised Lend- In addition to complying with SBA’s
er, whether through the ownership of requirements for SBA Lenders and SBA
voting securities, by contract or other- Supervised Lenders, an SBLC (includ-
wise. ing a Community Advantage SBLC)
(b) Approval required by other regu- must meet the requirements contained
latory authorities. If a change of owner- in this regulation and the SBLC regu-
ship or control of an SBA Supervised lations that follow.
Lender is subject to the approval of (a) Lending. An SBLC or Community
any state or Federal chartering, licens- Advantage SBLC may make:
ing or other regulatory authority, cop- (1) Loans under section 7(a) (except
ies of any documents filed with such section 7(a)(13) of the Act in participa-
authority must, at the same time, be tion with SBA); and/or
296
Small Business Administration § 120.471
(2) SBA guaranteed loans to Inter- (2) In the case of a purchase of an
mediaries (see subpart G of this part). SBLC by an organization that already
Such loans are subject to the same con- owns an SBLC, the purchasing entity
ditions as guaranteed loans made to will have six months to submit a plan
Intermediaries by 7(a) Lenders. to SBA for the divestiture of one of the
(b) Business structure. An SBLC must SBLCs. All divestiture plans must be
be a corporation (profit or nonprofit) or approved by SBA and SBA may with-
a limited liability company or limited hold approval in its discretion. Divesti-
partnership, except for a Community ture of the SBLC must occur within
Advantage SBLC, which must either be one year of purchase date.
a nonprofit corporation or have been a (3) Without prior written SBA ap-
Community Advantage Pilot Program proval, an Associate of one SBLC must
participant. not be an Associate of another SBLC or
(c) Written agreement. An SBLC must of any entity which directly or indi-
sign a written agreement with SBA. rectly controls, or is under common
(d) Dual control. An SBLC must main- control with, another SBLC.
tain dual control over disbursement of (4) For purposes of paragraph (f) of
funds and withdrawal of securities. this section, common control means a
(1) An SBLC may disburse funds only condition where two or more SBLCs,
by checks or wire transfers authorized either through ownership, manage-
by signatures of two or more officers ment, contract, or otherwise, are under
covered by the SBLC’s fidelity bond, the Control of one group or Person (as
except that checks in an amount of defined in § 120.10 of this chapter). Two
$10,000 or less may be signed by one or more SBLCs are presumed to be
bonded officer, provided that such ac- under common control if they are Af-
tion is permitted under the SBLC’s fi- filiates of each other by reason of com-
delity bond. mon ownership or common officers, di-
(2) There must be two or more bonded rectors, or general partners.
officers, or one bonded officer and a (5) ‘‘Affiliate’’ has the meaning set
bonded employee to open safe deposit forth in § 121.103 of this chapter.
boxes or withdraw securities from safe- (6) ‘‘Control’’ means the possession,
keeping. The SBLC must furnish to direct or indirect, of the power to di-
each depository bank, custodian, or en- rect or cause the direction of the man-
tity providing safe deposit boxes a cer- agement and policies of an SBLC or
tified copy of the resolution imple- other concern, whether through the
menting control procedures. ownership of voting securities, by con-
(e) Fidelity insurance. An SBLC, ex- tract, or otherwise. The common con-
cept for a Community Advantage trol presumption may be rebutted by
SBLC, must maintain a Brokers Blan- evidence satisfactory to SBA.
ket Bond, Standard Form 14, or Fi- (g) Borrowed funds. In general, an
nance Companies Blanket Bond, Stand- SBLC may not be capitalized with bor-
ard Form 15, or such other form of cov- rowed funds. Shareholders owning 10
erage as SBA may approve, in a min- percent or more of any class of its
imum amount of $2,000,000 executed by stock must not use personally-bor-
a surety holding a certificate of au- rowed funds to purchase the stock un-
thority from the Secretary of the less the net worth of the shareholder is
Treasury pursuant to 31 U.S.C. 9304– at least twice the amount borrowed or
9308. SBA’s Administrator, in consulta- unless the shareholder receives SBA’s
tion with SBA’s Associate Adminis- prior written approval for a lower
trator for the Office of Capital Access ratio.
(AA/OCA), or their designee(s), at their [73 FR 75515, Dec. 11, 2008, as amended at 85
discretion, will determine the appro- FR 78215, Dec. 4, 2020; 87 FR 38909, June 30,
priate bond coverage levels for Commu- 2022; 88 FR 21899, Apr. 12, 2023]
nity Advantage SBLCs as published in
Loan Program Requirements. § 120.471 What are the minimum cap-
(f) Common control. (1) An SBLC must ital requirements for SBLCs?
not control, be controlled by, or be (a) Minimum capital requirements. (1)
under common control with another Beginning on January 4, 2024, each
SBLC. SBLC that makes or acquires a 7(a)
297
§ 120.472 13 CFR Ch. I (1–1–25 Edition)
loan must maintain, at a minimum, (c) Voluntary capital reduction. With-
unencumbered paid-in capital and paid- out prior written SBA approval, an
in surplus of at least $5,000,000, or 10 SBLC must not voluntarily reduce its
percent of the aggregate of its share of capital, or repurchase and hold more
all outstanding loans, whichever is than 2 percent of any class or combina-
greater. tion of classes of its stock.
(2) Any SBLC approved on or after (d) Issuance of securities. Without
January 4, 2021, including in the event prior written SBA approval, an SBLC
of a change of ownership or control, must not issue any securities (includ-
must maintain the minimum capital ing stock options and debt securities)
requirement set forth in paragraph except stock dividends.
(a)(1) of this section.
[73 FR 75516, Dec. 11, 2008, as amended at 85
(3) Unless subject to paragraph (a)(1) FR 78215, Dec. 4, 2020; 88 FR 21899, Apr. 12,
or (2) of this section, an SBLC must 2023]
comply with the minimum capital re-
quirements that were in effect on Jan- § 120.472 Higher individual minimum
uary 3, 2021. capital requirement.
(4) A Community Advantage SBLC The Associate Administrator for Cap-
must maintain a minimum amount of ital Access (AA/CA) may require, under
capital as determined at the discretion § 120.473(d), an SBLC to maintain a
of the Administrator in consultation higher level of capital, if the AA/CA de-
with SBA’s Associate Administrator termines, in his/her discretion, that the
for the Office of Capital Access (AA/ SBLC’s level of capital is potentially
OCA), or their designee(s). The min- inadequate to protect the SBA from
imum capital amount as published in loss due to the financial failure of the
Loan Program Requirements will en- SBLC. The factors to be considered in
sure sufficient risk protection for SBA the determination will vary in each
and lenders while not burdening small- case and may include, for example:
er lenders with large capital require- (a) Specific conditions or cir-
ments. cumstances pertaining to the SBLC;
(5) Community Advantage SBLCs (b) Exigency of those circumstances
must maintain a loan loss reserve ac- or potential problems;
count as determined at the discretion
(c) Overall condition, management
of the Administrator in consultation
strength, and future prospects of the
with SBA’s Associate Administrator
SBLC and, if applicable, its parent or
for the Office of Capital Access (AA/
affiliates;
OCA), or their designee(s) as published
(d) The SBLC’s liquidity and existing
in Loan Program Requirements.
capital level, and the performance of
(b) Composition of capital. For pur-
its SBA loan portfolio;
poses of complying with paragraph (a)
(e) The management views of the
of this section, capital consists only of
SBLC’s directors and senior manage-
one or more of the following:
ment; and
(1) Common stock;
(2) Preferred stock that is noncumu- (f) Other risk-related factors, as de-
lative as to dividends and does not termined by SBA.
have a maturity date; [73 FR 75516, Dec. 11, 2008]
(3) Unrestricted net assets (for non-
profit corporations); § 120.473 Procedures for determining
(4) Additional paid-in capital rep- individual minimum capital re-
resenting amounts paid for stock in ex- quirement.
cess of the par value; (a) Notice. When SBA determines that
(5) Retained earnings of the business; an individual minimum capital re-
and/or quirement above that set forth in this
(6) For limited liability companies subpart or other legal authority is nec-
and limited partnerships, capital con- essary or appropriate for a particular
tributions must not be subject to re- SBLC, SBA will notify the SBLC in
payment at any specific time, must not writing of the proposed individual min-
be subject to withdrawal and must imum capital requirement, the date by
have no cumulative priority return. which it should be reached and will
298
Small Business Administration § 120.490
provide an explanation of why the re- cumstances affecting the SBLC’s cap-
quirement proposed is considered nec- ital adequacy or its ability to reach the
essary or appropriate. required individual minimum capital
(b) SBLC response. The SBLC may re- requirement by the specified date, ei-
spond to the notice. The response ther the SBLC or the AA/CA may pro-
should include any matters which the pose to the other a change in the indi-
SBLC would have SBA consider in de- vidual minimum capital requirement
ciding whether individual minimum for the SBLC, the date when the indi-
capital requirements should be estab- vidual minimum must be achieved,
lished for the SBLC, what those capital and/or the SBLC’s plan (if applicable).
requirements should be, and, if applica- The AA/CA may decline to consider
ble, when they should be achieved. The proposals that are not based on a sig-
response must be in writing and deliv-
nificant change in circumstances or are
ered to the AA/CA within 30 days after
repetitive or frivolous. Pending a deci-
the date on which the SBLC received
sion by the AA/CA on reconsideration,
the notice. SBA may shorten the time
SBA’s original decision and any plan
for response when, in the opinion of
SBA, the condition of the SBLC so war- required under that decision will con-
rants, provided that the SBLC is in- tinue in full force and effect.
formed promptly of the new time pe- [73 FR 75516, Dec. 11, 2008]
riod, or the SBLC consents to the
shortening of its response time. In its § 120.474 Relation to other actions.
discretion, SBA may extend the time In lieu of, or in addition to, the pro-
period for good cause.
cedures in this subpart, the individual
(c) Failure to respond. An SBLC that
minimum capital requirement for an
does not respond within 30 days or such
SBLC may be established or revised
other time period as may be specified
by SBA will have waived any objec- through a written agreement or cease
tions to the proposed minimum capital and desist proceedings under subpart I
requirement and the deadline for its of this part.
achievement. Failure to respond will [73 FR 75517, Dec. 11, 2008]
also constitute consent to the indi-
vidual minimum capital requirement. § 120.475 [Reserved]
(d) Decision. After the close of the
SBLC’s response period, the AA/CA will § 120.476 Prohibited financing.
decide, based on a review of SBA rea- An SBLC may not make a loan to a
sons for proposing the individual min- small business that has received fi-
imum capital requirement, the SBLC’s nancing (or a commitment for financ-
response, and other information con- ing) from an SBIC that is an Associate
cerning the SBLC, whether the indi-
of the SBLC.
vidual minimum capital requirement
should be established for the SBLC [61 FR 3235, Jan. 31, 1996. Redesignated at 73
and, if so, the requirement and the date FR 75516, Dec. 11, 2008]
it will become effective. The SBLC will
be notified of the decision in writing. § 120.490 Audits.
The notice will include an explanation Every SBLC is subject to periodic au-
of the decision; except for a decision dits by SBA’s Office of Inspector Gen-
not to establish an individual min- eral, Auditing Division, and the cost of
imum capital requirement for the such audits will be assessed against the
SBLC. SBLC, except for the first audit. Fees
(e) Submission of plan. The decision are structured based on the SBLC’s as-
may require the SBLC to develop and sets as of the date of the latest audited
submit to SBA, within a time period financial statement submitted to SBA
specified, an acceptable plan to reach
before the audit. The fee schedule is set
the individual minimum capital re-
forth in SBA’s Standard Operating Pro-
quirement by the date required.
cedures manual.
(f) Change in circumstances. If, after
SBA’s decision in paragraph (d) of this [61 FR 3235, Jan. 31, 1996. Redesignated at 73
section, there is a change in the cir- FR 75516, Dec. 11, 2008]
299
§ 120.520 13 CFR Ch. I (1–1–25 Edition)
Subpart E—Servicing, Liquidation purchased the guaranteed portion of
and Debt Collection Litigation such loan from a Registered Holder (as
of 7(a) and 504 Loans that term is defined in § 120.600(i)). In
the event that SBA purchases its guar-
SBA’S PURCHASE OF A GUARANTEED anteed portion of such a loan from the
PORTION Registered Holder, Lenders must pro-
vide SBA with a loan status report
§ 120.520 Purchase of 7(a) loan guaran- within 15 business days of such pur-
tees. chase. This report should include but
(a) When SBA will purchase—(1) For not be limited to, a status report on
loans approved on or after May 14, 2007. the borrower and current condition of
A Lender may demand in writing that the collateral, plans for any type of
SBA honor its guarantee if the Bor- loan workout or loan restructuring, ex-
rower is in default on any installment isting liquidation activities including
for more than 60 calendar days (or less the sale of loan collateral, or the sta-
if SBA agrees) and the default has not tus of ongoing foreclosure proceedings.
been cured, provided all business per- The report should accompany re-
sonal property securing the defaulted quested documentation that SBA
SBA loan has been liquidated. A Lend- deems sufficient to be able to review
er may also submit a request for pur- the Lender’s administration of the loan
chase of a defaulted 7(a) loan when a under § 120.524. A Lender’s failure to
Borrower files for federal bankruptcy provide sufficient documentation may
once a period of at least 60 days has constitute a material failure to comply
elapsed since the last full installment with SBA requirements under
payment. If a Borrower cures a default § 120.524(a)(1), and may lead to initi-
before a Lender requests purchase by ation of an action for recovery from
SBA, the Lender’s right to request pur- the Lender of all or some of the mon-
chase on that default lapses. SBA con- eys SBA paid to a Registered Holder on
siders liquidation of business personal a guarantee. SBA will also evaluate the
property collateral to be completed Lender’s continued participation in the
when a Lender has exhausted all pru- Secondary Market and may restrict
dent and commercially reasonable ef- further sale of guaranteed portions
forts to collect upon these assets. In into the Secondary Market until SBA
addition, SBA, in its sole discretion, determines that the Lender has pro-
may purchase the guaranteed portion vided sufficient documentation for pur-
of a loan at any time whether in de- chases.
fault or not, with or without the re- (d) No waiver of SBA’s rights. Purchase
quest from a Lender. by SBA of the guaranteed portion of a
(2) For loans approved before May 14, loan, or of a portion of SBA’s guar-
2007. The regulations applicable to the antee of a loan, either through a nego-
time that a Lender may make demand tiated agreement with a Lender or oth-
for purchase that were in effect imme- erwise, does not waive any of SBA’s
diately prior to this date will govern rights to recover from the responsible
such loans. Lender any money paid on the guar-
(b) Documentation for purchase. SBA antee based upon the occurrence of any
will not purchase its guaranteed por- of the events set forth in § 120.524(a) in
tion of a loan from a Lender unless the connection with that loan.
Lender has submitted to SBA docu- [72 FR 18360, Apr. 12, 2007]
mentation that SBA deems sufficient
to allow SBA to determine whether § 120.521 What interest rate applies
purchase of the guarantee is warranted after SBA purchases its guaranteed
under § 120.524. portion?
(c) Purchase of loans sold in Secondary When SBA purchases the guaranteed
Market. When the Lender has sold the portion of a fixed interest rate loan,
guaranteed portion of a loan in the the rate of interest remains as stated
Secondary Market, under subpart F of in the note. On loans with a fluc-
this part, Lenders must perform all tuating interest rate, the interest rate
necessary servicing and liquidation ac- that the Borrower owes will be at the
tions for such loan even after SBA has rate in effect at the time of the earliest
300
Small Business Administration § 120.524
uncured payment default, or the rate § 120.524 When is SBA released from li-
in effect at the time of purchase (where ability on its guarantee?
no default has occurred). (a) SBA is released from liability on
a loan guarantee (in whole or in part,
§ 120.522 Payment of accrued interest within SBA’s exclusive discretion), if
to the Lender or Registered Holder any of the events below occur:
when SBA purchases the guaran- (1) The Lender has failed to comply
teed portion.
materially with any Loan Program Re-
(a) Rate of interest. If SBA purchases quirement for 7(a) loans.
the guaranteed portion from a Lender (2) The Lender has failed to make,
or from a Registered Holder (if sold in close, service, or liquidate a loan in a
the Secondary Market), it will pay ac- prudent manner;
crued interest at: (3) The Lender’s improper action or
(1) The rate in the note if it is a fixed inaction has placed SBA at risk;
rate loan; or (4) The Lender has failed to disclose a
(2) The rate in effect on the date of material fact to SBA regarding a guar-
anteed loan in a timely manner;
the earliest uncured payment default,
(5) The Lender has misrepresented a
or of SBA’s purchase (if there has been
material fact to SBA regarding a guar-
no default). anteed loan;
(b) Payment to Lender—(1) For loans (6) SBA has received a written re-
approved on or after May 14, 2007. SBA quest from the Lender to terminate the
will pay up to a maximum of 120 days guarantee;
interest to a Lender at the time of (7) The Lender has not paid the guar-
guarantee purchase. antee fee within the period required
(2) For loans approved before May 14, under SBA rules and regulations;
2007. The regulations applicable to the (8) The Lender has failed to request
amount of interest that SBA will pay that SBA purchase a guarantee within
to a Lender upon loan default that 180 days after maturity of the loan.
were in effect immediately prior to However, if the Lender is conducting
this date will govern such loans. liquidation or debt collection litigation
(c) Payment to Registered Holder. SBA in connection with a loan that has ma-
will pay a Registered Holder all ac- tured, SBA will be released from its
crued interest up to the date of pay- guarantee only if the Lender fails to
ment. request that SBA purchase the guar-
antee within 180 days after the comple-
[61 FR 3235, Jan. 31, 1996, as amended at 72 tion of the liquidation or debt collec-
FR 18361, Apr. 12, 2007] tion litigation;
(9) The Lender has failed to use re-
§ 120.523 What is the ‘‘earliest uncured quired SBA forms or exact electronic
payment default’’? copies; or
The earliest uncured payment default (10) The Borrower has paid the loan
is the date of the earliest failure by a in full.
Borrower to pay a regular installment (b) If SBA determines, at any time,
of principal and/or interest when due. that any of the events set forth in
Payments made by the Borrower before paragraph (a) of this section occurred
a Lender makes its request to SBA to in connection with that loan, SBA is
entitled to recover any moneys paid on
purchase are applied to the earliest
the guarantee plus interest from the
uncured payment default. If the in-
Lender. In the exercise of its rights,
stallment is paid in full, the earliest
SBA may utilize all legal means avail-
uncured payment default date will ad- able, including offset and judicial rem-
vance to the next unpaid installment edies.
date. If a Borrower makes any payment (c) If the Lender’s loan documenta-
after the Lender makes its request to tion or other information indicates
SBA to purchase, the earliest uncured that one or more of the events in para-
payment default date does not change graph (a) of this section occurred, SBA
because the Lender has already exer- may undertake such investigation as it
cised its right to request purchase. deems necessary to determine whether
301
§ 120.530 13 CFR Ch. I (1–1–25 Edition)
to honor or deny the guarantee, and diligently than for their non-SBA port-
may withhold a decision on whether to folio, and in a prompt, cost-effective
honor the guarantee until the comple- and commercially reasonable manner,
tion of such investigation. consistent with prudent lending stand-
(d) Any information provided to SBA ards, and in accordance with Loan Pro-
by a Lender or other party will not gram Requirements and with any SBA
prejudice, or be construed as effecting approval of either a liquidation or liti-
any waiver of, SBA’s right to deny li- gation plan or any amendment of such
ability for a guarantee if one or more a plan. Lenders and CDCs that do not
of the events listed in paragraph (a) of maintain a non-SBA loan portfolio
this section occur.
must adhere to the same prudent lend-
(e) Unless SBA provides written no-
ing standards followed by commercial
tice to the contrary, the Lender re-
lenders that liquidate loans without a
mains responsible for all loan servicing
government guarantee. They are also
ad liquidation actions until SBA hon-
ors its guarantee in full. to operate in accordance with Loan
Program Requirements and with any
[61 FR 3235, Jan. 31, 1996, as amended at 72 SBA approval of either a liquidation or
FR 18361, Apr. 12, 2007; 82 FR 39503, Aug. 21, litigation plan or any amendment of
2017]
such a plan.
§ 120.530 Deferment of payment. (c) Absence of actual or apparent con-
flict of interest. A CDC must not take
SBA may agree to defer payments on
any action in the liquidation or debt
a business loan for a stated period of
time, and use such other methods as it collection litigation of a 504 loan that
considers necessary and appropriate to would result in an actual or apparent
help in the successful operation of the conflict of interest between the CDC
Borrower. This policy applies to all (or any employee of the CDC) and any
business loan programs, including 504 Third Party Lender, associate of a
loans. Third Party Lender, or any person par-
ticipating in a liquidation, foreclosure
§ 120.531 Extension of maturity. or loss mitigation action.
SBA may agree to extend the matu- (d) SBA rights to take over servicing or
rity of a loan for up to 10 years beyond liquidation. SBA may, in its sole discre-
its original maturity if the extension tion, undertake the servicing, liquida-
will aid in the orderly repayment of tion and/or litigation of any 7(a) or 504
the loan. loan. If SBA elects to service, liquidate
and/or litigate a loan, it will notify the
§ 120.535 Standards for Lender and relevant Lender or CDC in writing,
CDC loan servicing, loan liquida- and, upon receiving such notice, the
tion and debt collection litigation. Lender or CDC must assign the Loan
(a) Service using prudent lending stand- Instruments to SBA and provide any
ards. Lenders and CDCs must service needed assistance to allow SBA to serv-
7(a) and 504 loans in their portfolio no ice, liquidate and/or litigate the loan.
less diligently than their non-SBA SBA will notify the Borrower of the
portfolio, and in a commercially rea- change in servicing. SBA may use con-
sonable manner, consistent with pru- tractors to perform these actions.
dent lending standards, and in accord-
ance with Loan Program Require- [72 FR 18361, Apr. 12, 2007]
ments. Those Lenders and CDCs that
do not maintain a non-SBA loan port- § 120.536 Servicing and liquidation ac-
tions that require the prior written
folio must adhere to the same prudent consent of SBA.
lending standards for loan servicing
followed by commercial lenders on (a) Actions by Lenders and CDCs. Ex-
loans without a government guarantee. cept as otherwise provided in a Supple-
(b) Liquidate using prudent lending mental Guarantee Agreement with a
standards. Lenders and Authorized CDC Lender or an Agreement with a CDC,
Liquidators must liquidate and con- SBA must give its prior written con-
duct debt collection litigation for 7(a) sent before a Lender or CDC takes any
and 504 loans in their portfolio no less of the following actions:
302
Small Business Administration § 120.540
(1) Increases the principal amount of retain these and supporting documents
a loan above that authorized by SBA at in their file for future SBA review to
loan origination. determine if the actions taken by the
(2) Confers a Preference on the Lend- Lender or CDC were prudent, commer-
er or CDC or engages in an activity cially reasonable, and complied with
that creates a conflict of interest. all Loan Program Requirements.
(3) Compromises the principal bal- [72 FR 18361, Apr. 12, 2007]
ance of a loan.
(4) Takes title to any property in the § 120.540 Liquidation and litigation
name of SBA. plans.
(5) Takes title to environmentally (a) SBA oversight. SBA may monitor
contaminated property, or takes over or review liquidation through the re-
operation and control of a business view of liquidation plans which all Au-
that handles hazardous substances or thorized CDC Liquidators and certain
hazardous wastes. Lenders must submit to SBA for ap-
(6) Transfers, sells or pledges more proval prior to undertaking liquida-
than 90% of a loan. tion, and through liquidation wrap-up
(7) Takes any action for which prior reports which Lenders must submit to
written consent is required by a Loan SBA at the completion of liquidation.
Program Requirement. SBA will monitor debt collection liti-
(b) Actions by CDCs only (other than gation, such as judicial foreclosures,
PCLP CDCs). SBA must give its prior bankruptcy proceedings and other
written consent before a CDC, other state and federal insolvency pro-
than a PCLP CDC, takes any of the fol- ceedings, through the review of litiga-
lowing actions with respect to a 504 tion plans, as set forth in this section.
loan: (b) Liquidation plan. An Authorized
(1) Alters substantially the terms or CDC Liquidator and a Lender for a loan
conditions of any Loan Instrument. made under its authority as a CLP
(2) Releases collateral having a cu- Lender must, prior to undertaking any
mulative market value in excess of 10 liquidation, submit a written proposed
percent of the Debenture amount or liquidation plan to SBA and receive
$10,000, whichever is less. SBA’s written approval of that plan.
(3) Accelerates the maturity of the (c) Litigation plan. An Authorized
note. CDC Liquidator and a Lender must ob-
(4) Compromises or releases any tain SBA’s prior approval of a litiga-
claim against any Borrower or obligor, tion plan before proceeding with any
or against any guarantor, standby Non-Routine Litigation, as defined in
creditor, or any other person that is paragraph (c)(1) of this section. SBA’s
contingently liable for moneys owed on prior approval is not required for Rou-
the loan. tine Litigation, as defined in paragraph
(5) Purchases or pays off any indebt- (c)(2) of this section.
edness secured by the property that (1) Non-Routine Litigation includes:
serves as collateral for a defaulted 504 (i) All litigation where factual or
loan, such as payment of the debt(s) legal issues are in dispute and require
owed to a lien holder or lien holders resolution through adjudication;
with priority over the lien securing the (ii) Any litigation where legal fees
loan. are estimated to exceed $10,000;
(6) Accepts a workout plan to re- (iii) Any litigation involving a loan
structure the material terms and con- where a Lender or Authorized CDC Liq-
ditions of a loan that is in default or uidator has an actual or potential con-
liquidation. flict of interest with SBA; and
(7) Takes any action for which prior (iv) Any litigation involving a 7(a) or
written consent is required by a Loan 504 loan where the Lender or CDC has
Program Requirement. made a separate loan to the same bor-
(c) Documentation requirements. For rower which is not a 7(a) or 504 loan.
all servicing/liquidation actions not re- (2) Routine Litigation means
quiring SBA’s prior written consent, uncontested litigation, such as non-ad-
Lenders and CDCs must document the versarial matters in bankruptcy and
justifications for their decisions and undisputed foreclosure actions, having
303
§ 120.540 13 CFR Ch. I (1–1–25 Edition)
estimated legal fees not exceeding (3) If SBA has approved a liquidation
$10,000. plan, or an amended plan, and there-
(d) Decision by SBA to take over litiga- after the anticipated or actual costs of
tion. If a Lender or Authorized CDC conducting the liquidation increase by
Liquidator is conducting, or proposes more than 15 percent.
to conduct, debt collection litigation (f) Limited waiver of need for a written
on a 7(a) loan or 504 loan, SBA may liquidation or litigation plan. SBA may,
take over the litigation if SBA deter- in its discretion, and upon request by a
mines that the outcome of the litiga- Lender or Authorized CDC Liquidator,
tion could adversely affect SBA’s ad- waive the requirements of paragraphs
ministration of the loan program or (b), (c) or (e) of this section, if one of
that the Government is entitled to the following extraordinary cir-
legal remedies that are not available to cumstances warrant such a waiver: the
the Lender or Authorized CDC Liqui- need for expeditious action to avoid the
dator. Examples of cases that could ad- potential risk of loss on the loan or dis-
versely affect SBA’s administration of sipation of collateral exists; an imme-
a loan program include, but are not diate response is required to litigation
limited to, situations where SBA deter- by a borrower, guarantor or third
mines that:
party; or another urgent reason arises.
(1) The litigation involves important
The Lender or Authorized CDC Liqui-
governmental policy or program issues.
dator must obtain SBA’s written con-
(2) The case is potentially of great
sent to such waiver before undertaking
precedential value or there is a risk of
the Emergency action, if at all prac-
adverse precedent to the Government.
ticable. SBA’s waiver will apply only
(3) The Lender or Authorized CDC
to the specific action(s) which the
Liquidator has an actual or potential
conflict of interest with SBA. Lender or Authorized CDC Liquidator
(4) The legal fees of the Lender or Au- has identified to SBA as being nec-
thorized CDC Liquidator’s outside essary to address the Emergency. The
counsel are unnecessary, unreasonable Lender or Authorized CDC Liquidator
or not customary in the locality. must, as soon after the Emergency as
(e) Amendments to a liquidation or liti- is practicable, submit a written liq-
gation plan. Lenders and Authorized uidation or litigation plan to SBA or, if
CDC Liquidators must submit an appropriate, a written amended plan,
amended liquidation or litigation plan and may not take further liquidation
to address any material changes aris- or litigation action without written ap-
ing during the course of the liquidation proval of such plan or amendment by
or litigation that were not addressed in SBA.
the original plan or an amended plan. (g) Appeals. A Lender for loans made
Lenders and Authorized CDC Liquida- under its authority as a CLP Lender or
tors must obtain SBA’s written ap- an Authorized CDC Liquidator that dis-
proval of the amended plan prior to agrees with an SBA office’s decision
taking any further liquidation or liti- pertaining to an original or amended
gation action. Examples of such mate- liquidation plan, other than such por-
rial changes that would require the ap- tions of the plan that address litigation
proval of an amended plan include, but matters, may submit a written appeal
are not limited to: to the Director/Office of Financial Pro-
(1) Changes arising during the course gram Operations (D/OFPO) within 30
of Routine Litigation that transform days of the decision. The D/OFPO or
the litigation into Non-Routine Litiga- designee will make the final Agency
tion, such as when the debtor contests decision in consultation with the Asso-
a foreclosure or when the actual legal ciate General Counsel for Litigation. A
fees incurred exceed $10,000. Lender or Authorized CDC Liquidator
(2) If SBA has approved a litigation that disagrees with an SBA office’s de-
plan where anticipated legal fees ex- cision pertaining to an original or
ceed $10,000, or has approved an amend- amended litigation plan, or the portion
ed plan, and thereafter the anticipated of a liquidation plan addressing litiga-
or actual legal fees increase by more tion matters, may submit a written ap-
than 15 percent. peal to the Associate General Counsel
304
Small Business Administration § 120.542
for Litigation within 30 days of the de- (ii) In connection with actions of a
cision. The Associate General Counsel Lender or Authorized CDC Liquidator’s
for Litigation will make the final outside counsel for performing non-
Agency decision in consultation with legal liquidation services, unless au-
the D/OFPO. thorized by SBA prior to the action.
(iii) In taking actions which solely
[72 FR 18362, Apr. 12, 2007, as amended at 74
FR 45753, Sept. 4, 2009; 87 FR 38909, June 30, benefit a Lender or Authorized CDC
2022] Liquidator and which do not benefit
SBA, as determined by SBA.
§ 120.541 Time for approval by SBA. (2) SBA will not pay legal fees or
(a) Except as set forth in paragraph other costs a Lender or CDC incurs in
(c) of this section, in responding to a the defense of, or pay for any settle-
request for approval under §§ 120.540(b), ment or adverse judgment resulting
120.540(c), 120.536(b)(5) or 120.536(b)(6), from, a suit, counterclaim or other
SBA will approve or deny the request claim by a borrower, guarantor, or
within 15 business days of the date other party that seeks damages based
when SBA receives the request. If SBA upon a claim that the Lender or CDC
is unable to approve or deny the re- breached any duty or engaged in any
quest within this 15-day period, SBA wrongful actions, unless SBA expressly
will provide a written notice of no deci- directed the Lender or CDC to under-
sion to the Lender or Authorized CDC take the allegedly wrongful action that
Liquidator, stating the reason for is the subject of the suit, counterclaim
SBA’s inability to act; an estimate of or other claim.
the additional time required to act on (b) Legal fees SBA may decline to pay.
the plan or request; and, if SBA deems In addition to any right or authority
appropriate, requesting additional in- SBA may have under law or contract,
formation. SBA may, in its discretion, decline to
pay a Lender or Authorized CDC Liqui-
(b) Except as set forth in paragraph
dator for all, or a portion, of legal fees
(c) of this section, unless SBA gives its
and/or other costs incurred in connec-
written consent to a proposed liquida-
tion with the liquidation and/or litiga-
tion or litigation plan, or a proposed
tion of a 7(a) loan or 504 loan under any
amendment of a plan, or any of the ac-
of the following circumstances:
tions set forth in § 120.536(b)(5) or
(1) SBA determines that the Lender
§ 120.536(b)(6), SBA will not be deemed
or Authorized CDC Liquidator failed to
to have approved the proposed action.
perform liquidation or litigation
(c) If a Lender seeks to perform liq-
promptly and in accordance with com-
uidation on a loan made under its au-
mercially reasonable standards, in a
thority as a CLP Lender by submitting
prudent manner, or in accordance with
a liquidation plan to SBA for approval,
any Loan Program Requirement or
SBA will approve or deny such plan
SBA approvals of either a liquidation
within ten business days. If SBA fails
or litigation plan or any amendment of
to approve or deny the plan within ten
such a plan.
business days, SBA will be deemed to
(2) A Lender or Authorized CDC Liq-
have approved such plan.
uidator fails to obtain prior written ap-
[72 FR 18362, Apr. 12, 2007] proval from SBA for any liquidation or
litigation plan, or for any amended liq-
§ 120.542 Payment by SBA of legal fees uidation or litigation plan, or for any
and other expenses. action set forth in § 120.536, when such
(a) Legal fees SBA will not pay. (1) approval is required by these regula-
SBA will not pay legal fees or other tions or a Loan Program Requirement.
costs that a Lender or Authorized CDC (3) If SBA has not specifically ap-
Liquidator incurs: proved fees or costs identified in an
(i) In asserting a claim, cross claim, original or amended liquidation or liti-
counterclaim, or third-party claim gation plan under § 120.540, and SBA de-
against SBA or in defense of an action termines that such fees or costs are not
brought by SBA, unless payment of reasonable, customary or necessary in
such fees or costs is otherwise required the locality in question. In such cases,
by federal law. SBA will pay only such fees as it deems
305
§ 120.545 13 CFR Ch. I (1–1–25 Edition)
are necessary, customary and reason- may appeal this decision in writing to
able in the locality in question. the Associate General Counsel for Liti-
(c) Fees for liquidation actions per- gation within 30 days of the decision.
formed by Authorized CDC Liquidators. The decision of the Associate General
Subject to paragraph (d) of this sec- Counsel for Litigation will be made in
tion, SBA will compensate Authorized consultation with the D/OFPO, and will
CDC Liquidators for their liquidation be the final Agency decision.
actions on 504 loans, whether such ac-
[72 FR 18362, Apr. 12, 2007, as amended at 74
tions are performed by the CDC or the FR 45753, Sept. 4, 2009; 87 FR 38909, June 30,
CDC’s contractor retained in accord- 2022]
ance with § 120.975(a)(2) or (b)(2)(ii). The
compensation fee will be a percentage § 120.545 What are SBA’s policies con-
(to be published in the FEDERAL REG- cerning the liquidation of collateral
ISTER from time to time, but not to ex- and the sale of business loans and
ceed 10%) of the net recovery proceeds physical disaster assistance loans,
realized from the sale of collateral or physical disaster business loans
and economic injury disaster loans?
other liquidation actions on an indi-
vidual loan, up to a fee of $25,000 for (a) Liquidation policy. SBA or the
such loan, and a lower percentage (also Lender may liquidate collateral secur-
to be published in the FEDERAL REG- ing a loan if the loan is in default or
ISTER from time to time, but not to ex- there is no reasonable prospect that
ceed 5%) of the realized net recovery the loan can be repaid within a reason-
proceeds above such amounts. The able period.
compensation fee limits set forth in (b) Sale and conversion of loans. With-
this paragraph (c) do not include rea- out the consent of the Borrower, SBA
sonable, customary and necessary ad- may:
ministrative costs related to liquida- (1) Sell a direct loan;
tion activities on such loan that are in- (2) Convert a guaranteed or imme-
curred in accordance with the liquida- diate participation loan to a direct
tion plan, or amendments thereto, ap- loan; or
proved by SBA pursuant to § 120.540(b). (3) Convert an immediate participa-
The Authorized CDC Liquidator may tion loan to a guaranteed loan or a
compensate its contractor up to the loan owned solely by the Lender.
amount it receives from SBA. All re- (4) Sell direct and purchased 7(a) and
quests for compensation fees must be 501, 502, 503 and 504 loans and physical
received by SBA within nine months disaster home loans, physical disaster
from the date of SBA’s purchase of the business loans and economic injury dis-
defaulted debenture. Fee requests not aster loans in asset sales. SBA will
received within such timeframe will be offer these loans for sale to qualified
automatically rejected. bidders by means of competitive proce-
(d) Appeals—liquidation costs. A Lend- dures at publicly advertised sales. Bid-
er or Authorized CDC Liquidator that der qualifications will be set for each
disagrees with a decision by an SBA of- sale in accordance with the terms and
fice to decline to reimburse all, or a conditions of each sale.
portion, of the fees and/or costs in- (c) Disposal of collateral and assets ac-
curred in conducting liquidation may quired through foreclosure or conveyance.
appeal this decision in writing to the SBA or the Lender may sell real and
D/OFPO within 30 days of the decision. personal property (including contracts
The decision of the D/OFPO or designee and claims) pledged to secure a loan
will be made in consultation with the that is in default in accordance with
Associate General Counsel for Litiga- the provisions of the related security
tion, and will be the final Agency deci- instrument (see § 120.550 for Homestead
sion. Protection for Farmers).
