[Federal Register Volume 61, Number 247 (Monday, December 23, 1996)]
[Rules and Regulations]
[Pages 67624-67654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32170]


      

[[Page 67623]]

_______________________________________________________________________

Part III





Department of Agriculture





_______________________________________________________________________
Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency
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7 CFR Part 1980, et al.



Business and Industrial Loan Program; Final Rule

  Federal Register / Vol. 61, No. 247 / Monday, December 23, 1996 / 
Rules and Regulations  

[[Page 67624]]



DEPARTMENT OF AGRICULTURE

Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency

7 CFR Parts 1980, 4279 and 4287

RIN 0570-AA09


Business and Industrial Loan Program

AGENCIES: Rural Housing Service (RHS), Rural Business-Cooperative 
Service (RBS), Rural Utilities Service (RUS), and Farm Service Agency 
(FSA), USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Rural Business-Cooperative Service (RBS) is the successor 
to the Rural Business and Cooperative Development Service, which was 
the successor to the Rural Development Administration (RDA), which was 
the successor to the Farmers Home Administration (FmHA).
    RBS is issuing new Business and Industry (B&I) Guaranteed Loan 
Program regulations to replace the FmHA regulations for the program. 
This action is needed to streamline and update the program. The 
intended effect is to shorten, simplify, and clarify the regulation; 
shift some responsibility for loan documentation and analysis from the 
Agency to the lenders; make the program more responsive to the needs of 
lenders and businesses; and provide for smoother and faster processing 
of applications.

EFFECTIVE DATE: December 23, 1996.

FOR FURTHER INFORMATION CONTACT: Dwight A. Carmon, Business Programs 
Processing Division Director, RBS, U.S. Department of Agriculture, Stop 
3221, 1400 Independence Avenue, SW., Washington, DC 20250-3221, 
Telephone (202) 690-4100.

SUPPLEMENTARY INFORMATION:

Classification

    This final rule has been determined to be a ``significant 
regulatory action'' and was reviewed by OMB under Executive Order 
12866.

Programs Affected

    The Catalog of Federal Domestic Assistance program impacted by 
this action is: 10.768, Business and Industrial Loans.

Intergovernmental Review

    As set forth in the final rule related Notice to 7 CFR, part 3015, 
subpart V, 48 FR 29112, June 24, 1983, Business and Industry 
(previously ``Industrial'') Loans are subject to the provisions of 
Executive Order 12372 which requires intergovernmental consultation 
with state and local officials. RBS has conducted intergovernmental 
consultation in the manner delineated in FmHA Instruction 1940-J, 
``Intergovernmental Review of Farmers Home Administration Programs and 
Activities.''

Civil Justice Reform

    The final 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 11 must be exhausted before bringing suit in 
court challenging action taken under this rule.

Environmental Impact Statement

    The action has been reviewed in accordance with 7 CFR, part 1940, 
subpart G, ``Environmental Program.'' RBS 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, Public Law 91-190, an 
Environmental Impact Statement is not required.

Unfunded Mandate Reform Act of 1995

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Public 
Law 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 
1 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 costly, more 
cost-effective, or least burdensome alternative that achieves the 
objectives or 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.

Background

    This action replaces the Business and Industrial (B&I) loan program 
regulations at 7 CFR, part 1980, with regulations published at 7 CFR, 
parts 4279 and 4287, and significantly departs from the previous 
program of loan guarantees for businesses in rural areas. The new 
Business and Industrial Guaranteed Loan Program will be more flexible 
and will place more reliance on lenders. There are fewer specific 
requirements for lenders and businesses. Eligible loan purposes are 
broader. The lender has added responsibility for analyzing credit 
quality; for making, securing, and servicing the loan; and monitoring 
construction. The priority system will give increased priority to 
underserved communities. Application processing procedures will be more 
efficient, less burdensome for borrowers, lenders, and RBS staff and 
will provide for more rapid decisions in making, servicing, and 
liquidating loans.
    The B&I loan program is authorized by the Rural Development Act of 
1972. The loans are made by private lenders to rural businesses for the 
purpose of creating new businesses, expanding existing businesses, and 
for other purposes that create employment opportunities in rural areas. 
Eligibility for this program includes businesses located in cities of 
up to 50,000 population, but priority is given to areas outside cities 
of 25,000 or fewer population.
    Loans can be made for a variety of purposes including business 
acquisition, expansion, or improvement; purchase of land, easements, or 
buildings; purchase of equipment, machinery, or supplies; repair and 
modernization; pollution control; transportation services; start up and 
working capital; and feasibility studies. The rate and term of the loan 
is negotiated between the business and the lender.
    The Agency is promulgating these regulations to make the program 
more usable by lenders and borrowers. More importantly, the Agency 
recognizes the changes are necessary to make the program more effective 
in creating jobs and stimulating economic activity, particularly in 
chronically low income rural areas. Under these B&I regulations, the 
material that must be submitted to and reviewed by the Agency before 
approval of the guarantee is reduced and responsibilities for credit 
analysis and application processing tasks will be shifted from the 
Agency's National Office to field offices and from the Agency to the 
lender where feasible.

[[Page 67625]]

Following is a discussion of some of the most significant policy 
revisions included in the new regulations.
    Automatic eligibility to be a lender under the program is limited 
to certain types of organizations. This regulation allows the Agency to 
approve additional lenders when they are determined by the Agency to 
have sufficient legal authority, lending expertise, and financial 
strength. Currently, most lenders participating in the B&I program are 
commercial banks.
    The Agency is reducing the loan guarantee fee if it is determined 
that the business seeking the guarantee provides high impact business 
development and is located in a community experiencing long term 
population decline and job deterioration, a community that has remained 
persistently poor over the past 60 years, or a community experiencing 
economic trauma due to natural disaster or fundamental economic 
structural change. The intent of this provision is to encourage 
businesses to locate in areas with persistent economic problems.
    During the preparation of this rule, it was proposed that loans 
could be guaranteed to businesses with a majority ownership by a 
foreign entity. During the comment period, no one responded to the 
proposed rule concerning this issue. Because of uncertainty of how this 
provision may relate to the provisions of the Welfare Reform Act, the 
Agency has determined to remove this provision so as to provide an 
opportunity to further examine this relationship. This will avoid a 
delay in implementation of this rule that could be caused by conducting 
a potentially lengthy investigation.
    Presently, agricultural-production loans are not eligible for B&I 
guarantees. This new regulation will allow guarantees for agricultural 
production, but limit eligibility to integrated businesses involved in 
both production and processing.
    Previous regulations would not allow a lender to bring loans it had 
previously made under a guarantee through refinancing unless the 
percentage of guarantee was adjusted to maintain the previous 
unguaranteed exposure. The new regulations will allow the previous 
exposure to be guaranteed, provided the refinancing is a secondary part 
of the loan and the rates and terms will be restructured to improve 
cash flow.
    Eligible loan purposes are expanded to include hotels, motels, and 
other tourism and recreational facilities which have been ineligible 
for the past several years. Loans for such facilities will be evaluated 
on the merits and financial feasibility of each proposal, except for 
racetracks, golf courses, and gambling facilities which will remain 
ineligible.
    Previous regulations limited the size of loans considered for 
guarantee to $10 million. The new regulations will give the 
Administrator the authority to approve exceptions to the $10 million 
ceiling for high-priority projects of up to $25 million. The 
regulations limit the guarantee percentage to 80 percent for loans of 
$5 million or less, 70 percent for loans between $5 million and $10 
million, and 60 percent for loans exceeding $10 million. Authority is 
provided for the Administrator to approve exceptions so that up to 90-
percent of loans of $10 million may be guaranteed when the higher 
percentage is necessary to approve a high-priority project as specified 
in the regulation. The State Director has the authority to approve 
exceptions so that up to a 90 percent guarantee may be approved for 
loans of up to $2 million (within the State Director's loan approval 
authority) when the higher percentage is necessary to approve a high-
priority project.
    In conjunction with implementation of the new regulations, the 
Agency intends to provide a new application form that will serve the 
function of 10 forms now in use. The application form will be 
supplemented by additional information provided by the lender.
    The regulations provide for certain experienced lenders to apply 
for status as certified lenders. Certified lenders will submit 
significantly less information for Agency review as regular lenders.
    Agency staff will be authorized to rely on an acceptable written 
credit analysis prepared by the lender rather than the Agency 
completing its own complete credit analysis.
    Usually, the lender will determine the frequency of financial 
statements to be required from the business after the loan is closed 
and whether or not the statements must be audited.
    The lender and its legal counsel will be responsible for loan 
closing without a required review by the Office of the General Counsel.
    Loan servicing is simplified. Loans will be classified by the 
lender. Lenders will be able to release collateral with a cumulative 
value of up to 20 percent of the original loan amount, over the life of 
the loan, if the proceeds will be used to reduce the loan amount due or 
buy replacement collateral. Lenders may make protective advances of up 
to $5,000 without prior Agency approval. If unsecured personal or 
corporate guarantees cannot be settled promptly, a final loss report 
may be filed and paid and the guarantees treated as future recovery.
    RBS believes the streamlining of the regulations for this program 
will enhance the use of the program's effect by improving the 
prosperity of rural residents through guarantees of targeted 
investments that enhance rural competitiveness, facilitate industrial 
conversion, and enable rural residents to profit from private sector 
activity. The revisions are consistent with the Administration's 
efforts to streamline Government functions, improve efficiency and the 
effectiveness of Government activities, and be more customer friendly. 
The changes will enable the Agency to deliver a larger program with 
less staff resources and simultaneously meet the objectives of the 
National Performance Review concerning the Regulatory Reinvention 
Initiative dated March 4, 1995, as related to the President's 
initiative to improve customer service, provide for less regulations, 
and streamline Agency operations.
    Incorporation of the changes will provide more flexibility for both 
lenders and Agency staff. Many errors will be reduced because the 
guidelines and requirements are clearer and items are more easily found 
in a reduced and better organized volume of regulations. Lenders will 
be more interested in using the program because the procedures are 
simpler and more direct. The ultimate benefit of these changes will be 
increased lending activity resulting in the expansion of business 
opportunities and the creation of more jobs in rural areas, 
particularly in those areas that have historically experienced economic 
distress.

Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995, no persons are required 
to respond to a collection of information unless it displays a valid 
OMB control number. The valid OMB control number assigned to the 
collection of information in these final regulations is displayed at 
the end of the affected section of the regulations. The information 
collection requirements contained in this regulation have been 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 numbers 0575-0168, 
0575-0170, 0575-0171, 0575-0029, and 0575-0024 and in accordance with 
the Paperwork Reduction Act of 1995. This final rule does not impose 
any new information collection requirements from those approved by OMB.

1996 Farm Bill Initiatives

    The Federal Agriculture Improvement and Reform Act of 1996 (Pub. L. 
104-

[[Page 67626]]

127) requires the Agency to include language in the B&I regulations 
that will expand eligible loan purposes to allow the purchase of 
startup capital stock in a cooperative to allow family-sized farmers be 
eligible if selling their products to the cooperative. The definition 
of a family-sized farmer will be the same as used by the Farm Service 
Agency (FSA).
    In addition, the Agency will include language to allow B&I loan 
guarantees to assist agriculture-related industries adjusting to the 
terminated Federal agricultural programs or increased competition from 
foreign competitors.

Discussion of Revision and Comments

    The proposed rule was published in the Federal Register on February 
2, 1996 (61 FR 3853), and provided for a comment period ending April 2, 
1996.
    In response to the proposed rule, 86 respondents provided comments 
to the Agency. Of the 86 comments, 18 comments were considered late 
because they were received after April 2, 1996. However, the Agency 
reviewed and addressed all issues raised by all of the comments.
    Of the 86 commenters that responded to various sections of the 
proposed rule, 34 were lenders, mortgagors or related to the lending 
industry, 15 were Agency employees, 7 were various Government 
officials, 5 were housing authorities, chambers of commerce or planning 
commissions, 1 was a railroad association, 2 or more businesses, 2 
cooperatives, and the remaining were a combination of council members 
and others.
    Of the 86 respondents, 24 respondents provided general comments 
supporting the regulation. Several respondents provided editorial 
changes that indicated a personal preference which were not adopted. 
These changes included changes in sentence structure, wording, etc., 
that do not improve the regulation.
    The Agency requested comments from the public concerning the 
paperwork burden of the streamlined regulations and the loan priority 
system. Several respondents responded favorably to the changes, 
supporting the reduction in the paperwork, the streamlining of the 
regulations, moving more of the credit decisions to the lender, and 
increasing the enterprises that would be eligible under these 
streamlined regulations. Five comments suggested the proposed loan 
priority system is too complicated, time consuming, and difficult to 
explain to potential customers. The commenters further suggested that 
the criteria are too subjective, vague, difficult as a tool of 
measurement, and should be revised. The priority system has been 
modified to be more user friendly, however, the integrity of the system 
still meets the goal of reaching high-impact areas.
    Of the 86 respondents, 45 respondents provided comments on 
Sec. 4279.113, ``Eligible loan purposes,'' and Sec. 4279.114, 
``Ineligible loan purposes.'' Of the 45 respondents, 20 respondents 
were in favor of recreation and tourism and agricultural production as 
eligible loan purposes. There were no adverse comments concerning 
recreation and tourism. One of the respondents in favor of recreation 
and tourism suggested that the Agency require a minimum of 25-35 
percent tangible balance sheet equity because of the risk involved with 
these types of businesses. This comment was not adopted. The Agency 
feels that the regulations (Sec. 4279.131(d)) sufficiently address this 
concern.
    Another respondent felt that agricultural production as defined 
under Sec. 4279.113(h)(2) should be expanded to allow the agricultural-
production portion of any loan up to 50 percent of the total loan and 
that the Agency should not restrict it to integrated processing. This 
suggestion was not adopted. The Agency feels that to adopt such a broad 
change in the coverage of agricultural production without processing 
would result in the Agency competing with other farm lender 
organizations.
    One respondent felt that the guaranteed mortgage should be exempt 
from taxes like the FSA programs. Congress and the Internal Revenue 
Service control tax questions. The Agency has no authority to implement 
this proposal.
    One respondent is in favor of racetracks and gambling being 
included as eligible loan purposes. Under Sec. 4279.114(h), the Agency 
does not allow any business that derives more than 10 percent of annual 
gross revenue from gambling activities to be included as an eligible 
purpose. The Agency will not adopt the proposed change. Gambling is not 
a high priority loan purpose. Racetracks will continue to be an 
ineligible loan purpose as noted under Sec. 4279.114(g) because 
professional racetracks are not a high priority loan purpose. However, 
slicktracks and related amusement park entertainment, in which a 
participant is not receiving a cash award exceeding $500 for 
performance, will be considered eligible under the guaranteed loan 
program covered in Sec. 4279.113(u).
    Several respondents recommended that golf courses be an eligible 
loan purpose. This program is intended to provide long-term economic 
development to all segments of rural area populations. It has not been 
demonstrated that golf courses would provide the benefits intended. 
Therefore, the Agency will not adopt the recommendation to allow golf 
courses to be an eligible loan purpose.
    Several respondents recommended that Sec. 4279.114(n) be revised to 
allow multiple-family housing and residential housing. The Agency 
agrees and has adopted this change to allow all housing to be an 
eligible loan purpose, except guaranteed funds being used for owner-
occupied housing or any types of projects that would be eligible for 
the Rural Rental Housing and Rural Cooperative Housing loans under 
Sections 515, 521 and 538 of the Housing Act of 1949, as amended. 
Mobile home parks are considered eligible under this section.
    One respondent recommended that the Agency revise the definition of 
a rural area under Sec. 4279.108(c) to allow guaranteed funds to be 
utilized in urban areas which are not presently allowed under the 
current definition. The statutory authority prohibits a broader 
definition.
    Several respondents suggested that Sec. 4279.113(q), debt 
refinancing, be revised to eliminate the requirement in the proposed 
rule that the existing lender debt being refinanced only be a secondary 
part of the overall loan. It was also suggested that the Agency include 
language that would allow guaranteed funds to be offered on long-term 
rates to customers just as freely as other bank customers. One 
respondent recommended that the ``secondary part'' be defined as less 
than 50 percent of the debt being refinanced. The Agency will provide 
more clarification concerning ``secondary part'' adopting the 50 
percent requirement. However, the other comment concerning long-term 
rates being freely offered will not be adopted because the Agency wants 
flexibility to match interest rates or loan term adjustments to the 
individual loan.
    One respondent suggested that Sec. 4279.113(r), Interim Financing, 
be revised to allow the guaranteed lender to provide the appropriate 
documentation by a credit memorandum that the intent of the lender was 
that interim financing be considered as a take-out loan, and not to 
making this request a part of the preapplication or application request 
thereby reducing paperwork burden. This comment was not adopted because 
the request is not considered to be an excessive paperwork burden. It 
is a reasonable request for a credit review. The Agency feels that 
proper documentation should be included as

[[Page 67627]]

part of the preapplication and application to support the justification 
for using loan funds for this purpose.
    One respondent asked for a clarification of Sec. 4279.113(u), 
education and training, as an eligible loan purpose as compared to 
Sec. 4279.114(d), prohibition of funding for charitable institutions, 
churches, or church-controlled or fraternal organizations. Guarantees 
for education and training would not be available to any charitable 
institutions, churches, or church-controlled or fraternal organization, 
either directly or indirectly, even without any religious affiliation. 
The Agency has adopted the position that guaranteed funds will not be 
utilized for the above organizations because they are not cash 
generating business institutions.
    One respondent stated facilities constructed for lease to 
Government agencies, including USDA Rural Development, should be 
eligible. This comment will not be adopted because such a guarantee 
could lead to a perception of a conflict of interest.
    One comment asked ``what determines not being eligible for Farm 
Credit Programs'' under Sec. 4279.113(h). The Agency relies upon the 
referenced regulations as published by the FSA concerning what 
constitutes a customer not being eligible for farm credit programs.
    One comment suggested that the Agency limit guaranteed funds for 
housing-related loans due to the excessive demand that may be placed on 
our funds in future years. This comment will not be adopted. The Agency 
feels that the priority scoring system set up in the regulations will 
limit funding for housing-related loans to a manageable level.
    One respondent suggested that the definition under Sec. 4279.114(o) 
be clarified to note that guaranteed funds are eligible for taxable 
bond issues. The Agency will not adopt this comment because the 
regulation is clear as currently written.
    One respondent recommended that a ``line of credit'' be determined 
as an eligible loan purpose under Sec. 4279.113. This change will not 
be considered until further research can be concluded to determine the 
actual need for a line of credit guarantee.
    Twenty respondents provided comments on Sec. 4279.43, Certified 
Lender Program (CLP). Four comments requested clarification whether the 
CLP approval determination is made at the State or National level. The 
intent of the regulation is that the State Office will be point of 
approval.
    Two comments suggested establishing a turnaround time for 
application processing ranging from 3 to 20 working days. At this point 
in time, no turnaround time is established but the comments will be 
considered in our customer service activities.
    A comment suggested the CLP designation be made available only to 
active lenders, recognized in the area instead of in the State as a 
commercial lender, who has made at least two B&I loans in the last 24 
months. The lender who is recognized as a commercial lender in the area 
will also meet the requirement of being recognized in the State as a 
commercial lender. The intent of the regulation is to expand lender 
participation; therefore, the suggestion of only issuing a CLP 
designation to an active recognized lender is not adopted.
    Two comments suggested the requirements to become a CLP lender be 
waived for a lender already designated as a Small Business 
Administration (SBA) Certified or FSA Approved or Certified lender. The 
Agency will not adopt the proposed change because the requirements with 
which the lender must comply for this program are, to some extent, 
unique to this program.
    Two comments were received concerning Agency funding reserves. One 
was concerned that the CLP designation and the associated ability to 
reserve funds for 30 days will defeat the priority scoring system since 
a CLP lender with a low-priority project could reserve funds over a 
non-CLP lender with a high-priority project. This is a valid concern. 
Therefore, the rule has been changed to provide that there will be no 
reservation of funds during the last 60 days of the fiscal year in an 
effort to ensure full utilization of program funding authority. While 
this solution may not entirely eliminate the comments' concern, it 
should reduce the problem perceived, at least at the end of the year.
    The other comment wanted to establish a mechanism to create and 
operate a sufficiently funded National Reserve account to ensure 
adequate funds are available when requested, especially in smaller 
States. This concern will be addressed by a National Office reserve in 
an amount of not less than 10 percent of the total yearly allocation.
    A comment was made that the CLP feature should be eliminated 
altogether because of the excessive paperwork, complexity of the 
requirements, revocation of CLP status could appear to be onerous and 
punitive in nature, and because use of the CLP designation would be 
minimal due to lack of repeat lenders. This comment was not adopted 
because the Agency believes that with sufficient safeguards, the 
concept is workable.
    A comment suggested that CLP lenders be required to repurchase 
loans for servicing rather than having the ``option'' as is now the 
case. The Agency does not wish to place such a requirement on CLP 
lenders because the objective of the program is to improve customer 
service and encourage use of the program.
    A comment suggested Form 4279-2 be completed by the borrower not 
the lender. The Agency is relying on the lender to process most aspects 
of a loan. Therefore it is appropriate for the lender to complete and 
submit the form.
    A comment suggested basing the CLP designation on lender ratings 
available from examiner reports instead of published guidelines. The 
Agency did not adopt this suggestion because it believes the published 
guidelines are sufficient to allow the Agency to decide which lenders 
have requisite expertise to fulfill CLP responsibilities.
    A comment asked (1) if lenders could utilize their forms instead of 
Rural Development forms; and (2) whether approval authority is held by 
the lender or the Agency. The Agency agrees. The lenders can utilize 
their own forms as long as the form includes all of the information of 
the approved Agency forms, is approved by the Regional OGC and State 
Offices, and will not add additional burden to the public.
    Fourteen respondents submitted comments on Sec. 4279.137, Financial 
Statements. Nine of the comments were favorable. Two comments suggested 
eliminating loan size as the overriding factor while two other comments 
suggested different levels of CPA-developed statements based on loan 
size. One comment suggested having the principals (and their financial 
strength) provide a personal guarantee as the determining factor 
regarding the loan threshold size audited statement requirement. The 
Agency determines the application of this option on a case-by case-
basis due to individual circumstances. This section will remain the 
same.
    Nine respondents provided comments on Sec. 4279.155, Loan 
priorities, that ranged from short statements of support to substantial 
regulation rewrites. Five comments stated the proposed system is too 
complicated, time consuming, and difficult to explain to potential 
customers. The criteria are subjective, vague, difficult to determine, 
complex, defy measurement or are overly exacting. The Agency considered 
the concerns and the following sections were changed:

