[Federal Register Volume 61, Number 23 (Friday, February 2, 1996)]
[Proposed Rules]
[Pages 3853-3877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1576]
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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. 61, No. 23 / Friday, February 2, 1996 /
Proposed Rules
[[Page 3853]]
DEPARTMENT OF AGRICULTURE
Rural Housing Service
Rural Business-Cooperative Service
Rural Utilities Service
Farm Service Agency
7 CFR Part 1980
Rural Business-Cooperative Service
Rural Utilities Service
7 CFR Parts 4279 and 4287
RIN 0570-AA09
Business and Industrial Loan Program
AGENCIES: Rural Housing Service, Rural Business-Cooperative Service,
Rural Utilities Service, and Farm Service Agency, USDA.
ACTION: Proposed rule.
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SUMMARY: The Rural Business-Cooperative Service (RBS) is the successor
to the Rural Business and Cooperative Development Service, which was
the successor to the Rural Development Administration (RDA), which was
the successor to the Farmers Home Administration (FmHA).
RBS is issuing new Business and Industry Guaranteed Loan Program
regulations to replace the FmHA regulations for the program. This
action is needed to streamline and update the program. The intended
effect is to shorten, 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 and businesses, and provide for smoother and faster processing
of applications.
DATES: Written comments must be received on or before April 2, 1996.
ADDRESSES: Submit written comments in duplicate to the Chief,
Regulations, Analysis, and Control Branch, Rural Economic and Community
Development, U.S. Department of Agriculture, Ag Box 0743, 14th and
Independence SW., Washington, DC 20250-0743. All written comments will
be available for public inspection during regular work hours at the
above address.
FOR FURTHER INFORMATION CONTACT: M. Wayne Stansbery, Business and
Industry Senior Loan Specialist, RBS, U.S. Department of Agriculture,
Ag-Box 3221, 14th & Independence Avenue SW., Washington, DC 20250-3221,
Telephone (202) 720-6819.
SUPPLEMENTARY INFORMATION:
Classification
This proposed rule has been determined to be a ``significant
regulatory action'' and was reviewed by OMB under Executive Order
12866.
Programs Affected
The Catalog of Federal Domestic Assistance program impacted by this
action is: 10.768, Business and Industrial Loans.
Intergovernmental Review
As set forth in the final rule and related Notice to 7 CFR part
3015, subpart V, 48 FR 29112, June 24, 1983, Business and Industrial
Loans are subject to the provisions of Executive Order 12372 which
requires intergovernmental consultation with state and local officials.
RBS conducts intergovernmental consultation in the manner delineated in
FmHA Instruction 1940-J, ``Intergovernmental Review of Farmers Home
Administration Programs and Activities.''
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 in accordance with the regulations of
the agency at 7 CFR part 1900, subpart B or those regulations published
by the Department of Agriculture to implement the provisions of the
National Appeals Division as mandated by the Department of Agriculture
Reorganization Act of 1994 must be exhausted before bringing suit in
court challenging action taken under this rule.
Environmental Impact Statement
The action has been reviewed in accordance with 7 CFR part 1940,
subpart G, ``Environmental Program.'' RBS has determined that this
action does not constitute a major Federal action significantly
affecting the quality of the human environment, and in accordance with
the National Environmental Policy Act of 1969, Public Law 91-190, an
Environmental Impact Statement is not required.
Discussion of the Proposed Rule
This action replaces the Business and Industrial loan program
administered under 7 CFR part 1980 with a program to be administered
under 7 CFR parts 4279 and 4287 which significantly departs from the
previous program of loan guarantees for businesses in rural areas. The
new Business and Industrial Guaranteed Loan Program will be more
flexible and will place more reliance on lenders. There are fewer
specific requirements for lenders and businesses. Eligible loan
purposes are broader. The lender has added responsibility for analyzing
credit quality, and for making, securing, and servicing the loan and
monitoring construction. The priority system will give increased
priority to underserved communities. Application processing procedures
will be more efficient, less burdensome for borrowers, lenders, and RBS
staff, and will provide for more rapid decisions.
The Business and Industry (B&I) guaranteed loan program was
authorized by the Rural Development Act of 1972. The loans are made by
private lenders to rural businesses for the purpose of creating new
businesses, expanding existing businesses, and for other purposes that
create employment opportunities in rural areas. Eligibility for this
program includes businesses located in cities of up to 50,000
population, but priority is given to areas outside cities of 25,000 or
more population.
Since 1974, more than 5,120 businesses have received loans totaling
nearly $5 billion guaranteed through the B&I program. These loans have
helped to create or save over 460,000 jobs. The program level peaked in
1979 at just over $1 billion, then was reduced to $100 million annually
through much of the 1980's. The program level for FY 1994 was about
$249 million and for FY
[[Page 3854]]
1995 it was about $500 million. The FY 1996 budget is approximately
$700 million, which required only $6.5 million in budget authority to
be appropriated by Congress.
Loans can be made for a variety of purposes including business
acquisition, expansion, or improvement; purchase of land, easements, or
buildings; purchase of equipment, machinery, or supplies; repair and
modernization; pollution control; transportation services; start up and
working capital; and feasibility studies. The rate and term of the loan
is negotiated between the business and the lender.
The Rural Business-Cooperative Service proposes to replace the
regulations for the B&I program with a compete set of new regulations.
This is a high priority effort to streamline the administration and
operation of the program, responding to the requests of users of the
program and the field staff administering the program. The revised
regulations are shorter, simpler, clearer, and more logically
organized. The volume of material in the new regulations is about one-
half that of the current regulation.
The revisions are not required by statute. However, the senate
report on the FY 1995 Appropriations Act did contain a directive for
the department to streamline the B&I regulations and application
procedures, reduce loan application processing time by relying on in-
state resources, allow more management flexibility and decision making
capacity at the state office level, and expand eligible loan purposes
to include recreation and tourism.
Recognizing the need to streamline the regulations, the Agency
established a task force of State Directors and B&I program chiefs from
state offices to examine 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 and drafts
have been further developed by national office staff. In addition, the
Department's Office of inspector General (OIG) agreed to work in
conjunction with the Agency in competing an evaluation of the program
and to assist the agency in determining areas that could be changed to
assist in making the program more effective and more efficiently
administered. The OIG evaluation determined that (1) RBS needs to
better promote the program and encourage lender and borrower
participation, (2) lenders have little experience with the B&I program,
(3) some of the requirements of the program are too costly to be
attractive to borrowers wanting a relatively small loan, and (4) RBS
needs to employ its resources more efficiently by relying more on
lenders to analyze and monitor smaller loans. OIG surveyed 800 lenders
and, based on the responses to the survey, projected that only 5.2
percent of the universe of lenders have had any experience with the
program, but of those that did the experience was favorable. Further,
the Agency determined that of the lenders participating in the program,
the average number of times they did participate was 1.2. In a few
states, the program has been used more frequently by lenders, but
according to task force members and others familiar with the program
this has been true only because Agency officials in those states took
the time and effort to make the program more widely known.
OIG also determined that smaller borrowers refused to participate
in the program because they feel that meeting some of the requirements
is too costly to make a loan feasible. For example, the requirement to
submit annual audited financial statements is believed to be too costly
and OIG found that private lenders do not always request audited
financial statements from smaller commercial borrowers. The General
Accounting Office, in a 1992 report, also found that the cost of
feasibility studies and the annual audit requirements coupled with
appraisal fees and credit reports may impede participation.
Presently State office personnel analyze financial information
provided by the lenders and the borrowers regardless of the size of the
loan and regardless of the fact the lender has performed an analysis of
the borrower's financial condition. In order to increase the level of
lending activity as called for in the 1996 and 1997 budgets, and
improve the effectiveness of the program and the efficiency with which
it is delivered, RBS must rely more on the capabilities of the lending
community to deliver the program.
Based on the recommendations of the task force and other reviews,
the Agency has proposed these revisions to make the program more usable
by the lenders and the borrowers. More importantly, the Agency
recognizes the 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 B&I
regulations, the material that must be submitted to and reviewed by the
Agency before approval of the guarantee is reduced and responsibilities
for credit analysis and application processing tasks will be shifted
from the Agency national office to field offices and from the Agency to
the lender where feasible. Following is a discussion of some of the
most significant policy revisions included in the proposed new
regulations.
Currently, most lenders participating in the B&I program are
commercial banks and eligibility to be a lender under the program is
limited to certain types of organizations. This proposal allows the
Agency to approve additional lenders when determined by the
Administrator to have sufficient legal authority, lending expertise,
and financial strength.
The Agency proposes to reduce the loan guarantee fee if it is
determined that the business seeking the guarantee provides high-impact
business development and is located in a community experiencing long-
term population decline and job deterioration, a community that has
remained persistently poor over the past 60 years, or a community
experiencing economic trauma due to natural disaster or fundamental
economic structural change. The intent of this provision is to
encourage businesses to locate in areas with persistent economic
problems.
Presently, individual borrowers must be citizens of the United
States or reside in the United States after being legally admitted for
permanent residence and organization borrowers must be at least 51
percent owned by citizens or persons legally admitted. The proposed
regulations would allow guaranteed loans to businesses that do not meet
that requirement if the facility being financed will create or save
jobs for rural United States residents, adequate management is
available, and loan funds are used only for fixed assets that will
remain in the United States. The intent of this provision is to have
the flexibility to create jobs in rural areas even if the company is
owned by foreign interests. The Agency has experienced requests for
guarantees in such situations in border states.
Presently, agricultural production loans are not eligible for B&I
guarantees. RBS proposes to provide guarantees for agricultural
production, but limit eligibility to integrated businesses involved in
both production and processing.
Current regulations will not allow a lender to bring loans it has
previously made under a guarantee through refinancing unless the
percentage of guarantee is adjusted to maintain the previous
unguaranteed exposure. The new regulations will allow the previous
exposure to be guaranteed, provided the
[[Page 3855]]
refinancing is a secondary part of the loan and will allow the lender
to restructure the rates and terms.
The Agency is particularly interested in public comments on a new
priority system, designed to target loan guarantees to locations of
greatest need and businesses that will have the most impact. High
impact considers factors that effect such things as job quality,
potential to stimulate the local economy other than just through the
direct jobs provided, and potential for long term presence in the
community and future expansion. For example, businesses in industries
in the top half of the industrial life cycle are likely to be
successful for a longer period of time than those in an industry that
is declining. Businesses tied in some way to the community are less
likely to move on in a few years to a more favorable location outside
the community. A business in an industry new to the community provides
economic diversification. Businesses that will need new suppliers or
customers are likely to have a ripple effect, causing other new
businesses to be formed nearby. Priority points are also given for
lenders that will structure the loan at favorable rates to the borrower
or less risk for the Government.
Eligible loan purposes would be expanded to include hotels, motels,
and other tourism and recreational facilities, which have been
ineligible for the past several years. Loans for such facilities would
be evaluated on the merits and financial feasibility of each proposal,
except for racetracks, golf courses, and gambling facilities, which
would remain ineligible. The Agency is particularly requesting comments
on whether there is a significant need for loan guarantees for tourism
and recreation businesses and whether offering loan guarantees for such
businesses will significantly increase the risk to the Government and
satisfy otherwise unmet needs for financing of such businesses.
Current regulations limit the size of loans considered for
guarantee to $10 million. The proposed regulations would give the
Administrator the authority to approve exceptions for high priority
projects of up to $25 million.
The proposed regulations limit the guarantee percentage to 80
percent for loans of $5 million or less and 70 percent for loans
exceeding $5 million, but provide authority for the Administrator to
approve exceptions up to 90 percent when the higher percentage is
necessary to allow a high priority project to proceed.
In conjunction with implementation of the new regulations, the
Agency intends to provide a new application form that will serve the
function of 10 forms now in use. The application form will, of course,
be supplemented by additional information provided by the lender.
The proposed regulations also provide for experienced lenders to
apply for status as certified lenders. Certified lenders will submit
about one-half as much application material for agency review as
regular lenders. Consideration was given to creating another
classification of lender determined to be very reliable and familiar
with the program that would be able to obtain guarantees with little or
no review of individual projects by the Agency. However, it was
determined that the Agency does not have sufficient legal authority to
implement that alternative.
Agency staff will be authorized to rely on a written credit
analysis prepared by the lender rather than the Agency completing its
own complete credit analysis.
For the most part, the lender will determine the frequency of
financial statements to be required from the business after the loan is
closed and whether or not the statements must be audited.
The lender and its legal counsel will be responsible for loan
closing, without a required review by the Office of General Counsel.
Loan servicing will also be simplified and shifted toward the
lender. Loans will classified by the lender. Lenders will be able to
release collateral with a cumulative value of up to 20 percent of the
loan if the proceeds will be used to reduce the loan or buy replacement
collateral. Lenders may make protective advances of up to $5,000
without prior agency approval. If unsecured personal or corporate
guarantees cannot be settled promptly, a final loss report may be filed
and paid and the guarantees treated as future recovery.
RBS believes the streamlining of the regulations 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, facilitate industrial conversion, and enable rural
residents to profit from private sector activity. The proposed
revisions are consistent with the Administration's efforts to
streamline government functions, improve efficiency and the
effectiveness of government activities, and be more customer friendly.
The changes proposed will enable the Agency to deliver a larger program
with less staff resources, and simultaneously meet the objectives of
the National Performance review regarding improved customer service,
less regulation and streamlined Agency operations.
Incorporation of the proposed changes will provide more flexibility
for both lenders and agency staff. Many errors will be reduced because
the guidelines and requirements are much more clear and items are more
easily found in a reduced and better organized volume of regulations.
Lenders will be more interested in using the program because the
procedures are more simple and direct. The ultimate benefit to be
realized is increased lending activity resulting in the expansion of
business opportunities 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 Rural
Business-Cooperative Service (RBS) announces its intention to seek OMB
approval of the reporting/recordkeeping requirements contained in these
new regulations.
The purpose of the B&I loan program is to improve, develop, or
finance business, industry, and employment and improve the economic and
environmental climate in rural communities. This purpose is achieved by
bolstering the existing private credit structure through the guarantee
of loans which will provide lasting community benefits. Loans to rural
businesses are made by private lenders, primarily commercial banks, and
guaranteed by RBS. These proposed regulations include various
requirements for information from the lenders and borrowers. The
information requested is vital for RBS to be able to process
applications for loan guarantees in a responsible manner, make prudent
credit and program decisions, and effectively monitor the lenders'
servicing activities to protect the Government's financial interest. It
includes information to identify the lender and borrower, describe the
business and use of loan funds, indicate the rates and terms of the
loan, allow for credit quality analysis, and other information
necessary for prudent program and credit decisions. The lender or
borrower may need to provide information regarding some special
assistance or consideration, such as when a lender requests a change in
specific conditions cited by the Agency for approval of a guarantee.
Additional information is necessary to ensure a loan is adequately
serviced and continues to perform as expected, or, if necessary,
properly liquidated.
[[Page 3856]]
Currently, the regulations for the B&I Loan Program are contained
in 7 CFR 1980, subpart E. The information collection associated with 7
CFR 1980-E has been previously approved by the Office of Management and
Budget (OMB) and assigned control number 0575-0029. RBS is now
proposing new regulations for the B&I program to replace 7 CFR 1980-E.
RBS's primary reason for proposing new regulations is to simplify the
requirements and streamline the application and loanmaking process. The
total public reporting burden under these regulations is expected to be
significantly reduced, as compared to the burden contained in the
current regulation. The average public reporting burden for the
collections of information contained in these regulations is expected
to range from .75 to 54 hours per response. Lending institutions and
rural businesses are the primary respondents for this data collection.
The number of respondents for the various collections of information
contained in these regulations is expected to range from 15 to 1240 per
year. The number of annual responses per respondent is expected to
range from less than 1 to 4 per year. Total annual burden on
respondents is estimated at 67,456 hours. This is based on an estimated
volume of activity of 500 preapplications, 425 applications, and 360
new loan guarantees. The estimated total annual burden for 7 CFR 1980,
subpart E, was 78,318 hours. However, the larger estimated burden for 7
CFR 1980, subpart E, was based on a lower estimated volume of activity
of only 350 preapplications, 275 applications, and 220 new loan
guarantees.
In conjunction with implementation of the proposed new regulations,
RBS plans to initiate use of a new application form. The new form
should not be more difficult or time consuming to complete than the
current application but it will facilitate the elimination of 10 other
forms currently in use. Some items of information required by the
agency have been made easier to provide, such as the material
incorporated into the new application. Some has been eliminated by
changing program requirements and providing more flexibility to
lenders. An example of this is the documentation regarding refinancing
required by 7 CFR 1980, section 1980.452 Administrative C (1). Under
the proposed rule there are less restrictions on refinancing so there
is no need for the specific documentation. Some information will be
collected less frequently, as in the case of feasibility studies.
