[Federal Register: October 31, 2007 (Volume 72, Number 210)]
[Proposed Rules]
[Page 61751-61785]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31oc07-35]
[[Page 61751]]
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Part III
Small Business Administration
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13 CFR Part 120
Lender Oversight Program; Proposed Rule
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 120
RIN 3245-AE14
Lender Oversight Program
AGENCY: Small Business Administration (SBA).
ACTION: Notice of Proposed Rulemaking.
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SUMMARY: SBA is proposing a rule to incorporate SBA's risk-based lender
oversight program into SBA regulations. Specifically, the proposed rule
would establish the role and responsibilities of SBA's Office of Credit
Risk Management within a new subpart of the business loan regulations.
It would codify in SBA regulations SBA's process of risk-based
oversight including: (i) Accounting and reporting requirements; (ii)
off-site reviews/monitoring; (iii) on-site reviews and examinations;
and iv) capital adequacy requirements. The proposed rule would also
list the types of, grounds for, and procedures governing SBA
enforcement actions within consolidated enforcement regulations for all
7(a) Lenders, Certified Development Companies, Microloan
Intermediaries, and Non-Lending Technical Assistance Providers. This
rule is necessary to provide coordinated and effective oversight of
financial institutions that originate and manage SBA guaranteed loans.
DATES: Comments must be received on or before December 31, 2007.
ADDRESSES: You may submit comments, identified by [RIN number 3245-
AE14] by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Bryan Hooper, Director for Office of Credit Risk
Management, U.S. Small Business Administration, 409 3rd Street, SW.,
8th Floor, Washington, DC 20416.
Hand Delivery/Courier: Bryan Hooper, Director for Office
of Credit Risk Management, U.S. Small Business Administration, 409 3rd
Street, SW., 8th Floor, Washington, DC 20416.
All comments will be posted on http://www.Regulations.gov. If you
wish to include within your comment, confidential business information
(CBI) as defined in the Privacy and Use Notice/User Notice at http://www.Regulations.gov
and you do not want that information disclosed, you
must submit the comment by either Mail or Hand Delivery and you must
address the comment to the attention of Linda RU.S.C.he, Supervisory
Financial Analyst, Office of Credit Risk Management. In the submission,
you must highlight the information that you consider is CBI and explain
why you believe this information should be held confidential. SBA will
make a final determination, in its sole discretion, of whether the
information is CBI and, therefore, will not be published or not.
FOR FURTHER INFORMATION CONTACT: Linda RU.S.C.he, Supervisory Financial
Analyst, at (816) 426.4860, or Bryan Hooper, Director, Office of Credit
Risk Management, (202) 205.3049.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory
Section 7(a) of the Small Business Act (the Act), 15 U.S.C. 636,
authorizes SBA to guarantee loans made by Lenders (7a Lenders) to
eligible small businesses. Under Section 504 of the Small Business
Investment Act, 15 U.S.C. 697a, SBA guarantees Certified Development
Company (CDC) debentures. Section 7(m) of the Act authorizes SBA to
make direct loans to Microloan Intermediaries, who use proceeds to make
loans to very small businesses, and also authorizes SBA to make
technical assistance grants to non-lending technical assistance
providers (NTAPs). 15 U.S.C. 636(m). With this authority to offer
government guarantees and related grants, Congress has also provided
SBA with authority to support appropriate Lender, CDC, Microloan
Intermediary, and NTAP supervision. 15 U.S.C. 650; 15 U.S.C. 634 note,
citing Public Law 104-208, Division D, Title I, Sec. 103(h); 15 U.S.C.
634(b)(14); 15 U.S.C. 634(b)(7); 15 U.S.C. 636(a)(31); 15 U.S.C.
687(f); 15 U.S.C. 696(3)(A); 15 U.S.C. 697(a)(2); 15 U.S.C. 697e(c)(8);
and 15 U.S.C. 634(b)(6).
The provisions cited include both direct and indirect authority to
supervise, regulate, and examine Small Business Lending Companies
(SBLCs) and Non-Federally Regulated Lenders (NFRLs). 15 U.S.C. 650; 15
U.S.C. 634(b)(14); 15 U.S.C. 636(a)(31); and 15 U.S.C. 634(b)(6) and
(7). The cites also include both direct and indirect provisions that,
together, authorize SBA oversight of and reviews of the SBA operations
of other 7(a) Lenders (including national banks and other federally
regulated financial institutions), CDCs, Microloan Intermediaries, and
NTAPs. 15 U.S.C. 634 note, citing Public Law 104-208, Division D, Title
I, Sec. 103(h); 15 U.S.C. 634(b)(14); 15 U.S.C. 634(b)(6) and (7); 15
U.S.C. 636(a)(31); 15 U.S.C. Sec. 687(f); 15 U.S.C. 696(3)(A); 15
U.S.C. 697(a)(2); and 15 U.S.C. 697e(c)(8).
B. History
Currently, there are over 5,000 7(a) Lenders and CDC s (together,
SBA Lenders) authorized to make SBA-guaranteed loans and issue SBA-
guaranteed debentures. These SBA Lenders hold approximately $60 billion
of 7(a) and 504 loans outstanding (in gross dollars). SBA has delegated
increasingly more authority to its SBA Lenders such that the number of
loans originated under delegated authority has grown from approximately
20% of SBA's loan volume in 1992 to over 75% of SBA's loan volume as of
2006. As SBA continues to place more responsibility and independence on
its SBA Lenders, SBA must have the necessary controls to ensure that
SBA Lenders' SBA operations are well-managed and avoid unnecessary
losses. A comprehensive oversight process provides this control for the
Agency.
Prior to 1999, SBA's risk management, lender monitoring, and lender
oversight activities were conducted by SBA's Office of Financial
Assistance (OFA) and SBA's District Offices, which were also
responsible for developing and promoting the Agency's business loan
programs. With the increase in lending authority given to SBA Lenders
and lending volume, SBA needed a separate division to perform risk
management and lender oversight.
Therefore, in 1999 SBA established the Office of Lender Oversight
(OLO) for the primary purpose of ensuring the ``consistent and
appropriate supervision of SBA's lending partners.'' At the time it was
initially established, OLO's major responsibilities were defined as:
``evaluating existing oversight regulations, policies and procedures
and promulgating new ones where appropriate; monitoring changes in the
accounting, banking and financial industries, and recommending
appropriate modification of SBA oversight policy; coordinating all
headquarters and field office activities with respect to Lender
reviews; [and] evaluating new programs and changes to existing programs
to assess their risk potential * * *'' The head of the office, the
Associate Administrator for OLO, was to serve as a member of SBA's Risk
Management Committee and a key member of the group developing and
implementing the Agency's lender monitoring and oversight system.
Subsequent to its establishment, OLO assumed responsibility for
conducting ``safety and soundness'' examinations of the SBLCs and
compliance reviews for Preferred Lenders Program (PLP) Lenders. OLO
then began developing a risk-based review process for all SBA
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Lenders. OLO, in 2003, developed and implemented a Loan and Lender
Monitoring System (L/LMS). In late 2004, Congress provided SBA specific
supervision and enforcement authorities over SBLCs and NFRLs (together,
SBA Supervised Lenders). In April 2005, SBA published Delegations of
Authority that delineated the responsibilities of OLO and a new Lender
Oversight Committee (LOC) consistent with new authorities. 70 FR 21262
(April 25, 2005). On May 5, 2007, SBA published a final rule governing
7(a) Lender review/examination fees. 72 FR 25189. On May 16, 2007 OLO
published a final rule on SBA's Lender Risk Rating System. 72 FR 27611.
Also, in May 2007, SBA reorganized and renamed the office to the Office
of Credit Risk Management (OCRM). Most recently, SBA has reviewed the
Agency's current oversight regulations and is now proposing this rule
to incorporate OCRM's new authorities and SBA's risk-based lender
oversight program into SBA's regulations. A discussion of the proposed
rule, consisting of an overview and key provisions, follows.
II. Proposal
A. Overview
The proposed rule would incorporate SBA's risk management/lender
oversight program into SBA's business loan program regulations by: (i)
Adding risk management definitions to Part 120 (13 CFR 120.10); (ii)
incorporating risk management/lender oversight metrics and tools into
program participation criteria and requirements (13 CFR 120.410,
120.424, 120.433, 120.434, 120.451, 120.710, 120.812, 120.820, 120.826,
120.830, 120.839, and 120.841); (iii) updating provisions to include
key OCRM Delegations of Authority (13 CFR 120.451, 120.461, 120.702,
120.710, and 120.845); and (iv) consolidating loan program oversight
and enforcement regulations into subpart I, designated Risk-Based
Lender Oversight. (See below chart on Regulations Relocated). Subpart I
would cover the role and responsibilities of OCRM, the Risk Rating
System, off-site reviews/monitoring, on-site reviews and examinations,
and enforcement actions against SBA Lenders, Microloan Intermediaries,
and NTAPs.
Chart of Regulations Relocated
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Regulation subject Proposed regulatory
Current regulatory citation matter citation
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Sec. 120.414.............. SBA access to 7(a) Sec. 120.1010.
Lender files.
Sec. 120.415.............. 7(a) program-- Sec. 120.1400
Suspension or (grounds).
revocation of Sec. 120.1500
eligibility to (types of
participate. enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.442.............. Suspension or Sec. 120.1400
revocation of CLP (grounds).
status. Sec. 120.1500
(types of
enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.454.............. PLP performance Sec. 120.1000(a)
review. (Risk-Based Lender
Oversight).
Sec. 120.1025 (off-
site reviews/
monitoring).
Sec. 120.1050 (on-
site reviews and
examinations).
Sec. 120.455.............. Suspensions or Sec. 120.1400
revocations of PLP (grounds).
status. Sec. 120.1500
(types of
enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.470(b)(3)........ Minimum SBLC capital Sec. 120.471
requirement. (minimum capital
requirement).
Sec. 120.472
(higher individual
minimum capital
requirement).
Sec. 120.473
(procedures for
higher individual
minimum capital
requirement).
Sec. 120.470(b)(4)........ SBLC capital Sec. 120.462(d).
impairment.
Sec. 120.470(b)(5)........ SBLC issuance of Sec. 120.471(d).
securities.
Sec. 120.470(b)(6)........ SBLC voluntary Sec. 120.471(c).
capital reduction.
Sec. 120.470(b)(7)........ SBLC reserve for Sec. 120.463(e).
losses.
Sec. 120.470(b)(8)........ SBLC internal Sec. 120.460(b).
controls.
Sec. 120.470(b)(9)........ SBLC dual control... Sec. 120.470(d).
Sec. 120.470(b)(10)....... SBLC fidelity Sec. 120.470(e).
insurance.
Sec. 120.470(b)(11)....... SBLC common control. Sec. 120.470(f).
Sec. 120.470(b)(12)....... SBLC management..... Sec. 120.470(g).
Sec. 120.470(b)(13)....... SBLC borrowed funds. Sec. 120.470(h).
Sec. 120.471.............. SBLC recordkeeping Sec. 120.461.
and retention
requirements.
Sec. 120.473.............. SBLC change of Sec. 120.475.
control.
Sec. 120.474.............. SBLC prohibited Sec. 120.476.
financing.
Sec. 120.475.............. SBLC Audits......... Sec. 120.490.
Sec. 120.476.............. SBLC suspension and Sec. 120.1400
revocation. (grounds).
Sec. 120.1500
(types of
enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.716.............. Microloan Sec. 120.1425
Intermediary and (grounds).
NTAP suspension and Sec. 120.1540
revocation. (types of
enforcement
actions).
Sec. 120.1600
(enforcement
procedures).
Sec. 120.853.............. CDC reviews......... Sec. 120.1000,
Sec. 120.1050.
Sec. 120.854.............. CDC grounds for Sec. 120.1400
taking enforcement (grounds).
action.
Sec. 120.855.............. CDC types of Sec. 120.1500
enforcement actions. (types of
enforcement
actions).
Sec. 120.856.............. CDC enforcement Sec. 120.1600
procedures. (enforcement
procedures).
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Chart: This chart is intended to serve as a reference tool for locating
regulatory provisions repositioned under the proposed rule. In some
instances, the relocation involves simply moving text from one
regulatory section to another. In other instances, SBA is proposing
substantive changes with the move.
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B. Key Provisions
The following is a discussion of key provisions of the proposed
rule. They are as follows: (i) SBA Supervised Lender regulation; (ii)
capital regulation; (iii) incorporation of a risk rating system; (iv)
the addition of the CDC Single Audit Act provision; (v) the
codification of the risk-based on-site review and examination program;
and (vi) the coordination and development of enforcement policies and
procedures. These key provisions are highlighted because they generally
cover more than one regulation within the proposed rule. In addition,
their discussion will provide a useful background for regulation
review.
1. SBA Supervised Lender Regulation
Public Law 108-447, Division K, Title I (December 2004) effectively
created a new category of SBA Lender--an SBA Supervised Lender. SBA
Supervised Lenders consist of SBLCs and NFRLs. P.L 108-447 generally
treated these 7(a) Lenders the same for purposes of regulation,
supervision, and enforcement. Accordingly, SBA has drafted a group of
regulations applicable to SBA Supervised Lenders in general (Sec. Sec.
