[Federal Register: May 26, 2006 (Volume 71, Number 102)]
[Proposed Rules]
[Page 30323-30331]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26my06-21]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AF23
Business Loan Programs; Premier Certified Lenders Program
Alternative Loan Loss Reserve Pilot Program
AGENCY: Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The U.S. Small Business Administration (``SBA'' or ``the
Administration'') proposes to amend its Premier Certified Lenders
Program (``PCLP'') in accordance with recent statutory amendments to
the PCLP. Presently, under the PCLP, participating Certified
Development Companies (``CDCs'') have increased authority in connection
with making and servicing loans made under SBA's development company
loan program (``504 Program''). One PCLP requirement relates to a loan
loss reserve fund (``LLRF'') which a CDC participating in the PCLP
(``PCLP CDC'') must maintain to cover losses it may incur in connection
with the 504 Program loans (``504 Loans'') it has made under the PCLP
(``PCLP loans''). Recent statutory changes to the PCLP include two
pilot programs related to PCLP LLRF requirements. One pilot (``Pilot
1'') changes LLRF requirements by requiring the value of an LLRF to
equal 1 percent of the combined outstanding balances of each debenture
issued by a PCLP CDC to fund a PCLP loan (``PCLP Debenture''), instead
of the combined original face value of those PCLP Debentures. Another
pilot (``Pilot 2'') authorizes certain PCLP CDCs with significantly
large LLRFs to elect to meet alternative LLRF requirements in lieu of
certain existing PCLP LLRF requirements. The proposed regulations would
implement requirements, procedures, and guidelines relating to Pilot 1
and Pilot 2.
DATES: SBA must receive comments on or before July 25, 2006.
ADDRESSES: You may submit comments, identified by RIN number, by any of
the following methods: (1) Federal eRulemaking Portal: http://www.regulations.gov
; (2) E-mail: Charles.Thomas@SBA.gov. Include RIN
Number in the subject line of the message; (3) Fax: (202) 205-7722; (4)
Mail: Charles Thomas, Director, Program Development Division, Office of
Financial Assistance, U.S. Small Business Administration, 409 Third
Street, SW., Washington, DC 20416; (5) Hand Delivery/Courier: 409 3rd
Street, SW., Washington, DC 20416, c/o Charles Thomas.
FOR FURTHER INFORMATION CONTACT: Charles Thomas, Director, Program
Development Division, Office of Financial Assistance, Small Business
Administration, 409 Third Street, SW., Washington, DC 20416, (202) 205-
6656, Charles.Thomas@SBA.gov.
SUPPLEMENTARY INFORMATION:
Statutory Basis for This Proposed Rulemaking
SBA must amend the PCLP LLRF regulatory requirements established
pursuant to Title V (``Title V'') of the Small Business Investment Act
of 1958, as amended (the ``Act''), to conform with amendments to Title
V contained in Public Law 108-232, enacted on May 28, 2004 (``Pilot 1
and Pilot 2''). Pilot 1 and Pilot 2 were enacted with the ultimate goal
of having each PCLP LLRF more accurately correspond to the risk of loss
it secures.
Overview of the PCLP and the Basis for Pilot 1 and Pilot 2
While access to capital is vital to the success of small
businesses, many find it difficult to access financing, particularly
long term financing. SBA's lending programs address these
[[Page 30324]]
difficulties by providing a critical stream of funding to small
businesses. Last year, SBA loan programs supplied $21 billion in
capital, accounting for 40 percent of all long-term small business
lending to this country's entrepreneurs. One of SBA's most important
loan programs is the 504 Program.
The 504 Program provides small businesses with long-term, fixed-
rate financing to acquire major assets, such as heavy machinery and
equipment, land, and buildings, with the overall goal of enhancing the
economic development of a particular community or region. A typical 504
Loan has three components: (1) A loan from a private-sector lender,
secured by a senior lien, covering up to 50 percent of the project
cost; (2) a loan from an SBA authorized Certified Development Company,
secured by a junior lien position, covering up to 40 percent of the
cost; and (3) an equity contribution of at least 10 percent from the
small business. The CDC obtains the funds it needs to make its loan to
the small business by selling a debenture that is 100 percent
guaranteed by SBA. The maximum SBA debenture under the 504 Program is
generally $1.5 million, but it is $2.0 million if the proceeds of the
504 Loan will be directed toward certain public policy goals set forth
in Title V, and $4.0 million when the project is for a small
manufacturer as defined in Title V. In FY 2005, SBA approved about $5
billion in lending to approximately 9,200 small businesses through the
504 Program.
Currently, under non-PCLP 504 Loan processing procedures, SBA
analyzes each loan proposal to determine its creditworthiness and its
conformance with SBA's regulations and policies, which are designed to
control program risk. As the 504 Program expanded, however, SBA's
budget constraints limited its capacity to process and service
expeditiously the expanding number of 504 Loans. The PCLP was thus
conceived to transfer substantial 504 Program lending and servicing
authority to qualified CDCs, thereby reducing the demand for SBA
resources and improving 504 Loan turn-around time. However, to ensure
adequate program oversight and to protect the Federal Government from
undue risk of loss, PCLP CDCs were required to: (1) Meet and maintain
several additional qualifications and standards; (2) implement certain
critical management controls; (3) reimburse SBA for 10 percent of any
loss SBA incurred in connection with any of its PCLP Debentures; and
(4) contribute and maintain an SBA-controlled LLRF equal to one percent
of the aggregate of the face values of each of its PCLP Debentures.
Participation in PCLP has expanded gradually since its 1997
inception to nearly 30 PCLP CDCs, which collectively accounted for
approximately $720 million in 504 lending in FY 2005. Losses under the
program have been minimal thus far. As noted above, each participant
must maintain an LLRF equal to one percent of the sum of the face
values of each of its outstanding PCLP Debentures, even as the
outstanding balances of those PCLP Debentures decrease and,
consequently, the risk of loss to SBA relating to those Debentures
decreases.
Pilot 1 and Pilot 2 were enacted so that PCLP LLRFs would be more
accurately aligned with the true level of risk associated with the PCLP
Debentures those LLRFs secure. Pilot 1 reduces the amount a PCLP CDC is
required to maintain in its LLRF to one percent of the aggregate of the
outstanding balances of its PCLP Debentures rather than one percent of
the aggregate of the original face value amounts of those PCLP
Debentures. Pilot 2 allows a PCLP CDC, which meets certain
requirements, to maintain its LLRF under an alternative set of LLRF
requirements. Under Pilot 2, the amount of reserves required to be
maintained in an LLRF will be determined by a sound risk assessment
methodology, which must be evaluated and certified by an independent
auditor.