Feasibility studies will be required for new businesses at the
discretion of the loan approval official, rather than for all new
businesses. Financial statements will still be required at least
annually, but whether they are required more often than annually and
whether they must be audited statements will be decided by the lender.
Some new items of burden have also been created. For the most part,
however, these are the result of new options being made available. For
example, requesting status as a certified lender is a burden upon the
lenders that choose to make a request. That burden has not existed
previously because there were no certified lenders. To become certified
a lender must submit an executed Lender's Agreement (if it does not
already have a valid Lender's Agreement), a new form called ``Certified
Lender, Business and Industry,'' and a written request summarizing its
history of commercial lending activity with information on
delinquencies and losses. Loan officers of certified lenders must
receive training from RBS on the B&I program. The burden for completing
a request for certification has been estimated at 2.5 hours.
Certified lenders will submit less material for agency review for
each individual loan application proposed for guarantee. A complete
application for guarantee from a certified lender will include the
application form, a Form FmHA 1940-20, ``Request for Environmental
Information,'' the lender's written financial analysis with
spreadsheets, a proposed Loan Agreement or list of conditions for a
Loan agreement, and intergovernmental review comments. A complete
application for guarantee from an eligible lender that is not certified
will include all of those items plus the business's historical and
projected financial statements, financial statements of personal or
corporate guarantors, personal credit reports on the principals,
appraisals, commercial credit report on the business, and a business
plan or feasibility study.
Although it is not reflected in the proposed rule or the estimates
of burden, RBS is also working on a project to automate forms. It is
intended that most of the forms used in connection with an application
will be made available on computer disk so the form can be brought up
on a screen, the appropriate information typed in, and the entire
completed form printed. When completed, the appropriate disks will be
made available to the public as well as to Agency staff.
The complete text of the subject regulations is published herein
for public review and comment. Additional copies of the proposed
regulations or copies of the referenced forms may be obtained from Jack
Holston, Agency Information Collection Coordinator, at (202) 720-9736.
Send comments regarding the accuracy of the burden estimate, ways
to minimize the burden, including through the use of automated
collection techniques or other forms of information technology, or any
other aspects of this collection of information, to: Jack Holston,
Agency Information Collection Coordinator, U.S. Department of
Agriculture, RECD, Ag. Box 0743, Washington, DC 20250. These comments
must be received on or before April 2, 1996 to be assured of
consideration. All responses to this notice will be summarized and
included in the request for OMB approval. All comments will also become
a matter of public record.
List of Subjects
7 CFR Part 1980
Loan programs--Agriculture, Loan programs--Business and industry--
Rural development assistance, Loan programs--Housing and community
development, Loan programs--Community programs--Rural development
assistance, Rural areas.
7 CFR Part 4279
Loan programs--Business and industry--Rural development assistance,
Rural areas.
7 CFR Part 4287
Loan programs--Business and industry--Rural development assistance,
Rural areas.
Accordingly, chapters XVIII and XLII, title 7 of the Code of
Federal Regulations are proposed to be amended as follows:
CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE
SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT
OF AGRICULTURE
PART 1980--GENERAL
1. The authority citation for part 1980 is revised to read as
follows:
Authority: 7 U.S.C. 301; 7 U.S.C. 1989; 42 U.S.C. 1480.
Subpart A--General
2. Section 1980.6(a) is amended by: removing the definitions for
``Borrower,'' ``Disaster Assistance for Rural Business Enterprises,''
and
[[Page 3857]]
``Drought and Disaster Guaranteed loans;'' in the heading for the
definition of ``Assignment Guarantee Agreement,'' removing ``, 1980-70
or 1980-73;'' revising the definition of ``Guaranteed loan,'' to read
as set forth below; in the third sentence of the definition of
``Holder,'' removing the parenthetical phrase ``(or 1980-70 or 1980-
73);'' in the heading for the definition of ``Lender's Agreement,''
removing the comma and adding the word ``or'' in its place immediately
following ``449-35'' and removing ``, 1980-68, or 1980-71'' immediately
following ``1980-38;'' in the heading for the definition of ``Loan Note
Guarantee,'' removing the parenthetical phrase ``(or 1980-69 or 1980-
72)''.
Sec. 1980.6 Definitions and abbreviations.
(a) * * *
Guaranteed loan. A loan made and serviced by a lender for which
FmHA or its successor agency under Public Law 103-354 has entered into
a Form FmHA 449-35 or Form FmHA 1980-38, ``Lender's Agreement,'' and
for which FmHA or its successor agency under Public Law 103-354 has
issued a Form FmHA 449-34, ``Loan Note Guarantee.''
* * * * *
3. Section 1980.6 (b) is amended by removing the entries for
``B&I,'' ``DARBE,'' and ``D&D'' from the list of abbreviations.
Sec. 1980.13 [Amended]
4-5. Section 1980.13 is amended in the second sentence of paragraph
(a) introductory text by revising the reference ``paragraphs (a) (1),
(2) and (3)'' to read ``paragraphs (a) (1) and (2);'' in paragraph
(a)(2) by removing ``;or'' and adding a period at the end of the
paragraph; by removing paragraph (a)(3); and in paragraph (c) by
removing the parenthetical phrase ``(See subpart E of this part.)''.
Sec. 1980.20 [Amended]
6. Section 1980.20 is amended in paragraph (a) introductory text by
removing the third and forth sentences in their entirety; in the fifth
sentence, by removing the words ``for all other loans covered by this
section;'' and in the sixth sentence by removing the words ``except in
regards to D&D and DARBE guaranteed loans (see Subpart E of this
part),''.
Sec. 1980.41 [Amended]
7. Section 1980.41 is amended in the first sentence of paragraph
(b)(3)(iii)(A) by removing the parenthetical phrase ``(State Director
for B&I)''.
Sec. 1980.46 [Amended]
8. Section 1980.46 is amended in paragraph (a)(2) by removing the
parenthetical phrase ``(State Director for B&I)'' at the end of the
paragraph.
Sec. 1980.47 [Amended]
9. Section 1980.47 is amended in the first sentence of paragraph
(d) by removing the words ``and Business''.
10. Section 1980.60 is amended by revising paragraph (a) (2) to
read as follows:
Sec. 1980.60 Conditions precedent to issuance of the Loan Note
Guarantee or Contract of Guarantee.
(a) * * *
(1) * * *
(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 FmHA or its successor agency under Public Law 103-354.
* * * * *
Sec. 1980.61 [Amended]
11. Section 1980.61 is amended in the first sentence of paragraph
(b)(3) by revising ``Forms FmHA or its successor agency under Public
Law 103-354 449-35,'' to read ``Form FmHA 449-35'' and removing ``FmHA
or its successor agency under Public Law 103-354 1980-68, and FmHA or
its successor agency under Public Law 103-354 1980-71;'' in paragraph
(b)(4) by revising the word ``request'' to read ``requests,'' revising
``Forms FmHA or its successor agency under Public Law 103-354 449-
35,'' to read ``Form FmHA 449-35'' removing, ``FmHA or its successor
agency under Public Law 103-354 1980-68, and FmHA or its successor
agency under Public Law 103-354 1980-71,'' and removing the
parenthetical phrase ``(State Director for B&I);'' and in paragraph (h)
by removing the words ``,except for B&I where the State Director and
State B&I or C&BP Chief will execute these forms.''
Sec. 1980.63 [Amended]
12. Section 1980.63 is amended in paragraph (b) by removing the
parenthetical phrase ``(State Director for B&I)'' from the second and
fourth sentences and removing the parenthetical phrase ``(except for
B&I)'' from the third sentence.
Sec. 1980.67 [Amended]
13. Section 1980.67 is amended in the first sentence of paragraph
(a) by removing the reference ``E,''.
Sec. 1980.68 [Amended]
14. Section 1980.68 is amended by revising the reference
``paragraph 5'' to read ``paragraph 6'' in the second sentence and
removing the parenthetical phrase ``(State Director for B&I)'' from the
third and fourth sentences.
Sec. 1980.83 [Amended]
15. Section 1980.83 is amended in the table of forms in paragraph
(b) by removing the entries beginning with ``1980-68,'' ``1980-69,''
``1980-70,'' ``1980-71,'' ``1980-72,'' and ``1980-73.''
Subpart E--Business and Industrial Loan Program
16. Section 1980.401 is amended by revising paragraph (a) to read
as follows:
Sec. 1980.401 Introduction.
(a) This subpart contains the regulations for direct Business and
Industrial (B&I) loans disbursed by the Agency. All references to
guaranteed loan processing or servicing are not applicable. B&I loan
guarantees are to be processed and serviced under the provisions of
subparts A and B of part 4279 of this title and subpart B of part 4287
of this title. Any processing or servicing activity conducted pursuant
to this subpart involving authorized assistance to relatives, or
business or close personal associates, is subject to the provisions of
subpart D of part 1900 of this chapter. Applicants for this assistance
are required to identify any known relationship or association with any
Agency employee.
* * * * *
CHAPTER XLII--RURAL BUSINESS--COOPERATIVE SERVICE AND RURAL UTILITIES
SERVICE, DEPARTMENT OF AGRICULTURE
17. A new part 4279 is added to chapter XLII to read as follows:
PART 4279--GUARANTEED LOANMAKING
Subpart A--General
Sec.
4279.1 Purpose.
4279.2 Definitions.
4279.3-4279.14 [Reserved]
4279.15 Exception authority.
4279.16 Appeals.
4279.17-4279.28 [Reserved]
4279.29 Eligible lenders.
4279.30 Lenders' functions and responsibilities.
4279.31-4279.42 [Reserved]
4279.43 Certified Lender Program.
4279.44 Access to records.
4279.45-4279.57 [Reserved]
4279.58 Equal Credit Opportunity Act.
4279.59-4279.70 [Reserved]
4279.71 Public bodies and nonprofit corporations.
[[Page 3858]]
4279.72 Conditions of guarantee.
4279.73-4279.74 [Reserved]
4279.75 Sale or assignment of guaranteed loan.
4279.76 Participation.
4279.77 Minimum retention.
4279.78 Repurchase from holder.
4279.79-4279.83 [Reserved]
4279.84 Replacement of document.
4279.85-4279.100 [Reserved]
Subpart B--Business and Industry Loans
4279.101 Introduction.
4279.102 Definitions.
4279.103-4279.106 [Reserved]
4279.107 Guarantee fee.
4279.108 Eligible borrowers.
4279.109-4279.112 [Reserved]
4279.113 Eligible loan purposes.
4279.114 Ineligible purposes.
4279.115 Prohibition under Agency programs.
4279.116-4279.118 [Reserved]
4279.119 Loan guarantee limits.
4279.120 Fees and charges.
4279.121-4279.124 [Reserved]
4279.125 Interest rates.
4279.126 Loan terms.
4279.127-4279.130 [Reserved]
4279.131 Credit quality.
4279.132-4279.136 [Reserved]
4279.137 Financial statements.
4279.138-4279.142 [Reserved]
4279.143 Insurance.
4279.144 Appraisals.
4279.145-4279.148 [Reserved]
4279.149 Personal and corporate guarantees.
4279.150 Feasibility studies.
4279.151-4279.154 [Reserved]
4279.155 Loan priorities.
4279.156 Planning and performing development.
4279.157-4279.160 [Reserved]
4279.161 Filing preapplications and applications.
4279.162-4279.164 [Reserved]
4279.165 Evaluation of application.
4279.166-4279.172 [Reserved]
4279.173 Loan approval and obligating funds.
4279.174 Transfer of lenders.
4279.175-4279.179 [Reserved]
4279.180 Changes in borrower.
4279.181 Conditions precedent to issuance of Loan Note Guarantee.
4279.182-4279.185 [Reserved]
4279.186 Issuance of the guarantee.
4279.187 Refusal to execute Loan Note Guarantee.
4279.188-4279.200 [Reserved]
Authority: 5 U.S.C. 301; 7 U.S.C. 1989.
Subpart A--General
Sec. 4279.1 Purpose.
(a) This subpart contains general regulations for making and
servicing Business and Industry (B&I) loans guaranteed by the Agency
and applies to lenders, holders, borrowers and other parties involved
in making, guaranteeing, holding, servicing, or liquidating such loans.
(b) It is the responsibility of the lender to ascertain that all
requirements for making, securing, servicing, and collecting the loan
are met.
(c) Copies of all forms, regulations, and instructions referenced
in this subpart are available in any state or district office or the
National office.
Sec. 4279.2 Definitions.
Agency. The Federal agency within the United States Department of
Agriculture (USDA) with responsibility assigned by the Secretary of
Agriculture to administer the B&I program.
Arm's-length transaction. The sale, release, or disposition of
assets in which the title to the property passes to a ready, willing,
and able disinterested third party that is not affiliated with or
related to and has no security, monetary or stockholder interest in the
borrower or transferor at the time of the transaction.
Assignment Guarantee Agreement. The signed agreement among the
Agency, the lender, and the holder setting forth the terms and
conditions of an assignment of a guaranteed portion of a loan, using
the single note system. Such agreement will be documented using Form
RECD 4279-6, ``Assignment Guarantee Agreement.''
Borrower. All parties liable for the loan except for guarantors.
Conditional Commitment. Agency's notice to the lender that the loan
guarantee it has requested is approved subject to the completion of all
conditions and requirements set forth by the Agency. The commitment
will be documented on Form RECD 4279-3, ``Conditional Commitment.''
Deficiency balance. The balance remaining on a loan after all
collateral, including the personal guarantees, has been liquidated.
Deficiency judgment. A money judgment rendered by a court of
competent jurisdiction after foreclosure and liquidation of all
collateral securing the loan.
Existing lender debt. A debt not guaranteed by the Agency, but owed
by a borrower to the same lender that is applying for or has received
the Agency guarantee.
Fair market value. The price that could reasonably be expected for
an asset in an arms-length transaction between a willing buyer and a
willing seller in ordinary economic and business conditions.
Farmers Home Administration (``FmHA''). The former agency of the
United States Department of Agriculture (``USDA'') that previously
administered the programs of this Agency. Many Instructions and forms
of FmHA are still applicable to Agency programs.
Finance office. The office which maintains the Agency financial
accounting records and is located at 1520 Market Street, St. Louis,
Missouri 63103.
Holder. A person or entity, other than the lender, who owns all or
part of the guaranteed portion of the loan with no servicing
responsibilities. When the single note option is used and the lender
assigns a part of the guaranteed note to an assignee, the assignee
becomes a holder only when the Agency receives notice and the
transaction is completed through use of Form RECD 4279-6, ``Assignment
Guarantee Agreement.''
Interim Financing. A temporary or short-term loan made with the
clear intent that it will be repaid through another loan. Interim
financing is frequently used to pay construction and other costs
associated with a planned project, with permanent financing to be
obtained after project completion.
Lender. The organization making, servicing, and collecting the loan
which is guaranteed under the provisions of the appropriate subpart.
Lender's Agreement. The agreement between the Agency and the lender
setting forth the lender's loan responsibilities when the Loan Note
Guarantee is issued. The agreement is Form RECD 4279-4, ``Lender's
Agreement.''
Loan Agreement. The agreement between the borrower and lender
setting out the terms and conditions of the loan and the
responsibilities of the borrower and lender.
Loan Note Guarantee. The signed instrument issued by the Agency
setting out the terms and conditions of the guarantee. The guarantee is
Form RECD 4279-5, ``Loan Note Guarantee.''
Loan-to-value. The ratio of the dollar amount of a loan to the
dollar value of the collateral for the loan.
Negligent Servicing. The failure to perform those services which a
reasonably prudent lender would perform in servicing (including
liquidation of) its own portfolio of loans that are not guaranteed. The
term includes not only the concept of a failure to act but also not
acting in a timely manner or acting in a manner contrary to the manner
in which a reasonably prudent lender would act.
Parity. A lien position whereby two or more lenders share a
security interest of equal priority in collateral. In the event of
default, each lender will be affected on a proportional basis.
Participation. Sale of an interest by the lender in a loan wherein
the lender retains the note, collateral securing the
[[Page 3859]]
note, and all responsibility for loan servicing and liquidation.
Poor. A community or area is considered poor if, based on the most
recent decennial census data, either the county, city, or census tract
where the community or area is located has a median household income at
or below the poverty line for a family of four; has a median household
income below the nonmetropolitan median household income for the state;
or has a population of which 25 percent or more have income at or below
the poverty line.
Promissory Note. An evidence of debt. ``Note'' or ``Promissory
Note'' shall also be construed to include ``Bond'' or other evidence of
debt where appropriate.
RECD. The Under Secretary for Rural Economic and Community
Development (``RECD'') has policy and operational oversight
responsibilities for the Rural Housing Service (``RHCDS''), Rural
Business-Cooperative Service (``RBS''), and the Rural Utilities Service
(``RUS'').
