[Federal Register Volume 72, Number 178 (Friday, September 14, 2007)]
[Proposed Rules]
[Pages 52618-52666]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4349]



[[Page 52617]]

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

Part II





Department of Agriculture





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



Rural Utilities Service



Rural Housing Service



Rural Business-Cooperative Service



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



7 CFR Parts 1779, 3575, 4279, et al.



Rural Development Guaranteed Loans; Proposed Rule

  Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / 
Proposed Rules  

[[Page 52618]]


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

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1779

Rural Housing Service

7 CFR Part 3575

Rural Business-Cooperative Service

Rural Utilities Service

7 CFR Parts 4279 and 4280

Rural Business-Cooperative Service

Rural Housing Service

Rural Utilities Service

7 CFR Part 5001

RIN 0570-AA65


Rural Development Guaranteed Loans

AGENCY: Rural Business-Cooperative Service, Rural Housing Service, 
Rural Utilities Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: Rural Development, a mission area within the U.S. Department 
of Agriculture, is proposing a unified guaranteed loan platform for 
enhanced delivery of four existing Rural Development guaranteed loan 
programs--Community Facility; Water and Waste Disposal; Business and 
Industry; and Renewable Energy Systems and Energy Efficiency 
Improvement Projects. This proposed rule would eliminate the existing 
loan guarantee regulations for these four programs and consolidate them 
under a new, single part. In addition to consolidating these four 
programs, the proposed rulemaking incorporates provisions that will 
enable the Agency to better manage the risk associated with making and 
servicing guaranteed loans and that will reduce the cost of operating 
the guaranteed loan programs. Such provisions include incorporating 
specific project eligibility criteria, revisions to the requirements 
for lenders to participate in the programs, allowing approved lenders 
to become preferred lenders, and allowing guaranteed loan applications 
to be submitted with less documentation accompanying the application 
under certain conditions.

DATES: Comments on the proposed rule must be received on or before 
November 13, 2007. The comment period for the information collection 
under the Paperwork Reduction Act of 1995 continues through November 
13, 2007.

ADDRESSES: You may submit comments to this rule by any of the following 
methods:
     Agency Web Site: http://www.rurdev.usda.gov/regs. Follow 
instructions for submitting comments on the Web site.
     E-Mail: [email protected]. Include the RIN No. 0570-
AA65 in the subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Submit written comments via the U.S. Postal Service 
to the Branch Chief, Regulations and Paperwork Management Branch, U.S. 
Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., 
Washington, DC 20250-0742.
     Hand Delivery/Courier: Submit written comments via Federal 
Express Mail or other courier service requiring a street address to the 
Branch Chief, Regulations and Paperwork Management Branch, U.S. 
Department of Agriculture, 300 7th Street, SW., 7th Floor, Washington, 
DC 20024.
    All written comments will be available for public inspection during 
regular work hours at the 300 7th Street, SW., 7th Floor address listed 
above.

FOR FURTHER INFORMATION CONTACT: Mr. Michael Foore, Rural Development, 
Business and Cooperative Programs, U.S. Department of Agriculture, 1400 
Independence Avenue, SW., Stop 3201, Washington, DC 20250-3201; e-mail: 
[email protected]; telephone (202) 690-4730.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This proposed rule has been reviewed under Executive Order (EO) 
12866 and has been determined to be significant by the Office of 
Management and Budget. The EO defines a ``significant regulatory 
action'' as one that is likely to result in a rule that may: (1) Have 
an annual effect on the economy of $100 million or more or adversely 
affect, in a material way, the economy, a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local, or tribal governments or communities; (2) 
Create a serious inconsistency or otherwise interfere with an action 
taken or planned by another agency; (3) Materially alter the budgetary 
impact of entitlements, grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) Raise novel legal 
or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in this EO.
    The Agency conducted a qualitative benefit cost analysis to fulfill 
the requirements of Executive Order 12866. Based on the results of this 
qualitative analysis of the benefits and costs of the proposed rule, 
the Agency has concluded that the net effect of the rule will be 
beneficial in part due to improved underwriting.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act 1995 (UMRA) of Public 
Law 104-4 establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, 
Rural Development generally must prepare a written statement, including 
a cost-benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures to State, local, or tribal 
governments, in the aggregate, or to the private sector of $100 million 
or more in any one year. When such a statement is needed for a rule, 
section 205 of UMRA generally requires Rural Development 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 proposed rule contains no Federal mandates (under the 
regulatory provisions of Title II of the UMRA) for State, local, and 
tribal governments or the private sector. Thus, this rule is not 
subject to the requirements of sections 202 and 205 of the UMRA.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' Rural Development has determined 
that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment, and in 
accordance with the National Environmental Policy Act (NEPA) of 1969, 
42 U.S.C. 4321 et seq., an Environmental Impact Statement is not 
required. Loan applications will be reviewed individually to determine 
compliance with NEPA.

Executive Order 12988, Civil Justice Reform

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. In accordance with this rule: (1) All State and 
local laws and regulations that are in conflict with this rule will be 
preempted; (2) no retroactive effect will be given this rule; and (3) 
administrative proceedings in accordance with the regulations of the 
Department of Agriculture National Appeals Division (7 CFR part 11) 
must

[[Page 52619]]

be exhausted before bringing suit in court challenging action taken 
under this rule unless those regulations specifically allow bringing 
suit at an earlier time.

Executive Order 13132, Federalism

    It has been determined, under Executive Order 13132, Federalism, 
that this proposed rule does not have sufficient federalism 
implications to warrant the preparation of a Federalism Assessment. The 
provisions contained in the proposed rule will not have a substantial 
direct effect on States or their political subdivisions or on the 
distribution of power and responsibilities among the various government 
levels.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-602) (RFA) generally 
requires an agency to prepare a regulatory flexibility analysis of any 
rule subject to notice and comment rulemaking requirements under the 
Administrative Procedure Act or any other statute unless the agency 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities. Small entities include small 
businesses, small organizations, and small governmental jurisdictions.
    In compliance with the RFA, Rural Development has determined that 
this action will not have a significant economic impact on a 
substantial number of small entities. Rural Development made this 
determination based on the fact that this regulation only impacts those 
who choose to participate in the program. Small entity applicants will 
not be impacted to a greater extent than large entity applicants.

Executive Order 12372, Intergovernmental Review of Federal Programs

    Rural Development Guaranteed Loans are subject to the Provisions of 
Executive Order 12372, which require intergovernmental consultation 
with State and local officials. Rural Development will conduct 
intergovernmental consultation in the manner delineated in RD 
Instruction 1940-J, ``Intergovernmental Review of Rural Development 
Programs and Activities,'' available in any Rural Development office, 
on the Internet at http://rurdev.usda.gov.regs, and in 7 CFR part 3015, 
subpart V.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    This executive order imposes requirements on Rural Development in 
the development of regulatory policies that have tribal implications or 
preempt tribal laws. Rural Development has determined that the proposed 
rule does not have a substantial direct effect on one or more Indian 
tribe(s) or on either the relationship or the distribution of powers 
and responsibilities between the Federal Government and the Indian 
tribes. Thus, the proposed rule is not subject to the requirements of 
Executive Order 13175.

Programs Affected

    The Catalog of Federal Domestic Assistance Program numbers assigned 
to this program are 10.760, Water and Waste Disposal Systems for Rural 
Communities; 10.766, Community Facilities Loans and Grants; 10.768, 
Business and Industry Loans; and 10.775, Renewable Energy Systems and 
Energy Efficiency Improvements Program.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, Rural 
Development will seek OMB approval of the reporting and recordkeeping 
requirements contained in this proposed rule and hereby opens a 60-day 
public comment period.
    Title: Rural Development Guarantee Loans.
    Type of Request: New collection.
    Abstract: Rural Development is implementing a new consolidated 
guaranteed loan platform. The new guaranteed loan platform would 
combine the following four existing guaranteed loan regulations into a 
consolidated rule: (1) The Community Facility Program, (2) the Water 
and Waste Disposal Program, (3) the Business and Industry Program, and 
(4) the Renewable Energy Systems and Energy Efficiency Improvements 
Program under Title IX, Section 9006 of the Farm Security and Rural 
Investment Act of 2002 (FSRIA 2002). These programs provide loan 
guarantees for a variety of projects intended to improve the economies 
of rural America.
    The information required under the proposed rule is similar to much 
of the information currently being required under the four separate 
regulations. Under these four separate regulations, the current 
information being collected is approved under OMB control numbers 0570-
0016, 0670-0018, 0572-0122, and 0575-0137. The proposed rule, however, 
is requesting some new information from lenders. The two primary 
examples are: (1) lenders are required to supply information to the 
Agency in order to be approved for participation in the program and (2) 
more frequent reporting of loans that are in default. On the other 
hand, the proposed rule would not include some information previously 
being requested. This is most evident for the Renewable Energy Systems 
and Energy Efficiency Improvements guaranteed loan program, where 
technical reports are being required only for higher cost renewable 
energy systems projects because renewable energy projects of less than 
$200,000 are less complex, so for such projects the technical reports 
only have marginal value, and the energy audit requirements from energy 
efficiency improvement projects are sufficient so that separate 
technical reports also have only marginal value. The proposed rule 
creates a single set of common forms that lenders can use across all 
four programs, thereby creating efficiencies in reporting. On net, the 
information being requested to support the consolidated program is 
estimated to reduce burden and cost to lenders and borrowers.
    As noted in the previous paragraph, the information requirements 
contained in this proposed rule require information from lenders and 
borrowers. This information is vital to Rural Development to make wise 
decisions regarding the eligibility of projects, borrowers, and lenders 
in order to reduce the risk associated with making the loan guarantees, 
to ensure compliance with the proposed rule, to ensure that the funds 
obtained from the Government are used appropriately, and to effectively 
monitor the borrowers and lenders to protect the financial interests of 
the Government. In sum, this collection of information is necessary in 
order to implement the consolidated guaranteed loan regulation being 
proposed.
    The following estimates are based on the average over the first 
three years the program is in place.
    Estimate of Burden: Public reporting burden for this collection of 
information is estimated to average 2.6 hours per response.
    Respondents: Rural developers, farmers and ranchers, rural 
businesses, public bodies, local governments, lenders.
    Estimated Number of Respondents: 3,450.
    Estimated Number of Responses per Respondent: 5.4.
    Estimated Number of Responses: 18,472.

[[Page 52620]]

    Estimated Total Annual Burden (hours) on Respondents: 48,892.
    Copies of this information collection may be obtained from Cheryl 
Thompson, Regulations and Paperwork Management Branch, Support Services 
Division, U.S. Department of Agriculture, Rural Development, STOP 0742, 
1400 Independence Ave., SW., Washington, DC 20250-0742 or by calling 
(202) 692-0043.
    Comments: Comments are invited on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the functions of Rural Development, including whether the information 
will have practical utility; (b) the accuracy of the new Rural 
Development estimate of the burden of the proposed collection of 
information, including the validity of the methodology and assumptions 
used; (c) ways to enhance the quality, utility, and clarity of the 
information to be collected; and (d) ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of appropriate automated, electronic, mechanical, or 
other technological collection techniques or other forms of information 
technology. Comments may be sent to Cheryl Thompson, Regulations and 
Paperwork Management Branch, U.S. Department of Agriculture, Rural 
Development, STOP 0742, 1400 Independence Ave., SW., Washington, DC 
20250. All responses to this proposed rule will be summarized and 
included in the request for OMB approval. All comments will also become 
a matter of public record.

E-Government Act Compliance

    Rural Development is committed to complying with the E-Government 
Act, to promote the use of the Internet and other information 
technologies to provide increased opportunities for citizen access to 
Government information and services, and for other purposes.

I. Background

    Rural Development proposes a unified platform for delivery of four 
existing Rural Development guaranteed loan programs--Community 
Facility; Water and Waste Disposal; Business and Industry; and 
Renewable Energy Systems and Energy Efficiency Improvement Projects. 
These four programs are administered by Rural Housing Service 
(Community Facilities), Rural Utilities Services (Water and Waste 
Disposal), and Rural Business-Cooperative Service (Business and 
Industry and the Renewable Energy Systems and Energy Efficiency 
Improvements Projects). Collectively, Rural Development's programs work 
together to assist in building and maintaining entire, sustainable 
rural communities.
    Under the unified guaranteed loan platform, Rural Development will 
simplify, improve, and enhance the delivery of these four guaranteed 
loan programs across their service areas. The remainder of this section 
describes Rural Development's mission, the four current guaranteed loan 
programs being aligned under the new platform, why the new platform is 
being proposed, and how the new platform will work.
A. Rural Development's Mission
    By statutory authority, Rural Development is the leading Federal 
advocate for rural America, administering a multitude of programs, 
ranging from housing and community facilities to infrastructure and 
business development. Its mission is to increase economic opportunity 
and improve the quality of life in rural communities by providing the 
leadership, infrastructure, venture capital, and technical support that 
enables rural communities to prosper and supports them in the dynamic 
global environment defined by the Internet revolution, and the rise of 
new technologies, products, and markets.
    To achieve its mission, Rural Development provides financial 
support (including direct loans, grants, and loan guarantees) and 
technical assistance to help enhance the quality of life and provide 
the foundation for economic development in rural areas. This proposed 
rulemaking addresses the use of guaranteed loans in achieving Rural 
Development's mission.
B. Current Guaranteed Loan Programs
    Under this proposed rule, Rural Development is combining under one 
regulation the four guaranteed loan regulations of the following 
programs: Community Facilities, Water and Waste Disposal, Business and 
Industry, and Renewable Energy Systems and Energy Efficiency 
Improvements. The following paragraphs describe briefly the scope of 
each of the four current programs with regard to eligible projects, 
borrowers, and lenders; application processes; and guarantee and loan 
terms.
    Community Facilities Guaranteed Loan Program. The Community 
Facilities Guaranteed Loan Program guarantees loans to develop 
essential community facilities in rural areas and towns of up to 20,000 
in population. Loan funds may be used to construct, enlarge, or improve 
community facilities for health care, public safety, and public 
services. This can include costs to acquire land needed for a facility, 
pay necessary professional fees, and purchase equipment required for 
its operation. Refinancing existing loans may be considered an eligible 
guaranteed loan purpose under some circumstances.
    Eligible borrowers for Community Facilities guaranteed loans are 
public entities, such as municipalities, counties, and special-purpose 
districts, as well as not-for-profit corporations and tribal 
governments who are unable to obtain a loan without the Government's 
guarantee. Borrowers must have the legal authority to borrow and repay 
loans; to pledge security for loans, and to construct, operate; and 
maintain the facilities.
    Eligible lenders for Community Facilities guaranteed loans include 
banks, savings and loan associations, mortgage companies that are part 
of bank holding companies, banks of the Farm Credit System, and 
insurance companies regulated by the National Association of Insurance 
Commissioners. 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. Lenders must also 
have the capability to adequately service the loans for which a 
guarantee is requested.
    The lender is responsible for conducting an analysis of the 
proposed project to ensure loan repayment, taking into consideration 
tax assessments, revenues, fees, or other sources of money sufficient 
for operation and maintenance, reserves, and debt retirement. Financial 
feasibility studies, prepared by independent consultants, are normally 
required when loans are for start-up facilities or for existing 
facilities when the project will significantly change the borrower's 
financial operations.
    Recently under this program, guarantees have averaged 85 percent of 
the eligible loss of the loan. Lenders may impose an interest rate that 
is similar to unguaranteed projects. Interest rates may be fixed or 
variable, are determined by the lender and borrower, and are subject to 
Agency review and approval.
    Loan repayment terms may not exceed the lender's authority (under 
State law or organizational structure), the useful life of the 
facility, or a maximum 40 years.
    Water and Waste Disposal Guaranteed Loan Program. The Water and 
Waste Disposal Guaranteed Loan Program guarantees loans to develop

[[Page 52621]]

water and wastewater systems, including solid waste disposal and storm 
drainage, in rural areas and to cities and towns with a population of 
10,000 or less. Example projects include construction of water lines, 
pumping stations, wells, storage tanks, and sewage treatment 
facilities.
    Eligible borrowers include public entities, such as municipalities, 
counties, special-purpose districts, and Indian tribes. In addition, 
funds may be made available to corporations operated on a not-for-
profit basis. Borrowers must be unable to obtain funds from other 
sources at reasonable rates and terms. Borrowers must have the legal 
authority to borrow and repay loans, to pledge security for loans, and 
to construct, operate, and maintain the facilities.
    Eligible lenders for Water and Waste Disposal guaranteed loans 
include banks, savings and loan associations, mortgage companies that 
are part of a bank holding company, banks of the Farm Credit System, 
and insurance companies regulated by the National Association of 
Insurance Commissioners. 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. 
Lenders must also have the capability to adequately service the loans 
for which a guarantee is requested.
    The lender is responsible for conducting an analysis of the 
proposed project to ensure loan repayment, taking into consideration 
tax assessments, revenues, fees, or other sources of money sufficient 
for operation and maintenance, reserves, and debt retirement. 
Feasibility studies are normally required when loans are for start-up 
facilities or existing facilities when the project will significantly 
change the borrower's financial operations. The feasibility study 
should be prepared by an independent consultant with recognized 
expertise in the type of facility being financed.
    The Agency will determine borrower eligibility, project priority 
status, and funding availability. Priority is given to public entities, 
in areas with less than 5,500 people, to restore a deteriorating water 
supply, or to improve, enlarge, or modify a water facility or an 
inadequate waste facility. Preference is also given to requests that 
involve the merging of small facilities and those serving low-income 
communities. After an application is submitted, the time to process the 
application depends upon the scope of the project, environmental 
review, and legal issues.
    Recently under this program, guarantees have averaged 90 percent of 
the eligible loss of the loan. Interest rates are set periodically, 
usually quarterly, and are based on current market yields for municipal 
obligations. Interest rates may be fixed or variable, are determined by 
the lender and borrower, and are subject to Agency review and approval.
    The maximum term for all loans is 40 years; however, no repayment 
period will exceed State statutes or the useful life of the facility.
    Business and Industry Guaranteed Loan Program. The Business and 
Industry (B&I) Guaranteed Loan Program guarantees loans that help 
create jobs and stimulate rural economies by providing financial 
backing for rural businesses. Loan guarantees expand the lending 
capability of private lenders who provide financing to credit worthy 
entities and individuals in rural areas, helping them make and service 
quality loans that provide lasting community benefits. Loan proceeds 
may be used for permanent working capital, machinery and equipment, 
buildings and real estate, and refinancing of any loan. Except for the 
refinancing of Agency direct loans, refinancing of other loans will be 
limited to a minority portion of the guaranteed loan. The primary 
purpose is to create and maintain employment and improve the economic 
climate in rural communities.
    Eligible borrowers for B&I loans include virtually any legally 
organized entity, including a cooperative, corporation, partnership, 
trust or other profit or not-for-profit entity, Indian tribe or 
Federally recognized tribal group, municipality, county, or other 
political subdivision of a State. Pursuant to section 310B(a) of the 
Consolidated Farm and Rural Development Act, borrowers need not have 
been denied credit elsewhere to apply for this program.
    Eligible lenders for B&I loans include recognized commercial or 
other authorized lenders in rural areas (all areas other than cities of 
more than 50,000 people and the contiguous and adjacent urbanized areas 
of such cities or towns). Generally, authorized lenders include Federal 
or State chartered banks, credit unions, insurance companies, savings 
and loan associations, Farm Credit Banks or other Farm Credit System 
institutions with direct lending authority, a mortgage company that is 
part of a bank holding company, and the National Rural Utilities 
Cooperative Finance Corporation. Other lenders include eligible Rural 
Utilities Program electric and telecommunications borrowers, acting as 
financial intermediaries, and other lenders approved by Business and 
Cooperative Programs who have met the designated criteria.
    The application process may be initiated using a preapplication or 
application. The Agency reviews each application for compliance with 
borrower eligibility guidelines, project priority, and the availability 
of funds.
    Recently under this program, guarantees have averaged 78 percent of 
the eligible loss of the loan. The maximum aggregate debt that can be 
incurred by a borrowing entity at any given time under the B&I 
Guaranteed Loan program is $25 million. A maximum of 10 percent of 
program funding is available to value-added cooperative organizations 
for loans above $25 million to a maximum aggregate of $40 million. 
Repayment terms are up to 30 years for real estate; up to 15 years or 
useful life, whichever is less, for machinery and equipment; up to 30 
years for combined loans on real estate and equipment; and up to 7 
years on working capital loans.
    Renewable Energy Systems and Energy Efficiency Improvements 
Guaranteed Loan Program. The Renewable Energy Systems and Energy 
Efficiency Improvements Guaranteed Loan Program provides loan 
guarantees for the purchase and installation of renewable energy 
systems and energy efficiency improvements. Eligible borrowers include 
farmers, ranchers, and rural small businesses. In addition to being a 
renewable energy system or energy efficiency improvement project, 
project eligibility requirements include the project site being 
controlled by the agricultural producer or small business for the 
proposed financing term of any associated Federal loans or loan 
guarantees.
    Recently under this program, guarantees have averaged 78 percent of 
the eligible loss of the loan. Repayment terms are up to 30 years for 
real estate; up to 20 years or useful life, whichever is less, for 
machinery and equipment; up to 30 years for combined loans on real 
estate and equipment; and up to 7 years on working capital loans.
    The minimum amount of a guaranteed loan is $5,000 (less any program 
grant awards). The maximum amount of a guaranteed loan is $10 million. 
The amount of the loan that will be made available to an eligible 
project can not exceed 50 percent of total eligible project costs.
How the Current Programs Work
    While differences occur within each of the programs (e.g., borrower 
and

[[Page 52622]]

project eligibility, necessary documentation, and funding limits), the 
same basic framework for making loan guarantees applies to each.
     Each prospective borrower works with a lender to obtain a 
loan for a project eligible under one of the four programs, providing 
the lender with necessary information on the borrower and the project.
     Each lender evaluates borrower and project eligibility and 
performs a detailed credit analysis and, as applicable, an economic or 
financial analysis of the project to ensure that the project will be 
able to repay the loan.
     Each lender submits the guaranteed loan application, 
including its credit analysis, and all accompanying documentation to 
the Agency for review and approval.
     The Agency reviews each guaranteed loan application 
package in accordance with program requirements and approves or denies 
the guarantee. Subject to the availability of funds, each approved 
package is provided a loan guarantee.
     Each lender is responsible for the origination and 
servicing of its guaranteed loan portfolio and for working with the 
Agency, as necessary, to resolve borrower issues (such as default).
    Variations do occur in this basic framework, but for the most part 
are not as significant as the scope of each of the programs.
Issues With the Current Programs
    The regulations that are being combined under the proposed rule 
have developed over time and, in some aspects, independently of each 
other. Issues have developed when looking at all four program 
regulations as a whole as well as individually. Four of these 
operational issues are discussed below.
    Inefficiencies. Many of the same lenders and, in some cases, 
borrowers, seek loan guarantees under more than one of these four 
programs. Thus, the same entities are required to learn multiple 
programs. This is inefficient and costly to the lenders and makes the 
programs less attractive to lenders.
    Currently, when new programs are implemented, a whole new 
regulation is developed that, in many respects, addresses or adopts 
many of the same requirements. Time and effort are wasted in 
readdressing issues during the development of new program regulations 
leading to inefficient rulemaking and a delay in program 
implementation.
    Inflexibility. Maintaining four separate sets of basic requirements 
creates certain inflexibilities. For example, with each program 
administered under separate regulations, any change to basic 
requirements calls for multiple concurrences. Similarly, adding a new 
program requires the addition of a new set of basic requirements, as 
these are not currently shared. The proposed combined platform will 
streamline basic loan guarantee requirements, allowing all programs to 
reach a uniform functionality of process.
    Use of Agency Resources. Agency personnel spend a large amount of 
time performing process-related tasks that are not necessarily 
productive in making loan guarantees available to more lenders and, in 
turn, to more borrowers. These tasks are often inefficient and could be 
better managed by the private sector at the lender level. Further, 
these tasks are applied equally regardless of the relative level of 
risk of the associated loans. In sum, the current delivery of these 
four programs is not making the best use of Agency resources.
    Risk Management. In making and managing a portfolio of loan 
guarantees, consideration must be given to project risk, institutional 
risk, Agency loss exposure, and internal operational risk.
    Project risk refers to the ability of a project to repay its debt. 
The current process relies on the lender's evaluation of the project 
and then the Agency's review of the lender's analysis. The types of 
information required to be assessed under each of the programs by the 
lender may vary. Currently, the Agency lacks definitive parameters to 
evaluate project risk and is inconsistent in its evaluation of risk 
across State Offices.
    The lack of definitive parameters inherently creates more risk. It 
allows projects to be funded based on completed processes as opposed to 
appropriate evaluation. Furthermore, this funding may come at the 
expense of less risky projects over time because of limitations of 
available funds. The proposed unified platform will significantly 
reduce inconsistencies in the implementation of these four programs 
across State offices and improve underwriting for loan guarantees, 
which should result in a reduction in risk and an improvement in the 
credit subsidy scores for these programs.
    Institutional risk refers to the quality of the lender seeking the 
loan guarantee. Some lenders simply do a better job at managing their 
portfolios and thereby have a lower rate of defaults. The current 
system does little to pre-qualify lenders; that is, the criteria for a 
lender to originate a loan with the Agency are insufficient. By 
implementing a defined set of criteria to assess lender performance, 
the Agency can improve its management of lenders participating in these 
programs.
    Agency loss exposure refers to the Agency's risk for potential loss 
in any one project in terms of the percent of guarantee and the size of 
the loan. Currently, Agency loss exposure is managed by putting limits 
on the percent of guarantee relative to the size of the loan, by having 
collateral requirements, and, for some of the programs, by limiting the 
size of the loan. While these limits are the primary mechanism for 
managing Agency loss exposure, the current programs could do more to 
manage this risk.
    Agency operational risk refers to internal weaknesses inherent in 
administering multiple programs using a variety of regulations that 
require unique sets of processes and procedures. The new platform will 
reduce operational risk through reliance on commonalities, reduction of 
regulatory language, and integration of information management systems.
C. The New Platform
    As noted above, Rural Development manages multiple guaranteed loan 
programs in separate regulations requiring users to become familiar 
with each. These regulations share many common elements. The 
inefficiencies in maintaining separate regulations have resulted in an 
in-depth evaluation of current program delivery. Further, in assessing 
the delivery of these programs, Rural Development sees the opportunity 
to better manage the risks associated with their delivery.
    The proposed new platform simplifies, improves, and enhances the 
delivery of Rural Development's guaranteed loan programs, applies 
shared requirements when applicable, maintains programmatic nuances for 
varying rural development needs, and intends to reduce the amount of 
Agency loss claims paid through the provision of loan guarantees 
through improved underwriting. This new structure will also make it 
easier and faster to promulgate regulations for new loan guarantee 
programs in the future.
    The following paragraphs address improvements under the proposed 
platform. These improvements provide the requisite flexibility to 
accommodate additional or new programs and enable the Agency to better 
manage its risk.
    1. Increase efficiency. Having a common rule for multiple programs 
will reduce burden for the Rural Development staff, lenders, and 
borrowers, easing delivery and

[[Page 52623]]

increasing efficiency. A common platform will be easier to administer, 
improve communication of basic program aspects, and reduce end user 
confusion.
    Internally, a common regulation will reduce the time, effort, and 
training necessary to guarantee a loan. Externally, a common regulation 
will reduce the lender's and borrower's cost by providing simpler and 
more consistent program requirements.
    Further efficiencies will be realized as common program elements 
facilitate consolidation of information technology platforms and 
systems' maintenance cost. Internal management controls will improve 
with standardized servicing and oversight. Common elements will assist 
lenders in managing a diverse portfolio and meeting Federal 
requirements. Uniform processes will facilitate electronic commerce 
between Rural Development and its customers.
    2. Flexibility. The structure of the new platform provides for the 
addition of other Agency, or newly authorized, guaranteed loan programs 
as needed without the addition of new sets of basic requirements. The 
common elements (proposed subpart A) of the proposed rule are intended 
to remain unchanged, while additional programs would be added to 
proposed subpart B.
    3. Refocus of Agency resources. The new platform directs Agency 
resources away from a processing centric model toward a rural 
development model by emphasizing lender expertise, refocusing time 
spent on process to time spent with clients, and increasing access by 
eliminating regulatory redundancy.
    4. Reduce risk. In developing the proposed new platform, the key 
consideration was how to implement it in a manner that reduces the 
overall risk that a loan would not be repaid. The Agency considered the 
risk associated with making and managing a portfolio of guaranteed 
loans in developing the new platform. How these risks are addressed in 
the proposed new platform is covered in the following section.
D. How the New Platform Works
    Under the proposed platform, the common features of the four 
programs are incorporated into a single subpart (subpart A), with 
program specific features provided in a separate subpart (subpart B). 
While each of the four existing programs remains, the way these four 
programs will be delivered to Rural Development's customers is 
different. In delivering the proposed platform, the Agency will also 
publish Federal Register notices containing specific information 
associated with the guaranteed loan program.
    The following paragraphs address the new platform by examining the 
proposed delivery mechanisms, concluding with a discussion of the 
Federal Register notices that will be used as part of the 
implementation of the new platform.
    1. Eligibility. Under the new platform, three basic types of 
eligibility are identified--project eligibility, borrower eligibility, 
and lender eligibility.
    Project eligibility is based on the proposed project being for the 
benefit of a rural area, on the ability of the activity to be funded to 
meet the requirements of the applicable program, on meeting a minimum 
set of project criteria, and, when applicable, on the boundaries of the 
proposed service area meeting a non-discrimination criterion. Projects 
that do not meet these proposed criteria would be ineligible under the 
new program. In addition, these criteria can not be voided under the 
exception authority provided in the proposed rule.
    The applicable project eligibility requirements, located in 
proposed subpart B, remain essentially unchanged for those of the four 
current programs. Some differences are being proposed and these are 
discussed in sections II. and III. of this preamble. One important 
difference is that the proposed platform uses three minimum project 
financial conditions, which are specifically discussed, in detail, in 
section II.B. of this preamble, to reduce project risk by screening out 
those projects less likely to achieve a level of success that will 
support loan repayment. These three financial conditions establish 
minimum requirements for debt coverage ratio, cash equity or community 
support, and loan-to-value ratio. While the four existing programs 
address cash equity and community support, they do not have 
requirements associated with debt coverage ratios and loan-to-value 
ratios. By specifying these project financial conditions within the 
rule, borrowers and lenders will be able to determine a project's 
eligibility for a loan guarantee early in the process.
    In addition to identifying eligible projects, the proposed rule 
identifies specific projects and purposes that are ineligible under all 
circumstances from receiving a loan guarantee. The Agency assembled 
this list mainly from the list of ineligible projects and purposes 
identified in the regulations for the four current programs.
    Borrower eligibility is based on the borrower meeting two common 
requirements, which are citizenship and legal authority and 
responsibility, and program-specific criteria, which are contained in 
proposed subpart B. The proposed rule also identifies borrowers who 
would be categorically ineligible. In terms of eligible and ineligible 
entities, little has changed under the new platform compared to the 
four current programs.
    Lender eligibility is based on criteria dependent on whether or not 
the lender is a regulated or supervised lender. A lender, who is not 
otherwise debarred or suspended by the Federal government, must be 
approved, as described below, by the Agency to participate in this 
program. As part of the approval process, the Agency may consider the 
experience and capabilities of the lender to properly originate and 
service the variety of guaranteed loans available within the Agency. If 
the Agency disapproves a lender for participation, the lender has the 
right to appeal that decision. In addition, all participating lenders 
will be reviewed for eligibility at least every two years.
    Although the B&I guaranteed loan program has a process for ``other 
lenders'' to participate in the current B&I guaranteed loan program, 
the process for an eligible lender to participate in the proposed 
platform is generally new compared to the four current programs. Figure 
1 illustrates the basic process for lender approval under the proposed 
platform, with the following paragraphs describing this process.
    Any lender that is a regulated or supervised lender is eligible to 
participate in the guaranteed loan programs described in proposed 
subpart B. If a regulated or supervised lender has an existing 
portfolio with the Agency, it is considered to be ``approved'' for 
participation and would not be required to submit an application to the 
Agency for approval to participate. However, the lender would be 
required to submit certification to the Agency that it is in ``good 
standing'' with its regulator. If a regulated or supervised lender does 
not have an existing portfolio with the Agency, it must submit an 
application for lender approval to the Rural Development State Office 
in the State in which the lender is chartered. The State Office will 
review the application and make a decision to approve or disapprove the 
lender for participation in this program. State Office approval of the 
lender will extend to all States and all programs covered by this part. 
If disapproved, the lender will have the right to appeal the decision 
to the National Appeals Division. To be approved, a regulated or 
supervised lender must be in good standing with its regulator(s).

