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Small Business Administration 504/CDC Loan
Guaranty Program
Robert Jay Dilger
Senior Specialist in American National Government
February 19, 2015
Congressional Research Service
7-5700
www.crs.gov
R41184

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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 nonprofit 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. 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 sale of 504/CDC debentures. In FY2014, the SBA approved 5,885 504/CDC
loans amounting to about $4.2 billion.
Congressional interest in the SBA’s 504/CDC program has increased in recent years because of
concern that small businesses might be prevented from accessing sufficient capital to assist in the
economic recovery. During the 111th Congress, P.L. 111-240, the Small 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 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 expanded, for two years, the types of projects eligible for 504/CDC program
refinancing of existing debt, created an alternative 504/CDC size standard to increase the number
of businesses eligible for assistance, and provided $505 million (plus an additional $5 million for
administrative expenses) to extend temporary fee subsidies for the 504/CDC and 7(a) loan
guaranty programs and a temporary increase in the 7(a) program’s maximum loan guaranty
percentage to 90%. The temporary fee subsidies and 90% loan guaranty percentage ended on
January 3, 2011, and the temporary expansion of the projects eligible for 504/CDC program
refinancing of existing debt expired on September 27, 2012.
This report opens with a discussion of the rationale provided for the 504/CDC program. It then
examines the program’s borrower and lender eligibility standards, program requirements, and
program statistics, including loan volume, loss rates, use of proceeds, borrower satisfaction, and
borrower demographics.
In addition, the report examines congressional action taken during the 111th Congress to help
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 discusses congressional efforts during the 113th Congress to
extend the temporary expansion of the projects eligible for 504/CDC program refinancing of
existing debt, which expired on September 27, 2012. For example, H.R. 1240, the Commercial
Real Estate and Economic Development Act of 2013 (CREED Act of 2013), would have
extended the temporary expansion of the projects eligible for 504/CDC program refinancing of
existing debt for five years following the bill’s enactment. Its companion bill in the Senate (S.
289), as amended in committee, would have extended 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. The report also addresses 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
CDC Eligibility Standards, Operating Requirements, and Program Requirements ......................... 9
CDC Eligibility Standards ......................................................................................................... 9
CDC Operating Requirements ................................................................................................. 10
CDC Program Requirements ................................................................................................... 11
The Application Process .................................................................................................... 11
Loan Guaranty and Servicing Fees .......................................................................................... 14
SBA Fees ........................................................................................................................... 14
CDC Fees .......................................................................................................................... 15
Fee Subsidies ..................................................................................................................... 17
Program Statistics .......................................................................................................................... 18
Loan Volume ............................................................................................................................ 18
Appropriations for Subsidy Costs............................................................................................ 19
Use of Proceeds and Borrower Satisfaction ............................................................................ 20
Borrower Demographics ......................................................................................................... 21
Congressional Issues ...................................................................................................................... 22
Fee Subsidies and the 7(a) Program’s 90% Maximum Loan Guaranty Percentage ................ 22
Program Administration .......................................................................................................... 23
Legislative Activity During the 111th Congress ............................................................................. 25
The Obama Administration’s Proposals .................................................................................. 25
Arguments for Increasing the SBA’s Maximum Loan Limits ................................................. 26
Arguments Against Increasing the SBA’s Maximum Loan Limits .......................................... 26
P.L. 111-5, the American Recovery and Reinvestment Act of 2009 ........................................ 27
P.L. 111-240, the Small Business Jobs Act of 2010 ................................................................. 27
Legislative Activity During the 112th Congress ............................................................................. 28
Legislative Activity During the 113th Congress ............................................................................. 29
Concluding Observations ............................................................................................................... 30

Tables
Table 1. 504/CDC Loan Structures and Contribution Requirements ............................................... 3
Table 2. 504/CDC Loans and Amounts Approved, FY2006-FY2014 ........................................... 19
Table 3. Business Loan Credit Subsidies, 7(a) and 504/CDC Loan Guaranty Programs,
FY2007-FY2016 ......................................................................................................................... 20
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Small Business Administration 504/CDC Loan Guaranty Program


Contacts
Author Contact Information........................................................................................................... 31

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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. 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 in the act concerning the
sale of 504/CDC debentures.2 It is administered through nonprofit Certified Development
Companies (CDCs).3 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 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
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.4 After a 504/CDC loan is approved and disbursed, accounting for the loan is
set up at the Central Servicing Agent (CSA, currently Wells Fargo Corporate Trust Services), 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 semiannual due
date.5 In FY2014, the SBA approved 5,885 504/CDC loans amounting to about $4.2 billion.6
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.7 Congressional interest in small business access to

