[Federal Register Volume 79, Number 178 (Monday, September 15, 2014)]
[Proposed Rules]
[Pages 55316-55350]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-21351]
[[Page 55315]]
Vol. 79
Monday,
No. 178
September 15, 2014
Part III
Department of Agriculture
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Rural Business-Cooperative Service
Rural Utilities Service
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7 CFR Parts 4279 and 4287
Guaranteed Loanmaking and Servicing Regulations; Proposed Rule
Federal Register / Vol. 79 , No. 178 / Monday, September 15, 2014 /
Proposed Rules
[[Page 55316]]
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DEPARTMENT OF AGRICULTURE
Rural Business-Cooperative Service
Rural Utilities Service
7 CFR Parts 4279 and 4287
RIN 0570-AA85
Guaranteed Loanmaking and Servicing Regulations
AGENCY: Rural Business-Cooperative Service and Rural Utilities Service,
USDA.
ACTION: Proposed rule.
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SUMMARY: The Rural Business-Cooperative Service (Agency) is an agency
within the Rural Development mission area of the United States
Department of Agriculture (USDA) responsible for administering the
Business and Industry (B&I) Guaranteed Loan Program. The B&I Guaranteed
Loan Program is authorized by the Consolidated Farm and Rural
Development Act and provides loan guarantees to banks and other
approved lenders to finance private businesses located in rural areas.
The Agency is proposing changes to refine the regulations for the
B&I Guaranteed Loan Program in an effort to improve program delivery,
clarify the regulations to make them easier to understand, and reduce
delinquencies. The proposed changes to the program are expected to
reduce the subsidy rate and thereby lower program subsidy costs over
time as the proposed rule is implemented. By lowering the subsidy rate,
the Agency may be able to provide greater leverage for the budget
authority provided by Congress. This will allow the Agency to guarantee
a higher total dollar amount of loan requests and, assuming the same
average size of loans being guaranteed, to guarantee more loans. These
changes could also result in increased lending activity, expanded
business opportunities, and creation of more jobs in rural areas.
DATES: Comments on the proposed rule must be received on or before
November 14, 2014. The comment period for the information collection
under the Paperwork Reduction Act of 1995 continues through November
14, 2014.
ADDRESSES: You may submit comments to this rule by any of the following
methods:
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 with a copy to Brenda Griffin, Rural
Development, Business Programs, U.S. Department of Agriculture, 1400
Independence Avenue SW., Stop 3224, Washington, DC 20250-3224.
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 with a copy to Brenda Griffin, Rural Development, Business
Programs, U.S. Department of Agriculture, 1400 Independence Avenue SW.,
Room 6847, Washington, DC 20250-3224.
All written comments will be available for public inspection during
regular work hours at the 300 7th Street SW., 7th Floor address listed
above. Comments will also be available through regulations.gov
referencing RIN number 0570-AA85.
FOR FURTHER INFORMATION CONTACT: Brenda Griffin, Rural Development,
Business Programs, U.S. Department of Agriculture, 1400 Independence
Avenue SW., Stop 3224, Washington, DC 20250-3224; email:
[email protected]; telephone (202) 720-6802.
I. SUPPLEMENTARY INFORMATION
Executive Order 12866, Regulatory Planning and Review
This proposed rule has been reviewed under Executive Order (EO)
12866 and has been determined to be significant. The EO defines a
``economically significant regulatory action'' as one that is likely to
result in a rule that may 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. The actions in this rule collectively are
not expected to have an impact of $100 million or more, which negates
the need for a more detailed assessment of likely benefits and costs
and analysis of potentially effective and reasonably feasible
alternatives.
Programs Affected
The Catalog of Federal Domestic Assistance program number assigned
to the B&I Guaranteed Loan Program is 10.768.
Executive Order 12372, Intergovernmental Review of Federal Programs
B&I Guaranteed Loans are subject to the Provisions of Executive
Order 12372, which require intergovernmental consultation with State
and local officials. The Agency will conduct intergovernmental
consultation in the manner delineated in 7 CFR part 3015, subpart V, or
successor regulations.
Executive Order 12988, Civil Justice Reform
This rule has been reviewed under Executive Order 12988, Civil
Justice Reform. The Agency has determined that this rule meets the
applicable standards provided in section 3 of the Executive Order.
Additionally, (1) all state and local laws and regulations that are in
conflict with this rule will be preempted; (2) no retroactive effect
will be given to the rule; and (3) administrative appeal procedures, if
any, must be exhausted before litigation against the Department or its
agencies may be initiated, in accordance with the regulations of the
National Appeals Division of USDA at 7 CFR part 11.
Executive Order 13132, Federalism
The policies contained in this proposed rule do not have any
substantial direct effect on states, on the relationship between the
national government and the states, or on the distribution of power and
responsibilities among the various levels of government. Nor does this
proposed rule impose substantial direct compliance costs on state and
local governments. Therefore, consultation with states is not required.
Executive Order 13175, Consultation and Coordination With Indian Tribal
Governments
This executive order imposes requirements on the Agency in the
development of regulatory policies that have tribal implications or
preempt tribal laws. Rural Development has determined that this
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 Indian
tribes. Thus, this proposed rule is not subject to the requirements of
Executive Order 13175. If a tribe determines that this rule has
implications of which Rural Development is not aware and would like to
engage with Rural Development on this rule, please contact Rural
Development's Native American Coordinator at (720) 544-2911 or
[email protected].
[[Page 55317]]
Regulatory Flexibility Act
Under section 605(b) of the Regulatory Flexibility Act, 5 U.S.C.
605(b), the Agency certifies that this rule will not have a significant
economic impact on a substantial number of small entities. This
proposed rule affects lenders that utilize the B&I Guaranteed Loan
Program and any potential lenders that may utilize the program in the
future. There are currently 1,117 active lenders in the B&I portfolio.
The Agency estimates that approximately 50 percent of the lenders that
utilize the program are small community banks that are considered a
small entity, as defined by the Regulatory Flexibility Act. Therefore,
the Agency has determined that this proposed rule will have an impact
on a substantial number of small entities.
However, the Agency has determined that the economic impact of the
proposed rule on these small lenders will not be significant. Many of
the changes being implemented in the rule are tweaks to the program
that lenders have suggested at a series of lender roundtable meetings
or during annual lender visits that do not have any economic impact on
the lenders. The most significant change in the rule that affects
lenders is the criteria to become an approved non-regulated lender.
This change by itself, however, does not have a significant economic
impact on a substantial number of entities as it affects less than 2
percent of the active lenders (approximately 21 non-regulated lenders).
Based on the data in the Paperwork Reduction Act (PRA) burden package,
the Agency estimates the cost of the proposed rule to be approximately
$1,600 per lender. This is based on determining which of the estimated
costs in the PRA burden package would be incurred by the lenders
applying for and participating in the program, and the estimated number
of lenders. SBA's definition of a small business for lenders is total
assets of $500 million or less. The Agency selected 20 small lenders at
random to determine their total assets. Based on 2014 data, the range
of total assets for these 20 lenders is $52.6 million to $476 million.
The average cost of $1,600 per lender represents less than 0.003% of
the total assets of the smallest of these 20 lenders. Therefore, this
rule will not have a significant impact on a substantial number of
small entities.
Unfunded Mandates Reform Act
This rule contains no Federal mandates (under the regulatory
provisions of Title II of the Unfunded Mandates Reform Act of 1995) for
State, local, and tribal governments or the private sector. Thus, this
rule is not subject to the requirements of sections 202 and 205 of the
Unfunded Mandates Reform Act of 1995.
Environmental Impact Statement
This rule has been reviewed in accordance with 7 CFR part 1940,
subpart G, ``Environmental Program.'' The Agency has determined that
this action does not constitute a major Federal action significantly
affecting the quality of the human environment, and in accordance with
the National Environmental Protection Policy Act of 1969 (NEPA), 42
U.S.C. 4321 et seq., an Environmental Impact Statement is not required.
Under this program, the Agency conducts a NEPA review for each
application received. To date, no significant environmental impacts
have been reported, and Findings of No Significant Impact (FONSI) have
been issued for each approved application. Taken collectively, the
applications show limited potential for significant adverse cumulative
effects.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995, the Rural
Business-Cooperative Service announces its intention to seek OMB
approval of the new reporting and recordkeeping requirements contained
in this regulation.
The following estimates are based on an estimated volume of
activity of 100 preapplications, 600 applications, and 550 new loan
guarantees. Preapplications are not required and are submitted at the
option of the lender. The purpose of a preapplication is to allow a
lender to submit a limited amount of information, most of which should
be easily obtained, so that the Agency can determine and advise the
lender whether the request is likely to meet the requirements of the
program. Some lenders will skip the preapplication process and submit a
full application as the first contact with the Agency. If the
information is submitted in a preapplication, it would not need to be
resubmitted in the application unless the financials become more than
90 days old between the time of preapplication and application.
Applications are evaluated by the Agency to determine whether the
borrower is eligible, the proposed loan is for an eligible purpose,
there is reasonable assurance of repayment ability, there is sufficient
collateral and equity, and the proposed loan complies with all
applicable statutes and regulations.
Estimate of Burden: Public reporting burden for the additional
proposed requirements will increase the current collection of
information by an estimated total of 5,111 hours. The Agency
anticipates the number of respondents to fluctuate based on funding
levels. The average burden per respondent under the current rule is
estimated to be 8 hours, and the average burden under the proposed rule
is estimated to be 11 hours, for an estimated increase of 3 hours per
respondent.
Respondents: Primary respondents for this data are lending
institutions and rural for profit businesses but also include
individuals, non-profit businesses, Indian tribes, public bodies, and
cooperatives. The estimates below are for all three subparts associated
with this rule and include the additional proposed requirements.
Estimated Number of Respondents: 3,675.
Estimated Number of Responses per Respondent: 1-4.
Estimated Number of Responses: 27,076.
Estimated Total Annual Burden (hours) on Respondents: 40,511.
Copies of this information collection can be obtained from Jeanne
Jacobs, 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) 692-0040.
Comments
Comments are invited on: (a) 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; (b) ways to enhance the quality, utility, and clarity of the
information to be collected; and (c) 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 Jeanne Jacobs, 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. Comments can be viewed at
[[Page 55318]]
regulations.gov under RIN number 0570-AA85.
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.
II. Background
Rural Development administers a multitude of Federal programs for
the benefit of rural America, 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, access
to capital, and technical support that enables rural communities to
prosper. To achieve its mission, Rural Development provides financial
support--including direct loans, grants, and loan guarantees--and
technical assistance to help improve the quality of life and provide
the foundation for economic development in rural areas.
The B&I Guaranteed Loan Program was authorized by the Rural
Development Act of 1972. The loans are made by private lenders to rural
businesses for the purpose of creating new businesses, expanding
existing businesses, and for other purposes that create employment
opportunities in rural America. Businesses in rural areas are eligible
for this program. Rural area, as defined by 7 CFR 4279.108(c), is
defined as any area other than a city or town of more than 50,000
inhabitants and the urbanized area contiguous and adjacent to such a
city or town. The types of borrowers that are served by the B&I
Guaranteed Loan Program are cooperative organizations, corporations,
partnerships, or other legal entities organized and operated on a
profit or nonprofit basis; an Indian tribe on a Federal or State
reservation or other Federally recognized tribal group; a public body;
or an individual, provided the borrower is engage in, or proposing to
engage, in a business. Loans can be made for a variety of purposes
including business acquisition, expansion or improvement; purchase of
real estate, machinery and equipment, or supplies; debt refinancing;
and working capital. The rate and term of the loan is negotiated
between the business and the lender.
The regulations for the B&I Guaranteed Loan Program were rewritten
in 1996 to streamline and simplify the regulations for the program
while shifting primary responsibility for loan documentation and
analysis from the Agency to the lenders to make the program more
responsive to the needs of lenders and rural businesses.
III. Executive Summary
Purpose of the Regulatory Action
The Agency is promulgating these regulations to improve program
delivery, clarify the regulations to make them easier to understand,
and reduce delinquencies. The changes should reduce the cash outflows
and increase the cash inflows associated with the B&I Guaranteed Loan
Program portfolio, resulting in a lower subsidy rate. A lower subsidy
rate should result in increased lending activity, the expansion of
business opportunities, and the creation of more jobs in rural areas.
Changes proposed originated from informal third party comments and
Agency experience in administering the program, including observations
from assessment reviews and recommendations from the Agency's internal
Business Programs Advisory Team.
The Agency believes the proposed changes in the rule may increase
lending activity, resulting in the expansion of business opportunities
and the creation of more jobs in rural America, and improve the
program's effectiveness by improving the prosperity of rural residents
through guarantees of targeted investments that may improve rural
competitiveness, facilitate industrial conversion, and enable rural
residents to profit from private sector activity. The revisions
contained herein may improve the efficiency and effectiveness of the
program and make the regulation more customer friendly and easier to
understand. The Agency thinks that errors may be reduced because the
guidelines and requirements will be clearer and better organized.
The proposed rule's incremental effect to the public will be to
nominally increase the burden for lenders seeking to be an eligible
lender and for ``new'' investors in projects that receive B&I loan
guarantees after the Loan Note Guarantee is issued by a total of
approximately $4,800 per year. The cost to participating lenders and
borrowers was estimated to be approximately $2.5 million. The cost to
the Federal government to administer the program was estimated to be
approximately $2.1 million.
Summary of the Major Provisions of the Regulatory Action
This proposed rule is intended to replace the B&I Guaranteed Loan
Program regulations under 7 CFR parts 4279 and 4287, which will not
significantly depart from the current program of loan guarantees for
businesses in rural areas.
The rule will strengthen criteria for non-regulated lenders to
participate in the program. It will also codify provisions of the 2008
Farm Bill, including two types of rural area exceptions and eligibility
of local foods projects and cooperative equity security guarantees. The
rule also includes provisions for New Markets Tax Credits and the
Cooperative Stock Purchase Program. Changes are also made to the loan
scoring criteria. Loan servicing changes include the termination of
interest accrual to the lender after 90 days from the delinquency
effective date or to a holder 90 days from the date of the first demand
letter from any holder of the guaranteed portion. Additionally,
attorney/legal fees that the lender can claim in the liquidation
process will be reduced from full reimbursement to being shared equally
between the lender and the Agency. The rule also adds the ability to
obtain personal and corporate guarantees from those owning 20 percent
of the business when there is a sale of the borrower's stock.
IV. Discussion of the Proposed Rule
Following is a discussion of some of the most significant policy
revisions included in this proposed rule.
Eligible lenders for the program include regulated lenders
(formerly known as ``traditional lenders'') and Agency-approved non-
regulated lenders (formerly known as ``other lenders''). Insurance
companies will no longer be considered traditional or regulated lenders
under the program because historically, insurance companies have had
significant default and loss rates in the Agency B&I Guaranteed Loan
portfolio. However, insurance companies will be able to apply to become
Agency-approved eligible lenders by meeting criteria of a non-regulated
lender established in the regulation. Lenders will have to execute a
new Lender's Agreement to originate new guaranteed loans; however,
existing lenders are bound by their existing Lender's Agreements and
must continue to service existing guaranteed loans in their portfolio
regardless of whether they wish to originate new guaranteed loans.
Criteria to become an approved non-regulated lender for the B&I
program
[[Page 55319]]
will be strengthened under this proposed rule due to higher than usual
default and loss rates for this type of lender in the Agency B&I
Guaranteed Loan portfolio. Non-regulated lenders will be able to become
eligible lenders for a 3-year period and may request renewals to
continue originating loans under the program. Non-regulated lenders
will have to have and maintain 10 percent tangible balance sheet
equity, which is up from the 7 percent previously required. Non-
regulated lenders will have to have a record of successfully making at
least 10 commercial loans annually totaling at least $1 million for
each of the last 5 years, with lender's delinquent commercial loan
portfolio over that period not exceeding 6 percent of all commercial
loans made and 3 percent in commercial loan losses based on the
original principal loan amount. In addition, non-regulated lenders will
have to maintain a loss reserve and undergo a credit examination that
must be acceptable to the Agency. These requirements are being
strengthened to ensure participation in the program by lenders that
have a thorough knowledge of commercial lending and high standards of
professional competence to operate a successful lending program.
Under the B&I program, a rural area is generally any area of a
State other than a city or town that has a population of greater than
50,000 inhabitants and any urbanized area contiguous and adjacent to
such a city or town. In making this determination, the Agency will use
the latest decennial census from the U.S. Census Bureau. The 2008 Farm
Bill added the ability to make two different types of rural area
exceptions, which was incorporated into the Consolidated Farm and Rural
Development Act. Section 343(a)(13)(E) of the Consolidated Farm and
Rural Development Act states: ``Notwithstanding any other provision of
this definition, in determining which census blocks in an urbanized
area are not in a rural area, the Agency shall exclude any cluster of
census blocks that would otherwise be considered not in a rural area
only because the cluster is adjacent to not more than two census blocks
that are otherwise considered not in a rural area under this
definition.'' Additionally, the Under Secretary for Rural Development
may determine that areas are ``rural in character,'' and therefore
eligible for the program, under certain circumstances. Any
determination made by the Under Secretary under this provision will be
to areas that are determined to be ``rural in character'' in accordance
with Section 343(a)(13)(D) of the Consolidated Farm and Rural
Development Act and are within: (1) An urbanized area that has two
points on its boundary that are at least 40 miles apart, which is not
contiguous or adjacent to a city or town that has a population of
greater than 150,000 inhabitants or the urbanized area of such city or
town; or (2) an area within an urbanized area contiguous and adjacent
to a city or town of greater than 50,000 inhabitants that is within a
quarter mile of a rural area.
Presently, corporations or other non public-body type borrowers
must be at least 51 percent owned by persons who are either citizens of
the U.S. or reside in the U.S. after being legally admitted for
permanent residence to be eligible borrowers under the B&I program. The
Agency is inviting public comment on whether guaranteed loans should be
made to businesses that do not meet this requirement, if the facility
being financed will create new or save existing jobs for rural U.S.
residents and when loan funds are used only for fixed assets that will
remain in the U.S. This could provide flexibility to create or save
jobs in rural areas when the business is owned, in whole or in part, by
a foreign interest.
The eligibility section is proposed to be revised to include
cooperative equity security guarantees as eligible loan purposes in
accordance with the 2008 Farm Bill. Separate sections of the regulation
specifically address the requirements for New Markets Tax Credits and
cooperative equity security guarantees, as well as requirements for the
cooperative stock purchase program.
The eligibility section is being revised to include projects that
process, distribute, aggregate, store, and/or market locally or
regionally produced agricultural food products to support community
development and farm and ranch income. This is also a provision of the
2008 Farm Bill. The term ``locally or regionally produced agricultural
food product'' means any agricultural food product that is raised,
produced, and distributed in the locality or region in which the final
product is marketed, so that the distance the product is transported is
less than 400 miles from the origin of the product or within the State
in which the product is produced, as defined by Section
310B(g)(9)(A)(i) of the Consolidated Farm and Rural Development Act.
Food products could be raw, cooked, or a processed edible substance,
beverage, or ingredient used or intended for use or for sale in whole
or in part for human consumption. A significant amount of the food
product sold by the borrower must be locally or regionally produced,
and a significant amount of the locally or regionally produced food
product must be sold locally or regionally. Projects in non-rural areas
may be included when the project provides an economic benefit to the
surrounding rural communities. Funding priority will be given to
projects that provide a benefit to underserved communities. In
accordance with Section 310B(g)(9)(A)(ii) of the Consolidated Farm and
Rural Development Act, an underserved community is a community
(including an urban or rural community and an Indian tribal community)
that has limited access to affordable, healthy foods, including fresh
fruits and vegetables, in grocery retail stores or farmer to consumer
direct markets and that has either a high rate of hunger or food
insecurity or a high poverty rate as reflected in the most recent
decennial census.
The ineligible loan purpose section is being modified to permit
distribution or payment to an immediate family member of the owner to
accommodate intergenerational business acquisitions. Previously, no
loan proceeds could be distributed to a close relative of the owner who
retained an ownership interest in the borrower. This is being changed
so that an immediate family member of the owner, partner, or
stockholder can purchase the business from an owner, partner or
stockholder when the seller does not retain an ownership interest and
the Agency determines the price paid to be reasonable.
A definition for a high priority project is being added to the
rule. A high priority project is defined in the proposed rule as one
that scores more than half of the points available under the scoring
criteria outlined in the priority scoring section.
In an effort to reduce the cost for the taxpayer, 90 percent
guarantees will be limited to loans of $5 million and less that are
either high priority projects or where the lender needs the higher
percentage of guarantee because of its legal or regulatory lending
limit. Additionally, reduced guarantee fees will only be available on
loans of $5 million or less, unless an authorizing statute provides
otherwise (e.g., the Alaska Roadless Areas statute).
Previously, the interest rate on the guaranteed portion of the loan
could not exceed the unguaranteed portion of the loan. This was to
prevent the Agency from paying a higher loss on the guaranteed portion
than it otherwise would have if the interest on the guaranteed portion
was equal to or less than the unguaranteed portion. This requirement
has been relaxed to prevent
[[Page 55320]]
lenders from having to set floors and ceilings to remain compliant with
this requirement. The proposed rule now allows for the interest rate on
the guaranteed portion to be higher than the unguaranteed portion in
situations where a fixed rate on the guaranteed portion becomes a
higher rate than the variable rate on the unguaranteed portion due to
the normal fluctuation in the approved variable interest rate.
Although credit quality standards have not changed, the credit
quality section is being modified to be in line with the five C's of
credit (capacity, capital, collateral, conditions, character). The
Agency's policy on standardized collateral discounting has also been
added. The Agency is adding the ability to require guarantees from
persons whose ownership in the borrower is held indirectly through
other companies.
The Agency is relaxing the requirement for business plans with the
application for loans where the use of loan proceeds is exclusively for
debt refinancing and fees, but has added a requirement for feasibility
studies for all biofuels proposals, whether new or existing. The Agency
is also proposing to revise the requirement for 3 years of historical
financial statements for parent, subsidiary, and affiliated companies
to only require current financial statements. Additionally, the number
of attachments that need to be included as part a complete application
for loans of $600,000 and less are reduced.
Loan scoring criteria, which is used to fund projects by priority,
is being modified to award more points for the following: Leveraging
B&I program dollars, the business' loan-to-job ratio, and providing
quality jobs. The administrative points section has also been modified
to account for community economic development strategies and State
strategic plans and to allow for the awarding of points for projects
that will fulfill an Agency initiative, such as the biobased product
initiative or the Investing in Manufacturing Communities Partnership
initiative. The proposed rule now allows for 150 possible priority
points.
Loan servicing requirements under the B&I program have been
clarified. The annual conference between the lender and the Agency can
be held via teleconference. This change is not meant to replace a face-
to-face annual lender conference. However, it does give some
flexibility when face-to-face lender visits are not practical. The
lender may contract loan servicing activities. However, the lender
remains responsible for complying with all requirements of the
regulations. The contracting out of any loan servicing activities does
not relieve the lender of its responsibility to comply with the
statutes and regulations governing the program. The proposed rule also
clarifies that the Agency will not allow the write-down of debt while
leaving the borrower in business and no new promissory notes may be
issued to process a transfer and assumption since the Loan Note
Guarantee references a specifically dated promissory note(s) with
specific amount(s). The lender may use an allonge to the existing
promissory note to facilitate the transaction.
Lenders will also be able to utilize balloon payments to
restructure a guaranteed loan in default in a workout situation as long
as there is a reasonable prospect for success and the remaining life of
the collateral supports the workout terms.
Lenders will provide the loan classification of the guaranteed loan
at loan closing rather than 90 days after the loan has closed.
Additionally, lenders must notify the Agency when a borrower is 30 days
past due and cannot cure the delinquency within 30 days. The lender
must also provide a monthly default status report, as opposed to
bimonthly. This will allow the Agency to be more responsive to
delinquencies.
The lender can proceed with liquidation after the loan has been
properly accelerated while the Agency has the liquidation plan under
review. This will allow the lender to take such action as appropriate
to protect the interest of the lender and the Agency while the
liquidation plan is under review by the Agency. The appraisal
requirement threshold will be increased from $100,000 to $250,000 on
all collateral being released, and the requirement for a current
appraisal for collateral being liquidated is being increased from
$200,000 to $250,000. The $250,000 threshold is consistent with Office
of Management and Budget (OMB) guidelines set forth in OMB Circular A-
129.
