52618 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

DEPARTMENT OF AGRICULTURE 

Rural Utilities Service 

7 CFR Part 1779 

Rural Housing Service 

7 CFR Part 3575 

Rural Business-Cooperative Service 

Rural Utilities Service 

7 CFR Parts 4279 and 4280 

Rural Business-Cooperative Service 

Rural Housing Service 

Rural Utilities Service 

7 CFR Part 5001 

RIN 0570–AA65 

Rural Development Guaranteed Loans 

AGENCY: Rural Business-Cooperative 

Service, Rural Housing Service, Rural 

Utilities Service, USDA. 

ACTION: Proposed rule. 

SUMMARY: Rural Development, a mission 

area within the U.S. Department of 

Agriculture, is proposing a unified 

guaranteed loan platform for enhanced 

delivery of four existing Rural 

Development guaranteed loan 

programs—Community Facility; Water 

and Waste Disposal; Business and 

Industry; and Renewable Energy 

Systems and Energy Efficiency 

Improvement Projects. This proposed 

rule would eliminate the existing loan 

guarantee regulations for these four 

programs and consolidate them under a 

new, single part. In addition to 

consolidating these four programs, the 

proposed rulemaking incorporates 

provisions that will enable the Agency 

to better manage the risk associated with 

making and servicing guaranteed loans 

and that will reduce the cost of 

operating the guaranteed loan programs. 

Such provisions include incorporating 

specific project eligibility criteria, 

revisions to the requirements for lenders 

to participate in the programs, allowing 

approved lenders to become preferred 

lenders, and allowing guaranteed loan 

applications to be submitted with less 

documentation accompanying the 

application under certain conditions. 

DATES: Comments on the proposed rule 

must be received on or before November 

13, 2007. The comment period for the 

information collection under the 

Paperwork Reduction Act of 1995 

continues through November 13, 2007. 

ADDRESSES: You may submit comments 

to this rule by any of the following 

methods: 

• Agency Web Site: http:// 

www.rurdev.usda.gov/regs. Follow 

instructions for submitting comments 

on the Web site. 

• E-Mail: comments@wdc.usda.gov. 

Include the RIN No. 0570–AA65 in the 

subject line of the message. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Submit written comments via 

the U.S. Postal Service to the Branch 

Chief, Regulations and Paperwork 

Management Branch, U.S. Department 

of Agriculture, STOP 0742, 1400 

Independence Avenue, SW., 

Washington, DC 20250–0742. 

• Hand Delivery/Courier: Submit 

written comments via Federal Express 

Mail or other courier service requiring a 

street address to the Branch Chief, 

Regulations and Paperwork 

Management Branch, U.S. Department 

of Agriculture, 300 7th Street, SW., 7th 

Floor, Washington, DC 20024. 

All written comments will be 

available for public inspection during 

regular work hours at the 300 7th Street, 

SW., 7th Floor address listed above. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Michael Foore, Rural Development, 

Business and Cooperative Programs, 

U.S. Department of Agriculture, 1400 

Independence Avenue, SW., Stop 3201, 

Washington, DC 20250–3201; e-mail: 

Michael.Foore@wdc.usda.gov; telephone 

(202) 690–4730. 

SUPPLEMENTARY INFORMATION: 

Executive Order 12866 

This proposed rule has been reviewed 

under Executive Order (EO) 12866 and 

has been determined to be significant by 

the Office of Management and Budget. 

The EO defines a ‘‘significant regulatory 

action’’ as one that is likely to result in 

a rule that may: (1) Have an annual 

effect on the economy of $100 million 

or more or adversely affect, in a material 

way, the economy, a sector of the 

economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local, or tribal 

governments or communities; (2) Create 

a serious inconsistency or otherwise 

interfere with an action taken or 

planned by another agency; (3) 

Materially alter the budgetary impact of 

entitlements, grants, user fees, or loan 

programs or the rights and obligations of 

recipients thereof; or (4) Raise novel 

legal or policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in this EO. 

The Agency conducted a qualitative 

benefit cost analysis to fulfill the 

requirements of Executive Order 12866. 

Based on the results of this qualitative 

analysis of the benefits and costs of the 

proposed rule, the Agency has 

concluded that the net effect of the rule 

will be beneficial in part due to 

improved underwriting. 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act 1995 (UMRA) of Public Law 

104–4 establishes requirements for 

Federal agencies to assess the effects of 

their regulatory actions on State, local, 

and tribal governments and the private 

sector. Under section 202 of the UMRA, 

Rural Development generally must 

prepare a written statement, including a 

cost-benefit analysis, for proposed and 

final rules with ‘‘Federal mandates’’ that 

may result in expenditures to State, 

local, or tribal governments, in the 

aggregate, or to the private sector of 

$100 million or more in any one year. 

When such a statement is needed for a 

rule, section 205 of UMRA generally 

requires Rural Development to identify 

and consider a reasonable number of 

regulatory alternatives and adopt the 

least costly, more cost-effective, or least 

burdensome alternative that achieves 

the objectives of the rule. 

This proposed rule contains no 

Federal mandates (under the regulatory 

provisions of Title II of the UMRA) for 

State, local, and tribal governments or 

the private sector. Thus, this rule is not 

subject to the requirements of sections 

202 and 205 of the UMRA. 

Environmental Impact Statement 

This document has been reviewed in 

accordance with 7 CFR part 1940, 

subpart G, ‘‘Environmental Program.’’ 

Rural Development has determined that 

this action does not constitute a major 

Federal action significantly affecting the 

quality of the human environment, and 

in accordance with the National 

Environmental Policy Act (NEPA) of 

1969, 42 U.S.C. 4321 et seq., an 

Environmental Impact Statement is not 

required. Loan applications will be 

reviewed individually to determine 

compliance with NEPA. 

Executive Order 12988, Civil Justice 

Reform 

This proposed rule has been reviewed 

under Executive Order 12988, Civil 

Justice Reform. In accordance with this 

rule: (1) All State and local laws and 

regulations that are in conflict with this 

rule will be preempted; (2) no 

retroactive effect will be given this rule; 

and (3) administrative proceedings in 

accordance with the regulations of the 

Department of Agriculture National 

Appeals Division (7 CFR part 11) must 


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be exhausted before bringing suit in 

court challenging action taken under 

this rule unless those regulations 

specifically allow bringing suit at an 

earlier time. 

Executive Order 13132, Federalism 

It has been determined, under 

Executive Order 13132, Federalism, that 

this proposed rule does not have 

sufficient federalism implications to 

warrant the preparation of a Federalism 

Assessment. The provisions contained 

in the proposed rule will not have a 

substantial direct effect on States or 

their political subdivisions or on the 

distribution of power and 

responsibilities among the various 

government levels. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

U.S.C. 601–602) (RFA) generally 

requires an agency to prepare a 

regulatory flexibility analysis of any rule 

subject to notice and comment 

rulemaking requirements under the 

Administrative Procedure Act or any 

other statute unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. Small entities 

include small businesses, small 

organizations, and small governmental 

jurisdictions. 

In compliance with the RFA, Rural 

Development has determined that this 

action will not have a significant 

economic impact on a substantial 

number of small entities. Rural 

Development made this determination 

based on the fact that this regulation 

only impacts those who choose to 

participate in the program. Small entity 

applicants will not be impacted to a 

greater extent than large entity 

applicants. 

Executive Order 12372, 

Intergovernmental Review of Federal 

Programs 

Rural Development Guaranteed Loans 

are subject to the Provisions of 

Executive Order 12372, which require 

intergovernmental consultation with 

State and local officials. Rural 

Development will conduct 

intergovernmental consultation in the 

manner delineated in RD Instruction 

1940–J, ‘‘Intergovernmental Review of 

Rural Development Programs and 

Activities,’’ available in any Rural 

Development office, on the Internet at 

http://rurdev.usda.gov.regs, and in 7 

CFR part 3015, subpart V. 

Executive Order 13175, Consultation 

and Coordination With Indian Tribal 

Governments 

This executive order imposes 

requirements on Rural Development in 

the development of regulatory policies 

that have tribal implications or preempt 

tribal laws. Rural Development has 

determined that the proposed rule does 

not have a substantial direct effect on 

one or more Indian tribe(s) or on either 

the relationship or the distribution of 

powers and responsibilities between the 

Federal Government and the Indian 

tribes. Thus, the proposed rule is not 

subject to the requirements of Executive 

Order 13175. 

Programs Affected 

The Catalog of Federal Domestic 

Assistance Program numbers assigned to 

this program are 10.760, Water and 

Waste Disposal Systems for Rural 

Communities; 10.766, Community 

Facilities Loans and Grants; 10.768, 

Business and Industry Loans; and 

10.775, Renewable Energy Systems and 

Energy Efficiency Improvements 

Program. 

Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995, Rural 

Development will seek OMB approval of 

the reporting and recordkeeping 

requirements contained in this proposed 

rule and hereby opens a 60-day public 

comment period. 

Title: Rural Development Guarantee 

Loans. 

Type of Request: New collection. 

Abstract: Rural Development is 

implementing a new consolidated 

guaranteed loan platform. The new 

guaranteed loan platform would 

combine the following four existing 

guaranteed loan regulations into a 

consolidated rule: (1) The Community 

Facility Program, (2) the Water and 

Waste Disposal Program, (3) the 

Business and Industry Program, and (4) 

the Renewable Energy Systems and 

Energy Efficiency Improvements 

Program under Title IX, Section 9006 of 

the Farm Security and Rural Investment 

Act of 2002 (FSRIA 2002). These 

programs provide loan guarantees for a 

variety of projects intended to improve 

the economies of rural America. 

The information required under the 

proposed rule is similar to much of the 

information currently being required 

under the four separate regulations. 

Under these four separate regulations, 

the current information being collected 

is approved under OMB control 

numbers 0570–0016, 0670–0018, 0572–

0122, and 0575–0137. The proposed 

rule, however, is requesting some new 

information from lenders. The two 

primary examples are: (1) lenders are 

required to supply information to the 

Agency in order to be approved for 

participation in the program and (2) 

more frequent reporting of loans that are 

in default. On the other hand, the 

proposed rule would not include some 

information previously being requested. 

This is most evident for the Renewable 

Energy Systems and Energy Efficiency 

Improvements guaranteed loan program, 

where technical reports are being 

required only for higher cost renewable 

energy systems projects because 

renewable energy projects of less than 

$200,000 are less complex, so for such 

projects the technical reports only have 

marginal value, and the energy audit 

requirements from energy efficiency 

improvement projects are sufficient so 

that separate technical reports also have 

only marginal value. The proposed rule 

creates a single set of common forms 

that lenders can use across all four 

programs, thereby creating efficiencies 

in reporting. On net, the information 

being requested to support the 

consolidated program is estimated to 

reduce burden and cost to lenders and 

borrowers. 

As noted in the previous paragraph, 

the information requirements contained 

in this proposed rule require 

information from lenders and 

borrowers. This information is vital to 

Rural Development to make wise 

decisions regarding the eligibility of 

projects, borrowers, and lenders in order 

to reduce the risk associated with 

making the loan guarantees, to ensure 

compliance with the proposed rule, to 

ensure that the funds obtained from the 

Government are used appropriately, and 

to effectively monitor the borrowers and 

lenders to protect the financial interests 

of the Government. In sum, this 

collection of information is necessary in 

order to implement the consolidated 

guaranteed loan regulation being 

proposed. 

The following estimates are based on 

the average over the first three years the 

program is in place. 

Estimate of Burden: Public reporting 

burden for this collection of information 

is estimated to average 2.6 hours per 

response. 

Respondents: Rural developers, 

farmers and ranchers, rural businesses, 

public bodies, local governments, 

lenders. 

Estimated Number of Respondents: 

3,450. 

Estimated Number of Responses per 

Respondent: 5.4. 

Estimated Number of Responses: 

18,472. 


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52620 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

Estimated Total Annual Burden 

(hours) on Respondents: 48,892. 

Copies of this information collection 

may be obtained from Cheryl 

Thompson, Regulations and Paperwork 

Management Branch, Support Services 

Division, U.S. Department of 

Agriculture, Rural Development, STOP 

0742, 1400 Independence Ave., SW., 

Washington, DC 20250–0742 or by 

calling (202) 692–0043. 

Comments: Comments are invited on: 

(a) Whether the proposed collection of 

information is necessary for the proper 

performance of the functions of Rural 

Development, including whether the 

information will have practical utility; 

(b) the accuracy of the new Rural 

Development estimate of the burden of 

the proposed collection of information, 

including the validity of the 

methodology and assumptions used; (c) 

ways to enhance the quality, utility, and 

clarity of the information to be 

collected; and (d) ways to minimize the 

burden of the collection of information 

on those who are to respond, including 

through the use of appropriate 

automated, electronic, mechanical, or 

other technological collection 

techniques or other forms of information 

technology. Comments may be sent to 

Cheryl Thompson, Regulations and 

Paperwork Management Branch, U.S. 

Department of Agriculture, Rural 

Development, STOP 0742, 1400 

Independence Ave., SW., Washington, 

DC 20250. All responses to this 

proposed rule will be summarized and 

included in the request for OMB 

approval. All comments will also 

become a matter of public record. 

E-Government Act Compliance 

Rural Development is committed to 

complying with the E-Government Act, 

to promote the use of the Internet and 

other information technologies to 

provide increased opportunities for 

citizen access to Government 

information and services, and for other 

purposes. 

I. Background 

Rural Development proposes a unified 

platform for delivery of four existing 

Rural Development guaranteed loan 

programs—Community Facility; Water 

and Waste Disposal; Business and 

Industry; and Renewable Energy 

Systems and Energy Efficiency 

Improvement Projects. These four 

programs are administered by Rural 

Housing Service (Community Facilities), 

Rural Utilities Services (Water and 

Waste Disposal), and Rural BusinessCooperative Service (Business and 

Industry and the Renewable Energy 

Systems and Energy Efficiency 

Improvements Projects). Collectively, 

Rural Development’s programs work 

together to assist in building and 

maintaining entire, sustainable rural 

communities. 

Under the unified guaranteed loan 

platform, Rural Development will 

simplify, improve, and enhance the 

delivery of these four guaranteed loan 

programs across their service areas. The 

remainder of this section describes 

Rural Development’s mission, the four 

current guaranteed loan programs being 

aligned under the new platform, why 

the new platform is being proposed, and 

how the new platform will work. 

A. Rural Development’s Mission 

By statutory authority, Rural 

Development is the leading Federal 

advocate for rural America, 

administering a multitude of programs, 

ranging from housing and community 

facilities to infrastructure and business 

development. Its mission is to increase 

economic opportunity and improve the 

quality of life in rural communities by 

providing the leadership, infrastructure, 

venture capital, and technical support 

that enables rural communities to 

prosper and supports them in the 

dynamic global environment defined by 

the Internet revolution, and the rise of 

new technologies, products, and 

markets. 

To achieve its mission, Rural 

Development provides financial support 

(including direct loans, grants, and loan 

guarantees) and technical assistance to 

help enhance the quality of life and 

provide the foundation for economic 

development in rural areas. This 

proposed rulemaking addresses the use 

of guaranteed loans in achieving Rural 

Development’s mission. 

B. Current Guaranteed Loan Programs 

Under this proposed rule, Rural 

Development is combining under one 

regulation the four guaranteed loan 

regulations of the following programs: 

Community Facilities, Water and Waste 

Disposal, Business and Industry, and 

Renewable Energy Systems and Energy 

Efficiency Improvements. The following 

paragraphs describe briefly the scope of 

each of the four current programs with 

regard to eligible projects, borrowers, 

and lenders; application processes; and 

guarantee and loan terms. 

Community Facilities Guaranteed 

Loan Program. The Community 

Facilities Guaranteed Loan Program 

guarantees loans to develop essential 

community facilities in rural areas and 

towns of up to 20,000 in population. 

Loan funds may be used to construct, 

enlarge, or improve community 

facilities for health care, public safety, 

and public services. This can include 

costs to acquire land needed for a 

facility, pay necessary professional fees, 

and purchase equipment required for its 

operation. Refinancing existing loans 

may be considered an eligible 

guaranteed loan purpose under some 

circumstances. 

Eligible borrowers for Community 

Facilities guaranteed loans are public 

entities, such as municipalities, 

counties, and special-purpose districts, 

as well as not-for-profit corporations 

and tribal governments who are unable 

to obtain a loan without the 

Government’s guarantee. Borrowers 

must have the legal authority to borrow 

and repay loans; to pledge security for 

loans, and to construct, operate; and 

maintain the facilities. 

Eligible lenders for Community 

Facilities guaranteed loans include 

banks, savings and loan associations, 

mortgage companies that are part of 

bank holding companies, banks of the 

Farm Credit System, and insurance 

companies regulated by the National 

Association of Insurance 

Commissioners. These lenders must be 

subject to credit examination and 

supervision by an appropriate agency of 

the United States or a State that 

supervises and regulates credit 

institutions. Lenders must also have the 

capability to adequately service the 

loans for which a guarantee is 

requested. 

The lender is responsible for 

conducting an analysis of the proposed 

project to ensure loan repayment, taking 

into consideration tax assessments, 

revenues, fees, or other sources of 

money sufficient for operation and 

maintenance, reserves, and debt 

retirement. Financial feasibility studies, 

prepared by independent consultants, 

are normally required when loans are 

for start-up facilities or for existing 

facilities when the project will 

significantly change the borrower’s 

financial operations. 

Recently under this program, 

guarantees have averaged 85 percent of 

the eligible loss of the loan. Lenders 

may impose an interest rate that is 

similar to unguaranteed projects. 

Interest rates may be fixed or variable, 

are determined by the lender and 

borrower, and are subject to Agency 

review and approval. 

Loan repayment terms may not 

exceed the lender’s authority (under 

State law or organizational structure), 

the useful life of the facility, or a 

maximum 40 years. 

Water and Waste Disposal 

Guaranteed Loan Program. The Water 

and Waste Disposal Guaranteed Loan 

Program guarantees loans to develop 


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water and wastewater systems, 

including solid waste disposal and 

storm drainage, in rural areas and to 

cities and towns with a population of 

10,000 or less. Example projects include 

construction of water lines, pumping 

stations, wells, storage tanks, and 

sewage treatment facilities. 

Eligible borrowers include public 

entities, such as municipalities, 

counties, special-purpose districts, and 

Indian tribes. In addition, funds may be 

made available to corporations operated 

on a not-for-profit basis. Borrowers must 

be unable to obtain funds from other 

sources at reasonable rates and terms. 

Borrowers must have the legal authority 

to borrow and repay loans, to pledge 

security for loans, and to construct, 

operate, and maintain the facilities. 

Eligible lenders for Water and Waste 

Disposal guaranteed loans include 

banks, savings and loan associations, 

mortgage companies that are part of a 

bank holding company, banks of the 

Farm Credit System, and insurance 

companies regulated by the National 

Association of Insurance 

Commissioners. These lenders must be 

subject to credit examination and 

supervision by an appropriate agency of 

the United States or a State that 

supervises and regulates credit 

institutions. Lenders must also have the 

capability to adequately service the 

loans for which a guarantee is 

requested. 

The lender is responsible for 

conducting an analysis of the proposed 

project to ensure loan repayment, taking 

into consideration tax assessments, 

revenues, fees, or other sources of 

money sufficient for operation and 

maintenance, reserves, and debt 

retirement. Feasibility studies are 

normally required when loans are for 

start-up facilities or existing facilities 

when the project will significantly 

change the borrower’s financial 

operations. The feasibility study should 

be prepared by an independent 

consultant with recognized expertise in 

the type of facility being financed. 

The Agency will determine borrower 

eligibility, project priority status, and 

funding availability. Priority is given to 

public entities, in areas with less than 

5,500 people, to restore a deteriorating 

water supply, or to improve, enlarge, or 

modify a water facility or an inadequate 

waste facility. Preference is also given to 

requests that involve the merging of 

small facilities and those serving lowincome communities. After an 

application is submitted, the time to 

process the application depends upon 

the scope of the project, environmental 

review, and legal issues. 

Recently under this program, 

guarantees have averaged 90 percent of 

the eligible loss of the loan. Interest 

rates are set periodically, usually 

quarterly, and are based on current 

market yields for municipal obligations. 

Interest rates may be fixed or variable, 

are determined by the lender and 

borrower, and are subject to Agency 

review and approval. 

The maximum term for all loans is 40 

years; however, no repayment period 

will exceed State statutes or the useful 

life of the facility. 

Business and Industry Guaranteed 

Loan Program. The Business and 

Industry (B&I) Guaranteed Loan 

Program guarantees loans that help 

create jobs and stimulate rural 

economies by providing financial 

backing for rural businesses. Loan 

guarantees expand the lending 

capability of private lenders who 

provide financing to credit worthy 

entities and individuals in rural areas, 

helping them make and service quality 

loans that provide lasting community 

benefits. Loan proceeds may be used for 

permanent working capital, machinery 

and equipment, buildings and real 

estate, and refinancing of any loan. 

Except for the refinancing of Agency 

direct loans, refinancing of other loans 

will be limited to a minority portion of 

the guaranteed loan. The primary 

purpose is to create and maintain 

employment and improve the economic 

climate in rural communities. 

Eligible borrowers for B&I loans 

include virtually any legally organized 

entity, including a cooperative, 

corporation, partnership, trust or other 

profit or not-for-profit entity, Indian 

tribe or Federally recognized tribal 

group, municipality, county, or other 

political subdivision of a State. Pursuant 

to section 310B(a) of the Consolidated 

Farm and Rural Development Act, 

borrowers need not have been denied 

credit elsewhere to apply for this 

program. 

Eligible lenders for B&I loans include 

recognized commercial or other 

authorized lenders in rural areas (all 

areas other than cities of more than 

50,000 people and the contiguous and 

adjacent urbanized areas of such cities 

or towns). Generally, authorized lenders 

include Federal or State chartered 

banks, credit unions, insurance 

companies, savings and loan 

associations, Farm Credit Banks or other 

Farm Credit System institutions with 

direct lending authority, a mortgage 

company that is part of a bank holding 

company, and the National Rural 

Utilities Cooperative Finance 

Corporation. Other lenders include 

eligible Rural Utilities Program electric 

and telecommunications borrowers, 

acting as financial intermediaries, and 

other lenders approved by Business and 

Cooperative Programs who have met the 

designated criteria. 

The application process may be 

initiated using a preapplication or 

application. The Agency reviews each 

application for compliance with 

borrower eligibility guidelines, project 

priority, and the availability of funds. 

Recently under this program, 

guarantees have averaged 78 percent of 

the eligible loss of the loan. The 

maximum aggregate debt that can be 

incurred by a borrowing entity at any 

given time under the B&I Guaranteed 

Loan program is $25 million. A 

maximum of 10 percent of program 

funding is available to value-added 

cooperative organizations for loans 

above $25 million to a maximum 

aggregate of $40 million. Repayment 

terms are up to 30 years for real estate; 

up to 15 years or useful life, whichever 

is less, for machinery and equipment; 

up to 30 years for combined loans on 

real estate and equipment; and up to 7 

years on working capital loans. 

Renewable Energy Systems and 

Energy Efficiency Improvements 

Guaranteed Loan Program. The 

Renewable Energy Systems and Energy 

Efficiency Improvements Guaranteed 

Loan Program provides loan guarantees 

for the purchase and installation of 

renewable energy systems and energy 

efficiency improvements. Eligible 

borrowers include farmers, ranchers, 

and rural small businesses. In addition 

to being a renewable energy system or 

energy efficiency improvement project, 

project eligibility requirements include 

the project site being controlled by the 

agricultural producer or small business 

for the proposed financing term of any 

associated Federal loans or loan 

guarantees. 

Recently under this program, 

guarantees have averaged 78 percent of 

the eligible loss of the loan. Repayment 

terms are up to 30 years for real estate; 

up to 20 years or useful life, whichever 

is less, for machinery and equipment; 

up to 30 years for combined loans on 

real estate and equipment; and up to 7 

years on working capital loans. 

The minimum amount of a guaranteed 

loan is $5,000 (less any program grant 

awards). The maximum amount of a 

guaranteed loan is $10 million. The 

amount of the loan that will be made 

available to an eligible project can not 

exceed 50 percent of total eligible 

project costs. 

How the Current Programs Work 

While differences occur within each 

of the programs (e.g., borrower and 


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project eligibility, necessary 

documentation, and funding limits), the 

same basic framework for making loan 

guarantees applies to each. 

• Each prospective borrower works 

with a lender to obtain a loan for a 

project eligible under one of the four 

programs, providing the lender with 

necessary information on the borrower 

and the project. 

• Each lender evaluates borrower and 

project eligibility and performs a 

detailed credit analysis and, as 

applicable, an economic or financial 

analysis of the project to ensure that the 

project will be able to repay the loan. 

• Each lender submits the guaranteed 

loan application, including its credit 

analysis, and all accompanying 

documentation to the Agency for review 

and approval. 

• The Agency reviews each 

guaranteed loan application package in 

accordance with program requirements 

and approves or denies the guarantee. 

Subject to the availability of funds, each 

approved package is provided a loan 

guarantee. 

• Each lender is responsible for the 

origination and servicing of its 

guaranteed loan portfolio and for 

working with the Agency, as necessary, 

to resolve borrower issues (such as 

default). 

Variations do occur in this basic 

framework, but for the most part are not 

as significant as the scope of each of the 

programs. 

Issues With the Current Programs 

The regulations that are being 

combined under the proposed rule have 

developed over time and, in some 

aspects, independently of each other. 

Issues have developed when looking at 

all four program regulations as a whole 

as well as individually. Four of these 

operational issues are discussed below. 

Inefficiencies. Many of the same 

lenders and, in some cases, borrowers, 

seek loan guarantees under more than 

one of these four programs. Thus, the 

same entities are required to learn 

multiple programs. This is inefficient 

and costly to the lenders and makes the 

programs less attractive to lenders. 

Currently, when new programs are 

implemented, a whole new regulation is 

developed that, in many respects, 

addresses or adopts many of the same 

requirements. Time and effort are 

wasted in readdressing issues during the 

development of new program 

regulations leading to inefficient 

rulemaking and a delay in program 

implementation. 

Inflexibility. Maintaining four 

separate sets of basic requirements 

creates certain inflexibilities. For 

example, with each program 

administered under separate 

regulations, any change to basic 

requirements calls for multiple 

concurrences. Similarly, adding a new 

program requires the addition of a new 

set of basic requirements, as these are 

not currently shared. The proposed 

combined platform will streamline basic 

loan guarantee requirements, allowing 

all programs to reach a uniform 

functionality of process. 

Use of Agency Resources. Agency 

personnel spend a large amount of time 

performing process-related tasks that are 

not necessarily productive in making 

loan guarantees available to more 

lenders and, in turn, to more borrowers. 

These tasks are often inefficient and 

could be better managed by the private 

sector at the lender level. Further, these 

tasks are applied equally regardless of 

the relative level of risk of the 

associated loans. In sum, the current 

delivery of these four programs is not 

making the best use of Agency 

resources. 

Risk Management. In making and 

managing a portfolio of loan guarantees, 

consideration must be given to project 

risk, institutional risk, Agency loss 

exposure, and internal operational risk. 

Project risk refers to the ability of a 

project to repay its debt. The current 

process relies on the lender’s evaluation 

of the project and then the Agency’s 

review of the lender’s analysis. The 

types of information required to be 

assessed under each of the programs by 

the lender may vary. Currently, the 

Agency lacks definitive parameters to 

evaluate project risk and is inconsistent 

in its evaluation of risk across State 

Offices. 

The lack of definitive parameters 

inherently creates more risk. It allows 

projects to be funded based on 

completed processes as opposed to 

appropriate evaluation. Furthermore, 

this funding may come at the expense 

of less risky projects over time because 

of limitations of available funds. The 

proposed unified platform will 

significantly reduce inconsistencies in 

the implementation of these four 

programs across State offices and 

improve underwriting for loan 

guarantees, which should result in a 

reduction in risk and an improvement 

in the credit subsidy scores for these 

programs. 

Institutional risk refers to the quality 

of the lender seeking the loan guarantee. 

Some lenders simply do a better job at 

managing their portfolios and thereby 

have a lower rate of defaults. The 

current system does little to pre-qualify 

lenders; that is, the criteria for a lender 

to originate a loan with the Agency are 

insufficient. By implementing a defined 

set of criteria to assess lender 

performance, the Agency can improve 

its management of lenders participating 

in these programs. 

Agency loss exposure refers to the 

Agency’s risk for potential loss in any 

one project in terms of the percent of 

guarantee and the size of the loan. 

Currently, Agency loss exposure is 

managed by putting limits on the 

percent of guarantee relative to the size 

of the loan, by having collateral 

requirements, and, for some of the 

programs, by limiting the size of the 

loan. While these limits are the primary 

mechanism for managing Agency loss 

exposure, the current programs could do 

more to manage this risk. 

Agency operational risk refers to 

internal weaknesses inherent in 

administering multiple programs using 

a variety of regulations that require 

unique sets of processes and 

procedures. The new platform will 

reduce operational risk through reliance 

on commonalities, reduction of 

regulatory language, and integration of 

information management systems. 

C. The New Platform 

As noted above, Rural Development 

manages multiple guaranteed loan 

programs in separate regulations 

requiring users to become familiar with 

each. These regulations share many 

common elements. The inefficiencies in 

maintaining separate regulations have 

resulted in an in-depth evaluation of 

current program delivery. Further, in 

assessing the delivery of these programs, 

Rural Development sees the opportunity 

to better manage the risks associated 

with their delivery. 

The proposed new platform 

simplifies, improves, and enhances the 

delivery of Rural Development’s 

guaranteed loan programs, applies 

shared requirements when applicable, 

maintains programmatic nuances for 

varying rural development needs, and 

intends to reduce the amount of Agency 

loss claims paid through the provision 

of loan guarantees through improved 

underwriting. This new structure will 

also make it easier and faster to 

promulgate regulations for new loan 

guarantee programs in the future. 

The following paragraphs address 

improvements under the proposed 

platform. These improvements provide 

the requisite flexibility to accommodate 

additional or new programs and enable 

the Agency to better manage its risk. 

1. Increase efficiency. Having a 

common rule for multiple programs will 

reduce burden for the Rural 

Development staff, lenders, and 

borrowers, easing delivery and 


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increasing efficiency. A common 

platform will be easier to administer, 

improve communication of basic 

program aspects, and reduce end user 

confusion. 

Internally, a common regulation will 

reduce the time, effort, and training 

necessary to guarantee a loan. 

Externally, a common regulation will 

reduce the lender’s and borrower’s cost 

by providing simpler and more 

consistent program requirements. 

Further efficiencies will be realized as 

common program elements facilitate 

consolidation of information technology 

platforms and systems’ maintenance 

cost. Internal management controls will 

improve with standardized servicing 

and oversight. Common elements will 

assist lenders in managing a diverse 

portfolio and meeting Federal 

requirements. Uniform processes will 

facilitate electronic commerce between 

Rural Development and its customers. 

2. Flexibility. The structure of the new 

platform provides for the addition of 

other Agency, or newly authorized, 

guaranteed loan programs as needed 

without the addition of new sets of basic 

requirements. The common elements 

(proposed subpart A) of the proposed 

rule are intended to remain unchanged, 

while additional programs would be 

added to proposed subpart B. 

3. Refocus of Agency resources. The 

new platform directs Agency resources 

away from a processing centric model 

toward a rural development model by 

emphasizing lender expertise, 

refocusing time spent on process to time 

spent with clients, and increasing access 

by eliminating regulatory redundancy. 

4. Reduce risk. In developing the 

proposed new platform, the key 

consideration was how to implement it 

in a manner that reduces the overall risk 

that a loan would not be repaid. The 

Agency considered the risk associated 

with making and managing a portfolio 

of guaranteed loans in developing the 

new platform. How these risks are 

addressed in the proposed new platform 

is covered in the following section. 

D. How the New Platform Works 

Under the proposed platform, the 

common features of the four programs 

are incorporated into a single subpart 

(subpart A), with program specific 

features provided in a separate subpart 

(subpart B). While each of the four 

existing programs remains, the way 

these four programs will be delivered to 

Rural Development’s customers is 

different. In delivering the proposed 

platform, the Agency will also publish 

Federal Register notices containing 

specific information associated with the 

guaranteed loan program. 

The following paragraphs address the 

new platform by examining the 

proposed delivery mechanisms, 

concluding with a discussion of the 

Federal Register notices that will be 

used as part of the implementation of 

the new platform. 

1. Eligibility. Under the new platform, 

three basic types of eligibility are 

identified—project eligibility, borrower 

eligibility, and lender eligibility. 

Project eligibility is based on the 

proposed project being for the benefit of 

a rural area, on the ability of the activity 

to be funded to meet the requirements 

of the applicable program, on meeting a 

minimum set of project criteria, and, 

when applicable, on the boundaries of 

the proposed service area meeting a 

non-discrimination criterion. Projects 

that do not meet these proposed criteria 

would be ineligible under the new 

program. In addition, these criteria can 

not be voided under the exception 

authority provided in the proposed rule. 

The applicable project eligibility 

requirements, located in proposed 

subpart B, remain essentially unchanged 

for those of the four current programs. 

Some differences are being proposed 

and these are discussed in sections II. 

and III. of this preamble. One important 

difference is that the proposed platform 

uses three minimum project financial 

conditions, which are specifically 

discussed, in detail, in section II.B. of 

this preamble, to reduce project risk by 

screening out those projects less likely 

to achieve a level of success that will 

support loan repayment. These three 

financial conditions establish minimum 

requirements for debt coverage ratio, 

cash equity or community support, and 

loan-to-value ratio. While the four 

existing programs address cash equity 

and community support, they do not 

have requirements associated with debt 

coverage ratios and loan-to-value ratios. 

By specifying these project financial 

conditions within the rule, borrowers 

and lenders will be able to determine a 

project’s eligibility for a loan guarantee 

early in the process. 

In addition to identifying eligible 

projects, the proposed rule identifies 

specific projects and purposes that are 

ineligible under all circumstances from 

receiving a loan guarantee. The Agency 

assembled this list mainly from the list 

of ineligible projects and purposes 

identified in the regulations for the four 

current programs. 

Borrower eligibility is based on the 

borrower meeting two common 

requirements, which are citizenship and 

legal authority and responsibility, and 

program-specific criteria, which are 

contained in proposed subpart B. The 

proposed rule also identifies borrowers 

who would be categorically ineligible. 

In terms of eligible and ineligible 

entities, little has changed under the 

new platform compared to the four 

current programs. 

Lender eligibility is based on criteria 

dependent on whether or not the lender 

is a regulated or supervised lender. A 

lender, who is not otherwise debarred or 

suspended by the Federal government, 

must be approved, as described below, 

by the Agency to participate in this 

program. As part of the approval 

process, the Agency may consider the 

experience and capabilities of the lender 

to properly originate and service the 

variety of guaranteed loans available 

within the Agency. If the Agency 

disapproves a lender for participation, 

the lender has the right to appeal that 

decision. In addition, all participating 

lenders will be reviewed for eligibility 

at least every two years. 

