97-26363. Community Programs Guaranteed Loan Program  

  • [Federal Register Volume 62, Number 194 (Tuesday, October 7, 1997)]
    [Proposed Rules]
    [Pages 52277-52293]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 97-26363]
    
    
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    Proposed Rules
                                                    Federal Register
    ________________________________________________________________________
    
    This section of the FEDERAL REGISTER contains notices to the public of 
    the proposed issuance of rules and regulations. The purpose of these 
    notices is to give interested persons an opportunity to participate in 
    the rule making prior to the adoption of the final rules.
    
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    Federal Register / Vol. 62, No. 194 / Tuesday, October 7, 1997 / 
    Proposed Rules
    
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    DEPARTMENT OF AGRICULTURE
    
    Rural Housing Service
    Rural Business-Cooperative Service
    Rural Utilities Service
    Farm Service Agency
    
    7 CFR Part 1980
    
    RIN 0575-AC17
    
    
    Community Programs Guaranteed Loan Program
    
    AGENCIES: Rural Housing Service and Rural Utilities Service, USDA.
    
    ACTION: Proposed rule.
    
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    SUMMARY: The Agencies are proposing to issue a new Community Programs 
    (CP) guaranteed loan regulation (part 1980, subpart I) to replace the 
    current regulation for the program. This action is needed to streamline 
    and update the program. The intended effect is to simplify and clarify 
    the regulation; shift some responsibility for loan documentation and 
    analysis from the Government to the lenders; make the program more 
    responsive to the needs of lenders, local community public bodies, and 
    nonprofit corporations; and provide for smoother processing of 
    applications.
    
    DATES: Written comments must be received on or before December 8, 1997. 
    The comment period for information collections under the Paperwork 
    Reduction Act of 1995 continues through December 8, 1997.
    
    ADDRESSES: Submit written comments to the Chief, Regulations and 
    Paperwork Management Branch, Support Services Division, Rural 
    Development, U.S. Department of Agriculture, STOP 0743, 1400 
    Independence Ave. SW., Washington, D.C. 20250-0743. Also, comments may 
    be submitted via the Internet by addressing them to 
    comments@rus.usda.gov'' and must contain Community Programs 
    Guaranteed Loans in the subject line. All written comments will be 
    available for public inspection during regular work hours at the above 
    address.
    
    FOR FURTHER INFORMATION CONTACT: Mel Padgett, Community Programs Senior 
    Loan Specialist, Rural Housing Service, U.S. Department of Agriculture, 
    STOP 3222, 1400 Independence Ave. SW., Washington, D.C. 20250-3222, 
    telephone: (202) 720-1495.
    
    SUPPLEMENTARY INFORMATION:
    
    Classification
    
        This proposed rule has been determined to be not significant for 
    the purposes of Executive Order 12866 and, therefore, has not been 
    reviewed by OMB.
    
    Programs Affected
    
        The Catalog of Federal Domestic Assistance Programs impacted by 
    this action are 10.766, Community Facilities loans, and 10.760, Water 
    and Waste Disposal Systems for Rural Communities.
    
    Intergovernmental Review
    
        These loans are subject to the provisions of Executive Order 12372 
    which require intergovernmental consultation with State and local 
    officials. RHS conducts intergovernmental consultations for each loan 
    in the manner delineated in FmHA Instruction 1940-J.
    
    Civil Justice Reform
    
        The proposed rule has been reviewed under Executive Order 12778, 
    Civil Justice Reform. In accordance with this rule: (1) All State and 
    local laws and regulations that are in conflict with this rule will be 
    preempted; (2) no retroactive effect will be given to this rule; and 
    (3) administrative proceedings of the National Appeals Division (7 CFR 
    part 11) must be exhausted before bringing suit in court challenging 
    action taken under this rule.
    
    Environmental Impact Statement
    
        The action has been received in accordance with 7 CFR part 1940, 
    subpart G, ``Environmental Program.'' The Agencies have determined that 
    this action does not constitute a major Federal action significantly 
    affecting the quality of the human environment and, in accordance with 
    the National Environmental Policy Act of 1969, Pub. L. 91-190, an 
    Environmental Impact Statement is not required.
    
    Unfunded Mandates Reform Act
    
        Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
    L. 104-4, established requirements for Federal agencies to assess the 
    effects of their regulatory actions on State, local, and tribal 
    governments and the private sector. Under section 202 of the UMRA, the 
    Agencies generally must prepare a written statement, including a cost-
    benefit analysis, for proposed and final rules with ``Federal 
    mandates'' that may result in expenditures to State, local, or tribal 
    governments, in the aggregate, or to the private sector, of $100 
    million or more in any 1 year. When such a statement is needed for a 
    rule, section 205 of the UMRA generally requires the Agencies to 
    identify and consider a reasonable number of regulatory alternatives 
    and adopt the least costly, most cost-effective, or least burdensome 
    alternative that achieves the objectives of the rule.
        This rule contains no Federal mandates (under the regulatory 
    provisions of Title II of the UMRA) for State, local, and tribal 
    governments or the private sector. Therefore, this rule is not subject 
    to the requirements of sections 202 and 205 of the UMRA.
    
    National Performance Review
    
        This regulatory action is being taken as part of the National 
    Performance Review program to eliminate unnecessary regulations and 
    improve those that remain in force.
    
    Regulatory Flexibility Act
    
        This proposed rule has been reviewed with regard to the 
    requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). The 
    undersigned has determined and certified by signature of this document 
    that this rule will not have a significant economic impact on a 
    substantial number of small entities since this rulemaking action does 
    not involve a new or expanded program.
    
    Discussion of the Proposed Rule
    
        This action replaces the CP guaranteed loan program administered 
    under 7 CFR part 1980. Under the proposed rule, this guaranteed loan 
    program will be more flexible and place more reliance on lenders. There 
    are fewer specific requirements for lenders. The lender has added 
    responsibility for analyzing credit quality; for making, securing, and 
    servicing the loan; and for
    
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    monitoring construction. Application processing procedures will be more 
    efficient; less burdensome for borrowers, lenders, and Rural 
    Development staff; and will provide for more rapid decisions.
        The CP loan program was authorized by the Rural Development Act of 
    1972. The Agencies were authorized to guarantee CP loans under Pub. L. 
    101-161 enacted November 21, 1989. The loans are made by private 
    lenders to public bodies and nonprofit corporations for the purpose of 
    improving rural living standards and for other purposes that create 
    essential community facilities located in cities, towns, or 
    unincorporated areas of up to 50,000 population required by the Federal 
    Agriculture Improvement and Reform Act of 1996 (Pub. L. 104-127) and 
    water and waste disposal facilities located in cities or towns of up to 
    10,000 population. The previous statutory population limit for loans 
    for essential community facilities had been 20,000.
        Since 1990, more than 240 community programs projects, totaling 
    slightly more than $210 million, have received loans which were 
    guaranteed through the CP program.
        These loans can be made for a variety of purposes including health 
    care; public buildings and improvements; fire and rescue; easements; 
    purchase of equipment, machinery, and supplies; repair and 
    modernization; pollution control; transportation studies; and water and 
    waste disposal facilities. The rate and terms of the loan are 
    negotiated between the borrower and the lender.
        The Agencies propose to replace the regulation for the CP 
    guaranteed loan programs with a completely new regulation. This is a 
    high-priority effort to streamline the administration and operation of 
    the program, respond to the requests of users of the program, and 
    assist the field staff administering the program. The revised 
    regulation is shorter, simpler, clearer, and more logically organized. 
    The volume of regulatory material which a lender must review to 
    request, make, or service a CP guaranteed loan under the new regulation 
    is significantly less than the current regulation. Clarifications of 
    various items are also included, such as what is meant by the term 
    ``essential community facility.''
        Except for the increase in the population limit, the revisions are 
    not required by statute. However, the President, as well as the 
    Secretary of Agriculture, are committed to streamlining all Federal 
    regulations. This CP regulation streamlines our application procedures, 
    reduces loan application processing time by placing greater emphasis on 
    State resources, allows more management flexibility and decision-making 
    capacity at the State Office level, and expands eligible loan purposes 
    to include recreation.
        Recognizing the need to streamline the regulation, the Agencies 
    established two task forces. One was comprised of CP Program Chiefs, CP 
    Loan Specialists, and other field office personnel. The second was 
    comprised of lenders, secondary market representatives, and National 
    Office management. They examined changes that needed to be made in the 
    program to attract additional lenders and to make the program more user 
    friendly and customer oriented. Task force recommendations have been 
    incorporated into this regulation.
        Based on the recommendations of the task forces, the Agencies have 
    proposed these revisions to make the program more usable by lenders and 
    borrowers. Also, the Agencies recognize that changes are necessary to 
    make the program more effective in creating jobs and stimulating 
    economic activity (particularly in chronically low-income rural areas). 
    Under the proposed new CP regulation, the material that must be 
    submitted to, and reviewed by, the Agencies before approval of the 
    guarantee has been streamlined. Responsibilities for credit and 
    analysis and application processing tasks will be shifted from the 
    Agencies' National Offices to field offices and from the Agencies to 
    the lender, where feasible. Following is a discussion of some of the 
    most significant policy revisions included in the proposed new 
    regulation.
        To streamline the regulation, the Agencies have combined applicable 
    portions of the Direct Community Loan Programs (7 CFR part 1942, 
    subpart A), Fire and Rescue (7 CFR part 1942, subpart C), General 
    Guaranteed Regulation (7 CFR part 1980, subpart A), previously drafted 
    Guaranteed Community Programs Regulation, and parts of forms which were 
    not in regulations into the Guaranteed Community Programs Regulation (7 
    CFR part 1980, subpart I). The Agencies also divided the regulation 
    into general, processing, and servicing sections. These actions should 
    significantly reduce the amount of regulatory material that a lender 
    and a borrower must peruse to determine eligibility and complete the 
    application. This will also simplify making and servicing a CP loan.
        Additionally, the necessary information contained in the 
    preapplication package can be submitted simultaneously with the 
    application. The threshold for requiring audited financial statements 
    has been increased from $100,000 to $500,000 to reduce the reporting 
    burden on small organizations. Also, we have included recreation as 
    well as clarified telecommunications as eligible loan purposes.
        Under the revised regulations, the lender is responsible for legal 
    sufficiency. The lender will not only be able to negotiate interest 
    rates but will also be able to negotiate interest rate incremental 
    increases and caps for each loan. This will give the lender more 
    flexibility to fit the CP guaranteed loan program to its lending 
    policies and procedures. The lender does not have to be a local lender 
    provided it can demonstrate the ability to adequately service the loan. 
    This will permit an expansion of eligible lenders to include such 
    organizations as State bond banks, the Rural Utilities Cooperative 
    Finance Corporation, and Sallie Mae. All of these organizations have 
    expressed an interest in the CP guaranteed lending program in the past.
    
    Conclusion
    
        The Agencies believe the streamlining of the regulation for this 
    program will enhance the use of the program in improving the future 
    prosperity of rural residents through targeted investments that enhance 
    rural competitiveness, improve and diversify community services, and 
    enable rural residents to have a better quality of life. The proposed 
    revisions are consistent with Administration efforts to streamline 
    Government functions, improve efficiency and the effectiveness of 
    Government activities, and be more customer friendly. The changes 
    proposed will enable the Agencies to deliver a larger program with 
    fewer staff resources, simultaneously meet the objectives of the 
    National Performance Review regarding customer service, reduce 
    regulation, and streamline Agencies operations.
        The proposed changes will provide more flexibility for both lenders 
    and Agencies staff. Many errors will be reduced because the guidelines 
    and requirements are much clearer and items are more easily found in a 
    reduced and better-organized regulation. Lenders will be more 
    interested in using the program because the procedures are simpler and 
    more direct with significantly fewer cross references to other 
    regulations. The ultimate benefits to be realized are increased lending 
    activity resulting in a better-living standard for rural communities 
    with the infrastructure to attract new businesses
    
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    and the creation of more jobs in rural areas, particularly in those 
    areas that have experienced historical economic distress.
    
    Paperwork Reduction Act
    
        In accordance with the Paperwork Reduction Act of 1995, the 
    Agencies will seek Office of Management and Budget (OMB) approval of 
    the reporting and recordkeeping requirements contained in this 
    regulation. These reporting and recordkeeping requirements have been 
    previously approved under control numbers 0575-0024 and 0575-0137. We 
    have made the appropriate adjustments based upon the programs' 6-year 
    history.
        The loans are made by private lenders to public bodies and 
    nonprofit corporations for the purpose of improving rural living 
    standards and for other purposes that create employment opportunities 
    in rural areas. Eligibility for this program includes community 
    facilities located in cities, towns, or unincorporated areas of up to 
    50,000 population and water and waste disposal facilities located in 
    cities of up to 10,000 population.
        The information collected is used by the Agencies to manage, plan, 
    evaluate, and account for Government resources. The reports are 
    required to ensure the proper and judicious use of public funds.
        Estimate of Burden: Public reporting burden for this collection of 
    information is estimated to average 13.97 hours per response.
        Respondents: Nonprofit corporations and public bodies.
        Estimated Number of Respondents: 125.
        Estimated Number of Responses per Respondent: 10.12.
        Estimated Total Annual Burden on Respondents: 17,677.
        Copies of this information collection can be obtained from Barbara 
    Williams, Information Collection Coordinator, Regulations and Paperwork 
    Management Branch, Support Services Division, Rural Development, 
    telephone (202) 720-9734.
        Comments are invited on (a) whether the proposed collection of 
    information is necessary for the proper performance of the functions of 
    the Agencies, including whether the information will have practical 
    utility; (b) the accuracy of the Agencies' estimate of the burden of 
    the proposed collection of information, including the validity of the 
    methodology and assumptions used; (c) ways to enhance the quality, 
    utility, and clarity of the information to be collected; and (d) ways 
    to minimize the burden of the collection of information on those who 
    are to respond, including through the use of appropriate automated, 
    electronic, mechanical, or other technological collection techniques or 
    other forms of information technology.
        All responses to this notice will be summarized, included in the 
    request for OMB approval, and will become a matter of public record. 
    Comments should be submitted to the Desk Officer for Agriculture, 
    Office of Information and Regulatory Affairs, Office of Management and 
    Budget, Washington, D.C. 20503 and to Barbara Williams, Information 
    Collection Coordinator, Regulations and Paperwork Management Branch, 
    Support Services Division, Rural Housing Service, U.S. Department of 
    Agriculture, STOP 0743, 1400 Independence Avenue SW., Washington, D.C. 
    20250-0743. A comment to OMB is best assured of having its full effect 
    if OMB receives it within 30 days of publication of this rule.
    
