Small Business Administration 504/CDC Loan Guaranty Program

Changes from October 14, 2021 to November 12, 2021

This page shows textual changes in the document between the two versions indicated in the dates above. Textual matter removed in the later version is indicated with ~~red strikethrough~~ and textual matter added in the later version is indicated with blue.

Small Business Administration 504/CDC Loan
~~October 14~~November 12, 2021 , 2021
Guaranty Program
Robert Jay Dilger
The Small Business Administration (SBA) administers several programs to support small The Small Business Administration (SBA) administers several programs to support small
Senior Specialist in Senior Specialist in
businesses, including loan guaranty programs designed to encourage lenders to provide loans to businesses, including loan guaranty programs designed to encourage lenders to provide loans to
American National American National
small businesses “that might not otherwise obtain financing on reasonable terms and conditions.” small businesses “that might not otherwise obtain financing on reasonable terms and conditions.”
Government Government
The SBA’s 504 Certified Development Company (504/CDC) loan guaranty program is The SBA’s 504 Certified Development Company (504/CDC) loan guaranty program is

administered through nonprofit Certified Development Companies (CDCs). It provides long-term administered through nonprofit Certified Development Companies (CDCs). It provides long-term
fixed rate financing for major fixed assets, such as land, buildings, equipment, and machinery. Of fixed rate financing for major fixed assets, such as land, buildings, equipment, and machinery. Of

the total project costs, a third-party lender must provide at least 50% of the financing, the CDC the total project costs, a third-party lender must provide at least 50% of the financing, the CDC
provides up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant provides at least 10% of provides up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant provides at least 10% of
the financing. Its name is derived from Section 504 of the Small Business Investment Act of 1958 (P.L. 85-699, as amended), the financing. Its name is derived from Section 504 of the Small Business Investment Act of 1958 (P.L. 85-699, as amended),
which provides the most recent authorization for the SBA’s sale of 504/CDC debentures. In FY2021, the SBA approved which provides the most recent authorization for the SBA’s sale of 504/CDC debentures. In FY2021, the SBA approved
9,676 504/CDC loans totaling over $8.2 billion. 9,676 504/CDC loans totaling over $8.2 billion.
Congress has always shown a great interest in the SBA’s loan guarantee programs because of concerns that small businesses Congress has always shown a great interest in the SBA’s loan guarantee programs because of concerns that small businesses
might be prevented from accessing s ufficient capital to enable them to create and retain jobs. That interest has grown might be prevented from accessing s ufficient capital to enable them to create and retain jobs. That interest has grown
especially acute in the wake of the Coronavirus Disease 2019 (COVID-19) pandemic’s adverse economic impact on the especially acute in the wake of the Coronavirus Disease 2019 (COVID-19) pandemic’s adverse economic impact on the
national economy. For example, national economy. For example,
 P.L. 116-136, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), among other  P.L. 116-136, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), among other
provisions, created the $349 billion (now $806.45 billion) Paycheck Protection Program (PPP), which provisions, created the $349 billion (now $806.45 billion) Paycheck Protection Program (PPP), which
provides low-interest, forgivable loans to small businesses adversely affected by the COVID-19 pandemic, provides low-interest, forgivable loans to small businesses adversely affected by the COVID-19 pandemic,
and appropriated $17 billion for six-month payment relief for existing 7(a), 504/CDC, and Microloan and appropriated $17 billion for six-month payment relief for existing 7(a), 504/CDC, and Microloan
borrowers. Loans in a regular servicing status (i.e., fully disbursed) up to six months after enactment (until borrowers. Loans in a regular servicing status (i.e., fully disbursed) up to six months after enactment (until
September 27, 2020) were also eligible to receive the six monthly payments of debt relief. September 27, 2020) were also eligible to receive the six monthly payments of debt relief.
 P.L. 116-260, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Division N,  P.L. 116-260, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Division N,
Title III of the Consolidated Appropriations Act, 2021), among other provisions, appropriated $3.5 billion Title III of the Consolidated Appropriations Act, 2021), among other provisions, appropriated $3.5 billion
to resume monthly payment relief for 7(a), 504/CDC, and Microlo an borrowers, capped at $9,000 per to resume monthly payment relief for 7(a), 504/CDC, and Microlo an borrowers, capped at $9,000 per
month per borrower. Payments are dependent on the availability of funds, when the loan was disbursed, the month per borrower. Payments are dependent on the availability of funds, when the loan was disbursed, the
type of loan received, and the business’s industry. The act also waived specified 7(a) and 504/CDC loan type of loan received, and the business’s industry. The act also waived specified 7(a) and 504/CDC loan
guarantee program fees in FY2021, modified 504/CDC refinancing regulations to expand borrower access guarantee program fees in FY2021, modified 504/CDC refinancing regulations to expand borrower access
to the refinancing program and create reciprocity for refinancing under the 7(a) and 504/CDC programs, to the refinancing program and create reciprocity for refinancing under the 7(a) and 504/CDC programs,
and temporarily authorized the SBA, through September 30, 2023, to establish a 504/CDC Express Loan and temporarily authorized the SBA, through September 30, 2023, to establish a 504/CDC Express Loan
program to expedite the approval of 504/CDC loans that do not exceed $500,000. program to expedite the approval of 504/CDC loans that do not exceed $500,000.
This report examines the rationale provided for the 504/CDC program; its borrower and lender eligibility standards; operating This report examines the rationale provided for the 504/CDC program; its borrower and lender eligibility standards; operating
requirements; and performance statistics, including loan volume, loss rates, proceeds usage, borrower satisfaction, and requirements; and performance statistics, including loan volume, loss rates, proceeds usage, borrower satisfaction, and
borrower demographics. borrower demographics.
~~This report~~It also examines congressional action taken to help small businesses gain greater access to capital, including also examines congressional action taken to help small businesses gain greater access to capital, including
enactment of P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA); P.L. 111-240, the Small Business enactment of P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA); P.L. 111-240, the Small Business
Jobs Act of 2010; P.L. 116-136; and P.L. 116-260. Jobs Act of 2010; P.L. 116-136; and P.L. 116-260.
This report also discusses issues related to the SBA’s oversight of 504/CDC lenders . This report also discusses issues related to the SBA’s oversight of 504/CDC lenders .
Congressional Research Service Congressional Research Service

~~link to page 41~~ ~~Small Business Administration 504/CDC Loan Guaranty Program~~
21

Contacts
Author Information ....................................................................................................... 3729

Congressional Research Service Congressional Research Service

Small Business Administration 504/CDC Loan Guaranty Program

Small Business Administration Loan
Guaranty Programs
The Smal Business Administration (SBA) administers several programs to support small The Smal Business Administration (SBA) administers several programs to support small
businesses, including loan guaranty programs designed to encourage lenders to provide loans to businesses, including loan guaranty programs designed to encourage lenders to provide loans to
smal businesses “that might not otherwise obtain financing on reasonable terms and conditions.”1 smal businesses “that might not otherwise obtain financing on reasonable terms and conditions.”1
Historical y, one of the justifications presented for funding the SBA’s loan guaranty programs has Historical y, one of the justifications presented for funding the SBA’s loan guaranty programs has
been that smal businesses can be at a disadvantage, compared with other businesses, when trying been that smal businesses can be at a disadvantage, compared with other businesses, when trying
to obtain access to sufficient capital and credit.2 to obtain access to sufficient capital and credit.2
The SBA’s 504 Certified Development Company (504/CDC) loan guaranty program provides The SBA’s 504 Certified Development Company (504/CDC) loan guaranty program provides
long-term fixed rate financing for major fixed assets, such as land, buildings, equipment, and long-term fixed rate financing for major fixed assets, such as land, buildings, equipment, and
machinery. Its name is derived from Section 504 of the Smal Business Investment Act of 1958 machinery. Its name is derived from Section 504 of the Smal Business Investment Act of 1958
(P.L. 85-699, as amended), which provides the most recent authorization in the act concerning the (P.L. 85-699, as amended), which provides the most recent authorization in the act concerning the
SBA’s monthly sale of 20-year and 25-year 504/CDC debentures and bimonthly sale of 10-year SBA’s monthly sale of 20-year and 25-year 504/CDC debentures and bimonthly sale of 10-year
504/CDC debentures.3 504/CDC debentures.3
The 504/CDC loan guaranty program is administered through nonprofit Certified Development The 504/CDC loan guaranty program is administered through nonprofit Certified Development
Companies (CDCs).4 Of the total project costs, a third-party lender must provide at least 50% of Companies (CDCs).4 Of the total project costs, a third-party lender must provide at least 50% of
the financing, the CDC provides up to 40% of the financing backed by a 100% SBA-guaranteed the financing, the CDC provides up to 40% of the financing backed by a 100% SBA-guaranteed
debenture, and the applicant provides at least 10% of the financing.5 debenture, and the applicant provides at least 10% of the financing.5
The borrower makes two loan payments, one to the third-party lender and another to the CDC. The borrower makes two loan payments, one to the third-party lender and another to the CDC.
The third-party loan, typical y provided by a bank, can have a fixed or variable interest rate, is The third-party loan, typical y provided by a bank, can have a fixed or variable interest rate, is
negotiated between the lender and the borrower, is subject to an interest rate cap, and must have negotiated between the lender and the borrower, is subject to an interest rate cap, and must have
at least a 7-year term for a 10-year debenture and at least 10-year term for a 20- or 25-year at least a 7-year term for a 10-year debenture and at least 10-year term for a 20- or 25-year

1 U.S. Small Business Administration (SBA), 1 U.S. Small Business Administration (SBA), Fiscal Year 2010 Congressional Budget Justification, p. 30, at , p. 30, at
https://www.sba.gov/sites/default/files/2018-06/Congressional_Budget_Justification_2010.pdf. https://www.sba.gov/sites/default/files/2018-06/Congressional_Budget_Justification_2010.pdf.
2 U.S. Government Accountability Office (GAO), 2 U.S. Government Accountability Office (GAO), Small Business Administration: 7(a) Loan Program Needs
Additional Perform ance Measures, GAO-08-226T , November 1, 2007, pp. 3, 9, GAO-08-226T , November 1, 2007, pp. 3, 9 -11, at http://www.gao.gov/new.items/-11, at http://www.gao.gov/new.items/
d08226t.pdf; and Veronique de Rugy, d08226t.pdf; and Veronique de Rugy, Why the Sm all Business Adm inistration’s Loan Program s Should Be Abolished , ,
American Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006, at American Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006, at
http://www.aei.org/docLib/20060414_wp126.pdf. Proponents of federal funding for the SBA’s loan guarantee http://www.aei.org/docLib/20060414_wp126.pdf. Proponents of federal funding for the SBA’s loan guarantee
programs also argue that small business can promote competitive markets. See P.L. 83-163, §2(a), as amended; and 15 programs also argue that small business can promote competitive markets. See P.L. 83-163, §2(a), as amended; and 15
U.S.C. §631a. U.S.C. §631a.
3 T he 504 Certified Development Company (504/CDC) program was preceded by a Section 501 state development 3 T he 504 Certified Development Company (504/CDC) program was preceded by a Section 501 state development
company program (1958-1982), a Section 502 local development company program (1958 -1995), and a Section company program (1958-1982), a Section 502 local development company program (1958 -1995), and a Section
503/CDC program (1980-1986). T he 504/CDC program started in 1986. 503/CDC program (1980-1986). T he 504/CDC program started in 1986.
T he 504/CDC program’s 20-year and 25-year debentures are pooled and sold on the first T hursday of the first full week T he 504/CDC program’s 20-year and 25-year debentures are pooled and sold on the first T hursday of the first full week
of each month (beginning with and including Sunday); 10-year debentures are pooled and sold on the first T hursday of of each month (beginning with and including Sunday); 10-year debentures are pooled and sold on the first T hursday of
the first full week of every other month (beginning with and including Sunday)the first full week of every other month (beginning with and including Sunday) starting with the January sale. See starting with the January sale. See
Eagle Compliance, LLC, “Eagle Compliance, LLC, “ Monthly 504 Interest Rate,” at https://www.eaglecompliance504.com/monthly-504-interest-Monthly 504 Interest Rate,” at https://www.eaglecompliance504.com/monthly-504-interest-
rate.html. rate.html.
T he SBA made 25-year 504/CDC debentures available for 504/CDC projects approved on or after April 2, 2018. See T he SBA made 25-year 504/CDC debentures available for 504/CDC projects approved on or after April 2, 2018. See
SBA, “504 Loans and Debentures With 25 Year Maturity,” 83SBA, “504 Loans and Debentures With 25 Year Maturity,” 83 Federal Register 14536, April 4, 2018. 14536, April 4, 2018.
4 Five for-profit CDCs that participated in predecessor programs have been grandfathered into the current 504/CDC 4 Five for-profit CDCs that participated in predecessor programs have been grandfathered into the current 504/CDC
program. See SBA, “ 504 and 7(a) Loan Programs Updates,” 79 program. See SBA, “ 504 and 7(a) Loan Programs Updates,” 79 Federal Register 15642, March 21, 2014. 15642, March 21, 2014.
5 “Generally, a 504 loan may not exceed 40% of total Project cost plus 100% of eligible administrative costs. For good 5 “Generally, a 504 loan may not exceed 40% of total Project cost plus 100% of eligible administrative costs. For good
cause shown, SBA may authorize an increase in the percentage of Project costs covered up to 50%. No more than 50% cause shown, SBA may authorize an increase in the percentage of Project costs covered up to 50%. No more than 50%
of eligible Project costs can be from Federal sources, whether received directly or indirectly through an intermediary.” of eligible Project costs can be from Federal sources, whether received directly or indirectly through an intermediary.”
See 13 C.F.R. §120.930. See 13 C.F.R. §120.930.
Congressional Research Service Congressional Research Service

1 1

link to page 6 Small Business Administration 504/CDC Loan Guaranty Program

debenture.6 The CDC loan has a fixed interest rate that is determined when the SBA sel s the debenture.6 The CDC loan has a fixed interest rate that is determined when the SBA sel s the
debenture to fund the loan. The CDC loan’s term is either 10 years (typical y for machinery or debenture to fund the loan. The CDC loan’s term is either 10 years (typical y for machinery or
equipment) or 20 years or 25 years (typical y for real estate). equipment) or 20 years or 25 years (typical y for real estate).
The SBA’s debenture is backed by the full faith and credit of the United States and is sold to The SBA’s debenture is backed by the full faith and credit of the United States and is sold to
underwriters that form debenture pools. Investors purchase interests in the debenture pools and underwriters that form debenture pools. Investors purchase interests in the debenture pools and
receive Development Company Participation certificates (DCPC) representing ownership of al or receive Development Company Participation certificates (DCPC) representing ownership of al or
part of the pool. DCPCs have a minimum value of $25,000 and can be sold on the secondary part of the pool. DCPCs have a minimum value of $25,000 and can be sold on the secondary
market. market.
The SBA and CDCs use various agents to facilitate the sale and service of the certificates and the The SBA and CDCs use various agents to facilitate the sale and service of the certificates and the
orderly flow of funds among the parties.7 After a 504/CDC loan is approved and disbursed, orderly flow of funds among the parties.7 After a 504/CDC loan is approved and disbursed,
accounting for the loan is set up at the Central Servicing Agent (CSA, currently accounting for the loan is set up at the Central Servicing Agent (CSA, currently
PricewaterhouseCoopers Public Sector LLP), not the SBA. The SBA guarantees the timely PricewaterhouseCoopers Public Sector LLP), not the SBA. The SBA guarantees the timely
payment of the debenture. If the smal business is behind in its loan payments, the SBA pays the payment of the debenture. If the smal business is behind in its loan payments, the SBA pays the
difference to the investor on every semiannual due date. difference to the investor on every semiannual due date.
In FY2021, the SBA approved 9,676 504/CDC loans totaling over $8.2 bil ion.8 Included in these In FY2021, the SBA approved 9,676 504/CDC loans totaling over $8.2 bil ion.8 Included in these
figures were 693 504/CDC refinancing loans totaling $709 mil ion. As of figures were 693 504/CDC refinancing loans totaling $709 mil ion. As of ~~June~~September 30, 2021, regular 30, 2021, regular
504/CDC loans had an unpaid principal balance of about $28.504/CDC loans had an unpaid principal balance of about $28.39 bil ion, and 504/CDC bil ion, and 504/CDC ~~refinancing~~
refinancing loans had an unpaid principal balance of about $1.loans had an unpaid principal balance of about $1.~~6 bil ion.9~~
~~Congress has always shown a great interest in the SBA’s loan guarantee programs because of~~
~~concerns that smal businesses might be prevented from accessing sufficient capital to enable~~
~~them to create and retain jobs. That interest has grown especial y acute in recent years due to the~~
~~Coronavirus Disease 2019 (COVID-19) pandemic’s adverse economic impact on the national~~
~~economy.~~
~~Congress authorized several changes to the 504/CDC program during the 111th Congress in an~~
~~effort to assist smal businesses during and immediately following the Great Recession (2007-~~
~~2009). For example~~
~~ P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA),~~
~~provided $375 mil ion to temporarily reduce fees in the SBA’s 7(a) and 504/CDC~~
~~loan guaranty programs ($299 mil ion) and to temporarily increase the 7(a)~~
~~program’s maximum loan guaranty percentage to 90% ($76 mil ion).10 Congress~~
~~subsequently appropriated another $265 mil ion and authorized the SBA to~~
~~reprogram another $40 mil ion to extend those subsidies and the loan~~
~~modification through May 31, 2010. ARRA also authorized the SBA to al ow,~~

~~6 SBA, “504 Loans and Debentures With 25 Year Maturity,” 83~~7 bil ion.9 This report opens with an examination of the 504/CDC program’s operating structures and requirements, including borrower and lender eligibility standards, loan terms and conditions, and program fees. It presents 504/CDC program statistics, including loan volume, credit subsidies, proceeds usage, and borrower demographics. It then discusses issues raised concerning the SBA’s administration of the program, including the oversight of 504/CDC lenders. The report also presents 504/CDC legislation enacted from the 111th through 117th Congresses. Program Participants and Financing Contribution As shown in Table 1, 504/CDC projects general y have three main participants: a third-party lender provides 50% or more of the financing; a CDC provides up to 40% of the financing through a 504/CDC debenture, which is 100% guaranteed by the SBA; and the borrower contributes at least 10% of the financing. The CDC’s contribution, and the amount of the SBA’s 100% guaranteed debenture, general y cannot exceed 40% of the financing for standard 504/CDC loans. It cannot exceed 35% of the financing for new businesses (defined as “a business that is two years old or less at the time the loan is approved”) or if the loan is for either a limited-market property (defined as “a property with a unique physical design, special construction materials, or a layout that restricts its utility to 6 SBA, “504 Loans and Debentures With 25 Year Maturity,” 83 Federal Register 14536, April 4, 2018; and 13 C.F.R. 14536, April 4, 2018; and 13 C.F.R.
§120.921. §120.921.
7 13 C.F.R. §120.801. 7 13 C.F.R. §120.801.
8 SBA, “SBA Lending Statistics for Major Programs (as of September 30, 2021),” at https://www.sba.gov/document/8 SBA, “SBA Lending Statistics for Major Programs (as of September 30, 2021),” at https://www.sba.gov/document/
report -2021-weekly-lending-reports (hereinafter SBA, “ SBA Lending Statistics for Major Programs (as of September report -2021-weekly-lending-reports (hereinafter SBA, “ SBA Lending Statistics for Major Programs (as of September
30, 2021)”). 30, 2021)”).
9 SBA, “Small Business Administration loan program performance: T able 1 – Unpaid Principal Balance (UPB) by 9 SBA, “Small Business Administration loan program performance: T able 1 – Unpaid Principal Balance (UPB) by
Program,” effective Program,” effective ~~June~~September 30, 2021, at 30, 2021, at https://www.sba.gov/document/report-small-business-administration-loan-program-performance. Congressional Research Service 2 Small Business Administration 504/CDC Loan Guaranty Program the use for which it is designed”) or a special purpose property.10 The SBA lists 27 limited and special purpose properties (e.g., dormitories, golf courses, hospitals, and bowling al eys).11 The CDC’s contribution cannot exceed 30% of the financing when the borrower is a new business and the loan is for either a limited-market property or special purpose property. Borrowers must contribute at least 10% of the financing for standard 504/CDC loans and at least 15% if the borrower is a new business or if the loan is for a limited-market property or special purpose property.12 They must contribute at least 20% if the borrower is a new business and the loan is for either a limited-market property or special purpose property.13 Table 1. 504/CDC Loan Structures and Contribution Requirements New Business or Both New Business and Limited or Special Limited or Special Participant Standard Loan Purpose Property Loan Purpose Property Loan Third-Party Lender At least 50% At least 50% At least 50% CDC/SBA Maximum 40% Maximum 35% Maximum 30% Borrower At least 10% At least 15% At least 20% Source: U.S. Smal Business Administration, “SOP 50 10 6: Lender and Development Company Loan Programs,” effective October 1, 2020, pp. 455, 456, at https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs-0. 10 A 504/CDC loan generally may not exceed 40% of total project cost s, plus 100% of eligible administrative costs. “For good cause shown, SBA may authorize an increase in the percentage of project costs covered up to 50%. No more than 50% of eligible project costs can be from Federal sources, whether received directly or indirectly through an intermediary.” See 13 C.F.R. §120.930. 11~~https://www.sba.gov/document/report-small-business-administration-loan-~~
~~program-performance.~~
~~10 SBA, “Recovery Act Agency Plan,” May 15, 2009, at https://www.sba.gov/sites/default/files/~~
~~sba_recovery_act_plan.pdf.~~
~~Congressional Research Service~~

2

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~under specified circumstances, the use of 504/CDC program funds to refinance~~
~~existing debt for business expansion.11~~
~~ P.L. 111-240, the Smal Business Jobs Act of 2010, increased the 504/CDC~~
~~program’s loan guaranty limits from $1.5 million to $5 million for “regular”~~
~~borrowers, from $2 mil ion to $5 mil ion if the loan proceeds are directed toward~~
~~one or more specified public policy goals, and from $4 million to $5.5 million for~~
~~manufacturers. The act also temporarily expanded for two years after the date of~~
~~enactment (or until September 27, 2012) the types of projects eligible for~~
~~refinancing of existing debt under the 504/CDC program; provided $505 million~~
~~(plus an additional $5 million for administrative expenses) to continue fee~~
~~subsidies for the 7(a) loan guaranty program and the 504/CDC program through~~
~~December 31, 2010; and established an alternative size standard that al ows more~~
~~companies to qualify for 504/CDC assistance.~~
~~ P.L. 111-322, the Continuing Appropriations and Surface Transportation~~
~~Extensions Act, 2011, authorized the SBA to continue the fee subsidies and the~~
~~7(a) program’s 90% maximum loan guaranty percentage through March 4, 2011,~~
~~or until funding provided for these purposes in P.L. 111-240 was exhausted~~
~~(which occurred on January 3, 2011).~~
~~During the 114th Congress, P.L. 114-113, the Consolidated Appropriations Act, 2016, reinstated~~
~~the expansion of the types of projects eligible for refinancing under the 504/CDC loan guaranty~~
~~program, but only in any fiscal year in which the refinancing program and the 504/CDC program~~
~~as a whole do not have credit subsidy costs. (P.L. 116-260 repealed this limitation.) The act~~
~~required each CDC to limit its refinancing so that, during any fiscal year, the new refinancings do~~
~~not exceed 50% (now 100%) of the dollars it loaned under the 504/CDC program during the~~
~~previous fiscal year.12 The SBA was authorized to waive the 50% limit for good cause. An interim~~
~~final rule implementing the new refinancing program was issued by the SBA on May 25, 2016,~~
~~effective June 24, 2016.13~~
~~During the 115th Congress, P.L. 115-371, the Smal Business Access to Capital and Efficiency~~
~~(ACE) Act, amended the Smal Business Investment Act of 1958 to increase the threshold amount~~
~~for determining when a CDC is required to secure an independent real estate appraisal for a~~
~~504/CDC loan (from if the estimated value of the project property is greater than $250,000 to if~~

~~11 T he specified circumstances include the following: the amount of existing indebtedness does not exceed 50% of the~~
~~project cost of the expansion; the proceeds of the indebtedness were used to acquire land, including the building~~
~~situated thereon, to construct a building thereon, or to purchase equipment; the existing indebtedness is collateralized~~
~~by fixed assets; the existing indebtedness was incurred for the benefit of a small business; the financing is used only for~~
~~refinancing existing indebtedness or costs related to the project being financed; the refinancing provides a substantial~~
~~benefit to the borrower; the borrower has been current on all payments due on the existing debt for not less than one~~
~~year preceding the date of refinancing; and the financing provided will have better terms or rate of interest than the~~
~~existing indebtedness. See P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), Section 504.~~
~~Stimulus for Community Development Lending.~~
~~12 T he act also eliminated an alternative job retention goal for the expanded refinancing program authorized by P.L.~~
~~111-240, the Small Business Jobs Act of 2010. It also increased the SBA’s Small Business Investment Company~~
~~program’s family of funds limit (the amount of outstanding leverage allowed for two or more SBIC licenses under~~
~~common control) to $350 million from $225 million and increased the 7(a) loan program’s authorization limit to~~
~~$26.5 billion for FY2016 from $23.5 billion for FY2015.~~
~~13 SBA, “Debt Refinancing in 504 Loan Program,” 81 Federal Register 33123-33126, May 25, 2016.~~
~~Congressional Research Service~~

3

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~the estimated value of the project property is greater than the federal banking regulator appraisal~~
~~threshold, which was increased from $250,000 to $500,000 in 2018).14~~
~~In addition, the Trump Administration proposed in its FY2020 and FY2021 budget requests that~~
~~the maximum dollar amount for a 504 loan to a smal manufacturer be increased to $6.5 mil ion~~
~~from $5.5 mil ion.15~~
~~Congress authorized several changes to the 504/CDC program during the 116th Congress in an~~
~~effort to assist smal businesses adversely affected by the COVID-19 pandemic. For example,~~
~~ P.L. 116-136, the Coronavirus Aid, Relief, and Economic Security Act (CARES~~
~~Act), among other provisions, created the $349 bil ion (now $813.7 bil ion)~~
~~Paycheck Protection Program (PPP), which provides low-interest, forgivable~~
~~loans to smal businesses adversely affected by the COVID-19 pandemic, and~~
~~appropriated $17 bil ion for six-month payment relief for existing 7(a), 504/CDC,~~
~~and Microloan borrowers in a regular servicing status (i.e., fully disbursed)~~
~~beginning with the next payment due date. Loans already on deferment received~~
~~six months of SBA payments beginning with the first payment after the deferral~~
~~period. Loans in a regular servicing status up to six months after enactment (until~~
~~September 27, 2020) were also eligible for six monthly payments of debt relief.16~~
~~ P.L. 116-260, the Economic Aid to Hard-Hit Smal Businesses, Nonprofits, and~~
~~Venues Act (Division N, Title III of the Consolidated Appropriations Act, 2021),~~
~~among other provisions, appropriated $3.5 bil ion to resume monthly payment~~
~~relief for 7(a), 504/CDC, and Microloan borrowers, capped at $9,000 per month~~
~~per borrower. Payments are dependent on the availability of funds, when the loan~~
~~was disbursed, the type of loan received, and the business’s industry.17 The act~~
~~also waived specified 7(a) and 504/CDC loan guarantee program fees in FY2021,~~
~~modified 504/CDC refinancing regulations to expand borrower access to the~~
~~refinancing program and create reciprocity for refinancing under the 7(a) and~~
~~504/CDC programs, and temporarily authorized the SBA, through September 30,~~