Although the B&I guaranteed loan 

program has a process for ‘‘other 

lenders’’ to participate in the current 

B&I guaranteed loan program, the 

process for an eligible lender to 

participate in the proposed platform is 

generally new compared to the four 

current programs. Figure 1 illustrates 

the basic process for lender approval 

under the proposed platform, with the 

following paragraphs describing this 

process. 

Any lender that is a regulated or 

supervised lender is eligible to 

participate in the guaranteed loan 

programs described in proposed subpart 

B. If a regulated or supervised lender 

has an existing portfolio with the 

Agency, it is considered to be 

‘‘approved’’ for participation and would 

not be required to submit an application 

to the Agency for approval to 

participate. However, the lender would 

be required to submit certification to the 

Agency that it is in ‘‘good standing’’

with its regulator. If a regulated or 

supervised lender does not have an 

existing portfolio with the Agency, it 

must submit an application for lender 

approval to the Rural Development State 

Office in the State in which the lender 

is chartered. The State Office will 

review the application and make a 

decision to approve or disapprove the 

lender for participation in this program. 

State Office approval of the lender will 

extend to all States and all programs 

covered by this part. If disapproved, the 

lender will have the right to appeal the 

decision to the National Appeals 

Division. To be approved, a regulated or 

supervised lender must be in good 

standing with its regulator(s). 


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As proposed, all regulated or 

supervised lenders would be required to 

submit to the Agency a copy of their 

current written policies and procedures 

for originating and servicing guaranteed 

loans. This is not currently required 

under any of the four current programs. 

If the lender is not a regulated or 

supervised lender, it must submit an 

application to the Rural Development 

State Office in the State in which the 

lender is chartered for approval for 

participation. The application will 

address a number of criteria that the 

Agency will consider in approving or 

disapproving the lender (see section 

II.B. for more detail on these criteria). 

The State Office will review the 

application and submit it, along with its 

comments, to the National Office for 

review. The National Office will make 

the determination as to whether to 

approve the lender for participation. If 

the National Office approves the lender, 

that approval will apply to all States for 

all programs covered by this part. If 

disapproved by the National Office, the 

lender will have the right to appeal the 

decision to the National Appeals 

Division. 

The process described above is 

intended to help the Agency ensure that 

only qualified lenders participate in this 

program, and thereby mitigate 

institutional risk by encouraging the 

participation of better qualified and 

performing lenders. 

2. Preferred Lender versus Approved 

Lender. An important aspect for 

managing institutional risk under the 

new platform is the ability of an 

approved lender to apply for preferred 

lender status (see Figure 1 above and 

§ 5001.9(c) of the proposed rule). 

Currently, only the B&I guaranteed loan 

program has provisions for a preferred 

lender program, although there has been 

no material participation in it to date. 

Under the proposed program, there 

are several benefits for being a preferred 

lender. Preferred lenders would have 

more opportunities to submit 

applications for guarantee with less 

supporting documentation, would be 

subject to fewer Agency visits, and 

would be eligible to receive higher 

percent guarantees than lenders without 

preferred status. In addition, the Agency 

may expend fewer resources evaluating 

preferred lender loan guarantee 

applications and reallocate resources to 

better manage risk and encourage 

program participation. 

To receive preferred lender status, a 

Rural Development approved lender 

would submit an application for 

preferred lender status to the State 

Office in the State in which the lender 

is chartered. The State Office would 

then forward the application and its 

comments to the National Office for 

review and decision. 

The criteria proposed for obtaining 

preferred lender status (see Figure 2) 

address the qualifications of the lender 

for loans of similar nature and the 

quality of the lender in managing its 

loan portfolio by examining its 

commercial loan losses and any 

instances of Federal negligent loan 

origination or servicing. The Agency 

will also consider any comments 

submitted by State Offices when 

evaluating these applications. National 

Office approval will apply to all States. 

3. Guaranteed loan approval. Under 

the four current programs, the Agency 

views proper loan origination as a 

responsibility of the lender. The new 

platform clarifies this responsibility by 


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reinforcing the concept of negligent loan 

origination. To help lenders understand 

the importance of conducting proper 

credit analysis and sound loan 

origination, the new platform will 

clarify the Agency’s policy regarding 

negligence in the origination and 

servicing of loans. In the case where the 

lender is the holder of the guarantee, 

losses associated with the lender’s 

negligence will be deducted from the 

loss claims paid under the guarantee. In 

the case where there is a subsequent 

holder, losses associated with the 

lender’s negligence will not be deducted 

from the loss payment under the 

guarantee. However, in such cases, loss 

claims paid under the guaranteed will 

be collected from the lender. The 

Agency anticipates that the clarification 

for negligent loan origination will 

reduce loan defaults through improved 

loan origination. 

Under the new platform, Rural 

Development has standardized, to the 

extent possible, the type of information 

to be included in the loan guarantee 

application, although some additional 

content information is required by some 

of the programs described in subpart B. 

In general, the information associated 

with a loan guarantee application is not 

significantly different than currently 

required under the four current 

programs. 

The main difference in the 

application for loan guarantee under the 

new platform will be the amount of 

supporting documentation that is 

required to be submitted with or 

accompany the application for certain 

projects. If criteria are met as described 

below, the lender will have the option 

of submitting a ‘‘low documentation’’

application, which would allow the 

lender to self-certify that it has 

complied with certain Agency 

requirements. (See section II.B. for more 

information.) The Agency expects the 

lender to obtain the same level of 

documentation and to perform the same 

level of analysis and other origination 

activities whether the lender submits a 

full documentation application or a low 

documentation application. 

The determination of whether a low 

documentation application can be 

submitted will depend on the 

borrower’s status as a startup or existing 

business, on whether the lender has 

preferred lender status, and on certain 

project criteria. 

As proposed, all loan guarantee 

applications for startup businesses must 

be submitted with full documentation 

(see section II.B. for details) given the 

risk associated with startup businesses. 


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For existing businesses, the proposed 

rule would allow Rural Development 

approved lenders with preferred lender 

status to submit applications with either 

low or full documentation if the loan 

guarantee request is for $5 million or 

less. For a larger loan guarantee request, 

a full documentation application would 

be required. These provisions apply to 

all four programs under the proposed 

platform. 

For Rural Development approved 

lenders that do not have preferred 

lender status, all applications would 

have to be submitted with full 

documentation unless the project meets 

certain criteria, as discussed in section 

II.B., intended to lower the risk 

associated with the project. If the project 

meets the lower risk identification 

criteria, the Rural Development 

approved lender without preferred 

status would be allowed to submit a low 

documentation application. 

The Agency will examine the lender’s 

analysis of the project, the technical 

merit, any business plans or feasibility 

studies required, and environmental 

information. If the Agency disapproves 

the application, the lender and borrower 

have the right to appeal the decision. 

4. Servicing. Once the loan has been 

approved, the lender will continue to be 

responsible for servicing the entire loan. 

The lender’s servicing responsibilities, 

including those regarding negligent 

servicing, under the proposed unified 

platform are essentially the same as 

under the four existing regulations. 

5. Oversight and Monitoring. As under 

the four current programs, the Agency 

will conduct under the proposed new 

platform any and all oversight and 

monitoring activities necessary to 

ensure that lenders are originating and 

servicing Agency guaranteed loans in a 

manner consistent with lender and 

Agency standards. These tools include, 

but are not limited to, conducting lender 

visits and meetings and requiring 

various reports and notifications. There 

are a few differences between the 

proposed platform and the four current 

programs for conducting these activities. 

These differences are discussed later in 

this preamble. 

The Agency will also use this 

oversight and monitoring to ensure that 

lenders maintain the qualification 

criteria for being a Rural Development 

approved lender and, where applicable, 

for being a preferred lender. 

6. Managing Risk. As noted above, the 

Agency has incorporated into the 

proposed new platform certain features 

to help manage risk. 

To limit loss exposure, the Agency 

will require full supporting 

documentation on all applications for 

projects from startup businesses and 

from existing businesses unless, for 

existing businesses, the project is a 

‘‘lower risk’’ project as defined by the 

criteria in the proposed rule. 

Applications for projects that meet these 

criteria may be submitted with less 

supporting documentation (i.e., a low 

documentation application). 

The Agency will mitigate the 

possibility of increased loss exposure 

associated with low documentation 

applications as the discussed below. 

• The loan amount that will be 

guaranteed under a low documentation 

application would be limited to $5 

million. In other words, all loan 

requests for more than this amount must 

be submitted as full documentation 

applications. This applies across all four 

programs under the new platform. 

Setting a maximum value for which a 

low documentation application can be 

submitted will provide the Agency the 

ability to better monitor loans that 

represent greater potential liability. 

• If the low documentation 

application is from a lender who does 

not have preferred status, the maximum 

percent guarantee that the Agency will 

consider for that loan is 10 percentage 

points lower than for a full 

documentation application. Reducing 

the maximum percent guarantee 

available will mitigate Agency loss 

exposure. In consideration of the 

additional criteria necessary to become 

a preferred lender, the Agency has 

determined that the risk mitigation 

obtained by applying the preferred 

lender criteria offsets the risk mitigation 

obtained by reducing the guarantee. 

Therefore, the Agency is proposing to 

not apply this reduction in the 

maximum guarantee available to a 

preferred lender. 

• If the low documentation 

application if from a lender who does 

not have preferred status, the proposed 

rule requires additional financial 

criteria in order to qualify the project for 

a low documentation application. 

Requiring projects to meet additional 

financial criteria will mitigate project 

risk. 

To limit project risk, the new platform 

requires projects to meet a minimum set 

of project financial criteria to prevent 

high risk projects from being proposed 

at all. In addition, in order to avoid 

bypassing project eligibility criteria, the 

Agency is proposing that exception 

authority not be extended to any project 

eligibility criterion, including the 

project financial criteria. 

To limit institutional risk, the new 

platform requires lenders to meet 

criteria that help ensure the lender has 

the appropriate origination and 

servicing experience and track record to 

reduce the likelihood of loan defaults. 

The Agency is proposing different 

criteria for regulated and supervised 

lenders as opposed to those that are 

unregulated and not supervised. 

Further, by providing a preferred status 

designation, the Agency is hoping to 

attract more qualified lenders to the 

programs. 

Finally, to limit operational risk, the 

new platform relies on commonalities, 

reduction of regulatory language, and 

integration of information management 

systems. The use of electronic reporting 

and standardized forms also allows the 

Agency to better manage its portfolio of 

outstanding guaranteed loans. 

7. Federal Register notices. To 

implement the new platform, the 

Agency will publish at least one Federal 

Register notice each year. Each notice 

will address the following items as 

necessary: 

• Ineligible projects and purposes. If 

the Agency has identified any 

additional projects or purposes for 

which guaranteed loans will not be 

made, it will include such ineligible 

projects and purposes in the Federal 

Register notice. If there are no new 

ineligible projects or purposes have 

been identified, the notice would 

include a statement to that effect. 

• Maximum loan amounts. The 

Agency will identify in the Federal 

Register notice the maximum loan 

amount per loan that will be available 

under each of the programs. 

• Fees. If any are required, the 

Agency will identify in the Federal 

Register notice the guarantee fee and the 

renewal fee that will be used for that 

year in the calculation of the guarantee 

fee and the renewal fee for each 

program. In addition, for the B&I 

guaranteed loan program, the Agency 

will specify in the Federal Register 

notice the limit on the maximum 

portion of the guarantee authority 

available for that fiscal year that may be 

used to guarantee loans with the 

reduced guarantee fee of 1 percent. 

• Priority Scoring. For the B&I 

guaranteed loan program, the Agency 

will identify the scoring criteria that 

will be used, if necessary, to allocate 

funds if funds are insufficient to cover 

all applications within the program. The 

Agency will manage the Renewable 

Energy Systems and Energy Efficiency 

Improvements guaranteed loan program 

funds in the same manner. 

II. Discussion of Proposed Rule 

In this section, the proposed rule is 

described. First, an overall organization 

of the proposed rule is presented, 


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followed by a section-by-section 

discussion of each part. 

A. Overall Organization of the Rule 

The proposed rule is divided into two 

main parts. The first part, subpart A, 

contains the provisions that apply to all 

of the guaranteed loan programs covered 

by the proposed rule. The second part, 

subpart B, contains the provisions 

specific to the four programs identified 

earlier in this preamble. 

Subpart A. Subpart A is divided into 

five major elements. In the first element 

are general provisions that cover the 

purpose of this part (§ 5001.1), the 

definitions and abbreviations used in 

this part (§ 5001.2), various Agency 

authorities associated with providing 

guaranteed loans (§ 5001.3), oversight 

and monitoring (§ 5001.4), and forms, 

regulations, and instructions (§ 5001.5). 

The second element covers the basic 

eligibility requirements for the project 

(§ 5001.6) and unauthorized projects 

and purposes (§ 5001.7), for the 

borrower (§ 5001.8), and for the lender, 

including how a lender can be approved 

for preferred status, (§ 5001.9). 

The third element covers the basic 

requirements associated with the 

guaranteed loan application, describing 

the process for submitting an 

application and its approval (§ 5001.11) 

and the contents of the application 

(§ 5001.12). 

The fourth element covers the 

responsibilities of the lender and the 

borrower. Section 5001.15 covers 

general responsibilities of the lender. 

Lender responsibilities for originating 

the loan are covered by § 5001.16 and 

for servicing the loan by § 5001.17. 

Responsibilities of the borrower are 

found in § 5001.25. 

The fifth element covers basic 

provisions associated with the 

guarantee, including parameters for the 

guaranteed loan. General guarantee 

provisions are found in § 5001.30, with 

guaranteed loan parameters (e.g., 

interest rates, term length, maximum 

percent guarantee, etc.) found in 

§ 5001.31. The remaining sections in the 

fifth element address the process for 

obtaining the guarantee through changes 

in the guarantee and concluding with 

termination of the guarantee. 

Subpart B. This subpart addresses 

provisions that are specific to the 

individual programs. Section 5001.101 

covers provisions specific to the 

Community Facilities Program, 

§ 5001.102 covers provisions specific to 

the Water and Waste Disposal Facilities 

Program, § 5001.103 covers provisions 

specific to the Business and Industry 

Program, and § 5001.104 covers 

provisions specific to the Renewable 

Energy Systems and Energy Efficiency 

Improvements Program. 

Within each of these four sections, the 

specific provisions are related back to a 

corresponding section in subpart A. For 

example, each of the four sections has 

subsections that address project 

eligibility. Another example is 

additional application documentation 

requirements. The intent of subpart B is 

to identify all of the provisions specific 

to each of the four programs. In this 

way, each of the four programs 

maintains their integrity under the new 

platform. 

B. Discussion of Sections 

Purpose (§ 5001.1) 

This section defines the purpose of 

this part. 

Definitions and Abbreviations (§ 5001.2) 

This section presents the definitions 

and abbreviations used in this part, 

including terms that may be specific to 

one of the four programs found in 

subpart B. 

The proposed rule contains fewer 

definitions than found in the four 

existing regulations, primarily because 

the deleted terms are no longer used in 

the proposed rule. Some definitions 

have been added or revised, including, 

but not limited to: Essential community 

facility, negligent loan origination, 

negligent loan servicing, rural or rural 

areas, and water and waste disposal 

project. 

Agency Authorities (§ 5001.3) 

Under this section, the proposed 

rulemaking identifies Exception 

Authority and Appeal Rights. 

Exception authority. This paragraph 

identifies the situations under which 

the Administrator may make exceptions 

to the requirements contained in the 

regulation. The exceptions will be made 

on a case-by-case basis. 

Unlike the four current regulations, 

the proposed rule identifies four 

exceptions to this Exception Authority, 

where the Administrator would not be 

allowed to make exceptions. These four 

exceptions are: 

• Applicant and borrower eligibility, 

including both prospective borrowers 

and lenders. 

• Project eligibility, as found in 

proposed § 5001.6 and the individual 

program in subpart B. 

• Rural area definition, as found in 

proposed § 5001.2. 

• Maximum term length of a 

guaranteed loan, as found in proposed 

§ 5001.31(c). 

The Agency believes that applicant/ 

borrower and project eligibility criteria 

must be maintained at all times in order 

to maintain an acceptable level of risk 

associated with guaranteed loans made 

under this part. The Agency also 

believes that it is important to maintain 

the definition of rural area at all times 

in order to ensure that loans guaranteed 

under this program are used to benefit 

rural areas. Lastly, the Agency believes 

that it is important to ensure a 

reasonable period of payback on 

guaranteed loans in order to manage its 

portfolio of outstanding loans and, 

therefore, is proposing not to allow 

exceptions to the maximum term length 

of a guaranteed loan. For these reasons, 

the Agency is proposing that the 

Administrator not be allowed to exempt 

a project from any of these four criteria. 

Appeal rights. As provided by the 

four current programs, this paragraph 

provides the legal basis for a person to 

file an appeal of an adverse decision 

made by the Agency in implementing 

the proposed program. Such adverse 

decisions include, but are not limited to: 

(1) disapproving a lender for 

participation in the program, (2) 

disapproving an approved lender for 

preferred lender status, and (3) denying 

an application for a loan guarantee for 

reasons other than a lack of funds. 

When the Agency makes an adverse 

decision, a person may file an appeal 

with either the appropriate Agency 

official that oversees the program or 

with the National Appeals Division. 

Some negative determinations may 

affect a holder, in which case this 

paragraph provides the holder the legal 

right to file an appeal. 

Oversight and Monitoring (§ 5001.4) 

This section of the rule lays out the 

types of oversight and monitoring the 

Agency will perform in implementing 

this program. Consistent with the four 

current programs, these activities 

include, but are not necessarily limited 

to, reviewing lender records and 

meeting with the lenders to review the 

status of their guaranteed loans. The 

purposes of these oversight and 

monitoring activities are to: (1) Ensure 

that the lender has implemented, and is 

in compliance with, the provisions of 

this part and (2) determine if the lender 

is maintaining the appropriate 

requirements to maintain their status as 

a Rural Development approved lender 

and, if applicable, a preferred lender. 

The amount of oversight and monitoring 

will vary depending on whether the 

Rural Development approved lender has 

preferred lender status or not. 

Reports. The proposed rule would 

require each lender to submit periodic 

reports to the Agency on the condition 

of its Agency guaranteed loan portfolio. 

These reports include borrower status, 


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loan classification, and any material 

changes in the general financial 

condition of the lender since the last 

periodic report was submitted. For loans 

that are not in default, these reports 

would be submitted semiannually, as is 

the practice in the four current 

programs. 

The Agency considered requiring 

these reports on a monthly basis. This 

shorter duration provides the Agency 

with the more current information on 

the lenders’ portfolio status, which 

would allow the Agency more ‘‘up-todate’’ information to evaluate its loss 

exposure. The Agency, however, 

believes that the benefit of having this 

more ‘‘up-to-date’’ information did not 

outweigh the costs associated with 

generating this information on a 

monthly basis using current Agency 

technology. The Agency also considered 

annual submittal of these reports, but 

rejected this option because it does not 

provide for a timely assessment of the 

Agency’s loss exposure of all its 

guaranteed loans. 

For loans that go into or are in default, 

the proposed program would require 

default status reports to be provided on 

a monthly basis, regardless of the 

guaranteed loan amortization schedule, 

until such time the loan is no longer in 

default. This reporting frequency, which 

is shorter than found in the four current 

programs, helps the Agency focus its 

resources on problem loans sooner and 

with more frequency, thereby helping to 

mitigate the risk associated with such 

loans. 

Notifications. The Agency is 

proposing that the lender notify it 

within 5 days when the borrower has 

violated any terms of the loan agreement 

(including if the borrower has missed a 

scheduled payment by more than 30 

days) and when there has been any 

permanent reduction in the interest rate. 

The Agency is seeking these 

notifications to further allow the Agency 

to better manage its loss exposure in 

such instances that could affect 

repayment of the loan. Because both 

situations have substantial lead times, 

the Agency believes that 5 days is 

sufficient time for the lender to notify 

the Agency when either situation 

occurs. 

All four programs currently require 

notification when there has been a 

permanent reduction in the interest rate, 

although they allow a 10-day 

notification period. Only the current 

Community Facility and Water and 

Waste Disposal Facilities guaranteed 

loan programs require lender 

notification when a borrower has 

violated any term of the loan agreement, 

and those programs currently allow a 

longer notification period (30 days 

versus 5 days under the proposed rule). 

Forms, Regulations, and Instructions 

(§ 5001.5) 

This section describes where the 

lender and borrower can obtain all of 

the forms, regulations, and instructions 

necessary to participate in this program. 

These are available from any Rural 

Development State Office of the Agency 

and from the Agency’s Web site. 

Project Eligibility (§ 5001.6) 

In order for a project to receive a 

guaranteed loan under this program, it 

must be an ‘‘eligible’’ project. This 

section identifies four criteria that each 

project must meet in order to be eligible. 

For some projects, the fourth criterion is 

not applicable. In such cases, the project 

must meet each of the first three criteria 

in order to be eligible. 

Loan guarantee applications for 

projects that meet these criteria are not 

automatically approved. Instead, any 

project that fails to meet any one of 

these criteria are automatically 

ineligible for consideration for a loan 

guarantee, regardless of the other 

attributes of the project. 

Benefit a rural area. The first criterion 

(§ 5001.6(a)) addresses the purpose of 

the project—the project must be for the 

benefit of a rural area. This criterion is 

generally consistent with what the four 

current programs, but, unless otherwise 

specified in subpart B, does not require 

the project to be physically located 

within a rural area. 

Eligible project. The second criterion 

(§ 5001.6(b)) addresses the requirement 

that the project must meet the criteria 

specified in the applicable program 

identified in subpart B of the proposed 

rule. For example, if a project is for an 

anaerobic digester, it must meet the 

eligibility requirements specified in 

proposed § 5001.104 for renewable 

energy projects. If a project is for a 

community meeting hall, it must meet 

the eligibility requirements specified in 

proposed § 5001.101 for community 

facility projects. Generally, the same 

project criteria found in the four current 

programs have been carried over to 

subpart B of the proposed rule. 

Financial conditions. The third 

criterion (§ 5001.6(c)) addresses three 

financial conditions that the project 

must meet. The conditions are: (1) Be 

able to demonstrate a debt coverage 

ratio of 1.0 or higher, (2) have a cash 

equity of 10 percent for existing 

businesses or 20 percent for new 

businesses or, for community facility 

guaranteed loans and water and waste 

disposal guaranteed loans only, be able 

to demonstrate community support, and 

(3) have a loan-to-value ratio of no more 

than 1.0. 

As specified in subpart B, community 

facility guaranteed loans and water and 

waste disposal guaranteed loans may 

either satisfy the cash equity 

requirements noted above or 

demonstrate community support. 

However, as proposed, if a lender has 

stricter eligibility requirements, a 

project would be required to meet the 

lender’s requirements. For example, if a 

lender requires a community facility 

project to meet a cash equity 

requirement of 30 percent, which is 

more stringent than the proposed rule, 

and the lender does not accept 

community support in lieu of cash 

equity, then the project would be 

required to meet the lender’s cash 

equity requirement of 30 percent. 

As noted earlier, these financial 

metric criteria represent minimum 

conditions that a project must meet in 

order to be considered for a loan 

guarantee. If a project does not meet any 

one of these criteria, it is automatically 

ineligible for a loan guarantee. If it 

meets these criteria, the project is not 

automatically guaranteed a loan 

guarantee. For example, based on the 

Agency’s evaluation of the loan 

guarantee application and associated 

risks, the Agency may require more 

stringent financial ratios as a condition 

of approval. 

The four current programs do not 

have specific minimum criteria that a 

project must pass in order to be eligible 

for a guaranteed loan. Instead, the four 

programs rely on an evaluation of 

equity, cash flow, and collateral as 

appropriate to assess the viability of 

projects to repay the loan. 

There are no equivalent requirements 

in the four current programs regarding 

debt coverage ratios and loan-to-value 

ratios. With regard to the cash equity/ 

community support requirement, this is 

similar or the same as to what is 

required under the current programs. 

For example, both the Community 

Facilities and Water and Waste Disposal 

guaranteed loan programs require that 

projects demonstrate community 

support. The Renewable Energy Systems 

and Energy Efficiency Improvements 

guaranteed loan program currently 

requires demonstration of the adequacy 

of equity based on either 15 or 25 

percent of eligible project costs. Under 

the B&I guaranteed loan program, 

tangible balance sheet equity (rather 

than cash equity) is used to assess the 

adequacy of equity, requiring 10 percent 

for existing businesses and 20 percent 

for new businesses. 

Service area selection. The fourth 

criterion (§ 5001.6(d)) specifies that, for 


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projects that are determined by a service 

area, the proposed service area of the 

project must be chosen in a way that no 

user or area is excluded because of race, 

color, religion, sex, marital status, age, 

disability, or national origin. This 

criterion, where applicable, is the same 

as found under the current regulations 

of the Community Facilities and the 

Water and Waste Disposal guaranteed 

loan programs. 

To reiterate, a project must meet each 

one of the four project eligibility 

criteria, or each of the first three criteria 

if the fourth criterion is not applicable, 

in order to be eligible for a guaranteed 

loan under the proposed rule. Meeting 

only some of the criteria is insufficient 

to be eligible. These criteria would be 

applied to all projects seeking a loan 

guarantee under each program covered 

by the proposed rule and cannot be 

waived under the Exception Authority 

(§ 5001.3(a)). 

The Agency is proposing the project 

financial conditions under the third 

criterion in order to manage project risk. 

The Agency is concerned that under the 

current programs, loans are being sought 

for projects that are ‘‘too risky’’ and, in 

some cases, such projects are being 

funded. This increases the potential for 

loan defaults and reduces funding for 

projects that are inherently less risky. 

The Agency believes that setting such 

project financial conditions will allow 

more projects with less risk to be 

funded. 

The Agency selected these three 

project financial conditions because 

they represent the best metrics for 

initially evaluating the overall risk of 

any single project. The specific 

numerical values are those that the 

Agency believes are reasonable 

measures of risk. The Agency requests 

comments on the three project financial 

conditions of the third criterion (see 

section IV.A. of this preamble), and is 

specifically interested in receiving 

comments on the three project financial 

conditions selected and the values used. 

Unauthorized Projects and Purposes 

(§ 5001.7) 

This section of the proposed rule 

identifies the types of projects that are 

ineligible for loan guarantees under this 

program regardless of whether the 

project meets the conditions specified in 

subpart B and § 5001.6. These projects 

represent both an aggregation of projects 

already prohibited under the four 

programs being included in today’s 

proposed rulemaking and the addition 

of projects that the Agency has 

determined represent significant risk 

based on past experience (e.g., golf 

courses). 

The Agency has determined that 

certain recreational projects, such as 

golf courses, require a level of support 

or patronage beyond the local rural 

community that may be insufficient in 

order to sustain the project over the life 

of the loan. This determination by the 

Agency stems from the Agency’s poor 

loss experience in providing loan 

guarantees in the past to recreational 

projects of this type. Other recreational 

facilities may exhibit the same 

characteristics that would lead to 

similar Agency losses. In order for the 

Agency to mitigate the increased risk 

associated with these types of projects, 

the Agency is proposing to make 

ineligible certain recreational projects as 

specified in § 5001.7(b). 

As noted earlier in this preamble, the 

Agency will publish at least once per 

year a notice in the Federal Register to 

identify additional projects or purposes 

that the Agency has determined are 

ineligible for loan guarantees under this 

part. 

Borrower Eligibility (§ 5001.8) 

As for projects, in order for a 

prospective borrower to be eligible 

under this program, the borrower must 

also be an ‘‘eligible’’ borrower. This 

section identifies the eligibility 

requirements for prospective borrowers. 

Prospective borrowers must meet the 

program-specific eligibility 

requirements found in subpart B for the 

program under which their project falls. 

These specific requirements are 

discussed later in this preamble. 

This section also identifies two 

common borrower eligibility 

requirements that all prospective 

borrowers must meet, regardless of 

which program is applicable for their 

project. These two criteria address 

citizenship and legal authority and 

responsibility. These two criteria are in 

some of the four current regulations, but 

not in each. 

To be eligible, a prospective borrower 

must either be a citizen of the United 

States (U.S.) or reside in the United 

States after legal admittance for 

permanent residence. If the prospective 

borrower is an entity other than an 

individual, the borrower must be at least 

51 percent owned by persons who are 

U.S. citizens or are legally admitted 

permanent residents residing in the U.S. 

In addition, the prospective borrower 

must have, or be able to obtain, the legal 

authority to construct, operate, and 

maintain the proposed facility and 

services and to obtain, give security for, 

and repay the proposed loan. 

This section also identifies ineligible 

borrowers (§ 5001.8(b)). A prospective 

borrower is ineligible if the borrower 

has an outstanding judgment obtained 

by the U.S. in a Federal Court is 

delinquent on the payment of Federal 

income taxes, is delinquent on Federal 

debt, or is debarred or suspended from 

receiving Federal assistance. These 

conditions are generally consistent with 

those found in the four current 

programs. 

Lender Eligibility and Designation 

(§ 5001.9) 

As proposed, all lenders must be 

approved by the Agency under the 

standards of this regulation in order to 

participate. If a lender is debarred or 

suspended by the Federal government, 

the lender would be ineligible to 

participate. As noted earlier in this 

preamble and as discussed later in 

section III.C., there are differences 

between the lender approval process 

under the proposed rule and under the 

four current programs. 

Lender approval process. The Agency 

is proposing requirements to approve 

lenders in order to reduce institutional 

risk. There are some lenders that simply 

do a better job than others in originating 

and servicing their loans. The Agency is 

seeking, therefore, to reduce this 

institutional risk by setting lender 

requirements for participation, which in 

turn will lower the risk to the Agency’s 

outstanding loan guarantees. 

The proposed rules would use two 

different processes and requirements—

one for lenders that are regulated or 

supervised and one for lenders that are 

not regulated or supervised. 

As noted earlier in this preamble, any 

lender that is a regulated or supervised 

lender is eligible to participate in the 

guaranteed loan programs described in 

proposed subpart B. If a regulated or 

supervised lender has an existing 

portfolio with the Agency (see proposed 

§ 5001.9(a)(1)(ii)), it is considered to be 

‘‘approved’’ for participation and would 

not be required to submit an application 

to the Agency for approval to 

participate. However, the lender would 

be required to submit a certification to 

the Agency that it is in ‘‘good standing’’

with its regulator and a copy of its 

current written policies and procedures 

for origination and servicing guaranteed 

loans. 

If a regulated or supervised lender 

does not have an existing portfolio with 

the Agency (see proposed 

§ 5001.9(a)(1)(i)), it must submit an 

application for lender approval to the 

Rural Development State Office in the 

State in which the lender is chartered. 

Along with this application, the lender 

would submit a copy of its current 

written policies and procedures for 

origination and servicing guaranteed 


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52630 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

loans. The Rural Development State 

Office will review the application and 

make a decision to approve or 

disapprove the lender for participation 

in this program. Rural Development 

State Office approval of the lender will 

extend to all States and all programs 

covered by this part. If disapproved, the 

lender will have the right to appeal the 

decision to the National Appeals 

Division. To be approved, a regulated or 

supervised lender must be in good 

standing with its regulator(s). 

The criteria for approving a nonregulated or supervised lender are 

substantially more detailed (see 

proposed § 5001.9(b)). A non-supervised 

lender must have: 

• a minimum net worth of $2.5 

million, 

• liquid assets of at least $500,000, 

and 

• an Agency-approved line of credit 

that totals $5 million or more. 

If a non-regulated or supervised 

lender can not meet each of the above 

three criteria, then the National Office 

will not approve the lender for 

participation in this program. If the 

lender meets each of the above three 

criteria, then the lender can submit an 

application for lender approval to the 

Rural Development State Office in the 

State in which it is chartered that 

presents additional information on the 

lender. This information addresses: 

• Evidence showing that the lender 

has the necessary capital, resources, and 

funding capacity to successfully meet its 

requirements; 

• Copies of any license, charter, or 

other evidence of legal authority to 

engage in the proposed loan making and 

servicing activities; 

• Certification(s) of good standing 

from the States in which the lender 

intends to do business; and 

• Satisfactory description of its 

lending history and experience. 

If approved (by a Rural Development 

State Office for a regulated or 

supervised lender or by the National 

Office for a non-regulated or supervised 

lender), the lender may sign a Lender’s 

Agreement with the Agency. If the 

Lender’s Agreement is executed by the 

lender and the Agency, the lender may 

submit an application for guarantee in 

any State in which it is authorized to do 

business. In addition, approved lenders 

may submit an application for any of the 

four programs identified in subpart B. 

Finally, a Rural Development 

approved lender retains approved status 

for as long as the lender maintains the 

minimum requirements for approval. 

For regulated or supervised lenders, this 

means for as long as the lender remains 

in good standing with its regulator and 

as long as it meets the Agency 

requirements under this regulation or 

until otherwise notified by the Agency. 

For non-regulated or supervised lenders, 

this means for as long as the lender 

meets or exceeds the minimum Agency 

requirements specified and remains in 

good standing with the States in which 

they intend to conduct business. 

Preferred lender designation. A lender 

that has been approved as described 

above for participation is referred to as 

a ‘‘Rural Development approved lender’’

in the proposed rule. Under the 

proposed rule, a Rural Development 

approved lender may apply for 

preferred lender status. 

To become a preferred lender under 

the proposed rule, a Rural Development 

approved lender would submit an 

application for preferred lender status to 

the Agency in the State in which it is 

chartered or domiciled. The Rural 

Development State Office would review 

the application, comment on it, and 

then forward the application and its 

comments to the National Office for 

review and decision. If approved by the 

National Office, the lender will be 

afforded preferred lender status, which 

will be applicable in each State. If 

disapproved, the lender would be able 

to appeal the decision. 

The criteria that the Agency will use 

to make in determining whether to 

approve an application for preferred 

lender status are: 

• The lender’s current level of 

experience in commercial lending, 

government guaranteed commercial 

lending, financing, or other activity 

under similar loan programs; 

• Having had no annual losses of 

greater than 1 percent of its outstanding 

commercial loan portfolio if the lender 

has been making commercial loans for 

5 years or more or, no losses for the 

length or time the lender has been 

making commercial loans, if the lender 

has been making commercial loans for 

less than 5 years; and 

• Having no more than one instance 

of Federal government negligent loan 

origination or servicing. 

By including a preferred lender status, 

the Agency is seeking to encourage more 

participation by higher qualified lenders 

in this program. This would reduce 

institutional risk, which in turn reduces 

the risk to the Agency’s portfolio of 

outstanding loan guarantees. While 

Rural Development approved lenders 

with referred lender status would still 

be required to meet the same origination 

and servicing requirements as Rural 

Development approved lenders who do 

not have preferred lender status, lenders 

with preferred lender status would, as 

noted earlier in this preamble, have a 

reduced loan guarantee application 

burden for certain projects, would be 

subject to fewer Agency visits, and 

would be able to apply for higher loan 

guarantees for certain projects. 

