[Federal Register Volume 69, Number 11 (Friday, January 16, 2004)]
[Proposed Rules]
[Pages 2521-2528]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-979]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 69, No. 11 / Friday, January 16, 2004 / 
Proposed Rules  

[[Page 2521]]



DEPARTMENT OF AGRICULTURE

Rural Business-Cooperative Service

7 CFR Parts 1980 and 4279

RIN 0570-AA49


Business and Industry Guaranteed Loans--Tangible Balance Sheet 
Equity

AGENCY: Rural Business-Cooperative Service, USDA.

ACTION: Proposed rule.

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SUMMARY: The Rural Business-Cooperative Service (RBS or the Agency) 
proposes to amend existing regulations relating to Business and 
Industry (B&I) loans made or guaranteed by the Agency by modifying the 
provisions that address the evaluation of credit quality. Specifically, 
the Agency proposes to modify the definition of tangible balance sheet 
equity to include the off balance sheet value of tangible assets to the 
extent of the difference between the depreciated book value of real 
property assets and their current market value supported by an 
appraisal or the original book value, whichever is less. Adjusted 
tangible balance sheet equity will also include qualified subordinated 
debt owed to the owner. This adjusted equity calculation will apply 
only in cases where the Agency is asked to guarantee a refinancing of 
outstanding debt. The Agency also proposes to increase the equity 
requirements applicable to energy businesses. The intended effect of 
this action is to facilitate Agency guarantees of refinancing loans 
that otherwise would not meet the equity requirements because the 
financial statements prepared in accordance with generally accepted 
accounting principles do not reflect the current market value of real 
property assets owned by the borrower.

DATES: Written or e-mail comments on this proposed rule must be 
submitted on or before March 16, 2004.

ADDRESSES: Submit written comments, in duplicate, via either the U.S. 
Postal Service or express courier. Comments sent via the U.S. Postal 
Service should be addressed to the Branch Chief, Regulations and 
Paperwork Management Branch, Rural Development, U.S. Department of 
Agriculture, STOP 0742, 1400 Independence Ave., SW., Washington, DC 
20250-0742. Written comments via Federal Express Mail, or via another 
mail courier service requiring a street address, should be addressed to 
the same attention at 300 7th Street, SW., 7th Floor, Washington, DC 
20024. Also, comments may be submitted via the Internet by addressing 
them to ``[email protected]'' and must contain the word 
``Tangible'' in the subject line. All written comments will be 
available for public inspection during regular work hours at the 300 
7th Street, SW., address listed above.

FOR FURTHER INFORMATION CONTACT: Fred Kieferle, Rural Business-
Cooperative Service, USDA, Stop 3224, Room 6871, 1400 Independence 
Ave., SW, Washington, DC 20250-3224, Telephone (202) 720-7818, Fax 
(202) 720-6003, or e-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Classification

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

Programs Affected

    The Catalog of Federal Domestic Assistance Program number assigned 
to the applicable programs is 10.768, Business and Industry Loans.

Executive Order 12372

    As stated in the Notice related to 7 CFR part 3015, subpart V, the 
programs and activities within this rule are subject to E.O. 12372 
which requires intergovernmental consultation in the manner delineated 
in 7 CFR part 3015, subpart V. Accordingly, agency personnel advise all 
prospective applicants of whether their state has elected to 
participate in the consultation process by designating a single point 
of contact and name of that contact point.

Program Administration

    These programs are administered through the Business and Industry 
Division of the Rural Business-Cooperative Service within the Rural 
Development mission area of USDA and delivered via the USDA Rural 
Development State Directors.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, the 
information collection requirements contained in this regulation have 
been approved by OMB under control numbers 0570-0014 and 0570-0017. The 
changes made in this proposed rulemaking to part 4279 are covered under 
the scope of the paperwork burden on file for these control numbers and 
already approved by OMB. The revisions in this rulemaking for part 1980 
will require an amendment to the burden package and this modification 
to the burden package will be made when the final rule is promulgated.

Environmental Impact Statement

    It is the determination of RBS that this action is not a major 
Federal action significantly affecting the environment. Therefore, in 
accordance with the National Environmental Policy Act of 1969, an 
Environmental Impact Statement is not required.

Executive Order 12988

    This proposed rule has been reviewed in accordance with E.O. 12988, 
Civil Justice Reform. In accordance with this rule: (1) All state and 
local laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given to this rule; and 
(3) administrative proceedings in accordance with 7 CFR part 11 must be 
exhausted before bringing suit in court challenging action taken under 
this rule unless those regulations specifically allow bringing suit at 
an earlier time.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) 
establishes requirements for Federal agencies to assess the effects of 
their regulatory actions on state, local, and tribal governments and 
the private sector. Under section 202 of the UMRA, USDA must prepare a 
written statement, including a cost benefit analysis, for proposed and 
final rules with ``Federal mandates'' that may result in expenditures 
to state, local or tribal