Pilot 1
Pilot 1 is a two-year pilot program initiated because existing PCLP
statutory requirements do not take into account that SBA's risk of loss
decreases as each PCLP Debenture is paid down. PCLP Debentures are
issued for either a ten- or twenty-year term and are amortized over the
duration of the term. As the PCLP CDC makes its semi-annual payments on
its PCLP Debentures, the outstanding balance is reduced; however, prior
to Pilot 1 the PCLP CDC could only decrease its LLRF after one of the
PCLP Debentures secured by its LLRF was completely paid off. Now, in
accordance with Pilot 1, each PCLP CDC will be permitted to adjust its
LLRF downward to equal one percent of the sum of the outstanding
balances of its PCLP Debentures. Congress expects that Pilot 1 will
encourage additional CDCs to participate in the PCLP.
In addition, Congress anticipates that Pilot 1 will encourage PCLP
CDCs to use the funds withdrawn from its LLRF to promote more local
economic development.
Pilot 2
Pilot 2 allows certain PCLP CDCs with large LLRFs to elect to
calculate the appropriate funding of their LLRF using a risk-based
approach; provided, however, that the minimum amount of the LLRF
determined by this method equals or exceeds $100,000. A Pilot 2
participant must use an appropriate and effective process to maintain
acceptable funding of its LLRF. The American Institute of Certified
Public Accountants (``AICPA'') and the Federal Financial Institutions
Examination Council (``FFIEC'') are recognized by SBA to have published
substantial guidance on the Allowances for Loan and Lease Losses
(``ALLL'') methodologies and documentation used by the lending
industry. SBA believes that these methodologies will provide an
appropriate set of guidelines for independent auditors calculating LLRF
funding requirements for Pilot 2 participants. In addition, SBA
recognizes that the United States Department of Treasury, Office of
Thrift Supervision (``OTS''), has established regulations relating to
the qualifications of auditors working for institutions subject to OTS
oversight. SBA believes that those guidelines are also suitable for
independent auditors making Pilot 2 calculations. Accordingly, SBA
proposes that a Pilot 2 participant be required to have its LLRF
determined in accordance with AICPA and FFIEC ALLL methodologies by an
independent auditor that meets the OTS auditor requirements referenced
above. Due to the lack of portfolio diversification of CDC loan
portfolios in terms of region, industry, and asset size, and the
delegation of additional authority to participants, Congress added
additional eligibility requirements applicable to Pilot 2 participants.
For example, a Pilot 2 participant must submit a certification stating
that its LLRF is sufficient to protect the Federal Government from loss
due to inadequate LLRFs. The certification must be signed by the head
of the participating PCLP CDC and its independent auditor and a new
certification must be submitted for each quarter of Pilot 2
participation. The proposed regulations would require that the
certification be adequately supported by methodologies and
documentation which are consistent with the FFIEC's Policy Statement on
Allowance for Loan and Lease Losses Methodologies and Documentation for
Banks and Savings Institutions dated July 2, 2001, as published in 66
FR 35629, July 6, 2001.
Perhaps most significantly, a PCLP CDC electing to participate in
Pilot 2
[[Page 30325]]
would have its loss exposure related to PCLP Debentures increased from
10 percent to 15 percent for each PCLP Debenture issued while it was
participating in Pilot 2. Congress determined that this increase might
be a useful safety measure that could help balance unanticipated risks
associated with Pilot 2.
Section-by-Section Analysis
Section 120.847(a) would be amended by creating subsections (a)(1)
and (a)(2), with (a)(1) adding new definitions applicable to Pilot 1
and Pilot 2 and (a)(ii) containing the general PCLP CDC LLRF
information as amended to include reference to Pilot 2 requirements.
Section 120.847(g) would be amended to incorporate Pilot 1 LLRF
withdrawal options.
SBA would amend section 120.847(j) governing insufficient funding
of the LLRF to add guidance on SBA notification of an LLRF deficiency
to a Pilot 2 participant.
Section 120.848 would be redesignated as Sec. 120.849.
A new Sec. 120.848 would be added to incorporate Pilot 2
provisions, with the subsections covering various authorities,
requirements, procedures, and guidelines applicable to Pilot 2.
Subsection (a) references regulation sections applicable to Pilot 2 and
states that Pilot 2 participants must reimburse SBA for 15 percent of
any loss sustained as a result of a default in the payment of principal
or interest on a PCLP Debenture issued by the PCLP, and guaranteed by
SBA, during participation in Pilot 2 and 10 percent of any such loss
related to any of its other PCLP Debentures. Subsection (b) sets forth
the requirements a PCLP CDC must meet to participate in Pilot 2. In
addition to the statutory requirements, SBA proposes specific
guidelines relating to the statutory requirement that a prospective
Pilot 2 participant has established and is utilizing an appropriate and
effective process for analyzing the risk of loss associated with its
portfolio of PCLP loans. Specifically, SBA proposes that LLRF funding
requirements made under Pilot 2 follow GAAP, AICPA, FFIEC and SBA
Office of Lender Oversight guidelines for calculating appropriate
allowances for loan and lease losses. Proposed subsection (b) would
also provide for (in paragraph (4)) a performance requirement directed
at a Pilot 2 participant meeting four or more specified risk management
benchmarks. This is consistent with statutory language. In addition to
the benchmark indicator, SBA is considering whether the performance
requirement in the final rule should include that a Pilot 2
participant's risk rating (as determined by SBA pursuant to published
guidance) be at a level acceptable to SBA.
Subsection (c) sets forth the statutory requirements applicable to
independent auditors used by Pilot 2 participants. The statute requires
the independent auditor to ``be approved by SBA.'' Under the proposed
rule, SBA's Bureau of PCLP Oversight would approve the independent
auditor. SBA also proposes to include in subsection (c) the
qualifications for independent auditors who will be acceptable to SBA.
SBA used as a basis for these proposed qualifications the
qualifications OTS requires for the independent public accountants it
employs to audit financial statements, applications, or procedures of
institutions for which the OTS has oversight responsibility. SBA
believes these qualifications are broad enough to apply usefully to the
independent auditors who will be carrying out the agreed upon
procedures applicable to Pilot 2. The subsection also requires that a
Pilot 2 participant that changes auditors during a Pilot 2 Calendar
Quarter provide the reasons for the change to the Associate
Administrator, Office of Lender Oversight (``AA/OLO'') within 30 days
of the change.