Guarantee Application Process 

(§ 5001.11) 

To begin the application process, an 

approved lender may submit either a 

preapplication or a guarantee 

application. In the evaluation of the 

application, the Agency may require the 

lender to obtain additional assistance in 

those areas where the lender does not 

have the requisite expertise to originate 

or service the loan. 

The Agency is providing the 

preapplication option, which is not 

found in all of the four current 

programs, to allow lenders and 

borrowers a lower cost alternative to 

obtain Agency input on the proposed 

project before spending the time and 

effort assembling the guarantee 

application. 

If a lender submits a preapplication, 

the Agency will review the information 

in it and make an informal assessment 

of the project’s and prospective 

borrower’s eligibilities. The Agency will 

provide the lender with a written 

assessment of its findings, including the 

strengths and weaknesses of the project 

and borrower. It is important to note 

that the Agency’s findings may change 

as more information on the project and 

borrower is made available. It is also 

important to note that the Agency’s 

findings are solely advisory in nature 

and does not obligate the Agency to 

approve a guarantee if a guarantee 

application is subsequently submitted. 

Finally, the Agency’s findings are 

considered neither a favorable or 

adverse decision and are thus not 

appealable. 

Guarantee Application Content 

(§ 5001.12) 

This section of the proposed rule 

identifies the content of the application 

for guarantee. As proposed, the 

supporting documentation that must be 

submitted with the application for the 

guarantee varies, requiring either all of 

the supporting documentation (referred 

herein as a ‘‘full documentation’’

guarantee application) or some 

supporting documentation with 

certification to the remaining 

documentation (referred herein as a 

‘‘low documentation’’ guarantee 

application). The contents of a full 

documentation application are generally 

the same as being requested by the four 

current programs. The main difference 

is found under the low documentation 

application, which is discussed in 


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section III.B. of this preamble. As noted 

earlier in the preamble, the Agency 

expects the lender to perform the same 

level of analysis and other origination 

activities whether the lender submits a 

full documentation application or a low 

documentation application. 

Full documentation guarantee 

application. These applications must 

contain the following: 

(1) Agency-approved application 

forms; 

(2) Lender’s analysis and credit 

evaluation (conforming to § 5001.16(b)); 

(3) Environmental information; 

(4) Technical reports and energy 

audits (see subpart B); 

(5) A copy of Form 10-K, ‘‘Annual 

Report Pursuant to Section 13 or 15(d) 

of the Securities Exchange Act of 1934,’’

for companies listed on major stock 

exchanges and/or subject to the 

Securities and Exchange Commission 

regulations; 

(6) Proposed loan agreement between 

the lender and borrower; 

(7) Energy assessments (see subpart 

B); 

(8) Appraisals; 

(9) Business plan (only if the 

information is not already provided in 

the feasibility study); 

(10) Feasibility study (see subpart B); 

(11) If the application is for 5 or more 

residential units or for for-profit nursing 

homes or assisted-living centers, an 

Affirmative Fair Housing Marketing 

Plan that is in conformance with 7 CFR 

1901.203(c)(3); 

(12) Preliminary engineering report 

(as specified in subpart B); 

(13) Current credit reports or 

equivalent on the prospective borrower 

and any other person liable for the debt, 

except for public bodies; and 

(14) If the guaranteed loan is $1 

million or more, the most recent audited 

financial statements of the borrower or, 

if the guaranteed loan is less than $1 

million, the most recent audited or 

unaudited financial statements of the 

borrower. 

Low documentation guarantee 

applications. These applications must 

contain the following: 

(1) Agency-approved application 

forms; 

(2) Lender’s analysis and credit 

evaluation (conforming to § 5001.16(b)); 

(3) Environmental information; 

(4) Technical reports and energy 

audits (see subpart B); 

(5) A copy of Form 10-K, ‘‘Annual 

Report Pursuant to Section 13 or 15D of 

the Act of 1934,’’ for companies listed 

on major stock exchanges and/or subject 

to the Securities and Exchange 

Commission regulations; 

(6) Proposed loan agreement between 

the lender and borrower; 

(7) Certification to (as applicable): 

• Energy assessment; 

• Appraisals; 

• Business plan; 

• Feasibility study; 

• Affirmative Fair Marketing Housing 

plan; 

• Preliminary engineering report; 

• Current credit reports; and 

• Audited or unaudited financial 

statements. 

For a low documentation application, 

the certifications required indicate that 

the lender possesses and has reviewed 

the information to which it is certifying. 

In addition, the lender submitting a low 

documentation application must also 

certify that it has identified and 

reported to the Agency any significant 

risks that would jeopardize the 

repayment of the loan. 

A lender who is not yet a Rural 

Development approved lender may 

submit a guarantee application provided 

the lender submits with the application 

the lender application for approval and, 

if necessary, the application for 

preferred lender status. In this scenario, 

the review of the guarantee application 

will be deferred until the lender 

application and, if applicable, preferred 

lender status application are approved. 

Determination of documentation 

level. As stated above, the guarantee 

application may be submitted with full 

supporting documentation or with low 

supporting documentation. As proposed 

(see proposed § 5001.12(c)), the criteria 

for determining which level of 

supporting documentation is required 

depends on four factors: 

• Whether the application is for a 

startup business or an existing business 

• Whether the application is from a 

preferred lender or not; 

• The size of the guarantee request; 

and 

• The project’s ability to meet certain 

metric criteria (similar to the floor 

metric criteria noted earlier). 

If the guarantee application is for a 

startup business, it must always be 

submitted with the full supporting 

documentation regardless of the lender 

or project. The Agency believes this is 

appropriate to minimize the typically 

greater risk of projects associated with 

startup businesses. 

If the guarantee application is for an 

existing business submitted by a Rural 

Development approved lender with 

preferred lender status, a full 

documentation application must always 

be submitted if the requested loan 

guarantee is greater than $5 million. If, 

however, the requested loan guarantee 

is for $5 million or less, a preferred 

lender has the option of submitting 

either a full documentation guarantee 

application or a low documentation 

guarantee application for the project. 

If the guarantee application is for an 

existing business submitted by a Rural 

Development approved lender that does 

not have preferred lender status, a full 

documentation application must be 

submitted unless the project has: 

• Debt coverage of 1.25 or higher; 

• Cash equity of at least 25 percent of 

eligible project costs or community 

support as described in subpart B; 

• A minimum FICO (Fair Isaac and 

Company) credit score of 680 or 

equivalent industry credit score for each 

individual who signs the promissory 

note or guarantees repayment of the 

loan; 

• A loan-to-value ratio of no more 

than 0.8; and 

• Loan guarantee portion of the loan 

at or below $5 million. 

If the project meets each of the five 

criteria specified above, the Rural 

Development approved lender without 

preferred lender status has the option of 

submitting either a full documentation 

guarantee application or a low 

documentation guarantee application 

for the project. The purpose of the nonpreferred lender criteria is to offset 

institutional and project risk by 

allowing non-preferred lenders to 

submit low documentation guarantee 

applications for lower risk projects. The 

Agency welcomes comments on this set 

of project criteria for determining when 

a low documentation guarantee 

application from a non-preferred lender 

can be submitted. 

Lender Responsibilities—General 

(§ 5001.15) 

This section spells out three basic 

responsibilities of the lender, which are 

generally consistent with lender’s 

responsibilities under the four current 

programs. 

First, the lender must make sure that 

the project for which it is submitting a 

guarantee application complies with all 

Federal, State, and local laws and 

regulations at the time the guarantee 

application is submitted and that affect 

the project, the borrower, or lender 

activities. 

Second, the lender must provide full 

cooperation to the Agency and its 

representatives in all oversight and 

monitoring activities the Agency uses in 

implementing this program. 

Third, the lender remains responsible 

for the origination and servicing of a 

loan guaranteed under this part 

regardless of any action or inaction by 

the Agency. 


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52632 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

Lender Responsibilities—Origination 

(§ 5001.16) 

This section lays out the basic 

responsibilities associated with 

originating a guarantee under this 

program. These responsibilities cover: A 

general requirement of conformity with 

this part and the lender’s policies and 

procedures; credit evaluation; 

appraisals; personal and corporate 

guarantees; design requirements; 

monitoring requirements; compliance 

with other Federal laws; environmental 

responsibilities; and conflicts of 

interest. 

General 

Under the proposed rule, the lender is 

responsible for originating the loan in 

accordance with their current written 

policies and procedures and with the 

requirements of this part. Where a 

lender’s current written policies and 

procedures address a corresponding 

requirement in this part, the lender 

would be required to comply with 

whichever is more stringent. 

Compared to the four current 

programs, these requirements represent 

a departure by incorporating into the 

proposed rule reference to each lender’s 

own policies and procedures for loan 

origination. The appropriate standards 

to be followed by each lender for loan 

origination will be based on the lender’s 

own origination policies and procedures 

and those specified in the proposed 

rule, whichever is more stringent. 

Credit Evaluation 

The lender has the responsibility for 

conducting a credit evaluation of the 

project for which it is submitting the 

guarantee application. This credit 

evaluation must be consistent with 

Agency standards found in this part and 

with the lender’s policies, procedures, 

and lending practices. Where a lender’s 

current policy or procedure addresses a 

corresponding requirement in this part, 

the lender must comply with whichever 

is more stringent. 

The proposed rule identifies what the 

Agency considers to be an acceptable 

credit evaluation. Specifically, the 

lender must use credit documentation 

procedures and an underwriting process 

that are consistent with generally 

accepted commercial lending practices, 

and the lender’s own policies, 

procedures, and lending practices, and 

the lender must include an analysis of 

all credit factors associated with each 

guarantee application to ensure loan 

repayment. 

In making this analysis, the proposed 

rule requires the lender to consider the 

following: 

• Credit worthiness. This refers to 

those qualities that generally impel the 

prospective borrower to meet its 

obligations as demonstrated by its credit 

history. 

• Cash flow. This refers to a 

prospective borrower’s ability to 

produce sufficient cash to repay the 

loan as agreed. 

• Capital. This refers to the financial 

resources that the prospective borrower 

currently has and those it is likely to 

have when payment is due. The 

prospective borrower must be 

adequately capitalized. 

• Collateral. This refers to the assets 

pledged by the prospective borrower in 

support of the loan. Adequacy will be 

based on market value. For the purchase 

of cooperative stock, the lender must at 

least secure the loan with a lien on the 

stock acquired with loan funds, an 

assignment of any patronage refund, and 

the full and unconditional personal or 

corporate guarantee of the borrower. 

• Conditions. This refers to the 

general business environment and status 

of the prospective borrower’s industry. 

The elements that lenders must 

include in their credit evaluation are 

essentially the same as currently 

required under the current programs. 

However, as noted for the general loan 

origination requirements, the credit 

evaluation requirements of the proposed 

rule represent a departure for the four 

current programs by incorporating into 

the proposed rule reference to each 

lender’s own policies and procedures 

for credit evaluation. The appropriate 

standards to be followed by each lender 

for credit evaluation will be based on 

the lender’s own loan origination 

policies and procedures and those 

specified in the proposed rule, 

whichever is more stringent. 

Appraisals 

The lender would be required to have 

real property collateral appraised in 

accordance with the appropriate 

guidelines contained in Standards 1 and 

2 of the Uniform Standards of 

Professional Appraisal Practices to 

determine its value. All appraisals used 

to establish the fair market value of the 

real property would have to be no more 

than 1 year old, unless otherwise 

specified in subpart B. Because market 

value can be affected by environmental 

conditions, all appraisals would have to 

include consideration of the potential 

effects from a release of hazardous 

substances or petroleum products or 

other environmental hazards on the 

market value of the collateral. This 

requirement is generally consistent with 

the conduct of appraisals under the four 

current programs. 

Personal and Corporate Guarantees 

Under the proposed rule, Agencyapproved personal and corporate 

guarantees for the full term of the loan, 

and at least equal to the guarantor’s 

percent interest in the borrower times 

the loan amount, would be required 

from those owning at least a 20 percent 

interest in the borrower, unless, as 

discussed in the next paragraph, the 

lender documents to the Agency’s 

satisfaction that collateral, equity, 

cashflow, and profitability indicate an 

above-average ability to repay the loan. 

When warranted by an Agency 

assessment of potential financial risk, 

the Agency may also require Agencyapproved guarantees from parent, 

subsidiaries, and affiliated companies 

owning less than a 20 percent interest 

in the borrower and require security for 

any guarantee provided under this 

section. 

The proposed rule would allow 

exceptions to the requirement for 

personal guarantees. Such exemptions 

would have to be requested by the 

lender and concurred by the Agency 

approval official, and would be done on 

a case-by-case basis. In order to be 

considered for an exemption, the lender 

would have to document that collateral, 

equity, cashflow, and profitability 

indicate an above-average ability to 

repay the loan. 

As proposed, guarantors would be 

required to execute an Agency-approved 

unconditional guarantee form. This 

provides the Agency with another 

resource to recover losses on loans that 

are defaulted. Unconditional personal 

and corporate guarantees obtained 

under this program would be part of the 

collateral for the loan, but would not be 

considered in determining whether a 

loan is adequately secured for loan 

making purposes. 

Overall, the requirements for personal 

and corporate guarantees are generally 

consistent with those in the current B&I 

guaranteed loan program and, by 

incorporation, in the Renewable Energy 

Systems and Energy Efficiency 

Improvements program. The other two 

programs, however, do not currently use 

similar personal and corporate 

guarantee provisions. 

Design Requirements 

As under the four current programs, 

the lender would be required to ensure 

that all projects are designed utilizing 

accepted architectural and engineering 

practices. If the Agency comments on 

the design of the project, the lender 

would also be responsible for ensuring 

that the Agency’s comments are taken 

into consideration when the facility is 


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being designed. The design and 

construction of the project must 

conform to applicable Federal, State, 

and local codes and requirements. 

Lastly, the lender would also be 

required to ensure that the planned 

project will be fully constructed, within 

the original budget, to facilitate 

completion of the loan purpose and will 

be suitable, once completed, for the 

borrower’s needs in accordance with the 

borrower’s loan application. 

Monitoring Requirements 

The lender would be required to 

monitor the progress of construction 

and ensure that construction conforms 

to applicable Federal, State, and local 

code requirements and proceeds in 

accordance with the approved plans, 

specifications, and contract documents. 

The lender would also be required to 

ensure that funds are used only for 

eligible project costs. If any problems 

develop during project development, 

the lender must expeditiously report 

them to the Agency. These requirements 

are consistent with the four current 

programs. 

Compliance With Other Federal Laws 

As required under the four current 

programs, lenders would be required to 

comply with other applicable Federal 

laws including Equal Employment 

Opportunities, Americans with 

Disabilities Act, Equal Credit 

Opportunity Act, Fair Housing Act, and 

the Civil Rights Act of 1964. 

Environmental Responsibilities 

As proposed, the lender has several 

responsibilities for overseeing the 

borrower with regard to environmental 

requirements. These responsibilities are 

generally consistent with those under 

the four current programs. 

First, the lender must ensure that the 

prospective borrower has provided the 

necessary environmental information to 

enable the Agency to undertake its 

environmental review process in 

accordance with subpart G of either 7 

CFR part 1940 or 7 CFR part 1794, 

including the provision of all required 

Federal, State, and local permits. 

Second, the lender must ensure that 

the prospective borrower has complied 

with any mitigation measures required 

by the Agency’s environmental review 

for the purpose of avoiding or reducing 

adverse environmental impacts of 

construction or operation of the facility 

financed with the guaranteed loan. 

Third, the lender must ensure that the 

prospective borrower has not taken any 

actions or incurred any obligations with 

respect to the proposed project that 

would either limit the range of 

alternatives to be considered during the 

Agency’s environmental review process 

or which would have an adverse effect 

on the environment. If such actions or 

obligations have been incurred that 

would limit the range of alternatives, 

the project will be denied a guarantee. 

Conflicts of Interest 

The proposed rule, consistent with 

the four current programs, requires the 

lender to report to the Agency all 

appearances of conflicts of interest. 

Lender Responsibilities—Servicing 

(§ 5001.17) 

This section of the proposed rule lays 

out the lender’s requirements for 

servicing guaranteed loans made under 

this part, which are generally consistent 

with lender’s responsibilities under the 

four current programs. However, the 

Agency has made revisions in some 

servicing areas to incorporate industry 

standard practices. 

General 

Each lender is responsible for 

servicing the loan in accordance with 

the Lender’s Agreement, the 

requirements specified within this 

regulation, and their current written 

policies and procedures for servicing 

loans. Where a lender’s current written 

policies and procedures address a 

corresponding requirement in this 

regulation or in the Lender’s agreement, 

the lender must comply with whichever 

is more stringent. 

The lender must also ensure that the 

borrower has obtained all necessary 

insurance coverage appropriate to the 

proposed project. Such coverage is 

subject to Agency review and approval. 

In addition, the lender must ensure that 

the borrower maintains the necessary 

insurance coverage for the life of the 

loan. 

Finally, the Agency may determine 

that the lender is not adequately 

protecting the rights of the lender or the 

Agency in its servicing of the loan. The 

Agency, therefore, reserves the right to 

take any legal action it determines 

necessary to protect the rights of the 

lender and the Agency with respect to 

the loan. 

Compared to the four current 

programs, these requirements represent 

a departure by incorporating into the 

proposed rule reference to each lender’s 

own policies and procedures for loan 

servicing. The appropriate standards to 

be followed by each lender for loan 

servicing will be based on the lender’s 

own loan servicing policies and 

procedures and those specified in the 

proposed rule, whichever is more 

stringent. 

Certification 

For each guarantee loan application it 

submits to the Agency, the lender would 

be required to certify in the Lender’s 

Agreement that it will service the 

guaranteed loan according to Agency 

requirements and the lender’s current 

written servicing policies and 

procedures and that, where the lender’s 

current written policies and procedures 

address corresponding requirements of 

this regulation, it will comply with 

whichever is more stringent. Such 

certification is not part of the policies of 

the four current programs. 

When applicable, the lender will 

require an audit of the borrower in 

accordance with Office of Management 

and Budget requirements. This is 

consistent with the policies of the four 

current programs. 

Collateral Inspection and Release 

As proposed, the requirements for 

collateral inspection and release are 

generally consistent with the four 

current programs. Under the proposed 

rule, the lender would be required to 

inspect the collateral as often as 

necessary to properly service the loan. 

The Agency may require the lender to 

obtain Agency approval prior to 

releasing any collateral. In addition, the 

Agency may, at its discretion, require an 

appraisal of the remaining collateral in 

cases in which the Agency determines 

that it may be adversely affected by the 

release of the collateral. If an appraisal 

is required, it will be at the expense of 

the borrower and must meet the 

requirements of proposed § 5001.16(c). 

In all cases, the sale or release of 

collateral must be based on an arm’slength transaction. 

Transfers and Assumptions 

Under the proposed rule, the Agency 

is generally less involved in the 

processing of transfers and assumptions 

than under the four current programs. 

The proposed rule relies more on a 

lender’s own policies and procedures 

for conducting transfers and 

assumptions. 

General. Under the proposed rule, any 

time that a third party assumes a loan 

guaranteed under this part, it would be 

required to be processed and approved 

by the Agency as if it were a new loan 

guarantee. This is consistent with the 

four current programs. 

Processing transfers and assumptions. 

Under the proposed rule, the lender is 

allowed to release the transferor 

(including any guarantor) from liability, 

regardless of the amount of the loan 

being transferred or assumed. 

If a lender wants to change the terms 

of the loan, the lender would be 


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52634 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

required to first obtain, in writing, 

Agency approval with the concurrence 

of the holder and transferor (including 

guarantor if it has not been released 

from personal liability). Any new loan 

terms would not be allowed to exceed 

those authorized in this part as 

measured from the date the loan was 

initially guaranteed. 

In the case of a transfer and 

assumption of less than the outstanding 

balance, the lender (if holding the 

guaranteed portion) may file an 

estimated Report of Loss with respect to 

the difference. 

Transfer fees. As under the four 

current programs, the Agency may 

charge the lender a nonrefundable 

transfer fee at the time of a transfer 

application. The Agency would set the 

amount of the transfer fee in an annual 

notice of funds availability. 

Mergers 

The Agency may withdraw the 

guarantee when a borrower participates 

in a merger, but the Agency is no longer 

requiring that it provide prior approval 

of the merger. 

Subordination of Lien Position. 

The Agency currently has the 

authority to allow lenders to 

subordinate under each of the four 

programs being addressed under the 

proposed rule. However, the Agency has 

rarely used this authority. As proposed, 

the consolidated rule would allow the 

Agency to continue to provide the 

Agency the ability to allow 

subordinations when it has determined 

that it is in the Federal government’s 

financial interest. Before a 

subordination of the lender’s lien 

position can occur, the lender would be 

required to first make the request for 

subordination of the lien position in 

writing to the Agency and receive 

Agency concurrence for the 

subordination. Agency concurrence 

would require that the Agency’s 

financial interest will be enhanced, 

collateral will remain adequate to secure 

the loan, the lien to which the 

guaranteed loan is subordinated will be 

for a fixed dollar limit and that lien 

priorities remain for the portion of the 

loan that was not subordinated, and 

subordination to a revolving line of 

credit does not exceed 1 year. 

Repurchases From Holder(s) 

Under the proposed rule, the 

requirements associated with 

repurchases from holders, including 

repurchase by the lender and by the 

Agency, are generally consistent with 

those under the four current programs. 

The holder may make written demand 

on the lender or the Agency to 

repurchase the unpaid guarantee 

portion of the loan under two situations. 

The first situation is in the case of 

borrower default. The second situation 

is the failure of the lender to pay the 

holder its pro-rata share. The lender or 

Agency may determine that repurchase 

of the loan from the holder is necessary 

to adequately service the loan. In this 

situation, the holder must sell the 

guaranteed portion to the lender or 

Agency, whichever made the request. 

Repurchases by lender. The lender 

must respond to the holder’s demand 

within 30 days and notify the Agency, 

in writing, of its decision, including 

notifying the Agency of all repurchases 

it makes. If the lender decides to 

repurchase the loan, the lender would 

be required to accept an assignment 

without recourse from the holder upon 

repurchase. As proposed, all 

repurchases would be for an amount 

equal to the unpaid principal balance of 

the guaranteed portion and accrued 

interest less the lender’s servicing fee 

and must cover the principal and 

interest on the guaranteed loan accruing 

only up to 90 days after the date of the 

demand by the holder. 

Repurchases by Agency. If the Agency 

repurchases the loan, the holder would 

be required to submit a specific written 

demand to the Agency, along with 

appropriate documentation. The Agency 

will be subrogated to all rights of the 

holder and, subject to satisfactory 

documentation, will purchase the 

unpaid principal balance and interest of 

the guaranteed portion to date of 

repurchase less the lender’s servicing 

fee within 30 days after receipt of the 

demand. The lender would not be 

allowed to charge the Agency any fees 

unless provided for in the Assignment 

Guarantee Agreement. The lender 

would be required to use a form 

approved by the Agency to send the 

guaranteed loan payments to the Agency 

on all loans repurchased by the Agency 

from holders. Any purchase by the 

Agency does not change, alter, or 

modify any of the lender’s obligations to 

the Agency arising from the loan or 

guarantee and does not waive any of the 

Agency’s rights against the lender, 

borrower, or guarantor. 

Additional Expenditures and Loans 

As proposed and consistent with the 

four current programs, the lender would 

not be allowed to make additional 

expenditures or new loans to the 

borrower with an outstanding loan 

guaranteed under this part without first 

obtaining in writing Agency approval. 

Lender Failure 

In the event a lending institution fails, 

the applicable Administrator will 

provide instruction to the successor 

entity on a case-by-case basis. Such 

instructions may include that the 

Agency may determine to service the 

entire loan or the guaranteed portion of 

the loan. This provision is consistent 

with the four current programs. 

Under the proposed rule, the Agency 

reserves the right to enforce the 

provisions of the loan documents on 

behalf of the lender or to purchase the 

lender’s interest in the loan in the event 

no successor entity can be determined. 

The intent of this new provision is to 

permit the Agency to take over and/or 

service loans when a non-regulated or 

non-supervised lender does not have a 

successor entity appointed. With 

regulated or supervised lenders, State 

law usually provides a structure for the 

identification of a successor to a failed 

lender, but not necessarily for failed 

lenders who are not regulated or 

supervised. Thus, the Agency sees a 

need for this provision. 

Delinquent Loans 

Under the proposed rule, the lender 

would be required to service delinquent 

loans in accordance with the Lender’s 

Agreement, its current servicing 

standards, and reasonable and prudent 

lending standards. This is consistent 

with the four current programs except 

that the proposed rule adds the 

requirement to service delinquent loans 

in accordance with the lender’s own 

current servicing standards. 

If a borrower is delinquent more than 

30 days, the lender would be required 

to coordinate with the Agency and the 

borrower to implement appropriate 

curative actions to resolve the problem. 

Any curative action that affects the 

return to the holder would be required 

to receive the holder’s concurrence. Any 

change in the repayment schedule 

would be limited to the remaining life 

of the collateral. Finally, any loan 

performing in accordance with a 

curative action will no longer be 

delinquent. 

Protective Advances 

Under the proposed rule and 

consistent with the four current 

programs, protective advances would be 

allowed only when they are necessary to 

preserve the value of the collateral and 

must be reasonable with respect to the 

outstanding loan amount and the value 

of the collateral being preserved. 

Protective advances would not be 

allowed to include attorneys’ fees and 

advances in lieu of additional loans. 


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As proposed, the lender must obtain 

written Agency approval for any 

protective advance that will singularly 

or cumulatively amount to more than 

$200,000 or 10 percent of the 

guaranteed loan, whichever is less. This 

provision is different from current 

policy which requires Agency approval 

when the amount is $5,000 or more to 

the same borrower. 

Liquidation 

Under the proposed rule and 

consistent with the four current 

programs, the lender may decide to 

liquidate a loan when one or more 

incidents of default or third party 

actions occur that the borrower can not 

or will not cure or eliminate within a 

reasonable period of time. The Agency 

reserves the right to unilaterally 

conclude that liquidation is necessary 

and require the lender to assign the 

security instruments to the Agency. 

Liquidation by the lender. If the 

lender decides to liquidate a loan, the 

lender must first develop, in 

consultation with the Agency, a 

liquidation plan to determine the best 

course of action. The lender must 

include in this plan all aspects of 

liquidation, including, but not limited 

to, reports to the Agency, protection of 

collateral, loss payment, transmission of 

proceeds to the Agency, and future 

recovery. The lender would be required 

to submit its liquidation plan to the 

Agency at least 30 days before 

implementing the plan and must notify 

the Agency of any changes to or 

deviations from the plan. 

As under the four current programs, 

the proposed rule requires the lender to 

prepare a liquidation plan. However, the 

proposed rule would not require 

Agency’s prior approval of the 

liquidation plan, but would require the 

lender to notify the Agency of 

deviations from the plan. These two 

aspects are different from the current 

programs. 

Compromise settlement and release of 

personal guarantors. The lender may 

consider a compromise settlement at 

any time, unless otherwise provided in 

subpart B. However, before a guarantor 

is released from liability, the Agency 

must concur with the lender. Once 

agreement is reached, the lender may 

then proceed to implement a settlement 

compromise. These provisions are 

consistent with those found in the B&I 

guaranteed loan program, but have been 

simplified. 

Litigation 

Under the proposed rule, the Agency 

has consolidated requirements 

associated with all litigation into this 

new section. The provisions of this 

section are generally consistent with 

current Agency policy in implementing 

the four current programs. 

In all litigation proceedings, the 

lender would be responsible for 

protecting the rights of the lender or the 

Agency with respect to the loan, and 

keeping the Agency adequately and 

regularly informed, in writing, of all 

aspects of the proceedings. If the 

Agency determines that the lender is not 

adequately protecting the rights of the 

lender or the Agency with respect to the 

loan, the Agency reserves the right to 

take any legal action the Agency 

determines necessary to protect the 

rights of the lender, on behalf of the 

lender, or the Agency with respect to 

the loan. If the Agency exercises this 

right, the lender would be required to 

cooperate with the Agency. Any cost to 

the Agency associated with such action 

would be assessed against the lender. 

Loss Calculations and Payment 

Similar to the litigation section above, 

the Agency has consolidated into one 

section the requirements associated 

with loss calculations and payment. 

Generally, these provisions are 

consistent, but simplified, with the 

policies being implemented under the 

four current programs for loss 

calculations and payments. 

The proposed plan describes the 

general calculation procedures that 

would be followed in determining 

losses (see proposed § 5001.17(n)). 

During the course of any 

reorganization plan, the lender would 

be required to request and revise 

estimated loss payments using Agencyapproved forms. The estimated loss 

claim, as well as any revisions to this 

claim, would be accompanied by 

documentation to support the claim. 

In a chapter 9 or chapter 11 

reorganization, the lender would be 

required to obtain an independent 

appraisal of the collateral if so directed 

by the Agency. The Agency and the 

lender would share the appraisal fee 

equally. 

Final settlement of liquidation would 

be made with the lender after the 

collateral is liquidated (unless otherwise 

designated as a future recovery) or after 

settlement and compromise of all 

parties has been completed. The Agency 

retains the right to recover losses paid 

under the guarantee from any liable 

party. Final settlement would be subject 

to the following: 

• If the lender takes title to collateral, 

any loss will be based on the collateral 

value at the time the lender obtains title. 

• If the lender is conducting the 

liquidation and owns any of the 

guaranteed portion of the loan, the 

lender may request an estimated loss 

payment by submitting an estimate of 

loss that will occur in connection with 

liquidation of the loan. 

• Within 30 days after liquidation of 

all collateral, except for certain 

unsecured personal or corporate 

guarantees as provided for in this 

section, the lender would have to 

prepare a final report of loss and submit 

it to the Agency. The Agency will not 

guarantee interest beyond this 30-day 

period other than for the period of time 

it takes the Agency to process the loss 

claim. Before Agency approval of any 

final loss report, the lender must 

account for all funds, disposition of the 

collateral, and costs incurred, and must 

provide any other information necessary 

for successful completion of the 

liquidation. 

• After a final loss has been paid by 

the Agency, any future funds recovered 

by the lender would be pro-rated 

between the Agency and the lender 

based on the original percentage of 

guarantee even if the Loan Note 

Guarantee has been terminated. 

• In a bankruptcy, the lender would 

submit an estimated loss claim based on 

the final orders of the bankruptcy 

court’s direction. The Agency would 

pay the lender the estimated final loss 

based on these directions. 

Lastly, the proposed rule would 

require the lender to submit with each 

loss claim a copy of the current version 

of the lender’s written policies and 

procedures for origination and 

servicing. This new requirement reflects 

the intent of the proposed rule to ensure 

that the guaranteed loan is serviced to 

the lender’s own standards consistent 

with this rule. 

Basic Borrower Provisions 

Borrower Responsibilities (§ 5001.25) 

Under the proposed rule, the Agency 

has consolidated and simplified the 

responsibilities of borrowers under the 

guaranteed loan program. These 

responsibilities are consistent with 

those associated with the four current 

programs. 

Under the proposed rule, borrowers 

must comply with all Federal, State, and 

local laws and rules that are in existence 

and that affect the project including, but 

not limited to land use zoning; health, 

safety, and sanitation standards as well 

as design and installation standards; 

and protection of the environment and 

consumer affairs. Borrowers must also 

obtain all permits, agreements, and 

licenses that are applicable to the 

project. The borrower would also be 

responsible for maintaining all hazard, 


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flood, liability, worker compensation, 

and personal life insurance, when 

required, on the project. 

Upon request by the Agency, the 

borrower would be required to permit 

representatives of the Agency (or other 

agencies of the U.S. Department of 

Agriculture authorized by that 

Department or the U.S. Government) to 

inspect and make copies of any of the 

records of the borrower pertaining to 

any Agency guaranteed loan. 

Basic Guarantee and Loan Provisions 

General (§ 5001.30) 

Underwriting 

All loans guaranteed by the Agency 

must be underwritten in accordance 

with the credit evaluation requirements 

specified in proposed § 5001.16(b). As 

discussed earlier in this preamble, the 

credit evaluation requirements are 

generally consistent with the 

requirements found in the four current 

programs. 

Conditions of Guarantee 

Each loan guarantee issued under this 

part would be evidenced by a Loan Note 

Guarantee, which would be issued by 

the Agency. In addition, each lender 

would be required to execute a Lender’s 

Agreement. 

The entire loan would be required to 

be secured by the same security, with 

equal lien priority being given for the 

guaranteed and unguaranteed portions 

of the loan. The guaranteed portion 

would be paid first and given preference 

and priority over the unguaranteed 

portion. 

The lender would remain mortgagee 

or secured party of record 

notwithstanding the fact that another 

party may hold a portion of the loan. 

The holder of a guaranteed portion 

would have all rights of payment, as 

defined in the Loan Note Guarantee to 

the extent of the portion purchased. The 

lender would remain bound by all 

obligations under the Loan Note 

Guarantee, Lender’s Agreement, and 

Agency program regulations. 

The lender would receive all 

payments of principal and interest on 

the entire loan and would be required 

to promptly remit to each holder a prorata share, less any lender servicing fee. 

No loan guaranteed by the Agency 

under this part would be conditioned on 

any requirement that the borrower 

accept or receive electric service from 

any particular utility, supplier, or 

cooperative. 

These provisions are consistent with 

those found in the four current 

programs. 

Full Faith and Credit 

A guarantee under this part 

constitutes an obligation supported by 

the full faith and credit of the United 

States and is not contestable except for 

fraud or misrepresentation by the lender 

or holder, as appropriate, when the 

lender or holder has actual knowledge, 

participates in, or condones such fraud 

or misrepresentation. 

A note that provides for the payment 

of interest on interest would not be 

guaranteed and any Loan Note 

Guarantee or Assignment Guarantee 

Agreement attached to, or relating to, a 

note which provides for payment of 

interest on interest would be void. 

The guarantee would not be 

enforceable by the lender to the extent 

any loss is occasioned by the violation 

of usury laws, negligent loan 

origination, negligent loan servicing, or 

failure to obtain the required security 

regardless of the time at which the 

Agency acquires knowledge of the 

foregoing. Any losses occasioned would 

not be enforceable by the lender to the 

extent that loan funds are used for 

purposes other than those specifically 

approved by the Agency in its 

Conditional Commitment for Guarantee. 

When in the hands of a holder, the 

Loan Note Guarantee or Assignment 

Guarantee Agreement would not cover 

interest accruing 90 days after the 

holder has demanded repurchase by the 

lender. When in the hands of a holder, 

the Loan Note Guarantee or Assignment 

Guarantee Agreement would not cover 

interest accruing 90 days after the 

lender or Agency has requested the 

holder to surrender the evidence of debt 

for repurchase. 

As proposed, the Agency would 

guarantee payment as follows: 

• To any holder, 100 percent of any 

loss sustained by the holder on the 

guaranteed portion of the loan and on 

interest due on such portion. 

• To the lender, the lesser of any loss 

sustained by the lender on the 

guaranteed portion, including principal 

and interest evidenced by the notes or 

assumption agreements and secured 

advances for protection and 

preservation of collateral made with the 

Agency’s authorization; or the 

guaranteed principal advanced to or 

assumed by the borrower and any 

interest due thereon. 