[[Page 2522]]

governments, in the aggregate, or to the private sector, of $100 
million or more in any one year. When such a statement is needed for a 
rule, section 205 of UMRA generally requires USDA to identify and 
consider a reasonable number of regulatory alternatives and adopt the 
least costly, more cost effective or least burdensome alternative that 
achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of title II of the UMRA) for state, local, and tribal 
governments or the private sector. Therefore this rule is not subject 
to the requirements of sections 202 and 205 of UMRA.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-
612), the undersigned has determined and certified by signature of this 
document that this rule will not have a significant economic impact on 
a substantial number of small entities. Some provisions published as a 
part of this rule are, in fact, a benefit to small entities.
    The modified equity test in the case of refinancing applies equally 
to large and small entities, but in practice, the Agency expects it to 
benefit smaller entities disproportionately more than larger 
businesses. In the Agency's experience, the largest single component of 
off balance sheet value in a small firm is the real property it owns. 
Small firms that are real property rich, but cash flow constrained, may 
find this change to be the only means for achieve flexibility in 
refinancing, while larger businesses may have other ways, i.e., other 
assets to work with, to achieve the same result.
    The proposed change in equity requirements for energy loans may 
make it more difficult for small firms to qualify. The energy business 
is a capital intensive business and the corresponding risk is greater 
when it is undertaken by undercapitalized firms. It may be more 
difficult for small firms to raise the necessary equity for one 
project, whereas a larger business can spread the risk across more than 
one project.
    On balance, the net effect of this rulemaking is expected to be 
neutral in its overall impact on smaller firms. Accordingly, a 
regulatory flexibility analysis was not performed.''

Executive Order 13132, Federalism

    The policies contained in this rule do not have any substantial 
direct effect on states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. Nor does this 
rule impose substantial direct compliance costs on state and local 
governments. This rule is intended to foster cooperation between the 
Federal Government and the states and local governments, and reduces, 
where possible, any regulatory burden imposed by the Federal Government 
that impedes the ability of states and local governments to solve 
pressing economic, social and physical problems in their state.

Background

    The current loan processing regulations for B&I Guaranteed Loan 
Program provide that the lender is primarily responsible for 
determining credit quality and must address all of the elements of 
credit quality in a written credit analysis. The Agency assumes this 
responsibility for the B&I Direct Loan Program. One of the elements of 
credit quality required in the regulation is that borrowers demonstrate 
a minimum level of tangible balance sheet equity. The threshold level 
of required tangible balance sheet equity is higher for new businesses 
than for existing businesses; separate thresholds for all energy 
related businesses also apply.
    Conventional accounting policies and procedures provide for a 
distinction between tangible and intangible assets. The net equity on a 
balance sheet reflects the net book value of all assets, after 
depreciation, less total liabilities. The current regulations take a 
conservative approach in evaluating the equity component of a balance 
sheet, specifying that acceptable equity for credit quality purposes be 
restricted to tangible balance sheet equity, as defined in the 
regulation.
    Where the accounting terms used in the regulation coincide with 
terms used in generally accepted accounting principles (GAAP),\1\ the 
GAAP definitions are presumed in the regulation. Tangible balance sheet 
equity is not a term used in GAAP; there is no commonly held 
definition. It is nevertheless a concept familiar to many financial 
analysts and regulators who craft customized definitions, tailored to a 
specific industry or application, using the commonly understood terms 
found in GAAP as the basic building blocks.\2\
---------------------------------------------------------------------------

    \1\ The meaning of the term generally accepted accounting 
principles (GAAP) has evolved over time. It used to refer to widely 
used, but un-codified, accounting policies and procedures. With 
time, standard-setting bodies and professional organizations came 
into being and became more involved in recommending preferred 
practices by means of issued pronouncements. Over the past fifty 
years, principles were promulgated by different groups, some of 
which are no longer in existence, and some conflicts exist between 
the various pronouncements. The American Institute of Certified 
Public Accountants issued a statement of auditing standards (SAS-69) 
to better organize and clarify what is meant by GAAP. This statement 
instructs financial statement preparers, auditors and users of 
financial statements concerning the relative priority of the 
different sources of GAAP (past and present pronouncements by the 
many standard-setting entities) used by auditors to judge the 
fairness of presentation in financial statements.
    \2\ See, for example, Cal. Admin. Code title 28, section 
1300.76, where the state requires licensed health care service plans 
to maintain a minimum tangible net equity and another, Federal, 
example at 12 CFR 208.41 where tangible net equity is incorporated 
into the capital adequacy requirements required of state chartered 
banks that are members of the Federal Reserve system.
---------------------------------------------------------------------------

    Tangible balance sheet equity is a refinement of the GAAP concept 
of equity, typically arrived at by reducing balance sheet equity by the 
book value assigned to intangible assets, including but not limited to 
assets such as goodwill, going concern value, organizational start up 
expenses, etc. These items are recognized as capital assets for 
purposes of GAAP but may or may not be assets that can be readily 
liquidated or pledged as security for loans.
    The modification proposed in this rulemaking acknowledges that the 
market value of real property assets may increase at the same time the 
net book value of such assets decreases. The net book value of real 
property usually decreases over time due to depreciation, whereas the 
market value of real property may stay the same or appreciate over 
time.
    In a lower interest rate environment, refinancing is a reasonable 
business strategy. The current regulation, however, does not 
contemplate that any credit can be given for a positive difference 
between net book value and market value for purposes of evaluating the 
equity component of credit worthiness when a borrower seeks Agency-
guaranteed refinancing at a lower interest rate. It has happened that 
borrowers that could have met a modified balance sheet equity test have 
been foreclosed from this option because the equity ratio calculated 
using the conventional GAAP values reported on the balance sheet do not 
meet the equity test in the current regulation at the time the 
refinancing is of interest to the borrower. When this happens, the 
borrower is captive to the existing lender that is the beneficiary of 
the original Agency guarantee on what has become an above market rate 
loan. This lender has minimal incentive to refinance the above market 
rate loan, and unless the Agency can guarantee another lender willing 
to refinance the

