[Federal Register Volume 64, Number 101 (Wednesday, May 26, 1999)]
[Rules and Regulations]
[Pages 28333-28351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13117]



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 Rules and Regulations
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  Federal Register / Vol. 64, No. 101 / Wednesday, May 26, 1999 / Rules 
and Regulations  

[[Page 28333]]


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DEPARTMENT OF AGRICULTURE

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

7 CFR Parts 1980 and 3575

RIN 0575-AC17


Community Programs Guaranteed Loans

AGENCY: Rural Housing Service, USDA.

ACTION: Final rule.

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SUMMARY: The Rural Housing Service (RHS) is amending the Community 
Programs (CP) Guaranteed Loans regulation, which is also utilized by 
the Rural Utilities Service (RUS), by removing the requirements for 
Community Facilities and implementing a new Community Programs 
Guaranteed Loans regulation. RUS will continue to use 7 CFR part 1980, 
subpart I for RUS guaranteed loans. This action is needed to streamline 
and update the Community Programs Guaranteed Loans program. The 
intended effect is to simplify and clarify the regulation; shift some 
responsibility for loan documentation and analysis from the Government 
to the lenders; make the program more responsive to the needs of 
lenders, local community public bodies, and nonprofit corporations; and 
provide for smoother processing of applications.

EFFECTIVE DATE: June 25, 1999.

FOR FURTHER INFORMATION CONTACT: Mel Padgett, Community Programs Senior 
Loan Specialist, Rural Housing Service, U.S. Department of Agriculture, 
STOP 3222, 1400 Independence Ave. SW., Washington, DC 20250-3222, 
telephone: (202) 720-1495.

SUPPLEMENTARY INFORMATION:

Classification

    This final rule has been determined to be not significant for the 
purposes of Executive Order 12866 and, therefore, has not been reviewed 
by OMB.

Programs Affected

    The Catalog of Federal Domestic Assistance Programs impacted by 
this action are 10.766, Community Facilities loans.

Intergovernmental Review

    These loans are subject to the provisions of Executive Order 12372 
which require intergovernmental consultation with State and local 
officials. RHS conducts intergovernmental consultations for each loan 
in the manner delineated in subpart V, part 3015 of title 7.

Civil Justice Reform

    The final rule has been reviewed under Executive Order 12988, 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) except as expressively provided in the regulation, no 
retroactive effect will be given to this rule; and (3) administrative 
proceedings of the National Appeals Division (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.'' The Agency has determined that 
this action does not constitute a major Federal action significantly 
affecting the quality of the human environment and, in accordance with 
the National Environmental Policy Act of 1969, 42 U.S.C. 4321 et seq., 
an Environmental Impact Statement is not required.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), 2 
U.S.C. chapters 17A and 25, established 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, RHS 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 RHS to identify and 
consider a reasonable number of regulatory alternatives and adopt the 
least costly, most cost-effective, or least burdensome alternative that 
achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of title II of the UMRA) for State, local, and tribal 
governments or the private sector. Therefore, this rule is not subject 
to the requirements of sections 202 and 205 of the UMRA.

National Performance Review

    This regulatory action is being taken as part of the National 
Partnership for Reinventing Government to eliminate unnecessary 
regulations and improve those that remain in force.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (5 U.S.C. 601-612). The undersigned has 
determined and certified by signature of this document that this rule 
will not have a significant economic impact on a substantial number of 
small entities since this rulemaking action does not involve a new or 
expanded program.

Implementation

    It is the policy of this Department that rules relating to public 
property, loans, grants, benefits or contracts shall comply with 5 
U.S.C. 553 notwithstanding the exemption of that section with respect 
to such rules.

Paperwork Reduction Act

    The information collection and recordkeeping 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 were 
assigned OMB control number 0575-0137, in accordance with the Paperwork 
Reduction Act of 1995. Under the Paperwork Reduction Act of 1995, no 
person is required to respond to a collection of information unless it 
displays a valid OMB control number. This final rule does not impose 
any new information or recordkeeping

[[Page 28334]]

requirements from those approved by OMB.

Discussion of the Final Rule

    This action replaces the Community Facilities portion of the CP 
guaranteed loan program administered under 7 CFR part 1980, subpart I. 
Under the final rule, this guaranteed loan program will be more 
flexible and place more reliance on lenders. There are fewer specific 
requirements for lenders. The lender has added responsibility for 
analyzing credit quality; for making, securing, and servicing the loan; 
and for monitoring construction. Application processing procedures will 
be more efficient; less burdensome for borrowers, lenders, and Rural 
Development staff; and will provide for more rapid decisions.
    The CP loan program was authorized by the Rural Development Act of 
1972. The loans are made by private lenders to public bodies, nonprofit 
corporations, and certain Indian tribes for the purpose of improving 
rural living standards and for other purposes that create essential 
community facilities located in cities, towns, or unincorporated areas 
of up to 50,000 population required by the Federal Agriculture 
Improvement and Reform Act of 1996. The previous statutory population 
limit for loans for essential community facilities was 20,000. For 
fiscal year 1999, the population unit will be 20,000 pursuant to 
Sec. 735 of the Agriculture, Rural Development, Food and Drug 
Administration and Related Agencies Appropriation Act, 1999. Since 
1990, more than 355 community programs projects, totaling slightly more 
than $325 million, have received loans which were guaranteed through 
CP.
    These loans can be made for a variety of purposes including health 
care; public buildings and improvements; fire and rescue; easements; 
purchase of equipment, machinery, and supplies; repair and 
modernization; pollution control; and transportation studies. The rate 
and terms of the loan are negotiated between the borrower and the 
lender. This regulation is a high-priority effort to streamline the 
administration and operation of the program, respond to the requests of 
users of the program, and assist the field staff administering the 
program. The revised regulation is simpler, clearer, and more logically 
organized. The volume of regulatory material which a lender must review 
to request, make, or service a CP guaranteed loan under the new 
regulation is significantly less than the current regulation. 
Clarifications of various items are also included, such as what is 
meant by the term ``essential community facility.''
    Except for the increase in the population limit in the definition 
of ``Rural and Rural area,'' the revisions are not required by statute. 
However, the President and the Secretary of Agriculture are committed 
to streamlining all Federal regulations. This CP regulation streamlines 
our application procedures, reduces loan application processing time by 
placing greater emphasis on State resources, allows more management 
flexibility and decision-making capacity at the State Office level, and 
expands eligible loan purposes to include recreation.
    The Agency has implemented revisions to make the program more 
usable by lenders and borrowers. Also, the Agency recognizes that 
changes are necessary to make the program more effective in creating 
jobs and stimulating economic activity (particularly in chronically 
low-income rural areas). Under the new CP regulation, the material that 
must be submitted to, and reviewed by, the Agency before approval of 
the guarantee has been streamlined. Some responsibilities for credit 
analysis and application processing tasks will be shifted from the 
Agency to the lender, where feasible. Following is a discussion of some 
of the most significant policy revisions included in the final 
regulation.
    To streamline the regulation, the Agency has combined applicable 
portions of the Direct Community Loan Programs (7 CFR part 1942, 
subpart A), Fire and Rescue (7 CFR part 1942, subpart C), General 
Guaranteed Regulation (7 CFR part 1980, subpart A), previously drafted 
Guaranteed Community Programs Regulation, and program requirements 
contained in forms which were not in regulations into the Guaranteed 
Community Programs Regulation (7 CFR part 3575, subpart A). The Agency 
also divided the regulation into general, processing, and servicing 
sections. These actions should significantly reduce the amount of 
regulatory material that a lender and a borrower must review to 
determine eligibility and complete the application. This will also 
simplify making and servicing a CP loan.
    Additionally, the necessary information contained in the 
preapplication package can be submitted simultaneously with the 
application. Except the year that loan funds are received, the types of 
audited financial statements will be the responsibility of the lender. 
Also, we have included recreation as well as clarified that 
telecommunications are eligible loan purposes.
    Under the new regulation, the lender is responsible for legal 
sufficiency. The lender will not only be able to negotiate interest 
rates, but will also be able to negotiate incremental increases and 
caps for each loan. This will give the lender more flexibility to fit 
the CP guaranteed loan program to its lending policies and procedures. 
The lender does not have to be a local lender provided it can 
demonstrate the ability to adequately service the loan. This will 
permit an expansion of eligible lenders to include such organizations 
as State bond banks, the Rural Utilities Cooperative Finance 
Corporation, Sallie Mae, and other lenders that are subject to credit 
examination and supervision by a State or Federal entity that 
supervises and regulates credit institutions. All of these 
organizations have expressed an interest in the CP guaranteed lending 
program in the past.

Discussion of Comments

    The proposed rule was published in the Federal Register on October 
7, 1997 (62 FR 52277), for public comment. Five comments were received. 
All of the comments received expressed support for the changes in this 
streamlined regulation. The comments ranged from making the regulation 
easier to read and follow to agreeing that the regulatory burden was 
lessened on the lenders as well as on our field employees. Also, the 
ability to change interest rates on a quarterly basis was supported as 
more in line with industry standards. Other changes which were 
supported are: permitting the lender to monitor construction rather 
than the Agency; permitting the preapplication information and the 
application to be completed as one process; and making the lender 
responsible for legal sufficiency.
    One respondent requested consistent wording concerning the 5 
percent which the lender must retain in its portfolio. The wording has 
been changed to clarify that the amount which the lender must hold will 
be 5 percent of the total loan amount and that this amount must be from 
the unguaranteed portion of the loan.
    One respondent wanted to know what is contained in chapter 37 of 
title 31 of the United States Code. This chapter is commonly referred 
to as the Debt Collection Act.

Definitions

    One respondent suggested that all Rural Development program areas 
have similar definitions for ``rural'' and ``rural area.'' The Agency 
agrees that similar definitions would make the programs easier for our 
field employees to implement. However, the Federal Agriculture 
Improvement and Reform

[[Page 28335]]

Act of 1996 redefined the definition for ``rural'' and ``rural area'' 
as it applies to Community Facilities programs. This definition has 
been incorporated into this regulation.
    Except for fiscal year 1999, Community Facilities projects can be 
located in incorporated cities or towns or unincorporated areas with a 
population of less than 50,000; however, these projects cannot be 
located in urbanized areas regardless of the population. Urbanized 
areas are areas immediately adjacent to a city, town, or unincorporated 
area exceeding 50,000 inhabitants. The boundaries of urbanized areas 
are not limited to preexisting county or State lines. They often follow 
the boundaries of small census-defined geographic units such as census 
tracts and enumeration districts. Many urbanized areas cross county and 
sometimes State lines.

Eligibility

    One respondent wanted to include sole-member corporations as 
eligible for the Community Facilities program. While this would 
increase the potential number of borrowers, it goes against the concept 
of broad-based community support.
    One respondent suggested that business incubators be made an 
eligible purpose. Business incubators are already eligible provided 
they are designed as a training facility and they meet the basic 
eligibility criteria of being either a nonprofit corporation or a 
public body having broad-based community support.
    One respondent indicated that combining the floodplain management 
plan requirements with flood insurance would eliminate service to most 
of his State. The Agency did not intend to change the existing 
floodplain requirements. However, in our efforts to streamline the 
regulations, we combined two requirements and used a conjunction which 
tied the two requirements together. The Agency has separated and 
reworded these requirements in this final regulation. The requirements 
are the same as our existing regulation. To make a loan in a Federal 
Emergency Management Agency designated 100-year floodplain, a 
floodplain management plan must be in place.
    Also, National Flood Insurance must be available, and the lender 
must require such insurance.
    As a result of internal discussions, the Environmental Requirements 
section has been expanded slightly in order to highlight the existing 
burden on the applicant to take no actions that would either limit the 
range of alternatives to be considered or which might adversely effect 
the environment prior to completion of the Agency's environmental 
review.

Equal Opportunity and Fair Housing Act requirements

    One respondent suggested that we list all the specific individual 
requirements under these laws. These requirements are spelled out in a 
separate section. If a lender needs more specific information, the 
Agency can administratively handle these situations on a case-by-case 
basis.
    One respondent requested clarification concerning the Agency's 
review of the equal opportunity and nondiscrimination requirements when 
evaluating an application. The Agency will further clarify our 
employees' responsibilities for reviewing loan applications in Agency 
instructions.

Rates and Terms

    One respondent supported permitting both variable and fixed 
interest rates in the same loan but pointed out that the restriction 
which requires the guaranteed portion of the loan to always have a 
lower interest rate than the unguaranteed portion of the loan would 
prevent lenders from making the guaranteed portion fixed and the 
unguaranteed portion variable when the interest rate market is 
declining. We agree, and we have removed this restriction in these 
cases.