120.460-120.465). The SBA Supervised Lender regulations would cover for
example; internal controls, record retention, accounting and reporting,
and capital adequacy. Many of these new regulations governing SBA
Supervised Lenders, especially those related to capital, are similar to
that of either the Federal Deposit Insurance Corporation; the Federal
Reserve Board; the Office of the Comptroller of the Currency; the
Office of Thrift Supervision; the National Credit Union Administration;
or the Farm Credit Administration (each a Federal Financial Institution
Regulator).
2. Capital Regulation
Essential to the success of a government guaranteed loan program is
the financial strength of its lenders. Capital is a common metric for
measuring financial strength. The proposed rule would incorporate
capital more fully into the 7(a) program. Specifically, the proposed
rule would explicitly make having sufficient permanent capital a
requirement for 7(a) program participation (Sec. 120.410(a)). For 7(a)
Lenders with a Federal Financial Institution Regulator, meeting capital
requirements for an adequately capitalized financial institution would
be considered sufficient permanent capital to support SBA lending
activities. For SBA Supervised Lenders, adequate capital would mean
meeting its minimum capital requirement (For an SBLC--this would mean
meeting SBA's Sec. 120.471 minimum or Sec. 120.472 higher individual
minimum capital requirement, as applicable. For an NFRL--this would
mean meeting the minimum capital requirement set by its state of
incorporation regulator). While the proposed rule does not revise the
minimum capital requirement for all SBLCs, SBA is considering updating
this requirement. SBA seeks comments as to the appropriate minimum
capital requirement for SBLCs.
In addition to an SBLC minimum capital requirement, the proposed
regulations would allow SBA to set a higher individual minimum capital
requirement for an SBLC, where appropriate. (Sec. 120.472). SBA would
set such a higher minimum capital requirement after consideration of
certain risk-related factors described in proposed Sec. 120.472 and
pursuant to procedures contained in proposed Sec. 120.473. The
proposed rule would also require SBA Supervised Lenders to maintain a
minimum capital adequacy plan (Sec. 120.462(b)), and to quarterly
certify as to compliance with minimum capital requirements. (Sec.
120.462(c)). Capital impairment would be redefined under the proposed
rule for SBA Supervised Lenders, as failing to meet its applicable
minimum capital requirement. (Sec. 120.462(d)). Under the proposed
rule, if an SBA Supervised Lender fails to meet its minimum capital
requirement (i.e., is capitally impaired), it must file with SBA a
capital restoration plan (Sec. 120.462(e)) and then timely implement
the approved plan. SBA could take enforcement action under the proposed
enforcement regulations (Sec. Sec. 120.1400-1600) against an SBA
Supervised Lender that fails to submit a capital restoration plan that
is acceptable to SBA or fails to implement, in any material respect,
its capital restoration plan in a timely manner. The proposed capital
regulations contain provisions similar to those maintained by some
Federal Financial Institution Regulators.
3. Incorporation of a Risk Rating System
With the assistance of private industry leaders in predictive
modeling and risk rating systems, SBA has developed an SBA Lender Risk
Rating System. The proposed SBA Lender Risk Rating System was published
for comment in the Federal Register at 71 FR 25624 (May 1, 2006). On
May 16, 2007 OLO published the final rule on SBA's Lender Risk Rating
System. 72 FR 27611. The SBA Lender Risk Rating System is an internal
tool for assessing the risk of each SBA Lender's SBA loan operations on
a uniform basis within its program and for identifying those
institutions whose SBA loan operations and portfolio require additional
SBA monitoring or other action. Under the SBA Lender Risk Rating
System, SBA assigns each SBA Lender a composite rating of one to five
based on certain portfolio performance factors which may be overridden
in some cases due to SBA Lender specific factors that may be indicative
of a higher or lower level of risk. SBA would generally consider an SBA
assigned Risk Rating (Risk Rating) of either one, two, or three on a
scale of one to five to be an ``Acceptable Risk Rating''. A ``Less Than
Acceptable Risk Rating'' would be an SBA assigned Risk Rating of four
or five. (Sec. 120.10 and Sec. 120.1015). SBA may revise the scale
for SBA Risk Ratings and related definitions as the program develops.
Any such changes would be published in the Federal Register for notice
and comment. SBA plans to develop a risk rating system for Microloan
Intermediaries and NTAPs and will provide notice before implementation
of this system.
SBA has incorporated the SBA Lender Risk Rating System into its on-
site risk-based reviews and examinations as set forth in SOP 51-00
governing on-site SBA Lender reviews and examinations. The proposed
rule would incorporate the SBA Lender Risk Rating System and its
definitions into SBA's loan program regulations. Risk Ratings would be
considered in determining whether an SBA Lender (and, in the future, a
Microloan Intermediary, or NTAP) has satisfactory SBA performance for
purposes of continued participation in the 7(a), 504, Microloan, or
NTAP programs (including the delegated authority programs) under
proposed amendments to: Sec. Sec. 120.410 (requirements for 7(a)
Lenders); 120.424 (securitization requirements); 120.433 (sales and
sales of participating interests); 120.434 (pledges of SBA loans);
120.451 (PLP Program); 120.812 (Extensions of CDC probationary periods
and permanent CDC status); 120.820 (requirements for CDC certifications
and operation); 120.839 (outside area of operation loan approval); and
120.841 (ALP status). SBA would also consider a Risk Rating before
approving a Microloan Intermediary's reduction in its loan loss reserve
fund (LLRF) under proposed amendments to Sec. 120.710. Under proposed
Sec. 120.1051, SBA would consider an SBA Lender's, Intermediary's, or
NTAP's Risk Rating in determining frequency of on-site reviews/
examinations.
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Under proposed rule Sec. 120.1400(c)(9), a repeated Less Than
Acceptable Risk Rating (particularly in conjunction with other grounds)
may evidence increased financial risk to SBA to warrant consideration
of taking formal enforcement action. A repeated Less Than Acceptable
Risk Rating may also be evidence of an SBA Lender not performing
underwriting, closing, disbursing, servicing, liquidation, or
litigation in a commercially reasonable and prudent manner under
proposed Sec. 120.1400(c)(4). SBA expects to consider additional
factors (e.g., on-site review/examination assessment, corrective
actions implemented, and contribution toward SBA mission) before taking
formal enforcement action on these Risk Rating grounds. Finally, a
repeated Less Than Acceptable Risk Rating could be support for SBA not
renewing program or delegated authorities.
The incorporation of the Risk Rating System into the regulations is
consistent with SBA's movement away from considering only the lagging
indicators of our portfolio benchmark performance measures and towards
integration of more current and sophisticated performance measurement
systems developed by private sector leaders.
4. Single Audit Act Provisions
The proposed rule incorporates Single Audit Act requirements into
SBA's 504 program regulations. The Single Audit Act (31 U.S.C. 7501-
7507) requires Non-Federal entities, such as non-profit CDCs, that
expend a total of $500,000 or more of federal awards (e.g. loan
guarantees) in any fiscal year (including amounts outstanding), to have
a single audit performed for such fiscal year. The audit must be
conducted by an independent auditor in accordance with generally
accepted government auditing standards. The Single Audit Act may also
require, under certain circumstances, the Non-Federal entity to monitor
the subrecipients' use of federal awards through site visits, limited
scope audits, and other means. By including reference to the Single
Audit Act in SBA regulations, SBA would not intend to extend coverage
of the Single Audit Act to those CDCs for which the Single Audit Act
does not apply. Therefore, for example, if a CDC does not meet the
$500,000 federal award minimum, then the Single Audit Act compliance
requirement would not apply. However, SBA estimates that virtually all
active CDCs are covered by the Single Audit Act. SBA also would intend
to consider CDC compliance with the Single Audit Act, including any
future amendments to it, as a requirement for participation in the 504
program and, accordingly would monitor CDC compliance with Single Audit
Act requirements.
5. Review and Examination Program
SBA has developed a coordinated risk-based SBA Lender review and
examination program. SBA regulations need to reflect the updated
coordinated risk-based review/examination approach. The proposed rule
would remove current regulatory provisions governing on-site reviews
and examinations within SBA's loan program regulations (Sec. Sec.
120.414, 120.454, 120.470, 120.853) and consolidate them within subpart
I on Risk-Based Lender Oversight. Under the proposed regulations, SBA
Lenders could now look in one location for consistent regulatory
guidance on on-site reviews and examinations. In addition, the proposed
rule would extend such guidance beyond regulatory authorization for
reviews and examinations. Specifically, the proposed rule would include
provisions for off-site reviews and monitoring, on-site review and
examination evaluative components, the frequency of on-site reviews and
examinations, review and examination reports, and expected responses,
including, as applicable, corrective actions and capital restoration
plans. As to the proposed regulation's on-site reviews, if an SBA
Lender is to be examined by a Federal Financial Institution Regulator
in the same general timeframe, SBA would try to mutually coordinate the
timing of the SBA operation review and the supervisor's examination to
minimize any burden. Finally, the proposed rule also would include
Microloan Intermediaries and NTAPs in the review regulations, and would
harmonize the review process between for-profit 7(a) Lenders and non-
profit CDCs, since SBA's partial guaranty of credit risk on individual
loans for each program is similar.
6. Enforcement Policies and Procedures
SBA has consolidated within subpart I, the Agency's enforcement
regulations for SBA Lenders, Microloan Intermediaries, and NTAPs. The
consolidation would facilitate coordinated enforcement policies. It
would allow all SBA Lenders, Microloan Intermediaries, and NTAPs to
look in one place for such regulatory guidance. Finally, consolidation
within subpart I should provide for greater consistency in taking
formal enforcement actions.
SBA has modeled its proposed enforcement provisions after SBA's CDC
enforcement regulations. Like the current CDC enforcement regulations,
subpart I's enforcement provisions would consist primarily of three
main enforcement regulations. The first, proposed Sec. 120.1400, would
cover grounds for enforcement actions. The second, proposed Sec.
120.1500, would list types of formal enforcement actions. The third,
proposed Sec. 120.1600, would set forth the procedures governing each
type of formal enforcement action. Within each of these proposed
regulations, the subsections are generally broken down into provisions
that apply to all SBA Lenders; additional provisions that apply only to
7(a) Lenders; additional provisions that apply only to SBA Supervised
Lenders; additional provisions that apply only to SBLCs; and additional
provisions that apply only to CDCs.
Enforcement grounds and formal enforcement actions for Microloan
Intermediaries and NTAPs would be contained in separate regulations
within the enforcement series, as there was less overlap with these
participants.
III. Section-by-Section Analysis
Section 120.10--Definitions. SBA proposes to add ten new
definitions to this section primarily for purposes of risk management/
lender oversight and enforcement. The new definitions would help to
clarify categories of SBA Lenders and related parties referenced in the
proposed regulations. Definitions would be added for 7(a) Lender, SBA
Lender, Small Business Lending Company (SBLC), Non-Federally Regulated
Lender (NFRL), SBA Supervised Lender, Other Regulated SBLC, Federal
Financial Institutions Regulator, and Management Official. SBA would
also add Risk Rating definitions that would describe an SBA Risk Rating
and the key rating categories of Acceptable and Less Than Acceptable.
Section 120.410--Requirements for all participating Lenders. Under
the proposed rule, the requirement in section 120.410(a) that a 7(a)
Lender have the continuing ability to evaluate, process, close,
disburse, service, liquidate, (and litigate) loans would be more
specifically defined to include (but not be limited to) (i) holding
sufficient permanent capital (For Lenders with Federal Financial
Institution Regulators, that would entail being ``adequately
capitalized.'' For SBLCs, that would entail meeting its SBA minimum
capital requirement. For NFRLs, that would entail meeting the minimum
capital requirement of its state of incorporation) and (ii) having
satisfactory SBA performance. SBA is more specifically defining the
[[Page 61756]]
continuing ability provision to include adequate capital and
satisfactory SBA performance because sufficient capital and
satisfactory performance sustain a 7(a) Lender's ability to evaluate,
process, close, disburse, service, liquidate, and litigate loans.
In determining satisfactory SBA performance, SBA would consider a
Lender's Risk Rating, among other factors. The other factors SBA
anticipates considering may include on-site review/examination
assessments, historical performance measures (like default rate,
purchase rate and loss rate), loan volume to the extent that it impacts
performance measures, other performance related measurements and
information, and contribution toward SBA mission.
Subsection (a) would also be revised to specify the requirement
that a 7(a) Lender have the ability to litigate loans. This is
consistent with SBA's policy on 7(a) Lender litigation of SBA Loans.
In addition, the OCRM proposed rule would further define SBA's
requirements to participate in the 7(a) program by adding the following
7(a) Lender requirements: (i) Good standing (as generally defined under
Sec. 120.420(f) and with a Lender's state banking regulator and/or
Federal Financial Institution Regulator, as applicable); (ii) safe and
sound condition; and (iii) use of commercially reasonable lending
policies, procedures, and standards employed by prudent lenders. For
SBA Supervised Lenders, safe and sound condition would be determined by
SBA. For other 7(a) Lenders, SBA would look to a 7(a) Lender's Federal
Financial Institution Regulator or state banking regulator, as
applicable, to ensure safe and sound condition.
