Small Business Administration § 120.1060

§§ 119.2–119.20 13 CFR Ch. I (1–1–21 Edition)

may be used; advise potential appli- 120.111 What conditions must an Eligible cants regarding the process for obtain- Passive Company satisfy? ing, completing, and submitting an ap- USES OF PROCEEDS plication packet; and provide information regarding application deadlines 120.120 What are eligible uses of proceeds? 120.130 Restrictions on uses of proceeds. and any additional limitations, special 120.131 Leasing part of new construction or rules, procedures, and restrictions existing building to another business. which SBA may deem advisable. (c) SBA will evaluate applications for ETHICAL REQUIREMENTS PRIME awards in accordance with the 120.140 What ethical requirements apply to stated statutory goals of the program participants? and the specific criteria described in the relevant funding announcement. CREDIT CRITERIA FOR SBA LOANS (d) In administering the PRIME pro- 120.150 What are SBA’s lending criteria? gram, SBA will require recipients to 120.151 What is the statutory limit for total provide reports in accordance with the loans to a Borrower? 120.160 Loan conditions. subject matter areas and schedule identified in the terms and conditions of REQUIREMENTS IMPOSED UNDER OTHER LAWS their awards. In addition, SBA may, as AND ORDERS it deems appropriate, make site visits 120.170 Flood insurance. to recipients’ premises and review all 120.171 Compliance with child support obli- applicable documentation and records. gations. 120.172 Flood-plain and wetlands manage- [85 FR 62951, Oct. 6, 2020] ment. 120.173 Lead-based paint. §§ 119.2–119.20 [Reserved] 120.174 Earthquake hazards. 120.175 Coastal barrier islands. PART 120—BUSINESS LOANS 120.176 Compliance with other laws. APPLICABILITY AND ENFORCEABILITY OF LOAN GENERAL DESCRIPTIONS OF SBA’S BUSINESS PROGRAM REQUIREMENTS LOAN PROGRAMS 120.180 Compliance with Loan Program Re- Sec. quirements. 120.1 Which loan programs does this part 120.181 Status of Lenders and CDCs. cover? 120.2 Descriptions of the business loan pro- LOAN APPLICATIONS grams. 120.190 Where does an applicant apply for a 120.3 Pilot programs. loan? 120.191 The contents of a business loan ap- DEFINITIONS plication. 120.10 Definitions. 120.192 Approval or denial. 120.193 Reconsideration after denial. Subpart A—Policies Applying to All Business Loans COMPUTERIZED SBA FORMS 120.194 [Reserved] ELIGIBILITY REQUIREMENTS REPORTING 120.100 What are the basic eligibility requirements for all applicants for SBA 120.195 Disclosure of fees. business loans? 120.197 Notifying SBA’s Office of Inspector 120.101 Credit not available elsewhere. General of suspected fraud. 120.102 Funds not available from alternative sources, including the personal resources Subpart B—Policies Specific to 7(a) Loans of owners. 120.103 Are farm enterprises eligible? BONDING REQUIREMENTS 120.104 Are businesses financed by SBICs el- 120.200 What bonding requirements exist igible? during construction? 120.105 Special consideration for veterans. LIMITATIONS ON USE OF PROCEEDS INELIGIBLE BUSINESSES AND ELIGIBLE PASSIVE 120.201 Refinancing unsecured or under- COMPANIES secured loans. 120.110 What businesses are ineligible for 120.202 Restrictions on loans for changes in SBA business loans? ownership.

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MATURITIES; INTEREST RATES; LOAN AND 120.347 Use of proceeds. GUARANTEE AMOUNTS 120.348 Amount of guarantee. 120.349 Collateral. 120.210 What percentage of a loan may SBA guarantee? QUALIFIED EMPLOYEE TRUSTS (ESOP) 120.211 What limits are there on the amounts of direct loans? 120.350 Policy. 120.212 What limits are there on loan matu- 120.351 Definitions. rities? 120.352 Use of proceeds. 120.213 What fixed interest rates may a 120.353 Eligibility. Lender charge? 120.354 Creditworthiness. 120.214 What conditions apply for variable VETERANS LOAN PROGRAM interest rates? 120.215 What interest rates apply to smaller 120.360 Which veterans are eligible? loans? 120.361 Other conditions of eligibility.

FEES FOR GUARANTEED LOANS POLLUTION CONTROL PROGRAM 120.220 Fees that Lender pays SBA. 120.370 Policy. 120.221 Fees and expenses that the Lender LOANS TO PARTICIPANTS IN THE 8(a) PROGRAM may collect from an Applicant or Bor- rower. 120.375 Policy. 120.222 Prohibition on sharing premiums for 120.376 Special requirements. secondary market sales. 120.377 Use of proceeds. 120.223 Subsidy recoupment fee payable to SBA by Borrower. DEFENSE ECONOMIC TRANSITION ASSISTANCE 120.380 Program. Subpart C—Special Purpose Loans 120.381 Eligibility. 120.382 Repayment ability. 120.300 Statutory authority. 120.383 Restrictions on loan processing.

DISABLED ASSISTANCE LOAN PROGRAM (DAL) CAPLINES PROGRAM 120.310 What assistance is available for the 120.390 Revolving credit. disabled? 120.311 Definitions. BUILDERS LOAN PROGRAM 120.312 DAL–1 use of proceeds and other pro- 120.391 What is the Builders Loan Program? gram conditions. 120.392 Who may apply? 120.313 DAL–2 use of proceeds and other pro- 120.393 Are there special application re- gram conditions. quirements? 120.314 Resolving doubts about credit- 120.394 What are the eligible uses of pro- worthiness. ceeds? 120.315 Interest rate and loan limit. 120.395 What is SBA’s collateral position? BUSINESSES OWNED BY LOW INCOME 120.396 What is the term of the loan? INDIVIDUALS 120.397 Are there any special restrictions?

120.320 Policy. AMERICA’S RECOVERY CAPITAL (BUSINESS STA- BILIZATION) LOAN PROGRAM—ARC LOAN ENERGY CONSERVATION PROGRAM 120.330 Who is eligible for an energy con- 120.398 America’s Recovery Capital (ARC) servation loan? Loan Program. 120.331 What devices or techniques are eligible for a loan? Subpart D—Lenders 120.332 What are the eligible uses of proceeds? 120.400 Loan Guarantee Agreements. 120.333 Are there any special credit criteria? PARTICIPATION CRITERIA EXPORT WORKING CAPITAL PROGRAM (EWCP) 120.410 Requirements for all participating 120.340 What is the Export Working Capital Lenders. Program? 120.411 Preferences. 120.341 Who is eligible? 120.412 Other services Lenders may provide 120.342 What are eligible uses of proceeds? Borrowers. 120.343 Collateral. 120.413 Advertisement of relationship with 120.344 Unique requirements of the EWCP. SBA.

INTERNATIONAL TRADE LOANS PARTICIPATING LENDER FINANCINGS 120.345 Policy. 120.420 Definitions. 120.346 Eligibility. 120.421 Which Lenders may securitize?

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120.422 Are all securitizations subject to SBA SUPERVISED LENDERS this subpart? 120.460 What are SBA’s additional require- 120.423 Which 7(a) loans may a Lender ments for SBA Supervised Lenders? securitize? 120.424 What are the basic conditions a 120.461 What are SBA’s additional require- Lender must meet to securitize? ments for SBA Supervised Lenders con- 120.425 What are the minimum elements cerning records? that SBA will require before consenting 120.462 What are SBA’s additional require- to a securitization? ments on capital maintenance for SBA 120.426 What action will SBA take if a Supervised Lenders? securitizer transfers the subordinated 120.463 Regulatory accounting—What are tranche prior to the termination of the SBA’s regulatory accounting require- holding period? ments for SBA Supervised Lenders? 120.427 Will SBA approve a securitization 120.464 Reports to SBA. application from a capital impaired 120.465 Civil penalty for late submission of Securitizer? required reports. 120.428 What happens to a securitizer’s 120.466 SBA Supervised Lender application. other PLP responsibilities if SBA sus- 120.467 Evaluation of SBA Supervised Lend- pends its PLP approval privilege? er applicants. 120.468 Change of ownership or control re- OTHER CONVEYANCES quirements for SBA Supervised Lenders.

120.430 What conveyances are covered by SMALL BUSINESS LENDING COMPANIES (SBLC) §§ 120.430 through 120.435? 120.431 Which Lenders may sell, sell partici- 120.470 What are SBA’s additional require- pations in, or pledge 7(a) loans? ments for SBLCs? 120.432 Under what circumstances does this 120.471 What are the minimum capital re- subpart permit sales of, or sales of par- quirements for SBLCs? ticipating interests in, 7(a) loans? 120.472 Higher individual minimum capital 120.433 What are SBA’s other requirements requirement. for sales and sales of participating inter- 120.473 Procedures for determining indi- ests? vidual minimum capital requirement. 120.434 What are SBA’s requirements for 120.474 Relation to other actions. loan pledges? 120.475 Change of ownership or control. 120.435 Which loan pledges do not require 120.476 Prohibited financing. notice to or consent by SBA? 120.490 Audits.

DELEGATED AUTHORITY CRITERIA Subpart E—Servicing, Liquidation and Debt 120.440 How does a 7(a) Lender obtain dele- Collection Litigation of 7(a) and 504 Loans gated authority? SBA’S PURCHASE OF A GUARANTEED PORTION SBA EXPRESS AND EXPORT EXPRESS LOAN 120.520 Purchase of 7(a) loan guarantees. PROGRAMS 120.521 What interest rate applies after SBA 120.441 SBA Express and Export Express purchases its guaranteed portion? Loan Programs. 120.522 Payment of accrued interest to the 120.442 Process to obtain or renew SBA Ex- Lender or Registered Holder when SBA press or Export Express authority. purchases the guaranteed portion. 120.443 SBA Express and Export Express 120.523 What is the ‘‘earliest uncured pay- loan processing requirements. ment default’’? 120.444 Eligible uses of SBA Express and Ex- 120.524 When is SBA released from liability port Express loan proceeds. on its guarantee? 120.445 Terms and conditions of SBA Ex- 120.530 Deferment of payment. press and Export Express loans. 120.531 Extension of maturity. 120.446 SBA Express and Export Express 120.532 What is a loan Moratorium? loan closing, servicing, liquidation, and 120.535 Standards for Lender and CDC loan litigation requirements. servicing, loan liquidation and debt col- 120.447 Oversight of SBA Express and Ex- lection litigation. port Express Lenders. 120.536 Servicing and liquidation actions that require the prior written consent of PREFERRED LENDERS PROGRAM (PLP) SBA. 120.450 What is the Preferred Lenders Pro- 120.540 Liquidation and litigation plans. gram? 120.541 Time for approval by SBA. 120.451 [Reserved] 120.542 Payment by SBA of legal fees and 120.452 What are the requirements of PLP other expenses. loan processing? 120.545 What are SBA’s policies concerning 120.453 Responsibilities of PLP Lenders for the liquidation of collateral and the sale servicing and liquidating 7(a) loans. of business loans and physical disaster

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assistance loans, physical disaster busi- 120.703 How does an organization apply to ness loans and economic injury disaster become an Intermediary? loans? 120.704 How are applications evaluated? 120.546 Loan asset sales. 120.705 What is a Specialized Intermediary? 120.706 What are the terms and conditions HOMESTEAD PROTECTION FOR FARMERS of an SBA loan to an intermediary? 120.550 What is homestead protection for 120.707 What conditions apply to loans by farmers? Intermediaries to Microloan borrowers? 120.551 Who is eligible for homestead pro- 120.708 What is the Intermediary’s financial tection? contribution? 120.552 Lease. 120.709 What is the Microloan Revolving 120.553 Appeal. Fund? 120.554 Conflict of laws. 120.710 What is the Loan Loss Reserve Subpart F—Secondary Market Fund? 120.711 What rules govern Intermediaries? FISCAL AND TRANSFER AGENT (FTA) 120.712 How does an Intermediary get a grant to assist Microloan borrowers? 120.600 Definitions. 120.601 SBA Secondary Market. 120.713 Does SBA provide technical assistance to Intermediaries? CERTIFICATES 120.714 How are grants made to non-lending technical assistance providers (NTAP)? 120.610 Form and terms of Certificates. 120.715 Does SBA guarantee any loans an 120.611 Pools backing Pool Certificates. Intermediary obtains from another 120.612 Loans eligible to back Certificates. source? 120.613 Secondary Participation Guarantee Agreement. 120.716 What is the minimum number of loans an Intermediary must make each THE SBA GUARANTEE OF A CERTIFICATE Federal fiscal year?

120.620 SBA guarantee of a Pool Certificate. Subpart H—Development Company Loan 120.621 SBA guarantee of an Individual Cer- tificate. Program (504)

POOL ASSEMBLERS 120.800 The purpose of the 504 program. 120.801 How a 504 Project is financed. 120.630 Qualifications to be a Pool Assem- 120.802 Definitions. bler. 120.631 Suspension or termination of Pool CERTIFICATION PROCEDURES TO BECOME A CDC Assembler. 120.810 Applications for certification as a MISCELLANEOUS PROVISIONS CDC. 120.640 Administration of the Pool and Indi- 120.812 Probationary period for newly cer- vidual Certificates. tified CDCs. 120.641 Disclosure to purchasers. REQUIREMENTS FOR CDC CERTIFICATION AND 120.642 Requirements before the FTA issues OPERATION Pool Certificates. 120.643 Requirements before the FTA issues 120.816 CDC non-profit status and good Individual Certificates. standing. 120.644 Transfers of Certificates. 120.818 Applicability to existing for-profit 120.645 Redemption of Certificates. CDCs. 120.650 Registration duties of FTA in Sec- 120.820 CDC Affiliation. ondary Market. 120.821 CDC Area of Operations. 120.651 Claim to FTA by Registered Holder 120.823 CDC Board of Directors. to replace Certificate. 120.824 Professional management and staff, 120.652 FTA fees. and contracts for services. SUSPENSION OR REVOCATION OF PARTICIPANT 120.825 Financial ability to operate. IN SECONDARY MARKET 120.826 Basic requirements for operating a CDC. 120.660 Suspension or revocation. 120.827 Other services a CDC may provide to small businesses. Subpart G—Microloan Program 120.828 Minimum level of 504 loan activity 120.700 What is the Microloan Program? and restrictions on portfolio concentra- 120.701 Definitions. tions. 120.702 Are there limitations on who can be 120.829 Job Opportunity average a CDC an Intermediary or on where an Inter- must maintain. mediary may operate? 120.830 Reports a CDC must submit.

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EXTENDING A CDC’S AREA OF OPERATIONS THE BORROWER’S CONTRIBUTION 120.835 Application to expand an Area of Op- 120.910 Borrower contributions. erations. 120.911 Land contributions. 120.837 SBA decision on application for a 120.912 Borrowed contributions. new CDC or for an existing CDC to ex- 120.913 Limitations on any contributions by pand Area of Operations. a Licensee. 120.839 Case-by-case application to make a 504 loan outside of a CDC’s Area of Oper- THIRD PARTY LOANS ation. 120.920 Required participation by the Third Party Lender. ACCREDITED LENDERS PROGRAM (ALP) 120.921 Terms of Third Party loans. 120.840 Accredited Lenders Program (ALP). 120.922 Pre-existing debt on the Project 120.841 Qualifications for the ALP. Property. 120.923 Policies on subordination. PREMIER CERTIFIED LENDERS PROGRAM 120.925 [Reserved] 120.926 Referral fee. 120.845 Premier Certified Lenders Program (PCLP). 504 LOANS AND DEBENTURES 120.846 Requirements for maintaining and renewing PCLP status. 120.930 Amount. 120.847 Requirements for the Loan Loss Re- 120.931 504 Lending limits. serve Fund (LLRF). 120.932 Interest rate. 120.848 Requirements for 504 loan proc- 120.933 Maturity. essing, closing, servicing, liquidating, 120.934 Collateral. and litigating by PCLP CDCs. 120.935 Deposit from the Borrower that a CDC may require. ASSOCIATE DEVELOPMENT COMPANIES (ADCS) 120.937 Assumption. 120.938 Default. 120.850 Expiration of Associate Develop- 120.939 Borrower prohibition. ment Company designation. 120.940 Prepayment of the 504 loan or De- benture. OTHER CDC REQUIREMENTS 120.941 Certificates. 120.851 CDC ethical requirements. 120.852 [Reserved] DEBENTURE SALES AND SERVICE AGENTS 120.853 Inspector General audits of CDCs. 120.950 SBA and CDC must appoint agents. 120.857 Voluntary transfer and surrender of 120.951 Selling agent. CDC certification. 120.952 Fiscal agent. 120.953 Trustee. PROJECT ECONOMIC DEVELOPMENT GOALS 120.954 Central Servicing Agent. 120.860 Required objectives. 120.955 Agent bonds and records. 120.861 Job creation or retention. 120.956 Suspension or revocation of brokers 120.862 Other economic development objec- and dealers. tives. CLOSINGS LEASING POLICIES SPECIFIC TO 504 LOANS 120.960 Responsibility for closing. 120.870 Leasing Project Property. 120.961 Construction escrow accounts. 120.871 Leasing part of Project Property to another business. SERVICING 120.970 Servicing of 504 loans and Deben- LOAN-MAKING POLICIES SPECIFIC TO 504 LOANS tures. 120.880 Basic eligibility requirements. 120.881 Ineligible Projects for 504 loans. FEES 120.882 Eligible Project costs for 504 loans. 120.971 Allowable fees paid by Borrower. 120.883 Eligible administrative costs for 504 120.972 Third Party Lender participation fee loans. and CDC fee. 120.884 Ineligible costs for 504 loans. AUTHORITY OF CDCS TO PERFORM LIQUIDA- INTERIM FINANCING TION AND DEBT COLLECTION LITIGATION 120.890 Source of interim financing. 120.975 CDC Liquidation of loans and debt 120.891 Certifications of disbursement and collection litigation. completion. 120.892 Certifications of no adverse change. ENFORCEABILITY OF 501, 502 AND 503 LOANS AND OTHER LAWS PERMANENT FINANCING 120.990 501, 502 and 503 loans. 120.900 Sources of permanent financing. 120.991 Effect of other laws.

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Subpart I—Risk-Based Lender Oversight 120.1716 Required SBA approval of servicing actions. SUPERVISION 120.1717 Seller’s Pool Loan deferments. 120.1718 SBA’s right to assume Seller’s re- 120.1000 Risk-Based Lender Oversight. sponsibilities. 120.1005 Bureau of PCLP Oversight. 120.1719 SBA’s right to recover from Seller. 120.1010 SBA access to SBA Lender and 120.1720 SBA’s right to review Pool Loan Intermediary files. documents. 120.1015 Risk Rating System. 120.1721 SBA’s right to investigate. 120.1025 Monitoring. 120.1722 SBA’s offset rights. 120.1050 Reviews and examinations. 120.1723 Pool Loan receivables received by 120.1051 Frequency of reviews and examina- Seller. tions. 120.1724 Servicing and liquidation expenses. 120.1055 Review and examination results. 120.1725 No Program Preference by Seller or 120.1060 Confidentiality of Reports, Risk Pool Originator. Ratings, and related Confidential Infor- 120.1726 Pool Certificates a Seller cannot mation. purchase. 120.1070 SBA Lender oversight fees AUTHORITY: 15 U.S.C. 634(b) (6), (b) (7), (b) ENFORCEMENT ACTIONS (14), (h), and note, 636(a), (h) and (m), and note, 650, 657t, and note, 657u, and note, 120.1300 Informal enforcement actions—7(a) 687(f), 696(3) and (7), and note, and 697(a) and Lenders. (e), and note. 120.1400 Grounds for enforcement actions— SBA Lenders. SOURCE: 61 FR 3235, Jan. 31, 1996, unless 120.1425 Grounds for formal enforcement ac- otherwise noted. tions—Intermediaries participating in EDITORIAL NOTE: Nomenclature changes to the Microloan Program. part 120 appear at 72 FR 50039, Aug. 30, 2007. 120.1500 Types of formal enforcement actions—SBA Lenders. GENERAL DESCRIPTIONS OF SBA’S 120.1510 Other Regulated SBLCs. BUSINESS LOAN PROGRAMS 120.1511 Certification and other reporting and notification requirements for Other § 120.1 Which loan programs does this Regulated SBLCs. part cover? 120.1540 Types of formal enforcement actions—Intermediaries participating in This part regulates SBA’s financial the Microloan Program. assistance to small businesses under its 120.1600 General procedures for formal en- general business loan programs (‘‘7(a) forcement actions against SBA Lenders, loans’’) authorized by section 7(a) of SBA Supervised Lenders, Other Regu- the Small Business Act (‘‘the Act’’), 15 lated SBLCs, Management Officials, U.S.C. 636(a), its microloan demonstra- Other Persons, and Intermediaries. tion loan program (‘‘Microloans’’) au- Subpart J—Establishment of SBA Sec- thorized by section 7(m) of the Act, 15 ondary Market Guarantee Program for U.S.C. 636(m), and its development First Lien Position 504 Loan Pools company program (‘‘504 loans’’) authorized by Title V of the Small Business 120.1700 Definitions used in subpart J. Investment Act, 15 U.S.C. 695 to 697f 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. § 120.2 Descriptions of the business 120.1705 Pool formation requirements. loan programs. 120.1706 Pool Originator’s retained interest 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. (i) A direct loan by SBA; 120.1710 Central servicing of the Program. (ii) An immediate participation loan 120.1711 Suspension or termination of Pro- by a Lender and SBA; or gram participation privileges. (iii) A guaranteed loan (deferred par- 120.1712 Seller responsibilities with respect 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. (2) A guaranteed loan is initiated by 120.1715 Seller’s Pool Loan liquidation. a Lender agreeing to make an SBA

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guaranteed loan to a small business Acceptable Risk Rating is an SBA-as- and applying to SBA for SBA’s guar- signed Risk Rating, currently defined antee under a blanket guarantee agree- by SBA as ‘‘1’’, ‘‘2’’ or ‘‘3’’ on a scale of ment (participation agreement) be- 1 to 5, which represents an acceptable tween SBA and the Lender. If SBA level of risk as determined by SBA, and agrees to guarantee (authorizes) a por- which may be revised by SBA from tion of the loan, the Lender funds and time to time as published in the FED- services the loan. If the small business ERAL REGISTER through notice and defaults on the loan, SBA’s guarantee comment. requires SBA to purchase its portion of Associate. (1) An Associate of a Lend- the outstanding balance, upon demand er or CDC is: by the Lender and subject to specific (i) An officer, director, key employee, conditions. Regulations specific to 7(a) or holder of 20 percent or more of the loans are found in subpart B of this value of the Lender’s or CDC’s stock or part. debt instruments, or an Agent (as de- (b) Microloans. SBA makes loans and fined in § 103.1 of this chapter) involved loan guarantees to non-profit Inter- in the loan process; or mediaries that make short-term loans (ii) Any entity in which one or more up to $50,000 to eligible small busi- individuals referred to in paragraphs nesses for general business purposes, (1)(i) of this definition or a Close Rel- except payment of personal debts. SBA ative of any such individual owns or also makes grants to Intermediaries controls at least 20 percent. for use in providing management as- (2) An Associate of a small business sistance and counseling to small busi- is: nesses. Regulations specific to these (i) An officer, director, owner of more loans are found in subpart G of this than 20 percent of the equity, or key part. employee of the small business; (c) 504 loans. Projects involving 504 (ii) Any entity in which one or more loans require long-term fixed-asset fi- individuals referred to in paragraphs nancing for small businesses. A Cer- (2)(i) of this definition owns or controls tified Development Company (CDC) at least 20 percent; and provides the final portion of this fi- (iii) Any individual or entity in con- nancing with a 504 loan made from the trol of or controlled by the small busi- proceeds of a Debenture issued by the ness (except a Small Business Invest- CDC, guaranteed 100 percent by SBA ment Company (‘‘SBIC’’) licensed by (with the full faith and credit of the SBA). United States), and sold to investors. (3) For purposes of this definition, The regulations specific to these loans the time during which an Associate re- are found in subpart H of this part. lationship exists commences six months before the following dates and [61 FR 3235, Jan. 31, 1996, as amended at 76 continues as long as the certification, FR 63545, Oct. 12, 2011] participation agreement, or loan is outstanding: § 120.3 Pilot programs. (i) For a CDC, the date of certifi- The Administrator of SBA may from cation by SBA; time to time suspend, modify, or waive (ii) For a Lender, the date of applica- rules for a limited period of time to tion for a loan guarantee on behalf of test new programs or ideas. The Ad- an applicant; or ministrator shall publish a document (iii) For a small business, the date of in the FEDERAL REGISTER explaining the loan application to SBA, the CDC, the reasons for these actions. the Intermediary, or the Lender. Authorization is SBA’s written agree- DEFINITIONS ment providing the terms and conditions under which SBA will make or § 120.10 Definitions. guarantee business loans. It is not a The following terms have the same contract to make a loan. meaning wherever they are used in this Authorized CDC Liquidator is a CDC in part. Defined terms are capitalized good standing with authority under the wherever they appear. Act and SBA regulations to conduct

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liquidation and certain debt collection time to time as published in the FED- litigation in connection with 504 loans, ERAL REGISTER through notice and as authorized by § 120.975. comment. Borrower is the obligor of an SBA Loan Instruments are the Authoriza- business loan. tion, note, instruments of Certified Development Company hypothecation, and all other agree- (‘‘CDC’’) is an entity authorized by ments and documents related to a loan. SBA to deliver 504 financing to small Loan Program Requirements or SBA businesses. Loan Program Requirements are require- Close Relative is a spouse; a parent; or ments imposed upon Lenders, CDCs, or a child or sibling, or the spouse of any Intermediaries by statute; SBA and ap- such person. plicable government-wide regulations; Eligible Passive Company is a small en- any agreement the Lender, CDC, or tity or trust which does not engage in Intermediary has executed with SBA; regular and continuous business activ- SBA Standard Operating Procedures ity, which leases real or personal prop- (SOPs); FEDERAL REGISTER notices; of- erty to an Operating Company for use ficial SBA notices and forms applicable in the Operating Company’s business, to the 7(a) Loan Program, 504 Loan and which complies with the conditions Program or Microloan Program; and set forth in § 120.111. loan authorizations, as such require- Federal Financial Institution Regulator ments are issued and revised by SBA is the Federal banking regulator of a from time to time. For CDCs, this term 7(a) Lender and may include the Fed- also includes requirements imposed by eral Deposit Insurance Corporation, Debentures, as that term is defined in the Federal Reserve Board, the Office § 120.802. For Intermediaries, this term of the Comptroller of the Currency, the also includes requirements imposed by National Credit Union Administration, promissory notes, collateral docu- and the Farm Credit Administration. ments, and grant agreements. Intermediary is the entity in the Management Official is an officer, di- Microloan program that receives SBA 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 small business actively involved in duties include, but are not limited to, conducting business operations now or reviewing (in an advisory capacity) any about to be located on real property lender oversight, portfolio risk man- owned by an Eligible Passive Company, agement, or program integrity matters or using or about to use in its business brought by the Director of the Office of operations personal property owned by Credit Risk Management (D/OCRM), an Eligible Passive Company. and voting on formal enforcement ac- Other Regulated SBLC is a Small tion recommendations. Business Lending Company whose SBA Less Than Acceptable Risk Rating is an operations receive regular safety and SBA-assigned Risk Rating, currently soundness examinations by a state defined by SBA as ‘‘4’’ or ‘‘5’’ on a scale banking regulator or a Federal Finan- of 1 to 5, which represents a higher cial Institution Regulator, and which level of risk as determined by SBA, and meets the requirements set forth in which may be revised by SBA from § 120.1511.

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Person is any individual, corporation, SOPs are SBA Standard Operating partnership, association, unit of gov- Procedures, as issued and revised by ernment, or legal entity, however orga- SBA from time to time. SOPs are pub- nized. licly available on SBA’s Web site at Preference is any arrangement giving http://www.sba.gov in the online library. a Lender or a CDC a preferred position [61 FR 3235, Jan. 31, 1996, as amended at 64 compared to SBA relating to the mak- FR 2117, Jan. 13, 1999; 68 FR 57980, Oct. 7, 2003; ing, servicing, or liquidation of a busi- 72 FR 18360, Apr. 12, 2007; 73 FR 75510, Dec. 11, ness loan with respect to such things as 2008; 76 FR 63545, Oct. 12, 2011; 85 FR 7647, repayment, collateral, guarantees, con- Feb. 10, 2020; 85 FR 14780, Mar. 16, 2020] trol, maintenance of a compensating EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. balance, purchase of a Certificate of de- 14, 2020, § 120.10 was amended by revising posit or acceptance of a separate or paragraph (1)(i) of the defined term ‘‘Asso- companion loan, without SBA’s con- ciate’’, effective Mar. 27, 2021. For the consent. venience of the user, the revised text is set Rentable Property is the total square forth as follows: footage of all buildings or facilities § 120.10 Definitions. used for business operations. Risk Rating is an SBA internal com- * * * * * posite rating assigned to individual SBA Lenders, Intermediaries, or Associate. (1) * * * (i) An officer, director, key employee, or NTAPs that reflects the risk associated holder of 20 percent or more of the value of with the SBA Lender’s or the Lender’s or CDC’s stock or debt instru- Intermediary’s portfolio of SBA loans ments, or an agent involved in the loan proc- or with the NTAP. Risk Ratings cur- ess; or rently range from one to five, with one representing the least risk and five rep- * * * * * resenting the most risk, and may be revised by SBA from time to time as pub- Subpart A—Policies Applying to lished in the FEDERAL REGISTER through notice and comment. All Business Loans Rural Area is a political subdivision ELIGIBILITY REQUIREMENTS or unincorporated area in a non-metropolitan county (as defined by the De- § 120.100 What are the basic eligibility partment of Agriculture), or, if in a requirements for all applicants for metropolitan county, any such subdivi- SBA business loans? sion or area with a resident population To be eligible for an SBA business under 20,000 which is designated by loan, a small business applicant must: SBA as rural. (a) Be an operating business (except SBA Lender is a 7(a) Lender or a CDC. for loans to Eligible Passive Compa- This term includes SBA Supervised nies); Lenders. (b) Be organized for profit; SBA Supervised Lender is a 7(a) Lend- (c) Be located in the United States; er that is either a Small Business (d) Be small under the size require- Lending Company or a NFRL. ments of part 121 of this chapter (in- Service Provider is an entity that con- cluding affiliates). See subpart H of tracts with a Lender or CDC to perform this part for the size standards of part management, marketing, legal or other 121 of this chapter which apply only to services. 504 loans; and Small Business Lending Company (e) Be able to demonstrate a need for (SBLC) is a nondepository lending in- the desired credit. stitution that is SBA licensed and is authorized by SBA to only make loans § 120.101 Credit not available else- pursuant to section 7(a) of the Small where. Business Act and loans to Inter- SBA provides business loan assist- mediaries in SBA’s Microloan program. ance only to applicants for whom the SBA has imposed a moratorium on li- desired credit is not otherwise avail- censing new SBLCs since January 1982. able on reasonable terms from non-

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Federal, non-State, and non-local gov- defined in Loan Program Requirements ernment sources. Accordingly, SBA re- (see § 120.10)): quires the Lender or CDC to certify or (1) Is $350,000 or less, each 20 percent otherwise show that the desired credit owner of the Applicant must inject any is unavailable to the applicant on rea- liquid assets that are in excess of two sonable terms and conditions from non- times the total financing package, or Federal, non-State, and non-local gov- $500,000, whichever is greater; ernment sources without SBA assist- (2) Is between $350,001 and $1,000,000, ance, taking into consideration factors each 20 percent owner of the Applicant associated with conventional lending must inject any liquid assets that are practices, including: The business in- in excess of one and one-half times the dustry of the loan applicant; whether total financing package, or $1,000,000, the loan applicant has been in oper- whichever is greater; or ation two years or less; the adequacy of (3) Exceeds $1,000,000, each 20 percent collateral available to secure the loan; owner of the Applicant must inject any the loan term necessary to reasonably liquid assets that are in excess of one assure repayment of the loan from ac- times the total financing package, or tual or projected business cash flow; $2,500,000, whichever is greater. and any other factor relating to the (b) Any liquid assets in excess of the particular loan application that cannot applicable amount set forth in para- be overcome except through obtaining graph (a) of this section must be used a Federal loan guarantee under pru- to reduce the SBA loan amount. These dent lending standards. Submission of funds must be injected prior to the dis- an application to SBA by a Lender or bursement of the proceeds of any SBA CDC constitutes certification by the financing. In extraordinary cir- Lender or CDC that it has examined cumstances, SBA may, in its sole dis- the availability of credit to the appli- cretion, permit exceptions to the re- cant, has based its certification upon quired injection of an owner’s excess that examination, and has substan- liquid assets. tiation in its file to support the certifi- (c) For purposes of this section, ‘‘liq- cation. uid assets’’ means cash or cash equiva- lents, including savings accounts, CDs, [61 FR 3235, Jan. 31, 1996, as amended at 85 stocks, bonds, or other similar assets. FR 14780, Mar. 16, 2020] Equity in real estate holdings, the cash value of life insurance policies, and § 120.102 Funds not available from alternative sources, including the other fixed assets are not to be consid- personal resources of owners. ered liquid assets. In addition, the liquid assets of any 20 percent owner who (a) An Applicant for a business loan is an individual include the liquid as- must show that the desired funds are sets of the owner’s spouse and any not available from the resources of any minor children. individual or entity owning 20 percent (d) SBA Lenders must document or more of the Applicant. SBA will re- their analysis and determination in the quire the use of liquid assets from any loan file. such owner as an injection to reduce the SBA loan amount when that own- [85 FR 7647, Feb. 10, 2020] er’s liquid assets exceed the amounts EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. specified in paragraphs (a)(1) through 14, 2020, § 120.102 was removed and reserved, (3) of this section. SBA will reexamine effective Mar. 27, 2021. the thresholds periodically and, if adjustments are necessary based on na- § 120.103 Are farm enterprises eligible? tionally-recognized economic indica- Federal financial assistance to agri- tors, SBA may modify the thresholds cultural enterprises is generally made from time to time through rulemaking. by the United States Department of When the total financing package (i.e., Agriculture (USDA), but may be made any SBA loans and any other financ- by SBA under the terms of a Memo- ing, including loans from any other randum of Understanding between SBA source, requested by the Applicant and USDA. Farm-related businesses business at or about the same time, as which are not agricultural enterprises

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are eligible businesses under SBA’s (e) Businesses located in a foreign business loan programs. country (businesses in the U.S. owned by aliens may qualify); § 120.104 Are businesses financed by (f) Pyramid sale distribution plans; SBICs eligible? (g) Businesses deriving more than SBA may make or guarantee loans to one-third of gross annual revenue from a business financed by an SBIC if legal gambling activities; SBA’s collateral position will be supe- (h) Businesses engaged in any illegal rior to that of the SBIC. SBA may also activity; 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) Businesses principally engaged in teaching, instructing, counseling or in- § 120.105 Special consideration for vet- doctrinating religion or religious be- erans. liefs, whether in a religious or secular setting; SBA will give special consideration (l) [Reserved] to a small business owned by a veteran (m) Loan packagers earning more or, if the veteran chooses not to apply, than one third of their gross annual to a business owned or controlled by revenue from packaging SBA loans; one of the veteran’s dependents. If the (n) Businesses with an Associate who veteran is deceased or permanently dis- is incarcerated, on probation, on pa- abled, SBA will give special consider- role, or has been indicted for a felony ation to one survivor or dependent. or a crime of moral turpitude; 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; § 120.110 What businesses are ineli- (q) Unless waived by SBA for good gible for SBA business loans? cause, businesses that have previously 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, quired or improved with the loan pro- a compromise agreement shall also be ceeds (except Eligible Passive Compa- considered a loss; nies under § 120.111); (r) Businesses primarily engaged in (d) Life insurance companies; political or lobbying activities; and

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(s) Speculative businesses (such as oil (3) The lease between the Eligible wildcatting). Passive Company and the Operating Company must be in writing and must [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39502, Aug. 21, 2017] be subordinate to SBA’s mortgage, trust deed lien, or security interest on § 120.111 What conditions must an Eli- the property. The Eligible Passive gible Passive Company satisfy? Company (as landlord) must furnish as An Eligible Passive Company must collateral for the loan an assignment of use loan proceeds only to acquire or all rents paid under the lease. The rent lease, and/or improve or renovate, real or lease payments cannot exceed the or personal property (including eligible amount necessary to make the loan refinancing), that it leases to one or payment to the lender, and an addi- more Operating Companies for con- tional amount to cover the Eligible ducting the Operating Company’s busi- Passive Company’s direct expenses of ness, or to finance a change of owner- holding the property, such as mainte- ship between the existing owners of the nance, insurance and property taxes; Eligible Passive Company. When the (4) The lease between the Eligible Operating Company is a co-borrower on Passive Company and the Operating the loan, loan proceeds also may be Company, including options to renew used by the Operating Company for exercisable solely by the Operating working capital and/or the purchase of Company, must have a remaining term other assets, including intangible as- at least equal to the term of the loan; sets, for the Operating Company’s use (5) The Operating Company must be a as provided in paragraph (a)(5) of this guarantor or co-borrower with the Eli- section. (References to Operating Com- gible Passive Company. In a 7(a) loan pany in paragraphs (a) and (b) of this that includes working capital and/or section mean each Operating Com- the purchase of other assets, including pany.) In the 504 loan program, if the intangible assets, for the Operating Eligible Passive Company owns assets Company’s use, the Operating Com- in addition to the real estate or other pany must be a co-borrower. eligible long-term fixed assets, loan (6) Each holder of an ownership inter- proceeds may not be used to finance a est constituting at least 20 percent of change of ownership between existing either the Eligible Passive Company or owners of the Eligible Passive Com- the Operating Company must guar- pany unless the additional assets antee the loan. The trustee shall exe- owned by the Eligible Passive Company cute the guaranty on behalf of any are directly related to the real estate trust. When deemed necessary for cred- or other eligible long-term fixed assets, it or other reasons, SBA or, for a loan the amount attributable to the addi- processed under an SBA Lender’s dele- tional assets is de minimis, and the ad- gated authority, the SBA Lender may ditional assets are excluded from the require other appropriate individuals Project financing. Any ownership or entities to provide full or limited structure or legal form may qualify as guarantees of the loan without regard an Eligible Passive Company. Any own- to the percentage of their ownership ership structure or legal form may interests, if any. qualify as an Eligible Passive Com- (b) Additional conditions that apply to pany. 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 under the appropriate size standards in consent of SBA. The trustor must guar- part 121 of this chapter; antee the loan. For purposes of this

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section, the trustee shall certify to ing capital and/or the purchase of other SBA that: assets, including intangible assets, for (1) The trustee has authority to act; use by the Operating Company). (2) The trust has the authority to (c) A Borrower may use 7(a) loan pro- borrow funds, pledge trust assets, and ceeds for refinancing certain out- lease the property to the Operating standing debts. Company; [61 FR 3235, Jan. 31, 1996, as amended at 77 (3) The trustee has provided accurate, FR 19533, Apr. 2, 2012] pertinent language from the trust 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 SBA will not authorize nor may a and complete list of all trustors and Borrower use loan proceeds for the fol- donors. lowing purposes (including the replace- [61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1, ment of funds used for any such pur- 1996, as amended at 64 FR 2117, Jan. 13, 1999; pose): 77 FR 19533, Apr. 2, 2012; 82 FR 39502, Aug. 21, (a) Payments, distributions or loans 2017] to Associates of the applicant (except for ordinary compensation for services USES OF PROCEEDS rendered); (b) Refinancing a debt owed to a § 120.120 What are eligible uses of proceeds? Small Business Investment Company (‘‘SBIC’’) or a New Markets Venture A small business must use an SBA Capital Company (‘‘NMVCC’’); business loan for sound business pur- (c) Floor plan financing or other re- poses. The uses of proceeds are pre- volving line of credit, except under scribed in each loan’s Authorization. § 120.340, § 120.390, or § 120.444; (a) A Borrower may use loan proceeds (d) Investments in real or personal from any SBA loan to: property acquired and held primarily (1) Acquire land (by purchase or for sale, lease, or investment (except lease); for a loan to an Eligible Passive Com- (2) Improve a site (e.g., grading, pany or to a small contractor under streets, parking lots, landscaping), in- § 120.310); cluding up to 5 percent for community (e) The applicant may not use any of improvements such as curbs and side- the proceeds to pay past-due Federal, walks; state, or local payroll taxes, sales (3) Purchase one or more existing taxes, or other similar taxes that are buildings; required to be collected by the appli- (4) Convert, expand or renovate one cant and held in trust on behalf of a or more existing buildings; Federal, state, or local government en- (5) Construct one or more new build- tity. ings; and/or (f) A purpose which does not benefit (6) Acquire (by purchase or lease) and the small business; or install fixed assets (for a 504 loan, these (g) Any use restricted by §§ 120.201, assets must have a useful life of at 120.202, and 120.884 (specific to 7(a) least 10 years and be at a fixed loca- loans and 504 loans respectively). tion, although short-term financing for equipment, furniture, and furnishings [61 FR 3235, Jan. 31, 1996, as amended at 76 may be permitted where essential to FR 9218, Feb. 17, 2011; 76 FR 63545, Oct. 12, 2011; 82 FR 39502, Aug. 21, 2017; 85 FR 7648, and a minor portion of the 504 Project). Feb. 10, 2020] (b) A Borrower may also use 7(a) and microloan proceeds for: EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. (1) Inventory; 14, 2020, § 120.130 was amended by revising paragraph (c), effective Mar. 27, 2021. For the (2) Supplies; convenience of the user, the revised text is (3) Raw materials; and set forth as follows: (4) Working capital (if the Operating Company is a co-borrower with the Eli- § 120.130 Restrictions on uses of proceeds. gible Passive Company, part of the loan proceeds may be applied for work- * * * * *

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(c) Floor plan financing or other revolving obtains information concerning the un- line of credit, except under § 120.340 or ethical behavior of an Associate. The § 120.390; following are examples of such uneth- ical behavior. A Participant may not: * * * * * (a) Self-deal; (b) Have a real or apparent conflict of § 120.131 Leasing part of new con- interest with a small business with struction or existing building to an- which it is dealing (including any of its other business. Associates or an Associate’s Close Rel- (a) If the SBA financing (whether 7(a) atives) or SBA; or 504) is for the construction of a new (c) Own an equity interest in a busi- building, a Borrower may permanently ness that has received or is applying to lease up to 20 percent of the Rentable receive SBA financing (during the term Property to one or more tenants if the of the loan or within 6 months prior to Borrower permanently occupies and the loan application); uses no less than 60 percent of the (d) Be incarcerated, on parole, or on Rentable Property, and plans to perma- probation; nently occupy and use within three (e) Knowingly misrepresent or make years some of the remaining space not a false statement to SBA; immediately occupied and not perma- (f) Engage in conduct reflecting a nently leased and plans to permanently lack of business integrity or honesty; occupy and use within ten years all of (g) Be a convicted felon, or have an the remaining space not permanently adverse final civil judgment (in a case leased. If the Borrower is an Eligible involving fraud, breach of trust, or Passive Company which leases 100 per- other conduct) that would cause the cent of the new building’s space to one public to question the Participant’s or more Operating Companies, the Op- business integrity, taking into consid- erating Company, or Operating Compa- eration such factors as the magnitude, nies together, must follow the same repetition, harm caused, and remote- rules set forth in this paragraph. ness in time of the activity or activi- (b) If the SBA financing (whether 7(a) ties in question; or 504) is for the acquisition, renova- (h) Accept funding from any source tion, or reconstruction of an existing that restricts, prioritizes, or conditions building, the Borrower may perma- the types of small businesses that the nently lease up to 49 percent of the Participant may assist under an SBA Rentable Property if the Borrower per- program or that imposes any condi- manently occupies and uses no less tions or requirements upon recipients than 51 percent of the Rentable Prop- of SBA assistance inconsistent with erty. If the Borrower is an Eligible Pas- SBA’s loan programs or regulations; sive Company which leases 100 percent (i) Fail to disclose to SBA all rela- of the space of the existing building to tionships between the small business one or more Operating Companies, the and its Associates (including Close Rel- Operating Company, or Operating Com- atives of Associates), the Participant, panies together, must follow the same and/or the lenders financing the rules set forth in this paragraph. 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

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(4) Require the small business, or an ceived by an Eligible Passive Company Associate (including Close Relatives of applies to the loan limit of both the El- Associates), to invest in the Partici- igible Passive Company and the Oper- pant (except for institutions which re- ating Company. quire an investment from all members as a condition of membership, such as [61 FR 3235, Jan. 31, 1996, as amended at 68 a Production Credit Association); FR 51680, Aug. 28, 2003; 76 FR 63546, Oct. 12, (k) Issue a real estate forward com- 2011; 81 FR 41428, June 27, 2016] mitment to a builder or developer; or § 120.160 Loan conditions. (l) Engage in any activity which taints its objective judgment in evalu- The following requirements are nor- ating the loan. mally required by SBA for all business loans: [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57980, Oct. 7, 2003] (a) Personal guarantees. Holders of at least a 20 percent ownership interest CREDIT CRITERIA FOR SBA LOANS generally must guarantee the loan. When deemed necessary for credit or § 120.150 What are SBA’s lending cri- other reasons, SBA or, for a loan proc- teria? essed under an SBA Lender’s delegated The applicant (including an Oper- authority, the SBA Lender, may re- ating Company) must be creditworthy. quire other appropriate individuals or Loans must be so sound as to reason- entities to provide full or limited guar- ably assure repayment. SBA will con- antees of the loan without regard to sider: the percentage of their ownership in- (a) Character, reputation, and credit terests, if any. history of the applicant (and the Oper- (b) Appraisals. SBA may require pro- ating Company, if applicable), its Asso- ciates, and guarantors; fessional appraisals of the applicant’s (b) Experience and depth of manage- and principals’ assets, a survey, or a ment; feasibility study. (c) Strength of the business; (c) Hazard Insurance. SBA requires (d) Past earnings, projected cash hazard insurance on all collateral. flow, and future prospects; [61 FR 3235, Jan. 31, 1996, as amended at 82 (e) Ability to repay the loan with FR 39502, Aug. 21, 2017] earnings from the business; (f) Sufficient invested equity to oper- REQUIREMENTS IMPOSED UNDER OTHER ate on a sound financial basis; LAWS AND ORDERS (g) Potential for long-term success; (h) Nature and value of collateral (al- § 120.170 Flood insurance. though inadequate collateral will not Under the Flood Disaster Protection be the sole reason for denial of a loan Act of 1973 (Sec. 205(b) of Pub. L. 93–234; request); and (i) The effect any affiliates (as de- 87 Stat. 983 (42 U.S.C. 4000 et seq.)), a fined in part 121 of this chapter) may loan recipient must obtain flood insur- have on the ultimate repayment abil- ance if any building (including mobile ity of the applicant. homes), machinery, or equipment acquired, 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- cific program. The maximum loan mediaries must notify Borrowers that amount for any one 7(a) loan is flood insurance must be maintained. $5,000,000. The amount of any loan re-

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§ 120.171 Compliance with child sup- (4) Hazard mitigation measures; port obligations. (5) Working capital loans; or Any holder of 50% or more of the (6) SBA loan assistance of $1,500,000 ownership interest in the recipient of or less. an SBA loan must certify that he or § 120.173 Lead-based paint. she is not more than 60 days delinquent on any obligation to pay child support If loan proceeds are for the construc- arising under: tion or rehabilitation of a residential (a) An administrative order; structure, lead-based paint may not be (b) A court order; used on any interior surface, or on any (c) A repayment agreement between exterior surface that is readily acces- the holder and a custodial parent; or sible to children under the age of seven (d) A repayment agreement between years. the holder and a State agency providing child support enforcement serv- § 120.174 Earthquake hazards. ices. When loan proceeds are used to construct a new building or an addition to § 120.172 Flood-plain and wetlands an existing building, the construction management. must conform with the ‘‘National (a) All loans must conform to re- Earthquake Hazards Reduction Pro- quirements of Executive Orders 11988, gram (‘‘NEHRP’’) Recommended Provi- ‘‘Flood Plain Management’’ (3 CFR, sions for the Development of Seismic 1977 Comp., p. 117) and 11990, ‘‘Protec- Regulations for New Buildings’’ (which tion of Wetlands’’ (3 CFR, 1977 Comp., can be obtained from the Federal p. 121). Lenders, Intermediaries, CDCs, Emergency Management Agency, Pub- and SBA must comply with require- lications Office, Washington, DC) or a ments applicable to them. Applicants code identified by SBA as being sub- must show: stantially equivalent. (1) Whether the location for which financial assistance is proposed is in a § 120.175 Coastal barrier islands. floodplain or wetland; SBA and Intermediaries may not (2) If it is in a floodplain, that the as- make or guarantee any loan within the sistance is in compliance with local Coastal Barrier Resource System. land use plans; and (3) That any necessary construction § 120.176 Compliance with other laws. or use permits will be issued. All SBA loans are subject to all ap- (b) Generally, there is an 8-step deci- plicable laws, including (without limi- sion making process with respect to: tation) the civil rights laws (see parts (1) Construction or acquisition of 112, 113, 117 and 136 of this chapter), anything, other than a building; prohibiting discrimination on the (2) Repair and restoration equal to grounds of race, color, national origin, more than 50% of the market value of religion, sex, marital status, disability a building; or or age. SBA requests agreements or (3) Replacement of destroyed struc- evidence to support or document com- tures. pliance with these laws, including re- (c) SBA may determine for the fol- ports required by applicable statutes or lowing types of actions, on a case-by- the regulations in this chapter. case basis, that the full 8-step process is not warranted and that only the first APPLICABILITY AND ENFORCEABILITY OF step (determining if a proposed action LOAN PROGRAM REQUIREMENTS is in the base floodplain) need be completed: § 120.180 Compliance with Loan Pro- (1) Actions located outside the base gram Requirements. floodplain; SBA Lenders and Intermediaries (2) Repairs, other than to buildings, must comply and maintain familiarity that are less than 50% of the market with Loan Program Requirements for value; the 7(a) Loan Program, 504 Loan Pro- (3) Replacement of building contents, gram, and the Microloan Program, as materials, and equipment; applicable, and as such requirements

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are revised from time to time. Loan and a business plan, when applicable. Program Requirements in effect at the Personal histories and financial state- time that an SBA Lender or Inter- ments will be required from principals mediary takes an action in connection of the applicant (and the Operating with a particular loan govern that spe- Company, if applicable). cific action. For example, although loan closing requirements in effect § 120.192 Approval or denial. when an SBA Lender closes a loan will Applicants receive notice of approval govern the closing actions, an SBA or denial by the Lender, CDC, Inter- Lender’s liquidation actions on the mediary, or SBA, as appropriate. No- same loan are subject to the liquida- tice of denial will include the reasons. tion requirements in effect at the time If a loan is approved, an Authorization that a liquidation action is taken. An will be issued. SBA Lender or Intermediary must maintain sufficient documentation to § 120.193 Reconsideration after denial. demonstrate that Loan Program Re- An applicant or recipient of a busi- quirements have been satisfied. ness loan may request reconsideration of a denied loan or loan modification [85 FR 14781, Mar. 16, 2020] request within 6 months of denial. Ap- § 120.181 Status of Lenders and CDCs. plicants denied due to a size determination can appeal that determina- Lenders, CDCs and their contractors tion under part 121 of this chapter. All are independent contractors that are others must be submitted to the office responsible for their own actions with that denied the original request. To respect to a 7(a) or 504 loan. SBA has prevail, the applicant must dem- no responsibility or liability for any onstrate that it has overcome all le- claim by a borrower, guarantor or gitimate reasons for denial. Six months other party alleging injury as a result after denial, a new application is re- of any allegedly wrongful action taken quired. If the reconsideration is denied, by a Lender, CDC or an employee, a second and final reconsideration may agent, or contractor of a Lender or be considered by the Director, Office of CDC. Financial Assistance (D/FA), whose de- [72 FR 18360, Apr. 12, 2007] cision is final.

