LOAN TERMS AND CONDITIONS

SEC. 403. Loans made pursuant to section 402 (including immediate participation in and guaranties of such loans) shall have such terms and conditions as the Administrator of the Small Business Administration shall determine, subject to the following

limitations-

(a) There is reasonable assurance of repayment of the loan;

(b) The financial assistance is not otherwise available on reasonable terms from private sources or other Federal, State or local programs;

(c) The amount of the loan, together with other funds available, is adequate to assure completion of the project or achievement of the purposes for which the loan is made;

(d) The loan bears interest at a rate not less than (1) a rate determined by the Secretary of the Treasury, taking into consideration the average market yield on outstanding Treasury obligations of comparable maturity, plus (2) such additional charge, if any, toward covering other costs of the program as the Administrator of the Small Business Administration may determine to be consistent with its purposes: Provided, however, That the rate of interest charged on loans made in redevelopment areas designated under the Area Redevelopment Act (42 U.S.C. 2501 et seq.) shall not exceed the rate currently applicable to new loans made under section 6 of that Act (42 U.S.C. 2505); and

(e) Fees not in excess of amounts necessary to cover administrative expenses and probable losses may be required on loan guaranties.

DISTRIBUTION OF FINANCIAL ASSISTANCE

SEC. 404. The Administrator of the Small Business Administration shall take such steps as may be necessary to insure that, in any fiscal year, at least 50 per centum of the amounts loaned or guaranteed pursuant to this part are allotted to small business concerns located in urban areas identified by the Director, after consideration of any recommendations of the Administrator of the Small Business Administration, as having high concentrations of unemployed or lowincome individuals or to small business concerns owned by low-income individuals. The Administrator of the Small Business Administration, after consideration of any recommendations of the Director, shall define the meaning of low income as it applies to owners of small business concerns eligible to be assisted under this part, and such definition need not correspond to the definition of low income as used elsewhere in this Act.

LIMITATION OF FINANCIAL ASSISTANCE

SEC. 405. No financial assistance shall be extended pursuant to this title where the Administrator of the Small Business Administration determines that the assistance will be used in relocating establishments from

(a) The principal purpose of the Economic Opportunity Loan Program is to make funds available on reasonable terms and maturities to small business concerns located in areas with high proportions of unemployment or low-income individuals, or small business concerns owned by or to be established by persons with low incomes; and to provide management assistance to such persons.

(b) Particular emphasis will be placed on the preservation or establishment of small business concerns located in urban and rural areas with high proportions of unemployed or low-income individuals or owned by low-income individuals or those, who due to social or economic disadvantage, have been denied the opportunity to acquire adequate business financing through normal lending channels on reasonable terms. At least 50 percent of these loans will be made in each fiscal year in certain designated urban areas and to low-income individuals in urban or rural areas.

(c) Although certain of the credit standards used in the regular business loan program have been modified for the economic opportunity loan program, there must be a reasonable assurance of repayment. The maximum participation of the private business community in all phases of this program is to be encour aged. The program shall be administered to promote and facilitate this private participation.

For purposes of this part:

(a) "Director" means the Director, Office of Economic Opportunity.

(b) "Administrator" means the Administrator of the Small Business Administration.

(c) "SBA" means the Small Business Administration.

(d) "Small-business concern" means a business concern which would qualify as a small business under § 121.3-10 of this chapter.

(e) The "Act" means the Economic Opportunity Act of 1964, as amended. (f) "Economic Opportunity Loans" (EOL) means a loan authorized under section 402 (a) of the Economic Opportunity Act of 1964, as amended.

(a) In order to be eligible to apply for an EOL, a business must qualify under Parts 120 and 121 of this chapter, except where inconsistent with specific provisions in this part.

(b) The applicant must be at least 50 percent owned by a person or persons who either (1) has or have individual annual family income (s) (other than welfare) which is not sufficient to satisfy the basic need of each such individual family, or (2) has or have been denied the opportunity to have access to adequate financing on reasonable terms, through normal lending channels because of economic or social disadvantage. Businesses located in urban or rural areas with a high proportion of unemployed or low-income individuals may be considered economically disadvantaged.

