RD Instruction 1980-E

Table of Contents

Page 1

(Revision 3)

PART 1980 - GENERAL

Subpart E - Business and Industrial Loan Program

## [TABLE OF CONTENTS]{.underline}

[Sec]{.underline}. [Page]{.underline}

1980.401 Introduction. 1

1980.402 Definitions. 2

1980.403 Citizenship of borrowers. 4

1980.404 \[Reserved\] 4

1980.405 Rural area determinations. 4

1980.406 - 1980.410 \[Reserved\] 4A

1980.411 Loan purposes. 4A

\(a\) Private entrepreneurs. 4A

\(b\) Public bodies. 7

1980.412 Ineligible loan purposes. 7

1980.413 Transactions which will not be guaranteed. 9

1980.414 Fees and charges by lender and others. 9

1980.415 - 1980.418 \[Reserved\] 10

1980.419 Eligible lenders. 10

1980.420 Loan guarantee limits. 10

1980.421 - 1980.422 \[Reserved\] 10A

1980.423 Interest rates. 10A

\(a\) Guaranteed loans. 10A

\(b\) Insured loans. 12A

1980.424 Terms of loan repayment. 13

1980.425 Availability of credit from other sources. 15

1980.426 - 1980.431 \[Reserved\] 15

1980.432 Environmental requirements. 15

1980.433 Flood or mudslide hazard area precautions. 15

1980.434 Equal opportunity and nondiscrimination

requirements. 15

1980.435 - 1980.440 \[Reserved\] 16

1980.441 Borrower equity requirements. 16

1980.442 Feasibility studies. 16B

\(a\) Economic feasibility. 17

\(b\) Market feasibility. 17

\(c\) Technical feasibility. 17

\(d\) Financial feasibility. 17

\(e\) Management feasibility. 17

(2-25-87) PN 41

RD Instruction 1980-E

Table of Contents

Page 2

(Revision 3)

[Sec]{.underline}. [Page]{.underline}

1980.443 Collateral, personal and corporate guarantees

and other requirements. 18

\(a\) Collateral. 18

\(b\) Personal and corporate guarantees. 19

\(c\) Other requirements. 21

1980.444 Appraisal of property serving as collateral. 22

1980.445 Periodic financial statements and audits. 22A

\(a\) Audited financial statements. 22A

\(b\) Unaudited financial statements. 22A

\(c\) Internal financial statements. 22B

\(d\) Minimum requirements. 22B

\(e\) Public bodies and nonprofit corporations. 22B

1980.446 - 1980.450 \[Reserved\] 23

1980.451 Filing and processing applications. 23

\(a\) Borrowers\' and lenders\' contact. 23

\(b\) Applications from cooperatives. 23

\(c\) Borrowers eligible for Small Business

Administration (SBA) assistance. 23

\(d\) Loan priorities. 23

\(e\) Filing preapplications and applications. 24D

\(f\) Preapplications. 25

\(g\) Preliminary determination by the Agency. 26

\(h\) Department of Labor certifications. 26

\(i\) Content of applications. 26A

\(j\) Use of forms. 29

\(k\) Certificate of need. 29

1980.452 Agency evaluation of application. 36

1980.453 Review of requirements. 40

1980.454 Conditions precedent to issuance of the Loan Note

Guarantee. 41

\(a\) Transfer of lenders. 41

\(b\) Substitution of borrowers. 41

\(c\) Changes in terms and conditions in Form RD 449-14. 41

\(d\) Additional requirements for B&I guaranteed loans. 42

\(e\) Preguarantee review. 42

\(f\) Loan closing. 42

\(g\) Closing of working capital loans. 42

1980.455 - 1980.460 \[Reserved\] 44

RD Instruction 1980-E

Table of Contents

Page 3

(Revision 5)

[Sec]{.underline}. [Page]{.underline}

1980.461 Issuance of Lender\'s Agreement, Loan Note Guarantee,

and Assignment Guarantee Agreement. 44

1980.462 - 1980.468 \[Reserved\] 46

1980.469 Loan servicing. 46

1980.470 Defaults by borrower. 52

1980.471 Liquidation. 53

1980.472 Protective advances. 55

1980.473 Additional loans or advances. 56

1980.474 \[Reserved\] 56

1980.475 Bankruptcy. 56

1980.476 Transfer and assumptions. 58A

1980.477 - 1980.480 \[Reserved\] 61

1980.481 Insured loans. 61

1980.482 - 1980.487 \[Reserved\] 62

1980.488 Guaranteed industrial development bond issues. 62

1980.489 \[Reserved\] 62A

1980.490 Business and Industry Buydown loans. 62A

\(a\) Introduction. 62A

\(b\) Location of applicants. 62A

\(c\) Interest rate. 62A

\(d\) Interest rate buydown. 62A

\(e\) Duration of BIB loan program. 62B

\(f\) Administrative procedures. 62B

\(g\) Termination of interest buydown. 62C

\(h\) Loan purposes. 62C

\(i\) Small Business Administration. 62D

\(j\) Loan guarantee limits. 62D

\(k\) Credit quality analysis. 62D

\(l\) Equity requirements. 62D

\(m\) Collateral. 62D

\(n\) Conditional approval. 62D

\(o\) Financial statements. 62E

\(p\) Agriculture loans. 62E

1980.491 - 1980.494 \[Reserved\] 62H

1980.495 Rural Development forms and guides. 63

1980.496 Exception authority. 64

1980.497 General administrative. 64

\(a\) Office of the General Counsel (OGC). 64

\(b\) Contact with OGC. 64

\(c\) Reviews prior to issuance of the loan note 64A

guarantee.

\(d\) Please submit the following for OGC review. 65

\(e\) Do not submit for OGC review. 65

\(f\) OGC advice. 65

\(g\) Delegation of authority. 66

(2-25-87) PN 41

RD Instruction 1980-E

Table of Contents

Page 4

(Added 06-01-94, PN 225)

[Sec]{.underline}. [Page]{.underline}

1980.498 Business and Industry Disaster Loans. 66

\(a\) Introduction. 66

\(b\) Location of applicants. 66

\(c\) Loan purposes. 66

\(d\) Federal Emergency Management Agency (FEMA). 68

\(e\) Small Business Administration. 68

\(f\) Loan guarantee limits. 68

\(g\) Credit quality analysis. 68

\(h\) Equity requirements. 68

\(i\) Feasibility studies. 68

\(j\) Collateral. 69

\(k\) Conditional approval. 69

\(l\) Financial statements. 69

\(m\) Agriculture loans. 70

1980.499 \[Reserved\] 72

1980.500 OMB control number. 73

Appendix A - Form RD 449-1, \"Application for Loan and Guarantee\"

(Published in Federal Register only)

Appendix B - \"Certificate of Incumbency and Signature\" (Published in

Federal Register only)

Appendix C - \"Guidelines for Loan Guarantees for Alcohol Fuel
Production

Facilities\"

Appendix D - \"Alcohol Production Facilities Planning, Performing

Development and Project Control\"

Appendix E - \"Environmental Assessment Guidelines\"

Appendix F - Form RD 449-14, \"Conditional Commitment for Guarantee\"

(Published in Federal Register only)

Appendix G - Liquidation and Property Management Guide

Appendix H - Suggested Format for the Opinion of the Lender\'s Legal

Counsel

Appendix I - Instructions for Loan Guarantees for Drought and Disaster

Relief

Appendix J - Business and Industry Application Priority

Points Scoring

Appendix K - Regulations for Loan Guarantees for Disaster Assistance for

Rural Business Enterprises

Note: This subpart supplements the provisions of Subpart A of this part
of the regulations with respect to loans guaranteed by Rural
Development.

## oOo 

RD Instruction 1980-E

PART 1980 - GENERAL

Subpart E - Business and Industrial Loan Program

§1980.401 [Introduction]{.underline}.

\(a\) Direct Business and Industry (B&I) loans are disbursed by the
Agency under this subpart. B&I loan guarantees are to be processed and
serviced under the provisions of subparts A and B of part 4279 and
subpart B of part 4287 of this title. Any processing or servicing
activity conducted pursuant to this subpart involving authorized
assistance to relatives, or business or close personal associates, is
subject to the provisions of subpart D of part 1900 of this chapter.
Applicants for this assistance are required to identify any known
relationship or association with any Agency employee.\
(Revised 12-23-96, SPECIAL PN.)

\(b\) The purpose of the B&I program is to improve, develop or finance
business, industry and employment and improve the economic and
environmental climate in rural communities, including pollution
abatement and control. This purpose is achieved through bolstering the
existing private credit structure through guarantee of quality loans
which will provide lasting community benefits. It is NOT intended that
the guarantee authority will be used for marginal or substandard loans
or to \"bail out\" lenders having such loans.

\(c\) This subpart and its appendices (especially Appendix I and\
Appendix K) also contain regulations for Drought and Disaster (D&D) and
Disaster Assistance for Rural Business Enterprises (DARBE) guaranteed
loans authorized by §331 of the Disaster Assistance Act of 1988\
(P.L. 100-387) and §401 of the Disaster Assistance Act of 1989\
(P.L. 101-82). D&D loans must be to alleviate distress caused to rural
business entities, directly or indirectly, by drought, hail, excessive
moisture, or related conditions occurring in 1988, or to provide for the
guarantee of loans to such rural business entities that refinance or
restructure debt as a result of losses incurred, directly or indirectly,
because of such natural disasters and are limited to a guarantee of
principal only. DARBE loans must be to alleviate distress caused to
rural business entities, directly or indirectly, by drought, freeze,
storm, excessive moisture, earthquake or related conditions occurring in
1988 or 1989, or to provide for the guarantee of loans to such rural
business entities that refinance or restructure debt as a result of
losses incurred, directly or indirectly, because of such natural
disasters and within certain parameters guarantee both principal and
interest. (Revised 05-09-90, PN 133.)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

DISTRIBUTION: WSDC Guaranteed Loans

General

## 1

## (Revision 8)

(02-25-87) PN 41

RD Instruction 1980-E

§ 1980.401 (Con.)

\(d\) The B&I loan program is administered by the Administrator through
a State Director serving each State. The State Director is the focal
point for the program and the local contact person for processing and
servicing activities, although this subpart refers in various places to
the duties and responsibilities of other Rural Development employees.
(Renumbered 01-03-89, SPECIAL PN.)

\(e\) Throughout this subpart there appear Administrative provisions for
the State Director, District Director, and County Supervisor. These
provisions establish the internal duties, responsibilities and
procedures to carry out the requirements of the program. These
provisions are identified as \"ADMINISTRATIVE\" and follow appropriate
sections of this subpart. (Renumbered 01-03-89, SPECIAL PN.)

\(f\) This subpart also contains regulations for Business and Industry
Disaster (BID) loans under the authority of the Dire Emergency
Supplemental Appropriations Act, 1992, Public Law 102-368. This program
provides B&I guarantees for loans needed as a result of natural
disasters. Some of the requirements of this subpart are waived or
altered for BID loans. The waivers and alterations are provided in
§1980.498 of this subpart. (Added 10-05-92, SPECIAL PN.)

§ 1980.402 [Definitions]{.underline}. (Added 07-26-06, PN 400.)

> \(a\) The following general definitions are applicable to the terms
> used in this subpart.
>
> [Adjusted tangible net worth]{.underline}. Tangible balance sheet
> equity plus allowed tangible asset appreciation and subordinated owner
> debt.
>
> [Allowed tangible asset appreciation]{.underline}. The difference
> between the current net book value recorded on the financial
> statements (original cost less cumulative depreciation) of real
> property assets and the lesser of their current market value or
> original cost, where current market value is determined using an
> appraisal satisfactory to the Agency.

[Area of high unemployment]{.underline}. An area in which a B&I loan
guarantee can be issued, consisting of a county or group of contiguous
counties or equivalent subdivisions of a State which, on the basis of
the most recent 12-month average or the most recent annual average data,
has a rate of unemployment 150 percent or more of the national rate.
Data used must be those published by the Bureau of Labor Statistics,
U.S. Department of Labor.

[Biogas]{.underline}. Biomass converted to gaseous fuel.

## 2

## (Revision 8) 

RD Instruction 1980-E

§ 1980.402 (Con.)

[Biomass]{.underline}. Any organic material that is available on a
renewable or recurring basis including agricultural crops, trees grown
for energy production, wood waste and wood residues, plants, including
aquatic plants and grasses, fibers, animal waste and other waste
materials, fats, oils, greases, including recycled fats, oils and
greases. It does not include paper that is commonly recycled or
unsegregated solid waste.

> [Borrower]{.underline}. A borrower may be a cooperative organization,
> corporation, partnership, trust or other legal entity organized and
> operated on a profit or nonprofit basis; an Indian Tribe on a Federal
> or State reservation or other Federally recognized tribal group; a
> municipality, county, or other political subdivision of a State; or an
> individual. Such borrower must be engaged in or proposing to engage in
> improving, developing or financing business, industry and employment
> and improving the economic and environmental climate in rural areas,
> including pollution abatement and control.

[Business and Industry Disaster Loans]{.underline}. Business and
Industry loans guaranteed under the authority of the Dire Emergency
Supplemental Appropriations Act, 1992, Public Law 102-368. These
guaranteed loans cover costs arising from the direct consequences of
natural disasters such as Hurricanes Andrew and Iniki and Typhoon Omar
that occur after August 23, 1992, and receive a Presidential
declaration. Also included are the costs to any producer of crops and
livestock that are a direct consequence of at least a 40 percent loss to
a crop, 25 percent loss to livestock, or damage to building structures
from a microburst wind occurrence in calendar year 1992.

[Commercially available]{.underline}. Energy projects utilizing
technology that has a proven operating history, and for which there is
an established industry for the design, installation, and service
(including spare parts) of the equipment.

[Community facilities]{.underline}. For the purposes of this subpart,
community facilities are those facilities designed to aid in the
development of private business and industry in rural areas. Such
facilities include, but are not limited to, acquisition and site
preparation of land for industrial sites (but not for improvements
erected thereon), access streets and roads serving the site, parking
areas extension or improvements of community transportation systems
serving the site and utility extensions all incidental to site
preparation. Projects eligible for assistance under Subpart A of Part
1942 of this chapter are not eligible for assistance under this subpart.

## 2A

## (Revision 5)

(02-25-87) PN 41

RD Instruction 1980-E

§ 1980.402 (Con.)

[Development cost]{.underline}. These costs include, but are not limited
to, those for acquisition, planning, construction, repair or enlargement
of the proposed facility; purchase of buildings, machinery, equipment,
land easements, rights-of-way; payment of startup operating costs, and
interest during the period before the first principal payment becomes
due, including interest on interim financing.

> [Disaster Assistance for Rural Business Enterprises]{.underline}.
> Guaranteed loans authorized by §401 of the Disaster Assistance Act of
> 1989 (P.L. 101-82), providing for the guarantee of loans to assist in
> alleviating distress caused to rural business entities, directly or
> indirectly, by drought, freeze, storm, excessive moisture, earthquake
> or related conditions occurring in 1988 or 1989, and providing for the
> guarantee of loans to such rural business entities that refinance or
> restructure debt as a result of losses incurred, directly or
> indirectly, because of such natural disasters. See this subpart and
> its appendices, especially Appendix K, containing additional
> regulations for these loans.

[Drought and Disaster Guaranteed loans]{.underline}. Guaranteed loans
authorized by §331 of the Disaster Assistance Act of 1988 (P.L.
100-387), providing for the guarantee of loans to assist in alleviating
distress caused to rural business entities, directly or indirectly, by
drought, hail, excessive moisture, or related conditions occurring in
1988, and providing for the guarantee of loans to such rural business
entities that refinance or restructure debt as a result of losses
incurred, directly or indirectly, because of such natural disasters.
(Added 01-03-89, SPECIAL PN.)

[Energy projects]{.underline}. Commercially available projects that
produce or distribute energy or power and/or projects that produce
biomass or biogas fuel.

[Farmers Home Administration (FmHA).]{.underline} The former agency of
USDA that previously administered the programs of this Agency. Many
Instructions and forms of FmHA are still applicable to Agency programs.

[Hurricane Andrew]{.underline}. A hurricane that caused damage in
southern Florida on August 24, 1992, and in Louisiana on August 26,
1992.

[Hurricane Iniki]{.underline}. A hurricane that caused damage in Hawaii
on September 11, 1992.

[Letter of conditions]{.underline}. Letter issued by Rural Development
under Public Law 103-354 to a borrower setting forth the conditions
under which Rural Development will make a direct (insured) loan from the
Rural Development Insurance Fund.

## 

## 2B

## (Revision 1) 

RD Instruction 1980-E

§ 1980.402 (Con.)

[Loan classification system]{.underline}. The process by which loans are
examined and categorized by degree of potential for loss in the event of
default.

[Microburst wind]{.underline}. A violently descending column of air
associated with a thunderstorm which causes straight-line wind damage.

[Problem loan]{.underline}. A loan which is not performing according to
its original terms and conditions or which is not expected in the future
to perform according to those terms and conditions.

[Public body]{.underline}. A municipality, political subdivision, public
authority, district, or similar organization.

[Qualified Intellectual Property]{.underline}. Trademarks, patents or
copyrights included on current (within one year) audited balance sheets
for which an audit opinion has been received that states the financial
reports fairly represent the values therein and the reported value has
been arrived at in accordance with GAAP standards for valuing
intellectual property. The supporting work papers must be satisfactory
to the Administrator.

[Refinancing loan]{.underline}. A loan, all of the proceeds of which are
applied to extinguish the entire balance of an outstanding debt.

[Seasoned loan]{.underline}. A loan which:

\(1\) Has a remaining principal guaranteed loan balance of two-thirds or
less of the original aggregate of all existing B&I guaranteed loans made
to that business.

\(2\) Is in compliance with all loan conditions and B&I regulations.

\(3\) Has been current on the B&I guaranteed loan(s) payments for 24
consecutive months.

\(4\) Is secured by collateral which is determined to be adequate to
ensure there will be no loss on the B&I guaranteed loan.

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

## 2C

## (Added 07-26-06, PN 400)

(02-25-87) PN 41

RD Instruction 1980-E

§ 1980.402 (Con.)

[Subordinated owner debt]{.underline}. Debt owed by the borrower to one
or more of the owner(s) that is subordinated to debt owed by the
borrower to the Agency or guaranteed by the Agency (aggregate B&I Loan
Exposure) pursuant to a subordination agreement satisfactory to the
Agency. The debt must have been issued in exchange for cash loaned to
the borrower for the benefit of the borrower\'s business. The terms of
the subordination agreement must provide that repayment will not
commence until the earlier of the date all aggregate B&I loan exposure
has been repaid or when a period of three consecutive years has passed
during which the borrower has met all loan covenants and evidenced
operating profit sufficient to commence partial repayment of this
subordinated debt after giving effect to the annual debt service
requirements of the aggregate B&I loan exposure. The partial repayment
schedule in the case of the latter scenario is subject to annual Agency
concurrence and may not be more accelerated than the rate of the debt
repayment schedule in effect for the Agency\'s aggregate B&I loan
exposure.

[Tangible balance sheet equity]{.underline}. Total equity less the value
of intangible assets recorded on the financial statements, as determined
from balance sheets prepared in accordance with generally accepted
accounting principles (GAAP), plus qualified intellectual property.

[Typhoon Omar]{.underline}. A typhoon that caused damage in Guam on
August 28, 1992.

[Working capital]{.underline}. The excess of current assets over current
liabilities. It identifies the relatively liquid portion of total
enterprise capital which constitutes a margin or buffer for meeting
obligations within the ordinary operating cycle of the business.

\(b\) Accounting terms not otherwise defined in this part shall have the
definition ascribed to them under generally accepted accounting
principles (GAAP).

## 3

## (Revision 4)

(02-25-87) PN 41

RD Instruction 1980-E

§ 1980.403 [Citizenship of borrowers]{.underline}.

Loans to individuals will be made or guaranteed only to those who are
citizens of the United States or reside in the United States after being
legally admitted to permanent residence. At least 51 percent of the
outstanding interest in any corporation or organization-type applicant
must be owned by those who are either citizens of the United States or
reside in the United States after being legally admitted for permanent
residence.

§ 1980.404 \[Reserved\]

§ 1980.405 [Rural areas]{.underline}. (Revised 12-23-02, SPECIAL PN.)

The business financed with a B&I loan must be located in a rural area.
Loans to borrowers with facilities located in both rural and non-rural
areas will be limited to the amount necessary to finance the facility
located in the eligible rural area. Cooperatives that are headquartered
in a non-rural area may be eligible for a B&I loan if the loan is used
for a project or venture that is located in a rural area. Rural areas
are any areas other than:

\(a\) a city or town that has a population of greater than 50,000
inhabitants; and

\(b\) the urbanized area contiguous and adjacent to such a city or town,
as defined by the U.S. Bureau of the Census using the latest decennial
census of the United States.

§§ 1980.406 - 1980.410 \[Reserved\]

§ 1980.411 [Loan purposes]{.underline}.

\(a\) [Private entrepreneurs]{.underline}. Loans may be for improving,
developing or financing business, industry and employment and improving
the economic and environmental climate, including pollution abatement
and control, of rural areas and may include but is not limited to:

\(1\) Business and industrial acquisitions, construction, conversion,
enlargement, repair, modernization or development cost.

\(2\) Purchasing and development of land, easements, rights-of-way,
buildings, facilities, leases or materials.

\(3\) Purchasing of equipment, leasehold improvements, machinery or
supplies.

\(4\) Pollution control and abatement, including those in connection
with farming and ranching operations.

## 

## 4

(Revision 4)

§1980.411 (a) (Con.) RD Instruction 1980-E

\(5\) Transportation services incidental to industrial development.

\(6\) Startup costs and working capital.

\(7\) The financing of housing development sites located in open country
or cities, towns, or villages with populations not in excess of those
eligible for Rural Development rural housing loans, provided the
community demonstrates a need for additional housing to prevent a loss
of jobs in the area, or to house families moving to the area as a result
of new employment opportunities.

\(8\) Loans, other than for working capital or debt refinancing, for
meat processing facilities and integrated meat and poultry operations.
Loans may not be guaranteed for agricultural production as defined in
§1980.412(e); however, applicants who are in the business of processing,
marketing or packaging of agricultural products, as well as agricultural
production, may be eligible for loan assistance for that portion of the
business other than agricultural production provided the agricultural
production aspect is separate from the rest of the business; i.e., the
production aspects are handled through separate legal business entities
or through maintenance of the accounting system in such a manner as to
clearly identify the use of and future accounting of the loan proceeds
and operation of the business.

\(9\) Interest (including interest on interim financing) during the
period before the first principal payment becomes due or the facility
becomes income producing, whichever occurs first. (Renumbered 11-8-88,
SPECIAL PN)

\(10\) Feasibility studies. (Renumbered 11-8-88, SPECIAL PN)

\(11\) Debt refinancing. Lenders and Rural Development must provide as
part of their loan analysis the reasons for refinancing and the file
must be documented accordingly. Refinancing debts may be allowed in
connection with viable projects when it is determined by the lender and
Rural Development that it is necessary to create new or save existing
jobs. Rural Development will consider any lender\'s exposure as it
relates to this item and may adjust the guarantee percentage
accordingly. Refinancing in accordance with this paragraph may be
insured or guaranteed only when: (Revised 7-5-89, PN 112)

\(i\) It is necessary to spread substantial debt payment over a longer
period of time, thereby improving the business\' cash flow and working
capital position consistent with the useful life of the asset being
refinanced, or

## 5

## (Revision 3)

(2-25-87) PN 41

RD Instruction 1980-E

§ 1980.411(a)(11) (Con.)

\(ii\) For payment of short-term debt when required in situations
customarily financed over long periods of time (e.g., financing the
purchase of real estate, machinery or equipment with short-term debt or
cash expenditures, when lenders would not extend reasonable longer terms
to the business), or

\(iii\) It is necessary to place a permanent loan subsequent to an
interim loan for financing the construction of the project, or

\(iv\) It does not refinance subordinated owner debt, or (Added
07-26-06, PN 400.)

\(v\) (Except where the amount to be refinanced is owed directly to the
Federal government or is Federally guaranteed) the amount to be
refinanced by the Agency is a secondary part (less than 50 percent) of
the overall loan requested. (Added 07-26-06, PN 400.)

\(12\) Reasonable fees and charges only as specifically listed below and
disclosed on Form RD 449-1, \"Application for Loan and Guarantee,\" or
on an addendum to the application at the time the request is submitted
to Rural Development for processing. Authorized fees include fees for
services rendered by professionals generally licensed by individual
States or accreditation associations, such as engineers, architects,
lawyers, accountants, and appraisers. The amount of the fee will be what
is reasonable and customary in the community or region where the project
is located. For example, architects and engineers customarily charge
fees based on a percentage of estimated project costs. Lawyers,
accountants and appraisers customarily charge for services on an hourly
basis. Any fees for professional or expert services are to be fully
documented and justified on the Form RD 449-1 and are subject to Rural
Development review and approval before the application is presented to
the Rural Development State Loan Review Board for action. The above
approved fees and charges may be funded out of loan proceeds.
(Renumbered 11-8-88, SPECIAL PN)

\(13\) Rural Development guarantee fee. (Renumbered 11-8-88, SPECIAL PN)

## 6

## (Revision 3) 

RD Instruction 1980-E

§1980.411 (a) (Con.)

\(14\) Acquisition of membership and/or stocks, bonds or debentures
necessary to obtain a loan from Production Credit Associations, Banks
for Cooperatives, Small Business Investment Companies, and other
lenders, provided such acquisition is required of all their borrowers.
However, a lender which requires membership fees in such organization
will not use such proceeds to acquire, lease or improve property which
does not benefit its members. (Renumbered 11-8-88, SPECIAL PN)

\(15\) Aquaculture, including conservation, development and utilization
of water for aquaculture. Aquaculture means the culture or husbandry of
aquatic animals or plants by private industry for commercial purposes
including the culture and growing of fish by private industry for the
purpose of granting or augmenting publicly-owned and regulated stock of
fish. (Renumbered 11-8-88, SPECIAL PN)

\(16\) Energy projects. Commercially available energy projects that
produce biomass fuel or biogas as an output must have completed two
operating cycles at design performance levels submitted to the Agency.
Projects that produce steam or electricity as an output must have met or
exceeded acceptance test performance criteria submitted to the Agency
and be successfully interconnected with the purchaser of the output.
Performance or acceptance test requirements for all other energy
projects will be determined by the Agency on a case by case basis.
Financing for energy projects will only be allowed when the facility has
been constructed according to plans and specifications and is producing
at the quality and quantity projected in the application.

## 6A

## (Added 07-26-06, PN 400)

(02-25-87) PN 41

§1980.411 (Con.) RD Instruction 1980-E

\(b\) [Public bodies]{.underline}. See §1980.481 and §1980.488.

§1980.412 [Ineligible loan purposes]{.underline}.

Loans may [not]{.underline} be made or guaranteed if the funds are used:

\(a\) To pay off a creditor in excess of the value of the collateral.

\(b\) For distribution or payment to the owner, partners, stockholders
or beneficiaries of the applicant or members of their families when such
persons will retain any portion of their equity in the business.

\(c\) For projects in which such assistance exceeds \$1 million and when
direct employment increases more than 50 employees which is calculated
to or is likely to result in the transfer from one area to another of
any employment or business activity provided by the operations of the
applicant. This limitation will not prohibit assistance for the
expansion of an existing business entity through the establishment of a
new branch, affiliate or subsidiary of such entity if the expansion will
not result in an increase in the unemployment in the area of original
location or in any other area where such entity conducts business
operations unless there is reason to believe such expansion is being
established with the intention of closing down the operations of the
existing business entity in the area of its original location or in any
other area where it conducts such operations.

\(d\) For projects in which such assistance exceeds \$1 million and when
direct employment increases more than 50 employees which is calculated
to or likely to result in an increase in the production of goods,
materials or commodities, or the availability of services or facilities
in the area when there is not sufficient demand for such goods,
materials, commodities, services or facilities to employ the efficient
capacity of existing competitive commercial or industrial enterprises,
unless such financial or other assistance will not have an adverse
effect upon existing competitive enterprises in the area.

\(e\) For agricultural production which means the cultivation,
production (growing), and harvesting, either directly or through
integrated operations, of agricultural products (crops, animals, birds,
and marine life, either for fiber or food for human consumption), and
disposal or marketing thereof, the raising, housing, feeding (including
commercial custom feedlots), breeding, hatching, control and/or
management of farm and domestic animals. Exceptions to this definition
are: (Revised 11-8-88, SPECIAL PN)

## 7

## (Revision 1)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.412 (e) (Con.)

\(1\) Aquaculture as defined under eligible purposes.

\(2\) Commercial nurseries primarily engaged in the production of
ornamental plants and trees and other nursery products such as bulbs,
florists\' greens, flowers, shrubbery, flower and vegetable seeds, sod,
and the growing of vegetables from seed to the transplant stage.

\(3\) Forestry which includes establishments primarily engaged in the
operation of timber tracts, tree farms, forest nurseries, and related
activities such as reforestation.

\(4\) Loans for livestock and poultry processing as identified under
eligible purposes.

\(5\) The growing of mushrooms or hydroponics. (Renumbered 11-8-88,
SPECIAL PN)

\(f\) For the transfer of ownership of a business unless the loan will
keep the business from closing, prevent the loss of employment
opportunities in the area, or provide expanded job opportunities.

\(g\) For financing community antenna television services or facilities.

\(h\) Charitable and educational institutions, churches, organizations
affiliated with or sponsored by churches and fraternal organizations.

\(i\) For lending and investment institutions and insurance companies.

\(j\) For assistance to government employees and military personnel who
are directors, officers, or have a major ownership of 20 percent or more
in the business.

\(k\) For any legitimate business activity when more than 10 percent of
the annual gross revenue is derived from legalized gambling activity.

\(l\) For any illegal business activity.

\(m\) For hotels, motels, tourist homes, or convention centers.

\(n\) For any tourist, recreation or amusement facility.

\(o\) For any line of credit.

ADMINISTRATIVE: [Par (c) and (d)]{.underline}. The State Director will
review the criteria in §1980.412 (c) and (d) and make a written
determination with supporting data and reasons as to the determinations.
Such review must be independent of the Department of Labor
certification. The State Director will make sure the loan file contains
these determinations as part of the loan analysis prior to the issuance
of the Conditional Commitment for Guarantee.

## 8

## (Revision 1) 

RD Instruction 1980-E

§1980.413 [Transactions which will not be guaranteed]{.underline}.
(Revised 11-8-88, SPECIAL PN)

\(a\) The following transactions will not be guaranteed by Rural
Development:

\(1\) The guarantee of lease payments.

\(2\) The guarantee of loans made by other Federal agencies. This does
not preclude the guaranteeing of loans made by the Bank for
Cooperatives, Federal Land Bank, or Production Credit Association.

\(3\) The guarantee or making of any B&I loan(s), to any one borrower,
when the total amount of the B&I loan(s) requested plus the outstanding
balance of any existing B&I loan(s) is in excess of \$10 million.

\(b\) Guaranteeing of loans involved in tax-exempt obligations under
§1980.23 of Subpart A of this part.

[ADMINISTRATIVE]{.underline}

The State Director will consider the overall State allocations of
funding authority in recommending loans for processing. Loan requests
which fall within Small Business Administration (SBA) authority should
continue to be referred to SBA. If the State Director decides to process
SBA size loans, the loan file must be fully documented as to the reasons
for such actions.

§1980.414 [Fees and charges by lender and others]{.underline}.

\[See Subpart A, §1980.22\]

\(a\) All fees and charges must be specifically documented and justified
on the Form RD 449-1 or on an addendum to the application at the time
the loan request is submitted to Rural Development for processing.
Allowable fees will be those reasonably and customarily charged
borrowers in similar circumstances in the ordinary course of business
and are subject to Rural Development review and approval.

\(b\) Packaging fees include services rendered by the lender or others
in connection with preparation of the application and seeing the project
through to final decision. These services may or may not be performed by
an investment banker. If an investment banker

## 9

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.414 (b) (Con.)

provides needed assistance in addition to the packaging of the loan,
additional charges may be added to the packaging fee. The maximum
allowable packaging fees are 2 percent of the total principal amount of
the loan up to \$1 million and on all amounts over \$1 million, an
additional one-fourth percent up to a total maximum fee of \$50,000.
Packaging fees, investment banker fees and any other fees and charges
not specifically provided for in this section are permitted subject to
Rural Development review and approval. Loan proceeds may be used to pay
fees as specifically authorized under §1980.411(a) (12) and (13).
Packaging fees, investment banker fees, and any other fees and charges
shall not be paid from loan proceeds. (Revised 11-8-88, SPECIAL PN)

§§1980.415 - 1980.418 \[Reserved\]

§1980.419 [Eligible lenders]{.underline}. \[See Subpart A, §1980.13.\]

[ADMINISTRATIVE]{.underline}:

A. Par (a) of Subpart A, §1980.13 requires National Office approval for
any variations.

B. Par (b)(4) of Subpart A, §1980.13, State Director submits information
to National Office with recommendations.

C. With prior written approval of the Rural Development National Office,
a new eligible lender may be substituted for the original lender
provided the new lender agrees to assume all original loan requirements
including liabilities, servicing responsibilities and acquiring legal
title to the unguaranteed portion of the loan. Such approval will be
granted by the National Office only when a lender discontinues lending
operations or other extreme situations require a substitution of lender.
If approved by the National Office, the State Director will submit to
the Finance Office Form RD 1980-42, \"Notice of Substitution of
Lender.\"

§1980.420 [Loan guarantee limits]{.underline}. (Added 11-8-88, SPECIAL
PN)

The percentage of guarantee, up to the maximum allowed by this section,
is a matter of negotiation between the lender and Rural Development.

\(a\) For loans of \$2 million or less, the maximum percentage of
guarantee is 90 percent.

## 10

## (Revision 2) 

§1980.420 (Con.) RD Instruction 1980-E

\(b\) For loans over \$2 million but not over \$5 million, the maximum
percentage of guarantee is 80 percent.

\(c\) For loans in excess of \$5 million, the maximum percentage of
guarantee is 70 percent.

\(d\) Lenders and borrowers will propose the percentage of guarantee.
Rural Development informs lenders and borrowers in writing on Form RD
449-14 of any percentage of guarantee less than proposed by the lender
and borrower, and the reasons therefore. Rural Development determines
the percentage of guarantee after considering all credit factors
involved, including but not limited to:

\(1\) [Borrower\'s management]{.underline}. The borrower\'s management,
and when appropriate, equity capital, history of operation, marketing
plan, raw material requirements, and availability of necessary
supporting utilities and services;

\(2\) [Collateral]{.underline}. Collateral for the loan;

\(3\) [Financial condition]{.underline}. Financial condition of borrower
or borrower\'s principals, if appropriate;

\(4\) [Lender\'s exposure]{.underline}. The lender\'s exposure before
and after the loan, and any applicable limits on the lender\'s lending
authority; and

\(5\) [Trends and conditions]{.underline}. Current trends and economic
conditions.

§§1980.421 - 1980.422 \[Reserved\]

§1980.423 [Interest rates]{.underline}.

\(a\) [Guaranteed loans]{.underline}. Rates will be negotiated between
the lender and the borrower. They will be either fixed or variable as
long as they are legal. Interest rates will be those rates customarily
charged borrowers in similar circumstances in the ordinary course of
business and are subject to Rural Development review and approval.
Should any part of the loan(s) be sold by the lender, Rural Development,
in its analysis, will take into consideration in approving the lender\'s
interest rate, the rate at which guaranteed loans are being sold or
traded in the secondary market.

## 10A

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.423 (a) (Con.)

\(1\) A variable interest rate must be a rate that is tied to a base
rate published periodically in a recognized national or regional
financial publication specifically agreed to by the lender and borrower.
The variable interest rate may be adjusted at different intervals during
the term of the loan, but the adjustments may not be more often than
quarterly. The intervals between interest rate adjustments will be
specified in the loan agreement. The lender must incorporate within the
variable rate promissory note at loan closing, the provision for
adjustment of payment installments coincident with an interest rate
adjustment. This will assure that the outstanding principal balance is
properly amortized within the prescribed

## 10B

## (Revision 2) 

§1980.423 (a) (1) (Con.) RD Instruction 1980-E

loan maturity to eliminate the possibility of a balloon payment at the
end of the loan. (Revised

\(2\) Under a Memorandum of Understanding between Rural Development and
the Farm Credit Administration dated September 25, 1974, the interest
rate on loans made by the Bank for Cooperatives, Federal Land Bank and
Production Credit Associations may be a variable rate based on their
administrative and borrowing costs.

\(3\) Any change in the interest rate between the date of issuance of
the Form RD 449-14, \"Conditional Commitment For Guarantee,\" and before
the issuance of the Loan Note Guarantee must be approved by the State
Director. Approval of such change will be shown on an amendment to Form
RD 449-14.

\(4\) 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:

\(i\) The rate on the unguaranteed portion does not exceed that
currently being charged on loans of similar size and purpose for
borrowers under similar circumstances.

\(ii\) The rate on the guaranteed portion of the loan will not exceed
the rate on the unguaranteed portion.

\(5\) When multi-rates are used, the lender will provide Rural
Development with the overall effective interest rate for the entire
loan.

\(6\) The borrower, lender and holder (if any) may collectively effect a
permanent reduction in the interest rate on their B&I guaranteed loan at
any time during the life of the loan upon written agreement by these
parties. Rural Development must be notified by the lender, in writing,
within 10 calendar days of the change. If the guaranteed portion has
been repurchased by Rural Development, then Rural Development is a
holder and must affirm or reject interest rate change proposals. When
Rural Development is a holder, it will concur in such interest rate
change only when it is demonstrated to Rural Development that the change
is a more viable alternative than initiating or proceeding with
liquidation of the loan or continuing with the loan in its present state
and that the Government\'s financial interests are not adversely
affected. Factors which will be considered in making such determination
will include whether the proposed interest rate will

## 11

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.423 (a) (6) (Con.)

be below the Government\'s cost of borrowing money, whether continuing
with the loan would realistically promote or enhance rural development
and employment in rural areas, whether the monetary recovery would be
increased by proceeding immediately to liquidation, if applicable, or
allowing the borrower to continue at a reduced interest rate, and
whether an in-depth financial analysis by the lender reasonably
indicates that the business would be successful at a lower interest rate
and reasonably indicates that the borrower could make the reduced
payment and pay off amounts in arrears, if any. The Rural Development
file will reflect the documentation of the interest rate change
decision.

\(i\) 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.

\(ii\) Variable rates can be changed to reduce fixed rates. In a final
loss settlement, when qualifying rate changes were made with the
required written agreements and notification, the interest will be
calculated for the periods the given rates were in effect, except that
interest claimed on a loan which originated at a variable rate can never
exceed the amount which would have been eligible for claim had the
variable rate remained in force. The lesser cost to the Government will
always prevail. The lender must maintain records which adequately
document the accrued interest claimed.

\(iii\) The lender is responsible for the legal documentation of
interest changes by an allonge attached to the promissory note(s) or any
other legally effective amendment of the rate(s); however, no new
note(s) may be issued.

\(7\) No increases in interest rates will be permitted under the B&I
loan guarantee except the normal fluctuations in approved variable
interest rate loans.

## 12

## (Revision 2) 

§1980.423 (Con.) RD Instruction 1980-E

\(b\) [Insured loans]{.underline}.

\(1\) Loans for other than those in paragraph (b)(2) of this section
will bear interest at a rate prescribed by Rural Development, and will
be announced periodically. The interest rate for insured loans will be
the rate in effect at the time the loan is approved or at the time the
loan is closed, whichever rate is lower.

\(2\) Loans to public bodies, nonprofit associations and Indian Tribes
used to finance community facilities will bear interest at the rate
prescribed in RD Instruction 440.1, Exhibit B (available in any Rural
Development office).

[ADMINISTRATIVE]{.underline}: Par (a)(6) and (a)(7). (Added 4-26-85,
SPECIAL PN.)

The Director will notify the Finance Office of any interest rate
reduction by using Form RD 1980-47, \"Guaranteed Loan Borrower
Adjustments.\" The State Director will make corrections to the Rural
Community Facility Tracking System (RCFTS) reflecting the interest rate
change. The Rural Development loan file, as well as the attachments to
the copy of the promissory note in the file, will be documented by the
State Director to reflect any change in the interest rate.

## 12A

## (Added 10-17-88, SPECIAL PN) 

RD Instruction 1980-E

§1980.424 [Terms of loan repayment]{.underline}.

\(a\) Principal and interest on the loan will be due and payable as
provided in the promissory note except, any interest accrued as the
result of the borrower\'s default on the guaranteed loan(s) over and
above that which would have accrued at the normal note rate on the
guaranteed loan(s) will not be guaranteed by Rural Development. 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 applicant but on
terms that reasonably assure 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,
but such installment will be due and payable within three years from the
date of the promissory note and at least annually thereafter. Interest
will be due at least annually from the date of the note. Ordinarily,
monthly payments will be expected, except for seasonal-type businesses.

\(b\) The maximum time allowable for final maturity for a Rural
Development guaranteed B&I loan will be limited to thirty (30) years for
land, buildings and permanent fixtures; the usable life of the machinery
and equipment purchased with loan funds, but not to exceed fifteen (15)
years; and seven (7) years for the working capital portion of the loan.
The term for a loan that is being refinanced may be based on the
collateral the lender will take to secure the loan.

\(c\) The maximum time allowable for final maturity of a Rural
Development insured loan for community facilities will not exceed forty
(40) years.

\(d\) Rural Development will not guarantee any loan in which the
promissory note or any other document provides for the payment of
interest upon interest.

[ADMINISTRATIVE]{.underline}:

It is permissible for lenders to structure the borrower\'s financial
proposal under the multi-note option as provided for in paragraph III
A.2. of Form RD 449-35, \"Lender\'s Agreement,\" in the following ways:

A. To treat the entire financial package of the borrower as one loan
(i.e., loan purposes may include one or any combination of working
capital, machinery and equipment or real estate) provided:

1\. The loan is amortized to provide repayment of the working capital
portion within the 7 years, the machinery and equipment portion within
useful life or 15 years, whichever is less, and real estate portion
within 30 years.

2\. One note represents the unguaranteed portion of the loan. It is
permissible to issue as many as 10 notes on the guaranteed portion of
the loan.

## 13

## (Revision 1)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.424 ADMINIS A. (Con.)

3\. A Form RD 449-34, \"Loan Note Guarantee,\" is attached to all notes,
including the unguaranteed note.