Finally, subsection (d) would be clarified to provide that a 7(a)
Lender must be supervised and examined by either a Federal Financial
Institution Regulator, a state banking regulator (satisfactory to SBA)
or SBA. SBA is clarifying this provision to make clear that a 7(a)
Lender participating in SBA's program must be supervised and examined
by a banking regulator, satisfactory to SBA. The clarifications and
revisions proposed for Sec. 120.410 are intended to minimize losses in
the 7(a) program.
Sections 120.420(f)--Participating lender financings, definition of
``Good Standing''; 120.425(c)(2)--Reinstatement of securitizer PLP
status; and 120.426--Actions SBA would take if SBA securitizer
transfers tranche prior to holding period. SBA proposes to change the
determining authority in these provisions from the Securitization
Committee to the more recently established Lender Oversight Committee
(LOC). Proposed changes to Sec. 120.420(f) would also specify the
LOC's discretion in reviewing an SBA Lender's good-standing in certain
circumstances involving investigations, indictments, convictions, and
judgments, to be consistent with the LOC's discretion set forth in
120.420(f)(4). Finally, SBA proposes to add the words ``In general'' to
its ``good-standing'' definition to underscore the discretionary nature
of the ``good-standing'' determination.
Sections 120.424--What are the basic conditions a Lender must meet
to securitize; 120.433--What are SBA's other requirements for sales and
sales of participating interests; and 120.434--What are SBA's
requirements for loan pledges? SBA is revising the requirements in
these sections to more explicitly reference the ``good standing''
definition in Sec. 120.420(f). SBA is also proposing to add the
requirement that 7(a) Lenders have satisfactory SBA performance as
determined by SBA and that Risk Ratings would be considered among other
factors in determining satisfactory SBA performance. SBA expects to
consider among the other factors, on-site review/examination
assessments, historical performance measures like default rate,
purchase rate and loss rate, other performance-related measures and
information, and contribution toward SBA mission. This change would
incorporate SBA's Risk Rating System within SBA's securitization and
other conveyance regulations.
Section 120.435--Which loan pledges do not require notice to or
consent by SBA? SBA proposes to update the cross-reference to ``Sec.
120.434(e)'' within this section consistent with proposed revisions to
Sec. 120.434.
Section 120.451--How does a Lender become a PLP Lender? SBA is
proposing to amend Sec. 120.451 to add satisfactory SBA performance to
those items SBA would consider in approving PLP status. Subsection (e)
on PLP recertification would also be amended to include SBA performance
(including contribution to SBA mission), a Lender's Risk Rating,
examination and review results, and other risk-related factors in the
recertification decision. Section 120.451 would also be amended to
provide that the recertification decision would be made by the
appropriate Office of Capital Access official in accordance with
Delegations of Authority. Also, SBA proposes to delete current
subsections (c) and (f) to conform to existing Agency policy as
published in Notice 5000-989 dated May 2, 2006 governing PLP
territories. Finally, these additions incorporate lender oversight and
related performance metrics and OCRM's Delegations of Authority into
PLP program participation determinations.
Section 120.460--What are SBA's additional requirements for SBA
Supervised Lenders? SBA is proposing a new Sec. 120.460 entitled
``What are SBA's additional requirements for SBA Supervised Lenders?''
In addition to complying with SBA's requirements for 7(a) Lenders, an
SBA Supervised Lender would be required to meet additional requirements
set forth in Sec. 120.460 and the sections that follow. Under Sec.
120.460, SBA would require an SBA Supervised Lender to adopt an
internal control policy that would provide adequate direction for
establishing effective control over and accountability for operations,
programs, and resources. An SBA Supervised Lender that is required to
maintain an adequate internal control program may be more likely to
self-identify and self-correct operational deficiencies. Proposed Sec.
120.460 is similar to a Federal Financial Institution Regulator
internal control provision in Title 12 of the Code of Federal
Regulations.
Section 120.461--What are SBA's additional requirements for filing
SBA Supervised Lender reports with SBA and for record retention? This
proposed regulation would require that SBA Supervised Lender specific
reports be filed with the appropriate Office of Capital Access official
in accordance with Delegations of Authority. This is consistent with
current Delegations of Authority. This section would also extend the
recordkeeping requirements for SBLCs to NFRLs. Record retention is
required for SBA to be able to perform safety and soundness
examinations or Lender reviews and to monitor that SBLC licensing
requirements are maintained. Finally, this proposed section would newly
specify certain time periods for retrieving certain documents (i.e., 1
day for documents that must be immediately retrievable and 15 days for
originals of documents that are stored electronically). Consequently,
an SBA Supervised Lender must be able to produce needed records when
required, and within a reasonable period of time, as defined here.
Section 120.462--What are SBA's additional requirements on capital
maintenance for SBA Supervised Lenders? A financial institution is
expected to maintain capital commensurate with its existing and
potential risk exposure and the ability of management to identify,
measure, monitor, and control exposures. Given this, many SBA
Supervised Lenders do,
[[Page 61757]]
and should be expected to, maintain capital levels above specified
minimums. Therefore, SBA is proposing a new Sec. 120.462 which would
guide SBA Supervised Lenders to maintain their own capital adequacy
goals and plans, typically at a level above SBA's minimum. The
provision would also provide guidance as to factors an SBA Supervised
Lender should consider in determining the total amount of capital
needed to assure the SBA Supervised Lender's continued financial
viability and to provide for any necessary growth.
Given the importance of maintaining adequate capital, the proposed
rule would further require that all SBA Supervised Lenders, within 45
days of the end of each fiscal quarter, furnish SBA with a calculation
of its compliance with its minimum regulatory capital requirement.
Under proposed Sec. 120.462(c), SBA would require the SBA Supervised
Lender's chief financial officer to certify the calculation as correct.
Section 120.462 would extend to NFRLs SBA's requirement to timely
notify SBA in writing of capital impairment. Under proposed Sec.
120.462(d), SBA would redefine capital impairment as any failure by an
SBA Supervised Lender to meet its minimum capital requirements. SBA is
proposing this revision to provide SBA early notice of a Supervised
Lender's deteriorating capital position below required minimums. Unless
otherwise waived by SBA in writing, an SBA Supervised Lender would be
prohibited from presenting any loans to SBA for guarantee until the
capital impairment is cured.
Finally, the proposed rule would require an SBA Supervised Lender
that fails to meet its minimum capital requirement to submit a capital
restoration plan. Proposed subsection (e) would detail the plan
content, how SBA would respond, amendments to the capital plan, and
consequences of failure to: (i) Submit an acceptable plan within the
required timeframe or (ii) implement in any material respect an
approved capital restoration plan within the plan timeframe.
Section 120.463--Regulatory accounting. To facilitate accurate and
reliable financial reporting, the proposed rule contains a new Sec.
120.463 on regulatory accounting. The proposed regulation would require
that an SBA Supervised Lender's (i) books and records be kept on an
accrual basis in accordance with Generally Accepted Accounting
Principles (GAAP) as supplemented by Regulatory Accounting Principles
(RAP) and (ii) financial statements be audited annually in accordance
with generally accepted auditing standards by an independent certified
public accountant experienced in auditing financial institutions.
Proposed subsection (d) would require an SBA Supervised Lender that
discharges its auditor to notify SBA within ten days of discharge and
provide SBA with the name, address, and telephone number of the
discharged auditor. If the discharge involved a dispute over the
financial statements, the SBA Supervised Lender would also have to
provide additional information, including but not limited to, a
detailed reason for the discharge and the effect of each party's
position on the financial statements.
Proposed subsection (e) would extend the SBLC requirement for
maintenance of an allowance for losses on loans to NFRLs. Under
proposed Sec. 120.463(e), an SBA Supervised Lender would be required
to maintain documentation of its loan loss allowance calculations and
analysis in sufficient detail to permit the SBA to review assumptions
used and their application. SBA would also require, under subsection
(e) that the unguaranteed portions of loans identified as uncollectible
be charged off promptly. If the portion determined to be uncollectible
by the SBA Supervised Lender would differ from that determined by its
auditors or the SBA, the SBA Supervised Lender would be required to
charge-off such amount as the SBA may direct. Each SBA Supervised
Lender would also be required to classify loans as nonaccrual or
formally restructured in accordance with stated guidelines. Under the
proposed subsection, if one loan to a given borrower would be
classified as nonaccrual or formally restructured, all loans to that
borrower would be required to be so classified unless the SBA
Supervised Lender could document that the loans have independent
sources of repayment.
Finally, Sec. 120.463, subsection (f), would require that SBA
Supervised Lenders account for loan sales transactions and the
valuation of loan servicing rights in accordance with GAAP. At the end
of each quarter, assumptions used in the valuation would be reviewed by
the SBA Supervised Lender for reasonableness in the existing
environment. In evaluating the assumptions, the SBA Supervised Lender
would be required to give particular attention to interest rate and
repayment rate assumptions. Assumptions considered no longer reasonable
would be required to be modified and reflected in the valuation and
would have to be documented and supported by a market analysis. Under
subsection (f), SBA could require an SBA Supervised Lender to use
industry averages for the valuation of servicing rights, in lieu of any
other assumptions found unacceptable by SBA.
Section 120.464--Reports to SBA. Proposed Sec. 120.464 would
extend to NFRLs, SBA's current SBLC reporting requirements covering
audited financial statements, administrative and legal proceedings,
reports to stockholders, summaries of changes (in organization and
financing), stock pledges, and other reports, as listed in current
Sec. 120.472.
Proposed Sec. 120.464 would also clarify current reporting
requirements by, for example, detailing required statements to
accompany the Annual Report (audited financial statements); inserting
filing time requirements where presently not stated (Stockholder Report
and Report of Changes); detailing the form and format of financial
reporting (e.g. for Annual Reports, Quarterly Condition Reports, and
Reporting of Changes--to be in accord with GAAP, include footnotes, and
utilize accrual accounting), and specifying that any legal or
administrative proceedings must be included in other required reporting
(e.g., Annual Report, Quarterly Condition Report, any Capital plan
report, etc.) until such matter is resolved.
Proposed Sec. 120.464 would also introduce two additional SBA
Supervised Lender reports: (i) The Quarterly Condition Report and (ii)
the Reports of Changes in Financial Condition. SBA Supervised Lenders
would report quarterly financial status in Quarterly Condition Reports.
The Quarterly Condition Report under proposed Sec. 120.464 would
contain quarterly financial statements that could be internally
prepared and which would likely include the required certification of
compliance with capital requirements under proposed Sec. 120.462(c).
Reports of Changes in Financial Condition would report material changes
in an SBA Supervised Lender's financial condition (such as
unanticipated reductions in asset values due to unanticipated events
such as natural disasters or uninsured hazard loss). Generally, SBA
would require the SBA Supervised Lender to file the Report of Changes
in Financial Condition within 10 days of becoming aware of such a
material financial change, except in cases of capital impairment which
would be 30 days from the month-end in which the impairment occurred,
in accordance with proposed Sec. 120.462(d), as clearly specified in
the Regulation language. These two financial reports would result in
timelier financial reporting.
[[Page 61758]]
Subsection (c) would require that SBA Supervised Lenders certify
each report of financial condition (e.g., the Quarterly Condition
Report, the Changes in Financial Condition Report and the Annual
Report) as having been prepared in accordance with applicable
regulations and instructions and to be a true, accurate, and complete
representation of the SBA Supervised Lender's financial condition and
performance. Accurate financial reporting is essential to an
institution's safety and soundness. Reliable financial reports are
necessary for an SBA Supervised Lender to raise capital. They provide
data to stockholders and potential investors on the company's financial
position and results of operations. Such information is critical to
effective market discipline. Accurate financial information also
enables management to effectively manage the institution's risks and
make sound business decisions. Further, the compilation and submission
of accurate financial information on a regular basis in a consistent
format allows SBA to perform more timely and effective risk-based
supervision to support examination functions, off-site monitoring,
assessments of an institution's capital adequacy and financial
strength, and comparisons between SBA Supervised Lenders.
Finally, proposed Sec. 120.464 would provide for a waiver
provision for any reporting requirement for good cause. Good cause may
include, but is not limited to, where an SBA Supervised Lender has a
relatively small SBA loan portfolio, consistently-acceptable Risk
Ratings, portfolio performance that exceeds SBA's portfolio or peer
group averages, etc. This waiver would be determined by SBA, in its
sole discretion. In making this determination based on portfolio size,
SBA expects to consider the value of the report to SBA given the size
of SBA Supervised Lender's SBA loan portfolio and relative to other SBA
Supervised Lender's portfolios individually and in the aggregate and
other risk related factors. Authority for such actions will be in
accordance with SBA's Delegations of Authority.