[[Page 52624]]

[GRAPHIC] [TIFF OMITTED] TP14SE07.000

    As proposed, all regulated or supervised lenders would be required 
to submit to the Agency a copy of their current written policies and 
procedures for originating and servicing guaranteed loans. This is not 
currently required under any of the four current programs.
    If the lender is not a regulated or supervised lender, it must 
submit an application to the Rural Development State Office in the 
State in which the lender is chartered for approval for participation. 
The application will address a number of criteria that the Agency will 
consider in approving or disapproving the lender (see section II.B. for 
more detail on these criteria). The State Office will review the 
application and submit it, along with its comments, to the National 
Office for review. The National Office will make the determination as 
to whether to approve the lender for participation. If the National 
Office approves the lender, that approval will apply to all States for 
all programs covered by this part. If disapproved by the National 
Office, the lender will have the right to appeal the decision to the 
National Appeals Division.
    The process described above is intended to help the Agency ensure 
that only qualified lenders participate in this program, and thereby 
mitigate institutional risk by encouraging the participation of better 
qualified and performing lenders.
    2. Preferred Lender versus Approved Lender. An important aspect for 
managing institutional risk under the new platform is the ability of an 
approved lender to apply for preferred lender status (see Figure 1 
above and Sec.  5001.9(c) of the proposed rule). Currently, only the 
B&I guaranteed loan program has provisions for a preferred lender 
program, although there has been no material participation in it to 
date.
    Under the proposed program, there are several benefits for being a 
preferred lender. Preferred lenders would have more opportunities to 
submit applications for guarantee with less supporting documentation, 
would be subject to fewer Agency visits, and would be eligible to 
receive higher percent guarantees than lenders without preferred 
status. In addition, the Agency may expend fewer resources evaluating 
preferred lender loan guarantee applications and reallocate resources 
to better manage risk and encourage program participation.
    To receive preferred lender status, a Rural Development approved 
lender would submit an application for preferred lender status to the 
State Office in the State in which the lender is chartered. The State 
Office would then forward the application and its comments to the 
National Office for review and decision.
    The criteria proposed for obtaining preferred lender status (see 
Figure 2) address the qualifications of the lender for loans of similar 
nature and the quality of the lender in managing its loan portfolio by 
examining its commercial loan losses and any instances of Federal 
negligent loan origination or servicing. The Agency will also consider 
any comments submitted by State Offices when evaluating these 
applications. National Office approval will apply to all States.
    3. Guaranteed loan approval. Under the four current programs, the 
Agency views proper loan origination as a responsibility of the lender. 
The new platform clarifies this responsibility by

[[Page 52625]]

reinforcing the concept of negligent loan origination. To help lenders 
understand the importance of conducting proper credit analysis and 
sound loan origination, the new platform will clarify the Agency's 
policy regarding negligence in the origination and servicing of loans. 
In the case where the lender is the holder of the guarantee, losses 
associated with the lender's negligence will be deducted from the loss 
claims paid under the guarantee. In the case where there is a 
subsequent holder, losses associated with the lender's negligence will 
not be deducted from the loss payment under the guarantee. However, in 
such cases, loss claims paid under the guaranteed will be collected 
from the lender. The Agency anticipates that the clarification for 
negligent loan origination will reduce loan defaults through improved 
loan origination.
[GRAPHIC] [TIFF OMITTED] TP14SE07.001

    Under the new platform, Rural Development has standardized, to the 
extent possible, the type of information to be included in the loan 
guarantee application, although some additional content information is 
required by some of the programs described in subpart B. In general, 
the information associated with a loan guarantee application is not 
significantly different than currently required under the four current 
programs.
    The main difference in the application for loan guarantee under the 
new platform will be the amount of supporting documentation that is 
required to be submitted with or accompany the application for certain 
projects. If criteria are met as described below, the lender will have 
the option of submitting a ``low documentation'' application, which 
would allow the lender to self-certify that it has complied with 
certain Agency requirements. (See section II.B. for more information.) 
The Agency expects the lender to obtain the same level of documentation 
and to perform the same level of analysis and other origination 
activities whether the lender submits a full documentation application 
or a low documentation application.
    The determination of whether a low documentation application can be 
submitted will depend on the borrower's status as a startup or existing 
business, on whether the lender has preferred lender status, and on 
certain project criteria.
    As proposed, all loan guarantee applications for startup businesses 
must be submitted with full documentation (see section II.B. for 
details) given the risk associated with startup businesses.

[[Page 52626]]

    For existing businesses, the proposed rule would allow Rural 
Development approved lenders with preferred lender status to submit 
applications with either low or full documentation if the loan 
guarantee request is for $5 million or less. For a larger loan 
guarantee request, a full documentation application would be required. 
These provisions apply to all four programs under the proposed 
platform.
    For Rural Development approved lenders that do not have preferred 
lender status, all applications would have to be submitted with full 
documentation unless the project meets certain criteria, as discussed 
in section II.B., intended to lower the risk associated with the 
project. If the project meets the lower risk identification criteria, 
the Rural Development approved lender without preferred status would be 
allowed to submit a low documentation application.
    The Agency will examine the lender's analysis of the project, the 
technical merit, any business plans or feasibility studies required, 
and environmental information. If the Agency disapproves the 
application, the lender and borrower have the right to appeal the 
decision.
    4. Servicing. Once the loan has been approved, the lender will 
continue to be responsible for servicing the entire loan. The lender's 
servicing responsibilities, including those regarding negligent 
servicing, under the proposed unified platform are essentially the same 
as under the four existing regulations.
    5. Oversight and Monitoring. As under the four current programs, 
the Agency will conduct under the proposed new platform any and all 
oversight and monitoring activities necessary to ensure that lenders 
are originating and servicing Agency guaranteed loans in a manner 
consistent with lender and Agency standards. These tools include, but 
are not limited to, conducting lender visits and meetings and requiring 
various reports and notifications. There are a few differences between 
the proposed platform and the four current programs for conducting 
these activities. These differences are discussed later in this 
preamble.
    The Agency will also use this oversight and monitoring to ensure 
that lenders maintain the qualification criteria for being a Rural 
Development approved lender and, where applicable, for being a 
preferred lender.
    6. Managing Risk. As noted above, the Agency has incorporated into 
the proposed new platform certain features to help manage risk.
    To limit loss exposure, the Agency will require full supporting 
documentation on all applications for projects from startup businesses 
and from existing businesses unless, for existing businesses, the 
project is a ``lower risk'' project as defined by the criteria in the 
proposed rule. Applications for projects that meet these criteria may 
be submitted with less supporting documentation (i.e., a low 
documentation application).
    The Agency will mitigate the possibility of increased loss exposure 
associated with low documentation applications as the discussed below.
     The loan amount that will be guaranteed under a low 
documentation application would be limited to $5 million. In other 
words, all loan requests for more than this amount must be submitted as 
full documentation applications. This applies across all four programs 
under the new platform. Setting a maximum value for which a low 
documentation application can be submitted will provide the Agency the 
ability to better monitor loans that represent greater potential 
liability.
     If the low documentation application is from a lender who 
does not have preferred status, the maximum percent guarantee that the 
Agency will consider for that loan is 10 percentage points lower than 
for a full documentation application. Reducing the maximum percent 
guarantee available will mitigate Agency loss exposure. In 
consideration of the additional criteria necessary to become a 
preferred lender, the Agency has determined that the risk mitigation 
obtained by applying the preferred lender criteria offsets the risk 
mitigation obtained by reducing the guarantee. Therefore, the Agency is 
proposing to not apply this reduction in the maximum guarantee 
available to a preferred lender.
     If the low documentation application if from a lender who 
does not have preferred status, the proposed rule requires additional 
financial criteria in order to qualify the project for a low 
documentation application. Requiring projects to meet additional 
financial criteria will mitigate project risk.
    To limit project risk, the new platform requires projects to meet a 
minimum set of project financial criteria to prevent high risk projects 
from being proposed at all. In addition, in order to avoid bypassing 
project eligibility criteria, the Agency is proposing that exception 
authority not be extended to any project eligibility criterion, 
including the project financial criteria.
    To limit institutional risk, the new platform requires lenders to 
meet criteria that help ensure the lender has the appropriate 
origination and servicing experience and track record to reduce the 
likelihood of loan defaults. The Agency is proposing different criteria 
for regulated and supervised lenders as opposed to those that are 
unregulated and not supervised. Further, by providing a preferred 
status designation, the Agency is hoping to attract more qualified 
lenders to the programs.
    Finally, to limit operational risk, the new platform relies on 
commonalities, reduction of regulatory language, and integration of 
information management systems. The use of electronic reporting and 
standardized forms also allows the Agency to better manage its 
portfolio of outstanding guaranteed loans.
    7. Federal Register notices. To implement the new platform, the 
Agency will publish at least one Federal Register notice each year. 
Each notice will address the following items as necessary:
     Ineligible projects and purposes. If the Agency has 
identified any additional projects or purposes for which guaranteed 
loans will not be made, it will include such ineligible projects and 
purposes in the Federal Register notice. If there are no new ineligible 
projects or purposes have been identified, the notice would include a 
statement to that effect.
     Maximum loan amounts. The Agency will identify in the 
Federal Register notice the maximum loan amount per loan that will be 
available under each of the programs.
     Fees. If any are required, the Agency will identify in the 
Federal Register notice the guarantee fee and the renewal fee that will 
be used for that year in the calculation of the guarantee fee and the 
renewal fee for each program. In addition, for the B&I guaranteed loan 
program, the Agency will specify in the Federal Register notice the 
limit on the maximum portion of the guarantee authority available for 
that fiscal year that may be used to guarantee loans with the reduced 
guarantee fee of 1 percent.
     Priority Scoring. For the B&I guaranteed loan program, the 
Agency will identify the scoring criteria that will be used, if 
necessary, to allocate funds if funds are insufficient to cover all 
applications within the program. The Agency will manage the Renewable 
Energy Systems and Energy Efficiency Improvements guaranteed loan 
program funds in the same manner.

II. Discussion of Proposed Rule

    In this section, the proposed rule is described. First, an overall 
organization of the proposed rule is presented,

[[Page 52627]]

followed by a section-by-section discussion of each part.
A. Overall Organization of the Rule
    The proposed rule is divided into two main parts. The first part, 
subpart A, contains the provisions that apply to all of the guaranteed 
loan programs covered by the proposed rule. The second part, subpart B, 
contains the provisions specific to the four programs identified 
earlier in this preamble.
    Subpart A. Subpart A is divided into five major elements. In the 
first element are general provisions that cover the purpose of this 
part (Sec.  5001.1), the definitions and abbreviations used in this 
part (Sec.  5001.2), various Agency authorities associated with 
providing guaranteed loans (Sec.  5001.3), oversight and monitoring 
(Sec.  5001.4), and forms, regulations, and instructions (Sec.  
5001.5).
    The second element covers the basic eligibility requirements for 
the project (Sec.  5001.6) and unauthorized projects and purposes 
(Sec.  5001.7), for the borrower (Sec.  5001.8), and for the lender, 
including how a lender can be approved for preferred status, (Sec.  
5001.9).
    The third element covers the basic requirements associated with the 
guaranteed loan application, describing the process for submitting an 
application and its approval (Sec.  5001.11) and the contents of the 
application (Sec.  5001.12).
    The fourth element covers the responsibilities of the lender and 
the borrower. Section 5001.15 covers general responsibilities of the 
lender. Lender responsibilities for originating the loan are covered by 
Sec.  5001.16 and for servicing the loan by Sec.  5001.17. 
Responsibilities of the borrower are found in Sec.  5001.25.
    The fifth element covers basic provisions associated with the 
guarantee, including parameters for the guaranteed loan. General 
guarantee provisions are found in Sec.  5001.30, with guaranteed loan 
parameters (e.g., interest rates, term length, maximum percent 
guarantee, etc.) found in Sec.  5001.31. The remaining sections in the 
fifth element address the process for obtaining the guarantee through 
changes in the guarantee and concluding with termination of the 
guarantee.
    Subpart B. This subpart addresses provisions that are specific to 
the individual programs. Section 5001.101 covers provisions specific to 
the Community Facilities Program, Sec.  5001.102 covers provisions 
specific to the Water and Waste Disposal Facilities Program, Sec.  
5001.103 covers provisions specific to the Business and Industry 
Program, and Sec.  5001.104 covers provisions specific to the Renewable 
Energy Systems and Energy Efficiency Improvements Program.
    Within each of these four sections, the specific provisions are 
related back to a corresponding section in subpart A. For example, each 
of the four sections has subsections that address project eligibility. 
Another example is additional application documentation requirements. 
The intent of subpart B is to identify all of the provisions specific 
to each of the four programs. In this way, each of the four programs 
maintains their integrity under the new platform.
B. Discussion of Sections
Purpose (Sec.  5001.1)
    This section defines the purpose of this part.
Definitions and Abbreviations (Sec.  5001.2)
    This section presents the definitions and abbreviations used in 
this part, including terms that may be specific to one of the four 
programs found in subpart B.
    The proposed rule contains fewer definitions than found in the four 
existing regulations, primarily because the deleted terms are no longer 
used in the proposed rule. Some definitions have been added or revised, 
including, but not limited to: Essential community facility, negligent 
loan origination, negligent loan servicing, rural or rural areas, and 
water and waste disposal project.
Agency Authorities (Sec.  5001.3)
    Under this section, the proposed rulemaking identifies Exception 
Authority and Appeal Rights.
    Exception authority. This paragraph identifies the situations under 
which the Administrator may make exceptions to the requirements 
contained in the regulation. The exceptions will be made on a case-by-
case basis.
    Unlike the four current regulations, the proposed rule identifies 
four exceptions to this Exception Authority, where the Administrator 
would not be allowed to make exceptions. These four exceptions are:
     Applicant and borrower eligibility, including both 
prospective borrowers and lenders.
     Project eligibility, as found in proposed Sec.  5001.6 and 
the individual program in subpart B.
     Rural area definition, as found in proposed Sec.  5001.2.
     Maximum term length of a guaranteed loan, as found in 
proposed Sec.  5001.31(c).
    The Agency believes that applicant/borrower and project eligibility 
criteria must be maintained at all times in order to maintain an 
acceptable level of risk associated with guaranteed loans made under 
this part. The Agency also believes that it is important to maintain 
the definition of rural area at all times in order to ensure that loans 
guaranteed under this program are used to benefit rural areas. Lastly, 
the Agency believes that it is important to ensure a reasonable period 
of payback on guaranteed loans in order to manage its portfolio of 
outstanding loans and, therefore, is proposing not to allow exceptions 
to the maximum term length of a guaranteed loan. For these reasons, the 
Agency is proposing that the Administrator not be allowed to exempt a 
project from any of these four criteria.
    Appeal rights. As provided by the four current programs, this 
paragraph provides the legal basis for a person to file an appeal of an 
adverse decision made by the Agency in implementing the proposed 
program. Such adverse decisions include, but are not limited to: (1) 
disapproving a lender for participation in the program, (2) 
disapproving an approved lender for preferred lender status, and (3) 
denying an application for a loan guarantee for reasons other than a 
lack of funds. When the Agency makes an adverse decision, a person may 
file an appeal with either the appropriate Agency official that 
oversees the program or with the National Appeals Division. Some 
negative determinations may affect a holder, in which case this 
paragraph provides the holder the legal right to file an appeal.
Oversight and Monitoring (Sec.  5001.4)
    This section of the rule lays out the types of oversight and 
monitoring the Agency will perform in implementing this program. 
Consistent with the four current programs, these activities include, 
but are not necessarily limited to, reviewing lender records and 
meeting with the lenders to review the status of their guaranteed 
loans. The purposes of these oversight and monitoring activities are 
to: (1) Ensure that the lender has implemented, and is in compliance 
with, the provisions of this part and (2) determine if the lender is 
maintaining the appropriate requirements to maintain their status as a 
Rural Development approved lender and, if applicable, a preferred 
lender. The amount of oversight and monitoring will vary depending on 
whether the Rural Development approved lender has preferred lender 
status or not.
    Reports. The proposed rule would require each lender to submit 
periodic reports to the Agency on the condition of its Agency 
guaranteed loan portfolio. These reports include borrower status,

[[Page 52628]]

loan classification, and any material changes in the general financial 
condition of the lender since the last periodic report was submitted. 
For loans that are not in default, these reports would be submitted 
semiannually, as is the practice in the four current programs.
    The Agency considered requiring these reports on a monthly basis. 
This shorter duration provides the Agency with the more current 
information on the lenders' portfolio status, which would allow the 
Agency more ``up-to-date'' information to evaluate its loss exposure. 
The Agency, however, believes that the benefit of having this more 
``up-to-date'' information did not outweigh the costs associated with 
generating this information on a monthly basis using current Agency 
technology. The Agency also considered annual submittal of these 
reports, but rejected this option because it does not provide for a 
timely assessment of the Agency's loss exposure of all its guaranteed 
loans.
    For loans that go into or are in default, the proposed program 
would require default status reports to be provided on a monthly basis, 
regardless of the guaranteed loan amortization schedule, until such 
time the loan is no longer in default. This reporting frequency, which 
is shorter than found in the four current programs, helps the Agency 
focus its resources on problem loans sooner and with more frequency, 
thereby helping to mitigate the risk associated with such loans.
    Notifications. The Agency is proposing that the lender notify it 
within 5 days when the borrower has violated any terms of the loan 
agreement (including if the borrower has missed a scheduled payment by 
more than 30 days) and when there has been any permanent reduction in 
the interest rate. The Agency is seeking these notifications to further 
allow the Agency to better manage its loss exposure in such instances 
that could affect repayment of the loan. Because both situations have 
substantial lead times, the Agency believes that 5 days is sufficient 
time for the lender to notify the Agency when either situation occurs.
    All four programs currently require notification when there has 
been a permanent reduction in the interest rate, although they allow a 
10-day notification period. Only the current Community Facility and 
Water and Waste Disposal Facilities guaranteed loan programs require 
lender notification when a borrower has violated any term of the loan 
agreement, and those programs currently allow a longer notification 
period (30 days versus 5 days under the proposed rule).
Forms, Regulations, and Instructions (Sec.  5001.5)
    This section describes where the lender and borrower can obtain all 
of the forms, regulations, and instructions necessary to participate in 
this program. These are available from any Rural Development State 
Office of the Agency and from the Agency's Web site.
Project Eligibility (Sec.  5001.6)
    In order for a project to receive a guaranteed loan under this 
program, it must be an ``eligible'' project. This section identifies 
four criteria that each project must meet in order to be eligible. For 
some projects, the fourth criterion is not applicable. In such cases, 
the project must meet each of the first three criteria in order to be 
eligible.
    Loan guarantee applications for projects that meet these criteria 
are not automatically approved. Instead, any project that fails to meet 
any one of these criteria are automatically ineligible for 
consideration for a loan guarantee, regardless of the other attributes 
of the project.
    Benefit a rural area. The first criterion (Sec.  5001.6(a)) 
addresses the purpose of the project--the project must be for the 
benefit of a rural area. This criterion is generally consistent with 
what the four current programs, but, unless otherwise specified in 
subpart B, does not require the project to be physically located within 
a rural area.
    Eligible project. The second criterion (Sec.  5001.6(b)) addresses 
the requirement that the project must meet the criteria specified in 
the applicable program identified in subpart B of the proposed rule. 
For example, if a project is for an anaerobic digester, it must meet 
the eligibility requirements specified in proposed Sec.  5001.104 for 
renewable energy projects. If a project is for a community meeting 
hall, it must meet the eligibility requirements specified in proposed 
Sec.  5001.101 for community facility projects. Generally, the same 
project criteria found in the four current programs have been carried 
over to subpart B of the proposed rule.
    Financial conditions. The third criterion (Sec.  5001.6(c)) 
addresses three financial conditions that the project must meet. The 
conditions are: (1) Be able to demonstrate a debt coverage ratio of 1.0 
or higher, (2) have a cash equity of 10 percent for existing businesses 
or 20 percent for new businesses or, for community facility guaranteed 
loans and water and waste disposal guaranteed loans only, be able to 
demonstrate community support, and (3) have a loan-to-value ratio of no 
more than 1.0.
    As specified in subpart B, community facility guaranteed loans and 
water and waste disposal guaranteed loans may either satisfy the cash 
equity requirements noted above or demonstrate community support. 
However, as proposed, if a lender has stricter eligibility 
requirements, a project would be required to meet the lender's 
requirements. For example, if a lender requires a community facility 
project to meet a cash equity requirement of 30 percent, which is more 
stringent than the proposed rule, and the lender does not accept 
community support in lieu of cash equity, then the project would be 
required to meet the lender's cash equity requirement of 30 percent.
    As noted earlier, these financial metric criteria represent minimum 
conditions that a project must meet in order to be considered for a 
loan guarantee. If a project does not meet any one of these criteria, 
it is automatically ineligible for a loan guarantee. If it meets these 
criteria, the project is not automatically guaranteed a loan guarantee. 
For example, based on the Agency's evaluation of the loan guarantee 
application and associated risks, the Agency may require more stringent 
financial ratios as a condition of approval.
    The four current programs do not have specific minimum criteria 
that a project must pass in order to be eligible for a guaranteed loan. 
Instead, the four programs rely on an evaluation of equity, cash flow, 
and collateral as appropriate to assess the viability of projects to 
repay the loan.
    There are no equivalent requirements in the four current programs 
regarding debt coverage ratios and loan-to-value ratios. With regard to 
the cash equity/community support requirement, this is similar or the 
same as to what is required under the current programs. For example, 
both the Community Facilities and Water and Waste Disposal guaranteed 
loan programs require that projects demonstrate community support. The 
Renewable Energy Systems and Energy Efficiency Improvements guaranteed 
loan program currently requires demonstration of the adequacy of equity 
based on either 15 or 25 percent of eligible project costs. Under the 
B&I guaranteed loan program, tangible balance sheet equity (rather than 
cash equity) is used to assess the adequacy of equity, requiring 10 
percent for existing businesses and 20 percent for new businesses.
    Service area selection. The fourth criterion (Sec.  5001.6(d)) 
specifies that, for

[[Page 52629]]

projects that are determined by a service area, the proposed service 
area of the project must be chosen in a way that no user or area is 
excluded because of race, color, religion, sex, marital status, age, 
disability, or national origin. This criterion, where applicable, is 
the same as found under the current regulations of the Community 
Facilities and the Water and Waste Disposal guaranteed loan programs.
    To reiterate, a project must meet each one of the four project 
eligibility criteria, or each of the first three criteria if the fourth 
criterion is not applicable, in order to be eligible for a guaranteed 
loan under the proposed rule. Meeting only some of the criteria is 
insufficient to be eligible. These criteria would be applied to all 
projects seeking a loan guarantee under each program covered by the 
proposed rule and cannot be waived under the Exception Authority (Sec.  
5001.3(a)).
    The Agency is proposing the project financial conditions under the 
third criterion in order to manage project risk. The Agency is 
concerned that under the current programs, loans are being sought for 
projects that are ``too risky'' and, in some cases, such projects are 
being funded. This increases the potential for loan defaults and 
reduces funding for projects that are inherently less risky. The Agency 
believes that setting such project financial conditions will allow more 
projects with less risk to be funded.
    The Agency selected these three project financial conditions 
because they represent the best metrics for initially evaluating the 
overall risk of any single project. The specific numerical values are 
those that the Agency believes are reasonable measures of risk. The 
Agency requests comments on the three project financial conditions of 
the third criterion (see section IV.A. of this preamble), and is 
specifically interested in receiving comments on the three project 
financial conditions selected and the values used.
Unauthorized Projects and Purposes (Sec.  5001.7)
    This section of the proposed rule identifies the types of projects 
that are ineligible for loan guarantees under this program regardless 
of whether the project meets the conditions specified in subpart B and 
Sec.  5001.6. These projects represent both an aggregation of projects 
already prohibited under the four programs being included in today's 
proposed rulemaking and the addition of projects that the Agency has 
determined represent significant risk based on past experience (e.g., 
golf courses).
    The Agency has determined that certain recreational projects, such 
as golf courses, require a level of support or patronage beyond the 
local rural community that may be insufficient in order to sustain the 
project over the life of the loan. This determination by the Agency 
stems from the Agency's poor loss experience in providing loan 
guarantees in the past to recreational projects of this type. Other 
recreational facilities may exhibit the same characteristics that would 
lead to similar Agency losses. In order for the Agency to mitigate the 
increased risk associated with these types of projects, the Agency is 
proposing to make ineligible certain recreational projects as specified 
in Sec.  5001.7(b).
    As noted earlier in this preamble, the Agency will publish at least 
once per year a notice in the Federal Register to identify additional 
projects or purposes that the Agency has determined are ineligible for 
loan guarantees under this part.
Borrower Eligibility (Sec.  5001.8)
    As for projects, in order for a prospective borrower to be eligible 
under this program, the borrower must also be an ``eligible'' borrower. 
This section identifies the eligibility requirements for prospective 
borrowers.
    Prospective borrowers must meet the program-specific eligibility 
requirements found in subpart B for the program under which their 
project falls. These specific requirements are discussed later in this 
preamble.
    This section also identifies two common borrower eligibility 
requirements that all prospective borrowers must meet, regardless of 
which program is applicable for their project. These two criteria 
address citizenship and legal authority and responsibility. These two 
criteria are in some of the four current regulations, but not in each.
    To be eligible, a prospective borrower must either be a citizen of 
the United States (U.S.) or reside in the United States after legal 
admittance for permanent residence. If the prospective borrower is an 
entity other than an individual, the borrower must be at least 51 
percent owned by persons who are U.S. citizens or are legally admitted 
permanent residents residing in the U.S.
    In addition, the prospective borrower must have, or be able to 
obtain, the legal authority to construct, operate, and maintain the 
proposed facility and services and to obtain, give security for, and 
repay the proposed loan.
    This section also identifies ineligible borrowers (Sec.  
5001.8(b)). A prospective borrower is ineligible if the borrower has an 
outstanding judgment obtained by the U.S. in a Federal Court is 
delinquent on the payment of Federal income taxes, is delinquent on 
Federal debt, or is debarred or suspended from receiving Federal 
assistance. These conditions are generally consistent with those found 
in the four current programs.
Lender Eligibility and Designation (Sec.  5001.9)
    As proposed, all lenders must be approved by the Agency under the 
standards of this regulation in order to participate. If a lender is 
debarred or suspended by the Federal government, the lender would be 
ineligible to participate. As noted earlier in this preamble and as 
discussed later in section III.C., there are differences between the 
lender approval process under the proposed rule and under the four 
current programs.
    Lender approval process. The Agency is proposing requirements to 
approve lenders in order to reduce institutional risk. There are some 
lenders that simply do a better job than others in originating and 
servicing their loans. The Agency is seeking, therefore, to reduce this 
institutional risk by setting lender requirements for participation, 
which in turn will lower the risk to the Agency's outstanding loan 
guarantees.
    The proposed rules would use two different processes and 
requirements--one for lenders that are regulated or supervised and one 
for lenders that are not regulated or supervised.
    As noted earlier in this preamble, any lender that is a regulated 
or supervised lender is eligible to participate in the guaranteed loan 
programs described in proposed subpart B. If a regulated or supervised 
lender has an existing portfolio with the Agency (see proposed Sec.  
5001.9(a)(1)(ii)), it is considered to be ``approved'' for 
participation and would not be required to submit an application to the 
Agency for approval to participate. However, the lender would be 
required to submit a certification to the Agency that it is in ``good 
standing'' with its regulator and a copy of its current written 
policies and procedures for origination and servicing guaranteed loans.
    If a regulated or supervised lender does not have an existing 
portfolio with the Agency (see proposed Sec.  5001.9(a)(1)(i)), it must 
submit an application for lender approval to the Rural Development 
State Office in the State in which the lender is chartered. Along with 
this application, the lender would submit a copy of its current written 
policies and procedures for origination and servicing guaranteed

[[Page 52630]]

loans. The Rural Development State Office will review the application 
and make a decision to approve or disapprove the lender for 
participation in this program. Rural Development State Office approval 
of the lender will extend to all States and all programs covered by 
this part. If disapproved, the lender will have the right to appeal the 
decision to the National Appeals Division. To be approved, a regulated 
or supervised lender must be in good standing with its regulator(s).
    The criteria for approving a non-regulated or supervised lender are 
substantially more detailed (see proposed Sec.  5001.9(b)). A non-
supervised lender must have:
     a minimum net worth of $2.5 million,
     liquid assets of at least $500,000, and
     an Agency-approved line of credit that totals $5 million 
or more.
    If a non-regulated or supervised lender can not meet each of the 
above three criteria, then the National Office will not approve the 
lender for participation in this program. If the lender meets each of 
the above three criteria, then the lender can submit an application for 
lender approval to the Rural Development State Office in the State in 
which it is chartered that presents additional information on the 
lender. This information addresses:
     Evidence showing that the lender has the necessary 
capital, resources, and funding capacity to successfully meet its 
requirements;
     Copies of any license, charter, or other evidence of legal 
authority to engage in the proposed loan making and servicing 
activities;
     Certification(s) of good standing from the States in which 
the lender intends to do business; and
     Satisfactory description of its lending history and 
experience.
    If approved (by a Rural Development State Office for a regulated or 
supervised lender or by the National Office for a non-regulated or 
supervised lender), the lender may sign a Lender's Agreement with the 
Agency. If the Lender's Agreement is executed by the lender and the 
Agency, the lender may submit an application for guarantee in any State 
in which it is authorized to do business. In addition, approved lenders 
may submit an application for any of the four programs identified in 
subpart B.
    Finally, a Rural Development approved lender retains approved 
status for as long as the lender maintains the minimum requirements for 
approval. For regulated or supervised lenders, this means for as long 
as the lender remains in good standing with its regulator and as long 
as it meets the Agency requirements under this regulation or until 
otherwise notified by the Agency. For non-regulated or supervised 
lenders, this means for as long as the lender meets or exceeds the 
minimum Agency requirements specified and remains in good standing with 
the States in which they intend to conduct business.
    Preferred lender designation. A lender that has been approved as 
described above for participation is referred to as a ``Rural 
Development approved lender'' in the proposed rule. Under the proposed 
rule, a Rural Development approved lender may apply for preferred 
lender status.
    To become a preferred lender under the proposed rule, a Rural 
Development approved lender would submit an application for preferred 
lender status to the Agency in the State in which it is chartered or 
domiciled. The Rural Development State Office would review the 
application, comment on it, and then forward the application and its 
comments to the National Office for review and decision. If approved by 
the National Office, the lender will be afforded preferred lender 
status, which will be applicable in each State. If disapproved, the 
lender would be able to appeal the decision.
    The criteria that the Agency will use to make in determining 
whether to approve an application for preferred lender status are:
     The lender's current level of experience in commercial 
lending, government guaranteed commercial lending, financing, or other 
activity under similar loan programs;
     Having had no annual losses of greater than 1 percent of 
its outstanding commercial loan portfolio if the lender has been making 
commercial loans for 5 years or more or, no losses for the length or 
time the lender has been making commercial loans, if the lender has 
been making commercial loans for less than 5 years; and
     Having no more than one instance of Federal government 
negligent loan origination or servicing.
    By including a preferred lender status, the Agency is seeking to 
encourage more participation by higher qualified lenders in this 
program. This would reduce institutional risk, which in turn reduces 
the risk to the Agency's portfolio of outstanding loan guarantees. 
While Rural Development approved lenders with referred lender status 
would still be required to meet the same origination and servicing 
requirements as Rural Development approved lenders who do not have 
preferred lender status, lenders with preferred lender status would, as 
noted earlier in this preamble, have a reduced loan guarantee 
application burden for certain projects, would be subject to fewer 
Agency visits, and would be able to apply for higher loan guarantees 
for certain projects.
Guarantee Application Process (Sec.  5001.11)
    To begin the application process, an approved lender may submit 
either a preapplication or a guarantee application. In the evaluation 
of the application, the Agency may require the lender to obtain 
additional assistance in those areas where the lender does not have the 
requisite expertise to originate or service the loan.
    The Agency is providing the preapplication option, which is not 
found in all of the four current programs, to allow lenders and 
borrowers a lower cost alternative to obtain Agency input on the 
proposed project before spending the time and effort assembling the 
guarantee application.
    If a lender submits a preapplication, the Agency will review the 
information in it and make an informal assessment of the project's and 
prospective borrower's eligibilities. The Agency will provide the 
lender with a written assessment of its findings, including the 
strengths and weaknesses of the project and borrower. It is important 
to note that the Agency's findings may change as more information on 
the project and borrower is made available. It is also important to 
note that the Agency's findings are solely advisory in nature and does 
not obligate the Agency to approve a guarantee if a guarantee 
application is subsequently submitted. Finally, the Agency's findings 
are considered neither a favorable or adverse decision and are thus not 
appealable.
Guarantee Application Content (Sec.  5001.12)
    This section of the proposed rule identifies the content of the 
application for guarantee. As proposed, the supporting documentation 
that must be submitted with the application for the guarantee varies, 
requiring either all of the supporting documentation (referred herein 
as a ``full documentation'' guarantee application) or some supporting 
documentation with certification to the remaining documentation 
(referred herein as a ``low documentation'' guarantee application). The 
contents of a full documentation application are generally the same as 
being requested by the four current programs. The main difference is 
found under the low documentation application, which is discussed in

