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Small Business Administration 504/CDC Loan
Guaranty Program
Robert Jay Dilger
Senior Specialist in American National Government
October 4, 2010
Congressional Research Service
7-5700
www.crs.gov
R41184
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008
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Small Business Administration 504/CDC Loan Guaranty Program
Summary
The Small Business Administration (SBA) administers programs to support small businesses,
including several loan guaranty programs designed to encourage lenders to provide loans to small
businesses “that might not otherwise obtain financing on reasonable terms and conditions.” The
SBA’s 504 Certified Development Company (504/CDC) loan guaranty program is administered
through non-profit Certified Development Companies (CDC). It provides long-term 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 provides
up to 40% of the financing through a 100% SBA-guaranteed debenture, and the applicant
provides at least 10% of the financing. It is named from Section 504 of the Small Business
Investment Act of 1958 (P.L. 85-699, as amended), which authorized the program. In FY2009, the
SBA funded 6,293 504/CDC loans amounting to about $3.8 billion.
Congressional interest in the 504/CDC program has increased in recent years because of
increased concern that small businesses might be prevented from accessing sufficient capital to
assist in the economic recovery. Congress considered several Obama Administration proposals
and bills during the 111th Congress that would have amended the 504/CDC program in an effort
to increase the number, and amount, of 504/CDC loans before adopting the Small Business Jobs
Act of 2010. President Obama signed the bill into law (P.L. 111-240) on September 27, 2010. It
increased the 504/CDC program’s loan guaranty limits from $1.5 million to $5 million for
“regular” borrowers, from $2 million to $5 million if the loan proceeds are directed toward one or
more specified public policy goals, and from $4 million to $5.5 million for manufacturers. It also
temporarily expands the ability of 504/CDC borrowers to use the program for the refinancing of
existing debt, and provides $505 million to extend through December 31, 2010, the temporary
subsidization of 504/CDC and 7(a) loan guaranty program fees and the temporary increase in 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 all standard 7(a) loans. The fee subsidies
and 90% loan guaranty percentage were initially funded under P.L. 111-5, the American Recovery
and Reinvestment Act of 2009 (ARRA), and had expired on May 31, 2010.
This report opens with a discussion of the rationale provided for the 504/CDC program, the
program’s borrower and lender eligibility standards, program requirements, and program
statistics, including loan volume, loss rates, use of the proceeds, borrower satisfaction, and
borrower demographics.
It then examines congressional action taken during the 111th Congress to assist small businesses
gain greater access to capital, including the enactment of P.L. 111-5, the American Recovery and
Reinvestment Act of 2009 (ARRA) and P.L. 111-240, the Small Business Jobs Act of 2010. It also
examines issues raised concerning the SBA’s administration of the program, including the
oversight of 504/CDC lenders.
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Small Business Administration 504/CDC Loan Guaranty Program
Contents
Small Business Administration Loan Guaranty Programs ............................................................ 1
Program Participants and Financing Contribution........................................................................ 3
Borrower Eligibility Standards and Program Requirements ......................................................... 4
Borrower Eligibility Standards .............................................................................................. 4
Borrower Program Requirements .......................................................................................... 5
Use of Proceeds .............................................................................................................. 5
Job Creation and Retention Requirement ......................................................................... 6
Loan Amounts................................................................................................................. 7
Loan Terms, Interest Rate, and Collateral ........................................................................ 7
Lender Eligibility Standards, Operating Requirements and Program Requirements ...................... 9
Lender Eligibility Standards .................................................................................................. 9
Lender Operating Requirements .......................................................................................... 10
Lender Program Requirements ............................................................................................ 10
The Application Process................................................................................................ 10
Loan Guaranty and Servicing Fees ...................................................................................... 13
SBA Fees ...................................................................................................................... 13
CDC Fees ..................................................................................................................... 14
Program Statistics ..................................................................................................................... 15
Loan Volume....................................................................................................................... 15
Loss Rate............................................................................................................................ 16
Use of Proceeds and Borrower Satisfaction ......................................................................... 16
Borrower Demographics ..................................................................................................... 17
Congressional Issues ................................................................................................................. 17
Fee Subsidies and the 7(a) Program’s 90% Loan Guaranty .................................................. 17
Program Administration ...................................................................................................... 18
Presidential Proposals and Legislation....................................................................................... 20
The Obama Administration’s Proposals ............................................................................... 20
H.R. 3854, the Small Business Financing and Investment Act of 2009................................. 21
S. 2869, the Small Business Job Creation and Access to Capital Act of 2009 ....................... 22
P.L. 111-240, the Small Business Jobs Act of 2010 .............................................................. 23
Concluding Observations .......................................................................................................... 24
Tables
Table 1. 504/CDC Loan Structures and Contribution Requirements ............................................. 3
Table 2. 504/CDC Loans and Amounts, FY2007 - FY2009........................................................ 16
Contacts
Author Contact Information ...................................................................................................... 25
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Small Business Administration 504/CDC Loan Guaranty Program
Small Business Administration Loan
Guaranty Programs
The Small Business Administration (SBA) administers programs to support small businesses,
including several loan guaranty programs designed to encourage lenders to provide loans to small
businesses “that might not otherwise obtain financing on reasonable terms and conditions.”1 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
machinery. It is named from Section 504 of the Small Business Investment Act of 1958 (P.L. 85-
699, as amended), which authorized the program.2 It is administered through non-profit Certified
Development Companies (CDCs). 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 debenture, and the applicant provides at least 10% of the financing.
The SBA’s debenture is backed with the full faith and credit of the United States and is sold to
underwriters who form debenture pools. Investors purchase interests in the debenture pools and
receive certificates representing ownership of all or part of the pool. 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.3 After a 504/CDC loan is approved and disbursed, accounting for the loan is
set up at the Central Servicing Agent (CSA, currently Colson Services Corporation), not the SBA.
The SBA guarantees the timely payment of the debenture. If the small business is behind in its
loan payments, the SBA pays the difference to the investor on every semi-annual due date.4 In
FY2009, the SBA guaranteed 6,293 504/CDC loans amounting to about $3.8 billion.5
Historically, one of the justifications presented for funding the SBA’s loan guaranty programs has
been that small businesses can be at a disadvantage, compared with other businesses, when trying
to obtain access to sufficient capital and credit.6 Congressional interest in small business access to
1 U.S. Small Business Administration, Fiscal Year 2010 Congressional Budget Justification (Washington, DC: GPO,
2009), p. 30.
2 The 504/CDC program was preceded by a 501 state development company program (1958-1982), a 502 local
development company program (1958-1995), and a 503/CDC program (1980-1986). The 504/CDC program started in
1986. There are a small number of for-profit CDCs that participated in these predecessor programs that have been
grandfathered into the current 504/CDC program. See U.S. Small Business Administration, “SOP 50 10 5(B): Lender
and Development Company Loan Programs,” Washington, DC (effective October 1, 2009), p. 51, http://www.sba.gov/
idc/groups/public/documents/sba_homepage/serv_sops_50105b.pdf; and U.S. Small Business Administration, “2008
Loss Report,” Washington, DC, p. 3, http://www.sba.gov/idc/groups/public/documents/sba_program_office/
cfo_2008_loss_report.pdf.