LOAN APPLICATIONS COMPUTERIZED SBA FORMS

§ 120.190 Where does an applicant § 120.194 [Reserved] apply for a loan? REPORTING An applicant for a business loan should apply to: § 120.195 Disclosure of fees. (a) A Lender for a guaranteed or im- An Applicant for a business loan mediate participation loan; must identify to SBA the name of each (b) A CDC for a 504 loan; Agent as defined in part 103 of this (c) An Intermediary for a Microloan; chapter that helped the applicant ob- or tain the loan, describing the services (d) SBA for a direct loan. performed, and disclosing the amount of each fee paid or to be paid by the ap- § 120.191 The contents of a business plicant to the Agent in conjunction loan application. with the performance of those services. For most business loans, SBA requires that an application for a busi- § 120.197 Notifying SBA’s Office of In- ness loan contain, among other things, spector General of suspected fraud. a description of the history and nature Lenders, CDCs, Borrowers, and others of the business, the amount and pur- must notify the SBA Office of Inspec- pose of the loan, the collateral offered tor General of any information which for the loan, current financial state- indicates that fraud may have occurred ments, historical financial statements in connection with a 7(a) or 504 loan. (or tax returns if appropriate) for the Send the notification to the Assistant past three years, IRS tax verification, Inspector General for Investigations,

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Office of Inspector General, U.S. Small § 120.211 What limits are there on the Business Administration, 409 3rd amounts of direct loans? Street, SW., Washington, DC 20416. (a) The statutory limit for direct [72 FR 18360, Apr. 12, 2007] loans made under the authority of section 7(a)(1)-(19) of the Small Business Subpart B—Policies Specific to Act is $350,000. SBA has established an administrative limit of $150,000 for di- 7(a) Loans rect loans. The D/FA may authorize ac- BONDING REQUIREMENTS ceptance of an application up to the statutory limit. § 120.200 What bonding requirements (b) The statutory limit for direct exist during construction? loans made under the authority of sec- On 7(a) loans which finance construction 7(a)(20) is $750,000. SBA has estab- tion, the Borrower must supply a 100 lished an administrative limit of percent payment and performance bond $150,000. The Associate Administrator and builder’s risk insurance, unless for Business Development may author- waived by SBA. ize the acceptance of an application that exceeds the administrative limit. LIMITATIONS ON USE OF PROCEEDS (c) The statutory limit on SBA’s portion of an immediate participation § 120.201 Refinancing unsecured or loan is $350,000. The administrative undersecured loans. limit is the lesser of 75 percent of the A Borrower may not use 7(a) loan loan or $150,000. The D/FA may author- proceeds to pay any creditor in a posi- ize exceptions to the administrative tion to sustain a loss causing a shift to limit up to $350,000. SBA of all or part of a potential loss [61 FR 3235, Jan. 31, 1996, as amended at 74 from an existing debt. FR 45753, Sept. 4, 2009]

§ 120.202 Restrictions on loans for § 120.212 What limits are there on loan changes in ownership. maturities? A Borrower may not use 7(a) loan The term of a loan shall be: proceeds to purchase a portion of a (a) The shortest appropriate term, business or a portion of another own- depending upon the Borrower’s ability er’s interest. One or more current own- to repay; ers may use loan proceeds to purchase (b) Ten years or less, unless it fi- the entire interest of another current nances or refinances real estate or owner, or a Borrower can purchase equipment with a useful life exceeding ownership of an entire business. ten years; and (c) A maximum of 25 years, including MATURITIES; INTEREST RATES; LOAN extensions. (A portion of a loan used to AND GUARANTEE AMOUNTS acquire or improve real property may have a term of 25 years plus an addi- § 120.210 What percentage of a loan tional period needed to complete the may SBA guarantee? construction or improvements.) SBA’s guarantee percentage must not exceed the applicable percentage § 120.213 What fixed interest rates may established in section 7(a) of the Act. a Lender charge? The maximum allowable guarantee (a) Fixed Rates for Guaranteed Loans. percentage on a loan will be deter- A loan may have a reasonable fixed in- mined by the loan amount. Loans of terest rate. SBA periodically publishes $150,000 or less may receive a maximum the maximum allowable rate in the guaranty of 85 percent. Loans more FEDERAL REGISTER. than $150,000 may receive a maximum (b) Direct loans. A statutory formula guaranty of 75 percent, except as other- based on the cost of money to the Fed- wise authorized by law. eral government determines the inter- [61 FR 3235, Jan. 31, 1996, as amended at 68 est rate on direct loans. SBA publishes FR 51680, Aug. 28, 2003; 76 FR 63546, Oct. 12, the rate periodically in the FEDERAL 2011] REGISTER.

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§ 120.214 What conditions apply for § 120.215 What interest rates apply to variable interest rates? smaller loans? A Lender may use a variable rate of For a loan over $25,000 but not ex- interest, upon SBA’s approval. SBA’s ceeding $50,000, the interest rate may maximum allowable rates apply only be one percent more than the max- to the initial rate on the date SBA re- imum interest rate described above. ceived the loan application. SBA shall For a loan of $25,000 or less, the max- approve the use of a variable interest imum interest rate described above may be increased by two percentage rate under the following conditions: points. (a) Frequency. The first change may occur on the first calendar day of the [61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1, month following initial disbursement, 1996] using the base rate (see paragraph (c) FEES FOR GUARANTEED LOANS of this section) in effect on the first business day of the month. After that, § 120.220 Fees that Lender pays SBA. changes may occur no more often than A Lender must pay a guaranty fee to monthly. SBA for each loan it makes. If the (b) Range of fluctuation. The amount guarantee fee is not paid, SBA may ter- of fluctuation shall be equal to the minate the guarantee. Acceptance of movement in the base rate. The dif- the guaranty fee by SBA does not ference between the initial rate and the waive any right of SBA arising from a ceiling rate may be no greater than the Lender’s negligence, misconduct or difference between the initial rate and violation of any provision of these reg- the floor rate. ulations, the guaranty agreement, or (c) Base rate. The base rate will be the loan authorization. one of the following: (i) The prime rate; (a) Amount of guaranty fee—(1) In gen- (ii) the thirty-day (1-month) London eral. Except to the extent paragraph Interbank Offered Rate (LIBOR) plus 3 (a)(2) of this section applies, for a loan percentage points, or (iii) the Optional with a maturity of twelve (12) months Peg Rate. The prime or LIBOR rate or less, the guarantee fee which the Lender must pay to SBA is one-quarter will be that which is in effect on the (1⁄4) of one percent of the guaranteed first business day of the month, as portion of the loan. For a loan with a printed in a national financial news- maturity of more than twelve (12) paper published each business day. SBA months, the guarantee fee is payable as publishes the Optional Peg Rate quar- follows: terly in the FEDERAL REGISTER. (i) Not more than 2 percent of the (d) Maturities under 7 years. For loans guaranteed portion of a loan if the with maturities under seven years, the total amount of the loan is not more maximum interest rate shall not ex- than $150,000; ceed two and one-quarter (2 1/4) per- (ii) Not more than 3 percent of the centage points over the base rate. guaranteed portion of a loan if the (e) Maturities of 7 years or more. For total amount of the loan is more than loans with maturities of seven or more $150,000 but not more than $700,000; years, the maximum interest rate shall (iii) Except as provided in paragraph not exceed two and three-quarters (2 3/ (a)(1)(iv) of this section, not more than 4) percentage points over the base rate. 3.5 percent of the guaranteed portion of (f) Amortization. Initial amortization a loan if the total amount of the loan of principal and interest may be recom- is more than $700,000; and puted and reassessed as interest rates (iv) An additional 0.25 percent of the fluctuate, as directed by SBA. With guaranteed portion of a loan if the prior approval of SBA, the Lender may total amount of the loan is more than $1,000,000. use certain other amortization meth- (2) For loans approved October 1, 2002, ods, except that SBA does not allow through September 30, 2004. For a loan balloon payments. with a maturity of twelve (12) months [61 FR 3235, Jan. 31, 1996, as amended at 73 or less, the guarantee fee which the FR 67101, Nov. 13, 2008] Lender must pay to SBA is one-quarter

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(1⁄4) of one percent of the guaranteed (e) If the guarantee fee is not paid, portion of the loan. For a loan with a SBA may terminate the guarantee. The maturity of more than twelve (12) Borrower may use working capital loan months, the guarantee fee is: proceeds to reimburse the Lender for (i) 1 percent of the guaranteed por- the guarantee fee. Acceptance of the tion of the loan if the total loan guarantee fee by SBA shall not waive amount is not more than $150,000, any right of SBA arising from the (ii) 2.5 percent of the guaranteed por- Lender’s misconduct or violation of tion of a loan if the total loan amount any provision of this part, the guar- is more than $150,000, but not more antee agreement, the Authorization, or than $700,000, and other loan documents. (iii) 3.5 percent of the guaranteed (f) Lender’s annual service fee payable portion if the total loan amount is to SBA—(1) In general. Except to the ex- more than $700,000. tent paragraph (f)(2) of this section applies, the lender shall pay SBA an an- (3) For loans approved under section nual service fee in an amount not to 7(a)(31) of the Small Business Act (SBA exceed 0.55 percent of the outstanding Express loans) to veterans and/or the balance of the guaranteed portion of spouse of a veteran. In fiscal years when each loan. The service fee cannot be the 7(a) program is at zero subsidy, charged to the Borrower. SBA may in- SBA will not collect a guarantee fee in stitute a late fee charge for delinquent connection with a loan made under sec- payments of the annual service fee to tion 7(a)(31) of the Small Business Act cover administrative costs associated to a business owned and controlled by with collecting delinquent fees. a veteran or 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 gives its loan approval. The Lender [61 FR 3235, Jan. 31, 1996; 61 FR 11471, Mar. 20, may charge the Borrower the fee after 1996, as amended at 68 FR 51680, Aug. 28, 2003; 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] ment of the loan. The Borrower may use the loan proceeds to pay the guar- § 120.221 Fees and expenses that the anty fee. However, the first disburse- Lender may collect from an Appli- ment must not be made solely or pri- cant or Borrower. marily to pay the guaranty fee. Unless otherwise allowed by SBA (c) Refund of guaranty fee. For a loan Loan Program Requirements, the with a maturity of more than twelve Lender may charge and collect from (12) months, SBA will refund the guar- the applicant or Borrower only the fol- anty fee if the Lender has not made lowing fees and expenses: any disbursement and the lender re- (a) Fees that can be collected from the quests in writing the refund and can- Applicant for assistance in obtaining a cellation of the SBA guaranty. loan. The Lender may collect a fee (d) Lender’s retention of portion of from an Applicant (as defined in § 103.1 guaranty fee. With respect to a loan of this chapter) for assistance with ob- with a maturity of more than twelve taining an SBA-guaranteed loan. The (12) months, where the total loan fee may not exceed $3,000 for a loan up amount is no more than $150,000 Lender to and including $350,000 and may not may retain not more than 25 percent of exceed $5,000 for a loan over $350,000. the guaranty fee. The Lender must advise the Applicant

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in writing that the Applicant is not re- (a) Service and packaging fees. The Lender quired to obtain or pay for unwanted may charge an applicant reasonable fees services. In cases where the Lender (customary for similar Lenders in the geo- charges any fees to the Applicant in ex- graphic area where the loan is being made) for packaging and other services. The Lender cess of those specified in this part, the must advise the applicant in writing that the Lender must reduce the charge and re- applicant is not required to obtain or pay for fund to the Applicant any amount in unwanted services. The applicant is respon- excess of the permitted fee. If the sible for deciding whether fees are reason- Lender charges the Applicant a fee for able. SBA may review these fees at any time. assistance with obtaining an SBA- Lender must refund any such fee considered guaranteed loan, the fee must be dis- unreasonable by SBA. closed to SBA in accordance with § 103.5 of this chapter and documented in ac- * * * * * cordance with Loan Program Require- ments. § 120.222 Prohibition on sharing pre- (b) Extraordinary servicing. Subject to miums for secondary market sales. prior written SBA approval, if all or The Lender or its Associates may not part of a loan will have extraordinary share any premium received from the servicing needs, the Lender may charge sale of an SBA guaranteed loan in the the applicant a service fee not to ex- secondary market with a Service Pro- ceed 2 percent per year on the out- vider, packager, or other loan-referral standing balance of the part requiring source. special servicing. For certain revolving [82 FR 39503, Aug. 21, 2017, as amended at 85 lines of credit made under § 120.390 and FR 7648, Feb. 10, 2020] on Export Working Capital Program EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. loans (as allowed under § 120.344(b)), 14, 2020, § 120.222 was amended by adding the subject to SBA’s prior written ap- word ‘‘in’’ before the words ‘‘any premium proval, the Lender may charge extraor- received’’, effective Mar. 27, 2021. dinary servicing fees in excess of 2 percent per year on the outstanding bal- § 120.223 Subsidy recoupment fee pay- ance of the part requiring special serv- able to SBA by Borrower. icing, provided the fees are reasonable (a) The subsidy recoupment fee is and prudent. payable to SBA when: (c) Out-of-pocket expenses. The Lender (1) Loan has a maturity of 15 years or may collect from the applicant nec- more. essary out-of-pocket expenses such as (2) Borrower makes a voluntary pre- filing or recording fees. payment (or several prepayments in (d) Late payment fee. The Lender may the aggregate) during any one of the charge the Borrower a late payment fee first three successive 12 month periods not to exceed 5 percent of the regular following the first disbursement of the loan payment. loan. Prepayment is defined as a pay- (e) Legal services. Lender may charge ment of principal in excess of the the Borrower for legal services ren- amount due according to the amortiza- dered on an hourly basis. tion schedule. [61 FR 3235, Jan. 31, 1996, as amended at 82 (3) The prepayment (or several pre- FR 39503, Aug. 21, 2017; 85 FR 7648, Feb. 10, payments in the aggregate) is more 2020] than 25 percent of the highest outstanding principal balance of the loan EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. 14, 2020, § 120.221 was amended by revising the in any one of the first three successive section heading and paragraph (a) and re- 12 month periods following the first moving the last sentence of paragraph (b), ef- disbursement. fective Mar. 27, 2021. For the convenience of (b) When all the conditions above the user, the revised text is set forth as fol- exist, the following subsidy lows: recoupment fees apply: § 120.221 Fees and expenses that the Lender (1) If the prepayment is made during may collect from a loan applicant or Bor- the first 12 month period after first dis- rower. bursement, the charge is 5 percent of the total amount of all prepayments * * * * * made during such period;

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(2) If the prepayment is made during to produce commodities or services for the second 12 month period after first sale; and disbursement, the charge is 3 percent (4) Complies with occupational and of the total amount of all prepayments safety standards prescribed by the De- made during that period; and partment of Labor. (3) If the prepayment is made during (b) Disabled individual means a person the third 12 month period after first who has a permanent physical, mental disbursement, the charge is 1 percent or emotional impairment, defect, ail- of the total amount of all prepayments ment, disease or disability which lim- made during that period. its the type of employment for which [68 FR 51680, Aug. 28, 2003] the person would otherwise be qualified. Subpart C—Special Purpose Loans § 120.312 DAL–1 use of proceeds and § 120.300 Statutory authority. other program conditions. Congress has authorized several spe- (a) DAL–1 applicants must submit ap- cial purpose programs in various sub- propriate documents to establish pro- sections of section 7(a) of the Act. Gen- gram eligibility. erally, 7(a) loan policies, eligibility re- (b) Generally, applicants may use quirements and credit criteria enumer- loan proceeds for any 7(a) loan pur- ated in subpart B of this part apply to poses. Loan proceeds may not be used: these programs. The sections of this (1) To purchase or construct facilities subpart prescribe the special condi- if construction grants and mortgage tions applying to each special purpose assistance are available from another program. As with other business loans, Federal source; or special purpose loans are available (2) For supportive services (expenses only to the extent funded by annual appropriations. incurred by a DAL–1 organization to subsidize wages of low producers, DISABLED ASSISTANCE LOAN PROGRAM health and rehabilitation services, (DAL) management, training, education, and housing of disabled workers). § 120.310 What assistance is available (c) SBA does not consider a DAL–1 for the disabled? organization to have a conflict of inter- Section 7(a)(10) of the Act authorizes est if one or more of its Associates is SBA to guarantee or make direct loans an Associate of the Lender. to the disabled. SBA distinguishes two kinds of assistance: § 120.313 DAL–2 use of proceeds and (a) DAL–1. DAL–1 Financial Assist- other program conditions. ance is available to non-profit public or (a) The DAL–2 loan proceeds may be private organizations for disabled indi- used for any 7(a) loan purposes. viduals that employ such individuals; (b) An applicant may use DAL–2 loan or proceeds to acquire an eligible small (b) DAL–2. DAL–2 Financial Assist- ance is available to: business without complying with the (1) Small businesses wholly owned by change of ownership conditions in disabled individuals; and § 120.202. (2) Disabled individuals to establish, (c) A DAL–2 applicant must submit acquire, or operate a small business. evidence from a physician, psychia- trist, or other qualified professional as § 120.311 Definitions. to the permanent nature of the dis- (a) Organization for the disabled means ability and the limitation it places on one which: the applicant. (1) Is organized under federal or state law to operate in the interest of dis- § 120.314 Resolving doubts about cred- abled individuals; itworthiness. (2) Is non-profit; For the purpose of the DAL Program, (3) Employs disabled individuals for SBA shall resolve doubts concerning seventy-five percent of the time needed the creditworthiness of an applicant in

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favor of the applicant. However, the ap- (e) Equipment for cogeneration of en- plicant must present satisfactory evi- ergy, district heating or production of dence of repayment ability. Personal energy from industrial waste; guarantees of Associates are not re- (f) Hydroelectric power equipment; quired for purposes of DAL–1 financial (g) Wind energy conversion equip- assistance. ment; and (h) Engineering, architectural, con- § 120.315 Interest rate and loan limit. sulting, or other professional services The interest rate on direct DAL necessary or appropriate for any of the loans is three percent. There is an ad- devices or techniques in paragraphs (a) ministrative limit of $150,000 on a di- through (g) of this section. rect DAL loan. § 120.332 What are the eligible uses of BUSINESSES OWNED BY LOW INCOME proceeds? INDIVIDUALS (a) Acquire property. The Borrower § 120.320 Policy. may use the loan proceeds to acquire land necessary for imminent plant con- Section 7(a)(11) of the Act authorizes struction, buildings, machinery, equip- SBA to guarantee or make direct loans ment, furniture, fixtures, facilities, to establish, preserve or strengthen supplies, and material needed to ac- small business concerns: complish any of the eligible program (a) Located in an area having high purposes in § 120.330. unemployment according to the De- (b) Research and development. Up to partment of Labor; 30% of loan proceeds may be used for (b) Located in an area in which a research and development: high percentage of individuals have a (1) Of an existing product or service; low income inadequate to satisfy basic or family needs; and (c) More than 50 percent owned by (2) A new product or service. low income individuals. (c) Working capital. The Borrower may use proceeds for working capital 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 SBA may make or guarantee loans to criteria? 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 service, 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 or techniques include: EXPORT WORKING CAPITAL PROGRAM (a) Solar thermal equipment; (EWCP) (b) Photovoltaic cells and related equipment; § 120.340 What is the Export Working (c) A product or service which in- Capital Program? creases the energy efficiency of exist- Under the EWCP, SBA guarantees ing equipment, methods of operation or short-term working capital loans made systems which use fossil fuels, and by participating lenders to exporters which is on the Energy Conservation (section 7(a)(14) of the Act). Loan ma- Measures list of the Secretary of En- turities may be for up to three years ergy; with annual renewals. Proceeds can be (d) Equipment producing energy from used only to finance export trans- wood, biological waste, grain or other actions. Loans can be for single or mul- biomass energy sources; tiple export transactions. An export

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transaction is the production and pay- (c) SBA does not prescribe the inter- ment associated with a sale of goods or est rates for the EWCP, but will mon- services to a foreign buyer. The max- itor these rates for reasonableness. imum loan amount for any one EWCP [61 FR 3235, Jan. 31, 1996, as amended at 85 loan is $5,000,000. EWCP loans shall re- FR 7648, Feb. 10, 2020] ceive a guaranty of 90 percent, not to exceed $4,500,000. EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. 14, 2020, § 120.344 was amended by revising [61 FR 3235, Jan. 31, 1996, as amended at 76 paragraph (b), effective Mar. 27, 2021. For the FR 63546, Oct. 12, 2011] convenience of the user, the revised text is set forth as follows: § 120.341 Who is eligible? § 120.344 Unique requirements of the EWCP. In addition to the eligibility criteria applicable to all 7(a) loans, an appli- * * * * * cant must be in business for one full year at the time of application, but not (b) SBA does not limit the amount of extraordinary servicing fees, as referenced in necessarily in the exporting business. § 120.221(b), under the EWCP. SBA may waive this requirement if the applicant has sufficient export trade * * * * * experience or other managerial experience. INTERNATIONAL TRADE LOANS

§ 120.342 What are eligible uses of pro- § 120.345 Policy. ceeds? Section 7(a)(16) of the Act authorizes Loan proceeds may be used: SBA to guarantee loans to small busi- (a) To acquire inventory; nesses that are: (b) To pay the manufacturing costs of (a) Engaged or preparing to engage in goods for export; international trade; or (c) To purchase goods or services for (b) Adversely affected by import export; competition. (d) To support standby letters of credit; § 120.346 Eligibility. (e) For pre-shipment working capital; (a) An applicant must establish that: and (1) The loan proceeds will signifi- (f) For post-shipment foreign ac- cantly expand an existing export mar- counts receivable financing. ket or develop new export markets; or (2) The applicant business is ad- § 120.343 Collateral. versely affected by import competi- A Borrower must give SBA a first se- tion; and curity interest sufficient to cover 100 (3) The loan will improve the appli- percent of the EWCP loan amount cant’s competitive position. (such as insured accounts receivable or (b) The applicant must have a busi- letters of credit). Collateral must be lo- ness plan reasonably supporting its cated in the United States, its terri- projected export sales. tories or possessions. [61 FR 3235, Jan. 31, 1996, as amended at 76 FR 63546, Oct. 12, 2011] § 120.344 Unique requirements of the EWCP. § 120.347 Use of proceeds. (a) An applicant must submit cash The Borrower may use loan proceeds flow projections to support the need for to acquire, construct, renovate, mod- the loan and the ability to repay. After ernize, improve, or expand facilities the loan is made, the loan recipient and equipment to be used in the United must submit continual progress re- States to produce goods or services in- ports. volved in international trade, and to (b) SBA does not limit the amount of develop and penetrate foreign markets. extraordinary servicing fees, as ref- The Borrower may also use proceeds in erenced in § 120.221(b), under the EWCP, the refinancing of existing indebted- provided the fees are reasonable and ness that is not structured with reason- prudent. able terms and conditions, including

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any debt that qualifies for refinancing 27, 2021. For the convenience of the user, the under 7(a) Loan Program Require- revised text is set forth as follows: ments, and to provide working capital. § 120.350 Policy. [61 FR 3235, Jan. 31, 1996, as amended at 76 Section 7(a)(15) of the Act authorizes SBA FR 63546, Oct. 12, 2011] to guarantee a loan to a qualified employee trust (‘‘ESOP’’) to: § 120.348 Amount of guarantee. (a) Help finance the growth of its employ- The maximum loan amount for any er’s small business; or one International Trade (IT) loan is (b) Purchase ownership or voting control of the employer. $5,000,000. IT loans may receive a maximum guaranty of 90 percent or § 120.351 Definitions. $4,500,000, except that the maximum guaranty amount for any working cap- All terms specific to ESOPs have the ital component of an IT loan is limited same definition for purposes of this to $4,000,000. To the extent that the section as in the Internal Revenue Borrower has a separate EWCP loan or Service (IRS) Code (title 26 of the any other 7(a) loan for working capital, United States Code) or regulations (26 the guaranty amount for the other CFR chapter I). loan is counted against the $4,000,000 guaranty limit for the IT loan. § 120.352 Use of proceeds. Loan proceeds may be used for: [76 FR 63546, Oct. 12, 2011] (a) Qualified employee trust. A quali- § 120.349 Collateral. fied employee trust may use loan proceeds for two purposes: Each IT loan must be secured either (1) Qualified employer securities. A by a first lien position or first mort- qualified employee trust may relend gage on the property or equipment fi- loan proceeds to the employer by pur- nanced by the IT loan or on other as- chasing qualified employer securities. sets of the Borrower, except that an IT The small business concern may use loan may be secured by a second lien these funds for any general 7(a) pur- position on the property or equipment pose. financed by the IT loan or on other as- (2) Control of employer. A qualified sets of the Borrower, if the SBA deter- employee trust may use loan proceeds mines the second lien position provides to purchase a controlling interest (51 adequate assurance of the payment of percent) in the employer. Ownership the IT loan. and control must vest in the trust by [76 FR 63546, Oct. 12, 2011] the time the loan is repaid. (b) Small business concern. A small QUALIFIED EMPLOYEE TRUSTS (ESOP) business concern may only use loan proceeds to make a loan to a qualified § 120.350 Policy. employee trust that results in the Section 7(a)(15) of the Act authorizes qualified employee trust owning at SBA to guarantee a loan to a: least 51 percent of the small business (a) Qualified employee trust concern. (‘‘ESOP’’) to: (1) Help finance the growth of its em- [85 FR 7648, Feb. 10, 2020] ployer’s small business; or EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. (2) Purchase ownership or voting con- 14, 2020, § 120.352 was revised, effective Mar. trol of the employer; and a 27, 2021. For the convenience of the user, the (b) Small business concern, if the revised text is set forth as follows: proceeds from the loan are only used to § 120.352 Use of proceeds. make a loan to a qualified employee Loan proceeds may be used for two pur- trust that results in the qualified em- poses. ployee trust owning at least 51 percent (a) Qualified employer securities. A qualified of the small business concern. employee trust may relend loan proceeds to the employer by purchasing qualified em- [85 FR 7648, Feb. 10, 2020] ployer securities. The small business concern EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. may use these funds for any general purpose 14, 2020, § 120.350 was revised, effective Mar. under section 7(a) of the Act.

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(b) Control of employer. A qualified em- (c) A veteran may qualify only once ployee trust may use loan proceeds to pur- for this program on a direct loan basis. chase a controlling interest (51 percent) in the employer. Ownership and control must POLLUTION CONTROL PROGRAM vest in the trust by the time the loan is repaid. § 120.370 Policy. § 120.353 Eligibility. Section 7(a)(12) of the Act authorizes SBA may assist a qualified employee SBA to guarantee loans up to $1,000,000 trust (or equivalent trust) that meets to an eligible small business to plan, the requirements and conditions for an design or install a pollution control fa- ESOP prescribed in all applicable IRS, cility. An applicant must meet the eli- Treasury and Department of Labor gibility requirements for 7(a) loans. (DOL) regulations. In addition, the following conditions apply: LOANS TO PARTICIPANTS IN THE 8(a) (a) The small business must provide PROGRAM the funds needed by the trust to repay § 120.375 Policy. the loan; and (b) The small business must provide Section 7(a)(20) of the Act authorizes adequate collateral. SBA to provide direct (unilaterally or together with Lenders) or guaranteed § 120.354 Creditworthiness. loans to firms participating in the 8(a) In determining repayment ability, Program. SBA shall not consider the personal assets of the employee-owners of the § 120.376 Special requirements. trust. SBA shall consider the earnings The following special conditions history and projected future earnings apply (otherwise, 7(a) loan eligibility of the employer small business. SBA criteria apply): may consider the business and manage- (a) The Associate Administrator for ment experience of the employee-own- Business Development may waive the ers. direct loan administrative ceiling of $150,000, and raise it to $750,000. VETERANS LOAN PROGRAM (b) The SBA portion of a guaranteed loan must not exceed $750,000. § 120.360 Which veterans are eligible? (c) The interest rate on a guaranteed SBA may guarantee or make direct loan shall be the same as on 7(a) guar- loans to a small business 51 percent anteed business loans. The interest owned by one or more of the following rate on a direct loan shall be one per- eligible veterans: cent less than on a regular direct loan. (a) Vietnam-era veterans who served (d) For a direct loan or SBA’s portion for a period of more than 180 days be- of an immediate participation loan, tween August 5, 1964, and May 7, 1975, SBA shall subordinate its security in- and were discharged other than dishon- terest on all collateral to other debt of orably; the applicant. (b) Disabled veterans of any era with a minimum compensable disability of [61 FR 3235, Jan. 31, 1996, as amended at 74 30 percent; or FR 45753, Sept. 4, 2009] (c) A veteran of any era who was discharged for disability. § 120.377 Use of proceeds. The loan proceeds shall not be used § 120.361 Other conditions of eligi- for debt refinancing. Only a manufac- bility. turing concern may use loan proceeds (a) Management and daily operations for working capital. of the business must be directed by one or more of the veteran owners whose DEFENSE ECONOMIC TRANSITION veteran status was used to qualify for ASSISTANCE the loan. (b) This direct loan program is avail- § 120.380 Program. able only if private sector financing Section 7(a)(21) of the Act authorizes and guaranteed loans are not available. SBA to guarantee loans to help eligible

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small businesses transition from deferred Lender shall not make a defense fense to civilian markets, or eligible economic assistance loan under the individuals adversely impacted by base PLP or CLP programs. closures or defense cutbacks to acquire or open and operate a small business. CAPLINES PROGRAM

§ 120.381 Eligibility. § 120.390 Revolving credit. (a) Eligible small businesses. A small (a) CapLines finances eligible small business is eligible if it has been det- businesses’ short-term, revolving and rimentally impacted by the closure (or non-revolving working-capital needs. substantial reduction) of a Department SBA regulations governing the 7(a) of Defense installation, or the termi- loan program govern business loans nation (or substantial reduction) of a made under this program. The max- Department of Defense Program on imum guaranteed amount and the max- which the small business was a prime imum loan amount are the same under contractor, subcontractor, or supplier CapLines as other 7(a) loans, as stated at any tier. in § 120.151. (b) Eligible individual. An eligible in- (b) CapLines proceeds can be used to dividual, for purposes of this program, finance the cyclical, recurring, or other includes the following persons involun- identifiable short-term operating cap- tarily separated from their position or ital needs of small businesses. Proceeds voluntarily terminated under a pro- can be used to create current assets or gram offering inducements to encour- used to provide financing against the age early retirement: current assets that already exist. (1) A member of the Armed Forces of the United States (honorably dis- [61 FR 3235, Jan. 31, 1996, as amended at 76 charged); FR 63546, Oct. 12, 2011] (2) A civilian employee of the Depart- BUILDERS LOAN PROGRAM ment of Defense; or (3) An employee of a prime con- § 120.391 What is the Builders Loan tractor, sub-contractor, or supplier at Program? any tier of a Department of Defense program. Under section 7(a)(9) of the Act, SBA (c) Defense loan and technical assist- may make or guarantee loans to fi- ance (DELTA). The DELTA program nance small general contractors to provides financial and technical assist- construct or rehabilitate residential or ance to defense dependent small busi- commercial property for resale. This nesses which have been adversely af- program provides an exception under fected by defense reductions. The goal specified conditions to the general rule of the program is to assist these busi- against financing investment property. nesses to diversify into the commercial ‘‘Construct’’ and ‘‘rehabilitate’’ mean market while remaining part of the de- only work done on-site to the struc- fense industrial base. Complete infor- ture, utility connections and land- mation on eligibility and other rules is scaping. available from each SBA district office. § 120.392 Who may apply? § 120.382 Repayment ability. A construction contractor or home- SBA shall resolve reasonable doubts builder with a past history of profit- concerning the small business’ pro- able construction or rehabilitation posed business plan for transition to projects of comparable type and size non-defense-related markets in favor of may apply. An applicant may sub- the loan applicant in determining the contract the work. Subcontracts in ex- sound value of the proposed loan. cess of $25,000 may require 100 percent payment and performance bonds. § 120.383 Restrictions on loan processing. § 120.393 Are there special application Since greater risk may be associated requirements? with a loan to an applicant under this (a) An applicant must submit docu- program, a Certified Lender or Pre- mentation from:

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(1) A mortgage lender indicating that AMERICA’S RECOVERY CAPITAL (BUSI- permanent mortgage money is avail- NESS STABILIZATION) LOAN PROGRAM— able to qualified purchasers to buy ARC LOAN PROGRAM such properties; (2) A real estate broker indicating § 120.398 America’s Recovery Capital that a market exists for the proposed (ARC) Loan Program. building and that it will be compatible (a) Purpose. The purpose of the ARC with its neighborhood; and Loan Program is to enable SBA to (3) An architect, appraiser or engi- guarantee certain loans to viable small neer agreeing to make inspections and businesses that are experiencing imme- certifications to support interim dis- diate financial hardship. Loans made bursements. under this loan program are referred to (b) The Borrower may substitute a as ARC Loans and are subject to the letter from a qualified Lender for one requirements set forth in this Part for or more of the letters. 7(a) loans except as noted in this section. § 120.394 What are the eligible uses of (b) Definitions. (1) (i) Eligible Borrower proceeds? is a small business concern as defined A Borrower must use the loan pro- in Section 3 of the Small Business Act ceeds solely to acquire, construct or and § 120.100. Eligible Borrower does not substantially rehabilitate an indi- include: vidual residential or commercial build- (A) Ineligible small businesses as ing for sale. ‘‘Substantial’’ means reha- listed in § 120.110; and bilitation expenses of more than one- (B) Small business concerns with the third of the purchase price or fair mar- following primary industry North ket value at the time of the applica- American Industry Classification Sys- tion. A Borrower may use up to 33 per- tem (NAICS) codes: cent of the proceeds to acquire land, (1) 713210 (Casinos (Except Casino Ho- and up to 5 percent for community im- tels)); provements such as curbs and side- (2) 721120 (Casino Hotels); walks. (3) 713290 (Other Gambling Indus- tries); [61 FR 3235, Jan. 31, 1996, as amended at 82 (4) 713910 (Golf Courses and Country FR 39503, Aug. 21, 2017] Clubs); and § 120.395 What is SBA’s collateral posi- (5) 712130 (Zoos and Botanical Gar- tion? dens). (ii) Applications submitted by small SBA will require a lien on the build- business concerns with a primary in- ing which must be in no less than a dustry NAICS code of 713940 (Fitness second position. and Recreational Sports Centers) will be identified and reviewed by SBA to § 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

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lien position made by commercial lend- (i) Borrower’s payments. The borrower ers in connection with the Develop- will be responsible for all principal ment Company Loan Program (504), payments. home equity loans used to finance busi- (ii) Payment of interest by SBA. SBA ness operations, other loans to small will make periodic interest payments businesses made without an SBA guar- to the lender on ARC Loans. Interest anty, and loans made by or with an will accrue only until the date 120 days SBA guaranty on or after February 17, after the earliest uncured payment de- 2009. Loans made or guaranteed by SBA fault on the ARC Loan. However, the before February 17, 2009 are not Quali- amount paid by SBA on a defaulted fying Small Business Loans for the ARC Loan, when it honors its guar- purposes of the ARC Loan Program. A antee, will be adjusted to reconcile for Qualifying Small Business Loan may any overpayments or underpayments of not be used as the basis for more than interest previously paid to the Lender. one ARC Loan but ARC Loans may be Interim adjustments to interest paid used to pay multiple Qualifying Small by SBA to lenders may be made during Business Loans. the term of the ARC Loan and interest (4) Viable small business is a small payments due the Lender will be ad- business that is a Going Concern but justed to accommodate the interim in- which is having difficulty making peri- terest adjustments. odic payments of principal and interest (iii) Deferral period. No principal re- on Qualifying Small Business Loan(s) payment is required during the dis- and/or meeting operating expenses of bursement period or for 12 months fol- the business although it can reason- lowing the final loan disbursement. ably demonstrate its projected contin- (iv) Repayment period. The borrower ued operation for a reasonable period will be required to pay the loan prin- beyond the six month period of pay- cipal over five years beginning in the ment assistance with an ARC Loan. 13th month following the final loan dis- (c) Period of program. The ARC Loan bursement. The ARC Loan balance will Program is authorized through Sep- be fully amortized over the five year tember 30, 2010, or until appropriated repayment period. Balloon payments funds are exhausted, whichever is soon- may not be required by lenders. The er. borrower may prepay all or a portion of (d) Use of proceeds. Loans made under the principal during the life of the loan the ARC Loan Program are for the sole without penalty. purpose of making periodic payments (f) Number of ARC Loans per small of principal and interest (including de- business. No small business may obtain fault interest), in full or in part, for up more than one ARC Loan, but the pro- to six (6) months, on one or more exist- ceeds of the ARC loan may be used to ing Qualifying Small Business Loans. pay more than one Qualifying Small ARC Loan proceeds cannot be used to Business Loan. 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

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are not reimbursed by the borrower in to, points, bonus points, prepayment the event of default. Reimbursement of penalties, brokerage fees, fees for proc- the direct costs of liquidation by SBA essing, origination, or application, and to the Lender is limited to the amount out of pocket expenses (other than the of the recovery received on the ARC direct costs of securing and liquidating Loan. collateral). SBA will not impose any (i) Credit criteria. To be approved for fees on a lender making an ARC Loan. an ARC Loan, the applicant must be a (n) Lender reporting. Lenders shall re- creditworthy small business with a rea- port on its ARC Loans in accordance sonable expectation of repayment, tak- with requirements established by SBA ing into consideration the following: from time to time for 7a loans and (1) Character, reputation, and credit loans made under the American Recov- history of the applicant (and the Oper- ery and Reinvestment Act of 2009. ating Company, if applicable) and its (o) Loan servicing. Each originating Associates; lender shall service all of its ARC (2) Experience and depth of manage- Loans in accordance with the existing ment; practices and procedures that the (3) Strength of the business; Lender uses for its non-SBA guaran- (4) Past earnings, current earnings, teed commercial loans. In all cir- and projected cash flow; and cumstances, such practices and proce- (5) Ability to repay the loan with dures must be commercially reasonable earnings from the business. and consistent with prudent lending (j) Statement of hardship. In addition standards and in accordance with SBA to the certifications required for 7(a) Loan Program Requirements as defined loans generally, ARC Loan recipients in § 120.10. SBA’s prior written consent must submit a statement certifying is required for servicing actions that that they are experiencing immediate may have significant exposure implica- financial hardship and provide docu- tions for SBA. SBA may require writ- mentation to support the certification. ten notice of other servicing actions it (k) Loan application. The provisions considers necessary for portfolio man- of § 120.191 do not apply for ARC Loans. agement purposes. A lender making an ARC Loan will provide an application with information (p) Liquidations. Each Lender shall be on the small business that includes the responsible for liquidating any de- nature and history of the business, cur- faulted ARC Loan originated by the rent and historical financial state- Lender. ARC Loans will be liquidated ments (or tax returns), and other infor- in accordance with the existing prac- mation that SBA may require. tices and procedures that the Lender (l) Preferences and refinancing. A lend- uses for its non-SBA guaranteed com- er may make an ARC Loan to an Eligi- mercial loans. In all circumstances, ble Borrower that intends to use the such practices and procedures must be proceeds of the ARC Loan to make commercially reasonable and con- periodic payments of principal and in- sistent with prudent lending standards terest on a Qualifying Small Business and in accordance with SBA Loan Pro- Loan that is owned or serviced by that gram Requirements as defined in Sec- same lender. The provisions of §§ 120.10, tion 120.10. Loans with de minimis 120.536(a)(2) and 120.925 with regard to value may, at the Lender’s request and Preference for repayments without with SBA’s approval, be liquidated by prior SBA approval do not apply to SBA or its agent(s). Significant liq- ARC Loans. The provisions of § 120.201 uidation actions taken on ARC Loans restricting refinancing also do not must be documented. The reimburse- apply to ARC Loans. ment of liquidation related fees by SBA (m) Loan fees. Neither the lender nor to the Lender is limited to the amount SBA shall impose any fees or direct of the recovery on the ARC Loan. costs on a borrower of an ARC Loan, (q) Purchase requests. Any purchase except that lenders may charge bor- request to SBA to honor its guaranty rowers for the direct costs of securing on a defaulted ARC Loan shall be made and liquidating collateral for the ARC by the originating lender. Lenders may Loan. Fees include, but are not limited request SBA to purchase an ARC Loan

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when there has been an uncured pay- ice, liquidate and litigate small busi- ment default exceeding 60 days or when ness loans including, but not limited the borrower has declared bankruptcy. to: SBA requires Lenders to submit loans (1) Holding sufficient permanent cap- for purchase no later than 120 days ital to support SBA lending activities after the earliest uncured payment de- (for SBA Lenders with a Federal Finan- fault on the ARC Loan. Additionally, cial Institution Regulator, meeting SBA may honor its guarantee and re- capital requirements for an adequately quire a Lender to submit an ARC Loan capitalized financial institution is con- for purchase at any time. Except as sidered sufficient permanent capital to noted above, the Lender is required to support SBA lending activities; for complete all recovery actions on the SBLCs, meeting its SBA minimum cap- ARC Loan after purchase. (r) Prohibition on secondary market ital requirement; and for NFRLs, meet- sales and loan participations. A lender ing its state minimum capital require- may not sell an ARC loan into the sec- ment); and ondary market nor may a lender par- (2) Maintaining satisfactory SBA per- ticipate a portion of an ARC loan with formance, as determined by SBA in its another lender. discretion. The 7(a) Lender’s Risk Rat- (s) Loan volume. SBA reserves the ing, among other factors, will be con- right to allocate loan volume under the sidered in determining satisfactory ARC Loan Program among Lenders (as SBA performance. Other factors may defined in § 120.10). include, but are not limited to, review/ (t) Delegated authority. SBA may examination assessments, historical allow lenders to use their delegated au- performance measures (like default thority to process ARC Loans. rate, purchase rate and loss rate), loan (u) Personal resources test. The per- volume to the extent that it impacts sonal resources test provisions of performance measures, and other per- § 120.102 do not apply to ARC Loans. formance related measurements and (v) Statutory loan limit. The provisions information (such as contribution to- of § 120.151 do not apply to ARC Loans. ward SBA mission); [74 FR 27247, June 9, 2009] (b) Be open to the public for the making of such loans (not be a financing Subpart D—Lenders subsidiary, engaged primarily in financing the operations of an affiliate); § 120.400 Loan Guarantee Agreements. (c) Have continuing good character SBA may enter into a Loan Guar- and reputation, and otherwise meet antee Agreement with a Lender to and maintain the ethical requirements make deferred participation (guaran- of § 120.140 teed) loans. Such an agreement does (d) Be supervised and examined by ei- not obligate SBA to participate in any ther: specific proposed loan that a Lender (1) A Federal Financial Institution may submit. The existence of a Loan Regulator, Guarantee Agreement does not limit (2) A state banking regulator satis- SBA’s rights to deny a specific loan or factory to SBA, or establish general policies. See also (3) SBA; § 120.440(c) concerning Supplemental (e) Be in good standing with SBA, as Guarantee Agreements. defined in § 120.420(f) (and determined [61 FR 3235, Jan. 31, 1996, as amended at 82 by SBA in its discretion), and, as appli- FR 39503, Aug. 21, 2017] cable, with its state regulator and be considered Satisfactory by its Federal PARTICIPATION CRITERIA Financial Institution Regulator (as de- § 120.410 Requirements for all partici- termined by SBA and based on, for ex- pating Lenders. ample, information in published orders/ A Lender must: agreements and call reports); and (a) Have a continuing ability to (f) Operate in a safe and sound condi- evaluate, process, close, disburse, serv- tion using commercially reasonable

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lending policies, procedures, and stand- § 120.420 Definitions. ards employed by prudent Lenders. (a) 7(a) Loans—All references to 7(a) [61 FR 3235, Jan. 31, 1996, as amended at 62 loans under this subpart include loans FR 302, Jan. 3, 1997; 73 FR 75510, Dec. 11, 2008; made under section 7(a) of the Small 82 FR 39503, Aug. 21, 2017] Business Act (15 U.S.C. 631 et seq.) and loans made under section 502 of the EFFECTIVE DATE NOTE: At 85 FR 78213, Dec. Small Business Investment Act (15 4, 2020,§ 120.410 was amended in paragraph (a)(1) by removing the phrase ‘‘for SBLCs, U.S.C. 661 et seq.), both of which may be meeting its SBA minimum capital require- securitized under this subpart. ment; and for NFRLs, meeting its state min- (b) Bank Regulatory Agencies—The imum capital requirement); and’’, and add- bank regulatory agencies are the Fed- ing in its place the phrase, ‘‘and for SBLCs eral Deposit Insurance Corporation, and NFRLs, meeting their respective min- the Federal Reserve Board, the Office imum capital requirement); and’’, effective of the Comptroller of the Currency, and Jan. 4, 2021. the Office of Thrift Supervision. (c) Benchmark Number—The max- § 120.411 Preferences. imum number of percentage points An agreement to participate under that a securitizer’s Currency Rate can the Act may not establish any Pref- decrease without triggering the PLP suspension provision set forth in erences in favor of the Lender. § 120.425. SBA will publish the Bench- § 120.412 Other services Lenders may mark Number in the FEDERAL REG- provide Borrowers. ISTER. (d) Currency Rate—A securitizer’s Subject to § 120.140 Lenders, their As- ‘‘Currency Rate’’ is the dollar balance sociates or the designees of either may of its 7(a) guaranteed loans that are provide services to and contract for less than 30 days past due divided by goods with a Borrower only after full the dollar balance of its portfolio of disbursement of the loan to the small 7(a) guaranteed loans outstanding, as business or to an account not con- calculated quarterly by SBA, excluding trolled by the Lender, its Associate, or loans approved in SBA’s current fiscal the designee. A Lender, an Associate, year. or a designee providing such services (e) Currency Rate Percentage—The re- must do so under a written contract lationship between the securitizer’s with the small business, based on time Currency Rate and the SBA 7(a) loan and hourly charges, and must maintain portfolio Currency Rate as calculated time and billing records for examina- by dividing the securitizer’s Currency tion by SBA. Fees cannot exceed those Rate by the SBA 7(a) loan portfolio charged by established professional Currency Rate. consultants providing similar services. (f) Good Standing—In general, a Lend- er is in ‘‘good standing’’ with SBA if it: See also § 120.195. (1) Is in compliance with all applica- § 120.413 Advertisement of relation- ble: ship with SBA. (i) Laws and regulations; (ii) Policies; and A Lender may refer in its advertising (iii) Procedures; to its participation with SBA. The ad- (2) Is in good financial condition as vertising may not: determined by SBA; (a) State or imply that the Lender, or (3) Is not under investigation or in- any of its Borrowers, has or will re- dictment for, or has not been convicted ceive preferential treatment from SBA; of, or had a judgment entered against (b) Be false or misleading; or it for felony or fraud, or charges relat- (c) Make use of SBA’s seal. ing to a breach of trust or violation of a law or regulation protecting the in- PARTICIPATING LENDER FINANCINGS tegrity of business transactions or relationships, unless the Lender Over- SOURCE: Sections 120.420 through 120.428 ap- sight Committee has determined that pear at 64 FR 6507, Feb. 10, 1999, unless other- good standing exists despite the exist- wise noted. ence of such factors.

