---
kind: "range"
citation: "13 C.F.R. §§ 120.820–120.830"
title: "13"
from: "120.820"
to: "120.830"
count: 10
url: "https://uscodex.org/cfr/13/120.820..120.830"
---

# §120.820. CDC Affiliation.

- (a) A CDC must be independent and must not be affiliated (as determined in accordance with [§ 121.103](/cfr/13/121.103.md) of this chapter) with any Person (as defined in [§ 120.10](/cfr/13/120.10.md)) except as permitted under this section.
- (b) A CDC may be affiliated with an entity (other than a 7(a) Lender or another CDC) whose function is economic development in the same Area of Operations and that is either a non-profit entity or a State or local government or political subdivision (e.g., council of governments).
- (c) A CDC must not be affiliated (as determined in accordance with [§ 121.103](/cfr/13/121.103.md)) with or invest, directly or indirectly, in a 7(a) Lender. A CDC that was affiliated with a 7(a) Lender as of November 6, 2003 may continue such affiliation.
- (d) A CDC must not be affiliated (as determined in accordance with [§ 121.103](/cfr/13/121.103.md) of this chapter) with another CDC. In addition, a CDC must not directly or indirectly invest in or finance another CDC, except with the prior written approval of D/FA or designee and D/OCRM or designee if they determine in their discretion that such approval is in the best interests of the 504 Loan Program.
- (e) A CDC may remain affiliated with a for-profit entity (other than a 7(a) Lender) if such affiliation existed prior to March 21, 2014. A CDC may also be affiliated with a for-profit entity (other than a 7(a) Lender) whose function is economic development in the same Area of Operations with the prior written approval of the D/FA or designee if he or she determines in his or her discretion that such approval is in the best interests of the 504 Loan Program.
- (f) A CDC must not directly or indirectly invest in a Licensee (as defined in [§ 107.50](/cfr/13/107.50.md) of this chapter) licensed by SBA under the SBIC program authorized in Part A of Title III of the Small Business Investment Act, [15 U.S.C. 681](/usc/15/681.md) et seq. A CDC that has an SBA-approved investment in a Licensee as of November 6, 2003 may retain such investment.
- (g) Notwithstanding paragraphs [(b)](#b), [(c)](#c), and [(e)](#e) of this section, a CDC may be affiliated with a Community Advantage SBLC. Additionally, CDCs that are also Community Advantage Pilot Program Lenders as of May 11, 2023 may be licensed as Community Advantage SBLCs.

# §120.821. CDC Area of Operations.


A CDC must operate only within its designated Area of Operations approved by SBA except as provided in [§ 120.839](/cfr/13/120.839.md).


