Canada Gazette, Part I, Volume 146, Number 41: Regulations Amending the Canada Small Business Financing Regulations

October 13, 2012

Statutory authority

Canada Small Business Financing Act

Sponsoring departments

Department of Industry and Department of Finance

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issue

The Canada Small Business Financing Program (CSBFP) is a loan-loss sharing program, governed by the Canada Small Business Financing Act and the Canada Small Business Financing Regulations, which allows the Government to fill a market gap by sharing the risk of lending to small businesses with financial institutions. Industry Canada administers the CSBFP, registers loans, collects fees and pays lenders eligible portions of losses on defaulted loans. Lenders are responsible for all credit decisions such as approving the loans, disbursing their own funds, registering the loans with Industry Canada, administering the loans and, in the event of default, realizing on the security. During a recent third-party evaluation, the CSBFP was found to be fundamentally sound but recommendations suggested it could be improved through modernization and parameter changes.

During the past 10 years the number of small businesses accessing financing through the program has declined by over 55% and the total value of loans has declined by 30%. Lenders’ use of the program is decreasing due to the high level of administrative burden and lack of profitability. In order to ensure the long-term viability of the program, maintain the program’s relevance, and ensure continued access to financing for small businesses, measures to modernize the CSBFP are necessary. The challenge is to recalibrate the program parameters in a way that enables lenders to use the CSBFP as a viable product and enables small businesses to access affordable financing that they would not otherwise receive while continuing to mitigate the risks to the Government.

Objectives

The program’s purpose is to increase the availability of asset-based financing for the establishment, expansion, modernization and improvement of small businesses. The program has two main objectives: incrementality and cost recovery. Incrementality means that small businesses have access to financing that without the program would not have been available to them or would have been available only under less favourable conditions. Cost recovery is the extent to which the program offsets its costs (i.e. claims for loss) with its revenues (registration and annual administration fees).

The primary goal of the proposed regulatory changes is increasing incremental access to financing for small businesses by alleviating the administrative and financial disincentives to lenders. Better aligning the program with conventional lending would encourage financial institutions to offer loans to small businesses.

In addition to regulatory changes, awareness efforts will be strengthened through partnerships with the lending community and small business intermediaries to let more small businesses know about the program and encourage uptake.

The proposed amendments would assist the Government in meeting its commitment to improve access to financing. They would also remove unnecessary regulatory requirements by reducing red tape and paper burden. The proposed changes aim to increase the use and sustainability of the program so more small businesses are able to access the financing they need to grow and succeed.

Description

Regulatory intervention is necessary as program performance has been hampered by a set of program parameters which has made it less appealing for financial institutions to offer loans to small businesses. Financial institutions stressed the importance of bringing the CSBFP in line with conventional lending practices and suggest that some program requirements, such as those to gather and keep invoices for each loan, or rules that prohibit most service fees, are inconsistent with evolving and increasingly automated lending practices in the competitive environment in which they operate. The current Government-established practices for administrating CSBFP loans are becoming increasingly obsolete. Lenders also continue to express frustration because of adjustments and rejections of claims for losses due to errors.

The financial institutions that offer CSBFP loans have repeatedly cited that the additional administrative requirements to issue CSBFP loans and the limitations on what fees and interest rates can be charged to small business borrowers act as major deterrents when considering offering CSBFP loans to small businesses. Currently, the maximum interest rate is prime plus 3% (or the single-family residential mortgage rate plus 3% for fixed rates), of which 1.25% is remitted to Industry Canada as an administration fee. There are currently restrictions that do not allow any fees for loan setup, renewal or amendments which allow small businesses to be able to access affordable financing. To alleviate these impediments and enhance the availability of CSBFP financing to small businesses, it is proposed that lenders be allowed to charge conventional fees at a rate of no more than what they charge for conventional loans of the same amount, which is only a modest amount compared to the actual loan amount. As the current interest rate limit discourages lending under the CSBFP, especially to higher-risk small businesses, the maximum interest rate would also be increased by 0.75% for new loans after April 1, 2013, to

• prime plus 3.75% for floating interest rates; or
• the single-family residential mortgage rate plus 3.75% for fixed interest rates.