4\. One interest rate (either variable or fixed) is used for the entire
loan or one interest rate is used on the guaranteed portion and a
different interest rate is used on the unguaranteed portion, subject to
the requirements and conditions found in §1980.423 of this subpart.

5\. One of each of the following Forms: Form RD 449-14, Form RD 1940-3,
\"Request for Obligation of Funds - Guaranteed Loans,\" Form RD 449-35,
and Form RD 1980-19, \"Guaranteed Loan Closing Report,\" is used.
(Revised 02-28-91, SPECIAL PN.)

B. To treat the financial package of the borrower as separate loans that
are processed as a single application provided:

1\. A separate loan is made for each purpose (i.e., working capital,
machinery and equipment or real estate). As an example, a working
capital loan could be structured as follows:

One note for \$XXXX at X% interest due in 7 years representing the
unguaranteed portion of the loan, and

Up to 10 notes for \$XXXX at X% interest due in 7 years representing the
guaranteed portions of the loan.

2\. A Form RD 449-34 is attached to all notes, including the
unguaranteed note.

3\. A different interest rate may be used on the guaranteed and
unguaranteed portions of the loan, subject to the requirements and
conditions found in §1980.423 of this subpart.

4\. Separate Forms RD 449-14, 1940-3, 449-35, and 1980-19 are required
for each loan. If you have two loans, one for working capital and
another for real estate, then a set of these forms will be required for
each loan. (Revised 02-28-91, SPECIAL PN.)

C. Form RD 449-36, \"Assignment Guarantee Agreement,\" will never be
used when the multi-note option is utilized.

D. Par. (b). The State Director will assure that the loan officer
reviewing the application fully evaluates the useful life of the
collateral offered for the loan when determining maturities for the
loan. Loan requests for the maximum maturities could result in
collateral obsolescence prior to full repayment of the indebtedness. The
loan file must be documented to support the maturity granted for the
loan.

## 14

## (Revision 1) 

RD Instruction 1980-E

§1980.425 [Availability of credit from other sources]{.underline}.

\(a\) Inability to obtain credit elsewhere is not a requirement for
guaranteed assistance under this subpart.

\(b\) To be eligible for an insured loan under this subpart, the
borrower must be unable to obtain the required credit from private or
cooperative sources at reasonable rates and terms, taking into
consideration prevailing private and cooperative rates and terms in the
community in or near the borrower\'s location(s) for loans for similar
purposes and period of time. The borrower\'s inability to obtain such
credit elsewhere will be determined in accordance with Subpart A of Part
1942 of this chapter.

§§1980.426 - 1980.431 \[Reserved\]

§1980.432 [Environmental requirements]{.underline}. \[See Subpart A,
§1980.40 and G of Part 1940 of this chapter.\]

[ADMINISTRATIVE]{.underline}:

When required by Subpart G of Part 1940 of this chapter, the approving
official will review Form RD 1940-20, \"Request for Environmental
Information,\" submitted by the borrower and the environmental
assessment prepared by the environmental reviewer. The approving
official will indicate his/her decision as part of the assessment when
required. If the approving official determines that an EIS is required,
he/she will notify the borrower and lender in writing.

§1980.433 [Flood or mudslide hazard area precautions]{.underline}. (See
Subpart A, Part 1980.42.)

[ADMINISTRATIVE]{.underline}:

The State Director is responsible for determining if a project is
located in a special flood or mudslide hazard area. Refer to Subpart B
of Part 1806 of this chapter \[RD Instruction 426.2.\].

§1980.434 [Equal opportunity and nondiscrimination
requirements]{.underline}. \[See Subpart A §1980.41.\]

## 15

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

[ADMINISTRATIVE]{.underline}:

The State Director will assure that equal opportunity and
nondiscrimination requirements are met. If there is indication of
noncompliance with these requirements, such facts will be reported by
the Compliance Reviewing Officer or Rural Development official in
writing to the Administrator, ATTN: Equal Opportunity Officer.

§§ 1980.435 - 1980.440 \[Reserved\]

§ 1980.441 [Borrower equity requirements]{.underline}. (Revised
07-26-06, PN 400.)

> \(a\) A minimum of 10 percent tangible balance sheet equity will be
> required for existing businesses at loan closing. A minimum of 20
> percent tangible balance sheet equity will be required for new
> businesses at loan closing. For energy projects, the minimum tangible
> balance sheet equity requirement range will be between 25 percent and
> 40 percent. Criteria for considering the minimum equity required for
> an individual application will be based on: existing businesses with
> successful financial and management history vs. start-up businesses;
> personal/corporate guarantees offered; contractual relationships with
> suppliers and buyers; credit rating; and strength of the business
> plan/feasibility study. Where the application is a request to
> refinance outstanding Federal direct or guaranteed loans, without any
> new financing, the equity requirement may be determined using adjusted
> tangible net worth. An application that combines a refinancing loan or
> guarantee request with a new loan or guarantee request is subject to
> the standard, unadjusted, equity requirement except as provided in
> paragraphs (a)(1) or (a)(2) of this section. Increases or decreases in
> the equity requirements may be imposed or granted as follows:

\(1\) A reduction in the equity requirement for existing businesses may
be permitted by the Administrator. In order for a reduction to be
considered, the borrower must furnish the following:

> \(i\) Collateralized personal and corporate guarantees, including any
> parent, subsidiary, or affiliated company, when feasible and legally
> permissible, and
>
> \(ii\) Pro forma and historical financial statements that indicate the
> business to be financed meets or exceeds the median quartile (as
> identified in the Risk Management Association\'s Annual Statement
> Studies or similar publication) for the current ratio, quick ratio,
> debt-to-worth ratio, debt coverage ratio and working capital.

## 16

## (Revision 2) 

## RD Instruction 1980-E

§ 1980.441(a)(1) (Con.)

\(2\) The approval official may require more than the minimum equity
requirements provided in this paragraph if the official makes a written
determination that special circumstances necessitate this course of
action.

\(b\) The equity requirement must be met in the form of either cash or
tangible earning assets contributed to the business and reflected on the
balance sheet.

\(c\) The equity requirement must be determined using balance sheets
prepared in accordance with GAAP and met upon giving effect to the
entirety of the loan in the calculation, whether or not the loan itself
is fully advanced, as of the date the loan is closed; a certification to
this effect is required of all guaranteed lenders.

\(d\) The modified formula for determining whether the equity
requirement is met, \"adjusted tangible net worth,\" may be used only in
cases where the guarantee requested is for a loan, the proceeds of which
are to be used entirely to refinance a debt owed to the Federal
government or Federally guaranteed debt. In all other situations, the
equity requirement must be determined using tangible net worth.

[ADMINISTRATIVE]{.underline}:

A. The final Loan Agreement must contain all conditions of the
Conditional Commitment, including the tangible balance sheet
equity requirement. Therefore, the business must meet the requirement
before the lender executes the final loan documents and closes the
loan.  The lender must provide a certification to the Agency that
tangible balance sheet equity was calculated from financial statements
presented in accordance with GAAP and supported by attaching a copy of
the balance sheet on which the certification is based.

## 16A

## (Revision 2)

(02-25-87) PN 41

## RD Instruction 1980-E

§ 1980.442 (Con.)

B.  For sole proprietorships, financial statements should be prepared
    using only the assets and liabilities directly attributable to the
    business. Additionally, personal financial statements typically list
    assets at market values. The business assets must be valued at the
    lower of cost or market value before calculating tangible balance
    sheet equity.

C. Related party receivables routinely are classified as non-current
assets, unless they will be repaid within one year. These receivables do
not represent a liquid asset convertible to cash and available for
business operations because of the nature of the affiliation and the
absence of pressure to repay the receivables. The Loan Specialist should
determine why the receivable was incurred and that repayment ability
exists. Most banks deduct any amount due from officers or partners from
total equity. For example, an officer may have taken a loan from the
company instead of a salary or bonus. This receivable is, in effect, an
expense not recognized by the company, thus improving its profitability.
As a prudent lending practice, the Agency must make the appropriate
adjustment in the event the lender does not. Obtain a copy of any
applicable promissory note to document collectibility.

§ 1980.442 [Feasibility studies]{.underline}.

A feasibility study by a recognized independent consultant will be
required for all loans, except as provided in this paragraph. The cost
of the study will be borne by the borrower and may be paid from funds
included in the loan. The loan approval official may make an exception
to the requirement of a feasibility study for loans to existing
businesses when the financial history of the business, the current
financial condition of the business, and guarantees or other collateral
offered for the loan are sufficient to protect the interest of the
lender and Rural Development. Rural Development will thoroughly document
the justification for the exception to the feasibility study for such
businesses. An acceptable feasibility study should include but not be
limited to: (Revised 08-25-93, PN 211.)

## 16B

## (Added 07-26-06, PN 400)

(02-25-87) PN 41

RD Instruction 1980-E

§1980.442 (Con.)

\(a\) [Economic feasibility]{.underline}. Information related to the
project site, availability of trained or trainable labor; utilities,
rail, air and road service to the site; and the overall economic impact
of the project.

\(b\) [Market feasibility]{.underline}. Information on the sales
organization and management, nature and extent of market and market
area, marketing plans for sale of projected output, extent of
competition and commitments from customers or brokers.

\(c\) [Technical feasibility]{.underline}. Technical feasibility reports
shall be prepared by individuals who have previous experience in the
design and analysis of similar facilities and/or processes as are
proposed in the application. The technical feasibility reports shall
address the suitability of the selected site for the intended use,
including an environmental impact analysis. The report shall be based
upon verifiable data and contain sufficient information and analysis so
that a determination may be made on the technical feasibility of
achieving the levels of income and/or production that are projected in
the financial statements. The report shall also identify any constraints
or limitations in these financial projections and any other facility or
design related factors which might affect the success of the enterprise.
The report shall also identify and estimate project operating and
development costs and specify the level of accuracy of these estimates
and the assumptions on which these estimates have been based. For the
purpose of the technical feasibility reports, the project engineer or
architect may be considered an independent party provided the principals
of the firm or any individual of the firm who participates in the
technical feasibility report does not have a financial interest in the
project, and provided further that no other individual or firm with the
expertise necessary to make such a determination is reasonably available
to perform the function.

\(d\) [Financial feasibility]{.underline}. An opinion on the reliability
of the financial projections and the ability of the business to achieve
the financial projections and the ability of the business to achieve the
projected income and cash flow. An assessment of the cost accounting
system, the availability of short-term credit for seasonal business and
the adequacy of raw materials and supplies.

\(e\) [Management feasibility]{.underline}. Evidence that continuity and
adequacy of management has been evaluated and documented as being
satisfactory.

## 17

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.442 (Con.)

[ADMINISTRATIVE]{.underline}:

Rural Development loan approval officials will be selective in approving
borrowers for new business ventures involved in unproven products,
services, or markets. Should such businesses be considered, additional
equity will usually be required. (Added 08-25-93, PN 211.)

§1980.443 [Collateral, personal and corporate guarantees and
other]{.underline}

[requirements]{.underline}.

\(a\) [Collateral]{.underline}.

\(1\) The lender is responsible for seeing that proper and adequate
collateral is obtained and maintained in existence and of record to
protect the interest of the lender, the holder, and Rural Development.

\(2\) Collateral must be of such a nature that repayment of the loan is
reasonably assured when considered with the integrity and ability of
project management, soundness of the project, and applicant\'s
prospective earnings. Collateral may include, but is not limited to the
following: land, buildings, machinery, equipment, furniture, fixtures,
inventory, accounts receivable, cash or special cash collateral
accounts, marketable securities and cash surrender value of life
insurance. Collateral may also include assignments of leases or
leasehold interest, revenues, patents, and copyrights.

\(3\) All collateral must secure the entire loan. The lender will not
take separate collateral to secure only the portion of the loan or loss
not covered by the guarantee. 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. However,
compensating balances as used in the ordinary course of business may be
used.

\(4\) Release of collateral of a going concern is based on a complete
analysis of the proposal.

\(i\) Release of collateral prior to payment-in-full of the Rural
Development guaranteed debt must be requested by the lender and
concurred with by the State Director as prescribed in §1980.469
ADMINISTRATIVE D.2 of this subpart subject to the following conditions:

## 18

## (Revision 2) 

§1980.443 (a) (4) (i) (Con.) RD Instruction 1980-E

\(A\) Collateral taken initially or subsequently may not be released
prior to the payoff, in full, of the loan balance without adequate
consideration for the value of that collateral. Adequate consideration
may include, but is not limited to:

([1]{.underline}) Application of the net proceeds from the sale of the
collateral to the note in inverse order of maturity. All or part of the
total proceeds, if approved by the Administrator, may be applied to the
payment of current or delinquent principal and interest on the note; or

## 18A

## (Added 10-17-88, SPECIAL PN) 

§1980.443 (a) (4) (i) (A) (Con.) RD Instruction 1980-E

([2]{.underline}) Use of the net proceeds from the sale of collateral to
purchase collateral of equal or greater value for which the lender will
obtain a first lien position; or

([3]{.underline}) Application of net proceeds from the sale of
collateral to the borrower\'s business operations in such a manner that
enhancement of the borrower\'s debt service ability can be clearly
demonstrated; for example, the payoff or reamortization of the loan as
the result of a large extra payment which reduces subsequent
installments on the loan; or

([4]{.underline}) Assurance to Rural Development that the release of
collateral will contribute to the project\'s success thereby furthering
the goals of the B&I program to show why the release of collateral will
contribute to the success of the borrower and repayment of the loan; and

\(B\) Rural Development must not be adversely affected by the release of
collateral; and

\(C\) If the release of collateral does not involve a reduction of the
Rural Development guaranteed debt equal to the net proceeds of the
disposition of the collateral, then it must be determined that the
remaining collateral is sufficient to provide for the recovery of the
Rural Development guaranteed loan(s).

\(ii\) Sale of collateral of a going concern to the borrower,
borrower\'s stockholder(s) or officer(s), the lender or lender\'s
stockholder(s) or officer(s) must be based on an arm\'s-length
transaction with the concurrence of Rural Development.

\(b\) [Personal and corporate guarantees]{.underline}.

\(1\) Unconditional personal/corporate guarantees (i.e., absolute
guarantees of full and punctual payment and performance by the borrower)
from owners or major stockholders as determined by Rural Development and
all partners of partnerships (except for limited partnerships) unless
restricted by law [will]{.underline} be required unless exempted as
provided for in paragraph (b)(2) of this section. Guarantees of parent,
subsidiaries, or affiliated companies and/or secured guarantees may also
be required. Rural Development is not a co-guarantor with the personal
or corporate guarantors. The personal and corporate guarantees are part
of the collateral for the loan.

\(2\) An exception to the requirement for personal or corporate
guarantees may be made by Rural Development when requested by the lender
and if:

## 19

## (2-25-87) PN 41 

RD Instruction 1980-E

§1980.443 (b) (2) (Con.)

\(i\) The borrower has a satisfactory and current (not over 90 days old)
credit report, proven management, evidence of the market necessary to
support projections, profitable historical performance of no less than 3
years, abundant collateral to protect the lender and Rural Development,
sufficient cash flow to service its debts and meets key industry
standards such as those of Robert Morris Associates, Dunn and Bradstreet
or the like; or

\(ii\) The borrower\'s stock is widely enough held so that no one
individual can exercise control. Examples of control would include but
are not limited to: holding sufficient proxies and maintaining
sufficient family or special interest voting blocks; or

\(iii\) A borrower which has a parent, subsidiary, or affiliate which is
legally restricted from guaranteeing, or if the guarantee would conflict
with existing contractual obligations. Examples of existing contractual
obligations include but are not limited to restrictions in loan
agreements or in credit lines which may preclude guaranteeing.

\(3\) No guarantees are required from any partners in a limited
partnership.

\(4\) As a general rule, stockholders of publicly traded corporations
will not be required to guarantee. However, such guarantees can be
required from some of the stockholders where such guarantees are
determined necessary to adequately protect the interest of the
Government.

\(5\) If the guarantee would conflict with existing contractual
restrictions, the Administrator will have the authority to grant
exceptions to the above restrictions upon a finding by the Administrator
that such a guarantee is not necessary to adequately protect the
Government\'s interest. Relief would only be granted as to contractual
restrictions existing at the time the lender filed an application with
Rural Development.

\(6\) Unsecured Personal guarantees, while collateral, will not be
considered for purposes of adequacy of security. Personal guarantees
will be secured by collateral when business collateral offered is
determined by Rural Development to be insufficient or when the
borrower\'s credit does not meet the program\'s normal requirements or
anytime the lender deems such security should be taken.

## 20 

§1980.443 (b) (Con.) RD Instruction 1980-E

\(7\) Guarantors of borrowers will:

\(i\) In the case of personal guarantees, provide current financial
statements (not over 60 days old at time of filing), signed by the
guarantors, which make a clear disclosure of community or homestead
property.

\(ii\) In the case of corporate guarantees, provide current financial
statements (not over 90 days old at the time of filing), certified by an
officer of the corporation.

\(iii\) When applicable, provide written evidence to Rural Development
of their inability to provide a guarantee because of existing
contractual arrangements or legal restrictions.

\(c\) [Other requirements]{.underline}.

\(1\) The lender will ascertain that no claim or liens of laborers,
material men, contractors, subcontractors, suppliers of machinery and
equipment or other parties are against the collateral of the borrower,
and that no suits are pending or threatened that would adversely affect
the collateral of the borrower when the security instruments are filed.

\(2\) Hazard insurance with a standard mortgage clause naming the lender
as beneficiary will be required on every loan in an amount that is at
least the lesser of the depreciated replacement value of the property
being insured or the amount of the loan. Hazard insurance includes fire,
windstorm, lightening, hail, business interruption, explosion, riot,
civil commotion, aircraft, vehicle, marine, smoke, builder\'s risk,
public liability, property damage, flood or mudslide or other hazard
insurance that may be required to protect the collateral.

\(3\) Ordinarily, life insurance, which may be decreasing term
insurance, is required for the principals and key employees of the
borrower and will be assigned or pledged to the lender. A schedule of
life insurance available for the benefit of the loan will be included as
part of the application.

\(4\) Worker\'s compensation insurance is required in accordance with
State law.

## 21

## (Revision 1)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.443 (Con.)

[ADMINISTRATIVE]{.underline}:

A. [Par (a)(2)]{.underline}. Rural Development\'s credit analysis of
collateral will consist of the following:

1\. Little or no value will be assigned to unsecured personal or
corporate guarantees.

2\. A maximum of 80 percent of current market value will be given to
real estate. Special purpose real estate should be assigned less value.

3\. Rural Development at its option may permit a maximum of 60 percent
of book value to be assigned to acceptable accounts receivable; however,
all accounts over 90 days past due, contra accounts, affiliated accounts
and other accounts deemed, by the Rural Development official, not to be
collateral will be omitted. Calculations to determine the percentage to
be applied in the analysis are to be based on the realizable value of
the accounts receivable taken from a current aging of accounts
receivable from the borrower\'s most recent financial statement.

4\. A maximum of 60 percent of book value will be assigned to inventory.

5\. Collateral value assigned to machinery and equipment, furniture and
fixtures will be based upon its marketability, mobility, useful life and
alternative uses, if any.

B. [Par (b)]{.underline}. The State Director will assure that the
collateral values and personal and corporate guarantees are fully
reviewed, analyzed and the loan file is documented as to the facts and
reasons for decisions reached.

§1980.444 [Appraisal of property serving as collateral]{.underline}.

\(a\) Appraisal reports prepared by independent qualified fee appraisers
will be required on all property that will serve as collateral. In the
case of loans of \$2 million or less, the State Director may modify this
requirement by permitting the appraisal to be made by a qualified
appraiser on the lender\'s staff with experience appraising the type of
collateral involved. The appraisers will give their opinion regarding
the current market value of the collateral and the purpose for which the
appraisal will be used. The lender will be responsible for assuring that
appropriate appraisals are made. (Revised 10-17-88, SPECIAL PN)

## 22

## (Revision 1) 

RD Instruction 1980-E

§1980.444 (Con.)

\(b\) The lender will be responsible for determining that appraisers
have the necessary qualifications and experience to make the appraisals
lender will consult with the Agency for its recommendations before
having the appraisal made.

\(c\) The lender will determine that the fees or charges of appraisers
are reasonable.

\(d\) Independent appraisals will be made in accordance with the
accepted format of the industry and those prepared by the lender in
accordance with its policy and procedures. All appraisals will become
part of the application. (See §1980.451(i)(6).)

\(e\) If a subsequent loan request is made within 3 years from the date
of the most recent borrower\'s appraisal report, and there is no
significant change in the collateral, then the state director in his/her
discretion, and if the lender agrees, may use the existing appraisal
report in lieu of having a new appraisal prepared.

§1980.445 [Periodic financial statements and audits]{.underline}. (Added
04-24-96,\
PN 260.)

All borrowers will be required to submit periodic financial statements
to the lender. Lenders must forward copies of the financial statements
and the lender\'s analysis of the statements to the Agency.

\(a\) [Audited financial statements]{.underline}. Except as provided in
paragraphs (d) and (e) of this section, all borrowers with a total
principal and interest loan balance for loans under this subpart, at the
end of the borrower\'s fiscal year, of more than \$1 million must submit
annual audited financial statements. The audit must be performed in
accordance with generally accepted accounting principles (GAAP). In
addition, the audits are also to be performed in accordance with
appropriate Office of Management and Budget (OMB) circulars and any
Agency requirements specified in this subpart.

\(b\) [Unaudited financial statements]{.underline}. For borrowers with a
loan balance (principal plus interest at year-end) of \$1 million or
less, the Agency will require annual financial statements which may be
statements compiled or reviewed by an accountant qualified in accordance
with the publication \"Standards for Audit of Governmental
Organizations, Programs, Activities and Functions,\" instead of audited
financial statements.

## 22A

## (Revision 1)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.445 (Con.)

\(c\) [Internal financial statements]{.underline}. The Agency may
require submission of financial statements prepared by the borrower at
whatever frequency is determined necessary to adequately monitor the
loan. Quarterly financial statements will be required on new business
enterprises or 0r those needing close monitoring.

\(d\) [Minimum requirements]{.underline}. This section sets out minimum
requirements for audited and unaudited financial statements to be
submitted to the Agency. If specific circumstances warrant, the Agency
may require audited financial statements or independent unaudited
financial statements in excess of the minimum requirements. For example,
loans that depend heavily on inventory and accounts receivable for
collateral will normally be audited, regardless of the size of the loan.
Nothing herein shall be considered an impediment to the lender requiring
financial statements more frequently than required by the Agency or
requiring audited financial statements when the Agency would accept
unaudited financial statements.

\(e\) [Public bodies and nonprofit corporations]{.underline}.
Notwithstanding other provisions of this section, any public body or
nonprofit corporation that receives a guarantee of a loan that meets the
thresholds established by OMB Circular A-128 or A-133 for coverage under
such circular, must provide an audit in accordance with the applicable
OMB Circular A-128 or A-133 for the fiscal year of the borrower in which
the Loan Note Guarantee is issued. If the loan is for development or
purchases made in a previous fiscal year through interim financing, an
audit, in accordance with the applicable circular, will also be provided
for the fiscal year in which the development or purchases occurred. Any
audit provided by a public body or nonprofit corporation in compliance
with OMB Circular A-128 or A-133 will be considered adequate to meet the
requirements of this section for that year.

## 22B

## (Added 04-24-96, PN 260) 

RD Instruction 1980-E

§§1980.446 - 1980.450 \[Reserved\]

§1980.451 [Filing and processing applications]{.underline}.

\(a\) [Borrowers\' and lenders\' contact]{.underline}. Borrowers and
lenders desiring assistance as provided in this subpart may file
preapplications or applications with the county supervisor or district
director servicing the area in which the project is to be located. In
either case, the requirements of §1980.46 of subpart A must be met. The
county supervisor or district director receiving the request for
assistance will promptly notify the state director of the nature and
facts of the request. The state director will promptly arrange an early
meeting with the borrower and lender representatives to discuss
assembly, preparation and processing of preapplications and
applications. The state director

may call upon the county supervisor and district director to assist the
state director in any way necessary.

\(b\) [Applications from cooperatives]{.underline}. Borrowers eligible
for loans from the Bank for Cooperatives will be encouraged to obtain
guaranteed loans from that source since the Bank for Cooperatives is
experienced in making and servicing such loans and can provide
substantial counsel to the applicant. Applications must be submitted to
the Bank for Cooperatives as a test of credit elsewhere when an insured
loan is being considered (See RD Instruction 2000-Q available in any
Agency office for Memorandum of Understanding between the former Rural
Development and Farm Credit Administration.)

\(c\) [Borrowers eligible for Small Business Administration (SBA)
assistance]{.underline}. All borrowers for loan guarantees eligible for
SBA assistance will be advised by the Agency at the time of receipt of
the preapplication of the availability of such assistance and will be
encouraged to apply to that agency. (See RD Instruction 2000-P available
in any Agency office for Memorandum of Understanding between SBA and the
former Rural Development.)

\(d\) [Loan priorities]{.underline}. Applications and preapplications
received by

the Agency will be considered in the order received; however, for the
purpose of assigning priorities as described in paragraph (d)(3) of this
section. The Agency will compare an application to other pending
applications. (Revised 10-17-88, SPECIAL PN.)

## 23

## (Revision 3)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.451(d) (Con.)

\(1\) The Agency will cooperate fully with appropriate state agencies in
guaranteeing and insuring loans in a manner which will assure maximum
support of the state\'s strategies for development of its rural areas.

\(2\) When applications on hand otherwise have equal priority, the
applications from a veteran will have preference. A veteran is a person
who has been discharged or released from the active forces of the United
States Army, Navy, Air Force, Marine Corps, or Coast Guard under
conditions other than dishonorable and who served on active duty in such
forces:

\(i\) During the period April 6, 1917, through March 31, 1921;

\(ii\) During the period of December 7, 1941, through\
December 31, 1946;

\(iii\) During the period of June 27, 1950, through January 31, 1955; or

\(iv\) For a period of more than 180 days, any part of which occurred
after January 31, 1955; but on or before May 17, 1975. Discharges under
conditions other than dishonorable include \"clemency discharges.\"

\(3\) Priorities will be assigned to eligible applications on the basis
of a point system that takes into account project location, the creation
and saving of jobs, the cost at which those jobs would be created or
saved, seasonal and part-time job impact, and leveraging of Agency
assistance. The application and supporting information submitted with it
will be used to determine an eligible proposed project\'s priority for
available funds or guarantee authority. The priorities described in this
paragraph will be used by the Agency to score projects. A copy of the
calculation of the score should be placed in the file for future
reference. The format found in Appendix J of this subpart (available in
any Agency office) should be followed in scoring each application and a
copy signed by the state director should be placed in the case file.\
(Revised 08-30-89, PN 116.)

\(i\) [Location priorities]{.underline}. The priority score for location
will be the score for the highest-ranked category in which the project
fits. If the location does not fit one of these categories, it receives
no points for location. The categories, and their point scores, are:

## 24

## (Revision 3) 

§1980.451 (d) (3) (i) (Con.) RD Instruction 1980-E

\(A\) Located in a city or area under 25,000 population (10 points).

\(B\) Located in a city or area under 25,000 population that is an area
of high unemployment as of the date of application (20 points).

\(C\) Located in an area of high unemployment as of the date of
application, provided the borrower certifies in writing to the State
Director in simple narrative or letter form that the project will employ
on a permanent, full time basis (providing at its own cost such training
or retraining as may be needed) persons (numbering no fewer than 25
percent of the project\'s employment) who are members of displaced farm
families which recently derived from farming or ranching the majority of
their combined incomes, but are no longer actively engaged in farming or
ranching as operators or employees (35 points).

\(ii\) Jobs priorities. The priority score for jobs created and/or saved
is the score for the highest-ranked category in which the project fits.
If the project does not fit one of these categories, it receives no
points for jobs. The categories, and their point scores, are:

\(A\) Project will contribute to the overall economic stability of the
project area and generate permanent jobs beyond the entrepreneur and the
entrepreneur\'s household (10 points).

\(B\) Project will contribute to the overall economic stability of the
project area and will employ on a permanent, full time basis a number of
persons that is significant in the context of the area\'s economy (20
points).

\(C\) Project will contribute to the overall economic stability of the
project area, will employ on a permanent, full time basis a number of
persons that is significant in the context of the area\'s economy, and
will retain in that area a significant number of jobs that would
otherwise be lost (35 points).

## 24A

## (Added 10-17-88, SPECIAL PN) 

RD Instruction 1980-E

§1980.451 (d) (3) (Con.)

\(iii\) [Job cost priorities]{.underline}. The priority score for the
project\'s cost per job is the score for the highest-ranked category in
which the project fits. First, divide the amount of the Rural
Development guaranteed loan by the number of jobs created or saved. This
will result in the cost per job. Count only full time jobs. Part time
jobs may be reduced to a fraction of a full time job and counted. For
example, a 20 hour per week job, or a job that is full time for six
months per year is one half of a job. Second, determine the State\'s
nonmetropolitan household income as described in §1980.451(d)(3)(vi).
Third, divide the cost per job by the State\'s indexed nonmetropolitan
household income. For example, if the cost per job is \$10,000 and the
State\'s nonmetropolitan household income is \$20,000, the result will
be 0.5. The categories, and their point scores, are:

\(A\) Loans on which the result is greater than 1.5 but less than 2.0 (5
points).

\(B\) Loans on which the result is from 1.0 to 1.5 (15 points).

\(C\) Loans on which the result is less than 1.0 (25 points).

If the result exceeds 2.0, a high cost per job in that State, no points
are received for job cost.

\(iv\) [Additional points]{.underline}. There shall be added to the
score the points indicated for any and all of the following criteria met
by the project.

\(A\) Rural Development guaranteed loan is less than 50 percent of
project cost (5 points).

\(B\) Percentage of guarantee is 10 or more percentage points less than
the maximum allowable for a loan of its size (5 points).

\(C\) Project will, in addition to any permanent full time jobs, create
a significant number of part time or seasonal jobs that will provide
additional income to underemployed residents of the project area without
their having to give up any present part time or seasonal jobs (10
points).

## 24B

## (Added 10-17-88, SPECIAL PN) 

§1980.451 (d) (3) (Con.) RD Instruction 1980-E

\(v\) [Administrative points]{.underline}. The State Director may assign
up to 20 points to an application in addition to those points scored
under §1980.451(d)(3)(i) through (iv). These administrative points are
intended to be assigned by a State Director only in cases of unforeseen
exigencies, emergencies, benefits to other Rural Development-assisted
projects (including the limiting of financial risks affecting Rural
Development loans and loan guarantees) or the loss of financing if Rural
Development funds are not committed in a timely fashion. They may also
be assigned in cases in which the project\'s goods or services are
essential to other Federally assisted projects and activities in the
area or to the successful implementation of an economic development
strategy for the area that is sponsored and/or operated by an agency of
the Federal or State government. An explanation of the assigning of
these points by the State Director will be appended to the calculation
of the project score maintained in the case file. If an application is
considered in the National Office, the Administrator may also assign up
to 20 points. An assignment of points by the Administrator will be by
memorandum stating the Administrator\'s reasons, and that memorandum
will be appended to the calculation of the project score maintained in
the case file. In assigning priorities to applications and in selecting
projects for funding, Rural Development will consider State development
strategies. Funds (guarantee authority) allocated for use as prescribed
in this regulation are to be considered for use by Indian tribes within
the State regardless of whether State development plans include Indian
reservations within the State\'s boundaries. It is essential that
Indians residing on such reservations have equal opportunity to
participate in any benefits of these programs.

\(vi\) [Indexation]{.underline}. When current, annual data are not
available to determine a State\'s nonmetropolitan household income for
purposes of the calculations described in §1980.451(d)(3)(iii),
indexation of census data is necessary. The State Director will use the
figure for the most recent decennial census of the United States,
increased by a factor representing the increase since the year of that
census in the Consumer Price Index (\"CPI-U\"). That factor shall be
furnished annually by the National Office, Rural Development.

## 24C

## (Added 10-17-88, SPECIAL PN) 

RD Instruction 1980-E

§1980.451 (Con.)

\(e\) [Filing preapplications and applications]{.underline}. Borrowers
or lenders may file preapplications described in paragraph (f) of this
section if they desire an expression of Rural Development interest prior
to assembling the complete application and request for Loan Note
Guarantee or they may present the complete application, in one package,
including the material required in paragraphs (f), (i), (j) and (k) of
this section.

## 24D

## (Added 10-17-88, SPECIAL PN) 

§1980.451 (Con.) RD Instruction 1980-E

\(f\) [Preapplications]{.underline}. Applicants may file preapplications
with the County, District, or State Office, including:

\(1\) A letter prepared by the borrower and the lender which shall
include:

\(i\) Borrower\'s name, address, contact person and telephone number.

\(ii\) Amount of loan request.

\(iii\) Name of proposed lender, address, contact person, and telephone
number.

\(iv\) Brief description of the projects, products and services
provided.

\(v\) Type and number of employment opportunities and unemployment rate
where the project will be located.

\(vi\) Amount of borrower\'s equity and guarantees offered.

\(vii\) Anticipated loan maturity and interest rates.

\(viii\) Availability of raw materials and supplies.

\(ix\) If a corporation, names and addresses of borrower\'s parent,
affiliates and/or subsidiary firms and brief description of
relationship, products and ownership among borrower, parent, affiliates
and subsidiary firms.

\(2\) Form RD 449-22, \"Certification of Non-Relocation and Market
Capacity Information Report.\"

\(3\) Form RD 449-4, \"Statement of Personal History,\" for a proprietor
(owner), each partner, officer, director, key employee, and stockholders
holding 20 percent or more interest in the borrower except for those
corporations listed on a major stock exchange and for those so listed if
required by Rural Development. Form RD 449-4 is not required to be
submitted for elected officials and appointed officials in connection
with loan applications from public bodies. Failure to report full,
complete, and accurate information on the Statement of Personal History
may result in Rural Development\'s not making or

## 25

## (Revision 1)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.451(f) (Con.)

guaranteeing the loan. Whenever possible, a local, regional, or national
credit report, furnished by the lender, will be used to verify data on
Form RD 449-4. (Revised 10-17-88, SPECIAL PN)

\(4\) A record of any pending or final regulatory or legal (civil or
criminal) action against the borrower, parent, affiliate, proposed
guarantors, subsidiaries, principal stockholders, officers and
directors.

\(5\) For existing businesses, a current balance sheet, and latest
profit and loss statement (not more than 60 days old) and financial
statements including parent, affiliate and subsidiary firms, for at
least the last 3 years or more if necessary for a thorough evaluation.

\(6\) A detailed projection of gross revenue, net earnings and cash flow
statements for 3 years including assumptions upon which such forecasts
are based.

\(7\) Sales projections indicating the percent of the national and local
market the business expects to obtain.

\(8\) Intergovernmental consultation should be carried out in accordance
with 7 CFR Part 3015, Subpart V, \"Intergovernmental Review of
Department of Agriculture Programs and Activities.\" See RD Instruction
1940-J, available in any Rural Development Office.

\(g\) [Preliminary determination by Rural Development]{.underline}. If
preapplication information indicates the project will not meet Rural
Development\'s minimum credit standards for a sound loan, is ineligible,
does not have sufficient priority or that funds or guarantee authority
are not available for the project, Rural Development will so inform the
lender. The lender will be notified in writing with all reasons for the
decision indicated. If it appears that the project is eligible, has
sufficient priority, is economically feasible and loan guarantee
authority is available, Rural Development will inform the lender and
borrower in writing and request that they complete the application.

\(h\) [Department of Labor certifications]{.underline}. Rural
Development will submit Form RD 449-22 to the Department of Labor for
the necessary certification that the proposal will not be in conflict
with §1980.412(c) and (d).

## 26

## (Revision 1) 

§1980.451 (Con.) RD Instruction 1980-E

\(i\) [Content of application]{.underline}.

\(1\) Form RD 449-1.

\(2\) Form RD 449-2.

\(3\) Form RD 1940-20, when required by Subpart G of Part 1940 of this
chapter.

\(4\) Architectural or engineering plans, if applicable.

\(5\) Cost estimates and forecasts of contingency funds to cover cost
increases or project changes.

\(6\) Appraisal reports.

## 

## 26A

## (Added 10-17-88, SPECIAL PN) 

RD Instruction 1980-E

§1980.451(i) (Con.)

\(7\) For existing businesses a pro forma balance sheet at startup and
for at least 3 additional projected years, indicating the necessary
startup capital, operating capital and short term credit based on
financial statements for the last 3 years or more (if available); and
projected cash flow and earnings statements for at least 3 years
supported by a list of assumptions showing the basis for the
projections. The business should submit a current balance sheet with a
debt schedule of any debts to be refinanced and an income statement to
the Agency, through the lender, every 90 days from the time the
application is filed with the lender to the time of issuance of the Loan
Note Guarantee. If debt refinancing is requested, a debt schedule is
prepared (correlated to the latest balance sheets) reflecting the debts
to be refinanced including the name of the creditor, the original loan
amount and loan balance, date of loan, interest rate, maturity date,
monthly or annual payments, payment status and collateral that secured
such loans.

\(8\) For new businesses, a pro forma balance sheet at startup and for
the next 3 years, project cash flow (monthly first year, quarterly for 2
additional years) and projected earnings statements for 3 years
supported by a list of assumptions showing the basis for the
projections.

\(9\) Any credit reports obtained by the lender or the Agency on the
borrower, its principals and parent, affiliate and subsidiary firms.

\(10\) Form RD 400-1, \"Equal Opportunity Agreement,\" if construction
costing more than \$10,000 is involved.

\(11\) Copies of building permits, if applicable, and any necessary
certifications and recommendations of appropriate regulatory or other
agencies having jurisdiction over the project including any pollution
control agency.

\(12\) Personal and corporate financial statements of those guarantors
named in §1980.443.

## 27

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.451(i) (Con.)

\(13\) Loan agreements between the borrower and lender will be required.
The final executed loan agreement must include Agency requirements as
set forth in the Form RD 449-14 including the requirements for periodic
financial statements in accordance with §1980.445 of this subpart. The
loan agreement must include, but is not limited to, the following:
(Revised 04-24-96, PN 260.)

\(i\) Prohibition against assuming liabilities or obligations of others.

\(ii\) Restrictions on dividend payments.

\(iii\) Limitation on purchase or sale of equipment and fixed assets.

\(iv\) Limitations on compensation of officers and owners.

\(v\) Minimum working capital requirements.

\(vi\) Maximum debt to net worth ratio.

\(vii\) Restrictions concerning consolidations, mergers or other
circumstances.

\(viii\) Limitations on selling the business without concurrence of the
lender and the Agency.

\(ix\) Repayment and amortization of the loan.

\(x\) List of collateral for the loan including a list of persons and/or
corporations guaranteeing the loan with a schedule for providing the
lender and the Agency with personal and/or corporate financial
statements. (See §1980.443)

\(14\) A complete feasibility study when required. (See §1980.442)

\(15\) Any additional information required by the Agency.

\(16\) For companies listed on major stock exchanges and/or subject to
the Securities and Exchange Commission regulations, a copy of Form 10-K,
\"Annual Report Pursuant to Section 13 or 15 D of the Act of 1934.\"

## 28

## (Revision 2) 

§1980.451 (i) (Con.) RD Instruction 1980-E

\(17\) Documented evidence that the project is located within or without
special flood or mudslide hazard areas.

\(18\) Notices of compliance with the Privacy Act of 1974.

\(i\) If the borrower is acting in a personal capacity and not as an
entrepreneur for such entities as proprietorships, partnerships, or
corporations, and Rural Development solicits personal information about
him/her, the individual will be provided Form RD 410-9, \"Statement
Required by the Privacy Act.\"

\(ii\) If Rural Development desires to obtain information concerning an
individual from any source, Rural Development will provide such source
with Form RD 410-10, \"Privacy Act Statement to References.\"

\(19\) On any request for refinancing of existing loan(s) as authorized
under §1980.411 (a)(11), the lender is required, as a minimum, to obtain
the previously held collateral as security for the guaranteed loan(s)
Additional collateral will be required by Rural Development when
refinancing of unsecured loans is unavoidable in order to accomplish the
necessary strengthening of the firm\'s current position. (Revised
11-8-88, SPECIAL PN)

\(j\) [Use of forms]{.underline}. Rural Development numbered forms will
be used where shown in both preapplications and applications. Otherwise,
lenders should use their forms, real estate mortgages, security
instruments and other agreements, provided such forms do not contain any
provisions that are in conflict or are inconsistent with provisions of
this subpart.

\(k\) [Certificate of need]{.underline}. If the loan request is for
health care facilities (e.g., hospitals or nursing homes), a
\"Certificate of Need\" will be obtained by the borrower from the
appropriate regulatory or other agency having jurisdiction over the
project and submitted to Rural Development by the lender. If a
significant part of the project\'s income will be from third party
payors, (e.g., medicare or medicaid), the project will be designed and
operated in a manner necessary to meet the requirements of the
third-party payors.

[ADMINISTRATIVE]{.underline}

A. [The State Director]{.underline}:

1\. Determines if material and information submitted is completed and
signed by the appropriate party in the appropriate capacity.

## 29

## (Revision 3)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.451 ADMINIS (A) (Con.)

2\. May request the comments and recommendations of the County
Supervisor and District Director. Such comments will include but are not
limited to the following: community attitude toward project; a summary
of comments regarding the proposal by the lender, county leaders and
other interested parties; whether the project is likely to result in the
need for additional community facilities such as schools, water, sewer
and health care services, and if so, the community\'s plan for providing
such facilities; availability of any required additional labor force and
training plans for such force, if needed; an economic forecast of the
effect on the community should the project fail, if financed.

3\. Will furnish all individuals acting in a personal capacity at the
time of filing a preapplication or application and two copies of Form RD
410-9. The individual will sign both copies, retaining one and providing
Rural Development with the other copy which becomes a part of the loan
file.

4\. Will provide any source from whom Rural Development obtains
information concerning an individual with two copies of Form RD 410-10.
The source will sign both copies, retain one and provide Rural
Development with the other copy which becomes a part of the loan file.

5\. Will input the necessary data via terminal screens into the Rural
Community Facility Tracking System (RCFTS). The RCFTS data structure
consists of 3 sets: Applicant/Borrower (BOR), Facility (FAC), and
Loan/Grant Request (LGR) sets. There are multiple screens for the BOR
and LGR sets. The State Director may, if he/she so desires, prepare Form
RD 2033-34, \"Management System Card - Business and Industry,\" in
accordance with RD Instruction 2033 F (Revised 6-27-90, PN 138)

6\. Will forward immediately to the National Office on all projects.