3 13 C.F.R. § 120.801. 504/CDC debentures are normally sold and proceeds disbursed on the Wednesday after the
second Sunday of each month. See U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development
Company Loan Programs,” Washington, DC (effective October 1, 2009), p. 315, http://www.sba.gov/idc/groups/
public/documents/sba_homepage/serv_sops_50105b.pdf.
4 U.S. Small Business Administration, “Monthly Purchase of 504 Debentures for Accelerated Loans,” Washington, DC,
http://www.sba.gov/aboutsba/sbaprograms/elending/notices/BANK_5000_602_MONTHLY_PURC_504.html.
5 U.S. Small Business Administration, Fiscal Year 2011 Congressional Budget Justification and FY 2009 Annual
Performance Report (Washington, DC: GPO, 2010), pp. 39, 125.
6 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, pp. 3, 9-11, http://www.gao.gov/new.items/d08226t.pdf;
and Veronique de Rugy, Why the Small Business Administration’s Loan Programs Should Be Abolished, American
Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006, http://www.aei.org/docLib/
(continued...)
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Small Business Administration 504/CDC Loan Guaranty Program
capital, in general, and the 504/CDC program, in particular, has increased in recent years for three
reasons.
First, private lenders have tightened small business lending standards, making it more difficult
than in the past for small businesses to access capital.7 Second, some research suggests that small
business has led job formation during previous economic recoveries.8 Third, the number of
504/CDC loans funded declined 27.1% from FY2008 to FY2009 (8,630 to 6,293), and the total
amount of 504/CDC loans declined 27.5% from FY2008 to FY2009 ($5,289,790 to $3,834,263).9
The decline in 504/CDC lending, coupled with the tightening of private lending standards, has led
to increased concern in Congress that small businesses might be prevented from accessing
sufficient capital to enable small businesses to assist in the economic recovery.
Congress considered several Obama Administration proposals and bills during the 111th Congress
that would have amended the 504/CDC program in an effort to increase the number, and amount,
of 504/CDC loans before adopting the Small Business Jobs Act of 2010. President Obama signed
bill into law (P.L. 111-240) on September 27, 2010. It increases the 504/CDC program’s loan
guaranty limits from $1.5 million to $5 million for “regular” borrowers, from $2 million to $5
million if the loan proceeds are directed toward one or more specified public policy goals, and
from $4 million to $5.5 million for manufacturers. It also expands the ability of 504/CDC
borrowers to use the program for refinancing existing debt, and provides $505 million to continue
through December 31, 2010, the temporary subsidization of fees in the 504/CDC program and the
7(a) loan guaranty program and a temporary increase in 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 all standard 7(a) loans. The fee subsidies and 90% loan guaranty
percentage were initially funded under P.L. 111-5, the American Recovery and Reinvestment Act
of 2009 (ARRA), and had expired on May 31, 2010.
This report examines the program’s borrower and lender eligibility standards, program
requirements, and program statistics, including loan volume, loss rates, use of the proceeds,
borrower satisfaction, and borrower demographics.
It then examines congressional action taken during the 111th Congress to assist small businesses
gain greater access to capital, including the enactment of P.L. 111-5, the American Recovery and
Reinvestment Act of 2009 (ARRA) and P.L. 111-240, the Small Business Jobs Act of 2010. It also
examines issues raised concerning the SBA’s administration of the program, including the
oversight of 504/CDC lenders.
(...continued)
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 U.S.C. § 631a.
7 Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington, DC,
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/, cited in Brian Headd, “Forum Seeks Solutions To Thaw
Frozen Small Business Credit,” The Small Business Advocate, vol. 28, no. 10 (December 2009), p. 3,
http://www.sba.gov/advo/dec09.pdf.
8 U.S. Small Business Administration, Office of Advocacy, Small Business Economic Indicators for 2003, August
2004, p. 3, http://www.sba.gov/advo/stats/sbei03.pdf; and Brian Headd, “Small Businesses Most Likely to Lead
Economic Recovery,” The Small Business Advocate, vol. 28, no. 6 (July 2009), pp. 1, 2, http://www.sba.gov/advo/
july_09.pdf.
9 U.S. Small Business Administration, Fiscal Year 2011 Congressional Budget Justification and FY 2009 Annual
Performance Report (Washington, DC: GPO, 2010), pp. 39, 125.
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Small Business Administration 504/CDC Loan Guaranty Program
Program Participants and Financing Contribution
As shown in Table 1, 504/CDC projects generally 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 guaranteed 100% by the SBA; and the borrower
contributes at least 10% of the financing. No more than 50% of eligible costs can be from federal
sources.
The CDC’s contribution, and the amount of the SBA’s 100% guaranteed debenture, cannot exceed
40% of the financing for standard 504/CDC loans and 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 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 for a special purpose property. The SBA lists 27 limited or special purpose
properties (e.g., dormitories, golf courses, hospitals, and bowling alleys).10 The CDC’s
contribution cannot exceed 30% of the financing when the borrower is both a new businesses and
the loan is for either a limited-market property or a special purpose property.
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. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan
Programs,” Washington, DC (effective October 1, 2009), p. 242, http://www.sba.gov/idc/groups/public/
documents/sba_homepage/serv_sops_50105b.pdf.
Borrowers must contribute at least 10% of the financing for standard 504/CDC loans and at least
15% of the financing if they are a new business or if the loan is for a limited-market property or
for a special purpose property. They must contribute at least 20% of the financing if they are both
a new businesses and the loan is for either a limited-market property or a special purpose
property.
10 The SBA considers the following as a limited or special purpose property: dormitories; cold storage facilities where
more than 50% of total square footage is equipped for refrigeration; tennis clubs; golf courses; swimming pools;
amusement parks; sports arenas; bowling alleys; theaters; marinas; gas stations; service centers (e.g., oil and lube, brake
or transmission centers) with pits and in ground lifts; car wash properties; hospitals, surgery centers, urgent care centers
and other health or medical facilities; nursing homes, including assisted living facilities; funeral homes with
crematoriums; cemeteries; sanitary landfills; museums; clubhouses; hotels and motels; wineries; railroads; farms,
including dairy facilities; oil wells; mines; and quarries, including gravel pits. See U.S. Small Business Administration,
“SOP 50 10 5(B): Lender and Development Company Loan Programs,” Washington, DC (effective October 1, 2009),
pp. 244, 245, http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sops_50105b.pdf.