Subsection (d) states that, to elect to participate in Pilot 2, a
PCLP CDC must notify the Associate Administrator, Office of Financial
Assistance (``AA/FA'') and the AA/OLO in writing and include clear
documentation that it meets the requirements set forth in subsection
(b) and that its auditor meets the requirements set forth in subsection
(c).
Subsection (e) would set forth the statutorily-determined Pilot 2
participation periods: participation in Pilot 2 must be by calendar
quarter. Subsection (f) would require a Pilot 2 participant to make any
necessary contributions to its LLRF necessary to equal the amount
determined by the independent auditor in accordance with Pilot 2
requirements or $100,000 if the amount determined by the independent
auditor is less than $100,000.
Subsection (g) would set forth procedures related to the
statutorily-determined Pilot 2 certification requirements applicable to
the Pilot 2 participant and its auditor, and would permit the Pilot 2
participant to withdraw funds from its LLRF if the funds exceed Pilot 2
requirements. The statute states that a Pilot 2 participant which
decides not to participate in the pilot in the following calendar
quarter must make a contribution to its LLRF in such an amount as SBA
may determine. Subsection (g) proposes to allow a Pilot 2 participant
to adjust its LLRF to meet Pilot 1 requirements within 45 days after
its Pilot 2 participation or submit to SBA a proposed recontribution
schedule within 30 days after its Pilot 2 participation. Subsection (g)
would give SBA the authority to reject a proposed recontribution
schedule and to require the PCLP CDC to follow an SBA-determined
recontribution schedule if, in its sole discretion, SBA determines that
the recontribution schedule submitted by the PCLP CDC would cover the
exposure related to all of its outstanding PCLP Debentures, or if the
PCLP CDC fails to submit a recontribution schedule, within the 30-day
time frame.
Subsection (h) would provide SBA with the authority to remove a
PCLP CDC from Pilot 2 participation if that PCLP CDC fails to meet
Pilot 2 requirements. In such event, subsection (h) would authorize SBA
to take actions necessary to ensure that the LLRF covers the exposure
related to all of its outstanding PCLP Debentures, including, but not
limited to, the right to require the PCLP CDC to follow an SBA-
determined recontribution schedule.
Finally, subsection (i) would reference the statutorily created
Bureau of PCLP Oversight. Under the proposed rule, the Bureau may
review the Pilot 2 participant's process for analyzing the risk of loss
associated with the Pilot 2 participant's outstanding PCLP Debentures
(and the underlying PCLP loans) and make a determination as to whether
the process is consistent with ALLL Methodologies and Documentation and
in accord with GAAP, AICPA, FFIEC, and SBA Office of Lender Oversight
guidance/standards. A negative determination could result in SBA
finding the Pilot 2 participant ineligible to participate in Pilot 2
under proposed section 120.848(b) or serve as a basis for removal under
proposed section 120.848(h).
Compliance With Executive Orders 13132, 12988, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601-612) and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
This proposed rule would not have substantial direct effects on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Therefore, for the purposes of Executive
Order 13132, SBA determines that this final rule has no federalism
implications warranting preparation of a federalism assessment.
[[Page 30326]]
This proposed rule meets applicable standards set forth in sections
3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to
minimize litigation, eliminate ambiguity, and reduce burden. The
proposed rule does not have retroactive or preemptive effect.
The Office of Management and Budget (OMB) has determined that this
rule constitutes a significant regulatory action under Executive Order
12866. The statutory amendments to PCLP LLRF requirements (Pilot 1 and
Pilot 2) revise existing PCLP LLRF requirements and require SBA to
publish regulations implementing those amendments. The amendments and
these regulations are intended to: (1) Establish and test alternative
LLRF concepts that may more accurately reflect the potential risks and
the potential losses inherent in the PCLP; (2) Ensure LLRF alternatives
are well founded by incorporating methodologies and standards that
correspond to the well established principles and standards used by
commercial lenders for ALLL and that have been approved by the FFIEC
and the AICPA; (3) Free up PCLP loss reserve capital to enhance PCLP
CDC operational flexibility and to support additional 504 lending as
well as other local economic development activities; and (4) Ensure
each LLRF is adequate to cover the exposure related to all of the
outstanding PCLP Debentures of the PCLP CDC.
These objectives are embodied in two-year pilot alternative LLRF
options which are to be examined and evaluated. Together with the
existing LLRF requirements, these pilot alternatives represent the most
reasonable and most viable LLRF alternatives, at least until additional
longer term program performance data become available and provide the
basis for a comprehensive broad-based assessment of the PCLP and the
adequacy of its LLRFs.
The two pilots are based on reasonable, prudent, and well
established principles and standards, many of which have been developed
and tested over the course of several decades by the commercial lending
industry and have been generally accepted and codified by the Federal
Financial Institutions Examination Council (FFIEC), whose member
Federal agencies have various oversight responsibilities over the
Nation's banking and thrift institutions. However, while these pilot
concepts are based on sound loss reserve principles and standards, they
are new to SBA and the PCLP. Consequently, SBA has little empirical
data on the concepts and can therefore provide only broad and general
estimates of their costs and benefits. Also, while these alternatives
will generally reduce the amounts that PCLP CDCs must retain in their
LLRFs, it should be noted that neither pilot reduces the amount a PCLP
CDC must reimburse SBA as a result of a default under the PCLP, so the
pilots' implications for SBA are limited to the risk that a PCLP CDC
will not have adequate LLRFs or other additional resources with which
to reimburse the prescribed amount to SBA. (Pilot 2 actually increases
the amount the PCLP CDC must reimburse SBA as a result of a loss
relating to the PCLP Debentures issued and guaranteed during the PCLP
CDC's Pilot 2 participation.) Finally, while SBA recognizes that
prudent lending and adequate LLRFs sufficient to control program risk
are integral to the PCLP and its long-term viability, the PCLP is, as
part of SBA's 504 Program, a zero subsidy loan program. As a result,
any increased loss rate experienced by SBA under PCLP would translate
into a change to the 504 Program's subsidy model and ultimately the
fees paid by the borrowers and the lenders participating in the
program; it is extremely unlikely that it would affect or increase
Federal program subsidies because any increased losses are expected to
be covered by increases in program fees only.
Pilot 1 allows each PCLP CDC to reduce its LLRF based on the
decreasing outstanding balance of its PCLP Debentures as opposed to
maintaining a LLRF equal to one percent of the original amount of all
of its PCLP Debentures. SBA anticipates that most if not all of the
PCLP CDCs will take advantage of this option. Following discussions
with the CDC industry, SBA estimates that the costs incurred by PCLP
CDCs of adopting Pilot 1 would be relatively insignificant, comprising
less than $1,000 for each PCLP CDC for minor modifications to internal
control systems used to calculate LLRF requirements.
