PART 1779 -- Water and Waste Disposal Programs Guaranteed Loans

### Table of Contents

1779.1 General 1

1779.2 Definitions 1

1779.3 Full faith and credit 3

1779.4 Conditions of guarantee 3

1779.5 - 1779.7 \[Reserved\] 4

1779.8 Access to lender\'s records 4

1779.9 Environmental requirements 4

1779.10 - 1779.11 \[Reserved\] 4

1779.12 Inspections 4

1779.13 Appeals 4

1779.14 - 1779.16 \[Reserved\] 4

1779.17 Exception authority 5

1779.18 - 1779.19 \[Reserved\] 5

1779.20 Eligibility 5

> \(a\) Availability of credit from other sources 5

\(b\) Legal authority and responsibility 5

\(c\) Applicant 5

\(d\) Facility location 5

> \(e\) Facilities for public use 5

1779.21 -- 1779.23 \[Reserved\] 6

1779.24 Eligible loan purposes 6

1779.25 Ineligible loan purposes 7

1779.26 \[Reserved\] 7

1779.27 Lenders 7

> \(a\) Eligible lenders 7
>
> \(b\) Conflict of interest 8

1779.28 Transfer of lenders or borrowers (prior to issuance of Loan Note
Guarantee) 8

1779.29 Fees and charges by lender 8

> \(a\) Routine charges and fees 8
>
> \(b\) Late payment fees 8
>
> \(c\) Guarantee fees 9

1779.30 Loan guarantee limitations 9

1779.31 -- 1779.32 \[Reserved\] 9

1779.33 Interest rates 9

\(a\) General 9

\(b\) Variable rate publication 9

\(c\) Changes 9

\(d\) Different rates on guaranteed and unguaranteed portion of the loan
10

\(e\) Multi-rates 10

1779.34 Terms of loan repayment 10

\(a\) General 10

\(b\) Term length 10

\(c\) Balloon payments 10

1779.35 -- 1779.36 \[Reserved\] 10

1779.37 Insurance and fidelity bonds 10

1779.38 -- 1779.41 \[Reserved\] 10

1779.42 Design and construction requirements 10

\(a\) Architectural and engineering practices 11

\(b\) Construction monitoring 11

\(c\) Equal employment opportunities 11

\(d\) Americans with Disabilities Act 11

\(e\) Administrative 11

1779.43 Other Federal, State, and local requirements 11

1779.44 -- 1779.46 \[Reserved\] 11

1779.47 Economic feasibility requirements 11

> \(a\) Exceptions 12
>
> \(b\) Insufficient Information 12

1779.48 Collateral 12

\(a\) Lender responsibility 12

\(b\) Type of collateral 12

\(c\) Separate collateral 12

1779.49 - 1779.51 \[Reserved\] 12

1779.52 Processing 12

> \(a\) Preapplications 12
>
> \(b\) Applications 13

1779.53 Evaluation of application 13

1779.54 - 1779.58 \[Reserved\] 14

1779.59 Review of requirements 14

\(a\) Lender and borrower 14

\(b\) Cancellation 14

\(c\) Modifications 14

1779.60 - 1779.62 \[Reserved\] 14

1779.63 Conditions precedent to issuance of the Loan Note Guarantee 14

1779.64 Issuance of Lender\'s Agreement, Loan Note Guarantee, and

Assignment Guarantee Agreement 16

\(a\) Lender\'s Agreement 16

\(b\) Loan Note Guarantee 16

\(c\) Assignment of Guarantee 16

\(d\) Failure to meet conditions 16

\(e\) Loan closing report 16

1779.65 Lender\'s sale or assignment of the guaranteed portion of loan
16

\(a\) Assignment 16

\(b\) Participation 16

\(c\) Minimum retention 16

1779.66 - 1779.68 \[Reserved\] 16

1779.69 Loan servicing 17

\(a\) Lender responsibilities 17

\(b\) Financial reports 17

\(c\) Delinquent loans 17

\(d\) Loan balances 17

\(e\) Collateral inspections 17

1779.70 - 1779.72 \[Reserved\] 17

1779.73 Replacement of loss, theft, destruction, mutilation, or
defacement

of Loan Note Guarantee or Assignment Guarantee Agreement 17

\(a\) Replacement 17

\(b\) Lender responsibilities 17

1779.74 \[Reserved\] 18

1779.75 Defaults by borrower 18

\(a\) Lender notification to Agency 18

\(b\) Servicing options 18

\(c\) Multi-note 18

1779.76 - 1779.77 \[Reserved\] 18

1779.78 Repurchase of loan 19

\(a\) Repurchase by lender 19

\(b\) Agency repurchase 19

\(c\) Repurchase for servicing 19

1779.79 \[Reserved\] 20

1779.80 Interest rate changes after loan closing 20

\(a\) General 20

\(b\) Increases 20

1779.81 Liquidation 20

\(a\) General 20

\(b\) Acquiring property titles 20

\(c\) Liquidation plan 21

\(d\) Partial liquidation plan 21

\(e\) Disposition of collateral 21

\(f\) Agency liquidation 22

\(g\) Final loss payment 22

1779.82 \[Reserved\] 22

1779.83 Protective advances 22

\(a\) Agency approval 22

\(b\) Preserving collateral 22

1779.84 Additional loans or advances 22

1779.85 Bankruptcy 22

\(a\) Calculating losses 22

\(b\) Lender responsibility 22

\(c\) Appraisals 23

\(d\) Liquidation expenses 23

\(e\) Repurchase from the holder 23

\(f\) Chapter 11 bankruptcy 23

\(g\) Agency approval of estimated liquidation expenses 23

\(h\) Reconciliation 23

1779.86 - 1779.87 \[Reserved\] 23

1779.88 Transfers and assumptions 23

\(a\) General 23

\(b\) Transfers to an eligible borrower 24

\(c\) Ineligible borrower 24

\(d\) Transfer fees 24

\(e\) Processing transfers and assumptions 25

1779.89 Mergers 26

\(a\) General 26

\(b\) Distinguishing mergers from transfers and assumptions 26

1779.90 Disposition of acquired property 26

\(a\) General 26

\(b\) Re-title collateral 26

\(c\) Collateral preservation 26

\(d\) Collateral sale 26

1779.91 - 1779.93 \[Reserved\] 26

1779.94 Determination and payment of loss 26

\(a\) General 26

\(b\) Loss calculations 27

\(c\) Estimated loss payments 27

\(d\) Final report of loss 27

\(e\) Liquidation income 27

\(f\) Liquidation costs 27

\(g\) Protective advance losses 28

\(h\) Final loss approval 28

\(i\) Loss limits 28

1779.95 Future recovery 28

1779.96 Termination of Loan Note Guarantee 28

1779.97 - 1779.99 \[Reserved\] 28

1779.100 OMB control number 28

Authority: 5 U.S.C. 301, 7 U.S.C. 1989, 16 U.S.C. 1005.

§1779.1 General.

\(a\) This part contains the regulations for Water and Waste Disposal
(WW) loans guaranteed by the Agency and applies to lenders, holders,
borrowers, and other parties involved in making, guaranteeing, holding,
servicing, or liquidating such loans.

\(b\) The purpose of the WW guaranteed loan program is to provide a loan
guarantee for the construction or improvement of water and waste
projects serving the financially needy communities in rural areas. This
purpose is achieved through bolstering the existing private credit
structure through the guarantee of quality loans which will provide
lasting benefits.

§1779.2 [Definitions]{.underline}. The following general definitions are
applicable to the terms used in this part:

[Agency]{.underline}. The Rural Utilities Service which is within the
Rural Development mission area of the United States Department of
Agriculture or its successor agencies with authority delegated by the
Secretary of Agriculture to administer the Water and Waste Disposal
Programs.

[Application]{.underline}. An Agency prescribed form to request an
Agency guarantee (available in any Agency office).

[Arm\'s length transaction]{.underline}. The sale, release, or
disposition of assets in which the title to the property passes to a
ready, willing, and able third party who is not affiliated with, or
related to, and has no security, monetary, or stockholder interest in
the borrower or transferor at the time of the transaction.

[Assignment Guarantee Agreement]{.underline}. The signed agreement among
the Agency, the lender, and the holder setting forth the terms and
conditions of an assignment of the guaranteed portion of a loan or any
part thereof (available in any Agency office).

[Borrower]{.underline}. The entity that borrows money from the lender.

[Collateral]{.underline}. Property pledged to secure the guaranteed
loan.

[Conditional Commitment for Guarantee]{.underline}. The Agency\'s
written statement to the lender that the material submitted is approved
subject to the completion of all conditions and requirements contained
in the commitment (available in any Agency office).

[Guaranteed loan]{.underline}. A loan made and serviced by a lender for
which the Agency and lender have entered into a Lender\'s Agreement and
for which the Agency has issued a Loan Note Guarantee.

[Holder]{.underline}. The person or entity (other than the lender) who
holds all or a part of the guaranteed portion of the loan with no
servicing responsibilities. When the lender assigns part or all of the
guaranteed portion of the loan to an assignee, the assignee becomes a
holder when the Assignment Guarantee Agreement is signed by all parties.

[Immediate family]{.underline}. Individuals who are closely related by
blood or by marriage, or within the same household, such as a spouse,
parent, child, brother, sister, aunt, uncle, grandparent, grandchild,
niece, or nephew.

[In-house expenses]{.underline}. In-house expenses include, but are not
limited to, employees\' salaries, retainers being paid to lawyers,
travel, and overhead.

[Insurance]{.underline}. Fire, windstorm, lightning, hail, explosion,
riot, civil commotion, aircraft, vehicles, smoke, builder\'s risk,
liability, property damage, flood or mudslide, worker\'s compensation,
fidelity bond, malpractice, or any similar insurance that is available
and needed to protect the security or that is required by law.

[Joint financing]{.underline}. Two or more lenders (or any combination
of lenders and other financial sources) making separate relatively
contemporaneous loans or grants to supply the funds required by one
borrower. For example, such joint financing may consist of the Agency\'s
financial assistance with the Economic Development Administration,
Department of Housing and Urban Development (HUD), or other Federal and
State agencies, and private and quasi-public financial institutions.

[Lender]{.underline}. The person or organization making and responsible
for servicing the loan. The lender is also referred to in this part as
the applicant who is requesting a guarantee during the preapplication
and application stage of processing.

[Lender\'s Agreement]{.underline}. The signed agreement between the
Agency and the lender containing the lender\'s responsibilities when the
Loan Note Guarantee is issued (available in any Agency office).

