This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

23135

Vol. 66, No. 89

Tuesday, May 8, 2001

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Parts 1779 and 1780

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1980

RIN 0572–AB57

Water and Waste Disposal Programs

Guaranteed Loans

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

SUMMARY: The Rural Utilities Service

(RUS) is discontinuing the use of its

existing regulations for its Water and

Waste Disposal (WW) Guaranteed Loan

Program, and implementing a new

regulation for its WW Guaranteed Loan

Program. This action is needed to

streamline and update the WW

Guaranteed Loan Program. The intended

effect is to simplify and clarify the

regulation; shift some responsibility for

loan documentation and analysis from

the Government to the lenders; make the

program more responsive to the needs of

lenders, local community public bodies,

and nonprofit corporations; and provide

for smoother processing of applications.

EFFECTIVE DATE: June 7, 2001.

FOR FURTHER INFORMATION CONTACT:

Linda Scott, Water Programs Division

Loan Specialist, Rural Utilities Service,

U.S. Department of Agriculture, STOP

1570, 1400 Independence Ave. SW.,

Washington, DC 20250–1570, telephone:

(202) 720–9639.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This final rule has been determined to

be not significant for the purposes of

Executive Order 12866 and, therefore,

has not been reviewed by the Office of

Management and Budget (OMB).

Information Collection and

Recordkeeping Requirements

The information collection and

recordkeeping requirements contained

in this regulation have been approved

by the Office of Management and

Budget (OMB) under the provisions of

44 U.S.C. chapter 35 and were assigned

OMB control number 0572–0122, in

accordance with the Paperwork

Reduction Act of 1995. Under the

Paperwork Reduction Act of 1995, no

person is required to respond to a

collection of information unless it

displays a valid OMB control number.

This final rule does not impose any new

information recordkeeping.

National Environmental Policy Act

Certification

The Administrator of RUS has

determined that this final rule will not

significantly affect the quality of the

human environment as defined by the

National Environmental Policy Act of

1969 (42 U.S.C. 4321 et seq.). Therefore,

this action does not require an

environmental impact statement or

assessment.

Regulatory Flexibility Act Certification

RUS has determined that this final

rule will not have a significant

economic impact on a substantial

number of small entities, as defined in

the Regulatory Flexibility Act (5 U.S.C.

601 et seq.). The RUS Water and Waste

loan and grant programs provide loans

to borrowers at interest rates and on

terms that are more favorable than those

generally available from the private

sector. RUS borrowers, as a result of

obtaining federal financing, receive

economic benefits that exceed any

direct economic costs associated with

complying with RUS regulations and

requirements.

Executive Order 12988

This final rule has been reviewed

under Executive Order 12988, Civil

Justice Reform. RUS has determined

that this rule meets the applicable

standards provided in section 3 of that

Executive Order. In addition, all State

and local laws and regulations that are

in conflict with this rule will be

preempted, no retroactive effect will be

given to this rule, and, in accordance

with Sec. 212(e) of the Department of

Agriculture Reorganization Act of 1994

(7 U.S.C. Sec. 6912(e)), administrative

appeal procedures, if any, must be

exhausted before an action against the

Department or its agencies may be

initiated.

Unfunded Mandates

This rule contains no Federal

mandates (under the regulatory

provisions of Title II of the Unfunded

Mandates Reform Act of 1995) for State,

local, and tribal governments or the

private sector. Thus, this rule is not

subject to the requirements of section

202 and 205 of the Unfunded Mandates

Reform Act of 1995.

Intergovernmental Consultation

This program is listed in the Catalog

of Federal Domestic Assistance under

number 10.760 and is subject to the

provisions of Executive Order 12372

which requires intergovernmental

consultation with State and local

officials. This catalog is available on a

subscription basis from the

Superintendent of Documents, the

United States Government Printing

Office, Washington, DC 20402–9325. An

electronic version is available at

www.cfda.gov.

Discussion of the Final Rule

This action replaces the Water and

Waste Disposal facilities portion of the

guaranteed loan program administered

under 7 CFR part 1980, subparts A and

I. Under the final rule, this guaranteed

loan program will be more flexible and

place more reliance on lenders. There

are fewer specific requirements for

lenders. The lender has added

responsibility for analyzing credit

quality; for making, securing, and

servicing the loan; and for monitoring

construction. Application processing

procedures will be more efficient; less

burdensome for borrowers, lenders, and

Rural Development staff; and will

provide for more rapid decisions.

The WW Guaranteed Loan program

was authorized by the Rural

Development Act of 1972. The loans are

made by private lenders to public

bodies, nonprofit corporations, and

Indian tribes for the purpose of

23136 Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations

improving rural living standards and for

other purposes that create safe and

affordable drinking water and waste

disposal facilities located in rural areas

or towns with a population not

exceeding 10,000 inhabitants.

These loans can be made to construct

or improve drinking water or waste

disposal facilities serving the most

financially needy communities. The

rates and terms of the loan are

negotiated between the borrower and

the lender. This regulation is a highpriority effort to streamline the

administration and operation of the

program, respond to the requests of

users of the program, and assist the field

staff administering the program. The

revised regulation is simpler, clearer,

and more logically organized. The

volume of regulatory material which a

lender must review to request, make, or

service a WW guaranteed loan under the

new regulation is significantly less than

the current regulation.

The President and the Secretary of

Agriculture are committed to

streamlining all Federal regulations.

This WW regulation streamlines our

application procedures, reduces loan

application processing time by placing

greater emphasis on State resources, and

allows more management flexibility and

decision-making capacity at the State

Office level.

The Agency has implemented

revisions to make the program more

user-friendly for lenders and borrowers.

Also, the Agency recognizes that

changes are necessary to make the

program more effective in creating jobs

and stimulating economic activity

(particularly in chronically low-income

rural areas). Under the new WW

regulation, the material that must be

submitted to, and reviewed by, the

Agency before approval of the guarantee

has been reduced. Some responsibilities

for credit analysis and application

processing tasks will be shifted from the

Agency to the lender, where feasible.

Following is a discussion of some of the

most significant policy revisions

included in the final regulation.