[[Page 52631]]

section III.B. of this preamble. As noted earlier in the preamble, the 
Agency expects the lender to perform the same level of analysis and 
other origination activities whether the lender submits a full 
documentation application or a low documentation application.
    Full documentation guarantee application. These applications must 
contain the following:
    (1) Agency-approved application forms;
    (2) Lender's analysis and credit evaluation (conforming to Sec.  
5001.16(b));
    (3) Environmental information;
    (4) Technical reports and energy audits (see subpart B);
    (5) A copy of Form 10-K, ``Annual Report Pursuant to Section 13 or 
15(d) of the Securities Exchange Act of 1934,'' for companies listed on 
major stock exchanges and/or subject to the Securities and Exchange 
Commission regulations;
    (6) Proposed loan agreement between the lender and borrower;
    (7) Energy assessments (see subpart B);
    (8) Appraisals;
    (9) Business plan (only if the information is not already provided 
in the feasibility study);
    (10) Feasibility study (see subpart B);
    (11) If the application is for 5 or more residential units or for 
for-profit nursing homes or assisted-living centers, an Affirmative 
Fair Housing Marketing Plan that is in conformance with 7 CFR 
1901.203(c)(3);
    (12) Preliminary engineering report (as specified in subpart B);
    (13) Current credit reports or equivalent on the prospective 
borrower and any other person liable for the debt, except for public 
bodies; and
    (14) If the guaranteed loan is $1 million or more, the most recent 
audited financial statements of the borrower or, if the guaranteed loan 
is less than $1 million, the most recent audited or unaudited financial 
statements of the borrower.
    Low documentation guarantee applications. These applications must 
contain the following:
    (1) Agency-approved application forms;
    (2) Lender's analysis and credit evaluation (conforming to Sec.  
5001.16(b));
    (3) Environmental information;
    (4) Technical reports and energy audits (see subpart B);
    (5) A copy of Form 10-K, ``Annual Report Pursuant to Section 13 or 
15D of the Act of 1934,'' for companies listed on major stock exchanges 
and/or subject to the Securities and Exchange Commission regulations;
    (6) Proposed loan agreement between the lender and borrower;
    (7) Certification to (as applicable):
     Energy assessment;
     Appraisals;
     Business plan;
     Feasibility study;
     Affirmative Fair Marketing Housing plan;
     Preliminary engineering report;
     Current credit reports; and
     Audited or unaudited financial statements.
    For a low documentation application, the certifications required 
indicate that the lender possesses and has reviewed the information to 
which it is certifying. In addition, the lender submitting a low 
documentation application must also certify that it has identified and 
reported to the Agency any significant risks that would jeopardize the 
repayment of the loan.
    A lender who is not yet a Rural Development approved lender may 
submit a guarantee application provided the lender submits with the 
application the lender application for approval and, if necessary, the 
application for preferred lender status. In this scenario, the review 
of the guarantee application will be deferred until the lender 
application and, if applicable, preferred lender status application are 
approved.
    Determination of documentation level. As stated above, the 
guarantee application may be submitted with full supporting 
documentation or with low supporting documentation. As proposed (see 
proposed Sec.  5001.12(c)), the criteria for determining which level of 
supporting documentation is required depends on four factors:
     Whether the application is for a startup business or an 
existing business
     Whether the application is from a preferred lender or not;
     The size of the guarantee request; and
     The project's ability to meet certain metric criteria 
(similar to the floor metric criteria noted earlier).
    If the guarantee application is for a startup business, it must 
always be submitted with the full supporting documentation regardless 
of the lender or project. The Agency believes this is appropriate to 
minimize the typically greater risk of projects associated with startup 
businesses.
    If the guarantee application is for an existing business submitted 
by a Rural Development approved lender with preferred lender status, a 
full documentation application must always be submitted if the 
requested loan guarantee is greater than $5 million. If, however, the 
requested loan guarantee is for $5 million or less, a preferred lender 
has the option of submitting either a full documentation guarantee 
application or a low documentation guarantee application for the 
project.
    If the guarantee application is for an existing business submitted 
by a Rural Development approved lender that does not have preferred 
lender status, a full documentation application must be submitted 
unless the project has:
     Debt coverage of 1.25 or higher;
     Cash equity of at least 25 percent of eligible project 
costs or community support as described in subpart B;
     A minimum FICO (Fair Isaac and Company) credit score of 
680 or equivalent industry credit score for each individual who signs 
the promissory note or guarantees repayment of the loan;
     A loan-to-value ratio of no more than 0.8; and
     Loan guarantee portion of the loan at or below $5 million.
    If the project meets each of the five criteria specified above, the 
Rural Development approved lender without preferred lender status has 
the option of submitting either a full documentation guarantee 
application or a low documentation guarantee application for the 
project. The purpose of the non-preferred lender criteria is to offset 
institutional and project risk by allowing non-preferred lenders to 
submit low documentation guarantee applications for lower risk 
projects. The Agency welcomes comments on this set of project criteria 
for determining when a low documentation guarantee application from a 
non-preferred lender can be submitted.
 Lender Responsibilities--General (Sec.  5001.15)
    This section spells out three basic responsibilities of the lender, 
which are generally consistent with lender's responsibilities under the 
four current programs.
    First, the lender must make sure that the project for which it is 
submitting a guarantee application complies with all Federal, State, 
and local laws and regulations at the time the guarantee application is 
submitted and that affect the project, the borrower, or lender 
activities.
    Second, the lender must provide full cooperation to the Agency and 
its representatives in all oversight and monitoring activities the 
Agency uses in implementing this program.
    Third, the lender remains responsible for the origination and 
servicing of a loan guaranteed under this part regardless of any action 
or inaction by the Agency.

[[Page 52632]]

Lender Responsibilities--Origination (Sec.  5001.16)
    This section lays out the basic responsibilities associated with 
originating a guarantee under this program. These responsibilities 
cover: A general requirement of conformity with this part and the 
lender's policies and procedures; credit evaluation; appraisals; 
personal and corporate guarantees; design requirements; monitoring 
requirements; compliance with other Federal laws; environmental 
responsibilities; and conflicts of interest.
General
    Under the proposed rule, the lender is responsible for originating 
the loan in accordance with their current written policies and 
procedures and with the requirements of this part. Where a lender's 
current written policies and procedures address a corresponding 
requirement in this part, the lender would be required to comply with 
whichever is more stringent.
    Compared to the four current programs, these requirements represent 
a departure by incorporating into the proposed rule reference to each 
lender's own policies and procedures for loan origination. The 
appropriate standards to be followed by each lender for loan 
origination will be based on the lender's own origination policies and 
procedures and those specified in the proposed rule, whichever is more 
stringent.
Credit Evaluation
    The lender has the responsibility for conducting a credit 
evaluation of the project for which it is submitting the guarantee 
application. This credit evaluation must be consistent with Agency 
standards found in this part and with the lender's policies, 
procedures, and lending practices. Where a lender's current policy or 
procedure addresses a corresponding requirement in this part, the 
lender must comply with whichever is more stringent.
    The proposed rule identifies what the Agency considers to be an 
acceptable credit evaluation. Specifically, the lender must use credit 
documentation procedures and an underwriting process that are 
consistent with generally accepted commercial lending practices, and 
the lender's own policies, procedures, and lending practices, and the 
lender must include an analysis of all credit factors associated with 
each guarantee application to ensure loan repayment.
    In making this analysis, the proposed rule requires the lender to 
consider the following:
     Credit worthiness. This refers to those qualities that 
generally impel the prospective borrower to meet its obligations as 
demonstrated by its credit history.
     Cash flow. This refers to a prospective borrower's ability 
to produce sufficient cash to repay the loan as agreed.
     Capital. This refers to the financial resources that the 
prospective borrower currently has and those it is likely to have when 
payment is due. The prospective borrower must be adequately 
capitalized.
     Collateral. This refers to the assets pledged by the 
prospective borrower in support of the loan. Adequacy will be based on 
market value. For the purchase of cooperative stock, the lender must at 
least secure the loan with a lien on the stock acquired with loan 
funds, an assignment of any patronage refund, and the full and 
unconditional personal or corporate guarantee of the borrower.
     Conditions. This refers to the general business 
environment and status of the prospective borrower's industry.
    The elements that lenders must include in their credit evaluation 
are essentially the same as currently required under the current 
programs. However, as noted for the general loan origination 
requirements, the credit evaluation requirements of the proposed rule 
represent a departure for the four current programs by incorporating 
into the proposed rule reference to each lender's own policies and 
procedures for credit evaluation. The appropriate standards to be 
followed by each lender for credit evaluation will be based on the 
lender's own loan origination policies and procedures and those 
specified in the proposed rule, whichever is more stringent.
Appraisals
    The lender would be required to have real property collateral 
appraised in accordance with the appropriate guidelines contained in 
Standards 1 and 2 of the Uniform Standards of Professional Appraisal 
Practices to determine its value. All appraisals used to establish the 
fair market value of the real property would have to be no more than 1 
year old, unless otherwise specified in subpart B. Because market value 
can be affected by environmental conditions, all appraisals would have 
to include consideration of the potential effects from a release of 
hazardous substances or petroleum products or other environmental 
hazards on the market value of the collateral. This requirement is 
generally consistent with the conduct of appraisals under the four 
current programs.
Personal and Corporate Guarantees
    Under the proposed rule, Agency-approved personal and corporate 
guarantees for the full term of the loan, and at least equal to the 
guarantor's percent interest in the borrower times the loan amount, 
would be required from those owning at least a 20 percent interest in 
the borrower, unless, as discussed in the next paragraph, the lender 
documents to the Agency's satisfaction that collateral, equity, 
cashflow, and profitability indicate an above-average ability to repay 
the loan. When warranted by an Agency assessment of potential financial 
risk, the Agency may also require Agency-approved guarantees from 
parent, subsidiaries, and affiliated companies owning less than a 20 
percent interest in the borrower and require security for any guarantee 
provided under this section.
    The proposed rule would allow exceptions to the requirement for 
personal guarantees. Such exemptions would have to be requested by the 
lender and concurred by the Agency approval official, and would be done 
on a case-by-case basis. In order to be considered for an exemption, 
the lender would have to document that collateral, equity, cashflow, 
and profitability indicate an above-average ability to repay the loan.
    As proposed, guarantors would be required to execute an Agency-
approved unconditional guarantee form. This provides the Agency with 
another resource to recover losses on loans that are defaulted. 
Unconditional personal and corporate guarantees obtained under this 
program would be part of the collateral for the loan, but would not be 
considered in determining whether a loan is adequately secured for loan 
making purposes.
    Overall, the requirements for personal and corporate guarantees are 
generally consistent with those in the current B&I guaranteed loan 
program and, by incorporation, in the Renewable Energy Systems and 
Energy Efficiency Improvements program. The other two programs, 
however, do not currently use similar personal and corporate guarantee 
provisions.
Design Requirements
    As under the four current programs, the lender would be required to 
ensure that all projects are designed utilizing accepted architectural 
and engineering practices. If the Agency comments on the design of the 
project, the lender would also be responsible for ensuring that the 
Agency's comments are taken into consideration when the facility is

[[Page 52633]]

being designed. The design and construction of the project must conform 
to applicable Federal, State, and local codes and requirements. Lastly, 
the lender would also be required to ensure that the planned project 
will be fully constructed, within the original budget, to facilitate 
completion of the loan purpose and will be suitable, once completed, 
for the borrower's needs in accordance with the borrower's loan 
application.
Monitoring Requirements
    The lender would be required to monitor the progress of 
construction and ensure that construction conforms to applicable 
Federal, State, and local code requirements and proceeds in accordance 
with the approved plans, specifications, and contract documents. The 
lender would also be required to ensure that funds are used only for 
eligible project costs. If any problems develop during project 
development, the lender must expeditiously report them to the Agency. 
These requirements are consistent with the four current programs.
Compliance With Other Federal Laws
    As required under the four current programs, lenders would be 
required to comply with other applicable Federal laws including Equal 
Employment Opportunities, Americans with Disabilities Act, Equal Credit 
Opportunity Act, Fair Housing Act, and the Civil Rights Act of 1964.
Environmental Responsibilities
    As proposed, the lender has several responsibilities for overseeing 
the borrower with regard to environmental requirements. These 
responsibilities are generally consistent with those under the four 
current programs.
    First, the lender must ensure that the prospective borrower has 
provided the necessary environmental information to enable the Agency 
to undertake its environmental review process in accordance with 
subpart G of either 7 CFR part 1940 or 7 CFR part 1794, including the 
provision of all required Federal, State, and local permits.
    Second, the lender must ensure that the prospective borrower has 
complied with any mitigation measures required by the Agency's 
environmental review for the purpose of avoiding or reducing adverse 
environmental impacts of construction or operation of the facility 
financed with the guaranteed loan.
    Third, the lender must ensure that the prospective borrower has not 
taken any actions or incurred any obligations with respect to the 
proposed project that would either limit the range of alternatives to 
be considered during the Agency's environmental review process or which 
would have an adverse effect on the environment. If such actions or 
obligations have been incurred that would limit the range of 
alternatives, the project will be denied a guarantee.
Conflicts of Interest
    The proposed rule, consistent with the four current programs, 
requires the lender to report to the Agency all appearances of 
conflicts of interest.
Lender Responsibilities--Servicing (Sec.  5001.17)
    This section of the proposed rule lays out the lender's 
requirements for servicing guaranteed loans made under this part, which 
are generally consistent with lender's responsibilities under the four 
current programs. However, the Agency has made revisions in some 
servicing areas to incorporate industry standard practices.
General
    Each lender is responsible for servicing the loan in accordance 
with the Lender's Agreement, the requirements specified within this 
regulation, and their current written policies and procedures for 
servicing loans. Where a lender's current written policies and 
procedures address a corresponding requirement in this regulation or in 
the Lender's agreement, the lender must comply with whichever is more 
stringent.
    The lender must also ensure that the borrower has obtained all 
necessary insurance coverage appropriate to the proposed project. Such 
coverage is subject to Agency review and approval. In addition, the 
lender must ensure that the borrower maintains the necessary insurance 
coverage for the life of the loan.
    Finally, the Agency may determine that the lender is not adequately 
protecting the rights of the lender or the Agency in its servicing of 
the loan. The Agency, therefore, reserves the right to take any legal 
action it determines necessary to protect the rights of the lender and 
the Agency with respect to the loan.
    Compared to the four current programs, these requirements represent 
a departure by incorporating into the proposed rule reference to each 
lender's own policies and procedures for loan servicing. The 
appropriate standards to be followed by each lender for loan servicing 
will be based on the lender's own loan servicing policies and 
procedures and those specified in the proposed rule, whichever is more 
stringent.
Certification
    For each guarantee loan application it submits to the Agency, the 
lender would be required to certify in the Lender's Agreement that it 
will service the guaranteed loan according to Agency requirements and 
the lender's current written servicing policies and procedures and 
that, where the lender's current written policies and procedures 
address corresponding requirements of this regulation, it will comply 
with whichever is more stringent. Such certification is not part of the 
policies of the four current programs.
    When applicable, the lender will require an audit of the borrower 
in accordance with Office of Management and Budget requirements. This 
is consistent with the policies of the four current programs.
Collateral Inspection and Release
    As proposed, the requirements for collateral inspection and release 
are generally consistent with the four current programs. Under the 
proposed rule, the lender would be required to inspect the collateral 
as often as necessary to properly service the loan.
    The Agency may require the lender to obtain Agency approval prior 
to releasing any collateral. In addition, the Agency may, at its 
discretion, require an appraisal of the remaining collateral in cases 
in which the Agency determines that it may be adversely affected by the 
release of the collateral. If an appraisal is required, it will be at 
the expense of the borrower and must meet the requirements of proposed 
Sec.  5001.16(c).
    In all cases, the sale or release of collateral must be based on an 
arm's-length transaction.
Transfers and Assumptions
    Under the proposed rule, the Agency is generally less involved in 
the processing of transfers and assumptions than under the four current 
programs. The proposed rule relies more on a lender's own policies and 
procedures for conducting transfers and assumptions.
    General. Under the proposed rule, any time that a third party 
assumes a loan guaranteed under this part, it would be required to be 
processed and approved by the Agency as if it were a new loan 
guarantee. This is consistent with the four current programs.
    Processing transfers and assumptions. Under the proposed rule, the 
lender is allowed to release the transferor (including any guarantor) 
from liability, regardless of the amount of the loan being transferred 
or assumed.
    If a lender wants to change the terms of the loan, the lender would 
be

[[Page 52634]]

required to first obtain, in writing, Agency approval with the 
concurrence of the holder and transferor (including guarantor if it has 
not been released from personal liability). Any new loan terms would 
not be allowed to exceed those authorized in this part as measured from 
the date the loan was initially guaranteed.
    In the case of a transfer and assumption of less than the 
outstanding balance, the lender (if holding the guaranteed portion) may 
file an estimated Report of Loss with respect to the difference.
    Transfer fees. As under the four current programs, the Agency may 
charge the lender a nonrefundable transfer fee at the time of a 
transfer application. The Agency would set the amount of the transfer 
fee in an annual notice of funds availability.
Mergers
    The Agency may withdraw the guarantee when a borrower participates 
in a merger, but the Agency is no longer requiring that it provide 
prior approval of the merger.
Subordination of Lien Position.
    The Agency currently has the authority to allow lenders to 
subordinate under each of the four programs being addressed under the 
proposed rule. However, the Agency has rarely used this authority. As 
proposed, the consolidated rule would allow the Agency to continue to 
provide the Agency the ability to allow subordinations when it has 
determined that it is in the Federal government's financial interest. 
Before a subordination of the lender's lien position can occur, the 
lender would be required to first make the request for subordination of 
the lien position in writing to the Agency and receive Agency 
concurrence for the subordination. Agency concurrence would require 
that the Agency's financial interest will be enhanced, collateral will 
remain adequate to secure the loan, the lien to which the guaranteed 
loan is subordinated will be for a fixed dollar limit and that lien 
priorities remain for the portion of the loan that was not 
subordinated, and subordination to a revolving line of credit does not 
exceed 1 year.
Repurchases From Holder(s)
    Under the proposed rule, the requirements associated with 
repurchases from holders, including repurchase by the lender and by the 
Agency, are generally consistent with those under the four current 
programs.
    The holder may make written demand on the lender or the Agency to 
repurchase the unpaid guarantee portion of the loan under two 
situations. The first situation is in the case of borrower default. The 
second situation is the failure of the lender to pay the holder its 
pro-rata share. The lender or Agency may determine that repurchase of 
the loan from the holder is necessary to adequately service the loan. 
In this situation, the holder must sell the guaranteed portion to the 
lender or Agency, whichever made the request.
    Repurchases by lender. The lender must respond to the holder's 
demand within 30 days and notify the Agency, in writing, of its 
decision, including notifying the Agency of all repurchases it makes. 
If the lender decides to repurchase the loan, the lender would be 
required to accept an assignment without recourse from the holder upon 
repurchase. As proposed, all repurchases would be for an amount equal 
to the unpaid principal balance of the guaranteed portion and accrued 
interest less the lender's servicing fee and must cover the principal 
and interest on the guaranteed loan accruing only up to 90 days after 
the date of the demand by the holder.
    Repurchases by Agency. If the Agency repurchases the loan, the 
holder would be required to submit a specific written demand to the 
Agency, along with appropriate documentation. The Agency will be 
subrogated to all rights of the holder and, subject to satisfactory 
documentation, will purchase the unpaid principal balance and interest 
of the guaranteed portion to date of repurchase less the lender's 
servicing fee within 30 days after receipt of the demand. The lender 
would not be allowed to charge the Agency any fees unless provided for 
in the Assignment Guarantee Agreement. The lender would be required to 
use a form approved by the Agency to send the guaranteed loan payments 
to the Agency on all loans repurchased by the Agency from holders. 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 
and does not waive any of the Agency's rights against the lender, 
borrower, or guarantor.
Additional Expenditures and Loans
    As proposed and consistent with the four current programs, the 
lender would not be allowed to make additional expenditures or new 
loans to the borrower with an outstanding loan guaranteed under this 
part without first obtaining in writing Agency approval.
Lender Failure
    In the event a lending institution fails, the applicable 
Administrator will provide instruction to the successor entity on a 
case-by-case basis. Such instructions may include that the Agency may 
determine to service the entire loan or the guaranteed portion of the 
loan. This provision is consistent with the four current programs.
    Under the proposed rule, the Agency reserves the right to enforce 
the provisions of the loan documents on behalf of the lender or to 
purchase the lender's interest in the loan in the event no successor 
entity can be determined. The intent of this new provision is to permit 
the Agency to take over and/or service loans when a non-regulated or 
non-supervised lender does not have a successor entity appointed. With 
regulated or supervised lenders, State law usually provides a structure 
for the identification of a successor to a failed lender, but not 
necessarily for failed lenders who are not regulated or supervised. 
Thus, the Agency sees a need for this provision.
Delinquent Loans
    Under the proposed rule, the lender would be required to service 
delinquent loans in accordance with the Lender's Agreement, its current 
servicing standards, and reasonable and prudent lending standards. This 
is consistent with the four current programs except that the proposed 
rule adds the requirement to service delinquent loans in accordance 
with the lender's own current servicing standards.
    If a borrower is delinquent more than 30 days, the lender would be 
required to coordinate with the Agency and the borrower to implement 
appropriate curative actions to resolve the problem. Any curative 
action that affects the return to the holder would be required to 
receive the holder's concurrence. Any change in the repayment schedule 
would be limited to the remaining life of the collateral. Finally, any 
loan performing in accordance with a curative action will no longer be 
delinquent.
Protective Advances
    Under the proposed rule and consistent with the four current 
programs, protective advances would be allowed only when they are 
necessary to preserve the value of the collateral and must be 
reasonable with respect to the outstanding loan amount and the value of 
the collateral being preserved. Protective advances would not be 
allowed to include attorneys' fees and advances in lieu of additional 
loans.

[[Page 52635]]

    As proposed, the lender must obtain written Agency approval for any 
protective advance that will singularly or cumulatively amount to more 
than $200,000 or 10 percent of the guaranteed loan, whichever is less. 
This provision is different from current policy which requires Agency 
approval when the amount is $5,000 or more to the same borrower.
Liquidation
    Under the proposed rule and consistent with the four current 
programs, the lender may decide to liquidate a loan when one or more 
incidents of default or third party actions occur that the borrower can 
not or will not cure or eliminate within a reasonable period of time. 
The Agency reserves the right to unilaterally conclude that liquidation 
is necessary and require the lender to assign the security instruments 
to the Agency.
    Liquidation by the lender. If the lender decides to liquidate a 
loan, the lender must first develop, in consultation with the Agency, a 
liquidation plan to determine the best course of action. The lender 
must include in this plan all aspects of liquidation, including, but 
not limited to, reports to the Agency, protection of collateral, loss 
payment, transmission of proceeds to the Agency, and future recovery. 
The lender would be required to submit its liquidation plan to the 
Agency at least 30 days before implementing the plan and must notify 
the Agency of any changes to or deviations from the plan.
    As under the four current programs, the proposed rule requires the 
lender to prepare a liquidation plan. However, the proposed rule would 
not require Agency's prior approval of the liquidation plan, but would 
require the lender to notify the Agency of deviations from the plan. 
These two aspects are different from the current programs.
    Compromise settlement and release of personal guarantors. The 
lender may consider a compromise settlement at any time, unless 
otherwise provided in subpart B. However, before a guarantor is 
released from liability, the Agency must concur with the lender. Once 
agreement is reached, the lender may then proceed to implement a 
settlement compromise. These provisions are consistent with those found 
in the B&I guaranteed loan program, but have been simplified.
Litigation
    Under the proposed rule, the Agency has consolidated requirements 
associated with all litigation into this new section. The provisions of 
this section are generally consistent with current Agency policy in 
implementing the four current programs.
    In all litigation proceedings, the lender would be responsible for 
protecting the rights of the lender or the Agency with respect to the 
loan, and keeping the Agency adequately and regularly informed, in 
writing, of all aspects of the proceedings. If the Agency determines 
that the lender is not adequately protecting the rights of the lender 
or the Agency with respect to the loan, the Agency reserves the right 
to take any legal action the Agency determines necessary to protect the 
rights of the lender, on behalf of the lender, or the Agency with 
respect to the loan. If the Agency exercises this right, the lender 
would be required to cooperate with the Agency. Any cost to the Agency 
associated with such action would be assessed against the lender.
Loss Calculations and Payment
    Similar to the litigation section above, the Agency has 
consolidated into one section the requirements associated with loss 
calculations and payment. Generally, these provisions are consistent, 
but simplified, with the policies being implemented under the four 
current programs for loss calculations and payments.
    The proposed plan describes the general calculation procedures that 
would be followed in determining losses (see proposed Sec.  
5001.17(n)).
    During the course of any reorganization plan, the lender would be 
required to request and revise estimated loss payments using Agency-
approved forms. The estimated loss claim, as well as any revisions to 
this claim, would be accompanied by documentation to support the claim.
    In a chapter 9 or chapter 11 reorganization, the lender would be 
required to obtain an independent appraisal of the collateral if so 
directed by the Agency. The Agency and the lender would share the 
appraisal fee equally.
    Final settlement of liquidation would be made with the lender after 
the collateral is liquidated (unless otherwise designated as a future 
recovery) or after settlement and compromise of all parties has been 
completed. The Agency retains the right to recover losses paid under 
the guarantee from any liable party. Final settlement would be subject 
to the following:
     If the lender takes title to collateral, any loss will be 
based on the collateral value at the time the lender obtains title.
     If the lender is conducting the liquidation and owns any 
of the guaranteed portion of the loan, the lender may request an 
estimated loss payment by submitting an estimate of loss that will 
occur in connection with liquidation of the loan.
     Within 30 days after liquidation of all collateral, except 
for certain unsecured personal or corporate guarantees as provided for 
in this section, the lender would have to prepare a final report of 
loss and submit it to the Agency. The Agency will not guarantee 
interest beyond this 30-day period other than for the period of time it 
takes the Agency to process the loss claim. Before Agency approval of 
any final loss report, the lender must account for all funds, 
disposition of the collateral, and costs incurred, and must provide any 
other information necessary for successful completion of the 
liquidation.
     After a final loss has been paid by the Agency, any future 
funds recovered by the lender would be pro-rated between the Agency and 
the lender based on the original percentage of guarantee even if the 
Loan Note Guarantee has been terminated.
     In a bankruptcy, the lender would submit an estimated loss 
claim based on the final orders of the bankruptcy court's direction. 
The Agency would pay the lender the estimated final loss based on these 
directions.
    Lastly, the proposed rule would require the lender to submit with 
each loss claim a copy of the current version of the lender's written 
policies and procedures for origination and servicing. This new 
requirement reflects the intent of the proposed rule to ensure that the 
guaranteed loan is serviced to the lender's own standards consistent 
with this rule.
Basic Borrower Provisions
Borrower Responsibilities (Sec.  5001.25)
    Under the proposed rule, the Agency has consolidated and simplified 
the responsibilities of borrowers under the guaranteed loan program. 
These responsibilities are consistent with those associated with the 
four current programs.
    Under the proposed rule, borrowers must comply with all Federal, 
State, and local laws and rules that are in existence and that affect 
the project including, but not limited to land use zoning; health, 
safety, and sanitation standards as well as design and installation 
standards; and protection of the environment and consumer affairs. 
Borrowers must also obtain all permits, agreements, and licenses that 
are applicable to the project. The borrower would also be responsible 
for maintaining all hazard,

[[Page 52636]]

flood, liability, worker compensation, and personal life insurance, 
when required, on the project.
    Upon request by the Agency, the borrower would be required to 
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 
borrower pertaining to any Agency guaranteed loan.
Basic Guarantee and Loan Provisions
General (Sec.  5001.30)
Underwriting
    All loans guaranteed by the Agency must be underwritten in 
accordance with the credit evaluation requirements specified in 
proposed Sec.  5001.16(b). As discussed earlier in this preamble, the 
credit evaluation requirements are generally consistent with the 
requirements found in the four current programs.
Conditions of Guarantee
    Each loan guarantee issued under this part would be evidenced by a 
Loan Note Guarantee, which would be issued by the Agency. In addition, 
each lender would be required to execute a Lender's Agreement.
    The entire loan would be required to be secured by the same 
security, with equal lien priority being given for the guaranteed and 
unguaranteed portions of the loan. The guaranteed portion would be paid 
first and given preference and priority over the unguaranteed portion.
    The lender would remain mortgagee or secured party of record 
notwithstanding the fact that another party may hold a portion of the 
loan.
    The holder of a guaranteed portion would have all rights of 
payment, as defined in the Loan Note Guarantee to the extent of the 
portion purchased. The lender would remain bound by all obligations 
under the Loan Note Guarantee, Lender's Agreement, and Agency program 
regulations.
    The lender would receive all payments of principal and interest on 
the entire loan and would be required to promptly remit to each holder 
a pro-rata share, less any lender servicing fee.
    No loan guaranteed by the Agency under this part would be 
conditioned on any requirement that the borrower accept or receive 
electric service from any particular utility, supplier, or cooperative.
    These provisions are consistent with those found in the four 
current programs.
Full Faith and Credit
    A guarantee under this part constitutes an obligation supported by 
the full faith and credit of the United States and is not contestable 
except for fraud or misrepresentation by the lender or holder, as 
appropriate, when the lender or holder has actual knowledge, 
participates in, or condones such fraud or misrepresentation.
    A note that provides for the payment of interest on interest would 
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 would be void.
    The guarantee would not be enforceable by the lender to the extent 
any loss is occasioned by the violation of usury laws, negligent loan 
origination, negligent loan servicing, or failure to obtain the 
required security regardless of the time at which the Agency acquires 
knowledge of the foregoing. Any losses occasioned would 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.
    When in the hands of a holder, the Loan Note Guarantee or 
Assignment Guarantee Agreement would not cover interest accruing 90 
days after the holder has demanded repurchase by the lender. When in 
the hands of a holder, the Loan Note Guarantee or Assignment Guarantee 
Agreement would not cover interest accruing 90 days after the lender or 
Agency has requested the holder to surrender the evidence of debt for 
repurchase.
    As proposed, the Agency would guarantee payment as follows:
     To any holder, 100 percent of any loss sustained by the 
holder on the guaranteed portion of the loan and on interest due on 
such portion.
     To the lender, the lesser of any loss sustained by the 
lender on the guaranteed portion, including principal and interest 
evidenced by the notes or assumption agreements and secured advances 
for protection and preservation of collateral made with the Agency's 
authorization; or the guaranteed principal advanced to or assumed by 
the borrower and any interest due thereon.
    These provisions are consistent with those found in the four 
current programs. The proposed rule, however, does make explicit that 
negligent loan servicing may result in the guarantee not being 
enforceable to the extent any loss is occasioned by such negligent loan 
servicing.
Soundness of Guarantee
    Consistent with the four current programs, all loans guaranteed 
under this part must be financially sound and feasible, with reasonable 
assurance of repayment.
Rights and Liabilities
    When a guaranteed portion of a loan is sold to a holder, the holder 
would succeed to all payments of the lender under the Loan Note 
Guarantee to the extent of the portion purchased. While consistent in 
intent with the current policy, this provision has been revised to 
reflect that the holder ``would succeed to all payments'' of the lender 
rather than the holder ``shall have all rights'' of the lender.
    A guarantee and right to require purchase would be directly 
enforceable by a holder notwithstanding any fraud or misrepresentation 
by the lender or any unenforceability of the guarantee by the lender, 
except for fraud or misrepresentation of which the holder had actual 
knowledge at the time it became the holder or in which the holder 
participates or condones.
    The lender would not be allowed to represent a Conditional 
Commitment of Guarantee as a guarantee. This is a clarification of 
Agency policy to prevent misrepresentation of the Conditional 
Commitment of Guarantee.
    The Agency continues to reserve the right to collect from the 
lender any payments made to the holder that would not have been payable 
to the lender had they been the holder.
Reduction of Loss Claims Payable
    As proposed, the Agency may reduce the amount of loss claims 
payable under the loan guarantee to the lender, to zero if necessary, 
where the Agency has determined that the lender has engaged in either 
negligent loan origination or in negligent loan servicing that has 
resulted in a loss. The amount of the reduction would be based on the 
loss sustained as a result of the negligence. The Agency notes, 
however, that any reduction in claims payable under the guarantee would 
not apply to any subsequent holders. Claims payable associated with the 
lender's negligence paid to subsequent holders will be collected from 
the lender.
    While new compared to the four current regulations, this section of 
the proposed rule would implement current Agency policy to clarify how 
the Agency will address reduction of loss claims payable.
Write-Downs
    Consistent with current B&I policy, as proposed, debt write-downs 
for an

