[Federal Register Volume 81, Number 107 (Friday, June 3, 2016)]
[Rules and Regulations]
[Pages 35984-36027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12945]



[[Page 35983]]

Vol. 81

Friday,

No. 107

June 3, 2016

Part IV





 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; Final Rule

  Federal Register / Vol. 81 , No. 107 / Friday, June 3, 2016 / Rules 
and Regulations  

[[Page 35984]]


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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: Final 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 published a proposed rule on September 15, 2014, that 
proposed 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 changes to the program are expected to reduce the 
subsidy rate and thereby lower program subsidy costs over time as the 
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:  Effective August 2, 2016.

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.

SUPPLEMENTARY INFORMATION: 

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 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 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 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 rule replaces 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 strengthens criteria for non-regulated lenders to 
participate in the program. It also codifies 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 most recent 
delinquency effective date or to a holder the greater of: 90 days from 
the date of the most recent delinquency effective date as reported by 
the lender or 30 days from the date of the interest termination letter. 
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.
    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. 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. Historically, 
insurance companies have had significant default and loss rates in the 
Agency B&I Guaranteed Loan portfolio and merit closer scrutiny. 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 will be strengthened under this final 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

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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, 
have a line of credit issued by a regulated lender, 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 (7 U.S.C. 1991(a)(13)(E)) 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 2 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 the first provision of Section 
343(a)(13)(D) of the Consolidated Farm and Rural Development Act (7 
U.S.C. 1991(a)(13)(D)) 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.
    The eligibility section is revised to include cooperative equity 
security guarantees as eligible loan purposes in accordance with the 
2008 Farm Bill and the purchase of stock in a business by employees 
forming an Employee Stock Ownership Plan or worker cooperative. 
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 purchase of stock in a cooperative or Employee 
Stock Ownership Plan (ESOP) is limited to $600,000 per loan, which is 
the threshold for using the short application process; however, 
cooperatives and ESOPs may still obtain loan guarantees in amounts up 
to $25 million ($40 million for rural cooperative organizations that 
process value-added agricultural commodities) in accordance with Sec.  
4279.119.
    The eligibility section is 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 (7 
U.S.C. 1932(g)(9)(A)(i)). 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 may be located in urban areas, as well as rural areas. 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 (7 U.S.C. 
1932(g)(9)(A)(ii)), 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 (which the Agency will assess from 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 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, increased 
percentages of guarantee 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 lenders from having to set floors and 
ceilings to remain compliant with this requirement. The 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 Cs'' of 
credit (capacity, capital, collateral, conditions,

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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. The Agency is also revising 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 of 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 leveraging of B&I 
program dollars 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 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 rule also clarifies 
that the Agency will not allow the write-down of debt while leaving the 
borrower in business, except as directed or ordered under the 
Bankruptcy Code, and that 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 to be released, and the requirement for a current 
appraisal for collateral to be liquidated will be 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 
percentage of 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, have been 
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 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.
    A significant change that is expected to decrease the cost to the 
taxpayer is that interest accrual is limited to any lender to 90 days 
from the most recent delinquency effective date and any holder the 
greater of: 90 days from the date of the most recent delinquency 
effective date as reported by the lender or 30 days from the date of 
the interest termination letter. 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.

Executive Order 12866, Regulatory Planning and Review

    This rule has been reviewed under Executive Order (EO) 12866 and 
has been determined to be economically significant. The EO defines an 
``economically significant regulatory action'' as one that is likely to 
result in a rule that may: (1) Have an annual effect on the economy of 
$100 million or more or adversely affect, in a material way, the 
economy, a sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or State, local, or tribal 
governments or communities; (2) create a serious inconsistency or 
otherwise interfere with an action taken or planned by another agency; 
(3) materially alter the budgetary impact of entitlements, grants, user 
fees, or loan programs or the rights and obligations of recipients 
thereof; or (4) raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
this EO. This rule was determined to be economically significant 
because the changes to the B&I Guaranteed Loan Program regulations are 
estimated to have an impact on the economy of more than $100 million.

Programs Affected

    The Catalog of Federal Domestic Assistance program number assigned 
to the B&I Guaranteed Loan Program is 10.768.

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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 accordance with 2 CFR part 415, subpart C.

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 rule do not have any substantial 
direct effect on States, on the relationship between the Federal 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. Nor does this 
rule impose substantial direct compliance costs on State and local 
governments. 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 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 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].

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 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 
approximately 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 final rule will have an impact on a substantial 
number of small entities.
    However, the Agency has determined that the economic impact of the 
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 rule to be approximately $1,600 per non-
regulated 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. The Small Business Administration'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 non-regulated lender represents less than 0.003 percent 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 1970, 
``Environmental Policies and Procedures.'' 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 have been 
issued for each approved application. Taken collectively, the 
applications show limited potential for significant adverse cumulative 
effects.

Paperwork Reduction Act

    The information collection requirements contained in this final 
rule have been submitted to the Office of Management and Budget (OMB) 
for review and approval.

E-Government Act Compliance

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

I. Background

    Rural Development 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.

[[Page 35988]]

    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 
generally 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; Indian tribes on a Federal or State 
reservation or other federally recognized tribal group; public bodies; 
or individuals, provided the borrower is engaged 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; limited 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.

II. Discussion of Comments Received on the Proposed Rule

    The Agency received a total of 717 comments from 233 commenters. 
Approximately 277 comments received supported the rule as written, and 
approximately 170 of the comments resulted in minor changes to the 
rule. The remaining comments were adverse to certain proposed changes 
in the rule. The following is a discussion of the comments received on 
the proposed rule.
    Fourteen comments were received on the definitions section. One 
commenter recommended revising the agricultural production definition 
to clarify that ``for fiber or food for human consumption'' only 
applies to the breeding, raising, feeding, or housing of livestock and 
not to the cultivation, growing, or harvesting of crops, which should 
remain ineligible no matter what the purpose of the crop. This comment 
was adopted. One commenter recommended deleting the definition of 
``person'' and revising the definition of ``borrower'' to avoid 
confusion. This comment was not adopted because ``person'' is a 
standard legal definition, which means a person or entity, and is used 
many times throughout the rule. Two commenters recommended changing the 
definition of delinquency to ``a scheduled loan payment that is more 
than 90 days past due and cannot be cured within 30 days.'' These 
comments were not adopted because loans are considered delinquent by 
many lenders when the payment is not made by the payment due date. The 
Agency is already allowing for more time by considering a loan 
delinquent when the loan payment is 30 days past due and cannot be 
cured within 30 days, which effectively is 60 days late. One commenter 
recommended revising the energy project definition so that projects 
that have energy outputs that are a by-product of operations, or that 
the Agency otherwise determines is not an energy project, would not be 
subject to the increased equity requirements for energy projects. This 
comment was adopted. One commenter recommended changing the definition 
of high-priority project to exclude State Director and Administrator 
priority points from the total number of priority points because of the 
discretionary nature of those points, which was not adopted. The Agency 
feels that the reasons to award State Director and Administrator 
priority points are compelling and are not adequately captured under 
other categories. Additionally, not counting State Director and 
Administrator points would likely lead to errors in calculating a 
project's priority score. Five commenters supported the definition of 
high-priority project as proposed. Additionally, one commenter 
recommended adding a definition for ``farm or ranch'', another 
recommended adding a definition for ``residential housing'', and one 
commenter recommended adding a definition for ``business plan'' and 
``feasibility study.'' These comments were not adopted. Definitions for 
these terms are not necessary because these are commonly used terms 
that are generally understood and have caused no confusion in the past.
    Forty-five comments were received on the eligible lenders section. 
One commenter recommended mortgage companies that are approved by the 
Rural Housing Service be considered regulated lenders for the B&I 
program. This comment was not adopted because housing lenders are 
generally not commercial lenders and usually do not have adequate 
expertise in commercial lending. Four commenters recommended that 
Community Development Financial Institutions (CDFI) be considered 
regulated lenders. These comments were not adopted because CDFIs are 
not subject to credit examination and supervision by either an agency 
of the United States or a State. One commenter recommended either 
eliminating non-regulated lenders or further strengthening the criteria 
for them to be considered eligible, such as requiring the lender to 
have a line of credit issued by a regulated lender and requiring the 
lender to submit that line of credit information and their audited 
financial statements for review annually. The Agency is adopting part 
of this comment. The Agency will require non-regulated lenders to have 
a line of credit issued by a regulated lender and to submit their 
audited financial statements annually but will not be eliminating non-
regulated lenders because they are an additional source of funding for 
businesses in rural areas.
    Six commenters recommended allowing only regulated lenders to 
participate in the B&I program. These comments were not adopted because 
the Agency is strengthening eligibility criteria for non-regulated 
lenders but does not intend to deny all non-regulated lenders access to 
the program. Historically, non-regulated lenders have provided a 
meaningful lending source to businesses in rural areas, and the Agency 
believes the strengthened criteria to become a non-regulated lender 
will ensure that non-regulated lenders participating in the program 
have adequate commercial lending experience to operate a successful 
lending program. Fifteen comments were received on the 3-year renewal 
process for non-regulated lenders. Eleven commenters were against a 3-
year renewal process, two suggested a 5-year renewal process with 
existing approved lenders being grandfathered in, one suggested only 
grandfathering in existing approved lenders in good standing, and one 
recommended automatic renewal as long as the lender is in good 
standing. None of these comments were adopted for the following 
reasons. First, the Agency needs to implement a renewal process to 
maintain a list of actively approved lenders. Second, there is 
currently no vehicle to ensure non-regulated lenders continue to meet 
lender eligibility criteria once they are initially approved. Third, 
all non-regulated lenders must meet the new criteria to be an eligible 
non-regulated lender; therefore, they