[Loan Note Guarantee]{.underline}. The signed commitment issued by the
Agency containing the terms and conditions of the guarantee of an
identified loan (available in any Agency office).

[Market value]{.underline}. The amount for which property would sell for
its highest and best use at a voluntary sale in an arm\'s length
transaction.

[Note]{.underline}. An evidence of debt. In those instances where the
Agency guarantees a bond issue, "note" shall also be construed to
include a bond or other evidence of indebtedness, as appropriate.

[Participation]{.underline}. Sale of an interest in a loan in which the
lender retains the note, collateral securing the note, and all
responsibility for loan servicing and liquidation.

[Principals of borrowers]{.underline}. The owners, officers, directors,
entities, and supervisors directly involved in the operation and
management of the borrower.

[Protective advances]{.underline}. Advances made by the lender for the
purpose of preserving and protecting the collateral where the debtor has
failed to, and will not or cannot, meet obligations to protect or
preserve collateral.

[Report of loss]{.underline}. An Agency form used by lenders when
reporting a loss under an Agency guarantee (available in any Agency
office).

[Rural and rural area]{.underline}. Any area not in a city or town with
a population in excess of 10,000 inhabitants, according to the latest
decennial census of the United States

[Service area]{.underline}. The area reasonably expected to be served by
the project being financed by the guaranteed loan.

[State]{.underline}. Any of the 50 States, the Commonwealth of Puerto
Rico, the Virgin Islands of the United States, Guam, American Samoa,
Commonwealth of the Northern Mariana Islands, Republic of the Marshall
Islands, Republic of Palau, and the Federated States of Micronesia.

[State Bond Banks and State Bond Pools]{.underline}. An entity
authorized by the State to issue State debt instruments and utilize the
funds received to finance the construction or improvement of drinking
water or waste disposal facilities.

[State Director]{.underline}. The Rural Development State Director or
the staff member who has been delegated authority to perform action on
behalf of the State Director.

[Substantive change]{.underline}. Any change in the purpose of the loan
or any change in the financial condition of the borrower or the
collateral which would jeopardize the performance of the loan.

[Transfer and assumption]{.underline}. The conveyance by a debtor to an
assuming party of the assets, collateral, and liabilities of the loan in
return for the assuming party\'s binding promise to pay the outstanding
debt.

[Waste disposal]{.underline}. Sanitary sewer (treatment and collection),
solid waste, and storm drainage facilities.

[WW]{.underline}. An acronym for Water and Waste Disposal.

§1779.3 [Full faith and credit]{.underline}.

The Loan Note Guarantee constitutes an obligation supported by the full
faith and credit of the United States and is not contestable except for
fraud or misrepresentation (including negligent misrepresentation) of
which the lender or holder has actual knowledge, participates in, or
condones. A note which provides for the payment of interest on interest
shall not be guaranteed and any Loan Note Guarantee or Assignment
Guarantee Agreement attached to, or relating to, a note which provides
for payment of interest on interest is void. The Loan Note Guarantee
will not be enforceable by the lender to the extent any loss is
occasioned by violation of usury laws, negligent servicing, or failure
to obtain the required security regardless of the time at which the
Agency acquires knowledge of the foregoing. Any losses occasioned will
not be enforceable by the lender to the extent that loan funds are used
for purposes other than those specifically approved by the Agency in its
Conditional Commitment for Guarantee. Negligent servicing is defined as
the failure to perform those services which a reasonably prudent lender
would perform in servicing its own portfolio of loans that are not
guaranteed. The term includes not only the concept of a failure to act,
but also not acting in a timely manner, acting in a manner contrary to
the manner in which a reasonably prudent lender would act up to the time
of loan maturity, or until a final loss is paid. The Loan Note Guarantee
or Assignment Guarantee Agreement in the hands of a holder shall not
cover interest accruing 90 days after the holder has demanded repurchase
by the lender, nor shall the Loan Note Guarantee or Assignment Guarantee
Agreement in the hands of a holder cover interest accruing 90 days after
the lender or Agency has requested the holder to surrender the evidence
of debt for repurchase.

§1779.4 [Conditions of guarantee.]{.underline}

A loan guarantee under this part will be evidenced by a Loan Note
Guarantee issued by the Agency. Each lender will also execute a
Lender\'s Agreement.

\(a\) The entire loan will be secured by the same security with equal
lien priority for the guaranteed and non-guaranteed portions of the
loan. The non-guaranteed portion of the loan will not be paid first nor
given any preference or priority over the guaranteed portion.

\(b\) The lender will be responsible for servicing the entire loan and
will remain mortgagee or secured party of record notwithstanding the
fact that another party may hold a portion of the loan.

\(c\) When a guaranteed portion of a loan is sold to a holder, the
holder shall have all rights of the lender under the Loan Note Guarantee
to the extent of the portion purchased. The lender will remain bound by
all the obligations under the Loan Note Guarantee, Lender\'s Agreement,
and Agency program regulations. If the Agency makes a payment to a
holder, then the lender must reimburse the Agency.

\(d\) A lender will receive all payments of principal and interest on
the account of the entire loan and will promptly remit to each holder a
pro rata share, less any lender servicing fee.

\(e\) The lender may retain all of the unguaranteed portion of the loan
or may sell part of the unguaranteed portion of the loan through
participation. However, the lender is required to retain 5 percent of
the loan amount from the unguaranteed portion in their portfolio.

§§1779.5 - 1779.7 \[Reserved\]

§1779.8 [Access to lender\'s records]{.underline}.

Upon request by the Agency, the lender will permit representatives of
the Agency (or other agencies of the U.S. Department of Agriculture
authorized by that Department or the U.S. Government) to inspect and
make copies of any of the records of the lender pertaining to the
guaranteed loans. Such inspection and copying may be made during regular
office hours of the lender or at any other time the lender and the
Agency agree upon.

§1779.9 [Environmental requirements]{.underline}.

Facilities financed must undergo an environmental impact analysis in
accordance with the National Environmental Policy Act and Agency
requirements as contained in part 1794 of this chapter. In accordance
with Agency guidance documents (RUS Bulletin 1794A-602; this document is
available in any Agency State Office or on-line at
http://www.usda.gov/rus/water/ees/index.htm), the environmental review
requirements shall be performed by the applicant simultaneously and
concurrently with the project's engineering planning and design. This
should provide flexibility to consider reasonable alternatives to the
project and development methods to mitigate any adverse environmental
effects. Facility planning and design must not only be responsive to the
owner's needs but must consider the environmental consequences of the
proposed project. Facility design will incorporate and integrate, where
practicable, mitigation measures that avoid or minimize adverse
environmental impacts. The lender must assist the Agency in ensuring
that the borrower complies with the Agency's environmental review
process and implements any mitigation measure identified in the
environmental review document or Conditional Commitment for Guarantee.
This assistance includes ensuring that the borrower takes no action (for
example, initiation of construction) or incur any obligations that will
have an adverse environmental impact or limit the range of alternatives
to be considered prior to completion of the environmental review
process. If construction is started prior to completion of the
environmental review and the Agency is deprived of its opportunity to
fulfill its obligation to comply with applicable environmental
requirements, the application for financial assistance may be denied.
Satisfactory completion of the environmental review process must occur
prior to the approval of the applicant\'s request or commitment of
Agency resources.

§§1779.10 - 1779.11 \[Reserved\]

§1779.12 [Inspections]{.underline}.

The lender will notify the Agency of any scheduled field inspections
during construction and after issuance of the Loan Note Guarantee. The
Agency may attend such field inspections. Any inspections or review
conducted by the Agency, including those with the lender, are for the
benefit of the Agency only and not for the benefit of other parties in
interest. Agency inspections do not relieve any parties in interest of
their responsibilities to conduct necessary inspections.

§1779.13 [Appeals]{.underline}.

Only the borrower, lender, or holder can appeal an Agency decision. In
cases where the Agency has denied or reduced the amount of final loss
payment to the lender, the adverse decision may be appealed only by the
lender. A decision by a lender adverse to the interest of the borrower
is not a decision by the Agency, whether or not concurred in by the
Agency. Appeals will be handled in accordance with the regulations of
the National Appeals Division, U.S. Department of Agriculture, published
at 7 CFR part 11.

§§1779.14 - 1779.16 \[Reserved\]

§1779.17 [Exception authority]{.underline}.

The Administrator may, in individual cases, make an exception to any
requirement or provision of this part which is not inconsistent with the
authorizing statute or other applicable law and is determined to be in
the Government's interest.

§§1779.18 - 1779.19 \[Reserved\]

§1779.20 [Eligibility]{.underline}.

\(a\) [Availability of credit from other sources]{.underline}. The
Agency must determine that the borrower is unable to obtain the required
credit without the loan guarantee from private, commercial, or
cooperative sources at reasonable rates and terms for loans for similar
purposes and periods of time. The Agency must also determine if an
outstanding judgment obtained by the United States in a Federal Court
(other than the U.S. Tax Court) has been entered against the borrower or
if the borrower has an outstanding delinquent debt with any Federal
agency. Such judgment or delinquency shall cause the potential borrower
to be ineligible to receive a loan guarantee until the judgment is paid
in full or otherwise satisfied or the delinquency is cured.

\(b\) [Legal authority and responsibility]{.underline}.

> \(1\) Each borrower must have, or will obtain, the legal authority
> necessary to construct, operate, and maintain the proposed facility
> and services. They must also have legal authority for obtaining,
> giving security for, and repaying the proposed loan.
>
> \(2\) The borrower shall be responsible for operating, maintaining,
> and managing the facility and services, and providing for the
> continued availability and use of the facility and services at
> reasonable rates and terms.
>
> \(c\) [Applicant]{.underline}. Eligible entities are:
>
> \(1\) A public body such as a municipality, county, district,
> authority, or other political subdivision of a State located in a
> rural area.
>
> \(2\) An organization operated on a not-for-profit basis, such as an
> association, cooperative, or private corporation. The organization
> must be an association controlled by a local public body or bodies, or
> have a broadly based ownership by or membership of people of the local
> community; or
>
> \(3\) Indian tribes on Federal and State reservations and other
> federally recognized Indian tribes.
>
> \(d\) [Facility location]{.underline}. Facilities must be located in
> rural areas, except: For utility services such as drinking water,
> sanitary sewer, solid waste disposal or storm drainage facilities
> serving both rural and non-rural areas. In such cases, Agency funds
> may be used to finance only that portion serving rural areas,
> regardless of facility location.
>
> \(e\) [Facilities for public use]{.underline}. All facilities financed
> under the provisions of this part shall be for public purposes.
>
> \(1\) Facilities will be installed to serve any user within the
> service area who desires service and can be feasibly and legally
> served.

