[Federal Register: November 3, 2005 (Volume 70, Number 212)]
[Proposed Rules]
[Page 66800-66814]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03no05-10]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 66800]]
SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AE83
Business Loans and Development Company Loans; Liquidation and
Litigation Procedures
AGENCY: Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: This proposed rule: Establishes procedures for Certified
Development Companies (CDCs) that are eligible for, and that request,
authority from SBA to handle liquidation and litigation of loans that
are funded with the proceeds of debentures guaranteed by the SBA under
the 504 business loan program, and rights of appeal from denied
applications; provides for new liquidation and debt collection
litigation procedures for authorized CDCs and for lenders participating
in the 7(a) business loan program (Lenders); establishes procedures
for, and restrictions on, the payment by SBA of legal fees and expenses
to CDCs and Lenders; requires Lenders to complete all cost-effective
debt recovery actions prior to requesting guaranty purchase by SBA;
limits to 120 days the number of days of interest that SBA will pay
Lenders on 7(a) loans that have gone into default; revises SBA
regulations pertaining to loan servicing actions; states that for 7(a)
loans approved after the effective date of this rule, a Lender's
consent to SBA's sale of certain 7(a) loans after guaranty purchase is
granted; and clarifies existing regulations regarding the applicability
of SBA regulations and loan program requirements, and regarding SBA
purchases of guaranties.
DATES: Comments must be received on or before January 3, 2006.
ADDRESSES: You may submit written comments, identified by agency name
and RIN number for this rulemaking, by any of the following methods:
Follow instructions for submitting electronic comments through the
Federal eRulemaking Portal: http://www.regulations.gov; E-mail:
james.hammersley@sba.gov, Include RIN number in the subject line of the
message; Fax: (202) 481-2381; Mail or Hand Delivery/Courier: James
Hammersley, Acting Assistant Administrator, Office of Portfolio
Management, Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT: Walter C. Intlekofer, Director,
Portfolio Management Division, Office of Financial Assistance, (202)
205-7543, walter.intlekofer@sba.gov.
SUPPLEMENTARY INFORMATION: Section 7(a) of the Small Business Act
(``Act''), 15 U.S.C. 636(a), authorizes SBA to guarantee loans made by
Lenders to eligible small businesses (``7(a) loans''). Under the 504
business loan program, as authorized by Title V of the Small Business
Investment Act (``SBI Act''), 15 U.S.C. 695-697g, SBA guarantees the
repayment of debentures issued by CDCs for purchase by investors. The
proceeds from the sale of 504 debentures are loaned to eligible small
businesses to finance up to 40% of the cost of long-term fixed assets
(``504 loans''). If the borrower defaults on the repayment of a 504 or
7(a) loan, liquidation of the collateral securing the loan and debt
collection litigation generally take place to recover as much of the
loan balance as possible.
Historically, SBA approval was needed for many servicing actions by
Lenders and CDCs, and Agency personnel handled most liquidation and
debt collection litigation on defaulted loans. In the past decade,
however, Congress and SBA have delegated increased responsibilities to
certain Lenders and CDCs to perform liquidation and debt collection
litigation of 7(a) and 504 loans. SBA has now implemented a
transformation initiative to streamline its small business loan
assistance programs by delegating greater servicing and liquidation
responsibilities to Lenders and CDCs, thereby reducing the SBA
personnel needed to manage these programs and simplifying procedures
for Lenders and CDCs through reducing their need to seek the prior
approval of SBA for various actions.
This proposed rule implements Sec. 307(b) of Pub. L. 106-554,
which requires SBA to promulgate regulations to carry out Sec. 510 of
the SBI Act. Publication of the rule has been delayed because of a need
to modify program responsibilities in the face of reduced Agency
staffing. In addition, SBA's increased reliance on Lenders and CDCs to
perform servicing, liquidation and debt collection litigation has led
the Agency to conclude that other revisions are necessary to SBA's
liquidation and debt collection litigation regulations. These proposed
regulations will promote better understanding of Agency requirements
and better oversight and management by SBA of Lender and CDC
liquidation and debt collection litigation.
The proposed regulations would, among other things: (1) Establish
procedures for CDCs to request authority for and to conduct liquidation
and debt collection litigation; (2) eliminate the current requirement
for the submission of liquidation plans by Lenders, other than
Certified Lender Program (CLP) Lenders which are required to submit
plans by Sec. 7(a)(19) of the Act (15 U.S.C. 636(a)(19)(C)), and
revise the current requirements for the submission of litigation plans
by Lenders and CDCs; (3) provide for rights of appeal from adverse
decisions by SBA offices regarding liquidation plans or litigation
plans; (4) establish procedures for, and restrictions on, the payment
of legal fees and other costs of liquidation or debt collection
litigation incurred by Lenders and CDCs; and (5) impose performance
standards for servicing and liquidation efforts by Lenders and CDCs.
With regard to the proposed regulations concerning performance by
CDCs of liquidation and debt collection litigation activities with
respect to their 504 loans, the proposed rule contemplates that SBA
will not reimburse CDCs for their internal administrative costs
associated with such activities, whether such activities are performed
by a CDC or a CDC's contractor. SBA recognizes, however, that this
decision may adversely affect the ability of some CDCs to liquidate and
litigate their 504 loans and, therefore, is soliciting comments on this
topic. However, subject to the provisions of proposed new Sec.
120.542, SBA would reimburse CDCs for their reasonable, customary and
necessary expense disbursements related to liquidation activities on
particular
[[Page 66801]]
loans, which would include title reports and title insurance on real
estate collateral; appraisals; costs for the care and preservation of
collateral; fees for lien recordings, filings and lien searches; and
fees for legal services provided by outside counsel in litigating on a
particular loan account.
As part of its transformation initiative, SBA is also proposing to
revise current procedures which allow a Lender to request that SBA
purchase its guaranteed portion of a 7(a) loan prior to the completion
of liquidation efforts. Under current practices, SBA personnel may be
required, for a single loan, to review a liquidation plan, various
requests for approval of liquidation actions, liquidation status
updates, and a liquidation wrap-up report. In addition, under existing
practices, Lenders that are paid the guaranty prior to liquidation must
then remit to SBA its guaranteed share of any moneys obtained through
liquidation and debt collection litigation, and seek SBA's payment of
the Agency's pro rata share of expenses they incur throughout the
liquidation and litigation process. In addition, payment of a guaranty
to Lenders prior to completion of liquidation gives lenders less
incentive to diligently liquidate their loans.
Proposed Sec. 120.520 would preclude Lenders from requesting
purchase of a loan guaranty until after liquidation is completed for
all loans approved after the effective date of these regulations,
except for earlier purchases as permitted by SBA in certain protracted
liquidation situations. SBA would consider liquidation to be completed
when the Lender has exhausted all prudent and commercially reasonable
efforts to collect the debt. This will allow SBA personnel in most
cases to review a Lender's complete administration of a loan only once
at the completion of liquidation efforts. Deferring a guaranty purchase
review until after liquidation is completed will also limit the need
for ongoing payments of expenses because SBA would normally make only
one payment at the conclusion of liquidation. This proposed revision
also would require lenders to conduct liquidation and debt collection
litigation in a prompt and cost-effective manner.
SBA is also proposing to revise current regulations regarding the
Agency's payment of interest to Lenders on defaulted 7(a) loans. Under
current regulations, Lenders in certain loan programs that submit a
complete guaranty purchase request to SBA within 120 days of an uncured
payment default are entitled to the payment of SBA's pro rata share of
the interest on the loan from the interest paid-to-date until the date
of purchase by SBA. Lenders that do not submit a purchase request
within 120 days of default are only entitled to 120 days of interest.
Payment of more than 120 days of interest has served as a disincentive
for Lenders to liquidate prior to requesting purchase. Consequently,
and also to increase consistency among SBA's loan programs, SBA is
proposing to limit payment of interest after default to 120 days on all
7(a) loans approved after the effective date of the regulations except
for those loans where the guaranteed portion has been sold in the SBA
Secondary Market (as described in 13 CFR part 120, subpart F). Nothing
in the proposed rule would change the payment of interest and principal
to Secondary Market investors.
Finally, SBA is proposing another regulatory revision to facilitate
SBA's transformation initiative through the sale of groups of 7(a) and
504 loans in asset sales. SBA has determined that regulatory revisions
are needed to address the issue of a Lender's consent to the sale of
7(a) loans whose guaranteed portions Lender had sold in the Secondary
Market and that SBA subsequently purchased from the Secondary Market
investor after loan default, as well as those loans whose guaranteed
portions SBA purchased prior to the completion of recovery efforts
because of protracted liquidation proceedings. Accordingly, SBA is
proposing to require, for all 7(a) loans approved after the effective
date of the regulations, that Lenders which do not exercise their
option to purchase the guaranteed portion of a defaulted 7(a) loan from
a Registered Holder in the Secondary Market, as well as Lenders with
respect to any loan whose guaranteed portion SBA has purchased prior to
the completion of liquidation, will be deemed to have consented to the
sale of that loan in an asset sale. In addition, SBA is proposing that
after SBA has purchased a debenture as the result of a default of a 504
loan (other than a 504 loan made by a PCLP CDC), SBA may in its sole
discretion place such loan in an asset sale conducted or overseen by
SBA. For PCLP loans, SBA proposes that prior to including such loans in
an asset sale, it will provide advance notice to the PCLP CDCs that
made such loans, as required by Sec. 508(d)(1) of the SBI Act (15
U.S.C. 697e(d)(1)).
Section-by-Section Analysis
Section 120.10--Definitions of Authorized CDC Liquidator, Loan
Program Requirements and SOPs. SBA proposes to add a new definition in
Sec. 120.10, ``Authorized CDC Liquidator'' to describe CDCs that have
been delegated authority to perform liquidation and debt collection
litigation pursuant to Sec. 120.975. This term is used on numerous
occasions throughout these proposed regulations.
SBA also proposes to add a definition for the term ``Loan Program
Requirements'' which include requirements imposed upon Lenders or CDCs
by statute, SBA regulations, any agreement the Lender or CDC has
executed with SBA, SBA Standard Operating Procedures (SOP), official
SBA notices and forms applicable to the 7(a) and 504 loan programs, and
loan authorizations. For CDCs, this term also includes requirements
imposed by Debentures, as that term is defined in Sec. 120.802. SBA
proposes to make several conforming amendments to the following
sections in order to use this new defined term consistently throughout
part 120: Sec. Sec. 120.826; 120.841(c); 120.845(c)(1); 120.846(a)(3);
120.848(a); 120.854(a)(2); and 120.970(a).
The proposed regulations also modify the definition of the term
``SOPs'' to provide notice of availability of Agency SOPs on SBA's Web
site, http://www.sba.gov.