To streamline the regulation, the

Agency has combined applicable

portions of the Direct Water and Waste

Disposal Loan and Grant Program (7

CFR part 1780), Water and Waste Loans

and Grants, General Guaranteed

Regulation (7 CFR part 1980, subparts A

and I), and program requirements

contained in forms which were not in

regulations into the Guaranteed Water

and Waste Disposal Programs

Regulation (7 CFR part 1779). The

Agency also divided the regulation into

general, processing, and servicing

sections. These actions should

significantly reduce the amount of

regulatory material that a lender and a

borrower must review to determine

eligibility and complete the application.

This will also simplify making and

servicing a WW guaranteed loan.

Additionally, the necessary

information contained in the

preapplication package can be

submitted simultaneously with the

application. Except the year that loan

funds are received, the types of audited

financial statements will be determined

by the lender (with Agency

concurrence).

Under the new regulation, the lender

is responsible for ensuring that all loan

requirements are met, the loan is

properly secured, documents are duly

executed and binding, and all necessary

certifications are furnished. The lender

will not only be able to negotiate

interest rates, but will also be able to

negotiate incremental increases and

caps for each loan. This will give the

lender more flexibility to fit the WW

guaranteed loan program into its

lending policies and procedures. The

lender does not have to be a local lender

provided it can demonstrate the ability

to adequately service the loan. This will

permit an expansion of eligible lenders

to include such organizations as State

bond banks, Co-Bank, the Rural Utilities

Cooperative Finance Corporation, and

other lenders that are subject to credit

examination and supervision by a State

or Federal entity that supervises and

regulates credit institutions. All of these

organizations have expressed an interest

in the WW guaranteed lending program

in the past.

Discussion of Comments

The proposed rule was published in

the Federal Register on October 7, 1997

(62 FR 52277), for public comment. All

comments received were from Rural

Development employees. Three State

Directors, one Program Director, the

National Association of Credit

Specialists, and one Programs Specialist

submitted comments. All of the

comments received expressed support

for the changes in this streamlined

regulation. The comments ranged from

making the regulation easier to read and

follow to agreeing that the regulatory

burden was lessened on the lenders as

well as on our field employees. Also,

the ability to change interest rates on a

quarterly basis was supported as more

in line with industry standards. Other

changes which were supported are:

permitting the lender to monitor

construction rather than the Agency;

permitting the preapplication

information and the application to be

completed as one process; and making

the lender responsible for ensuring that

all loan requirements are met, the loan

is properly secured, documents are duly

executed and binding, and all necessary

certifications are furnished. The

comments relating to the Community

Facilities (CF) Programs portion of the

proposed rule were addressed in a Final

Rule published on May 26, 1999, at 64

FR 28333 (7 CFR part 3575).

General

One respondent requested consistent

wording concerning the 5 percent which

the lender must retain in its portfolio.

The wording has been changed to clarify

that the amount which the lender must

hold will be 5 percent of the total loan

amount and that this amount must be

from the unguaranteed portion of the

loan.

One respondent wanted to know what

is contained in chapter 37 of title 31 of

the United States Code. This chapter is

commonly referred to as the Debt

Collection Act.

Definitions

One respondent suggested that all

Rural Development program areas have

similar definitions for ‘‘rural’’ and

‘‘rural area.’’ The Agency agrees that

similar definitions would make the

programs easier for our field employees

to implement. However, the definitions

of ‘‘rural’’ and ‘‘rural area’’ are mostly

statutory and cannot be changed

regulatorily.

Eligibility

One respondent wanted to include

sole-member corporations as eligible for

the Community Facilities (CF) program.

This does not pertain to WW guaranteed

loans. The CF response may be found in

7 CFR part 3575.

One respondent suggested that

business incubators be made an eligible

purpose. Because this suggestion

pertains solely to the CF program, it was

addressed in 7 CFR part 3575.

One respondent indicated that

combining the floodplain management

plan requirements with flood insurance

would eliminate service to most of his

State. The Agency did not intend to

change the existing floodplain

requirements. However, in our efforts to

streamline the regulations, we combined

two requirements and used a

conjunction which tied the two

requirements together. The Agency has

separated and reworded these

requirements in this final regulation.

The requirements are the same as our

existing regulation. To make a loan in a

Federal Emergency Management Agency

designated 100-year floodplain, a

floodplain management plan must be in

Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations 23137

place. Also, National Flood Insurance

must be available, and the lender must

require such insurance.

As a result of internal discussions, the

Environmental Requirements section

has been expanded slightly in order to

highlight the requirement imposed on

the applicant to take no actions that

would either limit the range of

alternatives to be considered or which

might adversely effect the environment

prior to completion of the Agency’s

environmental review process.

Equal Opportunity and Fair Housing

Act Requirements

One respondent suggested listing all

the specific individual requirements

under these laws. This comment

pertains to the CF programs. The CF

response may be found in 7 CFR part

3575.

One respondent requested

clarification concerning the Agency’s

review of the equal opportunity and

nondiscrimination requirements when

evaluating an application. The Agency

will further clarify our employees’

responsibilities for reviewing loan

applications in Agency instructions.

Rates and Terms

One respondent supported permitting

both variable and fixed interest rates in

the same loan but pointed out that the

restriction which requires the

guaranteed portion of the loan to always

have a lower interest rate than the

unguaranteed portion of the loan would

prevent lenders from making the

guaranteed portion fixed and the

unguaranteed portion variable when the

interest rate market is declining. We

agree, and have removed the last

sentence of § 1779.33(e) to ensure

consistency when determining an

acceptable interest rate.

Design and Construction

One respondent said that this

regulation seems to say that if the

Agency guarantees a loan on an existing

building, we would not require any

changes to make the building meet the

Americans with Disabilities Act (ADA).

The ADA does not require that existing

buildings be made accessible unless

they are remodeled. Then only the

portion which is remodeled must be

made accessible. For example, if four

interior offices were remodeled, only

those four offices would have to be

made accessible. But the restrooms or

the entry way would not have to be

accessible. If you remodeled the

building front, then the front entry

would have to be made accessible. In

conclusion, any new work must be

accessible and designed in accordance

with the ADA. Any area of the existing

structure that is not remodeled does not

have to meet the ADA. This concept

will be clarified for our employees in

our instructions.

One respondent suggested a standard

certification form for the lender to

complete certifying that construction

has been completed in accordance with

the proper building codes. To maintain

flexibility and keep the regulations and

public paperwork at a minimum, we

have incorporated this as a lender

certification.