[[Page 2523]]

first lender's exposure, the borrower is locked into the higher 
interest rate. It is not able to ``shop'' for a lower interest rate. 
When the loan in question is already USDA guaranteed, the taxpayer is 
in a position of guaranteeing the higher interest rate when a lower 
exposure could otherwise be effected and there is a corresponding 
increased risk of default under the guarantee. The increased risk of 
default comes about when these higher interest rates undermine the 
financial health of the borrowers and lead to what otherwise could be 
avoidable financial defaults.
    This proposed rule is intended to provide the borrower with 
refinancing flexibility when the market value of the real property on 
the balance sheet justifies a more flexible approach to the equity 
requirement than is allowed by the current regulation. The amount of 
the refinancing loan may not exceed the outstanding balance of the loan 
to be refinanced. Where a refinancing request is coupled with a ``new 
money'' guarantee application, the conventional, unadjusted, tangible 
balance sheet equity test will be applied to the combined guarantee 
request.
    The Agency has considered, but not elected to propose, revising the 
tangible balance sheet equity test to apply across the board, for all 
borrowers, and not restrict its availability to refinancing loan 
applications. It may be that the Agency's experience with the limited 
applicability of this rulemaking will lead to proposing its wider 
application in the future. For now, it was determined to proceed with a 
more limited applicability in order to bring relief to at least some 
borrowers in a more rapid period of time.
    The Agency has considered, but not elected to allow, full market 
value refinancing in this proposed rulemaking. The potential for abuse 
of market appraisals for purposes of full market value refinancing is 
thought to be greater than the potential benefit of liberalizing the 
related equity criterion to this maximum degree. In the alternative, 
the Agency has opted to allow consideration of market value only with 
respect to the equity test calculation; the amount of the refinancing 
loan itself may not exceed the outstanding balance of the loan to be 
refinanced. Market value must be determined by appraisals using arms-
length methodologies to arrive at an unbiased ``fair or current market 
value''.
    Allowing flexibility in the equity requirement for refinancing 
loans where the market value of real property assets supports such 
flexibility will serve to enhance the financial health of Agency-
guaranteed borrowers and promote rural development.
    In order to provide for an alternate equity calculation in 
determining whether the credit requirement is met for refinancing 
loans, the Agency has modified existing regulations to define 
``tangible balance sheet equity'' and added two new definitions that 
build directly and indirectly on this term --adjusted tangible net 
worth'' and ``allowed tangible asset appreciation''. The term 
``subordinated owner debt'' is also added. These new terms apply only 
in the case of refinancing requests. ``Subordinated owner debt'' is 
defined as subordinated debt owed to one or more of the owners of the 
borrower.
    An example that demonstrates the practical effect of this change is 
as follows. XYZ Company is capitalized with $200,000 cash on day 1 and 
uses $200,000 cash and $800,000 Agency guaranteed debt to purchase a 
building for $1,000,000 on day 2. Assume (1) the building is 
depreciated at 10 percent a year, (2) the market value of the building 
at the end of year 2 has appreciated to $1,200,000, (3) there are no 
other assets on the balance sheet at the end of year 2 for purposes of 
this simplified example, (4) the mortgage does not begin to amortize 
until the end of year 4, and (5) the income statement reflects a 
cumulative net loss of ($200,000) for the first two years of 
operations. At the end of year 2 the company would like to refinance 
the mortgage debt. At this point in time tangible balance sheet equity 
is $ -0-. Per the revised regulation, however, the tangible balance 
sheet can be adjusted upwards by an increment equal to the difference 
between the net book value of the property ($800,000) and the lesser of 
(1) its original book value ($1,000,000) or (2) an appraisal supported 
current market value ($1,200,000). Thus, the adjusted tangible balance 
sheet equity in that case would be $-0 plus $200,000, or $200,000 for 
purposes of determining eligibility for a refinancing loan guarantee. 
In order to calculate the equity ratio, (equity as a percentage of 
equity plus total liabilities), the result would be 200,000/1,000,000, 
or 20 percent.
    A second refinement to the GAAP concept of equity proposed in this 
rulemaking for this credit evaluation criterion is to include in the 
equity calculation subordinated debt contributed to the borrower by the 
business owner(s). In order for this subordinated debt to count as 
equity for purposes of the equity criterion, the subordinated note must 
be expressly subordinate to the Agency's B&I loan exposure, whether 
that exposure is direct or guaranteed. Moreover, the loan documentation 
must provide that repayment of this subordinated debt may not commence 
until the earlier of the full repayment of the B&I loan exposure or 
when a period of three consecutive years has passed during which the 
borrower has met all loan covenants and evidenced operating profit 
sufficient to commence partial repayment of this subordinated debt 
after giving effect to the annual debt service requirements of the B&I 
loan exposure. The partial repayment schedule in the case of the latter 
scenario may not be more accelerated than the debt repayment schedule 
in effect for the Agency's B&I loan exposure.
    To carry our earlier example one step further, assume (1) that an 
owner provides $100,000 of subordinated debt to XYZ Company in year 3 
so that it can purchase a patent. Also assume (2) the market value of 
the building at the end of year 3 remains at $1,200,000, (3) there are 
no other assets on the balance sheet at the end of year 3 for purposes 
of this simplified example, and (4) the income statement reflects a 
cumulative net loss of ($300,000) for the first three years of 
operations. Instead of refinancing at the end of year two as described 
above, the Company seeks a refinancing loan guarantee at the end of 
year three. Total liabilities equal the $800,000 mortgage debt plus 
$100,000 in subordinated family capital. Tangible balance sheet equity 
as defined in the proposed rule equals total equity less the book value 
of intangible assets, or ($100,000) minus $100,000 = ($200,000). Per 
the revised regulation, however, the tangible balance sheet equity can 
be adjusted upwards by an increment equal to the difference between the 
net book value of the property ($700,000) and the lesser of (1) its 
original book value ($1,000,000) or (2) an appraisal supported current 
market value ($1,200,000). Thus, the adjusted tangible balance sheet 
equity in that case would be ($200,000) plus $300,000, or $100,000 for 
purposes of determining eligibility for a refinancing loan guarantee. 
In order to calculate the equity ratio, (equity as a percentage of 
equity plus total liabilities), the result would be 100,000/1,000,000, 
or 10 percent. In practice, the Agency has considered the dividing line 
between new businesses and existing businesses in similar situations to 
be three years. Thus, the 10 percent equity requirement for existing 
businesses would apply and this borrower would qualify for a 
refinancing loan as a result of this regulatory change. In this 
example, the income statement shows three years of

