13 CFR Part 120 — Business Loans

PART 120—BUSINESS LOANS Authority: 15 U.S.C. 634(b) (6), (b) (7), (b) (14), (h), and note, 636(a), (h) and (m), 650, 687(f), 696(3) and (7), and 697(a) and (e); sec. 521, Pub. L. 114-113, 129 Stat. 2242; sec. 328(a), Pub. L. 116-260, 134 Stat. 1182. Source: 61 FR 3235, Jan. 31, 1996, unless otherwise noted. Editorial Note: Nomenclature changes to part 120 appear at 72 FR 50039, Aug. 30, 2007. General Descriptions of SBA's Business Loan Programs § 120.1 Which loan programs does this part cover? This part regulates SBA's financial assistance to small businesses under its general business loan programs (“7(a) loans”) authorized by section 7(a) of the Small Business Act (“the Act”), 15 U.S.C. 636(a), its microloan demonstration loan program (“Microloans”) authorized by section 7(m) of the Act, 15 U.S.C. 636(m), and its development company program (“504 loans”) authorized by Title V of the Small Business Investment Act, 15 U.S.C. 695 to 697f (“Title V”). These three programs constitute the business loan programs of the SBA. § 120.2 Descriptions of the business loan programs. (a) 7(a) loans. (i) A direct loan by SBA; (ii) An immediate participation loan by a Lender and SBA; or (iii) A guaranteed loan (deferred participation) by which SBA guarantees a portion of a loan made by a Lender. (2) A guaranteed loan is initiated by a Lender agreeing to make an SBA guaranteed loan to a small business and applying to SBA for SBA's guarantee under a blanket guarantee agreement (participation agreement) between SBA and the Lender. If SBA agrees to guarantee (authorizes) a portion of the loan, the Lender funds and services the loan. If the small business defaults on the loan, SBA's guarantee requires SBA to purchase its portion of the outstanding balance, upon demand by the Lender and subject to specific conditions. Regulations specific to 7(a) loans are found in subpart B of this part. (b) Microloans. (c) 504 loans. [61 FR 3235, Jan. 31, 1996, as amended at 76 FR 63545, Oct. 12, 2011] § 120.3 Pilot programs. The Administrator of SBA may from time to time suspend, modify, or waive rules for a limited period of time to test new programs or ideas. The Administrator shall publish a document in the Federal Register § 120.4 Severability. Any provision of this part held to be invalid or unenforceable as applied to any person, entity, or circumstance shall be construed so as to continue to give the maximum effect to such provision as permitted by law, including as applied to persons or entities not similarly situated or to dissimilar circumstances, unless such holding is that the provision of this part is invalid and unenforceable in all circumstances, in which event the provision shall be severable from the remainder of this part and shall not affect the remainder thereof. [89 FR 34101, Apr. 30, 2024] Definitions § 120.10 Definitions. The following terms have the same meaning wherever they are used in this part. Defined terms are capitalized wherever they appear. Acceptable Risk Rating Federal Register Associate. (i) An officer, director, key employee, or holder of 20 percent or more of the value of the Lender's or CDC's stock or debt instruments, or an agent involved in the loan process; or (ii) Any entity in which one or more individuals referred to in paragraphs (1)(i) of this definition or a Close Relative of any such individual owns or controls at least 20 percent. (2) An Associate of a small business is: (i) An officer, director, owner of more than 20 percent of the equity, or key employee of the small business; (ii) Any entity in which one or more individuals referred to in paragraphs (2)(i) of this definition owns or controls at least 20 percent; and (iii) Any individual or entity in control of or controlled by the small business (except a Small Business Investment Company (“SBIC”) licensed by SBA). (3) For purposes of this definition, the time during which an Associate relationship exists commences six months before the following dates and continues as long as the certification, participation agreement, or loan is outstanding: (i) For a CDC, the date of certification by SBA; (ii) For a Lender, the date of application for a loan guarantee on behalf of an applicant; or (iii) For a small business, the date of the loan application to SBA, the CDC, the Intermediary, or the Lender. Authorized CDC Liquidator Borrower Certified Development Company Close Relative Community Advantage Small Business Lending Company (Community Advantage SBLC) Federal Register Eligible Passive Company Federal Financial Institution Regulator Intermediary Lender or 7(a) Lender Lender Oversight Committee (LOC) Federal Register. Less Than Acceptable Risk Rating Federal Register Loan Instruments Loan Program Requirements or SBA Loan Program Requirements Federal Register Management Official Non-Federally Regulated Lender (NFRL) Operating Company Other Regulated SBLC Person Preference Rentable Property Risk Rating Federal Register Rural Area SBA Lender SBA Supervised Lender Service Provider Small Business Lending Company (SBLC) Federal Register SOPs http://www.sba.gov [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2117, Jan. 13, 1999; 68 FR 57980, Oct. 7, 2003; 72 FR 18360, Apr. 12, 2007; 73 FR 75510, Dec. 11, 2008; 76 FR 63545, Oct. 12, 2011; 85 FR 7647, Feb. 10, 2020; 85 FR 14780, Mar. 16, 2020; 85 FR 80588, Dec. 14, 2020; 87 FR 38908, June 30, 2022; 88 FR 21899, Apr. 12, 2023] Subpart A—Policies Applying to All Business Loans Eligibility Requirements § 120.100 What are the basic eligibility requirements for all applicants for SBA business loans? To be eligible for an SBA business loan, a small business applicant must: (a) Be an operating business (except for loans to Eligible Passive Companies); (b) Be organized for profit; (c) Be located in the United States; (d) Be small under the size requirements of part 121 of this chapter (including affiliates). See subpart H of this part for the size standards of part 121 of this chapter which apply only to 504 loans; and (e) Be able to demonstrate a need for the desired credit. § 120.101 Credit not available elsewhere. SBA provides business loan assistance only to applicants for whom the desired credit is not otherwise available on reasonable terms from non-Federal, non-State, and non-local government sources. Accordingly, SBA requires the Lender or CDC to certify or otherwise show that the desired credit is unavailable to the applicant on reasonable terms and conditions from non-Federal, non-State, and non-local government sources without SBA assistance, taking into consideration factors associated with conventional lending practices, including: The business industry of the loan applicant; whether the loan applicant has been in operation two years or less; the adequacy of collateral available to secure the loan; the loan term necessary to reasonably assure repayment of the loan from actual or projected business cash flow; and any other factor relating to the particular loan application that cannot be overcome except through obtaining a Federal loan guarantee under prudent lending standards. Submission of an application to SBA by a Lender or CDC constitutes certification by the Lender or CDC that it has examined the availability of credit to the applicant, has based its certification upon that examination, and has substantiation in its file to support the certification. [61 FR 3235, Jan. 31, 1996, as amended at 85 FR 14780, Mar. 16, 2020] § 120.102 [Reserved] § 120.104 Are businesses financed by SBICs eligible? SBA may make or guarantee loans to a business financed by an SBIC if SBA's collateral position will be superior to that of the SBIC. SBA may also make or guarantee a loan to an otherwise eligible small business which temporarily is owned or controlled by an SBIC under the regulations in part 107 of this chapter. SBA neither guarantees SBIC loans nor makes loans jointly with SBICs. § 120.105 Special consideration for veterans. SBA will give special consideration to a small business owned by a veteran or, if the veteran chooses not to apply, to a business owned or controlled by one of the veteran's dependents. If the veteran is deceased or permanently disabled, SBA will give special consideration to one survivor or dependent. SBA will process the application of a business owned or controlled by a veteran or dependent promptly, resolve close questions in the applicant's favor, and pay particular attention to maximum loan maturity. For SBA loans, a veteran is a person honorably discharged from active military service. Ineligible Businesses and Eligible Passive Companies § 120.110 What businesses are ineligible for SBA business loans? The following types of businesses are ineligible: (a) Non-profit businesses (for-profit subsidiaries are eligible); (b) Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances); (c) Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111); (d) Life insurance companies; (e) Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify); (f) Pyramid sale distribution plans; (g) Businesses deriving more than one-third of gross annual revenue from legal gambling activities; (h) Businesses engaged in any activity that is illegal under Federal, State, or local law; (i) Private clubs and businesses which limit the number of memberships for reasons other than capacity; (j) Government-owned entities (except for businesses owned or controlled by a Native American tribe); (k)-

(l) [Reserved] (m) Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans; (n) Businesses with an Associate who is currently incarcerated, serving a sentence of imprisonment imposed upon adjudication of guilty, or is under indictment for a felony or any crime involving or relating to financial misconduct or a false statement; (o) Businesses in which the Lender or CDC, or any of its Associates owns an equity interest; (p) Businesses which: (1) Present live performances of a prurient sexual nature; or (2) Derive directly or indirectly more than de minimis (q) Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss; (r) Businesses primarily engaged in political or lobbying activities; and (s) Speculative businesses (such as oil wildcatting). [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39502, Aug. 21, 2017; 87 FR 38908, June 30, 2022; 89 FR 34101, Apr. 30, 2024] § 120.111 What conditions must an Eligible Passive Company satisfy? An Eligible Passive Company must use loan proceeds only to acquire or lease, and/or improve or renovate, real or personal property (including eligible refinancing), that it leases to one or more Operating Companies for conducting the Operating Company's business, or to finance a change of ownership between the existing owners of the Eligible Passive Company. When the Operating Company is a co-borrower on the loan, loan proceeds also may be used by the Operating Company for working capital and/or the purchase of other assets, including intangible assets, for the Operating Company's use as provided in paragraph (a)(5) of this section. (References to Operating Company in paragraphs (a) and (b) of this section mean each Operating Company.) In the 504 loan program, if the Eligible Passive Company owns assets in addition to the real estate or other eligible long-term fixed assets, loan proceeds may not be used to finance a change of ownership between existing owners of the Eligible Passive Company unless the additional assets owned by the Eligible Passive Company are directly related to the real estate or other eligible long-term fixed assets, the amount attributable to the additional assets is de minimis, and the additional assets are excluded from the Project financing. Any ownership structure or legal form may qualify as an Eligible Passive Company. (a) Conditions that apply to all legal forms: (1) The Operating Company must be an eligible small business, and the proposed use of the proceeds must be an eligible use if the Operating Company were obtaining the financing directly; (2) The Eligible Passive Company (with the exception of a trust) and the Operating Company each must be small under the appropriate size standards in part 121 of this chapter; (3) The lease between the Eligible Passive Company and the Operating Company must be in writing and must be subordinate to SBA's mortgage, trust deed lien, or security interest on the property. The Eligible Passive Company (as landlord) must furnish as collateral for the loan an assignment of all rents paid under the lease. The rent or lease payments cannot exceed the amount necessary to make the loan payment to the lender, and an additional amount to cover the Eligible Passive Company's direct expenses of holding the property, such as maintenance, insurance and property taxes; (4) The lease between the Eligible Passive Company and the Operating Company, including options to renew exercisable solely by the Operating Company, must have a remaining term at least equal to the term of the loan; (5) The Operating Company must be a guarantor or co-borrower with the Eligible Passive Company. In a 7(a) loan that includes working capital and/or the purchase of other assets, including intangible assets, for the Operating Company's use, the Operating Company must be a co-borrower. (6) Each holder of an ownership interest constituting at least 20 percent of either the Eligible Passive Company or the Operating Company must guarantee the loan. The trustee shall execute the guaranty on behalf of any trust. When deemed necessary for credit or other reasons, SBA or, for a loan processed under an SBA Lender's delegated authority, the SBA Lender may require other appropriate individuals or entities to provide full or limited guarantees of the loan without regard to the percentage of their ownership interests, if any. (b) Additional conditions that apply to trusts. (1) The trustee has authority to act; (2) The trust has the authority to borrow funds, pledge trust assets, and lease the property to the Operating Company; (3) The trustee has provided accurate, pertinent language from the trust agreement confirming the above; and (4) The trustee has provided and will continue to provide SBA with a true and complete list of all trustors and donors. [61 FR 3235, Jan. 31, 1996; 61 FR 7986, Mar. 1, 1996, as amended at 64 FR 2117, Jan. 13, 1999; 77 FR 19533, Apr. 2, 2012; 82 FR 39502, Aug. 21, 2017; 87 FR 38908, June 30, 2022] Uses of Proceeds § 120.120 What are eligible uses of proceeds? A small business must use an SBA business loan for sound business purposes. (a) A Borrower may use loan proceeds from any SBA loan to: (1) Acquire land (by purchase or lease); (2) Improve a site (e.g., grading, streets, parking lots, landscaping), including up to 5 percent for community improvements such as curbs and sidewalks; (3) Purchase one or more existing buildings; (4) Convert, expand or renovate one or more existing buildings; (5) Construct one or more new buildings; and/or (6) Acquire (by purchase or lease) and install fixed assets (for a 504 loan, these assets must have a useful life of at least 10 years and be at a fixed location, although short-term financing for equipment, furniture, and furnishings may be permitted where essential to and a minor portion of the 504 Project). (b) A Borrower may also use 7(a) and microloan proceeds for: (1) Inventory; (2) Supplies; (3) Raw materials; and (4) Working capital (if the Operating Company is a co-borrower with the Eligible Passive Company, part of the loan proceeds may be applied for working capital and/or the purchase of other assets, including intangible assets, for use by the Operating Company). (c) A Borrower may use 7(a) loan proceeds for refinancing certain outstanding debts. [61 FR 3235, Jan. 31, 1996, as amended at 77 FR 19533, Apr. 2, 2012; 88 FR 21899, Apr. 12, 2023] § 120.130 Restrictions on uses of proceeds. SBA will not authorize nor may a Borrower use loan proceeds for the following purposes (including the replacement of funds used for any such purpose): (a) Payments, distributions, or loans to Associates of the applicant (except for ordinary compensation for services rendered or to facilitate changes of ownership in accordance with § 120.202); (b) Refinancing a debt owed to a Small Business Investment Company (“SBIC”) or a New Markets Venture Capital Company (“NMVCC”); (c) Floor plan financing or other revolving line of credit, except under § 120.340 or § 120.390; (d) Investments in real or personal property acquired and held primarily for sale, lease, or investment (except for a loan to an Eligible Passive Company or to a small contractor under § 120.310); (e) The applicant may not use any of the proceeds to pay past-due Federal, state, or local payroll taxes, sales taxes, or other similar taxes that are required to be collected by the applicant and held in trust on behalf of a Federal, state, or local government entity. (f) A purpose which does not benefit the small business; or (g) Any use restricted by §§ 120.201 and 120.884 (specific to 7(a) loans and 504 loans respectively). [61 FR 3235, Jan. 31, 1996, as amended at 76 FR 9218, Feb. 17, 2011; 76 FR 63545, Oct. 12, 2011; 82 FR 39502, Aug. 21, 2017; 85 FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020; 88 FR 21085, Apr. 10, 2023] § 120.131 Leasing part of new construction or existing building to another business. (a) If the SBA financing (whether 7(a) or 504) is for the construction of a new building, a Borrower may permanently lease up to 20 percent of the Rentable Property to one or more tenants if the Borrower permanently occupies and uses no less than 60 percent of the Rentable Property, and plans to permanently occupy and use within three years some of the remaining space not immediately occupied and not permanently leased and plans to permanently occupy and use within ten years all of the remaining space not permanently leased. If the Borrower is an Eligible Passive Company which leases 100 percent of the new building's space to one or more Operating Companies, the Operating Company, or Operating Companies together, must follow the same rules set forth in this paragraph. (b) If the SBA financing (whether 7(a) or 504) is for the acquisition, renovation, or reconstruction of an existing building, the Borrower may permanently lease up to 49 percent of the Rentable Property if the Borrower permanently occupies and uses no less than 51 percent of the Rentable Property. If the Borrower is an Eligible Passive Company which leases 100 percent of the space of the existing building to one or more Operating Companies, the Operating Company, or Operating Companies together, must follow the same rules set forth in this paragraph. [68 FR 51679, Aug. 28, 2003] Ethical Requirements § 120.140 What ethical requirements apply to participants? Lenders, Intermediaries, and CDCs (in this section, collectively referred to as “Participants”), must act ethically and exhibit good character. Ethical indiscretion of an Associate of a Participant or a member of a CDC will be attributed to the Participant. A Participant must promptly notify SBA if it obtains information concerning the unethical behavior of an Associate. The following are examples of such unethical behavior. A Participant may not: (a) Self-deal; (b) Have a real or apparent conflict of interest with a small business with which it is dealing (including any of its Associates or an Associate's Close Relatives) or SBA; (c) Own an equity interest in a business that has received or is applying to receive SBA financing (during the term of the loan or within 6 months prior to the loan application); (d) Be incarcerated, on parole, or on probation; (e) Knowingly misrepresent or make a false statement to SBA; (f) Engage in conduct reflecting a lack of business integrity or honesty; (g) Be a convicted felon, or have an adverse final civil judgment (in a case involving fraud, breach of trust, or other conduct) that would cause the public to question the Participant's business integrity, taking into consideration such factors as the magnitude, repetition, harm caused, and remoteness in time of the activity or activities in question; (h) Accept funding from any source that restricts, prioritizes, or conditions the types of small businesses that the Participant may assist under an SBA program or that imposes any conditions or requirements upon recipients of SBA assistance inconsistent with SBA's loan programs or regulations; (i) Fail to disclose to SBA all relationships between the small business and its Associates (including Close Relatives of Associates), the Participant, and/or the lenders financing the Project of which it is aware or should be aware; (j) Fail to disclose to SBA whether the loan will: (1) Reduce the exposure of a Participant or an Associate of a Participant in a position to sustain a loss; (2) Directly or indirectly finance the purchase of real estate, personal property or services (including insurance) from the Participant or an Associate of the Participant; (3) Repay or refinance a debt due a Participant or an Associate of a Participant; or (4) Require the small business, or an Associate (including Close Relatives of Associates), to invest in the Participant (except for institutions which require an investment from all members as a condition of membership, such as a Production Credit Association); (k) Issue a real estate forward commitment to a builder or developer; or (l) Engage in any activity which taints its objective judgment in evaluating the loan. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57980, Oct. 7, 2003] Credit Criteria for SBA Loans § 120.150 What are SBA's lending criteria? The applicant (including an Operating Company) must be creditworthy. Loans must be so sound as to reasonably assure repayment. Lenders and CDCs must use appropriate and prudent generally acceptable commercial credit analysis processes and procedures consistent with those used for their similarly-sized, non-SBA guaranteed commercial loans. Lenders, CDCs, and SBA may use a business credit scoring model. When approving direct or guaranteed loans, Lenders, CDCs, and SBA may consider (as applicable) the following criteria: credit score or credit history of the applicant (and the Operating Company, if applicable), its Associates and any guarantors; the earnings or cashflow of applicant; or where applicable any equity or collateral of the applicant. [88 FR 21085, Apr. 10, 2023] § 120.151 What is the statutory limit for total loans to a Borrower? The aggregate amount of the SBA portions of all loans to a single Borrower, including the Borrower's affiliates as defined in § 121.301(f) of this chapter, must not exceed a guaranty amount of $3,750,000, except as otherwise authorized by statute for a specific program. The maximum loan amount for any one 7(a) loan is $5,000,000. The amount of any loan received by an Eligible Passive Company applies to the loan limit of both the Eligible Passive Company and the Operating Company. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 51680, Aug. 28, 2003; 76 FR 63546, Oct. 12, 2011; 81 FR 41428, June 27, 2016] § 120.160 Loan conditions. The following requirements are normally required by SBA for all business loans: (a) Personal guarantees. (b) Appraisals. (c) Hazard Insurance. [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39502, Aug. 21, 2017; 88 FR 21085, Apr. 10, 2023] Requirements Imposed Under Other Laws and Orders § 120.170 Flood insurance. Under the Flood Disaster Protection Act of 1973 (Sec. 205(b) of Pub. L. 93-234; 87 Stat. 983 (42 U.S.C. 4000 et seq. § 120.171 Compliance with child support obligations. Any holder of 50% or more of the ownership interest in the recipient of an SBA loan must certify that he or she is not more than 60 days delinquent on any obligation to pay child support arising under: (a) An administrative order; (b) A court order; (c) A repayment agreement between the holder and a custodial parent; or (d) A repayment agreement between the holder and a State agency providing child support enforcement services. § 120.172 Flood-plain and wetlands management. (a) All loans must conform to requirements of Executive Orders 11988, “Flood Plain Management” (3 CFR, 1977 Comp., p. 117) and 11990, “Protection of Wetlands” (3 CFR, 1977 Comp., p. 121). Lenders, Intermediaries, CDCs, and SBA must comply with requirements applicable to them. Applicants must show: (1) Whether the location for which financial assistance is proposed is in a floodplain or wetland; (2) If it is in a floodplain, that the assistance is in compliance with local land use plans; and (3) That any necessary construction or use permits will be issued. (b) Generally, there is an 8-step decision making process with respect to: (1) Construction or acquisition of anything, other than a building; (2) Repair and restoration equal to more than 50% of the market value of a building; or (3) Replacement of destroyed structures. (c) SBA may determine for the following types of actions, on a case-by-case basis, that the full 8-step process is not warranted and that only the first step (determining if a proposed action is in the base floodplain) need be completed: (1) Actions located outside the base floodplain; (2) Repairs, other than to buildings, that are less than 50% of the market value; (3) Replacement of building contents, materials, and equipment; (4) Hazard mitigation measures; (5) Working capital loans; or (6) SBA loan assistance of $1,500,000 or less. § 120.174 Earthquake hazards. When loan proceeds are used to construct a new building or an addition to an existing building, the construction must conform with the “National Earthquake Hazards Reduction Program (“NEHRP”) Recommended Provisions for the Development of Seismic Regulations for New Buildings” (which can be obtained from the Federal Emergency Management Agency, Publications Office, Washington, DC) or a code identified by SBA as being substantially equivalent. § 120.175 Coastal barrier islands. SBA and Intermediaries may not make or guarantee any loan within the Coastal Barrier Resource System. § 120.176 Compliance with other laws. All SBA loans are subject to all applicable laws, including (without limitation) the civil rights laws ( see Applicability and Enforceability of Loan Program Requirements § 120.180 Compliance with Loan Program Requirements. SBA Lenders and Intermediaries must comply and maintain familiarity with Loan Program Requirements for the 7(a) Loan Program, 504 Loan Program, and the Microloan Program, as applicable, and as such requirements are revised from time to time. Loan Program Requirements in effect at the time that an SBA Lender or Intermediary takes an action in connection with a particular loan govern that specific action. For example, although loan closing requirements in effect when an SBA Lender closes a loan will govern the closing actions, an SBA Lender's liquidation actions on the same loan are subject to the liquidation requirements in effect at the time that a liquidation action is taken. An SBA Lender or Intermediary must maintain sufficient documentation to demonstrate that Loan Program Requirements have been satisfied. [85 FR 14781, Mar. 16, 2020] § 120.181 Status of Lenders and CDCs. Lenders, CDCs and their contractors are independent contractors that are responsible for their own actions with respect to a 7(a) or 504 loan. SBA has no responsibility or liability for any claim by a borrower, guarantor or other party alleging injury as a result of any allegedly wrongful action taken by a Lender, CDC or an employee, agent, or contractor of a Lender or CDC. [72 FR 18360, Apr. 12, 2007] Loan Applications § 120.190 Where does an applicant apply for a loan? An applicant for a business loan should apply to: (a) A Lender for a guaranteed or immediate participation loan; (b) A CDC for a 504 loan; (c) An Intermediary for a Microloan; or (d) SBA for a direct loan. § 120.191 The contents of a business loan application. For most business loans, SBA requires that an application for a business loan contain, among other things, a description of the history and nature of the business, the amount and purpose of the loan, the collateral offered for the loan, current financial statements, historical financial statements (or tax returns if appropriate) for the past three years, IRS tax verification, and a business plan, when applicable. Personal histories and financial statements will be required from principals of the applicant (and the Operating Company, if applicable). § 120.192 Approval or denial. Applicants receive notice of approval or denial by the Lender, CDC, Intermediary, or SBA, as appropriate. Notice of denial will include the reasons. [61 FR 3235, Jan. 31, 1996, as amended at 88 FR 21899, Apr. 12, 2023] § 120.193 Reconsideration after denial. An applicant or recipient of a business loan may request reconsideration of a denied loan or loan modification request within 6 months of denial. Applicants denied due to a size determination can appeal that determination under part 121 of this chapter. All others must be submitted to the office that denied the original request. To prevail, the applicant must demonstrate that it has overcome all legitimate reasons for denial. Six months after denial, a new application is required. If the reconsideration is denied, a second and final reconsideration may be considered by the Director, Office of Financial Assistance (D/FA) or designee(s), whose decision is final. The SBA Administrator, solely within the Administrator's discretion, may choose to review the matter and make the final decision. Such discretionary authority of the Administrator does not create additional rights of appeal on the part of an applicant not otherwise specified in SBA regulations. [61 FR 3235, Jan. 31, 1996, as amended at 88 FR 21085, Apr. 10, 2023] Computerized SBA Forms § 120.194 [Reserved] Reporting § 120.195 Disclosure of fees. An Applicant for a business loan must identify to SBA the name of each Agent as defined in part 103 of this chapter that helped the applicant obtain the loan, describing the services performed, and disclosing the amount of each fee paid or to be paid by the applicant to the Agent in conjunction with the performance of those services. § 120.197 Notifying SBA's Office of Inspector General of suspected fraud. Lenders, CDCs, Borrowers, and others must notify the SBA Office of Inspector General of any information which indicates that fraud may have occurred in connection with a 7(a) or 504 loan. Send the notification to the Assistant Inspector General for Investigations, Office of Inspector General, U.S. Small Business Administration, 409 3rd Street, SW., Washington, DC 20416. [72 FR 18360, Apr. 12, 2007] Subpart B—Policies Specific to 7(a) Loans Bonding Requirements § 120.200 What bonding requirements exist during construction? On 7(a) loans which finance construction, the Borrower must supply a 100 percent payment and performance bond and builder's risk insurance, unless waived by SBA. Limitations on Use of Proceeds § 120.201 Refinancing unsecured or undersecured loans. A Borrower may not use 7(a) loan proceeds to pay any creditor in a position to sustain a loss causing a shift to SBA of all or part of a potential loss from an existing debt. § 120.202 Loans for changes of ownership. A Borrower may use 7(a) loan proceeds to purchase a portion of or the entirety of an owner's interest in a business, or a portion of or the entirety of a business itself. [88 FR 21086, Apr. 10, 2023] Maturities; Interest Rates; Loan and Guarantee Amounts § 120.210 What percentage of a loan may SBA guarantee? SBA's guarantee percentage must not exceed the applicable percentage established in section 7(a) of the Act. The maximum allowable guarantee percentage on a loan will be determined by the loan amount. Loans of $150,000 or less may receive a maximum guaranty of 85 percent. Loans more than $150,000 may receive a maximum guaranty of 75 percent, except as otherwise authorized by law. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 51680, Aug. 28, 2003; 76 FR 63546, Oct. 12, 2011] § 120.211 What limits are there on the amounts of direct loans? (a) The statutory limit for direct loans made under the authority of section 7(a)(1)-(19) of the Small Business Act is $350,000. SBA has established an administrative limit of $150,000 for direct loans. The D/FA may authorize acceptance of an application up to the statutory limit. (b) The statutory limit for direct loans made under the authority of section 7(a)(20) is $750,000. SBA has established an administrative limit of $150,000. The Associate Administrator for Business Development may authorize the acceptance of an application that exceeds the administrative limit. (c) The statutory limit on SBA's portion of an immediate participation loan is $350,000. The administrative limit is the lesser of 75 percent of the loan or $150,000. The D/FA may authorize exceptions to the administrative limit up to $350,000. [61 FR 3235, Jan. 31, 1996, as amended at 74 FR 45753, Sept. 4, 2009] § 120.212 What limits are there on loan maturities? The term of a loan shall be: (a) The shortest appropriate term, depending upon the Borrower's ability to repay; (b) Ten years or less, unless it finances or refinances real estate or equipment with a useful life exceeding ten years. The term for a loan to finance equipment and/or leasehold improvements may include an additional reasonable period, not to exceed 12 months, when necessary to complete the installation of the equipment and/or complete the leasehold improvements. (c) A maximum of 25 years, including extensions. (A portion of a loan used to acquire or improve real property may have a term of 25 years plus an additional period needed to complete the construction or improvements.) [61 FR 3235, Jan. 31, 1996, as amended at 87 FR 38908, June 30, 2022] § 120.213 What fixed interest rates may a Lender charge? (a) Fixed Rates for Guaranteed Loans. Federal Register. (b) Direct loans. Federal Register. § 120.214 What conditions apply for variable interest rates? A Lender may use a variable rate of interest for guaranteed loans under the following conditions: (a) Frequency. (b) Range of fluctuation. (c) Base rate. Federal Register. Federal Register (d) Maximum Allowable Variable Interest Rates. (1) For all 7(a) loans of $50,000 and less, the interest rate shall not exceed six and a half (6.5) percentage points over the base rate; (2) For all 7(a) loans of more than $50,000 and up to and including $250,000, the maximum interest rate shall not exceed six (6.0) percentage points over the base rate; (3) For all 7(a) loans of more than $250,000 and up to and including $350,000, the maximum interest rate shall not exceed four and a half (4.5) percentage points over the base rate; and (4) For all 7(a) loans of more than $350,000, the maximum interest rate shall not exceed three (3.0) percentage points over the base rate. (e) Amortization. [61 FR 3235, Jan. 31, 1996, as amended at 73 FR 67101, Nov. 13, 2008; 87 FR 38908, June 30, 2022] Fees for Guaranteed Loans § 120.220 Fees that Lender pays SBA. A Lender must pay a guaranty fee to SBA for each loan it makes. If the guarantee fee is not paid, SBA may terminate the guarantee. Acceptance of the guaranty fee by SBA does not waive any right of SBA arising from a Lender's negligence, misconduct or violation of any provision of these regulations or the guaranty agreement or other loan documents. (a) Amount of guaranty fee In general. 