The program also has substantial administrative requirements as compared to conventional lending practices. Certain requirements, such as personal guarantees, conventional lending fees and enabling electronic systems, would be aligned with conventional lending practices in order to decrease this burden and allow lenders to more easily use the CSBFP to make loans to small businesses. The administrative burden associated with current requirements of the lenders and small business borrowers to collect and provide proof of purchase and payment documentation to Industry Canada would be decreased, while practices would still meet the Government’s legal accountability requirements. Currently the lender and borrower need to collect all receipts, including for very small amounts (e.g. box of nails, cans of paint), for the entire purchase cost of the asset or improvement — only a portion of which is financed by the CSBFP loan — and submit them to Industry Canada during a claim for loss submission. The proposed changes would reduce the requirement to collecting receipts for the amount of the CSBFP loan, and submitting receipts for the outstanding loan amount during a claim for loss submission. As it is typical that about 20% of receipts represent about 80% of the cost of a project, this change should significantly reduce the amount of paperwork the borrower and lender need to collect and submit. In order to accomplish this decrease in paperwork, the requirement to finance a maximum percentage of 90% of the project’s cost would be removed and deregulated. This change would also let the lender and borrower determine what the appropriate portion of financing should be, based on risk and the needs of the borrower. It is also proposed that an optional unsecured personal guarantee may be taken for the full amount of the loan. This guarantee is a key fraud prevention tool as it provides a strong incentive to borrowers to make best efforts to pay off the loan and ensure the fullest possible realization on assets. Lenders have expressed frustration that although they take a number of steps to be prudent in making loans and taking security, they sometimes cannot enforce their security interest when a borrower defaults on a loan. In order to strengthen the relationship with financial institution partners, in the case of a default where security is not enforceable, provided the lender presents proof that they acted diligently by doing a site inspection to ensure the borrower appeared legitimate and the assets financed existed, the Minister would share in the loss with the lender.

A number of other minor and miscellaneous technical amendments would also be made in order to ensure that the program is operating effectively and efficiently. For example, an information and technology system, that is nearing completion, will enable electronic registration with and fee payments to financial institutions. Regulatory amendments would clarify and legitimize this process and its requirements.

Regulatory and non-regulatory options considered

A number of regulatory and non-regulatory alternatives were considered.

Status quo

As the program’s loan volume declines, the sustainability of the program may be jeopardized if key improvements to the program are not made. The number of small businesses able to access financing because of the CSBFP will continue to decline as well.

Operational approach

The program would be able to increase awareness and educate potential borrowers about the program through an increased promotion campaign. However, it would be difficult to effectively engage borrowers and lenders without making the program more appealing and less burdensome. It is unlikely that this measure alone would have a large enough effect to better meet the program’s goals and ensure small businesses have access to the financing they need to start, grow and succeed.

A number of stakeholder complaints and problems with the program cannot be addressed through simple administrative or operational solutions. In order to solve these problems, it would be necessary to intervene with regulatory changes as the issues are caused by requirements within the Regulations.

Regulatory approach

The concerns expressed by financial institution delivery partners are primarily related to the substantial administrative burden and financial disincentives within the Canada Small Business Financing Regulations, which impede their ability to offer CSBFP loans to small businesses. A substantial number of these issues can only be dealt with through regulatory amendments.

Regulatory and operational approach

Although many of the concerns expressed by financial institutions can only be addressed through regulatory changes, during consultations a number of small business associations noted that there are substantial opportunities to better inform small businesses about the CSBFP. As part of this proposed package, the program’s current awareness campaign will be expanded to better inform potential borrowers about the program and its benefits.

The program would also implement an electronic registration system which would allow financial institutions to register loans online as well as electronically transfer payment for the registration fee. This would reduce administrative burden and physical paperwork, allowing lenders to register loans faster and easier.

A combination of regulatory and operational changes would allow the program to better meet the needs of financial institutions and small businesses in a fiscally responsible manner.

Benefits and costs

An analysis of the benefits and costs of the proposed Regulations was conducted in order to estimate and monetize the material impacts of the regulatory proposal on stakeholders, including the Canadian public, small businesses, and Industry Canada.

This cost-benefit analysis assesses the expected incremental costs and benefits due to regulatory changes when compared with the costs and benefits that would accumulate normally under the current design.