1 U.S. Small Business Administration (SBA), Fiscal Year 2010 Congressional Budget Justification, p. 30.
2 The 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
503/CDC program (1980-1986). The 504/CDC program started in 1986.
3 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 Federal Register 15642, March 21, 2014.
4 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 SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,”
(effective October 1, 2014), pp. 315-316, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf.
5 SBA, “Monthly Purchase of 504 Debentures for Accelerated Loans,” at http://archive.sba.gov/aboutsba/sbaprograms/
elending/notices/BANK_5000_602_MONTHLY_PURC_504.html.
6 SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2014),” at http://www.sba.gov/sites/default/files/
aboutsbaarticle/WebsiteReport_asof9_30_2014.pdf.
7 U.S. Government Accountability Office (GAO), Small Business Administration: 7(a) Loan Program Needs
Additional Performance Measures, GAO-08-226T, November 1, 2007, pp. 3, 9-11, at 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, at
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
U.S.C. §631a.
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capital, in general, and the 504/CDC program, in particular, has increased in recent years because
of concern that small businesses might be prevented from accessing sufficient capital to enable
them to assist in the economic recovery.
Congress authorized several changes to the 504/CDC program during the 111th Congress in an
effort to increase the number and amount of 504/CDC loans. For example, P.L. 111-5, the
American Recovery and Reinvestment Act of 2009 (ARRA), provided $375 million to
temporarily reduce fees in the SBA’s 7(a) and 504/CDC loan guaranty programs ($299 million)
and to temporarily increase the 7(a) program’s maximum loan guaranty percentage to 90% ($76
million).8 Congress subsequently appropriated another $265 million and authorized the SBA to
reprogram another $40 million to extend those subsidies and the loan modification through May
31, 2010. ARRA also authorized the SBA to allow, under specified circumstances, the use of
504/CDC program funds to refinance existing debt for business expansion.9
P.L. 111-240, the Small 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 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. 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 allows 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).
This report opens with a discussion of the rationale for the 504/CDC program and then examines
the program’s borrower and lender eligibility standards; program requirements; and program
statistics, including loan volume, loss rates, use of proceeds, borrower satisfaction, and borrower
demographics. It then surveys congressional action taken during the 111th Congress to enhance
small business access to capital, including ARRA and P.L. 111-240, and discusses legislation
introduced during the 113th Congress to extend the temporary expansion of projects eligible for
504/CDC program refinancing of existing debt, which expired on September 27, 2012. For
example, H.R. 1240, the Commercial Real Estate and Economic Development (CREED) Act of
2013 would have extended the temporary expansion of the projects eligible for 504/CDC program
refinancing of existing debt for five years following the bill’s enactment. Its companion bill in the
Senate (S. 289), as amended in committee, would have extended the temporary expansion of the

8 SBA, “Recovery Act Agency Plan,” May 15, 2009, at http://www.sba.gov/sites/default/files/
sba_recovery_act_plan.pdf.
9 The 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.
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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. In addition, the report examines 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 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 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, generally
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.10 The SBA lists 27 limited and
special purpose properties (e.g., dormitories, golf courses, hospitals, and bowling alleys).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 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. Smal Business Administration (SBA), “U.S. Smal Business Administration, “SOP 50 10 5(G):
Lender and Development Company Loan Programs,” (effective October 1, 2014), pp. 232-235, at
http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf.

10 A 504/CDC loan generally may not exceed 40% of total project costs, plus 100% of eligible administrative costs. For
good cause shown, the 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 The SBA considers the following to be limited or special purpose properties: amusement parks; bowling alleys; car
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;
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;
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. See SBA, “SOP 50 10 5(G): Lender and
Development Company Loan Programs,” (effective October 1, 2014), pp. 235-236, at http://www.sba.gov/sites/default/
files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-
2014.pdf.
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Borrowers must contribute at least 10% of the financing for standard 504/CDC loans and at least
15% of the financing if the borrower is a new business or if the loan is for a limited-market
property or a special purpose property. They must contribute at least 20% of the financing if the
borrower is a new business and the loan is for either a limited-market property or a special
purpose property.
Borrower Eligibility Standards and Program
Requirements
Borrower Eligibility Standards
To be eligible for a 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;12
• 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 nonfederal sources without SBA
assistance.13
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 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
incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral
turpitude are ineligible.14

12 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. The 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, Small Business Size Standards: A Historical Analysis of Contemporary Issues, by Robert Jay
Dilger.
13 13 C.F.R. §120.100; and 13 C.F.R. §120.101.
14 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.
(continued...)
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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;
• 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.15
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 the fund does not exceed 10% of the
project’s construction costs; and

(...continued)
§120.10.
15 13 C.F.R. §120.150.
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• finance permissible debt refinancing related to business expansion.16
A 504/CDC loan cannot be used for working capital or inventory.
Job Creation and Retention Requirement
All 504/CDC borrowers must meet one of two specified economic development objectives. First,
borrowers, other than small manufacturers, 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 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 in which 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.”17
Second, if the borrower does not meet the job creation or retention requirement, the borrower can
retain eligibility by meeting any 1 of 5 community development goals or 10 public policy goals,
provided the CDC meets its required job opportunity average of at least 1 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 such as 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.18
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 10 public policy goals are
• revitalizing a business district of a community with a written revitalization or
redevelopment plan;
• increasing exports;

16 See SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), pp.
270-271, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf.
Expansion “includes any project that involves the acquisition, construction or improvement of land, building or
equipment for use by the small business applicant.” See ibid., p. 271.
17 Ibid., p. 267.
18 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. 50, 231, 267-269.
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• expanding small businesses owned and controlled by women;
• expanding small businesses owned and controlled by veterans (especially
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.19
Loan Amounts
The minimum 504/CDC debenture is $25,000. P.L. 111-240 increased the maximum 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.20
Loan Terms, Interest Rate, and Collateral
Loan Terms
The SBA determines the 504/CDC program’s loan terms and publishes them in the Federal
Register.21 The current maturities for 504/CDC loans are

19 13 C.F.R. §120.862.
20 P.L. 111-240, the Small Business Jobs Act of 2010, §1112. Maximum Loan Amounts Under 504 Program.
21 13 C.F.R. §120.933.
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• 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.22
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
years.23
Interest Rate
The interest rate for 504/CDC debentures is set by the SBA and approved by the Secretary of the
Treasury.24 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 February 2015 was 4.55%.25 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. The 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% greater than the New York
prime rate or the maximum interest rate permitted in that state, whichever is less.26
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 business has been in operation for more than two years; and
• the proposed project is a logical extension of the applicant’s current operations.27