    List of Subjects in 7 CFR Part 1980
    
        Loan programs--Agriculture, Loan programs--Business and industry--
    Rural development assistance, Loan programs--Community facilities--
    Rural development assistance, Loan programs--Housing and community 
    development.
        Accordingly, part 1980, chapter XVIII, title 7 of the Code of 
    Federal Regulations, is proposed to be amended as follows:
    
    PART 1980--GENERAL
    
        1. The authority citation for part 1980 is revised to read as 
    follows:
    
        Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C 1480.
    
    Subpart A--General
    
    
    Sec. 1980.47  [Amended]
    
        2. Section 1980.47(d) is removed.
    
    
    Sec. 1980.60  [Amended]
    
        3. Section 1980.60(a)(12) is amended by removing the words ``or 
    Form FmHA or its successor agency under Public Law 103-354 1980-10, 
    `Application for Loan and Guarantee' (Community Programs),'' in the 
    first sentence.
    
    Subpart I--Community Programs Guaranteed Loans
    
        4. Subpart I is revised to read as follows:
    Sec.
    1980.801  General.
    1980.802  Definitions.
    1980.803  Full faith and credit.
    1980.804  Conditions of Guarantee.
    1980.805--1980.807  [Reserved]
    1980.808  Access to lender's records.
    1980.809  Environmental requirements.
    1980.810--1980.811  [Reserved]
    1980.812  Inspections.
    1980.813  Appeals.
    1980.814--1980.816  [Reserved]
    1980.817  Exception authority.
    1980.818--1980.819  [Reserved]
    1980.820  Eligibility.
    1980.821  Priorities.
    1980.822--1980.823  [Reserved]
    1980.824  Eligible loan purposes.
    1980.825  Ineligible loan purposes.
    1980.826  [Reserved]
    1980.827  Eligible Lenders.
    1980.828  Transfer of lender or borrower prior to issuance of loan 
    note guarantee.
    1980.829  Fees and charges by lender.
    1980.830  Loan guarantee limitations.
    1980.831--1980.832  [Reserved]
    1980.833  Interest rates.
    1980.834  Terms of loan repayment.
    1980.835--1980.836  [Reserved]
    1980.837  Insurance and fidelity bonds.
    1980.838--1980.839  [Reserved]
    1980.840  Equal opportunity and Fair Housing Act requirements.
    1980.841  [Reserved]
    1980.842  Design and construction requirements.
    1980.843  Other Federal, State, and local requirements.
    1980.844--1980.846  [Reserved]
    1980.847  Economic feasibility requirements.
    1980.848  Security.
    1980.849--1980.851  [Reserved]
    1980.852  Processing.
    1980.853  Evaluation of application.
    1980.854--1980.858  [Reserved]
    1980.859  Review of requirements.
    1980.860--1980.862  [Reserved]
    1980.863  Conditions precedent to issuance of the Loan Note 
    Guarantee.
    1980.864  Issuance of Lender's Agreement, Loan Note Guarantee, and 
    Assignment Guarantee Agreement.
    1980.865  Lender's sale or assignment of the guaranteed portion of 
    loan.
    1980.866--1980.868  [Reserved]
    1980.869  Loan servicing.
    1980.870--1980.872  [Reserved]
    1980.873  Replacement of loss, theft, destruction, mutilation, or 
    defacement of Loan Note Guarantee or Assignment Guarantee Agreement.
    1980.874  [Reserved]
    1980.875  Defaults by borrower.
    1980.876--1980.877  [Reserved]
    1980.878  Repurchase of loan.
    1980.879  Transfer of lender after issuance of Loan Note Guarantee.
    1980.880  Interest rate changes after loan closing.
    1980.881  Liquidation.
    1980.882  [Reserved]
    1980.883  Protective advances.
    1980.884  Additional loans or advances.
    1980.885  Bankruptcy.
    1980.886--1980.887  [Reserved]
    1980.888  Transfers and assumptions.
    1980.889  Mergers.
    1980.890  Disposition of acquired property.
    1980.891--1980.893  [Reserved]
    1980.894  Determination and payment of loss.
    
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    1980.895  Future recovery.
    1980.896  Termination of Loan Note Guarantee.
    1980.897--1980.900  [Reserved]
    
    PART 1980--GENERAL
    
    Subpart I--Community Programs Guaranteed Loans
    
    
    Sec. 1980.801  General.
    
        (a) This subpart contains the regulations for Community Programs 
    loans guaranteed by the Agency and applies to lenders, holders, 
    borrowers, and other parties involved in making, guaranteeing, holding, 
    servicing, or liquidating such loans.
        (b) The purpose of the Community Programs guaranteed loan program 
    is to improve, develop, or finance essential community and water and 
    waste disposal facilities in rural areas. This purpose is achieved 
    through bolstering the existing private credit structure through the 
    guarantee of quality loans which will provide lasting community 
    benefits.
    
    
    Sec. 1980.802  Definitions.
    
        The following general definitions are applicable to the terms used 
    in this subpart:
        Agency. The Rural Housing Service and the Rural Utility Service 
    which are within the Rural Development mission area of the United 
    States Department of Agriculture (USDA) or their successor agencies 
    with authority delegated by the Secretary of Agriculture to administer 
    the Community Facilities and Water and Waste Disposal programs. This 
    also includes the Rural Development mission area.
        Application. An Agency prescribed form to request an Agency 
    guarantee. (Available in any Agency office.)
        Arm's length transaction. The sale, release, or disposition of 
    assets in which the title to the property passes to a ready, willing, 
    and able third party who is not affiliated with, or related to, and has 
    no security, monetary, or stockholder interest in the borrower or 
    transferor at the time of the transaction.
        Assignment Guarantee Agreement. The signed agreement among the 
    Agency, the lender, and the holder setting forth the terms and 
    conditions of an assignment of the guaranteed portion of a loan or any 
    part thereof. (This is an Agency prescribed form available in any 
    Agency office.)
        Borrower. The entity that borrows money from the lender.
        Collateral. Property pledged to secure the guaranteed loan.
        Community facility (essential). The term ``facility'' as used in 
    this subpart refers to both the physical structure financed and the 
    resulting service provided to rural residents. An essential community 
    facility must:
        (1) Be a function customarily provided by a local unit of 
    government;
        (2) Be a public improvement needed for the orderly development of a 
    rural community;
        (3) Not include private affairs or commercial or business 
    undertakings (except for limited authority for industrial parks);
        (4) Be the area of jurisdiction or operation for the public bodies 
    eligible to receive assistance or a similar local rural service area of 
    a not-for-profit corporation; and
        (5) Be located in a rural area.
        Conditional Commitment for Guarantee. The Agency's written 
    statement to the lender that the material submitted is approved subject 
    to the completion of all conditions and requirements set forth in the 
    agreement. (This is an Agency prescribed form available in any Agency 
    office.)
        Guaranteed loan. A loan made and serviced by a lender for which the 
    Agency and lender have entered into a Lender's Agreement and for which 
    the Agency has issued a Loan Note Guarantee.
        Holder. The person or entity (other than the lender) who holds all 
    or a part of the guaranteed portion of the loan with no servicing 
    responsibilities. When the lender assigns parts of the guaranteed 
    portion of the loan to an assignee, the assignee becomes a holder when 
    the Assignment Guarantee Agreement is signed by all parties.
        Immediate Family. Individuals who are closely related by blood or 
    by marriage, such as a spouse, significant other, parent, child, 
    brother, sister, aunt, uncle, grandparent, grandchild, niece, nephew, 
    or first cousin.
        Insurance. Fire, windstorm, lightning, hail, explosion, riot, civil 
    commotion, aircraft, vehicles, smoke, builder's risk, public liability, 
    property damage, flood or mudslide, worker's compensation, fidelity 
    bond, malpractice, or any similar insurance that is available and 
    needed to protect the security, or that is required by law.
        Joint financing. The situation occurring when two or more lenders 
    (or any combination of lenders and other financial sources) make 
    separate loans to supply the funds required by one borrower. For 
    example, such joint financing may consist of the Agency's financial 
    assistance with the Economic Development Administration, Department of 
    Housing and Urban Development (HUD), or other Federal and State 
    agencies, and private and quasi-public financial institutions.
        Lender. The person or organization making and responsible for 
    servicing the loan. The lender is also referred to in this subpart as 
    the applicant who is requesting a guarantee during the preapplication 
    and application stage of processing.
        Lender's Agreement. The signed agreement between the Agency and the 
    lender setting forth the lender's responsibilities when the Loan Note 
    Guarantee is issued. (This is an Agency prescribed form available in 
    any Agency office.)
        Loan classification system. The process by which loans are examined 
    and categorized by degree of potential for loss in the event of 
    default.
        Loan Note Guarantee. The signed commitment issued by the Agency 
    setting forth the terms and conditions of the guarantee of an 
    identified loan. (This is an Agency prescribed form available in any 
    Agency office.)
        Market value. The amount for which property would sell for its 
    highest and best use at a voluntary sale in an arm's length 
    transaction.
        Note. An evidence of debt. In those instances where the Agency 
    guarantees a bond issue, ``note'' shall also be construed to include a 
    bond or other evidence of indebtedness, as appropriate.
        Participation. Sale of an interest in a loan in which the lender 
    retains the note, collateral securing the note, and all responsibility 
    for loan servicing and liquidation.
        Principals of borrowers. The owners, officers, directors, entities, 
    and others directly involved in the operation and management of the 
    borrower.
        Problem loan. A loan which is not performing according to its terms 
    and conditions.
        Protective advances. Advances made by the lender for the purpose of 
    preserving and protecting the collateral where the debtor has failed to 
    and will not, or cannot, meet obligations to protect or preserve 
    collateral.
        Public body. A municipality, county, or other political subdivision 
    of a State, special purpose district, an Indian Tribe on a Federal or 
    State reservation, or another federally recognized Indian Tribe.
        Report of loss. An Agency prescribed form used by lenders when 
    reporting a loss under an Agency guarantee. (Available in any Agency 
    office.)
        Rural and rural area. Any area defined by the latest Decennial 
    Census of the United States except:
        (1) For water and waste disposal facilities--any city or town with 
    a population in excess of 10,000 inhabitants.
    
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        (2) For essential community facilities--any city, town, or 
    unincorporated area with a population in excess of 50,000 inhabitants, 
    and any urbanized area immediately adjacent to a city, town, or 
    unincorporated area that has a population of more than 50,000 
    inhabitants.
        Service area. The area reasonably expected to be served by the 
    facility being financed by the guaranteed loan.
        State. Any of the 50 States, the Commonwealth of Puerto Rico, the 
    Virgin Islands of the United States, Guam, American Samoa, Commonwealth 
    of the Northern Mariana Islands, Republic of the Marshall Islands, 
    Republic of Palau, and the Federated States of Micronesia.
        State Director. The Rural Development State Director or the staff 
    member who has been delegated authority to perform action on behalf of 
    the State Director.
        Substantive Change. Any change in the purpose of the loan or any 
    change in the financial condition of the borrower or the collateral 
    which would jeopardize the performance of the loan.
        Transfer and assumption. The conveyance by a debtor to an assuming 
    party of the assets, collateral, and liabilities of the loan in return 
    for the assuming party's binding promise to pay the outstanding debt.
        Water or waste disposal facility. A facility designed to provide, 
    enlarge, extend, or otherwise improve water, wastewater or sanitary 
    sewer, solid waste disposal, or storm wastewater services to rural 
    residents.
    
    
    Sec. 1980.803  Full faith and credit.
    