[[Page 52637]]

existing borrower where the same principals retain control of and 
decision-making authority for the business would be prohibited.
Guaranteed Loan Parameters (Sec.  5001.31)
Interest Rates
    Under the proposed rule, the provisions addressing interest rates 
and changes to interest rates (reductions and increases) are consistent 
with the provisions of the four current programs.
    As proposed, interest rates on the loan for which a guarantee is 
made would be allowed to be fixed or variable or a combination of both, 
as long as they are legal. If variable interest rates are used, they 
must be tied to an acceptable published index and the lender must 
incorporate the provision for adjustment of payment installments into 
the Note. When combined fixed and variable rates are used, the lender 
would provide the Agency with the overall effective interest rate for 
the entire loan.
    Under the proposed rule, interest rates, interest rate caps, and 
incremental adjustment limitations would be negotiated between the 
lender and the borrower.
    If the lender and borrower agree, the interest rate on the 
guaranteed portion of a loan may differ from the rate on the 
unguaranteed portion provided under certain conditions. These 
conditions are:
     The rate on the unguaranteed portion is equal to or below 
the market rate and does not exceed that currently being charged on 
loans for similar purposes to borrowers under similar circumstances; 
and
     the rate on the guaranteed portion does not exceed the 
rate on the unguaranteed portion unless the rate on the guaranteed 
portion is fixed and the unguaranteed portion is variable.
Interest Rate Changes
    Under the proposed rule, the Agency must approve, in writing, any 
change in the interest rate between issuance of the Conditional 
Commitment for Guarantee and issuance of the Loan Note Guarantee. All 
changes would then be shown as an amendment to the Conditional 
Commitment for Guarantee.
    The interest rate change may be either a reduction or increase, but 
are subject to certain restrictions.
    Reductions. The borrower, lender, and holder (if any) would be 
allowed to collectively effect a permanent or temporary reduction in 
the interest rate on the guaranteed loan at any time during the life of 
the loan by their written agreement, subject to the following 
conditions:
     If a permanent reduction was implemented, the Loan Note 
Guarantee would be allowed to cover only losses of interest at the 
reduced interest rate.
     In a final loss settlement when qualifying rate changes 
are made with the required written agreements and notification, the 
interest would be calculated for the periods the given rates were in 
effect. The lender would be required to maintain records that 
adequately document the accrued interest claimed.
     The lender would be responsible for the legal 
documentation of interest-rate changes by an endorsement or any other 
legally effective amendment to the promissory note; however, no new 
notes may be issued. The lender would have to provide copies of all 
legal documents to the Agency.
    The lender would be required to keep sufficient records to allow 
the Agency to calculate any loss at the reduced interest rate and to 
notify the Agency of all permanent interest rate reductions, as 
specified in proposed Sec.  5001.4(b)(3)(ii).
    Increases. Increases in interest rates, in general, are prohibited 
under the proposed rule. However, increases would be allowed only when 
the increase results from normal fluctuations in approved variable 
interest rates or the increase returns the rate to the rate prior to 
the temporary reduction.
Term Length
    Under the proposed rule, the loan term would be based on (1) the 
use of proceeds, (2) the useful economic life of the assets being 
financed, and (3) the borrower's repayment ability. However, under no 
circumstances would the term be allowed to exceed the lesser of the 
useful economic life of the asset, or 40 years.
    The proposed rule's provisions for term length are consistent with 
those found in the Community Facility and the Water and Waste Disposal 
Facilities programs, but are different from those found in the other 
two programs. The other two programs have shorter timeframes for 
several types of assets.
Loan Schedule and Repayment
    Repayment of loans for which a loan guarantee has been obtained 
under this part would be required to be structured in accordance with 
proposed Sec.  5001.31 and in accordance with the Loan Agreement. 
Repayments would be due and payable in accordance with the Note.
    As proposed, only loans that require a periodic payment schedule 
that retires the debt over the term of the loan without a balloon 
payment will be guaranteed by the Agency. Lenders, therefore, must 
ensure that the principal balance of a guaranteed loan is properly 
amortized within the prescribed loan maturity.
    These provisions are consistent with those found in the four 
current programs.
Maximum Loan Amounts
    Under the proposed rule, the maximum amount that may be guaranteed 
would be determined on a program-by-program basis. The Agency will 
publish a notice in the Federal Register each year in which it will 
specify the maximum loan amounts for each of the programs in this part. 
As seen later in this preamble, the maximum loan amounts being proposed 
are consistent with those in the current programs.
Maximum Percent of Guarantee
    As proposed, the maximum guarantee for each guaranteed loan program 
covered by this part is specified in subpart B. As seen later in this 
preamble, the maximum percent guarantees are consistent with those 
found in the current programs, except that a lower maximum percent 
guarantee is being proposed in specific situations.
Fees
    Under the proposed rule, a guarantee fee and a renewal fee are used 
to offset the costs of the guaranteed loan programs. Each year, the 
Agency will establish the guarantee fee and renewal fee for each 
guaranteed loan program, subject to any statutory limitations. The 
Agency will publish a notice in the Federal Register each year 
identifying these fees.
    Guarantee fee. This fee is a one-time, upfront fee based on the 
principal loan amount, and the percent of guarantee. Consistent with 
standard industry practice, this fee is referred to as the ``guarantee 
fee.'' As proposed, the guarantee fee would be paid to the Agency by 
the lender at the time the Guaranteed is issued and is non-refundable. 
The lender, however, would be allowed to pass this fee on to the 
borrower. Each of the four programs covered by the proposed rule 
currently charge a guarantee fee.
    Renewal fee. This fee is assessed annually, is based on a fixed fee 
rate established at the beginning of the loan, and, consistent with 
standard industry terminology, is referred to as a ``renewal fee.'' As 
applicable, the renewal fee would be calculated on the unpaid 
guaranteed principal balance as of close of business on December 31 of 
each

[[Page 52638]]

year. The fee would be billed to the lender and is non-refundable. Like 
the guarantee fee, the lender would be allowed to pass the renewal fee 
on to the borrower. Currently, the Business and Industry guaranteed 
loan program and the Renewable Energy Systems and Energy Efficiency 
Improvements guaranteed loan program have provisions for an annual 
renewal fee, while the Community Facilities and the Water and Waste 
Disposal guarantee loan programs do not. The proposed rule allows for, 
but does not require, the charging of the renewal fee for all of the 
four programs. At the present time, the Agency is not considering the 
implementation of an annual renewal fee in the Community Facility and 
Water and Waste Disposal programs.
Lender Fees
    As proposed and consistent with the four current programs, the 
lender may levy reasonable, routine, and customary charges and fees for 
the guaranteed loan provided they are similar to those charged other 
applicants for the same type of loan for which a non-guaranteed 
borrower would be assessed. The proposed rule prohibits late payment 
charges from being covered by the Loan Note Guarantee. Further, the 
lender would be prohibited from adding such charges to the principal 
and interest due under any guaranteed note.
Conditional Commitment for Guarantee (Sec.  5001.32)
    Consistent with the four current programs, upon approval of a loan 
guarantee, the Agency will issue a Conditional Commitment for Guarantee 
to the lender containing conditions under which the Guarantee will be 
issued. The lender must complete and sign the Acceptance of Conditions 
and return a copy to the Agency. The lender may propose alternate 
conditions for Agency consideration.
Conditions Precedent to Issuance of Loan Note Guarantee (Sec.  5001.33)
    This section identifies the conditions that need to have occurred 
in order for the Agency to issue the Loan Note Guarantee. These 
conditions are consistent with the conditions in the four current 
programs, but have been simplified.
    The Loan Note Guarantee would be issued once all of the conditions 
specified in the Conditional Commitment for Guarantee have been met and 
each of the following has occurred:
     The lender has paid the appropriate guarantee fee;
     The lender has advised the Agency of any plans to sell or 
assign any part of the loan as provided in the Lender's Agreement; and
     The lender has certified that the prospective borrower has 
obtained all necessary insurance appropriate to the proposed project.
Issuance of the guarantee (Sec.  5001.34)
    As proposed and consistent with the four current programs, the 
Agency, at its sole discretion, will determine if the conditions within 
the Conditional Commitment for Guarantee have been met and whether or 
not to issue the guarantee.
Loan Closing
    At loan closings, the lender would provide the lender's 
certifications, guarantee fee, and, if applicable, secondary market 
sale document.
Issuance
    Consistent with the four current programs, but simplified, under 
the proposed rule, the Agency would issue the Loan Note Guarantee and 
Assignment Guarantee Agreement upon the lender's compliance with 
requirements of the Conditional Commitment for Guarantee.
Refusal To Execute Loan Note Guarantee
    Consistent with the four current programs, if the Agency determines 
that it can not execute the Loan Note Guarantee, the Agency would 
promptly inform the lender of the reasons and give the lender a 
reasonable period within which to satisfy the objections. If the lender 
satisfies the objections within the time allowed, the guarantee would 
be issued.
Replacement of Loan Note Guarantee or Assignment Guarantee Agreement
    Consistent with the four current programs, if the Loan Note 
Guarantee or Assignment Guarantee Agreement has been lost, stolen, 
destroyed, mutilated, or defaced, the Agency may issue a replacement to 
the lender or holder upon receipt from the lender of a notarized 
certificate of loss and an indemnity bond acceptable to the Agency. An 
indemnity bond would not be required, however, if the holder is the 
United States, a Federal Reserve Bank, a Federal Government 
corporation, a State or Territory, or the District of Columbia.
Alterations to Loan Instruments (Sec.  5001.35)
    Consistent with the B&I and the Renewable Energy Systems and Energy 
Efficiency Improvements guaranteed loan programs, the provisions of 
this section would prohibit the lender from altering or approving any 
alterations of the Loan Note Guarantee or any other loan instrument 
without the prior written approval of the Agency.
Reorganizations (Sec.  5001.36)
    The provisions in this section of the proposed rule address changes 
in borrowers and lenders. In general, these provisions are consistent 
with those found in the current programs.
Change in Borrower Prior to Closing
    As proposed, any change in borrower ownership or organization prior 
to the issuance of the Loan Note Guarantee would be required to meet 
program eligibility requirements. Agency approval would be required 
prior to the issuance of the Conditional Commitment for Guarantee. Once 
the Conditional Commitment for Guarantee is issued, no substitution of 
borrower(s) or change in the form of legal entity would be approved, 
except that a change in the legal entity may be approved when the 
original borrower is replaced with substantially the same individuals 
or officers with the same interest as originally approved.
Transfer of Lender Prior to Issuance of the Loan Note Guarantee
    Prior to issuance of a Loan Note Guarantee, the Agency may approve 
the transfer of an outstanding Conditional Commitment for Guarantee to 
a new eligible lender, provided the present lender makes the request in 
writing and no substantive changes have occurred in the borrower, 
project, loan agreement, or Conditional Commitment for Guarantee. The 
new lender would have to meet the appropriate requirements specified in 
this part to become a Rural Development approved lender. In addition, a 
new application for guarantee would have to be executed.
Substitution of Lender After Issuance of the Loan Note Guarantee
    After the issuance of a Loan Note Guarantee, the lender would not 
be allowed to be substituted without the prior written approval of the 
Agency. A substitution of the lender would have to be requested in 
writing by the borrower, the proposed substitute lender, and the 
original lender if still in existence. The Agency may approve the 
substitution of a lender if the new lender is Rural Development 
approved; agrees in writing to acquire title to any unguaranteed 
portion of the loan held by the original lender; and assumes all

[[Page 52639]]

original loan requirements and lender responsibilities.
    The Agency would not pay any loss or share in any costs with a 
substitute lender who it not in compliance with the requirement of this 
section (i.e., proposed Sec.  5001.36).
Sale or Assignment of Guaranteed Loan (Sec.  5001.37)
General
    As proposed, the lender would be allowed to sell all or part of the 
guaranteed portion of the loan on the secondary market, subject to the 
following conditions:
     Any sale or assignment by the lender of the guaranteed 
portion of the loan would have to be accomplished in accordance with 
the conditions in the Lender's Agreement.
     The lender may obtain participation in the loan under its 
normal operating procedures; however, the lender must retain sufficient 
interest to perform its duties under this part.
     The lender would be prohibited from selling or 
participating any amount of the guaranteed, or non-guaranteed, portion 
of the loan to the borrower or members of the borrower's immediate 
family, the borrower's officers, directors, stockholders, other owners, 
or a parent, subsidiary, or affiliate.
     Disposition of the guaranteed portion of a loan would not 
be allowed 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.
     The lender would be required to retain all or part of the 
unguaranteed portion of the loan. However, if the lender does not have 
preferred lender status, the lender would be required to retain a 
minimum of 5 percent of the total loan amount in its portfolio. The 
amount required to be retained would have to be of the unguaranteed 
portion of the loan and could not be participated. Lenders would be 
allowed to sell the remaining amount of the unretained portion of the 
loan only through participation.
    These provisions are generally consistent with those found in the 
four current programs. One difference concerns the minimum retention 
provision. Under the current programs, all lenders would be required to 
retain a minimum of 5 percent of the total loan amount. Under the 
proposed rule, this 5 percent requirement would apply only to lenders 
who do not have preferred lender status.
Termination of Lender Servicing Fee
    As proposed and consistent with the four current programs, the 
lender's servicing fee would stop when the Agency purchases the 
guaranteed portion of the loan from the secondary market. No such 
servicing fee would be allowed to be charged to the Agency and all loan 
payments and collateral proceeds received would be applied first to the 
guaranteed loan.
Termination of Loan Note Guarantee (Sec.  5001.38)
    This section identifies the situations under which a Loan Note 
Guarantee will terminate. These situations, which are consistent with 
those found in the regulations for the four current programs, are:
     Full payment of the guaranteed loan; or
     full payment of any loss obligation or negotiated loss 
settlement except for future recovery provisions and payments made as a 
result of the Debt Collection Improvement Act (DCIA). After final 
payment of claims to lenders and/or holders, the Agency will retain all 
funds received as the result of the DCIA; or
     written request from the lender to the Agency that the 
guarantee will terminate 30 days after the date of the request, 
provided that the lender holds all of the guaranteed portion and the 
original Loan Note Guarantee is returned to the Agency to be canceled.
Subpart B--Program Specific Provisions
    Subpart B presents the program specific requirements for each of 
the four programs covered by this subpart.
Community Facilities (Sec.  5001.101)
    This section identifies program specific requirements for community 
facility projects seeking loan guarantees. The lender and prospective 
borrower must comply both with subpart A provisions and the provisions 
in this section when seeking a community facility loan guarantee. The 
program specific provisions for community facility projects follow.
Project Eligibility
    Project eligibility for community facility projects under the 
proposed rule is similar to the requirements found in the current 
community facility regulations. The proposed rule requires projects to 
be an eligible project for public use located in a rural area, unless 
otherwise excepted, with demonstrated community support. In addition, 
the proposed rule allows leased space to qualify under certain 
conditions.
    While the proposed rule streamlines the current regulatory language 
that identifies the types of projects that are eligible, its 
requirements are intended to be consistent with the types of projects 
and purposes currently eligible for community facility guaranteed 
loans. This includes considering the various types of other 
improvements to community projects, as found in 7 CFR 3575.24(a)(2), as 
being eligible for guaranteed loans, and considering the use of funds 
identified in 7 CFR 3573.24(b) as part of an essential community 
facility. In some instances, some of the currently eligible projects 
and purposes will be addressed in guidance material (e.g., a handbook) 
rather than in the regulatory language. Overall, the intent of the 
proposed rule is to allow more flexibility, but to maintain the current 
intent of the program as to the types of projects eligible for 
community facility guaranteed loans.
    Eligible projects. As proposed, to be eligible for community 
facility funding, the project would have to meet the project 
eligibility requirements specified in subpart A and be one of the types 
of projects or purposes shown below.
     Essential community facilities. These are facilities such 
as, but not limited to, fire, rescue, health and public safety 
facilities or equipment, telecommunications, supplemental and 
supporting structures for other rural electrification or telephone 
systems, the purchase of major equipment that in themselves provide an 
essential service to rural residents, and the purchase of facilities 
necessary to improve or prevent a loss of service.
     Community services or community-based social, recreational 
or cultural services.
     Transportation infrastructure and support.
     Hydroelectric generating facilities.
     Natural gas distribution systems.
     Acquisition of land and site preparation for industrial 
parks.
    Facilities for public use. As found in the current Community 
Facilities regulation, to be eligible for Community Facility funding, 
all facilities would have to be for public purposes. These facilities 
would have to be installed to serve any user within the service area 
who desires service and can be feasibly and legally served. In 
addition, the lender would have to determine that, when feasibly and 
legally possible, inequities within the proposed project's service area 
for the same type service proposed (e.g., gas distribution systems) 
would be remedied by the owner on, or before, completion of the 
project. Under the proposed rule, inequities are defined

[[Page 52640]]

as unjustified variations in availability, adequacy, or quality of 
service. However, user rate schedules for portions of existing systems 
or facilities that were developed under different financing, rates, 
terms, or conditions would not necessarily constitute inequities.
    Leased space. As proposed, a facility would remain eligible for 
community facility funding provided it has less than 25 percent of its 
floor space occupied by ineligible organizations or activities. The 
ineligible organization and the ineligible commercial activity, 
however, must be related to and enhance the primary purpose for which 
the facility is being established by the borrower. This eligible 
purpose is being included in the proposed rule to incorporate existing 
Agency practice.
    Facility location. As found in the current Community Facilities 
regulation, another requirement to be eligible for community facility 
funding is that facilities must be located in rural areas. Two 
exceptions to this requirement are proposed. These are for:
     Utility services, such as natural gas or hydroelectric 
serving both rural and non-rural areas. In such cases, Agency funds may 
be used to finance only that portion serving rural areas, regardless of 
facility location.
     Telecommunication projects. For these projects, the part 
of the facility located in a non-rural area must be necessary to 
provide the essential services to rural areas.
    Demonstration of community support. Instead of meeting the cash 
equity criterion for determining project eligibility under subpart A, a 
community facility may instead demonstrate community support, which the 
Agency will accept in lieu of cash equity. If a facility meets the 
other criteria in proposed Sec.  5001.6(c)(2) or Sec.  
5001.12(c)(2)(ii)(B), as applicable, and this demonstration of 
community support, then the project is eligible under this program. The 
Agency is allowing the use of a community support criterion in lieu of 
cash equity because community support is often a better predictor of 
project success.
    Under the proposed rule, community support would be evidenced in 
the form of a certification of support for each project or facility 
from any affected local government body. A certificate of support would 
have to be obtained from each affected local government within the 
service area of the facility, except for essential community facilities 
owned by a local public body or a Federally-recognized Indian tribe 
serving local residents or tribal members. The certificate of support 
would have to be signed by an authorized official of the local 
government, and should include sufficient information to determine that 
a community facility will provide needed services to the community and 
will have no adverse impact on other community facilities providing 
similar services. The organization would be required to provide 
sufficient information to affected local governments as may be needed 
to obtain the certificate of support.
    While the current Community Facilities guaranteed loan regulation 
requires projects to have significant ties to the community, requiring 
a demonstration of this community support provision in the regulation 
incorporates existing Agency practice for evaluating and approving loan 
guarantee applications for Community Facilities.
Unauthorized Projects and Purposes
    Under the proposed rule, the projects and purposes identified in 
the current Community Facilities guaranteed loan program are carried 
over into this proposed rule, except for new combined sanitary and 
storm water sewer facilities. These types of combined facilities are 
excluded from the regulatory language because the Agency does not see 
such facilities ever receiving approval from other regulatory agencies 
rather than an indication that such facilities are now eligible for 
community facilities guaranteed loans.
    In addition to the unauthorized projects and purposes identified in 
subpart A, loans guaranteed with Community Facility funding can not be 
used to finance the following:
     Properties to be used for commercial rental when the 
borrower has no control over tenants and services offered except for 
industrial-site infrastructure development;
     Facilities that are 25 percent or more for the purpose of 
housing Federal or State agencies;
     Community antenna television services or facilities;
     Telephone systems;
     Facilities that are not modest in size, design, and cost; 
and
     Finder's and packager's fees.
Borrower Eligibility
    To be eligible for a community facility guaranteed loan, a 
prospective borrower must meet the eligibility criteria specified in 
subpart A of the proposed rule. In addition, subpart B for the 
Community Facilities program (see proposed Sec.  5001.101(c)) provides 
two additional requirements, where applicable, as follows:
     YMCA, YWCA, Girl Scouts, and Boy Scouts are eligible 
applicant organizations (this provision incorporates current Agency 
practice), and
     A private not-for-profit essential community facility 
(other than utilities) must have significant ties with the local rural 
community to be eligible. Such ties are necessary to ensure to the 
greatest extent possible that a facility under private control will 
carry out a public purpose and continue to primarily serve rural areas. 
This provision and the conditions associated with, as discussed below, 
are found in the current Community Facilities regulation.
    The proposed rule identifies two conditions under which ties with 
the local rural community can be evidenced. These conditions, which are 
not inclusive, are:
     Association with, or controlled by, a local public body or 
bodies or broadly based ownership and controlled by members of the 
community, and
     Substantial public funding through taxes, revenue bonds, 
or other local government sources, or substantial voluntary community 
funding such as would be obtained through a community-wide funding 
campaign.
    Credit not available elsewhere. As found in the current Community 
Facilities regulation and as proposed, to be eligible, the prospective 
borrower would have to be found by the Agency as being 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.
Additional Application Documentation Requirements
    Feasibility study. The Agency may require a feasibility study by a 
qualified independent consultant. As defined in the proposed rule, the 
feasibility study is essentially the same as found in the current 
Community Facilities regulation. However, the current Community 
Facilities guaranteed loan program makes the feasibility study a 
prerequisite, while the proposed rule does not.
Additional Guarantee- and Loan-Related Requirements
    Funding limit. Under the proposed rule, the principal amount of a 
community facility loan guaranteed under this section would not be 
allowed to exceed $50 million. The current Community Facilities 
guaranteed loan program does not have a specified funding limit. 
Community Facility

[[Page 52641]]

projects in excess of $50 million are likely to require a level of 
support or patronage beyond the local rural community that the Agency 
is concerned may be insufficient in order to sustain the project over 
the life of the loan. Therefore, consistent with the Agency's approach 
for the management of risk under the proposed rule, the Agency is 
proposing to limit the maximum size loan for Community Facility 
projects.
    Maximum percent of guarantee. The maximum loan guarantees issued to 
lenders approved under this part with community facility funding are 
specified in Table 1.

             Table 1.--Maximum Loan Guarantee Percentages for Community Facilities Guaranteed Loans
----------------------------------------------------------------------------------------------------------------
                                                                           Guaranteed loan amount
                                                           -----------------------------------------------------
                                                                               Over $5 million
 Type of rural development approved   Type of application                         up to and         Over $10*
               lender                                         $5 million or     including $10        million
                                                             less  (percent)       million          (percent)
                                                                                  (percent)
----------------------------------------------------------------------------------------------------------------
Without preferred lender status....  Low documentation....                80                na                na
                                     Full documentation...                90                90                90
With preferred lender status.......  Low documentation....                90                na                na
                                     Full documentation...                90                90               90
----------------------------------------------------------------------------------------------------------------
na = not applicable.
* Per proposed Sec.   5001.101(e)(1), the maximum guaranteed loan amount is $50 million.

    These maximum loan guarantees are the same as found in the current 
Community Facilities regulation except that, under the proposed rule, 
the maximum guarantee is 10 percentage points lower for low 
documentation applications seeking a loan guarantee of $5 million or 
less from lenders who do not have preferred lender status.
    Fees. Any guarantee fee and renewal fee charged for community 
facility guaranteed loans will be established in a Federal Register 
notice that the Agency will publish annually, as provided under subpart 
A of the proposed rule. Under the current Community Facilities program, 
a guarantee fee is charged, but a renewal fee is not.
    Parity lien requirements. Whenever both a community facility 
guaranteed loan and a community facility direct loan are utilized to 
finance a single project, the Agency will require a parity lien, unless 
the lender cannot meet its regulatory requirements. This is a new 
provision for the Community Facilities program. This parity requirement 
ensures that when community facility direct and guaranteed loans are 
used on the same project, there is an opportunity for both to be 
adequately and independently secured, which is in the financial 
interest of the Agency.
Water and Waste Disposal Facilities (Sec.  5001.102)
    This section identifies program specific requirements for water and 
waste disposal projects seeking loan guarantees. The lender and 
prospective borrower must comply both with subpart A provisions and the 
provisions in this section when seeking a water or waste disposal loan 
guarantee. The program specific provisions for water and waste disposal 
projects follow.
Project Eligibility
    Project eligibility for water and waste disposal facilities under 
the proposed rule are similar to the requirements found in the current 
water and waste disposal regulations. The proposed rule requires such 
facilities to be an eligible project for public use with demonstrated 
community support or with cash equity, as specified in the regulation. 
The location requirement for a water and waste disposal facility under 
the proposed rule is equivalent to that under the current regulation.
    While the proposed rule streamlines the current regulatory language 
that identifies the types of projects and costs that are eligible, its 
requirements are generally intended to be consistent with the types of 
projects and costs currently eligible for water and waste disposal 
guaranteed loans. This includes considering the various other types of 
improvements necessary for the successful operation or protection of 
such facilities, as found in 7 CFR 1779.24(b) and (c), and considering 
the use of funds towards those items listed in 7 CFR 1779.234(e) when 
they are a necessary part of the project. Overall, the intent of the 
proposed rule is to allow more flexibility, but to maintain the current 
intent of the program as to the types of projects and costs eligible 
for water and waste disposal guaranteed loans.
    Eligible projects and costs. To be eligible for a water and waste 
disposal guaranteed loan, a project would have to meet the requirements 
in proposed Sec.  5001.6 in subpart A and be for one of the types of 
projects or costs shown below.
     A water or waste disposal facility. Such facilities 
include, but are not limited to, drinking water, sanitary sewage, solid 
waste disposal, and storm wastewater disposal. In addition, public 
improvements necessary for the successful operation or protection of 
such facilities are included. Improvements could include, for example, 
relocating buildings, roads, fences, or utilities.
     Payment of other utility connection charges as provided in 
service contracts between utility systems.
     Refinancing any loan. Except for the refinancing of Agency 
direct loans, refinancing of other loans will be limited to a minority 
portion of the guaranteed loan.
    Facilities for public use. As proposed and as found in the current 
Water and Waste Disposal regulation, to be eligible for water and waste 
disposal funding, facilities would also have to be for public purposes. 
These facilities would have to be installed to serve any user within 
the service area who desires service and can be feasibly and legally 
served. In addition, the lender would have to determine that, when 
feasibly and legally possible, inequities within the proposed project's 
service area for the same type service proposed (e.g., gas distribution 
systems) would be remedied by the owner on, or before, completion of 
the project. Under the proposed rule, inequities are defined as 
unjustified variations in availability, adequacy, or quality of 
service. However, user rate schedules for portions of existing systems 
or facilities that were developed under different financing, rates, 
terms, or conditions would not necessarily constitute inequities.

[[Page 52642]]

    Demonstration of community support. Instead of meeting the cash 
equity criterion for determining project eligibility under subpart A, a 
water and waste disposal project may instead demonstrate community 
support, which the Agency will accept in lieu of cash equity. If a 
project meets the other criteria in proposed Sec.  5001.6(c)(2) or 
Sec.  5001.12(c)(2)(ii)(B), as applicable, and demonstrates community 
support, then the project is eligible under this program.
    Demonstration of community support would be required as discussed 
earlier in this preamble for the Community Facilities program. While 
the current Water and Waste Disposal guaranteed loan regulation 
requires projects to have significant ties to the community, this 
community support provision in the regulation incorporates current 
Agency practice for evaluating and approving loan guarantee 
applications for Community Facilities.
Unauthorized Projects and Purposes
    Under the proposed rule, the projects and purposes identified in 
the current Water and Waste Disposal guaranteed loan program are 
carried over into this proposed rule.
    In addition to the unauthorized projects and purposes identified in 
subpart A, loan guarantees with water and waste disposal funding would 
not be allowed to finance any of the following:
     Facilities that are not modest in size, design, and cost;
     Loan or grant finder's fees;
     The construction of any new combined storm and sanitary 
sewer facilities;
     Any portion of the cost of a facility that does not serve 
a rural area;
     That portion of project costs normally provided by a 
business or industrial user, such as wastewater pretreatment;
     Rental for the use of equipment or machinery owned by the 
applicant;
     For other purposes not directly related to operating and 
maintenance of the facility being installed or improved; or
     The payment of a judgment which would disqualify an 
applicant for a loan under proposed Sec.  5001.102(c)(2).
Borrower Eligibility
    Consistent with the current Water and Waste Disposal guaranteed 
loan program, to be eligible for a water and waste disposal guaranteed 
loan, a prospective borrower not only must meet the eligibility 
criteria specified in subpart A of the proposed rule, but the borrower 
eligibility criteria specified in subpart B for the water and waste 
disposal program (see proposed Sec.  5001.102(c)). Specifically, these 
criteria specify that the prospective borrower must be a particular 
type of entity and must not have credit available elsewhere, as 
discussed below.
    Eligible entity. Under the proposed rule, a prospective borrower 
would have to meet one of the following types of entities to be 
eligible for a water and waste disposal guaranteed loan:
     A public body, such as a municipality, county, district, 
authority, or other political subdivision of a State located in a rural 
area;
     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
     An Indian tribe on a Federal or State reservation or any 
other Federally-recognized Indian tribe.
    Credit not available elsewhere. As found in the current Water and 
Waste Disposal regulation, to be eligible, the prospective borrower 
would have to be found by the Agency as being 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.
Additional Application Documentation Requirements
    Feasibility study. The Agency may require a feasibility study by a 
qualified independent consultant. As defined in the proposed rule, the 
feasibility study is essentially the same as found in the current Water 
and Waste Disposal regulation. However, the current Water and Waste 
Disposal regulation makes the feasibility study a prerequisite, while 
the proposed rule does not.
    Preliminary engineering report (PER). As required under the current 
Water and Waste Disposal guaranteed loan program, applications for 
water and waste disposal facilities would have to be submitted, with 
two copies of a preliminary engineering report (PER), under the 
proposed rule. The PER is a document normally prepared by the owner's 
consulting engineer that describes the owner's present situation, 
analyzes alternatives, and proposes a specific course of action from an 
engineering and environmental perspective.
    Preliminary engineering reports would be required to conform to 
customary professional standards. If a preliminary review by the Agency 
is desired, the PER may be submitted to the Agency prior to the rest of 
the application material. To assist in their preparation, PER 
guidelines for water, sanitary sewer, solid waste, and storm sewer are 
available from the Agency. The proposed rule does not include the same 
specifics for content as found in the current Water and Waste Disposal 
regulation. It is the Agency's intent that specific content 
requirements, which would be consistent with current Agency practices 
for these reports, would be available through a handbook or other means 
available from State offices.
    Financial reports. Under the proposed rule and consistent with the 
current Water and Waste Disposal guaranteed loan program, all lenders 
would be required to obtain and analyze financial statements as 
required by the Loan Agreement. A Rural Development approved lender 
that does not have preferred lender status would be required to submit 
a copy of the analysis to the Agency within 120 days of receipt of the 
financial statements. A Rural Development approved lender with 
preferred lender status would be required to provide evidence that it 
has such analysis on file, but would not be required to submit a copy 
to the Agency unless specifically requested.
Additional Guarantee- and Loan-Related Requirements
    Maximum percent of guarantee. The maximum loan guarantees issued to 
lenders approved under this part with Water and Waste Disposal funding 
are specified in Table 2.