These provisions are consistent with 

those found in the four current 

programs. The proposed rule, however, 

does make explicit that negligent loan 

servicing may result in the guarantee 

not being enforceable to the extent any 

loss is occasioned by such negligent 

loan servicing. 

Soundness of Guarantee 

Consistent with the four current 

programs, all loans guaranteed under 

this part must be financially sound and 

feasible, with reasonable assurance of 

repayment. 

Rights and Liabilities 

When a guaranteed portion of a loan 

is sold to a holder, the holder would 

succeed to all payments of the lender 

under the Loan Note Guarantee to the 

extent of the portion purchased. While 

consistent in intent with the current 

policy, this provision has been revised 

to reflect that the holder ‘‘would 

succeed to all payments’’ of the lender 

rather than the holder ‘‘shall have all 

rights’’ of the lender. 

A guarantee and right to require 

purchase would be directly enforceable 

by a holder notwithstanding any fraud 

or misrepresentation by the lender or 

any unenforceability of the guarantee by 

the lender, except for fraud or 

misrepresentation of which the holder 

had actual knowledge at the time it 

became the holder or in which the 

holder participates or condones. 

The lender would not be allowed to 

represent a Conditional Commitment of 

Guarantee as a guarantee. This is a 

clarification of Agency policy to prevent 

misrepresentation of the Conditional 

Commitment of Guarantee. 

The Agency continues to reserve the 

right to collect from the lender any 

payments made to the holder that would 

not have been payable to the lender had 

they been the holder. 

Reduction of Loss Claims Payable 

As proposed, the Agency may reduce 

the amount of loss claims payable under 

the loan guarantee to the lender, to zero 

if necessary, where the Agency has 

determined that the lender has engaged 

in either negligent loan origination or in 

negligent loan servicing that has 

resulted in a loss. The amount of the 

reduction would be based on the loss 

sustained as a result of the negligence. 

The Agency notes, however, that any 

reduction in claims payable under the 

guarantee would not apply to any 

subsequent holders. Claims payable 

associated with the lender’s negligence 

paid to subsequent holders will be 

collected from the lender. 

While new compared to the four 

current regulations, this section of the 

proposed rule would implement current 

Agency policy to clarify how the 

Agency will address reduction of loss 

claims payable. 

Write-Downs 

Consistent with current B&I policy, as 

proposed, debt write-downs for an 


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existing borrower where the same 

principals retain control of and 

decision-making authority for the 

business would be prohibited. 

Guaranteed Loan Parameters (§ 5001.31) 

Interest Rates 

Under the proposed rule, the 

provisions addressing interest rates and 

changes to interest rates (reductions and 

increases) are consistent with the 

provisions of the four current programs. 

As proposed, interest rates on the loan 

for which a guarantee is made would be 

allowed to be fixed or variable or a 

combination of both, as long as they are 

legal. If variable interest rates are used, 

they must be tied to an acceptable 

published index and the lender must 

incorporate the provision for adjustment 

of payment installments into the Note. 

When combined fixed and variable rates 

are used, the lender would provide the 

Agency with the overall effective 

interest rate for the entire loan. 

Under the proposed rule, interest 

rates, interest rate caps, and incremental 

adjustment limitations would be 

negotiated between the lender and the 

borrower. 

If the lender and borrower agree, the 

interest rate on the guaranteed portion 

of a loan may differ from the rate on the 

unguaranteed portion provided under 

certain conditions. These conditions 

are: 

• The rate on the unguaranteed 

portion is equal to or below the market 

rate and does not exceed that currently 

being charged on loans for similar 

purposes to borrowers under similar 

circumstances; and 

• the rate on the guaranteed portion 

does not exceed the rate on the 

unguaranteed portion unless the rate on 

the guaranteed portion is fixed and the 

unguaranteed portion is variable. 

Interest Rate Changes 

Under the proposed rule, the Agency 

must approve, in writing, any change in 

the interest rate between issuance of the 

Conditional Commitment for Guarantee 

and issuance of the Loan Note 

Guarantee. All changes would then be 

shown as an amendment to the 

Conditional Commitment for Guarantee. 

The interest rate change may be either 

a reduction or increase, but are subject 

to certain restrictions. 

Reductions. The borrower, lender, 

and holder (if any) would be allowed to 

collectively effect a permanent or 

temporary reduction in the interest rate 

on the guaranteed loan at any time 

during the life of the loan by their 

written agreement, subject to the 

following conditions: 

• If a permanent reduction was 

implemented, the Loan Note Guarantee 

would be allowed to cover only losses 

of interest at the reduced interest rate. 

• In a final loss settlement when 

qualifying rate changes are made with 

the required written agreements and 

notification, the interest would be 

calculated for the periods the given rates 

were in effect. The lender would be 

required to maintain records that 

adequately document the accrued 

interest claimed. 

• The lender would be responsible for 

the legal documentation of interest-rate 

changes by an endorsement or any other 

legally effective amendment to the 

promissory note; however, no new notes 

may be issued. The lender would have 

to provide copies of all legal documents 

to the Agency. 

The lender would be required to keep 

sufficient records to allow the Agency to 

calculate any loss at the reduced interest 

rate and to notify the Agency of all 

permanent interest rate reductions, as 

specified in proposed § 5001.4(b)(3)(ii). 

Increases. Increases in interest rates, 

in general, are prohibited under the 

proposed rule. However, increases 

would be allowed only when the 

increase results from normal 

fluctuations in approved variable 

interest rates or the increase returns the 

rate to the rate prior to the temporary 

reduction. 

Term Length 

Under the proposed rule, the loan 

term would be based on (1) the use of 

proceeds, (2) the useful economic life of 

the assets being financed, and (3) the 

borrower’s repayment ability. However, 

under no circumstances would the term 

be allowed to exceed the lesser of the 

useful economic life of the asset, or 40 

years. 

The proposed rule’s provisions for 

term length are consistent with those 

found in the Community Facility and 

the Water and Waste Disposal Facilities 

programs, but are different from those 

found in the other two programs. The 

other two programs have shorter 

timeframes for several types of assets. 

Loan Schedule and Repayment 

Repayment of loans for which a loan 

guarantee has been obtained under this 

part would be required to be structured 

in accordance with proposed § 5001.31 

and in accordance with the Loan 

Agreement. Repayments would be due 

and payable in accordance with the 

Note. 

As proposed, only loans that require 

a periodic payment schedule that retires 

the debt over the term of the loan 

without a balloon payment will be 

guaranteed by the Agency. Lenders, 

therefore, must ensure that the principal 

balance of a guaranteed loan is properly 

amortized within the prescribed loan 

maturity. 

These provisions are consistent with 

those found in the four current 

programs. 

Maximum Loan Amounts 

Under the proposed rule, the 

maximum amount that may be 

guaranteed would be determined on a 

program-by-program basis. The Agency 

will publish a notice in the Federal 

Register each year in which it will 

specify the maximum loan amounts for 

each of the programs in this part. As 

seen later in this preamble, the 

maximum loan amounts being proposed 

are consistent with those in the current 

programs. 

Maximum Percent of Guarantee 

As proposed, the maximum guarantee 

for each guaranteed loan program 

covered by this part is specified in 

subpart B. As seen later in this 

preamble, the maximum percent 

guarantees are consistent with those 

found in the current programs, except 

that a lower maximum percent 

guarantee is being proposed in specific 

situations. 

Fees 

Under the proposed rule, a guarantee 

fee and a renewal fee are used to offset 

the costs of the guaranteed loan 

programs. Each year, the Agency will 

establish the guarantee fee and renewal 

fee for each guaranteed loan program, 

subject to any statutory limitations. The 

Agency will publish a notice in the 

Federal Register each year identifying 

these fees. 

Guarantee fee. This fee is a one-time, 

upfront fee based on the principal loan 

amount, and the percent of guarantee. 

Consistent with standard industry 

practice, this fee is referred to as the 

‘‘guarantee fee.’’ As proposed, the 

guarantee fee would be paid to the 

Agency by the lender at the time the 

Guaranteed is issued and is nonrefundable. The lender, however, would 

be allowed to pass this fee on to the 

borrower. Each of the four programs 

covered by the proposed rule currently 

charge a guarantee fee. 

Renewal fee. This fee is assessed 

annually, is based on a fixed fee rate 

established at the beginning of the loan, 

and, consistent with standard industry 

terminology, is referred to as a ‘‘renewal 

fee.’’ As applicable, the renewal fee 

would be calculated on the unpaid 

guaranteed principal balance as of close 

of business on December 31 of each 


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year. The fee would be billed to the 

lender and is non-refundable. Like the 

guarantee fee, the lender would be 

allowed to pass the renewal fee on to 

the borrower. Currently, the Business 

and Industry guaranteed loan program 

and the Renewable Energy Systems and 

Energy Efficiency Improvements 

guaranteed loan program have 

provisions for an annual renewal fee, 

while the Community Facilities and the 

Water and Waste Disposal guarantee 

loan programs do not. The proposed 

rule allows for, but does not require, the 

charging of the renewal fee for all of the 

four programs. At the present time, the 

Agency is not considering the 

implementation of an annual renewal 

fee in the Community Facility and 

Water and Waste Disposal programs. 

Lender Fees 

As proposed and consistent with the 

four current programs, the lender may 

levy reasonable, routine, and customary 

charges and fees for the guaranteed loan 

provided they are similar to those 

charged other applicants for the same 

type of loan for which a non-guaranteed 

borrower would be assessed. The 

proposed rule prohibits late payment 

charges from being covered by the Loan 

Note Guarantee. Further, the lender 

would be prohibited from adding such 

charges to the principal and interest due 

under any guaranteed note. 

Conditional Commitment for Guarantee 

(§ 5001.32) 

Consistent with the four current 

programs, upon approval of a loan 

guarantee, the Agency will issue a 

Conditional Commitment for Guarantee 

to the lender containing conditions 

under which the Guarantee will be 

issued. The lender must complete and 

sign the Acceptance of Conditions and 

return a copy to the Agency. The lender 

may propose alternate conditions for 

Agency consideration. 

Conditions Precedent to Issuance of 

Loan Note Guarantee (§ 5001.33) 

This section identifies the conditions 

that need to have occurred in order for 

the Agency to issue the Loan Note 

Guarantee. These conditions are 

consistent with the conditions in the 

four current programs, but have been 

simplified. 

The Loan Note Guarantee would be 

issued once all of the conditions 

specified in the Conditional 

Commitment for Guarantee have been 

met and each of the following has 

occurred: 

• The lender has paid the appropriate 

guarantee fee; 

• The lender has advised the Agency 

of any plans to sell or assign any part 

of the loan as provided in the Lender’s 

Agreement; and 

• The lender has certified that the 

prospective borrower has obtained all 

necessary insurance appropriate to the 

proposed project. 

Issuance of the guarantee (§ 5001.34) 

As proposed and consistent with the 

four current programs, the Agency, at its 

sole discretion, will determine if the 

conditions within the Conditional 

Commitment for Guarantee have been 

met and whether or not to issue the 

guarantee. 

Loan Closing 

At loan closings, the lender would 

provide the lender’s certifications, 

guarantee fee, and, if applicable, 

secondary market sale document. 

Issuance 

Consistent with the four current 

programs, but simplified, under the 

proposed rule, the Agency would issue 

the Loan Note Guarantee and 

Assignment Guarantee Agreement upon 

the lender’s compliance with 

requirements of the Conditional 

Commitment for Guarantee. 

Refusal To Execute Loan Note 

Guarantee 

Consistent with the four current 

programs, if the Agency determines that 

it can not execute the Loan Note 

Guarantee, the Agency would promptly 

inform the lender of the reasons and 

give the lender a reasonable period 

within which to satisfy the objections. If 

the lender satisfies the objections within 

the time allowed, the guarantee would 

be issued. 

Replacement of Loan Note Guarantee or 

Assignment Guarantee Agreement 

Consistent with the four current 

programs, if the Loan Note Guarantee or 

Assignment Guarantee Agreement has 

been lost, stolen, destroyed, mutilated, 

or defaced, the Agency may issue a 

replacement to the lender or holder 

upon receipt from the lender of a 

notarized certificate of loss and an 

indemnity bond acceptable to the 

Agency. An indemnity bond would not 

be required, however, if the holder is 

the United States, a Federal Reserve 

Bank, a Federal Government 

corporation, a State or Territory, or the 

District of Columbia. 

Alterations to Loan Instruments 

(§ 5001.35) 

Consistent with the B&I and the 

Renewable Energy Systems and Energy 

Efficiency Improvements guaranteed 

loan programs, the provisions of this 

section would prohibit the lender from 

altering or approving any alterations of 

the Loan Note Guarantee or any other 

loan instrument without the prior 

written approval of the Agency. 

Reorganizations (§ 5001.36) 

The provisions in this section of the 

proposed rule address changes in 

borrowers and lenders. In general, these 

provisions are consistent with those 

found in the current programs. 

Change in Borrower Prior to Closing 

As proposed, any change in borrower 

ownership or organization prior to the 

issuance of the Loan Note Guarantee 

would be required to meet program 

eligibility requirements. Agency 

approval would be required prior to the 

issuance of the Conditional 

Commitment for Guarantee. Once the 

Conditional Commitment for Guarantee 

is issued, no substitution of borrower(s) 

or change in the form of legal entity 

would be approved, except that a 

change in the legal entity may be 

approved when the original borrower is 

replaced with substantially the same 

individuals or officers with the same 

interest as originally approved. 

Transfer of Lender Prior to Issuance of 

the Loan Note Guarantee 

Prior to issuance of a Loan Note 

Guarantee, the Agency may approve the 

transfer of an outstanding Conditional 

Commitment for Guarantee to a new 

eligible lender, provided the present 

lender makes the request in writing and 

no substantive changes have occurred in 

the borrower, project, loan agreement, or 

Conditional Commitment for Guarantee. 

The new lender would have to meet the 

appropriate requirements specified in 

this part to become a Rural 

Development approved lender. In 

addition, a new application for 

guarantee would have to be executed. 

Substitution of Lender After Issuance of 

the Loan Note Guarantee 

After the issuance of a Loan Note 

Guarantee, the lender would not be 

allowed to be substituted without the 

prior written approval of the Agency. A 

substitution of the lender would have to 

be requested in writing by the borrower, 

the proposed substitute lender, and the 

original lender if still in existence. The 

Agency may approve the substitution of 

a lender if the new lender is Rural 

Development approved; agrees in 

writing to acquire title to any 

unguaranteed portion of the loan held 

by the original lender; and assumes all 


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original loan requirements and lender 

responsibilities. 

The Agency would not pay any loss 

or share in any costs with a substitute 

lender who it not in compliance with 

the requirement of this section (i.e., 

proposed § 5001.36). 

Sale or Assignment of Guaranteed Loan 

(§ 5001.37) 

General 

As proposed, the lender would be 

allowed to sell all or part of the 

guaranteed portion of the loan on the 

secondary market, subject to the 

following conditions: 

• Any sale or assignment by the 

lender of the guaranteed portion of the 

loan would have to be accomplished in 

accordance with the conditions in the 

Lender’s Agreement. 

• The lender may obtain participation 

in the loan under its normal operating 

procedures; however, the lender must 

retain sufficient interest to perform its 

duties under this part. 

• The lender would be prohibited 

from selling or participating any amount 

of the guaranteed, or non-guaranteed, 

portion of the loan to the borrower or 

members of the borrower’s immediate 

family, the borrower’s officers, directors, 

stockholders, other owners, or a parent, 

subsidiary, or affiliate. 

• Disposition of the guaranteed 

portion of a loan would not be allowed 

prior to full disbursement, completion 

of construction, and acquisition of real 

estate and equipment without the prior 

written approval of the Agency. 

• If the lender desires to market all or 

part of the guaranteed portion of the 

loan at, or subsequent to, loan closing, 

the loan must not be in default. 

• The lender would be required to 

retain all or part of the unguaranteed 

portion of the loan. However, if the 

lender does not have preferred lender 

status, the lender would be required to 

retain a minimum of 5 percent of the 

total loan amount in its portfolio. The 

amount required to be retained would 

have to be of the unguaranteed portion 

of the loan and could not be 

participated. Lenders would be allowed 

to sell the remaining amount of the 

unretained portion of the loan only 

through participation. 

These provisions are generally 

consistent with those found in the four 

current programs. One difference 

concerns the minimum retention 

provision. Under the current programs, 

all lenders would be required to retain 

a minimum of 5 percent of the total loan 

amount. Under the proposed rule, this 

5 percent requirement would apply only 

to lenders who do not have preferred 

lender status. 

Termination of Lender Servicing Fee 

As proposed and consistent with the 

four current programs, the lender’s 

servicing fee would stop when the 

Agency purchases the guaranteed 

portion of the loan from the secondary 

market. No such servicing fee would be 

allowed to be charged to the Agency and 

all loan payments and collateral 

proceeds received would be applied 

first to the guaranteed loan. 

Termination of Loan Note Guarantee 

(§ 5001.38) 

This section identifies the situations 

under which a Loan Note Guarantee 

will terminate. These situations, which 

are consistent with those found in the 

regulations for the four current 

programs, are: 

• Full payment of the guaranteed 

loan; or 

• full payment of any loss obligation 

or negotiated loss settlement except for 

future recovery provisions and 

payments made as a result of the Debt 

Collection Improvement Act (DCIA). 

After final payment of claims to lenders 

and/or holders, the Agency will retain 

all funds received as the result of the 

DCIA; or 

• written request from the lender to 

the Agency that the guarantee will 

terminate 30 days after the date of the 

request, provided that the lender holds 

all of the guaranteed portion and the 

original Loan Note Guarantee is 

returned to the Agency to be canceled. 

Subpart B—Program Specific Provisions 

Subpart B presents the program 

specific requirements for each of the 

four programs covered by this subpart. 

Community Facilities (§ 5001.101) 

This section identifies program 

specific requirements for community 

facility projects seeking loan guarantees. 

The lender and prospective borrower 

must comply both with subpart A 

provisions and the provisions in this 

section when seeking a community 

facility loan guarantee. The program 

specific provisions for community 

facility projects follow. 

Project Eligibility 

Project eligibility for community 

facility projects under the proposed rule 

is similar to the requirements found in 

the current community facility 

regulations. The proposed rule requires 

projects to be an eligible project for 

public use located in a rural area, unless 

otherwise excepted, with demonstrated 

community support. In addition, the 

proposed rule allows leased space to 

qualify under certain conditions. 

While the proposed rule streamlines 

the current regulatory language that 

identifies the types of projects that are 

eligible, its requirements are intended to 

be consistent with the types of projects 

and purposes currently eligible for 

community facility guaranteed loans. 

This includes considering the various 

types of other improvements to 

community projects, as found in 7 CFR 

3575.24(a)(2), as being eligible for 

guaranteed loans, and considering the 

use of funds identified in 7 CFR 

3573.24(b) as part of an essential 

community facility. In some instances, 

some of the currently eligible projects 

and purposes will be addressed in 

guidance material (e.g., a handbook) 

rather than in the regulatory language. 

Overall, the intent of the proposed rule 

is to allow more flexibility, but to 

maintain the current intent of the 

program as to the types of projects 

eligible for community facility 

guaranteed loans. 

Eligible projects. As proposed, to be 

eligible for community facility funding, 

the project would have to meet the 

project eligibility requirements specified 

in subpart A and be one of the types of 

projects or purposes shown below. 

• Essential community facilities. 

These are facilities such as, but not 

limited to, fire, rescue, health and 

public safety facilities or equipment, 

telecommunications, supplemental and 

supporting structures for other rural 

electrification or telephone systems, the 

purchase of major equipment that in 

themselves provide an essential service 

to rural residents, and the purchase of 

facilities necessary to improve or 

prevent a loss of service. 

• Community services or communitybased social, recreational or cultural 

services. 

• Transportation infrastructure and 

support. 

• Hydroelectric generating facilities. 

• Natural gas distribution systems. 

• Acquisition of land and site 

preparation for industrial parks. 

Facilities for public use. As found in 

the current Community Facilities 

regulation, to be eligible for Community 

Facility funding, all facilities would 

have to be for public purposes. These 

facilities would have to be installed to 

serve any user within the service area 

who desires service and can be feasibly 

and legally served. In addition, the 

lender would have to determine that, 

when feasibly and legally possible, 

inequities within the proposed project’s 

service area for the same type service 

proposed (e.g., gas distribution systems) 

would be remedied by the owner on, or 

before, completion of the project. Under 

the proposed rule, inequities are defined 


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as unjustified variations in availability, 

adequacy, or quality of service. 

However, user rate schedules for 

portions of existing systems or facilities 

that were developed under different 

financing, rates, terms, or conditions 

would not necessarily constitute 

inequities. 

Leased space. As proposed, a facility 

would remain eligible for community 

facility funding provided it has less than 

25 percent of its floor space occupied by 

ineligible organizations or activities. 

The ineligible organization and the 

ineligible commercial activity, however, 

must be related to and enhance the 

primary purpose for which the facility 

is being established by the borrower. 

This eligible purpose is being included 

in the proposed rule to incorporate 

existing Agency practice. 

Facility location. As found in the 

current Community Facilities 

regulation, another requirement to be 

eligible for community facility funding 

is that facilities must be located in rural 

areas. Two exceptions to this 

requirement are proposed. These are for: 

• Utility services, such as natural gas 

or hydroelectric serving both rural and 

non-rural areas. In such cases, Agency 

funds may be used to finance only that 

portion serving rural areas, regardless of 

facility location. 

• Telecommunication projects. For 

these projects, the part of the facility 

located in a non-rural area must be 

necessary to provide the essential 

services to rural areas. 

Demonstration of community support. 

Instead of meeting the cash equity 

criterion for determining project 

eligibility under subpart A, a 

community facility may instead 

demonstrate community support, which 

the Agency will accept in lieu of cash 

equity. If a facility meets the other 

criteria in proposed § 5001.6(c)(2) or 

§ 5001.12(c)(2)(ii)(B), as applicable, and 

this demonstration of community 

support, then the project is eligible 

under this program. The Agency is 

allowing the use of a community 

support criterion in lieu of cash equity 

because community support is often a 

better predictor of project success. 

Under the proposed rule, community 

support would be evidenced in the form 

of a certification of support for each 

project or facility from any affected local 

government body. A certificate of 

support would have to be obtained from 

each affected local government within 

the service area of the facility, except for 

essential community facilities owned by 

a local public body or a Federallyrecognized Indian tribe serving local 

residents or tribal members. The 

certificate of support would have to be 

signed by an authorized official of the 

local government, and should include 

sufficient information to determine that 

a community facility will provide 

needed services to the community and 

will have no adverse impact on other 

community facilities providing similar 

services. The organization would be 

required to provide sufficient 

information to affected local 

governments as may be needed to obtain 

the certificate of support. 

While the current Community 

Facilities guaranteed loan regulation 

requires projects to have significant ties 

to the community, requiring a 

demonstration of this community 

support provision in the regulation 

incorporates existing Agency practice 

for evaluating and approving loan 

guarantee applications for Community 

Facilities. 

Unauthorized Projects and Purposes 

Under the proposed rule, the projects 

and purposes identified in the current 

Community Facilities guaranteed loan 

program are carried over into this 

proposed rule, except for new combined 

sanitary and storm water sewer 

facilities. These types of combined 

facilities are excluded from the 

regulatory language because the Agency 

does not see such facilities ever 

receiving approval from other regulatory 

agencies rather than an indication that 

such facilities are now eligible for 

community facilities guaranteed loans. 

In addition to the unauthorized 

projects and purposes identified in 

subpart A, loans guaranteed with 

Community Facility funding can not be 

used to finance the following: 

• Properties to be used for 

commercial rental when the borrower 

has no control over tenants and services 

offered except for industrial-site 

infrastructure development; 

• Facilities that are 25 percent or 

more for the purpose of housing Federal 

or State agencies; 

• Community antenna television 

services or facilities; 

• Telephone systems; 

• Facilities that are not modest in 

size, design, and cost; and 

• Finder’s and packager’s fees. 

Borrower Eligibility 

To be eligible for a community facility 

guaranteed loan, a prospective borrower 

must meet the eligibility criteria 

specified in subpart A of the proposed 

rule. In addition, subpart B for the 

Community Facilities program (see 

proposed § 5001.101(c)) provides two 

additional requirements, where 

applicable, as follows: 

• YMCA, YWCA, Girl Scouts, and 

Boy Scouts are eligible applicant 

organizations (this provision 

incorporates current Agency practice), 

and 

• A private not-for-profit essential 

community facility (other than utilities) 

must have significant ties with the local 

rural community to be eligible. Such 

ties are necessary to ensure to the 

greatest extent possible that a facility 

under private control will carry out a 

public purpose and continue to 

primarily serve rural areas. This 

provision and the conditions associated 

with, as discussed below, are found in 

the current Community Facilities 

regulation. 

The proposed rule identifies two 

conditions under which ties with the 

local rural community can be 

evidenced. These conditions, which are 

not inclusive, are: 

• Association with, or controlled by, 

a local public body or bodies or broadly 

based ownership and controlled by 

members of the community, and 

• Substantial public funding through 

taxes, revenue bonds, or other local 

government sources, or substantial 

voluntary community funding such as 

would be obtained through a 

community-wide funding campaign. 

Credit not available elsewhere. As 

found in the current Community 

Facilities regulation and as proposed, to 

be eligible, the prospective borrower 

would have to be found by the Agency 

as being unable to obtain the required 

credit without the loan guarantee from 

private, commercial, or cooperative 

sources at reasonable rates and terms for 

loans for similar purposes and periods 

of time. 

Additional Application Documentation 

Requirements 

Feasibility study. The Agency may 

require a feasibility study by a qualified 

independent consultant. As defined in 

the proposed rule, the feasibility study 

is essentially the same as found in the 

current Community Facilities 

regulation. However, the current 

Community Facilities guaranteed loan 

program makes the feasibility study a 

prerequisite, while the proposed rule 

does not. 

Additional Guarantee- and Loan-Related 

Requirements 

Funding limit. Under the proposed 

rule, the principal amount of a 

community facility loan guaranteed 

under this section would not be allowed 

to exceed $50 million. The current 

Community Facilities guaranteed loan 

program does not have a specified 

funding limit. Community Facility 


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projects in excess of $50 million are 

likely to require a level of support or 

patronage beyond the local rural 

community that the Agency is 

concerned may be insufficient in order 

to sustain the project over the life of the 

loan. Therefore, consistent with the 

Agency’s approach for the management 

of risk under the proposed rule, the 

Agency is proposing to limit the 

maximum size loan for Community 

Facility projects. 

Maximum percent of guarantee. The 

maximum loan guarantees issued to 

lenders approved under this part with 

community facility funding are 

specified in Table 1. 

TABLE 1.—MAXIMUM LOAN GUARANTEE PERCENTAGES FOR COMMUNITY FACILITIES GUARANTEED LOANS

Type of rural development approved 

lender Type of application 

Guaranteed loan amount 

$5 million or less 

(percent) 

Over $5 million 

up to and including $10 million 

(percent) 

Over $10* million 

(percent) 

Without preferred lender status ................ Low documentation .................................. 80 na na 

Full documentation ................................... 90 90 90 

With preferred lender status ..................... Low documentation .................................. 90 na na 

Full documentation ................................... 90 90 90 

na = not applicable. 

* Per proposed § 5001.101(e)(1), the maximum guaranteed loan amount is $50 million. 

These maximum loan guarantees are 

the same as found in the current 

Community Facilities regulation except 

that, under the proposed rule, the 

maximum guarantee is 10 percentage 

points lower for low documentation 

applications seeking a loan guarantee of 

$5 million or less from lenders who do 

not have preferred lender status. 

Fees. Any guarantee fee and renewal 

fee charged for community facility 

guaranteed loans will be established in 

a Federal Register notice that the 

Agency will publish annually, as 

provided under subpart A of the 

proposed rule. Under the current 

Community Facilities program, a 

guarantee fee is charged, but a renewal 

fee is not. 

Parity lien requirements. Whenever 

both a community facility guaranteed 

loan and a community facility direct 

loan are utilized to finance a single 

project, the Agency will require a parity 

lien, unless the lender cannot meet its 

regulatory requirements. This is a new 

provision for the Community Facilities 

program. This parity requirement 

ensures that when community facility 

direct and guaranteed loans are used on 

the same project, there is an opportunity 

for both to be adequately and 

independently secured, which is in the 

financial interest of the Agency. 

Water and Waste Disposal Facilities 

(§ 5001.102) 

This section identifies program 

specific requirements for water and 

waste disposal projects seeking loan 

guarantees. The lender and prospective 

borrower must comply both with 

subpart A provisions and the provisions 

in this section when seeking a water or 

waste disposal loan guarantee. The 

program specific provisions for water 

and waste disposal projects follow. 

Project Eligibility 

Project eligibility for water and waste 

disposal facilities under the proposed 

rule are similar to the requirements 

found in the current water and waste 

disposal regulations. The proposed rule 

requires such facilities to be an eligible 

project for public use with 

demonstrated community support or 

with cash equity, as specified in the 

regulation. The location requirement for 

a water and waste disposal facility 

under the proposed rule is equivalent to 

that under the current regulation. 

While the proposed rule streamlines 

the current regulatory language that 

identifies the types of projects and costs 

that are eligible, its requirements are 

generally intended to be consistent with 

the types of projects and costs currently 

eligible for water and waste disposal 

guaranteed loans. This includes 

considering the various other types of 

improvements necessary for the 

successful operation or protection of 

such facilities, as found in 7 CFR 

1779.24(b) and (c), and considering the 

use of funds towards those items listed 

in 7 CFR 1779.234(e) when they are a 

necessary part of the project. Overall, 

the intent of the proposed rule is to 

allow more flexibility, but to maintain 

the current intent of the program as to 

the types of projects and costs eligible 

for water and waste disposal guaranteed 

loans. 

Eligible projects and costs. To be 

eligible for a water and waste disposal 

guaranteed loan, a project would have to 

meet the requirements in proposed 

§ 5001.6 in subpart A and be for one of 

the types of projects or costs shown 

below. 

• A water or waste disposal facility. 

Such facilities include, but are not 

limited to, drinking water, sanitary 

sewage, solid waste disposal, and storm 

wastewater disposal. In addition, public 

improvements necessary for the 

successful operation or protection of 

such facilities are included. 

Improvements could include, for 

example, relocating buildings, roads, 

fences, or utilities. 

• Payment of other utility connection 

charges as provided in service contracts 

between utility systems. 

• Refinancing any loan. Except for the 

refinancing of Agency direct loans, 

refinancing of other loans will be 

limited to a minority portion of the 

guaranteed loan. 

Facilities for public use. As proposed 

and as found in the current Water and 

Waste Disposal regulation, to be eligible 

for water and waste disposal funding, 

facilities would also have to be for 

public purposes. These facilities would 

have to be installed to serve any user 

within the service area who desires 

service and can be feasibly and legally 

served. In addition, the lender would 

have to determine that, when feasibly 

and legally possible, inequities within 

the proposed project’s service area for 

the same type service proposed (e.g., gas 

distribution systems) would be 

remedied by the owner on, or before, 

completion of the project. Under the 

proposed rule, inequities are defined as 

unjustified variations in availability, 

adequacy, or quality of service. 

However, user rate schedules for 

portions of existing systems or facilities 

that were developed under different 

financing, rates, terms, or conditions 

would not necessarily constitute 

inequities. 


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Demonstration of community support. 

Instead of meeting the cash equity 

criterion for determining project 

eligibility under subpart A, a water and 

waste disposal project may instead 

demonstrate community support, which 

the Agency will accept in lieu of cash 

equity. If a project meets the other 

criteria in proposed § 5001.6(c)(2) or 

§ 5001.12(c)(2)(ii)(B), as applicable, and 

demonstrates community support, then 

the project is eligible under this 

program. 

Demonstration of community support 

would be required as discussed earlier 

in this preamble for the Community 

Facilities program. While the current 

Water and Waste Disposal guaranteed 

loan regulation requires projects to have 

significant ties to the community, this 

community support provision in the 

regulation incorporates current Agency 

practice for evaluating and approving 

loan guarantee applications for 

Community Facilities. 

Unauthorized Projects and Purposes 

Under the proposed rule, the projects 

and purposes identified in the current 

Water and Waste Disposal guaranteed 

loan program are carried over into this 

proposed rule. 

In addition to the unauthorized 

projects and purposes identified in 

subpart A, loan guarantees with water 

and waste disposal funding would not 

be allowed to finance any of the 

following: 

• Facilities that are not modest in 

size, design, and cost; 

• Loan or grant finder’s fees; 

• The construction of any new 

combined storm and sanitary sewer 

facilities; 

• Any portion of the cost of a facility 

that does not serve a rural area; 

• That portion of project costs 

normally provided by a business or 

industrial user, such as wastewater 

pretreatment; 

• Rental for the use of equipment or 

machinery owned by the applicant; 

• For other purposes not directly 

related to operating and maintenance of 

the facility being installed or improved; 

or 

• The payment of a judgment which 

would disqualify an applicant for a loan 

under proposed § 5001.102(c)(2). 

Borrower Eligibility 

Consistent with the current Water and 

Waste Disposal guaranteed loan 

program, to be eligible for a water and 

waste disposal guaranteed loan, a 

prospective borrower not only must 

meet the eligibility criteria specified in 

subpart A of the proposed rule, but the 

borrower eligibility criteria specified in 

subpart B for the water and waste 

disposal program (see proposed 

§ 5001.102(c)). Specifically, these 

criteria specify that the prospective 

borrower must be a particular type of 

entity and must not have credit 

available elsewhere, as discussed below. 

Eligible entity. Under the proposed 

rule, a prospective borrower would have 

to meet one of the following types of 

entities to be eligible for a water and 

waste disposal guaranteed loan: 

• A public body, such as a 

municipality, county, district, authority, 

or other political subdivision of a State 

located in a rural area; 

• An organization operated on a notfor-profit basis, such as an association, 

cooperative, or private corporation. The 

organization must be an association 

controlled by a local public body or 

bodies, or have a broadly based 

ownership by or membership of people 

of the local community; or 

• An Indian tribe on a Federal or 

State reservation or any other Federallyrecognized Indian tribe. 

Credit not available elsewhere. As 

found in the current Water and Waste 

Disposal regulation, to be eligible, the 

prospective borrower would have to be 

found by the Agency as being unable to 

obtain the required credit without the 

loan guarantee from private, 

commercial, or cooperative sources at 

reasonable rates and terms for loans for 

similar purposes and periods of time. 

Additional Application Documentation 

Requirements 

Feasibility study. The Agency may 

require a feasibility study by a qualified 

independent consultant. As defined in 

the proposed rule, the feasibility study 

is essentially the same as found in the 

current Water and Waste Disposal 

regulation. However, the current Water 

and Waste Disposal regulation makes 

the feasibility study a prerequisite, 

while the proposed rule does not. 

Preliminary engineering report (PER). 