(2) In no case will boundaries for the proposed service area be chosen
    in such a way that any user or area will be excluded because of
    race, color, religion, sex, marital status, age, disability, or
    national origin.

> \(3\) The lender will determine that, when feasible and legally
> possible, inequities within the proposed project\'s service area for
> the same type service proposed will be remedied by the owner on, or
> before, completion of the project. Inequities are defined as
> unjustified variations in availability, adequacy, or quality of
> service. User rate schedules for portions of existing systems or
> facilities that were developed under different financing, rates,
> terms, or conditions do not necessarily constitute inequities.

§§1779.21 -- 1779.23 \[Reserved\]

§1779.24 [Eligible loan purposes]{.underline}.

> \(a\) To construct, enlarge, extend, or otherwise improve rural
> drinking water, sanitary sewage, solid waste disposal, and storm
> wastewater disposal facilities.
>
> \(b\) To construct or relocate public buildings, roads, bridges,
> fences, or utilities, and to make other public improvements necessary
> for the successful operation or protection of facilities authorized in
> paragraph (a) of this section.
>
> \(c\) To relocate private buildings, roads, bridges, fences, or
> utilities, and other private improvements necessary for the successful
> operation or protection of facilities authorized in paragraph (a) of
> this section.
>
> \(d\) For payment of other utility connection charges as provided in
> service contracts between utility systems.
>
> \(e\) When a necessary part of the project relates to those facilities
> authorized in paragraphs (a), (b), (c) or (d) of this section the
> following may be considered:
>
> \(1\) Reasonable fees and costs such as: legal, engineering,
> administrative services, fiscal advisory, recording, environmental
> analyses and surveys, possible salvage or other mitigation measures,
> planning, establishing or acquiring rights;
>
> \(2\) Costs of acquiring interest in land: rights, such as water
> rights; leases; permits; rights-of-way; and other evidence of land or
> water control or protection necessary for development of the facility;
>
> \(3\) Purchasing or renting equipment necessary to install, operate,
> maintain, extend, or protect facilities;
>
> \(4\) Cost of additional applicant labor and other expenses necessary
> to install and extend service;
>
> \(5\) In unusual cases such as a low-income area, the cost for
> connecting the user to the main service line;
>
> \(6\) Interest incurred during construction in conjunction with
> multiple advances or interest on interim financing;
>
> \(7\) Initial operating expenses, including interest, for a period
> ordinarily not exceeding one year when the applicant is unable to pay
> such expenses;
>
> \(8\) The purchase of existing facilities when it is necessary either
> to improve service or prevent the loss of service; and
>
> \(9\) Refinancing non-Agency debts incurred by, or on behalf of, an
> applicant when all of the following conditions exist:
>
> \(i\) The debts being refinanced are a secondary part of the total
> loan unless the debt being refinanced is an Agency direct loan;
>
> \(ii\) The debts were incurred for the facility or service being
> financed or any part thereof; and
>
> \(iii\) Arrangements cannot be made with the creditors to extend or
> modify the terms of the debts so that a sound basis will exist for
> making a loan.
>
> \(10\) Refinancing Agency debts.

§1779.25 [Ineligible loan purposes]{.underline}.

Loan funds may not be used to finance:

> \(a\) Facilities which are not modest in size, design, and cost;
>
> \(b\) Loan or grant finder\'s fees;
>
> \(c\) The construction of any new combined storm and sanitary sewer
> facilities;
>
> \(d\) Any portion of the cost of a facility which does not serve a
> rural area;
>
> \(e\) That portion of project costs normally provided by a business or
> industrial user, such as wastewater pretreatment;
>
> \(f\) Rental for the use of equipment or machinery owned by the
> applicant;
>
> \(g\) For other purposes not directly related to operating and
> maintenance of the facility being installed or improved; or
>
> \(h\) The payment of a judgment which would disqualify an applicant
> for a loan under §1779.20(a).

§1779.26 \[Reserved\]

§1779.27 [Lenders]{.underline}.

> \(a\) [Eligible lenders]{.underline}. Eligible lenders may participate
> in the loan guarantee program. These lenders must be subject to credit
> examination and supervision by an appropriate agency of the United
> States or a State that supervises and regulates credit institutions. A
> lender must have the capability to adequately service loans for which
> a guarantee is requested. Eligible lenders are:
>
> \(1\) Any Federal or State chartered bank or savings and loan
> association;
>
> \(2\) Any mortgage company that is a part of a bank holding company;
>
> \(3\) Co-Bank, National Rural Utilities Cooperative Finance
> Corporation, Farm Credit Bank of the Federal Land Bank, or other Farm
> Credit System institution with direct lending authority authorized to
> make loans of the type guaranteed by this part;
>
> \(4\) An insurance company regulated by a State or National insurance
> regulatory agency;
>
> \(5\) State Bond Banks or State Bond Pools; and
>
> \(6\) Other lenders that possess the legal powers necessary and
> incidental to making and servicing guaranteed loans involving
> community development-type projects. Lenders under this category must
> be approved by the National Office prior to the issuance of the loan
> guarantee.
>
> \(b\) [Conflict of interest]{.underline}. When the lender\'s officers,
> stockholders, directors, or partners (including their immediate
> families) or the borrower, its officers, stockholders, directors, or
> partners (including their immediate families) own, or have management
> responsibilities in each other, the lender must disclose such business
> or ownership relationships. The Agency will determine if such
> relationships are likely to result in a conflict of interest. This
> does not preclude lender officials from being on the borrower's board
> of directors.

§1779.28 [Transfer of lenders or borrowers (prior to issuance of Loan
Note Guarantee)]{.underline}.

> \(a\) Prior to issuance of the loan guarantee, the Agency may approve
> the transfer of an outstanding Conditional Commitment for Guarantee
> from the present lender to a new eligible lender: Provided, That:
>
> \(1\) The former lender states in writing why it does not wish to
> continue to be the lender for this project;
>
> \(2\) No substantive changes in ownership or control of the borrower
> has occurred;
>
> \(3\) No substantive changes in the borrower's written plan, scope of
> work, or changes in the purpose or intent of the project has occurred;
> and
>
> \(4\) No substantive changes in the loan agreement or Conditional
> Commitment for Guarantee are required.

\(b\) The substitute lender must execute a new application for loan and
guarantee (available in any Agency office).

> \(c\) If approved, the Agency will issue a letter of amendment to the
> original Conditional Commitment for Guarantee reflecting the new
> lender who will acknowledge acceptance of the offer in writing.
>
> \(d\) Once the Conditional Commitment for Guarantee is issued, the
> Agency will not approve any substitution of borrowers, including
> changes in the form of the legal entity, except a change in the legal
> entity may be requested when the original borrower is replaced with
> substantially the same individuals or officers with the same interest
> as originally approved.

§1779.29 [Fees and charges by lender]{.underline}.

> \(a\) [Routine charges and fees]{.underline}. The lender may establish
> charges and fees for the loan if they do not exceed those charged
> other borrowers for similar types of transactions. "Similar types of
> transactions" mean those transactions involving the same type of loan
> for which a non-guaranteed loan borrower would be assessed charges and
> fees.
>
> \(b\) [Late payment fees]{.underline}. Late payment charges will not
> be covered by the Loan Note Guarantee. Such charges may not be added
> to the principal and interest due under any guaranteed note. Late
> payment charges may be made only if:
>
> \(1\) They are routinely made by the lender in all types of loan
> transactions;
>
> \(2\) Payment has not been received within the customary timeframe
> allowed by the lender; or
>
> \(3\) The lender agrees with the borrower, in writing, that the rate
> or method of calculating the late payment charges will not be changed
> to increase charges while the Loan Note Guarantee is in effect.
>
> \(c\) [Guarantee fees]{.underline}. The guaranteed loan fee will be
> the applicable guarantee fee rate multiplied by the principal loan
> amount multiplied by the percent of guarantee. The one-time guarantee
> fee is paid when the Loan Note Guarantee is issued.
>
> \(1\) The fee will be paid to the Agency by the lender and is
> nonreturnable. The lender may pass the fee to the borrower.
>
> \(2\) The guarantee fee rates are available in any Agency office.

§1779.30 [Loan guarantee limitations]{.underline}.

> \(a\) The guarantee will be 90 percent of eligible loss.
>
> \(b\) The lender will retain a minimum of 5 percent of the total loan
> amount. The retained amount must be from the unguaranteed portion of
> the loan and cannot be participated to another lender.

§§ 1779.31---1779.32 \[Reserved\]

§1779.33 [Interest rates]{.underline}.

> \(a\) [General]{.underline}. Rates will be negotiated between the
> lender and the borrower. They may be either fixed or variable rates.
> Interest rates will be those rates customarily charged borrowers in
> similar circumstances in the ordinary course of business and are
> subject to Agency review and approval.
>
> \(b\) [Variable rate publication]{.underline}. A variable interest
> rate must be tied to a base rate published periodically in a
> recognized national or regional financial publication specifically
> agreed to by the lender and borrower. Such an agreement must be
> documented in the borrower or lender loan agreement.
>
> \(1\) Interest rate caps and incremental adjustment limitations will
> also be negotiated between the lender and the borrower. Notice of any
> interest rate change proposed by the lender should allow a sufficient
> time period for the borrower to obtain any required State or other
> regulatory approval and to implement any user rate adjustments
> necessary as a result of the interest rate change. The intervals
> between interest rate adjustments will be specified in the loan
> agreement (but not more often than quarterly).
>
> \(2\) The lender must incorporate within the variable rate note, the
> provision for adjustment of payments coincident with an interest rate
> adjustment. This will ensure the outstanding principal balance is
> properly amortized within the prescribed loan maturity and eliminate
> the possibility of a balloon payment at the end of the loan.
>
> \(c\) [Changes]{.underline}. Any change in the interest rate between
> the date of issuance of the Conditional Commitment for Guarantee and
> before the issuance of the Loan Note Guarantee must be approved by the
> Agency. Approval of such change will be shown as an amendment to the
> Conditional Commitment for Guarantee.
>
> \(d\) [Different rates on guaranteed and unguaranteed portion of the
> loan]{.underline}. It is permissible to have one interest rate on the
> guaranteed portion of the loan and another interest rate on the
> unguaranteed portion of the loan, provided the lender and borrower
> agree, and:
>
> \(1\) The rate on the unguaranteed portion does not exceed that
> currently being charged on loans for similar purposes to borrowers
> under similar circumstances; and
>
> \(2\) The rate on the guaranteed portion of the loan will not exceed
> the rate on the unguaranteed portion. This requirement does not apply
> when the unguaranteed rate is variable and the guaranteed portion is
> fixed.
>
> \(e\) [Multi-rates]{.underline}. When multi-r ates are used, the
> lender will provide the Agency with the overall effective interest
> rate for the entire loan. Multi-rate loans may be either fixed,
> variable, or a combination of fixed and variable.