Section 120.465--Civil penalty for late submission of required
reports. Congress recognized the importance of reporting to effective
oversight and legislated civil monetary penalties of up to $5,000 per
day for SBA Supervised Lenders that fail to meet reporting requirements
(15 U.S.C. 650(j)). Proposed Sec. 120.465 would codify in SBA
regulations the statutory civil monetary penalties. The proposed
regulation would provide that penalties would automatically accrue from
the report due date until the SBA Supervised Lender submits a complete
report. If a submitted report is not complete, it would be deemed not
filed for purposes of civil monetary penalty assessment. Under the
proposed rule, if SBA discovers after the due date (e.g., during an
examination) that the report was submitted only in part or was not
filed, penalties would be assessed dating back to the original due
date. Finally, proposed Sec. 120.465 would provide procedures for
requesting: (i) Due date extension and waiver of automatic penalty up
to a new due date, (ii) reduction or exemption from the automatic
penalty, and (iii) reconsideration of SBA decisions on extensions and
reductions/exemptions and would include factors that would be
considered in the SBA approval (e.g. determination of reasonable cause
such as natural disaster or other conditions beyond the control of
management, that failure was not due to willful neglect, demonstration
of modified internal procedures to comply with reporting in the future,
etc.). SBA seeks comments on the factors SBA would consider as
discussed in the proposed rule.
Section 120.470--What is an SBLC? As part of the rewrite of the
SBLC regulations, SBA is proposing to amend the title and certain
content of current Sec. 120.470. Under the proposed rule, the subject
matter in several provisions of Sec. 120.470 would be moved elsewhere
in Part 120 (See Chart of Regulations Relocated in the Proposal section
of the preamble) and some remaining provisions would be updated,
reorganized, or expanded. Updates would include, for example: The
addition of limited liability companies and limited partnerships as
allowable business structures; an increase to $2 million for required
Fidelity Bond insurance; incorporation of new definitions of 7(a)
Lender and Intermediary into subsection (a)(2) on lending requirements;
a statement on SBA's policy on capitalization with borrowed funds. The
Fidelity Bond increase would update the insurance requirements
consistent with the current maximum loan amount that SBA can guarantee.
SBA would expand guidance, in particular, on SBA's policy against
capitalization with borrowed funds. Borrowed funds may result in a
weaker capital position of the SBLC due to the potential for required
repayment. SBA would also expand guidance in the proposed subsection on
common control--providing terms and definitions, requirements for
divestitures, and a clearer statement on common control and
presumptions.
Section 120.471, 120.472, 120.473, and 120.474--SBLC minimum
capital requirements. SBA sets SBLC capital standards pursuant to 15
U.S.C. 650(a)(2) and 15 U.S.C. 634(b)(7) in conjunction with 15 U.S.C.
636. Proposed Sec. Sec. 120.471 through 120.474 would govern SBLC
minimum capital standards. Proposed Sec. 120.471 would state SBA's
baseline minimum capital standard for SBLCs. Under proposed Sec.
120.471, the baseline would remain at the current level stated in Sec.
120.470(b)(3). However, SBA is considering revising the baseline
minimum capital standard and seeks comments on the appropriate minimum
capital level.
Proposed Sec. 120.471 would provide more detailed guidance on
those items that SBA would include in calculating an SBLC's capital
under the capital requirement. The capital calculation would generally
consist of the following items: (i) Common stock; (ii) preferred stock
that is non-cumulative as to dividends and does not have a maturity;
(iii) additional paid-in-capital for stock in excess of the par value;
(iv) retained earnings; and (v) for limited liability companies and
limited partnerships, those capital contributions that are not subject
to repayment at any specific time, are not subject to withdrawal and
have no cumulative priority return. The inclusion of retained earnings
and limitations on preferred stock in the proposed rule is consistent
with Federal Financial Institution Regulator policies.
In some cases, SBA may determine that the baseline minimum capital
formula may not be sufficient to support the risk associated with a
particular SBLC's portfolio. Consequently, proposed Sec. 120.472 would
provide that SBA may require a higher individual minimum capital
requirement for an SBLC. Proposed Sec. 120.472 would provide examples
of risk-related factors that SBA might consider in making that
determination. An SBLC individual minimum capital requirement would be
established pursuant to procedures set forth in proposed Sec. 120.473
or through written agreement or a cease and desist proceeding as stated
in proposed Sec. 120.474. The proposed individual minimum capital
requirement procedures are similar to those provided by some Federal
Financial Institution Regulators.
Finally, the SBLC capital regulations would include a change in
policy for approving issuances of securities (currently in Sec.
120.470(b)(5) and proposed in Sec. 120.471(d)). The proposed
provisions would delete the last part of
[[Page 61759]]
current Sec. 120.470(b)(5). This deletion would have the effect of
making it a requirement for an SBLC to obtain prior written approval
for issuances of common stock, including issuances for cash or direct
obligations of or obligations fully guaranteed as to principal and
interest by the United States government. This is consistent in general
with SBA's policy of prior approval for other types of financings (e.g.
warehouse lines, participations, and securitizations). For further
information on proposed rule capital provisions see the Capital
Regulation provision in the Proposal section of the preamble.
Section 120.475--Change of ownership or control. SBA proposes to
relocate current Sec. 120.473 governing change of ownership and
control for SBLCs to Sec. 120.475. In addition, the proposed rule
would shift approval authority from the D/FA to the appropriate Office
of Capital Access official in accordance with Delegations of Authority
to reflect changes in internal agency procedure. Further, if a transfer
of ownership or control is subject to approval of any State or Federal
chartering, licensing, or other regulatory authority, copies of any
documents filed with such authority would also have to be transmitted
to the appropriate Office of Capital Access official in accordance with
Delegations of Authority.
Section 120.630--Qualifications to be a Pool Assembler. SBA
proposes to add an additional requirement applicable only to SBA
Lenders. Specifically, SBA would require SBA Lenders seeking to become
a Pool Assembler to have satisfactory SBA performance, as determined by
SBA. SBA would consider an SBA Lender's Risk Rating, among other
factors, in determining satisfactory SBA performance. The other factors
that SBA anticipates considering may include on-site review/examination
assessments, historical performance measures (e.g., default rate,
purchase rate, and loss rate), loan volume to the extent that it
impacts performance measures, and other performance related
measurements and information. SBA considers these factors as relevant
to the expected performance of a Pool Assembler. SBA is revising this
regulation to incorporate SBA loan program performance for SBA Lenders/
pool assemblers into pool assembler eligibility criteria.
Section 120.702--Limitations on where an Intermediary may operate?
Current Sec. 120.702 provides that Microloan Intermediaries may
operate in only one state unless SBA determines that it would be in the
best interests of the small business community for it to operate across
state lines. The proposed rule would shift approval authority for
expansions from the D/FA to the appropriate Office of Capital Access
official in accordance with Delegations of Authority to reflect changes
in internal agency procedure.
Section 120.710(c) and (d)--Microloan Intermediary Loan Loss
Reserve Fund (LLRF) approval authority. SBA proposes amending Sec.
120.710(c) and (d) to shift approval authority for a reduction in the
LLFR calculation from the D/FA to the appropriate Office of Capital
Access official in accordance with Delegations of Authority. This
revision would reflect changes in internal agency procedure.
Sections 120.710(e)(1), 120.812, 120.820, 120.839, and 120.841--
Microloan Intermediary LLRF reduction and selected CDC authority
criteria. SBA proposes amending Sec. Sec. 120.710(e)(1) (Microloan
Intermediary reduction of LLRF); 120.812 (Extension of CDC probationary
periods and permanent CDC status); 120.820 (Requirements for CDC
certification and operation); 120.839 (Outside area of operation loan
approval); and 120.841 (ALP status), to incorporate that SBA would
consider an Intermediary's or SBA Lender's performance (which will
include its Risk Rating, among other factors) in making determinations
under these regulations. SBA expects to consider in determining
satisfactory SBA performance on-site review assessments; historical
performance measures; loan volume to the extent that it impacts
performance measures; other performance related measurements and
information, and contribution toward SBA mission. Proposed Sec.
120.841(c) (ALP status) would also add the requirement that an ALP CDC
must have a risk-based review assessment of ``acceptable'' or
``acceptable with corrective actions required'' to be considered for
ALP status.
Section 120.826--Basic requirements for operating a CDC. The
proposed rule adds to Sec. 120.826 internal control requirements
similar to those proposed for SBA Supervised Lenders. Under the
proposed rule, a CDC would be required to adopt an internal control
policy to include maintenance of a loan review program, in conjunction
with its SBA-guaranteed debenture financings. In addition, a CDC would
have to have its financial statements annually audited by an
independent certified public accountant since this would establish
consistency in application of GAAP (a requirement) for CDC audits.
Proposed Sec. 120.826 would also incorporate the Single Audit Act
requirements into SBA's 504 program regulations.
Section 120.830--Reports a CDC must submit. SBA is proposing an
amended Sec. 120.830 to clarify the current annual report requirement
by detailing the statements that must be included.
Section 120.845(b)--PCLP status. Section 120.845(b) would be
revised to provide that final determinations under this section would
be made by the appropriate Office of Capital Access official in
accordance with Delegations of Authority. This proposed revision would
reflect changes in internal agency procedure.
Section 120.853--Oversight and evaluation of CDCs. Section 120.853
currently covers both SBA reviews and Inspector General audits of CDCs.
The proposed rule would move the CDC review portion of the regulation
to subpart I--Lender Oversight (proposed Sec. Sec. 120.1000 and
120.1050--On-site Reviews and Examinations). The proposed rule would
retitle Sec. 120.853 ``Inspector General Audits of CDCs'' consistent
with the revised subject matter.
Section 120.956--Suspension or revocation of brokers and dealers.
The proposed rule would revise Sec. 120.956 to provide that the
appropriate Office of Capital Access official in accordance with
Delegations of Authority (rather than the D/FA) would be responsible
for suspensions and revocations of broker/dealer participation in the
Secondary Market. This is consistent with SBA's Delegations of
Authority for oversight and enforcement responsibilities. In addition,
the proposed rule deletes the last sentence on suspension of appeal
rights.
Subpart I--Risk-Based Lender Oversight. SBA is significantly
enhancing subpart I in Part 120 introduced on May 4, 2007 with SBA's
published final rule on its Lender oversight fees. 72 FR 25194. The
enhancements would consolidate SBA's supervision and enforcement
authorities for SBA Lenders, Microloan Intermediaries and NTAPs. This
consolidation would facilitate more coordinated and effective lender
oversight.
Section 120.1000--Risk management/Lender oversight. SBA is
proposing a new Sec. 120.1000 entitled ``Risk management/Lender
oversight'' that would describe lender oversight functions and the
financial institutions supervised under the subpart.
Section 120.1005--Bureau of PCLP Oversight. In Public Law 108-232
(May 28, 2004), the ``Premier Certified Lenders Program Improvement Act
of 2004'', Congress established two
[[Page 61760]]
alternative loss reserve pilot programs for certain Premier Certified
Lenders (PCLP CDCs) loan loss reserve funds (LLRF). The public law also
established the Bureau of PCLP Oversight in SBA to carry out such
functions as the Administrator designates towards implementing the
pilot programs. On May 26, 2006, SBA published a proposed rule
governing the LLRF pilot programs. See, 71 FR 30323. Under the
published proposed regulations, the Bureau of PCLP Oversight (Bureau)
would approve the independent auditor that a pilot participant would
engage to calculate its required LLRF. The Bureau would also review and
make a determination as to a pilot participant's process for analyzing
the risk of loss associated with the pilot participant's outstanding
PCLP debentures (and the underlying loans) and the sufficiency of the
LLRF. SBA anticipates publishing a final PCLP rule in the future.
Proposed Sec. 120.1005 as contained in today's proposed lender
oversight rule would include the Bureau of PCLP Oversight within
subpart I, SBA's consolidated lender oversight regulations. Proposed
Sec. 120.1005 would provide that the Bureau monitor the capitalization
of PCLP CDC pilot participants' LLRFs, and perform other related
functions. SBA may expand Bureau functions in the future consistent
with SBA's statutory authority.
Section 120.1010--SBA access to SBA Lender, Microloan Intermediary,
and NTAP files. Proposed Sec. 120.1010 governs SBA access to SBA
Lender, Microloan Intermediary, and NTAP files. SBA is relocating its
current file access regulation from Sec. 120.414 and expanding this
codification of authority to explicitly include CDCs, Microloan
Intermediaries, and NTAPs. This provision is intended to facilitate
lender oversight.
Section 120.1015--Risk Rating System. SBA is proposing a new Sec.
120.1015 entitled ``Risk Rating System.'' Under proposed Sec.
120.1015, SBA could assign a Risk Rating to all SBA Lenders, Microloan
Intermediaries, and NTAPs on a periodic basis (currently quarterly for
SBA Lenders). This SBA Risk Rating process is detailed separately in
final Federal Register notice at 72 FR 27320 (May 16, 2007). Risk
Ratings range from one to five, with one indicating the least risk and
five the most risk to SBA. OCRM would, from time to time, define the
numeric definitions of acceptable and unacceptable levels of risk. For
additional discussion of the Risk Rating System within this proposed
rule, see the Proposal section of the preamble.