Summary

It is anticipated that the proposed changes would result in an increase in the availability of financing for Canadian small businesses. Industry Canada estimates increased program uptake of $200 million in new loans per year, bringing the total to $1,150 million, up from $950 million in the base case scenario. Increased use of the program will result in approximately 1 550 additional loans per year, bringing the total number of loans to 8 940 each year. Through the CSBFP, up to 80%–85% of borrowers are able to access financing for start-up or growth of their businesses that would not have been otherwise available, or would have been available under less favourable conditions.

An increase in lending to small businesses is in turn expected to improve business viability, as demonstrated through greater sales revenue growth, increased probability of survival and greater growth in business investment for the incremental number of firms that received loans.

Canadian businesses are expected to benefit due to increased demand for their goods and services as a result of increased purchases of loan-eligible assets by borrowers, and expenditures by suppliers of loan-eligible assets to their suppliers.

Overall, the proposal is estimated to result in a total net benefit of $380.6 million from 2013/14 to 2022/23. Estimated total benefits amount to $747.1 million and total costs to $366.5 million. Overall, the benefits exceed the costs at a ratio of 2:1. A summary of the costs and benefits is available in Table 1.

Table 1: Summary cost-benefit statement

Cost-Benefit Statement	Base Year 2013/14	Final Year 2022/23 (Present Value)	Total (Present Value)	Average Annual (2013/14– 2022/23)
A. Quantified impacts (millions of dollars) Benefits
Canadian businesses	$59.982	$30.006	$434.686	$59.982
Lenders	$7.972	$15.396	$165.055	$24.294
Government of Canada — Industry Canada	$5.141	$5.990	$68.385	$9.901
Other Canadians	-	$8.529	$78.974	$12.154
Total benefits	$73.096	$59.921	$747.100	$106.332
Costs
Borrowers	$13.113	$21.385	$233.440	$34.195
Government of Canada — Industry Canada	$0.245	$11.657	$109.145	$16.687
Lenders	$1.052	$2.273	$23.876	$3.541
Total costs	$14.410	$35.315	$366.461	$54.423
Total net benefits	$58.686	$24.605	$380.639	$51.910
B. Quantified impacts
Borrowers — Firm survival (number of firms surviving for additional year)	-	63	478	76
Other Canadians — Employment (FTEs)	529	884	9 723	1 434
C. Qualitative impacts
Borrowers	Increased ability to access financing Growth in total sales revenues Ability to leverage investment, as demonstrated through growth in total assets greater than comparable SMEs
Industry Canada	Possibility for increased salary and benefit costs for additional CSBFP staff who may be required to administer a greater volume of loans Improved efficiency in loan registration and administration
Canadian small businesses	Increased availability of financing for Canadian SMEs
Lenders	Improved efficiency in loan registration and administration IT system costs to meet required reporting on CSBFP loans
Governments	Increased income tax revenues due to growth in average wages of individuals employed by borrowers Increased GST remittances due to growth in the volume of loan-eligible assets purchased from suppliers

Note: Average annual values are based on the undiscounted value of costs and benefits over the 10-year period.

Costs

Total costs to all stakeholders are expected to be $366.5 million over the 10-year period. A cost breakdown by stakeholder group follows.

Borrowers

Small businesses that borrow also incur costs to receive loans through the CSBFP that include the interest and lending fees they pay to financial institutions.

The total present value of total additional costs to borrowers is forecast to be $233.4 million over the 10-year period, which consists of $39.4 million in additional administration fees, $29.0 million in registration fees, $135.3 million for additional interest, and $29.8 million for lending fees. About 75% of the increase in interest paid is due to the proposed increase in the maximum interest rate that can be charged by lenders, and the remainder is due to additional lending.

Lenders

The costs to financial institutions that issue loans under the CSBFP include the salaries of staff who administer these loans, direct operating expenditures (including legal fees), and losses due to loans on which borrowers default.

The cost of the proposal to lenders is expected to total about $23.9 million over the 10-year period (present value). This is comprised of $4.0 million for loan officer and other salaries, $3.7 million for legal fees, and $16.5 million in loan default costs. Other costs to lenders have been previously described qualitatively in Table 1.

