[Federal Register: July 13, 2000 (Volume 65, Number 135)]
[Proposed Rules]               
[Page 43261-43265]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jy00-21]                         

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 123

 
Military Reservist Economic Injury Disaster Loans

AGENCY: Small Business Administration (SBA).

ACTION: Notice of proposed rulemaking.

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SUMMARY: With this document, SBA proposes to amend its Disaster Loan 
Program regulations to implement a new program authorized by the 
Veterans Entrepreneurship and Small Business Development Act of 1999. 
Under this new program, SBA would make a low interest, fixed rate loan 
available to a small business employing a military reservist if that 
reservist is called up to active military duty during a period of 
military conflict and if he or she is an essential employee critical to 
the success of the business' daily operation.

DATES: Submit comments on or before August 14, 2000.

ADDRESSES: Written comments should be sent to Bernard Kulik, Associate 
Administrator, Office of Disaster Assistance, U.S. Small Business 
Administration, 409 3rd Street, SW, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Herbert Mitchell, Deputy Associate 
Administrator, Office of Disaster Assistance, 202-205-6734.

SUPPLEMENTARY INFORMATION: SBA proposes adding Disaster Loan Program 
regulations to implement the Military Reservist Economic Injury 
Disaster Loan Program (``program''). This rule proposes the program's 
requirements, application and loan approval process.
    The Military Reservist Economic Injury Disaster Loan Program was 
authorized by Public Law 106-50, enacted on August 17, 1999. The 
program will allow SBA to make economic injury disaster loans (EIDL) to 
small businesses employing military reservists if those employees are 
called up to active duty during a period of military conflict (call-up) 
and those employees are essential to the success of the small 
businesses' daily operations.
    Under this proposed rule, to qualify for the Military Reservist 
EIDL, a business would be required to show that the call-up of an 
essential employee has caused or will cause the business substantial 
economic injury. The interest rate for a Military Reservist EIDL would 
be the same as for other EIDL assistance. At the present time the 
statutory interest rate may not exceed 4 percent. SBA calculates 
interest rates quarterly, which could result in a lower rate in the 
future, but SBA proposes that

[[Page 43262]]