§1779.34 [Terms of loan repayment]{.underline}.

> \(a\) [General]{.underline}. Principal and interest on the loan will
> be due and payable as provided in the note except, any interest
> accrued as the result of the borrower's default on the guaranteed loan
> over and above that which would have accrued at the note rate on the
> guaranteed loan will not be guaranteed by the Agency. The lender will
> structure repayments as established in the loan agreement between the
> lender and borrower. Ordinarily, such installments will be scheduled
> for payment as agreed upon by the lender and borrower on terms that
> reasonably ensure repayment of the loan. However, the first
> installment to include a repayment of principal may be scheduled for
> payment after the project is operable and has begun to generate
> income. Such installment must be due and payable within 3 years from
> the date of the note and at least annually thereafter. Interest will
> be due at least annually from the date of the note. Monthly payments
> will be required except for borrowers with income limited to less
> frequent intervals.
>
> \(b\) [Term length]{.underline}. The maximum time allowable for final
> maturity for a guaranteed WW loan will be limited to the useful life
> of the facility, not to exceed 40 years.
>
> \(c\) [Balloon payments]{.underline}. The principal balance should be
> properly amortized within the prescribed loan maturity. Balloon
> payments at the end of the loan are prohibited.

§§1779.35 -- 1779.36 \[Reserved\]

§1779.37 [Insurance and fidelity bonds]{.underline}.

The lender must provide evidence that the borrower has adequate
insurance and fidelity bond coverage by loan closing or start of
construction, whichever occurs first. Adequate coverage must be
maintained for the life of the loan and is subject to Agency review and
approval.

§§1779.38 -- 1779.41 \[Reserved\]

§1779.42 [Design and construction requirements]{.underline}.

The lender will provide the Agency with a written certification at the
end of construction that all funds were utilized for authorized
purposes. The borrower and the lender will authorize designs and plans
based upon the preliminary architectural and engineering reports or
plans approved by the lender and concurred in by the Agency. The
borrower will take into consideration any lender or Agency comments when
the facility is being designed.

> \(a\) [Architectural and engineering practices]{.underline}. All
> project facilities must be designed utilizing accepted architectural
> and engineering practices and must conform to applicable Federal,
> State, and local codes and requirements. The lender must ensure that
> the planned project will be completed within the available funds and,
> once completed, will be suitable for the borrower's needs.
>
> \(b\) [Construction monitoring]{.underline}. The lender will monitor
> the progress of construction and undertake the reviews and inspections
> necessary to ensure that construction proceeds in accordance with the
> approved plans, specifications, and contract documents and that funds
> are used for eligible project costs. The lender must expeditiously
> report any problems in project development to the Agency.
>
> \(c\) [Equal employment opportunities]{.underline}. For all
> construction contracts in excess of \$10,000, the contractor must
> comply with Executive Order 11246 (30 FR 12319, 3 CFR, 1964-1965
> Comp., p. 339) entitled "Equal Employment Opportunity" as amended and
> as supplemented by applicable Department of Labor regulations (41 CFR
> part 60-1). The borrower and lender are responsible for ensuring that
> the contractor complies with these requirements.
>
> \(d\) [Americans with Disabilities Act]{.underline}. WW loans which
> involve the construction of, or addition to, facilities that
> accommodate the public and commercial facilities as defined by the
> Americans with Disabilities Act (42 U.S.C. 12181---et seq.) must
> comply with that Act. The lender and borrower are responsible for
> compliance.

\(e\) [Administrative]{.underline}. When the Agency reviews the
preliminary architectural and engineering reports or plans, they must
also consider all applicable Federal laws such as the seismic
requirements of Executive Order 12699 (55 FR 835, 3 CFR, 1990 Comp., p.
269), the debarment requirements of 7 CFR part 3017, and the Copeland
Anti-Kickback Act (18 U.S.C. 874).

§1779.43 [Other Federal, State, and local requirements]{.underline}.

In addition to the specific requirements of this part and beginning on
the date of issuance of the Loan Note Guarantee, proposals for
facilities financed in whole or in part with a loan guaranteed by the
Agency will be coordinated with all appropriate Federal, State, and
local agencies. Borrowers and lenders will be required to comply with
any Federal, State, or local laws or regulatory commission rules which
are in existence and which affect the project including, but not limited
to:

> \(a\) Applicant's authority to design, construct, develop, operate,
> and maintain the proposed facilities;
>
> \(b\) Borrowing money, giving security, and raising revenues for
> repayment;
>
> \(c\) Land use zoning;
>
> \(d\) Health, safety, and sanitation standards as well as design and
> installation standards; and
>
> \(e\) Protection of the environment and consumer affairs.

§§1779.44 -- 1779.46 \[Reserved\]

§1779.47 [Economic feasibility requirements]{.underline}.

All projects financed under the provisions of this section must be based
on taxes, assessments, revenues, fees, or other sources of revenues in
an amount sufficient to provide for facility operation and maintenance,
a reasonable reserve, and debt payment. The lender is responsible for
determining the credit quality and economic feasibility of the proposed
loan and must address all elements of the credit quality in a written
financial feasibility analysis which includes adequacy of equity, cash
flow, security, history, and management capabilities. Financial
feasibility reports must take into consideration any interest rate
adjustment which may be instituted under the terms of the note. The
lender's financial credit analysis may also serve as the feasibility
analysis when sufficient evidence is included to determine economic
feasibility as well as financial viability. The borrower's consulting
engineer may complete the financial feasibility analysis for WW systems.
If the facility is used by businesses and the success or failure of the
facility is dependent on individual businesses, then the economic
viability of those businesses must be assessed.

> \(a\) [Exceptions]{.underline}. The Agency loan approval official may
> exempt the lender from the requirement for an independent financial
> feasibility report (when requested by the borrower and the lender)
> provided the approval official determines that the financial
> feasibility analysis prepared by the borrower fairly represents the
> financial feasibility of the facility and the financial feasibility
> analysis contains an accurate projection of the usage, revenues, and
> expenses of the facility.
>
> \(b\) [Insufficient information]{.underline}. When the lender or
> Agency has insufficient information to determine the borrower's
> repayment ability, an independent feasibility analysis is required.

§1779.48 [Collateral]{.underline}.

> \(a\) [Lender responsibility]{.underline}. The lender is responsible
> for obtaining and maintaining proper and adequate collateral to
> protect the interest of the lender, the holder, and the Government.
>
> \(b\) [Type of collateral]{.underline}. Collateral must be of such a
> nature that repayment of the loan is reasonably ensured when
> considered with the integrity and ability of project management,
> soundness of the project, and the borrower's prospective earnings. The
> collateral may include, but is not limited to, the following: General
> obligation bonds, revenue bonds, pledge of taxes or assessments,
> assignment of facility revenue, land, easements, rights-of-way, water
> rights, buildings, machinery, equipment, accounts receivable,
> contracts, cash, or other accounts or assignments of leases or
> leasehold interest.
>
> \(c\) [Separate collateral]{.underline}. All collateral must secure
> the entire loan. The lender will not take separate security to secure
> only the unguaranteed portion of the loan. The lender will not require
> compensating balances or certificates of deposit as a means of
> eliminating the lender's exposure on the unguaranteed portion of the
> loan.

§§1779.49 - 1779.51 \[Reserved\]

§1779.52 [Processing]{.underline}.

> \(a\) [Preapplications]{.underline}.
>
> \(1\) The preapplication package may be submitted either alone or the
> necessary information may be submitted simultaneously with the
> application. The preapplication package will contain:
>
> \(i\) An Application for Federal Assistance on a form provided by the
> Agency (available in any Agency office);
>
> \(ii\) State intergovernmental or other type review comments and
> recommendations for the borrower\'s project (clearinghouse comments,
> if applicable);
>
> \(iii\) Supporting documentation necessary to make an eligibility
> determination such as financial statements, audits, copies of
> organizational documents, or existing debt instruments; and
>
> \(iv\) Documentation of lender eligibility in accordance with
> §1779.27.
>
> \(2\) If the Agency determines that the project may meet requirements
> and is likely to be funded, the lender must submit a complete
> application if it has not previously submitted one.
>
> \(b\) [Applications]{.underline}. Contents of application package:
>
> \(1\) Application for Loan and Guarantee on a form prescribed by the
> Agency (available in any Agency office);
>
> \(2\) Proposed loan agreement;
>
> \(3\) Environmental Report. (See RUS Bulletin 1794A-602; this document
> is available in any Agency State Office or on-line at
> http://www.usda.gov/rus/water/ees/index.htm);
>
> \(4\) Preliminary architectural or engineering report (PER);
>
> \(5\) Cost estimates;
>
> \(6\) Appraisal reports (as appropriate);
>
> \(7\) Credit reports (as appropriate);
>
> \(8\) Financial feasibility analysis and report (as appropriate) if
> not included in PER; and
>
> \(9\) Any additional information required.

§1779.53 [Evaluation of application]{.underline}.

If the Agency determines that the borrower is eligible, the proposed
loan is for an eligible purpose, there is reasonable assurance of
repayment ability, sufficient collateral and equity exists, the proposed
loan complies with all applicable statutes and regulations, the
environmental impact analyses is complete, and adequate funds are
available, the Agency will provide the lender and the borrower with the
Conditional Commitment for Guarantee, listing all conditions for the
guarantee. Applicable requirements will include the following:

> \(a\) Approved use of guaranteed loan funds (source and use of funds);
>
> \(b\) Rates and terms of the loan;
>
> \(c\) Scheduling of payments;
>
> \(d\) Number of customers;

\(e\) Security and lien priority;

> \(f\) Appraisals;
>
> \(g\) Insurance and bonding;
>
> \(h\) Financial reporting;
>
> \(i\) Equal opportunity and nondiscrimination;

(j) Mitigation measures for environmental issues (if necessary);

> \(k\) Americans with Disabilities Act;
>
> \(l\) By-laws and articles of incorporation changes; and
>
> \(m\) Other requirements necessary to protect the Government.

§§1779.54 - 1779.58 \[Reserved\]

§1779.59 [Review of requirements]{.underline}.

