2524442 Notice of Emergency and Proposed Rulemaking amending subsection 851.1 and adding subsections 851.12 through 851.48 of chapter 8 in Title 27, revisions to the Microloan Fund.
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DEPARTMENT OF INSURANCE, SECURITIES AND BANKING
NOTICE OF EMERGENCY AND PROPOSED RULEMAKING
The Commissioner of the Department of Insurance, Securities and Banking, pursuant to the authority set forth in section 2372 of the Small, Local, and Disadvantaged Business Enterprise Development and Assistance Act of 2005, effective October 20, 2005 (D.C. Law 16-33; D.C. Official Code § 2-218.72 (2011 Repl.)) (Act) and Mayor’s Order 2012-69 dated May 17, 2012, hereby gives notice of the intent to adopt, by emergency and proposed rulemaking, revisions to section 851, Microloan Fund, in chapter 8, title 27 of the District of Columbia Municipal Regulations by amending subsection 851.2 and adding subsections 851.12 through 851.48, upon publication of this notice in the D.C. Register. The emergency rules will expire one hundred twenty (120) days after their effective date of May 21, 2012 on September 18, 2012 or upon publication in the D.C. Register of a Notice of Final Rulemaking, whichever occurs first.
This emergency action is necessary because the Commissioner of the Department of Insurance, Securities and Banking (DISB or Commissioner) filed an earlier application to participate in the U.S. Treasury State Small Business Credit Initiative Program (SSBCI) using the Capital Access Program Act of 2010 (D.C. Law 18-322; D.C. Official Code § 2-1210.02 et seq. (2011 Supp.)) . The Commissioner, after a series of meetings, has decided to use U.S. Treasury funds for additional programs permitted by the SSCBI and Mayor’s Order 2012-69, dated May 17, 2012 which authorizes the Microloan Fund as the mechanism to establish and administer two (2) new specific uses. Because the Microloan Fund is a financing tool established pursuant to section 2375(b) of the Act to sustain and/or increase the level of business activity, job creation and retention, and provide access to capital for the sustainability and expansion of designated categories of Certified Business Enterprises (CBEs), it is an ideal mechanism for the District of Columbia’s use of SSBCI funds. As part of the Commissioner’s amended application, the U.S. Treasury requires that the rulemaking be in place on the date of application. Therefore, the creation of the two (2) new specific uses of the Microloan Fund will entail revising the present rules in section 851 by amending subsection 851.2 and adding subsections 851.12 through 851.48. Additionally, because the amended application is tied to the SSBCI funds from the U.S. Treasury which requires that states and municipalities act expeditiously to receive those funds, the need to amend and get approval of the application necessitates that the comment period be shortened to ten (10) days to ensure that the rulemaking is in place on the date of the application. Further, emergency enactment will allow the Department of Small and Local Business Development to continue to administer the current uses of the Microloan Fund. This rulemaking, therefore, is necessary for the preservation of the public safety and welfare.
Pursuant to D.C. Official Code § 2-218.72 (2011 Repl.), the proposed rulemaking will be submitted to the Council of the District of Columbia for a forty-five (45) day period of review. Final rulemaking will occur upon approval by the Council. If the Council does not approve or disapprove the proposed rules, in whole or in part, by resolution within this forty-five (45) day review period, the proposed rules shall be deemed approved.
Simultaneously with the submission of this rulemaking to the Council, DISB will publish this emergency and proposed rulemaking, which includes a comment period of ten (10 days), in the D.C. Register. Upon approval or disapproval from the Council within the forty-five (45) days, a Notice of Final Rulemaking will be published.
Section 851 (Microloan Fund) of chapter 8 (Local, Small, and Disadvantaged Business Enterprises Contracting) of Title 27 (Contracts and Procurement) is amended as follows:
Subsection 851.2 is amended to read as follows:
851.2 Funding issued from the Microloan Fund may be structured as a grant, senior or subordinated secured loan, as a loan guarantee, collateral, surety, or any other financial assistance. The Department may, in its discretion, outsource the loan underwriting process to a qualified non-profit organization or financial institution.