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Small Business Administration 504/CDC Loan Guaranty Program
Borrower Eligibility Standards and Program
Requirements
Borrower Eligibility Standards
To be eligible for an SBA business loan, a small business applicant must
• be located in the United States,
• be a for-profit operating business (except for loans to eligible passive
companies),
• qualify as small,11
• demonstrate a need for the desired credit and that the funds are not available from
alternative sources, including personal resources of the principals, and
• be certified by a lender that the desired credit is unavailable to the applicant on
reasonable terms and conditions from non-federal sources without SBA
assistance.12
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
companies; life insurance companies; businesses located in a foreign country; businesses deriving
more than one-third of gross annual revenue from legal gambling activities; businesses that
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
turpitude are ineligible.13
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
• character, reputation, and credit history;
• experience and depth of management;
• strength of the business;
• past earnings, projected cash flow, and future prospects;
• ability to repay the loan with earnings from the business;
11 Under the 504/CDC program, the business qualifies as small if it does not have a tangible net worth in excess of $8.5
million and does not have an average net income in excess of $3 million after taxes for the preceding two years. For
further analysis concerning SBA size standards see CRS Report R40860, Defining Small Business: An Historical
Analysis of Contemporary Issues, by Robert Jay Dilger.
12 13 C.F.R. § 120.100; and 13 C.F.R. § 120.101.
13 13 C.F.R. § 120.110. Nineteen types of businesses are ineligible for 504/CDC loans. Also, 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 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 C.F.R. §
120.10.
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Small Business Administration 504/CDC Loan Guaranty Program
• sufficient invested equity to operate on a sound financial basis;
• potential for long-term success;
• nature and value of collateral (although inadequate collateral will not be the sole
reason for denial of a loan request); and
• affiliates’ effect on the applicant’s repayment ability.14
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;
• finance short-term debt (“bridge financing”) on the land as long as there is no
building currently on the land and the financing term is three years or less;
• 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;
• purchase, transport, dismantle, or install machinery and equipment, provided the
machinery and equipment have a useful life of at least 10 years;
• purchase essential furniture and fixtures;
• pay professional fees that are directly attributable and essential to the project,
such as title insurance, title searches and abstract costs, surveys and zoning
matters;
• pay interim financing costs, including points, fees, and interest;
• create a contingency fund, provided that the fund does not exceed 10% of the
project’s construction costs; and
• finance permissible debt refinancing related to business expansion.15
It cannot be used for working capital or inventory. In addition, as will be discussed later, P.L. 111-
240, the Small Business Jobs Act of 2010, temporarily expands the ability of 504/CDC borrowers
to use the program for the refinancing of existing debt.
14 13 C.F.R. § 120.150.
15 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), pp. 279, 280, http://www.sba.gov/idc/groups/public/documents/
sba_homepage/serv_sops_50105b.pdf. If the project “involves expansion of a small business applicant” 504/CDC loans
can be used to refinance “any amount of existing indebtedness that does not exceed 50 percent of the cost of the
expansion.... that involves the acquisition, construction or improvement of land, building or equipment for use by the
small business applicant.” See Ibid., p. 280.
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Small Business Administration 504/CDC Loan Guaranty Program
Job Creation and Retention Requirement
All 504/CDC borrowers must meet one of two specified economic development objectives. First,
except small manufacturers, they must create or retain at least one job for every $65,000 of
project debenture. Borrowers who are small manufacturers (defined as a small business with its
primary North American Industry Classification System Code in Sectors 31, 32, and 33, and all of
its production facilities are located in the United States) must create or retain one job per
$100,000 of project debenture. The jobs created do not have to be at the project facility, but 75%
of the jobs must be created in the community where the project is located. Using job retention to
satisfy this requirement is allowed only if the CDC “can reasonably show that jobs would be lost
to the community if the project was not done.”16
Second, if the borrower does not meet the job creation or retention requirement, the borrower can
retain eligibility by meeting any one of five community development goals or nine public policy
goals, provided the CDC meets its required job opportunity average of at least one job
opportunity created or retained for every $65,000 in project debenture, or for every $75,000 in
project debenture for projects located in special geographic areas (Alaska, Hawaii, state-
designated enterprise zones, empowerment zones, enterprise communities, and labor surplus
areas). Loans to small manufacturers are excluded from the calculation of this average.17
The five community development goals are
• improving, diversifying or stabilizing the economy of the locality;
• stimulating other business development;
• bringing new income into the community;
• assisting manufacturing firms; or
• assisting businesses in labor surplus areas as defined by the U.S. Department of
Labor.
The nine public policy goals are
• revitalizing a business district of a community with a written revitalization or
redevelopment plan;
• expansion of exports;
• expansion of small businesses owned and controlled by women;
• expansion of small businesses owned and controlled by veterans (especially
service-disabled veterans);
• expansion of minority enterprise development;
• aiding rural development;
16 Ibid., p. 277.
17 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 Ibid., pp. 58, 241, 278.
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Small Business Administration 504/CDC Loan Guaranty Program
• increasing productivity and competitiveness (e.g., retooling, robotics,
modernization, and competition with imports);
• modernizing or upgrading facilities to meet health, safety, and environmental
requirements; or
• 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.18
Loan Amounts
The minimum 504/CDC debenture is $25,000. P.L. 111-240, the Small Business Jobs Act of
2010, increased the gross debenture amount
• from $1.5 million for regular 504/CDC loans to $5 million,
• from $2 million if the loan proceeds are directed toward one or more of the
public policy goals described above to $5 million,
• from $4 million for small manufacturers to $5.5 million,
• from $4 million for projects that reduce the borrower’s energy consumption by at
least 10% to $5.5 million, and
• from $4 million for projects for plant, equipment, and process upgrades of
renewable energy sources, such as the small-scale production of energy for
individual buildings or communities consumption (commonly known as
micropower), or renewable fuel producers, including biodiesel and ethanol
producers to $5.5 million.19
Loan Terms, Interest Rate, and Collateral
Loan Terms
The SBA determines the 504/CDC program’s loan terms and publishes those terms in the Federal
Register.20 The current maturities for 504/CDC loans are
• 20 years for real estate,
• 10 years for machinery and equipment, and
• 10 or 20 years based upon a weighted average of the useful life of the assets
being financed.21
18 13 C.F.R. § 120.862.
19 P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1112. Maximum Loan Amounts Under 504 Program
20 13 C.F.R. § 120.933.
21 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), p. 301, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_sops_50105b.pdf.
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Small Business Administration 504/CDC Loan Guaranty Program
The maturities for the first mortgage issued by the third-party lender must be at least seven years
when the CDC/504 loan is for a term of 10 years, and 10 years when the loan is for 20 years.22
Interest Rate
The interest rate for 504/CDC debentures is set by the SBA and approved by the Secretary of the
Treasury.23 It is based on market conditions for long-term government debt at the time of sale, and
pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues.
The rate for September 2010 is 4.62%.24 In addition, the SBA sets the maximum interest rate that
can be charged by any third party lender for a commercial loan which funds any portion of the
cost of a 504/CDC project. That rate “must be reasonable” and published in the Federal Register.
The current maximum interest rate that a third-party lender is allowed to charge for a commercial
loan that funds any portion of the cost of a 504/CDC project is 6% over the New York prime rate
or the maximum interest rate permitted in that state, whichever is less.25
Collateral
The SBA usually 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 all of the following
criteria:
• strong, consistent cash flow that is sufficient to cover the debt;
• demonstrated, proven management;
• the applicant’s business has been in operation for more than two years; and
• the proposed project is a logical extension of the applicant’s current operations.26
If one or more of the above factors is not met, additional collateral or increased equity
contributions may be required. All 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.27 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.”28
22 13 C.F.R. § 120.921.