\(a\) Form RD 449-22 (7 copies) for loans over \$1 million and when
direct employment increases more than 50 employees.

\(b\) For insured loans where the borrower leases facilities to another,
submit Form RD 449-22 for such borrower. The lessor(s) will also be
required to provide Form RD 449-22. Subsequent loan requests require
resubmission of Form RD 449-22.

## 30

## (Revision 3) 

§1980.451 ADMINISTRATIVE (A)(6) (Con.) RD Instruction 1980-E

\(c\) A local, national, or regional credit report and Form RD 449-4 for
all loans over \$1 million or for loans, regardless of size, when the
State Director believes a character evaluation check is advisable.
(Revised 11-8-88, SPECIAL PN)

NOTE: Forms RD 449-22 and RD 449-4 should [only]{.underline} be
processed if a [complete]{.underline} preapplication or application has
been received.

## 30A

## (Revision 1)

(2-25-87) PN 41

§1980.451 ADMINIS (Con.) RD Instruction 1980-E

B. [Miscellaneous Administrative provisions]{.underline}:

1\. [Par (f)]{.underline}. Preapplications are not to be accepted or
processed unless a lender has agreed in writing to finance the proposal.
The preapplication letter is a joint letter prepared by the borrower and
lender.

2\. [Par (g)]{.underline}. Upon receipt of all preapplications in excess
of \$5 million, the State Director will transmit to the National Office
the material required under paragraph (f)(1), (f)(4) and (f)(5) of this
section together with recommendations and observations including an
analysis of the quality and permanency of the employment opportunities
involved in the project. The National Office will review the proposed
project in relation to objectives, priorities and intent of the program
and will advise the State Director. After receiving the National Office
advice or for loans less than \$5 million, the State Director will
inform the borrower of the decision.

3\. [Par (i)]{.underline}. State Director submits a transmittal letter
with recommendations on loan applications requiring National Office
review. Included are:

\(a\) Loan file.

\(b\) Form RD 449-29, \"Project Summary - Business Industrial Loan
Division,\" including State Director\'s spread sheets, financial history
and projections (use attachments to Project Summary if necessary).

\(c\) Proposed Form RD 449-14.

\(d\) Copy of Rural Development State Loan Review Board Minutes.

\(e\) Notification of required financial and other reports, their
frequency, due dates and fiscal yearend.

4\. [Par (i) (9), Credit reports]{.underline}.

\(a\) The National Office has a contract to provide credit reports for
preapplications, applications, and in instances after the loan(s) is
made, where a credit report is needed.

\(b\) States should first try to have the lender provide such a report
because credit reports are the responsibility of the lender.

## 31

## (Revision 1)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.451 ADMINIS B. 4. (Con.)

\(c\) Any state needing a credit report should telephone the National
Office, Director, B&I, and give the name of the business and the city
and State location. The report will be mailed to the State the same day,
if possible.

5\. [File documentation]{.underline}. Applications will be organized in
a loan file in accordance with RD Instruction 2033-A (available in any
Rural Development office.) An 8-position folder with tabs will be
utilized. The State Director may supplement the Position Guides to
include specific legal requirements within their State. If the lender
prepares a complete application package, it may accompany the docket
provided the docket is organized in a binder, indexed and tabbed.
Feasibility studies should be kept separate. It is the responsibility of
Rural Development employees who work on applications or servicing
actions to add to the correspondence section of the loan file (also
known as the running record) a written report of any field visits,
meetings, telephone conversations and memorandums covering decisions or
reasons for Rural Development actions on the cases. Particular attention
must be given to this requirement on cases that become delinquent or
problems in order that Rural Development\'s position will be defensible
in the event of an adverse action.

6\. [Par (i) (13), Audit agreements and requirements]{.underline}. Rural
Development urges the use of a written agreement between the lender and
borrower to assure that there is no misunderstanding concerning Rural
Development audit requirements.

7\. [Par (i), Forms and documents found in loan docket]{.underline}. The
following table is a guide to forms and documents used in completing an
application and loan docket. The filing position within the 8 position
folder is shown on the right. Some of these items may not be applicable
for a particular loan. However, a complete loan docket may need to
include items in addition to the following:

## Description of Record or Form \# and Title

Filing

Position

AD-425 Contractor\'s Affirmative Action Plan 1

For Equal Employment Opportunity

RD 400-1 Equal Opportunity Agreement 6

RD 400-3 Notice to Contractors and Applicants 6

RD 400-4 Assurance Agreement 3

## 32

## (Revision 1) 

§1980.451 ADMINIS B. 7. (Con.) RD Instruction 1980-E

RD 400-6 Compliance Statement 6

RD 410-8 Applicant Reference Letter 3

RD 410-9 Statement Required by the Privacy Act 3

RD 410-10 Privacy Act Statement to References 3

RD 424-12 Inspection Report 6

RD 1940-3 Request for Obligation of Funds - 2

Guaranteed Loans

RD 1940-22 Environmental Checklist for Categorical 3

Exclusion, or

## 32A

## (Added 02-28-91, SPECIAL PN.)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.451 (Con.)

Description of Record or Form \# and Title Filing

Position

RD 1940-21 Environmental Assessment for Class I 3

Action, or

Exhibit H, Environmental Assessment for Class II Action 3

Subpart G of

Part 1940

Environmental Impact Statement 3

RD 440-57 Acknowledgement of Obligated Funds/ 2

Check Request

RD 449-1 Application for Loan and Guarantee 3

RD 449-2 Statement of Collateral 5

RD 449-4 Statement of Personal History 3

RD 1940-20 Request for Environmental Information 3

RD 449-14 Condition Commitment for Guarantee 2

RD 449-22 Certification of Non-relocation and Market 3

and Capacity Information Report

RD 449-29 Project Summary - Business Industrial Loan 3

Division

RD 449-34 Loan Note Guarantee 2

RD 449-35 Lender\'s Agreement 2

RD 449-36 Assignment Guarantee Agreement 2

RD 1980-19 Guaranteed Loan Closing Report 2

Annual Audit Report 1

Borrower Financial Statements 3

Chattel Security Instruments 1

Report - Exhibit B, RD Instruction 2015 - C 1

Borrower\'s Certification of Indebtedness 1

Lender\'s Loan Agreement 2

Promissory Notes 2

(2-25-87) PN 41 33

RD Instruction 1980-E

§1980.451 (Con.)

Description of Record or Form \# and Title Filing

Position

Bond (specimen) Bond Ordinances, Bond 2

Transcripts or Similar Items

Running Case Record 3

Market Analysis Information (feasibility study) 3

Borrower\'s and Lender\'s Preapplication Letters 3

Lender\'s Evaluation and Recommendations 3

Cost Estimates and Forecast for Contingency 6

Funds

Dunn and Bradstreet Reports 3

Corporate or Personal Financial Statements 3

of Guarantors

S.E.C. 10-K Report 3

Pro-forma Balance Sheet 3

Current Profit and Loss Statements 3

Projection of Gross Revenues and Net Earnings 3

Cash Flow Statements, 3 Years with Assumptions 3

Appraisal Reports 8

Documentation for Considering Refinancing 3

Financial Statements for Last 3 years 3

Complete Debt Schedule 3

Interim Financial Statements 3

Aging and Turnover of Receivables and Inventory 3

Credit Reports 3

Records of any Pending or Final Regulatory 3

Litigation

Comments on any State Development Strategies 3

## 34 

RD Instruction 1980 - E

§1980.451 (Con.)

Description of Record or Form \# and Title Filing

Position

Flood or Mudslide Hazard Area Statement 3

National Historic Preservation Act Statement 3

State Review Board Minutes 3

Certificate of Need (Health Care Facilities) 3

Clean Air and Water Pollution Control Act 3

Requirements Statement

Correspondence (excluding closing instruments) 4

Department of Labor Certification 4

Mortgagee Title Insurance Policy 5

Title Opinions 5

By-Laws, Resolutions, or Regulations and 5

Amendments

Articles of Incorporation, By-laws and 5

Regulations or Charter

Lender Security Agreements and Financing 5

Statements

Lender Mortgages and Notes 5

Advice of Office of General Counsel 5

from Review of Docket

Partnership Agreements 5

Other Documents used in Loan Closing 5

Schedule of Stock Ownership 5

Franchise Agreement 5

Construction Contracts and Compliance Statements 6

Lender\'s Approval of Plans and Specifications 6

## 35

(2-25-87) PN 41

RD Instruction 1980-E

§1980.451 (Con.)

Description of Record or Form \# and Title Filing

Position

Engineer\'s Certification of Satisfactory 6

Completion in Accordance with Plans and

Specifications

Lender\'s Audit of Expenditures and Project Costs 6

Evidence of Concurrence and compliance with 6

Construction Requirements of State, County,

and Municipal Government (including building

permits)

Lender\'s Closing Certification 6

Lender\'s Loan Servicing Plan 6

Loan Closing Opinion of Lender\'s Legal Counsel 6

§1980.452 [Rural Development evaluation of application]{.underline}.

Rural Development will evaluate the application and make a determination
whether the borrower is eligible, the proposed loan is for an eligible
purpose and that there is reasonable assurance of repayment ability,
sufficient collateral and sufficient equity and the proposed loan
complies with all applicable statutes and regulations. If Rural
Development determines it is unable to guarantee the loan, the lender
will be informed in writing. Such notification will include the reasons
for denial of the guarantee. If Rural Development is able to guarantee
the loan, it will provide the lender and the borrower with Form RD
449-14 listing all requirements for such guarantees. Rural Development
will include in the requirements of the Conditional Commitment for
Guarantee a full description of the approved use of guaranteed loan
funds as reflected in the Form RD 449-1. The Conditional Commitment for
Guarantee may not be issued on any loan until the State Director has
been notified by the National Officer that the Statements of Personal
History(s) have been processed and cleared. Rural Development State
Directors are the only persons authorized to execute Form RD 449-14.

[ADMINISTRATIVE]{.underline}:

State Director evaluates the application and considers:

A. Rural area determinations. (See §1980.405 of this subpart).

B. Community impact of the proposal which includes:

1\. Number of businesses and industries in the town or city.

## 36 

§ 1980.452(B) (Con.) RD Instruction 1980-E

2\. Employment impact upon the community.

3\. Availability of skilled and unskilled labor and permanency of
employment opportunities.

4\. Vocational and educational facilities to provide skilled labor, if
applicable.

5\. Policies of applicant regarding unemployment, lay-offs, wage scales,
etc.

C. If debt refinancing is requested, consider in accordance with\
§ 1980.411 (a)(11) of this subpart and: (Revised 11-8-88, SPECIAL PN)

1\. A complete review will be made to determine whether it is essential
to restructure the company\'s debts on a schedule that will allow the
business to operate successfully rather than merely guaranteeing an
unsound loan.

\(a\) Obtain a borrower\'s complete debt schedule. Schedule should agree
with borrower\'s latest balance sheet.

\(b\) Determine from lender if the borrower\'s present loan(s) is on the
lender\'s regulatory examiner\'s report and if so determine the loan
classification.

\(c\) Analyze lender\'s liability ledger on the borrower, individual
customer credit file, installment Loan Ledger Card or Computer printouts
and other credit reports.

\(d\) The percentage of guarantee should be adjusted to assure that the
lender does not bring its previously existing unguaranteed exposure
under the guarantee.

\(e\) Any special servicing requirements should be identified and
included in the Conditional Commitment for Guarantee.

D. Applications will be analyzed by a Rural Development State Loan
Review Board before execution of Form RD 449-14. When analyzing the B&I
loan request, the State Loan Review Board will specifically address the
issue of the guarantee percentage to be approved. Consideration of
reducing the maximum guarantee to less than 90 percent is appropriate
when the loan has sufficient strength to warrant further participation
by the private sector or refinancing of existing lender debts to the
borrower is involved. Ordinarily, B&I loan guarantees should be
structured so that the lender bears a significant portion of the risk of
loss from a

## 37

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§ 1980.452(D) (Con.)

default. \"Significant\" means equal to or greater than 20 percent of
the loss stemming from default. All review board meetings will be fully
documented, including the review and decision concerning the guarantee
percentage, and will be signed by those Rural Development employees
serving on the board. A copy of such documentation will be retained in
the loan file. There will be a National Office Executive Loan (NOEL)
Committee evaluation and recommendation for all B&I Direct Loan making
and servicing actions, which are in excess of delegated authorities
given to Rural Development field offices. The core of the NOEL Committee
will be composed of the Administrator, as the chairperson, Deputy
Administrator for Business Programs, and Deputy Administrator for
Cooperative Services. Other members of the NOEL may be designated, in
writing, by the Administrator as he/she determines to be appropriate.
All recommended actions presented to the NOEL Committee will be in
written form with an oral presentation based on an objective analysis
conducted by a National Office loan specialist. All general exceptions
being considered by the Administrator will be reviewed by the NOEL
Committee to determine consistency with applicable regulations; and the
reasons will be documented prior to the granting of a general exception
by the Administrator. An Informational Memorandum outlining the reasons
for the general exceptions; recommendation of the State Director and the
NOEL Committee; and reasons for granting the general exception, if
inconsistent with recommendations of the State Director and NOEL
Committee, will be provided to the Under Secretary and to the Office of
the General Counsel (OGC). The Administrator will address any concerns
raised by either the Under Secretary or the OGC prior to issuing the
exception. If no response is received within 48 hours (2 Business days),
the Administrator may issue the exception. (Revised 07-25-01,\
PN 334.)

1\. Generally, the review board consists of the State Director as
Chairperson, Community and Business Programs Chief or the Business and
Industry Chief (Loan Specialist) and either the Community Programs
Chief, Rural Housing Chief, or Farmer Programs Chief, as appropriate.

2\. The State Director may wish to contact non-Rural Development sources
for expertise, such as bankers or other lenders, industrial development
specialists from state commissions, academicians, certified public
accountants, tax attorneys, successful business and professional
lenders, management consultants and officials from other Federal
agencies. Outside resource consultants may be reimbursed only for their
travel costs (transportation and subsistence). (See RD Instruction
2036-A which is available in any Rural Development Office).

## 38

## (Revision 2) 

RD Instruction 1980-E

§ 1980.452(D) (Con.)

3\. The Rural Housing Loan Chief will be a member of the State Loan
Review Board if a site development loan (see § 1980.411 (a) (7) of this
subpart) is being considered. The Community and Business Programs Chief
(Loan Specialist) will be a member if a loan for facilities of the type
financed under the provisions of Subpart A of Part 1942 of this chapter
is being considered. The Farmer Programs Chief will be a member of the
board if a project, the success of which is dependent on the production
of agricultural products, is being considered. If the proposed project
covers more than one program area, all the chiefs for those programs
involved will be members of the board. If the approval of an application
for a B&I loan may result in benefiting or hindering other USDA
programs, the review board will determine whether the making of such
loan or guarantee is likely to result in embarrassment for Rural
Development as a result of a possible conflict of interest whereby other
parties may accuse the agency of giving loan preference to housing
borrowers (in the case of site development) or producers (in the case of
agricultural processing plants) or other USDA programs.

4\. The State Director may request the Community Development Managers
and/or Rural Development Managers to attend the review board meeting
whenever it is determined they may have special knowledge of the
proposed loan which may affect the board\'s decision.

5\. Prior to submission of a B&I guaranteed loan(s) request to the
National Office for loan processing review and prior to loan approval,
the appropriate loan processing official must visit the project site and
discuss the loan proposal with the lender and borrower. In the event
there are multiple project sites the official should visit a
representative sample of project sites to develop deeper understanding
of the project operation. For businesses without a developed project
site a visit is not necessary; however, a visit with the lender and
borrower is still required. The findings of the visit should be
documented in the loan docket submitted to the National Office.

## 38A

## (Added 07-25-01, PN 334)

(02-25-97) PN 41

RD Instruction 1980-E

§1980.452 ADMINIS D. (Con.)

6\. The State Director will prepare an original and two copies of Form
RD 1940-3 for each loan to be obligated. Also, for each initial loan,
Form RD 1980-50, \"Add, Delete, or Change Guaranteed Loan Borrower
Information,\" will be prepared. The State Director will sign the
original and one copy and conform the second copy. Form RD 1940-3 will
not be mailed to the Finance Office. Notice of approval to lender will
be accomplished by providing or sending the lender the signed copy of
Form RD 1940-3 and Form RD 449-14 on the obligation date, unless the
Administrator has given prior authorization to the Finance Office to
obligate before the 6-day reservation period and directs the State
Director to forward Form RD 1940-3 to the lender in advance of issuance
of Form RD 449-14. The State Director or designee will record the actual
date of lender notification on the original of the Form RD 1940-3 and
retain the original of the form as a permanent part of the Rural
Development case file. The State Director may retain the remaining
conformed copy of Form RD 1940-3. The State Director or designee will
use the State Office terminal to request reservation/obligation of
funds. Use of the telephone for the reservation/obligation of funds is
restricted to those instances when the State Office terminal is
inoperative. Form RD 1980_50 will be prepared and distributed for
initial loans only. (Revised 02-28-91, SPECIAL PN)

a\. Immediately after contacting the Finance Office, the requesting
official will furnish the requesting office\'s security identification
code. Failure to furnish the security code will result in rejection of
the request for reservation of authority. After the security code is
furnished, all pertinent information contained on Form RD 1940-3 will be
furnished to the Finance Office. Upon receipt of the telephone request
for reservation of authority, the Finance Office will record all
information necessary to process the request for reservation in addition
to the date and time of the request. (Revised 02-28-91, SPECIAL PN)

b\. The individual making the telephone request will record the date and
time of the telephone request and place his/her signature in section 35
of Form RD 1940-3. (Revised 02-28-91, SPECIAL PN)

c\. The Finance Office will terminally process telephone reservation
requests. Those requests for reservations received before 2:30 p.m.
Central Time, to the extent possible, will be processed on the date
received; however, there may be instances in which the reservation will
be processed on the next working day.

## 39

## (Revision 3)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.452 ADMINIS D. 6. (Con.)

d\. Each working day the Finance Office will notify the State Office by
telephone of all projects for which authority was reserved during the
previous night\'s processing cycle and the date of obligation. If
authority cannot be reserved for a project, the Finance Office will
notify the State Office that authority is not available within the State
allocation. The obligation date will be 6 working days from the date of
the request for reservation of authority which is being processed in the
Finance Office. The Finance Office will mail to the State Director Form
RD 440-57, \"Acknowledgment of Obligated Funds/Check Request,\" prepared
in duplicate, confirming the reservation of authority with the
obligation date inserted as required by item No. 9 on the FMI for Form
RD 440-57. Immediately after notification by telephone of the
reservation of authority, the State Director will call the Legislative
Affairs and Public Information Staff in the National Office as required
by RD Instruction 2015-C (available in any Rural Development office).

e\. See RD Instruction 2015-C (available in any Rural Development
office) for notification procedures.

7\. State Director notifies the lender and borrower if he/she will not
issue the Form RD 449-14.

§1980.453 [Review of requirements]{.underline}.

\(a\) Immediately after reviewing the conditions and requirements in
Form RD 449-14, the lender and applicant should complete and sign the
\"Acceptance of Conditions\" and return a copy to the Rural Development
State Director. If certain conditions cannot be met, the lender and
borrower may propose alternate conditions to Rural Development.

\(b\) If the lender indicates in the \"Acceptance of Conditions\" that
it desires to obtain a Loan Note Guarantee and subsequently decides at
any time after receiving a conditional commitment that it no longer
wants a Loan Note Guarantee, the lender will immediately advise the
Rural Development State Director.

[ADMINISTRATIVE]{.underline}:

A. The State Director will negotiate with the lender and proposed
borrower any changes made to the initially issued or proposed Form RD
449-14. For loans requiring National Office concurrence, a copy of Form
RD 449-14 and any amendments thereto will be included when the loan file
is submitted to the National Office for review. When the National Office

## 40

## (Revision 3) 

RD Instruction 1980-E

§1980.453 ADMINIS A. (Con.)

recommends modifications or additions to Form RD 449-14, the State
Director will further negotiate these recommendations with the lender
and proposed borrower. If, as a result of these further negotiations,
the lender, proposed borrower or State Director presents alternate
conditions which would result in a change in the scope of the proposed
project and if the loan exceeds the State Director\'s loan approval
authority, the State Director will submit these conditions by memorandum
to the National Office for consideration with a copy of the revised Form
RD 449-14 and any amendments thereto. If the loan is within the State
Director\'s loan approval authority, the State Director may approve such
changes. (Revised 02-05-92, PN 181.)

B. On loan applications within the State Director\'s loan approval
authority, the State Director will submit to the National Office,
Business and Industry Division, within 30 days after the Form RD 449-14
has been accepted:

1\. A copy of Form RD 449-29.

2\. A copy of Form RD 449-14 as accepted by the lender and borrower.

3\. A copy of Rural Development State Loan Review Board Minutes.

4\. Notification of required financial and other reports, their
frequency, due dates and fiscal year-end.

5\. A copy of the proposed loan agreement between the lender and the
borrower.

6\. When debt refinancing is involved, a copy of the justification for
the refinancing.

7\. The cover memorandum should indicate whether the Form RD 449-34 has
been issued. If the Loan Note Guarantee has been issued, enclose a copy
of the Lender Certification required by §1980.60(a) of Subpart A of this
part, and, if not, a proposed date for issuance of the Form RD 449-34.

## 40A

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.454 [Conditions precedent to issuance of the Loan Note
Guarantee]{.underline}.

In addition to compliance with the requirements of §1980.60 of Subpart
A, compliance with the following provisions is required prior to
issuance of the Loan Note Guarantee.

\(a\) [Transfer of lenders]{.underline}. The state director may approve
a substitution of a new eligible lender in place of a former lender who
holds an outstanding Conditional Commitment for Guarantee (where the
Loan Note Guarantee has not yet been issued and the loan is within the
state director\'s loan approval authority) provided there are no changes
in the borrower\'s ownership or control, loan purposes, scope of project
and loan conditions in the Form RD 449-14 and the loan agreement remains
the same. To effect such a substitution, the former lender will provide
the Agency with a letter stating the reasons it no longer desires to be
a lender for the project. For loans in excess of the state director\'s
loan approval authority, National office concurrence is required. The
state director will submit a recommendation concerning the transfer of
lenders along with the lender\'s letter stating the reasons it no longer
desires to be a lender for the project. The substituted lender will
execute a new Part \"B\" of Form RD 449-1. If approved by the Agency,
the state director will issue a letter or amendment to the original Form
RD 449-14 reflecting the new lender and the new lender will acknowledge
acceptance of the letter or amendment in writing.\
(Revised 02-05-92, PN 181.)

\(b\) [Substitution of borrowers]{.underline}. The Agency will not issue
a Loan Note Guarantee to the lender who is in receipt of a Form RD
449-14 with an obligation in a previous fiscal year if the originally
approved borrower (including changes in legal entity) or owners are
changed. The only exception to this provision prohibiting a change in
the legal entity\'s form of ownership is when the originally approved
borrower or owner is replaced with substantially the same individuals
with substantially the same interests, as originally approved and
identified in the Form\
RD 449-1, item 15. All requests for exceptions must be approved by the
National office.

\(c\) [Changes in terms and conditions in Form RD 449-14]{.underline}.
It is the intent of the Agency that once the Form RD 449-14 is issued
and accepted by the lender, the commitment is not to be modified as to
the scope of the project, overall facility concept, project purpose, use
of proceeds or terms and conditions. Should changes be requested by the
lender, the state director will negotiate with the lender and proposed

## 41

## (Revision 3)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.454(c) (Con.)

borrower any proposed changes to the originally accepted Form\
RD 449-14. If, as a result of these negotiations, the lender, proposed
borrower or state director presents alternate conditions which would
result in a change in the scope of the project and the loan exceeds the
state director\'s loan approval authority, the state director will
submit these changes in the conditions by memorandum to the National
office for consideration with a copy of the revised Form RD 449-14 and
any amendments thereto. Changes to the conditional commitment may be
approved by the state director for loans within their loan approval
authority. (Revised 02-05-92, PN 181.)

\(d\) [Additional requirements for B&I guaranteed loans]{.underline}.
All B&I borrowers and lenders, as applicable, must comply with Appendix
D, paragraphs I(A) and (B); II(A) through II(A)(2)(g)(1); II(B) and (C);
III(A), (B), (C), (D), and (E).

\(e\) [Preguarantee review]{.underline}. Coincident with, or immediately
after loan closing, the lender will contact the Agency and provide those
documents and certifications required by §§1980.60 and 1980.61 of
Subpart A. Only when the B&I or C&BP chief or loan specialist, as
required by paragraph B. (Administrative) of this section, is satisfied
that all conditions for the guarantee have been met, will the Loan Note
Guarantee be executed. (Revised 02-05-92, PN 181.)

\(f\) [Loan closing]{.underline}. When the loan closing plans are
established, the lender will notify the Agency.

\(g\) [Closing of working capital loans]{.underline}. The state director
will not issue a Loan Note Guarantee for a working capital loan prior to
the completion of all proposed construction for the project. Working
capital loan funds will not be used to pay short-term notes.

[ADMINISTRATIVE]{.underline}:

A. The State director reviews:

1\. \[Reserved\]

2\. Plans for inspections made or construction projects. These should be
coordinated with the lender and borrower. Form RD 424-12, \"Inspection
Reports,\" may be used by the state engineer or architect who will make
an inspection of the projects which involve substantial construction.
The inspection shall be completed prior to the issuance of the Loan Note
Guarantee to assure all construction is complete. The state loan
specialist or chief may also participate in the inspections.

## 42

## (Revision 3) 

§1980.454 ADMINIS A. (Con.) RD Instruction 1980-E

3\. Cost overruns, if any, and how they will be met. State Directors may
approve cost overruns for projects in any amount or percentage within
their loan approval authority not to exceed 10 percent in loan amounts
between \$1 million and \$10 million.

4\. Basic credit requirements of all loans.

B. In all cases, the Program Chief or the B&I Loan Specialist will
conduct a preguarantee review before issuance of the Loan Note Guarantee
to assure that all requirements of the application, Conditional
Commitment for Guarantee and Loan Agreement have been met including the
required certifications using language specified by the regulations, and
will provide such verification in the loan file, including arrangements
for annual audit reports. In the conduct of this review, all
requirements of §1980.60 (a) of Subpart A of this part will be reviewed
and special attention should be paid to reviewing current financial
statements of the borrower to assure that no adverse change has taken
place. The District Director may participate in the review.

C. The State Director or any other Rural Development personnel shall not
sign any documents other than those specifically provided for in
Subparts A or E of this part. No certificates shall be signed except the
\"Certificate of Incumbency and Signature\" as set forth in Appendix B
of this subpart.

D. [Par (a) Transfer of Lender]{.underline}. The State Director will
analyze all requests for substituted lenders including the servicing
capability, eligibility and experience of the new lender before the
request is approved. If approved, notify the Finance Office of the
change using Form RD 1980-42. Do not deobligate and reobligate the loan
if the Form RD 449-14 was issued in a previous fiscal year.

E. [Par (b) Substitution of borrowers]{.underline}. The State Director
will review any request for exceptions to substitution of borrowers and
forward such requests with a memorandum of facts and recommendation to
the National Office for a decision. The National Office will not approve
any request where the legal entity is changed, such as from a
corporation to a partnership, etc., or if the ownership changes more
than 20 percent.

F. [Par (c) Changes in terms and conditions in Form RD
449-14]{.underline}. The State Director will review any requests for
changes to Form RD 449-14. Only those changes which do not materially
affect the project, its capacity, employment, original projections or
credit factors may be approved. Changes in legal entities or where tax
considerations are the reason for change will not be approved when
modifying any loan guarantee or conditions of guarantee. State Directors
may approve these changes in terms and conditions if the loan is within
the State Director\'s loan approval authority and the change will not
result in a major change in the scope of the project. Changes in terms
and conditions for loans in excess of the State Director\'s loan
approval authority, must be submitted to the National Office with a
memorandum of facts and recommendations for review and concurrence. In
order to identify the number and types of action taken, the following
procedures are to be followed when requests of this type are approved by
Rural Development. (Revised 02-05-92, PN 181.) 43

## (Revision 1)

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RD Instruction 1980-E

§1980.454 ADMINIS F. (Con.)

1\. Start with the number 1 when the first modification is approved and
enter this number in the upper right hand corner of the Letter of
Concurrence and on the related \"Modification or Administration Action\"
sheet.

2\. Next to the modified wording on the work copy of the Conditional
Commitment for Guarantee and the Term Loan Agreement or any form which
has been modified, pencil in a short cross reference to the modification
and identify the number given it.

3\. File the copies of the \"Modification or Administrative Action\"
sheet and related Letters of Concurrence numerically in the docket
directly on top of the affected original documents of conditions.

4\. The order of recordkeeping should include any requests which were
declined by the National Office.

§§1980.455 - 1980.460 \[Reserved\]

§1980.461 [Issuance of Lender\'s Agreement, Loan Note Guarantee, and
Assignment Guarantee Agreement]{.underline}. \[See §1980.61 of Subpart
A, of this part\]

[ADMINISTRATIVE]{.underline}:

A. [Par (a) of Subpart A, §1980.61]{.underline}. The original Form RD
449-35 will be retained in the Rural Development loan file.

B. [Par (b)(1) of Subpart A, §1980.61]{.underline}. Copies of all issued
Loan Note Guarantees will be kept in the Rural Development loan file.

C. [Par (b)(2) of Subpart A, §1980.61]{.underline}. The State Director
will approve all substitutions of Loan Note Guarantee or Contracts of
Guarantee.

D. It is imperative that the original loan covered by a Contract of
Guarantee is current.

E. [The registered holder will transmit to the State
Director]{.underline}:

1\. Request for substitution together with the original Contract of
Guarantee.

2\. Copies of notes with lender\'s identification numbers. (All
requirements of the Lender\'s Agreement will be complied with before any
new notes are issued.)

3\. Certification that the loan is current and in good standing.

4\. Certification of outstanding principal amount of the loan.

5\. Executed Lender\'s Agreement. (Rural Development provides form to
lender).

6\. Executed Form RD 1980-19. (See §1980.21 of Subpart A of this part
for calculation of fee due).

7\. Payment for appropriate guarantee fee.

## 44

## (Revision 1) 

RD Instruction 1980-E

§ 1980.461 ADMINIS (Con.)

F. [State Director will]{.underline}:

1\. Review all the requirements of paragraph E of this section.

2\. Verify the submitted request and if in order, send the guarantee fee
and Form RD 1980-19 to Finance Office with a notation of the date the
new Loan Note guarantee will be issued. (Note: The substitution of a
Loan Note Guarantee for the Contract of Guarantee is not to be
considered as a new loan for recordkeeping purposes).

3\. Complete the Loan Note Guarantee (appropriate number for attachment
to each note), date and sign the instrument. The following statement
will be entered at the too of the form: \"This Loan Note Guarantee is
issued in substitution of Contract of Guarantee dated
\_\_\_\_\_\_\_\_\_.\" The State Director will transfer from the Contract
of Guarantee all information pertaining to the Loan Note Guarantee.

4\. Execute Lender\'s Agreement.

5\. Cancel the original Contract of Guarantee.

6\. Transmit to the lender the original Loan Note Guarantee and a copy
of executed Lender\'s Agreement and retain in the loan file copies of
the Loan Note Guarantee with attached original cancelled Contract of
Guarantee, a copy of Form RD 1980-19 and the original Lender\'s
Agreement.

All applicable provisions of this subpart and Subpart A of this part
apply to the loan when the Loan Note Guarantee is signed.

G. [Alternate Procedure]{.underline}: If the Registered Holder does not
want to deliver the original contract of Guarantee with his/her request
for substitution, the State Director will accept a copy of the Contract
of Guarantee and proceed as above. However, the Loan Note Guarantee will
be delivered only upon receipt of the original Contract of Guarantee.

H. [Par (b) (3) of Subpart A, § 1980.61]{.underline}. For reporting
purposes where multi-notes are issued, the loan to the borrower will be
counted as one loan regardless of the number of notes issued.

I. [Par (b) (4) of Subpart A, § 1980.61]{.underline}. The State Director
will notify the Finance Office of the transaction.

J. [Par (d) of Subpart A, § 1980.61]{.underline}. A copy of Form RD
449-36 will be kept and a copy of executed Lender\'s Agreement retained
in loan file along with copies of the Loan Note Guarantee with attached
original cancelled Contract of Guarantee, copy of Guarantee Fee Report
and the original Lender\'s Agreement.

## 45

## (Revision 1)

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RD Instruction 1980-E

§ 1980.461 ADMINIS (Con.)

K. [Par (e) of Subpart A, § 1980.61]{.underline}. State Director signs
all Forms\
RD 449-13, \"Denial Letter.\"

L. [Par (g) of Subpart A, §1980.61]{.underline}. The State Director
will:

(Revised 10-28-03, SPECIAL PN.)

1\. Review Form RD 1980-19 for completeness.

2\. Deposit the guarantee fee in accordance with procedures prescribed
in RD Instruction 1951-B.

3\. Ascertain that originals or copies, as appropriate, are retained in
the Rural Development Loan file.

§§ 1980.462 - 1980.468 \[Reserved\]

§ 1980.469 [Loan servicing]{.underline}.

The lender is responsible for loan servicing and for notifying the Rural
Development of any violations in the Lender\'s Loan Agreement. (See
Paragraph X of Form RD 449-35).

\(a\) All B&I guaranteed loans in the lender\'s portfolio will be
classified by the lender as soon as it is notified by the State Office
to do so and again whenever there is a change in the loan which would
impact on the original classification. The State Director will notify
the lender of this requirement for all existing loan guarantees, when
new Loan Note Guarantees are issued to a lender and/or when the State
Office becomes aware of a condition that would affect the classification
and justification of the classification will be sent to the State
Office. The loans will be classified according to the following
criteria:

\(1\) [Substandard Classifications]{.underline} - Those loans which are
inadequately protected by the current sound worth and Paying capacity of
the obligor or of the collateral pledged, if any. Loans in this category
must have a well defined weakness or weaknesses that jeopardize the
payment in full of the debt. If the deficiencies are not corrected,
there is a distinct possibility that the lender and Rural Development
will sustain some loss.

\(2\) [Doubtful Classification]{.underline} - Those loans which have all
the weaknesses inherent in those classified Substandard with the added
characteristics that the weaknesses make collection or liquidation in
full, based on currently known facts, conditions and values, highly
questionable and improbable.

## 46

## (Revision 1) 

§1980.469 (a) (Con.) RD Instruction 1980-E

\(3\) [Loss Classifications]{.underline} - Those loans which are
considered uncollectible and of such little value that their continuance
as bankable loans is not warranted. Even though partial recovery may be
effected in the future, it is not practical or desirable to defer
writing off these basically worthless loans.

\(b\) There is a close relationship between classifications; and no
classifications category should be viewed as more important than the
other. The uncollectibility aspect of Doubtful and Loss classifications
are of obvious importance; however, the function of the Substandard
classification is to indicate those loans that are unduly risky which
may result in future claims against the B&I guarantee.

\(c\) Substandard, Doubtful and Loss are adverse classifications. There
are other classifications for loans which are not adversely classified
but which require the attention and followup of the lenders and Agency.
These classifications are:

\(1\) [Special Mention Classification]{.underline} - Those loans which
do not presently expose the lender and Agency to a sufficient degree of
risk to warrant a Substandard classification but do possess credit
deficiencies deserving the lender\'s close attention. Failure to correct
these deficiencies could result in greater credit risk in the future.
This classification would include loans that the lender is unable to
supervise properly because of a lack of expertise, an inadequate loan
agreement, the condition of or lack of control over the collateral,
failure to obtain proper documentation or any other deviations from
Prudent lending practices. Adverse trends in the borrower\'s operation
or an imbalanced position in the balance sheet which has not reached a
point that jeopardizes the repayment of the loan should be assigned to
this designation. Loans in which actual, not potential, weaknesses are
evident and significant should be considered for a Substandard
classification.

\(2\) [Seasoned Loan Classification]{.underline}. A loan which:

\(i\) Has a remaining principal guaranteed loan balance of two thirds or
less of the original aggregate of all existing B&I guaranteed loans made
to that business.

\(ii\) Is in compliance with all loan conditions and B&I regulations.

\(iii\) Has been current on the B&I guaranteed loan(s) payments for 24
consecutive months.

\(iv\) Is secured by collateral which is determined to be adequate to
ensure there will be no loss on the guaranteed loan.

## 47

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RD Instruction 1980-E

§1980.469 (c) (Con.)

\(3\) [Current Non-problem Classification]{.underline} - Those loans
that are current and are in compliance with all loan conditions and B&I
regulations but do not meet all the criteria for Seasoned Loan
classification. All loans not classified as Seasoned or Current
Non-problem will be reported on the quarterly status report with
documentation of the details of the reason(s) for the assigned
classification. (Revised 05-17-95, PN 245.)

[ADMINISTRATIVE]{.underline}:

Refer to Appendix G of this subpart (available in any State or District
Office) for advice on how to interact with the lender on liquidations
and property management.

A. While the lender has the primary responsibility for loan servicing
and protecting the collateral, the State Director is responsible for
seeing that servicing as required by the Lender\'s Agreement and
regulation is properly accomplished. Loan servicing is intended to be a
preventive rather than a curative action. Prompt followup on delinquent
accounts and early recognition of potential problems and pursuing a
solution to them are keys to resolving many problem loan cases.

B. [Paragraph II of the Lender\'s Agreement]{.underline}.

1\. The Loan Note Guarantee is unenforceable by the lender to the extent
any loss is occasioned by violation of usury laws, use of loan funds for
unauthorized purposes, negligent servicing, or failure to obtain the
required security regardless of the time at which Agency acquires
knowledge of the foregoing. As used herein, the phrase \"use of loan
funds for unauthorized purposes\" refers to the situation in which the
lender in fact agrees with the borrower that loan funds are to be so
used and the phrase \"unauthorized purposes\" means any purpose not
listed by the Lender in the completed application as approved by the
Agency.

2\. With respect to the negligent servicing and use of loan funds for
unauthorized purposes, the Loan Note Guarantee is unenforceable by the
lender to the extent any loss is occasioned by negligent servicing and
use of loan funds for unauthorized purposes regardless of the time the
Agency acquires knowledge of the negligent servicing or use of loan
funds for unauthorized purposes by the lender. Only the amount of the
loss caused by negligent servicing or use of loan funds for unauthorized
purposes can be withheld from the final loss claim submitted by the
lender. The dollar amount withheld from the final loss claim must be
ascertainable. In order to determine the final loss amount, the
guaranteed loan collateral and any collateral of the guarantor(s) must
be liquidated and settled or a settlement with the guarantor(s) reached.
In the event there is reason to suspect the lender of negligent
servicing or use of loan funds for unauthorized purposes during the life
of the loan, the lender should be notified

## 48

## (Revision 1) 

RD Instruction 1980-E

§1980.469 ADMINIS B. 2 (Con.)

in writing that (a) the acts of negligent servicing and/or use of loan
funds for unauthorized purposes will cause the guarantee to be
unenforceable by the lender to the extent these acts cause a loss; (b)
any decision not to honor any part of the guarantee is not possible
until the loan has been liquidated and a loss established; (c) if any
loss occurs Rural Development will consider whether negligent acts of
the lender caused a loss after the liquidation is complete; and (d) at
the time Rural Development determines a loss has occurred as the result
of negligent servicing the lender may appeal any adverse decision.

3\. When facts or circumstances indicate that criminal violation may
have been committed by an applicant, a borrower, or third party
purchaser, the State Director will refer the case to the appropriate
Regional Inspector General for Investigations, Office of the Inspector
General (OIG), USDA, in accordance with RD Instruction 2010-B (available
at any Rural Development Office) for criminal investigation. Any
questions as to whether a matter should be referred will be resolved
through consultation with OIG for Investigations and the State Director
and confirmed in writing. In order to assure protection of the financial
and other interest of the Government, a duplicate of the notification
will be sent to the Office of General Counsel (OGC). After OIG has
accepted any matter for investigation, Rural Development staff must
coordinate with OIG in advance regarding routine servicing actions on
existing loans. A borrower or lender can be sued even though criminal
fraud is present. If Rural Development has good reason to believe that,
for example, a borrower or a lender made a false statement to obtain a
loan or guarantee, or a lender submitted a loss claim which was false or
fraudulent, it should promptly call the matter to the attention of
OGC\--even if no payment of the loss claim has occurred yet. (This would
include those situations in which a borrower lied to the lender in order
to get the loan, the lender believed the borrower and made the
loan\--which was guaranteed by Rural Development\--and then the lender
presented a loss claim to Rural Development for payment after the
borrower defaulted on the loan.) Sometimes it might be necessary to ask
OIG to do an investigation to establish all the aspects of the fraud. If
at all possible, this should be done prior to referral to OGC.

4\. There are two methods the government could use to seek relief for
the fraud. One of the ways the Government could seek redress for the
fraud is to sue under the False Claims Act (31 U.S.C. Sections
3729-3731). If fraud is proven to have occurred, the False Claims Act
provides for the recovery of double damages and a \$2,000 penalty (and
the costs of one civil suit) for each act involving,

## 49

## (Revision 2)

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RD Instruction 1980-E

§1980.469 ADMINIS B. 4 (Con.)

for example: (a) knowingly submitting to a Government employee a false
or fraudulent claim for payment or approval, (b) knowingly making or
using a false record or statement to get a false or fraudulent claim
paid or approved, or (c) conspiring to defraud the United States be
getting a false or fraudulent claim allowed or paid. Suit under the
False Claims Act must be filed within six years from the date of the
commission of the act (e.g., presentation of the claim to the Agency for
payment). The double damage feature ought to be a good incentive to
convince OIG to undertake any necessary investigations to help establish
the fraud.

5\. In order to decide whether to file suit, the Department of Justice
will need to know such things as: What was the amount of the loan or the
loss paid to the lender or holder? How much did the scheme cost the
Government? What is the difference in money between what the Government
paid out and what it should have paid out? Does the borrower or lender
have enough assets to make it worth suing? If the Agency can answer
these questions before referral to OGC\--either on its own or by using
OIG\--then OGC can refer the matter that much more quickly to the
Justice Department.

6\. There is also a way to bring suit for civil fraud by alleging that
\"common law\" fraud occurred. This would just involve proving that a
borrower or a lender falsely represented by their words or actions, a
matter of fact either by alleging something in a false or misleading
manner or by concealing something that should have been disclosed; and
the Agency was deceived by this conduct, and relied on it to its
detriment. Under \"common law\" fraud, only single damages could be
recovered, and there would be no \$2,000 penalty assessed. The action
would generally have to be brought within three years from the date of
the discovery of the fraud.

