PART 1951 - SERVICING AND COLLECTIONS

Subpart R - Rural Development Loan Servicing

## TABLE OF CONTENTS

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

1951.851 Introduction. 1

1951.852 Definitions and Abbreviations. 1

\(a\) General definitions. 1

\(b\) Abbreviations. 3

1951.853 Loan purposes for undisbursed RDLF loan 3

funds from HHS.

\(a\) RDLF intermediaries. 3

\(b\) Ultimate recipients. 4

1951.854 Ineligible assistance purposes. 5

\(a\) RDLF intermediaries. 5

\(b\) Ultimate recipients. 6

1951.855 - 1951.858 \[Reserved\] 7

1951.859 Terms of loans. 7

1951.860 Interest on loans. 7

1951.861 - 1951.865 \[Reserved\] 9

1951.866 Security. 9

\(a\) Loans from RDLF intermediaries to ultimate 9

recipients.

\(b\) Additional security. 9

\(c\) Appraisals. 10

1951.867 Conflict of interest. 10

1951.868 - 1951.870 \[Reserved\] 10

1951.871 Post award requirements. 10

1951.872 Other regulatory requirements. 11

\(a\) Intergovernmental consultation. 11

\(b\) Environmental requirements. 12

\(c\) Equal opportunity and nondiscrimination 12

requirements.

1951.873 - 1951.876 \[Reserved\] 13

1951.877 Loan agreements. 13

1951.878 - 1951.880 \[Reserved\] 14

1951.881 Loan servicing. 14

1951.882 Field visits. 17

1951.883 Reporting requirements. 19

1951.884 Non-Federal funds. 20

1951.885 Loan classifications. 20

\(a\) Seasoned loan classification. 21

\(b\) Current non-problem classification. 21

\(c\) Special mention Classification. 21

\(d\) Substandard classification. 22

\(e\) Doubtful classification. 22

\(f\) Loss classification. 22

1951.886 - 1951.888 \[Reserved\] 22

1951.889 Transfer and assumption. 22

1951.890 Office of Inspector General and Office 23

of General Counsel referrals.

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RD Instruction 1951-R

Table of Contents

Page 2

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

1951.891 Liquidation; default. 23

1951.892 - 1951.893 \[Reserved\] 25

1951.894 Debt settlement. 25

1951.895 \[Reserved\] 25

1951.896 Appeals. 25

1951.897 Exception authority. 25

1951.898 - 1951.899 \[Reserved\] 25

1951.900 OMB Control Number. 25

RD Instruction 1951-R

PART 1951 - SERVICING AND COLLECTIONS

Subpart R - Rural Development Loan Servicing

§1951.851 [Introduction]{.underline}.

\(a\) This Subpart contains regulations for servicing or liquidating
loans made by Rural Development under the Intermediary Relending Program
(IRP) to eligible IRP intermediaries and applies to ultimate recipients
and other involved parties. The provisions of this Subpart supersede
conflicting provisions of any other Subpart.

\(b\) This Subpart also contains regulations for servicing the existing
Rural Development Loan Fund (RDLF) loans previously approved and
administered by the U.S. Department of Health and Human Services (HHS)
under 45 CFR Part 1076. This action is needed to implement the
provisions of Section 1323 of the Food Security Act of 1985, P.L.
99-198, which provides for the transfer of the loan servicing authority
for those loans from the HHS to the U.S. Department of Agriculture
(USDA).

\(c\) The portion of this regulation pertaining to loanmaking applies to
RDLF intermediaries cited in §1951.851(b) which have RDLF funds from HHS
and have not fully utilized relending of those funds to ultimate
recipients at the date of these regulations. The loanmaking of all other
IRP loans serviced by this regulation is in accordance with Part 1948,
Subpart C of this Chapter.

\(d\) These regulations do not negate contractual arrangements that were
previously made by the HHS, Office of Community Services (OCS), or the
intermediaries operating relending programs that have already been
entered into with ultimate recipients under previous regulations.

\(e\) The loan program is administered by the Rural Development National
Office. The Director, Business and Industry Division, is the point of
contact for servicing activities unless otherwise delegated by the
Administrator.

\(f\) Rural Development will input the necessary data via terminal
screens into the Rural Community Facility Tracking System (RCFTS) on the
RDLF loans. If Rural Development so desires. Form RD 2033-34,
\"Management System Card - Business and Industry,\" may be prepared in
accordance with RD Instruction 2033-F. (Added 6-27-90, PN 138)

§1951.852 [Definitions and abbreviations]{.underline}.

\(a\) [General definitions]{.underline}. The following definitions are
applicable to the terms used in this Subpart.

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

DISTRIBUTION: WSDC Account Servicing

Servicing and Collections

## 1

## (Revision 1)

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RD Instruction 1951-R

§1951.852 (a)(Con.)

\(1\) [Intermediary]{.underline} (Borrower). The entity receiving Rural
Development loan funds for relending to ultimate recipients. Rural
Development becomes an intermediary in the event it takes over loan
servicing and/or liquidation.

\(2\) [Loan Agreement]{.underline}. The signed agreement between Rural
Development and the intermediary setting forth the terms and conditions
of the loan.

\(3\) [Low-income]{.underline}. The level of income of a person or
family which is at or below the Poverty Guidelines as defined in Section
673(2) of the Community Services Block Grant Act (42 U.S.C. 9902(2)).

\(4\) [Market value]{.underline}. The most probable price which property
should bring, as of a specific date in a competitive and open market,
assuming the buyer and seller are prudent and knowledgeable, and the
price is not affected by undue stimulus such as forced sale or loan
interest subsidy.