[[Page 67628]]

    Section 4279.155(b)(1)(ii) was eliminated because, as suggested by 
the comments, the language was unclear and the factors not measurable.
    Sections 4279.155(b)(5)(i) (A) and (B) were eliminated because the 
criteria requested was not measurable or not available. Sections 
4279.155(b)(5)(i)(C) and (D) were changed to (A) and (B) because of the 
elimination of the above items. These changes added clarity to this 
section and will be more measureable in determining priority points. 
The words ``potential to achieve'' were eliminated under the new (A), 
and the points changed from 3 to 5 to place more weight on this 
category. Under the new (B), the sentence was amended to end after the 
word ``community'', deleting the balance of the sentence because the 
information required was not measureable. The points in new (B) were 
changed from 3 to 4 to place more weight on the category.
    Section 4279.155(b)(5)(ii)(A) revises the sentence to end after the 
word ``prices''. This change provided more clarity to the sentence, and 
the points were reduced from 3 to 2 to place less weight on this 
category because of the criteria measured.
    Section 4279.155(b)(5)(ii)(B) is changed to eliminate the words 
``has a significant potential to stimulate the development of a broader 
complex of business activities that provide inputs to or serve as the 
market for the initial business''. The words ``provides an additional 
market for existing local business'' will be inserted. This change was 
adopted to clarify this category.
    As one commenter noted, proposed Sec. 4279.155(b)(5)(ii)(D) 
eliminated the current language which favors the cooperative form of 
organization. The comment suggested that the wording be changed to 
refer to a business that produces a natural resource value-added 
product which is more measureable. The Agency agrees and has changed 
the language to read: ``Business that will produce a natural resource 
value-added product.'' Points were changed from 3 to 2, to add less 
weight to this category as compared to other categories.
    Section 4279.155(b)(5)(iii)(A) is deleted as recommended by one 
comment which suggested that this category was not measureable and 
should be removed.
    As a result of another comment, Sec. 4279.155(b)(5)(iii)(B) is 
modified to read: ``average wage exceeding 125 percent of the Federal 
minimum wage'', instead of ``150 percent of minimum wage'' to allow 
more points to be scored at lower minimum wage categories, and more 
weight will be placed on this category. With the deletion of (A) under 
this section, this category becomes (A). The points increased from 4 to 
5. The Agency adopted the recommended change.
    One comment suggested Sec. 4279.155(b)(5)(iii)(C) be modified to 
read: ``average wage exceeding 150 percent of the Federal minimum 
wage'', instead of ``200 percent of the minimum wage'' to allow more 
points to be scored at lower minimum wage categories. The Agency 
adopted the change and placed more weight on the category. The points 
increased from 4 to 10.
    One comment suggested developing points for improving the 
environmental climate in rural communities or eliminating this 
objective from B&I program purposes. This comment was not adopted by 
the Agency because ``improving the environmental climate'' is one 
purpose of the program and no other program purposes are given priority 
points. The Agency does not feel one program purpose is more valuable 
than another.
    One comment suggested that the phrase ``persistently poor'' in 
Sec. 4279.155(b)(2)(ii), Community Priority, be defined. Instead, a 
list of eligible communities will be made available through State 
Offices.
    One comment suggested increasing the points in Sec. 4279.155(b)(4), 
Loan features, points to 20. The Agency feels that this category should 
receive more emphasis and adopted the suggestion.
    Two comments requested a clarification for the secondary market 
rate in Secs. 4279.155(b)(4) (i) and (ii). It was also noted that there 
is no point difference between these two criteria. The words 
``secondary market'' are changed to ``Wall Street Journal published 
Prime Rate''. This change provides a reference that is readily 
available for comparison with the rate proposed by the lender. While 
there is no difference in points between the two criteria, if an 
interest rate is low enough, it can qualify for the points awarded in 
each subsection.
    Two comments pointed out that there is no priority point 
differentiation between Secs. 4279.155(b)(5)(iii) (A) and (B) regarding 
the wages of jobs created with assistance. These criteria are 
cumulative which means a project that creates higher wage jobs can 
obtain points for both. No change is made.
    Two comments suggesting the elimination of Secs. 4279.155(b)(3) (i) 
and (ii) will not be adopted since the initiatives were included to 
provide emphasis on the location of businesses in EZ/EC communities 
where job creation is important.
    One respondent suggested that the priority system be amended to 
include points for transportation improvement and infrastructure 
safety. The Agency did not adopt this recommendation. The Agency has 
determined that specific emphasis should be directed to the areas 
already included. While these areas are important, we do not believe 
they promote program purposes to the extent as the included areas. 
Transportation improvement and infrastructure safety remain eligible 
purposes and desirable goals.
    One comment suggested eliminating Sec. 4279.155(b)(1)(i) regarding 
the 25,000 population limit while another comment suggested giving 
10,000 population communities priority. The section retains the 25,000 
population guideline because previous Congressional guidance has 
indicated 25,000 population is a reasonable application of the priority 
rule.
    One respondent provided a comment on Sec. 4279.165(b), Evaluation 
of application, suggesting the words, ``the Agency's'' prior to the 
last two words in the sentence, ``environmental requirements''. This 
section was rewritten to provide clarity concerning the evaluation 
process.
    Thirteen respondents provided comments on Sec. 4279.161, ``Filing 
preapplications and applications,'' and of the 13 respondents, eight 
comments were favorable. One comment suggested eliminating the 
requirement for the lender to submit any item beyond those mentioned in 
Secs. 4279.161(a)(1) (i)-(iv). This comment was not adopted because the 
Agency needs this information to evaluate the proposal and to determine 
if the proposal is feasible and reasonable.
    One comment suggested eliminating written subjective information 
and data that are intended for the lender's internal reference and 
guidance and always requiring instead that the lender include only 
ratios and comparisons with industrial standards. The Agency needs the 
lender's complete written analysis and requested associated material in 
order to determine whether the lender is exercising due diligence and 
meeting the intent of this regulation which places more reliance on 
lenders for analyzing credit quality.
    Two comments suggested changes in proposed forms which were not a 
part of this regulation. They will be considered in the form 
development process.
    One comment suggested the need to specify that the business plan 
include economic, market, technical, financial and management 
information to ensure uniformity. This suggestion is not

[[Page 67629]]

adopted. The Agency feels that the requirements in Secs. 4279.150 and 
4279.161(b)(12) are sufficient for the intended purposes.
    One comment suggested changing the word ``must'' to ``should'' in 
Sec. 4279.161(b)(11) regarding items to be addressed in the Loan 
Agreement. These are minimal requirements. The Agency will not adopt 
this change because the items are mandatory.
    One comment suggested eliminating the intergovernmental 
consultation requirement to expedite loan processing and protect the 
applicant's privacy. Executive Order 12372 requires this action on all 
projects. The suggestion is not implemented.
    One comment proposed the adoption of another agency's application. 
The instant program focuses entirely on rural development. This comment 
was not adopted because this application is better suited to this 
program's missions and objectives.
    One respondent provided a comment on Sec. 4279.126, Loan terms, 
suggesting that the term of the loan for refinancing purposes be 
determined based on the weighted average of the underlying collateral's 
life. The regulation already provides for this.
    Five respondents provided comments on Sec. 4279.131, Credit 
quality. Four comments identified a need for the Agency to establish 
objective, minimum standards for tangible balance sheet equity to avoid 
abuse of the program and vulnerability in the appeals process. 
Suggested minimum standards ranged from 10 percent to 20 percent 
tangible balance sheet equity at time of issuance of the Loan Note 
Guarantee based on a variety of subjective criteria. The Agency adopts 
these suggestions changing the regulation to indicate that the minimum 
tangible balance sheet equity required at the time of issuance of the 
Loan Note Guarantee will be 10 percent for existing and 20 percent for 
new businesses. An exception to this requirement may be granted by the 
Administrator or designee based upon the objective standard delineated 
in the section.
    One comment supported establishing written discounting standards 
for collateral to ensure consistency but also recommended that an 
exception authority provision be developed. The regulation requires 
lenders to discount collateral consistent with sound loan-to-value 
policy. The Agency believes that this requirement is sufficient to 
protect the Agency and yet provide needed flexibility. Therefore, the 
suggestion is not adopted.
    Sixteen respondents provided comments on Sec. 4279.108, Eligible 
borrowers, and of the sixteen comments, four were favorable. Nine 
comments requested the Freely Associated States be determined eligible 
for program assistance. Under Sec. 4279.2, Definitions, ``State'' 
encompasses this area making it eligible. The Agency added language 
under Sec. 4279.108, Eligible borrowers, to amend the citizenship and 
residence requirements in Sec. 4279.108(b)(3). Under this section, 
citizens and residents of the United States include citizens and 
residents of the Republic of Palau, the Federated States of Micronesia, 
and the Republic of the Marshall Islands.
    Two comments suggested that the college student population not be 
included in determining population limits because student populations 
are seasonal and truly do not add to the industrial and tax base of a 
community. The Agency will not adopt this change since it cannot 
determine U.S. decennial census methodology upon which a statutory 
provision requires the determination to be made.
    One comment questioned whether communities under 25,000 population, 
Sec. 4279.155(b)(1)(i), population priority, is consistent with the 
preamble to the proposed rule. The Agency was unable to locate any such 
inconsistency and no change was made.
    Seven respondents provided comments on Sec. 4279.150, Feasibility 
studies. Three comments suggested establishing a dollar threshold for 
determining when to require a study. This suggestion was not adopted 
because, in the Agency's view, the business, not loan size, should be 
the determining factor in deciding whether to require a feasibility 
study.
    Two comments suggested adding the five elements of a feasibility 
study as outlined in the current program regulation, FmHA Instruction 
1980-E. It was suggested that the term ``significantly affect'' is 
vague and should be defined to limit appeal situations. The five 
elements of a feasibility study will be added; however, ``significantly 
affect'' was purposefully not defined to allow for determination on a 
case-by-case basis.
    One comment suggested feasibility studies are important only in 
start-up businesses. The Agency disagrees with this suggestion. There 
may be occasions when a significant impact on an existing business 
needs to be discussed via a feasibility study.
    Two respondents provided comments on Sec. 4279.75, Sale or 
assignment of guaranteed loan. One respondent was concerned that 
allowing lenders to sell the guaranteed portion for premium prices will 
allow the lender to cover its risk and encourage aggressive, high risk 
lending practices. The Agency does not dictate lender asset management 
practices. A prudent lender will work with the secondary market to 
achieve maximum benefits for its customer. Furthermore, the guarantee 
by its terms does not cover any premium an investor may pay.
    One comment suggested a provision be added which, at the lender's 
request, would require the Agency to purchase the loan at default. The 
Agency will not adopt this suggestion. It neither has the staff nor the 
resources to conduct liquidations of defaulted loans. The program 
requires the lender to make and service the loan. The Agency is to 
ensure a fair and equitable loss management is made to the lender.
    Four respondents provided comments on Sec. 4279.181, Conditions 
precedent to issuance of Loan Note Guarantee. Two comments proposed the 
creation of a single, standard form like FSA is developing containing 
all of the required lender certifications. The Agency does not agree 
because we guarantee different loans than FSA does. This mission of 
this Agency is to enhance the ability of rural citizens to create, 
build, and sustain non-farming ventures and communities.
    One comment suggested modifying the certification language to allow 
lenders to make determinations based on third party representations. 
This suggestion is not adopted because the lender is the one the Agency 
relies upon to ascertain the representations it makes in the 
certifications are true. Both the regulations and the Lender's 
Agreement make it clear that the lender must act as a reasonable and 
prudent lender.
    Two comments supported the elimination of lender's legal counsel 
certifying to the sufficiency of loan and security instruments and the 
efficacy of liens. Section 4279.181 requires certain lender 
certifications including this. The Agency has limited its internal 
legal review and feels the lender's legal counsel is needed. No change 
is made.
    One comment proposed changing Sec. 4279.181(1) from ``the 
Conditional Commitment Form 4279-1'' to ``Form 4279-1 as amended by the 
Conditional Commitment''. The regulation is correct as written, Form 
4279-1 is the Conditional Commitment.
    Two comments proposed expanding Sec. 4279.173, Loan approval and 
obligating funds, to explain that when the guarantee is approved and 
funding authority is available, the guarantee will be obligated and the 
Conditional Commitment issued on the obligation date. No change can be 
made since FmHA Instruction 2015-C (available in any RBS field office) 
provides for a

[[Page 67630]]

reservation period that is not covered by this Instruction. The 6 day 
reservation period gives political leaders an opportunity to announce 
projects which have a positive impact on the program. The 
recommendation is not adopted.
    Two respondents provided comments on Sec. 4279.161(b)(11), Filing 
preapplications and applications, suggesting either eliminating certain 
subsections or the Agency allowing lender discretion to modify the 
requirements. The sections that the respondents suggested be eliminated 
for preapplication submissions include the amount of borrower's equity 
and description of collateral; for existing businesses, a current 
balance sheet and a profit and loss statement; and for start-up 
businesses, a preliminary business plan. The respondents felt that this 
is excessive paperwork for a preapplication submission and suggested 
that only the application, environmental information, and a personal 
credit report be submitted. In addition, one respondent suggested that 
the lender has the ability to modify financial ratios for businesses 
and other requirements for an application submission and should not 
have to share internal bank information concerning the credits with the 
Agency. The suggestions will not be adopted by the Agency because these 
items requested from the lender under Sec. 4279.161 for a 
preapplication or application are items required to meet the standards 
of good prudent lending practices (see Sec. 4279.161).
    One respondent provided a comment on Sec. 4279.126, Loan terms, 
which supported Sec. 4279.131, Credit quality, paragraph (b)(2), which 
allows less than normal loan-to-value coverage for predominately cash 
flow oriented businesses. It proposed that the ``useful life or 15 year 
loan limit, whichever is less'' standard in Sec. 4279.126 not apply on 
certain equipment which has clear useful life beyond 15 years. The 
Agency disagrees because the established criteria outlined in this 
section are standard prudent lending criteria used by financial 
institutions to determine the term of the loan. The suggestion is not 
adopted.
    A comment on Sec. 4279.144, Appraisals, recommended that language 
be added discharging lenders from responsibility for assuring that 
appraisal values adequately reflect the actual value of all collateral 
if appraisals meet the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA), the Uniform Standards of Professional 
Appraisal Practices (USPAP), and generally accepted methods of 
determining value. The suggestion is not adopted because a reasonable, 
prudent lender will ensure that appraisal values reflect actual values.
    Four respondents provided comments on Sec. 4279.125, Interest 
rates. Two comments support the regulation which allows different 
interest rates on the unguaranteed and guaranteed portion of the loan; 
however, they want the restriction that the rate on the guaranteed 
portion cannot exceed the rate on the unguaranteed portion eliminated. 
This suggestion will not be adopted because the lender is already 
receiving the benefit of a guarantee on the guaranteed portion and 
allowing a higher rate on that portion causes the Agency to exceed its 
stated percentage.
    One comment recommended allowing daily changes in variable interest 
rate loans. The Agency will not adopt this suggestion because the 
quarterly adjustment limitation provides borrowers with a financial 
planning tool in that they have at least some assurance of these costs 
for the quarter.
    One comment suggested combining fixed and variable rates on the 
same loan to allow a fixed rate for the guaranteed portion and a 
variable rate for the unguaranteed portion. The regulation allows this 
as long as the guaranteed portion rate is not higher.
    Seven respondents provided generally supportive comments for the 
entire regulation. Several individual items raised included the hope 
that RBS staff will maintain involvement regarding due diligence. The 
Farm Credit System requested any reference on farm credit programs 
anywhere in the rule be in lower case to prevent misinterpretation by 
the reader. The Agency complied with that request. The Agency will 
continue to maintain the oversight needed to protect the taxpayer.
    Four respondents provided comments about Sec. 4279.113(r), Eligible 
loan purpose, regarding construction and interim loans. Comments 
suggested consideration be given to developing a mechanism for partial 
interim advances, making construction loans an eligible purpose, and 
issuing the guarantee at closing instead of at project completion. 
Additionally, two other comments suggested such a change so that in 
those instances the guaranteee could be sold sooner in the secondary 
market. The time period in which material adverse changes could occur 
would be reduced. The Agency agrees and has adopted the comments to 
allow the Loan Note Guarantee to be issued at closing on the interim 
financing based on certain conditions as set forth in the final 
regulations instead of when the project is substantially complete.
    Four respondents provided comments on Sec. 4279.186, Issuance of 
the guarantee. One comment suggested adding ``unless a valid lender's 
agreement already exists per Sec. 4279.72'' after Executed Lender's 
Agreement in Sec. 4279.186(a)(2). This comment is adopted because a 
valid Lender's Agreement may already be in existence.
    One respondent provided a comment on Sec. 4279.78(c), Purchase for 
servicing, disagreeing with not allowing the repurchase from the holder 
for arbitrage or other purposes to further its own financial gain. The 
secondary market option provides a risk management tool for the lender; 
however, it is also necessary to consider financial stability for the 
business. The language will not be changed.
    One respondent provided a comment on Sec. 4279.101, Introduction, 
recommending ``field office'' replace ``district, regional or area 
office''. This change is adopted.
    Five respondents provided comments on Sec. 4279.107, Guarantee fee, 
supporting the 1 percent option. Two of those comments requested 
clarification of the term ``high impact''. Section 4279.155, Loan 
priorities, paragraph (b)(5), was changed to provide clarification.
    One respondent felt Sec. 4279.107(a)(4) allowing a reduction in the 
guarantee fee in certain circumstances was too general. The Agency 
feels the language provides flexibility to respond to unique and 
unusual situations. This comment is not adopted.
    Seven respondents provided comments suggesting other guarantee fee 
structures. Four comments supported the determination of lower fees 
being made at the State Office level. This regulation provides that the 
Agency will have the authority to reduce the guarantee fee if the 
business meets the criteria in Sec. 4279.107. In writing this 
provision, budget considerations and OMB limitations must be considered 
since the program loan level is affected adversely if the guarantee fee 
is reduced. The National Office must monitor the loan level to ensure 
funds are available to provide the greatest benefit to rural customers 
that utilize this program. However, the State Director does have the 
authority to reduce guarantee fees if it is determined that the 
business meets the criteria in Sec. 4279.107.
    A commenter was concerned that the reduced fee option provided the 
Agency an unfair marketing advantage over another agency. It is not the 
intent to compete with any other agency for loans. The focus is on 
rural development and the intent of the lower

[[Page 67631]]

fee option is to help lenders assist business development in the areas 
that need it the most.
    One comment recommended elimination of a lower guarantee fee 
because the amount does not matter to the lender or business. The 
Agency will not adopt this change because the lower guarantee fee will 
benefit businesses located in high-priority areas.
    One comment suggested changing the Sec. 4270.107(a)(3) requirement 
that a community be persistently poor for 60 years or more to a 
requirement of 60 years and eliminate the words ``or more''. The Agency 
agrees nothing is added by the use of the phrase ``or more.'' The 
phrase has been deleted.
    One comment suggested an editorial change to Sec. 4279.113(r) 
regarding removing the hyphen between the words ``take-out''. The 
regulation will be conformed to the Government Style Manual which says 
the term used as a noun is ``takeout'' but if it were used as an 
adjective, for example ``take-out financing'', it would be two words 
with a hyphen.
    One comment recommends packager fees be limited in amount but still 
be considered eligible. The regulation already allows packager fees as 
an eligible purpose, provided it is an amount that is reasonable and 
customary in the local area. See Sec. 4279.120(b), fees and charges.
    One respondent provided comments on Sec. 4279.115, Prohibition 
under Agency programs, recommending this entire section be eliminated. 
This is a statutory requirement and cannot be eliminated.
    Twenty-three respondents provided comments on Sec. 4279.119, Loan 
guarantee limits.
    Two comments recommended the percentage of guarantee determined by 
the Agency not be subject to the appeal process. The comment was not 
adopted because the Agency does not determine the appealability of any 
decision.
    Six comments suggested alternative options for issuing guarantee 
percentages. No change is made because the Agency is satisfied that as 
written it provides sufficient flexibility in providing program 
benefits.
    One comment suggested determining the percentage of guarantee based 
on the size of the lender. The comment was not adopted because such a 
requirement is already inherent in the regulation. Variations in loan 
sizes, lender capitalization, and lender loan size limits established 
by lender regulators limit the sizes of lenders and the loans they can 
make.
    One comment suggested that increasing the guarantee percentage is 
more important than reducing the guarantee fee. The Agency prefers to 
retain the latitude to allow both options.
    Five respondents recommended the State Director be able to grant an 
exception to allow 90 percent guarantees. The respondents; suggestion 
is already in effect because the regulation has been changed to give 
the State Director limited authority to approve projects with a 
decreased guarantee fee for high-priority projects not exceeding $2 
million when it is within the State Director's approval authority to do 
so. If not within the State Director's approval authority, the loan 
request will be submitted to the National Office for review.
    One comment suggested the guarantee percentage be stairstepped 
versus a single rate to provide more increased coverage for loan 
requests that exceed the $5 million and $10 million thresholds. This 
was not adopted for a variety of loan servicing considerations 
involving variations in lender payment applications and effective 
maximum percentage of loss payments which would not make application of 
program regulations consistent.
    One comment wants the Agency to determine whether a loan is 
eligible for a 90 percent guarantee without submitting an application. 
The Agency can make this determination from a preapplication.
    Three comments did not support loans over $10 million being 
eligible because of possible funding concerns and credit quality 
issues. The commenters' concerns were considered. The Agency believes 
the revised regulations will provide measures through the priority 
scoring system, by reducing the guarantee percentage to 60 percent or 
less, and oversight of the Under Secretary's office for loans exceeding 
$10 million to control credit quality and aggressive use of funding.
    One comment suggested the State Director's loan approval authority 
be increased to $5 million based on staff expertise. This is internal 
management and is not a regulatory requirement.
    One comment suggested an exception authority be established for 7 
CFR, subpart B of parts 4279 and 4287. This comment has been adopted to 
include the exception authority language in subpart B of parts 4279 and 
4287.
    One comment expressed a concern for development of a standardized 
application software package for lenders. Such a package is being 
developed but it will not be part of this regulation.
    Nine respondents provided comments on Sec. 4279.29, Eligible 
lenders. Of the nine comments, three comments were from existing non-
lenders that desire consideration be given to eligibility under 
Sec. 4279.29. The Agency will not make any changes to the regulation 
since the current language will allow any lender the right to request 
an eligibility determination under the regulations.
    One comment suggested that ``adequately'' be removed from 
Sec. 4279.29(c). The Agency agrees and the word will be removed.
    Four comments support expanding eligible lender determination; 
however, two of the comments contained qualifying criteria. Of the four 
comments, two contained qualifying criteria such as audits by State or 
Federal Government auditing bodies at least every 12 months and non-
bank lenders be limited by their past experience in other Government 
guaranteed programs. The Agency feels that a change is not necessary 
because the proposed regulations provide the flexibility to make a 
determination of eligibility.
    Two comments objected to nonbanks being considered possible 
eligible lenders. The Agency does not agree. The program offers a 
variety of lenders an opportunity to participate and provide credit in 
rural areas so as to provide a greater availability of credit to rural 
residents.
    Two respondents provided editorial change comments on Sec. 4279.2, 
Definitions. The Agency adopted the comment that for the definition of 
``Deficiency balance,'' the words ``including the personal guarantee'' 
be eliminated.
    One respondent suggested reducing the State allocation of guarantee 
authority only by the guaranteed portion of the loan. Federal budget 
procedures require scoring the entire amount of a loan against the 
allocation regardless of the percentage of guarantee.
    Two comments recommended Sec. 4279.84, Replacement of document, be 
changed to indicate that the notarized certificate of loss should 
include limited information since the Agency has copies of the noted 
documents. This proposal is not adopted because the information 
requested is necessary to ensure the legal sufficiency of the 
replacement documents.
    One comment requested Sec. 4279.113, Eligible loan purposes, be 
changed to allow the growing of seed crops. Production of agriculture 
alone is not an eligible purpose. Section 4279.113(b)(h) addresses 
eligible agricultural production in a manner to ensure that no one area 
of business receives a disproportionate amount of funding.
    One comment recommended the adverse change period be changed to