1/4 (i) Not more than 2 percent of the guaranteed portion of a loan if the total amount of the loan is not more than $150,000; (ii) Not more than 3 percent of the guaranteed portion of a loan if the total amount of the loan is more than $150,000 but not more than $700,000; (iii) Except as provided in paragraph (a)(1)(iv) of this section, not more than 3.5 percent of the guaranteed portion of a loan if the total amount of the loan is more than $700,000; and (iv) An additional 0.25 percent of the guaranteed portion of a loan if the total amount of the loan is more than $1,000,000. (2) For loans approved October 1, 2002, through September 30, 2004. 1/4 (i) 1 percent of the guaranteed portion of the loan if the total loan amount is not more than $150,000, (ii) 2.5 percent of the guaranteed portion of a loan if the total loan amount is more than $150,000, but not more than $700,000, and (iii) 3.5 percent of the guaranteed portion if the total loan amount is more than $700,000. (3) For loans approved under section 7(a)(31) of the Small Business Act (SBA Express loans) to veterans and/or the spouse of a veteran. (b) When the guaranty fee is payable. (c) Refund of guaranty fee. (d) Lender's retention of portion of guaranty fee. (e) If the guarantee fee is not paid, SBA may terminate the guarantee. The Borrower may use working capital loan proceeds to reimburse the Lender for the guarantee fee. Acceptance of the guarantee fee by SBA shall not waive any right of SBA arising from the Lender's misconduct or violation of any provision of this part, the guarantee agreement or other loan documents. (f) Lender's annual service fee payable to SBA In general. (2) For loans approved from October 1, 2002, through September 30, 2004. [61 FR 3235, Jan. 31, 1996; 61 FR 11471, Mar. 20, 1996, as amended at 68 FR 51680, Aug. 28, 2003; 68 FR 56554, Oct. 1, 2003; 76 FR 63546, Oct. 12, 2011; 82 FR 39502, Aug. 21, 2017; 87 FR 38908, June 30, 2022; 88 FR 21899, Apr. 12, 2023] § 120.221 Fees and expenses that the Lender may collect from a loan applicant or Borrower. Unless otherwise allowed by SBA Loan Program Requirements, the Lender may charge and collect from the applicant or Borrower only the following fees and expenses: (a) Service and packaging fees. (b) Extraordinary servicing. (c) Out-of-pocket expenses. (d) Late payment fee. (e) Legal services. [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39503, Aug. 21, 2017; 85 FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020] § 120.222 Prohibition on sharing premiums for secondary market sales. The Lender or its Associates may not share any premium received from the sale of an SBA guaranteed loan in the secondary market with a Service Provider, packager, or other loan-referral source. [82 FR 39503, Aug. 21, 2017, as amended at 85 FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020; 87 FR 38908, June 30, 2022] § 120.223 Subsidy recoupment fee payable to SBA by Borrower. (a) The subsidy recoupment fee is payable to SBA when: (1) Loan has a maturity of 15 years or more. (2) Borrower makes a voluntary prepayment (or several prepayments in the aggregate) during any one of the first three successive 12 month periods following the first disbursement of the loan. Prepayment is defined as a payment of principal in excess of the amount due according to the amortization schedule. (3) The prepayment (or several prepayments in the aggregate) is more than 25 percent of the highest outstanding principal balance of the loan in any one of the first three successive 12 month periods following the first disbursement. (b) When all the conditions above exist, the following subsidy recoupment fees apply: (1) If the prepayment is made during the first 12 month period after first disbursement, the charge is 5 percent of the total amount of all prepayments made during such period; (2) If the prepayment is made during the second 12 month period after first disbursement, the charge is 3 percent of the total amount of all prepayments made during that period; and (3) If the prepayment is made during the third 12 month period after first disbursement, the charge is 1 percent of the total amount of all prepayments made during that period. [68 FR 51680, Aug. 28, 2003] Subpart C—Special Purpose Loans § 120.300 Statutory authority. Congress has authorized several special purpose programs in various subsections of section 7(a) of the Act. Generally, 7(a) loan policies, eligibility requirements and credit criteria enumerated in subpart B of this part apply to these programs. The sections of this subpart prescribe the special conditions applying to each special purpose program. As with other business loans, special purpose loans are available only to the extent funded by annual appropriations. Disabled Assistance Loan Program (DAL) § 120.310 What assistance is available for the disabled? Section 7(a)(10) of the Act authorizes SBA to guarantee or make direct loans to the disabled. SBA distinguishes two kinds of assistance: (a) DAL-1. (b) DAL-2. (1) Small businesses wholly owned by disabled individuals; and (2) Disabled individuals to establish, acquire, or operate a small business. § 120.311 Definitions. (a) Organization for the disabled (1) Is organized under federal or state law to operate in the interest of disabled individuals; (2) Is non-profit; (3) Employs disabled individuals for seventy-five percent of the time needed to produce commodities or services for sale; and (4) Complies with occupational and safety standards prescribed by the Department of Labor. (b) Disabled individual § 120.312 DAL-1 use of proceeds and other program conditions. (a) DAL-1 applicants must submit appropriate documents to establish program eligibility. (b) Generally, applicants may use loan proceeds for any 7(a) loan purposes. Loan proceeds may not be used: (1) To purchase or construct facilities if construction grants and mortgage assistance are available from another Federal source; or (2) For supportive services (expenses incurred by a DAL-1 organization to subsidize wages of low producers, health and rehabilitation services, management, training, education, and housing of disabled workers). (c) SBA does not consider a DAL-1 organization to have a conflict of interest if one or more of its Associates is an Associate of the Lender. § 120.313 DAL-2 use of proceeds and other program conditions. (a) The DAL-2 loan proceeds may be used for any 7(a) loan purposes. (b) An applicant may use DAL-2 loan proceeds to acquire an eligible small business without complying with the change of ownership conditions in § 120.202. (c) A DAL-2 applicant must submit evidence from a physician, psychiatrist, or other qualified professional as to the permanent nature of the disability and the limitation it places on the applicant. § 120.314 Resolving doubts about creditworthiness. For the purpose of the DAL Program, SBA shall resolve doubts concerning the creditworthiness of an applicant in favor of the applicant. However, the applicant must present satisfactory evidence of repayment ability. Personal guarantees of Associates are not required for purposes of DAL-1 financial assistance. § 120.315 Interest rate and loan limit. The interest rate on direct DAL loans is three percent. There is an administrative limit of $150,000 on a direct DAL loan. Businesses Owned by Low Income Individuals § 120.320 Policy. Section 7(a)(11) of the Act authorizes SBA to guarantee or make direct loans to establish, preserve or strengthen small business concerns: (a) Located in an area having high unemployment according to the Department of Labor; (b) Located in an area in which a high percentage of individuals have a low income inadequate to satisfy basic family needs; and (c) More than 50 percent owned by low income individuals. Energy Conservation § 120.330 Who is eligible for an energy conservation loan? SBA may make or guarantee loans to assist a small business to design, engineer, manufacture, distribute, market, install, or service energy devices or techniques designed to conserve the Nation's energy resources. § 120.331 What devices or techniques are eligible for a loan? Eligible energy conservation devices or techniques include: (a) Solar thermal equipment; (b) Photovoltaic cells and related equipment; (c) A product or service which increases the energy efficiency of existing equipment, methods of operation or systems which use fossil fuels, and which is on the Energy Conservation Measures list of the Secretary of Energy; (d) Equipment producing energy from wood, biological waste, grain or other biomass energy sources; (e) Equipment for cogeneration of energy, district heating or production of energy from industrial waste; (f) Hydroelectric power equipment; (g) Wind energy conversion equipment; and (h) Engineering, architectural, consulting, or other professional services necessary or appropriate for any of the devices or techniques in paragraphs (a) through (g) of this section. § 120.332 What are the eligible uses of proceeds? (a) Acquire property. (b) Research and development. (1) Of an existing product or service; or (2) A new product or service. (c) Working capital. § 120.333 Are there any special credit criteria? In addition to regular credit evaluation criteria, SBA shall weigh the greater risk associated with energy projects. SBA shall consider such factors as quality of the product or service, technical qualifications of the applicant's management, sales projections, and financial status. Export Working Capital Program (EWCP) § 120.340 What is the Export Working Capital Program? Under the EWCP, SBA guarantees short-term working capital loans made by participating lenders to exporters (section 7(a)(14) of the Act). Loan maturities may be for up to three years with annual renewals. Proceeds can be used only to finance export transactions. Loans can be for single or multiple export transactions. An export transaction is the production and payment associated with a sale of goods or services to a foreign buyer. The maximum loan amount for any one EWCP loan is $5,000,000. EWCP loans shall receive a guaranty of 90 percent, not to exceed $4,500,000. [61 FR 3235, Jan. 31, 1996, as amended at 76 FR 63546, Oct. 12, 2011] § 120.341 Who is eligible? In addition to the eligibility criteria applicable to all 7(a) loans, an applicant must be in business for one full year at the time of application, but not necessarily in the exporting business. SBA may waive this requirement if the applicant has sufficient export trade experience or other managerial experience. § 120.342 What are eligible uses of proceeds? Loan proceeds may be used: (a) To acquire inventory; (b) To pay the manufacturing costs of goods for export; (c) To purchase goods or services for export; (d) To support standby letters of credit; (e) For pre-shipment working capital; and (f) For post-shipment foreign accounts receivable financing. § 120.343 Collateral. A Borrower must give SBA a first security interest sufficient to cover 100 percent of the EWCP loan amount (such as insured accounts receivable or letters of credit). Collateral must be located in the United States, its territories or possessions. § 120.344 Unique requirements of the EWCP. (a) An applicant must submit cash flow projections to support the need for the loan and the ability to repay. After the loan is made, the loan recipient must submit continual progress reports. (b) SBA does not limit the amount of extraordinary servicing fees, as referenced in § 120.221(b), under the EWCP. (c) SBA does not prescribe the interest rates for the EWCP, but will monitor these rates for reasonableness. [61 FR 3235, Jan. 31, 1996, as amended at 85 FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020] International Trade Loans § 120.345 Policy. Section 7(a)(16) of the Act authorizes SBA to guarantee loans to small businesses that are: (a) Engaged or preparing to engage in international trade; or (b) Adversely affected by import competition. § 120.346 Eligibility. (a) An applicant must establish that: (1) The loan proceeds will significantly expand an existing export market or develop new export markets; or (2) The applicant business is adversely affected by import competition; and (3) The loan will improve the applicant's competitive position. (b) The applicant must have a business plan reasonably supporting its projected export sales. [61 FR 3235, Jan. 31, 1996, as amended at 76 FR 63546, Oct. 12, 2011] § 120.347 Use of proceeds. The Borrower may use loan proceeds to acquire, construct, renovate, modernize, improve, or expand facilities and equipment to be used in the United States to produce goods or services involved in international trade, and to develop and penetrate foreign markets. The Borrower may also use proceeds in the refinancing of existing indebtedness that is not structured with reasonable terms and conditions, including any debt that qualifies for refinancing under 7(a) Loan Program Requirements, and to provide working capital. [61 FR 3235, Jan. 31, 1996, as amended at 76 FR 63546, Oct. 12, 2011] § 120.348 Amount of guarantee. The maximum loan amount for any one International Trade (IT) loan is $5,000,000. IT loans may receive a maximum guaranty of 90 percent or $4,500,000, except that the maximum guaranty amount for any working capital component of an IT loan is limited to $4,000,000. To the extent that the Borrower has a separate EWCP loan or any other 7(a) loan for working capital, the guaranty amount for the other loan is counted against the $4,000,000 guaranty limit for the IT loan. [76 FR 63546, Oct. 12, 2011] § 120.349 Collateral. Each IT loan must be secured either by a first lien position or first mortgage on the property or equipment financed by the IT loan or on other assets of the Borrower, except that an IT loan may be secured by a second lien position on the property or equipment financed by the IT loan or on other assets of the Borrower, if the SBA determines the second lien position provides adequate assurance of the payment of the IT loan. [76 FR 63546, Oct. 12, 2011] Qualified Employee Trusts (ESOP) § 120.350 Policy. Section 7(a)(15) of the Act authorizes SBA to guarantee a loan to a: (a) Qualified employee trust (“ESOP”) to: (1) Help finance the growth of its employer's small business; or (2) Purchase ownership or voting control of the employer; and a (b) Small business concern, if the proceeds from the loan are only used to make a loan to a qualified employee trust that results in the qualified employee trust owning at least 51 percent of the small business concern. [87 FR 38908, June 30, 2022] § 120.351 Definitions. All terms specific to ESOPs have the same definition for purposes of this section as in the Internal Revenue Service (IRS) Code (title 26 of the United States Code) or regulations (26 CFR chapter I). § 120.352 Use of proceeds. Loan proceeds may be used for: (a) Qualified employee trust. (1) Qualified employer securities. (2) Control of employer. (b) Small business concern. [87 FR 38908, June 30, 2022] § 120.353 Eligibility. SBA may assist a qualified employee trust (or equivalent trust) that meets the requirements and conditions for an ESOP prescribed in all applicable IRS, Treasury and Department of Labor (DOL) regulations. In addition, the following conditions apply: (a) The small business must provide the funds needed by the trust to repay the loan; and (b) The small business must provide adequate collateral. § 120.354 Creditworthiness. In determining repayment ability, SBA shall not consider the personal assets of the employee-owners of the trust. SBA shall consider the earnings history and projected future earnings of the employer small business. SBA may consider the business and management experience of the employee-owners. Veterans Loan Program § 120.360 Which veterans are eligible? SBA may guarantee or make direct loans to a small business 51 percent owned by one or more of the following eligible veterans: (a) Vietnam-era veterans who served for a period of more than 180 days between August 5, 1964, and May 7, 1975, and were discharged other than dishonorably; (b) Disabled veterans of any era with a minimum compensable disability of 30 percent; or (c) A veteran of any era who was discharged for disability. § 120.361 Other conditions of eligibility. (a) Management and daily operations of the business must be directed by one or more of the veteran owners whose veteran status was used to qualify for the loan. (b) This direct loan program is available only if private sector financing and guaranteed loans are not available. (c) A veteran may qualify only once for this program on a direct loan basis. Loans to Participants in the 8( a § 120.375 Policy. Section 7(a)(20) of the Act authorizes SBA to provide direct (unilaterally or together with Lenders) or guaranteed loans to firms participating in the 8(a) Program. § 120.376 Special requirements. The following special conditions apply (otherwise, 7(a) loan eligibility criteria apply): (a) The Associate Administrator for Business Development may waive the direct loan administrative ceiling of $150,000, and raise it to $750,000. (b) The SBA portion of a guaranteed loan must not exceed $750,000. (c) The interest rate on a guaranteed loan shall be the same as on 7(a) guaranteed business loans. The interest rate on a direct loan shall be one percent less than on a regular direct loan. (d) For a direct loan or SBA's portion of an immediate participation loan, SBA shall subordinate its security interest on all collateral to other debt of the applicant. [61 FR 3235, Jan. 31, 1996, as amended at 74 FR 45753, Sept. 4, 2009] § 120.377 Use of proceeds. The loan proceeds shall not be used for debt refinancing. Only a manufacturing concern may use loan proceeds for working capital. CapLines Program § 120.390 Revolving credit. (a) CapLines finances eligible small businesses' short-term, revolving and non-revolving working-capital needs. SBA regulations governing the 7(a) loan program govern business loans made under this program. The maximum guaranteed amount and the maximum loan amount are the same under CapLines as other 7(a) loans, as stated in § 120.151. (b) CapLines proceeds can be used to finance the cyclical, recurring, or other identifiable short-term operating capital needs of small businesses. Proceeds can be used to create current assets or used to provide financing against the current assets that already exist. [61 FR 3235, Jan. 31, 1996, as amended at 76 FR 63546, Oct. 12, 2011] Builders Loan Program § 120.391 What is the Builders Loan Program? Under section 7(a)(9) of the Act, SBA may make or guarantee loans to finance small general contractors to construct or rehabilitate residential or commercial property for resale. This program provides an exception under specified conditions to the general rule against financing investment property. “Construct” and “rehabilitate” mean only work done on-site to the structure, utility connections and landscaping. § 120.392 Who may apply? A construction contractor or home-builder with a past history of profitable construction or rehabilitation projects of comparable type and size may apply. An applicant may subcontract the work. Subcontracts in excess of $25,000 may require 100 percent payment and performance bonds. § 120.393 Are there special application requirements? (a) An applicant must submit documentation from: (1) A mortgage lender indicating that permanent mortgage money is available to qualified purchasers to buy such properties; (2) A real estate broker indicating that a market exists for the proposed building and that it will be compatible with its neighborhood; and (3) An architect, appraiser or engineer agreeing to make inspections and certifications to support interim disbursements. (b) The Borrower may substitute a letter from a qualified Lender for one or more of the letters. § 120.394 What are the eligible uses of proceeds? A Borrower must use the loan proceeds solely to acquire, construct or substantially rehabilitate an individual residential or commercial building for sale. “Substantial” means rehabilitation expenses of more than one-third of the purchase price or fair market value at the time of the application. A Borrower may use up to 33 percent of the proceeds to acquire land, and up to 5 percent for community improvements such as curbs and sidewalks. [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39503, Aug. 21, 2017] § 120.395 What is SBA's collateral position? SBA will require a lien on the building which must be in no less than a second position. § 120.396 What is the term of the loan? The loan must not exceed sixty (60) months plus the estimated time to complete construction or rehabilitation. § 120.397 Are there any special restrictions? The borrower must not use loan proceeds to purchase vacant land for possible future construction or to operate or hold rental property for future rehabilitation. SBA may allow rental of the property only if the rental will improve the ability to sell the property. The sale must be a legitimate change of ownership. America's Recovery Capital (Business Stabilization) Loan Program—ARC Loan Program § 120.398 America's Recovery Capital (ARC) Loan Program. (a) Purpose. (b) Definitions. Eligible Borrower (A) Ineligible small businesses as listed in § 120.110; and (B) Small business concerns with the following primary industry North American Industry Classification System (NAICS) codes: ( 1 ( 2 ( 3 ( 4 ( 5 (ii) Applications submitted by small business concerns with a primary industry NAICS code of 713940 (Fitness and Recreational Sports Centers) will be identified and reviewed by SBA to determine eligibility in accordance with the statutory restriction on assistance to swimming pools. (2) Going Concern (3) Qualifying Small Business Loan (4) Viable small business (c) Period of program. (d) Use of proceeds. (e) Loan terms. Guaranty percentage. (2) Maximum loan size. (3) Interest rate. Federal Register. (4) Loan maturity. (5) Disbursement period. (6) Loan payments. (i) Borrower's payments. (ii) Payment of interest by SBA. (iii) Deferral period. (iv) Repayment period. (f) Number of ARC Loans per small business. (g) Personal guarantees. (h) Collateral. (i) Credit criteria. (1) Character, reputation, and credit history of the applicant (and the Operating Company, if applicable) and its Associates; (2) Experience and depth of management; (3) Strength of the business; (4) Past earnings, current earnings, and projected cash flow; and (5) Ability to repay the loan with earnings from the business. (j) Statement of hardship. (k) Loan application. (l) Preferences and refinancing. (m) Loan fees. (n) Lender reporting. (o) Loan servicing. (p) Liquidations. (q) Purchase requests. (r) Prohibition on secondary market sales and loan participations. (s) Loan volume. (t) Delegated authority. (u) Personal resources test. (v) Statutory loan limit. [74 FR 27247, June 9, 2009] Subpart D—Lenders § 120.400 Loan Guarantee Agreements. SBA may enter into a Loan Guarantee Agreement with a Lender to make deferred participation (guaranteed) loans. Such an agreement does not obligate SBA to participate in any specific proposed loan that a Lender may submit. The existence of a Loan Guarantee Agreement does not limit SBA's rights to deny a specific loan or establish general policies. See also [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39503, Aug. 21, 2017] Participation Criteria § 120.410 Requirements for all participating Lenders. A Lender must: (a) Have a continuing ability to evaluate, process, close, disburse, service, liquidate and litigate small business loans including, but not limited to: (1) Holding sufficient permanent capital to support SBA lending activities (for SBA Lenders with a Federal Financial Institution Regulator, meeting capital requirements for an adequately capitalized financial institution is considered sufficient permanent capital to support SBA lending activities; and for SBLCs and NFRLs, meeting their respective minimum capital requirement); and (2) Maintaining satisfactory SBA performance, as determined by SBA in its discretion. The 7(a) Lender's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission); (b) Be open to the public for the making of such loans (not be a financing subsidiary, engaged primarily in financing the operations of an affiliate); (c) Have continuing good character and reputation, and otherwise meet and maintain the ethical requirements of § 120.140 (d) Be supervised and examined by either: (1) A Federal Financial Institution Regulator, (2) A state banking regulator satisfactory to SBA, or (3) SBA; (e) Be in good standing with SBA, as defined in § 120.420(f) (and determined by SBA in its discretion), and, as applicable, with its state regulator and be considered Satisfactory by its Federal Financial Institution Regulator (as determined by SBA and based on, for example, information in published orders/agreements and call reports); and (f) Operate in a safe and sound condition using commercially reasonable lending policies, procedures, and standards employed by prudent Lenders. [61 FR 3235, Jan. 31, 1996, as amended at 62 FR 302, Jan. 3, 1997; 73 FR 75510, Dec. 11, 2008; 82 FR 39503, Aug. 21, 2017; 85 FR 78213, Dec. 4, 2020] § 120.411 Preferences. An agreement to participate under the Act may not establish any Preferences in favor of the Lender. § 120.412 Other services Lenders may provide Borrowers. Subject to § 120.140 Lenders, their Associates or the designees of either may provide services to and contract for goods with a Borrower only after full disbursement of the loan to the small business or to an account not controlled by the Lender, its Associate, or the designee. A Lender, an Associate, or a designee providing such services must do so under a written contract with the small business, based on time and hourly charges, and must maintain time and billing records for examination by SBA. Fees cannot exceed those charged by established professional consultants providing similar services. See also § 120.413 Advertisement of relationship with SBA. A Lender may refer in its advertising to its participation with SBA. The advertising may not: (a) State or imply that the Lender, or any of its Borrowers, has or will receive preferential treatment from SBA; (b) Be false or misleading; or (c) Make use of SBA's seal. Participating Lender Financings Source: Sections 120.420 through 120.428 appear at 64 FR 6507, Feb. 10, 1999, unless otherwise noted. § 120.420 Definitions. (a) 7(a) Loans et seq. et seq. (b) Benchmark Number Federal Register. (c) Currency Rate (d) Currency Rate Percentage (e) Good Standing (1) Is in compliance with all applicable: (i) Laws and regulations; (ii) Policies; and (iii) Procedures; (2) Is in good financial condition as determined by SBA; (3) Is not under investigation or indictment for, or has not been convicted of, or had a judgment entered against it for felony or fraud, or charges relating to a breach of trust or violation of a law or regulation protecting the integrity of business transactions or relationships, unless the Lender Oversight Committee has determined that good standing exists despite the existence of such factors. (4) Does not have any officer or employee who has been under investigation or indictment for, or has been convicted of or had a judgment entered against him for, a felony or fraud, or charges relating to a breach of trust or violation of a law or regulation protecting the integrity of business transactions or relationships, unless the Lender Oversight Committee has determined that good standing exists despite the existence of such person. (f) Initial Currency Rate (g) Initial Currency Rate Percentage (h) Loss Rate (i) Nondepository Institution (j) Securitization [64 FR 6507, Feb. 10, 1999, as amended at 73 FR 75511, Dec. 11, 2008; 87 FR 38909, June 30, 2022] § 120.421 Which Lenders may securitize? All SBA participating Lenders may securitize subject to SBA's approval. § 120.422 Are all securitizations subject to this subpart? All securitizations are subject to this subpart. Until additional regulations are promulgated, SBA will consider securitizations involving multiple Lenders on a case by case basis, using the conditions in § 120.425 as a starting point. SBA will consider securitizations by affiliates as single Lender securitizations for purposes of this subpart. § 120.423 Which 7(a) loans may a Lender securitize? A Lender may only securitize 7(a) loans that will be fully disbursed within 90 days of the securitization's closing date. If the amount of a fully disbursed loan increases after a securitization settles, the Lender must retain the increased amount. § 120.424 What are the basic conditions a Lender must meet to securitize? To securitize, a Lender must: (a) Be in good standing with SBA as defined in § 120.420(f) of this chapter and determined by SBA in its discretion; (b) Have satisfactory SBA performance, as determined by SBA in its discretion. The Lender's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission); (c) Use a securitization structure which is satisfactory to SBA; (d) Use documents acceptable to SBA, including SBA's model multi-party agreement, as amended from time to time; (e) Obtain SBA's written consent, which it may withhold in its sole discretion, prior to executing a commitment to securitize; and (f) Cause the original notes to be stored at the FTA, as defined in § 120.600, and other loan documents to be stored with a party approved by SBA. [64 FR 6507, Feb. 10, 1999, as amended at 73 FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21, 2017] § 120.425 What are the minimum elements that SBA will require before consenting to a securitization? A securitizer must comply with the following three conditions: (a) Capital Requirement—All securitizers must be considered to be “well capitalized” by their regulator. SBA will consider a depository institution to be in compliance with this section if it meets the definition of “well capitalized” used by its bank regulator. SBA's capital requirement does not change the requirements that banks already meet. For nondepository institutions, SBA, as the regulator, will consider a non-depository institution to be “well capitalized” if it maintains a minimum unencumbered paid in capital and paid in surplus equal to at least 10 percent of its assets, excluding the guaranteed portion of 7(a) loans. The capital charge applies to the remaining balance outstanding on the unguaranteed portion of the securitizer's 7(a) loans in its portfolio and in any securitization pools. Each nondepository institution must submit annual audited financial statements demonstrating that it has met SBA's capital requirement. (b) Subordinated Tranche—A securitizer or its wholly owned subsidiary must retain a tranche of the securities issued in the securitization (subordinated tranche) equal to the greater of two times the securitizer's Loss Rate or 2 percent of the principal balance outstanding at the time of securitization of the unguaranteed portion of the loans in the securitization. This tranche must be subordinate to all other securities issued in the securitization including other subordinated tranches. The securitizer or its wholly owned subsidiary may not sell, pledge, transfer, assign, sell participations in, or otherwise convey the subordinated tranche during the first 6 years after the closing date of the securitization. The securities evidencing the subordinated tranche must bear a legend stating that the securities may not be sold until 6 years after the issue date. SBA's Securitization Committee may modify the formula for determining the tranche size for a securitizer creating a securitization from a pool of loans located in a region affected by a severe economic downturn if the Securitization Committee concludes that enforcing this section might exacerbate the adverse economic conditions in the region. SBA will work with the securitizer to verify the accuracy of the data used to make the Loss Rate calculation. (c) PLP Privilege Suspension. (1) Suspension: Federal Register (2) Reinstatement: (3) The Benchmark Number. (4) Data. [64 FR 6508, Feb. 10, 1999, as amended at 65 FR 49481, Aug. 14, 2000; 73 FR 75511, Dec. 11, 2008] § 120.426 What action will SBA take if a securitizer transfers the subordinated tranche prior to the termination of the holding period? If a securitizer transfers the subordinated tranche prior to the termination of the holding period, SBA will suspend immediately the securitizer's ability to make new 7(a) loans. The securitizer will have 30 calendar days to submit an explanation to Lender Oversight Committee (“Committee”). The Committee will have 30 calendar days to review the explanation and determine whether to lift the suspension. If an explanation is not received within 30 calendar days or the explanation is not satisfactory to the Committee, SBA may transfer the servicing of the applicable securitized loans, including the securitizers' servicing fee on the guaranteed and unguaranteed portions and the premium protection fee on the guaranteed portion, to another SBA participating Lender. [64 FR 6507, Feb. 10, 1999, as amended at 73 FR 75511, Dec. 11, 2008] § 120.427 Will SBA approve a securitization application from a capital impaired Securitizer? If a securitizer does not maintain the level of capital required by this subpart, SBA will not approve a securitization application from that securitizer. § 120.428 What happens to a securitizer's other PLP responsibilities if SBA suspends its PLP approval privilege? The securitizer must continue to service and liquidate loans according to its PLP Supplemental Agreement. Other Conveyances Source: Sections 120.430 through 120.435 appear at 64 FR 6509, 6510, Feb. 10, 1999, unless otherwise noted. § 120.430 What conveyances are covered by §§ 120.430 through 120.435? Sections 120.430 through 120.435 cover all other transactions in which a Lender sells, sells a participating interest in, or pledges an SBA guaranteed loan other than for the purpose of securitizing and other than conveyances covered under Subpart F, Secondary Market, of this part. § 120.431 Which Lenders may sell, sell participations in, or pledge 7(a) loans? All Lenders may sell, sell participations in, or pledge 7(a) loans in accordance with this subpart. § 120.432 Under what circumstances does this subpart permit sales of, or sales of participating interests in, 7(a) loans? (a) A Lender may sell all of its interest in a 7(a) loan to another Lender operating under a current Loan Guarantee Agreement (SBA Form 750) (“participating Lender”), with SBA's prior written consent, which SBA may withhold in its sole discretion. A Lender may not sell any of its interest in a 7(a) loan to a nonparticipating Lender. The purchasing Lender must take possession of the promissory note and other loan documents, and service the sold 7(a) loan. The purchasing Lender purchases the loan subject to SBA's existing rights including its right to deny liability on its guarantee as provided in § 120.524. After purchase, the purchased loan will be subject to the purchasing Lender's Loan Guarantee Agreement. This paragraph (a) applies to all 7(a) loans purchased from any Federal or state banking regulator, any receiver, or any conservator, unless SBA agrees otherwise in writing.

