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SUMMARY

Before finally promulgating regulations EPA looks critically at the impact of capital requirements on small firms and incorporates such considerations appropriately in the guidelines. However, certain marginal businesses still cannot obtain private financing on reasonable terms. If these firms are small and fit the SBA definitions, then they may become eligible for SBA assistance. Every effort should be made to insure that no section of existing legislation arbitrarily excludes whole industries from pollution control loan assistance. Only after present programs prove to be inadequate should further assistance programs be proposed for pollution control expenses. Sincerely yours,

ROBERT G. RYAN,

Director, Office of Legislation. POLLUTION CONTROL INVESTMENT COSTS, FOR SMALL BUSINESSES

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Total.
Water costs: 4

Feedlots
Meat processing -
Canned and preserved seafood processing -
Dairies.
Textiles
Timber
Furniture
Paint and ink.
Paving and roofing-
Leather tanning
Electroplating and metal finishing --

5 40.0 20.6 89.1 256.3 78.0 9.4 3.7 7.0 3.4 46.0 8 221.3

46-71 37-85

40 73

46

72-86

Total.

704.8

1 All cost estimates are from 1974 "Cost of Clean Air" report. Table 1-2.
2 All size estimates (except for feedlots) from an unpublished SBA report based on 1967 census data.

3 Foundries have been included because they are the chief area within the metal industries group where EPA anticipates significant impacts on small businesses.

*All cost estimates are from EPA development documents, economic analyses, or Report to House Subcommittee on Agriculture, Environmental and Consumer Protection, November 1974. 5 Estimate is for large feedlots; guidelines for smaller feedlots are being developed. 6 Approximate estimate. 7 Estimate excludes large integrated mills, as only the smaller mills will be significantly impacted. 8 Represents costs for direct discharmers: does not net out costs for plants qualifying for a small plant variance.

[From the Federal Register, July 17, 1973]

CHAPTER 1-SMALL BUSINESS ADMINISTRATION

(Rev. 6]

PART 120-BUSINESS LOAN POLICY

On March 9, 1973, the Small Business Administration published in the Federal Register (38 FR 6409) a notice of proposed rulemaking which consolidated revision 5 and its several amendments. It also deleted policy relating to disaster loans, which policy has been added to Part 123 of these regulations, effective July 1, 1973. It also proposed changes relating to refusals by lending institutions prior to SBA approval of direct loans, gambling activities involving the sale of official State lottery tickets, and the one-time guaranty fee. The public was invited to comment by March 29, 1973. Such comment has been received and considered, and the proposed revision is adopted with minor modifications. This Revision 6 is effective as of July 1, 1973, as follows: Sec. 120.1 Introduction. 120.2 Business loans and guarantees. 120.3 Terms and conditions of business loans and guarantees.

AUTHORITY : 72 Stat. 387, as amended, 15 U.S.C. 636, sec. 5, 72 Stat. 395, 15 U.S.C. 634 (b) (6).

$ 120.1 Introduction.

(a) This part is established by the SBA to set forth principles and policies which will be followed in the granting and denial of financial assistance for business loans to small business concerns. It is not intended that this general statement of policy provide answers to all questions which may arise in connection with specific applications.

(b) “Financial assistance" as used in this part shall include direct loans made by SBA, immediate participation loans, and guaranteed loans.

(c) “Financial institutions” as used in this part shall include, but not be limited to, banks and other lending institutions whose regular course or business entails to making of commercial, industrial and/or other loans of the type authorized to be made by SBA to eligible small business concerns, and who otherwise meet the criteria specified in $ 120.3(c). $ 120.2 Business Loans and Guarantees.

Basic principles governing the granting and denial of applications for financial assistance:

(a) Applications for financial assistance may be considered only when there is evidence that the desired credit is not otherwise available on reasonable terms. The financial assistance applied for shall be deemed to be otherwise available on reasonable terms, unless it is satisfactorily demonstrated that:

(1) Proof of refusal of the required financial assistance has been obtained from

(i) The applicant's bank of account;

(ii) If the amount of financial assistance applied for is in excess of the amount that the lender normally lends to any one borrower, then a refusal from a correspondent bank or from any other lending institution whose lending capacity is adequate to cover the financial assistance applied for; and

(iii) Not less than 2 financial institutions for direct loans in cities where the population exceeds 200,000. Proof of refusal must contain the date, amount and terms requested, and the reasons for not granting the desired credit. Refusals to advance credit should not be considered the full test of unavailability of credit and, where there is knowledge or reasons to believe that credit is otherwise available on reasonable terms from other sources, the financial assistance applied for cannot be granted notwithstanding the receipt of written refusals from such lending institutions.