7\. Neither the False Claims Act nor the right to bring a \"common law\"
action for fraud precludes the Government from just suing to recover the
money wrongfully or mistakenly paid by its employees. If the Justice
Department decides not to pursue a civil frauds claim under the False
Claims Act or \"common law\", it will return the matter to OGC.
Depending on what stage the proceedings were in when the matter was
first referred, the Agency could then continue to negotiate with the
lender or OGC could re-refer the case to Justice for any contract-based
actions, including fraud or misrepresentation based on the terms of the
guarantee.

## 50

## (Revision 2) 

RD Instruction 1980-E

§1980.469 ADMINIS (Con.)

C. [The State Director will assure that]{.underline}:

1\. \[Reserved\]

2\. A timetable for routine site, borrower and lender visitations by
Agency personnel is established before the Loan Note Guarantee is
issued. As a guide, visits to newly established borrowers with the
lender represented should be scheduled monthly. Visits to established,
nonproblem borrowers must be made at least annually except for seasoned
loans which will be visited at least biennially. Special attention
problem accounts should be visited as frequently as the need demands. If
possible, these visitations should be coordinated with the lender\'s
visits.

3\. During or in preparation for field visits, the following functions
are to be performed:

## 50A

## (Revision 1)

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RD Instruction 1980-E

§1980.469 ADMINIS C. 3.(Con.)

\(a\) Current financial information is obtained in advance and analyzed
for trends.

\(b\) Any issues revealed or problems not resolved from the last
visitation are included in the agenda.

\(c\) Collateral is observed and its condition, maintenance, protection
and utilization by the borrower appears to be satisfactory.

\(d\) A report of the visit is made on Form RD 449-39, \"Field Visit
Review (Business and Industrial Loans),\" or otherwise documented and
included in the loan file. The report should include an opinion of the
borrower\'s status based upon observations made during the visit.

\(e\) Any instructions or directions to the lender should be confirmed
by letter.

4\. The Program Chief or Loan Specialist will conduct an annual meeting
with each lender or its agent with whom a Loan Note Guarantee(s) or
Contract of Guarantee(s) is outstanding. This cannot be redelegated.
These meetings may be scheduled at the time Rural Development makes
periodic field inspections to the borrower\'s Place of business. At the
meeting, a review will be made of the lender\'s performance in loan
servicing, including enforcement of conditions and covenants in the loan
agreements. The observations and results of the meeting will be
documented. Form RD 449-39 may be used for this purpose. Servicing
exceptions on the part of the lender which are noted by Rural
Development will be confirmed by letter to the lender.

5\. The lender performs an adequate analysis of borrower financial
statements for Rural Development. Rural Development in turn will
evaluate the lender\'s analysis and follow up with the lender on
servicing action(s) required or negative observations not detected
through the lender\'s analysis. The financial statement analysis of the
lender, the financial statement and a memorandum reflecting Rural
Development\'s analysis, including a comparison to Previous and
Projected performance of the borrower, will be forwarded to the National
Office, Attention: Business and Industry Division, only for the
following loans:

\(a\) All loans within the first Year of loan closing.

\(b\) Loans over one year old as determined by the State Director or a
National Office assigned loan reviewer who is participating in a field
review. In event of a disagreement between the State Director and an
assigned loan reviewer as to which loans should be included, the
assigned loan reviewer\'s decision will take precedence.

\(c\) All problem and delinquent loans.

\(d\) Loans that the State Director would like reviewed by the National
Office.

## 51

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RD Instruction 1980-E

§1980.469 ADMINIS C. (Con.)

6\. Meetings are arranged between the lender, borrower and Rural
Development to resolve any problems of late payment, etc.

D. [State Director Authorities]{.underline}.

1\. The State Director may delegate authority for the conduct of all
functions listed in Section 1980.469 Administrative B., except item C.
4. in Administrative B.

2\. The State Director may approve B&I guaranteed loan servicing
actions. as authorized in separate written approval authorities issued
in accordance with Subpart A of Part 1901 of this chapter.

3\. Servicing actions on loans which exceed the State Director\'s loan
approval authority are to be referred together with the State
Director\'s recommendations to the Director, business and Industry
Division, for Prior review and concurrence.

§1980.470 [Defaults by borrower]{.underline}. \[See §1980.63 of Subpart
A, of this part\]

[ADMINISTRATIVE]{.underline}:

Refer to Appendix G of RD Instruction 1980-E (available in any Rural
Development Office) for advice on how to interact with the lender on
liquidations and property management.

A. In case of any monetary or significant non-monetary default under the
loan agreement, the lender is responsible for arranging a meeting with
the State Director, or its designee, and borrower to resolve the
Problem. A memorandum of the meeting, individuals who attend, a summary
of the problem and proposed solution will he prepared by the Rural
Development representative and retained in the loan file. When the State
Director receives a notice of default on a loan, he/she will immediately
notify the National Office in writing of the details and will
subsequently report the problem loan to the National Office on the
quarterly status report. The State Director will notify the lender and
borrower of any decision reached by Rural Development.

B. In considering servicing options, some of which are identified in
paragraph X. A of Form RD 449-35, the prospects for providing a
permanent cure without adversely affecting the risks of the Rural
Development and the lender must become the paramount objective. Within
the State Director\'s authority, temporary curative actions such as
payment deferments, moratoriums on payments or collateral subordination,
if approved, must strengthen the loan and be in the best interests of
the lender and Rural Development. Some of these actions may require
concurrence of the holder(s). A deferral, rescheduling, reamortization
or moratorium is limited by the period of time authorized by this
subpart for the purpose for which the loan(s) is made or the remaining
useful life of the collateral securing the loan. For example, if the
promissory note on a working capital loan is scheduled to mature in 2
years the loan could be rescheduled for 7 years or the remaining life of
the collateral whichever is the lesser of the two.

## 52 

RD Instruction 1980-E

§1980.470 ADMIN. (Con.)

C. Subsequent loan guarantee requests will be processed in accordance
with provisions of §1980.473 of this subpart.

D. If the loan was closed with the multi-note option, the lender may
need to possess all notes to take some servicing actions. In these
situations when Rural Development is holder of some of the notes, the
State Director may endorse the notes back to the lender after the State
Director has sought the advice and guidance of OGC, provided a proper
receipt is received from the lender which defines the reason for the
transfer. Under no circumstances will Rural Development endorse the
original Form RD 449-34, to the lender.

E. The State Director\'s authority to approve servicing actions is
defined in §1980.469, Administrative D.2.

F. Consultant services may be recommended by the State Director to
assist Rural Development and the lender in determining which servicing
action is appropriate. Requests for consultant services should be made
by the State Director and addressed to the Administrator, Attn: Business
and Industry Division. A full explanation of the loan history, an
evaluation and scope of the proposed study and the need should be
included in the request.

G. When the National Office determines it is necessary on individual
cases, due to some special servicing requirements, it may, at its
option, assume the servicing responsibility on individual cases.

H. The State Director will report all delinquent and problem loans
quarterly to the Director, Business and Industry Division, by the 10th
day of January, April, July, and October. This report will be submitted
on Form RD 1980-59, \"Quarterly Delinquent/Problem Loan Report,\" in
duplicate. (Revised 12-05-90, PN 149.)

I. The State Director will notify the Finance Office by memorandum of
any change in payment terms such as remortizations or interest rate
adjustments and effective dates of any changes resulting from servicing
actions.

§1980.471 [Liquidation]{.underline}. (see §1980.64 of Subpart A of this
part)

Refer to Appendix G of this subpart (available in any Rural Development
Office) for advice on how to interact with the lender on liquidations
and property management.

## 53

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Instruction 1980-E

§1980.471 (Con.)

\(a\) Collateral acquired by the lender can only be released after a
complete review of the proposal.

\(1\) There may be instances when the lender acquires the collateral of
a business where the cost of liquidation exceeds the potential recovery
value of the collection. Whenever this occurs the lender with the
concurrence of Rural Development can abandon the collateral in lieu of
liquidation.

\(2\) Sale of acquired collateral to the former borrower, former
borrower\'s stockholder(s) or officer(s), the lender or lender\'s
stockholder(s) or officer(s) must be based on an arm\'s length
transaction with the concurrence of Rural Development.

[ADMINISTRATIVE]{.underline}:

A. The State Director determines which Rural Development personnel will
attend meetings with the lender.

B. Introduction to Paragraph XI and Paragraph XI B of the Lender\'s
Agreement. Rural Development will exercise the option to liquidate only
when there is reason to believe the lender is not likely to initiate
liquidation efforts that will result in maximum recovery. When there is
reason to believe the lender will not initiate efforts that will
maximize recovery through liquidation, the State Director will forward
the lender\'s liquidation plan, if available with appropriate
recommendations, along with the State Director\'s exceptions to the
lender\'s plan, if any, to the Director, Business and Industry Division,
for evaluation and approval or rejection of the State Director\'s
recommendation regarding liquidation. Only when compromise can not be
reached between Rural Development and the lender on the best means of
liquidation will Rural Development consider conducting the liquidation.
The State Director has no authority to exercise the option to liquidate
without National Office approval. When Rural Development liquidates,
reasonable liquidation expenses will be assessed against the proceeds
derived from the sale of the collateral. In such instances the State
Director will send to the Finance Office Form RD 1980-45, \"Notice of
Liquidation Responsibility.\"

## 54

## (Revision 1) 

RD Instruction 1980-E

§1980.471 ADMIN. (Con.)

C. State Directors are authorized to approve lender liquidation plans as
authorized on separate written approval authorities issued in accordance
with Subpart A of Part 1901 of this chapter. Within delegated
authorities, the State Director may approve a written partial
liquidation plan submitted by the lender covering collateral that must
be immediately protected or cared for in order to preserve or maintain
its value. Approval of the partial liquidation plan must be in the best
interest of the government. The approved partial liquidation plan is
only good for those actions necessary to immediately preserve and
protect the collateral and must be followed by a complete liquidation
plan prepared by the lender in accordance with the requirements of
paragraph XII A of the Lender\'s Agreement.

D. Paragraph XI D. State Directors are responsible for review and
acceptance of accounting reports as submitted by lenders and for
submission of such reports to lenders when Rural Development is
conducting liquidation, after they have been submitted with the State\'s
recommendations to the Director, Business and Industry Division for
prior review.

E. Paragraph XI E 2. State Directors are authorized to approve final
reports of loss from the lender in separate written approval authorities
issued in accordance with Subpart A of Part 1901 of this chapter. The

## 54A

## (Added 12-05-90, PN 149)

(02-25-87) PN 41

§1980.471 ADMINIS E. (Con.) RD Instruction 1980-E

State Director will submit to the Finance Office for payment any loss
claims of the lender on Form RD 449-30, \"Loan Note Guarantee Report of
Loss.\" The Finance Office forwards loss payment checks to the State
director for delivery to lender. When a loss claim is involved on a
particular loan guarantee, ordinarily one \"Estimated Loss Report\" will
be authorized. Only one final \"Report of Loss\" will be authorized. A
final Form RD 449-30 must be filed with the Finance Office at the
completion of all liquidations. Finance Office will use this form to
close out the account.

F. Paragraph XI E 3. Final loss payments will be made within the 60 days
required but only after a review by Rural Development to assure that all
collateral for the loan has been properly accounted for and liquidation
expenses are reasonable and within approved limits. State Directors are
responsible to see that such reviews are accomplished by the State
within 30 days and final loss claims in excess of the State Director\'s
approval authority are forwarded to be accepted or otherwise resolved by
the Director, Business and Industry Division within the 60-day period.
Any estimated loss payments made to the lender must be taken into
consideration when paying a final loss on the Rural Development
guaranteed loan. The estimated loss payment must be treated as a
deduction from the principal amount of the loan and interest cannot be
accrued on the principal amount of the loan that is equal to the
estimated loss payment. Community and Business Program Chiefs (C&BP),
Business and Industry Chiefs or Loan Specialists will conduct such
reviews. The State Director may request National Office assistance in
the conduct of any review. All reviews for final loss claim in excess of
the State Director\'s approval authority (See Subpart A of Part 1901 of
this Chapter) will be submitted to the National Office, Business and
Industry Division, for concurrence prior to the State Director\'s
approval of the claim. Close scrutiny of liquidation proceeds and their
application in accordance with lien priorities is required. Before final
loss payments are approved and to assist in the required review, the
C&BP Chief, B&I Chief or Loan Specialist will prepare a narrative
history of the guarantee transaction which will serve as the summary of
occurrence which led to failure of the borrower and actions taken to
maximize loan recovery. The original of this report will be filed in the
loan case file. A copy of this report together with the review of the
final loss claim will be included in the material sent to the Director,
B&I Division, for review prior to approval of final loss payments.

§1980.472 [Protective advances]{.underline}. \[See §1980.65 Subpart A of
this Part\]

[ADMINISTRATIVE]{.underline}:

Refer to Appendix G of this subpart (available in any Rural Development
Office) for advice on how to interact with the lender on liquidations
and property management.

A. Protective advances will not be made in lieu of additional loans, in
particular, working capital loans. Protective advances are advances made
by the lender for the purpose of preserving and protecting the

## 55

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RD Instruction 1980-E

§1980.472 ADMINIS A. (Con.)

collateral where the debtor has failed to and will not or cannot meet
its obligations. Ordinarily, protective advances are made when
liquidation is contemplated or in process. A precise rule of when a
protective advance should be made is impossible to state. A common, but
by no means the only, period when protective advances might be needed is
during liquidation. At this point, the borrower and success of the
project are no longer of paramount importance, but preserving collateral
for maximum recovery is of vital importance. Elements which should
always be considered include how close the project is to liquidation or
default, how much control the borrower will have over the funds, what
danger is there that collateral may be destroyed and whether there will
be a good chance of saving the collateral later if a protective advance
in contemplation of liquidation is made immediately. A protective
advance [must]{.underline} be an indebtedness of the borrower.

B. The State Director must approve, in writing, all protective advances
on loans within his/her loan approval authority which exceed a total
cumulative advance of \$500 to the same borrower. Protective advances
must be reasonable when associated with the value of collateral being
preserved.

C. When considering protective advances, sound judgment must be
exercised in determining that the additional funds advanced will
actually preserve collateral interests and recovery is actually enhanced
by making the advance.

§1980.473 [Additional loans or advances]{.underline}. (Refer to
paragraph XIII of Form RD 449-35)

[ADMINISTRATIVE]{.underline}:

Only the State director shall approve within his/her loan approval
authority additional nonguaranteed loans or advances prior to or
subsequent to the issuance of the Loan Note Guarantee. The State
Director shall determine that there will be no adverse changes in the
borrower\'s financial situation and that such loan or advance is not
likely to adversely affect the collateral or the guaranteed loan.

§1980.474 \[Reserved\]

§1980.475 [Bankruptcy]{.underline}.

\(a\) It is the lender\'s responsibility to protect the guaranteed loan
debt and all the collateral securing it in bankruptcy Proceedings. These
responsibilities include but are not limited to the following:

## 56 

RD Instruction 1980-E

§1980.475 (a) (Con.)

\(1\) The lender will file a proof of claim where necessary and all the
necessary papers and pleadings concerning the case.

\(2\) The lender will attend and, where necessary, participate in
meetings of the creditors and all court proceedings.

\(3\) The lender, whose collateral is subject to being used by the
trustee in bankruptcy, will immediately seek adequate protection of the
collateral.

\(4\) Where appropriate, the lender should seek involuntary conversion
of a pending Chapter 11 case to a liquidating proceeding under Chapter 7
or under Section 1123 (b)(4) or seek dismissal of the proceedings.

\(5\) When permitted by the Bankruptcy Code, the lender will request
modification of any plan of reorganization whenever it appears that
additional recoveries are likely. (Revised 1-13-89, SPECIAL PN)

\(6\) Rural Development will be kept adequately and regularly informed
in writing of all aspects of the proceedings. (Renumbered 1-13-89,
SPECIAL PN)

\(b\) In a Chapter 11 reorganization, if an independent appraisal of
collateral is necessary in Rural Development\'s opinion, Rural
Development and the lender will share such appraisal fee equally.
(Revised 1-13-89, SPECIAL PN)

\(c\) Expenses on Chapter 11 reorganization, liquidating Chapter 11 or
Chapter 7 (unless the lender is directly handling the liquidation) cases
are not to be deducted from the collateral proceeds.

\(d\) Estimated Loss Payments. See paragraph XVI of Form RD 449-35.
(Added 1-13-89, SPECIAL PN)

[ADMINISTRATIVE]{.underline}:

Refer to Appendix G of this subpart (available in any Rural Development
Office) for advice on how to interact with the lender on liquidation and
property management.

A. It is the responsibility of the State Program Chief to see that Rural
Development is being fully informed by the lender on all bankruptcy
cases.

## 57

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RD Instruction 1980-E

§1980.475 ADMIN. (Con.)

B. All bankruptcy cases should be reported immediately to the National
Office by utilizing and completing a problem/delinquent status report.
The status report will be completed on Form RD 1980-59 in duplicate. The
Regional Attorney must be informed promptly of the proceedings. (Revised
12-05-90, PN 149.)

C. Chapter 11 pertains to a reorganization of a business contemplating
an ongoing business rather than a termination and dissolution of the
business where legal protection is afforded to the business as defined
under Chapter 11 of the Bankruptcy Code. Consequently, expenses incurred
by the lender in a Chapter 11 reorganization can never be liquidation
expenses unless the proceeding becomes a Liquidating 11. If the
proceeding should become a Liquidating 11, reasonable and customary
liquidation expenses may be deducted from proceeds of collateral
provided the lender is doing the actual liquidation of the collateral as
provided in the Lender\'s Agreement. Chapter 7 pertains to a liquidation
of the borrower\'s assets. If, and when, liquidation of the borrower\'s
assets under Chapter 7 is conduced by the bankruptcy trustee, then the
lender cannot claim expenses. (Revised 1-13-89, SPECIAL PN)

D. The State Director may approve the repurchase of the unpaid
guaranteed portion of the loan from the holder(s) to reduce interest
accruals during Chapter 7 proceedings or after a Chapter 11 proceeding
becomes a liquidation proceeding. On loans in bankruptcy, any loss
payment must be halted in accordance with the Lender\'s Agreement and
carry the approval of the State Director. (Revised 1-13-89, SPECIAL PN)

E. The State Director must approve in advance and in writing the
lender\'s estimated liquidation expenses on loans in liquidation
bankruptcy. These expenses must be reasonable and customary and not
in-house expenses of the lender.

F. The lender is responsible for advising Rural Development of the
completion of the Chapter 11 reorganization plan; however, the Rural
Development servicing office will monitor the lender\'s files to ensure
timely notification of servicing actions. (Added 1-13-89, SPECIAL PN)

G. If an estimated loss claim is paid during the operation of the
reorganization plan, and the borrower repays in full the remaining
balance of the loan set forth in the plan without an additional loss
sustained by the by the lender, a Final Report of Loss is not necessary.
The Finance Office will close out the estimated loss account as a Final
Loss at the time notification of payment in full. (Added 1-13-89,
SPECIAL PN)

## 58

## (Revision 2) 

RD Instruction 1980-E

§1980.475 ADMIN. (Con.)

H. If the bankruptcy court attempts to direct that loss payments will be
applied to that account other than the unsecured principal first and
then to unsecured interest, the lender is responsible for notifying the
Rural Development servicing office immediately. The Rural Development
servicing office will then obtain advice from OGC on what actions Rural
Development should take. (Added 1-13-89, SPECIAL PN)

I. Protective Advances - Authorized Protective Advances may be included
with the estimated loss payment associated with the Chapter 11
reorganization provided they were incurred in connection with
liquidation of the account prior to the borrower filing bankruptcy.
(Added 1-13-89, SPECIAL PN)

J. Adequate Protection - The bankruptcy court can order protection of
the collateral while the borrower is in a reorganization bankruptcy. The
lender whose collateral is subject to being used by the trustee in
bankruptcy should immediately seek adequate protection of the
collateral, including petitioning for a super priority. (Added 1-13-89,
SPECIAL PN)

§1980.476 [Transfer and assumptions]{.underline}

\(a\) All transfers and assumptions will be approved in writing by Rural
Development. Such transfers and assumptions will be to an eligible
applicant.

\(b\) Transfers and assumptions will be considered without regard to
§1980.451 (d) of this subpart.

\(c\) The borrower will submit to Rural Development Form RD 449-4 for
the required character evaluation prior to the execution of the
Assumption Agreement.

\(d\) Available transfer and assumption options to eligible borrowers
include the following:

\(1\) The total indebtedness may be transferred to another borrower on
the same terms.

\(2\) The total indebtedness may be transferred to another borrower on
different terms not to exceed those terms for which an initial loan can
be made.

\(3\) Less than the total indebtedness may be transferred to another
borrower on the same terms.

\(4\) Less than the total indebtedness may be transferred to another
borrower on different terms.

## 58A

## (Revision 2)

(02-25-87) PN 41

RD Instruction 1980-E

§1980.476 (Con.)

\(e\) In any transfer and assumption case, the transferor, including any
guarantor(s), may be released from liability by the lender with Rural
Development written concurrence 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: (Revised 8-9-89, PN 115)

## 58B

## (Added 12-05-90, PN 149) 

§1980.476 (e) (Con.) RD Instruction 1980-E

\(1\) Rural Development must determine that the transferor and any
guarantors have no reasonable debt-paying ability considering their
assets and income at the time of transfer.

\(2\) The Rural Development County Committee must certify that the
transferor has cooperated in good faith, used due diligence to maintain
the collateral against loss, and has otherwise fulfilled all of the
regulations of this subpart to the best of borrower\'s ability.

\(f\) Any proceeds received from the sale of secured property before a
transfer and assumption will be credited on the transferor\'s guaranteed
loan debt in inverse order of maturity before the transfer and
assumption transaction is closed.

\(g\) When the transferee makes any cash downpayment in connection with
the transfer and assumption:

\(1\) The lender will employ an independent appraiser, subject to
concurrence of both the transferor and transferee, to make an appraisal
to determine the fair market value of all the collateral securing the
loan. Such appraisal report fee and any other costs related thereto will
be paid by the transferor and the transferee as they mutually agree.

\(2\) The market value of the secured Property being acquired by the
transferee, plus any additional security the transferee proposes to give
to secure the debt, will he adequate to secure the balance of the total
guaranteed loan owed, plus any prior liens. If any cash downpayment is
made, it may be paid directly to the transferor as payment for equity in
the project provided:

\(i\) The lender recommends and Rural Development approves the cash
downpayment be released to the transferor. The lender and Rural
Development may require that an amount be retained for an established
period of time in escrow as a reserve account as security for use
against any future default on the loan. Any interest accruing on such an
escrow account may be paid periodically to the transferor.

\(ii\) Any payments that are to be made by the transferee to the
transferor in respect to the downpayment do not suspend the
transferee\'s obligation to continue to meet the guaranteed loan
payments as they come due under the terms of the assumption.

\(iii\) The transferor will agree not to take any actions against the
transferee in connection with such transfer in the future without first
obtaining the written approval of Rural Development and the lender.

\(iv\) The lender determines that there is repayment ability for the
guaranteed debt assumed and any other indebtedness of the transferee.

## 59

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RD Instruction 1980-E

§1980.476 (Con.)

\(h\) The lender will make, in all cases, a complete credit analysis to
determine viability of the project, subject to Rural Development review
and approval, including any requirement for deposits in an escrow
account as security to meet its determined equity requirements for the
project.

\(i\) The lender will issue a statement to Rural Development that the
transaction can be properly transferred and the conveyance instruments
will be filed, registered, or recorded as appropriate and legally
permissible.

\(j\) Rural Development will not guarantee any additional loans to
provide equity funds for a transfer and assumption.

\(k\) The assumption will be made on the lender\'s form of assumption
agreement.

\(l\) The assumption agreement will contain the Rural Development case
number of the transferor and transferee.

\(m\) Loan terms cannot be changed by the Assumption Agreement unless
previously approved in writing by Rural Development, with the
concurrence of any holder(s) and concurrence of the transferor
(including guarantors) if they have not been released from personal
liability. Any new loan terms cannot exceed those authorized in this
subpart. The lender\'s request will be supported by:

\(1\) An explanation of the reasons for the proposed change in the loan
terms.

\(2\) Certification that the lien position securing the guaranteed loan
will be maintained or improved, proper hazard insurance will be
continued in effect and all applicable Truth in Lending requirements
will be met.

\(n\) 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(s). The lender will
provide Rural Development a copy of the transfer and assumption
agreement. Notice must be given by the lender to Rural Development
before any borrower or guarantor is released from liability.

\(o\) The holder(s), if any, need not be consulted on a transfer and
assumption case unless there is a change in loan terms.

\(p\) If a loss should occur upon consummation of a complete transfer of
assets and assumption for less than the full amount of the debt and the
transferor-debtor (including personal guarantor) is released from
personal liability, as provided in paragraph (e) of this section, the
lender, if it holds the guaranteed portion, may file an estimated
\"report of Loss\" on Form RD 449-10 to recover its pro rata share of
the actual loss at that time. In completing Form RD 440-30, the amount
of the debt assumed will be entered on line 24 as Net Collateral
(Recovery). Approved

## 60 

§1980.476 (P) (Con.) RD Instruction 1980-E

protective advances and accrued interest thereon made during the
arrangement of a transfer and assumption, if not assumed by the
transferee, will be entered on Form 449-30, lines 13 and 14.

[ADMINISTRATIVE]{.underline}:

Refer to Appendix G of this subpart (available in any Rural Development
Office) for advice on how to interact with the lender on liquidations
and property management.

A. The State Director may approve all transfer and assumption provisions
if the guaranteed loan debt balance is within his/her individual loan
approval authority including:

1\. Consent in writing to the release of the transferor and guarantors
from liability.

2\. Any changes in loan terms.

NOTE: The assumption will be reviewed as if it were a new loan. The Loan
Note Guarantee(s) will be endorsed in the space provided on the form(s).

B. A copy of the Assumption Agreement will be retained in the Rural
Development file. The State Director may notify the Finance Office of
all approved transfer and assumption cases on Form RD 1980-7, \"Notice
of Transfer and Assumption of a Guaranteed Loan,\" and submit Form RD
1980-50 for all new borrowers and Form RD 1980-51, \"Add, Change, or
Delete Guaranteed Loan Record,\" in order that Finance records may be
adjusted accordingly.

C. Any transfer and assumption of less than the total indebtedness must
be submitted to the Director, Business and Industry Division, for review
and concurrence.

D. If the guaranteed loan debt balance is in excess of the State
Director\'s loan approval authority, the State Director will forward the
file, together with his/her recommendations, to the National Office for
approval, ATTN: Business and Industry Division.

§§1980.477 - 1980.480 \[Reserved\]

§1980.481 [Insured loans]{.underline}.

Applications from private parties for whom Rural Development and such
borrowers agree that a guarantee lender is not available and from public
bodies shall be processed as insured loans in accordance with the
applicable provisions of this subpart and Subpart A of Part 1942 of this
chapter, including the credit elsewhere requirement, except as provided
in §1980.488 of this subpart which provides for the guarantee of taxable
bond issues of public bodies. Loans to public bodies will be used only
to finance:

## 61

## (Revision 1)

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RD Instruction 1980-E

§1980.481 (Con.)

\(a\) Community facilities as defined in §1980.402 of this subpart, and

\(b\) Constructing and equipping industrial plants for lease to private
businesses (not including loans for operating such businesses) when the
requested loan is not available under Subpart A of Part 1942 of this
chapter.

[ADMINISTRATIVE]{.underline}:

A. Without specific written delegated authority, all insured loans
require National Office concurrence prior to approval.

B. Applications from private parties for insured loans will not be
encouraged.

C. Loan closings on insured loans will be in accordance with this
subpart, the Regional Attorney and applicable provisions of Subpart A of
Part 1942 of this chapter.

§§1980.482 - 1980.487 \[Reserved\]

§1980.488 [Guaranteed industrial development bond issues]{.underline}.

\(a\) Loans to public bodies will be guaranteed only in connection with
the issuance of any class or series of industrial development bonds (as
defined in section 103 (c) (2) of the Internal Revenue Code of 1954, as
amended (IRC)), the interest on which is included in gross income under
IRC. No part of the loan guaranteed by Rural Development may extend to
any class or series of industrial development bonds the interest on
which is excludable from gross income under section 103 (a) (1) of such
Code. Before the execution of any Loan Note Guarantee, the lender will
furnish Rural Development evidence regarding interest on bonds being
taxable for Federal income tax purposes. Such evidence may be in the
form of an unqualified opinion of a recognized bond counsel or a ruling
from the Internal Revenue service. Guaranteed loans to public bodies can
only be used for constructing and equipping industrial plants for lease
to private businesses engaged in industrial manufacturing and does not
provide funds for debt refinancing, working capital and other
miscellaneous fees, charges or services. The lessee will have to provide
necessary capital and sufficient financial strength to provide for a
sound project.

\(b\) If Rural Development and the applicant agree that a guaranteed
lender is not available, the application may be considered for an
insured loan under the provisions of §1980.481 of this subpart.

## 62

## (Revision 1) 

§1980.488 (Con.) RD Instruction 1980-E

[ADMINISTRATIVE]{.underline}:

The lender is responsible for notifying the Rural Development of the
taxability of the proposed bond issue.

§1980.489 \[Reserved\]

§1980.490 [Business and Industry Buydown loans]{.underline}. (Added
06-01-94, PN 225.)

\(a\) [Introduction]{.underline}. This section contains regulations for
the Business and Industry Buydown (BIB) loan program. The purpose of
this program is to provide loan guarantees with reduced interest rates
to the borrowers, under the authority of Public Law 103-50. All
provisions of Subparts A and E of this part apply to BIB loans except as
provided in this section. All forms used in connection with a BIB loan
will be those used with other B&I loans, except as provided in this
section.

\(b\) [Location of applicants]{.underline}. Businesses eligible for BIB
loans shall be located within the area covered by the Presidential
disaster declaration related to Hurricanes Andrew or Iniki or Typhoon
Omar.

\(c\) [Interest rate]{.underline}.

\(1\) If the interest rate charged by the lender (note rate) on a BIB
loan is a variable rate in accordance with §1980.423 of this subpart,
the base rate must be the prime rate as published in the [Wall Street
Journal]{.underline} and the note rate must not exceed the prime rate as
published in the [Wall Street Journal]{.underline} by more than 100
basis points. If the note rate is fixed, it must not exceed by more than
100 basis points the prime rate as published in the [Wall Street
Journal]{.underline} on the day the Loan Note Guarantee is issued.

\(2\) The note rate for a BIB loan must be the same for the entire loan,
including both the guaranteed and unguaranteed portion.

\(d\) [Interest rate buydown]{.underline}.

\(1\) To be eligible for a BIB loan, the business must provide evidence
and the lender and Rural Development must determine that, at least for
the first year of the loan, the business will not have adequate cash
flow to meet all of its financial obligations including the required
payments on the proposed loan at the note rate, but that it can meet all
obligations if the interest rate is reduced by 100 basis points.

## 62A

## (Revision 1)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.490 (d) (Con.)

\(2\) During the first year after a Loan Note Guarantee is issued for a
BIB loan, Rural Development will pay one percentage point of interest on
the loan directly to the lender, thereby reducing the interest due from
the borrower by this amount. This interest payment shall be applied to
both the guaranteed and unguaranteed portion of the loan pro ratably
according to Rural Development regulation.

\(3\) Interest payments by Rural Development may continue in subsequent
years if the borrower\'s cash flow is insufficient to pay all
obligations including the required payments on the proposed loan at the
note rate. On or about each yearly anniversary of the promissory note
the lender may submit a request to Rural Development for continued
interest payments, along with current profit and loss and cash flow
statements and cash flow projections to show that the continued payments
are needed for another year. Rural Development will promptly review the
material submitted, determine whether the continued interest payments by
Rural Development are needed to provide for sufficient cash flow in the
coming year, and notify the lender in writing of the determination. Once
interest payments by Rural Development are terminated because the
borrower\'s cash flow is determined to be sufficient to pay the note
rate, such payments will not be made in subsequent years even if the
cash flow decreases.

\(4\) This section does not authorize interest payments by Rural
Development on B&I loans other than those approved under this section.
To be eligible for interest payments by Rural Development, the loan must
be designated as a BIB loan when approved and funded from funds
authorized by Public Law 103-50.

\(e\) [Duration of BIB loan program]{.underline}. No BIB loan will be
obligated after September 30, 1994.

\(f\) [Administrative procedures]{.underline}.

\(1\) A lender that wants a B&I application considered under BIB
authorities should so indicate by notation on Form RD 449-1 or by letter
submitted with the Form RD 449-1.

\(2\) Rural Development will identify a loan as a BIB loan by notation
in the top margin of Form RD 449-29 and by the \"type of assistance\"
code listed on Form RD 1940-3, in accordance with the Forms Manual
Insert.

\(3\) Rural Development will set out the interest buydown provisions in
accordance with this section in the Conditional Commitment for
Guarantee. When the Loan Note Guarantee is issued, the lender and Rural
Development will execute Form RD 1980-48, \"Business and Industry
Interest Rate Buydown Agreement.\"

## 62B

## (Added 06-01-94, PN 225) 

§1980.490 (f) (Con.) RD Instruction 1980-E

\(4\) The lender will request the interest payment from Rural
Development by submitting Form RD 1980-23, \"Request for Business and
Industry Interest Buydown Payment,\" to the Rural Development servicing
office. Each request must cover exactly 1 year and be filed within 30
days after the anniversary date of the promissory note, except when
interest buydown is terminated between anniversary dates. The Rural
Development servicing office will review each request for consistency
with Rural Development regulations and the Form RD 1980-48 and, if the
claim is valid, will approve it and forward it to the Finance Office for
issuance of the payment to the lender.

\(g\) [Termination of interest buydown]{.underline}. When Rural
Development purchases a portion of a loan, interest buydown will cease
on the entire loan. Interest buydown will also cease upon termination of
the Loan Note Guarantee or assumption/transfer of the loan. In the event
of any action that causes the interest buydown to terminate, the lender
will submit a claim on Form RD 1980-23 for interest buydown payments
through the date of termination.

\(h\) Loan purposes.

\(1\) [Refinancing]{.underline}. Section 1980.452 ADMINISTRATIVE C 1 (d)
of this subpart does not apply to BIB loans if refinancing is needed as
a direct consequence of the disaster. In such cases, the lender may be
allowed to bring previously unguaranteed exposure under the guarantee.
No loan will be refinanced unless the current market value of the
collateral is at least equal to the amount of the loan to be refinanced
plus any new loan amount.

\(2\) [Agriculture]{.underline}. Section 1980.412 (e) of this subpart
does not apply to BIB loans. BIB loans may be guaranteed for agriculture
production, which means the cultivation, production (growing), and
harvesting, either directly or through integrated operations, of
agricultural products (crops, animals, birds, and marine life, either
for fiber or food for human consumption), and disposal or marketing
thereof, the raising, housing, feeding (including commercial custom
feedlots), breeding, hatching, control and/or management of farm or
domestic animals.

\(3\) [Other eligible businesses]{.underline}. Eligible types of
businesses also include:

\(i\) Commercial nurseries primarily engaged in the production of
ornamental plants and trees and other nursery products such as bulbs,
florists\' greens, flowers, shrubbery, flower and vegetable seeds, sod,
and the growing of vegetables from seed to the transplant stage.

## 62C

## (Added 06-01-94, PN 225)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.490 (h)(3) (Con.)

\(ii\) Forestry which includes establishments primarily engaged in the
operation of timber tracts, tree farms, forest nurseries, and related
activities such as reforestation.

\(iii\) The growing of mushrooms or hydroponics.

\(4\) [Recreation and tourism]{.underline}. Loans may be guaranteed for
tourist or recreation facilities except for hotels, motels, bed and
breakfasts, race tracks, gambling, or golf courses.

\(5\) [Meat processing facilities]{.underline}. The provisions of
§1980.411 (a)(8) of this subpart will not apply to BIB loans. Loans,
including working capital or debt refinancing, may be guaranteed for
businesses engaged in meat or poultry processing.

\(i\) [Small Business Administration]{.underline}. Section 1980.451 (c)
of this subpart will not apply to BIB loans. Applicants eligible for
Small Business Administration assistance will be advised of the
availability of that assistance.

\(j\) [Loan guarantee limits]{.underline}. Notwithstanding the
provisions of §1980.420 of this subpart, the guarantee percentage on any
BIB loan will not exceed 80 percent.

\(k\) [Credit quality analysis]{.underline}. In analyzing the credit
quality of a proposed loan to a business that has lost assets to a
natural disaster, primary emphasis will be placed on the operating
history of the business, rather than its current financial condition. If
the business has a sound, profitable and successful history prior to the
disaster and there are reasonable projections to ensure it can operate
successfully in the future, the proposed loan may be approved even if
disaster losses have caused somewhat less equity and/or collateral than
would normally be expected for a B&I loan guarantee. If the business
appears to have had an unprofitable operation or inadequate cash flow
prior to the disaster, the proposed loan guarantee will not be approved.

\(l\) [Equity requirements]{.underline}. The equity requirements of
§1980.441 of this subpart do not apply to BIB loans.

\(m\) [Collateral]{.underline}. Section 1980.443 ADMINISTRATIVE A 2, 3,
and 4 of this subpart will not apply to BIB loans. Collateral may be
considered at its current market value without discount. Work-in-process
inventory may be valued at the estimated market value of the finished
product. All costs of producing the finished product must be included in
the cash flow analysis.

\(n\) [Conditional approval]{.underline}. A Form RD 449-14 may be issued
prior to receipt of specific items needed to complete an application
package provided:

## 62D

## (Added 06-01-94, PN 225) 

§1980.490 (n) (Con.) RD Instruction 1980-E

\(1\) The lender and/or borrower demonstrates to the Government\'s
satisfaction that it has a need for a prompt indication of the
availability of the proposed loan guarantee and the conditions under
which a guarantee are available;

\(2\) The specific items missing from the application package will take
considerable time to obtain;

\(3\) The lender requests a commitment prior to providing the items;

\(4\) The attachment to Form RD 449-14 clearly states that the
commitment is conditioned on satisfactory completion of the missing
item(s) and a guarantee will not be issued unless all conditions of
these regulations are met; and

\(5\) No Form RD 449-14 will be issued prior to the obligation date
established with the Finance Office.

\(o\) [Financial statements]{.underline}. All requirements of §1980.451
(i)(13) of this subpart will apply except that for BIB loans minimum
annual financial statements will be required as follows:

\(1\) For nonagricultural borrowers with a B&I indebtedness of \$500,000
or less, an annual compilation by an independent certified public
accountant or by an independent public accountant licensed and certified
on or before December 31, 1970.

\(2\) For nonagricultural borrowers with a B&I indebtedness of \$500,001
through \$1 million an annual review by an independent certified public
accountant or by an independent public accountant licensed and certified
on or before December 31, 1970.

\(3\) For nonagricultural borrowers with a B&I indebtedness of more than
\$1 million, an annual audited financial statement by an independent
certified public accountant or by an independent public accountant
licensed and certified on or before December 31, 1970.

\(4\) All agricultural loans will require annual financial statements
per §1980.113 of Subpart B of this part.

\(p\) [Agriculture loans]{.underline}. The following additional
provisions apply to BIB loan guarantees for businesses engaged in
agriculture production:

## 62E

## (Added 06-01-94, PN 225)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.490 (p) (Con.)

\(1\) [General policy]{.underline}. This portion of this section
contains the regulations for making BIB loans to farmers for
agricultural purposes. BIB loans made for agricultural purposes are
subject to the provisions in subparts A and E of this part except as
specified. In addition, certain sections of Subpart B of this part
referenced in this section are applicable subject to the limitations
outlined in this section. Several key loan processing and loan servicing
requirements stipulated in Subpart B of this part do not apply to loans
made to borrowers under this section.

\(2\) [Type of guarantee]{.underline}. BIB loans will be processed under
the Loan Note Guarantee option of §1980.101 (e)(1) of Subpart B of this
part ONLY. No loan will be processed for a Contract of Guarantee (Line
of Credit) under §1980.101 (e)(2) of Supart B of this part.

\(3\) [Farm size]{.underline}. Loan guarantees may be made under the BIB
program without regard to the size of the farming operation.

\(4\) [Filing and processing preapplications and
applications]{.underline}. If the applicant has already developed
material for an Rural Development Farmer Programs loan or if the
financial and production information required by §1980.113 of Subpart B
of this part is needed to document repayment ability or is required by
the lender, §1980.113 of Subpart B of this part may apply with the
following exceptions:

\(i\) Lines of credit will not be guaranteed.

\(ii\) If the application is submitted solely for a farm as defined in
§1980.106 (b) of Subpart B of this part, Form RD 1980-25, \"Farmer
Programs Application,\" or Form RD 449-1, will be used as an application
for assistance.

\(5\) [Evaluation of applications]{.underline}. If the application is
developed and processed in accordance with §1980.113 of Subpart B of
this part, the provisions outlined in §1980.114 of Subpart B of this
part apply with the following exceptions:

\(i\) Timeframe requirements for the evaluation of applications and
references to the Approved Lender Program are not applicable.

\(ii\) County Committee reviews of applications processed under this
section will not be required. If the loan approval official finds the
applicant is not eligible, the applicant will be notified in writing of
the reasons for disapproval and his/her rights through inclusion of the
Equal Credit Opportunity Act (ECOA) statement. An opportunity will be
given for an appeal as set out in Subpart B of Part 1900 of this
chapter.

## 62F

## (Added 06-01-94, PN 225) 

§1980.490 (p)(5) (Con.) RD Instruction 1980-E

\(iii\) When applied to BIB applications, references in §1980.114 of
this part to \"County Office\" shall normally be construed to mean
\"State Office.\" References to \"County Supervisor\" shall be construed
to mean \"Business and Industry Chief or Community and Business Programs
Chief, or other appropriate Rural Development official as designated by
the State Director.\"

\(6\) [Terms of loan repayment]{.underline}.

\(i\) Principal and interest on the loan will be due and payable to
coincide with the cash flow operating cycle of the business.
Installments will be scheduled for payment as agreed upon by the lender
and borrower on terms that reasonably assure repayment of the loan. The
first installment to include a repayment of principal may be scheduled
for payment after the project is operational and has begun to generate
income. However, such installment will be due and payable within 6 years
from the date of the debt instrument and at least annually thereafter.
Interest will not be deferred and will be due at least annually from the
date of the debt instrument. In granting a deferral of principal
payment, the loan approval official must document based on pro forma
financial statements and the nature of the crop that the deferral of
payments is necessary.

