B-149685, DEC 7, 1973, 53 COMP GEN 422

B-149685, DEC 7, 1973, 53 COMP GEN 422

LOANS - PARTICIPATORY LOANS - SMALL BUSINESS ADMINISTRATION AND PRIVATE LENDING INSTITUTIONS - INTEREST RATES PRIVATE LENDING INSTITUTIONS PARTICIPATING WITH THE SMALL BUSINESS ADMINISTRATION (SBA) IN MAKING LOANS TO ASSIST PUBLIC OR PRIVATE ORGANIZATIONS OPERATED FOR THE BENEFIT OF THE HANDICAPPED OR TO ASSIST HANDICAPPED INDIVIDUALS IN ESTABLISHING, ACQUIRING, OR OPERATING A SMALL BUSINESS CONCERN PURSUANT TO SECTION 7(G) OF THE SMALL BUSINESS ACT ARE NOT RESTRICTED TO THE 3 PER CENTUM PER ANNUM INTEREST RATE PRESCRIBED BY SECTION 7(G)(2) OF THE ACT, FOR TO APPLY THE LANGUAGE OF SECTION 7(G)(2) LITERALLY WOULD DEFEAT THE PURPOSE OF THE ACT. THEREFORE THE SBA MAY APPROVE AN INTEREST RATE WHICH IS "LEGAL AND REASONABLE" ON THE PARTICIPATION LOANS MADE BY LENDING INSTITUTIONS UNDER SECTION 7(G), EVEN THOUGH THE SBA ON ITS DIRECT OR PARTICIPATION LOANS IS RESTRICTED TO THE PRESCRIBED 3 PERCENT INTEREST RATE. HOWEVER, AT AN OPPORTUNE TIME THE SBA SHOULD SEEK APPROPRIATE LEGISLATIVE REVISION OF THE LANGUAGE IN QUESTION.

TO THE ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION, DECEMBER 7, 1973:

REFERENCE IS MADE TO YOUR LETTER OF AUGUST 8, 1973, REQUESTING OUR CONCURRENCE IN YOUR DECISION TO PERMIT PRIVATE LENDING INSTITUTIONS TO CHARGE A RATE OF INTEREST WHICH IS "LEGAL AND REASONABLE" ON LOANS MADE UNDER SECTION 7(G) OF THE SMALL BUSINESS ACT, AS AMENDED, 15 U.S.C. 636(H), PURSUANT TO AGREEMENTS TO PARTICIPATE ON AN IMMEDIATE OR DEFERRED BASIS WITH THE SMALL BUSINESS ADMINISTRATION (SBA).

SECTION 7(G) WHICH WAS ENACTED BY SECTION 3 OF PUBLIC LAW 92-595, APPROVED OCTOBER 27, 1972, AUTHORIZES SBA TO MAKE LOANS EITHER DIRECTLY OR IN COOPERATION WITH BANKS OR OTHER LENDING INSTITUTIONS THROUGH AGREEMENTS TO PARTICIPATE ON AN IMMEDIATE OR DEFERRED BASIS TO ASSIST PUBLIC OR PRIVATE ORGANIZATIONS OPERATED FOR THE BENEFIT OF HANDICAPPED INDIVIDUALS OR TO ASSIST HANDICAPPED INDIVIDUALS THEMSELVES IN ESTABLISHING, ACQUIRING OR OPERATING A SMALL BUSINESS CONCERN.

YOU STATE THAT WHILE THE STATUTE PERMITS THESE LOANS TO BE MADE EITHER DIRECTLY BY SBA OR IN PARTICIPATION WITH LENDING INSTITUTIONS THE LANGUAGE ESTABLISHING THE INTEREST RATE TO BE CHARGED APPEARS TO RESTRICT THE PARTICIPANT'S SHARE OF A LOAN TO 3 PER CENTUM PER ANNUM, THE SAME AS MAY BE CHARGED BY THE ADMINISTRATION. MORE SPECIFICALLY, SECTION 7(G)(2) OF THE SMALL BUSINESS ACT, AS ENACTED BY SECTION 3 OF PUBLIC LAW 92-595, PROVIDES: "ANY LOAN MADE UNDER THIS SUBSECTION SHALL BEAR INTEREST AT A RATE OF 3 PER CENTUM PER ANNUM."