[[Page 35989]]

must reapply. Lastly, a 5-year period is too long a period of time for 
the Agency to review a lender's information to ensure they continue to 
meet the requirements of an eligible lender. Seven comments were 
received with regard to the specific requirements set forth in section 
4279.29(b)(1)(ii) that a non-regulated lender must meet, including 
suggested changes to the number of commercial loans and delinquency 
percentage required. These comments were not adopted as the Agency is 
strengthening eligibility criteria for non-regulated lenders, and those 
suggestions do not accomplish that objective. Three comments were 
received that did not support the requirement for a loan loss reserve 
of 3 percent for non-regulated lenders. The Agency recognizes that many 
lenders use a loan loss reserve coverage ratio to establish the amount 
of a loan loss reserve, but this requires regular screening of a 
lender's loan portfolio, which is not something the Agency can easily 
manage. According to the Federal Administrator of National Banks, the 
amount set aside for loan losses is about 2 to 2.5 percent of 
outstanding loan receivables, depending on the quality of the loans in 
the portfolio, which indicates the 3 percent requirement is not out of 
line for a non-regulated lender. Four comments were received 
recommending that credit examinations performed by Aeris, formerly 
known as the CDFI Assessment and Ratings System, be accepted as an 
acceptable credit examination. The Agency concurs with this suggestion. 
However, these comments do not require a rule change and will be 
addressed administratively. One commenter recommended the credit 
examination requirement be stricken, which was not adopted because non-
regulated lenders need to undergo some type of examination to give the 
Agency a level of comfort approving them as non-regulated lenders for 
the program. Two commenters recommended not requiring audited financial 
statements for non-regulated lenders (a current requirement), which was 
also not adopted. The Agency needs to better monitor its approved non-
regulated lenders and is requiring not only an audited financial 
statement at the time of application and renewal but annually as review 
of financial statements is a routine way of monitoring. Lastly, one 
commenter recommended deleting the requirement that rates and fees 
charged by non-regulated lenders must not be greater than those charged 
by similarly located regulated commercial lenders. This comment was 
adopted because section 4279.120 allows the lender to 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.
    Two comments were received with regard to environmental issues. One 
commenter suggested that the new environmental proposed rule and the 
B&I proposed rule be aligned, which the Agency will ensure. Another 
commenter suggested that the Agency use the site assessment from the 
lender for the Agency's requirements, which could not be adopted 
because of National Environmental Policy Act of 1969 requirements.
    One comment was received with regard to audits for public bodies 
and nonprofits suggesting that the rule align with 2 CFR part 200, 
subpart F. This comment was adopted.
    Seven comments were received suggesting specifically stating that 
amendments may be made to the Conditional Commitment, which were 
adopted. The Agency made changes to the rule to clarify that the 
Conditional Commitment can be modified.
    Nine comments were received with regard to limiting interest 
accrual to holders. Three commenters indicated they did not believe the 
liquidity event of one investor should force the repurchase of a loan 
by the Agency, and one commenter indicated that one holder should not 
be able to initiate a claim and dictate the timeline for other holders. 
These comments were taken into consideration. The Agency agrees and has 
implemented these concepts by providing that for loans closed on or 
after the effective date of the final rule, the lender or the Agency 
will issue an interest termination letter to the holder(s) establishing 
the termination date for interest accrual. The guarantee will not cover 
interest to any holder accruing after the greater of: 90 Days from the 
date of the most recent delinquency effective date as reported by the 
lender or 30 days from the date of the interest termination letter. 
Four commenters supported the regulation change as proposed, and one 
commenter recommended that the new interest cap for lenders appear in 
the Full Faith and Credit section for consistency since the interest 
cap for holders is reflected there. This comment was adopted.
    One commenter recommended a requirement that the lender submit to 
the holder its pro rata share of payments within 5 business days, which 
was not adopted. The regulation indicates the payment should be 
remitted promptly, and the Agency declines to define ``promptly'' or 
set a specific time period for the lender to remit payment to the 
holder. Based upon discussions with some of the largest secondary 
market holders, lenders typically take as much as 30 days to process 
and remit payments to holders.
    One commenter suggested clarifying that a holder typically notifies 
the lender and the Agency of reassignments after a sale and recommended 
changing reference of the Bond Market Association to the Securities 
Industry and Financial Markets Association. Both recommendations were 
adopted. Another commenter recommended language stating that holders 
are encouraged to consult with the Agency in order to validate 
authenticity of guaranteed loans they purchase, which also was adopted.
    Two commenters suggested the minimum retention section be modified 
to allow lenders to sell the unguaranteed portion in any way as long as 
they buy back and retain the minimum 5 percent of the total loan 
amount. These suggestions were not adopted because of the potential for 
fraud or abuse. One commenter recommended clarifying that under the 
multi-note system, the lender does not retain title to the notes. This 
comment was adopted.
    Fourteen comments were received on the repurchase from holder 
section. Ten commenters recommended that the ``lender is encouraged to 
repurchase'' text be stricken, and three others recommended that the 
``in the opinion of lender'' text be stricken. Both of these provisions 
are in the current rule, as well as the Biorefinery Assistance Program 
regulation, although one sentence was added to emphasize the benefit to 
the lender. This was added to encourage lenders to repurchase 
guaranteed loans in default versus the Agency having to repurchase 
them. As such, the suggestions to strike the text were not adopted. One 
commenter suggested adding ``if the default is not cured'' to the 
repurchase text for clarification, which was adopted along with 
integrating paragraph (c) of Sec.  4279.78 into paragraph (a).
    One commenter suggested that a form be developed in lieu of 
requiring an indemnity bond when documents are lost, stolen, destroyed, 
mutilated, or defaced. This comment was not adopted because an 
indemnity bond is the only way the Agency is guaranteed to be made 
whole in the event the Agency erroneously makes payment on both an 
original and duplicate document. One commenter recommended Sec.  
4279.84(b)(4) be neutered to apply to both single note and multi-note 
options, which was adopted.

[[Page 35990]]

    The Agency invited public comment as to whether guaranteed loans 
should be made to businesses that do not meet citizenship requirements, 
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 United States. Sixteen comments were 
received with regard to the citizenship requirement for corporations or 
other non public-body type borrowers. Fifteen comments supported 
removing the citizenship requirement, and one did not. As such, the 
rule was revised to remove the citizenship requirement for corporations 
or other non public-body type borrowers 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 
United States. The B&I program is focused on the creation and retention 
of jobs in rural America. It is critical that jobs be created and 
retained in the United States, and this provision will help to achieve 
that.
    Nine comments were received with regard to rural area exceptions. 
Eight of the comments support addition of the Farm Bill language, and 
one suggested that the language for rural area exceptions in Sec.  
4279.108(c)(6) be rewritten, which was not adopted due to the text's 
statutory nature.
    Twenty-one comments were received with regard to eligible uses of 
funds. Four commenters support the enhanced and clarified uses of funds 
as proposed. Two commenters recommended that nursing homes and assisted 
living facilities be specifically listed as eligible loan purposes for 
clarification because the ineligible loan purpose/entity section uses 
the term ``or other residential housing.'' These comments were adopted. 
One commenter recommended clarifying that the purchase and development 
of land, buildings, etc., is for commercial or industrial properties, 
which was also adopted. One commenter recommended requiring 
documentation that newly proposed residential units as part of mixed-
use properties be necessary to fill a lack of currently available 
housing. This comment was not adopted because in mixed-use properties, 
the housing component is critical to project viability. One commenter 
recommended recasting the existing lender debt sentence to state 
existing lender debt refinancing may not exceed 50 percent of the 
overall loan instead of existing lender debt refinancing must be less 
than 50 percent of the overall loan. This comment was adopted. One 
commenter recommended stating that ``except for the refinancing of 
lines of credit'', debt being refinanced must have been for an eligible 
loan purpose. This comment was adopted. The same commenter further 
suggested that this paragraph reiterate that 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. This comment was not adopted because Sec.  4279.108(c) 
already states this and reiteration is not necessary. One commenter 
recommended removing industries undergoing adjustment from terminated 
Federal agricultural price and income support programs or increased 
competition from foreign trade as an eligible loan purpose. This 
comment was not adopted as the provision is required by Section 
310B(a)(2)(D) of the Consolidated Farm and Rural Development Act. Seven 
comments were received with regard to energy projects. One commenter 
indicated energy projects should be eligible regardless of whether the 
project is eligible for the Rural Energy for America Program (REAP), 
which was not accepted because the intent of this provision was to 
steer energy projects to the REAP program to the extent possible. Two 
comments from the same commenter were received with regard to expanding 
eligibility for ``next phase'' technology, which were not adopted 
because there is too much risk involved with next-phase technology. 
Energy projects are risky by nature, but requiring the energy project 
to be commercially available reduces risk. Three comments were received 
with regard to locally or regionally produced agricultural food 
products. Two commenters recommended allowing only non-rural local 
foods projects when the project assists rural businesses and creates 
and/or saves jobs in the surrounding rural communities. These comments 
were not adopted because they conflict with the statute. There could be 
projects in non-rural areas that serve underserved communities that do 
not necessarily provide an economic benefit to the surrounding rural 
communities, assist rural businesses, or create and/or save jobs in the 
surrounding rural communities. One commenter recommended the Agency 
retain the current policy that projects that are eligible under the 
locally or regionally produced agricultural food products initiative 
may be located in urban areas, as well as rural areas. This comment was 
adopted.
    Four commenters support the addition of the cooperative stock/
cooperative equity sections, and two commenters recommended not 
requiring a prospectus and striking reference to Securities Exchange 
Commission regulations for cooperatives since cooperatives are exempt 
from these requirements. These comments were adopted.
    Thirteen comments were received on the New Markets Tax Credit 
(NMTC) program. One commenter stated that unless legislation is passed 
to continue the NMTC program, the entire section should be stricken. As 
Section 141 of Division Q of the Consolidated Appropriations Act of 
2016, which was signed into law on December 18, 2015, extended the NMTC 
program through 2019 and the fact that Community Development Entities 
(CDE) have several years to deploy allocated funds, this comment was 
not adopted. One commenter suggested reserving guarantee authority for 
a pilot program, but this comment was not adopted because the Agency 
has no authority to reserve funding for an NMTC pilot program. One 
commenter suggested incorporating a requirement for ``reasonable and 
customary fees'' or the approved unwind at the end of the NMTC 
compliance period to include the sub-CDE conferring some significant 
percentage, if not all, of the NMTC subsidy to the Qualified Active Low 
Income Business (QALICB). This comment was adopted since Sec.  4279.120 
allows the lender to establish charges and fees for the loan. 
Furthermore, the regulation was revised to require the plan to unwind 
the fund be included in the guaranteed loan application to the Agency. 
Two commenters suggested that the rule be clarified that the guarantee 
is provided to a loan made to a qualified business in a rural area, and 
two commented that the Agency should consider allowing the guarantee to 
attach to the leveraged loan(s) made to the upper-tier investment fund, 
both of which were adopted. One commenter suggested clarifying that the 
guarantee could only attach to the QALICB's loan, which was not adopted 
because, as a result of other comments, the rule has been expanded to 
include a lender's leveraged loan to accommodate the mechanics of the 
NMTC program. The entire section was restructured to separate 
guarantees for QALICBs' loans and guarantees for lenders' leveraged 
loans. Three commenters recommended a ``direct tracing'' method. These 
suggestions were also adopted. Two commenters suggested that CDEs 
should not have to provide audited financial statements and loan 
performance statistics to become an eligible non-regulated lender. 
These comments were