Spreadsheet. A table containing data from a series of financial
statements of a business over a period of time. Financial statement
analysis normally contains spreadsheets for balance sheet items and
income statements and may include funds flow statement data and
commonly used ratios. The spreadsheets enable a reviewer to easily scan
the data, spot trends, and make comparisons.
State. Any of the 50 states, the Commonwealth of Puerto Rico, the
Virgin Islands of the United States, Guam, American Samoa, the
Commonwealth of the Northern Mariana Islands, the Republic of Palau,
the Federated States of Micronesia, and the Republic of the Marshall
Islands.
Subordination. An agreement between the lender and borrower whereby
lien priorities on certain assets pledged to secure payment of the
guaranteed loan will be reduced to a position junior to, or on parity
with, the lien position of another loan in order for the Agency
borrower to obtain additional financing, not guaranteed by the Agency,
from the lender or a third party.
Veteran. For the purposes of assigning priority points, a veteran
is a person who has been discharged or released from the active forces
of the United States Army, Navy, Air Force, Marine Corps, or Coast
Guard under conditions other than dishonorable and who served on active
duty in such forces:
(1) During the period of April 6, 1917, through March 31, 1921;
(2) During the period of December 7, 1941, through December 31,
1946;
(3) During the period of June 27, 1950, through January 31, 1955;
or
(4) For a period of more than 180 days, any part of which occurred
after January 31, 1955; but on or before May 17, 1975.
Secs. 4279.3-4279.14 [Reserved]
Sec. 4279.15 Exception authority.
The Administrator may, in individual cases, grant an exception to
any requirement or provision of this part or part 4287 which is not
inconsistent with any applicable law; provided that: the Administrator
determines that application of the requirement or provision would
adversely affect the Government's financial interest.
Sec. 4279.16 Appeals.
Only the borrower, lender, or holder can appeal an Agency decision
made under this part or part 4287. Except as set forth in this section,
the borrower and lender must jointly execute the written request for
review or appeal of an adverse decision made by the Agency. In cases
where the Agency has denied or reduced the amount of final loss payment
to the lender, the adverse decision may be appealed by the lender only.
An adverse decision that only impacts the holder may be appealed by the
holder only. A decision by a lender adverse to the interest of the
borrower is not a decision by the Agency, whether or not concurred in
by the Agency. Appeals will be handled in accordance with the
departmental appeal regulations.
Secs. 4279.17-4279.28 [Reserved]
Sec. 4279.29 Eligible lenders.
(a) An eligible lender is any Federal or state chartered bank, Farm
Credit Bank, other Farm Credit System institution with direct lending
authority, Bank for Cooperatives, Savings and Loan Association, or
mortgage company that is part of a bank-holding company. These entities
must be subject to credit examination and supervision by either an
agency of the United States or a state. Eligible lenders may also
include credit unions, provided they are subject to credit examination
and supervision by either the National Credit Union Administration or a
state agency, and insurance companies provided they are regulated by a
state or National insurance regulatory agency. Eligible lenders include
the National Rural Utilities Cooperative Finance Corporation.
(b) Rural Utilities Service borrowers and other lenders not meeting
the criteria of paragraph (a) of this section may be considered by the
Agency for eligibility to become a guaranteed lender provided the
Agency determines that they have the legal authority to operate a
lending program and sufficient lending expertise and financial strength
to operate a successful lending program.
(1) Such a lender must:
(i) Have a record of successfully making at least three commercial
loans for at least the most recent 3 years, with delinquent loans not
exceeding 10 percent of loans outstanding and historic losses not
exceeding 10 percent of dollars loaned; and
(ii) Have tangible balance sheet equity of at least 7 percent of
tangible assets and sufficient funds available to disburse the
guaranteed loans it proposes to approve within the first 6 months of
being approved as a guaranteed lender.
(2) A lender not covered under paragraph (a) of this section that
wishes consideration to become a guaranteed lender must submit a
request in writing to the state office for the state where the lender's
lending and servicing activity takes place. The National office will
notify the prospective lender, through the state director, whether the
lender's request for eligibility is approved or rejected. If rejected,
the reasons for the rejection will be indicated to the prospective
lender in writing, and appeal rights will be provided in accordance
with departmental appeal regulations. The lender's written request must
include:
(i) Evidence showing that the lender has the necessary capital and
resources to successfully meet its responsibilities.
(ii) Copy of any license, charter, or other evidence of authority
to engage in the proposed loanmaking and loan servicing activity. If
licensing by the state is not required, an attorney's opinion to this
effect must be submitted.
(iii) Information on lending experience, including length of time
in the lending business, range and volume of lending and servicing
activity, and status of loan portfolio including delinquency rate, loss
rate as a percentage of loan amounts, and other measures of success;
experience of management and loan officers; audited financial
statements not more than 1 year old; sources of funds for the proposed
loans; office location and proposed lending area; and proposed rates
and fees, including loan origination, loan preparation, and servicing
fees. Such fees must not be greater than those charged by similarly
located commercial lenders in the ordinary course of business.
(iv) An estimate of the number and size of guaranteed loan
applications the lender will develop.
[[Page 3860]]
(c) Expertise. Loan guarantees will only be approved for lenders
with adequate experience and expertise to adequately make, secure,
service, and collect B&I loans.
Sec. 4279.30 Lenders' functions and responsibilities.
(a) General. Lenders have the primary responsibility for the
successful delivery of the B&I loan program. All lenders obtaining or
requesting a B&I loan guarantee are responsible for processing
applications for guaranteed loans, developing and maintaining
adequately documented loan files, recommending only loan proposals that
are eligible and financially feasible, obtaining valid evidence of debt
and collateral in accordance with sound lending practices, supervising
construction and distribution of loan funds, servicing guaranteed loans
in a prudent manner, including liquidation if necessary, following
Agency regulations, and obtaining Agency approvals or concurrence as
required. This subpart, along with subpart B of this part and subpart B
of part 4287 sets out the regulations for this program, including the
lenders' responsibilities.
(b) Credit evaluation. This is a key function of all lenders during
the loan processing phase. The lender must analyze all credit factors
associated with each proposed loan and apply their professional
judgment to determine that the credit factors, considered in
combination, ensure loan repayment. The lender should have an adequate
underwriting process to ensure that loans are reviewed by other than
the originating officer. There must be good credit documentation
procedures.
(c) Environmental assessment. All lenders should alert the Agency
to any controversial environmental issues related to a proposed project
or items that may require extensive environmental review. Lenders
should help the borrower prepare Form FmHA 1940-20, ``Request for
Environmental Information,'' and attachments when required by FmHA
Instruction 1940-G.
(d) Loan closing. The lender will conduct loan closings at its
discretion.
Secs. 4279.31-4279.42 [Reserved]
Sec. 4279.43 Certified Lender Program.
(a) General. This section provides policies and procedures for the
Certified Lender Program (``CLP'') for loans guaranteed under this
part. The objectives are to expedite loan approval for those lenders
with a proven ability, in accordance with paragraph (b) of this
section, to process, service, and collect loans.
(b) CLP eligibility criteria. The lender must meet established
eligibility criteria prior to being considered for CLP status as
follows:
(1) Be an ``eligible lender'' as defined in Sec. 4279.29 and
authorized to do business in the state in which CLP status is desired.
(2) Demonstrate to the Agency's satisfaction that it has a thorough
knowledge of commercial lending. The lender will demonstrate such
knowledge by providing a summary of its guaranteed and unguaranteed
business lending activity. At a minimum, the summary should include the
dollar amount and number of loans in the lender's portfolio,
unguaranteed and guaranteed by any Federal agency, with information on
delinquencies and losses and, if applicable, the performance of the
lender as an SBA certified or preferred lender. A certified lender
should be recognized throughout the state as a commercial lender and
have a track record of successfully making at least five commercial
loans per year for at least the most recent 5 years, with delinquent
loans not exceeding 6 percent of loans outstanding and historic losses
not exceeding 6 percent of dollars loaned. The lender will provide a
written certification to this effect along with a statistical analysis
of its loan portfolio for the last 3 of its fiscal years.
(3) If a bank or savings and loan, have a financial strength rating
in the upper half of possible ratings as reported by a lender rating
service selected by the Administrator.
(4) Possess loan officers and other appropriate personnel who have
received training conducted by the Agency. Additional training may be
required if the lender's contact person changes or if the Agency feels
further instruction is needed.
(5) Have committed no action within the most recent 2 years prior
to requesting CLP status which would be considered cause for revoking
CLP status under Sec. 4279.43(e).
(c) CLP approval. The Agency may grant CLP status for a period not
to exceed 5 years by executing Form RECD 4279-8, ``Certified Lender,
Business and Industry Program,'' with the lender. The Form RECD 4279-8
will not apply to branches or suboffices of the lender unless so
specified in the agreement. Such branches or suboffices may submit
loans as regular lenders or apply for their own CLP status. Any lender
who desires CLP status must prepare a written request to the state
director for the state in which it desires status. The request should
address each of the required criteria outlined in paragraph (b) of this
section except for paragraph (b)(3) and may be accompanied by any other
information the lender believes will be helpful. The request will also
include Form RECD 4279-8 completed and executed by the lender and an
executed Lender's Agreement, if it does not already have a valid
Lender's Agreement on file with the Agency. Loans made by the lender
and guaranteed by the Agency prior to the lender receiving CLP status
shall continue to be governed by the forms and agreements executed
between the lender and the Agency for those loans.
(d) Renewal of CLP status. Renewal of CLP status is not automatic.
CLP status will lapse upon the expiration date of Form RECD 4279-8
unless the lender obtains a renewal. A lender whose CLP status has
lapsed may continue to submit loan guarantee requests, but only as a
regular lender. The lender must provide a new Form RECD 4279-8
completed and executed by the lender, along with a written update of
the eligibility criteria required in this section for CLP approval.
This information should be supplied at least 60 days prior to the
expiration of the existing agreement to be processed for uninterrupted
status. The information should address how the lender is complying with
each of the required criteria described in paragraph (b) of this
section. It should include any proposed changes in the designated
persons for processing guaranteed loans or operating methods used in
processing and servicing Agency guaranteed loans.
(e) Revocation of CLP status. The lender's CLP status may be
revoked at any time for cause. The debarment of a lender is an
additional alternative the Agency may consider. A lender which has lost
its CLP status, but has not been debarred and still meets the
requirements of Sec. 4279.29 may continue to submit loan guarantee
requests as a regular lender. Cause for revoking CLP status includes:
(1) Failure to maintain status as an eligible lender as set forth
in Sec. 4279.29.
(2) Knowingly submitting false information when requesting a
guarantee or basing a guarantee request on information known to be
false or upon information which the lender should have known to be
false.
(3) Making an Agency guaranteed loan with deficiencies which may
cause losses under the Loan Note Guarantee not to be covered by the
Loan Note Guarantee.
(4) Conviction for acts in connection with any loan transaction,
regardless of whether the loan was guaranteed by the Agency.
[[Page 3861]]
(5) Violation of usury laws in connection with any loan guaranteed
by the Agency.
(6) Failure to obtain the required security for any loan guaranteed
by the Agency.
(7) Using loan funds guaranteed by the Agency for purposes other
than those specifically approved by the Agency in the Conditional
Commitment.
(8) Violation of any terms of the Lender's Agreement.
(9) Failure to correct any cited deficiency in loan documents in a
timely manner.
(10) Failure to submit reports required by the Agency in a timely
manner.
(11) Failure to process Agency guaranteed loans in a reasonably
prudent manner.
(12) Failure to provide for adequate construction planning and
monitoring in connection with any loan to ensure that the project will
be completed within the available funds and, once completed, will be
suitable for the borrower's needs.
(13) Repetitive recommendations for guaranteed loans with marginal
or substandard credit quality or that do not comply with Agency
requirements.
(14) Repetitive recommendations for servicing actions that do not
comply with Agency requirements.
(15) Negligent servicing.
(16) Failure to conduct any approved liquidation of a loan
guaranteed by the Agency or its predecessors in a timely and effective
manner and in accordance with the approved liquidation plan.
(f) General loan processing and servicing guidelines. All requests
for guaranteed loans will be processed and serviced under subparts A
and B of this part and subpart B of part 4287 except as modified by
this section. When determining whether or not to request a guarantee
for a proposed loan, lenders must consider the priorities set forth in
Sec. 4279.155.
(1) Prior to processing an application, the CLP lender may give
written notice to the state director of its intention to submit an
application. Upon receipt of such written notice, the Agency will
notify the CLP lender whether or not there is sufficient guarantee
authority for the loan. Such guarantee authority will be held for 30
days pending receipt of the application. If a complete application for
which guarantee authority is being held is not received within 30 days
of the notice of intent to file, or is rejected, the guarantee
authority for this application will no longer be held in reserve.
(2) Refinancing of existing lender debt in accordance with
Sec. 4279.113(q) will not be permitted without prior Agency approval.
(3) CLP lenders will process all guaranteed loans as a ``complete
application'' by obtaining and completing all items required by
Sec. 4279.161(b). The CLP lender must maintain all information required
by Sec. 4279.161(b) in its loan file, and determine that such material
complies with all requirements.
(4) CLP lenders will make all material relating to any guarantee
application available to the Agency upon request.
(5) At the time of the Agency's issuance of the Loan Note
Guarantee, the CLP lender will provide the Agency with copies of the
following documents:
(i) Executed Loan Agreement.
(ii) Executed Promissory Notes.
(iii) Executed copies of security documents including personal and
corporate guarantees.
(g) Unique characteristics of the CLP. A proposed loan by a CLP
lender requires only a review by the Agency of the information
submitted by the lender. The Agency may rely on the lender's credit
analysis.
(1) The following will constitute a complete application submitted
by a CLP lender:
(i) Form RECD 4279-1, ``Application for Loan Guarantee (Business
and Industry),'' (marked with the letters ``CLP'' at the top) completed
in its entirety and executed by the borrower and CLP lender.
(ii) Copy of the proposed Loan Agreement or a list of proposed
requirements.
(iii) Form FmHA 1940-20, completed and signed, with attachments.
(iv) The lender's complete written analysis of the proposal,
including spreadsheets of the balance sheets and income statements for
the 3 previous years (for existing businesses), pro forma balance sheet
at startup, and 2 years projected yearend balance sheets and income
statements, with appropriate ratios and comparisons with industry
standards (such as Dun & Bradstreet or Robert Morris Associates). All
data must be shown in total dollars and also in common size form,
obtained by expressing all balance sheet items as a percentage of
assets and all income and expense items as a percentage of sales. The
lender's credit analysis must address the borrower's management,
repayment ability, history of debt repayment, necessity of any debt
refinancing, and the credit reports of the borrower, its principals,
and any parent, affiliate, or subsidiary.
(v) Intergovernmental consultation comments in accordance with 7
CFR part 3015, subpart V.
(vi) If the loan will exceed $1 million and will increase direct
employment by more than 50 employees, Form RECD 4279-2, ``Certification
of Non-Relocation and Market Capacity Information Report,'' must be
completed by the lender. For such loans, the Agency will submit Form
RECD 4279-2 to the Department of Labor and obtain clearance before a
Conditional Commitment may be issued.
(2) The Agency will make the final credit decision based primarily
on a review of the credit analysis submitted by the lender except that
refinancing of existing lender debt in accordance with Sec. 4279.113(q)
will not be approved without review of the borrower's complete
financial statements and complete credit analysis by the Agency. The
Agency may request additional information to clarify or complete the
submission.
(h) Lender loan servicing responsibilities. CLP lenders will be
fully responsible for all aspects of loan servicing and, if necessary,
liquidation as described in subpart B of part 4287.
Sec. 4279.44 Access to records.
The lender will permit representatives of the Agency (or other
agencies of the United States) to inspect and make copies of any
records of the lender pertaining to the Agency guaranteed loans during
regular office hours of the lender or at any other time upon agreement
between the lender and the Agency.
Secs. 4279.45-4279.57 [Reserved]
Sec. 4279.58 Equal Credit Opportunity Act.
In accordance with Title V of Pub.L. 93-495, the Equal Credit
Opportunity Act, with respect to any aspect of a credit transaction,
neither the lender nor the Agency will discriminate against any
applicant on the basis of race, color, religion, national origin, sex,
marital status or age (providing the applicant has the capacity to
contract), or because all or part of the applicant's income derives
from a public assistance program, or because the applicant has, in good
faith, exercised any right under the Consumer Protection Act. The
lender will comply with the requirements of the Equal Credit
Opportunity Act as set out in the Federal Reserve Board's Regulation
implementing this Act (see 12 CFR part 202). Such compliance will be
accomplished prior to loan closing.