\(ii\) The lender must ensure that loan repayment is scheduled to
eliminate the possibility of a balloon payment at the end of the loan.

\(7\) [Agriculture BIB loan purposes]{.underline}. Loans may be made
only for the following purposes:

\(i\) Operating purposes as outlined in §1980.175 (c)(1) of Subpart B of
this part except for those stipulated in paragraphs (c)(1)(iv) and (vii)
of that section.

\(ii\) Real estate purposes as outlined in §1980.180 (c) of Subpart B of
this part except for those stipulated in paragraphs (c)(1) and (4) of
that section.

## 62G

## (Added 06-01-94, PN 225)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.490 (p)(7) (Con.)

\(iii\) Refinancing in accordance with paragraph (h)(l) of this section
and §§1980.411 (a)(11), 1980.451 (i)(19), and 1980.452 ADMINISTRATIVE C
\[except §1980.452 ADMINISTRATIVE C l (d)\] of this subpart.

\(8\) [Sodbuster and swampbuster requirements]{.underline}. The
provisions of Exhibit M of Subpart G of Part 1940 of this chapter will
apply to loans made to enterprises engaged in agricultural production.

§§1980.491 - 1980.494 \[Reserved\]

## 62H

## (Added 06-01-94, PN 225) 

RD Instruction 1980-E

§ 1980.495 [RD forms and guides]{.underline}.

The following RD forms and guides, as applicable, are used in connection
with processing B&I, D&D, and DARBE loan guarantees; they are
incorporated in this subpart and made a part hereof: (Revised 10-17-89,
SPECIAL PN)

\(a\) Form RD 449-1, \"Application for Loan and Guarantee,\" is referred
to as \"Appendix A.\"

\(b\) The \"Certificate of Incumbency and Signature\" is referred to as
\"Appendix B.\"

\(c\) \"Guidelines for Loan Guarantees for Alcohol Fuel Production
Facilities\" is referred to as \"Appendix C.\"

\(d\) \"Alcohol Production Facilities Planning, Performing, Development
and Project Control\" is referred to as \"Appendix D.\"

\(e\) \"Environmental Assessment Guidelines\" is referred to as\
\"Appendix E.\"

\(f\) Form RD 449-14, \"Conditional Commitment for Guarantee,\" is
referred to as \"Appendix F.\"

\(g\) \"Liquidation and Property Management Guide\" is referred to as
\"Appendix G.\"

\(h\) \"Suggested Format for the Opinion of the Lender\'s Legal
Counsel\" is referred to as \"Appendix H.\"

\(i\) \"Regulations for Loan Guarantees for Drought and Disaster
Relief\" and Forms RD 1980-68, \"Lender\'s Agreement - Drought and
Disaster Guaranteed Loans,\" 1980-69, \"Loan Note Guarantee - Drought
and Disaster Guaranteed Loans,\" and 1980-70, \"Assignment Guarantee
Agreement - Drought and Disaster Guaranteed Loans\" are referred to as
\"Appendix I.\" (Added 01-03-89, SPECIAL PN.)

\(j\) \"Business and Industry Application Priority Points Scoring\" is
referred to as \"Appendix J.\" (Revised 08-30-89, PN 116.)

\(k\) \"Regulations for Loan Guarantees for Disaster Assistance for
Rural Business Enterprises\" and Forms RD 1980-71, \"Lender\'s
Agreement - Disaster Assistance for Rural Business Enterprises
Guaranteed Loans,\" 1980-72 \"Loan Note Guarantee - Disaster Assistance
for Rural Business Enterprises Guaranteed Loans,\" and 1980-73
\"Assignment Guarantee Agreement - Disaster Assistance for Rural
Business Enterprises Guaranteed Loans\" are referred to as \"Appendix
K.\" (Added 10-17-89, SPECIAL PN.)

## 63

## (Revision 4)

(02-25-87) PN 41

RD Instruction 1980-E

§ 1980.496 [Exception authority]{.underline}.

The Administrator may in individual cases grant an exception to any
requirement or provision of this subpart which is not inconsistent with
any applicable law or opinion of the Comptroller General, provided the
Administrator determines that application of the requirement or
provision would adversely affect the Government\'s interest. Requests
for exceptions must be in writing by the State Director and submitted
through the Assistant Administrator, Community and Business Programs.
Requests must be supported with documentation to explain the adverse
effect on the Government\'s interest, propose alternative courses of
action, and show how the adverse effect will be eliminated or minimized
if the exception is granted. All general exceptions being considered by
the Administrator will be reviewed by the NOEL Committee to determine
consistency with applicable regulations, and the reasons will be
documented prior to the granting of a general exception by the
Administrator. An Informational Memorandum outlining the reasons for the
general exceptions; recommendation of the State Director and the NOEL
Committee; and reasons for granting the general exception, if
inconsistent with recommendations with recommendations of the State
Director and NOEL Committee, will be provided to the Under Secretary and
to the Office of the General Counsel (OGC). The Administrator will
address any concerns raised by either the Under Secretary or the OGC
prior to issuing the exception. If no response is received within 48
hours (2 Business days), the Administrator may issue the exception.
(Revised 07-25-01, PN 334)

§ 1980.497 [General administrative]{.underline}.

Refer to Appendix G of this subpart (available in any RD Office) for
advice on how to interact with the OGC on liquidations and property
management.

\(a\) [Office of the General Counsel (OGC)]{.underline}. In performing
the RBS functions with regard to B&I, D&D, and DARBE loans, the advice
and assistance of OGC may be sought and followed on any legal matter.
However, it is the responsibility of the lender to ascertain that all
requirements for making, securing and servicing the loan are duly met.
If RBS has any questions concerning the lender\'s resolution of these
matters, OGC should be consulted. Assistance of OGC will be requested on
all loans specified herein and all liquidations and workouts. (Revised
10-17-89, SPECIAL PN)

\(b\) [Contact with OGC]{.underline}. Initial informal contact with OGC
should be made as soon as possible. RD State Directors should use the
following format in formally requesting legal assistance on workouts.

## 64

## (Revision 4) 

§1980.497 (b) (Con.) RD Instruction 1980-E

\(1\) [Origination]{.underline}: All written requests must come from the
State Director.

\(2\) [Method]{.underline}: Request should be made by referral
memorandum to the Regional Attorney setting forth a brief statement of
the facts, the reason assistance is requested, the extent of legal
assistance sought, the date when Rural Development\'s response to the
lender\'s liquidation plan (if any) is due, and:

\(i\) [Projected losses on collateral]{.underline}: [e.g.]{.underline},
projected losses on collateral are expected to be significant.

\(ii\) [Unusual or complex nature of primary collateral]{.underline}:
[e.g.]{.underline}, multi-state foreclosures or foreclosures of leases
or general intangibles.

\(iii\) [Presence of other major creditors or of senior
creditors]{.underline}: [e.g.]{.underline}, guaranteed loan collateral
may be subject to a prior lien or other creditors may have rights in
other assets of borrower, such as inventory and accounts receivable.

\(iv\) [Litigation]{.underline}: [e.g.]{.underline}, bankruptcy, other
foreclosure suits.

\(3\) [Materials to submit]{.underline}: Referral memorandums will be
accompanied by a copy of lender\'s liquidation plan together with a copy
of Rural Development\'s planned response and principal loan papers,
conditional commitment for guarantee, guarantee documents and any
comments from the National Office. If lender refuses to prepare a plan,
the State Director should so state. DO NOT SEND DOCKETS unless
specifically requested by OGC.

\(c\) [Reviews prior to issuance of the loan note
guarantee]{.underline}. After the conditional commitment for guarantee
has been issued and proposed with closing documents prepared by the
lender and forwarded to Rural Development with the lender\'s legal
counsel\'s opinion in the suggested format of Appendix H of this
subpart, but prior to issuing the loan note guarantee, the State
Director will forward the loan docket to the

## 64A

## (Revision 1)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.497 (c) (Con.)

Regional Attorney for review. After an administrative review, the State
Director will include with the docket a letter with recommendations and
indicating any special items, documents or problems that need to be
addressed specifically which may have a significant impact upon the loan
or may be contrary to the regulation. The docket will be assembled for
OGC review in accordance with §1980.451 Administrative B 5 of this
Subpart and indexed and tabbed.

\(d\) [Please submit the following for OGC review]{.underline}. Copies
of:

\(1\) Letter from Rural Development National Office authorizing loan
guarantee containing conditions (if applicable);

\(2\) Form RD 449-14, including any amendments;

\(3\) Loan Agreement;

\(4\) Promissory Notes;

\(5\) Security documents - Real Estate Mortgage, Security Agreement,
Financing Statements, and Leases (if applicable);

\(6\) Personal or corporation guarantees with related security
documents;

\(7\) Proposed Form RD 449-35.

\(8\) Proposed Form RD 449-34.

\(9\) Proposed Form RD 449-36, if any;

\(10\) Proposed Lender\'s Certification (§1980.60 of Subpart A of this
part); and

\(11\) Opinion of Lender\'s Counsel in form prescribed by OGC.

\(e\) [Do not submit for OGC review]{.underline} feasibility studies,
title information, or the original application unless specifically
requested to do so.

\(f\) [OGC Advice]{.underline}.

The Regional Attorney will review the docket and furnish advice to Rural
Development on whether it may issue the LOAN NOTE GUARANTEE AFTER THE
LOAN IS CLOSED. SUCH ADVICE IS FOR THE BENEFIT OF Rural Development ONLY
AND DOES NOT RELIEVE THE LENDER OF ITS RESPONSIBILITIES UNDER Rural
Development REGULATIONS. The Regional Attorney at his/her option may
attend the loan closing.

## 65

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.497 (f) (Con.)

Upon receipt of the Regional Attorney\'s advice, the State Director will
correct or cause to be corrected any noted deficiencies before issuing
the Loan Note Guarantee.

\(g\) [Delegation of authority]{.underline}. The State Director may
delegate those administrative duties and responsibilities as authorized
in the Administrative sections of this subpart, except those
specifically reserved to the State Director.

§1980.498 [Business and Industry Disaster Loans]{.underline}. (Added
10-05-92,\
SPECIAL PN.)

\(a\) [Introduction]{.underline}. This section contains regulations for
the Business and Industry Disaster (BID) loan program. The purpose of
the program is to provide loan guarantees under the authority of the
Dire Emergency Supplemental Appropriations Act, 1992, Public Law
102-368. These guaranteed loans cover costs arising from the
consequences of natural disasters such as Hurricanes Andrew and Iniki
and Typhoon Omar that occur after August 23, 1992, and receive a
Presidential declaration. Also included are the costs to any producer of
crops and livestock that are a consequence of at least a 40 percent loss
to a crop, 25 percent loss to livestock, or damage to building
structures from a microburst wind occurrence in calendar year 1992. No
BID loan guarantee will be approved after September 30, 1993. All
provisions of Subparts A and E of Part 1980 of this chapter apply to BID
loans, except as provided in this section. All forms used in connection
with a BID loan will be those used with other Business and Industry
(B&I) loans, except as provided in paragraph (m) of this section.
(Revised 08-03-93, SPECIAL PN.)

\(b\) [Location of applicants]{.underline}.

\(1\) Section 1980.405 of this subpart, \"Rural area determinations,\"
will not apply to BID loans. BID loans may be made in rural and nonrural
areas.

\(2\) Eligible borrowers\' businesses must be located within the area
covered by the Presidential declaration except for those with qualifying
losses from microburst wind in accordance with paragraph (a) of this
section.

\(c\) [Loan purposes]{.underline}. Loans may be guaranteed for the
purposes listed in §1980.411 of this subpart, \"Loan purposes,\" except
as follows:

\(1\) [Relationship to disaster]{.underline}. The purpose of any BID
loan must be to cover costs that are a direct consequence of a natural
disaster or microburst of wind in accordance with paragraph (a) of this
section. The amount of the loan must not be greater than the amount
needed as determined by the Rural Development Administration (RDA) to
cure problems caused

## 66

## (Revision 2) 

RD Instruction 1980-E

§1980.498 (c)(1) (Con.)

by the natural disaster so that the business is reestablished on a
successful basis. Facilities which were damaged or destroyed by the
natural disaster may be repaired or replaced by modern facilities as
necessary to ensure success. Replacement by modern facilities will not
be made solely for the purpose of enlarging the business or increasing
its production capacity. No loan for a change of purpose of the business
will be guaranteed. Eligible refinancing or working capital loans should
not exceed the amount needed to overcome the financial distress caused
by the disaster. Losses that were adequately paid by insurance or by
loans or grants from other sources will not be covered by BID loans. BID
loans may be used to supplement insurance payments and/or assistance
from other sources when the insurance coverage or other assistance is
not sufficient.

\(2\) [Refinancing]{.underline}. Section 1980.452 ADMINISTRATIVE C 1 (d)
of this subpart does not apply to BID loans. If refinancing is needed as
a direct consequence of the disaster, the lender may be allowed to bring
previously unguaranteed exposure under the guarantee. No loan will be
refinanced unless the current market value of the collateral is at least
equal to the amount of the loan to be refinanced plus any new loan
amount.

\(3\) [Agriculture]{.underline}. Section 1980.412 (e) of this subpart
does not apply to BID loans. BID loans may be guaranteed for agriculture
production, which means the cultivation, production (growing), and
harvesting, either directly or through integrated operations, of
agricultural products (crops, animals, birds, and marine life, either
for fiber or food for human consumption), and disposal or marketing
thereof, the raising, housing, feeding (including commercial custom
feedlots), breeding, hatching, control and/or management of farm or
domestic animals.

\(4\) [Other eligible businesses]{.underline}. Eligible types of
businesses also include:

\(i\) Commercial nurseries primarily engaged in the production of
ornamental plants and trees and other nursery products such as bulbs,
florists\' greens, flowers, shrubbery, flower and vegetable seeds, sod,
and the growing of vegetables from seed to the transplant stage.

\(ii\) Forestry which includes establishments primarily engaged in the
operation of timber tracts, tree farms, forest nurseries, and related
activities such as reforestation.

\(iii\) The growing of mushrooms or hydroponics.

## 67

## (Added 10-05-92, SPECIAL PN)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.498 (c) (Con.)

\(5\) [Recreation and tourism]{.underline}. Loans may be guaranteed for
tourist or recreation facilities except for hotels, motels, bed and
breakfasts, race tracks, gambling, or golf courses.

\(6\) [Meat processing facilities]{.underline}. The provisions of
§1980.411\_(a)(8) of this subpart will not apply to BID loans. Loans,
including working capital or debt refinancing, may be guaranteed for
businesses engaged in meat or poultry processing.

\(d\) [Federal Emergency Management Agency (FEMA)]{.underline}. BID
loans may be approved only to the extent that the assistance is not
available from FEMA. The case file will be documented to show that FEMA
assistance was not available or that FEMA assistance is not adequate to
cover the costs as a consequence of the natural disaster.

\(e\) [Small Business Administration]{.underline}. Section 1980.451 of
this subpart will not apply to BID loans. Applicants eligible for Small
Business Administration assistance will be advised of the availability
of that assistance.

\(f\) [Loan guarantee limits]{.underline}. Notwithstanding the
provisions of §1980.420 of this subpart, the guarantee percentage on any
BID loan will not exceed 80 percent.

\(g\) [Credit quality analysis]{.underline}. In analyzing the credit
quality of a proposed loan to a business that has lost assets to a
natural disaster, primary emphasis will be placed on the operating
history of the business, rather than its current financial condition. If
the business has a sound, profitable and successful history prior to the
disaster and there are reasonable projections to ensure it can operate
successfully in the future, the proposed loan may be approved even if
disaster losses have caused somewhat less equity and/or collateral than
would normally be expected for a B&I guarantee. If the business appears
to have had an unprofitable operation or inadequate cash flow prior to
the disaster, the proposed loan guarantee will not be approved.

\(h\) [Equity requirements]{.underline}. The equity requirements of
§1980.441 of this subpart do not apply to BID loans.

\(i\) [Feasibility studies]{.underline}. Feasibility studies as required
by §1980.442 of this subpart will not be required for BID loans if the
business has a successful financial history that supports future plans
and projections that indicate a successful operation with adequate
repayment ability.

## 68

## (Added 10-05-92, SPECIAL PN) 

§1980.498 (Con.) RD Instruction 1980-E

\(j\) [Collateral]{.underline}. Section 1980.443 ADMINISTRATIVE A 2, 3,
and 4 of this subpart will not apply to BID loans. Collateral may be
considered at its current market value without discount. Work-in-process
inventory may be valued at the estimated market value of the finished
product. All costs of producing the finished product must be included in
the cash flow analysis.

\(k\) [Conditional approval]{.underline}. A Form RD 449-14,
\"Conditional Commitment for Guarantee,\" may be issued prior to receipt
of specific items needed to complete an application package provided:

\(1\) The lender and/or borrower demonstrates to the Government\'s
satisfaction that it has a need for a prompt indication of the
availability of the proposed loan guarantee and the conditions under
which a guarantee are available;

\(2\) The specific items missing from the application package will take
considerable time to obtain;

\(3\) The lender requests a commitment prior to providing the items;

\(4\) The attachment to Form RD 449-14 clearly states that the
commitment is conditioned on satisfactory completion of the missing
item(s) and a guarantee will not be issued unless all conditions of
these regulations are met; and

\(5\) No Form RD 449-14 will be issued prior to the obligation date
established with the Finance Office.

\(l\) [Financial statements]{.underline}. All requirements of §1980.451
(i)(13) of this subpart will apply except that it is modified for BID
loans to require minimum annual financial statements as follows:

\(1\) For nonagricultural borrowers with a B&I indebtedness of \$500,000
or less, an annual compilation by an independent certified public
accountant or by an independent public accountant licensed and certified
on or before December 31, 1970.

\(2\) For nonagricultural borrowers with a B&I indebtedness of \$500,001
through \$1,000,000, an annual review by an independent certified public
accountant or by an independent public accountant licensed and certified
on or before December 31, 1970.

## 69

## (Revision 2)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.498 (l) (Con.)

\(3\) For nonagricultural borrowers with a B&I indebtedness of more than
\$1 million, an annual audited financial statement by an independent
certified public accountant or by an independent public accountant
licensed and certified on or before\
December 31, 1970.

\(4\) All agricultural loans will require annual financial statements
per §1980.113 of Subpart B of Part 1980 of this chapter. (Revised
07-26-93, SPECIAL PN.)

\(m\) [Agriculture loans]{.underline}. The following additional
provisions apply to BID loan guarantees for businesses engaged in
agriculture production:

\(1\) [General policy]{.underline}. This portion of this section
contains the regulations for making BID loans to farmers for
agricultural purposes. BID loans made for agricultural purposes are
subject to the provisions in Subparts A and E of Part 1980 of this
chapter except as specified. In addition, certain sections of Subpart B
of Part 1980 of this chapter referenced in this section are applicable
subject to the limitations outlined in this section. BID loans made for
agricultural purposes are made under the Business and Industry authority
of Section 310B of the Consolidated Farm and Rural Development Act of
1972, as amended. In this regard, several key loan processing and loan
servicing requirements stipulated in Subpart B of Part 1980 of this
chapter do not apply to loans made to borrowers under this section. Only
the material cross_referenced to Subpart B of Part 1980 of this chapter
is to be utilized in lieu of or in addition to the requirements
contained in Subpart E of Part 1980 of this chapter in processing loans
under this section.

\(2\) [Type of guarantee]{.underline}. See §1980.101 (e)(1) of Subpart B
of Part 1980 of this chapter. BID loans will be processed under the Loan
Note Guarantee option ONLY. No loan will be processed for a Contract of
Guarantee (Line of Credit) under this section.

\(3\) [Abbreviations and definitions]{.underline}.

\(i\) The abbreviations and definitions found in §1980.106 of Subpart B
of Part 1980 of this chapter will apply to loans made under this section
except for \"family farm,\" \"related by blood or marriage,\" and
\"subsequent loans.\" (Revised 09-30-93, SPECIAL PN.)

## 70

## (Revision 2) 

§1980.498 (m)(3) (Con.) RD Instruction 1980-E

\(ii\) Loan guarantees may be made under the BID program without regard
to the size of the farming operation.

\(4\) [Loan eligibility requirements]{.underline}. In addition to the
requirements set forth in this subpart, the requirements in §1980.175
(b) of Subpart B of Part 1980 of this chapter regarding controlled
substances are applicable.

\(5\) [Filing and processing preapplications and
applications]{.underline}. If the applicant has already developed
material for an Rural Development Farmer Programs loan or if the
financial and production information required by §1980.113 of Subpart B
of Part 1980 of this chapter is needed to document repayment ability or
is required by the lender, §1980.113 of Subpart B of Part 1980 of this
chapter may apply with the following exceptions: (Revised 07-21-93,\
SPECIAL PN.)

\(i\) Lines of credit will not be guaranteed.

\(ii\) Timeframes for applicant/lender notification in §1980.113 of
Subpart B of Part 1980 of this chapter do not apply.

\(iii\) If the application is submitted solely for a farm as defined in
§1980.106 (b) of Subpart B of Part 1980 of this chapter, Form RD 410-1,
\"Application for Rural Development Services,\" or Form RD 449-1,
\"Application for Loan and Guarantee,\" will be used as an application
for assistance.

(Revised 09-30-93, SPECIAL PN.)

\(6\) [Evaluation of applications]{.underline}. If the application is
developed and processed in accordance with §1980.113 of\
Subpart B of Part 1980 of this chapter, the provisions outlined in
§1980.114 of Subpart B of Part 1980 of this chapter applies with the
following exceptions: (Revised 07-21-93, SPECIAL PN.)

\(i\) Timeframe requirements for the evaluation of applications and
references to the Approved Lender Program are not applicable.

\(ii\) County Committee reviews of applications processed under this
section will not be required. If the loan approval official finds the
applicant is not eligible, the applicant will be notified in writing of
the reasons for disapproval and the opportunity given for an appeal as
set out in Subpart B of Part 1900 of this chapter.

\(7\) [Terms of loan repayment]{.underline}.

## 71

## (Revision 3)

(2-25-87) PN 41

RD Instruction 1980-E

§1980.498 (m)(7) (Con.)

\(i\) Principal and interest on the loan will be due and payable to
coincide with the cash flow operating cycle of the business.
Installments will be scheduled for payment as agreed upon by the lender
and borrower on terms that reasonably assure repayment of the loan. 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. However, such installment will be due and payable within 6 years
from the date of the debt instrument and at least annually thereafter.
All accrued interest will be due at least annually from the date of the
debt instrument. In no case will interest be deferred. In granting a
deferral of principal payment, the loan approval official must document
based on pro forma financial statements and the nature of the crop that
the deferral of payments is necessary.

\(ii\) The lender must ensure that loan repayment is scheduled to
eliminate the possibility of a balloon payment at the end of the loan.

\(8\) [BID agriculture loan purposes]{.underline}. Loans may be made
only for the following purposes: (Revised 07-21-93, SPECIAL PN.)

\(i\) Operating purposes as outlined in §1980.175 (c)(1) of Subpart B of
Part 1980 of this chapter except for those stipulated in paragraphs
(c)(1)(iv) and (vii) of that section.

\(ii\) Real estate purposes as outlined in §1980.180 (c) of Subpart B of
Part 1980 of this chapter except for those stipulated in paragraphs
(c)(1) and (4) of that section.

\(iii\) Refinancing in accordance with paragraphs (c)(1) and (c)(2) of
this section and §§1980.411 (a)(11), 1980.451 (i)(19), and 1980.452
ADMINISTRATIVE C \[except §1980.452 ADMINISTRATIVE C 1 (d)\] of this
subpart. (Added 07-21-93, SPECIAL PN.)

\(9\) [Sodbuster and swampbuster requirements]{.underline}. The
provisions of Exhibit M of Subpart G of Part 1940 of this chapter will
apply to loans made to enterprises engaged in agricultural production.

§1980.499 \[Reserved\]

## 72

## (Revision 3) 

RD Instruction 1980-E

§1980.500 [OMB control number]{.underline}.

The collection of information requirements contained in this rule have
been approved by the Office of Management and Budget and have been
assigned OMB control number 0575-0029.

Attachments: Appendices C, D, E, G, H, I, J, and K.

## oOo

## 73

## (Added 07-21-93, SPECIAL PN)

(2-25-87) PN 41

RD Instruction 1980-E

Appendix C

Page 1

[GUIDELINES FOR LOAN GUARANTEES FOR ALCOHOL FUEL PRODUCTION
FACILITIES]{.underline}

\(1\) [Alcohol production facility]{.underline}. An alcohol production
facility is a facility in which alcohol, suitable for use by itself or
in combination with ether substances as a substitute for petroleum or
petrochemical feedstocks and not suitable for beverage purposes, is
manufactured from biomass.

\(2\) The alcohol production facility includes all facilities necessary
for the production and storage of alcohol and the processing of the
by-products of alcohol production. The intent is to limit the alcohol
and by-products processing facilities to those facilities which are
necessary to yield marketable products and necessary for the financial
success of the project. Further refinements, such as gasoline blending
or the construction of facilities which use the alcohol or by-products
in another manufacturing process, are not considered part of the alcohol
production facility.

\(3\) Application will be reviewed by both B&I personnel and the State
Office engineer and forwarded to the National Office if approval is
recommended.

\(4\) The applicant should have a startup tangible book equity of 20-25
percent. Appraisal surplus and subordinated debt are not eligible equity
items.

\(5\) Loan maturity maximums will be as follows:

Real estate = 15 - 20 years

Machinery & Equipment = 10 years or less depending on the

estimated life of the equipment involved

Working capital = 3 years (It is assumed that the

additional equity required for these

projects will provide much of the

working capital needs.)

\(6\) Farmers Home Administration will ordinarily only finance new
facilities and will not get involved in the refinancing of existing
ones.

\(7\) Priority consideration will be given to the use of the primary
fuel other than petroleum or natural gas.

(10-17-89) SPECIAL PN

RD Instruction 1980-E

Appendix C

Page 2

\(8\) A positive energy balance must be indicated and supported by
appropriate data; i.e., the energy content of the alcohol produced at
the alcohol production facility must be greater than the energy used to
produce the alcohol and by-products.

\(9\) Plant location, in relation to feedstocks, primary fuel and
markets for products and by-products, will be an important
consideration.

\(10\) Debt refinancing will only be considered in modest amounts and
only when necessary to provide a satisfactory lien position.

\(11\) Feasibility studies are very important and required and will be
prepared by competent and knowledgeable independent parties.

\(12\) Participating lenders must either have expertise or the
availability of expertise in this field.

\(13\) The proposed operating managers must have experience in this or a
related field.

\(14\) Alcohol Fuel Production Facilities are eligible for assistance
under the Drought and Disaster (D&D) Guaranteed Loan and Disaster
Assistance for Rural Business Enterprises (DARBE) programs described in
this subpart, and especially in Appendix I and Appendix K. Any such loan
must meet the requirements for D&D and DARBE loans.

## oOo 

RD Instruction 1980-E

APPENDIX D

## [ALCOHOL PRODUCTION FACILITIES]{.underline}

## 

## [PLANNING, PERFORMING DEVELOPMENT AND PROJECT CONTROL]{.underline}

\(I\) [Design Policy]{.underline}. The borrower shall ensure or cause to
be ensured that:

(A). All project facilities are designed utilizing accepted

engineering practices and are conformed to applicable Federal, State and
local codes and requirements.

(B). Proven equipment and processes are employed in all project

facilities unless an exception is granted by the Administrator or
designee of the Farmers Home Administration (Rural Development)
(\"Administrator\") in accordance with paragraph (B)(2) hereof and pilot
equipment or processes are used instead.

(1). Equipment and processes shall be considered \"proven\" if

they have been successfully employed in other commercial facilities.

(2). Equipment and processes shall be considered pilot if

they have not been used in a commercial operation but have been operated
on a scale such that all design and material problems have been
identified and resolved and operations maintained to demonstrate that
the equipment and process may be successfully applied to the proposed
commercial operation. Pilot equipment and processes may be considered
for use in the project subject to the following:

(a). The plans, specifications, and operational data

for the applicable facilities are reviewed by the Administrator or
designee and lender. If, in the opinion of Rural Development, the
proposed processes or equipment are insufficiently developed to assure
reliable and successful operation of the project, proven processes and
equipment will be utilized.

(b). If pilot processes or equipment are used, the

Administrator or designee will also require that:

\(i\) Reasonable provision is made in the project

for conversion to proven equipment or processes; and

\(ii\) The borrower agrees to convert to proven

equipment or processes if conversion is necessary to protect the
interest of the Government in the project. A reserve account for this
conversion may be required. This account will not be an eligible loan
purpose.

(C). Facility and equipment design incorporates cost-effective

primary fuel systems, energy recovery systems and conservation measures
to the maximum extent that this is feasible and consistent with
paragraphs (I) (A) and (B) of this Appendix.

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix D

Page 2

\(II\) [Technical Services]{.underline}

(A). The borrower is responsible for selecting engineering

consultants with suitable experience, training and professional
competence in the design and construction of the project to assure that
the completed project will operate at the prescribed levels of
performance. In discharging its responsibility the borrower will obtain
or cause to be obtained:

(1). Full engineering services for design and construction

inspection for all project facilities. Resident inspection by qualified
persons will be required.

(2). Agreements for engineering or design/build services

which describe the project facilities in terms of the parameters
critical to the successful operation of the project. The parameters
shall include input quantities, conversion efficiency, rate of
production and fuel consumption and product quality under normal
operating conditions. The design parameters will be mutually agreed upon
by the borrower, lender, the State Director and the project engineer,
and may not be modified without the written concurrence of each of these
parties. These agreements for engineering or design/build services will
require, or the borrower will otherwise obtain, assurance satisfactory
to the State Director that:

\(a\) The project engineer will maintain adequate

insurance to protect the borrower, lender and the Government from
incurring expenses resulting from errors and omissions of the engineer
in performance of engineering services.

\(b\) The project engineer will certify that only proven

equipment and processes will be utilized in the proposed development.
The State Director may request evidence of successful operations of such
proven equipment and process. If proven equipment or processes are not
used in the project, the project engineer will identify these items and
provide the information necessary for acceptance by the Administrator,
borrower and lender in accordance with paragraph (I) (B) (2) of this
Appendix.

\(c\) If used equipment or existing facilities are

incorporated into the project, they must be inspected by the project
engineer or by another qualified engineer of the borrower. This engineer
will prepare a report describing the proposed facilities or equipment
and will comment on their suitability for use in the project. The report
will also identify the modifications necessary for successful
integration into the project. A cost estimate will also be included
comparing new equipment and facilities to the proposed existing
facilities or used equipment. Consideration

RD Instruction 1980-E

Appendix D

Page 3

must be given to the relative energy requirements of used and new
facilities and their relative operation and maintenance costs.

\(d\) The project engineer or qualified individuals

representing the manufacturer of principal equipment (or the
designer/builder if the contractor has designed the plant) will visit
the plant site at reasonable intervals for a period of one year after
substantial completion of the project. Such personnel will be
experienced in the proper operation and maintenance of applicable plant
components. A report will be presented to the borrower within two weeks
of each site visit advising the borrower of operation and maintenance
deficiencies. A copy of each report will be forwarded to the State
Director and lender by the borrower.

\(e\) The project engineer will prepare or supervise the

preparation of a record drawing of all facilities. One copy will be
submitted to the lender and the borrower.

\(f\) The project engineer or another group acceptable to

the State Director and lender will prepare an operation and maintenance
manual and assist the borrower in the startup of the project. The
operation and maintenance manual will describe the specific operation
and maintenance procedures which must be performed for the project to
operate at its rated capacity and efficiency and outline product
testing, quality control, plant safety and emergency shut-down
procedures.

\(g\) The project engineer will assist the borrower in

determining acceptability of materials, equipment and construction
during the construction period, review shop drawings, payment estimates
and change orders, and assist in determining substantial completion of
the project and final completion of individual contracts.

\(1\) The project is substantially complete when:

\(i\) Construction is sufficiently completed in

accordance with plans and specifications so that the project may be used
for its intended purpose, and;

\(ii\) The project is producing products of the

quantity and quality and at the conversion and energy efficiencies
proposed in the completed application submitted by the lender and
borrower and approved by the Rural Development.

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix D

Page 4

\(2\) The State Director must concur that the project

is substantially complete. The following evidence, in form and substance
satisfactory to the State Director and lender, must be submitted prior
to such concurrence:

\(i\) A certificate from the project engineer

stating that all facilities are substantially complete. Engineers who
design specialized equipment or processes must also certify that
construction/ fabrication is acceptable in accordance with plans and
specifications previously approved by them. The certification of the
project engineer must be based upon a project startup procedure where
the complete project operates continuously to reach steady-state
operating conditions. During this period contractors and engineers will
identify and correct problems in operations, malfunctions in equipment,
failure in materials and defects in workmanship. After this pre-startup,
the certifying engineers will monitor project operations for a
continuous period of at least 72 hours or 3 consecutive batch runs as
appropriate to assure that all equipment is operating satisfactorily at
rated capacity and efficiency.

\(ii\) Copies of system operation and performance

data obtained during project start-up.

\(iii\) Exceptions to substantial completion and a

list of nonsubstantial items which must be completed prior to release of
any contractor\'s retainage.

\(3\) If the project is not producing products of the

required quantity or quality at the prescribed conversion efficiencies,
even though the project is otherwise physically complete in accordance
with paragraph (1) (i) of this subparagraph, the project engineer will
prepare a report identifying the corrective actions including an
estimate of costs and additional time necessary to meet established
performance criteria.

\(4\) The project must be certified to be substantially

complete by an independent engineer if any portion of the project has
been designed or constructed by the borrower or the project engineer has
participated in any portion of the construction.

RD Instruction 1980-E

Appendix D

Page 5

\(B\) Modification of plans and specifications will not be made

without the written authorization of the project engineer.

\(C\) The Administrator, State Director or their representative\'s

acceptance or concurrence in feasibility studies, preliminary
engineering reports, plans, specifications, contract documents and
payment estimates will not be construed as a representation of the
adequacy of same, reliability of cost estimates or quality of
construction, nor will such acceptance or concurrence be deemed a waiver
of any of the Government\'s rights or remedies against any person or
party. Reviews and construction inspections by the Administrator, State
Director or their representatives are solely for the benefit of the
Government and do not relieve the lender or borrower of their obligation
to conduct project reviews and inspections.

\(III\) [Project Construction]{.underline}

\(A\) Borrower will not award contracts for the construction of any

project facilities unless and until:

\(1\) The borrower obtains applicable construction permits,

right-of-ways, licenses and approvals of Federal, State and local
authorities for the construction of such facilities.

\(2\) The State Director concurs in applicable plans,

specifications and contract documents. Standard contract documents
prescribed for use in Federally assisted projects may be used as a guide
for determining the minimum standards for contract acceptability. These
standard documents are contained in Guide 18 and 19 of Subpart A of Part
1942 of this Chapter (available in any Rural Development office).

\(B\) The borrower has the responsibility, without recourse to the

Government, for the settlement and satisfaction of all contractual and
administrative issues arising out of procurements. This includes, but is
not limited to, disputes, claims, protests of awards, or other matters
of a contractual nature. Matters concerning violation of laws are to be
referred to such local, State, or Federal authority as may have proper
jurisdiction.

\(C\) The borrower\'s attorney will review executed contract documents

including applicable performance and payment bonds and provide a
certificate to the borrower and lender that they have been properly
executed and that the persons executing these documents have been
properly authorized to do so.

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix D

Page 6

\(D\) In all contracts for construction or facility improvement

awarded in excess of \$100,000, the borrower will require bonds and a
bank letter of credit or cash deposit in escrow, assuring performance
and payment of 100 percent of the contract cost. The surety will
normally be in the form of performance and payment bonds. Such assurance
shall remain in full force and effect through any warranty period.
Companies providing performance and payment bonds must hold a
certificate of authority as an acceptable security on Federal bonds and
eligible for listing in Treasury circular 510 as amended and be legally
doing business in the state the project is located.

\(E\) Project Changes

Any change in the project which may affect collateral, its ultimate
financial viability or compliance with the conditional commitment must
have prior approval of the lender ana Rural Development.

\(1\) Construction contracts will require that change orders

receive prior approval from the lender when such changes:

\(a\) increase or decrease contract price

\(b\) materially modify contract provisions

\(c\) increase or decrease time of completion

\(d\) affect project performance

\(2\) All change orders will be recorded on a chronologically

numbered contract change order as they occur. Change orders will not be
included in payment estimates until approved by the borrower, project
engineer, the lender and concurred in by Rural Development.

\(F\) Warranty

\(1\) All major equipment must be guaranteed by the manufacturer

to be free from defects in workmanship and materials for a period of one
year after start-up of equipment.

\(2\) Equipment purchased by a construction contractor or design

builder and all other work shall be further warranted to be free from
defect in material and workmanship by the contractor or the design
builder for a period of one year after substantial completion of the
contract.

\(3\) Applicable provisions to this effect shall be included in

equipment purchase orders or construction contracts.

RD Instruction 1980-E

Appendix D

Page 7

(Revision 1)

\(G\) Lease Agreements

Where the right of use or control of any property or equipment not owned
by the borrower is essential to the successful operation of the project
during the life of the loan, such right will be evidenced by written
agreements or contracts between the owner(s) of the property or
equipment and the borrower. Lease agreements shall not contain
provisions for restricted use of the site or facility, forfeiture or
similar cancellation clauses and shall provide for the right to transfer
and lease without restriction. Such lease contracts or agreements shall
be approved by the lender and Rural Development.

\(IV\) [Project Control]{.underline}

\(A\) Lender will adopt project control procedures to assure that

loan funds are applied for costs or expenses properly attributable to
the project (\"Eligible Project Costs\") as proposed in the completed
application submitted by the lender and borrower and approved by the
Rural Development. A project monitoring account (\"Project Monitoring
Account\") will be developed by lender for this purpose and concurred in
by the State Director. This account will be divided into sufficient
budget categories to permit adequate control of expenditures and
identification of potential budget overruns.

\(B\) The first advance (\"First Advance\") of loan funds to the

borrower will not commence from the Project Monitoring Account prior to
lender\'s receipt of evidence that:

\(1\) The borrower has made adequate provisions for compliance

with measures established by Rural Development to mitigate adverse
historical and environmental impacts.

\(2\) Applicable engineering, design/build, construction

management, inspection and plant start-up service agreements have been
obtained and accepted by the State Director and lender.

\(3\) The project engineer has prepared a detailed cost estimate

and construction schedule for all facilities related to the project.
This estimate must indicate that the project can be completed with the
funds available as shown on the Form RD 449-1, \"Application for Loan
and Guarantee.\" A reasonable contingency amount will be included in the
estimate. This contingency shall be at least 20 percent of the estimated
project costs for which firm bids have

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix D

Page 8

(Revision 1)

not been received plus 5 percent of project costs for which firm bids
have been received. Construction interest and inspection costs will be
based upon a reasonable contingency for unforeseen delays in project
completion. The estimate shall include a listing with associated costs
of any proposed leasing arrangements for property or equipment that is
essential to the successful operation of the project. (Revised 6-27-84
PN 934.)

\(4\) All funds necessary for construction of project facilities

will be available when needed.

\(5\) The borrower has retained a project manager with

sufficient experience and training to supervise project construction and
engineering services on behalf of the borrower..

\(C\) After the first advance, future advances may be made from the

Project Monitoring Account, in accordance with prudent lender practice,
for all Eligible Project Costs established in the Project Monitoring
Account, provided these payments are made in accordance with the terms
of applicable contracts and are approved by the borrower and, when
applicable, recommended by the project engineer.

\(D\) Payments for Eligible Project Costs incurred by the borrower

prior to satisfaction of the conditions precedent to the first advance
shall be made with borrower\'s funds or other nonguaranteed loan funds
only. These payments, however, may be reimbursed through the Project
Monitoring Account as authorized by the State Director after compliance
with Paragraph (IV) (B) hereof. The lender will not advance and the
borrower will not be entitled to loan funds for reimbursement if such
costs or expenses incurred by the borrower prior to the first advance,
or at anytime thereafter, were for costs or expenses other than Eligible
Project Costs. Costs and expenses accruing from but not limited to,
interest charges imposed by construction, equipment, material or service
contracts, penalty payments, damage claims, awards or settlements are
not Eligible Project Costs unless specifically approved by the State
Director.

\(E\) The lender will monitor the progress of construction and

undertake the reviews and project inspections necessary to reasonably
assure that funds are paid for Eligible Project Costs and that problems
in project development are expeditiously reported to the State Director.

RD Instruction 1980-E

Appendix D

Page 9

\(F\) The lender will prepare a monthly report showing the

expenditures made from each budget category of the Project Monitoring
Account. This report will include a review of construction progress
including proposed and approved contract change orders and, to the
extent possible, identify problems or delays in construction or other
matters which might affect successful startup of project. This report
may be based upon information received from the project engineer and
borrower and/or independent observations of the lender. The report will
be initialed by the borrower and project engineer and submitted to the
State Director.

\(G\) Transfer of loan funds between established or new categories of

the Project Monitoring Account or any change in the total amount of
funds committed to the project will be reported by the lender to the
State Director as these changes occur.

## oOo

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix E

## [ENVIRONMENTAL ASSESSMENT GUIDELINES]{.underline}

In completing an assessment, it is important to understand the
comprehensive nature of the impacts which must be analyzed.
Consideration must be given to all potential impacts associated with the
construction of the project and its operation and maintenance. The
attainment of the project\'s major objectives often induces or supports
changes in population densities, land uses, community services,
transportation systems and resource consumption. The impacts of these
activities must also be assessed.

The environmental reviewer should consult with appropriate experts from
Federal, State and local agencies, universities and other organizations
or groups whose views could be helpful in the assessment of potential
impacts. In so doing, each discussion which is utilized in reaching a
conclusion with respect to the degree of an impact should be summarized
in the assessment as accurately as possible and include the name, title,
phone number, and organization of the individual contacted, plus the
date of contact. Related correspondence should be attached to the
assessment.

The Farmers Home Administration assessment should be prepared in the
following format; it should address the listed items and questions and
contain as attachments the indicated descriptive materials, as well as
the environmental information submitted by the applicant.

