Regulations for SBA Form 1081

Page 1 of2

Circular No. A-129 -- Managing Federal Credit Programs

B. MANAGEMENT
OF GUARANTEEDLOANLENDERSANDSERVICERS
REFERENCES:
ging Federal Receivables"
1. Lender Eligibility.
a.

Participation Criteria. Federal credit granting agencies shall establish and publish in the Federal Register
specific eligibility criteria for lender participation in Federally guaranteed loan programs. These criteria should
include:
(1) Requirements that the lender is not currently debarred/suspended

from participation in a

Government contract or delinquent on a Government debt;

:1(-(2)

Qualification

requirements

for principal

officers

and staff of the lender;

(3) Fidelity/surety bonding and/or errors and omissions insurance with the Federal Government as a
loss payee, where appropriate, for new or non-regulated lenders or lenders with questionable
performance under Federal guarantee programs;
(4) Financial and capital requirements for lenders not regulated by a Federal financial institution
regulatory agency, including minimum net worth requirements based on business volume.
b.

Review of Eligibility. Agencies shall review and document a lender's eligibility for continued participation in a
guaranteed loan program at least every two years. Ideally, these reviews should be conducted in conjunction
with on-site reviews of lender operations (see B.3) or other required reviews, such as renewal of a lender
agreement (see B.2). Lenders not meeting standards for continued participation should be decertified. In
addition to the participation criteria above, guarantor agencies should consider lender performance as a
critical factor in determining continued eligibility for participation.

c.

Fees. When authorized and appropriated for such purposes, agencies should assess non-refundable
defray the costs of determining and reviewing lender eligibility.

d.

Decertification. Guarantor agencies should establish specific procedures to decertify lenders or take other
appropriate action any time there is:
(1) Significant and/or continuing non-conformance

fees to

with agency standards; and/or

(2) Failure to meet financial and capital requirements or other eligibility criteria.
Agency procedures should define the process and establish timetables by which decertified lenders
can apply for reinstatement of eligibility for Federal guaranteed loan programs.
e.

Loan Servicers. Lenders transferring and/or assigning the right to service guaranteed loans to a loan servicer
should use only servicers meeting applicable standards set by the Federal guarantor agency. Where
appropriate, agencies may adopt standards for loan servicers established by a Government Sponsored
Enterprise (GSE) or a similar organization (e.g., Government National Mortgage Association for single family
mortgages) and/or may authorize lenders to use servicers that have been approved by a GSE or similar
organization.

2. Lender Agreements. Agencies should enter into written agreements with lenders that have been determined to
be eligible for participation in a guaranteed loan program. These agreements should incorporate general participation
requirements, performance standards and other applicable requirements of this Circular. Agencies are encouraged,
where not prohibited by authorizing legislation, to set a fixed duration for the agreement to ensure a formal review of
the lender eligibility for continued participation in the program.
a.

General ParticipationRequirements.
(1) Requirements

for lender eligibility, including participation criteria, eligibility reviews, fees, and

decertification (see Section 1, above);

(2)Agencyand lenderresponsibilitiesfor sharingthe riskof loandefaults(seeSection1/.3. a.(1»):
and, where feasible

http://www.whitehouse.gov/omb/
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Circular No. A-129 -- Managing Federal Credit Programs

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(3) Maximum delinquency, default and claims rates for lenders, taking into account individual program
characteristics.
b.

Performance Standards. Agencies should include due diligence requirements for originating, servicing, and
collecting loans in their lender agreements. This may be accomplished by referencing agency regulations or
guidelines. Examples of due diligence standards include collection procedures for past due accounts,
delinquent debtor counseling procedures and litigation to enforce loan contracts.
Agencies should ensure, through the claims review process, that lenders have met these standards prior to
making a claim payment. Agencies should reduce claim amounts or reject claims for lender nonperformance.

c.