[[Page 2524]]

consecutive accrual losses, but breakeven cash flows. The reduced 
equity requirement (from 20 percent to 10 percent) for existing 
business could have been triggered earlier under existing regulations 
had XYZ Company demonstrated a one full successful year of operations 
prior to the end of year three.
    This proposed rule also modifies the equity requirement for certain 
energy projects and provides that financing will be guaranteed for 
energy projects only when they have met certain performance criteria. 
Financing for energy projects will only be allowed when the facility 
has been constructed according to plans and specifications and is 
producing at the design levels approved by the Agency for purposes of 
underwriting the loan or loan guarantee. The higher equity requirements 
reflect the Agency's determination that energy projects are riskier 
than the average B&I portfolio loan. The Agency's energy borrowers are 
typically not utilities in the conventional sense. As a general rule, 
conventional utilities have other sources of financing and higher 
capital requirements than can practicably be met by RBS programs.
    The proposed rule contemplates that energy projects must 
demonstrate two complete operating cycles at design performance levels 
submitted to and accepted by the Agency. A complete operating cycle 
consists of the purchase of raw material inputs, their input into the 
manufacturing process and transformation into a design specified number 
of output units for a given level of raw material input within a 
specified period of time and at a design-specified quality level. In 
the case of projects that produce steam or electricity as an output, 
there is an additional requirement that they be successfully 
interconnected with the purchaser of the output. This is not the same 
as being connected to the power grid alone. Being connected to the 
grid, without enforceable wheeling agreements and physical 
interconnection with the buyer at the other end of the transmission 
route, does not satisfy this requirement. Successful interconnection 
with the purchaser of the steam or electricity means that everything is 
in place that is required for the purchaser to receive the steam or 
electricity output in accordance with the contractual terms specified 
and such delivery has been demonstrated.

List of Subjects in 7 CFR Parts 1980 and 4279

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

    Accordingly, Chapters XVIII and XLII, title 7, of the Code of 
Federal Regulations are proposed to be amended as follows:

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

PART 1980--GENERAL

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

    Authority: 5 U.S.C. 301 and 7 U.S.C. 1989. Subpart E also issued 
under 7 U.S.C 1932(a).

Subpart E--Business and Industrial Loan Program

    2. Section 1980.402 is revised to read as follows:


Sec.  1980.402  Definitions.

    (a) Definitions.
    The following general definitions are applicable to the terms used 
in this subpart. Additional definitions may be found in Sec.  1980.6 of 
subpart A of this part.
    Adjusted tangible net worth. Tangible balance sheet equity plus 
allowed tangible asset appreciation and subordinated owner debt.
    Allowed tangible asset appreciation. Allowed tangible asset 
appreciation means the difference between the current net book value 
recorded on the financial statements (original cost less cumulative 
depreciation) of real property assets and the lesser of their current 
market value or original cost, where current market value is determined 
using an appraisal satisfactory to the Agency.
    Area of high unemployment. An area in which a B&I Loan Guarantee 
can be issued, consisting of a county or group of contiguous counties 
or equivalent subdivisions of a State which, on the basis of the most 
recent 12-month average or the most recent annual average data, has a 
rate of unemployment 150 percent or more of the national rate. Data 
used must be those published by the Bureau of Labor Statistics, U.S. 
Department of Labor.
    Biogas. Biomass converted to gaseous fuel.
    Biomass. Any organic material that is available on a renewable or 
recurring basis including agricultural crops, trees grown for energy 
production, wood waste and wood residues, plants, including aquatic 
plants and grasses, fibers, animal waste and other waste materials, 
fats, oils, greases, including recycled fats, oils and greases. It does 
not include paper that is commonly recycled or unsegregated solid 
waste.
    Borrower. A borrower may be a cooperative, corporation, 
partnership, trust or other legal entity organized and operated on a 
profit or nonprofit basis; an Indian Tribe on a Federal or State 
reservation or other Federally recognized tribal group; a municipality, 
county or other political subdivision of a State; or an individual. 
Such borrower must be engaged in or proposing to engage in improving, 
developing or financing business, industry and employment and improving 
the economic and environmental climate in rural areas, including 
pollution abatement and control.
    Business and Industry Disaster Loans. Business and Industry loans 
guaranteed under the authority of the Dire Emergency Supplemental 
Appropriations Act, 1992, Public Law 102-368. These guaranteed loans 
cover costs arising from the direct consequences of natural disasters 
such as Hurricanes Andrew and Iniki and Typhoon Omar that occur after 
August 23, 1992, and receive a Presidential declaration. Also included 
are the costs to any producer of crops and livestock that are a direct 
consequence of at least a 40 percent loss to a crop, 25 percent loss to 
livestock or damage to building structures from a microburst wind 
occurrence in calendar year 1992.
    Community facilities. For the purpose of this subpart, community 
facilities are those facilities designed to aid in the development of 
private business and industry in rural areas. Such facilities include, 
but are not limited to, acquisition and site preparation of land for 
industrial sites (but not for improvements erected thereon), access 
streets and roads serving the site, parking areas extension or 
improvement of community transportation systems serving the site and 
utility extensions all incidental to site preparation. Projects 
eligible for assistance under Subpart A of Part 1942 of this chapter 
are not eligible for assistance under this subpart.
    Development cost. These costs include, but are not limited to, 
those for acquisition, planning, construction, repair or enlargement of 
the proposed facility; purchase of buildings, machinery, equipment, 
land easements, rights of way; payment of startup operating costs, and 
interest during the period before the first principal payment becomes 
due, including interest on interim financing.
    Disaster Assistance for Rural Business Enterprises. Guaranteed 
loans authorized by section 401 of the Disaster Assistance Act of 1989 
(Pub. L. 101-82), providing for the guarantee of loans to assist in 
alleviating distress caused to