~~14 Department of the Treasury, Office of the Comptroller of the Currency, Federal Reserve System, and Federal Deposit~~
~~Insurance Corporation, “Real Estate Appraisals,” 83 Federal Register 15,019, April 9, 2018.~~
~~15 SBA, FY2020 Congressional Budget Justification and FY2018 Annual Performance Report, p. 35, at~~
~~https://www.sba.gov/sites/default/files/2019-04/~~
~~SBA%20FY%202020%20Congressional%20Justification_final%20508%20%204%2023%202019.pdf ; and SBA,~~
FY2021 Congressional Budget Justification and FY2019 Annual Perform ance Report , p. 32, at https://www.sba.gov/
~~document/report —congressional-budget-justification-annual-performance-report (hereinafter SBA,~~ ~~FY2021~~
~~Congressional Budget Justification and FY2019 Annual Perform ance Report~~).
~~16 Community Advantage Recovery Loans in a regular servicing status (i.e., fully disbursed) up until October 1, 2020,~~
~~were eligible for six months of loan payments. See SBA, “Guidance on the Implementation of the Extension of the~~
~~Section 1112 Debt Relief Program for the 7(a) and 504 Loan Programs, as Authorized by Section 325 of the Economic~~
~~Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,” Procedural Notice 5000 -20079, January 19, 2021, at~~
~~https://www.sba.gov/document/procedural-notice-5000-20079-guidance-implementation-extension-section-1112-debt-~~
~~relief-program-7a-504-loan-programs-authorized.~~
~~17 T he SBA has announced that the $3.5 billion appropriation will enable the agency to provide two additional monthly~~
~~payments on 7(a) and 504/CDC loans that were in repayment before March 27, 2020, starting with the next payment~~
~~due on or after February 1, 2021. After the first two monthly payments are provided, businesses with an SBA~~
~~Community Advantage loan, Microloan, or operating in specified economically hard-hit industries will receive an~~
~~additional three monthly payments. Loans approved from February 1, 2021, through September 30, 2021, will receive~~
~~three monthly payments beginning with the first payment due. See SBA, “Adjustment to Number of Months of Section~~
~~1112 Payments in the 7(a), 504 and Microloan Programs Due to Insufficiency of Funds,” SBA Procedural Notice,~~
~~5000-20095, February 16, 2021, at https://www.sba.gov/document/procedural-notice-5000-20095-adjustment -number-~~
~~months-section-1112-payments-7a-504-microloan-programs-due-insufficiency-funds.~~
~~Congressional Research Service~~

4

~~link to page 10~~ ~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~2023, to establish a 504/CDC Express Loan program to expedite the approval of~~
~~504/CDC loans that do not exceed $500,000.~~
~~This report examines the program’s borrower and lender eligibility standards; program~~
~~requirements; and program statistics, including loan volume, loss rates, proceeds usage, borrower~~
~~satisfaction, and borrower demographics. Next, it surveys congressional action taken during~~
~~recent Congresses to enhance smal business access to capital, including P.L. 111-5, P.L. 111-240,~~
~~P.L. 116-136, and P.L. 116-260.~~
~~This report also discusses issues raised concerning the SBA’s administration of the program,~~
~~including the oversight of 504/CDC lenders.~~
~~Program Participants and Financing Contribution~~
~~As shown in Table 1, 504/CDC projects general y have three main participants: a third-party~~
~~lender provides 50% or more of the financing; a CDC provides up to 40% of the financing~~
~~through a 504/CDC debenture, which is 100% guaranteed by the SBA; and the borrower~~
~~contributes at least 10% of the financing.~~
~~The CDC’s contribution, and the amount of the SBA’s 100% guaranteed debenture, general y~~
~~cannot exceed 40% of the financing for standard 504/CDC loans. It cannot exceed 35% of the~~
~~financing for new businesses (defined as “a business that is two years old or less at the time the~~
~~loan is approved”) or if the loan is for either a limited-market property (defined as “a property~~
~~with a unique physical design, special construction materials, or a layout that restricts its utility to~~
~~the use for which it is designed”) or a special purpose property.18 The SBA lists 27 limited and~~
~~special purpose properties (e.g., dormitories, golf courses, hospitals, and bowling al eys).19 The~~
CDC’s contribution cannot exceed 30% of the financing when the borrower is a new business and
~~the loan is for either a limited-market property or special purpose property.~~
~~Borrowers must contribute at least 10% of the financing for standard 504/CDC loans and at least~~
~~15% if the borrower is a new business or if the loan is for a limited-market property or special~~

~~18 A 504/CDC loan generally may not exceed 40% of total project cost s, plus 100% of eligible administrative costs.~~
~~“For good cause shown, SBA may authorize an increase in the percentage of project costs covered up to 50%. No more~~
~~than 50% of eligible project costs can be from Federal sources, whether received directly or indirectly through an~~
~~intermediary.” See 13 C.F.R. §120.930.~~
19 T he SBA considers the following to be limited or special purpose propert ies: amusement parks; bowling alleys; car T he SBA considers the following to be limited or special purpose propert ies: amusement parks; bowling alleys; car
wash properties; cemeteries; clubhouses; cold storage facilities in which more than 50% of total square footage is wash properties; cemeteries; clubhouses; cold storage facilities in which more than 50% of total square footage is
equipped for refrigeration; dormitories; farms, including dairy facilities; funeral homes with crematoriums; gas stations; equipped for refrigeration; dormitories; farms, including dairy facilities; funeral homes with crematoriums; gas stations;
golf courses; hospitals, surgery centers, urgent care centers, and other health medical facilities; hotels and motels; golf courses; hospitals, surgery centers, urgent care centers, and other health medical facilities; hotels and motels;
marinas; mines; museums; nursing homes, including assisted living facilities; oil wells; quarries, including gravel pits; marinas; mines; museums; nursing homes, including assisted living facilities; oil wells; quarries, including gravel pits;
railroads; sanitary landfills; service centers (e.g., oil and lube, brake, or transmission centers) with pits and in-ground railroads; sanitary landfills; service centers (e.g., oil and lube, brake, or transmission centers) with pits and in-ground
lifts; sports arenas; swimming pools; tennis clubs; theaters; and wineries. SBA, “ SOP 50 10 6: Lender and lifts; sports arenas; swimming pools; tennis clubs; theaters; and wineries. SBA, “ SOP 50 10 6: Lender and
Development Company Loan Programs,” effective October 1, 2020, pp. 478, 479, at https://www.sba.gov/document/Development Company Loan Programs,” effective October 1, 2020, pp. 478, 479, at https://www.sba.gov/document/
sop-50-10-lender-development-company-loan-programs-0 (hereinafter “ SOP 50 10 6: Lender and Development sop-50-10-lender-development-company-loan-programs-0 (hereinafter “ SOP 50 10 6: Lender and Development
Company Loan Programs”). Company Loan Programs”).
~~Congressional Research Service~~

5

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~purpose property.20 They must contribute at least 20% if the borrower is a new business and the~~
~~loan is for either a limited-market property or special purpose property.21~~
~~Table 1. 504/CDC Loan Structures and Contribution Requirements~~
~~New Business or~~
~~Both New Business and~~
~~Limited or Special~~
~~Limited or Special~~
~~Participant~~
~~Standard Loan~~
~~Purpose Property Loan Purpose Property Loan~~
~~Third-Party Lender~~
~~At least 50%~~
~~At least 50%~~
~~At least 50%~~
~~CDC/SBA~~
~~Maximum 40%~~
~~Maximum 35%~~
~~Maximum 30%~~
~~Borrower~~
~~At least 10%~~
~~At least 15%~~
~~At least 20%~~
Source: U.S. Smal Business Administration, “SOP 50 10 6: Lender and Development Company Loan Programs,”
~~effective October 1, 2020, pp. 455, 456, at https://www.sba.gov/document/sop-50-10-lender-development-~~
~~company-loan-programs-0.~~
~~Borrower Eligibility Standards and Program~~
~~Requirements~~
~~Borrower Eligibility Standards~~
~~To be eligible for a SBA business loan, a smal business applicant must~~
~~ be located in the United States;~~
~~ be a for-profit operating business (except for loans to eligible passive~~
~~companies);~~
~~ qualify as smal ;22~~

2012 T he SBA announced in the T he SBA announced in the Federal Register on August 3, 2020, that “due to an economic recession as determined by on August 3, 2020, that “due to an economic recession as determined by
the National Bureau of Economic Research, borrowers in the 504 Loan Program may contribute not less than 10%, the National Bureau of Economic Research, borrowers in the 504 Loan Program may contribute not less than 10%,
instead of not less than 15%, to projects involving limited or special instead of not less than 15%, to projects involving limited or special ~~purpose~~pur pose buildings or buildings or ~~struc tures~~structures when refinancing when refinancing
debt without expansion. T he lower required contribution will be in effect until the first day of the calendar quarter debt without expansion. T he lower required contribution will be in effect until the first day of the calendar quarter
following the end of the economic recession as determined by the National Bureau of Economicfollowing the end of the economic recession as determined by the National Bureau of Economic Research or its Research or its
equivalent.” See SBA, “ 504 Debt Refinancing Without Expansion -Borrower’s Contribution for Projects Involving equivalent.” See SBA, “ 504 Debt Refinancing Without Expansion -Borrower’s Contribution for Projects Involving
Limited or Single Purpose Buildings During Recession,” 85Limited or Single Purpose Buildings During Recession,” 85 Federal Register 46775-46776, August 3, 2020. 46775-46776, August 3, 2020.
2113 “Loans under the 504 program provide permanent or take-out financing [long-term financing that replaces short -term “Loans under the 504 program provide permanent or take-out financing [long-term financing that replaces short -term
interim financing, often one with a shorter duration and higher interest rate] . ...An interim lender (either the T hird Party interim financing, often one with a shorter duration and higher interest rate] . ...An interim lender (either the T hird Party
Lender or another lender) provides the interim financing to Lender or another lender) provides the interim financing to ~~cov er~~cover the period between SBA approval of the project and the period between SBA approval of the project and
the debenture sale. After the project is completed, the CDC will close the 504 loan. T he proceeds from the Debenture the debenture sale. After the project is completed, the CDC will close the 504 loan. T he proceeds from the Debenture
sale repay the interim lender for the amount of the 504 project costs that it sale repay the interim lender for the amount of the 504 project costs that it ~~advance d~~advanced on an interim basis.… T he interim on an interim basis.… T he interim
financing must be fully disbursed and the project completed prior to the sale of the Debenture with one exception. A financing must be fully disbursed and the project completed prior to the sale of the Debenture with one exception. A
portion of the debenture proceeds may be put into an escrow account to completeportion of the debenture proceeds may be put into an escrow account to complete a minor portion of the total project.” a minor portion of the total project.”
SBA, “ SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 45 7, 500. SBA, “ SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 45 7, 500.
~~22 P.L. 111-240, the Small Business Jobs Act of 2010, required the SBA to establish an alternative size standard for the~~
~~504/CDC and 7(a) loan programs that uses maximum tangible net worth and average net income as an alternative to the~~
~~use of industry standards. At the time of passage, the 7(a) program used industry-specific size standards and the~~
~~504/CDC program used maximum net worth of $8.5 million and maximum average net income of $3 million to~~
~~determine program eligibility. T he act establishes the following alternative size standard for both the 504/CDC and 7(a)~~
~~programs on an interim basis: the business qualifies as small if it does not have a tangible net worth in excess of~~
~~$15 million and does not have an average net income after federal taxes (excluding any carry-over losses) in excess of~~
~~$5 million for two full fiscal years before the date of application . For further analysis concerning SBA size standards,~~
~~Congressional Research Service~~

6

~~Small Business Administration 504/CDC Loan Guaranty Program~~

Congressional Research Service 3 Small Business Administration 504/CDC Loan Guaranty Program Borrower Eligibility Standards and Program Requirements Borrower Eligibility Standards To be eligible for a SBA business loan, a smal business applicant must  be located in the United States;  be a for-profit operating business (except for loans to eligible passive companies);  qualify as smal ;14  demonstrate a need for the desired credit and that the funds are not available from  demonstrate a need for the desired credit and that the funds are not available from
alternative sources, including personal resources of the principals; and alternative sources, including personal resources of the principals; and
 be certified by a lender that the desired credit is unavailable to the applicant on  be certified by a lender that the desired credit is unavailable to the applicant on
reasonable terms and conditions from nonfederal sources without SBA reasonable terms and conditions from nonfederal sources without SBA
assistance.assistance.2315
Several types of businesses are prohibited from participating in the program. For example, Several types of businesses are prohibited from participating in the program. For example,
financial businesses primarily engaged in the business of lending, such as banks and finance financial businesses primarily engaged in the business of lending, such as banks and finance
companies; life insurance companies; businesses located in a foreign country; businesses deriving companies; life insurance companies; businesses located in a foreign country; businesses deriving
more than one-third of their gross annual revenue from legal gambling activities; businesses that more than one-third of their gross annual revenue from legal gambling activities; businesses that
present live performances of a prurient sexual nature; and businesses with an associate who is present live performances of a prurient sexual nature; and businesses with an associate who is
incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral
turpitude are ineligible. turpitude are ineligible.2416
To qualify for a SBA business loan, applicants must be creditworthy and able to reasonably assure To qualify for a SBA business loan, applicants must be creditworthy and able to reasonably assure
repayment. The SBA requires lenders to consider the applicant’s repayment. The SBA requires lenders to consider the applicant’s
 character, reputation, and credit history;  character, reputation, and credit history;
 experience and depth of management;  experience and depth of management;
 strength of the business;  strength of the business;
 past earnings, projected cash flow, and future prospects;  past earnings, projected cash flow, and future prospects;
~~ ability to repay the loan with earnings from the business;~~
~~ sufficient invested equity to operate on a sound financial basis;~~
~~ potential for long-term success;~~
~~ nature and value of collateral (although inadequate collateral wil not be the sole~~
~~reason for denial of a loan request); and~~
~~ affiliates’ effect on the applicant’s repayment ability.25~~
~~Borrower Program Requirements~~
~~Use of Proceeds~~
~~A 504/CDC loan can be used to~~
~~ purchase land and make necessary improvements to the land, such as adding~~
~~streets, curbs, gutters, parking lots, utilities, and landscaping;~~
~~ purchase buildings and make improvements to the buildings, such as altering the~~
~~building’s facade and updating its heating and electrical systems, plumbing, and~~
~~roofing;~~

~~see CRS Report R40860, Sm all Business Size Standards: A Historical Analysis of Contem porary Issues, by Robert Jay~~
~~Dilger.~~
~~23 13 C.F.R. §120.100; and 13 C.F.R. §120.101.~~
24 14 P.L. 111-240, the Small Business Jobs Act of 2010, required the SBA to establish an alternative size standard for the 504/CDC and 7(a) loan programs that uses maximum tangible net worth and average net income as an alternative to the use of industry standards. At the time of passage, the 7(a) program used industry-specific size standards and the 504/CDC program used maximum net worth of $8.5 million and maximum average net income of $3 million to determine program eligibility. T he act establishes the following alternative size standard for both the 504/CDC and 7(a) programs on an interim basis: the business qualifies as small if it does not have a tangible net worth in excess of $15 million and does not have an average net income after federal taxes (excluding any carry-over losses) in excess of $5 million for two full fiscal years before the date of application . For further analysis concerning SBA size standards, see CRS Report R40860, Sm all Business Size Standards: A Historical Analysis of Contem porary Issu es, by Robert Jay Dilger. 15 13 C.F.R. §120.100; and 13 C.F.R. §120.101. 16 13 C.F.R. §120.110. Nineteen types of businesses are ineligible for 504/CDC loans. In addition, an associate is an 13 C.F.R. §120.110. Nineteen types of businesses are ineligible for 504/CDC loans. In addition, an associate is an
officer, director, owner of more than 20% of the equity, or key employee of the small business; any entity in which one officer, director, owner of more than 20% of the equity, or key employee of the small business; any entity in which one
or more individuals referred to above owns or controls at least 20% of the equity; and any individual or entity in control or more individuals referred to above owns or controls at least 20% of the equity; and any individual or entity in control
of or controlled by the small business, except a Small Business Investment Company licensed by the SBA. See 13 of or controlled by the small business, except a Small Business Investment Company licensed by the SBA. See 13
C.F.R. §120.10. C.F.R. §120.10.
~~25 13 C.F.R. §120.150.~~
Congressional Research Service Congressional Research Service

74 Small Business Administration 504/CDC Loan Guaranty Program  ability to repay the loan with earnings from the business;  sufficient invested equity to operate on a sound financial basis;  potential for long-term success;  nature and value of collateral (although inadequate collateral wil not be the sole reason for denial of a loan request); and  affiliates’ effect on the applicant’s repayment ability.17 Borrower Program Requirements Use of Proceeds A 504/CDC loan can be used to  purchase land and make necessary improvements to the land, such as adding streets, curbs, gutters, parking lots, utilities, and landscaping;  purchase buildings and make improvements to the buildings, such as altering the building’s facade and updating its heating and electrical systems, plumbing, and roofing; 

~~Small Business Administration 504/CDC Loan Guaranty Program~~

 purchase, transport, dismantle, or instal machinery and equipment, provided the purchase, transport, dismantle, or instal machinery and equipment, provided the
machinery and equipment have a useful life of at least 10 years; machinery and equipment have a useful life of at least 10 years;
 purchase essential furniture and fixtures;  purchase essential furniture and fixtures;
 pay professional fees that are directly attributable and essential to the project,  pay professional fees that are directly attributable and essential to the project,
such as title insurance, title searches and abstract costs, surveys, and zoning such as title insurance, title searches and abstract costs, surveys, and zoning
matters; matters;
 finance short-term debt (  finance short-term debt (bridge financing) for eligible expenses that are directly ) for eligible expenses that are directly
attributable to the project and the financing term is three years or less; attributable to the project and the financing term is three years or less;
 pay interim financing costs, including points, fees, and interest;  pay interim financing costs, including points, fees, and interest;
 create a contingency fund, provided the fund does not exceed 10% of the  create a contingency fund, provided the fund does not exceed 10% of the
project’s construction costs; project’s construction costs;
 finance “do-it-yourself” construction expenses, including renovations and the  finance “do-it-yourself” construction expenses, including renovations and the
instal ation of machinery and equipment; and instal ation of machinery and equipment; and
 finance permissible debt refinancing with or without business expansion.  finance permissible debt refinancing with or without business expansion.2618
A 504/CDC loan cannot be used for working capital or inventory. A 504/CDC loan cannot be used for working capital or inventory.
Job Creation and Retention Requirement
Al 504/CDC borrowers must meet at least one of two specified economic development Al 504/CDC borrowers must meet at least one of two specified economic development
objectives. First, borrowers, other than smal manufacturers, must create or retain at least one job objectives. First, borrowers, other than smal manufacturers, must create or retain at least one job
for every $75,000 of project debenture within two years of project completion.for every $75,000 of project debenture within two years of project completion.~~27 Borrowers who~~
~~are smal manufacturers (defined as a smal business with its primary North American Industry~~
~~Classification System Code in Sectors 31, 32, and 33 and al of its production facilities located in~~
~~the United States) must create or retain at least one job per $120,000 of project debenture within~~
~~two years of project completion.28~~
~~Borrowers enter the number of jobs to be created or retained as a result of the project in their~~
~~application for funds and the CDC verifies that the project meets the job creation or retention~~
~~requirements. The jobs created do not have to be at the project facility, but 75% of the jobs must~~
~~be created in the community in which the project is located. Using job retention to satisfy this~~
~~requirement is al owed only if the CDC “can reasonably show that jobs would be lost to the~~
~~community if the project was not done.”29~~

2619 Borrowers who 17 13 C.F.R. §120.150. 18 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 4 60-462. A project involves SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 4 60-462. A project involves
expansion “ if it involves the acquisition, construction, or improvement of land, building or equipment for use by the expansion “ if it involves the acquisition, construction, or improvement of land, building or equipment for use by the
Applicant.” See “ SOP 50 10 6: Lender and Development Company Loan Programs,” p. 469. Applicant.” See “ SOP 50 10 6: Lender and Development Company Loan Programs,” p. 469.
2719 SBA, “Development Company Loan Program - Job Creation and Retention Requirements; Additional Areas for SBA, “Development Company Loan Program - Job Creation and Retention Requirements; Additional Areas for
Higher Portfolio Average,” 83Higher Portfolio Average,” 83 Federal Register 55225, November 2, 2018. Previously, P.L. 108-447, the Small 55225, November 2, 2018. Previously, P.L. 108-447, the Small
~~Business Reauthorization and Manufacturing Assistance Act of 2004, h ad required borrowers, other than small~~
~~manufactures, to create or retain at last one job for every $50,000 guaranteed by the Administration. P.L. 111-5, the~~
~~American Recovery and Reinvestment Act of 2009, increased that amount to every $65,000 guaranteed by the~~
~~Administration.~~
~~28 Previously, P.L. 108-447, the Small Business Reauthorization and Manufacturing Assistance Act of 2004, had~~
~~required small manufactures to create or retain at last one job for every $ 100,000 guaranteed by the Administration.~~
~~29 SBA “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 453. T he SBA reports that CDCs~~
~~supported 66,744 jobs in FY2014, 61,454 jobs in FY2015, 61,983 jobs in FY2016, 59,350 jobs in FY2017, 55,729 jobs~~
~~in FY2018, and 52,701 jobs in FY2021. See SBA,~~ ~~FY2021 Congressional Budget Justification and FY2019 Annual~~
~~Perform ance Report, p. 31.~~
~~Congressional Research Service~~

8

~~Small Business Administration 504/CDC Loan Guaranty Program~~
Congressional Research Service 5 Small Business Administration 504/CDC Loan Guaranty Program are smal manufacturers (defined as a smal business with its primary North American Industry Classification System Code in Sectors 31, 32, and 33 and al of its production facilities located in the United States) must create or retain at least one job per $120,000 of project debenture within two years of project completion.20 Borrowers enter the number of jobs to be created or retained as a result of the project in their application for funds and the CDC verifies that the project meets the job creation or retention requirements. The jobs created do not have to be at the project facility, but 75% of the jobs must be created in the community in which the project is located. Using job retention to satisfy this requirement is al owed only if the CDC “can reasonably show that jobs would be lost to the community if the project was not done.”21
If the borrower does not meet the job creation or retention requirement, the borrower can retain If the borrower does not meet the job creation or retention requirement, the borrower can retain
eligibility by meeting (1) any 1 of 5 community development goals, (2) any 1 of 10 public policy eligibility by meeting (1) any 1 of 5 community development goals, (2) any 1 of 10 public policy
goals, or (3) any 1 of 3 energy reduction goals, provided that the CDC’s overal portfolio of goals, or (3) any 1 of 3 energy reduction goals, provided that the CDC’s overal portfolio of
outstanding debentures meets or exceeds the job creation or retention criteria of at least 1 job outstanding debentures meets or exceeds the job creation or retention criteria of at least 1 job
opportunity created or retained for every $75,000 in project debenture (or for every $85,000 in opportunity created or retained for every $75,000 in project debenture (or for every $85,000 in
project debenture for projects located in special geographic areas such as Alaska, Hawai , state-project debenture for projects located in special geographic areas such as Alaska, Hawai , state-
designated enterprise zones, empowerment zones, enterprise communities, labor surplus areas, or designated enterprise zones, empowerment zones, enterprise communities, labor surplus areas, or
opportunity zones).opportunity zones).3022 Loans to smal manufacturers are excluded from the calculation of this Loans to smal manufacturers are excluded from the calculation of this
average. average.31
23 The five community development goals are The five community development goals are
 improving, diversifying, or stabilizing the economy of the locality;  improving, diversifying, or stabilizing the economy of the locality;
 stimulating other business development;  stimulating other business development;
 bringing new income into the community;  bringing new income into the community;
 assisting manufacturing firms; or  assisting manufacturing firms; or
 assisting businesses in labor surplus areas as defined by the U.S. Department of  assisting businesses in labor surplus areas as defined by the U.S. Department of
Labor. Labor.
The 10 public policy goals are The 10 public policy goals are
~~ revitalizing a business district of a community with a written revitalization or~~
~~redevelopment plan;~~
~~ expanding exports;~~
~~ expanding the development of women-owned and -control ed smal businesses;~~
~~ expanding smal businesses owned and controlled by veterans (especial y~~
~~service-disabled veterans);~~
~~ expanding minority enterprise development;~~
~~ aiding rural development;~~
~~ increasing productivity and competitiveness (e.g., retooling, robotics,~~
~~modernization, and competition with imports);~~
~~ modernizing or upgrading facilities to meet health, safety, and environmental~~
~~requirements;~~
~~ assisting businesses in or moving to areas affected by federal budget reductions,~~
~~including base closings, either because of the loss of federal contracts or the~~
~~reduction in revenues in the area due to a decreased federal presence; or~~
~~ reducing unemployment rates in labor surplus areas, as defined by the U.S.~~
~~Department of Labor.32~~