> \(a\) [Lender and borrower]{.underline}. The lender and borrower must
> complete and sign the Acceptance of Conditions and return a copy to
> the Agency as soon as possible. Notwithstanding the preceding
> sentence, if certain conditions cannot be met, the lender and borrower
> may propose alternate conditions for Agency consideration.
>
> \(b\) [Cancellation]{.underline}. If the lender decides at any time
> after receiving a Conditional Commitment for Guarantee that it no
> longer wants a guarantee, the lender must immediately advise the
> Agency of the cancellation.
>
> \(c\) [Modifications]{.underline}. The lender agrees that once the
> Conditional Commitment for Guarantee is issued and accepted by the
> lender and borrower, it will not be modified as to the scope of the
> project, overall facility concept, project purpose, use of proceeds,
> or other terms and conditions.

§§1779.60 - 1779.62 \[Reserved\]

§1779.63 [Conditions precedent to issuance of the Loan Note
Guarantee]{.underline}.

> The Loan Note Guarantee will not be issued until:

\(a\) The lender certifies that:

> \(1\) No changes have been made in the lender\'s loan conditions and
> requirements since the issuance of the Conditional Commitment for
> Guarantee except those approved in the interim by the Agency in
> writing.
>
> \(2\) All planned property acquisition has been completed and all
> development has been substantially completed in accordance with plans,
> specifications, and applicable building codes. No costs have exceeded
> the amounts approved by the lender and the Agency.
>
> \(3\) Required insurance is in effect.
>
> \(4\) The loan has been properly closed and the required security
> instruments have been obtained on any after-acquired property that
> cannot be covered initially under State statutory provisions.
>
> \(5\) 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.
>
> \(6\) When required, the entire amount of the loan for working capital
> has been disbursed except in cases where the Agency has approved
> disbursement over an extended time.
>
> \(7\) All other requirements of the Conditional Commitment for
> Guarantee have been met.

(8) Lien priorities are consistent with requirements of the Conditional
    Commitment for Guarantee.

> \(9\) The loan proceeds have been disbursed for purposes and in
> amounts consistent with the Conditional Commitment for Guarantee and
> as specified on the application for the guaranteed loan. A copy of a
> detailed statement by the lender detailing the use of loan funds will
> be attached to support this certification.
>
> \(10\) There has been no substantive adverse change in the borrower\'s
> financial condition nor any other adverse change in the borrower
> during the period of time from the Agency\'s issuance of the
> Conditional Commitment for Guarantee to issuance of the Loan Note
> Guarantee. The lender\'s certification must address all adverse
> changes of the borrower and the guarantors. For purposes of this
> paragraph (a)(10), the term borrower includes any parent, affiliate,
> or subsidiary of the borrower.
>
> \(11\) All Federal, State, and local design and construction
> requirements have been met.
>
> \(12\) The lender understands and will meet the requirements of the
> Debt Collection Act (31 U.S.C. Chapter 37).
>
> \(13\) The lender would not make the loan without an Agency guarantee.
>
> \(b\) The lender has executed and delivered the Lender\'s Agreement
> and closing report for the guaranteed loan along with the appropriate
> guarantee fee.
>
> \(c\) The lender has advised the Agency of plans to sell or assign any
> part of the loan as provided in the Lender\'s Agreement.
>
> \(d\) Where applicable, the lender must certify that the borrower has
> obtained:
>
> \(1\) A legal opinion relative to the title to rights-of-way and
> easements. Lenders are responsible for ensuring that borrowers have
> obtained valid, continuous, and adequate rights-of-way and easements
> needed for the construction, operation, and maintenance of a facility.
>
> \(2\) A title opinion or title insurance showing ownership of the land
> and all mortgages or other lien defects, restrictions, or
> encumbrances, if any. It is the responsibility of the lender to ensure
> that the borrower has obtained and recorded such releases, consents,
> or subordinations to such property rights from holders of outstanding
> liens or other instruments as may be necessary for the construction,
> operation, and maintenance of the facility and to provide the required
> security. For example, when a site is for major structures and the
> lender and borrower are able to obtain only a right-of-way or easement
> on such a site rather than a fee simple title, such a title opinion
> must be requested.
>
> \(e\) If the Loan Note Guarantee cannot be issued before the
> Conditional Commitment expires, the lender must submit a written
> request for an extension of the expiration date. The lender must
> document and certify to paragraph (a)(1) and (a)(11) of this section
> specifically identifying any modifications.

\(f\) Coincident with, or immediately after, loan closing, the lender
will contact the Agency and provide those documents and certifications
required in this section. For loans to public bodies, lenders may
require an opinion from recognized bond counsel regarding the adequacy
of the preparation and issuance of the debt instruments. Only when the
Agency is satisfied that all conditions for the guarantee have been met
will the Loan Note Guarantee be executed.

§1779.64 [Issuance of Lender\'s Agreement, Loan Note Guarantee, and
Assignment Guarantee Agreement]{.underline}.

> \(a\) [Lender\'s Agreement]{.underline}. If the Agency finds that all
> requirements have been met, the lender and the Agency will execute the
> Lender\'s Agreement. The original will be retained by the Agency and a
> signed duplicate original will be retained by the lender. A separate
> Lender\'s Agreement must be executed for each loan to be guaranteed by
> the Agency.
>
> \(b\) [Loan Note Guarantee]{.underline}.
>
> \(1\) Upon receipt of the executed Lender\'s Agreement and after all
> requirements have been met, the Agency will execute the Loan Note
> Guarantee. All originals of the Loan Note Guarantee will be provided
> to the lender and attached to the note.
>
> \(2\) If the lender has selected the multi-note system, a Loan Note
> Guarantee will be prepared and attached to each note the borrower
> issues. All the notes will be listed on the Loan Note Guarantee. Not
> more than ten notes will be issued for the guaranteed portion (unless
> the Agency and borrower agree otherwise) and one note issued for the
> unguaranteed portion.
>
> \(c\) [Assignment of Guarantee]{.underline}. In the event the lender
> assigns the guaranteed portion of the loan to a holder, the lender,
> holder, and Agency will execute an Agency prescribed Assignment
> Guarantee Agreement.
>
> \(d\) [Failure to meet conditions]{.underline}. If the Agency
> determines that it cannot execute the Loan Note Guarantee because all
> requirements have not been met, the lender will have a reasonable
> period within which to satisfy the objections. If the lender satisfies
> the objections within the time allowed, the guarantee will be issued.
>
> \(e\) [Loan closing report]{.underline}. The lender will prepare and
> deliver a guaranteed loan closing report for each loan to be
> guaranteed and a guarantee fee to the Agency in return for the Loan
> Note Guarantee.

§1779.65 [Lender\'s sale or assignment of the guaranteed portion of
loan]{.underline}.

The lender may retain all of the guaranteed loan. The lender must not
sell or participate any amount of the guaranteed or non-guaranteed
portion of the loan to the borrower or to members of the borrower\'s
immediate families, the borrower\'s officers, directors, stockholders,
other owners, or a subsidiary or affiliate. Disposition of the
guaranteed portion of a loan may not be made prior to full disbursement,
completion of construction, and acquisition of real estate and equipment
without the prior written approval of the Agency. If the lender desires
to market all or part of the guaranteed portion of the loan at, or
subsequent to, loan closing, the loan must not be in default.

> \(a\) [Assignment]{.underline}. Any sale or assignment by the lender
> of the guaranteed portion of the loan must be accomplished in
> accordance with the conditions in the Lender\'s Agreement.
>
> \(b\) [Participation]{.underline}. The lender may obtain participation
> in the loan under its normal operating procedures.
>
> \(c\) [Minimum retention]{.underline}. The lender is required to hold
> in its own portfolio or retain a minimum of 5 percent of the total
> loan amount. This amount must be of the non-guaranteed portion of the
> loan and cannot be participated to another. The lender may sell the
> remaining amount of the non-guaranteed portion of the loan only
> through participation.

§§1779.66 - 1779.68 \[Reserved\]

§1779.69 [Loan servicing]{.underline}.

> \(a\) [Lender responsibilities]{.underline}. The lender is responsible
> for servicing the entire loan in accordance with the lender\'s loan
> agreement. The unguaranteed portion of the loan will not be paid first
> nor given any preference or priority over the guaranteed portion of
> the loan. The lender is responsible for taking all servicing actions
> that a prudent lender would perform in servicing a portfolio of loans
> that are not guaranteed. This responsibility includes, but is not
> limited to, the collection of payments; obtaining compliance with the
> covenants and provisions in the note, loan agreement, security
> instrument, or any supplemental agreements; obtaining and analyzing
> financial statements; verifying the payment of taxes and insurance
> premiums; and maintaining liens on collateral. The lender must notify
> the Agency of any violation of the loan agreement with the borrower
> within 30 days of such violation.
>
> \(b\) [Financial reports]{.underline}. The lender must obtain the
> financial statements required by the Loan Agreement. The lender must
> submit the borrower\'s annual financial statements to the Agency
> within 120 days of the end of the borrower\'s fiscal year. The lender
> must analyze the financial statements and provide the Agency with a
> written summary of the lender\'s analysis and conclusions, including
> trends, strengths, weaknesses, extraordinary transactions, and other
> indications of the financial condition of the borrower. Additionally,
> when applicable, the lender will require an audit in accordance with
> Office of Management and Budget (OMB) circulars (available in any
> Agency office).
>
> \(c\) [Delinquent loans]{.underline}. The lender will service
> delinquent loans in accordance with the Lender\'s Agreement and
> reasonable and prudent lending standards.
>
> \(d\) [Loan balances]{.underline}. The lender must report to the
> Agency the outstanding principal and interest balance on each
> guaranteed loan semiannually.
>
> \(e\) [Collateral inspections]{.underline}. The lender will inspect
> the collateral as often as necessary to properly service the loan.

§§1779.70 - 1779.72 \[Reserved\]

§1779.73 [Replacement of loss, theft, destruction, mutilation, or
defacement of Loan Note Guarantee or Assignment Guarantee
Agreement]{.underline}.