YOUR LETTER CONTINUES:

IT IS EVIDENT THAT IF SBA WERE TO APPLY THE LANGUAGE OF PUBLIC LAW 92 595 IN ITS STRICTEST SENSE THE MAXIMUM AMOUNT OF INTEREST A PARTICIPANT COULD CHARGE WOULD BE 3 PER CENTUM PER ANNUM. IT IS EQUALLY EVIDENT THAT NO PARTICIPATION LOANS WOULD BE MADE IF A PARTICIPATING LENDING INSTITUTION COULD NOT CHARGE A MORE REALISTIC RATE. IT SEEMED IMPLAUSIBLE TO US THAT CONGRESS WOULD ENACT A LAW WHICH PERMITTED (AND THEREFORE ENCOURAGED) LENDING INSTITUTION PARTICIPATION IN A LOAN PROGRAM, AND AT THE SAME TIME ESTABLISHED AN INTEREST RATE WHICH WOULD IN EFFECT PRECLUDE THESE LENDING INSTITUTIONS FROM SUCH PARTICIPATION.

YOU STATE THAT AN EXAMINATION OF THE LEGISLATIVE HISTORY OF PUBLIC LAW 92 -595 SHEDS NO LIGHT, EITHER PRO OR CON, WHICH WOULD ENABLE YOU TO ESTABLISH THE INTENT OF CONGRESS WITH RESPECT TO THIS PROBLEM, BUT YOU FEEL THAT THE INTENT OF CONGRESS IN ENACTING PUBLIC LAW 92-595 WAS THAT A REASONABLE AND APPROPRIATE INTEREST RATE COULD BE CHARGED ON THE PARTICIPATING INSTITUTION'S SHARE OF ANY LOAN MADE UNDER SECTION 7(G) OF THE SMALL BUSINESS ACT, AS AMENDED.

THEREFORE SBA HAS SENT TO THE FEDERAL REGISTER FOR PUBLICATION PROPOSED RULES AND REGULATIONS TO ESTABLISH A LOAN PROGRAM TO PROVIDE ASSISTANCE TO CERTAIN NON-PROFIT ORGANIZATIONS AND TO SMALL BUSINESS CONCERNS OWNED BY HANDICAPPED INDIVIDUALS. YOU POINT OUT THAT SECTION 118.31(B) AND (C) THEREIN ESTABLISHES THE INTEREST RATE ON DIRECT LOANS AND THE SBA SHARE OF AN IMMEDIATE PARTICIPATION LOAN AT 3 PERCENT PER ANNUM WHILE, SUBJECT TO THE APPROVAL OF SBA, THE PARTICIPANT'S SHARE OF IMMEDIATE PARTICIPATION LOANS AND/OR GUARANTEED LOANS PRIOR TO SBA'S PURCHASE SHALL BE AT A RATE WHICH IS "LEGAL AND REASONABLE."

WE AGREE THAT IF SBA WERE TO APPLY THE LANGUAGE OF SECTION 7(G)(2) IN ITS STRICTEST SENSE, THE MAXIMUM AMOUNT OF INTEREST A PARTICIPANT COULD CHARGE WOULD BE 3 PER CENTUM PER ANNUM. AND AS YOU STATE IT IS PROBABLE THAT NO PARTICIPATION LOANS WOULD BE MADE BY PRIVATE BANKING INSTITUTIONS IF SUCH INSTITUTIONS COULD NOT CHARGE A MORE REALISTIC INTEREST RATE.

WE ALSO AGREE THAT IT SEEMS HIGHLY UNLIKELY THAT CONGRESS WOULD PASS LEGISLATION WHICH PERMITTED LENDING INSTITUTION PARTICIPATION IN A LOAN PROGRAM, AND AT THE SAME TIME ESTABLISH AN INTEREST RATE WHICH WOULD IN EFFECT PRECLUDE THESE LENDING INSTITUTIONS FROM SUCH PARTICIPATION. HENCE, IN THE INSTANT CASE IT WOULD NOT BE UNREASONABLE TO CONCLUDE THAT THE CONGRESSIONAL INTENT IN ENACTING THE INTEREST PROVISION OF PUBLIC LAW 92-595 WAS THAT A REASONABLE AND APPROPRIATE INTEREST RATE BE CHARGED ON THE PARTICIPATING INSTITUTION'S SHARE OF ANY LOAN MADE UNDER SECTION 7(G).

ACCORDINGLY, IN THE PRESENT CASE WE WOULD NOT OBJECT TO THE SMALL BUSINESS ADMINISTRATION'S PROPOSED RULES AND REGULATIONS, WHICH ESTABLISH THE INTEREST RATE ON DIRECT LOANS AND THE SBA SHARE OF AN IMMEDIATE PARTICIPATION LOAN - MADE UNDER SECTION 7(G) - AT 3 PERCENT PER ANNUM AND THE PARTICIPANT'S SHARE OF IMMEDIATE PARTICIPATION LOANS AND/OR GUARANTEED LOANS PRIOR TO SBA'S PURCHASE AT AN INTEREST RATE WHICH IS "LEGAL AND REASONABLE." WE SUGGEST, HOWEVER, THAT AT AN OPPORTUNE TIME SBA SEEK APPROPRIATE LEGISLATIVE REVISIONS OF THE LANGUAGE IN QUESTION.