[[Page 67632]]

cover from the date the application is submitted to the Agency to the 
date of the issuance of the Loan Note Guarantee. The Agency will not 
adopt this change since the final conditions are established at the 
time the Agency issues the Conditional Commitment.
    Two respondents provided comments on Sec. 4279.149, Personal and 
corporate guarantees. One supported the section, the other comment 
raised a concern that the language would appear to require a guarantee 
from significant customers. This concern is valid and the section 
language was revised to clarify intercompany relationships.
    Twelve respondents provided comments on 7 CFR, part 4287, subpart 
B--Servicing Business and Industry Guaranteed Loans.
    One comment on Sec. 4287.106, Routine servicing, suggested that the 
Agency establish internal monitoring of account servicing requirements. 
These are the lender's loans and as such the lender is accountable for 
its actions. The Agency is to pay the appropriate loss to those lenders 
which have exercised due diligence.
    One comment on Sec. 4287.106(d), Financial reports, proposed 
relaxing the requirement that lenders must obtain and provide the 
borrower's financial statements to the Agency within 120 days of the 
borrower's fiscal yearend.
    The lenders requested specific actions they are to use when they 
are unable to comply with these regulations due to uncooperative 
borrowers. Current regulations are appropriate and conform with 
industry standards so no change was made.
    One comment questioned Sec. 4287.106(e), Additional expenditures, 
asking why the Agency requires concurrence for additional expenditures 
if the loans security position is not altered. Additional expenditures 
may deplete operating capital which could cause default. The Agency has 
an interest to see that a loan is repaid by the borrower rather than 
the Agency having to provide funds pursuant to its guarantee.
    Five respondents provided comments on Sec. 4287.113(a), Release of 
collateral, stating they did not support the requirement that all 
releases of collateral must be supported by a current appraisal on the 
remaining collateral. They proposed several alternatives including 
prorating values established at loanmaking and documenting by means 
other than appraisal. The Agency agrees, and the language in this 
section has been revised.
    One respondent provided a comment about Secs. 4287.113 (a)(4), (b), 
and (c) regarding whether the 20-percent figure is for each instance or 
cumulative over the life of the loan. Lenders may, over the life of the 
loan, release collateral (other than personal and corporate guarantees) 
with a cumulative value of up to 20 percent of the original loan amount 
without Agency concurrence. The regulation has been changed to make 
this clear.
    One respondent provided a comment about Sec. 4287.156(a), 
Protective advances, pointing out that it does not reference a dollar 
amount. A ceiling will not be established because each case is unique 
and flexibility is desired.
    Two respondents made comments on Sec. 4287.157, Liquidation, 
suggesting the authority to approve liquidation plans be at the State 
Office and not the National Office level. This comment is adopted and 
the authority to approve liquidation plans will be at the State Office 
based on the State's delegated loan servicing authority without 
National Office concurrence.
    Two comments stated paragraphs (b)(2) and (c) of Sec. 4287.158, 
Determination of loss and payment, are in direct conflict. It appears 
that the writer may have felt there was a conflict concerning interest 
accrual. Under certain circumstances, interest accrual may continue. 
The language will not change as noted in the proposed rule.
    One comment suggested retaining the existing option which allows 
the Agency to permit the lender to calculate the final loss settlement 
using net proceeds received from the collateral at the time of ultimate 
disposition rather than at liquidation. Lenders feel it is unfair to 
settle when they acquired the collateral as it reflects what is 
actually received for the collateral. The Agency feels settlement at 
ultimate disposition is preferable because it reflects what is actually 
received for the collateral.
    One respondent provided a comment on Sec. 4287.170, Bankruptcy, 
expressing displeasure with the Agency's position that Chapter 11 
reorganization legal expenses are not considered liquidation costs. 
Reorganization legal expenses are not incurred in contemplation of 
liquidation. Therefore, they should not be treated as a liquidation 
expense which by definition is only deductible during a liquidation 
when there are adequate proceeds from collateral liquidation to cover 
the expense. This provision was not changed.
    One respondent provided editorial changes for the entire section. 
The editorial changes were not substantive and reflected a preference 
of the respondent. To ensure no confusion concerning the meaning of the 
regulation and to ensure consistency of language, the editorial changes 
were not adopted with the exception of the following items:
    In Sec. 4287.157, Liquidation, paragraph (c), Submission of 
liquidation plan, the third sentence which reads, ``State Directors 
have no authority to exercise the option to liquidate by the Agency 
without National Office approval'' is changed to state under what 
authority liquidation is carried out by the Agency, not the lender. The 
Agency clarified the language to indicate that in cases where the 
Agency carries out liquidation of the loan, the State Director must 
request approval from the National Office; and
    In Sec. 4287.157, Liquidation, paragraph (j), Abandonment of 
collateral, the words, ``National Office'' are replaced by ``Agency''.
    Those sections of the regulation that are administrative in nature 
and apply only to procedures within the Agency have been removed from 
the document. These procedures are available from any Agency office 
upon request.

List of Subjects

7 CFR Part 1980

    Loan programs--Agriculture, Loan programs--Business and industry--
Rural development assistance, Loan programs--Housing and community 
development, Loan programs--Community programs--Rural development 
assistance, Rural areas.

7 CFR Part 4279

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

7 CFR Part 4287

    Loan programs--Business and Industry--Rural development assistance, 
Rural areas.
    Accordingly, chapters XVIII and XLII, title 7 of the Code of 
Federal Regulations are amended as follows:

CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE 
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT 
OF AGRICULTURE.

PART 1980--GENERAL

    1. The authority citation for part 1980 is revised to read as 
follows:

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

Subpart A--General

    2. Section 1980.6(a) is amended by removing the definitions for 
``Borrower,'' ``Disaster Assistance for Rural Business Enterprises,'' 
and ``Drought and Disaster Guaranteed

[[Page 67633]]

loans;'' in the heading for the definition of ``Assignment Guarantee 
Agreement,'' removing ``, 1980-70 or 1980-73;'' in the third sentence 
of the definition of ``Holder,'' removing the parenthetical phrase 
``(or 1980-70 or 1980-73);'' in the heading for the definition of 
``Lender's Agreement,'' removing the comma and adding the word ``or'' 
in its place immediately following ``449-35''; removing ``, 1980-68, or 
1980-71'' immediately following ``1980-38;'' in the heading for the 
definition of ``Loan Note Guarantee,'' removing the parenthetical 
phrase ``, (or 1980-69, 1980-72)''; and revising the definition of 
``Guaranteed loan'' to read as follows:


Sec. 1980.6  Definitions and abbreviations.

     (a) * * *
    Guaranteed loan. A loan made and serviced by a lender for which 
FmHA or its successor agency has entered into a Form FmHA 449-35 or 
Form FmHA 1980-38, ``Lender's Agreement,'' and for which FmHA or its 
successor agency has issued a Form FmHA 449-34, ``Loan Note 
Guarantee.''
* * * * *


Sec. 1980.6  [Amended]

    3. Section 1980.6(b) is amended by removing the entries for 
``B&I,'' ``DARBE,'' and ``D&D'' from the list of abbreviations.


Sec. 1980.13  [Amended]

    4. Section 1980.13 is amended in the introductory text of paragraph 
(a) in the second sentence by revising the reference ``paragraphs (a) 
(1), (2) and (3)'' to read ``paragraphs (a) (1) and (2);'' in paragraph 
(a)(2) by removing ``; or'' and adding a period at the end of the 
paragraph; by removing paragraph (a)(3); and in paragraph (c) by 
removing the parenthetical phrase ``(See subpart E of this part.)''.


Sec. 1980.20  [Amended]

    5. Section 1980.20 is amended in the introductory text of paragraph 
(a) by removing the third and fourth sentences; in the fifth sentence, 
by removing the words ``for all other loans covered by this section;'' 
and in the sixth sentence by removing the words ``in regards to D&D and 
DARBE guaranteed loans (see Subpart E of this part) or''.


Sec. 1980.41  [Amended]

    6. Section 1980.41 is amended in the first sentence of paragraph 
(b)(3)(iii)(A) by removing the parenthetical phrase ``(State Director 
for B&I)''.


Sec. 1980.46  [Amended]

    7. Section 1980.46 is amended in paragraph (a)(2) by removing the 
parenthetical phrase ``(State Director for B&I)'' at the end of the 
paragraph.


Sec. 1980.47  [Amended]

    8. Section 1980.47 is amended in the first sentence of paragraph 
(d) by removing the words ``and Business''.
    9. Section 1980.60 is amended by revising paragraph (a)(2) to read 
as follows:


Sec. 1980.60  Conditions precedent to issuance of the Loan Note 
Guarantee or Contract of Guarantee.

    (a) * * *
    (2) All planned property acquisition has been completed and all 
development has been substantially completed in accordance with plans 
and specifications. All costs have not exceeded the amounts approved by 
the lender and the Agency.
* * * * *


Sec. 1980.61  [Amended]

    10. Section 1980.61 is amended in the first sentence of paragraph 
(b)(3) by revising the words ``Forms FmHA or its successor agency under 
Public Law 103-354 449-35'' to read ``Form FmHA 449-35'' and removing 
the words ``FmHA or its successor agency under Public Law 103-354 1980-
68, and FmHA or its successor agency under Public Law 103-354 1980-
71;'' in paragraph (b)(4) by revising the word ``request'' to read 
``requests,'' revising ``Forms FmHA or its successor agency under 
Public Law 103-354 449-35'' to read ``Form FmHA 449-35'' removing, 
``FmHA or its successor agency under Public Law 103-354 1980-68, and 
FmHA or its successor agency under Public Law 103-354 1980-71;'' and 
removing the parenthetical phrase ``(State Director for B&I);'' and in 
paragraph (h) by removing the words ``, except for B&I where the State 
Director and State B&I or C&BP Chief will execute these forms.''


Sec. 1980.63  [Amended]

    11. Section 1980.63 is amended in paragraph (b) by removing the 
parenthetical phrase ``(State Director for B&I)'' from the second and 
fourth sentences and removing the parenthetical phrase ``(except for 
B&I)'' from the third sentence.


Sec. 1980.67  [Amended]

    12. Section 1980.67 is amended in the first sentence of paragraph 
(a) by removing the reference ``E,''.


Sec. 1980.68  [Amended]

    13. Section 1980.68 is amended by revising the reference 
``paragraph 5'' to read ``paragraph 6'' in the second sentence and 
removing the parenthetical phrase ``(State Director for B&I)'' from the 
third and fourth sentences.

Subpart E--Business and Industrial Loan Program

    14. Section 1980.401 is amended by revising paragraph (a) to read 
as follows:


Sec. 1980.401  Introduction.

    (a) Direct Business and Industry (B&I) loans are disbursed by the 
Agency under this subpart. B&I loan guarantees are to be processed and 
serviced under the provisions of subparts A and B of part 4279 and 
subpart B of part 4287 of this title. Any processing or servicing 
activity conducted pursuant to this subpart involving authorized 
assistance to relatives, or business or close personal associates, is 
subject to the provisions of part 1900 subpart D of this chapter. 
Applicants for this assistance are required to identify any known 
relationship or association with any Agency employee.
* * * * *
    15. A new part 4279, consisting of 4279.1 through 4279.200, is 
added to chapter XLII to read as follows:

PART 4279--GUARANTEED LOANMAKING

Subpart A--General

Sec.
4279.1  Purpose.
4279.2  Definitions and abbreviations.
4279.3-4279.14  [Reserved]
4279.15  Exception authority.
4279.16  Appeals.
4279.17-4279.28  [Reserved]
4279.29  Eligible lenders.
4279.30  Lenders' functions and responsibilities.
4279.31-4279.42  [Reserved]
4279.43  Certified Lender Program.
4279.44  Access to records.
4279.45-4279.57  [Reserved]
4279.58  Equal Credit Opportunity Act.
4279.59  [Reserved]
4279.60  Civil Rights Impact Analysis
4279.61-4279.70  [Reserved]
4279.71  Public  bodies and nonprofit corporations.
4279.72  Conditions of guarantee.
4279.73-4279.74  [Reserved]
4279.75  Sale or assignment of guaranteed loan.
4279.76  Participation.
4279.77  Minimum retention.
4279.78  Repurchase from holder.
4279.79-4279.83  [Reserved]
4279.84  Replacement of document.
4279.85-4279.99  [Reserved]
4279.100  OMB control number.

Subpart B--Business and Industry Loans

4279.101  Introduction.
4279.102  Definitions.
4279.103  Exception Authority.
4279.104  Appeals.
4279.105-4279.106  [Reserved]

[[Page 67634]]

4279.107  Guarantee fee.
4279.108  Eligible borrowers.
4279.109-4279.112  [Reserved]
4279.113  Eligible loan purposes.
4279.114  Ineligible purposes.
4279.115  Prohibition under Agency programs.
4279.116-4279.118  [Reserved]
4279.119  Loan guarantee limits.
4279.120  Fees and charges.
4279.121-4279.124  [Reserved]
4279.125  Interest rates.
4279.126  Loan terms.
4279.127-4279.130  [Reserved]
4279.131  Credit quality.
4279.132-4279.136  [Reserved]
4279.137  Financial statements.
4279.138-4279.142  [Reserved]
4279.143  Insurance.
4279.144  Appraisals.
4279.145-4279.148  [Reserved]
4279.149  Personal and corporate guarantees.
4279.150  Feasibility studies.
4279.151-4279.154  [Reserved]
4279.155  Loan priorities.
4279.156  Planning and performing development.
4279.157-4279.160  [Reserved]
4279.161  Filing preapplications and applications.
4279.162-4279.164  [Reserved]
4279.165  Evaluation of application.
4279.166-4279.172  [Reserved]  
4279.173  Loan approval and obligating funds.
4279.174  Transfer of lenders.
4279.175-4279.179  [Reserved]
4279.180  Changes in borrower.
4279.181  Conditions precedent to issuance of Loan Note Guarantee.
4279.182-4279.185  [Reserved]
4279.186  Issuance of the guarantee.
4279.187  Refusal to execute Loan Note Guarantee.
4279.188-4279.199  [Reserved]
4279.200  OMB  control number.

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989.

Subpart A--General


Sec. 4279.1  Purpose.

    (a) This subpart contains general regulations for making and 
servicing Business and Industry (B&I) loans guaranteed by the Agency 
and applies to lenders, holders, borrowers and other parties involved 
in making, guaranteeing, holding, servicing, or liquidating such loans.
    (b) It is the responsibility of the lender to ascertain that all 
requirements for making, securing, servicing, and collecting the loan 
are complied with.
    (c) Copies of all forms, regulations, and Instructions referenced 
in this subpart are available in any Agency office. Whenever a form is 
designated in this subpart, that designation includes predecessor and 
successor forms, if applicable, as specified by the field or National 
Office.


Sec. 4279.2  Definitions and abbreviations.

    (a) Definitions.
    Agency. The Rural Business-Cooperative Service or successor Agency 
assigned by the Secretary of Agriculture to administer the B&I program. 
References to the National Office, Finance Office, State Office or 
other Agency offices or officials should be read as prefaced by Agency 
or ``Rural Development'' as applicable.
    Arm's-length transaction. The sale, release, or disposition of 
assets in which the title to the property passes to a ready, willing, 
and able disinterested third party that is not affiliated with or 
related to and has no security, monetary or stockholder interest in the 
borrower or transferor at the time of the transaction.
    Assignment Guarantee Agreement (Business and Industry). Form 4279-
6, the signed agreement among the Agency, the lender, and the holder 
containing the terms and conditions of an assignment of a guaranteed 
portion of a loan, using the single note system.
    Borrower. All parties liable for the loan except for guarantors.
    Conditional Commitment (Business and Industry). Form 4279-3, the 
Agency's notice to the lender that the loan guarantee it has requested 
is approved subject to the completion of all conditions and 
requirements set forth by the Agency.
    Deficiency balance. The balance remaining on a loan after all 
collateral has been liquidated.
    Deficiency judgment. A monetary judgment rendered by a court of 
competent jurisdiction after foreclosure and liquidation of all 
collateral securing the loan.
    Existing lender debt. A debt not guaranteed by the Agency, but owed 
by a borrower to the same lender that is applying for or has received 
the Agency guarantee.
    Fair market value. The price that could reasonably be expected for 
an asset in an arm's-length transaction between a willing buyer and a 
willing seller under ordinary economic and business conditions.
    Farmers Home Administration (FmHA). The former agency of USDA that 
previously administered the programs of this Agency. Many Instructions 
and forms of FmHA are still applicable to Agency programs.
    Finance office. The office which maintains the Agency financial 
accounting records located in St. Louis, Missouri.
    High-impact business. A business that offers specialized products 
and services that permit high prices for the products produced, may 
have a strong presence in international market sales, may provide a 
market for existing local business products and services, and which is 
locally owned and managed.
    Holder. A person or entity, other than the lender, who owns all or 
part of the guaranteed portion of the loan with no servicing 
responsibilities. When the single note option is used and the lender 
assigns a part of the guaranteed note to an assignee, the assignee 
becomes a holder only when the Agency receives notice and the 
transaction is completed through use of Form 4279-6 or predecessor 
form.
    Interim Financing. A temporary or short-term loan made with the 
clear intent that it will be repaid through another loan. Interim 
financing is frequently used to pay construction and other costs 
associated with a planned project, with permanent financing to be 
obtained after project completion.
    Lender. The organization making, servicing, and collecting the loan 
which is guaranteed under the provisions of the appropriate subpart.
    Lender's Agreement (Business and Industry). Form 4279-4 or 
predecessor form between the Agency and the lender setting forth the 
lender's loan responsibilities when the Loan Note Guarantee is issued.
    Loan Agreement. The agreement between the borrower and lender 
containing the terms and conditions of the loan and the 
responsibilities of the borrower and lender.
    Loan Note Guarantee (Business and Industry). Form 4279-5 or 
predecessor form issued and executed by the Agency containing the terms 
and conditions of the guarantee.
    Loan-to-value. The ratio of the dollar amount of a loan to the 
dollar value of the collateral pledged as security for the loan.
    Natural resource value-added product. Any naturally occurring 
product that is processed to add value to the product. For example, 
straw is processed into particle board.
    Negligent Servicing. The failure to perform those services which a 
reasonably prudent lender would perform in servicing (including 
liquidation of) its own portfolio of loans that are not guaranteed. The 
term includes not only the concept of a failure to act, but also not 
acting in a timely manner, or acting in a manner contrary to the manner 
in which a reasonably prudent lender would act.
    Parity. A lien position whereby two or more lenders share a 
security interest of equal priority in collateral. In the event of 
default, each lender will be affected on a pro rata basis.

[[Page 67635]]

    Participation. Sale of an interest in a loan by the lender wherein 
the lender retains the note, collateral securing the note, and all 
responsibility for loan servicing and liquidation.
    Poor. A community or area is considered poor if, based on the most 
recent decennial census data, either the county, city, or census tract 
where the community or area is located has a median household income at 
or below the poverty line for a family of four; has a median household 
income below the nonmetropolitan median household income for the State; 
or has a population of which 25 percent or more have income at or below 
the poverty line.
    Promissory Note. Evidence of debt. ``Note'' or ``Promissory Note'' 
shall also be construed to include ``Bond'' or other evidence of debt 
where appropriate.
    Rural Development. The Under Secretary for Rural Development has 
policy and operational oversight responsibilities for RHS, RBS, and 
RUS.
    Spreadsheet. A table containing data from a series of financial 
statements of a business over a period of time. Financial statement 
analysis normally contains spreadsheets for balance sheet items and 
income statements and may include funds flow statement data and 
commonly used ratios. The spreadsheets enable a reviewer to easily scan 
the data, spot trends, and make comparisons.
    State. Any of the 50 States, the Commonwealth of Puerto Rico, the 
Virgin Islands of the United States, Guam, American Samoa, the 
Commonwealth of the Northern Mariana Islands, the Republic of Palau, 
the Federated States of Micronesia, and the Republic of the Marshall 
Islands.
    Subordination. An agreement between the lender and borrower whereby 
lien priorities on certain assets pledged to secure payment of the 
guaranteed loan will be reduced to a position junior to, or on parity 
with, the lien position of another loan in order for the Agency 
borrower to obtain additional financing, not guaranteed by the Agency, 
from the lender or a third party.
    Veteran. For the purposes of assigning priority points, a veteran 
is a person who is a veteran of any war, as defined in section 101(12) 
of title 38, United States Code.
    (b) Abbreviations.