Design and Construction

    One respondent said that this regulation seems to say that if the 
Agency guarantees a loan on an existing building, we would not require 
any changes to make the building meet the Americans with Disabilities 
Act (ADA). The ADA does not require that existing buildings be made 
accessible unless they are remodeled. Then only the portion which is 
remodeled must be made accessible. For example, if four interior 
offices were remodeled, only those four offices would have to be made 
accessible. But the restrooms or the entry way would not have to be 
accessible. If you remodeled the building front, then the front entry 
would have to be made accessible. In conclusion, any new work must be 
accessible and designed in accordance with the ADA. Any area of the 
existing structure that is not remodeled does not have to meet the ADA. 
Since this is not a Community Programs requirement, we will clarify 
this concept for our employees in our instructions.
    One respondent suggested a standard certification form for the 
lender to complete certifying that construction has been completed in 
accordance with the proper building codes. To maintain flexibility and 
keep the regulations and public paperwork at a minimum, we have 
incorporated this as a lender certification.
    One respondent suggested amending our concurrence to preliminary 
architectural or engineering reports or plans because many Community 
Facilities projects do not require complex reports but rather simple 
drawings and estimates of project costs. We agree. This was our 
original intent in the proposed general portion of the design and 
construction requirements section. We have added the words ``or plans'' 
to this section.
    One respondent questioned the lack of a reference to procurement 
utilizing free and open competition. The borrower and the lender both 
benefit from free and open competition. In the spirit of reducing the 
regulatory burden to the public, the lender will now be responsible for 
determining the best method to ensure that the project is completed 
within budget. If the lender determines that design and build is a 
better method than sealed bids, the lender will have the flexibility to 
approve such construction.

Feasibility Requirements

    One respondent strongly supported the loan approval official being 
able to determine if an independent feasibility analysis is necessary. 
It also stated that the economic section of the regulation confuses the 
lender credit analysis with the feasibility report. The Agency intends 
that the loan approval official will determine whether or not an 
independent feasibility analysis is necessary. Consequently, the 
lender's financial credit analysis may serve as a feasibility analysis 
when the loan approval official concludes sufficient economic 
information is provided in their analysis. We have added a sentence to 
clarify this issue.

Processing

    One respondent indicated that we should have included a timeframe 
to provide the lender an answer. While we agree, this is an 
administrative matter within the Agency and will be incorporated into 
our field employee instructions.
    One respondent suggested moving the subsection concerning changing 
the scope of the project from the section describing the conditions 
precedent to issuing a loan note guarantee to the section discussing 
the review of requirements in the conditional commitment. The Agency 
agrees and has moved this subsection.

[[Page 28336]]

    One respondent suggested that the number of customers discussed in 
the loan application evaluation section should apply only to Water and 
Waste Division projects. The Agency disagrees. The number of customers 
is important for other utility-type projects such as gas distribution 
systems. Also, the number of customers may play an important role in 
other community facilities-type projects such as hospitals, nursing 
homes, and child care.
    One respondent questioned if the certifications listed under the 
conditions precedent to issuance of the loan note guarantee section met 
all applicable requirements set out in the regulations. It was 
suggested clarification was needed. The Agency listed the items which 
the lender must certify to before the loan note guarantee could be 
issued. By certifying to these conditions, the lender is stating that 
it has met the requirements set out in the regulation.
    One respondent requested clarification concerning the title report 
under the lender's certifications in the conditions precedent to 
issuance of a loan note guarantee. The respondent wanted to know 
whether or not the title report was referring to a final title opinion 
or a preliminary title opinion. The Agency intends this to be the 
lender's legal counsel's opinion which states that the loan has been 
closed and proper title has been obtained in accordance with the 
security instrument and other agreements between the lender and the 
Agency.
    One respondent requested further clarification of the guaranteed 
loan closing report. This report is a Rural Development form. All 
references to specific form numbers have been eliminated from the 
actual text of the Federal Register. The actual form numbers will 
appear in the Agency instructions to our field employees. Only the form 
names appear in the Federal Register.
    One respondent questioned the need to require a parity lien 
position. We agree, the lender should determine that adequate security 
is obtained for the loan and the Agency can either concur or choose not 
to guarantee the loan accordingly. This requirement has been deleted.
    One respondent requested that the Agency eliminate the test for 
credit. The respondent further points out that the Rural Development 
Business and Industry (B&I) program does not require such a test for 
credit to be eligible for a guaranteed loan. The Agency is bound by 
statute and must require this test for credit. The B&I program is 
exempt from this statutory provision.
    One respondent suggested that finder and packaging fees be 
considered an eligible loan purpose. This comment also suggested paying 
real estate broker fees. These fees are already paid as part of the 
sale and purchase. To be consistent with other Community Facilities 
loan programs, the Agency does not consider finder fees necessary. All 
Community Programs loans have professional and technical assistance 
such as architects, engineers, and accountants who provide similar 
services. Consequently, the Agency feels that paying additional fees is 
unnecessary.
    One respondent requested clarification concerning whether or not 
the preapplication forms are still necessary when the Agency receives 
an application for a loan guarantee from a lender without going through 
the preapplication process. The Agency will accept applications without 
a preapplication package.

Servicing

    Two respondents strongly suggested that the audit requirements 
should be the lender's responsibility. We agree, based upon discussions 
with our sister agencies and the Office of Management and Budget (OMB), 
we have determined that we do not have continuing compliance 
requirements as described in the OMB circular A-133. Consequently, in 
the year that funds are received, the Agency will require an audit in 
accordance with the OMB circular A-133. In subsequent years, the lender 
(with Agency concurrence) will determine the type of financial 
reporting and financial audits that will be required for the duration 
of the loan.
    One respondent noted that the lender and borrower visits were 
omitted and suggested that they should be required periodically. While 
we agree, this is an administrative matter and will be addressed in the 
Agency's field instruction.
    One respondent wanted to clarify that the sale of one lender to 
another in a merger situation did not constitute a transfer of lender. 
We agree.
    One respondent suggested that we increase the amount of protective 
advances from $500 to $5,000 dollars. This amount would be consistent 
with other mission area regulations and would be consistent with 
inflation. We agree, the amount of protective advances which the lender 
can make without Agency concurrence has been increased from $500 to 
$5,000.

List of Subjects

7 CFR Part 1980

    Loan programs--Agriculture, Loan programs--Business and industry, 
Loan programs--Housing and community development, Rural development 
assisance.

7 CFR Part 3575

    Community facilities, Guaranteed loans, Loan programs.

    Accordingly, chapters XVIII and XXXV, title 7, Code of Federal 
Regulations, are amended as follows:

PART 1980--GENERAL

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

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

Subpart I--Community Programs Guaranteed Loans


Sec. 1980.801  [Amended]

    2. Section 1980.801(b) is amended by removing the words ``and other 
essential community'' in the first sentence.


Sec. 1980.802  [Amended]

    3. Section 1980.802 is amended by removing the definition for 
``Community facilities.''


Sec. 1980.805  [Amended]

    4. Section 1980.805 is amended by removing the third through the 
seventh sentences of the section.


Sec. 1980.813  [Amended]

    5. Section 1980.813 is amended in the introductory text of 
paragraph (a) by revising the words ``, and other essential community 
facilities providing essential'' to read ``providing'' in the first 
sentence and by removing paragraphs (a)(2), (b)(1), and (b)(2); 
paragraphs (a)(3), (b)(3), and (b)(4), are redesignated as paragraphs 
(a)(2), (b)(1), and (b)(2), respectively; and by removing the words 
``and X-ray machines'' in newly redesignated paragraph (a)(2)(i).


Sec. 1980.814  [Amended]

    6. Section 1980.814 is amended by removing paragraph (d) and 
redesignating paragraphs (e) through (h) as paragraphs (d) through (g), 
respectively.
    7. Section 1980.844 is revised to read as follows:


Sec. 1980.844  Appraisal reports.

    The borrower is responsible for the acquisition of all property 
rights necessary for the project and will determine that prices paid 
are reasonable and fair.

[[Page 28337]]

    8. Chapter XXXV, title 7, Code of Federal Regulations is amended by 
adding a new part 3575 to read as follows:

PART 3575--GENERAL

Subpart A--Community Programs Guaranteed Loans

Sec.
3575.1  General.
3575.2  Definitions.
3575.3  Full faith and credit.
3575.4  Conditions of guarantee.
3575.5-3575.7  [Reserved]
3575.8  Access to lender's records.
3575.9  Environmental requirements.
3575.10-3575.11  [Reserved]
3575.12  Inspections.
3575.13  Appeals.
3575.14-3575.16  [Reserved]
3575.17  Exception authority.
3575.18-3575.19  [Reserved]
3575.20  Eligibility.
3575.21-3575.23  [Reserved]
3575.24  Eligible loan purposes.
3575.25  Ineligible loan purposes.
3575.26  [Reserved]
3575.27  Eligible lenders.
3575.28  Transfer of lenders or borrowers (prior to issuance of Loan 
Note Guarantee).
3575.29  Fees and charges by lender.
3575.30  Loan guarantee limitations.
3575.31-3575.32  [Reserved]
3575.33  Interest rates.
3575.34  Terms of loan repayment.
3575.35-3575.36  [Reserved]
3575.37  Insurance and fidelity bonds.
3575.38-3575.39  [Reserved]
3575.40  Equal opportunity and Fair Housing Act requirements.
3575.41  [Reserved]
3575.42  Design and construction requirements.
3575.43  Other Federal, State, and local requirements.
3575.44-3575.46  [Reserved]
3575.47  Economic feasibility requirements.
3575.48  Security.
3575.49-3575.51  [Reserved]
3575.52  Processing.
3575.53  Evaluation of application.
3575.54-3575.58  [Reserved]
3575.59  Review of requirements.
3575.60-3575.62  [Reserved]
3575.63  Conditions precedent to issuance of the Loan Note 
Guarantee.
3575.64  Issuance of Lender's Agreement, Loan Note Guarantee, and 
Assignment Guarantee Agreement.
3575.65  Lender's sale or assignment of the guaranteed portion of 
loan.
3575.66-3575.68  [Reserved]
3575.69  Loan servicing.
3575.70-3575.72  [Reserved]
3575.73  Replacement of loss, theft, destruction, mutilation, or 
defacement of Loan Note Guarantee or Assignment Guarantee Agreement.
3575.74  [Reserved]
3575.75  Defaults by borrower.
3575.76-3575.77  [Reserved]
3575.78  Repurchase of loan.
3575.79  [Reserved]
3575.80  Interest rate changes after loan closing.
3575.81  Liquidation.
3575.82  [Reserved]
3575.83  Protective advances.
3575.84  Additional loans or advances.
3575.85  Bankruptcy.
3575.86-3575.87  [Reserved]
3575.88  Transfer and assumptions.
3575.89  Mergers.
3575.90  Disposition of acquired property.
3575.91-3575.93  [Reserved]
3575.94  Determination and payment of loss.
3575.95  Future recovery.
3575.96  Termination of Loan Note Guarantee.
3575.97-3575.99  [Reserved]
3575.100  OMB control number.

Subpart B--[Reserved]

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

Subpart A--Community Programs Guaranteed Loans


Sec. 3575.1  General.

    (a) This subpart contains the regulations for Community Programs 
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) The purpose of the Community Programs guaranteed loan program 
is to improve, develop, or finance essential community facilities in 
rural areas. This purpose is achieved through bolstering the existing 
private credit structure through the guarantee of quality loans which 
will provide lasting community benefits.


Sec. 3575.2  Definitions.