The future recoveries section has been modified. The lender must
use reasonable efforts to attempt collection from any party still
liable for the guaranteed loan. Any net proceeds from that effort must
be split pro rata between the lender and the Agency based on the
original amount of the loan guarantee. To the extent any party to the
loan has a written agreement with the Agency to repay all or part of
any loss claim paid by the Agency, any collection on that agreement
will not be split with the lender. This is because the Federal
Government has collection remedies available to it that are not
available to the lender and that are not intended to benefit private
parties.
Several changes have been made in an effort to reduce the cost to
the taxpayer in guaranteeing business and industry loans. Reasonable
attorney/legal fees that the lender can claim in the liquidation
process, as well as a Chapter 7 or Liquidating 11 bankruptcy, will be
reduced from full reimbursement to being shared equally between the
lender and the Agency. The Agency will not allow default or penalty
interest to be charged to the borrower. This could cause the Agency to
pay a loss when a solution could have been possible if the interest
rate had not been increased. Additionally, the proposed rule clarifies
that late payment fees and interest on interest will not be covered by
the guarantee. The Agency has added the ability to require personal or
corporate guarantees from those owning 20 percent or more of the
borrower when stock of the borrower is sold. The ability for the Agency
to charge a transfer and assumption fee has been added to the proposed
rule. Notification for any such fee will be published annually in the
Federal Register.
A significant change that is expected to decrease the cost to the
taxpayer is that interest accrual is limited (1) to any holder to 90
days from the date of the first demand letter from a secondary market
holder for payment and (2) to any lender 90 days from the delinquency
effective date. A holder is a person or entity, other than the lender,
who owns all or part of the guaranteed portion of the loan. The Agency
was finding instances where holders were collecting interest on the
guaranteed portion of the loan for a much longer period of time than
other holders on the same loan. This was costing the Agency a
substantial amount of money in interest paid and complicating the
administration of the defaulted loan.
List of Subjects for 7 CFR Parts 4279 and 4287
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, and Rural areas.
For the reasons set forth in the preamble, parts 4279 and 4287 of
title 7 of the Code of Federal Regulations are proposed to be amended
as follows:
[[Page 55321]]
PART 4279--GUARANTEED LOANMAKING
0
1. The authority citation for part 4279 continues to read as follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1932(a), and 7 U.S.C. 1989.
0
2. Revise Subpart A to read as follows:
Subpart A--General
Sec.
4279.1 Introduction.
4279.2 Definitions and abbreviations.
4279.3-4279.14 [Reserved]
4279.15 Exception authority.
4279.16 Appeals.
4279.17-4279.28 [Reserved]
4279.29 Eligible lenders.
4279.30 Lenders' functions and responsibilities.
4279.31-4279.43 [Reserved]
4279.44 Access to Records.
4279.45-4279.58 [Reserved]
4279.59 Environmental requirements.
4279.60 Civil rights impact analysis.
4279.61 Equal Credit Opportunity Act.
4279.62-4279.70 [Reserved]
4279.71 Public bodies and nonprofit corporations.
4279.72 Conditions of guarantee.
4279.73 [Reserved]
4279.74 [Reserved]
4279.75 Sale or assignment of guaranteed loan.
4279.76 [Reserved]
4279.77 Minimum retention.
4279.78 Repurchase from holder.
4279.79-4279.83 [Reserved]
4279.84 Replacement of document.
4279.85-4279.99 [Reserved]
4279.100 OMB control number.
Subpart A--General
Sec. 4279.1 Introduction.
(a) This subpart contains general regulations for making and
servicing Business and Industry (B&I) loans guaranteed by the Agency
and applies to lenders, holders, borrowers and other parties involved
in making, guaranteeing, holding, servicing, or liquidating such loans.
This subpart is supplemented by subpart B of this part, which contains
loan processing regulations, and subpart B of part 4287 of this
chapter, which contains loan servicing regulations.
(b) The lender is responsible for ascertaining that all
requirements for making, securing, servicing, and collecting the loan
are complied with.
(c) Whether specifically stated or not, whenever Agency approval is
required, it must be in writing. Copies of all forms, regulations, and
instructions referenced in this subpart may be obtained from any Agency
office and from the USDA Rural Development Web site at
www.rurdev.usda.gov/rbs. Whenever a form is designated in this subpart,
it is initially capitalized and its reference includes predecessor and
successor forms, if applicable.
Sec. 4279.2 Definitions and abbreviations.
(a) Definitions.
Administrator. The Administrator of Rural Business-Cooperative
Service within the Rural Development mission area of the U.S.
Department of Agriculture.
Affiliate. An entity that is related to another entity by owning
shares or having an interest in the entity, by common ownership, or by
any means of control.
Agency. The Rural Business-Cooperative Service or successor Agency
assigned by the Secretary of Agriculture to administer the B&I program.
References to the National or State Office should be read as prefaced
by ``Agency'' or ``Rural Development'' as applicable.
Agricultural production. The cultivation, growing or harvesting of
crops and the breeding, raising, feeding or housing of livestock for
fiber or food for human consumption.
Annual renewal fee. The annual renewal fee is a fee that is paid
once a year by the lender and is required to maintain the
enforceability of the Loan Note Guarantee.
Appraisal surplus. The difference between the fair market value of
an asset and its depreciated book value when the fair market value is
higher.
Arm's-length transaction. A transaction between ready, willing, and
able disinterested parties that are not affiliated with or related to
each other and have no security, monetary, or stockholder interest in
each other.
Assignment Guarantee Agreement. Form RD 4279-6, ``Assignment
Guarantee Agreement,'' is the signed agreement between the Agency, the
lender, and the holder containing the terms and conditions of an
assignment of a guaranteed portion of a loan, using the single note
system.
Biogas. Renewable biomass converted to gaseous fuel.
Biomass. Any organic material that is available on a renewable or
recurring basis including agricultural crops, trees grown for energy
production, wood waste and wood residues, plants, including aquatic
plants and grasses, fibers, animal waste and other waste materials, and
fats, oils, greases, including recycled fats, oils and greases. It does
not include paper that is commonly recycled or unsegregated solid
waste.
Bond. A form of debt security in which the authorized issuer
(borrower) owes the bond holder (lender) a debt and is obligated to
repay the principal and interest (coupon) at a later date(s)
(maturity). An explanation of the type of bond and other bond
stipulations must be attached to the bond issuance.
Borrower. The person that borrows, or seeks to borrow, money from
the lender, including any party liable for the loan except for
guarantors.
Collateral. The asset(s) pledged by the borrower to secure the
loan.
Commercially available. A system that has a proven operating
history for at least 1 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 the balance of system
equipment and spare parts are readily available, and service is readily
available to properly maintain and operate the system. An established
warranty exists for major parts and labor. If the system is currently
commercially available only outside of the U.S., authoritative evidence
of the foreign operating history, performance and reliability is
required in order to address the proven operating history.
Conditional Commitment. Form RD 4279-3, ``Conditional Commitment,''
is the Agency's notice to the lender that the loan guarantee it has
requested is approved subject to the completion of all conditions and
requirements set forth by the Agency and outlined in the attachment to
the Conditional Commitment.
Conflict of interest. A situation in which a person has competing
personal, professional, or financial interests that prevents the person
from acting impartially.
Cooperative organization. An entity that is legally chartered as a
cooperative or an entity that is not legally chartered as a cooperative
but is owned and operated for the benefit of its members, with returns
of residual earnings paid to such members on the basis of patronage.
Debt Collection Improvement Act (DCIA). The Debt Collection
Improvement Act of 1996, 31 U.S.C. 3701 et seq, requires that any
monies that are payable or may become payable from the United States
under contracts and other written agreements to any person not an
agency or subdivision of a State or local government may be subject to
administrative offset for the collection of a delinquent debt the
person owes to the United States.
Default. The condition that exists when a borrower is not in
compliance with the promissory note, the loan
[[Page 55322]]
agreement, or other related documents evidencing the loan. Default
could be a monetary or non-monetary default.
Deficiency judgment. A monetary judgment rendered by a court of
competent jurisdiction after foreclosure and liquidation of all
collateral securing the loan.
Delinquency. A loan for which a scheduled loan payment is more than
30 days past due and cannot be cured within 30 days.
Energy projects. Commercially available projects that produce or
distribute energy or power and/or projects that produce biomass or
biogas fuel.
Existing business. A business that has been in operation for at
least 1 full year. Mergers or changes in the business name or legal
type of entity of a currently operating business are considered to be
existing businesses as long as there is not a significant change in
operations. Newly-formed entities that are buying existing businesses
will be considered an existing business as long as the business being
bought remains in operation and there is no significant change in
operations.
Existing lender debt. A debt owed by a borrower to the same lender
that is applying for or has received the Agency guarantee.
Fair market value. The price that could reasonably be expected for
an asset in an arm's-length transaction between a willing buyer and a
willing seller under ordinary economic and business conditions.
Future recovery. Funds collected by the lender after a final loss
claim is processed.
High impact business development investment. A business that scores
at least 20 points under Sec. 4279.166(b)(4).
High priority project. A project that scores more than 50 percent
of the priority points available under Sec. 4279.166(b)(1) through
(5).
Holder. A person, other than the lender, who owns all or part of
the guaranteed portion of the loan with no servicing responsibilities.
When the single note option is used and the lender assigns a part of
the guaranteed note to an assignee, the assignee becomes a holder only
when the Agency receives notice and the transaction is completed
through use of the Assignment Guarantee Agreement.
Immediate family. Individuals who live in the same household or who
are closely related by blood, marriage, or adoption, such as a spouse,
domestic partner, parent, child, sibling, aunt, uncle, grandparent,
grandchild, niece, nephew, or cousin.
In-house expenses. Expenses associated with activities that are
routinely the responsibility of a lender's internal staff or its
agents. In-house expenses include, but are not limited to, employees'
salaries, staff lawyers, travel, and overhead.
Interest. A fee paid by a borrower to the lender as a form of
compensation for the use of money. When money is borrowed, interest is
paid as a fee over a certain period of time (typically months or years)
to the lender as percentage of the principal amount owed. The term
interest does not include default or penalty interest or late payment
fees or charges.
Interim financing. A temporary or short-term loan made with the
clear intent when the loan is made that it will be repaid through
another loan that provides permanent financing. Interim financing is
frequently used to pay construction and other costs associated with a
planned project, with permanent financing to be obtained after project
completion.
Lender. The eligible lender approved by the Agency to make,
service, and collect the Agency guaranteed loan that is subject to this
subpart. Agency approval of the lender will be evidenced by an
outstanding Form RD 4279-4, ``Lender's Agreement,'' between the Agency
and the lender.
Lender's Agreement. Form RD 4279-4, ``Lender's Agreement,'' or
predecessor form, between the Agency and the lender setting forth the
lender's loan responsibilities.
Liquidation expenses. Costs directly associated with the
liquidation of collateral, including preparing collateral for sale
(e.g., repairs and transport) and conducting the sale (e.g.,
advertising, public notices, auctioneer expenses, and foreclosure
fees). Liquidation expenses do not include in-house expenses. Legal/
attorney fees are considered liquidation expenses provided that the
fees are reasonable, as determined by the Agency, and cover legal
issues pertaining to the liquidation that could not be properly handled
by the lender and its in-house counsel.
Loan agreement. The agreement between the borrower and lender
containing the terms and conditions of the loan and the
responsibilities of the borrower and lender.
Loan classification. The process by which loans are examined and
categorized by degree of potential loss in the event of default.
Loan Note Guarantee. Form RD 4279-5, ``Loan Note Guarantee,'' or
predecessor form, issued and executed by the Agency containing the
terms and conditions of the guarantee.
Loan packager. A person, other than the applicant borrower or
lender, that prepares a loan application package.
Loan service provider. A person, other than the lender of record,
that provides loan servicing activities to the lender.
Loan-to-discounted value. The ratio of the dollar amount of a loan
to the discounted dollar value of the collateral pledged as security
for the loan.
Loan-to-value. The ratio of the dollar amount of a loan to the
dollar value of the collateral pledged as security for the loan.
Local government. A county, municipality, town, township, village,
or other unit of general government, including tribal governments,
below the State level.
Material adverse change. Any change in circumstance associated with
a guaranteed loan, including the borrower's financial condition or
collateral, that could be reasonably expected to jeopardize loan
performance.
Natural resource value-added product. Any naturally occurring
resource, including agricultural resources, that is processed to add
value or the generation of renewable energy from a natural resource.
Negligent loan origination. The failure of a lender to perform
those services that a reasonably prudent lender would perform in
originating its own portfolio of loans that are not guaranteed. 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. The failure of a lender to perform those
services which a reasonably prudent lender would perform in servicing
(including liquidation of) its own portfolio of loans that are not
guaranteed. The term includes not only the concept of a failure to act,
but also not acting in a timely manner, or acting in a manner contrary
to the manner in which a reasonably prudent lender would act.
New business. A startup or otherwise new business that has been in
operation for less than 1 full year. New businesses include newly-
formed entities leasing space or building ground up facilities, even if
the owners of the new or startup business own affiliated businesses
doing the same kind of business.
Parity. A lien position whereby two or more lenders share a
security interest of equal priority in collateral. In the event of
default, each lender will be affected on an equal basis.
Participation. Sale of an interest in a loan by the lead lender to
one or more participating lenders wherein the lead
[[Page 55323]]
lender retains the note, collateral securing the note, and all
responsibility for managing and servicing the loan. Participants are
dependent upon the lead lender for protection of their interests in the
loan. The relationship is typically formalized by a participation
agreement. The participants and the borrower have no rights or
obligations to one another.
Person. An individual or entity.
Poverty. A community or area is considered a poverty area if the
county, city, or equivalent (such as parish, borough, municipio or
census designated place) where the community or area is located has a
population of which 20 percent or more have income below the poverty
line.
Pro rata. On a proportional basis.
Promissory note. Evidence of debt with stipulated repayment terms.
``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 cannot, meet its obligations to protect or preserve
collateral. Protective advances include, but are not limited to,
advances affecting the collateral made for property taxes, rent, hazard
and flood insurance premiums, and annual assessments. Legal/attorney
fees are not a protective advance.
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.
Report of loss. Form RD 449-30, ``Guaranteed Loan Report of Loss,''
used by lenders when reporting a financial loss under an Agency
guarantee.
Rural Development. The mission area of USDA that is comprised of
the Rural Business-Cooperative Service, Rural Housing Service, and
Rural Utilities Service and is under the policy direction and
operational oversight of the Under Secretary for Rural Development.
Spreadsheet. A table containing data from a series of financial
statements of a business over a period of time. Financial statement
analysis normally contains spreadsheets for balance sheet and income
statement items and includes a cash flow analysis and commonly used
ratios. The spreadsheets enable a reviewer to easily scan the data,
spot trends, and make comparisons.
State. Any of the 50 States of the U.S., the Commonwealth of Puerto
Rico, the U.S. Virgin Islands, 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.
Subordination. An agreement among the lender, borrower, and Agency
whereby lien priorities on certain assets pledged to secure payment of
the guaranteed loan will be reduced to a position junior to, or on
parity with, the lien position of another loan in order for the
Agency's borrower to obtain additional financing, not guaranteed by the
Agency, from the lender or a third party.
Tangible balance sheet equity. Tangible equity divided by tangible
assets. Formula: ((Assets-intangible assets)-liabilities)/(Assets-
intangible assets) or (Equity-intangible assets)/(Assets-intangible
assets)
Transfer and assumption. The conveyance by a borrower to an
assuming borrower of the assets, collateral, and liabilities of the
loan in return for the assuming borrower's binding promise to pay the
outstanding debt.
USDA Lender Interactive Network Connection (LINC). The portal Web
site currently at https://usdalinc.sc.egov.usda.gov/ used by lenders to
update loan data in the Agency's Guaranteed Loan System. Current
capabilities include loan closing and status reporting.
Veteran. For the purposes of assigning priority points, a veteran
is a person who is a veteran of any war, as defined in title 38 U.S.C.
101(12).
Working capital. Current assets available to support a business's
operations and growth. Working capital is calculated as current assets
less current liabilities.
(b) Abbreviations.
B&I--Business and Industry
CFR--Code of Federal Regulations
DCIA--Debt Collection Improvement Act
FDIC--Federal Deposit Insurance Corporation
FSA--Farm Service Agency
GAAP--Generally Accepted Accounting Principles of the U.S.
GLS--Guaranteed Loan System
LINC--USDA Lender Interactive Network Connection
NAD--National Appeals Division
OMB--Office of Management and Budget
REAP--Rural Energy for America Program
U.S.--United States of America
USDA--United States Department of Agriculture
(c) Accounting terms. Accounting terms not otherwise defined in
this part shall have the definition ascribed to them under GAAP.
Sec. Sec. 4279.3-4279.14 [Reserved]
Sec. 4279.15 Exception authority.
The Administrator may, on a case-by-case basis, grant an exception
to any requirement or provision of this subpart provided that such an
exception is in the best financial interests of the Federal Government.
Exercise of this authority cannot be in conflict with applicable law.
Sec. 4279.16 Appeals.
Applicants, borrowers, lenders, and holders have appeal or review
rights for Agency decisions made under this subpart, subpart B of this
part, or subpart B of part 4287. Programmatic decisions based on clear
and objective statutory or regulatory requirements are not appealable;
however, such decisions are reviewable for appealability by the NAD.
The borrower, lender, and holder can appeal any Agency decision that
directly and adversely impacts them. For an adverse decision that
impacts the borrower, the lender and borrower must jointly execute a
written request for appeal for an alleged adverse decision made by the
Agency. An adverse decision that only impacts the lender may be
appealed by the lender only. An adverse decision that only impacts the
holder may be appealed by the holder only. A decision by a lender
adverse to the interest of the borrower is not a decision by the
Agency, whether or not concurred in by the Agency. Appeals will be
conducted by USDA NAD and will be handled in accordance with 7 CFR part
11.
Sec. Sec. 4279.17-4279.28 [Reserved]
Sec. 4279.29 Eligible lenders.
An eligible lender must be domiciled in a State as defined in Sec.
4279.2 and must not be debarred or suspended by the Federal government.
If the lender is under a cease and desist order, or similar constraint,
from a Federal agency, the lender must inform the Agency. The Agency
will evaluate the lender's eligibility on a case-by-case basis given
the risk of loss posed by the cease and desist order. The Agency will
only approve loan guarantees for lenders with adequate capital to fund
and cover potential liquidation expenses for guaranteed loans it
proposes to make and adequate experience and expertise to make, secure,
service, and collect B&I loans. The lender must provide documentation
as to its capital and experience in commercial lending. The lender and
the Agency will execute a Lender's Agreement for each lender approved
to participate in the program. If a valid Lender's Agreement already
exists, it is
[[Page 55324]]
not necessary to execute a new Lender's Agreement with each loan
guarantee; however, a new Lender's Agreement must be executed with any
existing lenders making new loans on or after [DATE OF FINAL RULE
PUBLICATION]. The Agency may revoke a lender's eligible status at any
time for cause, including those examples cited in Sec. 4279.29(c).
(a) Regulated lenders. A regulated lender is any Federal or State
chartered bank, Farm Credit Bank, other Farm Credit System institution
with direct lending authority, Bank for Cooperatives, Savings and Loan
Association, Savings Bank, or mortgage company that is part of a bank-
holding company. These entities must be subject to credit examination
and supervision by either an agency of the U.S. or a State. Eligible
lenders may also include the National Rural Utilities Cooperative
Finance Corporation and credit unions provided that they are subject to
credit examination and supervision by either the National Credit Union
Administration or a State agency.
(b) Non-regulated lenders. The Agency may consider an applicant
lender that does not meet the criteria of paragraph (a) of this section
for eligibility to become a guaranteed lender for a 3-year period
provided that the Agency determines that the applicant lender has the
legal authority to operate a lending program and sufficient lending
expertise and financial strength to operate a successful lending
program. When the applicant lender is a multi-tiered entity, it will be
considered in its entirety. Insurance companies (formerly included as
traditional lenders) and non-regulated lenders (formerly known as other
lenders) previously approved as guaranteed lenders prior to [DATE OF
FINAL RULE PUBLICATION] must reapply to become an approved non-
regulated lender in order to originate new guaranteed loans. However,
both insurance companies and non-regulated lenders that have executed a
Lender's Agreement must continue to service the guaranteed loans in
their portfolios in accordance with that agreement.
(1) Non-regulated lenders must:
(i) Have been making commercial loans for at least 5 years;
(ii) Have a record of successfully making at least 10 commercial
loans annually totaling at least $1 million for each of the last 5
years, with lender's delinquent commercial loan portfolio over this
period not exceeding (a) 6 percent of all commercial loans made and (b)
3 percent in commercial loan losses (based on the original principal
loan amount);
(iii) Have and maintain tangible balance sheet equity of at least
10 percent of tangible assets and sufficient funds available to
disburse the guaranteed loans it proposes to approve within the first 6
months of being approved as a guaranteed lender;
(iv) Agree to establish and maintain an Agency approved loss
reserve equal to 3 percent of each B&I loan closed and agree to
increase the loss reserve for anticipated losses as required by the
Agency;
(v) Have adequate policies and procedures to ensure that internal
credit controls provide adequate loanmaking and servicing guidance; and
(vi) Have undergone a credit examination at its own expense from a
recognized independent reviewer acceptable to the Agency. The applicant
lender should consult with the Agency prior to receiving an examination
to ensure the examiner will be acceptable.
(2) A non-regulated lender that wishes consideration to become a
guaranteed lender must submit a request in writing to the Agency. The
Agency will notify the prospective lender whether the lender's request
for eligibility is approved or rejected. If rejected, the Agency will
notify the prospective lender, in writing, of the reasons for the
rejection. The lender must include in its written request the
following:
(i) An audited financial statement not more than 1 year old that
evidences that the lender has the required tangible balance sheet
equity and the resources to successfully meet its responsibilities;
(ii) A copy of any license, charter, or other evidence of authority
to engage in the proposed loanmaking and servicing activities. If
licensing by the State is not required, an attorney's opinion stating
that licensing is not required and that the entity has the legal
authority to engage in the proposed loanmaking and servicing activities
must be submitted;
(iii) Information on lending experience, including length of time
in the lending business; range and volume of lending and servicing
activity, including a list of the industries for which it has provided
financing; status of its loan portfolio, including a list of loans in
the portfolio with each loan's current loan classification code and
delinquency and loss rates as outlined in Sec. 4279.29(b)(1)(ii);
experience of management and loan officers; sources of funds for the
proposed loans; office location and proposed lending area; an estimate
of the number and size of guaranteed loan applications the lender will
develop; and proposed rates and fees, including loan origination, loan
preparation, and servicing fees. Such rates and fees must not be
greater than those charged by similarly located regulated commercial
lenders in the ordinary course of business;
(iv) A copy of the examination required under paragraph (b)(1)(vi)
of this section; and
(v) Documentation as to how the lender will fulfill the
requirements of Sec. 4279.30.
(3) Renewal of eligible lender status to continue making B&I loans
is not automatic. Eligible lender status will lapse 3 years from the
date of Agency approval and execution of the Lender's Agreement unless
the lender obtains a renewal. A lender whose eligible status has lapsed
must continue to service any outstanding loans guaranteed under this
part but may not submit requests for new loan guarantees. Lenders whose
eligibility has lapsed may file a subsequent request under this
subsection. Lenders requesting renewal must complete and execute a new
Lender's Agreement, along with a written update of the eligibility
criteria required by this section for approval. Lenders requesting
renewal must resubmit the information required by paragraph (b)(2) of
this section and must address how the lender is complying with each of
the required criteria described in paragraph (b)(1) of this section.
The written update of the eligibility criteria must also include any
change in the persons designated to process and service Agency
guaranteed loans or change in the operating methods used in the
processing and servicing of loans since the original or last renewal
date of eligible lender status. The lender must provide this
information to the Agency at least 60 days prior to the expiration of
the existing agreement to be assured of a timely renewal.