(c) Financial assistance may be used to effect a change in ownership of a business where such a change will further the objectives of the EOL program.

(d) A cooperative association is eligible provided that its members are eligible, small business concerns. Consumer cooperatives are not eligible.

(e) Financial assistance shall not be extended when it is determined that the loan funds will be used in relocating establishments from one area to another if the relocation would result in an increase in unemployment in the area of original location. (Relocation within a community or local area shall not be considered relocation from one area to another.)

(f) Financial assistance shall not be extended if funds are otherwise available on reasonable terms from private sources or other Federal, State, or local programs. The applicant's bank of account, if any, will be contacted to determine its willingness to finance the applicant independently, to participate with SBA, or to make a loan with a guaranty by SBA. New private lending activity should be sought.

§ 119.31 Terms and conditions.

(a) An EOL shall not be made, participated in, or guaranteed if the total amount of the Government's share of such assistance to a single borrower at any one time exceeds a total outstanding of $50,000. The $50,000 loan limit applies collectively to all EOL loans to

business entities owned or controlled by affiliated ownership.

(b) Repayment will be required at the earliest feasible date giving consideration to the use to be made of the funds and indicated ability to repay. Working capital loans will be limited to 10 years. Longer terms up to 15 years may be provided where the proceeds are for acquisition of realty or other fixed assets. Where a combination of purposes is involved, the period for repayment will be adjusted accordingly. When deemed necessary, grace periods for payment of principal may be provided. Interest payments must be as soon after the loan is disbursed as possible and will be required during any grace period. A fluctuating repayment schedule may be established for seasonal businesses.

(c) (1) Interest on direct loans varies from time to time, based on a statutory formula. On immediate participation loans, the interest rate on SBA's share is the same as for direct loans.

(2) Subject to the approval of SBA, the participant's share of immediate participation loans, and on guaranteed loans prior to SBA's purchase, the interest rate shall be at a legal and reasonable rate. Maximum allowable rates may be published in the FEDERAL REGISTER from time to time.

(3) The interest rate on SBA's share of a guaranteed loan after purchase by SBA becomes the same as the rate for direct loans in effect at the time the loan was approved by SBA. SBA's payment to the guaranteed participant of accrued interest to the date of purchase shall be at the interest rate established by participant but shall not exceed an effective rate of interest of 8 percent per annum, and without any future adjustment for any unpaid accrued interest in excess of 8 percent per annum.

(d) There are no statutory requirements with respect to collateral for loans. Inadequate collateral shall not be used as a reason to decline unless the applicant refuses to pledge whatever worthwhile collateral is available. § 119.41

Participation.

(a) The amount of SBA guaranty may be up to 100 percent of the EOL, but shall not exceed $50,000.

(b) In immediate participation loans, SBA participation shall not exceed $50,000 or 90 percent of the loan, whichever is the lesser. The service fees

charged by the bank may equal but not exceed those which it charges on regular business loans.

§ 119.51 Credit requirements.

An application must meet certain practical credit requirements established by SBA. Principal requirements are as follows:

(a) An applicant must be of good character as determined by SBA.

(b) There must be evidence of ability to operate the business successfully. When, in the opinion of SBA, an applicant requires management assistance to attain, supplement or improve such ability, SBA may require that the applicant accept such management assistance as SBA may prescribe, as a condition of the loan.

(c) As required by the Act, there must be reasonable assurance of repayment of the loan.

(d) There must be evidence that the loan proceeds, together with other funds available to the applicant, are adequate to assure completion or achievement of the purposes for the loan.

(e) The purposes of the financial assistance must be consistent with the intent of the Act (Economic Opportunity Act of 1964, as amended).

§ 119.61 Application procedure.

(a) An applicant desiring to obtain an EOL shall apply to the regional or district office serving the area in which the applicant resides. If another SBA office is closer, he may obtain counseling or advice from it. Addresses of regional and district offices may be obtained from SBA.