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(4) Does not have any officer or em- (k) Securitization—A ‘‘securitization’’ ployee who has been under investiga- is the pooling and sale of the tion or indictment for, or has been con- unguaranteed portion of SBA guaran- victed of or had a judgment entered teed loans to a trust, special purpose against him for, a felony or fraud, or vehicle, or other mechanism, and the charges relating to a breach of trust or issuance of securities backed by those violation of a law or regulation pro- loans to investors in either a private tecting the integrity of business trans- placement or public offering. actions or relationships, unless the [64 FR 6507, Feb. 10, 1999, as amended at 73 Lender Oversight Committee has deter- FR 75511, Dec. 11, 2008] mined that good standing exists despite the existence of such person. § 120.421 Which Lenders may (g) Initial Currency Rate—The Initial securitize? Currency Rate (ICR) is the securitizer’s All SBA participating Lenders may benchmark Currency Rate. SBA will securitize subject to SBA’s approval. calculate the securitizer’s ICR as of the end of the calendar quarter imme- § 120.422 Are all securitizations sub- diately prior to the first securitization ject to this subpart? completed after April 12, 1999. This cal- All securitizations are subject to this culation will include all 7(a) loans subpart. Until additional regulations which are outstanding and were ap- are promulgated, SBA will consider proved in any fiscal year prior to SBA’s securitizations involving multiple current fiscal year. Each quarter, SBA Lenders on a case by case basis, using will compare each securitizer’s Cur- the conditions in § 120.425 as a starting rency Rate to its ICR. point. SBA will consider (h) Initial Currency Rate Percentage— securitizations by affiliates as single The Initial Currency Rate Percentage Lender securitizations for purposes of (ICRP) measures the relationship be- this subpart. tween a securitizer’s Initial Currency Rate and the SBA 7(a) loan portfolio § 120.423 Which 7(a) loans may a Lend- Currency Rate at the time of the first er securitize? securitization after April 12, 1999. The A Lender may only securitize 7(a) ICRP is calculated by dividing the loans that will be fully disbursed with- securitizer’s Currency Rate by the SBA in 90 days of the securitization’s clos- 7(a) loan portfolio Currency Rate. SBA ing date. If the amount of a fully dis- will calculate the securitizer’s ICRP as bursed loan increases after a of the end of the calendar quarter im- securitization settles, the Lender must mediately prior to the first retain the increased amount. securitization completed after April 12, 1999. § 120.424 What are the basic conditions (i) Loss Rate—A securitizer’s ‘‘loss a Lender must meet to securitize? rate,’’ as calculated by SBA, is the ag- To securitize, a Lender must: gregate principal amount of the (a) Be in good standing with SBA as securitizer’s 7(a) loans determined defined in § 120.420(f) of this chapter and uncollectible by SBA for the most re- determined by SBA in its discretion; cent 10-year period, excluding SBA’s (b) Have satisfactory SBA perform- current fiscal year activity, divided by ance, as determined by SBA in its dis- the aggregate original principal cretion. The Lender’s Risk Rating, amount of 7(a) loans disbursed by the among other factors, will be considered securitizer during that period. in determining satisfactory SBA per- (j) Nondepository Institution—A ‘‘non- formance. Other factors may include, depository institution’’ is a Small but are not limited to, review/examina- Business Lending Company (‘‘SBLC’’) tion assessments, historical perform- regulated by SBA or a Business and In- ance measures (like default rate, pur- dustrial Development Company chase rate and loss rate), loan volume (‘‘BIDCO’’) or other nondepository in- to the extent that it impacts perform- stitution participating in SBA’s 7(a) ance measures, and other performance program. related measurements and information

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(such as contribution toward SBA mis- balance outstanding at the time of sion); securitization of the unguaranteed por- (c) Use a securitization structure tion of the loans in the securitization. which is satisfactory to SBA; This tranche must be subordinate to (d) Use documents acceptable to all other securities issued in the SBA, including SBA’s model multi- securitization including other subordi- party agreement, as amended from nated tranches. The securitizer or its time to time; wholly owned subsidiary may not sell, (e) Obtain SBA’s written consent, pledge, transfer, assign, sell participa- which it may withhold in its sole dis- tions in, or otherwise convey the sub- cretion, prior to executing a commit- ordinated tranche during the first 6 ment to securitize; and years after the closing date of the (f) Cause the original notes to be securitization. The securities evidenc- stored at the FTA, as defined in ing the subordinated tranche must bear § 120.600, and other loan documents to a legend stating that the securities be stored with a party approved by may not be sold until 6 years after the SBA. issue date. SBA’s Securitization Com- [64 FR 6507, Feb. 10, 1999, as amended at 73 mittee may modify the formula for de- FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21, termining the tranche size for a 2017] securitizer creating a securitization from a pool of loans located in a region § 120.425 What are the minimum ele- affected by a severe economic down- ments that SBA will require before turn if the Securitization Committee consenting to a securitization? concludes that enforcing this section A securitizer must comply with the might exacerbate the adverse economic following three conditions: conditions in the region. SBA will (a) Capital Requirement—All work with the securitizer to verify the securitizers must be considered to be accuracy of the data used to make the ‘‘well capitalized’’ by their regulator. Loss Rate calculation. SBA will consider a depository institu- (c) PLP Privilege Suspension. tion to be in compliance with this sec- (1) Suspension: If a securitizer’s Cur- tion if it meets the definition of ‘‘well rency Rate declines, SBA may suspend capitalized’’ used by its bank regu- the securitizer’s PLP unilateral loan lator. SBA’s capital requirement does approval privileges (PLP approval not change the requirements that privileges) if the decline from the banks already meet. For nondepository securitizer’s ICR is more than the institutions, SBA, as the regulator, Benchmark Number as published in the will consider a non-depository institu- FEDERAL REGISTER from time to time tion to be ‘‘well capitalized’’ if it main- and the securitizer’s Currency Rate tains a minimum unencumbered paid Percentage is less than its ICRP. The in capital and paid in surplus equal to securitizer will first be placed on pro- at least 10 percent of its assets, exclud- bation for one quarter. If, at the end of ing the guaranteed portion of 7(a) the probationary quarter the loans. The capital charge applies to the securitizer has not met either of the remaining balance outstanding on the following conditions in paragraph unguaranteed portion of the (c)(1)(i) or (c)(1)(ii) of this section, SBA securitizer’s 7(a) loans in its portfolio will suspend the securitizer’s PLP ap- and in any securitization pools. Each proval privileges and will not approve nondepository institution must submit additional securitization requests from annual audited financial statements that securitizer. SBA will provide writ- demonstrating that it has met SBA’s ten notice at least 10 days prior to the capital requirement. effective date of suspension. The sus- (b) Subordinated Tranche—A pension will last a minimum of 3 securitizer or its wholly owned sub- months. During the suspension period, sidiary must retain a tranche of the se- the securitizer must use Certified curities issued in the securitization Lender or Regular Procedures to proc- (subordinated tranche) equal to the ess 7(a) loan applications. The prohibi- greater of two times the securitizer’s tion will end if, at the end of the proba- Loss Rate or 2 percent of the principal tionary quarter: (i) the securitizer has

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improved its Currency Rate to above explanation to Lender Oversight Com- its ICR less the Benchmark Number; or mittee (‘‘Committee’’). The Committee (ii) its Currency Rate Percentage is ei- will have 30 calendar days to review ther the same or greater than its ICRP. the explanation and determine whether (2) Reinstatement: The suspension will to lift the suspension. If an explanation remain in effect until the securitizer is not received within 30 calendar days meets either the condition in para- or the explanation is not satisfactory graph (c)(1)(i) or (c)(1)(ii) of this sec- to the Committee, SBA may transfer tion. If the securitizer meets either the servicing of the applicable condition by the end of the 3-month pe- securitized loans, including the riod, notifies SBA with acceptable doc- securitizers’ servicing fee on the guar- umentation, and SBA agrees, SBA will anteed and unguaranteed portions and reinstate the securitizer. If the the premium protection fee on the securitizer cannot meet either condi- guaranteed portion, to another SBA tion, the suspension will remain in ef- participating Lender. fect. The securitizer may then petition the Lender Oversight Committee (Com- [64 FR 6507, Feb. 10, 1999, as amended at 73 mittee) for reinstatement. The Com- FR 75511, Dec. 11, 2008] mittee will review the reinstatement petition and determine if the § 120.427 Will SBA approve a securitization application from a securitizer’s PLP approval privilege capital impaired Securitizer? and securitization status should be re- instated. The Committee may consider If a securitizer does not maintain the the economic conditions in the level of capital required by this sub- securitizer’s market area, the part, SBA will not approve a securitizer’s efforts to improve its Cur- securitization application from that rency Rate, and the quality of the securitizer. securitizer’s 7(a) loan packages and servicing. The Committee will consider § 120.428 What happens to a only one petition by a securitizer per securitizer’s other PLP responsibil- quarter. ities if SBA suspends its PLP approval privilege? (3) The Benchmark Number. SBA will monitor the Benchmark Number. If The securitizer must continue to economic conditions or policy consid- service and liquidate loans according erations warrant, SBA may modify the to its PLP Supplemental Agreement. Benchmark Number to protect the safety and soundness of the 7(a) pro- OTHER CONVEYANCES gram. (4) Data. SBA will calculate Currency SOURCE: Sections 120.430 through 120.435 ap- Rate and Currency Rate Percentages pear at 64 FR 6509, 6510, Feb. 10, 1999, unless quarterly from financial information otherwise noted. that securitizers provide. SBA will § 120.430 What conveyances are cov- work with a securitizer to verify the ered by §§ 120.430 through 120.435? accuracy of the data used to make the Currency Rate calculation. Sections 120.430 through 120.435 cover all other transactions in which a Lend- [64 FR 6508, Feb. 10, 1999, as amended at 65 er sells, sells a participating interest FR 49481, Aug. 14, 2000; 73 FR 75511, Dec. 11, 2008] in, or pledges an SBA guaranteed loan other than for the purpose of § 120.426 What action will SBA take if securitizing and other than convey- a securitizer transfers the subordi- ances covered under Subpart F, Sec- nated tranche prior to the termi- ondary Market, of this part. nation of the holding period? If a securitizer transfers the subordi- § 120.431 Which Lenders may sell, sell nated tranche prior to the termination participations in, or pledge 7(a) of the holding period, SBA will suspend loans? immediately the securitizer’s ability to All Lenders may sell, sell participa- make new 7(a) loans. The securitizer tions in, or pledge 7(a) loans in accord- will have 30 calendar days to submit an ance with this subpart.

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§ 120.432 Under what circumstances er to be the owner of the part of a loan does this subpart permit sales of, or in which it has sold a participating in- sales of participating interests in, terest. 7(a) loans? [64 FR 6509, 6510, Feb. 10, 1999, as amended at (a) A Lender may sell all of its inter- 85 FR 7648, Feb. 10, 2020] est in a 7(a) loan to another Lender operating under a current Loan Guar- EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. 14, 2020, § 120.432(a) was amended by removing antee Agreement (SBA Form 750) the last sentence, effective Mar. 27, 2021. (‘‘participating Lender’’), with SBA’s prior written consent, which SBA may § 120.433 What are SBA’s other re- withhold in its sole discretion. A Lend- quirements for sales and sales of er may not sell any of its interest in a participating interests? 7(a) loan to a nonparticipating Lender. SBA requires the following: The purchasing Lender must take pos- (a) The Lender must be in good session of the promissory note and standing with SBA as defined in other loan documents, and service the § 120.420(f) and determined by SBA in sold 7(a) loan. The purchasing Lender its discretion; purchases the loan subject to SBA’s ex- (b) The Lender has satisfactory SBA isting rights including its right to deny performance, as determined by SBA in liability on its guarantee as provided its discretion. The Lender’s Risk Rat- in § 120.524. After purchase, the pur- ing, among other factors, will be con- chased loan will be subject to the pur- sidered in determining satisfactory chasing Lender’s Loan Guarantee SBA performance. Other factors may Agreement. This paragraph (a) applies include, but are not limited to, review/ to all 7(a) loans purchased from any examination assessments, historical Federal or state banking regulator, performance measures (like default any receiver, or any conservator, un- rate, purchase rate and loss rate), loan less SBA agrees otherwise in writing. volume to the extent that it impacts This paragraph (a) applies to all 7(a) performance measures, and other per- loans purchased from any Federal or formance related measurements and state banking regulator, any receiver, information (such as contribution to- or any conservator, unless SBA agrees ward SBA mission); and otherwise in writing. (c) In transactions requiring SBA’s (b) A Lender may sell, or sell a par- consent, all documentation must be ticipating interest in, a part of a 7(a) satisfactory to SBA, including, if SBA loan to another participating Lender. determines it to be necessary, a multi- If the Lender retains ownership of a party agreement. part of the unguaranteed portion of the [64 FR 6507, Feb. 10, 1999, as amended at 73 loan equal to at least 10 percent of the FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21, outstanding principal balance of the 2017] loan, the Lender must give SBA prior written notice of the transaction, and § 120.434 What are SBA’s requirements the Lender must continue to hold the for loan pledges? note and service the loan. If a Lender (a) Except as set forth in § 120.435, retains ownership of a part of the SBA must give its prior written con- unguaranteed portion of the loan equal sent to all pledges of any portion of a to less than 10 percent of the out- 7(a) loan, which consent SBA may standing principal balance of the loan, withhold in its sole discretion; the Lender must obtain SBA’s prior (b) The Lender must be in good written consent to the transaction, standing with SBA as defined in which consent SBA may withhold in its § 120.420(f) and determined by SBA in sole discretion. The Lender must con- its discretion; tinue to hold the note and other loan (c) The Lender has satisfactory SBA documents, and service the loan unless performance, as determined by SBA in SBA otherwise agrees in its sole discre- its discretion. The Lender’s Risk Rat- tion. ing, among other factors, will be con- (c) For purposes of determining the sidered in determining satisfactory percentage of ownership a Lender has SBA performance. Other factors may retained, SBA will not consider a Lend- include, but are not limited to, review/

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examination assessments, historical DELEGATED AUTHORITY CRITERIA performance measures (like default rate, purchase rate and loss rate), loan § 120.440 How does a 7(a) Lender obtain delegated authority? volume to the extent that it impacts performance measures, and other per- (a) In making its decision to grant or formance related measurements and renew a delegated authority, SBA con- information (such as contribution to- siders whether the Lender, as deter- ward SBA mission); mined by SBA in its discretion: (1) Has the continuing ability to (d) All loan documents must be satis- evaluate, process, close, disburse, serv- factory to SBA and must include a ice, liquidate and litigate SBA loans. multi-party agreement among SBA, This includes the ability to develop and Lender, the pledgee, FTA and such analyze complete loan packages. SBA other parties as SBA determines are may consider the experience and capa- necessary; bility of Lender’s management and (e) The Lender must use the proceeds staff. of the loan secured by the 7(a) loans (2) Has satisfactory SBA performance only for financing 7(a) loans and for (as defined in § 120.410(a)(2)); costs and expenses directly connected (3) Is in compliance with SBA Loan with the borrowing for which the loans Program Requirements (e.g., Form 1502 are pledged; reporting, timely payment of all fees to (f) The Lender must remain the SBA); servicer of the loans and retain posses- (4) Has completed to SBA’s satisfac- sion of all loan documents other than tion all required corrective actions; (5) Whether Lender is subject to any the original promissory notes; enforcement action, order or agree- (g) The Lender must deposit the ment with a regulator or the presence original promissory notes at the FTA; of other regulatory concerns as deter- and mined by SBA; and (h) The Lender must retain an eco- (6) Whether Lender exhibits other nomic interest in and the ultimate risk risk factors (e.g., has rapid growth; low of loss on the unguaranteed portion of SBA activity; SBA loan volume; Lend- the loans. er, an officer or director is under investigation or indictment). [64 FR 6507, Feb. 10, 1999, as amended at 73 FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21, (b) Delegated authority decisions are 2017] made by the appropriate SBA official in accordance with Delegations of Au- § 120.435 Which loan pledges do not re- thority, and are final. quire notice to or consent by SBA? (c) If delegated authority is approved or renewed, Lender must execute a sup- (a) Notwithstanding the provisions of plemental guarantee agreement, which § 120.434(e), 7(a) loans may be pledged will specify a term not to exceed two for the following purposes without no- years. As provided in § 120.442(c)(2)(i), tice to or consent by SBA: when SBA renews a Lender’s authority (1) Treasury tax and loan accounts; to participate in SBA Express, SBA (2) The deposit of public funds; may grant a longer term, but not to ex- (3) Uninvested trust funds; ceed three years. For approval or re- (4) Borrowings from a Federal Re- newal of any delegated authority, SBA serve Bank; or may grant shortened approvals or re- (5) Advances by a Federal Home Loan newals based on risk or any of the Bank. other delegated authority criteria. (b) For purposes of the Paycheck Lenders with less than three years of Protection Program (PPP), the other SBA lending experience will be limited provisions of § 120.434 shall also not to an initial term of one year or less. apply to PPP loans pledged under para- [82 FR 39503, Aug. 21, 2017, as amended at 85 graph (a)(4) or (5) of this section. FR 7648, Feb. 10, 2020] EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. [85 FR 21752, Apr. 20, 2020] 14, 2020, § 120.440 was amended by revising paragraph (c), effective Mar. 27, 2021. For the

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convenience of the user, the revised text is closing, servicing, and liquidation re- set forth as follows: quirements, as well as the same inter- § 120.440 How does a 7(a) Lender obtain del- est rates and applicable fees, as SBA egated authority? Express, except as otherwise provided in Loan Program Requirements.

* * * * * EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. (c) If delegated authority is approved or re- 14, 2020, § 120.441 was removed, effective Mar. newed, Lender must execute a Supplemental 27, 2021. Guarantee Agreement, which will specify a term not to exceed two years. SBA may § 120.442 Process to obtain or renew grant shortened renewals based on risk or SBA Express or Export Express au- any of the other delegated authority cri- thority. teria. Lenders with less than 3 years of SBA lending experience will be limited to a term The decision to grant or renew SBA of 1 year or less. Express or Export Express authority will be made by the appropriate SBA SBA EXPRESS AND EXPORT EXPRESS official in accordance with Delegations LOAN PROGRAMS of Authority and is final. If SBA Ex- press or Export Express authority is EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. approved or renewed, the Lender must 14, 2020, this undesignated center heading execute a supplemental guarantee was removed, effective Mar. 27, 2021. agreement before the Lender’s SBA Ex- SOURCE: 85 FR 7648, Feb. 10, 2020, unless press or Export Express authority will otherwise noted. become effective. (a) Criteria and process for initial ap- § 120.441 SBA Express and Export Ex- press Loan Programs. proval of SBA Express or Export Express authority. A Lender that wishes to par- (a) SBA Express. Under the SBA Ex- ticipate in SBA Express or Export Ex- press Loan Program (SBA Express), press must submit a written request to designated Lenders (SBA Express Lend- SBA. ers) process, close, service, and liq- (1) Existing 7(a) Lenders. In evaluating uidate SBA-guaranteed 7(a) loans using an existing 7(a) Lender’s application their own loan analyses, procedures, for SBA Express or Export Express au- and documentation to the maximum thority, SBA will consider the criteria extent practicable, with reduced re- and follow the procedures set forth in quirements for submitting documenta- § 120.440. tion to, and prior approval by, SBA. These loan analyses, procedures, and (2) Lending institutions that do not cur- documentation must meet prudent rently participate with SBA. Lending in- lending standards; be consistent with stitutions that do not currently par- those an SBA Express Lender uses for ticipate with SBA must become 7(a) its similarly-sized, non-SBA guaran- Lenders to participate in SBA Express teed commercial loans; and conform to and/or Export Express. Such institu- all requirements imposed upon Lenders tions may request SBA 7(a) lending and generally and SBA Express Lenders in SBA Express and/or Export Express au- particular by Loan Program Require- thority simultaneously. In evaluating ments, as such requirements are issued such institutions, in addition to the and revised by SBA from time to time, criteria set forth in §§ 120.410 and unless specifically identified by SBA as 120.440, SBA will consider whether the inapplicable to SBA Express loans. In institution: return for the expanded authority and (i) Has acceptable experience with autonomy provided by the program, small commercial loans, including an SBA Express Lenders agree to accept a acceptable number of performing small maximum SBA guaranty of 50 percent commercial loans outstanding at its of the SBA Express loan amount. most recent fiscal year end; and (b) Export Express. The Export Ex- (ii) Has received appropriate training press Loan Program (Export Express) on SBA’s policies and procedures. is designed to help current and prospec- (b) Criteria and process for renewal of tive small exporters. It is subject to SBA Express or Export Express authority. the same loan processing, making, In renewing a Lender’s SBA Express or

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Export Express authority and deter- § 120.443 SBA Express and Export Ex- mining the term of the renewal, SBA press loan processing requirements. will consider the criteria and follow (a) SBA Express and Export Express the process set forth in § 120.440 and loans are subject to all of the require- also will consider whether the Lender: ments set forth in subparts A and B of (1) Can effectively process, make, this part, unless such requirements are close, service, and liquidate SBA Ex- specifically identified by SBA as inap- press or Export Express loans, as appli- plicable. cable; (b) In addition to the eligibility cri- (2) Has received a major substantive teria applicable to all 7(a) loans, an Ex- objection regarding renewal from the port Express Applicant must have been Field Office(s) covering the territory in business for at least 12 full months where the Lender generates significant at the time of application, but not nec- numbers of SBA Express or Export Ex- essarily in the exporting business, un- press loans, as applicable; and less the Lender determines that the (3) Has received acceptable review re- Applicant’s key personnel have clearly sults on the SBA Express or Export Ex- demonstrated export expertise and sub- press portion, as applicable, of any stantial previous successful business SBA-administered Lender reviews. experience and the Lender processes the Export Express loan using conven- (c) Term—(1) Initial approval. SBA tional commercial loan underwriting may approve a Lender’s authority to procedures and does not rely solely on participate in SBA Express or Export credit scoring or credit matrices to ap- Express for a maximum term of two prove the loan. years. SBA may approve a shorter term (c) Certain types of loans and loan or limit a Lender’s maximum SBA Ex- programs are not eligible for SBA Ex- press or Export Express loan volume if, press or Export Express, as detailed in in SBA’s sole discretion, a Lender’s official SBA policy and procedures, in- qualifications, performance, experience cluding but not limited to: with SBA lending, or other factors so (1) A loan that would reduce the warrant. Lender’s existing credit exposure to a (2) Renewal—(i) SBA Express. SBA single Borrower, including its affiliates may renew a Lender’s authority to par- as defined in § 121.301(f) of this chapter; ticipate in SBA Express for two years (2) A loan to a business that has an or, in SBA’s sole discretion, a max- outstanding 7(a) loan where the Appli- imum of three years if a Lender’s cant is unable to certify that the loan qualifications, performance, experience is current at the time of approval of with SBA lending, or other factors so the SBA Express or Export Express warrant. loan; (ii) Export Express. SBA may renew a (3) A loan that would have as its pri- Lender’s authority to participate in mary collateral real estate or personal Export Express for a maximum term of property that does not meet SBA’s en- two years. vironmental requirements; and (iii) Shorter term or loan volume limit. (4) Complex loan structures or eligi- SBA may renew a Lender’s authority bility situations. to participate in SBA Express or Ex- (d) SBA has authorized SBA Express port Express for a shorter term or limit and Export Express Lenders to make a Lender’s maximum SBA Express or the credit decision without prior SBA Export Express loan volume if, in review. Lenders must not make an SBA’s sole discretion, a Lender’s quali- SBA-guaranteed loan that would be available on reasonable terms from ei- fications, performance, experience with ther the Lender itself or another SBA lending, or other factors so war- source without an SBA guaranty in ac- rant. cordance with § 120.101. The credit anal- EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. ysis must demonstrate that there is 14, 2020, § 120.442 was removed, effective Mar. reasonable assurance of repayment. 27, 2021. SBA Express and Export Express Lend- ers must use appropriate and prudent

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credit analysis processes and proce- (b) Export Express. (1) Export Express dures that are generally accepted in loans must be used for an export devel- the commercial lending industry and opment activity, which includes the are consistent with those used for their following: similarly-sized, non-SBA guaranteed (i) Obtaining a Standby Letter of commercial loans. As part of their pru- Credit when required as a bid bond, dent credit analysis, SBA Express and performance bond, or advance payment Export Express Lenders may use a guarantee; business credit scoring model (such a (ii) Participation in a trade show model cannot rely solely on consumer that takes place outside the United credit scores) to assess the credit his- States; tory of the Applicant and/or repayment (iii) Translation of product brochures ability if they do so for their similarly- or catalogues for use in markets out- sized, non-SBA guaranteed commercial side the United States; loans. SBA Express and Export Express (iv) Obtaining a general line of credit Lenders must validate (and document) for export purposes; with appropriate statistical meth- (v) Performing a service contract for odologies that their credit analysis buyers located outside the United procedures are predictive of loan per- States; formance, and they must provide that (vi) Obtaining transaction-specific fi- documentation to SBA upon request. nancing associated with completing ex- SBLCs must provide such credit scor- port orders; ing model validation and documenta- (vii) Purchasing real estate or equip- tion to SBA for review and approval on ment to be used in the production of an annual basis. goods or services for export; (e) SBA Express and Export Express (viii) Providing term loans and other Lenders are responsible for all loan de- financing to enable a small business cisions, including eligibility for 7(a) concern, including an export trading loans (including size), creditworthi- company and an export management ness, and compliance with Loan Pro- company, to develop a market outside gram Requirements. SBA Express and the United States; and Export Express Lenders also are re- (ix) Acquiring, constructing, ren- sponsible for confirming that all loan ovating, modernizing, improving or ex- closing decisions are correct and that panding a production facility or equip- they have complied with all requirement to be used in the United States in ments of law and Loan Program Re- the production of goods or services for quirements. export. (f) SBA Express and Export Express (2) Revolving lines of credit for ex- Lenders must ensure all required forms port purposes are eligible for Export are obtained and are complete and Express, provided they comply with of- properly executed. Appropriate docu- ficial SBA policy and procedures. mentation must be maintained in the (3) Export Express loans may not be Lender’s loan file, including adequate used to finance operations outside of information to support the eligibility the United States, except for the mar- of the Applicant and the loan. keting and/or distribution of products/ EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. services exported from the United 14, 2020, § 120.443 was removed, effective Mar. States. 27, 2021. (4) Export Express Lenders are responsible for ensuring that U.S. compa- § 120.444 Eligible uses of SBA Express nies are authorized to conduct business and Export Express loan proceeds. with the Persons and countries to (a) SBA Express. (1) SBA Express loan which the Borrower will be exporting. proceeds must be used exclusively for (c) Debt refinancing. An SBA Express eligible business-related purposes, as or Export Express Lender may use loan described in §§ 120.120 and 120.130. proceeds to refinance certain out- (2) Revolving lines of credit are eligi- standing debts, subject to official SBA ble for SBA Express, provided they policy and procedures. However, an comply with official SBA policy and SBA Express or Export Express Lender procedures. may not refinance its own existing

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SBA-guaranteed debt under SBA Ex- as described more fully in official SBA press or Export Express. policy and procedures. (2) Export Express. Export Express EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. 14, 2020, § 120.444 was removed, effective Mar. loans must have a stated maturity and 27, 2021. the maximum maturities are the same as any other 7(a) loan, except that re- § 120.445 Terms and conditions of SBA volving Export Express loans are lim- Express and Export Express loans. ited to a maximum maturity of 7 years, SBA Express and Export Express as described more fully in official SBA loans are subject to the same terms policy and procedures. and conditions as other 7(a) loans ex- (d) Interest rates. (1) For fixed interest cept as set forth in this section: rate loans, SBA Express and Export (a) Maximum loan amount and max- Express Lenders may charge a reason- imum aggregate loan amount—(1) SBA able fixed interest rate in accordance Express. The maximum loan amount for with § 120.213. an SBA Express loan is set forth in sec- (2) For variable interest rate loans: tion 7(a)(31) of the Small Business Act. (i) SBA Express and Export Express The aggregate amount of all out- Lenders may charge up to 4.5 percent standing SBA Express loans to a single over the prime rate on loans over Borrower, including the Borrower’s af- $50,000 and up to 6.5 percent over the filiates as defined in § 121.301(f) of this prime rate for loans of $50,000 or less, chapter, must not exceed the statutory regardless of the maturity of the loan. maximum. The prime rate will be that which is in (2) Export Express. The maximum loan effect on the first business day of the amount for an Export Express loan is month, as printed in a national finan- set forth in section 7(a)(34) of the Small cial newspaper published each business Business Act. The aggregate amount of day. all outstanding Export Express loans (ii) SBA Express and Export Express to a single Borrower, including the Lenders are not required to use the Borrower’s affiliates as defined in base rate identified in § 120.214(c). SBA § 121.301(f) of this chapter, must not ex- Express and Export Express Lenders ceed the statutory maximum. may use the same base rate of interest (b) Maximum SBA guarantee—(1) SBA they use on their similarly-sized, non- Express. The maximum SBA guarantee SBA guaranteed commercial loans, as on an SBA Express loan is 50 percent of well as their established change inter- the SBA Express loan amount. In addi- vals, payment accruals, and other in- tion, the guaranteed amount of all SBA terest rate terms. However, the inter- Express loans to a single Borrower, in- est rate must never exceed the max- cluding the Borrower’s affiliates, imum allowable interest rate stated in counts toward the maximum guaranty paragraph (d)(2)(i) of this section. Addi- amount as described in § 120.151. tionally, the loan may be sold on the (2) Export Express. The maximum Secondary Market only if the base rate SBA guarantee on an Export Express is one of the base rates allowed in loan of $350,000 or less is 90 percent, and § 120.214(c). for a loan over $350,000 is 75 percent, of (3) The amount of interest SBA will the Export Express loan amount. In ad- pay to a Lender following default of an dition, the guaranteed amount of all SBA Express or Export Express loan is Export Express loans to a single Bor- capped at the maximum interest rates rower, including the Borrower’s affili- for the standard 7(a) loan program set ates, counts toward the maximum forth in §§ 120.213 through 120.215. guaranty amount as described in (e) Collateral. (1) With the exception § 120.151. of paragraphs (e)(2) and (3) of this sec- (c) Maturity—(1) SBA Express. SBA tion, to the maximum extent prac- Express loans must have a stated ma- ticable, SBA Express and Export Ex- turity and the maximum maturities press Lenders must follow the same are the same as any other 7(a) loan, ex- collateral policies and procedures that cept that revolving SBA Express loans they have established and implemented are limited to a maximum of 10 years, for their similarly-sized, non-SBA

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guaranteed commercial loans, includ- loans. Such documentation and proce- ing those concerning identification of dures must comply with law, prudent collateral. Such policies and proce- lending practices, and Loan Program dures must be commercially reasonable Requirements. When closing an SBA and prudent. Express or Export Express loan, the (2) SBA may establish a threshold Lender must require the Borrower to below which SBA Express and Export execute a promissory note that is le- Express Lenders will not be required to gally enforceable and assignable. Be- take collateral to secure an SBA Ex- fore the first disbursement of any SBA press or Export Express loan. If estab- Express or Export Express loan pro- lished, such a threshold will be de- ceeds, the Lender must obtain all re- scribed more fully in official SBA pol- quired collateral, including obtaining icy and procedures. valid and enforceable security interests (3) Export Express lines of credit over in such collateral, and also must meet $25,000 used to support the issuance of a all other required pre-closing loan con- standby letter of credit must have col- ditions as set forth in official SBA pol- lateral (cash, cash equivalent, or icy and procedures. project) that will provide coverage for (b) Servicing, liquidation, and litiga- at least 25 percent of the issued stand- tion. Servicing, liquidation, and litiga- by letter of credit amount. tion responsibilities for SBA Express (f) Insurance. SBA Express and Ex- and Export Express Lenders are set port Express Lenders must follow the forth in subpart E of this part. same insurance policies they have es- (c) SBA’s purchase of the guaranteed tablished and implemented for their portion of an SBA Express or Export Ex- similarly-sized, non-SBA guaranteed press loan—(1) When SBA will purchase. commercial loans. SBA will purchase the guaranteed por- (g) Sale on the Secondary Market. SBA tion of an SBA Express or Export Ex- Express and Export Express Lenders press loan in accordance with § 120.520 may sell the guaranteed portion of an and official SBA policy and procedures. SBA Express or Export Express term An SBA Express or Export Express loan on the Secondary Market under Lender may not request purchase of the policies and procedures described the guaranty based solely on a viola- in subpart F of this part. SBA Express tion of a non-financial default provi- or Export Express Lenders may not sell sion. the guaranteed portion of an SBA Ex- (2) Amount that SBA will pay upon press or Export Express revolving line purchase—(i) SBA Express. SBA will pay of credit on the Secondary Market. a maximum of 50 percent of the total (h) Loan increases. With SBA’s prior principal balance of the SBA Express written consent, an SBA Express or Ex- loan outstanding after liquidation, plus port Express Lender may increase an up to 120 days of accrued interest at SBA Express or Export Express loan the rate in effect at the time of the based on the needs of the Borrower and earliest uncured default (if liquidation its credit situation, as further specified proceeds collected by the SBA Express in Loan Program Requirements. Lender were insufficient for the Lender to recover a full 120 days of interest). EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. 14, 2020, § 120.445 was removed, effective Mar. (ii) Export Express. SBA will pay a 27, 2021. maximum of 75 or 90 percent (as applicable) of the total principal balance of § 120.446 SBA Express and Export Ex- the Export Express loan outstanding press loan closing, servicing, liq- after liquidation, plus up to 120 days of uidation, and litigation require- interest at the rate in effect at the ments. time of the earliest uncured default (if (a) Closing. Except as set forth in this liquidation proceeds collected by the paragraph (a), SBA Express and Export Export Express Lender were insuffi- Express Lenders must close their SBA cient for the Lender to recover a full Express and Export Express loans using 120 days of interest). the same documentation and proce- (3) Release of SBA liability under its dures that they use for their similarly- guarantee. SBA will be released from sized, non-SBA guaranteed commercial its liability to purchase the guaranteed

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portion of an SBA Express or Export priate documentation signed by two of Express loan, either in whole or in the PLP’s authorized representatives. part, in SBA’s sole discretion, under SBA will attach the SBA guarantee any of the circumstances described in and notify the PLP Lender of the SBA § 120.524. loan number (if it does not identify a EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. problem with eligibility, and funds are 14, 2020, § 120.446 was removed, effective Mar. available). 27, 2021. (c) The PLP Lender is responsible for all PLP loan decisions regarding eligi- § 120.447 Oversight of SBA Express bility (including size) and creditworthi- and Export Express Lenders. ness. The PLP Lender is also respon- SBA Express and Export Express sible for confirming that all PLP loan Lenders are subject to the same risk- closing decisions are correct, and that based lender oversight as other 7(a) it has complied with all requirements Lenders, including the supervision and of law and SBA regulations. enforcement provisions, in accordance with subpart I of this part. § 120.453 Responsibilities of PLP Lend- EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. ers for servicing and liquidating 14, 2020, § 120.447 was removed, effective Mar. 7(a) loans. 27, 2021. Servicing and Liquidation responsibilities for PLP Lenders are set forth PREFERRED LENDERS PROGRAM (PLP) in subpart E of this part. § 120.450 What is the Preferred Lend- [72 FR 18360, Apr. 12, 2007] ers Program? Under the Preferred Lenders Pro- SBA SUPERVISED LENDERS gram (PLP), designated Lenders process, close, service, and liquidate SBA § 120.460 What are SBA’s additional re- guaranteed loans with reduced require- quirements for SBA Supervised ments for documentation to and prior Lenders? approval by SBA. (a) In general. In addition to complying with SBA’s requirements for § 120.451 [Reserved] SBA Lenders, an SBA Supervised Lend- er must meet the additional require- § 120.452 What are the requirements of PLP loan processing? ments set forth in this regulation and the SBA Supervised Lender regulations (a) Subparts A and B of this part gov- that follow. ern the making of PLP loans, except (b) Operations and internal controls. for the following: Each SBA Supervised Lender’s board of (1) Certain types of businesses, loans, directors (or management, if the SBA and loan programs are not eligible for Supervised Lender is a division of an- PLP, as detailed in published SBA pol- other company and does not have its icy and procedures. own board of directors) must adopt an (2) A Lender may not make a PLP internal control policy which provides business loan which reduces its existing credit exposure for any Borrower, adequate direction to the institution in except in cases where an interim establishing effective control over and loan(s) has been made for other than accountability for operations, pro- real estate construction purposes to grams, and resources. The internal con- the Borrower which was approved by trol policy must, at a minimum: the Lender within 90 days of receipt of (1) Direct management to assign re- the issuance fo a subsequent PLP loan sponsibility for the internal control number. function (covering financial, credit, (3) SBA will not guarantee more than credit review, collateral, and adminis- the specified statutory percentage of trative matters) to an officer or offi- any PLP loan. cers of the SBA Supervised Lender; (b) A PLP Lender notifies SBA of its (2) Adopt and set forth procedures for approval of a PLP loan by submitting maintenance and periodic review of the to SBA’s loan processing center appro- internal control function; and

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(3) Direct the operation of a program state regulator is located, except that an to review and assess the SBA Super- NFRL’s lending area may include a local vised Lender’s assets. The asset review trade area that is contiguous to such state program policies must specify the fol- (e.g., a city or metropolitan statistical area lowing: that is bisected by a state line) if the NFRL receives SBA’s prior written approval. This (i) Loan, loan-related asset, and ap- paragraph applies to all NFRLs on or after praisal review standards, including January 4, 2021, including in the event of ap- standards for scope of selection for re- proval of a new NFRL or a change of owner- view (of any such loan, loan-related ship or control of an NFRL; provided how- asset or appraisal) and standards for ever, that if SBA has approved any NFRL to work papers and supporting docu- make 7(a) loans out of their state, then this mentation; paragraph will apply on or after January 4, (ii) Asset quality classification 2022. standards consistent with the standardized classification systems used by § 120.461 What are SBA’s additional requirements for SBA Supervised the Federal Financial Institution Reg- Lenders concerning records? ulators; (iii) Specific internal control require- (a) Report filing. All SBA Supervised ments for the SBA Supervised Lender’s Lender-specific reports (including all major asset categories (cash and in- SBLC-only reports) must be filed with vestment securities), lending, and the the appropriate Office of Capital Ac- issuance of debt; cess official in accordance with Delega- (iv) Specific internal control require- tions of Authority. ments for the SBA Supervised Lender’s (b) Maintenance of records. An SBA oversight of Lender Service Providers; Supervised Lender must maintain at and its principal business office accurate (v) Standards for training to imple- and current financial records, includ- ment the asset review program. ing books of accounts, minutes of stockholder, directors, and executive [73 FR 75512, Dec. 11, 2008] committee meetings, and all docu- EFFECTIVE DATE NOTE: At 85 FR 78213, Dec. ments and supporting materials relat- 4, 2020, § 120.460 was amended by adding para- ing to the SBA Supervised Lender’s graphs (c) and (d), effective Jan. 4, 2021. For the convenience of the user, the added text is transactions. However, securities held set forth as follows: by a custodian pursuant to a written agreement are exempt from this re- § 120.460 What are SBA’s additional require- quirement. ments for SBA Supervised Lenders? (c) Permanent preservation of records. An SBA Supervised Lender must per- * * * * * manently preserve in a manner permit- (c) An SBA Supervised Lender must have ting immediate (one business day) re- qualified full-time professional management trieval the following documentation including, but not limited to, a chief execu- for the financial statements and other tive officer or the equivalent to manage reports required by § 120.464 (and the daily operations, and a chief credit/risk officer. An SBA Supervised Lender must also accompanying certified public account- have at least one other part-time profes- ant’s opinion): sional employee (which may be a shared em- (1) All general and subsidiary ledgers ployee of the lender’s affiliates) qualified by (or other records) reflecting asset, li- training and experience to carry out its busi- ability, capital stock and additional ness plan. An SBA Supervised Lender is ex- paid-in capital, income, and expense pected to sustain a sufficient level of lending accounts; activity in its lending area, which means obtaining at least four 7(a) loan approvals dur- (2) All general and special journals ing two consecutive fiscal years. This para- (or other records forming the basis for graph only applies to SBA Supervised Lend- entries in such ledgers); and ers that make or acquire a 7(a) loan after (3) The corporate charter, bylaws, ap- January 4, 2021, or to any SBA Supervised plication for determination of eligi- Lender approved after such date, including in the event of a change of ownership or con- bility to participate with SBA, and all trol of an SBA Supervised Lender. minutes books, capital stock certifi- (d) An NFRL may only make or acquire cates or stubs, stock ledgers, and stock 7(a) loans in the state in which its primary transfer registers.

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(d) Other preservation of records. An chase of treasury stock) can occur. In SBA Supervised Lender must preserve addition to factors described above for at least 6 years following final dis- that must be considered in meeting the position of each individual SBA loan: minimum standards, the board of direc- (1) All applications for financing; tors must also address the following (2) Lending, participation, and es- factors in developing the SBA Super- crow agreements; vised Lender’s capital adequacy plan: (3) Financing instruments; and (i) Management capability; (4) All other documents and sup- (ii) Quality of operating policies, pro- porting material relating to such cedures, and internal controls; loans, including correspondence. (iii) Quality and quantity of earn- (e) Electronic preservation. Records ings; and other documents referred to in this section may be preserved electroni- (iv) Asset quality and the adequacy cally if the original is available for re- of the allowance for loan losses within trieval within 15 working days. the loan portfolio; (v) Sufficiency of liquidity; and [73 FR 75512, Dec. 11, 2008] (vi) Any other risk-oriented activi- § 120.462 What are SBA’s additional re- ties or conditions that warrant addi- quirements on capital maintenance tional capital (e.g., portfolio growth for SBA Supervised Lenders? rate). (a) Capital adequacy. The board of di- (2) An SBA Supervised Lender must rectors (or management, if the SBA keep its capital plan current, updating Supervised Lender is a division of an- it at least annually or more often as other company and does not have its operating conditions may warrant. own board of directors) of each SBA (c) Certification of compliance. Within Supervised Lender must determine 45 days of the end of each fiscal quar- capital adequacy goals; that is, the ter, each SBA Supervised Lender must total amount of capital needed to as- furnish the SBA with a calculation of sure the SBA Supervised Lender’s con- capital and certification of compliance tinued financial viability and provide with its minimum capital requirement for any necessary growth. The min- as set forth in §§ 120.471, 120.472, or imum standards set in § 120.471 for 120.474, as applicable, for SBLCs and as SBLCs and those established by state established by state regulators for regulators for NFRLs are not to be NFRLs. The SBA Supervised Lender’s adopted as the ideal capital level for a chief financial officer must certify the given SBA Supervised Lender. Rather, calculation to be correct. The quar- the minimum standards are to serve as terly calculation and certification of minimum levels of capital that each compliance may be included in the SBA Supervised Lender must maintain SBA Supervised Lender’s Quarterly to protect against the credit risk and Condition Report. other general risks inherent in its op- (d) Capital impairment. An SBA Super- eration. vised Lender must meet its minimum (b) Capital plan. (1) The board of di- regulatory capital requirement and rectors of each SBA Supervised Lender avoid capital impairment. Capital im- must establish, adopt, and maintain a pairment exists if an SBA Supervised formal written capital plan. The plan Lender fails to meet its minimum reg- must include any interim capital tar- ulatory capital requirement under gets that are necessary to achieve the §§ 120.471, 120.472, and 120.474 for SBLCs SBA Supervised Lender’s capital ade- or as established by state regulators quacy goals as well as the minimum for NFRLs. An SBA Supervised Lender capital standards. The plan must ad- must provide the appropriate Office of dress any projected dividend goals, eq- Capital Access official in accordance uity retirements, or any other antici- with Delegations of Authority written pated action that may decrease the notice of any failure to meet its min- SBA Supervised Lender’s capital. The imum capital requirement within 30 plan must set forth the circumstances calendar days of the month-end in in which capital retirements (e.g., divi- which the impairment occurred. Unless dends, distributions of capital or pur- otherwise waived by the appropriate

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Office of Capital Access official in ac- (5) Failure. If an SBA Supervised cordance with Delegations of Author- Lender fails to submit a capital res- ity in writing, an SBA Supervised toration plan that is acceptable to SBA Lender may not present any loans to within its discretion within the re- SBA for guaranty until the impairment quired timeframe, or fails to imple- is cured. SBA may waive the present- ment, in any material respect as deter- ment prohibition for good cause as de- mined by SBA in its discretion, its termined by SBA in its discretion. In SBA approved capital restoration plan the case of differences in calculating within the plan timeframe, SBA may capital or capital requirements be- undertake enforcement actions under tween the SBA Supervised Lender and § 120.1500. SBA, SBA’s calculations will prevail [73 FR 75512, Dec. 11, 2008] until differences between the two calculations are resolved. EFFECTIVE DATE NOTE: At 85 FR 78213, Dec. (e) Capital restoration plan— (1) Filing 4, 2020, § 120.462 was amended by removing the requirement. An SBA Supervised Lender phrase ‘‘by state regulators’’ wherever it appears and adding in its place the phrase ‘‘in must file a written capital restoration § 120.462(a)(1)’’, and by redesignating para- plan with SBA within 45 days of the graphs (a) through (e) as paragraphs (b) date that the SBA Supervised Lender through (f); and adding a new paragraph (a), provides notice to SBA under para- effective Jan. 4, 2021. For the convenience of graph (d) of this section or receives no- the user, the added text is set forth as fol- tice from SBA (whichever is earlier) lows: that the SBA Supervised Lender has § 120.462 What are SBA’s additional require- not met its minimum capital requirements on capital maintenance for SBA ment, unless SBA notifies the SBA Su- Supervised Lenders? pervised Lender in writing that the (a) Minimum capital requirements—(1) For plan is to be filed within a different NFRLs. (i) Beginning on January 4, 2024, each time period. NFRL that makes or acquires a 7(a) loan (2) Plan content. An SBA Supervised must maintain the minimum capital required by its state regulator, or $2,500,000, Lender must detail the steps it will whichever is greater. take to meet its minimum capital re- (ii) Any NFRL approved on or after Janu- quirement; the time within which each ary 4, 2021, including in the event of a change step will be taken; the timeframe for of ownership or control, must maintain the accomplishing the entire capital res- minimum capital requirement set forth in toration; and the person or department paragraph (a)(1)(i) of this section. at the SBA Supervised Lender charged (iii) Unless subject to paragraph (a)(1)(i) or with carrying out the capital restora- (ii) of this section, an NFRL must comply with the minimum capital requirements for tion plan. NFRLs that were in effect on January 3, 2021. (3) SBA response. SBA will provide (2) For SBLCs. For information on min- written notice of whether the capital imum capital requirements for SBLCs, see restoration plan is approved or not or § 120.471. whether SBA will seek additional information. If the capital restoration * * * * * plan is not approved by SBA, the SBA Supervised Lender will submit a re- § 120.463 Regulatory accounting— vised capital restoration plan within What are SBA’s regulatory account- the timeframe specified by SBA. ing requirements for SBA Super- (4) Amendment of capital restoration vised Lenders? plan. An SBA Supervised Lender that (a) Books and records. The books and has submitted an approved capital res- records of an SBA Supervised Lender toration plan may, after prior written must be kept on an accrual basis in ac- notice to and approval by SBA, amend cordance with Generally Accepted Ac- the plan to reflect a change in cir- counting Principles (GAAP) as promul- cumstance. Until such time as a pro- gated by the Financial Accounting posed amendment has been approved, Standards Board (FASB), supplemented the SBA Supervised Lender must im- by Regulatory Accounting Principles plement the capital restoration plan as (RAP) as identified by SBA in Policy, approved prior to the proposed amend- Procedural or Information Notices, ment. from time to time.