(c) Revocation of eligible lender status. The Agency may revoke a
lender's status at any time for cause. Cause for revoking eligible
status includes:
(1) Failure to maintain status as an eligible lender as set forth
in Sec. 4279.29 of this subpart;
(2) Knowingly submitting false information when requesting a
guarantee or basing a guarantee request on information known to be
false or which the lender should have known to be false;
(3) Making a guaranteed loan with deficiencies that may cause
losses not to be covered by the Loan Note Guarantee, such as negligent
loan origination;
(4) Conviction of the lender or its officers for criminal acts in
connection with any loan transaction whether or not the loan was
guaranteed by the Agency;
[[Page 55325]]
(5) Violation of usury laws in connection with any loan transaction
whether or not the loan was guaranteed by the Agency;
(6) Failure to obtain and maintain the required security for any
loan guaranteed by the Agency;
(7) Using loan funds guaranteed by the Agency for purposes other
than those specifically approved by the Agency in the Conditional
Commitment;
(8) Violation of any term of the Lender's Agreement;
(9) Failure to correct any Agency cited deficiency in loan
documents in a timely manner;
(10) Failure to submit reports required by the Agency in a timely
manner;
(11) Failure to process Agency guaranteed loans as would a
reasonably prudent lender;
(12) Failure to provide for adequate construction planning and
monitoring in connection with any loan to ensure that the project will
be completed with the available funds and, once completed, will be
suitable for the borrower's needs;
(13) Repetitive recommendations for servicing actions or guaranteed
loans with marginal or substandard credit quality or that do not comply
with Agency requirements;
(14) Negligent loan origination;
(15) Negligent loan servicing;
(16) Failure to conduct any approved liquidation of a loan
guaranteed by the Agency or its predecessors in a timely and effective
manner and in accordance with the approved liquidation plan; or
(17) Violation of applicable nondiscrimination law, including, but
not limited to, statutes, regulations, USDA Departmental Regulations,
the Secretary's Civil Rights Policy Statement, and the Equal Credit
Opportunity Act.
(d) Debarment of lender. The Agency may debar a lender in addition
to the revocation of the lender's status.
Sec. 4279.30 Lenders' functions and responsibilities.
(a) General. (1) Lenders have the primary responsibility for the
successful delivery of the guaranteed loan program. 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 subpart, subpart B of this part, and subpart B of part 4287.
Lenders may contract for services but are ultimately responsible for
underwriting, loan origination, loan servicing, and compliance with all
Agency regulations. Agents and persons are prohibited from acting as
both loan packager and loan service provider on the same guaranteed
loan. All lenders obtaining or requesting a loan guarantee are
responsible for:
(i) Processing applications for guaranteed loans;
(ii) Developing and maintaining adequately documented loan files,
which must be maintained for at least 3 years after any final loss has
been paid;
(iii) Recommending only loan proposals that are eligible and
financially feasible;
(iv) Properly closing the loan and obtaining valid evidence of debt
and collateral in accordance with sound lending practices prior to
disbursing loan proceeds;
(v) Keeping an inventory accounting of all collateral items and
reconciling the inventory of all collateral sold during loan servicing,
including liquidation;
(vi) Supervising construction;
(vii) Distributing loan funds;
(viii) Servicing guaranteed loans in a prudent manner, including
liquidation if necessary;
(ix) Reporting all conflicts of interest, or appearances thereof,
to the Agency;
(x) Following Agency regulations and agreements; and
(xi) Obtaining Agency approvals or concurrence as required.
(2) This subpart, subpart B of this part, and subpart B of part
4287 contain the regulations for this program, including the lenders'
responsibilities. If a lender fails to comply with these requirements,
the Agency may reduce any loss payment in accordance with the
applicable regulations.
(b) Credit evaluation. The lender must analyze all credit factors
associated with each proposed loan and apply its professional judgment
to determine that the credit factors, considered in combination, ensure
loan repayment. The lender must have an adequate underwriting process
to ensure that loans are reviewed by persons other than the originating
officer, and there must be good credit documentation procedures. The
Agency will only guarantee loans that are sound and have reasonable
assurance of repayment. The Agency will not guarantee marginal or
substandard loans.
(c) Environmental responsibilities. Lenders are responsible for
becoming familiar with Federal environmental requirements; considering,
in consultation with the prospective borrower, the potential
environmental impacts of their proposals at the earliest planning
stages; and developing proposals that minimize the potential to
adversely impact the environment.
(1) Lenders must assist the borrower in completing Form RD 1940-20,
``Request for Environmental Information,'' (when required by 7 CFR part
1940, subpart G) or successor forms; assist in the collection of
additional data when the Agency needs such data to complete its
environmental review of the proposal; and assist in the resolution of
environmental problems.
(2) Lenders must ensure the borrower has:
(i) Provided the necessary environmental information to enable the
Agency to undertake its environmental review process in accordance with
7 CFR part 1940, subpart G, or successor regulations, including the
provision of all required Federal, State, and local permits;
(ii) Complied with any mitigation measures required by the Agency;
and
(iii) Not taken any actions or incurred any obligations with
respect to the proposed project that will either limit the range of
alternatives to be considered during the Agency's environmental review
process or that will have an adverse effect on the environment.
(3) Lenders must alert the Agency to any environmental issues
related to a proposed project or items that may require extensive
environmental review.
Sec. Sec. 4279.31--4279.43 [Reserved]
Sec. 4279.44 Access to records.
The lender must permit representatives of the Agency (or other
agencies of the U.S.) to inspect and make copies of any records of the
lender pertaining to Agency guaranteed loans during regular office
hours of the lender or at any other time upon agreement between the
lender and the Agency. In addition, the lender must cooperate fully
with Agency oversight and monitoring of all lenders involved in any
manner with any guarantee to ensure compliance with this subpart,
subpart B of this part, and subpart B of part 4287. Such oversight and
monitoring will include, but is not limited to, reviewing lender
records and meeting with lenders in accordance with subpart B of part
4287.
Sec. Sec. 4279.45--4279.58 [Reserved]
Sec. 4279.59 Environmental requirements.
The Agency is responsible for ensuring that the requirements of the
National Environmental Policy Act of 1969 (under 40 CFR part 1500) and
related compliance actions (such as Section 106 of the National
Historic Preservation Act (under 36 CFR part 800) and Section 7 of the
Endangered Species Act) are met and will complete the appropriate level
of environmental review in accordance with subpart G of part 1940 or
successor regulations.
[[Page 55326]]
Because development of the loan application occurs simultaneously with
development of the environmental review, applicants, including lenders
and borrowers, must not take any actions or incur any obligations that
would either limit the range of alternatives to be considered in the
environmental review or that would have an adverse effect on the
environment. Satisfactory completion of the environmental review
process must occur prior to issuance of the Conditional Commitment to
the lender.
Sec. 4279.60 Civil Rights Impact Analysis.
Issuance of a Conditional Commitment is conditioned on the Agency
being able to satisfactorily complete a Civil Rights Impact Analysis.
Sec. 4279.61 Equal Credit Opportunity Act.
In accordance with Title V of Public Law 93-495, the Equal Credit
Opportunity Act, with respect to any aspect of a credit transaction,
neither the lender nor the Agency will discriminate against any
applicant on the basis of race, color, religion, national origin, sex,
marital status or age (providing the applicant has the capacity to
contract), or because all or part of the applicant's income derives
from a public assistance program, or because the applicant has, in good
faith, exercised any right under the Consumer Protection Act. The
lender must comply with the requirements of the Equal Credit
Opportunity Act as contained in the Federal Reserve Board's Regulation
implementing that Act (see 12 CFR part 202) prior to loan closing.
Sec. Sec. 4279.62--4279.70 [Reserved]
Sec. 4279.71 Public bodies and nonprofit corporations.
Any public body or nonprofit corporation that receives a guaranteed
loan that meets the thresholds established by OMB must provide an audit
in accordance with applicable regulations. Any audit meeting OMB's
requirements will be adequate to meet any audit requirements of the B&I
program for that year.
Sec. 4279.72 Conditions of guarantee.
A loan guarantee under this part will be evidenced by a Loan Note
Guarantee issued by the Agency. The provisions of this part and part
4287 will apply to all outstanding guarantees. In the event of a
conflict between the guarantee documents and these regulations as they
exist at the time the documents are executed, these regulations will
control.
(a) Full faith and credit. A guarantee under this part constitutes
an obligation supported by the full faith and credit of the U.S. and is
incontestable except for fraud or misrepresentation of which a lender
or holder has actual knowledge at the time it becomes such lender or
holder or which a lender or holder participates in or condones. The
guarantee will be unenforceable to the extent that any loss is
occasioned by a provision for interest on interest or default or
penalty interest. In addition, the guarantee will be unenforceable by
the lender to the extent any loss is occasioned by the violation of
usury laws, use of loan proceeds for unauthorized purposes, negligent
loan origination, negligent servicing, or failure to obtain or maintain
the required security regardless of the time at which the Agency
acquires knowledge thereof. Any losses occasioned will be unenforceable
to the extent that loan funds were used for purposes other than those
specifically approved by the Agency in its Conditional Commitment. The
Agency may for cause terminate or reduce the Loan Note Guarantee at any
time. The Agency will guarantee payment as follows:
(1) To any holder, 100 percent of any loss sustained by the holder
on the guaranteed portion of the loan it owns and on interest due on
such portion less any servicing fee. For those loans closed on or after
[DATE OF FINAL RULE PUBLICATION], the guarantee will not cover note
interest to any holder after 90 days from the date of the first
repurchase demand to the lender made by a holder. Upon receipt of the
first demand letter from a holder, the Agency will notify any remaining
holders known by the Agency in writing that interest will discontinue
after 90 days from the date of the first holder's demand.
(2) To the lender, subject to the provisions of this part and
subpart B of part 4287, the lesser of:
(i) 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
(ii) The guaranteed principal advanced to or assumed by the
borrower and any interest due thereon.
(b) Rights and liabilities. When a guaranteed portion of a loan is
sold to a holder, the holder will succeed to all rights of the lender
under the Loan Note Guarantee to the extent of the portion purchased.
The full, legal interest in the note must remain with the lender, and
the lender will remain bound to all obligations under the Loan Note
Guarantee, Lender's Agreement, and Agency program regulations. 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 in or
condones. The lender will reimburse the Agency for any payments the
Agency makes to a holder on the lender's guaranteed loan that, under
the Loan Note Guarantee, would not have been paid to the lender had the
lender retained the entire interest in the guaranteed loan and not
conveyed an interest to a holder.
(c) Payments. A lender will receive all payments of principal and
interest on account of the entire loan and must promptly remit to the
holder its pro rata share thereof, determined according to its
respective interest in the loan, less only the lender's servicing fee.
Sec. 4279.73 [Reserved]
Sec. 4279.74 [Reserved]
Sec. 4279.75 Sale or assignment of guaranteed loan.
The lender may sell all or part of the guaranteed portion of the
loan on the secondary market or retain the entire loan. The lender must
fully disburse and properly close a loan prior to sale of the note(s)
on the secondary market. The lender cannot sell or participate any
amount of the guaranteed or unguaranteed portion of the loan to the
borrower or its parent, subsidiary, or affiliate or to officers,
directors, stockholders, other owners, or members of their immediate
families. The lender cannot share any premium received from the sale of
a guaranteed loan in the secondary market with a loan packager or other
loan service provider. If the lender desires to market all or part of
the guaranteed portion of the loan at or subsequent to loan closing,
such loan must not be in default. Lenders may use either the single
note or multi-note system as outlined in paragraphs (a) and (b) of this
section.
(a) Single note system. The entire loan is evidenced by one note,
and one Loan Note Guarantee is issued. When the loan is evidenced by
one note, the lender may not at a later date cause any additional notes
to be issued. The lender may assign all or part of the guaranteed
portion of the loan to one or more holders by using Form RD 4279-6,
``Assignment Guarantee Agreement.'' The lender must complete and
execute the Assignment Guarantee Agreement and return it to the Agency
for
[[Page 55327]]
execution prior to holder execution. The holder, upon written notice to
the lender and the Agency, may reassign the unpaid guaranteed portion
of the loan, in full, sold under the Assignment Guarantee Agreement.
Holders may only reassign the guaranteed portion in the complete Block
they have received and cannot subdivide or further split the guaranteed
portion of a loan or retain an interest strip. Upon notification and
completion of the assignment through the use of Form RD 4279-6, the
assignee shall succeed to all rights and obligations of the holder
there under. Subsequent assignments require notice to the lender and
Agency using any format, including that used by the Bond Market
Association, together with the transfer of the original Assignment
Guarantee Agreement. The Agency will neither execute a new Assignment
Guarantee Agreement to effect a subsequent reassignment nor reissue a
duplicate Assignment Guarantee Agreement unless the original was lost,
stolen, destroyed, mutilated, or defaced in accordance with Sec.
4279.84. The Assignment Guarantee Agreement clearly states the
percentage and corresponding amount of the guaranteed portion it
represents and the lender's servicing fee. A servicing fee may be
charged by the lender to a holder and is calculated as a percentage per
annum of the unpaid balance of the guaranteed portion of the loan
assigned by the Assignment Guarantee Agreement. The Agency is not and
will not be a party to any contract between the lender and another
party where the lender sells its servicing fee in an arm's length
marketplace transaction. The Agency will not acknowledge, approve, or
have any liability to any of the parties of this contract.
(b) Multinote system. Under this option, the lender may provide one
note for the unguaranteed portion of the loan and no more than ten
notes for the guaranteed portion. All promissory notes must reflect the
same payment terms. When the lender selects this option, the holder
will receive one of the borrower's executed notes and a Loan Note
Guarantee. The Agency will issue a Loan Note Guarantee for each note,
including the unguaranteed note, to be attached to each note. An
Assignment Guarantee Agreement will not be used when the multinote
option is utilized.
Sec. 4279.76 [Reserved]
Sec. 4279.77 Minimum retention.
The lender is required to hold in its own portfolio a minimum of 5
percent of the original total loan amount. The amount required to be
maintained must be of the unguaranteed portion of the loan and cannot
be participated to another. The lender may enter into no agreement that
reduces its exposure below the minimum 5 percent it is required to
retain in its portfolio. The lender may sell the remaining amount of
the unguaranteed portion of the loan only through participation. The
lender must retain title to the notes, retain the lender's interest in
the collateral, and retain the servicing responsibilities for the
guaranteed loan.
Sec. 4279.78 Repurchase from holder.
(a) Repurchase by lender. A lender has the option to repurchase the
unpaid guaranteed portion of the loan from a holder within 30 days of
written demand by the holder when the borrower is in default not less
than 60 days on principal or interest due on the loan; or when the
lender has failed to remit to the holder its pro rata share of any
payment made by the borrower within 30 days of the lenders receipt
thereof. The repurchase by the lender must be for an amount equal to
the unpaid guaranteed portion of principal and accrued interest less
the lender's servicing fee. The holder must concurrently send a copy of
the demand letter to the Agency. For loans closed on or after [DATE OF
FINAL RULE PUBLICATION], the guarantee will not cover note interest to
any holder accruing after 90 days from the date of the first demand
letter of a holder to the lender requesting the repurchase. The lender
must accept an assignment without recourse from the holder upon
repurchase. The lender is encouraged to repurchase the loan to
facilitate the accounting of funds, resolve any loan problems, and
prevent default, where and when reasonable. The benefit to the lender
is that it may resell the guaranteed portion of the loan in order to
continue collection of its servicing fee if the default is cured. The
lender will notify the holder and the Agency of its decision.
(b) Agency repurchase. (1) The lender's servicing fee will stop on
the date that interest was last paid by the borrower when the Agency
purchases the guaranteed portion of the loan from a holder. The lender
cannot charge such servicing fee to the Agency and must apply all loan
payments and collateral proceeds received to the guaranteed and
unguaranteed portions of the loan on a pro rata basis.
(2) If the Agency repurchases 100 percent of the guaranteed portion
of the loan, the Agency will not continue collection of the annual
renewal fee from the lender.
(3) If the lender does not repurchase the unpaid guaranteed portion
of the loan as provided in paragraph (a) of this section, the Agency
will purchase from the holder the unpaid principal balance of the
guaranteed portion together with accrued interest to date of
repurchase, less the lender's servicing fee, within 30 days after
written demand to the Agency from the holder. For loans closed on or
after [DATE OF FINAL RULE PUBLICATION], the guarantee will not cover
note interest to any holder accruing after 90 days from the date of the
first demand letter of a holder to the lender requesting the
repurchase. Accrued interest paid to the holder will be calculated from
the date interest was last paid on the loan with a cutoff date being
not more than 90 days from the date any holder makes demand. If there
is more than one holder, all subsequent holders will be paid using the
same date as the first holder (first holder's date of demand to the
lender). Once the holder makes demand upon the Agency, the request
cannot be rescinded.
(4) When the guaranteed loan has been delinquent more than 60 days
and no holder comes forward, the Agency may issue a letter to the
holder(s) establishing the cutoff date for interest accrual. Accrued
interest to be paid the holder will be calculated from the date
interest was last paid on the loan with a cutoff date being no more
than 90 days from the date of the most recent delinquency effective
date as reported by the lender.
(5) When the lender has accelerated the account and the lender
holds all or a portion of the guaranteed loan, an estimated loss claim
(loan in the liquidation process) must be filed by the lender with the
Agency within 60 days. Accrued interest paid to the lender will be
calculated from the date interest was last paid on the loan with a
cutoff date being no more than 90 days from the most recent delinquency
effective date as reported by the lender.
(6) The holder's demand to the Agency must include a copy of the
written demand made upon the lender. The holder must also include
evidence of its right to require payment from the Agency. Such evidence
must consist of either the original of the Loan Note Guarantee properly
endorsed to the Agency or the original of the Assignment Guarantee
Agreement properly assigned to the Agency without recourse including
all rights, title, and interest in the loan. When the single-note
system is utilized and the initial holder has sold its interest, the
current holder must present the original Assignment Guarantee Agreement
and an original of each Agency approved
[[Page 55328]]
reassignment document in the chain of ownership, with the latest
reassignment being assigned to the Agency without recourse, including
all rights, title, and interest in the guarantee. The holder must
include in its demand the amount due including unpaid principal, unpaid
interest to date of demand, and interest subsequently accruing from
date of demand to proposed payment date. The Agency will be subrogated
to all rights of the holder.
(7) Upon request by the Agency, the lender must promptly furnish a
current statement certified by an appropriate authorized officer of the
lender of the unpaid principal and interest then owed by the borrower
on the loan and the amount then owed to any holder, along with the
information necessary for the Agency to determine the appropriate
amount due the holder. Any discrepancy between the amount claimed by
the holder and the information submitted by the lender must be resolved
between the lender and the holder before payment will be approved. Such
conflict will suspend the running of the 30 day payment requirement.
(8) Purchase by the Agency neither changes, alters, nor modifies
any of the lender's obligations to the Agency arising from the loan or
guarantee nor does it waive any of Agency's rights against the lender.
The Agency will have the right to set-off against the lender all rights
inuring to the Agency as the holder of the instrument against the
Agency's obligation to the lender under the program.
(c) Repurchase for servicing. If, in the opinion of the lender,
repurchase of the guaranteed portion of the loan is necessary to
adequately service the loan, the holder must sell the guaranteed
portion of the loan to the lender for an amount equal to the unpaid
principal and interest on such portion less the lender's servicing fee.
The lender must not repurchase from the holder for arbitrage or other
purposes to further its own financial gain. Any repurchase must only be
made after the lender obtains the Agency's written approval. If the
lender does not repurchase the guaranteed portion from the holder, the
Agency may, at its option, purchase such guaranteed portion for
servicing purposes.
Sec. Sec. 4279.79-4279.83 [Reserved]
Sec. 4279.84 Replacement of document.
(a) The Agency may issue a replacement Loan Note Guarantee or
Assignment Guarantee Agreement that was lost, stolen, destroyed,
mutilated, or defaced to the lender or holder upon receipt of an
acceptable certificate of loss and an indemnity bond.
(b) When a Loan Note Guarantee or Assignment Guarantee Agreement is
lost, stolen, destroyed, mutilated, or defaced while in the custody of
the lender or holder, the lender must coordinate the activities of the
party who seeks the replacement documents and must submit the required
documents to the Agency for processing. The requirements for
replacement are as follows:
(1) A certificate of loss, notarized and containing a jurat, which
includes:
(i) Name and address of owner;
(ii) Name and address of the lender of record;
(iii) Capacity of person certifying;
(iv) Full identification of the Loan Note Guarantee or Assignment
Guarantee Agreement including the name of the borrower, the Agency's
case number, date of the Loan Note Guarantee or Assignment Guarantee
Agreement, face amount of the evidence of debt purchased, date of
evidence of debt, present balance of the loan, percentage of guarantee,
and, if an Assignment Guarantee Agreement, the original named holder
and the percentage of the guaranteed portion of the loan assigned to
that holder. Any existing parts of the document to be replaced must be
attached to the certificate;
(v) A full statement of circumstances of the loss, theft,
destruction, defacement, or mutilation of the Loan Note Guarantee or
Assignment Guarantee Agreement; and
(vi) For the holder, evidence demonstrating current ownership of
the Loan Note Guarantee and promissory note or the Assignment Guarantee
Agreement. If the present holder is not the same as the original
holder, a copy of the endorsement of each successive holder in the
chain of transfer from the initial holder to present holder must be
included. If copies of the endorsement cannot be obtained, best
available records of transfer must be submitted to the Agency (e.g.,
order confirmation, canceled checks, etc.).
(2) An indemnity bond acceptable to the Agency must accompany the
request for replacement except when the holder is the United States, a
Federal Reserve Bank, a Federal corporation, a State or territory, or
the District of Columbia. The bond must be with surety except when the
outstanding principal balance and accrued interest due the present
holder is less than $1 million verified by the lender in writing in a
letter of certification of balance due. The surety must be a qualified
surety company holding a certificate of authority from the Secretary of
the Treasury and listed in Treasury Department Circular 570.
(3) All indemnity bonds must be issued and payable to the United
States of America acting through the Agency. The bond must be in an
amount not less than the unpaid principal and interest. The bond must
hold the Agency harmless against any claim or demand that might arise
or against any damage, loss, costs, or expenses that might be sustained
or incurred by reasons of the loss or replacement of the instruments.
(4) In those cases where the guaranteed loan was closed under the
provision of the multinote system, the Agency will not attempt to
obtain, or participate in the obtaining of, replacement notes from the
borrower. The holder is responsible for bearing the costs of note
replacement if the borrower agrees to issue a replacement instrument.
Should such note be replaced, the terms of the note cannot be changed.
If the evidence of debt has been lost, stolen, destroyed, mutilated or
defaced, such evidence of debt must be replaced before the Agency will
replace any instruments.
Sec. Sec. 4279.85-4279.99 [Reserved]
Sec. 4279.100 OMB control number.
The information collection requirements contained in this
regulation have been approved by OMB and have been assigned OMB control
number . Public reporting burden for this
collection of information is estimated to vary from 30 minutes to 12
hours per response, with an average of 6 hours per response, including
time for reviewing the collection of information. The burden may
increase beyond the estimate reported here, if RBS determines
additional data will need to be collected to facilitate evaluation,
which can enhance the operation and performance of the program. Send
comments regarding this burden estimate or any other aspect of this
collection of information, including suggestions for reducing this
burden, to the Department of Agriculture, Clearance Officer, OIRM, Stop
7630, Washington, DC 20250. You are not required to respond to this
collection of information unless it displays a currently valid OMB
control number.
0
3. Revise Subpart B to read as follows:
Subpart B--Business and Industry Loans
Sec.
4279.101 Introduction.
4279.102 Definitions and abbreviations.
4279.103 Exception Authority.
4279.104 Appeals.
4279.105-4279.107 [Reserved]
4279.108 Eligible borrowers.
4279.109-4279.112 [Reserved]
[[Page 55329]]
4279.113 Eligible uses of funds.
4279.114 [Reserved]
4279.115 Cooperative stock/cooperative equity.
4279.116 New Markets Tax Credit program.
4279.117 Ineligible purposes and entity types.
4279.118 [Reserved]
4279.119 Loan guarantee limits.
4279.120 Fees and charges.
4279.121-4279.124 [Reserved]
4279.125 Interest rates.
4279.126 Loan terms.
4279.127-4279.130 [Reserved]
4279.131 Credit quality.
4279.132 Personal and corporate guarantees.
4279.133-4279.135 [Reserved]
4279.136 Insurance.
4279.137 Financial statements.
4279.138-4279.143 [Reserved]
4279.144 Appraisals.
4279.145-4279.149 [Reserved]
4279.150 Feasibility studies.
4279.151-4279.160 [Reserved]
4279.161 Filing preapplications and applications.
4279.162-4279.164 [Reserved]
4279.165 Evaluation of application.
4279.166 Loan priority scoring.
4279.167 Planning and performing development.
4279.168 Timeframe for processing applications.
4279.169-4279.172 [Reserved]
4279.173 Loan approval and obligating funds.
4279.174 Transfer of lenders.
4279.175-4279.179 [Reserved]
4279.180 Changes in borrower.
4279.181 Conditions precedent to issuance of the Loan Note
Guarantee.