22 See SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p.
294, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf.
23 13 C.F.R. §120.921.
24 13 C.F.R. §120.932.
25 Capital Certified Development Corporation, “504/CDC Program Interest Rates,” Austin, TX, at
https://www.capitalcdc.com/loan-programs/the-sba-504-program. The interest rate was 4.59% in March 2012, 4.01% in
January 2013, 4.16% in April 2013, 4.53% in June 2013, 5.69% in September 2013, 5.45% in October 2013, 5.29% in
April 2014, 4.82% in October 2014, and 4.78% in December 2014.
26 13 C.F.R. §120.921; and SBA, “Reporting and Recordkeeping Requirements Under OMB Review,” 77 Federal
Register 59447, September 27, 2012.
27 See SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p.
278, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf.
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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.28 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 small business 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.”29
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
nonprofit corporation,30 and it must
• 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;
• provide the SBA a copy of its IRS tax exempt status;
• indicate its area of operations, which is the state of the CDC’s incorporation;31
and
• have a board of directors that fulfills specified requirements, such as meeting at
least quarterly, mandating that a quorum consist of at least five directors, and
requiring a quorum to transact business.32

28 13 C.F.R. §120.934.
29 See SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p.
230, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf.
30 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 Federal Register 15642, March 21, 2014.
31 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]
C.F.R. §120.823.” See SBA, “504 and 7(a) Loan Programs Updates,” 79 Federal Register 15651, March 21, 2014 (the
multi-state CDC language is effective as of April 21, 2014).
32 See SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), pp.
43-45, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf. The
SBA has issued a final rule, effective April 21, 2015, that will change the SBA’s regulations concerning the CDC’s
board of directors (13 C.F.R. §120.823). For example, the CDC’s board of directors will be 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 directors, other than the CDC manager, who represent the commercial lending field. See
SBA, “504 and 7(a) Loan Programs Updates,” 79 Federal Register 15641, 15644-15646, March 21, 2014.
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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. 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
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).33
There are 270 CDCs and 228 CDCs provided at least one 504/CDC loan in FY2014.34
CDC 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 the CDC’s 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 satisfactory to the SBA, having all of its members live or work in
the area of operations of the state in which the 504/CDC project they are voting on is located, not
allowing 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.35 In addition, multistate CDCs are
required to have a separate loan committee “for each state into which the CDC expands.”36
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.37
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.”38 CDCs with 504/CDC loan portfolio balances of $20 million or more are required

33 13 C.F.R. §120.812.
34 SBA, “CDC/504 Loan Program,” at https://www.sba.gov/tools/local-assistance/cdc; and SBA, FY2016
Congressional Budget Justification and FY2014 Annual Performance Report, p. 42.
35 13 C.F.R. §120.823; and See SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,”
(effective October 1, 2014), pp. 43-45, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf. The
SBA has issued a final rule, effective April 21, 2015, that will change the SBA’s regulations 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 will be 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 Federal Register 15650, March 21,
2014.
36 See SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p. 44,
at http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf.
37 A CDC “may petition the SBA to waive the requirement of the manager being employed directly if: another
nonprofit with the same Area of Operations as the CDC and with economic development as one of its principal
activities will contribute to the management of the CDC; or the petitioning CDC is rural and has insufficient loan
volume to justify having management employed directly by the CDC.” See ibid., pp. 44-45.
38 Ibid., p. 46.
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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.39
CDC 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 standby debt;
• 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).40
CDCs submit this information, using required SBA forms, to the Sacramento, California, 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.41
Accredited Lender Program Status
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
demonstrated a good track record in the submission of documentation needed for making and

39 Ibid., p. 47.
40 Ibid., pp. 230-231.
41 Ibid., pp. 290-291.
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servicing of sound loans” an expedited process for approving loan applications and servicing
actions.42 P.L. 103-403, the Small Business Administration Reauthorization and Amendments Act
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
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
cooperation with all SBA offices.43 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 have ALP status, and ALP CDCs
approve about two-thirds of total 504/CDC loan amounts each year.44
Premier Certified Lenders Program Status
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
1, 2002, and given permanent statutory authorization by P.L. 106-554, the Consolidated
Appropriations Act, 2001 (§1: H.R. 5667, the Small Business Reauthorization Act of 2000).45
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
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 (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.”46
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
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.47

42 SBA, “Loans to State and Local Development Companies Accredited Lenders Program for Certified Development
Companies,” 60 Federal Register 20391, April 26, 1995.
43 SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p. 60, at
http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf.
44 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, on April 7, 2010 and
September 17, 2012. Also, the GAO reported that 83 CDCs had ALP status in FY2013. See GAO, Small Business
Administration: Actions Needed to Ensure Planned Improvements Address Key Requirements of the Development
Company (504) Loan Program, GAO-14-233, March 6, 2014, p. 28, at http://www.gao.gov/assets/670/661428.pdf.
45 P.L. 105-135, the Small Business Reauthorization Act of 1997, extended the program’s authorization to October 1,
2002.
46 SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p. 61, at
http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf.
47 Ibid., p. 62.
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As of October 27, 2014, 18 CDCs had PCLP status.48 In recent years, the number and amount of
504/CDC loans made through the PCLP program have declined. In FY2009, there were 441
PCLP loans amounting to $238.0 million. Those figures declined to 129 PCLP loans amounting
to $69.8 million in FY2010, 37 PCLP loans amounting to $16.1 million in FY2011, 23 PCLP
loans amounting to $8.6 million in FY2012, 15 PCLP loans amounting to $4.3 million in
FY2013, and no PCLP loans in FY2014.49
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”).50 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 more than $1
million, the appraiser must be state certified.51
Pre-Closing Interim Disbursements
SBA-approved 504/CDC loans are not closed until after project-related construction is complete,
which often takes one to two years. All loans must be disbursed within 48 months of approval.52
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, usually the same lender that provided the loan
covering 50% of the total 504 project financing.”53 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.54
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