One respondent suggested amending

our concurrence to preliminary

architectural or engineering reports or

plans because many projects do not

require complex reports but rather

simple drawings and estimates of

project costs. We agree. This was our

original intent in the proposed general

portion of the design and construction

requirements section. We have added

the words ‘‘or plans’’ to this section.

One respondent questioned the lack

of a reference to procurement utilizing

free and open competition. The

borrower and the lender both benefit

from free and open competition. In the

spirit of reducing the regulatory burden

to the public, the lender will now be

responsible for determining the best

method to ensure that the project is

completed within budget. If the lender

determines that design and build is a

better method than sealed bids, the

lender will have the flexibility to

approve such construction.

Feasibility Requirements

One respondent strongly supported

the loan approval official being able to

determine if an independent feasibility

analysis is necessary. The respondent

also stated that the economic section of

the regulation confuses the lender credit

analysis with the feasibility report. The

Agency intends that the loan approval

official will determine whether or not

an independent feasibility analysis is

necessary. Consequently, the lender’s

financial credit analysis may serve as a

feasibility analysis when the loan

approval official concludes sufficient

economic information is provided in its

analysis. A sentence has been added to

clarify this issue.

Processing

One respondent indicated that we

should have included a timeframe to

provide the lender an answer. While we

agree, this is an administrative matter

within the Agency and will be

incorporated into our field employee

instructions.

One respondent suggested moving the

subsection concerning changing the

scope of the project from the section

describing the conditions precedent to

issuing a loan note guarantee to the

section discussing the review of

requirements in the conditional

commitment. This subsection has been

moved as suggested.

One respondent suggested that the

number of customers discussed in the

loan application evaluation section

should apply only to Water and Waste

Disposal projects. This comment is

directed to Community Facilities

Programs and was addressed in 7 CFR

part 3575. However, the respondent is

correct in that WW projects do require

that the number of customers is used

when evaluating a loan application.

One respondent questioned whether

the certifications listed under the

conditions precedent to issuance of the

loan note guarantee section met all

applicable requirements contained out

in the regulations. It was suggested

clarification was needed. The Agency

listed the items which the lender must

certify to before the loan note guarantee

could be issued. By certifying to these

conditions, the lender is stating that it

has met the requirements contained in

the regulation.

One respondent requested

clarification concerning the title report

under the lender’s certifications in the

conditions precedent to issuance of a

loan note guarantee. The respondent

wanted to know whether or not the title

report was referring to a final title

opinion or a preliminary title opinion.

The Agency intends this to be the

lender’s legal counsel’s opinion which

states that the loan has been closed and

proper title has been obtained in

accordance with the security instrument

and other agreements between the

lender and the Agency.

One respondent requested further

clarification of the guaranteed loan

closing report. This report is a Rural

Development form. All references to

specific form numbers have been

eliminated from the actual text of the

Federal Register. The actual form

numbers will appear in the Agency

instructions to our field employees.

Only the form names appear in the

Federal Register.

One respondent questioned the need

to require a parity lien position. We

agree, the lender should determine that

adequate security is obtained for the

loan and the Agency can either concur

or choose not to guarantee the loan

accordingly. This requirement has been

deleted.

One respondent requested that the

Agency eliminate the test for credit. The

respondent further points out that the

Rural Development Business and

23138 Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations

Industry (B&I) program does not require

such a test for credit to be eligible for

a guaranteed loan. The Agency is bound

by statute and must require this test for

credit. The B&I program is exempt from

this statutory provision.

One respondent suggested that finder

and packaging fees be considered an

eligible loan purpose. This comment

also suggested paying real estate broker

fees. This comment is directed to

Community Facilities Programs and was

addressed in 7 CFR part 3575.

One respondent requested

clarification concerning whether or not

the preapplication forms are still

necessary when the Agency receives an

application for a loan guarantee from a

lender without going through the

preapplication process. The Agency will

accept applications without a

preapplication package.

Servicing

Two respondents strongly suggested

that the audit requirements should be

the lender’s responsibility. We agree,

based upon discussions with our sister

agencies and the Office of Management

and Budget (OMB), we have determined

that we do not have continuing

compliance requirements as described

in the OMB circular A–133.

Consequently, in the year that funds are

received by the borrower, the Agency

will require an audit in accordance with

the OMB circular A–133. In subsequent

years, the lender (with Agency

concurrence) will determine the type of

financial reporting and financial audits

that will be required for the duration of

the loan.

One respondent noted that the lender

and borrower visits were omitted and

suggested that they should be required

periodically. While we agree, this is an

administrative matter and will be

addressed in the Agency’s field

instruction.

One respondent wanted to clarify that

the sale of one lender to another in a

merger situation did not constitute a

transfer of lender. We agree.

One respondent suggested that we

increase the amount of protective

advances from $500 to $5,000 dollars.

This amount would be consistent with

other mission area regulations and

would be consistent with inflation. We

agree, the amount of protective

advances which the lender can make

without Agency concurrence has been

increased from $500 to $5,000.

List of Subjects

7 CFR Part 1779

Guaranteed loans, Loan programs,

Waste treatment and disposal, Water

supply

7 CFR Part 1780

Business and industry, Community

development, Community facilities,

Grant programs—housing and

community development, Rural areas,

Waste treatment and disposal, Water

supply

7 CFR Part 1980

Loan programs—agriculture, Loan

programs—business and industry, Loan

programs—housing and community

development, Rural development

assistance

Accordingly, chapters XVII and XVIII,

title 7, Code of Federal Regulations, are

amended as follows:

Chapter XVII—Rural Utilities Service,

Department of Agriculture

1. Add a new part 1779 to read as

follows:

PART 1779—WATER AND WASTE

DISPOSAL PROGRAMS GUARANTEED

LOANS

Sec.

1779.1 General.

1779.2 Definitions.

1779.3 Full faith and credit.

1779.4 Conditions of guarantee.

1779.5–1779.7 [Reserved]

1779.8 Access to lender’s records.

1779.9 Environmental requirements.

1779.10–1779.11 [Reserved]

1779.12 Inspections.

1779.13 Appeals.

1779.14–1779.16 [Reserved]

1779.17 Exception authority.

1779.18–1779.19 [Reserved]

1779.20 Eligibility.

1779.21–1779.23 [Reserved]

1779.24 Eligible loan purposes.

1779.25 Ineligible loan purposes.

1779.26 [Reserved]

1779.27 Eligible lenders.

1779.28 Transfer of lenders or borrowers

(prior to issuance of Loan Note

Guarantee).