4279.182-4279.186 [Reserved]
4279.187 Refusal to execute Loan Note Guarantee.
4279.188-4279.199 [Reserved]
4279.200 OMB control number.
PART 4279--GUARANTEED LOANMAKING
Subpart B--Business and Industry Loans
Sec. 4279.101 Introduction.
(a) Content. This subpart contains loan processing regulations for
the Business and Industry (B&I) Guaranteed Loan Program. It is
supplemented by subpart A of this part, which contains general
guaranteed loan regulations, and subpart B of part 4287 of this
chapter, which contains loan servicing regulations.
(b) Purpose. The purpose of the B&I Guaranteed Loan Program is to
improve, develop, or finance business, industry, and employment and
improve the economic and environmental climate in rural communities.
This purpose is achieved by bolstering the existing private credit
structure through the guarantee of quality loans that will provide
lasting community benefits. It is not intended that the guarantee
authority will be used for marginal or substandard loans or for relief
of lenders having such loans.
(c) Documents. Whether specifically stated or not, whenever Agency
approval is required, it must be in writing. Copies of all forms,
regulations, and Instructions referenced in this subpart may be
obtained from any Agency office and from the USDA Rural Development Web
site at www.rurdev.usda.gov/rbs. Whenever a form is designated in this
subpart, that designation includes predecessor and successor forms, if
applicable, as specified by the Agency.
Sec. 4279.102 Definitions and abbreviations.
The definitions and abbreviations in Sec. 4279.2 of this chapter
are applicable to this subpart.
Sec. 4279.103 Exception Authority.
Section 4279.15 of this chapter applies to this subpart.
Sec. 4279.104 Appeals.
Section 4279.16 of this chapter applies to this subpart.
Sec. Sec. 4279.105-4279.107 [Reserved]
Sec. 4279.108 Eligible borrowers.
(a) Type of entity. A borrower may be a cooperative organization,
corporation, partnership, or other legal entity organized and operated
on a profit or nonprofit basis; an Indian tribe on a Federal or State
reservation or other Federally recognized tribal group; a public body;
or an individual. 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 provide
employment and improve the economic or environmental climate.
(b) Citizenship. Individual borrowers must be citizens of the
United States (U.S.) or reside in the U.S. after being legally admitted
for permanent residence. For purposes of this subpart, citizens and
residents of the Republic of Palau, the Federated States of Micronesia,
American Samoa, and the Republic of the Marshall Islands are considered
U.S. citizens. Corporations or other non public-body type borrowers
must be at least 51 percent owned by persons who are either citizens of
the U.S. or reside in the U.S. after being legally admitted for
permanent residence. Individuals that reside in the U.S. after being
legally admitted for permanent residence must provide a permanent green
card as evidence of eligibility.
(c) Rural area. The business financed with a guaranteed loan under
this subpart must be located in a rural area, except for cooperative
organizations financed in accordance with Sec. 4279.113(j)(2) and
local foods projects financed in accordance with Sec. 4279.113(x)(2).
Loans to borrowers with facilities located in both rural and non-rural
areas will be limited to the amount necessary to finance the facility
located in the eligible rural area, except for those cooperative
organizations financed in accordance with Sec. 4279.113(j)(2) and
those local foods projects financed in accordance with Sec.
4279.113(x)(2).
(1) Rural areas are any area of a State other than a city or town
that has a population of greater than 50,000 inhabitants and any
urbanized area contiguous and adjacent to such a city or town. In
making this determination, the Agency will use the latest decennial
census of the U.S.
(2) 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.
(3) For the Commonwealth of Puerto Rico, the island is considered
rural, except for the San Juan Census Designated Place (CDP) and any
other CDP with greater than 50,000 inhabitants. However, CDPs with
greater than 50,000 inhabitants, other than the San Juan CDP, may be
eligible if they are determined to be ``not urban in character.''
(4) For the State of Hawaii, all areas within the State are
considered rural, except for the Honolulu CDP within the County of
Honolulu.
(5) For the Republic of Palau, the Federated States of Micronesia,
American Samoa, and the Republic of the Marshall Islands, the Agency
will determine what constitutes a rural area based on available
population data.
(6) Notwithstanding any other provision of this definition, in
determining which census blocks in an urbanized area are not in a rural
area, the Agency will exclude any cluster of census blocks that would
otherwise be considered not in a rural area only because the cluster is
adjacent to not more than two census blocks that are otherwise
considered not in a rural area under this definition.
(7)(i) The Under Secretary, whose authority may not be redelegated,
may determine that an area is ``rural in character.'' Any determination
made by the Under Secretary under this provision will be to areas that
are
[[Page 55330]]
determined to be ``rural in character'' and are within:
(A) An urbanized area that has two points on its boundary that are
at least 40 miles apart, which is not contiguous or adjacent to a city
or town that has a population of greater than 150,000 inhabitants or
the urbanized area of such city or town; or
(B) An area within an urbanized area contiguous and adjacent to a
city or town of greater than 50,000 inhabitants that is within \1/4\
mile of a rural area.
(ii) Units of local government may petition the Under Secretary for
a ``rural in character'' designation by submitting a petition to both
the appropriate Rural Development State Director and the Administrator
on behalf of the Under Secretary. The petition must document how the
area meets the requirements of paragraph (c)(7) of this section and
discuss why the petitioner believes the area is ``rural in character,''
including, but not limited to, the area's population density;
demographics; topography; and how the local economy is tied to a rural
economic base. Upon receiving a petition, the Under Secretary will
consult with the applicable Governor and Rural Development State
Director and request comments within 10 business days, unless those
comments were submitted with the petition. The Under Secretary will
release to the public a notice of a petition filed by a unit of local
government not later than 30 days after receipt of the petition by way
of notice in a local newspaper and notice on the applicable Rural
Development State Office Web site. The Under Secretary will make a
determination not less than 15 days, but no more than 60 days, after
the release of the notice. The public notice will appear for at least 3
consecutive days if published in a daily newspaper or otherwise in two
consecutive publications. Upon a negative determination, the Under
Secretary will provide to the petitioner an opportunity to appeal a
determination to the Under Secretary for reconsideration, and the
petitioner will have 10 business days to appeal the determination and
provide further information for consideration.
(d) Other credit. All applications for assistance will be accepted
and processed without regard to the availability of credit from any
other source.
(e) Prohibition under Agency programs. No loans guaranteed by the
Agency will be conditioned on any requirement that the recipients of
such assistance accept or receive electric or other services from any
particular utility, supplier, or cooperative.
Sec. Sec. 4279.109-4279.112 [Reserved]
Sec. 4279.113 Eligible uses of funds.
Eligible uses of funds must be consistent with Sec. 4279.101(b) of
this subpart and include, but are not limited, to the following:
(a) Purchase and development of land, buildings, and associated
infrastructure, including expansion or modernization.
(b) Business acquisitions provided that jobs will be created or
saved.
(c) Leasehold improvements when the lease contains no reverter
clauses or restrictive clauses that would impair the use or value of
the property as security for the loan. The term of the lease must be
equal to or greater than the term of the loan.
(d) Constructing or equipping facilities for lease to private
businesses engaged in commercial or industrial operations. Financing
for mixed-use properties involving both commercial business and
residential space is authorized provided that not less than 50 percent
of the building's projected revenue will be generated from business
use.
(e) Purchase of machinery and equipment.
(f) Startup costs, working capital, inventory, and supplies in the
form of a permanent working capital term loan.
(g) Debt refinancing when it is determined that the project is
viable and refinancing is necessary to improve cash flow and create new
or save existing jobs. Debt being refinanced must be debt of the
borrower reflected on its balance sheet, and the lender's analysis must
document that the debt being refinanced was for an eligible loan
purpose under this subpart. Except as provided for in paragraph (k)(3)
of this section, existing lender debt may be included provided that, at
the time of application, the loan being refinanced has been closed and
current for at least the past 12 months (current status cannot be
achieved by the lender forgiving the borrower's debt or servicing
actions that impact the borrower's repayment schedule), and the lender
is providing better rates or terms. Unless the amount to be refinanced
is owed directly to the Federal government or is Federally guaranteed,
the existing lender debt refinancing must be less than 50 percent of
the overall loan.
(h) Takeout of interim financing. Guaranteeing a loan that provides
for permanent, long-term financing after project completion to pay off
a lender's interim loan will not be treated as debt refinancing
provided that the lender submits a complete preapplication or
application that proposes such interim financing prior to closing the
interim loan. The borrower must take no action that would have an
adverse impact on the environment or limit the range of alternatives to
be considered by the Agency during the environmental review process.
The Agency will not guarantee takeout of interim financing loans that
prevent a meaningful environmental assessment prior to Agency loan
approval. Even for projects with interim financing, the Agency cannot
approve the loan and issue a Conditional Commitment until the
environmental process is complete. The Agency assumes no responsibility
or obligation for interim loans.
(i) Purchase of membership, stocks, bonds, or debentures necessary
to obtain a loan from Farm Credit System institutions and other lenders
provided that the purchase is required for all of their borrowers and
is the minimum amount required.
(j) Loans to cooperative organizations.
(1) Guaranteed loans to eligible cooperative organizations may be
made in principal amounts up to $40 million if the project is located
in a rural area, the cooperative facility being financed provides for
the value-added processing of agricultural commodities, and the total
amount of loans exceeding $25 million does not exceed 10 percent of the
funds available for the fiscal year.
(2) Guaranteed loans to eligible cooperative organizations may also
be made in non-rural areas provided:
(i) The primary purpose of the loan is for a facility to provide
value-added processing for agricultural producers that are located
within 80 miles of the facility;
(ii) The applicant satisfactorily demonstrates that the primary
benefit of the loan will be to provide employment for rural residents;
(iii) The principal amount of the loan does not exceed $25 million;
and
(iv) The total amount of loans guaranteed under this paragraph does
not exceed 10 percent of the funds available for the fiscal year.
(3) An eligible cooperative organization may refinance an existing
B&I loan provided that the existing loan is current and performing; the
existing loan is not and has not been in monetary default (more than 30
days late) or the collateral of which has not been converted; and there
is adequate security or full collateral for the new guaranteed loan.
(k) The purchase of cooperative stock by individual farmers or
ranchers in a farmer or rancher cooperative in accordance with Sec.
4279.115(a).
(l) The purchase of preferred stock or similar equity issued by a
cooperative organization or a fund that invests
[[Page 55331]]
primarily in cooperative organizations in accordance with Sec.
4279.115(b).
(m) Taxable corporate bonds when the bonds are fully amortized and
comply with all provisions of Sec. 4279.126, and the bond holder
(lender) retains 5 percent of the bond in accordance with Sec.
4279.77. The bonds must be fully secured with collateral in accordance
with Sec. 4279.131(b). The bonds must only provide for a trustee when
the trustee is totally under the control of the lender. The bonds must
provide no rights to bond holders other than the right to receive the
payments due under the bond. For instance, the bonds must not provide
for bond holders replacing the trustee or directing the trustee to take
servicing actions, such as accelerating the bonds. Convertible bonds
are not eligible under this paragraph due to the potential conflict of
interest of a lender having an ownership interest in the borrower.
(1) The bond issuer (borrower) must not issue more than 11 bonds
with no more than 10 of those bonds being guaranteed under this
program. The bond issuer must obtain the services and opinion of an
experienced bond counsel who must present a legal opinion stating that
the bonds are legal, valid and binding obligations of the issuer and
that the issuer has adhered to all applicable laws.
(2) The bond holder must purchase all of the bonds and comply with
all Agency regulations. There must be a bond purchase agreement between
the issuer and the bond holder. The bond purchase agreement must
contain similar language to what is required to be in a loan agreement
in accordance with Sec. 4279.161(b)(11) and must not be in conflict
with subparts A or B of part 4279 or subpart B of part 4287. The bond
holder is responsible for all servicing of the loan (bond), although
the bond holder may contract for servicing assistance, including
contracting with a trustee who remains under the lender's total
control.
(n) Interest (including interest on interim financing) during the
period before the first principal payment becomes due or when the
facility becomes income producing, whichever is earlier.
(o) Fees and charges outlined in Sec. 4279.120(a), (c) and (d).
(p) Feasibility studies.
(q) Agricultural production, when not eligible for Farm Service
Agency (FSA) farmer program assistance and when it is part of an
integrated business also involved in the processing of agricultural
products. Any agricultural production considered for guaranteed loan
financing must be owned, operated, and maintained by the business
receiving the loan for which a guarantee is provided. Except for
cooperative stock purchase loans in accordance with Sec. 4279.115(a),
independent agricultural production operations are not eligible, even
if not eligible for FSA farmer programs assistance.
(1) The agricultural-production portion of any loan must not exceed
50 percent of the total loan or $5 million, whichever is less.
(2) This paragraph does not preclude financing the following types
of businesses:
(i) Commercial nurseries engaged in the production of ornamental
plants; trees and other nursery products, such as bulbs, flowers,
shrubbery, flower and vegetable seeds, sod, and the growing of plants
from seed to the transplant stage; and forestry, which includes
businesses primarily engaged in the operation of timber tracts, tree
farms, forest nurseries, and related activities such as reforestation.
(ii) The growing of mushrooms or hydroponics.
(iii) The boarding and/or training of animals.
(iv) Commercial fishing.
(v) Aquaculture, including conservation, development, and
utilization of water for aquaculture.
(r) Educational or training facilities.
(s) Industries undergoing adjustment from terminated Federal
agricultural price and income support programs or increased competition
from foreign trade.
(t) Community facility projects that are not listed as an
ineligible loan purpose in Sec. 4279.117.
(u) Tourist and recreation facilities, including hotels, motels,
and bed and breakfast establishments, except as prohibited under
ineligible purposes in Sec. 4279.117.
(v) Pollution control and abatement.
(w) Energy projects that are not eligible under 7 CFR 4280, subpart
B, Rural Energy for America Program, unless sufficient funding is not
available under subpart B of part 4280, and when the facility has been
constructed according to plans and specifications and is producing at
the quality and quantity projected in the application. Eligible energy
projects must be commercially available. Eligible energy projects also
include those that 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 and
anaerobic digesters for the purpose of energy generation), including
the modification of existing systems in rural areas.
(1) Projects that produce biomass fuel or biogas as an output must
utilize commercially available technologies and have completed two
operating cycles at design performance levels prior to issuance of a
Loan Note Guarantee.
(2) Projects that produce steam or electricity as an output must
have met acceptance test performance criteria acceptable to the Agency
and be successfully interconnected with the purchaser of the output. An
executed power purchase agreement acceptable to the Agency will be
required prior to issuance of a Loan Note Guarantee.
(3) Performance or acceptance test requirements for all other
energy projects will be determined by the Agency on a case-by-case
basis.
(x) Projects that process, distribute, aggregate, store, and/or
market locally or regionally produced agricultural food products to
support community development and farm and ranch income, subject to
each of the following:
(1) The term ``locally or regionally produced agricultural food
product'' means any agricultural food product that is raised, produced,
and distributed in the locality or region in which the final product is
marketed, so that the distance the product is transported is less than
400 miles from the origin of the product, or within the State in which
the product is produced. Food products could be raw, cooked, or a
processed edible substance, beverage, or ingredient used or intended
for use or for sale in whole or in part for human consumption.
(2) Projects in non-rural areas may be included when the project
provides an economic benefit to the surrounding rural communities.
(3) A significant amount of the food product sold by the borrower
is locally or regionally produced, and a significant amount of the
locally or regionally produced food product is sold locally or
regionally.
(4) The borrower must include in an appropriate agreement, with
retail and institutional facilities to which the borrower sells locally
or regionally produced agricultural food products, a requirement to
inform consumers of the retail or institutional facilities that the
consumers are purchasing or consuming locally or regionally produced
agricultural food products.
(5) The Agency will give funding priority to projects that provide
a benefit to underserved communities in accordance with Sec.
4279.166(b)(4)(i)(G). An underserved community is a community
(including an urban or rural
[[Page 55332]]
community and an Indian tribal community) that has limited access to
affordable, healthy foods, including fresh fruits and vegetables, in
grocery retail stores or farmer to consumer direct markets and that has
either a high rate of hunger or food insecurity or a high poverty rate
as reflected in the most recent decennial census or other Agency
approved census.
Sec. 4279.114 [Reserved]
Sec. 4279.115 Cooperative stock/cooperative equity.
(a) Cooperative stock purchase program. The Agency may guarantee
loans for the purchase of cooperative stock by individual farmers or
ranchers in a farmer or rancher cooperative established for the purpose
of processing an agricultural commodity. The cooperative may use the
proceeds from the stock sale to recapitalize, 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. Loan proceeds must remain in the cooperative from
which stock was purchased, and the cooperative must not reinvest those
funds into another entity.
(1) The maximum loan amount is the threshold established in Sec.
4279.161(c), and all applications will be processed in accordance with
Sec. 4279.161(c).
(2) The maximum term is 7 years.
(3) The lender will, at a minimum, obtain a valid lien on the
stock, an assignment of any patronage refund, and the ability to
transfer the stock to another party, or otherwise liquidate and dispose
of the collateral in the event of a borrower default.
(4) The lender must complete a written credit analysis of each
stock purchase loan and a complete credit analysis of the cooperative
prior to making its first stock purchase loan.
(5) The borrower may provide financial information in the manner
that is generally required by commercial agricultural lenders.
(6) A feasibility study of the cooperative is required for startup
cooperatives and may be required by the Agency for existing
cooperatives when the cooperative's operations will be significantly
affected by the proceeds that were generated from the stock sale.
(7) The Agency will conduct an appropriate environmental assessment
on the processing facility and will not process individual applications
for the purchase of stock until the environmental assessment on the
cooperative processing facility is completed. Typically, an individual
loan for the purchase of cooperative stock is considered a categorical
exclusion.
(b) Cooperative equity security guarantees. The Agency may
guarantee loans for the purchase of preferred stock or similar equity
issued by a cooperative organization or for a fund that invests
primarily in cooperative organizations. In either case, the guarantee
must significantly benefit one or more entities eligible for assistance
under the B&I program.
(1) ``Similar equity'' is any special class of equity stock that is
available for purchase by non-members and/or members and lacks voting
and other governance rights.
(2) A fund that invests ``primarily'' in cooperative organizations
is determined by its percentage share of investments in and loans to
cooperatives. A fund portfolio must have at least 50 percent of its
loans and investments in cooperatives to be considered eligible for
loan guarantees for the purchase of preferred stock or similar equity.
(3) The principal amount of the loan will not exceed $10 million.
(4) The maximum term is 7 years or no longer than the specified
holding period for redemption as stated by the stock offering,
whichever is less.
(5) All borrowers purchasing preferred stock or similar equity must
provide a prospectus on the preferred stock being offered and financial
information about the issuer of the preferred stock to both the lender
and the Agency.
(6) Issuer(s) of preferred stock must be a cooperative organization
or a fund and must be able to issue preferred stock to the public in
accordance with the securities' regulations as set forth by the
Securities and Exchange Commission and any other applicable regulatory
body, if required.
(7) A fund must use a loan guaranteed under this subpart to
purchase preferred stock that is issued by cooperatives.
(8) The lender will, at a minimum, obtain a valid lien on the
preferred stock, an assignment of any patronage refund, and the ability
to transfer the stock to another party, or otherwise liquidate and
dispose of the collateral in the event of a borrower default. For the
purpose of recovering losses from loan defaults, lenders may take
ownership of all equities purchased with such loans, including
additional shares derived from re-investment of dividends.
(9) Shares of preferred stock that are purchased with guaranteed
loan proceeds cannot be converted to common or voting stock.
(10) In the absence of adequate provisions for investors' rights to
early redemption of preferred stock or similar equity, a borrower must
request from a cooperative or fund issuing such equities a contingent
waiver of the holding or redemption period in advance of share
purchases. This contingent waiver provides that in the event a borrower
defaults on a loan financed under the guaranteed loan program, the
borrower waives any ownership rights in the stock, and the lender and
Agency will then have the right to redeem the stock.
(11) Guaranteed loans for the purchase of preferred stock must be
pre-paid in the event a cooperative or fund that issued the stock has
either exercised an early redemption or subsequently enters into
bankruptcy.
Sec. 4279.116 New Markets Tax Credit program.
This section identifies the provisions specific to guaranteed loans
involving projects that include new markets tax credits available under
the New Markets Tax Credit (NMTC) program. Such applicants and
applications must comply with the provisions in subparts A and B of
this part, except as modified in this section.
(a) NMTC eligible lenders. To be an eligible lender for a loan
guarantee that involves NMTC, the organization must meet the applicable
eligibility criteria in Sec. 4279.29 as otherwise modified by
paragraphs (a)(1) and (2) of this section.
(1) Sub-entities under the control of a non-regulated lender
approved as a lender for this program do not need to separately meet
the requirements of Sec. 4279.29(b). An eligible non-regulated lender
may modify its list of eligible sub-entities under its control at any
time by notifying the Agency in writing.
(2) In order to take advantage of the requirement exemption in
paragraph (a)(1) of this section, the non-regulated lender must include
in its application to be a lender each sub-entity under its control and
must clearly define the multiple-entity organizational and control
structure. In addition, the lender must include each such sub-entity in
the audited financial statements, commercial loan portfolio, and
commercial loan performance statistics.
(b) NMTC eligible purposes. The provisions of Sec. 4279.117(r)
notwithstanding, a lender that is a Department of Treasury certified
Community Development Entity (CDE) or subsidiary of a CDE (sub-CDE) may
[[Page 55333]]
have an ownership interest in the borrower provided that each of the
conditions specified in paragraphs (b)(1) through (4) of this section
is met.
(1) The lender does not have an ownership interest in the borrower
prior to the guaranteed loan application.
(2) The lender does not take a controlling interest in the
borrower.
(3) The lender cannot provide equity or take an ownership interest
in a borrower at a level that would result in the lender owning 20
percent or more interest in the borrower.
(4) In its guaranteed loan application, the lender provides an
Agency approved exit strategy when the NMTCs expire after the seventh
year. The CDE's (or sub-CDE's) exit strategy must include a general
plan to address the lender's equity in the project, and, if the lender
will divest their equity interest, how this will be accomplished and
the impact on the borrower.
(c) Conflict of interest. Notwithstanding Sec. 4279.117(q), a
CDE's (or sub-CDE's) ownership interest in the borrower does not
constitute a conflict of interest. The Agency will mitigate the
potential for or appearance of a conflict interest by requiring
appropriate loan covenants regarding limitations on dividends and
distributions of earnings be established as well as other covenants in
accordance with Sec. 4279.161(b)(11). The Agency will also ensure that
the lender limits waivers of loan covenants and future modifications of
loan documents.
(d) Eligible borrowers. The provisions of Sec. 4279.117(t)
notwithstanding, a sub-CDE may be an eligible borrower as specified in
paragraph (d)(1) of this section. Paragraphs (d)(2) through (13) of
this section identify modifications to subpart B of this part that
apply when the eligible borrower is a sub-CDE.
(1) To be an eligible borrower for a NMTC loan, each of the
following conditions must be met:
(i) The sub-CDE must be established for a single specific NMTC
investment;
(ii) The lender is not an affiliate of the sub-CDE;
(iii) One hundred percent of the guaranteed loan funds are or will
be loaned by the sub-CDE to the Qualified Active Low-Income Community
Business (QALICB), as defined by applicable regulations of the Internal
Revenue Service and are or will be used by the QALICB in accordance
with Sec. Sec. 4279.113 and 4279.117. All of the B&I guaranteed loan
funds must be ``passed through'' the sub-CDE to the QALICB. The
QALICB's project must be the ultimate use of the B&I guaranteed loan
funds; and
(iv) The QALICB meets the requirements of Sec. 4279.108.
(2) The provisions of Sec. 4279.119 apply except that the loan
guarantee limits apply to the QALICB and not to the sub-CDE, who would
otherwise be understood to be the ``borrower.''
(3) Section 4279.126 applies to both the borrower (sub-CDE) and the
QALICB. The terms and payment schedule of the lender's loan to the sub-
CDE must be at least equal to the terms and payment schedule of the
sub-CDE's loan to the QALICB. An Agency approved unequal or escalating
schedule of principal and interest payments may be used for a NMTC
loan. The lender may require additional principle repayment by a co-
borrower such as an owner or principle of the QALICB. The lender or
sub-CDE may require a debt repayment reserve fund or sinking fund;
however, such fund is not in lieu of a principal repayment schedule in
accordance with Sec. 4279.126 as amended by this paragraph.