the interest rate at the time the Military Reservist EIDL application 
is filed would be the fixed rate for the entire term of the loan.
    Section 123.500 contains program definitions conforming with those 
in Public Law 106-50.
    Section 123.501 sets out the proposed program eligibility 
requirements including a reference to an ``eligible small business as 
defined in 13 CFR Part 121.'' While Public Law 106-50 describes an 
eligible or ``qualified borrower'' as a small business that ``employs'' 
an eligible reservist, Congress'' intent was that this program also 
include assistance to a small business sole proprietor who is an 
essential employee. See S. Rep. No.254, 106th Cong., 1st Sess. 4 
(1999). Therefore, SBA proposes to include such a category in the 
program eligibility requirements. In addition, this section includes 
the legislative requirement that the program apply only to military 
conflicts occurring or ending on or after March 24, 1999.
    Under Sec. 123.502 of this proposed rule, a small business would 
not be eligible to apply for a Military Reservist EIDL if it is an 
enterprise included in any of the categories described in 
Secs. 123.101, 123.201, and 123.301 of this part. These sections 
include general ineligibility categories applying to all EIDL 
assistance. For example, a business would not be eligible if a 
principal owner of the business had been convicted, during the year 
preceding its application for a Military Reservist EIDL, of a felony 
during and in connection with a riot or civil disorder. Another 
example, a business would not be eligible if it is an agricultural 
enterprise as defined in Sec. 123.201 of this part.
    Under Sec. 123.503 of this regulation, a business could not apply 
for a Military Reservist EIDL in anticipation of a call-up to active 
duty. It could only apply during a period beginning on the date the 
essential employee receives a call-up order and ending 90 days after 
the date the employee is discharged or released from active duty. The 
call-up of the essential employee would be the basis that triggers 
SBA's assistance under this program.
    Under proposed Sec. 123.504, the business must submit a copy of the 
reservist's call-up orders to show compliance with the statutory 
requirements described above. Also under this section, as a part of the 
application, the business owner must certify that the reservist is an 
essential employee and must detail the employee's duties and 
responsibilities. In addition, the employee must indicate in writing 
whether he or she concurs with such assessment. The application must 
also support a determination by SBA that the essential employee's 
absence will result in substantial economic injury to the business.
    SBA recognizes that the owner of a small business may be an 
essential employee of that business and may be called up and start 
active duty before applying for a Military Reservist EIDL. Accordingly, 
SBA proposes that it would accept a program application from a 
representative of the reservist if that representative has power of 
attorney to act on the behalf of the reservist for such matters.
    SBA proposes to offer this program, in part, to support individuals 
who choose to serve the United States as military reservists. These 
individuals should not be put in a position where a call to military 
service jeopardizes their employment situation. Therefore, under this 
proposed rule, SBA would require that the business offer the essential 
employee the same or similar job upon return from active duty.
    Under proposed Sec. 123.506, an eligible small business may borrow 
from SBA up to $1,500,000 necessary to meet its obligations as they 
mature, pay its ordinary and necessary expenses, and enable it to 
market, produce or provide products or services ordinarily marketed, 
produced, or provided by the business, which cannot be done as a result 
of the essential employee's active military service. This amount may 
not exceed the amount of working capital the business could have 
generated had the call-up not occurred. It may not include amounts the 
business, together with its affiliates and principal owners, could 
provide without undue hardship. SBA may consider waiving this loan 
limit if it determines that the conditions identified in Sec. 123.507 
are satisfied.
    Under Sec. 123.509, this rule proposes prohibitions on the use of 
loan proceeds. For example, EIDL funds could not be used to:
    (1) Refinance debt which the business incurred before the call up 
of the essential employee,
    (2) Make payments on loans owned by SBA or another federal agency 
or a Small Business Investment Company licensed under the Small 
Business Investment Act,
    (3) Pay any obligations resulting from a tax penalty or any non-tax 
criminal fine, or penalty for non-compliance with a law, regulation, or 
order of a federal, state, regional, or local agency or similar matter,
    (4) Repair physical damage, or
    (5) Pay dividends or other disbursements to owners, partners, 
officers or stockholders, except for reasonable remuneration directly 
related to their performance of services for the business.

Compliance With Executive Orders 12866, 12988, 13132, the 
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork 
Reduction Act (44 U.S.C. Ch. 35)

    The Office of Management and Budget (OMB) reviewed this rule as a 
``significant'' regulatory action under Executive Order 12866.
    SBA has determined that this proposed rule will not have a 
significant economic impact on a substantial number of small entities 
within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612. 
Since October, 1997, only 19,592 military reservists have been called 
up for active duty. This figure averages just under 10,000 call-ups per 
year. Further, 52 percent of the non-farm workforce of this country is 
employed by businesses that employ 500 or fewer persons. Applying this 
percentage to the average number of call-ups for the past years 
indicates that 5,200 of the call-ups affected non-farm businesses with 
less than 500 employees. Of this figure, SBA estimates that 30 percent 
of these individuals may be essential employees. This results in an 
estimate of approximately 1,590 businesses that could be affected by 
this proposed rule. SBA does not believe that this is a substantial 
number of small businesses. Furthermore, SBA has taken steps to 
simplify the loan documentation process for small business owners and 
permits small business owners to self-certify the designation of 
essential employees. These steps will substantially reduce any economic 
impact on small business owners applying for assistance.
    For the purposes of the Paperwork Reduction Act, 44 U.S.C. ch. 35, 
SBA has submitted the Military Reservist Economic Injury Disaster Loan 
Program Loan Application (application) to OMB for review. SBA is 
requesting that OMB approves or disapproves of this collection of 
information 30 days after submission. This application would allow 
small businesses to apply for Military Reservist EIDLs and would 
provide SBA with the information necessary to evaluate applicants. The 
application would request such information as name, address, type of 
business, management information, organization type, name of essential 
employee who is a military reservist employed by the small business, 
explanation of the designation of the employee as ``essential'' and 
financial