48 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, October 27, 2014. All PCLP-
CDCs have ALP status as that is a requirement for being provided PCLP authority.
49 SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2011),” at http://www.sba.gov/about-sba-info/26641;
SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2012),” at http://www.sba.gov/about-sba-info/317721;
SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2013),” at http://www.sba.gov/about-sba/
sba_newsroom/weekly_lending_report; and SBA, Office of Congressional and Legislative Affairs, correspondence
with the author, October 27, 2014.
50 SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p. 164, at
http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf.
51 Ibid., p. 165.
52 Ibid., p. 293.
53 GAO, Small Business Administration: Actions Needed to Ensure Planned Improvements Address Key Requirements
of the Development Company (504) Loan Program, GAO-14-233, March 6, 2014, p. 5, at http://www.gao.gov/assets/
670/661428.pdf.
54 SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p. 234, at
http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf.
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minor portion of the project). The SBA’s district counsel reviews the closing package and notifies
the Central Servicing Agent (CSA, currently Wells Fargo Corporate Trust Services) and the 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 transmittal
letter or spreadsheet. As mentioned, 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.55
Loan Guaranty and Servicing Fees
Borrowers are currently charged fees amounting to about 3.5% of the net debenture proceeds plus
annual servicing and guaranty fees of about 1.5% 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 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
debenture.56 The SBA elected not to charge this fee in FY2009, FY2010, and FY2011. The SBA
did charge this fee in FY2012, FY2013, and FY2014 and is charging the fee in FY2015.57
Servicing Fee
The SBA is authorized to charge CDCs an ongoing servicing fee paid monthly by the borrower
and adjusted annually 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
under the 504/CDC program or 0.9375% per annum of the unpaid principal balance of the loan.58
The SBA’s servicing fee for FY2015 is the maximum fee permitted under law—0.9375% of the
unpaid principal balance.59

55 Ibid., p. 234.
56 13 C.F.R. §120.971(d).
57 SBA, “SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2011,” September 30, 2011, at
http://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 http://www.sba.gov/content/7a-and-504-fees-effective-october-1-2012; SBA,
“SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2013,” September 24, 2013, at
http://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 http://www.sba.gov/sites/default/files/lender_notices/5000-1318.pdf.
58 15 U.S.C. §697(b)(7)(A)(i); and 13 C.F.R. §120.971(d). The SBA’s monthly servicing fee was 0.749% per annum in
FY2011 and 0.389% in FY2010.
59 SBA“SBA Information Notice: 7(a) and 504 Fees Effective On October 1, 2014,” September 18, 2014, at
(continued...)
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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.60
Development Company Fee
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
must be paid from the servicing fees collected by the CDC and cannot be paid from any
additional fees imposed on the borrower.61
Participation Fee
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, 1996.62
The fee may be paid by the third-party lender, CDC, or borrower.
CDC Fees
CDCs are allowed to charge borrowers a processing (or packaging) fee, closing fee, servicing fee,
late fee, assumption fee, CSA fee, other agent fees, and 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 an Authorization for the Debenture. The portion of the processing fee paid
by the borrower may be reimbursed from the debenture proceeds.63
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.”64 Up to
$2,500 in closing costs may be financed out of the debenture proceeds.65

(...continued)
http://www.sba.gov/sites/default/files/lender_notices/5000-1318.pdf. The SBA’s annual servicing fee was 0.749% in
FY2011 and 0.9375% in FY2012, FY2013, and FY2014.
60 13 C.F.R. §120.971(e).
61 13 C.F.R. §120.972.
62 Ibid. When there are different liens on a property, the senior lien must be satisfied before junior liens in the event of a
default.
63 SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p. 309, at
http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf; and 13 C.F.R. §120.971(a)(1).
64 13 C.F.R. §120.971(a)(2).
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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.66
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
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.67
Central Servicing Agent Fee
CSAs are allowed to charge an initiation fee on each loan (not presently applicable) and an
ongoing monthly servicing fee under the terms of the master servicing agreement. The current
ongoing CSA monthly servicing fee is 0.1% per annum of the loan amount.68 Also, “agent fees
and charges necessary to market and service debentures and certificates may be assessed to the
borrower or the investor.”69 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.”70 In cases in which fees appear to be unreasonable, CDCs “should contact” the SBA,
which, after conducting an investigation, can “reduce the fee to an amount SBA deems

(...continued)
65 SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p. 312, at
http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf; and 13 C.F.R. §120.883(e).
66 13 C.F.R. §120.971(a)(3); and SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,”
(effective October 1, 2014), pp. 231, 312, 318, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf.
67 13 C.F.R. §120.971(a)(4); 13 C.F.R. §120.971(a)(5); and SBA, “SOP 50 10 5(G): Lender and Development
Company Loan Programs,” (effective October 1, 2014), p. 312, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf.
68 13 C.F.R. §120.971(b); and SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective
October 1, 2014), p. 312, at http://www.sba.gov/sites/default/files/sops/
SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-%20CLEAN%20Eff,%2010-1-2014.pdf.
69 13 C.F.R. §120.971(c).
70 SBA, “SOP 50 10 5(G): Lender and Development Company Loan Programs,” (effective October 1, 2014), p. 317, at
http://www.sba.gov/sites/default/files/sops/SOP%2050%2010%205%20G%20FINALWEB%20VERSION%20-
%20CLEAN%20Eff,%2010-1-2014.pdf.
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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.”71
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.72 Underwriters
are approved by the SBA to form debenture pools and arrange for the sale of certificates.
Fee Subsidies
As mentioned previously, the SBA was provided more than $1.1 billion 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 all standard 7(a) loans.73 The last extension, 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 by the Small Business Jobs Act of 2010 for this
purpose was exhausted (which occurred on January 3, 2011).74
The Obama Administration argued that additional funding for the SBA’s loan guaranty programs,
including the 504/CDC program’s fee subsidies, 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.”75 Critics contended that small