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(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 provide the SBA with access to and (3) Each SBA Supervised Lender copies of any work papers, policies, and must classify loans as: procedures relating to the services per- (i) ‘‘Nonaccrual,’’ if any portion of formed; the principal or interest is determined (3)(i) Is in compliance with the to be uncollectible and AICPA Code of Professional Conduct; (ii) ‘‘Formally restructured,’’ if the and loan meets the ‘‘troubled debt restruc- (ii) Meets the independence require- turing’’ definition set forth in FASB ments and interpretations of the Secu- Statement of Financial Accounting rities and Exchange Commission and Standards No. 15, Accounting by Debt- its staff; ors and Creditors for Troubled Debt (4) Has received a peer review or is Restructurings. enrolled in a peer review program, that (4) When one loan to a borrower is meets AICPA guidelines; and classified as nonaccrual or formally re- (5) Is otherwise acceptable to SBA. structured, all loans to that borrower (d) Change of auditor. If an SBA Su- must be so classified unless the SBA pervised Lender discharges or changes Supervised Lender can document that its auditor, it must notify SBA in writ- the loans have independent sources of ing within ten days of the occurrence. repayment. Such notification must provide: (f) Valuing loan servicing rights and re- (1) The name, address, and telephone sidual interests. Each SBA Supervised number of the discharged auditor; and Lender must account for loan sales (2) If the discharge/change involved a transactions and the valuation of loan dispute over the financial statements, servicing rights in accordance with a reasonably detailed statement of all GAAP. At the end of each quarter, the the reasons for the discharge or SBA Supervised Lender must review change. This statement must set out for reasonableness the existing envi- the issue in dispute, the position of the ronmental assumptions used in the auditor, the position of the SBA Super- valuation. Particular attention must

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be given to interest rate and repay- content and frequency of filing Quar- ment rate assumptions. Assumptions terly Condition Reports. considered no longer reasonable must (3) Legal and Administrative Proceeding be modified and modifications must be Report. Each SBA Supervised Lender reflected in the valuation and must be must report any legal or administra- documented and supported by a market tive proceeding by or against the SBA analysis. Work papers reflecting the Supervised Lender, or against any offi- analysis of assumptions and any result- cer, director or employee of the SBA ing adjustment in the valuation must Supervised Lender for an alleged be maintained for SBA review in ac- breach of official duty, within ten busi- cordance with § 120.461. SBA may re- ness days after initiating or learning of quire an SBA Supervised Lender to use the proceeding, and also must notify industry averages for the valuation of the SBA of the terms of any settlement servicing rights. or final judgment. The SBA Supervised [73 FR 75513, Dec. 11, 2008] Lender must include such information in any reporting required under other § 120.464 Reports to SBA. provisions of SBA regulations. (a) An SBA Supervised Lender must (4) Stockholder Reports. Each SBA Su- submit the following to SBA: pervised Lender must submit to SBA a (1) Annual Report. Within three copy of any report furnished to its months after the close of each fiscal stockholders in any manner, within 30 year, each SBA Supervised Lender calendar days after submission to must submit to SBA two copies of an stockholders, including any prospectus, annual report including audited finan- letter, or other document, concerning cial statements as prepared by a cer- the financial operations or condition of tified public accountant in accordance the SBA Supervised Lender. with § 120.463. Specifically, the annual (5) Reports of Changes. Each SBA Su- report must, at a minimum, include pervised Lender must submit to SBA a the following: summary of any changes in the SBA (i) Audited balance sheet; Supervised Lender’s organization or fi- (ii) Audited statement of income and nancing (within 30 calendar days of the expense; change), such as: (iii) Audited reconciliation of capital (i) Any change in its name, address accounts; or telephone number; (iv) Audited source and application of (ii) Any change in its charter, by- funds; laws, or its officers or directors (to be (v) Such footnotes as are necessary accompanied by a statement of per- to an understanding of the report; sonal history on the form approved by (vi) Auditor’s letter to management SBA); on internal control weaknesses; and (iii) Any change in capitalization, in- (vii) The auditor’s report. cluding such types of change as are (2) Quarterly Condition Reports. By the identified in this part 120; 45th calendar day following the end of (iv) Any changes affecting an SBA each calendar quarter, each SBA Su- Supervised Lender’s eligibility to con- pervised Lender must submit a Quar- tinue to participate as an SBA Super- terly Condition Report in a form and vised Lender; and content as the SBA may prescribe from (v) Notice of any pledge of stock time to time. At a minimum, the Quar- (within 30 calendar days of the trans- terly Condition Report must include action) if 10 percent or more of the the SBA Supervised Lender’s quarterly stock is pledged by any person (or financial statements, which may be in- group of persons acting in concert) as ternally prepared. The SBA Supervised collateral for indebtedness. Lender must apply uniform definitions (6) Report of Changes in Financial Con- to categories of nonperforming loans dition. In addition to other reports re- and include recovery amounts on liq- quired under this part 120, each SBA uidated loans. SBA may, on a case-by- Supervised Lender must submit a re- case basis, depending on an SBA Super- port to SBA on any material change in vised Lender’s size and the quality of financial condition. The SBA Super- its assets, adjust the requirements for vised Lender must submit such report

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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 laws, regulations, procedures, stand- [73 FR 75514, Dec. 11, 2008] ards, and such instructions and specifications and in such form and media § 120.465 Civil penalty for late submis- format as may be prescribed by SBA sion of required reports. from time to time; (a) Obligation to submit required reports (2) On an accrual basis, in accordance by applicable due dates. SBA Supervised with GAAP principles and such other Lenders must submit complete reports accounting requirements, standards, by the due dates described in the regu- and procedures as may be prescribed by lations or as directed in writing by the SBA from time to time; SBA. SBA considers any report that an (3) That contain all applicable foot- SBA Supervised Lender sends to SBA notes in accordance with GAAP prin- by the applicable due date but that is cipals, one of which includes a brief submitted only in part, to have not analysis of how the SBA Supervised been submitted by the applicable due Lender complies with SBA’s capital date. SBA also considers any report regulations, as applicable; and that is postmarked by the due date to (4) In such manner as to facilitate be submitted by the due date. the reconciliation of these reports with (b) Amount of civil penalty. For each the books and records of the SBA Su- day past the due date for such report, pervised Lender. the SBA Supervised Lender must pay (c) Responsibility for assuring the accu- to SBA a civil penalty of not more racy of filed financial reports. Each fi- than $6,740 per day per report. Such nancial report filed with SBA must be civil penalty continues to accrue until certified as having been prepared in ac- and including the date upon which SBA cordance with all applicable regula- Supervised Lender submits the com- tions, SOPs, notices, and instructions plete report. In determining the and to be a true, accurate, and complete representation of the financial amount of the civil penalty to be as- condition and financial performance of sessed, SBA may consider the financial the SBA Supervised Lender to which it resources and good faith of the SBA applies. The reports must be certified Supervised Lender, the gravity of the by the officer of the reporting SBA Su- violation, the history of previous viola- pervised Lender named for that pur- tions and any such other matters as pose by action of the institution’s justice may require. board of directors. If the institution’s (c) Notification of amount of civil pen- board of directors has not acted to alty. SBA will notify the SBA Super- name an officer to certify the correct- vised Lender in writing of the amount ness of its reports of financial condi- of civil penalties imposed either upon tion and financial performance, then receiving the required complete report the reports must be certified by the or at such other time as SBA deter- president or chief executive officer of mines. The SBA Supervised Lender the reporting SBA Supervised Lender. must pay this amount to SBA within 30 (d) Waiver. The appropriate Office of days of the date of SBA’s written de- Capital Access official in accordance mand.

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(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 proves the extension, SBA will waive the reconsideration request. The deci- the civil penalty that has accrued so sion is a final agency decision. If on re- far for that particular report. However, consideration, a civil penalty remains a new civil penalty will accrue if the due, the SBA Supervised Lender must SBA Supervised Lender does not sub- pay to SBA the civil penalty within 30 mit a complete report by the new due days of the written decision or as oth- date established by SBA. erwise directed. Civil penalties will (f) Requests for reduction or exemption. continue to accrue while the reconsid- (1) An SBA Supervised Lender may re- eration request is pending. quest a reduction or exemption from (h) Other enforcement actions. SBA the civil penalty in writing to SBA. may seek additional remedies for fail- The request must reference the re- ure to timely file reports as authorized quired report, its due date and the by law. amount sought for reduction, and state (i) Exception for affiliate of SBLC. in detail the reasons for the reduction. Civil penalties under this section do

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not apply to any affiliate of an SBLC (4) A list of all members of the appli- that procures at least 10% of its annual cant’s management team, including purchasing requirements from small the applicant’s officers, directors, man- manufacturers. agers and key employees, as well as the applicant’s owners, Associates (as de- [73 FR 75515, Dec. 11, 2008, as amended at 81 FR 31491, May 19, 2016; 82 FR 9969, Feb. 9, fined in § 120.10) and Affiliates (as de- 2017; 83 FR 7363, Feb. 21, 2018; 84 FR 12061, fined in § 121.103 of this chapter); Apr. 1, 2019; 85 FR 13727, Mar. 10, 2020] (5) A written summary of the professional experience (including any prior § 120.466 SBA Supervised Lender ap- experience with any SBA program) of plication. the applicant’s management team (in- An entity seeking to participate as cluding key employees); an SBA Supervised Lender must apply (6) In connection with any applica- to SBA. SBA evaluates SBA Supervised tion to become an SBLC, the applicant Lender applicants through an initial must include a letter agreement signed review and final review, as follows: by an authorized official of an existing (a) Initial review. SBA Supervised SBLC certifying that the SBLC is seek- Lender applicants must submit a writing to transfer its SBA lending author- ten plan containing information about ity to the applicant; and the organization and its current and (7) If approval of any state or Federal proposed lending activities (‘‘Lender chartering, licensing or other regu- Assessment Plan’’). After SBA’s review latory authority is required, copies of of the Lender Assessment Plan, the Of- any licenses issued by or documents fice of Capital Access may require an filed with such authority. interview with the applicant and its (b) Final review. Each applicant that management team. SBA will deter- receives notice from SBA in writing mine, in its sole discretion, whether an that it may proceed to the final review applicant may proceed to the final re- must submit a complete application to view. If SBA determines that an appli- SBA within 90 calendar days. The ap- cant may not proceed to the final re- plication requirements for SBA Super- view, the applicant must wait at least vised Lenders are set forth in official 6 months before it may submit a new SBA policy and procedures. An incom- Lender Assessment Plan. Each appli- plete application submitted to SBA cant must demonstrate to SBA’s satis- will not be processed and will be re- faction that it meets the ethical re- turned to the applicant. SBA may, in quirements and the participation cri- its sole discretion, approve or deny any teria set forth in 13 CFR 120.140 and SBA Supervised Lender application. 120.410. The Lender Assessment Plan The decision to approve or deny an must include the following items: SBA Supervised Lender application is a (1) The legal name, address, tele- final agency decision. If an SBA Super- phone number and email address of the vised Lender application is denied by applicant; SBA or if a complete application is not (2) Business plan, detailing the appli- timely submitted, the applicant may cant’s proposed lending area and the not submit a new Lender Assessment volume of loan activity projected over Plan and restart the application proc- the next 3 years (supported by current ess until 12 months from the date of de- and projected balance sheets, income nial or the date a complete application statements and statements of cash was due to SBA, as applicable. flows); (c) NFRL operating and lending experi- (3) Capitalization (current and pro- ence requirement. For an entity seeking posed), including the form of organiza- to become an NFRL, evidence of at tion and the identification of all debt least 1 year of current operating and and classes of equity capital and pro- relevant commercial lending experi- posed funding amounts, including any ence by the entity must be provided. rights or preferences accorded to such interests (e.g., voting rights, redemp- [85 FR 78213, Dec. 4, 2020] tion rights and rights of convertibility) EFFECTIVE DATE NOTE: At 85 FR 78213, Dec. and any conditions for the transfer, 4, 2020, § 120.466 was added, effective Jan. 4, sale or assignment of such interests; 2021.

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§ 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 appropriate industry benchmarks, review/ex- [85 FR 78213, Dec. 4, 2020] amination assessments and other per- EFFECTIVE DATE NOTE: At 85 FR 78214, Dec. formance measures. 4, 2020, § 120.467 was added, effective Jan. 4, (3) The applicant’s capitalization, or- 2021. ganizational structure, business plan (including any risk factors), projected § 120.468 Change of ownership or con- financial performance, financial trol requirements for SBA Super- strength, liquidity, the soundness of its vised Lenders. financial projections and underlying (a) SBA prior approval required. Any assumptions, loan underwriting proc- change of ownership or control of an ess, operations plan and the history of SBA Supervised Lender without SBA’s compliance of the applicant and its prior written approval is prohibited. management team (including key em- Prior to entering into any agreement, ployees) with SBA Loan Program Re- other than a non-binding letter of in- quirements. tent, for a change of ownership or con- (4) Whether the NFRL’s state regu- trol, SBA Supervised Lenders must re- lator and the state statute or regula- ceive SBA’s prior written approval tions governing the NFRL’s operations, from the appropriate SBA official in including but not limited to those per- accordance with the prevailing Delega- taining to audit, examination, super- tions of Authority. An SBA Supervised vision, enforcement and information Lender may not register proposed new sharing, are satisfactory to SBA in its owners on its books and records or per- sole discretion. mit them to participate in any manner (5) For changes of ownership or con- in the conduct of the SBA Supervised trol, in addition to the factors listed in Lender’s affairs unless approved in

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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 Supervised Lender; or [85 FR 78213, Dec. 4, 2020] (5) Any other transaction or event EFFECTIVE DATE NOTE: At 85 FR 78214, Dec. that results in any change in the pos- 4, 2020, § 120.468 was added, effective Jan. 4, session (direct or indirect) of the right 2021. to control, or the power to direct or cause the direction of, the management SMALL BUSINESS LENDING COMPANIES or policies of an SBA Supervised Lend- (SBLC) er, whether through the ownership of voting securities, by contract or other- § 120.470 What are SBA’s additional re- wise. quirements for SBLCs? (b) Approval required by other regu- In addition to complying with SBA’s latory authorities. If a change of owner- requirements for SBA Lenders and SBA ship or control of an SBA Supervised Supervised Lenders, an SBLC must Lender is subject to the approval of meet the requirements contained in any state or Federal chartering, licens- this regulation and the SBLC regula- ing or other regulatory authority, cop- tions that follow. ies of any documents filed with such (a) Lending. An SBLC may only authority must, at the same time, be make: transmitted to the appropriate SBA official in accordance with the prevailing (1) Loans under section 7(a) (except Delegations of Authority. The approval section 7(a)(13) of the Act in participa- of any state or Federal authority will tion with SBA); and/or be required in addition to SBA’s prior (2) SBA guaranteed loans to Inter- written approval. mediaries (see subpart G of this part). (c) Application requirements for Such loans are subject to the same con- changes of ownership or control. An ap- ditions as guaranteed loans made to plicant must submit a Lender Assess- Intermediaries by 7(a) Lenders. ment Plan and a new application in ac- (b) Business structure. An SBLC must cordance with § 120.466 for any change be a corporation (profit or non-profit) of ownership or control. If a proposed or a limited liability company or lim- change of ownership is for less than 50 ited partnership. percent of the ownership interests in (c) Written agreement. An SBLC must an SBA Supervised Lender, SBA may, sign a written agreement with SBA.

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(d) Dual control. An SBLC must main- under common control if they are Af- tain dual control over disbursement of filiates of each other by reason of com- funds and withdrawal of securities. mon ownership or common officers, di- (1) An SBLC may disburse funds only rectors, or general partners. by checks or wire transfers authorized (5) ‘‘Affiliate’’ has the meaning set by signatures of two or more officers forth in § 121.103 of this chapter. covered by the SBLC’s fidelity bond, (6) ‘‘Control’’ means the possession, except that checks in an amount of direct or indirect, of the power to di- $1,000 or less may be signed by one rect or cause the direction of the man- bonded officer, provided that such ac- agement and policies of an SBLC or tion is permitted under the SBLC’s fi- other concern, whether through the delity bond. ownership of voting securities, by con- (2) There must be two or more bonded tract, or otherwise. The common con- officers, or one bonded officer and a trol presumption may be rebutted by bonded employee to open safe deposit evidence satisfactory to SBA. boxes or withdraw securities from safe- (g) Management. An SBLC must em- keeping. The SBLC must furnish to ploy full time professional manage- each depository bank, custodian, or en- ment. tity providing safe deposit boxes a cer- (h) Borrowed funds. In general, an tified copy of the resolution imple- SBLC may not be capitalized with bor- menting control procedures. rowed funds. Shareholders owning 10 (e) Fidelity insurance. An SBLC must percent or more of any class of its maintain a Brokers Blanket Bond, Standard Form 14, or Finance Compa- stock must not use personally-bor- nies Blanket Bond, Standard Form 15, rowed funds to purchase the stock un- or such other form of coverage as SBA less the net worth of the shareholder is may approve, in a minimum amount of at least twice the amount borrowed or $2,000,000 executed by a surety holding unless the shareholder receives SBA’s a certificate of authority from the Sec- prior written approval for a lower retary of the Treasury pursuant to 31 ratio. U.S.C. 9304–9308. [73 FR 75515, Dec. 11, 2008] (f) Common control. (1) An SBLC must not control, be controlled by, or be EFFECTIVE DATE NOTE: At 85 FR 78215, Dec. 4, 2020, § 120.470 was amended by removing under common control with another paragraph (g) and redesignating paragraph SBLC. (h) as paragraph (g), effective Jan. 4, 2021. (2) In the case of a purchase of an SBLC by an organization that already § 120.471 What are the minimum cap- owns an SBLC, the purchasing entity ital requirements for SBLCs? will have six months to submit a plan (a) Minimum capital requirements. to SBA for the divestiture of one of the Each SBLC must maintain, at a min- SBLCs. All divestiture plans must be imum, unencumbered paid-in capital approved by SBA and SBA may with- and paid-in surplus of at least hold approval in its discretion. Divesti- $1,000,000, or ten percent of the aggre- ture of the SBLC must occur within gate of its share of all outstanding one year of purchase date. loans, whichever is more. (3) Without prior written SBA approval, an Associate of one SBLC must (b) Composition of capital. For pur- not be an Associate of another SBLC or poses of complying with paragraph (a) of any entity which directly or indi- of this section, capital consists only of rectly controls, or is under common one or more of the following: control with, another SBLC. (1) Common stock; (4) For purposes of paragraph (f) of (2) Preferred stock that is noncumu- this section, common control means a lative as to dividends and does not condition where two or more SBLCs, have a maturity date; either through ownership, manage- (3) Additional paid-in capital rep- ment, contract, or otherwise, are under resenting amounts paid for stock in ex- the Control of one group or Person (as cess of the par value; defined in § 120.10 of this chapter). Two (4) Retained earnings of the business; or more SBLCs are presumed to be and/or

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(5) For limited liability companies (a) Specific conditions or cir- and limited partnerships, capital con- cumstances pertaining to the SBLC; tributions must not be subject to re- (b) Exigency of those circumstances payment at any specific time, must not or potential problems; be subject to withdrawal and must (c) Overall condition, management have no cumulative priority return. strength, and future prospects of the (c) Voluntary capital reduction. With- SBLC and, if applicable, its parent or out prior written SBA approval, an affiliates; SBLC must not voluntarily reduce its (d) The SBLC’s liquidity and existing capital, or repurchase and hold more capital level, and the performance of than 2 percent of any class or combina- its SBA loan portfolio; tion of classes of its stock. (e) The management views of the (d) Issuance of securities. Without SBLC’s directors and senior manage- prior written SBA approval, an SBLC ment; and must not issue any securities (includ- (f) Other risk-related factors, as de- ing stock options and debt securities) termined by SBA. except stock dividends. [73 FR 75516, Dec. 11, 2008] [73 FR 75516, Dec. 11, 2008] § 120.473 Procedures for determining EFFECTIVE DATE NOTE: At 85 FR 78215, Dec. individual minimum capital re- 4, 2020, § 120.471 was amended by revising quirement. paragraph (a); redesignating paragraphs (b)(3) through (5) as paragraphs (b)(4) (a) Notice. When SBA determines that through (6) respectively; and adding new an individual minimum capital re- paragraph (b)(3), effective Jan. 4, 2021. For quirement above that set forth in this the convenience of the user, the added and subpart or other legal authority is nec- revised text is set forth as follows: essary or appropriate for a particular § 120.471 What are the minimum capital re- SBLC, SBA will notify the SBLC in quirements for SBLCs? writing of the proposed individual min- (a) Minimum capital requirements. (1) Begin- imum capital requirement, the date by ning on January 4, 2024, each SBLC that which it should be reached and will makes or acquires a 7(a) loan must maintain, provide an explanation of why the re- at a minimum, unencumbered paid-in capital quirement proposed is considered nec- and paid-in surplus of at least $5,000,000, or 10 essary or appropriate. percent of the aggregate of its share of all (b) SBLC response. The SBLC may re- outstanding loans, whichever is greater. (2) Any SBLC approved on or after January spond to the notice. The response 4, 2021, including in the event of a change of should include any matters which the ownership or control, must maintain the SBLC would have SBA consider in de- minimum capital requirement set forth in ciding whether individual minimum paragraph (a)(1) of this section. capital requirements should be estab- (3) Unless subject to paragraph (a)(1) or (2) lished for the SBLC, what those capital of this section, an SBLC must comply with requirements should be, and, if applica- the minimum capital requirements that were in effect on January 3, 2021. ble, when they should be achieved. The (b) * * * response must be in writing and deliv- (3) Unrestricted net assets (for non-profit ered to the AA/CA within 30 days after corporations); the date on which the SBLC received the notice. SBA may shorten the time § 120.472 Higher individual minimum for response when, in the opinion of capital requirement. SBA, the condition of the SBLC so war- The Associate Administrator for Cap- rants, provided that the SBLC is in- ital Access (AA/CA) may require, under formed promptly of the new time pe- § 120.473(d), an SBLC to maintain a riod, or the SBLC consents to the higher level of capital, if the AA/CA de- shortening of its response time. In its termines, in his/her discretion, that the discretion, SBA may extend the time SBLC’s level of capital is potentially period for good cause. inadequate to protect the SBA from (c) Failure to respond. An SBLC that loss due to the financial failure of the does not respond within 30 days or such SBLC. The factors to be considered in other time period as may be specified the determination will vary in each by SBA will have waived any objec- case and may include, for example: tions to the proposed minimum capital

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requirement and the deadline for its and desist proceedings under subpart I achievement. Failure to respond will of this part. also constitute consent to the indi- [73 FR 75517, Dec. 11, 2008] vidual minimum capital requirement. (d) Decision. After the close of the § 120.475 Change of ownership or con- SBLC’s response period, the AA/CA will trol. decide, based on a review of SBA rea- (a) Any change of ownership or con- sons for proposing the individual min- trol without prior written approval of imum capital requirement, the SBLC’s SBA is prohibited. An SBLC must re- response, and other information con- quest approval of any such change from cerning the SBLC, whether the indi- the appropriate Office of Capital Ac- vidual minimum capital requirement cess official in accordance with Delega- should be established for the SBLC tions of Authority.Pending the ap- and, if so, the requirement and the date proval, the SBLC may not register the it will become effective. The SBLC will proposed new owners on its transfer be notified of the decision in writing. books nor permit them to participate The notice will include an explanation in any manner in the conduct of the of the decision; except for a decision SBLC’s affairs. Change of ownership or not to establish an individual min- control includes: imum capital requirement for the (1) Any transfer of 10 percent or more SBLC. of any class of the SBLC’s stock, and (e) Submission of plan. The decision any agreement providing for such may require the SBLC to develop and transfer; submit to SBA, within a time period (2) Any transfer that could result in specified, an acceptable plan to reach the beneficial ownership by any person or group of persons acting in concert of the individual minimum capital re- 10 percent or more of any class of its quirement by the date required. stock, and any agreement providing for (f) Change in circumstances. If, after such transfer; SBA’s decision in paragraph (d) of this (3) Any merger, consolidation, or re- section, there is a change in the cir- organization; or cumstances affecting the SBLC’s cap- (4) Any other transaction or agree- ital adequacy or its ability to reach the ment that transfers control of the required individual minimum capital SBLC. requirement by the specified date, ei- (b) If transfer of ownership or control ther the SBLC or the AA/CA may pro- is subject to the approval of any State pose to the other a change in the indi- or Federal chartering, licensing, or vidual minimum capital requirement other regulatory authority, copies of for the SBLC, the date when the indi- any documents filed with such author- vidual minimum must be achieved, ity must, at the same time, be trans- and/or the SBLC’s plan (if applicable). mitted to the appropriate Office of The AA/CA may decline to consider Capital Access official in accordance proposals that are not based on a sig- with Delegations of Authority. nificant change in circumstances or are [61 FR 3235, Jan. 31, 1996. Redesignated and repetitive or frivolous. Pending a deci- amended at 73 FR 75516, Dec. 11, 2008] sion by the AA/CA on reconsideration, SBA’s original decision and any plan EFFECTIVE DATE NOTE: At 85 FR 78228, Dec. required under that decision will con- 4, 2020, § 120.475 was removed, effective Jan. 4, 2021. tinue in full force and effect. [73 FR 75516, Dec. 11, 2008] § 120.476 Prohibited financing. An SBLC may not make a loan to a § 120.474 Relation to other actions. small business that has received fi- In lieu of, or in addition to, the pro- nancing (or a commitment for financ- cedures in this subpart, the individual ing) from an SBIC that is an Associate minimum capital requirement for an of the SBLC. SBLC may be established or revised [61 FR 3235, Jan. 31, 1996. Redesignated at 73 through a written agreement or cease FR 75516, Dec. 11, 2008]

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§ 120.490 Audits. diately prior to this date will govern such loans. Every SBLC is subject to periodic au- (b) Documentation for purchase. SBA dits by SBA’s Office of Inspector Gen- will not purchase its guaranteed por- eral, Auditing Division, and the cost of tion of a loan from a Lender unless the such audits will be assessed against the Lender has submitted to SBA docu- SBLC, except for the first audit. Fees mentation that SBA deems sufficient are structured based on the SBLC’s as- to allow SBA to determine whether sets as of the date of the latest audited purchase of the guarantee is warranted financial statement submitted to SBA under § 120.524. before the audit. The fee schedule is set (c) Purchase of loans sold in Secondary forth in SBA’s Standard Operating Pro- Market. When the Lender has sold the cedures manual. guaranteed portion of a loan in the [61 FR 3235, Jan. 31, 1996. Redesignated at 73 Secondary Market, under subpart F of FR 75516, Dec. 11, 2008] this part, Lenders must perform all necessary servicing and liquidation ac- Subpart E—Servicing, Liquidation tions for such loan even after SBA has 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- § 120.520 Purchase of 7(a) loan guaran- vide SBA with a loan status report tees. within 15 business days of such purchase. 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

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rights to recover from the responsible of principal and/or interest when due. Lender any money paid on the guar- Payments made by the Borrower before antee based upon the occurrence of any a Lender makes its request to SBA to of the events set forth in § 120.524(a) in purchase are applied to the earliest connection with that loan. uncured payment default. If the in- [72 FR 18360, Apr. 12, 2007] stallment is paid in full, the earliest uncured payment default date will ad- § 120.521 What interest rate applies vance to the next unpaid installment after SBA purchases its guaranteed date. If a Borrower makes any payment portion? after the Lender makes its request to When SBA purchases the guaranteed SBA to purchase, the earliest uncured portion of a fixed interest rate loan, payment default date does not change the rate of interest remains as stated because the Lender has already exer- in the note. On loans with a fluc- cised its right to request purchase. tuating interest rate, the interest rate that the Borrower owes will be at the § 120.524 When is SBA released from li- rate in effect at the time of the earliest ability on its guarantee? uncured payment default, or the rate (a) SBA is released from liability on in effect at the time of purchase (where a loan guarantee (in whole or in part, no default has occurred). within SBA’s exclusive discretion), if any of the events below occur: § 120.522 Payment of accrued interest (1) The Lender has failed to comply to the Lender or Registered Holder when SBA purchases the guaran- materially with any Loan Program Re- teed portion. quirement for 7(a) loans. (2) The Lender has failed to make, (a) Rate of interest. If SBA purchases close, service, or liquidate a loan in a the guaranteed portion from a Lender prudent manner; or from a Registered Holder (if sold in the Secondary Market), it will pay ac- (3) The Lender’s improper action or crued interest at: inaction has placed SBA at risk; (1) The rate in the note if it is a fixed (4) The Lender has failed to disclose a rate loan; or material fact to SBA regarding a guar- (2) The rate in effect on the date of 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- [61 FR 3235, Jan. 31, 1996, as amended at 72 antee within 180 days after the comple- FR 18361, Apr. 12, 2007] tion of the liquidation or debt collection litigation; § 120.523 What is the ‘‘earliest uncured (9) The Lender has failed to use repayment default’’? quired SBA forms or exact electronic The earliest uncured payment default copies; or is the date of the earliest failure by a (10) The Borrower has paid the loan Borrower to pay a regular installment in full.

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(b) If SBA determines, at any time, set by SBA. This relief is called a that any of the events set forth in ‘‘Moratorium.’’ Complete information paragraph (a) of this section occurred concerning this program may be ob- in connection with that loan, SBA is tained from local SBA offices. entitled to recover any moneys paid on the guarantee plus interest from the § 120.535 Standards for Lender and Lender. In the exercise of its rights, CDC loan servicing, loan liquida- SBA may utilize all legal means avail- tion and debt collection litigation. able, including offset and judicial rem- (a) Service using prudent lending stand- edies. ards. Lenders and CDCs must service (c) If the Lender’s loan documenta- 7(a) and 504 loans in their portfolio no tion or other information indicates less diligently than their non-SBA that one or more of the events in paragraph (a) of this section occurred, SBA portfolio, and in a commercially rea- may undertake such investigation as it sonable manner, consistent with pru- deems necessary to determine whether dent lending standards, and in accord- to honor or deny the guarantee, and ance with Loan Program Require- may withhold a decision on whether to ments. Those Lenders and CDCs that honor the guarantee until the comple- do not maintain a non-SBA loan port- tion of such investigation. folio must adhere to the same prudent (d) Any information provided to SBA lending standards for loan servicing by a Lender or other party will not followed by commercial lenders on prejudice, or be construed as effecting loans without a government guarantee. any waiver of, SBA’s right to deny li- (b) Liquidate using prudent lending ability for a guarantee if one or more standards. Lenders and Authorized CDC of the events listed in paragraph (a) of Liquidators must liquidate and con- this section occur. duct debt collection litigation for 7(a) (e) Unless SBA provides written no- and 504 loans in their portfolio no less tice to the contrary, the Lender re- diligently than for their non-SBA port- mains responsible for all loan servicing folio, and in a prompt, cost-effective ad liquidation actions until SBA hon- and commercially reasonable manner, ors its guarantee in full. consistent with prudent lending stand- [61 FR 3235, Jan. 31, 1996, as amended at 72 ards, and in accordance with Loan Pro- FR 18361, Apr. 12, 2007; 82 FR 39503, Aug. 21, gram Requirements and with any SBA 2017] approval of either a liquidation or liti- § 120.530 Deferment of payment. gation plan or any amendment of such a plan. Lenders and CDCs that do not SBA may agree to defer payments on maintain a non-SBA loan portfolio a business loan for a stated period of must adhere to the same prudent lend- time, and use such other methods as it ing standards followed by commercial considers necessary and appropriate to lenders that liquidate loans without a help in the successful operation of the government guarantee. They are also Borrower. This policy applies to all business loan programs, including 504 to operate in accordance with Loan loans. Program Requirements and with any SBA approval of either a liquidation or § 120.531 Extension of maturity. litigation plan or any amendment of SBA may agree to extend the matu- such a plan. rity of a loan for up to 10 years beyond (c) Absence of actual or apparent con- its original maturity if the extension flict of interest. A CDC must not take will aid in the orderly repayment of any action in the liquidation or debt the loan. collection litigation of a 504 loan that would result in an actual or apparent § 120.532 What is a loan Moratorium? conflict of interest between the CDC SBA may assume a Borrower’s obli- (or any employee of the CDC) and any gation to repay principal and interest Third Party Lender, associate of a on a loan by agreeing to make the pay- Third Party Lender, or any person par- ments to the Lender on behalf of the ticipating in a liquidation, foreclosure Borrower under terms and conditions or loss mitigation action.

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(d) SBA rights to take over servicing or (3) Accelerates the maturity of the liquidation. SBA may, in its sole discre- note. tion, undertake the servicing, liquida- (4) Compromises or releases any tion and/or litigation of any 7(a) or 504 claim against any Borrower or obligor, loan. If SBA elects to service, liquidate or against any guarantor, standby and/or litigate a loan, it will notify the creditor, or any other person that is relevant Lender or CDC in writing, contingently liable for moneys owed on and, upon receiving such notice, the the loan. Lender or CDC must assign the Loan (5) Purchases or pays off any indebt- Instruments to SBA and provide any edness secured by the property that needed assistance to allow SBA to serv- serves as collateral for a defaulted 504 ice, liquidate and/or litigate the loan. loan, such as payment of the debt(s) SBA will notify the Borrower of the owed to a lien holder or lien holders change in servicing. SBA may use con- with priority over the lien securing the tractors to perform these actions. loan. (6) Accepts a workout plan to re- [72 FR 18361, Apr. 12, 2007] structure the material terms and con- § 120.536 Servicing and liquidation ac- ditions of a loan that is in default or tions that require the prior written liquidation. consent of SBA. (7) Takes any action for which prior written consent is required by a Loan (a) Actions by Lenders and CDCs. Ex- Program Requirement. cept as otherwise provided in a Supple- (c) Documentation requirements. For mental Guarantee Agreement with a all servicing/liquidation actions not re- Lender or an Agreement with a CDC, quiring SBA’s prior written consent, SBA must give its prior written con- Lenders and CDCs must document the sent before a Lender or CDC takes any justifications for their decisions and of the following actions: retain these and supporting documents (1) Increases the principal amount of in their file for future SBA review to a loan above that authorized by SBA at determine if the actions taken by the loan origination. Lender or CDC were prudent, commer- (2) Confers a Preference on the Lend- cially reasonable, and complied with er or CDC or engages in an activity all Loan Program Requirements. that creates a conflict of interest. (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.

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(c) Litigation plan. An Authorized (e) Amendments to a liquidation or liti- CDC Liquidator and a Lender must ob- gation plan. Lenders and Authorized tain SBA’s prior approval of a litiga- CDC Liquidators must submit an tion plan before proceeding with any amended liquidation or litigation plan Non-Routine Litigation, as defined in to address any material changes aris- paragraph (c)(1) of this section. SBA’s ing during the course of the liquidation prior approval is not required for Rou- or litigation that were not addressed in tine Litigation, as defined in paragraph the original plan or an amended plan. (c)(2) of this section. Lenders and Authorized CDC Liquida- (1) Non-Routine Litigation includes: tors must obtain SBA’s written ap- (i) All litigation where factual or proval of the amended plan prior to legal issues are in dispute and require taking any further liquidation or liti- resolution through adjudication; gation action. Examples of such mate- (ii) Any litigation where legal fees rial changes that would require the ap- are estimated to exceed $10,000; proval of an amended plan include, but (iii) Any litigation involving a loan are not limited to: where a Lender or Authorized CDC Liq- (1) Changes arising during the course uidator has an actual or potential con- of Routine Litigation that transform flict of interest with SBA; and the litigation into Non-Routine Litiga- (iv) Any litigation involving a 7(a) or tion, such as when the debtor contests 504 loan where the Lender or CDC has a foreclosure or when the actual legal made a separate loan to the same bor- fees incurred exceed $10,000. rower which is not a 7(a) or 504 loan. (2) If SBA has approved a litigation (2) Routine Litigation means plan where anticipated legal fees ex- uncontested litigation, such as non-ad- ceed $10,000, or has approved an amend- versarial matters in bankruptcy and ed plan, and thereafter the anticipated undisputed foreclosure actions, having or actual legal fees increase by more estimated legal fees not exceeding than 15 percent. $10,000. (3) If SBA has approved a liquidation (d) Decision by SBA to take over litiga- plan, or an amended plan, and there- tion. If a Lender or Authorized CDC after the anticipated or actual costs of Liquidator is conducting, or proposes conducting the liquidation increase by to conduct, debt collection litigation more than 15 percent. on a 7(a) loan or 504 loan, SBA may (f) Limited waiver of need for a written take over the litigation if SBA deter- liquidation or litigation plan. SBA may, mines that the outcome of the litiga- in its discretion, and upon request by a tion could adversely affect SBA’s ad- Lender or Authorized CDC Liquidator, ministration of the loan program or waive the requirements of paragraphs that the Government is entitled to (b), (c) or (e) of this section, if one of legal remedies that are not available to the following extraordinary cir- the Lender or Authorized CDC Liqui- cumstances warrant such a waiver: the dator. Examples of cases that could ad- need for expeditious action to avoid the versely affect SBA’s administration of potential risk of loss on the loan or dis- a loan program include, but are not sipation of collateral exists; an imme- limited to, situations where SBA deter- diate response is required to litigation mines that: by a borrower, guarantor or third (1) The litigation involves important party; or another urgent reason arises. governmental policy or program issues. The Lender or Authorized CDC Liqui- (2) The case is potentially of great dator must obtain SBA’s written con- precedential value or there is a risk of sent to such waiver before undertaking adverse precedent to the Government. the Emergency action, if at all prac- (3) The Lender or Authorized CDC ticable. SBA’s waiver will apply only Liquidator has an actual or potential to the specific action(s) which the 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

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is practicable, submit a written liq- § 120.536(b)(6), SBA will not be deemed uidation or litigation plan to SBA or, if to have approved the proposed action. appropriate, a written amended plan, (c) If a Lender seeks to perform liq- and may not take further liquidation uidation on a loan made under its au- or litigation action without written ap- thority as a CLP Lender by submitting proval of such plan or amendment by a liquidation plan to SBA for approval, SBA. SBA will approve or deny such plan (g) Appeals. A Lender for loans made within ten business days. If SBA fails under its authority as a CLP Lender or to approve or deny the plan within ten an Authorized CDC Liquidator that dis- business days, SBA will be deemed to agrees with an SBA office’s decision have approved such plan. pertaining to an original or amended [72 FR 18362, Apr. 12, 2007] liquidation plan, other than such portions of the plan that address litigation § 120.542 Payment by SBA of legal fees matters, may submit a written appeal and other expenses. to the D/FA within 30 days of the deci- (a) Legal fees SBA will not pay. (1) sion. The D/FA or designee will make SBA will not pay legal fees or other the final Agency decision in consulta- costs that a Lender or Authorized CDC tion with the Associate General Coun- Liquidator incurs: sel for Litigation. A Lender or Author- ized CDC Liquidator that disagrees (i) In asserting a claim, cross claim, with an SBA office’s decision per- counterclaim, or third-party claim taining to an original or amended liti- against SBA or in defense of an action gation plan, or the portion of a liquida- brought by SBA, unless payment of tion plan addressing litigation matters, such fees or costs is otherwise required may submit a written appeal to the As- by federal law. sociate General Counsel for Litigation (ii) In connection with actions of a within 30 days of the decision. The As- Lender or Authorized CDC Liquidator’s sociate General Counsel for Litigation outside counsel for performing non- will make the final Agency decision in legal liquidation services, unless au- consultation with the D/FA. thorized by SBA prior to the action. (iii) In taking actions which solely [72 FR 18362, Apr. 12, 2007, as amended at 74 benefit a Lender or Authorized CDC FR 45753, Sept. 4, 2009] 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 (b) Except as set forth in paragraph pay a Lender or Authorized CDC Liqui- (c) of this section, unless SBA gives its dator for all, or a portion, of legal fees written consent to a proposed liquida- and/or other costs incurred in connection or litigation plan, or a proposed tion with the liquidation and/or litiga- amendment of a plan, or any of the action of a 7(a) loan or 504 loan under any tions set forth in § 120.536(b)(5) or of the following circumstances:

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(1) SBA determines that the Lender amount it receives from SBA. All re- or Authorized CDC Liquidator failed to quests for compensation fees must be perform liquidation or litigation received by SBA within nine months promptly and in accordance with com- from the date of SBA’s purchase of the mercially reasonable standards, in a defaulted debenture. Fee requests not prudent manner, or in accordance with received within such timeframe will be any Loan Program Requirement or automatically rejected. SBA approvals of either a liquidation (d) Appeals—liquidation costs. A Lend- or litigation plan or any amendment of er or Authorized CDC Liquidator that such a plan. disagrees with a decision by an SBA of- (2) A Lender or Authorized CDC Liq- fice to decline to reimburse all, or a uidator fails to obtain prior written ap- portion, of the fees and/or costs in- proval from SBA for any liquidation or curred in conducting liquidation may litigation plan, or for any amended liq- appeal this decision in writing to the uidation or litigation plan, or for any D/FA within 30 days of the decision. action set forth in § 120.536, when such The decision of the D/FA or designee approval is required by these regula- will be made in consultation with the tions or a Loan Program Requirement. Associate General Counsel for Litiga- (3) If SBA has not specifically ap- tion, and will be the final Agency deci- proved fees or costs identified in an sion. original or amended liquidation or liti- (e) Appeals—litigation costs. A Lender gation plan under § 120.540, and SBA de- or Authorized CDC Liquidator that dis- termines that such fees or costs are not agrees with a decision by SBA to de- reasonable, customary or necessary in cline to reimburse all, or a portion, of the locality in question. In such cases, the legal fees and/or costs incurred in SBA will pay only such fees as it deems conducting debt collection litigation 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/FA, and will be CDC Liquidators for their liquidation the final Agency decision. actions on 504 loans, whether such actions are performed by the CDC or the [72 FR 18362, Apr. 12, 2007, as amended at 74 CDC’s contractor retained in accord- FR 45753, Sept. 4, 2009] 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 and the sale of business loans and ISTER from time to time, but not to ex- physical disaster assistance loans, ceed 10%) of the net recovery proceeds physical disaster business loans realized from the sale of collateral or and economic injury disaster loans? other liquidation actions on an individual 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.

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(4) Sell direct and purchased 7(a) and deemed to be a co-guarantor with any 501, 502, 503 and 504 loans and physical other guarantors. disaster home loans, physical disaster [61 FR 3235, Jan. 31, 1996, as amended at 64 business loans and economic injury dis- FR 44110, Aug. 13, 1999; 65 FR 17133, Mar. 31, aster loans in asset sales. SBA will 2000; 68 FR 51680, Aug. 28, 2003. Redesignated offer these loans for sale to qualified and amended at 72 FR 18362, Apr. 12, 2007] bidders by means of competitive procedures at publicly advertised sales. Bid- § 120.546 Loan asset sales. der qualifications will be set for each (a) General. Loan asset sales are gov- sale in accordance with the terms and erned by § 120.545(b)(4) and by this sec- conditions of each sale. tion. (c) Disposal of collateral and assets ac- (b) 7(a) loans—(1) For loans approved quired through foreclosure or conveyance. on or after May 14, 2007. The Lender will SBA or the Lender may sell real and be deemed to have consented to SBA’s personal property (including contracts sale of the loan (guaranteed and and claims) pledged to secure a loan unguaranteed portions) in an asset sale that is in default in accordance with conducted or overseen by SBA upon the the provisions of the related security occurrence any of the following: instrument (see § 120.550 for Homestead (i) SBA’s purchase of the guaranteed Protection for Farmers). portion of the loan from the Registered (1) Competitive bids or negotiated sales. Holder for a loan where the guaranteed Generally, SBA will offer loan collat- portion has been sold in the Secondary eral and acquired assets for public sale Market pursuant to subpart F of this through competitive bids at auctions part and after default, the Lender has or sealed bid sales. The Lender may use not exercised its option to purchase such guaranteed portion; or negotiated sales if consistent with its usual practice for similar non-SBA as- (ii) SBA’s purchase of the guaranteed portion from the Lender, provided how- sets. ever, that if SBA purchased the guar- (2) Nor- Lease of acquired property. anteed portion pursuant to mally, neither SBA nor a Lender will § 120.520(a)(1) prior to the Lender’s com- rent or lease acquired property or pletion of liquidation for the loan, then grant options to purchase. SBA and the SBA will not sell such loan in an asset Lender will consider proposals for a sale until nine months from the date of lease if it appears a property cannot be SBA’s purchase; or sold advantageously and the lease may (iii) SBA receives written consent be terminated on reasonable notice from the Lender. upon receipt of a favorable purchase (2) For loans identified in paragraph offer. (b)(1)(i) of this section, the Lender may (d) Recoveries and security interests request that SBA withhold the loan shared. SBA and the Lender will share from an asset sale if the Lender sub- pro rata (in accordance with their re- mits a written request to SBA within spective interests in a loan) all loan 15 business days of SBA’s purchase of payments or recoveries, including pro- the guaranteed portion of the loan ceeds from asset sales, all reasonable from the Registered Holder and if such expenses (including advances for the request addresses the issues described care, preservation, and maintenance of in this subparagraph. The Lender’s collateral securing the loan and the written request must advise SBA of the payment of senior lienholders), and any status of the loan, the Lender’s plans security interest or guarantee (exclud- for workout and/or liquidation, including SBA’s guarantee) which the Lender ing and pending sale of loan collateral or SBA may hold or receive in connec- or foreclosure proceedings arranged tion with a loan. prior to SBA’s purchase that already are underway, and the Lender’s esti- (e) Guarantors. Guarantors of finan- mated schedule for restructuring the cial assistance have no rights of con- loan or liquidating the collateral. SBA tribution against SBA on an SBA guar- will consider the Lender’s request and, anteed or direct loan. SBA is not based on the circumstances, SBA in its

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sole discretion may elect to defer in- homestead protection rights within 30 cluding the loan in an asset sale in days after SBA acquires the property. order to provide the Lender additional A farmer-Borrower must: time to complete the planned restruc- (a) Apply for the homestead occu- turing and/or liquidation actions. pancy to the SBA field office which (3) For loans approved before May 14, serviced the loan within 90 days after 2007. SBA must obtain written consent SBA acquires the property; from the Lender for the sale of such (b) Provide evidence that the farm loans in an asset sale. produces farm income reasonable for (4) After SBA has purchased the the area and economic conditions; guaranteed portion of a loan from the Registered Holder or from the Lender, (c) Show that at least 60 percent of the Lender must continue to perform the Borrower and spouse’s gross annual all necessary servicing and liquidation income came from farm or ranch oper- actions for the loan up to the point the ations in at least any two out of the loan is transferred to the purchaser in last six calendar years; an asset sale. The Lender also must co- (d) Have resided on the property dur- operate and take all necessary actions ing the previous six years; and to effectuate both the asset sale and (e) Be personally liable for the debt. the transfer of the loan to the purchaser in the asset sale. § 120.552 Lease. (c) 504 loans—(1) PCLP Loans. After If approved, the applicant must per- SBA’s purchase of a Debenture, SBA sonally occupy the residence during may at its sole discretion sell a de- the term of the lease and pay a reason- faulted PCLP Loan in an asset sale able rent to SBA. The lease will be for conducted or overseen by SBA, after a period of at least 3 years, but no providing to the PCLP CDC that made more than 5 years. A lease of less than the loan advance notice of not less than 90 days before the date upon 5 years may be renewed, but not be- which SBA first makes its records con- yond 5 years from the original lease cerning such loan available to prospec- date. During or at the end of the lease tive purchasers for examination. period, the lessee has a right of first re- (2) All other 504 loans. After SBA’s fusal to reacquire the homestead prop- purchase of a Debenture, SBA may at erty under terms and conditions no less its sole discretion sell a defaulted 504 favorable than those offered to any loan in an asset sale conducted or over- other purchaser. seen by SBA. § 120.553 Appeal. [72 FR 18364, Apr. 12, 2007] If the application is denied, the Bor- HOMESTEAD PROTECTION FOR FARMERS rower may appeal the decision to the D/FA. Until the conclusion of any ap- § 120.550 What is homestead protec- peal, the Borrower may retain posses- tion for farmers? sion of the homestead property. SBA may lease to a farmer-Borrower the farm residence occupied by the § 120.554 Conflict of laws. Borrower and a reasonable amount of In the event of a conflict between the adjoining property (no more than 10 acres and seven farm buildings), if they homestead provisions at §§ 120.550 were acquired by SBA as a result of a through 120.553 of this part, and any defaulted farm loan made or guaran- state law relating to the right of a Bor- teed by SBA (see the Consolidated rower to designate for separate sale or Farm and Rural Development Act, 7 to redeem part or all of the real prop- U.S.C. 1921, for qualifying loan pur- erty securing a loan foreclosed by the poses). Lender, state law shall prevail.