With respect to anticipated benefits of Pilot 1 to PCLP CDCs, most
(about 95 percent) of the amortized debentures issued under the PCLP
are for a term of 20 years, with the vast majority of the initial
debenture payments comprised of interest payments. Since its inception
in FY 1997, approximately $1.3 billion in debentures have been issued
under the PCLP, and about $11 million have thus aggregated in all PCLP
LLRFs. SBA estimates that during the 2 years of Pilot 1, outstanding
PCLP Debentures will total approximately $1.8 billion, while the
amounts PCLP CDCs will be required to maintain in their LLRFs under
Pilot 1 will only increase to approximately $12 million. Without the
LLRF changes mandated under Pilot 1, SBA estimates that about $16
million would have otherwise been required to be maintained in the PCLP
LLRFs. SBA therefore estimates that PCLP CDCs would collectively
benefit under Pilot 1 with a reduction in PCLP LLRFs of about $4
million. Following discussions with PCLP CDCs, the consensus was that
the freed up $4 million in LLRFs would generally be used to expand the
marketing and delivery of the 504 Program, to support additional 504
lending, and to increase the local economic develop activities of the
CDC.
With respect to the potential costs and risks to SBA of Pilot 1,
the $4 million reduction in PCLP LLRFs could represent a slight
increase in the risk to SBA that PCLP LLRFs would be inadequate to
reimburse SBA for 10 percent of any SBA loss. However, given the
historical availability of additional assets from which PCLP CDCs could
reimburse SBA, combined with the extremely low PCLP loss rate of .28
percent for the program (from program inception), SBA believes that the
increased risk of non-reimbursement to SBA under Pilot 1 would be
insignificant. Additionally, SBA estimates that its internal costs for
modifying the calculation of PCLP LLRF requirements would be
insignificant, comprising just a few hours of computer programming.
Pilot 2, which also lasts 2 years, allows certain PCLP CDCs to
estimate the required level of their LLRF funding using a risk-based
approach. PCLP CDCs electing this option must have at least $100,000 in
their respective LLRFs, and they are required to use ALLL methodologies
and documentation approved by the FFIEC and AICPA, which must in turn
be certified by a qualified independent auditor meeting auditor
qualification requirements used by OTS.
There currently are fewer than 10 PCLP CDCs that meet the
requirements to participate in Pilot 2. Also, because Pilot 1 will
reduce PCLP LLRF funding requirements and other CDC program
enhancements recently instituted by SBA, the SBA believes very few PCLP
CDCs may elect to participate in Pilot 2 during its 2-year duration.
Additionally, the uncertainty about the permanence of Pilot 2 and its
initial development and start up costs may also discourage
participation. As a result, the aggregate costs and benefits of this 2-
year pilot to the CDC industry are expected to be limited.
Following discussions with industry representatives, SBA estimates
that the initial costs to a PCLP CDC for
[[Page 30327]]
developing and instituting Pilot 2's risk based LLRF methodology and
reporting would be about $8,000. Thereafter, annual costs for
administering the LLRF would depend on the size and complexity of the
PCLP CDC's portfolio. However, for a portfolio of about 500-600 PCLP
loans, which SBA judges to be an average portfolio size for PCLP CDCs
that might elect this option, SBA estimates that the annual cost would
be about $75,000. This includes internal costs of about $27,000 for
periodically assigning and/or reassessing the risk associated with each
PCLP Debenture, about $10,000 for management oversight and quality
control of the risk assessment process, about $5,000 for portfolio risk
management and control, about $30,000 annually to be paid to an
independent auditor for the ALLL quarterly audit report, and about
$1,000 for developing and transmitting to SBA the PCLP CDC's required
certification regarding the adequacy of the LLRF.
In addition to the costs for developing and maintaining the
alternative LLRF methodology and reporting, participating PCLP CDCs, as
noted above, are required to reimburse SBA for 15 percent of any SBA
loss relating to Debentures issued and guaranteed during Pilot 2
participation, as opposed to the 10 percent applicable to its other
PCLP Debentures. With historically low loss rates for the PCLP and
following discussions with the industry, SBA estimates that the
additional 5 percent reimbursement would cost a PCLP CDC with a
portfolio of 500-600 loans less than $5,000 annually.
With respect to the benefits to a PCLP CDC, Pilot 2 and its risk
based LLRF methodology represents a new concept for SBA's 504 Program.
As a result, SBA has no empirical data on how much a PCLP's LLRF could
be reduced under this concept, so estimating the potential impact and
benefits is difficult. However, following discussions with the
industry, and based on preliminary data from simulating the application
of an ALLL methodology to an existing PCLP portfolio of 500-600 504
loans, SBA estimates that a PCLP CDC participating in Pilot 2 could
reduce its LLRFs from the existing LLRF requirement of about $1.8
million to about $500,000 under Pilot 2, thus freeing up about $1.3
million from the LLRF for that PCLP CDC. Similar to Pilot 1, these
funds would generally be used to expand the marketing and delivery of
the 504 Program, support additional 504 lending, and increase the local
economic develop activities of the CDC.
With respect to the potential costs and risks to SBA of Pilot 2,
SBA believes that the estimated $1.3 million reduction in a typical
PCLP's LLRF would only marginally increase the risk to SBA that the
LLRF would be inadequate to cover PCLP CDC reimbursement obligations to
SBA as required under PCLP. SBA is optimistic that the certification by
an independent auditor, which meets the proposed requirements and
applies AICPA and FFIEC standards and methodologies to the ALLRF, will
help ensure that a LLRF calculated pursuant to Pilot 2 would be
commensurate with the risk inherent in the PCLP CDC's portfolio.
Additionally, as with Pilot 1, PCLP CDCs have other assets with which
to reimburse SBA which, combined with the extremely low PCLP loss rate
of .28 percent, will further help mitigate the risk that SBA will not
be reimbursed as required. Finally, Pilot 2 is a 2-year pilot and
participation is expected to be extremely limited, further controlling
the risk of loss to SBA. SBA does not foresee any significant
additional costs to SBA, due to the level of responsibility vested with
the independent auditor.
Based on the following analysis, SBA certifies that the proposed
rule will not have a significant economic impact on a substantial
number of small entities under the Regulatory Flexibility Act (RFA), 5
U.S.C. 601. SBA has determined that CDCs fall under the SBA size
standard for NAICS 522298, All Other Nondepository Credit
Intermediaries, which establishes $6 million in average annual receipts
as the maximum annual receipts for small entities. Approximately 5,440
credit intermediaries fall under that industry classification, about
4,990 of which are considered small. SBA's CDC Program currently
comprises approximately 270 CDCs, nearly 30 of which participate in
PCLP.