Section 120.1025--Off-site reviews/monitoring. SBA is proposing a
new Sec. 120.1025 entitled ``Off-site reviews/monitoring''. Under
proposed Sec. 120.1025, SBA may conduct off-site reviews/monitoring of
all SBA Lenders, Microloan Intermediaries, and NTAPs, including SBA
Lender self-assessments and other targeted off-site reviews as defined
by SBA. Currently, SBA conducts off-site SBA Lender reviews on at least
a quarterly basis using SBA's Loan and Lender Monitoring System (L/
LMS). The L/LMS off-site review is SBA's primary method of monitoring
all of SBA's 5000-plus SBA Lenders. For lower volume SBA Lenders, it
may be the sole method of SBA review. L/LMS off-site reviews/monitoring
are also used in conjunction with SBA Lender onsite reviews/exams and
self-assessments (e.g. for purposes of planning and prioritization of
exams/reviews/assessments and for evaluating performance).
Under proposed Sec. 120.1025, SBA could require an SBA Lender,
Microloan Intermediary, or NTAP to perform a self-assessment. This
would be analogous to an AICPA Agreed Upon Procedures Engagement. For
lower volume SBA Lenders, Microloan Intermediaries, and NTAPs, a self-
assessment could consist of a self-evaluation as to SBA performance or
compliance with certain SBA requirements. Generally, SBA would consider
requiring a self-assessment to confirm corrective actions implemented
or in lieu of a targeted or limited scope review. SBA expects to
provide additional guidance on self-assessments in its SOPs.
Finally, SBA may also perform targeted off-site reviews and
monitoring (e.g., performance comparison to SBA portfolio and peer
averages, error rates in 1502 reporting, trend analysis, etc.). Off-
site reviews/monitoring mechanisms like L/LMS, self-assessments, and
other targeted off-site reviews are a timely and cost effective means
of overseeing and monitoring the SBA performance and compliance of SBA
Lenders, Microloan Intermediaries, and NTAPs.
Section 120.1050--On-site reviews and examinations. Proposed Sec.
120.1050--``On-site reviews and examinations'' would codify in one
place within SBA regulations SBA's authority to conduct examinations of
SBA Supervised Lenders and reviews of the SBA operations of SBA
Lenders. The proposed section would also describe the examination and
review components that SBA would likely evaluate. For SBA Supervised
Lender safety and soundness examinations, SBA would examine capital
adequacy; asset quality; management quality; earnings; liquidity;
compliance with laws, regulations, rules, SOPs, and SBA agreements; and
such other risk related factors as SBA may identify from time to time.
SBA's safety and soundness examinations are similar in scope to those
conducted by the Federal Financial Institution Regulators. For SBA
operational reviews, SBA would review the SBA portfolio performance;
SBA operations management; credit administration; compliance with laws,
regulations, rules, SOPs, and SBA agreements; and such other risk
related factors as SBA identifies from time to time. These components
have been identified by SBA as most useful in assessing lender
performance and risk to the loan program. Section 120.1050 would also
provide for SBA reviews of Microloan Intermediaries and NTAPs. Finally
it would provide SBA with the flexibility to perform other reviews and
examinations, as SBA determines necessary. These could include targeted
or limited scope reviews/examinations (e.g., ad hoc reviews/
examinations, additional monitoring activities, special performance
assessments). Targeted and limited scope reviews/examinations would
provide for a more efficient and less burdensome means of supervision
of specific deficiencies.
Section 120.1051--Frequency of on-site Lender reviews and
examinations. Proposed Sec. 120.1051 provides that SBA would perform
on-site reviews and examinations on a periodic basis. Currently, SBA
plans on conducting such reviews and examinations on a 12 to 24 month
cycle, depending on the risk characteristics of the SBA Lender,
Microloan Intermediary, or NTAP. The proposed regulation would also
list some risk-related factors that SBA would consider in determining
review/examination frequency. They would include (but would not be
limited to): (i) Off-site review/monitoring results (e.g. Risk Rating);
(ii) SBA portfolio size; (iii) prior findings; (iv) responsiveness to
correcting past deficiencies; and v) such other risk-related factors as
determined by SBA.
Section 120.1055--Review and examination results. Under the
proposed rule, SBA would provide SBA Lenders, Microloan Intermediaries,
and NTAPs a copy of their report of examination or review (Report). The
Report would contain findings, conclusions, corrective actions and/or
recommendations. The proposed regulation requires each director of an
SBA Supervised Lender and manager of the SBA Operations of SBA Lenders,
Microloan Intermediaries, and NTAPs to review the Report. If such
senior
[[Page 61761]]
management review the Report consistent with their responsibilities, it
is more likely that the SBA Lender, Microloan Intermediary, and NTAP
would commit to and make corrective actions. Proposed Sec. 120.1055,
would also provide procedures for responding in writing to SBA Reports
along with the consequences of failure to submit or implement
responses, corrective actions, and capital restoration plans.
Section 120.1060--Confidentiality of Reports, Risk Ratings, and
related Confidential Information. Proposed Sec. 120.1060 would provide
that Reports and other SBA prepared review or examination related
documents are the property of SBA. It would also provide that Reports,
Risk Ratings and related Confidential Information (including SBA Lender
portal information) would be privileged and confidential. The term
``Confidential Information'' is defined in the SBA Lender Information
Portal, and by notice issued from time to time. Currently, it is
defined as ``all lender-related information contained in the Portal
including `Lender Results', except for the `Past 12 Month Actual
Purchase Rate' and the `Past 12 Month Actual Charge-Off Rate'.'' Under
the proposed rule, SBA Lenders, Microloan Intermediaries, and NTAPs
would be required to restrict access to the Report, the Risk Rating,
and the Confidential Information to certain ``permitted parties'' as
defined in this proposed regulation and to those for whom access is
required by applicable law or legal process. For example, if it is
determined that such law or legal process requires disclosure to a
Federal Financial Institution Regulator, then this proposed regulation
would not preclude that access. SBA Lenders, Microloan Intermediaries
and NTAPs would be prohibited from otherwise disclosing Report, Risk
Rating, and Confidential Information in full or in part in any manner
without SBA's prior written permission. The confidentiality requirement
is reflective of the principles underlying the bank examiners
privilege--it provides for more open dialogue between regulators and
financial institutions, intending to lead to more cooperative and
expeditious identification and resolution of institution issues. For
more discussion on the confidentiality and limitations on disclosure
see SBA Lender Risk Rating System final notice, 72 FR 27611 (May 16,
2007).
Section 120.1400--Grounds for enforcement actions--SBA Lenders. The
proposed rule would consolidate existing SBA enforcement authorities
for SBA Lenders with new authorities, most of which are outlined in 15
U.S.C. 650 et seq. The SBA enforcement action provisions of the
proposed rule would begin with a new Sec. 120.1400 that would provide
a listing of grounds that may trigger enforcement action. Proposed
Sec. 120.1400 lists first those grounds that, in general, could
trigger enforcement actions, then those grounds that are specific to
certain enforcement actions, most of which are specific to certain
types of institutions (e.g., SBA Supervised Lenders).
Grounds for enforcement actions would not be limited to violations
of the regulations as stated in proposed subsection (a). SBA is
authorized to bring enforcement actions for breaches of terms and
conditions in the SBA Form 750 Loan and Guaranty Agreement and all
other agreements jointly executed by the SBA Lender and SBA.
The grounds, as proposed, are primarily derived from current
regulations or directly from the Act. For example, the grounds would
include: Failure to maintain eligibility requirements; failure to
comply materially with any requirement imposed by statute, regulation,
SOP, policy or procedural notice, or any agreement; making a material
false statement; and not performing underwriting, closing, disbursing,
servicing, liquidation, or litigation in a commercially reasonable and
prudent manner with respect to the applicable loan program (e.g., 7(a)
or 504). A repeated Less Than Acceptable Risk Rating would be included
in enforcement action grounds indirectly through subsections (c)(4) and
(c)(9). Subsection (c)(4) would provide that a repeated Less Than
Acceptable Risk Rating or on-site review/examination assessment could
be evidence to support a determination that the SBA Lender was not
performing underwriting, closing, disbursing, servicing, liquidation,
litigation or other actions in a commercially reasonable and prudent
manner. Subsection (c)(9) would provide that SBA may take enforcement
action if SBA determines there is increased financial risk (for
example--if SBA Lender has a repeated Less Than Acceptable Risk Rating
or if an officer, key employee, or loan agent involved with SBA loans
for an SBA Lender is indicted for a felony or on fraud charges). SBA
expects to consider additional factors (e.g., on-site review/
examination assessment or corrective action implemented) before taking
formal enforcement actions on Risk Rating grounds. For CDCs, in
particular, the Risk Rating and review assessment would replace the
indirect role of the portfolio benchmarks under current Sec.
120.854(a)(4).
Proposed paragraphs (11) and (12) would provide the grounds for
immediate suspension of loan program activities for SBA Lenders except
SBA Supervised Lenders, as well as the grounds for immediate suspension
of delegated authorities for all SBA Lenders. The basis for such action
would be a determination by SBA that one or more of the grounds in
subsection (c) exist and, that immediate action is needed to prevent
the risk of significant loss to SBA or to prevent significant
impairment of the 7(a) or 504 programs.
Proposed subsections (d) and (e) would incorporate the statutory
grounds for certain SBA Supervised Lender and SBLC enforcement actions
under 15 U.S.C. 650 et seq. Among those are grounds specific to SBA
Supervised Lenders (excluding Other Regulated SBLCs under proposed
Sec. Sec. 120.1510 and 120.1511) for suspensions and revocations of
SBA program authority. Subsection (f) would list additional grounds
specific to CDCs and, for PCLP CDCs, includes failure to establish and
maintain a LLRF in accordance with SBA regulations.
Section 120.1425--Grounds--Intermediaries participating in the
Microloan program and NTAPs. Proposed Sec. 120.1425 would incorporate
grounds for enforcement actions against Microloan Intermediaries and
NTAPs contained in current Sec. 120.716 into subpart I. In addition,
the proposed regulation would provide that a repeated Less Than
Acceptable Risk Rating or an indictment for a felony or on fraud
charges of an officer, key employee, or loan agent involved with SBA
loans or the SBA program for a Microloan Intermediary or NTAP could be
evidence of SBA's increased financial or program risk, and as such,
also serve as grounds for formal enforcement action. However, it would
not automatically mean that SBA would take formal enforcement action
under proposed Sec. 120.1540. In addition, SBA expects to consider
additional factors (e.g. on-site review/examination assessment or
corrective actions implemented) before taking formal enforcement
action.
Section 120.1500--Enforcement actions--SBA Lenders. SBA is
proposing a new Sec. 120.1500 entitled ``Enforcement Actions--SBA
Lenders'' that lists the formal enforcement actions that SBA may take
against an SBA Lender. These provisions generally would be listed in a
graduated manner within each SBA Lender category. New to this formal
list is (i) imposition of
[[Page 61762]]
portfolio guarantee dollar limit, (ii) suspension and/or revocation of
Secondary Market activity; and (iii) the new statutory SBA Supervised
Lender enforcement actions. SBA added the portfolio guarantee limit as
a means of limiting SBA's risk exposure for a particular SBA Lender.
SBA included suspension/revocation of a 7(a) Lender's authority to sell
or purchase loans in the Secondary Market in its list of formal
graduated actions also as a means of limiting an SBA Lender's risk
exposure to SBA and the Secondary Market. The suspension and revocation
of individual lending functions would facilitate SBA taking more
targeted measures to address isolated but significant functional
deficiencies.
The capital directive is within the SBLC enforcement actions. Under
proposed subsection (d)(1), SBA may order a capitally impaired SBLC (or
SBLC operating in an imprudent manner) to meet its capital requirement,
submit and adhere to a capital restoration plan, and obtain SBA
approval before taking certain actions, as detailed.
Sections 120.1510 and 120.1511--Other Regulated SBLCs. Proposed
Sec. Sec. 120.1510 and 1511 would address the rare instance where an
SBLC itself is directly examined by a Federal Financial Institution
Regulator or State banking regulator. Under such circumstances, the
``Other Regulated SBLC'' would be exempt from the statutory enforcement
provisions specific to SBA Supervised Lenders as granted in Sec. 23 of
the Act, 15 U.S.C. 650 [except those for SBLCs only in subsections (b)
and (c)]. SBA, instead, would rely on a Federal Financial Institution
Regulator's or state banking regulator's safety and soundness
examination conducted directly on the SBLC and their follow-up to
address safety and soundness issues.
To obtain the designation of Other Regulated SBLC, the SBLC would
have to certify, under proposed Sec. 120.1511, that it is directly
examined and regulated by a Federal Financial Institution Regulator or
state banking regulator. The elements of this certification are
detailed in the Regulation. This certification would have to be
submitted in writing within 60 days of the effective date of the final
rule or within 60 days of the date the SBLC becomes directly examined
and directly regulated by such regulator. The SBLC would have to
identify the Federal Financial Institution or state banking regulator
performing the examinations on it directly and provide information on
the most recent safety and soundness examination. An Other Regulated
SBLC would also be required to notify SBA in writing each time such a
safety and soundness examination of the SBLC itself took place and
report the interaction, to the extent allowed by law.