These assessment guidelines have been designed to cover the wide variety
of impacts which may be encountered. Consequently, not every issue or
potential impact raised in these guidelines may be relevant to each
project. The purpose of the format is to give the preparer an
understanding of a standard range of impacts, environmental factors and
issues which may be encountered. In preparing an assessment, each topic
heading identified by a roman numeral and each environmental factor
listed under topic heading IV, such as air quality for example, must be
addressed.

The amount of analysis and material that must be provided will depend
upon the type and size of the project, the environment in which it is
located and the range and complexity of the potential impacts. The
amount of analysis and detail provided, therefore, must be commensurate
with the magnitude of the expected impact. The analysis of each
environmental factor (i.e., water quality) must be taken to the point
that a conclusion can be reached and supported concerning the degree of
the expected impact with respect to that factor.

\(I\) Project Description and Need

Identify the name, project number, location, and specific elements of
the project along with their sizes, and, when applicable, their design
capacities. Indicate the purpose of the project, Rural Development\'s
position regarding the need for it, and the extent or area of land to be
considered as the project site.

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix E

Page 2

\(II\) Primary Beneficiaries and Related Activities

Identify any existing businesses or major developments that will benefit
from the project and those which will expand or locate in the area
because of the project. Specify by name, product, service, and
operations involved.

Identify any related activities which are defined as interdependent
parts of an Rural Development action. Such undertakings are considered
interdependent parts whenever they either make possible or support the
Rural Development action or are themselves induced or supported by the
Rural Development action or another related activity. These activities
may have been completed in the very recent past and are now operational
or they may reasonably be expected to be accomplished in the near
future. Related activities may or may not be Federally permitted or
assisted. When they are, identify the involved Federal agency(s).

In completing the remainder of the assessment, it must be remembered
that the impacts to be addressed are those which stem from the project,
the primary beneficiaries, and the related activities.

\(III\) Description of Project Area

Describe the project site and its present use. Describe the surrounding
land uses; indicate the directions and distances involved. The extent of
the surrounding land to be considered depends on the extent of the
impacts of the project, its related activities, and the primary
beneficiaries. Unique or sensitive areas must be pointed out. These
include residential, schools, hospitals, recreational, historical sites,
beaches, lakes, rivers, parks, floodplains, wetlands, dunes, estuaries,
barrier islands, natural landmarks, unstable soils, steep slopes,
aquifer recharge areas, important farmlands and forestlands, prime
rangelands, endangered species habitats, or other delicate or rare
ecosystems.

Attach adequate location maps of the project area, as well as (1) a U.S.
Geological Survey \"15 minute\" (\"7 1/2 minute\" if available)
topographic map which clearly delineates the area and the location of
the project elements, (2) the Department of Housing and Urban
Development\'s floodplain map(s) for the project area, (3) site photos,
(4) if completed, a standard soil survey for the project and, (5) if
available, an aerial photograph of the site. When necessary for
descriptive purposes or environmental analysis, include land use maps or
other graphic information. All graphic materials shall be of high
quality resolution.

\(IV\) Environmental Impact

\(1\) Air Quality - Discuss, in terms of the amounts and types of
emissions to be produced, all aspects of the project including
beneficiaries\' operations and known indirect effects (such as increased
motor vehicle traffic) which will affect air quality. Indicate the
existing air quality in the area. Indicate if topographical or
meteorological conditions hinder or affect the

RD Instruction 1980-E

Appendix E

Page 3

dispersals of air emissions. Evaluate the impact on air quality given
the types and amounts of projected emissions, the existing air quality,
and topographical and meteorological conditions. Discuss the project\'s
consistency with the State\'s air quality implementation plan for the
area, the classification of the air quality control region within which
the project is located, and the status of compliance with air quality
standards within that region. Cite any contacts with appropriate experts
and agencies which must issue necessary permits.

\(2\) Water Quality - Discuss, in terms of amounts and types of
effluents all aspects of the project, including primary beneficiaries\'
operations and known indirect effects which will affect water quality.
Indicate the existing water quality of surface and/or underground water
to be affected. Evaluate the impacts of the project on this existing
water quality. Indicate if an aquifer recharge area is to be adversely
affected. If the project lies within or will affect a sole source
aquifer recharge area as designated by the Environmental Protection
Agency (EPA), contact the appropriate EPA regional office to determine
if its review is necessary. If it is, attach the results of its review.

Indicate the source and available supply of raw water and the extent to
which the additional demand will affect the raw water supply. Describe
the wastewater treatment system(s) to be used and indicate their
capacity and their adequacy in terms of the degree of treatment
provided. Discuss the characteristics and uses of the receiving waters
for any sources of discharge. If the treatment systems are or will be
inadequate or overloaded, describe the steps being taken for necessary
improvements and their completion dates. Compare such dates to the
completion date of the Rural Development project. Analyze the impacts on
the receiving water during any estimated period of inadequate treatment.

Discuss the project\'s consistency with the water quality planning for
the area, such as EPA\'s Section 208 areawide waste treatment management
plan. Describe how surface runoff is to be handled and the effect of
erosion on streams.

Evaluate the extent to which the project may create shortages for or
otherwise adversely affect the withdrawal capabilities of other present
users of the raw water supply, particularly in terms of possible human
health, safety, or welfare problems.

For projects utilizing a groundwater supply, evaluate the potential for
the project to exceed the safe pumping rate for the aquifer to the
extent that it would (1) adversely affect the pumping capability of
present users, (2) increase the likelihood of brackish or saltwater
intrusion, thereby decreasing water quality, or (3) substantially
increase surface subsidence risks.

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix E

Page 4

For projects utilizing a surface water supply, evaluate the potential
for the project to (1) reduce flows below the minimum required for the
protection of fish and wildlife or (2) reduce water quality standards
below those established for the stream classification at the point of
withdrawal or the adjacent downstream section.

Cite contacts with appropriate experts and agencies that must issue
necessary permits.

\(3\) Solid Waste Management - Indicate all aspects of the project,
including primary beneficiaries\' operations, and known indirect effects
which will necessitate the disposal of solid wastes. Indicate the kinds
and expected quantities of solid wastes involved and the disposal
techniques to be used. Evaluate the adequacy of these techniques
especially in relationship to air and water quality. Indicate if
recycling or resource recovery programs are or will be used. Cite any
contacts with appropriate experts and agencies that must issue necessary
permits.

\(4\) Land Use - Given the description of land uses as previously
indicated, evaluate (a) the effect of changing the land use of the
project site and (b) how this change in land use will affect the
surrounding land uses and those within the project\'s area of
environmental impact. Particularly address the potential impacts to the
unique or sensitive areas discussed under Section III, Description of
Project Area. Also address any changes in land use which may result from
demand for feedstock for the plant\'s operation. Describe the existing
land use plan and zoning restrictions for the project area. Evaluate the
consistency of the project and its impacts with these plans.

\(5\) Transportation - Describe available facilities such as highways
and rail. Discuss whether the project will result in an increase in
motor vehicle traffic and the existing roads\' ability to safely
accommodate this increase. Indicate if additional traffic control
devices are to be installed. Describe new traffic patterns which will
arise because of the project. Discuss how these new traffic patterns
will affect the land uses described above, especially residential,
hospitals, schools, and recreational. Describe the consistency of the
project\'s transportation impacts with the transportation plans for the
area and any air quality control plans. Cite any contact with
appropriate experts.

\(6\) Natural Environment - Indicate all aspects of the project,
including construction, beneficiaries\' operations, and known indirect
effects which will affect the natural environment including wildlife,
their habitats, and unique natural features. Cite contacts with
appropriate experts. If an area listed on the National Registry of
Natural Landmarks may be affected, consult with the Department of
Interior and document these consultations and any agreements reached
regarding avoidance or mitigation of potential adverse impacts.

\(7\) Human Population - Indicate the number of people to be relocated
and arrangements being made for this relocation. Discuss how impacts
resulting from the project such as changes in land use, transportation
changes, air emissions, noise, odor, etc., will affect nearby residents
and their lifestyles or users of the project area and surrounding areas.
Cite contacts with appropriate experts.

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Page 5

\(8\) Construction - Indicate the potential effects of construction of
the project on air quality, water quality, noise levels, solid waste
disposal, soil erosion and siltation. Describe the measures that will be
employed to limit adverse effects. Give particular consideration to
erosion, stream siltation, and clearing operations.

\(9\) Energy Impacts - Indicate the project\'s and its primary
beneficiaries\' effects on the area\'s existing energy supplies. This
discussion should address not only the direct energy utilization, but
any major indirect utilization resulting from the siting of the project.
Describe the availability of these supplies to the project site. Discuss
whether the project will utilize a large share of the remaining capacity
of an energy supply or will create a shortage of such supply. Discuss
any steps to be taken to conserve energy.

\(10\) Discuss any of the following areas which may be relevant: noise,
vibrations, safety, seismic conditions, fire prone locations, radiation,
and aesthetic considerations. Cite any discussions with appropriate
experts.

\(V\) Coastal Zone Management Act

Indicate if the project is within or will impact a coastal area defined
as such by the state\'s approved Coastal Zone Management Program. If so,
consult with the State agency responsible for the Program to determine
the project\'s consistency with it. The results of this coordination
shall be included in the assessment and considered in completing the
environmental impact determination and environmental findings.

\(VI\) Compliance with Advisory Council on Historic Preservation\'s
Regulations

In this section, the environmental reviewer shall detail the steps taken
to comply with the above regulations as specified in Subpart F of Part
1901 of this Chapter. First, indicate that the National Register of
Historic Places, including its monthly supplements, has been reviewed
and whether there are any listed properties located within the area to
be affected by the project. Second, indicate the steps taken such as
historical/archaeological surveys to determine if there are any
properties eligible for listing located within the affected area.
Summarize the results of the consultation with the State Historic
Preservation Officer (SHPO) and attach appropriate documentation of the
SHPO\'s views. Discuss the views of any other experts contacted. Based
upon the above review process and the views of the SHPO, state whether
or not an eligible or listed property will be affected.

If there will be an effect, discuss all of the steps and protective
measures taken to complete the Advisory Council\'s regulations. Describe
the affected property and the nature of the effect. Attach to the
assessment the results of the coordination process with the Advisory
Council on Historic Preservation.

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix E

Page 6

\(VII\) Compliance with the Wild and Scenic Rivers Act

Indicate whether the project will affect a river or portion of it which
is either included in the National Wild and Scenic Rivers System or
designated for potential addition to the System. This analysis shall be
conducted through discussions with the appropriate regional office of
the National Park Service or the Forest Service when its lands are
involved, as well as the appropriate State agencies having
implementation authorities. A summary of discussions held or any
required formal coordination shall be included in the assessment.

\(VIII\) Compliance with the Endangered Species Act.

Indicate whether the project will either (1) affect a listed endangered
or threatened species or critical habitat or (2) adversely affect a
proposed critical habitat for an endangered or threatened species or
jeopardize the continued existence of a proposed endangered or
threatened species. This analysis shall be conducted in consultation
with the Fish and Wildlife Service and the National Marine Fisheries
Service, when appropriate.

The results of any required coordination shall be included in the
assessment along with any completed biological opinion and mitigation
measures to be required for the project. These factors shall be
considered in completing the environmental impact determination.

\(IX\) Compliance with Executive Order 11988, Floodplain Management, and
Executive Order 11990, Protection of Wetlands.

Indicate whether the project is either located within a 100-year
floodplain (500-year floodplain for a critical action) or a wetland or
will impact a floodplain or wetland. If so, determine if there is a
practicable alternative project or location. If there is no such
alternative, determine whether all practicable mitigation measures are
included in the project and document as an attachment these
determinations and the steps taken to inform the public, locate
alternatives, and mitigate potential adverse impacts. See the U.S. Water
Resources Council\'s [Floodplain Management Guidelines]{.underline} for
more specific guidance.

\(X\) State Environmental Policy Act

Indicate if the proposed project is subject to a State environmental
policy act or similar regulation. Summarize the results of compliance
with these requirements and attach available documentation.

\(XI\) Consultation Requirements

Attach the comments of any State or local agency received through the
implementation of Executive Order 12372, Intergovernmental Review of
Federal Programs.

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(XII). Environmental Analysis of Participating Federal Agency

Indicate if another federal agency is participating in the project
either through the provision of additional funds, a companion project,
or a permit review authority. Summarize the results of the involved
agency\'s environmental impact analysis and attach available
documentation.

(XIII). Reaction to Project

Discuss any negative comments or public views raised about the project
and the consideration given to these comments. Indicate whether a public
hearing or public information meeting has been held either by the
applicant or Rural Development to include a summary of the results and
any objections raised. Indicate any other examples of the community\'s
awareness of the project, such as newspaper articles or public
notifications.

(XIV). Cumulative Impacts

Summarize the cumulative impacts of this project and the related
activities. Give particular attention to land use changes and air and
water quality impacts. Summarize the results of the environmental impact
analysis done for any of these related activities and/or your discussion
with the sponsoring agencies. Attach available documentation of the
analysis.

(XV). Adverse Impact

Summarize the potential adverse impacts of the proposal as pointed out
in the above analysis.

(XVI). Alternatives

Discuss the feasibility of alternatives to the project and their
environmental impacts. These alternatives should include (a) alternative
location, (b) alternative designs, (c) alternative projects having
similar benefits, and (d) no project.

(XVII). Mitigation Measures

Describe any measures which will be taken or required by Rural
Development to avoid or mitigate the identified adverse impacts. Such
measures shall be included as special requirements or provisions to the
offer of financial assistance.

## oOo

(7-1-83) SPECIAL PN

RD Instruction 1980-E

Appendix G

## [LIQUIDATION AND PROPERTY MANAGEMENT GUIDE]{.underline}

## Table of Contents

Page

I. Purpose 1

II\. Lenders in General 1

III\. Involving OGC 2

IV\. When to Liquidate and the Action Necessary to Properly 4

Classify a Loan as Being in Liquidation

V. Phasedown of Borrower\'s Operation 4

VI\. Do\'s and Don\'t\'s in Liquidation 5

VII\. Liquidation Plan 7

VIII\. Reviewing the Lender\'s Liquidation Plan 11

IX\. Risk Factors Associated with Rural Development Guaranteed Loans 13

X. Collateral Evaluation in Liquidation 16

XI\. Appraisal Reports 19

XII\. Different Options Open in Liquidation 20

XIII\. Protective Bids 28

XIV\. Methods of Disposition of Acquired Collateral by the Lender 31

XV\. Guarantors 35

XVI\. Compromise Settlement 36

XVII\. Liquidation Expenses 37

XVIII\. Protective Advances 38

XIX\. Bankruptcies 39

XX\. Negligent Servicing 41

XXI\. Fraud or Misrepresentation 42

XXII\. Final Report of Loss 44

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## [Liquidation and Property Management Guide]{.underline}

I [Purpose]{.underline}

\(a\) The Liquidation and Property Management Guide is designed to help
Farmers Home Administration (Rural Development) personnel better
understand the Rural Development regulations and procedures when faced
with liquidations.

\(b\) While the lenders have the primary responsibility for the
liquidation of the loans and protecting the collateral property in
liquidation, Rural Development\'s responsibility is assuring that the
lenders fully comply with the Rural Development regulations.

\(c\) Because not all lenders are experienced in handling a liquidation
on a Rural Development guaranteed loan, Rural Development personnel must
closely follow the liquidation of the loans. The primary concern is no
longer rural development but maximizing the recovery on the loan in the
minimum amount of time.

\(d\) This Guide is intended to assist the Rural Development official
responsible for the guarantee in making decisions during the course of
liquidation of Business and Industrial (B&I) loans. The guide contains
basic, practical information in handling liquidation cases.
Additionally, it is an outline to address the general issues normally
encountered in B&I liquidations and is not intended to address every
circumstance that may occur in liquidations.

II [Lenders in General]{.underline}

\(a\) There is a reluctance on the part of lenders to make loans secured
by industrial property because the specialized use limitations makes it
poor collateral for a loan. The B&I loan guarantees are secured by such
collateral and the borrowers are located in rural areas.

\(b\) When the borrower is not successful in its operations and the
collateral must be foreclosed, there is usually a limited list of
prospective purchasers willing to venture into business in a rural area.
Consequently, limited prospective purchasers, specialized collateral,
and the fact that the collateral is located in a rural area makes it
difficult to sell.

\(c\) While collateral should not be the consideration in judging the
quality of a loan, some real credit factors in judging a loan are the
quality of the borrower and its management and market. It is important
that proper and adequate collateral be required when making the loan.
Collateral is accepted on a loan only for the purpose of securing the
loan amount in case of liquidation.

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\(d\) Because not all lenders are experienced in handling liquidation of
varied business loans, the lender\'s liquidation capabilities should be
analyzed. The more experienced the lender, the fewer problems one will
normally have in liquidation. The inexperienced lender must be closely
guided and the liquidation of the loan closely followed. The primary
concern is no longer rural development, but maximizing the recovery on
the loan in the least amount of time.

\(e\) One of the primary functions of B&I is the monitoring of the
lender\'s servicing and liquidation activities in order to assure that
servicing, as required by Form RD 449-35, \"Lender\'s Agreement,\" and
Rural Development regulations, is carried out in such a manner that the
best interests of the Government are served. However, the lender should
not be told how to function with the borrower. The lender makes
recommendations and Rural Development evaluates the request(s) and the
lender\'s recommendations. The lender has total responsibility for
servicing the loan.

\(f\) Prompt action by the lender is essential once the decision has
been made by the lender and concurred with by Rural Development to
liquidate the collateral. Liquidation is a business operation and should
be handled as such.

\(g\) The importance of maintaining a good relationship with the lender
during the life of the loan is of great importance because once
liquidation starts Rural Development will likely receive better
cooperation during the liquidation.

\(h\) Any contacts with the borrower should also be on a friendly basis.
Less than 15 percent of the borrowers ever reach a liquidation status.
Keep in mind that the borrowers that have failed have given it their
best effort, lost their investment, and may find it hard to earn a
living in the community.

\(i\) Most of these failed borrowers as well as the lenders are honest
and want to cooperate and assist in closing out the case. Rural
Development officials should expect this attitude and should not take a
negative stance with the involved parties. Rural Development personnel
can help by being reasonable and cooperating fully with these parties
while keeping in mind that their main function is protecting the
government\'s interest.

III [Involving the Office of General Counsel (OGC)]{.underline}.

\(a\) The Regional Attorney must become involved on all workout and
liquidation loans. The [GENERAL ADMINISTRATIVE]{.underline} section
requires OGC involvement. From experience, the Regional Attorneys have
been most cooperative and willing to review such cases. However, do not
expect the Regional Attorneys to make the administrative decisions that
are necessary on these loans.

\(b\) In order to assist the Regional Attorney in the review of a
liquidation case, a memorandum addressed to the Regional Attorney should
be prepared by the State Director giving a narrative history of the loan

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along with a full explanation of the facts and setting forth clearly and
concisely what the Regional Attorney is being requested to review. If
the Regional Attorney is properly informed of all the facts, a correct
and expeditious reply will be obtained. Otherwise, correspondence and
telephone calls may continue between the involved parties to obtain the
necessary information; thereby, causing delays in the liquidation which
could increase Rural Development\'s loss on the loan.

\(c\) The memorandum to the Regional Attorney should address the
following along with sufficient facts and evidence to sustain Rural
Development\'s position:

\(1\) Each issue should be fully addressed.

\(2\) Reasons for each decision reached.

\(3\) Support each reason by citing to the appropriate regulation.

\(4\) Supply the necessary facts and evidence that relate to each
decision.

\(5\) Explain any facts or evidence which would tend to undermine the
decision or position.

\(6\) The action recommended by Rural Development and why Rural
Development wants to take this action. Where several alternatives
suggest themselves, explain why Rural Development prefers one
alternative to another.

\(d\) When involved in liquidation, lenders turn to their lawyers for
advice and assistance. Rural Development should turn to OGC. Do not get
into a situation where wrong information has been given to the lender
and based on this information, certain decisions have been made which
must be reversed. Involve the Regional Attorney at the beginning of any
liquidation case and seek legal advice during the course of liquidation
on issues that cannot be resolved as administrative decisions.

\(e\) All servicing actions in connection with liquidations that are
sent to the National Office for review which involve legal issues must
have the Regional Attorney\'s comments as part of the submitted
material.

\(f\) The OGC opinions and memoranda will never be given to persons
outside the Agency. Nor will non-Rural Development personnel be allowed
to see or discuss these opinions. The use of OGC does not relieve Rural
Development personnel of their administrative responsibility to assure
compliance with the Rural Development regulations. OGC renders advice,
any decision is, in the last analysis, Rural Development\'s.

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IV [When to Liquidate and the Action Necessary to Properly Classify a
Loan as Being in Liquidation]{.underline}

\(a\) It is time to consider liquidation when the lender has exhausted
all reasonable alternatives to collect the debt and efforts short of
liquidation having been made to resolve the problem are unsuccessful.
The lender and Rural Development should agree that the borrower cannot
or will not repay the debt or conclude that it is no longer reasonable
to assume that the borrower can succeed.

\(b\) There are certain other actions that could cause the lender and
Rural Development to place a loan in liquidation. These actions may
arise when the lender\'s and/or Rural Development\'s interest in the
collateral securing the debt is in jeopardy. Examples of such action may
be prior lienholders of the collateral securing the Rural Development
guaranteed debt taking foreclosure action against the respective
borrower; bankruptcy actions; abandonment of the collateral by the
borrower; and default on the loan agreement and/or other conditions.

\(c\) [Rural Development does not consider a loan in liquidation until
the loan has been accelerated and demand has been made by the lender for
payment of the loan balance in full plus any accrued interest and
expenses]{.underline}. All obligors must be included in this action.
Otherwise, improper notification could delay liquidation and result in
serious legal consequences which could cause potential additional losses
to Rural Development. Liquidation status can be changed by subsequent
events, e.g., Chapter 11 reorganization in which event the loan is no
longer being liquidated.

\(d\) After receiving the demand letter the borrower knows that the
lender means business and unless payment is made in full as instructed,
liquidation of the collateral will take place. This is not to say that
the lender should not work with the borrower to resolve the issue.
However, unless meaningful proposals are presented, Rural Development
expects liquidation to proceed as soon as practicable.

\(e\) If the borrower files under Chapter 11 bankruptcy reorganization,
before or after liquidation begins, there is no liquidation of the
borrower in effect and therefore, the letter is not required to file a
liquidation plan. Once the lender is in the position to liquidate the
collateral, a liquidation plan is required by the lender.

V [Phasedown of Borrower\'s Operation]{.underline}

\(a\) In some B&I loan guarantee cases the lender may be able to employ
a technique known as operational phasedown rather than put the borrower
in liquidation. Operational phasedown is getting the borrower out of its
operation with a full payoff on the guaranteed loan plus expenses
through a plan agreed upon by all interested parties.

RD Instruction 1980-E

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\(b\) Before submitting such a plan, the lender must fully understand
the borrower\'s operations, have reliable current financial information
and the full cooperation of the borrower and all creditors.

\(c\) If accounts receivable and inventory are part of the collateral,
the accounts receivable can be collected and the inventory sold through
the borrower\'s customers. If the customer base has been lost, it may be
that the supplier would be willing to take back the inventory at a
discounted price.

\(d\) If money is owed to the supplier on the inventory that is returned
to the supplier, the supplier would very likely pay the debt owed by the
borrower, to itself instead of paying the lender. Another alternative
would be not to permit the lender to return the merchandise but instead
sell the collateral for the best offer, to a disinterested party. The
object, of course, is to maximize the return on the sale of the assets.

\(e\) The phasedown plan may include continued operations of the
borrower for a period of time in order to move the inventory and/or
complete work in process to finished goods.

\(f\) Be sure that the borrower\'s principals\' compensation (salary,
bonus, withdrawals, etc.) during this time does not increase.
Consideration should be given to decreasing the principals\'
compensation based on any extenuating circumstances that may be
encountered during the phasedown of the operation.

\(g\) In the process of continued operations, the plan may call for the
borrower to begin selling portions of the business, machinery,
equipment, and reduce the payroll.

\(h\) After the sale of all assets, the borrower will make a settlement
with the creditors as called for in the phasedown plan.

\(i\) If payment in full is not expected and it is advantageous for the
lender and Rural Development to involve the borrower in the liquidation
of the collateral, consider the option, \"Private Sale of the Collateral
by the Borrower\" explained later in this appendix.

VI [Do\'s and Don\'t\'s in Liquidation]{.underline}

\(a\) Listed below are a few basic reminders for Rural Development
officials confronted with liquidations:

\(1\) [Do\'s]{.underline}

\(i\) Keep Rural Development\'s interests paramount. Throughout the
liquidation process, never lose sight of the fact that the loan
officer\'s primary responsibility is to protect Rural Development\'s
interests.

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\(ii\) Encourage the lender to take strong steps to prevent the theft,
surreptitious sale, or disposal of machinery and equipment. Such
expenditures as are necessary in this area possibly may be imputed to
protective advances or liquidation expenses.

\(iii\) Act promptly to make sure the lender obtains a complete
inventory of all machinery and equipment and makes sure that all items
are tagged and identified.

\(iv\) Insist upon a complete accounting from the lender of the disposal
of all items listed in this inventory and such collateral as accounts
receivable, recoveries from guarantors etc.

\(v\) Remember that an operating business is always more attractive to
prospective buyers than one which has ceased operations. Make sure that
the lender makes every possible effort to help find a buyer for a
business before its doors are officially closed.

\(vi\) Make sure the lender is prepared to assist the borrower to
identify possible buyers of specialized (e.g., electronic) equipment. In
many instances, trade associations can help identify potential buyers.

\(vii\) Be aware of State and local laws pertaining to liquidations.
What are the attitudes of the local courts toward liquidation?

\(viii\) If property used as loan collateral is to be sold at auction,
make sure that someone from Rural Development attends.

\(ix\) Ask the lender to provide a list of all collateral (especially
machinery and equipment) on hand at the time the liquidation plan is
submitted. This list will often differ somewhat form earlier lists, due
to maintenance and replacement of some items. However, it is important
to have a complete, written list of all items in existence at the time
of liquidation.

\(x\) Prepare a written memorandum to explain what Rural Development
would do differently if it had the opportunity to do the project again.
The experience and the memorandum will be useful in servicing other
cases.

\(2\) [Don\'t\'s]{.underline}

\(i\) Don\'t release the liquidation appraisal to the borrower,
prospective bidders, or anyone else. Note any action by the lender in
this regard as it may be negligent servicing. (Failure to protect the
collateral during foreclosure)

RD Instruction 1980-E

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\(ii\) Don\'t release information about the amount of the protective
bid. Note any action by the lender in this regard as it may also be
negligent servicing. (Failure to protect the collateral during
foreclosure.)

\(iii\) Don\'t be reluctant to call the Regional Attorney and National
Office for advice.

\(iv\) Don\'t take for granted the lender\'s evaluation of the
collateral when the lender is negotiating a private sale. An independent
appraisal will usually be required by the regulations.

\(v\) Don\'t allow the lender to schedule a liquidation sale for a time
when it would be difficult for prospective buyers to attend. Weekends
may be the best time for liquidation sales, in certain industries.

\(vi\) Don\'t hesitate to notify OGC and the National Office if there is
any indication that the lender is not fulfilling its contract (Lender\'s
Agreement and other regulations) with Rural Development. Let it be known
to the lender and the National Office when suspecting this is the case.
Don\'t wait.

\(vii\) Don\'t forget to keep a thorough record of everything that
happens in connection with a liquidation. Remember auditors reviewing
the loan file several years hence won\'t know why Rural Development took
certain actions unless a detailed written record of the events as they
happened is kept.

\(viii\) Don\'t make decisions for the lender regarding actions which
are the responsibility of the lender. Rural Development\'s role is one
of concurrence. The lender should be amenable to Rural Development\'s
concerns because the goal of both parties is to maximize recovery.

VII [Liquidation Plan]{.underline}

\(a\) As soon as the lender, with Rural Development concurrence, has
made the decision to liquidate the loan, the lender should begin
preparing the liquidation plan. Within delegated authorities the State
Director may approve a written partial liquidation plan submitted by the
lender covering collateral that must be immediately protected or cared
for in order to preserve or maintain its value. Approval of the partial
liquidation plan must be in the best interest of the Government. The
approved partial liquidation plan is only good for those actions
necessary to immediately preserve and protect the collateral and must be
followed promptly by a complete liquidation plan prepared by the lender
in accordance with the requirements of paragraph XI A of Form RD 449-35.
The lender has 30 days in which

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to submit the liquidation plan as set forth in the Form RD 449-35,
Section XI, Liquidations. A guide as to what should be covered in the
liquidation plan is shown in paragraph VII (b) of this Appendix. Bear in
mind that liquidations vary from area to area and case to case. This
guide should not be construed to cover all the material that may be
necessary to fit a particular liquidation case.

\(b\) It is strongly recommended that a visit be made to the lender at
the time liquidation is considered to discuss the liquidation of the
loan. Paragraph XI of the lender\'s Agreement requires a meeting between
the lender and Rural Development. Ordinarily, a discussion of the
structure of the lender\'s tentative plan of liquidation will help the
lender to prepare a complete liquidation plan for submission to Rural
Development. If the lender submits a complete liquidation plan, Rural
Development response time to the liquidation plan can be expedited; thus
speeding the liquidation of the loan.

\(c\) Additionally, at the time of the meeting, the lender\'s questions
should be answered in order for the lender to fully understand what is
expected of the lender during the liquidation. At the same time, the
Rural Development loan officer gains valuable knowledge regarding the
case.

\(d\) During the meeting with the lender, §1980.64(c) should be
discussed with the lender. This provision of the Rural Development
Regulation allows the lender a settlement option under the loan note
guarantee. The provision states \"If a lender acquires title to property
either through voluntary conveyance or foreclosure proceeding, Rural
Development may elect to permit the lender the option to calculate the
final loss settlement using the net proceeds received at the time of
ultimate disposition of such property.\" This option would allow the
lender to sell the property after bidding it in at foreclosure before a
Final Report of Loss is submitted. The lender must submit its written
request for this option to Rural Development, and Rural Development must
agree, prior to the lender submitting any request for an estimated loan
payment.\"

\(e\) If the lender submits a written request to Rural Development
asking Rural Development to delay calculation of final loss until the
lender finally disposes of the collateral out of its inventory, pursuant
to the §1980.64(c) option above Rural Development, at its option, may
accede to the request. Any loss paid by Rural Development would be based
on the sales price obtained at the time the lender sold the collateral
out of its inventory. (Paragraph XI. E. of the Lender\'s Agreement) Loss
occasioned by accruing interest will be covered to the extent of the
guarantee to the date of final settlement when the liquidation is
conducted by the lender provided it proceeds expeditiously with the
liquidation plan approved by Rural Development. (Paragraph XI F. of the
Lender\'s Agreement).

\(f\) The final loss could not be paid until all of the collateral,
including any guarantees (§1980.443 (b)), if applicable, was liquidated
or settled.

RD Instruction 1980-E

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\(g\) If the lender does not wish to extend the time for the loss claim
to the point of ultimate disposition of the collateral (except for
personal and corporate guarantees). any loss covered under the guarantee
would be based on the collateral\'s value at the time the lender
obtained title through the foreclosure method or a voluntary conveyance
of the collateral by the borrower.

\(h\) No final loss can be paid until any personal and/or corporate
guarantees have been liquidated or settled.

\(i\) At the time of the meeting, an estimated date for submission of
the complete liquidation plan should be agreed upon between Rural
Development and the lender. Hopefully submission of the liquidation plan
can be expedited by the lender as a result of the meeting since the
lender is now aware of its responsibilities. It is likely that the
lender could have the complete liquidation plan (exception - appraisal)
to Rural Development within 10 days.

\(j\) Priority should be given to the liquidation plan when received by
Rural Development. Rural Development should respond to the liquidation
plan as quickly as possible. Remember, for each day\'s reduction in the
liquidation of the loan, Rural Development\'s potential loss exposure is
reduced. Rural Development expects liquidation of the loan to maximize
collections in the minimum amount of time.

\(k\) The liquidation plan must be in writing and (Paragraph XI of the
Lender\'s Agreement) should include, but not be limited to:

\(1\) Loan position on the collateral held by the lender.

\(2\) Such proof as Rural Development requires to establish ownership of
the guaranteed loan promissory note(s) and related security instruments.
Also, a copy of the payment ledger should be included which should
reflect the current loan balance and accrued interest to date and the
method or basis of computing the interest.

\(3\) A full and complete listing of all collateral including any
personal and/or corporate guarantees and current financial information
on the guarantors.

\(4\) A copy of the demand letter sent to the borrower accelerating the
loan balance. The lender should give the borrower the minimum time
allowable to pay the balance in full on the loan. The chances of the
borrower paying the loan in full are practically nil and any additional
time over and above what is required by the respective State laws would
not be in the best interests of the lender or Rural Development.

\(5\) Copies of the borrower\'s latest available financial statements.

\(6\) The recommended plan of action on the best liquidation methods and
the justification for such action.

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\(7\) Recommended action on acquiring and disposing of all collateral.

\(8\) Recommended action to be taken on the guarantor(s) of the loan.

\(9\) Necessary steps for preservation of the collateral.

\(10\) A list of the estimated liquidation expenses expected to be
incurred and the justification for each expense. Each expense item
should specify what it covers and the estimated amount. It should be
emphasized that attorney\'s services are to be concerned with those
issues in liquidation proceedings with a strictly legal nature. In-house
administrative expenses incurred by the lender such as travel to and
from the borrower\'s business, telephone calls, typing and internal
secretarial services, related bank personnel salaries and wages,
accounting and all other miscellaneous expenses are not reimbursable
liquidation expenses. (Paragraph XII. I. of the Lender\'s Agreement)

\(11\) Establishment of a schedule to periodically report to Rural
Development on the progress of liquidation.

\(12\) Protective advance amounts that may be necessary and the
justification for the protective advance. Protective advances can only
be claimed on the Final Report of Loss. (Paragraph XI E. 6 of the
Lender\'s Agreement.)

\(13\) Protective bid amounts on the collateral to be sold and a
breakdown of how the amount(s) were determined (if collateral is
scheduled to be sold at public auction).

\(14\) If a voluntary conveyance of the collateral is considered, the
lender, with Rural Development\'s concurrence, must determine the amount
to be credited to the guaranteed debt. It is necessary to determine the
amount to be credited to the guaranteed debt because any deficiency
between the guaranteed debt and the amount credited to that debt is a
liability of the guarantor(s) which must be settled before establishing
any final loss.

\(15\) Legal opinions, if necessary, to justify recommended liquidation
methods, acquisition and preservation of the collateral.

\(16\) Appraisal of the collateral. If the current principal balance,
including accrued interest, is less than \$200,000, the lender should
provide an estimate of the current market and potential liquidation
value of the collateral. If the current principal loan balance,
including accrued interest, is in excess of \$200,000, the lender will
obtain an independent appraisal as required by the regulations on all
collateral which should reflect the current market value and the
[potential liquidation value]{.underline}. The appraisal report is very
important and is utilized to determine the current market liquidation

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value, the appropriate liquidation action and, if necessary, to
determine a proper protective bid price for a public auction sale. The
fee for the appraisal is shared equally between the lender and Rural
Development. (Paragraph XI. A. 4 of the Lender\'s Agreement.)

VIII [Reviewing the Lender\'s Liquidation Plan]{.underline}

\(a\) After receiving the liquidation plan from the lender, Rural
Development must carefully review the plan and all records. Rural
Development should review the following items and take appropriate
action, if necessary, to protect Rural Development\'s interests:

\(1\) Begin the review at the loan disbursement date:

\(i\) Was the loan disbursement proper and in accordance with Form RD
449-14, \"Conditional Commitment for Guarantee\" and/or 449-1,
\"Application for Loan and Guarantee?\"

\(ii\) Were the conditions of the conditional commitment met?

\(iii\) What is the collateral position and the type of collateral,
including guarantors? Were the agreed upon lien priorities obtained?

\(iv\) Was the loan properly closed? Were the loan disbursements proper?
Can the lender confirm that they were?

\(2\) From closing of the loan to date, was the lender\'s servicing
satisfactory?

\(i\) Were proper visits made by the lender to the borrower\'s place of
business?

\(ii\) Was the loan agreement complied with by all parties?

\(iii\) Did the lender make routine checks of the collateral and
properly account for same?

\(iv\) Review all correspondence in the file for any servicing actions
that took place which could affect the loan.

\(v\) Were there servicing actions which were not taken which a
reasonable prudent lender would have taken?

\(3\) If applicable, look at the guarantor\'s financial statement at
loan closing and compare to the current financial statement obtained at
liquidation. Were all assets listed at loan closing accounted for on the
financial statement given at liquidation? If not accounted for, what
happened to the assets? Was any transfer of assets made to avoid legal
attachment by the lender for the guaranteed loan?

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\(4\) Are the lien positions and collateral properly stated as compared
to loan closing documents and the conditional commitment? Review the
legal documents and UCC filings for proper documentation (lien position)
of the collateral and all legal matters. Check with the Regional
Attorney if you have questions on perfection of security interests.

\(5\) Compare the current appraisals to appraisals made at the time of
loan closing. Do amounts correspond? If not, obtain a satisfactory
explanation from the lender for any large differences.

\(6\) Does the liquidation plan submitted by the lender properly address
liquidation of the collateral from start to final disposition of the
collateral? Are all areas satisfactorily covered by the lender in the
liquidation plan?

\(b\) If there are any subsequent changes in the liquidation plan
originally agreed upon by the lender and Rural Development, the lender
should inform Rural Development in writing of the changes. Rural
Development should review the modification plan and inform the lender in
writing as to its position on the proposed changes made in the
liquidation plan.

\(c\) If for some reason Rural Development cannot concur in the
liquidation plan, negotiations should take place between the lender and
Rural Development to resolve the disagreement. The lender will
ordinarily conduct the liquidation; however, should Rural Development
opt to conduct the liquidation, Rural Development will proceed as
follows:

\(1\) The lender will transfer to Rural Development all rights and
interests necessary to allow Rural Development to liquidate the loan.
(Paragraph XIX. 8. 1 of the Lender\'s Agreement.) In this event, the
lender will not be paid for any loss until after the collateral is
liquidated and the final loss is determined by Rural Development.
(Paragraph XI. E.5. and E.2. of the Lender\'s Agreement.)

\(2\) Rural Development will attempt to obtain the maximum amount of
proceeds from liquidation. (Paragraph XI. B.2. of the Lender\'s
Agreement.)

\(3\) Options available to Rural Development include any one or
combination of the usual commercial methods of liquidation. (Paragraph
XI. B.3. of the Lender\'s Agreement.)

\(4\) Rural Development will proceed as expeditiously as possible when
acceleration of the indebtedness is necessary, including giving any
notices and taking any other legal actions required by the security
instruments. A copy of the acceleration notice will be sent to the
lender. (Paragraph XI. C. of the Lender\'s Agreement.)

\(5\) Rural Development will account for all funds during liquidation
(Paragraph XII. E.5 of the Lender\'s Agreement) and provide periodic
reports to the lender. (Paragraph XI. D of the Lender\'s Agreement.)

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\(6\) Rural Development will provide an accounting and Form RD 449-30,
\"Report of Loss\" to the lender and will pay the lender in accordance
with the Form RD 449-34, \"Loan Note Guarantee.\"

\(7\) Reasonable liquidation expenses will be allowed Rural Development
in its liquidation. (Paragraph XI. I. of the Lender\'s Agreement.)

\(d\) Rural Development [will not]{.underline}, unless unusual
circumstances prevail, conduct the liquidation of the loan. Before any
decisions are reached as to whether Rural Development should handle the
liquidation, the concurrence of the National Office must be obtained.

\(e\) If the guaranteed portion of the loan is being held in the
secondary market and the holder has made no request for either Rural
Development or the lender to repurchase, and the loan is in liquidation,
the lender should repurchase the guaranteed portion of the loan to
adequately service the loan. The lender will not repurchase from the
holder(s) for arbitrage purposes or other purposes to further its own
financial gain. Any repurchase will only be made after the lender
obtains Rural Development\'s written approval. If the lender does not
repurchase the guaranteed portion from the holder(s), Rural Development
will purchase such guaranteed portions. (Paragraph 10 of the Loan Note
Guarantee.)

\(f\) The lender must establish reasonable control of the collateral in
any liquidation case. This is true even if voluntary liquidation by the
borrower is considered. The only difference would be the type of control
initiated by the lender. The lender will be expected to account for all
collateral; therefore, the controls necessary to perform in this fashion
are left to the lender. The lender should initiate control to determine
the collateral on hand, location, and keep track of any sale of
collateral. Protection against pilferage would be expected of a
reasonable and prudent lender.

IX [Risk Factors Associated with Rural Development Guaranteed
Loans]{.underline}.

\(a\) Guaranteed loans in liquidation contain certain built-in risks to
Rural Development. These risks create potentially greater loss exposure
than are normally prevalent when lenders handle unguaranteed loan
liquidations in their portfolio. The increased risk factors are:

\(1\) Time restraints.

\(2\) Interest accruals.

\(3\) Dependency upon the lender to handle the liquidation.

\(4\) Deterioration of the collateral.

\(5\) Additional expenses.

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\(b\) As stated in paragraph VII of this Appendix, the lender must
submit a proper liquidation plan to Rural Development within 30 days
after the lender and Rural Development agree that liquidation is proper
and necessary. Rural Development has 30 days to respond to the
liquidation plan. In some cases, 60 days or more elapse before any real
action is taken by the lender on the liquidation of the loan. During
this 60-day period, insurance, taxes and other expenses may accrue.
Additionally, the collateral securing the loan may be deteriorating.

\(c\) During this 60-day period, the lender continues to accrue interest
within the terms of the Loan Note Guarantee at the promissory note rate.
This is permissible under the Rural Development regulations. (Paragraph
XI. F. of the Lender\'s Agreement.)

\(d\) If the lender has an attractive interest rate and holds the
guaranteed loan portion, the lender may not pursue the liquidation of
the loan as vigorously as an unguaranteed loan in its own portfolio
especially if the lender has pressing problems on one or more of its
other loans. Any delay in liquidating the collateral increases Rural
Development\'s loss exposure; therefore, it is important that the lender
move as quickly as reasonably possible to liquidate the collateral.
Rural Development personnel short on time should show preference on any
liquidation case as opposed to loan making or servicing of non-problem
cases and keep the liquidation of the loan expeditiously moving to a
conclusion. The following is an illustration reflecting potential
expenses caused by Rural Development requirements that the lender might
avoid if it was handling the loan and the loan was unguaranteed:

\(f\) Example: A \$1,500,000 original Rural Development 90 percent
guaranteed loan held by the lender reduced to a balance of \$1.200,000
at a 15 percent interest rate at the time of liquidation. Additional
risk factors to Rural Development as explained above reflect:

\$30,000 Interest at 15 percent per annum on

\$1,200,000 for 60 days (30 days for lender to submit a liquidation plan
and 30 days for Rural Development to respond).