[[Page 52643]]



       Table 2.--Maximum Loan Guarantee Percentages for Water and Waste Disposal Facility Guaranteed Loans
----------------------------------------------------------------------------------------------------------------
                                                                           Guaranteed loan amount
                                                           -----------------------------------------------------
 Type of rural development approved                                            Over $5 million
               lender                 Type of application     $5 million or       up to and     Over $10 million
                                                             less  (percent)    including $10       (percent)
                                                                                   million
----------------------------------------------------------------------------------------------------------------
Without preferred lender status....  Low documentation....                80                na                na
                                     Full documentation...                90                90                90
With preferred lender status.......  Low documentation....                90                na                na
                                     Full documentation...                90                90               90
----------------------------------------------------------------------------------------------------------------
na = not applicable.

    These maximum loan guarantees are the same as found in the current 
Water and Waste Disposal regulation except that, under the proposed 
rule, the maximum guarantee is 10 percentage points lower for low 
documentation applications seeking a loan guarantee of $5 million or 
less from lenders who do not have preferred lender status.
    Fees. Any guarantee fee or renewal fee charged for Water and Waste 
Disposal guaranteed loans will be established in a Federal Register 
notice that the Agency will publish annually, as provided under subpart 
A of the proposed rule. Under the current Water and Waste Disposal 
program, a guarantee fee is charged, but a renewal fee is not.
Business and Industry (Sec.  5001.103)
    This section identifies program specific requirements for business 
and industry projects seeking loan guarantees. The lender and 
prospective borrower must comply both with subpart A provisions and the 
provisions in this section when seeking a business and industry loan 
guarantee. The program specific provisions for business and industry 
projects follow.
Project Eligibility
    To be eligible for a business and industry guaranteed loan, a 
project would have to meet the requirements in proposed Sec.  5001.6 in 
subpart A and the following requirements found in proposed Sec.  
5001.103(a) in subpart B. The same types of projects eligible under the 
current B&I guaranteed loan program are eligible under this proposed 
rule.
    Eligible Projects. As proposed, to be eligible for business and 
industry funding, the project would have to meet one of the following 
types of projects or purposes:
     Business and industrial acquisitions when the loan will 
keep the business from closing, prevent the loss of employment 
opportunities, or provide expanded job opportunities;
     Business conversion, enlargement, repair, modernization, 
or development;
     Purchase and development of land, easements, rights-of-
way, buildings, or facilities;
     The purchase of equipment, leasehold improvements, 
machinery, supplies, inventory, start up costs, permanent working 
capital, pollution control and abatement, or feasibility studies;
     Transportation services incidental to industrial 
development;
     Agricultural production, with advance written approval 
from the Agency, when it is not eligible for Farm Service Agency farmer 
program assistance and when it is part of an integrated business also 
involved in the processing of agricultural products;
     The purchase of membership, stocks, bonds, debentures, or 
cooperative stock (as discussed further below);
     Commercial fishing, aquaculture, commercial nurseries, 
forestry, hydroponics, or the growing of mushrooms;
     Interest during the period before the first principal 
payment becomes due or when the facility becomes income producing, 
whichever is earlier;
     Refinancing any loan. Except for the refinancing of Agency 
direct loans, refinancing of other loans will be limited to a minority 
portion of the guaranteed loan;
     Providing takeout of interim financing when the lender 
submits a complete preapplication or application in which the interim 
financing is proposed, prior to extending any portion of the interim 
loan;
     Fees and charges for professional services and routine 
lender fees and the Agency guarantee fee;
     Tourist and recreation facilities, including hotels, 
motels, and bed and breakfast establishments;
     Educational, training, or community facilities;
     Housing development sites with certain restrictions;
     Community antenna television services or facilities;
     Assistance to industries adjusting to terminated Federal 
agricultural programs or increased foreign competition; or
     Assisting cooperative organizations.
    As proposed, ``permanent working capital'' is defined as ``liquid 
assets available to support a business' long-term operations and 
growth.'' It is the Agency's position that ``permanent working 
capital'' does not include lines of credit providing temporary 
financing for seasonal financial requirements.
    Purchase of cooperative stock. Under the proposed program and 
consistent with the current B&I guaranteed loan program, loans may be 
made to individual farmers or ranchers for the purchase of cooperative 
stock provided the entity that receives the proceeds from the stock 
sale is a farmer or rancher cooperative established for the purpose of 
processing agricultural commodities; not for electricity or other 
financial investments. Proceeds from the stock sale would be allowed 
for recapitalizing existing cooperatives, developing new processing 
facilities or product lines, and expanding an existing production 
facility. In addition, the cooperative would be allowed to contract for 
services to process agricultural commodities or otherwise process 
value-added agricultural products during the 5-year period beginning on 
the operation startup date of the cooperative in order to provide 
adequate time for the planning and construction of the processing 
facility of the cooperative.
    Unauthorized projects and purposes. Consistent with those found in 
the current B&I guaranteed loan regulations, the proposed rule 
identifies specific projects and purposes that would be ineligible for 
a business and industry guaranteed loan. These are:
     Businesses housed in private homes, except when the pro-
rata value of the owner's living quarters is deleted from the value of 
the project;
     Projects in excess of $1 million that would likely result 
in the transfer of jobs from one area to another and increase direct 
employment by more than 50 employees; and

[[Page 52644]]

     Projects in excess of $1 million that would increase 
direct employment by more than 50 employees, if the project would 
result in an increase in the production of goods for which there is not 
sufficient demand, or if the availability of services or facilities is 
insufficient to meet the needs of the business.
     Interim financing.
     Distribution or payment to an individual owner, partner, 
stockholder, or beneficiary of the borrower or a close relative of such 
an individual when such individual will retain any portion of the 
ownership of the borrower.
     Assistance to Government employees and military personnel 
who are directors or officers or have a major ownership of 20 percent 
or more in the business.
     The guarantee of lease payments.
     The guarantee of loans made by other Federal agencies.
     Loans made with the proceeds of any obligation the 
interest on which is excludable from income under 26 U.S.C. 103 or a 
successor statute. Funds generated through the issuance of tax-exempt 
obligations may neither be used to purchase the guaranteed portion of 
any Agency guaranteed loan nor may an Agency guaranteed loan serve as 
collateral for a tax-exempt issue. The Agency may guarantee a loan for 
a project which involves tax-exempt financing only when the guaranteed 
loan funds are used to finance a part of the project that is separate 
and distinct from the part which is financed by the tax-exempt 
obligation, and the guaranteed loan has at least a parity security 
position with the tax-exempt obligation.
Borrower Eligibility
    To be eligible for a business and industry guaranteed loan, a 
prospective borrower not only must meet the eligibility criteria 
specified in subpart A of the proposed rule, but the borrower 
eligibility criteria specified in subpart B for the business and 
industry program (see proposed Sec.  5001.103(c)). The requirements for 
borrower eligibility under the proposed rule are consistent with those 
in the current B&I guaranteed loan regulations. Specifically, these 
criteria require that the borrower be:
     A cooperative organization, corporation, partnership, or 
other legal entity organized and operated on a profit or not-for-profit 
basis; an Indian tribe on a Federal or State reservation or other 
Federally recognized tribal group; a public body; or an individual; and
     Engaged in or proposing to engage in a business.
    Qualifying businesses include manufacturing, wholesaling, 
retailing, providing services, or other activities that provide 
employment; improve the economic or environmental climate; promote the 
conservation, development, and use of water for aquaculture; or reduce 
reliance on nonrenewable energy resources by encouraging the 
development and construction of solar energy systems and other 
renewable energy systems (including wind energy systems, geothermal 
energy systems, and anaerobic digesters for the purpose of energy 
generation).
Additional Application Process Requirements--Obligation of Funds
    Under the current B&I guaranteed loan regulations, the Agency uses 
a scoring system to prioritize applications. Under the proposed rule, 
the Agency would only use a scoring priority system to allocate funds, 
which would give a priority to encourage economic development in 
communities that are suffering economic hardships, if funds are 
insufficient to cover all approved applications. The Agency would 
establish the scoring criteria each fiscal year and provide the 
criteria in a notice that would be published in the Federal Register.
Additional Application Documentation Requirements
    Audited financial statements. As found in the current B&I 
guaranteed loan regulations, if the proposed guaranteed loan exceeds $3 
million, the Agency may require audited financial statements to be 
submitted annually when the Agency is concerned about the borrower's 
credit risk.
    Feasibility study. As found in the current B&I guaranteed loan 
regulations, the Agency may require a feasibility study by a qualified 
independent consultant for start-up businesses or existing businesses 
when the project will significantly affect the borrower's operations. 
Under the proposed rule, the Agency is clarifying that, if the Agency 
requires a feasibility study of a cooperative, the feasibility study 
would determine the viability of the business and not the individual 
farm operators.
    Certification of Non-Relocation and Market Capacity. As found in 
the current B&I guaranteed loan regulations, if the loan will exceed $1 
million and will increase direct employment by more than 50 employees, 
the lender must provide the Agency with information on non-relocation 
and market capacity using a form approved by the Agency.
Additional Lender Responsibilities--Origination--Collateral
    Under the proposed rule and as found in the current B&I guaranteed 
loan regulations, when a business and industry guaranteed loan is used 
for the purchase of cooperative stock, the lender must secure the loan, 
at a minimum, with a lien on the stock acquired with loan funds, an 
assignment of any patronage refund, and the full and unconditional 
personal or corporate guarantee of the borrower.
Additional Guarantee- and Loan-Related Requirements
    Conditional Commitment for Guarantee. Under the proposed rule and 
as found in the current B&I guaranteed loan regulations, when a 
business and industry guaranteed loan is used for the purchase of 
cooperative stock, the Conditional Commitment for Guarantee would 
require the cooperative to provide the lender with all required 
Federal, State, and local permits and other clearances involving the 
environmental aspects for review and approval.
    Issuance of Loan Note Guarantee. Under the proposed rule and as 
found in the current B&I guaranteed loan regulations, if, for the 
purchase of cooperative stock, the lender requests the Agency to the 
issue the Loan Note Guarantee before the cooperative becomes 
operational, the lender would be required to certify to the Agency that 
the cooperative has all of the required Federal, State, and Local 
permits and other clearances involving the environmental aspects for 
review and approval.
    Funding limits. Under the proposed rule and consistent with the 
current B&I guaranteed loan program, the maximum principal amount of a 
business and industry loan guaranteed that would be allowed is $25 
million, except that the maximum principal amount of a business and 
industry guaranteed loan for a cooperative organization for rural 
projects processing value added commodities would be $40 million.
    The proposed rule would also limit the total principal amounts of 
business and industry guaranteed loans made to cooperative 
organizations for a fiscal year that are in excess of $25 million to no 
more than 10 percent of the business and industry loans guaranteed for 
the fiscal year.
    Lastly, the principal amount of a business and industry guaranteed 
loan for the purchase of cooperative stock would be limited to no more 
than $600,000.
    Fees. Any guarantee fee and renewal fee charged for B&I guaranteed 
loans

[[Page 52645]]

will be established in a Federal Register notice that the Agency will 
publish annually, as provided under subpart A of the proposed rule. 
Under the current B&I program, a guarantee fee and a renewal fee are 
charged.
    As provided in proposed Sec.  5001.103(g)(4) and consistent with 
the current B&I regulations, the maximum guarantee fee that could be 
charged would be 2 percent. The guarantee fee would be allowed to be 
reduced to 1 percent if the borrower is a high impact business and is 
located in an area of long term population decline and job 
deterioration as a result of persistent economic hardship, significant 
economic loss from a Presidentially-declared disaster, or a fundamental 
structural economic change. Each fiscal year, the Agency will establish 
a limit on the maximum portion of guarantee authority available for 
that fiscal year that may be used to guarantee loans with a guarantee 
fee of 1 percent. The Agency will announce the limit in a notice 
published in the Federal Register. Once the limit has been reached, the 
guarantee fee for all additional loans obligated during the remainder 
of that fiscal year would be 2 percent.
    Maximum percent of guarantee. The maximum loan guarantees issued to 
lenders approved under this part with Business and Industry funding are 
specified in Table 3.

             Table 3.--Maximum Loan Guarantee Percentages for Business and Industry Guaranteed Loans
----------------------------------------------------------------------------------------------------------------
                                                                           Guaranteed loan amount
                                                           -----------------------------------------------------
                                                                               Over $5 million
 Type of rural development approved   Type of application                         up to and         Over $10
               lender                                         $5 million or     including $10       million*
                                                             less (percent)        million          (percent)
                                                                                  (percent)
----------------------------------------------------------------------------------------------------------------
Without preferred lender status....  Low documentation....                70                na                na
                                     Full documentation...                80                70                60
With preferred lender status.......  Low documentation....                80                na                na
                                     Full documentation...                80                70               60
----------------------------------------------------------------------------------------------------------------
na = not applicable.
*Per proposed Sec.   5001.103(g)(3), the maximum guaranteed loan amount is $25 million except for a cooperative
  producing a value added commodity for which the maximum is $40 million.

    These maximum loan guarantees are the same as found in the current 
B&I guaranteed loan regulation except that, under the proposed rule, 
the maximum guarantee is 10 percentage points lower for low 
documentation applications seeking a loan guarantee of $5 million or 
less from lenders who do not have preferred lender status.
Renewable Energy Systems and Energy Efficiency Improvements (Sec.  
5001.104)
    This section identifies program specific requirements for renewable 
energy system or energy efficiency improvement projects seeking loan 
guarantees. The lender and prospective borrower must comply both with 
subpart A provisions and the provisions in this section when seeking a 
renewable energy system or energy efficiency improvement loan 
guarantee. The program specific provisions for renewable energy systems 
and energy efficiency improvement projects follow.
Project Eligibility
    To be eligible for a renewable energy system and energy efficiency 
improvement guaranteed loan, a project would have to meet the 
requirements in proposed Sec.  5001.6 in subpart A and the following 
requirements found in proposed Sec.  5001.104 in subpart B.
    Eligible projects. As proposed, a renewable energy system or energy 
efficiency improvement project would have to be for the purchase, 
installation, expansion, and/or other energy-related improvement of a 
renewable energy system or to make energy efficiency improvements where 
the technology used is replicable and either pre-commercial or 
commercially available. These two criteria are found in the current 
Renewable Energy Systems and Energy Efficiency Improvements regulation 
(7 CFR part 4280, subpart B).
Borrower Eligibility
    To be eligible for a renewable energy systems and energy efficiency 
improvements guaranteed loan, a borrower must meet not only the 
eligibility criteria specified in subpart A of the proposed rule, but 
the borrower eligibility criterion specified in subpart B for the 
renewable energy systems and energy efficiency improvements program 
(see proposed Sec.  5001.104(b)). Specifically, this criterion, which 
is in the current Renewable Energy Systems and Energy Efficiency 
Improvements regulation, requires that the borrower be an agricultural 
producer or rural small business.
Additional Application Process Requirements--Obligation of Funds
    Under the current Renewable Energy Systems and Energy Efficiency 
Improvements regulation, the Agency uses a scoring system to prioritize 
applications. Under the proposed rule, the Agency would only use a 
scoring priority system to allocate funds to encourage development of 
promising pre-commercial and commercially available alternative energy 
sources that are currently unable to obtain financing from commercial 
lending sources if funds are insufficient to cover all approved 
applications. The Agency would establish the scoring criteria on a 
periodic basis as changes are made and provide the criteria in a notice 
that would be published in the Federal Register.
Additional Application Documentation Requirements
    In addition to the application requirements specified in subpart A, 
applications would be required to contain the following, as applicable:
    Certifications. The lender would be required to certify in the 
application that the project is able to demonstrate technical merit and 
the prospective borrower is a small agricultural producer or rural 
small business. This provision implements two requirements found in the 
current Renewable Energy Systems and Energy Efficiency Improvements 
regulation.
    Technical Report. For renewable energy systems projects seeking a 
loan guarantee of more than $200,000, a satisfactory technical report 
must be provided that demonstrates that the project is commercially 
viable and can be installed and perform as intended in a reliable, 
safe, cost-effective, and legally compliant manner. To determine the 
overall technical merit of the renewable energy system, the lender must 
submit its proposal to an approved

[[Page 52646]]

Department of Energy (DOE) laboratory and obtain a DOE technical 
report. A Rural Development approved lender that does not have 
preferred lender status must submit the DOE technical report with its 
application. A preferred lender may instead certify in the application 
that a DOE technical report, deemed satisfactory by a DOE energy 
laboratory, has been obtained prior to the request for guarantee in 
lieu of submitting the technical report with the application.
    This provision under the proposed rule differs from the current 
Renewable Energy Systems and Energy Efficiency Improvements regulation 
in that the proposed rule does not apply to renewable energy systems 
seeking a loan guarantee of $200,000 or less or to any energy 
efficiency improvement project and does not specify the contents of the 
technical report.
    Due to the variety of potential projects, the content of these 
technical reports will be negotiated with the lender/borrower and 
further guidance will be provided through an agency handbook or other 
agency documents.
    Energy assessment/audit. For energy efficiency improvement 
projects, an energy assessment, with adequate and appropriate evidence 
of energy savings expected when the system is operated as designed, 
must be provided. For energy efficiency improvement projects with total 
eligible project costs greater than $50,000, an energy audit is 
required. Preferred lenders may certify in the application that an 
energy assessment or audit, as applicable, has been obtained prior to 
the request for guarantee in lieu of submitting the assessment or audit 
with the application. These provisions are the same as found in the 
current Renewable Energy Systems and Energy Efficiency Improvements 
regulation.
    Feasibility study. Under the proposed rule and consistent with the 
current Renewable Energy Systems and Energy Efficiency Improvements 
regulation, lenders are required to obtain feasibility studies for 
projects seeking a loan guarantee of greater than $200,000. To be 
acceptable, the feasibility study would have to be conducted by a 
qualified independent consultant.
    Financial statements. Consistent with the current Renewable Energy 
Systems and Energy Efficiency Improvements regulation, but applied only 
to lenders without preferred lender status, applications from Rural 
Development approved lenders without preferred lender status must 
include financial statements for the lesser of the past 3 years or the 
business life of the applicant. If the proposed guaranteed loan exceeds 
$3 million, the Agency may require audited financial statements 
annually when the Agency is concerned about the borrower's credit risk.
Additional Servicing Requirements--Post-Construction Requirements
    Once the project has been constructed, the lender would be required 
to provide the Agency annual reports from the borrower on the 
performance characteristics and results of the projects. For renewable 
energy system projects, these reports would be provided commencing in 
the first full calendar year after construction is completed and 
continuing for 3 full years. For Energy Efficiency Improvement 
projects, these reports would be provided commencing the first full 
calendar year following the year in which project construction was 
completed and continuing for 2 full years.
    The requirement to submit these reports is consistent with that 
found in the current Renewable Energy Systems and Energy Efficiency 
Improvements regulation. However, due to the variety of potential 
projects, the proposed rule does not specify a comprehensive list of 
the report contents. Instead, the proposed rule identifies minimum 
content requirements with additional content to be negotiated between 
the Agency and the lender/borrower, which must be clearly articulated 
before the loan note guarantee is executed. Further guidance will be 
provided through an agency handbook or other agency documents.
Additional Guarantee- and Loan-Related Requirements
    Conditions precedent to issuance of loan note guarantee. In 
addition to the requirements specified in proposed Sec.  5001.33, prior 
to the issuance of the loan note guarantee for renewable energy systems 
and energy efficiency improvements loans, the following conditions 
would have to be demonstrated:
     All planned property acquisitions and development have 
been performing at a steady state operating level in accordance with 
the technical requirements, plans, and specifications;
     The project conforms with applicable Federal, State, and 
local codes; and
     Costs have not exceeded the amount approved by the lender 
and the Agency.
    The above conditions are the same as those found in the current 
Renewable Energy Systems and Energy Efficiency Improvements regulation.
    Funding limits. Consistent with the current Renewable Energy 
Systems and Energy Efficiency Improvements regulation, the amount of 
assistance, which would be based on guaranteed loans, direct loans, and 
grants provided under the proposed program, available to an eligible 
project under the Renewable Energy Systems and Energy Efficiency 
program will not exceed 50 percent of total eligible project costs. 
Eligible project costs are only those costs specified by the Agency, as 
long as the items are an integral and necessary part of the renewable 
energy system or energy efficiency improvement. The eligible project 
costs, which are the same as those found in the current Renewable 
Energy Systems and Energy Efficiency Improvements regulation, are 
identified in proposed Sec.  5001.104(f)(2)(i) through (xi).
    The proposed rule, however, is not including the minimum and 
maximum funding limits specified in the current Renewable Energy 
Systems and Energy Efficiency Improvements regulation. Currently, the 
Renewable Energy Systems and Energy Efficiency Improvements program 
requires a minimum guaranteed loan request of $5,000 and limits the 
maximum guaranteed loan amounts to the same borrower to $10 million.
    Fees. Any guarantee fee and renewal fee charged for Renewable 
Energy Systems and Energy Efficiency Improvements guaranteed loans will 
be established in a Federal Register notice that the Agency will 
publish annually, as provided under subpart A of the proposed rule. 
Under the current Renewable Energy Systems and Energy Efficiency 
Improvements program, a guarantee fee and a renewal fee are charged.
    Maximum percent of guarantee. The maximum loan guarantees issued to 
lenders approved under this part with Renewable Energy Systems and 
Energy Efficiency Improvements funding are specified in Table 4.

[[Page 52647]]



               Table 4.--Maximum Loan Guarantee Percentages for Renewable Energy System and Energy Efficiency Improvement Guaranteed Loans
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Guaranteed loan amount
                                                                                 -----------------------------------------------------------------------
                                                                                                    Over $600,000 up   Over $5 million
  Type of rural development  approved lender           Type of application        $600,000 or less  to and including      up to and     Over $10 million
                                                                                      (percent)        $5 million       including $10       (percent)
                                                                                                        (percent)          million
--------------------------------------------------------------------------------------------------------------------------------------------------------
Without preferred lender status...............  Low documentation...............                75                70                na                na
                                                Full documentation..............                85                80                70                60
With preferred lender status..................  Low documentation...............                85                80                na                na
                                                Full documentation..............                85                80                70               60
--------------------------------------------------------------------------------------------------------------------------------------------------------
na = not applicable.

    These maximum loan guarantees are the same as found in the current 
Renewable Energy Systems and Energy Efficiency Improvements regulation 
except that, under the proposed rule, the maximum guarantee is 10 
percentage points lower for low documentation applications seeking a 
loan guarantee of $5 million or less from lenders who do not have 
preferred lender status.
    The maximum percent guarantees for each of the four programs for 
lenders who have preferred lender status under the proposed rule are 
the same as the current programs. For those lenders that do not have 
preferred lender status, however, the maximum percent guarantees are 10 
percentage points less than for those lenders with preferred lender 
status. Under the current four programs, no such distinction is made.

III. Significant Differences From Current Regulations

    The purpose of this section is to discuss significant differences 
between the proposed rule and the current regulations.
A. Project Eligibility--Metric Floor Criteria
    All four current programs identify the types of projects that are 
eligible for guaranteed loans. However, none identify project 
eligibility criteria that specifically address project risk. One of the 
new features included in the proposed rule is the requirement for all 
projects to meet a minimum set of criteria (referred to as the metric 
floor criteria) that address the potential risk associated with a 
project. As discussed earlier in this preamble, by incorporating risk-
based eligibility criteria, the Agency seeks to mitigate its project 
based risk.
B. Application Documentation
    Under the proposed rule, the amount of supporting documentation 
required would, in general, depend on certain conditions associated 
with the application. These conditions are:
     Whether the project application is for a startup business 
or an existing business. (If the project is a startup business, then 
full supporting documentation must be submitted with the application.)
     Whether the lender submitting the application has 
preferred lender status. (If the lender has preferred lender status, 
the lender has the opportunity to submit an application with a reduced 
level of supporting documentation.)
     For lenders that do not have preferred lender status, 
whether the project meets certain criteria. (If it meets these 
criteria, then reduced documentation is permitted with the 
application.)
     The size of the loan guarantee being requested. (The loan 
guarantee being requested must be below certain sizes in order for its 
application to be submitted with the lower amount of supporting 
documentation.)
    The proposed rule applies the same set of criteria across all four 
programs, bringing an overall consistency to delivery. To address 
statutory intent, it also provides documentation requirements that are 
specific to some of the programs. These program-specific requirements 
include documentation such as feasibility studies, technical reports, 
certifications, and energy assessments and audits.
    Compared to the proposed rule, the amount of documentation required 
among the four current programs varies more widely from program to 
program. The program-specific requirements are similar, but not 
necessarily identical, to those currently found within the four 
programs. For example, currently, the Renewable Energy Systems and 
Energy Efficiency Improvement Projects guaranteed loan program requires 
technical reports on all projects, with required documentation levels 
differing based on a project size of more or less than $200,000. Under 
the proposed rule, technical reports will only be required on projects 
greater than $200,000. Another difference is that technical reports for 
energy efficiency improvement projects would not be required under the 
proposed rule. However, an energy assessment or audit, depending on the 
size of the energy efficiency improvement project, would be required.
C. Lender Eligibility
    The proposed rule sets up criteria for lender participation that 
are different from the existing programs. The current programs 
generally make eligible regulated and supervised lenders that possess 
the capability to service the loan being requested, and then list the 
types of lender that fit the description. The Business and Industry 
program and the Renewable Energy System and Energy Efficiency 
Improvements program (by incorporating the B&I provisions) go one step 
further in identifying additional requirements that must be met for 
lenders that are not regulated or supervised.
    Under the proposed rule, two categories of lenders are created--
regulated or supervised lenders and other lenders. Regulated or 
supervised lenders would be eligible if they are in good standing with 
their regulators. This criterion is not found under the current 
programs. In addition, regulated or supervised lenders that do not have 
an existing portfolio with the Agency would be required to file an 
application, along with a copy of their policies and procedures for 
loan origination and servicing, to the Agency to be considered for 
participation. Under the current programs, such lenders are not 
required to submit such an application or their loan origination and 
servicing policies and procedures. Lastly, the proposed rulemaking does 
not list eligible lenders by lender type. The Agency does not believe 
that it is necessary to continue listing specific types of lenders.
    The second category of lender under the proposed rule--lenders that 
are not

[[Page 52648]]

regulated or supervised lenders--would be required to submit an 
application to the Agency, along with information to document their 
capabilities and experience and including a copy of their loan 
origination and servicing policies and procedures and certificate(s) of 
good standing from the States in which they intend to conduct business. 
For the most part, this is very similar to the current B&I guaranteed 
loan program.
D. Negligent Loan Origination
    As proposed, the Agency is making clear that negligent loan 
origination will be considered in determining whether or not to reduce 
loss claims payable under the loan guarantee to the lender when a loan 
is in default. The Agency believes that negligent loan origination may 
not have been articulated as clearly as it should have been in the 
previous programs. Therefore, the Agency recognizes that there may be 
some confusion within the lending community as to whether negligent 
loan origination could result in a reduction in the guarantee. In order 
to clarify this situation, the Agency is including in the proposed rule 
a definition of negligent loan origination and making explicit that 
negligent loan origination can be used to reduce loss claims payable 
under the guarantee held by the lender when a loss has occurred.
E. Criteria for Becoming a Preferred Lender
    The current B&I guaranteed loan program has a provision for lenders 
to become certified preferred lenders. The other three programs do not 
have a similar provision.
    Under the proposed rule, any Rural Development approved lender may 
apply for preferred lender status regardless of the program in which 
the lender wishes to participate. The criteria for becoming a preferred 
lender focus on lender experience, history of losses, and instances of 
negligent origination and servicing. These criteria are somewhat 
narrower and more stringent than those in the current B&I guaranteed 
loan program for qualifying as a certified preferred lender.
F. Percent Guarantee
    The maximum percent guarantees for each of the four programs for 
lenders who have preferred lender status under the proposed rule are 
the same as the current programs, except for loans over $10 million 
under the Renewable Energy Systems and Energy Efficiency Improvement 
Projects program. For that program, the proposed rule would limit the 
maximum percent guarantees for loans over $10 million to 60 percent 
compared to the current maximum of 70 percent. This change is being 
made for consistency in the guaranteed percentage for projects with 
similar risk profiles between this program and the Business and 
Industry program. For those lenders that do not have preferred lender 
status, the maximum percent guarantees are 10 percentage points less 
than for those lenders with preferred lender status. Under the current 
four programs, no such distinction is made.
    The Agency is implementing this distinction in an effort to 
encourage more lenders to qualify under a higher standard as 
``Preferred'' lenders. This allows the Agency to better manage 
institutional risk and lower Agency loss exposure by improving the 
quality of lenders who participate in these programs and by reducing 
the size of the loan guarantee to lenders that do not qualify for 
preferred lender status.
G. Tangible Balance Sheet Equity Versus Cash Equity
    Under the current B&I guaranteed loan program, one of the 
eligibility criteria for projects is based on meeting certain tangible 
balance sheet equity requirements. The new rule proposes to use, 
instead, cash equity. The Agency is proposing this change because of 
difficulties in applying the tangible balance sheet equity criteria, 
and because the private sector is moving away from the use of tangible 
balance sheet equity as a qualifying factor. The Agency believes that 
requiring cash equity will result in greater consistency with the 
lending industry, clarified equity expectations, and stronger guarantee 
applications.
H. Oversight and Monitoring--Default Reports
    Under the proposed rule, lenders would be required to submit 
information on each loan in default, including delinquent loans, on a 
monthly basis. This is more frequent than under the four current 
programs. The Agency believes this increase in frequency is necessary 
to provide the Agency with the most current information on the status 
on loans in default within its outstanding loan guarantee portfolio, 
thereby allowing the Agency to improve risk management and reduce its 
loss exposure.
I. Preapplications
    Under the proposed rule, lenders have the option of submitting a 
preapplication to obtain Agency input. Three of the four programs 
currently allow preapplications, but preapplications are not currently 
part of the renewable energy systems and energy efficiency improvement 
project guaranteed loan program.