Proposed Sec. 120.1511(g) would provide that, in the event an SBLC
fails to timely comply with the necessary certification and reporting
requirements, then the Sec. 120.1510 exemption would not apply and SBA
would exercise its statutory authority to supervise the safety and
soundness of the SBLC and may take the statutory SBA Supervised Lender
enforcement actions, as necessary, to protect the financial interests
of the 7(a) program.
While an Other Regulated SBLC would be expected to comply with SBLC
requirements, as set forth for example in proposed Sec. Sec. 120.470
(SBLC general licensing requirements), 120.471-474 (SBLC minimum
capital requirements), 120.475 (SBLC change of control), 120.476 (SBLC
prohibited financing), 120.460 (internal controls), 120.461 (document
retention), 120.463 (regulatory accounting), 120.464 (reports), and
120.490 (IG audits), it would only be subject to SBA Lender risk-based
reviews and enforcement provisions and not the statutory SBA Supervised
Lender supervision and enforcement provisions, except those that are
SBLC licensing specific (i.e., capital directive and civil action).
Section 120.1540--Enforcement actions--Intermediaries participating
in the Microloan program and NTAPs. Proposed Sec. 120.1540 would
incorporate formal enforcement actions against Microloan Intermediaries
and NTAPs set forth in current Sec. 120.716 into subpart I.
Section 120.1600--General procedures for enforcement actions--SBA
Lenders, Management Officials, Other Persons, Intermediaries, and
NTAPs. Proposed Sec. 120.1600 would largely adopt the enforcement
procedures for CDCs currently contained in Sec. 120.856 and extend
them, in general, to all SBA Lenders, Microloan Intermediaries and
NTAPs. Proposed procedures would include a notice of enforcement
action; opportunity to object; notice of final Agency decisions; and a
provision on appeals directly to federal district court. Additions/
changes to the general provision include, but are not limited to, a
provision to make clear that request for clarification of notice for
additional time to respond must be received by the same deadline for
objection; responses and such requests must be submitted to the
appropriate Office of Capital Access official in accordance with
Delegations of Authority; and appeals of the final Agency decision
would no longer be filed with SBA's OHA but would be filed in the
appropriate Federal district court. Proposed Sec. 120.1600 would also
set forth procedures for certain SBA Supervised Lender, Management
Official, or Other Person enforcement actions as prescribed by statute.
This would include enforcement procedures specific to SBA Supervised
Lenders (excluding Other Regulated SBLCs under proposed Sec. Sec.
120.1510 and 120.1511) for suspensions and revocations of SBA program
authority. The additional procedures in subsection ``c'' for SBLC
capital directive would generally follow similar provisions of other
Federal Financial Institution Regulators.
IV. Comments Request
Readers are encouraged to review closely each section of the
proposed rule in conjunction with current regulations to fully
comprehend the extent of the rule and its changes. SBA invites comment
on all aspects of this proposed rule, including the underlying
policies. SBA may rely on its own expertise in promulgating the final
rule. Submitted comments will be available to any person or entity upon
request.
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 a Regulatory Impact Analysis, as set forth below.
A. Regulatory Objective of the Proposal
SBA is proposing a rule to incorporate SBA's risk-based lender
oversight program into SBA regulations. Specifically, the proposed rule
would establish the role and responsibilities of SBA's Office of Credit
Risk Management within subpart I to 13 CFR Part 120. It would codify in
13 CFR SBA's process of risk-based oversight including: (i) Accounting
and reporting requirements; (ii) off-site reviews/monitoring; (iii) on-
site reviews and examinations; and (iv) capital adequacy requirements.
The proposed rule would also list the types of, grounds for, and
procedures governing SBA enforcement actions within consolidated
enforcement regulations for all 7(a) Lenders, CDCs, Microloan
Intermediaries, and NTAPs. This rule is necessary to provide
coordinated and effective oversight of financial institutions that
originate and manage SBA guaranteed loans.
[[Page 61763]]
These regulatory changes would improve SBA's oversight and
management of the 7(a), 504, Microloan and NTAP programs. SBA believes
that there are no viable alternatives to these changes that would
produce similar positive results without imposing an additional burden
on the SBA or the public.
B. Baseline Costs
1. Baseline Costs for 7(a) Lenders (Excluding SBA Supervised Lenders)
All 7(a) Lenders are currently required to be supervised and
examined by a state or Federal regulatory authority, satisfactory to
SBA. This is a cost already borne by these 7(a) Lenders. In addition,
these 7(a) Lenders are subject to SBA's supervisory and enforcement
provisions contained in the business programs portion of Part 120. The
estimated annual baseline costs to the Federal government for 7(a)
Lenders' oversight is provided for in the existing OCRM infrastructure.
2. Baseline Costs for SBLCs
Each SBLC is currently required to submit audited financial
statements within three months after the close of each fiscal year and
interim financial reporting when requested by SBA. SBA also currently
requires that SBLCs submit a report on any legal or administrative
proceeding, by or against the SBLC, or against an officer, director or
employee of the SBLC for an alleged breach of official duty; copies of
any report furnished to its stockholders; a summary of any changes in
the SBLC's organization or financing; notice of capital impairment; and
such other reports as SBA may require from time to time by written
directive. The collection of the information and reports referenced
here is largely already maintained by the SBLCs for operational and
financing purposes. It is estimated that preparation and submission of
this information takes about 80 hours annually for each SBLC. The hour
burden is an SBA estimate based on inquiries made to selected SBLCs.
The estimate of the total annual cost burden is based on an average
annual outside audit fee of $8,000 per respondent, plus an additional
$2,000 per respondent for staff involvement in the independent audit
engagement and SBA reporting (approximately 15 hours of CFO time at a
$100 hourly rate plus 15 hours of administrative profession time at a
$30 hourly rate, rounded). This total cost burden is estimated at
$140,000 for 14 SBLCs. SBA has reduced this figure by $20,000 to
$120,000 to adjust for reduced costs for smaller SBLCs. The estimated
annual cost to the Federal government for this information collection
is approximately 8 hours of Financial Analyst time at $55 per hour, or
$6,160 annually for all 14 SBLCs. Any additional estimated indirect
annual cost to the Federal government for oversight of these SBLCs is
provided for in the existing OCRM infrastructure.
3. Baseline Costs for NFRLs
No direct costs are currently incurred by NFRLs for SBA oversight
and related functions discussed in this proposed rule. The estimated
annual cost to the Federal government for oversight of these NFRLs is
provided for in the existing OCRM infrastructure.
4. Baseline Costs for CDCs
Each CDC is currently required to submit to SBA an annual report
within 180 days of the fiscal year end, including financial statements
of the CDC and any affiliates or subsidiaries and such interim reports
as SBA may require. The collection of the information and reports
referenced here is largely already maintained by the CDCs for
operational purposes. SBA has estimated that preparation and submission
of this information takes approximately 28 hours annually for each CDC,
at an average cost of $30 per hour for staff compilation, which
computes to a cost of $840 per CDC, and a total of 7,560 hours for all
CDCs. This total cost burden is $226,800 (7,560 hours x $30) for the
approximately 270 CDCs. The estimated annual cost to the Federal
government for this information collection is approximately 1 hour of
financial analyst time per CDC or 270 hours total for all CDCs, at a
cost of $55 per hour. Estimated annual Federal cost burden therefore is
estimated at $14,850 (270 hours x $55). The remaining estimated annual
cost to the Federal government for oversight of CDCs is provided for in
the existing OCRM infrastructure.
5. Baseline Costs for Microloan Intermediaries and NTAPs
Microloan Intermediaries and NTAPs currently incur no direct costs
for oversight and related functions as discussed in this proposed rule.
The estimated annual cost to the Federal government for oversight of
these Microloan Intermediaries and NTAPs is currently provided for in
the existing OFA infrastructure.
C. Potential Benefits and Costs of the Proposed Rule
1. Potential Benefits and Costs of the Proposed Rule to all SBA
Lenders, Microloan Intermediaries and NTAPs
The proposed rule would benefit SBA Lenders, Microloan
Intermediaries, and NTAPs by generally consolidating oversight
authority and responsibility within one SBA office, OCRM. These
institutions would also benefit from knowledge of established and
further defined programmatic standards, enforcement grounds, ranges of
enforcement actions and procedures for supervision and enforcement
actions as set forth in the proposed rule. They may further benefit
from performance feedback to the extent it can assist them in improving
their SBA operations and minimizing losses.
While there are specific benefit and costs issues for specific
categories of lenders as detailed below, all SBA Lenders, Microloan
Intermediaries and NTAPS will incur some relatively minimal costs
related to the proposed rule's incorporation of review/exam reporting
(e.g., self-assessments and related reporting, corrective action
plans). Self-assessments and review/exam reporting are a timely and
cost effective means of overseeing and monitoring the SBA performance
and compliance of SBA Lenders, Microloan Intermediaries and NTAPs.
2. Potential Benefits and Costs of the Proposed Rule to 7(a) Lenders
(Other Than SBLCs and Other NFRLs)
No additional direct costs are projected to be incurred by 7(a)
Lenders for oversight as contained in the proposed regulations. No
additional reporting or direct costs are projected to be incurred by
7(a) Lenders with the rule's implementation.
3. Potential Benefits and Costs of the Proposed Rule to SBLCs
The proposed rule would provide for more developed internal control
requirements and adoption of a formal capital plan. It would also
require filing of (i) quarterly condition reports (including financial
statements); (ii) reports of changes in financial condition; (iii)
notice of change of auditor; (iv) capital restoration plans; and (v)
Other Regulated SBLC Reports, with certifications as to accuracy or
compliance (including capital compliance) as applicable. Because
internal controls, formal capital plans, and quarterly financial
statements are likely already maintained by the SBLCs for operational
purposes, SBA estimates little or no additional cost for these new
[[Page 61764]]
requirements. It is estimated that preparation and submission of all
the additional reports and the new recordkeeping would take
approximately 3 hours annually of additional CFO time at a $100 hourly
cost, plus 3 hours annually of additional administrative professional
time at a $30 hourly cost. Therefore, the total additional cost burden
would be $5,460 ($390 x 14) for 14 SBLCs.
4. Potential Benefits and Costs of the Proposed Rule to NFRLs
The proposed rule would require each NFRL to submit an annual
report, including audited financial statements within three months
after the close of each fiscal year. The proposed rule would further
require that all audited financial report filings be prepared in
accordance with GAAP, and include an opinion from the independent
accounting firm engaged in the audit. It would also require NFRLs to
submit: (i) a report on any legal or administrative proceeding, by or
against the NFRL, or against an officer, director or employee of the
NFRL for an alleged breach of official duty; (ii) copies of any report/
publications furnished to its stockholders; (iii) summaries of changes
in the NFRL's organization or financial structure, personnel and
eligibility; (iv) notice of capital impairment; (v) quarterly condition
reports; (vi) changes in financial condition reports; (vii)
recapitalization plans; and (viii) notice of changes in auditors and
such other reports as SBA may require from time to time by written
directive--with certifications as to accuracy and compliance (including
capital compliance), as applicable. The proposed rule would also
require adoption of a developed internal control policy, records
maintenance, and adoption of a formal capital plan. Much of the
collection of the information and reports referenced here, as well as
the requirements for internal control, records retention and adoption
of a formal capital plan are likely information already maintained by
the NFRLs for operational, and in some instances financing, purposes.
SBA estimates preparation and submission costs consistent with that of
the baseline for the SBLCs, at 80 hours of external auditor time at
$100 hourly rate, plus an additional $2,000 per NFRL for staff
involvement in the independent audit engagement (approximately 15 hours
of CFO time at a $100 hourly rate plus 15 hours of administrative
profession time at a $30 hourly rate, rounded) for a total of $10,000
per NFRL. SBA estimates additional reporting and recordkeeping
requirements to the NFRLs (that which would be new to SBLCs as well) at
3 hours of additional CFO time at a $100 hourly rate plus 3 hours of
additional administrative professional time at a $30 hourly rate ($390
per NFRL). Since there are no current baseline costs to NFRLs, the
total additional cost burden for this proposed rule for the 58 NFRLs
(as of May 2007) would potentially be $602,620 ($10,390 x 58 NFRLs).