> \(a\) [Replacement]{.underline}. 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 a certificate of loss and an indemnity bond in
> accordance with this section.
>
> \(b\) [Lender responsibilities]{.underline}. 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 properly notarized which includes:
>
> \(i\) Legal name and present address of either the lender or the
> holder who is requesting the replacement forms;
>
> \(ii\) Legal name and address of the lender of record;
>
> \(iii\) Capacity of person certifying;
>
> \(iv\) Full identification of the Loan Note Guarantee or Assignment
> Guarantee Agreement, including the name of the borrower, Agency case
> number, date of the Loan Note Guarantee, Assignment Guarantee
> Agreement, face amount of the evidence of debt purchased, date of
> evidence of debt, present balance of the loan, percentages of
> guarantee and, if Assignment Guarantee Agreement, the original named
> holder and the percentage of the guaranteed portion of the loan
> assigned to that holder. Any existing parts of the document to be
> replaced must be attached to the certificate;
>
> \(v\) A full statement of circumstances of the loss, theft, or
> destruction of the Loan Note Guarantee or Assignment Guarantee
> Agreement; and
>
> \(vi\) The holder shall present evidence demonstrating current
> ownership of the Loan Note Guarantee and Note or Assignment Guarantee
> Agreement. If the present holder is not the same as the original
> holder, a copy of the endorsement of each successive holder in the
> chain of transfer from the initial holder to present holder must be
> included. If copies of the endorsement cannot be obtained, best
> available records of transfer must be presented to the Agency (e.g.,
> order confirmation, canceled checks).
>
> \(2\) An indemnity bond acceptable to the Agency shall accompany the
> request for replacement except when the holder is the United States, a
> Federal Reserve Bank, a Federal Government corporation, a State or
> Territory, or the District of Columbia.
>
> \(3\) All indemnity bonds must be issued and payable to the United
> States of America. The bond shall be in an amount not less than the
> unpaid principal and interest. The bond shall hold the Government
> harmless against any claim or demand which might arise or against any
> damage, loss, costs, or expenses which might be sustained or incurred
> by reasons of the loss or replacement of the instruments.

§1779.74 \[Reserved\]

§1779.75 [Defaults by borrower]{.underline}.

> \(a\) [Lender notification to Agency]{.underline}. The lender must
> notify the Agency when a borrower is 30 days past due on a payment,
> has not met its responsibilities of providing the required financial
> statements, or is otherwise in default. The lender will continue to
> keep the Agency informed on a bimonthly basis until such time as the
> loan is no longer in default. If a monetary default exceeds 60 days,
> the lender will arrange a meeting with the borrower to resolve the
> default. The lender will provide a summary of the meeting and any
> decisions or actions agreed upon.
>
> \(b\) [Servicing options]{.underline}. In considering servicing
> options, the prospects for providing a permanent cure without
> adversely affecting the risks to the Agency and the lender must be the
> paramount objective. Temporary curative actions (such as payment
> deferments or collateral subordination) must strengthen the loan and
> be in the best financial interest of the lender and the Agency. Some
> of these actions may require concurrence of the holder.
>
> \(c\) [Multi-note]{.underline}. If the loan was closed with the
> multi-note option, the lender may need to possess all notes to take
> some servicing actions. In those situations when the Agency is holder
> of some of the notes, the Agency may endorse the notes back to the
> lender, provided a proper receipt is received from the lender which
> defines the reason for the transfer. Under no circumstances will the
> Agency endorse the original Loan Note Guarantee to the lender.

§§1779.76 - 1779.77 \[Reserved\]

§1779.78 [Repurchase of loan]{.underline}.

> \(a\) [Repurchase by lender]{.underline}. The lender has the option to
> repurchase the loan from a holder within 30 days of written demand
> from the holder when the borrower is in default not less than 60 days
> on payment. The repurchase will be for an amount equal to the unpaid
> guaranteed portion of principal and accrued interest less the
> lender\'s servicing fee. The guarantee does not cover the note
> interest to the holder on the guaranteed loan accruing after 90 days
> from the date of the demand letter to the lender. The holder will
> concurrently send a copy of the demand to the Agency. The lender will
> accept an assignment without recourse from the holder upon repurchase.
> The lender is encouraged to repurchase the loan to facilitate the
> accounting of funds, resolve the problem, and permit the borrower to
> cure the default, where reasonable. The lender will notify the holder
> and the Agency of its decision within 30 days of receipt of demand
> from the holder.
>
> \(b\) [Agency repurchase]{.underline}.
>
> \(1\) 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 a specific written demand directed to the Agency.
> The copy of the demand on the lender is not sufficient. The guarantee
> will not cover the note interest to the holder on the guaranteed loan
> accruing after 90 days from the date of the original demand letter.
> The lender shall not charge the Agency any servicing fees nor are any
> such fees collectible from the Agency.
>
> \(2\) The holder\'s demand to the Agency must include a copy of the
> written demand made upon the lender. The holder or duly authorized
> agent must also include evidence of the right to require payment from
> the Agency. Such evidence will consist of either the original of the
> Loan Note Guarantee properly endorsed to the Agency or the original of
> the Assignment Guarantee Agreement properly assigned to the Agency
> without recourse including all rights, title, and interest in the
> loan. The Agency will be subrogated to all rights of the holder. The
> holder must include in the demand the amount due including unpaid
> principal, unpaid interest to date of demand, and interest
> subsequently accruing from the date of demand to the proposed payment
> date. Unless otherwise agreed to by the Agency, such proposed payment
> will not be later than 30 days from the date of demand.
>
> \(3\) The lender must promptly provide the Agency with the information
> necessary for the Agency\'s determination of the appropriate amount
> due the holder upon the Agency\'s notification to the lender of the
> holder\'s demand for payment. This information must be certified by an
> authorized officer of the lender. Any discrepancy between the amount
> claimed by the holder and the information submitted by the lender must
> be resolved before payment will be approved. The Agency will notify
> both parties and such conflict will suspend the running of the 30-day
> payment requirement.
>
> \(4\) Any purchase by the Agency does not change, alter, or modify any
> of the lender\'s obligations to the Agency arising from the loan or
> guarantee nor does it waive any of the Agency\'s rights against the
> lender. The Agency may set off against the lender all rights inuring
> to the Agency as the holder of the instrument against the Agency\'s
> obligation to the lender under the Loan Note Guarantee.
>
> \(c\) [Repurchase for servicing]{.underline}. When the lender
> determines that repurchase of the guaranteed portion of the loan is
> necessary to service the loan, the holder must sell the guaranteed
> portion to the lender for the unpaid principal and interest balance
> (less the lender\'s servicing fee). The guarantee does not cover
> interest accruing after 90 days from the date the lender\'s or
> Agency\'s letter requesting the holder to tender its guaranteed
> portion. The lender must not repurchase from the holder for arbitrage
> purposes to further its own financial gain. Any repurchase must be
> made only after the lender obtains the Agency written approval. If the
> lender does not repurchase the portion from the holder, the Agency
> may, at its option, purchase such guaranteed portion for servicing
> purposes.

§1779.79 \[Reserved\]

§1779.80 [Interest rate changes after loan closing]{.underline}.

> \(a\) [General]{.underline}. Subject to the restrictions below, the
> borrower, lender, and holder (if any) may collectively effect a
> permanent reduction in the interest rate on the guaranteed loan at any
> time during the life of the loan on written agreement by all of the
> applicable parties. After such a permanent reduction, the Loan Note
> Guarantee will only cover losses of interest at the reduced interest
> rate. The Agency must be notified by the lender, in writing, within 10
> calendar days of the change. When the Agency is a holder, it will
> concur only when it is demonstrated that the change is more viable
> than liquidation and that the Government\'s financial interests are
> not adversely affected. Factors which will be considered in making
> such determination are the Government\'s cost of borrowing money and
> the project\'s enhancement of rural development. The monetary recovery
> must be greater than the liquidation recovery, and a financial
> feasibility analysis must show the project\'s continued viability.
>
> \(1\) Fixed rates cannot be changed to variable rates to reduce the
> interest rate to the borrower unless the variable rate has a ceiling
> which is less than the original fixed rate.
>
> \(2\) Variable rates can be changed to a lower fixed rate. In a final
> loss settlement when qualifying rate changes are made with the
> required written agreements and notification, the interest will be
> calculated for the periods the given rates were in effect. The lender
> must maintain records which adequately document the accrued interest
> claimed.
>
> \(3\) The lender is responsible for the legal documentation of
> interest rate changes. However, the lender may not issue a new note.
>
> \(b\) [Increases]{.underline}. No increases in interest rates will be
> permitted under the loan guarantee except the normal fluctuations in
> approved variable interest rate loans.

§1779.81 [Liquidation]{.underline}.

Liquidation will occur when the lender concludes that liquidation of the
guaranteed loan is necessary because of default or third party actions
that the borrower cannot, or will not, cure or eliminate within a
reasonable period of time and the Agency concurs with the lender; or the
Agency, at any time, independently concludes that liquidation is
necessary. The lender will proceed as expeditiously as possible,
including giving any notices or taking any legal actions required by the
security instruments.