(b) If, following a preliminary review of the applicant's case, the SBA finds the applicant's request worthy of further consideration, an SBA loan officer will assist the applicant in the preparation of necessary application forms and supporting documents.

(c) After a direct loan application has been submitted to SBA and has been approved or declined, the regional or district office will send a letter of notification to the applicant. In cases of decline, the reasons will be stated. When a bank is participating, the bank will be notified of the final decision.

§ 119.71 Applicability of other SBA regulations.

All applicable provisions of Parts 120 and 122 of this chapter shall apply to

120.2 120.3

PART 120-LOAN POLICY

Introduction.

Business loans and guarantees.

Terms and conditions of business. loans and guarantees.

120.4 Disaster loans for physical property loss, or for substantial economic injury as a result of major or natural disasters, or inability to process or market a product because of disease or toxicity through natural or undetermined causes.

120.5 Displaced Business, Coal Mine Health and Safety, Consumer Protection, and Occupational Safety and Health Loans.

AUTHORITY: The provisions of this Part 120 issued under 72 Stat. 387, as amended, 15 U.S.C. 636; sec. 5, 72 Stat. 385; 15 U.S.C. 634(b) (6).

SOURCE: The provisions of this Part 120 contained in Revision 5, 36 F.R. 21332, Nov. 6, 1971, unless otherwise indicated.

by SBA, immediate participation loans, and guaranteed loans.

(c) "Financial institutions" as used in this part shall include, but not be limited to, banks and other lending institutions whose regular course of business entails, the making of commercial, industrial and/or other loans of the type authorized to be made by SBA to eligible small business concerns and who otherwise meet the criteria specified in § 120.3 (c).

[Rev. 5, 36 F.R. 21332, Nov. 6, 1971, as amended by Amdt. 4, 37 F.R. 26708, Dec. 15, 1972]

§ 120.2 Business loans and guarantees.

Basic principles governing the granting and denial of applications for financial assistance:

(a) Applications for financial assistance may be considered only when there is evidence that the desired credit is not otherwise available on reasonable terms. The financial assistance applied for shall be deemed to be otherwise available on reasonable terms, unless it is satisfactorily demonstrated that:

(1) Proof of refusal of the required financial assistance has been obtained from

(i) The applicant's bank of account; (ii) If the amount of financial assistance applied for is in excess of the legal lending limit of the applicant's bank or in excess of the amount that the bank normally lends to any one borrower, then a refusal from a correspondent bank or from any other lending institution whose lending capacity is adequate to cover the financial assistance applied for; and

(iii) Not less than two banks in cities where the population exceeds 200,000. Proof of refusal must contain the date, amount and terms requested, and the reasons for not granting the desired credit. Bank refusals to advance credit should not be considered the full test of unavailability of credit and, where there is knowledge of reasons to believe that credit is otherwise available on reasonable terms from sources other than such banks, the financial assistance applied for cannot be granted notwithstanding the receipt of written refusals from such banks.

(2) The financial assistance required does not appear to be obtainable:

(1) On reasonable terms through the public offering or private placing of securities of the applicant;

(ii) Through the disposal at a fair price of assets not required by the applicant in the conduct of its existing business or not reasonably necessary to its potential healthy growth; and

(iii) Without undue hardship through utilization of the personal credit or resources of the owner, partners, management, or principal shareholders of the applicant;

(iv) Through other applicable Government financing.

(b) It is the policy to stimulate and encourage loans by banks and other lending institutions.

(1) An applicant for a direct SBA loan must show that an immediate participation or guaranteed loan is not available. An applicant for an immediate participation loan must show that a guaranteed loan is not available.

(2) SBA's share of immediate participation loans shall not exceed 75 percent of the loan. Exceptions may be made in cases when the participant's legal lending limit precludes a 25-percent participation. In such cases the participant will be required to share in the loan to the extend of its legal lending limit but in no event less than 10 percent. In guaranteed loans the exposure of SBA under the guaranty may not exceed 90 percent of the unpaid principal balance and accrued interest.

(3) No agreement to extend financial assistance under the Small Business Act shall establish any preferences in favor of a bank or other lending institution.

