87 FR 66963 (Issued November 7, 2022)

SBA SUMMARY OF THE PROPOSED RULE:  The U.S. Small Business Administration (SBA or Agency) is proposing to lift the moratorium on licensing new Small Business Lending Companies (SBLCs) and to add a new type of entity called a Mission-Based SBLC.  SBA also is proposing to remove the requirement for a Loan Authorization.

This is the second of two proposed rules recently published by the SBA.  The comment period on the first regulatory proposal, Affiliation and Lender Criteria for the SBA Business Loan Programs (87 FR 64724) closes on December 27, 2022.  The comment period on this second regulatory proposal closes on January 6, 2023.  Comments on both Proposed Rules may be submitted through the Federal eRulemaking Portal:  http://www.regulations.gov.  Please refer to the Federal Register publications for more information.

As a reminder – following the close of the comment periods, SBA will review all public comments and decide whether to proceed with the rules as proposed, make modifications to the proposals, defer any action on the proposed amendments, or decide not to proceed with some or all of the proposed changes.  This process can take several months, or longer.  Any final amendments to existing regulations only take effect on the date specified in a Final Rule published in the Federal Register.  It also is important to remember that regulations provide the broad framework for SBA Program Requirements.  They can be, and almost always are, further clarified and interpreted in other guidance including SOPs and Notices. Unless and until a Final Rule(s) is published in the Federal Register, existing regulatory requirements continue to apply.

Regulations proposed to be amended –

13 CFR 120 – Business Loan Programs

13 CFR 120.10 – Definitions

  • SBA is proposing to revise the regulations to:
    1. Revise the definition for Small Business Lending Company (SBLC) to:
      1. Delete reference to the moratorium that SBA has imposed on licensing new SBLCs since January 1982, and
      2. Add the requirement that “SBA accepts applications for SBLCs from time to time as published in the Federal Register”;
    2. Add a new definition for “Mission-Based Small Business Lending Company” (Mission-Based SBLC);
    3. Remove the definition for “Authorization”;
    4. Revise the definition for “Loan Instruments” by removing the term “Authorization” from the list of Loan Instruments; and,
    5. Revise the definition of “Loan Program Requirements or SBA Loan Program Requirements” by removing “Authorization” from the list of sources for program requirements.
    [Note:  definitions are listed in alphabetical order without any numbering.] 
  • SMALL BUSINESS LENDING COMPANIES (SBLCs) –
    • SBA is proposing to lift the 40-year moratorium on licensing new Small Business Lending Companies and to create a new type of SBLCs, Mission-Based SBLCs. This action is based on its determination that “certain markets where there are capital market gaps continue to struggle to obtain financing on non-predatory terms” and its belief the proposed rule-change would help to bridge this financing gap.
    • SBA is proposing to periodically announce in the Federal Register the periods during which it would accept applications for new regular SBLC Licenses.[A similar separate requirement is proposed for the Mission-Based SBLCs.]
    • In the section-by-section summary, SBA indicates that establishing this process for increasing the number of SBLCs would allow SBA the “flexibility to respond to market conditions and oversight capacity while providing the public notice to allow interested parties to prepare applications”.
    • The background information also states that, based on its current oversight capacity and a cost-benefit analysis provided in the Proposed Rule, SBA has determined that it currently has the ability to license and supervise three additional regular SBLCs. However, the proposed regulatory language does not contain any limitation on the maximum number of regular SBLCs that SBA can approve during any individual period when it would be accepting applications, or in the aggregate.
    • Per the regulatory language, and the background information, SBA would continue the requirement that a regular SBLC must be a for profit or nonprofit corporation, a limited liability company or a limited partnership.
    • SBA also would continue the requirement that a regular SBLC may only make: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” with such loans being subject to the same conditions as guaranteed loans made to Intermediaries by 7(a) Lenders. Currently SBLCs are required to be separate legal entities with their business endeavors limited to making 7(a) loans and loans to Microloan intermediaries. Since this part of the current language would remain unchanged, it appears that this requirement would continue.
    [Additional discussion of SBA’s SBLC requirements appears in the relevant section-by-section discussions below – 13 CFR 120.466, 13 CFR 120.470, 13 CFR 120.471, 13 CFR 120.820.]
  • MISSION-BASED SBLCs –
    • SBA is proposing to add to the regulations the following new definition:Mission-Based SBLC is a type of SBLC that is a nonprofit lending institution licensed and authorized by SBA only to make loans pursuant to section 7(a) of the Small Business Act to fill an identified capital market gap.  SBA accepts applications for Mission-Based SBLCs from time to time as published in the Federal Register.
    • Based on the proposed regulatory language and the accompanying background information, it appears that Mission-Based SBLCs, would be required to be separate legal entities with their business endeavors limited to making 7(a) loans.
    • In the section-by-section analysis, SBA indicates that adding Mission-Based SBLCs to the list of eligible 7(a) lenders would allow current Community Advantage (CA) lenders the opportunity to apply to change their lender status in order to allow them to permanently participate as 7(a) lenders in the regular 7(a) program.
    • Also, per the proposed regulatory definition and the section-by-section analysis, as with the requirement for regular SBLCs, SBA intends to periodically announce in the Federal Register the periods during which it would accept applications for new Mission-Based SBLC Licenses, including the number of applications that it will accept and the number of licenses that it will issue. SBA further indicates that its ability to accept new lenders under this section will be tied to “market conditions” and “SBA’s capacity to supervise and oversee additional lenders”.
    • In the section-by-section analysis, SBA indicates that, since CA lenders already are supervised and overseen by SBA, it anticipates that current CA lenders in good standing may apply and “will be immediately approved” as Mission-Based SBLCs without increasing the number of entities subject to SBA’s oversight.
    [Additional proposed requirements regarding how Mission-Based SBLCs would be required to address capital market gaps are discussed in the summary of 13 CFR 120.470 – What are SBA’s additional requirements for SBLCs?, below.Additional discussion of other aspects of this topic appears in the relevant section-by-section discussions below – 13 CFR 120.466, 13 CFR 120.471, 13 CFR 120.820.] 
  • AUTHORIZATION –
    • The background information to the Proposed Rule indicates that SBA is proposing to eliminate the requirement that a separate Loan Authorization be created for each loan and instead use the terms and conditions of the loan authorization as submitted by the lender through E-Tran as part of the loan guaranty application process. The lender-submitted terms and conditions would be the basis for the agreement between SBA and the lender as to the criteria under which SBA would guaranteeing the loan.
    • Therefore, SBA is proposing to revise various provisions of 13 CFR 120.10, Definitions, consistent with the proposed change for program requirements.
    • Consistent with this change, SBA also is proposing to amend other sections of the regulations to delete the term “Authorization” wherever it appears.