71 Ibid.
72 Ibid., p. 313.
73 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% guaranty through February 28, 2010. P.L. 111-144, the Temporary Extension Act of 2010, enacted on March
2, 2010, provided $60 million to extend the 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 use 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 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 subsidies and 90%
guaranty through December 31, 2010. P.L. 111-322, the Continuing Appropriations and Surface Transportation
Extensions Act, 2011, authorized the SBA to continue the fee subsidies and 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
on January 3, 2011).
74 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. Typically, 7% to 10% of 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
Supported More Than $12 Billion in SBA Lending to Small Businesses in Just Three Months,” January 3, 2011, at
http://www.sba.gov/content/jobs-act-supported-more-12-billion-sba-lending-small-businesses-just-three-months.
75 SBA, “Administration Announces New Small Business Commercial Real Estate and Working Capital Programs,”
February 5, 2010, at http://www.sba.gov/sites/default/files/sba_rcvry_factsheet_cre_refi.pdf; and SBA, “SBA Recovery
Lending Extended Through April 30,” March 29, 2010, at http://www.sba.gov/about-sba-services/7367/5883.
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business tax reduction, reform of financial credit market regulation, and federal fiscal restraint are
better means to assist small business economic growth and job creation.76
Program Statistics
Loan Volume
The SBA generally uses the number and amount of loans approved each fiscal year, as opposed to
the number and amount of loans disbursed, for making comparisons of lending volume among its
loan guaranty programs.77 Although loan disbursement data can be useful, loan disbursements in
one fiscal year typically include significant amounts approved in previous fiscal years. For
example, in FY2014, 73.8% of 504/CDC loan disbursements were from loans approved prior to
FY2014.78
As shown in Table 2, the number and amount of 504/CDC loans approved by the SBA declined
in FY2008 and FY2009. The most likely causes for the decline were 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 small business credit lending standards.
The number and amount of 504/CDC loans approved increased during FY2010 and FY2011 and
reached 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 quarter of FY2011.79
The continuing economic recovery, which contributed to increased demand for small business
loans generally, 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
P.L. 111-240, the Small Business Jobs Act of 2010, most likely also contributed to the program’s
increased loan volume in FY2011 and FY2012. For example, 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 temporary
expansion in FY2012.80

76 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, at http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, at http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
77 As of December 31, 2014, the 504/CDC loan guaranty program had disbursed 119,721 504/CDC loans amounting to
$59.1 billion, with an unpaid principal balance of $27.1 billion. SBA, Office of Congressional and Legislative Affairs,
correspondence with the author, February 3, 2015. The SBA maintains selected disbursement data and will provide that
data to congressional offices by request.
78 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, February 3, 2015.
79 SBA, Press Office, “Recovery Loan Incentives Spurred Continued Rebound in SBA Lending in FY2010,” October 4,
2010, at http://www.sba.gov/about-sba-services/7367/5527; and SBA, “Jobs Act Supported More Than $12 Billion in
SBA Lending to Small Businesses in Just Three Months,” January 3, 2011, at http://www.sba.gov/content/jobs-act-
supported-more-12-billion-sba-lending-small-businesses-just-three-months.
80 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, March 14, 2013.
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As expected, given the expiration of the temporary refinancing expansion, the SBA approved
fewer 504/CDC loans in FY2013 than in FY2012 (7,708 504/CDC loans amounting to $5.2
billion in FY2013 compared with 9,471 504/CDC loans amounting to $6.7 billion in FY2012).
Table 2. 504/CDC Loans and Amounts Approved, FY2006-FY2014
($ amounts in billions)
Number of Loans
Amount of the
Fiscal Year
Approved
Debentures Approved
2006 9,943 $5.7
2007 10,669 $6.3
2008 8,883 $5.3
2009 6,608 $3.8
2010 7,833 $4.4
2011 7,983 $4.8
2012 9,471 $6.7
2013 7,708 $5.2
2014 5,885 $4.2
Source: SBA, “SBA Lending Report for Major Programs, Fiscal Year 2010,” October 4, 2010, at
http://archive.sba.gov/idc/groups/public/documents/sba_homepage/serv_fa_lending_major_progs.pdf; and U.S.
Smal Business Administration, “SBA Lending Statistics for Major Programs (as of 9/30/2012, 9/30/2013, and
9/30/2014),” at http://www.sba.gov/about-sba/sba_newsroom/weekly_lending_report.
Note: Based on previous experience, the number of loans approved is typical y about 4% to 5% higher than the
actual number of loans disbursed (e.g., some borrowers decide not to accept the loan or there is a change in
ownership); and the amount of debentures approved is typical y 10% to 12% higher than the amount of
debentures disbursed.
Appropriations for Subsidy Costs
One of the SBA’s goals 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
fee collections and recoveries of collateral on purchased (defaulted) loans to not require
appropriations to issue new loan guarantees. From 2005 to 2009, the SBA did not request
appropriations to subsidize the cost of any of its loan guaranty programs, including the 504/CDC
program. However, as indicated in Table 3, loan guaranty fees and loan liquidation recoveries did
not generate enough revenue to cover loan losses in the 7(a) loan guaranty program from FY2010
through FY2013, and in the 504/CDC loan guaranty program from FY2012 through FY2015.
Appropriations were provided to address the shortfalls.
The Obama Administration indicated in its FY2016 budget request that the 7(a) and 504/CDC
loan guaranty programs will not need appropriations for business loan credit subsidies in
FY2016.81

81 SBA, FY 2016 Congressional Budget Justification and FY 2014 Annual Performance Report, p. 16.
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Table 3. Business Loan Credit Subsidies, 7(a) and 504/CDC Loan Guaranty
Programs, FY2007-FY2016
($ in millions)
FY 7(a)
504/CDC