\(5\) [Principals of Intermediary]{.underline}. Includes members,
officers, directors, and other entities directly involved in the
operation and management of an intermediary organization.

\(6\) [Ultimate recipient]{.underline}. The entity receiving financial
assistance from the intermediary. This may be interchangeable with the
term \"subrecipient\" in some documents previously issued by HHS.

\(7\) [Rural area]{.underline}. Includes all territory of a State that
is not within the outer boundary of any city having a population of
twenty-five thousand or more.

\(8\) [State]{.underline}. Any of the fifty States, the Commonwealth of
Puerto Rico, the Virgin Islands of the United States, Guam, American
Samoa, and the Commonwealth of the Northern Mariana Islands.

\(9\) [Technical assistance or service]{.underline}. Technical
assistance or service is any function unreimbursed by Rural Development
performed by the intermediary for the benefit of the ultimate recipient.

## 2

## (Revision 1) 

RD Instruction 1951-R

§ 1951.852(a) (Con.)

\(10\) [Working capital]{.underline}. The excess of current assets over
current liabilities. It identifies the liquid portion of total
enterprise capital which constitutes a margin or buffer for meeting
obligations within the ordinary operating cycle of the business.

\(b\) [Abbreviations]{.underline}. The following abbreviations are
applicable: (Revised 02-06-98, SPECIAL PN.)

[B&I]{.underline} - Business and Industry

[CSA]{.underline} - Community Services Administration

[EIS]{.underline} - Environmental Impact Statement

[HHS]{.underline} - U.S. Department of Health and Human Services

[IRP]{.underline} - Intermediary Relending Program

[OCS]{.underline} - Office of Community Services

[OIG]{.underline} - Office of Inspector General

[OGC]{.underline} - Office of the General Counsel

[RDLF]{.underline} - Rural Development Loan Fund

[USDA]{.underline} - United States Department of Agriculture

§ 1951.853 [Loan purposes for undisbursed RDLF loan funds from
HHS]{.underline}.

\(a\) [RDLF Intermediaries]{.underline}. Rural Development Loan funds
will be used by the RDLF intermediary to provide loans to ultimate
recipients in accordance with paragraph (b) of this section. Interest
income, service fees, and other authorized financing charges received by
RDLF intermediaries operating relending programs may be used to pay for:
(1) The costs of administering the RDLF relending program, (2) the
provision of technical assistance to borrowers, (3) the absorption of
bad debts associated with RDLF loans, and (4) repayment of debt. All
proceeds in excess of those needed to cover authorized expenses, as
described above, must be returned to the Agency.

## 3

## (Revision 1)

(08-25-88) SPECIAL PN

RD Instruction 1951-R

§ 1951.853 (Con.)

\(b\) [Ultimate recipients]{.underline}.

\(1\) Financial assistance from the intermediary to the ultimate
recipient must be for business facilities and community development
projects in rural areas.

\(2\) Financial assistance involving Rural Development Loan funds from
the intermediary to the ultimate recipient may include but not be
limited to:

\(i\) Business acquisitions, construction, conversion, enlargement,
repair, modernization, or development cost.

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

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

\(iv\) Pollution control and abatement.

\(v\) Transportation services.

\(vi\) Startup operating costs and working capital.

\(vii\) Interest (including interest on interim financing) during the
period before the facility becomes income producing, but not to exceed 3
years.

\(viii\) Feasibility studies.

\(ix\) Reasonable fees and charges only as specifically listed in this
subparagraph. Authorized fees include loan packaging fees, environmental
data collection fees, and other professional fees rendered by
professionals generally licensed by individual State or accreditation
associations, such as engineers, architects, lawyers, accountants, and
appraisers. The amount of fee will be what is reasonable and customary
in the community or region where the project is located. Any such fees
are to be fully documented and justified.\
(Revised 02-06-98, SPECIAL PN.)

## 4

## (Revision 1) 

§1951.853 (b)(2)(Con.) RD Instruction 1951-R

\(x\) 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 or regulated stock of
fish.

§1951.854 [Ineligible assistance purposes]{.underline}.

\(a\) [RDLF Intermediaries]{.underline}. RDLF loans may
[not]{.underline} be used by the intermediary:

\(1\) For payment of the intermediary\'s own administrative costs or
expenses.

\(2\) To purchase goods or services or render assistance in excess of
what is needed to accomplish the purpose of the ultimate recipient
project.

\(3\) For distribution or payment to the owner, partners, shareholders,
or beneficiaries of the ultimate recipient or members of their families
when such persons will retain any portion of their equity in the
ultimate recipient.

\(4\) For charitable and educational institutions, churches,
organizations affiliated with or sponsored by churches, and fraternal
organizations.

\(5\) For assistance to government employees, military personnel, or
principals or employees of the intermediary who are directors, officers
or have major ownership (20 percent or more) in the ultimate recipient.

\(6\) For relending in a city with a population of twenty-five thousand
or more as determined by the latest decennial census.

\(7\) For a loan to an ultimate recipient which has applied or received
a loan from another intermediary unless Rural Development provides prior
written approval for such loan.

\(8\) For any line of credit.

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RD Instruction 1951-R

§1951.854 (a)(Con.)

\(9\) To finance more than 75 percent of the total cost of a project by
the ultimate recipient. The total amount of RDLF loan funds requested by
the ultimate recipient plus the outstanding balance of any existing RDLF
loan(s) will not exceed \$150,000. Other loans, grants, and/or
intermediary or ultimate recipient contributions or funds from other
sources must be used to make up the difference between the total cost
and the assistance provided with RDLF funds.