[[Page 3862]]
Secs. 4279.59-4279.70 [Reserved]
Sec. 4279.71 Public bodies and nonprofit corporations.
Any public body or nonprofit corporation that receives a guaranteed
loan that meets the thresholds established by Office of Management and
Budget (OMB) Circulars A-128 or A-133 or successor circulars must
provide an audit in accordance with the applicable OMB Circular for the
fiscal year (of the borrower) in which the Loan Note Guarantee is
issued. If the loan is for development or purchases made in a previous
fiscal year through interim financing, an audit will also be provided
for the fiscal year in which the development or purchases occurred. Any
audit provided by a public body or nonprofit corporation in compliance
with OMB Circulars A-128 or A-133 or their successsors will be
considered adequate to meet the audit requirements of the B&I program
for that year.
Sec. 4279.72 Conditions of guarantee.
A loan guarantee under this part will be evidenced by a Loan Note
Guarantee issued by the Agency. Each lender will execute a Lender's
Agreement. If a valid Lender's Agreement already exists, it is not
necessary to execute a new Lender's Agreement with each loan guarantee.
The provisions of this subpart, other appropriate subparts of this
part, and part 4287 of this chapter will apply to all outstanding
guarantees unless directly in conflict with the Loan Note Guarantee or
Lender's Agreement issued for the guarantee. In the event of such a
conflict, the lender may elect to have the loan serviced in accordance
with these regulations. The lender must notify the Agency of such
election in writing. Without such written election, the provisions of
the Loan Note Guarantee and Lender's Agreement will control.
(a) Full faith and credit. A guarantee under this part constitutes
an obligation supported by the full faith and credit of the United
States and is incontestable except for fraud or misrepresentation of
which a lender or holder has actual knowledge at the time it becomes
such lender or holder or which a lender or holder participates in or
condones. The guarantee will be unenforceable to the extent that any
loss is occasioned by a provision for interest on interest. In
addition, the guarantee will be unenforceable by the lender to the
extent any loss is occasioned by the 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 be unenforceable to the extent that loan funds
are used for purposes other than those specifically approved by the
Agency in its Conditional Commitment. The Agency will guarantee payment
as follows:
(1) To any holder, 100 percent of any loss sustained by the holder
on the guaranteed portion of the loan and on interest due on such
portion.
(2) To the lender, the lesser of:
(i) Any loss sustained by the lender on the guaranteed portion,
including principal and interest evidenced by the notes or assumption
agreements and secured advances for protection and preservation of
collateral made with Agency's authorization; or
(ii) The guaranteed principal advanced to or assumed by the
borrower and any interest due thereon.
(b) Rights and liabilities. When a guaranteed portion of a loan is
sold to a holder, the holder shall succeed to all rights of the lender
under the Loan Note Guarantee to the extent of the portion purchased.
The lender will remain bound to all obligations under the Loan Note
Guarantee, Lender's Agreement, and the Agency program regulations. A
guarantee and right to require purchase will be directly enforceable by
a holder notwithstanding any fraud or misrepresentation by the lender
or any unenforceability of the guarantee by the lender, except for
fraud or misrepresentation of which the holder had actual knowledge at
the time it became the holder or in which holder participates or
condones. In the event of material fraud, negligence or
misrepresentation by the lender or the lender's participation in or
condoning of such material fraud, negligence or misrepresentation, the
lender will be liable for payments made by the Agency to any holder.
(c) Payments. A lender will receive all payments of principal and
interest on account of the entire loan and will promptly remit to the
holder its pro rata share thereof, determined according to its
respective interest in the loan, less only the lender's servicing fee.
Secs. 4279.73-4279.74 [Reserved]
Sec. 4279.75 Sale or assignment of guaranteed loan.
The lender may sell all or part of the guaranteed portion of the
loan on the secondary market or retain the entire loan. The lender
shall not sell or participate any amount of the guaranteed or
unguaranteed portion of the loan to the borrower or members of the
borrower's immediate families, officers, directors, stockholders, other
owners, or a parent, subsidiary or affiliate. 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. Loans
made with the proceeds of any obligation the interest on which is
excludable from income under Section 103 of the Internal Revenue Code
of 1954, as amended, will not be guaranteed.
(a) Single note system. The entire loan is evidenced by one note,
and one Loan Note Guarantee is issued. The lender may assign all or
part of the guaranteed portion of the loan to one or more holders by
using Agency's Assignment Guarantee Agreement. The holder, upon written
notice to the lender and the Agency, may reassign the unpaid guaranteed
portion of the loan sold under the Assignment Guarantee Agreement. Upon
notification and completion of the assignment through the use of Form
RECD 4279-6, ``Assignment Guarantee Agreement,'' the assignee shall
succeed to all rights and obligations of the holder thereunder. If this
option is selected, the lender may not at a later date cause any
additional notes to be issued.
(b) Multinote system. Under this option the lender may provide one
note for the unguaranteed portion of the loan and no more than 10 notes
for the guaranteed portion. When this option is selected by the lender,
the holder will receive one of the borrower's executed notes and a Loan
Note Guarantee. The Agency will issue a Loan Note Guarantee for each
note, including the unguaranteed note, to be attached to the note. An
Assignment Guarantee Agreement will not be used when the multinote
option is utilized.
(c) After loan closing. If a loan is closed using the multinote
option and at a later date additional notes are desired, the lender may
cause a series of new notes, not to exceed the total number provided
for in paragraph (b) of this section, to be issued as replacement for
previously issued guaranteed notes, provided:
(1) Written approval of the Agency is obtained;
(2) The borrower agrees and executes the new notes;
(3) The interest rate does not exceed the interest rate in effect
when the loan was closed;
(4) The maturity of the loan is not changed;
(5) The Agency will not bear or guarantee any expenses that may be
incurred in reference to such reissuances of notes;
(6) There is adequate collateral securing the notes;
[[Page 3863]]
(7) No intervening liens have arisen or have been perfected and the
secured lien priority remains the same; and
(8) All holders agree.
(d) The lender's servicing fee will stop when the Agency purchases
the guaranteed portion of the loan from the secondary market. No such
servicing fee may be charged to the Agency and all loan payments and
collateral proceeds received will be applied first to the guaranteed
loan and when applied to the guaranteed loan, will be applied on a pro
rata basis.
(e) When the Agency purchases the guaranteed portion, the loan
shall not be sold with recourse. The purchased loans may be sold on a
nonrecourse basis only, i.e., without a Loan Note Guarantee attached
and without recourse.
Sec. 4279.76 Participation.
The lender may obtain participation in the loan under its normal
operating procedures; however, the lender must retain title to the
notes if any of them are unguaranteed and retain the lender's interest
in the collateral.
Sec. 4279.77 Minimum retention.
The lender is required to hold in its own portfolio a minimum of 5
percent of the total loan amount. The amount required to be maintained
must be of the unguaranteed portion of the loan and cannot be
participated to another. The lender may sell the remaining amount of
the unguaranteed portion of the loan only through participation.
Sec. 4279.78 Repurchase from holder.
(a) Repurchase by lender. A lender has the option to repurchase the
unpaid guaranteed portion of the loan from a holder within 30 days of
written demand by the holder when the borrower is in default not less
than 60 days on principal or interest due on the loan; or the lender
has failed to remit to the holder its pro rata share of any payment
made by the borrower within 30 days of its receipt thereof. The
repurchase by the lender will be for an amount equal to the unpaid
guaranteed portion of principal and accrued interest less the lender's
servicing fee. The holder will concurrently send a copy of the demand
letter 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 demand letter to the lender requesting the repurchase. 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
default, where and when reasonable. The lender will notify the holder
and the Agency of its decision.
(b) Agency purchase. (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 from
the holder. (This is in addition to the copy of the written demand on
the lender.) 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 of the holder to the lender requesting the
repurchase.
(2) The holder's demand to the Agency must include a copy of the
written demand made upon the lender. The holder must also include
evidence of its right to require payment from the Agency. Such evidence
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 holder must include in
its demand the amount due including unpaid principal, unpaid interest
to date of demand, and interest subsequently accruing from date of
demand to proposed payment date. The Agency will be subrogated to all
rights of the holder.
(3) The Agency will notify the lender of its receipt of the
holder's demand for payment. The lender must promptly provide the
Agency with the information necessary for the Agency to determine the
appropriate amount due the holder. Upon request by the Agency, the
lender will furnish a current statement certified by an appropriate
authorized officer of the lender of the unpaid principal and interest
then owed by the borrower on the loan and the amount then owed to any
holder. Any discrepancy between the amount claimed by the holder and
the information submitted by the lender must be resolved between the
lender and the holder before payment will be approved. Such conflict
will suspend the running of the 30-day payment requirement.
(4) Purchase by the Agency neither changes, alters, nor modifies
any of the lender's obligations to the Agency arising from the loan or
guarantee nor does it waive any of Agency's rights against the lender.
The Agency will have the right to set-off against the lender all rights
inuring to the Agency as the holder of the instrument against the
Agency's obligation to the lender under the guarantee.
(c) Purchase for servicing. If, in the opinion of the lender,
repurchase of the guaranteed portion of the loan is necessary to
adequately service the loan, the holder must sell the guaranteed
portion of the loan to the lender for an amount equal to the unpaid
principal and interest on such portion less the lender's servicing fee.
The guarantee will not cover the note interest to the holder on the
guaranteed loan accruing after 90 days from the date of the demand
letter of the lender or the Agency to the holder requesting the holder
to tender its guaranteed portion. The lender must not repurchase from
the holder for arbitrage or other purposes to further its own financial
gain. Any repurchase must only be made after the lender obtains the
Agency's written approval. If the lender does not repurchase the
portion from the holder, the Agency may, at its option, purchase such
guaranteed portion for servicing purposes.
Secs. 4279.79-4279.83 [Reserved]
Sec. 4279.84 Replacement of document.
(a) Authorized representative. 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) Requirements. 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 requirements for replacement are as follows:
(1) A certificate of loss, notarized, which includes:
(i) Name and address of owner;
(ii) Name and address of the lender of record;
(iii) Capacity of person certifying;
(iv) Full identification of the Loan Note Guarantee or Assignment
Guarantee Agreement including the name of the borrower, the Agency's
case number, date of the Loan Note Guarantee or Assignment Guarantee
Agreement, face amount of the evidence of debt purchased, date of
evidence of debt, present balance of the loan, percentage of guarantee,
and, if Assignment Guarantee Agreement, the
[[Page 3864]]
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 should 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) For the holder, evidence demonstrating current ownership of
the Loan Note Guarantee and Note or the Assignment Guarantee Agreement.
If the present holder is not the same as the original holder, a copy of
the endorsement of each successive holder in the chain of transfer from
the initial holder to present holder must be included if in existence.
If copies of the endorsement cannot be obtained, best available records
of transfer must be presented 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. The bond shall be with surety
except when the outstanding principal balance and accrued interest due
the present holder is less than $1 million verified by the lender in
writing in a letter of certification of balance due. The surety shall
be a qualified surety company holding a certificate of authority from
the Secretary of the Treasury and listed in Treasury Department
Circular 580.
(3) All indemnity bonds must be issued and payable to the United
States of America acting through the USDA. The bond shall be in an
amount not less than the unpaid principal and interest. The bond shall
hold USDA 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.
(4) In those cases where the guaranteed loan was closed under the
provision of the multinote system, the Agency will not attempt to
obtain, or participate in the obtaining of, replacement notes from the
borrower. It will be the responsibility of the holder to bear costs of
note replacement if the borrower agrees to issue a replacement
instrument. Should such note be replaced, the terms of the note cannot
be changed. If the evidence of debt has been lost, stolen, destroyed,
mutilated or defaced, such evidence of debt must be replaced before the
Agency will replace any instruments.
Secs. 4279.85-4279.100 [Reserved]
Subpart B--Business and Industry Loans
Sec. 4279.101 Introduction.
(a) Content. This subpart contains loan processing regulations for
the Business and Industry (B&I) Guaranteed Loan Program. It is
supplemented by subpart A of this part, which contains general
guaranteed loan regulations, and subpart B of part 4287, which contains
loan servicing regulations.
(b) Purpose. The purpose of the B&I Guaranteed Loan Program is to
improve, develop, or finance business, industry, and employment and
improve the economic and environmental climate in rural communities.
This purpose is achieved by bolstering the existing private credit
structure through the guarantee of quality loans which will provide
lasting community benefits. It is NOT intended that the guarantee
authority will be used for marginal or substandard loans or to relieve
lenders having such loans.
(c) Documents. Copies of all forms, regulations, and Instructions
referenced in this subpart are available in any state or district
office or the National office.
Sec. 4279.102 Definitions.
The definitions in Sec. 4279.2 of subpart A of this part also apply
to this subpart.
Secs. 4279.103-4279.106 [Reserved]
Sec. 4279.107 Guarantee fee.
The guarantee fee will be paid to the Agency by the lender and is
nonrefundable. The fee may be passed on to the borrower. Except as
provided in this section, the guarantee fee will be 2 percent
multiplied by the principal loan amount multiplied by the percent of
guarantee and will be paid one time only at the time the Loan Note
Guarantee is issued.
(a) The guarantee fee may be reduced to 1 percent if the Agency
determines that the business meets the following criteria:
(1) High-impact business development investment (It is the goal of
this program to encourage high-impact business investment in rural
areas. The weight given to business investments will be in accordance
with Sec. 4279.155(b)(5)); and
(2) The business is located in a community that is experiencing
long-term population decline and job deterioration; or
(3) The business is located in rural community that has remained
persistently poor over the last 60 years or more; or
(4) The business is located in a rural community that is
experiencing trauma as a result of natural disaster or that is
experiencing fundamental structural changes in its economic base.
(b) Each fiscal year, the Agency shall establish a limit on the
maximum portion of guarantee authority available for that fiscal year
that may be used to guarantee loans with a guarantee fee of 1 percent.
The limit will be announced by publishing a notice in the Federal
Register. Once the limit has been reached, the guarantee fee for all
additional loans guaranteed during the remainder of that fiscal year
will be 2 percent.
Sec. 4279.108 Eligible borrowers.
(a) Type of entity. A borrower may be a cooperative, corporation,
partnership, or other legal entity organized and operated on a profit
or nonprofit basis; an Indian tribe on a Federal or state reservation
or other Federally recognized tribal group; a public body; or an
individual. A borrower must be engaged in or proposing to engage in a
business. Business may include manufacturing, wholesaling, retailing,
providing services, or other activities that will:
(1) Provide employment;
(2) Improve the economic or environmental climate;
(3) Promote the conservation, development, and use of water for
aquaculture; or
(4) Reduce reliance on nonrenewable energy resources by encouraging
the development and construction of solar energy system.
(b) Citizenship. Borrowers must meet one of the following sets of
conditions:
(1) Individual borrowers must be citizens of the United States or
reside in the United States after being legally admitted for permanent
residence. Corporations or other nonpublic body organization-type
borrowers must be at least 51 percent owned by persons who are either
citizens of the United States or reside in the United States after
being legally admitted for permanent residence; or,
(2) The borrower does not meet the requirements of paragraph (1) of
this section; but,
(i) The facility financed will create or save jobs for U.S.
residents in a rural area, and
(ii) The principals or other capable management are present and
able to remain in the U.S. and will remain in the U.S. to continue the
operation of the company; and,
(iii) The loan funds will only be used to finance fixed assets that
will be located in the U.S.
[[Page 3865]]
(c) Rural area. The business financed with a B&I Guaranteed Loan
must be located in a rural area. Loans to borrowers with facilities
located in both urban and rural areas will be limited to the amount
necessary to finance the facility located in the eligible rural area.
(1) Rural areas include all territory of a state that is:
(i) Not within the outer boundary of any city having a population
of 50,000 or more; and,
(ii) Not within an area that:
(A) Is urbanized or urbanizing as defined in this section; and,
(B) Has a population density of more than 100 persons per square
mile, according to the latest decennial census of the United States.
All density determinations will be made on the basis of minor civil
divisions or census county divisions as used by the Bureau of the
Census. In making the density calculations, large nonresidential tracts
devoted to urban land uses such as railroad yards, airports, industrial
sites, parks, golf courses, cemeteries, office parks, shopping malls,
or land set aside for such purposes will be excluded.
(2) An urbanized area is an area immediately adjacent to a city
with a population of 50,000 or more, that for general social and
economic purposes forms a single community with such a city. An
urbanizing area is an area immediately adjacent to a city with a
population of 50,000 or more or its urbanized area, which appears
likely, based on development and population trends, to become urbanized
in the foreseeable future. The corporate status of an urbanized or
urbanizing area is not material. An area located in recognizable open
country or separated from any city of 50,000 or more population by
recognizable open country or by a river, will be assumed to be not
urbanized or urbanizing.