        The Loan Note Guarantee constitutes an obligation supported by the 
    full faith and credit of the United States and is not contestable 
    except for fraud or misrepresentation (including negligent 
    misrepresentation) of which the lender or holder has actual knowledge, 
    participates in, or condones. A note which provides for the payment of 
    interest on interest shall not be guaranteed and any Loan Note 
    Guarantee or Assignment Guarantee Agreement attached to, or relating 
    to, a note which provides for payment of interest on interest is void. 
    The guarantee and right to require purchase will be directly 
    enforceable by the holder notwithstanding any fraud, misrepresentation, 
    or any unenforceability of the Loan Note Guarantee. The Loan Note 
    Guarantee will not be enforceable by the lender to the extent any loss 
    is occasioned by violation of usury laws, negligent servicing, or 
    failure to obtain the required security regardless of the time at which 
    the Agency acquires knowledge of the foregoing. Any losses occasioned 
    will not be enforceable by the lender to the extent that loan funds are 
    used for purposes other than those specifically approved by the Agency 
    in its Conditional Commitment for Guarantee. Negligent servicing is 
    defined as the failure to perform those services which a reasonably 
    prudent lender would perform in servicing its own portfolio of loans 
    that are not guaranteed. The term includes not only the concept of a 
    failure to act but also not acting in a timely manner, acting in a 
    manner contrary to the manner in which a reasonably prudent lender 
    would act up to the time of loan maturity, or until a final loss is 
    paid. The Loan Note Guarantee or Assignment Guarantee Agreement in the 
    hands of a holder shall not cover interest accruing 90 days after the 
    holder has demanded repurchase by the lender, nor shall the Loan Note 
    Guarantee or Assignment Guarantee Agreement in the hands of a holder 
    cover interest accruing 90 days after the lender or Agency has 
    requested the holder to surrender the evidence of debt for repurchase.
    
    
    Sec. 1980.804  Conditions of Guarantee.
    
        A loan guarantee under this part will be evidenced by a Loan Note 
    Guarantee issued by the Agency. Each lender will also execute a 
    Lender's Agreement. The provisions of this subpart in effect at the 
    issuance of the Loan Note Guarantee and execution of the Lender's 
    Agreement will control the Loan Note Guarantee or Lender's Agreement.
        (a) The entire loan will be secured by the same security with equal 
    lien priority for the guaranteed and non-guaranteed portions of the 
    loan. The non-guaranteed portion of the loan will not be paid first nor 
    given any preference or priority over the guaranteed portion.
        (b) The lender will be responsible for servicing the entire loan 
    and will remain mortgagee or secured party of record notwithstanding 
    the fact that another party may hold a portion of the loan.
        (c) When a guaranteed portion of a loan is sold to a holder, the 
    holder shall have all rights of the lender under the Loan Note 
    Guarantee to the extent of the portion purchased. The lender will 
    remain bound by all the obligations under the Loan Note Guarantee, 
    Lender's Agreement, and Agency program regulations. 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. 
    If the Agency makes a payment to a holder, then the lender must 
    reimburse the Agency.
        (d) A lender will receive all payments of principal and interest on 
    the account of the entire loan and will promptly remit to each holder a 
    pro rata share, less any lender servicing fee.
        (e) The lender may retain all of the unguaranteed portion of the 
    loan or may sell part of the unguaranteed portion of the loan through 
    participation. However, the lender is required to retain 5 percent of 
    the loan amount from the unguaranteed portion in their portfolio.
    
    
    Secs. 1980.805--1980.807  [Reserved]
    
    
    Sec. 1980.808  Access to lender's records.
    
        Upon request by the Agency, the lender will permit representatives 
    of the Agency (or other agencies of the U.S. Department of Agriculture 
    authorized by that Department) to inspect and make copies of any of the 
    records of the lender pertaining to the guaranteed loans. Such 
    inspection and copying may be made during regular office hours of the 
    lender or at any other time the lender and the Agency agree upon.
    
    
    Sec. 1980.809  Environmental requirements.
    
        Requirements for an environmental review or mitigation actions are 
    contained in part 1940, subpart G, of this chapter. The lender must 
    assist the Agency to ensure that the borrower complies with any 
    mitigation measures required by the Agency's environmental review for 
    the purpose of avoiding or reducing the adverse environmental impact of 
    construction or operations of the facility financed with the guaranteed 
    loan.
    
    
    Secs. 1980.810--1980.811  [Reserved]
    
    
    Sec. 1980.812  Inspections.
    
        The lender will notify the Agency of any scheduled field 
    inspections during construction and after issuance of the Loan Note 
    Guarantee. The Agency may attend such field inspections. Any 
    inspections or review conducted by the Agency, including those with the 
    lender, are for the benefit of the Agency only and not for other 
    parties of interest. Agency inspections do not relieve any parties of 
    interest of their responsibilities to conduct necessary inspections.
    
    
    Sec. 1980.813  Appeals.
    
        Only the borrower, lender, or holder can appeal an Agency decision. 
    In cases where the Agency has denied or reduced the amount of final 
    loss payment to the lender, the adverse
    
    [[Page 52282]]
    
    decision may be appealed only by the lender. A decision by a lender 
    adverse to the interest of the borrower is not a decision by the 
    Agency, whether or not concurred in by the Agency. Appeals will be 
    handled in accordance with the regulations of the National Appeals 
    Division, U.S. Department of Agriculture, published at 7 CFR part 11.
    
    
    Secs. 1980.814--1980.816  [Reserved]
    
    
    Sec. 1980.817  Exception authority.
    
        The appropriate Agency Administrator may, in individual cases, make 
    an exception to any requirement or provision of this subpart or address 
    any omission of this subpart provided the Administrator determines that 
    application of the requirement, or provision, or failure to take action 
    in the case of an omission would adversely affect the Government's 
    financial interest. Requests for exceptions must be in writing by the 
    State Director.
    
    
    Secs. 980.818--1980.819  [Reserved]
    
    
    Sec. 1980.820  Eligibility.
    
        (a) The Agency must determine that the borrower is unable to obtain 
    the required credit without the loan guarantee from private, 
    commercial, or cooperative sources at reasonable rates and terms for 
    loans for similar purposes and period of time. This determination shall 
    become a part of the Agency casefile. The Agency should also determine 
    if an outstanding judgment obtained by the United States in a Federal 
    Court (other than the U.S. Tax Court) has been entered against the 
    borrower or if the borrower has an outstanding debt with any Federal 
    agency that is in a delinquent status. Such judgment or delinquency 
    shall cause the potential borrower to be ineligible to receive a loan 
    guarantee until the judgment is paid in full or otherwise satisfied or 
    the delinquency is cured.
        (b) Legal authority and responsibility. (1) Each borrower must 
    have, or will obtain, the legal authority necessary to construct, 
    operate, and maintain the proposed facility and services. They must 
    also must have legal authority for obtaining security and repaying the 
    proposed loan.
        (2) The borrower shall be responsible for operating, maintaining, 
    managing the facility and services, and providing for the continued 
    availability and use of the facility and services at reasonable rates 
    and terms.
        (i) These responsibilities must be exercised by the borrower even 
    though the facility may be operated, maintained, or managed by a third 
    party under contract, management agreement, or written lease.
        (ii) Leases may only be used when this is the only feasible way to 
    provide the service, is the customary practice to provide such service 
    in the State, and must provide for the borrower's management control of 
    the facility.
        (iii) Contracts, management agreements, or leases must not contain 
    options or other provisions for transfer of ownership.
        (3) The lender is responsible for reviewing any contracts, 
    management agreements, or leases to determine that they will not 
    adversely impact the borrower's repayment ability or the security value 
    of the guaranteed loan.
        (c) Borrower. (1) A public body such as a municipality, county, 
    district, authority, or other political subdivision of a State located 
    in a rural area.
        (2) An organization operated on a not-for-profit basis such as an 
    association, cooperative, or private corporation. Borrowers organized 
    under the general profit corporation laws may be eligible if they 
    actually will be operated on a not-for-profit basis under their 
    charter. Single member corporations or corporations owned or 
    substantially controlled by other corporations or associations are not 
    eligible organizations. Before a loan is made to a borrower other than 
    a public body, the articles of incorporation or the loan agreement will 
    include a condition similar to the following:
    
        If the corporation dissolves or ceases to perform the community 
    facility objectives and functions, the board of directors shall 
    distribute all business property and assets to one or more nonprofit 
    corporations or public bodies. This distribution must be approved by 
    75 percent of the users or members and must serve the public welfare 
    of the community. The assets may not be distributed to any members, 
    directors, stockholders, or others having financial or managerial 
    interest in the corporation. Nothing herein shall prohibit the 
    corporation from paying its debts.
    
        (3) A non-public body essential community facility borrower (other 
    than utility-type) must have significant ties with the local rural 
    community. Such ties are necessary to ensure to the greatest extent 
    possible that a facility under private control will carry out a public 
    purpose and continue to primarily serve rural areas. Ties may be 
    evidenced by items such as:
        (i) Association with, or controlled by, a local public body or 
    bodies or broadly based ownership and controlled by members of the 
    community.
        (ii) Substantial public funding through taxes, revenue bonds, or 
    other local government sources, or substantial voluntary community 
    funding such as would be obtained through a community-wide funding 
    campaign.
        (4) Indian tribes on Federal and State reservations and other 
    federally recognized Indian tribes.
        (d) Facilities must be located in rural areas, except:
        (1) For utility-type services such as water, sewer, natural gas, or 
    hydroelectric serving both rural and non-rural areas. In such cases, 
    Agency funds may be used to finance only that portion serving rural 
    areas, regardless of facility location.
        (2) Telecommunication projects. The part of the facility located in 
    a non-rural area must be necessary to provide the essential services to 
    rural areas.
        (e) All facilities financed under the provisions of this subpart 
    shall be for public use.
        (1) Facilities will be installed to serve any user within the 
    service area who desires service and can be feasibly and legally 
    served.
        (2) In no case will boundaries for the proposed service area be 
    chosen in such a way that any user or area will be excluded because of 
    race, color, religion, sex, marital status, age, handicap, or national 
    origin. This does not preclude:
        (i) Financing or constructing projects in phases when it is not 
    practical to finance or construct the entire project at one time, and
        (ii) Financing or constructing facilities where it is not 
    economically feasible to serve the entire area, provided economic 
    feasibility is determined on the basis of the entire system or 
    facilities and not by considering the cost of separate extensions to, 
    or parts thereof. Additionally, the borrower must publicly announce a 
    plan for extending service to areas not initially receiving service. 
    Also, the borrower must provide written notice to potential users 
    located in the areas not to be initially served.
        (3) The lender will determine that, when feasible and legally 
    possible, inequities within the proposed project's service area for the 
    same type service proposed (i.e., water or waste disposal) will be 
    remedied by the owner on, or before, completion of the project. 
    Inequities are defined as unjustified variations in availability, 
    adequacy, or quality of service. User rate schedules for portions of 
    existing systems or facilities that were developed under different 
    financing rates, terms, or conditions do not necessarily constitute 
    inequities.
    
    [[Page 52283]]
    
    Sec. 1980.821  Priorities.
    
        The Agency will publish a project selection guide for 
    administrative use. This guide will include items and conditions which 
    must be considered in selecting preapplications for further 
    development. Copies of this project selection guide will be available 
    in any Agency office. When ranking eligible preapplications for 
    consideration for limited funds, Agency officials must consider the 
    priority items met by each preapplication and the degree to which those 
    priorities are met. The project selection guide may change from time to 
    time but preapplication and application will be evaluated in accordance 
    with the project selection guide in existence at the time the 
    preapplication is submitted.
        (a) The preapplication (and supporting information submitted with 
    it) will be used to determine the proposed project's priority for 
    available funds.
        (b) Those lenders with eligible lower-scoring preapplications which 
    cannot be funded within the foreseeable future should be notified that 
    funds are not available and asked if they wish to have their 
    preapplication maintained in an active file for future consideration. 
    Lenders whose preapplications are found to be ineligible will be 
    advised.
        (c) After completing the review, the Agency will normally select 
    the preapplications with the highest scores for further processing. The 
    Agency may select a lower-scoring preapplication for processing when an 
    eligible, high-scoring preapplication:
        (1) Requires more than 25 percent of the State allocation, or
        (2) Exceeds the remaining State allocation for the fiscal year, or
        (3) Is incomplete in that the lender has not met the administrative 
    requirements to develop the loan. However the higher-scoring 
    preapplication must be notified and given an opportunity to revise and 
    resubmit their proposal. A written justification must be prepared and 
    placed in the project file when an eligible higher-rating 
    preapplication is not selected for further processing.
        (d) The Agency will notify the lender if an application should be 
    developed. Applications should be developed expeditiously following 
    good management practices. Applications that are not developed in a 
    reasonable period of time may be removed from the State's active file. 
    Lenders will be advised when such action is taken.
        (e) A cost overrun will receive consideration for funding before 
    others.
    
    
    Secs. 980.822--1980.823  [Reserved]
    
    
    Sec. 1980.824  Eligible loan purposes.
    