\(10\) For any investments in securities or certificates of deposit of
over 30-day duration without the concurrence of Rural Development. If
the RDLF funds have been unused to make loans to ultimate recipients for
6 months or more, those funds will be returned to Rural Development
unless Rural Development provides an exception to the RDLF intermediary.
Any exception would be based on evidence satisfactory to Rural
Development that every effort is being made by the intermediary to
utilize the RDLF funding in conformance with program objectives.

\(b\) [Ultimate recipients]{.underline}. Ultimate recipients may
[not]{.underline} use assistance received from RDLF intermediaries
involving RDLF funds:

\(1\) For agricultural production, which means the cultivation,
production (growing), 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, breeding, hatching,
control and/or management of farm and domestic animals). Exceptions to
this definition are:

\(i\) Aquaculture as identified under eligible purposes.

\(ii\) 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,
the growing of vegetables from seed to the transplant stage.

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

\(iv\) Financial assistance for livestock and poultry processing as
identified under eligible purposes.

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

## 6 

§1951.854 (b)(Con.) RD Instruction 1951-R

\(2\) For the transfer of ownership unless the loan will keep the
business from closing, or prevent the loss of employment opportunities
in the area, or provide expanded job opportunities.

\(3\) For community antenna television services or facilities.

\(4\) For any legitimate business activity when more than 10 percent of
the annual gross revenue is derived from legalized gambling activity.

\(5\) For any illegal activity.

\(6\) For any otherwise eligible project that is in violation of either
a Federal, State or local environmental protection law or regulation or
an enforceable land use restriction unless the financial assistance
required will result in curing or removing the violation.

\(7\) For any hotels, motels, tourist homes, or convention centers.

\(8\) For any tourist, recreation, or amusement centers.

§§1951.855 - 1951.858 \[Reserved\]

§1951.859 [Terms of loans]{.underline}.

\(a\) No loans shall be extended for a period exceeding 30 years.
Principal payments on loans will be made at least annually. The initial
principal payment may be deferred not more than 3 years.

\(b\) The terms of loan repayment will be those stipulated in the loan
agreement and/or promissory note.

§1951.860 [Interest on loans]{.underline}.

\(a\) RDLF intermediaries: When the RDLF loan portfolio was transferred
from HHS to USDA as required under P.L. 99-198, Section 1323 of the Food
Security Act of 1985, there were provisions that affected the interest
rates on those loans.

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RD Instruction 1951-R

§1951.860 (a)(Con.)

\(1\) Those loans made in 1980 and 1981 carried an original note rate of
1 percent interest when they were first issued. The legislation provides
for those loans made in 1980 and 1981 to have a permanent interest rate
reduction to 1 percent effective December 23, 1985, to maturity.
However, the interest rates on the loans made in 1983 and 1984 may
remain the same as the original note rate.

\(2\) Loans made in 1983 and 1984 do not automatically qualify for a
lower rate than the level of interest rates when the notes were first
issued. Section 407 of P.L. 99-425 provides for a weighted average
requirement that would affect those loans made in 1983 and 1984 to
intermediary borrowers.

\(3\) In those cases where loans were made to RDLF intermediaries and
the weighted average of all loans made by the RDLF intermediary after
December 31, 1982, does not exceed the sum of 6 percent plus the
interest rate to the intermediary (7 Percent), the interest rate to be
charged the RDLF intermediary will be the rate charged on such loans
made in 1980, or 1 percent. Should the weighted average exceed 7
percent, the note rate will control.

\(i\) In order for Rural Development to determine the weighted average
of the loan portfolio, the RDLF intermediary will be required to
complete a weighted loan average rate on its outstanding portfolio. The
schedule prepared for Rural Development\'s review should include:

\(A\) Calculations of the interest amount scheduled to accrue on each
loan outstanding over a l-year period based on the current interest rate
of each ultimate recipient\'s loan.

\(B\) The sum total of interest on each individual loan will be added
together to determine the total interest amount scheduled to accrue over
a l-year period.

\(C\) Divide the total of paragraph (a)(2) of this section by the total
principal outstanding to determine the average interest percent yield in
the intermediary\'s loan portfolio.

## 8 

§1951.860 (a)(3)(i) RD Instruction 1951-R

\(D\) The loans to be included in determining the weighted interest
average will be those made from January 1, 1983, forward.

\(E\) Rural Development will use the anniversary date of October 1 of
each year to request the intermediary to complete a weighted interest
average to determine the interest rate on its RDLF loan for the coming
calendar year, January 1 through December 31. All loans made in 1980 and
1981 have had the interest rate permanently reduced by legislation to 1
percent, effective December 25, 1985.

\(F\) The weighted loan average interest rate on the outstanding loan
portfolio as referenced in this section will be forwarded to Rural
Development along with sufficient documentation which should include
calculations, list of outstanding loans, current interest rate being
charged on the loan, etc.

\(b\) Interest rates charged by intermediaries to the ultimate
recipients shall be at rates negotiated by those parties. Intermediaries
are encouraged to make loans to ultimate recipients at the lowest
possible rate, taking into account the cost of the loan funds to the
intermediary and the cost of administering the loan portfolio.

§§1951.861 - 1951.865 \[Reserved\]

§1951.866 [Security]{.underline}.

\(a\) [Loans from RDLF intermediaries to ultimate
recipients]{.underline}. Security requirements for loans from
intermediaries to ultimate recipients will be negotiated between the
intermediaries and ultimate recipients. Rural Development concurrence in
the intermediary\'s security proposal is required only when security for
the loan from the intermediary to the ultimate recipient will also serve
as security for the Rural Development loan.