[[Page 35991]]

not adopted because CDEs must meet the requirements of Sec.  4279.29(b) 
to be an approved non-regulated lender.
    Fifty comments were received on the ineligible loan purpose/entity 
type section. One commenter suggested that Sec.  4279.117 be revised to 
align with Section 363 of the Consolidated Farm and Rural Development 
Act to include as an ineligible loan purpose any project that drains, 
dredges, fills, levels, or otherwise manipulates a wetland, which was 
adopted. One commenter suggested that transactions among immediate 
family members that are not arm's length transactions be value-
validated via an appropriate appraisal, which was also adopted. Another 
commenter recommended clarifying what documentation would be obtained 
from the selling immediate family member to ensure they are not trying 
to circumvent the regulation by staying on running/operating or 
assisting with the business. This comment does not require a rule 
change. The Agency will provide administrative guidance to clarify that 
the selling immediate family member is prohibited from having an 
ownership interest in the business but that does not preclude the 
former owner from remaining as an employee of the business during a 
transitional period. One commenter recommended a sentence be added to 
more specifically state that documented construction or installation 
costs may not include any profit or wages to related persons/entities 
and that all such work must be done at cost. This comment was adopted. 
One commenter recommended that a selling immediate family member be 
allowed to maintain a minority ownership interest in the borrower. This 
recommendation was not adopted because the business must be acquired in 
full to be a business acquisition in accordance with Sec.  4279.113(b). 
One commenter recommended that ``on account of an ownership interest'' 
be added and that the Agency allow reasonable overhead, developer fees, 
and profit in line with market standards. These comments were not 
adopted because the addition of ``on account of an ownership interest'' 
does not add anything to the sentence and the Agency only allows 
construction or installation work to be done by an affiliate at cost 
with no profit to the affiliate. Three comments were received 
questioning the prohibition of guaranteeing 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. 
These comments were not adopted because this is a statutory provision. 
Five commenters stated that campgrounds should be an eligible loan 
purpose. These comments were adopted, and campgrounds and resort 
trailer parks will not be listed as ineligible loan purposes. 
Campgrounds and resort trailer parks will be added to the list of 
examples under tourist and recreation facilities in the eligible loan 
purpose section. Eight commenters stated that apartments, duplexes, and 
other housing projects that would not be eligible for multi-family 
housing programs should be an eligible loan purpose. These comments 
were not adopted because these types of projects do not generally 
provide lasting community benefits and create or save quality jobs, and 
guarantee authority would be better utilized for projects that do. One 
commenter suggested clarification of the prohibition on supporting 
inherently religious activities, specifically as it relates to the 
financing of hospitals with chapels, funeral homes conducting religious 
services, or event centers that periodically host weddings. This 
comment was not adopted because it is already addressed at 7 CFR part 
16. In line with the Faith Based Initiative, the Agency revised its 
provision precluding the funding of ``church-controlled'' organizations 
to precluding the funding of ``inherently religious activity.'' While 
mere control by a church no longer disqualifies a proposed applicant, 
it is the Agency's position that religious entities are charitable 
organizations and, as such, must not exceed the 10 percent cap on 
charitable donations. One commenter suggested allowing next-phase 
technology, which was not adopted because the B&I program only 
guarantees projects that are commercially available, which by 
definition would exclude next-phase technology. There is too much risk 
involved with next-phase technology. Energy projects are risky by 
nature, but requiring the energy project to be commercially available 
reduces risk. Thirteen commenters recommended that debt service 
reserves be eligible. These comments were adopted, and debt service 
reserves were removed as an ineligible loan purpose. One commenter 
indicated the conflict of interest prohibition was overly broad and not 
well defined. The text is broad by design to provide flexibility while 
encompassing any conflict of interest situation. The Agency is 
available to provide eligibility determinations, which would enable 
applicants to determine whether a conflict of interest exists. One 
commenter suggested defining ``lender's officers'' and asked what the 
rationale was for removing the lender's directors, stockholders, or 
other owners from the prohibition and what documentation would be 
required on what policies the lender has in place to remove the 
lender's director, stockholder, or other owner from the decisionmaking 
process. The intent of this revision was to allow a borrower's owner 
who has a nominal interest (less than 5 percent) in the lender or who 
is a member of the lender's board of directors (as long as they are not 
also officers) to still have the lender provide the guaranteed loan to 
the borrower. The suggestion to add a definition for ``lender's 
officers'' was not adopted because it is not necessary, although 
additional language was added to address the concern of the lender's 
director, stockholder, or other owner being removed from the 
decisionmaking process. Two commenters recommended that charitable 
organizations engaged in or proposing to engage in a business be 
eligible. These comments were adopted when it can be demonstrated that 
not more than 10 percent of a charitable organization's revenue is 
generated from tax deductible charitable donations. A charitable 
organization proposing to engage in a business could charter that 
business separately as a for-profit business.
    One hundred and seventy five comments were received supporting 
allowing an owner to stay involved in a phased ownership buyout by 
employees for ESOPs and worker cooperatives. Three commenters 
recommended a specific eligibility provision for worker cooperative and 
ESOP stock purchases. These comments were adopted. Two commenters 
recommended that there be a limited time period where the transferred 
business must be fully employee owned upon completion. One of those 
suggestions was a 5-year period, which was adopted. One commenter 
suggested a more detailed description of the kind of stock to be 
transferred/financed, and one commenter suggested allowing loan 
guarantees in stages. These comments were adopted, and a new section 
was added to address staged financing and the transfer of stock within 
cooperatives.
    Fifteen comments were received on the loan guarantee limit section. 
One commenter suggested a guarantor loan limit of $50 million, which 
was adopted. One commenter suggested that the Agency clarify how legal 
or regulatory lending limits would impact the percentage of guarantee. 
The legal or regulatory lending limit does not impact the percentage of 
guarantee per se. As

[[Page 35992]]

long as the lender's legal lending limit would otherwise prevent it 
from being able to make the loan to the borrower, a lender may request 
up to a 90 percent guarantee. Two commenters recommended that 
guarantees of up to 90 percent be allowed for local and regional food 
enterprise loans of up to $10 million. Seven commenters recommended 
guarantees of up to 90 percent remain for loans of up to $10 million. 
These comments were not adopted because the $5 million loan limit for 
increased percentages of guarantee mirrors the loan limit for reduced 
guarantee fees, and these are steps the Agency is taking to reduce the 
cost of administering the program. Four comments were received 
supporting the limitation of increased percentages of guarantee to 
loans of $5 million or less.
    Ten comments were received on the fees and charges section. Seven 
commenters recommended that reduced guarantee fees be available for all 
loans, regardless of loan amount. These comments were not adopted 
because there is a negative impact on program subsidy for reduced 
guarantee fees, and the Agency is trying to reduce the costs of 
administering the program. One commenter suggested deleting ``or 
fundamental structural changes in its economic base'' in the criteria 
for allowing a reduced guarantee fee, which was adopted because the 
priority scoring section no longer contains that clause. Two commenters 
recommended that the responsibility to ensure that annual renewal fees 
have been paid be that of the lender. These comments were accepted as 
the requirement is directed at the lender.
    Twenty comments were received on the interest rate section. Three 
commenters addressed interest rate swaps, which the current regulation 
allows. One commenter recommended that interest rate swaps not be 
allowed because they expose users to interest rate and credit risk. Two 
commenters, however, pointed out that borrowers who opt for a variable 
rate loan will not have the opportunity to hedge against rising 
interest rates if interest rate swaps are not allowed. The Agency notes 
that it has long been its policy for the B&I Guaranteed Loan Program 
that interest rates are negotiated between the lender and the borrower, 
including instances of interest rate swaps. As noted by the commenters, 
interest rate swaps may benefit some borrowers and may expose other 
borrowers to interest rate and credit risk. On balance, the Agency has 
decided retain its long-standing policy of allowing interest rate swaps 
under this program. The Agency points out that the loan guarantees it 
issues under this program covers only the principal and interest on the 
guaranteed loans and does not cover any fees associated with interest 
rate swaps. One commenter suggested that a variable interest rate be 
tied to a base rate published in a national or regional financial 
publication, which was adopted. One commenter recommended that interest 
rates on the unguaranteed portion be allowed at the outset to be lower 
than the guaranteed portion if the adjustment period on the 
unguaranteed portion is shorter than the guaranteed portion, which 
would represent a lower rate risk to the bank. This comment was not 
adopted because allowing the guaranteed portion to have a higher 
interest rate would cause the Agency to pay more on a loss than it 
otherwise would if the guaranteed portion was equal to or less than the 
unguaranteed portion. Seven commenters support the new provision 
providing that lenders do not have to set interest rate floors and 
ceilings to remain in compliance with the regulation. Four commenters 
support the addition of the requirement that the lender's promissory 
note may not contain provisions for default or penalty interest. Three 
commenters recommended this provision be stricken. These comments were 
not adopted because allowing default interest rates could cause the 
borrower to continue in default because of the higher payment, which 
increases the likelihood of the Agency having to pay a loss. One 
commenter recommended adding a provision that the lender may not charge 
late payment fees for the same reason; however, this comment was not 
adopted because the Agency believes there needs to be some incentive 
for the borrower to get its payments in on time.
    One commenter suggested clarifying what is meant by project cash 
flow statements, which was adopted. Administrative text was added to 
the Instruction to provide clarification.
    Sixteen comments were received on collateral requirements. One 
commenter recommended that intangible assets not be allowed to serve as 
primary collateral and recommended minor changes to the rule text, both 
of which were adopted. Three commenters suggested tying collateral 
discount rates to the Federal Deposit Insurance Corporation (FDIC) 
supervisory loan-to-value limitations. These comments were not adopted 
because FDIC supervisory loan-to-value limitations only apply to real 
estate, and there are no set limitations for machinery and equipment or 
accounts receivables and inventory. Furthermore, the loan-to-value 
limitations are excluded when loans are guaranteed or insured by the 
U.S. Government when the amount of the guarantee or insurance is at 
least equal to the portion of the loan that exceeds the supervisory 
loan-to-value limit. Five commenters stated they did not believe there 
was a need to change the current language because lender regulatory 
requirements define collateral and appropriate discounts. These 
comments were not adopted because changes are necessary to bring 
consistency in collateral requirements. Seven comments were received on 
the requirement for reviewed financial statements when there is a 
predominant reliance on inventory and/or receivable collateral that 
exceeds $250,000. Four of these commenters mistakenly thought if the 
loan amount exceeds $250,000, reviewed financial statements would be 
required and recommended the threshold be $1 million. These comments 
were not adopted because reviewed financial statements would only be 
required when there is a predominant reliance on inventory and/or 
receivable collateral that exceeds $250,000, which will usually only be 
applicable for working capital loans. If receivables and inventory are 
the predominant or only collateral for a loan, the Agency must ensure 
collateral for these types of loans is adequate.
    Thirty-six comments were received with regard to equity. Three 
commenters suggested reducing the tangible balance sheet equity 
requirement for new businesses from 20 percent to 10 percent. These 
comments were not adopted because startup businesses are generally cost 
intensive, and those that are financed with more equity and less debt 
are more likely to succeed. Two commenters indicated that Generally 
Accepted Accounting Principles (GAAP) accounting allows related 
entities to transfer assets to one another at fair market value and 
asked why the Agency would not allow such a transaction if it is in 
accordance with GAAP. The Agency adopted the comments and modified the 
sentence to allow it when in accordance with GAAP and evidence is 
provided that the transaction was entered into at market terms. One 
commenter indicated clarification was needed on owner subordinated debt 
and asked if payments could be made on the subordinated debt and 
whether interest could be paid on the subordinated debt. This comment 
was accepted, and administrative text was added to the Instruction to 
clarify that as it is the principal amount of cash being injected as 
owner subordinated debt that the Agency will consider equity when