Section 120.180--Compliance with Loan Program Requirements. SBA
proposes to revise current Sec. 120.180 to clarify that Loan Program
Requirements in effect when a Lender or CDC undertook a particular
action with respect to a specific 7(a) or 504 loan will govern that
action, and that any subsequent changes in program requirements will
govern actions by a Lender or CDC that occur after the revision of the
requirement had been implemented. For example, if a Lender closed a
7(a) loan in 2003, the Loan Program Requirements in effect at that time
would govern the Lender's closing of the loan. However, if SBA
subsequently revised the requirements for liquidation in 2004, the
Lender would be subject to the 2004 liquidation requirements to the
extent that the Lender's liquidation actions occur after the time of
the revision. The proposed regulation also codifies longstanding
Agency, Lender and CDC practice that Lenders and CDCs must comply with
Agency Loan Program Requirements including SOPs and official notices.
Section 120.181--SBA control over Lenders and CDCs. Proposed Sec.
120.181 would clarify that Lenders or CDCs, and their contractors, are
independent contractors and that SBA is not responsible or liable for
actions taken by Lenders, CDCs or their contractors.
Section 120.197--Notifying SBA's Office of Inspector General of
suspected
[[Page 66802]]
fraud. SBA proposes to add this new section regarding notification to
SBA's Office of Inspector General (OIG) of fraud. The OIG's mission
includes investigating potential fraud for criminal prosecution. This
provision is designed to ensure that Lenders, CDCs and others who may
have knowledge of suspected fraud in the 7(a) and 504 loan programs
provide this information to the OIG.
Section 120.440--Minor Revision to Certified Lenders Program (CLP).
Under the CLP, designated Lenders process, close, service and liquidate
SBA guaranteed loans. The proposed revision of this section deletes the
word ``may'' so that it is clear that CLP lenders must liquidate their
7(a) loans as do all other 7(a) Lenders.
Section 120.453--Revisions to Preferred Lender Program (PLP)
responsibilities. SBA proposes to revise Sec. 120.453, which addresses
servicing and liquidation by participants in the PLP. The revised
regulation would delete the requirement that PLP Lenders submit
liquidation plans to SBA, the performance standards for PLP Lender
liquidation, and the need to obtain SBA consent to certain actions.
Under the proposed rule, PLP Lenders will be treated the same as all
7(a) Lenders with respect to servicing and liquidation performance
standards, the exemption from liquidation plan submission requirements,
and the need to obtain SBA consent for non-delegated actions.
Section 120.500--Loan servicing. The title for Subpart E is being
revised to read Servicing and Liquidation. Therefore, SBA proposes to
delete current Sec. 120.500 because it would be rendered obsolete by
these regulations.
Section 120.510--Servicing Direct and Immediate Participation
Loans. SBA no longer makes direct loans under the 7(a) program and
proposed Sec. 120.520(b) requires that Lenders perform loan servicing.
Therefore, SBA proposes to delete this section because it is no longer
needed.
Section 120.511--Servicing guaranteed loans. Under proposed Sec.
120.536, Lenders are required to service 7(a) loans. Therefore, SBA
proposes to delete this section because it is no longer needed.
Section 120.512--Servicing a loan after SBA honors the guarantee.
Under proposed Sec. 120.520, Lenders normally would not be able to
request purchase until after completion of liquidation efforts on a
loan. Further, the last sentence in current Sec. 120.512 regarding SBA
discretion to take over loan servicing has been incorporated into
proposed Sec. 120.536(d). Therefore, SBA proposes to delete this
section because it is no longer needed.
Section 120.513--Servicing actions that require prior written
consent of SBA. SBA is amending these requirements and promulgating the
revised regulations under new Sec. 120.536. Therefore, SBA proposes to
delete this section because it is no longer needed.
Section 120.520--Servicing and SBA honoring of its guarantee. SBA
proposes to revise this section to implement the requirement, for all
loans approved after the effective date of the regulations, that
Lenders normally must perform liquidation before requesting purchase,
as discussed above. In addition, proposed paragraph (b) would also
codify existing SBA policy that SBA will not purchase a guaranty unless
the Lender has provided sufficient documentation, as described by SBA
in its SOPs, which includes a listing of the documents in Lender's
possession that Lender must copy and submit to SBA with Lender's
purchase request, to allow the Agency to perform a guaranty purchase
review. SBA's ability to enforce Lender compliance with the
requirements of the 7(a) program requires that Lenders provide adequate
documentation to allow the Agency to review the Lender's administration
of a particular loan. The proposed paragraph also would retain the
existing regulatory provision that SBA may purchase a 7(a) guaranty at
any time in its discretion.
Proposed paragraph (c) would clarify purchase requirements in the
event that a Lender sells the guaranteed portion of a loan in the
Secondary Market as permitted by Subpart F of Part 120. Consistent with
existing SBA policy, this provision would make clear that a Lender's
failure to provide adequate documentation to SBA regarding a guaranty
that has been sold in the Secondary Market may be considered a material
failure to comply with SBA loan program requirements, and may lead to
an enforcement action under Sec. 120.524. As noted above, it is
critical to SBA's oversight responsibility that Lenders provide
adequate documentation to allow the Agency to conduct a guaranty
purchase review, including those that take place subsequent to a
Secondary Market purchase made by SBA.
Proposed paragraph (d) would largely incorporate and clarify
language that currently exists in Sec. 120.520(b). The proposed
paragraph would also refer to the guaranty purchase standards in Sec.
120.524(a).
Section 120.522--Payment of interest. The proposed revision of this
regulation would eliminate the current regulatory provision which
provides that SBA may pay more than 120 days of interest depending upon
when the Lender submits a complete purchase request to SBA. As
discussed above, SBA's proposed regulation would require that Lenders
normally complete liquidation prior to requesting purchase. Therefore,
the proposed regulation would limit interest purchased to 120 days to
prevent SBA from having to pay excessive interest on defaulted loans.
This provision does not affect the payment of interest to Secondary
Market investors.
Section 120.524--Guaranty purchase standards and procedures. SBA is
proposing to revise paragraph (a)(1) to codify SBA policy that a
Lender's material failure to comply with a Loan Program Requirement, as
defined in Sec. 120.10, discussed above, can constitute a basis for
the denial of a guaranty. The Agency is proposing additional minor
clarifications of Sec. 120.524 to amend paragraph (a)(8) because the
existing provision would be rendered obsolete by the proposed
requirement that Lenders normally complete liquidation prior to
requesting purchase of a guaranty. Currently, Lenders can lose a
guaranty if they do not request purchase within 120 days after a note
has matured. Under the proposed regulations, it is possible that
liquidation could be ongoing at that time. Inasmuch as proposed Sec.
120.520 precludes Lenders from requesting purchase prior to the
completion of liquidation except in certain protracted liquidation
situations, Sec. 120.524(a)(8) could cause confusion for Lenders as to
whether they would potentially lose an SBA guaranty if they didn't
request guaranty purchase prior to the completion of liquidation.
Therefore, SBA proposes to amend this provision to address this
situation and also to increase the time limit to 180 days. SBA is also
proposing to revise paragraphs (b), (c), and (d) to incorporate minor
clarifications of the Agency's guaranty purchase rights.
Section 120.535--Servicing and liquidation performance standards.
SBA is proposing to add paragraphs (a) and (b) to include standards of
performance for loan servicing and loan liquidation, which include the
requirements that Lenders and CDCs service and liquidate their SBA
loans using prudent lending standards and do so with no less diligence
than their practice on their non-SBA loans. These standards would
codify long standing SBA policy and are necessary so that SBA can
effectively enforce Lender and CDC performance in the 7(a) and 504
Programs. Paragraph (c) would incorporate language set forth in
[[Page 66803]]
Sec. 510(c)(3) of the SBI Act (15 U.S.C. 697g(c)(3)). Paragraph (d)
would incorporate existing language in current Sec. 120.512, which, as
noted above, is being deleted. However, paragraph (d) would expand the
existing language in that section to cover 504 loans as well as 7(a)
loans. SBA must retain this authority in order to be able to assume
loan servicing or liquidation of either a 7(a) or 504 loan if it is in
the Agency's interest to do so.
Section 120.536--Servicing and liquidation actions that require the
prior written consent of SBA. This proposed provision would incorporate
and revise regulations currently set forth at Sec. 120.513, but would
expand the existing regulations to include additional limitations on
servicing and liquidation actions by CDCs that previously had been
imposed by SBA policy as set forth in Agency SOPs.
Section 120.540--Uniform Liquidation and Debt Collection
Procedures. Pursuant to Sec. 510 of the SBI Act (15 U.S.C. 697g), and
the broad authority to manage the 7(a) loan guaranty program which
Sec. 5(b)(7) of the Act (15 U.S.C. 634(b)(7)) confers upon SBA, SBA
proposes to add new regulations establishing uniform procedures for the
performance of liquidation and debt collection litigation actions by
Lenders and CDCs. These proposed regulations revise the requirements
for submission of liquidation and litigation plans for SBA's prior
review by Lenders and those CDCs that are authorized to conduct
liquidation and debt collection litigation (which SBA has defined in
these proposed regulations as Authorized CDC Liquidators, see proposed
Sec. 120.10 above.) The proposed regulations also clarify the types of
liquidation actions that require prior written consent from SBA, and
establish rights of appeal for Lenders or Authorized CDC Liquidators
from decisions by SBA offices regarding liquidation or litigation
plans.
Under current regulations and procedures, many Lenders are required
to submit liquidation plans to SBA for review prior to conducting
liquidation efforts and to provide SBA with liquidation wrap-up reports
at the conclusion of liquidation. These requirements are contained in
the current version of Sec. 120.512, and SBA SOP 50 51, Loan
Liquidation and Acquired Property, and SOP 70 50, Legal
Responsibilities. (SBA SOPs are available on SBA's Web site, http://www.sba.gov
, in the online library.)
SBA proposes to redesignate the existing Sec. 120.540 as Sec.
120.545 and to add a new Sec. 120.540 regarding the submission of
liquidation and litigation plans. Proposed Sec. 120.540 would delete
the liquidation plan submission requirement for Lenders, except for
loans made by Lenders under the Certified Lender Program (CLP) as
required by Sec. 7(a)(19)(C) of the Act (15 U.S.C. 636(a)(19)(C)).
Instead, Lenders (other than CLP Lenders) would only need to submit
liquidation wrap-up reports to SBA at the conclusion of liquidation.
Other than the elimination of the requirement for the submission of
liquidation plans by Lenders (other than CLP Lenders), SBA does not
intend that these proposed regulations significantly alter current
procedures for the performance of liquidation by Lenders.
SBA has retained the requirement that CLP Lenders and Authorized
CDC Liquidators submit liquidation plans to SBA in accordance with the
requirements of Sec. 7(a)(19)(C) of the Act (15 U.S.C. 636(a)(19)(C)),
and Sec. 510 of the SBI Act (15 U.S.C. 697g). In addition to the fact
that the SBI Act requires Authorized CDC Liquidators to submit
liquidation plans, SBA believes that differences between the 7(a) and
504 loan programs also warrant continued submission of liquidation
plans by CDCs. Although CDCs are responsible for their actions taken in
connection with 504 loans, most CDCs do not have a direct financial
interest in 504 loans funded by the issuance of SBA-guaranteed
debentures. SBA, therefore, believes that it is in the Agency's
interest to require additional oversight of Authorized CDC Liquidator
efforts.