\(b\) [Additional security]{.underline}. The Rural Development may
require additional security at any time during the term of a loan to an
intermediary if, after review and monitoring, an assessment indicates
the need for such security.

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(8-25-88) SPECIAL PN

RD Instruction 1951-R

§1951.866 (Con.)

\(c\) [Appraisals]{.underline}. Real property serving as security for
all loans to intermediaries and for loans to ultimate recipients serving
as security for loans to intermediaries will be appraised by a qualified
appraiser. For all other types of property, a valuation shall be made
using any recognized, standard technique for the type of property
involved (including standard reference manuals), and this valuation
shall be described in the loan file.

§1951.867 [Conflict of interest]{.underline}.

The intermediary will, for each proposed loan to an ultimate recipient,
inform Rural Development in writing and furnish such additional evidence
as Rural Development requests as to whether and the extent to which the
intermediary or its principal officers (including immediate family) hold
any legal or financial interest or influence in the ultimate recipient
or the ultimate recipient or any of its principal officers (including
immediate family) holds any legal or financial interest or influence in
the intermediary. Rural Development shall determine whether such
ownership, influence or financial interest is sufficient to create a
potential conflict of interest. In the event Rural Development
determines there is a conflict of interest, the intermediary\'s
assistance to the ultimate recipient will not be approved until such
conflict is eliminated.

§§1951.868 - 1951.870 \[Reserved\]

§1951.871 [Post award requirements]{.underline}.

\(a\) RDLF intermediaries with undisbursed RDLF loan funds shall be
governed by these regulations, the loan agreement, the approved work
program, security interests, and other conditions which Rural
Development may require in awarding a loan.

\(b\) Unless otherwise specifically agreed to in writing by the Rural
Development, any loan funds held by an intermediary and any funds
obtained from loaning Rural Development-derived funds and recollecting
them that are not immediately needed by the intermediary for an ultimate
recipient should be deposited in an interest-bearing account in a bank
or other financial institution which will be covered by a form of
Federal deposit insurance. Any interest or income earned as a result of
such deposits shall be used by the intermediary only for purposes
authorized by Rural Development.

## 10 

§1951.871 (Con.) RD Instruction 1951-R

\(c\) Intermediaries operating relending programs must maintain separate
ledgers and segregated accounts for RDLF funds at all times.

\(d\) Reporting requirements shall be those delineated in the loan
agreement between the United States and the intermediary and such
subsequent requirements as Rural Development deems appropriate. The
intermediaries must document periodically the extent to which increased
employment, income and ownership opportunities are provided to rural
residents for each loan made by such intermediary.

\(e\) No intermediary may make a loan to an ultimate recipient who has
applied for or received a loan from another intermediary unless Rural
Development provides prior written approval for such loan.

\(f\) All loan payments that are due on RDLF loans will be made payable
to the Farmers Home Administration, using the number assigned, and
mailed directly to: Rural Development, Finance Office, FC 35, 1520
Market Street, St. Louis, Missouri 63103.

§1951.872 [Other regulatory requirements]{.underline}.

\(a\) [Intergovernmental consultation]{.underline}. The RDLF program is
subject to the provisions of Executive Order 12372 which requires
intergovernmental consultation with State and local officials. For each
ultimate recipient to be assisted with a loan under this Subpart and for
which the State in which the ultimate recipient is to be located has
elected to review the program under their intergovernmental review
process, the State Point of Contact must be notified. Notification, in
the form of a project description, can be initiated by the intermediary
or the ultimate recipient. Any comments from the State must be included
with the intermediary\'s request to use the loan funds for the ultimate
recipient. Prior to Rural Development\'s decision on the request,
compliance with the requirements of intergovernmental consultation must
be demonstrated for each ultimate recipient. These requirements should
be carried out in accordance with RD Instruction 1940-J,
\"Intergovernmental Review of Rural Development Programs and
Activities,\" available in any Rural Development office.

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RD Instruction 1951-R

§1951.872 (Con.)

\(b\) [Environmental requirements]{.underline}.

\(1\) Unless specifically modified by this section, the requirements of
Subpart G of Part 1940 of this Chapter apply to this Subpart. Rural
Development will give particular emphasis to ensuring compliance with
the environmental policies contained in §1940.303 and 1940.304 in
Subpart G of Part 1940 of this Chapter. Intermediaries and ultimate
recipients of loans must consider the potential environmental impacts of
their projects at the earliest planning stages and develop plans to
minimize the potential to adversely impact the environment.

\(2\) As part of the intermediary\'s request to Rural Development for
concurrence to make a loan to an ultimate recipient, the intermediary
will include for the ultimate recipient a properly completed Form RD
1940-20, \"Request for Environmental Information,\" if it is classified
as a Class I or Class II action. Rural Development will complete the
environmental review required by Subpart G of Part 1940 of this Chapter.
The results of this review will be used by Rural Development in making
its decision on the request.

\(c\) [Equal opportunity and nondiscrimination
requirements]{.underline}.

\(1\) In accordance with Title V of P.L. 93-495, the Equal Credit
Opportunity Act, neither the intermediary nor Rural Development will
discriminate against any applicant on the basis of race, color,
religion, national origin, age, physical or mental handicap (provided
that the applicant has the capacity to enter into a binding contract),
sex or marital status with respect to any aspect of a credit transaction
anytime Federal funds are involved.

\(2\) The regulations contained in Part 1901, Subpart E of this Chapter
apply to loans made under this program.