§ 120.551 Who is eligible for homestead protection? SBA must notify the Borrower in possession of the availability of these

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Subpart F—Secondary Market describes the characteristics of Sec- ondary Market transactions. FISCAL AND TRANSFER AGENT (FTA) (l) Weighted Average Coupon (WAC) Pool is a Pool where the interest rate § 120.600 Definitions. payable to the investor is equal to the (a) Certificate is the document the Dollar-Weighted Average Net Rate of FTA issues representing either a bene- the Pool. ficial fractional undivided interest in a [61 FR 3235, Jan. 31, 1996, as amended at 73 Pool (Pool Certificate), or a fractional FR 67102, Nov. 13, 2008; 76 FR 63546, Oct. 12, undivided interest in some or all of the 2011] guaranteed portion of an individual 7(a) guaranteed loan (Individual Cer- § 120.601 SBA Secondary Market. tificate). The SBA secondary market (‘‘Sec- (b) Current means that no repayment ondary Market’’) consists of the sale of from a Borrower to a Lender is over 29 Certificates, representing either a frac- days late measured from the due date tional undivided interest in some or all of the payment on the records of the of the guaranteed portion of an indi- FTA’s central registry (Pools) or the vidual 7(a) guaranteed loan or a frac- entity servicing the loan (individual tional undivided interest in a Pool con- guaranteed portion). sisting of the SBA guaranteed portions (c) Dollar-Weighted Average Net Rate of a number of 7(a) guaranteed loans. of a Pool is calculated by multiplying Transactions involving interests in the interest rate of each loan in the Pools or the sale of individual guaran- Pool by the ratio of that loan’s current teed portions of loans are governed by outstanding guaranteed principal to the contracts entered into by the par- the current outstanding guaranteed ties, SBA’s Secondary Market Program principal of all loans in the Pool, and Guide, and this subpart. See sections adding the sum of the resulting prod- 5(f), (g), and (h) of the Small Business ucts. The Dollar-Weighted Average Net Act (15 U.S.C. 634(f), (g), and (h)). Rate of a Pool will fluctuate over the life of the Pool as loan defaults, pre- [76 FR 63546, Oct. 12, 2011] payments and normal loan repayments CERTIFICATES occur. (d) FTA is the SBA’s fiscal and trans- § 120.610 Form and terms of Certifi- fer agent. cates. (e) Note Rate is the interest rate on (a) General form and content. Each the Borrower’s note. Certificate must be registered with the (f) Net Rate is the interest rate on an FTA. SBA must approve the terms of individual guaranteed portion of a loan the Certificate. in a Pool. (b) Face amount of Pool Certificate. (g) Pool is an aggregation of SBA The face amount of a Pool Certificate guaranteed portions of loans made by cannot be less than a minimum Lenders. amount as specified in the Program (h) Pool Assembler is a financial insti- Guide, and the dollar amount of Cer- tution that: tificates must be in increments which (1) Organizes and packages a Pool by SBA will specify in the Program Guide acquiring the SBA guaranteed portions (except for one Certificate in each of loans from Lenders; Pool). SBA may change these require- (2) Resells fractional interests in the ments based upon an analysis of mar- Pool to Registered Holders; and ket conditions and program experience, (3) Directs the FTA to issue Certifi- and will publish any such change in the cates. FEDERAL REGISTER. (i) Pool Rate is the interest rate on a (c) Basis of payment for Pool Certifi- Pool Certificate. cates. Principal installments and inter- (j) Registered Holder is the Certificate est payments are based on the unpaid owner listed in FTA’s records. principal balance of the portion of the (k) SBA’s Secondary Market Program Pool represented by a Pool Certificate. Guide is an issuance from SBA which All prepayments on loans in the Pool

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must be passed through to the appro- less than $500,000, in order to permit priate Registered Holders with the reg- the maximum amount of any guaran- ularly scheduled payments to such teed portion in a Pool to be not more Holders. than $500,000. Only one increment from (d) Basis of payment for Individual Cer- a loan to a specific borrower may be in- tificates. Principal installments and included in a Pool. terest payments are based on the unpaid principal balance of the SBA guar- [61 FR 3235, Jan. 31, 1996, as amended at 73 anteed portion of the loan supporting FR 67102, Nov. 13, 2008; 76 FR 63546, Oct. 12, an Individual Certificate. The Certifi- 2011] cate must provide for a pass through to the Registered Holder of payments § 120.612 Loans eligible to back Certifi- cates. which the FTA receives from a Lender or any entity servicing the loan, less (a) Pool Certificates are backed by applicable fees. the SBA guaranteed portions of loans (e) Interest rate on Pool Certificate. The comprising the Pool. An Individual interest rate on a Pool Certificate will Certificate is backed by the SBA guar- be either the lowest Net Rate of any in- anteed portion of a single loan. Any dividual guaranteed portion of a loan such loan must: in the Pool or the Dollar-Weighted Av- (1) Be current as of the date the Pool erage Net Rate of the Pool. is formed or the individual guaranteed [61 FR 3235, Jan. 31, 1996, as amended at 73 portion of a loan is initially sold in the FR 67102, Nov. 13, 2008] Secondary Market; (2) Be guaranteed under the Act; and § 120.611 Pools backing Pool Certifi- (3) Meet such other standards as SBA cates. may determine to be necessary for the (a) Pool characteristics. As set forth in successful operation of the Secondary the Program Guide, each Pool must Market program. have: (b) The loans that back a Pool must (1) A minimum number of guaranteed portions of loans; meet the SBA requirements in effect at (2) A minimum aggregate principal the time the Pool is formed. balance of the guaranteed portions; (3) A maximum percentage of the § 120.613 Secondary Participation Guarantee Agreement. Pool which an individual guaranteed portion may constitute; When a Lender wants to sell the (4) A maximum allowable difference guaranteed portion of a loan, it enters between the highest and lowest note into a Secondary Participation Guar- interest rates; antee Agreement (‘‘SPGA’’) with SBA (5) A maximum allowable difference and the prospective purchaser. The between the remaining terms to matu- terms of sale between the Lender and rity of the loans in the Pool; the purchaser cannot require the Lend- (6) A minimum weighted average ma- er or SBA to repurchase the guaran- turity at Pool formation; and teed portion of the loan except in ac- (7) A maximum allowable difference cordance with the terms of the SPGA. between the highest and lowest Net Before execution of the SPGA, the Rate on the guaranteed portions that Lender must: are placed in a WAC Pool. (a) Submit to FTA a copy of the pro- (b) Adjustment of Pool characteristics. SBA may adjust the Pool characteris- posed SPGA, the note, and such other tics periodically based upon program documents as SBA may require; experience and market conditions. (b) Except for export working capital (c) Increments of guaranteed portion. If loans, disburse to the Borrower the full the amount of the guaranteed portion amount of the loan; and of an individual 7(a) guaranteed loan is (c) Pay SBA all guarantee fees rel- more than $500,000, a Pool Assembler evant to the loan in full. may elect to divide the guaranteed por- [61 FR 3235, Jan. 31, 1996, as amended at 68 tion into increments of $500,000 and one FR 51680, Aug. 28, 2003] increment of any remaining amount

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THE SBA GUARANTEE OF A CERTIFICATE POOL ASSEMBLERS

§ 120.620 SBA guarantee of a Pool Cer- § 120.630 Qualifications to be a Pool tificate. Assembler. (a) Extent of Guarantee. SBA guaran- (a) Application to become Pool Assem- tees to a Registered Holder the timely bler. The application to become a Pool payment of principal and interest in- Assembler is available from the D/FA. stallments and any prepayment or In order to qualify as a Pool Assem- other recovery of principal to which bler, an entity must send the applica- the Registered Holder is entitled. If the tion to the D/FA, with an application Borrower of a loan in a Pool backing fee, and certify that it: the Certificates does not make a re- (1) Is regulated by the appropriate quired installment payment, SBA, agency as defined in section 3(a)(34)(G) through the FTA, will make advances of the Securities Exchange Act of 1934 to maintain the schedule of interest (15 U.S.C. 78c(a)(34)(G)); and principal payments to the Reg- (2) Meets all financial and other ap- istered Holders. plicable requirements of its regulatory (b) SBA guarantee backed by full faith authority and the Government Securi- and credit. SBA’s guarantee of the Pool ties Act of 1986, as amended (Pub. L. 99– Certificate is backed by the full faith 571, 100 Stat. 3208); and credit of the United States. (3) Has the financial capability to as- semble acceptable and eligible guaran- § 120.621 SBA guarantee of an Indi- teed loan portions in sufficient quan- vidual Certificate. tity to support the issuance of Pool Certificates; and (a) Extent of SBA guarantee. With re- (4) Is in good standing with SBA (as spect to Individual Certificates, SBA the D/FA determines in his or her dis- guarantees to purchase from the Reg- cretion), and is Satisfactory with the istered Holder the guaranteed portion Office of the Comptroller of the Cur- of the loan for an amount equal to the rency (‘‘OCC’’) if it is a national bank, unpaid principal and accrued interest the Federal Deposit Insurance Corpora- due as of the date of SBA’s purchase, tion if it is a bank not regulated by the less deductions for applicable fees. Un- OCC, or the Financial Industry Regu- like the SBA guarantee with respect to latory Authority (‘‘FINRA’’) if it is a pooled loans, SBA does not guarantee member as determined by SBA. timely payment on Individual Certifi- (5) For any pool assembler that is an cates. SBA Lender, that the SBA Lender has (b) What triggers the SBA guarantee. satisfactory SBA performance, as de- SBA’s guarantee to the Registered termined by SBA in its discretion. The Holder may be called upon when: Lender’s Risk Rating, among other fac- (1) The Borrower remains in uncured tors, will be considered in determining default for 60 days on payments of prin- satisfactory SBA performance. Other cipal or interest due on the note; factors may include, but are not lim- (2) The Lender fails to send to the ited to, review/examination assess- FTA on a timely basis payments it re- ments, historical performance meas- ceived from the Borrower; or ures (like default rate, purchase rate and loss rate), loan volume to the ex- (3) The FTA fails to send to the Reg- tent that it impacts performance meas- istered Holder on a timely basis any ures, and other performance related payments it has received from the measurements and information (such Lender. as contribution toward SBA mission). (c) Full faith and credit. SBA’s guar- (b) Approval by SBA. An entity may antee to the Registered Holder is not submit Pool applications to the backed by the full faith and credit of FTA until SBA has approved the appli- the United States. cation to become a Pool Assembler. (c) Conduct of business by Pool Assem- bler. An entity continues to qualify as a Pool Assembler so long as it:

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(1) Meets the eligibility standards in dures set forth in part 134 of this chap- paragraph (a) of this section; ter. The action of the D/FA shall re- (2) Conducts its business in accord- main in effect pending resolution of ance with SBA regulations and accept- the appeal. ed securities or banking industry practices, ethics, and standards; and MISCELLANEOUS PROVISIONS (3) Maintains its books and records in accordance with generally accepted ac- § 120.640 Administration of the Pool counting principles or in accordance and Individual Certificates. with the guidelines of the regulatory (a) FTA responsibility. The FTA has body governing its activities. the responsibility to administer each [61 FR 3235, Jan. 31, 1996, as amended at 73 Pool or Individual Certificate. It shall FR 75517, Dec. 11, 2008; 82 FR 39503, Aug. 21, maintain a registry of Registered Hold- 2017] ers and other information as SBA requires. § 120.631 Suspension or termination of Pool Assembler. (b) Self-liquidating. Each Pool or individual guaranteed portion of a loan in (a) Suspension or termination. The D/ the Secondary Market is self-liqui- FA may suspend a Pool Assembler dating because of Borrower payments from operating in the Secondary Mar- or prepayments, redemption by SBA, ket for up to 18 months or terminate and/or payments by SBA or the Lender its status as a Pool Assembler, if the after default by the Borrower. Substi- Pool Assembler (and/or its Associates): (1) Does not comply with any of the tution of the guaranteed portions of ex- requirements in § 120.630 (a) and (c); isting loans for defaulted loans is not (2) Has been indicted or otherwise permitted. formally charged with, or convicted of, (c) SBA’s right to subrogation. If SBA a misdemeanor or felony; pays a claim under a guarantee with (3) Has received an adverse civil judg- respect to a Certificate issued under ment that it has committed a breach of this subpart, it must be subrogated trust or a violation of a law or regula- fully to the rights satisfied by such tion protecting the integrity of busi- payment. ness transactions or relationships; (d) SBA ownership rights not limited. (4) Has not formed a Pool for at least No Federal, State or local law can pre- three years; or clude or limit the exercise by SBA of (5) Is under investigation by its regu- its ownership rights in the portions of lating authority for activities which loans constituting the Pool against may affect its fitness to participate in which the Certificates are issued. the Secondary Market. (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 the decision to suspend and the reasons any sale, the Pool Assembler, Reg- therefore at least 10 business days prior istered Holder of an Individual Certifi- to the effective date of the suspension. cate, or any subsequent seller must dis- The Pool Assembler may appeal the close to the purchaser, verbally or in suspension made under this section writing, information on the terms, con- pursuant to the procedures set forth in ditions, and yield as described in the part 134 of this chapter. The action of SBA Secondary Market Program the D/FA shall remain in effect pending Guide. resolution of the appeal. (b) Information on transfer document. (c) Notice of termination. In order to The seller must provide the same infor- terminate a Pool Assembler, the D/FA mation described in paragraph (a) of must issue an order to show cause why this section in writing on the transfer the SBA should not terminate the Pool document when the seller submits it to Assembler’s participation in the Sec- the FTA. After the sale of an Indi- ondary Market. The Pool Assembler vidual Certificate, the FTA will pro- may appeal the termination made vide the disclosure information in writ- under this section pursuant to proce- ing to the purchaser.

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(c) Information in prospectus. If the until it is satisfied that the documents Registered Holder is a trust, invest- of transfer are complete. ment Pool, mutual fund or other secu- (b) Transfer on FTA records. In order rity, it must disclose the information for the transfer of a Certificate to be in paragraph (a) of this section to in- effective the FTA must reflect it on its vestors through a prospectus and other records. promotional material if an Individual (c) Contents of letter of transmittal ac- Certificate or Pool Certificate is placed companying the transfer of Certificates. into or used as the backing for the in- (1) A letter of transmittal must accom- vestment vehicle. pany each Certificate which a Reg- istered Holder submits to the FTA for § 120.642 Requirements before the FTA transfer. The Registered Holder must issues Pool Certificates. supply the following information in the Before the FTA issues any Pool Cer- letter: tificate, the Pool Assembler must de- (i) Pool number, if applicable; liver to it the following documents: (ii) Certificate number; (a) A properly completed Pool appli- (iii) Name of purchaser of Certificate; cation form; (iv) Address and tax identification (b) Either: number of the purchaser; (1) Individual Certificates evidencing (v) Name and telephone number of the guaranteed portions comprising the the person handling or facilitating the Pool; or transfer; (vi) Instructions for the delivery of (2) An executed SPGA and related the new Certificate. documentation for the loans whose (2) The Registered Holder must also guaranteed portions are to be part of send the fee which the FTA charges for the Pool; and this service. The FTA will supply fee (c) Any other documentation which information to the Registered Holder. SBA may require. (d) Lender cannot purchase guaranteed § 120.643 Requirements before the FTA portion of loan it made. The Lender (or issues Individual Certificates. its Associate) that made a 7(a) guaranteed loan cannot purchase the guaran- (a) FTA issuance of initial Certificate. teed portion of that loan in the Sec- Before the FTA can issue the Indi- ondary Market. If a Lender does pur- vidual Certificate for a guaranteed por- chase the guaranteed portion of one of tion of a loan, the original seller must its own loans, it shall not have the un- provide the following documents to the conditional guarantee of SBA. FTA: (1) An executed SPGA; § 120.645 Redemption of Certificates. (2) A copy of the note representing (a) Redemption of Individual Certifi- the guaranteed loan; and cate. The prepayment of the underlying (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,

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with SBA’s approval, obtain any nec- rector, Office of Credit Risk Manage- essary information from the parties in- ment (D/OCRM) may suspend for a pe- volved in the Secondary Market. riod of no more than 120 calendar days or revoke for a period of no more than § 120.651 Claim to FTA by Registered two (2) years, the privilege of a Lender, Holder to replace Certificate. broker, dealer, or Registered Holder to (a) To replace a Certificate because sell, purchase, broker, or deal in loans of loss, theft, destruction, mutilation, or Certificates for: or defacement, the Registered Holder (1) Committing a serious violation, in must: SBA’s discretion, of: (1) Give the FTA information about (i) The regulations governing the the Certificate and the facts relating to Secondary Market; or the claim; (ii) Any provisions in the contracts (2) File an indemnity bond acceptable entered into by the parties, including to SBA and the FTA with a surety to SBA Forms 1086, 1088 and 1454; protect the interests of SBA and the (2) Knowingly submitting false or FTA; fraudulent information to the SBA or (3) Pay the FTA its fee to replace a FTA; or Certificate; and (4) Use an affidavit of loss (form (3) A Lender’s receipt, from its pri- available from the FTA) to report: mary Federal or state regulator (in- (i) The name and address of the Reg- cluding SBA), of a cease and desist istered Holder (and the name and ca- order, a consent agreement affecting pacity of any representative actually capital or commercial lending issues, a filing the claim); supervisory action citing unsafe or un- (ii) The Certificate by Pool number, sound banking practices, or any other if applicable; supervisory action a primary regulator (iii) The Certificate number; establishes hereafter that addresses un- (iv) The original principal amount; safe or unsound lending practices; or a (v) The name in which the Certificate going concern opinion issued by the was registered; Lender’s auditor. A Lender subject to a (vi) Any assignment, endorsement or public action or going concern opinion other writing on the Certificate; and must notify the D/FA and the D/OCRM (vii) A statement of the cir- within five (5) business days (or as soon cumstances of the theft or loss. as practicable thereafter) of the public (b) When the FTA receives notice of issuance of any such action or the the theft or loss, it will stop any trans- issuance of a going concern opinion. fer of the Certificate. The Registered The Lender notice shall include copies Holder must send to the FTA all avail- of all relevant documents for SBA re- able portions of a mutilated or defaced view. 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 dealer 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 considers, in its sole discretion, to be rel- § 120.660 Suspension or revocation. evant to the broker’s or dealer’s fitness (a) Temporary suspension or revocation to participate in the Secondary Mar- of Lender, broker, dealer, or Registered ket; 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

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bears on its fitness to participate in institution (not including an account the Secondary Market; or evidenced by a Certificate of Deposit). (3) A civil judgment is entered hold- (b) Grant is a Federal award of ing that the broker or dealer has com- money, or property in lieu of money mitted a breach of trust or a violation (including cooperative agreements) to of any law or regulation protecting the an eligible grantee that must account integrity of business transactions or for its use. The term does not include relationships. the provision of technical assistance, (c) Notice to suspend or revoke. The D/ revenue sharing, loans, loan guaran- FA and the D/OCRM shall notify the af- tees, interest subsidies, insurance, di- fected party in writing, providing the rect appropriations, or any fellowship reasons therefore, at least 10 business or other lump sum award. days prior to the effective date of the (c) Insured depository institution suspension or revocation. The affected means any Federally insured bank, party may appeal the suspension or savings association, or credit union. revocation made under this section (d) Intermediary is an entity partici- pursuant to the procedures set forth in pating in the Microloan Program which part 134 of this chapter. The action makes and services Microloans to eligi- taken by the D/FA and the D/OCRM ble small businesses and which pro- will remain in effect pending resolu- vides marketing, management, and tion of the appeal. technical assistance to its borrowers. (d) Early termination of suspension or It may be: revocation. SBA may, by written notice, (1) A private, nonprofit community terminate a Secondary Market suspen- development corporation or other enti- sion or revocation under this section, if ty; the D/FA and the D/OCRM, in their sole (2) A consortium of private, nonprofit discretion, determine that such termi- community development corporations nation is warranted for good cause. or other entities; (3) A quasi-governmental economic [61 FR 3235, Jan. 31, 1996, as amended at 82 development entity, other than a state, FR 39503, Aug. 21, 2017] county, municipal government or any agency thereof; or Subpart G—Microloan Program (4) An agency of or a nonprofit entity established by a Native American Trib- § 120.700 What is the Microloan Pro- al Government. gram? (e) Microloan is a short-term, fixed in- The Microloan Program assists terest rate loan of not more than women, low income individuals, minor- $50,000 made by an Intermediary to an ity entrepreneurs, and other small eligible small business. businesses which need small amounts (f) Non-Federal sources are sources of of financial assistance. Under this pro- funds other than the Federal Govern- gram, SBA makes direct and guaran- ment and may include indirect costs or teed loans to Intermediaries (as defined in-kind contributions paid for under below) who use the proceeds to make non-Federal programs. Community loans to eligible borrowers. SBA may Block Development Grants are consid- also make grants under the program to ered non-Federal sources. Intermediaries and other qualified non- (g) Non-lending technical assistance profit entities to be used for mar- provider (NTAP) is an entity which re- keting, management, and technical as- ceives grant funds from SBA to provide sistance to the program’s target popu- technical assistance to Microloan bor- lation. rowers. (h) Specialized Intermediary is an [61 FR 3235, Jan. 31, 1996, as amended at 66 Intermediary which maintains a port- FR 47073, Sept. 11, 2001] folio of Microloans averaging $10,000 or less. § 120.701 Definitions. [61 FR 3235, Jan. 31, 1996, as amended at 66 (a) Deposit account is a demand, time, FR 47073, Sept. 11, 2001; 66 FR 47878, Sept. 14, savings, passbook, or similar account 2001; 76 FR 63546, Oct. 12, 2011; 80 FR 34046, maintained with an insured depository June 15, 2015]

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§ 120.702 Are there limitations on who selors from the Service Corps of Re- can be an Intermediary or on where tired Executives) to help Microloan an Intermediary may operate? borrowers. (a) Prior experience requirement. To be eligible to be an Intermediary, an orga- § 120.704 How are applications evaluated? nization must: (1) Have made and serviced short- (a) Evaluation criteria. In selecting term fixed rate loans of not more than Intermediaries, SBA will attempt to $50,000 to newly established or growing insure that Microloans are available to small businesses for at least one year: small businesses in all industries and and particularly to small businesses lo- (2) Have at least one year of experi- cated in urban and rural areas. ence providing technical assistance to (b) Preference for organizations which its borrowers. make very small loans. In selecting (b) Limitation to one state. An Inter- Intermediaries, SBA will give priority mediary may not operate in more than to applicants which maintain a port- one state unless the appropriate Office folio of loans averaging $10,000 or less. of Capital Access official in accordance (c) Consideration of quasi-governmental with Delegations of Authority deter- organizations. Generally, SBA will con- mines that it would be in the best in- sider applications by quasi-govern- terests of the small business commu- mental organizations only when it de- nity for it to operate across state lines. termines that program services for a particular geographic area would be [61 FR 3235, Jan. 31, 1996, as amended at 66 best provided by such organization. FR 47878, Sept. 14, 2001; 73 FR 75517, Dec. 11, 2008; 76 FR 63546, Oct. 12, 2011] [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47878, Sept. 14, 2001] § 120.703 How does an organization apply to become an Intermediary? § 120.705 What is a Specialized Inter- mediary? (a) Application Process. Organizations interested in becoming Intermediaries At the end of an Intermediary’s first should contact SBA for information on year of participation in the program, the application process. SBA will determine whether it quali- (b) Documentation in support of appli- fies as a Specialized Intermediary. An cation. The application must include a Intermediary qualifies as a Specialized detailed narrative statement describ- Intermediary if it maintains a porting: folio of Microloans averaging $10,000 or (1) The types of businesses assisted in less. Specialized Intermediaries qualify the past and those the applicant infor more favorable interest rates on tends to assist with Microloans; SBA loans. If, after the first year, an (2) The average size of the loans made Intermediary qualifies as a Specialized in the past and the average size of in- Intermediary, the special interest rate tended Microloans; is applied retroactively to SBA loans (3) The extent to which the applicant made to the Intermediary. After the will make Microloans to small busi- first year SBA will determine an nesses in rural areas; Intermediary’s qualifications as a Spe- (4) The geographic area in which the cialized Intermediary annually, based applicant intends to operate, including on its lending practices during the a description of the economic and de- term of its participation in the pro- mographic conditions existing in the gram. Specialized Intermediaries also intended area of operations; qualify for a greater amount of tech- (5) The availability and cost of ob- nical assistance grant funding. 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- to small businesses; and mediary? (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

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the first year of participation in the § 120.707 What conditions apply to program. In later years, the loans by Intermediaries to Intermediary’s obligation to SBA may Microloan borrowers? not exceed an aggregate of $5 million, (a) Except as otherwise provided in subject to statutory limitations on the this paragraph, an Intermediary may total amount of funds available per only make Microloans to small busi- state. nesses eligible to receive financial as- (b) Repayment terms. During the first sistance under this part. A borrower year of the loan, an Intermediary is may also use Microloan proceeds to es- not required to make any payments, tablish a nonprofit child care business. but interest accrues from the date that An Intermediary may also make SBA disburses the loan proceeds to the Microloans to businesses with an Asso- Intermediary. After that, SBA will de- ciate who is currently on probation or termine the periodic payments. The parole; provided, however, that the As- loan must be repaid within 10 years. sociate is not on probation or parole (c) Interest rate. The interest rate is for an offense involving fraud or dis- equal to the rate applicable to five- honesty or, in the case of a child care year obligations of the United States business, is not on probation or parole Treasury, adjusted to the nearest one- for an offense against children. Pro- eighth percent, less 1.25 percent. How- ceeds from Microloans may be used ever, the interest rate for Specialized only for working capital and acquisi- Intermediaries is equal to the rate ap- tion of materials, supplies, furniture, plicable to five-year obligations of the fixtures, and equipment. SBA does not United States Treasury, adjusted to review Microloans for creditworthi- the nearest one-eighth percent, less ness. two percent. (b) Amount and maturity. Generally, Intermediaries should not make a (d) Collateral. As security for repay- Microloan of more than $10,000 to any ment of the SBA loan, an Intermediary borrower. An Intermediary may not must pledge to SBA a first lien posi- make a Microloan of more than $20,000 tion in the MRF (described below), unless the borrower demonstrates that LLRF (described below), and all notes it is unable to obtain credit elsewhere receivable from Microloans. at comparable interest rates and that (e) Default. If for any reason an Inter- it has good prospects for success. An mediary is unable to make payment to Intermediary may not make a SBA when due, SBA may accelerate Microloan of more than $50,000, and no maturity of the loan and demand pay- borrower may owe an Intermediary ment in full. In this event, or if an more than $50,000 at any one time. Intermediary violates this part or the Each Microloan must be repaid within terms of its loan agreement, it must seven years. surrender possession of all collateral (c) Interest rate. The maximum inter- described in paragraph (d) of this sec- est rate that can be charged a tion to SBA. The Intermediary is not Microloan borrower is: obligated to pay SBA any loss or defi- (1) On loans of more than $10,000, the ciency which may remain after liquida- interest rate charged on the SBA loan tion of the collateral unless the loss to the Intermediary, plus 7.75 percent- was caused by fraud, negligence, viola- age points; and tion of any of the ethical requirements (2) On loans of $10,000 or less, the in- of § 120.140, or violation of any other terest rate charged on the SBA loan to provision of this part. the Intermediary, plus 8.5 percentage (f) Fees. SBA does not charge Inter- points. mediaries any fees for loans under this Program. An Intermediary may, how- [61 FR 3235, Jan. 31, 1996, as amended at 66 ever, pay minimal closing costs to FR 47073, Sept. 11, 2001; 66 FR 47878, Sept. 14, 2001; 76 FR 63547, Oct. 12, 2011; 80 FR 34046, third parties, such as filing and record- June 15, 2015; 85 FR 7651, Feb. 10, 2020] ing fees. EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. [61 FR 3235, Jan. 31, 1996, as amended at 66 14, 2020, § 120.707(b) was amended by removing FR 47073, Sept. 11, 2001; 76 FR 63546, Oct. 12, the word ‘‘seven’’ and adding in its place the 2011] word ‘‘six’’ effective Mar. 27, 2021.

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§ 120.708 What is the Intermediary’s fi- (d) Reduction of Loan Loss Reserve nancial contribution? Fund. The appropriate Office of Capital The Intermediary must contribute Access official in accordance with Del- from non-Federal sources an amount egations of Authority has the author- equal to 15 percent of any loan that it ity to reduce the percentage of an receives from SBA. The contribution Intermediary’s Portfolio that it must may not be borrowed. For purposes of maintain in its LLRF to an amount this program, Community Develop- equal to the actual average loan loss ment Block Grants are considered non- rate during the preceding five-year pe- Federal sources. riod. The appropriate Office of Capital Access official in accordance with Del- § 120.709 What is the Microloan Re- egations of Authority cannot reduce volving Fund? the LLRF to less than ten percent of The Microloan Revolving Fund the Portfolio. (‘‘MRF’’) is a Deposit Account into (e) What must an intermediary dem- which an Intermediary must deposit onstrate to get a reduction in Loan Loss the proceeds from SBA loans, its con- Reserve Fund? To receive a reduction in tributions from non-Federal sources, its LLRF, an Intermediary must: and payments from its Microloan bor- (1) Have satisfactory SBA perform- rowers. An Intermediary may only ance, as determined by SBA in its dis- withdraw from this account the money cretion. The Intermediary’s Risk Rat- needed to establish the Loan Loss Re- ing, among other factors, will be conserve Fund (§ 120.710), proceeds for each sidered in determining satisfactory 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 must maintain a balance on deposit in FR 17439, Apr. 3, 2000; 73 FR 75517, Dec. 11, its LLRF equal to 15 percent of the 2008; 80 FR 34046, June 15, 2015; 82 FR 39504, outstanding balance of the notes re- Aug. 21, 2017] 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 Portfolio which it must maintain in its § 120.712 How does an Intermediary LLRF to an amount equal to the ac- get a grant to assist Microloan bor- tual average loan loss rate during the rowers? preceding five-year period. Upon re- (a) General. An Intermediary is eligi- ceipt of such request, he/she will review ble to receive grant funding from SBA the Intermediary’s annual loss rate for of not more than 25 percent of the out- the most recent five-year period pre- standing balance of all SBA loans to ceding the request. the Intermediary. The Intermediary

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must contribute, solely from non-Fed- § 120.713 Does SBA provide technical eral sources, an amount equal to 25 assistance to Intermediaries? percent of the grant. Contributions SBA may procure technical assist- may be made in cash or in kind. ance for an Intermediary to improve (b) Limitations on grant funds. An its knowledge, skill, and understanding Intermediary may not borrow its con- of microlending by awarding a grant to tribution. It may only use grant funds a more experienced Intermediary. SBA to provide Microloan borrowers with may also obtain such assistance for marketing, management, and technical prospective Intermediaries in areas of assistance, except that: the country that are either not served (1) Up to 50 percent of the grant funds or underserved by an existing Inter- may be used to provide information mediary. and technical assistance to prospective Microloan borrowers; provided, how- § 120.714 How are grants made to non- ever, that no more than 5 percent of lending technical assistance pro- the grant funds may be used to market viders (NTAP)? or advertise the products and services of the Microloan Intermediary directly SBA selects non-lending technical as- related to the Microloan Program; and sistance providers (NTAP) to receive (2) Grant monies may be used to at- grant funds for technical assistance to tend training required by SBA. Microloan borrowers. (c) Intermediaries eligible to receive ad- (a) Grant procedure for non-Inter- ditional grant monies. An Intermediary mediaries. Any nonprofit entity that is may receive an additional SBA grant not an Intermediary may apply to SBA equal to five percent of the outstanding for a grant to provide marketing, man- balance of all loans received from SBA agement and technical assistance to (with no obligation to contribute addi- low-income individuals for the purpose tional matching funds) if the Inter- of assisting them in obtaining private mediary is a Specialized Intermediary. sector financing in amounts of $50,000 (d) Third party contracts for technical or less. To qualify, it must submit in- assistance. An Intermediary may use no formation regarding its ability to pro- more than 30 percent of the grant funds vide this assistance. If approved, the it receives from SBA for contracts with grant agreement will establish the third parties for the latter to provide terms and conditions for the grant. technical assistance to Microloan bor- (b) Number and amount of grants. In rowers. each year of the Microloan Program, SBA may make no more than 55 grants [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001; 76 FR 63547, Oct. 12, to non-Intermediaries for terms of up 2011; 80 FR 34047, June 15, 2015; 85 FR 7651, to five years. A grant may not exceed Feb. 10, 2020] $200,000.

EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. (c) Contribution by nonprofit entity. 14, 2020, § 120.712 was amended by revising The nonprofit entity must contribute paragraph (b)(1); and removing the number an amount equal to 20 percent of the ‘‘30’’ and adding in its place the number ‘‘25’’ grant. The contribution from the non- in paragraph (d), effective Mar. 27, 2021. For profit entity must come solely from the convenience of the user, the revised text non-Federal sources, and may include is set forth as follows: direct costs or in-kind contributions § 120.712 How does an Intermediary get a paid for under non-Federal programs. grant to assist Microloan borrowers? [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001; 66 FR 47878, Sept. 14, * * * * * 2001; 76 FR 63547, Oct. 12, 2011] (b) * * * (1) Up to 25 percent of the grant funds may § 120.715 Does SBA guarantee any be used to provide information and technical loans an Intermediary obtains from assistance to prospective Microloan bor- another source? rowers; and (a) SBA may guarantee not less than 90 percent of loans made by for-profit * * * * * or nonprofit entities (or an alliance of

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such entities) to no more than 10 Inter- job opportunities, and stimulate mediaries in urban areas and 10 Inter- growth, expansion, and modernization mediaries in Rural Areas (as defined in of small businesses. § 120.10). (b) Any loan guaranteed by SBA § 120.801 How a 504 Project is fi- under this section will have a term of nanced. 10 years. If an Intermediary receives (a) One or more small businesses may such a loan, it will not need to repay apply for 504 financing through a CDC any principal or interest during the serving the area where the 504 Project first year, although the interest will is located. SBA issues an Authorization accrue. During the second through fifth if it agrees to guarantee part of the years, the Intermediary will pay inter- funding for a Project. est only. During the sixth through (b) Usually, a Project requires in- tenth years, it will pay interest and terim financing from an interim lender fully amortize the principal. (often the same lender that later pro- (c) The interest rate on any loan vides a portion of the permanent fi- under this section shall be calculated nancing). as described in § 120.706. (c) Generally, permanent financing of [61 FR 3235, Jan. 31, 1996, as amended at 66 the Project consists of: FR 47073, Sept. 11, 2001] (1) A contribution by the small business in an amount of at least 10 percent § 120.716 What is the minimum num- of the Project costs; ber of loans an Intermediary must (2) A loan made with the proceeds of make each Federal fiscal year? a CDC Debenture for up to 40 percent of (a) Minimum loan requirement. Inter- the Project costs and certain adminis- mediaries must close and fund the re- trative costs, collateralized by a second quired number of microloans per year lien on the Project Property; and (October 1–September 30) as follows, (3) A Third Party Loan comprising the except that an Intermediary entering balance of the financing, collateralized the program will not be required to by a first lien on the Project property meet the minimum in that year: (see § 120.920). (1) For fiscal year 2015, four (d) The Debenture is guaranteed 100 microloans, percent by SBA (with the full faith and (2) For fiscal year 2016, six credit of the United States), and sold microloans, to Underwriters who form Debenture (3) For fiscal year 2017, eight Pools. Investors purchase interests in microloans, and Debenture Pools and receive Certifi- (4) For fiscal years 2018 and there- cates representing ownership of all or after, ten microloans per year. part of a Debenture Pool. SBA and (b) Intermediaries that do not meet CDCs use various agents to facilitate the minimum loan requirement are not the sale and service of the Certificates eligible to receive new grant funding and the orderly flow of funds among unless they submit a corrective action the parties. plan acceptable to SBA, in its discretion. Intermediaries that have sub- [61 FR 3235, Jan. 31, 1996, as amended at 64 mitted acceptable corrective action FR 2118, Jan. 13, 1999] plans may receive a reduced grant at § 120.802 Definitions. SBA’s discretion. The following terms have the same [80 FR 34047, June 15, 2015] meaning wherever they are used in this subpart. Defined terms are capitalized Subpart H—Development wherever they appear. Company Loan Program (504) Area of Operations is the geographic area where SBA has approved a CDC’s § 120.800 The purpose of the 504 pro- request to provide 504 program services gram. to small businesses on a permanent As authorized by Congress, SBA has basis. The minimum Area of Oper- established this program to foster eco- ations is the State in which the CDC is nomic development, create or preserve incorporated.

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Central Servicing Agent (CSA) is an en- program (see § 120.812) that SBA has ap- tity that receives and disburses funds proved to participate in an expedited among the various parties involved in 504 loan and Debenture closing process. 504 financing under a master servicing Project is the purchase or lease, and/ agent agreement with SBA. or improvement or renovation of long- Certificate is a document issued by term fixed assets by a small business, SBA or its agent representing owner- with 504 financing, for use in its busi- ship of all or part of a Debenture Pool. ness operations. Debenture is an obligation issued by a Project Property is one or more long- CDC and guaranteed 100 percent by term fixed assets, such as land, build- SBA, the proceeds of which are used to ings, machinery, and equipment, ac- fund a 504 loan. quired or improved by a small business, Debenture Pool is an aggregation of with 504 financing, for use in its busi- Debentures. ness operations. Designated Attorney is the CDC clos- Third Party Loan is a loan from a ing attorney that SBA has approved to commercial or private lender, investor, close loans under an expedited closing or Federal (non-SBA), State or local process for a Priority CDC. government source that is part of the Investor is an owner of a beneficial in- Project financing. terest in a Debenture Pool. Underwriter is an entity approved by Job Opportunity is a full time (or SBA to form Debenture Pools and ar- equivalent) permanent job created range for the sale of Certificates. within two years of receipt of 504 funds, or retained in the community because [61 FR 3235, Jan. 31, 1996, as amended at 64 of a 504 loan. FR 2118, Jan. 13, 1999; 65 FR 42632, July 11, Lead SBA Office is the SBA District 2000; 68 FR 57980, Oct. 7, 2003] Office designated by SBA as the primary liaison between SBA and a CDC CERTIFICATION PROCEDURES TO BECOME and with responsibility for managing A CDC SBA’s relationship with that CDC. Local Economic Area is an area, as de- § 120.810 Applications for certification as a CDC. termined by SBA, that is in a State other than the State in which an exist- (a) An applicant for certification as a ing CDC (or an applicant applying to CDC must apply to the SBA District become a CDC) is incorporated, is con- Office serving the jurisdiction in which tiguous to the CDC’s existing Area of the applicant has or proposes to locate Operations (or the applicant’s proposed its headquarters (see § 101.103 of this Area of Operations) of its State of in- chapter). corporation, and is a part of a local (b) The applicant must apply for an trade area that is contiguous to the Area of Operations. The applicant’s CDC’s Area of Operations (or appli- proposed Area of Operations must in- cant’s proposed Area of Operations) of clude the entire State in which the ap- its State of incorporation. Examples of plicant is incorporated, and may in- a local trade area would be a city that clude Local Economic Areas. An appli- is bisected by a State line or a metro- cant may not apply to cover an area as politan statistical area that is bisected a Multi-State CDC. by a State line. (c) The applicant must demonstrate Multi-State CDC is a CDC that is in- that it satisfies the CDC certification corporated in one State and is author- and operational requirements in ized by SBA to operate as a CDC in a §§ 120.820, and 120.822 through 120.824. State contiguous to its State of incor- The applicant also must include an op- poration beyond any contiguous Local erating budget, approved by the appli- Economic Areas. cant’s Board of Directors, which dem- Net Debenture Proceeds are the por- onstrates the required financial ability tion of Debenture proceeds that finance (as described in § 120.825), and a plan to eligible Project costs (excluding ad- meet CDC operational requirements ministrative costs). (without specializing in a particular in- Priority CDC is a CDC certified to par- dustry) in §§ 120.821, and 120.826 through ticipate on a permanent basis in the 504 120.830.

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(d) The District Office will forward REQUIREMENTS FOR CDC CERTIFICATION the application and its recommenda- AND OPERATION tion to the D/FA, who will make the final decision. SBA will notify the CDC § 120.816 CDC non-profit status and in writing of its decision, and, if the pe- good standing. tition is declined, the reasons for the A CDC must be a non-profit corpora- decision. tion, except that for-profit CDCs certified by SBA prior to January 1, 1987 [68 FR 57980, Oct. 7, 2003] may retain their certifications. An § 120.812 Probationary period for SBIC may not become a CDC. A CDC newly certified CDCs. must be in good standing based upon the following criteria: (a) Newly certified CDCs will be on (a) In good standing in the State in probation for a period of two years which the CDC is incorporated and any from the date of certification, at the other State in which the CDC conducts end of which the CDC must petition the business. Lead SBA Office for: (b) In compliance with all laws, in- (1) Permanent CDC status; or cluding taxation requirements, in the (2) A single, one-year extension of State in which the CDC is incorporated probation. and any other State in which the CDC (b) SBA will consider the failure to conducts business. file a petition before the end of the pro- (c) Must have satisfactory SBA per- bationary period as a withdrawal from formance, as determined by SBA in its the 504 program. If the CDC elects discretion. The CDC’s Risk Rating, withdrawal, SBA will direct the CDC to among other factors, will be considered transfer all funded and/or approved in determining satisfactory SBA per- loans to another CDC, SBA, or another formance. Other factors may include, servicer approved by SBA. but are not limited to, review/examina- (c) The Lead SBA Office will send the tion assessments, historical perform- petition and its recommendation to the ance measures, loan volume to the ex- D/FA, who will make the final decision. tent that it impacts performance meas- SBA will determine permanent CDC ures, and other performance related status or an extension of probation, in measurements and information (such part, based upon the CDC’s compliance as contribution toward SBA mission). with the certification and operational (d) If a non-profit CDC has a member- requirements in §§ 120.820 through ship and the members are responsible 120.830. To be considered for permanent for electing or appointing voting direc- CDC status or an extension of proba- tors to the CDC’s Board of Directors, tion, the CDC must have satisfactory no person or entity can control more SBA performance, as determined by than 25 percent of the CDC’s voting SBA in its discretion. The CDC’s Risk membership. Rating, among other factors, will be [68 FR 57980, Oct. 7, 2003, as amended at 73 FR considered in determining satisfactory 75518, Dec. 11, 2008. Redesignated at 79 FR SBA performance. Other factors may 15649, Mar. 21, 2014; 82 FR 39504, Aug. 21, 2017; include, but are not limited to, review/ 84 FR 66294, Dec. 4, 2019] examination assessments, historical performance measures, loan volume to § 120.818 Applicability to existing for- the extent that it impacts performance profit CDCs. measures, and other performance re- (a) Unless expressly provided other- lated measurements and information wise in the regulations, any Loan Pro- (such as contribution toward SBA mis- gram Requirement that applies to non- sion). profit CDCs also applies to for-profit (d) SBA will notify the CDC in writ- CDCs. ing of its decision, and, if the petition (b) No person or entity can own or is declined, the reasons for the deci- control more than 25 percent of a for- sion. profit CDC’s stock. [68 FR 57980, Oct. 7, 2003, as amended at 73 FR [79 FR 15649, Mar. 21, 2014, as amended at 84 75517, Dec. 11, 2008; 82 FR 39504, Aug. 21, 2017] FR 66294, Dec. 4, 2019]

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§ 120.820 CDC Affiliation. § 120.821 CDC Area of Operations. (a) A CDC must be independent and A CDC must operate only within its must not be affiliated (as determined designated Area of Operations approved in accordance with § 121.103 of this by SBA except as provided in § 120.839. chapter) with any Person (as defined in [68 FR 57980, Oct. 7, 2003] § 120.10) except as permitted under this section. § 120.823 CDC Board of Directors. (b) A CDC may be affiliated with an (a) The CDC, whether for-profit or entity (other than a 7(a) Lender or an- non-profit, must have a Board of Direc- other CDC) whose function is economic tors with at least seven (7) voting di- development in the same Area of Oper- rectors who live or work in the CDC’s ations and that is either a non-profit State of incorporation or in an area entity or a State or local government that is contiguous to that State that or political subdivision (e.g., council of meets the definition of a Local Eco- governments). nomic Area for the CDC. The Board (c) A CDC must not be affiliated (as must be actively involved in encour- determined in accordance with § 121.103) aging economic development in the with or invest, directly or indirectly, Area of Operations. The initial Board in a 7(a) Lender. A CDC that was affili- may be created by any method per- ated with a 7(a) Lender as of November mitted by applicable State law. At a 6, 2003 may continue such affiliation. minimum, the Board must have direc- (d) A CDC must not be affiliated (as tors with background and expertise in determined in accordance with § 121.103 internal controls, financial risk man- of this chapter) with another CDC. In agement, commercial lending, legal addition, a CDC must not directly or issues relating to commercial lending, indirectly invest in or finance another corporate governance, and economic, CDC, except with the prior written ap- community or workforce development. proval of D/FA or designee and D/ Directors may be either currently em- OCRM or designee if they determine in ployed or retired. their discretion that such approval is (b) At least two voting members of in the best interests of the 504 Loan the Board of Directors, other than the Program. CDC manager, must possess commer- (e) A CDC may remain affiliated with cial lending experience satisfactory to a for-profit entity (other than a 7(a) SBA. When the Board votes on SBA Lender) if such affiliation existed prior loan approval or servicing actions, at to March 21, 2014. A CDC may also be least two voting Board members, with affiliated with a for-profit entity such commercial lending experience, (other than a 7(a) Lender) whose func- other than the CDC manager, must be tion is economic development in the present and vote. same Area of Operations with the prior (c) The Board of Directors must meet written approval of the D/FA or des- at least quarterly and shall be respon- ignee if he or she determines in his or sible for the actions of the CDC and her discretion that such approval is in any committees established by the the best interests of the 504 Loan Pro- Board of Directors. In addition, the Board of Directors is subject to the fol- gram. lowing requirements: (f) A CDC must not directly or indi- (1) Except for the CDC manager, no rectly invest in a Licensee (as defined person on the CDC’s staff may be a vot- in § 107.50 of this chapter) licensed by ing director of the Board; SBA under the SBIC program author- (2) A quorum must be present to ized in Part A of Title III of the Small transact business. The quorum shall be Business Investment Act, 15 U.S.C. 681 set by the CDC but shall be no less et seq. A CDC that has an SBA-ap- than 50% of the voting members of the proved investment in a Licensee as of Board of Directors; November 6, 2003 may retain such in- (3) Attendance at meetings may be vestment. through any format permitted by State [79 FR 15649, Mar. 21, 2014] law;

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(4) No CDC Board member may serve Loan Committee. The Loan Committee on the Board of another CDC. must: (d) The Board shall have and exercise (A) Be chosen by the Board of Direc- all corporate powers and authority and tors, and consist of individuals with a be responsible for all corporate actions background in either financial risk and business. There must be no actual management, commercial lending, or or appearance of a conflict of interest legal issues relating to commercial with respect to any actions of the lending who are not associated with Board. The Board is responsible for en- another CDC; suring that the structure and operation (B) Have a Quorum of at least four of the CDC, as set forth in the Bylaws, Loan Committee members authorized comply with SBA’s Loan Program Re- to vote; quirements. The responsibilities of the (C) Have at least two (2) Loan Com- Board include, but are not limited, to mittee members with commercial lend- the following: ing experience satisfactory to SBA; (1) Approving the mission and the (D) Have no actual or appearance of a policies for the CDC; conflict of interest, including for exam- (2) Hiring, firing, supervising and an- ple, a Loan Committee member partici- nually evaluating the CDC manager; pating in deliberations on a loan for (3) Setting the salary for the CDC which the Third Party Lender is the manager and reviewing all salaries; member’s employer or the member is (4) Establishing committees, at its otherwise associated with the Third discretion, including the following: Party Lender; and (i) Executive Committee. To the extent (E) Consist only of Loan Committee authorized in the Bylaws, the Board of members who live or work in the CDC’s Directors may establish an Executive State of incorporation or in an area Committee. The Executive Committee that meets the definition of a Local may exercise the authority of the Economic Area for the CDC, except Board; however, the delegation of its that, for Projects that are financed authority does not relieve the Board of under a CDC’s Multi-State authority, its responsibility imposed by law or the CDC must satisfy the requirements Loan Program Requirements. No fur- of either § 120.835(c)(1) or (2) when vot- ther delegation or redelegation of this ing on that Project. authority is permitted. If the Board es- (5) Ensuring that the CDC’s expenses tablishes an Executive Committee and are reasonable and customary; delegates any of its authority to the (6) Hiring directly an independent Executive Committee as set forth in auditor to provide the financial state- the Bylaws of the CDC, the Executive ments in accordance with Loan Pro- Committee must: gram Requirements; (A) Be chosen by and from the Board (7) Monitoring the CDC’s portfolio of Directors from the Board; and performance on a regular basis; (B) Meet the same organizational and (8) Reviewing a semiannual report on representational requirements as the portfolio performance from the CDC Board of Directors, except that the Ex- manager, which would include, but not ecutive Committee must have a min- be limited to, asset quality and indus- imum of four voting members who try concentration; must be present to conduct business. (9) Ensuring that the CDC establishes (ii) Loan Committee. The Board of Di- and maintains adequate reserves for rectors may establish a Loan Com- operations; mittee. The Loan Committee may ex- (10) Ensuring that the CDC invests in ercise the authority of the Board only economic development in each of the as set forth below; however, the delega- States in its Area of Operations in tion of its authority does not relieve which it has a portfolio, and approving the Board of its responsibility imposed each investment. If the investment is by law or Loan Program Requirements. included in the CDC’s budget, the If the Board of Directors chooses to es- Board’s approval of the budget may be tablish a Loan Committee, no CDC deemed approval of the investment. If staff or manager may serve on the the investment is not included in the