1779.29 Fees and charges by lender.

1779.30 Loan guarantee limitations.

1779.31–1779.32 [Reserved]

1779.33 Interest rates.

1779.34 Terms of loan repayment.

1779.35–1779.36 [Reserved]

1779.37 Insurance and fidelity bonds.

1779.38–1779.41 [Reserved]

1779.42 Design and construction

requirements.

1779.43 Other Federal, State, and local

requirements.

1779.44–1779.46 [Reserved]

1779.47 Economic feasibility requirements.

1779.48 Security.

1779.49–1779.51 [Reserved]

1779.52 Processing.

1779.53 Evaluation of application.

1779.54–1779.58 [Reserved]

1779.59 Review of requirements.

1779.60–1779.62 [Reserved]

1779.63 Conditions precedent to issuance

of the Loan Note Guarantee.

1779.64 Issuance of Lender’s Agreement,

Loan Note Guarantee, and Assignment

Guarantee Agreement.

1779.65 Lender’s sale or assignment of the

guaranteed portion of loan.

1779.66–1779.68 [Reserved]

1779.69 Loan servicing.

1779.70–1779.72 [Reserved]

1779.73 Replacement of loss, theft,

destruction, mutilation, or defacement of

Loan Note Guarantee or Assignment

Guarantee Agreement.

1779.74 [Reserved]

1779.75 Defaults by borrower.

1779.76–1779.77 [Reserved]

1779.78 Repurchase of loan.

1779.79 [Reserved]

1779.80 Interest rate changes after loan

closing.

1779.81 Liquidation.

1779.82 [Reserved]

1779.83 Protective advances.

1779.84 Additional loans or advances.

1779.85 Bankruptcy.

1779.86–1779.87 [Reserved]

1779.88 Transfer and assumptions.

1779.89 Mergers.

1779.90 Disposition of acquired property.

1779.91–1779.93 [Reserved]

1779.94 Determination and payment of loss.

1779.95 Future recovery.

1779.96 Termination of Loan Note

Guarantee.

1779.97–1779.99 [Reserved]

1779.100 OMB control number.

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

U.S.C. 1005.

§ 1779.1 General.

(a) This part contains the regulations

for Water and Waste Disposal (WW)

loans guaranteed by the Agency and

applies to lenders, holders, borrowers,

and other parties involved in making,

guaranteeing, holding, servicing, or

liquidating such loans.

(b) The purpose of the WW

guaranteed loan program is to provide a

loan guarantee for the construction or

improvement of water and waste

projects serving the financially needy

communities in rural areas. This

purpose is achieved through bolstering

the existing private credit structure

through the guarantee of quality loans

which will provide lasting benefits.

§ 1779.2 Definitions.

The following general definitions are

applicable to the terms used in this part:

Agency. The Rural Utilities Service

which is within the Rural Development

mission area of the United States

Department of Agriculture or its

successor agencies with authority

delegated by the Secretary of

Agriculture to administer the Water and

Waste Disposal Programs.

Application. An Agency prescribed

form to request an Agency guarantee

(available in any Agency office).

Arm’s length transaction. The sale,

release, or disposition of assets in which

Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations 23139

the title to the property passes to a

ready, willing, and able third party who

is not affiliated with, or related to, and

has no security, monetary, or

stockholder interest in the borrower or

transferor at the time of the transaction.

Assignment Guarantee Agreement.

The signed agreement among the

Agency, the lender, and the holder

setting forth the terms and conditions of

an assignment of the guaranteed portion

of a loan or any part thereof (available

in any Agency office).

Borrower. The entity that borrows

money from the lender.

Collateral. Property pledged to secure

the guaranteed loan.

Conditional Commitment for

Guarantee. The Agency’s written

statement to the lender that the material

submitted is approved subject to the

completion of all conditions and

requirements contained in the

commitment (available in any Agency

office).

Guaranteed loan. A loan made and

serviced by a lender for which the

Agency and lender have entered into a

Lender’s Agreement and for which the

Agency has issued a Loan Note

Guarantee.

Holder. The person or entity (other

than the lender) who holds all or a part

of the guaranteed portion of the loan

with no servicing responsibilities. When

the lender assigns part or all of the

guaranteed portion of the loan to an

assignee, the assignee becomes a holder

when the Assignment Guarantee

Agreement is signed by all parties.

Immediate family. Individuals who

are closely related by blood or by

marriage, or within the same household,

such as a spouse, parent, child, brother,

sister, aunt, uncle, grandparent,

grandchild, niece, or nephew.

In-house expenses. In-house expenses

include, but are not limited to,

employees’ salaries, retainers being paid

to lawyers, travel, and overhead.

Insurance. Fire, windstorm, lightning,

hail, explosion, riot, civil commotion,

aircraft, vehicles, smoke, builder’s risk,

liability, property damage, flood or

mudslide, worker’s compensation,

fidelity bond, malpractice, or any

similar insurance that is available and

needed to protect the security or that is

required by law.

Joint financing. Two or more lenders

(or any combination of lenders and

other financial sources) making separate

relatively contemporaneous loans or

grants to supply the funds required by

one borrower. For example, such joint

financing may consist of the Agency’s

financial assistance with the Economic

Development Administration,

Department of Housing and Urban

Development (HUD), or other Federal

and State agencies, and private and

quasi-public financial institutions.

Lender. The person or organization

making and responsible for servicing the

loan. The lender is also referred to in

this part as the applicant who is

requesting a guarantee during the

preapplication and application stage of

processing.

Lender’s Agreement. The signed

agreement between the Agency and the

lender containing the lender’s

responsibilities when the Loan Note

Guarantee is issued (available in any

Agency office).

Loan Note Guarantee. The signed

commitment issued by the Agency

containing the terms and conditions of

the guarantee of an identified loan

(available in any Agency office).

Market value. The amount for which

property would sell for its highest and

best use at a voluntary sale in an arm’s

length transaction.

Note. An evidence of debt. In those

instances where the Agency guarantees

a bond issue, ‘‘note’’ shall also be

construed to include a bond or other

evidence of indebtedness, as

appropriate.