23 13 C.F.R. § 120.932.
24 Capital Certified Development Corporation, “504/CDC Program Interest Rates,” Austin, Texas,
http://www.capitalcdc.com/interest.php.
25 13 C.F.R. § 120.921; and U.S. Small Business Administration, “Interest Rates,” 75 Federal Register 17454, April 6,
2010.
26 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), p. 286, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_sops_50105b.pdf.
27 13 C.F.R. § 120.934.
28 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), p. 313, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
(continued...)
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Small Business Administration 504/CDC Loan Guaranty Program
Lender Eligibility Standards, Operating
Requirements and Program Requirements
Lender Eligibility Standards
CDCs apply to the SBA for certification to participate in the 504/CDC program. A CDC must be a
non-profit corporation and
• be in good standing in the state in which it is incorporated;
• be in compliance with all laws, including taxation requirements, in the state in
which it is incorporated and any other state in which it conducts business;
• 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 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); and
• provide the SBA a copy of its IRS tax exempt status.29
In addition, when applying for certification a CDC must
• indicate its area of operations, which is the state of the CDC’s incorporation;30
• report its membership, which must include at least 25 members who actively
support economic development in their area of operations and represent (1)
government organizations, (2) financial institutions (lenders), (3) community
organizations, such as chambers of commerce, trade associations, colleges, or
small business development centers, and (4) businesses in the area of operations;
• meet other specified membership requirements, such as meeting at least annually,
requiring a quorum to transact business, and prohibiting any person or entity
from owning or controlling more than 10% of the CDC’s voting membership;
and
• have a board of directors which meet specified requirements, such as being
chosen from the membership by the members and representing at least three of
the four membership groups.31
(...continued)
serv_sops_50105b.pdf.
29 Ibid., p. 51.
30 A CDC can apply to be a multi-state CDC “provided the State the CDC seeks to expand into is contiguous to the
State of the CDC’s incorporation; the CDC demonstrates that its membership meets the requirements in 13 CFR §
120.822 separately for its State of incorporation and for each additional State in which it seeks to operate as a Multi-
State CDC; and the CDC has a loan committee meeting the requirements of 13 CFR § 120.823.” See Ibid., p. 76.
31 Ibid., p. 52.
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Small Business Administration 504/CDC Loan Guaranty Program
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
probation. Currently, there are 267 CDCs actively participating in the program.32
Lender Operating Requirements
The CDC’s board of directors is allowed to establish a loan committee composed of members of
the CDC who may or may not be on its board of directors. The loan committee reports to the
board, and must meet specified requirements, such as having at least one member with
commercial lending experience acceptable to the SBA, having all of its members live or work in
the area of operations of the state where the 504/CDC project they are voting on is located,
allowing CDC staff to serve on the committee, and requiring a quorum of at least five committee
members authorized to vote in order to hold a meeting.33 In addition, multi-state CDCs are
required to have a separate loan committee “for each state into which the CDC expands.”34
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”
and “directly employ full-time professional management,” typically including an executive
director (or the equivalent) to manage daily operations.35
CDCs are also required to operate “in accordance with all SBA loan program requirements” and
provide the SBA “current and accurate information about all certification and operational
requirements.”36 CDCs with 504/CDC loan portfolio balances of $20 million or more are required
to submit financial statements audited in accordance with Generally Accepted Accounting
Principles (GAAP) by an independent Certified Public Accountant (CPA). CDCs with 504/CDC
loan portfolio balances of less than $20 million must, at a minimum, submit a review of their loan
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.37
Lender Program Requirements
The Application Process
CDCs must analyze each application in a commercially 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
balance sheet must reflect the loan proceeds, use of the loan proceeds, and any
other adjustments such as required equity injection or stand-by debt;
32 U.S. Small Business Administration, Office of Legislative Affairs, correspondence with the author, April 7, 2010.
33 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), p. 53, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_sops_50105b.pdf.
34 Ibid.
35 Ibid.
36 Ibid., p. 55.
37 Ibid.
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Small Business Administration 504/CDC Loan Guaranty Program
• a financial analysis of repayment ability based on historical income statements,
tax returns (if an existing business) and projections, including the reasonableness
of the supporting assumptions;
• a ratio analysis of the financial statements including comments on any trends and
a comparison with industry averages;
• a discussion of the owners’ and managers’ relevant experience in the type of
business, as well as their personal credit histories;
• an analysis of collateral adequacy, including an evaluation of the collateral and
lien position offered as well as the liquidation value;
• 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
• other relevant information (e.g., if the application involves a franchise and the
success of the franchise).38
Lenders submit this information, using required SBA forms, to the Sacramento, CA, Loan
Processing Center. The SBA’s goal is to process all 504/CDC regular loans within six business
days and all loans submitted by members of the Accredited Lender Program (ALP) within three
business days.39
Accredited Lender Program Status
CDCs may apply to the SBA for Accredited Lender Program (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 their portfolio, their record of compliance with SBA loan program
requirements, and their record of cooperation with all SBA offices.40 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 decision to guarantee the debenture. About one-third of CDCs
(88 of 267, or 32.9%) have ALP status.41
Premier Certified Lenders Program Status
The SBA also has a Premier Certified Lenders Program (PCLP).42 ALP-CDCs may 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 same terms and conditions as
other 504/CDC loans, but the SBA delegates to the PCLP-CDC all loan approval decisions,
except eligibility. Selection is based on several factors, including all of the factors used to assess
ALP status plus evidence that the CDC is “in compliance with its Loan Loss Reserve Fund
38 Ibid., p. 240.
39 Ibid., pp. 297, 298.
40 Ibid., p. 68.
41 U.S. Small Business Administration, Office of Legislative Affairs, correspondence with the author, April 7, 2010.
42 The PCLP was authorized by P.L. 103-403, the Small Business Administration Reauthorization and Amendments
Act of 1994.
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Small Business Administration 504/CDC Loan Guaranty Program
(LLRF) requirements [described below], has established a PCLP processing goal of 50%, and has
a demonstrated ability to process, close, service and liquidate 504 and/or PCLP loans.”43
PCLP-CDCs are required to establish and maintain a Loan Loss Reserve Fund (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 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.44
About one out of every 10 CDCs (26 out of 267, or 9.7%) have PCLP status.45 In FY2009, they
processed about 7% of 504/CDC loan applications amounting to about 6% of the total amount
guaranteed.46
Real Estate Appraisals
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 $250,000,
or $250,000 or less “if such appraisal is necessary for appropriate evaluation of
creditworthiness.”47 The appraiser must have no appearance of a conflict of interest and be either
state-licensed or state-certified. When the project property’s estimated value is over $1 million,
the appraiser must be state-certified.48
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
minor portion of the project). The SBA’s district counsel reviews the closing package and notifies
the CSA (currently Colson Services Corporation) and the CDC via e-mail 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 transmittal letter or spreadsheet. Because the
504/CDC program provides permanent or “take-out” financing, an interim lender (either the third
party lender or another lender) typically 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 amount of the project costs that it advanced on an interim basis.49
43 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), p. 70, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_sops_50105b.pdf.