    The following general definitions are applicable to the terms used 
in this subpart:
    Agency. The Rural Housing Service which is within the Rural 
Development mission area of the United States Department of Agriculture 
or its successor agencies with authority delegated by the Secretary of 
Agriculture to administer the Community Facilities programs.
    Application. An Agency prescribed form to request an Agency 
guarantee (available in any Agency office).
    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 third party who 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. The signed agreement among the 
Agency, the lender, and the holder setting forth the terms and 
conditions of an assignment of the guaranteed portion of a loan or any 
part thereof (available in any Agency office).
    Borrower. The entity that borrows money from the lender.
    Collateral. Property pledged to secure the guaranteed loan.
    Community facility (essential). The term ``facility'' as used in 
this subpart refers to both the physical structure financed and the 
resulting service provided to rural residents. An essential community 
facility must:
    (1) Be a function customarily provided by a local unit of 
government;
    (2) Be a public improvement needed for the orderly development of a 
rural community;
    (3) Not include private affairs or commercial or business 
undertakings (except for limited authority for industrial parks);
    (4) Be within the area of jurisdiction or operation for eligible 
public bodies or a similar local rural service area of a not-for-profit 
corporation; and
    (5) Be located in a rural area.
    Conditional Commitment for Guarantee. The Agency's written 
statement to the lender that the material submitted is approved subject 
to the completion of all conditions and requirements contained in the 
commitment (available in any Agency office).
    Guaranteed loan. A loan made and serviced by a lender for which the 
Agency and lender have entered into a Lender's Agreement and for which 
the Agency has issued a Loan Note Guarantee.
    Holder. The person or entity (other than the lender) who holds all 
or a part of the guaranteed portion of the loan with no servicing 
responsibilities. When the lender assigns part or all of the guaranteed 
portion of the loan to an assignee, the assignee becomes a holder when 
the Assignment Guarantee Agreement is signed by all parties.
    Immediate family. Individuals who are closely related by blood or 
by marriage, or within the same household, such as a spouse, parent, 
child, brother, sister, aunt, uncle, grandparent, grandchild, niece, or 
nephew.
    In-house expenses. In-house expenses include, but are not limited 
to, employees' salaries, staff lawyers, travel, and overhead.
    Insurance. Fire, windstorm, lightning, hail, explosion, riot, civil 
commotion, aircraft, vehicles, smoke, builder's risk, liability, 
property damage, flood or mudslide, worker's compensation, fidelity 
bond, malpractice, or any similar insurance that is available and 
needed to protect the security or that is required by law.

[[Page 28338]]

    Joint financing. Two or more lenders (or any combination of lenders 
and other financial sources) making separate relatively contemporaneous 
loans to supply the funds required by one borrower. For example, such 
joint financing may consist of the Agency's financial assistance with 
the Economic Development Administration, Department of Housing and 
Urban Development (HUD), or other Federal and State agencies, and 
private and quasi-public financial institutions.
    Lender. The person or organization making and responsible for 
servicing the loan. The lender is also referred to in this subpart as 
the applicant who is requesting a guarantee during the preapplication 
and application stage of processing.
    Lender's Agreement. The signed agreement between the Agency and the 
lender containing the lender's responsibilities when the Loan Note 
Guarantee is issued (available in any Agency office).
    Loan classification system. The process by which loans are examined 
and categorized by degree of potential loss in the event of default.
    Loan Note Guarantee. The signed commitment issued by the Agency 
containing the terms and conditions of the guarantee of an identified 
loan (available in any Agency office).
    Market value. The amount for which property would sell for its 
highest and best use at a voluntary sale in an arm's length 
transaction.
    Note. An evidence of debt. In those instances where the Agency 
guarantees a bond issue, ``note'' shall also be construed to include a 
bond or other evidence of indebtedness, as appropriate.
    Participation. Sale of an interest in a loan in which the lender 
retains the note, collateral securing the note, and all responsibility 
for loan servicing and liquidation.
    Principals of borrowers. The owners, officers, directors, entities, 
and supervisors directly involved in the operation and management of 
the borrower.
    Problem loan. A loan which is not complying with its terms and 
conditions.
    Protective advances. Advances made by the lender for the purpose of 
preserving and protecting the collateral where the debtor has failed 
to, and will not or cannot, meet obligations to protect or preserve 
collateral.
    Public body. A municipality, county, or other political subdivision 
of a State, special purpose district, an Indian tribe on a Federal or 
State reservation, or another federally recognized Indian tribe.
    Report of loss. A form used by lenders when reporting a loss under 
an Agency guarantee (available in any Agency office).
    Rural and rural area. (1) For fiscal year 1999, the terms ``rural'' 
and ``rural area'' mean a city, town, or unincorporated area with 
20,000 inhabitants or less according to the latest decennnial census.
    (2) For later fiscal years, the terms ``rural'' and ``rural area'' 
mean a city, town, or unincorporated area that has a population of 
50,000 inhabitants or less according to the latest decennial census of 
the United States, other than an urbanized area immediately adjacent to 
a city, town, or unincorporated area that has a population in excess of 
50,000 inhabitants.
    Service area. The area reasonably expected to be served by the 
facility being financed by the guaranteed loan.
    State. Any of the 50 States, the Commonwealth of Puerto Rico, the 
Virgin Islands of the United States, Guam, American Samoa, Commonwealth 
of the Northern Mariana Islands, Republic of the Marshall Islands, 
Republic of Palau, and the Federated States of Micronesia.
    State Bond Banks and State Bond Pools. An entity authorized by the 
State to issue State debt instruments and utilize the funds received to 
finance essential community facilities.
    State Director. The Rural Development State Director or the staff 
member who has been delegated authority to perform action on behalf of 
the State Director.
    Substantive change. Any change in the purpose of the loan or any 
change in the financial condition of the borrower or the collateral 
which would jeopardize the performance of the loan.
    Transfer and assumption. The conveyance by a debtor to an assuming 
party of the assets, collateral, and liabilities of the loan in return 
for the assuming party's binding promise to pay the outstanding debt.


Sec. 3575.3  Full faith and credit.

    The Loan Note Guarantee constitutes an obligation supported by the 
full faith and credit of the United States and is not contestable 
except for fraud or misrepresentation (including negligent 
misrepresentation) of which the lender or holder has actual knowledge, 
participates in, or condones. A note which provides for the payment of 
interest on interest shall not be guaranteed and any Loan Note 
Guarantee or Assignment Guarantee Agreement attached to, or relating 
to, a note which provides for payment of interest on interest is void. 
The Loan Note Guarantee will not be enforceable by the lender to the 
extent any loss is occasioned by violation of usury laws, negligent 
servicing, or failure to obtain the required security regardless of the 
time at which the Agency acquires knowledge of the foregoing. Any 
losses occasioned will not be enforceable by the lender to the extent 
that loan funds are used for purposes other than those specifically 
approved by the Agency in its Conditional Commitment for Guarantee. 
Negligent servicing is defined as the failure to perform those services 
which a reasonably prudent lender would perform in servicing 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, acting in a manner contrary to the manner in which a reasonably 
prudent lender would act up to the time of loan maturity, or until a 
final loss is paid. The Loan Note Guarantee or Assignment Guarantee 
Agreement in the hands of a holder shall not cover interest accruing 90 
days after the holder has demanded repurchase by the lender, nor shall 
the Loan Note Guarantee or Assignment Guarantee Agreement in the hands 
of a holder cover interest accruing 90 days after the lender or Agency 
has requested the holder to surrender the evidence of debt for 
repurchase.


Sec. 3575.4  Conditions of guarantee.

    A loan guarantee under this part will be evidenced by a Loan Note 
Guarantee issued by the Agency. Each lender will also execute a 
Lender's Agreement.
    (a) The entire loan will be secured by the same security with equal 
lien priority for the guaranteed and non-guaranteed portions of the 
loan. The non-guaranteed portion of the loan will not be paid first nor 
given any preference or priority over the guaranteed portion.
    (b) The lender will be responsible for servicing the entire loan 
and will remain mortgagee or secured party of record notwithstanding 
the fact that another party may hold a portion of the loan.
    (c) When a guaranteed portion of a loan is sold to a holder, the 
holder shall have all rights of the lender under the Loan Note 
Guarantee to the extent of the portion purchased. The lender will 
remain bound by all the obligations under the Loan Note Guarantee, 
Lender's Agreement, and Agency program regulations. If the Agency makes 
a payment to a holder, then the lender must reimburse the Agency.

[[Page 28339]]

    (d) A lender will receive all payments of principal and interest on 
the account of the entire loan and will promptly remit to each holder a 
pro rata share, less any lender servicing fee.
    (e) The lender may retain all of the unguaranteed portion of the 
loan or may sell part of the unguaranteed portion of the loan through 
participation. However, the lender is required to retain 5 percent of 
the loan amount from the unguaranteed portion in their portfolio.


Secs. 3575.5--3575.7  [Reserved]


Sec. 3575.8  Access to lender's records.

    Upon request by the Agency, the lender will permit representatives 
of the Agency (or other agencies of the U.S. Department of Agriculture 
authorized by that Department or the U.S. Government) to inspect and 
make copies of any of the records of the lender pertaining to the 
guaranteed loans. Such inspection and copying may be made during 
regular office hours of the lender or at any other time the lender and 
the Agency agree upon.


Sec. 3575.9  Environmental requirements.

    Requirements for an environmental review or mitigation actions are 
contained in part 1940, subpart G, of this title. The lender must 
assist the Agency to ensure that the lender's applicant complies with 
any mitigation measures required by the Agency's environmental review 
for the purpose of avoiding or reducing adverse environmental impacts 
of construction or operation of the facility financed with the 
guaranteed loan. This assistance includes ensuring that the lender's 
applicant is to take no actions (for example, initiation of 
construction) or incur any obligations with respect to their proposed 
undertaking that would either limit the range of alternatives to be 
considered during the Agency's environmental review process or which 
would have an adverse effect on the environment. If construction is 
started prior to completion of the environmental review and the Agency 
is deprived of its opportunity to fulfill its obligation to comply with 
applicable environmental requirements, the application for financial 
assistance may be denied. Satisfactory completion of the environmental 
review process must occur prior to Agency approval of the applicant's 
request or any commitment of Agency resources.


Sec. Sec. 3575.10--3575.11  [Reserved]


Sec. 3575.12  Inspections.

    The lender will notify the Agency of any scheduled field 
inspections during construction and after issuance of the Loan Note 
Guarantee. The Agency may attend such field inspections. Any 
inspections or review conducted by the Agency, including those with the 
lender, are for the benefit of the Agency only and not for the benefit 
of other parties of interest. Agency inspections do not relieve any 
parties of interest of their responsibilities to conduct necessary 
inspections.


Sec. 3575.13  Appeals.

    Only the borrower, lender, or holder can appeal an Agency decision. 
In cases where the Agency has denied or reduced the amount of final 
loss payment to the lender, the adverse decision may be appealed only 
by the lender. 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 the 
regulations of the National Appeals Division, U.S. Department of 
Agriculture, published at 7 CFR part 11.


Sec. Sec. 3575.14--3575.16  [Reserved]


Sec. 3575.17  Exception authority.

    The Administrator may, in individual cases, make an exception to 
any requirement or provision of this subpart or address any omission of 
this subpart provided the Administrator determines that application of 
the requirement or provision, or failure to take action in the case of 
an omission, would adversely affect the Government's financial 
interest. Requests for exceptions must be in writing by the State 
Director.


Sec. Sec. 3575.18--3575.19  [Reserved]


Sec. 3575.20  Eligibility.

    (a) Availability of credit from other sources. The Agency must 
determine that the borrower is unable to obtain the required credit 
without the loan guarantee from private, commercial, or cooperative 
sources at reasonable rates and terms for loans for similar purposes 
and periods of time. This determination shall become a part of the 
Agency casefile. The Agency must also determine if an outstanding 
judgment obtained by the United States in a Federal Court (other than 
the U.S. Tax Court) has been entered against the borrower or if the 
borrower has an outstanding delinquent debt with any Federal agency. 
Such judgment or delinquency shall cause the potential borrower to be 
ineligible to receive a loan guarantee until the judgment is paid in 
full or otherwise satisfied or the delinquency is cured.
    (b) Legal authority and responsibility. (1) Each borrower must 
have, or will obtain, the legal authority necessary to construct, 
operate, and maintain the proposed facility and services. They must 
also have legal authority for obtaining security and repaying the 
proposed loan.
    (2) The borrower shall be responsible for operating, maintaining, 
and managing the facility and services, and providing for the continued 
availability and use of the facility and services at reasonable rates 
and terms.
    (i) These responsibilities must be exercised by the borrower even 
though the facility may be operated, maintained, or managed by a third 
party under contract, management agreement, or written lease.
    (ii) Leases may only be used when this is the only feasible way to 
provide the service, is the customary practice to provide such service 
in the State, and must provide for the borrower's management control of 
the facility.
    (iii) Contracts, management agreements, or leases must not contain 
options or other provisions for transfer of ownership.
    (3) The lender is responsible for reviewing any contracts, 
management agreements, or leases to determine that they will not 
adversely impact the borrower's repayment ability or the security value 
of the guaranteed loan.
    (c) Borrower. (1) A public body such as a municipality, county, 
district, authority, or other political subdivision of a State located 
in a rural area.
    (2) An organization operated on a not-for-profit basis such as an 
association, cooperative, or private corporation. For-profit 
corporations operated as not-for-profit corporations are eligible 
borrowers as long as they operate as a not-for-profit corporation for 
the duration of their guaranteed loans. Single member corporations or 
corporations owned or substantially controlled by other corporations or 
associations are not eligible organizations. Before a loan is made to a 
borrower other than a public body, the articles of incorporation or the 
loan agreement will include a condition similar to the following:

    If the corporation dissolves or ceases to perform the community 
facility objectives and functions, the board of directors shall 
distribute all business property and assets to one or more nonprofit 
corporations or public bodies. This distribution must be approved by 
75 percent of the users or members and must serve the public welfare 
of the community. The assets may not be distributed to any members, 
directors, stockholders, or others having financial or managerial 
interest in the corporation. Nothing herein shall prohibit the 
corporation from paying its debts.