(2) The financial assistance required does not appear to be obtainable:

(i) On reasonable terms through the public offering or provate placing of securities of the applicant;

(ii) Through the disposal at a fair price of assets not required by the applicant in the conduct of its existing business or not reasonably necessary of its potential healthy growth; and

(iii) Without undue hardship through utilization of the personal credit or resources of the owner, partners, management, or principal shareholders of the applicant;

(iv) Through other applicable Government financing.

(b) It is the policy to stimulate and encourage loans by banks and other lending institutions.

(1) An applicant for a direct SBA loan must show that an immediate participation or guaranteed loan is not available. An applicant for an immediate participation loan must show that a guaranteed loan is not available.

(2) SBA's share of immediate participation loans shall not exceed 75 percent of the loan. Exceptions may be made in cases when the participant's legal lending limit precludes a 25-percent participation. In such cases the participant will be required to share in the loan to the extent of its legal lending limit but in no event less than 10 percent. In guaranteed loans the exposure of SBA under the guaranty may not exceed 90 percent of the unpaid principal balance and accrued interest.

(3) No agreement to extend financial assistance under the Small Business Act shall establish any preferences in favor of a bank or other lending institution.

(c) Assurance of repayment, change of ownership, and recreational and amusement enterprises.

(1) No financial assistance shall be extended unless there exists reasonable assurance that the loan can and will be repaid pursuant to its terms. Reasonable assurance of repayment will exist only where the past earnings record and future prospects indicate ability to repay the loan and other obligations. It will be deemed not to exist when the proposed loan is to accomplish an expansion which is unwarranted in the light of the applicant's past experience and management ability, or when the effect of making the loan is to subsidize inferior management.

(2) Where the purpose of the loan application is to effect a change in the ownership of the applicant small business concern, the loan may usually be approved where there is a reasonable justification for the change in ownership on the ground that the change will promote the sound development or preserve the existence of a small business concern; or will contribute to a wellbalanced national economy by facilitating ownership of small business concerns by persons whose participation in the free enterprise system has been prevented or hampered because of economic, physical, or social disadvantages, or because of disadvantages in the business or residential locations.

(3) Where the purpose of the financial assistance is to finance the construction, acquisition, conversion, or operation of recreational or amusement enterprises, any such enterprise must be open to the general public, it must be properly licensed by appropriate State or local authority, and the character and reputation of the applicant will be given special consideration.

(d) Financial assistance will not be granted by SBA:

(1) If the direct or indirect purpose or result of granting such assistance would be to

(i) Pay off a creditor or creditors of the applicant who are inadequately secured and are in position to sustain a loss.

(ii) Provide funds, directly or indirectly, for payment distribution, or as a loan to owners, partners, or shareholders of the applicant which do not change ownership interests in applicant. This shall not apply to ordinary compensation for services rendered.

(iii) Refund a debt owed to a Small Business Investment Company. (iv) Replenish funds theretofore used for such purposes.

(2) If the financial assistance will provide or free funds for speculation in any kind of property, real or personal, tangible or intangible;

(3) If the applicant is an eleemosynary institution or other nonprofit enterprise: Provided, however, That this provision shall not be construed to bar financial assistance to a cooperative if it carries on a business activity and the purpose of such activity is to obtain pecuniary benefit for its members in the operation of their otherwise eligible small business concerns. An otherwise eligible small business concern will not become ineligible because it is owned in whole or in part by a nonprofit organization.

(4) If the applicant is a newspaper, magazine, book publishing company, radio broadcasting company, television broadcasting company, film production company, or similar enterprise;

(5) If any part of the gross income of the applicant (or of any of its principal owners) is derived from gambling activities, except in those cases where an otherwise eligible small business concern obtains less than one-third of his gross income from its income or commission from the sale of official state lottery tickets under a state license.

