[Federal Register Volume 61, Number 82 (Friday, April 26, 1996)]
[Rules and Regulations]
[Pages 18493-18495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10144]



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DEPARTMENT OF AGRICULTURE
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency

7 CFR Part 1980

RIN 0570-AA11


Business and Industrial Loan Program--Audit Requirements

AGENCIES: Rural Housing Services, Rural Business-Cooperative Service, 
Rural Utilities Service, and Farm Service Agency, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Business-Cooperative Service (RBS) is amending the 
regulations for the Business and Industry (B&I) Loan Program. The 
action clarifies the requirements for annual financial statements and 
establishes thresholds for determining which borrowers will be required 
to provide audited statements.

EFFECTIVE DATE: April 26, 1996.

FOR FURTHER INFORMATION CONTACT: Richard T. Bonnet, Commercial Loan 
Specialist, Rural Business-Cooperative Service, USDA, Ag Box 3221, 
Washington DC 20250-3221, Telephone (202) 720-1804.

SUPPLEMENTARY INFORMATION:

Classification

    This final rule has been determined to be significant and was 
reviewed by the Office of Management and Budget under Executive Order 
12866.

Intergovernmental Review

    This program is listed in the Catalog of Federal Domestic 
Assistance under number 10.768, 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 action has been reviewed in accordance with 7 CFR Part 1940, 
Subpart G, ``Environmental Program.'' The Agency has determined that 
this 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, Pub. L. 91-190, an 
Environmental Impact Statement is not required.

Civil Justice

    This rule has been reviewed under Executive Order 12778, Civil 
Justice Reform. In accordance with this rule: (1) All State and local 
laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3) administrative proceedings in accordance with the regulations of 
the agency at 7 CFR Part 1900 Subpart B or those regulations published 
by the Department of Agriculture to implement the provisions of the 
National Appeals Division as mandated by the Department of Agriculture 
Reorganization Act of 1994 must be exhausted before bringing suit in 
court challenging action taken under this rule unless those regulations 
specifically allow bringing suit at an earlier time.

Unfunded Mandate Reform Act

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Pub. L. 
104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, RBS 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures to State, local, or tribal governments, in 
the aggregate, or to the private sector, of $100 million or more in any 
one year. When such a statement is needed for a rule, section 205 of 
the UMRA generally requires RBS to identify and consider a reasonable 
number of regulatory alternatives and adopt the least burdensome 
alternative that achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector. Thus today's rule is not subject to 
the requirements of sections 202 and 205 of the UMRA.

Paperwork Reduction Act

    The collection of information requirements contained in this 
regulation have been previously approved by the Office of Management 
and Budget (OMB) under the provisions of 44 U.S.C. chapter 35 and have 
been assigned OMB control number 0575-0029. This final rule does not 
impose any new information collection requirements from those approved 
by OMB.

Background

    This regulatory package is an Agency 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

[[Page 18494]]

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.