[[Page 43263]]

information to permit SBA to determine repayment ability.
    The applicant would complete an application each time it applies 
for a Military Reservist Economic Injury Disaster Loan. SBA estimates 
that the time necessary to complete an application for the Military 
Reservist Economic Injury Disaster Loan Program would average 2 hours.
    In addition, SBA is proposing to collect ordinary and usual 
financial statements before making subsequent loan disbursements under 
the Military Reservist EIDL Program (see Sec. 123.511). This 
information will allow SBA to assess the continued need for 
disbursements under this program.
    SBA is seeking comments on: (a) Whether the information SBA 
proposes to collect is necessary for the proper performance of this 
program, (b) the accuracy of the burden estimate (time estimated to 
complete the application), (c) ways to minimize the burden estimate, 
and (d) ways to enhance the quality of the information being collected. 
Please send comments regarding this proposed collection to David 
Rostker, Office of Information and Regulatory Affairs, Office of 
Management and Budget, 725 17th Street, NW., Washington, DC 20503, and 
to Bernard Kulik, Associate Administrator, Office of Disaster 
Assistance, U.S. Small Business Administration, 409 3rd Street, SW., 
Washington, DC 20416.
    For purposes of Executive Order 13132, SBA has determined that this 
proposed rule has no federalism implications.
    For purposes of Executive Order 12988, SBA certifies that this 
proposed rule is drafted, to the extent practicable, to be in 
accordance with the standards set forth in section 3 of that Order.

List of Subjects in 13 CFR Part 123

    Disaster assistance, Loan programs--business, Reporting and 
recordkeeping requirements, Small businesses.

    For the reasons stated in the preamble, SBA amends 13 CFR part 123 
as follows:

PART 123--DISASTER LOAN PROGRAM

    1. The authority citation for part 123 is revised to read as 
follows:

    Authority: 15 U.S.C. 634(b)(6), 636(b), 636(c) and 636(f); Pub. 
L. 102-395, 106 Stat. 1828, 1864; Pub. L. 103-75, 107 Stat. 739; 
Pub. L. 106-50, 113 Stat. 233.

    2. In part 123 add the designated centerheading ``Military 
Reservist Economic Injury Disaster Loans'' and Secs. 123.500 through 
123.512 to read as follows:

Military Reservist Economic Injury Disaster Loans

Sec.
123.500   Definitions.
123.501   When is your business eligible to apply for a Military 
Reservist Economic Injury Disaster Loan (EIDL)?
123.502   When is your business ineligible to apply for a Military 
Reservist EIDL?
123.503   When can you apply for a Military Reservist EIDL?
123.504   How do you apply for a Military Reservist EIDL?
123.505   What if you are both an essential employee and the owner 
of the small business and you started active duty before applying 
for a Military Reservist EIDL?
123.506   How much can you borrow under the Military Reservist EIDL 
Program?
123.507   Under what circumstances will SBA consider waiving the 
$1.5 million loan limit?
123.508   How can you use Military Reservist EIDL funds?
123.509   What can't you use Military Reservist EIDL funds for?
123.510   What if you don't use your Military Reservist EIDL funds 
as authorized?
123.511   How will SBA disburse Military Reservist EIDL funds?
123.512   What is the interest rate on a Military Reservist EIDL?

Military Reservist Economic Injury Disaster Loans


Sec. 123.500  Definitions.

    The following terms have the same meaning wherever they are used in 
Secs. 123.500 through 123.512.
    (a) Essential employee is an individual (whether or not an owner of 
a small business) whose managerial or technical expertise is critical 
to the successful day-to-day operations of a small business.
    (b) Military reservist is a member of a reserve component of the 
Armed Forces ordered to active duty during a period of military 
conflict.
    (c) Period of military conflict means:
    (1) A period of war declared by the Congress,
    (2) A period of national emergency declared by the Congress or by 
the President, or
    (3) A period of contingency operation, as defined in 10 U.S.C. 
101(a).
    (d) Principal owner is a person, legal entity or affiliate(s) which 
owns 20 percent or more of the small business.
    (e) Substantial economic injury means an economic harm to the small 
business such that it cannot:
    (1) Meet its obligations as they mature,
    (2) Pay its ordinary and necessary operating expenses, or
    (3) Market, produce or provide a product or service ordinarily 
marketed, produced or provided by the business. Loss of anticipated 
profits or a drop in sales is not considered substantial economic 
injury for this purpose.


