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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: July 13, 2000

FROM: Barry McVay, CPCM

SUBJECT: Small Business Administration; Military Reservist Economic Injury Disaster Loans

SOURCE: Federal Register, July 13, 2000, Vol. 65, No. 135, page 43261

AGENCIES: Small Business Administration (SBA)

ACTION: Notice of Proposed Rulemaking

SYNOPSIS: SBA is proposing to amend its Disaster Loan Program regulations to implement a new program authorized by the Veterans Entrepreneurship and Small Business Development Act of 1999 (Public Law 106-50). Under this program, SBA would make a low interest, fixed rate loan available to a small business employing a military reservist if the reservist is called up to active military duty and he or she is an essential employee critical to the success of the business' daily operation.

DATES: Submit comments on or before August 14, 2000.

ADDRESSES: Send comments to Bernard Kulik, Associate Administrator, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW, Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: Herbert Mitchell, Deputy Associate Administrator, Office of Disaster Assistance, 202-205-6734.

SUPPLEMENTAL INFORMATION: Public Law 106-50, Section 402, Assistance to Active Duty Military Reservists, paragraph (b), Disaster Loan Assistance for Military Reservists' Small Businesses, authorizes the government to "make such disaster loans (either directly or in cooperation with banks or other lending institutions through agreements to participate on an immediate or deferred basis) to assist a small business concern that has suffered or that is likely to suffer substantial economic injury as the result of an essential employee of such small business concern being ordered to active military duty during a period of military conflict." SBA is proposing to implement this provision by instituting the "Military Reservist Economic Injury Disaster Loan (EIDL)" program.

The Military Reservist EIDL program would be covered by the addition of the following sections to Title 13 of the Code of Federal Regulations (CFR), Business and Credit Administration; Chapter 1, Small Business Administration; Part 123, Business Loans:

• Section 123.500, Definitions, which would contain definitions for "essential employee", "military reservist", "period of military conflict", "principle owner", and "substantial economic injury." These definitions would conform with those in Public Law 106-50.
  
  
• Section 123.501, When is your business eligible to apply for a Military Reservist Economic Injury Disaster Loan (EIDL)?, which would require the business seeking the EIDL loan to be a "small business as defined in 13 CFR Part 121", and that the military conflict must exist on or after March 24, 1999 (this date is specified in paragraph (e)(2) of Section 402 of Public Law 106-50). In addition, though the law does not address the situation in which the small business owner is the "essential employee" being called up to military duty, the legislative history is clear that Congress intended that this program also include assistance to a small business sole proprietor who is an essential employee. Therefore, "owner of the business is a military reservist and an essential employee" would be included as a category eligible for EIDL loans.
  
  
• Section 123.502, When is your business ineligible to apply for a Military Reservist EIDL?, which would state that a small business is ineligible for a Military Reservist EIDL if: (1) an owner has been convicted of a felony during the past year; (2) it "assumed the risk associated with employing the military reservist", such as by hiring the "essential employee" after the employee has received call-up orders; (3) an owner is incarcerated, on probation, or on parole; (4) the business is an agricultural enterprise; (5) the business is engaged in an illegal activity; or meets any of 10 other criteria.
  
  
• Section 123.503, When can you apply for a Military Reservist EIDL?, would permit a business to apply for a Military Reservist EIDL from the date the essential employee receives a call-up order until 90 days after the date the employee is discharged or released from active duty.
  
  
• Section 123.504, How do you apply for a Military Reservist EIDL?, would require the business to submit a copy of the reservist's call-up orders, to certify that the reservist is an essential employee, to detail the employee's duties and responsibilities, and agree to offer the essential employee the same or similar job upon return from active duty. In addition, the employee would be required to concurs with the assessment.
  
  
• If the essential employee being called up to active duty is the owner and is starting active duty before applying for a Military Reservist EIDL, Section 124.505, What if you are both an essential employee and the owner of the small business and you started active duty before applying for a Military Reservist EIDL?, would provide that "a person who has a power of attorney with the authority to borrow and make other related commitments...may complete and submit the EIDL loan application package..."
  
  
• Section 123.506, How much can you borrow under the Military Reservist EIDL Program?, would permit an eligible small business to borrow from SBA up to $1,500,000, not to exceed "the amount of working capital your business could have generated had the essential employee not been called to active duty."
  
  
• Section 123.507, Under what circumstances will SBA consider waiving the $1.5 million loan limit?, would state that SBA will waive the $1,500,000 limit if: (1) the business is a major source of employment; (2) the business is in imminent danger of going out of business because of the call-up of an essential employee, and a loan in excess of $1,500,000 is necessary to reopen or keep open the business; and (3) the business has used "all reasonably available funds from the small business, its affiliates, its principal owners and all available credit elsewhere to alleviate the small business' economic injury."
  
  
• Section 123.508, How can you use Military Reservist EIDL funds?, would permit EIDL funds to meet financial obligations, pay ordinary and necessary operating expenses, and to enable the business to market, produce, or provide its products or services.
  
  
• Section 123.509, What can't you use Military Reservist EIDL funds for?, would prohibit EIDL funds for "purposes described in 13 CFR 123.303(b) [How can my business spend my economic injury disaster loan?]." For example, EIDL funds could not be used to refinance debt incurred before the employee's call-up; make payments on loans owned by SBA or other federal agencies; pay tax penalties or non-tax fines; repair physical damage; or pay dividends to owners.
  
  
• Section 123.510, What if you don't use your Military Reservist EIDL funds as authorized?, would state that businesses that do not use their EIDL funds as authorized would be subject to the provisions of Section 123.9, What happens if I don't use loan proceeds for the intended purpose? Section 123.9 provides that the business would be liable for 1 1/2 times the amount disbursed by SBA when it learned of the wrongful misapplication. In addition, not using the loan proceeds for authorized purposes for 60 or more days after disbursement constitutes wrongful misapplication.
  
  
• Section 123.511, How will SBA disburse Military Reservist EIDL funds?, would provide for quarterly disbursements of the funds.
  
  
• Section 123.512, What is the interest rate on a Military Reservist EIDL?, would provide that the EIDL interest rate will be no more than 4%, and that SBA will publish the interest rate quarterly in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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