# §120.823. CDC Board of Directors.

- (a) The CDC, whether for-profit or non-profit, must have a Board of Directors with at least seven (7) voting directors who live or work in the CDC's State of incorporation or in an area that is contiguous to that State that meets the definition of a Local Economic Area for the CDC. The Board must be actively involved in encouraging economic development in the Area of Operations. The initial Board may be created by any method permitted by applicable State law. At a minimum, the Board must have directors with background and expertise in internal controls, financial risk management, commercial lending, legal issues relating to commercial lending, corporate governance, and economic, community or workforce development. Directors may be either currently employed or retired.
- (b) At least two voting members of the Board of Directors, other than the CDC manager, must possess commercial lending experience satisfactory to SBA. When the Board votes on SBA loan approval or servicing actions, at least two voting Board members, with such commercial lending experience, other than the CDC manager, must be present and vote.
- (c) The Board of Directors must meet at least quarterly and shall be responsible for the actions of the CDC and any committees established by the Board of Directors. In addition, the Board of Directors is subject to the following requirements:
  - (1) Except for the CDC manager, no person on the CDC's staff may be a voting director of the Board;
  - (2) A quorum must be present to transact business. The quorum shall be set by the CDC but shall be no less than 50% of the voting members of the Board of Directors;
  - (3) Attendance at meetings may be through any format permitted by State law;
  - (4) No CDC Board member may serve on the Board of another CDC.
- (d) The Board shall have and exercise all corporate powers and authority and be responsible for all corporate actions and business. There must be no actual or appearance of a conflict of interest with respect to any actions of the Board. The Board is responsible for ensuring that the structure and operation of the CDC, as set forth in the Bylaws, comply with SBA's Loan Program Requirements. The responsibilities of the Board include, but are not limited, to the following:
  - (1) Approving the mission and the policies for the CDC;
  - (2) Hiring, firing, supervising and annually evaluating the CDC manager;
  - (3) Setting the salary for the CDC manager and reviewing all salaries;
  - (4) **Establishing committees, at its discretion, including the following—**
    - (i) **Executive Committee.** To the extent authorized in the Bylaws, the Board of Directors may establish an Executive Committee. The Executive Committee may exercise the authority of the Board; however, the delegation of its authority does not relieve the Board of its responsibility imposed by law or Loan Program Requirements. No further delegation or redelegation of this authority is permitted. If the Board establishes an Executive Committee and delegates any of its authority to the Executive Committee as set forth in the Bylaws of the CDC, the Executive Committee must:
      - (A) Be chosen by and from the Board of Directors from the Board; and
      - (B) Meet the same organizational and representational requirements as the Board of Directors, except that the Executive Committee must have a minimum of four voting members who must be present to conduct business.
    - (ii) **Loan Committee.** The Board of Directors may establish a Loan Committee. The Loan Committee may exercise the authority of the Board only as set forth below; however, the delegation of its authority does not relieve the Board of its responsibility imposed by law or Loan Program Requirements. If the Board of Directors chooses to establish a Loan Committee, no CDC staff or manager may serve on the Loan Committee. The Loan Committee must:
      - (A) Be chosen by the Board of Directors, and consist of individuals with a background in either financial risk management, commercial lending, or legal issues relating to commercial lending who are not associated with another CDC;
      - (B) Have a Quorum of at least four Loan Committee members authorized to vote;
      - (C) Have at least two (2) Loan Committee members with commercial lending experience satisfactory to SBA;
      - (D) Have no actual or appearance of a conflict of interest, including for example, a Loan Committee member participating in deliberations on a loan for which the Third Party Lender is the member's employer or the member is otherwise associated with the Third Party Lender; and
      - (E) Consist only of Loan Committee members who live or work in the CDC's State of incorporation or in an area that meets the definition of a Local Economic Area for the CDC, except that, for Projects that are financed under a CDC's Multi-State authority, the CDC must satisfy the requirements of either § [120.835(c)(1)](/cfr/13/120.835.md?p=c-1) or [(2)](/cfr/13/120.835.md?p=c-2) when voting on that Project.
  - (5) Ensuring that the CDC's expenses are reasonable and customary;
  - (6) Hiring directly an independent auditor to provide the financial statements in accordance with Loan Program Requirements;
  - (7) Monitoring the CDC's portfolio performance on a regular basis;
  - (8) Reviewing a semiannual report on portfolio performance from the CDC manager, which would include, but not be limited to, asset quality and industry concentration;
  - (9) Ensuring that the CDC establishes and maintains adequate reserves for operations;
  - (10) Ensuring that the CDC invests in economic development in each of the States in its Area of Operations in which it has a portfolio, and approving each investment. If the investment is included in the CDC's budget, the Board's approval of the budget may be deemed approval of the investment. If the investment is not included in the budget, the Board must separately approve the investment;
  - (11) Establishing a policy in the Bylaws of the CDC prohibiting an actual conflict of interest or the appearance of same, and enforcing such policy (see [§ 120.140](/cfr/13/120.140.md) and [§ 120.851](/cfr/13/120.851.md));
  - (12) Retaining accountability for all of the actions of the CDC;
  - (13) Establishing written internal control policies, in accordance with [§ 120.826](/cfr/13/120.826.md);
  - (14) **Establishing commercially reasonable loan approval policies, procedures, and standards.** The Bylaws must include any delegations of authority to the Loan Committee and Executive Committee, if either Committee has been established. In addition, the CDC must establish and set forth in detail in a policy manual its credit approval process. All 504 loan applications must have credit approval prior to submission to the Agency. The Loan Committee, if established, may be delegated the authority to provide credit approval for loans up to $2,000,000 but, for loans of $1,000,000 to $2,000,000, the Loan Committee's action must be ratified by the Board or Executive Committee prior to Debenture closing. Only the Board or Executive Committee, if authorized by the Board, may provide credit approval for loans greater than $2,000,000.
  - (15) All members of the Board of Directors must annually certify in writing that they have read and understand this section, and copies of the certification must be included in the Annual Report to SBA.
- (e) The Board of Directors shall maintain Directors' and Officers' Liability and Errors and Omissions insurance in amounts established by SBA that are based on the size of the CDC's portfolio and other relevant factors.