(d) Other credit. All applications for assistance will be accepted
and processed without regard to the availability of credit from any
other source.
Secs. 4279.109-4279.112 [Reserved]
Sec. 4279.113 Eligible loan purposes.
Loan purposes must be consistent with the general purpose set forth
in Sec. 4279.101. They include but are not limited to the following:
(a) Business and industrial acquisitions when the loan will keep
the business from closing, prevent the loss of employment
opportunities, or provide expanded job opportunities.
(b) Business conversion, enlargement, repair, modernization, or
development.
(c) Purchase and development of land, easements, rights-of-way,
buildings, or facilities.
(d) Purchase of equipment, lease-hold improvements, machinery,
supplies, or inventory.
(e) Pollution control and abatement.
(f) Transportation services incidental to industrial development.
(g) Startup costs and working capital.
(h) Agricultural production, when not eligible for a Farm Credit
Programs loan from the Farm Service Agency and when it is part of an
integrated business also involved in the processing of agricultural
products.
(1) Examples of potentially eligible production include but are not
limited to: an apple orchard in conjunction with a food processing
plant; poultry buildings linked to a meat processing operation; or
sugar beet production coupled with storage and processing. Any
agricultural production considered for B&I financing must be owned,
operated, and maintained by the business receiving the loan for which a
guarantee is provided. Independent agricultural production operations,
even if not eligible for Farmer Programs loans, are not eligible for
the B&I program.
(2) The agricultural production portion of any loan will not exceed
50 percent of the total loan or $1 million, whichever is less.
(i) Purchase of membership, stocks, bonds, or debentures necessary
to obtain a loan from Farm Credit System institutions and other lenders
provided the purchase is required for all of their borrowers.
(j) Aquaculture, including conservation, development, and
utilization of water for aquaculture.
(k) Commercial fishing.
(l) Commercial nurseries engaged in the production of ornamental
plants and trees and other nursery products such as bulbs, flowers,
shrubbery, flower and vegetable seeds, sod, and the growing of plants
from seed to the transplant stage.
(m) Forestry, which includes businesses primarily engaged in the
operation of timber tracts, tree farms, and forest nurseries and
related activities such as reforestation.
(n) The growing of mushrooms or hydroponics.
(o) Interest (including interest on interim financing) during the
period before the first principal payment becomes due or the facility
becomes income producing, whichever is earlier.
(p) Feasibility studies.
(q) To refinance outstanding debt when it is determined that the
project is viable and refinancing is necessary to improve cash flow and
create new or save existing jobs. Existing lender debt may be included
provided that, at the time of application, the loan has been current
for at least the past 12 months (unless such status is achieved by the
lender forgiving the borrower's debt), the lender is providing better
rates or terms, and the refinancing is a secondary part of the overall
loan.
(r) Take out of interim financing. Guaranteeing a loan to pay off a
lender's interim loan will not be treated as debt refinancing provided
that the lender submits a complete preapplication or application which
proposes such interim financing prior to completing the interim loan. A
lender that is considering an interim loan should be advised that the
Agency assumes no responsibility or obligation for interim loans
advanced prior to the Conditional Commitment being issued.
(s) Fees and charges for professional services and routine lender
fees.
(t) Agency guarantee fee.
(u) Tourist and recreation facilities, including hotels, motels,
bed and breakfast establishments, and convention centers, except as
prohibited under ineligible purposes.
(v) Educational or training facilities.
(w) Community facility projects which are not listed as an
ineligible loan purpose.
(x) Constructing or equipping facilities for lease to private
businesses engaged in commercial or industrial operations.
(y) The financing of housing development sites provided that the
community demonstrates a need for additional housing to prevent a loss
of jobs in the area or to house families moving to the area as a result
of new employment opportunities.
(z) Community antenna television services or facilities.
Sec. 4279.114 Ineligible purposes.
(a) Distribution or payment to an individual owner, partner,
stockholder, or beneficiary of the borrower or a close relative of such
an individual when such individual will retain any portion of the
ownership of the borrower.
(b) Projects in excess of $1 million that would likely result in
the transfer of jobs from one area to another and increase direct
employment by more than 50 employees.
(c) Projects in excess of $1 million that would increase direct
employment by more than 50 employees, if the project would result in an
increase in the production of goods for which there is not sufficient
demand, or if the availability of services or facilities is
insufficient to meet the needs of the business.
[[Page 3866]]
(d) Charitable institutions, churches, or church-controlled or
fraternal organizations.
(e) Lending and investment institutions and insurance companies.
(f) Assistance to government employees and military personnel who
are directors or officers or have a major ownership of 20 percent or
more in the business.
(g) Golf courses or race tracks.
(h) Any business that derives more than 10 percent of annual gross
revenue from gambling activity.
(i) Any illegal business activity.
(j) Prostitution.
(k) Any line of credit.
(l) The guarantee of lease payments.
(m) The guarantee of loans made by other Federal agencies.
(n) Residential housing except when health care or assisted living
is involved.
(o) Loans made with the proceeds of any obligation the interest on
which is excludable from income under section 103 of the Internal
Revenue Code, as amended. Funds generated through the issuance of the
tax-exempt obligations may neither be used to purchase the guaranteed
portion of any Agency guaranteed loan nor may an Agency guaranteed loan
serve as collateral for a tax-exempt issue. The Agency may guarantee a
loan for a project which involves tax-exempt financing only when the
guaranteed loan funds are used to finance a part of the project that is
separate and distinct from the part which is financed by the tax-exempt
obligation, and the guaranteed loan has at least a parity security
position with the tax-exempt obligation.
Sec. 4279.115 Prohibition under Agency programs.
No B&I loans guaranteed by the Agency will be conditioned on any
requirement that the recipients of such assistance accept or receive
electric service from any particular utility, supplier, or cooperative.
Secs. 4279.116-4279.118 [Reserved]
Sec. 4279.119 Loan guarantee limits.
(a) Loan amount. The total amount of Agency loans to one borrower,
including the guaranteed and unguaranteed portions, the outstanding
principal and interest balance of any existing Agency guaranteed loans,
and new loan requests, must not exceed $10 million except as provided
for in this paragraph. The Administrator may, at the Administrator's
discretion, grant an exception to the $10 million limit under the
following circumstances:
(1) The project to be financed is a high priority project. Priority
will be determined in accordance with the criteria set forth in
Sec. 4279.155;
(2) The lender must document to the satisfaction of the Agency that
the loan will not be made and the project will not be completed if the
guarantee is not approved;
(3) In no circumstances will the total amount of guaranteed loans
to one borrower, including the guaranteed and unguaranteed portions,
the outstanding principal and interest balance of any existing Agency
guaranteed loans, and new loan requests, exceed $25 million;
(4) The percentage of guarantee will not exceed 60 percent. No
exception to this requirement will be approved under paragraph (b) of
this section for loans exceeding $10 million; and,
(5) Any request for a guaranteed loan exceeding the $10 million
limit must be submitted to the Agency in the form of a preapplication.
The preapplication must be submitted to the National office for review
and concurrence before encouraging a full application.
(b) Percent of guarantee. The percentage of guarantee, up to the
maximum allowed by this section, is a matter of negotiation between the
lender and the Agency. Except as provided in paragraphs (b) (1) through
(4) of this section, the maximum percentage of guarantee is 80 percent
for loans of $5 million or less and 70 percent for loans exceeding $5
million. The Administrator may, at the Administrator's discretion,
grant an exception to the guarantee percentage limits under the
following circumstances:
(1) The project to be financed is a high priority project. Priority
will be determined in accordance with the criteria set forth in
Sec. 4279.155;
(2) The lender must document to the satisfaction of the Agency that
the loan will not be made and the project will not be completed if the
higher guarantee percentage is not approved;
(3) The percentage of guarantee will not exceed 90 percent; and
(4) Each fiscal year, the Agency shall establish a limit on the
maximum portion of guarantee authority available for that fiscal year
that may be used to guarantee loans with a guarantee percentage
exceeding 80 percent. The limit will be announced by publishing a
notice in the Federal Register. Once the limit has been reached, the
guarantee percentage for all additional loans guaranteed during the
remainder of that fiscal year will not exceed 80 percent.
Sec. 4279.120 Fees and charges.
(a) Routine lender fees. The lender may establish charges and fees
for the loan provided they are similar to those normally charged other
applicants for the same type of loan in the ordinary course of
business.
(b) Professional services. Professional services are those rendered
by professionals generally licensed or certified by states or
accreditation associations, such as architects, engineers, packagers,
accountants, attorneys, or appraisers. The borrower may pay fees for
professional services needed for planning and developing a project
provided that the amounts are reasonable and customary in the area.
Professional fees may be included as an eligible use of loan proceeds.
Secs. 4279.121-4279.124 [Reserved]
Sec. 4279.125 Interest rates.
The interest rate for the guaranteed loan will be negotiated
between the lender and the applicant and may be either fixed or
variable as long as it is a legal rate. Interest rates will not be more
than those rates customarily charged borrowers in similar circumstances
in the ordinary course of business and are subject to Agency review and
approval. Lenders are encouraged to utilize the secondary market and
pass interest rate savings on to the borrower.
(a) A variable interest rate agreed to by the lender and borrower
must be a rate that is tied to a base rate agreed to by the lender and
the Agency. The variable interest rate may be adjusted at different
intervals during the term of the loan, but the adjustments may not be
more often than quarterly and must be specified in the Loan Agreement.
The lender must incorporate, within the variable rate Promissory Note
at loan closing, the provision for adjustment of payment installments
coincident with an interest rate adjustment. The lender will assure
that the outstanding principal balance is properly amortized within the
prescribed loan maturity to eliminate the possibility of a balloon
payment at the end of the loan.
(b) Any change in the interest rate between the date of issuance of
the Conditional Commitment and before the issuance of the Loan Note
Guarantee must be approved in writing by the Agency approval official.
Approval of such a change will be shown as an amendment to the
Conditional Commitment.
(c) It is permissible to have one interest rate on the guaranteed
portion of the loan and another rate on the unguaranteed portion of the
loan provided that the rate on the guaranteed portion does not exceed
the rate on the unguaranteed portion.
[[Page 3867]]
(d) A combination of fixed and variable rates will be allowed.
Sec. 4279.126 Loan terms.
(a) The maximum repayment for loans on real estate will not exceed
30 years; machinery and equipment repayment will not exceed the useful
life of the machinery and equipment purchased with loan funds or 15
years, whichever is less; and working capital repayment will not exceed
7 years. The term for a loan that is being refinanced may be based on
the collateral the lender will take to secure the loan.
(b) The first installment of principal and interest will, if
possible, be scheduled for payment after the project is operational and
has begun to generate income. However, the first full installment must
be due and payable within 3 years from the date of the Promissory Note
and be paid at least annually thereafter. Interest-only payments will
be paid at least annually from the date of the note.
(c) Only loans which require a periodic payment schedule which will
retire the debt over the term of the loan without a balloon payment
will be guaranteed.
(d) A loan's maturity will take into consideration the use of
proceeds, the useful life of assets being financed, and the borrower's
ability to repay the loan. The lender may apply the maximum guidelines
specified above only when the loan cannot be repaid over a shorter
term.
Secs. 4279.127-4279.130 [Reserved]
Sec. 4279.131 Credit quality.
The lender is primarily responsible for determining credit quality
and should address all of the elements of credit quality in a written
credit analysis including adequacy of equity, cash flow, collateral,
history, management, and the current status of the industry for which
credit is to be extended.
(a) Cash flow. All efforts will be made to structure or restructure
debt so that the business has adequate debt coverage and the ability to
accommodate expansion. All loans guaranteed through the B&I program
must be sound, with reasonably assured repayment.
(b) Collateral.
(1) Collateral must have documented value sufficient to protect the
interest of the lender and the Government and collateral value will
normally be at least equal to the loan amount. Lenders will discount
collateral consistent with sound loan-to-value policy.
(2) Some businesses are predominantly cash flow oriented, and where
cash flow and profitability is strong, loan-to-value coverage may be
less than normal policy. A loan primarily based on cash flow must be
supported by a successful and documented financial history.
(c) Industry. Current status of the industry will be considered and
businesses in areas of decline will be required to provide strong
business plans which outline how they differ from the current trends.
The regulatory environment surrounding the particular business or
industry will be considered.
(d) Equity. The equity amount will indicate a significant
investment by the owners, sufficient to provide reasonable protection
to creditors, and an ability to maintain a positive equity position
through a normal economic downturn.
(e) Lien priorities. The entire loan will be secured by the same
security with equal lien priority for the guaranteed and unguaranteed
portions of the loan. The unguaranteed portion of the loan will neither
be paid first nor given any preference or priority over the guaranteed
portion. A parity or junior position may be considered provided
discounted collateral values are adequate to secure the loan in
accordance with paragraph (b) of this section after considering prior
liens.
(f) Management. A thorough review of key management personnel will
be completed to assure that the business has adequately trained and
experienced managers.
Secs. 4279.132-4279.136 [Reserved]
Sec. 4279.137 Financial statements.
(a) The lender will determine the type and frequency of submission
of financial statements by the borrower. At a minimum, annual financial
statements prepared by an accountant in accordance with Generally
Accepted Accounting Principles will be required.
(b) If specific circumstances warrant and the proposed guaranteed
loan will exceed $3 million, the Agency may require annual audited
financial statements. For example, the need for audited financial
statements will be carefully considered in connection with loans that
depend heavily on inventory and accounts receivable for collateral.
Secs. 4279.138-4279.142 [Reserved]
Sec. 4279.143 Insurance.
(a) Hazard. Hazard insurance with a standard mortgage clause naming
the lender as beneficiary will be required on every loan in an amount
that is at least the lesser of the depreciated replacement value of the
collateral or the amount of the loan. Hazard insurance includes fire,
windstorm, lightning, hail, explosion, riot, civil commotion, aircraft,
vehicle, marine, smoke, builder's risk during construction by the
business, and property damage.
(b) Life. The lender may require life insurance to insure against
the risk of death of persons critical to the success of the business.
When required, coverage will be in amounts necessary to provide for
management succession or to protect the business. The cost of insurance
and its effect on the applicant's working capital must be considered as
well as the amount of existing insurance which could be assigned
without requiring additional expense.
(c) Worker compensation. Worker compensation insurance is required
in accordance with state law.
(d) Flood. National Flood insurance is required when it is
available.
(e) Other. Public liability, business interruption, malpractice and
other insurance appropriate to the borrower's particular business and
circumstances should be considered and required when needed to protect
the interests of the borrower.
Sec. 4279.144 Appraisals.
Lenders will be responsible for assuring that appraisal values
adequately reflect the actual value of all collateral. All real
property appraisals associated with Agency guaranteed loanmaking and
servicing transactions will meet the requirements set forth by the
Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of
1989 and the appropriate guidelines set forth in Standards 1 and 2 of
the Uniform Standards of Professional Appraisal Practices (USPAP). For
additional guidance and information concerning the completion of real
property appraisals, refer to subpart A of part 1922. Chattels will be
evaluated in accordance with normal banking practices and generally
accepted methods of determining value.
Secs. 4279.145-4279.148 [Reserved]
Sec. 4279.149 Personal and corporate guarantees.
(a) Personal and corporate guarantees, when obtained, are part of
the collateral for the loan. However, the value of such guarantee is
not considered in determining whether a loan is adequately secured for
loanmaking purposes.
(b) Personal/corporate guarantees for those owning greater than 20
percent of the borrower or those providing significant revenues or
income to the borrower will be required where legally
[[Page 3868]]
permissible, except as provided for by this section.
(c) Exceptions to the requirements for personal guarantees must be
requested by the lender and concurred in by the Agency approval
official on a case-by-case basis. The lender must strongly document
that collateral, equity, cash flow, and profitability, or a combination
of these, indicates an above average ability to repay the loan.
Sec. 4279.150 Feasibility studies.
A feasibility study by a qualified independent consultant may be
required by the Agency for startup businesses or existing businesses
when the project will significantly affect the borrower's operations.
Secs. 4279.151-4279.154 [Reserved]
Sec. 4279.155 Loan priorities.
Applications and preapplications received by the Agency will be
considered in the order received; however, for the purpose of assigning
priorities as described in paragraph (b) of this section, the Agency
will compare an application to other pending applications.
(a) When applications on hand otherwise have equal priority,
applications from qualified veterans will have preference.
(b) Priorities will be assigned by the Agency to eligible
applications on the basis of a point system as set forth in this
section. The application and supporting information will be used to
determine an eligible proposed project's priority for available
guarantee authority. All lenders, including CLP lenders, will consider
Agency priorities when choosing projects for guarantee. The lender will
provide necessary information related to determining the score, as
requested.
(1) Population priority. The priority score for population will be
the total score for the following categories:
(i) Located in an unincorporated area or in a city with under
25,000 population (10 points).