IV. Request for Comments

    The Agency is interested in receiving comments on all aspects of 
the proposed rule. In particular, the Agency is seeking comments in the 
areas listed below. All comments should be submitted as indicated in 
the ADDRESSES section of this preamble.
A. Project Financial Metric Criteria (Proposed Sec.  5001.6(c))
    The Agency is seeking to establish minimum financial metric 
criteria that each project must first meet in order to be eligible 
under the new program. The Agency is seeking comments on the proposed 
section as follows:
     Are these three criteria reasonable and appropriate to 
help mitigate project risk? If not, what other criteria should the 
Agency consider and why?
     Are the values proposed for the criteria reasonable? If 
not, what value(s) should the Agency consider and why?
B. Other Lender Criteria (Proposed Sec.  5001.9(b))
    The Agency is seeking to mitigate institutional risk by 
establishing an initial set of three criteria for lenders who are not 
regulated or supervised. These criteria address minimum net worth, 
liquid assets, and line(s) of credit. The Agency is seeking comments on 
these eligibility criteria for these ``other'' lenders as follows:
     Are these three criteria reasonable and appropriate to 
help manage and mitigate institutional risk? If not, what other 
criteria should the Agency consider and why?
     Are the values proposed for the criteria reasonable? If 
not, what value(s) should the Agency consider and why?
C. Preferred Lender Status Criteria (Proposed Sec.  5001.9(c)(1)(i) 
Through (iii))
    To further mitigate institutional risk, the Agency is proposing to 
designate approved lenders as ``preferred lenders'' if they meet three 
criteria. These criteria address the lender's experience in commercial 
lending, government guaranteed commercial lending, financing, or other 
activity under similar loan programs; the lender's annual losses 
depending on how long the lender has been in business; and instances of 
negligent loan origination or servicing of Federal Government loans. 
The Agency is seeking comments on these eligibility criteria for 
obtaining ``preferred lender'' status as follows:
     Are these three criteria reasonable and appropriate to 
designate approved lenders as ``preferred lenders''? If not,

[[Page 52649]]

what other criteria should the Agency consider and why?
     Are the values proposed for the criteria reasonable? If 
not, what value(s) should the Agency consider and why?
D. Low Documentation Application Content and Criteria (Proposed Sec.  
5001.12(b) and (c))
    The Agency is proposing that applications be submitted with either 
full supporting documentation or low supporting documentation, with 
criteria proposed for determining when a lender may submit a low 
documentation application. The Agency is seeking comments on the 
following areas:
     Proposed Sec.  5001.12(b) identifies five supporting 
documents (as found in proposed Sec.  5001.12(a)(2) through (a)(6)) 
that need to be submitted with the application and eight supporting 
documents (as found in proposed Sec.  5001.12(a)(7) through (a)(14)) 
that do not need to be submitted, but which the lenders must certify 
that they possess and used in the analysis of the project. Is this a 
reasonable and appropriate ``split'' between the documentation to be 
submitted versus the documentation to be certified to? If not, what 
would you recommend and why?
     Proposed Sec.  5001.12(c)(2)(ii)(A) through (E) proposes 
five project criteria that must be met in order for lenders that do not 
have preferred lender status to submit low documentation applications. 
Are these reasonable and appropriate criteria? If not, what other 
criteria should the Agency consider and why? Are the values proposed 
for the criteria reasonable? If not, what value(s) should the Agency 
consider and why?
     Proposed Sec.  5001.12(c)(2)(i) proposes to set the 
guaranteed loan value for submitting a low documentation application at 
$5 million; that is, if the guaranteed loan value is less than $5 
million, a low documentation application may be submitted. As stated 
earlier in the preamble, the Agency is proposing to limit the 
guaranteed loan value in order to offset Agency loss exposure. The 
Agency is seeking comment on (1) whether this is an appropriate value, 
(2) whether the value should vary depending on the program (e.g., a 
different threshold value for community facilities versus renewable 
energy systems) and (3) whether an alternative method (e.g., using an 
annual average loan value; the median loan value) should be used.
     As proposed in subpart B for each of the four programs, 
the Agency is further proposing to reduce the maximum loan guarantee by 
10 percentage points for low documentation applications submitted by 
approved lenders who do not have preferred lender status. As stated 
earlier in the preamble, the Agency is proposing this reduction in 
maximum loan guarantee in order to offset Agency loss exposure. The 
Agency is seeking comment on (1) whether this is an appropriate value, 
(2) whether the value should vary depending on the program, and (3) 
whether the reduction should be applied to preferred lenders.
E. Reporting Frequency (Proposed Sec.  5001.4(b))
    The Agency is seeking comments on the frequency for periodic 
reports and for default reports as proposed in Sec.  5001.4(b)(2). For 
periodic reports, the Agency is interested in comments on whether more 
frequent reporting (i.e., monthly) would be useful to the Agency and 
what increase level of lender burden would be associated with more 
frequent reporting. For default reports, if you propose an alternative 
frequency, please address how the alternative frequency would allow the 
Agency to maintain up-to-date information on the status of the 
guaranteed loans in default or explain why the Agency's proposed 
information requirements are onerous, in order to adequately manage and 
mitigate its guaranteed loan portfolio risk and loss exposure.

List of Subjects

7 CFR 1779

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

7 CFR 3575

    Community facilities, Guaranteed loans, Loan programs.

7 CFR 4279 and 4280

    Loan programs--Business and industry--Rural development assistance, 
Economic development, Energy, Direct loan programs, Grant programs, 
Guaranteed loan programs, Renewable energy systems, Energy efficiency 
improvements, Rural areas.

7 CFR Part 5001

    Business and industry, Community facility, Energy efficiency 
improvement, Loan programs, Renewable energy, Rural Development, Rural 
areas, Water and waste disposal.
    For the reasons set forth in the preamble, under the authority at 5 
U.S.C. 301 and 7 U.S.C. 1989, Chapters XVII, XXXV, and XLII of title 7 
of the Code of Federal Regulations are proposed to be amended and 
Chapter L is proposed to be established as follows:

CHAPTER XVII--RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE

PART 1779--[REMOVED]

    1. Part 1779 is removed and reserved.

CHAPTER XXXV--RURAL HOUSING SERVICE, DEPARTMENT OF AGRICULTURE

PART 3575--[REMOVED]

    2. Part 3575 is removed and reserved.

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

PART 4279--GUARANTEED LOANMAKING

    3. The authority citation for part 4279, continues to read as 
follows:

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

Subpart B of Part 4279 [Removed and Reserved]

    4. Subpart B of part 4279 is removed and reserved.

PART 4280--LOANS AND GRANTS

    5. The authority citation for part 4280, continues to read as 
follows:

    Authority: 7 U.S.C. 8106.

Subpart B of Part 4280 [Removed and Reserved]

    6. Subpart B of part 4280, is removed and reserved.
    7. Chapter L consisting of parts 5000 through 5099 is established 
and a new part 5001 is added to read as follows:

CHAPTER L--RURAL DEVELOPMENT, DEPARTMENT OF AGRICULTURE

PART 5001--GUARANTEED LOANS

Subpart A--General Provisions

Sec.
5001.1 Purpose.
5001.2 Definitions and abbreviations.
5001.3 Agency authorities.
5001.4 Oversight and monitoring.
5001.5 Forms, regulations, and instructions.

Basic Eligibility Provisions

5001.6 Project eligibility.
5001.7 Unauthorized projects and purposes.
5001.8 Borrower eligibility.
5001.9 Lender eligibility and designation.
5001.10 [Reserved]

Basic Guarantee Application Provisions

5001.11 Guarantee application process.
5001.12 Guarantee application content.
5001.13-5001.14 [Reserved]

Basic Lender Provisions

5001.15 Lender responsibilities--General.

[[Page 52650]]

5001.16 Lender responsibilities--Origination.
5001.17 Lender responsibilities--Servicing.
5001.18-5001.24 [Reserved]

Basic Borrower Provisions

5001.25 Borrower responsibilities.
5001.26-5001.29 [Reserved]

Basic Guarantee and Loan Provisions 5001.30

General.
5001.31 Guaranteed loan requirements.
5001.32 Conditional commitment for guarantee.
5001.33 Conditions precedent to issuance of Loan Note Guarantee.
5001.34 Issuance of the guarantee.
5001.35 Alterations to loan instruments.
5001.36 Reorganizations.
5001.37 Sale or assignment of guaranteed loan.
5001.38 Termination of Loan Note Guarantee.
5001.39-5001.100 [Reserved]
Subpart B--Program Specific Provisions
5001.101 Community Facilities Program.
5001.102 Water and Waste Disposal Facilities Program.
5001.103 Business and Industry Program.
5001.104 Renewable Energy Systems and Energy Efficiency Improvements 
Program.
5001.105-5001.200 [Reserved]


    Authority: 5 U.S.C. 301; 7 U.S.C. 1926(a)(1); 7 U.S.C. 1932(a); 
7 U.S.C. 8106.

Subpart A--General Provisions


Sec.  5001.1  Purpose.

    This part regulates the making, guaranteeing, holding, servicing, 
and liquidating of Rural Development guaranteed loans.


Sec.  5001.2  Definitions and abbreviations.

    (a) General definitions. The following definitions are applicable 
to the terms used in this part.
    Agency. The Rural Housing Service or successor for the programs it 
administers; the Rural Utilities Service or successor for the programs 
it administers; and the Rural Business--Cooperative Service or 
successor for the programs it administers.
    Agricultural producer. An individual or entity directly engaged in 
the production of agricultural products, including crops (including 
farming); livestock (including ranching); forestry products; 
hydroponics; nursery stock; or aquaculture, whereby 50 percent or 
greater of their gross income is derived from the operations.
    Applicant. The entity that is seeking a loan guarantee under this 
part.
    Arm's length transaction. A transaction between ready, willing, and 
able disinterested parties who are not affiliated with or related to 
each other and have no security, monetary, or stockholder interest in 
each other.
    Assignment guarantee agreement. A signed, Agency-approved agreement 
between the Agency, the lender, and the holder setting forth the terms 
and conditions of an assignment of a guaranteed portion of a loan or 
any part thereof.
    Assurance agreement. A signed, Agency-approved agreement between 
the Agency and the lender that assures the Agency that the lender is in 
compliance with and will continue to be in compliance with Title VI of 
the Civil Rights Act of 1964, 7 CFR part 15, and Agency regulations 
promulgated there under.
    Biomass. Any organic material, excluding paper that is commonly 
recycled and unsegregated solid waste, that is available on a renewable 
or recurring basis, including agricultural crops; trees grown for 
energy production; wood waste; wood residues; plants, aquatic plants 
and grasses; natural fibers; animal waste and other waste materials; 
and fats, oils, and greases, including recycled fats, oils, and 
greases.
    Borrower. The entity that borrows money from the lender, including 
any party or parties liable for the guaranteed loan except guarantors.
    Business plan. A comprehensive document that clearly describes the 
applicant's ownership structure and management experience including, if 
applicable, discussion of a parent, affiliates, and subsidiaries; a 
discussion of how the applicant will operate the proposed project, 
including, at a minimum, a description of the business and project, the 
products and services to be provided, pro forma financial statements 
for a period of 2 years, including balance sheet, income and expense, 
and cash flows, and the availability of the resources necessary to 
provide those product and services.
    Collateral. The asset(s) pledged by the borrower in support of the 
loan.
    Commercially available. A system that has a proven operating 
history of viability of at least one year, specific to the proposed 
application. Such a system is based on established design, and 
installation procedures and practices. Professional service providers, 
trades, large construction equipment providers, and labor are familiar 
with installation procedures and practices. Proprietary and balance of 
system equipment and spare parts are readily available. Service is 
readily available to properly maintain and operate the system. An 
established warranty exists for parts, labor, and performance.
    Community support. Sufficient evidence of the area to be served 
that there is enough demand and support for the service or facility to 
make the project economically viable.
    Conditional commitment for guarantee. An Agency-approved form to 
the lender that the loan guarantee it has requested is approved subject 
to the completion of all conditions and requirements contained in the 
commitment as set forth by the Agency.
    Conflicts of interest. Conflicts of interest include, but are not 
limited to, distribution or payment of guaranteed loan funds or award 
of project contracts to an individual owner, partner, stockholder, or 
beneficiary of the lender or borrower or an immediate family member of 
such an individual when such individual will retain any portion of the 
ownership of the lender or borrower.
    Cooperative organization. Any entity that is not legally chartered 
as a cooperative and that is owned and operated for the benefit of its 
members, including the manner in which it distributes its dividends and 
assets, provided those members are not employees of the organization.
    Debt coverage ratio. The ratio obtained when dividing the net 
operating income by a business's annual debt service. The annual debt 
service equals the annual total of all interest and principal paid for 
all loans on a business.
    Default. The condition that exists when a borrower is not in 
compliance with the promissory note, the loan agreement, or other 
related documents evidencing the loan.
    Delinquent loan. A loan for which a scheduled loan payment has not 
been received by the due date or within any grace period as stipulated 
in the promissory note and loan agreement.
    Eligible project costs. Those expenses approved by the Agency for 
the project.
    Energy assessment. A report conducted by an experienced energy 
assessor, certified energy manager or professional engineer assessing 
energy cost and efficiency. The report identifies and provides a 
savings and cost analysis of low-cost/no-cost measures, estimates 
overall costs and expected energy savings from the funded improvements, 
and dollars saved per year and provides an estimate of the anticipated 
weighted-average payback period in years.
    Energy audit. A report conducted by a Certified Energy Manager or 
Professional Engineer that focuses on potential capital-intensive 
projects and involves detailed gathering of field data and engineering 
analysis. The report will provide detailed project costs and

[[Page 52651]]

savings information with a high level of confidence sufficient for 
major capital investment decisions similar to but in more detail than 
an energy assessment.
    Energy efficiency improvement. A product or process installed in a 
facility, or building, that reduces energy consumption.
    Essential community facility. The physical structure financed or 
the resulting service provided to primarily rural residents that 
combined or severally must:
    (i) Perform or fulfill a function customarily provided by a local 
unit of government;
    (ii) Be a public improvement needed for the orderly development of 
a rural community;
    (iii) Not include a project that benefits a single individual or 
group of single individuals as opposed to a class within a community;
    (iv) Not include commercial or business undertakings (except for 
limited authority for industrial parks);
    (v) Be within the area of jurisdiction or operation for eligible 
public bodies or a similar local rural service area of a not-for-profit 
corporation; and
    (vi) Be located in a rural area.
    Existing business. A business that has been in operation for at 
least one full year. Mergers or changes in business name or legal type 
of currently operating businesses are considered to be existing 
businesses as long as the business purpose has not changed 
significantly.
    Feasibility study. An analysis of the economic, market, technical, 
financial, and management capabilities of a proposed project or 
business in terms of its expectation for success.
    Future recovery. Funds collected by lender after final loss claim.
    Guaranteed loan. A loan made and serviced by a lender for which the 
Agency has issued a Loan Note Guarantee.
    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. The person or entity, other than the lender, who owns all 
or part of the guaranteed portion of the loan with no servicing 
responsibilities.
    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.
    Interim financing. A temporary or short-term loan made with the 
clear intent that it will be repaid through another loan, cash, or 
other financing mechanism.
    Lender. The organization making, servicing, and collecting the loan 
that is guaranteed under the provisions of this part.
    Lender's agreement. The Agency-approved signed agreement between 
the Agency and the lender setting forth the lender's loan 
responsibilities under an issued Loan Note Guarantee.
    Lender's analysis. The analysis and evaluation of the credit 
factors associated with each guarantee application to ensure loan 
repayment through the use of credit document procedures and an 
underwriting process that is consistent with industry standards and the 
lender's written policy and procedures.
    Loan agreement. The Agency-approved agreement between the borrower 
and lender containing the terms and conditions of the loan and the 
responsibilities of the borrower and lender.
    Loan classification. The process by which loans are examined and 
categorized by degree of potential loss in the event of default.
    Loan Note Guarantee. The Agency-approved agreement containing the 
terms and conditions of the guarantee of an identified loan.
    Loan-to-value ratio. The ratio of the dollar amount of a loan to 
the dollar value of the collateral pledged as security for the loan.
    Local government. A county, municipality, town, township, village, 
or other unit of general government below the State level. The term 
also includes tribal governments when tribal lands are within the 
service area.
    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.
    Negligent loan origination.
    (i) The failure of a lender to perform those services that a 
reasonably prudent lender would perform in originating its own 
portfolio of unguaranteed loans; or
    (ii) The failure of the lender to perform its origination 
responsibilities in accordance with the origination policies and 
procedures in use by the lender at the time of the loan.
    (iii) The term includes the concepts of failure to act, not acting 
in a timely manner, or acting in a manner contrary to the manner in 
which a reasonably prudent lender would act.
    Negligent loan servicing.
    (i) The failure of a lender to perform those services that a 
reasonably prudent lender would perform in servicing and liquidating 
its own portfolio of unguaranteed loans; or
    (ii) The failure of the lender to perform its servicing 
responsibilities in accordance with its current servicing policies and 
procedures.
    (iii) The term includes the concepts of failure to act, not acting 
in a timely manner, or acting in a manner contrary to the manner in 
which a reasonably prudent lender would act.
    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.
    Permanent working capital. Liquid assets available to support a 
business's long-term operations and growth.
    Person. Any individual, corporation, company, foundation, 
association, labor organization, firm, partnership, society, joint 
stock company, group of organizations, or State or local government.
    Post-application. The date that the Agency receives an essentially 
completed application. An ``essentially completed'' application is an 
application that contains all parts necessary for the Agency to 
determine applicant and project eligibility, to score the application, 
and to conduct the technical evaluation.
    Pre-commercial technology. Technology that has emerged through the 
research and development process and has technical and economic 
potential for commercial application, but is not yet commercially 
available.
    Preliminary engineering report. A document normally prepared by the 
owner's consulting engineer that describes the owner's present 
situation, analyzes alternatives, and proposes a specific course of 
action from an engineering and environmental perspective. For further 
details see RUS Bulletins 1780-2, -3, -4, and -5.
    Promissory Note. A legal instrument that a borrower signs promising 
to pay a specific amount of money at a stated time or on demand. 
``Note'' or ``Promissory Note'' shall also be construed to include 
``Bond'' or other evidence of debt where appropriate.
    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 can not, meet obligations to protect or preserve 
collateral.
    Public body. A municipality, county, or other political subdivision 
of a State; a special purpose district; or an Indian tribe on a Federal 
or State reservation or other Federally recognized Indian tribe or an 
organization controlled by any of the above.

[[Page 52652]]

    Regulated or supervised lender. A lender that is subject to credit 
examination and supervision by an appropriate agency of the United 
States or a State that supervises and regulates credit institutions.
    Renewable energy. Energy derived from a wind, solar, biomass, or 
geothermal source; or hydrogen derived from biomass or water using 
wind, solar, biomass, or geothermal energy sources.
    Renewable energy system. A system that produces or produces and 
delivers usable energy from a renewable energy source.
    Report of loss. An Agency-approved form used by lenders when 
reporting a loss under an Agency guarantee.
    Rural or rural area.
    (i) For purposes of providing Business and Industry, or Renewable 
Energy/Energy Efficiency loan guarantees, Rural and Rural area are 
defined as any area of a State other than a city, town, or Census 
Designated Place that has a population of more than 50,000 inhabitants, 
according to the latest decennial census of the United States, and the 
contiguous and adjacent urbanized area.
    (ii) For the purpose of providing Community Facilities loan 
guarantees, the terms ``rural'' and ``rural area'' mean a city, town, 
or unincorporated area with a population of not more than 20,000 
inhabitants according to the latest decennial census.
    (iii) For the purpose of providing Water and Waste Disposal loan 
guarantees, Rural or Rural area is defined as any area not in a city, 
town, or unincorporated area with a population in excess of 10,000 
inhabitants, according to the latest decennial census of the United 
States.
    (iv) For the purposes of this definition, cities and towns are 
incorporated population centers with definite boundaries, local self-
government, and legal powers set forth in a charter granted by the 
State. For Puerto Rico, Census Designated Place (CDP), as defined by 
the U.S. Census Bureau, will be used as the equivalent to city or town. 
The appropriate population limit by applicable program will apply to 
the population of CDP.
    Small agricultural producer. An agricultural producer producing 
agricultural products with a gross market value of less than $600,000 
in the preceding year.
    Small business. An entity is considered a small business in 
accordance with the Small Business Administration's (SBA) small 
business size standards by the North American Industry Classification 
System (NAICS) found in Title 13 CFR part 121. A private entity, 
including a sole proprietorship, partnership, corporation, cooperative 
(including a cooperative qualified under section 501(c)(12) of the 
Internal Revenue Code), and an electric utility, including a Tribal or 
governmental electric utility, that provides service to rural consumers 
on a cost-of-service basis without support from public funds or subsidy 
from the Government authority establishing the district, provided such 
utilities meet SBA's definition of small business. These entities must 
operate independent of direct Government control. With the exception of 
the entities described above, all other not-for-profit entities are 
excluded.
    Startup business. A business that is a newly opened establishment 
that has been in operation for less than one full year. Newly-formed 
entities building ground-up facilities, even if there are affiliated 
businesses doing the same kind of business, are new businesses.
    State. Any of the 50 States, the Commonwealth of Puerto Rico, the 
District of Columbia, 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.
    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 projects that qualify for a guaranteed loan under this part.
    Substantive change. Any change in the purpose of the loan, the 
financial condition of the borrower, or the collateral, that might 
jeopardize loan performance.
    Total project cost. The sum of all costs associated with a 
completed project.
    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.
    Unincorporated area. A Census Designated Place.
    Water and waste disposal facility. A physical structure or series 
of structures used to provide water and waste disposal services. Such 
structures include, but are not necessarily limited to, those for rural 
drinking water, sanitary sewage, solid waste disposal, and storm 
wastewater disposal.
    (b) Abbreviations. The following are applicable to this part:
    RUS--Rural Utilities Service.
    SBA--Small Business Administration.


Sec.  5001.3  Agency authorities.

    (a) Exception authority. Except as specified in paragraphs (a)(1) 
through (4) of this section, the applicable Administrator may, on a 
case-by-case basis, make exceptions to any requirement or provision of 
this part, if such exception is necessary to implement the intent of 
the authorizing statute in a time of national emergency or in 
accordance with a Presidentially declared disaster, or when such an 
exception is in the best financial interests of the Federal Government 
and is otherwise not in conflict with applicable law.
    (1) Applicant and borrower eligibility. No exception to applicant 
or borrower eligibility can be made.
    (2) Project eligibility. No exception to project eligibility can be 
made.
    (3) Rural area definition. No exception to the definition of rural 
area, as defined in Sec.  5001.2, can be made.
    (4) Term length. No exception to the maximum length of the loan 
term, as specified in Sec.  5001.31(c), can be made.
    (b) Appeal rights. A person may seek a review of an Agency decision 
under this part from the appropriate Agency official that oversees the 
program in question or appeal to the National Appeals Division in 
accordance with 7 CFR part 11 of this title.


Sec.  5001.4  Oversight and monitoring.

    (a) General. The Agency will conduct oversight and monitoring of 
all lenders involved in any manner with any guarantee under this 
program to ensure compliance with this Part including ensuring lenders 
continue to meet the criteria for being an approved lender or a 
preferred lender. Such oversight and monitoring will include, but is 
not limited to, reviewing lender records and meeting with lenders. In 
addition, the Agency will review all approved and preferred lenders for 
eligibility at least every two years.
    (b) Reports and notifications. The Agency will require lenders to 
submit to the Agency reports and notifications to facilitate the 
Agency's oversight and monitoring. These reports and notifications 
include, but are not necessarily limited to:
    (1) Periodic reports regarding the condition of its Agency 
guaranteed loan portfolio (including borrower status and loan 
classification) and any material change in the general financial 
condition of the lender since the last periodic report to be submitted 
semiannually.
    (2) If a loan goes into default, the lender shall provide a monthly 
default report in a form approved by the Agency.

[[Page 52653]]

    (3) Notification within 5 days of:
    (i) any loan agreement violation by any borrower, including when a 
borrower is 30 days past due or is otherwise in default; and
    (ii) any permanent or temporary reduction in interest rate.


Sec.  5001.5  Forms, regulations, and instructions.

    Copies of all forms, regulations, and instructions referenced in 
this part may be obtained through the Agency.

Basic Eligibility Provisions


Sec.  5001.6  Project eligibility.

    To be eligible for a guaranteed loan under this part, at a minimum, 
a project must meet each of the requirements specified in paragraphs 
(a) through (d) of this section.
    (a) The project must benefit a rural area.
    (b) The project must meet the ownership, control, and revenue 
requirements specified in subpart B of this part.
    (c) The project must meet the following financial metric criteria:
    (1) A debt coverage ratio of 1.0 or higher;
    (2) A cash equity of 10 percent for guarantees on loans to existing 
businesses and 20 percent cash equity for guarantees on loans to 
startup businesses as determined using Generally Accepted Accounting 
Principles, or, as specified in Subpart B, community support; and
    (3) A loan-to-value ratio of no more than 1.0.
    (d) For projects that are determined by a service area, boundaries 
for the proposed service area must be chosen in such a way that no user 
or area will be excluded because of race, color, religion, sex, marital 
status, age, disability, or national origin. This does not preclude:
    (1) Financing or constructing projects in phases when it is not 
practical to finance or construct the entire project at one time, and
    (2) Financing or constructing facilities where it is not 
economically feasible to serve the entire area, provided economic 
feasibility is determined on the basis of the entire system or facility 
and not by considering the cost of separate extensions to, or parts 
thereof. Additionally, the borrower must publicly announce a plan for 
extending service to areas not initially receiving service. Also, the 
borrower must provide written notice to potential users located in the 
areas not to be initially served.


Sec.  5001.7  Unauthorized projects and purposes.

    Loans guaranteed under this part must not be used for any projects 
other than those authorized in subpart B of this part. In addition, 
loan proceeds must not be used for:
    (a) Investment or arbitrage, or speculative real estate investment.
    (b) Racetracks, golf courses, water parks, ski slopes, or similar 
recreational facilities listed in the annual Notice of Funds 
Availability.
    (c) Any business deriving more than 10 percent of its annual gross 
revenue from gambling activity.
    (d) Prostitution or businesses deriving income from activities of a 
prurient sexual nature.
    (e) Any line of credit, lease payment, or loan made by other 
Federal agencies.
    (f) Any project eligible for Rural Rental Housing and Rural 
Cooperative Housing loans under sections 515, 521, and 538 of the 
Housing Act of 1949, as amended.
    (g) Any facility used primarily for the purpose of housing Federal 
or State agencies.
    (h) Finders', packagers', or loan brokers? fees.
    (i) Any business deriving income from the sale of illegal drugs, 
drug paraphernalia, or any other illegal product.
    (j) Rental for the use of equipment or machinery owned by the 
applicant.
    (k) The payment of a judgment.
    (l) Any project resulting in a conflict of interest.
    (m) Properties to be used for commercial rental when the borrower 
has no control over tenants and services offered except for industrial-
site infrastructure development and limited sections of essential 
community facilities when the activity in the leased space is related 
to and enhances the primary purpose for which the facility is being 
established by the borrower.
    (n) Any project located within the Coastal Barriers Resource System 
that does not qualify for an exception as defined in section 6 of the 
Coastal Barriers Resource Act, 16 U.S.C. 3501 et seq.
    (o) Any project located in a special flood or mudslide hazard area 
as designated by the Federal Emergency Management Agency in a community 
that is not participating in the National Flood Insurance Program 
unless the project is an integral part of a community's flood control 
plan.
    (p) Any other similar project or purpose that the Agency determines 
is ineligible for funding under this part and publishes in a Federal 
Register notice.


Sec.  5001.8  Borrower eligibility.

    (a) Eligible entities. To be eligible, a prospective borrower must 
meet the requirements specified in paragraphs (a)(1) and (2) of this 
section and in subpart B to this part, as applicable.
    (1) Citizenship. Individual borrowers must be citizens of the 
United States (U.S.), or reside in the U.S. after legal admittance for 
permanent residence. Entities other than individuals must be at least 
51 percent owned by persons who are U.S. citizens or are legally 
admitted permanent residents residing in the U.S.
    (2) Legal authority and responsibility. Each borrower must have, or 
obtain, the legal authority necessary to construct, operate, and 
maintain the proposed facility and services and to obtain, give 
security for, and repay the proposed loan.
    (b) Ineligible entities. A borrower will be considered ineligible 
for a guarantee due to an outstanding judgment obtained by the U.S. in 
a Federal Court (other than U.S. Tax Court), is delinquent on the 
payment of Federal income taxes, is delinquent on Federal debt, or is 
debarred or suspended from receiving Federal assistance.


Sec.  5001.9  Lender eligibility and designation.

    Only lenders approved by the Agency are eligible to participate in 
the guaranteed loan programs described in this part.
    (a) Regulated and supervised lenders. Any regulated or supervised 
lender who is not otherwise debarred or suspended by the Federal 
government is eligible to participate in the guaranteed loan programs 
described in subpart B to this part.
    (1) The requirements for a regulated or supervised lender that does 
not have an existing portfolio of guaranteed loans with the Agency to 
be eligible to participate are identified in paragraph (a)(1)(i) of 
this section. The requirements for a regulated or supervised lender 
that has an existing portfolio of guaranteed loans with the Agency to 
be eligible to participate are identified in paragraph (a)(1)(ii) of 
this section.
    (i) A regulated or supervised lender that does not have an existing 
portfolio of guaranteed loans with the Agency must apply for lender 
approval to the Agency in the State in which it is chartered. The 
lender must also submit with the application a copy of its current 
written policies and procedures for loan origination and servicing. A 
lender must be in good standing with its regulator to be approved for 
participation.

[[Page 52654]]

    (ii) A regulated or supervised lender that has an existing 
portfolio of guaranteed loans with the Agency is considered ``proved'' 
for participation and is not required to submit an application for 
lender approval. Such lender, however, is required, as specified by the 
Agency, to certify that it is in good standing with its regulator and 
submit copies of its current written policies and procedures for loan 
origination and servicing.
    (2) If approved, the lender may sign a Lender's Agreement with the 
Agency. If the Lender's Agreement is executed by the lender and the 
Agency, the lender may submit an application for guarantee in any State 
in which it is authorized to do business. Approval for participation 
constitutes approval to participate in all guaranteed loan programs 
described in this part.
    (3) Approved status is maintained as long as the lender remains in 
good standing with its regulator, in conformance with this part, or 
until otherwise notified by the Agency.
    (b) Other lenders. Any lender not eligible in paragraph (a) of this 
section that wishes to originate or service a new loan under this part, 
who is not otherwise debarred or suspended by the Federal government, 
may apply for approved status, as specified in paragraph (b)(1) of this 
section, provided it has a minimum net worth of $2.5 million; liquid 
assets of at least $500,000; and an Agency-approved line of credit that 
totals $5 million or more.
    (1) Application for lender approval. The lender must submit an 
application to the Rural Development State Office in the State in which 
the lender is chartered providing the following information:
    (i) Evidence showing that the lender has the necessary capital, 
resources, and funding capacity to successfully meet its 
responsibilities;
    (ii) Copies of any license, charter, or other evidence of legal 
authority to engage in the proposed loan making and servicing 
activities;
    (iii) Certificate(s) of good standing from the States in which they 
intend to conduct business; and
    (iv) Description of its lending history and experience, including:
    (A) evidence of demonstrated expertise in loan origination, making, 
securing, servicing, and collecting loans; length of time in the 
commercial lending business; experience with government guaranteed 
lending, particularly within any of the subject programs; the range and 
volume of lending and servicing activity; the current status of the 
loan portfolio; the lender's commercial loan fee structure; and the 
level of experience of the lender's management, lending, and servicing 
staff;
    (B) copies of the lender's credit evaluation policy and procedures 
documents, including evidence of the criteria stated in Sec.  
5001.16(b); the lender's loan origination and servicing policies and 
procedures, including delineating ratio requirements and minimum 
reserves, delineating collection, loan document compliance, post-
closing financial statement analysis, verification of payment of taxes 
and insurance, and maintenance of liens; and audited financial 
statements not more than 1 year old;
    (C) documented sources of funds for funding and closing loans; and
    (D) office location(s) and proposed lending area(s).
    (2) Agency review. The Agency will review the application and 
request additional clarification or information if necessary. If 
approved, the lender may sign a Lender's Agreement with the Agency. If 
the Lender's Agreement is executed by the lender and the Agency, the 
lender may submit an application for guarantee in any State in which it 
is authorized to do business. Approved status is maintained as long as 
the lender meets or exceeds minimum Agency requirements.
    (c) Lender designation. A lender that meets the criteria specified 
in paragraph (a) or (b) of this section will be designated as a ``Rural 
Development Approved lender'' under this part. A Rural Development 
approved lender may submit to the Agency at any time, including when 
submitting its application for lender approval, an application for 
designation as a Preferred lender. No Rural Development approved lender 
will be afforded preferred lender status until approved by the Agency.
    (1) The criteria the Agency will use to determine if a Rural 
Development approved lender qualifies for preferred lender status are:
    (i) Current level of experience in commercial lending, government 
guaranteed commercial lending, financing, or other activity under 
similar loan programs;
    (ii) If the lender has been making commercial loans for 5 or more 
years, has had no annual losses in the last 5 years greater than 1 
percent of its outstanding commercial loan portfolio or if the lender 
has been making commercial loans for less than 5 years, has had no 
losses for the length of time the lender has been making commercial 
loans; and
    (iii) Having no more than one instance of Federal government 
negligent loan origination or servicing.
    (2) If approved as a Preferred lender, the lender has preferred 
lender status in each State.
    (3) Preferred lender status is maintained as long as the lender 
continues to meet each of the criteria under which it was approved as 
specified in paragraph (c)(1) of this section. Maintenance of preferred 
lender status will be based on paragraphs (c)(1)(i), (c)(1)(ii)(A), and 
(c)(1)(iii) for all lenders who have been making commercial loans for 5 
years or more, including those lenders who received Preferred lender 
status when having less than 5 years of commercial loan experience.


