[Federal Register Volume 65, Number 11 (Tuesday, January 18, 2000)]
[Rules and Regulations]
[Pages 2530-2537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-898]


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DEPARTMENT OF COMMERCE

Economic Development Administration

13 CFR Parts 308 and 314

[Docket No. 991208327-9327-01]
RIN 0610-ZA12


Requirements for Economic Adjustment Grants-Revolving Loan Fund 
Projects and Property

AGENCY:  Economic Development Administration (EDA), Department of 
Commerce (DoC).

ACTION:  Interim rule with request for comments.

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SUMMARY:  The Economic Development Administration (EDA) is amending its 
regulations consistent with recommendations of its Revolving Loan Fund 
Task Force, and comments received on EDA's interim-final rule to 
implement the comprehensive amendment to the Public Works and Economic 
Development Act of 1965, as amended by the Economic Development 
Administration Reform Act of 1998.
    EDA has clarified and simplified requirements and incorporated into 
the body of the rules, requirements unique to EDA for Revolving Loan 
Fund (RLF) projects previously appearing in Appendices A-D to 13 CFR 
part 308.

DATES:  Effective date: January 18, 2000.
    Comment date: Comments are due on or before March 20, 2000.

ADDRESSES:  Send comments to Edward M. Levin, Chief Counsel, Economic 
Development Administration, U.S. Department of Commerce, Herbert C. 
Hoover Building, 1401 Constitution Avenue, NW, Room 7005, Washington, 
DC 20230.

FOR FURTHER INFORMATION CONTACT:  Edward M. Levin, Chief Counsel, 
Telephone Number 202-482-4687, fax 202-482-5671, e-mail [email protected]

SUPPLEMENTARY INFORMATION:

Background

    The Economic Development Administration (EDA) was reauthorized for 
a five-year period by legislation enacted on November 13, 1998, 
creating stability and opportunities for EDA to better serve 
economically distressed communities across the country. On February 3, 
1999, EDA published an interim-final rule, Economic Development 
Administration Regulation: Revision to Implement the Economic 
Development Reform Act of 1998, Pub. L. 105-393, (64 FR 5347-5486). The 
public was invited to submit comments on the interim-final rule for a 
period of sixty (60) days ending April 5, 1999. EDA had postponed the 
revision of the RLF requirements until recently so that the RLF Task 
Force recommendations and public comments could be incorporated.

RLF Task Force Recommendations

    EDA's Revolving Loan Fund Task Force was established to consider 
contemporary issues of interest to the RLF community and to make 
recommendations for appropriate reforms and policies that resulted from 
such consideration. The solicitation of comments to the Task Force was 
widely publicized and included published articles in weekly and monthly 
newsletters and web sites of several national economic development 
organizations. The all-Federal Task Force, which included 
representatives from each of EDA's six regional offices and three other 
Federal Agencies, considered more than sixty comments and suggestions 
submitted by RLF operators and economic development organizations. 
Resulting Task Force recommendations involving the clarification of 
policies or regulatory changes, some of which were also suggested by 
those commenting on EDA's interim-final rule, are included in this 
interim-final rule. These recommendations were that EDA:
    1. Consider providing start-up technical assistance funding to 
train first time grantees and to cover the costs for administering 
borrower technical assistance programs associated with RLFs.
    We have added a provision as new Sec. 308.4(c)(2)(iv) to allow the 
use of in-kind local matching funds for such purposes.
    2. Provide clear criteria for determining when RLFs graduate from a 
semi-annual to annual reporting status.
    We have added specific requirements for graduating RLFs from a 
semi-annual to annual RLF reporting status, in new Sec. 308.14(a).
    3. Consider allowing loan loss reserves to be maintained by EDA 
RLFs.
    Because EDA RLFs are capitalized by grant funds (rather than by a 
loan which must be repaid to the Agency), EDA believes that there is no 
need for RLF recipients to maintain a cash reserve against loan losses 
that may occur. However, EDA does agree that a loan loss reserve 
appearing as non-cash financial statement entries should be permitted. 
We have added this provision as new Sec. 308.15(a)(2).
    4. Provide more flexibility in EDA's effective utilization of funds 
policy (also known as the excess retention policy) so that smaller RLFs 
would be able to accumulate larger amounts of loan repayments to handle 
larger loans.
    EDA has retained its basic rule, but has added a new Sec. 308.19 
clarifying the current authority to permit necessary and reasonable 
variances from this and other provisions that do not conflict with 
other legal requirements.
    5. Allow all EDA funds to be disbursed for new loans, while 
permitting loan repayments to accumulate.
    EDA does not agree with the requested change. EDA's existing 
practice is consistent with Federal requirements concerning 
disbursement of grant funds. However, the allowance of in-kind local 
share for RLFs has required that EDA articulate new requirements for 
disbursing EDA funds for RLF projects. EDA has addressed all RLF 
disbursement related issues in newly added Sec. 308.16.
    6. Commenters suggested that part 308, Appendix A, Economic 
Adjustment Program Revolving Loan Fund Plan Guidelines; Appendix B, 
Economic Adjustment Program Revolving Loan Fund Grants Standard Terms 
and Conditions; Appendix C, Economic Adjustment Program Revolving Loan 
Fund Grants Administrative Manual; and Appendix D, Economic Adjustment

[[Page 2531]]

Program Revolving Loan Fund Grants Audit Guidelines be simplified and 
combined into a single user-friendly RLF manual and that requirements 
that are specific to EDA be incorporated into EDA's final rule.
    We concur. Accordingly, we have removed Appendices A-D to part 308, 
and have incorporated requirements unique to EDA's RLF program into 13 
CFR part 308.
    The new condensed RLF manual to replace the Plan Guidelines, 
Standard Terms and Conditions, and Administrative Manual is anticipated 
to be forthcoming early in calendar year 2000. The Audit Guidelines are 
being incorporated into the Compliance Supplement to OMB Circular A-
133.