    (3) A private nonprofit essential community facility (other than 
utilities)

[[Page 28340]]

must have significant ties with the local rural community. Such ties 
are necessary to ensure to the greatest extent possible that a facility 
under private control will carry out a public purpose and continue to 
primarily serve rural areas. Ties may be evidenced by items such as:
    (i) Association with, or controlled by, a local public body or 
bodies or broadly based ownership and controlled by members of the 
community.
    (ii) Substantial public funding through taxes, revenue bonds, or 
other local government sources, or substantial voluntary community 
funding such as would be obtained through a community-wide funding 
campaign.
    (4) Indian tribes on Federal and State reservations and other 
federally recognized Indian tribes.
    (d) Facility location. Facilities must be located in rural areas, 
except:
    (1) For utility services such as natural gas or hydroelectric 
serving both rural and non-rural areas. In such cases, Agency funds may 
be used to finance only that portion serving rural areas, regardless of 
facility location.
    (2) Telecommunication projects. The part of the facility located in 
a non-rural area must be necessary to provide the essential services to 
rural areas.
    (e) Facilities for public use. All facilities financed under the 
provisions of this subpart shall be for public purposes.
    (1) Facilities will be installed to serve any user within the 
service area who desires service and can be feasibly and legally 
served.
    (2) In no case will boundaries for the proposed service area be 
chosen in such a way that any user or area will be excluded because of 
race, color, religion, sex, marital status, age, disability, or 
national origin. This does not preclude:
    (i) Financing or constructing projects in phases when it is not 
practical to finance or construct the entire project at one time, and
    (ii) Financing or constructing facilities where it is not 
economically feasible to serve the entire area, provided economic 
feasibility is determined on the basis of the entire system or facility 
and not by considering the cost of separate extensions to, or parts 
thereof. Additionally, the borrower must publicly announce a plan for 
extending service to areas not initially receiving service. Also, the 
borrower must provide written notice to potential users located in the 
areas not to be initially served.
    (3) The lender will determine that, when feasible and legally 
possible, inequities within the proposed project's service area for the 
same type service proposed (i.e., gas distribution system) will be 
remedied by the owner on, or before, completion of the project. 
Inequities are defined as unjustified variations in availability, 
adequacy, or quality of service. User rate schedules for portions of 
existing systems or facilities that were developed under different 
financing, rates, terms, or conditions do not necessarily constitute 
inequities.


Sec. Sec. 3575.21--3575.23  [Reserved]


Sec. 3575.24  Eligible loan purposes.

    (a) Funds may be used to construct, enlarge, extend, or otherwise 
improve other essential community facilities providing essential 
service primarily to rural residents and rural businesses.
    (1) Essential community facilities include, but are not limited to:
    (i) Fire, rescue, and public safety,
    (ii) Health services,
    (iii) Community, social, or cultural services,
    (iv) Transportation facilities such as streets, roads, and bridges,
    (v) Telecommunication equipment,
    (vi) Hydroelectric generating facilities and related connecting 
systems and appurtenances only when not eligible for financing under 
the authorities of the Rural Utilities Service. Funds may not be used 
to finance other types of electrical generating or transmitting 
facilities,
    (vii) Supplemental and supporting structures for other rural 
electrification or telephone systems (including facilities such as 
headquarters and office buildings, storage facilities, and maintenance 
shops) only when not eligible for financing under the authorities of 
the Rural Utilities Service,
    (viii) Natural gas distribution systems,
    (ix) Industrial park sites (but only to the extent of land 
acquisition and necessary site preparation) including access ways and 
utility extensions to and throughout the site. Funds may not be used in 
connection with industrial parks to finance on-site utility systems or 
business and industrial buildings, and
    (x) Recreational facilities.
    (2) Otherwise improve includes, but is not limited to, the 
following:
    (i) The purchase of major equipment (such as telecommunication 
equipment and X-ray machines) which will in themselves provide an 
essential service to rural residents,
    (ii) The purchase of existing facilities, when necessary, either to 
improve or to prevent a loss of service, and
    (iii) Payment of tap fees and other utility connection charges as 
provided in utility purchase contracts.
    (b) Funds also may be used:
    (1) To construct or relocate public buildings, roads, bridges, 
fences, or utilities and to make other public improvements necessary to 
the successful operation or protection of facilities authorized by 
paragraph (a) of this section.
    (2) To relocate private buildings, roads, bridges, fences, or 
utilities, and other private improvements necessary to the successful 
operation or protection of facilities authorized in paragraph (a) of 
this section.
    (3) To pay the following expenses (but only when such expenses are 
a necessary part of a loan to finance facilities authorized in 
paragraph (a) of this section):
    (i) Reasonable fees and costs such as origination fee, loan 
guarantee fee, legal, engineering, architectural, fiscal advisory, 
recording, environmental impact analyses, archaeological surveys, 
possible salvage or other mitigation measures, planning and 
establishing or acquiring rights.
    (ii) Interest on loans until the facility is self-supporting, but 
not for more than 2 years unless a longer period is approved by the 
Agency; interest on loans secured by general obligation bonds until tax 
revenues are available for payment, but not for more than 2 years 
unless a longer period is approved by the Agency's National Office; and 
interest on interim financing.
    (iii) Costs of acquiring interest in land; rights such as water 
rights, leases, permits, rights-of-way, and other evidence of land or 
water control necessary for development of the facility.
    (iv) Purchasing or renting equipment necessary to install, 
maintain, extend, protect, operate, or utilize facilities.
    (v) Initial operating expenses for a period ordinarily not 
exceeding 1 year when the borrower is unable to pay such expenses.
    (vi) Refinancing debts incurred by, or on behalf of, a community 
when all of the following conditions exist:
    (A) The debts being refinanced are less than 50 percent of the 
total loan,
    (B) The debts were incurred for the facility or service being 
financed or any part thereof (such as interim financing, construction 
expenses, etc.), and
    (C) Arrangements cannot be made with the creditors to extend or 
modify the terms of the debts so that a sound basis will exist for 
making a loan.
    (4) To pay obligations for construction incurred prior to filing a 
preapplication and application with the Agency. Construction work must 
not be started (and obligations for such work or materials must not be 
incurred) before

[[Page 28341]]

the Conditional Commitment for Guarantee is issued. If there are 
compelling reasons for proceeding with construction before the 
Conditional Commitment for Guarantee is issued, lenders may request 
Agency approval to pay such obligations and not jeopardize a guarantee 
from the Agency. Such request must comply with the following:
    (i) Provide conclusive evidence that the contract was entered into 
without intent to circumvent the Agency regulations. However, the 
Agency is not required or obligated to pay a loss unless a written 
guarantee is issued,
    (ii) Modify the outstanding contract to conform with the provisions 
of this subpart. Where this is not possible, modifications will be made 
to the extent practicable and, as a minimum, the contract must comply 
with all State and local laws and regulations as well as statutory 
requirements and executive orders related to the Agency financing. When 
construction is complete and it is impracticable to modify the 
contract, the borrower and lender must provide the certification 
required by paragraph (b)(4)(iii) of this section,
    (iii) Provide a certification by an engineer or architect that any 
construction performed complies fully with the plans and 
specifications, and
    (iv) The borrower and the contractor must have complied with all 
statutory and executive order requirements related to Agency financing 
for construction already performed even though the requirements may not 
have been included in the contract documents.


Sec. 3575.25  Ineligible loan purposes.

    Loan funds may not be used to finance:
    (a) Properties to be used for commercial rental when the borrower 
has no control over tenants and services offered except for industrial-
site infrastructure development,
    (b) Facilities primarily for the purpose of housing Federal or 
State agencies,
    (c) Community antenna television services or facilities,
    (d) Telephone systems,
    (e) Facilities which are not modest in size, design, and cost,
    (f) Finder's and packager's fees,
    (g) Projects located within the Coastal Barriers Resource System 
that do not qualify for an exception as defined in section 6 of the 
Coastal Barriers Resource Act, 16 U.S.C. 3501 et seq. (available in any 
Agency office),
    (h) New combined sanitary and storm water sewer facilities, or
    (i) Projects that are located in a special flood or mudslide hazard 
area as designated by the Federal Emergency Management Agency in a 
community that is not participating in the National Flood Insurance 
Program.


Sec. 3575.26  [Reserved]


Sec. 3575.27  Eligible lenders.

    (a) Eligible lenders. Eligible lenders (as defined in this section) 
may participate in the loan guarantee program. These lenders must be 
subject to credit examination and supervision by an appropriate agency 
of the United States or a State that supervises and regulates credit 
institutions. A lender must have the capability to adequately service 
loans for which a guarantee is requested. Eligible lenders are:
    (1) Any Federal or State chartered bank or savings and loan 
association;
    (2) Any mortgage company that is a part of a bank holding company;
    (3) Bank for Cooperatives, National Rural Utilities Cooperative 
Finance Corporation, Farm Credit Bank of the Federal Land Bank, or 
other Farm Credit System institution with direct lending authority 
authorized to make loans of the type guaranteed by this subpart;
    (4) An insurance company regulated by a State or National insurance 
regulatory agency;
    (5) State Bond Banks or State Bond Pools; and
    (6) Other lenders that possess the legal powers necessary and 
incidental to making and servicing guaranteed loans involving community 
development-type projects. These lenders must also be subject to credit 
examination and supervision by either an appropriate agency of the 
United States or a State that supervises and regulates credit 
institutions and provide documentation acceptable to the Agency that 
they have the ability to service the loan. Lenders under this category 
must be approved by the National Office prior to the issuance of the 
loan guarantee.
    (b) Conflict of interest. When the lender's officers, stockholders, 
directors, or partners (including their immediate families) or the 
borrower, its officers, stockholders, directors, or partners (including 
their immediate families) own, or have management responsibilities in 
each other, the lender must disclose such business or ownership 
relationships. The Agency will determine if such relationships are 
likely to result in a conflict of interest. This does not preclude 
lender officials from being on the borrower's board of directors.


Sec. 3575.28  Transfer of lenders or borrowers (prior to issuance of 
Loan Note Guarantee).

    (a) Prior to issuance of the loan guarantee, the Agency may approve 
the transfer of an outstanding Conditional Commitment for Guarantee 
from the present lender to a new eligible lender, provided:
    (1) The former lender states in writing why it does not wish to 
continue to be the lender for this project;
    (2) No substantive changes in ownership or control of the borrower 
has occurred;
    (3) No substantive changes in the borrower's written plan, scope of 
work, or changes in the purpose or intent of the project has occurred; 
and
    (4) No substantive changes in the loan agreement or Conditional 
Commitment for Guarantee are required.
    (b) The substitute lender must execute a new application for loan 
and guarantee (available in any Agency office).
    (c) If approved, the Agency will issue a letter of amendment to the 
original Conditional Commitment for Guarantee reflecting the new lender 
who will acknowledge acceptance of the offer in writing.
    (d) Once the Conditional Commitment for Guarantee is issued, the 
Agency will not approve any substitution of borrowers, including 
changes in the form of the legal entity. Exceptions to a change in the 
legal entity may be requested when the original borrower is replaced 
with substantially the same individuals or officers with the same 
interest as originally approved.


Sec. 3575.29  Fees and charges by lender.

    (a) Routine charges and fees. The lender may establish the charges 
and fees for the loan, provided they do not exceed those charged other 
borrowers for similar types of transactions. ``Similar types of 
transactions'' mean those transactions involving the same type of loan 
for which a non-guaranteed loan borrower would be assessed charges and 
fees.
    (b) Late payment fees. Late payment charges will not be covered by 
the Loan Note Guarantee. Such charges may not be added to the principal 
and interest due under any guaranteed note. Late payment charges may be 
made only if:
    (1) They are routinely made by the lender in all types of loan 
transactions;
    (2) Payment has not been received within the customary timeframe 
allowed by the lender; or
    (3) The lender agrees with the borrower, in writing, that the rate 
or method of calculating the late payment charges will not be changed 
to increase charges while the Loan Note Guarantee is in effect.
    (c) Guarantee fees. The guaranteed loan fee will be the applicable 
guarantee fee rate multiplied by the principal loan amount multiplied 
by the percent of

[[Page 28342]]

guarantee. The one-time guarantee fee is paid when the Loan Note 
Guarantee is issued.
    (1) The fee will be paid to the Agency by the lender and is 
nonreturnable. The lender may pass the fee to the borrower.
    (2) The guarantee fee rates are available in any Agency office.