[[Page 35993]]

calculating tangible balance sheet equity, no payments can be made on 
this subordinated debt because the cash must remain in the business for 
the life of the loan. This would not, however, preclude interest from 
being paid on the subordinated debt as long as the guaranteed loan is 
current and there are no loan agreement/covenant violations. Because 
the regulation requires an injection of cash in exchange for the 
subordinated debt, an owner would not be able to create a subordinated 
debt note in lieu of drawing a salary because the salary is drawn over 
time, and the reduction of expenses is not the same as an immediate 
cash injection. One commenter recommended that subordinated debt of 
non-owner parties be allowed the same consideration as owner 
subordinated debt. This comment was not adopted because debt is a 
liability of the business and is therefore not equity. Owner 
subordinated debt is only allowed when cash is injected into the 
business for the life of the loan. One commenter recommended that the 
Agency consider removing the tangible balance sheet equity requirement 
and allowing appraisal surplus, which was not adopted. The tangible 
balance sheet equity requirement cannot be removed as the Consolidated 
Farm and Rural Development Act contains a provision requiring that no 
loan commitment be conditioned upon an applicant investment in excess 
of 10 percent in the business or industrial enterprise unless special 
circumstances warrant (the Agency determined that startup businesses 
and energy projects are special circumstances), and review of the 
balance sheet is the only way to ascertain an applicant's investment in 
the business. Three commenters suggested removing the tangible balance 
sheet equity requirement and replacing it with a well-established 
lending industry metric, such as a leverage or debt-to-worth ratio. 
These comments were accepted, as a debt-to-worth ratio requirement is 
already specifically in the rule. Tangible balance sheet equity is the 
same as a debt-to-worth ratio, simply expressed as a percentage. Three 
commenters suggested allowing ``off balance sheet'' items, such as 
fully subordinated owner debt, stand-by debt, and equity in commonly 
owned real estate. Aside from fully subordinated owner debt that is 
already allowed, debt, stand-by or otherwise, is classified as a 
liability and is not equity. Therefore, this comment is not being 
accepted. Appraisal surplus is not allowed because it is the asset's 
book value that is reflected on the balance sheet. Furthermore, 
appraisals fluctuate widely, and an asset's book value is a more 
conservative and reliable approach to valuing an asset for equity 
purposes. Five commenters suggested adding back depreciation. These 
suggestions were not adopted. As financial statements must be prepared 
in line with GAAP standards and depreciation is a GAAP concept, it is 
the asset's depreciated value that is considered in the tangible 
balance sheet equity calculation. If a business has depreciated its 
assets in accordance with GAAP for tax purposes, it cannot add that 
depreciation back in for purposes of meeting the tangible balance sheet 
equity requirement. One commenter suggested allowing energy projects to 
meet the equity requirement at issuance of the Loan Note Guarantee, 
which was not adopted. The practice of allowing loans to close not 
having met the equity requirement would complicate administration of 
the program and tie up guarantee authority for projects that otherwise 
meet the equity requirement. One commenter suggested requiring an 
independent accountant to prepare the loan closing balance sheet. This 
comment was not adopted because it would be overly burdensome to 
require the balance sheet, on which the lender's certification is 
based, to be prepared by an independent accountant. Four commenters 
suggested removing the requirement for the loan closing balance sheet 
to be prepared by an accountant. These comments were adopted. Since it 
is the lender that is required to make the certification, it would be 
up to the lender whether or not to require an accountant to prepare the 
loan closing balance sheet. Two commenters suggested the timing of the 
tangible balance sheet equity requirement be at issuance of the Loan 
Note Guarantee versus loan closing. These comments were not adopted 
because the regulation has always required the Loan Note Guarantee to 
be issued coincident with or immediately after loan closing, and the 
regulation has always required the lender's loan agreement to contain 
all of the requirements of the Conditional Commitment (the tangible 
balance sheet equity requirement being one of those requirements). 
However, the Agency was finding that loans were being closed without 
having met the equity requirement and, in some cases, loans were closed 
with the hopes that retained earnings would increase at some point in 
the future to meet the equity requirement. This practice was tying up 
guarantee authority for projects that met the equity requirement. As a 
result of these findings, the regulation was changed in 2006 as a 
corrective action to clarify that equity was to be met at loan closing. 
Four comments were received with regard to the requirement for real 
estate holding companies and operating companies to be co-borrowers. 
These comments were taken into consideration, and the Agency added the 
ability for this requirement to be waived when the Agency determines 
that adequate justification exists. Two commenters suggested that the 
requirement for co-borrowers that are independent operations to both 
meet the equity requirement individually be removed. These comments 
were not adopted to prevent situations where a company unrelated to the 
project is made a co-borrower to compensate for the ``borrower'' not 
meeting the equity requirement, which effectively is a circumvention of 
the regulation. One commenter suggested that GAAP apply to sole 
proprietorships, which was not adopted because very few B&I loans are 
made to sole proprietors, and personal financial statements do not 
typically account for depreciation. One commenter recommended that the 
rule retain the ability for the Administrator to reduce the borrower's 
equity requirement, which is accepted as the regulation continues to 
provide the Administrator discretion to reduce the equity requirement. 
One commenter suggested adding the word ``all'' to the requirement for 
financial statements that meet or exceed industry standards when 
requesting a reduction in the equity requirement, which was adopted.
    Nine comments were received on the personal and corporate guarantee 
section. One commenter suggested adding a provision where guarantees 
are not required from owners who are legally prohibited from providing 
guarantees, which was adopted. One commenter suggested adding the words 
``for existing businesses'' to the guarantee exception language, which 
was also adopted because, in practice, only an existing business would 
be able to demonstrate cash flow and profitability. Two commenters 
suggested adding the exception language back into the rule. These 
comments were accepted. The exception language still exists but was 
simply moved to another paragraph. Five commenters suggested removing 
the ability for the Agency to obtain guarantees from persons whose 
ownership interest in the borrower is held indirectly through 
intermediate entities. These comments were not adopted because often 
times, borrowers are owned by shell companies, whose guarantees are 
typically worth little. The Agency needs to have the ability to

[[Page 35994]]

obtain guarantees where the financial strength lies, which is typically 
the principal(s) of the business, who may be layers up the ownership 
chain.
    Ten comments were received on the financial statement section. One 
commenter suggested adding ``Except for audited financial statements 
required by Sec.  4279.71 of this chapter, the lender will determine 
the type and frequency . . .,'' which was adopted. Two commenters 
suggested increasing the threshold where the Agency may require audited 
financial statements from $3 million to $10 million, which were also 
adopted. One commenter suggested requiring an independent accountant to 
prepare the annual financial statements. This comment was not adopted 
because it would be overly burdensome to require annual financial 
statements to be prepared by an independent accountant. Six commenters 
recommended language be added to allow for the approval of the loan 
with the requirement for audited financial statements to be provided in 
subsequent years, as opposed to requiring audited financial statements 
at the onset of the loan. These comments were not adopted as the lender 
already has the ability to require future audited financial statements 
if they wish, and it is not necessary to specifically state they have 
this ability in the rule.
    Eight comments were received on the appraisal section. One 
commenter suggested adding a requirement for lenders to follow their 
primary regulator's policies relating to appraisals and evaluations 
when collateral values are under the $250,000 threshold for requiring 
an appraisal, which was adopted. Six commenters suggested adding 
``unless it is a well-established industry norm to use business 
valuations in calculating the value of the enterprise and is in 
accordance with the lender's loan policies'' to the statement that 
values attributed to business valuations or as a going concern are not 
allowed. Although these comments were not adopted, the Agency changed 
the regulatory text to require that values of both tangible and 
intangible assets be reported individually/separately in the appraisal. 
Business valuations or going concern values will be deducted from the 
reconciled fair market value of the hard assets for purposes of 
calculating collateral coverage. One commenter recommended requiring a 
Certified Appraisal by a Certified Machinery and Equipment Appraiser, 
which was not adopted because this is not a normal banking practice.
    Twelve comments were received with regard to feasibility studies. 
One commenter suggested not requiring a feasibility study from an 
existing business expanding its facility if the existing facility is 
sufficient to service the new debt, which was adopted. One commenter 
recommended removing the requirement for a feasibility study for all 
biofuels projects, regardless of whether they are new or existing, 
which was also adopted. Since feasibility studies are required for new 
businesses and may be required for existing businesses where there is a 
significant change in operations, this requirement has been determined 
not to be necessary. Two commenters recommended that feasibility 
studies conducted with funding from other programs, such as the Value-
Added Producer Grants, the Rural Business Enterprise Grants, and the 
Rural Cooperative Development Grants, be accepted as fulfilling the 
feasibility study requirement. These commenters further recommended 
that the Agency work with lenders and borrowers to secure alternative 
grant funding for development of feasibility studies. These comments 
were accepted as the Agency currently accepts feasibility studies 
funded with other programs as long as they meet the requirements of 
Sec.  4279.150. While the borrower is ultimately responsible for 
securing any grant funding, the Agency does assist in securing grant 
funding for development of feasibility studies. Three commenters 
recommended that feasibility studies not be required for all new 
businesses. These comments were not adopted because current Agency 
policy is to obtain feasibility studies for startups/new businesses or 
when there is a significant change in operations in an existing 
business, and this provision simply codifies current Agency policy. 
Five commenters recommended defining ``significantly.'' These comments 
were not adopted because ``significant'' and ``significantly'' are used 
many times throughout the rule, and there may be unintended 
consequences of defining such a generic term. The Agency will rely on 
the commonly used definition of the term, meaning a noticeably or 
measurably large amount.
    Thirty-nine comments were received on the application section. One 
commenter suggested requiring additional information in order to 
complete the priority score sheet. This comment was accepted, and, 
although it is already covered by Sec.  4279.161(b)(19), text was added 
to clarify any information needed to score the project will be 
required. Nine comments were received supporting the reduction of 
historical financial information for any parent, affiliates, or 
subsidiaries from 3 years to current financial statements only. One 
commenter suggested adding that projections must be prepared in line 
with GAAP standards for clarification, which was adopted. Three 
commenters recommended that the Agency not require a loan agreement or 
ratios in the loan agreement. These comments were not adopted because 
the loan agreement needs to contain basic loan covenants, including 
ratios, and the Agency should review the draft loan agreement to ensure 
it complies with the regulation. At the time of issuance of the Loan 
Note Guarantee is too far along in the process to learn there may be 
problems with the loan agreement because, typically, the loan agreement 
has been executed by the lender and borrower by the time the lender 
requests issuance of the Loan Note Guarantee. One commenter recommended 
revising the citation for intergovernmental consultation comments to 2 
CFR part 415, subpart C, which was adopted. One commenter suggested 
that the technical review of the appraisal, which is required by Sec.  
4279.144(a), be added to the appraisal requirement in the application 
section, which was adopted. Seven commenters recommended that the 
Agency continue to issue Conditional Commitments subject to receipt of 
satisfactory appraisals. These comments were accepted, although the 
ability to issue Conditional Commitments subject to receipt of 
satisfactory appraisals remains. Four commenters suggested removing 
``at the Agency's discretion'' with regard to not requiring a business 
plan when loan proceeds are used exclusively for debt refinancing and 
fees in order to remove the burden of decisionmaking from local 
officials, which may be arbitrary in nature. Six commenters supported 
doing away with business plans when debt is being refinanced. Two 
commenters recommended the Agency conduct outreach to make lenders and 
borrowers aware of the abbreviated application option, and one further 
recommended that the Agency develop guidelines for common factors that 
constitute a ``significant risk.'' The Agency agrees with these 
comments and will adopt administrative text to address the concern. 
Three commenters support reducing the amount of documents required for 
the short application form/process, and one commenter suggested 
removing the short application form/process in its entirety, which was 
not adopted because the Consolidated Farm and Rural Development Act 
requires a simplified application form/process.