Comments on Regulatory Text

    Several similar comments were received by the RLF Task Force on the 
Regulatory Text. Comments on regulatory text not otherwise addressed by 
the RLF Task Force (see above) were as follows:
    A Commenter suggested that EDA make geographic eligibility criteria 
more flexible for regional use, noting that rural economic trade 
centers are often not eligible for EDA RLF grants even though they 
impact the adjacent jurisdictions.
    EDA does not concur that additional flexibility is required. 
Existing regulations at Sec. 300.2 and Sec. 301.2 adequately address 
applicant eligibility and establish area eligibility criteria 
sufficient to qualify distressed places consistent with statutory 
requirements.
    A commenter suggested that there be a reduction in the amount or 
percentage of non-Federal match needed to capitalize and recapitalize 
an RLF.
    EDA does not concur since current requirements are consistent with 
EDA's statutory and regulatory requirements. Local share requirements 
are explained in 13 CFR 301.4(b) and new Sec. 308.16(f).
    A commenter suggested that RLFs be allowed to pledge RLF loans to 
regional banks in order to borrow additional funds and to guarantee 
another lender's loans. Another commenter suggested that EDA encourage 
and assist in secondary market transactions as a method of increasing 
an RLF's lending capacity, provided that such transactions would not be 
a replacement for RLF recapitalization grants.
    EDA supports development of a secondary market for RLF loans. To 
further explore these issues, EDA is currently conducting an RLF 
secondary market (securitization) pilot project. Additional information 
on the pilot project can be found on EDA's Web Site, at http://www.doc.gov/eda.
    A commenter suggested that EDA allow unlimited use of RLF program 
income for purposes such as local match for other grants, loan loss 
reserves (such as for USDA's Intermediary Relending Program) or equity 
contributions.
    Although RLF recipients are provided wide latitude in using RLF 
income, which is defined in newly added Sec. 308.8, EDA does not concur 
with the suggestion concerning unlimited use of RLF program income. 
Under 15 CFR parts l4 and 24, EDA applies the principle that program 
income should be used in furtherance of the purpose of the project, in 
this case, the EDA RLF project.
    Limitations on the use of program income, consistent with 15 CFR 
parts l4 and 24 and longstanding EDA RLF practice, are in newly added 
Sec. 308.12(a).
    A commenter suggested that ceilings on administrative costs be 
revised or eliminated.
    EDA has clarified these requirements by adding new Sec. 308.14(c).
    A commenter suggested limiting EDA's RLF reporting requirements to 
ten years.
    While a 10 year rule does not apply to RLFs, EDA has clarified 
reporting requirements in new Sec. 308.14.
    Commenters suggested that EDA's property management regulations be 
revised to include provisions formerly found in appendices to part 308 
which are unique to EDA. These provisions addressed suspension and 
termination of RLFs and the treatment of proceeds of liquidated RLF 
loans.
    We concur and have changed Secs. 314.4 and 314.10 accordingly.
    A commenter suggested including personal guarantees as one of the 
required standard loan documents.
    EDA concurs with this common and prudent lending practice and has 
included personal guarantees as a required standard loan document in a 
new Sec. 308.15(b)(2)(vii).

Savings Clause

    The rights, duties, and obligations of all parties pursuant to 
parts, sections and portions thereof of the Code of Federal Regulations 
removed by this rule will continue in effect, except that EDA may waive 
administrative or procedural requirements of provisions removed by this 
rule.

Executive Order 12866 and 12875

    This rule has been determined to be significant for purposes of 
E.O. 12866, Regulatory Planning and Review. In addition, it has been 
determined that, consistent with the requirements of E.O. 12875, 
Enhancing Intergovernmental Partnership, this final rule will not 
impose any unfunded mandates upon state, local, and tribal governments.

Regulatory Flexibility Act

    Since notice and an opportunity for comment are not required to be 
given for the rule under 5 U.S.C. 553 or any other law, under sections 
603(a) and 604(a) of the Regulatory Flexibility Act (5 U.S.C. 601-612) 
no initial or final Regulatory Flexibility Analysis is required, and 
none has been prepared.

Paperwork Reduction Act

    This rule imposes no new information collection or record keeping 
requirements under the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 
et seq.), as amended, and has been cleared under OMB's clearance 
process under OMB approval numbers 0610-0095 valid until August 31, 
2002.

Administrative Procedure Act and Regulatory Flexibility Act

Executive Order 12612 (Federalism Assessment)

    This action has been reviewed in accordance with the principles and 
criteria contained in E.O. 12612. It has been determined that this 
final rule does not have significant Federalism implications to warrant 
a full Federalism Assessment under the principles and criteria 
contained in E.O. 12612.

List of Subjects

13 CFR Part 308

    Business and industry, Community development, Community facilities, 
Grant programs-business, Grant programs-community development, American 
Indians, Manpower training programs, Mortgages, Research, Technical 
assistance.