Industry Canada

There is a possibility, over the 10 years of the analysis, that there may be additional costs of salaries and benefits for the staff who manage the CSBFP. The need for any additional expenditures will be dependent on the extent to which additional workload can be absorbed within existing capacity, and the extent of the efficiencies gained by the implementation of an Electronic Registration System. There are currently no plans to provide additional staffing to the program.

The total cost of the proposal to Industry Canada is forecast to have a total present value of about $109.1 million over the 10-year period. Direct program operating expenditures of $0.8 million, and claims paid on loan defaults of $108.4 million are expected.

Benefits

Total benefits to all stakeholder groups are expected to amount to $747.1 million over the 10-year period. The details of benefits for each stakeholder group are provided below.

Borrowers and Canadian businesses

A number of benefits have been found to accrue to small businesses that borrow under the CSBFP. It is anticipated that the proposal would result in an increase in the availability of financing for Canadian small businesses. These include improved business viability and growth as demonstrated through higher sales revenue growth, increased probability of survival and higher growth in business investment when compared to similar small businesses. It is expected that an average of 117 firms will stay in business for an additional year than they would have otherwise. Total employment retention by small businesses is expected to increase due to their participation in the CSBFP. In any given year, an average of 1 434 full-time equivalent jobs are expected to be created or retained for a one-year period.

Canadian businesses are expected to benefit from the proposal due to increased demand for their goods and services as a result of increased purchases of loan-eligible assets (real property, leasehold improvements, and equipment) by borrowers. In addition, there is a multiplier effect in the economy resulting from expenditures by suppliers of loan-eligible assets to their suppliers.

The value-add component (salaries, wages and benefits, profits) of assets purchased and payments to suppliers is estimated to be $434.7 million (present value) over 10 years, $255.8 million from asset purchases and $178.9 million from payments by suppliers to suppliers.

Loans provided through the CSBFP have been shown to generate employment creation and retention. Through increased expenditures in the economy due to higher loan volumes, secondary employment is also expected to increase.

Other Canadians

Other Canadians will benefit from increased average wages paid by CSBF borrowers, and employment creation by borrowers and suppliers. Previous studies have found an increase in average wages paid by CSBF borrowers when compared to a similar group of small businesses. This impact is estimated to be $79.0 million (present value) over 10 years.

Lenders

Lenders receive interest revenues on loans, where net revenues are the difference between the interest charged to borrowers, and lenders’ cost of capital. The proposed regulatory changes would increase both the administration fees that must be remitted and interest rate that can be charged to borrowers. This 0.75% increase in the maximum interest rate would translate into an increase in net interest revenues for lenders from the current maximum of prime plus 1.75% to prime plus 2.5% (taking into consideration that lenders remit a 1.25% administration fee to Industry Canada, which they can charge to borrowers as part of the interest rate). The additional interest revenues to lenders would total $135.3 million over the 10-year period. In addition, lenders would receive a total of $29.8 million in lending fees from borrowers.

Industry Canada

To partially offset the costs of claims made for defaulted loans, registration and administration fees are charged on loans. The total value of these additional remittances is expected to have a total present value of $68.4 million over the 10-year period, $39.4 million from administration fees and $29.0 million from registration fees.

Rationale

The goal of the CSBFP is to increase the availability of financing for the establishment, expansion, modernization and improvement of small businesses, which would not otherwise be able to access financing, while offsetting costs to taxpayers. In the course of the Comprehensive Review, lenders indicated that the increasing gap between administration procedures of the CSBFP (which have changed little in the past two decades) and conventional lending administration are a disincentive to using the program. The administrative burden caused by the regulations and the current pricing limits on CSBFP loans directly limits how often lenders use the program to make CSBFP loans to small businesses. Ultimately, the program is a partnership with lenders, and success depends on their level of satisfaction with, and participation in, the program. Should their concerns not be substantially alleviated, the loan decline is expected to continue, thereby jeopardizing the sustainability of the CSBFP. These regulatory changes aim to reduce administrative burden and minimally increase the maximum price of CSBFP loans in order to ensure small businesses can access affordable financing through the CSBFP, that they cannot otherwise obtain.