[[Page 35995]]

    Thirteen comments were received on priority scoring. Four 
commenters support the changes in priority scoring. One commenter 
recommended deleting the requirement for lenders to consider Agency 
priorities when choosing projects for guarantee. This comment was not 
adopted because lenders are not discouraged from submitting 
applications that would receive a low priority score. They are simply 
required to consider priorities for scoring, especially the categories 
they have control over, such as the interest rate category. This 
requirement is in the current rule. With regard to the categories for 
loan-to-job ratio, one commenter suggested the Agency add language to 
explain how jobs should be counted and incorporate a verification 
component to the scoring criteria. This comment does not need to be 
addressed because this point category was deleted. Five commenters 
suggested that the Farmer Mac II rate not be utilized for priority 
scoring. These comments were accepted, and this point category was 
deleted as well. The proposal was in response to a concern that it was 
difficult for fixed rate loans to qualify for priority points using the 
Wall Street Journal Prime +1 and +1.5 equivalents. One commenter 
suggested that ``an agricultural resource value-added product'' be 
removed in the scoring section because the definition for this term was 
incorporated into ``natural resource value added product.'' This 
comment was adopted. One commenter suggested removing reference to the 
Work Opportunity Tax Credit Program because program authority expired 
December 31, 2013, and has not been extended to date. This comment was 
adopted as well.
    Ten comments were received on planning and performance development. 
Two commenters suggested that ``or similar document issued by the 
relevant building jurisdiction'' be included with the requirement for a 
Notice of Completion, which were adopted. One commenter recommended 
that the Agency clarify that a project architect or engineer may be a 
person with demonstrated experience to confirm that the budget is 
adequate for the planned development, which was also adopted. Five 
commenters recommended the Agency allow independent monitoring by a 
reputed nationwide firm during construction as an alternative to a 
performance bond as long as the contract guarantees project 
construction. These comments were taken into consideration, and the 
Agency will allow contracts with independent disbursement and 
monitoring firms where project construction and completion are 
guaranteed. One commenter recommended breaking a sentence into two 
sentences, which was not adopted because a third option was added due 
to other comments, and restructure of this sentence makes it clear 
there are several alternatives. One commenter recommended that Sec.  
4279.167(c) be revised to remove reference to the Americans with 
Disabilities Act and insert reference to the Architectural Barriers Act 
Accessibility Standard, which was adopted.
    One commenter recommended that a timeframe be established for 
responding to preapplications, and five commenters recommended that 
that timeframe be 30 days. These comments were not adopted in this rule 
because the Instruction contains an entire preapplication processing 
section; however, administrative text was added to the preapplication 
processing section instructing staff to respond to preapplications 
within 30 days.
    One commenter recommended that a transfer of lender request be 
received in writing from the current lender, the proposed lender, and 
the borrower, which aligns with the substitution of lender requirements 
in the servicing regulation, and one commenter recommended deleting a 
semicolon. Both of these suggestions were adopted.
    Three comments were received on the conditions precedent to 
issuance of the guarantee section. One commenter again recommended that 
the regulation specify that the loan closing balance sheet must be 
prepared by an independent accountant, which was not adopted because it 
would be overly burdensome to require the balance sheet, on which the 
lender's certification is based, to be prepared by an independent 
accountant. One commenter suggested that a form be developed for the 
lender's certification, which was not adopted because simply signing a 
form would not provide the Agency with the same level of comfort as 
when a lender has to actually prepare the certification on its own 
letterhead. One commenter suggested adding a definition for 
``accountant'' and emphasized that if the lender has to make the 
certification, it should be up to the lender who prepares the balance 
sheet. Part of this recommendation was adopted. The Agency has decided 
not to require the loan closing balance sheet to be prepared by an 
accountant. Since the lender is required to make the certification that 
tangible balance sheet equity was met, it would be up to the lender 
whether or not to require an accountant to prepare the balance sheet.
    One commenter recommended a field be created in the USDA Lender 
Interactive Network Connection (LINC) to prompt the lender to complete 
the loan classification. The Agency agrees with this recommendation and 
will adopt it administratively. One commenter recommended that Sec.  
4287.107(b) include the lender's ability to enter the loan 
classification in LINC if they remit the guarantee fee via LINC, which 
was also adopted. Five commenters support requiring the lender to 
establish the loan classification at loan closing. Five commenters 
support allowing the flexibility to have teleconferences to complete 
the Agency and lender annual lender conferences. One commenter 
recommended that the Agency only allow annual lender conferences to be 
held via teleconference if the lender has supplied all required 
servicing reports to the Agency. This comment was not adopted because 
face-to-face visits can be costly and allowing annual conferences to be 
held by teleconference not only reduces the cost to the lender, it 
reduces the cost of administering the program for the Agency. One 
commenter recommended clarification of a ``reasonable attempt to obtain 
financial statements.'' This was not adopted because it is not 
necessary and allows for flexibility in determining what is reasonable. 
Reasonable attempts could be documented telephone calls or written 
letters to the lender.
    Nine commenters support increasing the requirement for an appraisal 
from $100,000 to $250,000. One commenter recommended allowing 
subordination of lien positions when it would ``not adversely affect 
the potential for collection of the B&I loan through repayment or 
liquidation'' instead of stating when it would be in ``the best 
financial interest of the Agency.'' This comment was adopted. One 
commenter recommended changing the word ``loan'' to ``collateral'' in 
the lien priorities paragraph, which was also adopted. Five commenters 
recommended that subordinations to lines of credit be extended from 1 
year to 3 years. These recommendations were not adopted because it 
would increase the program's subsidy cost. The proposed rule initially 
proposed subordinations to lines of credit for up to 3 years but was 
reduced to 1 year during the clearance process due to the increase.
    Sixteen comments were received on the transfer and assumption 
section. One commenter recommended clarifying whether the value of the

[[Page 35996]]

collateral being transferred in a transfer and assumption situation is 
to be calculated on a discounted or non-discounted basis. This comment 
was adopted, and the words ``fair market'' will be added to clarify 
that the value of the collateral is the market value, not the 
discounted market value. One commenter suggested revising Sec.  
4287.134(g) to add ``unless a guarantor is being released from 
liability in accordance with paragraph (c) of the section.'' This 
comment was adopted. Five commenters support clarification that no new 
notes can be issued upon an assumption. Eight commenters stated the 
Agency should not charge a transfer fee for a transfer and assumption, 
and one commenter suggested the fee be lower. These comments were 
adopted, and the Agency will not charge a transfer fee for a transfer 
and assumption.
    One commenter suggested that Sec.  4287.135(d) be revised to strike 
``or a lender has been merged with or acquired by another lender'' and 
Sec.  4287.135(b) be revised to add ``merged with or'' to the second 
sentence of the paragraph. This comment was adopted.
    One commenter suggested adding a statement indicating the Agency 
may not look as favorably on a request for deferral when a lender's 
unguaranteed loans are also not deferred. This comment was taken into 
consideration, and the Agency has decided to require the lender's 
unguaranteed loan(s) and any stockholder loans to also be deferred or 
put under a moratorium during the period of deferment or moratorium of 
the guaranteed loan.
    Two commenters indicated that paying only 90 days of interest is 
not conducive for the bank to work with the borrower and recommended a 
longer period of time, and six commenters indicated that the Agency 
should modify the changes to the accrual of interest to better account 
for expenses and uncertainty that occur during a loan default. These 
comments were taken into consideration, but the Agency has decided to 
limit interest accrual to the lender to 90 days from the most recent 
delinquency effective date and to the holder the greater of: 90 Days 
from the most recent delinquency effective date as reported by the 
lender or 30 days from the date of an interest termination letter. One 
commenter suggested clarifying whether interest on a protective advance 
that is paid 95 days after the most recent delinquency effective date 
would be covered. This comment was not adopted because the regulation 
is clear that the guarantee will not cover interest on the protective 
advance accruing after 90 days from the most recent delinquency 
effective date. The Agency is reducing the cost of administering the 
program, and this is one step to achieve that objective. One commenter 
suggested adding ``not to exceed every 60 days'' to the requirement 
that the lender periodically report to the Agency on the progress of 
liquidation. This comment was adopted. One commenter recommended a 
definition of ``potential liquidation value'' and suggested that the 
Agency include those things that would impact the fair market value 
versus potential liquidation value. This comment was not adopted 
because a definition of potential liquidation value is not necessary, 
and it is the appraiser's responsibility to establish what would impact 
fair market value. One commenter suggested clarifying whether interest 
accrual stops after 90 days to the Agency when the Agency becomes the 
holder. This comment was adopted.
    One commenter suggested that the determination of loss and payment 
section include a time limit that the lender has to sell collateral it 
has acquired as a result of liquidation, such as 24 months for real 
estate. After that time period, the Agency could reduce the loss claim 
by 25 percent every 6 months, so that after 48 months, the lender would 
be unable to collect anything further under the Loan Note Guarantee. 
This comment was not adopted because it was too restrictive. No other 
Federal agency is imposing such restrictions on their lenders, and this 
proposal may harm future lender participation in the program because 
the lending community may view this as punitive. One commenter 
indicated there were contradictory statements with regard to how 
attorney/legal fees will be handled in liquidation and bankruptcy 
scenarios. This comment was adopted, and the rule was rewritten to 
provide clarification that attorney/legal fees are liquidation expenses 
and that the lender and the Agency will share in those expenses 
equally. Fifteen commenters suggested that liquidation expenses, 
litigation expenses, and bankruptcy expenses be shared on a pro rata 
basis versus being shared equally. These comments were not adopted 
because the Agency is reducing the cost of administering the program as 
part of this rulemaking, and sharing the costs with the lender equally 
achieves that objective. Additionally, these expenses are deducted from 
collateral sale proceeds prior to allocating pro rata shares of the 
sale proceeds. To share in the expenses on a pro rata basis would 
likely lead to errors in calculating estimated and final reports of 
loss.
    Several general comments were received. One commenter pointed out 
that the regulation and current forms use the terms ``reasonably 
prudent,'' ``prudent,'' and ``reasonable and prudent'' and recommended 
that ``reasonable and prudent,'' be utilized throughout the regulation 
and accompanying forms. This comment was taken into consideration, and 
changes were made for consistency. However, the Agency chose to use 
``reasonably prudent'' in a majority of the occurrences. One commenter 
recommended a more detailed explanation of the benefit of extending 
loan guarantees for employees to buy-out selling owners, who may remain 
for a transitional period to teach the employees how to run the firm, 
which was adopted administratively. One commenter suggested reviewing 
forms, giving them consistent numbers, and removing reference to the 
Section 9006 program on the forms. This comment is outside the scope of 
this rule and will be addressed administratively. One commenter 
recommended a handbook to promote consistency among the State Offices. 
This comment is outside the scope of this rule and will be addressed 
administratively. One commenter recommended the Agency not use a fiscal 
and transfer agent. The proposed rule published in the Federal Register 
on September 15, 2014, did not address use of a fiscal and transfer 
agent and, as such, is outside the scope of this rulemaking. One 
commenter recommended the Agency adopt a national loan registry system 
to help verify the validity of guaranteed loans. This comment was not 
adopted as there are privacy and funding issues with regard to a 
national loan registry system. One commenter recommended that Agency 
personnel be better utilized to avoid ``bottlenecks'' in the processing 
of loans. This comment is outside the scope of this rule and will be 
addressed administratively. Lastly, there were two comments made with 
regard to dividing appropriated funding into subsidized and non-
subsidized segments. While this will not be contemplated with this 
rulemaking, it remains a topic of discussion.