(4) Except for Sec. 4279.131(b), section 4279.131 applies to both
the lender's loan to the sub-CDE and the sub-CDE's loan to the QALICB.
Section 4279.131(b) applies only to the sub-CDE's loan to the QALICB.
(5) The personal and corporate guarantee provisions of Sec.
4279.132 and the insurance provisions of Sec. 4279.136 apply only to
the QALICB and the sub-CDE's loan to the QALICB.
(6) Section 4279.137 applies to both the borrower (sub-CDE) and the
QALICB.
(7) Sections 4279.144 and 4279.150 apply to both the QALICB and the
sub-CDE's loan to the QALICB.
(8) Section 4279.161 applies to both the borrower (sub-CDE) and the
QALICB. As part of the application completed by the lender in
accordance with Sec. 4279.161, the lender application documentation
the lender submits to the Agency must include comparable information
for the loan (using the B&I guaranteed loan funds) between the sub-CDE
and QALICB. The requirements of Sec. 4279.161 apply to the loan
application, application analysis and underwriting, and loan documents
between the sub-CDE and QALICB. The lender must include these materials
in its guaranteed loan application to the Agency.
(9) The environmental requirements specified in Sec. 4279.165(b)
apply to both the loan between the sub-CDE and QALICB and the QALICB's
project.
(10) When assigning the priority score to a NMTC loan application
under Sec. 4279.166, the Agency will score the project based on the
sub-CDE's loan to the QALICB, the QALICB, and the QALICB's project as
the ultimate use of B&I guaranteed loan funds.
(11) When complying with the planning and performing development
provisions in Sec. 4279.167, the lender is responsible for ensuring
that both the sub-CDE's loan to the QALICB and the QALICB's project
comply with the provisions in Sec. 4279.167.
(12) Section 4279.180 applies to both the sub-CDE (borrower) and
the QALICB.
(13) Section 4279.181 applies to both the sub-CDE (borrower) and
the QALICB.
(e) Subordinated debt as equity. For purposes of calculating
tangible balance sheet equity, the CDE's or sub-CDE's loan that is
subordinated to the guaranteed loan will be considered equity when
calculating tangible balance sheet equity. The QALICB's financial
statements must be prepared by an accountant in accordance with GAAP.
Sec. 4279.117 Ineligible purposes and entity types.
(a) Distribution or payment to an individual or entity that will
retain an ownership interest in the borrower. Distribution or payment
to a member of the immediate family of an owner, partner, or
stockholder will not be permitted, except for a change in ownership of
the business where the selling immediate family member does not retain
an ownership interest and the Agency determines the price paid to be
reasonable. In situations where there is common ownership or an
otherwise closely-related company is being paid to do construction or
installation work for a borrower, only documented costs associated with
construction or installation can be paid with loan proceeds. This
paragraph does not apply to transfers of ownership for Employee Stock
Ownership Plans or worker cooperatives, to cooperatives where the
cooperative pays the member for product or services, or where member
stock is transferred among members of the cooperative.
(b) 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. However, this limitation is not
to be construed to prohibit assistance for the expansion of an existing
business entity through the establishment of a new branch, affiliate,
or subsidiary of such entity if the establishment of such branch,
affiliate, or subsidiary will not result in an increase in unemployment
in the area of original location or in any other area where such entity
conducts business
[[Page 55334]]
operations, unless there is reason to believe that such branch,
affiliate, or subsidiary is being established with the intention of
closing down the operations of the existing business entity in the area
or its original location or in any other area where it conducts such
operations.
(c) Projects in excess of $1 million that would increase direct
employment by more than 50 employees, which is calculated to or likely
to result in an increase in the production of goods, materials, or
commodities, or the availability of services or facilities in the area,
when there is not sufficient demand for such goods, materials,
commodities, services or facilities to employ the efficient capacity of
existing competitive commercial or industrial enterprises, unless such
financial or other assistance will not have an adverse effect upon
existing competitive enterprises in the area.
(d) The financing of timeshares, residential or resort trailer
parks and campgrounds, housing, housing development sites, apartments,
duplexes, or other residential housing, except as authorized in Sec.
4279.113(d).
(e) Owner-occupied housing--bed and breakfasts, hotels and motels,
storage facilities, etc.--are only allowed when the pro rata value of
the owner's living quarters, based on square footage, is deducted from
the use of loan proceeds.
(f) Guaranteeing lease payments or any lines of credit.
(g) Guaranteeing loans made by other Federal agencies.
(h) 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
shall neither be used to purchase the guaranteed portion of any Agency
guaranteed loan nor shall an Agency guaranteed loan serve as collateral
for a tax-exempt issue. The Agency may guarantee a loan for a project
that 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 that is financed by the tax-exempt obligation, and the
guaranteed loan has at least a parity security position with the tax-
exempt obligation.
(i) Guarantees supporting inherently religious activities such as
worship, religious instruction, proselytization, or to pay costs
associated with acquisition, construction or rehabilitation of
structures for inherently religious activities, including the financing
of multi-purpose facilities where religious activities will be among
the activities conducted.
(j) Businesses that derive more than 10 percent of annual gross
revenue (including any lease income from space or machines) from
gambling activity, excluding State-authorized lottery proceeds.
(k) Businesses deriving income from activities of a prurient sexual
nature or illegal activities.
(l) Racetracks or facilities for the conduct of races by animals,
professional or amateur drivers, jockeys, etc.
(m) Golf courses and golf course infrastructure, including par 3
and executive golf courses.
(n) Cemeteries.
(o) Research and development projects and projects that involve
technology that is not commercially available.
(p) Debt service reserves.
(q) Any project that the Agency determines creates a conflict of
interest or an appearance thereof between any party related to the
project.
(r) Guarantees where the lender or any of the lender's officers has
an ownership interest in the borrower or is an officer or director of
the borrower or where the borrower or any of its officers, directors,
stockholders, or other owners have more than a 5 percent ownership
interest in the lender.
(s) Notwithstanding cooperative stock purchase loans and
cooperative equity security guarantees in accordance with Sec.
4279.115, guarantees supporting investment or arbitrage or speculative
real estate investment.
(t) Lending institutions, investment institutions, or insurance
companies.
(u) Charitable institutions or fraternal organizations.
(v) Any business 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.
(w) Any business 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.
Sec. 4279.118 [Reserved]
Sec. 4279.119 Loan guarantee limits.
(a) Loan amount. The total amount of B&I loans to one borrower
(including the guaranteed and unguaranteed portions, the outstanding
principal and interest balance of any existing B&I guaranteed loans,
and the new loan request) must not exceed $10 million, except as
outlined in paragraphs (a)(1) and (2) of this section.
(1) The Administrator may, at the Administrator's discretion, grant
an exception to the $10 million limit for loans of $25 million or less
under the following circumstances:
(i) The project to be financed is a high-priority project as
defined in Sec. 4279.2 of this chapter. Priority points will be
awarded in accordance with the criteria contained in Sec. 4279.166 of
this subpart;
(ii) The lender must document to the satisfaction of the Agency
that the loan will not be made and the project will not be completed if
the guaranteed loan is not approved; and
(iii) The percentage of guarantee will not exceed 60 percent. No
exception to this requirement will be approved under paragraph (b) of
this section for loans exceeding $10 million.
(2) The Secretary, whose authority may not be redelegated, may
approve guaranteed loans in excess of $25 million, at the Secretary's
discretion, for rural cooperative organizations that process value-
added agricultural commodities in accordance with Sec. 4279.113(j)(1)
of this subpart.
(b) Percentage of guarantee. The percentage of guarantee, up to the
maximum allowed by this section, is a matter of negotiation between the
lender and the Agency. The maximum percentage of guarantee is 80
percent for loans of $5 million or less, 70 percent for loans between
$5 and $10 million, and 60 percent for loans exceeding $10 million. For
subsequent guaranteed loans, the maximum percentage of guarantee will
be based on the total amount of outstanding principal and interest of
any existing B&I guaranteed loans and the new loan request.
Notwithstanding the preceding, the Administrator may, at the
Administrator's discretion, grant an exception allowing guarantees of
up to 90 percent on loans of $5 million or less if the conditions of
either paragraph (b)(1) or (b)(2) are met. 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
an increased percentage of guarantee. The Agency will publish a notice
announcing this limit in the Federal Register.
(1) The project to be financed is a high-priority project as
defined in Sec. 4279.2 of this chapter. Priority points will be
awarded in accordance with the criteria contained in Sec. 4279.166 of
this subpart; or
[[Page 55335]]
(2) The lender documents, to the satisfaction of the Agency, that
the loan will not be made and the project will not be completed due to
the bank's legal or regulatory lending limit if the higher percentage
of guarantee is not approved.
Sec. 4279.120 Fees and charges.
There are two types of non-refundable fees; the guarantee fee and
the annual renewal fee. These fees are to be paid by the lender but may
be passed on to the borrower.
(a) Guarantee fee. The guarantee fee is paid at the time the Loan
Note Guarantee is issued and may be included as an eligible use of
guaranteed loan proceeds. The amount of the guarantee fee is determined
by multiplying the total loan amount by the guarantee fee rate by the
percent of guarantee. The rate of the guarantee fee is established by
the Agency in an annual notice published in the Federal Register.
Subject to annual limits set by the Agency in the published notice, the
Agency may charge a reduced guarantee fee if requested by the lender
for loans of $5 million or less when the borrower's business:
(1) Supports value-added agriculture and results in farmers
benefiting financially,
(2) Promotes access to healthy foods, or
(3) Is a high impact business development investment as defined in
Sec. 4279.2 of this chapter and applied in accordance with Sec.
4279.166(b)(4), and is located in a rural community that:
(i) Is experiencing long-term population decline;
(ii) Has remained in poverty for the last 30 years;
(iii) Is experiencing trauma as a result of natural disaster or
fundamental structural changes in its economic base;
(iv) Is located in a city or county with an unemployment rate 125
percent of the statewide rate or greater; or
(v) Is located within the boundaries of a Federally recognized
Indian Tribe's reservation or within tribal trust lands or within land
owned by an Alaska Native Regional or Village Corporation as defined by
the Alaska Native Claims Settlement Act.
(b) Annual renewal fee. The annual renewal fee is paid by the
lender to the Agency once a year. Payment of the annual renewal fee is
required in order to maintain the enforceability of the guarantee as to
the lender.
(1) The Agency will establish the rate of the annual renewal fee in
an annual notice published in the Federal Register. The amount of the
annual renewal fee is determined by multiplying the outstanding
principal loan balance as of December 31 of each year by the annual
renewal fee rate by the percent of guarantee. The rate that is in
effect at the time the loan is obligated remains in effect for the life
of the guarantee on the loan.
(2) Annual renewal fees are due on January 31. Payments not
received by April 1 are considered delinquent and, at the Agency's
discretion, may result in the Agency terminating the guarantee to the
lender. The Agency will provide the lender 30 calendar days notice that
the annual renewal fee is delinquent before terminating the guarantee.
Holders' rights will continue in effect as specified in Form RD 4279-5,
``Loan Note Guarantee,'' and Form RD 4279-6, ``Assignment Guarantee
Agreement,'' unless the holder took possession of an interest in the
Loan Note Guarantee knowing the annual renewal fee had not been paid.
Until the Loan Note Guarantee is terminated by the Agency, any
delinquent annual renewal fees will bear interest at the note rate, and
any delinquent annual renewal fees, including any interest due thereon,
will be deducted from any loss payment due the lender. For loans where
the Loan Note Guarantee is issued between October 1 and December 31,
the first annual renewal fee payment is due January 31 of the second
year following the date the Loan Note Guarantee was issued.
(3) Lenders are prohibited from selling guaranteed loans on the
secondary market if there are unpaid annual renewal fees.
(c) Routine lender fees. The lender may establish charges and fees
for the loan provided they are similar to those normally charged other
applicants for the same type of loan in the ordinary course of
business, and these fees are an eligible use of loan proceeds. The
lender must document such routine fees on Form RD 4279-1, ``Application
for Loan Guarantee.'' The lender may charge prepayment penalties and
late payment fees that are stipulated in the loan documents, as long as
they are reasonable and customary; however, the Loan Note Guarantee
will not cover either prepayment penalties or late payment fees.
(d) Professional services. Professional services are those rendered
by entities generally licensed or certified by States or accreditation
associations, such as architects, engineers, accountants, attorneys, or
appraisers, and those rendered by loan packagers. The borrower may pay
fees for professional services needed for planning and developing a
project. Such fees are an eligible use of loan proceeds provided that
the Agency agrees that the amounts are reasonable and customary. The
lender must document these fees on Form RD 4279-1.
Sec. Sec. 4279.121-4279.124 [Reserved]
Sec. 4279.125 Interest rates.
The interest rate for the guaranteed loan will be negotiated
between the lender and the borrower and may be either fixed or
variable, or a combination thereof, as long as it is a legal rate.
Interest rate swaps must not be used in conjunction with guaranteed
loans made under this subpart. Interest rates will not be more than
those rates customarily charged borrowers for loans without guarantees
and are subject to Agency review and approval. Lenders are encouraged
to utilize the secondary market and pass interest-rate savings on to
the borrower.
(a) A variable interest rate must be a rate that is tied to a
published base rate agreed to by the lender and the Agency. The
variable interest rate must be specified in the promissory note and may
be adjusted at different intervals during the term of the loan, but the
adjustments may not be more often than quarterly. The lender must
incorporate, within the variable rate promissory note at loan closing,
the provision for adjustment of payment installments. The lender must
properly amortize the outstanding principal balance within the
prescribed loan maturity in order to eliminate the possibility of a
balloon payment at the end of the loan.
(b) It is permissible to have different interest rates on the
guaranteed and unguaranteed portions of the loan provided that the rate
of the guaranteed portion does not exceed the rate on the unguaranteed
portion, except for situations where a fixed rate on the guaranteed
portion becomes a higher rate than the variable rate on the
unguaranteed portion due to the normal fluctuations in the approved
variable interest rate.
(c) Any change in the base rate or fixed interest rate between
issuance of Form RD 4279-3, ``Conditional Commitment,'' and Form RD
4279-5 must be approved in writing by the Agency. Approval of such
change must be shown as an amendment to the attachment to Form 4279-3
and must be reflected on Form RD 1980-19, ``Guaranteed Loan Closing
Report.''
(d) The lender's promissory note must not contain provisions for
default or penalty interest nor will default or penalty interest,
interest on interest, or late payment fees or charges be paid under the
Loan Note Guarantee.
[[Page 55336]]
Sec. 4279.126 Loan terms.
(a) The length of the loan term must be the same for both the
guaranteed and unguaranteed portions of the loan. The maximum repayment
for loans for real estate will not exceed 30 years; machinery and
equipment repayment will not exceed the useful life of the machinery
and equipment or 15 years, whichever is less; and working capital
repayment will not exceed 7 years. The term for a debt refinancing loan
may be based on the collateral the lender will take to secure the loan.
(b) A loan's maturity will take into consideration the use of
proceeds, the useful life of assets being financed and those used as
collateral, and the borrower's ability to repay the loan.
(c) 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.
(d) The first installment of principal and interest will, if
possible, be scheduled for payment after the facility is operational
and has begun to generate income. However, the first full installment
must be due and payable within 3 years from the date of the promissory
note and be paid at least annually thereafter. In cases where there is
an interest-only period, interest will be paid at least annually from
the date of the note.
(e) There must be no ``due-on-demand'' clauses without cause.
Regardless of any ``due-on-demand'' with cause provision in a lender's
promissory note, the Agency must concur in any acceleration of the loan
if the sole basis for acceleration is a nonmonetary default.
Sec. 4279.127-4279.130 [Reserved]
Sec. 4279.131 Credit quality.
The Agency will only guarantee loans that are sound and that have a
reasonable assurance of repayment. The lender is responsible for
conducting a financial analysis that involves the systematic
examination and interpretation of information to assess a company's
past performance, present condition, and future viability. The lender
is primarily responsible for determining credit quality and must
address all of the elements of credit quality in a comprehensive,
written credit analysis including capacity (sufficient cash flow to
service the debt), collateral (assets to secure the loan), conditions
(borrower, economy, and industry), capital (equity/net worth), and
character (integrity of management), as further described in paragraphs
(a) through (e) of this section. The lender's analysis is the central
underwriting document and must be sufficiently detailed to describe the
proposed loan and business situation and document that the proposed
loan is sound. The lender's analysis must include a written discussion
of repayment ability with a cash-flow analysis, history of debt
repayment, borrower's management, necessity of any debt refinancing,
and credit reports of the borrower, principals, and any parent,
affiliate or subsidiary. The lender's analysis must also include
spreadsheets and discussion of the 3 years of historical balance sheets
and income statements (for existing businesses) and 2 years of
projected balance sheets, income statements and cash flow statements,
with appropriate ratios and comparisons with industrial standards (such
as Dun & Bradstreet or Risk Management Association). All data must be
shown in total dollars and also in common size form, obtained by
expressing all balance sheet items as a percentage of assets and all
income and expense items as a percentage of sales.
(a) Capacity/Cash Flow. The lender must make all efforts to ensure
the borrower has adequate working capital or operating capital and to
structure or restructure debt so that the borrower has adequate debt
coverage and the ability to accommodate expansion.
(b) Collateral. The lender must ensure that the collateral for the
loan has a documented value sufficient to protect the interest of the
lender and the Agency and, except as set forth in paragraph (b)(2) of
this section, the discounted collateral value must be at least equal to
the loan amount.
(1) The lender must discount collateral consistent with the sound
loan-to-discounted value policy outlined in paragraphs (b)(1)(i)
through (iv) of this section. The type, quality, and location of
collateral are relevant factors used to assess collateral adequacy and
appropriate levels of discounting. Other factors to be considered in
the discounted value of collateral must include the marketability and
alternative uses of the collateral. That is, specialized buildings or
equipment will be discounted greater than multi-purpose facilities or
equipment. When using discounts other than those outlined below, the
lender must document why such discounts are appropriate.
(i) A maximum of 80 percent of current fair market value will be
given to real estate. Special purpose real estate must be assigned less
value.
(ii) A maximum of 70 percent of cost or current fair market value
will be given to machinery, equipment, and furniture and fixtures and
will be based on its marketability, mobility, useful life,
specialization, and alternative uses, if any.
(iii) A maximum of 60 percent of book value will be assigned to
acceptable inventory and accounts receivable; however, all accounts
over 90 days past due, contra accounts, affiliated accounts, and other
accounts deemed not to be acceptable collateral, as determined by the
Agency, will be omitted. Calculations to determine the percentage to be
applied in the analysis are to be based on the realizable value of the
accounts receivable taken from a current aging of accounts receivable
from the borrower's most recent financial statement. At a minimum,
reviewed annual financial statements will be required when there is a
predominant reliance on inventory and/or receivable collateral that
exceeds $250,000. Except for working capital loans, term debt must not
be dependent upon accounts receivable and inventory to meet collateral
requirements.
(iv) No value will be assigned to unsecured personal, partnership,
or corporate guarantees.
(2) Some businesses are predominantly cash-flow oriented, and where
cash flow and profitability are strong, loan-to-value discounts may be
adjusted accordingly with satisfactory documentation. A loan primarily
based on cash flow must be supported by a successful and documented
financial history. Under no circumstances must the loan-to-value of the
collateral (loan-to-fair market value) ever be equal to or greater than
100 percent.
(3) A parity or junior lien position may be considered provided the
loan-to-discounted value is adequate to secure the guaranteed loan in
accordance with this section.
(4) The entire loan must be secured by the same security with equal
lien priority for the guaranteed and unguaranteed portions of the loan.
The unguaranteed portion of the loan will neither be paid first nor
given any preference or priority over the guaranteed portion.
(c) Conditions. The lender must consider the current status of the
borrower, overall economy, and industry for which credit is being
extended. The regulatory environment surrounding the particular
business or industry must also be considered. Businesses in areas of
decline will be required to provide strong business plans that outline
how they differ from the current trends. Local, regional and national
condition of the industry must be addressed.
(d) Capital/Equity. (1) A minimum of 10 percent tangible balance
sheet equity
[[Page 55337]]
(or a maximum debt to tangible net worth ratio of 9:1) will be required
at loan closing for borrowers that are existing businesses. A minimum
of 20 percent tangible balance sheet equity (or a maximum debt to
tangible net worth ratio of 4:1) will be required at loan closing for
borrowers that are new businesses. For energy projects, the minimum
tangible balance sheet equity requirement range will be between 25
percent and 40 percent (or a maximum debt to tangible net worth ratio
between 3:1 and 1.5:1) at loan closing, considering whether the
business is an existing business with a successful financial and
management history or a new business; the value of personal/corporate
guarantees offered; contractual relationships with suppliers and
buyers; credit rating; and strength of the business plan/feasibility
study.
(2) Tangible balance sheet equity will be determined based upon
financial statements prepared by an accountant in accordance with GAAP.
The capital/equity requirement must be met in the form of either cash
or tangible earning assets contributed to the business and reflected on
the borrower's balance sheet. Transfers of assets at fair market value
must be an arm's length transaction. Tangible equity cannot include
appraisal surplus, bargain purchase gains, or intangible assets. Owner
subordinated debt may be included when the subordinated debt is in
exchange for cash injected into the business that remains in the
business for the life of the guaranteed loan. The note or other form of
evidence must be submitted to the Agency in order for subordinated debt
to count towards meeting the tangible balance sheet equity requirement.
(3) The lender must certify, in accordance with Sec.
4279.181(a)(9)(i), that the capital/equity requirement was determined,
based on a balance sheet prepared by an accountant in accordance with
GAAP, and met, as of the date the guaranteed loan was closed, giving
effect to the entirety of the loan in the calculation, whether or not
the loan itself is fully advanced. A copy of the loan closing balance
sheet must be included with the lender's certification.
(4) In situations where a real estate holding company and an
operating entity are dependent upon one another's operations and are
effectively one business, they must be co-borrowers. The capital/equity
requirement will apply to both entities on a consolidated basis, and
financial statements must be prepared both individually and on a
consolidated basis.
(5) In situations where co-borrowers are independent operations,
the capital/equity requirement will apply to all co-borrowers on an
individual basis.
(6) For sole proprietorships and other situations where business
assets are held personally, financial statements must be prepared using
only the assets and liabilities directly attributable to the business.
Assets, plus any improvements, must be valued at the lower of cost or
fair market value.
(7) Increases in the equity requirement may be imposed by the
Agency. A reduction in the capital/equity requirement for existing
businesses may be permitted by the Administrator under the following
conditions:
(i) Collateralized personal and corporate guarantees, in accordance
with Sec. 4279.132 of this subpart, when feasible and legally
permissible are obtained; and
(ii) Pro forma and historical financial statements indicate the
business to be financed meets or exceeds the median quartile (as
identified in Risk Management Association's Annual Statement Studies or
similar publication) for the current ratio, quick ratio, debt-to-worth
ratio, and debt coverage ratio.
(e) Character. The lender must conduct a thorough review of key
management personnel to ensure that the business has adequately trained
and experienced managers. The borrower and all owners with a 20 percent
or more ownership interest must have a good credit history, reflecting
a record of meeting obligations in a timely manner. If there have been
credit problems in the past, the lender must provide a satisfactory
explanation to show that the problems are unlikely to recur.
Sec. 4279.132 Personal and corporate guarantees.
(a) Full, unconditional personal and/or corporate guarantees for
the full term of the loan are required from those owning 20 percent or
more interest in the borrower, unless the Agency grants an exception.
The Agency may grant an exception only when the lender requests it and
documents to the Agency's satisfaction that collateral, equity, cash
flow and profitability indicate an above-average ability to repay the
loan. Partial guarantees for the full term of the loan at least equal
to each owner's percentage of interest in the borrower times the loan
amount may be required in lieu of full, unconditional guarantees when
the guarantors' percentages equal 100 percent so that the loan is fully
guaranteed.
(b) When warranted by an Agency assessment of potential financial
risk, the Agency may require the following:
(1) Guarantees to be secured;
(2) Guarantees of parent, subsidiaries, or affiliated companies
owning less than a 20 percent interest in the borrower; and
(3) Guarantees from persons whose ownership interest in the
borrower is held indirectly through intermediate entities.