13 CFR Part 314

    Community development, Grant programs-community development.


    For the reasons set forth in the preamble, 13 CFR Chapter III, 
parts 308 and 314 are amended to read as follows:

PART 308--REQUIREMENTS FOR ECONOMIC ADJUSTMENT GRANTS

    1. The authority citation for part 308 continues to read as 
follows:

    Authority:  42 U.S.C. 3211; Department of

    1. Commerce Organization Order 10-4.
    2. Part 308 is amended by designating Secs. 308.1 through 308.6 as 
Subpart A and adding a heading for Subpart A to read as follows:

[[Page 2532]]

Subpart A--General

    3. Section 308.3 is amended by removing paragraph (c).
    4. Section 308.4 is amended by revising paragraph (c)(2)(ii) and 
(iii) and adding paragraph (c)(2)(iv) to read as follows:


Sec. 308.4  Selection and evaluation factors.

* * * * *
    (c) * * *
    (2) * * *
    (ii) The types of financing activities anticipated;
    (iii) The capacity of the RLF organization to manage lending, 
create networks between the business community and other financial 
providers, and contribute to the adjustment strategy; and
    (iv) Use of in-kind match. When in-kind match is included in a 
project, such match will be used for borrower technical assistance or 
general RLF administrative costs (e.g. the training of new RLF staff).
* * * * *
    5. Appendices A-D to part 308 are removed.
    6. Subpart B is added to read as follows:

Subpart B--Special Requirements for Revolving Loan Fund Projects 
and Uses of Grant Funds.

308.7   Revolving Loan Funds established for business leading.
308.8   Definitions.
308.9   Revolving Loan Fund Plan.
308.10   Pre-loan requirements.
308.11   Lending areas and modification of lending areas.
308.12   Revolving Loan Fund income.
308.13   Records and retention.
308.14   Revolving Loan Fund semi-annual and annual reports.
308.15   Prudent management of Revolving Loan Funds.
308.16   Disbursement of funds to Revolving Loan Funds.
308.17   Effective utilization of Revolving Loan Funds.
308.18   Uses of capital.
308.19   Variances.


Sec. 308.7  Revolving Loan Funds established for business lending.

    EDA grants to capitalize or recapitalize Revolving Loan Funds are 
most commonly used for business lending, but may also be established 
for public infrastructure lending or other authorized purposes 
involving lending. The RLF requirements in this subpart B are 
applicable to RLFs established for business lending. Appropriate 
modifications of these requirements will be addressed in special award 
conditions to accommodate non-business RLF awards.


Sec. 308.8  Definitions.

    As used in this part:
    Closed loan means any loan for which all required documentation has 
been executed, received, and reviewed.
    Guaranteed loan means a loan made and serviced by a lending 
institution under the agreement that a third party (e.g., a 
governmental agency) will purchase the guaranteed portion if the 
borrower defaults.
    Program income means gross income received by the grant RLF 
recipient or the sub-recipient directly generated by a grant supported 
activity, or earned only as a result of the grant agreement during the 
grant period. Program income includes principal repayments and RLF 
income.
    Prudent lending practices means generally accepted underwriting and 
lending practices for public loan programs based on sound judgment to 
protect Federal and lender interests. Such practices cover loan 
processing, documentation, loan approval, collections, servicing, 
administrative procedures, collateral protection, and recovery actions. 
Prudent lending practices include compliance with local laws and filing 
requirements to perfect and maintain security interests in RLF 
collateral.
    Recapitalization grants are additional grant funds awarded to 
increase the capital base of an RLF.
    RLF capital includes the funds which capitalized the RLF plus such 
earnings and fees generated by RLF activities as may be added to the 
RLF capital base to be used for lending. The original sources of 
capital for EDA RLFs are normally comprised of EDA grant funds and 
local cash matching share.
    RLF income means interest earned on outstanding loan principal, 
interest earned on accounts holding RLF funds not needed for immediate 
lending, all loan fees and loan-related charges received from RLF 
borrowers, and other income generated from RLF operations. The RLF 
recipient may use RLF income only to capitalize the RLF and/or to cover 
eligible and reasonable costs necessary to administer the RLF, unless 
otherwise provided for in the grant agreement or approved in writing by 
EDA. RLF income excludes principal repayments.
    Secondary market includes those entities that purchase an interest 
in a loan from an original lender.
    Securitization refers to the technique of securing an investment of 
new capital with the stream of income generated by one or more (usually 
a large group of) existing loans. EDA broadly defines securitization 
transactions to include techniques such as the sale of loans, pledging 
the future income stream of a loan, and similar activities, to access 
investor capital to increase available funds for lending.


Sec. 308.9  Revolving Loan Fund Plan.