[[Page 2525]]

rural business entities, directly or indirectly, by drought, freeze, 
storm, excessive moisture, earthquake, or related conditions occurring 
in 1988 or 1989, and providing for the guarantee of loans to such rural 
business entities that refinance or restructure debt as a result of 
losses incurred, directly or indirectly, because of such natural 
disasters. See this subpart and its appendices, especially appendix K, 
containing additional regulations for these loans.
    Drought and Disaster guaranteed loans. Guaranteed loans authorized 
by section 331 of the Disaster Assistance Act of 1988 (Pub. L. 100-
387), providing for the guarantee of loans to assist in alleviating 
distress caused to rural business entities, directly or indirectly, by 
drought, hail, excessive moisture, or related conditions occurring in 
1988, or providing for the guarantee of loans to such rural business 
entities that refinance or restructure debt as a result of losses 
incurred, directly or indirectly, because of such natural disasters.
    Energy projects. Projects that produce or distribute energy and 
projects that produce biomass or biogas fuel, where such projects 
utilize technology that has a proven operating history, and for which 
there is an established industry for the design, installation, and 
service (including spare parts) of the equipment.
    Hurricane Andrew. A hurricane that caused damage in southern 
Florida on August 24, 1992, and in Louisiana on August 26, 1992.
    Hurricane Iniki. A hurricane that caused damage in Hawaii on 
September 11, 1992.
    Letter of conditions. Letter issued by FmHA or its successor agency 
under Public Law 103-354 to a borrower setting forth the conditions 
under which FmHA or its successor agency under Public Law 103-354 will 
make a direct (insured) loan from the Rural Development Insurance Fund.
    Loan classification system. The process by which loans are examined 
and categorized by degree of potential for loss in the event of 
default.
    Microburst wind. A violently descending column of air associated 
with a thunderstorm which causes straight line wind damage.
    Problem loan. A loan which is not performing according to its 
original terms and conditions or which is not expected in the future to 
perform according to those terms and conditions.
    Public body. A municipality, political subdivision, public 
authority, district, or similar organization.
    Refinancing loan. A loan, all of the proceeds of which are applied 
to extinguish the entire balance of an outstanding debt.
    Seasoned loan. A loan which:
    (1) Has a remaining principal guaranteed loan balance of two-thirds 
or less of the original aggregate of all existing B&I guaranteed loans 
made to that business.
    (2) Is in compliance with all loan conditions and B&I regulations.
    (3) Has been current on the B&I guaranteed loan(s) payments for 24 
consecutive months.
    (4) Is secured by collateral which is determined to be adequate to 
insure there will be no loss on the B&I guaranteed loan.
    State. Any of the fifty States, the Commonwealth of Puerto Rico, 
the Virgin Islands of the United States, Guam, American Samoa and the 
Commonwealth of the Northern Mariana Islands.
    Subordinated owner debt. Debt owed by the borrower firm to the 
owner(s) that is subordinated to debt owed by the borrower to the 
Agency or guaranteed by the Agency (aggregate B&I Loan Exposure) 
pursuant to a subordination agreement satisfactory to the Agency. The 
debt must have been issued in exchange for cash loaned to the borrower. 
The terms of the subordination agreement must provide that repayment 
will not commence until the earlier of the date all indebtedness owed 
to or guaranteed by the Agency has been repaid or when a period of 
three consecutive years has passed during which the borrower has met 
all loan covenants and evidenced operating profit sufficient to 
commence partial repayment of this subordinated debt after giving 
effect to the annual debt service requirements of the aggregate B&I 
Loan Exposure. The partial repayment schedule in the case of the latter 
scenario is subject to annual Agency concurrence and may not be more 
accelerated than the debt repayment schedule in effect for the Agency's 
aggregate B&I Loan Exposure.
    Tangible balance sheet equity. Total equity less the value of 
intangible assets recorded on the financial statements, as determined 
from balance sheets prepared in accordance with generally accepted 
accounting principles (GAAP).
    Typhoon Omar. A typhoon that caused damage in Guam on August 28, 
1992.
    Working capital. The excess of current assets over current 
liabilities. It identifies the relatively liquid portion of total 
enterprise capital which constitutes a margin or buffer for meeting 
obligations within the ordinary operating cycle of the business.
    (b) Accounting terms not otherwise defined in this part shall have 
the definition ascribed to them under generally accepted accounting 
principles (GAAP).
    3. Section 1980.411 is amended by revising paragraph (a)(11)(iii), 
by adding new paragraphs (a)(11)(iv) and (a)(11)(v) and by adding a new 
paragraph (a)(16) to read as follows:


Sec.  1980.411  Loan purposes.