(ii) Located in a county defined as nonadjacent to a metropolitan
area, according to the latest definition provided by the Economic
Research Service of the Department of Agriculture (5 points).
(2) Community priority. The priority score for community will be
the total score for the following categories:
(i) Located in an eligible area of long term population decline and
job deterioration based on reliable statistical data (5 points).
(ii) Located in a rural community that has remained persistently
poor over the last 60 years or more (5 points).
(iii) Located in a rural community that is experiencing trauma as a
result of natural disaster or experiencing fundamental structural
changes in its economic base (5 points).
(iv) Located in a city or county with an unemployment rate 125
percent of the statewide rate or greater (5 points).
(3) Empowerment Zone/Enterprise Community (EZ/EC).
(i) Located in an EZ/EC selected or designated area (10 points).
(ii) Located in a EZ/EC applicant community which was not selected
or designated as EZ/EC. (5 points).
(4) Loan features. The priority score for loan features will be the
total score for the following categories except that the total score
for loan features cannot exceed 15 points:
(i) Lender will price the loan at secondary market rate plus 1.5
percent or less (5 points).
(ii) Lender will price the loan at secondary market rate plus 1
percent or less (5 points).
(iii) The Agency guaranteed loan is less than 50 percent of project
cost (5 points).
(iv) Percentage of guarantee is 10 or more percentage points less
than the maximum allowable for a loan of its size (5 points).
(5) High impact Business Investment Priorities. The priority score
for high impact business investment will be the total score for the
following three categories:
(i) Industry. The priority score for industry will be the total
score for the following, except that the total score for industry
cannot exceed 10 points.
(A) Industry that ranks among the leading-edge industries for
industrial growth potential, as measured by being in the top half of
industries in terms of industrial life cycle (3 points).
(B) Industry whose basis for competitiveness results from effective
use of the local natural resource base, rural location, or special
assets or contributions from the community, and not from extraordinary
tax abatements or other industrial attractions (3 points).
(C) Industry that has potential to achieve 20 percent or more of
its sales in international markets (3 points).
(D) Industry that is not already present in the community and
therefore represents a diversification of the local economy and reduces
overall community vulnerability to cyclical changes in the fortunes of
the predominant local industries (3 points).
(ii) Business. The priority score for business will be the total
score for the following, except that the total score for business
cannot exceed 10 points.
(A) Business that offers high value, specialized products and
services that command high prices because of uniqueness, high quality,
or niche marketing strategies and which displays the capacity for
innovativeness and rapid response in capitalizing on market
opportunities (3 points).
(B) Business that has a significant potential to stimulate the
development of a broader complex of business activities that provide
inputs to or serve as the markets for the initial business (3 points).
(C) Business that is locally owned and managed (3 points).
(D) Business that is a cooperative form of enterprise (3 points).
(iii) Job quality. The priority score for job quality will be the
total score for the following, except that the total score for job
quality cannot exceed 10 points.
(A) Business that provides jobs with career and earnings growth
opportunities within the local plant and does not require employees to
move away from the community in order to achieve career advancement (4
points).
(B) Business in which the average wage for project jobs exceeds 150
percent of the Federal minimum wage (4 points).
(C) Business in which the average wage for project jobs exceeds 200
percent of the Federal minimum wage (an additional 4 points).
(6) Administrative points. The state director may assign up to 10
additional points to an application to account for such factors as
statewide distribution of funds, natural or economic emergency
conditions, area economic development strategies, or other factors the
state director believes are not adequately covered elsewhere in the
scoring system. An explanation of the assigning of these points by the
state director will be appended to the calculation of the project score
maintained in the case file. If an application is considered in the
National office, the Administrator may also assign up to an additional
10 points. The Administrator may assign the additional points to an
application to account for items such as geographic distribution of
funds and emergency conditions caused by economic problems or natural
disasters or other factors the Administrator believes are not
adequately covered elsewhere in the scoring system.
Sec. 4279.156 Planning and performing development.
(a) Design policy. 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
[[Page 3869]]
within the available funds and, once completed, will be suitable for
the borrower's needs.
(b) Project control. The lender will monitor the progress of
construction and undertake the reviews and inspections necessary to
ensure that construction proceeds are used in accordance with the
approved plans, specifications, and contract documents and that funds
are used for eligible project costs.
(c) Equal opportunity. 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 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) Americans with Disabilities Act (ADA). B&I Guaranteed Loans
which involve the construction of or addition to facilities that
accommodate the public and commercial facilities, as defined by the
ADA, must comply with the ADA. The lender and borrower are responsible
for compliance.
Secs. 4279.157-4279.160 [Reserved]
Sec. 4279.161 Filing preapplications and applications.
Borrowers and lenders are encouraged to file preapplications and
obtain Agency comments before completing an application. However, if
they prefer, they may file a complete application as the first contact
with the Agency. Neither preapplications nor applications will be
accepted or processed unless a lender has agreed to finance the
proposal.
(a) Preapplications. Lenders may file preapplications by submitting
the following to the Agency:
(1) A letter signed by the borrower and lender containing the
following:
(i) Borrower's name, organization type, address, contact person,
and federal tax identification and telephone numbers.
(ii) Amount of the loan request, percent of guarantee requested,
and the proposed rates and terms.
(iii) Name of proposed lender, address, telephone number, contact
person, and lender's Internal Revenue Service (IRS) identification
number.
(iv) Brief description of the project, products, and services
provided, and availability of raw materials and supplies.
(v) Type and number of jobs created or saved.
(vi) Amount of borrower's equity and a description of collateral,
with estimated values, to be offered as security for the loan.
(vii) If a corporate borrower, the names and addresses of the
borrower's parent, affiliates, and/or subsidiary firms, if any, and a
description of the relationship.
(2) A completed Form RECD 4279-2, ``Certification of Non-Relocation
and Market Capacity Information Report,'' if the proposed loan is in
excess of $1 million and will increase direct employment by more than
50 employees.
(3) For existing businesses, a current balance sheet and a profit
and loss statement not more than 90 days old and financial statements
for the borrower and any parent, affiliates, and subsidiaries for at
least the 3 most recent years.
(4) For startup businesses, a preliminary business plan must be
provided as part of the preapplication.
(b) Applications. Except for CLP lenders, applications will be
filed with the Agency by submitting the following information: (CLP
applications will be completed in accordance with Sec. 4279.43(g)(1)
but CLP lenders must have the material listed in this paragraph in
their files.)
(1) A completed Form RECD 4279-1, ``Application for Loan Guarantee
(Business and Industry).''
(2) The information required for filing a preapplication, as listed
above, if not previously filed or if the information has changed.
(3) Form FmHA 1940-20, ``Request for Environmental Information,''
and attachments, unless the project is categorically excluded under
Agency environmental regulations. If a Phase I site assessment has been
completed, a copy must be provided.
(4) A personal credit report from an acceptable credit reporting
company for a proprietor (owner), each partner, officer, director, key
employee, and stockholder owning 20 percent or more interest in the
applicant, except for those corporations listed on a major stock
exchange. Credit reports are not required for elected and appointed
officials when the applicant is a public body.
(5) Intergovernmental consultation comments in accordance with 7
CFR part 3015, subpart V.
(6) Appraisals, if available. (Agency approval in the form of a
Conditional Commitment may be issued subject to receipt of adequate
appraisals.)
(7) For all businesses, a current (not more than 90 days old)
balance sheet, a pro forma balance sheet at startup, and projected
balance sheets, income and expense statements, and cash flow statements
for the next 2 years. Projections should be supported by a list of
assumptions showing the basis for the projections.
(8) Lender's complete written analysis, including spreadsheets of
the balance sheets and income statements for the 3 previous years (for
existing businesses), pro forma balance sheet at startup, and 2 years
projected yearend balance sheets and income statements, with
appropriate ratios and comparisons with industrial standards (such as
Dun & Bradstreet or Robert Morris Associates). All data must be shown
in total dollars and also in common size form, obtained by expressing
all balance sheet items as a percentage of assets and all income and
expense items as a percentage of sales. The lender's credit analysis
must address the borrower's management, repayment ability, history of
debt repayment, necessity of any debt refinancing, and the credit
reports of the borrower, its principals, and any parent, affiliate, or
subsidiary.
(9) Commercial credit reports obtained by the lender on the
borrower and any parent, affiliate, and subsidiary firms.
(10) Current personal and corporate financial statements of any
guarantors.
(11) A proposed Loan Agreement or a sample Loan Agreement with an
attached list of the proposed loan agreement provisions for the loan.
The final Loan Agreement must be executed by the lender and borrower
before the Agency issues a Loan Note Guarantee. The following
requirements must be addressed in the Loan Agreement:
(i) Prohibition against assuming liabilities or obligations of
others.
(ii) Restriction on dividend payments.
(iii) Limitation on purchase or sale of equipment and fixed assets.
(iv) Limitation on compensation of officers and owners.
(v) Minimum working capital or current ratio requirement.
(vi) Maximum debt to net worth ratio.
(vii) Restrictions concerning consolidations, mergers, or other
circumstances.
(viii) Limitations on selling the business without the concurrence
of the lender.
(ix) Repayment and amortization of the loan.
(x) List of collateral and lien priority for the loan including a
list of persons and corporations guaranteeing the loan with a schedule
for providing the lender with personal and corporate financial
statements. Financial statements on the corporate and personal
guarantors must be updated no less than annually.
[[Page 3870]]
(xi) Type and frequency of financial statements to be required for
the duration of the loan.
(xii) The final Loan Agreement between the lender and borrower will
contain any additional requirements imposed by the Agency in its
Conditional Commitment.
(12) A business plan, which includes at a minimum a description of
the business and project, management experience, products and services,
proposed use of funds, availability of labor, raw materials and
supplies, and the names of any corporate parent, affiliates, and
subsidiaries with a description of the relationship. This may be
omitted if the information is included in a feasibility study.
(13) Independent feasibility study, if required.
(14) For companies listed on a major stock exchange and/or subject
to the Securities and Exchange Commission (SEC) regulations, a copy of
SEC Form 10-K, ``Annual Report Pursuant to Section 13 or 15D of the Act
of 1934.''
(15) For health care facilities, a certificate of need, if required
by state law.
(16) A certification by the lender that it has completed a
comprehensive analysis of the proposal, the applicant is eligible, the
loan is for authorized purposes, and there is reasonable assurance of
repayment ability based on the borrower's history, projections and
equity, and the collateral to be obtained.
(17) Any additional information required by the Agency.
Secs. 4279.162-4279.164 [Reserved]
Sec. 4279.165 Evaluation of application.
(a) General review. If the Agency determines it is unable to
guarantee the loan, the lender will be informed in writing. Such
notification will include the reasons for denial of the guarantee.
Review of CLP applications will be modified in accordance with
Sec. 4279.43(g).
(b) Environment. Before loan approval, the proposed project must
comply with environmental requirements.
Secs. 4279.166-4279.172 [Reserved]
Sec. 4279.173 Loan approval and obligating funds.
(a) Upon approval of a loan guarantee, the Agency will issue a
Conditional Commitment to the lender to set forth conditions under
which a Loan Note Guarantee will be issued. The Conditional Commitment
must be accepted by the lender and borrower in writing.
(b) If certain conditions of the Conditional Commitment cannot be
met, the lender and applicant may propose alternate conditions. Within
the requirements of the applicable regulations and instructions and
prudent lending practices, the Agency may negotiate with the lender and
the applicant regarding any proposed changes to the Conditional
Commitment.
Sec. 4279.174 Transfer of lenders.
(a) The loan approval official may approve the substitution of a
new eligible lender in place of a former lender who holds an
outstanding Conditional Commitment when the Loan Note Guarantee has not
yet been issued, provided that there are no changes in the borrower's
ownership or control, loan purposes, or scope of project and loan
conditions in the Conditional Commitment and the Loan Agreement remain
the same.
(b) The new lender's servicing capability, eligibility, and
experience will be analyzed by the Agency prior to approval of the
substitution. The original lender will provide the Agency with a letter
stating the reasons it no longer desires to be a lender for the
project. The substituted lender must execute a new Part B of Form RECD
4279-1.
Secs. 4279.175-4279.179 [Reserved]
Sec. 4279.180 Changes in borrower.
Any changes in borrower ownership or organization prior to the
issuance of the Loan Note Guarantee must be approved by the Agency loan
approval official.
Sec. 4279.181 Conditions precedent to issuance of Loan Note Guarantee.
The Loan Note Guarantee will not be issued until the lender,
including a CLP lender, certifies to the following:
(a) No major changes have been made in the lender's loan conditions
and requirements since the issuance of the Conditional Commitment,
unless such changes have been approved by the Agency.
(b) All planned property acquisition has been completed, all
development has been substantially completed in accordance with plans
and specifications, and costs have not exceeded the amount approved by
the lender and the Agency.
(c) Required hazard, flood, liability, worker's compensation, and
personal life insurance, when required, are in effect.
(d) Truth in lending requirements have been met.
(e) All equal credit opportunity requirements have been met.
(f) The loan has been properly closed, and the required security
instruments have been obtained or will be obtained on any acquired
property that cannot be covered initially under state law.
(g) 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.
(h) 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 period of time.
(i) When required, personal, partnership, or corporate guarantees
have been obtained.
(j) All other requirements of the Conditional Commitment have been
met.
(k) Lien priorities are consistent with the requirements of the
Conditional Commitment. No claims or liens of laborers, subcontractors,
suppliers of machinery and equipment, or other parties have been filed
against the collateral and no suits are pending or threatened that
would adversely affect the collateral when the security instruments are
filed.
(l) The loan proceeds have been disbursed for purposes and in
amounts consistent with the Conditional Commitment and Form RECD 4279-
1. A copy of the detailed loan settlement of the lender must be
attached to support this certification.
(m) There has been neither any material adverse change in the
borrower's financial condition nor any other material adverse change in
the borrower, for any reason, during the period of time from the
Agency's issuance of the Conditional Commitment to issuance of the Loan
Note Guarantee regardless of the cause or causes of the change and
whether or not the change or causes of the change were within the
lender's or borrower's control. The lender's certification must address
all adverse changes of the borrower, any parent, affiliate, or
subsidiary of the borrower, and guarantors.
(n) None of the lender's officers, directors, stockholders, or
other owners (except stockholders in an institution that has normal
stockshare requirements for participation) has a substantial financial
interest in the borrower and neither the borrower nor its officers,
directors, stockholders, or other owners has a substantial financial
interest in the lender. If the borrower is a member of the board of
directors or an officer of a
[[Page 3871]]
Farm Credit System (FCS) institution that is the lender, the lender
will certify that an FCS institution on the next highest level will
independently process the loan request and act as the lender's agent in
servicing the account.
Secs. 4279.182-4279.185 [Reserved]
Sec. 4279.186 Issuance of the guarantee.
(a) When loan closing plans are established, the lender will notify
the Agency. Coincident with, or immediately after loan closing, the
lender will provide the following to the Agency:
(1) Lender's certifications as outlined in Sec. 4279.181.
(2) Executed Lender's Agreement.
(3) Form FmHA 1980-19, ``Guaranteed Loan Closing Report,'' and
appropriate guarantee fee.
(b) When the Agency is satisfied that all conditions for the
guarantee have been met, the Loan Note Guarantees and the following
documents, as appropriate, will be issued:
(1) Assignment Guarantee Agreement. In the event the lender uses
the single note option and assigns the guaranteed portion of the loan
to a holder, the lender, holder, and the Agency will execute the
Assignment Guarantee Agreement; and
(2) Certificate of Incumbency. If requested by the lender, the
Agency will provide the lender with a certification on Form RECD 4279-
7, ``Certificate of Incumbency and Signature,'' of the signature and
title of the Agency official who signs the Loan Note Guarantee,
Lender's Agreement, and Assignment Guarantee Agreement.
(c) The Agency may, at its discretion, request copies of loan
documents for its file.
(d) There may be instances when not all of the working capital has
been disbursed, and it appears practical to disburse the balance over a
period of time. The state director, after review of a disbursement
plan, may amend the Conditional Commitment in accordance with the
disbursement plan and issue the guarantee.
Sec. 4279.187 Refusal to execute Loan Note Guarantee.
If the Agency determines that it cannot execute the Loan Note
Guarantee, the Agency will promptly inform the lender of the reasons
and give the lender a reasonable period within which to satisfy the
objections. If the lender writes the Agency within the period allowed
requesting additional time to satisfy the objections, the Agency may
grant the request. If the lender satisfies the objections within the
time allowed, the guarantee will be issued.
Secs. 4279.188-4279.200 [Reserved]
18. A new part 4287, is added to chaper XLII to read as follows:
PART 4287--SERVICING
Subpart A--[Reserved]
Subpart B--Servicing Business and Industry (B&I) Guaranteed Loans
Sec.