(e) Appeals—litigation costs. A Lender (1) Competitive bids or negotiated sales.
or Authorized CDC Liquidator that dis- Generally, SBA will offer loan collat-
agrees with a decision by SBA to de- eral and acquired assets for public sale
cline to reimburse all, or a portion, of through competitive bids at auctions
the legal fees and/or costs incurred in or sealed bid sales. The Lender may use
conducting debt collection litigation negotiated sales if consistent with its
306
Small Business Administration § 120.546
usual practice for similar non-SBA as- anteed portion pursuant to
sets. § 120.520(a)(1) prior to the Lender’s com-
(2) Lease of acquired property. Nor- pletion of liquidation for the loan, then
mally, neither SBA nor a Lender will SBA will not sell such loan in an asset
rent or lease acquired property or sale until nine months from the date of
grant options to purchase. SBA and the SBA’s purchase; or
Lender will consider proposals for a (iii) SBA receives written consent
lease if it appears a property cannot be from the Lender.
sold advantageously and the lease may (2) For loans identified in paragraph
be terminated on reasonable notice (b)(1)(i) of this section, the Lender may
upon receipt of a favorable purchase request that SBA withhold the loan
offer. from an asset sale if the Lender sub-
(d) Recoveries and security interests mits a written request to SBA within
shared. SBA and the Lender will share 15 business days of SBA’s purchase of
pro rata (in accordance with their re- the guaranteed portion of the loan
spective interests in a loan) all loan from the Registered Holder and if such
payments or recoveries, including pro- request addresses the issues described
ceeds from asset sales, all reasonable in this subparagraph. The Lender’s
expenses (including advances for the written request must advise SBA of the
care, preservation, and maintenance of status of the loan, the Lender’s plans
collateral securing the loan and the
for workout and/or liquidation, includ-
payment of senior lienholders), and any
ing and pending sale of loan collateral
security interest or guarantee (exclud-
or foreclosure proceedings arranged
ing SBA’s guarantee) which the Lender
prior to SBA’s purchase that already
or SBA may hold or receive in connec-
are underway, and the Lender’s esti-
tion with a loan.
mated schedule for restructuring the
(e) Guarantors. Guarantors of finan-
loan or liquidating the collateral. SBA
cial assistance have no rights of con-
will consider the Lender’s request and,
tribution against SBA on an SBA guar-
anteed or direct loan. SBA is not based on the circumstances, SBA in its
deemed to be a co-guarantor with any sole discretion may elect to defer in-
other guarantors. cluding the loan in an asset sale in
order to provide the Lender additional
[61 FR 3235, Jan. 31, 1996, as amended at 64 time to complete the planned restruc-
FR 44110, Aug. 13, 1999; 65 FR 17133, Mar. 31, turing and/or liquidation actions.
2000; 68 FR 51680, Aug. 28, 2003. Redesignated
and amended at 72 FR 18362, Apr. 12, 2007]
(3) For loans approved before May 14,
2007. SBA must obtain written consent
§ 120.546 Loan asset sales. from the Lender for the sale of such
(a) General. Loan asset sales are gov- loans in an asset sale.
erned by § 120.545(b)(4) and by this sec- (4) After SBA has purchased the
tion. guaranteed portion of a loan from the
(b) 7(a) loans—(1) For loans approved Registered Holder or from the Lender,
on or after May 14, 2007. The Lender will the Lender must continue to perform
be deemed to have consented to SBA’s all necessary servicing and liquidation
sale of the loan (guaranteed and actions for the loan up to the point the
unguaranteed portions) in an asset sale loan is transferred to the purchaser in
conducted or overseen by SBA upon the an asset sale. The Lender also must co-
occurrence any of the following: operate and take all necessary actions
(i) SBA’s purchase of the guaranteed to effectuate both the asset sale and
portion of the loan from the Registered the transfer of the loan to the pur-
Holder for a loan where the guaranteed chaser in the asset sale.
portion has been sold in the Secondary (c) 504 loans—(1) PCLP Loans. After
Market pursuant to subpart F of this SBA’s purchase of a Debenture, SBA
part and after default, the Lender has may at its sole discretion sell a de-
not exercised its option to purchase faulted PCLP Loan in an asset sale
such guaranteed portion; or conducted or overseen by SBA, after
(ii) SBA’s purchase of the guaranteed providing to the PCLP CDC that made
portion from the Lender, provided how- the loan advance notice of not less
ever, that if SBA purchased the guar- than 90 days before the date upon
307
§ 120.550 13 CFR Ch. I (1–1–25 Edition)
which SBA first makes its records con- period, the lessee has a right of first re-
cerning such loan available to prospec- fusal to reacquire the homestead prop-
tive purchasers for examination. erty under terms and conditions no less
(2) All other 504 loans. After SBA’s favorable than those offered to any
purchase of a Debenture, SBA may at other purchaser.
its sole discretion sell a defaulted 504
loan in an asset sale conducted or over- § 120.553 Appeal.
seen by SBA. If the application is denied, the Bor-
[72 FR 18364, Apr. 12, 2007] rower may appeal the decision to the
D/FA. Until the conclusion of any ap-
HOMESTEAD PROTECTION FOR FARMERS peal, the Borrower may retain posses-
sion of the homestead property.
§ 120.550 What is homestead protec-
tion for farmers? § 120.554 Conflict of laws.
SBA may lease to a farmer-Borrower In the event of a conflict between the
the farm residence occupied by the homestead provisions at §§ 120.550
Borrower and a reasonable amount of through 120.553 of this part, and any
adjoining property (no more than 10 state law relating to the right of a Bor-
acres and seven farm buildings), if they rower to designate for separate sale or
were acquired by SBA as a result of a to redeem part or all of the real prop-
defaulted farm loan made or guaran- erty securing a loan foreclosed by the
teed by SBA (see the Consolidated Lender, state law shall prevail.
Farm and Rural Development Act, 7
U.S.C. 1921, for qualifying loan pur-
poses). Subpart F—Secondary Market
§ 120.551 Who is eligible for homestead FISCAL AND TRANSFER AGENT (FTA)
protection?
§ 120.600 Definitions.
SBA must notify the Borrower in
possession of the availability of these (a) Certificate is the document the
homestead protection rights within 30 FTA issues representing either a bene-
days after SBA acquires the property. ficial fractional undivided interest in a
A farmer-Borrower must: Pool (Pool Certificate), or a fractional
(a) Apply for the homestead occu- undivided interest in some or all of the
pancy to the SBA field office which guaranteed portion of an individual
serviced the loan within 90 days after 7(a) guaranteed loan (Individual Cer-
SBA acquires the property; tificate).
(b) Provide evidence that the farm (b) Current means that no repayment
produces farm income reasonable for from a Borrower to a Lender is over 29
the area and economic conditions; days late measured from the due date
(c) Show that at least 60 percent of of the payment on the records of the
the Borrower and spouse’s gross annual FTA’s central registry (Pools) or the
income came from farm or ranch oper- entity servicing the loan (individual
ations in at least any two out of the guaranteed portion).
last six calendar years; (c) Dollar-Weighted Average Net Rate
(d) Have resided on the property dur- of a Pool is calculated by multiplying
ing the previous six years; and the interest rate of each loan in the
(e) Be personally liable for the debt. Pool by the ratio of that loan’s current
outstanding guaranteed principal to
§ 120.552 Lease. the current outstanding guaranteed
If approved, the applicant must per- principal of all loans in the Pool, and
sonally occupy the residence during adding the sum of the resulting prod-
the term of the lease and pay a reason- ucts. The Dollar-Weighted Average Net
able rent to SBA. The lease will be for Rate of a Pool will fluctuate over the
a period of at least 3 years, but no life of the Pool as loan defaults, pre-
more than 5 years. A lease of less than payments and normal loan repayments
5 years may be renewed, but not be- occur.
yond 5 years from the original lease (d) FTA is the SBA’s fiscal and trans-
date. During or at the end of the lease fer agent.
308
Small Business Administration § 120.611
(e) Note Rate is the interest rate on CERTIFICATES
the Borrower’s note.
(f) Net Rate is the interest rate on an § 120.610 Form and terms of Certifi-
cates.
individual guaranteed portion of a loan
in a Pool. (a) General form and content. Each
(g) Pool is an aggregation of SBA Certificate must be registered with the
guaranteed portions of loans made by FTA. SBA must approve the terms of
Lenders. the Certificate.
(h) Pool Assembler is a financial insti- (b) Face amount of Pool Certificate.
tution that: The face amount of a Pool Certificate
(1) Organizes and packages a Pool by cannot be less than a minimum
amount as specified in the Program
acquiring the SBA guaranteed portions
Guide, and the dollar amount of Cer-
of loans from Lenders;
tificates must be in increments which
(2) Resells fractional interests in the SBA will specify in the Program Guide
Pool to Registered Holders; and (except for one Certificate in each
(3) Directs the FTA to issue Certifi- Pool). SBA may change these require-
cates. ments based upon an analysis of mar-
(i) Pool Rate is the interest rate on a ket conditions and program experience,
Pool Certificate. and will publish any such change in the
(j) Registered Holder is the Certificate FEDERAL REGISTER.
owner listed in FTA’s records. (c) Basis of payment for Pool Certifi-
(k) SBA’s Secondary Market Program cates. Principal installments and inter-
Guide is an issuance from SBA which est payments are based on the unpaid
describes the characteristics of Sec- principal balance of the portion of the
ondary Market transactions. Pool represented by a Pool Certificate.
(l) Weighted Average Coupon (WAC) All prepayments on loans in the Pool
Pool is a Pool where the interest rate must be passed through to the appro-
payable to the investor is equal to the priate Registered Holders with the reg-
Dollar-Weighted Average Net Rate of ularly scheduled payments to such
Holders.
the Pool.
(d) Basis of payment for Individual Cer-
[61 FR 3235, Jan. 31, 1996, as amended at 73 tificates. Principal installments and in-
FR 67102, Nov. 13, 2008; 76 FR 63546, Oct. 12, terest payments are based on the un-
2011] paid principal balance of the SBA guar-
anteed portion of the loan supporting
§ 120.601 SBA Secondary Market. an Individual Certificate. The Certifi-
The SBA secondary market (‘‘Sec- cate must provide for a pass through to
ondary Market’’) consists of the sale of the Registered Holder of payments
Certificates, representing either a frac- which the FTA receives from a Lender
tional undivided interest in some or all or any entity servicing the loan, less
of the guaranteed portion of an indi- applicable fees.
vidual 7(a) guaranteed loan or a frac- (e) Interest rate on Pool Certificate. The
tional undivided interest in a Pool con- interest rate on a Pool Certificate will
sisting of the SBA guaranteed portions be either the lowest Net Rate of any in-
of a number of 7(a) guaranteed loans. dividual guaranteed portion of a loan
Transactions involving interests in in the Pool or the Dollar-Weighted Av-
erage Net Rate of the Pool.
Pools or the sale of individual guaran-
teed portions of loans are governed by [61 FR 3235, Jan. 31, 1996, as amended at 73
the contracts entered into by the par- FR 67102, Nov. 13, 2008]
ties, SBA’s Secondary Market Program
Guide, and this subpart. See sections § 120.611 Pools backing Pool Certifi-
cates.
5(f), (g), and (h) of the Small Business
Act (15 U.S.C. 634(f), (g), and (h)). (a) Pool characteristics. As set forth in
the Program Guide, each Pool must
[76 FR 63546, Oct. 12, 2011] have:
(1) A minimum number of guaranteed
portions of loans;
309
§ 120.612 13 CFR Ch. I (1–1–25 Edition)
(2) A minimum aggregate principal § 120.613 Secondary Participation
balance of the guaranteed portions; Guarantee Agreement.
(3) A maximum percentage of the When a Lender wants to sell the
Pool which an individual guaranteed guaranteed portion of a loan, it enters
portion may constitute; into a Secondary Participation Guar-
(4) A maximum allowable difference antee Agreement (‘‘SPGA’’) with SBA
between the highest and lowest note and the prospective purchaser. The
interest rates; terms of sale between the Lender and
(5) A maximum allowable difference the purchaser cannot require the Lend-
between the remaining terms to matu- er or SBA to repurchase the guaran-
rity of the loans in the Pool; teed portion of the loan except in ac-
(6) A minimum weighted average ma- cordance with the terms of the SPGA.
turity at Pool formation; and Before execution of the SPGA, the
(7) A maximum allowable difference Lender must:
between the highest and lowest Net (a) Submit to FTA a copy of the pro-
Rate on the guaranteed portions that posed SPGA, the note, and such other
are placed in a WAC Pool. documents as SBA may require;
(b) Adjustment of Pool characteristics. (b) Except for export working capital
SBA may adjust the Pool characteris- loans, disburse to the Borrower the full
tics periodically based upon program amount of the loan; and
experience and market conditions. (c) Pay SBA all guarantee fees rel-
(c) Increments of guaranteed portion. If evant to the loan in full.
the amount of the guaranteed portion [61 FR 3235, Jan. 31, 1996, as amended at 68
of an individual 7(a) guaranteed loan is FR 51680, Aug. 28, 2003]
more than $500,000, a Pool Assembler
may elect to divide the guaranteed por- THE SBA GUARANTEE OF A CERTIFICATE
tion into increments of $500,000 and one
§ 120.620 SBA guarantee of a Pool Cer-
increment of any remaining amount tificate.
less than $500,000, in order to permit
the maximum amount of any guaran- (a) Extent of Guarantee. SBA guaran-
teed portion in a Pool to be not more tees to a Registered Holder the timely
than $500,000. Only one increment from payment of principal and interest in-
a loan to a specific borrower may be in- stallments and any prepayment or
cluded in a Pool. other recovery of principal to which
the Registered Holder is entitled. If the
[61 FR 3235, Jan. 31, 1996, as amended at 73 Borrower of a loan in a Pool backing
FR 67102, Nov. 13, 2008; 76 FR 63546, Oct. 12, the Certificates does not make a re-
2011]
quired installment payment, SBA,
§ 120.612 Loans eligible to back Certifi- through the FTA, will make advances
cates. to maintain the schedule of interest
and principal payments to the Reg-
(a) Pool Certificates are backed by istered Holders.
the SBA guaranteed portions of loans (b) SBA guarantee backed by full faith
comprising the Pool. An Individual and credit. SBA’s guarantee of the Pool
Certificate is backed by the SBA guar- Certificate is backed by the full faith
anteed portion of a single loan. Any and credit of the United States.
such loan must:
(1) Be current as of the date the Pool § 120.621 SBA guarantee of an Indi-
is formed or the individual guaranteed vidual Certificate.
portion of a loan is initially sold in the (a) Extent of SBA guarantee. With re-
Secondary Market; spect to Individual Certificates, SBA
(2) Be guaranteed under the Act; and guarantees to purchase from the Reg-
(3) Meet such other standards as SBA istered Holder the guaranteed portion
may determine to be necessary for the of the loan for an amount equal to the
successful operation of the Secondary unpaid principal and accrued interest
Market program. due as of the date of SBA’s purchase,
(b) The loans that back a Pool must less deductions for applicable fees. Un-
meet the SBA requirements in effect at like the SBA guarantee with respect to
the time the Pool is formed. pooled loans, SBA does not guarantee
310
Small Business Administration § 120.631
timely payment on Individual Certifi- tors, will be considered in determining
cates. satisfactory SBA performance. Other
(b) What triggers the SBA guarantee. factors may include, but are not lim-
SBA’s guarantee to the Registered ited to, review/examination assess-
Holder may be called upon when: ments, historical performance meas-
(1) The Borrower remains in uncured ures (like default rate, purchase rate
default for 60 days on payments of prin- and loss rate), loan volume to the ex-
cipal or interest due on the note; tent that it impacts performance meas-
(2) The Lender fails to send to the ures, and other performance related
FTA on a timely basis payments it re- measurements and information (such
ceived from the Borrower; or as contribution toward SBA mission).
(3) The FTA fails to send to the Reg-
(b) Approval by SBA. An entity may
istered Holder on a timely basis any
not submit Pool applications to the
payments it has received from the
FTA until SBA has approved the appli-
Lender.
(c) Full faith and credit. SBA’s guar- cation to become a Pool Assembler.
antee to the Registered Holder is (c) Conduct of business by Pool Assem-
backed by the full faith and credit of bler. An entity continues to qualify as
the United States. a Pool Assembler so long as it:
(1) Meets the eligibility standards in
POOL ASSEMBLERS paragraph (a) of this section;
(2) Conducts its business in accord-
§ 120.630 Qualifications to be a Pool ance with SBA regulations and accept-
Assembler.
ed securities or banking industry prac-
(a) Application to become Pool Assem- tices, ethics, and standards; and
bler. The application to become a Pool (3) Maintains its books and records in
Assembler is available from the D/FA. accordance with generally accepted ac-
In order to qualify as a Pool Assem- counting principles or in accordance
bler, an entity must send the applica- with the guidelines of the regulatory
tion to the D/FA, with an application
body governing its activities.
fee, and certify that it:
(1) Is regulated by the appropriate [61 FR 3235, Jan. 31, 1996, as amended at 73
agency as defined in section 3(a)(34)(G) FR 75517, Dec. 11, 2008; 82 FR 39503, Aug. 21,
of the Securities Exchange Act of 1934 2017]
(15 U.S.C. 78c(a)(34)(G));
(2) Meets all financial and other ap- § 120.631 Suspension or termination of
plicable requirements of its regulatory Pool Assembler.
authority and the Government Securi- (a) Suspension or termination. The D/
ties Act of 1986, as amended (Pub. L. 99– FA may suspend a Pool Assembler
571, 100 Stat. 3208); from operating in the Secondary Mar-
(3) Has the financial capability to as- ket for up to 18 months or terminate
semble acceptable and eligible guaran- its status as a Pool Assembler, if the
teed loan portions in sufficient quan- Pool Assembler (and/or its Associates):
tity to support the issuance of Pool (1) Does not comply with any of the
Certificates; and requirements in § 120.630 (a) and (c);
(4) Is in good standing with SBA (as
(2) Has been indicted or otherwise
the D/FA determines in his or her dis-
formally charged with, or convicted of,
cretion), and is Satisfactory with the
a misdemeanor or felony;
Office of the Comptroller of the Cur-
rency (‘‘OCC’’) if it is a national bank, (3) Has received an adverse civil judg-
the Federal Deposit Insurance Corpora- ment that it has committed a breach of
tion if it is a bank not regulated by the trust or a violation of a law or regula-
OCC, or the Financial Industry Regu- tion protecting the integrity of busi-
latory Authority (‘‘FINRA’’) if it is a ness transactions or relationships;
member as determined by SBA. (4) Has not formed a Pool for at least
(5) For any pool assembler that is an three years; or
SBA Lender, that the SBA Lender has (5) Is under investigation by its regu-
satisfactory SBA performance, as de- lating authority for activities which
termined by SBA in its discretion. The may affect its fitness to participate in
Lender’s Risk Rating, among other fac- the Secondary Market.
311
§ 120.640 13 CFR Ch. I (1–1–25 Edition)
(b) Suspension procedures. The D/FA § 120.641 Disclosure to purchasers.
shall notify a Pool Assembler by cer- (a) Information to purchaser. Prior to
tified mail, return receipt requested, of any sale, the Pool Assembler, Reg-
the decision to suspend and the reasons istered Holder of an Individual Certifi-
therefore at least 10 business days prior cate, or any subsequent seller must dis-
to the effective date of the suspension. close to the purchaser, verbally or in
The Pool Assembler may appeal the writing, information on the terms, con-
suspension made under this section ditions, and yield as described in the
pursuant to the procedures set forth in SBA Secondary Market Program
part 134 of this chapter. The action of Guide.
the D/FA shall remain in effect pending (b) Information on transfer document.
resolution of the appeal. The seller must provide the same infor-
(c) Notice of termination. In order to mation described in paragraph (a) of
terminate a Pool Assembler, the D/FA this section in writing on the transfer
must issue an order to show cause why document when the seller submits it to
the SBA should not terminate the Pool the FTA. After the sale of an Indi-
Assembler’s participation in the Sec- vidual Certificate, the FTA will pro-
ondary Market. The Pool Assembler vide the disclosure information in writ-
may appeal the termination made ing to the purchaser.
(c) Information in prospectus. If the
under this section pursuant to proce-
Registered Holder is a trust, invest-
dures set forth in part 134 of this chap-
ment Pool, mutual fund or other secu-
ter. The action of the D/FA shall re-
rity, it must disclose the information
main in effect pending resolution of in paragraph (a) of this section to in-
the appeal. vestors through a prospectus and other
promotional material if an Individual
MISCELLANEOUS PROVISIONS
Certificate or Pool Certificate is placed
§ 120.640 Administration of the Pool into or used as the backing for the in-
and Individual Certificates. vestment vehicle.
(a) FTA responsibility. The FTA has § 120.642 Requirements before the FTA
the responsibility to administer each issues Pool Certificates.
Pool or Individual Certificate. It shall Before the FTA issues any Pool Cer-
maintain a registry of Registered Hold- tificate, the Pool Assembler must de-
ers and other information as SBA re- liver to it the following documents:
quires. (a) A properly completed Pool appli-
(b) Self-liquidating. Each Pool or indi- cation form;
vidual guaranteed portion of a loan in (b) Either:
the Secondary Market is self-liqui- (1) Individual Certificates evidencing
dating because of Borrower payments the guaranteed portions comprising the
or prepayments, redemption by SBA, Pool; or
and/or payments by SBA or the Lender (2) An executed SPGA and related
after default by the Borrower. Substi- documentation for the loans whose
tution of the guaranteed portions of ex- guaranteed portions are to be part of
isting loans for defaulted loans is not the Pool; and
permitted. (c) Any other documentation which
SBA may require.
(c) SBA’s right to subrogation. If SBA
pays a claim under a guarantee with § 120.643 Requirements before the FTA
respect to a Certificate issued under issues Individual Certificates.
this subpart, it must be subrogated (a) FTA issuance of initial Certificate.
fully to the rights satisfied by such Before the FTA can issue the Indi-
payment. vidual Certificate for a guaranteed por-
(d) SBA ownership rights not limited. tion of a loan, the original seller must
No Federal, State or local law can pre- provide the following documents to the
clude or limit the exercise by SBA of FTA:
its ownership rights in the portions of (1) An executed SPGA;
loans constituting the Pool against (2) A copy of the note representing
which the Certificates are issued. the guaranteed loan; and
312
Small Business Administration § 120.651
(3) Any other documentation which loan or a default on such loan will trig-
SBA may require. ger the redemption of the Certificate
(b) Review of documentation. SBA by FTA/SBA in accordance with the
may review or require the FTA to re- procedures prescribed in the SPGA.
view any documentation before the (b) Redemption of Pool Certificate. The
FTA issues a Certificate. FTA and SBA may redeem a Pool Cer-
tificate because of prepayment or de-
§ 120.644 Transfers of Certificates. fault of all loans in a Pool.
(a) General rule. Certificates are
transferable. Transfers in the Sec- § 120.650 Registration duties of FTA in
ondary Market must comply with Arti- Secondary Market.
cle 8 of the Uniform Commercial Code The FTA registers all Certificates.
of the State of New York. The seller This means it issues, transfers title to,
must use the detached form of assign- and redeems them. All financial trans-
ment (SBA Form 1088), unless the sell- actions relating to a guaranteed por-
er and purchaser choose to use another tion of a loan flow through the FTA. In
form which the SBA approves. The fulfilling its obligation to keep the
FTA may refuse to issue a Certificate central registry current, the FTA may,
until it is satisfied that the documents with SBA’s approval, obtain any nec-
of transfer are complete. essary information from the parties in-
(b) Transfer on FTA records. In order volved in the Secondary Market.
for the transfer of a Certificate to be
effective the FTA must reflect it on its § 120.651 Claim to FTA by Registered
records. Holder to replace Certificate.
(c) Contents of letter of transmittal ac- (a) To replace a Certificate because
companying the transfer of Certificates. of loss, theft, destruction, mutilation,
(1) A letter of transmittal must accom- or defacement, the Registered Holder
pany each Certificate which a Reg- must:
istered Holder submits to the FTA for (1) Give the FTA information about
transfer. The Registered Holder must the Certificate and the facts relating to
supply the following information in the the claim;
letter: (2) File an indemnity bond acceptable
(i) Pool number, if applicable;
to SBA and the FTA with a surety to
(ii) Certificate number;
protect the interests of SBA and the
(iii) Name of purchaser of Certificate;
FTA;
(iv) Address and tax identification
(3) Pay the FTA its fee to replace a
number of the purchaser;
Certificate; and
(v) Name and telephone number of
the person handling or facilitating the (4) Use an affidavit of loss (form
transfer; available from the FTA) to report:
(vi) Instructions for the delivery of (i) The name and address of the Reg-
the new Certificate. istered Holder (and the name and ca-
(2) The Registered Holder must also pacity of any representative actually
send the fee which the FTA charges for filing the claim);
this service. The FTA will supply fee (ii) The Certificate by Pool number,
information to the Registered Holder. if applicable;
(d) Lender cannot purchase guaranteed (iii) The Certificate number;
portion of loan it made. The Lender (or (iv) The original principal amount;
its Associate) that made a 7(a) guaran- (v) The name in which the Certificate
teed loan cannot purchase the guaran- was registered;
teed portion of that loan in the Sec- (vi) Any assignment, endorsement or
ondary Market. If a Lender does pur- other writing on the Certificate; and
chase the guaranteed portion of one of (vii) A statement of the cir-
its own loans, it shall not have the un- cumstances of the theft or loss.
conditional guarantee of SBA. (b) When the FTA receives notice of
the theft or loss, it will stop any trans-
§ 120.645 Redemption of Certificates. fer of the Certificate. The Registered
(a) Redemption of Individual Certifi- Holder must send to the FTA all avail-
cate. The prepayment of the underlying able portions of a mutilated or defaced
313
§ 120.652 13 CFR Ch. I (1–1–25 Edition)
Certificate. When the Registered Hold- (b) Additional rules for suspension or
er completes these steps, the FTA will revocation of broker or dealer. In addi-
replace the Certificate. tion to acting under paragraph (a) of
this section, the D/FA may suspend or
§ 120.652 FTA fees. revoke the privilege of any broker or
The FTA may charge reasonable dealer to sell or otherwise deal in Cer-
servicing fees, transfer fees, and other tificates in the Secondary Market if:
fees as the SBA and FTA may nego- (1) Its supervisory agency has re-
tiate under contract. voked or suspended the broker or deal-
er from engaging in the securities busi-
SUSPENSION OR REVOCATION OF ness, or is investigating the firm or
PARTICIPANT IN SECONDARY MARKET broker for a practice which SBA con-
siders, in its sole discretion, to be rel-
§ 120.660 Suspension or revocation. evant to the broker’s or dealer’s fitness
to participate in the Secondary Mar-
(a) Temporary suspension or revocation
ket;
of Lender, broker, dealer, or Registered
Holder for violation of Secondary Market (2) The broker or dealer has been in-
rules and regulations or other risks to dicted or otherwise formally charged
SBA. The D/FA together with the Di- with a misdemeanor or felony which
rector, Office of Credit Risk Manage- bears on its fitness to participate in
ment (D/OCRM) may suspend for a pe- the Secondary Market; or
riod of no more than 120 calendar days (3) A civil judgment is entered hold-
or revoke for a period of no more than ing that the broker or dealer has com-
two (2) years, the privilege of a Lender, mitted a breach of trust or a violation
broker, dealer, or Registered Holder to of any law or regulation protecting the
sell, purchase, broker, or deal in loans integrity of business transactions or
or Certificates for: relationships.
(1) Committing a serious violation, in (c) Notice to suspend or revoke. The D/
SBA’s discretion, of: FA and the D/OCRM shall notify the af-
fected party in writing, providing the
(i) The regulations governing the
reasons therefore, at least 10 business
Secondary Market; or
days prior to the effective date of the
(ii) Any provisions in the contracts suspension or revocation. The affected
entered into by the parties, including party may appeal the suspension or
SBA Forms 1086, 1088 and 1454; revocation made under this section
(2) Knowingly submitting false or pursuant to the procedures set forth in
fraudulent information to the SBA or part 134 of this chapter. The action
FTA; or taken by the D/FA and the D/OCRM
(3) A Lender’s receipt, from its pri- will remain in effect pending resolu-
mary Federal or state regulator (in- tion of the appeal.
cluding SBA), of a cease and desist (d) Early termination of suspension or
order, a consent agreement affecting revocation. SBA may, by written notice,
capital or commercial lending issues, a terminate a Secondary Market suspen-
supervisory action citing unsafe or un- sion or revocation under this section, if
sound banking practices, or any other the D/FA and the D/OCRM, in their sole
supervisory action a primary regulator discretion, determine that such termi-
establishes hereafter that addresses un- nation is warranted for good cause.
safe or unsound lending practices; or a
going concern opinion issued by the [61 FR 3235, Jan. 31, 1996, as amended at 82
Lender’s auditor. A Lender subject to a FR 39503, Aug. 21, 2017]
public action or going concern opinion
must notify the D/FA and the D/OCRM Subpart G—Microloan Program
within five (5) business days (or as soon
as practicable thereafter) of the public § 120.700 What is the Microloan Pro-
issuance of any such action or the gram?
issuance of a going concern opinion. The Microloan Program assists
The Lender notice shall include copies women, low income individuals, minor-
of all relevant documents for SBA re- ity entrepreneurs, and other small
view. businesses which need small amounts
314
Small Business Administration § 120.702
of financial assistance. Under this pro- county, municipal government or any
gram, SBA makes direct and guaran- agency thereof; or
teed loans to Intermediaries (as defined (4) An agency of or a nonprofit entity
below) who use the proceeds to make established by a Native American Trib-
loans to eligible borrowers. SBA may al Government.
also make grants under the program to Microloan is a short-term, fixed inter-
Intermediaries and other qualified non- est rate loan of not more than $50,000
profit entities to be used for mar- made by an Intermediary to an eligible
keting, management, and technical as- small business.
sistance to the program’s target popu- Non-Federal sources are sources of
lation. funds other than the Federal Govern-
[61 FR 3235, Jan. 31, 1996, as amended at 66 ment and may include indirect costs or
FR 47073, Sept. 11, 2001] in-kind contributions paid for under
non-Federal programs. Community
§ 120.701 Definitions. Block Development Grants are consid-
Deposit account is a demand, time, ered non-Federal sources.
savings, passbook, or similar account Rural Area is any political subdivi-
maintained with an insured depository sion or unincorporated area:
institution (not including an account (1) In a nonmetropolitan county (as
evidenced by a Certificate of Deposit). defined by the Secretary of Agri-
Economically Distressed Area is a coun- culture) or its equivalent thereof; or
ty or equivalent division of local gov- (2) In a metropolitan county or its
ernment of a State in which the small equivalent that has a resident popu-
business concern is located, in which, lation of less than 20,000 if the Small
according to the most recent data Business Administration has deter-
available from the Bureau of the Cen- mined such political subdivision or
sus, Department of Commerce, not less area to be rural.
than 40 percent of residents have an an- Specialized Intermediary is an Inter-
nual income that is at or below the mediary which maintains a portfolio of
poverty level. Microloans averaging $10,000 or less.
Grant is a Federal award of money, or
property in lieu of money (including [89 FR 35689, May 2, 2024]
cooperative agreements) to an eligible
§ 120.702 Are there limitations on who
grantee that must account for its use. can be an Intermediary or on where
The term does not include the provi- an Intermediary may operate?
sion of technical assistance, revenue
sharing, loans, loan guarantees, inter- (a) Prior experience requirement. To be
est subsidies, insurance, direct appro- eligible to be an Intermediary, an orga-
priations, or any fellowship or other nization must:
lump sum award. (1) Have made and serviced short-
Insured depository institution means term fixed rate loans of not more than
any federally insured bank, savings as- $50,000 to newly established or growing
sociation, or credit union. small businesses for at least one year:
Intermediary is an entity partici- and
pating in the Microloan Program which (2) Have at least one year of experi-
makes and services Microloans to eligi- ence providing technical assistance to
ble small businesses and which pro- its borrowers.
vides marketing, management, and (b) Limitation to one state. An Inter-
technical assistance to its borrowers. mediary may not operate in more than
It may be: one state unless the appropriate Office
(1) A private, nonprofit community of Capital Access official in accordance
development corporation or other enti- with Delegations of Authority deter-
ty; mines that it would be in the best in-
(2) A consortium of private, nonprofit terests of the small business commu-
community development corporations nity for it to operate across state lines.
or other entities; [61 FR 3235, Jan. 31, 1996, as amended at 66
(3) A quasi-governmental economic FR 47878, Sept. 14, 2001; 73 FR 75517, Dec. 11,
development entity, other than a state, 2008; 76 FR 63546, Oct. 12, 2011]
315
§ 120.703 13 CFR Ch. I (1–1–25 Edition)
§ 120.703 How does an organization § 120.705 What is a Specialized Inter-
apply to become an Intermediary? mediary?
(a) Application Process. Organizations At the end of an Intermediary’s first
interested in becoming Intermediaries year of participation in the program,
should contact SBA for information on SBA will determine whether it quali-
the application process. fies as a Specialized Intermediary. An
(b) Documentation in support of appli- Intermediary qualifies as a Specialized
cation. The application must include a Intermediary if it maintains a port-
detailed narrative statement describ- folio of Microloans averaging $10,000 or
ing: less. Specialized Intermediaries qualify
(1) The types of businesses assisted in for more favorable interest rates on
the past and those the applicant in- SBA loans. If, after the first year, an
tends to assist with Microloans; Intermediary qualifies as a Specialized
(2) The average size of the loans made Intermediary, the special interest rate
in the past and the average size of in- is applied retroactively to SBA loans
tended Microloans; made to the Intermediary. After the
(3) The extent to which the applicant first year SBA will determine an
will make Microloans to small busi- Intermediary’s qualifications as a Spe-
nesses in rural areas; cialized Intermediary annually, based
(4) The geographic area in which the on its lending practices during the
applicant intends to operate, including term of its participation in the pro-
a description of the economic and de- gram. Specialized Intermediaries also
mographic conditions existing in the qualify for a greater amount of tech-
intended area of operations; nical assistance grant funding.
(5) The availability and cost of ob-
taining credit for small businesses in [61 FR 3235, Jan. 31, 1996, as amended at 66
the area; FR 47878, Sept. 14, 2001]
(6) The applicant’s experience and
qualifications in providing marketing, § 120.706 What are the terms and con-
management, and technical assistance ditions of an SBA loan to an Inter-
mediary?
to small businesses; and
(7) Any plan to use other technical (a) Loan amount. An Intermediary
assistance resources (such as coun- may not borrow more than $750,000 in
selors from the Service Corps of Re- the first year of participation in the
tired Executives) to help Microloan program, or more than $3,000,000 in any
borrowers. subsequent year. An Intermediary’s ob-
ligation to SBA may not exceed an ag-
§ 120.704 How are applications evalu- gregate of $7 million, subject to statu-
ated? tory limitations on the total amount of
(a) Evaluation criteria. In selecting funds available per state.
Intermediaries, SBA will attempt to (b) Repayment terms. During the first
insure that Microloans are available to year of the loan, an Intermediary is
small businesses in all industries and not required to make any payments,
particularly to small businesses lo- but interest accrues from the date that
cated in urban and rural areas. SBA disburses the loan proceeds to the
(b) Preference for organizations which Intermediary. After that, SBA will de-
make very small loans. In selecting termine the periodic payments. The
Intermediaries, SBA will give priority loan must be repaid within 10 years.
to applicants which maintain a port- (c) Interest rate. The interest rate is
folio of loans averaging $10,000 or less. equal to the rate applicable to five-
(c) Consideration of quasi-governmental year obligations of the United States
organizations. Generally, SBA will con- Treasury, adjusted to the nearest one-
sider applications by quasi-govern- eighth percent, less 1.25 percent. How-
mental organizations only when it de- ever, the interest rate for Specialized
termines that program services for a Intermediaries is equal to the rate ap-
particular geographic area would be plicable to five-year obligations of the
best provided by such organization. United States Treasury, adjusted to
[61 FR 3235, Jan. 31, 1996, as amended at 66 the nearest one-eighth percent, less
FR 47878, Sept. 14, 2001] two percent.