5. Potential Benefits and Costs of the Proposed Rule to CDCs
The proposed rule would require each CDC to submit an annual
report, including audited financial statements within three months
after the close of each fiscal year and interim financial reporting
when requested by SBA. All audited financial report filings would be
required to include an opinion from the independent accounting firm
engaged in the audit. The proposed rule would also require enhanced
internal control requirements. The collection of the information
referenced here, including the annual audited financial statements, as
well as the requirements for internal control would include
information, policies and procedures likely already maintained by many
of the CDCs for operational purposes. The hour burden is an SBA
estimate based on inquiries made to selected CDCs. It is estimated that
preparation and submission of this information would take approximately
40 (auditor) hours annually for each CDC, at an average cost of
approximately $4,000 ($100 per hour for CPA-credentialed auditor)
average outside audit fee, plus internal staff time of 4 hours at the
administrative professional rate of $30 per hour ($120 per CDC). This
is in lieu of existing Baseline Costs for CDCs outlined in paragraph 4
of Section B. Baseline Costs. The total cost would be $1,112,400
($4,120 x 270 CDCs). The total additional cost burden would be $885,600
($1,112,400-$226,800 baseline) for the 270 CDCs for this proposed rule.
We note, however, that this number may be dramatically reduced because
many CDCs are already required to maintain audited financial statements
and internal control programs under The Single Audit Act requirements.
6. Potential Benefits and Costs of the Proposed Rule to Microloan
Intermediaries and NTAPs
No additional direct costs are projected to be incurred by
Microloan Intermediaries and NTAPs for lender oversight and related
functions in this proposed rule. No additional costs would be incurred
by Intermediaries due to the implementation of this rule, since general
oversight, suspension or revocation already exists in Sec. 120.716 and
is replaced by consolidated oversight within subpart I, and no
additional reporting is required by this proposed rule.
7. Potential Benefits and Costs for SBA and the Federal Government
Benefits to SBA include improved administration of the lender
oversight process through general consolidation of oversight authority
within OCRM. SBA would also benefit from having more timely and
complete operations information, including financial information for
SBA Supervised Lenders and CDCs. In addition, the Agency would benefit
from further defined standards, enforcement grounds, ranges of
enforcement actions and procedures for supervision and enforcement
actions for all SBA Lenders, Microloan Intermediaries and NTAPs.
Finally, the rules' additional requirements and lender oversight
provisions would provide improved and more timely lender monitoring to
ultimately further minimize the risks of losses in SBA's loan programs.
For 7(a) Lender specific sections, no additional reporting from
these lenders is required by the proposed rule, and therefore no
additional direct costs for assessment of any such reporting would be
incurred by SBA for provisions related to oversight functions in this
proposed rule.
For SBLCs, we estimate the proposed rule would require an
additional 3 hours financial analyst time at a $55 hourly rate to the
Federal government for each SBLC or 42 hours overall (3 x 14 SBLCs) for
an additional annual cost of $2,310 to the Federal government.
For NFRLs, the estimated annual cost to the Federal government
would be approximately 8 hours financial analyst time at a $55 hourly
rate. Therefore, estimated annual cost to the Federal government
related to oversight of all 58 NFRLs in accordance with this proposed
rule would be 688 hours for $25,520.
For CDCs, the estimated cost to the Federal government would be for
additional information collected approximated at 1 hour financial
analyst time for each CDC at a $55 hourly rate. The total additional
cost would be $14,850 (1 hr x 270 x $55). In lieu of existing baseline
cost of $14,850 (1 hr per CDC), the total cost would be $29,700.
For Microloan Intermediaries and NTAPs, no additional direct costs
to SBA would be incurred for the lender oversight functions and related
provisions in this proposed rule.
[[Page 61765]]
Any additional indirect cost to the Federal government for
oversight of the SBA Lenders, Microloan Intermediaries, and NTAPs under
this proposed rule would be covered by the already-existing OCRM infra-
structure.
8. Cost Basis
For purposes of this proposal, CPA and CFO salary rates used were
based on information published by the American Institute of Certified
Public Accountants (AICPA) for CPA-credentialed individuals (external
auditor or internal CFO) estimated at $100. The salary rates for
administrative professionals were based on information published by the
International Association of Administrative Professionals. Internal SBA
financial analyst time was estimated at GS-14 step 5 level of $99,203
plus 24.8% benefits allocation, or approximately $55 per hour.
SBA is requesting comments from the public on any monetized,
quantitative or qualitative costs of SBA Lenders, Microloan
Intermediary, or NTAP compliance with this proposed rule. Please send
comments to the SBA official referenced in the ADDRESSES section of the
preamble.
D. Alternatives
SBA believes that this proposed rule is SBA's best available means
for achieving its regulatory objective of incorporating coordinated
risk-based supervision and enforcement into SBA regulations and
implementing the provisions of Public Law 108-447 and SBA's Delegation
of Authority for lender oversight. SBA is requesting comments from the
public on any potentially effective and reasonably feasible alternative
to this proposed rule as it applies to SBA Lenders, Microloan
Intermediaries, and NTAPs and the costs and benefits of those
alternatives.
Executive Order 13132: For the purposes of Executive Order 13132,
the SBA determined that this rule has no federalism implications
warranting preparation of a federalism assessment.
Executive Order 12988: For the purposes of Executive Order 12988,
Civil Justice Reform, SBA has determined that this proposed rule is
crafted, to the extent practicable, in accordance with the standards
set forth in Sec. Sec. 3(a) and 3(b)(2), to minimize litigation,
eliminate ambiguity, and reduce burden. The proposed regulations would
provide for rights of appeal to SBA Lenders, Microloan Intermediaries,
and NTAPs in the event they are aggrieved by an Agency decision,
thereby limiting the possibility of litigation by these entities. This
proposed rule would not have retroactive or pre-emptive effect.
Regulatory Flexibility Act: This proposed rule directly affects all
SBA Lenders, Microloan Intermediaries, and NTAPs. There are
approximately 5,000 7(a) Lenders, 270 CDCs, 250 Microloan
Intermediaries, and there were 11 NTAPs participating with SBA funding
when NTAPs were last funded. SBA has determined that CDCs, Microloan
Intermediaries, and the 14 SBLCs fall under the size standard for NAICS
522298, All other Nondepository Credit Intermediation. The size
standard for NAICS 522298 is $6.5 million or less in average annual
receipts. There are approximately 58 NFRLs, most of which fall in NAICS
522298 (the rest fall into NAICS 522110, Commercial Banking). The
remaining 7(a) Lenders fall under the size standard for NAICS 522110,
Commercial Banking. The size standard for NAICS 522110 is assets of
$165 million or less. The NTAPs fall under the size standard for NAICS
541990, All Other Professional, Scientific and Technical Services. The
size Standard for NAICS 541611 is $6.5 million or less in average
annual receipts.
SBA estimates that over 95 percent of the CDCs and Microloan
Intermediaries do not exceed the applicable size standard and are,
therefore, considered small entities by this definition. Approximately
half of all of the 7(a) Lenders exceed the small business size standard
set for NAICS 522110. Thus, SBA has determined that this proposed rule
would have an impact on a substantial number of small entities.
However, for the reasons explained following, SBA does not believe that
the proposed rule will have a significant economic impact on those
entities.
The proposed rule would contain several different sections. For
clarity, SBA has analyzed the economic impact by section, as follows:
A. Proposed Reporting Requirements for SBA Supervised Lenders and
CDCs: There are 14 Small Business Lending Companies (SBLCs) and
approximately 58 NFRLs that are authorized to make 7(a) loans. The
majority of the NFRLs are nondepository commercial Lenders. Most of the
NFRLs are classified under NAICS 522298, which has a small business
size standard of $6.5 million or less in annual revenues. The remaining
NFRLs are classified under NAICS 522110, Commercial Banking, which has
a small business size standard of $165 million or less in assets.
Current regulations require SBLCs to submit their audited financial
statements to SBA within three months after the close of their fiscal
year. Financial statement submission allows SBA to perform a size
determination on SBLCs with a reasonable degree of accuracy. Based on
submitted financial statement, of the twelve active SBLCs, four exceed
the small business size standard for NAICS 522298.
Presently, there is no requirement that NFRLs submit financial
statements to SBA. Therefore, SBA does not have the information to
determine current average annual receipts. To estimate the size of the
NFRLs, SBA reviewed a sample of the financial statements that NFRLs had
submitted to SBA when they first applied for authorization to make 7(a)
loans. Based on a review of those financial statements, we estimate
that two-thirds of the NFRLs are small. Based on the financial data in
the NFRL applications and up-to-date financial data supplied by SBLCs
to SBA, SBA believes that the proposed rule would impact a substantial
number of these small entities, but not constitute a significant
economic impact, as detailed below.
The proposed rule, which defines ``SBA Supervised Lenders'' as
NFRLs and SBLCs, requires these Lenders to provide SBA with the
following information: (1) Annual audited financial statements, (2)
quarterly condition reports, (3) copies of any legal and administrative
proceedings by or against the SBA Supervised Lender, (4) copies of any
report furnished to its stockholders, (5) reports of changes in the SBA
Supervised Lender's organization or financing, (6) reports of changes
in the SBA Supervised Lender's financial condition, (7) notice of
change in auditors, (8) notice of capital impairment, (9) capital
restoration plans, (10) Other Regulated SBLC reports, (11) other
reports (that SBA may require from time to time) and (12)
certifications of compliance with capital requirement. Several of these
are already required of SBLCs. The proposed rule would also provide for
record retention requirements and recordkeeping of a capital adequacy
plan.
As is mentioned above, SBLCs are already required to submit audited
annual financial statements to SBA. It has been SBA's experience that
SBLCs and NFRLs also prepare quarterly financial statements on a
regular basis for their own internal management purposes, and SBA
believes that most of the NFRLs also prepare audited annual financial
statements for their internal management purposes. The proposed rule
would require both NFRLs and SBLCs to provide the SBA with copies of
their financial statements on a quarterly basis and would expand the
requirement for annual audited
[[Page 61766]]
financial statements submitted to SBA to include NFRLs. Existing
regulations also require SBLCs to maintain compliance with SBA capital
requirements. The proposed rule would expand the number of firms
subject to SBA's capital regulation by making NFRLs subject to certain
capital regulations. The proposed rule would also require SBA
Supervised Lenders to provide SBA with a quarterly certification that
they are in compliance with the SBA capital requirement. A certificate
of compliance with SBA capital regulations would normally be prepared
by a financial institution's chief financial officer or someone from
his staff under the proposed rule. SBA believes that it would take no
more than one hour per quarter to prepare and certify. The
certification could accompany quarterly condition reporting. In
accordance with the American Institute of Public Accountants published
surveys, the salary and benefits rate for a CPA-credentialed individual
is estimated at $100 per hour. This computes to an estimated annual
cost of $400 to cover the CFO's time. We estimate that the
administrative staff work involved in preparing the submission
materials would take no more than one hour for those quarters not
covered by the Annual Report. According to a recent survey published by
the International Association of Administrative Professionals, the
salary estimate is $30 per hour. This calculates to an annual expense
of $120 per year. The combined annual expense that SBA Supervised
Lenders would incur in order to comply with this reporting would be on
average $520 ($400 + $120). SBA does not believe that an additional
$520 cost annually constitutes significant economic impact on any of
these firms, which can routinely engage in financings in the million
dollar range. Therefore, SBA certifies that this aspect of the proposed
rule would not have a significant economic impact on a substantial
number of small entities.
Current regulations require that SBLCs submit copies of the
following to SBA: (1) Any legal and administrative proceedings by or
against them, (2) any reports it furnishes to its stockholders, and (3)
summaries of changes in the SBLCs organization and financing, (4)
notice of capital impairment, and (5) such other report it is required
by SBA to furnish on a specific matter. The proposed rule would extend
to NFRLs these ad hoc reporting requirements. SBA believes this data is
likely already collected and that similar documents are already
prepared by the NFRLs. The proposal only requires the NFRLs to submit
the documents to SBA. Because these are documents that are likely
already in the possession of the NFRLs, SBA does not believe that the
NFRLs would incur any significant costs to comply with the proposal.
SBA, therefore, certifies that this aspect of the proposed rule would
not have a significant economic impact on a substantial number of small
entities. However, SBA requests data from the public that would enable
SBA to determine any additional costs as a result of the proposed rule
to require reporting of these items.
The new reporting and recordkeeping requirements in the proposed
rule for SBA Supervised Lenders that have not yet been discussed would
occur on an ad hoc basis (e.g. change in financial condition). They
generally would be triggered by exceptional circumstances. Thus given
their ad hoc and exceptional nature, they would not likely have a
significant economic impact on a substantial number of small entities.
The proposed rule would require all CDC financial statements that
are filed with the CDC annual report submission to be audited.
Currently, under OMB approved information collection number 3245-0074,
SBA only requires CDCs with a 504 loan portfolio balance of $20 million
dollars or more to have the financial statements of be audited. (See
SBA Form 1253.) For CDCs with a 504 loan portfolio balance of less than
$20 million dollars, the financial statements currently need only be
reviewed by an independent CPA and be prepared in accordance with GAAP.
SBA is extending the audit requirement to all CDCs to facilitate a
better assessment of the performance and financial strength of all
CDCs. In addition, this requirement is part of SBA's incorporation of
Single Audit Act requirements into its regulations. SBA estimates that
at least 70 of the 270 CDCs already maintain audited financial
statements, SBA also estimates that the cost of auditing the financial
statements beyond the current review requirement for the estimated
remaining 200 is approximately $4,000 per CDC (based upon an average
additional 40 hours x $100 per hour of auditor time). This $4,000
annually is not an excessive cost for CDCs, all of which can routinely
engage in financings in the million dollar range. Based on this, SBA
certifies that the extension of this requirement would not likely have
a significant economic impact on a substantial number of small
entities.