Subsections 851.12 through 851.48 are added as follows:
851.12 The Department of Insurance, Securities and Banking (DISB) shall administer that portion of the Microloan Fund specifically designated for the Collateral Support Loan Guarantee Program. DISB may, in its discretion, outsource the loan underwriting process to a qualified non-profit organization or financial institution.
851.13 The Collateral Support Loan Guarantee Program shall provide a cash collateral account to an eligible lender in order to enhance the collateral coverage of an eligible recipient, as defined in the Act, that is otherwise qualified but unable to meet the lender’s security requirements. The cash collateral account will then be pledged as collateral on behalf of the eligible recipient.
851.14 An eligible lender for the Collateral Support Loan Guarantee Program may include:
(a) A federally insured commercial lender;
(b) A federally insured credit union; or
(c) A Community Development Financial Institution.
851.15 To enroll in the Collateral Support Loan Guarantee Program the eligible lender must provide to DISB:
(a) A signed State Small Business Credit Initiative Collateral Support Agreement with DISB;
(b) A certification that it is in compliance with the requirements of section 31 C.F.R. § 103.121;
(c) A certification that, consistent with OMB Circular A-129, it has at least twenty percent (20%) of its own capital at risk in any loan enrolled in the Collateral Support Loan Guarantee Program, unless a waiver is granted;
(d) A certification that no principal of the lender has been convicted of a sex offense against a minor as such term is defined in section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. § 16911); and
(e) Any other document necessary for the administration of the Collateral Support Loan Guarantee Program or for compliance with the U.S. Treasury’s State Small Business Credit Initiative.
851.16 Eligible recipients under the Collateral Support Loan Guarantee Program include businesses that meet the requirements under § 851.3 and exclude businesses listed in § 851.4. Each eligible recipient shall submit an application, form to be determined by DISB or eligible lenders, to include the requirements outlined in § 851.8 (a) through (f) together with any other requirements mandated by DISB or eligible lenders.
851.17 An eligible recipient under the Collateral Support Loan Guarantee Program, including its affiliates and subsidiaries, must have seven hundred fifty (750) or fewer employees at the time the loan is enrolled in the Collateral Support Loan Guarantee Program. An eligible recipient must use the loans issued through the use of the Collateral Support Loan Guarantee Program for a business purpose. Eligible recipients may not be:
(a) Executive officers, directors, or principal shareholders of the financial institution enrolling the loan; a member of the immediate family of an executive officer, director, or principal shareholder of the financial institution or qualified non-profit organization enrolling the loan; or a related interest of such an executive officer, director, principal shareholder, or member of the immediate family. For the purpose of these eligible recipient restrictions, the terms “executive officer,” “director,” “principal shareholder,” “immediate family,” and “related interest” refer to the same relationship to a financial institution lender or qualified non-profit organization as the relationship described in 12 C.F.R. part 215, or any successor to such part;
(b) A business engaged in speculative activities that develops profits from fluctuations in price rather than through normal course of trade, such as wildcatting for oil or dealing in commodities futures, unless those activities are incidental to the regular activities of the business and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the business;
(c) A business that earns more than half of its annual net revenue from lending activities, unless the business is a non-bank or non-bank holding company or Community Development Financial Institution;
(d) A business engaged in pyramid sales, where a participant's primary incentive is based on the sales made by an ever-increasing number of participants; or
(e) A business engaged in activities that are prohibited by federal or District of Columbia law.