> \(a\) [General]{.underline}. If a lender has made a loan guaranteed by
> the Agency under previous regulations, the lender has the option to
> liquidate the loan under the provisions of this part or under the
> provisions of previous regulations. The lender will notify the Agency
> in writing within 10 days after its decision to liquidate, which
> regulatory provisions it chooses to use. The lender may not choose
> some provisions of one regulation and other provisions of the other
> regulation.
>
> \(b\) [Acquiring property titles]{.underline}. If a lender acquires
> title to property, the Agency may elect to permit the lender the
> option of calculating the final loss settlement using the net proceeds
> received at the time of the ultimate disposition of the property. The
> lender must submit to the Agency a written request to use this option
> within 15 days of acquiring title and the Agency must agree, in
> writing, prior to the lender submitting any request for estimated loss
> payment.
>
> \(c\) [Liquidation plan]{.underline}. The lender will (within 30 days
> after a decision to liquidate) submit to the Agency, in writing, a
> proposed, detailed liquidation plan. Upon approval by the Agency of
> the liquidation plan, the lender will commence liquidation. The
> lender\'s liquidation plan must include, but is not limited to, the
> following:
>
> \(1\) Such proof as the Agency requires to establish the lender\'s
> ownership of the guaranteed loan notes and related security
> instruments, a copy of the payment ledger or other documentation which
> reflects the outstanding loan balance and accrued interest to date,
> and the method of computing the interest;
>
> \(2\) A complete list of collateral;
>
> \(3\) The recommended liquidation methods for making the maximum
> collection possible on the indebtedness and the justification for such
> methods, including the recommended action for acquiring and disposing
> of all collateral;
>
> \(4\) Necessary steps for preservation of the collateral;
>
> \(5\) Copies of the borrower\'s latest available financial statements;
>
> \(6\) An itemized list of estimated liquidation expenses expected to
> be incurred and justification for each expense;
>
> \(7\) A schedule to periodically report to the Agency on the progress
> of the liquidation;
>
> \(8\) Estimated protective advance amounts with justification;
>
> \(9\) Proposed protective bid amounts on collateral to be sold at
> auction and a discussion of how the amounts were determined;
>
> \(10\) If a voluntary conveyance is considered, the proposed amount to
> be credited to the guaranteed debt;
>
> \(11\) Legal opinions, as needed; and
>
> \(12\) If the outstanding balance of principal and interest is less
> than \$250,000, the lender will obtain an estimate of fair market and
> potential liquidation value of the collateral. If the outstanding
> balance of principal and interest is \$250,000 or more, the lender
> will obtain an independent appraisal report on all collateral securing
> the loan which will reflect the fair market value and potential
> liquidation value. The independent appraiser\'s fee will be shared
> equally by the Agency and the lender.
>
> \(d\) [Partial liquidation plan]{.underline}. If actions are necessary
> to immediately preserve and protect the collateral, a partial
> liquidation plan may be submitted and, when approved, must be followed
> by a complete liquidation plan prepared by the lender.
>
> \(e\) [Disposition of collateral]{.underline}. Disposition of
> collateral acquired by the lender must be approved, in writing, by the
> Agency when:
>
> \(1\) The lender\'s cost to acquire the collateral of a borrower
> exceeds the potential recovery value of the security and the lender
> proposes abandoning the collateral in lieu of liquidation; or
>
> \(2\) The acquired collateral is to be sold to the borrower,
> borrower\'s stockholders or officers, or the lender or lender\'s
> stockholders or officers.
>
> [(f) Agency liquidation]{.underline}. The Agency will liquidate at its
> option only when it is a holder and there is reason to believe the
> lender is not likely to initiate liquidation efforts that will result
> in maximum recovery. When the Agency liquidates, proceeds derived from
> the sale of the collateral will be applied first to reasonable
> liquidation expenses and second to the guaranteed portion of the loan.
>
> \(g\) [Final loss payment]{.underline}. Final loss payments will be
> made only after all collateral has been properly accounted for and
> liquidation expenses are determined to be reasonable and within
> approved limits. Any estimated loss payments made to the lender will
> be credited against the final loss on the guaranteed loan. The amount
> of an estimated loss payment must be credited as a deduction from the
> principal balance of the loan.

§1779.82 \[Reserved\]

§1779.83 [Protective advances]{.underline}.

Protective advances can only be added to the loan account for purposes
of requirements to preserve the value of the security. Protective
advances constitute an indebtedness of the borrower to the lender and
must be secured by collateral to the same extent as principal and
interest. Protective advances include, but are not limited to, advances
made for taxes, annual assessments, ground rent, hazard and flood
insurance premiums affecting the collateral (including any other
expenses necessary to protect the collateral). Attorney fees are not a
protective advance.

> \(a\) [Agency approval]{.underline}. The Agency must approve, in
> writing, all protective advances on loans within its loan approval
> authority which exceed a total cumulative advance amount of \$5,000 to
> the same borrower. Protective advances must be reasonable when
> associated with the value of the collateral being preserved.
>
> \(b\) [Preserving collateral]{.underline}. When considering protective
> advances, sound judgment must be exercised in determining that the
> additional funds advanced will actually preserve collateral and
> recovery is actually enhanced by making the advance.

§1779.84 [Additional loans or advances]{.underline}.

The lender will not make additional expenditures or new loans to the
borrower without first obtaining the written approval of the Agency even
though such expenditures or loans will not be guaranteed.

§1779.85 [Bankruptcy]{.underline}.

> \(a\) [Calculating losses]{.underline}. Report of Loss form (available
> in any Agency office) will be used for calculating estimated and final
> loss determinations.
>
> \(b\) [Lender responsibility]{.underline}. The lender is responsible
> for protecting the guaranteed loan debt and all the collateral
> securing it in bankruptcy proceedings. These responsibilities include,
> but are not limited to, the following:
>
> \(1\) Filing a proof of claim, where necessary, and all necessary
> papers and pleadings;
>
> \(2\) Attending and, where necessary, participating in meetings of the
> creditors and all court proceedings;
>
> \(3\) Immediately seeking adequate protection of the collateral if it
> is subject to being used by the trustee in bankruptcy or the debtor in
> possession;
>
> \(4\) Where appropriate, seeking involuntary conversion of a pending
> chapter 11 case to a liquidation proceeding or seeking dismissal of
> the proceedings; and
>
> \(5\) Keeping the Agency adequately and regularly informed, in
> writing, of all aspects of the proceedings.
>
> \(c\) [Appraisals]{.underline}. In a chapter 9 or chapter 11
> reorganization, the lender must obtain an independent appraisal of the
> collateral if the Agency believes an independent appraisal is
> necessary. The Agency and the lender will share the appraisal fee
> equally.
>
> \(d\) [Liquidation expenses]{.underline}. Only expenses authorized by
> the court of chapter 9 plans or chapter 11 reorganizations, or
> chapters 11 or 7 liquidation (unless the liquidation is by the
> lender), may be deducted from the collateral proceeds.
>
> \(e\) [Repurchase from the holder]{.underline}. The Agency or the
> lender, with the approval of the Agency, may initiate the repurchase
> of the unpaid guaranteed portion of the loan from the holder. If the
> lender is the holder, an estimated loss payment may be filed at the
> initiation of a chapter 7 proceeding or after a chapter 9 or chapter
> 11 proceeding becomes a liquidation proceeding. Any loss payment on
> loans in bankruptcy must be approved by the Agency.
>
> \(f\) [Chapter 11 bankruptcy]{.underline}. If a borrower has filed for
> protection under chapters 9 or 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 may request an estimated loss payment
> of the guaranteed portion of the accrued interest and principal
> discharged by the court. If the court approves revisions to the
> chapter 9 plan or chapter 11 reorganization plan, subsequent estimated
> loss payments may be requested in accordance with the court approved
> changes. Once the reorganization plan has been satisfactorily
> 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.
>
> \(g\) [Agency approval of estimated liquidation expenses]{.underline}.
> The Agency must approve, in advance and in writing, the lender\'s
> estimated liquidation expenses of collateral in a liquidation if the
> liquidation is performed by the lender. These expenses must be
> reasonable and customary and not include in-house expenses of the
> lender.
>
> \(h\) [Reconciliation]{.underline}. In the event that the estimated
> loss payment exceeds the actual loss, the lender will reimburse the
> Agency the amount in excess of the actual loss plus interest at the
> note rate from the date of the estimated loss payment.

§§1779.86 - 1779.87 \[Reserved\]

§1779.88 [Transfers and assumptions]{.underline}.

> \(a\) [General]{.underline}. For all transfers and assumptions, the
> lender must concur in the plans for disposition of funds in the
> transferor\'s debt service, reserve, and operation and maintenance
> account. The Agency will approve, in writing, transfers and
> assumptions of loans to transferees who will continue the original
> purpose of the guaranteed loan subject to the following applicable
> provisions:
>
> \(1\) When the transaction is to a member of the borrower\'s
> organization, it will be at an amount which will not result in a loss
> to the lender.
>
> \(2\) Transfers to eligible borrowers will receive preference if
> recovery to the lender from the sale price is not less than it would
> be if the transfer was to an ineligible borrower.
>
> \(3\) The present borrower is unable or unwilling to accomplish the
> objectives of the guaranteed loan, and the transfer will be to the
> lender\'s and Agency\'s advantage.
>
> \(4\) The transferee will assume an amount at least equal to either
> the present market value or the debt, whichever is less.
>
> \(b\) [Transfers to an eligible borrower]{.underline}.
>
> \(1\) The total indebtedness may be transferred to an eligible
> borrower on the same terms.
>
> \(2\) The total indebtedness may be transferred to another eligible
> borrower on different terms not to exceed those terms for which an
> initial guaranteed loan can be made.
>
> \(3\) Less than the total indebtedness may be transferred to another
> eligible borrower on the same or different terms and the pro rata
> share of any eligible loss paid to the lender.
>
> \(4\) A guaranteed loan for which the transferee is eligible may be
> made in connection with a transfer subject to the policies and
> procedures governing the type of loan being made.
>
> \(5\) If the transferor is to receive a payment for the equity, the
> total debt must be assumed.
>
> \(c\) [Ineligible borrower]{.underline}. Transfers to ineligible
> borrowers are considered only when needed as a method for servicing
> problem cases when an eligible transferee is not available. Transfers
> should not be considered as a means by which members can obtain equity
> or as a method of providing a source of easy credit for purchasers.
> Transfers must meet the following requirements:
>
> \(1\) All transfers to ineligible borrowers will include a one-time
> nonrefundable transfer fee to the Agency of no more than 1 percent.
> Transfer fees will be collected, and payments applied, in accordance
> with paragraph (d) of this section.
>
> \(2\) For all loans covered by this part, the Agency may approve a
> transfer of indebtedness to, and assumption of, a loan by a transferee
> who does not meet the eligibility requirements for the kind of loan
> being assumed when the ineligible borrower will:
>
> \(i\) Make a significant down payment, and
>
> \(ii\) Agree to pay the remaining balance within not more than 15
> years. Installments will be at least equal to the amount amortized
> over a period not greater than the remaining life of the debt being
> transferred, and the balance will be due the fifteenth year.
>
> \(3\) Interest rates to ineligible transferees will be the rate
> specified in the note of the transferor or the rates customarily
> charged borrowers in similar circumstances in the ordinary course of
> business and are subject to Agency review and approval. The rates may
> be either fixed or variable.
>
> \(i\) Transferees must have the ability to repay as determined by the
> lender the debt according to the Assumption Agreement and must have
> the legal authority to enter into the contract. The transferee will
> submit a current balance sheet to the lender. The lender will obtain
> and analyze the credit history of the transferee.
>
> \(ii\) The transferor may receive equity payments only when the full
> amount of the debt is assumed. However, equity payments will not be
> made on more favorable terms than those on which the balance of the
> debt will be paid.
>
> \(d\) [Transfer fees]{.underline}. Transfer fees are a one-time
> nonrefundable cost to be collected by the lender at the time of
> application or proposal.
>
> \(1\) The transfer fees will be a standard fee plus the cost of the
> appraisal.
>
> \(2\) The lender will collect and submit the fee to the Agency.
>
> \(3\) The Agency may waive the transfer fee if it determines that such
> waiver is in the best interest of the Agency.
>
> \(e\) [Processing transfers and assumptions]{.underline}.
>
> \(1\) In any transfer and assumption case, the transferor (including
> any guarantor) may be released from liability by the lender only with
> prior Agency written concurrence and only when the value of the
> collateral being transferred is at least equal to the amount of the
> loan, or part of the loan, being assumed. If the transfer is for less
> than the entire debt:
>
> \(i\) The Agency must determine that the transferor and any guarantor
> have no reasonable debt-paying ability considering their assets and
> income at the time of transfer, and
>
> \(ii\) The lender must certify that the transferor has cooperated in
> good faith, used due diligence to maintain the collateral against
> loss, and has otherwise fulfilled all of the regulations of this part
> to the best of the borrower\'s ability.
>
> \(2\) The lender will make, in all cases, a complete credit analysis
> to determine viability of the project (subject to the Agency review
> and approval) including any requirement for deposit in an escrow
> account as security to meet the determined equity requirements for the
> project.
>
> \(3\) The lender will confirm that the transaction can be properly
> transferred and the conveyance instruments will be filed, registered,
> or recorded as appropriate and legally permissible.
>
> \(4\) The assumption will be made on the lender\'s form of Assumption
> Agreement and will contain the Agency case number of the transferor
> and transferee.
>
> \(5\) Loan terms cannot be changed by the Assumption Agreement unless
> previously approved in writing by the Agency with the concurrence of
> holder and the transferor (including guarantor if it has not been
> released from personal liability). Any new loan terms cannot exceed
> those authorized in this part. The lender\'s request will be supported
> by:
>
> \(i\) An explanation of the reasons for the proposed change in the
> loan terms, and
>
> \(ii\) Certification that the lien position securing the guaranteed
> loan will be maintained or improved, and proper hazard insurance will
> be continued in effect.
>
> \(6\) In the case of a transfer and assumption, it is the lender\'s
> responsibility to see that all such transfers and assumptions will be
> noted on all originals of the Loan Note Guarantee. The lender will
> provide the Agency a copy of the Transfer and Assumption Agreement.
>
> \(7\) If a loss should occur upon a complete transfer of assets and
> assumption for less than the full amount of the debt and the
> transferor-debtor (including personal guarantor) is released from
> personal liability (as provided in paragraph (e)(1)(i) of this
> section), the lender (if holding the guaranteed portion) may file an
> estimated Report of Loss to recover their pro rata share of the actual
> loss at that time. Approved protective advances and accrued interest
> made during the arrangement of a transfer and assumption, if not
> assumed by the transferee, will be entered on the estimated Report of
> Loss.