The proposed rule addresses two pilot programs. Pilot 1 allows each
PCLP CDC to reduce its LLRF based on the decreasing balance of PCLP
Debentures. Although all 270 CDCs are eligible to participate in the
PCLP, SBA estimates that only the 30 CDCs that currently participate in
the PCLP will likely take advantage of this option. Consequently, this
rule will not impact a substantial number of the small entities.
Moreover, SBA does not believe that the costs associated with Pilot
1 will be significant. As noted in the cost benefits analysis, SBA
estimates that the costs associated with Pilot 1 would be less than
$1,000 for each PCLP CDC, which is not a significant cost. SBA believes
that this cost will be offset by the $4 million aggregate reduction or
a $130,000 per PCLP CDC average reduction in the LLRF requirements.
Accordingly, SBA certifies that Pilot 1 will not have a significant
economic impact on a substantial number of small entities.
Pilot 2 allows certain qualified PCLP CDCs to fund their LLRF using
a risk-based approach. SBA estimates that less than 10 PCLP CDCs
currently qualify to participate in Pilot 2, and that less than five
will take advantage of this option during its 2-year pilot period. SBA
therefore concludes that this rule will not affect a substantial number
of small entities. However, as noted above, although the annual costs
associated with the program would be about $75,000, the reduction in
the LLRFs requirements for those few PCLP CDCs that do elect to
participate could be as much as $1.3 million each. Finally, and as also
noted above, participants in Pilot 2 would be required to reimburse SBA
for 15 percent of any SBA loss related to a PCLP Debenture issued and
guaranteed during participation in Pilot 2; the exposure relating to
its other PCLP Debentures would remain 10 percent. With an historical
loss rate of .28 percent for PCLP, this additional reimbursement
obligation is not expected to be significant. As such, SBA certifies
that Pilot 2 will not have a significant economic impact on a
substantial number of small entities.
SBA has determined that the proposed rule, which comprises two
pilot programs, imposes additional reporting requirements under the
Paperwork Reduction Act, 44 U.S.C. Ch. 35 (PRA), with respect to Pilot
2, but no additional recordkeeping requirements for Pilot 1. SBA
believes that only 5 or less PCLP CDCs will participate in Pilot 2.
These participating PCLP CDCs and the auditors retained by them would
be affected by the following information collections (as defined under
the PRA).
Auditor's Credential Information
Under proposed Sec. 120.848(c), the auditors retained by the PCLP
CDCs to conduct the required Pilot 2 LLRF Certification must meet
certain eligibility requirements established by SBA. The auditors and
the PCLP CDCs must submit to SBA documentation regarding the auditors'
credentials and qualifications for SBA's evaluation. We think that the
total amount of time it would take 5 sets of auditors and PCLP CDCs to
comply with this reporting requirement would be 30 hours [(5 auditors x
5 hours) + (5 PCLP CDCs x 1 hour)]. This estimated total is not
annualized because, based on discussions with the industry on the
average duration of relationships between CDCs and auditors, we
anticipate that participants will only
[[Page 30328]]
respond to this collection one time at the beginning of the 2-year
pilot program.
PCLP CDCs Application to Participate in Pilot 2
Under proposed Sec. 120.848(b), PCLP CDCs must meet certain
eligibility requirements established by SBA to participate in Pilot 2.
The PCLP CDC must submit a letter to SBA notifying the Agency of its
interest in and qualifications for Pilot 2. We think that the total
amount of time it would take 5 PCLP CDCs to comply with this reporting
requirement would be 20 hours (5 PCLP CDCs x 4 hours). This estimated
total is not annualized because we anticipate that participants will
only respond to this collection one time at the beginning of the 2-year
pilot program.
Pilot 2 LLRF Certification
PCLP CDCs and their independent auditor must submit a Pilot 2 LLRF
Certification, as defined by the proposed regulations, to SBA at the
time of the PCLP CDC's application to participate in Pilot 2 and every
quarter thereafter. SBA estimates that it would take each set of PCLP
CDCs and auditors 380 hours annually to comply with this quarterly
reporting requirement [(180 hours for the PCLP CDC) + (200 hours for
the auditor)]. The total annual hourly burden for 5 sets of PCLP CDCs
and their auditors would be 1900 hours (380 x 5).
SBA believes that these 3 information collections are necessary for
SBA to satisfy its statutory duty to manage and oversee Pilot 2. SBA's
management functions, as outlined in Public Law 108-232 and implemented
by the proposed rule, are essential to reasonably protect Pilot 2 and
the Agency from the risk of waste, fraud, and mismanagement.
An agency may not conduct or sponsor an information collection
without prior approval from OMB. Accordingly, we are submitting the
proposed information collections to OMB for review in accordance with
the PRA. Comments on the proposed information collection should be sent
to the Office of Management and Budget, Office of Information and
Regulatory Affairs, 725 17th Street NW., Washington, DC, 20503,
Attention: David Rostker, Desk Officer for SBA.
List of Subjects in 13 CFR Part 120
Loan programs--business, Small businesses, Reporting and
recordkeeping requirements.
For the reasons stated in the preamble, SBA proposes to amend 13
CFR part 120 as follows:
PART 120--BUSINESS LOANS
1. The authority citation for part 120 continues to read as
follows:
Authority: 15 U.S.C. 634(b)(6), and 636(a), 696(3) and
697(a)(2).
2. Revise Sec. 120.847 to read as follows:
Sec. 120.847 Requirements for the Loan Loss Reserve Fund.
(a)(1) Definitions. The following terms have the same meaning where
they are used in Sec. Sec. 120.845 through 120.848:
(i) AA/OLO means SBA's Associate Administrator for the Office of
Lender Oversight.
(ii) AICPA means the American Institute of Certified Public
Accountants.
(iii) ALLL Methodologies and Documentation means methodologies
followed, and supporting documentation prepared, by a lending
institution to determine the amounts of the allowance for loan and
lease losses and the provisions for loan losses for a loan portfolio.
(iv) FFIEC means the Federal Financial Institutions Examination
Council.
(v) GAAP means generally accepted accounting principles.
(vi) LLRF means the loan loss reserve funds a PCLP CDC maintains in
accordance with PCLP requirements to secure its loss exposure related
to all of its outstanding PCLP Debentures.
(vii) Pilot 1 means the temporary program established pursuant to
section 508(c)(6)(B) of the SBIA giving authority to a PCLP CDC to
withdraw from its LLRF, in accordance with the procedures set forth in
paragraph (g) of this section, any amount in excess of 1 percent of the
aggregate outstanding balances of all of its outstanding PCLP
Debentures.