851.18 Eligible recipients under the Collateral Support Loan Guarantee Program must certify that no principal of the borrowing entity has been convicted of a sex offense against a minor as such term is defined in section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. § 16911). For the purposes of this certification, “principal” is defined as “if a sole proprietorship, the proprietor; if a partnership, each managing partner and each partner who holds twenty percent (20%) or more ownership interest in the partnership; if a corporation, limited liability company, association or a development company, each director, each of the five (5) most highly compensated executives, officers, or employees of the entity, and each direct or indirect holder of twenty percent (20%) or more of the ownership stock or stock equivalent of the entity.”
851.19 The loan proceeds from the Collateral Support Loan Guarantee Program must be used for a business purpose, including, purposes outlined in § 851.6 business acquisitions and expansions, commercial real estate and construction. The entire proceeds of the loan must be used within the District of Columbia.
851.20 The loan proceeds from the Collateral Support Loan Guarantee Program cannot be used:
(a) To repay delinquent federal or District of Columbia income taxes unless the eligible recipient has a payment plan in place with the relevant taxing authority;
(b) To repay taxes held in trust or escrow, for example, payroll or sales taxes;
(c) To reimburse funds owed to any owner, including any equity injection or injection of capital for the business’s continuance;
(d) To purchase any portion of the ownership interest of any owner of the business;
(e) To acquire or hold passive investments;
(f) For refinancing of existing debt, other than a refinancing permitted by § 851.22;
(g) For legal or illegal gambling; or
(h) For evangelizing, proselytizing, or lobbying.
851.21 For the Collateral Support Loan Guarantee Program, the maximum aggregate outstanding loan amount(s) that may be enrolled for any single eligible recipient or any common enterprise in which the eligible recipient has an ownership interest is five million dollars ($5,000,000). Personal guarantees are required from any individual holding twenty percent (20%) or more ownership interest in the eligible recipient.
851.22 A loan refinanced from a different lender may be enrolled in the Collateral Support Loan Guarantee Program. Loans with the same lender or its affiliate may be refinanced and enrolled in the Collateral Support Loan Guarantee Program, but only to the extent additional principal is added above the refinanced amount. The additional principal amount, and only that amount, is eligible for enrollment in the Collateral Support Loan Guarantee Program. Fluctuations in the outstanding balance of a line of credit, without increasing the covered amount under the Collateral Support Loan Guarantee Program, will not be deemed to be a refinancing of the loan. If the outstanding balance of a loan, which is not a line of credit, is reduced to zero (0), that loan will no longer be considered an enrolled loan in the Collateral Support Loan Guarantee Program. If a loan that is a line of credit has an outstanding balance of zero (0) for twelve (12) consecutive months, it will no longer be considered an enrolled loan in the Collateral Support Loan Guarantee Program, unless, before the expiration of the twelve (12) month period, the eligible lender has reaffirmed in writing to the eligible recipient that the line of credit will remain open and the eligible recipient has acknowledged that reaffirmation in writing to the eligible lender and the DISB.
851.23 The maximum amount that DISB may pay into a cash collateral account, pursuant to the Collateral Support Loan Guarantee Program, is fifty percent (50%) of the loan amount. The amount paid into the cash collateral account may come from the Microloan Fund or from a financial institution pursuant to a Co-Guarantee Collateral Support Agreement between DISB and the eligible lender. The collateral support provided to the aggregate of all loans enrolled in the Collateral Support Loan Guarantee Program shall be as follows:
(a) No more than ten percent (10%) of the dollar amount of all enrolled loans shall receive a fifty percent (50%) guarantee, unless DISB modifies this standard upon reasonable belief that the District of Columbia will meet a ten (10) to one (1) leverage requirement for all funds disbursed through the Collateral Support Loan Guarantee Program.
(b) No more than seventy-five percent (75%) of the dollar amount of all enrolled loans shall receive a thirty percent (30%) guarantee, unless DISB modifies this standard upon reasonable belief that the District of Columbia will meet a ten (10) to one (1) leverage requirement for all funds disbursed through the Collateral Support Loan Guarantee Program; and
(c) No more than fifteen percent (15%) of the dollar amount of all enrolled loans shall receive a twenty percent (20%) guarantee, unless DISB modifies this standard upon reasonable belief that the District of Columbia will meet a ten (10) to one (1) leverage requirement for all funds disbursed through the Collateral Support Loan Guarantee Program.
