[Federal Register Volume 66, Number 89 (Tuesday, May 8, 2001)]
[Rules and Regulations]
[Pages 23135-23151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-11366]



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 Rules and Regulations
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  Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and 
Regulations  

[[Page 23135]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Parts 1779 and 1780

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1980

RIN 0572-AB57


Water and Waste Disposal Programs Guaranteed Loans

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

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

SUMMARY: The Rural Utilities Service (RUS) is discontinuing the use of 
its existing regulations for its Water and Waste Disposal (WW) 
Guaranteed Loan Program, and implementing a new regulation for its WW 
Guaranteed Loan Program. This action is needed to streamline and update 
the WW Guaranteed Loan 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 7, 2001.

FOR FURTHER INFORMATION CONTACT: Linda Scott, Water Programs Division 
Loan Specialist, Rural Utilities Service, U.S. Department of 
Agriculture, STOP 1570, 1400 Independence Ave. SW., Washington, DC 
20250-1570, telephone: (202) 720-9639.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

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

Information Collection and Recordkeeping Requirements

    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 0572-0122, 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 recordkeeping.

National Environmental Policy Act Certification

    The Administrator of RUS has determined that this final rule will 
not significantly affect the quality of the human environment as 
defined by the National Environmental Policy Act of 1969 (42 U.S.C. 
4321 et seq.). Therefore, this action does not require an environmental 
impact statement or assessment.

Regulatory Flexibility Act Certification

    RUS has determined that this final rule will not have a significant 
economic impact on a substantial number of small entities, as defined 
in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The RUS Water 
and Waste loan and grant programs provide loans to borrowers at 
interest rates and on terms that are more favorable than those 
generally available from the private sector. RUS borrowers, as a result 
of obtaining federal financing, receive economic benefits that exceed 
any direct economic costs associated with complying with RUS 
regulations and requirements.

Executive Order 12988

    This final rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. RUS has determined that this rule meets the 
applicable standards provided in section 3 of that Executive Order. In 
addition, all State and local laws and regulations that are in conflict 
with this rule will be preempted, no retroactive effect will be given 
to this rule, and, in accordance with Sec. 212(e) of the Department of 
Agriculture Reorganization Act of 1994 (7 U.S.C. Sec. 6912(e)), 
administrative appeal procedures, if any, must be exhausted before an 
action against the Department or its agencies may be initiated.

Unfunded Mandates

    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the Unfunded Mandates Reform Act of 1995) for 
State, local, and tribal governments or the private sector. Thus, this 
rule is not subject to the requirements of section 202 and 205 of the 
Unfunded Mandates Reform Act of 1995.

Intergovernmental Consultation

    This program is listed in the Catalog of Federal Domestic 
Assistance under number 10.760 and is subject to the provisions of 
Executive Order 12372 which requires intergovernmental consultation 
with State and local officials. This catalog is available on a 
subscription basis from the Superintendent of Documents, the United 
States Government Printing Office, Washington, DC 20402-9325. An 
electronic version is available at www.cfda.gov.

Discussion of the Final Rule

    This action replaces the Water and Waste Disposal facilities 
portion of the guaranteed loan program administered under 7 CFR part 
1980, subparts A and 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 WW Guaranteed Loan program was authorized by the Rural 
Development Act of 1972. The loans are made by private lenders to 
public bodies, nonprofit corporations, and Indian tribes for the 
purpose of

[[Page 23136]]