§1779.89 [Mergers]{.underline}.

> \(a\) [General]{.underline}. The Agency may approve mergers or
> consolidations (herein referred to as "mergers") when the resulting
> organization will be eligible for an Agency guaranteed loan and
> assumes all the liabilities and acquires all the assets of the merged
> borrower. Mergers may be approved when:
>
> \(1\) The merger is in the best interest of the Government and the
> merging borrower;
>
> \(2\) The resulting borrower can meet all required conditions as
> contained in specific loan note agreements; and
>
> \(3\) All property can be legally transferred to the resulting
> borrower.
>
> \(b\) [Distinguishing mergers from transfers and
> assumptions]{.underline}. Mergers occur when one entity combines with
> another entity in such a way that the first entity ceases to exist as
> a separate entity while the other continues. In a consolidation, two
> or more entities combine to form a new, consolidated entity with the
> original entity ceasing to exist. Such transactions must be
> distinguished from transfers and assumptions in which a transferor
> will not necessarily go out of existence, and the transferee will not
> always take all the transferor\'s assets nor assume all the
> transferor\'s liabilities.

§1779.90 [Disposition of acquired property]{.underline}.

> \(a\) [General]{.underline}. When the lender acquires title to the
> collateral and the final loss claim is not paid until final
> disposition, the lender must proceed as quickly as possible to develop
> a plan to fully protect the collateral, and the lender must dispose of
> the collateral without delay.
>
> \(b\) [Re-title collateral]{.underline}. Any collateral accepted by
> the lender must not be titled in the Agency\'s name in whole or in
> part. The Agency\'s position is that of a guarantor relating to
> losses, not a lender.
>
> \(c\) [Collateral preservation]{.underline}. After acquiring the
> collateral, the lender must protect the collateral from deterioration
> (weather, vandalism, etc.). Hazard insurance in an amount necessary to
> cover the fair market value of the collateral must be maintained.
>
> \(d\) [Collateral sale]{.underline}.
>
> \(1\) The lender will prepare and submit to the Agency a plan on the
> best method of sale, keeping in mind any prospective purchasers. The
> Agency must approve the plan in writing. If an existing approved
> liquidation plan addresses the disposition of acquired property, no
> further review is required unless modification of the plan is needed.
>
> \(2\) Anytime there is a case when the conversion of collateral to
> cash can reasonably be expected to result in a negative net recovery
> amount, abandonment of the collateral should be considered. The Agency
> must approve abandonment in writing.

§§1779.91 - 1779.93 \[Reserved\]

§1779.94 [Determination and payment of loss]{.underline}.

In all liquidation cases, final settlement will be made with the lender
after the collateral is liquidated. The Agency will have the right to
recover losses paid under the guarantee from any liable party.

> \(a\) [General]{.underline}. If the lender takes title to collateral,
> any loss will be based on the collateral value at the time the lender
> obtains title.
>
> \(b\) [Loss calculations]{.underline}. The Report of Loss form
> (available in any Agency office) will be used for calculations of all
> estimated and final loss determinations. Estimated loss payments may
> only be approved after the lender has submitted a liquidation plan
> approved by the Agency.
>
> \(c\) [Estimated loss payments]{.underline}. When the lender is
> conducting the liquidation and owns any of the guaranteed portion of
> the loan, it may request an estimated loss payment by submitting an
> estimate of loss that will occur in connection with liquidation of the
> loan. An estimated loss payment may be approved after the Agency has
> approved the liquidation plan.
>
> \(1\) The lender will prepare and submit a Report of Loss using the
> appraised value in lieu of amount received from sale of collateral.
>
> \(2\) The estimated loss payment shall be calculated as of the date of
> such payment. The total amount of the loss payment remitted by the
> Agency will be applied by the lender on the guaranteed portion of the
> loan debt. Such application does not release the borrower from
> liability. At the time of final loss settlement, the lender may notify
> the borrower that the loss payment has been so applied.
>
> \(3\) After liquidation has been completed, a final Report of Loss
> will be submitted by the lender to the Agency.
>
> \(d\) [Final report of loss]{.underline}. In all cases, a final Report
> of Loss must be submitted to the Agency. Before Agency approval of any
> final loss report, the lender must account for all funds obtained,
> disposition of the collateral, all costs incurred, and any other
> information necessary for the successful completion of liquidation.
> Upon receipt of the final accounting and Report of Loss, the Agency
> may conduct an audit and will determine the final loss. The lender
> will make its records available to, and otherwise assist, the Agency
> in making any audit it requires of the Report of Loss. The
> documentation accompanying the Report of Loss must support the loss
> claimed.
>
> \(1\) The lender must document and show that all of the collateral has
> been accounted for and properly liquidated and that liquidation
> proceeds have been properly accounted for and applied correctly on the
> loan. The Agency must be satisfied that the lender has accomplished
> this in the manner contained herein and that the lender has maximized
> the collections in conducting the liquidation.
>
> \(2\) The lender must show a breakdown on any protective advance
> amount as to the payee, purpose of the expenditure, date paid,
> evidence that the amount expended was proper, and that the amount was
> actually paid.
>
> \(3\) The lender must show a breakdown of liquidation expenses as to
> the payee, purpose of the expenditure, date paid, evidence that the
> amount expended was proper, and that the amount was actually paid.
>
> \(4\) Accrued interest should be supported by attachments showing how
> the amount was accrued by the lender. A copy of the promissory note
> and ledger will be attached. If the interest rate was a variable rate,
> the lender must include documentation of changes in the selected base
> rate and when the changes in the loan rate became effective.
>
> \(e\) [Liquidation income]{.underline}. 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]{.underline}. Certain reasonable liquidation
> costs will be allowed during the liquidation process. The liquidation
> costs must be submitted as a part of the liquidation plan. Such costs
> will be deducted from gross proceeds received from the disposition of
> collateral unless the costs have been previously determined by the
> lender (with Agency concurrence) to be protective advances. If changed
> circumstances after submission of the liquidation plan require a
> revision of liquidation costs, the lender will obtain the Agency\'s
> written concurrence prior to proceeding with the proposed changes. No
> in-house expenses of the lender will be allowed.
>
> \(g\) [Protective advance losses]{.underline}. In those instances
> where the lender made authorized protective advances, the lender may
> claim recovery for the guaranteed portion of any loss of monies
> advanced as well as interest resulting from such protective advances.
> These claims shall be included in the final Report of Loss.
>
> \(h\) [Final loss approval]{.underline}. After the final Report of
> Loss has been tentatively approved:
>
> \(1\) If the actual loss is greater than any estimated loss payment,
> such loss will be paid by the Agency;
>
> \(2\) If the actual loss is less than any estimated loss payment, the
> lender will reimburse the Agency;
>
> \(3\) If the Agency conducted the liquidation, it will provide an
> accounting to the lender and will pay the lender in accordance with
> the Loan Note Guarantee.
>
> \(i\) [Loss limits]{.underline}. The amount payable by the Agency to
> the lender cannot exceed the limits contained in the Loan Note
> Guarantee. If the Agency conducts the liquidation, loss occasioned by
> accruing interest will be covered by the guarantee only to the date
> the Agency accepts this responsibility. When the liquidation is
> conducted by the lender, loss occasioned by accruing interest will be
> covered to the extent of the guarantee to the date of final settlement
> provided the lender proceeds expeditiously with the liquidation plan
> approved by the Agency.

§1779.95 [Future recovery]{.underline}.

After a loan has been liquidated and a final loss has been paid by the
Agency, any future funds which may be recovered by the lender will be
pro-rated between the Agency and the lender in accordance with the
guaranteed percentage even if the Loan Note Guarantee has been
terminated.

§1779.96 [Termination of Loan Note Guarantee]{.underline}.

The Loan Note Guarantee under this part will terminate automatically:

> \(a\) Upon full payment of the guaranteed loan; or
>
> \(b\) Upon full payment of any loss obligation or negotiated loss
> settlement except for future recovery provisions; or
>
> \(c\) Upon written request from the lender to the Agency, provided
> that the lender holds all of the guaranteed portion and the original
> Loan Note Guarantee is returned to the Agency.

§§1779.97 - 1779.99 \[Reserved\]

§1779.100 OMB control number.

The reportingand recordkeeping requirements contained in this regulation
have been approved by the Office of Management and Budget and have been
assigned OMB control number 0572-0122.