30 Business Reauthorization and Manufacturing Assistance Act o f 2004, had required borrowers, other than small manufactures, to create or retain at last one job for every $50,000 guaranteed by the Administration. P.L. 111-5, the American Recovery and Reinvestment Act of 2009 , increased that amount to every $65,000 guaranteed by the Administration. 20 Previously, P.L. 108-447, the Small Business Reauthorization and Manufacturing Assistance Act of 2004, had required small manufactures to create or retain at last one job for every $ 100,000 guaranteed by the Administration. 21 SBA “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 453. T he SBA reports that CDCs supported 66,744 jobs in FY2014, 61,454 jobs in FY2015, 61,983 jobs in FY2016, 59,350 jobs in FY2017, 55,729 jobs in FY2018, and 52,701 jobs in FY2021. See SBA, FY2021 Congressional Budget Justification and FY2019 Annual Perform ance Report, p. 31, at https://www.sba.gov/sites/default/files/2020-02/FY%202021%20CJ-508_FINAL.pdf (hereinafter SBA, FY2021 Congressional Budget Justification and FY2019 Annual Perform ance Report). 22 SBA, “Development Company Loan Program - Job Creation and Retention Requirements; Additional Areas for SBA, “Development Company Loan Program - Job Creation and Retention Requirements; Additional Areas for
Higher Portfolio Average,” 83Higher Portfolio Average,” 83 Federal Register 55225-55226, November 2, 2018. Previously, P.L. 108-447, the Small 55225-55226, November 2, 2018. Previously, P.L. 108-447, the Small
Business Reauthorization and Manufacturing Assistance Act of 2004, had set these thresholds as: at least one job Business Reauthorization and Manufacturing Assistance Act of 2004, had set these thresholds as: at least one job
opportunity per every $50,000 guaranteed by the Administration and per every $75,000 guaranteed by the opportunity per every $50,000 guaranteed by the Administration and per every $75,000 guaranteed by the
Administration for small manufactures. P.L. 111-5, the American Recovery and Reinvestment Act of 2009, increased Administration for small manufactures. P.L. 111-5, the American Recovery and Reinvestment Act of 2009, increased
the $50,000 threshold to every $65,000 guaranteed by the Administration. the $50,000 threshold to every $65,000 guaranteed by the Administration.
3123 A job opportunity is defined as a full-time (or equivalent) permanent job created within two years of receipt of A job opportunity is defined as a full-time (or equivalent) permanent job created within two years of receipt of
504/CDC funds or retained in the community because of a 504/CDC loan . See SBA, “ SOP 50 10 6: Lender and 504/CDC funds or retained in the community because of a 504/CDC loan . See SBA, “ SOP 50 10 6: Lender and
Development Company Loan Programs,” p. 531. Development Company Loan Programs,” p. 531.
~~32 13 C.F.R. §120.862.~~
Congressional Research Service Congressional Research Service

96 Small Business Administration 504/CDC Loan Guaranty Program  revitalizing a business district of a community with a written revitalization or redevelopment plan;  expanding exports;  expanding the development of women-owned and -control ed smal businesses;  expanding smal businesses owned and controlled by veterans (especial y service-disabled veterans);  expanding minority enterprise development;  aiding rural development;  increasing productivity and competitiveness (e.g., retooling, robotics, modernization, and competition with imports);  modernizing or upgrading facilities to meet health, safety, and environmental requirements;  assisting businesses in or moving to areas affected by federal budget reductions, including base closings, either because of the loss of federal contracts or the reduction in revenues in the area due to a decreased federal presence; or  reducing unemployment rates in labor surplus areas, as defined by the U.S. Department of Labor.24

~~Small Business Administration 504/CDC Loan Guaranty Program~~

The three energy reduction goals are The three energy reduction goals are
 reducing existing energy consumption by at least 10%;  reducing existing energy consumption by at least 10%;
 increasing the use of sustainable designs, including designs that reduce the use of  increasing the use of sustainable designs, including designs that reduce the use of
greenhouse gas-emitting fossil fuels or low-impact design to produce buildings greenhouse gas-emitting fossil fuels or low-impact design to produce buildings
that reduce the use of nonrenewable resources and minimize environmental that reduce the use of nonrenewable resources and minimize environmental
impact; or impact; or
 upgrading plant, equipment, and processes involving renewable energy sources  upgrading plant, equipment, and processes involving renewable energy sources
such as the smal -scale production of energy for individual buildings’ or such as the smal -scale production of energy for individual buildings’ or
communities’ consumption, commonly known as micropower, or renewable fuel communities’ consumption, commonly known as micropower, or renewable fuel
producers including biodiesel and ethanol producers.producers including biodiesel and ethanol producers.3325
If the project cannot meet any of these guidelines, then the debenture amount must be reduced to If the project cannot meet any of these guidelines, then the debenture amount must be reduced to
meet the job creation or retention requirement. meet the job creation or retention requirement.3426
Loan Amounts
The minimum 504/CDC debenture is $25,000. P.L. 111-240, the Smal Business Jobs Act of The minimum 504/CDC debenture is $25,000. P.L. 111-240, the Smal Business Jobs Act of
2010, increased the maximum gross debenture amount 2010, increased the maximum gross debenture amount
 from $1.5 mil ion to $5 mil ion for regular 504/CDC loans;  from $1.5 mil ion to $5 mil ion for regular 504/CDC loans;
 from $2 mil ion to $5 mil ion if the loan proceeds are directed toward one or  from $2 mil ion to $5 mil ion if the loan proceeds are directed toward one or
more of the public policy goals described above; more of the public policy goals described above;
 from $4 mil ion to $5.5 mil ion for smal manufacturers;  from $4 mil ion to $5.5 mil ion for smal manufacturers;
 from $4 mil ion to $5.5 mil ion for projects that reduce the borrower’s energy  from $4 mil ion to $5.5 mil ion for projects that reduce the borrower’s energy
consumption by at least 10%; and consumption by at least 10%; and
24 13 C.F.R. §120.862. 25 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 454. 26 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 455. Congressional Research Service 7 Small Business Administration 504/CDC Loan Guaranty Program  from $4 mil ion to $5.5 mil ion for projects for plant, equipment, and process  from $4 mil ion to $5.5 mil ion for projects for plant, equipment, and process
upgrades of renewable energy sources, such as the smal -scale production of upgrades of renewable energy sources, such as the smal -scale production of
energy for individual buildings or communities consumption (commonly known energy for individual buildings or communities consumption (commonly known
as micropower), or renewable fuel producers, including biodiesel and ethanol as micropower), or renewable fuel producers, including biodiesel and ethanol
producers.producers.3527
Loan Terms, Interest Rate, and Collateral
Loan Terms
The SBA determines the 504/CDC program’s loan terms and publishes them in the The SBA determines the 504/CDC program’s loan terms and publishes them in the Federal
Register..3628 The current maturity for a 504/CDC loan is general y The current maturity for a 504/CDC loan is general y
 20 or 25 years for real estate;  20 or 25 years for real estate;
 10 years for machinery and equipment; and ~~ 10 years for machinery and equipment; and~~

~~33 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 454.~~
~~34 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 455.~~
~~35 P.L. 111-240, §1112. Maximum Loan Amounts Under 504 Program.~~
~~36 13 C.F.R. §120.933.~~
~~Congressional Research Service~~

10

~~Small Business Administration 504/CDC Loan Guaranty Program~~

 10, 20, or 25 years based upon a weighted average of the useful life of the assets  10, 20, or 25 years based upon a weighted average of the useful life of the assets
being financed. being financed.3729
The maturities for the first mortgage issued by the third-party lender must be at least 7 years The maturities for the first mortgage issued by the third-party lender must be at least 7 years
when the CDC/504 loan is for a term of 10 years and at least 10 years when the loan is for 20 or when the CDC/504 loan is for a term of 10 years and at least 10 years when the loan is for 20 or
25 years. 25 years.3830
Interest Rates
As mentioned, 504/CDC borrowers make two loan payments, one to the third-party lender and As mentioned, 504/CDC borrowers make two loan payments, one to the third-party lender and
one to the CDC. The third-party loan can have a fixed or variable interest rate, is negotiated one to the CDC. The third-party loan can have a fixed or variable interest rate, is negotiated
between the lender and the borrower, and is subject to an interest rate cap. between the lender and the borrower, and is subject to an interest rate cap.3931
The third-party loan’s interest rate “must be reasonable” and the interest rate cap is published by The third-party loan’s interest rate “must be reasonable” and the interest rate cap is published by
the SBA in the the SBA in the Federal Register. The current maximum interest rate that a third-party lender is . The current maximum interest rate that a third-party lender is
al owed to charge for a commercial loan that funds any portion of the cost of a 504/CDC project al owed to charge for a commercial loan that funds any portion of the cost of a 504/CDC project
is 6% greater than the New York prime rate or the maximum interest rate permitted in that state, is 6% greater than the New York prime rate or the maximum interest rate permitted in that state,
whichever is less. whichever is less.4032
Borrowers have a general sense of what their 504/CDC loan’s interest rate wil be when their Borrowers have a general sense of what their 504/CDC loan’s interest rate wil be when their
completed loan application is submitted to the SBA for approval. However, the loan’s exact completed loan application is submitted to the SBA for approval. However, the loan’s exact
interest rate is not known until after it is pooled with other 504/CDC loan requests and sold to interest rate is not known until after it is pooled with other 504/CDC loan requests and sold to
private investors (typical y large institutional investors such as pension funds, insurance private investors (typical y large institutional investors such as pension funds, insurance
companies, and large banks). Investors receive interest on the debt, cal ed a debenture, semi-companies, and large banks). Investors receive interest on the debt, cal ed a debenture, semi-
annual y. Borrowers make monthly payments. annual y. Borrowers make monthly payments.
27 P.L. 111-240, §1112. Maximum Loan Amounts Under 504 Program. 28 13 C.F.R. §120.933. 29 SBA, “504 Loans and Debentures With 25 Year Maturity,” 83 Federal Register 14536, April 4, 2018. 30 13 C.F.R. §120.921; and SBA, “504 Loans and Debentures With 25 Year Maturity,” 83 Federal Register 14536, April 4, 2018. 31 SBA, “504 Loans and Debentures With 25 Year Maturity,” 83 Federal Register 14536, April 4, 2018; and 13 C.F.R. §120.921. 32 13 C.F.R. §120.921; and SBA, “Reporting and Recordkeeping Requirements Under OMB Review,” 77 Federal Register 59447, September 27, 2012. Congressional Research Service 8 link to page 4 Small Business Administration 504/CDC Loan Guaranty Program The 504/CDC loan’s interest rate has several components: the debenture interest rate (i.e., the rate The 504/CDC loan’s interest rate has several components: the debenture interest rate (i.e., the rate
that determines interest paid semi-annual y to investors who purchase the debenture), the note that determines interest paid semi-annual y to investors who purchase the debenture), the note
rate (i.e., the monthly-pay equivalent of the debenture rate, which is typical y four to eight basis rate (i.e., the monthly-pay equivalent of the debenture rate, which is typical y four to eight basis
points higher than the debenture interest rate depending on the length of the loan’s term), and the points higher than the debenture interest rate depending on the length of the loan’s term), and the
effective rate (i.e., the note rate and the cost impact of ongoing fees). Effective rates are provided effective rate (i.e., the note rate and the cost impact of ongoing fees). Effective rates are provided
to CDCs on a full-term basis and in 5-year increments. to CDCs on a full-term basis and in 5-year increments.4133
The debenture interest rate is based on comparable market conditions for long-term government The debenture interest rate is based on comparable market conditions for long-term government
debt at the time of sale and pegged to an increment above the current market rate. The SBA’s debt at the time of sale and pegged to an increment above the current market rate. The SBA’s
fiscal agent, currently Eagle Compliance, LLC, reaches an agreement with the underwriters on fiscal agent, currently Eagle Compliance, LLC, reaches an agreement with the underwriters on
the sale price of the debentures and, after reaching this agreement, must obtain approvals from the the sale price of the debentures and, after reaching this agreement, must obtain approvals from the
SBA and Treasury before proceeding. SBA and Treasury before proceeding.42

~~37 SBA, “504 Loans and Debentures With 25 Year Maturity,” 83 Federal Register 14536, April 4, 2018.~~
~~38 13 C.F.R. §120.921; and SBA, “504 Loans and Debentures With 25 Year Maturity,” 83 Federal Register 14536,~~
~~April 4, 2018.~~
~~39 SBA, “504 Loans and Debentures With 25 Year Maturity,” 83 Federal Register 14536, April 4, 2018; and 13 C.F.R.~~
~~§120.921.~~
~~40 13 C.F.R. §120.921; and SBA, “Reporting and Recordkeeping Requirements Under OMB Review,” 77~~ ~~Federal~~
~~Register~~ ~~59447, September 27, 2012.~~
~~41 Effective rates do not include the impact of upfront fees and therefore are not APRs. APRs (annual percentage rates)~~
~~represent the actual yearly cost of funds over the term of a loan .~~
~~42 13 C.F.R. §120.932; and Eagle Compliance, LLC, “How Effective Rates are Calculated,” at~~
~~https://www.eaglecompliance504.com/monthly-504-interest-rate.html.~~
~~Congressional Research Service~~

11

~~link to page 5~~ ~~Small Business Administration 504/CDC Loan Guaranty Program~~
34
The 10-year 504/CDC debenture rate (set bimonthly) for September and October 2021 is 0.90%. The 10-year 504/CDC debenture rate (set bimonthly) for September and October 2021 is 0.90%.
The comparable Treasury market rate for September 2021 was 0.81%, the note rate was The comparable Treasury market rate for September 2021 was 0.81%, the note rate was
0.93642%, and the effective full-term interest rate was 2.687%. 0.93642%, and the effective full-term interest rate was 2.687%.4335
The 20-year 504/CDC debenture rate (set monthly) for October 2021 is 1.54%. The comparable The 20-year 504/CDC debenture rate (set monthly) for October 2021 is 1.54%. The comparable
Treasury market rate for October 2021 is 1.56%, the note rate is 1.56884%, and the effective full-Treasury market rate for October 2021 is 1.56%, the note rate is 1.56884%, and the effective full-
term interest rate is 3.021%. term interest rate is 3.021%.4436
The 25-year 504/CDC debenture rate (set monthly) for October 2021 is 1.74%. The comparable The 25-year 504/CDC debenture rate (set monthly) for October 2021 is 1.74%. The comparable
Treasury market rate for October 2021 is 1.56%, the note rate is 1.76496%, and the effective full-Treasury market rate for October 2021 is 1.56%, the note rate is 1.76496%, and the effective full-
term interest rate is 3.157%. term interest rate is 3.157%.4537
Collateral
The SBA usual y takes a second lien position on the project property to secure the loan. The The SBA usual y takes a second lien position on the project property to secure the loan. The
SBA’s second lien position is considered adequate when the applicant meets al of the following SBA’s second lien position is considered adequate when the applicant meets al of the following
criteria: criteria:
 strong, consistent cash flow that is sufficient to cover the debt;  strong, consistent cash flow that is sufficient to cover the debt;
 demonstrated, proven management;  demonstrated, proven management;
 the business has been in operation for more than two years; and  the business has been in operation for more than two years; and
 the proposed project is a logical extension of the applicant’s current operations. the proposed project is a logical extension of the applicant’s current operations.46
~~If one or more of the above factors is not met, additional collateral or increased equity~~
~~contributions may be required. Al collateral must be insured against such hazards and risks as the~~
~~SBA may require, with provisions for notice to the SBA and the CDC in the event of impending~~
~~lapse of coverage.47 However, for 504/CDC loans, the applicant’s cash flow is the primary source~~
~~of repayment, not the liquidation of collateral. Thus, “if the lender’s financial analysis~~
~~demonstrates that the applicant lacks reasonable assurance of repayment in a timely manner from~~
~~the cash flow of the business, the loan request must be declined, regardless of the collateral~~
~~available or outside sources of repayment.”48~~

4338 33 Effective rates do not include the impact of upfront fees and therefore are not APRs. APRs (annual percentage rates) represent the actual yearly cost of funds over the term of a loan . 34 13 C.F.R. §120.932; and Eagle Compliance, LLC, “How Effective Rates are Calculated,” at https://www.eaglecompliance504.com/monthly-504-interest-rate.html. 35 Eagle Compliance, LLC, “Monthly 504 Interest Rate, September 2021 Funding Rates,” at https://nebula.wsimg.com/ Eagle Compliance, LLC, “Monthly 504 Interest Rate, September 2021 Funding Rates,” at https://nebula.wsimg.com/
c80b5bd96db149b3f5bf20dbc3479252?AccessKeyId=EA7D1AA43344749CDDA0&disposition=0&alloworigin=1. c80b5bd96db149b3f5bf20dbc3479252?AccessKeyId=EA7D1AA43344749CDDA0&disposition=0&alloworigin=1.
44 36 Eagle Compliance, LLC, “Monthly 504 Interest Rate, October 2021 Funding Rates,” at Eagle Compliance, LLC, “Monthly 504 Interest Rate, October 2021 Funding Rates,” at
https://www.eaglecompliance504.com/monthly-504-interest-rate.html (hereinafter Eagle Compliance, LLC, “ Monthly https://www.eaglecompliance504.com/monthly-504-interest-rate.html (hereinafter Eagle Compliance, LLC, “ Monthly
504 Interest Rate, October 2021”). 504 Interest Rate, October 2021”).
4537 Eagle Compliance, LLC, “Monthly 504 Interest Rate, October 2021.” Eagle Compliance, LLC, “Monthly 504 Interest Rate, October 2021.”
As mentioned in footnot As mentioned in footnote 3, 10-year debentures are pooled and sold the first T hursday of the first full week of every, 10-year debentures are pooled and sold the first T hursday of the first full week of every
other month (beginning with and including Sunday) starting with the January sale; 20- and 25-year debentures are other month (beginning with and including Sunday) starting with the January sale; 20- and 25-year debentures are
pooled and sold the first T hursday of the first full week of each month (beginning with and including Sunday). pooled and sold the first T hursday of the first full week of each month (beginning with and including Sunday).
46 38 See SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 485. See SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 485.
~~47 13 C.F.R. §120.934.~~
~~48 See SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 246.~~
~~Congressional Research Service~~

12

~~Small Business Administration 504/CDC Loan Guaranty Program~~
Congressional Research Service 9 Small Business Administration 504/CDC Loan Guaranty Program If one or more of the above factors is not met, additional collateral or increased equity contributions may be required. Al collateral must be insured against such hazards and risks as the SBA may require, with provisions for notice to the SBA and the CDC in the event of impending lapse of coverage.39 However, for 504/CDC loans, the applicant’s cash flow is the primary source of repayment, not the liquidation of collateral. Thus, “if the lender’s financial analysis demonstrates that the applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment.”40
CDC Eligibility Standards, Operating
Requirements, and Program Requirements
CDC Eligibility Standards
CDCs apply to the SBA for certification to participate in the 504/CDC program. A CDC must be a CDCs apply to the SBA for certification to participate in the 504/CDC program. A CDC must be a
nonprofit corporation, nonprofit corporation,4941 and it must and it must
 be in good standing in the state in which it is incorporated;  be in good standing in the state in which it is incorporated;
 be in compliance with al laws, including taxation requirements, in the state in  be in compliance with al laws, including taxation requirements, in the state in
which it is incorporated and any other state in which it conducts business; which it is incorporated and any other state in which it conducts business;
 provide the SBA a copy of its IRS tax exempt status, organizational chart, articles  provide the SBA a copy of its IRS tax exempt status, organizational chart, articles
of incorporation, bylaws, plan of operation, and operating budget; of incorporation, bylaws, plan of operation, and operating budget;
 indicate its area of operations, which is the state of the CDC’s incorporation;  indicate its area of operations, which is the state of the CDC’s incorporation;5042
and and
 have a board of directors that fulfil s specified requirements, such as having at  have a board of directors that fulfil s specified requirements, such as having at
least nine voting members, requiring a quorum of at least 50% of its voting least nine voting members, requiring a quorum of at least 50% of its voting
membership to transact business, and meets at least quarterly.membership to transact business, and meets at least quarterly.5143
If approved by the SBA, newly certified CDCs are on probation for two years. At the end of this If approved by the SBA, newly certified CDCs are on probation for two years. At the end of this
time, the CDC must petition for either permanent CDC status or a single, one-year extension of time, the CDC must petition for either permanent CDC status or a single, one-year extension of
probation. To be considered for permanent CDC status or an extension of probation, the CDC probation. To be considered for permanent CDC status or an extension of probation, the CDC
must have satisfactory performance as determined by the SBA in its discretion. Examples of the must have satisfactory performance as determined by the SBA in its discretion. Examples of the
factors that may be considered in determining satisfactory performance include the CDC’s risk factors that may be considered in determining satisfactory performance include the CDC’s risk
~~rating, on-site review and examination assessments, historical performance measures (like default~~
~~rate, purchase rate, and loss rate), loan volume to the extent that it impacts performance measures,~~
~~and other performance-related measurements and information (such as contribution toward~~
~~SBA’s mission).52~~
~~In FY2020, 208 CDCs provided at least one 504/CDC loan.53~~

49 39 13 C.F.R. §120.934. 40 See SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 246. 41 Five for-profit CDCs that participated in predecessor programs have been grandfathered into the current 504/CDC Five for-profit CDCs that participated in predecessor programs have been grandfathered into the current 504/CDC
program. See SBA, “ 504 and 7(a) Loan Programs Updates,” 79 program. See SBA, “ 504 and 7(a) Loan Programs Updates,” 79 Federal Register 15642, March 21, 2014. 15642, March 21, 2014.
5042 A CDC can apply to be a multistate CDC “ only if the State the CDC seeks to expand into is contiguous to the State A CDC can apply to be a multistate CDC “ only if the State the CDC seeks to expand into is contiguous to the State
of the CDC’s incorporation and the CDC establishes a loan committee in that State meeting the requirements of [ 13] of the CDC’s incorporation and the CDC establishes a loan committee in that State meeting the requirements of [ 13]
C.F.R. §120.823.” See SBA, “ 504 and 7(a) Loan Programs Updates,” 79 C.F.R. §120.823.” See SBA, “ 504 and 7(a) Loan Programs Updates,” 79 Federal Register 15651, March 21, 2014 (the 15651, March 21, 2014 (the
multi-state CDC language is effective as of April 21, 2014). multi-state CDC language is effective as of April 21, 2014).
5143 See SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 67, 68. The SBA issued a final See SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 67, 68. The SBA issued a final
rule, effective April 21, 2015, that changed rule, effective April 21, 2015, that changed ~~the~~th e SBA’s regulations concerning the CDC’s board of directors ( 13 C.F.R. SBA’s regulations concerning the CDC’s board of directors ( 13 C.F.R.
§120.823). For example, the CDC’s board of directors are now required to have at least nine voting directors; at least §120.823). For example, the CDC’s board of directors are now required to have at least nine voting directors; at least
one voting director who represents the economic, community, or workforce development fields; and at least two voting one voting director who represents the economic, community, or workforce development fields; and at least two voting
directors, other than the CDC manager, who represent the commercial lending field. See SBA, “ 504 and 7(a) Loan directors, other than the CDC manager, who represent the commercial lending field. See SBA, “ 504 and 7(a) Loan
Programs Updates,” 79Programs Updates,” 79 Federal Register 15641, 15644-15646, March 21, 2014. 15641, 15644-15646, March 21, 2014.
~~52 13 C.F.R. §120.812.~~
~~53 SBA, FY2022 Congressional Justification and FY2020 Annual Performance Report, p. 40, at https://www.sba.gov/~~
~~document/report -congressional-budget-justification-annual-performance-report.~~
~~Congressional Research Service~~

13

~~Small Business Administration 504/CDC Loan Guaranty Program~~
Congressional Research Service 10 Small Business Administration 504/CDC Loan Guaranty Program rating, on-site review and examination assessments, historical performance measures (like default rate, purchase rate, and loss rate), loan volume to the extent that it impacts performance measures, and other performance-related measurements and information (such as contribution toward SBA’s mission).44 In FY2020, 208 CDCs provided at least one 504/CDC loan.45
CDC Operating Requirements
The CDC’s board of directors is al owed to establish a loan committee composed of members of The CDC’s board of directors is al owed to establish a loan committee composed of members of
the CDC who may or may not be on the CDC’s board of directors. The loan committee reports to the CDC who may or may not be on the CDC’s board of directors. The loan committee reports to
the board and must meet specified requirements, such as having at least two members with the board and must meet specified requirements, such as having at least two members with
commercial lending experience satisfactory to the SBA, general y requiring al of its members to commercial lending experience satisfactory to the SBA, general y requiring al of its members to
live or work in the area of operations of the state in which the 504/CDC project they are voting on live or work in the area of operations of the state in which the 504/CDC project they are voting on
is located, not al owing any CDC staff to serve on the loan committee, and requiring a quorum of is located, not al owing any CDC staff to serve on the loan committee, and requiring a quorum of
at least five committee members authorized to vote to hold a meeting.at least five committee members authorized to vote to hold a meeting.5446 In addition, multistate In addition, multistate
CDCs are required to have a separate loan committee “for each state into which the CDC CDCs are required to have a separate loan committee “for each state into which the CDC
expands.” expands.”5547
The SBA also has a number of requirements concerning CDC staff, such as requiring CDCs to The SBA also has a number of requirements concerning CDC staff, such as requiring CDCs to
“have qualified full-time professional staff to market, package, process, close and service loans” “have qualified full-time professional staff to market, package, process, close and service loans”
and “directly employ full-time professional management,” typical y including an executive and “directly employ full-time professional management,” typical y including an executive
director (or the equivalent) to manage daily operations. director (or the equivalent) to manage daily operations.5648
CDCs are also required to operate “in accordance with al SBA loan program requirements” and CDCs are also required to operate “in accordance with al SBA loan program requirements” and
provide the SBA “current and accurate information about al certification and operational provide the SBA “current and accurate information about al certification and operational
requirements.”requirements.”5749 CDCs with 504/CDC loan portfolio balances of $30 mil ion or more are required CDCs with 504/CDC loan portfolio balances of $30 mil ion or more are required
to submit financial statements audited in accordance with general y accepted accounting to submit financial statements audited in accordance with general y accepted accounting
principles (GAAP) by an independent certified public accountant (CPA). CDCs with 504/CDC principles (GAAP) by an independent certified public accountant (CPA). CDCs with 504/CDC
loan portfolio balances of less than $30 mil ion must, at a minimum, submit a review of their loan loan portfolio balances of less than $30 mil ion must, at a minimum, submit a review of their loan
portfolio balances by an independent CPA or independent accountant in accordance with GAAP. portfolio balances by an independent CPA or independent accountant in accordance with GAAP.
The auditor’s opinion must state that the financial statements are in conformity with GAAP. The auditor’s opinion must state that the financial statements are in conformity with GAAP.58
~~CDC Program Requirements~~
~~The Application Process~~
~~CDCs must analyze each application in a commercial y reasonable manner, consistent with~~
~~prudent lending standards. The CDC’s analysis must include~~