* * * * *
    (a) * * *
    (11) * * *
    (iii) It is necessary to place a permanent loan subsequent to an 
interim loan for financing the construction of the project;
    (iv) It does not refinance subordinated owner debt; and
    (v) The refinancing loan guaranteed by the Agency does not exceed 
the balance outstanding of the debt to be refinanced.
* * * * *
    (16) Energy projects. Energy projects that produce biomass fuel, 
biogas, fuel cells or batteries as an output must have completed two 
operating cycles at design performance levels submitted to and accepted 
by the Agency. Projects that produce steam or electricity as an output 
must have met or exceeded acceptance test performance criteria 
submitted to and approved by the Agency and be successfully 
interconnected with the purchaser of the output. Performance or 
acceptance test requirements for all other energy projects may be 
determined by the Agency on a case by case basis. Financing for energy 
projects will only be allowed when the facility has been constructed 
according to plans and specifications and is producing at the quality 
and quantity projected in the application.
* * * * *
    4. Section 1980.441 is revised to read as follows:


Sec.  1980.441  Borrower equity requirements.

    (a) A minimum of 10 percent tangible balance sheet equity will be 
required for existing businesses at the loan and guarantee closing (40 
percent for energy related businesses). A minimum of 20 percent 
tangible balance sheet equity will be required for new businesses at 
the loan or guarantee closing (50 percent for all new energy related 
businesses). Where the application is a request for only a refinancing 
loan guarantee, without any related incremental new financing, the 
equity requirement may be determined using adjusted tangible net worth. 
An application that combines a refinancing guarantee request with a

[[Page 2526]]

new loan guarantee request is subject to the standard, unadjusted, 
equity requirement except as provided in paragraphs (a)(1) or (a)(2) of 
this section. Increases or decreases in the equity requirements may be 
imposed or granted as follows:
    (1) A reduction in the equity requirement for existing businesses 
may be permitted by the Administrator. In order for a reduction to be 
considered, the borrower must furnish the following:
    (i) Collateralized personal and corporate guarantees, including any 
parent, subsidiary, or affiliated company, when feasible and legally 
permissible, and
    (ii) Pro forma and historical financial statements that indicate 
the business to be financed meets or exceeds the median quartile (as 
identified in the Risk Management Association's Annual Statement 
Studies or similar publication) for the current ratio, quick ratio, 
debt-to-worth ratio, debt coverage ratio, and working capital.
    (2) The approval official may require more than the minimum equity 
requirements provided in this paragraph if the official makes a written 
determination that special circumstances necessitate this course of 
action.
    (b) The equity requirement must be met in the form of either cash 
or tangible earning assets contributed to the business and reflected on 
the balance sheet.
    (c) The equity requirement must be determined using balance sheets 
prepared in accordance with GAAP and met upon giving effect to the 
entirety of the loan in the calculation, whether or not the loan itself 
is fully advanced, as of the date the guaranteed loan is closed.

CHAPTER XLII--RURAL BUSINESS-COOPERATIVE SERVICE AND RURAL UTILITIES 
SERVICE, DEPARTMENT OF AGRICULTURE

PART 4279--GUARANTEED LOANMAKING

    5. The authority citation for part 4279 is revised to read as 
follows:

    Authority: 5 U.S.C. 301, 7 U.S.C. 1989 and 7 U.S.C. 1932(a).

Subpart A--General

    6. Section 4279.2 is revised to read as follows:


Sec.  4279.2  Definitions and abbreviations.