Sec. 3575.30  Loan guarantee limitations.

    The percentage of guarantee, up to the maximum allowed by this 
section, is a matter for negotiation between the lender and the Agency.
    (a) The maximum guarantee is 90 percent of eligible loss.
    (b) The lender will retain a minimum of 5 percent of the total loan 
amount. The retained amount must be from the unguaranteed portion of 
the loan and cannot be participated to another lender.


Secs. 3575.31--3575.32  [Reserved]


Sec. 3575.33  Interest rates.

    (a) General. Rates will be negotiated between the lender and the 
borrower.
    They may be either fixed or variable rates. Interest rates will be 
those rates customarily charged borrowers in similar circumstances in 
the ordinary course of business and are subject to Agency review and 
approval.
    (b) Variable rate publication. A variable interest rate must be 
tied to a base rate published periodically in a recognized national or 
regional financial publication specifically agreed to by the lender and 
borrower. Such an agreement must be documented in the borrower or 
lender loan agreement.
    (1) Interest rate caps and incremental adjustment limitations will 
also be negotiated between the lender and the borrower. Notice of any 
interest rate change proposed by the lender should allow a sufficient 
time period for the borrower to obtain any required State or other 
regulatory approval and to implement any user rate adjustments 
necessary as a result of the interest rate change. The intervals 
between interest rate adjustments will be specified in the loan 
agreement (but not more often than quarterly).
    (2) The lender must incorporate within the variable rate note, the 
provision for adjustment of payments coincident with an interest rate 
adjustment. This will ensure the outstanding principal balance is 
properly amortized within the prescribed loan maturity and eliminate 
the possibility of a balloon payment at the end of the loan.
    (c) Changes. Any change in the interest rate between the date of 
issuance of the Conditional Commitment for Guarantee and before the 
issuance of the Loan Note Guarantee must be approved by the Agency. 
Approval of such change will be shown as an amendment to the 
Conditional Commitment for Guarantee.
    (d) Different rates on guaranteed and unguaranteed portion of the 
loan. It is permissible to have one interest rate on the guaranteed 
portion of the loan and another interest rate on the unguaranteed 
portion of the loan, provided the lender and borrower agree, and:
    (1) The rate on the unguaranteed portion does not exceed that 
currently being charged on loans for similar purposes to borrowers 
under similar circumstances; and,
    (2) The rate on the guaranteed portion of the loan will not exceed 
the rate on the unguaranteed portion. This requirement does not apply 
when the unguaranteed rate is variable and the guaranteed portion is 
fixed.
    (e) Multi-rates. When multi-rates are used, the lender will provide 
the Agency with the overall effective interest rate for the entire 
loan. Multi-rate loans may be either fixed, variable, or a combination 
of fixed and variable. When a combination of fixed and variable 
interest rates are used, the interest rate for the unguaranteed portion 
will not be lower than the guaranteed portion of the loan.


Sec. 3575.34  Terms of loan repayment.

    (a) General. Principal and interest on the loan will be due and 
payable as provided in the note except, any interest accrued as the 
result of the borrower's default on the guaranteed loan over and above 
that which would have accrued at the note rate on the guaranteed loan 
will not be guaranteed by the Agency. The lender will structure 
repayments as established in the loan agreement between the lender and 
borrower. Ordinarily, such installments will be scheduled for payment 
as agreed upon by the lender and borrower on terms that reasonably 
ensure repayment of the loan. However, the first installment to include 
a repayment of principal may be scheduled for payment after the project 
is operable and has begun to generate income. Such installment must be 
due and payable within 3 years from the date of the note and at least 
annually thereafter. Interest will be due at least annually from the 
date of the note. Monthly payments will be required except for 
borrowers with income limited to less frequent intervals.
    (b) Term length. The maximum time allowable for final maturity for 
a guaranteed CP loan will be limited to the useful life of the 
facility, not to exceed 40 years.
    (c) Balloon payments. The principal balance should be properly 
amortized within the prescribed loan maturity. Balloon payments at the 
end of the loan are prohibited.


Secs. 3575.35--3575.36  [Reserved]


Sec. 3575.37  Insurance and fidelity bonds.

    The lender must provide evidence that the borrower has adequate 
insurance and fidelity bond coverage by loan closing or start of 
construction, whichever occurs first. Adequate coverage must be 
maintained for the life of the loan and is subject to Agency review and 
approval.


Secs. 3575.38--3575.39  [Reserved]


Sec. 3575.40  Equal opportunity and Fair Housing Act requirements.

    (a) Equal Credit Opportunity Act. The lender will comply with the 
requirements of title V of the Equal Credit Opportunity Act (15 U.S.C. 
1691 et seq.). (See the Federal Reserve Board Regulation, 12 CFR part 
202.)
    (b) Fair Housing Act. Certain housing-related projects such as 
nursing homes, group homes, or assisted-living facilities must comply 
with the requirements of the Fair Housing Act (42 U.S.C. 3601 et seq.). 
This includes completion of an Affirmative Fair Housing Marketing Plan 
and compliance with the Housing and Urban Development accessibility 
guidelines except for areas open to the public which are covered by the 
Americans with Disabilities Act (42 U.S.C. 12181 et seq.). The lender 
will determine that the borrower has a valid plan in effect at all 
times.


Sec. 3575.41  [Reserved]


Sec. 3575.42  Design and construction requirements.

    The lender will provide the Agency with a written certification at 
the end of construction that all funds were utilized for authorized 
purposes. The borrower and the lender will authorize designs and plans 
based upon the preliminary architectural and engineering reports or 
plans approved by the lender and concurred in by the Agency. The 
borrower will take into consideration any lender or Agency comments 
when the facility is being designed.
    (a) Architectural and engineering practices. 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 must ensure that the planned project 
will be completed within the available funds and, once

[[Page 28343]]

completed, will be suitable for the borrower's needs.
    (b) Construction monitoring. The lender will monitor the progress 
of construction and undertake the reviews and inspections necessary to 
ensure that construction proceeds in accordance with the approved 
plans, specifications, and contract documents and that funds are used 
for eligible project costs. The lender must expeditiously report any 
problems in project development to the Agency.
    (c) Equal employment opportunities. For all construction contracts 
in excess of $10,000, the contractor must comply with Executive Order 
11246 entitled ``Equal Employment Opportunity'' as amended and as 
supplemented by applicable Department of Labor regulations (41 CFR part 
60-1). The borrower and lender are responsible for ensuring that the 
contractor complies with these requirements.
    (d) Americans with Disabilities Act. Community Facilities loans 
which involve the construction of, or addition to, facilities that 
accommodate the public and commercial facilities as defined by the 
Americans with Disabilities Act (42 U.S.C. 12181--et seq.) must comply 
with that Act. The lender and borrower are responsible for compliance.


Sec. 3575.43  Other Federal, State, and local requirements.

    In addition to the specific requirements of this subpart and 
beginning on the date of issuance of the Loan Note Guarantee, proposals 
for facilities financed in whole or in part with a loan guaranteed by 
the Agency will be coordinated with all appropriate Federal, State, and 
local agencies. Borrowers and lenders will be required to comply with 
any Federal, State, or local laws or regulatory commission rules which 
are in existence and which affect the project including, but not 
limited to:
    (a) Organization and authority to design, construct, develop, 
operate, and maintain the proposed facilities;
    (b) Borrowing money, giving security, and raising revenues for 
repayment;
    (c) Land use zoning;
    (d) Health, safety, and sanitation standards; and
    (e) Protection of the environment and consumer affairs.


Secs. 3575.44-3575.46  [Reserved]


Sec. 3575.47  Economic feasibility requirements.

    All projects financed under the provisions of this section must be 
based on taxes, assessments, revenues, fees, or other sources of 
revenues in an amount sufficient to provide for facility operation and 
maintenance, a reasonable reserve, and debt payment. Other sources of 
revenue or guarantors are particularly important in considering the 
feasibility of recreation-type loans. The lender is responsible for 
determining the credit quality and economic feasibility of the proposed 
loan and must address all elements of the credit quality in a written 
financial feasibility analysis which includes adequacy of equity, cash 
flow, security, history, and management capabilities. Financial 
feasibility reports must take into consideration any interest rate 
adjustment which may be instituted under the terms of the note. The 
lender's financial credit analysis may also serve as the feasibility 
analysis when sufficient evidence is included to determine economic 
feasibility as well as financial viability.
    (a) Financial feasibility. The borrower, lender, or other qualified 
entity must prepare the financial feasibility analysis (suggested 
financial feasibility guidelines are available in any Agency office) in 
the following instances:
    (1) Facilities primarily used for fire and rescue services;
    (2) Facilities that are not dependent on facility revenues for debt 
payment;
    (3) Loans of less than $500,000; or
    (4) Projects in which the borrower has operated similar facilities 
on a financially successful basis.
    (b) Utility projects. The borrower's consulting engineer may 
complete the financial feasibility analysis for utility systems.
    (c) Other community facilities. Financial feasibility reports for 
all other facilities must be prepared by a qualified entity not having 
a direct interest in the management of the facility. The lender may 
prepare the feasibility study if qualified staff is available.
    (d) Exceptions. The Agency loan approval official may exempt the 
lender from the requirement for an independent financial feasibility 
report (when requested by the borrower and the lender) provided the 
approval official determines that the financial feasibility analysis 
prepared by the borrower fairly represents the financial feasibility of 
the facility and the financial feasibility analysis contains an 
accurate projection of the usage, revenues, and expenses of the 
facility.
    (e) Insufficient information. When the lender or Agency has 
insufficient information to determine the borrower's repayment ability, 
an independent feasibility analysis is required.


Sec. 3575.48  Security.

    (a) Lender responsibility. The lender is responsible for obtaining 
and maintaining proper and adequate security to protect the interest of 
the lender, the holder, and the Government.
    (b) Type of security. Security must be of such a nature that 
repayment of the loan is reasonably ensured when considered with the 
integrity and ability of project management, soundness of the project, 
and the borrower's prospective earnings. The security may include, but 
is not limited to, the following: General obligation bonds, revenue 
bonds, pledge of taxes or assessments, assignment of facility revenue, 
land, easements, rights-of-way, water rights, buildings, machinery, 
equipment, accounts receivable, contracts, cash, or other accounts or 
assignments of leases or leasehold interest.
    (c) Separate security. All security must secure the entire loan. 
The lender will not take separate security to secure only the 
unguaranteed portion of the loan. The lender will not require 
compensating balances or certificates of deposit as a means of 
eliminating the lender's exposure on the unguaranteed portion of the 
loan.


Secs. 3575.49--3575.51  [Reserved]


Sec. 3575.52  Processing.

    (a) Preapplications. (1) The preapplication package must be 
submitted either alone or the necessary information may be submitted 
simultaneously with the application. The preapplication package will 
contain:
    (i) An Application for Federal Assistance on a form provided by the 
Agency (available in any Agency office);
    (ii) State intergovernmental or other type review comments and 
recommendations for the borrower's project (clearinghouse comments, if 
applicable);
    (iii) Supporting documentation necessary to make an eligibility 
determination such as financial statements, audits, copies of 
organizational documents, existing debt instruments, etc.; and
    (iv) Documentation of lender eligibility in accordance with 
Sec. 3575.27.
    (2) If the Agency determines that the project may meet requirements 
and is likely to be funded, the lender must submit a complete 
application if it has not previously submitted one. The Agency must do 
an environmental review before further processing will be completed.
    (b) Applications. Contents of application package:

[[Page 28344]]

    (1) Application for Loan and Guarantee on a form prescribed by the 
Agency (available in any Agency office);
    (2) Proposed loan agreement;
    (3) Request for Environmental Information (available in any Agency 
office);
    (4) Preliminary architectural or engineering report;
    (5) Cost estimates;
    (6) Appraisal reports (as appropriate);
    (7) Credit reports;
    (8) Financial feasibility analysis and report; and
    (9) Any additional information required.


Sec. 3575.53  Evaluation of application.