        (a) Funds may be used to construct, enlarge, extend, or otherwise 
    improve water or waste disposal and other essential community 
    facilities providing essential service primarily to rural residents and 
    rural businesses.
        (1) Water or waste disposal facilities include water, sanitary 
    sewerage, solid waste disposal, and storm wastewater facilities.
        (2) Essential community facilities include but are not limited to:
        (i) Fire, rescue, and public safety,
        (ii) Health services,
        (iii) Community, social, or cultural services,
        (iv) Transportation facilities such as streets, roads, and bridges,
        (v) Telecommunication equipment,
        (vi) Hydroelectric generating facilities and related connecting 
    systems and appurtenances only when not eligible for financing under 
    the authorities of the Rural Utilities Service. Funds may not be used 
    to finance other types of electrical generating or transmitting 
    facilities,
        (vii) Supplemental and supporting structures for other rural 
    electrification or telephone systems (including facilities such as 
    headquarters and office buildings, storage facilities, and maintenance 
    shops) only when not eligible for financing under the authorities of 
    the Rural Utilities Service,
        (viii) Natural gas distribution systems,
        (ix) Industrial park sites (but only to the extent of land 
    acquisition and necessary site preparation) including access ways and 
    utility extensions to and throughout the site. Funds may not be used in 
    connection with industrial parks to finance on-site utility systems or 
    business and industrial buildings, and
        (x) Recreational facilities.
        (3) Otherwise improve includes, but is not limited to, the 
    following:
        (i) The purchase of major equipment (such as solid waste collection 
    trucks, telecommunication equipment, and X-ray machines) which will in 
    themselves provide an essential service to rural residents;
        (ii) The purchase of existing facilities, when necessary, either to 
    improve or to prevent a loss of service; and
        (iii) Payment of tap fees and other utility connection charges as 
    provided in utility purchase contracts.
        (b) Funds also may be used:
        (1) To construct or relocate public buildings, roads, bridges, 
    fences, or utilities and to make other public improvements necessary to 
    the successful operation or protection of facilities authorized in 
    paragraphs (a)(1) and (a)(2) of this section.
        (2) To relocate private buildings, roads, bridges, fences, or 
    utilities, and other private improvements necessary to the successful 
    operation or protection of facilities authorized in paragraph (a) of 
    this section.
        (3) To pay the following expenses (but only when such expenses are 
    a necessary part of a loan to finance facilities authorized in 
    paragraphs (a), (b)(1), and (b)(2) of this section):
        (i) Reasonable fees and costs such as origination fee, loan 
    guarantee fee, legal, engineering, architectural, fiscal advisory, 
    recording, environmental impact analyses, archaeological surveys, 
    possible salvage or other mitigation measures, planning and 
    establishing or acquiring rights.
        (ii) Interest on loans until the facility is self-supporting, but 
    not for more than 2 years unless a longer period is approved by the 
    Agency; interest on loans secured by general obligation bonds until tax 
    revenues are available for payment, but not for more than 2 years 
    unless a longer period is approved by the National Office; and interest 
    on interim financing.
        (iii) Costs of acquiring interest in land; rights such as water 
    rights, leases, permits, rights-of-way; and other evidence of land or 
    water control necessary for development of the facility.
        (iv) Purchasing or renting equipment necessary to install, 
    maintain, extend, protect, operate, or utilize facilities.
        (v) Initial operating expenses for a period ordinarily not 
    exceeding 1 year when the borrower is unable to pay such expenses.
        (vi) Refinancing debts incurred by, or on behalf of, a community 
    when all of the following conditions exist:
        (A) The debts being refinanced are less than 50 percent of the 
    total loan,
        (B) The debts were incurred for the facility or service being 
    financed or any part thereof (such as interim financing, construction 
    expenses, etc.), and
        (C) Arrangements cannot be made with the creditors to extend or 
    modify the terms of the debts so that a sound basis will exist for 
    making a loan.
        (4) To pay obligations for construction incurred prior to filing a 
    preapplication and application with the Agency. Construction work 
    should not be started (and obligations for such work or materials 
    should not be incurred) before the Conditional Commitment for Guarantee 
    is issued. However, if there are compelling reasons for proceeding with 
    construction before the Conditional Commitment for Guarantee is issued, 
    lenders may request Agency
    
    [[Page 52284]]
    
    approval to pay such obligations. Such request must comply with the 
    following:
        (i) Provide conclusive evidence that the contract was entered into 
    without intent to circumvent the requirements of Agency regulations.
        (ii) Modify the outstanding contract to conform with the provisions 
    of this subpart. Where this is not possible, modifications will be made 
    to the extent practicable and, as a minimum, the contract must comply 
    with all State and local laws and regulations as well as statutory 
    requirements and executive orders related to the Agency financing. When 
    construction is complete and it is impracticable to modify the 
    contracts, the borrower and lender must provide the certification 
    required by paragraph (b)(5)(iii) of this section.
        (iii) Provide a certification by an engineer or architect that any 
    construction performed complies fully with the plans and 
    specifications.
        (iv) The borrower and the contractor must have complied with all 
    statutory and executive order requirements related to Agency financing 
    for construction already performed even though the requirements may not 
    have been included in the contract documents.
    
    
    Sec. 1980.825  Ineligible loan purposes.
    
        Loan funds may not be used to finance:
        (a) Properties to be used for commercial rental when the borrower 
    has no control over tenants and services offered except for industrial-
    site development,
        (b) Facilities primarily for the purpose of housing Federal or 
    State agencies,
        (c) Community antenna television services or facilities,
        (d) Telephone systems,
        (e) Facilities which are not modest in size, design, and cost,
        (f) Finder's and packager's fees,
        (g) Projects located within the Coastal Barriers Resource System 
    that do not qualify for an exception as defined in section 6 of the 
    Coastal Barriers Resource Act, Pub. L. 97-348 (available in any Agency 
    office),
        (h) New combined sanitary and storm water sewer facilities,
        (i) Projects located in a special flood or mudslide hazard area (as 
    designated by the Federal Insurance Administration (FIA) of the 
    Department of Housing and Urban Development) when it is not part of an 
    approved floodplain area management plan or flood insurance is not 
    available.
    
    
    Sec. 1980.826  [Reserved]
    
    
    Sec. 1980.827  Eligible lenders.
    
        (a) Eligible lenders (as defined in this section) may participate 
    in the loan guarantee program. These lenders must be subject to credit 
    examination and supervision by either an agency of the United States or 
    a State. A lender must have the capability to adequately service loans 
    for which a guarantee is requested. Eligible lenders are:
        (1) Any Federal or State chartered:
        (i) Bank, or
        (ii) Savings and loan association.
        (2) Any mortgage company that is a part of a bank holding company,
        (3) Bank for Cooperatives, National Rural Utilities Cooperative 
    Finance Corporation, Farm Credit Bank of the Federal Land Bank, or 
    other Farm Credit System institution with direct lending authority 
    authorized to make loans of the type guaranteed by this subpart,
        (4) An insurance company regulated by a State or National insurance 
    regulatory agency,
        (5) State Bond Banks and State Bond Pools, and
        (6) Other lenders that possess the legal powers necessary and 
    incidental to making and servicing guaranteed loans involving community 
    development-type projects. These lenders must also be subject to credit 
    examination and supervision by either an agency of the United States or 
    a State and provide documentation acceptable to the Agency that they 
    have the ability to service the loan. Lenders under this category must 
    be approved by the National Office prior to the issuance of the loan 
    guarantee.
        (b) When the lender's officers, stockholders, directors, or 
    partners (including their immediate families) or the borrower, its 
    officers, stockholders, directors, or partners (including their 
    immediate families) own, or have management responsibilities in each 
    other, the lender must disclose such business or ownership 
    relationships. The Agency shall determine if such relationships are 
    likely to result in a conflict of interest. This does not preclude 
    lender officials from being on the borrower's board of directors.
    
    
    Sec. 1980.828  Transfer of lenders or borrowers (prior to issuance of 
    Loan Note Guarantee)
    
        (a) Prior to issuance of the loan guarantee, the Agency may approve 
    the transfer of an outstanding Conditional Commitment for Guarantee 
    from the present lender to a new eligible lender, provided there are:
        (1) A letter from the former lender stating why they do not wish to 
    continue to be the lender for this project,
        (2) No substantive changes in ownership or control of the borrower,
        (3) No substantive changes in the borrower's written plan, scope of 
    work, or changes in the purpose or intent of the project,
        (4) No substantive changes in the loan agreement or Conditional 
    Commitment for Guarantee,
        (b) The substitute lender must execute a new application for loan 
    and guarantee (available in any Agency office).
        (c) If approved, the Agency will issue a letter of amendment to the 
    original Conditional Commitment for Guarantee reflecting the new lender 
    who will acknowledge acceptance of the offer in writing.
        (d) Once the Conditional Commitment for Guarantee is issued, the 
    Agency will not approve any substitution of borrowers including changes 
    in the form of the legal entity. Exceptions to a change in the legal 
    entity may be requested by Agency staff from the Agency's National 
    Office when the original borrower is replaced with substantially the 
    same individuals or officers with the same interest as originally 
    approved.
    
    
    Sec. 1980.829  Fees and charges by lender.
    
        (a) The lender may establish the charges and fees for the loan, 
    provided they do not exceed those charged other borrowers for similar 
    types of transactions. ``Similar types of transactions'' mean those 
    transactions involving the same type of loan which a non-guaranteed 
    loan borrower would be assessed charges and fees.
        (b) Late payment charges will not be covered by the Loan Note 
    Guarantee. Such charges may not be added to the principal and interest 
    due under any guaranteed note. Late payment charges may be made only 
    if:
        (1) They are routinely made by the lender in all types of loan 
    transactions.
        (2) Payment has not been received within the customary timeframe 
    allowed by the lender.
        (3) The lender agrees with the borrower, in writing, that the rate 
    or method of calculating the late payment charges will not be changed 
    to increase charges while the Loan Note Guarantee is in effect.
        (c) The guaranteed loan fee will be the applicable guarantee fee 
    rate multiplied by the principal loan amount multiplied by the percent 
    of guarantee. The one-time guarantee fee is paid when the Loan Note 
    Guarantee is issued.
        (1) The fee will be paid to the Agency by the lender and is 
    nonreturnable. The lender may pass the fee to the borrower.
        (2) The guarantee fee rates are available in any Agency office.
    
    [[Page 52285]]
    
    Sec. 1980.830  Loan guarantee limitations.
    
        The percentage of guarantee, up to the maximum allowed by this 
    section, is a matter for negotiation between the lender and the Agency.
        (a) The maximum allowable guarantee will be 90 percent.
        (b) The lender will retain a minimum of 5 percent of the total 
    guaranteed loan amount. The retained amount must be from the 
    unguaranteed portion of the loan and cannot be participated to another 
    lender.
    
    
    Secs. 1980.831-1980.832  [Reserved]
    
    
    Sec. 1980.833  Interest rates.
    
        (a) Rates will be negotiated between the lender and the borrower. 
    They may be either fixed or variable rates. Interest rates will be 
    those rates customarily charged borrowers in similar circumstances in 
    the ordinary course of business and are subject to Agency review and 
    approval.
        (b) A variable interest rate must be tied to a base rate published 
    periodically in a recognized national or regional financial publication 
    specifically agreed to by the lender and borrower. Such an agreement 
    must be documented in the borrower or lender loan agreement.
        (1) Interest rate caps and incremental adjustment limitations will 
    also be negotiated between the lender and the borrower. Notice of any 
    interest rate change proposed by the lender should allow a sufficient 
    time period for the borrower to obtain any required State or other 
    regulatory approval and to implement any user rate adjustments 
    necessary as a result of the interest rate change. The intervals 
    between interest rate adjustments will be specified in the loan 
    agreement (but not more often than quarterly).
        (2) The lender must incorporate within the variable rate note, the 
    provision for adjustment of payments coincident with an interest rate 
    adjustment. This will ensure the outstanding principal balance is 
    properly amortized within the prescribed loan maturity and eliminate 
    the possibility of a balloon payment at the end of the loan.
        (c) Any change in the interest rate between the date of issuance of 
    the Conditional Commitment for Guarantee and before the issuance of the 
    Loan Note Guarantee must be approved by the Agency. Approval of such 
    change will be shown on an amendment to the Conditional Commitment for 
    Guarantee.
        (d) It is permissible to have one interest rate on the guaranteed 
    portion of the loan and another interest rate on the unguaranteed 
    portion of the loan, provided the lender and borrower agree, and:
        (1) The rate on the unguaranteed portion does not exceed that 
    currently being charged on loans for similar purposes to borrowers 
    under similar circumstances; and,
        (2) The rate on the guaranteed portion of the loan will not exceed 
    the rate on the unguaranteed portion.
        (e) When multi-rates are used, the lender will provide the Agency 
    with the overall effective interest rate for the entire loan. Multi-
    rate loans may be either fixed, variable, or a combination of fixed and 
    variable. When a combination of fixed and variable interest rates are 
    used, the interest rate for the unguaranteed portion will not be lower 
    than the guaranteed portion of the loan.
    
    
    Sec. 1980.834  Terms of loan repayment.
    
        (a) Principal and interest on the loan will be due and payable as 
    provided in the note except, any interest accrued as the result of the 
    borrower's default on the guaranteed loan over and above that which 
    would have accrued at the note rate on the guaranteed loan will not be 
    guaranteed by the Agency. The lender will structure repayments as 
    established in the loan agreement between the lender and borrower. 
    Ordinarily, such installments will be scheduled for payment as agreed 
    upon by the lender and borrower on terms that reasonably ensure 
    repayment of the loan. However, the first installment to include a 
    repayment of principal may be scheduled for payment after the project 
    is operable and has begun to generate income. Such installment must be 
    due and payable within 3 years from the date of the note and at least 
    annually thereafter. Interest will be due at least annually from the 
    date of the note. Monthly payments will be required except for 
    borrowers with income limited to less frequent intervals.
        (b) The maximum time allowable for final maturity for a guaranteed 
    CP loan will be limited to the useful life of the facility, not to 
    exceed 40 years.
        (c) The principal balance should be properly amortized within the 
    prescribed loan maturity. Balloon payments at the end of the loan are 
    prohibited.
    