List of Subjects for 7 CFR Parts 4279 and 4287

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


[[Page 35997]]


    For the reasons set forth in the preamble, parts 4279 and 4287 of 
title 7 of the Code of Federal Regulations are amended as follows:

PART 4279--GUARANTEED LOANMAKING

0
1. The authority citation for part 4279 is revised to read as follows:

    Authority: 5 U.S.C. 301; 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.
4279.73-4279.74 [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 and regulations 
referenced in this subpart may be obtained from any Agency office and 
from the USDA Rural Development Web site at http://www.rd.usda.gov/publications. 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. The following definitions apply to this subpart:
    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 
Guaranteed Loan Program. References to the National or State Office 
should be read as prefaced by ``Agency'' or ``Rural Development'' as 
applicable.
    Agricultural production. The breeding, raising, feeding, or housing 
of livestock for fiber or food for human consumption and the 
cultivation, growing, or harvesting of crops.
    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 among the Agency, the 
lender, and the holder containing the terms and conditions of an 
assignment of a guaranteed portion of a loan, using the single note 
system.
    Bankruptcy Code. The provisions of title 11 of the United States 
Code or any successor statute.
    Biofuel. A fuel derived from Renewable Biomass.
    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.
    Certificate of Incumbency and Signature. Form RD 4279-7, 
``Certificate of Incumbency and Signature,'' is used to validate 
authenticity of Agency representatives' signatures on Forms RD 4279-4, 
4279-5, and 4279-6.
    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 United States, 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. 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 certain collection 
options, such as administrative offset, for 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 35998]]

agreement, or other documents relating to 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 generate 
energy or power or projects that produce biofuel. Projects that have 
energy outputs that are a by-product of operations or that the Agency 
otherwise determines is not an energy project are not subject to the 
increased equity requirement for energy projects required by Sec.  
4279.131(d)(1).
    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 business that has been in operation for at least 1 
full year 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 25 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 the 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 a 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,'' 
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, individually or in the aggregate, has jeopardized, or 
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 to generate 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 that a reasonably prudent lender would perform in servicing 
(including liquidation of) 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.
    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

[[Page 35999]]

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 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 (including a county, city, or 
equivalent such as parish, borough, municipio, or census designated 
place) where at least 20 percent of the population 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; an Indian tribe on a Federal or 
State reservation or other federally-recognized Indian tribe; or an 
organization controlled by any of the above.
    Renewable biomass. (1) Materials, pre-commercial thinnings, or 
invasive species from National Forest System land or public lands (as 
defined in section 103 of the Federal Land Policy and Management Act of 
1976 (43 U.S.C. 1702)) that:
    (i) Are by-products of preventive treatments that are removed to 
reduce hazardous fuels; to reduce or contain disease or insect 
infestation; or to restore ecosystem health;
    (ii) Would not otherwise be used for higher-value products; and
    (iii) Are harvested in accordance with applicable law and land 
management plans and the requirements for old-growth maintenance, 
restoration, and management direction of paragraphs (2), (3), and (4) 
of subsection (e) of section 102 of the Healthy Forests Restoration Act 
of 2003 (16 U.S.C. 6512) and large-tree retention of subsection (f) of 
that section; or
    (2) Any organic matter that is available on a renewable or 
recurring basis from non-Federal land or land belonging to an Indian or 
Indian Tribe that is held in trust by the United States or subject to a 
restriction against alienation imposed by the United States, including:
    (i) Renewable plant material, including feed grains; other 
agricultural commodities; other plants and trees; and algae; and
    (ii) Waste material, including crop residue; other vegetative waste 
material (including wood waste and wood residues); animal waste and by-
products (including fats, oils, greases, and manure); and food and yard 
waste.
    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, the Rural Housing Service, and 
the 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. A 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 United States, 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.
    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 LINC 
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' 
operations and growth. Working capital is calculated as current assets 
less current liabilities.
    (b) Abbreviations. The following abbreviations apply to this 
subpart:

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 United States
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--U.S. 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 of this chapter. Programmatic decisions 
based on clear and objective statutory or regulatory requirements are 
not appealable; however, such decisions are reviewable for 
appealability by the National Appeals Division (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

[[Page 36000]]

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 or the District of Columbia 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 or State 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 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 August 2, 2016. 
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 United States 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 August 2, 
2016 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) In order to become an eligible lender, 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) Have and maintain a line of credit issued by a regulated 
lender that is acceptable to the Agency;
    (v) 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;
    (vi) Have adequate policies and procedures to ensure that internal 
credit controls provide adequate loanmaking and servicing guidance; and
    (vii) 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 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;
    (iv) A copy of the examination required under paragraph (b)(1)(vii) 
of this section; and
    (v) Documentation as to how the lender will fulfill the 
requirements of Sec.  4279.30.
    (3) Non-regulated lenders must submit audited financial statements 
to the Agency annually for monitoring purposes.
    (4) 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

[[Page 36001]]

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;
    (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 or amendment thereof in accordance with Sec.  4279.173(b);
    (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 USDA Non-Discrimination Statement, and the Equal Credit Opportunity 
Act. USDA's Non-Discrimination Statement is located at the following 
Web site: http://www.usda.gov/wps/portal/usda/usdahome?navtype=FT&navid=NON_DISCRIMINATION.
    (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 of 
this chapter. Lenders may contract for services but are ultimately 
responsible for underwriting, loan origination, loan servicing, and 
compliance with all Agency regulations. No person may act as, or work 
for, both a 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) Monitoring construction and operation;
    (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 of this chapter 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 issue guarantees for loans that are sound and have 
reasonable assurance of repayment. The Agency will not issue guarantees 
for 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 providing details of the 
project's impact on the environment and historic properties in 
accordance with 7 CFR part 1970, ``Environmental Policies and 
Procedures,'' (or successor regulation), when applicable; 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:

[[Page 36002]]

    (i) Provided the necessary environmental information to enable the 
Agency to undertake its environmental review process in accordance with 
7 CFR part 1970, ``Environmental Policies and Procedures,'' or 
successor regulation, 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 United States) 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 of 
this chapter. 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 of this chapter.


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 7 CFR part 1970, 
``Environmental Policies and Procedures,'' or successor regulation. 
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 the Equal Credit Opportunity Act (15 U.S.C. 1691 
et seq.), 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.

    Audits will be required of any public body, nonprofit corporation 
or Indian Tribe that receives a guaranteed loan that meets the 
thresholds established by 2 CFR part 200, subpart F. Any audit provided 
by a public body, nonprofit corporation, or Indian Tribe required by 
this paragraph will be considered adequate to meet the 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 of this chapter 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 United 
States 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 loan 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 or amendment thereof in accordance with Sec.  4279.173(b). 
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 outstanding servicing fee. For those loans closed 
on or after August 2, 2016, the lender or the Agency will issue an 
interest termination letter to the holder(s) establishing the 
termination date for interest accrual. The guarantee will not cover 
interest to any holder accruing after the greater of: 90 days from the 
date of the most recent delinquency effective date as reported by the 
lender or 30 days from the date of the interest termination letter.
    (2) To the lender, subject to the provisions of this part and 
subpart B of part 4287 of this chapter, the lesser of:
    (i) Any loss sustained by the lender on the guaranteed portion, 
including principal and interest (for loans closed on or after August 
2, 2016, the guarantee will not cover note interest to the lender 
accruing after 90 days from the most recent delinquency effective date) 
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. For loans closed on or after 
August 2, 2016, the guarantee will not cover note interest to the 
lender accruing after 90 days from the most recent delinquency 
effective date.
    (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

[[Page 36003]]

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. Sec.  4279.73-4279.74  [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. The lender may also obtain participation in the loan under its 
normal operating procedures; however, the lender must retain title to 
the notes if any of them are unguaranteed and retain the lender's 
interest in the collateral.
    (a) Single note system. The entire loan is evidenced by one note, 
and one Loan Note Guarantee is issued. The lender must retain title to 
the note, retain the lender's interest in the collateral, and retain 
the servicing responsibilities for the guaranteed loan. 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 an 
Assignment Guarantee Agreement. The lender must complete and execute 
the Assignment Guarantee Agreement and return it to the Agency for 
execution prior to holder execution. In order to validate authenticity, 
holders are encouraged to consult with the Agency. Additionally, a 
Certificate of Incumbency and Signature may be requested. The holder, 
with 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 entire 
guaranteed portion 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 Guarantee Agreement, 
the assignee shall succeed to all rights and obligations of the holder 
thereunder. Subsequent assignments require notice to the lender and 
Agency using any format, including that used by the Securities Industry 
and Financial Markets Association (formerly known as 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. The Agency will not 
acknowledge, approve, nor have any liability to any of the parties of 
this contract.
    (b) Multi-note system. Under this option, the lender may provide 
one note for the unguaranteed portion of the loan and no more than 10 
notes for the guaranteed portion. All promissory notes must reflect the 
same payment terms. The lender must retain its interest in the 
collateral and servicing responsibilities for the guaranteed loan. 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 multi-note 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.