    RLF recipients must manage RLFs in accordance with an RLF Plan 
(Plan) as described in this part. For RLF recipients other than states, 
the Plan must be submitted to and approved by EDA and passed by 
resolution of the organizations' governing board prior to the grant 
award; political subdivisions of states may be exempted from this 
requirement with EDA approval.
    (a) Format and content. (1) The title page of the Plan should show 
the RLF recipient organization's name and the date the Plan was 
adopted.
    (2) Part I of the Plan, titled Revolving Loan Fund Strategy, 
summarizes the area CEDS and business development objectives, and 
describes the RLF's financing strategy, policy and portfolio standards. 
Organization of the material and the level of detail provided in the 
subsections of Part I may be varied to improve the narrative flow, 
provided the substantive content is adequately covered.
    (3) Part II of the Plan, titled Operational Procedures, serves as 
the internal operating manual for the RLF.
    (b) Evaluation of Plans. EDA will use the following criteria in 
evaluating Plans:
    (1) The Plan must flow from and be consistent with the EDA-approved 
CEDS for the area.
    (2) The Plan must be an internally consistent, coherent statement 
of the strategic purpose of the particular RLF and the various 
considerations influencing the selection of its financing strategy, 
policies, and loan selection criteria encompassing:
    (i) A financing strategy that demonstrates a knowledgeable analysis 
of the local capital market and the financing needs of the targeted 
businesses; and
    (ii) Financing policies and portfolio standards that are consistent 
with EDA policies and requirements.
    (3) The strategic objectives defined must be sufficiently 
meaningful, though not necessarily quantified, so that progress toward 
them can be assessed over time.
    (4) The administrative procedures for operating the RLF must be 
consistent with generally accepted prudent lending practices for public 
lending institutions.


Sec. 308.10  Pre-loan requirements.

    (a) RLF recipients must adopt procedures to review the impacts of 
prospective loan proposals on the

[[Page 2533]]

physical environment. The Plan must provide for the disapproval of any 
loan project that adversely (without mitigation) impacts flood plains, 
wetlands, significant historic or cultural properties, drinking water 
resources, or nonrenewable natural resources. In administering the RLF, 
the RLF recipient must adopt procedures to comply, and ensure that 
potential borrowers comply, with applicable laws and regulations 
including, but not limited to Secs. 316.1, 316.3, 316.7, 316.8, 316.15, 
and 317 of this chapter.
    (b) RLF recipients are responsible for ensuring compliance with the 
applicable requirements of this chapter prior to providing any loan 
assistance under the RLF. RLF recipients are responsible for ensuring 
that prospective borrowers, consultants, or contractors are aware of 
and comply with the Federal statutory and regulatory requirements that 
apply to activities carried out with RLF loans. RLF recipients must 
develop loan agreements that include applicable Federal requirements to 
ensure compliance. RLF recipients must adopt procedures to diligently 
correct instances of non-compliance, including the calling of loans, if 
necessary. RLF recipient loan documents and procedures must protect and 
hold the Government harmless from and against all liabilities that the 
Government may incur as a result of providing an award to assist 
(directly or indirectly) in site preparation or construction as well as 
the renovation or repair of any facility or site. This applies to the 
extent that such liabilities are incurred because of ground water, 
surface, soil or other conditions caused by operations of the RLF 
recipient or any of its predecessors on the property.


Sec. 308.11  Lending areas and modification of lending areas.

    (a) The economic activity and benefits of RLF loans must be located 
within the eligible areas identified in the grant award. The 
determination of eligibility of a new area will be made in accordance 
with Sec. 301.2 of this chapter.
    (1) Where such RLFs have a grant condition that permits new areas 
that subsequently become eligible to be added to the lending area, may 
add such areas with EDA approval. RLFs that were awarded assistance 
(RLF capitalization or recapitalization) before February 11, 1999, 
whether fully disbursed or not, and fully disbursed RLFs that were 
awarded assistance (RLF capitalization or recapitalization) on or after 
February 11, 1999.
    (2) In the case of existing RLFs that are not fully disbursed that 
were awarded assistance (RLF capitalization or recapitalization) on or 
after February 11, 1999, the area proposed to be added must also be 
eligible to receive an EDA grant rate equal to or greater than that of 
the original grant.
    (b) Whenever an area is added, modification to the RLF Plan 
incorporating the new area and outlining the RLF lending strategy is 
required. Once approved, area eligibility is retained indefinitely.


Sec. 308.12  Revolving Loan Fund income.

    (a) RLF income can be used to pay for eligible and reasonable 
administrative costs for the project. RLF recipients are expected to 
add RLF income to the RLF capital base where practicable. To determine 
the appropriate amount of RLF income to return to the RLF capital base, 
RLF operators must consider the costs necessary to operate an RLF 
program, the availability of other monetary resources, the portfolio 
risk level and projected capital erosions from loan losses and 
inflation, the community's (or area's) commitment to the RLF, and the 
anticipated demand for RLF loans.
    (b) RLF income that is not used for administrative costs during the 
selected twelve-month reporting period in which it is earned, must be 
added to the RLF capital base for lending purposes at the end of the 
twelve-month reporting period. Only RLF income earned during a current 
period may be used for current administrative expenses. RLF income may 
not be withdrawn from an RLF in a subsequent period for any uses, other 
than lending, without the written consent of EDA.
    (c) In accounting for RLF income, any net proceeds from the sale, 
collection, or liquidation of a defaulted loan, up to the amount of the 
unpaid principal, will be treated as repayments of RLF principal and 
placed in the RLF for lending purposes only. Any proceeds in excess of 
the unpaid principal will be treated as RLF income.
    (d) RLF recipients must comply with applicable OMB cost principles 
and with RLF Audit Guidelines (as found in OMB Circular A-133, Single 
Audit Act Requirements for State and Local Governments, Indian tribal 
governments, Institutions of Higher Education and Other Nonprofit 
Organizations or the Compliance Supplement, as appropriate) when 
charging costs against RLF income.
    (e) When a RLF recipients uses RLF income to cover all or part of 
RLF administrative costs it must complete an RLF Income and Expense 
Statement required under Sec. 308.14(c) of this chapter.