B&I--Business and Industry
CF--Community Facilities
CLP--Certified Lender Program
FSA--Farm Service Agency
FMI--Forms Manual Insert
NAD--National Appeals Division
OGC--Office of the General Counsel
RBS--Rural Business-Cooperative Service
RHS--Rural Housing Service
RUS--Rural Utilities Service
SBA--Small Business Administration
USDA--United States Department of Agriculture


Secs. 4279.3-4279.14  [Reserved]


Sec. 4279.15  Exception authority.

    The Administrator may, in individual cases, grant an exception to 
any requirement or provision of this subpart which is not inconsistent 
with any applicable law provided, the Administrator determines that 
application of the requirement or provision would adversely affect 
USDA's interest.


Sec. 4279.16  Appeals.

    Only the borrower, lender, or holder can appeal an Agency decision 
made under this subpart. In cases where the Agency has denied or 
reduced the amount of final loss payment to the lender, the adverse 
decision may be appealed by the lender only. An adverse decision that 
only impacts the holder may be appealed by the holder only. A decision 
by a lender adverse to the interest of the borrower is not a decision 
by the Agency, whether or not concurred in by the Agency. Appeals will 
be handled in accordance with 7 CFR, part 11. Any party adversely 
affected by an Agency decision under this subpart may request a 
determination of appealability from the Director, National Appeals 
Division, USDA, within 30 days of the adverse decision.


Secs. 4279.17-4279.28  [Reserved]


Sec. 4279.29  Eligible lenders.

    (a) Traditional lenders. An eligible lender is any Federal or State 
chartered bank, Farm Credit Bank, other Farm Credit System institution 
with direct lending authority, Bank for Cooperatives, Savings and Loan 
Association, or mortgage company that is part of a bank-holding 
company. These entities must be subject to credit examination and 
supervision by either an agency of the United States or a State. 
Eligible lenders may also include credit unions provided, they are 
subject to credit examination and supervision by either the National 
Credit Union Administration or a State agency, and insurance companies 
provided they are regulated by a State or National insurance regulatory 
agency. Eligible lenders include the National Rural Utilities 
Cooperative Finance Corporation.
    (b) Other lenders. Rural Utilities Service borrowers and other 
lenders not meeting the criteria of paragraph (a) of this section may 
be considered by the Agency for eligibility to become a guaranteed 
lender provided, the Agency determines that they have the legal 
authority to operate a lending program and sufficient lending expertise 
and financial strength to operate a successful lending program.
    (1) Such a lender must:
    (i) Have a record of successfully making at least three commercial 
loans annually for at least the most recent 3 years, with delinquent 
loans not exceeding 10 percent of loans outstanding and historic losses 
not exceeding 10 percent of dollars loaned, or when the proposed lender 
can demonstrate that it has personnel with equivalent previous 
experience and where the commercial loan portfolio was of a similar 
quantity and quality; and
    (ii) Have tangible balance sheet equity of at least seven percent 
of tangible assets and sufficient funds available to disburse the 
guaranteed loans it proposes to approve within the first 6 months of 
being approved as a guaranteed lender.
    (2) A lender not eligible under paragraph (a) of this section that 
wishes consideration to become a guaranteed lender must submit a 
request in writing to the State Office for the State where the lender's 
lending and servicing activity takes place. The National Office will 
notify the prospective lender, through the State Director, whether the 
lender's request for eligibility is approved or rejected. If rejected, 
the reasons for the rejection will be indicated to the prospective 
lender in writing. The lender's written request must include:
    (i) Evidence showing that the lender has the necessary capital and 
resources to successfully meet its responsibilities.
    (ii) Copy of any license, charter, or other evidence of authority 
to engage in the proposed loanmaking and servicing activities. If 
licensing by the State is not required, an attorney's opinion to this 
effect must be submitted.
    (iii) Information on lending experience, including length of time 
in the lending business; range and volume of lending and servicing 
activity; status of loan portfolio including delinquency rate, loss 
rate as a percentage of loan amounts, and other measures of success; 
experience of management and loan officers; audited financial 
statements not more than 1 year old; sources of funds for the proposed 
loans; office location and proposed lending area; and proposed rates 
and fees, including loan

[[Page 67636]]

origination, loan preparation, and servicing fees. Such fees must not 
be greater than those charged by similarly located commercial lenders 
in the ordinary course of business.
    (iv) An estimate of the number and size of guaranteed loan 
applications the lender will develop.
    (c) Expertise. Loan guarantees will only be approved for lenders 
with adequate experience and expertise to make, secure, service, and 
collect B&I loans.


Sec. 4279.30  Lenders' functions and responsibilities.

    (a) General. (1) Lenders have the primary responsibility for the 
successful delivery of the B&I loan program. All lenders obtaining or 
requesting a B&I loan guarantee are responsible for:
    (i) Processing applications for guaranteed loans,
    (ii) Developing and maintaining adequately documented loan files,
    (iii) Recommending only loan proposals that are eligible and 
financially feasible,
    (iv) Obtaining valid evidence of debt and collateral in accordance 
with sound lending practices,
    (v) Supervising construction
    (vi) Distribution of loan funds,
    (vii) Servicing guaranteed loans in a prudent manner, including 
liquidation if necessary,
    (viii) Following Agency regulations, and
    (ix) Obtaining Agency approvals or concurrence as required.
    (2) This subpart, along with subpart B of this part and subpart B 
of part 4287 of this chapter, contain the regulations for this program, 
including the lenders' responsibilities.
    (b) Credit evaluation. This is a key function of all lenders during 
the loan processing phase. The lender must analyze all credit factors 
associated with each proposed loan and apply its professional judgment 
to determine that the credit factors, considered in combination, ensure 
loan repayment. The lender must have an adequate underwriting process 
to ensure that loans are reviewed by other than the originating 
officer. There must be good credit documentation procedures.
    (c) Environmental responsibilities. Lenders have a responsibility 
to become familiar with Federal environmental requirements; to 
consider, in consultation with the prospective borrower, the potential 
environmental impacts of their proposals at the earliest planning 
stages; and to develop proposals that minimize the potential to 
adversely impact the environment. Lenders must alert the Agency to any 
controversial environmental issues related to a proposed project or 
items that may require extensive environmental review. Lenders must 
help the borrower prepare Form FmHA 1940-20, ``Request for 
Environmental Information'' (when required by subpart G of part 1940 of 
this title); assist in the collection of additional data when the 
Agency needs such data to complete its environmental review of the 
proposal; and assist in the resolution of environmental problems.
    (d) Loan closing. The lender will conduct loan closings.


Secs. 4279.31-4279.42  [Reserved]


Sec. 4279.43  Certified Lender Program.

    (a) General. This section provides policies and procedures for the 
Certified Lender Program (CLP) for loans guaranteed under this part. 
The objectives are to expedite loan approval, making, and servicing.
    (b) CLP eligibility criteria. The lender must meet established 
eligibility criteria as follows:
    (1) Be an ``eligible lender'' as defined in 4279.29 of this subpart 
and authorized to do business in the State in which CLP status is 
desired.
    (2) Demonstrate to the Agency's satisfaction that it has a thorough 
knowledge of commercial lending. The lender will demonstrate such 
knowledge by providing a summary of its guaranteed and unguaranteed 
business lending activity. At a minimum, the summary must include the 
dollar amount and number of loans in the lender's portfolio, 
unguaranteed and guaranteed by any Federal agency, with information on 
delinquencies and losses and, if applicable, the performance of the 
lender as a Small Business Administration (SBA) certified or preferred 
lender. A certified lender must be recognized throughout the State as a 
commercial lender and have a track record of successfully making at 
least five commercial loans per year for at least the most recent 5 
years, with delinquent commercial loans outstanding not exceeding 6 
percent of commercial loans outstanding and historic losses not 
exceeding 6 percent of dollars loaned, or it must demonstrate that it 
has personnel with equivalent previous experience where the commercial 
loan portfolio was of a similar quantity and quality. The lender will 
provide a written certification to this effect along with a statistical 
analysis of its commercial loan portfolio for the last 3 of its fiscal 
years.
    (3) The percentage of guarantee will not exceed 80 percent.
    (4) If the lender is a bank or savings and loan, it must have a 
financial strength rating in the upper half of possible ratings as 
reported by a lender rating service selected by the Agency.
    (5) Possess loan officers and other appropriate personnel who have 
received training conducted by the Agency. Additional training may be 
required if the lender's contact person changes or if the Agency 
determines further instruction is needed.
    (6) Have committed no action within the most recent 2 years prior 
to requesting CLP status which would be considered cause for revoking 
CLP status under paragraph (e) of this section.
    (c) CLP approval. The Agency may grant CLP status for a period not 
to exceed 5 years by executing Form 4279-8, ``Certified Lender, 
Business and Industry Program,'' with the lender. CLP status will not 
apply to branches or suboffices of the lender unless so specified in 
the agreement. Such branches or suboffices may submit loans as regular 
lenders or apply for their own CLP status. Any lender who desires CLP 
status must prepare a written request to the State Director where it 
desires CLP status. The request must address each of the required 
criteria outlined in paragraph (b) of this section, except paragraph 
(b)(3), and should be accompanied by any other information the lender 
believes will be helpful. The request will also include Form 4279-8 
completed and executed by the lender and an executed Lender's Agreement 
if it does not already have a valid Lender's Agreement on file with the 
Agency. Loans made by the lender and guaranteed by the Agency prior to 
the lender receiving CLP status shall continue to be governed by the 
forms and agreements executed between the lender and the Agency for 
those loans.
    (d) Renewal of CLP status. Renewal of CLP status is not automatic. 
CLP status will lapse upon the expiration date of Form 4279-8 unless 
the lender obtains a renewal. A lender whose CLP status has lapsed may 
continue to submit loan guarantee requests as a regular lender. A new 
Form 4279-8 completed and executed by the lender must be provided, 
along with a written update of the eligibility criteria required by 
this section for CLP approval. This information must be supplied at 
least 60 days prior to the expiration of the existing agreement to be 
assured of uninterrupted status. The information must address how the 
lender is complying with each of the required criteria described in 
paragraph (b) of this section. It must include any proposed changes in 
the designated

[[Page 67637]]

persons for processing guaranteed loans or operating methods used in 
processing and servicing Agency guaranteed loans.
    (e) Revocation of CLP status. The lender's CLP status may be 
revoked at any time for cause. The debarment of a lender is an 
additional alternative the Agency may consider. A lender which has lost 
its CLP status, but has not been debarred and still meets the 
requirements of Sec. 4279.29 of this subpart may continue to submit 
loan guarantee requests as a regular lender. Cause for revoking CLP 
status includes:
    (1) Failure to maintain status as an eligible lender as set forth 
in Sec. 4279.29 of this subpart;
    (2) Knowingly submitting false information when requesting a 
guarantee or basing a guarantee request on information known to be 
false or which the lender should have known to be false;
    (3) Making a guaranteed loan with deficiencies which may cause 
losses not to be covered by the Loan Note Guarantee;
    (4) Conviction for acts in connection with any loan transaction 
whether or not the loan was guaranteed by the Agency;
    (5) Violation of usury laws in connection with any loan guaranteed 
by the Agency;
    (6) Failure to obtain the required security for any loan guaranteed 
by the Agency;
    (7) Using loan funds guaranteed by the Agency for purposes other 
than those specifically approved by the Agency in the Conditional 
Commitment;
    (8) Violation of any term of the Lender's Agreement;
    (9) Failure to correct any cited deficiency in loan documents in a 
timely manner;
    (10) Failure to submit reports required by the Agency in a timely 
manner;
    (11) Failure to process Agency guaranteed loans in a reasonably 
prudent manner;
    (12) Failure to provide for adequate construction planning and 
monitoring in connection with any loan to ensure that the project will 
be completed with the available funds and, once completed, will be 
suitable for the borrower's needs;
    (13) Repetitive recommendations for guaranteed loans with marginal 
or substandard credit quality or that do not comply with Agency 
requirements;
    (14) Repetitive recommendations for servicing actions that do not 
comply with Agency requirements;
    (15) Negligent servicing; or
    (16) Failure to conduct any approved liquidation of a loan 
guaranteed by the Agency or its predecessors in a timely and effective 
manner and in accordance with the approved liquidation plan.
    (f) General loan processing and servicing guidelines. All requests 
for guaranteed loans will be processed and serviced under subparts A 
and B of this part and subpart B of part 4287 of this chapter except as 
modified by this section. When determining whether or not to request a 
guarantee for a proposed loan, lenders must consider the priorities set 
forth in Sec. 279.155 of subpart B of this part.
    (1) Prior to processing an application, the CLP lender may give 
written notice to the State Director of its intention to submit an 
application. Upon receipt of such written notice, the Agency will 
notify the CLP lender whether or not there is sufficient guarantee 
authority for the loan. Such guarantee authority will be held for 30 
days pending receipt of the application. If a complete application for 
which guarantee authority is being held is not received within 30 days 
of the notice of intent to file or is rejected, the guarantee authority 
for this application will no longer be held in reserve. Notwithstanding 
the preceding, no guarantee authority will be held in reserve the last 
60 days of the Agency's fiscal year.
    (2) Refinancing of existing lender debt in accordance with 
Sec. 4279.113(q) of subpart B of this part will not be permitted 
without prior Agency approval.
    (3) CLP lenders will process all guaranteed loans as a ``complete 
application'' by obtaining and completing all items required by 
Sec. 4279.161(b) of subpart B of this part. The CLP lender must 
maintain all information required by Sec. 4279.161(b) in its loan file 
and determine that such material complies with all requirements.
    (4) CLP lenders will make all material relating to any guarantee 
application available to the Agency upon request.
    (5) At the time of the Agency's issuance of the Loan Note 
Guarantee, the CLP lender will provide the Agency with copies of the 
following documents:
    (i) Executed Loan Agreement;
    (ii) Executed Promissory Notes; and
    (iii) Executed security documents including personal and corporate 
guarantees.
    (g) Unique characteristics of the CLP. A proposed loan by a CLP 
lender requires a review by the Agency of the information submitted by 
the lender, plus satisfactory completion of the environmental review 
process by the Agency. The Agency may rely on the lender's credit 
analysis.
    (1) The following will constitute a complete application submitted 
by a CLP lender:
    (i) Form 4279-1, ``Application for Loan Guarantee (Business and 
Industry),'' (marked with the letters ``CLP'' at the top) completed in 
its entirety and executed by the borrower and CLP lender;
    (ii) Copy of the proposed Loan Agreement or a list of proposed 
requirements;
    (iii) Form FmHA 1940-20, completed and signed, with attachments;
    (iv) The lender's complete written analysis of the proposal, 
including spreadsheets of the balance sheets and income statements for 
the 3 previous years (for existing businesses), pro forma balance sheet 
at startup, and 2 years projected yearend balance sheets and income 
statements, with appropriate ratios and comparisons with industry 
standards (such as Dun & Bradstreet or Robert Morris Associates). All 
data must be shown in total dollars and also in common size form, 
obtained by expressing all balance sheet items as a percentage of 
assets and all income and expense items as a percentage of sales. The 
lender's credit analysis must include the borrower's management, 
repayment ability including a cash flow analysis, history of debt 
repayment, necessity of any debt refinancing, and the credit reports of 
the borrower, its principals, and any parent, affiliate, or subsidiary;
    (v) Intergovernmental consultation comments in accordance with 7 
CFR part 3015, subpart V; and
    (vi) If the loan will exceed $1 million and will increase direct 
employment by more than 50 employees, Form 4279-2, ``Certification of 
Non-Relocation and Market Capacity Information Report,'' must be 
completed by the lender. For such loans, the Agency will submit Form 
4279-2 to the Department of Labor and obtain clearance before a 
Conditional Commitment may be issued.
    (2) The Agency will make the final credit decision based primarily 
on a review of the credit analysis submitted by the lender and approval 
of the Agency's completed environmental analysis, if required, except 
that refinancing of existing lender debt in accordance with 
Sec. 4279.113(q) of subpart B of this part will not be approved without 
a credit analysis by the Agency of the borrower's complete financial 
statements; and completion by the Agency of the environmental analysis. 
The Agency may request such additional information as it determines is 
needed to make a decision.

[[Page 67638]]

    (h) Lender loan servicing responsibilities. CLP lenders will be 
fully responsible for all aspects of loan servicing and, if necessary, 
liquidation as described in subpart B of part 4287 of this chapter.


Sec. 4279.44  Access to records.

    The lender will permit representatives of the Agency (or other 
agencies of the United States) to inspect and make copies of any 
records of the lender pertaining to the Agency guaranteed loans during 
regular office hours of the lender or at any other time upon agreement 
between the lender and the Agency.


Secs. 4279.45-4279.57  [Reserved]


Sec. 4279.58  Equal Credit Opportunity Act.

    In accordance with title V of Public Law 93-495, the Equal Credit 
Opportunity Act, with respect to any aspect of a credit transaction, 
neither the lender nor the Agency will discriminate against any 
applicant on the basis of race, color, religion, national origin, sex, 
marital status or age (providing the applicant has the capacity to 
contract), or because all or part of the applicant's income derives 
from a public assistance program, or because the applicant has, in good 
faith, exercised any right under the Consumer Protection Act. The 
lender will comply with the requirements of the Equal Credit 
Opportunity Act as contained in the Federal Reserve Board's Regulation 
implementing that Act (see 12 CFR part 202). Such compliance will be 
accomplished prior to loan closing.


Sec. 4279.59  [Reserved]


Sec. 4279.60  Civil Rights Impact Analysis

    The Agency is responsible for ensuring that all requirements of 
FmHA Instruction 2006-P, ``Civil Rights Impact Analysis'' are met and 
will complete the appropriate level of review in accordance with that 
instruction.


Secs. 4279.61-4279.70  [Reserved]


Sec. 4279.71  Public bodies and nonprofit corporations.

    Any public body or nonprofit corporation that receives a guaranteed 
loan that meets the thresholds established by OMB Circulars A-128 or A-
133 or successor regulations or circulars must provide an audit in 
accordance with the applicable circular or regulation 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 or their successors will be considered 
adequate to meet the audit requirements of the B&I program for that 
year.


Sec. 4279.72  Conditions of guarantee.

    A loan guarantee under this part will be evidenced by a Loan Note 
Guarantee issued by the Agency. Each lender will execute a Lender's 
Agreement. If a valid Lender's Agreement already exists, it is not 
necessary to execute a new Lender's Agreement with each loan guarantee. 
The provisions of this part and part 4287 of this chapter will apply to 
all outstanding guarantees. In the event of a conflict between the 
guarantee documents and these regulations as they exist at the time the 
documents are executed, the regulations will control.
    (a) Full faith and credit. A guarantee under this part constitutes 
an obligation supported by the full faith and credit of the United 
States and is incontestable except for fraud or misrepresentation of 
which a lender or holder has actual knowledge at the time it becomes 
such lender or holder or which a lender or holder participates in or 
condones. The guarantee will be unenforceable to the extent that any 
loss is occasioned by a provision for interest on interest. In 
addition, the guarantee will be unenforceable by the lender to the 
extent any loss is occasioned by the violation of usury laws, negligent 
servicing, or failure to obtain the required security regardless of the 
time at which the Agency acquires knowledge thereof. Any losses 
occasioned will be unenforceable to the extent that loan funds are used 
for purposes other than those specifically approved by the Agency in 
its Conditional Commitment. The Agency will guarantee payment as 
follows:
    (1) To any holder, 100 percent of any loss sustained by the holder 
on the guaranteed portion of the loan and on interest due on such 
portion.
    (2) To the lender, the lesser of:
    (i) Any loss sustained by the lender on the guaranteed portion, 
including principal and interest evidenced by the notes or assumption 
agreements and secured advances for protection and preservation of 
collateral made with the Agency's authorization; or
    (ii) The guaranteed principal advanced to or assumed by the 
borrower and any interest due thereon.
    (b) Rights and liabilities. When a guaranteed portion of a loan is 
sold to a holder, the holder shall succeed to all rights of the lender 
under the Loan Note Guarantee to the extent of the portion purchased. 
The lender will remain bound to all obligations under the Loan Note 
Guarantee, Lender's Agreement, and the Agency program regulations. A 
guarantee and right to require purchase will be directly enforceable by 
a holder notwithstanding any fraud or misrepresentation by the lender 
or any unenforceability of the guarantee by the lender, except for 
fraud or misrepresentation of which the holder had actual knowledge at 
the time it became the holder or in which the holder participates or 
condones. In the event of material fraud, negligence or 
misrepresentation by the lender or the lender's participation in or 
condoning of such material fraud, negligence or misrepresentation, the 
lender will be liable for payments made by the Agency to any holder.
    (c) Payments. A lender will receive all payments of principal and 
interest on account of the entire loan and will promptly remit to the 
holder its pro rata share thereof, determined according to its 
respective interest in the loan, less only the lender's servicing fee.


Secs. 4279.73-4279.74  [Reserved]


Sec. 4279.75  Sale or assignment of guaranteed loan.

    The lender may sell all or part of the guaranteed portion of the 
loan on the secondary market or retain the entire loan. The lender 
shall not sell or participate any amount of the guaranteed or 
unguaranteed portion of the loan to the borrower or members of the 
borrower's immediate families, officers, directors, stockholders, other 
owners, or a parent, subsidiary or affiliate. If the lender desires to 
market all or part of the guaranteed portion of the loan at or 
subsequent to loan closing, such loan must not be in default. Loans 
made with the proceeds of any obligation the interest on which is 
excludable from income under 26 U.S.C. 103 (interest on State and local 
banks) or any successor section will not be guaranteed.
    (a) Single note system. The entire loan is evidenced by one note, 
and one Loan Note Guarantee is issued. The lender may assign all or 
part of the guaranteed portion of the loan to one or more holders by 
using the Agency's Assignment Guarantee Agreement. The holder, upon 
written notice to the lender and the Agency, may reassign the unpaid 
guaranteed portion of the loan sold under the Assignment Guarantee 
Agreement. Upon notification and completion of the assignment through 
the use of Form 4279-6, the assignee shall succeed to all rights and 
obligations of the holder thereunder. If

[[Page 67639]]

this option is selected, the lender may not at a later date cause any 
additional notes to be issued.
    (b) Multinote system. Under this option the lender may provide one 
note for the unguaranteed portion of the loan and no more than 10 notes 
for the guaranteed portion. When this option is selected by the lender, 
the holder will receive one of the borrower's executed notes and a Loan 
Note Guarantee. The Agency will issue a Loan Note Guarantee for each 
note, including the unguaranteed note, to be attached to the note. An 
Assignment Guarantee Agreement will not be used when the multinote 
option is utilized.
    (c) After loan closing. If a loan is closed using the multinote 
option and at a later date additional notes are desired, the lender may 
cause a series of new notes, so that the total number of notes issued 
does not exceed the total number provided for in paragraph (b) of this 
section, to be issued as replacement for previously issued guaranteed 
notes, provided:
    (1) Written approval of the Agency is obtained;
    (2) The borrower agrees and executes the new notes;
    (3) The interest rate does not exceed the interest rate in effect 
when the loan was closed;
    (4) The maturity date of the loan is not changed;
    (5) The Agency will not bear or guarantee any expenses that may be 
incurred in reference to such reissuances of notes;
    (6) There is adequate collateral securing the notes;
    (7) No intervening liens have arisen or have been perfected and the 
secured lien priority is better or remains the same; and
    (8) All holders agree.
    (d) Termination of lender servicing fee. The lender's servicing fee 
will stop when the Agency purchases the guaranteed portion of the loan 
from the secondary market. No such servicing fee may be charged to the 
Agency and all loan payments and collateral proceeds received will be 
applied first to the guaranteed loan and, when applied to the 
guaranteed loan, will be applied on a pro rata basis.


