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CUNA Regulatory Comment Call

November 23, 2005

EXECUTIVE SUMMARY

• The Small Business Administration (SBA) has initiated a one year Gulf Opportunity Pilot Loan Program (GO Loan Pilot) to expedite financing on an emergency basis to small businesses in areas affected by Hurricanes Katrina and Rita. To help speed financing for recovery and rebuilding, the SBA will provide its full guaranty and streamlined centralized loan processing to qualified lending partners that agree to make expedited SBA 7(a) loans available to small businesses located in those disaster areas. The maximum loan amount is $150,000.
• SBA has issued an interim final rule (meaning there was no proposal issued) temporarily amending the size eligibility criteria for loan assistance provided in the GO Loan Pilot. Although the regulation became effective on November 14, 2005, the SBA is inviting comments on the rule.
• The GO Loan Pilot will be a temporary pilot program for use in fiscal year 2006. GO Loans will be available through Sept. 30, 2006, to small businesses in the counties and parishes of Texas, Louisiana, Mississippi, Alabama and western Florida that are included in the Presidential disaster declarations for Hurricanes Katrina and Rita, and the contiguous counties and parishes. More detailed information concerning the GO Loan Pilot, including a list of eligible parishes and counties is located on the SBA website. Hurricane fact sheets with more information on eligible parishes and counties can be obtained on this page of the SBA website.
• This interim final rule makes the expedited small business financing available to businesses that are considered small for the purpose of SBA’s 7(a) Business Loan Program and businesses considered small for the purpose of SBA’s Certified Development Company (CDC) Program -- also known as the 504 Loan Program. In order to expand the reach of its 7(a) program to fulfill the needs in the Gulf region impacted by the hurricanes, SBA has decided to utilize the size eligibility criteria of the CDC Program for the GO Loan Pilot. The structure and objectives of the CDC Program target a larger segment of the small business community than the 7(a) Business Loan Program. The CDC Program is a long-term financing tool for economic development that provides loans for major fixed assets, such as land and buildings. To be eligible for assistance under the CDC program, a business concern must meet either the size eligibility criteria of the 7(a) Business Loan Program OR have tangible net worth not in excess of $7 million and average net income after federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years not in excess of $2.5 million (loans cannot be made to businesses engaged in speculation or investment in rental real estate).

• Under 7(a) Loan Program regulations, a business including its affiliates cannot exceed the size standard for the primary industry in which it is engaged. In determining what is a small business, the definition varies from industry to industry to adequately reflect industry differences. The SBA has therefore developed a table of size standards that define the maximum size of an eligible small business, which includes numbers of employees and dollar amounts. More than 90 percent of 7(a) lenders are start-ups or businesses with 50 or fewer employees. This SBA web page discuss various aspects of the 7(a) Loan Program, including size eligibility criteria.

• This SBA web page contains information on the CDC (504) Loan Program.

• According to SBA, size standards based on net worth and net income have been established to assist businesses that tend to be larger in size than businesses concerns that qualify for the 7(a) Business Loan Program, but still qualify as ‘‘small’’ for the purpose of SBA. “Many of these larger-sized small businesses have long-term viability, but need immediate access to capital to sustain or rebuild their operations during this critical recovery period. SBA believes that applying the alternate net worth and net income size standards to the GO Loan Pilot provides an effective mechanism for the Federal Government to extend crucial financial assistance to this segment of the small business community that would otherwise be unavailable.”
• The loans will be modeled on SBAExpress loans, which carry an SBA guarantee. For the GO Loan Pilot, the SBA guaranty percentage will be 85 percent.
• Under the program, lenders will generally use their own paperwork and be responsible for evaluating the creditworthiness of applicants. Lenders perform credit analysis and may use credit scoring using its own procedures. SBA has developed some new forms pertaining to GO Loan Pilot loans that are modeled after the forms currently used by SBAExpress lenders (for example, the Guaranty Request Form, Certification of Borrower Eligibility and Servicing Checklist). The new forms may be obtained on this SBA web page. Participants are encouraged to utilize Internet and E-Tran (or Fax) to transmit applications to SBA. The decision on whether to apply an SBA guaranty to the loans will be made on an expedited basis, with an anticipated turnaround by the SBA of 24 hours or less.
• All lenders that are authorized to make SBA-backed loans under the SBAExpress program will be eligible to make GO Loans without further approval from SBA. In other words, a lender must be must be authorized to make 7(a) loans through SBAExpress in order to participate in the GO Loan Pilot. About 40 percent of SBA lenders are currently eligible. Information about the SBAExpress Program can be found here.
• In a notice dated a few days later, the SBA announced a waiver of certain agency provisions applicable to the GO Loan Pilot, including the following:

  • An applicant for an SBA-guaranteed loan through the 7(a) program must show that the desired funds are not available from the personal resources of any owner of 20 percent or more of the equity of the applicant. If such personal resources are readily available, SBA requires that those resources above a certain amount, which varies with the size of the loan, must be injected into the applicant firm’s financing package to reduce the amount of SBA’s funding.
  • SBA prescribes the maximum interest rates that a lender may charge a borrower. GO Loan Pilot lenders may charge the interest rates applicable to the SBAExpress program as set forth in the SBAExpress Program Guide, available on SBA’s Web site.
  • The prohibition on lenders from charging certain fees to borrowers. Under the Pilot, lenders will be permitted to charge the same fees on GO Loans as they charge on their non-SBA guaranteed commercial loans.

• Comments on the interim final rule are due to the SBA by December 14, 2005. Please send your comments to CUNA by December 7, 2005. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.com; or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, 6th Floor - South Building, Washington, DC 20004-2601. You may also contact us if you would like a copy of the SBA interim final rule, or you may access it here.

1. The interim final amends the definition of eligible “small business” for purposes of the GO Loan Pilot to encompass more businesses in the disaster areas. The new definition is based on net worth and net income.
   
   Do you agree with the size standards for the GO Loan Pilot?
   
   Yes ______ No ______
   
   If not, why not?
   
   

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2. The GO Loan Pilot is open only to lenders that are authorized SBAExpress lenders. Not all credit union 7(a) lenders are approved SBAExpress lenders. Do you think that the GO Loan Program should be open to all SBA 7(a) approved lenders, not just SBAExpress approved lenders?
   
   Yes ______ No ______
   
   If not, why not?
   
   

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3. Do you have concerns or suggestions with regard to any other aspects of the GO Loan Pilot?
   
   Yes ______ No ______
   
   If yes, what are those concerns or suggestions?
   
   

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4. Other comments?
   
   

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