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budget, the Board must separately ap- met if the CDC has at least one sala- prove the investment; ried professional employee that is em- (11) Establishing a policy in the By- ployed directly (not a contractor or an laws of the CDC prohibiting an actual officer, director, 20 percent or more eq- conflict of interest or the appearance uity owner, or key employee of a con- of same, and enforcing such policy (see tractor) on a full-time basis to manage § 120.140 and § 120.851); the CDC. The CDC manager must be (12) Retaining accountability for all hired by the CDC’s Board of Directors of the actions of the CDC; and subject to termination only by the (13) Establishing written internal Board. A CDC may obtain, under a control policies, in accordance with written contract, management services § 120.826; provided by a qualified individual (14) Establishing commercially rea- under the following circumstances: sonable loan approval policies, proce- (1) The CDC must submit a request dures, and standards. The Bylaws must for the D/FA (or designee) to approve, include any delegations of authority to in consultation with the D/OCRM (or the Loan Committee and Executive designee), a waiver of the requirement Committee, if either Committee has that the manager be employed directly been established. In addition, the CDC by the CDC. In its request, the CDC must establish and set forth in detail must demonstrate that: in a policy manual its credit approval (i) Another non-profit entity (that is process. All 504 loan applications must not a CDC) that has the economic de- have credit approval prior to submis- velopment of the CDC’s Area of Oper- sion to the Agency. The Loan Com- ations as one of its principal activities mittee, if established, may be dele- will provide management services to gated the authority to provide credit the CDC and, if the manager is also approval for loans up to $2,000,000 but, performing services for the non-profit for loans of $1,000,000 to $2,000,000, the entity, the manager will be available Loan Committee’s action must be rati- to small businesses interested in the fied by the Board or Executive Com- 504 program and to 504 loan borrowers mittee prior to Debenture closing. Only during regular business hours; or the Board or Executive Committee, if authorized by the Board, may provide (ii) The CDC submitting the request credit approval for loans greater than for the waiver is rural, has insufficient $2,000,000. loan volume to justify having manage- (15) All members of the Board of Di- ment employed directly by the CDC, rectors must annually certify in writ- and is requesting to contract with an- ing that they have read and understand other CDC located in the same general this section, and copies of the certifi- area to provide the management. cation must be included in the Annual (2) The CDC must submit a request Report to SBA. for the D/FA (or designee), in consulta- (e) The Board of Directors shall tion with the D/OCRM (or designee), to maintain Directors’ and Officers’ Li- pre-approve the contract for manage- ability and Errors and Omissions insur- ment services. This contract must ance in amounts established by SBA comply with paragraphs (c)(2) through that are based on the size of the CDC’s (4) and, if applicable, paragraph (d) of portfolio and other relevant factors. this section. (b) Professional staff. The CDC must [79 FR 15649, Mar. 21, 2014, as amended at 82 FR 39504, Aug. 21, 2017; 84 FR 66294, Dec. 4, have a full-time professional staff 2019] qualified by training and experience to market the 504 Loan Program, package § 120.824 Professional management and process loan applications, close and staff, and contracts for serv- loans, service, and, if authorized by ices. SBA, liquidate the loan portfolio, and (a) Management. A CDC must have to sustain a sufficient level of service full-time professional management, in- and activity in the Area of Operations. cluding an executive director or the (c) Professional services contracts. equivalent (CDC manager) to manage Through a written contract with quali- daily operations. This requirement is fied individuals or entities, a CDC may

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obtain services for marketing, pack- submitted an identical copy of the exe- aging, processing, closing, servicing, or cuted contract to SBA. liquidation functions, or for other serv- (5) With respect to any contract ices (e.g., legal, accounting, informa- under which the CDC’s staff are deemed tion technology, independent loan re- co-employees of both the CDC and the views, and payroll and employee bene- contractor (e.g., contracts with profes- fits), provided that: sional employer organizations to ob- (1) The contract must be pre-ap- tain employee benefits, such as retire- proved by the D/FA (or designee), sub- ment and health benefits, for the CDC’s ject to the following exceptions: staff), the contract must provide that (i) CDCs may contract for legal, ac- the CDC retains the final authority to counting, and information technology hire and fire the CDC’s employees. services without SBA approval, except (6) If the contract is between CDCs, for legal services in connection with the CDCs and the contract must also loan liquidation or litigation. comply with paragraph (d) of this sec- (ii) CDCs may contract for inde- tion. pendent loan review services with non- (d) Professional Services Contracts be- CDC entities without SBA approval. tween CDCs. Notwithstanding the pro- Contracts between CDCs for inde- hibition in 13 CFR 120.820(d) against a pendent loan reviews must be pre-ap- CDC affiliating with another CDC, a proved by SBA in accordance with CDC may obtain services through a paragraph (d) of this section. written contract with another CDC for (2) If the contract requires SBA’s managing, marketing, packaging, proc- prior approval under paragraph (c)(1) of essing, closing, servicing, independent this section, the CDC’s Board must ex- loan review, or liquidation functions, plain to SBA why it is in the best in- provided that: terest of the CDC to obtain services (1) The contract between the CDCs through a contract and must dem- must be pre-approved by the D/FA (or onstrate that: designee), in consultation with the D/ (i) The compensation under the con- OCRM (or designee), who determines in tract is paid only by the CDC obtaining his or her discretion that such approval the services, is reasonable and cus- is in the best interests of the 504 Loan tomary for similar services in the Area Program and that the terms and condi- of Operations, and is only for actual tions of the contract are satisfactory services performed; to SBA. For management services, a (ii) The full term of the contract (in- CDC may contract with another CDC cluding options) is necessary and ap- only in accordance with paragraph propriate and the contract permits the (a)(1)(ii) of this section. CDC procuring the services to termi- (2) Except for contracts for liquida- nate the contract prior to its expiration services and independent loan re- tion date with or without cause; and views: (iii) There is no actual or apparent (i) The CDCs entering into the con- conflict of interest or self-dealing on tract must be located in the same SBA the part of any of the CDC’s officers, Region or, if not located in the same management, or staff, including mem- SBA Region, must be located in contig- bers of the Board and Loan Committee, uous States. For purposes of this provi- in the negotiation, approval or imple- sion, the location of a CDC is the CDC’s mentation of the contract. State of incorporation; (3) Neither the contractor nor any of- (ii) A CDC may provide assistance to ficer, director, 20 percent or more eq- only one CDC per State; and uity owner, or key employee of a con- (iii) No CDC may provide assistance tractor may be a voting or non-voting to another CDC in its State of incorpo- member of the CDC’s Board. ration or in any State in which it has (4) The CDC procuring the services Multi-State authority. must provide a copy of all executed (3) The Board of Directors for each contracts requiring SBA prior approval CDC entering into the contract must to SBA as part of the CDC’s Annual Re- be separate and independent and may port submitted under § 120.830(a) unless not include any common directors. In the CDC certifies that it has previously addition, if either of the CDCs is for-

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profit, neither CDC may own any stock (b) Operations and internal controls. in the other CDC. The CDCs are also Each CDC’s board of directors must prohibited from comingling any funds. adopt an internal control policy which (4) With respect to contracts for inde- provides adequate direction to the in- pendent loan reviews, CDCs may not stitution for effective control over and review each other’s portfolios or ex- accountability for operations, pro- change any other services, nor may grams, and resources. The board adopt- they enter into any other arrangement ed internal control policy must, at a with each other that could appear to minimum: bias the outcome or integrity of the (1) Direct management to assign the independent loan review. responsibility for the internal control (5) The contract must satisfy the re- function (covering financial, credit, quirements set forth in paragraphs credit review, collateral, and adminis- (c)(2) through (4) of this section. trative matters) to an officer or offi- [84 FR 66294, Dec. 4, 2019] cers of the CDC; (2) Adopt and set forth procedures for § 120.825 Financial ability to operate. maintenance and periodic review of the A CDC must be able to sustain its op- internal control function; erations continuously, with reliable (3) Direct the operation of a program sources of funds (such as income from to review and assess the CDC’s 504-re- services rendered and contributions lated loans. For the 504 review pro- from government or other sponsors). gram, the internal control policies Any funds generated from 503 and 504 must specify the following: loan activity by a CDC remaining after (i) Loan, loan-related collateral, and payment of staff and overhead expenses appraisal review standards, including must be retained by the CDC as a re- standards for scope of selection (for reserve for future operations or for in- view of any such loan, loan-related col- vestment in other local economic de- lateral or appraisal) and standards for velopment activity in its Area of Oper- work papers and supporting docu- ations. If a CDC is operating as a mentation; Multi-State CDC, it must maintain a (ii) Loan quality classification stand- separate accounting for each State of ards consistent with the standardized all 504 fee income and expenses and classification systems used by the Fed- provide, upon SBA’s request, evidence eral Financial Institution Regulators; that the funds resulting from its Multi- State CDC operations are being in- (iii) Specific control requirements for vested in economic development activi- the CDC’s oversight of Lender Service ties in each State in which they were Providers; and generated. (iv) Standards for training to implement the loan review program; and [65 FR 42633, July 11, 2000] (4) Address other control requirements as may be established by SBA. § 120.826 Basic requirements for operating a CDC. (c) Annual Audited/Reviewed Financial Statements. Each CDC with a 504 loan A CDC must operate in accordance portfolio balance of $30 million or more with the following requirements: (as calculated by SBA) must have its (a) In general. CDCs must meet all 504 financial statements audited annually Loan Program Requirements. In its by a certified public accountant that is Area of Operations, a CDC must mar- independent and experienced in audit- ket the 504 program, package and proc- ing financial institutions. The audit ess 504 loan applications, close and service 504 loans, and if authorized by must be performed in accordance with SBA, liquidate and litigate 504 loans. It generally accepted auditing standards must supply to SBA current and accu- as adopted by the Auditing Standards rate information about all certification Board of the American Institute of Cer- and operational requirements, and tified Public Accountants (AICPA). maintain the records and submit all re- The auditor must be independent, as ports required by SBA.

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defined by the AICPA, of the CDC. An- scribed in § 120.2). A CDC is subject to nually, the auditor must issue an opin- part 103 of this chapter when providing ion as to the fairness of the CDC’s fi- such assistance. nancial statements and their compliance with GAAP. For CDCs with a 504 [68 FR 57981, Oct. 7, 2003] portfolio balance of less than $30 mil- § 120.828 Minimum level of 504 loan ac- lion (as calculated by SBA), the CDC’s tivity and restrictions on portfolio annual financial statements submitted concentrations. to SBA must be reviewed by an independent CPA in accordance with (a) A CDC is required to receive SBA GAAP, except that the D/OCRM may approval of at least four 504 loan ap- require a CDC with a portfolio balance provals during two consecutive fiscal of less than $30 million to submit an years. audited financial statement in the (b) A CDC’s 504 loan portfolio must be event the D/OCRM determines, in his diversified by business sector. or her discretion, that such audit is [68 FR 57981, Oct. 7, 2003] necessary or appropriate when the CDC is in material noncompliance with § 120.829 Job Opportunity average a Loan Program Requirements. CDC must maintain. (d) Auditor qualifications. The audit or (a) A CDC’s portfolio must maintain review must be conducted by an inde- a minimum average of one Job Oppor- pendent certified public accountant tunity per an amount of 504 loan fund- who: ing that will be specified by SBA from (1) Is registered or licensed to prac- time to time in a FEDERAL REGISTER tice as a public accountant, and is in notice. Such Job Opportunity average good standing, under the laws of the remains in effect until changed by sub- state or other political subdivision of sequent FEDERAL REGISTER publica- the United States in which the CDC’s tion. A CDC is permitted two years principal office is located; from its certification date to meet this (2) Agrees in the engagement letter average. with the CDC to provide the SBA with (b) A CDC must indicate in its annual access to and copies of any work pa- report the Job Opportunities actually pers, policies, and procedures relating or estimated to be provided by each to the services performed; Project. (3)(i) Is in compliance with the (c) If a CDC does not maintain the re- AICPA Code of Professional Conduct; quired average, it may retain its cer- and tification if it justifies to SBA’s satis- (ii) Meets the independence require- faction its failure to do so in its annual ments and interpretations of the Secu- report and shows how it intends to at- rities and Exchange Commission and tain the required average. its staff; (4) Has received a peer review or is [61 FR 3235, Jan. 31, 1996, as amended at 68 enrolled in a peer review program that FR 57981, Oct. 7, 2003] meets AICPA guidelines; and (5) Is otherwise acceptable to SBA. § 120.830 Reports a CDC must submit. [73 FR 75518, Dec. 11, 2008, as amended at 84 A CDC must submit the following re- FR 66295, Dec. 4, 2019] ports to SBA: (a) An Annual Report within one § 120.827 Other services a CDC may hundred-eighty days after the end of provide to small businesses. the CDC’s fiscal year (to include Fed- A CDC may provide a small business eral tax returns for that year). A CDC with assistance unrelated to the 504 that is certified by SBA within 6 loan program as long as the CDC does months of the CDC’s fiscal year-end is not make such assistance a condition not required to submit an Annual Re- of the CDC accepting from that small port for that year. The Annual Report business an application for a 504 loan. must include, but is not limited to, the An example of other services a CDC following: may provide is assisting a small busi- (1) Audited or Reviewed Financial ness in applying for a 7(a) loan (as de- Statements as required in § 120.826(c)

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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 (i) Audited financial statements more past due (and interim reports must, at a minimum, include the fol- upon request by SBA). lowing: (g) Other reports as required by SBA. (A) Audited balance sheet; (B) Audited statement of income (or [61 FR 3235, Jan. 31, 1996, as amended at 68 receipts) and expenses; FR 57981, Oct. 7, 2003; 73 FR 75518, Dec. 11, (C) Audited statement of source and 2008; 79 FR 15650, Mar. 21, 2014] application of funds; EXTENDING A CDC’S AREA OF (D) Such footnotes as are necessary OPERATIONS to an understanding of the financial statements; § 120.835 Application to expand an (E) Auditor’s letter to management Area of Operations. on internal control weaknesses; and (F) The auditor’s report; and (a) General. A CDC that has been cer- (ii) Reviewed financial statements tified to participate in the 504 program must, at a minimum, include the fol- may apply to expand its Area of Oper- lowing: ations if it meets all requirements to (A) Balance sheet; be an Accredited Lender Program (B) Statement of income (or receipts) (ALP) CDC, as set forth in § 120.840(c), and expenses; and demonstrates that it can com- (C) Statement of source and applica- petently fulfill its 504 program respon- tion of funds; sibilities in the proposed area. (D) Such footnotes as are necessary (b) Local Economic Area Expansion. A to an understanding of the financial CDC seeking to expand its Area of Op- statements; erations into a Local Economic Area (E) The accountant’s review report; must apply in writing to the Lead SBA and Office. (2) Report on compensation: CDCs are (c) Multi-State expansion. A CDC seek- required to provide detailed informa- ing to become a Multi-State CDC must tion on total compensation (including apply to the SBA District Office that salary, bonuses and expenses) paid within the CDC’s most recent tax year services the area within each State for current and former officers and di- where the CDC intends to locate its rectors, and for current and former em- principal office for that State. A CDC ployees and independent contractors may apply to be a Multi-State CDC with total compensation of more than only if the State the CDC seeks to ex- $100,000 during that period. pand into is contiguous to the State of (3) Certification of members of the the CDC’s incorporation and either: Board of Directors. Written annual cer- (1) The CDC establishes a Loan Com- tification by each Board member that mittee in the additional State con- he or she has read and understands the sisting only of members who live or requirements set forth in § 120.823. work in that State and that satisfies (4) Report on investment in economic the other requirements in development. Written report on invest- § 120.823(d)(4)(ii)(A) through (D); or ments in economic development in (2) For any Project located in the ad- each State in which the CDC has an ditional State, the CDC’s Board or outstanding 504 loan. Loan Committee (if established in the (b) For each new associate and staff, CDC’s State of incorporation) includes a Statement of Personal History (for at least two members who live or work use by non-bank lenders and CDCs) and in that State when voting on that other information required by SBA; Project. These two members may vote (c) Reports of involvement in any legal proceeding; only on Projects located in the addi- (d) Changes in organizational status; tional State. (e) Changes in any condition that af- [68 FR 57981, Oct. 7, 2003, as amended at 79 FR fects its eligibility to continue to par- 15650, Mar. 21, 2014; 84 FR 66295, Dec. 4, 2019] ticipate in the 504 program; and

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§ 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 trict Office in which the CDC operates measurements and information (such or proposes to operate. The processing as contribution toward SBA mission). District Office must determine that the The 504 loan processing center may ap- CDC is in compliance with SBA’s regu- prove the application if: lations, policies, and performance (a) The applicant CDC has previously benchmarks, including pre-approval assisted the business or its affiliate(s) and annual review by SBA of any man- to obtain a 504 loan; or agement or staff contracts, and the (b) The existing CDC or CDCs serving timely submission of all annual re- the area agree to permit the applicant ports. In making its recommendation CDC to make the 504 loan; or on the application, the District Office (c) There is no CDC within the Area may consider any information pre- of Operations. sented to it regarding the requesting [68 FR 57982, Oct. 7, 2003, as amended at 73 FR CDC, the existing CDC, or CDCs that 75518, Dec. 11, 2008; 82 FR 39504, Aug. 21, 2017; may be affected by the application, and 84 FR 66296, Dec. 4, 2019] the proposed Area of Operations. (a) The SBA District office will sub- ACCREDITED LENDERS PROGRAM (ALP) mit the application, recommendation, and supporting materials within 60 § 120.840 Accredited Lenders Program days of the receipt of a complete appli- (ALP). cation from the CDC to the D/FA, who (a) General. Under the ALP program, will make the final decision. The D/FA SBA designates qualified CDCs as ALP may consider any information sub- CDCs, gives them increased authority mitted or available related to the ap- to process, close, and service 504 loans, plicant and the application. and provides expedited processing of (b) SBA will notify the CDC of its de- loan approval and servicing actions. cision in writing, and if the application (b) Application. A CDC must apply for is denied, the reasons for its decision. ALP status by submitting an applica- (c) If a CDC is approved to operate as tion in accordance with SBA’s Stand- a Multi-State CDC, the CDC’s ALP, ard Operating Procedure 50 10, avail- PCLP, or Priority CDC authority will able at http://www.sba.gov. A final deci- carry over into every additional State sion will be made by the appropriate in which it is approved to operate as a SBA official in accordance with Dele- Multi-State CDC. gations of Authority. [65 FR 42633, July 11, 2000, as amended at 68 (c) Eligibility. In order for a CDC to be FR 57981, Oct. 7, 2003] eligible to receive ALP status, its application must show that it meets the § 120.839 Case-by-case application to criteria set forth in § 120.841. make a 504 loan outside of a CDC’s (d) Additional application requirements. Area of Operations. The CDC’s application must include A CDC may apply to make a 504 loan the following: for a Project outside its Area of Oper- (1) Certified copy of the CDC’s Board ations by submitting a request to the of Directors’ resolution authorizing the 504 loan processing center. The appli- application for ALP status. cant CDC must demonstrate that it can (2) Summary of the experience of adequately fulfill its 504 program re- each of the CDC’s loan processing, clos- sponsibilities for the 504 loan, including, and servicing staff members with ing proper servicing. In addition, the significant authority. CDC must have satisfactory SBA per- (3) Name, address, and summary of formance, as determined by SBA in its experience of Designated Attorney. discretion. The CDC’s Risk Rating, (4) Documentation of any SBA re- among other factors, will be considered quired insurance. in determining satisfactory SBA per- (5) Any other documentation re- formance. Other factors may include, quired by SBA.

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(e) Term of ALP designation. SBA gen- (b) Number of 504 loans approved and erally will designate a CDC as an ALP size of portfolio. SBA must have ap- CDC for a two-year period. SBA may proved at least 20 504 loan applications renew the designation for additional by the CDC in the most recent three two-year periods if the CDC continues years, and the CDC must have a port- to meet the ALP program eligibility folio of at least 30 active 504 loans. (An requirements. ‘‘active’’ 504 loan is a loan that was ap- (f) SBA approval or decline decision. proved and closed by the CDC and has SBA will notify the CDC in writing of a status of either current, delinquent, an approval or decline of either an ALP or in liquidation.) application or of an ALP renewal. If (c) CDC reviews. CDC reviews con- the SBA approves the CDC’s applica- ducted by SBA must be current (within tion, the ALP CDC may exercise its the last 24 months, if applicable) for ALP authority in its entire Area of Op- applicants for ALP status. The CDC erations. If an application or renewal is must have received a review assess- declined, SBA will notify the CDC of ment of either ‘‘Acceptable’’ or ‘‘Ac- the reasons for the decision. ceptable With Corrective Actions Re- [68 FR 57982, Oct. 7, 2003, as amended at 85 FR quired.’’ In addition, the CDC must 7651, Feb. 10, 2020] have satisfactory SBA performance, as determined by SBA in its discretion. EFFECTIVE DATE NOTE: At 85 FR 80588, Dec. 14, 2020, § 120.840 was amended by revising The CDC’s Risk Rating, among other paragraph (b), effective Mar. 27, 2021. For the factors, will be considered in deter- convenience of the user, the revised text is mining satisfactory SBA performance. set forth as follows: Other factors may include, but are not limited to, review/examination assess- § 120.840 Accredited Lenders Program (ALP). ments, historical performance measures, loan volume to the extent that it * * * * * impacts performance measures, and other performance related measure- (b) Application. A CDC must apply for ALP ments and information (such as con- status to the Lead SBA Office. The Lead tribution toward SBA mission); SBA Office will send its recommendation and the application to the D/FA for final deci- (d) Record of compliance with 504 pro- sion. gram requirements. The CDC must have a record of conforming to SBA’s poli- * * * * * cies and procedures and of satisfactorily underwriting, closing and serv- § 120.841 Qualifications for the ALP. icing 504 loans. SBA will consider all relevant material information, which An applicant for ALP status must will include but is not limited to show that it substantially meets the whether the CDC meets all SBA’s CDC following criteria: portfolio benchmarks, when deter- (a) CDC staff experience. The CDC’s mining the CDC’s record of compliance, staff must have well-trained, qualified including: loan officers who are knowledgeable (1) Submission of satisfactory 504 concerning SBA’s lending policies and loan analyses and applications, and all procedures for the 504 program. The CDC must have at least one loan officer required, and properly completed, loan with three years of 504 loan processing documents. experience and at least one loan officer (2) Careful and thorough analysis and with three years of 504 servicing experi- screening of all 504 loan applications ence or two years experience plus satis- for conformance with SBA credit and factory completion of SBA-approved eligibility standards; processing and servicing training. The (3) Proper completion of required 504 same loan officer may meet these loan closing documents and compliance qualifications. In addition, the CDC’s with SBA 504 loan closing policies and staff must have demonstrated satisfac- procedures. torily to SBA the ability to process (4) Compliance with SBA loan serv- and service 504 loans. icing policies and procedures.

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(5) Compliance with the certification (1) Certified copy of the CDC’s Board and operational requirements as set of Directors’ resolution authorizing the forth in §§ 120.820 through 120.830. application for PCLP status. (6) Submission of timely, complete (2) Summary of the experience of and acceptable annual reports. each of the CDC’s loan processing, clos- (7) Compliance with CDC ethical re- ing, servicing and liquidation staff quirements (see § 120.851). members with significant authority. (e) Priority CDC. The CDC must be a (3) Name, address and summary of ex- Priority CDC with a Designated Attor- perience of Designated Attorney. ney and SBA required insurance. (4) Documentation of any SBA re- (f) Record of Cooperation. The CDC quired insurance. must have a record of effective commu- (5) Any other documentation re- nication and a cooperative relationship quired by SBA. with all SBA offices including district (e) Term of designation. If approved, offices and SBA’s loan processing and SBA generally will confer PCLP status servicing centers. for a period of two years. However, if [68 FR 57982, Oct. 7, 2003, as amended at 72 FR SBA deems it appropriate, it may con- 18364, Apr. 12, 2007; 73 FR 75519, Dec. 11, 2008; fer PCLP status for a period of less 82 FR 39504, Aug. 21, 2017] than two years. (f) Area of Operations for PCLP CDCs. PREMIER CERTIFIED LENDERS PROGRAM If the SBA approves the CDC’s application, the PCLP CDC may exercise its § 120.845 Premier Certified Lenders 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 SBA will notify the CDC in writing of CDCs and delegates to them increased an approval or decline of a PCLP appli- authority to process, close, service, and cation. If an application is declined, liquidate 504 loans. SBA also may give SBA will notify the CDC of the reasons PCLP CDCs increased authority to liti- for the decision. gate 504 loans. (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 written recommendation and the applica- § 120.846 Requirements for maintain- tion to SBA’s PCLP Loan Processing ing and renewing PCLP status. Center. The PCLP Loan Processing (a) To maintain its status as a PCLP Center will review these materials and CDC, a CDC must continue to: forward them to the appropriate Office (1) Meet the PCLP eligibility require- of Capital Access official in accordance ments in § 120.845. with Delegations of Authority for final (2) Timely conform with all require- determination. ments and deadlines set forth in SBA’s (c) Eligibility. In order for a CDC to be regulations and policy and procedural eligible to receive PCLP status, its ap- guidance concerning properly estab- plication must show that it meets the lishing, funding and reporting a PCLP following criteria: Loan Loss Reserve Fund (LLRF). (1) The CDC must be an ALP CDC in (3) Substantially comply with all substantial compliance with Loan Pro- Loan Program Requirements. gram Requirements or meet the cri- (4) Remain an active CDC. teria to be an ALP CDC set forth in (5) In accordance with statutory re- § 120.841(a) through (h). quirements set forth in section 508(i) of (2) The CDC can adequately comply Title V, 15 U.S.C. 697e(i), establish a with SBA liquidation and litigation re- goal of processing at least 50 percent of quirements. its 504 loans using PCLP procedures. (d) Additional application requirements. (b) SBA will notify the PCLP CDC in The application must include the fol- writing of a renewal or non-renewal of lowing:

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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 Office to ensure that the LLRF is prop- of notification. The CDC may not begin erly established, that all necessary to use the declining balance method- documentation is executed and deliv- ology again until SBA notifies the CDC ered by all parties in a timely fashion, in writing that SBA has determined, in and that all required deposits are its discretion, that the CDC has cor- made. rected the noncompliance and has dem- (b) PCLP CDC Exposure and LLRF de- onstrated its ability to comply with posit requirements. A PCLP CDC’s ‘‘Ex- these requirements. posure’’ is defined as its reimburse- (c) Establishing a LLRF. The LLRF ment obligation to SBA with respect to must be a deposit account (or ac- default in the payment of any PCLP counts) with a federally insured deposi- Debenture. The amount of a PCLP tory institution selected by the PCLP CDC’s Exposure is 10 percent of any CDC. A ‘‘deposit account’’ is a demand, loss (including attorney’s fees; litiga- time, savings, or passbook account, in- tion costs; and care of collateral, ap- cluding a certificate of deposit (CD) praisal and other liquidation costs and which is either uncertificated or, if cer- expenses) sustained by SBA as a result tificated, non-transferable. A ‘‘deposit of a default in the payment of principal account’’ is not an investment account or interest on a PCLP Debenture. For and must not contain securities or each PCLP Debenture a PCLP CDC other investment properties. A deposit issues, it must establish and maintain account may contain only cash and an LLRF equal to one percent of the CDs credited to that account. A PCLP

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CDC may pool its deposits for multiple no later than one year after it issues PCLP Debentures in a single account the PCLP Debenture. in one institution. The LLRF must be (3) Any remainder of the required de- segregated from the PCLP CDC’s other posits to the LLRF no later than two operating accounts. The PCLP CDC is years after it issues the PCLP Deben- responsible for all fees, costs and ex- ture. penses incurred in connection with es- (f) LLRF reporting requirements. Each tablishing, managing and maintaining PCLP CDC must periodically report to the LLRF, including fees associated SBA the amount in the LLRF in a form with transferring funds or early with- that will readily facilitate reconcili- drawal of CDs, and related income tax ation of the amount maintained in the expenses. LLRF with the amount required to (d) Creating and perfecting a security meet a PCLP CDC’s Exposure for its interest in a LLRF. A PCLP CDC must entire portfolio of PCLP Debentures. give SBA a first priority, perfected se- (g) Withdrawal of excess funds. Inter- curity interest in the LLRF to secure est and other funds in the LLRF that the PCLP CDC’s obligation to reim- exceed the required minimums as set burse SBA for the PCLP CDC’s Expo- forth in paragraph (b) of this section, sure under all of its outstanding PCLP within the time frames set forth in Debentures. (If a PCLP CDC’s LLRF is paragraph (e) of this section, accrue to comprised of multiple deposit ac- the benefit of the PCLP CDC. PCLP counts, it must give SBA this security CDCs are authorized to withdraw ex- interest with respect to each such access funds, including interest, from the count.) The PCLP CDC must grant to LLRF if such funds exceed the required SBA the security interest in the LLRF minimums set forth in paragraph (b) of pursuant to a security agreement be- this section. The PCLP CDC must for- tween the PCLP CDC and SBA, and a ward requests for withdrawals to the control agreement between the PCLP Lead SBA Office, which will verify the CDC, SBA, and the applicable deposi- existence and amount of excess funds tory institution. The control agree- and notify the financial institution to ment must include provisions requiring transfer the excess funds to the PCLP the depository institution to follow CDC. SBA instructions regarding withdrawal (h) Determining SBA loss. When a from the account without a require- PCLP CDC has concluded the liquida- ment for obtaining further consent tion of a defaulted 504 loan made with from the PCLP CDC, and must restrict the proceeds of a PCLP Debenture and the PCLP CDC’s ability to make with- has submitted a liquidation wrap-up re- drawals from the account without SBA port to SBA, or when SBA otherwise consent. When establishing the LLRF, determines that the PCLP CDC has ex- a PCLP CDC must coordinate with its hausted all reasonable collection ef- Lead SBA Office to execute and deliver forts with respect to that 504 loan, SBA the required documentation. The PCLP will determine the amount of the loss CDC must provide to the Lead SBA Of- to SBA. SBA will notify the PCLP CDC fice a fully executed original of the se- of the amount of its reimbursement ob- curity and control agreements. All doc- ligation to SBA (if any) and will ex- uments must be satisfactory to SBA in plain how SBA calculated the loss. both form and substance. (1) If the PCLP CDC agrees with (e) Schedule for contributions to a SBA’s calculations of the loss, it must LLRF. The PCLP CDC must contribute reimburse SBA for ten percent of the to the LLRF the required deposits for amount of that loss no later than 30 each PCLP Debenture in accordance days after SBA’s notification to the with the following schedule: PCLP CDC of the CDC’s reimbursement (1) At least 50 percent of the required obligation. deposits to the LLRF on or about the (2) If the PCLP CDC disputes SBA’s date that it issues the PCLP Deben- calculations, it must reimburse SBA ture. for ten percent of any loss amount that (2) At least an additional 25 percent is not in dispute no later than 30 days of the required deposits to the LLRF after SBA’s notification to the PCLP

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CDC of the CDC’s reimbursement obli- loans under the PCLP (‘‘PCLP Loans’’), gation. No later than 30 days after the PCLP CDC must comply with Loan SBA’s notification, the PCLP CDC may Program Requirements and conduct submit to the D/FA or his or her dele- such activities in accordance with pru- gate a written appeal of any disagree- dent and commercially reasonable ment regarding the calculation of lending standards. SBA’s loss. The PCLP CDC must in- (b) Documentation of decision making. clude with that appeal an explanation For each PCLP Loan, the PCLP CDC of its reasons for the disagreement. must document in its files the basis for Upon the D/FA’s final decision as to its decisions with respect to loan proc- the disputed amount of the loss, the essing, closing, servicing, liquidating, PCLP CDC must promptly reimburse and litigating. SBA for ten percent of that amount. (c) Processing requirements. SBA ex- (i) Reimbursing SBA for loss. A PCLP pects PCLP CDCs to handle most 504 CDC may use funds in the LLRF or loan processing situations, although other funds to reimburse SBA for the SBA may require that the PCLP CDC PCLP CDC’s Exposure on a defaulted process 504 loans involving complex or PCLP Debenture. If a PCLP CDC does problematic eligibility issues through not satisfy the entire reimbursement the SBA using standard 504 loan proc- obligation within 30 days after SBA’s essing procedures. The PCLP CDC is re- notification to the PCLP CDC’s of its sponsible for properly determining bor- reimbursement obligation, SBA may rower creditworthiness and estab- cause funds in the LLRF to be trans- lishing the terms and conditions under ferred to SBA in order to cover the which the PCLP Loan will be made. PCLP CDC’s Exposure, unless the The PCLP CDC also is responsible for PCLP CDC has filed an appeal under properly undertaking such other proc- paragraph (h)(2) of this section. If the essing actions as SBA may delegate to PCLP CDC has filed such an appeal, the PCLP CDC. SBA may cause such a transfer of funds (d) Submission of loan documents. A to SBA 30 days after the D/FA’s or his PCLP CDC must notify SBA of its ap- or her delegate’s decision. If the LLRF proval of a 504 loan by submitting to does not contain sufficient funds to re- SBA’s PCLP Loan Processing Center imburse SBA for any unpaid Exposure all documentation required by SBA, in- with respect to any PCLP Debenture, cluding SBA’s PCLP eligibility check- the PCLP CDC must pay SBA the dif- list, signed by an authorized represent- ference within 30 days after demand for ative of the PCLP CDC. The PCLP payment by SBA. Loan Processing Center will review (j) Insufficient funding of LLRF. A these documents to determine whether PCLP CDC must diligently monitor the the PCLP CDC has identified any prob- LLRF to ensure that it contains suffi- lems with the PCLP Loan approval, cient funds to cover its Exposure for its and whether SBA funds are available entire portfolio of PCLP Debentures. for the PCLP Loan. If appropriate, the If, at any time, the LLRF does not con- PCLP Processing Center will notify the tain sufficient funds, the PCLP CDC PCLP CDC of the loan number assigned must, within 30 days of the earlier of to the loan. the date it becomes aware of this defi- (e) Loan and Debenture closing. After ciency or the date it receives notifica- receiving notification from SBA PCLP tion from SBA of this deficiency, make Loan Processing Center, the PCLP CDC additional contributions to the LLRF is responsible for properly undertaking to make up this difference. all actions necessary to close the PCLP [68 FR 57983, Oct. 7, 2003, as amended at 84 FR Loan and Debenture in accordance 66296, Dec. 4, 2019] with the expedited loan closing procedures applicable to a Priority CDC and § 120.848 Requirements for 504 loan with § 120.960. processing, closing, servicing, liqui- (f) Servicing, liquidation and litigation dating, and litigating by PCLP responsibilities. The PCLP CDC gen- CDCs. erally must service, liquidate and liti- (a) General. In processing closing, gate its entire portfolio of PCLP servicing, liquidating and litigating 504 Loans, although SBA may in certain

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circumstances elect to handle such du- § 120.852 [Reserved] ties with respect to a particular PCLP Loan or Loans. Additional servicing § 120.853 Inspector General audits of and liquidation requirements are set CDCs. forth in subpart E of this part. The SBA Office of Inspector General (g) Making a 504 loan previously con- may also conduct, supervise or coordi- sidered by another CDC. A PCLP CDC nate audits pursuant to the Inspector also may utilize its PCLP status to General Act. The CDC must cooperate process a 504 loan application from an and make its staff, records, and facili- applicant whose application was de- ties available. clined or rejected by another CDC oper- [68 FR 57985, Oct. 7, 2003, as amended at 73 FR ating in that same Area of Operations, 75519, Dec. 11, 2008] if the applicant is located within that area and as long as SBA has not pre- § 120.857 Voluntary transfer and sur- viously declined that applicant’s 504 render of CDC certification. loan application. This may include the A CDC may not transfer its certifi- processing of a 504 loan application cation or withdraw from the 504 pro- from an applicant that has withdrawn gram without SBA’s consent. The CDC its application from another CDC. must provide a plan to SBA to transfer [68 FR 57984, Oct. 7, 2003, as amended at 72 FR its portfolio. The portfolio may only be 18364, Apr. 12, 2007] transferred with SBA’s written consent. If a CDC desires to withdraw from ASSOCIATE DEVELOPMENT COMPANIES the 504 program, it must forfeit its (ADCS) portfolio to SBA. SBA may conduct an audit of the transferring or with- § 120.850 Expiration of Associate De- drawing CDC. velopment Company designation. The designation of Associate Devel- [61 FR 3235, Jan. 31, 1996. Redesignated at 68 FR 57987, Oct. 7, 2003] opment Company (ADC) will cease to exist on January 1, 2004. After that PROJECT ECONOMIC DEVELOPMENT date, former ADCs may continue to GOALS contract with CDCs as Lender Service Providers (see part 103 of this chapter) § 120.860 Required objectives. or to perform other services. A Project must achieve at least one [68 FR 57984, Oct. 7, 2003] of the economic development objectives set forth in § 120.861 or § 120.862. OTHER CDC REQUIREMENTS § 120.861 Job creation or retention. § 120.851 CDC ethical requirements. A Project must create or retain one CDCs and their Associates must act Job Opportunity per an amount of 504 ethically and exhibit good character. loan funding that will be specified by They must meet all of the ethical re- SBA from time to time in a FEDERAL quirements of § 120.140. In addition, REGISTER notice. Such Job Opportunity they are subject to the following: average remains in effect until changed (a) Any benefit flowing to a CDC’s by subsequent FEDERAL REGISTER pub- Associate or his or her employer from lication. activities as an Associate must be [68 FR 57987, Oct. 7, 2003] merely incidental (this requirement does not prevent an Associate or an As- § 120.862 Other economic development sociate’s employer from providing in- objectives. terim financing as described in § 120.890 A Project that achieves any of the or Third Party Loans as described in following community development or § 120.920, as long as such activity does public policy goals is eligible if the not violate § 120.140); and CDC’s overall portfolio of 504 loans, in- (b) A CDC’s Associate may not be an cluding the subject loan, meets or ex- officer, director, or manager of more ceeds the CDC’s required Job Oppor- than one CDC. tunity average. Loan applications must [68 FR 57984, Oct. 7, 2003] indicate how the Project will meet the

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specified economic development objec- LEASING POLICIES SPECIFIC TO 504 tive. LOANS (a) Community Development goals: (1) Improving, diversifying or stabi- § 120.870 Leasing Project Property. lizing the economy of the locality; (a) A Borrower may use the proceeds (2) Stimulating other business devel- of a 504 loan to acquire, construct, or opment; modify buildings and improvements, (3) Bringing new income into the and/or to purchase and install machin- community; ery and equipment located on land leased to the Borrower by an unrelated (4) Assisting manufacturing firms lessor if: (North American Industry Classifica- (1) The remaining term of the lease, tion System (NAICS), Sectors 31 ‘‘ 33); including options to renew, exercisable or only by the lessee, equals or exceeds (5) Assisting businesses in Labor Sur- the term of the Debenture; plus Areas as defined by the Depart- (2) The Borrower assigns its interest ment of Labor. in the lease to the CDC with right of (b) Public Policy goals: reassignment to SBA; and (1) Revitalizing a business district of (3) The 504 loan is secured by a re- a community with a written revitaliza- corded lien against the leasehold estate tion or redevelopment plan; and other collateral as necessary. (2) Expansion of exports; (b) If the Project is for new construc- (3) Expansion of small businesses tion, the Borrower may lease long term owned and controlled by women as de- up to 20 percent of the Rentable Prop- fined in section 29(a)(3) of the Act, 15 erty in the Project to one or more tenants if the Borrower immediately occu- U.S.C. 656(a)(3); pies at least 60 percent of the Rentable (4) Expansion of small businesses Property, plans to occupy within three owned and controlled by veterans (es- years some of the remaining space not pecially service-disabled veterans) as immediately occupied and not leased defined in section 3(q) of the Act, 15 long term, and plans to occupy all of U.S.C. 632(q); the remaining space not leased long (5) Expansion of minority enterprise term within ten years. development (see § 124.103(b) of this chapter for minority groups who qual- [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2118, Jan. 13, 1999; 68 FR 57987, Oct. 7, ify for this description); 2003] (6) Aiding rural development; (7) Increasing productivity and com- § 120.871 Leasing part of Project Prop- petitiveness (retooling, robotics, mod- erty to another business. ernization, competition with imports); (a) The costs of interior finishing of (8) Modernizing or upgrading facili- space to be leased out to another busi- ties to meet health, safety, and envi- ness are not eligible Project costs. ronmental requirements; (b) Third-party loan proceeds used to (9) Assisting businesses in or moving renovate the leased space do not count to areas affected by Federal budget re- towards the 504 first mortgage require- ductions, including base closings, ei- ment or the Borrower’s contribution. ther because of the loss of Federal con- LOAN-MAKING POLICIES SPECIFIC TO 504 tracts or the reduction in revenues in LOANS the area due to a decreased Federal presence; or § 120.880 Basic eligibility require- (10) Reduction of rates of unemploy- ments. ment in labor surplus areas, as such In addition to the eligibility require- areas are determined by the Secretary ments specified in subpart A, to be an of Labor. eligible Borrower for a 504 loan, a small business must: [61 FR 3235, Jan. 31, 1996, as amended at 64 (a) Use the Project Property (except FR 2118, Jan. 13, 1999; 68 FR 57987, Oct. 7, 2003; that an Eligible Passive Company may 76 FR 63547, Oct. 12, 2011] lease to an Operating Company); and

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(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 50 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 (85% 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 building: 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 (b) Projects in foreign countries portion of debt being refinanced in the (loans financing real or personal prop- case of a partial refinance must also erty located outside the United States collateralize the 504 Loan unless SBA or its possessions). approves a waiver due to extraordinary § 120.882 Eligible Project costs for 504 circumstances. PCLP CDCs may not loans. use their delegated authority to ap- Eligible Project costs which may be prove a loan requiring this waiver; paid with the proceeds of 504 loans are: (3) The existing indebtedness was in- (a) Costs directly attributable to the curred for the benefit of the small busi- Project including expenditures in- ness concern for which any new Project curred by the Borrower (with its own costs are incurred. Existing 7(a) and 504 funds or from a loan) to acquire land loans may be refinanced under this sec- used in the Project, or for any other tion in accordance with SBA policies or expense directly attributable to the procedures; Project, prior to applying to SBA for (4) The financing will be used only for the 504 loan; refinancing existing indebtedness or (b) In Projects involving construc- costs relating to the project financed; tion, a contingency reserve for cost (5) The financing will provide a sub- overruns not to exceed 10 percent of stantial benefit to the borrower when construction cost; prepayment penalties, financing fees, (c) Professional fees directly attrib- and other financing costs are ac- utable and essential to the Project, counted for. For purposes of this para- such as title insurance, opinion of title, graph, ‘‘substantial benefit’’ means architectural and engineering costs, that the portion of the new installment appraisals, environmental studies, and amount attributable to the debt being legal fees related to zoning, permits, or refinanced must be at least 10 percent platting; and less than the existing installment

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amount(s). Prepayment penalties, fi- period ending on the date of applica- nancing fees, and other financing costs tion; must also be added to the amount (3) The cost to the Federal Govern- being refinanced in calculating the per- ment of making guarantees under this centage reduction in the new install- subsection (g) and under section 503 of ment payment. Exceptions to the 10% the Small Business Investment Act of reduction requirement may be ap- 1958 (15 U.S.C. 697) during the fiscal proved by the D/FA or designee for year in which the guarantee is made is good cause. PCLP CDCs may not use zero; their delegated authority to approve a (4) In addition to the annual guar- loan requiring this exception; antee fee assessed under § 120.971(d)(2), (6) The borrower has been current on Borrower must pay SBA a supple- all payments due on the existing debt mental annual guarantee fee to cover for not less than 1 year preceding the the additional cost attributable to the date of refinancing. For purposes of refinancing in an amount established this section, ‘‘date of refinancing’’ re- by SBA each fiscal year. fers to the date the 504 loan is approved (5) The funding for the Refinancing by SBA. Any unremedied delinquency Project must come from three sources after approval must be reported to SBA as an adverse change; based on the current fair market value (7) The financing under section 504 of the fixed assets serving as collateral will provide better terms or rate of infor the Refinancing Project, including terest than the existing indebtedness a Third Party Loan that is at least as on the date of refinancing. For pur- much as the 504 loan, not less than 10% poses of this paragraph, ‘‘better terms from the Borrower (excluding adminis- or rate of interest’’ may include longer trative costs), and not more than 40% maturity (but always commensurate from the 504 loan. If the Refinancing with the assets’ useful life), a lower in- Project involves a limited or single terest rate committed on the Third purpose building or structure, the Bor- Party Lender Loan or projected on the rower must contribute not less than 504 loan, improved collateral condi- 15% (excluding administrative costs), tions, or less restrictive loan cov- unless SBA determines, in its discre- enants. tion, and publishes a notice in the FED- (8) The authority to approve the refi- ERAL REGISTER, that due to an eco- nancing of same institution debt must nomic recession, as determined by the be approved by SBA and is not dele- National Bureau of Economic Research gated to the PCLP CDCs. For the pur- or its equivalent, Borrowers may con- poses of this paragraph, ‘‘same institu- tribute not less than 10% for Refi- tion debt’’ means any debt of the CDC nancing Projects involving a limited or or the Third Party Lender financing single purpose property during the re- the new project, or of affiliates of ei- cession. The lower required contribu- ther. tion by the Borrower will be in effect (f) For the purposes of paragraph (e), until the first day of the calendar quar- the phrase ‘‘project involves expansion ter following the end of the economic of a small business concern’’ includes recession as determined by the Na- any project that involves the acquisi- tional Bureau of Economic Research or tion, construction or improvement of its equivalent. SBA will publish a no- land, building or equipment for use by tice in the FEDERAL REGISTER announc- the small business concern. ing the date on which the requirement (g) SBA may approve a Refinancing of the lower Borrower contribution Project of a qualified debt subject to ended. In addition to a cash contribu- the following conditions and require- tion, the Borrower’s contribution may ments: be satisfied as set forth in § 120.910 or (1) The Refinancing Project does not by the equity in any other fixed assets involve the expansion of a small busi- that are acceptable to SBA as collat- ness; eral for the Refinancing Project, pro- (2) The applicant for the refinancing vided that there is an independent ap- available under this paragraph (g) has praisal of the fair market value of the been in operation for all of the 2 year asset;

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(6)(i) The portion of the Refinancing statements, invoices marked ‘‘paid,’’ Project provided by the 504 loan and cleared checks, or any other documents the Third Party Loan may be no more that demonstrate that a business obli- than 90% of the fair market value of gation was satisfied with the funds pro- the fixed assets that will serve as col- vided. lateral, except that if the Borrower’s (7) If the qualified debt is not fully application includes a request to fi- satisfied by the funding provided by nance the Eligible Business Expenses the Refinancing Project, the lender of described in paragraph (g)(6)(ii) of this the qualified debt must take one of the section, the portion of the Refinancing following actions, or some combination Project provided by the 504 loan and thereof, to address the deficiency: the Third Party Loan may be no more (i) Forgiveness of all or part of the than 85% of the fair market value of deficiency; the fixed assets that will serve as col- (ii) Acceptance of payment by the lateral and the Borrower may receive Borrower, or no more than 20% of the fair market (iii) Acceptance of a Note executed value of the Eligible Fixed Asset(s) se- by the Borrower for the balance, or any curing the Qualified Debt for Eligible portion of the balance. Such Note must Business Expenses; be subordinate to the 504 loan if the (ii) The Borrower’s application may Note and the 504 loan are secured by include a request to finance eligible any of the same collateral. The Note is business expenses as part of the Refi- subject to any other restrictions that nancing Project if the amount of cash SBA may establish to protect its cred- funds that will be provided for the Refi- itor position, including standby re- nancing Project exceeds the amount to quirements; be paid to the lender of the Qualified (8) The Third Party Lender must Debt. The Borrower’s application must have a first lien position, and the 504 include a specific description of the loan must have a second lien position, business expenses for which the financ- on all Eligible Fixed Assets securing ing is requested and an itemization of the Refinancing Project. Any other the amount of each expense. For the lien must be junior in priority to these purposes of this paragraph (g), ‘‘Eligi- lien positions. For other fixed assets ble Business Expenses’’ are limited to serving as collateral for the Refi- the operating expenses of the business nancing Project, the lien positions of that were incurred but not paid prior the Third Party Lender and the 504 to the date of application or that will loan may be junior to any existing become due for payment within 18 liens acceptable to SBA; months after the date of application. (9) Eligible Project costs which may These expenses may include salaries, be paid with the proceeds of the 504 rent, utilities, inventory, and other ex- loan are the amount used to refinance penses of the business that are not cap- the qualified debt and other costs ital expenditures. Debt is not included under § 120.882(c) and (d) and eligible as an Eligible Business Expense, except administrative costs under § 120.883; debt that was incurred with a credit (10) A CDC must limit the amount of card or a business line of credit may be its loans under this paragraph (g) so included if the credit card or business that, during any Federal fiscal year, line of credit is issued in the name of the amount of the new loans approved the small business and the Applicant under this paragraph (g) does not ex- certifies that the debt being refinanced ceed 50% of the total dollar amount of was incurred exclusively for business the CDC’s 504 loans approved (including related purposes. Loan proceeds must the loans approved under this para- not be used to refinance any personal graph (g)) during the previous fiscal expenses. Both the CDC and the Bor- year. This limitation may be waived rower must certify in the application upon application by the CDC and upon that the funds will be used to cover Eli- a determination by SBA that the 504 gible Business Expenses. Borrower loan is needed for good cause. must, upon request, substantiate the (11) The authority to approve the re- use of the funds provided for business financing under this paragraph (g) is expenses through, for example, bank not delegated to PCLP CDCs;