Sec. 308.13  Records and retention.

    (a) Loan files and related documents and records. Loan files and 
related documents and records must be retained by RLF recipients over 
the life of the loan and for a three year period from the date of final 
disposition of the loan. The date of final disposition of the loan is 
defined as the date of:
    (1) Full payment of the principal, interest, fees, penalties, and 
other costs associated with the loan; or
    (2) Final settlement or write-off of any unpaid amounts associated 
with the loan.
    (b) Administrative records. RLF recipients must:
    (1) Maintain adequate accounting records and source documentation 
to substantiate the amount and percent of RLF income expended for 
eligible RLF administrative costs.
    (2) Retain records of administrative costs incurred for activities 
and equipment relating to the operation of the RLF for three years from 
the actual submission date of the last semi-annual or annual report 
which covers the period that such costs were claimed, or for five years 
from the date the costs were claimed, whichever is less.
    (3) Make any retained records, even those retained for longer than 
the period described, available for inspection. The record retention 
periods, described in this Sec. 308.13, are minimum periods and such 
prescription is not intended to limit any other record retention 
requirement of law or agreement. In any event, EDA will not question 
claimed administrative costs that are more than three years old, unless 
fraud is an issue.


Sec. 308.14  Revolving Loan Fund semi-annual and annual reports.

    (a) Frequency of reports. All RLF recipients, including existing 
RLFs that receive recapitalization grants, must submit semi-annual 
reports until they qualify or requalify for ``Annual Report'' status. 
RLF recipients may apply for ``Annual Report'' status if:
    (1) All grant funds have been disbursed for at least one year;
    (2) Accurate semi-annual reports have been submitted on-time for 
the preceding two years;
    (3) Required periodic audits have been completed and submitted to 
EDA for the most recent audit period within the last two years; and
    (4) EDA determines that the RLF is in compliance with all 
applicable RLF requirements.
    (b) Report contents. RLF recipients must certify as part of the 
semi-annual or annual report to EDA that the RLF is being operated in 
accordance with the Plan referenced in Sec. 308.9 of this part.

[[Page 2534]]

RLF recipients must request EDA approval of modifications to the Plan 
at any time there is evidence that such modifications are needed to 
ensure effective use of the RLF as a strategic financing tool.
    (c) RLF income statement. (1) RLF recipients using RLF income 
equivalent to 50 percent or more or at least $100,000 of RLF income for 
RLF administrative expenses during the selected twelve month period, 
must submit a completed RLF Income and Expense Statement per 
Sec. 308.12(e) to the appropriate EDA Regional Office within 90 days of 
either September 30 or the RLF recipient's fiscal year end, whichever 
period is selected by the RLF recipient. RLF recipients using less than 
50 percent and less than $100,000 of RLF income for administrative 
expenses in the twelve-month period will retain the RLF Income and 
Expense Statement for three years. RLF recipients are required to make 
this statement available to EDA personnel upon request.
    (2) Performance Measures. RLF recipients will submit to EDA as part 
of the semi-annual or annual report, the information identified as the 
Core Performance Measures in the special conditions accompanying the 
grant award. EDA will advise RLF recipients in writing, within a 
reasonable time for submission, in the event there are any 
modifications in the information required to be submitted.


Sec. 308.15  Prudent management of Revolving Loan Funds.