(viii) Pilot 2 means the temporary program established pursuant to
section 508(c)(7) of the SBIA which allows certain PCLP CDCs to
maintain their respective LLRFs in accordance with a calculated risk-
based approach, the terms and conditions of which are set forth in
Sec. 120.848.
(ix) Pilot 2 Calendar Quarter means any calendar quarter in which a
PCLP CDC participates in Pilot 2.
(x) Pilot 2 Independent Auditor means an auditor which meets the
requirements set forth in Sec. 120.848 and is providing the auditor
services related to a PCLP CDC's LLRF as described in that section.
(xi) Pilot 2 LLRF Certification means a certification, which the
Executive Director of the PCLP CDC and its Pilot 2 Independent Auditor
must sign and submit to SBA's Administrator, with copies to the AA/FA
and AA/OLO, stating:
(A) The amount the PCLP CDC needs to have in its LLRF to protect
the Federal Government from risk of loss as calculated in accordance
with Pilot 2 requirements (accompanied by the documentation necessary
for SBA to assess the basis of the certification);
(B) That an amount equal to or greater than the amount established
in accordance with paragraph (a)(1)(xi)(A) of this section is in the
PCLP CDC's LLRF and shall remain there until adjustments are made
pursuant to a new Pilot 2 LLRF Certification (see Sec. 120.848(f)) or
pursuant to requirements and procedures applicable after a PCLP CDC's
participation in Pilot 2 ends (see Sec. 120.848(g)); and
(C) That the PCLP CDC has established and is utilizing an
appropriate and effective process for analyzing the risk of loss
associated with its outstanding PCLP Debentures (and the underlying
PCLP loans) with ALLL Methodologies and Documentation in accord with
AICPA guidelines, GAAP, and the FFIEC's Policy Statement on Allowance
for Loan and Lease Losses Methodologies and Documentation for Banks and
Savings Institutions dated July 2, 2001, as published in 66 FR 35629,
July 6, 2001.
(xii) Pilot 2 Participation Period shall mean a full calendar
quarter as described in Sec. 120.848(e).
(xiii) SBIA means the Small Business Investment Act of 1958, as
amended.
(xiv) Specified Risk Management Benchmarks means, for the purposes
of Sec. 120.847 and Sec. 120.848, the following rates, as determined
by SBA:
(A) Currency rate;
(B) Delinquency rate;
(C) Default rate;
(D) Liquidation rate; and
(E) Loss rate.
(2) General. PCLP CDCs must establish and maintain a LLRF (in one
or multiple accounts) which complies with this section. A PCLP CDC must
use the LLRF or other funds to cover its Exposure (as defined in
paragraph (b) of this section) relating to any loss sustained by SBA as
a result of a default in the payment of principal or interest on a
Debenture it issued under the PCLP (``PCLP Debenture''). PCLP CDCs must
coordinate with their Lead SBA Office to ensure that the LLRF is
properly established, that all necessary documentation is executed and
delivered by all parties in a timely fashion, and that all required
deposits are made.
[[Page 30329]]
(b) PCLP CDC exposure and LLRF deposit requirements. A PCLP CDC's
``Exposure'' is defined as its reimbursement obligation to SBA with
respect to default in the payment of any PCLP Debenture. The amount of
a PCLP CDC's Exposure is 10 percent of any loss (including attorney's
fees; litigation costs; and care of collateral, appraisal and other
liquidation costs and expenses) sustained by SBA as a result of a
default in the payment of principal or interest on a PCLP Debenture;
provided, however, that a PCLP CDC's Exposure is 15 percent for any
PCLP Debenture issued during a PCLP CDC's participation in Pilot 2. If
Pilot 1 and Pilot 2 terminate or otherwise cease to apply to a PCLP
CDC, then, for each PCLP Debenture a PCLP CDC issues, it must follow
the applicable transition procedures and timeframes to establish and
maintain an LLRF equal to one percent of the original principal amount
(the face amount) of the PCLP Debenture. The amount the PCLP CDC must
maintain in the LLRF for each PCLP Debenture remains the same even as
the principal balance of the PCLP Debenture is paid down over time. If
Pilot 2 terminates or ceases to apply to a PCLP CDC, but Pilot 1
applies, then the PCLP CDC must establish and maintain an LLRF equal to
one percent of the outstanding principal balances of its PCLP
Debentures. (During Pilot 2 participation, Pilot 2 participants would
not be affected by the termination of Pilot 1.) A PCLP CDC may not
participate in Pilot 1 and Pilot 2 at the same time.
(c) Establishing a LLRF. The LLRF must be a deposit account (or
accounts) with a federally insured depository institution selected by
the PCLP CDC. A ``deposit account'' is a demand, time, savings, or
passbook account, including a certificate of deposit (CD) which is
either uncertificated or, if certificated, non-transferable. A
``deposit account'' is not an investment account and must not contain
securities or other investment properties. A deposit account may
contain only cash and CDs credited to that account. A PCLP CDC may pool
its deposits for multiple PCLP Debentures in a single account in one
institution. The LLRF must be segregated from the PCLP CDC's other
operating accounts. The PCLP CDC is responsible for all fees, costs and
expenses incurred in connection with establishing, managing and
maintaining the LLRF, including fees associated with transferring funds
or early withdrawal of CDs, and related income tax expenses.
(d) Creating and perfecting a security interest in a LLRF. A PCLP
CDC must give SBA a first priority, perfected security interest in the
LLRF to secure the PCLP CDC's obligation to reimburse SBA for the PCLP
CDC's Exposure under all of its outstanding PCLP Debentures. (If a PCLP
CDC's LLRF is comprised of multiple deposit accounts, it must give SBA
this security interest with respect to each such account.) The PCLP CDC
must grant to SBA the security interest in the LLRF pursuant to a
security agreement between the PCLP CDC and SBA, and a control
agreement between the PCLP CDC, SBA, and the applicable depository
institution. The control agreement must include provisions requiring
the depository institution to follow SBA instructions regarding
withdrawal from the account without a requirement for obtaining further
consent from the PCLP CDC, and must restrict the PCLP CDC's ability to
make withdrawals from the account without SBA consent. When
establishing the LLRF, a PCLP CDC must coordinate with its Lead SBA
Office to execute and deliver the required documentation. The PCLP CDC
must provide to the Lead SBA Office a fully executed original of the
security and control agreements. All documents must be satisfactory to
SBA in both form and substance.