44 Ibid., p. 71.
45 U.S. Small Business Administration, Office of Legislative Affairs, correspondence with the author, April 7, 2010.
All PCLP-CDCS have ALP status as that is a requirement for being provided PCLP authority.
46 U.S. Small Business Administration, “CDC Loan Program Approval Activity,” Washington, DC,
http://www.sba.gov/loans/business/regionaw.html.
47 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), p. 288, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_sops_50105b.pdf.
48 Ibid.
49 Ibid., pp. 16, 243.
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Small Business Administration 504/CDC Loan Guaranty Program
Loan Guaranty and Servicing Fees
Borrowers are currently charged fees amounting to about 2.25% of the net debenture proceeds
plus annual servicing and guaranty fees of generally less than 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 borrower.
SBA Fees
The SBA is authorized to charge fees that are sufficient to cover the estimated costs of the
504/CDC program. To meet this goal, the SBA charges CDCs an ongoing, annual servicing fee,
not to exceed 0.9375% on the unpaid principal balance of the loan, that is adjusted annually based
on the date the loan was approved. The annual servicing fee for FY2010 is 0.389% of the unpaid
principal balance. The SBA also 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.50
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.51 The fee may be paid by the third party lender, CDC,
or borrower. For SBA loans approved after September 30, 1996, the SBA also charges the CDC
an annual 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 additional fees
imposed on the borrower.52
As will be discussed later, P.L. 111-5, ARRA provided an additional $375 million to reduce fees
in the 7(a) and 504/CDC loan guaranty programs and to increase the 7(a) program’s maximum
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 all standard 7(a) loans. Congress subsequently approved an
additional $305 million to extend the fee reductions and 90% loan guaranty percentage for the
7(a) program through May 31, 2010.53 Congress later adopted the Small Business Jobs Act of
2010, which was signed into law (P.L. 111-240) by President Obama on September 27, 2010. It
provides $505 million to continue the fee subsidies and 7(a) program’s 90% loan guaranty
through December 31, 2010.
50 Ibid., p. 318; 13 C.F.R. § 120.971(d); and 13 C.F.R. § 120.971(e). The SBA previously also charged a one time, up
front 0.5% guaranty fee on the debenture. The SBA elected not to charge the fee in FY2009 and FY2010.
51 When there are different liens on a property, the senior lien must be satisfied before junior liens in the event of a
default.
52 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), p. 318, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_sops_50105b.pdf; and 13 C.F.R. § 120.972.
53 P.L. 111-118, the Department of Defense Appropriations Act, 2010, enacted on December 19, 2009, provided $125
million to extend ARRA’s “fee reductions and eliminations” for the SBA’s 7(a) and 504/CDC programs and 90% loan
guarantee limit for the SBA’s 7(a) program through February 28, 2010. P.L. 111-144, the Temporary Extension Act of
2010, enacted on March 2, 2010, provided $60 million to extend those fee reductions and loan modifications 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 use of $40 million in SBA appropriated funds to extend those fee reductions and loan
modifications through April 30, 2010. P.L. 111-157, the Continuing Extension Act of 2010, enacted on April 15, 2010,
provided $80 million to extend those fee reductions and loan modifications through May 31, 2010.
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Small Business Administration 504/CDC Loan Guaranty Program
CDC Fees
CDCs are allowed to charge borrowers a processing (or packaging) fee, closing fee, servicing fee,
late fee, assumption fee, Central Servicing Agent (CSA) fee, other agent fees, and an
underwriters’ fee.
Processing (or Packaging) Fee
The CDC is allowed 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
when the SBA issues a “Authorization for the Debenture.” The portion of the processing fee paid
by the borrower may be reimbursed from the debenture proceeds.54 As mentioned previously,
legislation was enacted that provided additional funding to eliminate this fee through May 31,
2010.
Closing Fee
The CDC is also allowed to charge “a reasonable closing fee sufficient to reimburse it for the
expenses of its in-house or outside legal counsel, and other miscellaneous closing costs.”55 Up to
$2,500 in closing costs may be financed out of the debenture proceeds.56
Servicing Fee
CDCs can also charge a monthly 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 parties involved in 504/CDC financing under a master servicing agent agreement with the
SBA.57
Late Fee and Assumption Fee
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 will be collected by the CSA on
54 Ibid.; and 13 C.F.R. § 120.971(a)(1).
55 13 C.F.R. § 120.971(a)(2).
56 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), p. 317, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_sops_50105b.pdf.; and 13 C.F.R. § 120.883(e).
57 13 C.F.R. § 120.971(a)(3); and U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development
Company Loan Programs,” Washington, DC (effective October 1, 2009), pp. 241, 317, http://www.sba.gov/idc/groups/
public/documents/sba_homepage/serv_sops_50105b.pdf.
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Small Business Administration 504/CDC Loan Guaranty Program
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.58
Central Servicing Agent (CSA) Fee
CSAs are allowed to charge an initiation fee on each loan and an ongoing monthly servicing fee
of 0.1% under the terms of the master servicing agreement (with the CSA receiving three sixty-
fourths of the servicing fee and the remainder going to the SBA). Also, “agent fees and charges
necessary to market and service debentures and certificates may be assessed to the borrower or
the investor.”59 CDCs 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, or when an applicant complains about the fees charged by an agent.”60 In
cases where fees appear to be unreasonable, CDCs “should contact the SBA” which, after
conducting an investigation, can “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 collecting from the
applicant any funds in excess of the amount SBA deems reasonable.”61
Underwriters’ Fee
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.62 As
mentioned previously, underwriters are approved by the SBA to form debenture pools and arrange
for the sale of certificates.
Program Statistics
Loan Volume
As shown in Table 2, in FY2007, the SBA guaranteed 10,405 504/CDC loans amounting to $6.3
billion. Loan applications fell during FY2008 and FY2009, primarily due to decreased small
business demand for capital during the recession, difficulties in secondary credit markets,
especially from October 2008 to February 2009, and a tightening of credit lending standards. In
FY2008, the SBA guaranteed 8,630 504/CDC loans amounting to approximately $5.3 billion. In
FY2009, it guaranteed 6,293 504/CDC loans amounting to about $3.8 billion. The SBA’s goal for
FY2010 is to approve at least $4 billion in 504/CDC program guaranties.63
58 13 C.F.R. § 120.971(a)(4); 13 C.F.R. § 120.971(a)(5); and U.S. Small Business Administration, “SOP 50 10 5(B):
Lender and Development Company Loan Programs,” Washington, DC (effective October 1, 2009), p. 317,
http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sops_50105b.pdf.
59 13 C.F.R. § 120.971(c).
60 U.S. Small Business Administration, “SOP 50 10 5(B): Lender and Development Company Loan Programs,”
Washington, DC (effective October 1, 2009), pp. 321, 322, http://www.sba.gov/idc/groups/public/documents/
sba_homepage/serv_sops_50105b.pdf.
61 Ibid.
62 Ibid., p. 318.
63 U.S. Small Business Administration, Fiscal Year 2011 Congressional Budget Justification and FY 2009 Annual
(continued...)