Sec. 123.501  When is your business eligible to apply for a Military 
Reservist Economic Injury Disaster Loan (EIDL)?

    Your business is eligible to apply for a Military Reservist EIDL 
if:
    (a) It is a small business as defined in 13 CFR part 121,
    (b) The owner of the business is a military reservist and an 
essential employee or the business employs a military reservist who is 
an essential employee,
    (c) The essential employee has been called-up to active military 
duty during a period of military conflict existing on or after March 
24, 1999, and
    (d) The business has suffered or is likely to suffer substantial 
economic injury as a result of the absence of the essential employee.


Sec. 123.502  When is your business ineligible to apply for a Military 
Reservist EIDL?

    Your business is ineligible for a Military Reservist EIDL if it, 
together with its affiliates, is subject to any of the following 
conditions:
    (a) Any of your business' principal owners has been convicted, 
during the past year, of a felony during and in connection with a riot 
or civil disorder;
    (b) You have assumed the risk associated with employing the 
military reservist, as determined by SBA (for example, hiring the 
``essential employee'' after the employee has received call-up orders 
or been notified that they are imminent);
    (c) Any of your business' principal owners is presently 
incarcerated, or on probation or parole following conviction of a 
serious criminal offense;
    (d) Your business is an agricultural enterprise. Agricultural 
enterprise means a business primarily engaged in the production of food 
and fiber, ranching and raising of livestock, aquaculture and all other 
farming and agriculture-related industries. (See 13 CFR 121.107, ``How 
does SBA determine a concern's `primary industry'?'') Sometimes a 
business is engaged in both agricultural and non-agricultural business 
activities. If the primary business activity of the business is not an 
agricultural enterprise, it may apply for a Military Reservist EIDL, 
but loan proceeds may not be used, directly or indirectly, for the 
benefit of the agricultural enterprises.
    (e) Your business is engaged in any illegal activity;

[[Page 43264]]

    (f) Your business is a government owned entity (except for a 
business owned or controlled by a Native American tribe);
    (g) Your business presents live performances of a prurient sexual 
nature or derives directly or indirectly more than insignificant gross 
revenue through the sale of products or services or through the 
presentation of any depictions or displays, of a prurient sexual 
nature;
    (h) Your business is engaged in lending, multi-level sales 
distribution, speculation, or investment (except for real estate 
investment with property held for commercial rental);
    (i) Your business is a non-profit or charitable concern;
    (j) Your business is a consumer or marketing cooperative;
    (k) Your business is not a small business concern;
    (l) Your business derives more than one-third of its gross annual 
revenue from legal gambling activities;
    (m) Your business is a loan packager which earns more than one-
third of its gross annual revenue from packaging SBA loans;
    (n) One of several of your business' principal activities is 
teaching, instructing, counseling, or indoctrinating religion or 
religious beliefs, whether in a religious or secular setting; or
    (o) Your business' principal activity is political or lobbying 
activities.


Sec. 123.503  When can you apply for a Military Reservist EIDL?

    Your small business can apply for a Military Reservist EIDL any 
time beginning on the date your essential employee receives official 
call-up orders and ending 90 days after the date the essential employee 
is discharged or released from active duty.


Sec. 123.504  How do you apply for a Military Reservist EIDL?

    To apply for a Military Reservist EIDL you must complete a SBA 
Military Reservist EIDL application package (SBA Form 5R and supporting 
documentation) including:
    (a) A copy of the essential employee's official call-up orders for 
active duty showing the date of call up, and if known, the date of 
release from active duty;
    (b) A statement from the business owner that the reservist is 
essential to the successful day-to-day operations of the business 
(detailing the employee's duties and responsibilities and explaining 
why these duties and responsibilities can't be completed in the 
essential employee's absence);
    (c) A certification by the essential employee supporting that he or 
she concurs with the business owner's statement as described in 
paragraph (b) of this section;
    (d) A written explanation and financial estimate of how the call-up 
of the essential employee has or will result in economic injury to your 
business;
    (e) The steps your business is taking to alleviate the economic 
injury; and
    (f) The business owners' certification that the essential employee 
will be offered the same or a similar job upon the employee's return 
from active duty.