    (a) Definitions.
    Adjusted tangible net worth. Tangible balance sheet equity plus 
allowed tangible asset appreciation and subordinated owner debt.
    Agency. The Rural Business-Cooperative Service or successor Agency 
assigned by the Secretary of Agriculture to administer the B&I program. 
References to the National Office, Finance Office, State Office or 
other Agency offices or officials should be read as prefaced by Agency 
or ``Rural Development'' as applicable.
    Allowed tangible asset appreciation. The difference between the 
current net book value recorded on the financial statements (original 
cost less cumulative depreciation) of real property assets and the 
lesser of their current market value or original cost, where current 
market value is determined using an appraisal satisfactory to the 
Agency.
    Arm's-length transaction. The sale, release, or disposition of 
assets in which the title to the property passes to a ready, willing 
and able disinterested third party that is not affiliated with or 
related to and has no security, monetary or stockholder interest in the 
borrower or transferor at the time of the transaction.
    Assignment Guarantee Agreement (Business and Industry). Form 4279-
6, the signed agreement among the Agency, the lender and the holder 
containing the terms and conditions of an assignment of a guaranteed 
portion of a loan, using the single note system.
    Biogas. Biomass converted to gaseous fuel.
    Biomass. Any organic material that is available on a renewable or 
recurring basis including agricultural crops, trees grown for energy 
production, wood waste and wood residues, plants, including aquatic 
plants and grasses, fibers, animal waste and other waste materials, 
fats, oils, greases, including recycled fats, oils and greases. It does 
not include paper that is commonly recycled or unsegregated solid 
waste.
    Borrower. All parties liable for the loan except for guarantors.
    Conditional Commitment (Business and Industry). Form 4279-3, the 
Agency's notice to the lender that the loan guarantee it has requested 
is approved subject to the completion of all conditions and 
requirements set forth by the Agency.
    Deficiency balance. The balance remaining on a loan after all 
collateral has been liquidated.
    Deficiency judgment. A monetary judgment rendered by a court of 
competent jurisdiction after foreclosure and liquidation of all 
collateral securing the loan.
    Energy projects. Projects that produce or distribute energy and 
projects that produce biomass or biogas fuel, where such projects 
utilize technology that has a proven operating history, and for which 
there is an established industry for the design, installation, and 
service (including spare parts) of the equipment.
    Existing lender debt. A debt not guaranteed by the Agency, but owed 
by a borrower to the same lender that is applying for or has received 
the Agency guarantee.
    Fair market value. The price that could reasonably be expected for 
an asset in an arm's-length transaction between a willing buyer and a 
willing seller under ordinary economic and business conditions.
    Farmers Home Administration (FmHA). The former agency of USDA that 
previously administered the programs of this Agency. Many instructions 
and forms of FmHA are still applicable to Agency programs.
    Finance office. The office which maintains the Agency financial 
accounting records located in St. Louis, Missouri.
    High-impact business. A business that offers specialized products 
and services that permit high prices for the products produced, may 
have a strong presence in international market sales, may provide a 
market for existing local business products and services, and which is 
locally owned and managed.
    Holder. A person or entity, other than the lender, who owns all or 
part of the guaranteed portion of the loan with no servicing 
responsibilities. When the single note option is used and the lender 
assigns a part of the guaranteed note to an assignee, the assignee 
becomes a holder only when the Agency receives notice and the 
transaction is completed through the use of Form 4279-6 or predecessor 
form.
    Interim financing. A temporary or short-term loan made with the 
clear intent that it will be repaid through another loan. Interim 
financing is frequently used to pay construction and other costs 
associated with a planned project, with permanent financing to be 
obtained after project completion.
    Lender. The organization making, servicing and collecting the loan 
which is guaranteed under the provision of the appropriate subpart.
    Lender's Agreement (Business and Industry). Form 4279-4 or 
predecessor form between the Agency and the lender setting forth the 
lender's loan responsibilities when the Loan Note Guarantee is issued.
    Loan agreement. The agreement between the borrower and lender 
containing the terms and conditions of the loan and the 
responsibilities of the borrower and lender.

[[Page 2527]]

    Loan Note Guarantee (Business and Industry). Form 4279-5 or 
predecessor form issued and executed by the Agency containing the terms 
and conditions of the guarantee.
    Loan-to-value. The ratio of the dollar amount of a loan to the 
dollar value of the collateral pledged as security for the loan.
    Natural resource value-added product. Any naturally occurring 
product that is processed to add value to the product. For example, 
straw is processed into particle board.
    Negligent servicing. The failure to perform those services which a 
reasonably prudent lender would perform in servicing (including 
liquidation of) its own portfolio of loans that are not guaranteed. The 
term includes not only the concept of a failure to act, but also not 
acting in a timely manner, or acting in a manner contrary to the manner 
in which a reasonably prudent lender would act.
    Parity. A lien position whereby two or more lenders share a 
security interest of equal priority in collateral. In the event of 
default, each lender will be affected on a pro rata basis.
    Participation. Sale of an interest in a loan by the lender wherein 
the lender retains the note, collateral securing the note, and all 
responsibility for loan servicing and liquidation.
    Poor. A community or area is considered poor if, based on the most 
recent decennial census data, either the county, city, or census tract 
where the community or area is located has a median household income at 
or below the poverty line for a family of four; has a median household 
income below the non-metropolitan median household income for the 
State; or has a population of which 25 percent or more have income at 
or below the poverty line.
    Promissory note. Evidence of debt. ``Note'' or ``Promissory note'' 
shall also be construed to include ``Bond'' or other evidence of debt 
where appropriate.
    Refinancing loan. A loan, all of the proceeds of which are applied 
to extinguish the entire balance of an outstanding debt.
    Rural Development. The Under Secretary for Rural Development has 
policy and operational oversight responsibilities for RHS, RBS and RUS.
    Spreadsheet. A table containing data from a series of financial 
statements of a business over a period of time. Financial statement 
analysis normally contains spreadsheets for balance sheet items and 
income statements and may include funds flow statement data and 
commonly used ratios. The spreadsheets enable a reviewer to easily scan 
the data, spot trends and make comparisons.
    State. Any of the 50 States, the Commonwealth of Puerto Rico, the 
Virgin Islands of the United States, Guam, American Samoa, the 
Commonwealth of the Northern Mariana Islands, the Republic of Palau, 
the Federated States of Micronesia and the Republic of the Marshall 
Islands.
    Subordinated owner debt. Debt owed by the borrower firm to the 
owner(s) that is subordinated to debt owed by the borrower to the 
Agency or guaranteed by the Agency (aggregate B&I Loan Exposure) 
pursuant to a subordination agreement satisfactory to the Agency. The 
debt must have been issued in exchange for cash loaned to the borrower. 
The terms of the subordination agreement must provide that repayment 
will not commence until the earlier of the date all indebtedness owed 
to or guaranteed by the Agency has been repaid or when a period of 
three consecutive years has passed during which the borrower has met 
all loan covenants and evidenced operating profit sufficient to 
commence partial repayment of this subordinated debt after giving 
effect to the annual debt service requirements of the aggregate B&I 
Loan Exposure. The partial repayment schedule in the case of the latter 
scenario is subject to annual Agency concurrence and may not be more 
accelerated than the debt repayment schedule in effect for the Agency's 
aggregate B&I Loan Exposure.
    Subordination. An agreement between the lender and borrower whereby 
lien priorities on certain assets pledged to secure payment of the 
guaranteed loan will be reduced to a position junior to or on parity 
with, the lien position of another loan in order for the Agency 
borrower to obtain additional financing, not guaranteed by the Agency, 
from the lender or a third party.
    Tangible balance sheet equity. Total equity less the value of 
intangible assets recorded on the financial statements, as determined 
from balance sheets prepared in accordance with generally accepted 
accounting principles (GAAP).
    Veteran. For the purposes of assigning priority points, a veteran 
is a person who is a veteran of any war, as defined in section 101(12) 
of title 38, United States Code.
    (b) Abbreviations.