As required under the current Water 

and Waste Disposal guaranteed loan 

program, applications for water and 

waste disposal facilities would have to 

be submitted, with two copies of a 

preliminary engineering report (PER), 

under the proposed rule. The PER is a 

document normally prepared by the 

owner’s consulting engineer that 

describes the owner’s present situation, 

analyzes alternatives, and proposes a 

specific course of action from an 

engineering and environmental 

perspective. 

Preliminary engineering reports 

would be required to conform to 

customary professional standards. If a 

preliminary review by the Agency is 

desired, the PER may be submitted to 

the Agency prior to the rest of the 

application material. To assist in their 

preparation, PER guidelines for water, 

sanitary sewer, solid waste, and storm 

sewer are available from the Agency. 

The proposed rule does not include the 

same specifics for content as found in 

the current Water and Waste Disposal 

regulation. It is the Agency’s intent that 

specific content requirements, which 

would be consistent with current 

Agency practices for these reports, 

would be available through a handbook 

or other means available from State 

offices. 

Financial reports. Under the proposed 

rule and consistent with the current 

Water and Waste Disposal guaranteed 

loan program, all lenders would be 

required to obtain and analyze financial 

statements as required by the Loan 

Agreement. A Rural Development 

approved lender that does not have 

preferred lender status would be 

required to submit a copy of the analysis 

to the Agency within 120 days of receipt 

of the financial statements. A Rural 

Development approved lender with 

preferred lender status would be 

required to provide evidence that it has 

such analysis on file, but would not be 

required to submit a copy to the Agency 

unless specifically requested. 

Additional Guarantee- and Loan-Related 

Requirements 

Maximum percent of guarantee. The 

maximum loan guarantees issued to 

lenders approved under this part with 

Water and Waste Disposal funding are 

specified in Table 2. 


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TABLE 2.—MAXIMUM LOAN GUARANTEE PERCENTAGES FOR WATER AND WASTE DISPOSAL FACILITY GUARANTEED LOANS

Type of rural development approved 

lender Type of application 

Guaranteed loan amount 

$5 million or less 

(percent) 

Over $5 million 

up to and including $10 million 

Over $10 million 

(percent) 

Without preferred lender status ................ Low documentation .................................. 80 na na 

Full documentation ................................... 90 90 90 

With preferred lender status ..................... Low documentation .................................. 90 na na 

Full documentation ................................... 90 90 90 

na = not applicable. 

These maximum loan guarantees are 

the same as found in the current Water 

and Waste Disposal regulation except 

that, under the proposed rule, the 

maximum guarantee is 10 percentage 

points lower for low documentation 

applications seeking a loan guarantee of 

$5 million or less from lenders who do 

not have preferred lender status. 

Fees. Any guarantee fee or renewal fee 

charged for Water and Waste Disposal 

guaranteed loans will be established in 

a Federal Register notice that the 

Agency will publish annually, as 

provided under subpart A of the 

proposed rule. Under the current Water 

and Waste Disposal program, a 

guarantee fee is charged, but a renewal 

fee is not. 

Business and Industry (§ 5001.103) 

This section identifies program 

specific requirements for business and 

industry projects seeking loan 

guarantees. The lender and prospective 

borrower must comply both with 

subpart A provisions and the provisions 

in this section when seeking a business 

and industry loan guarantee. The 

program specific provisions for business 

and industry projects follow. 

Project Eligibility 

To be eligible for a business and 

industry guaranteed loan, a project 

would have to meet the requirements in 

proposed § 5001.6 in subpart A and the 

following requirements found in 

proposed § 5001.103(a) in subpart B. 

The same types of projects eligible 

under the current B&I guaranteed loan 

program are eligible under this 

proposed rule. 

Eligible Projects. As proposed, to be 

eligible for business and industry 

funding, the project would have to meet 

one of the following types of projects or 

purposes: 

• Business and industrial acquisitions 

when the loan will keep the business 

from closing, prevent the loss of 

employment opportunities, or provide 

expanded job opportunities; 

• Business conversion, enlargement, 

repair, modernization, or development; 

• Purchase and development of land, 

easements, rights-of-way, buildings, or 

facilities; 

• The purchase of equipment, 

leasehold improvements, machinery, 

supplies, inventory, start up costs, 

permanent working capital, pollution 

control and abatement, or feasibility 

studies; 

• Transportation services incidental 

to industrial development; 

• Agricultural production, with 

advance written approval from the 

Agency, when it is not eligible for Farm 

Service Agency farmer program 

assistance and when it is part of an 

integrated business also involved in the 

processing of agricultural products; 

• The purchase of membership, 

stocks, bonds, debentures, or 

cooperative stock (as discussed further 

below); 

• Commercial fishing, aquaculture, 

commercial nurseries, forestry, 

hydroponics, or the growing of 

mushrooms; 

• Interest during the period before the 

first principal payment becomes due or 

when the facility becomes income 

producing, whichever is earlier; 

• Refinancing any loan. Except for the 

refinancing of Agency direct loans, 

refinancing of other loans will be 

limited to a minority portion of the 

guaranteed loan; 

• Providing takeout of interim 

financing when the lender submits a 

complete preapplication or application 

in which the interim financing is 

proposed, prior to extending any 

portion of the interim loan; 

• Fees and charges for professional 

services and routine lender fees and the 

Agency guarantee fee; 

• Tourist and recreation facilities, 

including hotels, motels, and bed and 

breakfast establishments; 

• Educational, training, or 

community facilities; 

• Housing development sites with 

certain restrictions; 

• Community antenna television 

services or facilities; 

• Assistance to industries adjusting to 

terminated Federal agricultural 

programs or increased foreign 

competition; or 

• Assisting cooperative organizations. 

As proposed, ‘‘permanent working 

capital’’ is defined as ‘‘liquid assets 

available to support a business’ longterm operations and growth.’’ It is the 

Agency’s position that ‘‘permanent 

working capital’’ does not include lines 

of credit providing temporary financing 

for seasonal financial requirements. 

Purchase of cooperative stock. Under 

the proposed program and consistent 

with the current B&I guaranteed loan 

program, loans may be made to 

individual farmers or ranchers for the 

purchase of cooperative stock provided 

the entity that receives the proceeds 

from the stock sale is a farmer or 

rancher cooperative established for the 

purpose of processing agricultural 

commodities; not for electricity or other 

financial investments. Proceeds from 

the stock sale would be allowed for 

recapitalizing existing cooperatives, 

developing new processing facilities or 

product lines, and expanding an 

existing production facility. In addition, 

the cooperative would be allowed to 

contract for services to process 

agricultural commodities or otherwise 

process value-added agricultural 

products during the 5-year period 

beginning on the operation startup date 

of the cooperative in order to provide 

adequate time for the planning and 

construction of the processing facility of 

the cooperative. 

Unauthorized projects and purposes. 

Consistent with those found in the 

current B&I guaranteed loan regulations, 

the proposed rule identifies specific 

projects and purposes that would be 

ineligible for a business and industry 

guaranteed loan. These are: 

• Businesses housed in private 

homes, except when the pro-rata value 

of the owner’s living quarters is deleted 

from the value of the project; 

• Projects in excess of $1 million that 

would likely result in the transfer of 

jobs from one area to another and 

increase direct employment by more 

than 50 employees; and 


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• Projects in excess of $1 million that 

would increase direct employment by 

more than 50 employees, if the project 

would result in an increase in the 

production of goods for which there is 

not sufficient demand, or if the 

availability of services or facilities is 

insufficient to meet the needs of the 

business. 

• Interim financing. 

• Distribution or payment to an 

individual owner, partner, stockholder, 

or beneficiary of the borrower or a close 

relative of such an individual when 

such individual will retain any portion 

of the ownership of the borrower. 

• Assistance to Government 

employees and military personnel who 

are directors or officers or have a major 

ownership of 20 percent or more in the 

business. 

• The guarantee of lease payments. 

• The guarantee of loans made by 

other Federal agencies. 

• Loans made with the proceeds of 

any obligation the interest on which is 

excludable from income under 26 U.S.C. 

103 or a successor statute. Funds 

generated through the issuance of taxexempt obligations may neither be used 

to purchase the guaranteed portion of 

any Agency guaranteed loan nor may an 

Agency guaranteed loan serve as 

collateral for a tax-exempt issue. The 

Agency may guarantee a loan for a 

project which involves tax-exempt 

financing only when the guaranteed 

loan funds are used to finance a part of 

the project that is separate and distinct 

from the part which is financed by the 

tax-exempt obligation, and the 

guaranteed loan has at least a parity 

security position with the tax-exempt 

obligation. 

Borrower Eligibility 

To be eligible for a business and 

industry guaranteed loan, a prospective 

borrower not only must meet the 

eligibility criteria specified in subpart A 

of the proposed rule, but the borrower 

eligibility criteria specified in subpart B 

for the business and industry program 

(see proposed § 5001.103(c)). The 

requirements for borrower eligibility 

under the proposed rule are consistent 

with those in the current B&I guaranteed 

loan regulations. Specifically, these 

criteria require that the borrower be: 

• A cooperative organization, 

corporation, partnership, or other legal 

entity organized and operated on a 

profit or not-for-profit basis; an Indian 

tribe on a Federal or State reservation or 

other Federally recognized tribal group; 

a public body; or an individual; and 

• Engaged in or proposing to engage 

in a business. 

Qualifying businesses include 

manufacturing, wholesaling, retailing, 

providing services, or other activities 

that provide employment; improve the 

economic or environmental climate; 

promote the conservation, development, 

and use of water for aquaculture; or 

reduce reliance on nonrenewable energy 

resources by encouraging the 

development and construction of solar 

energy systems and other renewable 

energy systems (including wind energy 

systems, geothermal energy systems, 

and anaerobic digesters for the purpose 

of energy generation). 

Additional Application Process 

Requirements—Obligation of Funds 

Under the current B&I guaranteed 

loan regulations, the Agency uses a 

scoring system to prioritize 

applications. Under the proposed rule, 

the Agency would only use a scoring 

priority system to allocate funds, which 

would give a priority to encourage 

economic development in communities 

that are suffering economic hardships, if 

funds are insufficient to cover all 

approved applications. The Agency 

would establish the scoring criteria each 

fiscal year and provide the criteria in a 

notice that would be published in the 

Federal Register. 

Additional Application Documentation 

Requirements 

Audited financial statements. As 

found in the current B&I guaranteed 

loan regulations, if the proposed 

guaranteed loan exceeds $3 million, the 

Agency may require audited financial 

statements to be submitted annually 

when the Agency is concerned about the 

borrower’s credit risk. 

Feasibility study. As found in the 

current B&I guaranteed loan regulations, 

the Agency may require a feasibility 

study by a qualified independent 

consultant for start-up businesses or 

existing businesses when the project 

will significantly affect the borrower’s 

operations. Under the proposed rule, the 

Agency is clarifying that, if the Agency 

requires a feasibility study of a 

cooperative, the feasibility study would 

determine the viability of the business 

and not the individual farm operators. 

Certification of Non-Relocation and 

Market Capacity. As found in the 

current B&I guaranteed loan regulations, 

if the loan will exceed $1 million and 

will increase direct employment by 

more than 50 employees, the lender 

must provide the Agency with 

information on non-relocation and 

market capacity using a form approved 

by the Agency. 

Additional Lender Responsibilities—

Origination—Collateral 

Under the proposed rule and as found 

in the current B&I guaranteed loan 

regulations, when a business and 

industry guaranteed loan is used for the 

purchase of cooperative stock, the 

lender must secure the loan, at a 

minimum, with a lien on the stock 

acquired with loan funds, an assignment 

of any patronage refund, and the full 

and unconditional personal or corporate 

guarantee of the borrower. 

Additional Guarantee- and Loan-Related 

Requirements 

Conditional Commitment for 

Guarantee. Under the proposed rule and 

as found in the current B&I guaranteed 

loan regulations, when a business and 

industry guaranteed loan is used for the 

purchase of cooperative stock, the 

Conditional Commitment for Guarantee 

would require the cooperative to 

provide the lender with all required 

Federal, State, and local permits and 

other clearances involving the 

environmental aspects for review and 

approval. 

Issuance of Loan Note Guarantee. 

Under the proposed rule and as found 

in the current B&I guaranteed loan 

regulations, if, for the purchase of 

cooperative stock, the lender requests 

the Agency to the issue the Loan Note 

Guarantee before the cooperative 

becomes operational, the lender would 

be required to certify to the Agency that 

the cooperative has all of the required 

Federal, State, and Local permits and 

other clearances involving the 

environmental aspects for review and 

approval. 

Funding limits. Under the proposed 

rule and consistent with the current B&I 

guaranteed loan program, the maximum 

principal amount of a business and 

industry loan guaranteed that would be 

allowed is $25 million, except that the 

maximum principal amount of a 

business and industry guaranteed loan 

for a cooperative organization for rural 

projects processing value added 

commodities would be $40 million. 

The proposed rule would also limit 

the total principal amounts of business 

and industry guaranteed loans made to 

cooperative organizations for a fiscal 

year that are in excess of $25 million to 

no more than 10 percent of the business 

and industry loans guaranteed for the 

fiscal year. 

Lastly, the principal amount of a 

business and industry guaranteed loan 

for the purchase of cooperative stock 

would be limited to no more than 

$600,000. 

Fees. Any guarantee fee and renewal 

fee charged for B&I guaranteed loans 


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will be established in a Federal Register 

notice that the Agency will publish 

annually, as provided under subpart A 

of the proposed rule. Under the current 

B&I program, a guarantee fee and a 

renewal fee are charged. 

As provided in proposed 

§ 5001.103(g)(4) and consistent with the 

current B&I regulations, the maximum 

guarantee fee that could be charged 

would be 2 percent. The guarantee fee 

would be allowed to be reduced to 1 

percent if the borrower is a high impact 

business and is located in an area of 

long term population decline and job 

deterioration as a result of persistent 

economic hardship, significant 

economic loss from a Presidentiallydeclared disaster, or a fundamental 

structural economic change. Each fiscal 

year, the Agency will establish a limit 

on the maximum portion of guarantee 

authority available for that fiscal year 

that may be used to guarantee loans 

with a guarantee fee of 1 percent. The 

Agency will announce the limit in a 

notice published in the Federal 

Register. Once the limit has been 

reached, the guarantee fee for all 

additional loans obligated during the 

remainder of that fiscal year would be 

2 percent. 

Maximum percent of guarantee. The 

maximum loan guarantees issued to 

lenders approved under this part with 

Business and Industry funding are 

specified in Table 3. 

TABLE 3.—MAXIMUM LOAN GUARANTEE PERCENTAGES FOR BUSINESS AND INDUSTRY GUARANTEED LOANS

Type of rural development approved 

lender Type of application 

Guaranteed loan amount 

$5 million or less 

(percent) 

Over $5 million 

up to and including $10 million 

(percent) 

Over $10 million* 

(percent) 

Without preferred lender status ................ Low documentation .................................. 70 na na 

Full documentation ................................... 80 70 60 

With preferred lender status ..................... Low documentation .................................. 80 na na 

Full documentation ................................... 80 70 60 

na = not applicable. 

*Per proposed § 5001.103(g)(3), the maximum guaranteed loan amount is $25 million except for a cooperative producing a value added commodity for which the maximum is $40 million. 

These maximum loan guarantees are 

the same as found in the current B&I 

guaranteed loan regulation except that, 

under the proposed rule, the maximum 

guarantee is 10 percentage points lower 

for low documentation applications 

seeking a loan guarantee of $5 million 

or less from lenders who do not have 

preferred lender status. 

Renewable Energy Systems and Energy 

Efficiency Improvements (§ 5001.104) 

This section identifies program 

specific requirements for renewable 

energy system or energy efficiency 

improvement projects seeking loan 

guarantees. The lender and prospective 

borrower must comply both with 

subpart A provisions and the provisions 

in this section when seeking a 

renewable energy system or energy 

efficiency improvement loan guarantee. 

The program specific provisions for 

renewable energy systems and energy 

efficiency improvement projects follow. 

Project Eligibility 

To be eligible for a renewable energy 

system and energy efficiency 

improvement guaranteed loan, a project 

would have to meet the requirements in 

proposed § 5001.6 in subpart A and the 

following requirements found in 

proposed § 5001.104 in subpart B. 

Eligible projects. As proposed, a 

renewable energy system or energy 

efficiency improvement project would 

have to be for the purchase, installation, 

expansion, and/or other energy-related 

improvement of a renewable energy 

system or to make energy efficiency 

improvements where the technology 

used is replicable and either precommercial or commercially available. 

These two criteria are found in the 

current Renewable Energy Systems and 

Energy Efficiency Improvements 

regulation (7 CFR part 4280, subpart B). 

Borrower Eligibility 

To be eligible for a renewable energy 

systems and energy efficiency 

improvements guaranteed loan, a 

borrower must meet not only the 

eligibility criteria specified in subpart A 

of the proposed rule, but the borrower 

eligibility criterion specified in subpart 

B for the renewable energy systems and 

energy efficiency improvements 

program (see proposed § 5001.104(b)). 

Specifically, this criterion, which is in 

the current Renewable Energy Systems 

and Energy Efficiency Improvements 

regulation, requires that the borrower be 

an agricultural producer or rural small 

business. 

Additional Application Process 

Requirements—Obligation of Funds 

Under the current Renewable Energy 

Systems and Energy Efficiency 

Improvements regulation, the Agency 

uses a scoring system to prioritize 

applications. Under the proposed rule, 

the Agency would only use a scoring 

priority system to allocate funds to 

encourage development of promising 

pre-commercial and commercially 

available alternative energy sources that 

are currently unable to obtain financing 

from commercial lending sources if 

funds are insufficient to cover all 

approved applications. The Agency 

would establish the scoring criteria on 

a periodic basis as changes are made 

and provide the criteria in a notice that 

would be published in the Federal 

Register. 

Additional Application Documentation 

Requirements 

In addition to the application 

requirements specified in subpart A, 

applications would be required to 

contain the following, as applicable: 

Certifications. The lender would be 

required to certify in the application 

that the project is able to demonstrate 

technical merit and the prospective 

borrower is a small agricultural 

producer or rural small business. This 

provision implements two requirements 

found in the current Renewable Energy 

Systems and Energy Efficiency 

Improvements regulation. 

Technical Report. For renewable 

energy systems projects seeking a loan 

guarantee of more than $200,000, a 

satisfactory technical report must be 

provided that demonstrates that the 

project is commercially viable and can 

be installed and perform as intended in 

a reliable, safe, cost-effective, and 

legally compliant manner. To determine 

the overall technical merit of the 

renewable energy system, the lender 

must submit its proposal to an approved 


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52646 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

Department of Energy (DOE) laboratory 

and obtain a DOE technical report. A 

Rural Development approved lender 

that does not have preferred lender 

status must submit the DOE technical 

report with its application. A preferred 

lender may instead certify in the 

application that a DOE technical report, 

deemed satisfactory by a DOE energy 

laboratory, has been obtained prior to 

the request for guarantee in lieu of 

submitting the technical report with the 

application. 

This provision under the proposed 

rule differs from the current Renewable 

Energy Systems and Energy Efficiency 

Improvements regulation in that the 

proposed rule does not apply to 

renewable energy systems seeking a 

loan guarantee of $200,000 or less or to 

any energy efficiency improvement 

project and does not specify the 

contents of the technical report. 

Due to the variety of potential 

projects, the content of these technical 

reports will be negotiated with the 

lender/borrower and further guidance 

will be provided through an agency 

handbook or other agency documents. 

Energy assessment/audit. For energy 

efficiency improvement projects, an 

energy assessment, with adequate and 

appropriate evidence of energy savings 

expected when the system is operated as 

designed, must be provided. For energy 

efficiency improvement projects with 

total eligible project costs greater than 

$50,000, an energy audit is required. 

Preferred lenders may certify in the 

application that an energy assessment or 

audit, as applicable, has been obtained 

prior to the request for guarantee in lieu 

of submitting the assessment or audit 

with the application. These provisions 

are the same as found in the current 

Renewable Energy Systems and Energy 

Efficiency Improvements regulation. 

Feasibility study. Under the proposed 

rule and consistent with the current 

Renewable Energy Systems and Energy 

Efficiency Improvements regulation, 

lenders are required to obtain feasibility 

studies for projects seeking a loan 

guarantee of greater than $200,000. To 

be acceptable, the feasibility study 

would have to be conducted by a 

qualified independent consultant. 

Financial statements. Consistent with 

the current Renewable Energy Systems 

and Energy Efficiency Improvements 

regulation, but applied only to lenders 

without preferred lender status, 

applications from Rural Development 

approved lenders without preferred 

lender status must include financial 

statements for the lesser of the past 3 

years or the business life of the 

applicant. If the proposed guaranteed 

loan exceeds $3 million, the Agency 

may require audited financial 

statements annually when the Agency is 

concerned about the borrower’s credit 

risk. 

Additional Servicing Requirements—

Post-Construction Requirements 

Once the project has been 

constructed, the lender would be 

required to provide the Agency annual 

reports from the borrower on the 

performance characteristics and results 

of the projects. For renewable energy 

system projects, these reports would be 

provided commencing in the first full 

calendar year after construction is 

completed and continuing for 3 full 

years. For Energy Efficiency 

Improvement projects, these reports 

would be provided commencing the 

first full calendar year following the 

year in which project construction was 

completed and continuing for 2 full 

years. 

The requirement to submit these 

reports is consistent with that found in 

the current Renewable Energy Systems 

and Energy Efficiency Improvements 

regulation. However, due to the variety 

of potential projects, the proposed rule 

does not specify a comprehensive list of 

the report contents. Instead, the 

proposed rule identifies minimum 

content requirements with additional 

content to be negotiated between the 

Agency and the lender/borrower, which 

must be clearly articulated before the 

loan note guarantee is executed. Further 

guidance will be provided through an 

agency handbook or other agency 

documents. 

Additional Guarantee- and Loan-Related 

Requirements 

Conditions precedent to issuance of 

loan note guarantee. In addition to the 

requirements specified in proposed 

§ 5001.33, prior to the issuance of the 

loan note guarantee for renewable 

energy systems and energy efficiency 

improvements loans, the following 

conditions would have to be 

demonstrated: 

• All planned property acquisitions 

and development have been performing 

at a steady state operating level in 

accordance with the technical 

requirements, plans, and specifications; 

• The project conforms with 

applicable Federal, State, and local 

codes; and 

• Costs have not exceeded the 

amount approved by the lender and the 

Agency. 

The above conditions are the same as 

those found in the current Renewable 

Energy Systems and Energy Efficiency 

Improvements regulation. 

Funding limits. Consistent with the 

current Renewable Energy Systems and 

Energy Efficiency Improvements 

regulation, the amount of assistance, 

which would be based on guaranteed 

loans, direct loans, and grants provided 

under the proposed program, available 

to an eligible project under the 

Renewable Energy Systems and Energy 

Efficiency program will not exceed 50 

percent of total eligible project costs. 

Eligible project costs are only those 

costs specified by the Agency, as long as 

the items are an integral and necessary 

part of the renewable energy system or 

energy efficiency improvement. The 

eligible project costs, which are the 

same as those found in the current 

Renewable Energy Systems and Energy 

Efficiency Improvements regulation, are 

identified in proposed § 5001.104(f)(2)(i) 

through (xi). 

The proposed rule, however, is not 

including the minimum and maximum 

funding limits specified in the current 

Renewable Energy Systems and Energy 

Efficiency Improvements regulation. 

Currently, the Renewable Energy 

Systems and Energy Efficiency 

Improvements program requires a 

minimum guaranteed loan request of 

$5,000 and limits the maximum 

guaranteed loan amounts to the same 

borrower to $10 million. 

Fees. Any guarantee fee and renewal 

fee charged for Renewable Energy 

Systems and Energy Efficiency 

Improvements guaranteed loans will be 

established in a Federal Register notice 

that the Agency will publish annually, 

as provided under subpart A of the 

proposed rule. Under the current 

Renewable Energy Systems and Energy 

Efficiency Improvements program, a 

guarantee fee and a renewal fee are 

charged. 

Maximum percent of guarantee. The 

maximum loan guarantees issued to 

lenders approved under this part with 

Renewable Energy Systems and Energy 

Efficiency Improvements funding are 

specified in Table 4. 


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TABLE 4.—MAXIMUM LOAN GUARANTEE PERCENTAGES FOR RENEWABLE ENERGY SYSTEM AND ENERGY EFFICIENCY

IMPROVEMENT GUARANTEED LOANS

Type of rural development 

approved lender Type of application 

Guaranteed loan amount 

$600,000 or less 

(percent) 

Over $600,000 

up to and including $5 million 

(percent) 

Over $5 million 

up to and including $10 million 

Over $10 million 

(percent) 

Without preferred lender status Low documentation .................. 75 70 na na 

Full documentation ................... 85 80 70 60 

With preferred lender status ..... Low documentation .................. 85 80 na na 

Full documentation ................... 85 80 70 60 

na = not applicable. 

These maximum loan guarantees are 

the same as found in the current 

Renewable Energy Systems and Energy 

Efficiency Improvements regulation 

except that, under the proposed rule, 

the maximum guarantee is 10 

percentage points lower for low 

documentation applications seeking a 

loan guarantee of $5 million or less from 

lenders who do not have preferred 

lender status. 

The maximum percent guarantees for 

each of the four programs for lenders 

who have preferred lender status under 

the proposed rule are the same as the 

current programs. For those lenders that 

do not have preferred lender status, 

however, the maximum percent 

guarantees are 10 percentage points less 

than for those lenders with preferred 

lender status. Under the current four 

programs, no such distinction is made. 

III. Significant Differences From Current 

Regulations 

The purpose of this section is to 

discuss significant differences between 

the proposed rule and the current 

regulations. 

A. Project Eligibility—Metric Floor 

Criteria 

All four current programs identify the 

types of projects that are eligible for 

guaranteed loans. However, none 

identify project eligibility criteria that 

specifically address project risk. One of 

the new features included in the 

proposed rule is the requirement for all 

projects to meet a minimum set of 

criteria (referred to as the metric floor 

criteria) that address the potential risk 

associated with a project. As discussed 

earlier in this preamble, by 

incorporating risk-based eligibility 

criteria, the Agency seeks to mitigate its 

project based risk. 

B. Application Documentation 

Under the proposed rule, the amount 

of supporting documentation required 

would, in general, depend on certain 

conditions associated with the 

application. These conditions are: 

• Whether the project application is 

for a startup business or an existing 

business. (If the project is a startup 

business, then full supporting 

documentation must be submitted with 

the application.) 

• Whether the lender submitting the 

application has preferred lender status. 

(If the lender has preferred lender 

status, the lender has the opportunity to 

submit an application with a reduced 

level of supporting documentation.) 

• For lenders that do not have 

preferred lender status, whether the 

project meets certain criteria. (If it meets 

these criteria, then reduced 

documentation is permitted with the 

application.) 

• The size of the loan guarantee being 

requested. (The loan guarantee being 

requested must be below certain sizes in 

order for its application to be submitted 

with the lower amount of supporting 

documentation.) 

The proposed rule applies the same 

set of criteria across all four programs, 

bringing an overall consistency to 

delivery. To address statutory intent, it 

also provides documentation 

requirements that are specific to some of 

the programs. These program-specific 

requirements include documentation 

such as feasibility studies, technical 

reports, certifications, and energy 

assessments and audits. 

Compared to the proposed rule, the 

amount of documentation required 

among the four current programs varies 

more widely from program to program. 

The program-specific requirements are 

similar, but not necessarily identical, to 

those currently found within the four 

programs. For example, currently, the 

Renewable Energy Systems and Energy 

Efficiency Improvement Projects 

guaranteed loan program requires 

technical reports on all projects, with 

required documentation levels differing 

based on a project size of more or less 

than $200,000. Under the proposed rule, 

technical reports will only be required 

on projects greater than $200,000. 

Another difference is that technical 

reports for energy efficiency 

improvement projects would not be 

required under the proposed rule. 

However, an energy assessment or audit, 

depending on the size of the energy 

efficiency improvement project, would 

be required. 

C. Lender Eligibility 

The proposed rule sets up criteria for 

lender participation that are different 

from the existing programs. The current 

programs generally make eligible 

regulated and supervised lenders that 

possess the capability to service the loan 

being requested, and then list the types 

of lender that fit the description. The 

Business and Industry program and the 

Renewable Energy System and Energy 

Efficiency Improvements program (by 

incorporating the B&I provisions) go one 

step further in identifying additional 

requirements that must be met for 

lenders that are not regulated or 

supervised. 

Under the proposed rule, two 

categories of lenders are created—

regulated or supervised lenders and 

other lenders. Regulated or supervised 

lenders would be eligible if they are in 

good standing with their regulators. 

This criterion is not found under the 

current programs. In addition, regulated 

or supervised lenders that do not have 

an existing portfolio with the Agency 

would be required to file an application, 

along with a copy of their policies and 

procedures for loan origination and 

servicing, to the Agency to be 

considered for participation. Under the 

current programs, such lenders are not 

required to submit such an application 

or their loan origination and servicing 

policies and procedures. Lastly, the 

proposed rulemaking does not list 

eligible lenders by lender type. The 

Agency does not believe that it is 

necessary to continue listing specific 

types of lenders. 

The second category of lender under 

the proposed rule—lenders that are not 


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52648 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

regulated or supervised lenders—would 

be required to submit an application to 

the Agency, along with information to 

document their capabilities and 

experience and including a copy of their 

loan origination and servicing policies 

and procedures and certificate(s) of 

good standing from the States in which 

they intend to conduct business. For the 

most part, this is very similar to the 

current B&I guaranteed loan program. 

D. Negligent Loan Origination 

As proposed, the Agency is making 

clear that negligent loan origination will 

be considered in determining whether 

or not to reduce loss claims payable 

under the loan guarantee to the lender 

when a loan is in default. The Agency 

believes that negligent loan origination 

may not have been articulated as clearly 

as it should have been in the previous 

programs. Therefore, the Agency 

recognizes that there may be some 

confusion within the lending 

community as to whether negligent loan 

origination could result in a reduction 

in the guarantee. In order to clarify this 

situation, the Agency is including in the 

proposed rule a definition of negligent 

loan origination and making explicit 

that negligent loan origination can be 

used to reduce loss claims payable 

under the guarantee held by the lender 

when a loss has occurred. 

E. Criteria for Becoming a Preferred 

Lender 

The current B&I guaranteed loan 

program has a provision for lenders to 

become certified preferred lenders. The 

other three programs do not have a 

similar provision. 

Under the proposed rule, any Rural 

Development approved lender may 

apply for preferred lender status 

regardless of the program in which the 

lender wishes to participate. The criteria 

for becoming a preferred lender focus on 

lender experience, history of losses, and 

instances of negligent origination and 

servicing. These criteria are somewhat 

narrower and more stringent than those 

in the current B&I guaranteed loan 

program for qualifying as a certified 

preferred lender. 

F. Percent Guarantee 

The maximum percent guarantees for 

each of the four programs for lenders 

who have preferred lender status under 

the proposed rule are the same as the 

current programs, except for loans over 

$10 million under the Renewable 

Energy Systems and Energy Efficiency 

Improvement Projects program. For that 

program, the proposed rule would limit 

the maximum percent guarantees for 

loans over $10 million to 60 percent 

compared to the current maximum of 70 

percent. This change is being made for 

consistency in the guaranteed 

percentage for projects with similar risk 

profiles between this program and the 

Business and Industry program. For 

those lenders that do not have preferred 

lender status, the maximum percent 

guarantees are 10 percentage points less 

than for those lenders with preferred 

lender status. Under the current four 

programs, no such distinction is made. 

The Agency is implementing this 

distinction in an effort to encourage 

more lenders to qualify under a higher 

standard as ‘‘Preferred’’ lenders. This 

allows the Agency to better manage 

institutional risk and lower Agency loss 

exposure by improving the quality of 

lenders who participate in these 

programs and by reducing the size of the 

loan guarantee to lenders that do not 

qualify for preferred lender status. 

G. Tangible Balance Sheet Equity Versus 

Cash Equity 

Under the current B&I guaranteed 

loan program, one of the eligibility 

criteria for projects is based on meeting 

certain tangible balance sheet equity 

requirements. The new rule proposes to 

use, instead, cash equity. The Agency is 

proposing this change because of 

difficulties in applying the tangible 

balance sheet equity criteria, and 

because the private sector is moving 

away from the use of tangible balance 

sheet equity as a qualifying factor. The 

Agency believes that requiring cash 

equity will result in greater consistency 

with the lending industry, clarified 

equity expectations, and stronger 

guarantee applications. 

H. Oversight and Monitoring—Default 

Reports 

Under the proposed rule, lenders 

would be required to submit 

information on each loan in default, 

including delinquent loans, on a 

monthly basis. This is more frequent 

than under the four current programs. 

The Agency believes this increase in 

frequency is necessary to provide the 

Agency with the most current 

information on the status on loans in 

default within its outstanding loan 

guarantee portfolio, thereby allowing 

the Agency to improve risk management 

and reduce its loss exposure. 

I. Preapplications 

Under the proposed rule, lenders have 

the option of submitting a 

preapplication to obtain Agency input. 

Three of the four programs currently 

allow preapplications, but 

preapplications are not currently part of 

the renewable energy systems and 

energy efficiency improvement project 

guaranteed loan program. 

IV. Request for Comments 

The Agency is interested in receiving 

comments on all aspects of the proposed 

rule. In particular, the Agency is seeking 

comments in the areas listed below. All 

comments should be submitted as 

indicated in the ADDRESSES section of 

this preamble. 

A. Project Financial Metric Criteria 

(Proposed § 5001.6(c)) 

The Agency is seeking to establish 

minimum financial metric criteria that 

each project must first meet in order to 

be eligible under the new program. The 

Agency is seeking comments on the 

proposed section as follows: 

• Are these three criteria reasonable 

and appropriate to help mitigate project 

risk? If not, what other criteria should 

the Agency consider and why? 

• Are the values proposed for the 

criteria reasonable? If not, what value(s) 

should the Agency consider and why? 

B. Other Lender Criteria (Proposed 

§ 5001.9(b)) 

The Agency is seeking to mitigate 

institutional risk by establishing an 

initial set of three criteria for lenders 

who are not regulated or supervised. 

These criteria address minimum net 

worth, liquid assets, and line(s) of 

credit. The Agency is seeking comments 

on these eligibility criteria for these 

‘‘other’’ lenders as follows: 

• Are these three criteria reasonable 

and appropriate to help manage and 

mitigate institutional risk? If not, what 

other criteria should the Agency 

consider and why? 

• Are the values proposed for the 

criteria reasonable? If not, what value(s) 

should the Agency consider and why? 

C. Preferred Lender Status Criteria 

(Proposed § 5001.9(c)(1)(i) Through (iii)) 

To further mitigate institutional risk, 

the Agency is proposing to designate 

approved lenders as ‘‘preferred lenders’’

if they meet three criteria. These criteria 

address the lender’s experience in 

commercial lending, government 

guaranteed commercial lending, 

financing, or other activity under 

similar loan programs; the lender’s 

annual losses depending on how long 

the lender has been in business; and 

instances of negligent loan origination 

or servicing of Federal Government 

loans. The Agency is seeking comments 

on these eligibility criteria for obtaining 

‘‘preferred lender’’ status as follows: 

• Are these three criteria reasonable 

and appropriate to designate approved 

lenders as ‘‘preferred lenders’’? If not, 


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what other criteria should the Agency 

consider and why? 

