December 1, 1979, the guaranty fee may be charged to the borrower: Provided, however, That the lender has paid such fee to SBA pursuant to this paragraph, and the charge to the borrower is not made prior to first disbursement. The fee may be a part of the proceeds of the loan.

(iv) For guaranties approved on and after February 1, 1980, the onetime guaranty fee, with respect to loans with a maturity not in excess of 12 months, shall be one quarter of one (4%) percent of the authorized and guaranteed portion of the loan, and shall be payable by the lender at the same time it submits the loan application to SBA. After SBA approves such short term loan, lender may charge the borrower the guaranty fee paid by lender and, in addition, lender may charge the borrower a commitment fee amounting to one quarter of one (4%) percent of the unguaranteed amount of such short term loan. If the loan application is declined or withdrawn prior to approval, SBA will return the guaranty fee to lender. There will be no rebate of the guaranty fee at any time after the date of loan approval stated in the loan authorization where the application for guaranty is approved as submitted by the lender. If SBA approves the guaranty of the loan with any substantial modification or addition to the loan conditions submitted by the lender, SBA will return the guaranty fee to lender if SBA receives, within 30 calendar days after SBA's approval date, a written request from lender to cancel the loan guaranty and to return the guaranty fee. SBA will not charge an additional guaranty fee for loans extended beyond the original maturity date. Lender shall not make any disbursements after the original maturity date.

(2) Interest. (i) The rate of interest on direct loans and on SBA's share of immediate participation loans is established by the statutory formula set forth in section 7(a)(4) of the Small Business Act, as amended.

(ii) Subject to approval of SBA a participating lending institution may establish such rate of interest on guaranteed loans, and on its share of immediate participation loans, as may be

legal and reasonable, subject to the maximum acceptable interest rate under paragraph (b)(1)(iv) of this section hereof.

(iii)(A) Subject to paragraph (b)(2)(ii) of this section, for loans approved between June 19, 1978, and November 30, 1979, a participating lending institution (lender) may utilize a fluctuating rate of interest. The fluctuations may occur not more often than quarterly, and must rise or fall on the same basis. The initial interest rate on the loan shall not exceed SBA's maximum acceptable rate as of the date the loan application was submitted by the lender to SBA, and the initial rate must remain in effect for not less than one full fluctuation period (e.g. one full calendar quarter): thereafter, the publication of, or variations in, SBA's maximum acceptable rate shall have no further effect or application when the interest rate fluctuates as the base rate fluctuates. The fluctuating interest may only be based either on the prime rate in effect on the first date of the fluctuation period and published daily in a public print media, or on the SBA Optional Peg Rate which is published by SBA. For loans with maturities under seven (7) years, the increase in interest added to the base rate cannot exceed the lesser of (1) the difference in interest rates between the base rate and SBA's maximum acceptable rate as of the date the loan application was submitted by the lender to SBA, or (2) two and onehalf (22) percentage points. For loans with maturities of seven (7) or more years, the increase in interest to be added to the base rate may be arbitrarily established by the lender up to, but not to exceed, three (3) percentage points, without regard to SBA's maximum acceptable rate, except as to the limitation on the initial interest rate as provided in this paragraph.

(B) Subject to paragraph (b)(2)(ii) of this section, and for loans approved on or after December 1, 1979, a participating lender may utilize a fluctuating rate of interest. The fluctuations may occur not more than quarterly, and must rise and fall on the same basis. Fluctuation periods commence on the first day of a calendar quarter (e.g., Jan. 1, April 1, July 1, Oct. 1). The ini

tial interest rate on the loan shall not exceed SBA's maximum acceptable rate as of the date the loan application was submitted by the lender to SBA, and the initial rate must remain in effect for not less than one full fluctuating period (e.g. one full calendar quarter) after first disbursement. Thereafter, the publication of, or variations in, SBA's maximum acceptable rate shall have no further effect or application when the interest rate on the note fluctuates as the base rate fluctuates. The base rate for fluctuating interest may be either the prime rate in effect on the first day of the fluctuation period and published daily in a public print media, or the SBA Optional Peg Rate which is published in the FEDERAL REGISTER quarterly by SBA. For loans with maturities under seven (7) years, the increase in interest to be added to the base rate may be established by the lender up to, but cannot exceed, two and one-quarter (2) percentage points. For loans with maturities of seven (7) or more years, the increase in interest to be added to the base rate may be established by the lender up to, but not to exceed, two and three quarter (2%) percentage points, without regard to SBA's maximum acceptable rate, except as to the limitation on the initial interest rate as provided in this paragraph. Amortization of the loan may be either by fixed principal amounts plus interest at the specified rate for the particular fluctuating period, or by equal payments combining principal and interest: Provided, however, That the equal payment may be based on an interest rate higher than the note rate to insure that future payments will be sufficient to pay interest on the outstanding principal.