(c) All personal and corporate guarantors must execute Form RD
4279-14, ``Unconditional Guarantee,'' and any guarantee form required
by the lender. The Agency will retain the original, executed Form RD
4279-14.
(1) Any amounts paid by the Agency on behalf of an Agency
guaranteed loan borrower will constitute a Federal debt owed to the
Agency by the guaranteed loan borrower.
(2) Any amounts paid by the Agency pursuant to a claim by a
guaranteed program lender will constitute a Federal debt owed to the
Agency by a guarantor of the loan, to the extent of the amount of the
guarantor's guarantee.
(3) In all instances under paragraphs (c)(1) and (2) of this
section, interest charges will be assessed in accordance with 7 CFR
1951.133.
Sec. Sec. 4279.133-4279.135 [Reserved]
Sec. 4279.136 Insurance.
The lender is responsible for ensuring that required insurance is
maintained by the borrower.
(a) Hazard. Hazard insurance with a standard clause naming the
lender as mortgagee or loss payee, as applicable, is required for the
life of the guaranteed loan. The amount must be at least equal to the
replacement value of the collateral or the outstanding balance of the
loan, whichever is the greater amount.
(b) Life. The lender may require a collateral assignment of life
insurance to insure against the risk of death of persons critical to
the success of the business. When required, coverage must be in amounts
necessary to provide for management succession or to protect the
business. The Agency may require life insurance on key individuals for
loans where the lender has not otherwise proposed such coverage. The
cost of insurance and its effect on the applicant's working capital
must be considered as well as the amount of existing insurance that
could be assigned without requiring additional expense.
(c) Worker compensation. Worker compensation insurance is required
in accordance with State law.
[[Page 55338]]
(d) Flood. National flood insurance is required in accordance with
applicable law.
(e) Other. The lender must consider whether public liability,
business interruption, malpractice, and other insurance is appropriate
to the borrower's particular business and circumstances and must
require the borrower to obtain such insurance as is necessary to
protect the interests of the borrower, the lender, or the Agency.
Sec. 4279.137 Financial statements.
The lender will determine the type and frequency of submission of
financial statements by the borrower and any guarantors. At a minimum,
annual financial statements prepared by an accountant in accordance
with GAAP are required, except for personal financial statements and
cooperative stock purchase loans in accordance with Sec. 4279.115(a).
However, if the loan amount exceeds $3 million or if circumstances
warrant, the Agency may require annual audited financial statements.
Sec. Sec. 4279.138-4279.143 [Reserved]
Sec. 4279.144 Appraisals.
Lenders must obtain appraisals for real estate and chattel
collateral when the value of the collateral exceeds $250,000. Lenders
must use the market value as established by the appraisal and
discounting policies outlined in Sec. 4279.131(b) to meet the
discounted collateral coverage requirements of this subpart. Lenders
are responsible for ensuring that appraisal values adequately reflect
the actual value of the collateral. The Agency will require
documentation that the appraiser has the necessary experience and
competency to appraise the property in question. Appraisals must not be
more than 1 year old, and a more recent appraisal may be requested by
the Agency in order to reflect more current market conditions. For loan
servicing purposes, an appraisal may be updated in lieu of a complete
new appraisal when the original appraisal is more than 1 year old but
less than 2 years old. Failure by the lender to follow these
requirements will be considered an act of fraud or misrepresentation.
(a) All real property appraisals associated with Agency guaranteed
loanmaking and servicing transactions must meet the requirements
contained in the Financial Institutions Reform, Recovery and
Enforcement Act (FIRREA) of 1989 and the appropriate guidelines
contained in Standards 1 and 2 of the Uniform Standards of Professional
Appraisal Practices (USPAP) and be performed by a State Certified
General Appraiser. Notwithstanding any exemption that may exist for
transactions guaranteed by a Federal Government agency, all appraisals
obtained by the lender for loanmaking and servicing must conform to the
Interagency Appraisal and Evaluations Guidelines established by the
lender's primary Federal or State regulator. All appraisals must
include consideration of the potential effects from a release of
hazardous substances or petroleum products or other environmental
hazards on the fair market value of the collateral, if applicable. The
lender must complete and submit its technical review of the appraisal.
For construction projects, the lender must use the ``as-completed''
market value of the real estate to determine value of the real estate
property.
(b) Values attributed to business valuation or as a going concern
are not allowed.
(c) Chattels must be evaluated in accordance with normal banking
practices and generally accepted methods of determining value. Chattel
appraisals must reflect the age, condition, and remaining useful life
of the equipment. If the appraisal is completed by a state licensed/
certified appraiser, the appraisal report must comply with USPAP
Standards 7 and 8.
Sec. 4279.145-4279.149 [Reserved]
Sec. 4279.150 Feasibility studies.
A feasibility study, by a qualified independent consultant
acceptable to the Agency, is required for new businesses. The Agency
may require a feasibility study for existing businesses when the
project will significantly affect the borrower's operations. A
feasibility study is also required for all biofuels proposals,
regardless of whether the business is new or existing. At a minimum, a
feasibility study must include an evaluation of the economic, market,
technical, financial, and management feasibility and an executive
summary that reaches an overall conclusion as to the business' chance
of success. The income approach of an appraisal is not an acceptable
feasibility study.
Sec. 4279.151-4279.160 [Reserved]
Sec. 4279.161 Filing preapplications and applications.
Borrowers and lenders are encouraged to file preapplications and
obtain Agency comments before completing an application. However, if
they prefer, borrowers and lenders may file a complete application
without filing a preapplication. The Agency will neither accept nor
process preapplications and applications unless a lender has agreed to
finance the proposal. Guaranteed loans exceeding $600,000 must be
submitted under the requirements specified in paragraph (b) of this
section. However, guaranteed loans of $600,000 and less may be
submitted under the requirements of either paragraph (b) or (c) of this
section.
(a) Preapplications. Lenders may file preapplications by submitting
the following to the Agency:
(1) A letter or preliminary lender credit analysis, signed by the
lender, containing the following:
(i) Name of the proposed borrower, organization type, address,
contact person, federal tax identification number, email address, and
telephone number;
(ii) Name of the proposed lender, address, telephone number,
contact person, email address, and lender's Internal Revenue Service
(IRS) identification number;
(iii) Amount of the loan request, percent of guarantee requested,
and the proposed rates and terms;
(iv) Description of collateral to be offered with estimated values
and the amount and source of equity to be contributed to the project;
(v) A brief description of the project, products, services
provided, and availability of raw materials and supplies; and
(vi) The number of current full-time equivalent jobs, the number of
jobs to be created as a result of the proposed loan, and the overall
average wage rate.
(2) The borrower's current (not more than 90 days old) balance
sheet and year-to-date income statement. For existing businesses, also
include balance sheets and income statements for the last 3 years; and
(3) A completed Form RD 4279-2, ``Certification of Non-Relocation
and Market Capacity Information Report,'' if the proposed loan is in
excess of $1 million and will increase direct employment by more than
50 employees.
(b) Applications. Lenders must submit the information specified in
paragraphs (b)(1) through (19) of this section when filing an
application with the Agency.
(1) A completed Form RD 4279-1.
(2) A completed Form RD 4279-2, if the proposed loan is in excess
of $1 million and will increase direct employment by more than 50
employees.
(3) A completed Form RD 1940-20, ``Request for Environmental
Information,'' and attachments, unless the project is categorically
excluded
[[Page 55339]]
under Agency environmental regulations.
(4) A personal or commercial credit report from an acceptable
credit reporting company for each individual or entity owning 20
percent or more interest in the borrower, except for those corporations
listed on a major stock exchange. Credit reports are not required for
elected and appointed officials when the applicant is a public body or
non-profit corporation.
(5) Commercial credit reports for the borrower(s) and any parent,
affiliate, and subsidiary companies.
(6) Current (not more than 90 days old) financial statements for
any parent, affiliate, and subsidiary companies.
(7) Current (not more than 90 days old) personal and corporate
financial statements of any guarantors.
(8) For all borrowers, a current (not more than 90 days old)
balance sheet and year-to-date income statement, a pro forma balance
sheet projected for loan closing, and projected balance sheets, income
statements and cash flow statements for the next 2 years. Projections
must be supported by a list of assumptions showing the basis for the
projections. In the event processing of the loan is not complete within
90 days, a current set of financial statements will be required every
90 days.
(9) For borrowers that are existing businesses, balance sheets and
income statements for the last 3 years. If the business has been in
operation for less than 3 years, balance sheets and income statements
for all years for which financial information is available.
(10) The lender's comprehensive, written credit analysis of the
proposal, as described in Sec. 4279.131.
(11) A draft loan agreement. A final loan agreement must be
executed by the lender and borrower before the Agency issues a Loan
Note Guarantee and must contain any additional requirements imposed by
the Agency in its Conditional Commitment. The loan agreement must
establish prudent, adequate controls to protect the interests of the
lender and Agency. At a minimum, the following requirements must be
included in the loan agreement:
(i) Type and frequency of borrower and guarantor financial
statements to be required for the duration of the loan;
(ii) Prohibition against assuming liabilities or obligations of
others;
(iii) Limitations on dividend payments and compensation of officers
and owners;
(iv) Limitation on the purchase and sale of equipment and other
fixed assets;
(v) Restrictions concerning consolidations, mergers, or other
circumstances and a limitation on selling the business without the
concurrence of the lender;
(vi) Maximum debt-to-net worth ratio; and
(vii) Minimum debt service coverage ratio.
(12) Intergovernmental consultation comments in accordance with 7
CFR, part 3015, subpart V, or successor regulation, unless exemptions
have been granted by the State single point of contact.
(13) Appraisals, accompanied by a copy of the appropriate
environmental site assessment, if available.
(14) A business plan or similar document that must include a
description of the business and project, management experience, sources
of capital, products and services and pricing, marketing plan, proposed
use of funds, availability of labor, raw materials and supplies,
contracts in place, distribution channels, and the names of any
corporate parent, affiliates, and subsidiaries with a description of
the relationship. A business plan may be omitted if the information is
included in a feasibility study. At the Agency's discretion, a business
plan may be omitted when loan proceeds are used exclusively for debt
refinancing and fees.
(15) Independent feasibility study, if required.
(16) For companies listed on a major stock exchange or subject to
the Securities and Exchange Commission regulations, a copy of SEC Form
10-K, ``Annual Report Pursuant to sections 13 or 15(d) of the
Securities Exchange Act of 1934.''
(17) For health care facilities, a certificate of need, if required
by statute or State law.
(18) For guaranteed loan applications for five or more residential
units, including nursing homes and assisted-living facilities, an
Affirmative Fair Housing Marketing Plan that is in conformance with 7
CFR 1901.203(c)(3).
(19) Any additional information required by the Agency to make a
decision.
(c) Applications of $600,000 and less. Guaranteed loan applications
may be processed under this paragraph if the request does not exceed
$600,000, provided the Agency determines that there is not a
significant increased risk of a default on the loan. A lender may need
to resubmit an application under paragraph (b) of this section if the
application under this paragraph does not contain sufficient
information for the Agency to make a decision whether to guarantee the
loan. Applications submitted under this paragraph must include the
information contained in paragraphs (b)(1) (with the short application
box marked at the top of Form RD 4279-1), (b)(3), (b)(8) through (10),
(b)(12), and (b)(13) of this section. The lender must have the
documentation identified in paragraph (b) of this section, with the
exception of paragraph (b)(2), available in its file for review.
Sec. Sec. 4279.162-4279.164 [Reserved]
Sec. 4279.165 Evaluation of application.
(a) General review. The Agency will evaluate the application and
make a determination whether the borrower is eligible, the proposed
loan is for an eligible purpose, there is reasonable assurance of
repayment ability, there is sufficient collateral and equity, and the
proposed loan complies with all applicable statutes and regulations. If
the Agency determines it is unable to guarantee the loan, it will
inform the lender in writing.
(b) Environmental requirements. The environmental review process
must be completed, in accordance with 7 CFR part 1940, subpart G or
successor regulation, prior to loan approval.
Sec. 4279.166 Loan priority scoring.
The Agency will consider applications and preapplications in the
order they are received by the Agency; however, for the purpose of
assigning priority points as described in paragraph (b) of this
section, the Agency will compare an application to other pending
applications that are competing for funding. The Agency may establish a
minimum loan priority score to fund projects from the National Office
reserve and will publish any minimum loan priority score in a notice
published in the Federal Register.
(a) When applications on hand otherwise have equal priority, the
Agency will give preference to applications for loans from qualified
veterans.
(b) The Agency will assign priority points on the basis of the
point system contained in this section. The Agency will use the
application and supporting information to determine an eligible
proposed project's priority for available guarantee authority. To the
extent possible, all lenders must consider Agency priorities when
choosing projects for guarantee. The lender must provide necessary
information related to determining the score, if requested.
(1) Population priority. Projects located in an unincorporated area
or in a city with a population under 25,000 (10 points).
(2) Demographics priority. The priority score for demographics
priority
[[Page 55340]]
will be the total score for the following categories:
(i) Located in an eligible area of long-term population decline
according to the last three decennial censuses (5 points);
(ii) Located in a rural county that has had 20 percent or more of
its population living in poverty based on the last three decennial
censuses (5 points);
(iii) Located in a rural community that is experiencing trauma as a
result of natural disaster (5 points);
(iv) Located in a city or county with an unemployment rate 125
percent of the statewide rate or greater (5 points);
(v) Located within the boundaries of a Federally recognized Indian
Tribe's reservation or within tribal trust lands or within land owned
by an Alaska Native Regional or Village Corporation as defined by the
Alaska Native Claims Settlement Act (5 points); and
(vi) Business is owned by a qualified veteran as defined by Sec.
4279.2 of this chapter (5 points).
(3) Loan features. The priority score for loan features will be the
total score for the following categories:
(i) Lender will price a variable rate loan at a rate equal to or
less than the Wall Street Journal published Prime Rate plus 1.5 percent
(5 points);
(ii) Lender will price a variable rate loan at a rate equal to or
less than the Wall Street Journal published Prime Rate plus 1 percent
(5 points);
(iii) Lender will price a fixed rate loan equal to or less than the
Farmer Mac II rate plus 2.5 percent (5 points);
(iv) Lender will price a fixed rate loan equal to or less than the
Farmer Mac II rate plus 2 percent (5 points);
(v) The Agency guaranteed loan is less than 60 percent of project
cost (5 points);
(vi) The Agency guaranteed loan is less than 50 percent of project
cost (5 points);
(vii) The Agency guaranteed loan is less than 40 percent of project
cost (5 points);
(viii) The loan-to-job ratio (loan amount/number of jobs created
and saved) is less than $75,000 in loan proceeds per job created and
saved (5 points);
(ix) The loan-to-job ratio is less than $50,000 in loan proceeds
per job created and saved (5 points); and
(x) For loans not requesting an exception under Sec. 4279.119(b)
of this subpart, the percentage of guarantee is 10 or more percentage
points less than the maximum allowable for a loan of its size (5
points).
(4) High impact business investment priorities. The priority score
for high impact business investment will be the total score for the
following two categories:
(i) Business/industry. The priority score for business/industry
will be the total score for the following:
(A) Industry that is not already present in the community (5
points);
(B) Business that has 20 percent or more of its sales in
international markets (5 points);
(C) Business that offers high value, specialized products and/or
services that command high prices (2 points);
(D) Business that provides an additional market for existing local
businesses (3 points);
(E) Business that is locally owned and managed (3 points);
(F) Business that will produce a natural resource value-added
product or an agricultural resource value-added product (2 points); and
(G) Business that processes, distributes, aggregates, stores and/or
markets locally or regionally produced agricultural food products to
underserved communities in accordance with Sec. 4279.113(x)(5) (5
points); and
(ii) Occupations. The priority score for occupations will be the
total score for the following:
(A) Business that creates or saves jobs with an average wage
exceeding 125 percent of the Federal minimum wage (5 points);
(B) Business that creates or saves jobs with an average wage
exceeding 150 percent of the Federal minimum wage (5 points); and
(C) Business that offers a healthcare benefits package to all
employees, with at least 50 percent of the premium paid by the
employer, or a business that qualifies under the Work Opportunity Tax
Credit Program authorized by the Small Business and Work Opportunity
Tax Act of 2007 (5 points).
(5) Administrative points. The State Director may assign up to 10
additional points to an application to account for statewide
distribution of funds, natural disasters or economic emergency
conditions, community economic development strategies, State strategic
plans, fundamental structural changes in a community's economic base,
or projects that will fulfill an Agency initiative. In addition to the
State Director assigned points, if an application is considered in the
National Office, the Administrator may assign up to an additional 10
points to account for geographic distribution of funds, emergency
conditions caused by economic problems or natural disasters, or
projects that will fulfill an Agency initiative.
Sec. 4279.167 Planning and performing development.
(a) Design policy. The lender must ensure that all facilities
constructed with program funds are designed, and costs estimated, by an
independent professional utilizing accepted architectural, engineering
and design practices. The Agency may require an independent
professional architect on complex projects. The lender must ensure the
design conforms to applicable Federal, State, and local codes and
requirements. The lender must also ensure that the project will be
completed with available funds and, once completed, will be used for
its intended purpose and produce in the quality and quantity proposed
in the completed application approved by the Agency. Once construction
is completed, the lender must provide the Agency with a copy of the
Notice of Completion.
(b) Issuing the Loan Note Guarantee prior to project completion. If
the lender requests that the Loan Note Guarantee be issued prior to
completion of a construction project, the lender must have a
construction monitoring plan acceptable to the Agency and undertake the
added responsibilities set forth in this paragraph. The lender must
monitor the progress of construction and undertake the reviews and
inspections necessary to ensure that construction conforms to
applicable Federal, State, and local code requirements; proceeds are
used in accordance with the approved plans, specifications, and
contract documents; and that funds are used for eligible project costs.
The lender must expeditiously report any problems in project
development to the Agency.
(1) In cases of takeout of interim financing where the Loan Note
Guarantee is issued prior to completion of a project, the promissory
note must contain the terms and conditions of the interim financing and
the permanent financing and convert the interim financing to the
permanent note as the Loan Note Guarantee can only be placed on one
note.
(2) Prior to disbursement of construction funds, the lender must
have:
(i) A complete set of plans and specifications for the project on
file;
(ii) A detailed timetable for the project with a corresponding
budget of costs setting forth the parties responsible for payment. The
timetable and budget must be agreed to by the borrower;
(iii) A person, with demonstrated experience relating to the
project's industry, confirm that the budget is adequate for the planned
development;
[[Page 55341]]
(iv) A firm, fixed-price construction contract with an independent
general contractor with costs and provisions for change order
approvals, a retainage percentage, and a disbursement schedule or a 100
percent performance/payment bond on the borrower's contactor will be
required in cases when the lender requests issuance of a Loan Note
Guarantee prior to completion of construction. The bonding agent must
be listed on Treasury Circular 570. A performance/payment bond will be
made a part of the contract if the borrower requests it or if the
contractor requests partial payments for construction work; and
(v) Contingencies in place to handle unforeseen cost overruns
without seeking additional guaranteed assistance. These are to be
agreed to by the borrower.
(3) Once construction begins, the lender is to:
(i) Use any borrower funds in the project first;
(ii) Ensure that the project is built to support the functions at
the level and quality contemplated by the borrower through the use of
accepted architectural and engineering practices. There is no absolute
requirement that the goal be achieved by the use of a professional
inspection. However, if after careful review, it appears that the use
of a professional inspector is the only method that ensures that the
project is built to support the functions at the level and quality
contemplated by the borrower through the use of accepted architectural
and engineering practices, one may be required by the Agency. If one is
required, inspections must be made by a qualified, independent
inspector prior to any progress payments. If other less expensive or
rigorous methods will achieve the same result, they may be utilized.
The decision will be made on a case-by-case basis and must be
reasonable under the specific circumstances of the case;
(iii) Obtain lien waivers from all contractors and materialmen
prior to any disbursement; and
(iv) Provide at least monthly, written reports to the Agency on
fund disbursement and project status.
(4) Once construction is completed, the lender is to provide the
Agency with a copy of the Notice of Completion.
(c) Compliance with other Federal laws. Lenders must comply with
other applicable Federal laws including Equal Employment Opportunities,
Equal Credit Opportunity Act, Fair Housing Act, and the Civil Rights
Act of 1964. Guaranteed loans that involve the construction of or
addition to facilities that accommodate the public and commercial
facilities, as defined by the Americans with Disabilities Act (ADA),
must comply with the ADA. The borrower and lender are responsible for
ensuring compliance with these requirements.
(d) 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 7 CFR part 1940 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 that would have an adverse effect on the environment.
Sec. 4279.168 Timeframe for processing applications.
All complete guaranteed loan applications will be approved or
disapproved within 60 days, unless approval is prevented by a lack of
guarantee authority or there are delays resulting from public comment
requirements of the environmental assessment or outstanding DOL
clearance issues.
Sec. Sec. 4279.169-4279.172 [Reserved]
Sec. 4279.173 Loan approval and obligating funds.
(a) Upon approval of a loan guarantee, the Agency will issue a
Conditional Commitment to the lender containing conditions under which
a Loan Note Guarantee will be issued. No Conditional Commitment can be
issued until the loan is obligated. If a Loan Note Guarantee is not
issued by the Conditional Commitment expiration date, the Conditional
Commitment may be extended at the request of the lender and only if
there has been no material adverse change in the borrower or the
borrower's financial condition since issuance of the Conditional
Commitment. If the Conditional Commitment is not accepted, the
Conditional Commitment may be withdrawn and funds may be deobligated.
Likewise, if the Conditional Commitment expires, funds may be
deobligated.
(b) If certain conditions of the Conditional Commitment cannot be
met, the lender and borrower may request changes to the Conditional
Commitment. Within the requirements of the applicable regulations and
prudent lending practices, the Agency may negotiate with the lender and
the borrower regarding any proposed changes to the Conditional
Commitment. Any changes to the Conditional Commitment must be
documented by written amendment to the Conditional Commitment.
(c) The borrower must comply with all Federal requirements then in
effect for receiving Federal assistance.
Sec. 4279.174 Transfer of lenders.
(a) The Agency may approve the substitution of a new eligible
lender in place of a former lender who has been issued and has accepted
an outstanding Conditional Commitment when the Loan Note Guarantee has
not yet been issued; provided that there are no changes in the
borrower's ownership or control, loan purposes, or scope of project and
the loan terms and conditions in the Conditional Commitment and the
loan agreement remain the same.
(b) Unless the new lender is already an approved lender, the Agency
will analyze the new lender's servicing capability, eligibility, and
experience prior to approving the substitution. The original lender
must provide the Agency with a letter stating the reasons it no longer
desires to be a lender for the project. The substituted lender must
execute a new part B of Form 4279-1, Form RD 4279-4, ``Lender's
Agreement,'' (unless a valid Lender's Agreement with the Agency already
exists), and must complete a new lender's analysis in accordance with
Sec. 4279.131. The new lender may also be required to provide other
updated application items outlined in Sec. 4279.161(b).
Sec. Sec. 4279.175-4279.179 [Reserved]
Sec. 4279.180 Changes in borrower.
Any changes in borrower ownership or organization prior to the
issuance of the Loan Note Guarantee must meet the eligibility
requirements of the program and be approved by the Agency.
Sec. 4279.181 Conditions precedent to issuance of the Loan Note
Guarantee.
(a) The lender must not close the loan until all conditions of the
Conditional Commitment are met. When loan closing plans are
established, the lender must notify the Agency. Coincident with, or
immediately after loan closing, the lender must provide the following
to the Agency:
(1) An executed Form RD 4279-4, unless a valid Lender's Agreement
[[Page 55342]]
exists that was issued after [DATE OF FINAL RULE PUBLICATION];
(2) Form RD 1980-19 and appropriate guarantee fee;
(3) Copy of the executed promissory note(s);
(4) Copy of the executed loan agreement;
(5) Copy of the executed settlement statement;
(6) Original, executed Forms RD 4279-14, as required;
(7) Any other documents required to comply with applicable law or
required by the Conditional Commitment.
(8) Borrower's loan closing balance sheet, supporting paragraph
(a)(9)(i) of this section of the lender certification, demonstrating
required tangible balance sheet equity; and
(9) The lender's certification to each of the following
certifications:
(i) The capital/equity requirement was determined, based on a
balance sheet prepared by an accountant in accordance with GAAP, and
met, as of the date the guaranteed loan was closed, giving effect to
the entirety of the loan in the calculation, whether or not the loan
itself is fully advanced.