    (a) Accounting principles. (1) RLFs are expected to be operated in 
accordance with the generally accepted accounting principles (GAAP) and 
the provisions outlined in OMB Circular A-133 and Compliance 
Supplements as applicable.
    (2) In accordance with GAAP, a loan loss reserve may be reflected 
in the financial statements to show the fair value of an RLF's loan 
portfolio provided it is non-funded and represents non-cash entries.
    (b) Loan and accounting system documents. (1) RLF recipients are 
required to provide certification by an independent accountant familiar 
with the RLF recipient's accounting system that its accounting system 
is adequate to identify, safeguard, and account for all RLF funds, 
including RLF income.
    (2) RLF recipients are required to certify that standard RLF loan 
documents necessary for lending are in place and that these documents 
have been reviewed by its legal counsel for adequacy and compliance 
with the terms and conditions of the grant and applicable state and 
local laws. The standard loan documents must include, at a minimum, the 
following:
    (i) Loan application,
    (ii) Loan agreement,
    (iii) Promissory note,
    (iv) Security agreement(s),
    (v) Deed of Trust or Mortgage (as applicable),
    (vi) Agreement of prior lien holder (as applicable), and
    (vii) Personal Guaranty Agreement (for officers or owners of 
corporate borrowers, as applicable).
    (c) Interest rates. A RLF recipient can make loans and loan 
guarantees to eligible borrowers at interest rates and under conditions 
determined by the RLF recipient to be most appropriate in achieving the 
goals of the RLF. However, the minimum interest rate an RLF can charge 
is four (4) percentage points below the current money center prime rate 
quoted in the Wall Street Journal or the maximum interest rate allowed 
under state law, whichever is lower. In no event may the interest rate 
be less than four (4) percent. However, should the prime interest rate 
exceed fourteen (14) percent, the minimum RLF interest rate is not 
required to be raised above ten (10) percent if doing so compromises 
the ability of the RLF recipient to implement its financing strategy.
    (d) Private leveraging. (1) RLF loans must be used to leverage 
private investment of at least two dollars for every one dollar of RLF 
investment. This leveraging requirement applies to the portfolio as a 
whole, rather than to individual loans and is effective for the life of 
the RLF. Private investment, to be classified as leveraged, must be 
made concurrently with an RLF loan as part of the same business 
development project and may include:
    (i) Capital invested by the borrower or others,
    (ii) Financing from private entities, or
    (iii) The unguaranteed portion and 90 percent of the guaranteed 
portions of SBA 7(a) and SBA 504 debenture loans.
    (2) Private investments do not include equity build-up in a 
borrower's assets or prior capital investments by a borrower unless the 
investment is made within nine months of the RLF loan and is recognized 
by the RLF recipient.
    (e) Conflict of interest. (1) No officer, employee, or member of 
the RLF recipient's Board of Directors, or other Board (hereinafter 
referred to as ``other board'') that advises, approves, recommends or 
otherwise participates in decisions concerning loans or the use of RLF 
grant funds, or person related to the officer, another employee, or any 
member of the Board by immediate family, law, or business arrangement, 
may receive any benefits resulting from the use of the RLF loan or 
grant funds. In addition, the RLF recipient may not lend RLF funds to 
an employee of the RLF recipient or any member of the RLF recipient's 
Board of Directors, or a member of any other Board. Immediate family is 
defined as parents, grandparents, siblings, children and grandchildren, 
but does not include more distant relatives, including cousins, unless 
they live in the same household. Exception: A benefit or loan may be 
conferred if the officer, employee, or Board member affected first 
discloses to the RLF recipient on the public record the proposed or 
potential benefit and receives the RLF recipient's written 
determination that the benefit involved is not so substantial as to 
reflect adversely upon or affect the integrity of the RLF recipient's 
decision process or the services of the officer, employee or board 
member.
    (2) An officer, employee or board member of the RLF recipient will 
not solicit or accept, directly or indirectly, any gift, gratuity, 
favor, entertainment or any other thing of monetary value, for himself 
or for another person, from any person or organization seeking to 
obtain a loan or any portion of the grant funds.
    (3) Former board members and/or officers are ineligible to apply 
for or receive an RLF loan for a period of one year from the date of 
termination of his/her services. Exception: A benefit or loan may be 
conferred if the officer, or Board member affected first discloses to 
the RLF recipient on the public record the proposed or potential 
benefit and receives the RLF recipient's written determination that the 
benefit involved is not so substantial as to reflect adversely upon the 
integrity of the RLF recipient's decision process.


Sec. 308.16  Disbursement of funds to Revolving Loan Funds.

    (a) Timing of request for disbursement. A RLF recipient must 
request disbursements from EDA only at the time and in the amount 
immediately needed to close a loan or disburse funds to a borrower. 
Grant funds must be requested only for immediate use, i.e., when the 
intent is to disburse the funds within 14 days of receipt.
    (b) Amount of disbursement. As each new loan is made, the grant RLF 
recipient may request a disbursement of grant funds only for the 
difference, if any, between the amount of funds available for relending 
(from repayments of loan principal and RLF income) and the amount of 
the new loan, less an amount for local matching funds as may be 
required to be disbursed concurrent with the grant.

[[Page 2535]]

However, RLF income received during the grant period may be held to 
cover eligible administrative expenses and need not be disbursed in 
order to draw additional grant funds.
    (c) Interest-bearing accounts. All RLF grant funds disbursed by EDA 
to reimburse RLF recipients for loan obligations already incurred must 
be held in interest bearing accounts by RLF recipients until disbursed 
to the borrower.
    (d) Pre-disbursement requirements. RLF recipients are required to 
provide:
    (1) Evidence to EDA that they have fidelity bond coverage for 
persons authorized to handle funds under the grant award in an amount 
sufficient to protect the interests of EDA and the RLF. Note that such 
insurance coverage must exist at all times during the life of the RLF; 
and
    (2) Certification in accordance with Sec. 308.15(b)(1) of this 
part.
    (e) Delays. (1) If grant funds are requested and the loan 
disbursement is subsequently delayed, a RLF recipient may hold the 
funds up to 30 days from the date of receipt. In the event that a loan 
disbursement is delayed beyond 30 days from the date of receipt of the 
Federal disbursement, the undisbursed funds must be returned to the 
Government for credit to the RLF recipient's account. Returned funds 
will be available to the RLF recipient for future draw down. When 
returning prematurely drawn funds, checks should identify on their face 
the name of the grantor agency--``EDA'' followed by the grant award 
number and the words ``Premature Draw.''
    (2) The interest earned on prematurely withdrawn funds must be 
returned to the Government (with the exception of $100 per year which 
may be retained for administrative expenses by states, local 
governments and Indian tribes in accordance with 15 CFR Part 24, and 
$250 for those subject to 15 CFR Part 14 as appropriate) and should be 
remitted promptly, but no less frequently than quarterly. All checks 
submitted should state ``EDA'' on their face and the award number 
followed by the word ``INTEREST'' in order to identify the check in 
question as remittance of interest income.
    (f) Local share. (1) When some portion of the local share of the 
RLF project is cash, it may only be used for lending. If the RLF 
project has an all-cash matching share, EDA's funds will be disbursed 
as needed for loan closing. The cash matching funds must be used either 
in proportion to the EDA funds, or at a faster rate than EDA funds.
    (2) When an RLF project has a combination of in-kind and cash 
matching share, the non-federal cash together with the Federal cash 
constitute the funds available for making loans and will be disbursed 
proportionately as needed for loan closing, provided that the last 20 
percent of the Federal funds may not be disbursed until all local in-
kind match has been expended. The full amount of the local cash 
matching share will be expected to remain for use in the RLF.
    (3) Upon repayment, local cash share funds are treated the same as 
EDA funds. Repayments of principal must be placed in the RLF for 
relending and interest payments must be used either for relending or 
for eligible RLF administrative costs. The local cash matching share 
must be available when needed for lending and must be under the control 
of the RLF recipient for the duration of the RLF for use in accordance 
with the terms of the grant.


