Barry McVay's FEDERAL CONTRACTS DISPATCH
DATE: July 11, 2000
FROM: Barry McVay, CPCM
SUBJECT: Small Business Administration; Certified Development Companies' Areas of Operations
SOURCE: Federal Register, July 11, 2000, Vol. 65, No. 133, page 42624
AGENCIES: Small Business Administration (SBA)
ACTION: Final Rule
SYNOPSIS: SBA is amending its regulations governing Certified Development Companies (CDC) Area of Operations, which is the geographic area where SBA authorizes a CDC to make loans under SBA's Development Company Loan Program ( 504 program )). This final will will permit a CDC to apply to have an area of operations that goes beyond its state of incorporation, and beyond a local economic area in an adjacent state, into a contiguous state.
EDITOR'S NOTE: The SBA's regulations being amended are in Title 13 of the Code of Federal Regulations (CFR), Business and Credit Administration; Chapter 1, Small Business Administration; Part 120, Business Loans; Subpart H, Development Company Program (504).
EFFECTIVE DATE: August 10, 2000.
FOR FURTHER INFORMATION CONTACT: Gail Hepler, 202-205-6490.
SUPPLEMENTAL INFORMATION: Since the inception of the 504 program, no CDC has been certified to operate permanently in more than one state, except in a relatively few circumstances when a CDC's operations are in a Local Economic Area. The reason for this was to ensure compliance with congressional intent that CDCs be formed by local citizens whose primary purpose is to improve their community's economy.
Regulations published in 1982 permitted a CDC to operate within two states if a state line bisects a city or a CDC has obtained prior written approval to operate within a contiguous economic area that crosses a state line, but only nine CDCs out of 270 active CDCs have applied to SBA and been approved to expand their Areas of Operation across state lines. In 1996, SBA revised its regulations to permit a single exception to the "contiguous" requirement -- the revised regulations provided for statewide CDCs, which are intended to cover those counties not covered by local CDCs. However, many states do not have statewide CDCs, so many of these states have counties that are not covered by any CDC. This means that small businesses in those counties do not have access to the CDC Program.
SBA believed that it would be in the best interests of underserved communities to permit active CDCs in good standing to permanently expand their Areas of Operations beyond their state of incorporation and beyond a Local Economic Area. SBA published a proposed rule authorizing "multi-state CDCs" on November 8, 1999, and held a public meeting on January 7, 2000. Based on those comments, SBA has revised the final rule (explanations of changes between the proposed and final rules are in brackets ("[ ]")).
- Section 120.802, Definitions, is revised to add definitions for "Local Economic Area" ("an area...[that] shares a border with the CDC's existing Area of Operations (or applicant's proposed Area of Operations) in its State of incorporation, and is a part of a local trade area that is contiguous to the CDC's Area of Operations (or applicant's proposed Area of Operations) within its state of incorporation") and "Multi-State CDC" ("a CDC that is incorporated in one State and is authorized by SBA to operate as a CDC in a state contiguous to its state of incorporation beyond any contiguous Local Economic Areas"). [The proposed "multi-state CDC" definition would have allowed a CDC to operate in "another state beyond any contiguous Local Economic Areas." The change to permit operation only a "contiguous" state was made because many commenters said that permitting CDCs to operate in noncontiguous states violated the Congressional intent that CDCs assist local economies -- SBA quotes on commenter as saying, "any CDC that applies to cross state lines...in a non-contiguous basis, in almost every instance, is not concerned with economic development, they are concerned with money."
- Section 120.810, Applications for Certification as a CDC, and Section 120.835, Application to Expand a CDC's Area of Operations, are revised to permit a new CDC or an existing CDC to apply to operate in a county with a population of 100,000 or more, even if the county is being "adequately served" by an existing CDC, if only one CDC includes the county in its permanent Area of Operations, and the CDC submits a statement of no objection to the application (currently, if a CDC is doing one 504 loan per year per 100,000 population averaged over 24 months in a particular county, the county is "adequately served"). [The requirement that a current CDC serving the county provide a "no objection" statement is added.]
- In Section 120.820, CDC Non-Profit Status, "limited liability company" is removed from the types of organizations that may apply to be certified as a CDC. Since a limited liability company structure only benefits its members when it is a for-profit entity providing its members certain tax advantages over a C Corporation, a limited liability company structure would not be appropriate to be used to fulfill the non-profit, local economic development role intended for CDCs. (EDITOR'S NOTE: SBA states it has never received an application from a limited liability company to become a CDC.)
- To Section 120.822, CDC Membership, is added a requirement that the membership must meet at least annually. Also, it states that a CDC must meet the membership requirements separately for its state of incorporation and for each state in which it proposes to operate as a Multi-State CDC.
- Section 120.823, CDC Board of Directors, is revised to clarify that a quorum represents at least five Directors authorized to vote, and that it is the number of Board members voting, not present, that determines whether there is a quorum. Also, the current Section 120.823 does not address Loan Committees, which many CDC Boards designate to review and decide on loan approvals and servicing actions between Board meetings. The proposed regulation clarifies that a Board may establish a Loan Committee made up of non-CDC Board members, and provides membership requirements. [The final rule allows the CDC manager to be a member of the CDC's Board of Directors. Also, the final rule restricts the membership on the Loan Committee to non-CDC Board members.]
- Section 120.824, Professional Management and Staff, is revised to require the CDC to have a full-time professional, including an Executive Director, managing daily operations, but that a CDC may petition SBA to waive this requirement under two circumstances: (1) when the management of a rural CDC with insufficient loan volume to justify its own management employee is to be contributed by another CDC located in the same general area; or (2) when the management of a CDC is to be contributed by a non-profit affiliate of the CDC that is financially subsidizing the CDC's operation and has the economic development of the CDC's Area of Operations as one of its principal activities. Also, CDCs are permitted to contract for packaging, processing, closing, and loan servicing functions with SBA approval. [The proposed rule would have required SBA to approve all CDC contracts.]
- Section 120.825, Financial Ability to Operate, is clarified to emphasize that any funds generated from loan activity by a CDC that remain after the payment of staff and overhead expenses must be retained in the CDC as a reserve for future operations or invested in other local economic activity in its Area of Operations.
- Section 120.837, is retitled "SBA Decision on Application for a New CDC or for an Existing CDC to Expand Area of Operations" and is revised as follows:
- The SBA's district office processing the application is required to solicit comments from all other district offices serving the CDC's existing and proposed area of operations to determine if the applicant is in compliance with all of SBA's regulations, policies, and performance benchmarks, including pre-approval and annual review of any management or staff contracts, and the timely submission of all annual reports.
- The examples of the types of information a district office might consider in reviewing an application for expansion is deleted (such as number of loans approved per 100,000, small business density, and jobs created). Instead, Section 120.837 is revised to clarify that the district office and the Associate Administrator for Financial Assistance (AA/FA) may consider any available information regarding the proposed area of operations, the requesting CDC, and the existing CDCs serving the area. (EDITOR'S NOTE: SBA found that "some CDCs and district offices have treated the examples in the current regulation as a prescribed list that could not be supplemented.")
- The requirement that the AA/FA must make his or her final decision within 30 days of receipt of the district office's recommendation is deleted because staffing limitations may prevent SBA from meeting this deadline.
- Added is a statement that "any unilateral authority that a CDC has in its state of incorporation under any SBA program, including Accredited Lender's Program (ALP), Premier Certified Lenders Program (PCLP), or Expedited Closing Process (Priority CDC), does not carry over into a State in which it is approved to operate as a Multi-State CDC. The CDC must earn the status in each State based solely on its activity and performance in that State."
FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.
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