Total
Subsidy
2007 $0.0
$0.0 $0.0
2008 $0.0
$0.0 $0.0
2009 $0.0
$0.0 $0.0
2010 $80.0
$0.0 $80.0
2011 $80.0
$0.0 $80.0
2012 $139.4
$67.7 $207.1
2013 $213.8
$102.5 $316.3
2014 $0.0 $107.0 $107.0
2015 $0.0 $45.0 $45.0
2016 request
$0.0
$0.0
$0.0
Source: SBA, FY 2011 Congressional Budget Justification and FY 2009 Annual Performance Report, p. 19; SBA,
FY 2012 Congressional Budget Justification and FY 2010 Annual Performance Report, p. 22; SBA, FY 2013
Congressional Budget Justification and FY 2011 Annual Performance Report, p. 19; SBA, FY 2014 Congressional
Budget Justification and FY 2012 Annual Performance Report, p. 25; SBA, FY 2015 Congressional Budget
Justification and FY 2013 Annual Performance Report, p. 24; P.L. 113-235, the Consolidation and Further
Continuing Appropriations Act, 2015; and SBA, FY 2016 Congressional Budget Justification and FY 2014 Annual
Performance Report, p. 16.
Notes: The Microloan program also receives a credit subsidy, primarily for providing below market interest
rates to Microloan intermediaries. The subsidies were $1.3 million in FY2007, $2.0 million in FY2008, $2.5
mil ion in FY2009, $3.0 million in FY2010 and FY2011, $3.678 million in FY2012, $3.498 million (after
sequestration) in FY2013, $4.6 mil ion in FY2014, and $2.5 million in FY2015. The Obama Administration has
requested $3.338 million for Microloan credit subsidies for FY2016.
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%),
• acquire 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%),
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• refinance existing debt (3%), or
• hire additional staff (2%).82
The Urban Institute also reported that two-thirds of the 504/CDC borrowers responding to the
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 did not know or did not respond.83 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 that it was somewhat unimportant, 4% reported very unimportant,
and 6% reported that they did not know or did not respond).84
In March 2014, the Government Accountability Office (GAO) released a report examining the
504/CDC program. GAO reported that from FY2003 through March 31, 2013, the top four types
of small businesses 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 to existing small businesses and 15% went to new small businesses.85
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.86 In FY2014, 20.3% of 504/CDC loan recipients were minority-owned businesses
(11.4% Asian, 7.1% Hispanic, 1.5% African American, and 0.3% Native American) and 16.4%
were women-owned businesses.87 Based on its comparative analysis of private-sector small
business loans and the SBA’s loan guaranty programs, the Urban Institute concluded that
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.88

82 Christopher Hayes, An Assessment of Small Business Administration Loan and Investment Performance: Survey of
Assisted Businesses (Washington, DC: The Urban Institute, 2008), p. 3, at http://www.urban.org/UploadedPDF/
411599_assisted_business_survey.pdf. The percentage total exceeds 100 because recipients were allowed to name more
than one use for the loan proceeds.
83 Ibid., p. 5.
84 Ibid.
85 GAO, Small Business Administration: Actions Needed to Ensure Planned Improvements Address Key Requirements
of the Development Company (504) Loan Program, GAO-14-233, March 6, 2014, p. 8, at http://www.gao.gov/assets/
670/661428.pdf.
86 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, at http://www.urban.org/
UploadedPDF/411596_504_gap_analysis.pdf.
87 SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2014),” at https://www.sba.gov/sites/default/files/
aboutsbaarticle/WebsiteReport_asof9_30_2014.pdf.
88 Kenneth Temkin, Brett Theodos, with Kerstin Gentsch, Competitive and Special Competitive Opportunity Gap
(continued...)
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Congressional Issues
Fee Subsidies and the 7(a) Program’s 90% Maximum Loan
Guaranty Percentage
Congress included provisions in ARRA to encourage both lenders and small businesses to use the
SBA’s loan guaranty programs. For example, ARRA provided an additional $730 million for SBA
programs. As mentioned previously, included in that amount was $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 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.89
ARRA’s funding for the fee subsidies and the 7(a) program’s 90% loan guaranty percentage was
exhausted on November 23, 2009. Congress subsequently approved an additional $305 million to
extend the fee reductions and the 90% loan guaranty percentage through May 31, 2010.90 P.L.
111-240, the Small Business Jobs Act of 2010, provided $505 million (plus an additional $5
million for related administrative expenses) to continue the fee subsidies and the 7(a) program’s
90% loan guaranty percentage through December 31, 2010. P.L. 111-322, the Continuing
Appropriations and Surface Transportation Extensions Act, 2011, authorized the SBA to continue
the fee subsidies and the 90% loan guaranty percentage through March 4, 2011, or until the
funding provided by the Small Business Jobs Act of 2010 for these purposes was exhausted
(which occurred on January 3, 2011).91
The Obama Administration argued that this additional funding 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.”92 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.93

(...continued)
Analysis of the 7(A) and 504 Programs (Washington, DC: The Urban Institute, 2008), p. 21, at http://www.urban.org/
UploadedPDF/411596_504_gap_analysis.pdf.
89 P.L. 111-5, the American Recovery and Reinvestment Act of 2009, Section 501. Fee Reductions.
90 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%
maximum 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.
91 See footnote 74.
92 SBA, “Administration Announces New Small Business Commercial Real Estate and Working Capital Programs,”
February 5, 2010, at http://www.sba.gov/sites/default/files/sba_rcvry_factsheet_cre_refi.pdf; and SBA, “SBA Recovery
Lending Extended Through April 30,” March 29, 2010, at http://www.sba.gov/about-sba-services/7367/5883.
93 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, at http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, at http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
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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 statistically
selected CDC/504 loans approved under Premier Certified Lender (PCL) authority that were
disbursed during fiscal year (FY) 2008.”94 The loans “had been approved by 3 of the most active
of the 24 PCLs” operating in 2008.95
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.”96 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.97
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.98
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.99
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

