[Federal Register Volume 59, Number 59 (Monday, March 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-7163]


[Federal Register: March 28, 1994]


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DEPARTMENT OF AGRICULTURE

Farmers Home Administration

7 CFR Part 1980

RIN 0575-AB37


Business and Industrial Loan Program

AGENCY: Farmers Home Administration and Rural Development 
Administration, USDA.

ACTION: Proposed rule.

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SUMMARY: The Farmers Home Administration (FmHA) and Rural Development 
Administration (RDA) propose to amend the regulations for the Business 
and Industry (B&I) Loan Program. The action is needed to relieve 
borrowers with small loans from the existing requirement to provide 
annual audited financial statements. The action is expected to clarify 
the requirements for annual financial statements and establish 
thresholds for determining which borrowers will be required to provide 
audited statements.

DATES: Comments must be received on or before May 27, 1994.

ADDRESSES: Submit written comments in duplicate to the Chief, 
Regulations Analysis and Control Branch, Farmers Home Administration, 
room 6348, South Agriculture Building, 14th and Independence Avenue, 
SW., Washington, DC 20250. All written comments made pursuant to this 
notice will be available for public inspection during regular working 
hours at the above address.

FOR FURTHER INFORMATION CONTACT: M. Wayne Stansbery, Business and 
Industry Loan Specialist, Rural Development Administration, USDA, Room 
6327, South Agriculture Building, 14th and Independence Avenue, SW., 
Washington DC 20250, Telephone (202) 720-6819

SUPPLEMENTARY INFORMATION:

Classification

    We are issuing this proposed rule in conformance with Executive 
Order 12866.

Intergovernmental Review

    This program is listed in the Catalog of Federal Domestic 
Assistance under number 10.422, and is subject to intergovernmental 
consultation in accordance with Executive Order 12372, and as stated in 
FmHA Instruction 1940-J, ``Intergovernmental Review of Farmers Home 
Administration Programs and Activities.''

Environmental Impact Statement

    This purposed action has been reviewed in accordance with 7 CFR 
part 1940, Subpart G, ``Environmental Program.'' FmHA has determined 
that this proposed action does not constitute a major Federal action 
significantly affecting the quality of the human environment and, in 
accordance with the National Environmental Policy Act of 1969, Public 
Law 91-190,, an Environmental Impact Statement is not required.

Civil Justice

    This proposed regulation has been reviewed in light of Executive 
Order 12778 and meets the applicable standards provided in sections 
2(a) and 2(B)(2) of that Order. Provisions within this part which are 
inconsistent with State law are controlling. All administrative 
remedies pursuant to 7 CFR part 1900, subpart B must be exhausted prior 
to filing suit.

Paperwork Reduction Act

    The collection of information requirements contained in this 
regulation have been submitted to the Office of Management and Budget 
for review under section 3504(h) of the Paperwork Reduction Act of 
1980. Public reporting burden for this collection of information is 
estimated to vary from 3 to 8 hours per response, with an average of 4 
hours per response including time for reviewing instructions, searching 
existing data sources, gathering and maintaining the data needed, and 
completing and reviewing the collection of information. Send comments 
regarding this burden estimate or any other aspect of this collection 
of information, including suggestions for reducing this burden, to 
Department of Agriculture, Clearance Officer, OIRM, room 404-W, 
Washington, DC 20250; and to the Office of Management and Budget, 
Attention: Desk Officer for the Farmers Home Administration, 
Washington, DC 20503.

Background

    This regulatory package is an FmHA initiative to enhance the 
program by reducing the financial burden on small business borrowers of 
obtaining annual audits of their financial statements. The existing 
regulations require annual audited financial statements from all 
borrowers, except those with loans that have been paid down to no more 
than $100,000 and to no more than two thirds of the original balance 
and have been current on repayments for at least 24 months. The cost of 
the audits can often be the difference between a profit and a loss for 
the year for small businesses. Many small businesses that need and want 
the assistance of the B&I guaranteed loan decide not to apply because 
they are unwilling to commit to the cost of an annual audit. Small 
businesses that have obtained B&I guaranteed loans sometimes become 
delinquent on the loans because the funds were spent on audits or 
refuse to honor their agreement to provide the audits.
    The proposed revision will remove or allow FmHA to waive the 
requirement for annual audits for all loans of $500,000 or less and for 
loans that have been outstanding and have provided audits for three 
years, have an unpaid balance not exceeding $1,000,000, and are current 
on repayments. All borrowers that do not provide audited financial 
statements will be required to provide financial statements compiled or 
reviewed by an independent certified public accountant or licensed 
public accountant.
    Guaranteed loan borrowers subject to OMB Circulars A-128 or A-133 
will also have to comply with those Circulars. Insured (direct) B&I 
loans are governed by the requirements of 7 CFR part 1942.

List of Subjects in 7 CFR Part 1980

    Loan programs, Business and industry, Rural development assistance, 
Rural areas.