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Small Business Administration 504/CDC Loan Guaranty Program
Table 2. 504/CDC Loans and Amounts, FY2007 - FY2009
($ amounts in billions)
Amount of the
Fiscal Year
Number of Loans
Debentures
2007 10,405 $6.3
2008 8,630 $5.3
2009 6,293 $3.8
Source: U.S. Small Business Administration, Fiscal Year 2011 Congressional Budget Justification and FY 2009 Annual
Performance Report (Washington, DC: GPO, 2010), pp. 39, 125.
Loss Rate
Since the program’s inception in 1958, the SBA has experienced a 2.36% loss rate (ratio of actual
losses to disbursements) on its CDC business loans. The loss rate for CDC guaranteed loans is
1.9% and 26.9% for direct loans (last issued in 1988).64
Use of Proceeds and Borrower Satisfaction
In 2008, the Urban Institute released the results of a SBA-commissioned study of the SBA’s loan
guaranty programs. As part of its analysis, the Urban Institute surveyed a random sample of SBA
loan guaranty borrowers. The survey indicated that borrowers used 504/CDC loan proceeds to
• build a new building (36%),
• purchase a new building (33%),
• purchase new land (16%),
• purchase or install new equipment (15%),
• acquire original business (8%),
• expand or renovate current building (7%),
• other (7%),
• improve land (6%),
• finance working capital (4%),
• refinance existing debt (3%), or
• hire additional staff (2%).65
(...continued)
Performance Report (Washington, DC: GPO, 2010), p. 39.
64 U.S. Small Business Administration, “2008 Loss Report,” Washington, DC, p. 8, http://www.sba.gov/idc/groups/
public/documents/sba_program_office/cfo_2008_loss_report.pdf.
65 Christopher Hayes, An Assessment of Small Business Administration Loan and Investment Performance: Survey of
Assisted Businesses (Washington, DC: The Urban Institute, 2008), p. 3, http://www.urban.org/UploadedPDF/
411599_assisted_business_survey.pdf. The percentage total exceeds 100 because recipients were allowed to name more
(continued...)
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Small Business Administration 504/CDC Loan Guaranty Program
The Urban Institute also reported that two-thirds the 504/CDC borrowers responding to their
survey rated their overall satisfaction with their loan and loan terms as either excellent (21%) or
good (45%). About one out of every four borrowers (23%) rated their overall satisfaction with
their loan and loan terms as fair, 8% rated their overall satisfaction as poor, and 4% reported that
they don’t know or did not respond.66 In addition, 87% of the survey’s respondents reported that
the 504/CDC loan was either very important (53%) or somewhat important (34%) to their
business success (4% reported somewhat unimportant, 4% reported very unimportant, and 6%
reported that they don’t know or did not respond).67
Borrower Demographics
The Urban Institute found that about 9.9% of private sector small business loans are issued to
minority-owned small businesses and about 16% of those loans are issued to women-owned
businesses.68 In FY2009, 30% of 504/CDC loan recipients were minority-owned businesses (21%
Asian, 7% Hispanic, and 2% African American) and 15% were women-owned businesses.69
Based on its comparative analysis of private sector small business loans and the SBA’s loan
guaranty programs, the Urban Institute concluded
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
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 substantially
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 SBA’s
objective of making credit available to firms that face a capital opportunity gap.70
Congressional Issues
Fee Subsidies and the 7(a) Program’s 90% Loan Guaranty
Congress included provisions in P.L. 111-5, the American Recovery and Reinvestment Act of
2009, to encourage both lenders and small businesses to use the SBA’s loan guaranty programs.
For example, it provides an additional $730 million for SBA programs. Included in that amount is
$375 million 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
(...continued)
than one use for the loan proceeds.
66 Ibid., p. 5.
67 Ibid.
68 Kenneth Temkin, Brett Theodos, with Kerstin Gentsch, Competitive and Special Competitive Opportunity Gap
Analysis of the 7(A) and 504 Programs (Washington, DC: The Urban Institute, 2008), p. 13, http://www.urban.org/
UploadedPDF/411596_504_gap_analysis.pdf.
69 U.S. Small Business Administration, “Business Loan Approval (Gross $) Ytd Activity,” Washington, DC, March 27,
2010, http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_fa_weekly_lending_report.pdf.
70 Kenneth Temkin, Brett Theodos, with Kerstin Gentsch, Competitive and Special Competitive Opportunity Gap
Analysis of the 7(A) and 504 Programs (Washington, DC: The Urban Institute, 2008), p. 21, http://www.urban.org/
UploadedPDF/411596_504_gap_analysis.pdf.
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Small Business Administration 504/CDC Loan Guaranty Program
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 all standard 7(a) loans.71 ARRA’s funding for the 7(a)
program was exhausted in November 2009. ARRA’s funding for the 504/CDC program was about
to expire in December 2009 when Congress acted to extend the subsidies and loan modification.
Congress subsequently provided another $305 million to extend the fee subsides and the 7(a)
program’s 90% loan guaranty percentage through May 31, 2010, and P.L. 111-240, the Small
Business Jobs Act of 2010, provides another $505 million to extend the fee subsides and 90%
loan guaranty percentage from September 27, 2010, through December 31, 2010.72
The Obama Administration argued that additional funding for the SBA’s loan guaranty programs,
including the 504/CDC program, improved the small business lending environment, increased
both the number and amount of SBA guaranteed loans, and supported “the retention and creation
of hundreds of thousands of jobs.”73 Critics argued that small business tax reduction, reform of
financial credit market regulation, and federal fiscal restraint are a better means to assist small
business economic growth and job creation.74
Program Administration
The SBA’s Office of Inspector General (OIG) and the U.S. Government Accountability Office
(GAO) have independently reviewed the administration of SBA’s loan guaranty programs. Both
agencies have reported deficiencies that need 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 statistically
selected CDC/504 loans approved under Premier Certified Lender (PCL) authority that were
disbursed during fiscal year (FY) 2008.”75 The loans “had been approved by 3 of the most active
of the 24 PCLs” operating in 2008.76
71 P.L. 111-5, the American Recovery and Reinvestment Act of 2009.
72 P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1111. Section 7(A) Business Loans. The Senate had adopted
H.R. 4213, the American Workers, State, and Business Relief Act of 2010, on March 10, 2010, by a 62-36 vote. It
would have provided $560 million to extend the fee reductions and 90% loan guarantee limit through December 31,
2010. The House approved an amended version of the bill, renamed the American Jobs and Closing Tax Loopholes Act
of 2010, on May 28, 2010, by a 245-171 vote. It would have provided $505 million to extend the fee reductions and
90% loan guarantee limit through December 31, 2010. The extension provision was subsequently removed from the
bill, which became P.L. 111-205, the Unemployment Compensation Extension Act of 2010.
73 U.S. Small Business Administration, “Administration Announces New Small Business Commercial Real Estate and
Working Capital Programs,” Washington, DC, February 5, 2010, http://www.sba.gov/idc/groups/public/documents/
sba_homepage/sba_rcvry_factsheet_cre_refi.pdf; and U.S. Small Business Administration, “SBA Recovery Lending
Extended Through April 30,” Washington DC, March 29, 2010, http://www.sba.gov/idc/groups/public/documents/
sba_homepage/news_release_10-08.pdf.