    
    Secs. 1980.835-1980.836  [Reserved]
    
    
    Sec. 1980.837  Insurance and fidelity bonds.
    
        The lender must provide evidence that the borrower has adequate 
    insurance and fidelity bond coverage by loan closing or start of 
    construction, whichever occurs first. Adequate coverage must be 
    maintained for the life of the loan and is subject to Agency review and 
    approval.
    
    
    Secs. 1980.838-1980.839  [Reserved]
    
    
    Sec. 1980.840  Equal opportunity and Fair Housing Act requirements.
    
        (a) The lender will comply with the requirements of title V of the 
    Equal Credit Opportunity Act (Pub. L. 93-495). See the Federal Reserve 
    Board Regulation, 12 CFR part 202.
        (b) Certain housing-related projects such as nursing homes, group 
    homes, or assisted-living facilities must comply with the requirements 
    of the Fair Housing Amendment Act of 1988 (Pub. L. 100-430). This 
    includes completion of an Affirmative Fair Housing Marketing Plan and 
    compliance with the Housing and Urban Development accessibility 
    guidelines except for areas open to the public which are covered by the 
    Americans with Disabilities Act (Pub. L. 101-336). The lender will 
    determine that the borrower has a valid plan in effect at all times.
    
    
    Sec. 1980.841  [Reserved]
    
    
    Sec. 1980.842  Design and construction requirements.
    
        The lender will provide the Agency with a written certification at 
    the end of construction that all funds were utilized for authorized 
    purposes. The borrower and the lender will authorize designs and plans 
    based upon the preliminary architectural and engineering reports 
    approved by the lender and concurred in by the Agency. The borrower 
    will take into consideration any lender or Agency comments when the 
    facility is being designed.
        (a) All project facilities must be designed utilizing accepted 
    architectural and engineering practices and must conform to applicable 
    Federal, State, and local codes and requirements. The lender must 
    ensure that the planned project will be completed within the available 
    funds and, once completed, will be suitable for the borrower's needs.
        (b) The lender will monitor the progress of construction and 
    undertake the reviews and inspections necessary to ensure that 
    construction proceeds in accordance with the approved plans, 
    specifications, and contract documents and that funds are used for 
    eligible project costs. The lender must expeditiously report any 
    problems in project development to the Agency.
        (c) For all construction contracts in excess of $10,000, the 
    contractor must comply with Executive Order 11246 entitled ``Equal 
    Employment Opportunity'' as amended by Executive Order 11375, and as 
    supplemented by
    
    [[Page 52286]]
    
    applicable Department of Labor regulations (41 CFR part 60). The 
    borrower and lender are responsible for ensuring that the contractor 
    complies with these requirements.
        (d) Community Facilities loans which involve the construction of, 
    or addition to, facilities that accommodate the public and commercial 
    facilities as defined by the Americans with Disabilities Act (Pub. L. 
    101-336) must comply with this Act. The lender and borrower are 
    responsible for compliance.
    
    
    Sec. 1980.843  Other Federal, State, and local requirements.
    
        In addition to the specific requirements of this subpart and 
    beginning on the date of issuance of the Loan Note Guarantee, proposals 
    for facilities financed in whole or in part with a loan guaranteed by 
    the Agency will be coordinated with all appropriate Federal, State, and 
    local agencies. Borrowers and lenders will be required to comply with 
    any Federal, State, or local laws or regulatory commission rules which 
    are in existence and which affect the project including, but not 
    limited to:
        (a) Organization and authority to design, construct, develop, 
    operate, and maintain the proposed facilities;
        (b) Borrowing money, giving security, and raising revenues for 
    repayment;
        (c) Land use zoning;
        (d) Health, safety, and sanitation standards; and
        (e) Protection of the environment and consumer affairs.
    
    
    Secs. 1980.844-1980.846  [Reserved]
    
    
    Sec. 1980.847  Economic feasibility requirements.
    
        All projects financed under the provisions of this section must be 
    based on taxes, assessments, revenues, fees, or other sources of 
    revenues in an amount sufficient to provide for facility operation and 
    maintenance, a reasonable reserve, and debt payment. Other sources of 
    revenue or guarantors are particularly important in considering the 
    feasibility of recreation-type loans. The lender is responsible for 
    determining the credit quality and economic feasibility of the proposed 
    loan and must address all elements of the credit quality in a written 
    financial feasibility analysis which includes adequacy of equity, cash 
    flow, security, history, and management capabilities. Financial 
    feasibility reports must take into consideration any interest rate 
    adjustment which may be instituted under the terms of the note.
        (a) The borrower may prepare the financial feasibility analysis 
    (suggested financial feasibility guidelines are available in any Agency 
    office) in the following instances:
        (1) Facilities primarily used for fire and rescue services;
        (2) Facilities that are not dependent on facility revenues for debt 
    payment;
        (3) Loans of less than $500,000; or
        (4) Projects in which the borrower has operated similar facilities 
    on a financially successful basis.
        (b) The borrower's consulting engineer may complete the financial 
    feasibility analysis for utility systems.
        (c) Financial feasibility reports for all other facilities must be 
    prepared by a qualified entity not having a direct interest in the 
    management of the facility. The lender may prepare the feasibility 
    study if qualified staff is available.
        (d) The Agency loan approval official may exempt the lender from 
    the requirement for an independent financial feasibility report (when 
    requested by the borrower and the lender) provided the approval 
    official determines that the financial feasibility analysis prepared by 
    the borrower fairly represents the financial feasibility of the 
    facility and the financial feasibility analysis contains an accurate 
    projection of the usage, revenues, and expenses of the facility.
        (e) When the lender or Agency has insufficient information to 
    determine the borrower's repayment ability, an independent feasibility 
    analysis will be required.
    
    
    Sec. 1980.848  Security.
    
        (a) The lender is responsible for obtaining and maintaining proper 
    and adequate security to protect the interest of the lender, the 
    holder, and the Government.
        (b) Security must be of such a nature that repayment of the loan is 
    reasonably ensured when considered with the integrity and ability of 
    project management, soundness of the project, and the borrower's 
    prospective earnings. The security may include, but is not limited to, 
    the following: General obligation bonds, revenue bonds, pledge of taxes 
    or assessments, assignment of facility revenue, land, easements, 
    rights-of-way, water rights, buildings, machinery, equipment, accounts 
    receivable, contracts, cash, or other accounts or assignments of leases 
    or leasehold interest.
        (c) All security must secure the entire loan. The lender will not 
    take separate security to secure only the unguaranteed portion of the 
    loan. The lender will not require compensating balances or certificates 
    of deposit as a means of eliminating the lender's exposure on the 
    unguaranteed portion of the loan.
        (d) For projects utilizing joint financing with the same security 
    to be shared, the Agency guaranteed loan will be secured by at least a 
    parity (equal) lien position.
    
    
    Secs. 1980.849--1980.851  [Reserved]
    
    
    Sec. 1980.852  Processing.
    
        (a) Preapplications. (1) The preapplication package may be 
    submitted alone or simultaneously with the application. The 
    preapplication package will contain:
        (i) An application for Federal assistance (available in any Agency 
    office).
        (ii) State intergovernmental or other type review comments and 
    recommendations for the borrower's project (clearinghouse comments, if 
    applicable).
        (iii) Supporting documentation necessary to make an eligibility 
    determination such as financial statements, audits, copies of 
    organizational documents, existing debt instruments, etc. The Agency 
    will advise lenders and borrowers on what documents are necessary. 
    Borrowers should not expend significant amounts of money or time 
    developing supporting documentation at the preapplication stage.
        (iv) Documentation of lender eligibility in accordance with 
    Sec. 1980.828.
        (2) The Agency will review each application for Federal assistance 
    along with other information that is deemed necessary to determine 
    eligibility and whether financing from commercial sources at reasonable 
    rates and terms is available without a guarantee.
        (3) If the project appears to be eligible, has sufficient priority, 
    is economically feasible, and loan guarantee authority is expected to 
    be available, the Agency will inform the lender and borrower, in 
    writing, and request a complete application. An environmental review 
    will be necessary, and no major commitment should be made by the lender 
    or borrower that could affect the consideration of alternatives.
        (b) Applications. Contents of application package.
        (1) Application for loan and guarantee (available in any Agency 
    office),
        (2) Proposed loan agreement,
        (3) Request for environmental information (available in any Agency 
    office),
        (4) Preliminary architectural or engineering report,
        (5) Cost estimates,
        (6) Appraisal reports (as appropriate),
    
    [[Page 52287]]
    
        (7) Credit reports,
        (8) Financial feasibility analysis and report, and
        (9) Any additional information required.
    
    
    Sec. 1980.853  3Evaluation of application.
    
        The Agency will evaluate the application and determine whether the 
    borrower is eligible, the proposed loan is for an eligible purpose, 
    there is reasonable assurance of repayment ability, sufficient 
    collateral and equity exists, the proposed loan complies with all 
    applicable statutes and regulations, and adequate funds are available. 
    If approved, the Agency will provide the lender and the borrower with 
    the Conditional Commitment for Guarantee, listing all conditions for 
    the guarantee. Applicable requirements will include the following:
        (a) Approved use of guaranteed loan funds (source and use of 
    funds),
        (b) Rates and terms of the loan,
        (c) Scheduling of payments,
        (d) Number of customers,
        (e) Security and lien priority requirements,
        (f) Appraisal requirements,
        (g) Insurance and bonding requirements,
        (h) Financial reporting requirements,
        (i) Equal opportunity and nondiscrimination requirements,
        (j) Environment or mitigation requirements,
        (k) Americans with Disabilities Act requirements,
        (l) By-laws and articles of incorporation change requirements, and
        (m) Other requirements necessary to protect the Government.
    
    
    Secs. 1980.854--1980.858  [Reserved]
    
    
    Sec. 1980.859  Review of requirements.
    
        (a) Immediately after reviewing the Agency's conditions and 
    requirements in the Conditional Commitment for Guarantee, the lender 
    and borrower must complete and sign the Acceptance of Conditions and 
    return a copy to the Agency. Notwithstanding the preceding sentence, if 
    certain conditions cannot be met, the lender and borrower may propose 
    alternate conditions for Agency consideration.
        (b) If the lender indicates in the Acceptance of Conditions that it 
    desires to obtain a Loan Note Guarantee and subsequently decides at any 
    time after receiving a Conditional Commitment for Guarantee that it no 
    longer wants a guarantee, the lender must immediately advise the 
    Agency.
    
    
    Secs. 1980.860--1980.862  [Reserved]
    
    
    Sec. 1980.863  Conditions precedent to issuance of the Loan Note 
    Guarantee.
    
        The Loan Note Guarantee will not be issued until:
        (a) The lender certifies that:
        (1) No major changes have been made in the lender's loan conditions 
    and requirements since the issuance of the Conditional Commitment for 
    Guarantee except those approved in the interim by the Agency in 
    writing.
        (2) All planned property acquisition has been completed and all 
    development has been substantially completed in accordance with plans 
    and specifications. All costs have not exceeded the amounts approved by 
    the lender and the Agency.
        (3) Required insurance is in effect.
        (4) Truth in lending requirements have been met.
        (5) All equal employment opportunity and Fair Housing Plan 
    requirements have been met.
        (6) The loan has been properly closed and the required security 
    instruments have been obtained on any after-acquired property that 
    cannot be covered initially under State statutory provisions.
        (7) The borrower has marketable title to the collateral then owned 
    by the borrower, subject to the instrument securing the loan to be 
    guaranteed and subject to any other exceptions approved, in writing, by 
    the Agency.
        (8) When required, the entire amount of the loan for working 
    capital has been disbursed except in cases where the Agency has 
    approved disbursement over an extended time.
        (9) All other requirements of the Conditional Commitment for 
    Guarantee have been met.
        (10) Lien priorities are consistent with requirements of the 
    Conditional Commitment for Guarantee.
        (11) The loan proceeds have been disbursed for purposes and in 
    amounts consistent with the Conditional Commitment for Guarantee and as 
    specified on the application for the guaranteed loan. A copy of a 
    detailed statement by the lender detailing the use of loan funds will 
    be attached to support this certification.
        (12) There has been no substantive adverse change in the borrower's 
    financial condition nor any other adverse change in the borrower during 
    the period of time from the Agency's issuance of the Conditional 
    Commitment for Guarantee to issuance of the Loan Note Guarantee. The 
    lender's certification must address all adverse changes of the borrower 
    and the guarantors. For purposes of this paragraph, the term borrower 
    includes any parent, affiliate, or subsidiary of the borrower.
        (13) All Federal, State, and local design and construction 
    requirements have been met.
        (14) The lender understands and will meet the requirements of 
    chapter 37 of title 31 of the United States Code.
        (15) The lender would not make the loan without an Agency 
    guarantee.
        (b) The lender has executed and delivered the Lender's Agreement 
    and closing report for the guaranteed loan along with the appropriate 
    guarantee fee.
        (c) The lender has advised the Agency of plans to sell or assign 
    any part of the loan as provided in the Lender's Agreement.
        (d) The lender agrees that once the Conditional Commitment for 
    Guarantee is issued and accepted by the lender and borrower, it shall 
    not be modified as to the scope of the project, overall facility 
    concept, project purpose, use of proceeds, or terms and conditions. 
    Only minor changes will be considered unless otherwise provided for in 
    this subpart.
        (e) Where applicable, the lender must certify that the borrower has 
    obtained:
        (1) A legal opinion relative to the title to rights-of-way and 
    easements. Lenders are responsible for ensuring that borrowers have 
    obtained valid, continuous, and adequate rights-of-way and easements 
    needed for the construction, operation, and maintenance of a facility.
        (2) A title report showing ownership of the land and all mortgages 
    or other lien defects, restrictions, or encumbrances, if any. It is the 
    responsibility of the lender to ensure that the borrower has obtained 
    and recorded such releases, consents, or subordinations to such 
    property rights from holders of outstanding liens or other instruments 
    as may be necessary for the construction, operation, and maintenance of 
    the facility and to provide the required security. For example, when a 
    site is for major structures for utility-type facilities (such as a 
    reservoir or pumping station) and the lender and borrower are able to 
    obtain only a right-of-way or easement on such a site rather than a fee 
    simple title, such a title report should be requested.
        (f) For loans exceeding $150,000, the lender has certified its 
    compliance with Public Law 101-121 (Anti-lobbying Act). Also, if any 
    funds have been, or will be, paid to any person for influencing or 
    attempting to influence an officer or employee of any agency, a Member 
    of Congress, an officer or
    