4287.101 Introduction.
4287.102 Definitions.
4287.103-4287.105 [Reserved]
4287.106 Routine servicing.
4287.107-4287.111 [Reserved]
4287.112 Interest rate adjustments.
4287.113 Release of collateral.
4287.114-4287.122 [Reserved]
4287.123 Subordination of lien position.
4287.124 Alterations of loan instruments.
4287.125-4287.133 [Reserved]
4287.134 Transfer and assumption.
4287.135 Substitution of lender.
4287.136-4287.144 [Reserved]
4287.145 Default by borrower.
4287.146-4287.155 [Reserved]
4287.156 Protective advances.
4287.157 Liquidation.
4287.158 Determination of loss and payment.
4287.159-4287.168 [Reserved]
4287.169 Future recovery.
4287.170 Bankruptcy.
4287.171-4287.179 [Reserved]
4287.180 Termination of guarantee.
4287.181-4287.200 [Reserved]
Authority: 5 U.S.C. 301; 7 U.S.C. 1989.
Subpart A--[Reserved]
Subpart B--Servicing Business and Industry Guaranteed Loans
Sec. 4287.101 Introduction.
(a) This subpart supplements subparts A and B of part 4279 by
providing additional requirements and instructions for servicing and
liquidating all Business and Industry (B&I) Guaranteed Loans. This
includes Drought and Disaster (D&D), Disaster Assistance for Rural
Business Enterprises (DARBE), and Business and Industry Disaster (BID)
loans.
(b) The lender will be responsible for servicing the entire loan
and will remain mortgagee and secured party of record notwithstanding
the fact that another party may hold a portion of the loan. The entire
loan will be secured by the same security with equal lien priority for
the guaranteed and unguaranteed portions of the loan. The unguaranteed
portion of a loan will neither be paid first nor given any preference
or priority over the guaranteed portion of the loan.
(c) Copies of all forms, regulations, and instructions referenced
in this subpart are available in any state or district office or the
National office.
Sec. 4287.102 Definitions.
The definitions contained in Sec. 4279.2 apply to this subpart.
Secs. 4287.103-4287.105 [Reserved]
Sec. 4287.106 Routine servicing.
The lender is responsible for servicing the entire loan and for
taking all servicing actions that a prudent lender would perform in
servicing its own portfolio of loans that are not guaranteed. The Loan
Note Guarantee is unenforceable by the lender to the extent any loss is
occasioned by violation of usury laws, use of loan funds for
unauthorized purposes, negligent servicing, or failure to obtain the
required security regardless of the time at which the Agency acquires
knowledge of the foregoing. This responsibility includes but is not
limited to the collection of payments, obtaining compliance with the
covenants and provisions in the Loan Agreement, obtaining and analyzing
financial statements, checking on payment of taxes and insurance
premiums, and maintaining liens on collateral.
(a) Lender reports. The lender must report the outstanding
principal and interest balance on each guaranteed loan semiannually
using Form FmHA 1980-41, ``Guaranteed Loan Status Report.''
(b) Loan classification. Within 90 days of receipt of the Loan Note
Guarantee, the lender must notify the Agency of the loan's
classification or rating under its regulatory standards. Should the
classification be changed at a future time, the Agency must be notified
immediately.
(c) Agency/lender conference. The lender will meet with the Agency
at the Agency's request to ascertain how the guaranteed loan is being
serviced and that the conditions and covenants of the Loan Agreement
are being enforced.
(d) Financial reports. The lender must obtain the financial
statements required by the Loan Agreement, and these statements must be
forwarded to the Agency. The lender is required to submit annual
statements to the Agency within 120 days of the borrower's fiscal
yearend. The lender must analyze the financial statements and provide
the Agency with a written summary of its analysis and conclusions,
including trends, strengths, weaknesses, extraordinary transactions,
and other indications of the financial condition of the borrower.
Spreadsheets of the new financial statements and previous financial
statements must also be included.
[[Page 3872]]
(e) Additional expenditures. The lender will not make additional
loans to the borrower without first obtaining the prior written
approval of the Agency, even though such loans will not be guaranteed.
Secs. 4287.107-4287.111 [Reserved]
Sec. 4287.112 Interest rate adjustments.
(a) Reductions. The borrower, lender, and holder (if any) may
collectively initiate a permanent or temporary reduction in the
interest rate of the guaranteed loan at any time during the life of the
loan upon written agreement among these parties. The Agency must be
notified by the lender, in writing, within 10 calendar days of the
change. If the guaranteed portion has been purchased by the Agency,
then the Agency will affirm or reject interest rate change proposals in
writing. When the Agency holds any portion of the loan, it will concur
in such interest rate changes only when it is demonstrated to the
Agency that the change is a more viable alternative than initiating or
proceeding with liquidation of the loan or continuing with the loan in
its present state. The Government's financial interests must not be
adversely affected by the reduction of the interest rate.
(1) Factors which will be considered in making such determinations
include:
(i) Whether the proposed interest rate will be below the
Government's cost of borrowing money;
(ii) Whether continuing with the loan would realistically promote
or enhance rural development and employment in rural areas;
(iii) Whether recovery is maximized and the monetary recovery would
be increased by proceeding immediately to liquidation (if applicable)
or allowing the borrower to continue at a reduced interest rate; and
(iv) Whether an in-depth financial analysis by the lender
reasonably indicates that the business would be successful at a lower
interest rate and reasonably indicates that the borrower could make the
reduced payment and pay off amounts in arrears, if any.
(2) Fixed rates can be changed to variable rates to reduce the
interest rate to the borrower only when the variable rate has a ceiling
which is less than or equal to the original fixed rate.
(3) Variable rates can be changed to a fixed rate, which is at or
below the current variable rate.
(4) The interest rates, after adjustments, must comply with the
requirements for interest rates on new loans, as established by
Sec. 4279.125.
(5) The lender is responsible for the legal documentation of
interest rate changes by an endorsement or any other legally effective
amendment to the promissory note; however, no new notes may be issued.
Copies of all legal instruments should be provided to the Agency for
its records.
(b) Increases. No increases in interest rates will be permitted
except the normal fluctuations in approved variable interest rates.
Sec. 4287.113 Release of collateral.
(a) All releases of collateral must be supported by a current
appraisal on the remaining collateral. The appraisal will be at the
expense of the borrower and must meet the requirements of
Sec. 4279.144. The Agency must not be adversely affected by the
release, and the remaining collateral must be sufficient to provide for
repayment of the Agency's guaranteed loan. Sale or release of
collateral must be based on an arm's-length transaction. There must be
adequate consideration for the release. Adequate consideration for
release of collateral may include, but is not limited to:
(1) Application of the net proceeds from the sale of collateral to
the borrower's debts in order of lien priority (Application of sale
proceeds to the Agency guaranteed debt must be in inverse order of
maturity);
(2) Use of the net proceeds from the sale of collateral to purchase
other collateral of equal or greater value for which the lender will
obtain a lien position equal or superior to the position previously
held;
(3) Application of the net proceeds from the sale of collateral to
the borrower's business operation in such a manner that a significant
enhancement of the borrower's debt service ability can be clearly
demonstrated. (The lender's written request must detail how the
borrower's debt service ability will be enhanced); and
(4) Assurance that the release of collateral is essential for the
success of the business, thereby furthering the goals of the B&I
program. Such assurance must be supported by written documentation from
the lender.
(b) Within the parameters of paragraph (a) of this section, lenders
may release collateral (other than personal and corporate guarantees)
with a cumulative value up to 20 percent of the original loan amount
without Agency concurrence if the proceeds will be used to reduce the
guaranteed loan or to buy replacement collateral.
(c) Within the parameters of paragraph (a) of this section, release
of collateral with a cumulative value in excess of 20 percent of the
original loan or when the proceeds will not be used to reduce the
guaranteed loan or to buy replacement collateral must be requested in
writing by the lender and concurred in by the Agency in writing in
advance of the release. A written evaluation will be done by the lender
to justify the release.
Secs. 4287.114-4287.122 [Reserved]
Sec. 4287.123 Subordination of lien position.
A subordination of the lender's lien position must be requested in
writing by the lender and concurred in by the Agency in writing in
advance of the subordination. The subordination must enhance the
borrower's business, and the Agency's interest in and lien position on
the collateral, after the subordination, must be adequate to secure the
loan. The lien to which the guaranteed loan is subordinated must be for
a fixed dollar limit and fixed or limited term, after which the
guaranteed loan lien priority will be restored. Generally,
subordination to a revolving line of credit will not exceed 1 year.
There must be adequate consideration for the subordination.
Sec. 4287.124 Alterations of loan instruments.
The lender shall neither alter nor approve any alterations of any
loan instruments without the prior written approval of the Agency.
Secs. 4287.125-4287.133 [Reserved]
Sec. 4287.134 Transfer and assumption.
(a) Documentation of request. All transfers and assumptions must be
approved in writing by the Agency and must be to eligible applicants in
accordance with subpart B of part 4279. An individual credit report
must be provided for transferee proprietors, partners, officers,
directors, and stockholders with 20 percent or more interest in the
business, along with such other documentation as the Agency may request
to determine eligibility.
(b) Terms. Loan terms must not be changed unless the change is
approved in writing by the Agency with the concurrence of any holder
and of the transferor (including guarantors) if they have not been or
will not be released from liability. Any new loan terms must be within
the terms authorized by Sec. 4279.126. The lender's request for
approval of new loan terms will be supported by an explanation of the
reasons for the proposed change in loan terms.
(c) Release of liability. The transferor, including any guarantor,
may be released from liability only with prior Agency written
concurrence and only when the value of the collateral being transferred
is at least equal to the
[[Page 3873]]
amount of the loan being assumed, supported by a current appraisal and
a current financial statement where applicable. The Agency will not pay
for the appraisal. If the transfer is for less than the entire debt,
the lender must demonstrate to the Agency that the transferor and any
guarantors have no reasonable debt-paying ability considering their
assets and income at the time of transfer.
(d) Proceeds. Any proceeds received from the sale of collateral
before a transfer and assumption will be credited to the transferor's
guaranteed loan debt in inverse order of maturity before the transfer
and assumption are closed.
(e) Additional loans. Loans to provide additional funds in
connection with a transfer and assumption must be considered as a new
loan application under subpart B of part 4279.
(f) Credit quality. In all cases, the lender must make a complete
credit analysis, subject to Agency review and approval.
(g) Documents. Prior to Agency approval, the lender must advise the
Agency, in writing, that the transaction can be properly and legally
transferred, and the conveyance instruments will be filed, registered,
or recorded as appropriate.
(1) The assumption will be done on the lender's form of assumption
agreement and will contain the Agency case number of the transferor and
transferee. The lender will provide the Agency with a copy of the
transfer and assumption agreement. It is the lender's responsibility to
ensure that all transfers and assumptions are noted on all original
Loan Note Guarantees.
(2) A new Loan Agreement, consistent in principle with the original
Loan Agreement, should be executed to establish the terms and
conditions of the loan being assumed. An assumption agreement can be
used to establish the loan covenants.
(3) The lender will provide to the Agency a written certification
that the transfer and assumption are valid, enforceable, and comply
with all Agency regulations.
(h) Loss resulting from transfer. If a loss should occur upon
consummation of a complete transfer and assumption for less than the
full amount of the debt and the transferor (including personal
guarantors) is released from liability, the lender, if it holds the
guaranteed portion, may file an estimated report of loss to recover its
pro rata share of the actual loss. In completing the report of loss,
the amount of the debt assumed will be entered as net collateral
(recovery). Approved protective advances and accrued interest thereon
made during the arrangement of a transfer and assumption, if not
assumed by the transferee, will be included in the calculations.
(i) Related party. If the transferor and transferee are affiliated
or related parties, any transfer and assumption must be for the full
amount of the debt.
(j) Payment requests. Requests for a loan guarantee to provide
equity for a transfer and assumption must be considered as a new loan
under subpart B of part 4279.
(k) Cash downpayment. When the transferee will be making a cash
downpayment as part of the transfer and assumption:
(1) The lender should have an appropriate appraiser, acceptable to
both the transferee and transferor and currently authorized to perform
appraisals, to determine the value of the collateral securing the loan.
The appraisal fee and any other costs will not be paid by the Agency.
(2) The market value of the collateral, plus any additional
property the transferee proposes to offer as collateral, must be
adequate to secure the balance of the guaranteed loans.
(3) Cash downpayments may be paid directly to the transferor
provided:
(i) The lender recommends that the cash be released and the Agency
concurs prior to the transaction being completed. The lender may wish
to require that an amount be retained for a defined period of time as a
reserve against future defaults. Interest on such account may be paid
periodically to the transferor or transferee as agreed;
(ii) The lender determines that the transferee has the repayment
ability to meet the obligations of the assumed guaranteed loan as well
as any other indebtedness;
(iii) Any payments by the transferee to the transferor will not
suspend the transferee's obligations to continue to meet the guaranteed
loan payments as they come due under the terms of the assumption; and
(iv) The transferor agrees not to take any action against the
transferee in connection with the assumption without prior written
approval of the lender and the Agency.
(4) The Agency will not consider a purchase money mortgage or
contract for purchase as an option to maximize recovery.
Sec. 4287.135 Substitution of lender.
After the issuance of a Loan Note Guarantee, the lender shall not
sell or transfer the entire loan without the prior written approval of
the Agency. The Agency will not pay any loss or share in any costs
(i.e., appraisal fees, environmental studies, or other costs associated
with servicing or liquidating the loan) with a new lender unless a
relationship is established through a substitution of lender in
accordance with paragraph (a) of this section. This includes cases
where the lender has failed and been taken over by a regulatory agency
such as the Federal Deposit Insurance Corporation (FDIC) and the loan
subsequently sold to another lender.
(a) The Agency may approve the substitution of a new lender if:
(1) The proposed substitute lender:
(i) Is an eligible lender in accordance with Sec. 4279.29;
(ii) Is able to service the loan in accordance with the original
loan documents; and
(iii) Agrees in writing to acquire title to the unguaranteed
portion of the loan held by the original lender and assumes all
original loan requirements, including liabilities and servicing
responsibilities.
(2) The substitution of lender is requested in writing by the
borrower, the proposed substitute lender, and the original lender if
still in existence.
(b) Where the lender has failed and been taken over by FDIC and the
guaranteed loan is liquidated by FDIC rather than being sold to another
lender, the Agency will pay losses and share in costs as if FDIC were
an approved substitute lender.
Secs. 4287.136-4287.144 [Reserved]
Sec. 4287.145 Default by borrower.
(a) The lender must notify the Agency when a borrower is 30 days
past due on a payment or is otherwise in default of the Loan Agreement.
Form FmHA 1980-44, ``Guaranteed Loan Borrower Default Status,'' will be
used and the lender will continue to complete this form bimonthly 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 Agency and
the borrower to resolve the problem.
(b) In considering options, the prospects for providing a permanent
cure without adversely affecting the risk to the Agency and the lender
is the paramount objective.
(1) Temporary curative actions include but are not limited to:
(i) Deferment of principal (subject to rights of any holder);
(ii) An additional temporary loan by the lender to bring the
account current;
(iii) Reamortization of or rescheduling the payments on the loan
(subject to rights of any holder);
(iv) Transfer and assumption of the loan in accordance with
Sec. 4287.134;
(v) Reorganization;
[[Page 3874]]
(vi) Liquidation;
(vii) Subsequent loans guarantees; and
(viii) Changes in interest rates with the Agency's, the lender's,
and holder's approval, provided such interest rate is adjusted
proportionally between the guaranteed and unguaranteed portion of the
loan and the type of rate remains the same.
(2) In the event a deferment, rescheduling, reamortization, or
moratorium is accomplished, it will be limited to the remaining life of
the collateral or limits as set out in Sec. 4279.126, whichever is
less.
Secs. 4286.146-4287.155 [Reserved]
Sec. 4287.156 Protective advances.
Protective advances are advances made by the lender for the purpose
of preserving and protecting the collateral where the debtor has failed
to, will not, or cannot meet its obligations. Sound judgment must be
exercised in determining that the protective advance preserves
collateral and recovery is actually enhanced by making the advance.
Protective advances will not be made in lieu of additional loans.
(a) The maximum loss to be paid by the Agency will never exceed the
original principal plus accrued interest regardless of any protective
advances made.
(b) Protective advances and interest thereon at the note rate will
be guaranteed at the same percentage of loss as provided in the Loan
Note Guarantee notwithstanding the guaranteed portion of the loan is
held by another.
(c) Protective advances must constitute an indebtedness of the
borrower to the lender and be secured by the security instruments.
Agency written authorization is required when cumulative protective
advances exceed $5,000.