Sec. 4279.76  Participation.

    The lender may obtain participation in the loan under its normal 
operating procedures; however, the lender must retain title to the 
notes if any of them are unguaranteed and retain the lender's interest 
in the collateral.


Sec. 4279.77  Minimum retention.

    The lender is required to hold in its own portfolio a minimum of 5 
percent of the total loan amount. The amount required to be maintained 
must be of the unguaranteed portion of the loan and cannot be 
participated to another. The lender may sell the remaining amount of 
the unguaranteed portion of the loan only through participation.


Sec. 4279.78  Repurchase from holder.

    (a) Repurchase by lender. A lender has the option to repurchase the 
unpaid guaranteed portion of the loan from a holder within 30 days of 
written demand by the holder when the borrower is in default not less 
than 60 days on principal or interest due on the loan; or the lender 
has failed to remit to the holder its pro rata share of any payment 
made by the borrower within 30 days of the lender's receipt thereof. 
The repurchase by the lender will be for an amount equal to the unpaid 
guaranteed portion of principal and accrued interest less the lender's 
servicing fee. The holder must concurrently send a copy of the demand 
letter to the Agency. The guarantee will not cover the note interest to 
the holder on the guaranteed loan accruing after 90 days from the date 
of the demand letter to the lender requesting the repurchase. The 
lender will accept an assignment without recourse from the holder upon 
repurchase. The lender is encouraged to repurchase the loan to 
facilitate the accounting of funds, resolve the problem, and prevent 
default, where and when reasonable. The lender will notify the holder 
and the Agency of its decision.
    (b) Agency purchase. (1) If the lender does not repurchase the 
unpaid guaranteed portion of the loan as provided in paragraph (a) of 
this section, the Agency will purchase from the holder the unpaid 
principal balance of the guaranteed portion together with accrued 
interest to date of repurchase, less the lender's servicing fee, within 
30 days after written demand to the Agency from the holder. (This is in 
addition to the copy of the written demand on the lender.) The 
guarantee will not cover the note interest to the holder on the 
guaranteed loan accruing after 90 days from the date of the original 
demand letter of the holder to the lender requesting the repurchase.
    (2) The holder's demand to the Agency must include a copy of the 
written demand made upon the lender. The holder must also include 
evidence of its right to require payment from the Agency. Such evidence 
will consist of either the original of the Loan Note Guarantee properly 
endorsed to the Agency or the original of the Assignment Guarantee 
Agreement properly assigned to the Agency without recourse including 
all rights, title, and interest in the loan. The holder must include in 
its demand the amount due including unpaid principal, unpaid interest 
to date of demand, and interest subsequently accruing from date of 
demand to proposed payment date. The Agency will be subrogated to all 
rights of the holder.
    (3) The Agency will notify the lender of its receipt of the 
holder's demand for payment. The lender must promptly provide the 
Agency with the information necessary for the Agency to determine the 
appropriate amount due the holder. Upon request by the Agency, the 
lender will furnish a current statement certified by an appropriate 
authorized officer of the lender of the unpaid principal and interest 
then owed by the borrower on the loan and the amount then owed to any 
holder. Any discrepancy between the amount claimed by the holder and 
the information submitted by the lender must be resolved between the 
lender and the holder before payment will be approved. Such conflict 
will suspend the running of the 30 day payment requirement.
    (4) Purchase by the Agency neither changes, alters, nor modifies 
any of the lender's obligations to the Agency arising from the loan or 
guarantee nor does it waive any of Agency's rights against the lender. 
The Agency will have the right to set-off against the lender all rights 
inuring to the Agency as the holder of the instrument against the 
Agency's obligation to the lender under the guarantee.
    (c) Repurchase for servicing. If, in the opinion of the lender, 
repurchase of the guaranteed portion of the loan is necessary to 
adequately service the loan, the holder must sell the guaranteed 
portion of the loan to the lender for an amount equal to the unpaid 
principal and interest on such portion less the lender's servicing fee. 
The guarantee will not cover the note interest to the holder on the 
guaranteed loan accruing after 90 days from the date of the demand 
letter of the lender or the Agency to the holder requesting the holder 
to tender its guaranteed portion. The lender must not repurchase from 
the holder for arbitrage or other purposes to further its own financial 
gain. Any repurchase must only be made after the lender obtains the 
Agency's written approval. If the lender does not repurchase the 
portion from the holder, the Agency may, at its option, purchase such 
guaranteed portion for servicing purposes.

[[Page 67640]]

Secs. 4279.79-4279.83  [Reserved]


Sec. 4279.84  Replacement of document.

    (a) The Agency may issue a replacement Loan Note Guarantee or 
Assignment Guarantee Agreement which was lost, stolen, destroyed, 
mutilated, or defaced to the lender or holder upon receipt of an 
acceptable certificate of loss and an indemnity bond.
    (b) When a Loan Note Guarantee or Assignment Guarantee Agreement is 
lost, stolen, destroyed, mutilated, or defaced while in the custody of 
the lender or holder, the lender will coordinate the activities of the 
party who seeks the replacement documents and will submit the required 
documents to the Agency for processing. The requirements for 
replacement are as follows:
    (1) A certificate of loss, notarized and containing a jurat, which 
includes:
    (i) Name and address of owner;
    (ii) Name and address of the lender of record;
    (iii) Capacity of person certifying;
    (iv) Full identification of the Loan Note Guarantee or Assignment 
Guarantee Agreement including the name of the borrower, the Agency's 
case number, date of the Loan Note Guarantee or Assignment Guarantee 
Agreement, face amount of the evidence of debt purchased, date of 
evidence of debt, present balance of the loan, percentage of guarantee, 
and, if an Assignment Guarantee Agreement, the original named holder 
and the percentage of the guaranteed portion of the loan assigned to 
that holder. Any existing parts of the document to be replaced must be 
attached to the certificate;
    (v) A full statement of circumstances of the loss, theft, or 
destruction of the Loan Note Guarantee or Assignment Guarantee 
Agreement; and
    (vi) For the holder, evidence demonstrating current ownership of 
the Loan Note Guarantee and Note or the Assignment Guarantee Agreement. 
If the present holder is not the same as the original holder, a copy of 
the endorsement of each successive holder in the chain of transfer from 
the initial holder to present holder must be included if in existence. 
If copies of the endorsement cannot be obtained, best available records 
of transfer must be submitted to the Agency (e.g., order confirmation, 
canceled checks, etc.).
    (2) An indemnity bond acceptable to the Agency shall accompany the 
request for replacement except when the holder is the United States, a 
Federal Reserve Bank, a Federal corporation, a State or territory, or 
the District of Columbia. The bond shall be with surety except when the 
outstanding principal balance and accrued interest due the present 
holder is less than $1 million verified by the lender in writing in a 
letter of certification of balance due. The surety shall be a qualified 
surety company holding a certificate of authority from the Secretary of 
the Treasury and listed in Treasury Department Circular 580.
    (3) All indemnity bonds must be issued and payable to the United 
States of America acting through the USDA. The bond shall be in an 
amount not less than the unpaid principal and interest. The bond shall 
hold USDA harmless against any claim or demand which might arise or 
against any damage, loss, costs, or expenses which might be sustained 
or incurred by reasons of the loss or replacement of the instruments.
    (4) In those cases where the guaranteed loan was closed under the 
provision of the multinote system, the Agency will not attempt to 
obtain, or participate in the obtaining of, replacement notes from the 
borrower. It will be the responsibility of the holder to bear costs of 
note replacement if the borrower agrees to issue a replacement 
instrument. Should such note be replaced, the terms of the note cannot 
be changed. If the evidence of debt has been lost, stolen, destroyed, 
mutilated or defaced, such evidence of debt must be replaced before the 
Agency will replace any instruments.


Secs. 4279.85-4279.99  [Reserved]


Sec. 4279.100  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by OMB and have been assigned OMB control 
number 0575-0171. Public reporting burden for this collection of 
information is estimated to vary from 1 hour to 8 hours per response, 
with an average of 4 hours per response, including time for 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 the Department of 
Agriculture, Clearance Officer, OIRM, Stop 7630, Washington, D.C. 
20250. You are not required to respond to this collection of 
information unless it displays a currently valid OMB control number.

Subpart B--Business and Industry Loans


Sec. 4279.101  Introduction.

    (a) Content. This subpart contains loan processing regulations for 
the Business and Industry (B&I) Guaranteed Loan Program. It is 
supplemented by subpart A of this part, which contains general 
guaranteed loan regulations, and subpart B of part 4287 of this 
chapter, which contains loan servicing regulations.
    (b) Purpose. The purpose of the B&I Guaranteed Loan Program is to 
improve, develop, or finance business, industry, and employment and 
improve the economic and environmental climate in rural communities. 
This purpose is achieved by bolstering the existing private credit 
structure through the guarantee of quality loans which will provide 
lasting community benefits. It is not intended that the guarantee 
authority will be used for marginal or substandard loans or for relief 
of lenders having such loans.
    (c) Documents. Copies of all forms, regulations, and Instructions 
referenced in this subpart are available in any Agency office.


Sec. 4279.102  Definitions.

    The definitions and abbreviations in Sec. 4279.2 of subpart A of 
this part are applicable to this subpart.


Secs. 4279.103  Exception Authority.

    Section 4279.15 of subpart A of this part applies to this subpart.


Sec. 4279.104  Appeals.

    Section 4279.16 of subpart A of this part applies to this subpart.


Sec. 4279.105-4279.106  [Reserved]


Sec. 4279.107  Guarantee fee.

    The guarantee fee will be paid to the Agency by the lender and is 
nonrefundable. The fee may be passed on to the borrower. Except as 
provided in this section, the guarantee fee will be 2 percent 
multiplied by the principal loan amount multiplied by the percent of 
guarantee and will be paid one time only at the time the Loan Note 
Guarantee is issued.
    (a) The guarantee fee may be reduced to 1 percent if the Agency 
determines that the business meets the following criteria:
    (1) High impact business development investment (It is the goal of 
this program to encourage high impact business investment in rural 
areas. The weight given to business investments will be in accordance 
with Sec. 4279.155(b)(5) of this subpart); and
    (2) The business is located in a community that is experiencing 
long term population decline and job deterioration; or
    (3) The business is located in a rural community that has remained 
persistently poor over the last 60 years; or

[[Page 67641]]

    (4) The business is located in a rural community that is 
experiencing trauma as a result of natural disaster or that is 
experiencing fundamental structural changes in its economic base.
    (b) Each fiscal year, the Agency shall establish a limit on the 
maximum portion of guarantee authority available for that fiscal year 
that may be used to guarantee loans with a guarantee fee of 1 percent. 
The limit will be announced by publishing a notice in the Federal 
Register. Once the limit has been reached, the guarantee fee for all 
additional loans obligated during the remainder of that fiscal year 
will be 2 percent.


Sec. 4279.108  Eligible borrowers.

    (a) Type of entity. A borrower may be a cooperative, corporation, 
partnership, or other legal entity organized and operated on a profit 
or nonprofit basis; an Indian tribe on a Federal or State reservation 
or other Federally recognized tribal group; a public body; or an 
individual. A borrower must be engaged in or proposing to engage in a 
business. Business may include manufacturing, wholesaling, retailing, 
providing services, or other activities that will:
    (1) Provide employment;
    (2) Improve the economic or environmental climate;
    (3) Promote the conservation, development, and use of water for 
aquaculture; or
    (4) Reduce reliance on nonrenewable energy resources by encouraging 
the development and construction of solar energy systems.
    (b) Citizenship. Individual borrowers must be citizens of the 
United States (U.S.) or reside in the U.S. after being legally admitted 
for permanent residence. Citizens and residents of the Republic of 
Palau, the Federated States of Micronesia, and the Republic of the 
Marshall Islands shall be considered U.S. citizens. Corporations or 
other nonpublic body organization-type borrowers must be at least 51 
percent owned by persons who are either citizens of the U.S. or reside 
in the U.S. after being legally admitted for permanent residence.
    (c) Rural area. The business financed with a B&I Guaranteed Loan 
must be located in a rural area. Loans to borrowers with facilities 
located in both urban and rural areas will be limited to the amount 
necessary to finance the facility located in the eligible rural area.
    (1) Rural areas include all territory of a State that is:
    (i) Not within the outer boundary of any city having a population 
of 50,000 or more; and
    (ii) Not within an area that is urbanized or urbanizing as defined 
in this section.
    (2) All density determinations will be made on the basis of minor 
civil divisions or census county divisions as used by the Bureau of the 
Census in the latest decennial census of the U.S. In making the density 
calculations, large nonresidential tracts devoted to urban land uses 
such as railroad yards, airports, industrial sites, parks, golf 
courses, cemeteries, office parks, shopping malls, or land set aside 
for such purposes will be excluded.
    (3) An urbanized area is an area immediately adjacent to a city 
with a population of 50,000 or more, that for general social and 
economic purposes forms a single community with such a city. An 
urbanizing area is an area immediately adjacent to a city with a 
population of 50,000 or more with a population density of more than 100 
persons per square mile or is an area with a population density of less 
than 100 persons per square mile which appears likely, based on 
development and population trends, to become urbanized in the 
foreseeable future. The corporate status of an urbanized or urbanizing 
area is not material. An area located in recognizable open country or 
separated from any city of 50,000 or more population by recognizable 
open country or by a river, will be assumed to be not urbanized or 
urbanizing.
    (d) Other credit. All applications for assistance will be accepted 
and processed without regard to the availability of credit from any 
other source.


Secs. 4279.109-4279.112  [Reserved]


Sec. 4279.113  Eligible loan purposes.

    Loan purposes must be consistent with the general purpose contained 
in Sec. 4279.101 of this subpart. They include but are not limited to 
the following:
    (a) Business and industrial acquisitions when the loan will keep 
the business from closing, prevent the loss of employment 
opportunities, or provide expanded job opportunities.
    (b) Business conversion, enlargement, repair, modernization, or 
development.
    (c) Purchase and development of land, easements, rights-of-way, 
buildings, or facilities.
    (d) Purchase of equipment, leasehold improvements, machinery, 
supplies, or inventory.
    (e) Pollution control and abatement.
    (f) Transportation services incidental to industrial development.
    (g) Startup costs and working capital.
    (h) Agricultural production, when not eligible for Farm Service 
Agency (FSA) farmer program assistance and when it is part of an 
integrated business also involved in the processing of agricultural 
products.
    (1) Examples of potentially eligible production include but are not 
limited to: An apple orchard in conjunction with a food processing 
plant; poultry buildings linked to a meat processing operation; or 
sugar beet production coupled with storage and processing. Any 
agricultural production considered for B&I financing must be owned, 
operated, and maintained by the business receiving the loan for which a 
guarantee is provided. Independent agricultural production operations, 
even if not eligible for FSA farmer programs assistance, are not 
eligible for the B&I program.
    (2) The agricultural-production portion of any loan will not exceed 
50 percent of the total loan or $1 million, whichever is less.
    (i) Purchase of membership, stocks, bonds, or debentures necessary 
to obtain a loan from Farm Credit System institutions and other lenders 
provided that the purchase is required for all of their borrowers. 
Purchase of startup cooperative stock for family-sized farms where 
commodities are produced to be processed by the cooperative.
    (j) Aquaculture, including conservation, development, and 
utilization of water for aquaculture.
    (k) Commercial fishing.
    (l) Commercial nurseries engaged in the production of ornamental 
plants and trees and other nursery products such as bulbs, flowers, 
shrubbery, flower and vegetable seeds, sod, and the growing of plants 
from seed to the transplant stage.
    (m) Forestry, which includes businesses primarily engaged in the 
operation of timber tracts, tree farms, and forest nurseries and 
related activities such as reforestation.
    (n) The growing of mushrooms or hydroponics.
    (o) Interest (including interest on interim financing) during the 
period before the first principal payment becomes due or when the 
facility becomes income producing, whichever is earlier.
    (p) Feasibility studies.
    (q) To refinance outstanding debt when it is determined that the 
project is viable and refinancing is necessary to improve cash flow and 
create new or save existing jobs. Existing lender debt may be included 
provided that, at the time of application, the loan has been current 
for at least the past 12 months (unless such status is achieved by the 
lender forgiving the borrower's debt), the lender is providing better 
rates or terms, and the refinancing is a

[[Page 67642]]

secondary part (less than 50 percent) of the overall loan.
    (r) Takeout of interim financing. Guaranteeing a loan after project 
completion to pay off a lender's interim loan will not be treated as 
debt refinancing provided that the lender submits a complete 
preapplication or application which proposes such interim financing 
prior to completing the interim loan. A lender that is considering an 
interim loan should be advised that the Agency assumes no 
responsibility or obligation for interim loans advanced prior to the 
Conditional Commitment being issued.
    (s) Fees and charges for professional services and routine lender 
fees.
    (t) Agency guarantee fee.
    (u) Tourist and recreation facilities, including hotels, motels, 
and bed and breakfast establishments, except as prohibited under 
ineligible purposes.
    (v) Educational or training facilities.
    (w) Community facility projects which are not listed as an 
ineligible loan purpose such as convention centers.
    (x) Constructing or equipping facilities for lease to private 
businesses engaged in commercial or industrial operations.
    (y) The financing of housing development sites provided that the 
community demonstrates a need for additional housing to prevent a loss 
of jobs in the area or to house families moving to the area as a result 
of new employment opportunities.
    (z) Community antenna television services or facilities.
    (aa) Provide loan guarantees to assist industries adjusting to 
terminated Federal agricultural programs or increased foreign 
competition.


Sec. 4279.114  Ineligible purposes.

    (a) Distribution or payment to an individual owner, partner, 
stockholder, or beneficiary of the borrower or a close relative of such 
an individual when such individual will retain any portion of the 
ownership of the borrower.
    (b) Projects in excess of $1 million that would likely result in 
the transfer of jobs from one area to another and increase direct 
employment by more than 50 employees.
    (c) Projects in excess of $1 million that would increase direct 
employment by more than 50 employees, if the project would result in an 
increase in the production of goods for which there is not sufficient 
demand, or if the availability of services or facilities is 
insufficient to meet the needs of the business.
    (d) Charitable institutions, churches, or church-controlled or 
fraternal organizations.
    (e) Lending and investment institutions and insurance companies.
    (f) Assistance to Government employees and military personnel who 
are directors or officers or have a major ownership of 20 percent or 
more in the business.
    (g) Racetracks for the conduct of races by professional drivers, 
jockeys, etc., where individual prizes are awarded in the amount of 
$500 or more.
    (h) Any business that derives more than 10 percent of annual gross 
revenue from gambling activity.
    (i) Any illegal business activity.
    (j) Prostitution.
    (k) Any line of credit.
    (l) The guarantee of lease payments.
    (m) The guarantee of loans made by other Federal agencies.
    (n) Owner-occupied housing. Bed and breakfasts, storage facilities, 
et al, are allowed when the pro rata value of the owner's living 
quarters is deleted.
    (o) Projects that are eligible for the Rural Rental Housing and 
Rural Cooperative Housing loans under sections 515, 521, and 538 of the 
Housing Act of 1949, as amended.
    (p) Loans made with the proceeds of any obligation the interest on 
which is excludable from income under 26 U.S.C. 103 or a successor 
statute. Funds generated through the issuance of tax-exempt obligations 
may neither be used to purchase the guaranteed portion of any Agency 
guaranteed loan nor may an Agency guaranteed loan serve as collateral 
for a tax-exempt issue. The Agency may guarantee a loan for a project 
which involves tax-exempt financing only when the guaranteed loan funds 
are used to finance a part of the project that is separate and distinct 
from the part which is financed by the tax-exempt obligation, and the 
guaranteed loan has at least a parity security position with the tax-
exempt obligation.
    (q) The guarantee of loans where there may be, directly or 
indirectly, a conflict of interest or an appearance of a conflict of 
interest involving any action by the Agency.
    (r) Golf courses.


Sec. 4279.115  Prohibition under Agency programs.

    No B&I loans guaranteed by the Agency will be conditioned on any 
requirement that the recipients of such assistance accept or receive 
electric service from any particular utility, supplier, or cooperative.


Secs. 4279.116-4279.118  [Reserved]


Sec. 4279.119  Loan guarantee limits.