(6) If the financial assistance is to provide funds to an enterprise primarily engaged in the business of lending or investments or to any otherwise eligible enterprise for the purpose of financing investments not related or essential to the enterprise;

(7) If the purpose of the financial assistance is to finance the acquisition, construction, improvement, or operation of real property which, or is to be, held primarily for sale or investment;

(8) If the effect of the granting of the financial assistance will be to encourage monopoly or will be inconsistent with the accepted standards of the American system of free competitive enterprise;

(9) Generally, if the financial assistance would be used primarily in agricultural activities, Agricultural activities include, but are not limited to, the production of food and fiber. Where the applicant is engaged in an agricultural activity and financial assistance has been formally declined by an Agency of the Federal Government or an agricultural credit service supervised by the Farm Credit Administration, such applicant may be eligible for financial assistance from SBA: Provided, however, That an activity will not be eligible for financial assistance if it (i) produces (or in the last growing season produced) one or more crops currently eligible for U.S. Department of Agriculture support payment or production loan; (ii) is engaged in the production of livestock or poultry, including eggs, except for (a) the operation of a hatchery for the production of baby chicks for sale to others, provided that the hatchery purchases from others more than

15 years:

50 percent of its eggs; or (b) the operation of a commercial feed yard for cattle or hogs where its income is derived from the service operation of housing and feeding animals, either owned by others or purchased from producers solely for the purpose of fattening and resale prior to slaughter; or (c) the operation of a commercial poultry feed yard where its income is derived from the service operation of housing and feeding poultry owned by others, even when such operation results in the production of eggs; or (iii) is engaged in the production of fish, unless the production process or type of fish is novel, innovative, or experimental in nature.

(10) Generally, if the financial assistance to be provided is for use in multilevel sales distribution plans. $ 120.3 Terms and conditions of business loans and guarantees.

(a) Maturities. The maturity of business loans made under the Small Buisness Act shall be restricted to the minimum consistent with sound business practice. The maturity may not exceed 10 years, except that such portion of a loan made for the purpose of constructing facilities may have a maturity not in excess of

(b) Charges and interest rates—(1) Charges. In guaranteed loans (those made by a financial institution with which SBA has entered into an ageeement to guarantee as set forth in the Part 122 of this chapter), a guaranty charge shall be payable by the financial institution to SBA for such agreement. The guaranty charge shall be one-fourth of 1 percent per annum of the portion of the loan which, SBA has guaranteed, for guarantees approved prior to January 1 1973. Effective January 1, 1973, the guaranty charge is set on a one-time basis at 1 percent of the amount of the authorized guaranteed portion of the loan, and is payable at first disbursement by the participating lender. For loans made under a revolving line of credit with a maturity of up to 12 months, the guaranty charge is one quarter of one percent of the guaranteed portion payable initially by the participating lender at the time of SBA approval of the line of credit. Longer maturities, or extensions, will be pro-rated on the basis of one quarter of one percent per annum, payable to SBA at the time of approval of the extension of maturity.

(2) Interest. (i) Except as provided in subdivision (iii) of this subparagraph, interest on SBA's share of immediate participation loans shall not exceed 572 percent per annum and where the rate of interest on the share of the loan of the bank or other financial institution is less than 512 per annum then the rate of SBA's share of the loan shall be at the same rate, but not less than 5 percent per annum. Subject to the approval of SBA, a participating financial institution may establish such rate of interest on its share of a loan as shall be legal and reasonable. Subject to the above guidelines, lending institutions may be given the option of utilizing a fluctuating rate of interest. The fluctuations may occur no more than semiannually, and must rise or fall on the same basis.

(ii) Direct loans: Except as provided in subdivision (iii) of this subparagraph, interest on all direct loans which may be made by SBA shall be at the rate of 572 percent per annum except as may be otherwise required by reason of the provisions of the Servicemen's Readjustment Act of 1944, as amended.

(iii) Interest on SBA's share of financial assistance, which may be extended to Group Corporations shall be at the rate of 5 percent per annum. Subject to the approval of SBA, financial institutions may establish such rate of interest on their share of participation or guaranteed loans as shall be legal and reasonable.