Reporting Requirements. Federal credit granting agencies should require certain data to monitor the health of
their guaranteed loan portfolios, track and evaluate lender performance and satisfy OMB, Treasury, and other
reporting requirements which include the k

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-un~
ethical
behavior
of an Associate.
The
following
are examples
of Silch 1iD.ethical 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,
225

§ 120.150

13 CFR Ch. I (1- 1-06 Edition)

and/or
the
lenders
financing
the
Project
of which it is aware or should
be aware;
0) Fail to disclose to SBA whether
the loan will:
(1) Reduce the exposure of a Partici':
pant 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
(1) 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
teria?

What

are

SBA's

lending

cri-

The applicant
(including
an Operating Company) must be creditworthy.
Loans must be so sound as to reasonably assure repayment.
SBA will consider:
(a) Character,
reputation,
and credit
history
of the applica,nt (and the Operating Company;nif- applicable),
its Associates; and guarantors;
(b) Experience
and depth of management;
(c) Strength
of the business;
(d) Past
earnings,
projected
cash
flow, and future prospects;
(e) Ability
to repay the loan with
earnings from the business;
(f) Sufficient
invested equity to operate on a sound financial basis;
(g) Potential
for long-term
success;
(h) Nature and value of collateral
(although
inadequate
collateral
will not
be the sole reason for denial of a loan
request); and

0) The effect any affiliates
(as defined in part 121 of this chapter)
may
have on the ultimate
repayment
ability of the applicant.
§ 120.151 What is the statutory
for total loans to a Borrower?

limit

The aggregate
amount
of the SBA
portions
of all loans to a single Borrower, including
the Borrower's
affiliates as defined in §121.103 of this chapter,
must
not
exceed
a guaranty
amount
of $1,000,000, except as otherwise authorized
by statute
for a specific
program.
The
maximum
loan
amount
for anyone
7(a) loan
is
$2,000,000. 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]
§ 120.160

Loan conditions.

The fOllowing requirements
are normally required
by SBA for all business
loans:
(a) Personal guarantees. Holders of at
least a 20 percent
ownership
interest
generally
must
guarantee
the loan.
SBA, in its discretion,
consulting
with
the Participating
Lender, may require
other appropriate
individuals
to guarantee the loan as well, except SBA will
not require
personal
guarantees
from
those owning less than 5% ownership.
(b) Appraisals. SBA may require professional
appraisals
of the applicant's
and principals'
assets, a survey,
or a
feasibility
study.
(c) Hazard Insurance.
SBA requires
hazard insurance
on all collateral.
(d) Taxes. The applicant
may not use
any of the proceeds
to pay past-due
Federal and state payroll taxes.
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.», a
loan recipient
must obtain flood insurance if any building
(including
mobile
226

§ 120.410

13 CFRCh. I (1-1-06 Edition)

SBA's rights to deny a specific loan or
establish
general
policies.
See also
§§120.441(b) and 120.451(d) concerning
Supplemental
Guarantee
Agreements.

x

P ARTICIP

§120.412 Other services Lenders Dlay
provide Borrowe~.
Subject to §120.140Lenders, 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.

ATION CRITERIA

--- § 120.410

Requirements
for all participating Lenders.
A Lender must:
(a) Have a continuing
ability
to
evaluate,
process, close, disburse,
service and liquidate
small business
loans;
(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 a
State or Federal regulatory
authority,
satisfactory
to SBA; and
(e) In order to make Low Documentation loans, be:
(1) A bank or thrift institution
which
has executed
an SBA Form 750, Loan
Guaranty
Agreement,
and which has at
least 20 qualified
loans outstanding
as
of the call report
date closest to the
date of its fiscal year end, or
(2) An institution
other than a bank
or thrift
institution
which has executed an SBA Form 750, Loan Guaranty
Agreement,
and which has at least 20
qualified
loans outstanding
as of its
latest fiscal year end. For purposes
of
this paragraph
(e), a qualified
loan is
one which was initially
approved in the
amount of $100,000 or less and is classified asa
commercial,
industrial
or
commercial
real estate
loan for purposes of call reporting.
A lender may
request
an exception
to the requirements of this paragraph
(e) from the
SBA Associate
Administrator
for Financial Assistance.
[61 FR 3235, Jan. 31, 1996, as amended at 62
FR 302, Jan. 3, 1997]
§ 120.411

Preferences.