13 CFR 120.466 – SBA Supervised Lender Application

  • Under current regulations, SBA only can approve a new SBLC if it is buying the SBLC license of another entity. Therefore, currently every applicant for a SBLC license is required to provide a letter agreement from the existing SBLC stating that it is seeking to transfer its lending authority to the applicant SBLC.
  • Recognizing that SBA would have the ability to approve new SBLCs that would not be purchasing the licenses of existing SBLCs, SBA is proposing to amend this section to require such agreement only when an applicant SBLC is acquiring an existing license. Per the background information provided, SBA anticipates that such transactions might occur during periods when new SBLC licenses are not being issued.

13 CFR 120.470 – What are SBA’s additional requirements for SBLCs?

  • SBA is proposing to revise this section to include additional requirements for Mission-Based SBLCs.
  • As indicated in the definitions section (13 CFR 120.10), Mission-Based SBLCs would be required to be nonprofit organizations.[Regular SBLCs would continue to be allowed to be for-profit or nonprofit corporations, limited liability companies, or limited partnerships.]
  • In addition, SBA is proposing to add a new paragraph to this section that would describe additional requirements that Mission-Based SBLCs must meet. Specifically, SBA is proposing that for each Mission-Based SBLC, on an individual basis, it would:
    1. Require that the entity make a certain percentage of its total number of its loans in “its identified capital market gap”. As part of its application to be a Mission-Based SBLC, the lender would be required to identify in its business plan the capital market gap it would propose to target and the percentage of total loans it proposes to make in that market. The capital market gap could include “a geographic area start-up businesses, business sector, demographic, or other underserved market”. SBA would have sole discretion to accept such plan.
    2. Determine “a minimum acceptable lender capitalization, percentage of total loans that it will make in its identified capital market gap, maximum loan size and geographic area of operations”.  The background information indicates that SBA would make these determinations based on the individual Mission-Based SBLC’s proposed capitalization, proposed identified capital market gap, Loan Loss Reserve Account, business plan, experience of staff, or lending history, among other things.

13 CFR 120.471 – What are the minimum capital requirements for SBLCs?

  • For regular SBLCs, SBA is proposing no change to current regulations which require that, beginning January 4, 2021, each newly approved SBLC, and beginning January 4, 2024, each existing SBLC that makes or acquires a 7(a) loan, must maintain, at a minimum, unencumbered paid-in capital and paid-in surplus of at least $5 million or 10% of the aggregate of its share of all outstanding loans, whichever is greater.
  • For Mission-Based SBLCs only, SBA is proposing to authorize the SBA Administrator [currently Isabella Casillas Guzman], in consultation with the Associate Administrator/Office of Capital Access [currently Patrick Kelley], to establish minimum capital requirements necessary to ensure sufficient risk protection to SBA and lenders on a lender-by-lender basis. 13 CFR 120.820 – CDC Affiliation
  • SBA is proposing to add a new paragraph (g) stating that, notwithstanding other provisions in the regulations, a Certified Development Company (CDC) may be affiliated with a Mission-Based SBLC.
  • Under current regulations, CDCs already are authorized to make 7(a) loans within the requirements of the CA Pilot Program. This amendment would expand their authority to allow them to originate regular 7(a) loans without the limitations imposed by the Pilot Program, including the current $350,000 limit on the CA maximum loan size.
  • The section-by-section summary indicates that the proposed revision would allow a CDC to “form the required entity whose sole purpose is to make 7(a) loans as a Mission-Based SBLC that targets capital market gaps identified by SBA”.

SBA also is proposing additional regulatory amendments relating to the 504 Program.  Please see the Proposed Rule for details on these proposed changes.