Sec. 123.505  What if you are both an essential employee and the owner 
of the small business and you started active duty before applying for a 
Military Reservist EIDL?

    If you are both an essential employee and the owner of the small 
business and you started active duty before applying for an Military 
Reservist EIDL, a person who has a power of attorney with the authority 
to borrow and make other related commitments on your behalf, may 
complete and submit the EIDL loan application package for you.


Sec. 123.506  How much can you borrow under the Military Reservist EIDL 
Program?

    You can borrow a total loan amount of up to $1.5 million until 
normal operations resume regardless of the number of essential 
employees called to active duty. You can't borrow more than the amount 
of working capital your business could have generated had the essential 
employee not been called to active duty.


Sec. 123.507  Under what circumstances will SBA consider waiving the 
$1.5 million loan limit?

    SBA will consider waiving the $1.5 million dollar limit if you can 
certify to the following conditions and SBA approves of such 
certification based on the information supplied in your application:
    (a) Your small business is a major source of employment. A major 
source of employment:
    (1) Employs 10 percent or more of the work force within the 
commuting area of the geographically identifiable community (no larger 
than a county) in which the business employing the essential employee 
is located, provided that the commuting area does not extend more than 
50 miles from such community; or
    (2) Employs 5 percent of the work force in an industry within such 
commuting area and, if the small business is a non-manufacturing small 
business, employs no less than 50 employees in the same commuting area, 
or if the small business is a manufacturing small business, employs no 
less than 150 employees in the commuting area; or
    (3) Employs no less than 250 employees within such commuting area;
    (b) Your small business is in imminent danger of going out of 
business as a result of one or more essential employees being called up 
to active duty during a period of military conflict, and a loan in 
excess of $1.5 million is necessary to reopen or keep open the small 
business; and
    (c) Your small business has used all reasonably available funds 
from the small business, its affiliates, its principal owners and all 
available credit elsewhere to alleviate the small business' economic 
injury. Credit elsewhere means that SBA believes your small business, 
its affiliates and principal owners could obtain financing from non-
Federal sources on reasonable terms given your available cash flow and 
disposable assets.


Sec. 123.508  How can you use Military Reservist EIDL funds?

    Your small business can use Military Reservist EIDL to:
    (a) Meet obligations as they mature,
    (b) Pay ordinary and necessary operating expenses, or
    (c) Enable the business to market, produce or provide products or 
services ordinarily marketed, produced, or provided by the business, 
which cannot be done as a result of the essential employee's military 
call-up.


Sec. 123.509  What can't you use Military Reservist EIDL funds for?

    Your small business can not use Military Reservist EIDL funds for 
purposes described in 13 CFR 123.303(b) (See Sec. 123.303, ``How can my 
business spend my economic injury disaster loan?'').


Sec. 123.510  What if you don't use your Military Reservist EIDL funds 
as authorized?

    If your small business does not use Military Reservist EIDL funds 
as authorized by Sec. 123.509, then Sec. 123.9 applies (See Sec. 123.9, 
``What happens if I don't use loan proceeds for the intended 
purpose?'').


Sec. 123.511  How will SBA disburse Military Reservist EIDL funds?

    SBA will disburse your funds in quarterly installments (unless 
otherwise specified in your loan authorization agreement) based on a 
continued need as demonstrated by comparative financial information. On 
or about 30 days before your scheduled fund disbursement, SBA will 
request ordinary and usual financial statements

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(including balance sheets and profit and loss statements). Based on 
this information, SBA will assess your continued need for disbursements 
under this program. Upon making such assessment, SBA will notify you of 
the status of future disbursements.


Sec. 123.512  What is the interest rate on a Military Reservist EIDL?

    The interest rate on a Military Reservist EIDL will be 4 percent 
per annum or less. SBA will publish the interest rate quarterly in the 
Federal Register.

    Dated: June 30, 2000.
Aida Alvarez,
Administrator.
[FR Doc. 00-17560 Filed 7-12-00; 8:45 am]
BILLING CODE 8025-01-P