316
Small Business Administration § 120.709
(d) Collateral. As security for repay- (b) Amount and maturity. Generally,
ment of the SBA loan, an Intermediary Intermediaries should not make a
must pledge to SBA a first lien posi- Microloan of more than $10,000 to any
tion in the MRF (described below), borrower. An Intermediary may not
LLRF (described below), and all notes make a Microloan of more than $20,000
receivable from Microloans. unless the borrower demonstrates that
(e) Default. If for any reason an Inter- it is unable to obtain credit elsewhere
mediary is unable to make payment to at comparable interest rates and that
SBA when due, SBA may accelerate it has good prospects for success. An
maturity of the loan and demand pay- Intermediary may not make a
ment in full. In this event, or if an Microloan of more than $50,000, and no
Intermediary violates this part or the borrower may owe an Intermediary
terms of its loan agreement, it must more than $50,000 at any one time.
surrender possession of all collateral Each Microloan must be repaid within
described in paragraph (d) of this sec- seven years.
tion to SBA. The Intermediary is not
(c) Interest rate. The maximum inter-
obligated to pay SBA any loss or defi-
est rate that can be charged a
ciency which may remain after liquida-
Microloan borrower is:
tion of the collateral unless the loss
was caused by fraud, negligence, viola- (1) On loans of more than $10,000, the
tion of any of the ethical requirements interest rate charged on the SBA loan
of § 120.140, or violation of any other to the Intermediary, plus 7.75 percent-
provision of this part. age points; and
(f) Fees. SBA does not charge Inter- (2) On loans of $10,000 or less, the in-
mediaries any fees for loans under this terest rate charged on the SBA loan to
Program. An Intermediary may, how- the Intermediary, plus 8.5 percentage
ever, pay minimal closing costs to points.
third parties, such as filing and record- [61 FR 3235, Jan. 31, 1996, as amended at 66
ing fees. FR 47073, Sept. 11, 2001; 66 FR 47878, Sept. 14,
[61 FR 3235, Jan. 31, 1996, as amended at 66 2001; 76 FR 63547, Oct. 12, 2011; 80 FR 34046,
FR 47073, Sept. 11, 2001; 76 FR 63546, Oct. 12, June 15, 2015; 85 FR 7651, Feb. 10, 2020; 85 FR
2011; 87 FR 38909, June 30, 2022; 89 FR 35690, 80588, Dec. 14, 2020; 87 FR 38909, June 30, 2022;
May 2, 2024] 89 FR 34101, Apr. 30, 2024]
§ 120.707 What conditions apply to § 120.708 What is the Intermediary’s fi-
loans by Intermediaries to nancial contribution?
Microloan borrowers? The Intermediary must contribute
(a) General. Except as otherwise pro- from non-Federal sources an amount
vided in this paragraph (a), an Inter- equal to 15 percent of any loan that it
mediary may only make Microloans to receives from SBA. The contribution
small businesses eligible to receive fi- may not be borrowed. For purposes of
nancial assistance under this part. A this program, Community Develop-
borrower may also use Microloan pro- ment Block Grants are considered non-
ceeds to establish a nonprofit childcare Federal sources.
business. An Intermediary may not
make Microloans to businesses with an § 120.709 What is the Microloan Re-
Associate who is currently incarcer- volving Fund?
ated, serving a sentence of imprison- The Microloan Revolving Fund
ment imposed upon adjudication of (‘‘MRF’’) is a Deposit Account into
guilty, or to childcare businesses with which an Intermediary must deposit
an Associate who is currently on pro- the proceeds from SBA loans, its con-
bation or parole for an offense against tributions from non-Federal sources,
children. Proceeds from Microloans
and payments from its Microloan bor-
may be used only for working capital
rowers. An Intermediary may only
and acquisition of materials, supplies,
withdraw from this account the money
furniture, fixtures, and equipment.
needed to establish the Loan Loss Re-
SBA does not review Microloans for
creditworthiness. serve Fund (§ 120.710), proceeds for each
317
§ 120.710 13 CFR Ch. I (1–1–25 Edition)
Microloan it makes, and any payments SBA performance. Other factors may
to be made to SBA. include, but are not limited to, review/
[61 FR 3235, Jan. 31, 1996, as amended at 80 examination assessments, historical
FR 34046, June 15, 2015] performance measures (like default
rate, purchase rate and loss rate), loan
§ 120.710 What is the Loan Loss Re- volume to the extent that it impacts
serve Fund? performance measures, and other per-
(a) General. The Loan Loss Reserve formance related measurements and
Fund (‘‘LLRF’’) is a Deposit Account information (such as contribution to-
which an Intermediary must establish ward SBA mission); and
to pay any shortage in the MRF caused (2) No other factors exist that may
by delinquencies or losses on impair the Intermediary’s ability to
Microloans. repay all obligations which it owes to
(b) Level of Loan Loss Reserve Fund. the SBA under the Microloan program.
Until it is in the Microloan program
for at least five years, an Intermediary [61 FR 3235, Jan. 31, 1996, as amended at 65
FR 17439, Apr. 3, 2000; 73 FR 75517, Dec. 11,
must maintain a balance on deposit in 2008; 80 FR 34046, June 15, 2015; 82 FR 39504,
its LLRF equal to 15 percent of the Aug. 21, 2017]
outstanding balance of the notes re-
ceivable owed to it by its Microloan § 120.711 What rules govern Inter-
borrowers (‘‘Portfolio’’). mediaries?
(c) SBA review of Loan Loss Reserve
Fund. After an Intermediary has been Intermediaries must operate in ac-
in the Microloan program for five cordance with applicable statutes, reg-
years, it may request SBA’s appro- ulations, policy notices, SBA’s Stand-
priate Office of Capital Access official ard Operating Procedures (SOPs), and
in accordance with Delegations of Au- the information in the application.
thority to reduce the percentage of its
§ 120.712 How does an Intermediary
Portfolio which it must maintain in its get a grant to assist Microloan bor-
LLRF to an amount equal to the ac- rowers?
tual average loan loss rate during the
preceding five-year period. Upon re- (a) General. (1) Except as provided in
ceipt of such request, he/she will review (a)(2) of this section, an Intermediary
the Intermediary’s annual loss rate for is eligible to receive a base grant of not
the most recent five-year period pre- more than 25 percent of the out-
ceding the request. standing balance of all SBA loans to
(d) Reduction of Loan Loss Reserve the Intermediary.
Fund. The appropriate Office of Capital (2) In fiscal years in which the
Access official in accordance with Del- amount appropriated for grants is suf-
egations of Authority has the author- ficient to provide all Intermediaries
ity to reduce the percentage of an with a base grant equal to 25 percent or
Intermediary’s Portfolio that it must more of their total outstanding SBA
maintain in its LLRF to an amount loan balances, then the amount of base
equal to the actual average loan loss grants to eligible Intermediaries will
rate during the preceding five-year pe- be equal to at least 25 percent of the
riod. The appropriate Office of Capital outstanding balance of all SBA loans
Access official in accordance with Del- to the Intermediary and not more than
egations of Authority cannot reduce 30 percent of such balance.
the LLRF to less than ten percent of (3) The Intermediary must con-
the Portfolio. tribute, solely from non-Federal
(e) What must an intermediary dem- sources, an amount equal to 25 percent
onstrate to get a reduction in Loan Loss of the grant. Contributions may be
Reserve Fund? To receive a reduction in made in cash or in kind.
its LLRF, an Intermediary must: (b) Limitations on grant funds. An
(1) Have satisfactory SBA perform- Intermediary may not borrow its con-
ance, as determined by SBA in its dis- tribution. It may only use grant funds
cretion. The Intermediary’s Risk Rat- to provide Microloan borrowers with
ing, among other factors, will be con- marketing, management, and technical
sidered in determining satisfactory assistance, except that:
318
Small Business Administration § 120.801
(1) Up to 50 percent of the grant funds §§ 120.714–120.715 [Reserved]
may be used to provide information
and technical assistance to prospective § 120.716 What is the minimum num-
Microloan borrowers; provided, how- ber of loans an Intermediary must
make each Federal fiscal year?
ever, that no more than 5 percent of
the grant funds may be used to market (a) Minimum loan requirement. Inter-
or advertise the products and services mediaries must close and fund the re-
of the Microloan Intermediary directly quired number of microloans per year
(October 1–September 30) as follows,
related to the Microloan Program; and
except that an Intermediary entering
(2) Grant monies may be used to at- the program will not be required to
tend training required by SBA. meet the minimum in that year:
(c) Intermediaries eligible to receive ad- (1) For fiscal year 2015, four
ditional bonus grant monies. An Inter- microloans,
mediary may receive an additional (2) For fiscal year 2016, six
SBA grant equal to five percent of the microloans,
outstanding balance of all loans re- (3) For fiscal year 2017, eight
ceived from SBA (with no obligation to microloans, and
contribute additional matching funds) (4) For fiscal years 2018 and there-
if the Intermediary: after, ten microloans per year.
(1) Is a Specialized Intermediary; (b) Intermediaries that do not meet
(2) Provides not less than 25 percent the minimum loan requirement are not
of its loans to small business concerns eligible to receive new grant funding
unless they submit a corrective action
located in or owned by one or more
plan acceptable to SBA, in its discre-
residents of an Economically Dis-
tion. Intermediaries that have sub-
tressed Area; or mitted acceptable corrective action
(3) Maintains a portfolio of plans may receive a reduced grant at
Microloans of which at least 25 percent SBA’s discretion.
is serving Rural Areas.
[80 FR 34047, June 15, 2015]
(d) Third party contracts for technical
assistance. An Intermediary may use no
more than 50 percent of the grant funds Subpart H—Development
it receives from SBA for contracts with Company Loan Program (504)
third parties for the latter to provide § 120.800 [Reserved]
technical assistance to Microloan bor-
rowers. § 120.801 How a 504 Project is fi-
nanced.
[61 FR 3235, Jan. 31, 1996, as amended at 66
FR 47073, Sept. 11, 2001; 76 FR 63547, Oct. 12, (a) One or more small businesses may
2011; 80 FR 34047, June 15, 2015; 85 FR 7651, apply for 504 financing through a CDC
Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020; 87 FR serving the area where the 504 Project
38909, June 30, 2022; 89 FR 35690, May 2, 2024] is located. SBA issues a loan number if
it agrees to guarantee part of the fund-
§ 120.713 Does SBA provide technical ing for a Project.
assistance to Intermediaries? (b) Usually, a Project requires in-
SBA may procure technical assist- terim financing from an interim lender
ance for an Intermediary to improve (often the same lender that later pro-
its knowledge, skill, and understanding vides a portion of the permanent fi-
of microlending by awarding a grant to nancing).
a more experienced Intermediary. SBA (c) Generally, permanent financing of
may also obtain such assistance for the Project consists of:
(1) A contribution by the small busi-
prospective Intermediaries in areas of
ness in an amount of at least 10 percent
the country that are either not served
of the Project costs;
or underserved by an existing Inter- (2) A loan made with the proceeds of
mediary. a CDC Debenture for up to 40 percent of
the Project costs and certain adminis-
trative costs, collateralized by a second
lien on the Project Property; and
319
§ 120.802 13 CFR Ch. I (1–1–25 Edition)
(3) A Third Party Loan comprising the mary liaison between SBA and a CDC
balance of the financing, collateralized and with responsibility for managing
by a first lien on the Project property SBA’s relationship with that CDC.
(see § 120.920). Local Economic Area is an area, as de-
(d) The Debenture is guaranteed 100 termined by SBA, that is in a State
percent by SBA (with the full faith and other than the State in which an exist-
credit of the United States), and sold ing CDC (or an applicant applying to
to Underwriters who form Debenture become a CDC) is incorporated, is con-
Pools. Investors purchase interests in tiguous to the CDC’s existing Area of
Debenture Pools and receive Certifi- Operations (or the applicant’s proposed
cates representing ownership of all or Area of Operations) of its State of in-
part of a Debenture Pool. SBA and corporation, and is a part of a local
CDCs use various agents to facilitate trade area that is contiguous to the
the sale and service of the Certificates CDC’s Area of Operations (or appli-
and the orderly flow of funds among cant’s proposed Area of Operations) of
the parties.
its State of incorporation. Examples of
[61 FR 3235, Jan. 31, 1996, as amended at 64 a local trade area would be a city that
FR 2118, Jan. 13, 1999; 88 FR 21899, Apr. 12, is bisected by a State line or a metro-
2023] politan statistical area that is bisected
§ 120.802 Definitions. by a State line.
Multi-State CDC is a CDC that is in-
The following terms have the same corporated in one State and is author-
meaning wherever they are used in this ized by SBA to operate as a CDC in a
subpart. Defined terms are capitalized
State contiguous to its State of incor-
wherever they appear.
poration beyond any contiguous Local
Area of Operations is the geographic
Economic Areas.
area where SBA has approved a CDC’s
request to provide 504 program services Net Debenture Proceeds are the por-
to small businesses on a permanent tion of Debenture proceeds that finance
basis. The minimum Area of Oper- eligible Project costs (excluding ad-
ations is the State in which the CDC is ministrative costs).
incorporated. Priority CDC is a CDC certified to par-
Central Servicing Agent (CSA) is an en- ticipate on a permanent basis in the 504
tity that receives and disburses funds program (see § 120.812) that SBA has ap-
among the various parties involved in proved to participate in an expedited
504 financing under a master servicing 504 loan and Debenture closing process.
agent agreement with SBA. Project is the purchase or lease, and/
Certificate is a document issued by or improvement or renovation of long-
SBA or its agent representing owner- term fixed assets by a small business,
ship of all or part of a Debenture Pool. with 504 financing, for use in its busi-
Debenture is an obligation issued by a ness operations.
CDC and guaranteed 100 percent by Project Property is one or more long-
SBA, the proceeds of which are used to term fixed assets, such as land, build-
fund a 504 loan. ings, machinery, and equipment, ac-
Debenture Pool is an aggregation of quired or improved by a small business,
Debentures. with 504 financing, for use in its busi-
Designated Attorney is the CDC clos- ness operations.
ing attorney that SBA has approved to Third Party Loan is a loan from a
close loans under an expedited closing commercial or private lender, investor,
process for a Priority CDC.
or Federal (non-SBA), State or local
Investor is an owner of a beneficial in-
government source that is part of the
terest in a Debenture Pool.
Project financing.
Job Opportunity is a full time (or
equivalent) permanent job created Underwriter is an entity approved by
within two years of receipt of 504 funds, SBA to form Debenture Pools and ar-
or retained in the community because range for the sale of Certificates.
of a 504 loan. [61 FR 3235, Jan. 31, 1996, as amended at 64
Lead SBA Office is the SBA District FR 2118, Jan. 13, 1999; 65 FR 42632, July 11,
Office designated by SBA as the pri- 2000; 68 FR 57980, Oct. 7, 2003]
320
Small Business Administration § 120.816
EFFECTIVE DATE NOTE: Amendments to or an additional one-year extension of
§ 120.802 were published at 89 FR 102701, Dec. probation.
18, 2024, effective Jan. 17, 2025.
(b) SBA will consider the failure to
file a petition before the end of the pro-
CERTIFICATION PROCEDURES TO BECOME
bationary period as a withdrawal from
A CDC
the 504 program. If the CDC elects
§ 120.810 Applications for certification withdrawal, SBA will direct the CDC to
as a CDC. transfer all funded and/or approved
loans to another CDC, SBA, or another
(a) An applicant for certification as a servicer approved by SBA.
CDC must apply to the SBA District
(c) The Lead SBA Office will send the
Office serving the jurisdiction in which
petition and its recommendation to the
the applicant has or proposes to locate
D/FA, who will make the final decision.
its headquarters (see § 101.103 of this
SBA will determine permanent CDC
chapter).
status or an extension of probation, in
(b) The applicant must apply for an part, based upon the CDC’s compliance
Area of Operations. The applicant’s with the certification and operational
proposed Area of Operations must in- requirements in §§ 120.820 through
clude the entire State in which the ap- 120.830. To be considered for permanent
plicant is incorporated, and may in- CDC status or an extension of proba-
clude Local Economic Areas. An appli- tion, the CDC must have satisfactory
cant may not apply to cover an area as
SBA performance, as determined by
a Multi-State CDC.
SBA in its discretion. The CDC’s Risk
(c) The applicant must demonstrate Rating, among other factors, will be
that it satisfies the CDC certification considered in determining satisfactory
and operational requirements in SBA performance. Other factors may
§§ 120.820, and 120.822 through 120.824. include, but are not limited to, review/
The applicant also must include an op- examination assessments, historical
erating budget, approved by the appli- performance measures, loan volume to
cant’s Board of Directors, which dem-
the extent that it impacts performance
onstrates the required financial ability
measures, and other performance re-
(as described in § 120.825), and a plan to
lated measurements and information
meet CDC operational requirements
(such as contribution toward SBA mis-
(without specializing in a particular in-
sion).
dustry) in §§ 120.821, and 120.826 through
120.830. (d) SBA will notify the CDC in writ-
ing of its decision, and, if the petition
(d) The District Office will forward
is declined, the reasons for the deci-
the application and its recommenda-
sion. If SBA declines the petition, the
tion to the D/FA, who will make the
CDC will no longer have authority to
final decision. SBA will notify the CDC
participate in the 504 Loan Program
in writing of its decision, and, if the pe-
and SBA will direct the CDC to trans-
tition is declined, the reasons for the
fer all funded and/or approved loans to
decision.
another CDC, SBA, or another servicer
[68 FR 57980, Oct. 7, 2003] approved by SBA.
§ 120.812 Probationary period for [68 FR 57980, Oct. 7, 2003, as amended at 73 FR
newly certified CDCs. 75517, Dec. 11, 2008; 82 FR 39504, Aug. 21, 2017;
87 FR 38909, June 30, 2022]
(a) Newly certified CDCs will be on
probation for a period of two years REQUIREMENTS FOR CDC CERTIFICATION
from the date of certification, at the AND OPERATION
end of which the CDC must petition the
Lead SBA Office for: § 120.816 CDC non-profit status and
(1) Permanent CDC status; or good standing.
(2) A one-year extension of probation. A CDC must be a non-profit corpora-
If a one-year extension of probation is tion, except that for-profit CDCs cer-
granted, at the end of this extension tified by SBA prior to January 1, 1987
period, the CDC must petition the Lead may retain their certifications. An
SBA Office for permanent CDC status SBIC may not become a CDC. A CDC
321
§ 120.818 13 CFR Ch. I (1–1–25 Edition)
must be in good standing based upon development in the same Area of Oper-
the following criteria: ations and that is either a non-profit
(a) In good standing in the State in entity or a State or local government
which the CDC is incorporated and any or political subdivision (e.g., council of
other State in which the CDC conducts governments).
business. (c) A CDC must not be affiliated (as
(b) In compliance with all laws, in- determined in accordance with § 121.103)
cluding taxation requirements, in the
with or invest, directly or indirectly,
State in which the CDC is incorporated
in a 7(a) Lender. A CDC that was affili-
and any other State in which the CDC
conducts business. ated with a 7(a) Lender as of November
(c) Must have satisfactory SBA per- 6, 2003 may continue such affiliation.
formance, as determined by SBA in its (d) A CDC must not be affiliated (as
discretion. The CDC’s Risk Rating, determined in accordance with § 121.103
among other factors, will be considered of this chapter) with another CDC. In
in determining satisfactory SBA per- addition, a CDC must not directly or
formance. Other factors may include, indirectly invest in or finance another
but are not limited to, review/examina- CDC, except with the prior written ap-
tion assessments, historical perform- proval of D/FA or designee and D/
ance measures, loan volume to the ex- OCRM or designee if they determine in
tent that it impacts performance meas- their discretion that such approval is
ures, and other performance related in the best interests of the 504 Loan
measurements and information (such Program.
as contribution toward SBA mission). (e) A CDC may remain affiliated with
(d) If a non-profit CDC has a member-
a for-profit entity (other than a 7(a)
ship and the members are responsible
Lender) if such affiliation existed prior
for electing or appointing voting direc-
tors to the CDC’s Board of Directors, to March 21, 2014. A CDC may also be
no person or entity can control more affiliated with a for-profit entity
than 25 percent of the CDC’s voting (other than a 7(a) Lender) whose func-
membership. tion is economic development in the
same Area of Operations with the prior
[68 FR 57980, Oct. 7, 2003, as amended at 73 FR
written approval of the D/FA or des-
75518, Dec. 11, 2008. Redesignated at 79 FR
15649, Mar. 21, 2014; 82 FR 39504, Aug. 21, 2017; ignee if he or she determines in his or
84 FR 66294, Dec. 4, 2019] her discretion that such approval is in
the best interests of the 504 Loan Pro-
§ 120.818 Applicability to existing for- gram.
profit CDCs. (f) A CDC must not directly or indi-
(a) Unless expressly provided other- rectly invest in a Licensee (as defined
wise in the regulations, any Loan Pro- in § 107.50 of this chapter) licensed by
gram Requirement that applies to non- SBA under the SBIC program author-
profit CDCs also applies to for-profit ized in Part A of Title III of the Small
CDCs. Business Investment Act, 15 U.S.C. 681
(b) No person or entity can own or et seq. A CDC that has an SBA-ap-
control more than 25 percent of a for- proved investment in a Licensee as of
profit CDC’s stock.
November 6, 2003 may retain such in-
[79 FR 15649, Mar. 21, 2014, as amended at 84 vestment.
FR 66294, Dec. 4, 2019] (g) Notwithstanding paragraphs (b),
(c), and (e) of this section, a CDC may
§ 120.820 CDC Affiliation.
be affiliated with a Community Advan-
(a) A CDC must be independent and tage SBLC. Additionally, CDCs that
must not be affiliated (as determined are also Community Advantage Pilot
in accordance with § 121.103 of this Program Lenders as of May 11, 2023
chapter) with any Person (as defined in
may be licensed as Community Advan-
§ 120.10) except as permitted under this
tage SBLCs.
section.
(b) A CDC may be affiliated with an [79 FR 15649, Mar. 21, 2014, as amended at 88
entity (other than a 7(a) Lender or an- FR 21900, Apr. 12, 2023]
other CDC) whose function is economic
322
Small Business Administration § 120.823
§ 120.821 CDC Area of Operations. (4) No CDC Board member may serve
on the Board of another CDC.
A CDC must operate only within its
(d) The Board shall have and exercise
designated Area of Operations approved
all corporate powers and authority and
by SBA except as provided in § 120.839.
be responsible for all corporate actions
[68 FR 57980, Oct. 7, 2003] and business. There must be no actual
or appearance of a conflict of interest
§ 120.823 CDC Board of Directors. with respect to any actions of the
(a) The CDC, whether for-profit or Board. The Board is responsible for en-
non-profit, must have a Board of Direc- suring that the structure and operation
tors with at least seven (7) voting di- of the CDC, as set forth in the Bylaws,
rectors who live or work in the CDC’s comply with SBA’s Loan Program Re-
State of incorporation or in an area quirements. The responsibilities of the
that is contiguous to that State that Board include, but are not limited, to
meets the definition of a Local Eco- the following:
nomic Area for the CDC. The Board (1) Approving the mission and the
must be actively involved in encour- policies for the CDC;
aging economic development in the (2) Hiring, firing, supervising and an-
Area of Operations. The initial Board nually evaluating the CDC manager;
may be created by any method per- (3) Setting the salary for the CDC
mitted by applicable State law. At a manager and reviewing all salaries;
minimum, the Board must have direc- (4) Establishing committees, at its
tors with background and expertise in discretion, including the following:
internal controls, financial risk man- (i) Executive Committee. To the extent
agement, commercial lending, legal authorized in the Bylaws, the Board of
issues relating to commercial lending, Directors may establish an Executive
corporate governance, and economic, Committee. The Executive Committee
community or workforce development. may exercise the authority of the
Directors may be either currently em- Board; however, the delegation of its
ployed or retired. authority does not relieve the Board of
(b) At least two voting members of its responsibility imposed by law or
the Board of Directors, other than the Loan Program Requirements. No fur-
CDC manager, must possess commer- ther delegation or redelegation of this
cial lending experience satisfactory to authority is permitted. If the Board es-
SBA. When the Board votes on SBA tablishes an Executive Committee and
loan approval or servicing actions, at delegates any of its authority to the
least two voting Board members, with Executive Committee as set forth in
such commercial lending experience, the Bylaws of the CDC, the Executive
other than the CDC manager, must be Committee must:
present and vote. (A) Be chosen by and from the Board
(c) The Board of Directors must meet of Directors from the Board; and
at least quarterly and shall be respon- (B) Meet the same organizational and
sible for the actions of the CDC and representational requirements as the
any committees established by the Board of Directors, except that the Ex-
Board of Directors. In addition, the ecutive Committee must have a min-
Board of Directors is subject to the fol- imum of four voting members who
lowing requirements: must be present to conduct business.
(1) Except for the CDC manager, no (ii) Loan Committee. The Board of Di-
person on the CDC’s staff may be a vot- rectors may establish a Loan Com-
ing director of the Board; mittee. The Loan Committee may ex-
(2) A quorum must be present to ercise the authority of the Board only
transact business. The quorum shall be as set forth below; however, the delega-
set by the CDC but shall be no less tion of its authority does not relieve
than 50% of the voting members of the the Board of its responsibility imposed
Board of Directors; by law or Loan Program Requirements.
(3) Attendance at meetings may be If the Board of Directors chooses to es-
through any format permitted by State tablish a Loan Committee, no CDC
law; staff or manager may serve on the
323
§ 120.824 13 CFR Ch. I (1–1–25 Edition)
Loan Committee. The Loan Committee budget, the Board must separately ap-
must: prove the investment;
(A) Be chosen by the Board of Direc- (11) Establishing a policy in the By-
tors, and consist of individuals with a laws of the CDC prohibiting an actual
background in either financial risk conflict of interest or the appearance
management, commercial lending, or of same, and enforcing such policy (see
legal issues relating to commercial § 120.140 and § 120.851);
lending who are not associated with (12) Retaining accountability for all
another CDC; of the actions of the CDC;
(B) Have a Quorum of at least four (13) Establishing written internal
Loan Committee members authorized control policies, in accordance with
to vote; § 120.826;
(C) Have at least two (2) Loan Com- (14) Establishing commercially rea-
mittee members with commercial lend- sonable loan approval policies, proce-
ing experience satisfactory to SBA; dures, and standards. The Bylaws must
(D) Have no actual or appearance of a include any delegations of authority to
conflict of interest, including for exam- the Loan Committee and Executive
ple, a Loan Committee member partici- Committee, if either Committee has
pating in deliberations on a loan for been established. In addition, the CDC
which the Third Party Lender is the must establish and set forth in detail
member’s employer or the member is in a policy manual its credit approval
otherwise associated with the Third process. All 504 loan applications must
Party Lender; and have credit approval prior to submis-
sion to the Agency. The Loan Com-
(E) Consist only of Loan Committee
mittee, if established, may be dele-
members who live or work in the CDC’s
gated the authority to provide credit
State of incorporation or in an area
approval for loans up to $2,000,000 but,
that meets the definition of a Local
for loans of $1,000,000 to $2,000,000, the
Economic Area for the CDC, except
Loan Committee’s action must be rati-
that, for Projects that are financed
fied by the Board or Executive Com-
under a CDC’s Multi-State authority,
mittee prior to Debenture closing. Only
the CDC must satisfy the requirements
the Board or Executive Committee, if
of either § 120.835(c)(1) or (2) when vot-
authorized by the Board, may provide
ing on that Project.
credit approval for loans greater than
(5) Ensuring that the CDC’s expenses $2,000,000.
are reasonable and customary; (15) All members of the Board of Di-
(6) Hiring directly an independent rectors must annually certify in writ-
auditor to provide the financial state- ing that they have read and understand
ments in accordance with Loan Pro- this section, and copies of the certifi-
gram Requirements; cation must be included in the Annual
(7) Monitoring the CDC’s portfolio Report to SBA.
performance on a regular basis; (e) The Board of Directors shall
(8) Reviewing a semiannual report on maintain Directors’ and Officers’ Li-
portfolio performance from the CDC ability and Errors and Omissions insur-
manager, which would include, but not ance in amounts established by SBA
be limited to, asset quality and indus- that are based on the size of the CDC’s
try concentration; portfolio and other relevant factors.
(9) Ensuring that the CDC establishes [79 FR 15649, Mar. 21, 2014, as amended at 82
and maintains adequate reserves for FR 39504, Aug. 21, 2017; 84 FR 66294, Dec. 4,
operations; 2019]
(10) Ensuring that the CDC invests in
economic development in each of the § 120.824 Professional management
States in its Area of Operations in and staff, and contracts for serv-
which it has a portfolio, and approving ices.
each investment. If the investment is (a) Management. A CDC must have
included in the CDC’s budget, the full-time professional management, in-
Board’s approval of the budget may be cluding an executive director or the
deemed approval of the investment. If equivalent (CDC manager) to manage
the investment is not included in the daily operations. This requirement is
324
Small Business Administration § 120.824
met if the CDC has at least one sala- aging, processing, closing, servicing, or
ried professional employee that is em- liquidation functions, or for other serv-
ployed directly (not a contractor or an ices (e.g., legal, accounting, informa-
officer, director, 20 percent or more eq- tion technology, independent loan re-
uity owner, or key employee of a con- views, and payroll and employee bene-
tractor) on a full-time basis to manage fits), provided that:
the CDC. The CDC manager must be (1) The contract must be pre-ap-
hired by the CDC’s Board of Directors proved by the D/FA (or designee), sub-
and subject to termination only by the ject to the following exceptions:
Board. A CDC may obtain, under a (i) CDCs may contract for legal, ac-
written contract, management services counting, and information technology
provided by a qualified individual services without SBA approval, except
under the following circumstances: for legal services in connection with
(1) The CDC must submit a request loan liquidation or litigation.
for the D/FA (or designee) to approve, (ii) CDCs may contract for inde-
in consultation with the D/OCRM (or pendent loan review services with non-
designee), a waiver of the requirement CDC entities without SBA approval.
that the manager be employed directly Contracts between CDCs for inde-
by the CDC. In its request, the CDC pendent loan reviews must be pre-ap-
must demonstrate that: proved by SBA in accordance with
(i) Another non-profit entity (that is
paragraph (d) of this section.
not a CDC) that has the economic de-
(2) If the contract requires SBA’s
velopment of the CDC’s Area of Oper-
prior approval under paragraph (c)(1) of
ations as one of its principal activities
this section, the CDC’s Board must ex-
will provide management services to
plain to SBA why it is in the best in-
the CDC and, if the manager is also
terest of the CDC to obtain services
performing services for the non-profit
through a contract and must dem-
entity, the manager will be available
onstrate that:
to small businesses interested in the
504 program and to 504 loan borrowers (i) The compensation under the con-
during regular business hours; or tract is paid only by the CDC obtaining
(ii) The CDC submitting the request the services, is reasonable and cus-
for the waiver is rural, has insufficient tomary for similar services in the Area
loan volume to justify having manage- of Operations, and is only for actual
ment employed directly by the CDC, services performed;
and is requesting to contract with an- (ii) The full term of the contract (in-
other CDC located in the same general cluding options) is necessary and ap-
area to provide the management. propriate and the contract permits the
(2) The CDC must submit a request CDC procuring the services to termi-
for the D/FA (or designee), in consulta- nate the contract prior to its expira-
tion with the D/OCRM (or designee), to tion date with or without cause; and
pre-approve the contract for manage- (iii) There is no actual or apparent
ment services. This contract must conflict of interest or self-dealing on
comply with paragraphs (c)(2) through the part of any of the CDC’s officers,
(4) and, if applicable, paragraph (d) of management, or staff, including mem-
this section. bers of the Board and Loan Committee,
(b) Professional staff. The CDC must in the negotiation, approval or imple-
have a full-time professional staff mentation of the contract.
qualified by training and experience to (3) Neither the contractor nor any of-
market the 504 Loan Program, package ficer, director, 20 percent or more eq-
and process loan applications, close uity owner, or key employee of a con-
loans, service, and, if authorized by tractor may be a voting or non-voting
SBA, liquidate the loan portfolio, and member of the CDC’s Board.
to sustain a sufficient level of service (4) The CDC procuring the services
and activity in the Area of Operations. must provide a copy of all executed
(c) Professional services contracts. contracts requiring SBA prior approval
Through a written contract with quali- to SBA as part of the CDC’s Annual Re-
fied individuals or entities, a CDC may port submitted under § 120.830(a) unless
obtain services for marketing, pack- the CDC certifies that it has previously
325
§ 120.825 13 CFR Ch. I (1–1–25 Edition)
submitted an identical copy of the exe- profit, neither CDC may own any stock
cuted contract to SBA. in the other CDC. The CDCs are also
(5) With respect to any contract prohibited from comingling any funds.
under which the CDC’s staff are deemed (4) With respect to contracts for inde-
co-employees of both the CDC and the pendent loan reviews, CDCs may not
contractor (e.g., contracts with profes- review each other’s portfolios or ex-
sional employer organizations to ob- change any other services, nor may
tain employee benefits, such as retire- they enter into any other arrangement
ment and health benefits, for the CDC’s with each other that could appear to
staff), the contract must provide that bias the outcome or integrity of the
the CDC retains the final authority to independent loan review.
hire and fire the CDC’s employees. (5) The contract must satisfy the re-
(6) If the contract is between CDCs, quirements set forth in paragraphs
the CDCs and the contract must also (c)(2) through (4) of this section.
comply with paragraph (d) of this sec-
tion. [84 FR 66294, Dec. 4, 2019]
(d) Professional Services Contracts be-
tween CDCs. Notwithstanding the pro- § 120.825 Financial ability to operate.
hibition in 13 CFR 120.820(d) against a A CDC must be able to sustain its op-
CDC affiliating with another CDC, a erations continuously, with reliable
CDC may obtain services through a sources of funds (such as income from
written contract with another CDC for services rendered and contributions
managing, marketing, packaging, proc- from government or other sponsors).
essing, closing, servicing, independent Any funds generated from 503 and 504
loan review, or liquidation functions, loan activity by a CDC remaining after
provided that: payment of staff and overhead expenses
(1) The contract between the CDCs must be retained by the CDC as a re-
must be pre-approved by the D/FA (or serve for future operations or for in-
designee), in consultation with the D/ vestment in other local economic de-
OCRM (or designee), who determines in velopment activity in its Area of Oper-
his or her discretion that such approval ations. If a CDC is operating as a
is in the best interests of the 504 Loan Multi-State CDC, it must maintain a
Program and that the terms and condi- separate accounting for each State of
tions of the contract are satisfactory all 504 fee income and expenses and
to SBA. For management services, a provide, upon SBA’s request, evidence
CDC may contract with another CDC that the funds resulting from its Multi-
only in accordance with paragraph State CDC operations are being in-
(a)(1)(ii) of this section. vested in economic development activi-
(2) Except for contracts for liquida- ties in each State in which they were
tion services and independent loan re- generated.
views:
(i) The CDCs entering into the con- [65 FR 42633, July 11, 2000]
tract must be located in the same SBA
Region or, if not located in the same § 120.826 Basic requirements for oper-
ating a CDC.
SBA Region, must be located in contig-
uous States. For purposes of this provi- A CDC must operate in accordance
sion, the location of a CDC is the CDC’s with the following requirements:
State of incorporation; (a) In general. CDCs must meet all 504
(ii) A CDC may provide assistance to Loan Program Requirements. In its
only one CDC per State; and Area of Operations, a CDC must mar-
(iii) No CDC may provide assistance ket the 504 program, package and proc-
to another CDC in its State of incorpo- ess 504 loan applications, close and
ration or in any State in which it has service 504 loans, and if authorized by
Multi-State authority. SBA, liquidate and litigate 504 loans. It
(3) The Board of Directors for each must supply to SBA current and accu-
CDC entering into the contract must rate information about all certification
be separate and independent and may and operational requirements, and
not include any common directors. In maintain the records and submit all re-
addition, if either of the CDCs is for- ports required by SBA.