    Accordingly, chapter XVIII, title 7, Code of Federal Regulations is 
amended as follows:

PART 1980--GENERAL

    1. The authority citation for Part 1980 continues to read as 
follows:

    Authority: 7 CFR 1989; 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR 2.23; 
7 CFR 2.70.

Subpart E--Business and Industrial Loan Program

    2. Section 1980.445 is added to read as follows:


Sec. 1980.445  Periodic financial statements and audits.

    All borrowers will be required to submit periodic financial 
statements to the lender. Lenders must forward copies of the financial 
statements and the lender's analysis of the statements to FmHA.
    (a) Audited financial statements. Except as provided in paragraphs 
(b), (d), and (e) of this section, all recipients of guaranteed loans 
of more than $500,000 will be required to submit annual audited 
financial statements. The audit must be performed in accordance with 
generally accepted government auditing standards (GAGAS) using the 
publication, ``Standards for Audit of Governmental Organizations, 
Programs, Activities and Functions,'' developed by the Comptroller 
General of the United States in 1988, and any subsequent revisions. In 
addition, the audits are also to be performed in accordance with 
various Office of Management and Budget (OMB) circulars and any FmHA 
requirements specified in this subpart.
    (b) Unaudited financial statements. For borrowers with a loan 
balance (principal plus interest) of $500,000 or less, FmHA will 
require annual financial statements which may be statements compiled or 
reviewed by an accountant qualified in accordance with the publication 
``Standards for audit of Governmental Organizations, Programs, 
Activities and Functions,'' instead of audited financial statements. 
For all loans, FmHA may also accept compilation or review statements 
even though the loan agreement requires an audit, when all of the 
following conditions are met:

    (1) The loan has been outstanding and satisfactory audits have 
been provided for at least 3 years;
    (2) The loan balance does not exceed $1,000,000; and
    (3) The loan repayment is on schedule.

    (c) Internal financial statements. FmHA may require submission of 
financial statements prepared by the borrower's staff at whatever 
frequency is determined necessary to adequately monitor the loan. 
Quarterly financial statements should be required on new business 
enterprises or those needing close monitoring.
    (d) Minimum requirements. This section sets out minimum 
requirements for frequency and quality of financial statements to be 
submitted to FmHA. If specific circumstances warrant, FmHA may require 
audited financial statements or independent unaudited financial 
statements in excess of the minimum requirements. For example, loans 
that depend heavily on inventory and accounts receivable for collateral 
should normally be audited, regardless of the size of the loan. Nothing 
herein shall be considered an impediment to the lender requiring 
financial statements more frequently or of a higher quality than 
required by FmHA.
    (e) Public bodies and Nonprofit Corporations. Notwithstanding other 
provisions of this section, any public body or nonprofit corporation 
that receives a guarantee of a loan of $100,000 or more must provide an 
audit in accordance with Office of Management and Budget (OMB) 
Circulars A-128 or A-133 for the fiscal year of the borrower in which 
the Loan Note Guarantee is issued. If the loan is for development or 
purchases made in a previous fiscal year through interim financing, an 
audit will also be provided for the fiscal year in which the 
development or purchases occurred. Any audit provided by a public body 
or nonprofit corporation in compliance with OMB Circulars A-128 or A-
133 will be considered adequate to meet the requirements of this 
section for that year.
    3. Section 1980.451 is amended by revising paragraph (i)(13) to 
read as follows:


Sec. 1980.451  Filing and processing applications.

* * * * *
    (i) * * *
    (13) Proposed loan agreement. (See paragraph VII of Form FmHA 449-
35). Loan agreements between the borrower and lender will be required. 
The final executed loan agreement must include FmHA's requirements as 
set forth in the Form FmHA 449-14 including the requirements for 
periodic financial statements and recordkeeping in accordance with 
Sec. 1980.445 of this subpart. The loan agreement must also include, 
but is not limited to, the following:
* * * * *
    4. Section 1980.454 is amended by revising ADMINISTRATIVE A. 1. to 
read as follows:


Sec. 1980.454  Conditions precedent to issuance of the Loan Note 
Guarantee.

* * * * *

Administrative

    A. * * *
    1. The loan agreement between the borrower and lender which 
provides for frequency of submission of financial statements to the 
State Director.
* * * * *
    5. Section 1980.469 is amended by revising ADMINISTRATIVE C. 1. to 
read as follows:


Sec. 1980.469  Loan Servicing.

* * * * *

Administrative

* * * * *
    C. * * *
    1. The lender understands upon initial contact during loan 
application and in particular at loan closing that the lender is 
responsible for loan servicing and, for loans of more than $500,000, 
that annual audited financial statements are required.
* * * * *
    Dated: February 23, 1994.
Bob J. Nash,
Under Secretary, Small Community and Rural Development.
[FR Doc. 94-7163 Filed 3-25-94; 8:45 am]
BILLING CODE 3410-07-M