This paragraph (a) applies to all 7(a) loans purchased from any Federal or state banking regulator, any receiver, or any conservator, unless SBA agrees otherwise in writing. (b) A Lender may sell, or sell a participating interest in, a part of a 7(a) loan to another participating Lender. If the Lender retains ownership of a part of the unguaranteed portion of the loan equal to at least 10 percent of the outstanding principal balance of the loan, the Lender must give SBA prior written notice of the transaction, and the Lender must continue to hold the note and service the loan. If a Lender retains ownership of a part of the unguaranteed portion of the loan equal to less than 10 percent of the outstanding principal balance of the loan, the Lender must obtain SBA's prior written consent to the transaction, which consent SBA may withhold in its sole discretion. The Lender must continue to hold the note and other loan documents, and service the loan unless SBA otherwise agrees in its sole discretion. (c) For purposes of determining the percentage of ownership a Lender has retained, SBA will not consider a Lender to be the owner of the part of a loan in which it has sold a participating interest. [64 FR 6509, 6510, Feb. 10, 1999, as amended at 85 FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020; 87 FR 38909, June 30, 2022] § 120.433 What are SBA's other requirements for sales and sales of participating interests? SBA requires the following: (a) The Lender must be in good standing with SBA as defined in § 120.420(f) and determined by SBA in its discretion; (b) The Lender has satisfactory SBA performance, as determined by SBA in its discretion. The Lender's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission); and (c) In transactions requiring SBA's consent, all documentation must be satisfactory to SBA, including, if SBA determines it to be necessary, a multi-party agreement. [64 FR 6507, Feb. 10, 1999, as amended at 73 FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21, 2017] § 120.434 What are SBA's requirements for loan pledges? (a) Except as set forth in § 120.435, SBA must give its prior written consent to all pledges of any portion of a 7(a) loan, which consent SBA may withhold in its sole discretion; (b) The Lender must be in good standing with SBA as defined in § 120.420(f) and determined by SBA in its discretion; (c) The Lender has satisfactory SBA performance, as determined by SBA in its discretion. The Lender's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission); (d) All loan documents must be satisfactory to SBA and must include a multi-party agreement among SBA, Lender, the pledgee, FTA and such other parties as SBA determines are necessary; (e) The Lender must use the proceeds of the loan secured by the 7(a) loans only for financing 7(a) loans and for costs and expenses directly connected with the borrowing for which the loans are pledged; (f) The Lender must remain the servicer of the loans and retain possession of all loan documents other than the original promissory notes; (g) The Lender must deposit the original promissory notes at the FTA; and (h) The Lender must retain an economic interest in and the ultimate risk of loss on the unguaranteed portion of the loans. [64 FR 6507, Feb. 10, 1999, as amended at 73 FR 75511, Dec. 11, 2008; 82 FR 39503, Aug. 21, 2017] § 120.435 Which loan pledges do not require notice to or consent by SBA? (a) Notwithstanding the provisions of § 120.434(e), 7(a) loans may be pledged for the following purposes without notice to or consent by SBA: (1) Treasury tax and loan accounts; (2) The deposit of public funds; (3) Uninvested trust funds; (4) Borrowings from a Federal Reserve Bank; or (5) Advances by a Federal Home Loan Bank. (b) For purposes of the Paycheck Protection Program (PPP), the other provisions of § 120.434 shall also not apply to PPP loans pledged under paragraph (a)(4) or (5) of this section. [85 FR 21752, Apr. 20, 2020] Delegated Authority Criteria § 120.440 How does a 7(a) Lender obtain delegated authority? (a) In making its decision to grant or renew a delegated authority, SBA considers whether the Lender, as determined by SBA in its discretion: (1) Has the continuing ability to evaluate, process, close, disburse, service, liquidate and litigate SBA loans. This includes the ability to develop and analyze complete loan packages. SBA may consider the experience and capability of Lender's management and staff. (2) Has satisfactory SBA performance (as defined in § 120.410(a)(2)); (3) Is in compliance with SBA Loan Program Requirements ( e.g., (4) Has completed to SBA's satisfaction all required corrective actions; (5) Whether Lender is subject to any enforcement action, order or agreement with a regulator or the presence of other regulatory concerns as determined by SBA; and (6) Whether Lender exhibits other risk factors ( e.g., (b) Delegated authority decisions are made by the appropriate SBA official in accordance with Delegations of Authority, and are final. (c) If delegated authority is approved or renewed, Lender must execute a Supplemental Guarantee Agreement, which will specify a term not to exceed two years. SBA may grant shortened renewals based on risk or any of the other delegated authority criteria. Lenders with less than 3 years of SBA lending experience will be limited to a term of 1 year or less. [82 FR 39503, Aug. 21, 2017, as amended at 85 FR 7648, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020] § 120.441-§ 120.447 [Reserved] Preferred Lenders Program (PLP) § 120.450 What is the Preferred Lenders Program? Under the Preferred Lenders Program (PLP), designated Lenders process, close, service, and liquidate SBA guaranteed loans with reduced requirements for documentation to and prior approval by SBA. § 120.451 [Reserved] § 120.452 What are the requirements of PLP loan processing? (a) Subparts A and B of this part govern the making of PLP loans, except for the following: (1) Certain types of businesses, loans, and loan programs are not eligible for PLP, as detailed in published SBA policy and procedures. (2) A Lender may not make a PLP business loan which reduces its existing credit exposure for any Borrower, except in cases where an interim loan(s) has been made for other than real estate construction purposes to the Borrower which was approved by the Lender within 90 days of receipt of the issuance fo a subsequent PLP loan number. (3) SBA will not guarantee more than the specified statutory percentage of any PLP loan. (b) A PLP Lender notifies SBA of its approval of a PLP loan by submitting to SBA's loan processing center appropriate documentation signed by two of the PLP's authorized representatives. SBA will attach the SBA guarantee and notify the PLP Lender of the SBA loan number (if it does not identify a problem with eligibility, and funds are available). (c) The PLP Lender is responsible for all PLP loan decisions regarding eligibility (including size) and creditworthiness. The PLP Lender is also responsible for confirming that all PLP loan closing decisions are correct, and that it has complied with all requirements of law and SBA regulations. SBA Supervised Lenders § 120.460 What are SBA's additional requirements for SBA Supervised Lenders? (a) In general. In addition to complying with SBA's requirements for SBA Lenders, an SBA Supervised Lender must meet the additional requirements set forth in this regulation and the SBA Supervised Lender regulations that follow. (b) Operations and internal controls. Each SBA Supervised Lender's board of directors (or management, if the SBA Supervised Lender is a division of another company and does not have its own board of directors) must adopt an internal control policy which provides adequate direction to the institution in establishing effective control over and accountability for operations, programs, and resources. The internal control policy must, at a minimum: (1) Direct management to assign responsibility for the internal control function (covering financial, credit, credit review, collateral, and administrative matters) to an officer or officers of the SBA Supervised Lender; (2) Adopt and set forth procedures for maintenance and periodic review of the internal control function; and (3) Direct the operation of a program to review and assess the SBA Supervised Lender's assets. The asset review program policies must specify the following: (i) Loan, loan-related asset, and appraisal review standards, including standards for scope of selection for review (of any such loan, loan-related asset or appraisal) and standards for work papers and supporting documentation; (ii) Asset quality classification standards consistent with the standardized classification systems used by the Federal Financial Institution Regulators; (iii) Specific internal control requirements for the SBA Supervised Lender's major asset categories (cash and investment securities), lending, and the issuance of debt; (iv) Specific internal control requirements for the SBA Supervised Lender's oversight of Lender Service Providers; and (v) Standards for training to implement the asset review program. (c) An SBA Supervised Lender must have qualified full-time professional management including, but not limited to, a chief executive officer or the equivalent to manage daily operations, and a chief credit/risk officer. An SBA Supervised Lender must also have at least one other part-time professional employee (which may be a shared employee of the lender's affiliates) qualified by training and experience to carry out its business plan. An SBA Supervised Lender is expected to sustain a sufficient level of lending activity in its lending area, which means obtaining at least four 7(a) loan approvals during two consecutive fiscal years. This paragraph only applies to SBA Supervised Lenders that make or acquire a 7(a) loan after January 4, 2021, or to any SBA Supervised Lender approved after such date, including in the event of a change of ownership or control of an SBA Supervised Lender. (d) An NFRL may only make or acquire 7(a) loans in the state in which its primary state regulator is located, except that an NFRL's lending area may include a local trade area that is contiguous to such state (e.g., a city or metropolitan statistical area that is bisected by a state line) if the NFRL receives SBA's prior written approval. This paragraph applies to all NFRLs on or after January 4, 2021, including in the event of approval of a new NFRL or a change of ownership or control of an NFRL; provided however, that if SBA has approved any NFRL to make 7(a) loans out of their state, then this paragraph will apply on or after January 4, 2022. [73 FR 75512, Dec. 11, 2008, as amended at 85 FR 78213, Dec. 4, 2020] § 120.461 What are SBA's additional requirements for SBA Supervised Lenders concerning records? (a) Report filing. (b) Maintenance of records. (c) Permanent preservation of records. (1) All general and subsidiary ledgers (or other records) reflecting asset, liability, capital stock and additional paid-in capital, income, and expense accounts; (2) All general and special journals (or other records forming the basis for entries in such ledgers); and (3) The corporate charter, bylaws, application for determination of eligibility to participate with SBA, and all minutes books, capital stock certificates or stubs, stock ledgers, and stock transfer registers. (d) Other preservation of records. (1) All applications for financing; (2) Lending, participation, and escrow agreements; (3) Financing instruments; and (4) All other documents and supporting material relating to such loans, including correspondence. (e) Electronic preservation. [73 FR 75512, Dec. 11, 2008] § 120.462 What are SBA's additional requirements on capital maintenance for SBA Supervised Lenders? (a) Minimum capital requirements For NFRLs. (ii) Any NFRL approved on or after January 4, 2021, including in the event of a change of ownership or control, must maintain the minimum capital requirement set forth in paragraph (a)(1)(i) of this section. (iii) Unless subject to paragraph (a)(1)(i) or (ii) of this section, an NFRL must comply with the minimum capital requirements for NFRLs that were in effect on January 3, 2021. (2) For SBLCs. (b) Capital adequacy. (c) Capital plan. (i) Management capability; (ii) Quality of operating policies, procedures, and internal controls; (iii) Quality and quantity of earnings; (iv) Asset quality and the adequacy of the allowance for loan losses within the loan portfolio; (v) Sufficiency of liquidity; and (vi) Any other risk-oriented activities or conditions that warrant additional capital (e.g., portfolio growth rate). (2) An SBA Supervised Lender must keep its capital plan current, updating it at least annually or more often as operating conditions may warrant. (d) Certification of compliance. (e) Capital impairment. (f) Capital restoration plan Filing requirement. (2) Plan content. (3) SBA response. (4) Amendment of capital restoration plan. (5) Failure. [73 FR 75512, Dec. 11, 2008, as amended at 85 FR 78213, Dec. 4, 2020] § 120.463 Regulatory accounting—What are SBA's regulatory accounting requirements for SBA Supervised Lenders? (a) Books and records. (b) Annual audit. (c) Auditor qualifications. (1) Is registered or licensed to practice as a certified public accountant, and is in good standing, under the laws of the state or other political subdivision of the United States in which the SBA Supervised Lender's principal office is located; (2) Agrees in the engagement letter with the SBA Supervised Lender to provide the SBA with access to and copies of any work papers, policies, and procedures relating to the services performed; (3)(i) Is in compliance with the AICPA Code of Professional Conduct; and (ii) Meets the independence requirements and interpretations of the Securities and Exchange Commission and its staff; (4) Has received a peer review or is enrolled in a peer review program, that meets AICPA guidelines; and (5) Is otherwise acceptable to SBA. (d) Change of auditor. (1) The name, address, and telephone number of the discharged auditor; and (2) If the discharge/change involved a dispute over the financial statements, a reasonably detailed statement of all the reasons for the discharge or change. This statement must set out the issue in dispute, the position of the auditor, the position of the SBA Supervised Lender, and the effect of each position on the balance sheet and income statement of the SBA Supervised Lender. (e) Specific accounting requirements. (2) The unguaranteed portions of loans determined to be uncollectible must be charged-off promptly. If the portion determined to be uncollectible by the SBA Supervised Lender is different from the amount determined by its auditors or the SBA, the SBA Supervised Lender must charge-off such amount as the SBA may direct. (3) Each SBA Supervised Lender must classify loans as: (i) “Nonaccrual,” if any portion of the principal or interest is determined to be uncollectible and (ii) “Formally restructured,” if the loan meets the “troubled debt restructuring” definition set forth in FASB Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings. (4) When one loan to a borrower is classified as nonaccrual or formally restructured, all loans to that borrower must be so classified unless the SBA Supervised Lender can document that the loans have independent sources of repayment. (f) Valuing loan servicing rights and residual interests. [73 FR 75513, Dec. 11, 2008] § 120.464 Reports to SBA. (a) An SBA Supervised Lender must submit the following to SBA: (1) Annual Report. (i) Audited balance sheet; (ii) Audited statement of income and expense; (iii) Audited reconciliation of capital accounts; (iv) Audited source and application of funds; (v) Such footnotes as are necessary to an understanding of the report; (vi) Auditor's letter to management on internal control weaknesses; and (vii) The auditor's report. (2) Quarterly Condition Reports. (3) Legal and Administrative Proceeding Report. (4) Stockholder Reports. (5) Reports of Changes. (i) Any change in its name, address or telephone number; (ii) Any change in its charter, bylaws, or its officers or directors (to be accompanied by a statement of personal history on the form approved by SBA); (iii) Any change in capitalization, including such types of change as are identified in this part 120; (iv) Any changes affecting an SBA Supervised Lender's eligibility to continue to participate as an SBA Supervised Lender; and (v) Notice of any pledge of stock (within 30 calendar days of the transaction) if 10 percent or more of the stock is pledged by any person (or group of persons acting in concert) as collateral for indebtedness. (6) Report of Changes in Financial Condition. (7) Other Reports. (b) Preparing financial reports for filing. (1) In accordance with all applicable laws, regulations, procedures, standards, and such instructions and specifications and in such form and media format as may be prescribed by SBA from time to time; (2) On an accrual basis, in accordance with GAAP principles and such other accounting requirements, standards, and procedures as may be prescribed by the SBA from time to time; (3) That contain all applicable footnotes in accordance with GAAP principals, one of which includes a brief analysis of how the SBA Supervised Lender complies with SBA's capital regulations, as applicable; and (4) In such manner as to facilitate the reconciliation of these reports with the books and records of the SBA Supervised Lender. (c) Responsibility for assuring the accuracy of filed financial reports. (d) Waiver. [73 FR 75514, Dec. 11, 2008] § 120.465 Civil penalty for late submission of required reports. (a) Obligation to submit required reports by applicable due dates. (b) Amount of civil penalty. (c) Notification of amount of civil penalty. (d) Identification during examination. (e) Extensions of submission due dates. (i) Whether the SBA Supervised Lender failed to file required reports for more than two reporting periods and (ii) If SBA provided the SBA Supervised Lender notice of the failure to file and the SBA Supervised Lender failed to respond or failed to provide a reasonable explanation for the filing failure in its response. (2) If SBA disapproves the extension, the due date remains the same. The civil penalty accrues regardless of whether the SBA Supervised Lender files an extension request. If SBA approves the extension, SBA will waive the civil penalty that has accrued so far for that particular report. However, a new civil penalty will accrue if the SBA Supervised Lender does not submit a complete report by the new due date established by SBA. (f) Requests for reduction or exemption. (i) Whether there is reasonable cause for failure to file timely and it was not due to willful neglect; (ii) Whether the SBA Supervised Lender has demonstrated to SBA's satisfaction that it has modified its internal procedures to comply with reporting requirements in the future; and (iii) Whether the SBA Supervised Lender has demonstrated to SBA's satisfaction, based on financial information fully disclosed together with its request, that it would have difficulty paying the civil penalty assessed. (2) SBA must also determine that a reduction or exemption is not inconsistent with the public interest or the protection of SBA. (3) SBA may in writing approve the exemption, reduce the civil penalty, or deny the exemption. (4) If SBA grants the reduction request or denies the reduction or exemption, the SBA Supervised Lender must pay the amount owed within 30 days of the letter date. Civil penalties will accrue while the request is pending. (g) Reconsideration of decisions. (h) Other enforcement actions. (i) Exception for affiliate of SBLC. [73 FR 75515, Dec. 11, 2008, as amended at 81 FR 31491, May 19, 2016; 82 FR 9969, Feb. 9, 2017; 83 FR 7363, Feb. 21, 2018; 84 FR 12061, Apr. 1, 2019; 85 FR 13727, Mar. 10, 2020; 86 FR 52957, Sept. 24, 2021; 87 FR 28758, May 11, 2022; 88 FR 50005, Aug. 1, 2023; 89 FR 48134, June 5, 2024; 90 FR 23424, June 3, 2025] § 120.466 SBA Supervised Lender application. An entity seeking to participate as an SBA Supervised Lender must apply to SBA. SBA evaluates SBA Supervised Lender applicants through an initial review and final review, as follows: (a) Initial review. (1) The legal name, address, telephone number and email address of the applicant; (2) Business plan, detailing the applicant's proposed lending area and the volume of loan activity projected over the next 3 years (supported by current and projected balance sheets, income statements and statements of cash flows); (3) Capitalization (current and proposed), including the form of organization and the identification of all debt and classes of equity capital and proposed funding amounts, including any rights or preferences accorded to such interests ( e.g., (4) A list of all members of the applicant's management team, including the applicant's officers, directors, managers and key employees, as well as the applicant's owners, Associates (as defined in § 120.10) and Affiliates (as defined in § 121.103 of this chapter); (5) A written summary of the professional experience (including any prior experience with any SBA program) of the applicant's management team (including key employees); (6) In connection with any application to acquire an existing SBLC License, the applicant must include a letter agreement signed by an authorized official of the SBLC whose License is to be acquired certifying that the SBLC is seeking to transfer its SBA lending authority to the applicant; (7) If approval of any state or Federal chartering, licensing or other regulatory authority is required, copies of any licenses issued by or documents filed with such authority. (b) Final review. (c) NFRL operating and lending experience requirement. [85 FR 78213, Dec. 4, 2020, as amended at 88 FR 21899, Apr. 12, 2023] § 120.467 Evaluation of SBA Supervised Lender applicants. (a) SBA will evaluate an SBA Supervised Lender applicant based on information from, among other sources, the Lender Assessment Plan, an interview with the applicant's management team (if required), the application and any other documentation submitted by the applicant, the results of background investigations, public record searches and due diligence conducted by SBA or other Federal or state agencies. SBA's evaluation will consider factors such as the following: (1) Professional qualifications of its management team (including key employees), including demonstrated commercial lending experience, business reputation, adherence to legal and ethical standards, track record in making and monitoring business loans, and prior history, if any, working as an officer, manager, director or key employee of a lender involved in any SBA program or any other Federal or state lending program. (2) Historical performance measures of loans originated by the applicant or attributable to its management team (including key employees), including loan default rates, purchase rates and loss rates, measured in both percentage terms and in comparison to appropriate industry benchmarks, review/examination assessments and other performance measures. (3) The applicant's capitalization, organizational structure, business plan (including any risk factors), projected financial performance, financial strength, liquidity, the soundness of its financial projections and underlying assumptions, loan underwriting process, operations plan and the history of compliance of the applicant and its management team (including key employees) with SBA Loan Program Requirements. (4) Whether the NFRL's state regulator and the state statute or regulations governing the NFRL's operations, including but not limited to those pertaining to audit, examination, supervision, enforcement and information sharing, are satisfactory to SBA in its sole discretion. (5) For changes of ownership or control, in addition to the factors listed in paragraphs (a)(1) through (4) of this section, SBA will consider whether the applicant's plan for the resolution of any outstanding monetary liabilities to SBA, including repairs and denials and civil monetary penalties, is acceptable to SBA in its sole discretion. (b) SBA may prohibit any individual or entity from participating as an officer, director, manager, owner or key employee of the applicant if such individual or entity: (1) Has a previous record of failing to materially comply with SBA Loan Program Requirements; (2) Previously participated in a material way with any past or present SBA Lender or Intermediary that failed to maintain satisfactory SBA performance; (3) Previously defaulted on any Federal loan or Federally assisted financing that resulted in the Federal Government or any of its agencies or departments sustaining a loss in any of its programs; or (4) Ever failed to pay when due any debt or obligation, including any amounts in dispute, to the Federal Government or guaranteed by the Federal Government (including but not limited to taxes or business or student loans). [85 FR 78214, Dec. 4, 2020] § 120.468 Change of ownership or control requirements for SBA Supervised Lenders. (a) SBA prior approval required. (1) Any transfer(s) (direct or indirect) of 10 percent or more of any class of the SBA Supervised Lender's stock or ownership interests (or series of transfers which, in the aggregate over an 18 month period, equals 10 percent or more), or any agreement providing for such transfer; (2) Any transfer(s) (direct or indirect) that could result in the beneficial ownership by any person or group of persons acting in concert of 10 percent or more of any class of the SBA Supervised Lender's stock or ownership interests, or any agreement providing for such transfer(s); (3) Any merger, consolidation, or reorganization; (4) Any other transaction or agreement that transfers control of an SBA Supervised Lender; or (5) Any other transaction or event that results in any change in the possession (direct or indirect) of the right to control, or the power to direct or cause the direction of, the management or policies of an SBA Supervised Lender, whether through the ownership of voting securities, by contract or otherwise. (b) Approval required by other regulatory authorities. (c) Application requirements for changes of ownership or control. (d) Voluntary surrender of SBA lending authority. [85 FR 78214, Dec. 4, 2020] Small Business Lending Companies (SBLC) § 120.470 What are SBA's additional requirements for SBLCs? In addition to complying with SBA's requirements for SBA Lenders and SBA Supervised Lenders, an SBLC (including a Community Advantage SBLC) must meet the requirements contained in this regulation and the SBLC regulations that follow. (a) Lending. (1) Loans under section 7(a) (except section 7(a)(13) of the Act in participation with SBA); and/or (2) SBA guaranteed loans to Intermediaries (see subpart G of this part). Such loans are subject to the same conditions as guaranteed loans made to Intermediaries by 7(a) Lenders. (b) Business structure. (c) Written agreement. (d) Dual control. (1) An SBLC may disburse funds only by checks or wire transfers authorized by signatures of two or more officers covered by the SBLC's fidelity bond, except that checks in an amount of $10,000 or less may be signed by one bonded officer, provided that such action is permitted under the SBLC's fidelity bond. (2) There must be two or more bonded officers, or one bonded officer and a bonded employee to open safe deposit boxes or withdraw securities from safekeeping. The SBLC must furnish to each depository bank, custodian, or entity providing safe deposit boxes a certified copy of the resolution implementing control procedures. (e) Fidelity insurance. (f) Common control. (2) In the case of a purchase of an SBLC by an organization that already owns an SBLC, the purchasing entity will have six months to submit a plan to SBA for the divestiture of one of the SBLCs. All divestiture plans must be approved by SBA and SBA may withhold approval in its discretion. Divestiture of the SBLC must occur within one year of purchase date. (3) Without prior written SBA approval, an Associate of one SBLC must not be an Associate of another SBLC or of any entity which directly or indirectly controls, or is under common control with, another SBLC. (4) For purposes of paragraph (f) of this section, common control means a condition where two or more SBLCs, either through ownership, management, contract, or otherwise, are under the Control of one group or Person (as defined in § 120.10 of this chapter). Two or more SBLCs are presumed to be under common control if they are Affiliates of each other by reason of common ownership or common officers, directors, or general partners. (5) “Affiliate” has the meaning set forth in § 121.103 of this chapter. (6) “Control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an SBLC or other concern, whether through the ownership of voting securities, by contract, or otherwise. The common control presumption may be rebutted by evidence satisfactory to SBA. (g) Borrowed funds. [73 FR 75515, Dec. 11, 2008, as amended at 85 FR 78215, Dec. 4, 2020; 87 FR 38909, June 30, 2022; 88 FR 21899, Apr. 12, 2023] § 120.471 What are the minimum capital requirements for SBLCs? (a) Minimum capital requirements. (2) Any SBLC approved on or after January 4, 2021, including in the event of a change of ownership or control, must maintain the minimum capital requirement set forth in paragraph (a)(1) of this section. (3) Unless subject to paragraph (a)(1) or (2) of this section, an SBLC must comply with the minimum capital requirements that were in effect on January 3, 2021. (4) A Community Advantage SBLC must maintain a minimum amount of capital as determined at the discretion of the Administrator in consultation with SBA's Associate Administrator for the Office of Capital Access (AA/OCA), or their designee(s). The minimum capital amount as published in Loan Program Requirements will ensure sufficient risk protection for SBA and lenders while not burdening smaller lenders with large capital requirements. (5) Community Advantage SBLCs must maintain a loan loss reserve account as determined at the discretion of the Administrator in consultation with SBA's Associate Administrator for the Office of Capital Access (AA/OCA), or their designee(s) as published in Loan Program Requirements. (b) Composition of capital. (1) Common stock; (2) Preferred stock that is noncumulative as to dividends and does not have a maturity date; (3) Unrestricted net assets (for non-profit corporations); (4) Additional paid-in capital representing amounts paid for stock in excess of the par value; (5) Retained earnings of the business; and/or (6) For limited liability companies and limited partnerships, capital contributions must not be subject to repayment at any specific time, must not be subject to withdrawal and must have no cumulative priority return. (c) Voluntary capital reduction. (d) Issuance of securities. [73 FR 75516, Dec. 11, 2008, as amended at 85 FR 78215, Dec. 4, 2020; 88 FR 21899, Apr. 12, 2023] § 120.472 Higher individual minimum capital requirement. The Associate Administrator for Capital Access (AA/CA) may require, under § 120.473(d), an SBLC to maintain a higher level of capital, if the AA/CA determines, in his/her discretion, that the SBLC's level of capital is potentially inadequate to protect the SBA from loss due to the financial failure of the SBLC. The factors to be considered in the determination will vary in each case and may include, for example: (a) Specific conditions or circumstances pertaining to the SBLC; (b) Exigency of those circumstances or potential problems; (c) Overall condition, management strength, and future prospects of the SBLC and, if applicable, its parent or affiliates; (d) The SBLC's liquidity and existing capital level, and the performance of its SBA loan portfolio; (e) The management views of the SBLC's directors and senior management; and (f) Other risk-related factors, as determined by SBA. [73 FR 75516, Dec. 11, 2008] § 120.473 Procedures for determining individual minimum capital requirement. (a) Notice. (b) SBLC response. (c) Failure to respond. (d) Decision. (e) Submission of plan. (f) Change in circumstances. [73 FR 75516, Dec. 11, 2008] § 120.474 Relation to other actions. In lieu of, or in addition to, the procedures in this subpart, the individual minimum capital requirement for an SBLC may be established or revised through a written agreement or cease and desist proceedings under subpart I of this part. [73 FR 75517, Dec. 11, 2008] § 120.475 [Reserved] § 120.476 Prohibited financing. An SBLC may not make a loan to a small business that has received financing (or a commitment for financing) from an SBIC that is an Associate of the SBLC. [61 FR 3235, Jan. 31, 1996. Redesignated at 73 FR 75516, Dec. 11, 2008] § 120.490 Audits. Every SBLC is subject to periodic audits by SBA's Office of Inspector General, Auditing Division, and the cost of such audits will be assessed against the SBLC, except for the first audit. Fees are structured based on the SBLC's assets as of the date of the latest audited financial statement submitted to SBA before the audit. The fee schedule is set forth in SBA's Standard Operating Procedures manual. [61 FR 3235, Jan. 31, 1996. Redesignated at 73 FR 75516, Dec. 11, 2008] Subpart E—Servicing, Liquidation and Debt Collection Litigation of 7(a) and 504 Loans SBA'S Purchase of a Guaranteed Portion § 120.520 Purchase of 7(a) loan guarantees. (a) When SBA will purchase For loans approved on or after May 14, 2007. (2) For loans approved before May 14, 2007. (b) Documentation for purchase. (c) Purchase of loans sold in Secondary Market. (d) No waiver of SBA's rights. [72 FR 18360, Apr. 12, 2007] § 120.521 What interest rate applies after SBA purchases its guaranteed portion? When SBA purchases the guaranteed portion of a fixed interest rate loan, the rate of interest remains as stated in the note. On loans with a fluctuating interest rate, the interest rate that the Borrower owes will be at the rate in effect at the time of the earliest uncured payment default, or the rate in effect at the time of purchase (where no default has occurred). § 120.522 Payment of accrued interest to the Lender or Registered Holder when SBA purchases the guaranteed portion. (a) Rate of interest. (1) The rate in the note if it is a fixed rate loan; or (2) The rate in effect on the date of the earliest uncured payment default, or of SBA's purchase (if there has been no default). (b) Payment to Lender For loans approved on or after May 14, 2007. (2) For loans approved before May 14, 2007. (c) Payment to Registered Holder. [61 FR 3235, Jan. 31, 1996, as amended at 72 FR 18361, Apr. 12, 2007] § 120.523 What is the “earliest uncured payment default”? The earliest uncured payment default is the date of the earliest failure by a Borrower to pay a regular installment of principal and/or interest when due. Payments made by the Borrower before a Lender makes its request to SBA