5450 44 13 C.F.R. §120.812. 45 SBA, FY2022 Congressional Justification and FY2020 Annual Performance Report, p. 40, at https://www.sba.gov/document/report -congressional-budget-justification-annual-performance-report (hereinafter SBA, FY2022 Congressional Justification and FY2020 Annual Perform ance Report). 46 13 C.F.R. §120.823. T he SBA issued a final rule, effective April 21, 2015, that changed the SBA’s regulations 13 C.F.R. §120.823. T he SBA issued a final rule, effective April 21, 2015, that changed the SBA’s regulations
concerning the CDC’s board of directors and the structure and operations of CDC loan committees (13 C.F.R. concerning the CDC’s board of directors and the structure and operations of CDC loan committees (13 C.F.R.
§120.823). Under the new rule, loan committees are required to have at least two members (instead of one) with §120.823). Under the new rule, loan committees are required to have at least two members (instead of one) with
commercial lending experience satisfactory to the SBA. See SBA, “ 504 and 7(a) Loan Programs Updates,” 79 commercial lending experience satisfactory to the SBA. See SBA, “ 504 and 7(a) Loan Programs Updates,” 79 Federal
Register 15650, March 21, 2014. 15650, March 21, 2014.
5547 See SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 85. See SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 85.
5648 A CDC “ A CDC “ may request that SBA waive the requirement of the manager being employed directly only if: (i) T he may request that SBA waive the requirement of the manager being employed directly only if: (i) T he
requesting CDC will have full-time professional management that is employed by a non -profit entity (not another requesting CDC will have full-time professional management that is employed by a non -profit entity (not another
CDC) that has the economic development of the CDC’s Area of CDC) that has the economic development of the CDC’s Area of ~~Operations~~Op erations as one of its principal activities. Such full- as one of its principal activities. Such full-
time management may also work on and operate the other entity’s economic development programs, but must be time management may also work on and operate the other entity’s economic development programs, but must be
available to small businesses interested in the 504 Loan P rogram and to 504 loan borrowers during regular business available to small businesses interested in the 504 Loan P rogram and to 504 loan borrowers during regular business
hours; or (ii) t he requesting CDC is rural and has insufficient loan volume to justify having management employed hours; or (ii) t he requesting CDC is rural and has insufficient loan volume to justify having management employed
directly by the CDC. T he rural CDC must contract with another CDC located (i.e., incorporated) in the directly by the CDC. T he rural CDC must contract with another CDC located (i.e., incorporated) in the ~~sa me~~same general general
area.” See SBA, “ SOP 50 10 6: Lender and Development Company Loan Programs,” p. 90. area.” See SBA, “ SOP 50 10 6: Lender and Development Company Loan Programs,” p. 90.
5749 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 93. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 93.
5850 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 95. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 95.
Congressional Research Service Congressional Research Service

1411

Small Business Administration 504/CDC Loan Guaranty Program

CDC Program Requirements The Application Process CDCs must analyze each application in a commercial y reasonable manner, consistent with prudent lending standards. The CDC’s analysis must include  a financial analysis of the applicant’s pro forma balance sheet. The pro forma  a financial analysis of the applicant’s pro forma balance sheet. The pro forma
balance sheet must reflect the loan proceeds, use of the loan proceeds, and any balance sheet must reflect the loan proceeds, use of the loan proceeds, and any
other adjustments such as required equity injection or standby debt; other adjustments such as required equity injection or standby debt;
 a financial analysis of the applicant’s repayment ability, which must address debt  a financial analysis of the applicant’s repayment ability, which must address debt
service coverage after the effects of the SBA loans are taken into account and service coverage after the effects of the SBA loans are taken into account and
include a historical analysis of the applicant’s cash flow and address the include a historical analysis of the applicant’s cash flow and address the
reasonableness of the supporting assumptions used; reasonableness of the supporting assumptions used;
 a ratio analysis of the applicant’s federal tax returns and financial statements,  a ratio analysis of the applicant’s federal tax returns and financial statements,
including comments on any trends and a comparison with industry averages; including comments on any trends and a comparison with industry averages;
 a discussion of the owners’ and managers’ relevant experience in the type of  a discussion of the owners’ and managers’ relevant experience in the type of
business, as wel as their personal credit histories; business, as wel as their personal credit histories;
 an analysis of collateral adequacy, including an evaluation of the collateral and  an analysis of collateral adequacy, including an evaluation of the collateral and
lien position offered as wel as the liquidation value; lien position offered as wel as the liquidation value;
 a discussion of the applicant’s credit experience, including a review of business  a discussion of the applicant’s credit experience, including a review of business
credit reports and any experience the CDC may have with the applicant; and credit reports and any experience the CDC may have with the applicant; and
 other relevant information (e.g., if the application involves a franchise and the  other relevant information (e.g., if the application involves a franchise and the
success of the franchise). success of the franchise).5951
CDCs submit this information, using required SBA forms, to the Sacramento, CA, loan CDCs submit this information, using required SBA forms, to the Sacramento, CA, loan
processing center. processing center.
Accredited Lender Program Status
In 1991, the SBA established the ALP on a pilot basis to provide CDCs that “have developed a In 1991, the SBA established the ALP on a pilot basis to provide CDCs that “have developed a
good partnership with their SBA field office in promoting local economic development and have good partnership with their SBA field office in promoting local economic development and have
demonstrated a good track record in the submission of documentation needed for making and demonstrated a good track record in the submission of documentation needed for making and
servicing of sound loans” an expedited process for approving loan applications and servicing servicing of sound loans” an expedited process for approving loan applications and servicing
actions.actions.6052 P.L. 103-403, the Smal Business Administration Reauthorization and Amendments Act P.L. 103-403, the Smal Business Administration Reauthorization and Amendments Act
of 1994, authorized the SBA to establish the ALP on a permanent basis. of 1994, authorized the SBA to establish the ALP on a permanent basis.
CDCs may apply to the SBA for ALP status. Selection is based on several factors, including the CDCs may apply to the SBA for ALP status. Selection is based on several factors, including the
CDC’s experience as a CDC, the number of 504/CDC loans approved, the size of the CDC’s CDC’s experience as a CDC, the number of 504/CDC loans approved, the size of the CDC’s
portfolio, its record of compliance with SBA loan program requirements, and its record of portfolio, its record of compliance with SBA loan program requirements, and its record of
cooperation with al SBA offices.cooperation with al SBA offices.6153 The SBA is able to process loan requests from ALP-CDCs The SBA is able to process loan requests from ALP-CDCs
more quickly than from regular CDCs because it relies on their credit analysis when making the more quickly than from regular CDCs because it relies on their credit analysis when making the
~~decision to guarantee the debenture. About one-third of CDCs have ALP status and they account~~
~~for about 60% to 70% of al 504/CDC lending each year.62~~

5951 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 476-484. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 476-484.
6052 SBA, “Loans to State and Local Development Companies Accredited Lenders Program for Certified Development SBA, “Loans to State and Local Development Companies Accredited Lenders Program for Certified Development
Companies,” 60Companies,” 60 Federal Register 20391, April 26, 1995. 20391, April 26, 1995.
6153 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 74-76. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 74-76.
~~62 In FY2019, the SBA disbursed 5,845 504/CDC loans totaling $4.74 billion. Of this amount, 4,024 were ALP loans~~
~~totaling $3.27 billion. See SBA, Office of Congressional and Legislative Affairs, “ W DS Report Amount and Count~~
~~Summary, September 30, 2019: Draft T able 2.8. Delivery Method Approvals by Program and Cohort ,” October 18,~~
~~2018.~~
~~Congressional Research Service~~

15

~~Small Business Administration 504/CDC Loan Guaranty Program~~
Congressional Research Service 12 Small Business Administration 504/CDC Loan Guaranty Program decision to guarantee the debenture. About one-third of CDCs have ALP status and they account for about 60% to 70% of al 504/CDC lending each year.54
Premier Certified Lenders Program Status
P.L. 103-403 also authorized the SBA’s Premier Certified Lenders Program (PCLP) on a pilot P.L. 103-403 also authorized the SBA’s Premier Certified Lenders Program (PCLP) on a pilot
basis through October 1, 1997. The program’s authorization was later extended through October basis through October 1, 1997. The program’s authorization was later extended through October
1, 2002, and given permanent statutory authorization by P.L. 106-554, the Consolidated 1, 2002, and given permanent statutory authorization by P.L. 106-554, the Consolidated
Appropriations Act, 2001 (§1: H.R. 5667, the Smal Business Reauthorization Act of 2000). Appropriations Act, 2001 (§1: H.R. 5667, the Smal Business Reauthorization Act of 2000).6355
ALP-CDCs must apply to the SBA for PCLP status. CDCs provided PCLP status have increased ALP-CDCs must apply to the SBA for PCLP status. CDCs provided PCLP status have increased
authority to process, close, service, and liquidate 504/CDC loans. The loans are subject to the authority to process, close, service, and liquidate 504/CDC loans. The loans are subject to the
same terms and conditions as other 504/CDC loans, but the SBA delegates to the PCLP-CDC al same terms and conditions as other 504/CDC loans, but the SBA delegates to the PCLP-CDC al
loan approval decisions, except eligibility. Selection is based on several factors, including al of loan approval decisions, except eligibility. Selection is based on several factors, including al of
the factors used to assess ALP status plus evidence that the CDC has established a Loan Loss the factors used to assess ALP status plus evidence that the CDC has established a Loan Loss
Reserve Fund (LLRF) in compliance with al requirements [described below], has a demonstrated Reserve Fund (LLRF) in compliance with al requirements [described below], has a demonstrated
ability “to process, close, service and liquidate 504 and/or PCLP loans,” and has satisfactory SBA ability “to process, close, service and liquidate 504 and/or PCLP loans,” and has satisfactory SBA
performance. performance.6456
PCLP-CDCs are required to establish and maintain a LLRF for its financings under the program. PCLP-CDCs are required to establish and maintain a LLRF for its financings under the program.
The LLRF is used to reimburse the SBA for 10% of any loss sustained by the SBA resulting from The LLRF is used to reimburse the SBA for 10% of any loss sustained by the SBA resulting from
a default in the payment of principal or interest on a PCLP debenture. Each LLRF must equal 1% a default in the payment of principal or interest on a PCLP debenture. Each LLRF must equal 1%
of the original principal amount of each PCLP debenture. of the original principal amount of each PCLP debenture.6557
As of September 30, 2017, 15 CDCs had active PCLP status. As of September 30, 2017, 15 CDCs had active PCLP status.6658 In recent years, the number and In recent years, the number and
amount of 504/CDC loans made through the PCLP program have declined. In FY2009, 373 PCLP amount of 504/CDC loans made through the PCLP program have declined. In FY2009, 373 PCLP
loans amounting to $185.4 mil ion were disbursed. In FY2019, 22 PCLP loans totaling $14 loans amounting to $185.4 mil ion were disbursed. In FY2019, 22 PCLP loans totaling $14
mil ion were disbursed. mil ion were disbursed.6759
Real Estate Appraisals
As part of its analysis of each application, CDCs are required to have an independent appraisal As part of its analysis of each application, CDCs are required to have an independent appraisal
conducted of the real estate if the estimated value of the project property is greater than the conducted of the real estate if the estimated value of the project property is greater than the
federal banking regulator appraisal threshold (currently $500,000). CDCs may be required to federal banking regulator appraisal threshold (currently $500,000). CDCs may be required to
have an independent appraisal conducted of the real estate if the estimated value of the project have an independent appraisal conducted of the real estate if the estimated value of the project
property is equal to or less than the federal banking regulator appraisal threshold “and such property is equal to or less than the federal banking regulator appraisal threshold “and such
appraisal is necessary for appropriate evaluation of creditworthiness.”appraisal is necessary for appropriate evaluation of creditworthiness.”6860 The appraiser must have The appraiser must have

6354 In FY2019, the SBA disbursed 5,845 504/CDC loans totaling $4.74 billion. Of this amount, 4,024 were ALP loans totaling $3.27 billion. See SBA, Office of Congressional and Legislative Affairs, “ WDS Report Amount and Count Summary, September 30, 2019: Draft T able 2.8. Delivery Method Approvals by Program and Cohort ,” October 18, 2018. 55 P.L. 105-135, the Small Business Reauthorization Act of 1997, extended the program’s authorization to October 1, P.L. 105-135, the Small Business Reauthorization Act of 1997, extended the program’s authorization to October 1,
2002. 2002.
6456 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 77, 78. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” pp. 77, 78.
6557 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 79. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 79.
6658 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, August 24, 2017. All PCLP- SBA, Office of Congressional and Legislative Affairs, correspondence with the author, August 24, 2017. All PCLP-
CDCs have ALP status as that is a requirement for being provided PCLP authority. CDCs have ALP status as that is a requirement for being provided PCLP authority.
6759 SBA, Office of Congressional and Legislative Affairs, “WDS Report Amount and Count Summary SBA, Office of Congressional and Legislative Affairs, “WDS Report Amount and Count Summary , September 30, , September 30,
2019: Draft T able 2.8. Delivery Method Approvals by Program and Cohort,” October 18, 2018. 2019: Draft T able 2.8. Delivery Method Approvals by Program and Cohort,” October 18, 2018.
6860 15 U.S.C. §696(3)(E)(ii). T he federal banking regulator appraisal threshold is “…the lesser of the threshold amounts 15 U.S.C. §696(3)(E)(ii). T he federal banking regulator appraisal threshold is “…the lesser of the threshold amounts
set by the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Federal Deposit set by the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Federal Deposit
~~Insurance Corporation for when a federally related transaction that is a commercial real estate transaction requires an~~
~~appraisal prepared by a State licensed or certified appraiser.” See P.L. 115-371, the Small Business Access to Capital~~
~~and Efficiency (ACE) Act.~~
~~Previously, the thresholds in statute were more th an $250,000 and $250,000 or less if the appraisal was necessary for~~
~~appropriate evaluation of creditworthiness. See SBA, “ SOP 50 10 5(J): Lender and Development Company Loan~~
~~Programs,” effective January 1, 2018, p. 194, at https://www.sba.gov/document/sop-50-10-5-lender-development-~~
~~company-loan-programs.~~
~~Congressional Research Service~~

16 Congressional Research Service 13

Small Business Administration 504/CDC Loan Guaranty Program

no appearance of a conflict of interest and be either state licensed or state certified. When the no appearance of a conflict of interest and be either state licensed or state certified. When the
project property’s estimated value is more than $1 mil ion, the appraiser must be state certified. project property’s estimated value is more than $1 mil ion, the appraiser must be state certified.6961
Pre-Closing Interim Disbursements
SBA-approved 504/CDC loans are not closed until after project-related construction is complete, SBA-approved 504/CDC loans are not closed until after project-related construction is complete,
which often takes one to two years. Al loans must be disbursed within 48 months of approval.which often takes one to two years. Al loans must be disbursed within 48 months of approval.7062
Prior to the sale of a debenture and the SBA’s funding of the 504/CDC loan, the borrower may Prior to the sale of a debenture and the SBA’s funding of the 504/CDC loan, the borrower may
obtain interim financing from a third-party lender, obtain interim financing from a third-party lender, ~~usual y~~usually the same lender that provided the loan the same lender that provided the loan
covering 50% of the total 504 project financing.covering 50% of the total 504 project financing.7163 The proceeds from the debenture sale repay the The proceeds from the debenture sale repay the
interim lender for the amount of the 504/CDC project costs that it advanced on an interim basis. interim lender for the amount of the 504/CDC project costs that it advanced on an interim basis.7264
Closing
The CDC closes the loan in time to meet a specific debenture funding date. At the time of closing, The CDC closes the loan in time to meet a specific debenture funding date. At the time of closing,
the project must be complete (except funds put into a construction escrow account to complete a the project must be complete (except funds put into a construction escrow account to complete a
minor portion of the project). The SBA’s district counsel reviews the closing package and notifies minor portion of the project). The SBA’s district counsel reviews the closing package and notifies
the Central Servicing Agent (CSA, currently PricewaterhouseCoopers Public Sector LLP) and the the Central Servicing Agent (CSA, currently PricewaterhouseCoopers Public Sector LLP) and the
CDC via email if the loan is approved for debenture funding. If the loan is approved, the CDC CDC via email if the loan is approved for debenture funding. If the loan is approved, the CDC
forwards specified documents needed for the debenture funding directly to the CSA using a forwards specified documents needed for the debenture funding directly to the CSA using a
transmittal letter or spreadsheet. As mentioned, because the 504/CDC program provides transmittal letter or spreadsheet. As mentioned, because the 504/CDC program provides
permanent or permanent or take-out financing, an interim lender (either the third-party lender or another lender) financing, an interim lender (either the third-party lender or another lender)
typical y provides financing to cover the period between SBA approval of the project and the typical y provides financing to cover the period between SBA approval of the project and the
debenture sale. Proceeds from the debenture sale are used to repay the interim lender for the debenture sale. Proceeds from the debenture sale are used to repay the interim lender for the
amount of the project costs that it advanced on an interim basis. amount of the project costs that it advanced on an interim basis.7365
Loan Guaranty and Servicing Fees
Borrowers are currently charged fees amounting to about 3.5% of the net debenture proceeds plus Borrowers are currently charged fees amounting to about 3.5% of the net debenture proceeds plus
annual servicing and guaranty fees of about 1% of the unpaid debenture balance. Some of these annual servicing and guaranty fees of about 1% of the unpaid debenture balance. Some of these
fees are charged by the SBA to the CDC and others are charged by the CDC directly to the fees are charged by the SBA to the CDC and others are charged by the CDC directly to the
borrower. borrower.
~~SBA Fees~~
~~The SBA is authorized to charge CDCs five fees to help recoup the SBA’s expenses: a guaranty~~
~~fee, servicing fee, funding fee, development company fee, and participation fee.~~

~~69 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 260.~~
~~70 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 515.~~
71 Insurance Corporation for when a federally related transaction that is a commercial real estate transaction requires an appraisal prepared by a State licensed or certified appraiser.” See P.L. 115-371, the Small Business Access to Capital and Efficiency (ACE) Act. Previously, the thresholds in statute were more than $250,000 and $250,000 or less if the appraisal was necessary for appropriate evaluation of creditworthiness. See SBA, “ SOP 50 10 5(J): Lender and Development Company Loan Programs,” effective January 1, 2018, p. 194, at https://www.sba.gov/document/sop-50-10-5-lender-development-company-loan-programs. 61 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 260. 62 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 515. 63 GAO, GAO, Small Business Administration: Actions Needed to Ensure Planned Improvements Address Key Requirements
of the Developm ent Com pany (504) Loan Program, GAO-14-233, March 6, 2014, p. 5, at http://www.gao.gov/assets/, GAO-14-233, March 6, 2014, p. 5, at http://www.gao.gov/assets/
670/661428.pdf. 670/661428.pdf.
7264 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 458. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 458.
7365 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 458. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 458.
Congressional Research Service Congressional Research Service

1714

Small Business Administration 504/CDC Loan Guaranty Program

SBA Fees The SBA is authorized to charge CDCs five fees to help recoup the SBA’s expenses: a guaranty fee, servicing fee, funding fee, development company fee, and participation fee. Guaranty Fee
The SBA is authorized to charge CDCs a one-time, up-front guaranty fee of 0.5% of the The SBA is authorized to charge CDCs a one-time, up-front guaranty fee of 0.5% of the
debenture.debenture.7466 The SBA elected not to charge this fee in FY2009-FY2011, and FY2016-FY2018. The SBA elected not to charge this fee in FY2009-FY2011, and FY2016-FY2018.
The SBA charged this fee in FY2012-FY2015, FY2019-FY2020, at the outset of FY2021, and in The SBA charged this fee in FY2012-FY2015, FY2019-FY2020, at the outset of FY2021, and in
FY2022. FY2022.7567
As mentioned, P.L. 116-260, appropriated $1.918 bil ion for SBA loan enhancements, including As mentioned, P.L. 116-260, appropriated $1.918 bil ion for SBA loan enhancements, including
the waiver of the 504/CDC guaranty fee from the date of enactment (December 27, 2020) through the waiver of the 504/CDC guaranty fee from the date of enactment (December 27, 2020) through
September 30, 2021. September 30, 2021.
Servicing Fee
The SBA is authorized to charge CDCs an ongoing servicing fee paid monthly by the borrower The SBA is authorized to charge CDCs an ongoing servicing fee paid monthly by the borrower
and adjusted annual y based on the date the loan was approved. By statute, the fee is the lesser of and adjusted annual y based on the date the loan was approved. By statute, the fee is the lesser of
the amount necessary to cover the estimated cost of purchasing and guaranteeing debentures the amount necessary to cover the estimated cost of purchasing and guaranteeing debentures
under the 504/CDC program or 0.9375% per annum of the unpaid principal balance of the loan.under the 504/CDC program or 0.9375% per annum of the unpaid principal balance of the loan.76
68 The SBA’s servicing fee for FY2022 is 0.2475% of the unpaid principal balance for regular The SBA’s servicing fee for FY2022 is 0.2475% of the unpaid principal balance for regular
504/CDC loans and 0.2590% for 504 refinancing loans. 504/CDC loans and 0.2590% for 504 refinancing loans.77
~~Funding Fee~~
~~The SBA charges CDCs a funding fee, not to exceed 0.25% of the debenture, to cover costs~~
~~incurred by the trustee, fiscal agent, and transfer agent.78~~69

7466 13 C.F.R. §120.971(d). 13 C.F.R. §120.971(d).
7567 SBA, “SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2011,” September 30, 2011, at SBA, “SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2011,” September 30, 2011, at
https://www.sba.gov/sites/default/files/5000-1223.pdf; SBA, “ SBA Information Notice: 7(a) and 504 Fees Effective On https://www.sba.gov/sites/default/files/5000-1223.pdf; SBA, “ SBA Information Notice: 7(a) and 504 Fees Effective On
October 1, 2012,” September 28, 2012, at https://www.sba.gov/sites/default/files/lender_notices/5000-1253.pdf; SBA, October 1, 2012,” September 28, 2012, at https://www.sba.gov/sites/default/files/lender_notices/5000-1253.pdf; SBA,
“SBA Information Notice: 7(a) and 504 Fees Effective On October 1, “SBA Information Notice: 7(a) and 504 Fees Effective On October 1, ~~201 3~~2013,” September 24, 2013, at ,” September 24, 2013, at
https://www.sba.gov/sites/default/files/5000-1288.pdf; SBA, “ SBA Information Notice: 7(a) and 504 Fees Effective On https://www.sba.gov/sites/default/files/5000-1288.pdf; SBA, “ SBA Information Notice: 7(a) and 504 Fees Effective On
October 1, 2014,” September 18, 2014, at https://www.sba.gov/sites/default/files/lender_notices/5000-1318.pdf; SBA, October 1, 2014,” September 18, 2014, at https://www.sba.gov/sites/default/files/lender_notices/5000-1318.pdf; SBA,
“SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2015,” September 28, 2015, at “SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2015,” September 28, 2015, at
https://www.sba.gov/sites/default/files/lender_notices/5000-1352.pdf; SBA, “ SBA Information Notice: 7(a) and https://www.sba.gov/sites/default/files/lender_notices/5000-1352.pdf; SBA, “ SBA Information Notice: 7(a) and ~~504~~50 4
Fees Effective On October 1, 2016,” September 16, 2016, at https://www.sba.gov/sites/default/files/lender_notices/Fees Effective On October 1, 2016,” September 16, 2016, at https://www.sba.gov/sites/default/files/lender_notices/
5000-1389.fees_for_FY_2017.pdf; SBA, “ SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2017,” 5000-1389.fees_for_FY_2017.pdf; SBA, “ SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2017,”
August 15, 2017, at https://www.sba.gov/sites/default/files/lender_notices/5000-1954.pdf; SBA, “ SBA Information August 15, 2017, at https://www.sba.gov/sites/default/files/lender_notices/5000-1954.pdf; SBA, “ SBA Information
Notice: 504 Fees Effective On October 1, 2018,” August 14, 2018, at https://www.sba.gov/document/information-Notice: 504 Fees Effective On October 1, 2018,” August 14, 2018, at https://www.sba.gov/document/information-
notice-5000-180011-504-fees-effective-october-1-2018; SBA, “ SBA Information Notice: 504 Fees Effective On notice-5000-180011-504-fees-effective-october-1-2018; SBA, “ SBA Information Notice: 504 Fees Effective On
October 1, 2019,” September 16, 2019, at https://www.sba.gov/sites/default/files/resource_files/October 1, 2019,” September 16, 2019, at https://www.sba.gov/sites/default/files/resource_files/
504_Fees_Effective_October_1_2019_0.pdf; SBA, “ SBA Information Notice: 504 Fees Effective During Fiscal Year 504_Fees_Effective_October_1_2019_0.pdf; SBA, “ SBA Information Notice: 504 Fees Effective During Fiscal Year
2021,” September 15, 2020, at https://www.sba.gov/document/information-notice-5000-20045-sba-information-notice; 2021,” September 15, 2020, at https://www.sba.gov/document/information-notice-5000-20045-sba-information-notice;
and SBA, “SBA Information Notice: 504 Fees Effective During Fiscal Year 2022,” September 7, 2021, at and SBA, “SBA Information Notice: 504 Fees Effective During Fiscal Year 2022,” September 7, 2021, at
https://www.sba.gov/document/information-notice-5000-818642-504-fees-effective-during-fiscal-year-2022 https://www.sba.gov/document/information-notice-5000-818642-504-fees-effective-during-fiscal-year-2022
(hereinafter SBA, “ SBA Information Notice: 504 Fees Effective During Fiscal Year 2022”).(hereinafter SBA, “ SBA Information Notice: 504 Fees Effective During Fiscal Year 2022”).
76 68 15 U.S.C. §697(b)(7)(A)(i); and 13 C.F.R. §120.971(d). 15 U.S.C. §697(b)(7)(A)(i); and 13 C.F.R. §120.971(d).
7769 SBA, “SBA Information Notice: 504 Fees Effective During Fiscal Year 2022.” SBA, “SBA Information Notice: 504 Fees Effective During Fiscal Year 2022.”
T he SBA’s annual servicing fee was 0.749% in FY2011, 0.9375% in FY2012 -FY2015, 0.914% for regular 504/CDC T he SBA’s annual servicing fee was 0.749% in FY2011, 0.9375% in FY2012 -FY2015, 0.914% for regular 504/CDC
loans and 0.958% for 504/CDC refinancing loans in FY2016, 0.697% for regular 504/CDC loans and 0.731% for loans and 0.958% for 504/CDC refinancing loans in FY2016, 0.697% for regular 504/CDC loans and 0.731% for
504/CDC refinancing loans in FY2017, 0.642% for regular 504/CDC loans and 0.682% for 504/CDC refinancing loans 504/CDC refinancing loans in FY2017, 0.642% for regular 504/CDC loans and 0.682% for 504/CDC refinancing loans
in FY2018, 0.368% for regular 504/CDC loans and 0.395% for 504/CDC refinancing loans in FY201 9; and 0.3205% in FY2018, 0.368% for regular 504/CDC loans and 0.395% for 504/CDC refinancing loans in FY201 9; and 0.3205%
for regular 504/CDC loans and 0.3220% for 504/CDC refinancing loans in FY20 20. for regular 504/CDC loans and 0.3220% for 504/CDC refinancing loans in FY20 20.
~~78 13 C.F.R. §120.971(e).~~
Congressional Research Service Congressional Research Service