As discussed in the cost-benefit section, the proposal is estimated to result in substantial net benefits to small businesses and Canada. Net benefits are expected to be $380.6 million from 2013/14 to 2022/23 with total benefits amounting to $747.1 million and total costs to $366.5 million. Overall, the benefits exceed costs at a ratio of 2:1, indicating substantial benefits to small businesses and Canada. Employment retention by small businesses is also expected to increase due to their participation in the CSBFP. In any given year, an average of 1 434 full-time equivalent jobs are expected to be created or retained for a one-year period.

At the same time, awareness will be increased by a renewed commitment to increase Industry Canada’s efforts to work with small business associations and other small business intermediaries to let them know about the program and encourage uptake. Previous experience has shown that in target areas where the program has been promoted more heavily, the use of the program has also increased. These measures will address the low level of awareness identified in the Comprehensive Review and the Evaluation Report.

Consultation

Industry Canada has used a collaborative approach to developing this package of proposed changes by actively involving stakeholders throughout the process. Consultations were held with small business and financial institution stakeholders in January 2010 to discuss possible improvements to the CSBFP. Stakeholders were also given two weeks after consultation meetings were held to submit additional comments in writing.

In follow-up to these consultations, a revised proposal was created to reflect input from stakeholders and then provided to them for further comments.

In general, financial institutions are supportive of the changes to reduce administrative burden. Lenders also favour changes that would better align the CSBFP with conventional lending, improve profitability, decrease claim adjustments and rejections and hold the borrower more accountable for loans losses. Therefore, lender reactions to the proposed measures are expected to be positive and supportive.

All small business associations strongly favour greater effort to promote increased awareness of the CSBFP, and measures to improve access to financing are seen as positive steps. However, some small businesses and their associations recognize that increased access to financing may only be achieved at a slightly increased cost, while others are opposed to any changes that could increase costs. One small business association supports the program as it is designed now and does not support any changes.

Implementation, enforcement and service standards

Industry Canada has been and will continue to work with all CSBFP lenders to ensure a smooth introduction of these changes — this includes early communication and consultation on any revised forms, guidelines and how-to guides. Industry Canada continues to work with lenders to ensure that they have all the necessary administrative tools to prepare for implementation. These amendments are proposed to come into force on April 1, 2013. Amendments related to the electronic registration system would come into effect once the Regulations are registered to ensure quick access to the new system.

Industry Canada will work with the associations of small- and medium-sized businesses to raise awareness about the program and its benefits to small businesses. These efforts will build on the program’s past promotional activities and will examine additional innovative efforts to better target small businesses and entrepreneurs.

These amendments would not alter existing compliance and enforcement mechanisms under the Act or Regulations. Industry Canada conducts compliance reviews during the claims-processing procedure by analyzing the information that the financial institution provided to justify the amount of its claim. In these reviews, Industry Canada verifies whether the loan met the conditions of the program (size of the business, activity, type of asset financed, interest rate, terms of the loan, etc.) and whether the financial institution collected the collateral that secured the loan before submitting its claim. An examination of this process by the Auditor General in 2002 showed that Industry Canada uses a valid procedure to ensure that claims are properly justified.

In addition, compliance and enforcement provisions contained in the enabling legislation provide for audit and examination of lenders’ books and records of account on reasonable notice (21 days) and require lenders to cooperate and assist the Minister as required. If a lender fails to cooperate, the Minister may deny liability for any payment otherwise due to the lender. The Regulations provide for fines and/or imprisonment (up to $500,000 and/or five years for indictable offences; $50,000 and/or six months for summary conviction) for a variety of offences under the CSBFA, including the making of false statements in applications and the disposition of assets or use of proceeds of loans with fraudulent intent.

Industry Canada strives for excellence in the service provided to financial institutions and small businesses and has committed to meeting service standards with respect to language of service, response to enquiries, availability, loan registration, claims for loss and client satisfaction. These service standards are available at www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la02297.html and will remain unchanged as a result of these amendments.

Performance measurement and evaluation

The evaluation of the CSBFP is guided by a results-based management accountability framework, which was most recently revised in 2006. Over the course of each five-year lending period, a number of research studies are conducted to assess various facets of the program in order to provide the necessary evidence that is required to complete the evaluation.