to purchase are applied to the earliest uncured payment default. If the installment is paid in full, the earliest uncured payment default date will advance to the next unpaid installment date. If a Borrower makes any payment after the Lender makes its request to SBA to purchase, the earliest uncured payment default date does not change because the Lender has already exercised its right to request purchase. § 120.524 When is SBA released from liability on its guarantee? (a) SBA is released from liability on a loan guarantee (in whole or in part, within SBA's exclusive discretion), if any of the events below occur: (1) The Lender has failed to comply materially with any Loan Program Requirement for 7(a) loans. (2) The Lender has failed to make, close, service, or liquidate a loan in a prudent manner; (3) The Lender's improper action or inaction has placed SBA at risk; (4) The Lender has failed to disclose a material fact to SBA regarding a guaranteed loan in a timely manner; (5) The Lender has misrepresented a material fact to SBA regarding a guaranteed loan; (6) SBA has received a written request from the Lender to terminate the guarantee; (7) The Lender has not paid the guarantee fee within the period required under SBA rules and regulations; (8) The Lender has failed to request that SBA purchase a guarantee within 180 days after maturity of the loan. However, if the Lender is conducting liquidation or debt collection litigation in connection with a loan that has matured, SBA will be released from its guarantee only if the Lender fails to request that SBA purchase the guarantee within 180 days after the completion of the liquidation or debt collection litigation; (9) The Lender has failed to use required SBA forms or exact electronic copies; or (10) The Borrower has paid the loan in full. (b) If SBA determines, at any time, that any of the events set forth in paragraph (a) of this section occurred in connection with that loan, SBA is entitled to recover any moneys paid on the guarantee plus interest from the Lender. In the exercise of its rights, SBA may utilize all legal means available, including offset and judicial remedies. (c) If the Lender's loan documentation or other information indicates that one or more of the events in paragraph (a) of this section occurred, SBA may undertake such investigation as it deems necessary to determine whether to honor or deny the guarantee, and may withhold a decision on whether to honor the guarantee until the completion of such investigation. (d) Any information provided to SBA by a Lender or other party will not prejudice, or be construed as effecting any waiver of, SBA's right to deny liability for a guarantee if one or more of the events listed in paragraph (a) of this section occur. (e) Unless SBA provides written notice to the contrary, the Lender remains responsible for all loan servicing ad liquidation actions until SBA honors its guarantee in full. [61 FR 3235, Jan. 31, 1996, as amended at 72 FR 18361, Apr. 12, 2007; 82 FR 39503, Aug. 21, 2017] § 120.530 Deferment of payment. SBA may agree to defer payments on a business loan for a stated period of time, and use such other methods as it considers necessary and appropriate to help in the successful operation of the Borrower. This policy applies to all business loan programs, including 504 loans. § 120.531 Extension of maturity. SBA may agree to extend the maturity of a loan for up to 10 years beyond its original maturity if the extension will aid in the orderly repayment of the loan. § 120.535 Standards for Lender and CDC loan servicing, loan liquidation and debt collection litigation. (a) Service using prudent lending standards. (b) Liquidate using prudent lending standards. (c) Absence of actual or apparent conflict of interest. (d) SBA rights to take over servicing or liquidation. [72 FR 18361, Apr. 12, 2007] § 120.536 Servicing and liquidation actions that require the prior written consent of SBA. (a) Actions by Lenders and CDCs. (1) Increases the principal amount of a loan above that authorized by SBA at loan origination. (2) Confers a Preference on the Lender or CDC or engages in an activity that creates a conflict of interest. (3) Compromises the principal balance of a loan. (4) Takes title to any property in the name of SBA. (5) Takes title to environmentally contaminated property, or takes over operation and control of a business that handles hazardous substances or hazardous wastes. (6) Transfers, sells or pledges more than 90% of a loan. (7) Takes any action for which prior written consent is required by a Loan Program Requirement. (b) Actions by CDCs only (other than PCLP CDCs). (1) Alters substantially the terms or conditions of any Loan Instrument. (2) Releases collateral having a cumulative market value in excess of 10 percent of the Debenture amount or $10,000, whichever is less. (3) Accelerates the maturity of the note. (4) Compromises or releases any claim against any Borrower or obligor, or against any guarantor, standby creditor, or any other person that is contingently liable for moneys owed on the loan. (5) Purchases or pays off any indebtedness secured by the property that serves as collateral for a defaulted 504 loan, such as payment of the debt(s) owed to a lien holder or lien holders with priority over the lien securing the loan. (6) Accepts a workout plan to restructure the material terms and conditions of a loan that is in default or liquidation. (7) Takes any action for which prior written consent is required by a Loan Program Requirement. (c) Documentation requirements. [72 FR 18361, Apr. 12, 2007] § 120.540 Liquidation and litigation plans. (a) SBA oversight. (b) Liquidation plan. (c) Litigation plan. (1) Non-Routine Litigation includes: (i) All litigation where factual or legal issues are in dispute and require resolution through adjudication; (ii) Any litigation where legal fees are estimated to exceed $10,000; (iii) Any litigation involving a loan where a Lender or Authorized CDC Liquidator has an actual or potential conflict of interest with SBA; and (iv) Any litigation involving a 7(a) or 504 loan where the Lender or CDC has made a separate loan to the same borrower which is not a 7(a) or 504 loan. (2) Routine Litigation means uncontested litigation, such as non-adversarial matters in bankruptcy and undisputed foreclosure actions, having estimated legal fees not exceeding $10,000. (d) Decision by SBA to take over litigation. (1) The litigation involves important governmental policy or program issues. (2) The case is potentially of great precedential value or there is a risk of adverse precedent to the Government. (3) The Lender or Authorized CDC Liquidator has an actual or potential conflict of interest with SBA. (4) The legal fees of the Lender or Authorized CDC Liquidator's outside counsel are unnecessary, unreasonable or not customary in the locality. (e) Amendments to a liquidation or litigation plan. (1) Changes arising during the course of Routine Litigation that transform the litigation into Non-Routine Litigation, such as when the debtor contests a foreclosure or when the actual legal fees incurred exceed $10,000. (2) If SBA has approved a litigation plan where anticipated legal fees exceed $10,000, or has approved an amended plan, and thereafter the anticipated or actual legal fees increase by more than 15 percent. (3) If SBA has approved a liquidation plan, or an amended plan, and thereafter the anticipated or actual costs of conducting the liquidation increase by more than 15 percent. (f) Limited waiver of need for a written liquidation or litigation plan. (g) Appeals. [72 FR 18362, Apr. 12, 2007, as amended at 74 FR 45753, Sept. 4, 2009; 87 FR 38909, June 30, 2022] § 120.541 Time for approval by SBA. (a) Except as set forth in paragraph (c) of this section, in responding to a request for approval under §§ 120.540(b), 120.540(c), 120.536(b)(5) or 120.536(b)(6), SBA will approve or deny the request within 15 business days of the date when SBA receives the request. If SBA is unable to approve or deny the request within this 15-day period, SBA will provide a written notice of no decision to the Lender or Authorized CDC Liquidator, stating the reason for SBA's inability to act; an estimate of the additional time required to act on the plan or request; and, if SBA deems appropriate, requesting additional information. (b) Except as set forth in paragraph (c) of this section, unless SBA gives its written consent to a proposed liquidation or litigation plan, or a proposed amendment of a plan, or any of the actions set forth in § 120.536(b)(5) or § 120.536(b)(6), SBA will not be deemed to have approved the proposed action. (c) If a Lender seeks to perform liquidation on a loan made under its authority as a CLP Lender by submitting a liquidation plan to SBA for approval, SBA will approve or deny such plan within ten business days. If SBA fails to approve or deny the plan within ten business days, SBA will be deemed to have approved such plan. [72 FR 18362, Apr. 12, 2007] § 120.542 Payment by SBA of legal fees and other expenses. (a) Legal fees SBA will not pay. (i) In asserting a claim, cross claim, counterclaim, or third-party claim against SBA or in defense of an action brought by SBA, unless payment of such fees or costs is otherwise required by federal law. (ii) In connection with actions of a Lender or Authorized CDC Liquidator's outside counsel for performing non-legal liquidation services, unless authorized by SBA prior to the action. (iii) In taking actions which solely benefit a Lender or Authorized CDC Liquidator and which do not benefit SBA, as determined by SBA. (2) SBA will not pay legal fees or other costs a Lender or CDC incurs in the defense of, or pay for any settlement or adverse judgment resulting from, a suit, counterclaim or other claim by a borrower, guarantor, or other party that seeks damages based upon a claim that the Lender or CDC breached any duty or engaged in any wrongful actions, unless SBA expressly directed the Lender or CDC to undertake the allegedly wrongful action that is the subject of the suit, counterclaim or other claim. (b) Legal fees SBA may decline to pay. (1) SBA determines that the Lender or Authorized CDC Liquidator failed to perform liquidation or litigation promptly and in accordance with commercially reasonable standards, in a prudent manner, or in accordance with any Loan Program Requirement or SBA approvals of either a liquidation or litigation plan or any amendment of such a plan. (2) A Lender or Authorized CDC Liquidator fails to obtain prior written approval from SBA for any liquidation or litigation plan, or for any amended liquidation or litigation plan, or for any action set forth in § 120.536, when such approval is required by these regulations or a Loan Program Requirement. (3) If SBA has not specifically approved fees or costs identified in an original or amended liquidation or litigation plan under § 120.540, and SBA determines that such fees or costs are not reasonable, customary or necessary in the locality in question. In such cases, SBA will pay only such fees as it deems are necessary, customary and reasonable in the locality in question. (c) Fees for liquidation actions performed by Authorized CDC Liquidators. Federal Register Federal Register (d) Appeals—liquidation costs. (e) Appeals—litigation costs. [72 FR 18362, Apr. 12, 2007, as amended at 74 FR 45753, Sept. 4, 2009; 87 FR 38909, June 30, 2022] § 120.545 What are SBA's policies concerning the liquidation of collateral and the sale of business loans and physical disaster assistance loans, physical disaster business loans and economic injury disaster loans? (a) Liquidation policy. (b) Sale and conversion of loans. (1) Sell a direct loan; (2) Convert a guaranteed or immediate participation loan to a direct loan; or (3) Convert an immediate participation loan to a guaranteed loan or a loan owned solely by the Lender. (4) Sell direct and purchased 7(a) and 501, 502, 503 and 504 loans and physical disaster home loans, physical disaster business loans and economic injury disaster loans in asset sales. SBA will offer these loans for sale to qualified bidders by means of competitive procedures at publicly advertised sales. Bidder qualifications will be set for each sale in accordance with the terms and conditions of each sale. (c) Disposal of collateral and assets acquired through foreclosure or conveyance. see (1) Competitive bids or negotiated sales. (2) Lease of acquired property. (d) Recoveries and security interests shared. (e) Guarantors. [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 44110, Aug. 13, 1999; 65 FR 17133, Mar. 31, 2000; 68 FR 51680, Aug. 28, 2003. Redesignated and amended at 72 FR 18362, Apr. 12, 2007] § 120.546 Loan asset sales. (a) General. (b) 7(a) loans For loans approved on or after May 14, 2007. (i) SBA's purchase of the guaranteed portion of the loan from the Registered Holder for a loan where the guaranteed portion has been sold in the Secondary Market pursuant to subpart F of this part and after default, the Lender has not exercised its option to purchase such guaranteed portion; or (ii) SBA's purchase of the guaranteed portion from the Lender, provided however, that if SBA purchased the guaranteed portion pursuant to § 120.520(a)(1) prior to the Lender's completion of liquidation for the loan, then SBA will not sell such loan in an asset sale until nine months from the date of SBA's purchase; or (iii) SBA receives written consent from the Lender. (2) For loans identified in paragraph (b)(1)(i) of this section, the Lender may request that SBA withhold the loan from an asset sale if the Lender submits a written request to SBA within 15 business days of SBA's purchase of the guaranteed portion of the loan from the Registered Holder and if such request addresses the issues described in this subparagraph. The Lender's written request must advise SBA of the status of the loan, the Lender's plans for workout and/or liquidation, including and pending sale of loan collateral or foreclosure proceedings arranged prior to SBA's purchase that already are underway, and the Lender's estimated schedule for restructuring the loan or liquidating the collateral. SBA will consider the Lender's request and, based on the circumstances, SBA in its sole discretion may elect to defer including the loan in an asset sale in order to provide the Lender additional time to complete the planned restructuring and/or liquidation actions. (3) For loans approved before May 14, 2007. (4) After SBA has purchased the guaranteed portion of a loan from the Registered Holder or from the Lender, the Lender must continue to perform all necessary servicing and liquidation actions for the loan up to the point the loan is transferred to the purchaser in an asset sale. The Lender also must cooperate and take all necessary actions to effectuate both the asset sale and the transfer of the loan to the purchaser in the asset sale. (c) 504 loans PCLP Loans. (2) All other 504 loans. [72 FR 18364, Apr. 12, 2007] Homestead Protection for Farmers § 120.550 What is homestead protection for farmers? SBA may lease to a farmer-Borrower the farm residence occupied by the Borrower and a reasonable amount of adjoining property (no more than 10 acres and seven farm buildings), if they were acquired by SBA as a result of a defaulted farm loan made or guaranteed by SBA ( see § 120.551 Who is eligible for homestead protection? SBA must notify the Borrower in possession of the availability of these homestead protection rights within 30 days after SBA acquires the property. A farmer-Borrower must: (a) Apply for the homestead occupancy to the SBA field office which serviced the loan within 90 days after SBA acquires the property; (b) Provide evidence that the farm produces farm income reasonable for the area and economic conditions; (c) Show that at least 60 percent of the Borrower and spouse's gross annual income came from farm or ranch operations in at least any two out of the last six calendar years; (d) Have resided on the property during the previous six years; and (e) Be personally liable for the debt. § 120.552 Lease. If approved, the applicant must personally occupy the residence during the term of the lease and pay a reasonable rent to SBA. The lease will be for a period of at least 3 years, but no more than 5 years. A lease of less than 5 years may be renewed, but not beyond 5 years from the original lease date. During or at the end of the lease period, the lessee has a right of first refusal to reacquire the homestead property under terms and conditions no less favorable than those offered to any other purchaser. § 120.553 Appeal. If the application is denied, the Borrower may appeal the decision to the D/FA. Until the conclusion of any appeal, the Borrower may retain possession of the homestead property. § 120.554 Conflict of laws. In the event of a conflict between the homestead provisions at §§ 120.550 through 120.553 of this part, and any state law relating to the right of a Borrower to designate for separate sale or to redeem part or all of the real property securing a loan foreclosed by the Lender, state law shall prevail. Subpart F—Secondary Market Fiscal and Transfer Agent (FTA) § 120.600 Definitions. (a) Certificate (b) Current (c) Dollar-Weighted Average Net Rate (d) FTA (e) Note Rate (f) Net Rate (g) Pool (h) Pool Assembler (1) Organizes and packages a Pool by acquiring the SBA guaranteed portions of loans from Lenders; (2) Resells fractional interests in the Pool to Registered Holders; and (3) Directs the FTA to issue Certificates. (i) Pool Rate (j) Registered Holder (k) SBA's Secondary Market Program Guide (l) Weighted Average Coupon (WAC) Pool [61 FR 3235, Jan. 31, 1996, as amended at 73 FR 67102, Nov. 13, 2008; 76 FR 63546, Oct. 12, 2011] § 120.601 SBA Secondary Market. The SBA secondary market (“Secondary Market”) consists of the sale of Certificates, representing either a fractional undivided interest in some or all of the guaranteed portion of an individual 7(a) guaranteed loan or a fractional undivided interest in a Pool consisting of the SBA guaranteed portions of a number of 7(a) guaranteed loans. Transactions involving interests in Pools or the sale of individual guaranteed portions of loans are governed by the contracts entered into by the parties, SBA's Secondary Market Program Guide, and this subpart. See sections 5(f), (g), and (h) of the Small Business Act (15 U.S.C. 634(f), (g), and (h)). [76 FR 63546, Oct. 12, 2011] Certificates § 120.610 Form and terms of Certificates. (a) General form and content. (b) Face amount of Pool Certificate. Federal Register. (c) Basis of payment for Pool Certificates. (d) Basis of payment for Individual Certificates. (e) Interest rate on Pool Certificate. [61 FR 3235, Jan. 31, 1996, as amended at 73 FR 67102, Nov. 13, 2008] § 120.611 Pools backing Pool Certificates. (a) Pool characteristics. (1) A minimum number of guaranteed portions of loans; (2) A minimum aggregate principal balance of the guaranteed portions; (3) A maximum percentage of the Pool which an individual guaranteed portion may constitute; (4) A maximum allowable difference between the highest and lowest note interest rates; (5) A maximum allowable difference between the remaining terms to maturity of the loans in the Pool; (6) A minimum weighted average maturity at Pool formation; and (7) A maximum allowable difference between the highest and lowest Net Rate on the guaranteed portions that are placed in a WAC Pool. (b) Adjustment of Pool characteristics. (c) Increments of guaranteed portion. [61 FR 3235, Jan. 31, 1996, as amended at 73 FR 67102, Nov. 13, 2008; 76 FR 63546, Oct. 12, 2011] § 120.612 Loans eligible to back Certificates. (a) Pool Certificates are backed by the SBA guaranteed portions of loans comprising the Pool. An Individual Certificate is backed by the SBA guaranteed portion of a single loan. Any such loan must: (1) Be current as of the date the Pool is formed or the individual guaranteed portion of a loan is initially sold in the Secondary Market; (2) Be guaranteed under the Act; and (3) Meet such other standards as SBA may determine to be necessary for the successful operation of the Secondary Market program. (b) The loans that back a Pool must meet the SBA requirements in effect at the time the Pool is formed. § 120.613 Secondary Participation Guarantee Agreement. When a Lender wants to sell the guaranteed portion of a loan, it enters into a Secondary Participation Guarantee Agreement (“SPGA”) with SBA and the prospective purchaser. The terms of sale between the Lender and the purchaser cannot require the Lender or SBA to repurchase the guaranteed portion of the loan except in accordance with the terms of the SPGA. Before execution of the SPGA, the Lender must: (a) Submit to FTA a copy of the proposed SPGA, the note, and such other documents as SBA may require; (b) Except for export working capital loans, disburse to the Borrower the full amount of the loan; and (c) Pay SBA all guarantee fees relevant to the loan in full. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 51680, Aug. 28, 2003] The SBA Guarantee of a Certificate § 120.620 SBA guarantee of a Pool Certificate. (a) Extent of Guarantee. (b) SBA guarantee backed by full faith and credit. § 120.621 SBA guarantee of an Individual Certificate. (a) Extent of SBA guarantee. (b) What triggers the SBA guarantee. (1) The Borrower remains in uncured default for 60 days on payments of principal or interest due on the note; (2) The Lender fails to send to the FTA on a timely basis payments it received from the Borrower; or (3) The FTA fails to send to the Registered Holder on a timely basis any payments it has received from the Lender. (c) Full faith and credit. Pool Assemblers § 120.630 Qualifications to be a Pool Assembler. (a) Application to become Pool Assembler. (1) Is regulated by the appropriate agency as defined in section 3(a)(34)(G) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(34)(G)); (2) Meets all financial and other applicable requirements of its regulatory authority and the Government Securities Act of 1986, as amended (Pub. L. 99-571, 100 Stat. 3208); (3) Has the financial capability to assemble acceptable and eligible guaranteed loan portions in sufficient quantity to support the issuance of Pool Certificates; and (4) Is in good standing with SBA (as the D/FA determines in his or her discretion), and is Satisfactory with the Office of the Comptroller of the Currency (“OCC”) if it is a national bank, the Federal Deposit Insurance Corporation if it is a bank not regulated by the OCC, or the Financial Industry Regulatory Authority (“FINRA”) if it is a member as determined by SBA. (5) For any pool assembler that is an SBA Lender, that the SBA Lender has satisfactory SBA performance, as determined by SBA in its discretion. The Lender's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission). (b) Approval by SBA. (c) Conduct of business by Pool Assembler. (1) Meets the eligibility standards in paragraph (a) of this section; (2) Conducts its business in accordance with SBA regulations and accepted securities or banking industry practices, ethics, and standards; and (3) Maintains its books and records in accordance with generally accepted accounting principles or in accordance with the guidelines of the regulatory body governing its activities. [61 FR 3235, Jan. 31, 1996, as amended at 73 FR 75517, Dec. 11, 2008; 82 FR 39503, Aug. 21, 2017] § 120.631 Suspension or termination of Pool Assembler. (a) Suspension or termination. (1) Does not comply with any of the requirements in § 120.630 (a) and (c); (2) Has been indicted or otherwise formally charged with, or convicted of, a misdemeanor or felony; (3) Has received an adverse civil judgment that it has committed a breach of trust or a violation of a law or regulation protecting the integrity of business transactions or relationships; (4) Has not formed a Pool for at least three years; or (5) Is under investigation by its regulating authority for activities which may affect its fitness to participate in the Secondary Market. (b) Suspension procedures. (c) Notice of termination. Miscellaneous Provisions § 120.640 Administration of the Pool and Individual Certificates. (a) FTA responsibility. (b) Self-liquidating. (c) SBA's right to subrogation. (d) SBA ownership rights not limited. § 120.641 Disclosure to purchasers. (a) Information to purchaser. (b) Information on transfer document. (c) Information in prospectus. § 120.642 Requirements before the FTA issues Pool Certificates. Before the FTA issues any Pool Certificate, the Pool Assembler must deliver to it the following documents: (a) A properly completed Pool application form; (b) Either: (1) Individual Certificates evidencing the guaranteed portions comprising the Pool; or (2) An executed SPGA and related documentation for the loans whose guaranteed portions are to be part of the Pool; and (c) Any other documentation which SBA may require. § 120.643 Requirements before the FTA issues Individual Certificates. (a) FTA issuance of initial Certificate. (1) An executed SPGA; (2) A copy of the note representing the guaranteed loan; and (3) Any other documentation which SBA may require. (b) Review of documentation. SBA may review or require the FTA to review any documentation before the FTA issues a Certificate. § 120.644 Transfers of Certificates. (a) General rule. (b) Transfer on FTA records. (c) Contents of letter of transmittal accompanying the transfer of Certificates. (i) Pool number, if applicable; (ii) Certificate number; (iii) Name of purchaser of Certificate; (iv) Address and tax identification number of the purchaser; (v) Name and telephone number of the person handling or facilitating the transfer; (vi) Instructions for the delivery of the new Certificate. (2) The Registered Holder must also send the fee which the FTA charges for this service. The FTA will supply fee information to the Registered Holder. (d) Lender cannot purchase guaranteed portion of loan it made. § 120.645 Redemption of Certificates. (a) Redemption of Individual Certificate. (b) Redemption of Pool Certificate. § 120.650 Registration duties of FTA in Secondary Market. The FTA registers all Certificates. This means it issues, transfers title to, and redeems them. All financial transactions relating to a guaranteed portion of a loan flow through the FTA. In fulfilling its obligation to keep the central registry current, the FTA may, with SBA's approval, obtain any necessary information from the parties involved in the Secondary Market. § 120.651 Claim to FTA by Registered Holder to replace Certificate. (a) To replace a Certificate because of loss, theft, destruction, mutilation, or defacement, the Registered Holder must: (1) Give the FTA information about the Certificate and the facts relating to the claim; (2) File an indemnity bond acceptable to SBA and the FTA with a surety to protect the interests of SBA and the FTA; (3) Pay the FTA its fee to replace a Certificate; and (4) Use an affidavit of loss (form available from the FTA) to report: (i) The name and address of the Registered Holder (and the name and capacity of any representative actually filing the claim); (ii) The Certificate by Pool number, if applicable; (iii) The Certificate number; (iv) The original principal amount; (v) The name in which the Certificate was registered; (vi) Any assignment, endorsement or other writing on the Certificate; and (vii) A statement of the circumstances of the theft or loss. (b) When the FTA receives notice of the theft or loss, it will stop any transfer of the Certificate. The Registered Holder must send to the FTA all available portions of a mutilated or defaced Certificate. When the Registered Holder completes these steps, the FTA will replace the Certificate. § 120.652 FTA fees. The FTA may charge reasonable servicing fees, transfer fees, and other fees as the SBA and FTA may negotiate under contract. Suspension or Revocation of Participant in Secondary Market § 120.660 Suspension or revocation. (a) Temporary suspension or revocation of Lender, broker, dealer, or Registered Holder for violation of Secondary Market rules and regulations or other risks to SBA. (1) Committing a serious violation, in SBA's discretion, of: (i) The regulations governing the Secondary Market; or (ii) Any provisions in the contracts entered into by the parties, including SBA Forms 1086, 1088 and 1454; (2) Knowingly submitting false or fraudulent information to the SBA or FTA; or (3) A Lender's receipt, from its primary Federal or state regulator (including SBA), of a cease and desist order, a consent agreement affecting capital or commercial lending issues, a supervisory action citing unsafe or unsound banking practices, or any other supervisory action a primary regulator establishes hereafter that addresses unsafe or unsound lending practices; or a going concern opinion issued by the Lender's auditor. A Lender subject to a public action or going concern opinion must notify the D/FA and the D/OCRM within five (5) business days (or as soon as practicable thereafter) of the public issuance of any such action or the issuance of a going concern opinion. The Lender notice shall include copies of all relevant documents for SBA review. (b) Additional rules for suspension or revocation of broker or dealer. (1) Its supervisory agency has revoked or suspended the broker or dealer from engaging in the securities business, or is investigating the firm or broker for a practice which SBA considers, in its sole discretion, to be relevant to the broker's or dealer's fitness to participate in the Secondary Market; (2) The broker or dealer has been indicted or otherwise formally charged with a misdemeanor or felony which bears on its fitness to participate in the Secondary Market; or (3) A civil judgment is entered holding that the broker or dealer has committed a breach of trust or a violation of any law or regulation protecting the integrity of business transactions or relationships. (c) Notice to suspend or revoke. (d) Early termination of suspension or revocation. [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39503, Aug. 21, 2017] Subpart G—Microloan Program § 120.700 What is the Microloan Program? The Microloan Program assists women, low income individuals, minority entrepreneurs, and other small businesses which need small amounts of financial assistance. Under this program, SBA makes direct and guaranteed loans to Intermediaries (as defined below) who use the proceeds to make loans to eligible borrowers. SBA may also make grants under the program to Intermediaries and other qualified nonprofit entities to be used for marketing, management, and technical assistance to the program's target population. [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001] § 120.701 Definitions. Deposit account Economically Distressed Area Grant Insured depository institution Intermediary (1) A private, nonprofit community development corporation or other entity; (2) A consortium of private, nonprofit community development corporations or other entities; (3) A quasi-governmental economic development entity, other than a state, county, municipal government or any agency thereof; or (4) An agency of or a nonprofit entity established by a Native American Tribal Government. Microloan Non-Federal sources Rural Area (1) In a nonmetropolitan county (as defined by the Secretary of Agriculture) or its equivalent thereof; or (2) In a metropolitan county or its equivalent that has a resident population of less than 20,000 if the Small Business Administration has determined such political subdivision or area to be rural. Specialized Intermediary [89 FR 35689, May 2, 2024] § 120.702 Are there limitations on who can be an Intermediary or on where an Intermediary may operate? (a) Prior experience requirement. (1) Have made and serviced short-term fixed rate loans of not more than $50,000 to newly established or growing small businesses for at least one year: and (2) Have at least one year of experience providing technical assistance to its borrowers. (b) Limitation to one state. [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47878, Sept. 14, 2001; 73 FR 75517, Dec. 11, 2008; 76 FR 63546, Oct. 12, 2011] § 120.703 How does an organization apply to become an Intermediary? (a) Application Process. (b) Documentation in support of application. (1) The types of businesses assisted in the past and those the applicant intends to assist with Microloans; (2) The average size of the loans made in the past and the average size of intended Microloans; (3) The extent to which the applicant will make Microloans to small businesses in rural areas; (4) The geographic area in which the applicant intends to operate, including a description of the economic and demographic conditions existing in the intended area of operations; (5) The availability and cost of obtaining credit for small businesses in the area; (6) The applicant's experience and qualifications in providing marketing, management, and technical assistance to small businesses; and (7) Any plan to use other technical assistance resources (such as counselors from the Service Corps of Retired Executives) to help Microloan borrowers. § 120.704 How are applications evaluated? (a) Evaluation criteria. (b) Preference for organizations which make very small loans. (c) Consideration of quasi-governmental organizations. [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47878, Sept. 14, 2001] § 120.705 What is a Specialized Intermediary? At the end of an Intermediary's first year of participation in the program, SBA will determine whether it qualifies as a Specialized Intermediary. An Intermediary qualifies as a Specialized Intermediary if it maintains a portfolio of Microloans averaging $10,000 or less. Specialized Intermediaries qualify for more favorable interest rates on SBA loans. If, after the first year, an Intermediary qualifies as a Specialized Intermediary, the special interest rate is applied retroactively to SBA loans made to the Intermediary. After the first year SBA will determine an Intermediary's qualifications as a Specialized Intermediary annually, based on its lending practices during the term of its participation in the program. Specialized Intermediaries also qualify for a greater amount of technical assistance grant funding. [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47878, Sept. 14, 2001] § 120.706 What are the terms and conditions of an SBA loan to an Intermediary? (a) Loan amount. (b) Repayment terms. (c) Interest rate. (d) Collateral. (e) Default. (f) Fees. [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001; 76 FR 63546, Oct. 12, 2011; 87 FR 38909, June 30, 2022; 89 FR 35690, May 2, 2024] § 120.707 What conditions apply to loans by Intermediaries to Microloan borrowers? (a) General. (b) Amount and maturity. (c) Interest rate. (1) On loans of more than $10,000, the interest rate charged on the SBA loan to the Intermediary, plus 7.75 percentage points; and (2) On loans of $10,000 or less, the interest rate charged