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 lender's 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. The lender must accept an assignment 
without recourse from the holder upon repurchase. For those loans 
closed on or after August 2, 2016, the lender or the Agency will issue 
an interest termination letter to the holder(s) establishing the 
termination date for interest accrual if the default is not cured. The 
guarantee will not cover interest to any holder accruing after the 
greater of: 90 days from the date of the most recent delinquency 
effective date as reported by the lender or 30 days from the date of 
the interest termination letter. 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

[[Page 36004]]

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. 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. When the lender repurchases the guaranteed portion 
from the secondary market for servicing purposes, the lender must 
discontinue interest accrual if Federal or State regulators place the 
loan in non-accrual status if the default is not cured within 90 days. 
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 and becomes the holder, interest accrual on the loan will 
cease, and 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 those loans closed on 
or after August 2, 2016, the lender or the Agency will issue an 
interest termination letter to the holder(s) establishing the 
termination date for interest accrual. The guarantee will not cover 
interest to any holder accruing after the greater of: 90 days from the 
date of the most recent delinquency effective date as reported by the 
lender or 30 days from the date of the interest termination letter. 
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 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 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 the 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.


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 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

[[Page 36005]]

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) 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.

    In accordance with the Paperwork Reduction Act of 1995, the 
information collection requirements contained in this subpart have been 
submitted to the Office of Management and Budget (OMB) under OMB 
Control Number 0570-0069 for OMB approval.

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]
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.

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 and 
regulations referenced in this subpart may be obtained from any Agency 
office and from the USDA Rural Development Web site at http://www.rd.usda.gov/publications. 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 are applicable to 
this subpart.


Sec.  4279.103  Exception authority.

    Section 4279.15 applies to this subpart.


Sec.  4279.104  Appeals.

    Section 4279.16 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. A 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 or reside in the United States 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, Guam, the Commonwealth of the Northern 
Mariana Islands, and the Republic of the Marshall Islands are 
considered U.S. citizens. Individuals that reside in the United States 
after being legally admitted for permanent residence must provide a 
permanent green card as evidence of eligibility. Private entity 
borrowers must demonstrate, to the Agency's satisfaction, that loan 
funds will remain in the United States and the facility being financed 
will primarily create new or save existing jobs for rural U.S. 
residents.

[[Page 36006]]

    (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(y)(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(y)(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 United States.
    (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, Guam, the Commonwealth of the Northern Mariana Islands, 
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) 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 determined to be ``rural in character'' and are within: 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 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.
    (i) 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.
    (ii) Rural Development State Directors may also initiate a request 
to the Under Secretary to determine if an area is ``rural in 
character.'' A written recommendation should be sent to the 
Administrator, on behalf of the Under Secretary, that documents how the 
area meets the statutory requirements of paragraph (c)(7) of this 
section and discusses why the State Director 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 receipt of such a request, the 
Administrator will review the request for compliance with the ``rural 
in character'' provisions and make a recommendation to the Under 
Secretary. Provided a favorable determination is made, the Under 
Secretary will consult with the applicable Governor and request 
comments within 10 business days, unless gubernatorial comments were 
submitted with the request. A public notice will be published by the 
State Office in accordance with paragraph (c)(7)(i) of this section. 
There is no appeal process for requests made on the initiative of the 
State Director.
    (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) 
and Sec.  4279.108(a) and include, but are not limited to, the 
following:
    (a) Purchase and development of land, buildings, and associated 
infrastructure for commercial or industrial properties, including 
expansion or modernization.
    (b) Business acquisitions provided that jobs will be created or 
saved. A business acquisition is considered the acquisition of an 
entire business, not a partial stock acquisition in a business.
    (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.

[[Page 36007]]

    (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. The lender's analysis must 
document that, except for the refinancing of lines of credit, the debt 
being refinanced was for an eligible loan purpose under this subpart. 
Except as provided for in paragraph (j)(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, existing lender debt 
may not exceed 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 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 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 or the purchase of 
transferable cooperative stock in accordance with Sec.  4279.115(a); or 
the purchase of stock in a business by employees forming an Employee 
Stock Ownership Plan or worker cooperative in accordance with Sec.  
4279.115(c).
    (l) The purchase of preferred stock or similar equity issued by a 
cooperative organization or a fund that invests primarily in 
cooperative organizations in accordance with Sec.  4279.115(b).
    (m) Taxable corporate bonds when the bonds are fully amortizing 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 of this 
chapter. 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) farm loan programs 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 farm loan 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

[[Page 36008]]

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) Nursing homes and assisted living facilities where constant 
medical care is provided and available onsite to the residents. 
Independent living facilities are considered residential in nature and 
are not eligible in accordance with Sec.  4279.117(d).
    (v) Tourist and recreation facilities, including hotels, motels, 
bed and breakfast establishments, and resort trailer parks and 
campgrounds, except as prohibited under ineligible purposes in Sec.  
4279.117.
    (w) Pollution control and abatement.
    (x) Energy projects that are not eligible for the Rural Energy for 
America Program (REAP) (7 CFR part 4280, subpart B), unless sufficient 
funding is not available under REAP, and when the facility has been 
constructed according to plans and specifications and is producing at 
the quality and quantity projected in the application. This does not 
preclude the guarantee of joint REAP/B&I projects. 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 renewable biomass or biofuel 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.
    (y) 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 may be located in urban areas, as well as rural areas.
    (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. The Agency is choosing not to set a threshold for 
``significant'' but reserves the right to do so in periodic notices in 
the Federal Register.
    (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 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. The Agency may also guarantee loans for the 
purchase of transferable stock shares of any type of existing 
cooperative, which would primarily involve new or incoming members. 
Such stock may provide delivery or some form of participation rights 
and may only be traded among cooperative members. Paragraphs (5) 
through (7) of this section are not applicable for guaranteed loans for 
the purchase of transferable cooperative stock.
    (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.

[[Page 36009]]

    (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 documentation of the terms of the offering that includes 
compliance with State and Federal securities laws 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 that, 
if required, complies with State and Federal securities laws.
    (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 reinvestment 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 
prepaid in the event a cooperative or fund that issued the stock 
exercises an early redemption. If the cooperative enters into 
bankruptcy, to the extent the cooperative can redeem the preferred 
stock, the borrower is required to repay the loan from the redemption 
of the stock.
    (c) Employee ownership succession. The Agency may guarantee loans 
for conversions of businesses to either cooperatives or Employee Stock 
Ownership Plans (ESOP) within 5 years from the date of initial transfer 
of stock.
    (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 
or ESOP prior to making its first stock purchase loan.
    (5) If a cooperative is organized, the selling owner(s) become 
members with special control rights to protect their stake in the 
business while a succession plan is implemented. At the completion of 
the stock transfer, selling owners may retain their membership in the 
cooperative provided that their control rights are the same as all 
other members. Any special covenants that selling owners may have held 
must be extinguished upon completion of the transfer.
    (6) If an ESOP is organized for transferring ownership to 
employees, selling owner(s) may not retain ownership in the business 
after 5 years from the date of the initial transfer of stock.


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) Loan guarantees for Qualified Active Low Income Community 
Businesses (QALICB). (1) To be an eligible lender for a loan guarantee 
that involves NMTCs, the organization must meet the applicable 
eligibility criteria in Sec.  4279.29 as otherwise modified by 
paragraphs (a)(1)(i) and (ii) of this section.
    (i) 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.
    (ii) In order to take advantage of the requirement exemption in 
paragraph (a)(1)(i) 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.
    (2) The provisions of Sec.  4279.117(q) notwithstanding, a lender 
that is a Department of Treasury certified Community Development Entity 
(CDE) or subsidiary of a CDE (sub-CDE) may have an ownership interest 
in the borrower provided that each of the conditions specified in 
paragraphs (a)(2)(i) through (iv) of this section is met.
    (i) The lender does not have an ownership interest in the borrower 
prior to the guaranteed loan application.
    (ii) The lender does not take a controlling interest in the 
borrower.
    (iii) 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.
    (iv) In its guaranteed loan application, the lender provides an 
Agency-approved exit strategy when the NMTCs expire after the seventh 
year. The CDE's

[[Page 36010]]

(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 its 
equity interest, how this will be accomplished and the impact on the 
borrower.
    (3) Notwithstanding Sec.  4279.117(p), 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 of 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.
    (4) 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 in 
accordance with GAAP.
    (b) Loan guarantees for the leveraged lender. The provisions of 
Sec.  4279.117(s) notwithstanding, a sub-CDE may be an eligible 
borrower as specified in paragraph (b)(1) of this section. Paragraphs 
(b)(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 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 through a direct tracing method. 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 principal repayment by a co-
borrower, such as an owner or principal 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. 
Section 4279.116(a)(4) also applies when calculating tangible balance 
sheet equity.
    (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 application documentation 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.


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 or distribution or payment 
to a beneficiary of 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. As 
this type of transaction is not an arm's length transaction, 
reasonableness of the price paid will be based upon an appraisal. 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. Documented construction or 
installation costs may not include any profit or wages to a related 
person, and all work must be done at cost with no profit built into the 
cost. This paragraph does not apply to transfers of ownership for ESOPs 
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 in accordance with Sec.  4279.115.
    (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 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

[[Page 36011]]

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 trailer parks, housing 
development sites, apartments, duplexes, or other residential housing, 
except as authorized in Sec.  4279.113(d).
    (e) Owner-occupied housing, such as 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) Any project that the Agency determines creates a conflict of 
interest or an appearance thereof between any party related to the 
project.
    (q) 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. Any of the lender's directors, stockholders, or 
other owners that are officers, directors, stockholders, or other 
owners of the borrower must be recused from the decisionmaking process.
    (r) Other than 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.
    (s) Lending institutions, investment institutions, or insurance 
companies.
    (t) Charitable or fraternal organizations. Businesses that derive 
more than 10 percent of annual gross revenue from tax deductible 
charitable donations, based on historical financial statements required 
by Sec.  4279.161(b), are considered charitable organizations for the 
purpose of this paragraph. Fees for services rendered or that are 
otherwise ineligible for deduction under the Internal Revenue Code are 
not considered tax deductible charitable donations.
    (u) 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.
    (v) 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.
    (w) Any project that drains, dredges, fills, levels, or otherwise 
manipulates a wetland or engages in any activity that results in 
impairing or reducing the flow, circulation, or reach of water, except 
in the case of activity related to the maintenance of previously 
converted wetlands. This does not apply to loans for utility lines.