The Canada Small Business Financing Act requires a comprehensive review to be completed and laid before each House of Parliament every five years. The review is largely based on the findings of the Evaluation Report, and helps Industry Canada to monitor and assess the operational and financial performance of the program. This includes the extent to which the goals of incrementality and cost recovery are being met, the program’s relevance and challenges faced in meeting the financing needs of small businesses, and any changes that may be required to maintain and improve the program. The most recent review of operations from 2004 to 2009 was tabled in April 2010 and can be found at www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/la03012.html.

The Canada Small Business Financing Act also requires the tabling of an annual report on the administration of the program for each fiscal year. This report contains various statistics and information about the use and operations of the program. The 2010–11 annual report was tabled in February 2012 and can be found at www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/h_la03085.html.

Contact

For further information, please contact the following person:

Nathalie Poirier-Mizon
Director
Small Business Financing Directorate
Industry Canada
235 Queen Street
Ottawa, Ontario
K1A 0H5
Telephone: 613-946-3391
Fax: 613-954-5541
Email: nathalie.poirier-mizon@ic.gc.ca

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to section 14 of the Canada Small Business Financing Act (see footnote a), proposes to make the annexed Regulations Amending the Canada Small Business Financing Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Nathalie Poirier-Mizon, Director, Small Business Financing Directorate, Industry Canada, 235 Queen Street, Ottawa, Ontario K1A 0H5 (tel.: 613-946-3391; fax: 613-954-5541; email: CSBFR-RFPEC@ic.gc.ca).

Ottawa, October 4, 2012

JURICA ČAPKUN
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE CANADA SMALL BUSINESS FINANCING REGULATIONS

AMENDMENTS

1. (1) Paragraphs 3(1)(h) and (i) of the Canada Small Business Financing Regulations (see footnote 1) are replaced by the following:

• (h) the lender’s acknowledgement that, before making the loan, it verified within the branch where the loan was to be made, or if it has no branches, within itself, that the outstanding loan amount in relation to the borrower does not exceed the limits set out in paragraph 4(2)(c) of the Act;
• (i) the borrower’s acknowledgement that the outstanding loan amount in relation to the borrower does not exceed the limits set out in paragraph 4(2)(c) of the Act;

(2) Section 3 of the Regulations is amended by adding the following after subsection (1):

(2) If a loan registration form is transmitted by electronic means, it must include the electronic signature of the lender and contain the information set out in paragraphs (1)(a) to (l) and the following:

• (a) the borrower’s acknowledgement that the lender is authorized to transmit electronically the information contained in the form on behalf of the borrower and that the borrower has signed a copy of the form; and
• (b) the lender’s acknowledgement that it will keep a copy of the form that is signed by the borrower on file.

(3) For the purposes of subsection (2), “electronic signature” has the same meaning as in subsection 31(1) of the Personal Information Protection and Electronic Documents Act.

(4) A loan registration form must not be transmitted by electronic means unless it is transmitted through a designated secure electronic registration system.

2. (1) Subsection 4(7) of the Regulations is replaced by the following:

(7) With each payment made under subsection (2), the lender must submit a statement that substantiates the basis on which the payment was calculated.

(2) Paragraph 4(8)(a) of the Regulations is replaced by the following:

• (a) that for that year, the lender may make the payments under subsection (2), except the payment for the last quarter of the year, on the basis of estimates of the amounts payable; and

3. Subsection 5(5) of the Regulations is replaced by the following:

(5) The cost of purchasing or improving the equipment, real property, immovables or leasehold improvements financed by a loan referred to in any of paragraphs (1)(a) to (c) must not include the cost of labour provided by the borrower.

4. Paragraph 9(3)(b) of the Regulations is replaced by the following:

• (b) the estimated cost of the services required to improve the asset represents all or substantially all of the estimated value of the improvement to the asset; and

5. Section 12 of the Regulations is replaced by the following:

12. (1) The maximum annual rate of interest payable in respect of a floating rate loan on each day of the loan term must not exceed the aggregate of the prime lending rate that is in effect at that lender on each of those days and

• (a) 3%, on a loan made before April 1, 2013 and on any subsequent renewals of or amendments to that loan; and
• (b) 3.75%, on a loan made after March 31, 2013 and on any subsequent renewals of or amendments to that loan.

