Oct 26 -- The U.S. Small Business Administration (SBA or Agency) is proposing to amend various regulations governing SBA's 7(a) Loan Program and 504 Loan Program, including use of proceeds for partial changes of ownership, lending criteria, loan conditions, reconsiderations, and affiliation standards, to expand access to capital to small businesses and drive economic recovery. The proposed amendments to affiliation standards will also apply to the Microloan Program, Intermediary Lending Pilot Program, Surety Bond Guarantee Program, and the Disaster Loan programs (except for the COVID Economic Injury Disaster Loan (EIDL) Disaster Loan Program). SBA must receive comments on this proposed rule on or before December 27, 2022.
The mission of SBA is to “aid, counsel, assist and protect the interests of small business concerns in order to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.” 15 U.S.C. 631(a). SBA accomplishes this mission, in part, through Capital Access programs that bridge the financing gap in the private market and help businesses of all sizes to recover from disasters. 15 U.S.C. 636(a) and (b). SBA has determined that changing conditions in the American economy, technological developments, and a constantly evolving small business community necessitate the need to revise regulations to improve program efficiency and the customer experience for the 7(a) and 504 Loan Programs. Additionally, SBA has determined that revisions for similar purposes to SBA regulations on affiliation determinations should also apply to the Microloan Program, the Intermediary Lending Pilot Program (ILP Program), the Surety Bond Guarantee Program (SBG Program), and the Business Disaster Loan Programs, which consist of Physical Disaster Business Loans, Economic Injury Disaster Loans, and Military Reservist Economic Injury Disaster Loans (but do not include COVID EIDL Disaster Loans).
SBA is proposing to streamline and modernize the 7(a) Loan Program and 504 Loan Program regulations setting forth use of proceeds regarding partial changes of ownership, lending criteria, hazard insurance requirements, and reconsiderations. Specifically, SBA is revising 13 CFR 120.130 on “Restrictions on uses of proceeds”; 13 CFR 120.150 on “What are SBA's lending criteria?”; 13 CFR 120.160 on “Loan conditions”; 13 CFR 120.193 on “Reconsideration after denial”; 13 CFR 120.202 on “Restrictions on loans for changes of ownership”.
Historically, SBA has permitted loan proceeds for use only in three situations involving a change of ownership: (1) A complete change of ownership where the debt was used to finance a change of ownership of a business concern with new owner(s) who previously held no interest in the small business concern acquiring 100 percent of the outstanding equity ownership in the small business from the selling owner(s), and the seller(s) completely divest from all ownership interest and management activities for the small business concern; or (2) A Partner Buyout, where the small business concern uses the loan to affect a change of ownership between existing owners and the owners which remain after the sale is complete held an ownership interest prior to the sale, and the selling owner(s) completely divest from all ownership interest and management activities for the small business concern; and (3) where an Employee Stock Ownership Plan or equivalent trust (ESOP) purchases a controlling interest (51% or more) in the employer small business from the current owner(s). Except for where an ESOP purchases a controlling interest (51% or more) in the employer small business from the current owner(s), SBA's current regulations do not permit 7(a) loan proceeds to be used for partial changes of ownership. SBA proposes to revise restrictions on Borrowers using 7(a) loan proceeds to effect partial changes of ownership to assist small businesses and expand pathways to ownership.
SBA believes that streamlining and modernizing regulations on lending criteria and loan conditions for its 7(a) Loan Program and 504 Loan Program can better position the Agency and participating lenders to meet the needs of America's small businesses, create jobs, assist with recovery from the COVID-19 pandemic, and grow the economy, fueling American entrepreneurship. Further, these proposed changes will enable SBA to provide capital in the form of 7(a) and 504 loans to more small businesses.
SBA also proposes to revise the process for reconsideration after denial of a loan application or loan modification request in its 7(a) Loan Program and 504 Loan Program to provide the Director, Office of Financial Assistance, with the authority to delegate decision making to designees. The proposed revision would also provide that the Administrator, solely within her discretion, may review these matters and make the final agency decision on reconsideration. Such discretionary authority of the Administrator would not create additional rights of appeal on the part of an applicant not otherwise specified in SBA regulations.
Further, SBA proposes to simplify 13 CFR 121.301, which sets forth the principles for determining affiliation in the 7(a) Loan Program, 504 Loan Program, Microloan Program, ILP Program, SBG Program, and Business Disaster Loan Programs (except for the COVID EIDL Disaster Loan Program). Specifically, SBA proposes to remove the provisions on affiliation arising from management and control, franchise or license agreements, and identity of interest, and SBA proposes to streamline affiliation determinations based on ownership. This proposed rule would redefine affiliation for all these programs, thereby simplifying affiliation determinations.
The Agency requests comments on all aspects of regulatory revisions in this proposed rule and on any related issues affecting the 7(a) Loan, 504 Loan, Microloan, ILP, SBG, and Business Disaster Loan Programs.