Participation. Sale of an interest in a

loan in which the lender retains the

note, collateral securing the note, and

all responsibility for loan servicing and

liquidation.

Principals of borrowers. The owners,

officers, directors, entities, and

supervisors directly involved in the

operation and management of the

borrower.

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 cannot, meet obligations to

protect or preserve collateral.

Report of loss. An Agency form used

by lenders when reporting a loss under

an Agency guarantee (available in any

Agency office).

Rural and rural area. Any area not in

a city or town with a population in

excess of 10,000 inhabitants, according

to the latest decennial census of the

United States

Service area. The area reasonably

expected to be served by the project

being financed by the guaranteed loan.

State. Any of the 50 States, the

Commonwealth of Puerto Rico, the

Virgin Islands of the United States,

Guam, American Samoa,

Commonwealth of the Northern Mariana

Islands, Republic of the Marshall

Islands, Republic of Palau, and the

Federated States of Micronesia.

State Bond Banks and State Bond

Pools. An entity authorized by the State

to issue State debt instruments and

utilize the funds received to finance the

construction or improvement of

drinking water or waste disposal

facilities.

State Director. The Rural

Development State Director or the staff

member who has been delegated

authority to perform action on behalf of

the State Director.

Substantive change. Any change in

the purpose of the loan or any change

in the financial condition of the

borrower or the collateral which would

jeopardize the performance of the loan.

Transfer and assumption. The

conveyance by a debtor to an assuming

party of the assets, collateral, and

liabilities of the loan in return for the

assuming party’s binding promise to pay

the outstanding debt.

Waste disposal. Sanitary sewer

(treatment and collection), solid waste,

and storm drainage facilities.

WW. An acronym for Water and

Waste Disposal.

§ 1779.3 Full faith and credit.

The Loan Note Guarantee constitutes

an obligation supported by the full faith

and credit of the United States and is

not contestable except for fraud or

misrepresentation (including negligent

misrepresentation) of which the lender

or holder has actual knowledge,

participates in, or condones. A note

which provides for the payment of

interest on interest shall not be

guaranteed and any Loan Note

Guarantee or Assignment Guarantee

Agreement attached to, or relating to, a

note which provides for payment of

interest on interest is void. The Loan

Note Guarantee will not be enforceable

by the lender to the extent any loss is

occasioned by violation of usury laws,

negligent servicing, or failure to obtain

the required security regardless of the

time at which the Agency acquires

knowledge of the foregoing. Any losses

occasioned will not be enforceable by

the lender to the extent that loan funds

are used for purposes other than those

specifically approved by the Agency in

its Conditional Commitment for

Guarantee. Negligent servicing is

defined as the failure to perform those

services which a reasonably prudent

lender would perform in servicing its

own portfolio of loans that are not

guaranteed. The term includes not only

the concept of a failure to act, but also

not acting in a timely manner, acting in

a manner contrary to the manner in

which a reasonably prudent lender

would act up to the time of loan

maturity, or until a final loss is paid.

The Loan Note Guarantee or Assignment

Guarantee Agreement in the hands of a

23140 Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations

holder shall not cover interest accruing

90 days after the holder has demanded

repurchase by the lender, nor shall the

Loan Note Guarantee or Assignment

Guarantee Agreement in the hands of a

holder cover interest accruing 90 days

after the lender or Agency has requested

the holder to surrender the evidence of

debt for repurchase.

§ 1779.4 Conditions of guarantee.

A loan guarantee under this part will

be evidenced by a Loan Note Guarantee

issued by the Agency. Each lender will

also execute a Lender’s Agreement.

(a) The entire loan will be secured by

the same security with equal lien

priority for the guaranteed and nonguaranteed portions of the loan. The

non-guaranteed portion of the loan will

not be paid first nor given any

preference or priority over the

guaranteed portion.

(b) The lender will be responsible for

servicing the entire loan and will

remain mortgagee or secured party of

record notwithstanding the fact that

another party may hold a portion of the

loan.

(c) When a guaranteed portion of a

loan is sold to a holder, the holder shall

have all rights of the lender under the

Loan Note Guarantee to the extent of the

portion purchased. The lender will

remain bound by all the obligations

under the Loan Note Guarantee,

Lender’s Agreement, and Agency

program regulations. If the Agency

makes a payment to a holder, then the

lender must reimburse the Agency.

(d) A lender will receive all payments

of principal and interest on the account

of the entire loan and will promptly

remit to each holder a pro rata share,

less any lender servicing fee.

(e) The lender may retain all of the

unguaranteed portion of the loan or may

sell part of the unguaranteed portion of

the loan through participation.

However, the lender is required to retain

5 percent of the loan amount from the

unguaranteed portion in their portfolio.

§§ 1779.5–1779.7 [Reserved]

§ 1779.8 Access to lender’s records.

Upon request by the Agency, the

lender will permit representatives of the

Agency (or other agencies of the U.S.

Department of Agriculture authorized

by that Department or the U.S.

Government) to inspect and make

copies of any of the records of the

lender pertaining to the guaranteed

loans. Such inspection and copying may

be made during regular office hours of

the lender or at any other time the

lender and the Agency agree upon.

§ 1779.9 Environmental requirements.

Facilities financed must undergo an

environmental impact analysis in

accordance with the National

Environmental Policy Act and Agency

requirements as contained in part 1794

of this chapter. In accordance with

Agency guidance documents (RUS

Bulletin 1794A–602; this document is

available in any Agency State Office or

online at http://www.usda.gov/rus/

water/ees/index.htm), the

environmental review requirements

shall be performed by the applicant

simultaneously and concurrently with

the project’s engineering planning and

design. This should provide flexibility

to consider reasonable alternatives to

the project and development methods to

mitigate any adverse environmental

effects. Facility planning and design

must not only be responsive to the

owner’s needs but must consider the

environmental consequences of the

proposed project. Facility design will

incorporate and integrate, where

practicable, mitigation measures that

avoid or minimize adverse

environmental impacts. The lender

must assist the Agency in ensuring that

the borrower complies with the

Agency’s environmental review process

and implements any mitigation measure

identified in the environmental review

document or Conditional Commitment

for Guarantee. This assistance includes

ensuring that the borrower takes no

action (for example, initiation of

construction) or incur any obligations

that will have an adverse environmental

impact or limit the range of alternatives

to be considered prior to completion of

the environmental review process. If

construction is started prior to

completion of the environmental review

and the Agency is deprived of its

opportunity to fulfill its obligation to

comply with applicable environmental

requirements, the application for

financial assistance may be denied.