• Are the values proposed for the 

criteria reasonable? If not, what value(s) 

should the Agency consider and why? 

D. Low Documentation Application 

Content and Criteria (Proposed 

§ 5001.12(b) and (c)) 

The Agency is proposing that 

applications be submitted with either 

full supporting documentation or low 

supporting documentation, with criteria 

proposed for determining when a lender 

may submit a low documentation 

application. The Agency is seeking 

comments on the following areas: 

• Proposed § 5001.12(b) identifies 

five supporting documents (as found in 

proposed § 5001.12(a)(2) through (a)(6)) 

that need to be submitted with the 

application and eight supporting 

documents (as found in proposed 

§ 5001.12(a)(7) through (a)(14)) that do 

not need to be submitted, but which the 

lenders must certify that they possess 

and used in the analysis of the project. 

Is this a reasonable and appropriate 

‘‘split’’ between the documentation to 

be submitted versus the documentation 

to be certified to? If not, what would 

you recommend and why? 

• Proposed § 5001.12(c)(2)(ii)(A) 

through (E) proposes five project criteria 

that must be met in order for lenders 

that do not have preferred lender status 

to submit low documentation 

applications. Are these reasonable and 

appropriate criteria? If not, what other 

criteria should the Agency consider and 

why? Are the values proposed for the 

criteria reasonable? If not, what value(s) 

should the Agency consider and why? 

• Proposed § 5001.12(c)(2)(i) 

proposes to set the guaranteed loan 

value for submitting a low 

documentation application at $5 

million; that is, if the guaranteed loan 

value is less than $5 million, a low 

documentation application may be 

submitted. As stated earlier in the 

preamble, the Agency is proposing to 

limit the guaranteed loan value in order 

to offset Agency loss exposure. The 

Agency is seeking comment on (1) 

whether this is an appropriate value, (2) 

whether the value should vary 

depending on the program (e.g., a 

different threshold value for community 

facilities versus renewable energy 

systems) and (3) whether an alternative 

method (e.g., using an annual average 

loan value; the median loan value) 

should be used. 

• As proposed in subpart B for each 

of the four programs, the Agency is 

further proposing to reduce the 

maximum loan guarantee by 10 

percentage points for low 

documentation applications submitted 

by approved lenders who do not have 

preferred lender status. As stated earlier 

in the preamble, the Agency is 

proposing this reduction in maximum 

loan guarantee in order to offset Agency 

loss exposure. The Agency is seeking 

comment on (1) whether this is an 

appropriate value, (2) whether the value 

should vary depending on the program, 

and (3) whether the reduction should be 

applied to preferred lenders. 

E. Reporting Frequency (Proposed 

§ 5001.4(b)) 

The Agency is seeking comments on 

the frequency for periodic reports and 

for default reports as proposed in 

§ 5001.4(b)(2). For periodic reports, the 

Agency is interested in comments on 

whether more frequent reporting (i.e., 

monthly) would be useful to the Agency 

and what increase level of lender 

burden would be associated with more 

frequent reporting. For default reports, if 

you propose an alternative frequency, 

please address how the alternative 

frequency would allow the Agency to 

maintain up-to-date information on the 

status of the guaranteed loans in default 

or explain why the Agency’s proposed 

information requirements are onerous, 

in order to adequately manage and 

mitigate its guaranteed loan portfolio 

risk and loss exposure. 

List of Subjects 

7 CFR 1779 

Guaranteed loans, Loan programs, 

Waste treatment and disposal, Water 

supply. 

7 CFR 3575 

Community facilities, Guaranteed 

loans, Loan programs. 

7 CFR 4279 and 4280 

Loan programs—Business and 

industry—Rural development 

assistance, Economic development, 

Energy, Direct loan programs, Grant 

programs, Guaranteed loan programs, 

Renewable energy systems, Energy 

efficiency improvements, Rural areas. 

7 CFR Part 5001 

Business and industry, Community 

facility, Energy efficiency improvement, 

Loan programs, Renewable energy, 

Rural Development, Rural areas, Water 

and waste disposal. 

For the reasons set forth in the 

preamble, under the authority at 5 

U.S.C. 301 and 7 U.S.C. 1989, Chapters 

XVII, XXXV, and XLII of title 7 of the 

Code of Federal Regulations are 

proposed to be amended and Chapter L 

is proposed to be established as follows: 

CHAPTER XVII—RURAL UTILITIES 

SERVICE, DEPARTMENT OF 

AGRICULTURE 

PART 1779—[REMOVED] 

1. Part 1779 is removed and reserved. 

CHAPTER XXXV—RURAL HOUSING 

SERVICE, DEPARTMENT OF 

AGRICULTURE 

PART 3575—[REMOVED] 

2. Part 3575 is removed and reserved. 

CHAPTER XLII—RURAL BUSINESSCOOPERATIVE SERVICE AND RURAL 

UTILITIES SERVICE, DEPARTMENT OF 

AGRICULTURE 

PART 4279—GUARANTEED 

LOANMAKING 

3. The authority citation for part 4279, 

continues to read as follows: 

Authority: 5 U.S.C. 301; 7 U.S.C. 1989. 

Subpart B of Part 4279 [Removed and 

Reserved] 

4. Subpart B of part 4279 is removed 

and reserved. 

PART 4280—LOANS AND GRANTS 

5. The authority citation for part 4280, 

continues to read as follows: 

Authority: 7 U.S.C. 8106. 

Subpart B of Part 4280 [Removed and 

Reserved] 

6. Subpart B of part 4280, is removed 

and reserved. 

7. Chapter L consisting of parts 5000 

through 5099 is established and a new 

part 5001 is added to read as follows: 

CHAPTER L—RURAL DEVELOPMENT, 

DEPARTMENT OF AGRICULTURE 

PART 5001—GUARANTEED LOANS 

Subpart A—General Provisions 

Sec. 

5001.1 Purpose. 

5001.2 Definitions and abbreviations. 

5001.3 Agency authorities. 

5001.4 Oversight and monitoring. 

5001.5 Forms, regulations, and instructions. 

Basic Eligibility Provisions 

5001.6 Project eligibility. 

5001.7 Unauthorized projects and purposes. 

5001.8 Borrower eligibility. 

5001.9 Lender eligibility and designation. 

5001.10 [Reserved] 

Basic Guarantee Application Provisions 

5001.11 Guarantee application process. 

5001.12 Guarantee application content. 

5001.13–5001.14 [Reserved] 

Basic Lender Provisions 

5001.15 Lender responsibilities—General. 


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5001.16 Lender responsibilities—

Origination. 

5001.17 Lender responsibilities—Servicing. 

5001.18–5001.24 [Reserved] 

Basic Borrower Provisions 

5001.25 Borrower responsibilities. 

5001.26–5001.29 [Reserved] 

Basic Guarantee and Loan Provisions 

5001.30 

General. 

5001.31 Guaranteed loan requirements. 

5001.32 Conditional commitment for 

guarantee. 

5001.33 Conditions precedent to issuance 

of Loan Note Guarantee. 

5001.34 Issuance of the guarantee. 

5001.35 Alterations to loan instruments. 

5001.36 Reorganizations. 

5001.37 Sale or assignment of guaranteed 

loan. 

5001.38 Termination of Loan Note 

Guarantee. 

5001.39–5001.100 [Reserved] 

Subpart B—Program Specific Provisions 

5001.101 Community Facilities Program. 

5001.102 Water and Waste Disposal 

Facilities Program. 

5001.103 Business and Industry Program. 

5001.104 Renewable Energy Systems and 

Energy Efficiency Improvements 

Program. 

5001.105–5001.200 [Reserved] 

Authority: 5 U.S.C. 301; 7 U.S.C. 

1926(a)(1); 7 U.S.C. 1932(a); 7 U.S.C. 8106. 

Subpart A—General Provisions 

§ 5001.1 Purpose. 

This part regulates the making, 

guaranteeing, holding, servicing, and 

liquidating of Rural Development 

guaranteed loans. 

§ 5001.2 Definitions and abbreviations. 

(a) General definitions. The following 

definitions are applicable to the terms 

used in this part. 

Agency. The Rural Housing Service or 

successor for the programs it 

administers; the Rural Utilities Service 

or successor for the programs it 

administers; and the Rural Business—

Cooperative Service or successor for the 

programs it administers. 

Agricultural producer. An individual 

or entity directly engaged in the 

production of agricultural products, 

including crops (including farming); 

livestock (including ranching); forestry 

products; hydroponics; nursery stock; or 

aquaculture, whereby 50 percent or 

greater of their gross income is derived 

from the operations. 

Applicant. The entity that is seeking 

a loan guarantee under this part. 

Arm’s length transaction. A 

transaction between ready, willing, and 

able disinterested parties who are not 

affiliated with or related to each other 

and have no security, monetary, or 

stockholder interest in each other. 

Assignment guarantee agreement. A 

signed, Agency-approved agreement 

between the Agency, the lender, and the 

holder setting forth the terms and 

conditions of an assignment of a 

guaranteed portion of a loan or any part 

thereof. 

Assurance agreement. A signed, 

Agency-approved agreement between 

the Agency and the lender that assures 

the Agency that the lender is in 

compliance with and will continue to be 

in compliance with Title VI of the Civil 

Rights Act of 1964, 7 CFR part 15, and 

Agency regulations promulgated there 

under. 

Biomass. Any organic material, 

excluding paper that is commonly 

recycled and unsegregated solid waste, 

that is available on a renewable or 

recurring basis, including agricultural 

crops; trees grown for energy 

production; wood waste; wood residues; 

plants, aquatic plants and grasses; 

natural fibers; animal waste and other 

waste materials; and fats, oils, and 

greases, including recycled fats, oils, 

and greases. 

Borrower. The entity that borrows 

money from the lender, including any 

party or parties liable for the guaranteed 

loan except guarantors. 

Business plan. A comprehensive 

document that clearly describes the 

applicant’s ownership structure and 

management experience including, if 

applicable, discussion of a parent, 

affiliates, and subsidiaries; a discussion 

of how the applicant will operate the 

proposed project, including, at a 

minimum, a description of the business 

and project, the products and services to 

be provided, pro forma financial 

statements for a period of 2 years, 

including balance sheet, income and 

expense, and cash flows, and the 

availability of the resources necessary to 

provide those product and services. 

Collateral. The asset(s) pledged by the 

borrower in support of the loan. 

Commercially available. A system 

that has a proven operating history of 

viability of at least one year, specific to 

the proposed application. Such a system 

is based on established design, and 

installation procedures and practices. 

Professional service providers, trades, 

large construction equipment providers, 

and labor are familiar with installation 

procedures and practices. Proprietary 

and balance of system equipment and 

spare parts are readily available. Service 

is readily available to properly maintain 

and operate the system. An established 

warranty exists for parts, labor, and 

performance. 

Community support. Sufficient 

evidence of the area to be served that 

there is enough demand and support for 

the service or facility to make the 

project economically viable. 

Conditional commitment for 

guarantee. An Agency-approved form to 

the lender that the loan guarantee it has 

requested is approved subject to the 

completion of all conditions and 

requirements contained in the 

commitment as set forth by the Agency. 

Conflicts of interest. Conflicts of 

interest include, but are not limited to, 

distribution or payment of guaranteed 

loan funds or award of project contracts 

to an individual owner, partner, 

stockholder, or beneficiary of the lender 

or borrower or an immediate family 

member of such an individual when 

such individual will retain any portion 

of the ownership of the lender or 

borrower. 

Cooperative organization. Any entity 

that is not legally chartered as a 

cooperative and that is owned and 

operated for the benefit of its members, 

including the manner in which it 

distributes its dividends and assets, 

provided those members are not 

employees of the organization. 

Debt coverage ratio. The ratio 

obtained when dividing the net 

operating income by a business’s annual 

debt service. The annual debt service 

equals the annual total of all interest 

and principal paid for all loans on a 

business. 

Default. The condition that exists 

when a borrower is not in compliance 

with the promissory note, the loan 

agreement, or other related documents 

evidencing the loan. 

Delinquent loan. A loan for which a 

scheduled loan payment has not been 

received by the due date or within any 

grace period as stipulated in the 

promissory note and loan agreement. 

Eligible project costs. Those expenses 

approved by the Agency for the project. 

Energy assessment. A report 

conducted by an experienced energy 

assessor, certified energy manager or 

professional engineer assessing energy 

cost and efficiency. The report identifies 

and provides a savings and cost analysis 

of low-cost/no-cost measures, estimates 

overall costs and expected energy 

savings from the funded improvements, 

and dollars saved per year and provides 

an estimate of the anticipated weightedaverage payback period in years. 

Energy audit. A report conducted by 

a Certified Energy Manager or 

Professional Engineer that focuses on 

potential capital-intensive projects and 

involves detailed gathering of field data 

and engineering analysis. The report 

will provide detailed project costs and 


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savings information with a high level of 

confidence sufficient for major capital 

investment decisions similar to but in 

more detail than an energy assessment. 

Energy efficiency improvement. A 

product or process installed in a facility, 

or building, that reduces energy 

consumption. 

Essential community facility. The 

physical structure financed or the 

resulting service provided to primarily 

rural residents that combined or 

severally must: 

(i) Perform or fulfill a function 

customarily provided by a local unit of 

government; 

(ii) Be a public improvement needed 

for the orderly development of a rural 

community; 

(iii) Not include a project that benefits 

a single individual or group of single 

individuals as opposed to a class within 

a community; 

(iv) Not include commercial or 

business undertakings (except for 

limited authority for industrial parks); 

(v) Be within the area of jurisdiction 

or operation for eligible public bodies or 

a similar local rural service area of a 

not-for-profit corporation; and 

(vi) Be located in a rural area. 

Existing business. A business that has 

been in operation for at least one full 

year. Mergers or changes in business 

name or legal type of currently 

operating businesses are considered to 

be existing businesses as long as the 

business purpose has not changed 

significantly. 

Feasibility study. An analysis of the 

economic, market, technical, financial, 

and management capabilities of a 

proposed project or business in terms of 

its expectation for success. 

Future recovery. Funds collected by 

lender after final loss claim. 

Guaranteed loan. A loan made and 

serviced by a lender for which the 

Agency has issued a Loan Note 

Guarantee. 

High-impact business. A business that 

offers specialized products and services 

that permit high prices for the products 

produced, may have a strong presence 

in international market sales, may 

provide a market for existing local 

business products and services, and 

which is locally owned and managed. 

Holder. The person or entity, other 

than the lender, who owns all or part of 

the guaranteed portion of the loan with 

no servicing responsibilities. 

Immediate family. Individuals who 

are closely related by blood or by 

marriage, or within the same household, 

such as a spouse, parent, child, brother, 

sister, aunt, uncle, grandparent, 

grandchild, niece, or nephew. 

Interim financing. A temporary or 

short-term loan made with the clear 

intent that it will be repaid through 

another loan, cash, or other financing 

mechanism. 

Lender. The organization making, 

servicing, and collecting the loan that is 

guaranteed under the provisions of this 

part. 

Lender’s agreement. The Agencyapproved signed agreement between the 

Agency and the lender setting forth the 

lender’s loan responsibilities under an 

issued Loan Note Guarantee. 

Lender’s analysis. The analysis and 

evaluation of the credit factors 

associated with each guarantee 

application to ensure loan repayment 

through the use of credit document 

procedures and an underwriting process 

that is consistent with industry 

standards and the lender’s written 

policy and procedures. 

Loan agreement. The Agencyapproved agreement between the 

borrower and lender containing the 

terms and conditions of the loan and the 

responsibilities of the borrower and 

lender. 

Loan classification. The process by 

which loans are examined and 

categorized by degree of potential loss 

in the event of default. 

Loan Note Guarantee. The Agencyapproved agreement containing the 

terms and conditions of the guarantee of 

an identified loan. 

Loan-to-value ratio. The ratio of the 

dollar amount of a loan to the dollar 

value of the collateral pledged as 

security for the loan. 

Local government. A county, 

municipality, town, township, village, 

or other unit of general government 

below the State level. The term also 

includes tribal governments when tribal 

lands are within the service area. 

Market value. The amount for which 

property would sell for its highest and 

best use at a voluntary sale in an arm’s 

length transaction. 

Negligent loan origination. 

(i) The failure of a lender to perform 

those services that a reasonably prudent 

lender would perform in originating its 

own portfolio of unguaranteed loans; or 

(ii) The failure of the lender to 

perform its origination responsibilities 

in accordance with the origination 

policies and procedures in use by the 

lender at the time of the loan. 

(iii) The term includes the concepts of 

failure to act, not acting in a timely 

manner, or acting in a manner contrary 

to the manner in which a reasonably 

prudent lender would act. 

Negligent loan servicing. 

(i) The failure of a lender to perform 

those services that a reasonably prudent 

lender would perform in servicing and 

liquidating its own portfolio of 

unguaranteed loans; or 

(ii) The failure of the lender to 

perform its servicing responsibilities in 

accordance with its current servicing 

policies and procedures. 

(iii) The term includes the concepts of 

failure to act, not acting in a timely 

manner, or acting in a manner contrary 

to the manner in which a reasonably 

prudent lender would act. 

Participation. Sale of an interest in a 

loan by the lender wherein the lender 

retains the note, collateral securing the 

note, and all responsibility for loan 

servicing and liquidation. 

Permanent working capital. Liquid 

assets available to support a business’s 

long-term operations and growth. 

Person. Any individual, corporation, 

company, foundation, association, labor 

organization, firm, partnership, society, 

joint stock company, group of 

organizations, or State or local 

government. 

Post-application. The date that the 

Agency receives an essentially 

completed application. An ‘‘essentially 

completed’’ application is an 

application that contains all parts 

necessary for the Agency to determine 

applicant and project eligibility, to score 

the application, and to conduct the 

technical evaluation. 

Pre-commercial technology. 

Technology that has emerged through 

the research and development process 

and has technical and economic 

potential for commercial application, 

but is not yet commercially available. 

Preliminary engineering report. A 

document normally prepared by the 

owner’s consulting engineer that 

describes the owner’s present situation, 

analyzes alternatives, and proposes a 

specific course of action from an 

engineering and environmental 

perspective. For further details see RUS 

Bulletins 1780–2, –3, –4, and –5. 

Promissory Note. A legal instrument 

that a borrower signs promising to pay 

a specific amount of money at a stated 

time or on demand. ‘‘Note’’ or 

‘‘Promissory Note’’ shall also be 

construed to include ‘‘Bond’’ or other 

evidence of debt where appropriate. 

Protective advances. Advances made 

by the lender for the purpose of 

preserving and protecting the collateral 

where the debtor has failed to, and will 

not or can not, meet obligations to 

protect or preserve collateral. 

Public body. A municipality, county, 

or other political subdivision of a State; 

a special purpose district; or an Indian 

tribe on a Federal or State reservation or 

other Federally recognized Indian tribe 

or an organization controlled by any of 

the above. 


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Regulated or supervised lender. A 

lender that is subject to credit 

examination and supervision by an 

appropriate agency of the United States 

or a State that supervises and regulates 

credit institutions. 

Renewable energy. Energy derived 

from a wind, solar, biomass, or 

geothermal source; or hydrogen derived 

from biomass or water using wind, 

solar, biomass, or geothermal energy 

sources. 

Renewable energy system. A system 

that produces or produces and delivers 

usable energy from a renewable energy 

source. 

Report of loss. An Agency-approved 

form used by lenders when reporting a 

loss under an Agency guarantee. 

Rural or rural area. 

(i) For purposes of providing Business 

and Industry, or Renewable Energy/ 

Energy Efficiency loan guarantees, Rural 

and Rural area are defined as any area 

of a State other than a city, town, or 

Census Designated Place that has a 

population of more than 50,000 

inhabitants, according to the latest 

decennial census of the United States, 

and the contiguous and adjacent 

urbanized area. 

(ii) For the purpose of providing 

Community Facilities loan guarantees, 

the terms ‘‘rural’’ and ‘‘rural area’’ mean 

a city, town, or unincorporated area 

with a population of not more than 

20,000 inhabitants according to the 

latest decennial census. 

(iii) For the purpose of providing 

Water and Waste Disposal loan 

guarantees, Rural or Rural area is 

defined as any area not in a city, town, 

or unincorporated area with a 

population in excess of 10,000 

inhabitants, according to the latest 

decennial census of the United States. 

(iv) For the purposes of this 

definition, cities and towns are 

incorporated population centers with 

definite boundaries, local selfgovernment, and legal powers set forth 

in a charter granted by the State. For 

Puerto Rico, Census Designated Place 

(CDP), as defined by the U.S. Census 

Bureau, will be used as the equivalent 

to city or town. The appropriate 

population limit by applicable program 

will apply to the population of CDP. 

Small agricultural producer. An 

agricultural producer producing 

agricultural products with a gross 

market value of less than $600,000 in 

the preceding year. 

Small business. An entity is 

considered a small business in 

accordance with the Small Business 

Administration’s (SBA) small business 

size standards by the North American 

Industry Classification System (NAICS) 

found in Title 13 CFR part 121. A 

private entity, including a sole 

proprietorship, partnership, 

corporation, cooperative (including a 

cooperative qualified under section 

501(c)(12) of the Internal Revenue 

Code), and an electric utility, including 

a Tribal or governmental electric utility, 

that provides service to rural consumers 

on a cost-of-service basis without 

support from public funds or subsidy 

from the Government authority 

establishing the district, provided such 

utilities meet SBA’s definition of small 

business. These entities must operate 

independent of direct Government 

control. With the exception of the 

entities described above, all other notfor-profit entities are excluded. 

Startup business. A business that is a 

newly opened establishment that has 

been in operation for less than one full 

year. Newly-formed entities building 

ground-up facilities, even if there are 

affiliated businesses doing the same 

kind of business, are new businesses. 

State. Any of the 50 States, the 

Commonwealth of Puerto Rico, the 

District of Columbia, 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. 

State Bond Banks and State Bond 

Pools. An entity authorized by the State 

to issue State debt instruments and 

utilize the funds received to finance 

projects that qualify for a guaranteed 

loan under this part. 

Substantive change. Any change in 

the purpose of the loan, the financial 

condition of the borrower, or the 

collateral, that might jeopardize loan 

performance. 

Total project cost. The sum of all costs 

associated with a completed project. 

Transfer and assumption. The 

conveyance by a debtor to an assuming 

party of the assets, collateral, and 

liabilities of the loan in return for the 

assuming party’s binding promise to pay 

the outstanding debt. 

Unincorporated area. A Census 

Designated Place. 

Water and waste disposal facility. A 

physical structure or series of structures 

used to provide water and waste 

disposal services. Such structures 

include, but are not necessarily limited 

to, those for rural drinking water, 

sanitary sewage, solid waste disposal, 

and storm wastewater disposal. 

(b) Abbreviations. The following are 

applicable to this part: 

RUS—Rural Utilities Service. 

SBA—Small Business Administration. 

§ 5001.3 Agency authorities. 

(a) Exception authority. Except as 

specified in paragraphs (a)(1) through 

(4) of this section, the applicable 

Administrator may, on a case-by-case 

basis, make exceptions to any 

requirement or provision of this part, if 

such exception is necessary to 

implement the intent of the authorizing 

statute in a time of national emergency 

or in accordance with a Presidentially 

declared disaster, or when such an 

exception is in the best financial 

interests of the Federal Government and 

is otherwise not in conflict with 

applicable law. 

(1) Applicant and borrower eligibility. 

No exception to applicant or borrower 

eligibility can be made. 

(2) Project eligibility. No exception to 

project eligibility can be made. 

(3) Rural area definition. No 

exception to the definition of rural area, 

as defined in § 5001.2, can be made. 

(4) Term length. No exception to the 

maximum length of the loan term, as 

specified in § 5001.31(c), can be made. 

(b) Appeal rights. A person may seek 

a review of an Agency decision under 

this part from the appropriate Agency 

official that oversees the program in 

question or appeal to the National 

Appeals Division in accordance with 7 

CFR part 11 of this title. 

§ 5001.4 Oversight and monitoring. 

(a) General. The Agency will conduct 

oversight and monitoring of all lenders 

involved in any manner with any 

guarantee under this program to ensure 

compliance with this Part including 

ensuring lenders continue to meet the 

criteria for being an approved lender or 

a preferred lender. Such oversight and 

monitoring will include, but is not 

limited to, reviewing lender records and 

meeting with lenders. In addition, the 

Agency will review all approved and 

preferred lenders for eligibility at least 

every two years. 

(b) Reports and notifications. The 

Agency will require lenders to submit to 

the Agency reports and notifications to 

facilitate the Agency’s oversight and 

monitoring. These reports and 

notifications include, but are not 

necessarily limited to: 

(1) Periodic reports regarding the 

condition of its Agency guaranteed loan 

portfolio (including borrower status and 

loan classification) and any material 

change in the general financial 

condition of the lender since the last 

periodic report to be submitted 

semiannually. 

(2) If a loan goes into default, the 

lender shall provide a monthly default 

report in a form approved by the 

Agency. 


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(3) Notification within 5 days of: 

(i) any loan agreement violation by 

any borrower, including when a 

borrower is 30 days past due or is 

otherwise in default; and 

(ii) any permanent or temporary 

reduction in interest rate. 

§ 5001.5 Forms, regulations, and 

instructions. 

Copies of all forms, regulations, and 

instructions referenced in this part may 

be obtained through the Agency. 

Basic Eligibility Provisions 

§ 5001.6 Project eligibility. 

To be eligible for a guaranteed loan 

under this part, at a minimum, a project 

must meet each of the requirements 

specified in paragraphs (a) through (d) 

of this section. 

(a) The project must benefit a rural 

area. 

(b) The project must meet the 

ownership, control, and revenue 

requirements specified in subpart B of 

this part. 

(c) The project must meet the 

following financial metric criteria: 

(1) A debt coverage ratio of 1.0 or 

higher; 

(2) A cash equity of 10 percent for 

guarantees on loans to existing 

businesses and 20 percent cash equity 

for guarantees on loans to startup 

businesses as determined using 

Generally Accepted Accounting 

Principles, or, as specified in Subpart B, 

community support; and 

(3) A loan-to-value ratio of no more 

than 1.0. 

(d) For projects that are determined by 

a service area, boundaries for the 

proposed service area must be chosen in 

such a way that no user or area will be 

excluded because of race, color, 

religion, sex, marital status, age, 

disability, or national origin. This does 

not preclude: 

(1) Financing or constructing projects 

in phases when it is not practical to 

finance or construct the entire project at 

one time, and 

(2) Financing or constructing facilities 

where it is not economically feasible to 

serve the entire area, provided economic 

feasibility is determined on the basis of 

the entire system or facility and not by 

considering the cost of separate 

extensions to, or parts thereof. 

Additionally, the borrower must 

publicly announce a plan for extending 

service to areas not initially receiving 

service. Also, the borrower must 

provide written notice to potential users 

located in the areas not to be initially 

served. 

§ 5001.7 Unauthorized projects and 

purposes. 

Loans guaranteed under this part 

must not be used for any projects other 

than those authorized in subpart B of 

this part. In addition, loan proceeds 

must not be used for: 

(a) Investment or arbitrage, or 

speculative real estate investment. 

(b) Racetracks, golf courses, water 

parks, ski slopes, or similar recreational 

facilities listed in the annual Notice of 

Funds Availability. 

(c) Any business deriving more than 

10 percent of its annual gross revenue 

from gambling activity. 

(d) Prostitution or businesses deriving 

income from activities of a prurient 

sexual nature. 

(e) Any line of credit, lease payment, 

or loan made by other Federal agencies. 

(f) Any project eligible for Rural 

Rental Housing and Rural Cooperative 

Housing loans under sections 515, 521, 

and 538 of the Housing Act of 1949, as 

amended. 

(g) Any facility used primarily for the 

purpose of housing Federal or State 

agencies. 

(h) Finders’, packagers’, or loan 

brokers? fees. 

(i) Any business deriving income from 

the sale of illegal drugs, drug 

paraphernalia, or any other illegal 

product. 

(j) Rental for the use of equipment or 

machinery owned by the applicant. 

(k) The payment of a judgment. 

(l) Any project resulting in a conflict 

of interest. 

(m) Properties to be used for 

commercial rental when the borrower 

has no control over tenants and services 

offered except for industrial-site 

infrastructure development and limited 

sections of essential community 

facilities when the activity in the leased 

space is related to and enhances the 

primary purpose for which the facility 

is being established by the borrower. 

(n) Any project located within the 

Coastal Barriers Resource System that 

does not qualify for an exception as 

defined in section 6 of the Coastal 

Barriers Resource Act, 16 U.S.C. 3501 et 

seq. 

(o) Any project located in a special 

flood or mudslide hazard area as 

designated by the Federal Emergency 

Management Agency in a community 

that is not participating in the National 

Flood Insurance Program unless the 

project is an integral part of a 

community’s flood control plan. 

(p) Any other similar project or 

purpose that the Agency determines is 

ineligible for funding under this part 

and publishes in a Federal Register 

notice. 

§ 5001.8 Borrower eligibility. 

(a) Eligible entities. To be eligible, a 

prospective borrower must meet the 

requirements specified in paragraphs 

(a)(1) and (2) of this section and in 

subpart B to this part, as applicable. 

(1) Citizenship. Individual borrowers 

must be citizens of the United States 

(U.S.), or reside in the U.S. after legal 

admittance for permanent residence. 

Entities other than individuals must be 

at least 51 percent owned by persons 

who are U.S. citizens or are legally 

admitted permanent residents residing 

in the U.S. 

(2) Legal authority and responsibility. 

Each borrower must have, or obtain, the 

legal authority necessary to construct, 

operate, and maintain the proposed 

facility and services and to obtain, give 

security for, and repay the proposed 

loan. 

(b) Ineligible entities. A borrower will 

be considered ineligible for a guarantee 

due to an outstanding judgment 

obtained by the U.S. in a Federal Court 

(other than U.S. Tax Court), is 

delinquent on the payment of Federal 

income taxes, is delinquent on Federal 

debt, or is debarred or suspended from 

receiving Federal assistance. 

§ 5001.9 Lender eligibility and designation. 

Only lenders approved by the Agency 

are eligible to participate in the 

guaranteed loan programs described in 

this part. 

(a) Regulated and supervised lenders. 

Any regulated or supervised lender who 

is not otherwise debarred or suspended 

by the Federal government is eligible to 

participate in the guaranteed loan 

programs described in subpart B to this 

part. 

(1) The requirements for a regulated 

or supervised lender that does not have 

an existing portfolio of guaranteed loans 

with the Agency to be eligible to 

participate are identified in paragraph 

(a)(1)(i) of this section. The 

requirements for a regulated or 

supervised lender that has an existing 

portfolio of guaranteed loans with the 

Agency to be eligible to participate are 

identified in paragraph (a)(1)(ii) of this 

section. 

(i) A regulated or supervised lender 

that does not have an existing portfolio 

of guaranteed loans with the Agency 

must apply for lender approval to the 

Agency in the State in which it is 

chartered. The lender must also submit 

with the application a copy of its 

current written policies and procedures 

for loan origination and servicing. A 

lender must be in good standing with its 

regulator to be approved for 

participation. 


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(ii) A regulated or supervised lender 

that has an existing portfolio of 

guaranteed loans with the Agency is 

considered ‘‘proved’’ for participation 

and is not required to submit an 

application for lender approval. Such 

lender, however, is required, as 

specified by the Agency, to certify that 

it is in good standing with its regulator 

and submit copies of its current written 

policies and procedures for loan 

origination and servicing. 

(2) If approved, the lender may sign 

a Lender’s Agreement with the Agency. 

If the Lender’s Agreement is executed 

by the lender and the Agency, the 

lender may submit an application for 

guarantee in any State in which it is 

authorized to do business. Approval for 

participation constitutes approval to 

participate in all guaranteed loan 

programs described in this part. 

(3) Approved status is maintained as 

long as the lender remains in good 

standing with its regulator, in 

conformance with this part, or until 

otherwise notified by the Agency. 

(b) Other lenders. Any lender not 

eligible in paragraph (a) of this section 

that wishes to originate or service a new 

loan under this part, who is not 

otherwise debarred or suspended by the 

Federal government, may apply for 

approved status, as specified in 

paragraph (b)(1) of this section, 

provided it has a minimum net worth of 

$2.5 million; liquid assets of at least 

$500,000; and an Agency-approved line 

of credit that totals $5 million or more. 

(1) Application for lender approval. 

The lender must submit an application 

to the Rural Development State Office in 

the State in which the lender is 

chartered providing the following 

information: 

(i) Evidence showing that the lender 

has the necessary capital, resources, and 

funding capacity to successfully meet its 

responsibilities; 

(ii) Copies of any license, charter, or 

other evidence of legal authority to 

engage in the proposed loan making and 

servicing activities; 

(iii) Certificate(s) of good standing 

from the States in which they intend to 

conduct business; and 

(iv) Description of its lending history 

and experience, including: 

(A) evidence of demonstrated 

expertise in loan origination, making, 

securing, servicing, and collecting loans; 

length of time in the commercial 

lending business; experience with 

government guaranteed lending, 

particularly within any of the subject 

programs; the range and volume of 

lending and servicing activity; the 

current status of the loan portfolio; the 

lender’s commercial loan fee structure; 

and the level of experience of the 

lender’s management, lending, and 

servicing staff; 

(B) copies of the lender’s credit 

evaluation policy and procedures 

documents, including evidence of the 

criteria stated in § 5001.16(b); the 

lender’s loan origination and servicing 

policies and procedures, including 

delineating ratio requirements and 

minimum reserves, delineating 

collection, loan document compliance, 

post-closing financial statement 

analysis, verification of payment of 

taxes and insurance, and maintenance 

of liens; and audited financial 

statements not more than 1 year old; 

(C) documented sources of funds for 

funding and closing loans; and 

(D) office location(s) and proposed 

lending area(s). 

(2) Agency review. The Agency will 

review the application and request 

additional clarification or information if 

necessary. If approved, the lender may 

sign a Lender’s Agreement with the 

Agency. If the Lender’s Agreement is 

executed by the lender and the Agency, 

the lender may submit an application 

for guarantee in any State in which it is 

authorized to do business. Approved 

status is maintained as long as the 

lender meets or exceeds minimum 

Agency requirements. 

(c) Lender designation. A lender that 

meets the criteria specified in paragraph 

(a) or (b) of this section will be 

designated as a ‘‘Rural Development 

Approved lender’’ under this part. A 

Rural Development approved lender 

may submit to the Agency at any time, 

including when submitting its 

application for lender approval, an 

application for designation as a 

Preferred lender. No Rural Development 

approved lender will be afforded 

preferred lender status until approved 

by the Agency. 