\(3\) The Administrator will assure that equal opportunity and
nondiscrimination requirements are met in accordance with Title VI of
the Civil Rights Act of 1964, \"Nondiscrimination in Federally Assisted
Programs,\" 42 U.S.C. 2000d - 2000d-4. If there is indication of
noncompliance with these requirements, such facts will be reported in
writing to the Administrator, ATTN: Equal Opportunity Officer.

## 12 

RD Instruction 1951-R

§§1951.873 - 1951.876 \[Reserved\]

§1951.877 [Loan agreements]{.underline}.

\(a\) A loan agreement will have been executed by the RDLF intermediary
and OCS or HHS for each loan. The loan agreement ordinarily would
contain the following provisions:

\(1\) The amount of the loan.

\(2\) The interest rate.

\(3\) The term and repayment schedule.

\(4\) The provisions for late charges.

\(5\) Provisions regarding default.

\(6\) Disbursement procedure.

\(7\) Insurance requirements.

\(i\) Hazard insurance with a standard mortgage clause naming the
intermediary as beneficiary will be required on every ultimate recipient
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, lightning, hail, business
interruption, explosion, riot, civil commotion, aircraft, vehicle,
marine, smoke, builder\'s risk, public liability, property damage, flood
or mudslide, or any other hazard insurance that may be required to
protect the security. The RDLF intermediary\'s interest in the insurance
ordinarily will be assigned to the Rural Development.

\(ii\) Ordinarily, life insurance, which may be decreasing term
insurance, is required for the principals and key employees of the
ultimate recipient and will be assigned or pledged to the RDLF
intermediary and subsequently to Rural Development. A schedule of life
insurance available for the benefit of the loan will be included as part
of the application.

## 13

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RD Instruction 1951-R

§1951.877 (a)(7) (Con.)

\(iii\) Workmen\'s compensation insurance on ultimate recipients is
required in accordance with State law.

\(iv\) The RDLF intermediary is responsible for determining if an
ultimate recipient is located in a special flood or mudslide hazard area
anytime Federal funds are involved. If the ultimate recipient is in a
flood or mudslide area, then flood or mudslide insurance must be
provided.

\(b\) The RDLF intermediary will agree:

\(i\) Not to make any changes in the RDLF intermediary\'s articles of
incorporation, charter or bylaws without the concurrence of Rural
Development.

\(ii\) Not to make a loan commitment to an ultimate recipient without
first receiving Rural Development\'s written concurrence in the proposed
use of loan funds.

§§1951.878 - 1951.880 \[Reserved\]

§1951.881 [Loan servicing]{.underline}.

\(a\) These regulations do not negate contractual arrangements that were
previously made by the HHS, Office of Community Services (OCS), or the
intermediaries operating relending programs that have already been
entered into with ultimate recipients under previous regulations.
Preexisting documents control when in conflict with these regulations.
The loan is governed by terms of existing legal documents of each
intermediary. The RDLF/IRP intermediary is responsible for compliance
with the terms and conditions of the loan agreement.

\(b\) Each intermediary will be monitored by Rural Development based on
progress reports submitted by the intermediary, audit findings,
disbursement transactions, visitations, and other contact with the
intermediary as necessary.

## 14 

§1951.881 (Con.) RD Instruction 1951-R

\(c\) Loan servicing is intended to be preventive rather than a curative
action. Prompt follow-up on delinquent accounts and early recognition of
potential problems and pursuing a solution to them are keys to resolving
many problem loan cases.

\(d\) Written notices on payments coming due will be prepared and sent
to the intermediary by the Rural Development Finance Office
approximately 15 days in advance of the due date of the payments. A copy
of the notice will be sent to the Rural Development Administrator or
designee.

\(e\) If the scheduled payment is not made by the intermediary within 30
days after due date of the payment, the Finance Office will send a past
due notice to the intermediary. The notice will show the late charge
amount, if applicable, and the interest amount past due. The late charge
amount, if applicable, and the interest past due amount will be
capitalized as principal due 30 days after the due date of the monthly
payment unless existing loan documents prior to this regulation state
otherwise. If the loan documents state when late charge amounts or
interest accruals are to be capitalized, the loan documents will
prevail.

\(1\) A per diem amount will be shown on the late notice sent to the
intermediary. The Finance Office will send this notice to the
Administrator or designee 30 days after the past due notice has been
sent to the intermediary and the account remains delinquent. Thereafter,
further notices by Rural Development designee will be sent to the
intermediary on the late payments or any further payments until the
account is in a current status.

\(2\) The Finance Office will notify the Administrator or designee on
any payments due from the delinquent intermediary. It will be the
responsibility of the Administrator or designee to follow up on
delinquent payments to bring the account to a current status.

\(3\) A copy of any correspondence or notice generated by the
Administrator or designee on any delinquent loan will be sent to the
Finance Office.

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RD Instruction 1951-R

§1951.881 (e)(Con.)

\(4\) Interest will be computed on a 365-day basis unless legal
documents state otherwise.

\(f\) It is the responsibility of the Finance Office to maintain
complete accounting records for each intermediary. The Finance Office
will:

\(1\) Coordinate with the Administrator or designee to assure that
interest and principal payments received are in accordance with the
promissory notes and its companion documents, and the effective
amortization schedule. If the payments received appear to be incorrect,
the Finance Office will advise the Administrator or designee. The
Administrator or designee will take the necessary action to clear the
issue and promptly advise the Finance Office of the proper accounting
procedure.

\(2\) Send monthly statements to the National Office reflecting all
payments received to date on each borrower.