(ii) All requirements of the Conditional Commitment have been met.
(iii) No major changes have been made in the lender's loan
conditions and requirements since the issuance of the Conditional
Commitment, unless such changes have been approved by the Agency in
writing.
(iv) There is a reasonable prospect that the guaranteed loan and
other project debt will be repaid on time and in full (including
interest) from project cash flow according to the terms proposed in the
application for loan guarantee.
(v) All planned property acquisition has been or will be completed,
all development has been or will be substantially completed in
accordance with plans and specifications and conforms with applicable
Federal, State, and local codes, and costs have not exceeded the amount
approved by the lender and the Agency.
(vi) The borrower has marketable title to the collateral then owned
by the borrower, subject to the instrument securing the loan to be
guaranteed and to any other exceptions approved in writing by the
Agency.
(vii) The loan has been properly closed, and the required security
instruments have been properly executed, or will be obtained on any
acquired property that cannot be covered initially under State law.
(viii) Lien priorities are consistent with the requirements of the
Conditional Commitment. No claims or liens of laborers, subcontractors,
suppliers of machinery and equipment, materialmen, or other parties
have been filed against the collateral and no suits are pending or
threatened that would adversely affect the collateral when the security
instruments are filed.
(ix) When required, personal or corporate guarantees have been
obtained in accordance with Sec. 4279.132.
(x) The loan proceeds have been or will be disbursed for purposes
and in amounts consistent with the Conditional Commitment and the
application submitted to the Agency. When applicable, the entire amount
of the loan for working capital has been disbursed to the borrower,
except in cases where the Agency has approved disbursement over an
extended period of time and funds are escrowed so that the settlement
statement reflects the full amount to be disbursed.
(xi) All truth-in-lending and equal credit opportunity requirements
have been met.
(xii) There has been neither any material adverse change in the
borrower's financial condition nor any other material adverse change in
the borrower, for any reason, during the period of time from the
Agency's issuance of the Conditional Commitment to issuance of the Loan
Note Guarantee regardless of the cause or causes of the change and
whether or not the change or causes of the change were within the
lender's or borrower's control. The lender must address any assumptions
or reservations in the requirement and must address all adverse changes
of the borrower, any parent, affiliate, or subsidiary of the borrower,
and guarantors.
(xiii) Neither the lender nor any of the lender's officers has an
ownership interest in the borrower or is an officer or director of the
borrower, and neither the borrower nor its officers, directors,
stockholders, or other owners have more than a 5 percent ownership
interest in the lender.
(xiv) The loan agreement includes all measures identified in the
Agency's environmental impact analysis for this proposal with which the
borrower must comply for the purpose of avoiding or reducing adverse
environmental impacts of the project's construction or operation.
(xv) If required, hazard, flood, liability, workers compensation,
and life insurance are in effect.
(b) The Agency may, at its discretion, request copies of additional
loan documents for its file.
(c) When the Agency is satisfied that all conditions for the
guarantee have been met, the Agency will issue the Loan Note Guarantee
and the following documents, as appropriate.
(1) Assignment Guarantee Agreement. In the event the lender uses
the single note option and assigns the guaranteed portion of the loan
to a holder, the lender, holder, and the Agency will execute Form RD
4279-6, and
(2) Certificate of Incumbency. If requested by the lender, the
Agency will provide the lender with a certification on Form RD 4279-7,
``Certificate of Incumbency and Signature,'' of the signature and title
of the Agency official who signs the Loan Note Guarantee, Lender's
Agreement, and Assignment Guarantee Agreement.
Sec. Sec. 4279.182-4279.186 [Reserved]
Sec. 4279.187 Refusal to execute Loan Note Guarantee.
If the Agency determines that it cannot 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 Agency will issue the Loan Note Guarantee. If the lender
requests additional time in writing and within the period allowed, the
Agency may grant the request.
Sec. Sec. 4279.188-4279.199 [Reserved]
Sec. 4279.200 OMB control number.
The information collection requirements contained in this
regulation have been approved by OMB and have been assigned OMB control
number . Public reporting
burden for this collection of information is estimated to vary from 30
minutes to 24 hours per response, with an average of 3 hours per
response, including time for reviewing the collection of information.
The burden may increase beyond the estimates reported here, if RBS
determines additional data will need to be collected to facilitate
evaluation, which can enhance the operation and performance of the
program.
PART 4287--SERVICING
0
4. The authority citation for part 4287 is revised to read as follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 1932(a); 7 U.S.C. 1989.
0
5. Revise Subpart B to read as follows:
Subpart B--Servicing Business and Industry Guaranteed Loans
Sec.
4287.101 Introduction.
4287.102 Definitions and abbreviations.
4287.103 Exception Authority.
[[Page 55343]]
4287.104 [Reserved]
4287.105 [Reserved]
4287.106 Appeals.
4287.107 Routine servicing.
4287.108-4287.111 [Reserved]
4287.112 Interest rate changes.
4287.113 Release of collateral.
4287.114-4287.122 [Reserved]
4287.123 Subordination of lien position.
4287.124 Alterations of loan instruments.
4287.125-4287.132 [Reserved]
4287.133 Sale of corporate stock.
4287.134 Transfer and assumption.
4287.135 Substitution of lender.
4287.136 Lender failure.
4287.137-4287.144 [Reserved]
4287.145 Default by borrower.
4287.146-4287.155 [Reserved]
4287.156 Protective advances.
4287.157 Liquidation.
4287.158 Determination of loss and payment.
4287.159-4287.168 [Reserved]
4287.169 Future recovery.
4287.170 Bankruptcy.
4287.171-4287.179 [Reserved]
4287.180 Termination of guarantee.
4287.181-4287.199 [Reserved]
4287.200 OMB control number.
Subpart B--Servicing Business and Industry Guaranteed Loans
Sec. 4287.101 Introduction.
(a) This subpart supplements subparts A and B of part 4279 of this
chapter by providing additional requirements and instructions for
servicing and liquidating all B&I guaranteed loans and loans guaranteed
under the Rural Energy for America Program. This includes Drought and
Disaster, Disaster Assistance for Rural Business Enterprises, Business
and Industry Disaster, and American Recovery and Reinvestment Act
guaranteed loans.
(b) The lender is responsible for servicing the entire loan and
must remain mortgagee and secured party of record notwithstanding the
fact that another party may hold a portion of the loan.
(c) Whether specifically stated or not, whenever Agency approval is
required, it must be in writing. Copies of all forms, regulations, and
Instructions referenced in this subpart may be obtained from any Agency
office and from the USDA Rural Development Web site at
www.rurdev.usda.gov/rbs. Whenever a form is designated in this subpart,
that designation includes predecessor and successor forms, if
applicable, as specified by the Agency.
Sec. 4287.102 Definitions and abbreviations.
The definitions and abbreviations contained in Sec. 4279.2 of this
chapter apply to this subpart.
Sec. 4287.103 Exception authority.
Section 4279.15 of this chapter applies to this subpart.
Sec. 4287.104 [Reserved]
Sec. 4287.105 [Reserved]
Sec. 4287.106 Appeals.
Section 4279.16 of this chapter applies to this subpart.
Sec. 4287.107 Routine servicing.
The lender is responsible for servicing the entire loan and for
taking all servicing actions that a prudent lender would perform in
servicing its own portfolio of loans that are not guaranteed. The
lender may contract for services but is ultimately responsible for
underwriting, loan origination, loan servicing, and compliance with all
Agency regulations. Form RD 4279-4, ``Lender's Agreement,'' is the
contractual agreement between the lender and the Agency that sets forth
some of the lender's loan servicing responsibilities. These
responsibilities include, but are not limited to, periodic borrower
visits, the collection of payments, obtaining compliance with the
covenants and provisions in the loan agreement, obtaining and analyzing
financial statements, ensuring payment of taxes and insurance premiums,
maintaining liens on collateral, and keeping an inventory accounting of
all collateral items and reconciling the inventory of all collateral
sold during loan servicing, including liquidation.
(a) Lender reports and annual renewal fee. The lender must report
the outstanding principal and interest balance and the current loan
classification on each guaranteed loan semiannually (at June 30 and
December 31) using either the USDA Lender Interactive Network
Connection (LINC) system or Form RD 1980-41, ``Guaranteed Loan Status
Report.'' The lender must transmit the annual renewal fee to the Agency
in accordance with Sec. 4279.120(b) of this chapter calculated based
on the December 31 semiannual status report.
(b) Loan classification. The lender must provide the loan
classification or rating under its regulatory standards as of loan
closing on Form RD 1980-19, ``Guaranteed Loan Closing Report.'' When
the lender changes the loan classification in the future, the lender
must notify the Agency within 30 days, in writing, of any change in the
loan classification.
(c) Agency and lender conference. At the Agency's request, the
lender must consult with the Agency to ascertain how the guaranteed
loan is being serviced and that the conditions and covenants of the
loan agreement are being enforced.
(d) Borrower financial reports. The lender must obtain, analyze,
and forward to the Agency the borrower's and any guarantor's annual
financial statements required by the loan agreement within 120 days of
the end of the borrower's fiscal year. The lender must analyze these
financial statements and provide the Agency with a written summary of
the lender's analysis, ratio analysis, and conclusions, which, at a
minimum, must include trends, strengths, weaknesses, extraordinary
transactions, violations of loan covenants and covenant waivers
proposed by the lender, any routine servicing actions performed, and
other indications of the financial condition of the borrower.
Spreadsheets of the financial statements must also be included.
Following the Agency's review of the lender's financial analysis, the
Agency will provide a written report of any concerns to the lender. Any
concerns based upon the Agency's review must be addressed by the
lender. If the lender makes a reasonable attempt to obtain financial
statements but is unable to obtain the borrower's cooperation, the
failure to obtain financial statements will not impair the validity of
the Loan Note Guarantee.
(e) Protection of Agency interests. 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 to rectify the situation. In determining any loss, the Agency
will assess against the lender any cost to the Agency associated with
such action.
Sec. Sec. 4287.108-4287.111 [Reserved]
Sec. 4287.112 Interest rate changes.
(a) The borrower, lender, and holder (if any) may collectively
initiate a permanent or temporary reduction in the interest rate of the
guaranteed loan at any time during the life of the loan upon written
agreement among these parties. The lender must obtain prior Agency
concurrence and must provide a copy of the modification agreement to
the Agency. If any of the guaranteed portion has been purchased by the
Agency, the Agency (as a holder) will affirm or reject interest rate
change proposals in writing.
(b) No increases in interest rates will be permitted, except the
normal fluctuations in approved variable interest rates, unless a
temporary interest rate reduction occurred.
(c) The interest rate, after adjustments, must comply with the
interest rate
[[Page 55344]]
requirements set forth in Sec. 4279.125 of this chapter.
(d) 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 shall be
issued. The lender must provide copies of all legal documents to the
Agency.
Sec. 4287.113 Release of collateral.
(a) Within the parameters of paragraph (c) of this section, lenders
may, over the life of the loan, release collateral (other than personal
and corporate guarantees) with a cumulative value of up to 20 percent
of the original loan amount without Agency concurrence if the proceeds
generated are used to reduce the guaranteed loan or to buy replacement
collateral. Working assets, such as accounts receivable, inventory, and
work-in-progress that are routinely depleted or sold and proceeds used
for the normal course of business operations may be used in and
released for routine business purposes without prior concurrence of the
Agency as long as the loan has not been accelerated.
(b) If a release of collateral does not meet the requirements of
paragraph (a) of this section, the lender must complete a written
evaluation to justify the release and must obtain written Agency
concurrence in advance of the release.
(c) Collateral must remain sufficient to provide for adequate
collateral coverage. The lender must support all releases of collateral
with a value exceeding $250,000 with a current appraisal on the
collateral being released. The appraisal must meet the requirements of
Sec. 4279.144 of this chapter. The cost of this appraisal will not be
paid for by the Agency. The Agency may, at its discretion, require an
appraisal of the remaining collateral in cases where it has been
determined that the Agency may be adversely affected by the release of
collateral. The sale or release of the collateral must be based on an
arm's length transaction, and there must be adequate consideration for
the release of collateral. Such consideration may include, but is not
limited to:
(1) Application of the net proceeds from the sale of collateral to
the borrower's debts in order of their lien priority against the sold
collateral;
(2) Use of the net proceeds from the sale of collateral to purchase
other collateral of equal or greater value for which the lender will
obtain as security for the benefit of the guaranteed loan with a lien
position equal or superior to the position previously held;
(3) Application of the net proceeds from the sale of collateral to
the borrower's business operation in such a manner that a significant
improvement to the borrower's debt service ability will be clearly
demonstrated. The lender's written request must detail how the
borrower's debt service ability will be improved; or
(4) Assurance that the release of collateral is essential for the
success of the business, thereby furthering the goals of the program.
Such assurance must be supported by written documentation from the
lender acceptable to the Agency.
Sec. Sec. 4287.114-4287.122 [Reserved]
Sec. 4287.123 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. The lender's subordination proposal must
include a financial analysis of the servicing action and be fully
supported by current financial statements of the borrower and
guarantors that are less than 90 days old.
(a) The subordination of lien position must enhance the borrower's
business and be in the best financial interest of the Agency.
(b) The lien to which the guaranteed loan is subordinated is for a
fixed dollar limit and for a fixed term after which the guaranteed loan
lien priority will be restored.
(c) Collateral must remain sufficient to provide for adequate
collateral coverage. The Agency may require a current independent
appraisal in accordance with Sec. 4279.144 of this chapter.
(d) Lien priorities must remain for the portion of the loan that
was not subordinated.
(e) A subordination to a line of credit cannot exceed 1 year. The
term of the line of credit cannot be extended.
Sec. 4287.124 Alterations of loan instruments.
The lender must neither alter nor approve any alterations or
modifications of any loan instrument without the prior written approval
of the Agency.
Sec. Sec. 4287.125-4287.132 [Reserved]
Sec. 4287.133 Sale of corporate stock.
Any sale or transfer of corporate stock must be approved by the
Agency in writing and must be to an eligible individual or entity in
accordance with Sec. Sec. 4279.108(a) and 4279.108(b) of this chapter.
In the event a portion of the borrower's stock is sold or transferred,
the Agency may require personal or corporate guarantees from those then
owning a 20 percent or more interest in the borrower in accordance with
Sec. 4279.132 of this chapter.
Sec. 4287.134 Transfer and assumption.
The lender may request a transfer and assumption of a guaranteed
loan in situations where the total indebtedness, or less than the total
indebtedness, is transferred to another eligible borrower on the same
or different terms. A transfer and assumption of the borrower's
operation can be accomplished before or after the loan goes into
liquidation. However, if the collateral has been purchased through
foreclosure or the borrower has conveyed title to the lender, no
transfer and assumption is permitted. Additionally, no transfer and
assumption is permitted when the Agency has repurchased 100 percent of
the guaranteed portion of the loan.
(a) Documentation of request. All transfers and assumptions must be
approved in writing by the Agency and must be to an eligible borrower.
The lender must provide credit reports for each individual or entity
owning 20 percent or more interest in the transferee, along with such
other documentation as the Agency may request to determine eligibility.
In accordance with Sec. 4279.132 of this chapter, the Agency will
require personal and/or corporate guarantee(s) from all owners that
have a 20 percent or more interest in the transferee. When warranted by
an Agency assessment of potential financial risk, the Agency may also
require guarantees of parent, subsidiaries, or affiliated companies
(owning less than a 20 percent interest in the borrower) and may
require security for any guarantee. The new borrower must sign Form RD
4279-1, ``Application for a Loan Guarantee,'' and any guarantors of the
guaranteed loan must sign Form RD 4279-14, ``Unconditional Guarantee.''
(b) Terms. Loan terms may be changed with the concurrence of the
Agency, all holders, and the transferor (including guarantors) if the
transferor has not been or will not be released from liability. Any new
loan terms must be within the terms authorized by Sec. 4279.126 of
this chapter.
(c) Release of liability. The transferor, including any guarantor,
may be released from liability only with prior Agency written
concurrence and only when the value of the collateral being transferred
is at least equal to the amount of the loan being assumed and is
supported by a current appraisal and
[[Page 55345]]
a current financial statement of the transferee. The Agency will not
pay for the appraisal. If the transfer is for less than the debt, for a
release of liability, the lender must demonstrate to the Agency that
the transferor and guarantors have no reasonable debt-paying ability
considering their assets and income in the foreseeable future.
(d) Proceeds. The lender must credit any proceeds received from the
sale of collateral before a transfer and assumption to the transferor's
guaranteed loan debt in order of lien priority before the transfer and
assumption is closed.
(e) Additional loans. Loans to provide additional funds in
connection with a transfer and assumption must be considered a new loan
application, which requires submission of a complete Agency application
in accordance with Sec. 4279.161(b) of this chapter.
(f) Credit quality. The lender will provide a credit analysis of
the proposal that addresses capacity (sufficient cash flow to service
the debt), capital (net worth), collateral (assets to secure the debt),
conditions (of the borrower, industry trends, and the overall economy),
and character (integrity of the transferee management) in accordance
with Sec. 4279.131 of this chapter.
(g) Appraisals. If the proposed transfer and assumption is for the
full amount of the Agency guaranteed loan, the Agency will not require
an appraisal. If the proposed transfer and assumption is for less than
the full amount of the Agency guaranteed loan, the Agency will require
an appraisal on all of the collateral being transferred, and the amount
of the assumption must not be less than this appraised value. The
lender is responsible for obtaining this appraisal, which must conform
to the requirements of Sec. 4279.144 of this chapter. The Agency will
not pay the appraisal fee or any other costs associated with this
transfer.
(h) Documents. Prior to Agency approval, the lender must provide
the Agency a written legal opinion that the transaction can be properly
and legally transferred and assurance that the conveyance instruments
will be appropriately filed, registered, and recorded.
(1) The lender must not issue any new promissory notes. The
assumption must be completed in accordance with applicable law and must
contain the Agency case number of the transferor and transferee. The
lender must provide the Agency with a copy of the transfer and
assumption agreement. The lender must ensure that all transfers and
assumptions are noted on all original Loan Note Guarantees.
(2) A new loan agreement, consistent in principle with the original
loan agreement, must be executed to establish the terms and conditions
of the loan being assumed. An assumption agreement can be used to
establish the loan covenants.
(3) Upon execution of the transfer and assumption, the lender must
provide the Agency with a written legal opinion that the transfer and
assumption is completed, valid, enforceable, and certification that the
transfer and assumption is consistent with the conditions outlined in
the Agency's conditions of approval for the transfer and complies with
all Agency regulations.
(i) Loss/repurchase resulting from transfer. (1) Any resulting loss
must be processed in accordance with Sec. 4287.158.
(2) If a holder owns any of the guaranteed portion, such portion
must be repurchased by the lender or the Agency in accordance with
Sec. 4279.78 of this chapter.
(j) Related party. If the transferor and transferee are affiliated
or related parties, any transfer and assumption must be for the full
amount of the debt.
(k) Cash downpayment. The lender may allow the transferee to make
cash downpayments directly to the transferor provided:
(1) The transfer and assumption is made for the total indebtedness;
(2) The lender recommends that the cash be released, and the Agency
concurs prior to the transaction being completed. The lender may
require that an amount be retained for a defined period of time as a
reserve against future defaults. Interest on such account may be paid
periodically to the transferor or transferee as agreed;
(3) The lender determines that the transferee has the repayment
ability to meet the obligations of the assumed guaranteed loan as well
as any other indebtedness; and
(4) Any payments by the transferee to the transferor will not
suspend the transferee's obligations to continue to meet the guaranteed
loan payments as they come due under the terms of the assumption.
(l) Transfer/annual renewal fees.
(1) The Agency will charge a nonrefundable transfer fee at the time
of transfer, which may be passed on to the borrower by the lender. The
transfer fee rate will be equal to the rate of the guarantee fee
authorized in Sec. 4279.120 of this chapter for the fiscal year in
which the transfer occurs. The amount of the transfer fee is determined
by multiplying the principal balance at the time of the transfer by the
transfer fee rate by the percentage of guarantee on the original loan.
(2) The lender must pay any annual renewal fee published in the
Federal Register and then in effect at the time the loan is closed for
the duration of the Loan Note Guarantee. Annual renewal fees are due
for the entire year even if the Loan Note Guarantee is terminated
before the end of the year.
Sec. 4287.135 Substitution of lender.
After the issuance of a Loan Note Guarantee, the lender is
prohibited from selling or transferring the entire loan without the
prior written approval of the Agency. Because the Loan Note Guarantee
is associated with a specific promissory note and cannot be transferred
to a new promissory note, the lender must transfer the original
promissory note to the new lender, who must agree to its current loan
terms, including the interest rate, secondary market holder (if any),
collateral, loan agreement terms, and guarantors. The new lender must
also obtain the original Loan Note Guarantee, original personal and
corporate guarantee(s), and the loan payment history from the
transferor lender. If the new lender wishes to modify the loan terms
after acquisition, the new lender must submit a request to the Agency.
(a) The Agency may approve the substitution of a new lender if:
(1) The proposed substitute lender:
(i) Is an eligible lender in accordance with Sec. 4279.29 of this
chapter and is approved as such;
(ii) Is able to service the loan in accordance with the original
loan documents; and
(iii) Agrees in writing to acquire title to the unguaranteed
portion of the loan held by the original lender and assumes all
original loan requirements, including liabilities and servicing
responsibilities; and
(2) The substitution of the lender is requested in writing by the
borrower, the proposed substitute lender, and the original lender of
record, if still in existence.
(b) The Agency will not pay any loss or share in any costs (e.g.,
appraisal fees and environmental assessments) with a new lender unless
a relationship is established through a substitution of lender in
accordance with paragraph (a) of this section. This includes situations
where a lender is acquired by another lender and situations where the
lender has failed and been taken over by a regulatory agency such as
the Federal Deposit Insurance Corporation (FDIC)
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and the loan is subsequently sold to another lender.
(c) Where the lender has failed and been taken over by the FDIC and
the loan is liquidated by the FDIC rather than being sold to another
lender, the Agency will pay losses and share in costs as if the FDIC
were an approved substitute lender.
(d) In cases where there is a substitution of lender or a lender
has been merged with or acquired by another lender, the Agency and the
new lender must execute a new Form RD 4279-4, ``Lender's Agreement,''
unless a valid Lender's Agreement already exists with the new lender.
Sec. 4287.136 Lender failure.
(a) Uninsured lender. The lender or insuring agency cannot
arbitrarily change the Lender's Agreement and related documents on the
guaranteed loan, and the Agency will make the successor to the failed
institution aware of the statutory and regulatory requirements. If the
acquiring institution is not an eligible lender as set forth in Sec.
4279.29 of this chapter, the Loan Note Guarantee will not be
enforceable, and the institution must promptly apply to become an
eligible lender. The failure of the uninsured lender to become an
eligible lender will result in the Loan Note Guarantee being
unenforceable. A new lender approved by the Agency will be afforded the
benefits of the Loan Note Guarantee in sharing of any loss and eligible
expenses subject to the limits that are set forth in the regulations
governing the program.
(b) Insured lender. The FDIC and the Agency have entered into an
Inter Agency Agreement and all parties are to abide by this Agreement
or successor document(s). This document sets forth the duties and
responsibilities of each Agency when an institution fails. The lender
must take such action that a prudent lender would take if it did not
have a Loan Note Guarantee to protect the lender and Agency's mutual
interest.
Sec. Sec. 4287.137-4287.144 [Reserved]
Sec. 4287.145 Default by borrower.
The lender's primary responsibilities in default are to act
prudently and expeditiously, to work with the borrower to bring the
account current or cure the default through restructuring if a
realistic plan can be developed, or to accelerate the account and
conduct a liquidation in a manner that will minimize any potential
loss. The lender may initiate liquidation subject to submission and
approval of a complete liquidation plan.
(a) The lender must notify the Agency when a borrower is more than
30 days past due on a payment and the delinquency cannot be cured
within 30 days or when a borrower is otherwise in default of covenants
in the loan agreement by promptly submitting Form RD 1980-44,
``Guaranteed Loan Borrower Default Status,'' or processing the Default
Status report in LINC. The lender must update the loan's status each
month using either Form RD 1980-44 or the LINC Default Status report
until such time as the loan is no longer in default. If a monetary
default exceeds 60 days, the lender must meet with the Agency and, if
practical, the borrower to discuss the situation.