Discussion of Comments

    On March 28, 1994, a proposed rule was published in the Federal 
Register (59 FR 14371) to remove or allow the Agency 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 million, and are current 
on repayments. As proposed, all borrowers that did not provide audited 
financial statements would 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 would also have to comply with those 
Circulars. Insured (direct) B&I loans are governed by the requirements 
of 7 CFR 1942.
    Eleven letters commenting on the proposed rule were received. Ten 
strongly supported the concept of relaxing audit requirements. None of 
the writers objected to the concept. Two writers recommended raising 
the threshold for requiring audits in connection with new loans from 
$500,000 to $1 million. Also, two writers recommended removing the 
proposed requirement that existing borrowers with loans not exceeding 
$1 million must provide audited statements for three years before an 
exception to the audit requirements may be made. To deal with both of 
these issues, the final rule provides for only one threshold for either 
new or existing loans. The threshold for requiring audited statements 
will be a total Agency guaranteed loan balance exceeding $1 million.
    Two writers objected to the proposed requirement that audits be 
performed in accordance with Generally Accepted Government Auditing 
Standards (GAGAS) rather than Generally Accepted Accounting Principles 
(GAAP). The Agency has determined that since most businesses already 
use GAAP and there is no reason to require audits be done two different 
ways, GAAP will be used. That requirement is changed in the final rule.
    One writer recommended the language be revised to make it clear 
that the monetary threshold is referring to the total principal plus 
interest balance at year end. This suggestion has been adopted.
    One writer objected to the use of the term ``quality'' in reference 
to whether financial statements are audited, reviewed, or compiled. The 
phrasing has been revised in the final rule to eliminate that word 
usage.
    One writer questioned how an individual borrower could be expected 
to know when the Agency wanted audited or unaudited financial 
statements in excess of the minimum requirements. We believe it is 
sufficiently clear that the Agency will inform the lender and borrower 
of the requirements being imposed for each loan. The final rule is not 
different from the proposed rule in this regard.
    One writer suggested the specific threshold for audits to be 
performed under OMB Circulars A-128 and A-133 be removed because the 
threshold set by OMB might change. This suggestion has been adopted.

List of Subjects in 7 CFR part 1980

    Loan programs--Business, Rural areas, Rural development assistance.

    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 the Agency.
    (a) Audited financial statements. Except as provided in paragraphs 
(d) and (e) of this section, all borrowers with a total principal and 
interest loan balance for loans under this subpart, at the end of the 
borrower's fiscal year of more than $1 million, must submit annual 
audited financial statements. The audit must be performed in accordance 
with generally accepted accounting principles (GAAP). In addition, the 
audits are also to be performed in accordance with approriate Office of 
Management and Budget (OMB) circulars and any Agency requirements 
specified in this subpart.
    (b) Unaudited financial statements. For borrowers with a loan 
balance (principal plus interest at year-end) of $1 million or less, 
the Agency 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.
    (c) Internal financial statements. The Agency may require 
submission of financial statements prepared by the borrower at whatever 
frequency is determined necessary to adequately monitor the loan. 
Quarterly financial statements will be required on new business 
enterprises or those needing close monitoring.
    (d) Minimum requirements. This section sets out minimum 
requirements for audited and unaudited financial statements to be 
submitted to the Agency. If specific circumstances warrant, the Agency 
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 will normally be audited, regardless of the size of the 
loan. Nothing in this section shall be considered an impediment to the 
lender requiring financial statements more frequently than required by 
the Agency or requiring audited financial statements when the Agency 
would accept unaudited financial statements.
    (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 that meets the thresholds 
established by OMB Circular A-128 or A-133 for coverage under such 
circular, must provide an audit in accordance with the applicable OMB 
Circular 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, in accordance with the applicable circular, 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

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compliance with OMB Circular A-128 or A-133 will be considered adequate 
to meet the requirements of this section for that year. OMB Circulars 
are available from the Office of Management and Budget, EOP 
Publications Office, 725 17th Street, NW., Room 2200, New Executive 
Office Building, Washington, DC 20503.
    3. Section 1980.451 is amended by revising paragraph (i)(13) 
introductory text 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 the Agency requirements 
as set forth in the Form FmHA 449-14 including the requirements for 
periodic financial statements in accordance with Sec. 1980.445. The 
loan agreement must also include, but is not limited to, the following:
 * * * * *


Sec. 1980.454  [Amended]

    4. Section 1980.454 is amended by removing and reserving 
ADMINISTRATIVE A. 1.


Sec. 1980.469  [Amended]

    5. Section 1980.469 is amended by removing and reserving 
ADMINISTRATIVE c. 1.

    Dated: January 30, 1996.
Jill L. Thompson,
Under Secretary, Rural Economic and Community Development.
[FR Doc. 96-10144 Filed 4-25-96; 8:45 am]
BILLING CODE 3410-32-P