(iv) Except as provided in subdivision (iii) of this subparagraph, the interest rate on guaranteed loans, subject to the approval of SBA, may be established by the participating financial institution at a rate that shall be legal and reasonable. Subject to the above guidelines, lending institutions may be given the option of utilizing a fluctuating rate of interest. The fluctuations may occur no more than semiannually, and must rise or fall on the same basis. When purchased by SBA, the rate of interest to the borrower on SBA's share of the loan shall be 572 percent per annum, except where the rate of interest on the share of the loan of the financial institution is less than 572 percent per annum then the rate on SBA's share of the loan shall be at the same rate, but not less than 5 percent per annum. When SBA purchases its guaranteed share, its payment to the guaranteed participant of accrued interest to the date of purchase shall be at the interest rate established by participant but shall not exceed an effective rate of interest of 8 percent per annum, and without any future adjustment for any unpaid accrued interest in excess of 8 percent per annum.

iv) The interest which a financial institution pays SBA for temporary advances under the liquidity privilege in a guaranty loan agreement varies according to the approval date of SBA's guaranty on a given loan.

(vi) From time to time SBA may publish in the Federal Register notices of the maximum rates acceptable to SBA under the immediate participation and guaranty programs.

(3) Service fees. In immediate participation loans, and guaranteed loans where SBA has purchased its portion, made and serviced by a finanical institution, the financial institution may deduct a service fee only out of interest collected for the account of SBA so long as the bank is servicing the loan: And provided, That such fee shall not be added to any amount which borrower is obligated to pay under the loan. Where SBA's share of the loan is 75 percent or less, the service fee shall be three-eighths of 1 percent per annum on the unpaid principal balance of SBA's share of the loan. Where SBA's share is in excess of 75 percent of the loan, the service fee shall be one-fourth of 1 percent per annum on the unpaid principal balances of SBA's portion of the loan.

(4) Closing fees. A closing fee equivalent to one-eighth of 1 percent of SBA's approved portion of the loan, or $10, whichever is the greater, shall be imposed upon all direct loans and immediate participation loans made and serviced by SBA which are authorized pursuant to section 7(a) of the Small Business Act, as amended. The fee shall be paid to SBA prior to disbursement of the loan and shall be exclusive of any other closing costs (such as recording fees and taxes, costs of title examination and title insurance, and other charges incident to the transaction)

which are customarily paid by the borrower. (c) Eligible loan participant. SBA is authorized by appropriate enabling legislation to make participation loans to small concerns in cooperation with banks or other lending institutions through agreements to participate on an immediate or deferred basis. In order to serve as an eligible loan participant in a particular loan transaction with SBA, the financial institution must

(1) Capacity to service loan. Have the continuing capacities for processing; evaluating, disbursing, and servicing commercial term, and other loans authorized to be made by SBA to small concerns.

(2) Capital structure and financial standing. Have an adequate capital structure aggregating not less than $200,000, which must be so unimpaired or of such tangible nature to be considered sound (except that the $200,000 minimum shall not apply to institutions which are subject supervisory and examining control of State or Federal chartering, licensing, or similar regulatory authority) and, together with its existing or proposed directors, officers, other employees, and other persons connected with its organization and operations, possess good character as well as general standing and reputation in the community based on their lending and other established financial ability and experience.

(3) Qualified management. Have and maintain in charge of operations qualified management which shall be available to the public during regular business hours, and hold itself out to the public as engaged in the making of commercial, industrial and other loans of the type authorized to be made by SBA to eligible small concerns.

(4) Supervisory and examining authority. Be operating subject to applicable supervisory and examining control of State or Federal chartering, licensing or similar regulatory authority, or, in the absence of such control, be authorized to and shall enter into a written agreement with SBA to submit appropriate financial reports to SBA or to make available for SBA examination its books, records, accounts and affairs deemed necessary and appropriate by SBA to the protection of its interest in the transaction.

(5) Absence of other financial or self-dealing interest in borrower concern. Not possess, nor may any of its officers, directors, stockholders owning ten (10) or more percent of any class of shares, investment advisers, or other associates or affiliates, possess any interest directly or indirectly, in the small business concern (or in the case of a loan to a Local Development Company, the small business concern to be assisted) by reason of a stock or warrants position, or as a result of financing its own sales or business operations (except that any such interest in the borrower by a small business investment company, duly licensed by SBA, associated or affiliated with a loan participant shall not disqualify such otherwise eligible loan participant). Concerns operating as a subsidiary or affiliate engaged primarily in lending for the purpose of financing the sale of products or services or other business operations of an affiliate or parent concern are not considered eligible. In the event the borrower shall be required to obtain personal insurance coverage (as contrasted with hazard insurance to protect collateral), it shall be only in such minimum amounts and costs as are necessary to protect the loan. Such insurance coverage shall be limited to declining term policies, providing a decrease in coverage consistent with the decreasing loan balance outstanding.

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