326
Small Business Administration § 120.827
(b) Operations and internal controls. ance with GAAP. For CDCs with a 504
Each CDC’s board of directors must portfolio balance of less than $30 mil-
adopt an internal control policy which lion (as calculated by SBA), the CDC’s
provides adequate direction to the in- annual financial statements submitted
stitution for effective control over and to SBA must be reviewed by an inde-
accountability for operations, pro- pendent CPA in accordance with
grams, and resources. The board adopt- GAAP, except that the D/OCRM may
ed internal control policy must, at a require a CDC with a portfolio balance
minimum: of less than $30 million to submit an
(1) Direct management to assign the audited financial statement in the
responsibility for the internal control event the D/OCRM determines, in his
function (covering financial, credit,
or her discretion, that such audit is
credit review, collateral, and adminis-
necessary or appropriate when the CDC
trative matters) to an officer or offi-
cers of the CDC; is in material noncompliance with
(2) Adopt and set forth procedures for Loan Program Requirements.
maintenance and periodic review of the (d) Auditor qualifications. The audit or
internal control function; review must be conducted by an inde-
(3) Direct the operation of a program pendent certified public accountant
to review and assess the CDC’s 504-re- who:
lated loans. For the 504 review pro- (1) Is registered or licensed to prac-
gram, the internal control policies tice as a public accountant, and is in
must specify the following: good standing, under the laws of the
(i) Loan, loan-related collateral, and state or other political subdivision of
appraisal review standards, including the United States in which the CDC’s
standards for scope of selection (for re- principal office is located;
view of any such loan, loan-related col- (2) Agrees in the engagement letter
lateral or appraisal) and standards for with the CDC to provide the SBA with
work papers and supporting docu- access to and copies of any work pa-
mentation; pers, policies, and procedures relating
(ii) Loan quality classification stand- to the services performed;
ards consistent with the standardized
(3)(i) Is in compliance with the
classification systems used by the Fed-
eral Financial Institution Regulators; AICPA Code of Professional Conduct;
(iii) Specific control requirements for and
the CDC’s oversight of Lender Service (ii) Meets the independence require-
Providers; and ments and interpretations of the Secu-
(iv) Standards for training to imple- rities and Exchange Commission and
ment the loan review program; and its staff;
(4) Address other control require- (4) Has received a peer review or is
ments as may be established by SBA. enrolled in a peer review program that
(c) Annual Audited/Reviewed Financial meets AICPA guidelines; and
Statements. Each CDC with a 504 loan (5) Is otherwise acceptable to SBA.
portfolio balance of $30 million or more
[73 FR 75518, Dec. 11, 2008, as amended at 84
(as calculated by SBA) must have its
FR 66295, Dec. 4, 2019]
financial statements audited annually
by a certified public accountant that is § 120.827 Other services a CDC may
independent and experienced in audit- provide to small businesses.
ing financial institutions. The audit
must be performed in accordance with A CDC may provide a small business
generally accepted auditing standards with assistance unrelated to the 504
as adopted by the Auditing Standards loan program as long as the CDC does
Board of the American Institute of Cer- not make such assistance a condition
tified Public Accountants (AICPA). of the CDC accepting from that small
The auditor must be independent, as business an application for a 504 loan.
defined by the AICPA, of the CDC. An- An example of other services a CDC
nually, the auditor must issue an opin- may provide is assisting a small busi-
ion as to the fairness of the CDC’s fi- ness in applying for a 7(a) loan (as de-
nancial statements and their compli- scribed in § 120.2). A CDC is subject to
327
§ 120.828 13 CFR Ch. I (1–1–25 Edition)
part 103 of this chapter when providing (i) Audited financial statements
such assistance. must, at a minimum, include the fol-
[68 FR 57981, Oct. 7, 2003]
lowing:
(A) Audited balance sheet;
§ 120.828 Minimum level of 504 loan ac- (B) Audited statement of income (or
tivity and restrictions on portfolio receipts) and expenses;
concentrations. (C) Audited statement of source and
(a) A CDC is required to receive SBA application of funds;
approval of at least four 504 loan ap- (D) Such footnotes as are necessary
provals during two consecutive fiscal to an understanding of the financial
years. statements;
(b) A CDC’s 504 loan portfolio must be (E) Auditor’s letter to management
diversified by business sector. on internal control weaknesses; and
(F) The auditor’s report; and
[68 FR 57981, Oct. 7, 2003] (ii) Reviewed financial statements
§ 120.829 Job Opportunity average a must, at a minimum, include the fol-
CDC must maintain. lowing:
(A) Balance sheet;
(a) A CDC’s portfolio must maintain (B) Statement of income (or receipts)
a minimum average of one Job Oppor- and expenses;
tunity per an amount of 504 loan fund- (C) Statement of source and applica-
ing that will be specified by SBA from tion of funds;
time to time in a FEDERAL REGISTER (D) Such footnotes as are necessary
notice. Such Job Opportunity average to an understanding of the financial
remains in effect until changed by sub- statements;
sequent FEDERAL REGISTER publica- (E) The accountant’s review report;
tion. A CDC is permitted two years and
from its certification date to meet this (2) Report on compensation: CDCs are
average. required to provide detailed informa-
(b) A CDC must indicate in its annual tion on total compensation (including
report the Job Opportunities actually salary, bonuses and expenses) paid
or estimated to be provided by each within the CDC’s most recent tax year
Project. for current and former officers and di-
(c) If a CDC does not maintain the re- rectors, and for current and former em-
quired average, it may retain its cer- ployees and independent contractors
tification if it justifies to SBA’s satis- with total compensation of more than
faction its failure to do so in its annual $100,000 during that period.
report and shows how it intends to at- (3) Certification of members of the
tain the required average. Board of Directors. Written annual cer-
[61 FR 3235, Jan. 31, 1996, as amended at 68 tification by each Board member that
FR 57981, Oct. 7, 2003] he or she has read and understands the
requirements set forth in § 120.823.
§ 120.830 Reports a CDC must submit. (4) Report on investment in economic
A CDC must submit the following re- development. Written report on invest-
ports to SBA: ments in economic development in
(a) An Annual Report within one each State in which the CDC has an
hundred-eighty days after the end of outstanding 504 loan.
the CDC’s fiscal year (to include Fed- (b) For each new associate and staff,
eral tax returns for that year). A CDC a Statement of Personal History (for
that is certified by SBA within 6 use by non-bank lenders and CDCs) and
months of the CDC’s fiscal year-end is other information required by SBA;
not required to submit an Annual Re- (c) Reports of involvement in any
port for that year. The Annual Report legal proceeding;
must include, but is not limited to, the (d) Changes in organizational status;
following: (e) Changes in any condition that af-
(1) Audited or Reviewed Financial fects its eligibility to continue to par-
Statements as required in § 120.826(c) ticipate in the 504 program; and
and (d) for the CDC and any affiliates (f) Quarterly service reports on each
or subsidiaries of the CDC. loan in its portfolio which is 60 days or
328
Small Business Administration § 120.839
more past due (and interim reports trict Office in which the CDC operates
upon request by SBA). or proposes to operate. The processing
(g) Other reports as required by SBA. District Office must determine that the
[61 FR 3235, Jan. 31, 1996, as amended at 68
CDC is in compliance with SBA’s regu-
FR 57981, Oct. 7, 2003; 73 FR 75518, Dec. 11, lations, policies, and performance
2008; 79 FR 15650, Mar. 21, 2014] benchmarks, including pre-approval
and annual review by SBA of any man-
EXTENDING A CDC’S AREA OF agement or staff contracts, and the
OPERATIONS timely submission of all annual re-
ports. In making its recommendation
§ 120.835 Application to expand an on the application, the District Office
Area of Operations. may consider any information pre-
(a) General. A CDC that has been cer- sented to it regarding the requesting
tified to participate in the 504 program CDC, the existing CDC, or CDCs that
may apply to expand its Area of Oper- may be affected by the application, and
ations if it meets all requirements to the proposed Area of Operations.
be an Accredited Lender Program (a) The SBA District office will sub-
(ALP) CDC, as set forth in § 120.840(c), mit the application, recommendation,
and demonstrates that it can com- and supporting materials within 60
petently fulfill its 504 program respon- days of the receipt of a complete appli-
sibilities in the proposed area. cation from the CDC to the D/FA, who
(b) Local Economic Area Expansion. A will make the final decision. The D/FA
CDC seeking to expand its Area of Op- may consider any information sub-
erations into a Local Economic Area mitted or available related to the ap-
must apply in writing to the Lead SBA plicant and the application.
Office. (b) SBA will notify the CDC of its de-
(c) Multi-State expansion. A CDC seek- cision in writing, and if the application
ing to become a Multi-State CDC must is denied, the reasons for its decision.
apply to the SBA District Office that (c) If a CDC is approved to operate as
services the area within each State a Multi-State CDC, the CDC’s ALP,
where the CDC intends to locate its PCLP, or Priority CDC authority will
principal office for that State. A CDC carry over into every additional State
may apply to be a Multi-State CDC in which it is approved to operate as a
only if the State the CDC seeks to ex- Multi-State CDC.
pand into is contiguous to the State of [65 FR 42633, July 11, 2000, as amended at 68
the CDC’s incorporation and either: FR 57981, Oct. 7, 2003]
(1) The CDC establishes a Loan Com-
mittee in the additional State con- § 120.839 Case-by-case application to
sisting only of members who live or make a 504 loan outside of a CDC’s
work in that State and that satisfies Area of Operations.
the other requirements in A CDC may apply to make a 504 loan
§ 120.823(d)(4)(ii)(A) through (D); or for a Project outside its Area of Oper-
(2) For any Project located in the ad- ations by submitting a request to the
ditional State, the CDC’s Board or 504 loan processing center. The appli-
Loan Committee (if established in the cant CDC must demonstrate that it can
CDC’s State of incorporation) includes adequately fulfill its 504 program re-
at least two members who live or work sponsibilities for the 504 loan, includ-
in that State when voting on that ing proper servicing. In addition, the
Project. These two members may vote CDC must have satisfactory SBA per-
only on Projects located in the addi- formance, as determined by SBA in its
tional State. discretion. The CDC’s Risk Rating,
[68 FR 57981, Oct. 7, 2003, as amended at 79 FR among other factors, will be considered
15650, Mar. 21, 2014; 84 FR 66295, Dec. 4, 2019] in determining satisfactory SBA per-
formance. Other factors may include,
§ 120.837 SBA decision on application but are not limited to, review/examina-
for a new CDC or for an existing tion assessments, historical perform-
CDC to expand Area of Operations. ance measures, loan volume to the ex-
The processing District Office must tent that it impacts performance meas-
solicit the comments of any other Dis- ures, and other performance related
329
§ 120.840 13 CFR Ch. I (1–1–25 Edition)
measurements and information (such to meet the ALP program eligibility
as contribution toward SBA mission). requirements.
The 504 loan processing center may ap- (f) SBA approval or decline decision.
prove the application if: SBA will notify the CDC in writing of
(a) The applicant CDC has previously an approval or decline of either an ALP
assisted the business or its affiliate(s) application or of an ALP renewal. If
to obtain a 504 loan; or the SBA approves the CDC’s applica-
(b) The existing CDC or CDCs serving tion, the ALP CDC may exercise its
the area agree to permit the applicant ALP authority in its entire Area of Op-
CDC to make the 504 loan; or erations. If an application or renewal is
(c) There is no CDC within the Area declined, SBA will notify the CDC of
of Operations. the reasons for the decision.
[68 FR 57982, Oct. 7, 2003, as amended at 73 FR [68 FR 57982, Oct. 7, 2003, as amended at 85 FR
75518, Dec. 11, 2008; 82 FR 39504, Aug. 21, 2017; 7651, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020;
84 FR 66296, Dec. 4, 2019] 87 FR 38909, June 30, 2022]
ACCREDITED LENDERS PROGRAM (ALP) § 120.841 Qualifications for the ALP.
§ 120.840 Accredited Lenders Program An applicant for ALP status must
(ALP). show that it substantially meets the
(a) General. Under the ALP program, following criteria:
SBA designates qualified CDCs as ALP (a) CDC staff experience. The CDC’s
CDCs, gives them increased authority staff must have well-trained, qualified
to process, close, and service 504 loans, loan officers who are knowledgeable
and provides expedited processing of concerning SBA’s lending policies and
loan approval and servicing actions. procedures for the 504 program. The
(b) Application. A CDC must apply for CDC must have at least one loan officer
ALP status by submitting an applica- with three years of 504 loan processing
tion in accordance with SBA’s Stand- experience and at least one loan officer
ard Operating Procedure 50 10, avail- with three years of 504 servicing experi-
able at http://www.sba.gov. A final deci- ence or two years experience plus satis-
sion will be made by the appropriate factory completion of SBA-approved
SBA official in accordance with Dele- processing and servicing training. The
gations of Authority. same loan officer may meet these
(c) Eligibility. In order for a CDC to be qualifications. In addition, the CDC’s
eligible to receive ALP status, its ap- staff must have demonstrated satisfac-
plication must show that it meets the torily to SBA the ability to process
criteria set forth in § 120.841. and service 504 loans.
(d) Additional application requirements. (b) Number of 504 loans approved and
The CDC’s application must include size of portfolio. SBA must have ap-
the following: proved at least 20 504 loan applications
(1) Certified copy of the CDC’s Board by the CDC in the most recent three
of Directors’ resolution authorizing the years, and the CDC must have a port-
application for ALP status. folio of at least 30 active 504 loans. (An
(2) Summary of the experience of ‘‘active’’ 504 loan is a loan that was ap-
each of the CDC’s loan processing, clos- proved and closed by the CDC and has
ing, and servicing staff members with a status of either current, delinquent,
significant authority. or in liquidation.)
(3) Name, address, and summary of (c) CDC reviews. CDC reviews con-
experience of Designated Attorney. ducted by SBA must be current (within
(4) Documentation of any SBA re- the last 24 months, if applicable) for
quired insurance. applicants for ALP status. The CDC
(5) Any other documentation re- must have received a review assess-
quired by SBA. ment of either ‘‘Acceptable’’ or ‘‘Ac-
(e) Term of ALP designation. SBA gen- ceptable With Corrective Actions Re-
erally will designate a CDC as an ALP quired.’’ In addition, the CDC must
CDC for a two-year period. SBA may have satisfactory SBA performance, as
renew the designation for additional determined by SBA in its discretion.
two-year periods if the CDC continues The CDC’s Risk Rating, among other
330
Small Business Administration § 120.842
factors, will be considered in deter- (1) Means a 504 loan in an amount
mining satisfactory SBA performance. that is not more than $500,000; and
Other factors may include, but are not (2) Does not include a loan made to a
limited to, review/examination assess- borrower that is in an industry that
ments, historical performance meas- has a high rate of default, as annually
ures, loan volume to the extent that it determined by SBA. SBA will publish
impacts performance measures, and an annual list of the industries with a
other performance related measure- high rate of default in a notice in the
ments and information (such as con- FEDERAL REGISTER.
tribution toward SBA mission); (b) Requirements for the underwriting,
(d) Record of compliance with 504 pro- approving, closing, and servicing of ALP
gram requirements. The CDC must have Express Loans—(1) General. When under-
a record of conforming to SBA’s poli- writing, approving, closing, and serv-
cies and procedures and of satisfac- icing 504 loans under this section, the
torily underwriting, closing and serv- ALP CDC must comply with Loan Pro-
icing 504 loans. SBA will consider all gram Requirements and conduct such
relevant material information, which activities in accordance with prudent
will include but is not limited to and commercially reasonable lending
whether the CDC meets all SBA’s CDC standards.
portfolio benchmarks, when deter-
(2) Documentation of decision making.
mining the CDC’s record of compliance,
For each ALP Express Loan, the ALP
including:
CDC must document in its files the
(1) Submission of satisfactory 504
loan analyses and applications, and all basis for its decisions with respect to
required, and properly completed, loan underwriting, approving, closing, and
documents. servicing the loan.
(2) Careful and thorough analysis and (3) Processing requirements—(i) Eligi-
screening of all 504 loan applications bility. An ALP Express Loan is subject
for conformance with SBA credit and to SBA’s final approval as to eligibility
eligibility standards; and, for each loan, an ALP CDC must
(3) Proper completion of required 504 submit the documents required by SBA
loan closing documents and compliance to complete the eligibility review. ALP
with SBA 504 loan closing policies and CDCs must submit to SBA for review
procedures. and approval any servicing action that
(4) Compliance with SBA loan serv- the ALP CDC proposes prior to closing
icing policies and procedures. that may affect the eligibility of the
(5) Compliance with the certification borrower or the ALP Express Loan.
and operational requirements as set (ii) Credit decisions. The ALP CDC is
forth in §§ 120.820 through 120.830. responsible for properly determining
(6) Submission of timely, complete the applicant’s creditworthiness and
and acceptable annual reports. establishing the terms and conditions
(7) Compliance with CDC ethical re- under which the ALP Express Loan
quirements (see § 120.851). will be made in accordance with SBA’s
(e) Priority CDC. The CDC must be a Loan Program Requirements and pru-
Priority CDC with a Designated Attor- dent lending standards. The ALP CDC’s
ney and SBA required insurance. determination regarding creditworthi-
(f) Record of Cooperation. The CDC ness will not be subject to SBA review.
must have a record of effective commu- (4) Submission of loan documents. An
nication and a cooperative relationship ALP CDC must notify SBA of its credit
with all SBA offices including district decision on an ALP Express Loan by
offices and SBA’s loan processing and submitting to SBA all required docu-
servicing centers. mentation. SBA will review these docu-
[68 FR 57982, Oct. 7, 2003, as amended at 72 FR ments to determine whether the appli-
18364, Apr. 12, 2007; 73 FR 75519, Dec. 11, 2008; cant and the ALP Express Loan are eli-
82 FR 39504, Aug. 21, 2017] gible and whether SBA funds are avail-
able for the ALP Express Loan. If ap-
§ 120.842 ALP Express Loans. proved, SBA will notify the ALP CDC
(a) Definition. For the purposes of of the loan number assigned to the
this section, an ALP Express Loan: loan.
331
§ 120.845 13 CFR Ch. I (1–1–25 Edition)
(5) Loan and Debenture closing. After tion to SBA’s PCLP Loan Processing
receiving notification of the loan num- Center. The PCLP Loan Processing
ber from SBA, the ALP CDC is respon- Center will review these materials and
sible for properly undertaking all ac- forward them to the appropriate Office
tions necessary to close the ALP Ex- of Capital Access official in accordance
press Loan and Debenture in accord- with Delegations of Authority for final
ance with the expedited loan closing determination.
procedures applicable to a Priority (c) Eligibility. In order for a CDC to be
CDC and with § 120.960, and in compli- eligible to receive PCLP status, its ap-
ance with all applicable Loan Program
plication must show that it meets the
Requirements.
following criteria:
(6) Servicing. The ALP CDC is respon-
sible for servicing its ALP Express (1) The CDC must be an ALP CDC in
Loans in accordance with § 120.970. SBA substantial compliance with Loan Pro-
may in certain circumstances, in its gram Requirements or meet the cri-
discretion, elect to handle such duties teria to be an ALP CDC set forth in
with respect to a particular ALP Ex- § 120.841(a) through (f).
press Loan or Loans. Additional serv- (2) The CDC can adequately comply
icing requirements are set forth in sub- with SBA liquidation and litigation re-
part E of this part. The CDC must quirements.
promptly notify SBA when it approves (d) Additional application requirements.
any servicing action delegated to the The application must include the fol-
CDC under Loan Program Require- lowing:
ments. (1) Certified copy of the CDC’s Board
(c) Prohibition against making a 504 of Directors’ resolution authorizing the
loan previously submitted to the SBA. An application for PCLP status.
ALP CDC may not process a 504 loan (2) Summary of the experience of
application under paragraph (b)(3) of
each of the CDC’s loan processing, clos-
this section from an applicant whose
ing, servicing and liquidation staff
application was previously submitted
to SBA and was withdrawn by the CDC members with significant authority.
or was declined or otherwise not ap- (3) Name, address and summary of ex-
proved by SBA. perience of Designated Attorney.
(d) Applicability. The authority to (4) Documentation of any SBA re-
make ALP Express Loans is available quired insurance.
for applications submitted to the ALP (5) Any other documentation re-
CDC on or after June 27, 2022 and ap- quired by SBA.
proved through September 30, 2023. (e) Term of designation. If approved,
[87 FR 37982, June 27, 2022, as amended at 88 SBA generally will confer PCLP status
FR 21900, Apr. 12, 2023] for a period of two years. However, if
EFFECTIVE DATE NOTE: Amendments to
SBA deems it appropriate, it may con-
§ 120.842 were published at 89 FR 102701, Dec. fer PCLP status for a period of less
18, 2024, effective Jan. 17, 2025. than two years.
(f) Area of Operations for PCLP CDCs.
PREMIER CERTIFIED LENDERS PROGRAM If the SBA approves the CDC’s applica-
§ 120.845 Premier Certified Lenders tion, the PCLP CDC may exercise its
Program (PCLP). PCLP authority in its entire Area of
Operations.
(a) General. Under the PCLP, SBA
(g) SBA approval or decline decision.
designates qualified CDCs as PCLP
CDCs and delegates to them increased SBA will notify the CDC in writing of
authority to process, close, service, and an approval or decline of a PCLP appli-
liquidate 504 loans. SBA also may give cation. If an application is declined,
PCLP CDCs increased authority to liti- SBA will notify the CDC of the reasons
gate 504 loans. for the decision.
(b) Application. A CDC must apply for [68 FR 57982, Oct. 7, 2003, as amended at 72 FR
PCLP status to the Lead SBA Office. 18364, Apr. 12, 2007; 73 FR 75519, Dec. 11, 2008;
The Lead SBA Office will send its writ- 87 FR 38909, June 30, 2022]
ten recommendation and the applica-
332
Small Business Administration § 120.847
§ 120.846 Requirements for maintain- Office to ensure that the LLRF is prop-
ing and renewing PCLP status. erly established, that all necessary
(a) To maintain its status as a PCLP documentation is executed and deliv-
CDC, a CDC must continue to: ered by all parties in a timely fashion,
(1) Meet the PCLP eligibility require- and that all required deposits are
ments in § 120.845. made.
(2) Timely conform with all require- (b) PCLP CDC Exposure and LLRF de-
ments and deadlines set forth in SBA’s posit requirements. A PCLP CDC’s ‘‘Ex-
regulations and policy and procedural posure’’ is defined as its reimburse-
guidance concerning properly estab- ment obligation to SBA with respect to
lishing, funding and reporting a PCLP default in the payment of any PCLP
Loan Loss Reserve Fund (LLRF). Debenture. The amount of a PCLP
(3) Substantially comply with all CDC’s Exposure is 10 percent of any
Loan Program Requirements. loss (including attorney’s fees; litiga-
(4) Remain an active CDC. tion costs; and care of collateral, ap-
(5) In accordance with statutory re- praisal and other liquidation costs and
quirements set forth in section 508(i) of expenses) sustained by SBA as a result
Title V, 15 U.S.C. 697e(i), establish a of a default in the payment of principal
goal of processing at least 50 percent of or interest on a PCLP Debenture. For
its 504 loans using PCLP procedures. each PCLP Debenture a PCLP CDC
(b) SBA will notify the PCLP CDC in issues, it must establish and maintain
writing of a renewal or non-renewal of an LLRF equal to one percent of the
PCLP status. If PCLP status is not re- original principal amount of the PCLP
newed, SBA will notify the CDC of the Debenture. The amount the PCLP CDC
reasons for the decision. must maintain in the LLRF for each
[68 FR 57983, Oct. 7, 2003, as amended at 72 FR
PCLP Debenture remains the same
18364, Apr. 12, 2007] even as the principal balance of the
PCLP Debenture is paid down over
§ 120.847 Requirements for the Loan time except that, after the first 10
Loss Reserve Fund (LLRF). years of the term of the Debenture, the
(a) General. PCLP CDCs must estab- amount maintained in the LLRF may
lish and maintain a LLRF (or multiple be based on one percent of the current
accounts which together constitute one principal amount of the PCLP Deben-
LLRF) which complies with paragraphs ture (the declining balance method-
(b) through (g) of this section. A PCLP ology), as determined by SBA. All
CDC must use the LLRF or other funds withdrawals must be made in accord-
to reimburse the SBA for 10 percent of ance with the requirements of para-
any loss sustained by SBA as a result graph (g) of this section. A CDC may
of a default in the payment of principal not use the declining balance method-
or interest on a Debenture it issued ology:
under the PCLP (‘‘PCLP Debenture’’). (1) With respect to any Debenture
A CDC that is participating in the that has been purchased. Within 30
PCLP as of January 1, 2004, and a CDC days after purchase, the CDC must re-
that has participated in the PCLP in store the balance maintained in the
the past but which does not have PCLP LLRF for the Debenture that was pur-
status as of that date, must establish a chased to one percent of the original
LLRF within 30 days of that date to principal amount of that Debenture; or
cover potential losses for all 504 loans (2) With respect to any other Deben-
made in connection with PCLP Deben- ture if SBA notifies the CDC in writing
tures that remain outstanding as of that it has failed to satisfy the require-
that date. A CDC that receives PCLP ments in paragraph (e), (f), (h), (i), or
status after that date must establish (j) of this section. In such case, the
and maintain a LLRF prior to closing CDC will not be required to restore the
any 504 loans processed under its PCLP balance maintained in the LLRF to one
status. The LLRF is the accumulation percent of the original principal
of deposits that a PCLP CDC must es- amount of the Debenture but must
tablish and maintain for each PCLP base the amount maintained in the
Debenture that it issues. PCLP CDCs LLRF on one percent of the principal
must coordinate with their Lead SBA amount of the Debenture as of the date
333
§ 120.847 13 CFR Ch. I (1–1–25 Edition)
of notification. The CDC may not begin drawals from the account without SBA
to use the declining balance method- consent. When establishing the LLRF,
ology again until SBA notifies the CDC a PCLP CDC must coordinate with its
in writing that SBA has determined, in Lead SBA Office to execute and deliver
its discretion, that the CDC has cor- the required documentation. The PCLP
rected the noncompliance and has dem- CDC must provide to the Lead SBA Of-
onstrated its ability to comply with fice a fully executed original of the se-
these requirements. curity and control agreements. All doc-
(c) Establishing a LLRF. The LLRF uments must be satisfactory to SBA in
must be a deposit account (or ac- both form and substance.
counts) with a federally insured deposi- (e) Schedule for contributions to a
tory institution selected by the PCLP LLRF. The PCLP CDC must contribute
CDC. A ‘‘deposit account’’ is a demand, to the LLRF the required deposits for
time, savings, or passbook account, in- each PCLP Debenture in accordance
cluding a certificate of deposit (CD) with the following schedule:
which is either uncertificated or, if cer- (1) At least 50 percent of the required
tificated, non-transferable. A ‘‘deposit deposits to the LLRF on or about the
account’’ is not an investment account date that it issues the PCLP Deben-
and must not contain securities or ture.
other investment properties. A deposit (2) At least an additional 25 percent
account may contain only cash and of the required deposits to the LLRF
CDs credited to that account. A PCLP no later than one year after it issues
CDC may pool its deposits for multiple the PCLP Debenture.
PCLP Debentures in a single account (3) Any remainder of the required de-
in one institution. The LLRF must be posits to the LLRF no later than two
segregated from the PCLP CDC’s other years after it issues the PCLP Deben-
operating accounts. The PCLP CDC is ture.
responsible for all fees, costs and ex- (f) LLRF reporting requirements. Each
penses incurred in connection with es- PCLP CDC must periodically report to
tablishing, managing and maintaining SBA the amount in the LLRF in a form
the LLRF, including fees associated that will readily facilitate reconcili-
with transferring funds or early with- ation of the amount maintained in the
drawal of CDs, and related income tax LLRF with the amount required to
expenses. meet a PCLP CDC’s Exposure for its
(d) Creating and perfecting a security entire portfolio of PCLP Debentures.
interest in a LLRF. A PCLP CDC must (g) Withdrawal of excess funds. Inter-
give SBA a first priority, perfected se- est and other funds in the LLRF that
curity interest in the LLRF to secure exceed the required minimums as set
the PCLP CDC’s obligation to reim- forth in paragraph (b) of this section,
burse SBA for the PCLP CDC’s Expo- within the time frames set forth in
sure under all of its outstanding PCLP paragraph (e) of this section, accrue to
Debentures. (If a PCLP CDC’s LLRF is the benefit of the PCLP CDC. PCLP
comprised of multiple deposit ac- CDCs are authorized to withdraw ex-
counts, it must give SBA this security cess funds, including interest, from the
interest with respect to each such ac- LLRF if such funds exceed the required
count.) The PCLP CDC must grant to minimums set forth in paragraph (b) of
SBA the security interest in the LLRF this section. The PCLP CDC must for-
pursuant to a security agreement be- ward requests for withdrawals to the
tween the PCLP CDC and SBA, and a Lead SBA Office, which will verify the
control agreement between the PCLP existence and amount of excess funds
CDC, SBA, and the applicable deposi- and notify the financial institution to
tory institution. The control agree- transfer the excess funds to the PCLP
ment must include provisions requiring CDC.
the depository institution to follow (h) Determining SBA loss. When a
SBA instructions regarding withdrawal PCLP CDC has concluded the liquida-
from the account without a require- tion of a defaulted 504 loan made with
ment for obtaining further consent the proceeds of a PCLP Debenture and
from the PCLP CDC, and must restrict has submitted a liquidation wrap-up re-
the PCLP CDC’s ability to make with- port to SBA, or when SBA otherwise
334
Small Business Administration § 120.848
determines that the PCLP CDC has ex- LLRF to ensure that it contains suffi-
hausted all reasonable collection ef- cient funds to cover its Exposure for its
forts with respect to that 504 loan, SBA entire portfolio of PCLP Debentures.
will determine the amount of the loss If, at any time, the LLRF does not con-
to SBA. SBA will notify the PCLP CDC tain sufficient funds, the PCLP CDC
of the amount of its reimbursement ob- must, within 30 days of the earlier of
ligation to SBA (if any) and will ex- the date it becomes aware of this defi-
plain how SBA calculated the loss. ciency or the date it receives notifica-
(1) If the PCLP CDC agrees with tion from SBA of this deficiency, make
SBA’s calculations of the loss, it must additional contributions to the LLRF
reimburse SBA for ten percent of the to make up this difference.
amount of that loss no later than 30
days after SBA’s notification to the [68 FR 57983, Oct. 7, 2003, as amended at 84 FR
66296, Dec. 4, 2019]
PCLP CDC of the CDC’s reimbursement
obligation. § 120.848 Requirements for 504 loan
(2) If the PCLP CDC disputes SBA’s processing, closing, servicing, liqui-
calculations, it must reimburse SBA dating, and litigating by PCLP
for ten percent of any loss amount that CDCs.
is not in dispute no later than 30 days
(a) General. In processing closing,
after SBA’s notification to the PCLP
servicing, liquidating and litigating 504
CDC of the CDC’s reimbursement obli-
loans under the PCLP (‘‘PCLP Loans’’),
gation. No later than 30 days after
SBA’s notification, the PCLP CDC may the PCLP CDC must comply with Loan
submit to the D/FA or his or her dele- Program Requirements and conduct
gate a written appeal of any disagree- such activities in accordance with pru-
ment regarding the calculation of dent and commercially reasonable
SBA’s loss. The PCLP CDC must in- lending standards.
clude with that appeal an explanation (b) Documentation of decision making.
of its reasons for the disagreement. For each PCLP Loan, the PCLP CDC
Upon the D/FA’s final decision as to must document in its files the basis for
the disputed amount of the loss, the its decisions with respect to loan proc-
PCLP CDC must promptly reimburse essing, closing, servicing, liquidating,
SBA for ten percent of that amount. and litigating.
(i) Reimbursing SBA for loss. A PCLP (c) Processing requirements. SBA ex-
CDC may use funds in the LLRF or pects PCLP CDCs to handle most 504
other funds to reimburse SBA for the loan processing situations, although
PCLP CDC’s Exposure on a defaulted SBA may require that the PCLP CDC
PCLP Debenture. If a PCLP CDC does process 504 loans involving complex or
not satisfy the entire reimbursement problematic eligibility issues through
obligation within 30 days after SBA’s the SBA using standard 504 loan proc-
notification to the PCLP CDC’s of its essing procedures. The PCLP CDC is re-
reimbursement obligation, SBA may sponsible for properly determining bor-
cause funds in the LLRF to be trans- rower creditworthiness and estab-
ferred to SBA in order to cover the lishing the terms and conditions under
PCLP CDC’s Exposure, unless the which the PCLP Loan will be made.
PCLP CDC has filed an appeal under The PCLP CDC also is responsible for
paragraph (h)(2) of this section. If the properly undertaking such other proc-
PCLP CDC has filed such an appeal, essing actions as SBA may delegate to
SBA may cause such a transfer of funds the PCLP CDC.
to SBA 30 days after the D/FA’s or his (d) Submission of loan documents. A
or her delegate’s decision. If the LLRF PCLP CDC must notify SBA of its ap-
does not contain sufficient funds to re- proval of a 504 loan by submitting to
imburse SBA for any unpaid Exposure SBA’s PCLP Loan Processing Center
with respect to any PCLP Debenture, all documentation required by SBA, in-
the PCLP CDC must pay SBA the dif- cluding SBA’s PCLP eligibility check-
ference within 30 days after demand for list, signed by an authorized represent-
payment by SBA. ative of the PCLP CDC. The PCLP
(j) Insufficient funding of LLRF. A Loan Processing Center will review
PCLP CDC must diligently monitor the these documents to determine whether
335
§ 120.851 13 CFR Ch. I (1–1–25 Edition)
the PCLP CDC has identified any prob- § 120.920, as long as such activity does
lems with the PCLP Loan approval, not violate § 120.140); and
and whether SBA funds are available (b) A CDC’s Associate may not be an
for the PCLP Loan. If appropriate, the officer, director, or manager of more
PCLP Processing Center will notify the than one CDC.
PCLP CDC of the loan number assigned
to the loan. [68 FR 57984, Oct. 7, 2003]
(e) Loan and Debenture closing. After
receiving notification from SBA PCLP § 120.852 [Reserved]
Loan Processing Center, the PCLP CDC
§ 120.853 Inspector General audits of
is responsible for properly undertaking
CDCs.
all actions necessary to close the PCLP
Loan and Debenture in accordance The SBA Office of Inspector General
with the expedited loan closing proce- may also conduct, supervise or coordi-
dures applicable to a Priority CDC and nate audits pursuant to the Inspector
with § 120.960. General Act. The CDC must cooperate
(f) Servicing, liquidation and litigation and make its staff, records, and facili-
responsibilities. The PCLP CDC gen- ties available.
erally must service, liquidate and liti-
gate its entire portfolio of PCLP [68 FR 57985, Oct. 7, 2003, as amended at 73 FR
Loans, although SBA may in certain 75519, Dec. 11, 2008]
circumstances elect to handle such du-
§ 120.857 Voluntary transfer and sur-
ties with respect to a particular PCLP render of CDC certification.
Loan or Loans. Additional servicing
and liquidation requirements are set A CDC may not transfer its certifi-
forth in subpart E of this part. cation or withdraw from the 504 pro-
(g) Making a 504 loan previously con- gram without SBA’s consent. The CDC
sidered by another CDC. A PCLP CDC must provide a plan to SBA to transfer
also may utilize its PCLP status to its portfolio. The portfolio may only be
process a 504 loan application from an transferred with SBA’s written con-
applicant whose application was de- sent. If a CDC desires to withdraw from
clined or rejected by another CDC oper- the 504 program, it must forfeit its
ating in that same Area of Operations, portfolio to SBA. SBA may conduct an
if the applicant is located within that audit of the transferring or with-
area and as long as SBA has not pre- drawing CDC.
viously declined that applicant’s 504
loan application. This may include the [61 FR 3235, Jan. 31, 1996. Redesignated at 68
processing of a 504 loan application FR 57987, Oct. 7, 2003]
from an applicant that has withdrawn
its application from another CDC. PROJECT ECONOMIC DEVELOPMENT
GOALS
[68 FR 57984, Oct. 7, 2003, as amended at 72 FR
18364, Apr. 12, 2007] § 120.860 Required objectives.
OTHER CDC REQUIREMENTS A Project must achieve at least one
of the economic development objec-
§ 120.851 CDC ethical requirements. tives set forth in § 120.861 or § 120.862.
CDCs and their Associates must act
ethically and exhibit good character. § 120.861 Job creation or retention.
They must meet all of the ethical re- A Project must create or retain one
quirements of § 120.140. In addition, Job Opportunity per an amount of 504
they are subject to the following: loan funding that will be specified by
(a) Any benefit flowing to a CDC’s SBA from time to time in a FEDERAL
Associate or his or her employer from REGISTER notice. Such Job Opportunity
activities as an Associate must be
average remains in effect until changed
merely incidental (this requirement
by subsequent FEDERAL REGISTER pub-
does not prevent an Associate or an As-
lication.
sociate’s employer from providing in-
terim financing as described in § 120.890 [68 FR 57987, Oct. 7, 2003]
or Third Party Loans as described in
336
Small Business Administration § 120.870
§ 120.862 Other economic development (10) Reduction of rates of unemploy-
objectives. ment in labor surplus areas, as such
A Project that achieves any of the areas are determined by the Secretary
following community development or of Labor;
public policy goals is eligible if the (11) Reduction of energy consumption
CDC’s overall portfolio of 504 loans, in- by at least 10 percent;
cluding the subject loan, meets or ex- (12) Increased use of sustainable de-
ceeds the CDC’s required Job Oppor- sign, including designs that reduce the
tunity average. Loan applications must use of greenhouse gas emitting fossil
indicate how the Project will meet the fuels, or low-impact design to produce
specified economic development objec- buildings that reduce the use of non-re-
tive. newable resources and minimize envi-
(a) Community Development goals: ronmental impact; or
(1) Improving, diversifying or stabi- (13) Plant, equipment and process up-
lizing the economy of the locality; grades of renewable energy sources
(2) Stimulating other business devel- such as the small-scale production of
opment; energy for individual buildings’ or
(3) Bringing new income into the communities’ consumption, commonly
community; known as micropower, or renewable
(4) Assisting manufacturing firms fuels producers including biodiesel and
(North American Industry Classifica- ethanol producers.
tion System (NAICS), Sectors 31 ‘‘ 33);
or [61 FR 3235, Jan. 31, 1996, as amended at 64
FR 2118, Jan. 13, 1999; 68 FR 57987, Oct. 7, 2003;
(5) Assisting businesses in Labor Sur- 76 FR 63547, Oct. 12, 2011; 87 FR 38909, June 30,
plus Areas as defined by the Depart- 2022]
ment of Labor.
(b) Public Policy goals: LEASING POLICIES SPECIFIC TO 504
(1) Revitalizing a business district of LOANS
a community with a written revitaliza-
tion or redevelopment plan; § 120.870 Leasing Project Property.