    (a) Loan amount. The total amount of Agency loans to one borrower, 
including the guaranteed and unguaranteed portions, the outstanding 
principal and interest balance of any existing Agency guaranteed loans, 
and new loan request, must not exceed $10 million. The Administrator 
may, at the Administrator's discretion, grant an exception to the $10 
million limit under the following circumstances:
    (1) The project to be financed is a high-priority project. Priority 
will be determined in accordance with the criteria contained in 
Sec. 4279.155 of this subpart;
    (2) The lender must document to the satisfaction of the Agency that 
the loan will not be made and the project will not be completed if the 
guarantee is not approved; and
    (3) Under no circumstances will the total amount of guaranteed 
loans to one borrower, including the guaranteed and unguaranteed 
portions, the outstanding principal and interest balance of any 
existing Agency guaranteed loans, and new loan request, exceed $25 
million;
    (4) The percentage of guarantee will not exceed 60 percent. No 
exception to this requirement will be approved under paragraph (b) of 
this section for loans exceeding $10 million; and
    (5) Any request for a guaranteed loan exceeding the $10 million 
limit must be submitted to the Agency in the form of a preapplication. 
The preapplication must be submitted to the National Office for review 
and concurrence before encouraging a full application.
    (b) Percent of guarantee. The percentage of guarantee, up to the 
maximum allowed by this section, is a matter of negotiation between the 
lender and the Agency. The maximum percentage of guarantee is 80 
percent for loans of $5 million or less, 70 percent for loans between 
$5 and $10 million, and 60 percent for loans exceeding $10 million. 
Notwithstanding the preceding, the Administrator may, at the 
Administrator's discretion, grant an exception allowing guarantees of 
up to 90 percent on loans of $10 million or less under the following 
circumstances:
    (1) The project to be financed is a high-priority project. Priority 
will be determined in accordance with the criteria contained in 
4279.155 of this subpart;
    (2) The lender must document to the satisfaction of the Agency that 
the loan will not be made and the project will not be completed if the 
higher guarantee percentage is not approved; and
    (3) The State Director may grant an exception for loans of up to 90 
percent on loans of $2 million or less subject to the State Director's 
delegated loan authority and meeting all of the conditions as set forth 
in this section. In

[[Page 67643]]

cases where the State Director does not have the loan approval 
authority to approve a loan of $2 million or less or the proposed 
percentage, the case must be submitted to the National Office for 
review.
    (4) Each fiscal year, the Agency will establish a limit on the 
maximum portion of guarantee authority available for that fiscal year 
that may be used to guarantee loans with a guarantee percentage 
exceeding 80 percent. The limit will be announced by publishing a 
notice in the Federal Register. Once the limit has been reached, the 
guarantee percentage for all additional loans guaranteed during the 
remainder of that fiscal year will not exceed 80 percent.


Sec. 4279.120  Fees and charges.

    (a) Routine lender fees. The lender may establish charges and fees 
for the loan provided they are similar to those normally charged other 
applicants for the same type of loan in the ordinary course of 
business.
    (b) Professional services. Professional services are those rendered 
by entities generally licensed or certified by States or accreditation 
associations, such as architects, engineers, packagers, accountants, 
attorneys, or appraisers. The borrower may pay fees for professional 
services needed for planning and developing a project provided that the 
amounts are reasonable and customary in the area. Professional fees may 
be included as an eligible use of loan proceeds.


Secs. 4279.121-4279.124  [Reserved]


Sec. 4279.125  Interest rates.

    The interest rate for the guaranteed loan will be negotiated 
between the lender and the applicant and may be either fixed or 
variable as long as it is a legal rate. Interest rates will not be more 
than those rates customarily charged borrowers in similar circumstances 
in the ordinary course of business and are subject to Agency review and 
approval. Lenders are encouraged to utilize the secondary market and 
pass interest-rate savings on to the borrower.
    (a) A variable interest rate agreed to by the lender and borrower 
must be a rate that is tied to a base rate agreed to by the lender and 
the Agency. The variable interest rate may be adjusted at different 
intervals during the term of the loan, but the adjustments may not be 
more often than quarterly and must be specified in the Loan Agreement. 
The lender must incorporate, within the variable rate Promissory Note 
at loan closing, the provision for adjustment of payment installments 
coincident with an interest-rate adjustment. The lender will ensure 
that the outstanding principal balance is properly amortized within the 
prescribed loan maturity to eliminate the possibility of a balloon 
payment at the end of the loan.
    (b) Any change in the interest rate between the date of issuance of 
the Conditional Commitment and before the issuance of the Loan Note 
Guarantee must be approved in writing by the Agency approval official. 
Approval of such a change will be shown as an amendment to the 
Conditional Commitment.
    (c) It is permissible to have one interest rate on the guaranteed 
portion of the loan and another rate on the unguaranteed portion of the 
loan provided that the rate on the guaranteed portion does not exceed 
the rate on the unguaranteed portion.
    (d) A combination of fixed and variable rates will be allowed.


Sec. 4279.126  Loan terms.

    (a) The maximum repayment for loans on real estate will not exceed 
30 years; machinery and equipment repayment will not exceed the useful 
life of the machinery and equipment purchased with loan funds or 15 
years, whichever is less; and working capital repayment will not exceed 
7 years. The term for a loan that is being refinanced may be based on 
the collateral the lender will take to secure the loan.
    (b) The first installment of principal and interest will, if 
possible, be scheduled for payment after the project is operational and 
has begun to generate income. However, the first full installment must 
be due and payable within 3 years from the date of the Promissory Note 
and be paid at least annually thereafter. Interest-only payments will 
be paid at least annually from the date of the note.
    (c) Only loans which require a periodic payment schedule which will 
retire the debt over the term of the loan without a balloon payment 
will be guaranteed.
    (d) A loan's maturity will take into consideration the use of 
proceeds, the useful life of assets being financed, and the borrower's 
ability to repay the loan. The lender may apply the maximum guidelines 
specified above only when the loan cannot be repaid over a shorter 
term.
    (e) All loans guaranteed through the B&I program must be sound, 
with reasonably assured repayment.


Secs. 4279.127-4279.130  [Reserved]


Sec. 4279.131  Credit quality.

    The lender is primarily responsible for determining credit quality 
and must address all of the elements of credit quality in a written 
credit analysis including adequacy of equity, cash flow, collateral, 
history, management, and the current status of the industry for which 
credit is to be extended.
    (a) Cash flow. All efforts will be made to structure or restructure 
debt so that the business has adequate debt coverage and the ability to 
accommodate expansion.
    (b) Collateral. (1) Collateral must have documented value 
sufficient to protect the interest of the lender and the Agency and, 
except as set forth in paragraph (b)(2) of this section, the discounted 
collateral value will be at least equal to the loan amount. Lenders 
will discount collateral consistent with sound loan-to-value policy.
    (2) Some businesses are predominantly cash-flow oriented, and where 
cash flow and profitability are strong, loan-to-value coverage may be 
discounted accordingly. A loan primarily based on cash flow must be 
supported by a successful and documented financial history.
    (c) Industry. Current status of the industry will be considered and 
businesses in areas of decline will be required to provide strong 
business plans which outline how they differ from the current trends. 
The regulatory environment surrounding the particular business or 
industry will be considered.
    (d) Equity. A minimum of 10 percent tangible balance sheet equity 
will be required for existing businesses at the time the Loan Note 
Guarantee is issued. A minimum of 20 percent tangible balance sheet 
equity will be required for new businesses at the time the Loan Note 
Guarantee is issued. Tangible balance sheet equity will be determined 
in accordance with Generally Accepted Accounting Principles. 
Modifications to the equity requirements may be granted by the 
Administrator or designee. For the Administrator to consider a 
reduction in the equity requirement, the borrower must furnish the 
following:
    (1) Collateralized personal and corporate guarantees, including any 
parent, subsidiary, or affiliated company, when feasible and legally 
permissible (in accordance with 4279.149 of this subpart), and
    (2) Pro forma and historical financial statements which indicate 
the business to be financed meets or exceeds the median quartile (as 
identified in Robert Morris Associates Annual Statement Studies or 
similar publication) for the

[[Page 67644]]

current ratio, quick ratio, debt-to-worth ratio, debt coverage ratio, 
and working capital.
    (e) Lien priorities. The entire loan will be secured by the same 
security with equal lien priority for the guaranteed and unguaranteed 
portions of the loan. The unguaranteed portion of the loan will neither 
be paid first nor given any preference or priority over the guaranteed 
portion. A parity or junior position may be considered provided that 
discounted collateral values are adequate to secure the loan in 
accordance with paragraph (b) of this section after considering prior 
liens.
    (f) Management. A thorough review of key management personnel will 
be completed to ensure that the business has adequately trained and 
experienced managers.


Secs. 4279.132-4279.136  [Reserved]


Sec. 4279.137  Financial statements.

    (a) The lender will determine the type and frequency of submission 
of financial statements by the borrower. At a minimum, annual financial 
statements prepared by an accountant in accordance with Generally 
Accepted Accounting Principles will be required.
    (b) If specific circumstances warrant and the proposed guaranteed 
loan will exceed $3 million, the Agency may require annual audited 
financial statements. For example, the need for audited financial 
statements will be carefully considered in connection with loans that 
depend heavily on inventory and accounts receivable for collateral.


Sec. Sec. 4279.138-4279.142  [Reserved]


Sec. 4279.143  Insurance.

    (a) Hazard. Hazard insurance with a standard mortgage clause naming 
the lender as beneficiary will be required on every loan in an amount 
that is at least the lesser of the depreciated replacement value of the 
collateral or the amount of the loan. Hazard insurance includes fire, 
windstorm, lightning, hail, explosion, riot, civil commotion, aircraft, 
vehicle, marine, smoke, builder's risk during construction by the 
business, and property damage.
    (b) Life. The lender may require life insurance to insure against 
the risk of death of persons critical to the success of the business. 
When required, coverage will be in amounts necessary to provide for 
management succession or to protect the business. The cost of insurance 
and its effect on the applicant's working capital must be considered as 
well as the amount of existing insurance which could be assigned 
without requiring additional expense.
    (c) Worker compensation. Worker compensation insurance is required 
in accordance with State law.
    (d) Flood. National flood insurance is required in accordance with 
7 CFR, part 1806, subpart B (FmHA Instruction 426.2, available in any 
field office or the National Office).
    (e) Other. Public liability, business interruption, malpractice, 
and other insurance appropriate to the borrower's particular business 
and circumstances will be considered and required when needed to 
protect the interests of the borrower.


Sec. 4279.144  Appraisals.

    Lenders will be responsible for ensuring that appraisal values 
adequately reflect the actual value of the collateral. All real 
property appraisals associated with Agency guaranteed loanmaking and 
servicing transactions will meet the requirements contained in the 
Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 
1989 and the appropriate guidelines contained in Standards 1 and 2 of 
the Uniform Standards of Professional Appraisal Practices (USPAP). All 
appraisals will include consideration of the potential effects from a 
release of hazardous substances or petroleum products or other 
environmental hazards on the market value of the collateral. For 
additional guidance and information concerning the completion of real 
property appraisals, refer to subpart A of part 1922 of this title and 
to ``Standard Practices for Environmental Site Assessments: Transaction 
Screen Questionnaire'' and ``Phase I Environmental Site Assessment,'' 
both published by the American Society of Testing and Materials. 
Chattels will be evaluated in accordance with normal banking practices 
and generally accepted methods of determining value.


Secs. 4279.145-4279.148  [Reserved]


Sec. 4279.149  Personal and corporate guarantees.

    (a) Personal and corporate guarantees, when obtained, are part of 
the collateral for the loan. However, the value of such guarantee is 
not considered in determining whether a loan is adequately secured for 
loanmaking purposes.
    (b) Personal and corporate guarantees for those owning greater than 
20 percent of the borrower will be required where legally permissible, 
except as provided for in this section. Guarantees of parent, 
subsidiaries, or affiliated companies and secured guarantees may also 
be required.
    (c) Exceptions to the requirements for personal guarantees must be 
requested by the lender and concurred in by the Agency approval 
official on a case-by- case basis. The lender must document that 
collateral, equity, cash flow, and profitability indicate an above 
average ability to repay the loan.


Sec. 4279.150  Feasibility studies.

    A feasibility study by a qualified independent consultant may be 
required by the Agency for start-up businesses or existing businesses 
when the project will significantly affect the borrower's operations. 
An acceptable feasibility study should include, but not be limited to, 
economic, market, technical, financial, and management feasibility.


Secs. 4279.151-4279.154  [Reserved]


Sec. 4279.155  Loan priorities.

    Applications and preapplications received by the Agency will be 
considered in the order received; however, for the purpose of assigning 
priorities as described in paragraph (b) of this section, the Agency 
will compare an application to other pending applications.
    (a) When applications on hand otherwise have equal priority, 
applications for loans from qualified veterans will have preference.
    (b) Priorities will be assigned by the Agency to eligible 
applications on the basis of a point system as contained in this 
section. The application and supporting information will be used to 
determine an eligible proposed project's priority for available 
guarantee authority. All lenders, including CLP lenders, will consider 
Agency priorities when choosing projects for guarantee. The lender will 
provide necessary information related to determining the score, as 
requested.
    (1) Population priority. Projects located in an unincorporated area 
or in a city with under 25,000 population (10 points).
    (2) Community priority. The priority score for community will be 
the total score for the following categories:
    (i) Located in an eligible area of long term population decline and 
job deterioration based on reliable statistical data (5 points).
    (ii) Located in a rural community that has remained persistently 
poor over the last 60 years (5 points).
    (iii) Located in a rural community that is experiencing trauma as a 
result of natural disaster or experiencing fundamental structural 
changes in its economic base (5 points).

[[Page 67645]]

    (iv) Located in a city or county with an unemployment rate 125 
percent of the statewide rate or greater (5 points).
    (3) Empowerment Zone/Enterprise Community (EZ/EC).
    (i) Located in an EZ/EC designated area (10 points).
    (ii) Located in a designated Champion Community (5 points). A 
Champion Community is a community which developed a strategic plan to 
apply for an EZ/EC designation, but not selected as a designated EZ/EC 
Community.
    (4) Loan features. The priority score for loan features will be the 
total score for the following categories:
    (i) Lender will price the loan at the Wall Street Journal published 
Prime Rate plus 1.5 percent or less (5 points).
    (ii) Lender will price the loan at the Wall Street Journal 
published Prime Rate plus 1 percent or less (5 points).
    (iii) The Agency guaranteed loan is less than 50 percent of project 
cost (5 points).
    (iv) Percentage of guarantee is 10 or more percentage points less 
than the maximum allowable for a loan of its size (5 points).
    (5) High impact business investment priorities. The priority score 
for high impact business investment will be the total score for the 
following three categories:
    (i) Industry. The priority score for industry will be the total 
score for the following, except that the total score for industry 
cannot exceed 10 points.
    (A) Industry that has 20 percent or more of its sales in 
international markets (5 points).
    (B) Industry that is not already present in the community (5 
points).
    (ii) Business. The priority score for business will be the total 
score for the following:
    (A) Business that offers high value, specialized products and 
services that command high prices (2 points).
    (B) Business that provides an additional market for existing local 
business (3 points).
    (C) Business that is locally owned and managed (3 points).
    (D) Business that will produce a natural resource value-added 
product (2 points).
    (iii) Occupations. The priority score for occupations will be the 
total score for the following, except that the total score for job 
quality cannot exceed 10 points:
    (A) Business that creates jobs with an average wage exceeding 125 
percent of the Federal minimum wage (5 points).
    (B) Business that creates jobs with an average wage exceeding 150 
percent of the Federal minimum wage (10 points).
    (6) Administrative points. The State Director may assign up to 10 
additional points to an application to account for such factors as 
statewide distribution of funds, natural or economic emergency 
conditions, or area economic development strategies. An explanation of 
the assigning of these points by the State Director will be appended to 
the calculation of the project score maintained in the case file. If an 
application is considered in the National Office, the Administrator may 
also assign up to an additional 10 points. The Administrator may assign 
the additional points to an application to account for items such as 
geographic distribution of funds and emergency conditions caused by 
economic problems or natural disasters.


Sec. 4279.156  Planning and performing development.

    (a) Design policy. The lender must ensure that all project 
facilities must be designed utilizing accepted architectural and 
engineering practices and must conform to applicable Federal, state, 
and local codes and requirements. The lender will also ensure that the 
project will be completed using the available funds and, once 
completed, will be used for its intended purpose and produce products 
in the quality and quantity proposed in the completed application 
approved by the Agency.
    (b) Project control. The lender will monitor the progress of 
construction and undertake the reviews and inspections necessary to 
ensure that construction conforms with applicable Federal, state, and 
local code requirements; proceeds are used in accordance with the 
approved plans, specifications, and contract documents; and that funds 
are used for eligible project costs.
    (c) Equal opportunity. For all construction contracts in excess of 
$10,000, the contractor must comply with Executive Order 11246, 
entitled ``Equal Employment Opportunity,'' as amended by Executive 
Order 11375, and as supplemented by applicable Department of Labor 
regulations (41 CFR, part 60). The borrower and lender are responsible 
for ensuring that the contractor complies with these requirements.
    (d) Americans with Disabilities Act (ADA). B&I Guaranteed Loans 
which involve the construction of or addition to facilities that 
accommodate the public and commercial facilities, as defined by the 
ADA, must comply with the ADA. The lender and borrower are responsible 
for compliance.


Secs. 4279.157-4279.160  [Reserved]


Sec. 4279.161  Filing preapplications and applications.

    Borrowers and lenders are encouraged to file preapplications and 
obtain Agency comments before completing an application. However, if 
they prefer, they may file a complete application as the first contact 
with the Agency. Neither preapplications nor applications will be 
accepted or processed unless a lender has agreed to finance the 
proposal.
    (a) Preapplications. Lenders may file preapplications by submitting 
the following to the Agency:
    (1) A letter signed by the borrower and lender containing the 
following:
    (i) Borrower's name, organization type, address, contact person, 
and federal tax identification and telephone numbers.
    (ii) Amount of the loan request, percent of guarantee requested, 
and the proposed rates and terms.
    (iii) Name of the proposed lender, address, telephone number, 
contact person, and lender's Internal Revenue Service (IRS) 
identification number.
    (iv) Brief description of the project, products, services provided, 
and availability of raw materials and supplies.
    (v) Type and number of jobs created or saved.
    (vi) Amount of borrower's equity and a description of collateral, 
with estimated values, to be offered as security for the loan.
    (vii) If a corporate borrower, the names and addresses of the 
borrower's parent, affiliates, and subsidiary firms, if any, and a 
description of the relationship.
    (2) A completed Form 4279-2, ``Certification of Non-Relocation and 
Market Capacity Information Report,'' if the proposed loan is in excess 
of $1 million and will increase direct employment by more than 50 
employees.
    (3) For existing businesses, a current balance sheet and a profit 
and loss statement not more than 90 days old and financial statements 
for the borrower and any parent, affiliates, and subsidiaries for at 
least the 3 most recent years.
    (4) For start-up businesses, a preliminary business plan must be 
provided.
    (b) Applications. Except for CLP lenders, applications will be 
filed with the Agency by submitting the following information: (CLP 
applications will be completed in accordance with 4279.43(g)(1) but CLP 
lenders must have the material listed in this paragraph in their 
files.)

[[Page 67646]]

    (1) A completed Form 4279-1, ``Application for Loan Guarantee 
(Business and Industry)''.
    (2) The information required for filing a preapplication, as listed 
above, if not previously filed or if the information has changed.
    (3) Form FmHA 1940-20, ``Request for Environmental Information,'' 
and attachments, unless the project is categorically excluded under 
Agency environmental regulations.
    (4) A personal credit report from an acceptable credit reporting 
company for a proprietor (owner), each partner, officer, director, key 
employee, and stockholder owning 20 percent or more interest in the 
applicant, except for those corporations listed on a major stock 
exchange. Credit reports are not required for elected and appointed 
officials when the applicant is a public body.
    (5) Intergovernmental consultation comments in accordance with 7 
CFR, part 3015, subpart V.
    (6) Appraisals, accompanied by a copy of the appropriate 
environmental site assessment, if available. (Agency approval in the 
form of a Conditional Commitment may be issued subject to receipt of 
adequate appraisals.)
    (7) For all businesses, a current (not more than 90 days old) 
balance sheet, a pro forma balance sheet at startup, and projected 
balance sheets, income and expense statements, and cash flow statements 
for the next 2 years. Projections should be supported by a list of 
assumptions showing the basis for the projections.
    (8) Lender's complete written analysis, including spreadsheets of 
the balance sheets and income statements for the 3 previous years (for 
existing businesses), pro forma balance sheet at startup, and 2 years 
projected yearend balance sheets and income statements, with 
appropriate ratios and comparisons with industrial standards (such as 
Dun & Bradstreet or Robert Morris Associates). All data must be shown 
in total dollars and also in common size form, obtained by expressing 
all balance sheet items as a percentage of assets and all income and 
expense items as a percentage of sales. The lender's credit analysis 
must address the borrower's management, repayment ability including a 
cash-flow analysis, history of debt repayment, necessity of any debt 
refinancing, and the credit reports of the borrower, its principals, 
and any parent, affiliate, or subsidiary.
    (9) Commercial credit reports obtained by the lender on the 
borrower and any parent, affiliate, and subsidiary firms.
    (10) Current personal and corporate financial statements of any 
guarantors.
    (11) A proposed Loan Agreement or a sample Loan Agreement with an 
attached list of the proposed Loan Agreement provisions. The Loan 
Agreement must be executed by the lender and borrower before the Agency 
issues a Loan Note Guarantee. The following requirements must be 
addressed in the Loan Agreement:
    (i) Prohibition against assuming liabilities or obligations of 
others.
    (ii) Restriction on dividend payments.
    (iii) Limitation on the purchase or sale of equipment and fixed 
assets.
    (iv) Limitation on compensation of officers and owners.
    (v) Minimum working capital or current ratio requirement.
    (vi) Maximum debt-to-net worth ratio.
    (vii) Restrictions concerning consolidations, mergers, or other 
circumstances.
    (viii) Limitations on selling the business without the concurrence 
of the lender.
    (ix) Repayment and amortization of the loan.
    (x) List of collateral and lien priority for the loan including a 
list of persons and corporations guaranteeing the loan with a schedule 
for providing the lender with personal and corporate financial 
statements. Financial statements on the corporate and personal 
guarantors must be updated at least annually.
    (xi) Type and frequency of financial statements to be required for 
the duration of the loan.
    (xii) The final Loan Agreement between the lender and borrower will 
contain any additional requirements imposed by the Agency in its 
Conditional Commitment.
    (xiii) A section for the later insertion of any necessary measures 
by the borrower to avoid or reduce adverse environmental impacts from 
this proposal's construction or operation. Such measures, if necessary, 
will be determined by the Agency through the completion of the 
environmental review process.
    (12) A business plan, which includes, at a minimum, a description 
of the business and project, management experience, products and 
services, proposed use of funds, availability of labor, raw materials 
and supplies, and the names of any corporate parent, affiliates, and 
subsidiaries with a description of the relationship. Any or all of 
these requirements may be omitted if the information is included in a 
feasibility study.
    (13) Independent feasibility study, if required.
    (14) For companies listed on a major stock exchange or subject to 
the Securities and Exchange Commission (SEC) regulations, a copy of SEC 
Form 10-K, ``Annual Report Pursuant to Section 13 or 15D of the Act of 
1934.''
    (15) For health care facilities, a certificate of need, if required 
by statute.
    (16) A certification by the lender that it has completed a 
comprehensive analysis of the proposal, the applicant is eligible, the 
loan is for authorized purposes, and there is reasonable assurance of 
repayment ability based on the borrower's history, projections and 
equity, and the collateral to be obtained.
    (17) Any additional information required by the Agency.