Satisfactory completion of the

environmental review process must

occur prior to the approval of the

applicant’s request or commitment of

Agency resources.

§§ 1779.10–1779.11 [Reserved]

§ 1779.12 Inspections.

The lender will notify the Agency of

any scheduled field inspections during

construction and after issuance of the

Loan Note Guarantee. The Agency may

attend such field inspections. Any

inspections or review conducted by the

Agency, including those with the

lender, are for the benefit of the Agency

only and not for the benefit of other

parties in interest. Agency inspections

do not relieve any parties in interest of

their responsibilities to conduct

necessary inspections.

§ 1779.13 Appeals.

Only the borrower, lender, or holder

can appeal an Agency decision. In cases

where the Agency has denied or

reduced the amount of final loss

payment to the lender, the adverse

decision may be appealed only by the

lender. A decision by a lender adverse

to the interest of the borrower is not a

decision by the Agency, whether or not

concurred in by the Agency. Appeals

will be handled in accordance with the

regulations of the National Appeals

Division, U.S. Department of

Agriculture, published at 7 CFR part 11.

§§ 1779.14–1779.16 [Reserved]

§ 1779.17 Exception authority.

The Administrator may, in individual

cases, make an exception to any

requirement or provision of this part

which is not inconsistent with the

authorizing statute or other applicable

law and is determined to be in the

Government’s interest.

§§ 1779.18–1779.19 [Reserved]

§ 1779.20 Eligibility.

(a) Availability of credit from other

sources. The Agency must determine

that the borrower is unable to obtain the

required credit without the loan

guarantee from private, commercial, or

cooperative sources at reasonable rates

and terms for loans for similar purposes

and periods of time. The Agency must

also determine if an outstanding

judgment obtained by the United States

in a Federal Court (other than the U.S.

Tax Court) has been entered against the

borrower or if the borrower has an

outstanding delinquent debt with any

Federal agency. Such judgment or

delinquency shall cause the potential

borrower to be ineligible to receive a

loan guarantee until the judgment is

paid in full or otherwise satisfied or the

delinquency is cured.

(b) Legal authority and responsibility.

(1) Each borrower must have, or will

obtain, the legal authority necessary to

construct, operate, and maintain the

proposed facility and services. They

must also have legal authority for

obtaining, giving security for, and

repaying the proposed loan.

(2) The borrower shall be responsible

for operating, maintaining, and

managing the facility and services, and

providing for the continued availability

and use of the facility and services at

reasonable rates and terms.

(c) Applicant. Eligible entities are:

Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations 23141

(1) A public body such as a

municipality, county, district, authority,

or other political subdivision of a State

located in a rural area.

(2) An organization operated on a 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

(3) Indian tribes on Federal and State

reservations and other federally

recognized Indian tribes.

(d) Facility location. Facilities must be

located in rural areas, except: For utility

services such as drinking water, sanitary

sewer, solid waste disposal or storm

drainage facilities serving both rural and

non-rural areas. In such cases, Agency

funds may be used to finance only that

portion serving rural areas, regardless of

facility location.

(e) Facilities for public use. All

facilities financed under the provisions

of this part shall be for public purposes.

(1) Facilities will be installed to serve

any user within the service area who

desires service and can be feasibly and

legally served.

(2) In no case will boundaries for the

proposed service area be chosen in such

a way that any user or area will be

excluded because of race, color,

religion, sex, marital status, age,

disability, or national origin.

(3) The lender will determine that,

when feasible and legally possible,

inequities within the proposed project’s

service area for the same type service

proposed will be remedied by the owner

on, or before, completion of the project.

Inequities are defined as unjustified

variations in availability, adequacy, or

quality of service. User rate schedules

for portions of existing systems or

facilities that were developed under

different financing, rates, terms, or

conditions do not necessarily constitute

inequities.

§§ 1779.21–1779.23 [Reserved]

§ 1779.24 Eligible loan purposes.

(a) To construct, enlarge, extend, or

otherwise improve rural drinking water,

sanitary sewage, solid waste disposal,

and storm wastewater disposal facilities.

(b) To construct or relocate public

buildings, roads, bridges, fences, or

utilities, and to make other public

improvements necessary for the

successful operation or protection of

facilities authorized in paragraph (a) of

this section.

(c) To relocate private buildings,

roads, bridges, fences, or utilities, and

other private improvements necessary

for the successful operation or

protection of facilities authorized in

paragraph (a) of this section.

(d) For payment of other utility

connection charges as provided in

service contracts between utility

systems.

(e) When a necessary part of the

project relates to those facilities

authorized in paragraphs (a), (b), (c) or

(d) of this section the following may be

considered:

(1) Reasonable fees and costs such as:

legal, engineering, administrative

services, fiscal advisory, recording,

environmental analyses and surveys,

possible salvage or other mitigation

measures, planning, establishing or

acquiring rights;

(2) Costs of acquiring interest in land:

rights, such as water rights; leases;

permits; rights-of-way; and other

evidence of land or water control or

protection necessary for development of

the facility;

(3) Purchasing or renting equipment

necessary to install, operate, maintain,

extend, or protect facilities;

(4) Cost of additional applicant labor

and other expenses necessary to install

and extend service;

(5) In unusual cases such as a lowincome area, the cost for connecting the

user to the main service line;

(6) Interest incurred during

construction in conjunction with

multiple advances or interest on interim

financing;

(7) Initial operating expenses,

including interest, for a period

ordinarily not exceeding one year when

the applicant is unable to pay such

expenses;

(8) The purchase of existing facilities

when it is necessary either to improve

service or prevent the loss of service;

and

(9) Refinancing non-Agency debts

incurred by, or on behalf of, an

applicant when all of the following

conditions exist:

(i) The debts being refinanced are a

secondary part of the total loan unless

the debt being refinanced is an Agency

direct loan;

(ii) The debts were incurred for the

facility or service being financed or any

part thereof; and

(iii) Arrangements cannot be made

with the creditors to extend or modify

the terms of the debts so that a sound

basis will exist for making a loan.

(10) Refinancing Agency debts.

§ 1779.25 Ineligible loan purposes.