1815

Small Business Administration 504/CDC Loan Guaranty Program
Funding Fee The SBA charges CDCs a funding fee, not to exceed 0.25% of the debenture, to cover costs incurred by the trustee, fiscal agent, and transfer agent.70
Development Company Fee
For SBA loans approved after September 30, 1996, the SBA charges CDCs an annual For SBA loans approved after September 30, 1996, the SBA charges CDCs an annual
development company fee of 0.125% of the debenture’s outstanding principal balance. The fee development company fee of 0.125% of the debenture’s outstanding principal balance. The fee
must be paid from the servicing fees collected by the CDC and cannot be paid from any must be paid from the servicing fees collected by the CDC and cannot be paid from any
additional additional fees imposed on the borrower.fees imposed on the borrower.7971
Participation Fee
The SBA charges third-party lenders a one-time participation fee of 0.5% of the senior mortgage The SBA charges third-party lenders a one-time participation fee of 0.5% of the senior mortgage
loan if in a senior lien position to the SBA and the loan was approved after September 30, 1996.loan if in a senior lien position to the SBA and the loan was approved after September 30, 1996.8072
The fee may be paid by the third-party lender, CDC, or borrower. The fee may be paid by the third-party lender, CDC, or borrower.
CDC Fees
CDCs are al owed to charge borrowers a processing (or packaging) fee, closing fee, servicing fee, CDCs are al owed to charge borrowers a processing (or packaging) fee, closing fee, servicing fee,
late fee, assumption fee, CSA fee, other agent fees, and underwriters’ fee. late fee, assumption fee, CSA fee, other agent fees, and underwriters’ fee.
Processing (or Packaging) Fee
The CDC is al owed to charge borrowers a processing (or packaging) fee of up to 1.5% of the net The CDC is al owed to charge borrowers a processing (or packaging) fee of up to 1.5% of the net
debenture proceeds. Two-thirds of this fee is considered earned and may be collected by the CDC debenture proceeds. Two-thirds of this fee is considered earned and may be collected by the CDC
when the SBA issues an Authorization for the Debenture. The portion of the processing fee paid when the SBA issues an Authorization for the Debenture. The portion of the processing fee paid
by the borrower may be reimbursed from the debenture proceeds. by the borrower may be reimbursed from the debenture proceeds.8173
As mentioned, P.L. 116-260, appropriated $1.918 bil ion for SBA loan enhancements, including As mentioned, P.L. 116-260, appropriated $1.918 bil ion for SBA loan enhancements, including
the waiver of the 504/CDC processing fee from the date of enactment (December 27, 2020) the waiver of the 504/CDC processing fee from the date of enactment (December 27, 2020)
through September 30, 2021. The SBA wil reimburse CDCs 1.5% of the net debenture proceeds through September 30, 2021. The SBA wil reimburse CDCs 1.5% of the net debenture proceeds
for not imposing the processing fee. for not imposing the processing fee.
Closing Fee
The CDC is also al owed to charge “a reasonable closing fee sufficient to reimburse it for the The CDC is also al owed to charge “a reasonable closing fee sufficient to reimburse it for the
expenses of its in-house or outside legal counsel, and other miscel aneous closing costs.”expenses of its in-house or outside legal counsel, and other miscel aneous closing costs.”8274 Up to Up to
$2,500 in closing costs may be financed out of the debenture proceeds. $2,500 in closing costs may be financed out of the debenture proceeds.83
~~Servicing Fee~~
~~CDCs can also charge an annual servicing fee of at least 0.625% per annum and no more than 2%~~
~~per annum on the unpaid balance of the loan as determined at five-year anniversary intervals. A~~
~~servicing fee greater than 1.5% for rural areas and 1% elsewhere requires the SBA’s prior written~~
~~approval, based on evidence of substantial need. The servicing fee may be paid only from loan~~
~~payments received. The fees may be accrued without interest and collected from the CSA when~~

7975 70 13 C.F.R. §120.971(e). 71 13 C.F.R. §120.972. 13 C.F.R. §120.972.
8072 13 C.F.R. §120.972. When there are different liens on a property, the senior lien must be satisfied before junior liens 13 C.F.R. §120.972. When there are different liens on a property, the senior lien must be satisfied before junior liens
in the event of a default. in the event of a default.
8173 13 C.F.R. §120.971(a)(1). 13 C.F.R. §120.971(a)(1).
8274 13 C.F.R. §120.971(a)(2). 13 C.F.R. §120.971(a)(2).
8375 13 C.F.R. §120.883(e). 13 C.F.R. §120.883(e).
Congressional Research Service Congressional Research Service

1916

Small Business Administration 504/CDC Loan Guaranty Program

Servicing Fee CDCs can also charge an annual servicing fee of at least 0.625% per annum and no more than 2% per annum on the unpaid balance of the loan as determined at five-year anniversary intervals. A servicing fee greater than 1.5% for rural areas and 1% elsewhere requires the SBA’s prior written approval, based on evidence of substantial need. The servicing fee may be paid only from loan payments received. The fees may be accrued without interest and collected from the CSA when the payments are made. CSAs are entities that receive and disburse funds among the various the payments are made. CSAs are entities that receive and disburse funds among the various
parties involved in 504/CDC financing under a master servicing agent agreement with the SBA. parties involved in 504/CDC financing under a master servicing agent agreement with the SBA.8476
Late Fee and Assumption Fee
Loan payments received after the 15th of each month may be subject to a late payment fee of 5% Loan payments received after the 15th of each month may be subject to a late payment fee of 5%
of the late payment or $100, whichever is greater. Late fees wil be collected by the CSA on of the late payment or $100, whichever is greater. Late fees wil be collected by the CSA on
behalf of the CDC. Also, with the SBA’s written approval, CDCs may charge an assumption fee behalf of the CDC. Also, with the SBA’s written approval, CDCs may charge an assumption fee
not to exceed 1% of the outstanding principal balance of the loan being assumed. not to exceed 1% of the outstanding principal balance of the loan being assumed.8577
Central Servicing Agent Fee
CSAs are al owed to charge an initiation fee on each loan and an ongoing monthly servicing fee CSAs are al owed to charge an initiation fee on each loan and an ongoing monthly servicing fee
under the terms of the master servicing agreement. The current ongoing CSA monthly servicing under the terms of the master servicing agreement. The current ongoing CSA monthly servicing
fee is 0.1% per annum of the loan amount.fee is 0.1% per annum of the loan amount.8678 Also, “agent fees and charges necessary to market Also, “agent fees and charges necessary to market
and service debentures and certificates may be assessed to the borrower or the investor.”and service debentures and certificates may be assessed to the borrower or the investor.”8779 CDCs CDCs
must review the agent’s services and related fees “to determine if the fees are necessary and must review the agent’s services and related fees “to determine if the fees are necessary and
reasonable when there is an indication from a third party that an agent’s fees might be excessive, reasonable when there is an indication from a third party that an agent’s fees might be excessive,
or when an applicant complains about the fees charged by an agent.”or when an applicant complains about the fees charged by an agent.”8880 In cases in which fees In cases in which fees
appear to be unreasonable, CDCs “should contact” the SBA and if a SBA investigation appear to be unreasonable, CDCs “should contact” the SBA and if a SBA investigation
determines that the fee is excessive, the agent “must reduce the fee to an amount SBA deems determines that the fee is excessive, the agent “must reduce the fee to an amount SBA deems
reasonable, refund any sum in excess of that amount to the applicant, and refrain from charging or reasonable, refund any sum in excess of that amount to the applicant, and refrain from charging or
collecting from the applicant any funds in excess of the amount SBA deems reasonable.” collecting from the applicant any funds in excess of the amount SBA deems reasonable.”8981
Underwriters’ Fee
Borrowers are also charged an up-front underwriters’ fee of 0.4% for 20-year loans and 0.375% Borrowers are also charged an up-front underwriters’ fee of 0.4% for 20-year loans and 0.375%
for 10-year loans. The underwriters’ fee is paid by the borrower to the underwriter.for 10-year loans. The underwriters’ fee is paid by the borrower to the underwriter.9082 Underwriters Underwriters
are approved by the SBA to form debenture pools and arrange for the sale of certificates. are approved by the SBA to form debenture pools and arrange for the sale of certificates.
Fee Subsidies
The SBA was provided more than $1.1 bil ion in funding in 2009 and 2010 to subsidize the The SBA was provided more than $1.1 bil ion in funding in 2009 and 2010 to subsidize the
504/CDC program’s third-party participation fee and CDC processing fee, subsidize the SBA’s 504/CDC program’s third-party participation fee and CDC processing fee, subsidize the SBA’s
~~7(a) program’s guaranty fee, and increase the 7(a) program’s maximum loan guaranty percentage~~
~~from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000 to 90%~~
~~for al standard 7(a) loans.91 The last extension, P.L. 111-322, the Continuing Appropriations and~~

84 76 13 C.F.R. §120.971(a)(3). 13 C.F.R. §120.971(a)(3).
8577 13 C.F.R. §120.971(a)(4); 13 C.F.R. §120.971(a)(5); and SBA, “SOP 50 10 6: Lender and Development Company 13 C.F.R. §120.971(a)(4); 13 C.F.R. §120.971(a)(5); and SBA, “SOP 50 10 6: Lender and Development Company
Loan Programs,” p. 192. Loan Programs,” p. 192.
8678 SBA, “Servicing Loan Agreement,” at https://www.sba.gov/sites/default/files/forms/SBA_Form_1506.pdf. SBA, “Servicing Loan Agreement,” at https://www.sba.gov/sites/default/files/forms/SBA_Form_1506.pdf.
8779 13 C.F.R. §120.971(c). 13 C.F.R. §120.971(c).
8880 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 196. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 196.
8981 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 196. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 196.
9082 SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 192. SBA, “SOP 50 10 6: Lender and Development Company Loan Programs,” p. 192.
~~91 P.L. 111-5, the ARRA, provided $375 million for fee subsidies and the 7(a) program’s 90% guaranty for all standard~~
~~7(a) loans. ARRA’s funding for these purposes was exhausted on November 23, 2009. P.L. 111-118, the Department of~~
~~Defense Appropriations Act, 2010, enacted on December 19, 2009, provided $125 million to extend the fee subsidies~~
~~and 90% guarant y through February 28, 2010. P.L. 111-144, the T emporary Extension Act of 2010, enacted on March~~
~~2, 2010, provided $60 million to extend th e fee subsidies and 90% guaranty through March 28, 2010. P.L. 111-150, an~~
~~Congressional Research Service~~

20

~~Small Business Administration 504/CDC Loan Guaranty Program~~

Congressional Research Service 17 Small Business Administration 504/CDC Loan Guaranty Program 7(a) program’s guaranty fee, and increase the 7(a) program’s maximum loan guaranty percentage from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000 to 90% for al standard 7(a) loans.83 The last extension, P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorized the SBA to continue the fee subsidies Surface Transportation Extensions Act, 2011, authorized the SBA to continue the fee subsidies
and the 7(a) program’s 90% maximum loan guaranty percentage through March 4, 2011, or until and the 7(a) program’s 90% maximum loan guaranty percentage through March 4, 2011, or until
funding provided by the Smal Business Jobs Act of 2010 for this purpose was exhausted (which funding provided by the Smal Business Jobs Act of 2010 for this purpose was exhausted (which
occurred on January 3, 2011). occurred on January 3, 2011).9284
The Obama Administration The Obama Administration argued that additional funding for the SBA’s loan guaranty programs, argued that additional funding for the SBA’s loan guaranty programs,
including the 504/CDC program’s fee subsidies, improved the smal business lending including the 504/CDC program’s fee subsidies, improved the smal business lending
environment, increased both the number and amount of SBA guaranteed loans, and supported environment, increased both the number and amount of SBA guaranteed loans, and supported
“tens of thousands of smal businesses and supported hundreds of thousands of jobs.”“tens of thousands of smal businesses and supported hundreds of thousands of jobs.”9385 Critics Critics
contended that smal business tax reduction, reform of financial credit market regulation, and contended that smal business tax reduction, reform of financial credit market regulation, and
federal fiscal restraint are better means to assist smal business economic growth and job federal fiscal restraint are better means to assist smal business economic growth and job
creation. creation.9486
As mentioned, the CARES Act, among other provisions, appropriated $17 bil ion for six-month As mentioned, the CARES Act, among other provisions, appropriated $17 bil ion for six-month
payment relief for existing 7(a), 504/CDC, and Microloan borrowers in a regular servicing status payment relief for existing 7(a), 504/CDC, and Microloan borrowers in a regular servicing status
(i.e., fully disbursed) beginning with the next payment due date. Loans already on deferment (i.e., fully disbursed) beginning with the next payment due date. Loans already on deferment
received six months of SBA payments beginning with the first payment after the deferral period. received six months of SBA payments beginning with the first payment after the deferral period.
Loans in a regular servicing status up to six months after enactment (until September 27, 2020) Loans in a regular servicing status up to six months after enactment (until September 27, 2020)
were also eligible for six monthly payments of debt relief. were also eligible for six monthly payments of debt relief.95
~~In addition, P.L. 116-260, the Economic Aid to Hard-Hit Smal Businesses, Nonprofits, and~~
~~Venues Act (Division N, Title III of the Consolidated Appropriations Act, 2021), among other~~
~~provisions, appropriated $3.5 bil ion to resume monthly payment relief for 7(a), 504/CDC, and~~
~~Microloan borrowers, capped at $9,000 per month per borrower. Payments are dependent on the~~
~~availability of funds, when the loan was disbursed, the type of loan received, and the business’s~~

87 83 P.L. 111-5, the ARRA, provided $375 million for fee subsidies and the 7(a) program’s 90% guaranty for all standard 7(a) loans. ARRA’s funding for these purposes was exhausted on November 23, 2009. P.L. 111-118, the Department of Defense Appropriations Act, 2010, enacted on December 19, 2009, provided $125 million to extend the fee subsidies and 90% guarant y through February 28, 2010. P.L. 111-144, the T emporary Extension Act of 2010, enacted on March 2, 2010, provided $60 million to extend th e fee subsidies and 90% guaranty through March 28, 2010. P.L. 111-150, an act to extend the Small Business Loan Guarantee Program, enacted on March 26, 2010, authorized theact to extend the Small Business Loan Guarantee Program, enacted on March 26, 2010, authorized the use of $40 use of $40
million in SBA-appropriated funds to extend the fee subsidies and 90% guaranty through April 30, 2010. P.L. 111-157, million in SBA-appropriated funds to extend the fee subsidies and 90% guaranty through April 30, 2010. P.L. 111-157,
the Continuing Extension Act of 2010, the Continuing Extension Act of 2010, ~~enacted~~enact ed on April 15, 2010, provided $80 million to extend the fee subsides and on April 15, 2010, provided $80 million to extend the fee subsides and
90% guaranty through May 31, 2010. P.L. 111-240, the Small Business Jobs Act of 2010, enacted on September 27, 90% guaranty through May 31, 2010. P.L. 111-240, the Small Business Jobs Act of 2010, enacted on September 27,
2010, provided $505 million (plus $5 million for related administrative expenses) to extend the fee subsidies and 90% 2010, provided $505 million (plus $5 million for related administrative expenses) to extend the fee subsidies and 90%
guaranty through December 31, 2010. P.L. 111-322, the Continuing Appropriations and Surface T ransportation guaranty through December 31, 2010. P.L. 111-322, the Continuing Appropriations and Surface T ransportation
Extensions Act, 2011, authorized the SBA to continue the fee subsidies andExtensions Act, 2011, authorized the SBA to continue the fee subsidies and 90% guaranty through March 4, 2011, or 90% guaranty through March 4, 2011, or
until the funding provided by the Small Business Jobs Act of 2010 for these purposes was exhausted (which occurred until the funding provided by the Small Business Jobs Act of 2010 for these purposes was exhausted (which occurred
on January 3, 2011). on January 3, 2011).
9284 On January 3, 2011, the SBA announced it had formed a SBA Loan Queue for loan applicants should any funding On January 3, 2011, the SBA announced it had formed a SBA Loan Queue for loan applicants should any funding
with the enhancements become available from loan cancellations. T ypically, 7% to 10% with the enhancements become available from loan cancellations. T ypically, 7% to 10% ofo f previously approved SBA previously approved SBA
loans are later canceled by the borrower or lender and are not disbursed for a variety of reasons. See SBA, “ Jobs Act loans are later canceled by the borrower or lender and are not disbursed for a variety of reasons. See SBA, “ Jobs Act
Supported More T han $12 Billion in SBA Lending to Small Businesses in Just T hree Months,” January 3, 2011, at Supported More T han $12 Billion in SBA Lending to Small Businesses in Just T hree Months,” January 3, 2011, at
https://www.sba.gov/content/jobs-act-supported-more-12-billion-sba-lending-small-businesses-just-three-months. https://www.sba.gov/content/jobs-act-supported-more-12-billion-sba-lending-small-businesses-just-three-months.
9385 SBA, “Statement from Administrator Mills on Continuing Support for Small Businesses through SBA Recovery SBA, “Statement from Administrator Mills on Continuing Support for Small Businesses through SBA Recovery
Programs,” February 19, 2010, at https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/Programs,” February 19, 2010, at https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/
statement -administrator-mills-continuing-support-small-businesses-through-sba-recovery-programs; and SBA, “ SBA statement -administrator-mills-continuing-support-small-businesses-through-sba-recovery-programs; and SBA, “ SBA
Recovery Lending Extended T hrough April 30,” March 29, 2010, at https://www.sba.gov/aboutRecovery Lending Extended T hrough April 30,” March 29, 2010, at https://www.sba.gov/about -sba/sba-newsroom/-sba/sba-newsroom/
press-releases-media-advisories/sba-recovery-lending-extended-through-april-30. press-releases-media-advisories/sba-recovery-lending-extended-through-april-30.
94 86 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21, Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009; and NFIB, “ Government Spending,” Washington, DC. Also, see NFIB, “ Government Spending: Small 2009; and NFIB, “ Government Spending,” Washington, DC. Also, see NFIB, “ Government Spending: Small
Businesses Have a Bottom Line – Government Should, T oo,” at https://www.nfib.com/content/issues/economy/Businesses Have a Bottom Line – Government Should, T oo,” at https://www.nfib.com/content/issues/economy/
government -spending-small-businesses-have-a-bottom-line-government-should-too-49051/. government -spending-small-businesses-have-a-bottom-line-government-should-too-49051/.
9587 Community Advantage Recovery Loans in a regular servicing status (i.e., fully disbursed) up until October 1, 2020, Community Advantage Recovery Loans in a regular servicing status (i.e., fully disbursed) up until October 1, 2020,
were eligible for six months of loan payments. See SBA, “were eligible for six months of loan payments. See SBA, “ Guidance on the Implementation of the Extension of the Guidance on the Implementation of the Extension of the
Section 1112 Debt Relief Program for the 7(a) and 504 Loan Programs, as Authorized by Section 325 of the Economic Section 1112 Debt Relief Program for the 7(a) and 504 Loan Programs, as Authorized by Section 325 of the Economic
~~Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,” Procedural Notice 5000 -20079, January 19, 2021, at~~
~~https://www.sba.gov/document/procedural-notice-5000-20079-guidance-implementation-extension-section-1112-debt-~~
~~relief-program-7a-504-loan-programs-authorized.~~
~~Congressional Research Service~~

21

~~link to page 26 link to page 27~~ ~~Small Business Administration 504/CDC Loan Guaranty Program~~

Congressional Research Service 18 link to page 23 link to page 23 Small Business Administration 504/CDC Loan Guaranty Program In addition, P.L. 116-260, the Economic Aid to Hard-Hit Smal Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Appropriations Act, 2021), among other provisions, appropriated $3.5 bil ion to resume monthly payment relief for 7(a), 504/CDC, and Microloan borrowers, capped at $9,000 per month per borrower. Payments are dependent on the availability of funds, when the loan was disbursed, the type of loan received, and the business’s industry. The act also waived the 504/CDC loan guarantee fee and the CDC processing fee in industry. The act also waived the 504/CDC loan guarantee fee and the CDC processing fee in
FY2021. FY2021.
Program Statistics
Loan Volume
Table 2 shows the number and amount of 504/CDC loans that the SBA approved in FY2005-shows the number and amount of 504/CDC loans that the SBA approved in FY2005-
FY2021 and the number and amount of 504/CDC loans after cancel ations and other FY2021 and the number and amount of 504/CDC loans after cancel ations and other
modifications are taken into account in FY2005-FY2019. Each year, 5% to 15% of SBA-modifications are taken into account in FY2005-FY2019. Each year, 5% to 15% of SBA-
approved 504/CDC loans are subsequently canceled for a variety of reasons, typical y by the approved 504/CDC loans are subsequently canceled for a variety of reasons, typical y by the
borrower (e.g., funds are no longer needed or there was a change in ownership). borrower (e.g., funds are no longer needed or there was a change in ownership).
As the data indicate, the number and amount of 504/CDC loans declined in FY2008 and FY2009. As the data indicate, the number and amount of 504/CDC loans declined in FY2008 and FY2009.
The most likely causes for the decline were decreased smal business demand for capital during The most likely causes for the decline were decreased smal business demand for capital during
the recession; difficulties in secondary credit markets, especial y from October 2008 to February the recession; difficulties in secondary credit markets, especial y from October 2008 to February
2009; and a tightening of smal business credit lending standards. 2009; and a tightening of smal business credit lending standards.
The number and amount of 504/CDC loans increased during FY2010 and FY2011 and reached The number and amount of 504/CDC loans increased during FY2010 and FY2011 and reached
prerecession levels in FY2012. The SBA attributed the increase in FY2010 and FY2011 to the prerecession levels in FY2012. The SBA attributed the increase in FY2010 and FY2011 to the
continuation of 504/CDC fee subsidies, which were in place through most of FY2010 and the first continuation of 504/CDC fee subsidies, which were in place through most of FY2010 and the first
quarter of FY2011. quarter of FY2011.9688
The continuing economic recovery, which contributed to increased demand for smal business The continuing economic recovery, which contributed to increased demand for smal business
loans general y, and the temporary two-year expansion of the types of projects eligible for loans general y, and the temporary two-year expansion of the types of projects eligible for
504/CDC program refinancing of existing commercial debt (through September 27, 2012) under 504/CDC program refinancing of existing commercial debt (through September 27, 2012) under
P.L. 111-240, the Smal Business Jobs Act of 2010, most likely also contributed to the program’s P.L. 111-240, the Smal Business Jobs Act of 2010, most likely also contributed to the program’s
increased loan volume in FY2011 and FY2012 (se increased loan volume in FY2011 and FY2012 (see Table 3)..9789
As expected, given the expiration of the temporary refinancing expansion, 504/CDC loan volume As expected, given the expiration of the temporary refinancing expansion, 504/CDC loan volume
declined in FY2013 and FY2014. The program’s loan volume has general y increased since then. declined in FY2013 and FY2014. The program’s loan volume has general y increased since then.
~~Table 2. Number and Amount of 504/CDC Loans, FY2005-FY2021~~
~~($ amounts in bil ions)~~
~~Amount of the~~
~~Number (after~~
~~Amount of the~~
~~Debentures (after~~
~~Number~~
~~full~~
~~Debentures~~
~~modifications and~~
~~Fiscal Year~~
~~Approved~~
~~cancellations)~~
~~Approved~~
~~cancellations)~~
~~2005~~
~~9,194~~
~~7,672~~
~~$5.05~~
~~$4.22~~
~~2006~~
~~9,943~~
~~8,325~~
~~$5.73~~
~~$4.77~~
~~2007~~
~~10,669~~
~~8,941~~
~~$6.31~~
~~$5.22~~

96 Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,” Procedural Notice 5000-20079, January 19, 2021, at https://www.sba.gov/document/procedural-notice-5000-20079-guidance-implementation-extension-section-1112-debt-relief-program-7a-504-loan-programs-authorized. 88 SBA, Press Office, “Recovery Loan Incentives Spurred Continued Rebound in SBA Lending in SBA, Press Office, “Recovery Loan Incentives Spurred Continued Rebound in SBA Lending in ~~FY201 0~~FY2010 ,” October 4, ,” October 4,
2010, at https://www.sba.gov/content/recovery-loan-incentives-spurred-continued-rebound-sba-lending-fy2010; and 2010, at https://www.sba.gov/content/recovery-loan-incentives-spurred-continued-rebound-sba-lending-fy2010; and
SBA, “ Jobs Act Supported More T han $12 SBA, “ Jobs Act Supported More T han $12 ~~Billion~~Billio n in SBA Lending to Small Businesses in Just T hree Months,” in SBA Lending to Small Businesses in Just T hree Months,”
January 3, 2011, at https://www.sba.gov/content/jobs-act-supported-more-12-billion-sba-lending-small-businesses-just-January 3, 2011, at https://www.sba.gov/content/jobs-act-supported-more-12-billion-sba-lending-small-businesses-just-
three-months. three-months.
9789 T he expanded 504/CDC refinancing program became operational on February 17, 2011, began accepting loan T he expanded 504/CDC refinancing program became operational on February 17, 2011, began accepting loan
applications on February 28, 2011, and ended on September 27, 2012. See SBA, “ T emporary 504 Loan Refinancing for applications on February 28, 2011, and ended on September 27, 2012. See SBA, “ T emporary 504 Loan Refinancing for
Eligible Small Business Assets Under the Jobs Act : Fact Sheet,” at https://thebusinesstimes.com/504-loan-refinancing-Eligible Small Business Assets Under the Jobs Act : Fact Sheet,” at https://thebusinesstimes.com/504-loan-refinancing-
program/. program/.
Congressional Research Service Congressional Research Service