(2) The maximum annual rate of interest payable in respect of a fixed rate loan on the day on which the loan is made or renewed or on which the loan term is amended, or on which a document is signed that sets out the terms of the loan that is made or renewed or that sets out the amended loan term, must not exceed the aggregate of, in the case of a loan made before April 1, 2013, 3% on the loan and on any subsequent renewal of or amendment to that loan and, in the case of a loan made after March 31, 2013, 3.75% on the loan and on any subsequent renewal of or amendment to that loan, and the following rate:

• (a) the single family residential mortgage or hypothec rate in effect at that lender for the loan term; or
• (b) in the case of a loan term of more than five years if there is no single family residential mortgage or hypothec rate for that loan term, the five-year single family residential mortgage or hypothec rate.

6. Subsection 13(1) of the Regulations is amended by striking out “and” at the end of paragraph (b), by adding “and” at the end of paragraph (c) and by adding the following after paragraph (c):

• (d) in the case of a loan made after March 31, 2013 that is in good standing, any other charge that would be charged by the lender in respect of a conventional loan of the same amount.

7. Paragraph 19(1)(a) of the Regulations is replaced by the following:

• (a) in the case of a loan made before April 1, 2013, 25% of the original amount of the loan and in the case of a loan made after March 31, 2013, the original amount of the loan;

8. The portion of section 25 of the Regulations before paragraph (a) is replaced by the following:

25. If the non-compliance described in any of the following paragraphs was inadvertent, the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), on the portion of the amount of principal outstanding on the loan to which the non-compliance does not relate:

9. Subsection 25.1(3) of the Regulations is replaced by the following:

(3) Despite the fact that the lender has not provided the documentation referred to in paragraph (1)(b), the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), on the portion of the amount of principal outstanding on the loan to which the non-compliance does not relate.

10. Section 26 of the Regulations is replaced by the following:

25.3 Despite the fact that the primary security taken by the lender is not enforceable, the Minister must pay the lender the amount of any loss resulting from the loan, calculated in accordance with subsection 38(7), on the portion of the amount of principal outstanding on the loan to which the non-compliance relates if

• (a) the non-compliance was inadvertent;
• (b) the requirements set out in section 14 with respect to the validity and ranking of the security are complied with; and
• (c) the lender provides the Minister with documentation that substantiates the following:
  • (i) the lender, or their mandatary or agent, performed, during the period beginning on the day on which the loan was approved and ending 90 days after the final disbursement under the loan agreement, an on-site visit of the premises where the borrower’s small business is carried on or about to be carried on, and
  • (ii) the lender, or their mandatary or agent, confirmed that the assets for which the loan under subsection 5(1) was approved were delivered to and, if required, installed at the premises where the borrower’s small business is carried on or about to be carried on at the time of the on-site visit.

25.4 If the non-compliance was inadvertent with respect to the outstanding loan amount referred to in paragraphs 4(2)(b) and (c), the Minister must pay to the lender the amount of any loss, calculated in accordance with subsection 38(7), on the portion of the amount of the principal outstanding on the loan to which the non-compliance does not relate.

26. (1) In the case where the requirements with respect to guarantees and suretyships set out in sections 19 to 22 were inadvertently not satisfied in respect of a loan, the Minister must pay to the lender the amount of any loss resulting from the loan calculated in accordance with subsection 38(7), less the personal guarantee and suretyship taken but not realized due to the non-compliance.

(2) Subsection (1) does not apply in the case of a loan made before April 1, 2013, if the aggregate amount recovered from the realization of any personal guarantees and suretyships is greater than the sum of

• (a) 25% of the original amount of the loan;
• (b) interest on any judgment against the guarantor or surety;
• (c) taxed costs for, or incidental to, the legal proceedings against the guarantor or surety; and
• (d) legal fees and disbursements — other than costs referred to in paragraph (c) — and other costs incurred by the lender for services rendered to it by persons other than its employees for the purpose of the legal proceedings against the guarantor or surety.

11. Subsection 29(1) of the Regulations is replaced by the following:

29. (1) A lender may assign a loan to another lender at the request of the borrower if the Minister’s liability under subsection 6(2) of the Act in relation to the remaining loans of the transferor does not, as a result of the transfer, exceed the amount already paid by the Minister to the transferor.