# §120.824. Professional management and staff, and contracts for services.

- (a) **Management.** A CDC must have full-time professional management, including an executive director or the equivalent (CDC manager) to manage daily operations. This requirement is met if the CDC has at least one salaried professional employee that is employed directly (not a contractor or an officer, director, 20 percent or more equity owner, or key employee of a contractor) on a full-time basis to manage the CDC. The CDC manager must be hired by the CDC's Board of Directors and subject to termination only by the Board. A CDC may obtain, under a written contract, management services provided by a qualified individual under the following circumstances:
  - (1) The CDC must submit a request for the D/FA (or designee) to approve, in consultation with the D/OCRM (or designee), a waiver of the requirement that the manager be employed directly by the CDC. In its request, the CDC must demonstrate that:
    - (i) Another non-profit entity (that is not a CDC) that has the economic development of the CDC's Area of Operations as one of its principal activities will provide management services to the CDC and, if the manager is also performing services for the non-profit entity, the manager will be available to small businesses interested in the 504 program and to 504 loan borrowers during regular business hours; or
    - (ii) The CDC submitting the request for the waiver is rural, has insufficient loan volume to justify having management employed directly by the CDC, and is requesting to contract with another CDC located in the same general area to provide the management.
  - (2) The CDC must submit a request for the D/FA (or designee), in consultation with the D/OCRM (or designee), to pre-approve the contract for management services. This contract must comply with [paragraphs (c)(2) through (4)](#c-2..c-4) and, if applicable, [paragraph (d)](#d) of this section.
- (b) **Professional staff.** The CDC must have a full-time professional staff qualified by training and experience to market the 504 Loan Program, package and process loan applications, close loans, service, and, if authorized by SBA, liquidate the loan portfolio, and to sustain a sufficient level of service and activity in the Area of Operations.
- (c) **Professional services contracts.** Through a written contract with qualified individuals or entities, a CDC may obtain services for marketing, packaging, processing, closing, servicing, or liquidation functions, or for other services (e.g., legal, accounting, information technology, independent loan reviews, and payroll and employee benefits), provided that:
  - (1) The contract must be pre-approved by the D/FA (or designee), subject to the following exceptions:
    - (i) CDCs may contract for legal, accounting, and information technology services without SBA approval, except for legal services in connection with loan liquidation or litigation.
    - (ii) CDCs may contract for independent loan review services with non-CDC entities without SBA approval. Contracts between CDCs for independent loan reviews must be pre-approved by SBA in accordance with [paragraph (d)](#d) of this section.
  - (2) If the contract requires SBA's prior approval under [paragraph (c)(1)](#c-1) of this section, the CDC's Board must explain to SBA why it is in the best interest of the CDC to obtain services through a contract and must demonstrate that:
    - (i) The compensation under the contract is paid only by the CDC obtaining the services, is reasonable and customary for similar services in the Area of Operations, and is only for actual services performed;
    - (ii) The full term of the contract (including options) is necessary and appropriate and the contract permits the CDC procuring the services to terminate the contract prior to its expiration date with or without cause; and
    - (iii) There is no actual or apparent conflict of interest or self-dealing on the part of any of the CDC's officers, management, or staff, including members of the Board and Loan Committee, in the negotiation, approval or implementation of the contract.
  - (3) Neither the contractor nor any officer, director, 20 percent or more equity owner, or key employee of a contractor may be a voting or non-voting member of the CDC's Board.
  - (4) The CDC procuring the services must provide a copy of all executed contracts requiring SBA prior approval to SBA as part of the CDC's Annual Report submitted under [§ 120.830(a)](/cfr/13/120.830.md?p=a) unless the CDC certifies that it has previously submitted an identical copy of the executed contract to SBA.
  - (5) With respect to any contract under which the CDC's staff are deemed co-employees of both the CDC and the contractor (e.g., contracts with professional employer organizations to obtain employee benefits, such as retirement and health benefits, for the CDC's staff), the contract must provide that the CDC retains the final authority to hire and fire the CDC's employees.
  - (6) If the contract is between CDCs, the CDCs and the contract must also comply with [paragraph (d)](#d) of this section.
- (d) **Professional Services Contracts between CDCs.** Notwithstanding the prohibition in [13 CFR 120.820(d)](/cfr/13/120.820.md?p=d) against a CDC affiliating with another CDC, a CDC may obtain services through a written contract with another CDC for managing, marketing, packaging, processing, closing, servicing, independent loan review, or liquidation functions, provided that:
  - (1) The contract between the CDCs must be pre-approved by the D/FA (or designee), in consultation with the D/OCRM (or designee), who determines in his or her discretion that such approval is in the best interests of the 504 Loan Program and that the terms and conditions of the contract are satisfactory to SBA. For management services, a CDC may contract with another CDC only in accordance with [paragraph (a)(1)(ii)](#a-1-ii) of this section.
  - (2) **Except for contracts for liquidation services and independent loan reviews—**
    - (i) The CDCs entering into the contract must be located in the same SBA Region or, if not located in the same SBA Region, must be located in contiguous States. For purposes of this provision, the location of a CDC is the CDC's State of incorporation;
    - (ii) A CDC may provide assistance to only one CDC per State; and
    - (iii) No CDC may provide assistance to another CDC in its State of incorporation or in any State in which it has Multi-State authority.
  - (3) The Board of Directors for each CDC entering into the contract must be separate and independent and may not include any common directors. In addition, if either of the CDCs is for-profit, neither CDC may own any stock in the other CDC. The CDCs are also prohibited from comingling any funds.
  - (4) With respect to contracts for independent loan reviews, CDCs may not review each other's portfolios or exchange any other services, nor may they enter into any other arrangement with each other that could appear to bias the outcome or integrity of the independent loan review.
  - (5) The contract must satisfy the requirements set forth in [paragraphs (c)(2) through (4)](#c-2..c-4) of this section.