(2) Expansion of exports; (a) A Borrower may use the proceeds
(3) Expansion of small businesses of a 504 loan to acquire, construct, or
owned and controlled by women as de- modify buildings and improvements,
fined in section 29(a)(3) of the Act, 15 and/or to purchase and install machin-
U.S.C. 656(a)(3); ery and equipment located on land
(4) Expansion of small businesses leased to the Borrower by an unrelated
owned and controlled by veterans (es-
lessor if:
pecially service-disabled veterans) as
(1) The remaining term of the lease,
defined in section 3(q) of the Act, 15
U.S.C. 632(q); including options to renew, exercisable
only by the lessee, equals or exceeds
(5) Expansion of minority enterprise
development (see § 124.103(b) of this the term of the Debenture;
chapter for minority groups who qual- (2) The Borrower assigns its interest
ify for this description); in the lease to the CDC with right of
(6) Aiding rural development; reassignment to SBA; and
(7) Increasing productivity and com- (3) The 504 loan is secured by a re-
petitiveness (retooling, robotics, mod- corded lien against the leasehold estate
ernization, competition with imports); and other collateral as necessary.
(8) Modernizing or upgrading facili- (b) If the Project is for new construc-
ties to meet health, safety, and envi- tion, the Borrower may lease long term
ronmental requirements; up to 20 percent of the Rentable Prop-
(9) Assisting businesses in or moving erty in the Project to one or more ten-
to areas affected by Federal budget re- ants if the Borrower immediately occu-
ductions, including base closings, ei- pies at least 60 percent of the Rentable
ther because of the loss of Federal con- Property, plans to occupy within three
tracts or the reduction in revenues in years some of the remaining space not
the area due to a decreased Federal immediately occupied and not leased
presence; long term, and plans to occupy all of
337
§ 120.871 13 CFR Ch. I (1–1–25 Edition)
the remaining space not leased long (b) Projects in foreign countries
term within ten years. (loans financing real or personal prop-
[61 FR 3235, Jan. 31, 1996, as amended at 64
erty located outside the United States
FR 2118, Jan. 13, 1999; 68 FR 57987, Oct. 7, or its possessions).
2003]
§ 120.882 Eligible Project costs for 504
§ 120.871 Leasing part of Project Prop- loans.
erty to another business. Eligible Project costs which may be
(a) The costs of interior finishing of paid with the proceeds of 504 loans are:
space to be leased out to another busi- (a) Costs directly attributable to the
ness are not eligible Project costs. Project including expenditures in-
(b) Third-party loan proceeds used to curred by the Borrower (with its own
renovate the leased space do not count funds or from a loan) to acquire land
towards the 504 first mortgage require- used in the Project, or for any other
ment or the Borrower’s contribution. expense directly attributable to the
Project, prior to applying to SBA for
LOAN-MAKING POLICIES SPECIFIC TO 504 the 504 loan;
LOANS (b) In Projects involving construc-
tion, a contingency reserve for cost
§ 120.880 Basic eligibility require- overruns not to exceed 10 percent of
ments.
construction cost;
In addition to the eligibility require- (c) Professional fees directly attrib-
ments specified in subpart A, to be an utable and essential to the Project,
eligible Borrower for a 504 loan, a small such as title insurance, opinion of title,
business must: architectural and engineering costs,
(a) Use the Project Property (except appraisals, environmental studies, and
that an Eligible Passive Company may legal fees related to zoning, permits, or
lease to an Operating Company); and platting; and
(b) Together with its Affiliates, meet (d) Repayment of interim financing
one of the size standards set forth in including points, fees and interest.
§ 121.301(b) of this chapter. (e) If the project involves expansion
[61 FR 3235, Jan. 31, 1996, as amended at 68 of a small business concern, any
FR 57987, Oct. 7, 2003] amount of existing indebtedness that
does not exceed 100 percent of the
§ 120.881 Ineligible Projects for 504 project cost of the expansion may be
loans. refinanced and added to the expansion
In addition to the ineligible busi- cost if:
nesses and uses of proceeds specified in (1) Substantially all (75% or more) of
subpart A of this part, the following the proceeds of the indebtedness were
Projects are ineligible for 504 financ- used to acquire land, including a build-
ing: ing situated thereon, to construct a
(a) Relocation of any of the oper- building thereon, or to purchase equip-
ations of a small business which will ment. The assets acquired must be eli-
cause a net reduction of one-third or gible for financing under the 504 loan
more in the workforce of a relocating program. If the acquisition, construc-
small business or a substantial in- tion, or purchase of the asset was origi-
crease in unemployment in any area of nally financed through a commercial
the country, unless the CDC can justify loan that would have satisfied the
the loan because: ‘‘substantially all’’ requirement and
(1) The relocation is for key eco- that was subsequently refinanced one
nomic reasons and crucial to the con- or more times, with the current com-
tinued existence, economic wellbeing, mercial loan being the most recent re-
and/or competitiveness of the appli- financing, the current commercial loan
cant; and will be deemed to satisfy this para-
(2) The economic development bene- graph (e)(1).
fits to the applicant and the receiving (2) The existing indebtedness is
community outweigh the negative im- collateralized by fixed assets. The 504
pact on the community from which the eligible fixed assets collateralizing any
applicant is moving; and debt to be refinanced or relating to the
338
Small Business Administration § 120.882
portion of debt being refinanced in the tions, or less restrictive loan cov-
case of a partial refinance must also enants.
collateralize the 504 Loan unless SBA (8) The authority to approve the refi-
approves a waiver due to extraordinary nancing of same institution debt must
circumstances. PCLP CDCs may not be approved by SBA and is not dele-
use their delegated authority to ap- gated to the PCLP CDCs. For the pur-
prove a loan requiring this waiver; poses of this paragraph, ‘‘same institu-
(3) The existing indebtedness was in- tion debt’’ means any debt of the CDC
curred for the benefit of the small busi- or the Third Party Lender financing
ness concern for which any new Project the new project, or of affiliates of ei-
costs are incurred. Existing 7(a) and 504 ther.
loans may be refinanced under this sec- (f) For the purposes of paragraph (e),
tion in accordance with SBA policies or the phrase ‘‘project involves expansion
procedures; of a small business concern’’ includes
(4) The financing will be used only for any project that involves the acquisi-
refinancing existing indebtedness or tion, construction or improvement of
costs relating to the project financed; land, building or equipment for use by
(5) The financing will provide a sub- the small business concern.
stantial benefit to the borrower when (g) SBA may approve a Refinancing
prepayment penalties, financing fees, Project of a qualified debt subject to
and other financing costs are ac- the following conditions and require-
counted for. For purposes of this para- ments:
graph (e)(5), substantial benefit means (1) The Refinancing Project does not
that the portion of the new installment involve the expansion of a small busi-
amount attributable to the debt being ness;
refinanced must be less than the exist- (2) The applicant for the refinancing
ing installment amount(s). Prepay- available under this paragraph (g) has
ment penalties, financing fees, and been in operation for all of the 2 year
other financing costs must also be period ending on the date of applica-
added to the amount being refinanced tion;
in calculating the percentage reduction (3) A loan that is subject to a guar-
in the new installment payment. Ex- antee by a Federal agency or depart-
ceptions to the reduction requirement ment may be refinanced under the fol-
may be approved by the Director, Of- lowing conditions and requirements:
fice of Financial Assistance (D/FA) or (i) An existing 504 loan may be refi-
designee for good cause. PCLP CDCs nanced if both the Third Party Loan
may not use their delegated authority and the 504 Loan are being refinanced
to approve a loan requiring this excep- or the Third Party Loan has been paid
tion. in full. If the 504 Loan being refinanced
(6) The borrower has been current on received approval through another
all payments due on the existing debt CDC, the CDC working on the current
for not less than 1 year preceding the refinancing must provide advance no-
date of refinancing. For purposes of tice to the other CDC in writing (by
this section, ‘‘date of refinancing’’ re- email or letter).
fers to the date the 504 loan is approved (ii) An existing 7(a) loan may be refi-
by SBA. Any unremedied delinquency nanced if the CDC notifies the 7(a)
after approval must be reported to SBA lender in advance in writing (by email
as an adverse change; or letter).
(7) The financing under section 504 (iii) The refinancing will provide a
will provide better terms or rate of in- substantial benefit to the Borrower.
terest than the existing indebtedness For purposes of this paragraph
on the date of refinancing. For pur- (g)(3)(iii), substantial benefit means that
poses of this paragraph, ‘‘better terms the portion of the new installment
or rate of interest’’ may include longer amount attributable to the debt being
maturity (but always commensurate refinanced must be less than the exist-
with the assets’ useful life), a lower in- ing installment amount(s). Prepay-
terest rate committed on the Third ment penalties (including subsidy
Party Lender Loan or projected on the recoupment fees), financing fees, and
504 loan, improved collateral condi- other financing costs must be added to
339
§ 120.882 13 CFR Ch. I (1–1–25 Edition)
the amount being refinanced in calcu- eral for the Refinancing Project, pro-
lating the percentage reduction in the vided that there is an independent ap-
new installment payment, but the por- praisal of the fair market value of the
tion of the new installment amount at- asset;
tributable to Eligible Business Ex- (6)(i) The portion of the Refinancing
penses (as described in paragraph Project provided by the 504 loan and
(g)(16) of this section) is not included in the Third Party Loan may be no more
this calculation. Exceptions to the re- than 90% of the fair market value of
duction requirement may be approved the fixed assets that will serve as col-
by the D/FA or designee for good cause. lateral.
PCLP CDCs may not use their dele- (ii) The Borrower’s application may
gated authority to approve a loan re- include a request to finance Eligible
quiring the exception in this paragraph Business Expenses as part of the Refi-
(g)(3)(iii). nancing Project if the amount of cash
(4) In addition to the annual guar- funds that will be provided for the Refi-
antee fee assessed under § 120.971(d)(2), nancing Project exceeds the amount to
Borrower must pay SBA a supple- be paid to the lender of the qualified
mental annual guarantee fee to cover debt. The Borrower’s application must
the additional cost attributable to the include a specific description of the El-
refinancing in an amount established igible Business Expenses for which the
by SBA each fiscal year. financing is requested and an
(5) The funding for the Refinancing itemization of the amount of each ex-
Project must come from three sources pense. Any debt for Operating Expenses
based on the current fair market value of the business that was incurred with
of the fixed assets serving as collateral a credit card or a business line of credit
for the Refinancing Project, including may be included if the credit card or
a Third Party Loan that is at least as business line of credit is issued in the
much as the 504 loan, not less than 10% name of the small business and the Ap-
from the Borrower (excluding adminis- plicant certifies that the debt being re-
trative costs), and not more than 40% financed was incurred exclusively for
from the 504 loan. If the Refinancing business related purposes. Loan pro-
Project involves a limited or single ceeds must not be used to refinance
purpose building or structure, the Bor- any personal expenses. Both the CDC
rower must contribute not less than and the Borrower must certify in the
15% (excluding administrative costs), application that the funds will be used
unless SBA determines, in its discre- to cover Eligible Business Expenses.
tion, and publishes a notice in the FED- Borrower must, upon request, substan-
ERAL REGISTER, that due to an eco- tiate the use of the funds provided for
nomic recession, as determined by the business expenses through, for exam-
National Bureau of Economic Research ple, bank statements, invoices marked
or its equivalent, Borrowers may con- ‘‘paid,’’ cleared checks, or any other
tribute not less than 10% for Refi- documents that demonstrate that a
nancing Projects involving a limited or business obligation was satisfied with
single purpose property during the re- the funds provided.
cession. The lower required contribu- (7) If the qualified debt is not fully
tion by the Borrower will be in effect satisfied by the funding provided by
until the first day of the calendar quar- the Refinancing Project, the lender of
ter following the end of the economic the qualified debt must take one of the
recession as determined by the Na- following actions, or some combination
tional Bureau of Economic Research or thereof, to address the deficiency:
its equivalent. SBA will publish a no- (i) Forgiveness of all or part of the
tice in the FEDERAL REGISTER announc- deficiency;
ing the date on which the requirement (ii) Acceptance of payment by the
of the lower Borrower contribution Borrower, or
ended. In addition to a cash contribu- (iii) Acceptance of a Note executed
tion, the Borrower’s contribution may by the Borrower for the balance, or any
be satisfied as set forth in § 120.910 or portion of the balance. Such Note must
by the equity in any other fixed assets be subordinate to the 504 loan if the
that are acceptable to SBA as collat- Note and the 504 loan are secured by
340
Small Business Administration § 120.882
any of the same collateral. The Note is (i) The number of full-time employ-
subject to any other restrictions that ees of the Borrower on the date of the
SBA may establish to protect its cred- application; and
itor position, including standby re- (ii) The product obtained by multi-
quirements; plying:
(8) The Third Party Lender must (A) The number of part-time employ-
have a first lien position, and the 504 ees of the Borrower on the date of the
loan must have a second lien position, application; by
on all Eligible Fixed Assets securing (B) The quotient obtained by dividing
the Refinancing Project. Any other the average number of hours each part-
lien must be junior in priority to these time employee of the Borrower works
lien positions. For other fixed assets each week by 40.
serving as collateral for the Refi- Example 1 to paragraph (g)(15): 30 full-
nancing Project, the lien positions of time employees and 35 part-time em-
the Third Party Lender and the 504 ployees working 20 hours per week is
loan may be junior to any existing calculated as follows: 30 + (35 × (20/40))
liens acceptable to SBA; = 47.5. The maximum amount of the 504
(9) Eligible Project costs which may loan would be 47.5 multiplied by $90,000,
be paid with the proceeds of the 504 or $4,275,000.
loan are the amount used to refinance (16) For the purposes of this para-
the qualified debt and other costs graph (g), the terms below are defined
under § 120.882(c) and (d) and eligible as follows:
administrative costs under § 120.883; Date of application refers to the date
(10) [Reserved] the 504 loan application is received by
(11) PCLP CDCs may not approve the SBA.
refinancing of same institution debt Eligible Business Expenses are pay-
under their delegated authority and ments of the business for either Oper-
must submit the application to SBA ating Expenses or Other Secured Debt.
for approval. Eligible Fixed Assets are one or more
(12) The 504 loans approved under this long-term fixed assets, such as land,
paragraph (g) must be disbursed within buildings, machinery, and equipment,
9 months after loan approval. The Di- acquired, constructed or improved by a
rector, Office of Financial Assistance, small business for use in its business
or his or her designee, may approve a operations.
request for extension of the disburse- Fair market value refers to the cur-
ment period for an additional 6 months rent appraised value of an asset that is
for good cause. established by an independent ap-
(13) The Third Party Loan may not praiser in accordance with the stand-
be sold on the secondary market as a ards established by SBA in its SOPs.
part of a pool guaranteed under sub- Operating Expenses are expenses of
part J of this part, or any successor to the business that were incurred but not
this program, when the debt being refi- paid prior to the date of the 504 appli-
nanced is same institution debt; cation or that will become due for pay-
(14) The Third Party Lender must ment within 18 months after the date
certify that it would not refinance the of application. Examples include sala-
qualified debt except for the assistance ries, rent, utilities, inventory, and
provided under this paragraph (g); other expenses of the business that are
(15) Notwithstanding § 120.860, a debt not capital expenditures.
may be refinanced under this para- Other Secured Debt is debt incurred
graph (g) if it does not meet the job prior to the 504 loan application that
creation or other economic develop- has been secured by the same Eligible
ment objectives set forth in § 120.861 or Fixed Assets securing the qualified
§ 120.862. In such case, the 504 loan may debt and incurred for the benefit of the
not exceed the product obtained by Borrower and/or Operating Company.
multiplying the number of employees Other Secured Debt does not include
of the Borrower by $90,000. The number debt incurred for the purposes of cap-
of employees of the Borrower is equal ital expenditures, and any existing
to the sum of: liens must be released or subordinated
341
§ 120.883 13 CFR Ch. I (1–1–25 Edition)
to the amount of the debt being refi- § 120.883 Eligible administrative costs
nanced by the 504 loan. for 504 loans.
Qualified debt is a commercial loan: The following administrative costs
(A) That was incurred not less than 6 are not part of Project costs, but may
months before the date of the applica- be paid with the proceeds of the 504
tion for refinancing available under loan and the Debenture (see § 120.971):
this paragraph (g). (a) SBA guarantee fee;
(B) Substantially all (75% or more) of (b) Funding fee (to cover the cost of
which was for an Eligible Fixed Asset. a public issuance of securities and the
If the Eligible Fixed Asset was origi- Trustee);
nally financed through a commercial (c) CDC processing fee;
loan that would have satisfied the (d) Borrower’s out-of-pocket costs as-
‘‘substantially all’’ standard (the sociated with 504 loan and Debenture
‘‘original loan’’) and that was subse- closing other than legal fees (for exam-
quently refinanced one or more times, ple, certifications and the copying
with the current commercial loan costs associated with them, overnight
being the most recent refinancing, the delivery, postage, and messenger serv-
current commercial loan will be ices) but not to include fees and costs
deemed to satisfy this paragraph (B). If described in § 120.882;
the original loan was for the construc- (e) CDC Closing Fee (see
tion of a new building, or the acquisi- § 120.971(a)(2)) up to a maximum of
tion, renovation, or reconstruction of $10,000; and
an existing building, and such loan (f) Underwriters’ fee.
would not have satisfied the leasing
policies set forth in §§ 120.131 and [64 FR 2118, Jan. 13, 1999, as amended at 68
120.870(b), the current commercial loan FR 57987, Oct. 7, 2003; 88 FR 70586, Oct. 12,
will be deemed to satisfy these policies, 2023]
provided that Borrower demonstrates § 120.884 Ineligible costs for 504 loans.
compliance with § 120.131(b) for existing
buildings as of the date of application. Costs not directly attributable and
(C) That was for the benefit of the necessary for the Project may not be
small business concern; paid with proceeds of the 504 loan.
(D) That is collateralized by Eligible These include, but are not limited to,
Fixed Assets; and the following:
(E) That is not a Third Party Loan (a) Debt refinancing (other than in-
that is part of an existing 504 Project, terim financing), except as provided in
except as allowed under paragraph § 120.882(e) and (g).
(g)(3) of this section. (b) A CDC may not use 504 loan pro-
Refinancing Project means the fair ceeds to pay any creditor in a position
market value of the Eligible Fixed to sustain a loss causing a shift to SBA
Asset(s) securing the qualified debt and of all or part of a potential loss from
any other fixed assets acceptable to an existing debt.
SBA, except that if the Refinancing (c) Third-Party Loan fees (commit-
Project includes the financing of Eligi- ment, broker, finders, origination,
ble Business Expenses, SBA will not ac- processing fees of permanent financ-
cept as collateral any fixed assets ing).
other than the Eligible Fixed Asset(s) (d) Ancillary business expenses, such
securing the Qualified Debt. as:
Same institution debt means any debt (1) Working capital;
of the CDC or the Third Party Lender, (2) Counseling or management serv-
or an affiliate of either, that is pro- ices fees;
viding funds for the refinancing. (3) Incorporation/organization costs;
(4) Franchise fees; and
[61 FR 3235, Jan. 31, 1996, as amended at 68 (5) Advertising.
FR 57987, Oct. 7, 2003; 74 FR 29591, June 23,
(e) Fixed-asset Project components,
2009; 76 FR 9218, Feb. 17, 2011; 76 FR 63155,
Oct. 12, 2011; 79 FR 15650, Mar. 21, 2014; 81 FR such as:
33125, May 25, 2016; 83 FR 19920, May 7, 2018; (1) Short-term equipment, furniture,
86 FR 40779, July 29, 2021; 88 FR 70585, Oct. 12, and furnishings (unless essential to and
2023; 89 FR 79740, Oct. 1, 2024] a minor portion of the Project);
342
Small Business Administration § 120.910
(2) Automobiles, trucks, and air- there has been no unremedied substan-
planes; and tial adverse change in its financial con-
(3) Construction equipment (except dition or its ability to repay the 504
for heavy duty construction equipment loan since the date of application, and
integral to the business’ operations must furnish interim financial state-
with a remaining useful life of a min- ments, current within 120 days of clos-
imum of 10 years). ing; and
(c) The CDC must issue an opinion to
[61 FR 3235, Jan. 31, 1996, as amended at 64
FR 2118, Jan. 13, 1999; 74 FR 29591, June 23,
the best of its knowledge that there
2009; 76 FR 9219, Feb. 17, 2011; 82 FR 39504, has been no unremedied substantial ad-
Aug. 21, 2017] verse change in the Borrower’s (or Op-
erating Company’s) ability to repay
INTERIM FINANCING the 504 loan since its submission of the
loan application to SBA.
§ 120.890 Source of interim financing.
[61 FR 3235, Jan. 31, 1996, as amended at 68
A Project may use interim financing FR 57987, Oct. 7, 2003]
for all Project costs except the Bor-
rower’s contribution. Any source (in- PERMANENT FINANCING
cluding a CDC) may supply interim fi-
nancing provided: § 120.900 Sources of permanent financ-
ing.
(a) The financing is not derived from
any SBA program, directly or indi- Permanent financing for each Project
rectly; must come from three sources: the Bor-
(b) The terms and conditions of the rower’s contribution, Third-Party
financing are acceptable to SBA; Loans, and the 504 loan. Typically, the
(c) The source is not the Borrower or Borrower contributes 10 percent of the
an Associate of the Borrower; and permanent financing, Third-Party
(d) The source has the experience and Loans 50 percent and the 504 loan 40
qualifications to monitor properly all percent.
Project construction and progress pay-
ments. (If the source lacks such experi- THE BORROWER’S CONTRIBUTION
ence or qualifications, SBA may re- § 120.910 Borrower contributions.
quire the interim loan to be managed
by a third party such as a bank or pro- (a) The Borrower must contribute to
fessional construction manager.) the Project cash (or property accept-
able to SBA obtained with the cash) or
§ 120.891 Certifications of disburse- land (that is part of the Project Prop-
ment and completion. erty), in an amount equal to the fol-
Before the Debenture is issued, the lowing percentage of the Project cost,
interim lender must certify the excluding administrative costs:
amount disbursed. The CDC must cer- (1) At least 15 percent, if the Bor-
tify that the Project was completed in rower (or Operating Company if the
accordance with the final plans and Borrower is an Eligible Passive Com-
specifications (except as provided in pany) has operated for two years or
§ 120.961). less;
(2) At least 15 percent, if the Project
§ 120.892 Certifications of no adverse involves the acquisition, construction,
change. conversion, or expansion of a limited or
Following completion of the Project, single purpose building or structure;
the following certifications must be (3) At least 20 percent, if the Project
made before the 504 loan closing: involves conditions described in para-
(a) The interim lender must certify graphs (a)(1) and (2) of this section; or
to the CDC that it has no knowledge of (4) At least 10 percent, in all other
any unremedied substantial adverse circumstances.
change in the condition of the small (b) The source of the contribution
business since the application to the may be a CDC or any other source ex-
interim lender; cept an SBA business loan program
(b) The Borrower (or Operating Com- (see § 120.913 for SBIC exception).
pany) must certify to the CDC that [64 FR 2118, Jan. 13, 1999]
343
§ 120.911 13 CFR Ch. I (1–1–25 Edition)
§ 120.911 Land contributions. (2) The Project is for the acquisition,
construction, conversion or expansion
The Borrower’s contribution may be
of a limited or single purpose asset.
land (including buildings, structures (b) Third party loan collateral. The 504
and other site improvements which loan is usually collateralized by a sec-
will be part of the Project Property) ond lien on Project Property. The
previously acquired by the Borrower. Third Party Lender may obtain addi-
[68 FR 57987, Oct. 7, 2003] tional collateral or other security for
the Third Party Loan (‘‘Additional Col-
§ 120.912 Borrowed contributions. lateral’’) only if in the event of liquida-
The Borrower may borrow its cash tion and unless otherwise approved in
writing by SBA:
contribution from the CDC or a third
(1) The Third Party Lender liquidates
party. If any of the contribution is bor-
or otherwise exhausts all reasonable
rowed, the interest rate must be rea-
avenues of collection with respect to
sonable. If the loan is secured by any of
the Additional Collateral no later than
the Project assets, the loan must be
the disposition of the Project Property,
subordinate to the liens securing the
and
504 Loan, and the loan may not be re-
(2) The Third Party Lender applies
paid at a faster rate than the 504 Loan any proceeds received as a result of the
unless SBA gives prior written ap- Additional Collateral to the balance
proval. A third party lender may not outstanding on the Third Party Loan
receive voting rights, stock options, or prior to the application of proceeds
any other actual or potential voting in- from the disposition of the Project
terest in the small business. Property to the Third Party Loan.
§ 120.913 Limitations on any contribu- [64 FR 2118, Jan. 13, 1999, as amended at 79
tions by a Licensee. FR 15650, Mar. 21, 2014]
Subject to part 107 of this chapter, a § 120.921 Terms of Third Party loans.
Licensee may provide financing for all
or part of the Borrower’s contribution (a) Maturity. A Third Party Loan
to the Project. SBA will consider Li- must have a term of at least 7 years
censee funds to be derived from federal when the 504 loan is for a term of 10
sources if the Licensee has Leverage years and 10 years when the 504 loan is
(as defined in § 107.50 of this chapter). If for 20 years. If there is more than one
the Licensee does not have Leverage, Third Party Loan, an overall loan ma-
SBA will consider the investment to be turity must be calculated, taking into
from private funds. Licensee financing account the maturities and amounts of
must be subordinated to the 504 loan each loan.
and must not be repaid at a faster rate (b) Interest rates. Interest rates must
than the Debenture. (Refer to be reasonable. SBA must establish and
§ 120.930(a) for additional limitations.) publish in the FEDERAL REGISTER a
maximum interest rate for any Third
[68 FR 57987, Oct. 7, 2003] Party Loan from commercial financial
institutions. The rate shall remain in
THIRD PARTY LOANS effect until changed.
(c) Other terms. The Third Party Loan
§ 120.920 Required participation by must not have any early call feature or
the Third Party Lender.
contain any demand provisions unless
(a) Amount of Third Party Loans. A the loan is in default. By participating,
Project financing must include one or a Third Party Loan lender waives, as
more Third Party Loans totaling at to the CDC/SBA financing, any provi-
least as much as the 504 loan. However, sion in its deed of trust, or mortgage,
the Third Party Loans must total at or other documents prohibiting further
least 50 percent of the total cost of the encumbrances or subordinate debt. In
Project if: the event of default, the Third Party
(1) The Borrower (or Operating Com- Lender must give the CDC and SBA
pany, if the Borrower is an Eligible written notice of default within 30 days
Passive Company) has operated for two of the event of default and at least 60
years or less, or days prior to foreclosure.
344
Small Business Administration § 120.931
(d) Future advances. The Third Party (c) The Borrower must not prepay
Loan must not be open-ended. After any Project financing subordinate to
completion of the Project, the Third the 504 loan without SBA’s prior writ-
Party Lender may not make future ad- ten consent.
vances under the Third Party Loan ex- [61 FR 3235, Jan. 31, 1996, as amended at 68
cept expenditures to collect amounts FR 57988, Oct. 7, 2003]
due the Third Party Loan notes, main-
tain collateral and protect the Third § 120.925 [Reserved]
Party Lender’s lien position on the
Third Party Loan. § 120.926 Referral fee.
(e) Subordination. The Third Party The CDC can receive a reasonable re-
Lender’s lien will be subordinate to the ferral fee from the Third Party Lender
CDC/SBA lien regarding any prepay- if the CDC secured the Third Party
ment penalties, late fees, other default Lender for the Borrower under a writ-
charges, and escalated interest after ten contract between the CDC and the
default due under the Third Party Third Party Lender. Both the CDC and
Loan. the Third Party Lender are prohibited
(f) Escalation upon default. A Third- from charging this fee to the Borrower.
Party Lender may not escalate the If a CDC charges a referral fee, the CDC
rate of interest upon default to a rate will be construed as a Referral Agent
greater than the maximum rate set under part 103 of this chapter.
forth in paragraph (b) of this section.
[68 FR 57988, Oct. 7, 2003]
Regarding any Project that SBA ap-
proved after September 30, 1996, SBA 504 LOANS AND DEBENTURES
will only pay the interest rate on the
note in effect before the date of the § 120.930 Amount.
Borrower’s default. (a) Generally, a 504 loan may not ex-
[61 FR 3235, Jan. 31, 1996, as amended at 64 ceed 40 percent of total Project cost
FR 2118, Jan. 13, 1999; 88 FR 21900, Apr. 12, plus 100 percent of eligible administra-
2023] tive costs. For good cause shown, SBA
may authorize an increase in the per-
§ 120.922 Pre-existing debt on the centage of Project costs covered up to
Project Property. 50 percent. No more than 50 percent of
In addition to its share of Project eligible Project costs can be from Fed-
cost, a Third-Party Loan may include eral sources, whether received directly
consolidation of existing debt on the or indirectly through an intermediary.
Project Property. The consolidation (b) A 504 loan must not be less than
must not improve the lien position of $25,000.
the Lender on the pre-existing debt, (c) Upon completion of the Project,
unless the debt is a previous Third- the Debenture amount will be reduced
Party Loan. by the amount that the unused contin-
gency reserve exceeds 2 percent of the
§ 120.923 Policies on subordination. anticipated Debenture.
(a) Financing provided by the seller [61 FR 3235, Jan. 31, 1996, as amended at 68
of Project Property must be subordi- FR 57988, Oct. 7, 2003]
nate to the 504 loan. SBA may waive
the subordination requirement if the § 120.931 504 Lending limits.
property is classified as ‘‘other real es- 504 loan amounts shall be limited to:
tate owned’’ by a national bank or (a) An outstanding balance of
other Federally regulated lender and $5,000,000 for each Borrower and its af-
SBA considers the property to be of filiates if the loan proceeds will not be
sufficient value to support the 504 loan. directed towards a Project in para-
(b) A Borrower is eligible for a 504 graph (c) of this section,
loan even if part of the Project financ- (b) An outstanding balance of
ing is tax-exempt. SBA’s lien position $5,000,000 for each Borrower and its af-
must not be subordinate to loans made filiates if one or more of the public pol-
from the proceeds of the tax-exempt icy goals enumerated in § 120.862(b) ap-
obligation. plies to the Project; and
345
§ 120.932 13 CFR Ch. I (1–1–25 Edition)
(c) $5,500,000 for each Project for: the small business withdraws its appli-
(1) Small Manufacturers (NAICS cation, the CDC may deduct from the
Codes 31–33) with all production facili- deposit reasonable costs incurred in
ties located in the United States; packaging and processing the applica-
(2) Reduction of the Borrower’s, or if tion.
the Borrower is an Eligible Passive
Company, the Operating Company’s en- § 120.937 Assumption.
ergy consumption by at least 10%; or A 504 loan may be assumed with
(3) Plant, equipment and process up- SBA’s prior written approval.
grades of renewable energy sources
such as the small-scale production of § 120.938 Default.
energy for individual buildings’ or
communities’ consumption, commonly (a) Upon occurrence of an event of de-
known as micropower, or renewable fault specified in the 504 note which re-
fuel producers including biodiesel and quires automatic acceleration, the
ethanol producers. note becomes due and payable. Upon
occurrence of an event of default which
[76 FR 63547, Oct. 12, 2011] does not require automatic accelera-
tion, SBA may forbear acceleration of
§ 120.932 Interest rate.
the note and attempt to resolve the de-
The interest rate of the 504 Loan and fault. If the default is not cured subse-
the Debenture which funds it is set by quently, the note shall be accelerated.
the SBA and approved by the Secretary In either case, upon acceleration of the
of the Treasury. note, the Debenture which funded it is
also due immediately, and SBA must
§ 120.933 Maturity.
honor its guarantee of the Debenture.
From time to time, SBA will publish SBA shall not reimburse the investor
in the FEDERAL REGISTER the available for any premium paid.
maturities for a 504 loan and the De- (b) If a CDC defaults on a Debenture,
benture that funds it. Such available SBA generally shall limit its recovery
maturities remain in effect until to the payments made by the small
changed by subsequent FEDERAL REG- business to the CDC on the loan made
ISTER publication. from the Debenture proceeds, and the
[68 FR 57988, Oct. 7, 2003] collateral securing the defaulted loan.
However, SBA will look to the CDC for
§ 120.934 Collateral. the entire amount of the Debenture in
The CDC usually takes a second lien the case of fraud, negligence, or mis-
position on the Project Property to se- representation by the CDC.
cure the 504 loan. Sometimes addi-
tional collateral is required. (In rare § 120.939 Borrower prohibition.
circumstances, SBA may permit other Neither a Borrower nor an Associate
collateral substituted for Project Prop- of the Borrower may purchase an inter-
erty.) All collateral must be insured est in a Debenture Pool in which the
against such hazards and risks as SBA Debenture that funded its 504 loan has
may require, with provisions for notice been placed.
to SBA and the CDC in the event of im-
pending lapse of coverage. § 120.940 Prepayment of the 504 loan
or Debenture.
[68 FR 57988, Oct. 7, 2003]
The Borrower may prepay its 504
§ 120.935 Deposit from the Borrower loan, if it pays the entire principal bal-
that a CDC may require. ance, unpaid interest, any unpaid fees,
At the time of application for a 504 and any prepayment premium estab-
loan, the CDC may require a deposit lished in the note. If the Borrower pre-
from the Borrower of $2,500 or 1 percent pays, the CDC must prepay the cor-
of the Net Debenture Proceeds, which- responding Debenture with interest
ever is less. The deposit may be applied and premium. If one of the Debentures
to the loan processing fee if the appli- in a Debenture Pool is prepaid, the In-
cation is accepted, but must be re- vestors in that Debenture Pool must be
funded if the application is denied. If paid pro rata, and SBA’s guarantee on
346
Small Business Administration § 120.954
the entire Debenture Pool must be pro- (1) Debenture Pools, including the
portionately reduced. If the entire De- CDC obligors and the interest rate pay-
benture Pool is paid off, SBA may call able on the Debentures in each Pool;
all Certificates backed by the Pool for (2) Certificates issued or transferred,
redemption. including the Debenture Pool backing
the Certificate, name and address of
§ 120.941 Certificates. the purchaser, price paid, the interest
(a) The face value of a Certificate rate on the Certificate, and fees or
must be at least $25,000. Certificates charges assessed by the transferror;
are issued in registered form and trans- and
ferred only by entry on the central reg- (3) Brokers and dealers in Certifi-
istry maintained by the Trustee. SBA cates, and the commissions, fees or dis-
guarantees the timely payment of prin- counts granted to the brokers and deal-
cipal and interest on the Certificates. ers;
(e) Receive semi-annual Debenture
(b) Before the sale of a Certificate,
payments and prepayments;
the seller, or the broker or dealer act-
(f) Make regularly scheduled and pre-
ing as the seller’s agent, must disclose
payment payments to Investors; and
to the purchaser the terms, conditions,
(g) Assure before any resale of a De-
yield, and premium and other charac-
benture or Certificate is recorded in
teristics not guaranteed by SBA.
the registry that the seller has pro-
DEBENTURE SALES AND SERVICE AGENTS vided the purchaser a written disclo-
sure statement approved by SBA.
§ 120.950 SBA and CDC must appoint EFFECTIVE DATE NOTE: Amendments to
agents. § 120.953 were published at 89 FR 102701, Dec.
SBA and the CDC must appoint the 18, 2024, effective Jan. 17, 2025.
following agents to facilitate the sale
§ 120.954 Central Servicing Agent.
and service of the Certificates and dis-
bursement of the proceeds. (a) SBA has entered into a Master
Servicing Agreement designating a
§ 120.951 Selling agent. Central Servicing Agent (CSA) to sup-
The CDC, with SBA approval, shall port the orderly flow of funds among
appoint a Selling Agent to select un- Borrowers, CDCs, and SBA. The CDC
derwriters, negotiate the terms and and Borrower must enter into an indi-
conditions of Debenture offerings with vidual Servicing Agent Agreement
the underwriters, and direct and co- with the CSA for each 504 loan, consti-
ordinate Debenture sales. tuting acceptance by the CDC and the
Borrower of the terms of the Master
§ 120.952 Fiscal agent. Servicing Agreement.