(e)(1) Schedule for contributions to a LLRF. The PCLP CDC must
contribute to the LLRF the required deposits for each PCLP Debenture in
accordance with the following schedule:
(i) At least 50 percent of the required deposits to the LLRF on or
about the date that it issues the PCLP Debenture.
(ii) At least an additional 25 percent of the required deposits to
the LLRF no later than one year after it issues the PCLP Debenture.
(iii) Any remainder of the required deposits to the LLRF no later
than two years after it issues the PCLP Debenture.
(2) This paragraph (e) does not apply to a PCLP CDC while it is
participating in Pilot 2 or following the LLRF transition procedures
applicable to a PCLP CDC after participating in Pilot 2.
(f) LLRF reporting requirements. Each PCLP CDC must periodically
report to SBA the amount in the LLRF in a form that will readily
facilitate reconciliation of the amount maintained in the LLRF with the
amount required to meet a PCLP CDC's Exposure for its entire portfolio
of PCLP Debentures. (For Pilot 2 participants, the applicable amount
will be the amount set forth in the last Pilot 2 LLRF Certification
submitted by the participant to SBA in accordance with Pilot 2
requirements.)
(g) Withdrawal of excess funds. Interest and other funds in the
LLRF that exceed the required minimums as set forth in paragraph (b) of
this section, within the time frames set forth in paragraph (e) of this
section, accrue to the benefit of the PCLP CDC. PCLP CDCs are
authorized to withdraw excess funds, including interest, from its LLRF
if such funds exceed the required minimums set forth in paragraph (b)
of this section. In addition, prior to the expiration of Pilot 1, a
Pilot 1 participant may withdraw amounts from its LLRF as permitted
under Pilot 1. The PCLP CDC must forward requests for withdrawals to
the Lead SBA Office, which will verify the existence and amount of
excess funds and notify the financial institution to transfer the
excess funds to the PCLP CDC. A Pilot 2 participant may make
withdrawals from its LLRF in accordance with Pilot 2 rules.
(h) Determining SBA loss. When a PCLP CDC has concluded the
liquidation of a defaulted 504 loan made with the proceeds of a PCLP
Debenture and has submitted a liquidation wrap-up report to SBA, or
when SBA otherwise determines that the PCLP CDC has exhausted all
reasonable collection efforts with respect to that 504 loan, SBA will
determine the amount of the loss to SBA. SBA will notify the PCLP CDC
of the amount of its reimbursement obligation to SBA (if any) and will
explain how SBA calculated the loss.
(1) If the PCLP CDC agrees with SBA's calculations of the loss, it
must reimburse SBA an amount equal to its Exposure no later than 30
days after SBA's notification to the PCLP CDC of the CDC's
reimbursement obligation.
(2) If the PCLP CDC disputes SBA's calculations, it must reimburse
SBA for the amount of the PCLP CDC's Exposure that is not in dispute no
later than 30 days after SBA's notification to the PCLP CDC of the
CDC's reimbursement obligation. No later than 30 days after SBA's
notification, the PCLP CDC may submit to the AA/FA or his or her
delegate a written appeal of any disagreement regarding the calculation
of SBA's loss. The PCLP CDC must include with that appeal an
explanation of its reasons for the disagreement. Upon the AA/FA's final
decision as to the disputed amount of the loss, the PCLP CDC must
promptly reimburse SBA the amount of the PCLP CDC's Exposure.
(i) Reimbursing SBA for loss. A PCLP CDC may use funds in the LLRF
or other funds to reimburse SBA for the PCLP CDC's Exposure on a
defaulted PCLP Debenture. If a PCLP CDC does not satisfy the entire
reimbursement obligation within 30 days after SBA's notification to the
PCLP CDC of its reimbursement obligation, then SBA
[[Page 30330]]
may cause funds in the LLRF to be transferred to SBA in order to cover
the PCLP CDC's Exposure, unless the PCLP CDC has filed an appeal under
paragraph (h)(2) of this section. If the PCLP CDC has filed such an
appeal, SBA may cause such a transfer of funds to SBA 30 days after,
and in accordance with, the AA/FA's or his or her delegate's decision.
If the LLRF does not contain sufficient funds to reimburse SBA for any
unpaid Exposure with respect to any PCLP Debenture, the PCLP CDC must
pay SBA the difference within 30 days after demand for payment by SBA.
(j) Insufficient funding of LLRF. A PCLP CDC must diligently
monitor the LLRF to ensure that it contains sufficient funds to cover
its Exposure for its entire portfolio of PCLP Debentures. If, at any
time, the LLRF does not contain sufficient funds, the PCLP CDC must,
within 30 days of the earlier of the date it becomes aware of this
deficiency or the date it receives notification from SBA of this
deficiency, make additional contributions to the LLRF to make up this
difference. For Pilot 2 deficiencies, notification will be made by the
Bureau of PCLP Oversight. The Bureau will so notify Pilot 2
participants if it determines that:
(1) The Pilot 2 Independent Auditor failed to calculate the
portfolio risk and reserve amount using ALLL Methodologies and
Documentation in accord with GAAP, AICPA, SBA Office of Lender
Oversight, and FFIEC guidance/standards; and
(2) The LLRF is insufficient to protect the Federal Government from
loss due to inadequate LLRF. The notification will state the LLRF
amount that SBA has determined to be sufficient to protect the Federal
Government from loss due to inadequate LLRF.
Sec. 120.848 [Redesignated]
3. Redesignate Sec. 120.848 as Sec. 120.849.
4. Add a new Sec. 120.848 to read as follows:
Sec. 120.848 Pilot 2.
(a) General. A PCLP CDC participating in Pilot 2 must establish and
maintain a LLRF (in one or multiple accounts) which complies with this
section and the sections of Sec. 120.847 not otherwise expressly noted
as inapplicable to Pilot 2 participants. Pilot 2 participants must
reimburse the SBA for 10 percent of any loss sustained by SBA as a
result of a default in payment of principal or interest on a PCLP
Debenture; provided however, such participant must reimburse SBA for 15
percent of any such loss if the PCLP Debenture was issued during the
PCLP CDC's participation in Pilot 2. Notwithstanding any of the
provisions of this section, a PCLP CDC may not participate in Pilot 2
after Pilot 2 terminates.