Secs. 4279.162-4279.164  [Reserved]


Sec. 4279.165  Evaluation of application.

    (a) General review. The Agency will evaluate the application and 
make a determination whether the borrower is eligible, the proposed 
loan is for an eligible purpose, there is reasonable assurance of 
repayment ability, there is sufficient collateral and equity, and the 
proposed loan complies with all applicable statutes and regulations. If 
the Agency determines it is unable to guarantee the loan, the lender 
will be informed in writing. Such notification will include the reasons 
for denial of the guarantee.
    (b) Environmental requirements. The environmental review process 
must be completed, in accordance with subpart G of part 1940 of this 
title, prior to the issuance of the Conditional Commitment, loan 
approval, or obligation of funds, whichever occurs first.


Secs. 4279.166-4279.172  [Reserved]


Sec. 4279.173  Loan approval and obligating funds.

    (a) Upon approval of a loan guarantee, the Agency will issue a 
Conditional Commitment to the lender containing conditions under which 
a Loan Note Guarantee will be issued.
    (b) If certain conditions of the Conditional Commitment cannot be 
met, the lender and applicant may propose alternate conditions. Within 
the requirements of the applicable regulations and instructions and 
prudent lending practices, the Agency may negotiate with the lender and 
the applicant regarding any proposed changes to the Conditional 
Commitment.


Sec. 4279.174  Transfer of lenders.

    (a) The loan approval official may approve the substitution of a 
new eligible lender in place of a former lender who holds an 
outstanding Conditional Commitment when the

[[Page 67647]]

Loan Note Guarantee has not yet been issued provided, that there are no 
changes in the borrower's ownership or control, loan purposes, or scope 
of project and loan conditions in the Conditional Commitment and the 
Loan Agreement remain the same.
    (b) The new lender's servicing capability, eligibility, and 
experience will be analyzed by the Agency prior to approval of the 
substitution. The original lender will provide the Agency with a letter 
stating the reasons it no longer desires to be a lender for the 
project. The substituted lender must execute a new part B of Form 4279-
1.


Secs. 4279.175-4279.179  [Reserved]


Sec. 4279.180  Changes in borrower.

    Any changes in borrower ownership or organization prior to the 
issuance of the Loan Note Guarantee must meet the eligibility 
requirements of the program and be approved by the Agency loan approval 
official.


Sec. 4279.181  Conditions precedent to issuance of Loan Note Guarantee.

    The Loan Note Guarantee will not be issued until the lender, 
including a CLP lender, certifies to the following:
    (a) No major changes have been made in the lender's loan conditions 
and requirements since the issuance of the Conditional Commitment, 
unless such changes have been approved by the Agency.
    (b) All planned property acquisition has been or will be completed, 
all development has been or will be substantially completed in 
accordance with plans and specifications, conforms with applicable 
Federal, state, and local codes, and costs have not exceeded the amount 
approved by the lender and the Agency.
    (c) Required hazard, flood, liability, worker compensation, and 
personal life insurance, when required, are in effect.
    (d) Truth-in-lending requirements have been met.
    (e) All equal credit opportunity requirements have been met.
    (f) The loan has been properly closed, and the required security 
instruments have been obtained or will be obtained on any acquired 
property that cannot be covered initially under State law.
    (g) The borrower has marketable title to the collateral then owned 
by the borrower, subject to the instrument securing the loan to be 
guaranteed and to any other exceptions approved in writing by the 
Agency.
    (h) When required, the entire amount of the loan for working 
capital has been disbursed except in cases where the Agency has 
approved disbursement over an extended period of time.
    (i) When required, personal, partnership, or corporate guarantees 
have been obtained.
    (j) All other requirements of the Conditional Commitment have been 
met.
    (k) Lien priorities are consistent with the requirements of the 
Conditional Commitment. No claims or liens of laborers, subcontractors, 
suppliers of machinery and equipment, or other parties have been or 
will be filed against the collateral and no suits are pending or 
threatened that would adversely affect the collateral when the security 
instruments are filed.
    (l) The loan proceeds have been or will be disbursed for purposes 
and in amounts consistent with the Conditional Commitment and Form 
4279-1. A copy of the detailed loan settlement of the lender must be 
attached to support this certification.
    (m) There has been neither any material adverse change in the 
borrower's financial condition nor any other material adverse change in 
the borrower, for any reason, during the period of time from the 
Agency's issuance of the Conditional Commitment to issuance of the Loan 
Note Guarantee regardless of the cause or causes of the change and 
whether or not the change or causes of the change were within the 
lender's or borrower's control. The lender must address any assumptions 
or reservations in the requirement and must address all adverse changes 
of the borrower, any parent, affiliate, or subsidiary of the borrower, 
and guarantors.
    (n) None of the lender's officers, directors, stockholders, or 
other owners (except stockholders in an institution that has normal 
stockshare requirements for participation) has a substantial financial 
interest in the borrower and neither the borrower nor its officers, 
directors, stockholders, or other owners has a substantial financial 
interest in the lender. If the borrower is a member of the board of 
directors or an officer of a Farm Credit System (FCS) institution that 
is the lender, the lender will certify that an FCS institution on the 
next highest level will independently process the loan request and act 
as the lender's agent in servicing the account.
    (o) The Loan Agreement includes all measures identified in the 
Agency's environmental impact analysis for this proposal (measures with 
which the borrower must comply) for the purpose of avoiding or reducing 
adverse environmental impacts of the proposal's construction or 
operation.


Sec. 4279.182-4279.185  [Reserved]


Sec. 4279.186  Issuance of the guarantee.

    (a) When loan closing plans are established, the lender will notify 
the Agency. Coincident with, or immediately after loan closing, the 
lender will provide the following to the Agency:
    (1) Lender's certifications as required by Sec. 4279.181.
    (2) Executed Lender's Agreement.
    (3) Form FmHA 1980-19, ``Guaranteed Loan Closing Report,'' and 
appropriate guarantee fee.
    (b) When the Agency is satisfied that all conditions for the 
guarantee have been met, the Loan Note Guarantee and the following 
documents, as appropriate, will be issued:
    (1) Assignment Guarantee Agreement. In the event the lender uses 
the single note option and assigns the guaranteed portion of the loan 
to a holder, the lender, holder, and the Agency will execute the 
Assignment Guarantee Agreement; and
    (2) Certificate of Incumbency. If requested by the lender, the 
Agency will provide the lender with a certification on Form 4279-7, 
``Certificate of Incumbency and Signature (Business and Industry),'' of 
the signature and title of the Agency official who signs the Loan Note 
Guarantee, Lender's Agreement, and Assignment Guarantee Agreement.
    (c) The Agency may, at its discretion, request copies of loan 
documents for its file.
    (d) There may be instances when not all of the working capital has 
been disbursed, and it appears practical to disburse the balance over a 
period of time. The State Director, after review of a disbursement 
plan, may amend the Conditional Commitment in accordance with the 
disbursement plan and issue the guarantee.


Sec. 4279.187  Refusal to execute Loan Note Guarantee.

    If the Agency determines that it cannot execute the Loan Note 
Guarantee, the Agency will promptly inform the lender of the reasons 
and give the lender a reasonable period within which to satisfy the 
objections. If the lender requests additional time in writing and 
within the period allowed, the Agency may grant the request. If the 
lender satisfies the objections within the time allowed, the guarantee 
will be issued.


Secs. 4279.188-4279.199  [Reserved]


Sec. 4279.200  OMB control number.

    The information collection requirements contained in this

[[Page 67648]]

regulation have been approved by OMB and have been assigned OMB control 
number 0575-0170. Public reporting burden for this collection of 
information is estimated to vary from 30 minutes to 54 hours per 
response, with an average of 27 hours per response, including time for 
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 the Department of 
Agriculture, Clearance Officer, OIRM, Stop 7630, Washington, DC 20250. 
You are not required to respond to this collection of information 
unless it displays a currently valid OMB control number.
    16. A new part 4287, consisting of Secs. 4287.101 through 4287.200, 
is added to chapter XLII to read as follows:

PART 4287--SERVICING

Subpart A--[Reserved]

Subpart B--Servicing Business and Industry Guaranteed Loans

Sec.
4287.101  Introduction.
4287.102  Definitions.
4287.103  Exception Authority.
4287.104-4287.105  [Reserved]
4287.106  Appeals.
4287.107  Routine servicing.
4287.108-4287.111  [Reserved]
4287.112  Interest rate adjustments.
4287.113  Release of collateral.
4287.114-4287.122  [Reserved]
4287.123  Subordination of lien position.
4287.124  Alterations of loan instruments.
4287.125-4287.133  [Reserved]
4287.134  Transfer and assumption.
4287.135  Substitution of lender.
4287.136-4287.144  [Reserved]
4287.145  Default by borrower.
4287.146-4287.155  [Reserved]
4287.156  Protective advances.
4287.157  Liquidation.
4287.158  Determination of loss and payment.
4287.159-4287.168  [Reserved]
4287.169  Future recovery.
4287.170  Bankruptcy.
4287.171-4287.179  [Reserved]
4287.180  Termination of guarantee.
4287.181-4287.199  [Reserved]
4287.200  OMB control number.

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989

Subpart A--[Reserved]

Subpart B--Servicing Business and Industry Guaranteed Loans


Sec. 4287.101  Introduction.

    (a) This subpart supplements part 4279, subparts A and B, by 
providing additional requirements and instructions for servicing and 
liquidating all Business and Industry (B&I) Guaranteed Loans. This 
includes Drought and Disaster (D&D), Disaster Assistance for Rural 
Business Enterprises (DARBE), and Business and Industry Disaster (BID) 
loans.
    (b) The lender will be responsible for servicing the entire loan 
and will remain mortgagee and secured party of record notwithstanding 
the fact that another party may hold a portion of the loan. The entire 
loan will be secured by the same security with equal lien priority for 
the guaranteed and unguaranteed portions of the loan. The unguaranteed 
portion of a loan will neither be paid first nor given any preference 
or priority over the guaranteed portion of the loan.
    (c) Copies of all forms, regulations, and Instructions referenced 
in this subpart are available in any Agency office. Whenever a form is 
designated in this subpart, that designation includes predecessor and 
successor forms, if applicable, as specified by the field or National 
Office.


Sec. 4287.102  Definitions.

    The definitions and abbreviations contained in Sec. 4279.2 of 
subpart A of part 4279 of this chapter apply to this subpart.


Sec. 4287.103 Exception authority.

    Section 4279.15 of subpart A of part 4279 of this chapter applies 
to this subpart.


Secs. 4287.104-4287.105  [Reserved]


Sec. 4287.106  Appeals.

    Section 4279.16 of subpart A of part 4279 of this chapter applies 
to this subpart.


Sec. 4287.107  Routine servicing.

    The lender is responsible for servicing the entire loan and for 
taking all servicing actions that a prudent lender would perform in 
servicing its own portfolio of loans that are not guaranteed. The Loan 
Note Guarantee is unenforceable by the lender to the extent any loss is 
occasioned by violation of usury laws, use of loan funds for 
unauthorized purposes, negligent servicing, or failure to obtain the 
required security interest regardless of the time at which the Agency 
acquires knowledge of the foregoing. This responsibility includes but 
is not limited to the collection of payments, obtaining compliance with 
the covenants and provisions in the Loan Agreement, obtaining and 
analyzing financial statements, checking on payment of taxes and 
insurance premiums, and maintaining liens on collateral.
    (a) Lender reports. The lender must report the outstanding 
principal and interest balance on each guaranteed loan semiannually 
using Form FmHA 1980-41, ``Guaranteed Loan Status Report.''
    (b) Loan classification. Within 90 days of receipt of the Loan Note 
Guarantee, the lender must notify the Agency of the loan's 
classification or rating under its regulatory standards. Should the 
classification be changed at a future time, the Agency must be notified 
immediately.
    (c) Agency and lender conference. At the Agency's request, the 
lender will meet with the Agency to ascertain how the guaranteed loan 
is being serviced and that the conditions and covenants of the Loan 
Agreement are being enforced.
    (d) Financial reports. The lender must obtain and forward to the 
Agency the financial statements required by the Loan Agreement. The 
lender must submit annual financial statements to the Agency within 120 
days of the end of the borrower's fiscal year. The lender must analyze 
the financial statements and provide the Agency with a written summary 
of the lender's analysis and conclusions, including trends, strengths, 
weaknesses, extraordinary transactions, and other indications of the 
financial condition of the borrower. Spreadsheets of the new financial 
statements must be included.
    (e) Additional expenditures. The lender will not make additional 
loans to the borrower without first obtaining the prior written 
approval of the Agency, even though such loans will not be guaranteed.


Secs. 4287.108-4287.111  [Reserved]


Sec. 4287.112  Interest rate adjustments.

    (a) Reductions. The borrower, lender, and holder (if any) may 
collectively initiate a permanent or temporary reduction in the 
interest rate of the guaranteed loan at any time during the life of the 
loan upon written agreement among these parties. The Agency must be 
notified by the lender, in writing, within 10 calendar days of the 
change. If any of the guaranteed portion has been purchased by the 
Agency, then the Agency will affirm or reject interest rate change 
proposals in writing. The Agency will concur in such interest-rate 
changes only when it is demonstrated to the Agency that the change is a 
more viable alternative than initiating or proceeding with liquidation 
of the loan or continuing with the loan in its present state.
    (1) Fixed rates can be changed to variable rates to reduce the 
borrower's interest rate only when the variable rate has a ceiling 
which is less than or equal to the original fixed rate.

[[Page 67649]]

    (2) Variable rates can be changed to a fixed rate which is at or 
below the current variable rate.
    (3) The interest rates, after adjustments, must comply with the 
requirements for interest rates on new loans as established by 
Sec. 4279.125 of subpart B of part 4279 of this chapter.
    (4) The lender is responsible for the legal documentation of 
interest-rate changes by an endorsement or any other legally effective 
amendment to the promissory note; however, no new notes may be issued. 
Copies of all legal documents must be provided to the Agency.
    (b) Increases. No increases in interest rates will be permitted 
except the normal fluctuations in approved variable interest rates 
unless a temporary interest-rate reduction had occurred.


Sec. 4287.113  Release of collateral.

    (a) All releases of collateral with a value exceeding $100,000 must 
be supported by a current appraisal on the collateral released. The 
appraisal will be at the expense of the borrower and must meet the 
requirements of Sec. 4279.144 of subpart B of part 4279 of this 
chapter. The remaining collateral must be sufficient to provide for 
repayment of the Agency's guaranteed loan. The Agency may, at its 
discretion, require an appraisal of the remaining collateral in cases 
where it is determined that the Agency may be adversely affected by the 
release of collateral. Sale or release of collateral must be based on 
an arm's-length transaction.
    (b) Within the parameters of paragraph (a) of this section, lenders 
may, over the life of the loan, release collateral (other than personal 
and corporate guarantees) with a cumulative value of up to 20 percent 
of the original loan amount without Agency concurrence if the proceeds 
generated are used to reduce the guaranteed loan or to buy replacement 
collateral.
    (c) Within the parameters of paragraph (a) of this section, release 
of collateral with a cumulative value in excess of 20 percent of the 
original loan or when the proceeds will not be used to reduce the 
guaranteed loan or to buy replacement collateral must be requested in 
writing by the lender and concurred in by the Agency in writing in 
advance of the release. A written evaluation will be completed by the 
lender to justify the release.


Secs. 4287.114-4287.122  [Reserved]


Sec. 4287.123  Subordination of lien position.

    A subordination of the lender's lien position must be requested in 
writing by the lender and concurred in by the Agency in writing in 
advance of the subordination. The subordination must enhance the 
borrower's business and the Agency's interest. After the subordination, 
collateral must be adequate to secure the loan. The lien to which the 
guaranteed loan is subordinated must be for a fixed dollar limit and 
fixed or limited term, after which the guaranteed loan lien priority 
will be restored. Subordination to a revolving line of credit will not 
exceed 1 year. There must be adequate consideration for the 
subordination.


Sec. 4287.124  Alterations of loan instruments.

    The lender shall neither alter nor approve any alterations of any 
loan instrument without the prior written approval of the Agency.


Secs. 4287.125-4287.133  [Reserved]


Sec. 4287.134  Transfer and assumption.

    (a) Documentation of request. All transfers and assumptions must be 
approved in writing by the Agency and must be to eligible applicants in 
accordance with subpart B of part 4279 of this chapter. An individual 
credit report must be provided for transferee proprietors, partners, 
officers, directors, and stockholders with 20 percent or more interest 
in the business, along with such other documentation as the Agency may 
request to determine eligibility.
    (b) Terms. Loan terms must not be changed unless the change is 
approved in writing by the Agency with the concurrence of any holder 
and the transferor (including guarantors) if they have not been or will 
not be released from liability. Any new loan terms must be within the 
terms authorized by 4279.126 of subpart B of part 4279 of this chapter. 
The lender's request for approval of new loan terms will be supported 
by an explanation of the reasons for the proposed change in loan terms.
    (c) Release of liability. The transferor, including any guarantor, 
may be released from liability only with prior Agency written 
concurrence and only when the value of the collateral being transferred 
is at least equal to the amount of the loan being assumed and is 
supported by a current appraisal and a current financial statement. The 
Agency will not pay for the appraisal. If the transfer is for less than 
the debt, the lender must demonstrate to the Agency that the transferor 
and guarantors have no reasonable debt-paying ability considering their 
assets and income in the foreseeable future.
    (d) Proceeds. Any proceeds received from the sale of collateral 
before a transfer and assumption will be credited to the transferor's 
guaranteed loan debt in inverse order of maturity before the transfer 
and assumption are closed.
    (e) Additional loans. Loans to provide additional funds in 
connection with a transfer and assumption must be considered as a new 
loan application under subpart B of part 4279 of this chapter.
    (f) Credit quality. The lender must make a complete credit analysis 
which is subject to Agency review and approval.
    (g) Documents. Prior to Agency approval, the lender must advise the 
Agency, in writing, that the transaction can be properly and legally 
transferred, and the conveyance instruments will be filed, registered, 
or recorded as appropriate.
    (1) The assumption will be done on the lender's form of assumption 
agreement and will contain the Agency case number of the transferor and 
transferee. The lender will provide the Agency with a copy of the 
transfer and assumption agreement. The lender must ensure that all 
transfers and assumptions are noted on all original Loan Note 
Guarantees.
    (2) A new Loan Agreement, consistent in principle with the original 
Loan Agreement, should be executed to establish the terms and 
conditions of the loan being assumed. An assumption agreement can be 
used to establish the loan covenants.
    (3) The lender will provide to the Agency a written certification 
that the transfer and assumption is valid, enforceable, and complies 
with all Agency regulations.
    (h) Loss resulting from transfer. If a loss should occur upon 
consummation of a complete transfer and assumption for less than the 
full amount of the debt and the transferor (including personal 
guarantors) is released from liability, the lender, if it holds the 
guaranteed portion, may file an estimated report of loss to recover its 
pro rata share of the actual loss. If a holder owns any of the 
guaranteed portion, such portion must be repurchased by the lender or 
the Agency in accordance with 4279.78(c) of subpart A of part 4279 of 
this chapter. In completing the report of loss, the amount of the debt 
assumed will be entered as net collateral (recovery). Approved 
protective advances and accrued interest thereon made during the 
arrangement of a transfer and assumption will be included in the 
calculations.
    (i) Related party. If the transferor and transferee are affiliated 
or related parties, any transfer and assumption must be for the full 
amount of the debt.

[[Page 67650]]

    (j) Payment requests. Requests for a loan guarantee to provide 
equity for a transfer and assumption must be considered as a new loan 
under subpart B of part 4279 of this chapter.
    (k) Cash downpayment. When the transferee will be making a cash 
downpayment as part of the transfer and assumption:
    (1) The lender must have an appropriate appraiser, acceptable to 
both the transferee and transferor and currently authorized to perform 
appraisals, determine the value of the collateral securing the loan. 
The appraisal fee and any other costs will not be paid by the Agency.
    (2) The market value of the collateral, plus any additional 
property the transferee proposes to offer as collateral, must be 
adequate to secure the balance of the guaranteed loans.
    (3) Cash downpayments may be paid directly to the transferor 
provided:
    (i) The lender recommends that the cash be released, and the Agency 
concurs prior to the transaction being completed. The lender may wish 
to require that an amount be retained for a defined period of time as a 
reserve against future defaults. Interest on such account may be paid 
periodically to the transferor or transferee as agreed;
    (ii) The lender determines that the transferee has the repayment 
ability to meet the obligations of the assumed guaranteed loan as well 
as any other indebtedness;
    (iii) Any payments by the transferee to the transferor will not 
suspend the transferee's obligations to continue to meet the guaranteed 
loan payments as they come due under the terms of the assumption; and
    (iv) The transferor agrees not to take any action against the 
transferee in connection with the assumption without prior written 
approval of the lender and the Agency.


Sec. 4287.135  Substitution of lender.

    After the issuance of a Loan Note Guarantee, the lender shall not 
sell or transfer the entire loan without the prior written approval of 
the Agency. The Agency will not pay any loss or share in any costs 
(i.e., appraisal fees, environmental studies, or other costs associated 
with servicing or liquidating the loan) with a new lender unless a 
relationship is established through a substitution of lender in 
accordance with paragraph (a) of this section. This includes cases 
where the lender has failed and been taken over by a regulatory agency 
such as the Federal Deposit Insurance Corporation (FDIC) and the loan 
is subsequently sold to another lender.
    (a) The Agency may approve the substitution of a new lender if:
    (1) the proposed substitute lender:
    (i) is an eligible lender in accordance with 4279.29 of subpart A 
of part 4279 of this chapter;
    (ii) is able to service the loan in accordance with the original 
loan documents; and
    (iii) agrees in writing to acquire title to the unguaranteed 
portion of the loan held by the original lender and assumes all 
original loan requirements, including liabilities and servicing 
responsibilities.
    (2) the substitution of the lender is requested in writing by the 
borrower, the proposed substitute lender, and the original lender if 
still in existence.
    (b) Where the lender has failed and been taken over by FDIC and the 
guaranteed loan is liquidated by FDIC rather than being sold to another 
lender, the Agency will pay losses and share in costs as if FDIC were 
an approved substitute lender.


Secs. 4287.136-4287.144  [Reserved]


Sec. 4287.145  Default by borrower.