Section 120.540 of the proposed regulations would also modify the
existing requirement that Lenders and Authorized CDC Liquidators submit
litigation plans to SBA for review of certain debt collection
litigation. Current Agency procedures require Lenders to submit
litigation plans for litigation defined as ``Non-Routine Litigation,''
which includes contested litigation or litigation with expected or
actual costs in excess of $5,000. Litigation can be very costly and,
because SBA is required to pay its pro rata share of certain of these
expenses, the Agency believes that there is considerable need to review
and approve Non-Routine Litigation prior to its initiation to prevent
payment of excessive fees. SBA is also concerned that debt collection
litigation by Lenders and Authorized CDC Liquidators, unlike the
liquidation of collateral, raises the prospect of adverse judicial
decisions that could serve as harmful precedent restricting future debt
collection litigation by SBA or other governmental agencies.
Accordingly, the proposed regulations would codify the existing
litigation plan requirement. However, in order to reduce the burden on
SBA personnel and delegate greater responsibilities to Lenders and
Authorized CDC Liquidators, the proposed regulations raise the dollar
threshold for what is considered Non-Routine Litigation from litigation
costing $5,000 to $10,000, thereby reducing the frequency of plan
submissions for Agency review.
Proposed Sec. 120.540 also would:
(1) Require submission of an amended liquidation or litigation plan
for SBA approval if material changes occur during the course of
liquidation or litigation, such as when Routine Litigation changes to
Non-Routine Litigation;
(2) Provide for emergency situations by allowing a Lender or
Authorized CDC Liquidator to undertake urgent liquidation or litigation
actions by obtaining SBA's prior written approval where practicable,
but without the need to submit a liquidation or litigation plan prior
to taking an urgent action;
(3) Provide a right of appeal in the event that a Lender or
Authorized CDC Liquidator disagrees with a decision by an SBA field
office or servicing center regarding a liquidation or litigation plan;
and
(4) Identify when SBA's prior written consent is required for
specific liquidation actions.
Section 120.541--Deadlines for SBA approval. Section 510(c)(2) of
the SBI Act (15 U.S.C. 697g), imposes deadlines on SBA approval of CDC
liquidation plans and other actions that could arise during the
servicing or liquidation phase of a loan. So that Authorized CDC
Liquidators and Lenders will be treated similarly, SBA is proposing in
Sec. 120.541 uniform deadlines for SBA's approval of proposed
liquidation plans, litigation plans and other requests. These deadlines
will expedite SBA consideration of these requests. At the same time, as
recognized in Sec. 510(c)(2) of the SBI Act, SBA will be able to
notify a Lender or Authorized CDC Liquidator if it is unable to meet
the deadline and request additional information as necessary to be able
to process the request. The section also incorporates specific language
in Sec. 7(a)(19)(C) of the Act (15 U.S.C. 636(a)(19)(C)) relating to
submission of liquidation plans by Lenders which have made a loan under
their CLP authority.
Section 120.542--Payment of legal fees and other expenses incurred
in liquidation, debt collection litigation and other litigation. SBA is
proposing new regulations regarding the reimbursement and payment of
legal
[[Page 66804]]
fees and other costs to Lenders and CDCs for liquidation, debt
collection litigation, and any other litigation. Proposed Sec.
120.542(a) prohibits the reimbursement of legal fees incurred by a
Lender or Authorized CDC Liquidator in the following situations: (1)
When a Lender or Authorized CDC Liquidator asserts claims against SBA
in any type of litigation, unless payment of such fees is otherwise
required by federal law; (2) when outside counsel of a Lender or
Authorized CDC Liquidator performs non-legal work in connection with
liquidation or debt collection litigation without SBA consent; and (3)
when a Lender or Authorized CDC Liquidator undertakes actions in
connection with liquidation or debt collection litigation which only
benefit the Lender or CDC.
Proposed Sec. 120.542(b) also clarifies that SBA will not pay for
legal fees or costs incurred by a Lender or CDC in defending against a
bad faith lending claim or any other claim brought by a borrower or
guarantor against a Lender or CDC, or for the settlement of, or adverse
judgment incurred in, any such suit unless SBA specifically directed
the Lender or CDC to take the allegedly wrongful action in question.
In order to ensure that Lenders and Authorized CDC Liquidators
comply with the SBA requirements for liquidation and debt collection
litigation, proposed Sec. 120.542(c) allows SBA to deny legal fees and
other costs incurred during the liquidation or debt collection
litigation in connection with a 7(a) or 504 loan if a Lender or
Authorized CDC Liquidator: (1) Fails to act in accordance with
commercially reasonable lending standards, in a prudent manner, or in
compliance with SBA requirements; (2) fails to obtain SBA prior written
approval (using procedures described in Agency SOPs) of a liquidation
and/or litigation plan, or an amended plan, when such approval is
required by these regulations; or (3) fails to obtain prior SBA
approval (using procedures described in Agency SOPs) of other servicing
or liquidation actions if approval is required by Sec. 120.536. To
limit the expense of unnecessary or unreasonable legal expenses, SBA
also proposes to be able to deny legal fees and other litigation or
liquidation expenses that SBA had not previously approved if such fees
or expenses are not reasonable, customary or necessary in the locality
where the Lender or Authorized CDC Liquidator is conducting the
liquidation or litigation. Proposed Sec. Sec. 120.542(d) and (e) also
provide rights of appeal to specific officials in SBA's Headquarters if
a Lender or Authorized CDC Liquidator disagrees with an SBA
determination to deny reimbursement of liquidation or litigation fees
or costs.
Section 120.546--Loan asset sales. As discussed above, SBA wants to
facilitate its transformation initiative by proposing certain changes
to its loan asset sale program. The proposed section would impose a
requirement, for all 7(a) loans made after the effective date of the
regulations, that Lenders will be deemed to have consented to the sale
of a loan in an asset sale under the specified circumstances. This
provision is needed to facilitate an effective asset sales program by
SBA. The proposed section also addresses 504 loans to be sold in asset
sales.
Section 120.848--PCLP CDC servicing and liquidation actions. SBA is
proposing a minor revision of this section to include a cross-reference
to the proposed servicing regulations in subpart E of part 120.
Section 120.970--CDC servicing actions. SBA is proposing a minor
revision of this section to include a cross-reference to the proposed
servicing regulations in subpart E of part 120.
Section 120.975--CDC Authority to Perform Liquidation and Debt
collection Litigation. Section 510(c) of the SBI Act (15 U.S.C. 697g)
authorizes certain CDCs to perform liquidation and debt collection
litigation with respect to 504 loans. SBA proposes adding a new
regulation, Sec. 120.975, to establish criteria for CDCs that request
authority to become an Authorized CDC Liquidator, with authority
delegated from SBA to conduct foreclosure and other liquidation
actions, and debt collection litigation, on behalf of SBA. Section
510(b)(1) of the SBI Act (15 U.S.C. 697g(b)(1)) provides that CDCs
qualified to receive such delegated authority are those that
participated in the loan liquidation pilot program established by the
Small Business Programs Improvement Act of 1996; are participating in
the Premier Certified Lenders Program (PCLP); or have made an average
of at least ten 504 loans per year during the three fiscal years
immediately prior to the date on which the CDC requests this authority
to liquidate and litigate, as well as show that it has trained
employees, or has engaged contractors satisfactory to SBA, to perform
these actions.
PCLP CDCs are already required to perform liquidation and debt
collection litigation on their PCLP loans, pursuant to Sec. 508(e)(1)
of the SBI Act (15 U.S.C. 697e(e)(1)) and the existing Sec.
120.848(f). This proposed rule would require PCLP CDCs that meet the
statutory test, consisting of having either trained employees or having
engaged contractors satisfactory to SBA, as determined by SBA, to
exercise their delegated authority to perform liquidation and debt
collection litigation on their other 504 loans as well, upon receiving
written notice from SBA that the CDC has met the statutory test and
without the CDC first having to apply for SBA approval to exercise such
delegated authority. All other CDCs would be required to apply for SBA
approval.
In accordance with Sec. 510(b)(2) of the SBI Act (15 U.S.C.
697g(b)(2)), a qualified non-PCLP CDC requesting to handle liquidation
and debt collection litigation must submit an application to SBA. The
proposed regulations also provide for rights of appeal from the denial
by SBA of applications from non-PCLP CDCs.
Compliance With Executive Orders 12866, 12988, and 13132, the
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork
Reduction Act (44 U.S.C., Ch. 35)
Executive Order 12866
The Office of Management and Budget has determined that this rule
constitutes a ``significant regulatory action'' under Executive Order
12866 thus requiring Regulatory Impact Analysis, as set forth below.
A. Regulatory Objective of Proposed Rule
The objective of the proposed rule is to clarify and make uniform
SBA's existing regulations governing lenders participating in the 7(a)
business loan program (Lenders) and Certified Development Companies
(CDCs) that are performing loan servicing, liquidation and debt
collection litigation. The proposed rule will promote better
understanding of Agency requirements by Lenders and CDCs, and improve
oversight and management by SBA of Lender and CDC liquidation and debt
collection litigation.
B. Baseline Costs of Existing Regulatory Framework
SBA 7(a) loan programs presently require Lenders to submit
liquidation plans for most defaulted loans, except for those made
pursuant to the SBAExpress program. SBA estimates that these
requirements currently result in the submission of about 4,000
liquidation plans per year. The approximate time needed for lenders to
complete a liquidation plan is two hours at an average cost of $30 per
hour, resulting in a total annual cost to Lenders of $240,000.
[[Page 66805]]
Presently, CDCs that are authorized to perform liquidation
activities on 504 loans submit about 100 liquidation plans per year.
The approximate time needed for CDCs to complete a liquidation plan is
two hours at an average cost of $30 per hour, resulting in a total
annual cost to CDCs of $6,000.
SBA's 7(a) loan programs also presently require Lenders to submit
litigation plans to SBA for approval. Lenders currently submit to SBA
approximately 3,000 litigation plans per year. Preparation of each plan
takes about one hour, at an average cost of $150 per hour for private
counsel time, for a total annual cost to Lenders of $450,000. SBA
reimburses Lenders for their share of reasonable, customary and
necessary attorney fees, including those incurred for the preparation
of litigation plans. CDCs submit to SBA only a small number of
litigation plans presently, because SBA currently handles most
litigation involving 504 loans.
SBA takes an average of one hour to review and respond to each
liquidation and litigation plan submitted by Lenders and CDCs. This
equates to 4,000 hours for Lender liquidation plans at an average cost
of $30 per hour, for a total of $120,000. For review of CDC liquidation
plans by SBA, 100 hours is required at an average cost of $30 per hour,
for a total of $3,000. For Lender litigation plans, 3,000 hours of SBA
review time is required at an average cost of $30 per hour, for a total
of $90,000. SBA processes approximately 54,000 servicing and
liquidation actions per year for Lenders and CDCs. The average action
takes one-half hour for SBA to process, for a total of 27,000 hours
processing time. At $30 per hour, this equates to a total cost to SBA
of $810,000. Therefore, the total administrative cost to SBA under the
current regulatory framework for these activities is approximately
$1,023,000.