    [[Page 52288]]
    
    employee of Congress, or an employee of a Member of Congress in 
    connection with this commitment providing for the United States to 
    guarantee a loan, the lender shall completely disclose such lobbying 
    activities in accordance with 31 U.S.C. 1352.
        (g) If the Loan Note Guarantee cannot be issued before the 
    Conditional Commitment expires, the lender must submit a written 
    request for an extension of the expiration date. The lender must 
    document and certify to paragraph (a)(1), (a)(12), and (e) of this 
    section specifically identifying any modifications.
        (h) Coincident with, or immediately after, loan closing, the lender 
    will contact the Agency and provide those documents and certifications 
    required in this section. For loans to public bodies, lenders may 
    require an opinion from recognized bond counsel regarding the adequacy 
    of the preparation and issuance of the debt instruments. Only when the 
    Agency is satisfied that all conditions for the guarantee have been met 
    will the Loan Note Guarantee be executed.
    
    
    Sec. 1980.864  Issuance of Lender's Agreement, Loan Note Guarantee, and 
    Assignment Guarantee Agreement.
    
        (a) If the Agency finds that all requirements have been met, the 
    lender and the Agency will execute the Lender's Agreement. The original 
    will be retained by the Agency and a signed duplicate original will be 
    retained by the lender. A Lender's Agreement must be executed for all 
    loans to be guaranteed by the Agency.
        (b) Loan Note Guarantee. (1) Upon receipt of the executed Lender's 
    Agreement and after all requirements have been met, the Agency will 
    execute the Loan Note Guarantee. All originals of the Loan Note 
    Guarantee will be provided to the lender and attached to the note.
        (2) If the lender has selected the multi-note system, a Loan Note 
    Guarantee will be prepared and attached to each note the borrower 
    issues. All the notes will be listed on the Loan Note Guarantee. Not 
    more than ten notes will be issued for the guaranteed portion (unless 
    the Agency and borrower agree otherwise) and one note issued for the 
    unguaranteed portion.
        (c) In the event the lender assigns the guaranteed portion of the 
    loan to a holder, the lender, holder, and Agency will execute an Agency 
    prescribed Assignment Guarantee Agreement. The original of the 
    agreement will be provided to the holder with conformed copies to the 
    lender and the Agency. If the lender desires to assign a part of the 
    guaranteed loan to a holder, an Agency prescribed Assignment Guarantee 
    Agreement will be executed for each assigned portion.
        (d) If requested by the lender, the Agency will provide a 
    Certificate of Incumbency and signature and title of the Agency 
    official who executes the Agency prescribed Loan Note Guarantee, 
    Lender's Agreement, and Assignment Guarantee Agreement.
        (e) If the Agency determines that it cannot execute the Loan Note 
    Guarantee because all requirements have not been met, the lender will 
    have a reasonable period within which to satisfy the objections. If the 
    lender satisfies the objections within the time allowed, the guarantee 
    will be issued.
        (f) The lender will prepare and deliver a guaranteed loan closing 
    report for each loan to be guaranteed and guarantee fee to the Agency 
    which concurrently will deliver the Loan Note Guarantee.
    
    
    Sec. 1980.865  Lender's sale or assignment of guaranteed portion of 
    loan.
    
        The lender may retain all of the guaranteed loan. The lender must 
    not sell or participate any amount of the guaranteed or non-guaranteed 
    portion of the loan to the borrower or to members of the borrower's 
    immediate families, the borrower's officers, directors, stockholders, 
    other owners, or a subsidiary or affiliate. Disposition of the 
    guaranteed portion of a loan may not be made prior to full 
    disbursement, completion of construction, and acquisition without the 
    prior written approval of the Agency. If the lender desires to market 
    all or part of the guaranteed portion of the loan at, or subsequent to, 
    loan closing, such loan must not be in default.
        (a) Assignment. Any sale or assignment by the lender of the 
    guaranteed portion of the loan must be accomplished in accordance with 
    the conditions in the Lender's Agreement. Should the lender know at the 
    time the loan application is prepared that it plans to sell or assign 
    any part of the guaranteed portion, the lender will provide this 
    information with the application.
        (b) Participation. The lender may obtain participation in the loan 
    under its normal operating procedures.
        (c) Minimum retention. The lender is required to hold in its own 
    portfolio or retain a minimum of 5 percent of the total guaranteed loan 
    amount. This amount must be of the non-guaranteed portion of the loan 
    and cannot be participated to another. The lender may sell the 
    remaining amount of the non-guaranteed portion of the loan only through 
    participation.
    
    
    Secs. 1980.866--1980.868  [Reserved]
    
    
    Sec. 1980.869  Loan servicing.
    
        (a) The lender is responsible for servicing the entire loan in 
    accordance with the lender's loan agreement. The unguaranteed portion 
    of the loan will not be paid first nor given any preference or priority 
    over the guaranteed portion of the loan. The lender is responsible for 
    taking all servicing actions that a prudent lender would perform in 
    servicing their portfolio of loans that are not guaranteed. This 
    responsibility includes, but is not limited to, the collection of 
    payments; obtaining compliance with the covenants and provisions in the 
    note, loan agreement, security instrument, or any supplemental 
    agreements; obtaining and analyzing financial statements; verifying the 
    payment of taxes and insurance premiums; and maintaining liens on 
    collateral. The lender will notify the Agency of any violations of the 
    loan agreement with the borrower.
        (b) The lender will require, at a minimum, annual audited financial 
    statements which will be reviewed by the lender and a copy forwarded to 
    the Agency with a summary evaluation by the lender. The lender will 
    service delinquent loans in accordance with the lender's agreement The 
    Agency may waive the audit requirement for financial statements for 
    borrowers with gross annual income of less than $500,000.
        (c) The lender must report the outstanding principal and interest 
    balance on each guaranteed loan semi-annually.
        (d) The lender will inspect the collateral as often as necessary to 
    properly service the loan.
    
    
    Secs. 1980.870-1980.872  [Reserved]
    
    
    Sec. 1980.873  Replacement of loss, theft, destruction, mutilation, or 
    defacement of Loan Note Guarantee or Assignment Guarantee Agreement.
    
        (a) The Agency may issue a replacement Loan Note Guarantee or 
    Assignment Guarantee Agreement which may have been lost, stolen, 
    destroyed, mutilated, or defaced to the lender or holder upon receipt 
    of 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 will coordinate the activities of the 
    party who seeks the replacement documents and will submit the required 
    documents to the Agency for processing. The
    
    [[Page 52289]]
    
    requirements for replacement are as follows:
        (1) A certificate of loss properly notarized which includes:
        (i) Legal name and present address of either the lender or the 
    holder who is requesting the replacement forms,
        (ii) Legal name and address of the lender of record,
        (iii) Capacity of person certifying,
        (iv) Full identification of the Loan Note Guarantee or Assignment 
    Guarantee agreement including the name of the borrower, Agency case 
    number, date of the Loan Note Guarantee, Assignment Guarantee 
    Agreement, face amount of the evidence of debt purchased, date of 
    evidence of debt, present balance of the loan, percentages of guarantee 
    and, if Assignment Guarantee Agreement, the original named holder and 
    the percentage of the guaranteed portion of the loan assigned to that 
    holder. Any existing parts of the document to be replaced must be 
    attached to the certificate,
        (v) A full statement of circumstances of the loss, theft, or 
    destruction of the Loan Note Guarantee or Assignment Guarantee 
    Agreement, and
        (vi) The holder shall present evidence demonstrating current 
    ownership of the Loan Note Guarantee and Note or Assignment Guarantee 
    Agreement. If the present holder is not the same as the original 
    holder, a copy of the endorsement of each successive holder in the 
    chain of transfer from the initial holder to present holder must be 
    included. If copies of the endorsement cannot be obtained, best 
    available records of transfer must be presented to the Agency (e.g., 
    order confirmation, canceled checks, etc.).
        (2) An indemnity bond acceptable to the Agency shall accompany the 
    request for replacement except when the holder is the United States, a 
    Federal Reserve Bank, a Federal Government corporation, a State or 
    Territory, or the District of Columbia.
        (3) All indemnity bonds must be issued and payable to the United 
    States of America. The bond shall be in an amount not less than the 
    unpaid principal and interest. The bond shall hold the Government 
    harmless against any claim or demand which might arise or against any 
    damage, loss, costs, or expenses which might be sustained or incurred 
    by reasons of the loss or replacement of the instruments.
    
    
    Sec. 1980.874  [Reserved]
    
    
    Sec. 1980.875  Defaults by borrower.
    
        (a) The lender must notify the Agency when a borrower is 30 days 
    past due on a payment, has not met its responsibilities of providing 
    the required financial statements, or is otherwise in default. The 
    lender will continue to keep the Agency informed on a bimonthly basis 
    until such time as the loan is no longer in default. If a monetary 
    default exceeds 60 days, the lender will arrange a meeting with the 
    borrower to resolve the default. The lender must advise the Agency of 
    the meeting in the event an Agency representative wishes to attend. The 
    lender will provide a summary of the meeting and any decisions or 
    actions agreed upon.
        (b) In considering servicing options, the prospects for providing a 
    permanent cure without adversely affecting the risks to the Agency and 
    the lender must be the paramount objective. Temporary curative actions 
    (such as payment deferments or collateral subordination) must 
    strengthen the loan and be in the best financial interest of the lender 
    and the Agency. Some of these actions may require concurrence of the 
    holder.
        (c) If the loan was closed with the multi-note option, the lender 
    may need to possess all notes to take some servicing actions. In those 
    situations when the Agency is holder of some of the notes, the Agency 
    may endorse the notes back to the lender, provided a proper receipt is 
    received from the lender which defines the reason for the transfer. 
    Under no circumstances will the Agency endorse the original Loan Note 
    Guarantee to the lender.
    
    
    Secs. 1980.876-1980.877  [Reserved]
    
    
    Sec. 1980.878  Repurchase of loan.
    
        (a) The lender has the option to repurchase the loan from a holder 
    within 30 days of written demand from the holder when the borrower is 
    in default not less than 60 days on principal or interest. The 
    repurchase will be for an amount equal to the unpaid guaranteed portion 
    of principal and accrued interest less the lender's servicing fee. The 
    guarantee does not cover the note interest to the holder on the 
    guaranteed loan accruing after 90 days from the date of the demand 
    letter to the lender. The holder will concurrently send a copy of the 
    demand to the Agency. The lender will accept an assignment without 
    recourse from the holder upon repurchase. The lender is encouraged to 
    repurchase the loan to facilitate the accounting of funds, resolve the 
    problem, and permit the borrower to cure the default, where reasonable. 
    The lender will notify the holder and the Agency of their decision 
    within 30 days of receipt of demand from the holder.
        (b) Agency repurchase. (1) If the lender does not repurchase as 
    provided in paragraph (a) of this section, the Agency will purchase 
    from the holder the unpaid principal balance of the guaranteed portion 
    together with accrued interest to date of repurchase (less the lender's 
    servicing fee) within 30 days after written demand to the Agency. The 
    guarantee will not cover the note interest to the holder on the 
    guaranteed loan accruing after 90 days from the date of the original 
    demand letter. The lender shall not charge the Agency any servicing 
    fees nor are any such fees collectible from the Agency.
        (2) The holder's demand to the Agency must include a copy of the 
    written demand made upon the lender. The holder or duly authorized 
    agent must also include evidence of the right to require payment from 
    the Agency. Such evidence will consist of either the original of the 
    Loan Note Guarantee properly endorsed to the Agency or the original of 
    the Assignment Guarantee Agreement properly assigned to the Agency 
    without recourse including all rights, title, and interest in the loan. 
    The Agency will be subrogated to all rights of the holder. The holder 
    must include in the demand the amount due including unpaid principal, 
    unpaid interest to date of demand, and interest subsequently accruing 
    from the date of demand to the proposed payment date. Unless otherwise 
    agreed to by the Agency, such proposed payment will not be later than 
    30 days from the date of demand.
        (3) The lender must promptly provide the Agency with the 
    information necessary for the Agency's determination of the appropriate 
    amount due the holder upon the Agency's notification to the lender of 
    the holder's demand for payment. This information must be certified by 
    an authorized officer of the lender. Any discrepancy between the amount 
    claimed by the holder and the information submitted by the lender must 
    be resolved before payment will be approved. The Agency will notify 
    both parties and such conflict will suspend the running of the 30-day 
    payment requirement.
        (4) Any purchase by the Agency does not change, alter, or modify 
    any of the lender's obligations to the Agency arising from the loan or 
    guarantee nor does it waive any of the Agency's rights against the 
    lender. The Agency may set off against the lender all rights inuring to 
    the Agency as the holder of the instrument against the Agency's 
    obligation to the lender under the Loan Note Guarantee.
    