on the SBA loan to the Intermediary, plus 8.5 percentage points. [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001; 66 FR 47878, Sept. 14, 2001; 76 FR 63547, Oct. 12, 2011; 80 FR 34046, June 15, 2015; 85 FR 7651, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020; 87 FR 38909, June 30, 2022; 89 FR 34101, Apr. 30, 2024] § 120.708 What is the Intermediary's financial contribution? The Intermediary must contribute from non-Federal sources an amount equal to 15 percent of any loan that it receives from SBA. The contribution may not be borrowed. For purposes of this program, Community Development Block Grants are considered non-Federal sources. § 120.709 What is the Microloan Revolving Fund? The Microloan Revolving Fund (“MRF”) is a Deposit Account into which an Intermediary must deposit the proceeds from SBA loans, its contributions from non-Federal sources, and payments from its Microloan borrowers. An Intermediary may only withdraw from this account the money needed to establish the Loan Loss Reserve Fund (§ 120.710), proceeds for each Microloan it makes, and any payments to be made to SBA. [61 FR 3235, Jan. 31, 1996, as amended at 80 FR 34046, June 15, 2015] § 120.710 What is the Loan Loss Reserve Fund? (a) General. (b) Level of Loan Loss Reserve Fund. (c) SBA review of Loan Loss Reserve Fund. (d) Reduction of Loan Loss Reserve Fund. (e) What must an intermediary demonstrate to get a reduction in Loan Loss Reserve Fund? (1) Have satisfactory SBA performance, as determined by SBA in its discretion. The Intermediary's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission); and (2) No other factors exist that may impair the Intermediary's ability to repay all obligations which it owes to the SBA under the Microloan program. [61 FR 3235, Jan. 31, 1996, as amended at 65 FR 17439, Apr. 3, 2000; 73 FR 75517, Dec. 11, 2008; 80 FR 34046, June 15, 2015; 82 FR 39504, Aug. 21, 2017] § 120.711 What rules govern Intermediaries? Intermediaries must operate in accordance with applicable statutes, regulations, policy notices, SBA's Standard Operating Procedures (SOPs), and the information in the application. § 120.712 How does an Intermediary get a grant to assist Microloan borrowers? (a) General. (2) In fiscal years in which the amount appropriated for grants is sufficient to provide all Intermediaries with a base grant equal to 25 percent or more of their total outstanding SBA loan balances, then the amount of base grants to eligible Intermediaries will be equal to at least 25 percent of the outstanding balance of all SBA loans to the Intermediary and not more than 30 percent of such balance. (3) The Intermediary must contribute, solely from non-Federal sources, an amount equal to 25 percent of the grant. Contributions may be made in cash or in kind. (b) Limitations on grant funds. (1) Up to 50 percent of the grant funds may be used to provide information and technical assistance to prospective Microloan borrowers; provided, however, that no more than 5 percent of the grant funds may be used to market or advertise the products and services of the Microloan Intermediary directly related to the Microloan Program; and (2) Grant monies may be used to attend training required by SBA. (c) Intermediaries eligible to receive additional bonus grant monies. (1) Is a Specialized Intermediary; (2) Provides not less than 25 percent of its loans to small business concerns located in or owned by one or more residents of an Economically Distressed Area; or (3) Maintains a portfolio of Microloans of which at least 25 percent is serving Rural Areas. (d) Third party contracts for technical assistance. [61 FR 3235, Jan. 31, 1996, as amended at 66 FR 47073, Sept. 11, 2001; 76 FR 63547, Oct. 12, 2011; 80 FR 34047, June 15, 2015; 85 FR 7651, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020; 87 FR 38909, June 30, 2022; 89 FR 35690, May 2, 2024] § 120.713 Does SBA provide technical assistance to Intermediaries? SBA may procure technical assistance for an Intermediary to improve its knowledge, skill, and understanding of microlending by awarding a grant to a more experienced Intermediary. SBA may also obtain such assistance for prospective Intermediaries in areas of the country that are either not served or underserved by an existing Intermediary. §§ 120.714-120.715 [Reserved] § 120.716 What is the minimum number of loans an Intermediary must make each Federal fiscal year? (a) Minimum loan requirement. (1) For fiscal year 2015, four microloans, (2) For fiscal year 2016, six microloans, (3) For fiscal year 2017, eight microloans, and (4) For fiscal years 2018 and thereafter, ten microloans per year. (b) Intermediaries that do not meet the minimum loan requirement are not eligible to receive new grant funding unless they submit a corrective action plan acceptable to SBA, in its discretion. Intermediaries that have submitted acceptable corrective action plans may receive a reduced grant at SBA's discretion. [80 FR 34047, June 15, 2015] Subpart H—Development Company Loan Program (504) § 120.800 [Reserved] § 120.801 How a 504 Project is financed. (a) One or more small businesses may apply for 504 financing through a CDC serving the area where the 504 Project is located. SBA issues a loan number if it agrees to guarantee part of the funding for a Project. (b) Usually, a Project requires interim financing from an interim lender (often the same lender that later provides a portion of the permanent financing). (c) Generally, permanent financing of the Project consists of: (1) A contribution by the small business in an amount of at least 10 percent of the Project costs; (2) A loan made with the proceeds of a CDC Debenture for up to 40 percent of the Project costs and certain administrative costs, collateralized by a second lien on the Project Property; and (3) A Third Party Loan (d) The Debenture is guaranteed 100 percent by SBA (with the full faith and credit of the United States), and sold to Underwriters who form Debenture Pools. Investors purchase interests in Debenture Pools and receive Certificates representing ownership of all or part of a Debenture Pool. SBA and CDCs use various agents to facilitate the sale and service of the Certificates and the orderly flow of funds among the parties. [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2118, Jan. 13, 1999; 88 FR 21899, Apr. 12, 2023] § 120.802 Definitions. The following terms have the same meaning wherever they are used in this subpart. Defined terms are capitalized wherever they appear. Area of Operations Central Servicing Agent Certificate Debenture Debenture Pool Designated Attorney Investor Job Opportunity Lead SBA Office Local Economic Area Multi-State CDC Net Debenture Proceeds Priority CDC Project Project Property Third Party Loan Underwriter [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2118, Jan. 13, 1999; 65 FR 42632, July 11, 2000; 68 FR 57980, Oct. 7, 2003; 89 FR 102701, Dec. 18, 2024] Certification Procedures To Become a CDC § 120.810 Applications for certification as a CDC. (a) An applicant for certification as a CDC must apply to the SBA District Office serving the jurisdiction in which the applicant has or proposes to locate its headquarters (see § 101.103 of this chapter). (b) The applicant must apply for an Area of Operations. The applicant's proposed Area of Operations must include the entire State in which the applicant is incorporated, and may include Local Economic Areas. An applicant may not apply to cover an area as a Multi-State CDC. (c) The applicant must demonstrate that it satisfies the CDC certification and operational requirements in §§ 120.820, and 120.822 through 120.824. The applicant also must include an operating budget, approved by the applicant's Board of Directors, which demonstrates the required financial ability (as described in § 120.825), and a plan to meet CDC operational requirements (without specializing in a particular industry) in §§ 120.821, and 120.826 through 120.830. (d) The District Office will forward the application and its recommendation to the D/FA, who will make the final decision. SBA will notify the CDC in writing of its decision, and, if the petition is declined, the reasons for the decision. [68 FR 57980, Oct. 7, 2003] § 120.812 Probationary period for newly certified CDCs. (a) Newly certified CDCs will be on probation for a period of two years from the date of certification, at the end of which the CDC must petition the Lead SBA Office for: (1) Permanent CDC status; or (2) A one-year extension of probation. If a one-year extension of probation is granted, at the end of this extension period, the CDC must petition the Lead SBA Office for permanent CDC status or an additional one-year extension of probation. (b) SBA will consider the failure to file a petition before the end of the probationary period as a withdrawal from the 504 program. If the CDC elects withdrawal, SBA will direct the CDC to transfer all funded and/or approved loans to another CDC, SBA, or another servicer approved by SBA. (c) The Lead SBA Office will send the petition and its recommendation to the D/FA, who will make the final decision. SBA will determine permanent CDC status or an extension of probation, in part, based upon the CDC's compliance with the certification and operational requirements in §§ 120.820 through 120.830. To be considered for permanent CDC status or an extension of probation, the CDC must have satisfactory SBA performance, as determined by SBA in its discretion. The CDC's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures, loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission). (d) SBA will notify the CDC in writing of its decision, and, if the petition is declined, the reasons for the decision. If SBA declines the petition, the CDC will no longer have authority to participate in the 504 Loan Program and SBA will direct the CDC to transfer all funded and/or approved loans to another CDC, SBA, or another servicer approved by SBA. [68 FR 57980, Oct. 7, 2003, as amended at 73 FR 75517, Dec. 11, 2008; 82 FR 39504, Aug. 21, 2017; 87 FR 38909, June 30, 2022] Requirements for CDC Certification and Operation § 120.816 CDC non-profit status and good standing. A CDC must be a non-profit corporation, except that for-profit CDCs certified by SBA prior to January 1, 1987 may retain their certifications. An SBIC may not become a CDC. A CDC must be in good standing based upon the following criteria: (a) In good standing in the State in which the CDC is incorporated and any other State in which the CDC conducts business. (b) In compliance with all laws, including taxation requirements, in the State in which the CDC is incorporated and any other State in which the CDC conducts business. (c) Must have satisfactory SBA performance, as determined by SBA in its discretion. The CDC's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures, loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission). (d) If a non-profit CDC has a membership and the members are responsible for electing or appointing voting directors to the CDC's Board of Directors, no person or entity can control more than 25 percent of the CDC's voting membership. [68 FR 57980, Oct. 7, 2003, as amended at 73 FR 75518, Dec. 11, 2008. Redesignated at 79 FR 15649, Mar. 21, 2014; 82 FR 39504, Aug. 21, 2017; 84 FR 66294, Dec. 4, 2019] § 120.818 Applicability to existing for-profit CDCs. (a) Unless expressly provided otherwise in the regulations, any Loan Program Requirement that applies to non-profit CDCs also applies to for-profit CDCs. (b) No person or entity can own or control more than 25 percent of a for-profit CDC's stock. [79 FR 15649, Mar. 21, 2014, as amended at 84 FR 66294, Dec. 4, 2019] § 120.820 CDC Affiliation. (a) A CDC must be independent and must not be affiliated (as determined in accordance with § 121.103 of this chapter) with any Person (as defined in § 120.10) except as permitted under this section. (b) A CDC may be affiliated with an entity (other than a 7(a) Lender or another CDC) whose function is economic development in the same Area of Operations and that is either a non-profit entity or a State or local government or political subdivision (e.g., council of governments). (c) A CDC must not be affiliated (as determined in accordance with § 121.103) with or invest, directly or indirectly, in a 7(a) Lender. A CDC that was affiliated with a 7(a) Lender as of November 6, 2003 may continue such affiliation. (d) A CDC must not be affiliated (as determined in accordance with § 121.103 of this chapter) with another CDC. In addition, a CDC must not directly or indirectly invest in or finance another CDC, except with the prior written approval of D/FA or designee and D/OCRM or designee if they determine in their discretion that such approval is in the best interests of the 504 Loan Program. (e) A CDC may remain affiliated with a for-profit entity (other than a 7(a) Lender) if such affiliation existed prior to March 21, 2014. A CDC may also be affiliated with a for-profit entity (other than a 7(a) Lender) whose function is economic development in the same Area of Operations with the prior written approval of the D/FA or designee if he or she determines in his or her discretion that such approval is in the best interests of the 504 Loan Program. (f) A CDC must not directly or indirectly invest in a Licensee (as defined in § 107.50 of this chapter) licensed by SBA under the SBIC program authorized in Part A of Title III of the Small Business Investment Act, 15 U.S.C. 681 et seq. A CDC that has an SBA-approved investment in a Licensee as of November 6, 2003 may retain such investment. (g) Notwithstanding paragraphs (b), (c), and (e) of this section, a CDC may be affiliated with a Community Advantage SBLC. Additionally, CDCs that are also Community Advantage Pilot Program Lenders as of May 11, 2023 may be licensed as Community Advantage SBLCs. [79 FR 15649, Mar. 21, 2014, as amended at 88 FR 21900, Apr. 12, 2023] § 120.821 CDC Area of Operations. A CDC must operate only within its designated Area of Operations approved by SBA except as provided in § 120.839. [68 FR 57980, Oct. 7, 2003] § 120.823 CDC Board of Directors. (a) The CDC, whether for-profit or non-profit, must have a Board of Directors with at least seven (7) voting directors who live or work in the CDC's State of incorporation or in an area that is contiguous to that State that meets the definition of a Local Economic Area for the CDC. The Board must be actively involved in encouraging economic development in the Area of Operations. The initial Board may be created by any method permitted by applicable State law. At a minimum, the Board must have directors with background and expertise in internal controls, financial risk management, commercial lending, legal issues relating to commercial lending, corporate governance, and economic, community or workforce development. Directors may be either currently employed or retired. (b) At least two voting members of the Board of Directors, other than the CDC manager, must possess commercial lending experience satisfactory to SBA. When the Board votes on SBA loan approval or servicing actions, at least two voting Board members, with such commercial lending experience, other than the CDC manager, must be present and vote. (c) The Board of Directors must meet at least quarterly and shall be responsible for the actions of the CDC and any committees established by the Board of Directors. In addition, the Board of Directors is subject to the following requirements: (1) Except for the CDC manager, no person on the CDC's staff may be a voting director of the Board; (2) A quorum must be present to transact business. The quorum shall be set by the CDC but shall be no less than 50% of the voting members of the Board of Directors; (3) Attendance at meetings may be through any format permitted by State law; (4) No CDC Board member may serve on the Board of another CDC. (d) The Board shall have and exercise all corporate powers and authority and be responsible for all corporate actions and business. There must be no actual or appearance of a conflict of interest with respect to any actions of the Board. The Board is responsible for ensuring that the structure and operation of the CDC, as set forth in the Bylaws, comply with SBA's Loan Program Requirements. The responsibilities of the Board include, but are not limited, to the following: (1) Approving the mission and the policies for the CDC; (2) Hiring, firing, supervising and annually evaluating the CDC manager; (3) Setting the salary for the CDC manager and reviewing all salaries; (4) Establishing committees, at its discretion, including the following: (i) Executive Committee. (A) Be chosen by and from the Board of Directors from the Board; and (B) Meet the same organizational and representational requirements as the Board of Directors, except that the Executive Committee must have a minimum of four voting members who must be present to conduct business. (ii) Loan Committee. (A) Be chosen by the Board of Directors, and consist of individuals with a background in either financial risk management, commercial lending, or legal issues relating to commercial lending who are not associated with another CDC; (B) Have a Quorum of at least four Loan Committee members authorized to vote; (C) Have at least two (2) Loan Committee members with commercial lending experience satisfactory to SBA; (D) Have no actual or appearance of a conflict of interest, including for example, a Loan Committee member participating in deliberations on a loan for which the Third Party Lender is the member's employer or the member is otherwise associated with the Third Party Lender; and (E) Consist only of Loan Committee members who live or work in the CDC's State of incorporation or in an area that meets the definition of a Local Economic Area for the CDC, except that, for Projects that are financed under a CDC's Multi-State authority, the CDC must satisfy the requirements of either § 120.835(c)(1) or (2) when voting on that Project. (5) Ensuring that the CDC's expenses are reasonable and customary; (6) Hiring directly an independent auditor to provide the financial statements in accordance with Loan Program Requirements; (7) Monitoring the CDC's portfolio performance on a regular basis; (8) Reviewing a semiannual report on portfolio performance from the CDC manager, which would include, but not be limited to, asset quality and industry concentration; (9) Ensuring that the CDC establishes and maintains adequate reserves for operations; (10) Ensuring that the CDC invests in economic development in each of the States in its Area of Operations in which it has a portfolio, and approving each investment. If the investment is included in the CDC's budget, the Board's approval of the budget may be deemed approval of the investment. If the investment is not included in the budget, the Board must separately approve the investment; (11) Establishing a policy in the Bylaws of the CDC prohibiting an actual conflict of interest or the appearance of same, and enforcing such policy (see § 120.140 and § 120.851); (12) Retaining accountability for all of the actions of the CDC; (13) Establishing written internal control policies, in accordance with § 120.826; (14) Establishing commercially reasonable loan approval policies, procedures, and standards. The Bylaws must include any delegations of authority to the Loan Committee and Executive Committee, if either Committee has been established. In addition, the CDC must establish and set forth in detail in a policy manual its credit approval process. All 504 loan applications must have credit approval prior to submission to the Agency. The Loan Committee, if established, may be delegated the authority to provide credit approval for loans up to $2,000,000 but, for loans of $1,000,000 to $2,000,000, the Loan Committee's action must be ratified by the Board or Executive Committee prior to Debenture closing. Only the Board or Executive Committee, if authorized by the Board, may provide credit approval for loans greater than $2,000,000. (15) All members of the Board of Directors must annually certify in writing that they have read and understand this section, and copies of the certification must be included in the Annual Report to SBA. (e) The Board of Directors shall maintain Directors' and Officers' Liability and Errors and Omissions insurance in amounts established by SBA that are based on the size of the CDC's portfolio and other relevant factors. [79 FR 15649, Mar. 21, 2014, as amended at 82 FR 39504, Aug. 21, 2017; 84 FR 66294, Dec. 4, 2019] § 120.824 Professional management and staff, and contracts for services. (a) Management. (1) The CDC must submit a request for the D/FA (or designee) to approve, in consultation with the D/OCRM (or designee), a waiver of the requirement that the manager be employed directly by the CDC. In its request, the CDC must demonstrate that: (i) Another non-profit entity (that is not a CDC) that has the economic development of the CDC's Area of Operations as one of its principal activities will provide management services to the CDC and, if the manager is also performing services for the non-profit entity, the manager will be available to small businesses interested in the 504 program and to 504 loan borrowers during regular business hours; or (ii) The CDC submitting the request for the waiver is rural, has insufficient loan volume to justify having management employed directly by the CDC, and is requesting to contract with another CDC located in the same general area to provide the management. (2) The CDC must submit a request for the D/FA (or designee), in consultation with the D/OCRM (or designee), to pre-approve the contract for management services. This contract must comply with paragraphs (c)(2) through (4) and, if applicable, paragraph (d) of this section. (b) Professional staff. (c) Professional services contracts. e.g., (1) The contract must be pre-approved by the D/FA (or designee), subject to the following exceptions: (i) CDCs may contract for legal, accounting, and information technology services without SBA approval, except for legal services in connection with loan liquidation or litigation. (ii) CDCs may contract for independent loan review services with non-CDC entities without SBA approval. Contracts between CDCs for independent loan reviews must be pre-approved by SBA in accordance with paragraph (d) of this section. (2) If the contract requires SBA's prior approval under paragraph (c)(1) of this section, the CDC's Board must explain to SBA why it is in the best interest of the CDC to obtain services through a contract and must demonstrate that: (i) The compensation under the contract is paid only by the CDC obtaining the services, is reasonable and customary for similar services in the Area of Operations, and is only for actual services performed; (ii) The full term of the contract (including options) is necessary and appropriate and the contract permits the CDC procuring the services to terminate the contract prior to its expiration date with or without cause; and (iii) There is no actual or apparent conflict of interest or self-dealing on the part of any of the CDC's officers, management, or staff, including members of the Board and Loan Committee, in the negotiation, approval or implementation of the contract. (3) Neither the contractor nor any officer, director, 20 percent or more equity owner, or key employee of a contractor may be a voting or non-voting member of the CDC's Board. (4) The CDC procuring the services must provide a copy of all executed contracts requiring SBA prior approval to SBA as part of the CDC's Annual Report submitted under § 120.830(a) unless the CDC certifies that it has previously submitted an identical copy of the executed contract to SBA. (5) With respect to any contract under which the CDC's staff are deemed co-employees of both the CDC and the contractor ( e.g., (6) If the contract is between CDCs, the CDCs and the contract must also comply with paragraph (d) of this section. (d) Professional Services Contracts between CDCs. (1) The contract between the CDCs must be pre-approved by the D/FA (or designee), in consultation with the D/OCRM (or designee), who determines in his or her discretion that such approval is in the best interests of the 504 Loan Program and that the terms and conditions of the contract are satisfactory to SBA. For management services, a CDC may contract with another CDC only in accordance with paragraph (a)(1)(ii) of this section. (2) Except for contracts for liquidation services and independent loan reviews: (i) The CDCs entering into the contract must be located in the same SBA Region or, if not located in the same SBA Region, must be located in contiguous States. For purposes of this provision, the location of a CDC is the CDC's State of incorporation; (ii) A CDC may provide assistance to only one CDC per State; and (iii) No CDC may provide assistance to another CDC in its State of incorporation or in any State in which it has Multi-State authority. (3) The Board of Directors for each CDC entering into the contract must be separate and independent and may not include any common directors. In addition, if either of the CDCs is for-profit, neither CDC may own any stock in the other CDC. The CDCs are also prohibited from comingling any funds. (4) With respect to contracts for independent loan reviews, CDCs may not review each other's portfolios or exchange any other services, nor may they enter into any other arrangement with each other that could appear to bias the outcome or integrity of the independent loan review. (5) The contract must satisfy the requirements set forth in paragraphs (c)(2) through (4) of this section. [84 FR 66294, Dec. 4, 2019] § 120.825 Financial ability to operate. A CDC must be able to sustain its operations continuously, with reliable sources of funds (such as income from services rendered and contributions from government or other sponsors). Any funds generated from 503 and 504 loan activity by a CDC remaining after payment of staff and overhead expenses must be retained by the CDC as a reserve for future operations or for investment in other local economic development activity in its Area of Operations. If a CDC is operating as a Multi-State CDC, it must maintain a separate accounting for each State of all 504 fee income and expenses and provide, upon SBA's request, evidence that the funds resulting from its Multi-State CDC operations are being invested in economic development activities in each State in which they were generated. [65 FR 42633, July 11, 2000] § 120.826 Basic requirements for operating a CDC. A CDC must operate in accordance with the following requirements: (a) In general. (b) Operations and internal controls. (1) Direct management to assign the responsibility for the internal control function (covering financial, credit, credit review, collateral, and administrative matters) to an officer or officers of the CDC; (2) Adopt and set forth procedures for maintenance and periodic review of the internal control function; (3) Direct the operation of a program to review and assess the CDC's 504-related loans. For the 504 review program, the internal control policies must specify the following: (i) Loan, loan-related collateral, and appraisal review standards, including standards for scope of selection (for review of any such loan, loan-related collateral or appraisal) and standards for work papers and supporting documentation; (ii) Loan quality classification standards consistent with the standardized classification systems used by the Federal Financial Institution Regulators; (iii) Specific control requirements for the CDC's oversight of Lender Service Providers; and (iv) Standards for training to implement the loan review program; and (4) Address other control requirements as may be established by SBA. (c) Annual Audited/Reviewed Financial Statements. (d) Auditor qualifications. (1) Is registered or licensed to practice as a public accountant, and is in good standing, under the laws of the state or other political subdivision of the United States in which the CDC's principal office is located; (2) Agrees in the engagement letter with the CDC to provide the SBA with access to and copies of any work papers, policies, and procedures relating to the services performed; (3)(i) Is in compliance with the AICPA Code of Professional Conduct; and (ii) Meets the independence requirements and interpretations of the Securities and Exchange Commission and its staff; (4) Has received a peer review or is enrolled in a peer review program that meets AICPA guidelines; and (5) Is otherwise acceptable to SBA. [73 FR 75518, Dec. 11, 2008, as amended at 84 FR 66295, Dec. 4, 2019] § 120.827 Other services a CDC may provide to small businesses. A CDC may provide a small business with assistance unrelated to the 504 loan program as long as the CDC does not make such assistance a condition of the CDC accepting from that small business an application for a 504 loan. An example of other services a CDC may provide is assisting a small business in applying for a 7(a) loan (as described in § 120.2). A CDC is subject to part 103 of this chapter when providing such assistance. [68 FR 57981, Oct. 7, 2003] § 120.828 Minimum level of 504 loan activity and restrictions on portfolio concentrations. (a) A CDC is required to receive SBA approval of at least four 504 loan approvals during two consecutive fiscal years. (b) A CDC's 504 loan portfolio must be diversified by business sector. [68 FR 57981, Oct. 7, 2003] § 120.829 Job Opportunity average a CDC must maintain. (a) A CDC's portfolio must maintain a minimum average of one Job Opportunity per an amount of 504 loan funding that will be specified by SBA from time to time in a Federal Register Federal Register (b) A CDC must indicate in its annual report the Job Opportunities actually or estimated to be provided by each Project. (c) If a CDC does not maintain the required average, it may retain its certification if it justifies to SBA's satisfaction its failure to do so in its annual report and shows how it intends to attain the required average. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57981, Oct. 7, 2003] § 120.830 Reports a CDC must submit. A CDC must submit the following reports to SBA: (a) An Annual Report within one hundred-eighty days after the end of the CDC's fiscal year (to include Federal tax returns for that year). A CDC that is certified by SBA within 6 months of the CDC's fiscal year-end is not required to submit an Annual Report for that year. The Annual Report must include, but is not limited to, the following: (1) Audited or Reviewed Financial Statements as required in § 120.826(c) and (d) for the CDC and any affiliates or subsidiaries of the CDC. (i) Audited financial statements must, at a minimum, include the following: (A) Audited balance sheet; (B) Audited statement of income (or receipts) and expenses; (C) Audited statement of source and application of funds; (D) Such footnotes as are necessary to an understanding of the financial statements; (E) Auditor's letter to management on internal control weaknesses; and (F) The auditor's report; and (ii) Reviewed financial statements must, at a minimum, include the following: (A) Balance sheet; (B) Statement of income (or receipts) and expenses; (C) Statement of source and application of funds; (D) Such footnotes as are necessary to an understanding of the financial statements; (E) The accountant's review report; and (2) Report on compensation: CDCs are required to provide detailed information on total compensation (including salary, bonuses and expenses) paid within the CDC's most recent tax year for current and former officers and directors, and for current and former employees and independent contractors with total compensation of more than $100,000 during that period. (3) Certification of members of the Board of Directors. Written annual certification by each Board member that he or she has read and understands the requirements set forth in § 120.823. (4) Report on investment in economic development. Written report on investments in economic development in each State in which the CDC has an outstanding 504 loan. (b) For each new associate and staff, a Statement of Personal History (for use by non-bank lenders and CDCs) and other information required by SBA; (c) Reports of involvement in any legal proceeding; (d) Changes in organizational status; (e) Changes in any condition that affects its eligibility to continue to participate in the 504 program; and (f) Quarterly service reports on each loan in its portfolio which is 60 days or more past due (and interim reports upon request by SBA). (g) Other reports as required by SBA. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57981, Oct. 7, 2003; 73 FR 75518, Dec. 11, 2008; 79 FR 15650, Mar. 21, 2014] Extending a CDC'S Area of Operations § 120.835 Application to expand an Area of Operations. (a) General. (b) Local Economic Area Expansion. (c) Multi-State expansion. (1) The CDC establishes a Loan Committee in the additional State consisting only of members who live or work in that State and that satisfies the other requirements in § 120.823(d)(4)(ii)(A) through (D); or (2) For any Project located in the additional State, the CDC's Board or Loan Committee (if established in the CDC's State of incorporation) includes at least two members who live or work in that State when voting on that Project. These two members may vote only on Projects located in the additional State. [68 FR 57981, Oct. 7, 2003, as amended at 79 FR 15650, Mar. 21, 2014; 84 FR 66295, Dec. 4, 2019] § 120.837 SBA decision on application for a new CDC or for an existing CDC to expand Area of Operations. The processing District Office must solicit the comments of any other District Office in which the CDC operates or proposes to operate. The processing District Office must determine that the CDC is in compliance with SBA's regulations, policies, and performance benchmarks, including pre-approval and annual review by SBA of any management or staff contracts, and the timely submission of all annual reports. In making its recommendation on the application, the District Office may consider any information presented to it regarding the requesting CDC, the existing CDC, or CDCs that may be affected by the application, and the proposed Area of Operations. (a) The SBA District office will submit the application, recommendation, and supporting materials within 60 days of the receipt of a complete application from the CDC to the D/FA, who will make the final decision. The D/FA may consider any information submitted or available related to the applicant and the application. (b) SBA will notify the CDC of its decision in writing, and if the application is denied, the reasons for its decision. (c) If a CDC is approved to operate as a Multi-State CDC, the CDC's ALP, PCLP, or Priority CDC authority will carry over into every additional State in which it is approved to operate as a Multi-State CDC. [65 FR 42633, July 11, 2000, as amended at 68 FR 57981, Oct. 7, 2003] § 120.839 Case-by-case application to make a 504 loan outside of a CDC's Area of Operations. A CDC may apply to make a 504 loan for a Project outside its Area of Operations by submitting a request to the 504 loan processing center. The applicant CDC must demonstrate that it can adequately fulfill its 504 program responsibilities for the 504 loan, including proper servicing. In addition, the CDC must have satisfactory SBA performance, as determined by SBA in its discretion. The CDC's Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, review/examination assessments, historical performance measures, loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission). The 504 loan processing center may approve the application if: (a) The applicant CDC has previously assisted the business or its affiliate(s) to obtain a 504 loan; or (b) The existing CDC or CDCs serving the area agree to permit the applicant CDC to make the 504 loan; or (c) There is no CDC within the Area of Operations. [68 FR 57982, Oct. 7, 2003, as amended at 73 FR 75518, Dec. 11, 2008; 82 FR 39504, Aug. 21, 2017; 84 FR 66296, Dec. 4, 2019] Accredited Lenders Program (ALP) § 120.840 Accredited Lenders Program (ALP). (a) General. (b) Application. http://www.sba.gov. (c) Eligibility. (d) Additional application requirements. (1) Certified copy of the CDC's Board of Directors' resolution authorizing the application for ALP status. (2) Summary of the experience of each of the CDC's loan processing, closing, and servicing staff members with significant authority. (3) Name, address, and summary of experience of Designated Attorney. (4) Documentation of any SBA required insurance. (5) Any other documentation required by SBA. (e) Term of ALP designation. (f) SBA approval or decline decision. [68 FR 57982, Oct. 7, 2003, as amended at 85 FR 7651, Feb. 10, 2020; 85 FR 80588, Dec. 14, 2020; 87 FR 38909, June 30, 2022] § 120.841 Qualifications for the ALP. An applicant for ALP status must show that it substantially meets the following criteria: (a) CDC staff experience. (b) Number of 504 loans approved and size of portfolio. (c) CDC reviews. (d) Record of compliance with 504 program requirements. (1) Submission of satisfactory 504 loan analyses and applications, and all required, and properly completed, loan documents. (2) Careful and thorough analysis and screening of all 504 loan applications for conformance with SBA credit and eligibility standards; (3) Proper completion of required 504 loan closing documents and compliance with SBA 504 loan closing policies and procedures. (4) Compliance with SBA loan servicing policies and procedures. (5) Compliance with the certification and operational requirements as set forth in §§ 120.820 through 120.830. (6) Submission of timely, complete and acceptable annual reports. (7) Compliance with CDC ethical requirements (see § 120.851). (e) Priority CDC. (f) Record of Cooperation. [68 FR 57982, Oct. 7, 2003, as amended at 72 FR 18364, Apr. 12, 2007; 73 FR 75519, Dec. 11, 2008; 82 FR 39504, Aug. 21, 2017] § 120.842 ALP Express Loans. (a) Definition. (b) Requirements for the underwriting, approving, closing, and servicing of ALP Express Loans General. (2) Documentation of decision making. (3) Processing requirements Eligibility. (ii) Credit decisions. (4) Submission of loan documents. (5) Loan and Debenture closing. (6) Servicing. (c) Prohibition against making a 504 loan previously submitted to the SBA. [87 FR 37982, June 27, 2022, as amended at 88 FR 21900, Apr. 12, 2023; 89 FR 102701, Dec. 18, 2024] Premier Certified Lenders Program § 120.845 Premier Certified Lenders Program (PCLP). (a) General. (b) Application. (c) Eligibility. (1) The CDC must be an ALP CDC in substantial compliance with Loan Program Requirements or meet the criteria to be an ALP CDC set forth in § 120.841(a) through (f). (2) The CDC can adequately comply with SBA liquidation and litigation requirements. (d) Additional application requirements. (1) Certified copy of the CDC's Board of Directors' resolution authorizing the application for PCLP status. (2) Summary of the experience of each of the CDC's loan processing, closing, servicing and liquidation staff members with significant authority. (3) Name, address and summary of experience of Designated Attorney. (4) Documentation of any SBA required insurance. (5) Any other documentation required by SBA. (e) Term of designation. (f) Area of Operations for PCLP CDCs. (g) SBA approval or decline decision. [68 FR 57982, Oct. 7, 2003, as amended at 72 FR 18364, Apr. 12, 2007; 73 FR 75519, Dec. 11, 2008; 87 FR 38909, June 30, 2022] § 120.846 Requirements for maintaining and renewing PCLP status. (a) To maintain its status as a PCLP CDC, a CDC must continue to: (1) Meet the PCLP eligibility requirements in § 120.845. (2) Timely conform with all requirements and deadlines set forth in SBA's regulations and policy and procedural guidance concerning properly establishing, funding and reporting a PCLP Loan Loss Reserve Fund (LLRF). (3) Substantially comply with all Loan Program Requirements. (4) Remain an active CDC. (5) In accordance with statutory requirements set forth in section 508(i) of Title V, 15 U.S.C. 697e(i), establish a goal of processing at least 50 percent of its 504 loans using PCLP procedures. (b) SBA will notify the PCLP CDC in writing of a renewal or non-renewal of PCLP status. If PCLP status is not renewed, SBA will notify the CDC of the reasons for the decision. [68 FR 57983, Oct. 7, 2003, as amended at 72 FR 18364, Apr. 12, 2007] § 120.847 Requirements for the Loan Loss Reserve Fund (LLRF). (a) General. (b) PCLP CDC Exposure and LLRF deposit requirements. (1) With respect to any Debenture that has been purchased. Within 30 days after purchase, the CDC must restore the balance maintained in the LLRF for the Debenture that was purchased to one percent of the original principal amount of that Debenture; or (2) With respect to any other Debenture if SBA notifies the CDC in writing that it has failed to satisfy the requirements in paragraph (e), (f), (h), (i), or (j) of this section. In such case, the CDC will not be required to restore the balance maintained in the LLRF to one percent of the original principal amount of the Debenture but must base the amount maintained in the LLRF on one percent of the principal amount of the Debenture as of the date of notification. The CDC may not begin to use the declining balance methodology again until SBA notifies the CDC in writing that SBA has determined, in its discretion, that the CDC has corrected the noncompliance and has demonstrated its ability to comply with these requirements. (c) Establishing a LLRF. (d) Creating and perfecting a security interest in a LLRF. (e) Schedule for contributions to a LLRF. (1) At least 50 percent of the required deposits to the LLRF on or about the date that it issues the PCLP Debenture. (2) At least an additional 25 percent of the required deposits to the LLRF no later than one year after it issues the PCLP Debenture. (3) Any remainder of the required deposits to the LLRF no later than two years after it issues the PCLP Debenture. (f) LLRF reporting requirements. (g) Withdrawal of excess funds. (h) Determining SBA loss. (1) If the PCLP CDC agrees with SBA's calculations of the loss, it must reimburse SBA for ten percent of the amount of that loss no later than 30 days after SBA's notification to the PCLP CDC of the CDC's reimbursement obligation. (2) If the PCLP CDC disputes SBA's calculations, it must reimburse SBA for ten percent of any loss amount that is not in dispute no later than 30 days after SBA's notification to the PCLP CDC of the CDC's reimbursement obligation. No later than 30 days after SBA's notification, the PCLP CDC may submit to the D/FA or his or her delegate a written appeal of any disagreement regarding the calculation of SBA's loss. The PCLP CDC must include with that appeal an explanation of its reasons for the disagreement. Upon the D/FA's final decision as to the disputed amount of the loss, the PCLP CDC must promptly reimburse SBA for ten percent of that amount. (i) Reimbursing SBA for loss. (j) Insufficient funding of LLRF. [68 FR 57983, Oct. 7, 2003, as amended at 84 FR 66296, Dec. 4, 2019] § 120.848 Requirements for 504 loan processing, closing, servicing, liquidating, and litigating by PCLP CDCs. (a) General. (b) Documentation of decision making. (c) Processing requirements. (d) Submission of loan documents. (e) Loan and Debenture closing. (f) Servicing, liquidation and litigation responsibilities. (g) Making a 504 loan previously considered by another CDC. [68 FR 57984, Oct. 7, 2003, as amended at 72 FR 18364, Apr. 12, 2007] Other CDC Requirements § 120.851 CDC ethical requirements. CDCs and their Associates must act ethically and exhibit good character. They must meet all of the ethical requirements of § 120.140. In addition, they are subject to the following: (a) Any benefit flowing to a CDC's Associate or his or her employer from activities as an Associate must be merely incidental (this requirement does not prevent an Associate or an Associate's employer from providing interim financing as described in § 120.890 or Third Party Loans as described in § 120.920, as long as such activity does not violate § 120.140); and (b) A CDC's Associate may not be an officer, director, or manager of more than one CDC. [68 FR 57984, Oct. 7, 2003] § 120.852 [Reserved] § 120.853 Inspector General audits of CDCs. The SBA Office of Inspector General may also conduct, supervise or coordinate audits pursuant to the Inspector General Act. The CDC must cooperate and make its staff, records, and facilities available. [68 FR 57985, Oct. 7, 2003, as amended at 73 FR 75519, Dec. 11, 2008] § 120.857 Voluntary transfer and surrender of CDC certification. A CDC may not transfer its certification or withdraw from the 504 program without SBA's consent. The CDC must provide a plan to SBA to transfer its portfolio. The portfolio may only be transferred with SBA's written consent. If a CDC desires to withdraw from the 504 program, it must forfeit its portfolio to SBA. SBA may conduct an audit of the transferring or withdrawing CDC. [61 FR 3235, Jan. 31, 1996. Redesignated at 68 FR 57987, Oct. 7, 2003] Project Economic Development Goals § 120.860 Required objectives. A Project must achieve at least one of the economic development objectives set forth in § 120.861 or § 120.862. § 120.861 Job creation or retention. A Project must create or retain one Job Opportunity per an amount of 504 loan funding that will be specified by SBA from time to time in a Federal Register Federal Register [68 FR 57987, Oct. 7, 2003] § 120.862 Other economic development objectives. A Project that achieves any of the following community development or public policy goals is eligible if the CDC's overall portfolio of 504 loans, including the subject loan, meets or exceeds the CDC's required Job Opportunity average. Loan applications must indicate how the Project will meet the specified economic development objective. (a) Community Development goals: (1) Improving, diversifying or stabilizing the economy of the locality; (2) Stimulating other business development; (3) Bringing new income into the community; (4) Assisting manufacturing firms (North American Industry Classification System (NAICS), Sectors 31 “ 33); or (5) Assisting businesses in Labor Surplus Areas as defined by the Department of Labor. (b) Public Policy goals: (1) Revitalizing a business district of a community with a written revitalization or redevelopment plan; (2) Expansion of exports; (3) Expansion of small businesses owned and controlled by women as defined in section 29(a)(3) of the Act, 15 U.S.C. 656(a)(3); (4) Expansion of small businesses owned and controlled by veterans (especially service-disabled veterans) as defined in section 3(q) of the Act, 15 U.S.C. 632(q); (5) Expansion of minority enterprise development (see § 124.103(b) of this chapter for minority groups who qualify for this description); (6) Aiding rural development; (7) Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports); (8) Modernizing or upgrading facilities to meet health, safety, and environmental requirements; (9) Assisting businesses in or moving to areas affected by Federal budget reductions, including base closings, either because of the loss of Federal contracts or the reduction in revenues in the area due to a decreased Federal presence; (10) Reduction of rates of unemployment in labor surplus areas, as such areas are determined by the Secretary of Labor; (11) Reduction of energy consumption by at least 10 percent; (12) Increased use of sustainable design, including designs that reduce the use of greenhouse gas emitting fossil fuels, or low-impact design to produce buildings that reduce the use of non-renewable resources and minimize environmental impact; or (13) Plant, equipment and process upgrades of renewable energy sources such as the small-scale production of energy for individual buildings' or communities' consumption, commonly known as micropower, or renewable fuels producers including biodiesel and ethanol producers. [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2118, Jan. 13, 1999; 68 FR 57987, Oct. 7, 2003; 76 FR 63547, Oct. 12, 2011; 87 FR 38909, June 30, 2022] Leasing Policies Specific to 504 Loans § 120.870 Leasing Project Property. (a) A Borrower may use the proceeds of a 504 loan to acquire, construct, or modify buildings and improvements, and/or to purchase and install machinery and equipment located on land leased to the Borrower by an unrelated lessor if: (1) The remaining term of the lease, including options to renew, exercisable only by the lessee, equals or exceeds the term of the Debenture; (2) The Borrower assigns its interest in the lease to the CDC with right of reassignment to SBA; and (3) The 504 loan is secured by a recorded lien against the leasehold estate and other collateral as necessary. (b) If the Project is for new construction, the Borrower may lease long term up to 20 percent of the Rentable Property in the Project to one or more tenants if the Borrower immediately occupies at least 60 percent of the Rentable Property, plans to occupy within three years some of the remaining space not immediately occupied and not leased long term, and plans to occupy all of the remaining space not leased long term within ten years. [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2118, Jan. 13, 1999; 68 FR 57987, Oct. 7, 2003] § 120.871 Leasing part of Project Property to another business. (a) The costs of interior finishing of space to be leased out to another business are not eligible Project costs. (b) Third-party loan proceeds used to renovate the leased space do not count towards the 504 first mortgage requirement or the Borrower's contribution. Loan-Making Policies Specific to 504 Loans § 120.880 Basic eligibility requirements. In addition to the eligibility requirements specified in subpart A, to be an eligible Borrower for a 504 loan, a small business must: (a) Use the Project Property (except that an Eligible Passive Company may lease to an Operating Company); and (b) Together with its Affiliates, meet one of the size standards set forth in § 121.301(b) of this chapter. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57987, Oct. 7, 2003] § 120.881 Ineligible Projects for 504 loans. In addition to the ineligible businesses and uses of proceeds specified in subpart A of this part, the following Projects are ineligible for 504 financing: (a) Relocation of any of the operations of a small business which will cause a net reduction of one-third or more in the workforce of a relocating small business or a substantial increase in unemployment in any area of the country, unless the CDC can justify the loan because: (1) The relocation is for key economic reasons and crucial to the continued existence, economic wellbeing, and/or competitiveness of the applicant; and (2) The economic development benefits to the applicant and the receiving community outweigh the negative impact on the community from which the applicant is moving; and (b) Projects in foreign countries (loans financing real or personal property located outside the United States or its possessions). § 120.882 Eligible Project costs for 504 loans. Eligible Project costs which may be paid with the proceeds of 504 loans are: (a) Costs directly attributable to the Project including expenditures incurred by the Borrower (with its own funds or from a loan) to acquire land used in the Project, or for any other expense directly attributable to the Project, prior to applying to SBA for the 504 loan; (b) In Projects involving construction, a contingency reserve for cost overruns not to exceed 10 percent of construction cost; (c) Professional fees directly attributable and essential to the Project, such as title insurance, opinion of title, architectural and engineering costs, appraisals, environmental studies, and legal fees related to zoning, permits, or platting; and (d) Repayment of interim financing including points, fees and interest. (e) If the project involves expansion of a small business concern, any amount of existing indebtedness that does not exceed 100 percent of the project cost of the expansion may be refinanced and added to the expansion cost if: (1) Substantially all (75% or more) of the proceeds of the indebtedness were used to acquire land, including a building situated thereon, to construct a building thereon, or to purchase equipment. The assets acquired must be eligible for financing under the 504 loan program. If the acquisition, construction, or purchase of the asset was originally financed through a commercial loan that would have satisfied the “substantially all” requirement and that was subsequently refinanced one or more times, with the current commercial loan being the most recent refinancing, the current commercial loan will be deemed to satisfy this paragraph (e)(1). (2) The existing indebtedness is collateralized by fixed assets. The 504 eligible fixed assets collateralizing any debt to be refinanced or relating to the portion of debt being refinanced in the case of a partial refinance must also collateralize the 504 Loan unless SBA approves a waiver due to extraordinary circumstances. PCLP CDCs may not use their delegated authority to approve a loan requiring this waiver; (3) The existing indebtedness was incurred for the benefit of the small business concern for which any new Project costs are incurred. Existing 7(a) and 504 loans may be refinanced under this section in accordance with SBA policies or procedures; (4) The financing will be used only for refinancing existing indebtedness or costs relating to the project financed; (5) The financing will provide a substantial benefit to the borrower when prepayment penalties, financing fees, and other financing costs are accounted for. For purposes of this paragraph (e)(5), substantial benefit (6) The borrower has been current on all payments due on the existing debt for not less than 1 year preceding the date of refinancing. For purposes of this section, “date of refinancing” refers to the date the 504 loan is approved by SBA. Any unremedied delinquency after approval must be reported to SBA as an adverse change; (7) The financing under section 504 will provide better terms or rate of interest than the existing indebtedness on the date of refinancing. For purposes of this paragraph, “better terms or rate of interest” may include longer maturity (but always commensurate with the assets' useful life), a lower interest rate committed on the Third Party Lender Loan or projected on the 504 loan, improved collateral conditions, or less restrictive loan covenants. (8) The authority to approve the refinancing of same institution debt must be approved by SBA and is not delegated to the PCLP CDCs. For the purposes of this paragraph, “same institution debt” means any debt of the CDC or the Third Party Lender financing the new project, or of affiliates of either. (f) For the purposes of paragraph (e), the phrase “project involves expansion of a small business concern” includes any project that involves the acquisition, construction or improvement of land, building or equipment for use by the small business concern. (g) SBA may approve a Refinancing Project of a qualified debt subject to the following conditions and requirements: (1) The Refinancing Project does not involve the expansion of a small business; (2) The applicant for the refinancing available under this paragraph (g) has been in operation for all of the 2 year period ending on the date of application; (3) A loan that is subject to a guarantee by a Federal agency or department may be refinanced under the following conditions and requirements: (i) An existing 504 loan may be refinanced if both the Third Party Loan and the 504 Loan are being refinanced or the Third Party Loan has been paid in full. If the 504 Loan being refinanced received approval through another CDC, the CDC working on the current refinancing must provide advance notice to the other CDC in writing (by email or letter). (ii) An existing 7(a) loan may be refinanced if the CDC notifies the 7(a) lender in advance in writing (by email or letter). (iii) The refinancing will provide a substantial benefit to the Borrower. For purposes of this paragraph (g)(3)(iii), substantial benefit (4) In addition to the annual guarantee fee assessed under § 120.971(d)(2), Borrower must pay SBA a supplemental annual guarantee fee to cover the additional cost attributable to the refinancing in an amount established by SBA each fiscal year. (5) The funding for the Refinancing Project must come from three sources based on the current fair market value of the fixed assets serving as collateral for the Refinancing Project, including a Third Party Loan that is at least as much as the 504 loan, not less than 10% from the Borrower (excluding administrative costs), and not more than 40% from the 504 loan. If the Refinancing Project involves a limited or single purpose building or structure, the Borrower must contribute not less than 15% (excluding administrative costs), unless SBA determines, in its discretion, and publishes a notice in the Federal Register, Federal Register (6)(i) The portion of the Refinancing Project provided by the 504 loan and the Third Party Loan may be no more than 90% of the fair market value of the fixed assets that will serve as collateral. (ii) The Borrower's application may include a request to finance Eligible Business Expenses as part of the Refinancing Project if the amount of cash funds that will be provided for the Refinancing Project exceeds the amount to be paid to the lender of the qualified debt. The Borrower's application must include a specific description of the Eligible Business Expenses for which the financing is requested and an itemization of the amount of each expense. Any debt for Operating Expenses of the business that was incurred with a credit card or a business line of credit may be included if the credit card or business line of credit is issued in the name of the small business and the Applicant certifies that the debt being refinanced was incurred exclusively for business related purposes. Loan proceeds must not be used to refinance any personal expenses. Both the CDC and the Borrower must certify in the application that the funds will be used to cover Eligible Business Expenses. Borrower must, upon request, substantiate the use of the funds provided for business expenses through, for example, bank statements, invoices marked “paid,” cleared checks, or any other documents that demonstrate that a business obligation was satisfied with the funds provided. (7) If the qualified debt is not fully satisfied by the funding provided by the Refinancing Project, the lender of the qualified debt must take one of the following actions, or some combination thereof, to address the deficiency: (i) Forgiveness of all or part of the deficiency; (ii) Acceptance of payment by the Borrower, or (iii) Acceptance of a Note executed by the Borrower for the balance, or any portion of the balance. Such Note must be subordinate to the 504 loan if the Note and the 504 loan are secured by any of the same collateral. The Note is subject to any other restrictions that SBA may establish to protect its creditor position, including standby requirements; (8) The Third Party Lender must have a first lien position, and the 504 loan must have a second lien position, on all Eligible Fixed Assets securing the Refinancing Project. Any other lien must be junior in priority to these lien positions. For other fixed assets serving as collateral for the Refinancing Project, the lien positions of the Third Party Lender and the 504 loan may be junior to any existing liens acceptable to SBA; (9) Eligible Project costs which may be paid with the proceeds of the 504 loan are the amount used to refinance the qualified debt and other costs under § 120.882(c) and (d) and eligible administrative costs under § 120.883; (10) [Reserved] (11) PCLP CDCs may not approve the refinancing of same institution debt under their delegated authority and must submit the application to SBA for approval. (12) The 504 loans approved under this paragraph (g) must be disbursed within 9 months after loan approval. The Director, Office of Financial Assistance, or his or her designee, may approve a request for extension of the disbursement period for an additional 6 months for good cause. (13) The Third Party Loan may not be sold on the secondary market as a part of a pool guaranteed under subpart J of this part, or any successor to this program, when the debt being refinanced is same institution debt; (14) The Third Party Lender must certify that it would not refinance the qualified debt except for the assistance provided under this paragraph (g); (15) Notwithstanding § 120.860, a debt may be refinanced under this paragraph (g) if it does not meet the job creation or other economic development objectives set forth in § 120.861 or § 120.862. In such case, the 504 loan may not exceed the product obtained by multiplying the number of employees of the Borrower by $90,000. The number of employees of the Borrower is equal to the sum of: (i) The number of full-time employees of the Borrower on the date of the application; and (ii) The product obtained by multiplying: (A) The number of part-time employees of the Borrower on the date of the application; by (B) The quotient obtained by dividing the average number of hours each part-time employee of the Borrower works each week by 40. Example 1 to paragraph (g)(15): (16) For the purposes of this paragraph (g), the terms below are defined as follows: Date of application Eligible Business Expenses Eligible Fixed Assets Fair market value Operating Expenses Other Secured Debt Qualified debt (A) That was incurred not less than 6 months before the date of the application for refinancing available under this paragraph (g). (B) Substantially all (75% or more) of which was for an Eligible Fixed Asset. If the Eligible Fixed Asset was originally financed through a commercial loan that would have satisfied the “substantially all” standard (the “original loan”) and that was subsequently refinanced one or more times, with the current commercial loan being the most recent refinancing, the current commercial loan will be deemed to satisfy this paragraph (B). If the original loan was for the construction of a new building, or the acquisition, renovation, or reconstruction of an existing building, and such loan would not have satisfied the leasing policies set forth in §§ 120.131 and 120.870(b), the current commercial loan will be deemed to satisfy these policies, provided that Borrower demonstrates compliance with § 120.131(b) for existing buildings as of the date of application. (C) That was for the benefit of the small business concern; (D) That is collateralized by Eligible Fixed Assets; and (E) That is not a Third Party Loan that is part of an existing 504 Project, except as allowed under paragraph (g)(3) of this section. Refinancing Project Same institution debt [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57987, Oct. 7, 2003; 74 FR 29591, June 23, 2009; 76 FR 9218, Feb. 17, 2011; 76 FR 63155, Oct. 12, 2011; 79 FR 15650, Mar. 21, 2014; 81 FR 33125, May 25, 2016; 83 FR 19920, May 7, 2018; 86 FR 40779, July 29, 2021; 88 FR 70585, Oct. 12, 2023; 89 FR 79740, Oct. 1, 2024] § 120.883 Eligible administrative costs for 504 loans. The following administrative costs are not part of Project costs, but may be paid with the proceeds of the 504 loan and the Debenture (see § 120.971): (a) SBA guarantee fee; (b) Funding fee (to cover the cost of a public issuance of securities and the Trustee); (c) CDC processing fee; (d) Borrower's out-of-pocket costs associated with 504 loan and Debenture closing other than legal fees (for example, certifications and the copying costs associated with them, overnight delivery, postage, and messenger services) but not to include fees and costs described in § 120.882; (e) CDC Closing Fee (see § 120.971(a)(2)) up to a maximum of $10,000; and (f) Underwriters' fee. [64 FR 2118, Jan. 13, 1999, as amended at 68 FR 57987, Oct. 7, 2003; 88 FR 70586, Oct. 12, 2023] § 120.884 Ineligible costs for 504 loans. Costs not directly attributable and necessary for the Project may not be paid with proceeds of the 504 loan. These include, but are not limited to, the following: (a) Debt refinancing (other than interim financing), except as provided in § 120.882(e) and (g). (b) A CDC may not use 504 loan proceeds to pay any creditor in a position to sustain a loss causing a shift to SBA of all or part of a potential loss from an existing debt. (c) Third-Party Loan fees (commitment, broker, finders, origination, processing fees of permanent financing). (d) Ancillary business expenses, such as: (1) Working capital; (2) Counseling or management services fees; (3) Incorporation/organization costs; (4) Franchise fees; and (5) Advertising. (e) Fixed-asset Project components, such as: (1) Short-term equipment, furniture, and furnishings (unless essential to and a minor portion of the Project); (2) Automobiles, trucks, and airplanes; and (3) Construction equipment (except for heavy duty construction equipment integral to the business' operations with a remaining useful life of a minimum of 10 years). [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2118, Jan. 13, 1999; 74 FR 29591, June 23, 2009; 76 FR 9219, Feb. 17, 2011; 82 FR 39504, Aug. 21, 2017] Interim Financing § 120.890 Source of interim financing. A Project may use interim financing for all Project costs except the Borrower's contribution. Any source (including a CDC) may supply interim financing provided: (a) The financing is not derived from any SBA program, directly or indirectly; (b) The terms and conditions of the financing are acceptable to SBA; (c) The source is not the Borrower or an Associate of the Borrower; and (d) The source has the experience and qualifications to monitor properly all Project construction and progress payments. (If the source lacks such experience or qualifications, SBA may require the interim loan to be managed by a third party such as a bank or professional construction manager.) § 120.891 Certifications of disbursement and completion. Before the Debenture is issued, the interim lender must certify the amount disbursed. The CDC must certify that the Project was completed in accordance with the final plans and specifications (except as provided in § 120.961). § 120.892 Certifications of no adverse change. Following completion of the Project, the following certifications must be made before the 504 loan closing: (a) The interim lender must certify to the CDC that it has no knowledge of any unremedied substantial adverse change in the condition of the small business since the application to the interim lender; (b) The Borrower (or Operating Company) must certify to the CDC that there has been no unremedied substantial adverse change in its financial condition or its ability to repay the 504 loan since the date of application, and must furnish interim financial statements, current within 120 days of closing; and (c) The CDC must issue an opinion to the best of its knowledge that there has been no unremedied substantial adverse change in the Borrower's (or Operating Company's) ability to repay the 504 loan since its submission of the loan application to SBA. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57987, Oct. 7, 2003] Permanent Financing § 120.900 Sources of permanent financing. Permanent financing for each Project must come from three sources: the Borrower's contribution, Third-Party Loans, and the 504 loan. Typically, the Borrower contributes 10 percent of the permanent financing, Third-Party Loans 50 percent and the 504 loan 40 percent. The Borrower's Contribution § 120.910 Borrower contributions. (a) The Borrower must contribute to the Project cash (or property acceptable to SBA obtained with the cash) or land (that is part of the Project Property), in an amount equal to the following percentage of the Project cost, excluding administrative costs: (1) At least 15 percent, if the Borrower (or Operating Company if the Borrower is an Eligible Passive Company) has operated for two years or less; (2) At least 15 percent, if the Project involves the acquisition, construction, conversion, or expansion of a limited or single purpose building or structure; (3) At least 20 percent, if the Project involves conditions described in paragraphs (a)(1) and (2) of this section; or (4) At least 10 percent, in all other circumstances. (b) The source of the contribution may be a CDC or any other source except an SBA business loan program (see § 120.913 for SBIC exception). [64 FR 2118, Jan. 13, 1999] § 120.911 Land contributions. The Borrower's contribution may be land (including buildings, structures and other site improvements which will be part of the Project Property) previously acquired by the Borrower. [68 FR 57987, Oct. 7, 2003] § 120.912 Borrowed contributions. The Borrower may borrow its cash contribution from the CDC or a third party. If any of the contribution is borrowed, the interest rate must be reasonable. If the loan is secured by any of the Project assets, the loan must be subordinate to the liens securing the 504 Loan, and the loan may not be repaid at a faster rate than the 504 Loan unless SBA gives prior written approval. A third party lender may not receive voting rights, stock options, or any other actual or potential voting interest in the small business. § 120.913 Limitations on any contributions by a Licensee. Subject to part 107 of this chapter, a Licensee may provide financing for all or part of the Borrower's contribution to the Project. SBA will consider Licensee funds to be derived from federal sources if the Licensee has Leverage (as defined in § 107.50 of this chapter). If the Licensee does not have Leverage, SBA will consider the investment to be from private funds. Licensee financing must be subordinated to the 504 loan and must not be repaid at a faster rate than the Debenture. (Refer to § 120.930(a) for additional limitations.) [68 FR 57987, Oct. 7, 2003] Third Party Loans § 120.920 Required participation by the Third Party Lender. (a) Amount of Third Party Loans. (1) The Borrower (or Operating Company, if the Borrower is an Eligible Passive Company) has operated for two years or less, or (2) The Project is for the acquisition, construction, conversion or expansion of a limited or single purpose asset. (b) Third party loan collateral. (1) The Third Party Lender liquidates or otherwise exhausts all reasonable avenues of collection with respect to the Additional Collateral no later than the disposition of the Project Property, and (2) The Third Party Lender applies any proceeds received as a result of the Additional Collateral to the balance outstanding on the Third Party Loan prior to the application of proceeds from the disposition of the Project Property to the Third Party Loan. [64 FR 2118, Jan. 13, 1999, as amended at 79 FR 15650, Mar. 21, 2014] § 120.921 Terms of Third Party loans. (a) Maturity. (b) Interest rates. Federal Register (c) Other terms. (d) Future advances. (e) Subordination. (f) Escalation upon default. [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2118, Jan. 13, 1999; 88 FR 21900, Apr. 12, 2023] § 120.922 Pre-existing debt on the Project Property. In addition to its share of Project cost, a Third-Party Loan may include consolidation of existing debt on the Project Property. The consolidation must not improve the lien position of the Lender on the pre-existing debt, unless the debt is a previous Third-Party Loan. § 120.923 Policies on subordination. (a) Financing provided by the seller of Project Property must be subordinate to the 504 loan. SBA may waive the subordination requirement if the property is classified as “other real estate owned” by a national bank or other Federally regulated lender and SBA considers the property to be of sufficient value to support the 504 loan. (b) A Borrower is eligible for a 504 loan even if part of the Project financing is tax-exempt. SBA's lien position must not be subordinate to loans made from the proceeds of the tax-exempt obligation. (c) The Borrower must not prepay any Project financing subordinate to the 504 loan without SBA's prior written consent. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57988, Oct. 7, 2003] § 120.925 [Reserved] § 120.926 Referral fee. The CDC can receive a reasonable referral fee from the Third Party Lender if the CDC secured the Third Party Lender for the Borrower under a written contract between the CDC and the Third Party Lender. Both the CDC and the Third Party Lender are prohibited from charging this fee to the Borrower. If a CDC charges a referral fee, the CDC will be construed as a Referral Agent under part 103 of this chapter. [68 FR 57988, Oct. 7, 2003] 504 Loans and Debentures § 120.930 Amount. (a) Generally, a 504 loan may not exceed 40 percent of total Project cost plus 100 percent of eligible administrative costs. For good cause shown, SBA may authorize an increase in the percentage of Project costs covered up to 50 percent. No more than 50 percent of eligible Project costs can be from Federal sources, whether received directly or indirectly through an intermediary. (b) A 504 loan must not be less than $25,000. (c) Upon completion of the Project, the Debenture amount will be reduced by the amount that the unused contingency reserve exceeds 2 percent of the anticipated Debenture. [61 FR 3235, Jan. 31, 1996, as amended at 68 FR 57988, Oct. 7, 2003] § 120.931 504 Lending limits. 504 loan amounts shall be limited to: (a) An outstanding balance of $5,000,000 for each Borrower and its affiliates if the loan proceeds will not be directed towards a Project in paragraph (c) of this section, (b) An outstanding balance of $5,000,000 for each Borrower and its affiliates if one or more of the public policy goals enumerated in § 120.862(b) applies to the Project; and (c) $5,500,000 for each Project for: (1) Small Manufacturers (NAICS Codes 31-33) with all production facilities located in the United States; (2) Reduction of the Borrower's, or if the Borrower is an Eligible Passive Company, the Operating Company's energy consumption by at least 10%; or (3) Plant, equipment and process upgrades of renewable energy sources such as the small-scale production of energy for individual buildings' or communities' consumption, commonly known as micropower, or renewable fuel producers including biodiesel and ethanol producers. [76 FR 63547, Oct. 12, 2011] § 120.932 Interest rate. The interest rate of the 504 Loan and the Debenture which funds it is set by the SBA and approved by the Secretary of the Treasury. § 120.933 Maturity. From time to time, SBA will publish in the Federal Register Federal Register [68 FR 57988, Oct. 7, 2003] § 120.934 Collateral. The CDC usually takes a second lien position on the Project Property to secure the 504 loan. Sometimes additional collateral is required. (In rare circumstances, SBA may permit other collateral substituted for Project Property.) All collateral must be insured against such hazards and risks as SBA may require, with provisions for notice to SBA and the CDC in the event of impending lapse of coverage. [68 FR 57988, Oct. 7, 2003] § 120.935 Deposit from the Borrower that a CDC may require. At the time of application for a 504 loan, the CDC may require a deposit from the Borrower of $2,500 or 1 percent of the Net Debenture Proceeds, whichever is less. The deposit may be applied to the loan processing fee if the application is accepted, but must be refunded if the application is denied. If the small business withdraws its application, the CDC may deduct from the deposit reasonable costs incurred in packaging and processing the application. § 120.937 Assumption. A 504 loan may be assumed with SBA's prior written approval. § 120.938 Default. (a) Upon occurrence of an event of default specified in the 504 note which requires automatic acceleration, the note becomes due and payable. Upon occurrence of an event of default which does not require automatic acceleration, SBA may forbear acceleration of the note and attempt to resolve the default. If the default is not cured subsequently, the note shall be accelerated. In either case, upon acceleration of the note, the Debenture which funded it is also due immediately, and SBA must honor its guarantee of the Debenture. SBA shall not reimburse the investor for any premium paid. (b) If a CDC defaults on a Debenture, SBA generally shall limit its recovery to the payments made by the small business to the CDC on the loan made from the Debenture proceeds, and the collateral securing the defaulted loan. However, SBA will look to the CDC for the entire amount of the Debenture in the case of fraud, negligence, or misrepresentation by the CDC. § 120.939 Borrower prohibition. Neither a Borrower nor an Associate of the Borrower may purchase an interest in a Debenture Pool in which the Debenture that funded its 504 loan has been placed. § 120.940 Prepayment of the 504 loan or Debenture. The Borrower may prepay its 504 loan, if it pays the entire principal balance, unpaid interest, any unpaid fees, and any prepayment premium established in the note. If the Borrower prepays, the CDC must prepay the corresponding Debenture with interest and premium. If one of the Debentures in a Debenture Pool is prepaid, the Investors in that Debenture Pool must be paid pro rata, and SBA's guarantee on the entire Debenture Pool must be proportionately reduced. If the entire Debenture Pool is paid off, SBA may call all Certificates backed by the Pool for redemption. § 120.941 Certificates. (a) The face value of a Certificate must be at least $25,000. Certificates are issued in registered form and transferred only by entry on the central registry maintained by the Trustee. SBA guarantees the timely payment of principal and interest on the Certificates. (b) Before the sale of a Certificate, the seller, or the broker or dealer acting as the seller's agent, must disclose to the purchaser the terms, conditions, yield, and premium and other characteristics not guaranteed by SBA. Debenture Sales and Service Agents § 120.950 SBA and CDC must appoint agents. SBA and the CDC must appoint the following agents to facilitate the sale and service of the Certificates and disbursement of the proceeds. § 120.951 Selling agent. The CDC, with SBA approval, shall appoint a Selling Agent to select underwriters, negotiate the terms and conditions of Debenture offerings with the underwriters, and direct and coordinate Debenture sales. § 120.952 Fiscal agent. SBA shall appoint a Fiscal Agent to assess the financial markets, minimize the cost of sales, arrange for the production of the Offering Circular, Debenture Certificates, and other required documents, and monitor the performance of the Trustee and the underwriters. § 120.953 Trustee. SBA must appoint a Trustee to: (a) Issue Certificates; (b) Transfer the Certificates upon resale in the secondary market; (c) Hold in trust paper Debentures composing a Debenture Pool for the benefit of SBA and the Certificate holders; (d) Establish and maintain a central registry of: (1) Debenture Pools, including the CDC obligors and the interest rate payable on the Debentures in each Pool; (2) Certificates issued or transferred, including the Debenture Pool backing the Certificate, name and address of the purchaser, price paid, the interest rate on the Certificate, and fees or charges assessed by the transferror; and (3) Brokers and dealers in Certificates, and the commissions, fees or discounts granted to the brokers and dealers; (e) Receive semi-annual Debenture payments and prepayments; (f) Make regularly scheduled and prepayment payments to Investors; and (g) Assure before any resale of a Debenture or Certificate is recorded in the registry that the seller has provided the purchaser a written disclosure statement approved by SBA. [61 FR 3235, Jan. 31, 1996, as amended at 89 FR 102701, Dec. 18, 2024] § 120.954 Central Servicing Agent. (a) SBA has entered into a Master Servicing Agreement designating a Central Servicing Agent (CSA) to support the orderly flow of funds among Borrowers, CDCs, and SBA. The CDC and Borrower must enter into an individual Servicing Agent Agreement with the CSA for each 504 loan, constituting acceptance by the CDC and the Borrower of the terms of the Master Servicing Agreement. (b) The CSA has established a master reserve account. All funds related to the 504 loans and Debentures flow through the master reserve account under the provisions of the Master Servicing Agreement. The master reserve account will be funded by a guarantee fee, a funding fee to be published from time to time in the Federal Register, § 120.955 Agent bonds and records. (a) Each agent (in §§ 120.951 through 120.954) must provide a fidelity bond or insurance in such amount as necessary to fully protect the interest of the government. (b) SBA must have access at the agent's place of business to all books, records and other documents relating to Debenture activities. § 120.956 Suspension or revocation of brokers and dealers. The appropriate Office of Capital Access official in accordance with Delegations of Authority may suspend or revoke the privilege of any broker or dealer to participate in the sale or marketing of Debentures and Certificates for actions or conduct bearing negatively on the broker's fitness to participate in the securities market. SBA must give the broker or dealer written notice, stating the reasons, at least 10 business days prior to the effective date of the suspension or revocation. A broker or dealer may appeal the suspension or revocation made under this section pursuant to the procedures set forth in part 134 of this chapter. The action of this official will remain in effect pending resolution of the appeal. [73 FR 75519, Dec. 11, 2008] Closings § 120.960 Responsibility for closing. (a) The CDC is responsible for the 504 loan closing. (b) The Debenture closing is the joint responsibility of the CDC and SBA. (c) SBA may, within its sole discretion, decline to close the Debenture; direct the transfer of the 504 loan to another CDC; or cancel its guarantee of the Debenture, prior to sale, if any of the following occur: (1) The CDC has failed to comply materially with any Loan Program Requirement as defined in § 120.10; (2) The CDC has failed to make or close the 504 loan or prepare the Debenture closing in a prudent or commercially reasonable manner; (3) The CDC's improper action or inaction places SBA at risk; (4) The CDC has failed to use required SBA forms or electronic versions of those forms; (5) The CDC, Third Party Lender or Borrower has failed to timely disclose to SBA a material fact regarding the Project or 504 loan; (6) The CDC, Third Party Lender or Borrower has misrepresented a material fact to SBA regarding the Project or 504 loan; or (7) SBA determines that there has been an unremedied material adverse change, such as deterioration in the Borrower's financial condition, since the 504 loan was approved, or that approving the closing of the Debenture will put SBA at unacceptable financial risk. [68 FR 57988, Oct. 7, 2003, as amended at 88 FR 21900, Apr. 12, 2023] § 120.961 Construction escrow accounts. The CSA, title company, CDC attorney, or bank may hold Debenture proceeds in escrow to complete Project components such as landscaping and parking lots, and acquire machinery and equipment if the component or acquisition is a minor portion of the total Project and has been contracted for completion or delivery at a specified price and specific future date. The escrow agent must disburse funds upon approval by the CDC and the SBA, supported by invoices and payable jointly to the small business and the designated contractor. Servicing § 120.970 Servicing of 504 loans and Debentures. (a) In servicing 504 loans, CDCs must comply with Loan Program Requirements and in accordance with prudent and commercially reasonable lending standards. (b) The CDC is responsible for routine servicing including receipt and review of the Borrower's or Operating Company's financial statements on an annual or more frequent basis and monitoring the status of the Borrower and 504 loan collateral. (c) The CDC is responsible for assuring that the Borrower makes all required insurance premium payments and has paid all taxes when due. (d) The CDC is responsible for filing renewals and extensions of security interests on collateral for the 504 loan, as required. (e) The CDC must timely respond to Borrower requests for loan modifications. (f) For any 504 loan that is more than three months past due, the CDC must promptly request that SBA purchase the Debenture unless the 504 loan has an SBA-approved deferment or is in compliance with an SBA-approved plan to allow the Borrower to catch up on delinquent loan payments. (g) The CDC must cooperate with SBA to cure defaults and initiate workouts. (h) Additional servicing requirements are set forth in subpart E of this part. [68 FR 57988, Oct. 7, 2003, as amended at 72 FR 18364, Apr. 12, 2007] Fees § 120.971 Allowable fees paid by Borrower. (a) CDC fees. (1) Processing fee. (2) Closing fee. (3) Servicing fee. (4) Late fees. (5) Assumption fee. (b) CSA fees. (c) Other agent fees. Federal Register. (d) SBA fees. (2) For loans approved by SBA after September 30, 1996, SBA charges a fee of not more than 0.9375 percent annually on the unpaid principal balance of the loan as determined at five-year anniversary intervals. (e) Miscellaneous fees. [61 FR 3235, Jan. 31, 1996, as amended at 64 FR 2119, Jan. 13, 1999; 68 FR 57988, Oct. 7, 2003; 88 FR 21900, Apr. 12, 2023] § 120.972 Third Party Lender participation fee and CDC fee. (a) Participation fee. (b) CDC fee. [68 FR 57988, Oct. 7, 2003] Authority of CDCs To Perform Liquidation and Debt Collection Litigation § 120.975 CDC Liquidation of loans and debt collection litigation. (a) PCLP CDCs. (1) The PCLP CDC has one or more employees who have not less than two years of substantive, decision-making experience in administering the liquidation and workout of defaulted or problem loans secured in a manner substantially similar to loans funded with 504 loan program debentures, and who have completed a training program on loan liquidation developed by the Agency in conjunction with qualified CDCs that meet the requirements of this section; or (2) The PCLP CDC has entered into a contract with a qualified third party for the performance of its liquidation responsibilities and obtains the approval of SBA with respect to the qualifications of the contractor and the terms and conditions of the contract. (b) All other CDCs. (1) The CDC meets either of the following criteria: (i) The CDC participated in the loan liquidation pilot program established by the Small Business Programs Improvement Act of 1996 prior to October 1, 2006; or (ii) During the three fiscal years immediately prior to seeking such authority, the CDC made an average of not less than ten 504 loans per year; and (2) The CDC meets either of the following requirements: (i) The CDC has one or more employees who have not less than two years of substantive, decision-making experience in administering the liquidation and workout of defaulted or problem loans secured in a manner substantially similar to loans funded with 504 loan program debentures, and who have completed a training program on loan liquidation developed by the Agency in conjunction with qualified CDCs that meet the requirements of this section; or (ii) The CDC has entered into a contract with a qualified third party for the performance of its liquidation responsibilities and obtains the approval of SBA with respect to the qualifications of the contractor and the terms and conditions of the contract. (c) CDC counsel. (d) Application for authority to liquidate and litigate. [72 FR 18365, Apr. 12, 2007] Enforceability of 501, 502 and 503 Loans and Other Laws § 120.990 501, 502 and 503 loans. SBA has discontinued loan programs for 501, 502, and 503 loans. Outstanding loans remain under these programs, and Borrowers, CDCs, and SBA must comply with the terms and conditions of the corresponding notes and Debentures, and the regulations in this part in effect when the obligations were undertaken or last in effect, if applicable. § 120.991 Effect of other laws. No State or local law may preclude or limit SBA's exercise of its rights with respect to notes, guarantees, Debentures and Debenture Pools, or of its enforcement rights to foreclose on collateral. Subpart I—Risk-Based Lender Oversight Source: 72 FR 25194, May 4, 2007, unless otherwise noted. Supervision § 120.1000 Risk-Based Lender Oversight. (a) Risk-Based Lender Oversight. (b) Scope. [85 FR 14781, Mar. 16, 2020] § 120.1005 Bureau of PCLP Oversight. SBA's Bureau of PCLP Oversight within OCRM, monitors the capitalization of PCLP CDC pilot participants' LLRFs and performs other related functions. [73 FR 75519, Dec. 11, 2008] § 120.1010 SBA access to SBA Lender and Intermediary files. An SBA Lender and Intermediary must allow SBA's authorized representatives, including representatives authorized by the SBA Inspector General, during normal business hours, access to its files to review, inspect, and copy all records and documents, relating to SBA guaranteed loans or as requested for SBA oversight. [73 FR 75519, Dec. 11, 2008, as amended at 85 FR 14781, Mar. 16, 2020] § 120.1015 Risk Rating System. (a) Risk Rating. (b) Rating categories. [73 FR 75519, Dec. 11, 2008, as amended at 85 FR 14781, Mar. 16, 2020] § 120.1025 Monitoring. SBA may conduct monitoring of SBA Lenders and Intermediaries including, but not limited to, SBA Lenders' or Intermediaries' self-assessments. [85 FR 14781, Mar. 16, 2020] § 120.1050 Reviews and examinations. (a) Reviews. (1) Portfolio performance; (2) SBA operations management; (3) Credit administration; and (4) Compliance with Loan Program Requirements. (b) Examinations. (1) Capital adequacy; (2) Asset quality (including credit administration and allowance for loan losses); (3) Management quality (including internal controls, loan portfolio management, and asset/liability management); (4) Earnings; (5) Liquidity; and (6) Compliance with Loan Program Requirements. (c) Reviews/examinations of Intermediaries. (d) Other reviews or examinations. [73 FR 75519, Dec. 11, 2008, as amended at 82 FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16, 2020] § 120.1051 Frequency of reviews and examinations. SBA may conduct reviews and examinations of SBA Lenders and Intermediaries on a periodic basis. SBA may consider, but is not limited to, the following factors in determining frequency: (a) Results of monitoring, including an SBA Lender's or Intermediary's Risk Rating; (b) SBA loan portfolio size; (c) Previous review or examination findings; (d) Responsiveness in correcting deficiencies noted in prior reviews or examinations; and (e) Such other risk-related information as SBA, in its discretion, determines to be appropriate. [73 FR 75519, Dec. 11, 2008, as amended at 82 FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16, 2020] § 120.1055 Review and examination results. (a) Written Reports. (b) Response to review and examination Reports. (c) SBA response. (d) Failure to respond or to submit or implement an acceptable plan. [73 FR 75519, Dec. 11, 2008, as amended at 85 FR 14781, Mar. 16, 2020] § 120.1060 Confidentiality of Reports, Risk Ratings and related Confidential Information. (a) In general. (b) Disclosure prohibition. [73 FR 75519, Dec. 11, 2008, as amended at 82 FR 39504, Aug. 21, 2017; 85 FR 14781, Mar. 16, 2020] § 120.1070 SBA Lender oversight fees. Lenders are required to pay to SBA fees to cover costs of examinations and reviews and, if assessed by SBA, other Lender oversight activities. (a) Fee components: (1) Examinations. (2) Reviews. e.g., (3) Monitoring. (4) Other lender oversight activities. (b) Allocation. (1) Where the costs that SBA incurs for a review, exam, monitoring or other lender oversight activity are specific to a particular 7(a) Lender, SBA will charge that 7(a) Lender a fee for the actual costs of conducting the review, exam, monitoring or other lender oversight activity; and (2) Where the costs that SBA incurs for the lender oversight activity are not sufficiently specific to a particular Lender, SBA will assess a fee based on each 7(a) Lender's portion of the total dollar amount of SBA guarantees in SBA's total portfolio or in the relevant portfolio segment being reviewed or examined, to cover the costs of such activity. SBA may waive the assessment of this fee for all 7(a) Lenders owing less than a threshold amount below which SBA determines that it is not cost effective to collect the fee. (c) Billing process. (d) Delinquent payment and late-payment charges. [61 FR 3235, Jan. 31, 1996, as amended at 82 FR 39505, Aug. 21, 2017] Enforcement Actions § 120.1300 Informal enforcement actions—7(a) Lenders. (a) Upon a determination that the grounds in § 120.1400 exist, the D/OCRM may undertake, in his/her discretion, one or more of the informal enforcement actions listed in this section and is not restricted from delegating as appropriate. SBA will consider the severity or frequency of the violation or action triggering the ground and the circumstances in determining whether and what type of informal action to take. Circumstances that may lead to SBA taking informal enforcement action rather than formal enforcement action include, for example, when problems are narrow in scope and are correctible and SBA is confident of a 7(a) Lender's Board of Directors (“Board”) and management commitment and ability to correct; where violations are less frequent or less severe but warrant enforcement; or while more fully assessing risk. (b) Informal enforcement actions include, but are not limited to: (1) An SBA supervisory letter. (2) Mandatory training. (3) A commitment letter or Board resolution. (i) Include specific written commitments to take corrective actions in response to the 7(a) Lender's acknowledged deficiencies; (ii) Identify the person(s) responsible for taking the corrective action; and (iii) Set forth the timeframe for taking the corrective action. The document may be drafted by SBA or the 7(a) Lender; (4) Agreements. (5) Other informal enforcement actions. (c) A 7(a) Lender may appeal informal enforcement actions to the appropriate Federal district court or SBA's Office of Hearings and Appeals (OHA) within 20 calendar days of the date of the decision, and in the event of an OHA appeal, OHA will issue its decision in accordance with part 134 of this title. The enforcement action will remain in effect pending resolution of the appeal, if any. SBA is not precluded from taking one or more formal enforcement actions under § 120.1500, or as otherwise authorized by law, while an appeal of an informal enforcement action is pending. [85 FR 14781, Mar. 16, 2020] § 120.1400 Grounds for enforcement actions—SBA Lenders. (a) Agreements. (1) Additional agreements by CDCs. (2) Additional agreements by SBA Supervised Lenders (except Other Regulated SBLCs (b) Scope. (c) Grounds in general. (1) Failure to maintain eligibility requirements for specific SBA programs and delegated authorities, including but not limited to: 7(a), PLP, SBAExpress, 504, ALP, PCLP, the alternative loss reserve pilot program and any pilot loan program; (2) Failure to comply materially with any requirement imposed by Loan Program Requirements; (3) Making a material false statement or failure to disclose a material fact to SBA. (A material fact is any fact which is necessary to make a statement not misleading in light of the circumstances under which the statement was made.); (4) Not performing underwriting, closing, disbursing, servicing, liquidation, litigation or other actions in a commercially reasonable and prudent manner for 7(a) or 504 loans, respectively, as applicable. Evidence of such performance or actions may include, but is not limited to, the SBA Lender having a repeated Less Than Acceptable Risk Rating (generally in conjunction with other evidence) or an on-site review/examination assessment which is Less Than Acceptable; (5) Failure within the time period specified to correct an underwriting, closing, disbursing, servicing, liquidation, litigation, or reporting deficiency, or failure in any material respect to take other corrective action, after receiving notice from SBA of a deficiency and the need to take corrective action; (6) Engaging in a pattern of uncooperative behavior or taking an action that SBA determines is detrimental to the integrity or reputation of an SBA program, that undermines management or administration of a program, or that is not consistent with standards of good conduct. Prior to issuing a notice of a proposed enforcement action or immediate suspension under § 120.1500 based upon this paragraph, SBA must send prior written notice to the SBA Lender explaining why the SBA Lender's actions were uncooperative, detrimental to the program, undermined SBA's management of the program, or were not consistent with standards of good conduct. The prior notice must also state that the SBA Lender's actions could give rise to a specified enforcement action, and provide the SBA Lender with a reasonable time to cure the deficiency before any further action is taken; (7) Repeated failure to correct continuing deficiencies; (8) Unauthorized disclosure of Reports, Risk Rating, or Confidential Information; (9) Any other reason that SBA determines may increase SBA's financial risk (for example, repeated Less Than Acceptable Risk Ratings (generally in conjunction with other indicators of increased financial risk); failure to properly oversee Agent activity (“Agent” as defined in part 103 of this title); or, indictment on felony or fraud charges of an officer, key employee, or loan agent involved with SBA loans for the SBA Lender); (10) As otherwise authorized by law; (11) For immediate suspension of all SBA Lenders from delegated authorities—upon a determination by SBA that: (i) One or more of the grounds in paragraph (c) or (f) of this section, as applicable, exists; and (ii) Immediate action is needed to protect the interests of the Federal Government (such as where there is risk of immediate harm or loss, a significant program integrity concern, or clear evidence of conduct indicating a lack of business integrity); and (12) For immediate suspension of all SBA Lenders (except SBA Supervised Lenders, which are covered under paragraph (d)(2) of this section) from the authority to participate in the SBA loan program, including the authority to make, service, liquidate, or litigate 7(a) or 504 loans—upon a determination by SBA that: (i) One or more of the grounds in paragraph (c) or (f) of this section, as applicable, exists; and (ii) Immediate action is needed to protect the interests of the Federal Government (such as where there is risk of immediate harm or loss, a significant program integrity concern, or clear evidence of conduct indicating a lack of business integrity). (d) Grounds required for certain enforcement actions against SBA Supervised Lenders (except Other Regulated SBLCs) or, as applicable, Other Persons. (1) For SBA program suspensions and revocations (i) False statements knowingly made in any required written submission to SBA; or (ii) An omission of a material fact from any written submission required by SBA; or (iii) A willful or repeated violation of SBA Loan Program Requirements; or (iv) A willful or repeated violation of any condition imposed by SBA with respect to any application or request with SBA; or (v) A violation of any cease and desist order of SBA. (2) For SBA program immediate suspension (3) For cease and desist orders (i) A violation of SBA Loan Program Requirements; or (ii) Where an SBA Supervised Lender or Other Person engages in or is about to engage in any acts or practices that will violate SBA Loan Program Requirements. (4) For an emergency cease and desist order (i) Where grounds for cease and desist order are met, (ii) The Administrator (or the Deputy Administrator, only if the Administrator is unavailable to take such action) finds extraordinary circumstances, and (iii) In order to protect the financial or legal position of the United States. (5) For transfer of Loan portfolio (i) Where a court has appointed a receiver; or (ii) The SBA Supervised Lender is either not in compliance with capital requirements or is insolvent. An SBA Supervised Lender is insolvent within the meaning of this provision when all of its capital, surplus, and undivided profits are absorbed in funding losses and the remaining assets are not sufficient to pay and discharge its contracts, debts, and other obligations as they come due. (6) For transfer of servicing activity (i) Where grounds for transfer of Loan portfolio are met; or (ii) Where the SBA Supervised Lender is otherwise operating in an unsafe and unsound condition. (7) For order to remove Management Official (i) Willfully and knowingly committed a substantial violation of the Act, SBA regulation, a final cease and desist order, or any agreement by the Management Official or the SBA Supervised Lender under the Act or SBA regulations, or (ii) Willfully and knowingly committed a substantial breach of a fiduciary duty of that person as a Management Official and the violation or breach of fiduciary duty is one involving personal dishonesty on the part of such Management Official, or (iii) The Management Official is convicted of a felony involving dishonesty or breach of trust and the conviction is no longer subject to further judicial review (excludes writ of habeas corpus). (8) For order to suspend or prohibit participation of Management Official (9) For order to suspend or prohibit participation of Management Official due to criminal charges (e) Grounds required for certain enforcement actions against SBLCs and Other Regulated SBLCs Capital directive. (2) Civil action for termination. (f) Additional grounds specific to CDCs. (1) Failure to receive SBA approval for at least four 504 loans during the last two consecutive fiscal years, or (2) For PCLP CDCs, failure to establish or maintain a LLRF as required by the PCLP. [73 FR 75521, Dec. 11, 2008, as amended at 82 FR 39505, Aug. 21, 2017; 85 FR 14782, Mar. 16, 2020; 87 FR 38909, June 30, 2022] § 120.1425 Grounds for formal enforcement actions—Intermediaries participating in the Microloan Program. (a) Agreement. (b) Scope. (c) Grounds in general (1) Failure to comply materially with any requirement imposed by Loan Program Requirements; (2) Failure to meet any one of the following performance standards: (i) Coverage of the service territory assigned by SBA, including honoring SBA's determined boundaries of neighboring intermediaries; (ii) Fulfill reporting requirements; (iii) Manage program funds and matching funds in a satisfactory and financially sound manner; (iv) Communicate and file reports within six months after beginning participation in program; (v) Maintain a currency rate of 85% or more for the Intermediary's SBA Microloan portfolio (that is, loans that are no more than 30 days late in scheduled payments); (vi) Maintain a default rate in the Intermediary's Microloan portfolio of 15% or less of the cumulative dollars loaned under the program; (vii) Maintain a staff trained in Microloan Program issues and Loan Program Requirements; (viii) Maintain the financial ability to sustain the Intermediary's operations (including, but not limited to, adequate capital), as determined by SBA; (ix) Satisfactorily provide in-house technical assistance to Microloan borrowers and prospective Microloan borrowers; or (x) Close and fund the required number of microloans per year under § 120.716; (3) Failure within the time period specified to correct an underwriting, closing, disbursing, servicing, liquidation, litigation, or reporting deficiency, or failure in any material respect to take other corrective action, after receiving notice from SBA of a deficiency and the need to take corrective action; (4) Engaging in a pattern of uncooperative behavior or taking an action that SBA determines is detrimental to the integrity or reputation of the Microloan Program, that undermines management or administration of the program, or that is not consistent with standards of good conduct. Prior to issuing a notice of a proposed formal enforcement action or immediate suspension under § 120.1540 based upon the grounds discussed in this paragraph (c)(4), SBA must send prior written notice to the Intermediary explaining why the Intermediary's actions were uncooperative, detrimental to the program, undermined SBA's management of the program, or were not consistent with standards of good conduct. The prior notice must also state that the Intermediary's actions could give rise to a specified formal enforcement action, and provide the Intermediary with a reasonable time to cure the deficiency before any further action is taken; (5) Any other