    If the Agency determines that the borrower is eligible, the 
proposed loan is for an eligible purpose, there is reasonable assurance 
of repayment ability, sufficient collateral and equity exists, the 
proposed loan complies with all applicable statutes and regulations, 
the environmental review is complete and considered in determining 
compliance, and adequate funds are available, the Agency will provide 
the lender and the borrower with the Conditional Commitment for 
Guarantee, listing all conditions for the guarantee. Applicable 
requirements will include the following:
    (a) Approved use of guaranteed loan funds (source and use of 
funds);
    (b) Rates and terms of the loan;
    (c) Scheduling of payments;
    (d) Number of customers;
    (e) Security and lien priority;
    (f) Appraisals;
    (g) Insurance and bonding;
    (h) Financial reporting;
    (i) Equal opportunity and nondiscrimination;
    (j) Environment or mitigation;
    (k) Americans with Disabilities Act;
    (l) By-laws and articles of incorporation changes; and
    (m) Other requirements necessary to protect the Government.


Sec. Sec. 3575.54-3575.58  [Reserved]


Sec. 3575.59  Review of requirements.

    (a) Lender and borrower. The lender and borrower must complete and 
sign the Acceptance of Conditions and return a copy to the Agency as 
soon as possible. Notwithstanding the preceding sentence, if certain 
conditions cannot be met, the lender and borrower may propose alternate 
conditions for Agency consideration.
    (b) Cancellation. If the lender decides at any time after receiving 
a Conditional Commitment for Guarantee that it no longer wants a 
guarantee, the lender must immediately advise the Agency of the 
cancellation.
    (c) Modifications. The lender agrees that once the Conditional 
Commitment for Guarantee is issued and accepted by the lender and 
borrower, it will not be modified as to the scope of the project, 
overall facility concept, project purpose, use of proceeds, or other 
terms and conditions.


Sec. Sec. 3575.60-3575.62  [Reserved]


Sec. 3575.63  Conditions precedent to issuance of the Loan Note 
Guarantee.

    The Loan Note Guarantee will not be issued until:
    (a) The lender certifies that:
    (1) No changes have been made in the lender's loan conditions and 
requirements since the issuance of the Conditional Commitment for 
Guarantee except those approved in the interim by the Agency in 
writing.
    (2) All planned property acquisition has been completed and all 
development has been substantially completed in accordance with plans, 
specifications, and applicable building codes. No costs have exceeded 
the amounts approved by the lender and the Agency.
    (3) Required insurance is in effect.
    (4) All equal opportunity and Fair Housing Plan requirements have 
been met.
    (5) The loan has been properly closed and the required security 
instruments have been obtained on any after-acquired property that 
cannot be covered initially under State statutory provisions.
    (6) The borrower has marketable title to the collateral then owned 
by the borrower, subject to the instrument securing the loan to be 
guaranteed and subject to any other exceptions approved, in writing, by 
the Agency.
    (7) 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 time.
    (8) All other requirements of the Conditional Commitment for 
Guarantee have been met.
    (9) Lien priorities are consistent with requirements of the 
Conditional Commitment for Guarantee.
    (10) The loan proceeds have been disbursed for purposes and in 
amounts consistent with the Conditional Commitment for Guarantee and as 
specified on the application for the guaranteed loan. A copy of a 
detailed statement by the lender detailing the use of loan funds will 
be attached to support this certification.
    (11) There has been no substantive adverse change in the borrower's 
financial condition nor any other adverse change in the borrower during 
the period of time from the Agency's issuance of the Conditional 
Commitment for Guarantee to issuance of the Loan Note Guarantee. The 
lender's certification must address all adverse changes of the borrower 
and the guarantors. For purposes of this paragraph, the term borrower 
includes any parent, affiliate, or subsidiary of the borrower.
    (12) All Federal, State, and local design and construction 
requirements have been met.
    (13) The lender understands and will meet the requirements of the 
Debt Collection Act (chapter 37 of title 31 of the United States Code).
    (14) The lender would not make the loan without an Agency 
guarantee.
    (b) The lender has executed and delivered the Lender's Agreement 
and closing report for the guaranteed loan along with the appropriate 
guarantee fee.
    (c) The lender has advised the Agency of plans to sell or assign 
any part of the loan as provided in the Lender's Agreement.
    (d) Where applicable, the lender must certify that the borrower has 
obtained:
    (1) A legal opinion relative to the title to rights-of-way and 
easements. Lenders are responsible for ensuring that borrowers have 
obtained valid, continuous, and adequate rights-of-way and easements 
needed for the construction, operation, and maintenance of a facility.
    (2) A title opinion or title insurance showing ownership of the 
land and all mortgages or other lien defects, restrictions, or 
encumbrances, if any. It is the responsibility of the lender to ensure 
that the borrower has obtained and recorded such releases, consents, or 
subordinations to such property rights from holders of outstanding 
liens or other instruments as may be necessary for the construction, 
operation, and maintenance of the facility and to provide the required 
security. For example, when a site is for major structures for utility-
type facilities (such as a gas distribution system) and the lender and 
borrower are able to obtain only a right-of-way or easement on such a 
site rather than a fee simple title, such a title opinion must be 
requested.
    (e) For loans exceeding $150,000, the lender has certified its 
compliance with the Anti-Lobby Act (18 U.S.C. 1913). Also, if any funds 
have been, or will be, paid to any person for influencing or attempting 
to influence an officer or employee of any agency, a Member of 
Congress, an officer or employee of Congress, or an employee of a 
Member of Congress in connection with this

[[Page 28345]]

commitment providing for the United States to guarantee a loan, the 
lender shall completely disclose such lobbying activities in accordance 
with 31 U.S.C. 1352.
    (f) If the Loan Note Guarantee cannot be issued before the 
Conditional Commitment expires, the lender must submit a written 
request for an extension of the expiration date. The lender must 
document and certify to paragraph (a)(1) and (a)(11) of this section 
specifically identifying any modifications.
    (g) Coincident with, or immediately after, loan closing, the lender 
will contact the Agency and provide those documents and certifications 
required in this section. For loans to public bodies, lenders may 
require an opinion from recognized bond counsel regarding the adequacy 
of the preparation and issuance of the debt instruments. Only when the 
Agency is satisfied that all conditions for the guarantee have been met 
will the Loan Note Guarantee be executed.


Sec. 3575.64  Issuance of Lender's Agreement, Loan Note Guarantee, and 
Assignment Guarantee Agreement.

    (a) Lender's Agreement. If the Agency finds that all requirements 
have been met, the lender and the Agency will execute the Lender's 
Agreement. The original will be retained by the Agency and a signed 
duplicate original will be retained by the lender. A separate Lender's 
Agreement must be executed for each loan to be guaranteed by the 
Agency.
    (b) Loan Note Guarantee. (1) Upon receipt of the executed Lender's 
Agreement and after all requirements have been met, the Agency will 
execute the Loan Note Guarantee. All originals of the Loan Note 
Guarantee will be provided to the lender and attached to the note.
    (2) If the lender has selected the multi-note system, a Loan Note 
Guarantee will be prepared and attached to each note the borrower 
issues. All the notes will be listed on the Loan Note Guarantee. Not 
more than ten notes will be issued for the guaranteed portion (unless 
the Agency and borrower agree otherwise) and one note issued for the 
unguaranteed portion.
    (c) Assignment of Guarantee. In the event the lender assigns the 
guaranteed portion of the loan to a holder, the lender, holder, and 
Agency will execute an Agency prescribed Assignment Guarantee 
Agreement.
    (d) Failure to meet conditions. If the Agency determines that it 
cannot execute the Loan Note Guarantee because all requirements have 
not been met, the lender will have a reasonable period within which to 
satisfy the objections. If the lender satisfies the objections within 
the time allowed, the guarantee will be issued.
    (e) Loan closing report. The lender will prepare and deliver a 
guaranteed loan closing report for each loan to be guaranteed and a 
guarantee fee to the Agency in return for the Loan Note Guarantee.


Sec. 3575.65  Lender's sale or assignment of the guaranteed portion of 
loan.

    The lender may retain all of the guaranteed loan. The lender must 
not sell or participate any amount of the guaranteed or non-guaranteed 
portion of the loan to the borrower or to members of the borrower's 
immediate families, the borrower's officers, directors, stockholders, 
other owners, or a subsidiary or affiliate. Disposition of the 
guaranteed portion of a loan may not be made prior to full 
disbursement, completion of construction, and acquisition of real 
estate and equipment without the prior written approval of the Agency. 
If the lender desires to market all or part of the guaranteed portion 
of the loan at, or subsequent to, loan closing, the loan must not be in 
default.
    (a) Assignment. Any sale or assignment by the lender of the 
guaranteed portion of the loan must be accomplished in accordance with 
the conditions in the Lender's Agreement.
    (b) Participation. The lender may obtain participation in the loan 
under its normal operating procedures.
    (c) Minimum retention. The lender is required to hold in its own 
portfolio or retain a minimum of 5 percent of the total loan amount. 
This amount must be of the non-guaranteed portion of the loan and 
cannot be participated to another. The lender may sell the remaining 
amount of the non-guaranteed portion of the loan only through 
participation.


Sec. Sec. 3575.66--3575.68  [Reserved]


Sec. 3575.69  Loan servicing.

    (a) Lender responsibilities. The lender is responsible for 
servicing the entire loan in accordance with the lender's loan 
agreement. The unguaranteed portion of the loan will not be paid first 
nor given any preference or priority over the guaranteed portion of the 
loan. The lender is responsible for taking all servicing actions that a 
prudent lender would perform in servicing a portfolio of loans that are 
not guaranteed. This responsibility includes, but is not limited to, 
the collection of payments; obtaining compliance with the covenants and 
provisions in the note, loan agreement, security instrument, or any 
supplemental agreements; obtaining and analyzing financial statements; 
verifying the payment of taxes and insurance premiums; and maintaining 
liens on collateral. The lender must notify the Agency of any violation 
of the loan agreement with the borrower within 30 days of such 
violation.
    (b) Financial reports. The lender must obtain the financial 
statements required by the Loan Agreement. The lender must submit the 
borrower's 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. Additionally, when applicable, the 
lender will require an audit in accordance with Office of Management 
and Budget (OMB) circulars (available in any Agency office).
    (c) Delinquent loans. The lender will service delinquent loans in 
accordance with the Lender's Agreement and reasonable and prudent 
lending standards.
    (d) Loan balances. The lender must report to the Agency the 
outstanding principal and interest balance on each guaranteed loan 
semiannually.
    (e) Collateral inspections. The lender will inspect the collateral 
as often as necessary to properly service the loan.


Sec. Sec. 3575.70--3575.72  [Reserved]


Sec. 3575.73  Replacement of loss, theft, destruction, mutilation, or 
defacement of Loan Note Guarantee or Assignment Guarantee Agreement.

    (a) Replacement of Loan Note Guarantee. The Agency may issue a 
replacement Loan Note Guarantee or Assignment Guarantee Agreement which 
may have been lost, stolen, destroyed, mutilated, or defaced to the 
lender or holder upon receipt of a certificate of loss and an indemnity 
bond in accordance with this section.
    (b) Lender responsibilities. 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 properly notarized which includes:

[[Page 28346]]

    (i) Legal name and present address of either the lender or the 
holder who is requesting the replacement forms;
    (ii) Legal 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, Agency case 
number, date of the Loan Note Guarantee, Assignment Guarantee 
Agreement, face amount of the evidence of debt purchased, date of 
evidence of debt, present balance of the loan, percentages of guarantee 
and, if 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) The holder shall present evidence demonstrating current 
ownership of the Loan Note Guarantee and Note or 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 copies of the endorsement cannot be obtained, best 
available records of transfer must be presented 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 Government corporation, a State or 
Territory, or the District of Columbia.
    (3) All indemnity bonds must be issued and payable to the United 
States of America. The bond shall be in an amount not less than the 
unpaid principal and interest. The bond shall hold the Government 
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.


Sec. 3575.74  [Reserved]


Sec. 3575.75  Defaults by borrower.

    (a) Lender notification to Agency. The lender must notify the 
Agency when a borrower is 30 days past due on a payment, has not met 
its responsibilities of providing the required financial statements, or 
is otherwise in default. The lender will continue to keep the Agency 
informed on a bimonthly basis 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 borrower to resolve the default. The lender 
will provide a summary of the meeting and any decisions or actions 
agreed upon.
    (b) Servicing options. In considering servicing options, the 
prospects for providing a permanent cure without adversely affecting 
the risks to the Agency and the lender must be the paramount objective. 
Temporary curative actions (such as payment deferments or collateral 
subordination) must strengthen the loan and be in the best financial 
interest of the lender and the Agency. Some of these actions may 
require concurrence of the holder.
    (c) Multi-note. If the loan was closed with the multi-note option, 
the lender may need to possess all notes to take some servicing 
actions. In those situations when the Agency is holder of some of the 
notes, the Agency may endorse the notes back to the lender, provided a 
proper receipt is received from the lender which defines the reason for 
the transfer. Under no circumstances will the Agency endorse the 
original Loan Note Guarantee to the lender.