851.24 All Microloan Funds transferred to a cash collateral account will be the property of, and solely controlled by DISB. Interest or income earned on the funds will be credited to the cash collateral account. DISB is authorized to withdraw at any time from a cash collateral account all interest or income that has been credited to the cash collateral account. Interest or income withdrawals may be used for any purpose in connection with the Collateral Support Loan Guarantee Program. The cash collateral account will be reduced proportionately with the principal reduction of the loan, on an annual basis or sooner if the loan is paid off.
851.25 Each cash collateral account for participating eligible lenders will be established in the name of DISB and maintained at that eligible lender or at another designated insured depository financial institution in a segregated account to be identified as “DISB Microloan Fund - Collateral Support Loan Guarantee Program” or other name that DISB determines.
851.26 The cash collateral accounts are to be interest bearing, and participating eligible lenders may not charge DISB for any fees related to the Collateral Support Loan Guarantee Program transactions or for the maintenance of a cash collateral account or any other related fees.
851.27 After an eligible lender charges off all or part of a loan enrolled in the Collateral Support Loan Guarantee Program and after making other efforts to collect upon the enrolled loan, including but not limited to seeking judgment and levying against collateral, the lender may file a claim with DISB by submitting a completed claim form, including any required information that DISB determines, bearing the execution signature of an authorized officer of the eligible lender. The eligible lender’s claim may include the amount of the enrolled principal left unpaid by eligible lender’s collection efforts plus up to ninety (90) days of accrued interest, and fifty percent (50%) of the reasonable, documented out-of-pocket expenses incurred by the eligible lender, but not paid by the eligible recipient, in pursuing collection efforts, including the preservation of collateral, the total not to exceed the amount of funds in the cash collateral account for that particular loan.
851.28 Upon receipt and acceptance by DISB of a claim filed by the eligible lender, DISB will promptly pay the claim as submitted solely from funds in the cash collateral account for that particular loan. If after DISB pays the claim, the eligible lender recovers from an eligible recipient any amount for which payment of the claim was made, the eligible lender shall promptly pay to the Microloan Fund the amount recovered, less its reasonable, documented out-of-pocket expenses. The eligible lender shall retain documentation in its files of those out-of-pocket expenses. The eligible lender will only be required to pay to DISB amounts in excess of the amount needed to fully cover the eligible lender’s loss on a loan under the Collateral Support Loan Guarantee Program.
851.29 Each eligible lender will make quarterly and annual reports to DISB. Quarterly reports will be due on or before the thirtieth (30th) day of the month following the end of the quarter for which the eligible lender is submitting its report. On or before January 31st of each year, the eligible lender shall file a report with DISB indicating the number of eligible recipients, the total dollar amount of new loans (broken down by industry type, loan size, annual revenues, and number of full-time equivalent employees (including those who are District residents by Ward, and separately, the number of jobs created or retained as a result of the loan, for each eligible recipient) and the aggregate outstanding balance of all enrolled loans as of the previous December 31st. In computing the aggregate outstanding balance of all enrolled loans, the balance of any loan shall not be greater than the covered amount of the loan as enrolled and, in the case of lines of credit, the outstanding balance shall be the enrolled credit line amount.
851.30 The eligible lender is to submit to DISB a monthly account statement which reflects all activity for the period under the cash collateral account within ten (10) days of the previous calendar month end.
851.31 From time to time, but no less frequently than annually, DISB will submit a report to the eligible lender indicating the aggregate amount of funds available under the Collateral Support Loan Guarantee Program. If at any time such report indicates that the aggregate amount of available funds is less than one million dollars ($1,000,000), then during the period of time until the next report, the eligible lender may contact DISB for confirmation of the aggregate amount of then available funds under the Collateral Support Loan Guarantee Program.