C. Potential Benefits and Costs of the Proposed Rule
1. Potential Benefits and Costs to Lenders. The proposed rule would
provide benefits for Lenders because it reduces the costs for those
institutions to participate in the 7(a) program by eliminating the need
to submit liquidation plans to SBA (except for lenders under the
Certified Lenders Program which are required to submit liquidation
plans by statute). Submission of liquidation plans is currently
required in most lending programs by SBA procedures and regulations.
SBA estimates that ending this requirement will enable Lenders to
eliminate the preparation and submission to SBA of at least 4,000
liquidation plans a year. The approximate time to complete and submit a
plan to SBA is about two hours at an average cost of $30 per hour.
Consequently, eliminating the requirement to submit liquidation plans
will save Lenders about $240,000 per year.
Other benefits for Lenders would result from the proposal to raise
the dollar threshold for non-routine litigation (for which submission
to SBA for pre-approval is required) from $5,000 to $10,000. Because
fewer cases would rise above that higher threshold, Lenders would be
required to submit fewer litigation plans to SBA. The Agency
anticipates that approximately 500 fewer plans annually would be
required to be submitted to the Agency as a result of this change.
Because preparation of each plan takes about one hour at an average
cost of $150 per hour, SBA estimates that the proposed rule would
result in a cost savings of $75,000.
Lenders also would benefit under a provision of the proposed rule
which defers, until after liquidation is complete, SBA's guaranty
purchase on loans whose guaranteed portions have not been sold in the
Secondary Market. Currently, Lenders whose loans SBA has purchased are
required to process paperwork (SBA Form 172, Transaction Report on Loan
Serviced by Lender) in connection with the remittance to SBA of the
Agency's portion of any collections the Lender receives subsequent to
guaranty purchase. Under the proposed rule, Lenders that are required
to complete liquidation prior to purchase would not remit any payments
to SBA along with a Form 172 unless collections are obtained by the
Lenders subsequent to guaranty purchase.
Finally, the proposed rule would reduce the number of loan
servicing and liquidation actions taken by Lenders that require prior
SBA approval as compared with existing SBA requirements, and make
remaining SBA prior approval requirements similar among the various SBA
loan programs. These changes would simplify and reduce the costs of
loan servicing and liquidation processes for Lenders.
SBA does not know of any specific costs that would be imposed on
Lenders as a result of this proposed rule except for the loss of income
that would result from the proposed limitation on interest on
guarantees purchased by SBA to 120 days. However, such a limitation
would affect only a small percentage (estimated at around 10%) of SBA
guaranty purchases, and Lenders typically place loans on interest non-
accrual after 90 days delinquency. SBA is requesting comments from the
public on any monetized, quantitative or qualitative costs of Lenders'
compliance with this rule. Please send comments to the SBA official
referenced in the ADDRESSES section of the preamble.
2. Potential Benefits and Costs to CDCs. As provided by statute,
this proposed rule would enable qualified CDCs to seek authority to
perform liquidation and debt collection litigation, and by doing so,
qualified CDCs would be determining that the benefits of conducting
their own recovery on defaulted loans would outweigh any burdens
associated with the preparation and submission to SBA of liquidation
and litigation plans as set forth in these proposed regulations. Such
benefits would include the ability to pursue quicker liquidations and
possibly achieve higher recoveries as a result.
SBA expects that CDCs would incur some additional costs as a result
of this proposed rule. SBA anticipates that CDCs would be required to
submit to the Agency for approval about 300 liquidation plans per year,
an increase of 200 from the approximately 100 liquidation plans CDCs
currently submit annually. SBA estimates that the average time for
completion of each plan would consist of two hours at an average cost
of $30 per hour. Therefore, the annual cost of submitting the plans
under the proposed rule would be $18,000 per year, for an overall cost
increase of $12,000 from the $6,000 annual cost under the current
regulatory framework. CDCs that receive delegated liquidation authority
under the proposed rule would also incur added costs through acquiring
resources and creating the necessary internal structures to engage in
liquidation and litigation activities. SBA is requesting comments from
the public on any other monetized, quantitative or qualitative costs of
CDCs' compliance with this rule. Please send comments to the SBA
official referenced in the ADDRESSES section of the preamble.
3. Potential Benefits and Costs for SBA and the Federal Government.
The proposed rule would benefit SBA because it would eliminate the need
for most Lenders to submit liquidation plans to SBA (the exception is
for Lenders under the Certified Lenders Program, which are required to
submit liquidation plans by statute; the number of liquidation plans
submitted by such Lenders currently is minimal, and SBA expects even
further reduction under the proposed rule). SBA estimates that ending
this requirement would eliminate the need for SBA to review about 4,000
liquidation plans a year.
[[Page 66806]]
The approximate time required for SBA to review a liquidation plan is
one hour at an average cost of $30 per hour. Consequently, there would
be a cost savings to SBA of $120,000 per year.
Another benefit for SBA would result from the proposal to raise the
dollar threshold for non-routine litigation (for which submission to
SBA for pre-approval is required) from $5,000 to $10,000. SBA
anticipates that approximately 500 fewer plans annually would be
required to be submitted to the Agency as a result of this change.
Because review of each plan takes about one hour at an average cost of
$30 per hour, SBA estimates that the proposed rule would result in a
cost savings of $15,000. In addition, SBA would not be required to
reimburse Lenders for the Agency's proportionate share of the costs
incurred by Lenders in connection with the preparation of these
litigation plans, resulting in a further savings of approximately
$50,000.
SBA would also benefit under a provision of the proposed rule which
defers, until after Lender liquidation is complete, SBA's guaranty
purchase on loans whose guaranteed portion has not been sold in the
Secondary Market (except for earlier purchases as permitted by SBA in
certain protracted liquidation situations). This would allow SBA
personnel, in most cases, to review a Lender's complete administration
of a loan, including liquidation expenses incurred and recoveries
received, only once at the completion of liquidation efforts.
Currently, Lenders whose loans SBA has purchased are required to submit
SBA Form 172 (Transaction Report on Loan Serviced by Lender) in
connection with the remittance to SBA of the Agency's portion of any
collections the Lender receives subsequent to guaranty purchase. Under
the proposed rule, Lenders that are required to complete liquidation
prior to purchase would not remit any payments to SBA along with a Form
172 unless collections are obtained by the Lenders subsequent to
guaranty purchase. Consequently, SBA would be relieved of the
administrative burden of reviewing and processing a large number of
lender payments under the proposed rule.
Although under the proposed rule SBA would be required to review
liquidation plans submitted by qualified CDCs (estimated at 300
liquidation plans per year), this would not represent a significant
increase in SBA administrative costs because currently SBA reviews
approximately 100 such plans per year as well as provides assistance to
CDCs on the preparation of such plans.
The proposed rule would also reduce SBA administrative costs
associated with oversight of the Agency's business loan assistance
programs by delegating greater servicing and liquidation
responsibilities to Lenders and CDCs, and reducing their need to seek
the prior approval of SBA for their proposed recovery activities and
for various specific liquidation actions. This would decrease the
amount of time required for SBA personnel to manage these programs. It
is estimated that reviews of at least 30% (16,200) of the approximately
54,000 servicing and liquidation actions SBA currently processes
annually would be eliminated. This would save an average of one-half
hour processing time per action for a total time savings of 8,100 hours
at $30 per hour, or $243,000.
In addition to increasing consistency among SBA's loan programs and
creating more uniformity in processing of guaranty purchase requests,
the proposed rule would save taxpayer dollars by limiting payment of
interest to Lenders on purchased loans to 120 days, except for loans
where the guaranteed portion has been sold in the Secondary Market.
This change would not be a burden on Lenders because Lenders typically
place loans on interest non-accrual after 90 days of delinquency and
SBA already limits interest purchased to 120 days in two of the
existing 7(a) loan programs, including the fastest growing program
(SBAExpress). However, it is estimated that such a limitation in the
proposed rule would affect only a small percentage (estimated at around
10%) of future SBA guaranty purchases.
Finally, the proposed rule would facilitate SBA's transformation
initiative through enabling the sale of groups of 7(a) and 504 loans in
asset sales. To this end, the rule provides that Lenders that do not
exercise their option to purchase the guaranteed portion of a defaulted
7(a) loan from a Registered Holder in the Secondary Market, as well as
Lenders with respect to any loan whose guaranteed portion SBA has
purchased prior to the completion of liquidation, would be deemed to
have consented to the sale of that loan in an asset sale. In addition,
SBA is proposing that after SBA has purchased a debenture as the result
of a default of a 504 loan, SBA may place such loan in an asset sale
conducted or overseen by the Agency.
Costs imposed on SBA as a result of the proposed rules would
include personnel and administrative costs associated with implementing
appeals processes to which Lenders and Authorized CDC Liquidators may
be entitled under the proposed rule when they disagree with a decision
by an SBA field office or servicing center regarding a liquidation or
litigation plan, when they disagree with an SBA determination to deny
reimbursement of liquidation or litigation fees or costs, or when SBA
denies applications from non-PCLP CDCs requesting authority to handle
liquidation and debt collection litigation.
D. Proposed Rule Is the Best Available Means To Reach the Regulatory
Objective
This proposed rule is SBA's best available means for achieving its
regulatory objective of clarifying and making uniform existing SBA
regulations and policy, which currently only partially address
liquidation and debt collection litigation and vary across Agency
lending programs. SBA is requesting comments from the public on any
potentially effective and reasonably feasible alternatives to this rule
as it applies to Lenders, and the costs and benefits of those
alternatives. Please send comments to the SBA official referenced in
the ADDRESSES section of the preamble.
With respect to CDCs that are eligible for and request liquidations
and debt collection authority from SBA, the proposed rule merely
implement Sec. 307(b) of Pub. L. 106-554, which requires SBA to
promulgate regulations to carry out Sec. 510 of the SBI Act, 15 U.S.C.
697g, regarding CDC liquidation and debt collection litigation
authority. SBA considers those statutory provisions applicable to CDCs
to be mandatory, and SBA has not identified any reasonable alternative
to this proposed rule implementing the statutory mandate.
Executive Order 12988
This proposed action meets applicable standards set forth in
Sec. Sec. 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice
Reform, to minimize litigation, eliminate ambiguity, and reduce burden.
In particular, the proposed regulations provide for rights of appeal to
Lenders and CDCs in the event they are aggrieved by an Agency decision,
thereby limiting the possibility of litigation by these entities. The
proposed action does not have retroactive or preemptive effect.
Executive Order 13132
This proposed rule would not have substantial direct effects on the
States, on the relationship between the National Government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Therefore, for the
[[Page 66807]]
purposes of Executive Order 13132, SBA has determined that this
proposed rule has no federalism implications warranting preparation of
a federalism assessment.