# §120.825. Financial ability to operate.


A CDC must be able to sustain its operations continuously, with reliable sources of funds (such as income from services rendered and contributions from government or other sponsors). Any funds generated from 503 and 504 loan activity by a CDC remaining after payment of staff and overhead expenses must be retained by the CDC as a reserve for future operations or for investment in other local economic development activity in its Area of Operations. If a CDC is operating as a Multi-State CDC, it must maintain a separate accounting for each State of all 504 fee income and expenses and provide, upon SBA's request, evidence that the funds resulting from its Multi-State CDC operations are being invested in economic development activities in each State in which they were generated.


# §120.826. Basic requirements for operating a CDC.


A CDC must operate in accordance with the following requirements:

- (a) **In general.** CDCs must meet all 504 Loan Program Requirements. In its Area of Operations, a CDC must market the 504 program, package and process 504 loan applications, close and service 504 loans, and if authorized by SBA, liquidate and litigate 504 loans. It must supply to SBA current and accurate information about all certification and operational requirements, and maintain the records and submit all reports required by SBA.
- (b) **Operations and internal controls.** Each CDC's board of directors must adopt an internal control policy which provides adequate direction to the institution for effective control over and accountability for operations, programs, and resources. The board adopted internal control policy must, at a minimum:
  - (1) Direct management to assign the responsibility for the internal control function (covering financial, credit, credit review, collateral, and administrative matters) to an officer or officers of the CDC;
  - (2) Adopt and set forth procedures for maintenance and periodic review of the internal control function;
  - (3) **Direct the operation of a program to review and assess the CDC's 504-related loans.** For the 504 review program, the internal control policies must specify the following:
    - (i) Loan, loan-related collateral, and appraisal review standards, including standards for scope of selection (for review of any such loan, loan-related collateral or appraisal) and standards for work papers and supporting documentation;
    - (ii) Loan quality classification standards consistent with the standardized classification systems used by the Federal Financial Institution Regulators;
    - (iii) Specific control requirements for the CDC's oversight of Lender Service Providers; and
    - (iv) Standards for training to implement the loan review program; and
  - (4) Address other control requirements as may be established by SBA.
- (c) **Annual Audited/Reviewed Financial Statements.** Each CDC with a 504 loan portfolio balance of $30 million or more (as calculated by SBA) must have its financial statements audited annually by a certified public accountant that is independent and experienced in auditing financial institutions. The audit must be performed in accordance with generally accepted auditing standards as adopted by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA). The auditor must be independent, as defined by the AICPA, of the CDC. Annually, the auditor must issue an opinion as to the fairness of the CDC's financial statements and their compliance with GAAP. For CDCs with a 504 portfolio balance of less than $30 million (as calculated by SBA), the CDC's annual financial statements submitted to SBA must be reviewed by an independent CPA in accordance with GAAP, except that the D/OCRM may require a CDC with a portfolio balance of less than $30 million to submit an audited financial statement in the event the D/OCRM determines, in his or her discretion, that such audit is necessary or appropriate when the CDC is in material noncompliance with Loan Program Requirements.
- (d) **Auditor qualifications.** The audit or review must be conducted by an independent certified public accountant who:
  - (1) Is registered or licensed to practice as a public accountant, and is in good standing, under the laws of the state or other political subdivision of the United States in which the CDC's principal office is located;
  - (2) Agrees in the engagement letter with the CDC to provide the SBA with access to and copies of any work papers, policies, and procedures relating to the services performed;
  - (3)
    - (i) Is in compliance with the AICPA Code of Professional Conduct; and
    - (ii) Meets the independence requirements and interpretations of the Securities and Exchange Commission and its staff;
  - (4) Has received a peer review or is enrolled in a peer review program that meets AICPA guidelines; and
  - (5) **Is otherwise acceptable to SBA.**