(c) Assurance of repayment, change of ownership, and recreational and amusement enterprises.

(1) No financial assistance shall be extended unless there exists reasonable assurance that the loan can and will be repaid pursuant to its terms. Reasonable assurance of repayment will exist only where the past earnings record and future prospects indicate ability to repay the loan and other obligations. It will be deemed not to exist when the proposed loan is to accomplish an expansion which is unwarranted in the light of the applicant's past experience and management ability, or when the effect of making the loan is to subsidize inferior management.

(2) Where the purpose of the loan application is to effect a change in the ownership of the applicant small business concern, the loan may usually be approved where there is a reasonable

justification for the change in ownersihp on the ground that the change will promote the sound development or preserve the existence of a small business concern; or will contribute to a well-balanced national economy by facilitating ownership of small business concerns by persons whose participation in the free enterprise system has been prevented or hampered because of economic, physical, or social disadvantages, or because of disadvantages in the business or residential locations.

(3) Where the purpose of the financial assistance is to finance the construction, acquisition, conversion, or operation of recreational or amusement enterprises, any such enterprise must be open to the general public, it must be properly licensed by appropriate State or local authority, and the character and reputation of the applicant will be given special consideration.

(d) Financial assistance will not be granted by SBA:

(1) If the direct or indirect purpose or result of granting such assistance would be to

(i) Pay off a creditor or creditors of the applicant who are inadequately secured and are in position to sustain a loss.

(ii) Provide funds, directly or indirectly, for payment, distribution, or as a loan to owners, partners, or shareholders of the applicant which do not change ownership interests in applicant. This shall not apply to ordinary compensation for services rendered.

(iii) Refund a debt owed to a Small Business Investment Company.

(iv) Replenish funds theretofore used for such purposes.

(2) If the financial assistance will provide or free funds for speculation in any kind of property, real or personal, tangible or intangible;

(3) If the applicant is an eleemosynary institution or other nonprofit enterprise: Provided, however, That this provision shall not be construed to bar financial assistance to a cooperative if it carries on a business activity and the purpose of such activity is to obtain pecuniary benefit for its members in the operation of their otherwise eligible small business

concerns.

(4) [Reserved]

(5) If the applicant is a newspaper, magazine, book publishing company, radio broadcasting company, television

broadcasting company, film production company, or similar enterprise;

(6) If any part of the gross income of the applicant (or of any of its principal owners) is derived from gambling activities;

(7) If the financial assistance is to provide funds to an enterprise primarily engaged in the business of lending or investments or to any otherwise eligible enterprise for the purpose of financing investments not related or essential to the enterprise;

(8) If the purpose of the financial assistance is to finance the acquisition, construction, improvement, or operation of real property which is, or is to be, held primarily for sale or investment;

(9) If the effect of the granting of the financial assistance will be to encourage monopoly or will be inconsistent with the accepted standards of the American system of free competitive enterprise;

(10) Generally, if the financial assistance would be used primarily in agricultural activities. Agricultural activities include, but are not limited to, the production of food and fiber. Where the applicant is engaged in an agricultural activity and financial assistance has been formally declined by an Agency of the Federal Government or an agricultural credit service supervised by the Farm Credit Administration, such applicant may be eligible for financial assistance from SBA: Provided, however, That an activity will not be eligible for financial assistance if it (i) produces (or in the last growing season produced) one or more crops currently eligible for a U.S. Department of Agriculture support payment or production loan; (ii) is engaged in the production of livestock or poultry, including eggs, except for (a) the operation of a hatchery for the production of baby chicks for sale to others, provided that the hatchery purchases from others more than 50 percent of its eggs; or (b) the operation of a commercial feed yard for cattle or hogs where its income is derived from the service operation of housing and feeding animals, either owned by others or purchased from producers solely for the purpose of fattening and resale prior to slaughter; or (c) the operation of a commercial poultry feed yard where its income is derived from the service operation of housing and feeding poultry owned by others, even when such operation results in the production of eggs; or (iii) is engaged in the produc