(iv) 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 loan programs.

(v) When SBA purchases its share of a loan, the rate of interest to the borrower on SBA's share shall be the same as the rate of interest provided in the note. On those loans with a fluctuating interest rate, the interest charged by SBA shall be at that rate in effect at the time of default where

a default has occurred, or at that rate in effect at the time of purchase where no default has occurred.

(vi) When SBA purchases its guaranteed share, its payment of accrued interest to the date of purchase shall be at the rate of interest provided in the note. On those loans with a fluctuating interest rate, the SBA's payment of accrued interest shall be at that rate in effect at the time of default where a default has occurred, or at that rate in effect at the time of purchase where no default has occurred. (3) Service fees. In servicing (i) immediate participation loans, (ii) guaranteed loans where SBA has purchased its portion but has not assumed responsibility for servicing, and (iii) guaranteed loans where, the guaranteed portion has been transferred by the lender to a third party, the lender may charge a service fee but shall deduct such fee only from interest collected for the account of SBA or the said third party, as the case may be, and only so long as the lender is servicing the loan: Provided, however, That such fee shall not be added to any amount which the borrower is obligated to pay under the loan. Where SBA's share of any loan described in clauses (i) and (ii) is seventy-five percent or less, the service fee shall be three-eighths of one percent per annum on the unpaid principal balance of SBA's share of the loan. Where SBA's share of any loan described in clauses (i) and (ii) is in excess of seventy-five percent, the service fee shall be one-fourth of one percent per annum on the unpaid principal balance of SBA's share of the loan. The above stated limitations do not apply when a lender is servicing a loan for the benefit of a third party other than SBA.

(4) [Reserved]

(5) Applicants' fees. No applicant for SBA financial assistance shall be required as a condition or requirement for obtaining a loan to pay any fees or charges to the lender, Associate, or designee of either, or to purchase any goods or services (including insurance) from the lender, Associate, or designee of either, except as hereinafter provided.

(i) Fees for services. A lender or Associate may charge an applicant reasonable fees for necessary services actually performed at the request of the applicant, including fees for necessary services actually rendered in in the preparation of the application. Nothing contained herein shall be deemed to authorize any lender to impose upon an applicant fees or charges, any part of which defrays the lender's overhead costs. If additional, supplemental or revised financial statements, income projections, appraisals, abstracts of title or other record searches are required for the processing of a loan, or as a condition of the disbursement thereof, a lender or an Associate (with the consent of the applicant in either case) may prepare such documentation for a reasonable fee: Provided, however, That legible copies of any such documents shall be made available to the applicant, together with any supporting work papers that the applicant may request. A lender may receive the fees authorized under this paragraph whether or not the requested loan is made. A lender may be reimbursed by the borrower for any expenses incurred for filing or recordation necessary to perfect a security interest in the assets of the borrower, including title insurance.

(ii) Disclosure of fees. On all applications submitted to SBA the full amount of all fees or expenses, together with a description of the services rendered therefor, paid or to be paid by the applicant to the lender, Associate, or designee of either for purchase of any goods or services (including insurance), shall be disclosed to SBA, as required by Part 103 and by § 122.18 of this chapter.

(6) Insurance. An applicant may be required, as a condition of the loan, to purchase or maintain hazard insurance on tangible assets to be used as collateral. An applicant may also be required, when appropriate, to purchase or maintain personal insurance coverage; but any such requirement to purchase personal insurance shall be limited to declining balance term insurance in an initial face amount not in excess of the outstanding balance of the loan, and declining thereafter consistently with the amortization of the

loan balance. An applicant shall not be required to purchase insurance from the lender, Associate, or broker, agent, or carrier designated by the lender or Associate. When any insurance is purchased from the lender, Associate, or broker, agent, or carrier designated by the lender or Associate, the cost of such insurance shall be deemed a fee for the purpose of § 120.3(b)(5).