(1) The criteria the Agency will use to 

determine if a Rural Development 

approved lender qualifies for preferred 

lender status are: 

(i) Current level of experience in 

commercial lending, government 

guaranteed commercial lending, 

financing, or other activity under 

similar loan programs; 

(ii) If the lender has been making 

commercial loans for 5 or more years, 

has had no annual losses in the last 5 

years greater than 1 percent of its 

outstanding commercial loan portfolio 

or if the lender has been making 

commercial loans for less than 5 years, 

has had no losses for the length of time 

the lender has been making commercial 

loans; and 

(iii) Having no more than one instance 

of Federal government negligent loan 

origination or servicing. 

(2) If approved as a Preferred lender, 

the lender has preferred lender status in 

each State. 

(3) Preferred lender status is 

maintained as long as the lender 

continues to meet each of the criteria 

under which it was approved as 

specified in paragraph (c)(1) of this 

section. Maintenance of preferred lender 

status will be based on paragraphs 

(c)(1)(i), (c)(1)(ii)(A), and (c)(1)(iii) for 

all lenders who have been making 

commercial loans for 5 years or more, 

including those lenders who received 

Preferred lender status when having less 

than 5 years of commercial loan 

experience. 

§ 5001.10 [Reserved] 

Basic Guarantee Application 

Provisions 

§ 5001.11 Guarantee application process. 

(a) Beginning the process. Any lender 

may submit a pre-application or a full 

application to begin an application for 

guarantee. 

(1) Pre-application. Based on the 

information in the pre-application, the 

Agency will make an informal 

assessment of the eligibility of the 

prospective borrower and project. The 

Agency will provide written informal 

comments regarding the preapplication’s strengths and weaknesses. 

The Agency’s assessment may change 

based on subsequently submitted 

information, is solely advisory in 

nature, does not obligate the Agency to 

approve a guarantee request, and is not 

considered a favorable or adverse 

decision by the Agency. 

(2) Guarantee application. For each 

guarantee request, the lender must 

submit to the Agency an application 

that is in conformance with § 5001.12. 

(b) Guarantee application evaluation. 

All loan guarantee applications will be 

evaluated according to this part. 

(1) The Agency will notify the lender 

in writing of its decision. 

(2) In the evaluation of the 

application, the Agency may require the 

lender to obtain additional assistance in 

those areas where the lender does not 

have the requisite expertise to originate 

or service the loan. 

§ 5001.12 Guarantee Application Content. 

All guarantee applications must 

contain the information specified in 

either paragraph (a) or (b) of this 

section, as determined under paragraph 

(c), and as specified in subpart B of this 

part. 


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(a) Full documentation applications. 

Full documentation applications must 

contain the following: 

(1) Agency-approved application 

forms; 

(2) Lender’s analysis and credit 

evaluation (conforming to § 5001.16(b)); 

(3) Environmental information 

required by the Agency to conduct its 

environmental reviews (as specified in 

§ 5001.16(h)); 

(4) Technical reports and energy 

audits (as specified in subpart B); 

(5) A copy of Form 10–K, ‘‘Annual 

Report Pursuant to Section 13 or 15(d) 

of the Securities Exchange Act of 1934,’’

for companies listed on major stock 

exchanges and/or subject to the 

Securities and Exchange Commission 

regulations; 

(6) Proposed loan agreement between 

the lender and borrower; 

(7) Energy assessments (as specified 

in subpart B); 

(8) Appraisals (as specified in 

§ 5001.16(c)); 

(9) Business plan, unless the 

information is contained in the 

feasibility study; 

(10) Feasibility study (as specified in 

subpart B); 

(11) If the application is for 5 or more 

residential units or for for-profit nursing 

homes or assisted-living centers, an 

Affirmative Fair Housing Marketing 

Plan that is in conformance with 7 CFR 

1901.203(c)(3); 

(12) Preliminary engineering report 

(as specified in subpart B); 

(13) Current credit reports or 

equivalent on the prospective borrower 

and any other person liable for the debt, 

except for public bodies; and 

(14) If the guaranteed loan is $1 

million or more, the most recent audited 

financial statements of the borrower or 

if the guaranteed loan is less than $1 

million, the most recent audited or 

unaudited financial statements of the 

borrower. 

(15) If the lender is not yet a Rural 

Development approved lender, the 

application for lender approval 

specified in § 5001.9(a) or (b), as 

applicable. 

(b) Low documentation applications. 

Low documentation applications must 

contain: 

(1) The information specified in 

paragraphs (a)(1) through (6) of this 

section; and 

(2) Certification that the lender 

possesses and has reviewed the 

information specified in paragraphs 

(a)(7) through (14) of this section and 

has identified and reported to the 

Agency any significant risks that would 

jeopardize the repayment of the loan. 

(3) If the lender is not yet a Rural 

Development approved lender, the 

application for lender approval 

specified in § 5001.9(a) or (b), as 

applicable, must also be submitted. 

(c) Determination of documentation 

level. 

(1) Startup business. All applications 

for startup businesses must be full 

documentation applications. 

(2) Existing business. 

(i) Rural Development approved 

lenders that have preferred lender status 

may submit either a full or low 

documentation application for a loan 

guarantee request of $5 million or less. 

Only a full documentation application 

will be acceptable for a loan guarantee 

request of greater than $5 million. 

(ii) Rural Development approved 

lenders that do not have preferred 

lender status must submit full 

documentation applications unless the 

project meets the criteria specified in 

paragraphs (c)(2)(ii)(A) through (E) of 

this section. If the project meets each of 

these criteria, as applicable, the lender 

may submit either a low or full 

documentation application. 

(A) Debt coverage ratio of 1.25 or 

higher. 

(B) Cash equity of at least 25 percent 

of eligible project costs or, as specified 

in Subpart B, community support. 

(C) A minimum FICO (Fair Isaac and 

Company) credit score of 680 or 

equivalent industry credit score for each 

individual who signs the promissory 

note or guarantees repayment of the 

loan. 

(D) A loan-to-value ratio of no more 

than 0.8. 

(E) Loan guarantee portion of the loan 

at or below $5 million. 

§§ 5001.13–5001.14 [Reserved] 

Basic Lender Provisions 

Lender responsibilities—

General.§ 5001.15 

(a) Lenders must ensure that 

proposals for facilities seeking a 

guarantee under this part comply with 

all Federal, State, and local laws and 

regulatory rules that are in existence 

and that affect the project, the borrower, 

or lender activities. 

(b) Any lender involved in any 

manner with any guarantee under this 

part must cooperate fully with all 

oversight and monitoring efforts of the 

Agency or its representatives. 

(c) Any action or inaction on the part 

of the Agency does not relieve the 

lender of its responsibilities to originate 

and service the loan guaranteed under 

this part. 

§ 5001.16 Lender responsibilities—

Origination. 

(a) General. The lender is responsible 

for originating all loans in accordance 

with their current written policies and 

procedures and with the requirements 

of this part. Where a lender’s current 

written policies and procedures address 

a corresponding requirement in this 

part, the lender must comply with 

whichever is more stringent. The 

Agency may require, at its discretion, an 

independent credit risk analysis (e.g., a 

credit rating or assessment) on the loan 

without consideration of the guarantee. 

(b) Credit evaluation. For all 

applications for guarantee, the lender 

must prepare a credit evaluation that is 

consistent with Agency standards found 

in this part and with the current written 

policies and procedures of the lender 

submitting the application. Where a 

lender’s current written policies and 

procedures address a corresponding 

requirement in this part, the lender 

must comply with whichever is more 

stringent. An acceptable credit 

evaluation must: 

(1) Use credit documentation 

procedures and an underwriting process 

that are consistent with generally 

accepted commercial lending practices, 

and the lender’s own policies, 

procedures, and lending practices, and 

(2) Include an analysis of the credit 

factors associated with each guarantee 

application to ensure loan repayment, 

including consideration of each of the 

following five elements. 

(i) Credit worthiness. Those financial 

qualities that generally impel the 

prospective borrower to meet its 

obligations as demonstrated by its credit 

history. 

(ii) Cash flow. A prospective 

borrower’s ability to produce sufficient 

cash to repay the loan as agreed. 

(iii) Capital. The financial resources 

that the prospective borrower currently 

has and those it is likely to have when 

payments are due. The prospective 

borrower must be adequately 

capitalized. 

(iv) Collateral. The assets pledged by 

the prospective borrower in support of 

the loan. Adequacy will be based on 

market value. For the purchase of 

cooperative stock, the lender must at 

least secure the loan with a lien on the 

stock acquired with loan funds, an 

assignment of any patronage refund, and 

the full and unconditional personal or 

corporate guarantee of the borrower. 

(v) Conditions. The general business 

environment and status of the 

prospective borrower’s industry. 

(c) Appraisals. Real property 

collateral will be appraised by the 

lender in accordance with the 

appropriate guidelines contained in the 

current Standards 1 and 2 of the 

Uniform Standards of Professional 


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Appraisal Practices or successor 

standards. 

(1) All appraisals used to establish the 

fair market value of the real property 

must not be more than 1 year old, 

except as otherwise specified in subpart 

B of this part. 

(2) All appraisals will include 

consideration of the potential effects 

from a release of hazardous substances 

or petroleum products or other 

environmental hazards on the market 

value of the collateral. 

(d) Personal and corporate 

guarantees. Unconditional personal and 

corporate guarantees are part of the 

collateral for the loan, but are not 

considered in determining whether a 

loan is adequately secured for loan 

making purposes. 

(1) Agency-approved personal and 

corporate guarantees for the full term of 

the loan and at least equal to the 

guarantor’s percent interest in the 

borrower, times the loan amount are 

required from those owning greater than 

a 20 percent interest in the borrower, 

unless the lender documents to the 

Agency’s satisfaction that collateral, 

equity, cashflow, and profitability 

indicate an above-average ability to 

repay the loan. The guarantors will 

execute an Agency-approved 

unconditional guarantee form. When 

warranted by an Agency assessment of 

potential financial risk, Agencyapproved guarantees may also be 

required of parent, subsidiaries, or 

affiliated companies (owning less than a 

20 percent interest in the borrower) and 

require security for any guarantee 

provided under this section. 

(2) Exceptions to the requirement for 

personal guarantees must be requested 

by the lender and concurred by the 

Agency approval official on a case-bycase basis. The lender must document 

that collateral, equity, cashflow, and 

profitability indicate an above-average 

ability to repay the loan. 

(e) Design requirements. The lender 

must ensure that all projects are 

designed utilizing accepted 

architectural and engineering practices, 

taking into consideration any Agency 

comments when the facility is being 

designed, and conform to applicable 

Federal, State, and local codes and 

requirements. The lender must also 

ensure that the planned project will be 

fully constructed, within the original 

budget, to facilitate completion of the 

loan purpose and will be suitable, once 

completed, for the borrower’s needs in 

accordance with the borrower’s loan 

application. 

(f) Monitoring requirements. The 

lender must monitor the progress of 

construction and ensure that 

construction conforms to applicable 

Federal, State, and local code 

requirements and proceeds in 

accordance with the approved plans, 

specifications, and contract documents. 

The lender must also ensure that funds 

are used for eligible project costs. The 

lender must expeditiously report any 

problems in project development to the 

Agency. 

(g) Compliance with other Federal 

laws. Lenders must comply with other 

applicable Federal laws including Equal 

Employment Opportunities, Americans 

with Disabilities Act, Equal Credit 

Opportunity Act, Fair Housing Act, and 

the Civil Rights Act of 1964. With regard 

to the Civil Rights Act of 1964, data 

must be made available to conduct 

compliance reviews in accordance with 

7 CFR 1901.204 of this title or successor 

regulation; initial reviews will be 

conducted after the Assurance 

Agreement is signed and all subsequent 

reviews every 3 years thereafter for 

loans; and the last review will occur 3 

years after the date of loan closing. 

(h) Environmental responsibilities. 

The lender must ensure that the 

borrower has: 

(1) Provided the necessary 

environmental information to enable the 

Agency to undertake its environmental 

review process in accordance with 

subpart G of either 7 CFR part 1940 or 

7 CFR part 1794 or successor 

regulations, including the provision of 

all required Federal, State, and local 

permits; 

(2) complied with any mitigation 

measures required by the Agency; and 

(3) not taken any actions or incurred 

any obligations with respect to the 

proposed project that would either limit 

the range of alternatives to be 

considered during the Agency’s 

environmental review process or which 

would have an adverse effect on the 

environment. 

(i) Conflicts of interest. The lender 

must report to the Agency all 

appearances of conflicts of interest. 

§ 5001.17 Lender’s responsibilities—

Servicing. 

(a) General. The lender is responsible 

for servicing the loan in accordance 

with the Lender’s Agreement, this part, 

and their current written policies and 

procedures. Where a lender’s current 

written policies and procedures address 

a corresponding requirement in this part 

or in the Lender’s agreement, the lender 

must comply with whichever is more 

stringent. The lender must ensure that 

the borrower has obtained, and will 

maintain for the life of the loan, all 

necessary insurance coverage 

appropriate to the proposed project. If 

the Agency determines that the lender is 

not in compliance with its servicing 

responsibilities, the Agency reserves the 

right to take any action the Agency 

determines necessary to protect the 

Agency’s interests with respect to the 

loan. If the Agency exercises this right, 

the lender must cooperate with the 

Agency. Any cost to the Agency 

associated with such action will be 

assessed against the lender. 

(b) Certification. The lender will 

certify in the Lender’s Agreement that it 

will service the guaranteed loan 

according to Agency requirements and 

the lender’s current written servicing 

policies and procedures and that, where 

the lender’s current written policies and 

procedures address corresponding 

requirements of this part, it will comply 

with whichever is more stringent. When 

applicable, the lender will require an 

audit of the borrower in accordance 

with Office of Management and Budget 

requirements. 

(c) Collateral inspection and release. 

The lender must inspect the collateral as 

often as necessary to properly service 

the loan. The Agency may require the 

lender to obtain prior Agency approval 

of any release of any collateral. The 

Agency may, at its discretion, require an 

appraisal of the remaining collateral in 

cases in which the Agency determines 

that it may be adversely affected by the 

release of the collateral. The appraisal 

will be at the expense of the borrower 

and must meet the requirements of 

§ 5001.16(c). In all cases, the sale or 

release of collateral must be based on an 

arm’s length transaction. 

(d) Transfers and assumptions. 

(1) General. Any time that a third 

party assumes a loan guaranteed under 

this part, it shall be processed and 

approved by the Agency as if it were a 

new loan guarantee. 

(2) Processing transfers and 

assumptions. The lender may release 

the transferor (including any guarantor) 

from liability, regardless of the amount 

of the loan being transferred or 

assumed. 

(i) Loan terms cannot be changed 

unless previously approved in writing 

by the Agency with the concurrence of 

the holder and transferor (including 

guarantor if it has not been released 

from personal liability). Any new loan 

term cannot exceed those authorized in 

this part as measured from the date the 

loan was initially guaranteed. 

(ii) In the case of a transfer and 

assumption of less than the outstanding 

balance, the lender (if holding the 

guaranteed portion) may file an 

estimated Report of Loss with respect to 

the difference. 


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(3) Transfer fees. The Agency may 

charge the lender a nonrefundable 

transfer fee at the time of a transfer 

application. The Agency will set the 

amount of the transfer fee in an annual 

notice of funds availability. 

(e) Mergers. The Agency may 

withdraw the guarantee when a 

borrower participates in a merger. 

(f) Subordination of lien position. A 

subordination of the lender’s lien 

position must be requested in writing by 

the lender and concurred with in 

writing by the Agency in advance of the 

subordination. Agency concurrence 

requires that the Agency’s financial 

interest will be enhanced; collateral will 

remain adequate to secure the loan; the 

lien to which the guaranteed loan is 

subordinated will be for a fixed dollar 

limit and that lien priorities remain for 

the portion of the loan that was not 

subordinated; and subordination to a 

revolving line of credit does not exceed 

1 year. 

(g) Repurchases from holder(s). The 

holder may make written demand on 

the lender or the Agency to repurchase 

the unpaid guarantee portion of the loan 

in the case of borrower default or failure 

of the lender to pay the holder its prorata share. When either the lender or the 

Agency determines that repurchase is 

necessary to adequately service the loan, 

the holder must sell the guaranteed 

portion to the requesting entity. 

(1) Repurchases by lender. The lender 

must respond to the holder’s demand 

within 30 days and will notify the 

Agency in writing of its decision, 

including notifying the Agency in 

writing of all repurchases it makes. 

When repurchased, the lender will 

accept an assignment without recourse 

from the holder upon repurchase. All 

repurchases must be for an amount 

equal to the holder’s interest in the 

unpaid principal balance of the 

guaranteed portion and accrued interest 

less the lender’s servicing fee and cover 

the principal and interest on the 

guaranteed loan accruing only up to 90 

days after the date of the demand by the 

holder. 

(2) Repurchases by Agency. When the 

Agency repurchases the loan, the holder 

must submit a specific written demand 

to the Agency, along with appropriate 

documentation. The Agency will be 

subrogated to all rights of the holder 

and, subject to satisfactory 

documentation, will purchase the 

unpaid principal and interest of the 

guaranteed portion to date of repurchase 

less the lender’s servicing fee within 30 

days after receipt of the demand. The 

lender may not charge the Agency any 

fees unless provided for in the 

Assignment Guarantee Agreement. The 

lender shall use a form approved by the 

Agency to send the guaranteed loan 

payments to the Agency on all loans 

repurchased by the Agency from 

holders. Any purchase by the Agency 

does not change, alter, or modify any of 

the lender’s obligations to the Agency 

arising from the loan or guarantee and 

does not waive any of the Agency’s 

rights against the lender, borrower, or 

guarantor. 

(h) Additional expenditures and 

loans. The lender will not make 

additional expenditures or new loans to 

a borrower with an outstanding loan 

guaranteed under this part without 

obtaining prior written Agency 

approval. 

(i) Lender failure. In the event a 

lending institution fails, the Agency will 

provide instruction to the successor 

entity on a case-by-case basis. Such 

instructions may include that the 

Agency may determine to service the 

entire loan or the guaranteed portion of 

the loan. In the event no successor 

entity can be determined, the Agency 

reserves the right to enforce the 

provisions of the loan documents on 

behalf of the lender or to purchase the 

lender’s interest in the loan. 

(j) Delinquent loans. The lender must 

service delinquent loans in accordance 

with the Lender’s Agreement, its current 

servicing standards, and reasonable and 

prudent lending standards. If a borrower 

is delinquent more than 30 days, the 

lender must coordinate with the Agency 

and the borrower to implement 

appropriate curative actions to resolve 

the problem. Any curative action that 

affects the return to the holder must 

receive the holder’s concurrence. Any 

change in the repayment schedule must 

be limited to the remaining life of the 

collateral. Any loan performing in 

accordance with a curative action will 

no longer be delinquent. 

(k) Protective advances. Protective 

advances are allowed only when they 

are necessary to preserve the value of 

the collateral and must be reasonable 

with respect to the outstanding loan 

amount and the value of the collateral 

being preserved. Protective advances 

will not include attorneys’ fees or 

advances in lieu of additional loans. 

The lender must obtain written Agency 

approval for any protective advance that 

will singularly or cumulatively amount 

to more than $200,000 or 10 percent of 

the guaranteed loan, whichever is less. 

(l) Liquidation. The lender may 

liquidate a loan when one or more 

incidents of default or third party 

actions occur that the borrower can not 

or will not cure or eliminate within a 

reasonable period of time. The Agency 

reserves the right to unilaterally 

conclude that liquidation is necessary 

and require the lender to assign the 

security instruments to the Agency. 

(1) Liquidation by the lender. The 

lender must develop, in consultation 

with the Agency, a liquidation plan to 

determine the best course of action. This 

plan must include all aspects of 

liquidation, including but not limited to 

reports to the Agency, protection of 

collateral, loss payment, transmission of 

proceeds to the Agency, and future 

recovery. The lender must submit its 

liquidation plan to the Agency at least 

30 days before implementing the plan. 

The Agency must be notified of any 

changes to or deviations from the plan. 

(2) Compromise settlement and 

release of personal guarantors. A 

compromise settlement may be 

considered at any time, except as 

provided in subpart B to this part. 

Before a guarantor is released from 

liability, the Agency must concur with 

the lender. Upon agreement, the lender 

may proceed to effect a settlement 

compromise. 

(m) Litigation. In all litigation 

proceedings involving the borrower, the 

lender is responsible for protecting the 

rights of the lender or the Agency with 

respect to the loan, and keeping the 

Agency adequately and regularly 

informed, in writing, of all aspects of 

the proceedings. If the Agency 

determines that the lender is not 

adequately protecting the rights of the 

lender or the Agency with respect to the 

loan, the Agency reserves the right to 

take any legal action the Agency 

determines necessary to protect the 

rights of the lender, on behalf of the 

lender, or the Agency with respect to 

the loan. If the Agency exercises this 

right, the lender must cooperate with 

the Agency. Any cost to the Agency 

associated with such action will be 

assessed against the lender. 

(n) Loss calculations and payment. 

Losses shall be calculated by 

determining the total guaranteed loan 

amount including principal, protective 

advances, and accrued interest. From 

this amount will be deducted prior lien 

amounts owed through the settlement 

date, the net value of collateral, and 

other funds that can be applied to the 

debt. The maximum loss allowed is the 

lower of the percent of loss guarantee 

time the foregoing or the sum of 

principal advances and accrued interest. 

The amount due the lender is adjusted 

to take into account protective advances 

and interest. 

(1) During the course of any 

reorganization plan, the lender will 

request and revise estimated loss 

payments using Agency-approved 

forms. The estimated loss claim, as well 


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52658 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

as any revisions to this claim, will be 

accompanied by documentation to 

support the claim. 

(2) In a chapter 9 or chapter 11 

reorganization, the lender must obtain 

an independent appraisal of the 

collateral if so directed by the Agency. 

The Agency and the lender will share 

the appraisal fee equally. 

(3) Final settlement of liquidation will 

be made with the lender after the 

collateral is liquidated (unless otherwise 

designated as a future recovery) or after 

settlement and compromise of all 

parties has been completed. The Agency 

retains the right to recover losses paid 

under the guarantee from any liable 

party. 

(i) If the lender takes title to collateral, 

any loss will be based on the collateral 

value at the time the lender obtains title. 

(ii) When the lender is conducting the 

liquidation and owns any of the 

guaranteed portion of the loan, it may 

request an estimated loss payment by 

submitting an estimate of loss that will 

occur in connection with liquidation of 

the loan. 

(iii) Within 30 days after liquidation 

of all collateral, except for certain 

unsecured personal or corporate 

guarantees as provided for in this 

section, the lender must prepare a final 

report of loss and submit it to the 

Agency. The Agency will not guarantee 

interest beyond this 30-day period other 

than for the period of time it takes the 

Agency to process the loss claim. Before 

Agency approval of any final loss report, 

the lender must account for all funds, 

disposition of the collateral, and costs 

incurred, and must provide any other 

information necessary for successful 

completion of the liquidation. 

(iv) After a final loss has been paid by 

the Agency, any future funds recovered 

by the lender will be pro-rated between 

the Agency and the lender based on the 

original percentage of guarantee even if 

the Loan Note Guarantee has been 

terminated. 

(v) In a bankruptcy, the lender will 

submit an estimated loss claim based on 

the final orders of the bankruptcy 

court’s direction. The Agency will pay 

the lender the estimated final loss based 

on these directions. 

(4) The lender shall submit with each 

loss claim the current version of its 

written policies and procedures for 

origination and servicing. 

§§ 5001.18–5001.24 [Reserved] 

Basic Borrower Provisions 

§ 5001.25 Borrower responsibilities. 

(a) Federal, State, and local 

regulations. Borrowers must comply 

with all Federal, State, and local laws 

and rules that are in existence and that 

affect the project including, but not 

limited to 

(1) Land use zoning; 

(2) Health, safety, and sanitation 

standards as well as design and 

installation standards; and 

(3) Protection of the environment and 

consumer affairs. 

(b) Permits, agreements, and licenses. 

Borrowers must obtain all permits, 

agreements, and licenses that are 

applicable to the project. 

(c) Insurance. The borrower is 

responsible for maintaining all hazard, 

flood, liability, worker compensation, 

and personal life insurance, when 

required, on the project. 

(d) Access to borrower’s records. 

Upon request by the Agency, the 

borrower will permit representatives of 

the Agency (or other agencies of the U.S. 

Department of Agriculture authorized 

by that Department or the U.S. 

Government) to inspect and make 

copies of any of the records of the 

borrower pertaining to any Agency 

guaranteed loan. Such inspection and 

copying may be made during regular 

office hours of the borrower or at any 

other time agreed upon between the 

borrower and the Agency. 

§ 5001.26–5001.29 [Reserved] 

Basic Guarantee and Loan Provisions 

§ 5001.30 General. 

(a) Underwriting. All loans guaranteed 

by the Agency must be underwritten in 

accordance with the credit evaluation 

requirements specified in § 5001.16(b). 

(b) Conditions of guarantee. A loan 

guarantee under this part will be 

evidenced by a Loan Note Guarantee 

issued by the Agency. Each lender will 

execute a Lender’s Agreement. 

(1) The entire loan will be secured by 

the same security with equal lien 

priority for the guaranteed and 

unguaranteed portions of the loan. The 

guaranteed portion will be paid first and 

given preference and priority over the 

unguaranteed portion. 

(2) The lender will remain mortgagee 

or secured party of record 

notwithstanding the fact that another 

party may hold a portion of the loan. 

(3) The holder of a guaranteed portion 

shall have all rights of payment, as 

defined in the Loan Note Guarantee to 

the extent of the portion purchased. The 

lender will remain bound by all 

obligations under the Loan Note 

Guarantee, Lender’s Agreement, and 

Agency program regulations. 

(4) The lender will receive all 

payments of principal and interest on 

the entire loan and will promptly remit 

to each holder a pro-rata share, less any 

lender servicing fee. 

(5) No loan guaranteed by the Agency 

under this part will be conditioned on 

any requirement that the borrower 

accept or receive electric service from 

any particular utility, supplier, or 

cooperative. 

(c) Full faith and credit. A guarantee 

under this part constitutes an obligation 

supported by the full faith and credit of 

the United States and is not contestable 

except for fraud or misrepresentation by 

the lender or holder, as appropriate, 

when the lender or holder has actual 

knowledge, participates in, or condones 

such fraud or misrepresentation. 

(1) A note that provides for the 

payment of interest on interest will not 

be guaranteed and any Loan Note 

Guarantee or Assignment Guarantee 

Agreement attached to, or relating to, a 

note which provides for payment of 

interest on interest is void. 

(2) The guarantee will not be 

enforceable by the lender to the extent 

any loss is occasioned by the violation 

of usury laws, negligent loan origination 

or servicing, or failure to obtain the 

required security regardless of the time 

at which the Agency acquires 

knowledge of the foregoing. Any losses 

occasioned will not be enforceable by 

the lender to the extent that loan funds 

are used for purposes other than those 

specifically approved by the Agency in 

its Conditional Commitment for 

Guarantee. 

(3) When in the hands of a holder, the 

Loan Note Guarantee or Assignment 

Guarantee Agreement shall not cover 

interest accruing 90 days after the 

holder has demanded repurchase by the 

lender. When in the hands of a holder, 

the Loan Note Guarantee or Assignment 

Guarantee Agreement shall not cover 

interest accruing 90 days after the 

lender or Agency has requested the 

holder to surrender the evidence of debt 

for repurchase. 

(4) The Agency will guarantee 

payment as follows: 

(i) To any holder, 100 percent of any 

loss sustained by the holder on the 

guaranteed portion of the loan and on 

interest due on such portion. 

(ii) To the lender, the lesser of: 

(A) Any loss sustained by the lender 

on the guaranteed portion, including 

principal and interest evidenced by the 

notes or assumption agreements and 

secured advances for protection and 

preservation of collateral made with the 

Agency’s authorization; or 

(B) The guaranteed principal 

advanced to or assumed by the borrower 

and any interest due thereon. 

(d) Soundness of guarantee. All loans 

guaranteed under this part must be 


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financially sound and feasible, with 

reasonable assurance of repayment. 

(e) Rights and liabilities. When a 

guaranteed portion of a loan is sold to 

a holder, the holder shall succeed to all 

payments of the lender under the Loan 

Note Guarantee to the extent of the 

portion purchased. A guarantee and 

right to require purchase will be directly 

enforceable by a holder notwithstanding 

any fraud or misrepresentation by the 

lender or any unenforceability of the 

guarantee by the lender, except for fraud 

or misrepresentation of which the 

holder had actual knowledge at the time 

it became the holder or in which the 

holder participates or condones. The 

lender shall not represent a Conditional 

Commitment of Guarantee as a 

guarantee. The Agency reserves the right 

to collect from the lender any payments 

made to the holder that would not have 

been payable to the lender had they 

been the holder. 

(f) Reduction of loss claims payable. 

Negligent loan origination or servicing 

will result in reduction of loss claims 

payable under the guarantee to the 

lender if any losses have occurred as the 

result of such negligence. The extent of 

the reduction, which could be a total 

reduction, of the loss claims payable, 

will depend on the extent of the losses 

occasioned as the result of the negligent 

loan origination and servicing. 

(g) Write-downs. Debt write-downs for 

an existing borrower where the same 

principals retain control of and 

decision-making authority for the 

business are prohibited. 

§ 5001.31 Guaranteed loan requirements. 

(a) Interest rates. Interest rates may be 

fixed or variable or a combination of 

both, as long as they are legal. Variable 

interest rates must be tied to an 

acceptable published index and the 

lender must incorporate the provision 

for adjustment of payment installments 

into the Note. When combined fixed 

and variable rates are used, the lender 

will provide the Agency with the overall 

effective interest rate for the entire loan. 

(1) Negotiated rates. Interest rates, 

interest rate caps, and incremental 

adjustment limitations will be 

negotiated between the lender and the 

borrower. 

(2) Different rates on guaranteed and 

unguaranteed portion of the loan. If the 

lender and borrower agree, the interest 

rate on the guaranteed portion of a loan 

may differ from the rate on the 

unguaranteed portion provided: 

(i) The rate on the unguaranteed 

portion is equal to or below the market 

rate and does not exceed that currently 

being charged on loans for similar 

purposes to borrowers under similar 

circumstances; and 

(ii) the rate on the guaranteed portion 

does not exceed the rate on the 

unguaranteed portion unless the rate on 

the guaranteed portion is fixed and the 

unguaranteed portion is variable. 

(b) Interest rate changes. Any change 

in the interest rate between issuance of 

the Conditional Commitment for 

Guarantee and issuance of the Loan 

Note Guarantee must be approved in 

writing by the Agency and shown as an 

amendment to the Conditional 

Commitment for Guarantee, and are 

subject to the restrictions specified in 

paragraphs (b)(1) and (2) of this section. 

(1) Reductions. The borrower, lender, 

and holder (if any) may collectively 

effect a permanent or temporary 

reduction in the interest rate on the 

guaranteed loan at any time during the 

life of the loan by their written 

agreement, subject to the conditions 

specified in paragraphs (b)(1)(i) through 

(iii) of this section. The lender must 

keep sufficient records to allow the 

Agency to calculate any loss at the 

reduced interest rate. The lender must 

notify the Agency of all permanent 

interest rate reductions, as specified in 

§ 5001.4(b)(3)(ii). 

(i) After a permanent reduction, the 

Loan Note Guarantee will only cover 

losses of interest at the reduced interest 

rate. 

(ii) In a final loss settlement when 

qualifying rate changes are made with 

the required written agreements and 

notification, the interest will be 

calculated for the periods the given rates 

were in effect. The lender must 

maintain records that adequately 

document the accrued interest claimed. 

(iii) The lender is responsible for the 

legal documentation of interest-rate 

changes by an endorsement or any other 

legally effective amendment to the 

promissory note; however, no new notes 

may be issued. Copies of all legal 

documents must be provided to the 

Agency. 

(2) Increases. Increases in interest 

rates are not permitted except when the 

increase results from normal 

fluctuations in approved variable 

interest rates, or the increase returns the 

rate to the rate prior to the temporary 

reduction. 

(c) Term length. The loan term will be 

based on the use of proceeds, the useful 

economic life of the assets being 

financed, and the borrower’s repayment 

ability. In no event may the term exceed 

40 years. 

(d) Loan schedule and repayment. 

Repayment will be structured in 

accordance with this section and the 

Loan Agreement, and will be due and 

payable in accordance with the Note. 

Only loans that require a periodic 

payment schedule that will retire the 

debt over the term of the loan without 

a balloon payment will be guaranteed. 

Lenders must ensure that the principal 

balance of a guaranteed loan is properly 

amortized within the prescribed loan 

maturity. 

(e) Maximum loan amounts. The 

maximum amount that may be 

guaranteed will be determined on a 

program-by-program basis and will be 

published each year in the Federal 

Register. 

(f) Maximum percent of guarantee. 

The maximum guarantee is specified in 

subpart B for each guaranteed loan 

program covered by this part. 

(g) Fees. Each year, the Agency will 

establish, and publish in a Federal 

Register notice, the guarantee fee and 

renewal fee for each guaranteed loan 

program. A guarantee fee and a renewal 

fee will be assessed on each loan, as 

specified in the Federal Register notice. 

Both the guarantee fee and the renewal 

fee are nonrefundable. 

(1) Guarantee fee. The guarantee fee 

will be paid to the Agency by the lender 

at the time the Guarantee is issued. The 

fee may be passed on to the borrower. 

(2) Renewal fee. As applicable, the 

renewal fee is assessed annually, is 

based on a fixed fee rate established at 

the beginning of the loan, and will be 

calculated on the unpaid guaranteed 

principal balance as of close of business 

on December 31 of each year. The fee 

will be billed to the lender and may be 

passed on to the borrower. 

(h) Lender fees. The lender may levy 

reasonable, routine, and customary 

charges and fees for the guaranteed loan 

provided they are similar to those 

charged other applicants for the same 

type of loan for which a non-guaranteed 

borrower would be assessed. Late 

payment charges will not be covered by 

the Loan Note Guarantee. Such charges 

may not be added to the principal and 

interest due under any guaranteed note. 

§ 5001.32 Conditional commitment for 

guarantee. 

Upon approval of a loan guarantee, 

the Agency will issue a Conditional 

Commitment for Guarantee to the lender 

containing conditions under which the 

Guarantee will be issued. The lender 

must complete and sign the Acceptance 

of Conditions and return a copy to the 

Agency. The lender may propose 

alternate conditions for Agency 

consideration. 

§ 5001.33 Conditions precedent to 

issuance of Loan Note Guarantee. 

The Loan Note Guarantee will be 

issued once all of the conditions 


pwalker on PROD1PC71 with PROPOSALS2
52660 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

specified in the Conditional 

Commitment for Guarantee have been 

met and each of the following has 

occurred: 

(a) Payment of the appropriate 

guarantee fee; 

(b) The lender has advised the Agency 

of any plans to sell or assign any part 

of the loan as provided in the Lender’s 

Agreement; and 

(c) The lender has certified that the 

prospective borrower has obtained all 

necessary insurance appropriate to the 

proposed project. 

§ 5001.34 Issuance of the guarantee. 