improving rural living standards and for other purposes that create 
safe and affordable drinking water and waste disposal facilities 
located in rural areas or towns with a population not exceeding 10,000 
inhabitants.
    These loans can be made to construct or improve drinking water or 
waste disposal facilities serving the most financially needy 
communities. The rates 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 WW guaranteed loan 
under the new regulation is significantly less than the current 
regulation.
    The President and the Secretary of Agriculture are committed to 
streamlining all Federal regulations. This WW regulation streamlines 
our application procedures, reduces loan application processing time by 
placing greater emphasis on State resources, and allows more management 
flexibility and decision-making capacity at the State Office level.
    The Agency has implemented revisions to make the program more user-
friendly for 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 WW regulation, the material that 
must be submitted to, and reviewed by, the Agency before approval of 
the guarantee has been reduced. 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 Water and Waste Disposal Loan and Grant Program 
(7 CFR part 1780), Water and Waste Loans and Grants, General Guaranteed 
Regulation (7 CFR part 1980, subparts A and I), and program 
requirements contained in forms which were not in regulations into the 
Guaranteed Water and Waste Disposal Programs Regulation (7 CFR part 
1779). 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 WW guaranteed 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 determined by the lender (with 
Agency concurrence).
    Under the new regulation, the lender is responsible for ensuring 
that all loan requirements are met, the loan is properly secured, 
documents are duly executed and binding, and all necessary 
certifications are furnished. 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 WW guaranteed loan program into 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, Co-Bank, the Rural Utilities 
Cooperative Finance Corporation, 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 WW 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. All comments received were 
from Rural Development employees. Three State Directors, one Program 
Director, the National Association of Credit Specialists, and one 
Programs Specialist submitted comments. 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 ensuring that all loan 
requirements are met, the loan is properly secured, documents are duly 
executed and binding, and all necessary certifications are furnished. 
The comments relating to the Community Facilities (CF) Programs portion 
of the proposed rule were addressed in a Final Rule published on May 
26, 1999, at 64 FR 28333 (7 CFR part 3575).

General

    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 definitions of ``rural'' and 
``rural area'' are mostly statutory and cannot be changed regulatorily.

Eligibility

    One respondent wanted to include sole-member corporations as 
eligible for the Community Facilities (CF) program. This does not 
pertain to WW guaranteed loans. The CF response may be found in 7 CFR 
part 3575.
    One respondent suggested that business incubators be made an 
eligible purpose. Because this suggestion pertains solely to the CF 
program, it was addressed in 7 CFR part 3575.
    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

[[Page 23137]]

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 
requirement imposed 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 process.

Equal Opportunity and Fair Housing Act Requirements

    One respondent suggested listing all the specific individual 
requirements under these laws. This comment pertains to the CF 
programs. The CF response may be found in 7 CFR part 3575.
    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 have removed the last sentence of 
Sec. 1779.33(e) to ensure consistency when determining an acceptable 
interest rate.

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. 
This concept will be clarified 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 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. 
The respondent 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 its analysis. A sentence has been added 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. This 
subsection has been moved as suggested.
    One respondent suggested that the number of customers discussed in 
the loan application evaluation section should apply only to Water and 
Waste Disposal projects. This comment is directed to Community 
Facilities Programs and was addressed in 7 CFR part 3575. However, the 
respondent is correct in that WW projects do require that the number of 
customers is used when evaluating a loan application.
    One respondent questioned whether the certifications listed under 
the conditions precedent to issuance of the loan note guarantee section 
met all applicable requirements contained 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 contained 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

[[Page 23138]]

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. This comment is directed to Community 
Facilities Programs and was addressed in 7 CFR part 3575.
    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 by the borrower, 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 1779

    Guaranteed loans, Loan programs, Waste treatment and disposal, 
Water supply

7 CFR Part 1780

    Business and industry, Community development, Community facilities, 
Grant programs--housing and community development, Rural areas, Waste 
treatment and disposal, Water supply

7 CFR Part 1980

    Loan programs--agriculture, Loan programs--business and industry, 
Loan programs--housing and community development, Rural development 
assistance