reason that SBA determines may increase SBA's financial or program risk (for example, repeated Less Than Acceptable Risk Ratings (generally in conjunction with other indicators of increased risk) or indictment on felony or fraud charges of an officer, key employee, or loan agent involved with SBA programs for the Intermediary); (6) For immediate suspension of an Intermediary—upon a determination by SBA that: (i) One or more of the grounds in paragraph (c) of this section exists; and (ii) Immediate action is needed to protect the interests of the Federal Government (such as where there is risk of immediate harm or loss, a significant program integrity concern, or clear evidence of conduct indicating a lack of business integrity); and (7) As otherwise authorized by law. [73 FR 75521, Dec. 11, 2008, as amended at 80 FR 34047, June 15, 2015; 85 FR 14782, Mar. 16, 2020] § 120.1500 Types of formal enforcement actions—SBA Lenders. Upon a determination that the grounds set forth in § 120.1400 exist, the D/OCRM may undertake, in his/her discretion (and with the involvement of the LOC as appropriate and consistent with its assigned responsibilities), one or more of the following formal enforcement actions for each of the types of SBA Lender listed, and is not restricted from delegating as appropriate. SBA will consider the severity or frequency of the violation or action and the circumstances triggering the ground in determining whether and what type of enforcement action to take. SBA will take formal enforcement action in accordance with procedures set forth in § 120.1600. If formal enforcement action is taken under this section and the SBA Lender fails to implement required corrective action in any material respect within the required timeframe in response to the formal enforcement action, the D/OCRM may take further enforcement action, as authorized by law. SBA's decision to take a formal enforcement action will not, by itself, invalidate a guaranty previously provided by SBA. (a) Formal enforcement actions for all SBA Lenders Imposition of portfolio guaranty dollar limit. (2) Suspension or revocation of delegated authority. (3) Suspension or revocation from SBA program. (4) Immediate suspension. (5) Debarment. (6) Other actions available under law. (b) Formal enforcement actions specific to 7(a) Lenders. (1) Secondary market suspension or revocation (other than temporary suspension and revocation under § 120.660). SBA may suspend or revoke a 7(a) Lender's authority to sell or purchase loans or certificates in the Secondary Market; or (2) Civil monetary penalty (other than SBA Supervised Lender civil monetary penalty under § 120.465). SBA may assess a civil monetary penalty against a 7(a) Lender. The civil monetary penalty will be in an amount not to exceed the maximum published in the Federal Register e.g., (c) Formal enforcement actions specific to SBA Supervised Lenders and Other Persons (except Other Regulated SBLCs). (1) Cease and desist order. (2) Remove Management Official. (3) Initiate request for appointment of receiver and/or other relief. (i) for NFRLs: (A) the existence of fraud or false statements; (B) the NFRL's refusal to cooperate with SBA enforcement action instructions or orders; (C) the NFRL's insolvency (legal or equitable); (D) the size of the NFRL's SBA loan portfolio(s) in relation to other activities of the NFRL; (E) the dollar amount of any claims SBA may have against the NFRL; (F) the NFRL's failure to comply materially with any requirement imposed by Loan Program Requirements; and/or (G) the existence of other non-SBA enforcement actions against the NFRL; (ii) for SBLCs: (A) the existence of fraud or false statements; (B) the SBLC's refusal to cooperate with SBA enforcement action instructions or orders; (C) the SBLC's insolvency (legal or equitable); (D) the dollar amount of any claims SBA may have against the SBLC; and/or (E) the SBLC's failure to comply materially with any requirement imposed by Loan Program Requirements. (4) Civil monetary penalties for report filing failure under § 120.465. (d) Formal enforcement actions specific to SBLCs. (1) Capital directive. (i) Achieve its minimum capital requirement applicable to it by a specified date; (ii) Adhere to a previously submitted capital restoration plan (provided under § 120.462 or § 120.1055) to achieve the applicable capital requirement; (iii) Submit and adhere to a capital restoration plan acceptable to SBA describing the means and time schedule by which the SBLC will achieve the applicable capital requirement (The SBLC must provide its capital restoration plan within 30 days from the date of the SBA order unless SBA notifies the SBLC that the plan is to be filed within a different time period. SBA may perform an on-site examination (generally within 90 days after the restoration plan is submitted) to verify the implementation of the plan and verify that the SBLC meets minimum capital requirements.); (iv) Refrain from taking certain actions without obtaining SBA's prior written approval (Such actions may include but are not limited to: paying any dividend; retiring any equity; maintaining a rate of growth that causes further deterioration in the capital percentage; securitizing any unguaranteed portion of its 7(a) loans; or selling participations in any of its 7(a) loans); or (v) Undertake a combination of any of these or similar actions. (2) Civil action for termination. (e) Formal enforcement actions specific to CDCs. (1) Require the CDC to transfer part or all of its existing 504 loan portfolio and/or part or all of its pending 504 loan applications to SBA, another CDC, or any other entity designated by SBA. Any such transfer may be on a temporary or permanent basis, in SBA's discretion; or (2) Instruct the Central Servicing Agent to withhold payment of servicing, late and/or other fee(s) to the CDC. (3) Apply to any Federal court of competent jurisdiction for the court to take exclusive jurisdiction, without notice, of the CDC, and SBA shall be entitled to the appointment of a receiver of SBA's choosing to hold, administer, operate and/or liquidate the CDC; and to such injunctive or other equitable relief as may be appropriate. SBA will limit the scope of the receivership to the CDC's assets related to the SBA loan program(s) except where the CDC's business is almost exclusively SBA-related. SBA will only seek a receivership if there is either the existence of fraud or false statements, or if the CDC has refused to cooperate with SBA enforcement action instructions or orders. Without limiting the foregoing and with SBA's consent, the receiver may take possession of the portfolio of 504 loans and/or pending 504 loan applications, including for the purpose of carrying out an enforcement order under paragraph (e)(1) of this section. [73 FR 75521, Dec. 11, 2008, as amended at 82 FR 39506, Aug. 21, 2017; 84 FR 12061, Apr. 1, 2019; 85 FR 14783, Mar. 16, 2020; 86 FR 52957, Sept. 24, 2021; 87 FR 28758, May 11, 2022; 87 FR 38910, June 30, 2022; 88 FR 50005, Aug. 1, 2023; 89 FR 48134, June 5, 2024; 90 FR 23424, June 3, 2025] § 120.1510 Other Regulated SBLCs. Other Regulated SBLCs are exempt from §§ 120.465, 120.1050(b), 120.1400(d), 120.1500(c), and 120.1600(b). This exemption is not intended to preclude SBA from seeking any other remedy authorized by law or equity. [73 FR 75521, Dec. 11, 2008] § 120.1511 Certification and other reporting and notification requirements for Other Regulated SBLCs. (a) Certification. (1) Within 60 calendar days of the effective date of this section or (2) If the SBLC becomes subject to regulation by a Federal Financial Institution Regulator or state banking regulator after the effective date of this section for any reason (e.g. license transfers), within 60 days of the date that the SBLC becomes directly examined and directly regulated by such regulator. (b) Contents of Certification: (1) The identity of the Federal Financial Institution Regulator or state banking regulator that regulates the lending activities of the SBLC; (2) A statement that the Federal Financial Institution Regulator or state banking regulator identified in paragraph (b)(1) of this section regularly conducts safety and soundness examinations on the SBLC itself and not only on the SBLC's parent company or affiliate, if any; and (3) The date of the most recent safety and soundness examination conducted on the SBLC by the Federal Financial Institution Regulator or state banking regulator. To qualify as an Other Regulated SBLC, the SBLC must have received this examination within the past 3 years of the date of certification. (c) Notification of examination. (d) Report. (e) Notification of change in status. (f) Extension of timeframes. (g) Failure to satisfy requirements. [73 FR 75521, Dec. 11, 2008] § 120.1540 Types of formal enforcement actions—Intermediaries participating in the Microloan Program. Upon a determination that any ground set out in § 120.1425 exists, the D/OCRM may undertake, in his/her discretion (and with the involvement of the LOC as appropriate and consistent with its assigned responsibilities), one or more of the following formal enforcement actions against an Intermediary, and is not restricted from delegating as appropriate: (a) S uspension. (b) Immediate suspension. (c) Revocation. (1) Removal from the program; (2) Liquidation of the Intermediary's MRF and LLRF accounts by SBA, and application of the liquidated funds to any outstanding balance owed to SBA; (3) Payment of outstanding debt to SBA by the Intermediary; (4) Forfeiture or repayment of any unused grant funds by the Intermediary; (5) Debarment of the organization from receipt of Federal funds until loan and grant repayments are met; and (6) Surrender of possession of Intermediary's SBA microloan portfolio to SBA, with the microloan portfolio and all associated rights transferred on a permanent basis to SBA, in accordance with SBA's rights as a secured creditor. (d) Other actions. [85 FR 14783, Mar. 16, 2020] § 120.1600 General procedures for formal enforcement actions against SBA Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management Officials, Other Persons, and Intermediaries. (a) In general. (1) SBA's notice of formal enforcement action. (ii) If a proposed formal enforcement action or immediate suspension is based upon information obtained from a third party other than the SBA Lender, Intermediary, or SBA, SBA's notice of proposed action or immediate suspension will provide copies of documentation received from such third party, or the name of the third party in case of oral information, unless SBA determines that there are compelling reasons not to provide such information. If compelling reasons exist, SBA will provide a summary of the information it received to the SBA Lender or Intermediary. (2) SBA Lender's or Intermediary's opportunity to object. (ii) The objection must set forth in detail all grounds known to the SBA Lender or Intermediary to contest the proposed action or immediate suspension and all mitigating factors, and must include documentation that the SBA Lender or Intermediary believes is most supportive of its objection. An SBA Lender or Intermediary must exhaust this administrative remedy in order to preserve its objection to a proposed formal enforcement action or an immediate suspension. (iii) If an SBA Lender or Intermediary can show legitimate reasons as determined by SBA in SBA's discretion why it does not understand the reasons given by SBA in its notice of the action, the Agency will provide clarification. SBA will provide the requested clarification in writing to the SBA Lender or Intermediary or notify the SBA Lender or Intermediary in writing that SBA has determined that such clarification is not necessary. SBA, in its discretion, will further advise in writing whether the SBA Lender or Intermediary may have additional time to present its objection to the notice. Requests for clarification must be made to the appropriate Office of Capital Access official in accordance with Delegations of Authority in writing and received by SBA within the 30 day timeframe or the timeframe given by the notice for response. (iv) An SBA Lender or Intermediary may request additional time to respond to SBA's notice if it can show that there are compelling reasons why it is not able to respond within the 30 day timeframe or the response timeframe given by the notice. If such requests are submitted to the Agency, SBA may, in its discretion, provide the SBA Lender or Intermediary with additional time to respond to the notice of proposed action or immediate suspension. Requests for additional time to respond must be made in writing to the appropriate Office of Capital Access official in accordance with Delegations of Authority or other official identified in the notice and received by SBA within the 30 day timeframe or the response timeframe given by the notice. (v) Prior to the issuance of a final agency decision by SBA, if an SBA Lender or Intermediary can show that there is newly discovered material evidence which, despite the SBA Lender's or Intermediary's exercise of due diligence, could not have been discovered within the timeframe given by SBA to respond to a notice, or that there are compelling reasons beyond the SBA Lender's or Intermediary's control as to why it was not able to present a material fact or argument to SBA, and that the SBA Lender or Intermediary has been prejudiced by not being able to present such information, the SBA Lender or Intermediary may submit such information to SBA and request that the Agency consider such information in its final agency decision. (3) SBA's notice of final agency decision on a formal enforcement action where an SBA Lender or Intermediary filed objection to the proposed action or immediate suspension. (ii) If the affected SBA Lender or Intermediary files a timely written objection to a notice of immediate suspension, SBA must issue a written notice of final agency decision to the affected SBA Lender or Intermediary within 30 days of receiving the objection advising whether SBA is continuing with the immediate suspension, unless SBA provides notice that it requires additional time. If the SBA Lender or Intermediary submits additional information to SBA (under paragraph (a)(2)(v) or (a)(3)(iii) of this section) after submitting its objection but before SBA issues its final agency decision, SBA must issue its final agency decision within 30 days of receiving such information, unless SBA provides notice that it requires additional time. (iii) Prior to issuing a notice of decision, SBA in its discretion can request additional information from the affected SBA Lender or Intermediary or other partiesand conduct any other investigation it deems appropriate. If SBA determines, in its discretion, to consider an untimely objection, it must issue a notice of final agency decision pursuant to this paragraph (a)(3). (4) SBA's notice of final agency decision on a formal enforcement action where no filed objection or untimely objection not considered. (5) Appeals. (6) Receiverships of Certified Development Companies and/or other relief. (b) Procedures for certain formal enforcement actions against SBA Supervised Lenders (except Other Regulated SBLCs) and, where applicable, Management Officials and Other Persons Suspension and revocation actions and cease and desist orders. (i) Show cause order and hearing. (ii) Witnesses. (iii) Administrator finding and order issuance. (iv) Judicial review. (2) Immediate suspension or immediate cease and desist order. (3) Removal of Management Official. (i) Notice and hearing. (ii) Suspension from office or prohibition in participation, pending removal. (iii) Decision. (iv) Effective date and judicial review. (4) Receiverships, transfer of assets and servicing activities. (5) Civil penalties for report filing failure. (c) Additional procedures for certain formal enforcement actions against SBLCs. Capital directive Notice of intent to issue capital directive. (i) Reasons for issuance of the directive and (ii) The proposed contents of the directive. (2) Response to notice. (A) When, in the opinion of SBA, the condition of the SBLC so requires, provided that the SBLC will be informed promptly of the new time period; (B) With the consent of the SBLC; or (C) When the SBLC already has advised SBA that it cannot or will not achieve its applicable minimum capital requirement. (ii) Failure to respond within 30 days or such other time period as may be specified by SBA will constitute a waiver of any objections to the proposed capital directive. (3) Decision. (4) Issuance of a capital directive. (ii) A capital directive is effective immediately upon its receipt by the SBLC, or upon such later date as may be specified therein, and will remain effective and enforceable until it is stayed, modified, or terminated by SBA. (5) Reconsideration based on change in circumstances. (6) Relation to other administrative actions. (7) Appeals. [73 FR 75521, Dec. 11, 2008, as amended at 82 FR 39506, Aug. 21, 2017; 85 FR 14784, Mar. 16, 2020] Subpart J—Establishment of SBA Secondary Market Guarantee Program for First Lien Position 504 Loan Pools Source: 74 FR 56093, Oct. 30, 2009, unless otherwise noted. § 120.1700 Definitions used in subpart J. 504 financing. Affiliate. Central Servicing Agent or CSA. Certified Development Company or CDC. Current. First Lien Position 504 Loan. First Lien Position 504 Loan Pool Guarantee Agreement. http://www.sba.gov/aboutsba/sbaprograms/elending/index.html/. Guide. http://www.sba.gov/aboutsba/sbaprograms/elending/index.html/. Liquidation Proceeds. Loan Interest. Maturity. Ongoing Guarantee Fee. Obligor. Pool. Pool Assembler. Pool Certificate. Pooled. Pooling. Pool Investor. Pool Loan. Pool Loan Receivables. Pool Note. Pool Originator. Pool Originator Receipt. Premier Certified Lenders Program. Program. Program Participant. Program Participant Associate. Program Preference. Program Rules and Regulations. Project. SBA. Seller. Seller's Pool Loan. Seller Receipt. Servicing Retention Amount. Weighted Average Interest Rate. Weighted Average Maturity. § 120.1701 Program purpose. As authorized by the American Recovery and Reinvestment Act of 2009 (Recovery Act), SBA establishes the Program to authorize an entity to apply for SBA's guarantee of Pools comprised of portions of First Lien Position 504 Loans backing Pool Certificates to be sold to Pool Investors. The purpose of the Program is to temporarily provide a federal guarantee for Pools of First Lien Position 504 Loans to facilitate the sale of such loans and increase the liquidity of the lenders holding the loans so that the lenders can use the sale proceeds to fund more such loans. The Program's authorization expires on September 23, 2012 and the Administrator may guarantee not more than $3,000,000,000 of pools under this authority pursuant to section 503(c)(B)(iii) of the Recovery Act, as amended by section 1119 of the Small Business Jobs Act of 2010. [61 FR 3235, Jan. 31, 1996, as amended at 76 FR 63547, Oct. 12, 2011] § 120.1702 Program fee. Ongoing Guarantee Fee. § 120.1703 Qualifications to be a Pool Originator. (a) Application to become Pool Originator. (1) Is regulated by the appropriate agency as defined in section 3(a)(34)(G) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(34)(G)); (2) Meets all financial and other applicable requirements of its regulatory authority and the Government Securities Act of 1986, as amended (Pub. L. 99-571, 100 Stat. 3208); (3) Has the financial capability to originate acceptable pools consisting of eligible First Lien Position 504 Loans in sufficient quantity to support the issuance of Pool Certificates; (4) Is in good standing with SBA (as the SBA determines), and is Satisfactory with the Office of the Comptroller of the Currency (OCC) if it is a national bank, the Federal Deposit Insurance Corporation if it is a bank not regulated by the OCC, the Financial Institutions Regulatory Authority if it is a member, the National Credit Union Administration if it is a credit union, as determined by SBA; and (5) for any Pool Originator that is an SBA Lender, that the SBA Lender has satisfactory SBA performance, as determined by SBA in its sole discretion. (b) Approval by SBA. (c) Conduct of business by Pool Originator. (1) Meets the eligibility standards in paragraph (a) of this section; (2) Conducts its business in accordance with SBA regulations and accepted securities or banking industry practices, ethics, and standards; (3) Maintains its books and records in accordance with generally accepted accounting principles or in accordance with the guidelines of the regulatory body governing its activities; and (4) Has not been suspended or terminated from the Program by SBA. [74 FR 56093, Oct. 30, 2009, as amended at 82 FR 39506, Aug. 21, 2017] § 120.1704 Pool Loans eligible for Pooling. (a) General Pool Loan eligibility requirements. (1) Be a loan that is: (i) A Third Party Loan as defined in § 120.801(c)(3); (ii) Made by a private sector lender acceptable to SBA in its sole discretion; and (iii) Secured by a first lien on the Project Property as defined in § 120.801 of this chapter; (2) Be part of a 504 financing that is comprised of only one Third Party Loan and one CDC 504 loan; the CDC 504 loan must be funded by a Debenture that was been sold on or after February 17, 2009; (3) Be Current and have been Current for the six-month-period immediately prior to the date the Pool is formed or for the life of the Pool Loan, whichever time period is shorter; (4) Have been made and closed in a commercially reasonable manner, consistent with prudent lending standards; (5) Be part of a completed 504 financing, funded by a 504 debenture, which means that the Pool Loan must be fully disbursed and the debenture funding the related loan by a CDC must have been sold on or after February 17, 2009; and (6) Not be: (i) To a business deriving more than one-third of its gross annual revenue from legal gambling activities; (ii) To a casino, gambling establishment, or casino hotel; (iii) For financing the acquisition, construction or renovation of an aquarium, zoo, golf course, or swimming pool; or (iv) To a business covered by a six-digit North American Industry Classification System (NAICS) code for casinos—713210 (“Casinos (Except Casino Hotels)”); casino hotels—721120 (“Casino Hotels”); other gambling institutions—713290 (“Other Gambling Industries”); golf courses—713910 (“Golf Courses and Country Clubs”); or aquariums and zoos—712130 (“Zoos and Botanical Gardens”). (b) SBA review of a Pool Loan prior to pool formation. (1) The Pool Loan is to a business within NAICS code 713940 covering Fitness and Recreational Sports Centers; (If SBA determines that a Pool Loan has had any of its proceeds used for any of the restricted purposes listed above, the Pool Loan will be prohibited from being part of a Pool.) (2) The Pool Loan was part of a 504 financing involving a 504 loan that was processed under SBA's Premier Certified Lenders Program; or (3) The Project the Pool Loan financed included the refinancing of existing debt owed to the Seller or Third Party Lender (not including interim financing associated with the Project). § 120.1705 Pool formation requirements. (a) Initiation of Pool formation. (b) Adjustment of Pool requirements. Federal Register (c) When the Pool Originator is the Seller. (d) When the Pool Originator does not own the Pool Loan. (e) What CSA must receive prior to Pool formation. (1) From the Pool Originator: A properly completed First Lien Position 504 Loan Pool application form, First Lien Position 504 Loan Guarantee Agreement, and any other documentation which SBA may require, if applicable; and (2) All cost reimbursement due and payable to the CSA prior to Pool formation owed by the Participants participating in the formation of the Pool. § 120.1706 Pool Originator's retained interest in Pool. The Pool Originator must retain an ownership interest in any Pool it has formed that is equal to at least 5% of the aggregate of the total outstanding principal balance of each Pool Loan with a Loan Interest in the Pool as calculated at the time of Pool formation. Such interest will decline with Loan Interest payments, prepayments, defaults and any other early termination. At Pool formation, the CSA will issue the Pool Originator a Pool Originator Receipt evidencing the Pool Originator's retained interest in the Pool. The Pool Originator may not sell, pledge, participate, or otherwise transfer its Pool Originator Receipt or any interest therein for the life of the Pool. § 120.1707 Seller's retained Loan Interest. The Seller must retain a 15% or greater Loan Interest in each of its loans included in a Pool. At Pool formation, the CSA will issue the Seller a Seller Receipt evidencing the Seller's retained ownership in the Pool Loan. With SBA's written permission, the Seller may sell the Seller Receipt and Servicing Retention Amount in whole, but not in part, to a single entity at one time. The Seller may not sell less than 100% of the Seller Receipt and Servicing Retention Amount, and may not sell a participation interest in any portion of any of its Pooled loans. In addition, in order to complete such sale, Seller must have the purchaser of its rights to the Pool Loan execute an allonge to the Seller's First Lien Position 504 Loan Pool Guarantee Agreement in a form acceptable to SBA, acknowledging and accepting all terms of the Seller's First Lien Position 504 Loan Pool Guarantee Agreement, and deliver the executed original allonge and a copy of the corresponding First Lien Position 504 Loan Pool Guarantee Agreement to the CSA. All Pool Loan payments related to a Seller Receipt and Servicing Retention Amount proposed for sale will be withheld by the CSA pending SBA acknowledgement of receipt of all executed documents required to complete the transfer. [74 FR 56093, Oct. 30, 2009, as amended at 82 FR 39506, Aug. 21, 2017] § 120.1708 Pool Certificates. (a) SBA Guarantee of Pool Certificates. (b) SBA guarantee backed by full faith and credit. (c) SBA purchase of a Loan Interest. (d) Self-liquidating. (e) Pool Certificate form. (f) Pool Certificate registration. (g) Face amount of Pool Certificate. Federal Register. (h) Basis of payment for Pool Certificates. (i) Pool Certificate interest rate. (j) Pool Certificate maturity. (k) Early Pool Certificate redemption. § 120.1709 Transfers of Pool Certificates. (a) Transfer of Pool Certificates. (b) Transfer on CSA records. (c) Contents of letter of transmittal for Pool Certificate. (1) Pool number; (2) Pool Certificate number; (3) Name of purchaser of Pool Certificate; (4) Address and tax identification number of the purchaser; (5) Name, e-mail address and telephone number of the person handling or facilitating the transfer; and (6) Instructions for the delivery of the new Pool Certificate. (d) CSA transfer cost recovery. § 120.1710 Central servicing of the Program. (a) Pool Certificates and Receipts issued at Pool formation. (b) CSA fiscal transfer responsibilities. (c) Administration of the Pool Certificates. (d) CSA Monthly Report. § 120.1711 Suspension or termination of Program participation privileges. (a) Participant suspension or termination. (1) Failed to comply materially with any requirement imposed by the Program Rules and Regulations or other SBA rules and regulations; or (2) Made a material false statement or failed to disclose a material fact to SBA. (b) Additional rules for suspension or termination of Pool Originator. (1) Does not comply with any of the requirements in 120.1703(a) or (c); (2) Has been revoked or suspended it from engaging in the securities business by its supervisory agency, or is under investigation for a practice which SBA considers, in its sole discretion, to be relevant to its fitness to participate in the Program; (3) Has been indicted or otherwise formally charged with, or convicted of, a felony, or a misdemeanor which, in SBA's sole discretion, bears on its fitness to participate in the Program; (4) Has received an adverse civil judgment that it has committed a breach of trust or a violation of a law or regulation protecting the integrity of business transactions or relationships; or (5) Has been suspended or terminated as a Pool Assembler under 120.631. (c) Suspension procedures. § 120.1712 Seller responsibilities with respect to Seller's Pool Loan. Seller shall remain obligated for servicing and liquidating Seller's Pool Loan until the Pool Loan is repaid in full unless SBA provides written approval or notice to the contrary. § 120.1713 Seller's Pool Loan origination. SBA is entitled to recover from the Seller losses incurred by SBA on its guarantee of a Pool if such losses resulted because Seller's Pool Loan was not made and closed in a commercially reasonable manner, consistent with prudent lending standards, and in accordance with any applicable Program Rules and Regulations. § 120.1714 Seller's Pool Loan servicing. Subject to § 120.1718 of this subpart J, the Seller must service Seller's Pool Loan in a commercially reasonable manner, consistent with prudent lending standards, and in accordance with applicable Program Rules and Regulations. The Seller receives the Servicing Retention Amount for servicing the Seller's Pool Loan. § 120.1715 Seller's Pool Loan liquidation. Subject to § 120.1718 of this subpart J, the Seller must liquidate and conduct debt collection litigation for Seller's Pool Loan in a prompt, cost-effective and commercially reasonable manner, consistent with prudent lending standards, in accordance with applicable Program Rules and Regulations, and with SBA approval of a liquidation plan and any litigation plan, and any amendment of either such a plan, if applicable. § 120.1716 Required SBA approval of servicing actions. Seller shall not, without prior written consent of SBA, take the following actions with respect to Seller's Pool Loan: (a) Make or consent to any substantial alteration in the terms (“substantial” includes, but is not limited to, any changes to the principal amount or interest rate); (b) Accelerate the maturity; (c) Sue; or (d) Waive or release any claim. Guidance on other servicing actions, some of which may need prior SBA approval, is provided in the Guide. § 120.1717 Seller's Pool Loan deferments. Without the prior written consent of SBA, Seller, at the request of Obligor, may grant one deferment of Obligor's scheduled payments for a continuous period not to exceed three months of past or future installments. Seller shall immediately notify CSA of any payment deferment and that notification shall include: (a) The SBA Pool Loan number; (b) The Obligor's name; (c) The terms of such deferment; (d) The date Obligor is to resume payment; and (e) Reconfirmation of the basis of interest calculation (e.g. 30/360 or Actual Days/365). § 120.1718 SBA's right to assume Seller's responsibilities. SBA may, in its sole discretion, undertake the servicing, liquidation and/or litigation of Seller's Pool Loan at any time and, in such event, Seller must take any steps necessary to facilitate the assumption by SBA of such responsibilities, which can be transferred by SBA at its discretion to a contractor, agent or other entity, and such steps shall include, among other things, providing or assigning to SBA any documents requested by SBA within 15 calendar days of Seller's receipt of such request. SBA will notify the Obligor of the change in servicing. § 120.1719 SBA's right to recover from Seller. SBA is entitled to recover from Seller any monies paid on SBA's guarantee of a Pool Certificate backed in part by Seller's Pool Loan, plus interest, if SBA in its sole discretion determines that any of the following events has occurred: (a) Seller's improper action or inaction has put SBA at risk; (b) Seller has failed to disclose a material fact to SBA regarding a Seller's Pool Loan in a timely manner; (c) Seller has misrepresented a material fact to SBA regarding Seller's Pool Loan; (d) Seller has failed to comply materially with § 120.1720 of this subpart; (e) SBA has received a written request from Seller to terminate the SBA's guarantee on the Loan Interest in Seller's Pool Loan; (f) Seller has failed to comply materially with Program Rules and Regulations; or (g) Seller has failed to make, close, service or liquidate Seller's Pool Loan in a prudent manner. § 120.1720 SBA's right to review Pool Loan documents. In the event that SBA purchases a Loan Interest in Seller's Pool Loan, Seller must provide to SBA copies of the Pool Loan collateral documents, Pool Loan underwriting documents, and any other documents SBA may require in writing within 15 calendar days of a written request from SBA (which SBA will review in connection with its efforts to determine if Seller is obligated to reimburse SBA pursuant to this subpart). A Seller's failure to provide the requested documentation may constitute a material failure to comply with the Program Rules and Regulations and may lead to an action for recovery under § 120.1719. SBA will also evaluate a Seller's continued participation in the Program and may restrict further sales under the Program until SBA determines that the Seller has provided sufficient documentation. § 120.1721 SBA's right to investigate. SBA may undertake such investigation as it deems necessary to determine whether it is entitled to seek recovery from the Seller and Seller agrees to take whatever actions are necessary to facilitate such investigation. § 120.1722 SBA's offset rights. SBA shall have the right to offset any amount owed by Lender to SBA, including, without limitation, an offset against CSA's obligation to pay Lender pursuant to any Section 504 First Mortgage Loan Pool Guarantee Agreement. § 120.1723 Pool Loan receivables received by Seller. Any Pool Loan Receivables received by Seller in connection with obligations under Seller's Pool Loan must be forwarded by Seller to CSA within two business days of receipt of collected funds. § 120.1724 Servicing and liquidation expenses. All ordinary and reasonable expenses of servicing and liquidating Seller's Pool Loan shall be paid by, or be recoverable from, Obligor, and all such ordinary and reasonable expenses incurred by Seller or SBA which are not recoverable from Obligor shall be shared ratably by Seller, SBA, and the Pool Originator pursuant to the applicable percentages set forth in the First Lien Position 504 Loan Pool Guarantee Agreement. § 120.1725 No Program Preference by Seller or Pool Originator. The Seller and the Pool Originator must not establish a Program Preference, which is defined in 13 CFR 120.10. § 120.1726 Pool Certificates a Seller cannot purchase. Neither a Seller, nor any of its Program Associates or Affiliates, may purchase a Pool Certificate that is backed by a Loan Interest in a Pool Loan that the Seller, or any of its Program Associates or Affiliates, originated or owned, and, in the event such purchase occurs, SBA's guarantee shall not be in effect with respect to any such Pool Certificate.

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