74 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
75 U.S. Small Business Administration, Office of the Inspector General, “Report on Audit of Premier Certified Lenders
in the Section 504 Loan Program,” Washington, DC, March 23, 2010, p. 20, http://www.sba.gov/idc/groups/public/
documents/sba_homepage/oig_report_10-10.pdf.
76 Ibid.
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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.”77 The OIG
determined that
PCLs may not have used prudent practices in approving and disbursing 68 percent of the
sampled loans, totaling nearly $8.9 million, due to poor loan underwriting, and eligibility or
loan closing issues. Specifically, 40 percent of the loans had faulty underwriting repayment
analyses, and 52 percent 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-percent 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. 78
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.79
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.80
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.”81
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.82
77 Ibid., p. 1.
78 Ibid., pp. 3, 4.
79 Ibid., p. 4.
80 Ibid., pp. 4, 5.
81 Ibid., p. 5.
82 Ibid.
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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 small businesses. GAO recommended
that the SBA strengthen its oversight of these lenders. GAO argued that although the SBA’s
“lender risk rating system has enabled the agency to conduct some off-site monitoring of lenders,
the agency does not use the system to target lenders for on-site reviews or to inform the scope of
the reviews.”83 It also noted that
the SBA targets for review those lenders with the largest SBA-guaranteed loan portfolios. As
a result of this approach, 97 percent 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.84
GAO argued that although the SBA “has made improvements to its off-site monitoring of lenders,
the agency will not be able to substantially improve its lender oversight efforts unless it improves
its on-site review process.”85
Presidential Proposals and Legislation
Congress considered several Obama Administration proposals and bills during the 111th Congress
that would have authorized changes to the 504/CDC program before it approved the Small
Business Jobs Act of 2010.
The Obama Administration’s Proposals
The Obama Administration supported congressional efforts to temporarily subsidize fees for the
7(a) and 504/CDC loan guaranty programs and to increase the 7(a) program’s 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%. The latest extension of the fee subsidies and 7(a) program’s 90% loan guaranty
percentage was authorized by P.L. 111-240, the Small Business Jobs Act of 2010, which President
Obama signed into law on September 27, 2010. It provides $505 million to extend the fee
reductions and 90% loan guaranty percentage from September 27, 2010, through December 31,
2010.86
83 U.S. Government Accountability Office, 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, http://www.gao.gov/new.items/
d1053.pdf.
84 Ibid., pp. i, 27-30.
85 Ibid., p. 35.
86 U.S. Small Business Administration, “Administration Announces New Small Business Commercial Real Estate and
Working Capital Programs,” Washington, DC, February 5, 2010, http://www.sba.gov/idc/groups/public/documents/
sba_homepage/sba_rcvry_factsheet_cre_refi.pdf; and P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1111.
Section 7(A) Business Loans. Previously, P.L. 111-118, the Department of Defense Appropriations Act, 2010, enacted
on December 19, 2009, provided $125 million to extend ARRA’s “fee reductions and eliminations” for the SBA’s 7(a)
and 504/CDC programs and 90% loan guarantee limit for the SBA’s 7(a) program through February 28, 2010. P.L.
111-144, the Temporary Extension Act of 2010, enacted on March 2, 2010, provided $60 million to extend those fee
reductions and loan modifications 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 use of $40 million in SBA appropriated funds to extend
those fee reductions and loan modifications through April 30, 2010. P.L. 111-157, the Continuing Extension Act of
(continued...)
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In an effort to make the SBA’s loan guaranty programs more attractive to small businesses, the
Obama Administration also proposed the following modifications to several SBA programs,
including the 504/CDC program:
• increase the maximum loan size for the 504/CDC program from $2 million to $5
million for regular projects and from $4 million to $5.5 million for
manufacturing projects,
• temporarily allow in FY2010 and FY2011, with an option to extend into FY2012,
the refinancing of owner-occupied commercial real estate loans within one year
of maturity under the SBA’s 504/CDC program,
• increase the maximum loan size for standard 7(a) loans from $2 million to $5
million,
• increase the maximum loan size for microloans to small business concerns from
$35,000 to $50,000,
• increase the maximum loan limits for lenders in their first year of participation in
the Microloan program, from $750,000 to $1 million, and from $3.5 million to $5
million in the subsequent years, and
• temporarily increase the cap on SBAExpress loans from $350,000 to $1
million.87
H.R. 3854, the Small Business Financing and Investment Act
of 2009
H.R. 3854 would have authorized several new SBA programs and change several existing SBA
programs, including the 504/CDC program, in an effort to enhance job creation by increasing the
availability of credit to small businesses. The bill was passed by the House, 389-32, on October
29, 2009. The Senate did not take action on the bill.88
It would have
• increased the maximum loan size for 504/CDC loans from $1.5 million to $3
million for regular projects, from $2 million to $4 million for projects located in
a low-income community, from $4 million to $8 million for manufacturers, and
for up to $10 million for projects that constitute “a major source of employment”
as determined by the Administration;
(...continued)
2010, enacted on April 15, 2010, provided $80 million to extend those fee reductions and loan modifications through
May 31, 2010.
87 U.S. Small Business Administration, “Administration Announces New Small Business Commercial Real Estate and
Working Capital Programs,” Washington, DC, February 5, 2010, http://www.sba.gov/idc/groups/public/documents/
sba_homepage/sba_rcvry_factsheet_cre_refi.pdf. For an analysis of the pros and cons associated with these actions see
CRS Report R41146, Small Business Administration 7(a) Loan Guaranty Program, by Robert Jay Dilger.
88 For further analysis see CRS Report R40985, Small Business: Access to Capital and Job Creation, by Robert Jay
Dilger and Oscar R. Gonzales.
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• extended ARRA’s fee reductions and loan modifications through September 30,
2011;
• increased the maximum loan size for 7(a) loans from $2 million to $3 million,
• extended, with modifications, ARRA’s America’s Recovery Capital Loan
Program (ARC), which temporarily provides small businesses loan assistance for
debt relief, through the end of FY2011;89 and
• provided a 100% loan guaranty for small business concerns owned and
controlled by veterans, and expanded and made permanent the SBA’s secondary
market lending authority.90
The bill would have also created a temporary SBA direct lending program following enactment
that would have been available to creditworthy small business borrowers that were unable to find
credit elsewhere.91
S. 2869, the Small Business Job Creation and Access to Capital Act
of 2009
S. 2869 was ordered to be reported by the Senate Committee on Small Business and
Entrepreneurship on December 10, 2009. The Senate did not take further action on the bill, but
several of its provisions were later included in P.L. 111-240, the Small Business Jobs Act of 2010.