12. Section 31 of the Regulations and the heading before it are replaced by the following:

AMALGAMATION OF LENDERS AND OTHER ACTIONS RELATING TO LENDING

31. (1) Before undertaking any of the following actions, the lender must notify the Minister in writing of their intention to undertake the action and of the day on which it is to take effect:

• (a) a lender amalgamates with another lender;
• (b) a lender acquires the lending business of another lender;
• (c) a lender discontinues its commercial lending business and sells all of its outstanding loans to another lender; and
• (d) a lender closes its branch and sells that entire branch’s outstanding loans to another lender.

(2) When an action set out in paragraph (1)(a) takes effect, the Minister’s liability under the Act in respect of losses sustained by the amalgamating lenders as a result of loans made by them continues in respect of losses sustained by the new lender as a result of those loans and

• (a) the loans made by the amalgamating lenders are considered to have been made by the new lender;
• (b) claims for loss sustained in respect of a loan that have been paid by the Minister to each of the amalgamating lenders are considered to have been paid to the new lender; and
• (c) if, as a result of the amalgamation, the amount already paid by the Minister to the amalgamating lenders as a result of the Minister’s liability under subsection 6(2) of the Act is greater than the Minister’s liability with respect to the new lender, the Minister’s liability is deemed to be equal to the amount already paid.

(3) When an action set out in any of paragraphs (1)(b) to (d) takes effect, the Minister’s liability under the Act continues in respect of losses sustained by the transferee lender as a result of those loans and

• (a) the Minister’s liability under the Act in respect of losses sustained by the lenders as a result of loans made by them continues in respect of losses sustained by the transferee;
• (b) the loans made by the transferor are considered to have been made by the transferee;
• (c) claims for loss sustained in respect of a loan that have been paid by the Minister to each of the lenders are considered to have been paid to the transferee; and
• (d) if, as a result of the transfer, the amount already paid by the Minister to the transferor and transferee as a result of the Minister’s liability under subsection 6(2) of the Act is greater than the Minister’s liability with respect to the transferee, the Minister’s liability is deemed to be equal to the amount already paid.

13. Section 32 of the Regulations and the heading before it are repealed.

14. (1) Paragraph 33(1)(a) of the Regulations is replaced by the following:

• (a) the purchaser is approved by the lender as a borrower in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the limits referred to in paragraph 4(2)(c) of the Act;

(2) Paragraph 33(2)(a) of the Regulations is replaced by the following:

• (a) the new partner is approved by the lender as a borrower in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the limits referred to in paragraph 4(2)(c) of the Act;

(3) Paragraph 33(3)(a) of the Regulations is replaced by the following:

• (a) the remaining partners are approved by the lender as borrowers in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the limits referred to in paragraph 4(2)(c) of the Act;

15. Paragraph 37(4)(a) of the Regulations is replaced by the following:

• (a) in the case of a loan made before April 1, 2013, 25% of the original amount of the loan and in the case of a loan made after March 31, 2013, the original amount of the loan;

16. (1) Section 38 of the Regulations is amended by adding the following after subsection (3):

(3.1) If the Minister has paid a lender for an eligible loss under subsections (7) and (8), the lender may submit a further claim within 12 months after the end of the period specified in subsection (2) or (3), as applicable, if the lender’s failure to comply with the period was inadvertent.

(3.2) If the Minister has paid a lender for an eligible loss under subsections (7) and (8), the lender may submit a further claim for any amount or amounts paid by the lender as a result of a deemed trust claim by the Canada Revenue Agency or any provincial department of revenue received by the lender at any time after the expiry of the period specified in subsection (2) or (3).

(2) Subparagraph 38(4)(a)(i) of the Regulations is replaced by the following:

• (i) the cost and proof of payment of the purchase or im-provement that was financed by the loan in an amount equal to the principal outstanding on the loan, and

17. Section 40 of the Regulations is amended by adding the following after subsection (2):

(3) The payment made to the Minister under subsection (2) shall be taken into account when calculating the Minister’s limit of liability with respect to the lender under subsection 6(2) of the Act.

COMING INTO FORCE

18. (1) These Regulations, except for subsection 1(2), come into force on April 1, 2013.

(2) Subsection 1(2) comes into force on the day on which these Regulations are registered.

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