851.32 DISB may, in its sole discretion, terminate its obligation to enroll loans under the Collateral Support Loan Guarantee Program. The termination shall be applicable on the effective date specified in the notice of termination, except that the termination shall not apply to any loan which is made on or before the date on which the notice of termination is received by the eligible lender. If a participating eligible lender discontinues using the Collateral Support Loan Guarantee Program and no additional loans are being made under the Collateral Support Loan Guarantee Program, DISB will make withdrawals against each cash collateral account proportionately to the outstanding balance of the loan until each loan has been repaid. At that time, DISB will withdraw all remaining funds in the account.
851.33 DISB may charge a Closing Fee of up to four percent (4%) of the balance of the cash collateral account at closing and an annual fee of up to four percent (4%) of the annual balance of the cash collateral account.
851.34 DISB shall administer that portion of the Microloan Fund specifically designated for the Surety Bonding Guarantee Program.
851.35 Under the Surety Bonding Guarantee Program, DISB may guarantee a surety up to the lesser of ninety percent (90%) or one million dollars ($1,000,000) of the surety’s loss under a bid bond, payment bond, or performance bond on a contract financed by the federal government, a state government, a local government, or a private entity. DISB shall deposit the amount of the guarantee into a cash collateral account for each approved surety guarantee. The amount paid into the cash collateral account may come from the Microloan Fund or from a financial institution pursuant to a Co-Guarantee Collateral Support Agreement between DISB and the financial institution.
851.36 An eligible surety under the Surety Bonding Guarantee Program shall:
(a) Be acceptable as surety or reinsurer on Federal bonds under title 31 of the United States Code or shall be approved by the Commissioner of the DISB;
(b) Sign a State Small Business Credit Initiative Surety Bonding Guarantee Agreement with DISB; and
(c) Sign any other document necessary for the administration of the Surety Bonding Guarantee Program or for compliance with the U.S. Treasury’s State Small Business Credit Initiative.
851.37 The term of a guarantee under the Surety Bonding Guarantee Program may not exceed the contract term, including:
(a) The maintenance or warranty period required by the contract; and
(b) The period during which the surety may be liable for latent defects.
851.38 DISB may vary the terms and conditions of a guarantee based on:
(a) DISB's history of experience with a surety; and
(b) Any other factor DISB considers relevant.
851.39 DISB may execute and perform a bid bond, performance bond, and payment bond as a surety for the benefit of a principal, who is an eligible recipient under the Act and excluding business under § 851.4, in connection with a contract financed by the federal government or a state government, a local government, or a private entity. The bonds may not exceed one million dollars ($1,000,000) each. Bonds are subject to the approval of DISB based on the bond worthiness of the principal. DISB shall deposit the amount of the bond into a cash collateral account for each approved surety.
851.40 DISB may only approve a guarantee or a bond under this part if DISB determines that the contract, for which a bond is sought to be guaranteed or issued, will have a substantial economic impact on the District. To determine the economic impact of a contract on the District, DISB may consider:
(a) The amount of the guarantee obligation;
(b) The terms of the bond to be guaranteed;
(c) The number of new jobs in the District that the contract to be bonded will create; and
(d) Any other factor that DISB considers relevant.
851.41 To qualify for financial assistance under the Surety Bonding Guarantee Program the principal shall satisfy DISB that:
(a) The principal is of good moral character or is owned by individuals of good moral character;
(b) As determined from creditors, employers, and other individuals who have personal knowledge, the principal is an individual with a reputation for financial responsibility or is owned by individuals, a majority of whom have a reputation for financial responsibility;
(c) The principal qualifies as an eligible recipient under the Act and does not satisfy § 851.4;
(d) The principal is unable to obtain adequate bonding on reasonable terms through normal channels; and
(e) Certify that no principal of the eligible recipient entity has been convicted of a sex offense against a minor as such term is defined in section 111 of the Sex Offender Registration and Notification Act (42 U.S.C. § 16911). For the purposes of this certification, “principal” is defined as “if a sole proprietorship, the proprietor; if a partnership, each managing partner and each partner who holds twenty percent (20%) or more ownership interest in the partnership; if a corporation, limited liability company, association or a development company, each director, each of the five (5) most highly compensated executives, officers, or employees of the entity, and each direct or indirect holder of twenty percent (20%) or more of the ownership stock or stock equivalent of the entity.