(b) The CSA has established a master
SBA shall appoint a Fiscal Agent to reserve account. All funds related to
assess the financial markets, minimize the 504 loans and Debentures flow
the cost of sales, arrange for the pro- through the master reserve account
duction of the Offering Circular, De- under the provisions of the Master
benture Certificates, and other re- Servicing Agreement. The master re-
quired documents, and monitor the serve account will be funded by a guar-
performance of the Trustee and the un- antee fee, a funding fee to be published
derwriters. from time to time in the FEDERAL REG-
ISTER, and by principal and interest
§ 120.953 Trustee.
payments of 504 loans. At SBA’s direc-
SBA must appoint a Trustee to: tion, the CSA may use funds in the
(a) Issue Certificates; master reserve account to defray pro-
(b) Transfer the Certificates upon re- gram expenses. In the event a Borrower
sale in the secondary market; defaults and its 504 note is accelerated,
(c) Maintain physical possession of SBA shall add funds under its guar-
the Debentures for SBA and the Cer- antee to ensure the full and timely
tificate holders; payment of the Debenture which fund-
(d) Establish and maintain a central ed the 504 loan. At SBA’s direction, the
registry of: CSA must pay to the CDC servicing
347
§ 120.955 13 CFR Ch. I (1–1–25 Edition)
each loan the interest accruing in the the Debenture, prior to sale, if any of
master reserve account on loan pay- the following occur:
ments made by each Borrower between (1) The CDC has failed to comply ma-
the date of receipt of each monthly terially with any Loan Program Re-
payment and the date of disbursement quirement as defined in § 120.10;
to investors. The CSA may disburse (2) The CDC has failed to make or
such interest periodically to CDCs on a close the 504 loan or prepare the Deben-
pro rata basis. SBA may use interest ture closing in a prudent or commer-
accruals in the master reserve account cially reasonable manner;
earned prior to October 1991 (not pre- (3) The CDC’s improper action or in-
viously distributed to the CDCs) for the action places SBA at risk;
costs of 504 program administration. (4) The CDC has failed to use required
§ 120.955 Agent bonds and records. SBA forms or electronic versions of
those forms;
(a) Each agent (in §§ 120.951 through (5) The CDC, Third Party Lender or
120.954) must provide a fidelity bond or Borrower has failed to timely disclose
insurance in such amount as necessary to SBA a material fact regarding the
to fully protect the interest of the gov- Project or 504 loan;
ernment.
(6) The CDC, Third Party Lender or
(b) SBA must have access at the
Borrower has misrepresented a mate-
agent’s place of business to all books,
records and other documents relating rial fact to SBA regarding the Project
to Debenture activities. or 504 loan; or
(7) SBA determines that there has
§ 120.956 Suspension or revocation of been an unremedied material adverse
brokers and dealers. change, such as deterioration in the
The appropriate Office of Capital Ac- Borrower’s financial condition, since
cess official in accordance with Delega- the 504 loan was approved, or that ap-
tions of Authority may suspend or re- proving the closing of the Debenture
voke the privilege of any broker or will put SBA at unacceptable financial
dealer to participate in the sale or risk.
marketing of Debentures and Certifi- [68 FR 57988, Oct. 7, 2003, as amended at 88 FR
cates for actions or conduct bearing 21900, Apr. 12, 2023]
negatively on the broker’s fitness to
participate in the securities market. § 120.961 Construction escrow ac-
SBA must give the broker or dealer counts.
written notice, stating the reasons, at The CSA, title company, CDC attor-
least 10 business days prior to the ef- ney, or bank may hold Debenture pro-
fective date of the suspension or rev- ceeds in escrow to complete Project
ocation. A broker or dealer may appeal components such as landscaping and
the suspension or revocation made parking lots, and acquire machinery
under this section pursuant to the pro- and equipment if the component or ac-
cedures set forth in part 134 of this quisition is a minor portion of the
chapter. The action of this official will total Project and has been contracted
remain in effect pending resolution of for completion or delivery at a speci-
the appeal. fied price and specific future date. The
[73 FR 75519, Dec. 11, 2008] escrow agent must disburse funds upon
approval by the CDC and the SBA, sup-
CLOSINGS ported by invoices and payable jointly
to the small business and the des-
§ 120.960 Responsibility for closing. ignated contractor.
(a) The CDC is responsible for the 504
loan closing. SERVICING
(b) The Debenture closing is the joint
responsibility of the CDC and SBA. § 120.970 Servicing of 504 loans and
(c) SBA may, within its sole discre- Debentures.
tion, decline to close the Debenture; di- (a) In servicing 504 loans, CDCs must
rect the transfer of the 504 loan to an- comply with Loan Program Require-
other CDC; or cancel its guarantee of ments and in accordance with prudent
348
Small Business Administration § 120.971
and commercially reasonable lending Closing Fee). Some closing costs may
standards. be funded out of the Debenture pro-
(b) The CDC is responsible for routine ceeds (see § 120.883 for limitations);
servicing including receipt and review (3) Servicing fee. The CDC will charge
of the Borrower’s or Operating Com- a monthly servicing fee of at least 0.625
pany’s financial statements on an an- percent per annum and no more than 2
nual or more frequent basis and moni- percent per annum on the unpaid bal-
toring the status of the Borrower and ance of the loan as determined at five-
504 loan collateral. year anniversary intervals. A servicing
(c) The CDC is responsible for assur- fee greater than 1.5 percent in a rural
ing that the Borrower makes all re- area and 1 percent everywhere else re-
quired insurance premium payments quires SBA’s prior written approval,
and has paid all taxes when due. based on evidence of substantial need.
(d) The CDC is responsible for filing The servicing fee may be paid only
renewals and extensions of security in- from loan payments received. The fees
terests on collateral for the 504 loan, as may be accrued without interest and
required. collected from the CSA when the pay-
(e) The CDC must timely respond to ments are made.
Borrower requests for loan modifica- (4) Late fees. Loan payments received
tions. after the 15th of each month may be
(f) For any 504 loan that is more than subject to a late payment fee of 5 per-
three months past due, the CDC must cent of the late payment or $100,
promptly request that SBA purchase whichever is greater. These fees will be
the Debenture unless the 504 loan has collected by the CSA on behalf of the
an SBA-approved deferment or is in CDC; and
compliance with an SBA-approved plan (5) Assumption fee. Upon SBA’s writ-
to allow the Borrower to catch up on ten approval, a CDC may charge an as-
delinquent loan payments. sumption fee not to exceed 1 percent of
(g) The CDC must cooperate with the outstanding principal balance of
SBA to cure defaults and initiate work- the loan being assumed.
outs. (b) CSA fees. The CSA may charge an
(h) Additional servicing requirements initiation fee on each loan and a
are set forth in subpart E of this part. monthly servicing fee under the terms
[68 FR 57988, Oct. 7, 2003, as amended at 72 FR of the Master Servicing Agreement.
18364, Apr. 12, 2007] (c) Other agent fees. Agent fees and
charges necessary to market and serv-
FEES ice Debentures and Certificates may be
§ 120.971 Allowable fees paid by Bor- assessed to the Borrower or the inves-
rower. tor. The fees must be approved by SBA
and published periodically in the FED-
(a) CDC fees. The fees a CDC may
ERAL REGISTER.
charge the Borrower in connection
(d) SBA fees. (1) SBA charges a 0.5
with a 504 loan and Debenture are lim-
percent guarantee fee on the Deben-
ited to the following:
ture.
(1) Processing fee. The CDC may
charge up to 1.5 percent of the net De- (2) For loans approved by SBA after
benture proceeds to process the financ- September 30, 1996, SBA charges a fee
ing. Two-thirds of this fee will be con- of not more than 0.9375 percent annu-
sidered earned and may be collected by ally on the unpaid principal balance of
the CDC when the loan number is the loan as determined at five-year an-
issued by SBA. The portion of the proc- niversary intervals.
essing fee paid by the Borrower may be (e) Miscellaneous fees. A funding fee
reimbursed from the Debenture pro- not to exceed 0.25 percent of the Deben-
ceeds; ture may be charged to cover costs in-
(2) Closing fee. The CDC may charge a curred by the trustee, fiscal agent,
reasonable closing fee sufficient to re- transfer agent.
imburse it for the expenses of its in- [61 FR 3235, Jan. 31, 1996, as amended at 64
house or outside legal counsel, and FR 2119, Jan. 13, 1999; 68 FR 57988, Oct. 7, 2003;
other miscellaneous closing costs (CDC 88 FR 21900, Apr. 12, 2023]
349
§ 120.972 13 CFR Ch. I (1–1–25 Edition)
§ 120.972 Third Party Lender partici- (2) The PCLP CDC has entered into a
pation fee and CDC fee. contract with a qualified third party
(a) Participation fee. For loans ap- for the performance of its liquidation
proved by SBA after September 30, responsibilities and obtains the ap-
1996, SBA must collect a one-time fee proval of SBA with respect to the
equal to 50 basis points on the Third qualifications of the contractor and the
Party Lender’s participation in a terms and conditions of the contract.
Project when the Third Party Lender (b) All other CDCs. A CDC that is not
occupies a senior credit position to authorized under paragraph (a) of this
SBA in the Project. section may apply to become an Au-
thorized CDC Liquidator with author-
(b) CDC fee. For loans approved by
ity to liquidate and handle debt collec-
SBA after September 30, 1996, SBA
tion litigation with respect to 504 loans
must collect an annual fee from the
on behalf of SBA, in accordance with
CDC equal to 0.125 percent of the out-
subpart E of this part, if the CDC
standing principal balance of the De-
meets the following requirements:
benture. The fee must be paid from the
(1) The CDC meets either of the fol-
servicing fees collected by the CDC and
lowing criteria:
cannot be paid from any additional fees
(i) The CDC participated in the loan
imposed on the Borrower.
liquidation pilot program established
[68 FR 57988, Oct. 7, 2003] by the Small Business Programs Im-
provement Act of 1996 prior to October
AUTHORITY OF CDCS TO PERFORM LIQ- 1, 2006; or
UIDATION AND DEBT COLLECTION LITI- (ii) During the three fiscal years im-
GATION mediately prior to seeking such au-
thority, the CDC made an average of
§ 120.975 CDC Liquidation of loans and not less than ten 504 loans per year;
debt collection litigation. and
(a) PCLP CDCs. If a CDC is designated (2) The CDC meets either of the fol-
as a PCLP CDC under § 120.845, the CDC lowing requirements:
must liquidate and handle debt collec- (i) The CDC has one or more employ-
tion litigation with respect to all ees who have not less than two years of
PCLP Loans in its portfolio on behalf substantive, decision-making experi-
of SBA as required by § 120.848(f), in ac- ence in administering the liquidation
cordance with subpart E of this part. and workout of defaulted or problem
With respect to all other 504 loans that loans secured in a manner substan-
a PCLP CDC makes, the PCLP CDC is tially similar to loans funded with 504
an Authorized CDC Liquidator and loan program debentures, and who have
must exercise its delegated authority completed a training program on loan
to liquidate and handle debt-collection liquidation developed by the Agency in
litigation in accordance with subpart E conjunction with qualified CDCs that
of this part for such loans, if the PCLP meet the requirements of this section;
CDC is notified by SBA that it meets or
either of the following requirements to (ii) The CDC has entered into a con-
be an Authorized CDC Liquidator, as tract with a qualified third party for
determined by SBA: the performance of its liquidation re-
(1) The PCLP CDC has one or more sponsibilities and obtains the approval
employees who have not less than two of SBA with respect to the qualifica-
years of substantive, decision-making tions of the contractor and the terms
experience in administering the liq- and conditions of the contract.
uidation and workout of defaulted or (c) CDC counsel. To perform debt col-
problem loans secured in a manner sub- lection litigation under paragraphs (a)
stantially similar to loans funded with or (b) of this section, a CDC must also
504 loan program debentures, and who have either in-house counsel with ade-
have completed a training program on quate experience as approved by SBA
loan liquidation developed by the or entered into a contract for the per-
Agency in conjunction with qualified formance of debt collection litigation
CDCs that meet the requirements of with an experienced attorney or law
this section; or firm as approved by SBA.
350
Small Business Administration § 120.1025
(d) Application for authority to liq- ations of SBA Lenders and Inter-
uidate and litigate. To seek authority to mediaries.
perform liquidation and debt collection (b) Scope. Most rules and standards
litigation under paragraphs (b) and (c) set forth in this subpart apply to SBA
of this section, a CDC other than a Lenders as well as Intermediaries; how-
PCLP CDC must submit a written ap- ever, SBA has separate regulations for
plication to SBA and include docu- enforcement grounds and formal en-
mentation demonstrating that the CDC forcement actions for Intermediaries
meets the requirements of paragraph at §§ 120.1425 and 120.1540.
(b) and (c) of this section. If a CDC in-
tends to use a contractor to perform [85 FR 14781, Mar. 16, 2020]
liquidation, it must obtain approval
from SBA of both the qualifications of § 120.1005 Bureau of PCLP Oversight.
the contractor and the terms and con- SBA’s Bureau of PCLP Oversight
ditions in the contract covering the within OCRM, monitors the capitaliza-
CDC’s retention of the contractor. SBA tion of PCLP CDC pilot participants’
will notify a CDC in writing when the LLRFs and performs other related
CDC can begin to perform liquidation functions.
and/or debt collection litigation under
this section. [73 FR 75519, Dec. 11, 2008]
[72 FR 18365, Apr. 12, 2007] § 120.1010 SBA access to SBA Lender
and Intermediary files.
ENFORCEABILITY OF 501, 502 AND 503
LOANS AND OTHER LAWS An SBA Lender and Intermediary
must allow SBA’s authorized rep-
§ 120.990 501, 502 and 503 loans. resentatives, including representatives
SBA has discontinued loan programs authorized by the SBA Inspector Gen-
for 501, 502, and 503 loans. Outstanding eral, during normal business hours, ac-
loans remain under these programs, cess to its files to review, inspect, and
and Borrowers, CDCs, and SBA must copy all records and documents, relat-
comply with the terms and conditions ing to SBA guaranteed loans or as re-
of the corresponding notes and Deben- quested for SBA oversight.
tures, and the regulations in this part
[73 FR 75519, Dec. 11, 2008, as amended at 85
in effect when the obligations were un-
FR 14781, Mar. 16, 2020]
dertaken or last in effect, if applicable.
§ 120.1015 Risk Rating System.
§ 120.991 Effect of other laws.
No State or local law may preclude (a) Risk Rating. SBA may assign a
or limit SBA’s exercise of its rights Risk Rating to all SBA Lenders and
with respect to notes, guarantees, De- Intermediaries on a periodic basis.
bentures and Debenture Pools, or of its Risk Ratings are based on certain risk-
enforcement rights to foreclose on col- related portfolio performance factors
lateral. as set forth in notices or SBA’s SOPs
and as published from time to time.
Subpart I—Risk-Based Lender (b) Rating categories. Risk Ratings fall
into one of two broad categories: Ac-
Oversight
ceptable Risk Ratings or Less Than Ac-
ceptable Risk Ratings.
SOURCE: 72 FR 25194, May 4, 2007, unless
otherwise noted. [73 FR 75519, Dec. 11, 2008, as amended at 85
FR 14781, Mar. 16, 2020]
SUPERVISION
§ 120.1025 Monitoring.
§ 120.1000 Risk-Based Lender Over-
sight. SBA may conduct monitoring of SBA
Lenders and Intermediaries including,
(a) Risk-Based Lender Oversight. SBA but not limited to, SBA Lenders’ or
monitors, supervises, examines, regu-
Intermediaries’ self-assessments.
lates, and enforces laws against SBA
Supervised Lenders and the SBA oper- [85 FR 14781, Mar. 16, 2020]
351
§ 120.1050 13 CFR Ch. I (1–1–25 Edition)
§ 120.1050 Reviews and examinations. (d) Responsiveness in correcting defi-
ciencies noted in prior reviews or ex-
(a) Reviews. SBA may conduct re-
aminations; and
views of the SBA loan operations of
SBA Lenders. The review may include, (e) Such other risk-related informa-
but is not limited to, an evaluation of tion as SBA, in its discretion, deter-
the following: mines to be appropriate.
(1) Portfolio performance; [73 FR 75519, Dec. 11, 2008, as amended at 82
(2) SBA operations management; FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16,
(3) Credit administration; and 2020]
(4) Compliance with Loan Program
Requirements. § 120.1055 Review and examination re-
sults.
(b) Examinations. SBA may conduct
safety and soundness examinations of (a) Written Reports. SBA will provide
SBA Supervised Lenders, except SBA an SBA Lender and Intermediary a
will not conduct safety and soundness copy of SBA’s written report prepared
examinations of Other Regulated as a result of the SBA Lender or Inter-
SBLCs under §§ 120.1510 and 1511. The mediary review or examination (‘‘Re-
safety and soundness examination may port’’). SBA will provide the Report
include, but is not limited to, an eval- generally within 60 business days fol-
uation of: lowing SBA’s conclusion of the review/
(1) Capital adequacy; examination unless SBA notifies the
(2) Asset quality (including credit ad- SBA Lender or Intermediary of a later
ministration and allowance for loan date and the reason for the delay. The
losses); Report may contain findings, conclu-
(3) Management quality (including sions, corrective actions, and rec-
internal controls, loan portfolio man- ommendations. Each director (or man-
agement, and asset/liability manage- ager, in the absence of a Board of Di-
ment); rectors) of the SBA Lender or Inter-
(4) Earnings; mediary, in keeping with his or her re-
(5) Liquidity; and sponsibilities, must become fully in-
(6) Compliance with Loan Program formed regarding the contents of the
Requirements. Report.
(c) Reviews/examinations of Inter- (b) Response to review and examination
mediaries. SBA may perform reviews or Reports. SBA Lenders and Inter-
examinations of Intermediaries. mediaries must respond to Report find-
(d) Other reviews or examinations. SBA ings, recommendations, and corrective
may perform other reviews/examina- actions, if any, in writing to SBA and,
tions as needed as determined by SBA if requested, submit proposed correc-
in its discretion. tive actions and/or a capital restora-
[73 FR 75519, Dec. 11, 2008, as amended at 82 tion plan. An SBA Lender or Inter-
FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16, mediary must respond within 45 busi-
2020] ness days from the date the Report is
received unless SBA notifies the SBA
§ 120.1051 Frequency of reviews and Lender or Intermediary in writing that
examinations. the response, proposed corrective ac-
SBA may conduct reviews and exami- tions or capital restoration plan is to
nations of SBA Lenders and Inter- be filed within a different time period
mediaries on a periodic basis. SBA may (either shortened or extended in SBA’s
consider, but is not limited to, the fol- discretion). The SBA Lender or Inter-
lowing factors in determining fre- mediary response must address each
quency: finding, recommendation, and correc-
(a) Results of monitoring, including tive action. In proposing a corrective
an SBA Lender’s or Intermediary’s action or capital restoration plan, the
Risk Rating; SBA Lender or Intermediary must de-
(b) SBA loan portfolio size; tail the steps it will take to correct the
(c) Previous review or examination finding(s); the time within which each
findings; step will be taken; the timeframe for
352
Small Business Administration § 120.1060
accomplishing the entire corrective ac- documents are the property of SBA and
tion plan; and the person(s) or depart- are loaned to an SBA Lender or Inter-
ment at the SBA Lender or Inter- mediary for its confidential use only.
mediary charged with carrying out the The Reports, Risk Ratings, and related
corrective action or capital restoration Confidential Information are privileged
plan, as applicable. In addition, SBA and confidential as more fully ex-
Lenders and Intermediaries must im- plained in paragraph (b) of this section.
plement corrective actions within 90 The Report, Risk Rating, and Confiden-
calendar days from the date the Report tial Information must not be relied
or SBA’s letter requiring corrective ac-
upon for any purpose other than SBA’s
tion is received, unless SBA provides
Lender oversight and SBA’s portfolio
written notice of another timeframe.
management purposes. An SBA Lender
For purposes of this paragraph (b), a
Report will be deemed to have been re- or Intermediary must not make any
ceived on the date it was emailed to representations concerning the Report
the last known email address of the (including its findings, conclusions,
SBA Lender or Intermediary unless the and recommendations), the Risk Rat-
SBA Lender or Intermediary can pro- ing, or the Confidential Information.
vide compelling evidence to the con- For purposes of this regulation, Report
trary. means the review or examination re-
(c) SBA response. SBA will provide port and related documents. For pur-
written notice of whether the response poses of this regulation, Confidential
and, if applicable, any corrective ac- Information is defined in the SBA
tion or capital restoration plan, is ap- Lender information portal and by no-
proved, or whether SBA will seek addi- tice issued from time to time. Access
tional information or require other ac- to the Lender information portal may
tion. be obtained by contacting the OCRM.
(d) Failure to respond or to submit or (b) Disclosure prohibition. Each SBA
implement an acceptable plan. If an SBA Lender and Intermediary is prohibited
Lender or Intermediary fails to respond from disclosing its Report, Risk Rat-
in writing to SBA, respond timely to ing, and Confidential Information, in
SBA, or provide a response acceptable full or in part, in any manner, without
to SBA within SBA’s discretion, or re- SBA’s prior written permission. An
spond to all findings and required cor- SBA Lender and Intermediary may use
rective actions in a Report, then SBA the Report, Risk Rating, and Confiden-
may take enforcement action under tial Information for confidential use
this subpart. If an SBA Lender or
within its own immediate corporate or-
Intermediary that is requested to sub-
ganization. SBA Lender’s and
mit a corrective action plan or capital
Intermediary’s must restrict access to
restoration plan to SBA fails to do so
in writing; fails to submit timely such their Report, Risk Rating and Con-
plan to SBA; or fails to submit a plan fidential Information to their respec-
acceptable to SBA within SBA’s discre- tive parent entities, officers, directors,
tion, then SBA may take enforcement employees, auditors and consultants,
action under this subpart. If an SBA in each case who demonstrate a legiti-
Lender or Intermediary fails to imple- mate need to know such information
ment in any material respect a correc- for the purpose of assisting in improv-
tive action or capital restoration plan ing the SBA Lender’s or Intermediary’s
within the required timeframe, then SBA program operations in conjunc-
SBA may undertake enforcement ac- tion with SBA’s Program and SBA’s
tion under this subpart. portfolio management (for purposes of
this regulation, each referred to as a
[73 FR 75519, Dec. 11, 2008, as amended at 85
FR 14781, Mar. 16, 2020] ‘‘permitted party’’), and to those for
whom SBA has approved access by
§ 120.1060 Confidentiality of Reports, prior written consent, and those for
Risk Ratings and related Confiden- whom access is required by applicable
tial Information. law or legal process. If such law or
(a) In general. Reports and other SBA process requires SBA Lender or
prepared review or examination related Intermediaryto disclose the Report,
353
§ 120.1070 13 CFR Ch. I (1–1–25 Edition)
Risk Rating, or Confidential Informa- (a) Fee components: The fees may
tion to any person other than a per- cover the following:
mitted party, SBA Lender or Inter- (1) Examinations. The costs of con-
mediary will promptly notify SBA and ducting a safety and soundness exam-
SBA’s Information Provider in writing ination and related activities of an
and in advance of such disclosure so SBA-Supervised Lender, including any
that SBA and the Information Provider expenses that are incurred in relation
have, within their discretion, the op- to the examination and such activities.
portunity to seek appropriate relief (2) Reviews. The costs of conducting a
such as an injunction or protective review of a 7(a) Lender or a 7(a) Lend-
order prior to disclosure. For purposes er’s loans, and related review activities
of this regulation, ‘‘consultants’’ (e.g., corrective action assessments,
means only those consultants that are delegated loan reviews), including any
under written contract with an SBA expenses that are incurred in relation
Lender or Intermediary specifically to to the review and such activities.
assist with addressing its Report Find- (3) Monitoring. The costs of con-
ings and Corrective Actions to SBA’s ducting monitoring reviews of a 7(a)
satisfaction. The consultant contract Lender, including any expenses that
must provide for both the consultant’s are incurred in relation to the moni-
agreement to abide by the disclosure toring review activities.
prohibition in this paragraph and the (4) Other lender oversight activities.
consultant’s agreement not to use the The costs of additional expenses that
Report, Risk Rating, and Confidential SBA incurs in carrying out other lend-
Information for any purpose other than er oversight activities (for example,
to assist with addressing the Report the salaries and travel expenses of SBA
Findings and Corrective Actions. ‘‘In- employees and equipment expenses
formation Provider’’ means any con- that are directly related to carrying
tractor that provides SBA with the out lender oversight activities, tech-
Risk Rating. Each SBA Lender and nical assistance and analytics to sup-
Intermediary must ensure that each port the monitoring and review pro-
permitted party is aware of and agrees gram, and supervision and enforcement
to these regulatory requirements and activity costs).
must ensure that each such permitted (b) Allocation. SBA will assess to 7(a)
party abides by them. Any disclosure Lender(s) the costs associated with the
of the Report, Risk Rating, or Con- review, examination, monitoring, or
fidential Information other than as other lender oversight activity, as de-
permitted by this regulation may re- termined by SBA in its discretion. In
sult in appropriate action as author- general:
ized by law. An SBA Lender and Inter-
(1) Where the costs that SBA incurs
mediary will indemnify and hold harm-
for a review, exam, monitoring or other
less SBA from and against any and all
lender oversight activity are specific to
claims, demands, suits, actions, and li-
a particular 7(a) Lender, SBA will
abilities to any degree based upon or
charge that 7(a) Lender a fee for the ac-
resulting from any unauthorized use or
tual costs of conducting the review,
disclosure of the Report, Risk Rating,
exam, monitoring or other lender over-
or Confidential Information. Informa-
sight activity; and
tion Provider contact information is
available from the Office of Capital Ac- (2) Where the costs that SBA incurs
cess. for the lender oversight activity are
not sufficiently specific to a particular
[73 FR 75519, Dec. 11, 2008, as amended at 82 Lender, SBA will assess a fee based on
FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16, each 7(a) Lender’s portion of the total
2020] dollar amount of SBA guarantees in
SBA’s total portfolio or in the relevant
§ 120.1070 SBA Lender oversight fees. portfolio segment being reviewed or ex-
Lenders are required to pay to SBA amined, to cover the costs of such ac-
fees to cover costs of examinations and tivity. SBA may waive the assessment
reviews and, if assessed by SBA, other of this fee for all 7(a) Lenders owing
Lender oversight activities. less than a threshold amount below
354
Small Business Administration § 120.1300
which SBA determines that it is not tion rather than formal enforcement
cost effective to collect the fee. action include, for example, when prob-
(c) Billing process. For the examina- lems are narrow in scope and are
tions or reviews conducted under para- correctible and SBA is confident of a
graphs (a)(1) and (2) of this section, 7(a) Lender’s Board of Directors
SBA will bill each 7(a) Lender for the (‘‘Board’’) and management commit-
amount owed following completion of ment and ability to correct; where vio-
the examination, review or related ac- lations are less frequent or less severe
tivity. For monitoring conducted under but warrant enforcement; or while
paragraph (a)(3) of this section and the more fully assessing risk.
other lender oversight activity ex- (b) Informal enforcement actions in-
penses incurred under paragraph (a)(4) clude, but are not limited to:
of this section, SBA will bill each 7(a) (1) An SBA supervisory letter. The let-
Lender for the amount owed on an an- ter may discuss serious or persistent
nual basis. SBA will state in the bill supervisory concerns, as determined by
the date by which payment is due SBA SBA, and expected corrective action by
and the approved payment method(s). the 7(a) Lender. Supervisory letters in-
The payment due date will be no less clude, for example, Notices of Material
than 30 calendar days from the bill Non-Compliance;
date. (2) Mandatory training. SBA may re-
(d) Delinquent payment and late-pay- quire a 7(a) Lender to complete train-
ment charges. Payments that are not re- ing to address certain findings, weak-
ceived by the due date specified in the nesses, and deficiencies;
bill shall be considered delinquent. (3) A commitment letter or Board resolu-
SBA will charge interest, and other ap- tion. SBA may require a 7(a) Lender to
plicable charges and penalties, on de- submit a commitment letter or Board
linquent payments, as authorized by 31 resolution, satisfactory to SBA, signed
U.S.C. 3717. SBA may waive or abate by the 7(a) Lender’s Board on behalf of
the collection of interest, charges and/ the entity that may:
or penalties if circumstances warrant. (i) Include specific written commit-
In addition, a 7(a) Lender’s failure to ments to take corrective actions in re-
pay any of the fee components de- sponse to the 7(a) Lender’s acknowl-
scribed in this section, or to pay inter- edged deficiencies;
est, charges and penalties that have (ii) Identify the person(s) responsible
been charged, may result in a decision for taking the corrective action; and
to suspend or revoke a participant’s (iii) Set forth the timeframe for tak-
eligibility, limit a participant’s dele- ing the corrective action. The docu-
gated authority, or other remedy avail- ment may be drafted by SBA or the
able under law. 7(a) Lender;
[61 FR 3235, Jan. 31, 1996, as amended at 82 (4) Agreements. SBA may request that
FR 39505, Aug. 21, 2017] a 7(a) Lender enter into a written
agreement with, and drafted by, SBA
ENFORCEMENT ACTIONS to address and correct identified weak-
nesses and/or limit or mitigate risk.
§ 120.1300 Informal enforcement ac- The agreement may provide, for exam-
tions—7(a) Lenders. ple, that a 7(a) Lender take certain ac-
(a) Upon a determination that the tions or refrain from certain actions;
grounds in § 120.1400 exist, the D/OCRM and
may undertake, in his/her discretion, (5) Other informal enforcement actions.
one or more of the informal enforce- Others as SBA determines appropriate
ment actions listed in this section and on a case by case basis.
is not restricted from delegating as ap- (c) A 7(a) Lender may appeal infor-
propriate. SBA will consider the sever- mal enforcement actions to the appro-
ity or frequency of the violation or ac- priate Federal district court or SBA’s
tion triggering the ground and the cir- Office of Hearings and Appeals (OHA)
cumstances in determining whether within 20 calendar days of the date of
and what type of informal action to the decision, and in the event of an
take. Circumstances that may lead to OHA appeal, OHA will issue its decision
SBA taking informal enforcement ac- in accordance with part 134 of this
355
§ 120.1400 13 CFR Ch. I (1–1–25 Edition)
title. The enforcement action will re- advance any right it may have to con-
main in effect pending resolution of test the validity of the appointment of
the appeal, if any. SBA is not precluded a receiver. The SBA Supervised Lender
from taking one or more formal en- agrees that its consent to SBA’s appli-
forcement actions under § 120.1500, or as cation to a Federal court of competent
otherwise authorized by law, while an jurisdiction for appointment of a re-
appeal of an informal enforcement ac- ceiver of SBA’s choosing, an injunction
tion is pending. or other equitable relief, and the SBA
[85 FR 14781, Mar. 16, 2020] Supervised Lender’s consent in advance
to the court’s granting of SBA’s appli-
§ 120.1400 Grounds for enforcement cation, may be enforced upon any basis
actions—SBA Lenders. in law or equity recognized by the
(a) Agreements. By making SBA 7(a) court. The SBA Supervised Lender’s
guaranteed loans or 504 loans, SBA consent does not preclude such Lender
Lenders automatically agree to the from contesting whether or not SBA
terms, conditions, and remedies in has established the grounds for seeking
Loan Program Requirements, as pro- the remedy of a receivership. The SBA
mulgated or issued from time to time Supervised Lender’s consent to receiv-
and as if fully set forth in the SBA ership as a remedy does not require
Form 750 (Loan Guaranty Agreement), SBA to seek appointment of a receiver
Development Company 504 Debenture, in any particular SBA enforcement ac-
CDC Certification, Servicing Agent tion.
Agreement, or other applicable partici- (b) Scope. SBA may undertake one or
pation, guaranty, or supplemental more of the enforcement actions listed
agreement. SBA Lenders further agree in §§ 120.1300 and 120.1500, or as other-
that a violation of Loan Program Re- wise authorized by law, if SBA deter-
quirements constitutes default under mines that the grounds applicable to
their respective agreements with SBA. the enforcement action exist. Para-
(1) Additional agreements by CDCs. By graphs (c) through (e) of this section
obtaining approval for 504 loans after list the grounds that trigger enforce-
January 1, 2018, a CDC consents to the ment actions against each type of SBA
remedies in § 120.1500(e)(3) and waives in Lender. In general, the grounds listed
advance any right it may have to con- in paragraph (c) apply to all SBA Lend-
test the validity of the appointment of ers. However, certain enforcement ac-
a receiver. The CDC agrees that its tions against SBA Supervised Lenders
consent to SBA’s application to a Fed- require the existence of certain
eral court of competent jurisdiction for grounds, as set forth in paragraphs (d)
appointment of a receiver of SBA’s and (e). In addition, paragraph (f) of
choosing, an injunction or other equi- this section lists two additional
table relief, and the CDC’s consent in grounds for taking enforcement action
advance to the court’s granting of against CDCs that do not apply to
SBA’s application, may be enforced other SBA Lenders. SBA considers the
upon any basis in law or equity recog- severity or frequency of a violation in
nized by the court. The CDC’s consent determining whether to take an en-
does not preclude the CDC from con- forcement action and the type of en-
testing whether or not SBA has estab- forcement action to take.
lished the grounds for seeking the rem- (c) Grounds in general. Except as pro-
edy of a receivership. A CDC’s consent vided in paragraphs (d) and (e) of this
to receivership as a remedy does not section, the grounds that may trigger
require SBA to seek appointment of a an enforcement action against any
receiver in any particular SBA enforce- SBA Lender (regardless of its Risk Rat-
ment action. ing) include:
(2) Additional agreements by SBA Su- (1) Failure to maintain eligibility re-
pervised Lenders (except Other Regulated quirements for specific SBA programs
SBLCs). By making SBA 7(a) guaran- and delegated authorities, including
teed loans after January 1, 2018, an but not limited to: 7(a), PLP,
SBA Supervised Lender (except an SBAExpress, 504, ALP, PCLP, the al-
Other Regulated SBLC) consents to the ternative loss reserve pilot program
remedies in § 120.1500(c)(3) and waives in and any pilot loan program;
356
Small Business Administration § 120.1400
(2) Failure to comply materially with (8) Unauthorized disclosure of Re-
any requirement imposed by Loan Pro- ports, Risk Rating, or Confidential In-
gram Requirements; formation;
(3) Making a material false state- (9) Any other reason that SBA deter-
ment or failure to disclose a material mines may increase SBA’s financial
fact to SBA. (A material fact is any risk (for example, repeated Less Than
fact which is necessary to make a Acceptable Risk Ratings (generally in
statement not misleading in light of conjunction with other indicators of
the circumstances under which the increased financial risk); failure to
statement was made.); properly oversee Agent activity
(4) Not performing underwriting, (‘‘Agent’’ as defined in part 103 of this
closing, disbursing, servicing, liquida- title); or, indictment on felony or fraud
tion, litigation or other actions in a charges of an officer, key employee, or
commercially reasonable and prudent loan agent involved with SBA loans for
manner for 7(a) or 504 loans, respec- the SBA Lender);
tively, as applicable. Evidence of such (10) As otherwise authorized by law;
performance or actions may include, (11) For immediate suspension of all
but is not limited to, the SBA Lender SBA Lenders from delegated authori-
having a repeated Less Than Accept- ties—upon a determination by SBA
able Risk Rating (generally in conjunc- that:
tion with other evidence) or an on-site
(i) One or more of the grounds in
review/examination assessment which
paragraph (c) or (f) of this section, as
is Less Than Acceptable;
applicable, exists; and
(5) Failure within the time period
(ii) Immediate action is needed to
specified to correct an underwriting,
protect the interests of the Federal
closing, disbursing, servicing, liquida-
Government (such as where there is
tion, litigation, or reporting defi-
risk of immediate harm or loss, a sig-
ciency, or failure in any material re-
nificant program integrity concern, or
spect to take other corrective action,
after receiving notice from SBA of a clear evidence of conduct indicating a
deficiency and the need to take correc- lack of business integrity); and
tive action; (12) For immediate suspension of all
(6) Engaging in a pattern of unco- SBA Lenders (except SBA Supervised
operative behavior or taking an action Lenders, which are covered under para-
that SBA determines is detrimental to graph (d)(2) of this section) from the
the integrity or reputation of an SBA authority to participate in the SBA
program, that undermines manage- loan program, including the authority
ment or administration of a program, to make, service, liquidate, or litigate
or that is not consistent with stand- 7(a) or 504 loans—upon a determination
ards of good conduct. Prior to issuing a by SBA that:
notice of a proposed enforcement ac- (i) One or more of the grounds in
tion or immediate suspension under paragraph (c) or (f) of this section, as
§ 120.1500 based upon this paragraph, applicable, exists; and
SBA must send prior written notice to (ii) Immediate action is needed to
the SBA Lender explaining why the protect the interests of the Federal
SBA Lender’s actions were uncoopera- Government (such as where there is
tive, detrimental to the program, un- risk of immediate harm or loss, a sig-
dermined SBA’s management of the nificant program integrity concern, or
program, or were not consistent with clear evidence of conduct indicating a
standards of good conduct. The prior lack of business integrity).
notice must also state that the SBA (d) Grounds required for certain en-
Lender’s actions could give rise to a forcement actions against SBA Supervised
specified enforcement action, and pro- Lenders (except Other Regulated SBLCs)
vide the SBA Lender with a reasonable or, as applicable, Other Persons. For pur-
time to cure the deficiency before any poses of Subpart I, Other Person means
further action is taken; a Management Official, attorney, ac-
(7) Repeated failure to correct con- countant, appraiser, Lender Service
tinuing deficiencies; Provider or other individual involved
357
§ 120.1400 13 CFR Ch. I (1–1–25 Edition)
in the SBA Supervised Lender’s oper- meaning of this provision when all of
ations. For the below listed SBA Su- its capital, surplus, and undivided prof-
pervised Lender enforcement actions, its are absorbed in funding losses and
the grounds that are required to take the remaining assets are not sufficient
the enforcement action are: to pay and discharge its contracts,
(1) For SBA program suspensions and debts, and other obligations as they
revocations— come due.