Sec. 4287.157 Liquidation.
In the event of one or more incidents of default or third party
actions that the borrower cannot or will not cure or eliminate within a
reasonable period of time, liquidation may be considered. If the lender
concludes that liquidation is necessary, it must request the Agency's
concurrence. The lender will liquidate the loan unless the Agency, at
its option, carries out liquidation. When the decision to liquidate is
made, if the loan has not already been repurchased, provisions will be
made for repurchase in accordance with Sec. 4279.78.
(a) Decision to liquidate. A decision to liquidate shall be made
when it is determined that the default cannot be cured through actions
listed in Sec. 4287.145 or it has been determined that it is in the
best interest of the Government and the lender to liquidate because
such actions would only delay liquidation and liquidating early would
enhance the possibility of a maximum recovery. Therefore, the decision
to liquidate or continue with the borrower must be made as soon as
possible when any of the following exist:
(1) A loan has been delinquent 90 days and the lender and borrower
have not been able to cure the delinquency through one of the actions
listed in Sec. 4287.145.
(2) It has been determined that delaying liquidation will
jeopardize or eliminate the possibility of full recovery on the loan.
(3) The borrower or lender has been uncooperative in resolving the
problem and the Agency or the lender has reason to believe the borrower
is not acting in good faith, and it would enhance the position of the
guarantee to liquidate immediately.
(b) Submission of liquidation plan. The lender will, within 30 days
after a decision to liquidate, submit to the Agency in writing its
proposed detailed method of liquidation. Upon approval by the Agency of
the liquidation plan, the lender will commence liquidation. State
directors have no authority to exercise the option to liquidate by the
Agency without National office approval. When the Agency liquidates,
reasonable liquidation expenses will be assessed against the proceeds
derived from the sale of the collateral. Form FmHA 1980-45, ``Notice of
Liquidation Responsibility,'' will be forwarded to the Finance office
when the Agency liquidates.
(c) Lender's liquidation plan. The 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 promissory note and related security
instruments and a copy of the payment ledger if available which
reflects the current loan balance and accrued interest to date and the
method of computing the interest.
(2) A full and complete list of all collateral including any
personal and corporate guarantees.
(3) The recommended liquidation methods for making the maximum
collection possible on the indebtedness and the justification for such
methods, including:
(i) Recommended action for acquiring and disposing of all
collateral; and
(ii) Recommended action to collect from guarantors.
(4) Necessary steps for preservation of the collateral.
(5) Copies of borrower's latest available financial statements.
(6) Copies of guarantor's latest available financial statements.
(7) An itemized list of estimated liquidation expenses expected to
be incurred and justification for each expense.
(8) A schedule to periodically report to the Agency on progress of
liquidation.
(9) Estimated protective advance amounts with justification.
(10) Proposed protective bid amounts on collateral to be sold at
auction and a breakdown on how the amounts were determined.
(11) If a voluntary conveyance is considered, the proposed amount
to be credited to the guaranteed debt.
(12) Legal opinions, if needed.
(13) If the outstanding balance of principal and accrued 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 accrued 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.
(14) The Agency must concur in advance regarding the need for and
scope of an environmental site assessment. If an environmental site
assessment is needed to evaluate potential risks associated with the
acquisition of real estate serving as collateral, the lender will
arrange for a qualified, independent environmental assessment of the
property. The cost of the assessment will be shared equally by the
Agency and the lender.
(d) Approval of liquidation plan. The Agency will inform the lender
in writing whether it concurs in the lender's liquidation plan. Should
the Agency and the lender not agree on the liquidation plan,
negotiations will take place between the Agency and the lender to
resolve the disagreement. When the liquidation plan is approved by the
Agency, the lender will proceed expeditiously with liquidation.
(1) A transfer and assumption of the borrower's operation can be
accomplished before or after the loan goes into liquidation. However,
if the collateral has been purchased through foreclosure or the
borrower has conveyed title to the lender, no transfer and assumption
is permitted.
(2) A protective bid may be made by the lender, with prior Agency
written approval, at a foreclosure sale to protect
[[Page 3875]]
the lender's and the Agency's interest. The reason for a protective bid
is to ensure that the collateral is not sold to other bidders at an
unrealistically low price. The protective bid will not exceed the
amount of the loan, including expenses of foreclosure, and should be
based on the liquidation value less estimated expenses for holding and
reselling the property. These expenses include, but are not limited to,
expenses for resale, interest accrual, length of time necessary for
resale, maintenance, guard service, weatherization, and prior liens.
(e) Acceleration. The lender, or the Agency if it liquidates, will
proceed to accelerate the indebtedness as expeditiously as possible
when acceleration is necessary including giving any notices and taking
any other legal actions required. A copy of the acceleration notice or
other acceleration document will be sent to the Agency (or lender if
the Agency liquidates). The guaranteed loan will be considered in
liquidation once the loan has been accelerated and a demand for payment
has been made upon the borrower.
(f) Filing an estimated loss claim. When the lender is conducting
the liquidation and owns any or all of the guaranteed portion of the
loan, the lender will file an estimated loss claim once a decision has
been made to liquidate if the liquidation will exceed 90 days. The
estimated loss payment will be based on the liquidation value of the
collateral. For the purpose of reporting and loss claim computation,
the lender will discontinue interest accrual on the defaulted loan in
accordance with Agency procedures, and the loss claim will be promptly
processed in accordance with applicable Agency regulations.
(g) Accounting and reports. When the lender conducts liquidation,
it will account for funds during the period of liquidation and will
provide the Agency with reports at least quarterly on the progress of
liquidation including disposition of collateral, resulting costs, and
additional procedures necessary for successful completion of the
liquidation.
(h) Transmitting payments and proceeds to the Agency. When the
Agency is the holder of a portion of the guaranteed loan, the lender
will transmit to the Agency any payments received from the borrower and
pro rata share of liquidation or other proceeds, using Form FmHA 1980-
43, ``Lender's Guaranteed Loan Payment to FmHA.''
(i) Abandonment of collateral. There may be instances when the cost
of liquidation would exceed the potential recovery value of the
collection. The lender, with proper documentation and the concurrence
of the National office, may abandon the collateral in lieu of
liquidation. A proposed abandonment will be considered a servicing
action requiring the appropriate environmental review by the Agency in
accordance with subpart G of part 1940. Examples where abandonment may
be considered include but are not limited to:
(1) The cost of liquidation is increased or the value of the
collateral is decreased by environmental issues;
(2) The collateral is functionally or economically obsolete;
(3) There are superior liens held by other parties;
(4) The collateral has deteriorated; and
(5) The collateral is specialized and there is little or no demand
for it.
(j) Disposition of personal or corporate guarantees. The lender
should take action to maximize recovery from all collateral, including
personal and corporate guarantees. The lender will seek a deficiency
judgment when there is a reasonable chance of future collection of the
judgment. The lender must make a decision whether or not to seek a
deficiency judgment when:
(1) A borrower voluntarily liquidates the collateral, but the sale
fails to pay the guaranteed indebtedness;
(2) The collateral is voluntarily conveyed to the lender, but the
borrower and personal and corporate guarantors are not released from
liability; or
(3) A liquidation plan is being developed for forced liquidation.
(k) Compromise settlement. A compromise settlement will normally
not take place until all collateral has been sold, a deficiency balance
exists, and the deficiency obligation exceeds the debtor's repayment
ability.
(1) The lender and the Agency must receive complete financial
information on all parties obligated for the loan and must be satisfied
that the statements reflect the true and correct financial position of
the debtor including all assets. Adequate consideration must be
received before a release from liability is issued. Adequate
consideration includes money, additional security, or other benefit to
the goals and objectives of the Agency.
(2) Before a personal guarantor can be released from liability, the
following factors must be considered:
(i) Cash or other consideration offered by the guarantor;
(ii) Age and health of the guarantor;
(iii) Potential income of the guarantor;
(iv) Inheritance prospects of the guarantor;
(v) Availability of the guarantor's assets;
(vi) Possibility that the guarantor's assets have been concealed or
improperly transferred; and
(vii) Effect of other guarantors on the loan.
(3) Once the Agency and the lender agree on a reasonable amount
that is fair and adequate, the lender can proceed to effect the
settlement compromise.
Sec. 4287.158 Determination of loss and payment.
In all liquidation cases, final settlement will be made with the
lender after the collateral is liquidated, unless otherwise designated
as a future recovery or after settlement and compromise of all parties
has been completed. The Agency will have the right to recover losses
paid under the guarantee from any party which may be liable.
(a) Report of loss form. Form FmHA 449-30, ``Loan Note Guarantee
Report of Loss,'' will be used for calculations of all estimated and
final loss determinations. Estimated loss payments may only be approved
by the Agency after the Agency has approved a liquidation plan.
(b) Estimated loss. In accordance with the requirements of
Sec. 4287.157(f), an estimated loss claim based on liquidation
appraisal value will be prepared and submitted by the lender.
(1) 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.
(2) An estimated loss will be applied first to reduce the principal
balance on the guaranteed loan and the balance, if any, to accrued
interest. Interest accrual on the defaulted loan will be discontinued.
(3) A protective advance claim will be paid only at the time of the
final report of loss payment.
(c) Final loss. Within 30 days after liquidation of all collateral,
except for certain unsecured personal or corporate guarantees as
provided for in this section, is completed, a final report of loss must
be prepared and submitted by the lender to the Agency. The Agency will
not guarantee interest beyond this 30-day period other than for the
period of time it takes the Agency to process the loss claim. Before
approval by the Agency of any final loss report, the lender must
account for all funds during the period of liquidation, disposition of
the collateral, all costs incurred, and any other information necessary
for the successful completion of liquidation.
[[Page 3876]]
Upon receipt of the final accounting and report of loss, the Agency may
audit all applicable documentation to determine the final loss. The
lender will make its records available and otherwise assist the Agency
in making any investigation. The documentation accompanying the report
of loss must support the amounts shown on Form FmHA 449-30.
(1) A determination must be made regarding the collectibility of
unsecured personal and corporate guarantees. If reasonably possible,
such guarantees should be promptly collected or otherwise disposed of
in accordance with Sec. 4287.157(j) prior to completion of the final
loss report. However, in the event that collection from the guarantors
appears unlikely or will require a prolonged period of time, the report
of loss will be filed when all other collateral has been liquidated,
and unsecured personal or corporate guarantees will be treated as a
future recovery with the net proceeds to be shared on a pro rata basis
by the lender and the Agency.
(2) The lender must document that all of the collateral has been
accounted for and properly liquidated and that liquidation proceeds
have been properly accounted for and applied correctly to the loan.
(3) The lender will show a breakdown of any protective advance
amount as to the payee, purpose of the expenditure, date paid, and
evidence that the amount expended was proper and that payment was
actually made.
(4) The lender will show a breakdown of liquidation expenses as to
the payee, purpose of the expenditure, date paid, and evidence that the
amount expended was proper and that payment was actually made.
Liquidation expenses are recoverable only from collateral proceeds.
Attorney fees may be approved as liquidation expenses provided the fees
are reasonable and cover legal issues pertaining to the liquidation
that could not be properly handled by the lender and its in-house
counsel.
(5) Accrued interest will be supported by documentation as to how
the amount was accrued. If the interest rate was a variable rate, the
lender will include documentation of changes in both the selected base
rate and the loan rate.
(6) Loss payments will be paid by the Agency within 60 days after
the review of the final loss report and accounting of the collateral.
(d) Loss limit. The amount payable by the Agency to the lender
cannot exceed the limits set forth in the Loan Note Guarantee.
(e) Rent. 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) Liquidation costs. Liquidation costs will be deducted from the
proceeds of the disposition of primary collateral. If changed
circumstances after submission of the liquidation plan require a
substantial 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, employee's salaries, staff
lawyers, travel, and overhead.
(g) Payment. When the Agency finds the final report of loss to be
proper in all respects, it will approve Form FmHA 449-30 and proceed as
follows:
(1) If the loss is greater than any estimated loss payment, the
Agency will pay the additional amount owed by the Agency to the lender.
(2) If the loss is less than the estimated loss payment, the lender
will reimburse the Agency for the overpayment plus interest at the note
rate from the date of payment.
(3) If the Agency has conducted the liquidation, it will pay the
lender in accordance with the Loan Note Guarantee.
Secs. 4287.159-4287.168 [Reserved]
Sec. 4287.169 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 prorated between the Agency and the lender based on the original
percentage of guarantee.
Sec. 4287.170 Bankruptcy.
The lender is responsible for protecting the guaranteed loan and
all collateral securing the loan in bankruptcy proceedings.
(a) Legal expenses during bankruptcy proceedings. (1) When a
bankruptcy proceeding results in a liquidation of the borrower by a
trustee, legal expenses will be handled as directed by the court.
(2) When a proceeding under Title 11 of the United States Code
(Bankruptcy) results in liquidation by the lender, legal expenses
incurred by the lender during the entire bankruptcy proceedings will be
considered eligible liquidation costs for payment only from liquidation
proceeds.
(b) Reports of loss during bankruptcy. When the loan is involved in
reorganization proceedings, payment of loss claims may be made as
provided in this section. For a liquidation proceeding, only paragraphs
(b)(3) and (5) of this section are applicable.
(1) Estimated loss payments. (i) If a borrower has filed for
protection under Title 11 of the United States Code for a
reorganization (but not Chapter 13) and all or a portion of the debt
has been discharged, the lender will request an estimated loss payment
of the guaranteed portion of the accrued interest and principal
discharged by the court. Only one estimated loss payment is allowed
during the reorganization. All subsequent claims of the lender during
reorganization will be considered revisions to the initial estimated
loss. A revised estimated loss payment may be processed by the Agency,
at its option, in accordance with any court-approved changes in the
reorganization plan. Once the reorganization plan has been completed,
the lender is responsible for submitting the documentation necessary
for the Agency to review and adjust the estimated loss claim to reflect
any actual discharge of principal and interest and to reimburse the
lender for any court-ordered interest rate reduction under the terms of
the reorganization plan.
(ii) The lender will use Form FmHA 449-30 to request an estimated
loss payment and to revise any estimated loss payments during the
course of the reorganization plan. The estimated loss claim, as well as
any revisions to this claim, will be accompanied by documentation to
support the claim.
(iii) Upon completion of a reorganization plan, the lender will
complete a Form FmHA 1980-44 and forward this form to the Finance
office.
(2) Interest loss payments. (i) Interest losses sustained during
the period of the reorganization plan will be processed in accordance
with paragraph (b)(1) of this section.
(ii) Interest losses sustained after the reorganization plan is
completed will be processed annually when the lender sustains a loss as
a result of a permanent interest rate reduction which extends beyond
the period of the reorganization plan.
(iii) A report of loss will be completed to compensate the lender
for the difference in interest rates specified on the Loan Note
Guarantee and the rate of interest specified in the plan.
(iv) If an estimated loss claim is paid during the operation of the
Chapter 11 reorganization plan and the borrower repays in full the
remaining balance without an additional loss sustained by the lender, a
final report of loss is not necessary.
(3) Final loss payments. Final loss payments will be processed when
the loan is liquidated.
(4) Payment application. The lender must apply estimated loss
payments first to the unsecured principal of the
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guaranteed portion of the debt and then to the unsecured interest of
the guaranteed portion of the debt. In the event a bankruptcy court
attempts to direct the payments to be applied in a different manner,
the lender will immediately notify the Agency servicing office.
(5) Overpayments. Upon completion of the reorganization plan, the
lender will provide the Agency with the documentation necessary to
determine whether the estimated loss paid equals the actual loss
sustained. If the actual loss sustained as a result of the
reorganization is less than the estimated loss, the lender will
reimburse the Agency for the overpayment plus interest at the note rate
from the date of payment of the estimated loss. If the actual loss is
greater than the estimated loss payment, the lender will submit a
revised estimated loss in order to obtain payment of the additional
amount owed by the Agency to the lender.
(6) Protective advances. If approved protective advances were made
prior to the borrower having filed bankruptcy, these protective
advances and accrued interest will be considered in the loss
calculations.
Secs. 4287.171-4287.179 [Reserved]
Sec. 4287.180 Termination of guarantee.
A guarantee under this part will terminate automatically:
(a) upon full payment of the guaranteed loan;
(b) upon full payment of any loss obligation; or
(c) upon written notice from the lender to the Agency that the
guarantee will terminate 30 days after the date of notice, provided
that the lender holds all of the guaranteed portion and the Loan Note
Guarantee is returned to the Agency to be canceled.
Secs. 4287.181-4287.200 [Reserved]
Dated: September 12, 1995.
Jill Long Thompson,
Under Secretary for Rural Economic and Community Development.
[FR Doc. 96-1576 Filed 2-1-96; 8:45 am]
BILLING CODE 3410-32-U