851.42 To qualify for financial assistance under the Surety Bonding Guarantee Program the principal shall certify to DISB, and DISB shall be satisfied, that:
(a) A bond is required to bid on a contract or to serve as prime contractor or subcontractor;
(b) A bond cannot be obtained on reasonable terms and conditions without assistance from the Surety Bonding Guarantee Program; and
(c) The principal will not subcontract more than seventy-five percent (75%) of the monetary value of the contract.
851.43 To apply for financial assistance from the Surety Bonding Guarantee Program, a principal and, if applicable, a surety shall submit to DISB an application on the form that the DISB provides. The application shall include:
(a) A detailed description of the project;
(b) An itemization of known and estimated costs;
(c) The total investment required to perform the contract;
(d) The working capital available to the principal;
(e) The bonding assistance sought;
(f) Information that demonstrates the inability of the principal to obtain adequate bonding on reasonable terms and conditions through normal channels without assistance from the Surety Bonding Guarantee Program;
(g) A current balance sheet, a profit and loss statement, and credit references about the financial status of the principal;
(h) A schedule of the status of existing and pending contracts;
(i) All requirements outlined in § 851.8 (a) through (f); and
(j) Any other relevant information DISB requests.
851.44 DISB may require an eligible recipient to provide an audited balance sheet before the DISB approves or denies the application under the Surety Bonding Guarantee Program.
851.45 DISB may not approve a guarantee or bond under the Surety Bonding Guarantee Program for a principal that has defaulted on a loan or guarantee from DISB or the District of Columbia Government including agencies, instrumentalities, and government corporations unless:
(a) Two (2) years have passed since the time of the default; and
(b) The principal has cured the default.
851.46 DISB may set the premiums and fees for providing bonding assistance under the Surety Bonding Guarantee Program and the terms and conditions when the premiums and fees are payable. The premiums and fees may vary in amount among transactions and at different stages of a transaction.
851.47 DISB shall ensure that the Surety Bonding Guarantee Program meets the ten (10) to one (1) leverage requirement from the U.S. Treasury’s State Small Business Credit Initiative.
851.48 DISB may, as a condition of providing a guarantee under the Surety Bonding Guarantee Program, require a principal to:
(a) Participate in targeted training, technical assistance, and/or periodic monitoring to help strengthen business operations and develop the principals’ capacity to receive a bond on future contracts without a guarantee from the Surety Bonding Guarantee Program;
(b) Sign an agreement that requires contract payments from the federal government, state government, local government, or private entity be managed by DISB or a qualified organization or individual selected by DISB; and
(c) Sign an agreement that delegates the management of the contract to DISB or a qualified organization or individual selected by DISB.
All persons desiring to comment on the subject matter of this proposed rulemaking shall file comments in writing, not later than ten (10) days after the date of the publication of this notice in the D.C. Register. Comments should be filed with Christopher Weaver, Associate Commissioner of Banking, Department of Insurance, Securities and Banking, 810 First Street, N.E., Suite 701, Washington, D.C. 20002, telephone number (202) 442-7774. Comments may also be sent electronically to christopher.weaver@dc.gov. Copies of the proposed rulemaking are available by writing to the above address. Copies of the proposed rulemaking also may be obtained from the Department of Insurance, Securities and Banking during the hours of 8:30 a.m. and 4:30 p.m., Monday through Friday, excluding legal holidays.