Loan funds may not be used to

finance:

(a) Facilities which are not modest in

size, design, and cost;

(b) Loan or grant finder’s fees;

(c) The construction of any new

combined storm and sanitary sewer

facilities;

(d) Any portion of the cost of a facility

which does not serve a rural area;

(e) That portion of project costs

normally provided by a business or

industrial user, such as wastewater

pretreatment;

(f) Rental for the use of equipment or

machinery owned by the applicant;

(g) For other purposes not directly

related to operating and maintenance of

the facility being installed or improved;

or

(h) The payment of a judgment which

would disqualify an applicant for a loan

under § 1779.20(a).

§ 1779.26 [Reserved]

§ 1779.27 Lenders.

(a) Eligible lenders. Eligible lenders

may participate in the loan guarantee

program. These lenders must be subject

to credit examination and supervision

by an appropriate agency of the United

States or a State that supervises and

regulates credit institutions. A lender

must have the capability to adequately

service loans for which a guarantee is

requested. Eligible lenders are:

(1) Any Federal or State chartered

bank or savings and loan association;

(2) Any mortgage company that is a

part of a bank holding company;

(3) Co-Bank, National Rural Utilities

Cooperative Finance Corporation, Farm

Credit Bank of the Federal Land Bank,

or other Farm Credit System institution

with direct lending authority authorized

to make loans of the type guaranteed by

this part;

(4) An insurance company regulated

by a State or National insurance

regulatory agency;

(5) State Bond Banks or State Bond

Pools; and

(6) Other lenders that possess the

legal powers necessary and incidental to

making and servicing guaranteed loans

involving community development-type

projects. Lenders under this category

must be approved by the National Office

prior to the issuance of the loan

guarantee.

(b) Conflict of interest. When the

lender’s officers, stockholders, directors,

or partners (including their immediate

families) or the borrower, its officers,

stockholders, directors, or partners

(including their immediate families)

own, or have management

responsibilities in each other, the lender

must disclose such business or

ownership relationships. The Agency

will determine if such relationships are

likely to result in a conflict of interest.

23142 Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations

This does not preclude lender officials

from being on the borrower’s board of

directors.

§ 1779.28 Transfer of lenders or borrowers

(prior to issuance of Loan Note Guarantee).

(a) Prior to issuance of the loan

guarantee, the Agency may approve the

transfer of an outstanding Conditional

Commitment for Guarantee from the

present lender to a new eligible lender:

Provided, That:

(1) The former lender states in writing

why it does not wish to continue to be

the lender for this project;

(2) No substantive changes in

ownership or control of the borrower

has occurred;

(3) No substantive changes in the

borrower’s written plan, scope of work,

or changes in the purpose or intent of

the project has occurred; and

(4) No substantive changes in the loan

agreement or Conditional Commitment

for Guarantee are required.

(b) The substitute lender must execute

a new application for loan and

guarantee (available in any Agency

office).

(c) If approved, the Agency will issue

a letter of amendment to the original

Conditional Commitment for Guarantee

reflecting the new lender who will

acknowledge acceptance of the offer in

writing.

(d) Once the Conditional Commitment

for Guarantee is issued, the Agency will

not approve any substitution of

borrowers, including changes in the

form of the legal entity, except a change

in the legal entity may be requested

when the original borrower is replaced

with substantially the same individuals

or officers with the same interest as

originally approved.

§ 1779.29 Fees and charges by lender.

(a) Routine charges and fees. The

lender may establish charges and fees

for the loan if they do not exceed those

charged other borrowers for similar

types of transactions. ‘‘Similar types of

transactions’’ mean those transactions

involving the same type of loan for

which a non-guaranteed loan borrower

would be assessed charges and fees.

(b) Late payment fees. Late payment

charges will not be covered by the Loan

Note Guarantee. Such charges may not

be added to the principal and interest

due under any guaranteed note. Late

payment charges may be made only if:

(1) They are routinely made by the

lender in all types of loan transactions;

(2) Payment has not been received

within the customary timeframe

allowed by the lender; or

(3) The lender agrees with the

borrower, in writing, that the rate or

method of calculating the late payment

charges will not be changed to increase

charges while the Loan Note Guarantee

is in effect.

(c) Guarantee fees. The guaranteed

loan fee will be the applicable guarantee

fee rate multiplied by the principal loan

amount multiplied by the percent of

guarantee. The one-time guarantee fee is

paid when the Loan Note Guarantee is

issued.

(1) The fee will be paid to the Agency

by the lender and is nonreturnable. The

lender may pass the fee to the borrower.

(2) The guarantee fee rates are

available in any Agency office.

§ 1779.30 Loan guarantee limitations.

(a) The guarantee will be 90 percent

of eligible loss.

(b) The lender will retain a minimum

of 5 percent of the total loan amount.

The retained amount must be from the

unguaranteed portion of the loan and

cannot be participated to another

lender.

§§ 1779.31–1779.32 [Reserved]

§ 1779.33 Interest rates.

(a) General. Rates will be negotiated

between the lender and the borrower.

They may be either fixed or variable

rates. Interest rates will be those rates

customarily charged borrowers in

similar circumstances in the ordinary

course of business and are subject to

Agency review and approval.

(b) Variable rate publication. A

variable interest rate must be tied to a

base rate published periodically in a

recognized national or regional financial

publication specifically agreed to by the

lender and borrower. Such an agreement

must be documented in the borrower or

lender loan agreement.

(1) Interest rate caps and incremental

adjustment limitations will also be

negotiated between the lender and the

borrower. Notice of any interest rate

change proposed by the lender should

allow a sufficient time period for the

borrower to obtain any required State or

other regulatory approval and to

implement any user rate adjustments

necessary as a result of the interest rate

change. The intervals between interest

rate adjustments will be specified in the

loan agreement (but not more often than

quarterly).

(2) The lender must incorporate

within the variable rate note, the

provision for adjustment of payments

coincident with an interest rate

adjustment. This will ensure the

outstanding principal balance is

properly amortized within the

prescribed loan maturity and eliminate

the possibility of a balloon payment at

the end of the loan.

(c) Changes. Any change in the

interest rate between the date of

issuance of the Conditional

Commitment for Guarantee and before

the issuance of the Loan Note Guarantee

must be approved by the Agency.

Approval of such change will be shown

as an amendment to the Conditional

Commitment for Guarantee.