[Rev. 6, 38 FR 19022, July 17, 1973, as amended by Amdt. 3, 40 FR 7622, Feb. 21, 1975; Amdt. 4, 40 FR 30262, July 18, 1975; Amdt. 6, 41 FR 26203, June 25, 1976; 43 FR 26279, June 19, 1978; 43 FR 35907, Aug. 14, 1978; 44 FR 70455, Dec. 7, 1979; Amdt. 25, 45 FR 20054, Mar. 27, 1980]

§ 120.4 Eligible loan participants.

(a) General eligibility requirements. SBA is authorized by appropriate enabling legislation to make participation loans in its discretion in cooperation with banks and other lending institutions, excluding small business investment companies licensed by SBA, through agreements to participate on an immediate or deferred (guaranty) basis. Such agreements do not obligate SBA to participate on any particular loan or loans that a lender may submit. The existence of a participation agreement does not limit SBA's right to determine from time to time, as a matter of general policy or with respect to particular loans, the ratio between its share, immediate or guaranteed, of a loan and the lender's share, or SBA's right to withhold, at its sole discretion, approval of a proposed transfer of the guaranteed portion of any loan. To qualify as a loan participant a lending institution must

(1) Capability. Have a continuing capability to evaluate, process, close, disburse, and service commercial term and other loans authorized to be made by SBA to small business concerns. Such capability will be deemed to exist when the lending institution's operations are at all times conducted by persons possessing the ability to evaluate, process, close, disburse, and service loans of the types aforesaid. The lending institution shall hold itself out to the public as engaged in the making of such loans, and shall maintain a reasonably accessible office in its own

name, have a listed telephone number, and be open to the public during regular business hours.

(2) Good character and reputation. Have continuing good character and reputation. A lending institution will be deemed to possess good character and reputation if the holders, direct or indirect, of ninety percent or more of its stock, and all members of its management (including officers and directors) possess good character and reputation.

(3) Financing subsidiaries. Not be a concern that is or will be engaged primarily in financing the operations of an affiliate as defined in § 121.3-2 of this chapter.

(4) Supervision and examination. Be a lending institution subject to continuing supervision and examination by a State or Federal chartering, licensing, or similar regulatory authority as SBA may deem satisfactory, such as a State or National bank, or a State or Federal savings and loan association.

(b) Small Business Lending Companies. Lending institutions which have qualified as "Subsection (b) Lenders" (Small Business Lending Companies) may continue as loan participants if in addition to the requirements set forth in paragraphs (a) (1), (2) and (3) of this section, they also meet each of the following requirements:

(1) Business Purpose. Be a corporation (profit or non-profit) engaged solely in the making of loans in participation with SBA, and shall not be engaged in any other business or activity except as hereinafter authorized.

(2) Subject to SBA Supervision and Examination. Be subject to supervision and examination by SBA and to conduct their business operations in accordance with such regulations as may be promulgated by SBA.

(c) Determination of eligibility—(1) Application by prospective Subsection (a) Lenders. A lending institution wishing to participate with SBA in making loans to small business concerns and meeting all requirements set forth in paragraph (a) of this section should submit its request to the SBA District Office serving the area in which the lending institution intends to participate with SBA in making

loans to small business concerns. The District Office may require further evidence of the lending institution's qualifications.

(d) Suspension and revocation of eligibility to participate. SBA reserves the right to revoke the eligibility of any lender to participate with SBA or to suspend temporarily the eligibility of any lender to participate with SBA, as a result of any violation of SBA regulations, any breach of any agreement with SBA, or any change of circumstance resulting in the lender's inabil- . ity to meet the operational requirements set forth herein: Provided, however, that such suspension or revocation shall not invalidate any guaranty previously entered into by SBA. Suspension or revocation shall be accomplished in the manner set forth below:

(1) Service of Notice. SBA shall serve upon a lender notice of its intention to suspend or revoke its eligibility (Notice), which Notice shall set forth in detail the basis of SBA's intention to suspend or revoke the said lender's eligibility. The Notice shall be served upon the lender by registered or certified mail, return receipt requested, addressed to the said lender's principal business office.