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(12) The 504 loans approved under this be submitted to SBA as part of the ap- paragraph (g) must be disbursed within plication. 9 months after loan approval. The Di- (ii) That is not subject to a guarantee rector, Office of Financial Assistance, by a Federal agency or department; or his or her designee, may approve a (iii) Substantially all (85% or more) request for extension of the disburse- of which was for an Eligible Fixed ment period for an additional 6 months Asset. If the Eligible Fixed Asset was for good cause. originally financed through a commer- (13) The Third Party Loan may not cial loan that would have satisfied the be sold on the secondary market as a ‘‘substantially all’’ standard (the part of a pool guaranteed under sub- ‘‘original loan’’) and that was subse- part J of this part, or any successor to quently refinanced one or more times, this program, when the debt being refi- with the current commercial loan nanced is same institution debt; being the most recent refinancing, the (14) The Third Party Lender must current commercial loan will be certify that it would not refinance the deemed to satisfy this paragraph (iii). qualified debt except for the assistance If the original loan was for the con- provided under this paragraph (g); struction of a new building, or the ac- (15) Definitions. For the purposes of quisition, renovation, or reconstruc- this paragraph (g), the terms below are tion of an existing building, and such loan would not have satisfied the leas- defined as follows: ing policies set forth in 13 CFR 120.131 Date of application refers to the date and 13 CFR 120.870(b), the current com- the 504 loan application is received by mercial loan will be deemed to satisfy SBA. these policies, provided that Borrower Eligible Fixed Assets are one or more demonstrates compliance with 13 CFR long-term fixed assets, such as land, 120.131(b) for existing buildings as of buildings, machinery, and equipment, the date of application. acquired, constructed or improved by a (iv) That was for the benefit of the small business for use in its business small business concern; operations. (v) That is collateralized by Eligible Fair market value refers to the cur- Fixed Assets; rent appraised value of an asset that is (vi) That is not a Third Party Loan established by an independent ap- that is part of an existing 504 Project; praiser in accordance with the stand- and ards established by SBA in its SOPs. (vii) For which the applicant for the Qualified debt is a commercial loan: refinancing available under this para- (i) That was incurred not less than 2 graph (g) has been current on all pay- years before the date of the application ments due for not less than one year for the refinancing available under this preceding the date of application. For paragraph (g). A commercial loan that the purposes of this paragraph (vii), was refinanced within the two years ‘‘current on all payments due’’ means prior to the date of application (the that no payment was more than 30 days most recent loan) may be deemed in- past due from either the original pay- curred not less than 2 years before the ment terms or modified payment terms date of the application provided that (whether through a modification to an the effect of the most recent loan was existing Note or through a refinancing to extend the maturity date without that results in a new Note). The modi- advancing any additional proceeds (ex- fication (or refinancing) must have cept to cover closing costs) and the col- been agreed to in writing by the Bor- lateral for the most recent loan in- rower and the lender of the existing cludes, at a minimum, the same Eligi- debt no less than one year preceding ble Fixed Asset(s) that served as collat- the date of application, except that a eral for the former loan that was refi- modified (or refinanced) loan may be nanced. The loan documents and lien allowed if the purpose of the modifica- instruments for the most recent loan, tion (or refinancing) was to extend the as well as the loan documents and lien maturity date of the loan, including instruments for the loan that was re- any balloon payment, and if, during placed by the most recent loan, must the one year period prior to the date of

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application (i.e., in the months prior to § 120.884 Ineligible costs for 504 loans. and after the modification or refi- Costs not directly attributable and nancing), the Borrower was current on necessary for the Project may not be all payments due, there have been no paid with proceeds of the 504 loan. deferments of any payments, and no These include, but are not limited to, additional proceeds were advanced the following: through the modification or refi- (a) Debt refinancing (other than in- nancing (except to cover closing costs). terim financing), except as provided in Any delinquency in payment on the § 120.882(e) and (g). loan to be refinanced after approval (b) A CDC may not use 504 loan pro- and before debenture funding must be ceeds to pay any creditor in a position reported to SBA as an adverse change. to sustain a loss causing a shift to SBA Refinancing Project means the fair of all or part of a potential loss from market value of the Eligible Fixed an existing debt. Asset(s) securing the qualified debt and (c) Third-Party Loan fees (commit- any other fixed assets acceptable to ment, broker, finders, origination, SBA, except that if the Refinancing processing fees of permanent financ- Project includes the financing of Eligi- ing). ble Business Expenses, SBA will not ac- (d) Ancillary business expenses, such cept as collateral any fixed assets as: other than the Eligible Fixed Asset(s) (1) Working capital; securing the Qualified Debt. (2) Counseling or management serv- Same institution debt means any debt ices fees; of the Third Party Lender that is pro- (3) Incorporation/organization costs; viding funds for the refinancing, or of (4) Franchise fees; and its affiliates. (5) Advertising. [61 FR 3235, Jan. 31, 1996, as amended at 68 (e) Fixed-asset Project components, FR 57987, Oct. 7, 2003; 74 FR 29591, June 23, such as: 2009; 76 FR 9218, Feb. 17, 2011; 76 FR 63155, (1) Short-term equipment, furniture, Oct. 12, 2011; 79 FR 15650, Mar. 21, 2014; 81 FR and furnishings (unless essential to and 33125, May 25, 2016; 83 FR 19920, May 7, 2018] a minor portion of the Project); (2) Automobiles, trucks, and air- § 120.883 Eligible administrative costs planes; and for 504 loans. (3) Construction equipment (except The following administrative costs for heavy duty construction equipment are not part of Project costs, but may integral to the business’ operations be paid with the proceeds of the 504 with a remaining useful life of a min- loan and the Debenture (see § 120.971): imum of 10 years). (a) SBA guarantee fee; [61 FR 3235, Jan. 31, 1996, as amended at 64 (b) Funding fee (to cover the cost of FR 2118, Jan. 13, 1999; 74 FR 29591, June 23, a public issuance of securities and the 2009; 76 FR 9219, Feb. 17, 2011; 82 FR 39504, Trustee); Aug. 21, 2017] (c) CDC processing fee; INTERIM FINANCING (d) Borrower’s out-of-pocket costs associated with 504 loan and Debenture § 120.890 Source of interim financing. closing other than legal fees (for example, certifications and the copying A Project may use interim financing costs associated with them, overnight for all Project costs except the Bor- delivery, postage, and messenger serv- rower’s contribution. Any source (in- ices) but not to include fees and costs cluding a CDC) may supply interim fi- described in § 120.882; nancing provided: (a) The financing is not derived from (e) CDC Closing Fee (see any SBA program, directly or indi- § 120.971(a)(2)) up to a maximum of rectly; $2,500; and (b) The terms and conditions of the (f) Underwriters’ fee. financing are acceptable to SBA; [64 FR 2118, Jan. 13, 1999, as amended at 68 (c) The source is not the Borrower or FR 57987, Oct. 7, 2003] an Associate of the Borrower; and

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(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 payments. (If the source lacks such experi- THE BORROWER’S CONTRIBUTION ence or qualifications, SBA may require the interim loan to be managed § 120.910 Borrower contributions. by a third party such as a bank or pro- (a) The Borrower must contribute to fessional construction manager.) the Project cash (or property acceptable 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; § 120.892 Certifications of no adverse (2) At least 15 percent, if the Project change. involves the acquisition, construction, Following completion of the Project, conversion, or expansion of a limited or the following certifications must be single purpose building or structure; made before the 504 loan closing: (3) At least 20 percent, if the Project (a) The interim lender must certify involves conditions described in para- to the CDC that it has no knowledge of graphs (a)(1) and (2) of this section; or any unremedied substantial adverse (4) At least 10 percent, in all other change in the condition of the small circumstances. business since the application to the (b) The source of the contribution interim lender; may be a CDC or any other source ex- (b) The Borrower (or Operating Com- cept an SBA business loan program pany) must certify to the CDC that (see § 120.913 for SBIC exception). there has been no unremedied substantial adverse change in its financial con- [64 FR 2118, Jan. 13, 1999] dition or its ability to repay the 504 loan since the date of application, and § 120.911 Land contributions. must furnish interim financial state- The Borrower’s contribution may be ments, current within 120 days of clos- land (including buildings, structures ing; and and other site improvements which (c) The CDC must issue an opinion to will be part of the Project Property) the best of its knowledge that there previously acquired by the Borrower. has been no unremedied substantial adverse change in the Borrower’s (or Op- [68 FR 57987, Oct. 7, 2003] erating Company’s) ability to repay § 120.912 Borrowed contributions. the 504 loan since its submission of the loan application to SBA. The Borrower may borrow its cash contribution from the CDC or a third [61 FR 3235, Jan. 31, 1996, as amended at 68 party. If any of the contribution is bor- FR 57987, Oct. 7, 2003] rowed, the interest rate must be rea- PERMANENT FINANCING sonable. If the loan is secured by any of the Project assets, the loan must be § 120.900 Sources of permanent financ- subordinate to the liens securing the ing. 504 Loan, and the loan may not be re- Permanent financing for each Project paid at a faster rate than the 504 Loan must come from three sources: the Bor- unless SBA gives prior written ap- rower’s contribution, Third-Party proval. A third party lender may not Loans, and the 504 loan. Typically, the receive voting rights, stock options, or Borrower contributes 10 percent of the any other actual or potential voting in- permanent financing, Third-Party terest in the small business.

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§ 120.913 Limitations on any contribu- from the disposition of the Project tions by a Licensee. Property to the Third Party Loan. Subject to part 107 of this chapter, a [64 FR 2118, Jan. 13, 1999, as amended at 79 Licensee may provide financing for all FR 15650, Mar. 21, 2014] or part of the Borrower’s contribution § 120.921 Terms of Third Party loans. to the Project. SBA will consider Li- censee funds to be derived from federal (a) Maturity. A Third Party Loan sources if the Licensee has Leverage must have a term of at least 7 years (as defined in § 107.50 of this chapter). If when the 504 loan is for a term of 10 years and 10 years when the 504 loan is the Licensee does not have Leverage, for 20 years. If there is more than one SBA will consider the investment to be Third Party Loan, an overall loan ma- from private funds. Licensee financing turity must be calculated, taking into must be subordinated to the 504 loan account the maturities and amounts of and must not be repaid at a faster rate each loan. If there is a balloon pay- than the Debenture. (Refer to ment, it must be justified in the loan § 120.930(a) for additional limitations.) report and clearly identified in the [68 FR 57987, Oct. 7, 2003] Loan Authorization. (b) Interest rates. Interest rates must THIRD PARTY LOANS be reasonable. SBA must establish and publish in the FEDERAL REGISTER a § 120.920 Required participation by maximum interest rate for any Third the Third Party Lender. Party Loan from commercial financial institutions. The rate shall remain in (a) Amount of Third Party Loans. A effect until changed. Project financing must include one or (c) Other terms. The Third Party Loan more Third Party Loans totaling at must not have any early call feature or least as much as the 504 loan. However, contain any demand provisions unless the Third Party Loans must total at the loan is in default. By participating, least 50 percent of the total cost of the a Third Party Loan lender waives, as Project if: to the CDC/SBA financing, any provi- (1) The Borrower (or Operating Com- sion in its deed of trust, or mortgage, pany, if the Borrower is an Eligible or other documents prohibiting further Passive Company) has operated for two encumbrances or subordinate debt. In years or less, or the event of default, the Third Party (2) The Project is for the acquisition, Lender must give the CDC and SBA construction, conversion or expansion written notice of default within 30 days of a limited or single purpose asset. of the event of default and at least 60 (b) Third party loan collateral. The 504 days prior to foreclosure. loan is usually collateralized by a sec- (d) Future advances. The Third Party ond lien on Project Property. The Loan must not be open-ended. After Third Party Lender may obtain addi- completion of the Project, the Third tional collateral or other security for Party Lender may not make future ad- the Third Party Loan (‘‘Additional Col- vances under the Third Party Loan ex- lateral’’) only if in the event of liquida- cept expenditures to collect amounts due the Third Party Loan notes, main- tion and unless otherwise approved in tain collateral and protect the Third writing by SBA: Party Lender’s lien position on the (1) The Third Party Lender liquidates Third Party Loan. or otherwise exhausts all reasonable (e) Subordination. The Third Party avenues of collection with respect to Lender’s lien will be subordinate to the the Additional Collateral no later than CDC/SBA lien regarding any prepay- the disposition of the Project Property, ment penalties, late fees, other default and charges, and escalated interest after (2) The Third Party Lender applies default due under the Third Party any proceeds received as a result of the Loan. Additional Collateral to the balance (f) Escalation upon default. A Third- outstanding on the Third Party Loan Party Lender may not escalate the prior to the application of proceeds rate of interest upon default to a rate

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greater than the maximum rate set will be construed as a Referral Agent forth in paragraph (b) of this section. under part 103 of this chapter. Regarding any Project that SBA ap- [68 FR 57988, Oct. 7, 2003] proved after September 30, 1996, SBA will only pay the interest rate on the 504 LOANS AND DEBENTURES note in effect before the date of the Borrower’s default. § 120.930 Amount. [61 FR 3235, Jan. 31, 1996, as amended at 64 (a) Generally, a 504 loan may not ex- FR 2118, Jan. 13, 1999] ceed 40 percent of total Project cost plus 100 percent of eligible administra- § 120.922 Pre-existing debt on the tive costs. For good cause shown, SBA Project Property. may authorize an increase in the per- In addition to its share of Project centage of Project costs covered up to cost, a Third-Party Loan may include 50 percent. No more than 50 percent of consolidation of existing debt on the eligible Project costs can be from Fed- Project Property. The consolidation eral sources, whether received directly must not improve the lien position of or indirectly through an intermediary. the Lender on the pre-existing debt, (b) A 504 loan must not be less than unless the debt is a previous Third- $25,000. Party Loan. (c) Upon completion of the Project, the Debenture amount will be reduced § 120.923 Policies on subordination. by the amount that the unused contin- (a) Financing provided by the seller gency reserve exceeds 2 percent of the of Project Property must be subordi- anticipated Debenture. nate to the 504 loan. SBA may waive [61 FR 3235, Jan. 31, 1996, as amended at 68 the subordination requirement if the FR 57988, Oct. 7, 2003] property is classified as ‘‘other real estate owned’’ by a national bank or § 120.931 504 Lending limits. other Federally regulated lender and 504 loan amounts shall be limited to: SBA considers the property to be of (a) An outstanding balance of sufficient value to support the 504 loan. $5,000,000 for each Borrower and its af- (b) A Borrower is eligible for a 504 filiates if the loan proceeds will not be loan even if part of the Project financ- directed towards a Project in para- ing is tax-exempt. SBA’s lien position graph (c) of this section, must not be subordinate to loans made (b) An outstanding balance of from the proceeds of the tax-exempt $5,000,000 for each Borrower and its af- obligation. filiates if one or more of the public pol- (c) The Borrower must not prepay icy goals enumerated in § 120.862(b) ap- any Project financing subordinate to plies to the Project; and the 504 loan without SBA’s prior writ- (c) $5,500,000 for each Project for: ten consent. (1) Small Manufacturers (NAICS Codes 31–33) with all production facili- [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57988, Oct. 7, 2003] ties located in the United States; (2) Reduction of the Borrower’s, or if § 120.925 [Reserved] the Borrower is an Eligible Passive Company, the Operating Company’s en- § 120.926 Referral fee. ergy consumption by at least 10%; or The CDC can receive a reasonable re- (3) Plant, equipment and process up- ferral fee from the Third Party Lender grades of renewable energy sources if the CDC secured the Third Party such as the small-scale production of Lender for the Borrower under a writ- energy for individual buildings’ or ten contract between the CDC and the communities’ consumption, commonly Third Party Lender. Both the CDC and known as micropower, or renewable fuel producers including biodiesel and the Third Party Lender are prohibited ethanol producers. from charging this fee to the Borrower. If a CDC charges a referral fee, the CDC [76 FR 63547, Oct. 12, 2011]

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§ 120.932 Interest rate. tion, SBA may forbear acceleration of 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 § 120.933 Maturity. also due immediately, and SBA must 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- § 120.939 Borrower prohibition. tional collateral is required. (In rare 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 loan, if it pays the entire principal bal- § 120.935 Deposit from the Borrower ance, unpaid interest, any unpaid fees, that a CDC may require. and any prepayment premium estab- At the time of application for a 504 lished in the note. If the Borrower pre- loan, the CDC may require a deposit pays, the CDC must prepay the cor- from the Borrower of $2,500 or 1 percent responding Debenture with interest of the Net Debenture Proceeds, which- and premium. If one of the Debentures ever is less. The deposit may be applied in a Debenture Pool is prepaid, the In- to the loan processing fee if the appli- vestors in that Debenture Pool must be cation is accepted, but must be repaid pro rata, and SBA’s guarantee on funded if the application is denied. If the entire Debenture Pool must be pro- the small business withdraws its appli- portionately reduced. If the entire De- cation, the CDC may deduct from the benture Pool is paid off, SBA may call deposit reasonable costs incurred in all Certificates backed by the Pool for packaging and processing the applica- redemption. tion. § 120.941 Certificates. § 120.937 Assumption. (a) The face value of a Certificate A 504 loan may be assumed with must be at least $25,000. Certificates SBA’s prior written approval. are issued in registered form and transferred only by entry on the central reg- § 120.938 Default. istry maintained by the Trustee. SBA (a) Upon occurrence of an event of de- guarantees the timely payment of prin- fault specified in the 504 note which re- cipal and interest on the Certificates. quires automatic acceleration, the (b) Before the sale of a Certificate, note becomes due and payable. Upon the seller, or the broker or dealer act- occurrence of an event of default which ing as the seller’s agent, must disclose does not require automatic accelera- to the purchaser the terms, conditions,

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yield, and premium and other charac- (g) Assure before any resale of a De- teristics not guaranteed by SBA. benture or Certificate is recorded in the registry that the seller has pro- DEBENTURE SALES AND SERVICE AGENTS vided the purchaser a written disclosure statement approved by SBA. § 120.950 SBA and CDC must appoint agents. § 120.954 Central Servicing Agent. SBA and the CDC must appoint the (a) SBA has entered into a Master following agents to facilitate the sale Servicing Agreement designating a and service of the Certificates and dis- Central Servicing Agent (CSA) to sup- bursement of the proceeds. port the orderly flow of funds among Borrowers, CDCs, and SBA. The CDC § 120.951 Selling agent. and Borrower must enter into an indi- The CDC, with SBA approval, shall vidual Servicing Agent Agreement appoint a Selling Agent to select un- with the CSA for each 504 loan, consti- derwriters, negotiate the terms and tuting acceptance by the CDC and the conditions of Debenture offerings with Borrower of the terms of the Master the underwriters, and direct and co- Servicing Agreement. ordinate Debenture sales. (b) The CSA has established a master reserve account. All funds related to § 120.952 Fiscal agent. the 504 loans and Debentures flow SBA shall appoint a Fiscal Agent to through the master reserve account assess the financial markets, minimize under the provisions of the Master the cost of sales, arrange for the pro- Servicing Agreement. The master reduction of the Offering Circular, De- serve account will be funded by a guar- benture Certificates, and other re- antee fee, a funding fee to be published quired documents, and monitor the from time to time in the FEDERAL REG- performance of the Trustee and the un- ISTER, and by principal and interest derwriters. payments of 504 loans. At SBA’s direction, the CSA may use funds in the § 120.953 Trustee. master reserve account to defray program expenses. In the event a Borrower SBA must appoint a Trustee to: defaults and its 504 note is accelerated, (a) Issue Certificates; SBA shall add funds under its guar- (b) Transfer the Certificates upon re- antee to ensure the full and timely sale in the secondary market; payment of the Debenture which fund- (c) Maintain physical possession of ed the 504 loan. At SBA’s direction, the the Debentures for SBA and the Cer- CSA must pay to the CDC servicing tificate holders; each loan the interest accruing in the (d) Establish and maintain a central master reserve account on loan pay- registry of: ments made by each Borrower between (1) Debenture Pools, including the the date of receipt of each monthly CDC obligors and the interest rate pay- payment and the date of disbursement able on the Debentures in each Pool; to investors. The CSA may disburse (2) Certificates issued or transferred, such interest periodically to CDCs on a including the Debenture Pool backing pro rata basis. SBA may use interest the Certificate, name and address of accruals in the master reserve account the purchaser, price paid, the interest earned prior to October 1991 (not pre- rate on the Certificate, and fees or viously distributed to the CDCs) for the charges assessed by the transferror; costs of 504 program administration. and (3) Brokers and dealers in Certifi- § 120.955 Agent bonds and records. cates, and the commissions, fees or dis- (a) Each agent (in §§ 120.951 through counts granted to the brokers and deal- 120.954) must provide a fidelity bond or ers; insurance in such amount as necessary (e) Receive semi-annual Debenture to fully protect the interest of the gov- payments and prepayments; ernment. (f) Make regularly scheduled and pre- (b) SBA must have access at the payment payments to Investors; and agent’s place of business to all books,

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records and other documents relating to SBA a material fact regarding the to Debenture activities. Project or 504 loan; (6) The CDC, Third Party Lender or § 120.956 Suspension or revocation of Borrower has misrepresented a mate- brokers and dealers. rial fact to SBA regarding the Project The appropriate Office of Capital Ac- or 504 loan; or cess official in accordance with Delega- (7) SBA determines that there has tions of Authority may suspend or re- been an unremedied material adverse voke the privilege of any broker or change, such as deterioration in the dealer to participate in the sale or Borrower’s financial condition, since marketing of Debentures and Certifi- the 504 loan was approved, or that ap- cates for actions or conduct bearing proving the closing of the Debenture negatively on the broker’s fitness to will put SBA at unacceptable financial participate in the securities market. risk. SBA must give the broker or dealer written notice, stating the reasons, at [68 FR 57988, Oct. 7, 2003] least 10 business days prior to the ef- § 120.961 Construction escrow ac- fective date of the suspension or rev- counts. ocation. A broker or dealer may appeal the suspension or revocation made The CSA, title company, CDC attor- under this section pursuant to the pro- ney, or bank may hold Debenture procedures set forth in part 134 of this ceeds in escrow to complete Project chapter. The action of this official will components such as landscaping and remain in effect pending resolution of parking lots, and acquire machinery the appeal. and equipment if the component or acquisition is a minor portion of the [73 FR 75519, Dec. 11, 2008] total Project and has been contracted for completion or delivery at a speci- CLOSINGS fied price and specific future date. The escrow agent must disburse funds upon § 120.960 Responsibility for closing. approval by the CDC and the SBA, sup- (a) The CDC is responsible for the 504 ported by invoices and payable jointly loan closing. to the small business and the des- (b) The Debenture closing is the joint ignated contractor. responsibility of the CDC and SBA. (c) SBA may, within its sole discre- SERVICING tion, decline to close the Debenture; direct the transfer of the 504 loan to an- § 120.970 Servicing of 504 loans and other CDC; or cancel its guarantee of Debentures. the Debenture, prior to sale, if any of (a) In servicing 504 loans, CDCs must the following occur: comply with Loan Program Require- (1) The CDC has failed to comply ma- ments and in accordance with prudent terially with any requirement imposed and commercially reasonable lending by statute, regulation, SOP, policy and standards. procedural notice, any agreement the (b) The CDC is responsible for routine CDC has executed with SBA, or the servicing including receipt and review terms of a Debenture or loan author- of the Borrower’s or Operating Com- ization; pany’s financial statements on an an- (2) The CDC has failed to make or nual or more frequent basis and moni- close the 504 loan or prepare the Deben- toring the status of the Borrower and ture closing in a prudent or commer- 504 loan collateral. cially reasonable manner; (c) The CDC is responsible for assur- (3) The CDC’s improper action or in- ing that the Borrower makes all re- action places SBA at risk; quired insurance premium payments (4) The CDC has failed to use required and has paid all taxes when due. SBA forms or electronic versions of (d) The CDC is responsible for filing those forms; renewals and extensions of security in- (5) The CDC, Third Party Lender or terests on collateral for the 504 loan, as Borrower has failed to timely disclose required.

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(e) The CDC must timely respond to collected from the CSA when the pay- Borrower requests for loan modifica- ments are made. tions. (4) Late fees. Loan payments received (f) For any 504 loan that is more than after the 15th of each month may be three months past due, the CDC must subject to a late payment fee of 5 per- promptly request that SBA purchase cent of the late payment or $100, the Debenture unless the 504 loan has whichever is greater. These fees will be an SBA-approved deferment or is in collected by the CSA on behalf of the compliance with an SBA-approved plan CDC; and to allow the Borrower to catch up on (5) Assumption fee. Upon SBA’s writ- delinquent loan payments. ten approval, a CDC may charge an as- (g) The CDC must cooperate with sumption fee not to exceed 1 percent of SBA to cure defaults and initiate work- the outstanding principal balance of outs. the loan being assumed. (h) Additional servicing requirements (b) CSA fees. The CSA may charge an are set forth in subpart E of this part. initiation fee on each loan and a 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 assessed to the Borrower or the inves- § 120.971 Allowable fees paid by Bor- tor. The fees must be approved by SBA rower. 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 (2) For loans approved by SBA after charge up to 1.5 percent of the net De- September 30, 1996, SBA charges a fee benture proceeds to process the financ- of not more than 0.9375 percent annu- ing. Two-thirds of this fee will be con- ally on the unpaid principal balance of sidered earned and may be collected by the loan as determined at five-year an- the CDC when the Authorization for niversary intervals. the Debenture is issued by SBA. The (e) Miscellaneous fees. A funding fee portion of the processing fee paid by not to exceed 0.25 percent of the Deben- the Borrower may be reimbursed from ture may be charged to cover costs in- the Debenture proceeds; curred by the trustee, fiscal agent, (2) Closing fee. The CDC may charge a transfer agent. reasonable closing fee sufficient to re- [61 FR 3235, Jan. 31, 1996, as amended at 64 imburse it for the expenses of its in- FR 2119, Jan. 13, 1999; 68 FR 57988, Oct. 7, house or outside legal counsel, and 2003] other miscellaneous closing costs (CDC Closing Fee). Some closing costs may § 120.972 Third Party Lender partici- be funded out of the Debenture pro- pation fee and CDC fee. ceeds (see § 120.883 for limitations); (a) Participation fee. For loans ap- (3) Servicing fee. The CDC will charge proved by SBA after September 30, a monthly servicing fee of at least 0.625 1996, SBA must collect a one-time fee percent per annum and no more than 2 equal to 50 basis points on the Third percent per annum on the unpaid bal- Party Lender’s participation in a ance of the loan as determined at five- Project when the Third Party Lender year anniversary intervals. A servicing occupies a senior credit position to fee greater than 1.5 percent in a rural SBA in the Project. area and 1 percent everywhere else re- (b) CDC fee. For loans approved by quires SBA’s prior written approval, SBA after September 30, 1996, SBA based on evidence of substantial need. must collect an annual fee from the The servicing fee may be paid only CDC equal to 0.125 percent of the out- from loan payments received. The fees standing principal balance of the De- may be accrued without interest and benture. The fee must be paid from the

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servicing fees collected by the CDC and (1) The CDC meets either of the fol- cannot be paid from any additional fees lowing criteria: imposed on the Borrower. (i) The CDC participated in the loan 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- § 120.975 CDC Liquidation of loans and thority, the CDC made an average of debt collection litigation. not less than ten 504 loans per year; 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. (2) The PCLP CDC has entered into a (d) Application for authority to liq- contract with a qualified third party uidate and litigate. To seek authority to for the performance of its liquidation perform liquidation and debt collection responsibilities and obtains the ap- litigation under paragraphs (b) and (c) proval of SBA with respect to the of this section, a CDC other than a qualifications of the contractor and the PCLP CDC must submit a written ap- terms and conditions of the contract. plication to SBA and include docu- (b) All other CDCs. A CDC that is not mentation demonstrating that the CDC authorized under paragraph (a) of this meets the requirements of paragraph section may apply to become an Au- (b) and (c) of this section. If a CDC in- thorized CDC Liquidator with author- tends to use a contractor to perform ity to liquidate and handle debt collec- liquidation, it must obtain approval tion litigation with respect to 504 loans from SBA of both the qualifications of on behalf of SBA, in accordance with the contractor and the terms and con- subpart E of this part, if the CDC ditions in the contract covering the meets the following requirements: CDC’s retention of the contractor. SBA

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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 [73 FR 75519, Dec. 11, 2008] this section. [72 FR 18365, Apr. 12, 2007] § 120.1010 SBA access to SBA Lender and Intermediary files. ENFORCEABILITY OF 501, 502 AND 503 An SBA Lender and Intermediary LOANS AND OTHER LAWS must allow SBA’s authorized representatives, including representatives § 120.990 501, 502 and 503 loans. authorized by the SBA Inspector Gen- SBA has discontinued loan programs eral, during normal business hours, ac- for 501, 502, and 503 loans. Outstanding cess to its files to review, inspect, and loans remain under these programs, copy all records and documents, relat- and Borrowers, CDCs, and SBA must ing to SBA guaranteed loans or as re- comply with the terms and conditions quested for SBA oversight. of the corresponding notes and Deben- [73 FR 75519, Dec. 11, 2008, as amended at 85 tures, and the regulations in this part FR 14781, Mar. 16, 2020] in effect when the obligations were un- dertaken or last in effect, if applicable. § 120.1015 Risk Rating System. (a) Risk Rating. SBA may assign a § 120.991 Effect of other laws. Risk Rating to all SBA Lenders and No State or local law may preclude Intermediaries on a periodic basis. or limit SBA’s exercise of its rights Risk Ratings are based on certain risk- with respect to notes, guarantees, De- related portfolio performance factors bentures and Debenture Pools, or of its as set forth in notices or SBA’s SOPs enforcement rights to foreclose on col- and as published from time to time. lateral. (b) Rating categories. Risk Ratings fall into one of two broad categories: Ac- Subpart I—Risk-Based Lender ceptable Risk Ratings or Less Than Ac- Oversight ceptable Risk Ratings. [73 FR 75519, Dec. 11, 2008, as amended at 85 SOURCE: 72 FR 25194, May 4, 2007, unless FR 14781, Mar. 16, 2020] otherwise noted. § 120.1025 Monitoring. SUPERVISION SBA may conduct monitoring of SBA Lenders and Intermediaries including, § 120.1000 Risk-Based Lender Over- but not limited to, SBA Lenders’ or sight. Intermediaries’ self-assessments. (a) Risk-Based Lender Oversight. SBA monitors, supervises, examines, regu- [85 FR 14781, Mar. 16, 2020] lates, and enforces laws against SBA § 120.1050 Reviews and examinations. Supervised Lenders and the SBA operations of SBA Lenders and Inter- (a) Reviews. SBA may conduct re- mediaries. views of the SBA loan operations of (b) Scope. Most rules and standards SBA Lenders. The review may include, set forth in this subpart apply to SBA but is not limited to, an evaluation of Lenders as well as Intermediaries; how- the following: ever, SBA has separate regulations for (1) Portfolio performance; enforcement grounds and formal en- (2) SBA operations management; forcement actions for Intermediaries (3) Credit administration; and at §§ 120.1425 and 120.1540. (4) Compliance with Loan Program Requirements. [85 FR 14781, Mar. 16, 2020] (b) Examinations. SBA may conduct safety and soundness examinations of § 120.1005 Bureau of PCLP Oversight. SBA Supervised Lenders, except SBA SBA’s Bureau of PCLP Oversight will not conduct safety and soundness within OCRM, monitors the capitaliza- examinations of Other Regulated tion of PCLP CDC pilot participants’ SBLCs under §§ 120.1510 and 1511. The

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safety and soundness examination may lowing SBA’s conclusion of the review/ include, but is not limited to, an eval- examination unless SBA notifies the uation of: SBA Lender or Intermediary of a later (1) Capital adequacy; date and the reason for the delay. The (2) Asset quality (including credit ad- Report may contain findings, conclu- ministration and allowance for loan sions, corrective actions, and rec- losses); ommendations. Each director (or man- (3) Management quality (including ager, in the absence of a Board of Di- internal controls, loan portfolio man- rectors) of the SBA Lender or Inter- agement, and asset/liability manage- mediary, in keeping with his or her re- ment); sponsibilities, must become fully in- (4) Earnings; formed regarding the contents of the (5) Liquidity; and Report. (6) Compliance with Loan Program (b) Response to review and examination Requirements. Reports. SBA Lenders and Inter- (c) Reviews/examinations of Inter- mediaries. SBA may perform reviews or mediaries must respond to Report find- examinations of Intermediaries. ings, recommendations, and corrective (d) Other reviews or examinations. SBA actions, if any, in writing to SBA and, may perform other reviews/examina- if requested, submit proposed correc- tions as needed as determined by SBA tive actions and/or a capital restora- in its discretion. tion plan. An SBA Lender or Inter- mediary must respond within 45 busi- [73 FR 75519, Dec. 11, 2008, as amended at 82 ness days from the date the Report is FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16, received unless SBA notifies the SBA 2020] Lender or Intermediary in writing that § 120.1051 Frequency of reviews and the response, proposed corrective ac- examinations. tions or capital restoration plan is to SBA may conduct reviews and exami- be filed within a different time period nations of SBA Lenders and Inter- (either shortened or extended in SBA’s mediaries on a periodic basis. SBA may discretion). The SBA Lender or Inter- consider, but is not limited to, the fol- mediary response must address each lowing factors in determining fre- finding, recommendation, and correc- quency: tive action. In proposing a corrective (a) Results of monitoring, including action or capital restoration plan, the an SBA Lender’s or Intermediary’s SBA Lender or Intermediary must de- Risk Rating; tail the steps it will take to correct the (b) SBA loan portfolio size; finding(s); the time within which each (c) Previous review or examination step will be taken; the timeframe for findings; accomplishing the entire corrective ac- (d) Responsiveness in correcting defi- tion plan; and the person(s) or depart- ciencies noted in prior reviews or ex- ment at the SBA Lender or Inter- aminations; and mediary charged with carrying out the (e) Such other risk-related informa- corrective action or capital restoration tion as SBA, in its discretion, deter- plan, as applicable. In addition, SBA mines to be appropriate. Lenders and Intermediaries must im- [73 FR 75519, Dec. 11, 2008, as amended at 82 plement corrective actions within 90 FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16, calendar days from the date the Report 2020] or SBA’s letter requiring corrective action is received, unless SBA provides § 120.1055 Review and examination re- written notice of another timeframe. sults. For purposes of this paragraph (b), a (a) Written Reports. SBA will provide Report will be deemed to have been re- an SBA Lender and Intermediary a ceived on the date it was emailed to copy of SBA’s written report prepared the last known email address of the as a result of the SBA Lender or Inter- SBA Lender or Intermediary unless the mediary review or examination (‘‘Re- SBA Lender or Intermediary can pro- port’’). SBA will provide the Report vide compelling evidence to the con- generally within 60 business days fol- trary.

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(c) SBA response. SBA will provide poses of this regulation, Confidential written notice of whether the response Information is defined in the SBA and, if applicable, any corrective ac- Lender information portal and by no- tion or capital restoration plan, is ap- tice issued from time to time. Access proved, or whether SBA will seek addi- to the Lender information portal may tional information or require other ac- be obtained by contacting the OCRM. tion. (b) Disclosure prohibition. Each SBA (d) Failure to respond or to submit or Lender and Intermediary is prohibited implement an acceptable plan. If an SBA from disclosing its Report, Risk Rat- Lender or Intermediary fails to respond ing, and Confidential Information, in in writing to SBA, respond timely to full or in part, in any manner, without SBA, or provide a response acceptable SBA’s prior written permission. An to SBA within SBA’s discretion, or re- SBA Lender and Intermediary may use spond to all findings and required cor- the Report, Risk Rating, and Confiden- rective actions in a Report, then SBA tial Information for confidential use may take enforcement action under within its own immediate corporate or- this subpart. If an SBA Lender or ganization. SBA Lender’s and Intermediary that is requested to sub- Intermediary’s must restrict access to mit a corrective action plan or capital their Report, Risk Rating and Con- restoration plan to SBA fails to do so fidential Information to their respec- in writing; fails to submit timely such tive parent entities, officers, directors, plan to SBA; or fails to submit a plan employees, auditors and consultants, acceptable to SBA within SBA’s discre- in each case who demonstrate a legiti- tion, then SBA may take enforcement mate need to know such information action under this subpart. If an SBA for the purpose of assisting in improv- Lender or Intermediary fails to imple- ing the SBA Lender’s or Intermediary’s ment in any material respect a correc- SBA program operations in conjunc- tive action or capital restoration plan tion with SBA’s Program and SBA’s within the required timeframe, then portfolio management (for purposes of SBA may undertake enforcement ac- this regulation, each referred to as a tion under this subpart. ‘‘permitted party’’), and to those for [73 FR 75519, Dec. 11, 2008, as amended at 85 whom SBA has approved access by FR 14781, Mar. 16, 2020] prior written consent, and those for whom access is required by applicable § 120.1060 Confidentiality of Reports, law or legal process. If such law or Risk Ratings and related Confiden- process requires SBA Lender or tial Information. Intermediaryto disclose the Report, (a) In general. Reports and other SBA Risk Rating, or Confidential Informa- prepared review or examination related tion to any person other than a per- documents are the property of SBA and mitted party, SBA Lender or Inter- are loaned to an SBA Lender or Inter- mediary will promptly notify SBA and mediary for its confidential use only. SBA’s Information Provider in writing The Reports, Risk Ratings, and related and in advance of such disclosure so Confidential Information are privileged that SBA and the Information Provider and confidential as more fully ex- have, within their discretion, the op- plained in paragraph (b) of this section. portunity to seek appropriate relief The Report, Risk Rating, and Confiden- such as an injunction or protective tial Information must not be relied order prior to disclosure. For purposes upon for any purpose other than SBA’s of this regulation, ‘‘consultants’’ Lender oversight and SBA’s portfolio means only those consultants that are management purposes. An SBA Lender under written contract with an SBA or Intermediary must not make any Lender or Intermediary specifically to representations concerning the Report assist with addressing its Report Find- (including its findings, conclusions, ings and Corrective Actions to SBA’s and recommendations), the Risk Rat- satisfaction. The consultant contract ing, or the Confidential Information. must provide for both the consultant’s For purposes of this regulation, Report agreement to abide by the disclosure means the review or examination re- prohibition in this paragraph and the port and related documents. For pur- consultant’s agreement not to use the

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Report, Risk Rating, and Confidential er oversight activities (for example, Information for any purpose other than the salaries and travel expenses of SBA to assist with addressing the Report employees and equipment expenses Findings and Corrective Actions. ‘‘In- that are directly related to carrying formation Provider’’ means any con- out lender oversight activities, tech- tractor that provides SBA with the nical assistance and analytics to sup- Risk Rating. Each SBA Lender and port the monitoring and review pro- Intermediary must ensure that each gram, and supervision and enforcement permitted party is aware of and agrees activity costs). to these regulatory requirements and (b) Allocation. SBA will assess to 7(a) must ensure that each such permitted Lender(s) the costs associated with the party abides by them. Any disclosure review, examination, monitoring, or of the Report, Risk Rating, or Con- other lender oversight activity, as de- fidential Information other than as termined by SBA in its discretion. In permitted by this regulation may re- general: sult in appropriate action as author- (1) Where the costs that SBA incurs ized by law. An SBA Lender and Inter- for a review, exam, monitoring or other mediary will indemnify and hold harm- lender oversight activity are specific to less SBA from and against any and all a particular 7(a) Lender, SBA will claims, demands, suits, actions, and li- charge that 7(a) Lender a fee for the ac- abilities to any degree based upon or tual costs of conducting the review, resulting from any unauthorized use or exam, monitoring or other lender over- disclosure of the Report, Risk Rating, sight activity; and or Confidential Information. Informa- (2) Where the costs that SBA incurs tion Provider contact information is for the lender oversight activity are available from the Office of Capital Ac- not sufficiently specific to a particular cess. Lender, SBA will assess a fee based on [73 FR 75519, Dec. 11, 2008, as amended at 82 each 7(a) Lender’s portion of the total FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16, dollar amount of SBA guarantees in 2020] SBA’s total portfolio or in the relevant portfolio segment being reviewed or ex- § 120.1070 SBA Lender oversight fees. amined, to cover the costs of such ac- Lenders are required to pay to SBA tivity. SBA may waive the assessment fees to cover costs of examinations and of this fee for all 7(a) Lenders owing reviews and, if assessed by SBA, other less than a threshold amount below Lender oversight activities. which SBA determines that it is not (a) Fee components: The fees may cost effective to collect the fee. cover the following: (c) Billing process. For the examina- (1) Examinations. The costs of con- tions or reviews conducted under para- ducting a safety and soundness exam- graphs (a)(1) and (2) of this section, ination and related activities of an SBA will bill each 7(a) Lender for the SBA-Supervised Lender, including any amount owed following completion of expenses that are incurred in relation the examination, review or related ac- to the examination and such activities. tivity. For monitoring conducted under (2) Reviews. The costs of conducting a paragraph (a)(3) of this section and the review of a 7(a) Lender or a 7(a) Lend- other lender oversight activity exer’s loans, and related review activities penses incurred under paragraph (a)(4) (e.g., corrective action assessments, of this section, SBA will bill each 7(a) delegated loan reviews), including any Lender for the amount owed on an an- expenses that are incurred in relation nual basis. SBA will state in the bill to the review and such activities. the date by which payment is due SBA (3) Monitoring. The costs of con- and the approved payment method(s). ducting monitoring reviews of a 7(a) The payment due date will be no less Lender, including any expenses that than 30 calendar days from the bill are incurred in relation to the moni- date. toring review activities. (d) Delinquent payment and late-pay- (4) Other lender oversight activities. ment charges. Payments that are not re- The costs of additional expenses that ceived by the due date specified in the SBA incurs in carrying out other lend- bill shall be considered delinquent.

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SBA will charge interest, and other ap- (3) A commitment letter or Board resolu- plicable charges and penalties, on de- tion. SBA may require a 7(a) Lender to linquent payments, as authorized by 31 submit a commitment letter or Board U.S.C. 3717. SBA may waive or abate resolution, satisfactory to SBA, signed the collection of interest, charges and/ by the 7(a) Lender’s Board on behalf of or penalties if circumstances warrant. the entity that may: In addition, a 7(a) Lender’s failure to (i) Include specific written commit- pay any of the fee components de- ments to take corrective actions in re- scribed in this section, or to pay inter- sponse to the 7(a) Lender’s acknowl- est, charges and penalties that have edged deficiencies; been charged, may result in a decision (ii) Identify the person(s) responsible to suspend or revoke a participant’s for taking the corrective action; and eligibility, limit a participant’s dele- (iii) Set forth the timeframe for tak- gated authority, or other remedy avail- ing the corrective action. The docu- able under law. ment may be drafted by SBA or the 7(a) Lender; [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39505, Aug. 21, 2017] (4) Agreements. SBA may request that a 7(a) Lender enter into a written ENFORCEMENT ACTIONS agreement with, and drafted by, SBA to address and correct identified weak- § 120.1300 Informal enforcement ac- nesses and/or limit or mitigate risk. tions—7(a) Lenders. The agreement may provide, for exam- (a) Upon a determination that the ple, that a 7(a) Lender take certain ac- grounds in § 120.1400 exist, the D/OCRM tions or refrain from certain actions; may undertake, in his/her discretion, and one or more of the informal enforce- (5) Other informal enforcement actions. ment actions listed in this section and Others as SBA determines appropriate is not restricted from delegating as ap- on a case by case basis. propriate. SBA will consider the sever- (c) A 7(a) Lender may appeal infor- ity or frequency of the violation or ac- mal enforcement actions to the appro- tion triggering the ground and the cir- priate Federal district court or SBA’s cumstances in determining whether Office of Hearings and Appeals (OHA) and what type of informal action to within 20 calendar days of the date of take. Circumstances that may lead to the decision, and in the event of an SBA taking informal enforcement ac- OHA appeal, OHA will issue its decision tion rather than formal enforcement in accordance with part 134 of this action include, for example, when prob- title. The enforcement action will re- lems are narrow in scope and are main in effect pending resolution of correctible and SBA is confident of a the appeal, if any. SBA is not precluded 7(a) Lender’s Board of Directors from taking one or more formal en- (‘‘Board’’) and management commit- forcement actions under § 120.1500, or as ment and ability to correct; where vio- otherwise authorized by law, while an lations are less frequent or less severe appeal of an informal enforcement ac- but warrant enforcement; or while tion is pending. more fully assessing risk. [85 FR 14781, Mar. 16, 2020] (b) Informal enforcement actions include, but are not limited to: § 120.1400 Grounds for enforcement (1) An SBA supervisory letter. The let- actions—SBA Lenders. ter may discuss serious or persistent (a) Agreements. By making SBA 7(a) supervisory concerns, as determined by guaranteed loans or 504 loans, SBA SBA, and expected corrective action by Lenders automatically agree to the the 7(a) Lender. Supervisory letters in- terms, conditions, and remedies in clude, for example, Notices of Material Loan Program Requirements, as pro- Non-Compliance; mulgated or issued from time to time (2) Mandatory training. SBA may re- and as if fully set forth in the SBA quire a 7(a) Lender to complete train- Form 750 (Loan Guaranty Agreement), ing to address certain findings, weak- Development Company 504 Debenture, nesses, and deficiencies; CDC Certification, Servicing Agent

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Agreement, or other applicable partici- grounds for taking enforcement action pation, guaranty, or supplemental against CDCs that do not apply to agreement. SBA Lenders further agree other SBA Lenders. SBA considers the that a violation of Loan Program Re- severity or frequency of a violation in quirements constitutes default under determining whether to take an en- their respective agreements with SBA. forcement action and the type of en- (1) Additional agreements by CDCs. By forcement action to take. obtaining approval for 504 loans after (c) Grounds in general. Except as pro- October 20, 2017, a CDC consents to the vided in paragraphs (d) and (e) of this remedies in § 120.1500(e)(3) and waives in section, the grounds that may trigger advance any right it may have to con- an enforcement action against any test the validity of the appointment of SBA Lender (regardless of its Risk Rat- a receiver. The CDC agrees that its ing) include: consent to SBA’s application to a Fed- (1) Failure to maintain eligibility re- eral court of competent jurisdiction for quirements for specific SBA programs appointment of a receiver of SBA’s and delegated authorities, including choosing, an injunction or other equi- but not limited to: 7(a), PLP, table relief, and the CDC’s consent in SBAExpress, 504, ALP, PCLP, the al- advance to the court’s granting of ternative loss reserve pilot program SBA’s application, may be enforced and any pilot loan program; upon any basis in law or equity recog- (2) Failure to comply materially with nized by the court. any requirement imposed by Loan Pro- (2) Additional agreements by SBA Su- gram Requirements; pervised Lenders (except Other Regulated SBLCs). By making SBA 7(a) guaran- (3) Making a material false state- teed loans after October 20, 2017, an ment or failure to disclose a material SBA Supervised Lender (except an fact to SBA. (A material fact is any Other Regulated SBLC) consents to the fact which is necessary to make a remedies in § 120.1500(c)(3) and waives in statement not misleading in light of advance any right it may have to con- the circumstances under which the test the validity of the appointment of statement was made.); a receiver. The SBA Supervised Lender (4) Not performing underwriting, agrees that its consent to SBA’s appli- closing, disbursing, servicing, liquida- cation to a Federal court of competent tion, litigation or other actions in a jurisdiction for appointment of a re- commercially reasonable and prudent ceiver of SBA’s choosing, an injunction manner for 7(a) or 504 loans, respec- or other equitable relief, and the SBA tively, as applicable. Evidence of such Supervised Lender’s consent in advance performance or actions may include, to the court’s granting of SBA’s appli- but is not limited to, the SBA Lender cation, may be enforced upon any basis having a repeated Less Than Accept- in law or equity recognized by the able Risk Rating (generally in conjunc- court. tion with other evidence) or an on-site (b) Scope. SBA may undertake one or review/examination assessment which more of the enforcement actions listed is Less Than Acceptable; in §§ 120.1300 and 120.1500, or as other- (5) Failure within the time period wise authorized by law, if SBA deter- specified to correct an underwriting, mines that the grounds applicable to closing, disbursing, servicing, liquida- the enforcement action exist. Para- tion, litigation, or reporting defi- graphs (c) through (e) of this section ciency, or failure in any material re- list the grounds that trigger enforce- spect to take other corrective action, ment actions against each type of SBA after receiving notice from SBA of a Lender. In general, the grounds listed deficiency and the need to take correc- in paragraph (c) apply to all SBA Lend- tive action; ers. However, certain enforcement ac- (6) Engaging in a pattern of unco- tions against SBA Supervised Lenders operative behavior or taking an action require the existence of certain that SBA determines is detrimental to grounds, as set forth in paragraphs (d) the integrity or reputation of an SBA and (e). In addition, paragraph (f) of program, that undermines manage- this section lists two additional ment or administration of a program,

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or that is not consistent with stand- (i) One or more of the grounds in ards of good conduct. Prior to issuing a paragraph (c) or (f) of this section, as notice of a proposed enforcement ac- applicable, exists; and tion or immediate suspension under (ii) Immediate action is needed to § 120.1500 based upon this paragraph, protect the interests of the Federal SBA must send prior written notice to Government (such as where there is the SBA Lender explaining why the risk of immediate harm or loss, a sig- SBA Lender’s actions were uncoopera- nificant program integrity concern, or tive, detrimental to the program, un- clear evidence of conduct indicating a dermined SBA’s management of the lack of business integrity). program, or were not consistent with (d) Grounds required for certain en- standards of good conduct. The prior forcement actions against SBA Supervised notice must also state that the SBA Lenders (except Other Regulated SBLCs) Lender’s actions could give rise to a or, as applicable, Other Persons. For pur- specified enforcement action, and proposes of Subpart I, Other Person means vide the SBA Lender with a reasonable a Management Official, attorney, ac- time to cure the deficiency before any countant, appraiser, Lender Service further action is taken; Provider or other individual involved (7) Repeated failure to correct con- in the SBA Supervised Lender’s oper- tinuing deficiencies; ations. For the below listed SBA Su- (8) Unauthorized disclosure of Re- pervised Lender enforcement actions, ports, Risk Rating, or Confidential In- the grounds that are required to take formation; the enforcement action are: (9) Any other reason that SBA deter- (1) For SBA program suspensions and mines may increase SBA’s financial revocations— risk (for example, repeated Less Than (i) False statements knowingly made Acceptable Risk Ratings (generally in in any required written submission to conjunction with other indicators of SBA; or increased financial risk); failure to (ii) An omission of a material fact properly oversee Agent activity from any written submission required (‘‘Agent’’ as defined in part 103 of this by SBA; or title); or, indictment on felony or fraud (iii) A willful or repeated violation of charges of an officer, key employee, or SBA Loan Program Requirements; or loan agent involved with SBA loans for (iv) A willful or repeated violation of the SBA Lender); any condition imposed by SBA with re- (10) As otherwise authorized by law; spect to any application or request (11) For immediate suspension of all with SBA; or SBA Lenders from delegated authori- (v) A violation of any cease and de- ties—upon a determination by SBA sist order of SBA. that: (2) For SBA program immediate suspen- (i) One or more of the grounds in sion—SBA may suspend an SBA Super- paragraph (c) or (f) of this section, as vised Lender, effective immediately, if applicable, exists; and in addition to meeting the grounds set (ii) Immediate action is needed to forth in paragraph (d)(1) of this section, protect the interests of the Federal the Administrator (or the Deputy Ad- Government (such as where there is ministrator, only if the Administrator risk of immediate harm or loss, a sig- is unavailable to take such action) nificant program integrity concern, or finds extraordinary circumstances and clear evidence of conduct indicating a takes such action in order to protect lack of business integrity); and the financial or legal position of the (12) For immediate suspension of all United States. SBA Lenders (except SBA Supervised (3) For cease and desist orders— Lenders, which are covered under para- (i) A violation of SBA Loan Program graph (d)(2) of this section) from the Requirements; or authority to participate in the SBA (ii) Where an SBA Supervised Lender loan program, including the authority or Other Person engages in or is about to make, service, liquidate, or litigate to engage in any acts or practices that 7(a) or 504 loans—upon a determination will violate SBA Loan Program Re- by SBA that: quirements.