(i) False statements knowingly made (6) For transfer of servicing activity—
in any required written submission to (i) Where grounds for transfer of
SBA; or Loan portfolio are met; or
(ii) An omission of a material fact (ii) Where the SBA Supervised Lend-
from any written submission required er is otherwise operating in an unsafe
by SBA; or and unsound condition.
(iii) A willful or repeated violation of (7) For order to remove Management Of-
SBA Loan Program Requirements; or ficial—where, in the opinion of the Ad-
(iv) A willful or repeated violation of ministrator or his/her delegatee, the
any condition imposed by SBA with re- Management Official—
spect to any application or request (i) Willfully and knowingly com-
with SBA; or mitted a substantial violation of the
(v) A violation of any cease and de- Act, SBA regulation, a final cease and
sist order of SBA. desist order, or any agreement by the
(2) For SBA program immediate suspen- Management Official or the SBA Su-
sion—SBA may suspend an SBA Super- pervised Lender under the Act or SBA
vised Lender, effective immediately, if regulations, or
in addition to meeting the grounds set (ii) Willfully and knowingly com-
forth in paragraph (d)(1) of this section, mitted a substantial breach of a fidu-
the Administrator (or the Deputy Ad- ciary duty of that person as a Manage-
ministrator, only if the Administrator ment Official and the violation or
is unavailable to take such action) breach of fiduciary duty is one involv-
finds extraordinary circumstances and ing personal dishonesty on the part of
takes such action in order to protect such Management Official, or
the financial or legal position of the (iii) The Management Official is con-
United States. victed of a felony involving dishonesty
(3) For cease and desist orders— or breach of trust and the conviction is
(i) A violation of SBA Loan Program no longer subject to further judicial re-
Requirements; or view (excludes writ of habeas corpus).
(ii) Where an SBA Supervised Lender (8) For order to suspend or prohibit par-
or Other Person engages in or is about ticipation of Management Official (in-
to engage in any acts or practices that terim measure pending removal)—
will violate SBA Loan Program Re- where SBA is undertaking enforcement
quirements. action of removal of a Management Of-
(4) For an emergency cease and desist ficial.
order— (9) For order to suspend or prohibit par-
(i) Where grounds for cease and desist ticipation of Management Official due to
order are met, criminal charges—where the Manage-
(ii) The Administrator (or the Deputy ment Official is charged in any infor-
Administrator, only if the Adminis- mation, indictment or complaint au-
trator is unavailable to take such ac- thorized by a United States attorney
tion) finds extraordinary cir- with a felony involving dishonesty or
cumstances, and breach of trust.
(iii) In order to protect the financial (e) Grounds required for certain en-
or legal position of the United States. forcement actions against SBLCs and
(5) For transfer of Loan portfolio— Other Regulated SBLCs—(1) Capital di-
(i) Where a court has appointed a re- rective. If the AA/CA determines that
ceiver; or an SBLC is capitally impaired or is
(ii) The SBA Supervised Lender is ei- otherwise being operated in an impru-
ther not in compliance with capital re- dent manner, the AA/CA may, in addi-
quirements or is insolvent. An SBA Su- tion to any other action authorized by
pervised Lender is insolvent within the law, issue a directive to the SBLC to
358
Small Business Administration § 120.1425
increase capital consistent with (iv) Communicate and file reports
§ 120.1500(d)(1). within six months after beginning par-
(2) Civil action for termination. If an ticipation in program;
SBLC violates the Act or SBA regula- (v) Maintain a currency rate of 85%
tions, SBA may institute a civil action or more for the Intermediary’s SBA
to terminate SBLC rights, privileges, Microloan portfolio (that is, loans that
and the franchise under § 120.1500(d)(2). are no more than 30 days late in sched-
(f) Additional grounds specific to CDCs. uled payments);
In addition to the grounds set forth in (vi) Maintain a default rate in the
paragraphs (b) and (c) of this section, Intermediary’s Microloan portfolio of
SBA may take enforcement action 15% or less of the cumulative dollars
against a CDC for: loaned under the program;
(1) Failure to receive SBA approval (vii) Maintain a staff trained in
for at least four 504 loans during the Microloan Program issues and Loan
last two consecutive fiscal years, or Program Requirements;
(2) For PCLP CDCs, failure to estab- (viii) Maintain the financial ability
lish or maintain a LLRF as required by to sustain the Intermediary’s oper-
the PCLP. ations (including, but not limited to,
adequate capital), as determined by
[73 FR 75521, Dec. 11, 2008, as amended at 82 SBA;
FR 39505, Aug. 21, 2017; 85 FR 14782, Mar. 16, (ix) Satisfactorily provide in-house
2020; 87 FR 38909, June 30, 2022] technical assistance to Microloan bor-
rowers and prospective Microloan bor-
§ 120.1425 Grounds for formal enforce-
ment actions—Intermediaries par- rowers; or
ticipating in the Microloan Pro- (x) Close and fund the required num-
gram. ber of microloans per year under
§ 120.716;
(a) Agreement. By participating in the
(3) Failure within the time period
SBA Microloan Program, Inter-
specified to correct an underwriting,
mediaries automatically agree to the
closing, disbursing, servicing, liquida-
terms, conditions, and remedies in this
tion, litigation, or reporting defi-
part as if fully set forth in their par-
ciency, or failure in any material re-
ticipation agreement and all other
spect to take other corrective action,
agreements jointly executed by the
after receiving notice from SBA of a
Intermediary and SBA.
deficiency and the need to take correc-
(b) Scope. SBA may undertake one or tive action;
more of the formal enforcement ac- (4) Engaging in a pattern of unco-
tions listed in § 120.1540, or as otherwise operative behavior or taking an action
authorized by law, if SBA determines that SBA determines is detrimental to
that any of the grounds listed in para- the integrity or reputation of the
graph (c) of this section exist. Microloan Program, that undermines
(c) Grounds in general. For any Inter- management or administration of the
mediary, grounds that may trigger en- program, or that is not consistent with
forcement action against the Inter- standards of good conduct. Prior to
mediary (regardless of its Risk Rating) issuing a notice of a proposed formal
include: enforcement action or immediate sus-
(1) Failure to comply materially with pension under § 120.1540 based upon the
any requirement imposed by Loan Pro- grounds discussed in this paragraph
gram Requirements; (c)(4), SBA must send prior written no-
(2) Failure to meet any one of the fol- tice to the Intermediary explaining
lowing performance standards: why the Intermediary’s actions were
(i) Coverage of the service territory uncooperative, detrimental to the pro-
assigned by SBA, including honoring gram, undermined SBA’s management
SBA’s determined boundaries of neigh- of the program, or were not consistent
boring intermediaries; with standards of good conduct. The
(ii) Fulfill reporting requirements; prior notice must also state that the
(iii) Manage program funds and Intermediary’s actions could give rise
matching funds in a satisfactory and fi- to a specified formal enforcement ac-
nancially sound manner; tion, and provide the Intermediary
359
§ 120.1500 13 CFR Ch. I (1–1–25 Edition)
with a reasonable time to cure the defi- tion will not, by itself, invalidate a
ciency before any further action is guaranty previously provided by SBA.
taken; (a) Formal enforcement actions for all
(5) Any other reason that SBA deter- SBA Lenders—(1) Imposition of portfolio
mines may increase SBA’s financial or guaranty dollar limit. SBA may limit
program risk (for example, repeated the maximum dollar amount that SBA
Less Than Acceptable Risk Ratings will guarantee on the SBA Lender’s
(generally in conjunction with other SBA loans or debentures.
indicators of increased risk) or indict- (2) Suspension or revocation of dele-
ment on felony or fraud charges of an gated authority. SBA may suspend or
officer, key employee, or loan agent in- revoke an SBA Lender’s delegated au-
volved with SBA programs for the thority (including, but not limited to,
Intermediary); PLP, SBA Express, or PCLP delegated
(6) For immediate suspension of an authorities).
Intermediary—upon a determination (3) Suspension or revocation from SBA
by SBA that: program. SBA may suspend or revoke
(i) One or more of the grounds in an SBA Lender’s authority to partici-
paragraph (c) of this section exists; and pate in the SBA loan program, includ-
(ii) Immediate action is needed to ing the authority to make, service, liq-
protect the interests of the Federal uidate, or litigate 7(a) or 504 loans. Sec-
Government (such as where there is tion 120.1400(d)(1) sets forth the
risk of immediate harm or loss, a sig- grounds for SBA program suspension or
nificant program integrity concern, or revocation of an SBA Supervised Lend-
clear evidence of conduct indicating a er (except Other Regulated SBLCs).
lack of business integrity); and The grounds for SBA program suspen-
(7) As otherwise authorized by law. sion or revocation for all other SBA
[73 FR 75521, Dec. 11, 2008, as amended at 80 Lenders are set forth in § 120.1400(c)
FR 34047, June 15, 2015; 85 FR 14782, Mar. 16, and, as applicable, paragraph (f) of
2020] § 120.1400.
(4) Immediate suspension. SBA may
§ 120.1500 Types of formal enforce- suspend, effective immediately, an
ment actions—SBA Lenders. SBA Lender’s delegated authority or
Upon a determination that the authority to participate in the SBA
grounds set forth in § 120.1400 exist, the loan program, or the authority to
D/OCRM may undertake, in his/her dis- make, service, liquidate, or litigate
cretion (and with the involvement of 7(a) or 504 loans. Section 120.1400(d)(2)
the LOC as appropriate and consistent sets forth the grounds for SBA program
with its assigned responsibilities), one immediate suspension of an SBA Su-
or more of the following formal en- pervised Lender (except Other Regu-
forcement actions for each of the types lated SBLCs). The grounds for SBA
of SBA Lender listed, and is not re- program immediate suspension for all
stricted from delegating as appro- other SBA Lenders and the grounds for
priate. SBA will consider the severity immediate suspension of delegated au-
or frequency of the violation or action thority for all SBA Lenders are set
and the circumstances triggering the forth in § 120.1400(c)(11) and
ground in determining whether and § 120.1400(c)(12).
what type of enforcement action to (5) Debarment. In accordance with 2
take. SBA will take formal enforce- CFR Parts 180 and 2700, SBA may take
ment action in accordance with proce- any necessary action to debar a Per-
dures set forth in § 120.1600. If formal son, as defined in § 120.10, including but
enforcement action is taken under this not limited to an officer, a director, a
section and the SBA Lender fails to im- general partner, a manager, an em-
plement required corrective action in ployee, an agent or other participant in
any material respect within the re- the affairs of an SBA Lender’s SBA op-
quired timeframe in response to the erations.
formal enforcement action, the D/ (6) Other actions available under law.
OCRM may take further enforcement SBA may take all other enforcement
action, as authorized by law. SBA’s de- actions against SBA Lenders available
cision to take a formal enforcement ac- under law.
360
Small Business Administration § 120.1500
(b) Formal enforcement actions specific of the SBA Supervised Lender or in re-
to 7(a) Lenders. In addition to those for- viewing, approving, closing, servicing,
mal enforcement actions applicable to liquidating or litigating any 7(a) loan,
all SBA Lenders, SBA may take the or any other activities of the SBA Su-
following actions: pervised Lender while the removal pro-
(1) Secondary market suspension or ceeding is pending in order to protect
revocation (other than temporary sus- an SBA Supervised Lender or the inter-
pension and revocation under § 120.660). ests of SBA or the United States.
SBA may suspend or revoke a 7(a) (3) Initiate request for appointment of
Lender’s authority to sell or purchase receiver and/or other relief. The SBA
loans or certificates in the Secondary may make application to any Federal
Market; or court of competent jurisdiction for the
(2) Civil monetary penalty (other court to take exclusive jurisdiction,
than SBA Supervised Lender civil mon- without notice, of an SBA Supervised
etary penalty under § 120.465). SBA may Lender, and SBA shall be entitled to
assess a civil monetary penalty against the appointment of a receiver of SBA’s
a 7(a) Lender. The civil monetary pen- choosing to hold, administer, operate,
alty will be in an amount not to exceed and/or liquidate the SBA Supervised
the maximum published in the FED- Lender; and to such injunctive or other
ERAL REGISTER from time to time, equitable relief as may be appropriate.
which will be 298,887 plus any increases Without limiting the foregoing and
required under law. In determining with SBA’s written consent, the re-
whether to assess a civil monetary pen- ceiver may take possession of the port-
alty and, if so, in what amount, SBA folio of 7(a) loans and sell such loans to
may consider, for example, the fol- a third party, and/or take possession of
lowing: The gravity (e.g., severity and servicing activities of 7(a) loans and
frequency) of the violation; the history sell such servicing rights to a third
of previous violations; the financial re- party. In deciding whether to seek the
sources and good faith of the 7(a) Lend- appointment of a receiver and in deter-
er; and any other matters as justice mining the scope of a receivership,
may require. SBA will consider the following fac-
(c) Formal enforcement actions specific tors, in its discretion:
to SBA Supervised Lenders and Other (i) for NFRLs:
Persons (except Other Regulated SBLCs). (A) the existence of fraud or false
In addition to those enforcement ac- statements;
tions listed in paragraphs (a) and (b) of (B) the NFRL’s refusal to cooperate
this section, SBA may take any one or with SBA enforcement action instruc-
more of the following enforcement ac- tions or orders;
tions specific to SBA Supervised Lend- (C) the NFRL’s insolvency (legal or
ers and as applicable, Other Persons: equitable);
(1) Cease and desist order. SBA may
(D) the size of the NFRL’s SBA loan
issue a cease and desist order against
portfolio(s) in relation to other activi-
the SBA Supervised Lender or Other
ties of the NFRL;
Person. The Cease and Desist order
(E) the dollar amount of any claims
may either require the SBA Supervised
SBA may have against the NFRL;
Lender or the Other Person to take a
specific action, or to refrain from a (F) the NFRL’s failure to comply ma-
specific action. The Cease and Desist terially with any requirement imposed
Order may be issued as effective imme- by Loan Program Requirements; and/or
diately (or as a proposal for Order). (G) the existence of other non-SBA
SBA may include in the cease and de- enforcement actions against the NFRL;
sist order the suspension of authority (ii) for SBLCs:
to lend. (A) the existence of fraud or false
(2) Remove Management Official. SBA statements;
may issue an order to remove a Man- (B) the SBLC’s refusal to cooperate
agement Official from office. SBA may with SBA enforcement action instruc-
suspend a Management Official from tions or orders;
office or prohibit a Management Offi- (C) the SBLC’s insolvency (legal or
cial from participating in management equitable);
361
§ 120.1500 13 CFR Ch. I (1–1–25 Edition)
(D) the dollar amount of any claims (v) Undertake a combination of any
SBA may have against the SBLC; and/ of these or similar actions.
or (2) Civil action for termination. SBA
(E) the SBLC’s failure to comply ma- may institute a civil action to termi-
terially with any requirement imposed nate the rights, privileges, and fran-
by Loan Program Requirements. chises of an SBLC.
(4) Civil monetary penalties for report (e) Formal enforcement actions specific
filing failure under § 120.465. SBA may to CDCs. In addition to those enforce-
seek civil penalties, in accordance with ment actions listed in paragraph (a) of
§ 120.465, against an SBA Supervised
this section, SBA may take any one or
Lender that fails to file any regular or
more of the following enforcement ac-
special report by its due date as speci-
fied by regulation or SBA written di- tions specific to CDCs:
rective. (1) Require the CDC to transfer part
(d) Formal enforcement actions specific or all of its existing 504 loan portfolio
to SBLCs. In addition to those super- and/or part or all of its pending 504
visory actions listed in paragraphs (a), loan applications to SBA, another CDC,
(b), and (c) of this section, SBA may or any other entity designated by SBA.
take the following enforcement actions Any such transfer may be on a tem-
specific to SBLCs. porary or permanent basis, in SBA’s
(1) Capital directive. The AA/CA may discretion; or
issue a capital directive upon a deter- (2) Instruct the Central Servicing
mination that the grounds in Agent to withhold payment of serv-
§ 120.1400(e)(1) exist. A directive may icing, late and/or other fee(s) to the
order the SBLC to: CDC.
(i) Achieve its minimum capital re- (3) Apply to any Federal court of
quirement applicable to it by a speci- competent jurisdiction for the court to
fied date; take exclusive jurisdiction, without no-
(ii) Adhere to a previously submitted tice, of the CDC, and SBA shall be enti-
capital restoration plan (provided
tled to the appointment of a receiver of
under § 120.462 or § 120.1055) to achieve
SBA’s choosing to hold, administer, op-
the applicable capital requirement;
(iii) Submit and adhere to a capital erate and/or liquidate the CDC; and to
restoration plan acceptable to SBA de- such injunctive or other equitable re-
scribing the means and time schedule lief as may be appropriate. SBA will
by which the SBLC will achieve the ap- limit the scope of the receivership to
plicable capital requirement (The the CDC’s assets related to the SBA
SBLC must provide its capital restora- loan program(s) except where the
tion plan within 30 days from the date CDC’s business is almost exclusively
of the SBA order unless SBA notifies SBA-related. SBA will only seek a re-
the SBLC that the plan is to be filed ceivership if there is either the exist-
within a different time period. SBA ence of fraud or false statements, or if
may perform an on-site examination the CDC has refused to cooperate with
(generally within 90 days after the res- SBA enforcement action instructions
toration plan is submitted) to verify or orders. Without limiting the fore-
the implementation of the plan and going and with SBA’s consent, the re-
verify that the SBLC meets minimum ceiver may take possession of the port-
capital requirements.); folio of 504 loans and/or pending 504
(iv) Refrain from taking certain ac- loan applications, including for the
tions without obtaining SBA’s prior purpose of carrying out an enforcement
written approval (Such actions may in- order under paragraph (e)(1) of this sec-
clude but are not limited to: paying tion.
any dividend; retiring any equity;
maintaining a rate of growth that [73 FR 75521, Dec. 11, 2008, as amended at 82
causes further deterioration in the cap- FR 39506, Aug. 21, 2017; 84 FR 12061, Apr. 1,
ital percentage; securitizing any 2019; 85 FR 14783, Mar. 16, 2020; 86 FR 52957,
unguaranteed portion of its 7(a) loans; Sept. 24, 2021; 87 FR 28758, May 11, 2022; 87 FR
or selling participations in any of its 38910, June 30, 2022; 88 FR 50005, Aug. 1, 2023;
89 FR 48134, June 5, 2024]
7(a) loans); or
362
Small Business Administration § 120.1540
§ 120.1510 Other Regulated SBLCs. banking regulator conducts a safety
and soundness examination, and this
Other Regulated SBLCs are exempt
notification must be submitted to SBA
from §§ 120.465, 120.1050(b), 120.1400(d),
within 30 calendar days of the SBLC re-
120.1500(c), and 120.1600(b). This exemp-
ceiving the results of the examination.
tion is not intended to preclude SBA
To retain its status as an Other Regu-
from seeking any other remedy author-
lated SBLC, the Other Regulated SBLC
ized by law or equity.
must receive such examination, and
[73 FR 75521, Dec. 11, 2008] provide the written notification to
SBA, at least once every two years fol-
§ 120.1511 Certification and other re- lowing initial certification.
porting and notification require- (d) Report. An Other Regulated SBLC
ments for Other Regulated SBLCs. must report in writing to SBA on its
(a) Certification. An SBLC seeking interactions with other Federal Finan-
Other Regulated SBLC status must cial Institution Regulators or state
certify to SBA in writing that its lend- banking regulator (e.g., the results of
ing activities are subject to regulation the safety and soundness examinations
by a Federal Financial Institution Reg- and any order issued against the Other
ulator or state banking regulator. This Regulated SBLC), to the extent al-
certification must be executed by the lowed by law.
chair of the board of directors of the (e) Notification of change in status. If,
SBLC and submitted to SBA either: for any reason, an Other Regulated
(1) Within 60 calendar days of the ef- SBLC becomes no longer subject to
fective date of this section or regulation by a Federal Financial In-
(2) If the SBLC becomes subject to stitution Regulator or state banking
regulation by a Federal Financial In- regulator, the Other Regulated SBLC
stitution Regulator or state banking must immediately notify SBA in writ-
regulator after the effective date of ing, and the exemption provided in
this section for any reason (e.g. license § 120.1510 will immediately no longer
transfers), within 60 days of the date apply.
that the SBLC becomes directly exam- (f) Extension of timeframes. SBA may
ined and directly regulated by such in its discretion extend any timeframe
regulator. imposed on the SBLC under this sec-
(b) Contents of Certification: This cer- tion if the SBLC can show good cause
tification must include: for any delay in meeting the time re-
(1) The identity of the Federal Finan- quirement. The SBLC may appeal this
cial Institution Regulator or state decision to the AA/CA.
banking regulator that regulates the (g) Failure to satisfy requirements. In
lending activities of the SBLC; the event that an SBLC fails to satisfy
(2) A statement that the Federal Fi- the requirements set forth in para-
nancial Institution Regulator or state graphs (a), (b), and (c) of this section,
banking regulator identified in para- then the exemption provided in
graph (b)(1) of this section regularly § 120.1510 will not apply to the SBLC.
conducts safety and soundness exami- [73 FR 75521, Dec. 11, 2008]
nations on the SBLC itself and not
only on the SBLC’s parent company or § 120.1540 Types of formal enforce-
affiliate, if any; and ment actions—Intermediaries par-
(3) The date of the most recent safety ticipating in the Microloan Pro-
and soundness examination conducted gram.
on the SBLC by the Federal Financial Upon a determination that any
Institution Regulator or state banking ground set out in § 120.1425 exists, the
regulator. To qualify as an Other Regu- D/OCRM may undertake, in his/her dis-
lated SBLC, the SBLC must have re- cretion (and with the involvement of
ceived this examination within the the LOC as appropriate and consistent
past 3 years of the date of certification. with its assigned responsibilities), one
(c) Notification of examination. An or more of the following formal en-
Other Regulated SBLC must notify forcement actions against an Inter-
SBA in writing each time a Federal Fi- mediary, and is not restricted from del-
nancial Institution Regulator or state egating as appropriate:
363
§ 120.1600 13 CFR Ch. I (1–1–25 Edition)
(a) Suspension. SBA may suspend an tions listed in paragraphs (a)(6), (b),
Intermediary’s authority to participate and (c) of this section and in § 120.465,
in the Microloan Program, which may SBA will follow the procedures listed
include, but is not limited to, the au- in this section.
thority to make, service, liquidate, (1) SBA’s notice of formal enforcement
and/or litigate SBA microloans, and action. (i) When undertaking an imme-
the imposition of a freeze on the diate suspension under § 120.1500(a)(4),
Intermediary’s MRF and LLRF ac- or prior to undertaking a formal en-
counts. forcement action set forth in
(b) Immediate suspension. SBA may § 120.1500(a), (b), and (e) and § 120.1540,
suspend, effective immediately, an SBA will issue a written notice to the
Intermediary’s authority to participate affected SBA Lender or Intermediary
in the Microloan Program, which may identifying the proposed formal en-
include, but is not limited to, the au- forcement action or notifying it of an
thority to make, service, liquidate, immediate suspension. The notice will
and/or litigate SBA microloans, and set forth in reasonable detail the un-
the imposition of an immediate freeze derlying facts and reasons for the pro-
on the Intermediary’s MRF and LLRF posed action or immediate suspension.
accounts. Section 120.1425(c)(6) sets If the notice is for a proposed or imme-
forth the grounds for SBA Microloan diate suspension, SBA will also state
Program immediate suspension of an the scope and term of the proposed or
Intermediary. immediate suspension.
(c) Revocation. SBA may revoke an
(ii) If a proposed formal enforcement
Intermediary’s authority to participate
action or immediate suspension is
in the Microloan Program which may
based upon information obtained from
include, but is not limited to:
a third party other than the SBA Lend-
(1) Removal from the program;
er, Intermediary, or SBA, SBA’s notice
(2) Liquidation of the Intermediary’s
of proposed action or immediate sus-
MRF and LLRF accounts by SBA, and
pension will provide copies of docu-
application of the liquidated funds to
mentation received from such third
any outstanding balance owed to SBA;
party, or the name of the third party in
(3) Payment of outstanding debt to
SBA by the Intermediary; case of oral information, unless SBA
(4) Forfeiture or repayment of any determines that there are compelling
unused grant funds by the Inter- reasons not to provide such informa-
mediary; tion. If compelling reasons exist, SBA
(5) Debarment of the organization will provide a summary of the informa-
from receipt of Federal funds until tion it received to the SBA Lender or
loan and grant repayments are met; Intermediary.
and (2) SBA Lender’s or Intermediary’s op-
(6) Surrender of possession of portunity to object. (i) An SBA Lender or
Intermediary’s SBA microloan port- Intermediary that desires to contest a
folio to SBA, with the microloan port- proposed formal enforcement action or
folio and all associated rights trans- an immediate suspension must file,
ferred on a permanent basis to SBA, in within 30 calendar days of its receipt of
accordance with SBA’s rights as a se- the notice or within some other term
cured creditor. established by SBA in its notice, a
(d) Other actions. Such other actions written objection with the appropriate
available under law. Office of Capital Access official in ac-
cordance with Delegations of Author-
[85 FR 14783, Mar. 16, 2020]
ity or other SBA official identified in
§ 120.1600 General procedures for for- the notice. Notice will be presumed to
mal enforcement actions against have been received within five days of
SBA Lenders, SBA Supervised the date of the notice unless the SBA
Lenders, Other Regulated SBLCs, Lender or Intermediary can provide
Management Officials, Other Per- compelling evidence to the contrary.
sons, and Intermediaries. (ii) The objection must set forth in
(a) In general. Except as otherwise set detail all grounds known to the SBA
forth for the formal enforcement ac- Lender or Intermediary to contest the
364
Small Business Administration § 120.1600
proposed action or immediate suspen- gence, could not have been discovered
sion and all mitigating factors, and within the timeframe given by SBA to
must include documentation that the respond to a notice, or that there are
SBA Lender or Intermediary believes is compelling reasons beyond the SBA
most supportive of its objection. An Lender’s or Intermediary’s control as
SBA Lender or Intermediary must ex- to why it was not able to present a ma-
haust this administrative remedy in terial fact or argument to SBA, and
order to preserve its objection to a pro- that the SBA Lender or Intermediary
posed formal enforcement action or an has been prejudiced by not being able
immediate suspension. to present such information, the SBA
(iii) If an SBA Lender or Inter- Lender or Intermediary may submit
mediary can show legitimate reasons such information to SBA and request
as determined by SBA in SBA’s discre- that the Agency consider such informa-
tion why it does not understand the tion in its final agency decision.
reasons given by SBA in its notice of (3) SBA’s notice of final agency decision
the action, the Agency will provide on a formal enforcement action where an
clarification. SBA will provide the re- SBA Lender or Intermediary filed objec-
quested clarification in writing to the tion to the proposed action or immediate
SBA Lender or Intermediary or notify suspension. (i) If the affected SBA Lend-
the SBA Lender or Intermediary in er or Intermediary files a timely writ-
writing that SBA has determined that ten objection to a proposed formal en-
such clarification is not necessary. forcement action other than an imme-
SBA, in its discretion, will further ad- diate suspension in accordance with
vise in writing whether the SBA Lend- this section, SBA must issue a written
er or Intermediary may have addi- notice of final agency decision to the
tional time to present its objection to affected SBA Lender or Intermediary
the notice. Requests for clarification advising whether SBA is undertaking
must be made to the appropriate Office the proposed formal enforcement ac-
of Capital Access official in accordance tion and setting forth the grounds for
with Delegations of Authority in writ- the decision. SBA will issue such a no-
ing and received by SBA within the 30 tice of decision within 90 days of either
day timeframe or the timeframe given receiving the objection or from when
by the notice for response. additional information is provided
(iv) An SBA Lender or Intermediary under paragraph (a)(2)(v) or (a)(3)(iii) of
may request additional time to respond this section, whichever is later, unless
to SBA’s notice if it can show that SBA provides notice that it requires
there are compelling reasons why it is additional time.
not able to respond within the 30 day (ii) If the affected SBA Lender or
timeframe or the response timeframe Intermediary files a timely written ob-
given by the notice. If such requests jection to a notice of immediate sus-
are submitted to the Agency, SBA pension, SBA must issue a written no-
may, in its discretion, provide the SBA tice of final agency decision to the af-
Lender or Intermediary with additional fected SBA Lender or Intermediary
time to respond to the notice of pro- within 30 days of receiving the objec-
posed action or immediate suspension. tion advising whether SBA is con-
Requests for additional time to respond tinuing with the immediate suspen-
must be made in writing to the appro- sion, unless SBA provides notice that
priate Office of Capital Access official it requires additional time. If the SBA
in accordance with Delegations of Au- Lender or Intermediary submits addi-
thority or other official identified in tional information to SBA (under para-
the notice and received by SBA within graph (a)(2)(v) or (a)(3)(iii) of this sec-
the 30 day timeframe or the response tion) after submitting its objection but
timeframe given by the notice. before SBA issues its final agency deci-
(v) Prior to the issuance of a final sion, SBA must issue its final agency
agency decision by SBA, if an SBA decision within 30 days of receiving
Lender or Intermediary can show that such information, unless SBA provides
there is newly discovered material evi- notice that it requires additional time.
dence which, despite the SBA Lender’s (iii) Prior to issuing a notice of deci-
or Intermediary’s exercise of due dili- sion, SBA in its discretion can request
365
§ 120.1600 13 CFR Ch. I (1–1–25 Edition)
additional information from the af- SBA will follow the applicable proce-
fected SBA Lender or Intermediary or dures under Federal law to obtain such
other partiesand conduct any other in- remedies and to enforce the Certified
vestigation it deems appropriate. If Development Company’s consent and
SBA determines, in its discretion, to waiver in advance to those remedies.
consider an untimely objection, it (b) Procedures for certain formal en-
must issue a notice of final agency de- forcement actions against SBA Supervised
cision pursuant to this paragraph Lenders (except Other Regulated SBLCs)
(a)(3). and, where applicable, Management Offi-
(4) SBA’s notice of final agency decision cials and Other Persons—(1) Suspension
on a formal enforcement action where no and revocation actions and cease and de-
filed objection or untimely objection not sist orders. If SBA seeks to suspend or
considered. If SBA chooses not to con- revoke loan program authority (includ-
sider an untimely objection or if the af- ing, the authority to make, service,
fected SBA Lender or Intermediary liquidate, or litigate SBA loans), or
fails to file a written objection to a issue a cease and desist order to an
proposed formal enforcement action or SBA Supervised Lender or, as applica-
an immediate suspension, and if SBA ble, Other Person, SBA will follow the
continues to believe that such proposed procedures below in lieu of those in
formal enforcement action or imme- paragraph (a) of this section.
diate suspension is appropriate, SBA (i) Show cause order and hearing. The
must issue a written notice of final Administrator will serve upon the SBA
agency decision to the affected SBA
Supervised Lender or Other Person an
Lender or Intermediary that SBA is
order to show cause why an order sus-
undertaking one or more of the pro-
pending or revoking the authority or
posed formal enforcement actions
why a cease and desist order should not
against the SBA Lender or Inter-
be issued. The show cause order will
mediary or that an immediate suspen-
contain a statement of the matters of
sion of the SBA Lender or Inter-
fact and law asserted by SBA, as well
mediary will continue. Such a notice of
as the legal authority and jurisdiction
final agency decision need not state
under which an administrative hearing
any grounds for the action other than
will be held, and will set forth the
to reference the SBA Lender’s or
Intermediary’s failure to file a timely place and time of the administrative
objection, and represents the final hearing. The hearing will be conducted
agency decision. by an administrative law judge in ac-
(5) Appeals. An SBA Lender or Inter- cordance with 5 U.S.C. 554–557, 15 U.S.C.
mediary may appeal the final agency 650, and applicable sections of part 134
decision to the appropriate Federal dis- of this chapter. The Administrative
trict court. Alternatively, 7(a) Lenders Law Judge will issue a recommended
may appeal such decisions (except for decision based on the record.
decisions against SBA Supervised (ii) Witnesses. The party calling wit-
Lenders that are covered by procedures nesses will pay the witness the same
in § 120.1600(b) or (c) or § 120.465) to fees and mileage paid witnesses for
SBA’s Office of Hearings and Appeals their appearance in U.S. courts.
(‘‘OHA’’) within 30 calendar days of the (iii) Administrator finding and order
date of the decision, and in the event of issuance. If after the administrative
such an appeal, OHA will issue its deci- hearing, or the SBA Supervised Lend-
sion in accordance with part 134 of this er’s or Other Person’s waiver of the ad-
title. The enforcement action will re- ministrative hearing, the Adminis-
main in effect pending resolution of trator determines that the order
the appeal, if any. should be issued, the Administrator
(6) Receiverships of Certified Develop- will issue an order to suspend or revoke
ment Companies and/or other relief. If authority or a cease and desist order,
SBA undertakes the appointment of a as applicable. The order will include a
receiver for a Certified Development statement of findings, the grounds and
Company and/or injunctive or other eq- reasons, and will specify the order’s ef-
uitable relief, paragraphs (a)(1) through fective date. SBA will serve the order
(5) of this section will not apply and on the SBA Supervised Lender or Other
366
Small Business Administration § 120.1600
Person. The Administrator may dele- fect pending the completion of the ad-
gate the power to issue a cease and de- ministrative proceedings to remove
sist order or to suspend or revoke loan and until such time as either SBA dis-
program authority only if the Adminis- misses the charges in the removal no-
trator is unavailable and only to the tice or, if an order to remove or pro-
Deputy Administrator. hibit participation is issued, until the
(iv) Judicial review. The order con- effective date of an order to remove or
stitutes a final agency action. The SBA prohibit. In the case of suspension or
Supervised Lender or Other Person will prohibition following criminal charges,
have 20 days from the order issuance it may remain in effect until the infor-
date to file an appeal in the appro- mation, indictment, or complaint is fi-
priate federal district court. nally disposed of, or until the suspen-
(2) Immediate suspension or immediate sion is terminated by SBA or by order
cease and desist order. If SBA under- of a district court. A Management Offi-
takes an immediate suspension of au- cial may appeal to the appropriate fed-
thority to participate in the 7(a) loan eral district court for a stay of the sus-
program or immediate cease and desist pension or prohibition pending comple-
order against an SBA Supervised Lend- tion of the administrative hearing not
er or, as applicable, Other Person, SBA later than 10 days from the suspension
will within two business days follow or prohibition’s effective date.
the procedures set forth in paragraph (iii) Decision. SBA may issue the
(b)(1) of this section. order of removal if the Management
(3) Removal of Management Official. If Official consents or is convicted of the
SBA undertakes the removal of a Man- criminal charges and the judgment is
agement Official of an SBA Supervised not subject to further judicial review
Lender, SBA will follow the procedures (not including writ of habeas corpus),
below in lieu of those in paragraph (a) or if upon a record of a hearing, SBA
of this section. finds that any of the notice grounds
(i) Notice and hearing. SBA will serve have been established. After the hear-
upon the Management Official and the ing, in the latter case, and within 30
SBA Supervised Lender written notice days after SBA has notified the parties
of intention to remove that includes a that the case has been submitted for
statement of the facts constituting the final decision, SBA will render a deci-
grounds and the date, time, and place sion (which includes findings of fact
for an administrative hearing. The ad- upon which the decision is predicated)
ministrative hearing will be held be- and issue and serve an order upon each
tween 30 and 60 days from the date no- party to the proceeding. The decision
tice is served, unless an earlier or later will constitute final agency action.
date is set at the request of the Man- (iv) Effective date and judicial review.
agement Official for good cause shown The removal order will take effect 30
or at the request of the Attorney Gen- days after date of service upon the SBA
eral. The hearing will be conducted in Supervised Lender and the Manage-
accordance with 5 U.S.C. 554–557, 15 ment Official except in case of consent
U.S.C. 650 and applicable sections of which will be effective at the time
part 134 of this chapter. Failure of the specified in the order or in case of re-
Management Official to appear at the moval for conviction on criminal
administrative hearing will constitute charges the order will be effective upon
consent to the removal order. SBA will removal order service on the SBA Su-
serve on the SBA Supervised Lender a pervised Lender and the Management
copy of each notice that is served on a Official. The order will remain effec-
Management Official. tive and enforceable, except to the ex-
(ii) Suspension from office or prohibi- tent it is stayed, modified, terminated,
tion in participation, pending removal. or set aside by Administrator or a re-
The suspension or prohibition will take viewing court. The adversely affected
effect upon service of intention to re- party will have 20 days from the order
move the Management Official or such issuance date to seek judicial review in
subsequent time as the Administrator the appropriate federal district court.
or his/her delegate deems appropriate (4) Receiverships, transfer of assets and
and serves notice. It will remain in ef- servicing activities. If SBA undertakes
367
§ 120.1600 13 CFR Ch. I (1–1–25 Edition)
the appointment of a receiver for, or waiver of any objections to the pro-
the transfer of assets or servicing posed capital directive.
rights of an SBA Supervised Lender (3) Decision. After the closing date of
and/or injunctive or other equitable re- the SBLC’s response period, or receipt
lief, SBA will follow the applicable pro- of the SBLC’s response, if earlier, SBA
cedures under Federal law to obtain may seek additional information or
such remedies and to enforce the SBA clarification of the response. There-
Supervised Lender’s consent and waiv- after, SBA will determine whether or
er in advance to those remedies. not to issue a capital directive, and if
(5) Civil penalties for report filing fail- one is to be issued, whether it should
ure. If SBA seeks to impose civil pen- be as originally proposed or in modified
alties against an SBA Supervised Lend- form.
er for failure to file a report in accord-
(4) Issuance of a capital directive. (i) A
ance with SBA regulations or written
capital directive will be served by de-
directive, SBA will follow the proce-
livery to the SBLC. It will include, or
dures set forth for enforcement actions
be accompanied by, a statement of rea-
in § 120.465.
sons for its issuance.