Sec.  5001.10  [Reserved]

    Basic Guarantee Application Provisions


Sec.  5001.11  Guarantee application process.

    (a) Beginning the process. Any lender may submit a pre-application 
or a full application to begin an application for guarantee.
    (1) Pre-application. Based on the information in the pre-
application, the Agency will make an informal assessment of the 
eligibility of the prospective borrower and project. The Agency will 
provide written informal comments regarding the pre-application's 
strengths and weaknesses. The Agency's assessment may change based on 
subsequently submitted information, is solely advisory in nature, does 
not obligate the Agency to approve a guarantee request, and is not 
considered a favorable or adverse decision by the Agency.
    (2) Guarantee application. For each guarantee request, the lender 
must submit to the Agency an application that is in conformance with 
Sec.  5001.12.
    (b) Guarantee application evaluation. All loan guarantee 
applications will be evaluated according to this part.
    (1) The Agency will notify the lender in writing of its decision.
    (2) In the evaluation of the application, the Agency may require 
the lender to obtain additional assistance in those areas where the 
lender does not have the requisite expertise to originate or service 
the loan.


Sec.  5001.12  Guarantee Application Content.

    All guarantee applications must contain the information specified 
in either paragraph (a) or (b) of this section, as determined under 
paragraph (c), and as specified in subpart B of this part.

[[Page 52655]]

    (a) Full documentation applications. Full documentation 
applications must contain the following:
    (1) Agency-approved application forms;
    (2) Lender's analysis and credit evaluation (conforming to Sec.  
5001.16(b));
    (3) Environmental information required by the Agency to conduct its 
environmental reviews (as specified in Sec.  5001.16(h));
    (4) Technical reports and energy audits (as specified in subpart 
B);
    (5) A copy of Form 10-K, ``Annual Report Pursuant to Section 13 or 
15(d) of the Securities Exchange Act of 1934,'' for companies listed on 
major stock exchanges and/or subject to the Securities and Exchange 
Commission regulations;
    (6) Proposed loan agreement between the lender and borrower;
    (7) Energy assessments (as specified in subpart B);
    (8) Appraisals (as specified in Sec.  5001.16(c));
    (9) Business plan, unless the information is contained in the 
feasibility study;
    (10) Feasibility study (as specified in subpart B);
    (11) If the application is for 5 or more residential units or for 
for-profit nursing homes or assisted-living centers, an Affirmative 
Fair Housing Marketing Plan that is in conformance with 7 CFR 
1901.203(c)(3);
    (12) Preliminary engineering report (as specified in subpart B);
    (13) Current credit reports or equivalent on the prospective 
borrower and any other person liable for the debt, except for public 
bodies; and
    (14) If the guaranteed loan is $1 million or more, the most recent 
audited financial statements of the borrower or if the guaranteed loan 
is less than $1 million, the most recent audited or unaudited financial 
statements of the borrower.
    (15) If the lender is not yet a Rural Development approved lender, 
the application for lender approval specified in Sec.  5001.9(a) or 
(b), as applicable.
    (b) Low documentation applications. Low documentation applications 
must contain:
    (1) The information specified in paragraphs (a)(1) through (6) of 
this section; and
    (2) Certification that the lender possesses and has reviewed the 
information specified in paragraphs (a)(7) through (14) of this section 
and has identified and reported to the Agency any significant risks 
that would jeopardize the repayment of the loan.
    (3) If the lender is not yet a Rural Development approved lender, 
the application for lender approval specified in Sec.  5001.9(a) or 
(b), as applicable, must also be submitted.
    (c) Determination of documentation level.
    (1) Startup business. All applications for startup businesses must 
be full documentation applications.
    (2) Existing business.
    (i) Rural Development approved lenders that have preferred lender 
status may submit either a full or low documentation application for a 
loan guarantee request of $5 million or less. Only a full documentation 
application will be acceptable for a loan guarantee request of greater 
than $5 million.
    (ii) Rural Development approved lenders that do not have preferred 
lender status must submit full documentation applications unless the 
project meets the criteria specified in paragraphs (c)(2)(ii)(A) 
through (E) of this section. If the project meets each of these 
criteria, as applicable, the lender may submit either a low or full 
documentation application.
    (A) Debt coverage ratio of 1.25 or higher.
    (B) Cash equity of at least 25 percent of eligible project costs 
or, as specified in Subpart B, community support.
    (C) A minimum FICO (Fair Isaac and Company) credit score of 680 or 
equivalent industry credit score for each individual who signs the 
promissory note or guarantees repayment of the loan.
    (D) A loan-to-value ratio of no more than 0.8.
    (E) Loan guarantee portion of the loan at or below $5 million.


Sec. Sec.  5001.13-5001.14  [Reserved]

Basic Lender Provisions


Lender responsibilities--  General.Sec.  5001.15

    (a) Lenders must ensure that proposals for facilities seeking a 
guarantee under this part comply with all Federal, State, and local 
laws and regulatory rules that are in existence and that affect the 
project, the borrower, or lender activities.
    (b) Any lender involved in any manner with any guarantee under this 
part must cooperate fully with all oversight and monitoring efforts of 
the Agency or its representatives.
    (c) Any action or inaction on the part of the Agency does not 
relieve the lender of its responsibilities to originate and service the 
loan guaranteed under this part.


Sec.  5001.16  Lender responsibilities--Origination.

    (a) General. The lender is responsible for originating all loans in 
accordance with their current written policies and procedures and with 
the requirements of this part. Where a lender's current written 
policies and procedures address a corresponding requirement in this 
part, the lender must comply with whichever is more stringent. The 
Agency may require, at its discretion, an independent credit risk 
analysis (e.g., a credit rating or assessment) on the loan without 
consideration of the guarantee.
    (b) Credit evaluation. For all applications for guarantee, the 
lender must prepare a credit evaluation that is consistent with Agency 
standards found in this part and with the current written policies and 
procedures of the lender submitting the application. Where a lender's 
current written policies and procedures address a corresponding 
requirement in this part, the lender must comply with whichever is more 
stringent. An acceptable credit evaluation must:
    (1) Use credit documentation procedures and an underwriting process 
that are consistent with generally accepted commercial lending 
practices, and the lender's own policies, procedures, and lending 
practices, and
    (2) Include an analysis of the credit factors associated with each 
guarantee application to ensure loan repayment, including consideration 
of each of the following five elements.
    (i) Credit worthiness. Those financial qualities that generally 
impel the prospective borrower to meet its obligations as demonstrated 
by its credit history.
    (ii) Cash flow. A prospective borrower's ability to produce 
sufficient cash to repay the loan as agreed.
    (iii) Capital. The financial resources that the prospective 
borrower currently has and those it is likely to have when payments are 
due. The prospective borrower must be adequately capitalized.
    (iv) Collateral. The assets pledged by the prospective borrower in 
support of the loan. Adequacy will be based on market value. For the 
purchase of cooperative stock, the lender must at least secure the loan 
with a lien on the stock acquired with loan funds, an assignment of any 
patronage refund, and the full and unconditional personal or corporate 
guarantee of the borrower.
    (v) Conditions. The general business environment and status of the 
prospective borrower's industry.
    (c) Appraisals. Real property collateral will be appraised by the 
lender in accordance with the appropriate guidelines contained in the 
current Standards 1 and 2 of the Uniform Standards of Professional

[[Page 52656]]

Appraisal Practices or successor standards.
    (1) All appraisals used to establish the fair market value of the 
real property must not be more than 1 year old, except as otherwise 
specified in subpart B of this part.
    (2) All appraisals will include consideration of the potential 
effects from a release of hazardous substances or petroleum products or 
other environmental hazards on the market value of the collateral.
    (d) Personal and corporate guarantees. Unconditional personal and 
corporate guarantees are part of the collateral for the loan, but are 
not considered in determining whether a loan is adequately secured for 
loan making purposes.
    (1) Agency-approved personal and corporate guarantees for the full 
term of the loan and at least equal to the guarantor's percent interest 
in the borrower, times the loan amount are required from those owning 
greater than a 20 percent interest in the borrower, unless the lender 
documents to the Agency's satisfaction that collateral, equity, 
cashflow, and profitability indicate an above-average ability to repay 
the loan. The guarantors will execute an Agency-approved unconditional 
guarantee form. When warranted by an Agency assessment of potential 
financial risk, Agency-approved guarantees may also be required of 
parent, subsidiaries, or affiliated companies (owning less than a 20 
percent interest in the borrower) and require security for any 
guarantee provided under this section.
    (2) Exceptions to the requirement for personal guarantees must be 
requested by the lender and concurred by the Agency approval official 
on a case-by-case basis. The lender must document that collateral, 
equity, cashflow, and profitability indicate an above-average ability 
to repay the loan.
    (e) Design requirements. The lender must ensure that all projects 
are designed utilizing accepted architectural and engineering 
practices, taking into consideration any Agency comments when the 
facility is being designed, and conform to applicable Federal, State, 
and local codes and requirements. The lender must also ensure that the 
planned project will be fully constructed, within the original budget, 
to facilitate completion of the loan purpose and will be suitable, once 
completed, for the borrower's needs in accordance with the borrower's 
loan application.
    (f) Monitoring requirements. The lender must monitor the progress 
of construction and ensure that construction conforms to applicable 
Federal, State, and local code requirements and proceeds in accordance 
with the approved plans, specifications, and contract documents. The 
lender must also ensure that funds are used for eligible project costs. 
The lender must expeditiously report any problems in project 
development to the Agency.
    (g) Compliance with other Federal laws. Lenders must comply with 
other applicable Federal laws including Equal Employment Opportunities, 
Americans with Disabilities Act, Equal Credit Opportunity Act, Fair 
Housing Act, and the Civil Rights Act of 1964. With regard to the Civil 
Rights Act of 1964, data must be made available to conduct compliance 
reviews in accordance with 7 CFR 1901.204 of this title or successor 
regulation; initial reviews will be conducted after the Assurance 
Agreement is signed and all subsequent reviews every 3 years thereafter 
for loans; and the last review will occur 3 years after the date of 
loan closing.
    (h) Environmental responsibilities. The lender must ensure that the 
borrower has:
    (1) Provided the necessary environmental information to enable the 
Agency to undertake its environmental review process in accordance with 
subpart G of either 7 CFR part 1940 or 7 CFR part 1794 or successor 
regulations, including the provision of all required Federal, State, 
and local permits;
    (2) complied with any mitigation measures required by the Agency; 
and
    (3) not taken any actions or incurred any obligations with respect 
to the proposed project that would either limit the range of 
alternatives to be considered during the Agency's environmental review 
process or which would have an adverse effect on the environment.
    (i) Conflicts of interest. The lender must report to the Agency all 
appearances of conflicts of interest.


Sec.  5001.17  Lender's responsibilities--Servicing.

    (a) General. The lender is responsible for servicing the loan in 
accordance with the Lender's Agreement, this part, and their current 
written policies and procedures. Where a lender's current written 
policies and procedures address a corresponding requirement in this 
part or in the Lender's agreement, the lender must comply with 
whichever is more stringent. The lender must ensure that the borrower 
has obtained, and will maintain for the life of the loan, all necessary 
insurance coverage appropriate to the proposed project. If the Agency 
determines that the lender is not in compliance with its servicing 
responsibilities, the Agency reserves the right to take any action the 
Agency determines necessary to protect the Agency's interests with 
respect to the loan. If the Agency exercises this right, the lender 
must cooperate with the Agency. Any cost to the Agency associated with 
such action will be assessed against the lender.
    (b) Certification. The lender will certify in the Lender's 
Agreement that it will service the guaranteed loan according to Agency 
requirements and the lender's current written servicing policies and 
procedures and that, where the lender's current written policies and 
procedures address corresponding requirements of this part, it will 
comply with whichever is more stringent. When applicable, the lender 
will require an audit of the borrower in accordance with Office of 
Management and Budget requirements.
    (c) Collateral inspection and release. The lender must inspect the 
collateral as often as necessary to properly service the loan. The 
Agency may require the lender to obtain prior Agency approval of any 
release of any collateral. The Agency may, at its discretion, require 
an appraisal of the remaining collateral in cases in which the Agency 
determines that it may be adversely affected by the release of the 
collateral. The appraisal will be at the expense of the borrower and 
must meet the requirements of Sec.  5001.16(c). In all cases, the sale 
or release of collateral must be based on an arm's length transaction.
    (d) Transfers and assumptions.
    (1) General. Any time that a third party assumes a loan guaranteed 
under this part, it shall be processed and approved by the Agency as if 
it were a new loan guarantee.
    (2) Processing transfers and assumptions. The lender may release 
the transferor (including any guarantor) from liability, regardless of 
the amount of the loan being transferred or assumed.
    (i) Loan terms cannot be changed unless previously approved in 
writing by the Agency with the concurrence of the holder and transferor 
(including guarantor if it has not been released from personal 
liability). Any new loan term cannot exceed those authorized in this 
part as measured from the date the loan was initially guaranteed.
    (ii) In the case of a transfer and assumption of less than the 
outstanding balance, the lender (if holding the guaranteed portion) may 
file an estimated Report of Loss with respect to the difference.

[[Page 52657]]

    (3) Transfer fees. The Agency may charge the lender a nonrefundable 
transfer fee at the time of a transfer application. The Agency will set 
the amount of the transfer fee in an annual notice of funds 
availability.
    (e) Mergers. The Agency may withdraw the guarantee when a borrower 
participates in a merger.
    (f) Subordination of lien position. A subordination of the lender's 
lien position must be requested in writing by the lender and concurred 
with in writing by the Agency in advance of the subordination. Agency 
concurrence requires that the Agency's financial interest will be 
enhanced; collateral will remain adequate to secure the loan; the lien 
to which the guaranteed loan is subordinated will be for a fixed dollar 
limit and that lien priorities remain for the portion of the loan that 
was not subordinated; and subordination to a revolving line of credit 
does not exceed 1 year.
    (g) Repurchases from holder(s). The holder may make written demand 
on the lender or the Agency to repurchase the unpaid guarantee portion 
of the loan in the case of borrower default or failure of the lender to 
pay the holder its pro-rata share. When either the lender or the Agency 
determines that repurchase is necessary to adequately service the loan, 
the holder must sell the guaranteed portion to the requesting entity.
    (1) Repurchases by lender. The lender must respond to the holder's 
demand within 30 days and will notify the Agency in writing of its 
decision, including notifying the Agency in writing of all repurchases 
it makes. When repurchased, the lender will accept an assignment 
without recourse from the holder upon repurchase. All repurchases must 
be for an amount equal to the holder's interest in the unpaid principal 
balance of the guaranteed portion and accrued interest less the 
lender's servicing fee and cover the principal and interest on the 
guaranteed loan accruing only up to 90 days after the date of the 
demand by the holder.
    (2) Repurchases by Agency. When the Agency repurchases the loan, 
the holder must submit a specific written demand to the Agency, along 
with appropriate documentation. The Agency will be subrogated to all 
rights of the holder and, subject to satisfactory documentation, will 
purchase the unpaid principal and interest of the guaranteed portion to 
date of repurchase less the lender's servicing fee within 30 days after 
receipt of the demand. The lender may not charge the Agency any fees 
unless provided for in the Assignment Guarantee Agreement. The lender 
shall use a form approved by the Agency to send the guaranteed loan 
payments to the Agency on all loans repurchased by the Agency from 
holders. 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 and does not waive any of the Agency's rights against the 
lender, borrower, or guarantor.
    (h) Additional expenditures and loans. The lender will not make 
additional expenditures or new loans to a borrower with an outstanding 
loan guaranteed under this part without obtaining prior written Agency 
approval.
    (i) Lender failure. In the event a lending institution fails, the 
Agency will provide instruction to the successor entity on a case-by-
case basis. Such instructions may include that the Agency may determine 
to service the entire loan or the guaranteed portion of the loan. In 
the event no successor entity can be determined, the Agency reserves 
the right to enforce the provisions of the loan documents on behalf of 
the lender or to purchase the lender's interest in the loan.
    (j) Delinquent loans. The lender must service delinquent loans in 
accordance with the Lender's Agreement, its current servicing 
standards, and reasonable and prudent lending standards. If a borrower 
is delinquent more than 30 days, the lender must coordinate with the 
Agency and the borrower to implement appropriate curative actions to 
resolve the problem. Any curative action that affects the return to the 
holder must receive the holder's concurrence. Any change in the 
repayment schedule must be limited to the remaining life of the 
collateral. Any loan performing in accordance with a curative action 
will no longer be delinquent.
    (k) Protective advances. Protective advances are allowed only when 
they are necessary to preserve the value of the collateral and must be 
reasonable with respect to the outstanding loan amount and the value of 
the collateral being preserved. Protective advances will not include 
attorneys' fees or advances in lieu of additional loans. The lender 
must obtain written Agency approval for any protective advance that 
will singularly or cumulatively amount to more than $200,000 or 10 
percent of the guaranteed loan, whichever is less.
    (l) Liquidation. The lender may liquidate a loan when one or more 
incidents of default or third party actions occur that the borrower can 
not or will not cure or eliminate within a reasonable period of time. 
The Agency reserves the right to unilaterally conclude that liquidation 
is necessary and require the lender to assign the security instruments 
to the Agency.
    (1) Liquidation by the lender. The lender must develop, in 
consultation with the Agency, a liquidation plan to determine the best 
course of action. This plan must include all aspects of liquidation, 
including but not limited to reports to the Agency, protection of 
collateral, loss payment, transmission of proceeds to the Agency, and 
future recovery. The lender must submit its liquidation plan to the 
Agency at least 30 days before implementing the plan. The Agency must 
be notified of any changes to or deviations from the plan.
    (2) Compromise settlement and release of personal guarantors. A 
compromise settlement may be considered at any time, except as provided 
in subpart B to this part. Before a guarantor is released from 
liability, the Agency must concur with the lender. Upon agreement, the 
lender may proceed to effect a settlement compromise.
    (m) Litigation. In all litigation proceedings involving the 
borrower, the lender is responsible for protecting the rights of the 
lender or the Agency with respect to the loan, and keeping the Agency 
adequately and regularly informed, in writing, of all aspects of the 
proceedings. If the Agency determines that the lender is not adequately 
protecting the rights of the lender or the Agency with respect to the 
loan, the Agency reserves the right to take any legal action the Agency 
determines necessary to protect the rights of the lender, on behalf of 
the lender, or the Agency with respect to the loan. If the Agency 
exercises this right, the lender must cooperate with the Agency. Any 
cost to the Agency associated with such action will be assessed against 
the lender.
    (n) Loss calculations and payment. Losses shall be calculated by 
determining the total guaranteed loan amount including principal, 
protective advances, and accrued interest. From this amount will be 
deducted prior lien amounts owed through the settlement date, the net 
value of collateral, and other funds that can be applied to the debt. 
The maximum loss allowed is the lower of the percent of loss guarantee 
time the foregoing or the sum of principal advances and accrued 
interest. The amount due the lender is adjusted to take into account 
protective advances and interest.
    (1) During the course of any reorganization plan, the lender will 
request and revise estimated loss payments using Agency-approved forms. 
The estimated loss claim, as well

[[Page 52658]]

as any revisions to this claim, will be accompanied by documentation to 
support the claim.
    (2) In a chapter 9 or chapter 11 reorganization, the lender must 
obtain an independent appraisal of the collateral if so directed by the 
Agency. The Agency and the lender will share the appraisal fee equally.
    (3) Final settlement of liquidation will be made with the lender 
after the collateral is liquidated (unless otherwise designated as a 
future recovery) or after settlement and compromise of all parties has 
been completed. The Agency retains the right to recover losses paid 
under the guarantee from any liable party.
    (i) If the lender takes title to collateral, any loss will be based 
on the collateral value at the time the lender obtains title.
    (ii) 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.
    (iii) Within 30 days after liquidation of all collateral, except 
for certain unsecured personal or corporate guarantees as provided for 
in this section, the lender must prepare a final report of loss and 
submit it to the Agency. The Agency will not guarantee interest beyond 
this 30-day period other than for the period of time it takes the 
Agency to process the loss claim. Before Agency approval of any final 
loss report, the lender must account for all funds, disposition of the 
collateral, and costs incurred, and must provide any other information 
necessary for successful completion of the liquidation.
    (iv) After a final loss has been paid by the Agency, any future 
funds recovered by the lender will be pro-rated between the Agency and 
the lender based on the original percentage of guarantee even if the 
Loan Note Guarantee has been terminated.
    (v) In a bankruptcy, the lender will submit an estimated loss claim 
based on the final orders of the bankruptcy court's direction. The 
Agency will pay the lender the estimated final loss based on these 
directions.
    (4) The lender shall submit with each loss claim the current 
version of its written policies and procedures for origination and 
servicing.


Sec. Sec.  5001.18-5001.24  [Reserved]

Basic Borrower Provisions


Sec.  5001.25  Borrower responsibilities.

    (a) Federal, State, and local regulations. Borrowers must comply 
with all Federal, State, and local laws and rules that are in existence 
and that affect the project including, but not limited to
    (1) Land use zoning;
    (2) Health, safety, and sanitation standards as well as design and 
installation standards; and
    (3) Protection of the environment and consumer affairs.
    (b) Permits, agreements, and licenses. Borrowers must obtain all 
permits, agreements, and licenses that are applicable to the project.
    (c) Insurance. The borrower is responsible for maintaining all 
hazard, flood, liability, worker compensation, and personal life 
insurance, when required, on the project.
    (d) Access to borrower's records. Upon request by the Agency, the 
borrower 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 borrower pertaining to any Agency guaranteed loan. Such 
inspection and copying may be made during regular office hours of the 
borrower or at any other time agreed upon between the borrower and the 
Agency.


Sec.  5001.26-5001.29  [Reserved]

Basic Guarantee and Loan Provisions


Sec.  5001.30  General.

    (a) Underwriting. All loans guaranteed by the Agency must be 
underwritten in accordance with the credit evaluation requirements 
specified in Sec.  5001.16(b).
    (b) Conditions of guarantee. A loan guarantee under this part will 
be evidenced by a Loan Note Guarantee issued by the Agency. Each lender 
will execute a Lender's Agreement.
    (1) The entire loan will be secured by the same security with equal 
lien priority for the guaranteed and unguaranteed portions of the loan. 
The guaranteed portion will be paid first and given preference and 
priority over the unguaranteed portion.
    (2) The lender will remain mortgagee or secured party of record 
notwithstanding the fact that another party may hold a portion of the 
loan.
    (3) The holder of a guaranteed portion shall have all rights of 
payment, as defined in the Loan Note Guarantee to the extent of the 
portion purchased. The lender will remain bound by all obligations 
under the Loan Note Guarantee, Lender's Agreement, and Agency program 
regulations.
    (4) The lender will receive all payments of principal and interest 
on the entire loan and will promptly remit to each holder a pro-rata 
share, less any lender servicing fee.
    (5) No loan guaranteed by the Agency under this part will be 
conditioned on any requirement that the borrower accept or receive 
electric service from any particular utility, supplier, or cooperative.
    (c) Full faith and credit. A guarantee under this part constitutes 
an obligation supported by the full faith and credit of the United 
States and is not contestable except for fraud or misrepresentation by 
the lender or holder, as appropriate, when the lender or holder has 
actual knowledge, participates in, or condones such fraud or 
misrepresentation.
    (1) A note that provides for the payment of interest on interest 
will 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.
    (2) The guarantee will not be enforceable by the lender to the 
extent any loss is occasioned by the violation of usury laws, negligent 
loan origination or 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.
    (3) When in the hands of a holder, the Loan Note Guarantee or 
Assignment Guarantee Agreement shall not cover interest accruing 90 
days after the holder has demanded repurchase by the lender. When in 
the hands of a holder, the Loan Note Guarantee or Assignment Guarantee 
Agreement shall not cover interest accruing 90 days after the lender or 
Agency has requested the holder to surrender the evidence of debt for 
repurchase.
    (4) The Agency will guarantee payment as follows:
    (i) To any holder, 100 percent of any loss sustained by the holder 
on the guaranteed portion of the loan and on interest due on such 
portion.
    (ii) To the lender, the lesser of:
    (A) Any loss sustained by the lender on the guaranteed portion, 
including principal and interest evidenced by the notes or assumption 
agreements and secured advances for protection and preservation of 
collateral made with the Agency's authorization; or
    (B) The guaranteed principal advanced to or assumed by the borrower 
and any interest due thereon.
    (d) Soundness of guarantee. All loans guaranteed under this part 
must be

[[Page 52659]]

financially sound and feasible, with reasonable assurance of repayment.
    (e) Rights and liabilities. When a guaranteed portion of a loan is 
sold to a holder, the holder shall succeed to all payments of the 
lender under the Loan Note Guarantee to the extent of the portion 
purchased. A guarantee and right to require purchase will be directly 
enforceable by a holder notwithstanding any fraud or misrepresentation 
by the lender or any unenforceability of the guarantee by the lender, 
except for fraud or misrepresentation of which the holder had actual 
knowledge at the time it became the holder or in which the holder 
participates or condones. The lender shall not represent a Conditional 
Commitment of Guarantee as a guarantee. The Agency reserves the right 
to collect from the lender any payments made to the holder that would 
not have been payable to the lender had they been the holder.
    (f) Reduction of loss claims payable. Negligent loan origination or 
servicing will result in reduction of loss claims payable under the 
guarantee to the lender if any losses have occurred as the result of 
such negligence. The extent of the reduction, which could be a total 
reduction, of the loss claims payable, will depend on the extent of the 
losses occasioned as the result of the negligent loan origination and 
servicing.
    (g) Write-downs. Debt write-downs for an existing borrower where 
the same principals retain control of and decision-making authority for 
the business are prohibited.


Sec.  5001.31  Guaranteed loan requirements.

    (a) Interest rates. Interest rates may be fixed or variable or a 
combination of both, as long as they are legal. Variable interest rates 
must be tied to an acceptable published index and the lender must 
incorporate the provision for adjustment of payment installments into 
the Note. When combined fixed and variable rates are used, the lender 
will provide the Agency with the overall effective interest rate for 
the entire loan.
    (1) Negotiated rates. Interest rates, interest rate caps, and 
incremental adjustment limitations will be negotiated between the 
lender and the borrower.
    (2) Different rates on guaranteed and unguaranteed portion of the 
loan. If the lender and borrower agree, the interest rate on the 
guaranteed portion of a loan may differ from the rate on the 
unguaranteed portion provided:
    (i) The rate on the unguaranteed portion is equal to or below the 
market rate and does not exceed that currently being charged on loans 
for similar purposes to borrowers under similar circumstances; and
    (ii) the rate on the guaranteed portion does not exceed the rate on 
the unguaranteed portion unless the rate on the guaranteed portion is 
fixed and the unguaranteed portion is variable.
    (b) Interest rate changes. Any change in the interest rate between 
issuance of the Conditional Commitment for Guarantee and issuance of 
the Loan Note Guarantee must be approved in writing by the Agency and 
shown as an amendment to the Conditional Commitment for Guarantee, and 
are subject to the restrictions specified in paragraphs (b)(1) and (2) 
of this section.
    (1) Reductions. The borrower, lender, and holder (if any) may 
collectively effect a permanent or temporary reduction in the interest 
rate on the guaranteed loan at any time during the life of the loan by 
their written agreement, subject to the conditions specified in 
paragraphs (b)(1)(i) through (iii) of this section. The lender must 
keep sufficient records to allow the Agency to calculate any loss at 
the reduced interest rate. The lender must notify the Agency of all 
permanent interest rate reductions, as specified in Sec.  
5001.4(b)(3)(ii).
    (i) After a permanent reduction, the Loan Note Guarantee will only 
cover losses of interest at the reduced interest rate.
    (ii) 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 that adequately document the 
accrued interest claimed.
    (iii) The lender is responsible for the legal documentation of 
interest-rate changes by an endorsement or any other legally effective 
amendment to the promissory note; however, no new notes may be issued. 
Copies of all legal documents must be provided to the Agency.
    (2) Increases. Increases in interest rates are not permitted except 
when the increase results from normal fluctuations in approved variable 
interest rates, or the increase returns the rate to the rate prior to 
the temporary reduction.
    (c) Term length. The loan term will be based on the use of 
proceeds, the useful economic life of the assets being financed, and 
the borrower's repayment ability. In no event may the term exceed 40 
years.
    (d) Loan schedule and repayment. Repayment will be structured in 
accordance with this section and the Loan Agreement, and will be due 
and payable in accordance with the Note. Only loans that require a 
periodic payment schedule that will retire the debt over the term of 
the loan without a balloon payment will be guaranteed. Lenders must 
ensure that the principal balance of a guaranteed loan is properly 
amortized within the prescribed loan maturity.
    (e) Maximum loan amounts. The maximum amount that may be guaranteed 
will be determined on a program-by-program basis and will be published 
each year in the Federal Register.
    (f) Maximum percent of guarantee. The maximum guarantee is 
specified in subpart B for each guaranteed loan program covered by this 
part.
    (g) Fees. Each year, the Agency will establish, and publish in a 
Federal Register notice, the guarantee fee and renewal fee for each 
guaranteed loan program. A guarantee fee and a renewal fee will be 
assessed on each loan, as specified in the Federal Register notice. 
Both the guarantee fee and the renewal fee are nonrefundable.
    (1) Guarantee fee. The guarantee fee will be paid to the Agency by 
the lender at the time the Guarantee is issued. The fee may be passed 
on to the borrower.
    (2) Renewal fee. As applicable, the renewal fee is assessed 
annually, is based on a fixed fee rate established at the beginning of 
the loan, and will be calculated on the unpaid guaranteed principal 
balance as of close of business on December 31 of each year. The fee 
will be billed to the lender and may be passed on to the borrower.
    (h) Lender fees. The lender may levy reasonable, routine, and 
customary charges and fees for the guaranteed loan provided they are 
similar to those charged other applicants for the same type of loan for 
which a non-guaranteed borrower would be assessed. 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.


Sec.  5001.32  Conditional commitment for guarantee.

    Upon approval of a loan guarantee, the Agency will issue a 
Conditional Commitment for Guarantee to the lender containing 
conditions under which the Guarantee will be issued. The lender must 
complete and sign the Acceptance of Conditions and return a copy to the 
Agency. The lender may propose alternate conditions for Agency 
consideration.


Sec.  5001.33  Conditions precedent to issuance of Loan Note Guarantee.