\$ 1,667 Insurance for two months based on a \$10,000

annual insurance premium.

\$ 5,000 Taxes for two months on real estate

collateral based on a \$30,000 annual tax bill.

\$12,000 Heat, electricity, water and guard services

for two months assuming that the borrower walked away from the property.

RD Instruction 1980-E

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unknown Collateral deterioration and/or possible

loss of ideal market conditions in selling the collateral if there is
any delay in liquidation.

\$48,667 Total

\_\_\_\_\_x\_\_90%\_ Rural Development Guarantee

\$43,800 Rural Development\'s loss exposure for the 60-day

period.

\(g\) Based on this illustration, Rural Development\'s additional risk
exposure is \$730 daily for the 60 day period allowable under the Rural
Development regulations for the lender to submit a liquidation plan and
for Rural Development to address the plan. Any additional delay by
either the lender and/or Rural Development further increases the loss
exposure.

\(h\) Although \$43,800 may not seem to be a large exposure on Rural
Development\'s part, consider the number of loans in liquidation
nationwide.

\(i\) As one can see, any delays in actual days lost by not vigorously
pursuing the end result of liquidation exposes Rural Development to
tremendous losses.

\(j\) Hope and belief that there will be a future economic change that
would enhance recovery on the debt almost always results in a diminished
recovery on the guaranteed loan due to accumulating interest, costs of
maintaining the property and deteriorating collateral. The lender is not
in the real estate market and; therefore, a quick and expeditious
liquidation is the manner in which to proceed.

\(k\) Another procedure to utilize in order to possibly reduce Rural
Development loss exposure if the lender is holding the guaranteed
portion of the loan, would be to pay an estimated loss to the lender. If
Government interest rates on long term borrowing are less than the
current interest rate on the Rural Development guaranteed loan, the net
savings by paying the estimated loss would be the difference between the
cost of money to the Government and the guaranteed promissory note rate.
However, before paying any estimated loss, be sure that the lender will
continue to expeditiously liquidate the loan and that the lender has
performed satisfactorily to date on the closing and servicing of the
loan. Otherwise, if a claim against the lender for negligent servicing
or use of loan funds for unauthorized purposes arose and Rural
Development was holding the guaranteed portion of the loan, the lender
may refuse to honor such a claim, making legal action necessary by Rural
Development to claim the rightful amount due to Rural Development for
the lender\'s improprieties. The Government would have to initiate legal
action to obtain the amount due Rural Development and the burden of
proof would rest on the Government in a claim of negligent servicing
and/or unauthorized use of loan funds.

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\(l\) Liquidation expenses and protective advance amounts requested by
the lender should be closely reviewed to determine, before actual
approval by Rural Development, that the expenses are necessary to
properly conduct the liquidation of the loan. Examples of abuse by
lenders as cited by the Office of Inspector General (OIG) of
liquidations approved by Rural Development include inappropriate
attorney fees, inhouse expenses, lender fees, care and maintenance of
the collateral property.

\(m\) Just because a lender recommends an expense item, Rural
Development should not grant automatic approval to such expense. Obtain
the necessary facts and be satisfied that the expenses are necessary and
reasonable. By giving close attention to all expenses, Rural
Development\'s loss exposure could possibly be further reduced.

X [Collateral Evaluation In Liquidation]{.underline}

\(a\) [Accounts Receivable]{.underline}

\(1\) Accounts receivable are the easiest to convert to cash in
liquidation in that the only effort required is to notify the
borrower\'s debtors that the receivables are collateral to the loan and
payments should be made to the lender. Since this type of collateral is
easily converted to cash without further efforts by the borrower, it can
be used by the borrower to keep operations going during periods of
financial difficulty. Therefore, when liquidation occurs, more often
than not, the accounts receivable have been partially collected by the
borrower, thereby, dissipating the collateral on the guaranteed loan.
Also, when the borrower is experiencing financial difficulties, the
quality of goods manufactured could deteriorate, thereby, creating
claims by the borrower\'s debtors when collection is pursued by the
lender.

\(2\) If the lender properly secures the accounts receivable and has
included in the Security Agreement the right to inform the borrower\'s
debtors in writing in any acceleration of the debt, this is the action
that should be taken. The lender, to protect itself, should if possible,
obtain the authorized borrower\'s signature(s) on any notice to the
borrower\'s debtors requesting payment be made directly to the lender.
If the lender quickly takes action once the decision to liquidate the
loan has been made, there is a better chance to maximize the recovery on
this type of collateral.

\(b\) [Inventory]{.underline}

\(1\) Inventory is more difficult to move and convert into cash in a
liquidation than accounts receivable. A buyer must be found for the
inventory collateral before it can be converted to cash.

RD Instruction 1980-E

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Normally, in a manufacturing business, the inventory is in three stages;
raw materials, work in process, and finished goods. The raw materials
and finished goods normally have value in liquidation, whereas, work in
process may have little value.

\(2\) If the borrower is experiencing financial difficulties, the
quality of goods produced could deteriorate and the demand for this
collateral may diminish. Additionally, the borrower may be utilizing the
collateral to continue operations without replacement during periods of
financial difficulty, thereby, diminishing the collateral value or the
amount of collateral on hand. A prudent lender should take action as
quickly as possible to gain control of this type of collateral.

\(3\) Once the lender has the inventory in its possession, arrangements
should be made to secure the collateral and tag it for identification
purposes. A reasonable prudent lender understands that adequate
insurance coverage is necessary on the inventory collateral.

\(c\) [Machinery, Equipment and Parts]{.underline}

\(1\) Machinery, equipment and parts take a good deal of effort and time
to liquidate. Much of this type of collateral is of a specialized nature
which may make locating an interested party difficult. Also, if the
collateral is of a specialized nature, the demand and value of such
collateral is greatly diminished.

\(2\) The prudent lender, upon gaining control of the collateral, should
take steps to preserve and account for all such collateral. Preservation
and control would include such items as:

\(i\) Storing and tagging of all collateral.

\(ii\) Moving exposed equipment under shelter.

\(iii\) Protecting the collateral from theft or damage.

\(iv\) Protective maintenance such as greasing, oiling, etc.

\(v\) Adequate insurance coverage.

\(vi\) A listing of all machinery and equipment.

\(3\) If there is any question of ownership when the lender is listing
the collateral, a prudent lender would indicate the problem on the
listing. The completed list of collateral made by the lender and
submitted to Rural Development should be compared to the list of
collateral taken at loan closing to determine whether all the collateral
has been accounted for and under the control of the lender. The lender
is responsible for accounting for the collateral.

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\(d\) [Rolling Stock]{.underline}

Rolling stock type of collateral consists of automobiles, trucks,
tractors, etc. The rolling stock, if used on the State highways, must be
titled in the appropriate State and a lien placed against each vehicle
in order to perfect a valid lien on the respective collateral. This type
of collateral, provided it is in good condition, is normally in demand
in any liquidation. The collateral is easy to move and secure, and value
is easily determined as various publications are available for this
purpose. Deciding whether a valid lien was perfected may be more
difficult. If there is any doubt, the Regional Attorney should be
contacted.

\(2\) The lender should act quickly in any liquidation to gain control
of rolling stock as it can easily disappear from the borrower\'s place
of business and can be difficult to locate.

\(3\) Adequate legal title cannot be obtained by another party on this
type of equipment if a proper lien was recorded against the property by
the lender until the lien position on the respective vehicle has been
released by the secured party.

\(e\) [Real Estate]{.underline}

\(1\) Real estate is normally the most difficult to liquidate. It
usually takes longer to sell and is expensive to hold until liquidated.
Prospective buyers of the property in question are limited. Arriving at
a fair sale price is difficult in most cases. The lender must obtain
appraisals on this type of collateral as well as machinery and
equipment, rolling stock and other hard collateral as set forth in
Paragraph XI A 4 of Form RD 449-35:

\"If the outstanding principal B&I loan balance, including accrued
interest, is less than \$200,000; the lender will obtain an estimate of
the market and potential liquidation value of the collateral. On B&I
loan balances in excess of \$200,000 the lender will obtain an
independent appraisal report on all collateral securing the loan, which
will reflect the current market value and potential liquidation value.
The appraisal report is for the purpose of permitting the lender and
Rural Development to determine the appropriate liquidation actions. Any
independent appraiser\'s fee will be shared equally by Rural Development
and the lender.\"

\(2\) The appraisal reports are very important and are utilized to
determine the current market and liquidation values, the appropriate
liquidation action and if necessary, to determine a proper protective
bid amount for a public auction sale.

\(3\) In order to pay for Rural Development\'s portion of the appraisal,
complete Form 1980-46, \"Report of Liquidation Expense,\" and forward
this report to the Finance Center for payment. Do not include the cost
of the appraisal in any report of loss claims.

RD Instruction 1980-E

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XI [Appraisal Reports]{.underline}

\(a\) An acceptable appraisal should include:

\(1\) The appraiser\'s transmittal letter which should state:

\(i\) Collateral being appraised.

\(ii\) Location of the collateral.

\(iii\) Explanation of condition (excellent, good, satisfactory, etc.)
should be used in describing the collateral.

\(iv\) A definition of the current market and liquidation values.

\(v\) Date the appraisal was completed.

\(vi\) Different approaches used in determining the value of the
collateral. In appraising the machinery and equipment, very seldom is
the income approach used, whereas in appraising real estate, all three
approaches are utilized; i.e., cost, income and market.

\(vii\) Methods used to determine the value of the collateral should be
defined.

\(viii\) Purpose of the appraisal. In liquidation cases, it is to
establish market and liquidation values.

\(2\) Certification from the appraiser that he/she:

\(i\) Has no interest in the property.

\(ii\) Personally inspected the property.

\(iii\) Report is accurate and correct to the best of his/her knowledge.

\(iv\) Appraisal was made in accordance with the standard of practices
and within the code of ethics of the various appraiser\'s organizations.

\(3\) Qualifications of the appraiser:

\(i\) Background

\(ii\) Experience

\(iii\) Names of companies that appraisals have been made for

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\(iv\) Education

\(v\) Certificates, licenses, etc.

\(4\) Description of the collateral:

\(i\) Condition

\(ii\) Fair market value

\(iii\) Liquidation value

\(iv\) Photographs of the collateral

\(b\) It is important to obtain a value on each piece of collateral as
it may be decided to sell each piece separately rather than as a bulk
sale arrangement.

\(c\) In addition to the aforementioned information which would normally
be in a machinery and equipment liquidation appraisal a real estate
appraisal should contain the following information:

\(1\) Income approach to the real estate.

\(2\) Comparables of property similar to the property being appraised.
Make sure comparables used are local and not out of the trading area.

\(3\) Values reflected in the cost, income and market approach.

\(d\) The appraisal is made for the benefit of the lender and Rural
Development and should not be discussed with any other individuals. A
prudent lender should treat the appraisal as confidential. The Rural
Development official must always be the final judge of the value of the
collateral based on the known facts. If the Rural Development official
disagrees with the appraisal, the reason for disagreement must be fully
documented. In a situation such as this, the National Office should be
consulted for the necessary, action to take. In some cases more than one
appraisal may be necessary, such as, cases with specialized machinery
and equipment.

XII [Different Options Open in Liquidation]{.underline}

The options open to the lender in liquidating a loan are:

\(a\) [Sale of the business as an on-going operation, provided this
method can be legally utilized]{.underline}

\(1\) In order to utilize this option, a cooperative borrower who can
legally convey fee simple title to the collateral is essential.

RD Instruction 1980-E

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\(2\) Normally, this option comes into being before the lender actually
places the borrower in liquidation; however, it can be an option to sell
the collateral after acceleration of the loan balance. This option is
similar to a private sale of the collateral by the borrower except all
parties are interested in trying to locate a purchaser.

\(3\) This type of sale normally brings the maximum dollars for the
collateral and is normally advantageous for both the borrower and the
purchaser (buyer). The advantages and disadvantages to such a sale
include:

\(i\) [Advantages]{.underline}

\(A\) Maximizes collections on the loan.

\(B\) Buyer obtains an operating entity; the business is in place with
no moving expenses.

\(C\) Several parties including the borrower are interested in locating
prospects.

\(D\) No liquidation costs.

\(E\) Save legal expenses.

\(F\) No piecemeal sale of collateral necessary.

\(ii\) [Disadvantages]{.underline}

\(A\) Rural Development may be called upon to finance the purchase over
a period of years, possibly extending terms and changing other terms in
order to obtain a purchaser. Such a purchase may require a new
guaranteed loan.

\(B\) In some cases, the borrower wishes to remain discreet in locating
prospects for the business. Interested purchasers may never receive
notice that the business is for sale.

\(C\) Borrower may attempt to continue to extract a living from the
operations and discourage any prospects.

\(D\) Borrower may want a higher sales price than is realistic for the
collateral.

\(E\) Borrower may not put \"best foot forward\" in preparing the
business for sale.

\(F\) Once a purchaser is located and the sale ready for liquidation,
borrower could withdraw from the transaction.

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\(4\) In any sale of this type, the corporate/personal guarantor(s)
liability on the loan should be adequately addressed and resolved.

\(5\) In order to maximize collections on the loan, the lender cannot
always make a cash settlement when selling an on-going business.
However, a cash settlement has some real advantages. A cash settlement
is a sure transaction and one in which a loan can be cleared without any
further obligation by Rural Development. This permits the lender and
Rural Development to rid themselves of a bad situation and move on to
other concerns. In other words, it rids the lender and Rural Development
of a problem.

\(6\) However, never be too anxious to settle a bad loan just to avoid a
problem. Remember, Rural Development regulations state that the lender
must maximize the return on the collateral. It is the Rural Development
official\'s responsibility to see that the lender fulfills its
obligation.

\(7\) A cash settlement offer is always preferred to a long-term
transaction. A cash settlement offer is usually less than the sales
price that could be obtained on a financing arrangement. It is necessary
to calculate the immediate return of a cash sale as opposed to x
financing interest costs. Additionally, consider the additional
incidental expenses of holding on to the property for a longer period of
time if the cash offer is not accepted.

\(8\) If an extended financing arrangement is considered, be sure the
collateral is adequate to support the loan. Strive to sufficiently
support the loan balance with collateral and additional
personal/corporate guarantees and, when possible, secure the guarantee
with collateral.

\(9\) When considering long-term financing, it may be possible to build
into any proposal flexible conditions such as a net earnings recapture
clause and certain sales ratios whereby if the transferee (purchaser)
performs better than expected, it is possible to capture a greater
return on the sale. This technique has been used in several cases and
the purchaser is usually agreeable to such arrangements.

\(10\) Most important, keep in mind that a saleable company is necessary
to attract potential purchasers. If the borrower\'s operations have been
such that the production has been of poor quality, the borrower has lost
its sales base (customers) or the plant and equipment have been abused,
the chances of selling a company such as this are poor. Face reality in
situations such as this and instruct the lender to move as quickly as
possible to liquidate the collateral.

\(11\) As a general rule any liquidation sale of the collateral
property, for less than the full guaranteed debt, must be to an
independent purchaser not connected in any way with the borrower or

RD Instruction 1980-E

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the lender except for financing of the transaction. Only in rare
circumstances would such a sale to the borrower, its principals,
relatives, be approved by Rural Development. Be careful and assured that
any sale of the collateral is independent of the borrower as well as the
lender except for financing of the transaction and include this as one
of the conditions of sale.

\(12\) Documentation is very important. Make sure any offer made on the
property is documented in the files along with the reasons for
considering or rejecting the offer. This type of documentation serves to
justify an offer that is finally accepted.

\(b\) [Transfer and assumption of the borrower\'s
operations]{.underline}

\(1\) Transfer and assumption of the borrower\'s operations can be
accomplished before or after the loan goes into liquidation. A transfer
and assumption has certain advantages in that it may be the best means
to keep an active business operating; keeps the Rural Development
guarantee intact (a good selling point with the Lender) and provides an
opportunity to strengthen the loan through additional collateral and/or
additional guarantees.

\(2\) If the lender has purchased the collateral property through a
foreclosure public auction sale or the borrower has conveyed title to
the lender, no transfer and assumption is permitted. Also any other
transactions that affect the promissory note may rule out transfer and
assumption of the debt. These situations should be referred to the
Regional Attorney.

\(3\) Section 1980.476 of Subpart E of Part 1980 of this chapter must be
followed in any transfer and assumption case. The advantages and
disadvantages to such a transfer include:

\(i\) [Advantages]{.underline}

\(A\) Purchaser obtains an operating entity; business in place with no
moving expenses.

\(B\) Opportunity to transfer a potential or existing problem loan and
keep existing collateral and guarantor(s).

\(C\) Opportunity to strengthen the loan through additional collateral
and/or additional guarantor(s) while keeping existing collateral and
guarantor(s).

\(D\) A transfer of the loan can be made without liquidating the
collateral; thus eliminating liquidation costs.

\(E\) May maximize collections on a loan in liquidation.

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\(ii\) [Disadvantages]{.underline}

\(A\) Transferee may request more liberal terms. If different terms are
requested, there may be statutory problems with the terms. If the
guarantee has been sold to a holder, this may also create problems if
different terms are being considered. The Regional Attorney and National
Office can furnish advice on specific transactions.

\(B\) No final loss or protective advance amount, if applicable can be
paid to the lender, until the transferee fulfills its obligations under
the transfer.

\(C\) May be trading one problem for another.

\(D\) Side transactions could take place between the transferee and the
borrower without the lender\'s knowledge.

\(E\) May have an impact on the customer base.

\(4\) Any transfer and assumption case should be fully understood and
evaluated before concurring with the lender. The Rural Development
official should treat any transfer and assumption as if Rural
Development was evaluating a new loan obtaining proper documentation on
the new management team, financial reports, projections, pro formas (if
applicable) and assurances of adequate collateral.

\(c\) [Leases and purchase money contracts]{.underline}

\(1\) Once the lender has purchased the collateral property through a
foreclosure public auction sale or the borrower has conveyed title to
the lender and the lender wishes to have the collateral begin generating
income to be applied to the guaranteed debt without transferring title,
the only options open to the lender would be leasing the collateral
property or a purchase money contract.

\(2\) Generally, leasing the collateral or utilizing a purchase money
contract is not in the best interest of Rural Development. There may be
times when such an arrangement is advantageous and if such a situation
arises, the guaranteed lender must make a written request for
continuation of the Rural Development guarantee.

\(3\) The only real advantage of a lease or purchase money contract is
the availability of a servicing tool for an improved recovery on the
potential loan loss when faced with a low cash sale probability.

\(4\) When considering such a proposal, make the terms and conditions
fit Rural Development\'s interests. Fully understand the proposal before
committing Rural Development to any such arrangement. Otherwise, Rural
Development could be agreeing to long term contracts which may cause
additional problems. The object is to liquidate collateral as soon as
practical, not to create long standing relationships

RD Instruction 1980-E

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\(5\) Before concurring in any lease arrangement or a purchase money
contract, involve the Regional OGC to review all legal documents and
comply with the Regional Attorney\'s legal advice on these issues.

\(d\) [Private sale of the collateral by the borrower]{.underline}

This method of liquidation is similar to a sale of the business as an
on-going concern except, in this case, the lender is directly guiding
the borrower in the sale of the collateral.

\(1\) This option permits the borrower to dispose of the collateral and
liquidate the loan under the lender\'s guidance and expertise. Generally
liquidation by the borrower is not advantageous to Rural Development as
liquidation could be prolonged due to the borrower wanting more than the
collateral is worth. Also, in a liquidation of this type, the borrower
[must]{.underline} be of unquestionable integrity.

\(2\) Liquidation by the borrower would be advantageous when certain
collateral is involved in which the borrower\'s expertise and knowledge
is needed to obtain the best price for the collateral. For example, if
inventory was taken as collateral, the borrower may be able to utilize
its customer base to move the inventory; thus, obtaining top dollar for
this type of collateral.

\(3\) The advantages and disadvantages of this type of liquidation
include:

\(i\) [Advantages]{.underline}

\(A\) No liquidation costs.

\(B\) Saves legal expenses.

\(C\) Possibility of realizing greater proceeds on collateral sales,
especially accounts receivable, inventory, and assets of some value that
needs the borrower\'s knowledge to maximize collections.

\(ii\) [Disadvantages]{.underline}

\(A\) Title to the collateral remains with the borrower.

\(B\) Borrower may attempt to extract a living from the operations,
extending the time of liquidation.

\(C\) Borrower may attempt to obtain a higher sale price than is
reasonable for the collateral to create funds over and above the loan
balance for personal use.

\(D\) Lender does not have control of the liquidation.

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\(E\) Borrower is first to touch collateral sale proceeds.

\(F\) Any delays by the borrower in paying off the loan balance
increases Rural Development\'s obligations due to interest accruals.

\(G\) Borrower may sell only the good saleable collateral leaving the
less desirable collateral which eventually may have to be sold by the
lender.

\(e\) [Voluntary conveyance of the collateral]{.underline}

\(1\) This option permits the borrower to deed title of the collateral
immediately to the lender. It is voluntary to both parties (lender and
borrower). If this action is considered, the lender must be sure that
the borrower can convey clear title.

\(2\) The lender should consider such action when there would be long
delays to obtain clear title to the collateral property. It is always
desirable to cut delays in the liquidation process whenever possible;
however, the proposal should be fully understood before acceptance by
Rural Development.

\(3\) Most voluntary conveyances of clear title means a cancellation of
the full debt. This action would automatically cancel any guarantor\'s
liability on the debt.

\(4\) A voluntary conveyance of the collateral can be accomplished at a
set amount of less than the full amount of the debt. To accomplish this
objective, an arrangement must be made whereby the parties agree to a
fixed amount for which the collateral property would be conveyed to the
lender. Be careful when handling such an arrangement and involve the
Regional Attorney before acceptance of such a plan. Careful
documentation of the file demonstrating the commercial reasonableness of
the decision is necessary.

\(5\) When looking to the guarantor(s) for collection on the loan
deficiency balance, the guarantor(s) and the lender with Rural
Development\'s consent should agree to a value to be credited on the
promissory note and the lender should attempt to have the guarantor(s)
execute a continued liability agreement to the effect that the
guarantor(s) remain liable for the loan balance before the voluntary
conveyance.

\(6\) The advantages and disadvantages to such an option include:

\(i\) [Advantages]{.underline}

\(A\) Lowers liquidation costs.

\(B\) Saves legal expenses.

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\(C\) Lender has control of liquidation.

\(D\) Speeds up liquidation.

\(E\) Eliminates any redemption rights the borrower holds.

\(ii\) [Disadvantages]{.underline}

\(A\) Private sale could involve a conflict of interest.

\(B\) Possibility of losing legal rights to collect any loan deficiency
amounts from the personal/corporate guarantor(s) unless handled
properly. Usually the personal guarantor will also be a principal of the
business and the lender and Rural Development will have to agree not to
pursue the guarantor in order to get them to agree to a voluntary
conveyance.

\(C\) Lose right to any potential transfer and assumption of the loan.

\(D\) Lender may lose incentive to sell the collateral if holding only
the unguaranteed portion of the loan, or if holding the full loan and
the lender has a good interest rate on the loan.

\(7\) Anytime a voluntary conveyance of title takes place or the lender
acquires title to any real property through other means, the title to
the property should be recorded at the proper locations.

\(f\) [Foreclosure by public auction sale]{.underline}

\(1\) A public auction foreclosure is necessary when the lender has an
uncooperative borrower who will not convey title to the collateral
and/or when there are liens against the collateral property which must
be cleared in order to obtain fee simple title. The advantages and
disadvantages to such a sale include:

\(i\) [Advantages]{.underline}

\(A\) Clears existing liens.

\(B\) Ascertains the demand for the collateral and value.

\(C\) Protect the lender\'s legal rights to proceed against
guarantor(s), if necessary, for any loan deficiency.

\(D\) Easier to prevent a defense by the guarantor(s) on the loan
deficiency amount when proceeding legally against guarantor(s).

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\(E\) Could speed up liquidation of the collateral.

\(F\) Quick cash for the collateral.

\(ii\) [Disadvantages]{.underline}

\(A\) Increases liquidation costs, including legal expenses.

\(B\) Protective advances may be necessary.

\(C\) Loss of option for any transfer and assumption of the loan.

\(D\) Lender may have to bid on the collateral at a price up to a
negotiated protective bid price and arrange a private sale.

\(E\) Auction sale possibly would not realize maximum value of the
collateral as opposed to other methods of collateral disposition.

\(F\) Normally requires quick and immediate decisions on sale.

XIII [Protective Bids]{.underline}

\(a\) In establishing a protective bid amount, the lender should work
closely with Rural Development in arriving at a proper protective bid
amount. There must be a current appraisal available which reflects both
the fair market value and the potential liquidation value of the
collateral. In order to fully understand these values and their purpose,
a definition of each is given below:

\(1\) Fair market value is the price a willing buyer would be justified
in paying and a willing seller would be warranted in accepting if each
is (1) well informed or well advised; (2) motivated by reactions of
typical users; (3) free from undue stimulus; (4) financially capable of
ownership and/or use; and (5) allowed a reasonable time period in which
to test the market.

\(2\) Forced sale liquidation values (public auction sales) is defined
as a price which the collateral will bring if exposed for immediate sale
on the open market, both buyers and sellers having knowledge of the uses
and purposes to which the collateral is capable of being used, the
seller being compelled to sell and the buyer being willing but not
compelled to buy.

\(b\) The sound market appraisal and liquidation values of all
collateral must be established in order to determine the amount of the
protective bid.

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\(c\) Before the protective bid amount is established, the Rural
Development official must agree with the appraised values. If the Rural
Development official or the lender disagrees with the amounts in the
appraisal, those concerns should be noted and the amounts adjusted
accordingly with concurrence of both parties. The Rural Development
official must document the justification for the change in the values.

\(d\) The protective bid amount is made by the lender (with Rural
Development prior concurrence) at a foreclosure sale to protect the
lender\'s and Rural Development\'s interests. The reason for the
protective bid is to insure that the collateral is not sold at
unrealistically low values to other bidders. The protective bid should
be high enough to protect the lender\'s and Rural Development\'s
interests; however, the protective bid amount should be reasonable.

\(e\) In normal situations, the lender should not be interested in
purchasing the collateral at the sale but merely enters a protective bid
amount, if necessary, to protect the collateral and to insure that a
reasonable selling price has been established.

\(f\) If the collateral appraised liquidation value is in excess of the
amount owed on the loan plus expenses incurred, the protective bid
amount should not exceed the aggregate of these amounts. The lender
should never bid more than is owed on the loan.

\(g\) Should the collateral appraised liquidation value reflect that
sales proceeds would cover only the cost of the sale and/or pay off
senior lien positions in front of the lien covering the guaranteed loan
balance, normally a protective bid amount would not be established.

\(h\) Protective bid amounts established must be reasonable and
equitable. Otherwise, the lender could run into legal problems should
the protective bid amount be the successful bid price. For example, the
lender could have legal problems when attempting to establish a
deficiency judgment.

\(i\) The protective bid amount established should assure an adequate
and equitable return on the collateral, protect the lender and Rural
Development\'s interests and press other interested parties into making
higher bids for the collateral at the foreclosure sale.

\(j\) Protective bid amounts should be reasonable and equitable for an
amount when added to the various expenses of sale and other
considerations and should not exceed the liquidation appraisal values.

\(k\) Special considerations to be taken into account in establishing
the protective bid amount are:

\(1\) Expenses of resale. (Increased real estate taxes, commissions,
recording costs, etc.)

\(2\) Interest accrual on the loan.

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\(3\) Length of time necessary for the resale of the collateral.

\(4\) Collateral deterioration.

\(5\) Maintenance of collateral.

\(6\) Guard services.

\(7\) Seasonability of collateral.

\(8\) Prior liens, taxes.

\(9\) Utilities.

\(10\) Storage costs.

\(11\) Moving expenses.

\(12\) Weatherization.

\(l\) A hypothetical example of a protective bid amount is shown below:

\(1\) The appraised liquidation value of the collateral to be sold is
\$1,000,000 and total debt owed on the loan including interest is
\$1,600,000. It is estimated that the collateral is in good condition
and could be sold within a six-month time frame if the lender bid the
property in at the foreclosure sale. One guard would be needed to
protect the collateral until sold. Some utility costs would be involved.
There are no prior liens or taxes due and it is not necessary to
consider the seasonability of the collateral. The protective bid amount
would be \$885,000 as shown below:

Protective Bid Amount \$885,000

Consideration given for:

a\. 6% commission - resale 53,000

b\. Interest accruals for 6 mos. @ 10% 44,250

c\. Guard service for 6 mos. @ \$120 weekly 2,880

d\. Utility costs for 6 mos. 2,220

e\. Miscellaneous costs - (Advertising, Atty, 12,650

fees, etc.)

APPRAISED LIQUIDATION VALUE \$1,000,000

\(2\) If the highest bid was \$900,000 placed at the liquidation sale, a
prudent lender should permit the respective bidder to purchase the
property.

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\(m\) The lender who decides upon a foreclosure public auction sale of
the collateral must know and fully understand the legal aspects of any
superior lien(s) on the collateral as the lender is responsible for
payment in full on such liens when selling the collateral unless the
property is sold subject to such lien(s). If there are any junior liens
the proceeds will be available to pay such liens only to the extent of
funds remaining after paying expenses and prior liens.

\(n\) A final payoff amount in writing as of the day of the sale should
be obtained from the superior lienholder. The junior lienholder
(lender), to protect its position, could purchase the mortgage for the
unpaid balance and have the respective lender assign all of its rights
and interests in the mortgage on a non recourse basis. The promissory
note should not be marked paid as this would destroy the superior lien
position.

\(o\) The lender should be bidding on the collateral along with all
other bidders up to the maximum of the protective bid amount. If the
protective bid amount entered by the lender is the highest bid entered,
the lender would purchase the collateral. If other bids entered are
higher than the lender\'s protective bid amounts, the person entering
the highest bid would purchase the property subject to a confirmation
period if a confirmation period was established in the terms of the
sale. A confirmation period is normally a good practice as it gives the
lender the opportunity to determine all factors and confer with Rural
Development on the sale.

\(p\) If the lender acquired the collateral and it was agreed by the
lender and Rural Development in the liquidation plan that this practice
would be acceptable to all parties, the Rural Development guarantee
would continue in effect and any 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 Rural Development.

XIV [Method of Disposition of Acquired Collateral by the Lender if the
Rural Development final loss claim is not to be paid until the lender
disposes of the collateral]{.underline}.

\(a\) When the lender acquires title to the collateral through a
voluntary basis or foreclosure means and the Rural Development final
loss claim is not paid until final disposition, the lender should
proceed as quickly as possible to develop a plan to see that the
collateral is fully protected and a program to dispose of the collateral
is commenced.

\(b\) Any collateral accepted by the lender on a voluntary basis or
through foreclosure means must be titled in only the lender\'s name.
Rural Development should never be named as owner or co-owner of the
collateral. Rural Development\'s position is that of a guarantor.

\(c\) The first step the lender should take after acquiring the
collateral is to see that the collateral is protected from deterioration
(weather, vandalism). Hazard insurance in an amount necessary to cover
the fair market value of the collateral should be maintained by a
prudent lender.

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\(d\) The lender should prepare a plan on the best method of sale,
keeping in mind any prospective purchasers and send the plan to Rural
Development for its review and comments. Rural Development should
approve the plan in writing if it concurs with the lender. Otherwise,
address the objections to the plan and put the lender on notice of your
disapproval.

\(e\) It may be that the lender addressed such a plan of action when
submitting the liquidation plan. If this is the case and the method of
sale as addressed in the liquidation plan is still feasible, no further
action on the lender\'s part is necessary. [If some modification to the
plan is necessary the lender and the Rural Development official should
discuss the modification(s) and work together to attempt to assure that
the modified liquidation plan is in the best interests of Rural
Development and the lender]{.underline}.

\(f\) Methods and options open to the lender in considering a plan of
action to sell the collateral property include:

\(1\) [Direct sale by the lender]{.underline}

\(i\) Some questions that come to mind should be: (A) should the
collateral be sold piecemeal or in bulk?; (B) is the collateral stored
at a convenient and safe area?; (C) will the collateral be maintained
during the lender\'s possession?; and (D) should the collateral be
improved and \"window dressed\" in order to obtain a greater value for
the collateral? These questions should not be the only ones to consider
but are listed to provide some insight in the areas that must be
considered when the lender is preparing to sell the collateral.

\(ii\) Rural Development should be satisfied that the lender\'s plan of
sale is realistic, sound, and maximizes the return on the collateral.

\(2\) [Commercial Broker]{.underline}

\(i\) In dealing with a commercial broker, the lender should engage an
experienced salesman who is knowledgeable about the product or industry
for sale. The contract should be on a short-term basis of preferably no
more than 120 days. The contract can always be renewed if it is
considered worthwhile to do so.

\(ii\) The commercial broker engaged should have knowledge of the
product the lender is selling, the value of such collateral and
prospective purchasers throughout the country. Some commercial brokers
have computer listings of prospects that may be interested in a
particular type of property. The broker would list the property, mail
notices to possible buyers and advertise in the respective trade
journals and various publications.

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\(iii\) Most important is the engaging of an experienced and
knowledgeable broker. If the broker is inexperienced or unsure of
himself/herself, he/she is less likely to aggressively seek a
prospective purchaser. If the broker finds a prospect, the prospect
being experienced and knowledgeable in the type of property for sale,
would have a distinct advantage over the inexperienced broker.

\(iv\) If the property for sale is a general type of commercial building
which could be beneficial to several different types of industries, the
broker engaged does not need the expertise necessary as in selling
larger or more complex property. The lender in those cases, could engage
a less experienced commercial broker with multiple listing arrangements.

\(v\) Also, if possible, when engaging a commercial broker, the prudent
lender should have an agreement with the broker to the effect that
should the lender locate a purchaser for the property, no sales
commission would be paid to the broker. The lender may want to consider
continuing its efforts to locate a buyer for the property even though
the collateral is in the broker\'s hands.

\(vi\) If the lender has engaged the proper commercial broker and the
commercial broker cannot locate any serious prospects within a
reasonable period of time, the only other approach is a public auction
of the property if the collateral has value. This is probably the least
desirable method to use in liquidating the collateral.

\(3\) [Public auction sale]{.underline}

\(i\) This option could be selected first if it is obvious that it will
maximize recovery; however, normally the net proceeds from the sale of
collateral by means of a public auction will not be as great as the
recovery realized by the other methods of sale previously mentioned;
therefore, after exhausting all other options to sell the collateral and
if the lender has been unable to successfully complete a sale, a public
auction sale should be strongly considered. The sale should be carefully
planned and well organized. Consideration should be given to engaging a
professional auctioneer experienced in selling the type of property that
will be listed.

\(ii\) The fee for a professional auctioneer may be high when compared
to the cost of engaging a broker to sell the property or having the
lender conduct the sale. However, experience has shown that in engaging
a professional auctioneer, the loan official obtains expert services and
advice usually resulting in a higher return on the collateral sold.

(11-13-85) PN 985

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\(iii\) A professional auctioneer makes an evaluation of the property
for sale, determines the market area and the prospects most likely to be
interested in the collateral. Additionally, the auctioneer has knowledge
of advertising methods and knows which advertising medium will give the
maximum exposure for the dollars spent.

\(iv\) A real estate auction under the guidance of a professional
auctioneer normally attracts more potential buyers because of proper
advertising and therefore, usually produces a better price for the
property. A professional auctioneer may recover more than its fees
charged netting to the lender on the guaranteed loan a larger return
than would have been obtained using other methods. In addition, by
engaging the professional auctioneer, the lender is more likely to sell
the collateral.

\(v\) The lender, in utilizing a public auction should determine a
minimum sale price for the collateral. The amount determined by the
lender should carry Rural Development prior concurrence. The minimum
amount acceptable can be included in the advertisements or the
auctioneer can announce the minimum sale price on the day of the sale.
If the lender does not wish to proceed in this manner, the public
auction could be held with the lender retaining the approval rights of
any sale. Normally, the lender retains a 5-7 day confirmation period on
any sale to review the highest bid and consults with Rural Development
on whether to accept the bid.

\(vi\) If the collateral being auctioned consisted of real property and
machinery and equipment, consideration should be given to holding the
public auction sale in different stages; first to sell the real
property; secondly, to sell the machinery; thirdly, to sell in a bulk
sale. The lender should determine which arrangement brings the greatest
return and if the price meets the lender\'s and Rural Development
approval, the property should be sold.

\(vii\) When deciding whether to accept the highest bid offer keep in
mind that a professional auctioneer has covered the market for the
collateral to be sold and informed all interested prospects of the sale.
In a case such as this, if it can be said that the public auction was
the best and most effective method of determining the true market value
of the collateral, the highest bid should probably be accepted and the
file documented accordingly. Before turning down the offer, consider the
expenses that may continue on the property while being held in the
lender\'s possession along with the length of time the lender may have
to hold on to the property before another interested party can be found.

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\(4\) [Abandonment of the collateral]{.underline}

\(i\) The primary purpose of collateral is to afford a net return on the
loan funds not repaid in cases of liquidation. However, there will be
times when Rural Development will be faced with situations when
converting the collateral to cash would result in a loss.

\(ii\) Situations when this type of action could exist are:

\(A\) Senior lien claims held by other parties against the guaranteed
loan collateral and the senior lien claims are more than the collateral
value.

\(B\) Collateral on the loan has deteriorated to the point where the net
sale value (after expenses) of the collateral would not produce any
funds that could be applied to the outstanding debt.

\(C\) Specialized collateral which has little or no value or demand for
the collateral taking into consideration the expenses of the sale.

\(iii\) 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 strongly considered.
However, the lender should rarely find itself in this position.
Abandonment of the collateral is a judgment factor and before any
decision is made to abandon the collateral make sure the facts are known
and document both the facts and the reasons for the decision in the
file.

\(iv\) When considering the action of abandoning the collateral, it must
be determined what effect this would have on the pursuing of collection
on the guarantor(s) and proceed accordingly.

XV [Guarantors]{.underline}

\(a\) The following considerations should be carefully reviewed before a
determination is made whether to release or settle the guarantor(s)
liability on any B&I loans:

\(1\) Age and health of the guarantor(s).

\(2\) Potential income.

\(3\) Inheritance prospects.

\(4\) The possibility that assets have been concealed or improperly
transferred by the guarantor(s).

(11-13-85) PN 985

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\(5\) The availability of assets or income which may be realized.

\(6\) Any compromise must be reasonable when compared with what could be
recovered if enforced collection Procedures were followed.

\(7\) Effect of other guarantor(s) on the loan. May need consent of
other guarantor(s) on loan if one guarantor is released.

\(8\) Cash consideration or other collateral in exchange for the
guarantee.

\(b\) When releasing a guarantor from liability on a B&I loan, adequate
consideration must be received. This concept encompasses some new
benefit to Rural Development either in the form of money, additional
security or some other benefit to the goals and objectives of Rural
Development. When the question of consideration arises in this context,
contact the National Office.

XVI [Compromise Settlement]{.underline} - Any compromise which involves
a forgiveness of the debt must be approved by the Administrator.

\(a\) There are situations when compromise of the remaining debt may be
in the best interest of everyone concerned. A compromise settlement
normally will not take place until all the collateral has been sold and
a deficiency loan balance remains.

\(b\) A compromise settlement would be considered when attempting to
settle with any guarantor(s) on the loan when the deficiency balance of
the loan is larger than the financial ability of the guarantor(s) to pay
the remaining loan debt.

\(c\) Before consideration is given to compromising the debt the lender
should have a current financial statement on any guarantor(s). The
financial statement(s) must reflect all assets and the lender and Rural
Development should be reasonably satisfied all assets are properly
reflected.

\(d\) If the Rural Development official cannot put full faith in the
financial material received or wishes additional documentation to
support the financial condition of the guarantor(s), a deposition could
be taken from the guarantor(s). The lender can request such action on
any guarantee(s) before compromising or settling a claim against the
guarantor(s).

\(e\) As stated earlier, the current personal financial statement(s)
should be compared to the financial statement(s) taken at loan closing
to determine if all assets are accounted for. Rural Development expects
a full disclosure of all assets before considering any compromise
settlement. After reviewing all assets and determining values, a
reasonable settlement amount should be set as to the amount the lender
and Rural Development feel is fair and adequate under the circumstances.
If Rural Development, with the Administrator\'s approval, can concur in
an amount presented by the lender, then the

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lender can proceed to effect the compromise with the guarantor. Rural
Development should not become involved with the guarantor in any
negotiations. It is the lender\'s job to take all necessary steps. Rural
Development is a guarantor for the loan, not the servicer.

\(f\) Another instance when Rural Development would consider a
compromise settlement is in a situation when Rural Development may have
a claim against the lender for negligent servicing of the loan. However,
before considering compromising a settlement in such cases, review the
case with the Regional Attorney to determine what Rural Development\'s
chances are of collecting the debt in full from the lender through the
legal process. If there is some doubt that the case can be successfully
collected through the legal process, a compromise settlement could be
the answer. If fraud or misrepresentation is involved, the case must he
sent to the Regional Attorney so that the Regional Attorney can decide
whether the case must be referred to the Department of Justice.

\(g\) Before considering a compromise settlement, all the facts must be
known. Ascertain what amount may be collected through the legal process
and take into consideration legal costs and time when arriving at a fair
compromise settlement.

XVII [Liquidation Expenses]{.underline}

\(a\) When submitting a liquidation plan, the lender must include as
part of the plan, an estimate of the liquidation expenses that are
expected to be incurred during the course of liquidation. (Paragraph XI.
I of the Lender\'s Agreement). If the expenses to be incurred are not
in-house and are reasonable and customary when compared to the
anticipated recovery value of the collateral property to be sold, the
expenses can be approved by Rural Development when approving the
liquidation plan subject to the liquidation expenses being deducted from
the gross proceeds from the sale of the collateral.

\(b\) If after the submission of the liquidation plan, circumstances
arise which may dictate a revision of liquidation costs, the lender must
obtain Rural Development\'s written concurrence prior to proceeding with
any proposed changes. In-house expenses of the lender such as routine
travel costs, accounting expenses or employee\'s time in handling the
liquidation will not be allowed.