The Agency, at its sole discretion, will 

determine if the conditions within the 

Conditional Commitment for Guarantee 

have been met. The Agency, at its sole 

discretion, will determine whether or 

not to issue the guarantee. 

(a) Loan closing. At loan closings, the 

lender must provide the lender’s 

certifications, guarantee fee, and, if 

applicable, secondary market sale 

document. 

(b) Issuance. Upon the lender’s 

compliance with requirements of the 

Conditional Commitment for Guarantee, 

the Agency will issue the Loan Note 

Guarantee and Assignment Guarantee 

Agreement. 

(c) Refusal to execute Loan Note 

Guarantee. If the Agency determines 

that it can not execute the Loan Note 

Guarantee, the Agency will promptly 

inform the lender of the reasons and 

give the lender a reasonable period 

within which to satisfy the objections. If 

the lender satisfies the objections within 

the time allowed, the guarantee will be 

issued. 

(d) Replacement of Loan Note 

Guarantee or Assignment Guarantee 

Agreement. If the Loan Note Guarantee 

or Assignment Guarantee Agreement 

has been lost, stolen, destroyed, 

mutilated, or defaced, the Agency may 

issue a replacement to the lender or 

holder upon receipt from the lender of 

a notarized certificate of loss and an 

indemnity bond acceptable to the 

Agency. If the holder is the United 

States, a Federal Reserve Bank, a 

Federal Government corporation, a State 

or Territory, or the District of Columbia, 

an indemnity bond is not required. 

§ 5001.35 Alterations of loan instruments. 

Under no circumstances shall the 

lender alter or approve any alterations 

of the Loan Note Guarantee or any other 

loan instrument without the prior 

written approval of the Agency. 

§ 5001.36 Reorganizations. 

(a) Change in borrower prior to 

closing. Any change in borrower 

ownership or organization prior to the 

issuance of the Loan Note Guarantee 

must meet program eligibility 

requirements and be approved by the 

Agency prior to the issuance of the 

Conditional Commitment for Guarantee. 

Once the Conditional Commitment for 

Guarantee is issued, no substitution of 

borrower(s) or change in the form of 

legal entity will be approved, except 

that a change in the legal entity may be 

approved when the original borrower is 

replaced with substantially the same 

individuals or officers with the same 

interest as originally approved. 

(b) Transfer of lender prior to 

issuance of the Loan Note Guarantee. 

Prior to issuance of a Loan Note 

Guarantee, the Agency may approve the 

transfer of an outstanding Conditional 

Commitment for Guarantee to a new 

eligible lender, provided the present 

lender makes the request in writing and 

no substantive changes have occurred in 

the borrower, project, loan agreement, or 

Conditional Commitment for Guarantee. 

The new lender must be approved 

under this part and must execute a new 

application for guarantee in 

conformance with this part. 

(c) Substitution of lender after 

issuance of the Loan Note Guarantee. 

After the issuance of a Loan Note 

Guarantee, the lender shall not be 

substituted without the prior written 

approval of the Agency. A substitution 

of the lender must be requested in 

writing by the borrower, the proposed 

substitute lender, and the original 

lender if still in existence. The Agency 

may approve the substitution of a lender 

if the new lender is Rural Development 

approved; agrees in writing to acquire 

title to any unguaranteed portion of the 

loan held by the original lender; and 

assumes all original loan requirements 

and lender responsibilities. The Agency 

will not pay any loss or share in any 

costs with a lender who is not in 

compliance with this section. 

§ 5001.37 Sale or assignment of 

guaranteed loan. 

(a) General. The lender may sell all or 

part of the guaranteed portion of the 

loan, subject to the conditions specified 

in paragraphs (a)(1) through (6) of this 

section. 

(1) Any sale or assignment by the 

lender of the guaranteed portion of the 

loan must be accomplished in 

accordance with the conditions in the 

Lender’s Agreement. 

(2) The lender may obtain 

participation in the loan under its 

normal operating procedures; however, 

the lender must retain sufficient interest 

to perform its duties under this part. 

(3) The lender must not sell or 

participate any amount of the 

guaranteed, or non-guaranteed, portion 

of the loan to the borrower or members 

of the borrower’s immediate family, the 

borrower’s officers, directors, 

stockholders, other owners, or a parent, 

subsidiary, or affiliate. 

(4) Disposition of the guaranteed 

portion of a loan may not be made prior 

to full disbursement, completion of 

construction, and acquisition of real 

estate and equipment without the prior 

written approval of the Agency. 

(5) If the lender desires to market all 

or part of the guaranteed portion of the 

loan at, or subsequent to, loan closing, 

the loan must not be in default. 

(6) The lender may retain all or part 

of the unguaranteed portion of the loan. 

However, if the lender does not have 

preferred lender status, the lender is 

required to retain a minimum of 5 

percent of the total loan amount in its 

portfolio. The amount required to be 

retained must be of the unguaranteed 

portion of the loan and can not be 

participated. Lenders may sell the 

remaining amount of the unretained 

amount of the loan only through 

participation. 

(b) Termination of lender servicing 

fee. The lender’s servicing fee will stop 

when the Agency purchases the 

guaranteed portion of the loan from the 

secondary market. No such servicing fee 

may be charged to the Agency and all 

loan payments and collateral proceeds 

received will be applied first to the 

guaranteed loan. 

§ 5001.38 Termination of Loan Note 

Guarantee. 

Each Loan Note Guarantee issued 

under this part will terminate 

automatically upon: 

(a) Full payment of the guaranteed 

loan; or 

(b) full payment of any loss obligation 

or negotiated loss settlement except for 

future recovery provisions and 

payments made as a result of the Debt 

Collection Improvement Act (DCIA). 

After final payment of claims to lenders 

and/or holders, the Agency will retain 

all funds received as the result of the 

DCIA; or 

(c) written request from the lender to 

the Agency that the guarantee will 

terminate 30 days after the date of the 

request, provided that the lender holds 

all of the guaranteed portion, and the 

original Loan Note Guarantee is 

returned to the Agency to be canceled. 


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Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 52661 

§§ 5001.39–5001.100 [Reserved] 

Subpart B—Program-Specific 

Provisions 

§ 5001.101 Community Facilities Program. 

(a) Project eligibility. To be eligible for 

a Community Facility guaranteed loan, 

the project must meet the criteria 

specified in paragraphs (a)(1) through 

(4) of this section and in § 5001.6. 

(1) Eligible projects. All loans 

guaranteed with community facility 

funding shall be for: 

(i) Essential community facilities; 

(ii) community services or 

community-based social, recreational or 

cultural services; 

(iii) transportation infrastructure and 

support; 

(iv) hydroelectric generating facilities 

or supplemental and supporting 

structures for rural electrification only 

with advance written approval from the 

Agency; 

(v) natural gas distribution systems; 

(vi) acquisition of land and site 

preparation for industrial parks; or 

(vii) refinancing any loan. Except for 

the refinancing of Agency direct loans, 

refinancing of other loans will be 

limited to a minority portion of the 

guaranteed loan. 

(2) Facilities for public use. All 

facilities financed under the provisions 

of this section shall be for public 

purposes. 

(i) Facilities will be installed to serve 

any user within the service area who 

desires service and can be feasibly and 

legally served. 

(ii) The lender will determine that, 

when feasibly and legally possible, 

inequities within the proposed project’s 

service area for the same type service 

proposed (e.g., gas distribution systems) 

will be remedied by the owner on, or 

before, completion of the project. 

Inequities are defined as unjustified 

variations in availability, adequacy, or 

quality of service. User rate schedules 

for portions of existing systems or 

facilities that were developed under 

different financing, rates, terms, or 

conditions do not necessarily constitute 

inequities. 

(3) Leased space. A facility will 

remain eligible for CF funding provided 

it has less than 25 percent of its floor 

space occupied by ineligible 

organizations or activities. The 

ineligible organization and the ineligible 

commercial activity must be related to 

and enhance the primary purpose for 

which the facility is being established 

by the borrower. 

(4) Facility location. Facilities must be 

located in rural areas, except: 

(i) For utility services such as natural 

gas or hydroelectric serving both rural 

and non-rural areas. In such cases, 

Agency funds may be used to finance 

only that portion serving rural areas, 

regardless of facility location. 

(ii) For telecommunication projects, 

the part of the facility located in a nonrural area must be necessary to provide 

the essential services to rural areas. 

(5) Demonstration of community 

support. A project may demonstrate 

community support in lieu of the cash 

equity required under § 5001.6(c)(2) or 

§ 5001.12(c)(2)(ii)(B), as applicable. 

(i) Evidence of community support in 

the form of a certification of support for 

each project or facility from any affected 

local government body is required. 

(ii) With the exceptions of essential 

community facilities owned by a local 

public body or a Federally-recognized 

Indian tribe serving local residents or 

tribal members, a certificate of support 

must be obtained from each affected 

local government within the service area 

of the facility. The certificate of support 

must be signed by an authorized official 

of the local government. 

(iii) The certificate of support should 

include sufficient information to 

determine that a community facility will 

provide needed services to the 

community and will have no adverse 

impact on other community facilities 

providing similar services. The 

organization is required to provide 

sufficient information to affected local 

governments as may be needed to obtain 

the certificate of support. 

(b) Unauthorized projects and 

purposes. Loan funds may not be used 

to finance: 

(1) Properties to be used for 

commercial rental when the borrower 

has no control over tenants and services 

offered except for industrial-site 

infrastructure development; 

(2) Facilities that are 25 percent or 

more for the purpose of housing Federal 

or State agencies; 

(3) Community antenna television 

services or facilities; 

(4) Telephone systems; 

(5) Facilities that are not modest in 

size, design, and cost; and 

(6) Finder’s and packager’s fees. 

(c) Borrower eligibility. In addition to 

the requirements specified in subpart A 

of this part, the following requirements 

also apply where applicable: 

(1) YMCA, YWCA, Girl Scouts, and 

Boy Scouts are eligible applicant 

organizations. 

(2) A private not-for-profit essential 

community facility (other than utilities) 

must have significant ties with the local 

rural community. Such ties are 

necessary to ensure to the greatest 

extent possible that a facility under 

private control will carry out a public 

purpose and continue to primarily serve 

rural areas. Ties may be evidenced by 

items such as: 

(i) Association with, or controlled by, 

a local public body or bodies or broadly 

based ownership and controlled by 

members of the community. 

(ii) Substantial public funding 

through taxes, revenue bonds, or other 

local government sources, or substantial 

voluntary community funding such as 

would be obtained through a 

community-wide funding campaign. 

(3) Credit not available elsewhere. The 

Agency must determine that the 

borrower is unable to obtain the 

required credit without the loan 

guarantee from private, commercial, or 

cooperative sources at reasonable rates 

and terms for loans for similar purposes 

and periods of time. 

(d) Additional application 

documentation requirements—

feasibility study. A feasibility study by 

a qualified independent consultant may 

be required by the Agency. 

(e) Additional guarantee- and loanrelated requirements. 

(1) Funding limit. The principal 

amount of a Community Facility loan 

guaranteed under this section may not 

exceed $50 million. 

(2) Maximum percent of guarantee. 

The maximum loan guarantees issued to 

a Rural Development approved lender 

with Community Facilities funding are 

specified in the table to paragraph (e). 


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52662 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

TABLE TO PARAGRAPH (E).—MAXIMUM LOAN GUARANTEE PERCENTAGES FOR COMMUNITY FACILITIES GUARANTEED

LOANS

Type of rural development 

approved lender Type of application 

Guaranteed loan amount 

$5 million 

or less 

(percent) 

Over $5 million 

up to and including $10 million 

(percent) 

Over $10* 

million 

(percent) 

Without preferred lender status ................ Low documentation .................................. 80 na na 

Full documentation ................................... 90 90 90 

With preferred lender status ..................... Low documentation .................................. 90 na na 

Full documentation ................................... 90 90 90 

na = not applicable. 

* Per § 5001.101(e)(1), the maximum guaranteed loan amount is $50 million. 

(3) Parity lien requirements. 

Whenever both a Community Facilities 

guaranteed loan and a Community 

Facilities direct loan are utilized to 

finance a single project, the Agency will 

require a parity lien, unless the lender 

can not meet its regulatory 

requirements. 

§ 5001.102 Water and Waste Disposal 

Facilities Program. 

(a) Project eligibility. To be eligible for 

a Water and Waste Disposal Facilities 

guaranteed loan, the project must meet 

the criteria specified in paragraphs (a)(1) 

through (3) of this section and in 

§ 5001.6. 

(1) Eligible projects and costs. All 

loans guaranteed with Water and Waste 

Disposal funding shall be for: 

(i) A water or wastewater disposal 

facility; 

(ii) payment of other utility 

connection charges as provided in 

service contracts between utility 

systems; or 

(iii) refinancing any loan. Except for 

the refinancing of Agency direct loans, 

refinancing of other loans will be 

limited to a minority portion of the 

guaranteed loan. 

(2) Facilities for public use. All 

facilities financed under the provisions 

of this section shall be for public 

purposes. 

(i) Facilities will be installed to serve 

any user within the service area who 

desires service and can be feasibly and 

legally served. 

(ii) The lender will determine that, 

when feasible and legally possible, 

inequities within the proposed project’s 

service area for the same type service 

proposed will be remedied by the owner 

on, or before, completion of the project. 

Inequities are defined as unjustified 

variations in availability, adequacy, or 

quality of service. User rate schedules 

for portions of existing systems or 

facilities that were developed under 

different financing, rates, terms, or 

conditions do not necessarily constitute 

inequities. 

(3) Demonstration of community 

support. A project may demonstrate 

community support in lieu of the cash 

equity required under § 5001.6(c)(2) or 

§ 5001.12(c)(2)(ii)(B), as applicable. 

Demonstration of community support 

shall be made as specified in 

§ 5001.101(a)(5)(i) through (iii). 

(b) Unauthorized projects and 

purposes. Loan funds may not be used 

to finance: 

(1) Facilities that are not modest in 

size, design, and cost; 

(2) Loan or grant finder’s fees; 

(3) The construction of any new 

combined storm and sanitary sewer 

facilities; 

(4) Any portion of the cost of a facility 

that does not serve a rural area; 

(5) That portion of project costs 

normally provided by a business or 

industrial user, such as wastewater 

pretreatment; 

(6) Rental for the use of equipment or 

machinery owned by the applicant; 

(7) For other purposes not directly 

related to operating and maintenance of 

the facility being installed or improved; 

or 

(8) The payment of a judgment which 

would disqualify an applicant for a loan 

under § 5001.102(c)(2). 

(c) Borrower eligibility. To be eligible 

for a Water and Waste Disposal 

Facilities guaranteed loan, a prospective 

borrower must meet the criteria 

specified in paragraphs (c)(1) and (2) of 

this section and in § 5001.8(a)(1) and 

(2). 

(1) Eligible entity. The prospective 

borrower must be one of the following 

types of entities: 

(i) A public body such as a 

municipality, county, district, authority, 

or other political subdivision of a State 

located in a rural area; 

(ii) An organization operated on a notfor-profit basis, such as an association, 

cooperative, or private corporation. The 

organization must be an association 

controlled by a local public body or 

bodies, or have a broadly based 

ownership by or membership of people 

of the local community; or 

(iii) An Indian tribe on a Federal or 

State reservation or any other Federallyrecognized Indian tribe. 

(2) Credit not available elsewhere. The 

Agency must determine that the 

borrower is unable to obtain the 

required credit without the loan 

guarantee from private, commercial, or 

cooperative sources at reasonable rates 

and terms for loans for similar purposes 

and periods of time. 

(d) Additional application 

documentation requirements. 

(1) Feasibility study. A feasibility 

study by a qualified independent 

consultant may be required by the 

Agency. 

(2) Preliminary engineering report 

(PER). Two copies of the PER are to be 

submitted. Preliminary engineering 

reports must conform to customary 

professional standards. PER guidelines 

for water, sanitary sewer, solid waste, 

and storm sewer are available from the 

Agency. The PER may be submitted to 

the Agency prior to the rest of the 

application material if a preliminary 

review by the Agency is desired. 

(3) Financial reports. Lenders are 

required to obtain and analyze financial 

statements as required by the Loan 

Agreement. Rural Development 

approved lenders that do not have 

preferred lender status must submit a 

copy of the analysis to the Agency 

within 120 days of receipt of the 

financial statements. Rural Development 

approved lenders that have preferred 

lender status must provide evidence 

that they have such an analysis in their 

file, but are not required to submit a 

copy to the Agency unless specifically 

requested. 

(e) Additional guarantee- and loanrelated requirements—maximum 

percent of guarantee. The maximum 

loan guarantees issued to a Rural 

Development approved lender with 

Water and Waste Disposal Facility 


pwalker on PROD1PC71 with PROPOSALS2
Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 52663 

funding are specified in Table to 

paragraph (e). 

TABLE TO PARAGRAPH (E).—MAXIMUM LOAN GUARANTEE PERCENTAGES FOR WATER AND WASTE DISPOSAL FACILITY

GUARANTEED LOANS

Type of rural development 

approved lender Type of application 

Guaranteed loan amount 

$5 million or less 

(percent) 

Over $5 million 

up to and including $10 million 

(percent) 

Over $10 million 

(percent) 

Without preferred lender status ................ Low documentation .................................. 80 na na 

Full documentation ................................... 90 90 90 

With preferred lender status ..................... Low documentation .................................. 90 na na 

Full documentation ................................... 90 90 90 

na = not applicable. 

§ 5001.103 Business and Industry 

Program. 

(a) Project eligibility. To be eligible for 

a Business and Industry guaranteed 

loan, the project must meet the criteria 

specified in paragraph (a) of this section 

and in § 5001.6. 

(1) All loans guaranteed with 

Business and Industry funding shall be 

for: 

(i) Business and industrial 

acquisitions when the loan will keep the 

business from closing, prevent the loss 

of employment opportunities, or 

provide expanded job opportunities; 

(ii) business conversion, enlargement, 

repair, modernization, or development; 

(iii) the purchase and development of 

land, easements, rights-of-way, 

buildings, or facilities; 

(iv) the purchase of equipment, 

leasehold improvements, machinery, 

supplies, inventory, start up costs, 

permanent working capital, pollution 

control and abatement, or feasibility 

studies; 

(v) transportation services incidental 

to industrial development; 

(vi) agricultural production, with 

advance written approval from the 

Agency, when it is not eligible for Farm 

Service Agency farmer program 

assistance and when it is part of an 

integrated business also involved in the 

processing of agricultural products; 

(vii) the purchase of membership, 

stocks, bonds, or debentures or, as 

allowed under paragraph (a)(2) of this 

section, cooperative stock; 

(viii) commercial fishing, aquaculture, 

commercial nurseries, forestry, 

hydroponics, or the growing of 

mushrooms; 

(ix) interest during the period before 

the first principal payment becomes due 

or when the facility becomes income 

producing, whichever is earlier; 

(x) refinancing any loan. Except for 

the refinancing of Agency direct loans, 

refinancing of other loans will be 

limited to a minority portion of the 

guaranteed loan; 

(xi) providing takeout of interim 

financing when the lender submits a 

complete preapplication or application 

in which the interim financing is 

proposed, prior to extending any 

portion of the interim loan; 

(xii) fees and charges for professional 

services and routine lender fees and the 

Agency guarantee fee; 

(xiii) tourist and recreation facilities, 

including hotels, motels, and bed and 

breakfast establishments; 

(xiv) educational, training, or 

community facilities; 

(xv) housing development sites with 

certain restrictions; 

(xvi) community antenna television 

services or facilities; 

(xvii) assistance to industries 

adjusting to terminated Federal 

agricultural programs or increased 

foreign competition; or 

(xviii) assisting cooperative 

organizations. 

(2) Purchase of cooperative stock. 

Loans may be made to individual 

farmers or ranchers for the purchase of 

cooperative stock. The entity to receive 

the proceeds from the stock sale must be 

a farmer or rancher cooperative 

established for the purpose of 

processing agricultural commodities. 

Proceeds from the stock sale may be 

used to recapitalize an existing 

cooperative, to develop a new 

processing facility or product line, or to 

expand an existing production facility. 

The cooperative may contract for 

services to process agricultural 

commodities or otherwise process 

value-added agricultural products 

during the 5-year period beginning on 

the operation startup date of the 

cooperative in order to provide adequate 

time for the planning and construction 

of the processing facility of the 

cooperative. 

(b) Unauthorized projects and 

purposes. 

(1) Businesses housed in private 

homes, except when the pro-rata value 

of the owner’s living quarters is deleted 

from the value of the project. 

(2) Projects in excess of $1 million 

that would likely result in the transfer 

of jobs from one area to another and 

increase direct employment by more 

than 50 employees. 

(3) Projects in excess of $1 million 

that would increase direct employment 

by more than 50 employees, if the 

project would result in an increase in 

the production of goods for which there 

is not sufficient demand, or if the 

availability of services or facilities is 

insufficient to meet the needs of the 

business. 

(4) Interim financing. 

(5) Distribution or payment to an 

individual owner, partner, stockholder, 

or beneficiary of the borrower or a close 

relative of such an individual when 

such individual will retain any portion 

of the ownership of the borrower. 

(6) Assistance to Government 

employees and military personnel who 

are directors or officers or have a major 

ownership of 20 percent or more in the 

business. 

(7) The guarantee of lease payments. 

(8) The guarantee of loans made by 

other Federal agencies. 

(9) Loans made with the proceeds of 

any obligation the interest on which is 

excludable from income under 26 U.S.C. 

§ 103 or a successor statute. Funds 

generated through the issuance of taxexempt obligations may neither be used 

to purchase the guaranteed portion of 

any Agency guaranteed loan nor may an 

Agency guaranteed loan serve as 

collateral for a tax-exempt issue. The 

Agency may guarantee a loan for a 

project which involves tax-exempt 

financing only when the guaranteed 

loan funds are used to finance a part of 

the project that is separate and distinct 


pwalker on PROD1PC71 with PROPOSALS2
52664 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

from the part which is financed by the 

tax-exempt obligation, and the 

guaranteed loan has at least a parity 

security position with the tax-exempt 

obligation. 

(c) Borrower eligibility. In addition to 

the criteria specified in § 5001.8(a)(1) 

and (2), a prospective borrower must 

meet both of the criteria specified in 

paragraphs (c)(1) and (2) of this section 

to be eligible for a Business and 

Industry guaranteed loan. 

(1) A borrower must be a cooperative 

organization, corporation, partnership, 

or other legal entity organized and 

operated on a profit or not-for-profit 

basis; an Indian tribe on a Federal or 

State reservation or other Federally 

recognized tribal group; a public body; 

or an individual. 

(2) A borrower must be engaged in or 

proposing to engage in a business. 

Business may include manufacturing, 

wholesaling, retailing, providing 

services, or other activities that will: 

(i) Provide employment; 

(ii) Improve the economic or 

environmental climate; 

(iii) Promote the conservation, 

development, and use of water for 

aquaculture; or 

(iv) Reduce reliance on nonrenewable 

energy resources by encouraging the 

development and construction of solar 

energy systems and other renewable 

energy systems (including wind energy 

systems, geothermal energy systems, 

and anaerobic digesters for the purpose 

of energy generation). 

(d) Additional application process 

requirements—obligation of funds. If 

funds are insufficient to cover all 

approved applications, the Agency will 

use a scoring priority system to allocate 

funds, which will give a priority to 

encourage economic development in 

communities that are suffering 

economic hardships. The Agency will 

establish the scoring criteria each fiscal 

year and provide them in a notice in the 

Federal Register. 

(e) Additional application 

documentation requirements. 

(1) Audited financial statements. If 

the proposed guaranteed loan exceeds 

$3 million, the Agency may, at its sole 

discretion, require audited financial 

statements to be submitted annually 

when the Agency is concerned about the 

borrower’s credit risk. 

(2) Feasibility study. A feasibility 

study by a qualified independent 

consultant may be required by the 

Agency for start-up businesses or 

existing businesses when the project 

will significantly affect the borrower’s 

operations. If a feasibility study of a 

cooperative is required, the feasibility 

study will determine the viability of the 

business and not the individual farm 

operators. 

(3) Certification of Non-Relocation 

and Market Capacity. If the loan will 

exceed $1 million and will increase 

direct employment by more than 50 

employees, a form approved by the 

Agency concerning non-relocation and 

market capacity. 

(f) Additional Lender 

Responsibilities—Origination—

Collateral. At a minimum, for the 

purchase of cooperative stock, the 

lender must secure the loan with a lien 

on the stock acquired with loan funds, 

an assignment of any patronage refund, 

and the full and unconditional personal 

or corporate guarantee of the borrower. 

(g) Additional guarantee- and loanrelated requirements. 

(1) Conditional Commitment for 

Guarantee. For the purchase of 

cooperative stock, the Conditional 

Commitment for Guarantee shall require 

the cooperative to provide the lender 

with all required Federal, State, and 

local permits and other clearances 

involving the environmental aspects for 

review and approval. 

(2) Issuance of Loan Note Guarantee. 

If, for the purchase of cooperative stock, 

the lender requests the issuance of the 

Loan Note Guarantee before the 

cooperative becomes operational, the 

lender must certify to the Agency that 

the cooperative has all of the required 

Federal, State, and local permits and 

other clearances involving the 

environmental aspects for review and 

approval. 

(3) Funding limits. The principal 

amount of a Business and Industry loan 

guaranteed under this section may not 

exceed $25,000,000, except that the 

principal amount made to a cooperative 

organization and guaranteed under this 

section may not exceed $40,000,000 for 

rural projects processing value added 

commodities. 

(i) The total amount of Business and 

Industry loans made to cooperative 

organizations and guaranteed for a fiscal 

year under this section with principal 

amounts that are in excess of 

$25,000,000 may not exceed 10 percent 

of the business and industry loans 

guaranteed for the fiscal year. 

(ii) The principal amount of a 

Business and Industry loan made under 

this section for the purchase of 

cooperative stock may not exceed 

$600,000. 

(4) Guarantee fee. The maximum 

guarantee fee that may be charged is 2 

percent. The guarantee fee may be 

reduced to 1 percent if the borrower is 

a high impact business and is located in 

an area of long term population decline 

and job deterioration as a result of 

persistent economic hardship, 

significant economic loss from a 

Presidentially-declared disaster, or a 

fundamental structural economic 

change. Each fiscal year, the Agency 

will establish a limit on the maximum 

portion of guarantee authority available 

for that fiscal year that may be used to 

guarantee loans with a guarantee fee of 

1 percent. The limit will be announced 

by publishing a notice in the Federal 

Register. Once the limit has been 

reached, the guarantee fee for all 

additional loans obligated during the 

remainder of that fiscal year will be 2 

percent. 

(5) Maximum percent of guarantee. 

The maximum loan guarantees issued to 

a Rural Development approved lender 

with Business and Industry funding are 

specified in Table to paragraph (g). 

TABLE TO PARAGRAPH (G).—MAXIMUM LOAN GUARANTEE PERCENTAGES FOR BUSINESS AND INDUSTRY GUARANTEED

LOANS

Type of rural 

development 

approved lender 

Type of application 

Guaranteed loan amount 

$5 million or less 

(percent) 

Over $5 million 

up to and including $10 million 

(percent) 

Over $10 

million * 

(percent) 

Without preferred lender status ................ Low documentation .................................. 70 na na 

Full documentation ................................... 80 70 60 

With preferred lender status ..................... Low documentation .................................. 80 na na 

Full documentation ................................... 80 70 60 

na = not applicable. 


pwalker on PROD1PC71 with PROPOSALS2
Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 52665 

* Per § 5001.103(g)(3), the maximum guaranteed loan amount is $25 million except for a cooperative producing a value added commodity for 

which the maximum is $40 million. 

5001.104 Renewable Energy Systems and 

Energy Efficiency Improvements Program. 

(a) Project eligibility. To be eligible for 

a Renewable Energy Systems and 

Energy Efficiency Improvements 

guaranteed loan, the project must meet 

the criteria specified in paragraphs (a)(1) 

and (2) of this section and in § 5001.6. 

(1) The project shall be for the 

purchase, installation, expansion and/or 

other energy-related improvement of a 

renewable energy system or to make 

energy efficiency improvements project; 

and 

(2) The project shall be for technology 

that is 

(i) pre-commercial or commercially 

available, and 

(ii) replicable. 

(b) Borrower eligibility. To be eligible 

for a renewable energy systems and 

energy efficiency improvements 

guaranteed loan, a prospective borrower 

must be an agricultural producer or 

rural small business and must meet the 

criteria specified in § 5001.8(a)(1) and 

(2). 

(c) Additional application process 

requirements—obligation of funds. If 

funds are insufficient to cover all 

approved applications, the Agency will 

use a scoring priority system to allocate 

funds to encourage development of 

promising pre-commercial and 

commercially available alternative 

energy sources that are currently unable 

to obtain financing from commercial 

lending sources. The Agency will 

establish the scoring criteria on a 

periodic basis and publish it in the 

Federal Register. 

(d) Additional application 

documentation requirements. 

Applications must also contain the 

following, as applicable: 

(1) Certifications. The lender must 

certify in the application that the project 

is able to demonstrate technical merit 

and that the prospective borrower is a 

small agricultural producer or rural 

small business. 

(2) Technical report. For renewable 

energy systems projects seeking a loan 

guarantee of more than $200,000, a 

satisfactory technical report that 

demonstrates that the project is 

commercially viable and can be 

installed and perform as intended in a 

reliable, safe, cost-effective, and legally 

compliant manner must be provided. To 

determine the overall technical merit of 

the renewable energy system, the lender 

must submit its proposal to an approved 

Department of Energy (DOE) laboratory 

and obtain a DOE technical report. A 

Rural Development approved lender 

that does not have preferred lender 

status must submit the DOE technical 

report with its application. A Preferred 

lender may instead certify in the 

application that a DOE technical report, 

deemed satisfactory by a DOE energy 

laboratory, has been obtained prior to 

the request for guarantee in lieu of 

submitting the technical report with the 

application. 

(3) Energy assessment/audit. For 

energy efficiency improvement projects, 

an energy assessment, with adequate 

and appropriate evidence of energy 

savings expected when the system is 

operated as designed, must be provided. 

For energy efficiency improvement 

projects with total eligible project costs 

greater than $50,000, an energy audit is 

required. Rural Development approved 

lenders with preferred lender status may 

certify in the application that an energy 

assessment or audit, as applicable, has 

been obtained prior to the request for 

guarantee in lieu of submitting the 

assessment or audit with the 

application. 

(4) Feasibility study. Lenders are 

required to obtain a feasibility study for 

each project seeking a loan guarantee of 

greater than $200,000. To be acceptable, 

the feasibility study must be conducted 

by a qualified independent consultant. 

(5) Financial statements. Applications 

from Rural Development approved 

lenders without preferred lender status 

must include financial statements for 

the lesser of the past 3 years or the 

business life of the applicant. If the 

proposed guaranteed loan exceeds 

$3?million, the Agency may require 

audited financial statements annually 

when the Agency is concerned about the 

borrower’s credit risk. 

(e) Additional servicing 

requirements—post-construction 

reporting requirements. Once the project 

has been constructed, the lender must 

provide to the Agency annual reports 

from the borrower on the performance 

characteristics and results of the 

projects. 

(1) Schedule. For renewable energy 

system projects, these reports are to be 

provided commencing in the first full 

calendar year after construction is 

completed and continuing for 3 full 

years. For energy efficiency 

improvement projects, these reports are 

to be provided commencing the first full 

calendar year following the year in 

which project construction was 

completed and continuing for 2 full 

years. 

(2) Contents. Reports for renewable 

energy system projects must contain, at 

a minimum, information on output and 

sales and/or energy savings. Reports for 

Energy Efficiency Improvement projects 

must contain, at a minimum, 

information on energy savings. 

Additional information to be included 

in these reports will be negotiated 

between the Agency and the lender/ 

borrower prior to the execution of the 

loan note guarantee. 

(f) Additional guarantee- and loanrelated requirements—(1) Conditions 

precedent to issuance of loan note 

guarantee. In addition to the 

requirements specified in § 5001.33, for 

renewable energy systems and energy 

efficiency improvements loans, all 

planned property acquisitions and 

development have been performing at a 

steady state operating level in 

accordance with the technical 

requirements, plans, and specifications; 

the project conforms with applicable 

Federal, State, and local codes; and 

costs have not exceeded the amount 

approved by the lender and the Agency. 

(2) Funding limits. The amount of a 

Renewable Energy Systems and Energy 

Efficiency loan guarantee, including any 

grants and direct loans made under this 

program, that will be made available to 

an eligible project will not exceed 50 

percent of total eligible project costs. 

Eligible project costs are only those 

costs associated with the items 

identified in paragraphs (f)(2)(i) through 

(xi) of this section, as long as the items 

are an integral and necessary part of the 

renewable energy system or energy 

efficiency improvement. 

(i) Post-application purchase and 

installation of equipment (new, 

refurbished, or remanufactured), except 

agricultural tillage equipment, used 

equipment, and vehicles. 

(ii) Post-application construction or 

improvements, except residential. 

(iii) Energy audits or assessments. 

(iv) Permit and license fees. 

(v) Professional service fees, except 

for application preparation. 

(vi) Feasibility studies and technical 

reports. 

(vii) Business plans. 

(viii) Retrofitting. 

(ix) Construction of a new energy 

efficient facility only when the facility 

is used for the same purpose, is 

approximately the same size, and based 

on the energy audit will provide more 

energy savings than improving an 

existing facility. Only costs identified in 

the energy audit for energy efficiency 

improvements are allowed. 


pwalker on PROD1PC71 with PROPOSALS2
52666 Federal Register / Vol. 72, No. 178 / Friday, September 14, 2007 / Proposed Rules 

(x) Permanent working capital. 

(xi) Land acquisition. 

(3) Maximum percent of guarantee. 

The maximum loan guarantees issued to 

a Rural Development approved lender 

with Renewable Energy Systems and 

Energy Efficiency Improvements 

funding are shown in Table to 

paragraph (f). 

TABLE TO PARAGRAPH (F).—MAXIMUM LOAN GUARANTEE PERCENTAGES FOR RENEWABLE ENERGY SYSTEM AND ENERGY

EFFICIENCY IMPROVEMENT GUARANTEED LOANS

Type of rural development approved 

lender Type of application 

Guaranteed loan amount 

$600,000 

or less 

(percent) 

Over 

$600,000 

up to and 

including 

$5 million 

(percent) 

Over $5 million up to 

and including $10 

million 

(percent) 

Over $10 

million 

(percent) 

Without preferred lender status ................ Low documentation .................................. 75 70 na na 

Full documentation ................................... 85 80 70 60 

With preferred lender status ..................... Low documentation .................................. 85 80 na na 

Full documentation ................................... 85 80 70 60 

na = not applicable. 

§§ 5001.105–5001.200 [Reserved] 

Dated: August 30, 2007. 

Thomas C. Dorr, 

Under Secretary, Rural Development. 

[FR Doc. 07–4349 Filed 9–13–07; 8:45 am] 

BILLING CODE 3410–XY–P 


pwalker on PROD1PC71 with PROPOSALS2