2219

Small Business Administration 504/CDC Loan Guaranty Program

Table 2. Number and Amount of 504/CDC Loans, FY2005-FY2021 ($ amounts in bil ions) Amount of the
Number (after
Amount of the
Debentures (after
Number
full
Debentures
modifications and
Fiscal Year
Approved
cancellations)
Approved
cancellations)
2005 9,194 7,672 $5.05 $4.22 2006 9,943 8,325 $5.73 $4.77 2007 10,669 8,941 $6.31 $5.22 2008 2008
8,883 8,883
7,328 7,328
$5.29 $5.29
$4.25 $4.25
2009 2009
6,608 6,608
5,471 5,471
$3.83 $3.83
$3.09 $3.09
2010 2010
7,833 7,833
6,642 6,642
$4.47 $4.47
$3.68 $3.68
2011 2011
8,015 8,015
6,913 6,913
$4.99 $4.99
$4.19 $4.19
2012 2012
9,594 9,594
8,399 8,399
$7.28 $7.28
$6.34 $6.34
2013 2013
7,708 7,708
6,626 6,626
$5.23 $5.23
$4.33 $4.33
2014 2014
5,885 5,885
5,246 5,246
$4.20 $4.20
$3.70 $3.70
2015 2015
5,787 5,787
5,313 5,313
$4.30 $4.30
$3.94 $3.94
2016 2016
5,938 5,938
5,557 5,557
$4.74 $4.74
$4.94 $4.94
2017 2017
6,218 6,218
5,925 5,925
$5.01 $5.01
$4.23 $4.23
2018 2018
5,874 5,874
5,774 5,774
$4.75 $4.75
$4.38 $4.38
2019 2019
6,099 6,099
6,006 6,006
$4.96 $4.96
$4.89 $4.89
2020 2020
7,119 7,119
NA NA
$5.83 $5.83
NA NA
2021 2021
9,676 9,676
NA NA
$8.22 $8.22
NA NA
Source: U.S. Smal Business Administration, Office of Congressional and Legislative Affairs, “WDS Report U.S. Smal Business Administration, Office of Congressional and Legislative Affairs, “WDS Report
Amount and Count Summary, September 30, 2019: DRAFT Table 2.7. Approvals by Program and Cohort,” Amount and Count Summary, September 30, 2019: DRAFT Table 2.7. Approvals by Program and Cohort,”
October 18, 2018; and U.S. Smal Business Administration, “SBA Lending Statistics for Major Programs (as of October 18, 2018; and U.S. Smal Business Administration, “SBA Lending Statistics for Major Programs (as of
September 30, 2021),” at https://www.sba.gov/document/report-2021-weekly-lending-reports. September 30, 2021),” at https://www.sba.gov/document/report-2021-weekly-lending-reports.
Table 3. Number and Amount of 504/CDC Refinance Loans,
FY2011, FY2012, FY2016-FY2021
($ amounts in mil ions) ($ amounts in mil ions)
Amount of the
Debentures
Amount of the
(after
Number
Number (after
Debentures
modifications and
Fiscal Year
Approved
full cancellations)
Approved
cancellations)
2011 2011
307 307
272 272
$255.3 $255.3
$226.0 $226.0
2012 2012
2,424 2,424
2,119 2,119
$2,268.2 $2,268.2
$2,007.2 $2,007.2
2016 2016
45 45
41 41
$41.4 $41.4
$38.9 $38.9
2017 2017
266 266
244 244
$287.4 $287.4
$262.3 $262.3
2018 2018
181 181
166 166
$154.1 $154.1
$142.7 $142.7
2019 2019
166 166
161 161
$154.8 $154.8
$149.7 $149.7
Congressional Research Service 20 link to page 24 Small Business Administration 504/CDC Loan Guaranty Program Amount of the Debentures Amount of the (after Number Number (after Debentures modifications and Fiscal Year Approved full cancellations) Approved cancellations) 2020 2020
386 386
NA NA
$370.2 $370.2
NA NA
2021 2021
693 693
NA NA
$709.0 $709.0
NA NA
Source: U.S. Smal Business Administration, Office of Congressional and Legislative Affairs, “WDS Report U.S. Smal Business Administration, Office of Congressional and Legislative Affairs, “WDS Report
Amount and Count Summary, September 30, 2019: DRAFT Table 2.7. Approvals by Program and Cohort,” Amount and Count Summary, September 30, 2019: DRAFT Table 2.7. Approvals by Program and Cohort,”
October 18, 2018; and U.S. Smal Business Administration, “SBA Lending Statistics for Major Programs (as of October 18, 2018; and U.S. Smal Business Administration, “SBA Lending Statistics for Major Programs (as of
September 30, 2021),” at https://www.sba.gov/document/report-2021-weekly-lending-reports. September 30, 2021),” at https://www.sba.gov/document/report-2021-weekly-lending-reports.
~~Congressional Research Service~~

23

~~link to page 28~~ ~~Small Business Administration 504/CDC Loan Guaranty Program~~

Appropriations for Subsidy Costs
The SBA’s goal is to achieve a zero subsidy rate for its loan guaranty programs. A zero subsidy The SBA’s goal is to achieve a zero subsidy rate for its loan guaranty programs. A zero subsidy
rate occurs when the SBA’s loan guaranty programs generate sufficient revenue through fees and rate occurs when the SBA’s loan guaranty programs generate sufficient revenue through fees and
recoveries of collateral on purchased (defaulted) loans to not require appropriations to issue new recoveries of collateral on purchased (defaulted) loans to not require appropriations to issue new
loan guarantees. loan guarantees.
As indicated i As indicated in Table 4, fees and recoveries did not generate enough revenue to cover 7(a) loan fees and recoveries did not generate enough revenue to cover 7(a) loan
losses from FY2010 through FY2013, and in FY2020 and FY2021. Appropriations were provided losses from FY2010 through FY2013, and in FY2020 and FY2021. Appropriations were provided
to address the shortfal s. to address the shortfal s.
The 504/CDC loan guaranty program experienced loan losses from FY2012 through FY2015. The 504/CDC loan guaranty program experienced loan losses from FY2012 through FY2015.
Appropriations were provided to address the shortfal s. Appropriations were provided to address the shortfal s.
Table 4. Business Loan Credit Subsidies, 7(a) and 504/CDC Loan Guaranty
Programs, FY2005-FY2022
($ amounts in mil ions) ($ amounts in mil ions)
FY
7(a)
504/CDC
Total Subsidy
2005 2005
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
2006 2006
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
2007 2007
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
2008 2008
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
2009 2009
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
2010 2010
$80.0 $80.0
$0.0 $0.0
$80.0 $80.0
2011 2011
$80.0 $80.0
$0.0 $0.0
$80.0 $80.0
2012 2012
$139.4 $139.4
$67.7 $67.7
$207.1 $207.1
2013 2013
$213.8 $213.8
$102.5 $102.5
$316.3 $316.3
2014 2014
$0.0 $0.0
$107.0 $107.0
$107.0 $107.0
2015 2015
$0.0 $0.0
$45.0 $45.0
$45.0 $45.0
2016 2016
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
2017 2017
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
2018 2018
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
2019 2019
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
Congressional Research Service 21 Small Business Administration 504/CDC Loan Guaranty Program FY 7(a) 504/CDC Total Subsidy 2020 2020
$99.0 $99.0
$0.0 $0.0
$99.0 $99.0
2021 2021
$15.0 $15.0
$0.0 $0.0
$15.0 $15.0
2022 request 2022 request
$0.0 $0.0
$0.0 $0.0
$0.0 $0.0
Source: P.L. 108-447, Consolidated Appropriations Act, 2005; P.L. 109-108, the Science, State, Justice, P.L. 108-447, Consolidated Appropriations Act, 2005; P.L. 109-108, the Science, State, Justice,
Commerce and Related Agencies Appropriations Act, 2006; U.S. Smal Business Administration (SBA), Commerce and Related Agencies Appropriations Act, 2006; U.S. Smal Business Administration (SBA),
Congressional Budget Justification: FY2008 Annual Performance Report, p. 17; SBA, , p. 17; SBA, FY2010 Congressional Budget
Justification and FY2008 Annual Performance Report, p. 11; SBA, , p. 11; SBA, FY2011 Congressional Budget Justification and FY2009
Annual Performance Report, p. 19; SBA, , p. 19; SBA, FY2012 Congressional Budget Justification and FY2010 Annual Performance
Report, p. 22; SBA, , p. 22; SBA, FY2013 Congressional Budget Justification and FY2011 Annual Performance Report, p. 19; SBA, , p. 19; SBA,
FY2014 Congressional Budget Justification and FY2012 Annual Performance Report, p. 25; SBA, , p. 25; SBA, FY2015 Congressional
Budget Justification and FY2013 Annual Performance Report, p. 24; P.L. 113-235, the Consolidation and Further , p. 24; P.L. 113-235, the Consolidation and Further
Continuing Appropriations Act, 2015; P.L. 114-113, the Consolidated Appropriations Act, 2016, P.L. 115-31, the Continuing Appropriations Act, 2015; P.L. 114-113, the Consolidated Appropriations Act, 2016, P.L. 115-31, the
Consolidated Appropriations Act, 2017; P.L. 115-141, the Consolidated Appropriations Act, 2018; P.L. 116-6, Consolidated Appropriations Act, 2017; P.L. 115-141, the Consolidated Appropriations Act, 2018; P.L. 116-6,
~~Congressional Research Service~~

24

~~Small Business Administration 504/CDC Loan Guaranty Program~~

the Consolidated Appropriations Act, 2019; P.L. 116-93, the Consolidated Appropriations Act, 2020; P.L. 116-the Consolidated Appropriations Act, 2019; P.L. 116-93, the Consolidated Appropriations Act, 2020; P.L. 116-
260, the Consolidated Appropriations Act, 2021; and U.S. Smal Business Administration, 260, the Consolidated Appropriations Act, 2021; and U.S. Smal Business Administration, FY2022 Congressional
Justification and FY2020 Annual Performance Report, p. 8. , p. 8.
Notes: The Microloan program also receives a credit subsidy, primarily for providing below market interest The Microloan program also receives a credit subsidy, primarily for providing below market interest
rates to Microloan intermediaries. The subsidies were $1.45 mil ion in FY2005, $1.3 mil ion in FY2006 and rates to Microloan intermediaries. The subsidies were $1.45 mil ion in FY2005, $1.3 mil ion in FY2006 and
FY2007, $2.0 mil ion in FY2008, $8.5 mil ion in FY2009 ($6 mil ion added by P.L. 111-5, the American Recovery FY2007, $2.0 mil ion in FY2008, $8.5 mil ion in FY2009 ($6 mil ion added by P.L. 111-5, the American Recovery
and Reinvestment Act of 2009), $3.0 mil ion in FY2010 and FY2011, $3.678 mil ion in FY2012, $3.498 mil ion and Reinvestment Act of 2009), $3.0 mil ion in FY2010 and FY2011, $3.678 mil ion in FY2012, $3.498 mil ion
(after sequestration) in FY2013, $4.6 mil ion in FY2014, $2.5 mil ion in FY2015, $3.3 mil ion in FY2016, $4.3 (after sequestration) in FY2013, $4.6 mil ion in FY2014, $2.5 mil ion in FY2015, $3.3 mil ion in FY2016, $4.3
mil ion in FY2017, $3.44 mil ion in FY2018; $4 mil ion in FY2019; $5 mil ion in FY2020, and $12 mil ion in mil ion in FY2017, $3.44 mil ion in FY2018; $4 mil ion in FY2019; $5 mil ion in FY2020, and $12 mil ion in
FY2021. The Biden Administration has requested $6 mil ion for Microloan credit subsidies in FY2022. FY2021. The Biden Administration has requested $6 mil ion for Microloan credit subsidies in FY2022.
In addition, P.L. 116-136, the CARES Act, appropriated $17 bil ion and P.L. 116-260, the Economic Aid to Hard-In addition, P.L. 116-136, the CARES Act, appropriated $17 bil ion and P.L. 116-260, the Economic Aid to Hard-
Hit Smal Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Appropriations Act, Hit Smal Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Appropriations Act,
2021) appropriated $3.5 bil ion for loan credit subsidies related to the provision of monthly debt relief payments 2021) appropriated $3.5 bil ion for loan credit subsidies related to the provision of monthly debt relief payments
to 7(a), 504/CDC, and Microloan borrowers. P.L. 116-260 also appropriated $1.918 bil ion for 7(a) and to 7(a), 504/CDC, and Microloan borrowers. P.L. 116-260 also appropriated $1.918 bil ion for 7(a) and
504/CDC loan credit subsidies related to temporarily increasing the 7(a) loan guarantee to 90%, temporarily 504/CDC loan credit subsidies related to temporarily increasing the 7(a) loan guarantee to 90%, temporarily
increasing the SBAExpress program’s maximum loan amount to $1 mil ion, temporarily increasing the increasing the SBAExpress program’s maximum loan amount to $1 mil ion, temporarily increasing the
SBAExpress program’s loan guarantee from 50% to 75% for loans of $350,000 and less, and waiving specified 7(a) SBAExpress program’s loan guarantee from 50% to 75% for loans of $350,000 and less, and waiving specified 7(a)
and 504/CDC fees. and 504/CDC fees.
Use of Proceeds and Borrower Satisfaction
In FY2016 (the latest available data), borrowers used 504/CDC loan proceeds to In FY2016 (the latest available data), borrowers used 504/CDC loan proceeds to
 purchase land and existing building (51.56%),  purchase land and existing building (51.56%),
 building (construction, remodeling, improvements, etc.) (21.10%),  building (construction, remodeling, improvements, etc.) (21.10%),
 machinery and equipment (purchase, instal ation, etc.) (7.09%),  machinery and equipment (purchase, instal ation, etc.) (7.09%),
 make renovations to a building (4.90%),  make renovations to a building (4.90%),
 purchase land (5.18%),  purchase land (5.18%),
 other expenses (eligible contingency expenses, interim interest, etc.) (2.84%),  other expenses (eligible contingency expenses, interim interest, etc.) (2.84%),
 purchase improvements (2.30%),  purchase improvements (2.30%),
 debt to be refinanced (1.51%),  debt to be refinanced (1.51%),
 professional fees (appraiser, architect, legal, etc.) (1.41%),  professional fees (appraiser, architect, legal, etc.) (1.41%),
 add an addition to a building (1.04%),  add an addition to a building (1.04%),
 purchase or instal fixtures (0.55%), or  purchase or instal fixtures (0.55%), or
Congressional Research Service 22 Small Business Administration 504/CDC Loan Guaranty Program  make leasehold improvements to a building (0.52%). make leasehold improvements to a building (0.52%).9890
In 2008, the Urban Institute surveyed 504/CDC borrowers and found that two-thirds of the In 2008, the Urban Institute surveyed 504/CDC borrowers and found that two-thirds of the
respondents rated their overal satisfaction with their 504/CDC loan and loan terms as either respondents rated their overal satisfaction with their 504/CDC loan and loan terms as either
excel ent (21%) or good (45%). About one out of every four borrowers (23%) rated their overal excel ent (21%) or good (45%). About one out of every four borrowers (23%) rated their overal
satisfaction with their loan and loan terms as fair, 8% rated their overal satisfaction as poor, and satisfaction with their loan and loan terms as fair, 8% rated their overal satisfaction as poor, and
4% reported that they did not know or did not respond.4% reported that they did not know or did not respond.9991 In addition, 87% of the survey’s In addition, 87% of the survey’s
respondents reported that the 504/CDC loan was either very important (53%) or somewhat respondents reported that the 504/CDC loan was either very important (53%) or somewhat

~~98 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, August 24, 2017.~~
~~99 Christopher Hayes,~~ ~~An Assessment of Small Business Administration Loan and Investment Performance: Survey of~~
~~Assisted Businesses~~ ~~(Washington, DC: T he Urban Institute, 2008), p. 5, at http://www.urban.org/UploadedPDF/~~
~~411599_assisted_business_survey.pdf (hereinafter Christopher Hayes,~~ ~~An Assessm ent of Sm all Business Adm inistration~~
~~Loan and Investm ent Perform ance: Survey of Assisted Businesses). T he percentage total exceeds 100 because~~
~~recipients were allowed to name more than one use for the loan proceeds.~~
~~Congressional Research Service~~

25

~~Small Business Administration 504/CDC Loan Guaranty Program~~

important (34%) to their business success (4% reported that it was somewhat unimportant, 4% important (34%) to their business success (4% reported that it was somewhat unimportant, 4%
reported very unimportant, and 6% reported that they did not know or did not respond). reported very unimportant, and 6% reported that they did not know or did not respond).~~100~~92
A March 2014 Government Accountability Office (GAO) report examining the 504/CDC A March 2014 Government Accountability Office (GAO) report examining the 504/CDC
program found that, from FY2003 through March 31, 2013, the top four types of smal businesses program found that, from FY2003 through March 31, 2013, the top four types of smal businesses
funded by 504/CDC loans were hotels (12%), restaurants (5%), doctor’s offices (4%), and funded by 504/CDC loans were hotels (12%), restaurants (5%), doctor’s offices (4%), and
dentist’s offices (3%). GAO also reported that 85% of approved 504/CDC loans and dollars went dentist’s offices (3%). GAO also reported that 85% of approved 504/CDC loans and dollars went
to existing smal businesses and 15% went to new smal businesses. to existing smal businesses and 15% went to new smal businesses.~~101~~93
Borrower Demographics
In 2008, the Urban Institute found that about 9.9% of private-sector smal business loans were In 2008, the Urban Institute found that about 9.9% of private-sector smal business loans were
issued to minority-owned smal businesses and about 16% of those loans were issued to women-issued to minority-owned smal businesses and about 16% of those loans were issued to women-
owned businesses. owned businesses.~~102~~94
In FY2021, 22.9% of the total amount of 504/CDC approved loans went to minority-owned In FY2021, 22.9% of the total amount of 504/CDC approved loans went to minority-owned
businesses (13.5% Asian, 7.7% Hispanic, 1.3% African American, and 0.3% Native American) businesses (13.5% Asian, 7.7% Hispanic, 1.3% African American, and 0.3% Native American)
and 8.7% went to women-owned businesses.and 8.7% went to women-owned businesses.~~103~~95 Based on its comparative analysis of private- Based on its comparative analysis of private-
sector sector smal business loans and the SBA’s loan guaranty programs, the Urban Institute concluded smal business loans and the SBA’s loan guaranty programs, the Urban Institute concluded
that that
Overall, loans under the 7(a) and 504 programs were more likely to be made to minority - Overall, loans under the 7(a) and 504 programs were more likely to be made to minority -
owned, women-owned, and start-up businesses (firms that have historically faced capital owned, women-owned, and start-up businesses (firms that have historically faced capital
gaps) as compared to conventional small business loans. Moreover, the average amounts gaps) as compared to conventional small business loans. Moreover, the average amounts
for loans made under the 7(a) and 504 programs to these types of firms were substantialy for loans made under the 7(a) and 504 programs to these types of firms were substantialy
greater than conventional small business loans to such firms. These findings suggest that greater than conventional small business loans to such firms. These findings suggest that
the 7(a) and 504 programs are being used by lenders in a manner that is consistent with the 7(a) and 504 programs are being used by lenders in a manner that is consistent with
SBA’s objective of making credit available to firms that face a capital opportunity gap.SBA’s objective of making credit available to firms that face a capital opportunity gap.~~104~~
~~Congressional Issues~~
~~Fee Subsidies and the 7(a) Program’s 90% Maximum Loan~~
~~Guaranty Percentage~~
~~As mentioned, the SBA was provided more than $1.1 bil ion in funding in 2009 and 2010 to~~
~~subsidize the 504/CDC program’s third-party participation fee and CDC processing fee, subsidize~~
~~the SBA’s 7(a) program’s guaranty fee, and increase the 7(a) program’s maximum loan guaranty~~
~~percentage from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding~~

~~100~~96 90 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, August 24, 2017. 91 Christopher Hayes, An Assessment of Small Business Administration Loan and Investment Performance: Survey of Assisted Businesses (Washington, DC: T he Urban Institute, 2008), p. 5, at http://www.urban.org/UploadedPDF/411599_assisted_business_survey.pdf (hereinafter Christopher Hayes, An Assessm ent of Sm all Business Adm inistration Loan and Investm ent Perform ance: Survey of Assisted Businesses). T he percentage total exceeds 100 because recipients were allowed to name more than one use for the loan proceeds. 92 Christopher Hayes, Christopher Hayes, An Assessment of Small Business Administration Loan and Investment Performance: Survey of
Assisted Businesses, p. 5. , p. 5.
~~101~~93 GAO, GAO, Small Business Administration: Actions Needed to Ensure Planned Improvements Address Key Requirements
of the Developm ent Com pany (504) Loan Program, GAO-14-233, March 6, 2014, p. 8, at http://www.gao.gov/assets/, GAO-14-233, March 6, 2014, p. 8, at http://www.gao.gov/assets/
670/661428.pdf. 670/661428.pdf.
~~102~~94 Kenneth T emkin, Brett T heodos, with Kerstin Gentsch, Kenneth T emkin, Brett T heodos, with Kerstin Gentsch, Competitive and Special Competitive Opportunity Gap
Analysis of the 7(A) and 504 Program s (Washington, DC: T he Urban Institute, 2008), p. 13, at http://www.urban.org/(Washington, DC: T he Urban Institute, 2008), p. 13, at http://www.urban.org/
UploadedPDF/411596_504_gap_analysis.pdf. UploadedPDF/411596_504_gap_analysis.pdf.
~~103~~95 SBA, “SBA Lending Statistics for Major Programs (as of September 30, 2021) SBA, “SBA Lending Statistics for Major Programs (as of September 30, 2021) .” .”
~~104~~96 Kenneth T emkin, Brett T heodos, with Kerstin Gentsch, Kenneth T emkin, Brett T heodos, with Kerstin Gentsch, Competitive and Special Competitive Opportunity Gap
Analysis of the 7(A) and 504 Program s (Washington, DC: T he Urban Institute, 2008), p. 21, at http://www.urban.org/(Washington, DC: T he Urban Institute, 2008), p. 21, at http://www.urban.org/
~~UploadedPDF/411596_504_gap_analysis.pdf.~~
Congressional Research Service Congressional Research Service

2623

Small Business Administration 504/CDC Loan Guaranty Program

Congressional Issues Fee Subsidies and the 7(a) Program’s 90% Maximum Loan Guaranty Percentage As mentioned, the SBA was provided more than $1.1 bil ion in funding in 2009 and 2010 to subsidize the 504/CDC program’s third-party participation fee and CDC processing fee, subsidize the SBA’s 7(a) program’s guaranty fee, and increase the 7(a) program’s maximum loan guaranty percentage from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000 to 90% for al standard 7(a) loans.97~~$150,000 to 90% for al standard 7(a) loans.105~~ The Obama Administration argued that this The Obama Administration argued that this
additional funding improved the smal business lending environment, increased both the number additional funding improved the smal business lending environment, increased both the number
and amount of SBA guaranteed loans, and supported hundreds of thousands of jobs.and amount of SBA guaranteed loans, and supported hundreds of thousands of jobs.~~106~~98 Critics Critics
argued that smal business tax reduction, reform of financial credit market regulation, and federal argued that smal business tax reduction, reform of financial credit market regulation, and federal
fiscal restraint are a better means to assist smal business economic growth and job creation. fiscal restraint are a better means to assist smal business economic growth and job creation.~~107~~99
As mentioned, P.L. 116-136, the CARES Act, and P.L. 116-260, the Economic Aid to Hard-Hit As mentioned, P.L. 116-136, the CARES Act, and P.L. 116-260, the Economic Aid to Hard-Hit
Smal Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Smal Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated
Appropriations Act, 2021) appropriated $17 bil ion and $3.5 bil ion, respectively, to provide Appropriations Act, 2021) appropriated $17 bil ion and $3.5 bil ion, respectively, to provide
monthly debt relief payments for 7(a), 504/CDC, and Microloan borrowers. P.L. 116-260 also monthly debt relief payments for 7(a), 504/CDC, and Microloan borrowers. P.L. 116-260 also
appropriated $1.918 bil ion for SBA loan enhancements, including the waiver of the 504/CDC appropriated $1.918 bil ion for SBA loan enhancements, including the waiver of the 504/CDC
loan guaranty and processing fees from the date of enactment (December 27, 2020) through loan guaranty and processing fees from the date of enactment (December 27, 2020) through
September 30, 2021. September 30, 2021.
~~Program Administration~~
~~The SBA’s Office of Inspector General (OIG) and the GAO have independently reviewed the~~
~~administration of SBA’s loan guaranty programs. Both agencies have reported deficiencies that~~
~~they argued needed to be addressed, including issues involving the oversight of 504/CDC lenders.~~
~~On March 23, 2010, the SBA’s OIG released the results of an audit of “25 of 100 statistical y~~
~~selected CDC/504 loans approved under Premier Certified Lender (PCL) authority that were~~
~~disbursed during fiscal year (FY) 2008.”108 The loans “had been approved by 3 of the most active~~
~~of the 24 PCLs” operating in 2008.109~~