    [[Page 52290]]
    
        (c) When the lender determines that repurchase of the guaranteed 
    portion of the loan is necessary to service the loan, the holder must 
    sell the guaranteed portion to the lender for the unpaid principal and 
    interest balance (less the lender's servicing fee). The guarantee does 
    not cover interest accruing after 90 days from the date the lender's or 
    Agency's letter requesting the holder to tender its guaranteed portion. 
    The lender must not repurchase from the holder for arbitrage purposes 
    to further its own financial gain. Any repurchase must be made only 
    after the lender obtains the Agency written approval. If the lender 
    does not repurchase the portion from the holder, the Agency may, at its 
    option, purchase such guaranteed portion for servicing purposes.
    
    
    Sec. 1980.879  Transfer of lender after issuance of Loan Note 
    Guarantee.
    
        Subsequent to issuance of the Loan Note Guarantee, the Agency may, 
    under extraordinary circumstances, approve the transfer of an 
    outstanding Loan Note Guarantee from the present lender to another 
    eligible lender, provided the new lender agrees to assume all original 
    loan requirements including liabilities, servicing responsibilities, 
    and acquiring legal title to the unguaranteed portion of the loan.
    
    
    Sec. 1980.880  Interest rate changes after loan closing.
    
        (a) The borrower, lender, and holder (if any) may collectively 
    effect a permanent reduction in the interest rate on the guaranteed 
    loan at any time during the life of the loan on written agreement by 
    these parties. After such a permanent reduction, the Loan Note 
    Guarantee will only cover losses in interest at the reduced interest 
    rate. The Agency must be notified by the lender, in writing, within 10 
    calendar days of the change. When the Agency is a holder, it will 
    concur only when it is demonstrated that the change is more viable than 
    liquidation and that the Government's financial interests are not 
    adversely affected. Factors which will be considered in making such 
    determination are the Government's cost of borrowing money and the 
    project's enhancement of rural development. The monetary recovery must 
    be greater than the liquidation recovery, and a financial feasibility 
    analysis must show the project's continued viability.
        (1) Fixed rates cannot be changed to variable rates to reduce the 
    interest rate to the borrower unless the variable rate has a ceiling 
    which is less than the original fixed rate.
        (2) Variable rates can be changed to a lower fixed rate. In a final 
    loss settlement when qualifying rate changes are made with the required 
    written agreements and notification, the interest will be calculated 
    for the periods the given rates were in effect. The lender must 
    maintain records which adequately document the accrued interest 
    claimed.
        (3) The lender is responsible for the legal documentation of 
    interest rate changes. However, the lender may not issue a new note.
        (b) No increases in interest rates will be permitted under the loan 
    guarantee except the normal fluctuations in approved variable interest 
    rate loans.
    
    
    Sec. 1980.881  Liquidation.
    
        Liquidation will occur when the lender concludes that liquidation 
    of the guaranteed loan is necessary because of one or more defaults or 
    third party actions that the borrower cannot, or will not, cure or 
    eliminate within a reasonable period of time and the Agency concurs 
    with the lender; or the Agency, at any time, independently concludes 
    that liquidation is necessary. The lender, or the Agency (if it 
    liquidates) will proceed as expeditiously as possible, including giving 
    any notices or taking any legal actions required by the security 
    instruments.
        (a) If a lender has made a loan guaranteed by the Agency under 
    regulations in this subpart in effect prior to [the effective date of 
    the final rule] \1\, the lender has the option to liquidate the loan 
    under the provisions of this subpart in effect on [the effective date 
    of the final rule] or under the provisions in effect previous to that 
    date. The lender will notify the Agency in writing within 10 days after 
    its decision to liquidate, which regulatory provisions they choose to 
    use. The lender may not choose some provisions in effect on one date 
    and other provisions in effect on another date.
    ---------------------------------------------------------------------------
    
        \1\ See 7 CFR part 180, subpart I, contained in the 7 CFR, parts 
    1950 to 1999, edition revised as of January 1, 1997 and amended at 
    [Federal Register cites and dates to be inserted in final rule].
    ---------------------------------------------------------------------------
    
        (b) If a lender acquires title to property, the Agency may elect to 
    permit the lender the option of calculating the final loss settlement 
    using the net proceeds received at the time of the ultimate disposition 
    of such property. The lender must submit a written request within 15 
    days of acquiring title for this option to the Agency, and the Agency 
    must agree, in writing, prior to the lender submitting any request for 
    estimated loss payment.
        (c) The lender will (within 30 days after a decision to liquidate) 
    submit to the Agency, in writing, a proposed, detailed liquidation 
    plan. Upon approval by the Agency of the liquidation plan, the lender 
    will commence liquidation. When the Agency liquidates, reasonable 
    liquidation expenses will be assessed against the proceeds derived from 
    the sale of the collateral. The lender's liquidation plan must include, 
    but is not limited to, the following:
        (1) Such proof as the Agency requires to establish the lender's 
    ownership of the guaranteed loan notes and related security 
    instruments, a copy of the payment ledger or other documentation which 
    reflects the outstanding loan balance and accrued interest to date, and 
    the method of computing the interest;
        (2) A complete list of all collateral;
        (3) The recommended liquidation methods for making the maximum 
    collection possible on the indebtedness and the justification for such 
    methods, including the recommended action for acquiring and disposing 
    of all collateral;
        (4) Necessary steps for preservation of the collateral;
        (5) Copies of the borrower's latest available financial statements;
        (6) An itemized list of estimated liquidation expenses expected to 
    be incurred and justification for each expense;
        (7) A schedule to periodically report to the Agency on the progress 
    of the liquidation;
        (8) Estimated protective advance amounts with justification;
        (9) Proposed protective bid amounts on collateral to be sold at 
    auction and a breakdown on how the amounts were determined;
        (10) If a voluntary conveyance is considered, the proposed amount 
    to be credited to the guaranteed debt;
        (11) Legal opinions, as needed; and
        (12) If the outstanding balance of principal and interest is less 
    than $200,000, the lender will obtain an estimate of fair market and 
    potential liquidation value of the collateral. If the outstanding 
    balance of principal and interest is $200,000 or more, the lender will 
    obtain an independent appraisal report on all collateral securing the 
    loan which will reflect the fair market value and potential liquidation 
    value. The independent appraiser's fee will be shared equally by the 
    Agency and the lender.
        (d) If actions are necessary to immediately preserve and protect 
    the collateral, a partial liquidation plan may be submitted and when 
    approved, must
    
    [[Page 52291]]
    
    be followed by a complete liquidation plan prepared by the lender.
        (e) Disposition of collateral acquired by the lender must be 
    approved by the Agency.
        (1) There may be instances when the lender acquires the collateral 
    of a borrower where the cost of liquidation exceeds the potential 
    recovery value of the security. Whenever this occurs, the lender, with 
    the concurrence of the National Office, may abandon the collateral in 
    lieu of liquidation.
        (2) Sale of acquired collateral to the borrower, borrower's 
    stockholders or officers, or the lender or lender's stockholders or 
    officers requires the written concurrence of the Agency.
        (f) The Agency will exercise the option to liquidate only when 
    there is reason to believe the lender is not likely to initiate 
    liquidation efforts that will result in maximum recovery. When the 
    Agency liquidates, reasonable liquidation expenses will be assessed 
    against the proceeds derived from the sale of the collateral.
        (g) Final loss payments will be made within the 60 days required 
    but only after all collateral has been properly accounted for and 
    liquidation expenses are determined to be reasonable and within 
    approved limits. Any estimated loss payments made to the lender will be 
    credited against the final loss on the guaranteed loan. The amount of 
    an estimated loss payment must be credited as a deduction from the 
    principal balance of the loan.
    
    
    Sec. 1980.882  [Reserved]
    
    
    Sec. 1980.883  Protective advances.
    
        Protective advances constitute an indebtedness of the borrower to 
    the lender and must be secured by collateral to the same extent as 
    principal and interest. Protective advances include, but are not 
    limited to, advances made for taxes, annual assessments, ground rent 
    hazard, or flood insurance premiums affecting the collateral (including 
    any other expenses necessary to protect the collateral). Attorney fees 
    are not a protective advance.
        (a) The Agency must approve, in writing, all protective advances on 
    loans within their loan approval authority which exceed a total 
    cumulative advance amount of $500 to the same borrower. Protective 
    advances must be reasonable when associated with the value of the 
    collateral being preserved.
        (b) When considering protective advances, sound judgment must be 
    exercised in determining that the additional funds advanced will 
    actually preserve collateral interests and recovery is actually 
    enhanced by making the advance.
    
    
    Sec. 1980.884  Additional loans or advances.
    
        The lender will not make additional expenditures or new loans to 
    the borrower without first obtaining the written approval of the Agency 
    even though such expenditures or loans will not be guaranteed.
    
    
    Sec. 1980.885  Bankruptcy.
    
        (a) An Agency Report of Loss form will be used for calculating 
    estimated and final loss determinations.
        (b) Lender's are responsible to protect the guaranteed loan debt 
    and all the collateral securing it in bankruptcy proceedings. These 
    responsibilities include, but are not limited to, the following:
        (1) Filing a proof of claim, where necessary, and all necessary 
    papers and pleadings,
        (2) Attending and, where necessary, participating in meetings of 
    the creditors and all court proceedings,
        (3) Immediately seeking adequate protection of the collateral if 
    its collateral is subject to being used by the trustee in bankruptcy or 
    the debtor in possession.
        (4) Where appropriate, seeking involuntary conversion of a pending 
    Chapter 11 case to a liquidation proceeding or seeking dismissal of the 
    proceedings, and
        (5) Keeping the Agency adequately and regularly informed, in 
    writing, of all aspects of the proceedings.
        (c) In a Chapter 9 or Chapter 11 reorganization, obtaining an 
    independent appraisal of the collateral if the Agency believes an 
    independent appraisal is necessary, the Agency and the lender will 
    share the appraisal fee equally.
        (d) Only expenses of Chapter 11 reorganizations, or Chapter 11 or 
    Chapter 7 liquidations (unless the liquidation is by the lender) 
    authorized by the court may be deducted from the collateral proceeds.
        (e) The Agency or the lender, with the approval of the Agency, may 
    initiate the repurchase of the unpaid guaranteed portion of the loan 
    from the holder. If the lender is the holder, an estimated loss payment 
    may be filed at the initiation of a Chapter 7 proceeding or after a 
    Chapter 11 proceeding becomes a liquidation proceeding. On loans in 
    bankruptcy, any loss payment must be approved by the Agency.
        (f) The Agency must approve, in advance and in writing, the 
    lender's estimated liquidation expenses of collateral in liquidation 
    bankruptcy. These expenses must be reasonable and customary and not 
    include in-house expenses of the lender.
    
    
    Secs. 1980.886-1980.887  [Reserved]
    
    
    Sec. 1980.888  Transfers and assumptions.
    
        (a) The Agency will approve in writing transfers and assumptions of 
    loans to transferees who will continue the original purpose of the 
    guaranteed loan.
        (1) When the transaction is to a member of the borrower's 
    organization, it will be at a price which will not result in a loss to 
    the lender.
        (2) Transfers to eligible borrowers will receive preference over 
    transfers to ineligible borrowers if recovery to the lender from the 
    sale price is not less than it would be if the transfer was to an 
    ineligible borrower.
        (3) The present borrower is unable or unwilling to accomplish the 
    objectives of the guaranteed loan, and the transfer will be to the 
    lender's and Agency's advantage.
        (4) The transferee will assume an amount at least equal to either 
    the present market value or the debt, whichever is less. The percentage 
    of the Agency's guarantee will be based on the amount assumed.
        (5) The lender concurs in the plans for disposition of funds in the 
    transferor's debt service, reserve, and operation and maintenance 
    account.
        (b) Transfers to eligible borrower.
        (1) The total indebtedness may be transferred to an eligible 
    borrower on the same terms.
        (2) The total indebtedness may be transferred to another eligible 
    borrower on different terms not to exceed those terms for which an 
    initial guaranteed loan can be made.
        (3) Less than the total indebtedness may be transferred to another 
    eligible borrower on the same or different terms.
        (4) A guaranteed loan for which the transferee is eligible may be 
    made in connection with a transfer subject to the policies and 
    procedures governing the kind of loan being made.
        (5) If the transferor is to receive a payment for the equity, the 
    total debt must be assumed.
        (c) Transfers to ineligible borrowers are considered only when 
    needed as a method for servicing problem cases when an eligible 
    transferee is not available. Transfers should not be considered as a 
    means by which members can obtain equity or as a method of providing a 
    source of easy credit for purchasers. Transfers are as follows:
        (1) All transfers to ineligible borrowers will include a one-time 
    nonrefundable transfer fee. Transfer fees will be collected, and 
    payments applied, in accordance with paragraph (d) of this section.
    