    The Loan Note Guarantee will be issued once all of the conditions

[[Page 52660]]

specified in the Conditional Commitment for Guarantee have been met and 
each of the following has occurred:
    (a) Payment of the appropriate guarantee fee;
    (b) The lender has advised the Agency of any plans to sell or 
assign any part of the loan as provided in the Lender's Agreement; and
    (c) The lender has certified that the prospective borrower has 
obtained all necessary insurance appropriate to the proposed project.


Sec.  5001.34  Issuance of the guarantee.

    The Agency, at its sole discretion, will determine if the 
conditions within the Conditional Commitment for Guarantee have been 
met. The Agency, at its sole discretion, will determine whether or not 
to issue the guarantee.
    (a) Loan closing. At loan closings, the lender must provide the 
lender's certifications, guarantee fee, and, if applicable, secondary 
market sale document.
    (b) Issuance. Upon the lender's compliance with requirements of the 
Conditional Commitment for Guarantee, the Agency will issue the Loan 
Note Guarantee and Assignment Guarantee Agreement.
    (c) Refusal to execute Loan Note Guarantee. If the Agency 
determines that it can not execute the Loan Note Guarantee, the Agency 
will promptly inform the lender of the reasons and give the lender a 
reasonable period within which to satisfy the objections. If the lender 
satisfies the objections within the time allowed, the guarantee will be 
issued.
    (d) Replacement of Loan Note Guarantee or Assignment Guarantee 
Agreement. If the Loan Note Guarantee or Assignment Guarantee Agreement 
has been lost, stolen, destroyed, mutilated, or defaced, the Agency may 
issue a replacement to the lender or holder upon receipt from the 
lender of a notarized certificate of loss and an indemnity bond 
acceptable to the Agency. If the holder is the United States, a Federal 
Reserve Bank, a Federal Government corporation, a State or Territory, 
or the District of Columbia, an indemnity bond is not required.


Sec.  5001.35  Alterations of loan instruments.

    Under no circumstances shall the lender alter or approve any 
alterations of the Loan Note Guarantee or any other loan instrument 
without the prior written approval of the Agency.


Sec.  5001.36  Reorganizations.

    (a) Change in borrower prior to closing. Any change in borrower 
ownership or organization prior to the issuance of the Loan Note 
Guarantee must meet program eligibility requirements and be approved by 
the Agency prior to the issuance of the Conditional Commitment for 
Guarantee. Once the Conditional Commitment for Guarantee is issued, no 
substitution of borrower(s) or change in the form of legal entity will 
be approved, except that a change in the legal entity may be approved 
when the original borrower is replaced with substantially the same 
individuals or officers with the same interest as originally approved.
    (b) Transfer of lender prior to issuance of the Loan Note 
Guarantee. Prior to issuance of a Loan Note Guarantee, the Agency may 
approve the transfer of an outstanding Conditional Commitment for 
Guarantee to a new eligible lender, provided the present lender makes 
the request in writing and no substantive changes have occurred in the 
borrower, project, loan agreement, or Conditional Commitment for 
Guarantee. The new lender must be approved under this part and must 
execute a new application for guarantee in conformance with this part.
    (c) Substitution of lender after issuance of the Loan Note 
Guarantee. After the issuance of a Loan Note Guarantee, the lender 
shall not be substituted without the prior written approval of the 
Agency. A substitution of the lender must be requested in writing by 
the borrower, the proposed substitute lender, and the original lender 
if still in existence. The Agency may approve the substitution of a 
lender if the new lender is Rural Development approved; agrees in 
writing to acquire title to any unguaranteed portion of the loan held 
by the original lender; and assumes all original loan requirements and 
lender responsibilities. The Agency will not pay any loss or share in 
any costs with a lender who is not in compliance with this section.


Sec.  5001.37  Sale or assignment of guaranteed loan.

    (a) General. The lender may sell all or part of the guaranteed 
portion of the loan, subject to the conditions specified in paragraphs 
(a)(1) through (6) of this section.
    (1) 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.
    (2) The lender may obtain participation in the loan under its 
normal operating procedures; however, the lender must retain sufficient 
interest to perform its duties under this part.
    (3) The lender must not sell or participate any amount of the 
guaranteed, or non-guaranteed, portion of the loan to the borrower or 
members of the borrower's immediate family, the borrower's officers, 
directors, stockholders, other owners, or a parent, subsidiary, or 
affiliate.
    (4) 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.
    (5) 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.
    (6) The lender may retain all or part of the unguaranteed portion 
of the loan. However, if the lender does not have preferred lender 
status, the lender is required to retain a minimum of 5 percent of the 
total loan amount in its portfolio. The amount required to be retained 
must be of the unguaranteed portion of the loan and can not be 
participated. Lenders may sell the remaining amount of the unretained 
amount of the loan only through participation.
    (b) Termination of lender servicing fee. The lender's servicing fee 
will stop when the Agency purchases the guaranteed portion of the loan 
from the secondary market. No such servicing fee may be charged to the 
Agency and all loan payments and collateral proceeds received will be 
applied first to the guaranteed loan.


Sec.  5001.38  Termination of Loan Note Guarantee.

    Each Loan Note Guarantee issued under this part will terminate 
automatically upon:
    (a) Full payment of the guaranteed loan; or
    (b) full payment of any loss obligation or negotiated loss 
settlement except for future recovery provisions and payments made as a 
result of the Debt Collection Improvement Act (DCIA). After final 
payment of claims to lenders and/or holders, the Agency will retain all 
funds received as the result of the DCIA; or
    (c) written request from the lender to the Agency that the 
guarantee will terminate 30 days after the date of the request, 
provided that the lender holds all of the guaranteed portion, and the 
original Loan Note Guarantee is returned to the Agency to be canceled.

[[Page 52661]]

Sec. Sec.  5001.39-5001.100  [Reserved]

Subpart B--Program-Specific Provisions


Sec.  5001.101  Community Facilities Program.

    (a) Project eligibility. To be eligible for a Community Facility 
guaranteed loan, the project must meet the criteria specified in 
paragraphs (a)(1) through (4) of this section and in Sec.  5001.6.
    (1) Eligible projects. All loans guaranteed with community facility 
funding shall be for:
    (i) Essential community facilities;
    (ii) community services or community-based social, recreational or 
cultural services;
    (iii) transportation infrastructure and support;
    (iv) hydroelectric generating facilities or supplemental and 
supporting structures for rural electrification only with advance 
written approval from the Agency;
    (v) natural gas distribution systems;
    (vi) acquisition of land and site preparation for industrial parks; 
or
    (vii) refinancing any loan. Except for the refinancing of Agency 
direct loans, refinancing of other loans will be limited to a minority 
portion of the guaranteed loan.
    (2) Facilities for public use. All facilities financed under the 
provisions of this section shall be for public purposes.
    (i) Facilities will be installed to serve any user within the 
service area who desires service and can be feasibly and legally 
served.
    (ii) The lender will determine that, when feasibly and legally 
possible, inequities within the proposed project's service area for the 
same type service proposed (e.g., gas distribution systems) 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.
    (3) Leased space. A facility will remain eligible for CF funding 
provided it has less than 25 percent of its floor space occupied by 
ineligible organizations or activities. The ineligible organization and 
the ineligible commercial activity must be related to and enhance the 
primary purpose for which the facility is being established by the 
borrower.
    (4) Facility location. Facilities must be located in rural areas, 
except:
    (i) For utility services such as natural gas or hydroelectric 
serving both rural and non-rural areas. In such cases, Agency funds may 
be used to finance only that portion serving rural areas, regardless of 
facility location.
    (ii) For telecommunication projects, the part of the facility 
located in a non-rural area must be necessary to provide the essential 
services to rural areas.
    (5) Demonstration of community support. A project may demonstrate 
community support in lieu of the cash equity required under Sec.  
5001.6(c)(2) or Sec.  5001.12(c)(2)(ii)(B), as applicable.
    (i) Evidence of community support in the form of a certification of 
support for each project or facility from any affected local government 
body is required.
    (ii) With the exceptions of essential community facilities owned by 
a local public body or a Federally-recognized Indian tribe serving 
local residents or tribal members, a certificate of support must be 
obtained from each affected local government within the service area of 
the facility. The certificate of support must be signed by an 
authorized official of the local government.
    (iii) The certificate of support should include sufficient 
information to determine that a community facility will provide needed 
services to the community and will have no adverse impact on other 
community facilities providing similar services. The organization is 
required to provide sufficient information to affected local 
governments as may be needed to obtain the certificate of support.
    (b) Unauthorized projects and purposes. Loan funds may not be used 
to finance:
    (1) Properties to be used for commercial rental when the borrower 
has no control over tenants and services offered except for industrial-
site infrastructure development;
    (2) Facilities that are 25 percent or more for the purpose of 
housing Federal or State agencies;
    (3) Community antenna television services or facilities;
    (4) Telephone systems;
    (5) Facilities that are not modest in size, design, and cost; and
    (6) Finder's and packager's fees.
    (c) Borrower eligibility. In addition to the requirements specified 
in subpart A of this part, the following requirements also apply where 
applicable:
    (1) YMCA, YWCA, Girl Scouts, and Boy Scouts are eligible applicant 
organizations.
    (2) A private not-for-profit essential community facility (other 
than utilities) must have significant ties with the local rural 
community. Such ties are necessary to ensure to the greatest extent 
possible that a facility under private control will carry out a public 
purpose and continue to primarily serve rural areas. Ties may be 
evidenced by items such as:
    (i) Association with, or controlled by, a local public body or 
bodies or broadly based ownership and controlled by members of the 
community.
    (ii) Substantial public funding through taxes, revenue bonds, or 
other local government sources, or substantial voluntary community 
funding such as would be obtained through a community-wide funding 
campaign.
    (3) Credit not available elsewhere. 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.
    (d) Additional application documentation requirements--feasibility 
study. A feasibility study by a qualified independent consultant may be 
required by the Agency.
    (e) Additional guarantee- and loan-related requirements.
    (1) Funding limit. The principal amount of a Community Facility 
loan guaranteed under this section may not exceed $50 million.
    (2) Maximum percent of guarantee. The maximum loan guarantees 
issued to a Rural Development approved lender with Community Facilities 
funding are specified in the table to paragraph (e).

[[Page 52662]]



      Table to paragraph (e).--Maximum Loan Guarantee Percentages for Community Facilities Guaranteed Loans
----------------------------------------------------------------------------------------------------------------
                                                                           Guaranteed loan amount
                                                           -----------------------------------------------------
                                                                               Over $5 million
Type of rural development  approved   Type of application                         up to and         Over $10*
               lender                                        $5 million  or     including $10        million
                                                             less  (percent)       million          (percent)
                                                                                  (percent)
----------------------------------------------------------------------------------------------------------------
Without preferred lender status....  Low documentation....                80                na                na
                                     Full documentation...                90                90                90
With preferred lender status.......  Low documentation....                90                na                na
                                     Full documentation...                90                90               90
----------------------------------------------------------------------------------------------------------------
na = not applicable.
* Per Sec.   5001.101(e)(1), the maximum guaranteed loan amount is $50 million.

    (3) Parity lien requirements. Whenever both a Community Facilities 
guaranteed loan and a Community Facilities direct loan are utilized to 
finance a single project, the Agency will require a parity lien, unless 
the lender can not meet its regulatory requirements.


Sec.  5001.102  Water and Waste Disposal Facilities Program.

    (a) Project eligibility. To be eligible for a Water and Waste 
Disposal Facilities guaranteed loan, the project must meet the criteria 
specified in paragraphs (a)(1) through (3) of this section and in Sec.  
5001.6.
    (1) Eligible projects and costs. All loans guaranteed with Water 
and Waste Disposal funding shall be for:
    (i) A water or wastewater disposal facility;
    (ii) payment of other utility connection charges as provided in 
service contracts between utility systems; or
    (iii) refinancing any loan. Except for the refinancing of Agency 
direct loans, refinancing of other loans will be limited to a minority 
portion of the guaranteed loan.
    (2) Facilities for public use. All facilities financed under the 
provisions of this section shall be for public purposes.
    (i) Facilities will be installed to serve any user within the 
service area who desires service and can be feasibly and legally 
served.
    (ii) 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.
    (3) Demonstration of community support. A project may demonstrate 
community support in lieu of the cash equity required under Sec.  
5001.6(c)(2) or Sec.  5001.12(c)(2)(ii)(B), as applicable. 
Demonstration of community support shall be made as specified in Sec.  
5001.101(a)(5)(i) through (iii).
    (b) Unauthorized projects and purposes. Loan funds may not be used 
to finance:
    (1) Facilities that are not modest in size, design, and cost;
    (2) Loan or grant finder's fees;
    (3) The construction of any new combined storm and sanitary sewer 
facilities;
    (4) Any portion of the cost of a facility that does not serve a 
rural area;
    (5) That portion of project costs normally provided by a business 
or industrial user, such as wastewater pretreatment;
    (6) Rental for the use of equipment or machinery owned by the 
applicant;
    (7) For other purposes not directly related to operating and 
maintenance of the facility being installed or improved; or
    (8) The payment of a judgment which would disqualify an applicant 
for a loan under Sec.  5001.102(c)(2).
    (c) Borrower eligibility. To be eligible for a Water and Waste 
Disposal Facilities guaranteed loan, a prospective borrower must meet 
the criteria specified in paragraphs (c)(1) and (2) of this section and 
in Sec.  5001.8(a)(1) and (2).
    (1) Eligible entity. The prospective borrower must be one of the 
following types of entities:
    (i) A public body such as a municipality, county, district, 
authority, or other political subdivision of a State located in a rural 
area;
    (ii) 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
    (iii) An Indian tribe on a Federal or State reservation or any 
other Federally-recognized Indian tribe.
    (2) Credit not available elsewhere. 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.
    (d) Additional application documentation requirements.
    (1) Feasibility study. A feasibility study by a qualified 
independent consultant may be required by the Agency.
    (2) Preliminary engineering report (PER). Two copies of the PER are 
to be submitted. Preliminary engineering reports must conform to 
customary professional standards. PER guidelines for water, sanitary 
sewer, solid waste, and storm sewer are available from the Agency. The 
PER may be submitted to the Agency prior to the rest of the application 
material if a preliminary review by the Agency is desired.
    (3) Financial reports. Lenders are required to obtain and analyze 
financial statements as required by the Loan Agreement. Rural 
Development approved lenders that do not have preferred lender status 
must submit a copy of the analysis to the Agency within 120 days of 
receipt of the financial statements. Rural Development approved lenders 
that have preferred lender status must provide evidence that they have 
such an analysis in their file, but are not required to submit a copy 
to the Agency unless specifically requested.
    (e) Additional guarantee- and loan-related requirements--maximum 
percent of guarantee. The maximum loan guarantees issued to a Rural 
Development approved lender with Water and Waste Disposal Facility

[[Page 52663]]

funding are specified in Table to paragraph (e).

  Table to Paragraph (e).--Maximum Loan Guarantee Percentages for Water and Waste Disposal Facility Guaranteed
                                                      Loans
----------------------------------------------------------------------------------------------------------------
                                                                           Guaranteed loan amount
                                                           -----------------------------------------------------
                                                                               Over $5 million
Type of rural development  approved   Type of application                         up to and
               lender                                         $5 million or     including $10   Over $10 million
                                                             less  (percent)       million          (percent)
                                                                                  (percent)
----------------------------------------------------------------------------------------------------------------
Without preferred lender status....  Low documentation....                80                na                na
                                     Full documentation...                90                90                90
With preferred lender status.......  Low documentation....                90                na                na
                                     Full documentation...                90                90                90
----------------------------------------------------------------------------------------------------------------
na = not applicable.

Sec.  5001.103  Business and Industry Program.

    (a) Project eligibility. To be eligible for a Business and Industry 
guaranteed loan, the project must meet the criteria specified in 
paragraph (a) of this section and in Sec.  5001.6.
    (1) All loans guaranteed with Business and Industry funding shall 
be for:
    (i) Business and industrial acquisitions when the loan will keep 
the business from closing, prevent the loss of employment 
opportunities, or provide expanded job opportunities;
    (ii) business conversion, enlargement, repair, modernization, or 
development;
    (iii) the purchase and development of land, easements, rights-of-
way, buildings, or facilities;
    (iv) the purchase of equipment, leasehold improvements, machinery, 
supplies, inventory, start up costs, permanent working capital, 
pollution control and abatement, or feasibility studies;
    (v) transportation services incidental to industrial development;
    (vi) agricultural production, with advance written approval from 
the Agency, when it is not eligible for Farm Service Agency farmer 
program assistance and when it is part of an integrated business also 
involved in the processing of agricultural products;
    (vii) the purchase of membership, stocks, bonds, or debentures or, 
as allowed under paragraph (a)(2) of this section, cooperative stock;
    (viii) commercial fishing, aquaculture, commercial nurseries, 
forestry, hydroponics, or the growing of mushrooms;
    (ix) interest during the period before the first principal payment 
becomes due or when the facility becomes income producing, whichever is 
earlier;
    (x) refinancing any loan. Except for the refinancing of Agency 
direct loans, refinancing of other loans will be limited to a minority 
portion of the guaranteed loan;
    (xi) providing takeout of interim financing when the lender submits 
a complete preapplication or application in which the interim financing 
is proposed, prior to extending any portion of the interim loan;
    (xii) fees and charges for professional services and routine lender 
fees and the Agency guarantee fee;
    (xiii) tourist and recreation facilities, including hotels, motels, 
and bed and breakfast establishments;
    (xiv) educational, training, or community facilities;
    (xv) housing development sites with certain restrictions;
    (xvi) community antenna television services or facilities;
    (xvii) assistance to industries adjusting to terminated Federal 
agricultural programs or increased foreign competition; or
    (xviii) assisting cooperative organizations.
    (2) Purchase of cooperative stock. Loans may be made to individual 
farmers or ranchers for the purchase of cooperative stock. The entity 
to receive the proceeds from the stock sale must be a farmer or rancher 
cooperative established for the purpose of processing agricultural 
commodities. Proceeds from the stock sale may be used to recapitalize 
an existing cooperative, to develop a new processing facility or 
product line, or to expand an existing production facility. The 
cooperative may contract for services to process agricultural 
commodities or otherwise process value-added agricultural products 
during the 5-year period beginning on the operation startup date of the 
cooperative in order to provide adequate time for the planning and 
construction of the processing facility of the cooperative.
    (b) Unauthorized projects and purposes.
    (1) Businesses housed in private homes, except when the pro-rata 
value of the owner's living quarters is deleted from the value of the 
project.
    (2) Projects in excess of $1 million that would likely result in 
the transfer of jobs from one area to another and increase direct 
employment by more than 50 employees.
    (3) Projects in excess of $1 million that would increase direct 
employment by more than 50 employees, if the project would result in an 
increase in the production of goods for which there is not sufficient 
demand, or if the availability of services or facilities is 
insufficient to meet the needs of the business.
    (4) Interim financing.
    (5) Distribution or payment to an individual owner, partner, 
stockholder, or beneficiary of the borrower or a close relative of such 
an individual when such individual will retain any portion of the 
ownership of the borrower.
    (6) Assistance to Government employees and military personnel who 
are directors or officers or have a major ownership of 20 percent or 
more in the business.
    (7) The guarantee of lease payments.
    (8) The guarantee of loans made by other Federal agencies.
    (9) Loans made with the proceeds of any obligation the interest on 
which is excludable from income under 26 U.S.C. Sec.  103 or a 
successor statute. Funds generated through the issuance of tax-exempt 
obligations may neither be used to purchase the guaranteed portion of 
any Agency guaranteed loan nor may an Agency guaranteed loan serve as 
collateral for a tax-exempt issue. The Agency may guarantee a loan for 
a project which involves tax-exempt financing only when the guaranteed 
loan funds are used to finance a part of the project that is separate 
and distinct

[[Page 52664]]

from the part which is financed by the tax-exempt obligation, and the 
guaranteed loan has at least a parity security position with the tax-
exempt obligation.
    (c) Borrower eligibility. In addition to the criteria specified in 
Sec.  5001.8(a)(1) and (2), a prospective borrower must meet both of 
the criteria specified in paragraphs (c)(1) and (2) of this section to 
be eligible for a Business and Industry guaranteed loan.
    (1) A borrower must be a cooperative organization, corporation, 
partnership, or other legal entity organized and operated on a profit 
or not-for-profit basis; an Indian tribe on a Federal or State 
reservation or other Federally recognized tribal group; a public body; 
or an individual.
    (2) A borrower must be engaged in or proposing to engage in a 
business. Business may include manufacturing, wholesaling, retailing, 
providing services, or other activities that will:
    (i) Provide employment;
    (ii) Improve the economic or environmental climate;
    (iii) Promote the conservation, development, and use of water for 
aquaculture; or
    (iv) Reduce reliance on nonrenewable energy resources by 
encouraging the development and construction of solar energy systems 
and other renewable energy systems (including wind energy systems, 
geothermal energy systems, and anaerobic digesters for the purpose of 
energy generation).
    (d) Additional application process requirements--obligation of 
funds. If funds are insufficient to cover all approved applications, 
the Agency will use a scoring priority system to allocate funds, which 
will give a priority to encourage economic development in communities 
that are suffering economic hardships. The Agency will establish the 
scoring criteria each fiscal year and provide them in a notice in the 
Federal Register.
    (e) Additional application documentation requirements.
    (1) Audited financial statements. If the proposed guaranteed loan 
exceeds $3 million, the Agency may, at its sole discretion, require 
audited financial statements to be submitted annually when the Agency 
is concerned about the borrower's credit risk.
    (2) Feasibility study. A feasibility study by a qualified 
independent consultant may be required by the Agency for start-up 
businesses or existing businesses when the project will significantly 
affect the borrower's operations. If a feasibility study of a 
cooperative is required, the feasibility study will determine the 
viability of the business and not the individual farm operators.
    (3) Certification of Non-Relocation and Market Capacity. If the 
loan will exceed $1 million and will increase direct employment by more 
than 50 employees, a form approved by the Agency concerning non-
relocation and market capacity.
    (f) Additional Lender Responsibilities--Origination--Collateral. At 
a minimum, for the purchase of cooperative stock, the lender must 
secure the loan with a lien on the stock acquired with loan funds, an 
assignment of any patronage refund, and the full and unconditional 
personal or corporate guarantee of the borrower.
    (g) Additional guarantee- and loan-related requirements.
    (1) Conditional Commitment for Guarantee. For the purchase of 
cooperative stock, the Conditional Commitment for Guarantee shall 
require the cooperative to provide the lender with all required 
Federal, State, and local permits and other clearances involving the 
environmental aspects for review and approval.
    (2) Issuance of Loan Note Guarantee. If, for the purchase of 
cooperative stock, the lender requests the issuance of the Loan Note 
Guarantee before the cooperative becomes operational, the lender must 
certify to the Agency that the cooperative has all of the required 
Federal, State, and local permits and other clearances involving the 
environmental aspects for review and approval.
    (3) Funding limits. The principal amount of a Business and Industry 
loan guaranteed under this section may not exceed $25,000,000, except 
that the principal amount made to a cooperative organization and 
guaranteed under this section may not exceed $40,000,000 for rural 
projects processing value added commodities.
    (i) The total amount of Business and Industry loans made to 
cooperative organizations and guaranteed for a fiscal year under this 
section with principal amounts that are in excess of $25,000,000 may 
not exceed 10 percent of the business and industry loans guaranteed for 
the fiscal year.
    (ii) The principal amount of a Business and Industry loan made 
under this section for the purchase of cooperative stock may not exceed 
$600,000.
    (4) Guarantee fee. The maximum guarantee fee that may be charged is 
2 percent. The guarantee fee may be reduced to 1 percent if the 
borrower is a high impact business and is located in an area of long 
term population decline and job deterioration as a result of persistent 
economic hardship, significant economic loss from a Presidentially-
declared disaster, or a fundamental structural economic change. Each 
fiscal year, the Agency will establish a limit on the maximum portion 
of guarantee authority available for that fiscal year that may be used 
to guarantee loans with a guarantee fee of 1 percent. The limit will be 
announced by publishing a notice in the Federal Register. Once the 
limit has been reached, the guarantee fee for all additional loans 
obligated during the remainder of that fiscal year will be 2 percent.
    (5) Maximum percent of guarantee. The maximum loan guarantees 
issued to a Rural Development approved lender with Business and 
Industry funding are specified in Table to paragraph (g).

     Table to paragraph (g).--Maximum Loan Guarantee Percentages for Business and Industry Guaranteed Loans
----------------------------------------------------------------------------------------------------------------
                                                                           Guaranteed loan amount
                                                           -----------------------------------------------------
                                                                               Over $5 million
     Type of rural  development       Type of application                         up to and         Over $10
          approved lender                                     $5 million or     including $10       million *
                                                             less  (percent)       million          (percent)
                                                                                  (percent)
----------------------------------------------------------------------------------------------------------------
Without preferred lender status....  Low documentation....                70                na                na
                                     Full documentation...                80                70                60
With preferred lender status.......  Low documentation....                80                na                na
                                     Full documentation...                80                70                60
----------------------------------------------------------------------------------------------------------------
na = not applicable.

[[Page 52665]]

 
* Per Sec.   5001.103(g)(3), the maximum guaranteed loan amount is $25 million except for a cooperative
  producing a value added commodity for which the maximum is $40 million.

5001.104  Renewable Energy Systems and Energy Efficiency Improvements 
Program.

    (a) Project eligibility. To be eligible for a Renewable Energy 
Systems and Energy Efficiency Improvements guaranteed loan, the project 
must meet the criteria specified in paragraphs (a)(1) and (2) of this 
section and in Sec.  5001.6.
    (1) The project shall be for the purchase, installation, expansion 
and/or other energy-related improvement of a renewable energy system or 
to make energy efficiency improvements project; and
    (2) The project shall be for technology that is
    (i) pre-commercial or commercially available, and
    (ii) replicable.
    (b) Borrower eligibility. To be eligible for a renewable energy 
systems and energy efficiency improvements guaranteed loan, a 
prospective borrower must be an agricultural producer or rural small 
business and must meet the criteria specified in Sec.  5001.8(a)(1) and 
(2).
    (c) Additional application process requirements--obligation of 
funds. If funds are insufficient to cover all approved applications, 
the Agency will use a scoring priority system to allocate funds to 
encourage development of promising pre-commercial and commercially 
available alternative energy sources that are currently unable to 
obtain financing from commercial lending sources. The Agency will 
establish the scoring criteria on a periodic basis and publish it in 
the Federal Register.
    (d) Additional application documentation requirements. Applications 
must also contain the following, as applicable:
    (1) Certifications. The lender must certify in the application that 
the project is able to demonstrate technical merit and that the 
prospective borrower is a small agricultural producer or rural small 
business.
    (2) Technical report. For renewable energy systems projects seeking 
a loan guarantee of more than $200,000, a satisfactory technical report 
that demonstrates that the project is commercially viable and can be 
installed and perform as intended in a reliable, safe, cost-effective, 
and legally compliant manner must be provided. To determine the overall 
technical merit of the renewable energy system, the lender must submit 
its proposal to an approved Department of Energy (DOE) laboratory and 
obtain a DOE technical report. A Rural Development approved lender that 
does not have preferred lender status must submit the DOE technical 
report with its application. A Preferred lender may instead certify in 
the application that a DOE technical report, deemed satisfactory by a 
DOE energy laboratory, has been obtained prior to the request for 
guarantee in lieu of submitting the technical report with the 
application.
    (3) Energy assessment/audit. For energy efficiency improvement 
projects, an energy assessment, with adequate and appropriate evidence 
of energy savings expected when the system is operated as designed, 
must be provided. For energy efficiency improvement projects with total 
eligible project costs greater than $50,000, an energy audit is 
required. Rural Development approved lenders with preferred lender 
status may certify in the application that an energy assessment or 
audit, as applicable, has been obtained prior to the request for 
guarantee in lieu of submitting the assessment or audit with the 
application.
    (4) Feasibility study. Lenders are required to obtain a feasibility 
study for each project seeking a loan guarantee of greater than 
$200,000. To be acceptable, the feasibility study must be conducted by 
a qualified independent consultant.
    (5) Financial statements. Applications from Rural Development 
approved lenders without preferred lender status must include financial 
statements for the lesser of the past 3 years or the business life of 
the applicant. If the proposed guaranteed loan exceeds $3?million, the 
Agency may require audited financial statements annually when the 
Agency is concerned about the borrower's credit risk.
    (e) Additional servicing requirements--post-construction reporting 
requirements. Once the project has been constructed, the lender must 
provide to the Agency annual reports from the borrower on the 
performance characteristics and results of the projects.
    (1) Schedule. For renewable energy system projects, these reports 
are to be provided commencing in the first full calendar year after 
construction is completed and continuing for 3 full years. For energy 
efficiency improvement projects, these reports are to be provided 
commencing the first full calendar year following the year in which 
project construction was completed and continuing for 2 full years.
    (2) Contents. Reports for renewable energy system projects must 
contain, at a minimum, information on output and sales and/or energy 
savings. Reports for Energy Efficiency Improvement projects must 
contain, at a minimum, information on energy savings. Additional 
information to be included in these reports will be negotiated between 
the Agency and the lender/borrower prior to the execution of the loan 
note guarantee.
    (f) Additional guarantee- and loan-related requirements--(1) 
Conditions precedent to issuance of loan note guarantee. In addition to 
the requirements specified in Sec.  5001.33, for renewable energy 
systems and energy efficiency improvements loans, all planned property 
acquisitions and development have been performing at a steady state 
operating level in accordance with the technical requirements, plans, 
and specifications; the project conforms with applicable Federal, 
State, and local codes; and costs have not exceeded the amount approved 
by the lender and the Agency.
    (2) Funding limits. The amount of a Renewable Energy Systems and 
Energy Efficiency loan guarantee, including any grants and direct loans 
made under this program, that will be made available to an eligible 
project will not exceed 50 percent of total eligible project costs. 
Eligible project costs are only those costs associated with the items 
identified in paragraphs (f)(2)(i) through (xi) of this section, as 
long as the items are an integral and necessary part of the renewable 
energy system or energy efficiency improvement.
    (i) Post-application purchase and installation of equipment (new, 
refurbished, or remanufactured), except agricultural tillage equipment, 
used equipment, and vehicles.
    (ii) Post-application construction or improvements, except 
residential.
    (iii) Energy audits or assessments.
    (iv) Permit and license fees.
    (v) Professional service fees, except for application preparation.
    (vi) Feasibility studies and technical reports.
    (vii) Business plans.
    (viii) Retrofitting.
    (ix) Construction of a new energy efficient facility only when the 
facility is used for the same purpose, is approximately the same size, 
and based on the energy audit will provide more energy savings than 
improving an existing facility. Only costs identified in the energy 
audit for energy efficiency improvements are allowed.

[[Page 52666]]

    (x) Permanent working capital.
    (xi) Land acquisition.
    (3) Maximum percent of guarantee. The maximum loan guarantees 
issued to a Rural Development approved lender with Renewable Energy 
Systems and Energy Efficiency Improvements funding are shown in Table 
to paragraph (f).

  Table to Paragraph (f).--Maximum Loan Guarantee Percentages for Renewable Energy System and Energy Efficiency
                                          Improvement Guaranteed Loans
----------------------------------------------------------------------------------------------------------------
                                                                            Guaranteed loan amount
                                                             ---------------------------------------------------
                                                                                          Over $5
                                                                               Over      million up
 Type of rural development approved     Type of application     $600,000     $600,000      to and      Over $10
               lender                                           or less     up to and    including     million
                                                               (percent)    including       $10       (percent)
                                                                            $5 million    million
                                                                            (percent)    (percent)
----------------------------------------------------------------------------------------------------------------
Without preferred lender status.....  Low documentation.....           75           70           na           na
                                      Full documentation....           85           80           70           60
With preferred lender status........  Low documentation.....           85           80           na           na
                                      Full documentation....           85           80           70           60
----------------------------------------------------------------------------------------------------------------
na = not applicable.

Sec. Sec.  5001.105-5001.200  [Reserved]

    Dated: August 30, 2007.
Thomas C. Dorr,
Under Secretary, Rural Development.
[FR Doc. 07-4349 Filed 9-13-07; 8:45 am]
BILLING CODE 3410-XY-P