Sec. 308.17  Effective utilization of Revolving Loan Funds.

    (a) Loan closing and disbursement schedule. (1) RLF loan activity 
must be sufficient to draw down grant funds in accordance with the time 
schedule for loan closings and disbursements to eligible RLF borrowers 
as prescribed in the award conditions. The time schedule requires that 
the initial round of lending (i.e., the grant disbursement phase) be 
completed within three years of the grant award.
    (2) If a RLF recipient substantially fails to meet the prescribed 
time schedules for loan closings and disbursements, EDA may terminate 
the undisbursed balance of the award. Exceptions may be granted where:
    (i) Funds are needed to close and disburse funds on loans approved 
prior to the deadline and will be disbursed within 45 days of the 
deadline,
    (ii) Funds are needed to meet continuing disbursement obligations 
on loans closed prior to the deadline, or
    (iii) EDA has approved a time schedule extension.
    (b) Time schedule extension. (1) RLF recipients are responsible for 
contacting EDA as soon as conditions become known that may materially 
affect their ability to meet the approved time schedules. RLF 
recipients must submit a written request to EDA for continued use of 
grant funds beyond a missed deadline. Extension requests must provide 
good reason for the delay and demonstrate that:
    (i) The delay was unforeseen or generally beyond the control of the 
RLF recipient;
    (ii) The need for the RLF still exists;
    (iii) The current and planned use and the anticipated benefits of 
the RLF will remain consistent with the current CEDS and the RLF Plan;
    (iv) The achievement of a new proposed time schedule is reasonable; 
and
    (v) An explanation why no further delays are foreseen.
    (2) EDA is under no obligation to grant a time extension, and in 
the event an extension is denied, EDA may deobligate (terminate) all or 
part of the unused portion of the grant.
    (c) Capital Utilization Standard. (1) During the revolving phase, 
RLF recipients must manage their repayment and lending schedules such 
that at least 75 percent of the RLF's capital is loaned out or 
committed at all times. RLF income earned during a current reporting 
period is not included as RLF capital when calculating the capital 
utilization percentage. Exception:
    (i) RLF recipients that anticipate making large loans relative to 
the size of the capital base, may propose RLF Plans that call for 
holding more than 25 percent.
    (ii) EDA may require an RLF with a capital base in excess of $4 
million to adopt a Plan that maintains a proportionately higher 
percentage of their funds loaned out.
    (2) When the percentage of loaned out capital falls below the 
applicable standard, the dollar amount of the funds equivalent to the 
difference between the actual percentage of capital loaned out and the 
standard is referred to as ``excess funds.''
    (i) Sequestration of excess funds. If the capital utilization 
standard is not met for two consecutive reporting intervals, EDA may 
require the RLF recipient to deposit ``excess funds'' in an interest 
bearing account; the portion of the interest earned on that account, 
attributable to the EDA grant, will be remitted to the U.S. Treasury. 
EDA approval is required to withdraw sequestered funds.
    (ii) Persistent noncompliance. A RLF recipient will normally be 
provided a reasonable period of time to lend ``excess funds'' and 
achieve the standard. However, if a RLF recipient fails to achieve the 
standard after a reasonable period of time as determined by EDA, the 
grant may be subject to sanctions for suspension and/or termination.


Sec. 308.18  Uses of capital.

    Generally, eligible loans to borrowers include loans for fixed 
assets, the acquisition of equipment, working capital, or other 
authorized uses. The EDA grant and the local cash matching funds will 
be used only for the purpose of making loans under an RLF. To

[[Page 2536]]