Sec. Sec. 3575.76--3575.77  [Reserved]


Sec. 3575.78  Repurchase of loan.

    (a) Repurchase by lender. The lender has the option to repurchase 
the loan from a holder within 30 days of written demand from the holder 
when the borrower is in default not less than 60 days on payment. The 
repurchase will be for an amount equal to the unpaid guaranteed portion 
of principal and accrued interest less the lender's servicing fee. The 
guarantee does 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. The holder will concurrently send a copy of the 
demand to the Agency. 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 permit the borrower to cure the default, where reasonable. 
The lender will notify the holder and the Agency of its decision within 
30 days of receipt of demand from the holder.
    (b) Agency repurchase. (1) If the lender does not repurchase 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. 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. The lender shall not charge the Agency any servicing 
fees nor are any such fees collectible from the Agency.
    (2) The holder's demand to the Agency must include a copy of the 
written demand made upon the lender. The holder or duly authorized 
agent must also include evidence of the 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 Agency will be subrogated to all rights of the holder. The holder 
must include in the demand the amount due including unpaid principal, 
unpaid interest to date of demand, and interest subsequently accruing 
from the date of demand to the proposed payment date. Unless otherwise 
agreed to by the Agency, such proposed payment will not be later than 
30 days from the date of demand.
    (3) The lender must promptly provide the Agency with the 
information necessary for the Agency's determination of the appropriate 
amount due the holder upon the Agency's notification to the lender of 
the holder's demand for payment. This information must be certified by 
an authorized officer of the lender. Any discrepancy between the amount 
claimed by the holder and the information submitted by the lender must 
be resolved before payment will be approved. The Agency will notify 
both parties and such conflict will suspend the running of the 30-day 
payment requirement.
    (4) Any purchase by the Agency does not change, alter, or modify 
any of the lender's obligations to the Agency arising from the loan or 
guarantee nor does it waive any of the Agency's rights against the 
lender. The Agency may 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 Loan Note Guarantee.
    (c) Repurchase for servicing. When the lender determines that 
repurchase of the guaranteed portion of the loan is necessary to 
service the loan, the holder must sell the guaranteed portion to the 
lender for the unpaid principal and

[[Page 28347]]

interest balance (less the lender's servicing fee). The guarantee does 
not cover interest accruing after 90 days from the date the lender's or 
Agency's letter requesting the holder to tender its guaranteed portion. 
The lender must not repurchase from the holder for arbitrage purposes 
to further its own financial gain. Any repurchase must be made only 
after the lender obtains the Agency 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.


Sec. 3575.79  [Reserved]


Sec. 3575.80  Interest rate changes after loan closing.

    (a) General. Subject to the restrictions below, the borrower, 
lender, and holder (if any) may collectively effect a permanent 
reduction in the interest rate on the guaranteed loan at any time 
during the life of the loan on written agreement by all of the 
applicable parties. After such a permanent reduction, the Loan Note 
Guarantee will only cover losses of interest at the reduced interest 
rate. The Agency must be notified by the lender, in writing, within 10 
calendar days of the change. When the Agency is a holder, it will 
concur only when it is demonstrated that the change is more viable than 
liquidation and that the Government's financial interests are not 
adversely affected. Factors which will be considered in making such 
determination are the Government's cost of borrowing money and the 
project's enhancement of rural development. The monetary recovery must 
be greater than the liquidation recovery, and a financial feasibility 
analysis must show the project's continued viability.
    (1) Fixed rates cannot be changed to variable rates to reduce the 
interest rate to the borrower unless the variable rate has a ceiling 
which is less than the original fixed rate.
    (2) Variable rates can be changed to a lower fixed rate. In a final 
loss settlement when qualifying rate changes are made with the required 
written agreements and notification, the interest will be calculated 
for the periods the given rates were in effect. The lender must 
maintain records which adequately document the accrued interest 
claimed.
    (3) The lender is responsible for the legal documentation of 
interest rate changes. However, the lender may not issue a new note.
    (b) Increases. No increases in interest rates will be permitted 
under the loan guarantee except the normal fluctuations in approved 
variable interest rate loans.


Sec. 3575.81  Liquidation.

    Liquidation will occur when the lender concludes that liquidation 
of the guaranteed loan is necessary because of default or third party 
actions that the borrower cannot, or will not, cure or eliminate within 
a reasonable period of time and the Agency concurs with the lender; or 
the Agency, at any time, independently concludes that liquidation is 
necessary. The lender will proceed as expeditiously as possible, 
including giving any notices or taking any legal actions required by 
the security instruments.
    (a) General. If a lender has made a loan guaranteed by the Agency 
under previous regulations, the lender has the option to liquidate the 
loan under the provisions of this subpart or under the provisions of 
previous regulations. The lender will notify the Agency in writing 
within 10 days after its decision to liquidate, which regulatory 
provisions it chooses to use. The lender may not choose some provisions 
of one regulation and other provisions of the other regulation.
    (b) Acquiring property titles. If a lender acquires title to 
property, the Agency may elect to permit the lender the option of 
calculating the final loss settlement using the net proceeds received 
at the time of the ultimate disposition of the property. The lender 
must submit to the Agency a written request to use this option within 
15 days of acquiring title and the Agency must agree, in writing, prior 
to the lender submitting any request for estimated loss payment.
    (c) Liquidation plan. The lender will (within 30 days after a 
decision to liquidate) submit to the Agency, in writing, a proposed, 
detailed liquidation plan. Upon approval by the Agency of the 
liquidation plan, the lender will commence liquidation. The lender's 
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 notes and related security 
instruments, a copy of the payment ledger or other documentation which 
reflects the outstanding loan balance and accrued interest to date, and 
the method of computing the interest;
    (2) A complete list of collateral;
    (3) The recommended liquidation methods for making the maximum 
collection possible on the indebtedness and the justification for such 
methods, including the recommended action for acquiring and disposing 
of all collateral;
    (4) Necessary steps for preservation of the collateral;
    (5) Copies of the borrower's latest available financial statements;
    (6) An itemized list of estimated liquidation expenses expected to 
be incurred and justification for each expense;
    (7) A schedule to periodically report to the Agency on the progress 
of the liquidation;
    (8) Estimated protective advance amounts with justification;
    (9) Proposed protective bid amounts on collateral to be sold at 
auction and a discussion of how the amounts were determined;
    (10) If a voluntary conveyance is considered, the proposed amount 
to be credited to the guaranteed debt;
    (11) Legal opinions, as needed; and
    (12) If the outstanding balance of principal and interest is less 
than $250,000, the lender will obtain an estimate of fair market and 
potential liquidation value of the collateral. If the outstanding 
balance of principal and interest is $250,000 or more, the lender will 
obtain an independent appraisal report on all collateral securing the 
loan which will reflect the fair market value and potential liquidation 
value. The independent appraiser's fee will be shared equally by the 
Agency and the lender.
    (d) Partial liquidation plan. If actions are necessary to 
immediately preserve and protect the collateral, a partial liquidation 
plan may be submitted and, when approved, must be followed by a 
complete liquidation plan prepared by the lender.
    (e) Disposition of collateral. Disposition of collateral acquired 
by the lender must be approved, in writing, by the Agency when:
    (1) The lender's cost to acquire the collateral of a borrower 
exceeds the potential recovery value of the security and the lender 
proposes abandoning the collateral in lieu of liquidation; or
    (2) The acquired collateral is to be sold to the borrower, 
borrower's stockholders or officers, or the lender or lender's 
stockholders or officers.
    (f) Agency liquidation. The Agency will liquidate at its option 
only when it is a holder and there is reason to believe the lender is 
not likely to initiate liquidation efforts that will result in maximum 
recovery. When the Agency liquidates, reasonable liquidation expenses 
will be assessed against the proceeds derived from the sale of the 
collateral.
    (g) Final loss payment. Final loss payments will be made only after 
all collateral has been properly accounted for and liquidation expenses 
are

[[Page 28348]]

determined to be reasonable and within approved limits. Any estimated 
loss payments made to the lender will be credited against the final 
loss on the guaranteed loan. The amount of an estimated loss payment 
must be credited as a deduction from the principal balance of the loan.


Sec. 3575.82  [Reserved]


Sec. 3575.83  Protective advances.

    Protective advances can only be added to the loan account for 
purposes of requirements to preserve the value of the security. 
Protective advances constitute an indebtedness of the borrower to the 
lender and must be secured by collateral to the same extent as 
principal and interest. Protective advances include, but are not 
limited to, advances made for taxes, annual assessments, ground rent, 
hazard and flood insurance premiums affecting the collateral (including 
any other expenses necessary to protect the collateral). Attorney fees 
are not a protective advance.
    (a) Agency approval. The Agency must approve, in writing, all 
protective advances on loans within its loan approval authority which 
exceed a total cumulative advance amount of $5,000 to the same 
borrower. Protective advances must be reasonable when associated with 
the value of the collateral being preserved.
    (b) Preserving collateral. When considering protective advances, 
sound judgment must be exercised in determining that the additional 
funds advanced will actually preserve collateral and recovery is 
actually enhanced by making the advance.


Sec. 3575.84  Additional loans or advances.

    The lender will not make additional expenditures or new loans to 
the borrower without first obtaining the written approval of the Agency 
even though such expenditures or loans will not be guaranteed.


Sec. 3575.85  Bankruptcy.

    (a) Calculating losses. Report of Loss form (available in any 
Agency office) will be used for calculating estimated and final loss 
determinations.
    (b) Lender responsibility. The lender is responsible for protecting 
the guaranteed loan debt and all the collateral securing it in 
bankruptcy proceedings. These responsibilities include, but are not 
limited to, the following:
    (1) Filing a proof of claim, where necessary, and all necessary 
papers and pleadings;
    (2) Attending and, where necessary, participating in meetings of 
the creditors and all court proceedings;
    (3) Immediately seeking adequate protection of the collateral if it 
is subject to being used by the trustee in bankruptcy or the debtor in 
possession;
    (4) Where appropriate, seeking involuntary conversion of a pending 
chapter 11 case to a liquidation proceeding or seeking dismissal of the 
proceedings; and
    (5) Keeping the Agency adequately and regularly informed, in 
writing, of all aspects of the proceedings.
    (c) Appraisals. In a chapter 9 or chapter 11 reorganization, the 
lender must obtain an independent appraisal of the collateral if the 
Agency believes an independent appraisal is necessary. The Agency and 
the lender will share the appraisal fee equally.
    (d) Liquidation expenses. Only expenses authorized by the court of 
chapter 11 reorganizations, or chapters 11 or 7 liquidation (unless the 
liquidation is by the lender), may be deducted from the collateral 
proceeds.
    (e) Repurchase from the holder. The Agency or the lender, with the 
approval of the Agency, may initiate the repurchase of the unpaid 
guaranteed portion of the loan from the holder. If the lender is the 
holder, an estimated loss payment may be filed at the initiation of a 
chapter 7 proceeding or after a chapter 11 proceeding becomes a 
liquidation proceeding. Any loss payment on loans in bankruptcy must be 
approved by the Agency.
    (f) Chapter 11 bankruptcy. 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 may request an estimated loss payment of the guaranteed 
portion of the accrued interest and principal discharged by the court. 
If the court approves revisions to the chapter 11 reorganization plan, 
subsequent estimated loss payments may be requested in accordance with 
the court approved changes. Once the reorganization plan has been 
satisfactorily 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.
    (g) Agency approval of estimated liquidation expenses. The Agency 
must approve, in advance and in writing, the lender's estimated 
liquidation expenses of collateral in a liquidation if the liquidation 
is performed by the lender. These expenses must be reasonable and 
customary and not include in-house expenses of the lender.
    (h) Reconciliation. In the event that the estimated loss payment 
exceeds the actual loss, the lender will reimburse the Agency the 
amount in excess of the actual loss plus interest at the note rate from 
the date of the estimated loss payment.


Sec. Sec. 3575.86--3575.87  [Reserved]


Sec. 3575.88  Transfers and assumptions.