    [[Page 52292]]
    
        (2) For all loans covered by this subpart, the Agency may approve a 
    transfer of indebtedness to, and assumption of, a loan by a transferee 
    who does not meet the eligibility requirements for the kind of loan 
    being assumed when the ineligible borrower will:
        (i) Make a significant downpayment, and
        (ii) Agree to pay the remaining balance within not more than 15 
    years. Installments will be at least equal to the amount amortized over 
    a period not greater than the remaining life of the debt being 
    transferred, and the balance will be due the fifteenth year.
        (3) Interest rates to ineligible transferees will be the rate 
    specified in the note of the transferor or the rates customarily 
    charged borrowers in similar circumstances in the ordinary course of 
    business and are subject to Agency review and approval. The rates may 
    be either fixed or variable.
        (i) Transferees must have the ability to repay the debt according 
    to the Assumption Agreement and must have the legal authority to enter 
    into the contract. The transferee will submit a current balance sheet. 
    The lender will obtain and analyze the credit history of the 
    transferee. In all transfers, consideration will be given to obtaining 
    individual liability agreements from members of the transferee 
    organization.
        (ii) The transferor may receive equity payments when the full 
    amount of the debt is assumed. However, equity payments will not be 
    made on more favorable terms than those on which the balance of the 
    debt will be paid.
        (d) Transfer fees are a one-time nonrefundable cost to be collected 
    by the lender at the time of application or proposal.
        (1) The transfer fees will be a standard fee plus the cost of the 
    appraisal.
        (2) The lender will collect and submit the fee to the Agency.
        (3) The Agency's National Office may waive the transfer fee if it 
    determines that such waiver is in the best interest of the Agency.
        (e) Processing transfers and assumptions. (1) In any transfer and 
    assumption case, the transferor (including any guarantors) may be 
    released from liability by the lender only with prior Agency written 
    concurrence and only when the value of the collateral being transferred 
    is at least equal to the amount of the loan, or part of the loan, being 
    assumed. If the transfer is for less than the entire debt:
        (i) The Agency must determine that the transferor and any 
    guarantors have no reasonable debt-paying ability considering their 
    assets and income at the time of transfer, and
        (ii) The lender must certify that the transferor has cooperated in 
    good faith, used due diligence to maintain the collateral against loss, 
    and has otherwise fulfilled all of the regulations of this subpart to 
    the best of the borrower's ability.
        (2) The lender will make, in all cases, a complete credit analysis 
    to determine viability of the project (subject to the Agency review and 
    approval) including any requirement for deposits in an escrow account 
    as security to meet the determined equity requirements for the project.
        (3) The lender will issue a statement that the transaction can be 
    properly transferred and the conveyance instruments will be filed, 
    registered, or recorded as appropriate and legally permissible.
        (4) The assumption will be made on the lender's form of Assumption 
    Agreement and will contain the Agency case number of the transferor and 
    transferee.
        (5) Loan terms cannot be changed by the Assumption Agreement unless 
    previously approved in writing by the Agency with the concurrence of 
    any holder and the transferor (including guarantors) if they have not 
    been released from personal liability. Any new loan terms cannot exceed 
    those authorized in this subpart. The lender's request will be 
    supported by:
        (i) An explanation of the reasons for the proposed change in the 
    loan terms.
        (ii) Certification that the lien position securing the guaranteed 
    loan will be maintained or improved, proper hazard insurance will be 
    continued in effect, and all applicable Truth in Lending requirements 
    will be met.
        (6) In the case of a transfer and assumption, it is the lender's 
    responsibility to see that all such transfers and assumptions will be 
    noted on all originals of the Loan Note Guarantee. The lender will 
    provide the Agency a copy of the Transfer and Assumption Agreement.
        (7) If a loss should occur upon a complete transfer of assets and 
    assumption for less than the full amount of the debt and the 
    transferor-debtor (including personal guarantor) is released from 
    personal liability (as provided in paragraph (e) of this section), the 
    lender (if holding the guaranteed portion) may file an estimated Report 
    of Loss to recover their pro rata share of the actual loss at that 
    time. Approved protective advances and accrued interest made during the 
    arrangement of a transfer and assumption, if not assumed by the 
    transferee, will be entered on the estimated Report of Loss.
    
    
    Sec. 1980.889  Mergers.
    
        (a) The Agency may approve mergers or consolidations (referred to 
    in this section as ``mergers'') when the resulting organization will be 
    eligible for an Agency guaranteed loan and assumes all the liabilities 
    and acquires all the assets of the merged borrower. Mergers may be 
    approved when:
        (1) The merger is in the best interest of the Government and the 
    merging borrower.
        (2) The resulting borrower can meet all required conditions as set 
    forth in specific loan note agreements.
        (3) All property can be legally transferred to the resulting 
    borrower.
        (b) Distinguishing mergers from transfers and assumptions. Mergers 
    occur when one corporation combines with another corporation in such a 
    way that the first corporation ceases to exist as a separate entity 
    while the other continues. In a consolidation, two or more corporations 
    combine to form a new, consolidated corporation with the original 
    corporations ceasing to exist. Such transactions must be distinguished 
    from transfers and assumptions in which a transferor will not 
    necessarily go out of existence, and the transferee will not always 
    take all the transferor's assets, nor assume all the transferor's 
    liabilities.
    
    
    Sec. 1980.890  Disposition of acquired property.
    
        (a) When the lender acquires title to the collateral and the final 
    loss claim is not paid until final disposition, the lender must proceed 
    as quickly as possible to develop a plan to fully protect the 
    collateral and the lender must dispose of the collateral without delay.
        (b) Any collateral accepted by the lender must not be titled in the 
    Agency's name in whole or in part. The Agency's position is that of a 
    guarantor, relating to losses.
        (c) After acquiring the collateral the lender must protect the 
    collateral from deterioration (weather, vandalism, etc.). Hazard 
    insurance in an amount necessary to cover the fair market value of the 
    collateral must be maintained.
        (d) The lender will prepare and submit to the Agency a plan on the 
    best method of sale, keeping in mind any prospective purchasers. 
    Concurrence or non-concurrence of the plan will be made in writing to 
    the lender. If an existing liquidation plan addressed the disposition 
    of acquired property, no further review is required unless modification 
    of the plan is needed.
    
    [[Page 52293]]
    
        (e) Methods of liquidation.
        (1) Direct sale by lender.
        (2) Use of commercial broker.
        (3) Public auction.
        (f) Abandonment of the collateral. (1) The primary purpose of 
    collateral is to afford a net return on the loan balance. However, 
    there will be times when converting the collateral to cash would result 
    in a loss.
        (2) Anytime there is a case when the conversion of collateral to 
    cash can reasonably be expected to result in a negative net recovery 
    amount, abandonment of the collateral should be considered.
    
    
    Secs. 1980.891-1980.893  [Reserved]
    
    
    Sec. 1980.894  Determination and payment of loss.
    
        In all liquidation cases, final settlement will be made with the 
    lender after the collateral is liquidated. The Agency will have the 
    right to recover losses paid under the guarantee from any party liable.
        (a) If the lender takes title to collateral any loss will be based 
    on the collateral value at the time the lender obtains title.
        (b) The Report of Loss form will be used for calculations of all 
    estimated and final loss determinations. Estimated loss payments may 
    only be approved after the lender has submitted a liquidation plan 
    approved by the Agency.
        (c) When the lender is conducting the liquidation and owns any of 
    the guaranteed portion of the loan, it may request an estimated loss 
    payment by submitting an estimate of loss that will occur in connection 
    with liquidation of the loan. An estimated loss payment may be approved 
    after the Agency has approved the liquidation plan.
        (1) The estimate will be prepared and submitted by the lender on 
    the Report of Loss form using the basic formula as provided on the 
    report except that appraisal value will be used in lieu of amount 
    received from sale of collateral.
        (2) The estimated loss payment shall be applied as of the date of 
    such payment. The total amount of the loss payment remitted by the 
    Agency will be applied by the lender on the guaranteed portion of the 
    loan debt. Such application does not release the borrower from 
    liability. At the time of final loss settlement, the lender may notify 
    the borrower that the loss payment has been so applied.
        (3) After liquidation has been completed, a final Report of Loss 
    will be submitted by the lender to the Agency.
        (d) In all cases, a final Report of Loss must be submitted to the 
    Agency. Before Agency approval of any final loss report, the lender 
    must account for all funds obtained, disposition of the collateral, all 
    costs incurred, and any other information necessary for the successful 
    completion of liquidation. Upon receipt of the final accounting and 
    Report of Loss, the Agency may audit, and will determine the final 
    loss. The lender will make its records available to, and otherwise 
    assist, the Agency in making any audit it requires of the Report of 
    Loss. The documentation accompanying the Report of Loss must support 
    the loss claimed.
        (1) The lender must document and show that all of the collateral 
    has been accounted for and properly liquidated and that liquidation 
    proceeds have been properly accounted for and applied correctly on the 
    loan. The Agency must be satisfied that the lender has accomplished 
    this in the manner set out in this subpart and that the lender has 
    maximized the collections in conducting the liquidation.
        (2) The lender must show a breakdown on any protective advance 
    amount as to the payee, purpose of the expenditure, date paid, evidence 
    that the amount expended was proper, and that the amount was actually 
    paid.
        (3) The lender must show a breakdown of liquidation expenses as to 
    the payee, purpose of the expenditure, date paid, evidence that the 
    amount expended was proper, and that the amount was actually paid.
        (4) Accrued interest should be supported by attachments showing how 
    the amount was accrued by the lender. A copy of the promissory note and 
    ledger will be attached. If the interest rate was a variable rate, the 
    lender must include documentation of changes in the selected base rate 
    and when the changes in the loan rate became effective.
        (e) Any net rental or other income that has been received by the 
    lender from the collateral will be applied on the guaranteed loan debt.
        (f) Certain reasonable liquidation costs will be allowed during the 
    liquidation process. The liquidation costs will be submitted as a part 
    of the liquidation plan. Such costs will be deducted from gross 
    proceeds received from the disposition of collateral unless the costs 
    have been previously determined by the lender (with Agency concurrence) 
    to be protective advances. If changed circumstances after submission of 
    the liquidation plan require a revision of liquidation costs, the 
    lender will procure the Agency's written concurrence prior to 
    proceeding with the proposed changes. No in-house expenses of the 
    lender will be allowed. In-house expenses include, but are not limited 
    to, employees' salaries, staff lawyers, travel, and overhead.
        (g) In those instances where the lender made authorized protective 
    advances, the lender may claim recovery for the guaranteed portion of 
    any loss of monies advanced as well as interest resulting from such 
    protective advances. These claims shall be included in the final Report 
    of Loss.
        (h) After the final Report of Loss has been tentatively approved:
        (1) If the actual loss is greater than any estimated loss payment, 
    such loss will be paid by the Agency.
        (2) If the Agency conducted the liquidation, it will provide an 
    accounting to the lender and will pay the lender in accordance with the 
    Loan Note Guarantee.
        (i) The amount payable by the Agency to the lender cannot exceed 
    the limits contained in the Loan Note Guarantee. If the Agency conducts 
    the liquidation, loss occasioned by accruing interest will be covered 
    by the guarantee only to the date the Agency accepts this 
    responsibility. When the liquidation is conducted by the lender, loss 
    occasioned by accruing interest will be covered to the extent of the 
    guarantee to the date of final settlement provided the lender proceeds 
    expeditiously with the liquidation plan approved by the Agency.
    
    
    Sec. 1980.895  Future recovery.
    
        After a loan has been liquidated and a final loss has been paid by 
    the Agency, any future funds which may be recovered by the lender will 
    be pro-rated between the Agency and the lender in accordance with the 
    guaranteed percentage even if the Loan Note Guarantee has been 
    terminated.
    
    
     Sec. 1980.896  Termination of Loan Note Guarantee.
    
        The Loan Note Guarantee under this subpart will terminate 
    automatically:
        (a) Upon full payment of the guaranteed loan; or
        (b) Upon full payment of any loss obligation or negotiated loss 
    settlement except for future recovery provisions; or
        (c) Upon written request from the lender to the Agency, provided 
    that the lender holds all of the guaranteed portion and the original 
    Loan Note Guarantee is returned to the Agency.
    
    
    Secs. 1980.897-1980.900  [Reserved]
    
        Dated: September 24, 1997.
    Jill Long Thompson,
    Under Secretary, Rural Development.
    [FR Doc. 97-26363 Filed 10-6-97; 8:45 am]
    BILLING CODE 3410-XV-U
    
    
    

Document Information

Published:
10/07/1997
Department:
Farm Service Agency
Entry Type:
Proposed Rule
Action:
Proposed rule.
Document Number:
97-26363
Dates:
Written comments must be received on or before December 8, 1997. The comment period for information collections under the Paperwork Reduction Act of 1995 continues through December 8, 1997.
Pages:
52277-52293 (17 pages)
RINs:
0575-AC17: Community Programs Guaranteed Loans
RIN Links:
https://www.federalregister.gov/regulations/0575-AC17/community-programs-guaranteed-loans
PDF File:
97-26363.pdf
CFR: (71)
7 CFR 1980.47
7 CFR 1980.60
7 CFR 1980.801
7 CFR 1980.802
7 CFR 1980.803
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