ALP Express Pilot to Permanent Status

SUPPLEMENTARY INFORMATION:

1. Background Information

The 504 Loan Program is an SBA financing program authorized under title V of the Small Business Investment Act of 1958, as amended, 15 U.S.C. 695 et seq (“Small Business Investment Act”). The core mission of the 504 Loan Program is to provide long-term financing to small businesses for the purchase or improvement of land, buildings, and major equipment, and to facilitate the creation or retention of jobs and local economic development. Under the 504 Loan Program, loans are made to small business applicants by Certified Development Companies (“CDCs”), which are certified and regulated by SBA to promote economic development within their community. In general, a project in the 504 Loan Program (a “504 Project”) includes: a loan obtained from a private sector lender with a senior lien covering at least 50 percent of the project cost; a loan obtained from a CDC (a “504 Loan”) with a junior lien covering up to 40 percent of the total cost (backed by a 100 percent SBA guaranteed debenture); and a contribution from the Borrower of at least ten percent equity.

There are three types of CDCs that participate in the 504 Loan Program. This document relates to the temporary increased delegated authority that was granted, in accordance with section 328(b) of the Economic Aid Act (“EAA”), to CDCs that are approved by SBA to participate in the Accredited Lenders Program (hereafter “ALP CDCs”), which is authorized under section 507(a) of the Small Business Investment Act. Under section 507(c) of the Small Business Investment Act, SBA is authorized to develop an expedited procedure for processing a loan application or servicing action submitted by ALP CDCs. [15 U.S.C. 697d.]

Prior to the Economic Aid Act, ALP CDCs were required to obtain SBA's approval on both the loan's eligibility and creditworthiness determinations. In addition, ALP CDCs only had delegated authority to make certain “No Adverse Change” certifications prior to loan closing without SBA's review and approval and were only authorized to close 504 loans under the expedited loan closing procedures applicable to a Priority CDC. Further, ALP CDCs were required to obtain SBA's approval for most servicing actions. Section 328(b) of the EAA temporarily provided ALP CDCs increased delegated authority to “approve, authorize, close and service covered loans,” for loans of not more than $500,000 and that are not made to a borrower in an industry with a high rate of default as defined by SBA (hereafter referred to as “ALP Express Loans”). SBA implemented these increased delegated authorities with the publication of an interim final rule on June 27, 2022. (87 FR 37979). Pursuant to the EAA, these delegated authorities were to expire on September 30, 2023.

In order to evaluate the use of these increased delegated authorities by ALP CDCs and to identify opportunities for further modification, SBA developed the ALP Express Pilot program to provide these increased delegated authorities through September 30, 2025 to ALP CDCs (hereafter referred to as “ALP Express Pilot Loans”). The ALP Express Pilot's delegated authorities in effect represented a continuation of the ALP Express authority provided by the Economic Aid Act. (88 FR 69529 (October 6, 2023)). When ALP Express delegated authorities become permanent, SBA is not including the prohibition found in section 328(b) of the EAA against making loans with ALP Express authority to a borrower in an industry with a high rate of default because this mandatory requirement sunset with the EAA expiration date. A subsequent review of the 504 portfolio in June 2024 also found that no ALP Express Pilot program loans or covered loans made pursuant to Section 328(b) of the EAA were in default or liquidation as of June 30, 2024.

Pursuant to its authority set forth in Section 507(c) of the Small Business Investment Act (15 U.S.C. 697d(c)), which authorizes SBA to develop expedited procedures for processing a loan application or servicing action submitted by ALP CDCs, SBA proposes to make permanent the increased delegated authorities available under the ALP Express Pilot. The Agency requests comments on all aspects of regulatory revisions in this proposed rule.

2. Evaluation Criteria for ALP Express Pilot

SBA typically initiates a pilot loan program to test an innovative approach to enhance or streamline assistance to small businesses, or a subset of small businesses, and/or lower taxpayer cost or risk. Pilot loan program evaluations assess how well a program is achieving its objectives and other aspects of performance in the context in which the program operates. Our ongoing evaluations of the 504 program and delegations authorized will give the SBA the opportunity to refine the design of the program and assist in determining whether the program operations have resulted in the desired benefits for participants.

By documenting on SBA Form 1244 whether the ALP CDC is using its ALP Express authority when submitting an application for an ALP Express Pilot Loan, SBA was able to track ALP CDCs' use of this increased delegated authority. In addition to the program changes introduced through the ALP Express Pilot, on May 11, 2023, SBA instituted an E-Tran risk mitigation technology compliance check on all 504 loans, including those with ALP Express authority, and streamlined the affiliation policy guidance that reduced the amount of paperwork required for submitting loan packages. The ALP Express “covered loans” had performed well prior to this quality control upgrade and continue to perform well with this enhanced fraud risk management systems upgrade in place. The processing time for ALP Express loans was reduced significantly from an average of 5 days to 2.3 days (one loan processed in 3 hours). The quality of the ALP Express Pilot 504 loans have been reviewed by the SBA Office of Credit Risk Management (OCRM) and present low risk to the 504 portfolio. The E-Tran risk mitigation protocols consists of background checks on 504 borrowers, checks of USCIS verifications, confirmation of the identity of the borrower using their social security number or tax identification number and verification by checking government databases if the applicant has prior loss on government debt. This enhancement streamlines the application process requirements for the CDCs and provides government resources to assist in detecting and preventing fraud for 504 applicants.

SBA reviewed the following data related to ALP CDCs and their use of ALP Express authority under the Economic Aid Act and used the same evaluation criteria for the ALP Express Pilot:

A. Did the number and percentage of 504 loans in the portfolio under $500,000 increase as a result of the availability of ALP Express authority? It is hard to evaluate the success of ALP Express based solely on the increased number of 504 loans during this period, as there were other factors that influenced demand. During the pandemic, SBA experienced a surge of 504 loan activity in part due to Section 1112 of the CARES Act, which authorized SBA to make the loan payments on SBA loans for SBA borrowers for six months (or more, in some cases). For a more accurate comparison, loan activity prior to this surge period was also considered. Therefore, SBA analyzed recent and pre-pandemic activity levels, as shown in table 1.