An agreement
to participate
under
the Act may not establish
any Preferences in favor of the Lender.

See also § 120.195.

--

PROVISIONS

SBA accessto Lender files.
A Lender must allow SBA's authorized representatives,
during normal
business hours, access to its files to review, inspect and copy all records and
documents relating to SBA guaranteed
loans.

§ 120.414

.

[61 FR 3235, Jan. 31, 1996. R-edesignated
FR 6509, Feb. 10, 1999)

at '64

Suspension
or reyoc,,#op of
eligibility to partiCipate.
SBA may suspend or revoke the eligibili ty of a Lender to participate in the
7(a) program because of a violation of
SBA regulations,
a breach of any
agreement with SBA, a change of circumstance resulting in the Lender's inability to meet operational
requirements, or a failure to engage in prudent lending practices. Proceedings for
such purposes will be conducted in accordance with the provisions of part 134

§ 120.415

238

---

i

§120.413 AdvertiseDlent
of relationshipwith 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
MISCELLANEOUS

d.

I
I
\

Small Business Administration
ASSOCIATE

DEVELOPMENT
(ADCS)

§ 120.854
in a Licensee as of November
may retain such investment.

COMPANIES

[68 FR 57985. Oct. 7, 2003]

§ 120.850 Expiration
of Associate
Development
Company designation.
The designation
of Associate
Development
Company
(ADC) will cease to
exist on January
1, 2004. After that
date,
former
ADCs may continue
to
contract
with CDCs as Lender Service
Providers
(see part 103 of this chapter)
or to perform other services.
[68 FR 57984, Oct.

*

SBA OVERSIGHT
§ 120.853 Oversight
CDCs.

OTHERCDC REQUffiEMENTS

§ 12Q.851 CDC ethical requirements.
CDCs and their-Associates
must act
ethically
arid 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

§ 120.852 Restrictions
regarding
CDC
participation
in the Small Business
Investment
Company
(SBIC) program and the 7(a) loan program.
(a) 7(a) loan program. A CDC must not
invest in or be an Affiliate of a Lender
participating
in the 7(a) loan program
described in §120.2(a). (For a definition
of Affiliation,
refer to § 121.103 of this
chapter.)
CDCs that already
are affiliated with state development
companies
approved by SBA under section 501 of
Title V, as of November 6, 2003 may remain Affiliates.
(b) SEIC program. 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 ill of the Small Business Invest-

ment Act, 15 U.S.C. 6B1et seq. A CDC
that has an SBA-approved investment

evaluation

of

7. 2003]

ENFORCEMENT

ACTIONS

§ 120.854 Grounds
for taking
enforcement action against a CDC.
(a) General. The AAJFA or his or her
authorized
delegate may undertake
one
or more of the enforcement
actions set
forth in §§120.855(a) and (b) with respect to a CDC, based upon a determination
that one or more of the following grounds exist:
(1) The CDC has failed to receive SBA
approval for at least four 504 loans during two consecutive
fiscal years;
(2) The CDC has failed to comply materially
with any requirement
imposed
by statute,
regulation,
SOP, policy and
procedural
notice,
any agreement
the
CDC has executed
with SBA. or the
terms of a Debenture
or loan authorization.
(3) The CDC has made a material
false statement
or has failed 'to disclose a material
fact to SBA:
(i) With respect to a 504 loan;
(ii) In applying
to SBA for authority
to participate
in the 504 program or for
any change in the CDC's participation
in the 504 program; or
(iii) In any report or other disclosure
of information
that SBA requires.
(4) The CDC is not performing
underwriting,
closing, servicing,
liquidation,
litigation,
or other
actions
with respect to 504 loans in a commercially
reasonable
or prudent
manner.
Supporting
evidence
of a CDC's commercially unreasonable
or imprudent
actionmay
include, but is not limited to,
failure to meet one or more of the portfolio benchmarks.

273

-~

57985. Oct.

SBA

[68 FR 57984,Oct. 7, 2003]

~

and

SBA may conduct an operational review of a CDC. 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.

7. 2003]

-

6, 2003