Regulatory Flexibility Act
Based on the following analysis, SBA certifies that the proposed
rule would not have a significant economic impact on a substantial
number of small entities under the Regulatory Flexibility Act
(``RFA''), 5 U.S.C. 601 et seq.
This proposed rule directly affects only those CDCs that are
eligible for, and that request, authority from SBA to conduct
liquidation and debt collection litigation, of which SBA estimates that
there are approximately 80 out of about 270 active CDCs, and an unknown
number of small lending institutions. SBA assumes, therefore, that this
proposed rule may have an impact on a substantial number of small
entities. However, the proposed rule merely implements statutory
mandates and, further, SBA has determined that the impact on entities
affected by the proposed rule will not be significant for the reasons
set forth below.
The proposed rule would not impose a significant economic impact on
small lending institutions because it in fact reduces the costs for
those institutions to participate in the 7(a) program by eliminating
the need to submit liquidation plans to SBA (except for Lenders under
the Certified Lenders Program which are required to submit liquidation
plans by statute), which is currently required by SBA procedures and
regulations. SBA estimates that ending this requirement will enable
Lenders to eliminate the preparation and submission to SBA of at least
4,000 liquidation plans a year. The approximate time to complete and
submit these plans to SBA is about two hours at an average cost of $30
per hour. The average cost is based on a mid-level professional salary
level of $60,000 per year. Consequently, eliminating the requirement to
submit liquidation plans will save Lenders about $240,000 per year. The
proposed rule also reduces the number of loan servicing and liquidation
actions taken by Lenders that require prior SBA approval as compared
with existing SBA requirements, and makes the remaining prior approval
requirements similar among the various SBA loan programs, thereby
simplifying the loan servicing and liquidation process for SBA
participating Lenders. In addition, as pointed out above, small lending
institutions will be required to submit fewer litigation plans since
the proposed rule raises the dollar threshold for Non-Routine
Litigation from $5,000 to $10,000. SBA anticipates that approximately
500 fewer plans will be required to be submitted to the Agency as a
result of this change. Since preparation of each plan takes about one
hour at an average cost of $150 per hour, which is based on a
nationwide estimate of the billing level for attorneys qualified to
perform this type of work, SBA estimates that the proposed rule will
result in a cost savings of $75,000.
The proposed rule also would not have a significant economic impact
on CDCs, which are entities that are licensed and regulated by SBA. As
provided by statute, the rule would enable qualified CDCs to seek
authority to perform liquidation and debt collection litigation, and by
doing so, qualified CDCs would be determining that the benefits of
conducting their own recovery on defaulted loans would outweigh any
burdens associated with the preparation and submission to SBA of
liquidation and litigation plans as set forth in these proposed
regulations. Such benefits include the ability to pursue quicker
liquidations and possibly achieve higher recoveries. In the loan
liquidation pilot program established by the Small Business Programs
Improvement Act of 1996, CDCs that conducted their own liquidation
achieved a slightly higher overall recovery rate than did SBA in the
comparison group of cases handled directly by the Agency. Subject to
the provisions of proposed new Sec. 120.542, SBA would reimburse CDCs
for their reasonable, customary and necessary expense disbursements
related to liquidation activities on particular loans, which would
include title reports and title insurance on real estate collateral;
appraisals; costs for the care and preservation of collateral; fees for
lien recordings, filings and lien searches; and fees for legal services
provided by outside counsel in litigating on a particular loan account.
SBA anticipates that CDCs will be required to submit to the Agency
for approval, as required by statute, about 300 liquidation plans per
year. SBA estimates that the average time for completion of each plan
will necessitate two hours at an average cost of $30 per hour, which is
based on a mid-level professional salary level of $60,000 per year.
Therefore, the total annual cost for all plans would be $18,000 per
year.
CDCs participating in the Premier Certified Lenders Program (PCLP)
would not be required to seek authority to conduct liquidation and debt
collection litigation on their PCLP loans since they are already
required to do so by statute and regulation. PCLPs will be also be
required to liquidate and litigate their non-PCLP loans by this rule in
order to have one consistent standard for all their loans.
In addition, this regulation merely codifies the existing SBA
practice of requiring the submission of liquidation and litigation
plans by Lenders and CDCs, but reduces any burden from this requirement
as to litigation plans by raising the dollar threshold for Non-Routine
Litigation from $5,000 to $10,000, as noted above. Further, the
performance standards for 7(a) and 504 loan servicing and liquidation
contained in these proposed regulations merely codifies existing SBA
policy as set forth in SOPs and currently existing lending standards.
In addition, it is a prudent lending practice for Lenders to prepare
plans prior to undertaking liquidation and debt collection litigation.
Therefore, this rule does not impose any new or unnecessary
requirements on these small entities.
Accordingly, SBA certifies that this rule will not have a
significant economic impact on a substantial number of small entities.
SBA invites comments from members of the public who believe there will
be significant impact either on CDCs, small lending institutions, or
small businesses that receive funding from, or with the assistance of,
CDCS or such institutions.
Paperwork Reduction Act
SBA has determined that this proposed rule imposes additional
reporting or recordkeeping requirements under the Paperwork Reduction
Act (``PRA''), 44 U.S.C. 3501-3520. This collection of information, as
defined by the PRA, includes four different reporting requirements
which are (1) the application for CDCs to apply for liquidation and
debt collection litigation authority on 504 loans, (2) a liquidation
plan describing proposed collection activities for defaulted 504 loans,
(3) a litigation plan describing proposed debt collection litigation
for defaulted 7(a) or 504 loans, and (4) a request for a waiver of the
need for a written liquidation or litigation plan. The titles,
descriptions and respondent descriptions of the information collections
are discussed below with an estimate of the annual reporting burden.
Included in the estimate is the time for reviewing instructions,
searching existing data sources, gathering and maintaining the data
needed, and completing and reviewing each collection of information.
SBA invites comments on: (1) Whether the proposed collection of
information is necessary for the proper performance of SBA's functions,
[[Page 66808]]
including whether the information will have a practical utility; (2)
the accuracy of SBA's estimate of the burden of the proposed
collections of information, including the validity of the methodology
and assumptions used; (3) ways to enhance the quality, utility, and
clarity of the information to be collected; and (4) ways to minimize
the burden of the collection of information on respondents, including
the use of automated collection techniques, when appropriate, and other
forms of information technology.
Please send comments by the closing date for comment for this
proposed rule to David Rostker, Office of Management and Budget, Office
of Information and Regulatory Affairs, 725 17th Street, NW.,
Washington, DC 20503 and to James Hammersley, Acting Assistant
Administrator, Office of Portfolio Management, Small Business
Administration, 409 Third Street, SW., Washington, DC 20416.
A. Application for Liquidation Authority
Title: CDC Application for Authority to Perform Liquidation and
Debt Collection Litigation on 504 Loans [No SBA Form Number].
Summary: As described in proposed Sec. 120.975, certain CDCs that
seek authority from SBA to perform liquidation and debt collection
litigation in connection with defaulted loans will submit the
application to the Agency. SBA will review the application to determine
whether the CDC has participated in the CDC loan liquidation pilot
program, is participating in the PCLP, or has made sufficient loans in
the past three years, as specified in the SBI Act and the proposed
rule, and has trained employees or contractors, satisfactory to SBA, to
perform liquidation and litigation in a manner that will reduce the
risk of loss to the Agency. Recoveries from these liquidation efforts
and debt collection litigation will be remitted to SBA to reduce the
Agency's loss on the loan.
Need and Purpose: Section 510 of the SBI Act (15 U.S.C. 697g)
authorizes certain CDCs to conduct liquidation and debt collection
litigation in connection with section 504 loans that have gone into
default, and specifies the criteria that CDCs must meet to apply for
this authority. The proposed regulation incorporates the statutory
criteria. SBA will use the information CDCs submit to determine whether
the CDC meets the qualifications.
Description of Respondents: CDCs that have requested authority to
handle liquidation and litigation and which meet the specified
criteria. SBA estimates that approximately 40 CDCs annually will apply
for the liquidation authority.
SBA estimates the burden of this collection of information as
follows: An applicant will complete this collection normally only once.
SBA estimates that the time needed to complete this collection will
average one hour. SBA estimates that the cost to complete this
collection will be approximately $30 per hour. Therefore, SBA estimates
that the total annual burden for the 40 applications per year is 40
hours per year and the total cost is $1,200 per year.
B. The Liquidation Plan
Title: SBA Liquidation Plan [SBA Form 1979].
Summary: The liquidation plan will describe the specific steps that
CDCs anticipate using to recover through liquidation of collateral and
other actions, debts owed on their defaulted 504 loans.
Need and Purpose: This plan is required under proposed Sec.
120.540(a), and is needed for SBA to oversee recovery actions of CDCs
because SBA, as guarantor on CDC debentures, may incur financial losses
of 100% on defaulted 504 loans funded by these debentures. Thus, SBA
must oversee and manage the liquidation actions of CDCs to ensure that
they will take action to maximize recovery, minimize risks, and limit
unnecessary and excessive costs. SBA is authorized to require
submission of this plan under several statutory provisions: sections
5(b)(7), 7(a)(2)(C), and 7(a)(19) of the Act (15 U.S.C. 634(b)(7),
636(a)(2)(C) and (a)(19)), and section 510 of the SBI Act (15 U.S.C.
697g).
Description of Respondents: The respondents are CDCs that have made
504 loans funded by SBA guaranteed debentures and that are authorized
to conduct liquidation (Authorized CDC Liquidation). SBA estimates that
such CDCs would submit approximately 300 liquidation plans each year.
SBA estimates that the average amount of time for an Authorized CDC
Liquidator to complete this collection is two hours. SBA estimates that
the cost to complete this collection will be approximately $30 per
hour. Therefore, we estimate that the total annual burden for all CDCs
affected by this requirement is 600 hours and the total cost is $18,000
per year.
C. The Litigation Plan
Title: SBA Litigation Plan [No SBA Form Number].
Summary: The litigation plan will describe the proposed conduct of
debt collection litigation that Lenders/CDCs anticipate using to
recover debts owed on their defaulted 7(a) and 504 loans where
litigation is not anticipated to be Non-Routine Litigation.
Need and Purpose: This plan is required under proposed Sec.
120.540(b), and is needed for SBA to oversee and manage debt collection
litigation by Lenders and CDCs because SBA, as guarantor on 7(a) loans
and 504 debentures, may incur financial losses of up to 90% on
defaulted 7(a) loans and 100% on defaulted 504 loans. Thus, SBA must
oversee the liquidation actions of Lender/CDCs to ensure that they will
take action to maximize recovery, minimize risks, and limit unnecessary
and excessive costs. SBA is authorized to require submission of this
plan under several statutory provisions: sections 5(b)(7), 7(a)(2)(C),
and 7(a)(19) of the Act (15 U.S.C. 634(b)(7), 636(a)(2)(C) and
(a)(19)), and section 510 of the SBI Act (15 U.S.C. 697g).