94 SBA, Office of the Inspector General, “Report on Audit of Premier Certified Lenders in the Section 504 Loan
Program,” March 23, 2010, at p. 20, http://www.sba.gov/office-of-inspector-general/868/5032.
95 Ibid.
96 Ibid., p. 1.
97 Ibid., pp. 3, 4.
98 Ibid., p. 4.
99 Ibid., pp. 4, 5.
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guidance for these reviews should be modified, as appropriate, to ensure that reviewers properly
assess lender determination of borrower repayment ability and eligibility.”100
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.101
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 and 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.”102 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.103
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.”104
As mentioned previously, in recent years, both the number and amount of 504/CDC loans made
through the PCLP has declined. In FY2009, PCLP CDCs approved 441 504/CDC loans totaling
$238.0 million. Those figures declined to 129 504/CDC loans totaling $69.8 million in FY2010,
37 504/CDC loans totaling $16.1 million in FY2011, 23 504/CDC loans totaling $8.6 million in
FY2012, 15 504/CDC loans totaling $4.3 million in FY2013, and no 504/CDC loans in
FY2014.105
In addition, the SBA’s Office of Credit Risk Management (OCRM) created new metrics in
FY2014 for monitoring 504/CDC lender loan performance called SMART (measuring the
lender’s solvency and financial condition, management and governance, asset quality and

100 Ibid., p. 5.
101 Ibid.
102 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.
103 Ibid., pp. i, 27-30.
104 Ibid., p. 35.
105 SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2011),” at http://www.sba.gov/about-sba-info/26641;
SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2012),” at http://www.sba.gov/about-sba-info/317721;
SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2013),” at http://www.sba.gov/about-sba/
sba_newsroom/weekly_lending_report; and SBA, “SBA Lending Statistics for Major Programs (as of 9/30/2014),” at
https://www.sba.gov/sites/default/files/aboutsbaarticle/WebsiteReport_asof9_30_2014.pdf.
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servicing, regulatory compliance, and technical issues and mission).106 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 the SBA.”107
OCRM also created a “detailed bench-marking analysis project that will 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.”108
Legislative Activity During the 111th Congress
Congress authorized several changes to the 504/CDC program during the 111th Congress in an
effort to increase the number, and amount, of 504/CDC loans. Congress did not approve any
changes to the program during the 112th Congress and has not, to date, approved any changes to
the program during the 113th Congress.
The Obama Administration’s Proposals
During the 111th Congress, the Obama Administration supported congressional efforts to
temporarily subsidize fees for the 7(a) and 504/CDC loan guaranty programs and 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% for all standard 7(a) loans. As mentioned previously,
Congress subsequently provided nearly $1.1 billion to subsidize fees for the 7(a) and 504/CDC
loan guaranty programs and to increase the 7(a) program’s maximum loan guaranty percentage to
90%.
The Obama Administration also proposed 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 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;

106 SBA, Office of Inspector General, “The 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-
17%20The%20SBA's%20Portfolio%20Risk%20Management%20Program%20Can%20Be%20Strengthened.pdf.
107 Ibid.
108 Ibid.
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• raise 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.109
Arguments for Increasing the SBA’s Maximum Loan Limits
The Obama Administration argued that increasing the maximum loan limits for the 504/CDC,
7(a), Microloan, and SBAExpress programs would allow the SBA to “support larger projects,”
which would “allow the SBA to help America’s small businesses drive long-term economic
growth and the creation of jobs in communities across the country.”110 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.”111
Arguments Against Increasing the SBA’s Maximum Loan Limits
Critics of the Obama Administration’s proposals to increase 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, especially for the SBAExpress program, which has
experienced somewhat higher default rates than other SBA loan guaranty programs.112 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 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.”113
Others contended that creating a small business direct lending program within the SBA would
reduce paperwork requirements and be more efficient in providing small businesses access to
capital than modifying existing SBA programs that rely on private lenders to determine if they
will issue the loans.114 Also, as mentioned previously, others argued that providing additional
resources to the SBA or modifying the SBA’s loan programs as a means to augment small
businesses’ access to capital is ill-advised. In their view, the SBA has limited impact on small
businesses’ access to capital. They argued that the best means to assist small business economic

109 SBA, “Administration Announces New Small Business Commercial Real Estate and Working Capital Programs,”
February 5, 2010, at http://www.omwbe.wa.gov/OMWBE%20News/documents%5Csba_rcvry.pdf.
110 Ibid.
111 Ibid.
112 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/; 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,
Jr., Chair, House Committee on the Budget, 111th Cong., 2nd sess., March 11, 2009, p. 3, at http://www.house.gov/
smbiz/democrats/Reports/FY%202010%20Views%20and%20Estimates%20v2.pdf.
113 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.
114 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/.
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growth and job creation is to focus on small business tax reduction, reform of financial credit
market regulation, and federal fiscal restraint.115
P.L. 111-5, the American Recovery and Reinvestment Act of 2009
As mentioned previously, in 2009, ARRA provided an additional $730 million for SBA
programs, including $375 million to temporarily reduce fees in the SBA’s 504/CDC loan
guaranty and 7(a) programs ($299 million) 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 all standard 7(a) loans ($76 million).116
P.L. 111-240, the Small Business Jobs Act of 2010
P.L. 111-240 included several provisions designed to enhance small business access to capital.
For example, it
• provided $510 million 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 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;
• 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;117

115 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, at http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, at http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
116 SBA, “Recovery Act Agency Plan,” May 15, 2009, at http://archive.sba.gov/idc/groups/public/documents/
sba_homepage/sba_recovery_act_plan.pdf.
117 The 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.” The 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). The
refinancing could not be used for indebtedness subject to a federal guarantee, and it had to be collateralized by eligible
fixed assets. The 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. The act limited the amount of refinancing to $7.5 billion each fiscal year. See P.L.
111-240, the Small Business Jobs Act of 2010, §1122. Low-Interest Refinancing Under the Local Development
(continued...)
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• 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
million and an average net income after federal taxes (excluding any carryover
losses) for the preceding two fiscal years of not more than $5 million;118
• increased the maximum loan size for 7(a) loans from $2 million to $5 million;
• temporarily increased for one year (through September 27, 2011) the cap on
SBAExpress loans from $350,000 to $1 million; and
• increased the maximum loan size for the Microloan program from $35,000 to
$50,000.
The act also authorized the Secretary of the Treasury to establish a $30 billion Small Business
Lending Fund to encourage community banks to provide small business loans ($4 billion was
issued), 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.119 In addition, it contained revenue raising provisions to offset the act’s cost and
authorized a number of changes to other SBA loan and contracting programs.
Legislative Activity During the 112th Congress
As mentioned previously, 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, initially enacted as part
of P.L. 111-240, the Small Business Jobs Act of 2010, argued that it would create jobs by enabling
small 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.”120