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. In addition to 
the borrower loan limit, there is a guarantor loan limit of $50 
million.
    (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. Priority points will be awarded in accordance 
with the criteria contained in Sec.  4279.166;
    (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).
    (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 cumulative 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,

[[Page 36012]]

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. Priority points will be awarded in accordance 
with the criteria contained in Sec.  4279.166; or
    (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 
percentage 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 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;
    (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 percentage 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 persons 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 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, published in a national or regional financial 
publication, 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 
fully 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

[[Page 36013]]

Conditional Commitment in accordance with Sec.  4279.173(b) 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.


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 
unless the basis for acceleration is monetary default.


Sec. 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 the 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. 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 in paragraphs 
(b)(1)(i) through (b)(1)(iv) and when in accordance with paragraph 
(b)(2), 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) Intangible assets cannot serve as primary collateral.
    (4) 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.
    (5) 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.

[[Page 36014]]

    (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 (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 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 
between related parties, which are not arm's length transactions, must 
be in accordance with GAAP and require evidence that the transaction 
was entered into at market terms. 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 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, unless waived by 
the Agency when the Agency determines that adequate justification 
exists to not require the entities to be co-borrowers. The capital/
equity requirement will apply to all borrowing 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/or corporate guarantees, in 
accordance with Sec.  4279.132, when feasible and legally permissible, 
are obtained; and
    (ii) All pro forma and historical financial statements indicate the 
business to be financed meets or exceeds the median quartile (as 
identified in the Risk Management Association's Annual Statement 
Studies or similar publication) for the current ratio, quick ratio, 
debt-to-worth ratio, 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, where legally permissible, unless the 
Agency grants an exception. The Agency may grant an exception for 
existing businesses 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

[[Page 36015]]

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.
    (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.

    Except for audited financial statements required by Sec.  4279.71, 
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) 
that do not have to be prepared in accordance with GAAP. However, if 
the loan amount exceeds $10 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. For 
collateral values under this threshold, lenders must follow their 
primary regulator's policies relating to appraisals and evaluations or, 
if the lender is not regulated, normal banking practices and generally 
accepted methods of determining value. Lenders must use the fair 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 
not acting in a reasonably prudent manner.
    (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 of both tangible and intangible assets, including values 
attributed to business valuation or as a going concern, must be 
reported individually/separately in the appraisal as values attributed 
to business valuation or as a going concern will be deducted from the 
reconciled fair market value of the hard assets for purposes of 
calculating collateral coverage.
    (c) Chattels with values under the $250,000 threshold must be 
evaluated in accordance with the lender's primary regulator's policies 
relating to appraisals and evaluations or, if the lender is not 
regulated, 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. 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, and cash 
flow from the existing facility is not sufficient to service the new 
debt. 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. 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. For borrowers other than individuals, a Dun and 
Bradstreet Universal Numbering System (DUNS) number is required, which 
can be obtained online at http://fedgov/dnd.com/webform. 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

[[Page 36016]]

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 
value(s) and the amount and source of equity to be contributed to the 
project;
    (v) A brief description of the project, products or 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, unless already submitted in accordance with Sec.  
4279.161(a)(3).
    (3) Environmental review documentation in accordance with 7 CFR 
part 1970, ``Environmental Policies and Procedures,'' or successor 
regulation.
    (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 prepared in line with GAAP standards and 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 2 
CFR part 415, subpart C, 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, and the technical review 
of the appraisals required by Sec.  4279.144(a).
    (14) A business plan or similar document that must include a 
description of the business and project; management experience; sources 
of capital; products, 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. A business plan may also 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, including any information needed to score the project in 
accordance with Sec.  4279.166.
    (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 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.

[[Page 36017]]

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 1970, ``Environmental 
Policies and Procedures,'' 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 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 (10 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, 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 (5 points).
    (3) Loan features. The priority score for loan features will be the 
total score for each of the following categories:
    (i) Lender will price the guaranteed loan at an interest rate equal 
to or less than the equivalent of the Wall Street Journal published 
Prime Rate plus 1.5 percent (5 points);
    (ii) Lender will price the guaranteed loan at an interest rate 
equal to or less than the equivalent of the Wall Street Journal 
published Prime Rate plus 1 percent (5 points);
    (iii) The Agency guaranteed loan is less than 60 percent of project 
cost (5 points);
    (iv) The Agency guaranteed loan is less than 50 percent of project 
cost (5 points);
    (v) The Agency guaranteed loan is less than 40 percent of project 
cost (5 points); and
    (vi) For loans not requesting an exception under Sec.  4279.119(b), 
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 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 (5 points);
    (D) Business that provides an additional market for existing local 
businesses (5 points);
    (E) Business that is locally owned and managed (5 points);
    (F) Business that will produce a natural resource value-added 
product (5 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(y)(5) (10 
points).
    (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 
(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 or similar document issued by the 
relevant building jurisdiction.
    (b) Issuing the Loan Note Guarantee prior to project completion. If 
the lender requests that the Loan Note Guarantee be issued prior to 
construction or

[[Page 36018]]

completion of a 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 construction or 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, who may be the project architect or engineer, with 
demonstrated experience relating to the project's industry, confirm 
that the budget is adequate for the planned development;
    (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; a 100 
percent performance/payment bond on the borrower's contractor; or a 
contract with an independent disbursement and monitoring firm where 
project construction and completion are guaranteed. A bonding agent 
must be listed on Treasury Circular 570; 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 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 payment. 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 or similar document 
issued by the relevant building jurisdiction.
    (c) Compliance with other Federal laws. Lenders must comply with 
other applicable Federal laws, including Equal Employment 
Opportunities, the Equal Credit Opportunity Act, the 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 
must comply with the Architectural Barriers Act Accessibility Standard. 
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 
7 CFR part 1970, ``Environmental Policies and Procedures,'' or 
successor regulation, 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. Any request for a

[[Page 36019]]

transfer of lender must be submitted in writing by the current lender, 
the proposed lender, and the borrower. The original lender must state 
the reason(s) it no longer desires to be the lender for the project.
    (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 substituted lender 
must execute a new part B of Form 4279-1, ``Application for Loan 
Guarantee;'' Form RD 4279-4, ``Lender's Agreement'' (unless a valid 
Lender's Agreement with the Agency already exists); and 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 
exists that was issued after August 2, 2016;
    (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 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 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, 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.
    (ix) When required, personal and/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 (or Agency-
approved amendment thereof) 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 the 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 in accordance with Sec.  4279.75(a); 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

[[Page 36020]]

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.

    In accordance with the Paperwork Reduction Act of 1995, the 
information collection requirements contained in this rule have been 
submitted to the Office of Management and Budget (OMB) under OMB 
Control Number 0570-0069 for OMB approval.

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.
4287.104-4287.105 [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. 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 and regulations 
referenced in this subpart may be obtained from any Agency office and 
from the USDA Rural Development Web site at http://www.rd.usda.gov/publications. 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. Sec.  4287.104-4287.105  [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 reasonably 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, 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, using either the LINC system or Form 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

[[Page 36021]]

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 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 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 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.  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 not adversely affect the potential for collection of the 
B&I loan through repayment or liquidation.
    (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 collateral 
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.  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.  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

[[Page 36022]]

or more ownership 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 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 fair market 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 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, unless a guarantor is being released from liability in 
accordance with paragraph (c) of this section. 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, and 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) Annual renewal fees. 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

[[Page 36023]]

all original loan requirements, including liabilities and servicing 
responsibilities.
    (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 merged with or 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) 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 the 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 the 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 reasonably prudent lender would take if it 
did not have a Loan Note Guarantee to protect the lender and Agency's 
mutual interest.


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 and 
Agency concurrence) 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;
    (v) Reorganization;
    (vi) Liquidation; and
    (vii) Changes in interest rates with the Agency's, the lender's, 
and any holder's approval. Any interest payments 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)). During a period of deferment or 
moratorium on the guaranteed loan, the lender's unguaranteed loan(s) 
and any stockholder loans must also be under deferment or moratorium. 
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 under the 
Bankruptcy Code.
    (d) For loans closed on or after August 2, 2016, 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 August 2, 2016, the lender or the 
Agency will issue an interest termination letter to the holder(s) 
establishing the termination date for interest accrual. The guarantee 
will not cover interest to any holder accruing after the greater of: 90 
days from the date of the most recent delinquency effective date as 
reported by the lender or 30 days from the date of the interest 
termination letter.
    (f) For repurchases of guaranteed loans, refer to Sec.  4279.78 of 
this chapter.


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

[[Page 36024]]

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 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 or 
after August 2, 2016, 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, not to exceed every 60 days;
    (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. For collateral values under this threshold, lenders 
must follow their primary regulator's policies relating to appraisals 
and evaluations or, if the lender is not regulated, normal banking 
practices and generally accepted methods of determining 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 reasonably 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 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

[[Page 36025]]

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 August 2, 
2016, 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 
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 1970, 
``Environmental Policies and Procedures.''
    (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. When the 
lender is conducting the liquidation and owns any or all 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 
will exceed 90 days. The estimated loss payment will be based on the 
liquidation value of the collateral.
    (1) Such estimate will be prepared and submitted by the lender on 
Form RD 449-30 using the basic formula as provided on the report, 
except that the liquidation appraisal value will be used in lieu of the 
amount received from the sale of collateral. 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.
    (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. If the lender holds 
all or a portion of the guaranteed loan, the Agency will not guarantee 
interest to the lender accruing after 90 days from the most recent 
delinquency effective date. The Agency will not guarantee interest to 
any holder accruing after the greater of: 90 days from the date of the 
most recent delinquency effective date as reported by the lender or 30 
days from the date of the interest termination letter. 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.

[[Page 36026]]

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 that 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 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 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 percentage of guarantee. Any 
collection of Federal debt made by the United State 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, including taking actions that result in greater 
recoveries and not taking actions that would not likely be cost-
effective. 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.
    (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 Form RD 1980-44 and forward it 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

[[Page 36027]]

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 a 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 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 Form RD 1980-44 and 
forward it 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 August 2, 2016:
    (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 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 August 2, 2016, 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 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 a 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. 
Liquidation expenses must be 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. Liquidation expenses must be deducted 
from collateral sale proceeds. The lender and Agency will share 
liquidation expenses equally. To accomplish this, the lender will 
deduct 50 percent of the liquidation expenses from the collateral sale 
proceeds.
    (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 and any 
relief from the stay has been obtained, the lender will conduct the 
liquidation in accordance with Sec.  4287.157.
    (5) Proceeds received from the partial sale of collateral during 
bankruptcy may be used by the lender to pay reasonable costs associated 
with the partial sale, such as freight, labor, and sales commissions. 
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.

    In accordance with the Paperwork Reduction Act of 1995, the 
information collection requirements contained in this rule have been 
submitted to the Office of Management and Budget (OMB) under OMB 
Control Number 0570-0069 for OMB approval.

    Dated: May 26, 2016.
Lisa Mensah,
Under Secretary, Rural Development.
[FR Doc. 2016-12945 Filed 6-2-16; 8:45 am]
 BILLING CODE 3410-XY-P