(2) Service of papers other than the Notice. Papers other than the Notice may be served upon a lender as provided in (d)(1) of this section, or by service in the manner provided therein upon an attorney at law or other agent designated by the lender.

(3) Service of papers upon SBA. Papers in connection with the suspension or revocation of a lender's eligibility shall be served upon SBA by:

(i) Delivery to the Associate Administrator for Finance and Investment, SBA, 1441 L Street, NW., Washington, D.C. 20416; or

(ii) Registered or certified mail, return receipt requested, addressed to the Associate Administrator for Finance and Investment at the abovelisted address.

(4) Effect of failure to respond. The revocation or temporary suspension of a lender's eligibility to participate shall become effective as of the close of business on the tenth day following the lender's receipt of the Notice unless, prior to the expiration of the

aforementioned time period, SBA shall receive notice of the lender's intention to submit an answer.

(5) Answer. A lender that has notified SBA of its intention to file an answer shall be given twenty additional days to submit to SBA such answer, including briefs and affidavits, showing why its eligibility should not be suspended or revoked. SBA may, in its sole discretion, extend the period permitted hereunder for the filing of an answer. Suspension or revocation of the eligibility of any lender that has filed an answer shall be held in abeyance pending final determination by SBA.

(6) Initial decision. SBA's Notice, together with the said lender's answer thereto, including briefs and affidavits, shall be referred by the Associate Administrator for Finance and Investment to an SBA employee designated by him (designee) for initial determination of any material issues of fact or of law. No person who has participated in the preparation or approval of the Notice to the lender, or in any investigation or other fact-finding procedure in connection therewith shall participate in the preparation of the initial determination; and no person who has participated in the lender's case, as aforesaid, shall communicate with, or otherwise attempt to influence the initial decision of, the designee, who shall, as soon as possible, prepare proposed findings and conclusions and present them to the Associate Administrator for Finance and Investment.

(7) Final decision. The decision of the Associate Administrator for Finance and Investment shall give appropriate weight to the recommended findings and conclusions of the designee and shall, without further proceedings, be the final decision of SBA.

(8) Effect of decision. Suspension or revocation of a lender's eligibility to participate with SBA shall become effective upon the lender's receipt of notification of SBA's decision, but shall not relieve that lender from its obligation to service any loan made in participation with SBA, nor any other obligation arising out of, or out of the breach of, any agreement with SBA, or any regulation promulgated by SBA.

[Amdt. 3, 40 FR 7623, Feb. 21, 1975, as amended by Amdt. 13, 42 FR 35150, July 8, 1977; Rev. 6, Amdt. 27, 47 FR 10, Jan. 4, 1982]

§ 120.5 Operations of eligible participants.

(a) General. Lenders must observe the following regulations as a condition of their continuing eligibility as participants:

(1) Conflicts. Without the prior written approval of the responsible SBA district office, SBA will not participate in any loan to a small business concern in which the lender has, or acquires while the loan is outstanding, a direct or indirect interest. For example:

(i) SBA will not participate in any loans made to an Associate;

(ii) SBA will not participate in any loan made for the purpose of financing, directly or indirectly, the purchase of real or personal property, or of services, from the lender or any Associate unless SBA shall have first made a written determination that the purchase of the property or services from the lender or Associate is in the best interests of the small business concern.

(iii) SBA will not participate in repaying or refinancing an existing loan unless SBA shall have first made a written determination, upon the basis of evidence in the file, that

(A) The terms of the existing indebtedness are causing undue hardship to the small business concern;

(B) Financing on the terms proposed will relieve the hardship and contribute to the orderly growth of the small business concern, and will not violate § 120.2(d)(1) of this part; and

(C) Refinancing, extension, or modification of the outstanding indebtedness is not available without such SBA participation.

(iv) When the Lender's application to SBA for an immediate participation or loan guarantee does not contain a full disclosure statement, including negative statements to the best of their knowledge, from the lender and from the small business concern, relative to all relationships discussed in § 120.1(d) of this part that exist or have existed within six months prior to the date of the lender's application and an undertaking that no such rela