(...continued)
Business Loan Program.
118 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.
119 For further analysis of P.L. 111-240, the Small Business Jobs Act of 2010, see CRS Report R41385, Small Business
Legislation During the 111th Congress, by Robert Jay Dilger and Gary Guenther. For further analysis of the Small
Business Lending Fund, see CRS Report R42045, The Small Business Lending Fund, by Robert Jay Dilger. For further
analysis of the State Small Business Credit Initiative, see CRS Report R42581, State Small Business Credit Initiative:
Implementation and Funding Issues, by Robert Jay Dilger.
120 Senator 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
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.
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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.”121 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 small businesses than expanding an existing
SBA spending program.
H.R. 2950, the Small Business Administration 504 Loan Refinancing Extension Act of 2011, was
introduced on September 15, 2011, and referred to the House Committee on Small Business. The
bill would have 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 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 allowed 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 Small
Business Jobs Act of 2010.122 The amendment was ruled non-germane by the chair on March 21,
2012, and was not included in the final version of the bill that was approved by the Senate the
following day.123
S. 3572, the Restoring Tax and Regulatory Certainty to Small Businesses Act of 2012, was
introduced on September 19, 2012, and referred to the Senate Committee on Small Business and
Entrepreneurship and the Senate Committee on Finance. It would have allowed 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 Small Business Jobs Act of 2010.
S. 1828, a bill to increase small business lending, and for other purposes, was introduced on
November 8, 2011, and referred to the Senate Committee on Small Business and
Entrepreneurship. The bill 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 originally funded by ARRA.
Legislative Activity During the 113th Congress
Two bills 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

121 Barry Pineless, Chief Counsel, House Committee on Small Business, “Letter to Members, House Committee on
Small Business, Full Committee Hearing on The Budget Outlook for the Small Business Administration,” April 18,
2013, pp. 12, 13, at http://smallbusiness.house.gov/uploadedfiles/revised_hearing_memo_4-24-2013.pdf.
122 Senator Harry Reid, “Consideration of H.R. 3606, the Jumpstart our Business Startups Act,” Text of Amendments,
Congressional Record, vol. 158, part 43 (March 15, 2012), p. S1754.
123 H.R. 3606, the Jumpstart Our Business Startups Act, was passed by the House on March 8, 2012. The 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).
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504/CDC program refinancing of existing debt for five years following the bill’s enactment. It
was referred to the House Committee on Small Business on March 18, 2013. Its companion bill in
the Senate (S. 289) was referred to the Senate Committee on Small 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.124
The Obama Administration has requested authority to reinstate the 504/CDC refinancing program
(without a business expansion requirement) in FY2016 to support up to $7.5 billion in lending.125
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 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.126 Others worried about
the long-term adverse economic effects of spending programs that increase the federal deficit and
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.127
In terms of specific program changes, continuing the 504/CDC program’s temporary fee
subsidies, increasing its loan limits, temporarily expanding its refinancing options, and
authorizing the SBA to establish an alternative size standard 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.128
Critics argued that these actions would increase the risk of defaults and result in higher guaranty
fees or the need to provide the SBA additional funding to cover loan subsidy costs.129 Others

124 The 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 Performance Report, p. 37; and SBA, FY2015 Congressional Budget Justification
and FY2013 Annual Performance Report, pp. 5, 37.
125 SBA, FY2016 Congressional Budget Justification and FY2014 Annual Performance Report, p. 41.
126 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, at http://www.whitehouse.gov/the-press-office/remarks-
president-job-creation-and-economic-growth.
127 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, at http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, at http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
128 SBA, “Administration Announces New Small Business Commercial Real Estate and Working Capital Programs,”
February 5, 2010, at http://www.sba.gov/sites/default/files/sba_rcvry_factsheet_cre_refi.pdf.
129 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/; and U.S.
(continued...)
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advocated a more modest increase in the maximum loan limits to 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 that they avoid “making small borrowers carry a
disproportionate share of the risk associated with larger loans.”130
During the 112th and 113th Congresses, congressional oversight focused on the SBA’s
administration of the program changes enacted during the 111th Congress, the impact of those
changes on the SBA’s lending, and ways to address and minimize increased costs associated with
loan losses. Although there continues to be widespread congressional support for providing
assistance to small businesses, federal fiscal constraints may impede efforts to further expand the
504/CDC program in the near future.
Given existing fiscal constraints, it is likely that congressional oversight during the 114th
Congress will continue to focus on (1) the SBA’s administration of the 504/CDC program to
ensure that the program is as efficient as possible; and (2) the program’s efficacy in job retention
and creation. In addition, now that the 504/CDC program is no longer expected to require
appropriations for loan credit subsidies, it is likely that legislation to reinstate the 504/CDC loan
refinancing program (without a business expansion requirement) will be reintroduced during the
114th Congress.

Author Contact Information

Robert Jay Dilger

Senior Specialist in American National Government
rdilger@crs.loc.gov, 7-3110


(...continued)
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,
Jr., Chair, House Committee on the Budget, 111th Cong., 2nd sess., March 11, 2009, p. 3, at http://www.house.gov/
smbiz/democrats/Reports/FY%202010%20Views%20and%20Estimates%20v2.pdf.
130 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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