\(3\) Send to the Administrator or designee a monthly summary of all
intermediary loans as follows:

\(i\) Number and amount of all loans.

\(ii\) Total advanced on all loans.

\(iii\) Total interest and principal received on the loans.

\(iv\) Total outstanding balance on all loans.

\(4\) Prepare reamortization schedules needed as a result of
restructuring any loans and send to the Administrator or designee.

\(5\) Furnish in writing to the Administrator or designee a per diem
amount on the actual interest amount due when requested by the
Administrator.

\(g\) It is the responsibility of the Administrator or designee to:

\(1\) Review and analyze the semiannual report of the intermediaries and
reconcile same to the annual audits.

## 16 

RD Instruction 1951-R

§ 1951.881(g) (Con.)

\(2\) Review the annual audits of the intermediaries.

\(3\) Review the semiannual reports of the intermediaries and take
appropriate action when necessary.

\(4\) Follow up on delinquent intermediaries to bring the account
current.

\(5\) Notify the Finance Office in writing when a loan is determined to
be uncollectible in order for the Finance Office to make provisions for
an appropriate timely entry to the loss account.

\(6\) Furnish to the Finance Office the necessary information to produce
reamortization schedules.

\(7\) Provide the Finance Office a copy of any correspondence in regard
to the restructuring of the loans.

\(8\) Review reamortization schedules, the schedule will then be
forwarded to the intermediary.

\(9\) Confirm account balances. Payment history of loans and any other
related matter will be furnished to the requesting party, (i.e. third
party auditing firms) if warranted and proper. If there are
discrepancies in any loan balances being confirmed, the Finance Office
should be consulted before the Administrator or designee writes the
requested parties.

\(10\) Furnish upon request by the Finance Office, the information
necessary to help reconcile account balances, obtain evidence of
payments made by the borrower, and any other related data necessary to
keep the financial records correct and in balance.

\(11\) Answer Congressional and other correspondence.

\(12\) Review intermediary\'s plans, cash flow projections, balance
sheets, and operating statements.

§ 1951.882 [Field visits]{.underline}.

The Agency will conduct an annual field visit to the IRP/RDLF
intermediary and the report should be done on Form RD 1951-5,
"Intermediary Relending Program/Rural Development Loan Fund Field Visit
Review." (Revised 05-08-02, SPECIAL PN.)

## 17

## (Revision 1)

(08-25-88) SPECIAL PN

RD Instruction 1951-R

§ 1951.882 (Con.)

\(a\) During or in preparation for field visits to RDLF/IRP
intermediaries by Rural Development personnel, the following loan
servicing activities are to be performed:

\(1\) Review what is being done to inform eligible applicants of the
program\'s existence.

\(2\) Obtain current and proper financial information and analyze for
trends on all RDLF/IRP intermediaries. Also determine if there is a
sufficient interest rate spread between the interest rate charged the
intermediary and the interest rate charged the ultimate recipients to
cover the administrative costs, including bad debts of operating the
program.

\(3\) Include in the write-ups of the field visit any issues or problems
not resolved from the last visitation in the agenda.

\(4\) Review credit elsewhere information (has the ultimate recipient
been refused funds by other sources?) to determine if this information
is in the files.

\(5\) Observe collateral and its condition, maintenance, protection and
utilization by the intermediary or ultimate recipient.

\(6\) Review the process for handling loan proceeds to assure they are
deposited in an interest-bearing account or time deposit in a bank or
other financial institution fully protected by Federal or State
insurance.

\(7\) Review materials to determine if the purpose of the program is
being fulfilled; i.e., loan funds are being used in accordance with
Rural Development policies, procedures, the approved work plan and the
Loan Agreement.

\(8\) A report of the visit will be made on \"RDLF/IRP Review Summary
Sheet,\" or otherwise documented and included in the loan file in the
format of the \"RDLF/IRP Review Summary Sheet.\" The report should
include an opinion on the financial condition of the intermediary based
upon the review of the annual audited financial statement, periodic
financial statements, and observations made during the visit and other
sources.

\(9\) Determine if the ultimate recipients\' files are complete,
organized, and current.

\(10\) Any instructions, directions, or corrective action should be
confirmed by letter to the intermediaries.

## 18

## (Revision 1) 

RD Instruction 1951-R

§ 1951.882 (Con.)

\(b\) All intermediaries are required to provide an annual audited
financial statement as well as a summary sheet of their lending program
on each ultimate recipient receiving Federal funds. The summary sheet of
their lending program on each ultimate recipient should include but not
be limited to: the borrower\'s name and address, type of business, use
of loan funds, loan amount, date of note, outstanding balance, date of
final payment, interest rate, amount and type of collateral, insurance
information, loan status, and the date of Agency approval, if
applicable.

\(c\) The intermediary should perform an analysis on its ultimate
recipients and follow up in writing on any servicing action required. A
copy of the analysis will be provided to the Agency for those ultimate
recipients having Federal funds.

§ 1951.883 [Reporting Requirements]{.underline}:

\(a\) Intermediaries are to provide the Agency with reports as required
in their respective loan agreements, applicable statutes and as required
by the Agency. The report shall include the following:

\(1\) An annual audit; dates of audit report period need not necessarily
coincide with other reports on the RDLF/IRP. Audits shall be due 90 days
following the audit period. Audits must cover all of the intermediary\'s
activities. Audits will be performed by an independent certified public
accountant or by an independent public accountant licensed and certified
on or before December 31, 1970, by a regulatory authority of a State or
other political subdivision of the United States. An acceptable audit
will be performed in accordance with generally accepted auditing
standards and include such tests of the accounting records as the
auditor considers necessary in order to express an opinion on the
financial condition of the intermediary. The Agency does not require an
unqualified audit opinion as a result of the audit. Compilations or
reviews do not satisfy the audit requirement.