(b) In considering options, the prospects for providing a permanent
cure without adversely affecting the risk to the Agency and the lender
is the paramount objective.
(1) Curative actions (subject to the rights of any holder) include,
but are not limited to:
(i) Deferment of principal and/or interest payments;
(ii) An additional unguaranteed temporary loan by the lender to
bring the account current;
(iii) Reamortization of or rescheduling the payments on the loan;
(iv) Transfer and assumption of the loan in accordance with Sec.
4287.134 of this subpart;
(v) Reorganization;
(vi) Liquidation; and
(vii) Changes in interest rates with the Agency's, the lender's,
and any holder's approval. Any interest rate changes must be adjusted
proportionately between the guaranteed and unguaranteed portion of the
loan.
(2) The term of any deferment, rescheduling, reamortization, or
moratorium will be limited to the lesser of the remaining useful life
of the collateral or remaining limits as set forth in Sec. 4279.126 of
this chapter (excluding paragraph (c)). Balloon payments are permitted
as a loan servicing option as long as there is a reasonable prospect
for success and the remaining life of the collateral supports the
action.
(3) In the event of a loss or a repurchase, the lender cannot claim
default or penalty interest, late payment fees, or interest on
interest. If the restructuring includes the capitalization of interest,
interest accrued on the capitalized interest will not be covered by the
guarantee. Consequently, it is not eligible for repurchase from the
holder and cannot be included in the loss claim.
(c) Debt write-downs for an existing borrower, where the same
principals retain control of and decisionmaking authority for the
business, are prohibited, except as directed or ordered by the
Bankruptcy Court.
(d) For loans closed on or after [DATE OF FINAL RULE PUBLICATION],
in the event of a loss, the guarantee will not cover note interest to
the lender accruing after 90 days from the most recent delinquency
effective date.
(e) For loans closed on or after [DATE OF FINAL RULE PUBLICATION],
the guarantee will not cover note interest to any holder accruing after
90 days from the date of the first demand letter from a holder to the
lender requesting the repurchase of the loan guarantee.
(f) For repurchases of guaranteed loans, refer to Sec. 4279.78 of
this chapter.
Sec. Sec. 4286.146-4287.155 [Reserved]
Sec. 4287.156 Protective advances.
Protective advances are advances made by the lender for the purpose
of preserving and protecting the collateral where the debtor has failed
to, will not, or cannot meet its obligations. Lenders must exercise
sound judgment in determining that the protective advance preserves
collateral and recovery is actually enhanced by making the advance.
Lenders cannot make protective advances in lieu of additional loans. A
protective advance claim will be paid only at the time of the final
report of loss payment.
(a) The maximum loss to be paid by the Agency will never exceed the
original loan amount plus accrued interest times the percentage of
guarantee regardless of any protective advances made.
(b) In the event of a final loss, protective advances will accrue
interest at the note rate and will be guaranteed at the same percentage
of guarantee as provided for in the Loan Note Guarantee. The guarantee
will not cover interest on the protective advance accruing after 90
days from the most recent delinquency effective date.
(c) Protective advances must constitute an indebtedness of the
borrower to the lender and be secured by the security instruments.
Agency written authorization is required when the cumulative total of
protective advances exceeds $200,000 or 10 percent of the aggregate
outstanding balance of principal and interest, whichever is less.
Sec. 4287.157 Liquidation.
In the event of one or more incidents of default or third party
actions that the borrower cannot or will not cure or eliminate within a
reasonable period of time, the lender, with Agency consent, must
liquidate the loan. In accordance with Sec. 4287.145(d), for loans
closed on
[[Page 55347]]
or after [DATE OF FINAL RULE PUBLICATION], in the event of a loss, the
guarantee will not cover note interest to the lender accruing after 90
days from the most recent delinquency effective date.
(a) Decision to liquidate. A decision to liquidate must be made
when the lender determines that the default cannot be cured through
actions such as those contained in Sec. 4287.145, or it has been
determined that it is in the best interest of the Agency and the lender
to liquidate. The decision to liquidate or continue with the borrower
must be made as soon as possible when one or more of the following
exist:
(1) A loan is 90 days behind on any scheduled payment and the
lender and the borrower have not been able to cure the delinquency
through actions such as those contained in Sec. 4287.145.
(2) It is determined that delaying liquidation will jeopardize full
recovery on the loan.
(3) The borrower or lender is uncooperative in resolving the
problem or the Agency or lender has reason to believe the borrower is
not acting in good faith, and it would improve the position of the
guarantee to liquidate immediately.
(b) Repurchase of loan. When the decision to liquidate is made, if
any portion of the loan has been sold or assigned under Sec. 4279.75
of this chapter and not already repurchased, provisions will be made
for repurchase in accordance with Sec. 4279.78 of this chapter.
(c) Lender's liquidation plan. The lender is responsible for
initiating actions immediately and as necessary to assure a prompt,
orderly liquidation that will provide maximum recovery. Within 30 days
after a decision to liquidate, the lender must submit a written,
proposed plan of liquidation to the Agency for approval. The
liquidation plan must be detailed and include at least the following:
(1) Such proof as the Agency requires to establish the lender's
ownership of the guaranteed loan promissory note and related security
instruments and a copy of the payment ledger, if available, that
reflects the current loan balance, accrued interest to date, and the
method of computing the interest;
(2) A full and complete list of all collateral, including any
personal and corporate guarantees;
(3) The recommended liquidation methods for making the maximum
collection possible on the indebtedness and the justification for such
methods, including recommended action for acquiring and disposing of
all collateral and collecting from guarantors;
(4) Necessary steps for preservation of the collateral;
(5) Copies of the borrower's most recently available financial
statements;
(6) Copies of each guarantor's most recently available financial
statements;
(7) An itemized list of estimated liquidation expenses expected to
be incurred along with justification for each expense;
(8) A schedule to periodically report to the Agency on the progress
of liquidation;
(9) Estimated protective advance amounts with justification;
(10) Proposed protective bid amounts on collateral to be sold at
auction and a breakdown to show how the amounts were determined. A
protective bid may be made by the lender, with prior Agency written
approval, at a foreclosure sale to protect the lender's and the
Agency's interest. The protective bid will not exceed the amount of the
loan, including expenses of foreclosure, and must be based on the
liquidation value considering estimated expenses for holding and
reselling the property. These expenses include, but are not limited to,
expenses for resale, interest accrual, length of time necessary for
resale, maintenance, guard service, weatherization, and prior liens;
(11) If a voluntary conveyance is considered, the proposed amount
to be credited to the guaranteed debt;
(12) Legal opinions, if needed by the lender's legal counsel; and
(13) An estimate of fair market and potential liquidation value of
the collateral. If the value of the collateral is $250,000 or more, the
lender must obtain an independent appraisal report meeting the
requirements of Sec. 4279.144 of this chapter for the collateral
securing the loan, which reflects the fair market value and potential
liquidation value. The liquidation appraisal of the collateral must
evaluate the impact on market value of any release of hazardous
substances, petroleum products, or other environmental hazards. The
independent appraiser's fee, including the cost of the environmental
site assessment, will be shared equally by the Agency and the lender.
In order to assure prompt action, the liquidation plan can be submitted
with an estimate of collateral value, and the liquidation plan may be
approved by the Agency subject to the results of the final liquidation
appraisal.
(d) Approval of liquidation plan. The lender's liquidation plan
must be approved by the Agency in writing. The lender and Agency must
attempt to resolve any Agency concerns. If the liquidation plan is
approved by the Agency, the lender must proceed expeditiously with
liquidation and must take all legal action necessary to liquidate the
loan in accordance with the approved liquidation plan. The lender must
update or modify the liquidation plan when conditions warrant,
including a change in value based on a liquidation appraisal. If the
liquidation plan is not approved by the Agency, the lender must take
such actions that a prudent lender would take without a guarantee and
keep the Agency informed in writing. The lender must continue to
develop a liquidation plan in accordance with this section.
(e) Acceleration. The lender will proceed to accelerate the
indebtedness as expeditiously as possible when acceleration is
necessary, including giving any notices and taking any other legal
actions required. The guaranteed loan will be considered in liquidation
once the loan has been accelerated and a demand for payment has been
made upon the borrower. The lender must obtain from the Agency
concurrence prior to the acceleration of the loan if the sole basis for
acceleration is a nonmonetary default. In the case of monetary default,
prior approval by the Agency of the lender's acceleration is not
required, although Agency concurrence must still be given not later
than at the time the liquidation plan is approved. The lender will
provide a copy of the acceleration notice or other acceleration
document to the Agency.
(f) Filing an estimated loss claim. When the lender owns any of the
guaranteed portion of the loan, the lender must file an estimated loss
claim once a decision has been made to liquidate if the liquidation is
expected to exceed 90 days. The estimated loss payment will be based on
the liquidation value of the collateral. For the purpose of reporting
and loss claim computation, for loans closed on or after [FINAL RULE
PUBLICATION DATE], the guarantee will not cover note interest to the
lender accruing after 90 days from the most recent delinquency
effective date. The Agency will promptly process the loss claim in
accordance with applicable Agency regulations as set forth in Sec.
4287.158.
(g) Accounting and reports. The lender must account for funds
during the period of liquidation and must, in accordance with the
Agency-approved liquidation plan, provide the Agency with reports on
the progress of liquidation including disposition of collateral,
resulting costs, and additional procedures necessary for successful
completion of the liquidation.
(h) Transmitting payments and proceeds to the Agency. When the
[[Page 55348]]
Agency is the holder of a portion of the guaranteed loan, the lender
must transmit to the Agency its pro rata share of any payments received
from the borrower, liquidation, or other proceeds using Form RD 1980-
43, ``Lender's Guaranteed Loan Payment to Rural Development.''
(i) Abandonment of collateral. When the lender adequately documents
that the cost of liquidation would exceed the potential recovery value
of certain collateral and receives Agency concurrence, the lender may
abandon that collateral. When the lender makes a recommendation for
abandonment of collateral, it must comply with 7 CFR part 1940, subpart
G.
(j) Personal or corporate guarantees. The lender must take action
to maximize recovery from all personal and corporate guarantees,
including seeking deficiency judgments when there is a reasonable
chance of future collection.
(k) Compromise settlement. Compromise settlements must be approved
by the lender and the Agency. Complete current financial information on
all parties obligated for the loan must be provided. At a minimum, the
compromise settlement must be equivalent to the value and timeliness of
that which would be received from attempting to collect on the
guarantee. The guarantor cannot be released from liability until the
full amount of the compromise settlement has been received. In weighing
whether the compromise settlement should be accepted, among other
things, the Agency will weigh whether the comparison is more
financially advantageous than collecting on the guarantee.
(l) Litigation. In all litigation proceedings involving the
borrower, the lender is responsible for protecting the rights of the
lender and 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.
Sec. 4287.158 Determination of loss and payment.
Unless the Agency anticipates a future recovery, the Agency will
make a final settlement with the lender after the collateral is
liquidated or after settlement and compromise of all parties has been
completed. The Agency has the right to recover losses paid under the
guarantee from any party that may be liable.
(a) Report of loss form. Form RD 449-30, ``Loan Note Guarantee
Report of Loss,'' will be used for reporting and calculating all
estimated and final loss determinations.
(b) Estimated loss. In accordance with the requirements of Sec.
4287.157(f), the lender must prepare an estimated loss claim, based on
liquidation appraisal value, and submit it to the Agency.
(1) Interest accrual eligible for payment under the guarantee on
the defaulted loan will be discontinued when the estimated loss is
paid.
(2) A protective advance claim will be paid only at the time of the
final report of loss payment.
(3) The estimated loss payment is a payment to the lender and is
not to be applied as a payment on the loan for purposes of reducing the
unpaid balance owed by the borrower or for status reporting (semi-
annual status/default status reports).
(c) Final loss. Within 30 days after liquidation of all collateral
is completed (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 90 days from the date any holder makes
demand, or, if the lender holds all or a portion of the guaranteed
loan, no more than 90 days from the most recent delinquency effective
date as reported by the lender. Before approval by the Agency of any
final loss report, the lender must account for all funds during the
period of liquidation, disposition of the collateral, all costs
incurred, and any other information necessary for the successful
completion of liquidation. Upon receipt of the final accounting and
report of loss, the Agency may audit all applicable documentation to
determine the final loss. The lender must make its records available
and otherwise assist the Agency in making any investigation. The
documentation accompanying the report of loss must support the amounts
reported as losses on Form RD 449-30.
(1) The lender must make a determination regarding the
collectability of unsecured personal and corporate guarantees. If
reasonably possible, the lender must promptly collect or otherwise
dispose of such guarantees in accordance with Sec. 4287.157(j) prior
to completion of the final loss report. However, in the event that
collection from the guarantors appears unlikely or will require a
prolonged period of time, the lender must file the report of loss when
all other collateral has been liquidated. Unsecured personal or
corporate guarantees outstanding at the time of the submission of the
final loss claim will be treated as a future recovery with the net
proceeds to be shared on a pro rata basis by the lender and the Agency.
Debts owed to the Agency (Federal debt) may be collected using DCIA
authority. The Agency may consider a compromise settlement of Federal
debt after it has processed a final report of loss and issued a 60 day
due process letter. Any funds collected on Federal debt will not be
shared with the lender.
(2) The lender must document that all of the collateral has been
accounted for and properly liquidated and liquidation proceeds have
been accounted for and applied correctly to the loan.
(3) The lender must provide receipts and a breakdown of any
protective advance amount as to the payee, purpose of the expenditure,
date paid, and evidence that the amount expended was proper.
(4) The lender must provide receipts and a breakdown of liquidation
expenses as to the payee, purpose of the expenditure, date paid, and
evidence that the amount expended was proper. Liquidation expenses are
recoverable only from liquidation proceeds. The Agency may approve
attorney/legal fees as liquidation expenses provided that the fees are
reasonable, require the assistance of attorneys, and cover legal issues
pertaining to the liquidation that could not be properly handled by the
lender and its employees.
(5) The lender must support accrued interest by documenting how the
amount was accrued. If the interest rate was a variable rate, the
lender must include documentation of changes in both the selected base
rate and the loan rate.
(6) The Agency will pay loss payments within 60 days after it has
reviewed the complete final loss report and accounting of the
collateral.
(d) Loss limit. The amount payable by the Agency to the lender
cannot exceed the limits set forth in the Loan Note Guarantee.
(e) Liquidation expenses. The Agency will deduct liquidation
expenses from the liquidation proceeds of the collateral. The lender
cannot claim any liquidation expenses in excess of liquidation
proceeds. Any changes to
[[Page 55349]]
the liquidation expenses that exceed 10 percent of the amount proposed
in the liquidation plan must be approved by the Agency. Reasonable
attorney/legal expenses will be shared by the lender and Agency
equally, including those instances where the lender has incurred such
expenses from a trustee conducting the liquidation of assets. The
lender cannot claim the guarantee fee or the annual renewal fee as
authorized liquidation expenses, and no in-house expenses of the lender
will be allowed. In-house expenses include, but are not limited to,
employee's salaries, staff lawyers, travel, and overhead.
(f) Rent. The lender must apply any net rental or other income that
it receives from the collateral to the guaranteed loan debt.
(g) Payment. Once the Agency approves the Form RD 449-30 and
supporting documents submitted by the lender:
(1) If the loss is greater than any estimated loss payment, the
Agency will pay the additional amount owed by the Agency to the lender.
(2) If the loss is less than the estimated loss payment, the lender
must reimburse the Agency for the overpayment plus interest at the note
rate from the date of payment.
Sec. Sec. 4287.159-4287.168 [Reserved]
Sec. 4287.169 Future recovery.
Unless notified otherwise by the Agency, after the final loss claim
has been paid, the lender must use reasonable efforts to attempt
collection from any party still liable on any loan that was guaranteed.
Any net proceeds from that effort must be split pro rata between the
lender and the Agency based on the original amount of the loan
guarantee. Any collection of Federal debt made by the U.S. from any
liable party to the guaranteed loan will not be split with the lender.
Sec. 4287.170 Bankruptcy.
(a) Lender's responsibilities. It is the lender's responsibility to
protect the guaranteed loan and all of the collateral securing it in
bankruptcy proceedings. These responsibilities include, but are not
limited to the following:
(1) Monitoring confirmed bankruptcy plans to determine borrower
compliance, and, if the borrower fails to comply, seeking a dismissal
of the bankruptcy plan;
(2) Filing a proof of claim, where necessary, and all the necessary
papers and pleadings concerning the case;
(3) Attending and, where necessary, participating in meetings of
the creditors and all court proceedings;
(4) Requesting modifications of any bankruptcy plan whenever it
appears that additional recoveries are likely; and
(5) Keeping the Agency adequately and regularly informed in writing
of all aspects of the proceedings.
(6) The lender must submit a default status report when the
borrower defaults and every 30 days until the default is resolved or a
final loss claim is paid by the Agency. The default status report will
be used to inform the Agency of the bankruptcy filing, the plan
confirmation date, when the plan is complete, and when the borrower is
not in compliance with the plan.
(7) With written Agency consent, the lender and Agency will equally
share the cost of any independent appraisal fee to protect the
guaranteed loan in any bankruptcy proceedings.
(b) Reports of loss during bankruptcy. In bankruptcy proceedings,
payment of loss claims will be made as provided in this section.
Attorney/legal fees and protective advances as a result of a bankruptcy
are only recoverable from liquidation proceeds and not the guarantee on
the loan.
(1) Estimated loss payments. (i) If a borrower has filed for
bankruptcy and all or a portion of the debt has been discharged, the
lender must request an estimated loss payment of the guaranteed portion
of the accrued interest and principal discharged by the court. Only one
estimated loss payment is allowed during the bankruptcy. All subsequent
claims of the lender during bankruptcy will be considered revisions to
the initial estimated loss. A revised estimated loss payment may be
processed by the Agency, at its option, in accordance with any court-
approved changes in the bankruptcy plan. Once the bankruptcy plan has
been completed, the lender is responsible for submitting the
documentation necessary for the Agency to review and adjust the
estimated loss claim to reflect any actual discharge of principal and
interest and to reimburse the lender for any court-ordered interest-
rate reduction under the terms of the bankruptcy plan.
(ii) The lender must use Form RD 449-30 to request an estimated
loss payment and to revise any estimated loss payments during the
course of the bankruptcy plan. The estimated loss claim, as well as any
revisions to this claim, must be accompanied by documentation to
support the claim.
(iii) Upon completion of a bankruptcy plan, the lender must
complete a Form RD 1980-44 and forward this form to the Agency.
(iv) Upon completion of the bankruptcy plan, the lender must
provide the Agency with the documentation necessary to determine
whether the estimated loss paid equals the actual loss sustained. If
the actual loss sustained as a result of the bankruptcy is less than
the estimated loss, the lender must reimburse the Agency for the
overpayment plus interest at the note rate from the date of payment of
the estimated loss. If the actual loss is greater than the estimated
loss payment, the lender must submit a revised estimated loss claim in
order to obtain payment of the additional amount owed by the Agency to
the lender.
(2) Bankruptcy loss payments. (i) The lender must request a
bankruptcy loss payment of the guaranteed portion of the accrued
interest and principal discharged by the court for all bankruptcies
when all or a portion of the debt has been discharged. Unless the
Bankruptcy Court approves a subsequent change to the bankruptcy plan
that is adverse to the lender, only one bankruptcy loss payment is
allowed during the bankruptcy. Once the Bankruptcy Court has discharged
all or part of the guaranteed loan and any appeal period has run, the
lender must submit the documentation necessary for the Agency to review
and adjust the bankruptcy loss claim to reflect any actual discharge of
principal and interest.
(ii) The lender must use Form RD 449-30 to request a bankruptcy
loss payment and to revise any bankruptcy loss payments during the
course of the bankruptcy. The lender must include with the bankruptcy
loss claim documentation to support the claim, as well as any revisions
to this claim.
(iii) Upon completion of a bankruptcy plan, restructure, or
liquidation, the lender must either complete a Form RD 1980-44 and
forward this form to the Agency or enter the data directly into LINC.
(iv) If an estimated loss claim is paid during a bankruptcy and the
borrower repays in full the remaining balance without an additional
loss sustained by the lender, a final report of loss is not necessary.
(3) Interest rate losses as a result of bankruptcy reorganization.
(i) For guaranteed loans approved prior to [DATE OF FINAL RULE
PUBLICATION]:
(A) Interest losses sustained during the period of the bankruptcy
plan will be processed in accordance with paragraph (b)(1) of this
section;
(B) Interest losses sustained after the bankruptcy plan is
confirmed will be processed annually when the lender sustains a loss as
a result of a permanent interest rate reduction that extends
[[Page 55350]]
beyond the period of the bankruptcy plan;
(C) If a bankruptcy loss claim is paid during the operation of the
bankruptcy plan and the borrower repays in full the remaining balance
without an additional loss sustained by the lender, a final report of
loss is not necessary.
(ii) For guaranteed loans approved on or after [DATE OF FINAL RULE
PUBLICATION], the Agency will not compensate the lender for any
difference in the interest rate specified in the Loan Note Guarantee
and the rate of interest specified in the bankruptcy plan.
(4) Final bankruptcy loss payments. The Agency will process final
bankruptcy loss payments when the loan is fully liquidated.
(5) Application of loss claim payments. The lender must apply
estimated loss payments first to the unsecured principal of the
guaranteed portion of the debt and then to the unsecured interest of
the guaranteed portion of the debt. In the event a bankruptcy court
attempts to direct the payments to be applied in a different manner,
the lender must immediately notify the Agency in writing.
(6) Protective advances. If approved protective advances, as
authorized by Sec. 4287.156 were incurred in connection with the
initiation of liquidation action and were required to provide repairs,
insurance, etc., to protect the collateral as result of delays in the
case of failure of the borrower to maintain the security prior to the
borrower having filed bankruptcy, the protective advances together with
accrued interest, are payable under the guarantee in the final loss
claim.
(c) Expenses during bankruptcy proceedings. (1) Under no
circumstances will the guarantee cover liquidation expenses in excess
of liquidation proceeds.
(2) Expenses, such as reasonable attorney/legal fees and the cost
of appraisals incurred by the lender as a direct result of the
borrower's bankruptcy filing, are considered liquidation expenses and
will be shared equally by the lender and the Agency. Liquidation
expenses must be deducted from collateral sale proceeds. Liquidation
expenses are covered under the guarantee, provided they are reasonable,
customary, and provide a demonstrated economic benefit to the lender
and the Agency. Lender's in-house expenses, which are those expenses
that would normally be incurred for administration of the loan,
including in-house lawyers, are not covered by the guarantee.
(3) When a bankruptcy proceeding results in a liquidation of the
borrower by a bankruptcy trustee, expenses will be handled as directed
by the court, and the lender cannot claim liquidation expenses for the
sale of the assets.
(4) If the property is abandoned by the bankruptcy trustee, the
lender will conduct the liquidation in accordance with Sec. 4287.157.
(5) Proceeds received from partial sale of collateral during
bankruptcy may be used by the lender to pay reasonable costs, such as
freight, labor and sales commissions, associated with the partial sale.
Reasonable use of proceeds for this purpose must be documented with the
final loss claim.
(6) Reasonable and customary liquidation expenses in bankruptcy may
be deducted from liquidation proceeds of collateral.
Sec. Sec. 4287.171-4287.179 [Reserved]
Sec. 4287.180 Termination of guarantee.
The Loan Note Guarantee will terminate under any of the following
conditions:
(a) Upon full payment of the guaranteed loan;
(b) Upon full payment of any loss obligation; or
(c) Upon written notice from the lender to the Agency that the
guarantee will terminate 30 days after the date of notice, provided
that the lender holds all of the guaranteed portion and the Loan Note
Guarantee is returned to the Agency to be canceled.
Sec. Sec. 4287.181-4287.199 [Reserved]
Sec. 4287.200 OMB control number.
The information collection requirements contained in this
regulation have been approved by OMB and have been assigned OMB control
number . Public reporting burden for this
collection of information is estimated to vary from 30 minutes to 25
hours per response, with an average of 2.5 hours per response,
including time for reviewing the collection of information. The burden
may increase beyond the estimate reported here, if RBS determines
additional data will need to be collected to facilitate evaluation,
which can enhance the operation and performance of the program.
Dated: August 28, 2014.
Doug O'Brien,
Acting Under Secretary, Rural Development.
[FR Doc. 2014-21351 Filed 9-12-14; 8:45 am]
BILLING CODE 3410-XY-P