    (a) General. For all transfers and assumptions, the lender must 
concur in the plans for disposition of funds in the transferor's debt 
service, reserve, and operation and maintenance account. The Agency 
will approve, in writing, transfers and assumptions of loans to 
transferees who will continue the original purpose of the guaranteed 
loan subject to the following applicable provisions:
    (1) When the transaction is to a member of the borrower's 
organization, it will be at an amount which will not result in a loss 
to the lender.
    (2) Transfers to eligible borrowers will receive preference if 
recovery to the lender from the sale price is not less than it would be 
if the transfer was to an ineligible borrower.
    (3) The present borrower is unable or unwilling to accomplish the 
objectives of the guaranteed loan, and the transfer will be to the 
lender's and Agency's advantage.
    (4) The transferee will assume an amount at least equal to either 
the present market value or the debt, whichever is less.
    (b) Transfers to an eligible borrower. (1) The total indebtedness 
may be transferred to an eligible borrower on the same terms.
    (2) The total indebtedness may be transferred to another eligible 
borrower on different terms not to exceed those terms for which an 
initial guaranteed loan can be made.
    (3) Less than the total indebtedness may be transferred to another 
eligible borrower on the same or different terms and the pro rata share 
of any eligible loss paid to the lender.
    (4) A guaranteed loan for which the transferee is eligible may be 
made in connection with a transfer subject to the policies and 
procedures governing the type of loan being made.
    (5) If the transferor is to receive a payment for the equity, the 
total debt must be assumed.
    (c) Ineligible borrower. Transfers to ineligible borrowers are 
considered only when needed as a method for servicing

[[Page 28349]]

problem cases when an eligible transferee is not available. Transfers 
should not be considered as a means by which members can obtain equity 
or as a method of providing a source of easy credit for purchasers. 
Transfers must meet the following requirements:
    (1) All transfers to ineligible borrowers will include a one-time 
nonrefundable transfer fee to the Agency of no more than one percent. 
Transfer fees will be collected, and payments applied, in accordance 
with paragraph (d) of this section.
    (2) For all loans covered by this subpart, the Agency may approve a 
transfer of indebtedness to, and assumption of, a loan by a transferee 
who does not meet the eligibility requirements for the kind of loan 
being assumed when the ineligible borrower will:
    (i) Make a significant down payment, and
    (ii) Agree to pay the remaining balance within not more than 15 
years. Installments will be at least equal to the amount amortized over 
a period not greater than the remaining life of the debt being 
transferred, and the balance will be due the fifteenth year.
    (3) Interest rates to ineligible transferees will be the rate 
specified in the note of the transferor or the rates customarily 
charged borrowers in similar circumstances in the ordinary course of 
business and are subject to Agency review and approval. The rates may 
be either fixed or variable.
    (i) Transferees must have the ability to repay as determined by the 
lender the debt according to the Assumption Agreement and must have the 
legal authority to enter into the contract. The transferee will submit 
a current balance sheet to the lender. The lender will obtain and 
analyze the credit history of the transferee.
    (ii) The transferor may receive equity payments only when the full 
amount of the debt is assumed. However, equity payments will not be 
made on more favorable terms than those on which the balance of the 
debt will be paid.
    (d) Transfer fees. Transfer fees are a one-time nonrefundable cost 
to be collected by the lender at the time of application or proposal.
    (1) The transfer fees will be a standard fee plus the cost of the 
appraisal.
    (2) The lender will collect and submit the fee to the Agency.
    (3) The Agency may waive the transfer fee if it determines that 
such waiver is in the best interest of the Agency.
    (e) Processing transfers and assumptions. (1) In any transfer and 
assumption case, the transferor (including any guarantor) may be 
released from liability by the lender 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, or part of the loan, being 
assumed. If the transfer is for less than the entire debt:
    (i) The Agency must determine that the transferor and any guarantor 
have no reasonable debt-paying ability considering their assets and 
income at the time of transfer, and
    (ii) The lender must certify that the transferor has cooperated in 
good faith, used due diligence to maintain the collateral against loss, 
and has otherwise fulfilled all of the regulations of this subpart to 
the best of the borrower's ability.
    (2) The lender will make, in all cases, a complete credit analysis 
to determine viability of the project (subject to the Agency review and 
approval) including any requirement for deposit in an escrow account as 
security to meet the determined equity requirements for the project.
    (3) The lender will confirm that the transaction can be properly 
transferred and the conveyance instruments will be filed, registered, 
or recorded as appropriate and legally permissible.
    (4) The assumption will be made on the lender's form of Assumption 
Agreement and will contain the Agency case number of the transferor and 
transferee.
    (5) Loan terms cannot be changed by the Assumption Agreement unless 
previously approved in writing by the Agency with the concurrence of 
holder and the transferor (including guarantor if it has not been 
released from personal liability). Any new loan terms cannot exceed 
those authorized in this subpart. The lender's request will be 
supported by:
    (i) An explanation of the reasons for the proposed change in the 
loan terms, and
    (ii) Certification that the lien position securing the guaranteed 
loan will be maintained or improved, and proper hazard insurance will 
be continued in effect.
    (6) In the case of a transfer and assumption, it is the lender's 
responsibility to see that all such transfers and assumptions will be 
noted on all originals of the Loan Note Guarantee. The lender will 
provide the Agency a copy of the Transfer and Assumption Agreement.
    (7) If a loss should occur upon a complete transfer of assets and 
assumption for less than the full amount of the debt and the 
transferor-debtor (including personal guarantor) is released from 
personal liability (as provided in paragraph (e) of this section), the 
lender (if holding the guaranteed portion) may file an estimated Report 
of Loss to recover their pro rata share of the actual loss at that 
time. Approved protective advances and accrued interest made during the 
arrangement of a transfer and assumption, if not assumed by the 
transferee, will be entered on the estimated Report of Loss.


Sec. 3575.89  Mergers.

    (a) General. The Agency may approve mergers or consolidations 
(herein referred to as ``mergers'') when the resulting organization 
will be eligible for an Agency guaranteed loan and assumes all the 
liabilities and acquires all the assets of the merged borrower. Mergers 
may be approved when:
    (1) The merger is in the best interest of the Government and the 
merging borrower;
    (2) The resulting borrower can meet all required conditions as 
contained in specific loan note agreements; and
    (3) All property can be legally transferred to the resulting 
borrower.
    (b) Distinguishing mergers from transfers and assumptions. Mergers 
occur when one entity combines with another entity in such a way that 
the first entity ceases to exist as a separate entity while the other 
continues. In a consolidation, two or more entities combine to form a 
new, consolidated entity with the original entity ceasing to exist. 
Such transactions must be distinguished from transfers and assumptions 
in which a transferor will not necessarily go out of existence, and the 
transferee will not always take all the transferor's assets nor assume 
all the transferor's liabilities.


Sec. 3575.90  Disposition of acquired property.

    (a) General. When the lender acquires title to the collateral and 
the final loss claim is not paid until final disposition, the lender 
must proceed as quickly as possible to develop a plan to fully protect 
the collateral, and the lender must dispose of the collateral without 
delay.
    (b) Re-title collateral. Any collateral accepted by the lender must 
not be titled in the Agency's name in whole or in part. The Agency's 
position is that of a guarantor relating to losses, not a lender.
    (c) Collateral preservation. After acquiring the collateral, the 
lender must protect the collateral from deterioration (weather, 
vandalism, etc.). Hazard insurance in an amount necessary to

[[Page 28350]]

cover the fair market value of the collateral must be maintained.
    (d) Collateral sale. (1) The lender will prepare and submit to the 
Agency a plan on the best method of sale, keeping in mind any 
prospective purchasers. The Agency must approve the plan in writing. If 
an existing approved liquidation plan addresses the disposition of 
acquired property, no further review is required unless modification of 
the plan is needed.
    (2) Anytime there is a case when the conversion of collateral to 
cash can reasonably be expected to result in a negative net recovery 
amount, abandonment of the collateral should be considered. The Agency 
must approve abandonment in writing.


Secs. 3575.91-3575.93  [Reserved]


Sec. 3575.94  Determination and payment of loss.

    In all liquidation cases, final settlement will be made with the 
lender after the collateral is liquidated. The Agency will have the 
right to recover losses paid under the guarantee from any liable party.
    (a) General. If the lender takes title to collateral, any loss will 
be based on the collateral value at the time the lender obtains title.
    (b) Loss calculations. The Report of Loss form (available in any 
Agency office) will be used for calculations of all estimated and final 
loss determinations. Estimated loss payments may only be approved after 
the lender has submitted a liquidation plan approved by the Agency.
    (c) Estimated loss payments. When the lender is conducting the 
liquidation and owns any of the guaranteed portion of the loan, it may 
request an estimated loss payment by submitting an estimate of loss 
that will occur in connection with liquidation of the loan. An 
estimated loss payment may be approved after the Agency has approved 
the liquidation plan.
    (1) The lender will prepare and submit a Report of Loss using the 
appraised value in lieu of amount received from sale of collateral.
    (2) The estimated loss payment shall be calculated 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. At the time of final loss settlement, the lender may notify 
the borrower that the loss payment has been so applied.
    (3) After liquidation has been completed, a final Report of Loss 
will be submitted by the lender to the Agency.
    (d) Final report of loss. In all cases, a final Report of Loss must 
be submitted to the Agency. Before Agency approval of any final loss 
report, the lender must account for all funds obtained, 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 conduct an may audit and 
will determine the final loss. The lender will make its records 
available to, and otherwise assist, the Agency in making any audit it 
requires of the Report of Loss. The documentation accompanying the 
Report of Loss must support the loss claimed.
    (1) The lender must document and show that all of the collateral 
has been accounted for and properly liquidated and that liquidation 
proceeds have been properly accounted for and applied correctly on the 
loan. The Agency must be satisfied that the lender has accomplished 
this in the manner contained herein and that the lender has maximized 
the collections in conducting the liquidation.
    (2) The lender must show a breakdown on any protective advance 
amount as to the payee, purpose of the expenditure, date paid, evidence 
that the amount expended was proper, and that the amount was actually 
paid.
    (3) The lender must show a breakdown of liquidation expenses as to 
the payee, purpose of the expenditure, date paid, evidence that the 
amount expended was proper, and that the amount was actually paid.
    (4) Accrued interest should be supported by attachments showing how 
the amount was accrued by the lender. A copy of the promissory note and 
ledger will be attached. If the interest rate was a variable rate, the 
lender must include documentation of changes in the selected base rate 
and when the changes in the loan rate became effective.
    (e) Liquidation income. 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. Certain reasonable liquidation costs will be 
allowed during the liquidation process. The liquidation costs must be 
submitted as a part of the liquidation plan. Such costs will be 
deducted from gross proceeds received from the disposition of 
collateral unless the costs have been previously determined by the 
lender (with Agency concurrence) to be protective advances. If changed 
circumstances after submission of the liquidation plan require a 
revision of liquidation costs, the lender will obtain the Agency's 
written concurrence prior to proceeding with the proposed changes. No 
in-house expenses of the lender will be allowed.
    (g) Protective advance losses. In those instances where the lender 
made authorized protective advances, the lender may claim recovery for 
the guaranteed portion of any loss of monies advanced as well as 
interest resulting from such protective advances. These claims shall be 
included in the final Report of Loss.
    (h) Final loss approval. After the final Report of Loss has been 
tentatively approved:
    (1) If the actual loss is greater than any estimated loss payment, 
such loss will be paid by the Agency;
    (2) If the actual loss is less than any estimated loss payment, the 
lender will reimburse the Agency;
    (3) If the Agency conducted the liquidation, it will provide an 
accounting to the lender and will pay the lender in accordance with the 
Loan Note Guarantee.
    (i) Loss limits. The amount payable by the Agency to the lender 
cannot exceed the limits contained in the Loan Note Guarantee. If the 
Agency conducts the liquidation, loss occasioned by accruing interest 
will be covered by the guarantee only to the date the Agency accepts 
this responsibility. When the liquidation is conducted by the lender, 
loss occasioned by accruing interest will be covered to the extent of 
the guarantee to the date of final settlement provided the lender 
proceeds expeditiously with the liquidation plan approved by the 
Agency.


Sec. 3575.95  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 in accordance with the 
guaranteed percentage even if the Loan Note Guarantee has been 
terminated.


Sec. 3575.96  Termination of Loan Note Guarantee.

    The Loan Note Guarantee under this subpart will terminate 
automatically:
    (a) Upon full payment of the guaranteed loan; or
    (b) Upon full payment of any loss obligation or negotiated loss 
settlement except for future recovery provisions; or
    (c) Upon written request from the lender to the Agency, provided 
that the lender holds all of the guaranteed portion and the original 
Loan Note Guarantee is returned to the Agency.

[[Page 28351]]

Secs. 3575.97--3575.99  [Reserved]


Sec. 3575.100  OMB control number.

    The report and recordkeeping requirements contained in this 
regulation have been approved by the Office of Management and Budget 
and have been assigned OMB control number 0575-0137.

Subpart B--[Reserved]

    Dated: May 17, 1999.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 99-13117 Filed 5-25-99; 8:45 am]
BILLING CODE 3410-XV-U