Description of Respondents: Respondents include Lenders that have
made 7(a) guaranteed loans and CDCs that have made 504 loans funded by
SBA guaranteed debentures. A Litigation plan will only be needed if
litigation falls within the definition of Non-Routine Litigation.
However, SBA has not maintained data on how many debt collection
actions are initiated in connection with defaulted 7(a) or 504 loans or
the average litigation costs or contested nature of such litigation.
Therefore, SBA is calculating that an applicant will complete this
collection once per defaulted loan. SBA estimates that such Lenders and
CDCs will submit approximately 3,000 litigation plans each year.
SBA estimates that the average amount of time needed to complete
this collection is one hour. SBA anticipates that the work will be done
largely by private sector attorneys and estimates that this will cost
approximately $150 per hour. Therefore, we estimate that the total
annual burden for all entities affected by this requirement is 3,000
hours per year and the total cost is $450,000 per year.
D. Request for Emergency Waiver
Title: Request for waiver of need for written liquidation or
litigation plan [No SBA Form Number].
Summary: As described in proposed Sec. 120.540(f), Lenders and
Authorized CDC Liquidators who are required to submit written
liquidation or litigation plans to SBA for advance approval, may
request a waiver of such requirement under urgent circumstances (for
example, when an immediate response to litigation is required). Such
Lenders
[[Page 66809]]
and Authorized CDC Liquidators would be required to apply for and
obtain SBA's consent to such a waiver before taking the urgent action.
Need and Purpose: SBA must oversee Lenders' and CDCs' liquidation
and litigation actions for the reasons described above. However, SBA
recognizes that circumstances may arise in which obtaining prior SBA
approval may be impracticable and potentially delay urgently-needed
liquidation or litigation action. Therefore, SBA proposes to create a
limited waiver to address such circumstances.
Description of Respondents: The respondents are Lenders and CDCs
who are subject to the requirement to submit liquidation or litigation
plans. SBA estimates that SBA will receive 500 waiver requests each
year.
SBA estimates that the average amount of time for a Lender or CDC
to complete this collection is one-half hour. SBA anticipates that this
work will be done largely by private sector attorneys and expects will
cost approximately $150 per hour. Therefore, SBA estimates that the
total annual burden for Lenders and CDCs affected by this requirement
is 250 hours and the total cost is $37,500 per year.
List of Subjects in 13 CFR Part 120
Loan programs--business, Reporting and recordkeeping requirements,
Small businesses.
For the reasons set forth above, SBA proposes to amend 13 CFR part
120 as follows:
PART 120--BUSINESS LOANS
1. The authority citation for part 120 is revised to read as
follows:
Authority: 15 U.S.C. 634(b)(6), 636(a) and (h), 696(3),
697(a)(2), and 697(g).
2. Amend Sec. 120.10 by adding the definitions of ``Authorized CDC
Liquidator'' and ``Loan Program Requirements'' and by adding a sentence
to the end of the definition of ``SOPs'' to read as follows:
Sec. 120.10 Definitions.
* * * * *
Authorized CDC Liquidator: A CDC in good standing with authority
under the Act and SBA regulations to conduct liquidation and certain
debt collection litigation in connection with 504 loans, as authorized
by Sec. 120.975.
* * * * *
Loan Program Requirements: Requirements imposed upon Lenders or
CDCs by statute, SBA regulations, any agreement the Lender or CDC has
executed with SBA, SBA SOPs, official SBA notices and forms applicable
to the 7(a) and 504 loan programs, and loan authorizations, as such
requirements are issued and revised by SBA from time to time. For CDCs,
this term also includes requirements imposed by Debentures, as that
term is defined in Sec. 120.802.
* * * * *
SOPs * * * SOPs are publicly available on SBA's Web site at http://www.sba.gov
in the online library.
* * * * *
Subpart A--Policies Applying to All Business Loans
3-4. Revise the undesignated center heading immediately preceding
Sec. 120.180 and revise Sec. 120.180 to read as follows:
Applicability and Enforceability of Loan Program Requirements
Sec. 120.180 Lender and CDC Compliance with Loan Program
Requirements.
Lenders must comply and maintain familiarity with Loan Program
Requirements for the 7(a) program, as such requirements are revised
from time to time. CDCs must comply and maintain familiarity with Loan
Program Requirements for the 504 program, as such requirements are
revised from time to time. Loan Program Requirements in effect at the
time that a Lender or CDC takes an action in connection with a
particular loan govern that specific action. For example, although loan
closing requirements in effect when a Lender or CDC closes a loan will
govern the closing actions, a Lender or CDC's liquidation actions on
the same loan are subject to the liquidation requirements in effect at
the time that a liquidation action is taken.
5. Add Sec. 120.181 to read as follows:
Sec. 120.181 Status of Lenders and CDCs.
Lenders, CDCs and their contractors are independent contractors
that are responsible for their own actions with respect to a 7(a) or
504 loan. SBA has no responsibility or liability for any claim by a
borrower, guarantor or other party alleging injury as a result of any
allegedly wrongful action taken by a Lender, CDC or an employee, agent,
or contractor of a Lender or CDC.
6. Revise the undesignated center heading immediately preceding
Sec. 120.195 to read as follows:
Reporting
7. Add new Sec. 120.197 to read as follows:
Sec. 120.197 Notifying SBA's Office of Inspector General of suspected
fraud.
Lenders, CDCs, Borrowers, and others must notify the SBA Office of
Inspector General of any information which indicates that fraud may
have occurred in connection with a 7(a) or 504 loan. Send the
notification to the Assistant Inspector General for Investigations,
Office of Inspector General, U.S. Small Business Administration, 409
3rd Street SW., Washington DC 20416.
Subpart D--Lenders
8. Amend Sec. 120.440 by revising the heading and the first
sentence to read as follows:
Sec. 120.440 The Certified Lenders Program.
Under the Certified Lenders Program (CLP), designated Lenders
process and close 7(a) loans and service and liquidate such loans in
accordance with subpart E of this part. * * *
9. Amend Sec. 120.453 by revising the heading and the section to
read as follows:
Sec. 120.453 Responsibilities of PLP Lenders for servicing and
liquidating 7(a) loans.
Servicing and Liquidation responsibilities for PLP Lenders are set
forth in subpart E of this part.
9a. Revise the heading of subpart E to read as follows:
Subpart E--Servicing, Liquidation, and Debt Collection Litigation
of 7(a) and 504 Loans
Sec. Sec. 120.500, 120.510, 120.511, 120.512, and 120.513 [Removed]
10. Remove Sec. Sec. 120.500, 120.510, 120.511, 120.512, and
120.513, and the undesignated center heading immediately preceding
Sec. 120.510 entitled ``Servicing''.
11. Amend Sec. 120.520 by revising the heading and the section to
read as follows:
Sec. 120.520 Purchase of 7(a) Loan Guarantees.
(a) When SBA will purchase. (1) For loans approved on or after the
effective date of this regulation. A Lender must not make demand on SBA
to purchase a guaranteed portion of a loan until after the Lender has
completed liquidation for that loan. SBA considers liquidation to be
completed when a Lender has exhausted all prudent and commercially
reasonable efforts to collect upon the debt. However, a Lender may
request in writing that SBA purchase the guaranteed portion of a loan
prior to completion of liquidation, if a debt collection judicial or
other similar proceeding involving that loan (including but not limited
to foreclosure and bankruptcy proceedings) has been underway for more
than eighteen (18) months. In addition, SBA, in its sole discretion,
may purchase the guaranteed
[[Page 66810]]
portion of a loan at any time with or without a request from a Lender.
(2) For loans approved before the effective date of this
regulation. The regulations applicable to the time that a Lender may
demand purchase that were in effect immediately prior to this date will
govern such loans.
(b) Documentation for purchase. SBA will not purchase its
guaranteed portion of a loan from a Lender unless the Lender has
submitted to SBA documentation that SBA deems sufficient to allow SBA
to determine whether purchase of the guarantee is warranted under Sec.
120.524.
(c) Purchase of loans sold in Secondary Market. When the Lender has
sold the guaranteed portion of a loan in the Secondary Market, pursuant
to subpart F of this part, Lenders must perform all necessary servicing
and liquidation actions for such loan even after SBA has purchased the
guaranteed portion of such loan from a Registered Holder (as that term
is defined in Sec. 120.600(i)). In the event that SBA purchases its
guaranteed portion of such a loan from the Registered Holder, Lenders
must provide documentation upon request by SBA that SBA deems
sufficient to be able to review the Lender's administration of the loan
under Sec. 120.524. A Lender's failure to provide sufficient
documentation may constitute a material failure to comply with SBA
requirements under Sec. 120.524(a)(1), and may lead to initiation of
an action for recovery from the Lender of all or some of the moneys SBA
paid to a Registered Holder on a guarantee.
(d) No waiver of SBA's rights. Purchase by SBA of the guaranteed
portion of a loan, or of a portion of SBA's guarantee of a loan, either
through a negotiated agreement with a Lender or otherwise, does not
waive any of SBA's rights to recover from the responsible Lender any
money paid on the guarantee based upon the occurrence of any of the
events set forth in Sec. 120.524(a) in connection with that loan.
12. Amend Sec. 120.522 by revising the section heading and
paragraph (b), and by deleting paragraph (d), to read as follows:
Sec. 120.522 Payment of accrued interest to the Lender or Registered
Holder when SBA purchases the guaranteed portion.
* * * * *
(b) Payment to Lender. (1) For loans approved on or after the
effective date of this regulation. SBA will pay up to a maximum of 120
days interest to a Lender at the time of guarantee purchase.
(2) For loans approved before the effective date of this
regulation. The regulations applicable to the amount of interest that
SBA will pay to a Lender upon loan default that were in effect
immediately prior to this date will govern such loans.
* * * * *
13. Amend Sec. 120.524 by revising paragraphs (a)(1), (a)(8), and
(b) through (d) to read as follows:
Sec. 120.524 When is SBA released from liability on its guarantee on
loans?
(a) * * *
(1) The Lender has failed to comply materially with any Loan
Program Requirement for 7(a) loans.
* * * * *
(8) The Lender has failed to request that SBA purchase a guarantee
within 180 days after maturity of the loan. However, if the Lender is
conducting liquidation or debt collection litigation in connection with
a loan that has matured, SBA will be released from its guarantee only
if the Lender fails to request that SBA purchase the guarantee within
180 days after the completion of the liquidation or debt collection
litigation;
* * * * *
(b) If SBA determines, at any time, that any of the events set
forth in paragraph (a) of this section occurred in connection with that
loan, SBA is entitled to recover any moneys paid on the guarantee plus
interest from the Lender responsible for those events.
(c) If the Lender's loan documentation or other information
indicates that one or more of the events in paragraph (a) of this
section occurred, SBA may undertake such investigation as it deems
necessary to determine whether to honor or deny the guarantee, and may
withhold a decision on whether to honor the guarantee until the
completion of such investigation.