\(2\) Quarterly or semiannual reports (due 30 days after the end of the
period). (Revised 02-06-98, SPECIAL PN.)

\(i\) Reports will be required quarterly during the first year after
loan closing and, if all loan funds are not utilized during the first
year, quarterly reports will be continued until at least 90 percent of
the Agency IRP loan funds have been advanced to ultimate recipients.
Thereafter, reports will

## 19

## (Revision 1)

(08-25-88) SPECIAL PN

RD Instruction 1951-R

§ 1951.883(a)(2)(i) (Con.)

be required semiannually. Also, the Agency may require quarterly reports
if the intermediary becomes delinquent in repayment of its loan or
otherwise fails to fully comply with the provisions of its work plan or
Loan Agreement, or the Agency determines that the intermediary's IRP
revolving fund is not adequately protected by the current sound worth
and paying capacity of the ultimate recipients.

\(ii\) These reports shall contain information only on the IRP

revolving loan fund, or if other funds are included, the IRP loan
program portion shall be segregated from the others; and in the case
where the intermediary has more than one IRP revolving fund from the
Agency a separate report shall be made for each of the IRP revolving
funds.

\(iii\) The reports will include, on a form provided by the Agency,
(Form RD 1951-4, "Report of IRP/RDLF Lending Activity"), information on
the intermediary\'s lending activity, income and expenses, financial
condition, and a summary of names and characteristics of the ultimate
recipients the intermediary has financed.

\(3\) An annual report on the extent to which increased employment,
income and ownership opportunities are provided to low-income persons,
farm families, and displaced farm families for each loan made by such
intermediary.

\(4\) Proposed budget for the following year.

\(5\) Other reports as the Agency may require from time to time.

\(b\) Intermediaries shall report to the Agency whenever an ultimate
recipient is more than 90 days in arrears in the repayment of principal
or interest.

§ 1951.884 [Non-Federal funds]{.underline}.

Once all the Agency-derived loan funds have been utilized by the
intermediary for assistance to ultimate recipients according to the
provisions of these regulations and the loan agreement, assistance to
new ultimate recipients financed thereafter from the intermediary\'s
revolving loan fund shall not be considered as being derived from
Federal funds and the requirements of these regulations will not be
imposed on those new ultimate recipients. Ultimate recipients assisted
by the intermediary with Agency-derived loan funds shall be required to
comply with the provisions of these regulations and/or loan agreement.

## 20

## (Revision 1) 

RD Instruction 1951-R

§ 1951.885 [Loan classifications]{.underline}.

All loans to intermediaries in the Agency portfolio will be classified
by the Agency at loan closing and again whenever there is a change in
the loan which would impact on the original classification. No one
classification should be viewed as more important than others. The
uncollectibility aspect of Doubtful and Loss classifications is of
obvious importance. However, the function of the Substandard
classification is to indicate those loans that are unduly risky which
may result in future losses. Substandard, Doubtful

## 20A

## (Added 02-06-98, SPECIAL PN)

(08-25-88) SPECIAL PN

§1951.885 (Con.) RD Instruction 1951-R

and Loss are adverse classifications. The special mention classification
is for loans which are not adversely classified but which require the
attention and follow-up of Rural Development. The loans will be
classified as follows:

\(a\) [Seasoned loan classification]{.underline}. To be classified as a
seasoned loan, a loan must:

\(1\) Have a remaining principal loan balance of two thirds or less
of(1)the original aggregate of all existing loans made to that
intermediary.

\(2\) Be in compliance with all loan conditions and Rural Development
regulations.

\(3\) Have been current on the loan(s) payments for 24 consecutive
months.

\(4\) Be secured by collateral which is determined to be adequate to
ensure there will be no loss on the loan.

\(b\) [Current non-problem classification]{.underline}. This
classification includes those loans which have been current for less
than 24 consecutive months and are in compliance with the loan
conditions and Rural Development regulations, and are not considered to
pose a credit risk to Rural Development. These loans would be classified
as seasoned but for the \"24 months\" and \"two-thirds\" requirements
for seasoned loans.

\(c\) [Special mention classification]{.underline}. This classification
includes loans which do not presently expose Rural Development to a
sufficient degree of risk to warrant a Substandard classification but do
possess credit deficiencies deserving Rural Development\'s close
attention because the failure to correct these deficiencies could result
in greater credit risk in the future. This classification would include
loans that may be high quality, but which Rural Development is unable to
supervise properly because of an inadequate loan agreement, the
condition or lack of control over the collateral, failure to obtain
proper documentation or any other deviations from prudent lending
practices. Adverse trends in the intermediary\'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
classification. Loans in which actual, not potential, weaknesses are
evident and significant should be considered for a Substandard
classification.

## 21

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RD Instruction 1951-R

§1951.885 (Con.)

\(d\) [Substandard classification]{.underline}. This classification
includes 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 classification 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
Rural Development will sustain some loss.

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

\(f\) [Loss classification]{.underline}. This classification includes
those loans which are considered uncollectible and of such little value
that their continuance as 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.

§§1951.886 - 1951.888 \[Reserved\]

§1951.889 [Transfer and assumption]{.underline}.

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

\(b\) Available transfer and assumption options to eligible
intermediaries include the following:

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

\(2\) The total indebtedness may be transferred to another eligible
intermediary on different terms not to exceed those terms for which an
initial loan can be made to an organization that would have been
eligible originally.