~~105~~ UploadedPDF/411596_504_gap_analysis.pdf. 97 P.L. 111-5, the ARRA, provided $375 million for fee subsidies and the 7(a) program’s 90% guaranty for all P.L. 111-5, the ARRA, provided $375 million for fee subsidies and the 7(a) program’s 90% guaranty for all
standard 7(a) loans. ARRA’s funding for these purposes was exhausted on November 23, 2009. P.L. 111-118, the standard 7(a) loans. ARRA’s funding for these purposes was exhausted on November 23, 2009. P.L. 111-118, the
Department of Defense Appropriations Act, 2010, enacted on December 19, 2009, provided $125 million to extend the Department of Defense Appropriations Act, 2010, enacted on December 19, 2009, provided $125 million to extend the
fee subsidiesfee subsidies and 90% guarant y through Februaryand 90% guarant y through February 28, 2010. P.L. 111-144, the T emporary Extension Act of 2010, 28, 2010. P.L. 111-144, the T emporary Extension Act of 2010,
enacted on March 2, 2010, provided $60 million to extend th e fee subsidies and 90% guaranty through March 28, 2010. enacted on March 2, 2010, provided $60 million to extend th e fee subsidies and 90% guaranty through March 28, 2010.
P.L. 111-150, an act to extend the Small Business Loan Guarantee Program, enacted on March 26, 2010, authorized the P.L. 111-150, an act to extend the Small Business Loan Guarantee Program, enacted on March 26, 2010, authorized the
~~use~~ use of $40 million in SBA-appropriated funds to extend the fee subsidies and 90% guaranty through April 30, 2010. of $40 million in SBA-appropriated funds to extend the fee subsidies and 90% guaranty through April 30, 2010.
P.L. 111-157, the Continuing Extension Act of 2010, enacted on April 15, 2010, provided $80 million to extend the fee P.L. 111-157, the Continuing Extension Act of 2010, enacted on April 15, 2010, provided $80 million to extend the fee
subsides and 90% guaranty through May 31, 2010. P.L. 111-240, the Small Business Jobs Act of 2010, enacted on subsides and 90% guaranty through May 31, 2010. P.L. 111-240, the Small Business Jobs Act of 2010, enacted on
September 27, 2010, provided $505 million (plus $5 million for related administrative expenses) to extend the fee September 27, 2010, provided $505 million (plus $5 million for related administrative expenses) to extend the fee
subsidies andsubsidies and 90% guaranty through December 31, 2010. P.L. 111-322, the Continuing Appropriations and Surface90% guaranty through December 31, 2010. P.L. 111-322, the Continuing Appropriations and Surface
T ransportation Extensions Act, 2011, authorized the SBA to continue the fee subsidies andT ransportation Extensions Act, 2011, authorized the SBA to continue the fee subsidies and 90% guaranty through 90% guaranty through
March 4, 2011, or until the funding provided by the SmallMarch 4, 2011, or until the funding provided by the Small Business Jobs Act of 2010 for these purposes was exhausted Business Jobs Act of 2010 for these purposes was exhausted
(which occurred on January 3, 2011). (which occurred on January 3, 2011).
~~106~~98 SBA, “Statement from Administrator Mills on Continuing Support for Small Businesses through SBA Recovery SBA, “Statement from Administrator Mills on Continuing Support for Small Businesses through SBA Recovery
Programs,” February 19, 2010, at https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/Programs,” February 19, 2010, at https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/
statement -administrator-mills-continuing-support-small-businesses-through-sba-recovery-programs; and SBA, “ SBA statement -administrator-mills-continuing-support-small-businesses-through-sba-recovery-programs; and SBA, “ SBA
Recovery Lending Extended T hrough April 30,” March 29, 2010, at https://www.sba.gov/content/sba-recovery-Recovery Lending Extended T hrough April 30,” March 29, 2010, at https://www.sba.gov/content/sba-recovery-
lending-extended-through-april-30. lending-extended-through-april-30.
~~107~~99 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21, Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009; and NFIB, “ Government Spending,” Washington, DC. Also, see NFIB, “ Government Spending: Small 2009; and NFIB, “ Government Spending,” Washington, DC. Also, see NFIB, “ Government Spending: Small
Businesses Have a Bottom Line – Government Should, T oo,” at https://www.nfib.com/content/issues/economy/Businesses Have a Bottom Line – Government Should, T oo,” at https://www.nfib.com/content/issues/economy/
government -spending-small-businesses-have-a-bottom-line-government-should-too-49051/. government -spending-small-businesses-have-a-bottom-line-government-should-too-49051/.
~~108 SBA, Office of the Inspector General, “Report on Audit of Premier Certified Lenders in the Section 504 Loan~~
~~Program,” March 23, 2010, p. 20, at https://www.sba.gov/content/10-10-audit-premier-certified-lenders-section-504-~~
~~loan-program (hereinafter SBA, OIG, “ Report on Audit of Premier Certified Lenders”).~~
~~109 SBA, OIG, “Report on Audit of Premier Certified Lenders.”~~
~~Congressional Research Service~~

27Congressional Research Service 24

Small Business Administration 504/CDC Loan Guaranty Program

~~The audit was initiated “based on concerns that PCLs were engaging in risky underwriting~~
~~practices and that five PCLs were paying their executives excessive compensation.”110 The OIG~~
~~determined that~~
~~PCLs may not have used prudent practices in approving and disbursing 68% of the sampled~~
~~loans, totaling nearly $8.9 million, due to poor loan underwriting, and eligibility or loan~~
~~closing issues. Specifically, 40% of the loans had faulty underwriting repayment analyses,~~
~~and 52% of the loans had eligibility and/or loan closing issues.... Projecting our sample~~
~~results to the universe of CDC/504 loans disbursed in 2008 by these three PCLs, we~~
~~estimate with 90% confidence that at least 572 loans, totaling nearly $254.9 million in~~
~~CDC/504 loan proceeds, had weaknesses in the underwriting process, eligibility~~
~~determinations or loan closing. Of this amount, we estimate that a minimum of 183 loans,~~
~~totaling $56.4 million or more, were made to borrowers based on faulty repayment~~
~~analyses. We also estimate that lenders disbursed $209 million or more to borrowers who~~
~~had eligibility and/or loan closing issues.111~~
~~In terms of dollars paid for CDC executive compensation, the OIG found that~~
~~4 of the 5 CDCs reviewed were among the top 10 highest for executive compensation... In~~
~~terms of percentage of gross receipts spent on executive compensation, 3 of the 5~~
~~questioned CDCs ranked among the top 10 highest of the 56 CDCs that had gross receipts~~
~~over $1 million.112~~
~~The OIG made several recommendations to address these issues, including changing the SBA’s~~
~~Standard Operating Procedures (SOP) to require lenders to use~~
~~(1) the actual cash flow method to determine borrower repayment ability for businesses~~
~~using accrual accounting, (2) historical salary levels to estimate salaries of the borrower’s~~
~~officers, and (3) historical sales data to make sales projections.113~~
~~It also recommended that the SBA develop a process “to ensure that corrective actions are taken~~
~~in response to the Agency’s onsite reviews to ensure these conditions do not continue, and/or~~
~~guidance for these reviews should be modified, as appropriate, to ensure that reviewers properly~~
~~assess lender determination of borrower repayment ability and eligibility.”114~~
~~The OIG reported that the SBA~~
~~disagreed that SOP 50 10 should be revised to strengthen lender repayment analyses by~~
~~requiring the use of the actual cash flow method and historical salary and sales data. The~~
~~Agency also did not believe an additional process was needed to ensure that corrective~~
~~actions are taken to improve lender performance, but acknowledged that better use of onsite~~
~~review results are needed to make more informed lender decisions and programmatic~~
~~determinations.115~~
~~In 2009, GAO released an analysis of the SBA’s oversight of the lending and risk management~~
~~activities of lenders that extend 7(a) and 504/CDC loans to smal businesses. GAO recommended~~
~~that the SBA strengthen its oversight of these lenders and argued that although the SBA’s “lender~~
~~risk rating system has enabled the agency to conduct some off-site monitoring of lenders, the~~

~~110 SBA, OIG, “Report on Audit of Premier Certified Lenders,” p.1.~~
~~111 SBA, OIG, “Report on Audit of Premier Certified Lenders,” pp. 3, 4.~~
~~112 SBA, OIG, “Report on Audit of Premier Certified Lenders,” p. 4.~~
~~113 SBA, OIG, “Report on Audit of Premier Certified Lenders,” pp. 4, 5.~~
~~114 SBA, OIG, “Report on Audit of Premier Certified Lenders,” p. 5.~~
~~115 SBA, OIG, “Report on Audit of Premier Certified Lenders.”~~
~~Congressional Research Service~~

28

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~agency does not use the system to target lenders for on-site reviews or to inform the scope of the~~
~~reviews.”116 GAO also noted that~~
~~the SBA targets for review those lenders with the largest SBA -guaranteed loan portfolios.~~
~~As a result of this approach, 97% of the lenders that SBA’s risk rating system identified as~~
~~high risk in 2008 were not reviewed. Further, GAO found that the scope of the on -site~~
~~reviews that SBA performs is not informed by the lenders’ risk ratings, and the reviews do~~
~~not include an assessment of lenders’ credit decisions.117~~
~~GAO argued that although the SBA “has made improvements to its off-site monitoring of lenders,~~
~~the agency wil not be able to substantial y improve its lender oversight efforts unless it improves~~
~~its on-site review process.”118~~
~~As mentioned, in recent years, both the number and amount of 504/CDC loans made through the~~
~~PCLP has declined. In FY2009, 373 PCLP loans amounting to $185.4 mil ion were disbursed. In~~
~~FY2019, 22 PCLP loans totaling $14 mil ion were disbursed.119~~
~~In addition, the SBA’s Office of Credit Risk Management (OCRM)~~Lender Oversight The SBA’s Office of Inspector General (OIG) has included lender oversight in its list of the most serious management and performance chal enges facing the SBA each year from FY2008 through FY2022.100 In its FY2022 report, the OIG argued that SBA loans are originated by lenders and non-bank lenders that have various degrees of expertise in SBA loan program requirements. Lenders often rely on the services of loan agents and lender service providers to help originate, close, service, and liquidate SBA loans ... [and many] traditional SBA 7(a) and 504 Certified Development Company loans are originated by lenders with delegated approval authority. Our previous audits have found SBA has not adequately recognized or managed significant lender weaknesses.101 The SBA’s Office of Credit Risk Management (OCRM) manages SBA lending program risk, monitors lender performance, and enforces SBA lending program requirements.102 OCRM monitors portfolio risk through the SBA’s Loan and Lender Monitoring System (L/LMS), which tracks monthly lender and loan performance and quarterly credit scores for al 7(a) and 504/CDC loans. The L/LMS system is designed to help OCRM assess risks for 7(a) and CDC lenders, and it identifies lenders “whose portfolio performance or other lender-specific risk-related factors demonstrated the need for additional SBA monitoring.”103 In FY2020, the SBA conducted 622 risk-based reviews of 7(a) and 504/CDC lenders. In an effort to further enhance its ability to detect risks and to determine prospective trends, OCRM created new metrics in 2015 created new metrics in 2015
for monitoring 504/CDC lender loan performance cal ed SMART (measuring the lender’s for monitoring 504/CDC lender loan performance cal ed SMART (measuring the lender’s
solvency and financial condition, management and governance, asset quality and servicing, solvency and financial condition, management and governance, asset quality and servicing,
regulatory compliance, and technical issues and mission) and updated regulatory compliance, and technical issues and mission) and updated those metrics in 2016.those metrics in 2016.~~120~~
104 SMART is designed to “assist OCRM in identifying high risk lenders and ensuring that lender SMART is designed to “assist OCRM in identifying high risk lenders and ensuring that lender
oversight drives meaningful review activities, findings, and corrective actions that reduce risk to oversight drives meaningful review activities, findings, and corrective actions that reduce risk to
the SBA.”the SBA.”~~121~~105 OCRM also created a “detailed bench-marking analysis 100 SBA, Office of Inspector General (OIG), “Report on the Most Serious Management and Performance Challenges By Office of Inspector General,” reports from FY2008-FY2022, at https://www.sba.gov/document/report-report-most-serious-management -performance-challenges-office-inspector-general. 101 SBA, OIG, “T op Management and Performance Challenges Facing the Small Business Administration in Fiscal Year 2022,” Report 22-02, October 15, 2021, p. 14, at https://www.sba.gov/document/report-report-most-serious-management -performance-challenges-office-inspector-general. 102 P.L. 115-189, the Small Business 7(a) Lending Oversight Reform Act of 2018, codified the SBA’s Office of Credit Risk Management (OCRM), required that it be headed by a Director who is a career appointee in the Senior Executive Service, and provided OCRM with a list of duties, including submitting a report to Congress on each December 1 st “containing the results of each portfolio risk analysis conducted ... during the fiscal year preceding the submission of the report.” 103 SBA, FY2022 Congressional Justification and FY2020 Annual Performance Report, p. 44. 104 SBA, OIG, ~~OCRM also created a “detailed bench-marking analysis project that wil serve to~~
~~establish quantitative performance metrics and indicators of quality (Preferred, Acceptable and~~
~~Less than Acceptable) to be incorporated into each area of risk assessment identified in the ...~~
~~SMART protocol measurement attributes.”122~~
~~Legislative Activity During the 111th Congress~~
~~Congress approved legislation in 2009 (ARRA) that provided the SBA an additional $730~~
~~mil ion, including $299 mil ion to temporarily reduce fees in the SBA’s 504/CDC loan guaranty~~

~~116 GAO,~~ ~~Small Business Administration: Actions Needed to Improve the Usefulness of the Agency’s Lender Risk~~
~~Rating System~~ ~~, GAO-1-53, November 6, 2009, p. i, at http://www.gao.gov/new.items/d1053.pdf. (hereinafter GAO,~~
SBA: Actions to Improve Usefulness of Agency’s Lender Risk Rating System .)
~~117 GAO, SBA: Actions to Improve Usefulness of Agency’s Lender Risk Rating System , pp. i, 27-30.~~
~~118 GAO, SBA: Actions to Improve Usefulness of Agency’s Lender Risk Rating System, p. 35.~~
~~119 SBA, Office of Congressional and Legislative Affairs, “WDS Report Amount and Count Summar y, September 30,~~
~~2019: Draft T able 2.8. Delivery Method Approvals by Program and Cohort,” October 18, 2018.~~
~~120 SBA, Office of Inspector General,~~ “T he SBA’s Portfolio Risk Management Program Can be Strengthened,” July 2, “T he SBA’s Portfolio Risk Management Program Can be Strengthened,” July 2,
2013, p. 19, at https://www.sba.gov/sites/default/files/oig/Audit%20Evaluation%20Report%2013-2013, p. 19, at https://www.sba.gov/sites/default/files/oig/Audit%20Evaluation%20Report%2013-
17%20T he%20SBA's%20Portfolio%20Risk%20Management%20Program%20Can%20Be%20Strengthened.pdf , SBA, 17%20T he%20SBA's%20Portfolio%20Risk%20Management%20Program%20Can%20Be%20Strengthened.pdf , SBA,
“SBA Information Notice 5000-1348: Revised Risk-Based Review Protocol for Certified Development Companies,” “SBA Information Notice 5000-1348: Revised Risk-Based Review Protocol for Certified Development Companies,”
October 3, 2017 (effective August 5, 2015), at https://www.sba.gov/sites/default/files/lender_notices/5000-1348.pdf; October 3, 2017 (effective August 5, 2015), at https://www.sba.gov/sites/default/files/lender_notices/5000-1348.pdf;
and SBA, “and SBA, “ SBA Information Notice 5000-1398: Updated SMART Methodology for OversightSBA Information Notice 5000-1398: Updated SMART Methodology for Oversight of CDCs,” October 3, of CDCs,” October 3,
2017 (effective November 9, 2016), at https://www.sba.gov/sites/default/files/lender_notices/SBA_Info_Notice_5000-2017 (effective November 9, 2016), at https://www.sba.gov/sites/default/files/lender_notices/SBA_Info_Notice_5000-
1398_SM.pdf. 1398_SM.pdf.
~~121 SBA, Office of Inspector General,~~ 105 SBA, OIG, “T he SBA’s Portfolio Risk Management Program Can be Strengthened,” July 2, “T he SBA’s Portfolio Risk Management Program Can be Strengthened,” July 2,
2013, p. 19, at https://www.sba.gov/sites/default/files/oig/Audit%20Evaluation%20Report%20132013, p. 19, at https://www.sba.gov/sites/default/files/oig/Audit%20Evaluation%20Report%2013 -
~~17%20T he%20SBA's%20Portfolio%20Risk%20Management%20Program%20Can%20Be%20Strengthened.pdf .~~
~~122 SBA, OIG, “T he SBA’s Portfolio Risk Management Program Can be Strengthened.”~~
- Congressional Research Service Congressional Research Service

2925 Small Business Administration 504/CDC Loan Guaranty Program project that wil serve to establish quantitative performance metrics and indicators of quality (Preferred, Acceptable and Less than Acceptable) to be incorporated into each area of risk assessment identified in the ... SMART protocol measurement attributes.”106 In a 2019 audit, the SBA’s OIG reported that OCRM “did not always conduct planned high-risk lender reviews, recommend adequate and consistent risk mitigation actions, or communicate loan deficiencies they noted during their high-risk lender reviews to SBA approval and purchase loan centers.”107 The OIG made six recommendations to address these and other issues (including the development and implementation of policies and procedures to document OCRM’s justification for not conducting planned reviews and to communicate systemic lender issues and material loan deficiencies to the appropriate SBA loan approval and purchase centers). SBA agreed with the OIG’s findings and recommendations and indicated that it would take actions to resolve al of the recommendations.108 Legislation Congress has always shown a great interest in the SBA’s loan guarantee programs because of concerns that smal businesses might be prevented from accessing sufficient capital to enable them to create and retain jobs. That interest has grown especial y acute in recent years due to the Coronavirus Disease 2019 (COVID-19) pandemic’s adverse economic impact on the national economy. During the 111th Congress, legislation was enacted to assist smal businesses during and immediately following the Great Recession (2007-2009). For example,  P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), provided $375 mil ion to temporarily reduce fees in the SBA’s 7(a) and 504/CDC loan guaranty programs ($299 mil ion) and to temporarily increase the 7(a) program’s maximum loan guaranty percentage to 90% ($76 mil ion).109 Congress subsequently appropriated another $265 mil ion and authorized the SBA to reprogram another $40 mil ion to extend those subsidies and the loan modification through May 31, 2010. ARRA also authorized the SBA to al ow, under specified circumstances, the use of 504/CDC program funds to refinance existing debt for business expansion.110 17%20T he%20SBA's%20Portfolio%20Risk%20Management%20Program%20Can%20Be%20Strengthened.pdf. 106 SBA, OIG, “T he SBA’s Portfolio Risk Management Program Can Be Strengthened.” 107 SBA, Office of Inspector General (OIG), Audit of SBA’s Oversight of High-Risk Lenders, Report Number 20-03, November 12, 2019, p. i, at https://www.sba.gov/document/report -20-03-audit-sbas-oversight -high-risk-lenders (hereinafter SBA, OIG, Audit of SBA’s Oversight of High-Risk Lenders). 108 SBA, OIG, Audit of SBA’s Oversight of High-Risk Lenders, pp. 11-12. 109 SBA, “Recovery Act Agency Plan,” May 15, 2009, at https://www.sba.gov/sites/default/files/sba_recovery_act_plan.pdf. 110 T he specified circumstances include the following: the amount of existing indebtedness does not exceed 50% of the project cost of the expansion; the proceeds of the indebtedness were used to acquire land, including the building situated thereon, to construct a building thereon, or to purchase equipment; the existing indebtedness is collateralized by fixed assets; the existing indebtedness was incurred for the benefit of a small business; the financing is used only for refinancing existing indebtedness or costs related to the project being financed; the refinancing provides a substantial benefit to the borrower; the borrower has been current on all payments due on the existing debt for not less than one year preceding the date of refinancing; and t he financing provided will have better terms or rate of interest than the existing indebtedness. See P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), Section 504. Stimulus for Community Development Lending. Congressional Research Service 26 Small Business Administration 504/CDC Loan Guaranty Program  P.L. 111-240, the Smal Business Jobs Act of 2010, increased the 504/CDC program’s loan guaranty limits from $1.5 million to $5 million for “regular” borrowers, from $2 mil ion to $5 mil ion if the loan proceeds are directed toward one or more specified public policy goals, and from $4 million to $5.5 million for manufacturers. The act also temporarily expanded for two years after the date of enactment (or until September 27, 2012) the types of projects eligible for refinancing of existing debt under the 504/CDC program; provided $505 million (plus an additional $5 million for administrative expenses) to continue fee subsidies for the 7(a) loan guaranty program and the 504/CDC program through December 31, 2010; and established an alternative size standard that al ows more companies to qualify for 504/CDC assistance.  P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorized the SBA to continue the fee subsidies and the 7(a) program’s 90% maximum loan guaranty percentage through March 4, 2011, or until funding provided for these purposes in P.L. 111-240 was exhausted (which occurred on January 3, 2011). During the 114th Congress

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~and 7(a) programs and $76 mil ion to temporarily increase the 7(a) program’s loan guaranty from~~
~~up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000.123~~
~~Congress approved legislation in 2010 (P.L. 111-240, the Smal Business Jobs Act of 2010) that~~
~~was designed to enhance smal business access to capital. Among other provisions, the act~~
~~ provided $510 mil ion to extend the 504/CDC and 7(a) loan guaranty programs’~~
~~fee subsidies and the 7(a) program’s 90% maximum loan guaranty percentage~~
~~through December 31, 2010 (later extended to March 4, 2011) or until available~~
~~funding was exhausted (which occurred on January 3, 2011);~~
~~ increased the 504/CDC program’s loan limits from $1.5 mil ion to $5 mil ion for~~
~~regular 504/CDC loans; from $2 mil ion to $5 mil ion if the loan proceeds are~~
~~directed toward one or more of the program’s specified public policy goals; from~~
~~$4 mil ion to $5.5 mil ion for smal manufacturers; from $4 mil ion to $5.5~~
~~mil ion for projects that reduce the borrower’s energy consumption by at least~~
~~10%; and from $4 mil ion to $5.5 mil ion for projects for plant, equipment, and~~
~~process upgrades of renewable energy sources, such as the smal -scale production~~
~~of energy for individual buildings or communities consumption (commonly~~
~~known as micropower), or renewable fuel producers, including biodiesel and~~
~~ethanol producers;~~
~~ temporarily expanded, for two years after enactment (through September 27,~~
~~2012), the types of projects eligible for 504/CDC program refinancing of existing~~
~~commercial debt;124 and~~
~~ authorized the SBA to establish an alternative size standard for the 7(a) and~~
~~504/CDC programs that uses maximum tangible net worth and average net~~
~~income as an alternative to the use of industry standards and established an~~
~~interim size standard of a maximum tangible net worth of not more than $15~~
~~mil ion and an average net income after federal taxes (excluding any carryover~~
~~losses) for the preceding two fiscal years of not more than $5 mil ion.125~~
~~The Obama Administration argued that increasing maximum loan limit for SBA programs~~
~~(including the 504/CDC program) would al ow the SBA to “support larger projects,” which~~
~~would “al ow the SBA to help America’s smal businesses drive long-term economic growth and~~

~~123 SBA, “Recovery Act Agency Plan,” May 15, 2009, at https://www.sba.gov/sites/default/files/recovery_act_reports/~~
~~sba_recovery_act_plan.pdf.~~
~~124 T he act temporarily allowed 504/CDC loans to be used to refinance projects not involving expansions as long as the~~
~~financing did not exceed 90% of the value of the collateral for the financing, “except that, if the appraised value of the~~
~~eligible fixed assets serving as collateral for the financing is less than the amount equal to 125% of the amount of the~~
~~financing, the borrower may provide additional cash or other collateral to eliminate any deficiency.” T he refinancing~~
~~could be used only for commercial indebtedness incurred not less than two years before the date of the application for~~
~~assistance and only for eligible fixed assets (to acquire land, buildings, or equipment, or to construct a building). T he~~
~~refinancing could not be used for indebtedness subject to a federal guarantee, and it had to be collateralized by eligible~~
~~fixed assets. T he borrower also had to be current on all payments due on the existing debt for not less than one year~~
~~before the date of the application. T he act limited the amount of refinancing to $7.5 billion each fiscal year. T he act~~
~~also included an alternative job retention goal that allowed borrowers that do not meet the 504/CDC program’s job~~
~~creation and retention goals to participate in the expanded refinancing program, but limited that participation to “n ot~~
~~more than the product obtained by multiplying the number of employees of the borrower by $65,000.” See P.L. 111-~~
~~240, §1122. Low-Interest Refinancing Under the Local Development Business Loan Program.~~
~~125 At the time of passage, the 7(a) program used industry-specific size standards and the 504/CDC program used~~
~~maximum net worth of $8.5 million and maximum average net income of $3 million to determine program eligibility.~~
~~Congressional Research Service~~

30

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~the creation of jobs in communities across the country.”126 The Administration also argued that~~
~~increasing the maximum loan limits for these programs wil be “budget neutral” over the long run~~
~~and “help improve the availability of smal er loans.”127~~
~~Critics of increasing the SBA’s maximum loan limits argued that doing so might increase the risk~~
~~of defaults, resulting in higher guaranty fees or the need to provide the SBA additional funding.128~~
~~Others advocated a more modest increase in the maximum loan limits to ensure that the 7(a)~~
~~program “remains focused on startup and early-stage smal firms, businesses that have~~
~~historical y encountered the greatest difficulties in accessing credit” and “avoids making smal~~
~~borrowers carry a disproportionate share of the risk associated with larger loans.”129~~
~~Others contended that creating a smal business direct lending program within the SBA would~~
~~reduce paperwork requirements and be more efficient in providing smal businesses access to~~
~~capital than modifying existing SBA programs that rely on private lenders to determine if they~~
~~wil issue the loans.130 Others argued that providing additional resources to the SBA or modifying~~
~~the SBA’s loan programs as a means to augment smal businesses’ access to capital is il -advised.~~
~~In their view, the SBA has limited impact on smal businesses’ access to capital. They argued that~~
~~the best means to assist smal business economic growth and job creation is to focus on smal~~
~~business tax reduction, reform of financial credit market regulation, and federal fiscal restraint. 131~~
~~Legislative Activity During the 112th Congress~~
~~Congress did not approve any changes to the 504/CDC program during the 112th Congress.~~
~~However, legislation was introduced during the 112th Congress to change the program, including~~
~~several proposals to extend the now-expired two-year temporary expansion of the eligibility of~~
~~504/CDC refinancing projects not involving expansions.~~
~~Proponents of extending the 504/CDC refinancing expansion provision, initial y enacted as part~~
~~of P.L. 111-240, the Smal Business Jobs Act of 2010, argued that it would create jobs by enabling~~
~~smal business owners to lower their monthly payments “at no cost to taxpayers” and “is one of~~
~~many things that we should be doing to put more capital in the hands of America’s job~~
~~creators.”132~~

~~126 SBA, “Administration Announces New Small Business Commercial Real Estate and Working Capital Programs,”~~
~~February 5, 2010, at https://www2.illinois.gov/dceo/SmallBizAssistance/CenterConnect/WeeklyConnect/~~
~~SBA%20Fact%20Sheet%20CRE%20REFI%20and%20WORKING%20CAPIT AL.docx (hereinafter SBA,~~
~~“Administration Announces New Small Business Commercial Real Estate and Working Capital Programs”).~~
~~127 SBA, “Administration Announces New Small Business Commercial Real Estate and Working Capital Programs.”~~
~~128 Robb Mandelbaum, “ Small Business Incentives Face a Hard Road in Congress,” New York Times, February 12,~~
~~2010, at http://boss.blogs.nytimes.com/2010/02/12/small-business-incentives-face-a-hard-road-in-congress/.~~
~~129 U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act Of 2009 , report~~
~~to accompany H.R. 3854, 111th Cong., 2nd sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), p. 1.~~
~~130 Robb Mandelbaum, “Why Won’t the S.B.A. Lend Directly to Small Businesses?” New York Times, March 10, 2010,~~
~~at http://boss.blogs.nytimes.com/2010/03/10/why-wont -the-s-b-a-loan-directly-to-small-businesses/.~~
~~131 Susan Eckerly, “NFIB Responds to President ’s Small Business Lending Initiatives,” Washington, DC, October 21,~~
~~2009; and NFIB, “ Government Spending,” Washington, DC. Also, see NFIB, “ Government Spending: Small~~
~~Businesses Have a Bottom Line – Government Should, T oo,” at https://www.nfib.com/content/issues/economy/~~
~~government -spending-small-businesses-have-a-bottom-line-government-should-too-49051/.~~
~~132 Sen. Mary Landrieu, “Statements on Introduced Bills and Joint Resolutions: S. 289, Commercial Real Estate and~~
~~Economic Development Act of 2013 ,” remarks in the Senate, Congressional Record, vol. 159, part 22 (February 12,~~
~~2013), p. S661. Note: the SBA approved 307 loans amounting to $257.7 million in 504/CDC refinancing under the~~
~~temporary expansion in FY2011, and 2,424 loans amounting to $2.28 billion in 504/CDC refinancing under the~~
~~Congressional Research Service~~