B&I--Business and Industry
CF--Community Facilities
CLP--Certified Lenders Program
FSA--Farm Service Agency
FMI--Forms Manual Insert
NAD--National Appeals Division
OGC--Office of the General Counsel
RBS--Rural Business-Cooperative Service
RHS--Rural Housing Service
RUS--Rural Utilities Service
SBA--Small Business Administration
USDA--United States Department of Agriculture
    (c) Accounting terms not otherwise defined in this part shall have 
the definition ascribed to them under GAAP.

Subpart B--Business and Industry Loans

    7. Section 4279.113 is amended by revising paragraph (q) and by 
adding a paragraph (bb) to read as follows:


Sec.  4279.113  Eligible loan purposes.

* * * * *
    (q) To refinance outstanding debt when it is determined that the 
project is viable and refinancing is necessary to improve cash flow and 
create new or save existing jobs. Existing lender debt may be eligible 
provided that, at the time of the application, the loan has been 
current for at least the past 12 months (unless such status is achieved 
by the lender forgiving the borrower's debt) and the borrower will 
receive better rates or terms. Subordinated owner debt is not eligible 
under this paragraph. A refinancing loan guaranteed by the Agency may 
not exceed the balance outstanding of the debt to be refinanced.
* * * * *
    (bb) To finance energy projects. Energy projects that produce 
biomass fuel, biogas, fuel cells or batteries as an output must have 
completed two operating cycles at design performance levels submitted 
to and accepted by the Agency. Projects that produce steam or 
electricity as an output must have met or exceeded acceptance test 
performance criteria submitted to and approved by the Agency and be 
successfully interconnected with the purchaser of the output. 
Performance or acceptance test requirements for all other energy 
projects may be determined by the Agency on a case by case basis. 
Financing for energy projects will only be allowed when the facility 
has been constructed according to plans and specifications and is 
producing at the quality and quantity projected in the application.
    8. Section 4279.131 is amended by revising paragraph (d) to read as 
follows:


Sec.  4279.131  Credit quality.

* * * * *
    (d) Equity. (1) A minimum of 10 percent tangible balance sheet 
equity

[[Page 2528]]

will be required for existing businesses at the loan and guarantee 
closing (40 percent for energy related businesses). A minimum of 20 
percent tangible balance sheet equity will be required for new 
businesses at the loan or guarantee closing (50 percent for all new 
energy related businesses). Where the application is a request for only 
a refinancing loan guarantee, without any related incremental new 
financing, the equity requirement may be determined using adjusted 
tangible net worth. An application that combines a refinancing 
guarantee request with a new loan guarantee request is subject to the 
standard, unadjusted, equity requirement except as provided in 
paragraphs (d)(1)(i) or (d)(1)(ii) of this section. Increases or 
decreases in the equity requirements may be imposed or granted as 
follows:
    (i) A reduction in the equity requirement for existing businesses 
may be permitted by the Administrator. In order for a reduction to be 
considered, the borrower must furnish the following:
    (A) Collateralized personal and corporate guarantees, including any 
parent, subsidiary, or affiliated company, when feasible and legally 
permissible, and
    (B) Pro forma and historical financial statements that indicate the 
business to be financed meets or exceeds the median quartile (as 
identified in the Risk Management Association's Annual Statement 
Studies or similar publication) for the current ratio, quick ratio, 
debt-to-worth ratio, debt coverage ratio, and working capital.
    (ii) The approval official may require more than the minimum equity 
requirements provided in this paragraph if the official makes a written 
determination that special circumstances necessitate this course of 
action.
    (2) The equity requirement must be met in the form of either cash 
or tangible earning assets contributed to the business and reflected on 
the balance sheet.
    (3) The Lender must certify that the equity requirement was 
determined using balance sheets prepared in accordance with GAAP and 
met upon giving effect to the entirety of the loan in the calculation, 
whether or not the loan itself is fully advanced, as of the date the 
guaranteed loan is closed.
* * * * *

    Dated: January 12, 2004.
John Rosso,
Administrator, Rural Business-Cooperative Service.
[FR Doc. 04-979 Filed 1-15-04; 8:45 am]
BILLING CODE 3410-XY-P