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

Chapter XVII--Rural Utilities Service, Department of Agriculture

    1. Add a new part 1779 to read as follows:

PART 1779--WATER AND WASTE DISPOSAL PROGRAMS GUARANTEED LOANS

Sec.
1779.1   General.
1779.2   Definitions.
1779.3   Full faith and credit.
1779.4   Conditions of guarantee.
1779.5-1779.7   [Reserved]
1779.8   Access to lender's records.
1779.9   Environmental requirements.
1779.10-1779.11   [Reserved]
1779.12   Inspections.
1779.13   Appeals.
1779.14-1779.16   [Reserved]
1779.17   Exception authority.
1779.18-1779.19   [Reserved]
1779.20   Eligibility.
1779.21-1779.23   [Reserved]
1779.24   Eligible loan purposes.
1779.25   Ineligible loan purposes.
1779.26   [Reserved]
1779.27   Eligible lenders.
1779.28   Transfer of lenders or borrowers (prior to issuance of 
Loan Note Guarantee).
1779.29   Fees and charges by lender.
1779.30   Loan guarantee limitations.
1779.31-1779.32   [Reserved]
1779.33   Interest rates.
1779.34   Terms of loan repayment.
1779.35-1779.36   [Reserved]
1779.37   Insurance and fidelity bonds.
1779.38-1779.41   [Reserved]
1779.42   Design and construction requirements.
1779.43   Other Federal, State, and local requirements.
1779.44-1779.46   [Reserved]
1779.47   Economic feasibility requirements.
1779.48   Security.
1779.49-1779.51   [Reserved]
1779.52   Processing.
1779.53   Evaluation of application.
1779.54-1779.58   [Reserved]
1779.59   Review of requirements.
1779.60-1779.62   [Reserved]
1779.63   Conditions precedent to issuance of the Loan Note 
Guarantee.
1779.64   Issuance of Lender's Agreement, Loan Note Guarantee, and 
Assignment Guarantee Agreement.
1779.65   Lender's sale or assignment of the guaranteed portion of 
loan.
1779.66-1779.68   [Reserved]
1779.69   Loan servicing.
1779.70-1779.72   [Reserved]
1779.73   Replacement of loss, theft, destruction, mutilation, or 
defacement of Loan Note Guarantee or Assignment Guarantee Agreement.
1779.74   [Reserved]
1779.75   Defaults by borrower.
1779.76-1779.77   [Reserved]
1779.78   Repurchase of loan.
1779.79   [Reserved]
1779.80   Interest rate changes after loan closing.
1779.81   Liquidation.
1779.82   [Reserved]
1779.83   Protective advances.
1779.84   Additional loans or advances.
1779.85   Bankruptcy.
1779.86-1779.87   [Reserved]
1779.88   Transfer and assumptions.
1779.89   Mergers.
1779.90   Disposition of acquired property.
1779.91-1779.93   [Reserved]
1779.94   Determination and payment of loss.
1779.95   Future recovery.
1779.96   Termination of Loan Note Guarantee.
1779.97-1779.99   [Reserved]
1779.100   OMB control number.

    Authority: 5 U.S.C. 301, 7 U.S.C. 1989, 16 U.S.C. 1005.


Sec. 1779.1  General.

    (a) This part contains the regulations for Water and Waste Disposal 
(WW) 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 WW guaranteed loan program is to provide a 
loan guarantee for the construction or improvement of water and waste 
projects serving the financially needy communities in rural areas. This 
purpose is achieved through bolstering the existing private credit 
structure through the guarantee of quality loans which will provide 
lasting benefits.


Sec. 1779.2  Definitions.

    The following general definitions are applicable to the terms used 
in this part:
    Agency. The Rural Utilities 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 Water and Waste Disposal 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

[[Page 23139]]

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.
    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, retainers being paid to 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.
    Joint financing. Two or more lenders (or any combination of lenders 
and other financial sources) making separate relatively contemporaneous 
loans or grants 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 part 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 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.
    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.
    Report of loss. An Agency form used by lenders when reporting a 
loss under an Agency guarantee (available in any Agency office).
    Rural and rural area. Any area not in a city or town with a 
population in excess of 10,000 inhabitants, according to the latest 
decennial census of the United States
    Service area. The area reasonably expected to be served by the 
project 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 the construction or improvement of drinking water or waste 
disposal 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.
    Waste disposal. Sanitary sewer (treatment and collection), solid 
waste, and storm drainage facilities.
    WW. An acronym for Water and Waste Disposal.


Sec. 1779.3  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

[[Page 23140]]

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. 1779.4  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.
    (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. 1779.5-1779.7  [Reserved]


Sec. 1779.8  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. 1779.9  Environmental requirements.