# §120.827. Other services a CDC may provide to small businesses.


A CDC may provide a small business with assistance unrelated to the 504 loan program as long as the CDC does not make such assistance a condition of the CDC accepting from that small business an application for a 504 loan. An example of other services a CDC may provide is assisting a small business in applying for a 7(a) loan (as described in [§ 120.2](/cfr/13/120.2.md)). A CDC is subject to [part 103](/cfr/13/part103.md) of this chapter when providing such assistance.


# §120.828. Minimum level of 504 loan activity and restrictions on portfolio concentrations.

- (a) A CDC is required to receive SBA approval of at least four 504 loan approvals during two consecutive fiscal years.
- (b) A CDC's 504 loan portfolio must be diversified by business sector.

# §120.829. Job Opportunity average a CDC must maintain.

- (a) A CDC's portfolio must maintain a minimum average of one Job Opportunity per an amount of 504 loan funding that will be specified by SBA from time to time in a Federal Register notice. Such Job Opportunity average remains in effect until changed by subsequent Federal Register publication. A CDC is permitted two years from its certification date to meet this average.
- (b) A CDC must indicate in its annual report the Job Opportunities actually or estimated to be provided by each Project.
- (c) If a CDC does not maintain the required average, it may retain its certification if it justifies to SBA's satisfaction its failure to do so in its annual report and shows how it intends to attain the required average.

# §120.830. Reports a CDC must submit.


A CDC must submit the following reports to SBA:

- (a) An Annual Report within one hundred-eighty days after the end of the CDC's fiscal year (to include Federal tax returns for that year). A CDC that is certified by SBA within 6 months of the CDC's fiscal year-end is not required to submit an Annual Report for that year. The Annual Report must include, but is not limited to, the following:
  - (1) Audited or Reviewed Financial Statements as required in § [120.826(c)](/cfr/13/120.826.md?p=c) and [(d)](/cfr/13/120.826.md?p=d) for the CDC and any affiliates or subsidiaries of the CDC.
    - (i) **Audited financial statements must, at a minimum, include the following—**
      - (A) Audited balance sheet;
      - (B) Audited statement of income (or receipts) and expenses;
      - (C) Audited statement of source and application of funds;
      - (D) Such footnotes as are necessary to an understanding of the financial statements;
      - (E) Auditor's letter to management on internal control weaknesses; and
      - (F) The auditor's report; and
    - (ii) **Reviewed financial statements must, at a minimum, include the following—**
      - (A) Balance sheet;
      - (B) Statement of income (or receipts) and expenses;
      - (C) Statement of source and application of funds;
      - (D) Such footnotes as are necessary to an understanding of the financial statements;
      - (E) The accountant's review report; and
  - (2) **Report on compensation—** CDCs are required to provide detailed information on total compensation (including salary, bonuses and expenses) paid within the CDC's most recent tax year for current and former officers and directors, and for current and former employees and independent contractors with total compensation of more than $100,000 during that period.
  - (3) **Certification of members of the Board of Directors.** Written annual certification by each Board member that he or she has read and understands the requirements set forth in [§ 120.823](/cfr/13/120.823.md).
  - (4) **Report on investment in economic development.** Written report on investments in economic development in each State in which the CDC has an outstanding 504 loan.
- (b) For each new associate and staff, a Statement of Personal History (for use by non-bank lenders and CDCs) and other information required by SBA;
- (c) Reports of involvement in any legal proceeding;
- (d) Changes in organizational status;
- (e) Changes in any condition that affects its eligibility to continue to participate in the 504 program; and
- (f) Quarterly service reports on each loan in its portfolio which is 60 days or more past due (and interim reports upon request by SBA).
- (g) **Other reports as required by SBA.**