31

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~Opponents worried that the provision may require funding to cover loan losses in the future,~~
~~arguing that “commercial refinancing may pose an undue risk … at a time of significant~~
~~budgetary constraints.”133 Others opposed the expansion of 504/CDC refinancing on economic or~~
~~ideological grounds, arguing that federal fiscal restraint, business tax reduction, and business~~
~~regulatory relief would provide greater assistance to smal businesses than expanding an existing~~
~~SBA spending program.~~
~~H.R. 2950, the Smal Business Administration 504 Loan Refinancing Extension Act of 2011, was~~
~~introduced on September 15, 2011, and referred to the House Committee on Smal Business. The~~
~~bil would have al owed 504/CDC loans to be used to refinance projects not involving expansions~~
~~as long as the financing did not exceed 90% of the value of the collateral for the financing for an~~
~~additional year beyond the two years from the date of enactment that was authorized by the Small~~
~~Business Jobs Act of 2010.~~
~~S.Amdt. 1833, the INVEST in America Act of 2012—an amendment in the nature of a substitute~~
~~for H.R. 3606, the Jumpstart Our Business Startups Act—was introduced on March 15, 2012. It~~
~~would have al owed 504/CDC loans to be used to refinance projects not involving expansions for~~
~~an additional year beyond the two years from the date of enactment authorized by the Smal~~
~~Business Jobs Act of 2010.134 The amendment was ruled nongermane by the chair on March 21,~~
~~2012, and was not included in the final version of the bil that was approved by the Senate the~~
~~following day.135~~
~~S. 3572, the Restoring Tax and Regulatory Certainty to Smal Businesses Act of 2012, was~~
~~introduced on September 19, 2012, and referred to the Senate Committee on Smal Business and~~
~~Entrepreneurship and the Senate Committee on Finance. It would have al owed 504/CDC loans to~~
~~be used to refinance projects not involving expansions for an additional year and a half beyond~~
~~the two years from the date of enactment authorized by the Smal Business Jobs Act of 2010.~~
~~S. 1828, a bil to increase smal business lending, and for other purposes, was introduced on~~
~~November 8, 2011, and referred to the Senate Committee on Smal Business and~~
~~Entrepreneurship. The bil would have reinstated for a year following the date of its enactment the~~
~~fee subsidies for the 504/CDC and 7(a) loan guaranty programs and the 90% loan guaranty~~
~~percentage for the 7(a) program that were original y funded by ARRA.~~
~~Legislative Activity During the 113th Congress~~
~~Two bil s were introduced during the 113th Congress to reinstate the temporary two-year~~
~~expansion of projects eligible for 504/CDC program refinancing of existing debt, which expired~~
~~on September 27, 2012. H.R. 1240, the Commercial Real Estate and Economic Development~~
~~(CREED) Act of 2013, would have reinstated the temporary expansion of the projects eligible for~~

~~temporary expansion in FY2012. As of March 14, 2013, one loan issued under this provision, in the amount of~~
~~$869,000, had been purchased (was in default) and, as of that date, was in liquidation.~~
~~133 Barry Pineless, Chief Counsel, House Committee on Small Business, “Letter to Members, House Committee on~~
~~Small Business, Full Committee Hearing on T he Budget Outlook for the Small Business Administration,” April 18,~~
~~2013, pp. 12, 13.~~
~~134 Sen. Harry Reid, “Consideration of H.R. 3606, the Jumpstart our Business Startups Act,” T ext of Amendments,~~
Congressional Record, vol. 158, part 43 (March 15, 2012), p. S1754.
~~135 H.R. 3606, the Jumpstart Our Business Startups Act , was passed by the House on March 8, 2012. T he bill did not~~
~~contain a provision concerning 504/CDC refinancing. President Obama signed the bill, as amended, into law on April~~
~~5, 2012 (P.L. 112-106, the Jumpstart Our Business Startups).~~
~~Congressional Research Service~~

32

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~504/CDC program refinancing of existing debt for five years following the bil ’s enactment. It~~
~~was referred to the House Committee on Smal Business on March 18, 2013. Its companion bil in~~
~~the Senate (S. 289) was referred to the Senate Committee on Smal Business and~~
~~Entrepreneurship on February 12, 2013, and was ordered to be reported favorably, with an~~
~~amendment, on June 17, 2013. As amended, S. 289 would have reinstated the temporary~~
~~expansion of the projects eligible for 504/CDC program refinancing of existing debt during any~~
~~fiscal year in which the 504/CDC program is operating at zero subsidy.136~~
~~In addition, H.R. 4652, the Increasing Smal Business Lending Act, would have authorized fee~~
~~waivers for the 7(a) and 504/CDC programs.~~
~~Legislative Activity During the 114th Congress~~
~~As mentioned~~, P.L. 114-113, the Consolidated Appropriations Act, 2016, reinstated the expansion , P.L. 114-113, the Consolidated Appropriations Act, 2016, reinstated the expansion
of the types of projects eligible for refinancing under the 504/CDC loan guaranty of the types of projects eligible for refinancing under the 504/CDC loan guaranty ~~program~~ program, but only in any in any
fiscal year in which the refinancing program and the 504/CDC program as a whole do not have fiscal year in which the refinancing program and the 504/CDC program as a whole do not have
credit subsidy costs. credit subsidy costs. (P.L. 116-260 repealed this limitation.) The act required~~The act requires~~ each CDC to limit its refinancing so that, during any fiscal each CDC to limit its refinancing so that, during any fiscal
year, the new refinancings do not exceed 50% year, the new refinancings do not exceed 50% (now 100%) of the dollars it loaned under the 504/CDC of the dollars it loaned under the 504/CDC
program during the previous fiscal year.program during the previous fiscal year. ~~This limitation may be waived if the SBA determines~~
~~that the refinance loan is needed~~111 The SBA was authorized to waive the 50% limit for good cause. An for good cause. An interim final rule implementing the new interim final rule implementing the new
refinancing program was issued by the SBA on May 25, refinancing program was issued by the SBA on May 25, 2016, effective June 24, 2016.112 During the 115th Congress~~2016, effective June 24, 2016.137~~
~~The act also eliminated an alternative job retention goal provision that al owed borrowers that do~~
~~not meet the 504/CDC program’s job creation and retention goals to participate in the expanded~~
~~refinancing program, but limited that participation to “not more than the product obtained by~~
~~multiplying the number of employees of the borrower by $65,000.”138~~
~~As mentioned, P.L. 116-260, modified 504/CDC refinancing regulations to expand borrower~~
~~access to the refinancing program and create reciprocity for refinancing under the 7(a) and~~
~~504/CDC programs. For example, the act repealed the requirement that the expansion of the types~~
~~of projects eligible for refinancing could take place only during a fiscal year in which the~~
~~refinancing program and the 504/CDC program as a whole do not have credit subsidy costs.~~
~~Among other changes, the act also increased the CDC refinancing limit from 50% of the dollars it~~
~~loaned under the 504/CDC program during the previous fiscal year to 100%, and al ows~~
~~borrowers to use refinancing solely for the payment of businesses expenses.~~
~~Legislative Activity During the 115th Congress~~
~~As mentioned, P.L. 115-371, the Smal Business Access to Capital and Efficiency~~ , P.L. 115-371, the Smal Business Access to Capital and Efficiency (ACE) Act, amended the Smal Business Investment Act of 1958 to increase~~(ACE) Act,~~
~~increased~~ the threshold amount for determining when a CDC is required to secure an independent the threshold amount for determining when a CDC is required to secure an independent
real estate appraisal for a 504/CDC loan (from if the estimated value of the project property is real estate appraisal for a 504/CDC loan (from if the estimated value of the project property is
greater than $250,000 to if the estimated value of the project property is greater than the federal greater than $250,000 to if the estimated value of the project property is greater than the federal
banking regulator appraisal banking regulator appraisal threshold, which was threshold, which was ~~recently~~ increased from $250,000 to $500,000increased from $250,000 to $500,000 in 2018).113 In addition, the Trump Administration proposed in its FY2020 and FY2021 budget requests that the maximum dollar amount for a 504 loan to a smal manufacturer be increased to $6.5 mil ion from $5.5 mil ion.114 111 T he act also eliminated an alternative job retention goal for the expanded refinancing program authorized by P.L. 111-240, the Small Business Jobs Act of 2010. It also increased the SBA’s Small Business Investment Company program’s family of funds limit (the amount of outstanding leverage allowed for two or more SBIC licenses under common control) to $350 million from $225 million and increased the 7(a) loan program’s authorization limit to $26.5 billion for FY2016 from $23.5 billion for FY2015. 112 SBA, “Debt Refinancing in 504 Loan Program,” 81 Federal Register 33123-33126, May 25, 2016. 113 Department of the Treasury, Office of the Comptroller of the Currency, Federal Reserve System, and Federal Deposit Insurance Corporation, “Real Estate Appraisals,” 83 Federal Register 15,019, April 9, 2018. 114 SBA, FY2020 Congressional Budget Justification and FY2018 Annual Performance Report, p. 35, at https://www.sba.gov/sites/default/files/2019-04/SBA%20FY%202020%20Congressional%20Justification_final%20508%20%204%2023%202019.pdf ; and SBA, FY2021 Congressional Budget Justification and FY2019 Annual Perform ance Report , p. 32. Congressional Research Service 27 Small Business Administration 504/CDC Loan Guaranty Program During the 116th Congress, legislation was enacted to assist smal businesses adversely affected by the COVID-19 pandemic. For example,  P.L. 116-136, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), among other provisions, created the Paycheck Protection Program (PPP), which provides low-interest, forgivable loans to smal businesses adversely affected by the COVID-19 pandemic, and).

~~136 T he Obama Administration recommended in its FY2014 and FY2015 congressional budget justification documents~~
~~that the 504/CDC expansion of refinancing provision be extended for a year. See SBA ,~~ ~~FY2014 Congressional Budget~~
~~Justification and FY2012 Annual Perform ance Report, p. 37; and SBA,~~ ~~FY2015 Congressional Budget Justification~~
~~and FY2013 Annual Perform ance Report, pp. 5, 37.~~
~~137 SBA, “Debt Refinancing in 504 Loan Program,” 81 Federal Register 33123-33126, May 25, 2016.~~
~~138 P.L. 111-240, §1122. Low-Interest Refinancing Under the Local Development Business Loan Program.~~
~~Congressional Research Service~~

33

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~The act also increased the threshold amount for determining when a CDC may be required to~~
~~secure an independent real estate appraisal for a 504/CDC loan (from if the estimated value of the~~
~~project property is equal to or less than $250,000 and such appraisal is necessary for appropriate~~
~~evaluation of creditworthiness to if the estimated value of the project property is equal to or less~~
~~than the federal banking regulator appraisal threshold and such appraisal is necessary for~~
~~appropriate evaluation of creditworthiness). The change was designed to “remove the uncertainty~~
~~lenders now have juggling two different real estate appraisal thresholds.”139~~
~~In addition, S. 347, the Investing in America’s Smal Manufacturers Act, among other provisions,~~
~~would have al owed CDCs to provide up to 50% of project costs instead of up to 40% if the~~
~~borrower is a smal manufacturer and the 504/CDC loan guarantee program’s subsidy cost for~~
~~that current fiscal year is not above zero.~~
~~Legislative Activity During the 116th Congress~~
~~P.L. 116-6, the Consolidated Appropriations Act, 2019, authorized the SBA to issue up to $7.5~~
~~bil ion in 504/CDC debentures and $7.5 bil ion in 504/CDC refinancing in FY2019.~~
~~Following the enactment of two continuing appropriations acts, P.L. 116-93, the Consolidated~~
~~Appropriations Act, 2020, provided the SBA $988.463 mil ion in appropriations for FY2020.140~~
~~The act also authorized the SBA to issue up to $7.5 bil ion in 504/CDC debentures and $7.5~~
~~bil ion in 504/CDC refinancing in FY2020.141~~
~~Following the enactment of five continuing appropriations acts, P.L. 116-260, the Consolidated~~
~~Appropriations Act, 2021, provided the SBA $921.733 mil ion.142 The act also authorized the~~
~~SBA to issue up to $7.5 bil ion in 504/CDC debentures and $7.5 bil ion in 504/CDC refinancing~~
~~in FY2021.~~
~~In addition, after considering several bil s and proposals to assist smal businesses adversely~~
~~affected by the COVID-19 pandemic, Congress appropriated an additional $1.086 tril ion to the~~
~~SBA ($20 mil ion in P.L. 116-123, the Coronavirus Preparedness and Response Supplemental~~
~~Appropriations Act, 2020; $377.527 bil ion in P.L. 116-136, the Coronavirus Aid, Relief, and~~
~~Economic Security Act [CARES Act]; $383.435 bil ion in P.L. 116-139, the Paycheck Protection~~
~~Program and Health Care Enhancement Act; and $324.975 bil ion in P.L. 116-260, the Economic~~

~~139 U.S. Congress, House Committee on Small Business, Small Business Access to Capital and Efficiency Act, report to~~
~~accompany H.R. 6348, 115th Cong., 2nd sess., September 12, 2018, H.Rept. 115-941 (Washington: GPO, 2018), p. 6~~
~~(hereinafter U.S. Congress, House Committee on Small Business, Sm all Business Access to Capital and Efficiency Act).~~
~~“In 1994, federal banking regulators, including the Federal Reserve, the Office of the Comptroller of the Currency, and~~
~~the Federal Deposit Insurance Corporation, set the appraisal threshold at $250,000… After more than two decades,~~
~~federal banking regulators decided to update and modernize the real estate appraisal threshold from $250,000 to~~
~~$500,000. Due to the 504/CDC Loan Program threshold value being codified in statute, H.R. 6348 was introduced to~~
~~modernize SBA’s real estate appraisal threshold.” See U.S. Congress, House Committee on Small Business,~~ ~~Small~~
~~Business Access to Capital and Efficiency Act, p. 3.~~
~~140 See P.L. 116-59, the Continuing Appropriations Act, 2020, and P.L. 116-69, the Further Continuing Appropriations~~
~~Act, 2020.~~
~~141 P.L. 116-123, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020, provided the~~
~~SBA an additional $20 million for disaster loan administrative expenses related to the coronavirus impact on small~~
~~businesses.~~
~~142 See P.L. 116-159, the Continuing Appropriations Act, 2021 and Other Extensions Act ; P.L. 116-215, the Further~~
~~Continuing Appropriations Act, 2021, and Other Extensions Act ; P.L. 116-225, the Further Additional Continuing~~
~~Appropriations Act, 2021; P.L. 116-226, the Extension of Continuing Appropriations Act, 2021; and P.L. 116-246, the~~
~~Further Extension of Continuing Appropriations Act, 2021 .~~
~~Congressional Research Service~~

34

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~Aid to Hard-Hit Smal Businesses, Nonprofits, and Venues Act (Division N, Title III of the~~
~~Consolidated Appropriations Act, 2021).~~
~~As mentioned~~
~~ P.L. 116-136, the CARES Act, among other provisions, appropriated $17 bil ion~~
appropriated $17 bil ion for six-month payment relief for existing 7(a), 504/CDC, and Microloan for six-month payment relief for existing 7(a), 504/CDC, and Microloan
borrowers in a regular servicing status (i.e., fully disbursed) beginning with the borrowers in a regular servicing status (i.e., fully disbursed) beginning with the
next payment due date. next payment due date. Loans already on deferment received six months of SBA Loans already on deferment received six months of SBA
payments beginning with the first payment after the deferral period. Loans in a payments beginning with the first payment after the deferral period. Loans in a
regular servicing status up to six months after enactment (until September 27, regular servicing status up to six months after enactment (until September 27,
2020) were also eligible2020) were also eligible for six monthly payments of debt relief.for six monthly payments of debt relief.115
 P.L. 116-260,  P.L. 116-260, the Economic Aid to Hard-Hit Smal Businesses, Nonprofits, and Venues Act (Division N, Title III of the Consolidated Appropriations Act, 2021Division N, Title III of the Consolidated Appropriations Act, 2021), ,
among other provisions, appropriated $3.5 bil ion to resume monthly payment among other provisions, appropriated $3.5 bil ion to resume monthly payment
relief for 7(a), 504/CDC, and Microloan borrowers, capped at $9,000 per month relief for 7(a), 504/CDC, and Microloan borrowers, capped at $9,000 per month
per borrower. Payments are dependent on the availability of funds, when the loan per borrower. Payments are dependent on the availability of funds, when the loan
was disbursed, the type of loan received, and the business’s industry.was disbursed, the type of loan received, and the business’s industry.116 The act The act ~~also~~
also waived specified 7(a) and 504/CDC loan guarantee program fees in FY2021, waived specified 7(a) and 504/CDC loan guarantee program fees in FY2021,
modified 504/CDC refinancing regulations to expand borrower access to the modified 504/CDC refinancing regulations to expand borrower access to the
refinancing program and create reciprocity for refinancing under the 7(a) and refinancing program and create reciprocity for refinancing under the 7(a) and
504/CDC programs, and temporarily authorized the SBA, through September 30, 504/CDC programs, and temporarily authorized the SBA, through September 30,
2023, to establish a 504/CDC Express Loan program to expedite the approval of 2023, to establish a 504/CDC Express Loan program to expedite the approval of
504/CDC loans that do not exceed $500,000. 504/CDC loans that do not exceed $500,000.
~~Legislative Activity~~ During the 117th Congress,
P.L. 117-43, the Extending Government Funding and Delivering Emergency Assistance Act, P.L. 117-43, the Extending Government Funding and Delivering Emergency Assistance Act,
provides continuing FY2022 appropriations for federal agencies, provides continuing FY2022 appropriations for federal agencies, including the SBA, through including the SBA, through
December 3, 2021. The SBA is authorized to appropriate availableDecember 3, 2021. The SBA is authorized to appropriate available funds up to the rate necessary funds up to the rate necessary
to accommodate increased demand for commitments for several to accommodate increased demand for commitments for several SBA programs, including SBA programs, including
504/CDC business loans.504/CDC business loans.~~143~~
~~Concluding Observations~~
~~The smal business relief legislation enacted during the 116th Congress included several~~
~~provisions that were enacted during the 111th Congress to address the Great Recession, such as~~
~~fee waivers, increased loan limits, and increased loan guarantee percentages. However, the~~
~~legislation enacted during the 116th Congress is fundamental y different from that enacted during~~
~~the 111th Congress. First, it is much larger in scale ($1.086 tril ion in supplemental appropriations)~~
~~than the legislation enacted during the 111th Congress ($1.693 bil ion in supplemental~~
~~appropriations). Second, expectations about repayment are much different, as the smal business~~

~~143 P.L. 117-43 §128 provides that amounts made available by section 101 for “Small Business Administration~~ 117 115 Community Advantage Recovery Loans in a regular servicing status (i.e., fully disbursed) up until October 1, 2020, were eligible for six months of loan payments. See SBA, “Guidance on the Implementation of the Extension of the Section 1112 Debt Relief Program for the 7(a) and 504 Loan Programs, as Authorized by Section 325 of the Econo mic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act,” Procedural Notice 5000 -20079, January 19, 2021, at https://www.sba.gov/document/procedural-notice-5000-20079-guidance-implementation-extension-section-1112-debt-relief-program-7a-504-loan-programs-authorized. 116 T he SBA announced that the $3.5 billion appropriation would enable the agency to provide two additional monthly payments on 7(a) and 504/CDC loans that were in repayment before March 27, 2020, starting with the next payment due on or after February 1, 2021. After the first two monthly payments are provided, busine sses with an SBA Community Advantage loan, Microloan, or operating in specified economically hard-hit industries would receive an additional three monthly payments. Loans approved from February 1, 2021, through September 30, 2021, would receive three monthly payments beginning with the first payment due. See SBA, “ Adjustment to Number of Months of Section 1112 Payments in the 7(a), 504 and Microloan Programs Due to Insufficiency of Funds,” SBA Procedural Notice, 5000-20095, February 16, 2021, at https://www.sba.gov/document/procedural-notice-5000-20095-adjustment-number-months-section-1112-payments-7a-504-microloan-programs-due-insufficiency-funds. 117 P.L. 117-43 §128 provides that amounts made available by Section 101 for “Small Business Administration——
Business Loans Program Account” may be apportioned up to the rate for operations necessary to accommodate Business Loans Program Account” may be apportioned up to the rate for operations necessary to accommodate
increased demand for commitments for general business loans authorized under paragraphs (1) through (35) of increased demand for commitments for general business loans authorized under paragraphs (1) through (35) of ~~section~~Section
7(a) of the Small Business Act (15 U.S.C. §636(a)), for guarantees of trust certificates authorized by 7(a) of the Small Business Act (15 U.S.C. §636(a)), for guarantees of trust certificates authorized by ~~section~~Section 5(g) of the 5(g) of the
Small Business Act (15 U.S.C. §634(g)), for Small Business Act (15 U.S.C. §634(g)), for ~~commitments~~commit ments to guarantee loans under to guarantee loans under ~~section~~Section 503 of the Small Business Congressional Research Service 28 Small Business Administration 504/CDC Loan Guaranty Program Concluding Observations The smal business relief legislation enacted during the 116th Congress included several provisions enacted during the 111th Congress to address the Great Recession, such as fee waivers, increased loan limits, and increased loan guarantee percentages. However, the legislation enacted during the 116th Congress is fundamental y different from that enacted during the 111th Congress. First, it is much larger in scale ($1.086 tril ion in supplemental appropriations) than the legislation enacted during the 111th Congress ($1.693 bil ion in supplemental appropriations). Second, expectations about repayment are much different, as the smal business relief legislation enacted ~~503 of the Small Business~~
~~Investment Act of 1958 (15 U.S.C. §697), and for commitments to guarantee loans for debentures under section 303(b)~~
~~of the Small Business Investment Act of 195 8 (15 U.S.C. §683(b)).~~
~~Congressional Research Service~~

35

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~relief legislation enacted~~ during the 116th Congress includes PPP loan forgiveness and monthly during the 116th Congress includes PPP loan forgiveness and monthly
debt relief payments for 7(a), 504/CDC, and Microloan borrowers. Third, the legislation enacted debt relief payments for 7(a), 504/CDC, and Microloan borrowers. Third, the legislation enacted
~~Congressional Research Service~~

36

~~Small Business Administration 504/CDC Loan Guaranty Program~~

~~during the 116th~~ during the 116th Congress greatly expanded program eligibility, including, for the first time, eligibility for greatly expanded program eligibility, including, for the first time, eligibility for
specific types of specific types of nonprofit organizations. nonprofit organizations.
In terms of recent program changes, providing 504/CDC fee waivers, expanding 504/CDC In terms of recent program changes, providing 504/CDC fee waivers, expanding 504/CDC
refinancing, and creating a 504/CDC Express Loan program were (and are) designed to create refinancing, and creating a 504/CDC Express Loan program were (and are) designed to create
and retain jobs by increasing the ability of 504/CDC borrowers to access credit at affordable and retain jobs by increasing the ability of 504/CDC borrowers to access credit at affordable
rates. rates.
Initial y, Congress focused on providing relief as quickly as possible to prevent smal business Initial y, Congress focused on providing relief as quickly as possible to prevent smal business
failures and job loss. In the coming months, congressional oversight is likely to focus increased failures and job loss. In the coming months, congressional oversight is likely to focus increased
attention on the SBA’s administration of these programs, especial y the SBA’s efforts to deter attention on the SBA’s administration of these programs, especial y the SBA’s efforts to deter
fraud, and the impact these programs have on smal business survival and job creation and fraud, and the impact these programs have on smal business survival and job creation and
retention. retention.
Among the lessons learned from the 111th Congress are the potential benefits that Among the lessons learned from the 111th Congress are the potential benefits that ~~can be derived~~could derive
from providing additional funding for the SBA’s from providing additional funding for the SBA’s ~~Office of Inspector General (OIG) and the~~
~~Government Accountability Office (GAO)~~OIG and for GAO. GAO and the SBA’s OIG can provide Congress . GAO and the SBA’s OIG can provide Congress
information that could prove useful as Congress engages in congressional oversight of the SBA’s information that could prove useful as Congress engages in congressional oversight of the SBA’s
administration of these programs, provide an early warning if unforeseen administration of these programs, provide an early warning if unforeseen administrative problems administrative problems
should arise, and, through investigations and audits, serve as a deterrent should arise, and, through investigations and audits, serve as a deterrent to fraud. to fraud.
Requiring the SBA to report regularly on its implementation of these programs could also Requiring the SBA to report regularly on its implementation of these programs could also
promote transparency and assist Congress in performing its oversight responsibilities. In addition, promote transparency and assist Congress in performing its oversight responsibilities. In addition,
requiring output and outcome performance measures and requiring the SBA to report this requiring output and outcome performance measures and requiring the SBA to report this
information directly to both Congress and the public by posting that information on the SBA’s information directly to both Congress and the public by posting that information on the SBA’s
website could enhance both congressional oversight and public confidence in the SBA’s efforts to website could enhance both congressional oversight and public confidence in the SBA’s efforts to
assist assist ~~smal~~ small businesses. businesses.

Author Information

Robert Jay Dilger Robert Jay Dilger

Senior Specialist in American National Government Senior Specialist in American National Government

Investment Act of 1958 (15 U.S.C. §697), and for commitments to guarantee loans for debentures under Section 303(b) of the Small Business Investment Act of 1958 (15 U.S.C. §683(b)). Congressional Research Service 29 Small Business Administration 504/CDC Loan Guaranty Program

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material. copy or otherwise use copyrighted material.

Congressional Research Service Congressional Research Service
R41184 R41184 · VERSION 9598 · UPDATED
3730