    Facilities financed must undergo an environmental impact analysis 
in accordance with the National Environmental Policy Act and Agency 
requirements as contained in part 1794 of this chapter. In accordance 
with Agency guidance documents (RUS Bulletin 1794A-602; this document 
is available in any Agency State Office or online at http://www.usda.gov/rus/water/ees/index.htm), the environmental review 
requirements shall be performed by the applicant simultaneously and 
concurrently with the project's engineering planning and design. This 
should provide flexibility to consider reasonable alternatives to the 
project and development methods to mitigate any adverse environmental 
effects. Facility planning and design must not only be responsive to 
the owner's needs but must consider the environmental consequences of 
the proposed project. Facility design will incorporate and integrate, 
where practicable, mitigation measures that avoid or minimize adverse 
environmental impacts. The lender must assist the Agency in ensuring 
that the borrower complies with the Agency's environmental review 
process and implements any mitigation measure identified in the 
environmental review document or Conditional Commitment for Guarantee. 
This assistance includes ensuring that the borrower takes no action 
(for example, initiation of construction) or incur any obligations that 
will have an adverse environmental impact or limit the range of 
alternatives to be considered prior to completion of the environmental 
review process. 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 the approval of the applicant's request or commitment of 
Agency resources.


Secs. 1779.10-1779.11  [Reserved]


Sec. 1779.12  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 in interest. Agency inspections do not relieve any 
parties in interest of their responsibilities to conduct necessary 
inspections.


Sec. 1779.13  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.


Secs. 1779.14-1779.16  [Reserved]


Sec. 1779.17  Exception authority.

    The Administrator may, in individual cases, make an exception to 
any requirement or provision of this part which is not inconsistent 
with the authorizing statute or other applicable law and is determined 
to be in the Government's interest.


Secs. 1779.18-1779.19  [Reserved]


Sec. 1779.20  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. 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, giving security for, 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.
    (c) Applicant. Eligible entities are:

[[Page 23141]]

    (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. The organization must 
be an association controlled by a local public body or bodies, or have 
a broadly based ownership by or membership of people of the local 
community; or
    (3) Indian tribes on Federal and State reservations and other 
federally recognized Indian tribes.
    (d) Facility location. Facilities must be located in rural areas, 
except: For utility services such as drinking water, sanitary sewer, 
solid waste disposal or storm drainage facilities 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.
    (e) Facilities for public use. All facilities financed under the 
provisions of this part 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.
    (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 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.


Secs. 1779.21-1779.23  [Reserved]


Sec. 1779.24  Eligible loan purposes.

    (a) To construct, enlarge, extend, or otherwise improve rural 
drinking water, sanitary sewage, solid waste disposal, and storm 
wastewater disposal facilities.
    (b) To construct or relocate public buildings, roads, bridges, 
fences, or utilities, and to make other public improvements necessary 
for the successful operation or protection of facilities authorized in 
paragraph (a) of this section.
    (c) To relocate private buildings, roads, bridges, fences, or 
utilities, and other private improvements necessary for the successful 
operation or protection of facilities authorized in paragraph (a) of 
this section.
    (d) For payment of other utility connection charges as provided in 
service contracts between utility systems.
    (e) When a necessary part of the project relates to those 
facilities authorized in paragraphs (a), (b), (c) or (d) of this 
section the following may be considered:
    (1) Reasonable fees and costs such as: legal, engineering, 
administrative services, fiscal advisory, recording, environmental 
analyses and surveys, possible salvage or other mitigation measures, 
planning, establishing or acquiring rights;
    (2) Costs of acquiring interest in land: rights, such as water 
rights; leases; permits; rights-of-way; and other evidence of land or 
water control or protection necessary for development of the facility;
    (3) Purchasing or renting equipment necessary to install, operate, 
maintain, extend, or protect facilities;
    (4) Cost of additional applicant labor and other expenses necessary 
to install and extend service;
    (5) In unusual cases such as a low-income area, the cost for 
connecting the user to the main service line;
    (6) Interest incurred during construction in conjunction with 
multiple advances or interest on interim financing;
    (7) Initial operating expenses, including interest, for a period 
ordinarily not exceeding one year when the applicant is unable to pay 
such expenses;
    (8) The purchase of existing facilities when it is necessary either 
to improve service or prevent the loss of service; and
    (9) Refinancing non-Agency debts incurred by, or on behalf of, an 
applicant when all of the following conditions exist:
    (i) The debts being refinanced are a secondary part of the total 
loan unless the debt being refinanced is an Agency direct loan;
    (ii) The debts were incurred for the facility or service being 
financed or any part thereof; and
    (iii) 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.
    (10) Refinancing Agency debts.