It would have
• increased the maximum loan size for the 504/CDC loans from $1.5 million to $5
million for regular projects, from $2 million to $5 million for projects meeting
one of the program’s specified public policy goals, and from $4 million to $5.5
million for manufacturers;
• allowed 504/CDC loans to be used to refinance up to $4 billion in short-term
commercial real estate debt each fiscal year for two years after enactment into
long-term fixed rate loans;
• 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;
• extended ARRA’s fee reductions and loan modifications through December 31,
2010;
• increased the maximum loan size for 7(a) loans from $2 million to $5 million;
and
• increased the maximum loan size for the Microloan program from $35,000 to
$50,000.92
89 ARC’s loan limit would be increased from $35,000 to $50,000, and to $75,000 in areas of high unemployment, and
borrowers would be allowed to use ARC loans to refinance existing SBA loan debt.
90 H.R. 3854, the Small Business Financing and Investment Act of 2009.
91 Ibid. For further analysis see CRS Report R40985, Small Business: Access to Capital and Job Creation, by Robert
Jay Dilger and Oscar R. Gonzales.
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P.L. 111-240, the Small Business Jobs Act of 2010
P.L. 111-240, the Small Business Jobs Act of 2010, was signed into law by President Obama on
September 27, 2010. The act authorizes the Secretary of the Treasury to establish a $30 billion
Small Business Lending Fund (SBLF) to encourage community banks to provide small business
loans, a $1.5 billion State Small Business Credit Initiative to provide funding to participating
states with small business capital access programs, and about $12 billion in tax relief for small
businesses.93 It also contains revenue raising provisions to offset the act’s cost, a number of
changes to the SBA’s loan and contracting programs, and establishes an alternative SBA small
business eligibility size standard.94
As mentioned previously, P.L. 111-240 also increased the 504/CDC program’s loan limits from
$1.5 million to $5 million for regular 504/CDC loans, from $2 million to $5 million if the loan
proceeds are directed toward one or more of the program’s specified public policy goals, from $4
million to $5.5 million for small manufacturers, from $4 million to $5.5 million for projects that
reduce the borrower’s energy consumption by at least 10%, and from $4 million to $5.5 million
for projects for plant, equipment, and process upgrades of renewable energy sources, such as the
small-scale production of energy for individual buildings or communities consumption
(commonly known as micropower), or renewable fuel producers, including biodiesel and ethanol
producers.95
P.L. 111-240, also provides $505 million to continue the fee subsidies for the 7(a) and 504/CDC
loan guaranty programs and the temporary increase in the 7(a) program’s 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 all standard 7(a) loans from September 27, 2010, through December 31,
2010. The fee subsidies and 90% loan guaranty percentage had expired on May 31, 2010.
In addition, the act temporarily allows, for two years, 504/CDC loans to be used to refinance
projects not involving expansions as long as the financing does 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.”96 The refinancing can 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). In addition, the refinancing
can not be used for indebtedness subject to a federal guarantee, and it has to be collateralized by
eligible fixed assets. The borrower also has to be current on all payments due on the existing debt
(...continued)
92 S. 2869, the Small Business Job Creation and Access to Capital Act of 2009.
93 For further analysis of P.L. 111-240, the Small Business Jobs Act of 2010, see CRS Report R41385, Small Business
Legislation: H.R. 3854 and H.R. 5297, by Robert Jay Dilger, Oscar R. Gonzales, and Gary Guenther.
94 For further analysis of the SBA’s size standards see CRS Report R40860, Defining Small Business: An Historical
Analysis of Contemporary Issues, by Robert Jay Dilger.
95 P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1112. Maximum Loan Amounts Under 504 Program
96 P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1122. Low-Interest Refinancing Under the Local
Development Business Loan Program.
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for not less than one year before the date of the application. The act authorizes the SBA to issue
up to $7.5 billion in refinancing annually, for two fiscal years. 97
Concluding Observations
During the 111th Congress, congressional debate concerning proposed changes to the SBA’s loan
guaranty programs, including the 504/CDC program, centered on the likely impact the changes
would have on small business access to capital, job retention, and job creation. As a general
proposition, some, including the chairs of the House and Senate Committees on Small Business
and President Obama, argued that economic conditions made it imperative that the SBA be
provided additional resources to assist small businesses in acquiring capital necessary to start,
continue, or expand operations and create jobs.98 Others worried about the long-term adverse
economic effects of spending programs that increase the federal deficit. They advocated business
tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best
means to assist small business economic growth and job creation.99
In terms of specific program changes, continuing the 504/CDC program’s temporary fee
subsidies, increasing its loan limits, and temporarily expanding its refinancing options were
designed to achieve the same goal: to enhance job creation and retention by increasing the ability
of 504/CDC borrowers to obtain credit at affordable rates. For example, the Obama
Administration argued that increasing the maximum loan limits for the 504/CDC, 7(a),
Microloan, and SBAExpress programs will allow the SBA to “support larger projects” which will
“allow the SBA to help America’s small businesses drive long-term economic growth and the
creation of jobs in communities across the country.” 100 The Administration also argued that
increasing the maximum loan limits for these programs will be “budget neutral” over the long run
and “help improve the availability of smaller loans.”101
Critics argued that increasing these loan limits might increase the risk of defaults and result in
higher guaranty fees or the need to provide the SBA additional funding, especially for the
SBAExpress program, which had experienced somewhat higher losses than other SBA loan
guaranty programs.102 Others advocated a more modest increase in the maximum loan limits to
97 Ibid.
98 Representative Nydia Velázquez, “Small Business Financing and Investment Act of 2009,” House debate,
Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009), pp. H12074, H12075; Senator Mary
Landrieu, “Statements on Introduced Bills and Joint Resolutions,” remarks in the Senate, Congressional Record, daily
edition, vol. 155, no. 185 (December 10, 2009), p. S12910; and The White House, “Remarks by the President on Job
Creation and Economic Growth,” December 8, 2009, http://www.whitehouse.gov/the-press-office/remarks-president-
job-creation-and-economic-growth.
99 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
100 U.S. Small Business Administration, “Administration Announces New Small Business Commercial Real Estate and
Working Capital Programs,” Washington, DC, February 5, 2010, http://www.sba.gov/idc/groups/public/documents/
sba_homepage/sba_rcvry_factsheet_cre_refi.pdf.
101 Ibid.
102 Robb Mandelbaum, “Small Business Incentives Face a Hard Road in Congress,” New York Times, February 12,
2010, http://boss.blogs.nytimes.com/2010/02/12/small-business-incentives-face-a-hard-road-in-congress/; and U.S.
Congress, House Committee on Small Business, House Committee on Small Business Views With Regard to the Fiscal
Year (FY) 2010 Budget, Letter from Nydia Velázquez, Chair, House Committee on Small Business, to John M. Spratt,
(continued...)
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ensure that the programs focus on start-ups and early-stage small firms, “businesses that have
historically encountered the greatest difficulties in accessing credit” and “avoids making small
borrowers carry a disproportionate share of the risk associated with larger loans.”103
Author Contact Information
Robert Jay Dilger
Senior Specialist in American National Government
rdilger@crs.loc.gov, 7-3110
(...continued)
Jr., Chair, House Committee on the Budget, 111th Cong., 2nd sess., March 11, 2009, p. 3, http://www.house.gov/smbiz/
democrats/Reports/FY%202010%20Views%20and%20Estimates%20v2.pdf.
103 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.
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