\(c\) Attorney\'s fees are approved liquidation expenses provided the
fees are reasonable and cover legal issues pertaining to the liquidation
that could not be properly handled by the lender and its house-counsel
or retainer. This should not be construed to mean that when liquidation
occurs, the lender engages the services of an attorney to handle the
liquidation of the loan. The preparation of the liquidation plan and the
liquidation of the loan is the lender\'s responsibility.

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\(d\) Attorney\'s fees and/or expenses incurred by the lender while the
borrower is in a Chapter 11 reorganization would not be deductible from
collateral proceeds as liquidation expenses. A reorganization is not a
liquidation. Paragraph IX C 5 of Form RD 449-35 requires the lender to
protect the collateral in bankruptcy, receivership and insolvency.
Expenses incurred by the lender in these situations are not recoverable
by the lender under the loan guarantee.

\(e\) If a trustee is appointed by the bankruptcy court to sell the
collateral under a Chapter 11 liquidation or Chapter 7, the trustee
rather than the lender in this instance, is responsible for liquidating
the collateral. Most expenses will be the trustee\'s expenses and will
be approved by the court. Normally, even though the loan will then be in
liquidation, there will be no liquidation expenses of the lender. If you
have questions, contact your Regional Attorney or the National Office.

\(f\) Pursuit of personal/corporate guarantors who are not the borrower
on the loan while the borrower is in Chapter 11 reorganization or the
Chapter 7 proceeding is a matter outside the bankruptcy. The automatic
stay imposed by the Bankruptcy Code does not apply to proceedings
against persons who are not in the bankruptcy proceedings. Reasonable
expenses incurred in pursuit of these guarantors (even though the
borrower is in bankruptcy) would be allowable provided there was
sufficient collateral sold or collections made on the guarantee which
would at a minimum cover the expenses.

\(g\) The lender at Rural Development\'s request will provide complete
records, acceptable to Rural Development, listing of all expenses before
payment of an final loss or closing out the loan guarantee. (Paragraph
XI. E.3 of the Lender\'s Agreement)

XVIII [Protective Advances]{.underline}

\(a\) Protective advances generally cannot be authorized unless the
borrower is in liquidation. Any advances must constitute an indebtedness
of the borrower to the lender and be secured by the security
instrument(s). Rural Development\'s written authorization is required on
all protective advances which exceed a total cumulative advance of \$500
to the same borrower. (Paragraph XII of the Lender\'s Agreement.)

\(b\) Protective advances include, but are not limited to, advances made
for taxes, annual assessments, ground rent, hazard or flood insurance
premiums affecting the collateral and other expenses necessary to
preserve or protect the security. (Paragraph XII of the Lender\'s
Agreement.)

\(c\) Protective advances are not generally authorized while the
borrower is in a Chapter 11 reorganization. A reorganization is not a
liquidation. The bankruptcy court can order protection of the collateral
while the

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borrower is under Chapter 11 Protection and the lender, whose collateral
is subject to being used by the trustee in bankruptcy, should
immediately seek adequate protection of the collateral.

\(d\) When classifying liquidation expenses and protective advances,
keep in mind that liquidation expenses do not accrue interest, whereas
protective advance amounts do accrue interest at the promissory note
rate. Therefore, it is to Rural Development\'s advantage that whenever
possible, any amount authorized by Rural Development during liquidation
be classified as liquidation expense. For example, hazard insurance
premiums may be a liquidation expense rather than a protective advance
if hazard insurance is necessary while the loan is in liquidation.
Payment of the hazard insurance premium could also be a protective
advance if it is necessary to protect the security of the guaranteed
loan. Thus, an item such as payment of hazard insurance, in certain
circumstances, could be treated two different ways if it occurred during
liquidation.

XIX [Bankruptcies]{.underline}

\(a\) In bankruptcies, there are two separate proceedings; liquidation
and reorganization under the bankruptcy court\'s protection. It is the
lender\'s responsibility to protect the guaranteed loan debt and all
collateral securing the loan in bankruptcy proceedings. (Paragraph IX.
C.5 of the Lender\'s Agreement) Section 1980.475 of Subpart E of Part
1980 of this chapter sets forth certain responsibilities of the lender.
These responsibilities include, but are not limited to, the following:

\(1\) The lender will file a proof of claim where necessary and all the
necessary papers and pleadings concerning the case.

\(2\) The lender will attend and where necessary participate in meetings
of the creditors and all court proceedings.

\(3\) The lender, whose collateral is subject to being used by the
bankruptcy estate, will immediately seek adequate protection of the
collateral. Adequate protection of the collateral, depending on
interpretation, may take several forms. In s bankruptcy, the trustee is
authorized to sell, lease or use the collateral if the borrower\'s
business is in operation. The only collateral the trustee cannot utilize
is cash collateral unless the secured creditor grants permission or the
bankruptcy court authorizes the use of such after giving a proper
hearing and notice.

\(i\) Cash collateral means cash, negotiable instruments, documents of
title, securities, deposit accounts, or other cash equivalents, such as
accounts receivable.

(11-13-85) PN 985

RD Instruction 1980-E

Appendix G

Page 40

\(ii\) Concerning machinery, equipment and real estate, adequate
protection can be interpreted differently under Chapter 11
reorganization. The bankruptcy trustee could dispose of certain
collateral and grant to the secured party a replacement lien on some
other collateral which may or may not have the same value. For example,
the lender may hold a first lien on a good saleable piece of real estate
and could find replacement of this particular parcel of property with a
second or possibly a third lien on another parcel of land that the
lender may find undesirable for adequate protection. There are no
guarantees to the lender when the borrower is in Chapter 11
reorganization that the collateral will be protected to the lender\'s
satisfaction. The lender should be fully aware of what is taking place
with the collateral and resist any adverse changes that may be made in
the collateral securing the Rural Development guaranteed loan.

\(4\) Where appropriate, the lender should seek involuntary conversion
of a pending Chapter 11 case to a liquidating proceeding under Chapter 7
or under Section 1123 (b)(4) or seek dismissal of the proceedings. A
Chapter 11 case can be converted into a liquidating Chapter 11 or
Chapter 7 upon the request of the lender if the lender can show cause
and it is in the best interest of all creditors. Cause may be:

\(i\) Continuing losses and very little likelihood that the borrower can
successfully reorganize;

\(ii\) Borrower\'s failure to submit a plan to the bankruptcy court
within the prescribed time set by the court;

\(iii\) Unreasonable delays by the borrower detrimental to creditors;

\(iv\) Inability on the borrower\'s part to submit a sound
reorganization plan; or

\(v\) Bankruptcy court decision denying the proposed reorganization plan
and failure on the borrower\'s part to gain additional time from the
bankruptcy court to submit an amended plan.

\(5\) Rural Development will be kept adequately and regularly informed
in writing of all aspects of the proceedings.

\(b\) In a Chapter 11 reorganization, if an independent appraisal is
necessary in Rural Development\'s opinion, Rural Development and the
lender will share such appraisal fee equally.

\(c\) Lender expenses on Chapter 11 reorganization cases are not to be
deducted from the collateral proceeds because a reorganization is not
considered liquidation. All expenses incurred (except a collateral

RD Instruction 1980-E

Appendix G

Page 41

appraisal) by the lender while the borrower is in reorganization are the
responsibility of the lender and are not deductible from collateral
proceeds or covered under the Rural Development guarantee. Attorney fees
incurred by the lender, without exception, cannot be approved.
Reasonable and customary liquidation expenses may be deducted from the
collateral proceeds in liquidation cases under Chapter 7 or Section 1123
(b)(4), [Liquidations]{.underline}, provided the lender is doing the
actual liquidation of the collateral and presents adequate written
justification for each expense and secures Rural Development\'s written
concurrence Prior to incurring the expense.

\(d\) If a trustee is appointed by the bankruptcy court to sell the
collateral under a Chapter 11 liquidation or Chapter 7, the trustee
rather than the lender in this instance, is responsible for liquidating
thUe collateral. Normally, any expenses incurred by the lender during
this period are not considered liquidation expenses and cannot be
deducted from collateral proceeds. The lender is not engaged in the
actual liquidation but is performing in a manner considered to be normal
servicing of the loan under the circumstances.

\(e\) If the property is abandoned by the trustee and the lender is
actually engaged in actual liquidation, reasonable liquidation expenses
would be recoverable from liquidation proceeds with prior written
concurrence for each expenses from Rural Development before the expense
is incurred.

\(f\) It is the responsibility of the State Program Chief to see that
Rural Development is being fully informed by the lender in all
bankruptcy cases.

\(g\) All bankruptcy cases should be reported immediately to the
National Office by utilizing and completing a problem/delinquent status
report. The Regional Attorney must be promptly informed of the
proceedings.

\(h\) Even if the loan is not in default the State Director may approve
the repurchase of the unpaid guaranteed portion of the loan from the
holder(s) to reduce interest accruals during Chapter 7 proceedings or
after a Chapter 11 proceeding becomes a liquidation proceeding.
(Paragraph 10.C. of the Loan Note Guarantee). On loans in bankruptcy,
any loss payment must be handled in accordance with the Lender\'s
Agreement and carry the approval of the State Director.

XX [Negligent Servicing]{.underline}

\(a\) Negligent servicing is defined in the Lender\'s Agreement \"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 or action 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.\"

(11-13-85) PN 985

RD Instruction 1980-E

Appendix G

Page 42

\(b\) If a lender fails to act responsibly as stated above, the
guarantee is unenforceable by the lender to the extent any loss is
occasioned by negligent servicing. As a practical matter, in many cases
it is hard to prove negligent servicing actually caused a loss. A
connection must be made between the lender\'s act or failure to act and
the loss amount to be established. The loss amount must be
ascertainable.

\(c\) When such a case arises, obtain all the facts and submit these
facts in writing to the Regional OGC for a legal opinion. Do not notify
the lender of any negligent act until such time as the Regional OGC
legally clears such actions.

\(d\) Legally Rural Development cannot withdraw the guarantee for
negligent servicing. The response to the lender in negligent servicing
cases, when no loss has been established, should merely put the lender
on notice that the act(s) of negligent servicing will cause the
guarantee to be unenforceable to the extent the act(s) causes a loss.

\(e\) When the lender holds the guaranteed portion of the loan and Rural
Development refuses to reimburse the lender for the portion of the
guarantee because of negligent servicing, while the lender must
institute suit, Rural Development will have the burden of proof
regarding the loss occasioned by negligent servicing. Also, if Rural
Development repurchased the guaranteed portion and the lender refuses to
reimburse Rural Development for the amount designated as negligent
servicing, Rural Development bears the burden of proof in court.

\(f\) An amount of loss must be ascertainable in negligent servicing
cases. If this cannot be accomplished, a legal case against the lender
would not be handled by the U.S. Attorney. A negotiated settlement would
be a practical course to take in these situations.

XXI [Fraud or Misrepresentation]{.underline}

\(a\) The guarantee constitutes an obligation supported by the full
faith and credit of the United States and is incontestable except for
fraud or misrepresentation of which the lender has actual knowledge at
the time it became such lender or which the lender participates in or
condones.

\(b\) Fraud is established by showing that an individual
(lender/borrower) made a material representation, and such
representation was false, that the individual knew it was false when the
individual made it and it was made with the intention that the
individual would benefit from such misrepresentation and another party
would act in reliance on such information and suffer damages.

\(c\) Misrepresentation is generally any material statement of alleged
fact which is untrue, or partly untrue, or which is so stated as to lead
to false conclusions. For example, a false description of the condition
of property on an insurance application which would lead to the wrong
premium being charged, is clearly a misrepresentation.

RD Instruction 1980-E

Appendix G

Page 43

\(d\) Nondisclosure can amount to misrepresentation or fraud if a
transaction is based on the existence of a particular fact and one party
fails to tell the other that the circumstances have changed with regard
to that particular fact.

\(e\) If the borrower makes fraudulent representation to the lender to
induce the lender/Rural Development to provide a loan or other benefits,
which the lender/Rural Development relied upon to its detriment, the
loan note guarantee would still be enforceable by the lender as long as
the lender had no knowledge or participated in the misrepresentations.
When such an act occurs and Rural Development becomes knowledgeable of
such act, the Regional Attorney must be immediately notified of all such
facts for a determination of action to be taken by Rural Development.

\(f\) If the lender made fraudulent representations, the loan note
guarantee would be contestable for the full amount of the loan in most
cases. However, Rural Development must:

\(1\) Prove that the lender made or participated in making a false
representation.

\(2\) Prove that the lender had knowledge or belief that the
representation was false, or that the lender had an insufficient basis
to make the representation.

\(3\) Prove that the lender intended to induce the Government to act or
refrain from action in reliance on the misrepresentation.

\(4\) Prove justifiable reliance by the Government on the
misrepresentation.

\(5\) Prove that such reliance caused damage to the Government.

\(g\) If Rural Development becomes aware of fraud or misrepresentation
by the lender, the Regional Attorney must be notified immediately of all
the facts for a determination of the action to be taken by Rural
Development.

\(h\) If for some reason Rural Development strongly suspects the lender
may have committed fraud or misrepresentation, it may be necessary to
request OIG to do an investigation to determine the facts. If possible,
this action should take place prior to referral of the case to OGC.

\(i\) If the guaranteed portion of the loan has been sold in the
secondary market and the holder makes a demand on Rural Development to
purchase the guaranteed portion of the loan under the conditions set
forth in paragraphs x C. and D of Form RD 449-35, Rural Development has
a legal responsibility to repurchase the guaranteed portion of the loan
except for fraud or misrepresentation of which the holder has actual
knowledge at the time it became the holder. (Paragraph 3 of the Loan
Note Guarantee)

(11-13-85) PN 985

RD Instruction 1980-E

Appendix G

Page 44

XXII [Final Report of Loss]{.underline}

\(a\) Before approval by Rural Development any final loss report, the
lender must account for all funds during the period of liquidation,
disposition of the collateral, all costs incurred and any other
information necessary for the successful completion of liquidation.

\(b\) Rural Development, upon receipt of the final accounting and the
report of loss, may review and determine the final loss. (Paragraph XI.
E.3 of the Lender\'s Agreement). If Rural Development has any questions
regarding the amounts set forth in the final report of loss, the matter
should be investigated. The lender should make its records available and
otherwise assist Rural Development in making the investigation. If Rural
Development finds any discrepancies, Rural Development will contact the
lender as soon as possible for any necessary corrections.

\(c\) Documentation should accompany the report of loss to support the
figures shown on the final loss report. Areas of special concern
include:

\(1\) The lender should document and show that all of the collateral has
been accounted for, properly liquidated, liquidation proceeds properly
accounted for and applied correctly on the loan. The State Office must
be satisfied that the lender has accomplished this in the manner set
forth in Form RD 449-35 and that the lender maximized the collections in
conducting the liquidation.

\(2\) The lender should show a breakdown on any protective advance
amount as to the payee, purpose of the expenditure, date paid, evidence
supporting the amount expended was proper and data showing the bill was
paid.

\(3\) Liquidation expenses must be accounted for by the lender in the
same manner as protective advance amounts. The lender should show a
breakdown of the liquidation expenses as to the payee, purpose of the
expenditure, date paid, evidence supporting the amount expended was
proper and data showing the bill was paid. Rural Development should
review all liquidation expenses to determine if the expenses were
proper, reasonable and claimed in accordance with the approval given by
Rural Development.

\(4\) Accrued interest owed to the lender should be supported by
attachments as to how the amount was accrued by the lender. A copy of
the promissory note and ledger should also be attached. As part of the
review of the final loss claim, the State Director should be assured
that the lender has not accrued interest on the amount of the loan that
is equal to the estimated loss payment. The State Office is responsible
for the accuracy of the interest calculations on the final report of
loss before submission to the Finance Office.

\(d\) If the interest on the loan was a variable interest rate tied to a
published standard, the interest charged by the lender should be
supported by documentation of when the changes in the interest rate
became effective.

RD Instruction 1980-E

Appendix G

Page 45

Rural Development should review this to see that the lender complied
with the rise and fall of the changes in the selected base rate and the
changes, if any, were made no more often than quarterly.

\(e\) The maximum loss that can be paid by Rural Development on any loan
guarantee will never exceed the original amount guaranteed plus any
accrued interest times the percentage of guarantee. For example, a
\$1,000,000, 90 percent guaranteed loan with \$100,000 accrued interest
on the loan and there is no collateral to liquidate and no payments were
made on the loan, the maximum loss would be 900,000 principal and
\$90,000 accrued interest.

\(f\) In the example cited, if there were protective advance amounts,
these amounts could not be authorized or paid by Rural Development since
the maximum amount was reached. Rarely would a situation occur as stated
as normally payments have been made on the loan before liquidation takes
place and there is collateral to be sold in liquidation cases.

## oOo

(11-13-85) PN 985

RD Instruction 1980-E

Appendix H

Suggested Format for the Opinion

of the Lender\'s Legal Counsel

[(LEGAL OPINION TO BE RETYPED ON LENDER\'S COUNSEL\'S
LETTERHEAD)]{.underline}

To: (Name of Lender)

I/we have acted as counsel to \_\_\_[(Lender)]{.underline}\_\_\_\_\_\_\_
in connection with a \$\_\_\_[(amount)]{.underline}\_\_\_\_\_
\_\_[(type)]{.underline}\_\_ loan by the
\_\_[(Lender)]{.underline}\_\_\_ (hereinafter \"the Lender\") to
[(Borrower)]{.underline} (hereinafter \"Borrower\"), the terms of which
loan are set forth in a certain Loan Agreement (hereinafter \"the Loan
Agreement\") executed by the Lender and Borrower on
\_\_\_[(date)]{.underline}\_.

In connection with this loan, I/we have examined:

1\. The corporate records of Borrower, including its Articles of
Incorporation, By-Laws and Resolutions of its Board of Directors.

2\. The Loan Agreement between the Lender and Borrower.

3\. The Security Agreement executed by Borrower on
\_\_\_[(date)]{.underline}\_\_\_\_\_\_.

4\. The Guaranty (where applicable) executed on
\_\_[(date)]{.underline}\_\_\_\_\_ by \_\_\_\_[(personal
guarantors)]{.underline}\_\_\_.

5\. Financing Statements executed by Borrower and the Lender.

6\. Real Estate Mortgages dated \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ and
executed by Borrower in favor of the Lender.

7\. Real Estate Mortgages dated \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ and/or
other security documents dated \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ executed
by \_\_\_\_[(personal guarantors)]{.underline}\_\_ in favor of the Bank.

8\. The appropriate title and/or lien searches relating to Borrower\'s
property.

9\. The pledge of stock and instruments related thereto.

10\. Such other materials, including relevant provisions of the laws of
this state as I/we have deemed pertinent as a basis for rendering the
opinion hereafter set forth.

## [IN SOME CIRCUMSTANCES]{.underline}

## 

11\. Lease(s) between Borrower and \_\_[(lessor\'s
name)]{.underline}\_\_ for the rental of \_\_\_[(property being
rented)]{.underline}\_\_, (if real property, give the address of the
premises; if machinery equipment, etc., give brief, precise description
of property for a \_\_[(length of lease)]{.underline}\_\_\_\_ term
commencing on \_\_[(date)]{.underline}\_\_\_.

(2-25-87) PN 41

RD Instruction 1980-E

Appendix H

Page 2

Based on the foregoing examinations, I am/we are of the opinion and
advise you that:

1\. Borrower is a duly organized corporation in good standing under the
laws of the Commonwealth/State of \_\_[(State)]{.underline}\_\_\_.

2\. Borrower has the necessary corporate power to authorize and has
taken the necessary corporate action to authorize the Loan Agreement and
to execute and deliver the Note, Security Agreement, Financing
Statement, and Mortgage. Said instruments hereinafter collectively
referred to as the \"Loan Instruments.\"

3\. The Loan Instruments were all duly authorized, executed, and
delivered and constitute the valid and legally binding obligation of the
Borrower and collectively create a valid (first) lien upon or valid
security interest in favor of the Lender, in the security covered
thereby, and are enforceable in accordance with their terms, except to
the extent that the enforceability (but not the validity) thereof may be
limited by laws of bankruptcy, insolvency, or other laws generally
affecting creditors\' rights.

4\. The execution and delivery of the Loan Instruments and compliance
with the Provisions thereof under the circumstances contemplated thereby
did not, do not and will not in any material respect conflict with,
constitute default under, or contravene any contract or agreement or
other instrument to which the Borrower is a Party or any existing law,
regulation, court order, or consent decree or device to which the
Borrower is subject.

5\. All applicable Federal, State and local tax returns and reports as
required have been duly filed by Borrower and all Federal, State and
local taxes, assessments and other governmental charges imposed upon
Borrower or its respective assets, which are due and payable, have been
paid.

6\. The Guaranty has been duly executed by the Guarantors and is a
legal, valid and binding joint and several obligations of the
Guarantors, enforceable in accordance with its terms, except to the
extent that the enforceability (but not the validity) thereof may be
limited by laws of bankruptcy, insolvency, or other laws generally
affecting creditors\' rights.

7\. All necessary consents, approvals, or authorizations of any
governmental agency or regulatory authority or of stockholders which are
necessary have been obtained. The improvements and the use of the
property comply in all respects with all Federal, State, and local laws
applicable thereto.

8\. (In cases involving subordinate or other than first lien position)
That the mortgage/deed of trust on Borrower\'s real estate and
(fixtures, e.g. machinery and equipment) and the security interest on
(type of collateral,

RD Instruction 1980-E

Appendix H

Page 3

e.g., machinery and equipment, accounts receivables and inventory) both
given as security to the Lender for the Loan, will be subordinate to
\_\_\_\_[(first mortgagee)]{.underline}\_\_ given as security for a loan
in the amount of \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_ and the security
interest in Borrower\'s \_\_[(type of collateral, e.g., accounts
inventory)]{.underline}\_ given to \_\_[(secured
creditor)]{.underline}\_ as security for a loan (state type of loan,
i.e., revolving line of credit, if known) in the amount of
\$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

9\. That there are no liens, as of the date hereof, on record with
respect to the property of Borrower other than those set forth above.

10\. There are no actions, suits or proceedings Pending or, to the best
of our knowledge, threatened before any court or administrative agency
against Borrower which could materially adversely affect the financial
condition and operations of Borrower.

11\. Borrower has good and marketable title to the real estate security
free and clear of all liens and encumbrances other than those set forth
above. I/we have no knowledge of any defect in the title of the Borrower
to the property described in the Loan Instruments.

12\. Borrower is the absolute owner of all property given to secure the
repayment of the loan, free and clear of all liens, encumbrances, and
security interests.

13\. Duly executed and valid functioning statements have been filed in
all offices in which it is necessary to file financing statements to
fully perfect the security interests granted in the Loan Instruments.

14\. Duly executed real estate mortgages/deeds of trust have been
recorded in all offices in which it is necessary to record to fully
perfect the security interests granted in the Loan Instruments.

15\. (IN SOME OTHER CIRCUMSTANCES) The Indemnification Agreement has
been duly executed by the Indemnitors and is a legal, valid and binding
joint and several obligation of the Indemnitors, enforceable in
accordance with its terms, except to the extent that the enforceability
(but not the validity) thereof may be limited by laws of bankruptcy,
insolvency, or other laws generally affecting creditors\' rights.

16\. That the lease contains a valid and enforceable right of assignment
and right of reassignment, enforceable in accordance with its terms,
except to the extent the enforceability (but not the validity) thereof
may be limited by laws of bankruptcy, insolvency, or other laws
generally affecting creditors\' rights.

(2-25-87) PN 41

RD Instruction 1980-E

Appendix H

Page 4

17\. The Lender\'s lien has been duly noted on all motor vehicle titles,
stock certificates or other instruments where such notations are
required for proper perfection of security interests therein.

18\. That a valid pledge of the outstanding and unissued stock and/or
shares of Borrower has been obtained and the Lender has a validly
perfected and enforceable security interest in the shares/stock of
Borrower, except to the extent the enforceability thereof may be limited
by laws of bankruptcy, insolvency, or other laws generally affecting
creditors rights.

## oOo 

RD Instruction 1980-E

Appendix I

Page 1

(Revision 2)

[INSTRUCTIONS FOR LOAN GUARANTEES FOR DROUGHT AND DISASTER
RELIEF]{.underline}

A. [In general]{.underline}. Drought and Disaster (D&D) guaranteed loans
are authorized by §331 (\"Disaster Assistance for Rural Business
Enterprises\") of the Disaster Assistance Act of 1988, which provides
for guarantees of up to 90 percent of the unpaid principal amount of
qualifying loans. Interest and protective advances are not covered by
the guarantee. Drought and Disaster Guaranteed loans may be either to
assist in alleviating financial distress caused to rural business
entities, directly or indirectly, by drought, hail, excessive moisture,
or related conditions occurring in 1988, or to assist such entities that
refinance or restructure debt as a result of losses incurred, directly
or indirectly, because of such natural disasters. Where used in this
appendix, the term \"natural disaster(s)\" refers only to drought, hail,
excessive moisture, and related conditions occurring in 1988. All
provisions of Subparts A and E of Part 1980 of this chapter apply to D&D
loans, except as provided in this appendix. All forms used in connection
with a D&D loan will be those used in connection with a B&I guaranteed
loan, except for the following three forms that are incorporated in this
Appendix I of this Subpart E, made a part hereof, and appear in the
Federal Register following the body of this appendix as Exhibits A, B,
and C in the following order:

\(1\) Form RD 1980-68, \"Lender\'s Agreement - Drought and Disaster
Guaranteed Loans,\" will be used instead of Form RD 449-35, \"Lender\'s
Agreement.\"

\(2\) Form RD 1980-69, \"Loan Note Guarantee - Drought and Disaster
Guaranteed Loans,\" will be used instead of Form RD 449-34, \"Loan Note
Guarantee.\"

\(3\) Form RD 1980-70, \"Assignment Guarantee Agreement - Drought and
Disaster Guaranteed Loans,\" will be used instead of Form RD 449-36,
\"Assignment Guarantee Agreement.\"

B. [Loan purposes]{.underline}. Except for §§1980.411(a)(11), 1980.412,
and paragraph C., below, loan proceeds may be used for purposes
described in §1980.411(a) if such use of loan proceeds will assist in
alleviating financial distress caused, directly or indirectly, by
drought, hail, excessive moisture, or related conditions which occurred
in 1988. In lieu of the debt refinancing requirements in
§1980.411(a)(ll), the following refinancing requirements apply to D&D
loans. Loan proceeds to be used for refinancing must be used solely for
refinancing or restructuring of debts as a result of losses incurred,
directly or indirectly, as a result of drought, hail, excessive
moisture, or related conditions occurring in 1988, and such refinancing
or restructuring of debt(s) must be essential for the borrower to meet
its financial obligations in a timely fashion. In addition, D&D loan
proceeds may be used for hotels, motels, tourist or recreation
facilities which meet the eligibility requirements for D&D guaranteed
loans. (Revised 6-28-89, PN 111)

(1-3-89) SPECIAL PN

RD Instruction 1980-E

Appendix I

Page 2

(Revision 2)

C. [Ineligible loan purposes]{.underline}. See §1980.412. Except for
hotels, motels, tourist and recreation facilities mentioned in paragraph
B of this appendix, purposes listed as ineligible B&I loan purposes are
ineligible D&D loan purposes. In addition, D&D guaranteed loans may not
be used for: (Revised 6-28-89, PN 111)

\(1\) Business expansion, acquisition of real estate, machinery,
equipment, inventory, other goods or services, or for any other purpose
unless related directly to the financial distress or loss that is the
basis for the D&D loan.

\(2\) Any eligible agricultural production purpose if annual tillage of
the soil is involved.

\(3\) Refinancing or restructuring debt(s) which are or were in payment
default more than 60 consecutive days during the 12 months preceding the
date of the adverse financial effect of the natural disaster of 1988
upon the borrower.

D. [Transactions which will not be guaranteed]{.underline}. In addition
to transactions listed in §1980.413, Rural Development will not
guarantee:

\(1\) D&D guaranteed loan(s) to any borrower if the total cumulative
principal amount of D&D guaranteed loan(s) to that borrower would exceed
\$500,000, or

\(2\) Any D&D guaranteed loan if the completed application is not
received by Rural Development on or before September 30, 1991.

E. [Borrower equity requirements]{.underline}. See §1980.441. In lieu of
the borrower equity requirements in §1980.441, paragraphs (a) and (b),
the following applies to D&D loans. Tangible balance sheet equity must
be positive when the Loan Note Guarantee is issued. Equity must be such
that, when considered with other credit factors, repayment of the loan
and the continued success of the business operation are reasonably
assured. Requirements of §1980.441(c) apply to D&D guaranteed loans.

F. [Filing and processing preapplications and applications]{.underline}.
See §1980.451. All requirements of §1980.451 remain in effect. But, in
addition to the information required as part of a preapplication under
§1980.451(f), and unless previously submitted, as a part of an
application under §1980.451(i), evidence is required which demonstrates:

\(1\) The causal relationship between a 1988 natural disaster and the
financial distress or loss upon which the preapplication or application
is based; and,

RD Instruction 1980-E

Appendix I

Page 3

\(2\) That the amount of the loan requested is not greater than the
amount necessary for curing the problems caused by the natural disaster.
Financial distress or loss shall be determined on the basis of a
comparison of financial data for comparable periods of time and need not
necessarily be based on data at the year\'s end. Evidence submitted may
include, but is not limited to, the following:

\(a\) Evidence of financial loss or distress (including loss or distress
caused by business interruption) resulting from physical damage caused
by natural disaster, or

\(b\) Evidence that the financial loss and/or distress of the business
is the direct or indirect result of loss of sales, business
interruption, loss of markets, shortage of raw materials, or decline in
patronage or customers caused by a natural disaster. It must be shown
that business operations were damaged as a result of such natural
disaster.

G. [Loan guarantee limit]{.underline}. See §1980.20 of Subpart A. The
maximum loss covered by the Loan Note Guarantee, Form RD 1980-69, can
never exceed the percentage of guarantee multiplied by the unpaid
principal amount of the loan as evidenced by the note(s) or by
assumption agreement(s). Interest, capitalized interest, and protective
advances are not covered by the guarantee of a D&D loan.

H. [Percentage of guarantee]{.underline}. See §1980.420. The maximum
percentage of guarantee on a D&D loan is 90 percent of the unpaid
principal.

I. [Lender\'s existing unguaranteed exposure]{.underline}. The
provisions of §1980.452 ADMINISTRATIVE C. l(d) do not apply.

J. [No direct or \"insured\" loans]{.underline}. §§1980.423(b),
1980.488(b), 1980.481, 1980.411(b), and other provisions of this subpart
dealing with \"insured\" or direct loans do not apply to D&D loans. All
D&D loans are Rural Development guaranteed loans. Rural Development has
no authority to make D&D loans directly to borrowers.

## oOo

(1-3-89) SPECIAL PN

Appendix I, Exhibit A in PDF ONLY.

Appendix I, Exhibit B in PDF ONLY.

Appendix I, Exhibit C in PDF ONLY.

RD Instruction 1980-E

Appendix J

## BUSINESS AND INDUSTRY

## APPLICATION PRIORITY POINTS SCORING

Name Date: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

State \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

List the maximum points the applicant is eligible for under each
category.

Jobs created\_\_\_\_\_\_ Jobs saved\_\_\_\_\_ Total jobs \_\_\_\_\_\_

Loan amount \$\_\_\_,\_\_\_,\_\_\_ Index factor\_\_\_\_\_

State income \$\_\_\_,\_\_\_ Indexed State income \$ \_\_,\_\_\_

National unemployment \_\_\_.\_% Area unemployment \_\_.\_%

1\. Location:

A. Located in city or area under 25,000. (10 points) \_\_\_

B. Located in city or area under 25,000 population

which is a high unemployment area. (20 points) \_\_\_

C. Located in a high unemployment area and the

borrower has certified that at least 25 percent

of its employees will be displaced farmers.

(35 points) \_\_\_

2\. Jobs:

A. Project will contribute to the overall economic

stability of the area and generate employment

beyond entrepreneur\'s household. (10 points) \_\_\_

B. Project will contribute to the overall economic

stability of the area and provide significant

employment in the area. (20 points) \_\_\_

C. Project will contribute to the overall economic

stability of the area, provide significant full-

time employment in the area, and retain a

significant number of jobs in the area.(35 points) \_\_\_

3\. Job cost: \[See RD Instruction 1980-E. §1980.451

(d)(3)(iii), for calculation instructions\]

A. Job cost score greater than 1.5 but less than

2.0. (5 points) \_\_\_

B. Job cost score from 1.0 to 1.5. (15 points) \_\_\_

C. Job cost score less than 1.0. (25 points) \_\_\_

(8-30-89) PN 116

RD Instruction 1980-E

Appendix J

Page 2

4\. Additional points: \[Give points for each criteria met\]

A. Loan is less than 50 percent of project cost.

(5 points) \_\_\_

B. Percentage of guarantee is 10 or more percentage

points less than the maximum allowable. (5 points) \_\_\_

C. Project will create a significant number of part-

time or seasonal jobs in addition to permanent

full-time jobs. (10 points) \_\_\_

5\. State Director\'s administrative points: (May be up to

20 points but documentation must support the number

given)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_

Total points \_\_\_

Is applicant eligible for veteran preference?\_\_\_\_\_

Date served:\_\_\_\_\_\_\_\_ to\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

State Director

THE FOLLOWING TO BE COMPLETED BY THE NATIONAL OFFICE ON

APPLICATIONS SUBMITTED TO THE NATIONAL OFFICE:

Administrator\'s administrative points: (May be up to

20 points but documentation must support the number

given)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_

Total points \_\_\_

## oOo 

RD Instruction 1980-E

Appendix K

Page 1

(Revision 1)

## [REGULATIONS FOR LOAN GUARANTEES FOR DISASTER ASSISTANCE]{.underline}

## [FOR RURAL BUSINESS ENTERPRISES]{.underline}

A. [In General]{.underline}. Disaster Assistance for Rural Business
Enterprises (DARBE) guaranteed loans are authorized by §401 of the
Disaster Assistance Act of 1989, which provides for guarantees of up to
90 percent of the unpaid principal and interest amount of qualifying
loans, or \$2,500,000 whichever is less, to any one borrower. DARBE
guaranteed loans may be either to assist in alleviating financial
distress caused to rural business entities, directly or indirectly, by
drought, freeze, storm, excessive moisture, earthquake or related
conditions occurring in 1988 or 1989, or to assist such entities that
refinance or restructure debt as a result of losses incurred, directly
or indirectly, because of such natural disasters. Where used in this
appendix, the term \"natural disaster(s)\" refers only to drought,
freeze, storm, excessive moisture, earthquake and related conditions
occurring in 1988 or 1989. All provisions of Subparts A and E of Part
1980 of this chapter apply to DARBE loans, except as provided in this
appendix. All forms used in connection with a DARBE loan will be those
used in connection with a Business and Industrial (B&I) guaranteed loan,
except for the following three forms that are incorporated in this
Appendix K of this Subpart E, made a part hereof, and appear in the
Federal Register following the body of this appendix as exhibits A, B,
and C in the following order: (Revised 5-9-90, PN 133)

\(1\) Form RD 1980-71, \"Lender\'s Agreement - Disaster Assistance for
Rural Business Enterprise Guaranteed Loans,\" will be used instead of
Form RD 449-35, \"Lender\'s Agreement.\"

\(2\) Form RD 1980-72, \"Loan Note Guarantee - Disaster Assistance for
Rural Business Enterprise Guaranteed Loans,\" will be used instead of
Form RD 449-34, \"Loan Note Guarantee.\"

\(3\) Form RD 1980-73, \"Assignment Guarantee Agreement - Disaster
Assistance for Rural Business Enterprise Guaranteed Loans,\" will be
used instead of Form RD 449-36, \"Assignment Guarantee Agreement.\"

B. [Loan purposes]{.underline}. Loan proceeds may be used for purposes
described in §1980.411(a), except in lieu of the debt refinancing
requirements in §1980.411(a)(11), the following refinancing requirements
apply to DARBE loans. Loan proceeds to be used for refinancing must be
used solely for refinancing or restructuring of debts as a result of
losses incurred, directly or indirectly, as a result of drought, freeze,
storm, excessive moisture, earthquake or related conditions occurring in
1988 or 1989, and such refinancing or restructuring of debt(s) must be
essential for the borrower to meet its financial obligations in a timely
fashion. DARBE loan proceeds may be used for hotels, motels, tourist, or
recreation facilities which meet the eligibility requirements of DARBE
guaranteed loans in addition to the eligible loan purposes as stated in
RD Instruction 1980-E. In addition, DARBE loan proceeds may be used for
business enterprises engaged in agricultural production (Production
agriculture) which means the

RD Instruction 1980-E

Appendix K

Page 2

(Revision 1)

cultivation, production (growing), and harvesting, either directly or
through integrated operations, of agricultural products (crops, animals,
birds, and marine life, either for fibers or food for human
consumption), and disposal or marketing thereof, the raising, housing,
feeding (including commercial custom feedlots), breeding, hatching,
control and/or management of farm and domestic animals. Other eligible
uses of loan proceeds under agricultural production include; (Revised
5-9-90, PN 133)

\(1\) Commercial nurseries primarily engaged in the production of
ornamental plants and trees and other nursery products such as bulbs,
florists\' greens, flowers, shrubbery, flower and vegetable seeds, sod,
and the growing of vegetables from seed to the transplant stage.

\(2\) Forestry which includes establishments primarily engaged in the
operation of timber tracts, tree farms, forest nurseries, and related
activities such as reforestation.

\(3\) Loans for livestock and poultry processing as identified under
eligible purposes.

\(4\) The growing of mushrooms or hydroponics.

In addition, those business enterprises which qualify for assistance as
agricultural production must be ineligible entities for Rural
Development farmer program loans because the entity exceeds the
definition of a family-size farm as defined by RD Instruction 1941-A,
§1941.4 (d).

C. [Ineligible loan purposes]{.underline}. RD Instruction 1980-E,
§1980.412 are ineligible purposes for DARBE guaranteed loans except for
hotels, motels, tourist, recreation facilities and agricultural
production (production agriculture) as defined in §1980.412(e), DARBE
guaranteed loans may not be used for:

\(1\) Business expansion, acquisition of real estate, machinery,
equipment, inventory, other goods or services, or for any other purpose
unless related directly to the financial distress or loss that is the
basis for the DARBE guaranteed loan.

\(2\) Alleviating financial distress of entities engaged in agricultural
production that are eligible for other Rural Development-type farm loan
programs.

D. [Transactions which will not be guaranteed]{.underline}. In addition
to transactions listed in RD Instruction 1980-E, §1980.413, except for
§1980.413(a)(3). Rural Development will not make DARBE guaranteed loans
if the completed application is not received by Rural Development on or
before September 30, 1991, nor will Rural Development make subsequent
DARBE guarantee loans.

RD Instruction 1980-E

Appendix K

Page 3

(Revision 1)

E. [Borrower equity requirements]{.underline}. See RD Instruction
1980-E, §1980.441. In lieu of the borrower equity requirements in
§1980.441, paragraphs (a) and (b), the following applies to DARBE loans.
Tangible balance sheet equity must be positive when the Loan Note
Guarantee is issued. Equity must be such that, when considered with
other credit factors, repayment of the loan and the continued success of
the business operation are reasonably assured. Requirements of
§1980.441(c) apply to DARBE guaranteed loans.

F. [Filing and processing preapplications and applications]{.underline}.
See RD Instruction 1980-E, §1980.451. All requirements of §1980.451
remain in effect. In addition to the information required as part of a
preapplication under §1980.451(f), and unless previously submitted as a
part of an application under §1980.451(i) evidence is required which
demonstrates to Rural Development\'s satisfaction:

\(1\) The causal relationship between a 1988 or 1989 natural disaster
and the financial distress or loss upon which the preapplication or
application is based; and,

\(2\) That the amount of the loan requested is not greater than the
amount necessary for curing the problems caused by the natural disaster.
Financial distress or loss shall be determined on the basis of a
comparison of financial data for comparable periods of time and need not
necessarily be based on data at the year\'s end. Evidence submitted may
include, but is not limited to, the following:

\(a\) Evidence of financial loss or distress (including loss or distress
caused by business interruption) resulting from physical damage caused
by natural disaster, or

\(b\) Evidence that the financial loss and/or distress of the business
is the direct or indirect result of loss of sales, business
interruption, loss of markets, shortage of raw materials, or decline in
patronage or customers caused by a natural disaster. It must be shown
that business operations were damaged as a result of such natural
disaster.

\(3\) Evidence of compliance with Sodbuster and Swampbuster requirements
as referenced in paragraph K below.

G. [Loan guarantee limit]{.underline}. The total principal amount of
DARBE guaranteed loans to any one borrower cannot exceed \$10,000,000.
The maximum loss covered by Form RD 1980-72, \"Loan Note Guarantee
DARBE,\" issued on any one borrower can never exceed the percentage of
guarantee multiplied by the unpaid principal and accrued interest on the
loan as evidenced by the note(s) or by assumption agreement(s), and
protective advances, or \$2,500,000, whichever is the lesser amount.
(Revised 1-3-90, SPECIAL PN)

RD Instruction 1980-E

Appendix K

Page 4

(Revision 1)

H. [Percentage of guarantee]{.underline}. The provisions of RD
Instruction 1980-E, §1980.420 will not apply to DARBE. For loans in
excess of \$2,000,000 the percentage of guarantee will be calculated so
that the guaranteed portion of the principal amount of the loan cannot
exceed \$2,000,000. For loans of \$2,000,000 or less the maximum
percentage of guarantee will be 90 percent. For example, a loan of
\$10,000,000 would not exceed a 20 percent guarantee; a \$5,000,000 loan
would not exceed a 40 percent guarantee, etc. (Revised 1-3-90, SPECIAL
PN)

I. [Lender\'s existing unguaranteed exposure]{.underline}. The
provisions of §1980.452 ADMINISTRATIVE C. 1(d) do not apply.

J. [No direct or insured loans]{.underline}. RD Instruction 1980-E,
§§1980.423(b), 1980.488(b), 1980.481, 1980.411(b), and other provisions
or this subpart dealing with insured or direct loans do not apply to
DARBE loans. All DARBE loans are Rural Development guaranteed loans.
Rural Development has no authority to make DARBE loans directly to
borrowers.

K. Sodbuster and Swampbuster requirements. The provisions of RD
Instruction 1940-G, Exhibit M, will apply to loans made to rural
business enterprises engaged in agricultural production.

## oOo