(c) Additional procedures for certain
formal enforcement actions against (ii) A capital directive is effective
SBLCs. Capital directive—(1) Notice of in- immediately upon its receipt by the
tent to issue capital directive. SBA will SBLC, or upon such later date as may
notify an SBLC in writing of its inten- be specified therein, and will remain ef-
tion to issue a directive. The notice fective and enforceable until it is
will state: stayed, modified, or terminated by
(i) Reasons for issuance of the direc- SBA.
tive and (5) Reconsideration based on change in
(ii) The proposed contents of the di- circumstances. Upon a change in cir-
rective. cumstances, an SBLC may request SBA
(2) Response to notice. (i) An SBLC to reconsider the terms of its capital
may respond to the notice by stating directive or may propose changes in
why a capital directive should not be the plan to achieve the SBLC’s applica-
issued and/or by proposing alternative ble minimum capital requirement. SBA
contents for the capital directive or also may take such action on its own
seeking other appropriate relief. The initiative. SBA may decline to consider
response must include any informa- requests or proposals that are not
tion, mitigating circumstances, docu- based on a significant change in cir-
mentation, or other relevant evidence cumstances or are repetitive or frivo-
that supports its position. The re- lous. Pending a decision on reconsider-
sponse may include a plan for achiev- ation, the capital directive and plan
ing the minimum capital requirement will continue in full force and effect.
applicable to the SBLC. The response (6) Relation to other administrative ac-
must be in writing and delivered to the tions. A capital directive may be issued
SBA within 30 days after the date on in addition to, or in lieu of, any other
which the SBLC received the notice. In action authorized by law, including
its discretion, SBA may extend the cease and desist proceedings. SBA also
time period for good cause. SBA may may, in its discretion, take any action
shorten the 30-day time period: authorized by law, in lieu of a capital
(A) When, in the opinion of SBA, the directive, in response to an SBLC’s
condition of the SBLC so requires, pro- failure to achieve or maintain the ap-
vided that the SBLC will be informed
plicable minimum capital requirement.
promptly of the new time period;
(7) Appeals. The capital directive con-
(B) With the consent of the SBLC; or
(C) When the SBLC already has ad- stitutes a final agency action. An
vised SBA that it cannot or will not SBLC may appeal the final agency de-
achieve its applicable minimum capital cision only in the appropriate federal
requirement. district court.
(ii) Failure to respond within 30 days [73 FR 75521, Dec. 11, 2008, as amended at 82
or such other time period as may be FR 39506, Aug. 21, 2017; 85 FR 14784, Mar. 16,
specified by SBA will constitute a 2020]
368
Small Business Administration § 120.1700
Subpart J—Establishment of SBA property and any improvements there-
Secondary Market Guarantee on, and any other amounts received in
Program for First Lien Position connection with the liquidation of the
504 Loan Pools Pool Loan, whether through Seller’s
sale, foreclosure sale, any offset or
workout, or otherwise.
SOURCE: 74 FR 56093, Oct. 30, 2009, unless
otherwise noted. Loan Interest. The right to receive the
owned portion of the principal balance
§ 120.1700 Definitions used in subpart of the Pool Loan together with interest
J. thereon at a per annum rate in effect
504 financing. The loans made to a from time to time in accordance with
small business to fund a Project under the First Lien Position 504 Loan Pool
the SBA’s development company loan Guarantee Agreement.
program authorized by Title V of the Maturity. The maturity of the Loan
Small Business Investment Act of 1958. Interest in the Pool that has the long-
Affiliate. A person or entity SBA de- est remaining term of any Loan Inter-
termines to be an affiliate of a Pro- est in the Pool. The maturity will
gram Participant pursuant to the ap- change from time to time due to pre-
plication of the principles and guide- payment or default on Loan Interests
lines set forth in § 121.103 of this Title. in the Pool.
Central Servicing Agent or CSA. The Ongoing Guarantee Fee. An annual fee
entity serving as SBA’s central serv-
collected monthly and based on the
icing agent for the Program.
percentage of the Pool Loan amount,
Certified Development Company or
CDC. An entity that meets the defini- pursuant to section 503(C)(3)(B)(ii) of
tion of a Certified Development Com- the Recovery Act, to result in a cost of
pany as defined in § 120.10 of this Part. the loan guarantee of zero as deter-
Current. That no scheduled payment mined under the Federal Credit Reform
owed by an Obligor pursuant to a Pool Act of 1990, as amended. The funds gen-
Note is over 29 days past due. erated by the fee serve as a reserve to
First Lien Position 504 Loan. The fi- pay for program losses.
nancing provided by the First Lien Po- Obligor. The obligor(s) under a Pool
sition 504 lender that is part of the 504 Note.
project financing. Pool. The aggregate of Loan Interests
First Lien Position 504 Loan Pool Guar- formed into a single pool by the Pool
antee Agreement. The agreement, in the Originator in accordance with the Pro-
form approved by SBA, wherein enti- gram. The Pool is comprised of an
ties agree to participate in the forming unguaranteed portion and an SBA-
of a Pool under the Program, available guaranteed portion. The unguaranteed
at http://www.sba.gov/aboutsba/ portion of the Pool backs the Pool
sbaprograms/elending/index.html/. Originator Receipt, and cannot be sold
Guide. The First Lien Position 504 to Pool Investors. The SBA-guaranteed
Loan Pooling Program Guide published portion of the Pool backs the Pool Cer-
by SBA which provides information ap- tificates sold to Pool Investors. The
plicable to the Program including, Seller’s Loan Interest is not included
among other things, requirements re-
in the Pool.
lating to the formation of a Pool,
available at http://www.sba.gov/ Pool Assembler. An entity that meets
aboutsba/sbaprograms/elending/ the qualifications of a Pool Assembler
index.html/. as set forth in section 120.630 of this
Liquidation Proceeds. Cash, including Part and has been approved as such by
insurance proceeds, proceeds of any SBA.
foreclosed-on property disposition, rev- Pool Certificate. The document rep-
enues received with respect to the con- resenting a beneficial fractional inter-
servation and disposition of a fore- est in the SBA-guaranteed portion of a
closed-on property or repossessed col- Pool.
lateral, including any real property se- Pooled. When one or more Loan Inter-
curing the Pool Loan, consisting of a ests in a Pool Loan has been put into a
commercial property or residential Pool.
369
§ 120.1700 13 CFR Ch. I (1–1–25 Edition)
Pooling. The transfer of one or more such things as repayment, collateral,
Loan Interests in a Pool Loan into a guarantees, control, maintenance of a
Pool. compensating balance, purchase of a
Pool Investor. An entity which holds a certificate of deposit or acceptance of a
Pool Certificate in accordance with separate or companion loan, without
Program Rules and Regulations. SBA’s consent. Seller’s agreement to
Pool Loan. A loan that meets the Pro- grant a Pool Loan’s Obligor a
gram eligibility requirements as set deferment in return for receiving more
forth in § 120.1704 of this subpart J and collateral on a different loan owned by
has been pooled. Seller is an example of a preference.
Pool Loan Receivables. Pool Loan pay- Program Rules and Regulations. This
ments, prepayments, or collections subpart J, as may be amended from
made in connection with the Pool Loan time to time by SBA (the Program
by the Obligor pursuant to Pool Note Regulations), the First Lien Position
or any other Pool Loan documents or 504 Loan Pool Guarantee Agreement,
agreements, or by another person or any other Program agreements signed
entity made on behalf of any such Pool by a Program Participant, if applica-
Loan obligor, and Liquidation Pro- ble, the Guide, the Recovery Act, and
ceeds. the provisions of subpart H governing
Pool Note. The document evidencing a Third Party Loans and Third Party
Pool Loan. Lenders.
Pool Originator. An entity approved Project. A project as defined by
by SBA to pool Loan Interests under § 120.802 of the Part.
the Program. SBA. The United States Small Busi-
Pool Originator Receipt. The document ness Administration, an agency of the
evidencing the Pool Originator’s re- United States Government.
tained ownership in a Pool it has Seller. An entity that has sold a Pool
formed under the Program. Loan to a Pool Originator to be Pooled
Premier Certified Lenders Program. The and any successor entity that has exe-
program defined in § 120.845 of this cuted the First Lien Position 504 Loan
Part. Pool Guaranty Agreement pursuant to
Program. The program authorized by § 120.1707.
section 503 of the American Recovery Seller’s Pool Loan. The Pool Loan sold
and Reinvestment Act of 2009. to a Pool Originator pursuant to the
Program Participant. An entity that First Lien Position 504 Loan Pool
executes the First Lien Position 504 Guarantee Agreement.
Loan Pool Guarantee Agreement as Seller Receipt. The document that evi-
Seller, Pool Originator, or Pool Inves- dences a Seller’s Loan Interest.
tor, and any successors or assignees Servicing Retention Amount. The
thereof. amount of a Pool Loan interest pay-
Program Participant Associate. (1) An ment retained by Seller for servicing
officer, director, key employee, or the Pool Loan that is payable and cal-
holder of 20 percent or more of the culated pursuant to the First Lien Po-
value of a Program Participant’s stock sition 504 Loan Pool Guarantee Agree-
or debt instruments, or (2) Any indi- ment.
vidual in which one or more individuals Weighted Average Interest Rate. The
referred to in paragraph (1) of this defi- dollar-weighted average interest rate
nition, or a spouse, or child, or sibling, of a Pool Certificate calculated by mul-
or the spouse of any such individual, tiplying the interest rate of each Loan
owns or controls at least 20 percent. Interest in the Pool by the ratio of
Program Preference. Any arrangement that Loan Interest’s current out-
giving the Seller, Pool Originator, or a standing principal in the SBA-guaran-
Program Associate or Affiliate of Sell- teed portion of the Pool (that is, the
er or Pool Originator, a preference or portion of the Pool Loan backing the
benefit of proportion greater than its Pool Certificates) to the current aggre-
Loan Interest as compared to Pool gate or outstanding principal of each
Originator, Pool Investor, or SBA re- Loan Interest in the SBA-guaranteed
lating to the making, servicing, or liq- portion of the Pool, and adding the
uidation of the Loan with respect to sum of the resulting products. The
370
Small Business Administration § 120.1703
Pool Certificate interest rate will fluc- Agreement. This fee is used to pay pro-
tuate over the life of the Pool as de- gram losses.
faults, prepayments and normal repay-
ments applicable to Loan Interests in § 120.1703 Qualifications to be a Pool
the Pool occur. Originator.
Weighted Average Maturity. The (a) Application to become Pool Origi-
weighted average maturity of a Pool nator. The application to become a
Certificate is a dollar weighted average Pool Originator is available from the
maturity that is calculated by multi- SBA and can be found on SBA’s
plying the remaining term, in months, website. In order to qualify as a Pool
of each Loan Interest in a Pool by the Originator, an entity must send the ap-
ratio of that Loan Interest’s current plication to the SBA and certify that it
outstanding pooled principal to the is a Pool Assembler or it:
current aggregate outstanding pooled (1) Is regulated by the appropriate
principal of all Loan Interests in the agency as defined in section 3(a)(34)(G)
Pool, and adding the sum of the result- of the Securities Exchange Act of 1934
ing products. The weighted average (15 U.S.C. 78c(a)(34)(G));
maturity of a Pool Certificate will (2) Meets all financial and other ap-
fluctuate over the life of the Pool as plicable requirements of its regulatory
Loan Interest defaults, prepayments authority and the Government Securi-
and normal Loan Interest repayments ties Act of 1986, as amended (Pub. L. 99–
occur. 571, 100 Stat. 3208);
(3) Has the financial capability to
§ 120.1701 Program purpose.
originate acceptable pools consisting of
As authorized by the American Re- eligible First Lien Position 504 Loans
covery and Reinvestment Act of 2009 in sufficient quantity to support the
(Recovery Act), SBA establishes the issuance of Pool Certificates;
Program to authorize an entity to (4) Is in good standing with SBA (as
apply for SBA’s guarantee of Pools the SBA determines), and is Satisfac-
comprised of portions of First Lien Po- tory with the Office of the Comptroller
sition 504 Loans backing Pool Certifi- of the Currency (OCC) if it is a national
cates to be sold to Pool Investors. The bank, the Federal Deposit Insurance
purpose of the Program is to tempo- Corporation if it is a bank not regu-
rarily provide a federal guarantee for lated by the OCC, the Financial Insti-
Pools of First Lien Position 504 Loans tutions Regulatory Authority if it is a
to facilitate the sale of such loans and member, the National Credit Union Ad-
increase the liquidity of the lenders ministration if it is a credit union, as
holding the loans so that the lenders determined by SBA; and
can use the sale proceeds to fund more (5) for any Pool Originator that is an
such loans. The Program’s authoriza- SBA Lender, that the SBA Lender has
tion expires on September 23, 2012 and satisfactory SBA performance, as de-
the Administrator may guarantee not termined by SBA in its sole discretion.
more than $3,000,000,000 of pools under (b) Approval by SBA. An entity may
this authority pursuant to section not submit applications to form Pools
503(c)(B)(iii) of the Recovery Act, as to the CSA until SBA has approved its
amended by section 1119 of the Small application to become a Pool Origi-
Business Jobs Act of 2010. nator.
[61 FR 3235, Jan. 31, 1996, as amended at 76 (c) Conduct of business by Pool Origi-
FR 63547, Oct. 12, 2011] nator. An entity continues to qualify as
a Pool Originator so long as it:
§ 120.1702 Program fee. (1) Meets the eligibility standards in
Ongoing Guarantee Fee. The Ongoing paragraph (a) of this section;
Guarantee Fee is payable to SBA, and (2) Conducts its business in accord-
it is calculated and payable monthly ance with SBA regulations and accept-
from the amounts received in respect ed securities or banking industry prac-
of interest on Loan Interests in the tices, ethics, and standards;
SBA-guaranteed portion of a Pool. This (3) Maintains its books and records in
amount is set forth in the First Lien accordance with generally accepted ac-
Position 504 Loan Pool Guarantee counting principles or in accordance
371
§ 120.1704 13 CFR Ch. I (1–1–25 Edition)
with the guidelines of the regulatory tions—713290 (‘‘Other Gambling Indus-
body governing its activities; and tries’’); golf courses—713910 (‘‘Golf
(4) Has not been suspended or termi- Courses and Country Clubs’’); or aquar-
nated from the Program by SBA. iums and zoos—712130 (‘‘Zoos and Bo-
[74 FR 56093, Oct. 30, 2009, as amended at 82 tanical Gardens’’).
FR 39506, Aug. 21, 2017] (b) SBA review of a Pool Loan prior to
pool formation. SBA has the right to re-
§ 120.1704 Pool Loans eligible for Pool- view any Pool Loan before a Loan In-
ing. terest in it is added to a Pool, and SBA
(a) General Pool Loan eligibility re- may prohibit the Pool’s formation as
quirements. For a First Lien Position proposed based on SBA’s review in
504 Loan to be eligible for Pooling it SBA’s sole discretion. In the event SBA
must: decides to review Pool Loan documents
(1) Be a loan that is: related to a Loan Interest prior to the
(i) A Third Party Loan as defined in requested Pool formation, that Loan
§ 120.801(c)(3); Interest may not be added to the Pool
(ii) Made by a private sector lender until SBA reviews and approves the
acceptable to SBA in its sole discre- Pool Loan for such purpose. Copies of
tion; and Pool Loan documents related to under-
(iii) Secured by a first lien on the writing and origination, and any other
Project Property as defined in § 120.801 Pool Loan-related documents SBA
of this chapter; may, in its sole discretion, request to
(2) Be part of a 504 financing that is review in writing, must be sent to
comprised of only one Third Party SBA’s Sacramento Pool Loan Proc-
Loan and one CDC 504 loan; the CDC 504 essing Center. The Pool Originator
loan must be funded by a Debenture must identify and SBA must review
that was been sold on or after February Pool Loan documents before a Loan In-
17, 2009; terest is added to a Pool if:
(3) Be Current and have been Current (1) The Pool Loan is to a business
for the six-month-period immediately within NAICS code 713940 covering Fit-
prior to the date the Pool is formed or ness and Recreational Sports Centers;
for the life of the Pool Loan, whichever (If SBA determines that a Pool Loan
time period is shorter; has had any of its proceeds used for
(4) Have been made and closed in a any of the restricted purposes listed
commercially reasonable manner, con- above, the Pool Loan will be prohibited
sistent with prudent lending standards;
from being part of a Pool.)
(5) Be part of a completed 504 financ-
ing, funded by a 504 debenture, which (2) The Pool Loan was part of a 504 fi-
means that the Pool Loan must be nancing involving a 504 loan that was
fully disbursed and the debenture fund- processed under SBA’s Premier Cer-
ing the related loan by a CDC must tified Lenders Program; or
have been sold on or after February 17, (3) The Project the Pool Loan fi-
2009; and nanced included the refinancing of ex-
(6) Not be: isting debt owed to the Seller or Third
(i) To a business deriving more than Party Lender (not including interim fi-
one-third of its gross annual revenue nancing associated with the Project).
from legal gambling activities;
(ii) To a casino, gambling establish- § 120.1705 Pool formation require-
ments.
ment, or casino hotel;
(iii) For financing the acquisition, (a) Initiation of Pool formation. Only
construction or renovation of an aquar- an entity approved by SBA to be a Pool
ium, zoo, golf course, or swimming Originator under the Program that
pool; or continues to qualify to be a Pool Origi-
(iv) To a business covered by a six- nator pursuant to this subpart may ini-
digit North American Industry Classi- tiate the formation of a Pool. The Pool
fication System (NAICS) code for casi- Originator creates the Pool subject to
nos—713210 (‘‘Casinos (Except Casino Program Rules and Regulations, in-
Hotels)’’); casino hotels—721120 (‘‘Ca- cluding the parameters set forth in the
sino Hotels’’); other gambling institu- Guide, and SBA approval.
372
Small Business Administration § 120.1707
(b) Adjustment of Pool requirements. § 120.1706 Pool Originator’s retained
SBA may adjust the Pool characteris- interest in Pool.
tics periodically based on program ex- The Pool Originator must retain an
perience and market conditions and ownership interest in any Pool it has
will publish a revised version of the formed that is equal to at least 5% of
Guide in the FEDERAL REGISTER to im- the aggregate of the total outstanding
plement such adjustments. Any such principal balance of each Pool Loan
adjustments shall not affect Pools with a Loan Interest in the Pool as cal-
formed prior to the adjustment. culated at the time of Pool formation.
(c) When the Pool Originator is the Sell- Such interest will decline with Loan
er. When a Pool Originator proposes to Interest payments, prepayments, de-
form a Pool involving a Pool Loan it faults and any other early termination.
owns, it must execute the First Lien At Pool formation, the CSA will issue
the Pool Originator a Pool Originator
Position 504 Loan Pool Guarantee
Receipt evidencing the Pool Origina-
Agreement as Pool Originator and as
tor’s retained interest in the Pool. The
Seller and, consequently, will be sub- Pool Originator may not sell, pledge,
ject to all applicable Program Rules participate, or otherwise transfer its
and Regulations pertaining to both Pool Originator Receipt or any interest
roles. therein for the life of the Pool.
(d) When the Pool Originator does not
own the Pool Loan. When a Pool Origi- § 120.1707 Seller’s retained Loan Inter-
nator proposes to form a Pool involv- est.
ing a Pool Loan it does not own, it The Seller must retain a 15% or
must purchase the Loan Interest it greater Loan Interest in each of its
proposes to pool from a Seller that loans included in a Pool. At Pool for-
owns the whole Pool Loan and that has mation, the CSA will issue the Seller a
the servicing rights. The Pool Origi- Seller Receipt evidencing the Seller’s
nator must purchase the Loan Interest retained ownership in the Pool Loan.
and take it into inventory or settle the With SBA’s written permission, the
purchase of the Loan Interest through Seller may sell the Seller Receipt and
Servicing Retention Amount in whole,
the CSA concurrently with the forma-
but not in part, to a single entity at
tion of the Pool. The entity selling the
one time. The Seller may not sell less
Loan Interest to the Pool Originator than 100% of the Seller Receipt and
must execute the First Lien Position Servicing Retention Amount, and may
504 Loan Pool Guarantee Agreement as not sell a participation interest in any
Seller and, consequently, will be sub- portion of any of its Pooled loans. In
ject to all applicable Program Rules addition, in order to complete such
and Regulations pertaining to a Seller. sale, Seller must have the purchaser of
The Pool Originator must also execute its rights to the Pool Loan execute an
the First Lien Position 504 Loan Pool allonge to the Seller’s First Lien Posi-
Guaranty Agreement. tion 504 Loan Pool Guarantee Agree-
(e) What CSA must receive prior to Pool ment in a form acceptable to SBA, ac-
formation. Before the CSA may carry knowledging and accepting all terms of
out its responsibilities relating to the the Seller’s First Lien Position 504
formation of a Pool, it must receive: Loan Pool Guarantee Agreement, and
(1) From the Pool Originator: A prop- deliver the executed original allonge
and a copy of the corresponding First
erly completed First Lien Position 504
Lien Position 504 Loan Pool Guarantee
Loan Pool application form, First Lien
Agreement to the CSA. All Pool Loan
Position 504 Loan Guarantee Agree- payments related to a Seller Receipt
ment, and any other documentation and Servicing Retention Amount pro-
which SBA may require, if applicable; posed for sale will be withheld by the
and CSA pending SBA acknowledgement of
(2) All cost reimbursement due and receipt of all executed documents re-
payable to the CSA prior to Pool for- quired to complete the transfer.
mation owed by the Participants par-
[74 FR 56093, Oct. 30, 2009, as amended at 82
ticipating in the formation of the Pool. FR 39506, Aug. 21, 2017]
373
§ 120.1708 13 CFR Ch. I (1–1–25 Edition)
§ 120.1708 Pool Certificates. represented by the Pool Certificate.
(a) SBA Guarantee of Pool Certificates. Any Pool Loan Receivables applicable
SBA guarantees to a Pool Investor the to a Loan Interest in the SBA-guaran-
timely payment of principal and inter- teed portion of a Pool will be passed
est installments and any prepayment through to the appropriate Pool Inves-
or other recovery of principal to which tors with the regularly scheduled pay-
the Pool Investor is entitled. If an Obli- ments to such Pool Investors.
gor misses a scheduled payment pursu- (i) Pool Certificate interest rate. A Pool
ant to the terms of the Pool Note un- Certificate must have a Weighted Aver-
derlying a Loan Interest backing a age Interest Rate.
Pool Certificate, SBA, through the (j) Pool Certificate maturity. A Pool
CSA, will make advances to maintain Certificate must have a Maturity and a
the schedule of interest and principal Weighted Average Maturity.
payments to the Pool Investor. If SBA (k) Early Pool Certificate redemption.
makes such payments, it is subrogated SBA, or the CSA on behalf of SBA, may
fully to the rights satisfied by such redeem a Pool Certificate prior to its
payment. Maturity because of Obligor prepay-
(b) SBA guarantee backed by full faith ment and/or SBA purchase of all Loan
and credit. SBA’s guarantee of the Pool Interests in the Pool backing the Pool
Certificate is backed by the full faith Certificate.
and credit of the United States.
(c) SBA purchase of a Loan Interest. § 120.1709 Transfers of Pool Certifi-
cates.
SBA will determine whether to pur-
chase a Loan Interest backing a Pool (a) Transfer of Pool Certificates. A Pool
Certificate with an underlying Pool Certificate is transferable. A transfer
Note that is 60 days or more in arrears. of a Pool Certificate must comply with
SBA reserves the right to purchase a Article 8 of the Uniform Commercial
Loan Interest from a Pool at any time. Code of the State of New York. The
(d) Self-liquidating. A Pool Certificate seller may use any form of assignment
represents a fractional beneficial inter- acceptable to SBA and the CSA. The
est in a Pool that is self-liquidating by CSA may refuse to issue a Pool Certifi-
Pool Loan Receivables and/or SBA cate until it is satisfied that the docu-
Loan Interest payment or redemption. ments of transfer are complete.
(e) Pool Certificate form. The CSA pre- (b) Transfer on CSA records. In order
pares the Pool Certificate. SBA must for the transfer of a Pool Certificate to
approve the form and terms of the Pool be effective, the CSA must reflect the
Certificate. transfer on its records.
(f) Pool Certificate registration. A Pool (c) Contents of letter of transmittal for
Certificate must be registered with the Pool Certificate. A letter of transmittal
CSA. must accompany each Pool Certificate
(g) Face amount of Pool Certificate. which a Pool Investor submits to the
The face amount of a Pool Certificate CSA for transfer. The Pool Investor
cannot be less than a minimum must supply the following information
amount as specified in the Guide, and in the letter:
the dollar amount of Pool Certificates (1) Pool number;
must be in increments which SBA will (2) Pool Certificate number;
specify in the Guide (except for one (3) Name of purchaser of Pool Certifi-
Pool Certificate for each Pool). SBA cate;
may change these requirements based (4) Address and tax identification
upon an analysis of market conditions number of the purchaser;
and program experience, and will pub- (5) Name, e-mail address and tele-
lish any such change in the FEDERAL phone number of the person handling
REGISTER. or facilitating the transfer; and
(h) Basis of payment for Pool Certifi- (6) Instructions for the delivery of
cates. All payments on a Pool Certifi- the new Pool Certificate.
cate are due pursuant to terms, condi- (d) CSA transfer cost recovery. At the
tions, and percentages set forth or ref- same time a Pool Investor submits a
erenced therein and are based on the letter of transmittal for a Pool Certifi-
unpaid principal balance of the Pool cate pursuant to this section, it must
374
Small Business Administration § 120.1713
send to the CSA sufficient funds to gram Rules and Regulations or other
cover its cost for this service. The CSA SBA rules and regulations; or
will supply the transfer information to (2) Made a material false statement
the Pool Investor. or failed to disclose a material fact to
SBA.
§ 120.1710 Central servicing of the Pro- (b) Additional rules for suspension or
gram. termination of Pool Originator. In addi-
(a) Pool Certificates and Receipts issued tion to the conditions set forth in para-
at Pool formation. As part of its role as graph (a) above, SBA may also suspend
Central Servicing Agent for the Pool, or terminate the Program participa-
at Pool formation, CSA issues a Seller tion privileges of a Pool Originator if
Receipt to the Seller, a Pool Originator the Pool Originator (and/or its Associ-
Receipt to the Pool Originator, and a ates):
Pool Certificate to each Pool Investor. (1) Does not comply with any of the
(b) CSA fiscal transfer responsibilities. requirements in 120.1703(a) or (c);
All Pool Loan Receivables on a Pool (2) Has been revoked or suspended it
Loan received by the CSA must be for- from engaging in the securities busi-
warded by it to pay the Servicing Re- ness by its supervisory agency, or is
tention Amount, Ongoing Guarantee under investigation for a practice
Fee, Seller Receipt, Pool Originator which SBA considers, in its sole discre-
Receipt, Pool Certificates, any SBA- tion, to be relevant to its fitness to
purchased Loan Interest, and any other participate in the Program;
payment applicable to the Pooling of (3) Has been indicted or otherwise
such Pooled Loan, in accordance with formally charged with, or convicted of,
Program Rules and Regulations. a felony, or a misdemeanor which, in
(c) Administration of the Pool Certifi- SBA’s sole discretion, bears on its fit-
cates. CSA must administer each Pool ness to participate in the Program;
Certificate. It shall maintain a registry (4) Has received an adverse civil judg-
of Pool Investors and other informa- ment that it has committed a breach of
tion as SBA requires. CSA registers all trust or a violation of a law or regula-
Pool Certificates. This means it issues, tion protecting the integrity of busi-
transfers title to, and redeems them. It ness transactions or relationships; or
shall maintain a registry of Pool Inves- (5) Has been suspended or terminated
tors and other information as SBA re- as a Pool Assembler under 120.631.
quires. In fulfilling its obligation to (c) Suspension procedures. SBA may
keep the central registry current, the undertake suspension or enforcement
CSA may, with SBA’s approval, obtain actions under this section using the
any necessary information from the procedures set forth in § 120.1600(a).
parties involved in the Program.
(d) CSA Monthly Report. CSA must § 120.1712 Seller responsibilities with
provide SBA with a list, by Pool, of respect to Seller’s Pool Loan.
each Loan Interest with an underlying Seller shall remain obligated for
Pool Note that is 60 days or more in ar- servicing and liquidating Seller’s Pool
rears on a monthly basis. Loan until the Pool Loan is repaid in
full unless SBA provides written ap-
§ 120.1711 Suspension or termination proval or notice to the contrary.
of Program participation privileges.
(a) Participant suspension or termi- § 120.1713 Seller’s Pool Loan origina-
nation. The SBA may suspend or termi- tion.
nate the privilege of a Participant, and/ SBA is entitled to recover from the
or any Associate or Affiliate of the Seller losses incurred by SBA on its
Participant, to sell, purchase, broker, guarantee of a Pool if such losses re-
or deal in Pool Loans, Loan Interests, sulted because Seller’s Pool Loan was
or Pool Certificates under the Program not made and closed in a commercially
if any such Participant or its Associate reasonable manner, consistent with
or Affiliate has: prudent lending standards, and in ac-
(1) Failed to comply materially with cordance with any applicable Program
any requirement imposed by the Pro- Rules and Regulations.
375
§ 120.1714 13 CFR Ch. I (1–1–25 Edition)
§ 120.1714 Seller’s Pool Loan servicing. (d) The date Obligor is to resume
payment; and
Subject to § 120.1718 of this subpart J,
(e) Reconfirmation of the basis of in-
the Seller must service Seller’s Pool
terest calculation (e.g. 30/360 or Actual
Loan in a commercially reasonable
Days/365).
manner, consistent with prudent lend-
ing standards, and in accordance with § 120.1718 SBA’s right to assume Sell-
applicable Program Rules and Regula- er’s responsibilities.
tions. The Seller receives the Servicing
SBA may, in its sole discretion, un-
Retention Amount for servicing the
dertake the servicing, liquidation and/
Seller’s Pool Loan.
or litigation of Seller’s Pool Loan at
§ 120.1715 Seller’s Pool Loan liquida- any time and, in such event, Seller
tion. must take any steps necessary to fa-
cilitate the assumption by SBA of such
Subject to § 120.1718 of this subpart J, responsibilities, which can be trans-
the Seller must liquidate and conduct ferred by SBA at its discretion to a
debt collection litigation for Seller’s contractor, agent or other entity, and
Pool Loan in a prompt, cost-effective such steps shall include, among other
and commercially reasonable manner, things, providing or assigning to SBA
consistent with prudent lending stand- any documents requested by SBA with-
ards, in accordance with applicable in 15 calendar days of Seller’s receipt of
Program Rules and Regulations, and such request. SBA will notify the Obli-
with SBA approval of a liquidation gor of the change in servicing.
plan and any litigation plan, and any
amendment of either such a plan, if ap- § 120.1719 SBA’s right to recover from
plicable. Seller.
§ 120.1716 Required SBA approval of SBA is entitled to recover from Sell-
servicing actions. er any monies paid on SBA’s guarantee
of a Pool Certificate backed in part by
Seller shall not, without prior writ- Seller’s Pool Loan, plus interest, if
ten consent of SBA, take the following SBA in its sole discretion determines
actions with respect to Seller’s Pool that any of the following events has oc-
Loan: curred:
(a) Make or consent to any substan- (a) Seller’s improper action or inac-
tial alteration in the terms (‘‘substan- tion has put SBA at risk;
tial’’ includes, but is not limited to, (b) Seller has failed to disclose a ma-
any changes to the principal amount or terial fact to SBA regarding a Seller’s
interest rate); Pool Loan in a timely manner;
(b) Accelerate the maturity; (c) Seller has misrepresented a mate-
(c) Sue; or rial fact to SBA regarding Seller’s Pool
(d) Waive or release any claim. Guid- Loan;
ance on other servicing actions, some (d) Seller has failed to comply mate-
of which may need prior SBA approval, rially with § 120.1720 of this subpart;
is provided in the Guide. (e) SBA has received a written re-
quest from Seller to terminate the
§ 120.1717 Seller’s Pool Loan SBA’s guarantee on the Loan Interest
deferments.
in Seller’s Pool Loan;
Without the prior written consent of (f) Seller has failed to comply mate-
SBA, Seller, at the request of Obligor, rially with Program Rules and Regula-
may grant one deferment of Obligor’s tions; or
scheduled payments for a continuous (g) Seller has failed to make, close,
period not to exceed three months of service or liquidate Seller’s Pool Loan
past or future installments. Seller in a prudent manner.
shall immediately notify CSA of any
payment deferment and that notifica- § 120.1720 SBA’s right to review Pool
tion shall include: Loan documents.
(a) The SBA Pool Loan number; In the event that SBA purchases a
(b) The Obligor’s name; Loan Interest in Seller’s Pool Loan,
(c) The terms of such deferment; Seller must provide to SBA copies of
376
Small Business Administration Pt. 121
the Pool Loan collateral documents, Position 504 Loan Pool Guarantee
Pool Loan underwriting documents, Agreement.
and any other documents SBA may re-
quire in writing within 15 calendar § 120.1725 No Program Preference by
days of a written request from SBA Seller or Pool Originator.
(which SBA will review in connection The Seller and the Pool Originator
with its efforts to determine if Seller is must not establish a Program Pref-
obligated to reimburse SBA pursuant erence, which is defined in 13 CFR
to this subpart). A Seller’s failure to 120.10.
provide the requested documentation
may constitute a material failure to § 120.1726 Pool Certificates a Seller
comply with the Program Rules and cannot purchase.
Regulations and may lead to an action Neither a Seller, nor any of its Pro-
for recovery under § 120.1719. SBA will gram Associates or Affiliates, may pur-
also evaluate a Seller’s continued par- chase a Pool Certificate that is backed
ticipation in the Program and may re- by a Loan Interest in a Pool Loan that
strict further sales under the Program the Seller, or any of its Program Asso-
until SBA determines that the Seller ciates or Affiliates, originated or
has provided sufficient documentation. owned, and, in the event such purchase
occurs, SBA’s guarantee shall not be in
§ 120.1721 SBA’s right to investigate. effect with respect to any such Pool
SBA may undertake such investiga- Certificate.
tion as it deems necessary to deter-
mine whether it is entitled to seek re- PART 121—SMALL BUSINESS SIZE
covery from the Seller and Seller REGULATIONS
agrees to take whatever actions are
necessary to facilitate such investiga- Subpart A—Size Eligibility Provisions and
tion. Standards
PROVISIONS OF GENERAL APPLICABILITY
§ 120.1722 SBA’s offset rights.
Sec.
SBA shall have the right to offset 121.101 What are SBA size standards?
any amount owed by Lender to SBA, 121.102 How does SBA establish size stand-
including, without limitation, an offset ards?
against CSA’s obligation to pay Lender 121.103 How does SBA determine affiliation?
pursuant to any Section 504 First Mort- 121.104 How does SBA calculate annual re-
gage Loan Pool Guarantee Agreement. ceipts?
121.105 How does SBA define ‘‘business con-
§ 120.1723 Pool Loan receivables re- cern or concern’’?
ceived by Seller. 121.106 How does SBA calculate number of
employees?
Any Pool Loan Receivables received 121.107 How does SBA determine a concern’s
by Seller in connection with obliga- ‘‘primary industry’’?
tions under Seller’s Pool Loan must be 121.108 What are the penalties for misrepre-
forwarded by Seller to CSA within two sentation of size status?
121.109 What is a small business status advi-
business days of receipt of collected sory opinion?
funds. 121.110 What must a concern do in order to
be identified as a small business concern
§ 120.1724 Servicing and liquidation in any Federal procurement databases?
expenses.
SIZE STANDARDS USED TO DEFINE SMALL
All ordinary and reasonable expenses BUSINESS CONCERNS
of servicing and liquidating Seller’s
Pool Loan shall be paid by, or be recov- 121.201 What size standards has SBA identi-
fied by North American Industry Classi-
erable from, Obligor, and all such ordi-
fication System codes?
nary and reasonable expenses incurred
by Seller or SBA which are not recov- SIZE ELIGIBILITY REQUIREMENTS FOR SBA
erable from Obligor shall be shared rat- FINANCIAL ASSISTANCE
ably by Seller, SBA, and the Pool 121.301 What size standards and affiliation
Originator pursuant to the applicable principles are applicable to financial as-
percentages set forth in the First Lien sistance programs?
377
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