    (a) The lender must notify the Agency when a borrower is 30 days 
past due on a payment or is otherwise in default of the Loan Agreement. 
Form FmHA 1980-44, ``Guaranteed Loan Borrower Default Status,'' will be 
used and the lender will continue to submit this form bimonthly until 
such time as the loan is no longer in default. If a monetary default 
exceeds 60 days, the lender will arrange a meeting with the Agency and 
the borrower to resolve the problem.
    (b) In considering options, the prospects for providing a permanent 
cure without adversely affecting the risk to the Agency and the lender 
is the paramount objective.
    (1) Curative actions include but are not limited to:
    (i) deferment of principal (subject to rights of any holder);
    (ii) an additional unguaranteed loan by the lender to bring the 
account current;
    (iii) reamortization of or rescheduling the payments on the loan 
(subject to rights of any holder);
    (iv) transfer and assumption of the loan in accordance with 
Sec. 4287.134 of this subpart;
    (v) reorganization;
    (vi) liquidation;
    (vii) subsequent loan guarantees; and
    (viii) changes in interest rates with the Agency's, the lender's, 
and holder's approval, provided that the interest rate is adjusted 
proportionately between the guaranteed and unguaranteed portion of the 
loan and the type of rate remains the same.
    (2) In the event a deferment, rescheduling, reamortization, or 
moratorium is accomplished, it will be limited to the remaining life of 
the collateral or remaining limits as contained in Sec. 4279.126 of 
subpart B of part 4279 of this chapter, whichever is less.


Secs. 4287.146-4287.155  [Reserved]


Sec. 4287.156  Protective advances.

    Protective advances are advances made by the lender for the purpose 
of preserving and protecting the collateral where the debtor has failed 
to, will not, or cannot meet its obligations. Sound judgment must be 
exercised in determining that the protective advance preserves 
collateral and recovery is actually enhanced by making the advance. 
Protective advances will not be made in lieu of additional loans.
    (a) The maximum loss to be paid by the Agency will never exceed the 
original principal plus accrued interest regardless of any protective 
advances made.
    (b) Protective advances and interest thereon at the note rate will 
be guaranteed at the same percentage of loss as provided in the Loan 
Note Guarantee.
    (c) Protective advances must constitute an indebtedness of the 
borrower to the lender and be secured by the security instruments. 
Agency written authorization is required when cumulative protective 
advances exceed $5,000.


Sec. 4287.157  Liquidation.

    In the event of one or more incidents of default or third party 
actions that the borrower cannot or will not cure or eliminate within a 
reasonable period of time, liquidation may be considered. If the lender 
concludes that liquidation is necessary, it must request the Agency's 
concurrence. The lender will liquidate the loan unless the Agency, at 
its option, carries out liquidation. When the decision to liquidate is 
made, if the loan has not already been repurchased, provisions will be 
made for repurchase in accordance with Sec. 4279.78 of subpart A of 
part 4279 of this chapter.
    (a) Decision to liquidate. A decision to liquidate shall be made 
when it is determined that the default cannot be cured through actions 
contained in Sec. 4287.145 of this subpart or it has been determined 
that it is in the best interest of the Agency and the lender to 
liquidate. The decision to liquidate or continue with the borrower must 
be made as soon as possible when any of the following exist:
    (1) A loan has been delinquent 90 days and the lender and borrower 
have

[[Page 67651]]

not been able to cure the delinquency through one of the actions 
contained in Sec. 4287.145 of this subpart.
    (2) It has been determined that delaying liquidation will 
jeopardize full recovery on the loan.
    (3) The borrower or lender has been uncooperative in resolving the 
problem and the Agency or the lender has reason to believe the borrower 
is not acting in good faith, and it would enhance the position of the 
guarantee to liquidate immediately.
    (b) Liquidation by the Agency. The Agency may require the lender to 
assign the security instruments to the Agency if the Agency, at its 
option, decides to liquidate the loan. When the Agency liquidates, 
reasonable liquidation expenses will be assessed against the proceeds 
derived from the sale of the collateral. Form FmHA 1980-45, ``Notice of 
Liquidation Responsibility,'' will be forwarded to the Finance Office 
when the Agency liquidates the loan.
    (c) Submission of liquidation plan. The lender will, within 30 days 
after a decision to liquidate, submit to the Agency in writing its 
proposed detailed method of liquidation. Upon approval by the Agency of 
the liquidation plan, the lender will commence liquidation.
    (d) Lender's liquidation plan. The liquidation plan must include, 
but is not limited to, the following:
    (1) Such proof as the Agency requires to establish the lender's 
ownership of the guaranteed loan promissory note and related security 
instruments and a copy of the payment ledger if available which 
reflects the current loan balance and accrued interest to date and the 
method of computing the interest.
    (2) A full and complete list of all collateral including any 
personal and corporate guarantees.
    (3) The recommended liquidation methods for making the maximum 
collection possible on the indebtedness and the justification for such 
methods, including recommended action:
    (i) for acquiring and disposing of all collateral; and
    (ii) to collect from guarantors.
    (4) Necessary steps for preservation of the collateral.
    (5) Copies of the borrower's latest available financial statements.
    (6) Copies of the guarantor's latest available financial 
statements.
    (7) An itemized list of estimated liquidation expenses expected to 
be incurred along with justification for each expense.
    (8) A schedule to periodically report to the Agency on the progress 
of liquidation.
    (9) Estimated protective advance amounts with justification.
    (10) Proposed protective bid amounts on collateral to be sold at 
auction and a breakdown to show how the amounts were determined.
    (11) If a voluntary conveyance is considered, the proposed amount 
to be credited to the guaranteed debt.
    (12) Legal opinions, if needed.
    (13) If the outstanding balance of principal and accrued interest 
is less than $200,000, the lender will obtain an estimate of fair 
market and potential liquidation value of the collateral. If the 
outstanding balance of principal and accrued interest is $200,000 or 
more, the lender will obtain an independent appraisal report meeting 
the requirements of Sec. 4279.144 of subpartB of part 4279 of this 
chapter on all collateral securing the loan which will reflect the fair 
market value and potential liquidation value. In order to formulate a 
liquidation plan which maximizes recovery, collateral must be evaluated 
for the release of hazardous substances, petroleum products, or other 
environmental hazards which may adversely impact the market value of 
the collateral. The appraisal shall consider this aspect. The 
independent appraiser's fee, including the cost of the environmental 
site assessment, will be shared equally by the Agency and the lender.
    (e) Approval of liquidation plan. The Agency will inform the lender 
in writing whether it concurs in the lender's liquidation plan. Should 
the Agency and the lender not agree on the liquidation plan, 
negotiations will take place between the Agency and the lender to 
resolve the disagreement. When the liquidation plan is approved by the 
Agency, the lender will proceed expeditiously with liquidation.
    (1) A transfer and assumption of the borrower's operation can be 
accomplished before or after the loan goes into liquidation. However, 
if the collateral has been purchased through foreclosure or the 
borrower has conveyed title to the lender, no transfer and assumption 
is permitted.
    (2) A protective bid may be made by the lender, with prior Agency 
written approval, at a foreclosure sale to protect the lender's and the 
Agency's interest. The protective bid will not exceed the amount of the 
loan, including expenses of foreclosure, and should be based on the 
liquidation value considering estimated expenses for holding and 
reselling the property. These expenses include, but are not limited to, 
expenses for resale, interest accrual, length of time necessary for 
resale, maintenance, guard service, weatherization, and prior liens.
    (f) Acceleration. The lender, or the Agency if it liquidates, will 
proceed to accelerate the indebtedness as expeditiously as possible 
when acceleration is necessary including giving any notices and taking 
any other legal actions required. A copy of the acceleration notice or 
other acceleration document will be sent to the Agency (or lender if 
the Agency liquidates). The guaranteed loan will be considered in 
liquidation once the loan has been accelerated and a demand for payment 
has been made upon the borrower.
    (g) Filing an estimated loss claim. When the lender is conducting 
the liquidation and owns any or all of the guaranteed portion of the 
loan, the lender will file an estimated loss claim once a decision has 
been made to liquidate if the liquidation will exceed 90 days. The 
estimated loss payment will be based on the liquidation value of the 
collateral. For the purpose of reporting and loss claim computation, 
the lender will discontinue interest accrual on the defaulted loan in 
accordance with Agency procedures, and the loss claim will be promptly 
processed in accordance with applicable Agency regulations.
    (h) Accounting and reports. When the lender conducts liquidation, 
it will account for funds during the period of liquidation and will 
provide the Agency with reports at least quarterly on the progress of 
liquidation including disposition of collateral, resulting costs, and 
additional procedures necessary for successful completion of the 
liquidation.
    (i) Transmitting payments and proceeds to the Agency. When the 
Agency is the holder of a portion of the guaranteed loan, the lender 
will transmit to the Agency its pro rata share of any payments received 
from the borrower; liquidation; or other proceeds using Form FmHA 1980-
43, ``Lender's Guaranteed Loan Payment to FmHA.''
    (j) Abandonment of collateral. There may be instances when the cost 
of liquidation would exceed the potential recovery value of the 
collection. The lender, with proper documentation and concurrence of 
the Agency, may abandon the collateral in lieu of liquidation. A 
proposed abandonment will be considered a servicing action requiring 
the appropriate environmental review by the Agency in accordance with 
subpart G of part 1940 of this title. Examples where abandonment may be 
considered include, but are not limited to:
    (1) The cost of liquidation is increased or the value of the 
collateral is decreased by environmental issues;

[[Page 67652]]

    (2) The collateral is functionally or economically obsolete;
    (3) There are superior liens held by other parties in excess of the 
value of the collateral;
    (4) The collateral has deteriorated; or
    (5) The collateral is specialized and there is little or no demand 
for it.
    (k) Disposition of personal or corporate guarantees. The lender 
should take action to maximize recovery from all collateral, including 
personal and corporate guarantees. The lender will seek a deficiency 
judgment when there is a reasonable chance of future collection of the 
judgment. The lender must make a decision whether or not to seek a 
deficiency judgment when:
    (1) a borrower voluntarily liquidates the collateral, but the sale 
fails to pay the guaranteed indebtedness;
    (2) the collateral is voluntarily conveyed to the lender, but the 
borrower and personal and corporate guarantors are not released from 
liability; or
    (3) a liquidation plan is being developed for forced liquidation.
    (1) Compromise settlement. A compromise settlement may be 
considered at any time.
    (1) The lender and the Agency must receive complete financial 
information on all parties obligated for the loan and must be satisfied 
that the statements reflect the true and correct financial position of 
the debtor including all assets. Adequate consideration must be 
received before a release from liability is issued. Adequate 
consideration includes money, additional security, or other benefit to 
the goals and objectives of the Agency.
    (2) Before a personal guarantor can be released from liability, the 
following factors must be considered.
    (i) Cash, either lump sum or over a period of time, or other 
consideration offered by the guarantor;
    (ii) Age and health of the guarantor;
    (iii) Potential income of the guarantor;
    (iv) Inheritance prospects of the guarantor;
    (v) Availability of the guarantor's assets.
    (vi) Possibility that the guarantor's assets have been concealed or 
improperly transferred; and
    (vii) Effect of other guarantors on the loan.
    (3) Once the Agency and the lender agree on a reasonable amount 
that is fair and adequate, the lender can proceed to effect the 
settlement compromise.
    (4) A compromise will only be accepted if it is in the best 
interest of the Agency.


Sec. 4287.158  Determination of loss and payment.

    In all liquidation cases, final settlement will be made with the 
lender after the collateral is liquidated, unless otherwise designated 
as a future recovery or after settlement and compromise of all parties 
has been completed. The Agency will have the right to recover losses 
paid under the guarantee from any party which may be liable.
    (a) Report of loss form. Form FmHA 449-30, ``Loan Note Guarantee 
Report of Loss,'' will be used for calculations of all estimated and 
final loss determinations. Estimated loss payments may only be approved 
by the Agency after the Agency has approved a liquidation plan.
    (b) Estimated loss. In accordance with the requirements of 
Sec. 4287.157(g) of this subpart, an estimated loss claim based on 
liquidation appraisal value will be prepared and submitted by the 
lender.
    (1) The estimated loss payment shall be applied as of the date of 
such payment. The total amount of the loss payment remitted by the 
Agency will be applied by the lender on the guaranteed portion of the 
loan debt. Such application does not release the borrower from 
liability.
    (2) An estimated loss will be applied first to reduce the principal 
balance on the guaranteed loan and the balance, if any, to accrued 
interest. Interest accrual on the defaulted loan will be discontinued.
    (3) A protective advance claim will be paid only at the time of the 
final report of loss payment, except in certain transfer and assumption 
situations as specified in Sec. 4287.134 of this subpart.
    (c) Final loss. Within 30 days after liquidation of all collateral, 
except for certain unsecured personal or corporate guarantees as 
provided for in this section, is completed, a final report of loss must 
be prepared and submitted by the lender to the Agency. The Agency will 
not guarantee interest beyond this 30-day period other than for the 
period of time it takes the Agency to process the loss claim. Before 
approval by the Agency of any final loss report, the lender must 
account for all funds during the period of liquidation, disposition of 
the collateral, all costs incurred, and any other information necessary 
for the successful completion of liquidation. Upon receipt of the final 
accounting and report of loss, the Agency may audit all applicable 
documentation to determine the final loss. The lender will make its 
records available and otherwise assist the Agency in making any 
investigation. The documentation accompanying the report of loss must 
support the amounts shown on Form FmHA 449-30.
    (1) A determination must be made regarding the collectibility of 
unsecured personal and corporate guarantees. If reasonably possible, 
such guarantees should be promptly collected or otherwise disposed of 
in accordance with Sec. 4287.157(k) of this subpart prior to completion 
of the final loss report. However, in the event that collection from 
the guarantors appears unlikely or will require a prolonged period of 
time, the report of loss will be filed when all other collateral has 
been liquidated, and unsecured personal or corporate guarantees will be 
treated as a future recovery with the net proceeds to be shared on a 
pro rata basis by the lender and the Agency.
    (2) The lender must document that all of the collateral has been 
accounted for and properly liquidated and that liquidation proceeds 
have been properly accounted for and applied correctly to the loan.
    (3) The lender will show a breakdown of any protective advance 
amount as to the payee, purpose of the expenditure, date paid, and 
evidence that the amount expended was proper and that payment was 
actually made.
    (4) The lender will show a breakdown of liquidation expenses as to 
the payee, purpose of the expenditure, date paid, and evidence that the 
amount expended was proper and that payment was actually made. 
Liquidation expenses are recoverable only from collateral proceeds. 
Attorney fees may be approved as liquidation expenses provided the fees 
are reasonable and cover legal issues pertaining to the liquidation 
that could not be properly handled by the lender and its in-house 
counsel.
    (5) Accrued interest will be supported by documentation as to how 
the amount was accrued. If the interest rate was a variable rate, the 
lender will include documentation of changes in both the selected base 
rate and the loan rate.
    (6) Loss payments will be paid by the Agency within 60 days after 
the review of the final loss report and accounting of the collateral.
    (d) Loss limit. The amount payable by the Agency to the lender 
cannot exceed the limits set forth in the Loan Note Guarantee.
    (e) Rent. Any net rental or other income that has been received by 
the lender from the collateral will be applied on the guaranteed loan 
debt.
    (f) Liquidation costs. Liquidation costs will be deducted from the 
proceeds of the disposition of primary collateral. If changed 
circumstances after submission of the liquidation plan require a

[[Page 67653]]

substantial revision of liquidation costs, the lender will procure the 
Agency's written concurrence prior to proceeding with the proposed 
changes. No in-house expenses of the lender will be allowed. In-house 
expenses include, but are not limited to, employee's salaries, staff 
lawyers, travel, and overhead.
    (g) Payment. When the Agency finds the final report of loss to be 
proper in all respects, it will approve Form FmHA 449-30 and proceed as 
follows:
    (1) If the loss is greater than any estimated loss payment, the 
Agency will pay the additional amount owed by the Agency to the lender.
    (2) If the loss is less than the estimated loss payment, the lender 
will reimburse the Agency for the overpayment plus interest at the note 
rate from the date of payment.
    (3) If the Agency has conducted the liquidation, it will pay the 
lender in accordance with the Loan Note Guarantee.


Secs. 4287.159-4287.168  [Reserved]


Sec. 4287.169  Future recovery.

    After a loan has been liquidated and a final loss has been paid by 
the Agency, any future funds which may be recovered by the lender will 
be pro rated between the Agency and the lender based on the original 
percentage of guarantee.


Sec. 4287.170  Bankruptcy.

    The lender is responsible for protecting the guaranteed loan and 
all collateral securing the loan in bankruptcy proceedings.
    (a) Lender's responsibilities. It is the lender's responsibility to 
protect the guaranteed loan debt and all of the collateral securing it 
in bankruptcy proceedings. These responsibilities include but are not 
limited to the following:
    (1) The lender will file a proof of claim where necessary and all 
the necessary papers and pleadings concerning the case.
    (2) The lender will attend and, where necessary, participate in 
meetings of the creditors and all court proceedings.
    (3) When permitted by the Bankruptcy Code, the lender will request 
modification of any plan of reorganization whenever it appears that 
additional recoveries are likely.
    (4) The Agency will be kept adequately and regularly informed in 
writing of all aspects of the proceedings.
    (5) In a Chapter 11 reorganization, if an independent appraisal of 
collateral is necessary in the Agency's opinion, the Agency and the 
lender will share such appraisal fee equally.
    (b) Reports of loss during bankruptcy. When the loan is involved in 
reorganization proceedings, payment of loss claims may be made as 
provided in this section. For a liquidation proceeding, only paragraphs 
(b)(3) and (5) of this section are applicable.
    (1) Estimated loss payments. (i) If a borrower has filed for 
protection under Chapter 11 of the United States Code for a 
reorganization (but not Chapter 13) and all or a portion of the debt 
has been discharged, the lender will request an estimated loss payment 
of the guaranteed portion of the accrued interest and principal 
discharged by the court. Only one estimated loss payment is allowed 
during the reorganization. All subsequent claims of the lender during 
reorganization will be considered revisions to the initial estimated 
loss. A revised estimated loss payment may be processed by the Agency, 
at its option, in accordance with any court-approved changes in the 
reorganization plan. Once the reorganization plan has been completed, 
the lender is responsible for submitting the documentation necessary 
for the Agency to review and adjust the estimated loss claim to reflect 
any actual discharge of principal and interest and to reimburse the 
lender for any court-ordered interest-rate reduction under the terms of 
the reorganization plan.
    (ii) The lender will use Form FmHA 449-30 to request an estimated 
loss payment and to revise any estimated loss payments during the 
course of the reorganization plan. The estimated loss claim, as well as 
any revisions to this claim, will be accompanied by documentation to 
support the claim.
    (iii) Upon completion of a reorganization plan, the lender will 
complete a Form FmHA 1980-44 and forward this form to the Finance 
Office.
    (2) Interest loss payments. (i) Interest losses sustained during 
the period of the reorganization plan will be processed in accordance 
with paragraph (b)(1) of this section.
    (ii) Interest losses sustained after the reorganization plan is 
completed will be processed annually when the lender sustains a loss as 
a result of a permanent interest rate reduction which extends beyond 
the period of the reorganization plan.
    (iii) If an estimated loss claim is paid during the operation of 
the Chapter 11 reorganization plan and the borrower repays in full the 
remaining balance without an additional loss sustained by the lender, a 
final report of loss is not necessary.
    (3) Final loss payments. Final loss payments will be processed when 
the loan is liquidated.
    (4) Payment application. The lender must apply estimated loss 
payments first to the unsecured principal of the guaranteed portion of 
the debt and then to the unsecured interest of the guaranteed portion 
of the debt. In the event a bankruptcy court attempts to direct the 
payments to be applied in a different manner, the lender will 
immediately notify the Agency servicing office.
    (5) Overpayments. Upon completion of the reorganization plan, the 
lender will provide the Agency with the documentation necessary to 
determine whether the estimated loss paid equals the actual loss 
sustained. If the actual loss sustained as a result of the 
reorganization is less than the estimated loss, the lender will 
reimburse the Agency for the overpayment plus interest at the note rate 
from the date of payment of the estimated loss. If the actual loss is 
greater than the estimated loss payment, the lender will submit a 
revised estimated loss in order to obtain payment of the additional 
amount owed by the Agency to the lender.
    (6) Protective advances. If approved protective advances were made 
prior to the borrower having filed bankruptcy, these protective 
advances and accrued interest will be considered in the loss 
calculations.
    (c) Legal expenses during bankruptcy proceedings. (1) When a 
bankruptcy proceeding results in a liquidation of the borrower by a 
trustee, legal expenses will be handled as directed by the court.
    (2) Chapter 11 pertains to a reorganization of a business 
contemplating an ongoing business rather than a termination and 
dissolution of the business where legal protection is afforded to the 
business as defined under Chapter 11 of the Bankruptcy Code. 
Consequently, expenses incurred by the lender in a Chapter 11 
reorganization can never be liquidation expenses unless the proceeding 
becomes a Chapter 11 liquidation. If the proceeding should become a 
Liquidating 11, reasonable and customary liquidation expenses may be 
deducted from proceeds of collateral as provided in the Lender's 
Agreement. Chapter 7 pertains to a liquidation of the borrower's 
assets. If, and when, liquidation of the borrower's assets under 
Chapter 7 is conducted by the bankruptcy trustee, then the lender 
cannot claim expenses.


Secs. 4287.171-4287.179  [Reserved]


Sec. 4287.180  Termination of guarantee.

    A guarantee under this part will terminate automatically:

[[Page 67654]]

    (a) upon full payment of the guaranteed loan;
    (b) upon full payment of any loss obligation; or
    (c) upon written notice from the lender to the Agency that the 
guarantee will terminate 30 days after the date of notice, provided 
that the lender holds all of the guaranteed portion and the Loan Note 
Guarantee is returned to the Agency to be canceled.


Secs. 4287.181-4287.199  [Reserved]


Sec. 4287.200  OMB control number.

    The information collection requirements contained in this 
regulation have been approved by OMB and have been assigned OMB control 
number 0575-0168. Public reporting burden for this collection of 
information is estimated to vary from 15 minutes to 8 hours per 
response, with an average of 4 hours per response, including time for 
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 the Department of 
Agriculture, Clearance Officer, OIRM, Stop 7630, Washington, DC 20250. 
You are not required to respond to this collection of information 
unless it displays a currently valid OMB control number.

    Dated: December 12, 1996.
Jill Long Thompson,
Under Secretary for Rural Development.
[FR Doc. 96-32170 Filed 12-20-96; 8:45 am]
BILLING CODE 3410-XY-U