Sec. 1779.25  Ineligible loan purposes.

    Loan funds may not be used to finance:
    (a) Facilities which are not modest in size, design, and cost;
    (b) Loan or grant finder's fees;
    (c) The construction of any new combined storm and sanitary sewer 
facilities;
    (d) Any portion of the cost of a facility which does not serve a 
rural area;
    (e) That portion of project costs normally provided by a business 
or industrial user, such as wastewater pretreatment;
    (f) Rental for the use of equipment or machinery owned by the 
applicant;
    (g) For other purposes not directly related to operating and 
maintenance of the facility being installed or improved; or
    (h) The payment of a judgment which would disqualify an applicant 
for a loan under Sec. 1779.20(a).


Sec. 1779.26  [Reserved]


Sec. 1779.27  Lenders.

    (a) Eligible lenders. Eligible lenders 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) Co-Bank, 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 part;
    (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. 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.

[[Page 23142]]

This does not preclude lender officials from being on the borrower's 
board of directors.


Sec. 1779.28  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, That:
    (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, except 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. 1779.29  Fees and charges by lender.

    (a) Routine charges and fees. The lender may establish charges and 
fees for the loan if 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 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. 1779.30  Loan guarantee limitations.

    (a) The guarantee will be 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. 1779.31-1779.32  [Reserved]


Sec. 1779.33  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.


Sec. 1779.34  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 WW loan will be limited to the useful life of the 
facility, not to exceed 40 years.

[[Page 23143]]

    (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. 1779.35-1779.36  [Reserved]


Sec. 1779.37  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. 1779.38-1779.41  [Reserved]


Sec. 1779.42  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 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 (30 FR 12319, 3 CFR, 1964-1965 Comp., p. 339) 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. WW 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.
    (e) Administrative. When the Agency reviews the preliminary 
architectural and engineering reports or plans, they must also consider 
all applicable Federal laws such as the seismic requirements of 
Executive Order 12699 (55 FR 835, 3 CFR, 1990 Comp., p. 269), the 
debarment requirements of 7 CFR part 3017, and the Copeland Anti-
Kickback Act (18 U.S.C. 874).


Sec. 1779.43  Other Federal, State, and local requirements.

    In addition to the specific requirements of this part 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) Applicant's 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 as well as design and 
installation standards; and
    (e) Protection of the environment and consumer affairs.


Secs. 1779.44-1779.46  [Reserved]


Sec. 1779.47  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. 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. The borrower's consulting engineer may complete the 
financial feasibility analysis for WW systems. If the facility is used 
by businesses and the success or failure of the facility is dependent 
on individual businesses, then the economic viability of those 
businesses must be assessed.
    (a) 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.
    (b) Insufficient information. When the lender or Agency has 
insufficient information to determine the borrower's repayment ability, 
an independent feasibility analysis is required.


Sec. 1779.48  Collateral.

    (a) Lender responsibility. The lender is responsible for obtaining 
and maintaining proper and adequate collateral to protect the interest 
of the lender, the holder, and the Government.
    (b) Type of collateral. Collateral 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 collateral 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 collateral. All collateral 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. 1779.49-1779.51  [Reserved]


Sec. 1779.52  Processing.

    (a) Preapplications. (1) The preapplication package may be 
submitted either alone or the necessary

[[Page 23144]]

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, or existing debt instruments; and
    (iv) Documentation of lender eligibility in accordance with 
Sec. 1779.27.
    (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.
    (b) Applications. Contents of application package:
    (1) Application for Loan and Guarantee on a form prescribed by the 
Agency (available in any Agency office);
    (2) Proposed loan agreement;
    (3) Environmental Report. (See RUS Bulletin 1794A-602; this 
document is available in any Agency State Office or online at http://www.usda.gov/rus/water/ees/index.htm);
    (4) Preliminary architectural or engineering report (PER);
    (5) Cost estimates;
    (6) Appraisal reports (as appropriate);
    (7) Credit reports (as appropriate);
    (8) Financial feasibility analysis and report (as appropriate) if 
not included in PER; and
    (9) Any additional information required.


Sec. 1779.53  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 impact analyses is complete, 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) Mitigation measures for environmental issues (if necessary);
    (k) Americans with Disabilities Act;
    (l) By-laws and articles of incorporation changes; and
    (m) Other requirements necessary to protect the Government.