(d) Any information provided to SBA by a Lender or other party will
not prejudice, or be construed as effecting any waiver of, SBA's right
to deny liability for a guarantee if one or more of the events listed
in paragraph (a) of this section occur.
* * * * *
14-15. Add the following new Sec. 120.535 and Sec. 120.536 to
read as follows:
Sec. 120.535. Standards for Lender and CDC loan servicing, loan
liquidation and debt collection litigation.
(a) Lenders and CDCs must service 7(a) and 504 loans in their
portfolio no less diligently than their non-SBA portfolio, and in a
commercially reasonable manner, consistent with prudent lending
standards, and in accordance with Loan Program Requirements.
(b) Lenders and Authorized CDC Liquidators must liquidate and
conduct debt collection litigation for 7(a) and 504 loans in their
portfolio no less diligently than for their non-SBA portfolio, and in a
prompt, cost-effective and commercially reasonable manner, consistent
with prudent lending standards, and in accordance with Loan Program
Requirements and with any SBA approval of either a liquidation or
litigation plan or any amendment of such a plan.
(c) A CDC must not take any action in the liquidation or debt
collection litigation of a 504 loan that would result in an actual or
apparent conflict of interest between the CDC (or any employee of the
CDC) and any Third Party Lender, associate of a Third Party Lender, or
any person participating in a liquidation, foreclosure or loss
mitigation action.
(d) SBA may, in its discretion, undertake the servicing or
liquidation of any 7(a) or 504 loan. If SBA elects to service or
liquidate a loan, it will notify the relevant Lender or CDC in writing,
and, upon receiving such notice, the Lender or CDC must assign the Loan
Instruments to SBA and provide any needed assistance to allow SBA to
service and liquidate the loan. SBA will notify the Borrower of the
change in servicing. SBA may use contractors to perform these actions.
Sec. 120.536 Servicing and liquidation actions that require the prior
written consent of SBA.
(a) Actions by Lenders and CDCs. Except as otherwise provided in a
Supplemental Guarantee Agreement with a Lender or an Agreement with a
CDC, SBA must give its prior written consent before a Lender or CDC
takes any of the following actions:
(1) Increases the principal amount of a loan above that authorized
by SBA at loan origination.
(2) Confers a Preference on the Lender or CDC or engages in an
activity that creates a conflict of interest.
(3) Compromises the principal balance of a loan.
(4) Takes title to any property in the name of SBA.
(5) Takes title to environmentally contaminated property, or takes
over operation and control of a business that handles hazardous
substances or hazardous wastes.
(6) Transfers, sells or pledges more than 90% of a loan.
(7) Takes any action for which prior written consent is required by
a Loan Program Requirement.
[[Page 66811]]
(b) Actions by CDCs only (other than PCLP CDCs). SBA must give its
prior written consent before a CDC, other than a PCLP CDC, takes any of
the following actions with respect to a 504 loan:
(1) Alters substantially the terms or conditions of any Loan
Instrument.
(2) Releases collateral having a cumulative market value in excess
of 10 percent of the Debenture amount or $10,000, whichever is less.
(3) Accelerates the maturity of the note.
(4) Compromises or releases any claim against any Borrower or
obligor, or against any guarantor, standby creditor, or any other
person that is contingently liable for moneys owed on the loan.
(5) Purchases or pays off any indebtedness secured by the property
that serves as collateral for a defaulted 504 loan, such as payment of
the debt(s) owed to a lien holder or lien holders with priority over
the lien securing the loan.
(6) Accepts a workout plan to restructure the material terms and
conditions of a loan that is in default or liquidation.
(7) Takes any action for which prior written consent is required by
a Loan Program Requirement.
(c) Documentation requirements. For all servicing/liquidation
actions not requiring SBA's prior written consent, Lenders and CDCs
must document the justifications for their decisions and retain these
and supporting documents in their file for future SBA review to
determine if the actions taken by the Lender or CDC were prudent and
commercially reasonable.
16. Remove the undesignated center heading before Sec. 120.540
entitled ``Liquidation of Collateral.''
Sec. 120.540 [Redesignated as Sec. 120.545]
17. Redesignate Sec. 120.540 as Sec. 120.545.
18. Add new Sec. 120.540 through Sec. 120.542 to read as follows:
Sec. 120.540 Liquidation and litigation plans.
(a) SBA oversight. SBA may monitor or review liquidation through
the review of liquidation plans which all Authorized CDC Liquidators
and certain Lenders must submit to SBA for approval prior to
undertaking liquidation, and through liquidation wrap-up reports which
Lenders must submit to SBA at the completion of liquidation. SBA will
monitor debt collection litigation, such as judicial foreclosures,
bankruptcy proceedings and other State and Federal insolvency
proceedings, through the review of litigation plans, as set forth in
this section.
(b) Liquidation plan. An Authorized CDC Liquidator and a Lender for
a loan made under its authority as a CLP Lender must, prior to
undertaking any liquidation, submit a written proposed liquidation plan
to SBA and receive SBA's written approval of that plan.
(c) Litigation plan. An Authorized CDC Liquidator and a Lender must
obtain SBA's prior approval of a litigation plan before proceeding with
any Non-Routine Litigation, as defined in paragraph (c)(1) of this
section. SBA's prior approval is not required for Routine Litigation,
as defined in paragraph (c)(2) of this section.
(1) Non-Routine Litigation includes:
(i) All litigation where factual or legal issues are in dispute and
require resolution through adjudication;
(ii) Any litigation where legal fees and costs are estimated to
exceed $10,000;
(iii) Any litigation involving a loan where a Lender or Authorized
CDC Liquidator has an actual or potential conflict of interest with
SBA; and
(iv) Any litigation involving a 7(a) or 504 loan where the Lender
or CDC has made a separate loan to the same borrower which is not a
7(a) or 504 loan.
(2) Routine Litigation means uncontested litigation, such as non-
adversarial matters in bankruptcy and undisputed foreclosure actions,
having estimated legal fees and costs not exceeding $10,000.
(d) Decision by SBA to take over litigation. If a Lender or
Authorized CDC Liquidator is conducting, or proposes to conduct, debt
collection litigation on a 7(a) loan or 504 loan, SBA may take over the
litigation if SBA determines that the outcome of the litigation could
adversely affect SBA's administration of the loan program or that the
Government is entitled to legal remedies that are not available to the
Lender or Authorized CDC Liquidator. Examples of cases that could
adversely affect SBA's administration of a loan program include, but
are not limited to, situations where SBA determines that:
(1) The litigation involves important governmental policy or
program issues.
(2) The case is potentially of great precedential value or there is
a risk of adverse precedent to the Government.
(3) The Lender or Authorized CDC Liquidator has an actual or
potential conflict of interest with SBA.
(4) The legal fees of the Lender or Authorized CDC Liquidator's
outside counsel are unnecessary, unreasonable or not customary in the
locality.
(e) Amendments to a liquidation or litigation plan. Lenders and
Authorized CDC Liquidators must submit an amended liquidation or
litigation plan to address any material changes arising during the
course of the liquidation or litigation that were not addressed in the
original plan or an amended plan. Lenders and Authorized CDC
Liquidators must obtain SBA's written approval of the amended plan
prior to taking any further liquidation or litigation action. Examples
of such material changes that would require the approval of an amended
plan include, but are not limited to:
(1) Changes arising during the course of Routine Litigation that
transform the litigation into Non-Routine Litigation, such as when the
debtor contests a foreclosure or when the actual legal fees incurred
exceed $10,000.
(2) If SBA has approved a litigation plan where anticipated costs
of conducting the litigation exceed $10,000, or has approved an amended
plan, and thereafter the anticipated or actual costs of conducting the
litigation increase by more than 15 percent.
(3) If SBA has approved a liquidation plan, or an amended plan, and
thereafter the anticipated or actual costs of conducting the
liquidation increase by more than 15 percent.
(f) Limited waiver of need for a written liquidation or litigation
plan. SBA may, in its discretion, and upon request by a Lender or
Authorized CDC Liquidator, waive the requirements of paragraphs (b),
(c) or (e) of this section, if one of the following circumstances
(Emergency) warrant such a waiver: the need for expeditious action to
avoid the potential risk of loss on the loan or dissipation of
collateral exists; an immediate response is required to litigation by a
borrower, guarantor or third party; or another urgent reason arises.
The Lender or Authorized CDC Liquidator must obtain SBA's written
consent to such waiver before undertaking the Emergency action, if at
all practicable. SBA's waiver will apply only to the specific action(s)
which the Lender or Authorized CDC Liquidator has identified to SBA as
being necessary to address the Emergency. The Lender or Authorized CDC
Liquidator must, as soon after the Emergency as is practicable, submit
a written liquidation or litigation plan to SBA or, if appropriate, a
written amended plan, and may not take further liquidation or
litigation action without written approval of such plan or amendment by
SBA.
(g) Appeals. A Lender for loans made under its authority as a CLP
Lender or an Authorized CDC Liquidator that disagrees with an SBA
office's decision pertaining to an original or amended liquidation
plan, other than such portions of the plan that address litigation
matters, may submit a written appeal to the AA/FA within 30 days of
[[Page 66812]]
the decision. The AA/FA or designee will make the final Agency decision
in consultation with the Associate General Counsel for Litigation. A
Lender or Authorized CDC Liquidator that disagrees with an SBA office's
decision pertaining to an original or amended litigation plan, or the
portion of a liquidation plan addressing litigation matters, may submit
a written appeal to the Associate General Counsel for Litigation within
30 days of the decision. The Associate General Counsel for Litigation
will make the final Agency decision in consultation with the AA/FA.
Sec. 120.541 Time for approval by SBA.
(a) Except as set forth in paragraph (c) of this section, in
responding to a request for approval under Sec. Sec. 120.540(b),
120.540(c), 120.537(c)(5) or 120.537(c)(6), SBA will approve or deny
the request within 15 business days of the date when SBA receives the
request. If SBA is unable to approve or deny the request within this
15-day period, SBA will provide a written notice of no decision to the
Lender or Authorized CDC Liquidator, stating the reason for SBA's
inability to act; an estimate of the additional time required to act on
the plan or request; and, if SBA deems appropriate, requesting
additional information.
(b) Except as set forth in paragraph (c) of this section, unless
SBA gives its written consent to a proposed liquidation or litigation
plan, or a proposed amendment of a plan, or any of the actions set
forth in Sec. 120.536(b)(5) or Sec. 120.536(b)(6), SBA will not be
deemed to have approved the proposed action.
(c) If a Lender seeks to perform liquidation on a loan made under
its authority as a CLP Lender by submitting a liquidation plan to SBA
for approval, SBA will approve or deny such plan within ten business
days. If SBA fails to approve or deny the plan within ten business
days, SBA will be deemed to have approved such plan.
Sec. 120.542 Payment by SBA of legal fees and other expenses.