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(4) For an emergency cease and desist action of removal of a Management Of- order— ficial. (i) Where grounds for cease and desist (9) For order to suspend or prohibit par- order are met, ticipation of Management Official due to (ii) The Administrator (or the Deputy criminal charges—where the Manage- Administrator, only if the Adminis- ment Official is charged in any infor- trator is unavailable to take such ac- mation, indictment or complaint au- tion) finds extraordinary cir- thorized by a United States attorney cumstances, and with a felony involving dishonesty or (iii) In order to protect the financial breach of trust. or legal position of the United States. (e) Grounds required for certain en- (5) For transfer of Loan portfolio— forcement actions against SBLCs and (i) Where a court has appointed a re- Other Regulated SBLCs—(1) Capital di- ceiver; or rective. If the AA/CA determines that 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 meaning of this provision when all of increase capital consistent with its capital, surplus, and undivided prof- § 120.1500(d)(1). its are absorbed in funding losses and (2) Civil action for termination. If an the remaining assets are not sufficient SBLC violates the Act or SBA regula- to pay and discharge its contracts, tions, SBA may institute a civil action debts, and other obligations as they to terminate SBLC rights, privileges, come due. and the franchise under § 120.1500(d)(2). (6) For transfer of servicing activity— (f) Additional grounds specific to CDCs. (i) Where grounds for transfer of In addition to the grounds set forth in Loan portfolio are met; or paragraphs (b) and (c) of this section, (ii) Where the SBA Supervised Lend- SBA may take enforcement action er is otherwise operating in an unsafe against a CDC for: and unsound condition. (1) Failure to receive SBA approval (7) For order to remove Management Of- for at least four 504 loans during the ficial—where, in the opinion of the Ad- last two consecutive fiscal years, or ministrator or his/her delegatee, the (2) For PCLP CDCs, failure to estab- Management Official— lish or maintain a LLRF as required by (i) Willfully and knowingly com- the PCLP. mitted a substantial violation of the Act, SBA regulation, a final cease and [73 FR 75521, Dec. 11, 2008, as amended at 82 desist order, or any agreement by the FR 39505, Aug. 21, 2017; 85 FR 14782, Mar. 16, 2020] Management Official or the SBA Su- pervised Lender under the Act or SBA § 120.1425 Grounds for formal enforce- regulations, or ment actions—Intermediaries par- (ii) Willfully and knowingly com- ticipating in the Microloan Pro- mitted a substantial breach of a fidu- gram. ciary duty of that person as a Manage- (a) Agreement. By participating in the ment Official and the violation or SBA Microloan Program, Inter- breach of fiduciary duty is one involv- mediaries automatically agree to the ing personal dishonesty on the part of terms, conditions, and remedies in this such Management Official, or part as if fully set forth in their par- (iii) The Management Official is con- ticipation agreement and all other victed of a felony involving dishonesty agreements jointly executed by the or breach of trust and the conviction is Intermediary and SBA. no longer subject to further judicial re- (b) Scope. SBA may undertake one or view (excludes writ of habeas corpus). more of the formal enforcement ac- (8) For order to suspend or prohibit par- tions listed in § 120.1540, or as otherwise ticipation of Management Official (in- authorized by law, if SBA determines terim measure pending removal)— that any of the grounds listed in para- where SBA is undertaking enforcement graph (c) of this section exist.

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(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 (iv) Communicate and file reports with a reasonable time to cure the defi- within six months after beginning par- ciency before any further action is ticipation in program; taken; (v) Maintain a currency rate of 85% (5) Any other reason that SBA deter- or more for the Intermediary’s SBA mines may increase SBA’s financial or Microloan portfolio (that is, loans that program risk (for example, repeated are no more than 30 days late in sched- Less Than Acceptable Risk Ratings uled payments); (generally in conjunction with other (vi) Maintain a default rate in the indicators of increased risk) or indict- Intermediary’s Microloan portfolio of ment on felony or fraud charges of an 15% or less of the cumulative dollars officer, key employee, or loan agent in- loaned under the program; volved with SBA programs for the (vii) Maintain a staff trained in Intermediary); Microloan Program issues and Loan (6) For immediate suspension of an Program Requirements; Intermediary—upon a determination (viii) Maintain the financial ability by SBA that: to sustain the Intermediary’s oper- (i) One or more of the grounds in ations (including, but not limited to, paragraph (c) of this section exists; and adequate capital), as determined by (ii) Immediate action is needed to SBA; protect the interests of the Federal (ix) Satisfactorily provide in-house Government (such as where there is technical assistance to Microloan bor- risk of immediate harm or loss, a sig- rowers and prospective Microloan bor- nificant program integrity concern, or rowers; or clear evidence of conduct indicating a (x) Close and fund the required num- lack of business integrity); and ber of microloans per year under (7) As otherwise authorized by law. § 120.716; (3) Failure within the time period [73 FR 75521, Dec. 11, 2008, as amended at 80 specified to correct an underwriting, FR 34047, June 15, 2015; 85 FR 14782, Mar. 16, closing, disbursing, servicing, liquida- 2020] tion, litigation, or reporting deficiency, or failure in any material re- § 120.1500 Types of formal enforce- spect to take other corrective action, ment actions—SBA Lenders. after receiving notice from SBA of a Upon a determination that the deficiency and the need to take correc- grounds set forth in § 120.1400 exist, the tive action; D/OCRM may undertake, in his/her dis- (4) Engaging in a pattern of unco- cretion (and with the involvement of operative behavior or taking an action the LOC as appropriate and consistent that SBA determines is detrimental to with its assigned responsibilities), one the integrity or reputation of the or more of the following formal en- Microloan Program, that undermines forcement actions for each of the types

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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. tion will not, by itself, invalidate a (b) Formal enforcement actions specific guaranty previously provided by SBA. to 7(a) Lenders. In addition to those for- (a) Formal enforcement actions for all mal enforcement actions applicable to SBA Lenders.—(1) Imposition of portfolio all SBA Lenders, SBA may take the guaranty dollar limit. SBA may limit following actions: the maximum dollar amount that SBA (1) Secondary market suspension or will guarantee on the SBA Lender’s revocation (other than temporary sus- SBA loans or debentures. pension and revocation under § 120.660). (2) Suspension or revocation of dele- SBA may suspend or revoke a 7(a) gated authority. SBA may suspend or Lender’s authority to sell or purchase revoke an SBA Lender’s delegated au- loans or certificates in the Secondary thority (including, but not limited to, Market; or PLP, SBA Express, or PCLP delegated (2) Civil monetary penalty (other authorities). than SBA Supervised Lender civil mon- (3) Suspension or revocation from SBA etary penalty under § 120.465). SBA may program. SBA may suspend or revoke assess a civil monetary penalty against an SBA Lender’s authority to partici- a 7(a) Lender. The civil monetary pen- pate in the SBA loan program, includ- alty will be in an amount not to exceed ing the authority to make, service, liq- the maximum published in the FED- uidate, or litigate 7(a) or 504 loans. Sec- ERAL REGISTER from time to time, tion 120.1400(d)(1) sets forth the which will be $250,000 plus any in- grounds for SBA program suspension or creases required under law. In deter- revocation of an SBA Supervised Lend- mining whether to assess a civil mone- er (except Other Regulated SBLCs). tary penalty and, if so, in what The grounds for SBA program suspen- amount, SBA may consider, for exam- sion or revocation for all other SBA ple, the following: The gravity (e.g., se- Lenders are set forth in § 120.1400(c) verity and frequency) of the violation; and, as applicable, paragraph (f) of the history of previous violations; the § 120.1400. financial resources and good faith of (4) Immediate suspension. SBA may the 7(a) Lender; and any other matters suspend, effective immediately, an as justice may require. SBA Lender’s delegated authority or (c) Formal enforcement actions specific authority to participate in the SBA to SBA Supervised Lenders and Other loan program, or the authority to Persons (except Other Regulated SBLCs). make, service, liquidate, or litigate In addition to those enforcement ac- 7(a) or 504 loans. Section 120.1400(d)(2) tions listed in paragraphs (a) and (b) of sets forth the grounds for SBA program this section, SBA may take any one or immediate suspension of an SBA Su- more of the following enforcement ac- pervised Lender (except Other Regu- tions specific to SBA Supervised Lend- lated SBLCs). The grounds for SBA ers and as applicable, Other Persons:

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(1) Cease and desist order. SBA may take the following enforcement actions issue a cease and desist order against specific to SBLCs. the SBA Supervised Lender or Other (1) Capital directive. The AA/CA may Person. The Cease and Desist order issue a capital directive upon a deter- may either require the SBA Supervised mination that the grounds in Lender or the Other Person to take a § 120.1400(e)(1) exist. A directive may specific action, or to refrain from a order the SBLC to: specific action. The Cease and Desist (i) Achieve its minimum capital re- Order may be issued as effective imme- quirement applicable to it by a speci- diately (or as a proposal for Order). fied date; SBA may include in the cease and de- (ii) Adhere to a previously submitted sist order the suspension of authority capital restoration plan (provided to lend. under § 120.462 or § 120.1055) to achieve (2) Remove Management Official. SBA the applicable capital requirement; may issue an order to remove a Man- (iii) Submit and adhere to a capital agement Official from office. SBA may restoration plan acceptable to SBA de- suspend a Management Official from scribing the means and time schedule office or prohibit a Management Offi- by which the SBLC will achieve the ap- cial from participating in management plicable capital requirement (The of the SBA Supervised Lender or in re- SBLC must provide its capital restora- viewing, approving, closing, servicing, tion plan within 30 days from the date liquidating or litigating any 7(a) loan, of the SBA order unless SBA notifies or any other activities of the SBA Su- pervised Lender while the removal pro- the SBLC that the plan is to be filed ceeding is pending in order to protect within a different time period. SBA an SBA Supervised Lender or the inter- may perform an on-site examination ests of SBA or the United States. (generally within 90 days after the restoration plan is submitted) to verify (3) Initiate request for appointment of the implementation of the plan and receiver and/or other relief. The SBA may make application to any Federal verify that the SBLC meets minimum court of competent jurisdiction for the capital requirements.); court to take exclusive jurisdiction, (iv) Refrain from taking certain ac- without notice, of an SBA Supervised tions without obtaining SBA’s prior Lender, and SBA shall be entitled to written approval (Such actions may in- the appointment of a receiver of SBA’s clude but are not limited to: paying choosing to hold, administer, operate, any dividend; retiring any equity; and/or liquidate the SBA Supervised maintaining a rate of growth that Lender; and to such injunctive or other causes further deterioration in the cap- equitable relief as may be appropriate. ital percentage; securitizing any Without limiting the foregoing and unguaranteed portion of its 7(a) loans; with SBA’s written consent, the re- or selling participations in any of its ceiver may take possession of the port- 7(a) loans); or folio of 7(a) loans and sell such loans to (v) Undertake a combination of any a third party, and/or take possession of of these or similar actions. servicing activities of 7(a) loans and (2) Civil action for termination. SBA sell such servicing rights to a third may institute a civil action to termi- party. nate the rights, privileges, and fran- (4) Civil monetary penalties for report chises of an SBLC. filing failure under § 120.465. SBA may (e) Formal enforcement actions specific seek civil penalties, in accordance with to CDCs. In addition to those enforce- § 120.465, against an SBA Supervised ment actions listed in paragraph (a) of Lender that fails to file any regular or this section, SBA may take any one or special report by its due date as speci- more of the following enforcement ac- fied by regulation or SBA written ditions 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.

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Any such transfer may be on a tem- (b) Contents of Certification: This cer- porary or permanent basis, in SBA’s tification must include: discretion; or (1) The identity of the Federal Finan- (2) Instruct the Central Servicing cial Institution Regulator or state Agent to withhold payment of serv- banking regulator that regulates the icing, late and/or other fee(s) to the lending activities of the SBLC; CDC. (2) A statement that the Federal Fi- (3) Apply to any Federal court of nancial Institution Regulator or state competent jurisdiction for the court to banking regulator identified in para- take exclusive jurisdiction, without no- graph (b)(1) of this section regularly tice, of the CDC, and SBA shall be enti- conducts safety and soundness exami- tled to the appointment of a receiver of nations on the SBLC itself and not SBA’s choosing to hold, administer, op- only on the SBLC’s parent company or erate and/or liquidate the CDC; and to affiliate, if any; and such injunctive or other equitable relief as may be appropriate. Without (3) The date of the most recent safety limiting the foregoing and with SBA’s and soundness examination conducted consent, the receiver may take posses- on the SBLC by the Federal Financial sion of the portfolio of 504 loans and/or Institution Regulator or state banking pending 504 loan applications, includ- regulator. To qualify as an Other Regu- ing for the purpose of carrying out an lated SBLC, the SBLC must have re- enforcement order under paragraph ceived this examination within the (e)(1) of this section. past 3 years of the date of certification. (c) Notification of examination. An [73 FR 75521, Dec. 11, 2008, as amended at 82 Other Regulated SBLC must notify FR 39506, Aug. 21, 2017; 84 FR 12061, Apr. 1, 2019; 85 FR 14783, Mar. 16, 2020] SBA in writing each time a Federal Fi- nancial Institution Regulator or state § 120.1510 Other Regulated SBLCs. banking regulator conducts a safety Other Regulated SBLCs are exempt and soundness examination, and this from §§ 120.465, 120.1050(b), 120.1400(d), notification must be submitted to SBA 120.1500(c), and 120.1600(b). This exemp- within 30 calendar days of the SBLC re- tion is not intended to preclude SBA ceiving the results of the examination. from seeking any other remedy author- To retain its status as an Other Regu- ized by law or equity. lated SBLC, the Other Regulated SBLC 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 reporting and notification require- lowing initial certification. ments for Other Regulated SBLCs. (d) Report. An Other Regulated SBLC (a) Certification. An SBLC seeking must report in writing to SBA on its Other Regulated SBLC status must interactions with other Federal Finan- certify to SBA in writing that its lend- cial Institution Regulators or state ing activities are subject to regulation banking regulator (e.g., the results of by a Federal Financial Institution Reg- the safety and soundness examinations ulator or state banking regulator. This and any order issued against the Other certification must be executed by the Regulated SBLC), to the extent al- chair of the board of directors of the lowed by law. SBLC and submitted to SBA either: (e) Notification of change in status. If, (1) Within 60 calendar days of the ef- for any reason, an Other Regulated fective date of this section or SBLC becomes no longer subject to (2) If the SBLC becomes subject to regulation by a Federal Financial In- regulation by a Federal Financial In- stitution Regulator or state banking stitution Regulator or state banking regulator, the Other Regulated SBLC regulator after the effective date of must immediately notify SBA in writ- this section for any reason (e.g. license ing, and the exemption provided in transfers), within 60 days of the date § 120.1510 will immediately no longer that the SBLC becomes directly exam- apply. ined and directly regulated by such (f) Extension of timeframes. SBA may regulator. in its discretion extend any timeframe

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imposed on the SBLC under this sec- (3) Payment of outstanding debt to tion if the SBLC can show good cause SBA by the Intermediary; for any delay in meeting the time re- (4) Forfeiture or repayment of any quirement. The SBLC may appeal this unused grant funds by the Inter- decision to the AA/CA. mediary; (g) Failure to satisfy requirements. In (5) Debarment of the organization the event that an SBLC fails to satisfy from receipt of Federal funds until the requirements set forth in para- loan and grant repayments are met; graphs (a), (b), and (c) of this section, and then the exemption provided in (6) Surrender of possession of § 120.1510 will not apply to the SBLC. Intermediary’s SBA microloan portfolio to SBA, with the microloan port- [73 FR 75521, Dec. 11, 2008] folio and all associated rights transferred on a permanent basis to SBA, in § 120.1540 Types of formal enforcement actions—Intermediaries par- accordance with SBA’s rights as a se- ticipating in the Microloan Pro- cured creditor. gram. (d) Other actions. Such other actions available under law. Upon a determination that any ground set out in § 120.1425 exists, the [85 FR 14783, Mar. 16, 2020] D/OCRM may undertake, in his/her discretion (and with the involvement of § 120.1600 General procedures for for- the LOC as appropriate and consistent mal enforcement actions against SBA Lenders, SBA Supervised with its assigned responsibilities), one Lenders, Other Regulated SBLCs, or more of the following formal en- Management Officials, Other Per- forcement actions against an Inter- sons, and Intermediaries. mediary, and is not restricted from del- (a) In general. Except as otherwise set egating as appropriate: forth for the formal enforcement ac- (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

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case of oral information, unless SBA day timeframe or the timeframe given determines that there are compelling by the notice for response. reasons not to provide such informa- (iv) An SBA Lender or Intermediary tion. If compelling reasons exist, SBA may request additional time to respond will provide a summary of the informa- to SBA’s notice if it can show that tion it received to the SBA Lender or there are compelling reasons why it is Intermediary. not able to respond within the 30 day (2) SBA Lender’s or Intermediary’s op- timeframe or the response timeframe portunity to object. (i) An SBA Lender or given by the notice. If such requests Intermediary that desires to contest a are submitted to the Agency, SBA proposed formal enforcement action or may, in its discretion, provide the SBA an immediate suspension must file, Lender or Intermediary with additional within 30 calendar days of its receipt of time to respond to the notice of pro- the notice or within some other term posed action or immediate suspension. established by SBA in its notice, a Requests for additional time to respond written objection with the appropriate must be made in writing to the appro- Office of Capital Access official in ac- priate Office of Capital Access official cordance with Delegations of Author- in accordance with Delegations of Au- ity or other SBA official identified in thority or other official identified in the notice. Notice will be presumed to the notice and received by SBA within have been received within five days of the 30 day timeframe or the response the date of the notice unless the SBA timeframe given by the notice. (v) Prior to the issuance of a final Lender or Intermediary can provide agency decision by SBA, if an SBA compelling evidence to the contrary. Lender or Intermediary can show that (ii) The objection must set forth in there is newly discovered material evi- detail all grounds known to the SBA dence which, despite the SBA Lender’s Lender or Intermediary to contest the or Intermediary’s exercise of due dili- 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 information 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

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receiving the objection or from when any grounds for the action other than additional information is provided to reference the SBA Lender’s or under paragraph (a)(2)(v) or (a)(3)(iii) of Intermediary’s failure to file a timely this section, whichever is later, unless objection, and represents the final SBA provides notice that it requires agency decision. additional time. (5) Appeals. An SBA Lender or Inter- (ii) If the affected SBA Lender or mediary may appeal the final agency Intermediary files a timely written ob- decision to the appropriate Federal dis- jection to a notice of immediate sus- trict court. Alternatively, 7(a) Lenders pension, SBA must issue a written no- may appeal such decisions (except for tice of final agency decision to the af- decisions against SBA Supervised fected SBA Lender or Intermediary Lenders that are covered by procedures within 30 days of receiving the objec- in § 120.1600(b) or (c) or § 120.465) to tion advising whether SBA is con- SBA’s Office of Hearings and Appeals tinuing with the immediate suspen- (‘‘OHA’’) within 30 calendar days of the sion, unless SBA provides notice that date of the decision, and in the event of it requires additional time. If the SBA such an appeal, OHA will issue its deci- Lender or Intermediary submits addi- sion in accordance with part 134 of this tional information to SBA (under para- title. The enforcement action will re- graph (a)(2)(v) or (a)(3)(iii) of this sec- main in effect pending resolution of tion) after submitting its objection but the appeal, if any. before SBA issues its final agency deci- (6) Receiverships of Certified Develop- sion, SBA must issue its final agency ment Companies and/or other relief. If decision within 30 days of receiving SBA undertakes the appointment of a such information, unless SBA provides receiver for a Certified Development notice that it requires additional time. Company and/or injunctive or other eq- (iii) Prior to issuing a notice of deci- uitable relief, paragraphs (a)(1) through sion, SBA in its discretion can request (5) of this section will not apply and 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

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will be held, and will set forth the statement of the facts constituting the place and time of the administrative grounds and the date, time, and place hearing. The hearing will be conducted for an administrative hearing. The ad- by an administrative law judge in ac- ministrative hearing will be held be- cordance with 5 U.S.C. 554–557, 15 U.S.C. tween 30 and 60 days from the date no- 650, and applicable sections of part 134 tice is served, unless an earlier or later of this chapter. The Administrative date is set at the request of the Man- Law Judge will issue a recommended agement Official for good cause shown decision based on the record. or at the request of the Attorney Gen- (ii) Witnesses. The party calling wit- eral. The hearing will be conducted in nesses will pay the witness the same accordance with 5 U.S.C. 554–557, 15 fees and mileage paid witnesses for U.S.C. 650 and applicable sections of their appearance in U.S. courts. part 134 of this chapter. Failure of the (iii) Administrator finding and order Management Official to appear at the issuance. If after the administrative administrative hearing will constitute hearing, or the SBA Supervised Lend- consent to the removal order. SBA will er’s or Other Person’s waiver of the ad- serve on the SBA Supervised Lender a ministrative hearing, the Adminis- copy of each notice that is served on a trator determines that the order Management Official. should be issued, the Administrator (ii) Suspension from office or prohibi- will issue an order to suspend or revoke tion in participation, pending removal. authority or a cease and desist order, The suspension or prohibition will take as applicable. The order will include a effect upon service of intention to re- statement of findings, the grounds and move the Management Official or such reasons, and will specify the order’s ef- subsequent time as the Administrator fective date. SBA will serve the order or his/her delegate deems appropriate on the SBA Supervised Lender or Other and serves notice. It will remain in ef- 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

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final decision, SBA will render a deci- contents for the capital directive or sion (which includes findings of fact seeking other appropriate relief. The upon which the decision is predicated) response must include any informa- and issue and serve an order upon each tion, mitigating circumstances, docu- party to the proceeding. The decision mentation, or other relevant evidence will constitute final agency action. that supports its position. The re- (iv) Effective date and judicial review. sponse may include a plan for achiev- The removal order will take effect 30 ing the minimum capital requirement days after date of service upon the SBA applicable to the SBLC. The response Supervised Lender and the Manage- must be in writing and delivered to the ment Official except in case of consent SBA within 30 days after the date on which will be effective at the time which the SBLC received the notice. In specified in the order or in case of re- its discretion, SBA may extend the moval for conviction on criminal time period for good cause. SBA may charges the order will be effective upon shorten the 30-day time period: removal order service on the SBA Su- (A) When, in the opinion of SBA, the pervised Lender and the Management condition of the SBLC so requires, pro- Official. The order will remain effec- vided that the SBLC will be informed tive and enforceable, except to the ex- promptly of the new time period; tent it is stayed, modified, terminated, (B) With the consent of the SBLC; or or set aside by Administrator or a re- (C) When the SBLC already has ad- viewing court. The adversely affected vised SBA that it cannot or will not party will have 20 days from the order achieve its applicable minimum capital issuance date to seek judicial review in requirement. the appropriate federal district court. (ii) Failure to respond within 30 days (4) Receiverships, transfer of assets and or such other time period as may be servicing activities. If SBA undertakes specified by SBA will constitute a 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 (ii) A capital directive is effective formal enforcement actions against immediately upon its receipt by the SBLCs. Capital directive—(1) Notice of in- SBLC, or upon such later date as may tent to issue capital directive. SBA will be specified therein, and will remain ef- notify an SBLC in writing of its inten- fective and enforceable until it is tion to issue a directive. The notice stayed, modified, or terminated by will state: SBA. (i) Reasons for issuance of the direc- (5) Reconsideration based on change in tive and circumstances. Upon a change in cir- (ii) The proposed contents of the di- cumstances, an SBLC may request SBA rective. to reconsider the terms of its capital (2) Response to notice. (i) An SBLC directive or may propose changes in may respond to the notice by stating the plan to achieve the SBLC’s applica- why a capital directive should not be ble minimum capital requirement. SBA issued and/or by proposing alternative also may take such action on its own

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initiative. SBA may decline to consider sition 504 lender that is part of the 504 requests or proposals that are not project financing. based on a significant change in cir- First Lien Position 504 Loan Pool Guar- cumstances or are repetitive or frivo- antee Agreement. The agreement, in the lous. Pending a decision on reconsider- form approved by SBA, wherein enti- ation, the capital directive and plan ties agree to participate in the forming will continue in full force and effect. of a Pool under the Program, available (6) Relation to other administrative ac- at http://www.sba.gov/aboutsba/ tions. A capital directive may be issued sbaprograms/elending/index.html/. in addition to, or in lieu of, any other Guide. The First Lien Position 504 action authorized by law, including Loan Pooling Program Guide published cease and desist proceedings. SBA also by SBA which provides information ap- may, in its discretion, take any action plicable to the Program including, authorized by law, in lieu of a capital among other things, requirements re- directive, in response to an SBLC’s lating to the formation of a Pool, failure to achieve or maintain the ap- available at http://www.sba.gov/ plicable minimum capital requirement. aboutsba/sbaprograms/elending/ (7) Appeals. The capital directive con- index.html/. stitutes a final agency action. An Liquidation Proceeds. Cash, including SBLC may appeal the final agency de- insurance proceeds, proceeds of any cision only in the appropriate federal foreclosed-on property disposition, rev- district court. enues received with respect to the conservation and disposition of a fore- [73 FR 75521, Dec. 11, 2008, as amended at 82 FR 39506, Aug. 21, 2017; 85 FR 14784, Mar. 16, closed-on property or repossessed col- 2020] lateral, including any real property securing the Pool Loan, consisting of a commercial property or residential 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 SOURCE: 74 FR 56093, Oct. 30, 2009, unless workout, or otherwise. 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 pursuant to section 503(C)(3)(B)(ii) of CDC. An entity that meets the defini- the Recovery Act, to result in a cost of tion of a Certified Development Com- the loan guarantee of zero as deter- pany as defined in § 120.10 of this Part. mined under the Federal Credit Reform Current. That no scheduled payment Act of 1990, as amended. The funds gen- owed by an Obligor pursuant to a Pool erated by the fee serve as a reserve to Note is over 29 days past due. pay for program losses. First Lien Position 504 Loan. The fi- Obligor. The obligor(s) under a Pool nancing provided by the First Lien Po- Note.

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Pool. The aggregate of Loan Interests Program Participant. An entity that formed into a single pool by the Pool executes the First Lien Position 504 Originator in accordance with the Pro- Loan Pool Guarantee Agreement as gram. The Pool is comprised of an Seller, Pool Originator, or Pool Inves- unguaranteed portion and an SBA- tor, and any successors or assignees guaranteed portion. The unguaranteed thereof. portion of the Pool backs the Pool Program Participant Associate. (1) An Originator Receipt, and cannot be sold officer, director, key employee, or to Pool Investors. The SBA-guaranteed holder of 20 percent or more of the portion of the Pool backs the Pool Cer- value of a Program Participant’s stock tificates sold to Pool Investors. The or debt instruments, or (2) Any indi- Seller’s Loan Interest is not included vidual in which one or more individuals in the Pool. referred to in paragraph (1) of this defi- Pool Assembler. An entity that meets nition, or a spouse, or child, or sibling, the qualifications of a Pool Assembler or the spouse of any such individual, as set forth in section 120.630 of this owns or controls at least 20 percent. Part and has been approved as such by Program Preference. Any arrangement SBA. giving the Seller, Pool Originator, or a Pool Certificate. The document rep- Program Associate or Affiliate of Sell- resenting a beneficial fractional inter- er or Pool Originator, a preference or est in the SBA-guaranteed portion of a benefit of proportion greater than its Pool. Loan Interest as compared to Pool Pooled. When one or more Loan Inter- Originator, Pool Investor, or SBA re- ests in a Pool Loan has been put into a lating to the making, servicing, or liq- Pool. uidation of the Loan with respect to 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

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First Lien Position 504 Loan Pool Pools of First Lien Position 504 Loans Guarantee Agreement. to facilitate the sale of such loans and Seller Receipt. The document that evi- increase the liquidity of the lenders dences a Seller’s Loan Interest. holding the loans so that the lenders Servicing Retention Amount. The can use the sale proceeds to fund more amount of a Pool Loan interest pay- such loans. The Program’s authoriza- ment retained by Seller for servicing tion expires on September 23, 2012 and the Pool Loan that is payable and cal- the Administrator may guarantee not culated pursuant to the First Lien Po- more than $3,000,000,000 of pools under sition 504 Loan Pool Guarantee Agree- this authority pursuant to section ment. 503(c)(B)(iii) of the Recovery Act, as Weighted Average Interest Rate. The amended by section 1119 of the Small dollar-weighted average interest rate Business Jobs Act of 2010. of a Pool Certificate calculated by multiplying the interest rate of each Loan [61 FR 3235, Jan. 31, 1996, as amended at 76 Interest in the Pool by the ratio of FR 63547, Oct. 12, 2011] that Loan Interest’s current outstanding principal in the SBA-guaran- § 120.1702 Program fee. teed portion of the Pool (that is, the Ongoing Guarantee Fee. The Ongoing portion of the Pool Loan backing the Guarantee Fee is payable to SBA, and Pool Certificates) to the current aggre- it is calculated and payable monthly gate or outstanding principal of each from the amounts received in respect Loan Interest in the SBA-guaranteed of interest on Loan Interests in the portion of the Pool, and adding the SBA-guaranteed portion of a Pool. This sum of the resulting products. The amount is set forth in the First Lien Pool Certificate interest rate will fluc- Position 504 Loan Pool Guarantee tuate over the life of the Pool as de- Agreement. This fee is used to pay pro- faults, prepayments and normal repay- gram losses. ments applicable to Loan Interests in the Pool occur. § 120.1703 Qualifications to be a Pool Weighted Average Maturity. The Originator. weighted average maturity of a Pool (a) Application to become Pool Origi- Certificate is a dollar weighted average nator. The application to become a maturity that is calculated by multi- Pool Originator is available from the plying the remaining term, in months, SBA and can be found on SBA’s of each Loan Interest in a Pool by the website. In order to qualify as a Pool ratio of that Loan Interest’s current Originator, an entity must send the ap- outstanding pooled principal to the plication to the SBA and certify that it current aggregate outstanding pooled principal of all Loan Interests in the is a Pool Assembler or it: Pool, and adding the sum of the result- (1) Is regulated by the appropriate ing products. The weighted average agency as defined in section 3(a)(34)(G) maturity of a Pool Certificate will of the Securities Exchange Act of 1934 fluctuate over the life of the Pool as (15 U.S.C. 78c(a)(34)(G)); Loan Interest defaults, prepayments (2) Meets all financial and other ap- and normal Loan Interest repayments plicable requirements of its regulatory occur. authority and the Government Securi- ties Act of 1986, as amended (Pub. L. 99– § 120.1701 Program purpose. 571, 100 Stat. 3208); As authorized by the American Re- (3) Has the financial capability to covery and Reinvestment Act of 2009 originate acceptable pools consisting of (Recovery Act), SBA establishes the eligible First Lien Position 504 Loans Program to authorize an entity to in sufficient quantity to support the apply for SBA’s guarantee of Pools issuance of Pool Certificates; comprised of portions of First Lien Po- (4) Is in good standing with SBA (as sition 504 Loans backing Pool Certifi- the SBA determines), and is Satisfac- cates to be sold to Pool Investors. The tory with the Office of the Comptroller purpose of the Program is to tempo- of the Currency (OCC) if it is a national rarily provide a federal guarantee for bank, the Federal Deposit Insurance

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Corporation if it is a bank not regu- for the life of the Pool Loan, whichever lated by the OCC, the Financial Insti- time period is shorter; tutions Regulatory Authority if it is a (4) Have been made and closed in a member, the National Credit Union Ad- commercially reasonable manner, con- ministration if it is a credit union, as sistent with prudent lending standards; determined by SBA; and (5) Be part of a completed 504 financ- (5) for any Pool Originator that is an ing, funded by a 504 debenture, which SBA Lender, that the SBA Lender has means that the Pool Loan must be satisfactory SBA performance, as de- fully disbursed and the debenture fund- termined by SBA in its sole discretion. ing the related loan by a CDC must (b) Approval by SBA. An entity may have been sold on or after February 17, not submit applications to form Pools 2009; and to the CSA until SBA has approved its (6) Not be: application to become a Pool Origi- (i) To a business deriving more than nator. one-third of its gross annual revenue (c) Conduct of business by Pool Origi- from legal gambling activities; nator. An entity continues to qualify as (ii) To a casino, gambling establish- a Pool Originator so long as it: ment, or casino hotel; (1) Meets the eligibility standards in (iii) For financing the acquisition, paragraph (a) of this section; construction or renovation of an aquar- (2) Conducts its business in accord- ium, zoo, golf course, or swimming ance with SBA regulations and accept- pool; or ed securities or banking industry prac- (iv) To a business covered by a six- tices, ethics, and standards; digit North American Industry Classi- (3) Maintains its books and records in fication System (NAICS) code for casi- accordance with generally accepted ac- nos—713210 (‘‘Casinos (Except Casino counting principles or in accordance Hotels)’’); casino hotels—721120 (‘‘Ca- with the guidelines of the regulatory sino Hotels’’); other gambling institu- body governing its activities; and tions—713290 (‘‘Other Gambling Indus- (4) Has not been suspended or termi- tries’’); golf courses—713910 (‘‘Golf nated from the Program by SBA. Courses and Country Clubs’’); or aquar- 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;

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(If SBA determines that a Pool Loan Loan Interest to the Pool Originator has had any of its proceeds used for must execute the First Lien Position any of the restricted purposes listed 504 Loan Pool Guarantee Agreement as above, the Pool Loan will be prohibited Seller and, consequently, will be sub- from being part of a Pool.) ject to all applicable Program Rules (2) The Pool Loan was part of a 504 fi- and Regulations pertaining to a Seller. nancing involving a 504 loan that was The Pool Originator must also execute processed under SBA’s Premier Cer- the First Lien Position 504 Loan Pool tified Lenders Program; or Guaranty Agreement. (3) The Project the Pool Loan fi- (e) What CSA must receive prior to Pool nanced included the refinancing of ex- formation. Before the CSA may carry isting debt owed to the Seller or Third out its responsibilities relating to the Party Lender (not including interim fi- formation of a Pool, it must receive: nancing associated with the Project). (1) From the Pool Originator: A properly completed First Lien Position 504 § 120.1705 Pool formation require- Loan Pool application form, First Lien ments. Position 504 Loan Guarantee Agree- (a) Initiation of Pool formation. Only ment, and any other documentation an entity approved by SBA to be a Pool which SBA may require, if applicable; Originator under the Program that and continues to qualify to be a Pool Origi- (2) All cost reimbursement due and nator pursuant to this subpart may ini- payable to the CSA prior to Pool for- tiate the formation of a Pool. The Pool mation owed by the Participants par- Originator creates the Pool subject to ticipating in the formation of the Pool. Program Rules and Regulations, including the parameters set forth in the § 120.1706 Pool Originator’s retained Guide, and SBA approval. interest in Pool. (b) Adjustment of Pool requirements. The Pool Originator must retain an SBA may adjust the Pool characteris- ownership interest in any Pool it has tics periodically based on program ex- formed that is equal to at least 5% of perience and market conditions and the aggregate of the total outstanding will publish a revised version of the principal balance of each Pool Loan Guide in the FEDERAL REGISTER to im- with a Loan Interest in the Pool as cal- plement such adjustments. Any such culated at the time of Pool formation. adjustments shall not affect Pools Such interest will decline with Loan formed prior to the adjustment. Interest payments, prepayments, de- (c) When the Pool Originator is the Sell- faults and any other early termination. er. When a Pool Originator proposes to At Pool formation, the CSA will issue form a Pool involving a Pool Loan it the Pool Originator a Pool Originator owns, it must execute the First Lien Receipt evidencing the Pool Origina- Position 504 Loan Pool Guarantee tor’s retained interest in the Pool. The Agreement as Pool Originator and as Pool Originator may not sell, pledge, Seller and, consequently, will be sub- participate, or otherwise transfer its ject to all applicable Program Rules Pool Originator Receipt or any interest and Regulations pertaining to both therein for the life of the Pool. roles. (d) When the Pool Originator does not § 120.1707 Seller’s retained Loan Inter- own the Pool Loan. When a Pool Origi- est. nator proposes to form a Pool involv- The Seller must retain a 15% or ing a Pool Loan it does not own, it greater Loan Interest in each of its must purchase the Loan Interest it loans included in a Pool. At Pool for- proposes to pool from a Seller that mation, the CSA will issue the Seller a owns the whole Pool Loan and that has Seller Receipt evidencing the Seller’s the servicing rights. The Pool Origi- retained ownership in the Pool Loan. nator must purchase the Loan Interest With SBA’s written permission, the and take it into inventory or settle the Seller may sell the Seller Receipt and purchase of the Loan Interest through 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

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than 100% of the Seller Receipt and (e) Pool Certificate form. The CSA pre- Servicing Retention Amount, and may pares the Pool Certificate. SBA must not sell a participation interest in any approve the form and terms of the Pool portion of any of its Pooled loans. In Certificate. addition, in order to complete such (f) Pool Certificate registration. A Pool sale, Seller must have the purchaser of Certificate must be registered with the its rights to the Pool Loan execute an CSA. allonge to the Seller’s First Lien Posi- (g) Face amount of Pool Certificate. tion 504 Loan Pool Guarantee Agree- The face amount of a Pool Certificate ment in a form acceptable to SBA, ac- cannot be less than a minimum knowledging and accepting all terms of amount as specified in the Guide, and the Seller’s First Lien Position 504 the dollar amount of Pool Certificates Loan Pool Guarantee Agreement, and must be in increments which SBA will deliver the executed original allonge specify in the Guide (except for one and a copy of the corresponding First Pool Certificate for each Pool). SBA Lien Position 504 Loan Pool Guarantee may change these requirements based Agreement to the CSA. All Pool Loan upon an analysis of market conditions payments related to a Seller Receipt and program experience, and will pub- and Servicing Retention Amount pro- lish any such change in the FEDERAL posed for sale will be withheld by the REGISTER. CSA pending SBA acknowledgement of (h) Basis of payment for Pool Certifi- receipt of all executed documents re- cates. All payments on a Pool Certifi- quired to complete the transfer. cate are due pursuant to terms, condi- [74 FR 56093, Oct. 30, 2009, as amended at 82 tions, and percentages set forth or ref- FR 39506, Aug. 21, 2017] erenced therein and are based on the unpaid principal balance of the Pool § 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- SBA will determine whether to pur- cates. 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.

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(b) Transfer on CSA records. In order tors and other information as SBA re- for the transfer of a Pool Certificate to quires. In fulfilling its obligation to be effective, the CSA must reflect the keep the central registry current, the transfer on its records. CSA may, with SBA’s approval, obtain (c) Contents of letter of transmittal for any necessary information from the Pool Certificate. A letter of transmittal parties involved in the Program. must accompany each Pool Certificate (d) CSA Monthly Report. CSA must which a Pool Investor submits to the provide SBA with a list, by Pool, of CSA for transfer. The Pool Investor each Loan Interest with an underlying must supply the following information Pool Note that is 60 days or more in ar- in the letter: rears on a monthly basis. (1) Pool number; (2) Pool Certificate number; § 120.1711 Suspension or termination (3) Name of purchaser of Pool Certifi- of Program participation privileges. cate; (a) Participant suspension or termi- (4) Address and tax identification nation. The SBA may suspend or termi- number of the purchaser; nate the privilege of a Participant, and/ (5) Name, e-mail address and tele- or any Associate or Affiliate of the phone number of the person handling Participant, to sell, purchase, broker, or facilitating the transfer; and or deal in Pool Loans, Loan Interests, (6) Instructions for the delivery of or Pool Certificates under the Program the new Pool Certificate. if any such Participant or its Associate (d) CSA transfer cost recovery. At the or Affiliate has: same time a Pool Investor submits a (1) Failed to comply materially with letter of transmittal for a Pool Certifi- any requirement imposed by the Pro- cate pursuant to this section, it must gram Rules and Regulations or other send to the CSA sufficient funds to SBA rules and regulations; or cover its cost for this service. The CSA (2) Made a material false statement will supply the transfer information to or failed to disclose a material fact to the Pool Investor. SBA. (b) Additional rules for suspension or § 120.1710 Central servicing of the Pro- termination of Pool Originator. In addi- gram. tion to the conditions set forth in para- (a) Pool Certificates and Receipts issued graph (a) above, SBA may also suspend at Pool formation. As part of its role as or terminate the Program participa- Central Servicing Agent for the Pool, tion privileges of a Pool Originator if at Pool formation, CSA issues a Seller the Pool Originator (and/or its Associ- Receipt to the Seller, a Pool Originator ates): Receipt to the Pool Originator, and a (1) Does not comply with any of the Pool Certificate to each Pool Investor. requirements in 120.1703(a) or (c); (b) CSA fiscal transfer responsibilities. (2) Has been revoked or suspended it All Pool Loan Receivables on a Pool from engaging in the securities busi- Loan received by the CSA must be for- ness by its supervisory agency, or is warded by it to pay the Servicing Re- under investigation for a practice tention Amount, Ongoing Guarantee which SBA considers, in its sole discre- Fee, Seller Receipt, Pool Originator tion, to be relevant to its fitness to Receipt, Pool Certificates, any SBA- participate in the Program; purchased Loan Interest, and any other (3) Has been indicted or otherwise payment applicable to the Pooling of formally charged with, or convicted of, such Pooled Loan, in accordance with a felony, or a misdemeanor which, in Program Rules and Regulations. SBA’s sole discretion, bears on its fit- (c) Administration of the Pool Certifi- ness to participate in the Program; cates. CSA must administer each Pool (4) Has received an adverse civil judg- Certificate. It shall maintain a registry ment that it has committed a breach of of Pool Investors and other informa- trust or a violation of a law or regulation as SBA requires. CSA registers all tion protecting the integrity of busi- Pool Certificates. This means it issues, ness transactions or relationships; or transfers title to, and redeems them. It (5) Has been suspended or terminated shall maintain a registry of Pool Inves- as a Pool Assembler under 120.631.

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(c) Suspension procedures. SBA may tial’’ includes, but is not limited to, undertake suspension or enforcement any changes to the principal amount or actions under this section using the interest rate); procedures set forth in § 120.1600(a). (b) Accelerate the maturity; (c) Sue; or § 120.1712 Seller responsibilities with (d) Waive or release any claim. Guid- respect to Seller’s Pool Loan. ance on other servicing actions, some Seller shall remain obligated for of which may need prior SBA approval, servicing and liquidating Seller’s Pool is provided in the Guide. Loan until the Pool Loan is repaid in full unless SBA provides written ap- § 120.1717 Seller’s Pool Loan proval or notice to the contrary. deferments. Without the prior written consent of § 120.1713 Seller’s Pool Loan origina- SBA, Seller, at the request of Obligor, tion. may grant one deferment of Obligor’s SBA is entitled to recover from the scheduled payments for a continuous Seller losses incurred by SBA on its period not to exceed three months of guarantee of a Pool if such losses re- past or future installments. Seller sulted because Seller’s Pool Loan was shall immediately notify CSA of any not made and closed in a commercially payment deferment and that notifica- reasonable manner, consistent with tion shall include: prudent lending standards, and in ac- (a) The SBA Pool Loan number; cordance with any applicable Program (b) The Obligor’s name; Rules and Regulations. (c) The terms of such deferment; (d) The date Obligor is to resume § 120.1714 Seller’s Pool Loan servicing. 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 lending 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 any time and, in such event, Seller § 120.1715 Seller’s Pool Loan liquida- must take any steps necessary to fa- tion. 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. SBA is entitled to recover from Sell- § 120.1716 Required SBA approval of er any monies paid on SBA’s guarantee servicing actions. 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;

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(b) Seller has failed to disclose a ma- pursuant to any Section 504 First Mort- terial fact to SBA regarding a Seller’s gage Loan Pool Guarantee Agreement. Pool Loan in a timely manner; (c) Seller has misrepresented a mate- § 120.1723 Pool Loan receivables re- rial fact to SBA regarding Seller’s Pool ceived by Seller. Loan; Any Pool Loan Receivables received (d) Seller has failed to comply mate- by Seller in connection with obliga- rially with § 120.1720 of this subpart; tions under Seller’s Pool Loan must be (e) SBA has received a written re- forwarded by Seller to CSA within two quest from Seller to terminate the business days of receipt of collected SBA’s guarantee on the Loan Interest funds. in Seller’s Pool Loan; (f) Seller has failed to comply mate- § 120.1724 Servicing and liquidation expenses. rially with Program Rules and Regula- tions; or All ordinary and reasonable expenses (g) Seller has failed to make, close, of servicing and liquidating Seller’s service or liquidate Seller’s Pool Loan Pool Loan shall be paid by, or be recov- in a prudent manner. erable from, Obligor, and all such ordinary and reasonable expenses incurred § 120.1720 SBA’s right to review Pool by Seller or SBA which are not recov- Loan documents. erable from Obligor shall be shared rat- In the event that SBA purchases a ably by Seller, SBA, and the Pool Loan Interest in Seller’s Pool Loan, Originator pursuant to the applicable Seller must provide to SBA copies of percentages set forth in the First Lien the Pool Loan collateral documents, Position 504 Loan Pool Guarantee Pool Loan underwriting documents, Agreement. and any other documents SBA may re- § 120.1725 No Program Preference by quire in writing within 15 calendar Seller or Pool Originator. days of a written request from SBA (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 § 120.1726 Pool Certificates a Seller may constitute a material failure to cannot purchase. comply with the Program Rules and 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 Certificate. SBA may undertake such investigation as it deems necessary to determine 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?

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