Secs. 1779.54-1779.58  [Reserved]


Sec. 1779.59  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.


Secs. 1779.60-1779.62  [Reserved]


Sec. 1779.63  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) 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.
    (5) 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.
    (6) 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.
    (7) All other requirements of the Conditional Commitment for 
Guarantee have been met.
    (8) Lien priorities are consistent with requirements of the 
Conditional Commitment for Guarantee.
    (9) 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.
    (10) 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 (a)(10), the term 
borrower includes any parent, affiliate, or subsidiary of the borrower.
    (11) All Federal, State, and local design and construction 
requirements have been met.
    (12) The lender understands and will meet the requirements of the 
Debt Collection Act (31 U.S.C. Chapter 37).
    (13) 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

[[Page 23145]]

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 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) 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.
    (f) 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. 1779.64  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. 1779.65  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.


Secs. 1779.66-1779.68  [Reserved]


Sec. 1779.69  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.


Secs. 1779.70-1779.72  [Reserved]


Sec. 1779.73  Replacement of loss, theft, destruction, mutilation, or 
defacement of Loan Note Guarantee or Assignment Guarantee Agreement.

    (a) Replacement. 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,

[[Page 23146]]

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:
    (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).
    (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. 1779.74  [Reserved]


Sec. 1779.75  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.


Secs. 1779.76-1779.77  [Reserved]


Sec. 1779.78  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 a specific written demand directed 
to the Agency. The copy of the demand on the lender is not sufficient. 
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

[[Page 23147]]

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 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. 1779.79  [Reserved]


Sec. 1779.80  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. 1779.81  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 part 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

[[Page 23148]]

liquidation efforts that will result in maximum recovery. When the 
Agency liquidates, proceeds derived from the sale of the collateral 
will be applied first to reasonable liquidation expenses and second to 
the guaranteed portion of the loan.
    (g) Final loss payment. Final loss payments will be made only after 
all collateral has been properly accounted for and liquidation expenses 
are 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. 1779.82  [Reserved]


Sec. 1779.83  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. 1779.84  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. 1779.85  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 9 plans or 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 9 or 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 chapters 9 or 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 9 plan or 
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.


Secs. 1779.86-1779.87  [Reserved]


Sec. 1779.88  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

[[Page 23149]]

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 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 1 percent. 
Transfer fees will be collected, and payments applied, in accordance 
with paragraph (d) of this section.
    (2) For all loans covered by this part, 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 part 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 part. 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)(1)(i) 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. 1779.89  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. 1779.90  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

[[Page 23150]]

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 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. 1779.91-1779.93  [Reserved]


Sec. 1779.94  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 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. 1779.95  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.

[[Page 23151]]

Sec. 1779.96  Termination of Loan Note Guarantee.

    The Loan Note Guarantee under this part 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.


Secs. 1779.97-1779.99  [Reserved]


Sec. 1779.100  OMB control number.

    The reporting and recordkeeping requirements contained in this part 
have been approved by the Office of Management and Budget and have been 
assigned OMB control number 0572-0122.

PART 1780--WATER AND WASTE LOANS AND GRANTS

    2. The authority citation for part 1780 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16 U.S.C. 1005.

Subpart A--General Policies and Requirements

    3. Amend Sec. 1780.10(b)(4) by removing the reference ``subpart I 
of part 1980 of this title'' and adding in its place ``7 CFR part 
1779.''

Chapter XVIII--Rural Housing Service, Rural Business--Cooperative 
Services, Rural Utilities Service, and Farm Service Agency, Department 
of Agriculture

PART 1980--GENERAL

    4. 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 A--[Removed and Reserved]

    5. Remove and reserve subpart A, consisting of Secs. 1980.1 through 
1980.100 and Appendices A through C.

Subpart I--[Removed and Reserved]

    6. Remove and reserve Subpart I, consisting of Secs. 1980.801 
through 1980.900.

    Dated: April 23, 2001.
Dawn Riley,
Acting Deputy Under Secretary, Food, Nutrition and Consumer Services.
[FR Doc. 01-11366 Filed 5-7-01; 8:45 am]
BILLING CODE 3410-15-P