preclude borrowers from using RLF funds inappropriately, the purpose of 
each RLF loan should be clearly stated in the loan agreement. RLFs 
established for business lending must conform to the following:
    (a) Loan guarantees. Prior to full disbursement of grant funds, the 
RLF recipient may not use the RLF to guarantee loans made by other 
lenders. In the revolving phase, after the full disbursement of grant 
funds, the RLF may be used to guarantee loans of private lenders 
provided the RLF recipient has obtained EDA's prior written approval of 
its proposed loan guarantee activities. The Plan for any loan guarantee 
activities should include the following information:
    (1) The maximum guarantee percentage that will be offered;
    (2) A certification from the RLF attorney that the guarantee 
agreement is valid under state law. At a minimum, the guarantee 
agreement must address the following:
    (i) The maximum reserve requirement;
    (ii) The rights and duties of each party in regard to loan 
collections, servicing, delinquencies and defaults;
    (iii) Foreclosures;
    (iv) Bankruptcies;
    (v) Collateral disposition and the call provisions of the 
guarantee; and
    (vi) Interest income and loan fees, if any, which will accrue to 
the RLF.
    (b) Restrictions on RLF capital. RLF capital may not be used to:
    (1) Acquire an equity position in a private business;
    (2) Subsidize interest payments on an existing loan;
    (3) Provide the equity contribution required of borrowers under 
other Federal loan programs;
    (4) Enable an RLF borrower to acquire an interest in a business, 
either through the purchase of stock or through the acquisition of 
assets, unless the need for RLF financing is sufficiently justified and 
documented in the loan write-up. Acceptable justification could include 
acquiring a business to substantially save it from imminent 
foreclosure, or acquiring it to facilitate a significant expansion or 
increased investment. In any case, the resulting economic benefits 
should be clearly consistent with the strategic objectives of the RLF;
    (5) Provide loans to a borrower for the purpose of investing in 
interest bearing accounts, certificates of deposit, or other 
investments not related to the objectives of the RLF;
    (6) Refinance existing debt unless:
    (i) There is sound economic justification and the RLF recipient 
sufficiently documents in the loan write-up that the RLF is not 
replacing private capital solely for the purpose of reducing the risk 
of loss to an existing lender(s) or to lower the cost of financing to a 
borrower, or
    (ii) An RLF uses RLF income sources and/or recycled RLF funds to 
purchase the rights of a prior lien holder during an in-process 
foreclosure action in order to preclude a significant loss on an RLF 
loan. This action may be undertaken only if there is a high probability 
of receiving compensation within 18 months from the sale of assets 
sufficient to cover an RLF's expenses plus a reasonable portion of the 
outstanding loan obligation; or
    (7) Finance any activity that serves to relocate jobs from one 
commuting area to another. (Commuting area is that area defined by the 
distance people travel to work in the locality of the project receiving 
RLF financial assistance.) An RLF's standard loan agreement must 
include a provision for calling the loan if it is determined that:
    (i) The business used the RLF loan to relocate jobs from another 
commuting area. or
    (ii) The activity financed was subsequently moved to a different 
commuting area to the detriment of local workers.
    (c) Credit otherwise available. Unless otherwise provided for in 
the grant agreement or modified in writing by EDA, a borrower is not 
eligible for RLF financing if credit is otherwise available on terms 
and conditions that permit the completion or successful operation of 
the project activity to be financed. The RLF recipient is responsible 
for determining that each borrower meets this requirement and for 
documenting the basis for its determination in the loan write-up.


Sec. 308.19  Variances.

    EDA may approve variances to the requirements of subpart B of this 
part provided they:
    (a) Are consistent with the goals of the Economic Adjustment 
Program and with an RLF's strategy,
    (b) Are necessary and reasonable for the effective implementation 
of the RLF,
    (c) Are economically and financially sound,
    (d) Do not conflict with applicable legal requirements, and
    (e) Do not change the scope of the award after the period of 
availability of the funds for obligation has expired.

PART 314--PROPERTY

    1. The authority citation for part 314 continues to read as 
follows:

    Authority:  42 U.S.C. 3211; 19 U.S.C. 2341-2355; 42 U.S.C. 6701; 
42 U.S.C. 184; Department of Commerce Organization Order 10-4.
    2. Section 314.4 is amended by adding paragraph (c) to read as 
follows:


Sec. 314.4  Unauthorized use.

* * * * *
    (c) RLF grant projects. (1) EDA may suspend or terminate any RLF 
grant for cause based on, but not limited to, the following:
    (i) Failure to make loans in accordance with the RLF Plan, 
including the time-schedule for loan closings;
    (ii) Failure to obtain prior EDA approval for such changes to the 
RLF Plan, including provisions for administering the RLF;
    (iii) Failure to submit progress, financial or audit reports as 
required by the terms and conditions of the grant agreement;
    (iv) Failure to comply with prohibitions against conflict-of-
interest for any transactions involving the use of RLF funds; or
    (v) Failure to operate the RLF in accordance with the RLF Plan and 
the terms and conditions of the grant agreement.
    (2) Whenever an RLF recipient fails in its fiduciary 
responsibilities or is unable or unwilling to perform as trustee of the 
grant, EDA may suspend, terminate or transfer the grant to an eligible 
successor with jurisdiction over the project area, to administer it as 
such trustee (replacement grantee).
    (3) Whenever EDA terminates any RLF grant for cause, in whole or in 
part, it has the right to recover residual funds and assets of the RLF 
grant in accordance with the legal rights of the parties.
    (4) If there is a partial termination of an RLF grant, the full 
amount of the original non-federal matching share is expected to be 
retained in the RLF for lending purposes unless otherwise provided for 
in the grant agreement or agreed to in writing by EDA.
    3. Section 314.10 is amended by adding paragraph (c) to read as 
follows:


Sec. 314.10  Revolving Loan Funds.

* * * * *
    (c) In the event of the sale, collection, or liquidation of RLF 
loans, any proceeds, net of repaid principal and reasonable 
administrative costs incurred, up to the amount of the outstanding loan 
principal, must be returned to the RLF for relending. Any net proceeds 
from loan sales above the outstanding loan principal is considered RLF 
income and must either be added to the RLF capital base for lending or

[[Page 2537]]

used to cover eligible costs for administering the RLF in accordance 
with the rules for use of RLF income. The net transaction proceeds must 
be used for additional loans as part of the RLF project.

    Dated: January 10, 2000.
Chester J. Straub, Jr.,
Acting Assistant Secretary for Economic Development.
[FR Doc. 00-898 Filed 1-14-00; 8:45 am]
BILLING CODE 3510-24-P