(a) Legal fees SBA will not pay. (1) SBA will not pay legal fees or
other costs that a Lender or Authorized CDC Liquidator incurs:
(i) In asserting a claim, cross claim, counterclaim, or third-party
claim against SBA or in defense of an action brought by SBA, unless
payment of such fees or costs is otherwise required by federal law.
(ii) In connection with actions of a Lender or Authorized CDC
Liquidator's outside counsel for performing non-legal liquidation
services, unless authorized by SBA prior to the action.
(iii) In taking actions which solely benefit a Lender or Authorized
CDC Liquidator and which do not benefit SBA, as determined by SBA.
(2) SBA will not pay legal fees or other costs a Lender or CDC
incurs in the defense of, or pay for any settlement or adverse judgment
resulting from, a suit, counterclaim or other claim by a borrower,
guarantor, or other party that seeks damages based upon a claim that
the Lender or CDC breached any duty or engaged in any wrongful actions,
unless SBA expressly directed the Lender or CDC to undertake the
allegedly wrongful action that is the subject of the suit, counterclaim
or other claim.
(b) Legal fees SBA may decline to pay. In addition to any right or
authority SBA may have under law or contract, SBA may, in its
discretion, decline to pay a Lender or Authorized CDC Liquidator for
all, or a portion, of legal fees and/or other costs incurred in
connection with the liquidation and/or litigation of a 7(a) loan or 504
loan under any of the following circumstances:
(1) SBA determines that the Lender or Authorized CDC Liquidator
failed to perform liquidation or litigation promptly and in accordance
with commercially reasonable standards, in a prudent manner, or in
accordance with any Loan Program Requirement or SBA approvals of either
a liquidation or litigation plan or any amendment of such a plan.
(2) A Lender or Authorized CDC Liquidator fails to obtain prior
written approval from SBA for any liquidation or litigation plan, or
for any amended liquidation or litigation plan, or for any action set
forth in Sec. 120.536, when such approval is required by these
regulations or a Loan Program Requirement.
(3) If SBA has not specifically approved fees or costs identified
in an original or amended liquidation or litigation plan under Sec.
120.540, and SBA determines that such fees or costs are not reasonable,
customary or necessary in the locality in question. In such cases, SBA
will pay only such fees as it deems are necessary, customary and
reasonable in the locality in question.
(c) Appeals--liquidation costs. A Lender or Authorized CDC
Liquidator that disagrees with a decision by an SBA office to decline
to reimburse all, or a portion, of the fees and/or costs incurred in
conducting liquidation may appeal this decision in writing to the AA/FA
within 30 days of the decision. The decision of the AA/FA or designee
will be made in consultation with the Associate General Counsel for
Litigation, and will be the final Agency decision.
(d) Appeals--litigation costs. A Lender or Authorized CDC
Liquidator that disagrees with a decision by SBA to decline to
reimburse all, or a portion, of the legal fees and/or costs incurred in
conducting debt collection litigation may appeal this decision in
writing to the Associate General Counsel for Litigation within 30 days
of the decision. The decision of the Associate General Counsel for
Litigation will be made in consultation with the AA/FA, and will be the
final Agency decision.
19. Add a new Sec. 120.546 to read as follows:
Sec. 120.546 Loan asset sales.
(a) General. Loan asset sales are governed by Sec. 120.845(b)(4)
and by this section.
(b) 7(a) loans. (1) For loans approved on or after the effective
date of this regulation. The Lender will be deemed to have consented to
SBA's sale of the loan (guaranteed and unguaranteed portions) in an
asset sale conducted or overseen by SBA if:
(i) For a loan where the guaranteed portion has been sold in the
Secondary Market pursuant to subpart F of this part and the loan
subsequently goes into default, and the Lender does not exercise its
option to purchase the guaranteed portion of the loan from the
Registered Holder and instead SBA purchases the guaranteed portion of
the loan from the Registered Holder; or
(ii) SBA has purchased the guaranteed portion of a loan prior to
completion of liquidation as provided in Sec. 120.520(a)(1).
(2) For loans approved before the effective date of this
regulation. SBA must obtain written consent from the Lender for the
sale of such loans in an asset sale.
(c) 504 loans. (1) PCLP Loans. After SBA's purchase of a Debenture,
SBA may at its sole discretion sell a defaulted PCLP Loan in an asset
sale conducted or overseen by SBA, after providing to the PCLP CDC that
made the loan advance notice of not less than 90 days before the date
upon which SBA first makes its records concerning such loan available
to prospective purchasers for examination.
(2) All other 504 loans. After SBA's purchase of a Debenture, SBA
may at its sole discretion sell a defaulted 504 loan in an asset sale
conducted or overseen by SBA.
20. Revise Sec. 120.826 to read as follows:
[[Page 66813]]
Sec. 120.826 Basic requirements for operating a CDC.
A CDC must operate in accordance with all Loan Program
Requirements. In its Area of Operations, a CDC must market the 504
program, package and process 504 loan applications, close and service
504 loans, and if authorized by SBA, liquidate and litigate 504 loans.
It must supply to SBA current and accurate information about all
certification and operational requirements, and maintain the records
and submit the reports required by SBA.
21. Revise Sec. 120.841(c) to read as follows:
Sec. 120.841 Qualifications for the ALP.
* * * * *
(c) Current reviews in compliance. SBA-conducted oversight reviews
must be current (within past 12 months) for applicants for ALP status,
and these reviews must have found the CDC to be in compliance with Loan
Program Requirements.
* * * * *
22. Revise Sec. 120.845(c)(1) to read as follows:
Sec. 120.845 Premier Certified Lenders Program (PCLP).
* * * * *
(c) * * *
(1) The CDC must be an ALP CDC in substantial compliance with Loan
Program Requirements or meet the criteria to be an ALP CDC set forth in
Sec. 120.841(a) through (h).
* * * * *
23. Revise Sec. 120.846(a)(3) to read as follows:
Sec. 120.846 Requirements for maintaining and reviewing PCLP Status.
(a) * * *
(3) Substantially comply with all Loan Program Requirements.
* * * * *
Subpart H--Development Company Loan Program (504)
24. Amend Sec. 120.848 by revising paragraphs (a) and (f) to read
as follows:
Sec. 120.848 Requirements for 504 loan processing, closing,
servicing, liquidating and litigating by PCLP CDCs.
(a) General. In processing closing, servicing, liquidating and
litigating 504 loans under the PCLP (``PCLP Loans''), the PCLP CDC must
comply with Loan Program Requirements and conduct such activities in
accordance with prudent and commercially reasonable lending standards.
* * * * *
(f) Servicing, liquidation and litigation responsibilities. The
PCLP CDC generally must service, liquidate and litigate its entire
portfolio of PCLP Loans, although SBA may in certain circumstances
elect to handle such duties with respect to a particular PCLP Loan or
Loans. Additional servicing and liquidation requirements are set forth
in Subpart E.
* * * * *
25. Revise Sec. 120.854(a)(2) to read as follows:
Sec. 120.854 Grounds for taking enforcement action against a CDC.
(a) * * *
(2) The CDC has failed to comply materially with any Loan Program
Requirement.
* * * * *
24. Amend Sec. 120.970 by revising paragraphs (a) and (h) to read
as follows:
120.970 Servicing of 504 Loans and Debentures.
(a) In servicing 504 loans, CDCs must comply with Loan Program
Requirements and in accordance with prudent and commercially reasonable
lending standards.
* * * * *
(h) Additional servicing requirements are set forth in Subpart E.
26. Add a new undesignated center heading after Sec. 120.972 to
read as follows: Authority of CDCs to Perform Liquidation and Debt
Collection Litigation.
27. Add Sec. 120.975 to read as follows:
Sec. 120.975 CDC Liquidation of Loans and Debt Collection Litigation.
(a) PCLP CDCs. If a CDC is designated as a PCLP CDC under Sec.
120.845, the CDC must liquidate and handle debt collection litigation
with respect to all PCLP Loans in its portfolio on behalf of SBA as
required by Sec. 120.848(f), in accordance with subpart E of this
part. With respect to all other 504 loans that a PCLP CDC makes, the
PCLP CDC is an Authorized CDC Liquidator and must exercise its
delegated authority to liquidate and handle debt-collection litigation
in accordance with subpart E of this part for such loans, if the PCLP
CDC is notified by SBA that it meets either of the following
requirements to be an Authorized CDC Liquidator, as determined by SBA:
(1) The PCLP CDC has one or more employees who have not less than
two years of substantive, decision-making experience in administering
the liquidation and workout of defaulted or problem loans secured in a
manner substantially similar to loans funded with 504 loan program
debentures, and who have completed a training program on loan
liquidation developed by the Agency in conjunction with qualified CDCs
that meet the requirements of this section; or
(2) The PCLP CDC has entered into a contract with a qualified third
party for the performance of its liquidation responsibilities and
obtains the approval of SBA with respect to the qualifications of the
contractor and the terms and conditions of the contract.
(b) All other CDCs. A CDC that is not authorized under paragraph
(a) of this section may apply to become an Authorized CDC Liquidator
with authority to liquidate and handle debt collection litigation with
respect to 504 loans on behalf of SBA, in accordance with subpart E of
this part, if the CDC meets the following requirements:
(1) The CDC meets either of the following criteria:
(i) The CDC participated in the loan liquidation pilot program
established by the Small Business Programs Improvement Act of 1996
prior to the effective date of this regulation; or
(ii) During the three fiscal years immediately prior to seeking
such authority, the CDC made an average of not less than ten 504 loans
per year; and
(2) The CDC meets either of the following requirements:
(i) The CDC has one or more employees who have not less than two
years of substantive, decision-making experience in administering the
liquidation and workout of defaulted or problem loans secured in a
manner substantially similar to loans funded with 504 loan program
debentures, and who have completed a training program on loan
liquidation developed by the Agency in conjunction with qualified CDCs
that meet the requirements of this section; or
(ii) The CDC has entered into a contract with a qualified third
party for the performance of its liquidation responsibilities and
obtains the approval of SBA with respect to the qualifications of the
contractor and the terms and conditions of the contract.
(c) CDC counsel. To perform debt collection litigation under
paragraphs (a) or (b) of this section, a CDC must also have either in-
house counsel with adequate experience as approved by SBA or entered
into a contract for the performance of debt collection litigation with
an experienced attorney or law firm as approved by SBA.
(d) Application for authority to liquidate and litigate. To seek
authority to perform liquidation and debt collection litigation under
paragraphs (b) and (c) of this section, a CDC other than a PCLP CDC
must submit a written application to SBA and include documentation
demonstrating that the
[[Page 66814]]
CDC meets the requirements of paragraph (b) and (c) of this section. If
a CDC intends to use a contractor to perform liquidation, it must
obtain approval from SBA of both the qualifications of the contractor
and the terms and conditions in the contract covering the CDC's
retention of the contractor. SBA will notify a CDC in writing when the
CDC can begin to perform liquidation and/or debt collection litigation
under this section.
Hector V. Barreto,
Administrator.
[FR Doc. 05-21681 Filed 11-2-05; 8:45 am]
BILLING CODE 8025-01-P