(b) Eligibility. A PCLP CDC is eligible to participate in Pilot 2
if SBA determines that the PCLP CDC:
(1) Has a LLRF containing at least $100,000;
(2) Has established and is utilizing an appropriate and effective
process for analyzing the risk of loss associated with its outstanding
PCLP Debentures (and the underlying PCLP loans) with ALLL Methodologies
and Documentation in accord with AICPA guidelines, GAAP, SBA's Office
of Lender Oversight guidance, and the FFIEC's Policy Statement on
Allowance for Loan and Lease Losses Methodologies and Documentation for
Banks and Savings Institutions dated July 2, 2001, as published in 66
FR 35629, July 6, 2001;
(3) Has retained an independent auditor that meets the requirements
set forth in paragraph (c) of this section; and
(4) Has met or exceeded 4 or more of the Specified Risk Management
Benchmarks as of the most recent assessment by SBA or SBA has issued a
waiver for good cause with respect to the requirement of this clause.
(c) Independent auditor requirements. In order to be eligible to
participate in Pilot 2, the Bureau of PCLP Oversight must determine
based on the documentation provided that the auditor:
(1) Is compensated by the PCLP CDC;
(2) Is an independent public accountant who:
(i) Is registered or licensed to practice as a public accountant,
and is in good standing, under the laws of the state or other political
subdivision of the United States in which the PCLP CDC's principal
office is located,
(ii) Agrees in an engagement letter with the PCLP CDC to provide
SBA with access to and copies of any work papers, policies, and
procedures relating to the services performed,
(iii) Is in compliance with the AICPA Code of Professional Conduct,
(iv) Meets the independence requirements and interpretations of the
Securities and Exchange Commission and its staff, and
(v) Has received, or is enrolled in, a peer review program that
meets AICPA industry guidelines and standards;
(3) Has substantial experience calculating portfolio risk and
reserve amounts using ALLL Methodologies and Documentation in accord
with AICPA and FFIEC guidance and standards and GAAP;
(4) Has experience evaluating portfolios comparable to PCLP 504
Debenture Portfolios; and
(5) Is otherwise acceptable to SBA. (A Pilot 2 participant which
changes auditors during a Pilot 2 Calendar Quarter must provide the
reasons for the change to the AA/OLO within 30 days of the change.)
(d) Pilot 2 election procedures. A PCLP CDC may elect to
participate in Pilot 2 by notifying the AA/FA and AA/OLO in writing;
such notification, which must be received by SBA no less than 10 days
and no more than 45 days prior to any Pilot 2 participation period for
which an election is made, must include:
(1) Clear and complete documentation that the PCLP CDC meets the
requirements set forth in paragraph (b) of this section;
(2) Clear and complete documentation that the PCLP CDC's auditor
meets the requirements set forth in paragraph (c) of this section; and
(3) A Pilot 2 LLRF Certification.
(e)(1) Pilot 2 participation periods. Following receipt of written
confirmation from SBA by the PCLP CDC that it provided the
documentation required in paragraph (d) of this section, the PCLP CDC's
Pilot 2 participation period will be the next full calendar quarter and
any following calendar quarter for which a timely election has been
made in accordance with paragraph (d) of this section. For purposes of
this section, full calendar quarters shall mean:
(i) The period which begins on January 1 and ends on March 31 of
each year;
(ii) The period which begins on April 1 and ends on June 30 of each
year;
(iii) The period which begins on July 1 and ends on September 30 of
each year; and
(iv) The period which begins on October 1 and ends on December 31
of each year.
(2) Under no circumstances may a PCLP CDC participate in Pilot 2
after if it has been statutorily terminated.
(f) (1) Pilot 2 LLRF contribution requirements. A Pilot 2
participant must maintain a LLRF in an amount sufficient to cover its
Exposure as determined by its Pilot 2 Independent Auditor in accordance
with this section and as set forth in the most recent Pilot 2 LLRF
Certification; provided, however, that under no circumstances can the
LLRF contain less than $100,000.
(2) Pilot 2 LLRF certifications. Pilot 2 LLRF Certifications may be
made in accordance with Pilot 2 election
[[Page 30331]]
procedures set forth in paragraph (d) of this section; a Pilot 2
participant must increase the amount of its LLRF, and may reduce the
amount of its LLRF, as appropriate in order to adjust its LLRF to
accord with the most recent Pilot 2 LLRF Certification.
(g) Recontribution requirements after Pilot 2 participation. When a
PCLP CDC does not participate in Pilot 2 in a calendar quarter
following Pilot 2 participation, it must adjust the amount of its LLRF
to equal 1 percent of the sum of outstanding balances of its PCLP
Debentures either within 45 days after its Pilot 2 participation or in
accordance with a recontribution schedule submitted by the PCLP CDC and
approved by SBA. A recontribution schedule must be submitted to SBA in
writing within 30 days after the end of a PCLP CDC's Pilot 2
participation and contain documentation necessary to show that the
schedule would sufficiently cover its Exposure. SBA may disapprove of a
recontribution schedule if, in SBA's judgment, the schedule would not
cover the PCLP CDC's Exposure. In that event, SBA will revise the
recontribution schedule as SBA determines is necessary to cover the
PCLP CDC's Exposure (SBA-determined recontribution schedule). SBA may
also require the PCLP CDC to follow an SBA-determined recontribution
schedule if the PCLP CDC does not submit one within the 30-day time
frame. An SBA-determined recontribution schedule will be a final agency
determination.
(h) Failure by participant to meet Pilot 2 requirements. SBA shall
have the authority to remove a Pilot 2 participant from Pilot 2 if the
participant fails to meet one or more Pilot 2 requirements stated in
Sec. 120.848. In that event, SBA may, among other corrective actions
it deems necessary to cause the PCLP CDC's LLRF to cover the PCLP CDC's
Exposure adequately, direct a Pilot 2 participant to follow an SBA-
determined recontribution schedule for its LLRF.
(1) Bureau of PCLP Oversight. (i) Establishment. There is hereby
established in the Small Business Administration a bureau to be known
as the Bureau of PCLP Oversight to carry out such functions as the
Administrator may from time to time designate or delegate to the Bureau
of PCLP Oversight (including those described in paragraph (h)(1)(ii) of
this section).
(ii) Pilot 2. The Bureau may review the Pilot 2 participant's
process for analyzing the risk of loss associated with its portfolio of
PCLP loans or for grading each PCLP loan made by the pilot 2
participant and make a determination as to whether the process is
consistent with ALLL Methodologies and Documentation and in accord with
GAAP, AICPA, SBA Office of Lender Oversight and FFIEC guidance/
standards. A negative determination may result in SBA finding the Pilot
2 participant ineligible to participate in Pilot 2 under Sec.
120.848(b). It may also serve as a basis for program removal under
Sec. 120.848(h).
(2) [Reserved].
Dated: February 3, 2006.
Hector V. Barreto,
Administrator.
[FR Doc. E6-8039 Filed 5-25-06; 8:45 am]
BILLING CODE 8025-01-P