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

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

## 22 

§1951.889 (Con.) RD Instruction 1951-R

\(c\) The transferor will prepare the transfer document for Rural
Development\'s review prior to the transfer and assumption.

\(d\) The transferee will provide Rural Development with a copy of its
latest financial statement and a copy of its annual financial statement
for the past 3 years if available; its Federal Tax Identification
number; organizational charter; minutes from the Board of Directors
authorizing the transaction; certification of good standing from the
Secretary of State or whatever regulatory agency oversees nonprofit
corporations for that State or Commonwealth where the entity is
headquartered; and any other information that Rural Development deems
necessary for its review.

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

\(f\) When the transferee makes a cash downpayment in connection with
the transfer and assumption, any proceeds received by the transferor
will be credited on the transferor\'s loan debt in inverse order of
maturity.

\(g\) The Administrator or designee will approve or decline all
transfers and assumptions.

§1951.890 [Office of Inspector General and Office of General Counsel
referrals]{.underline}.

When facts or circumstances indicate that criminal violations, civil
fraud, misrepresentations, or regulatory violations may have been
committed by an applicant or an intermediary, Rural Development will
refer the case to the appropriate Regional Inspector General for
Investigations, OIG, USDA, in accordance with RD Instruction 2012-B
(available in any Rural Development office) for criminal investigation.
Any questions as to whether a matter should be referred will be resolved
through consultation with OIG and Rural Development and confirmed in
writing. In order to assure protection of the financial and other
interests of the Government, a duplicate of the notification will be
sent to the OGC. OGC will be consulted on legal questions. After OIG has
accepted any matter for investigation, Rural Development staff must
coordinate with OIG in advance regarding routine servicing actions on
existing loans.

§1951.891 [Liquidation; default]{.underline}.

\(a\) In the event that Rural Development takes over the servicing of
the ultimate recipient of an intermediary, those loans will be serviced
by this regulation and in accordance with the contractual arrangement
between the intermediary and the ultimate recipient. Should the Rural
Development determine that it is necessary or desirable to take action
to protect or further the interests of Rural Development in connection
with any default or breach of conditions under any loan made hereunder,
the Rural Development may:

## 23

(8-25-88) SPECIAL PN

RD Instruction 1951-R

§1951.891 (a)(Con.)

\(1\) Declare that the loan is immediately due and payable.

\(2\) Assign or sell at public or private sale, or otherwise dispose of
for cash or credit at its discretion and upon such terms and conditions
as Rural Development shall determine to be reasonable, any evidence of
debt, contract, claim, personal or real property or security assigned to
or held by the Rural Development in connection with financial assistance
extended hereunder.

\(3\) Adjust interest rates, use fixed or variable rates, grant
moratoriums on repayment of principal and interest, collect or
compromise any obligations held by Rural Development and take such
actions in respect to such loans as are necessary or appropriate,
consistent with the purpose of the program and this Subpart. The
Administrator will notify the Rural Development Finance Office of any
change in payment terms, such as reamortizations or interest rate
adjustments, and effective dates of any changes resulting from servicing
actions.

\(b\) Failure by an ultimate recipient to comply with the provisions of
these regulations and/or loan agreement shall constitute grounds for a
declaration of default and the demand for immediate and full repayment
of its loan.

\(c\) Failure by an intermediary to comply with the provisions of these
regulations or to relend funds in accordance with an approved work plan
or loan agreement shall constitute grounds for a declaration of default
and the demand for immediate and full repayment of the loan.

\(d\) In the event of default, the intermediary will promptly be
informed in writing of the consequences of failing to comply with loan
covenant(s).

\(e\) Protective advances to the intermediary will not be made in lieu
of additional loans, in particular working capital loans. Protective
advances are advances made by Rural Development for the purpose of
preserving and protecting the collateral where the intermediary has
failed to and will not or cannot meet its obligations. The Administrator
or designee must approve in writing all protective advances.

\(f\) In the event of bankruptcy by the intermediary and/or ultimate
recipient, Rural Development is responsible for protecting the interests
of the Government. All bankruptcy cases should be reported immediately
to the Regional Attorney. The Administrator must approve in advance and
in

## 24 

§1951.891 (f)(Con.) RD Instruction 1951-R

writing the estimated liquidation expenses on loans in liquidation
bankruptcy. These expenses must be considered by Rural Development to be
reasonable and customary.

\(g\) Liquidation, management, and disposal of inventory property will
be handled in accordance with Subparts A, B, and C of Part 1955 of this
Chapter.

§§1951.892 - 1951.893 \[Reserved\]

§1951.894 [Debt settlement]{.underline}.

Debt settlement of all claims will be handled in accordance with the
Federal Claims Collection Standards (4 CFR Parts 101-105).

§1951.895 \[Reserved\]

§1951.896 [Appeals]{.underline}.

Any appealable adverse decision made by Rural Development which affects
the borrower may be appealed upon written request of the aggrieved party
in accordance with Subpart B of Part 1900 of this Chapter.

§1951.897 [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
an 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. The basis
for this exception will be fully documented. The documentation will:
demonstrate the adverse impact; identify the particular requirement
involved; and show how the adverse impact will be eliminated.

§§1951.898 - 1951.899 \[Reserved\]

§1951.900 [OMB Control Number]{.underline}.

The collection of information requirements in this regulation have been
approved by the Office of Management and Budget and assigned OMB Control
Number 0575-0131. In accordance with 5 CFR 1320, summarized below is the
annualized public reporting burden for this regulation.

## oOo

## 25

(8-25-88) SPECIAL PN