B. Capital Adequacy: Only SBLCs are presently subject to the
minimum capital requirements currently found in 13 CFR 120.470. The
proposed rule would require SBLCs quarterly compliance with its minimum
capital requirement. It would also require that NFRLs provide the SBA
with a quarterly certification that they are in compliance with their
state regulator's minimum capital requirement. In addition, the
proposed rule would broaden the existing definition of capital, making
it more consistent with that of other Federal Financial Institution
Regulators, by allowing SBA Supervised Lenders to count retained
earnings towards their regulatory capital requirement. SBA asserts that
broadening the types of capital that are eligible towards the SBA
capital requirements would have no adverse financial impact on small
Lenders. In fact, allowing retained earnings to count toward an SBA
Supervised Lender's regulatory capital would allow those SBLCs with
significant retained earnings on their balance sheet to increase the
size of their 7(a) portfolio without necessitating any additional
injection of permanent capital. SBA, therefore, certifies that this
aspect of the rule will not have a significant economic impact on a
substantial number of small entities.
C. Enforcement Provisions: The proposed rule would list the types
of, grounds for, and procedures governing SBA enforcement actions
within consolidated enforcement regulations for all SBA Lenders,
Microloan Intermediaries, and NTAPs. The general enforcement provisions
for SBA Lenders, Microloan Intermediaries, and NTAPs follow, for the
most part, the same format that was established for the CDC program.
The enforcement provisions for SBA Supervised Lender specific and SBLC
specific actions follow recent legislation codified at 15 U.S.C. 650
et. seq. Because SBA anticipates that enforcement actions would occur
on an exception basis, SBA does not anticipate that these provisions
would have a significant economic impact on a substantial number of
small entities within the meaning of the Regulatory Flexibility Act, 5
U.S.C. 601-612. SBA, therefore, certifies that the proposed rule would
not have a significant impact on a substantial number of small
entities.
D. Bureau of PCLP Oversight: SBA proposes to establish the Bureau
of PCLP Oversight in accordance with statutory guidance to address
undercapitalization in the LLRFs of Premier Certified Lenders (PCLP
CDCs). Of the approximately 270 CDCs, less than 20 of them have PCLP
authority. These are generally the larger CDCs, with portfolios which
have a total outstanding portfolio balance of $5.1
[[Page 61767]]
billion. SBA, therefore, certifies that the proposed rule Bureau of
PCLP Oversight provision would not have a significant impact on a
substantial number of small entities.
Paperwork Reduction Act: SBA has determined that this proposed rule
would impose additional reporting and recordkeeping requirements under
the Paperwork Reduction Act, 44 U.S.C. Chapter 35. Specifically, SBA
would revise OMB approved information collection number 3245-0077 to
include NFRLs in SBA's current reporting requirements for SBLCs. SBA
would also revise 3245-0077 to add four reporting requirements for all
SBA Supervised Lenders and one reporting requirement just for SBLCs. In
addition, the proposed rule would also revise OMB approved information
collection number 3245-0074 to extend to all CDCs a certain requirement
in reporting that applied only to CDCs with 504 loan portfolio balances
of $20 million or more. Finally, the proposed rule would add a review/
examination reporting requirement.
Under the proposed rule, NFRLs, like SBLCs, would have to file (i)
Annual Reports (including audited financial statements); (ii) Reports
of Administrative and Legal Proceedings; (iii) Stockholder Reports;
(iv) Reports of Changes (in organization and financing); (v) notice of
capital impairment; and (vi) other reports as required by SBA. The new
reporting requirements would mean that both NFRLs and SBLCs would also
have to file: (i) Quarterly Condition Reports (including certain
certifications); (ii) Reports of Changes in Financial Condition (also
including certain certifications); (iii) notice of a change in
auditors; and (iv) Capital Restoration Plans, where applicable. In
addition, SBLCs eligible to be exempt from the SBLC supervision and
enforcement statutory provisions would have to report on direct
examination activity and regulation by Federal Financial Institution
Regulators or state banking regulators under proposed Sec. Sec.
120.1510 and 1511. Also, under the proposed rule, all CDC (not just
CDCs with a 504 loan portfolio of $20 million dollars or more) would be
required to have their annual financial statements that they submit to
SBA, to be audited. Finally, the proposed rule would provide for self-
assessments and corrective action plans, as applicable, for SBA
Lenders, Microloan Intermediaries and NTAPs.
This proposed rule would also extend SBLC recordkeeping
requirements to NFRLs in proposed Sec. 120.461 and would add a new
recordkeeping requirement for all SBA Supervised Lenders. Specifically
NFRLs, like SBLCs, would be required to retain a permanent record of
certain substantiating documents for the financial statements and
reports submitted to SBA. Such documents would include corporate
charters and bylaws, applications for eligibility determination,
capital stock certificates or stubs, general and subsidiary ledgers and
journals, stock ledgers, stock transfer registers, and all minute
books. The proposed rule would also require NFRLs, like SBLCs, to
retain all documents and materials related to or supporting an SBA
loan, such as applications for financing, participation and escrow
accounts, and financing instruments, for a period of 6 years following
final disposition of the loan. Many NFRLs may already retain much of
this information for other purposes.
Under the proposed rule, the new recordkeeping requirement would
apply to SBA Supervised Lenders. In particular, SBA Supervised Lenders
would be required to maintain a capital adequacy plan. Under proposed
Sec. 120.462, the capital adequacy plan would detail Board of Director
approved capital adequacy goals towards maintaining the financial
institution's financial strength.
The titles, descriptions of respondents and the information
collections are discussed below. In addition, SBA has provided an
estimate of the annual reporting and recordkeeping burdens.
SBA invites comments on: (1) Whether the proposed collection of
information is necessary for the proper performance of SBA's functions,
including whether the information would 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
through 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 Bryan Hooper, Associate Administrator for
Lender Oversight, Small Business Administration, 409 Third Street, SW.,
Washington, DC 20416.
I. SBA Supervised Lender Reporting and Recordkeeping Requirements
The following authorities, description of respondents, statement of
needs and purposes, and estimated hourly cost to respondents is
applicable to the reports and recordkeeping to be included in revision
to OMB approved information collection number 3245-0077 for SBA
Supervised Lenders.
Authority: SBA is authorized pursuant to 15 U.S.C. 650(a) and 15
U.S.C. 634(b)(7) to collect this information associated with examining
the safety and soundness of SBA Supervised Lenders.
Description of Respondents: The respondents for the below listed
information collections would consist of all SBA Supervised Lenders.
Currently there are approximately 100 (14 SBLCs and 58 NFRLs).
Statement of Needs and Purposes: The reports and recordkeeping
requirements would facilitate safety and soundness examinations and
appropriate supervision of SBA's licensed SBLCs and NFRLs. Annual and
interim financial information would be analyzed by program management
to timely assess SBA Supervised Lenders' financial strength, as well as
compliance, with relevant program regulations (e.g., capital and SBLC
licensing regulations). Other reporting requirements would update
program management on the operational status of the SBA Supervised
Lender and timely notify SBA of (i) changes in structure, personnel,
auditors, and financial condition and (ii) potential financial
exposure. Informed, SBA as supervisor and guarantor of 50 to 85% of an
SBA Supervised Lender's portfolio, could intervene (where appropriate)
to protect the interests of the United States.
Estimated Cost to Respondents: SBA estimates a cost of $10,390 per
SBA Supervised Lender (or approximately $748,080 for all SBA Supervised
Lenders; 14 SBLCs and 58 NFRLs) to comply with the below listed
information collections. The $10,390 per SBA Supervised Lender includes
$8,000 for the annual report audit (80 hours x $100 per hour) plus
$2,390 for staff time to support the information collections
survey of SBA Supervised Lenders. While a few of the information
collections, like the annual and quarterly condition reports are
required, most are ad hoc and occur on an exception basis. The hourly
costs are derived from salary and benefit rate
[[Page 61768]]
surveys of the AICPA and International Association of Administrative
Professionals. This $628,080 increase from the current OMB approved
collection is mainly attributable to the extension of the information
collection to the 58 NFRLs, and SBA also believes that this number will
be dramatically reduced to the extent that many or some of the NFRLs
already maintain this information for other purposes.
Below is a listing of those reports and recordkeeping requirements
that would be included in the revision to OMB approved information
collection number 3245-0077.
A. Annual Audit Report [No SBA Form Number]
Summary: The Annual Audited Report would primarily consist of an
SBA Supervised Lender's annual audited financial statements. The Annual
Report would be due to SBA within three months after the SBA Supervised
Lender's fiscal year end.
B. Legal and Administrative Proceedings [No SBA Form Number]
Summary: Under proposed Sec. 120.464(a)(3), each SBA Supervised
Lender would submit a report of any legal or administrative proceeding,
by or against the SBA Supervised Lender, or against any officer,
director or employee of the SBA Supervised Lender for an alleged breach
of official duty.
C. Stockholder Report [No SBA Form Number]
Summary: Under proposed Sec. 120.464(a)(4), all SBA Supervised
Lenders would be required to submit to SBA copies of any report or
publications concerning financial operations furnished to its
stockholders.
D. Report of Changes [No SBA Form Number]
Summary: Under the proposed Sec. 120.464(a)(5), all SBA Supervised
Lenders would be required to submit a copy of any changes in the SBA
Supervised Lender's organization or financing (e.g., change in type of
organization, acquisition by or change of parent, change in primary
financing entity, etc.).
E. Notice of Capital Impairment [No SBA Form Number]
Summary: Proposed Sec. 120.462(d) would require all SBA Supervised
Lenders to provide SBA prompt written notice of capital impairment.
F. Other Reports [No SBA Form Number]
Summary: Proposed rule Sec. 120.464(a)(5) would require all SBA
Supervised Lenders to submit such other reports as SBA may from time to
time require by written directive.
G. Quarterly Condition Report and Certifications [No SBA Form Number]
Summary: Under proposed Sec. 120.464(a)(2), all SBA Supervised
Lenders would be required to submit a Quarterly Condition Report to SBA
within 45 days following the end of each calendar quarter. The content
of the Quarterly Condition Report would include the SBA Supervised
Lender's interim financial statements, which may be internally
prepared. SBA Supervised Lenders would be required to apply uniform
definitions to categories of nonperforming loans and recovery amounts
on liquidated loans within the reports. The Quarterly Condition Report
would also contain a certification by the SBA Supervised Lender as to
compliance with laws, completeness, and accuracy and may contain a
certification as to capital requirement compliance.
H. Changes in Financial Condition Report [No SBA Form Number]
Summary: Proposed Sec. 120.464(a)(6) would require SBA Supervised
Lenders to file with SBA a report on any material change in financial
condition within ten days after management becomes aware of the
changes, except when reporting capital impairment under proposed Sec.
120.462(d).
I. Notice of Change in Auditor [No SBA Form Number]
Summary: Proposed Sec. 120.463(d) would require SBA Supervised
Lenders to notify SBA in writing if it discharged or changed auditors.
J. Capital Restoration Plan [No SBA Form Number]
Summary: Proposed Sec. 120.462(e) would require an SBA Supervised
Lender to file a written capital restoration plan with SBA generally
within 45 days of the date the SBA Supervised Lender receives or is
deemed to have received notice that it has not met its minimum capital
requirement.
K. Other Regulated SBLC Report [No SBA Form Number]
Summary: Proposed Sec. Sec. 120.1510 and 120.1511 would require
an SBLC that is directly examined by a Federal Financial Institution
Regulator or State banking regulator to certify to SBA in writing the
extent to which its lending activities are subject to such regulation.
It would also require such an Other Regulated SBLC to report to SBA on
its interactions with its Federal Financial Institution Regulator or
State banking regulator to the extent allowed by law.
L. Records Retention, In General
Summary: Proposed Sec. 120.461(b) and (c) require SBA Supervised
Lenders to maintain and preserve certain records with immediate
availability of specific documents (e.g. general and subsidiary
ledgers, general journals, bylaws, stock transfer ledgers). The
provision provides for electronic preservation, if the original is
available for retrieval within a reasonable period.
M. Capital Adequacy Plan
Summary: Proposed Sec. 120.462 would require SBA Supervised
Lenders' Board of Directors to determine capital adequacy goals and to
establish, adopt, and maintain a capital plan.
II. CDC Reporting Requirements
The following corresponds to the revisions to OMB approved
information collection number 3245-0074, CDC Annual Report Guide.
Authority: SBA is authorized to collect this information under 15
U.S.C. 687(f).
Description of Respondents: The respondents would consist of all
CDCs. Currently, there are approximately 270.
Estimated Cost to Respondents: SBA estimates a cost of $4,120 per
CDC (or approximately $1,112,400 for all CDCs) to comply with the
information collection as revised. The $4,120 cost per CDC includes
$4,000 for the elevated audit requirement (40 hours x $100 per