(d) Different rates on guaranteed and

unguaranteed portion of the loan. It is

permissible to have one interest rate on

the guaranteed portion of the loan and

another interest rate on the

unguaranteed portion of the loan,

provided the lender and borrower agree,

and:

(1) The rate on the unguaranteed

portion does not exceed that currently

being charged on loans for similar

purposes to borrowers under similar

circumstances; and

(2) The rate on the guaranteed portion

of the loan will not exceed the rate on

the unguaranteed portion. This

requirement does not apply when the

unguaranteed rate is variable and the

guaranteed portion is fixed.

(e) Multi-rates. When multi-rates are

used, the lender will provide the

Agency with the overall effective

interest rate for the entire loan. Multirate loans may be either fixed, variable,

or a combination of fixed and variable.

§ 1779.34 Terms of loan repayment.

(a) General. Principal and interest on

the loan will be due and payable as

provided in the note except, any interest

accrued as the result of the borrower’s

default on the guaranteed loan over and

above that which would have accrued at

the note rate on the guaranteed loan will

not be guaranteed by the Agency. The

lender will structure repayments as

established in the loan agreement

between the lender and borrower.

Ordinarily, such installments will be

scheduled for payment as agreed upon

by the lender and borrower on terms

that reasonably ensure repayment of the

loan. However, the first installment to

include a repayment of principal may be

scheduled for payment after the project

is operable and has begun to generate

income. Such installment must be due

and payable within 3 years from the

date of the note and at least annually

thereafter. Interest will be due at least

annually from the date of the note.

Monthly payments will be required

except for borrowers with income

limited to less frequent intervals.

(b) Term length. The maximum time

allowable for final maturity for a

guaranteed WW loan will be limited to

the useful life of the facility, not to

exceed 40 years.

Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations 23143

(c) Balloon payments. The principal

balance should be properly amortized

within the prescribed loan maturity.

Balloon payments at the end of the loan

are prohibited.

§§ 1779.35–1779.36 [Reserved]

§ 1779.37 Insurance and fidelity bonds.

The lender must provide evidence

that the borrower has adequate

insurance and fidelity bond coverage by

loan closing or start of construction,

whichever occurs first. Adequate

coverage must be maintained for the life

of the loan and is subject to Agency

review and approval.

§§ 1779.38–1779.41 [Reserved]

§ 1779.42 Design and construction

requirements.

The lender will provide the Agency

with a written certification at the end of

construction that all funds were utilized

for authorized purposes. The borrower

and the lender will authorize designs

and plans based upon the preliminary

architectural and engineering reports or

plans approved by the lender and

concurred in by the Agency. The

borrower will take into consideration

any lender or Agency comments when

the facility is being designed.

(a) Architectural and engineering

practices. All project facilities must be

designed utilizing accepted

architectural and engineering practices

and must conform to applicable Federal,

State, and local codes and requirements.

The lender must ensure that the

planned project will be completed

within the available funds and, once

completed, will be suitable for the

borrower’s needs.

(b) Construction monitoring. The

lender will monitor the progress of

construction and undertake the reviews

and inspections necessary to ensure that

construction proceeds in accordance

with the approved plans, specifications,

and contract documents and that funds

are used for eligible project costs. The

lender must expeditiously report any

problems in project development to the

Agency.

(c) Equal employment opportunities.

For all construction contracts in excess

of $10,000, the contractor must comply

with Executive Order 11246 (30 FR

12319, 3 CFR, 1964–1965 Comp., p. 339)

entitled ‘‘Equal Employment

Opportunity’’ as amended and as

supplemented by applicable Department

of Labor regulations (41 CFR part 60–1).

The borrower and lender are responsible

for ensuring that the contractor

complies with these requirements.

(d) Americans with Disabilities Act.

WW loans which involve the

construction of, or addition to, facilities

that accommodate the public and

commercial facilities as defined by the

Americans with Disabilities Act (42

U.S.C. 12181—et seq.) must comply

with that Act. The lender and borrower

are responsible for compliance.

(e) Administrative. When the Agency

reviews the preliminary architectural

and engineering reports or plans, they

must also consider all applicable

Federal laws such as the seismic

requirements of Executive Order 12699

(55 FR 835, 3 CFR, 1990 Comp., p. 269),

the debarment requirements of 7 CFR

part 3017, and the Copeland AntiKickback Act (18 U.S.C. 874).

§ 1779.43 Other Federal, State, and local

requirements.

In addition to the specific

requirements of this part and beginning

on the date of issuance of the Loan Note

Guarantee, proposals for facilities

financed in whole or in part with a loan

guaranteed by the Agency will be

coordinated with all appropriate

Federal, State, and local agencies.

Borrowers and lenders will be required

to comply with any Federal, State, or

local laws or regulatory commission

rules which are in existence and which

affect the project including, but not

limited to:

(a) Applicant’s authority to design,

construct, develop, operate, and

maintain the proposed facilities;

(b) Borrowing money, giving security,

and raising revenues for repayment;

(c) Land use zoning;

(d) Health, safety, and sanitation

standards as well as design and

installation standards; and

(e) Protection of the environment and

consumer affairs.

§§ 1779.44–1779.46 [Reserved]

§ 1779.47 Economic feasibility

requirements.

All projects financed under the

provisions of this section must be based

on taxes, assessments, revenues, fees, or

other sources of revenues in an amount

sufficient to provide for facility

operation and maintenance, a

reasonable reserve, and debt payment.

The lender is responsible for

determining the credit quality and

economic feasibility of the proposed

loan and must address all elements of

the credit quality in a written financial

feasibility analysis which includes

adequacy of equity, cash flow, security,

history, and management capabilities.

Financial feasibility reports must take

into consideration any interest rate

adjustment which may be instituted

under the terms of the note. The

lender’s financial credit analysis may

also serve as the feasibility analysis

when sufficient evidence is included to

determine economic feasibility as well

as financial viability. The borrower’s

consulting engineer may complete the

financial feasibility analysis for WW

systems. If the facility is used by

businesses and the success or failure of

the facility is dependent on individual

businesses, then the economic viability

of those businesses must be assessed.

(a) Exceptions. The Agency loan

approval official may exempt the lender

from the requirement for an

independent financial feasibility report

(when requested by the borrower and

the lender) provided the approval

official determines that the financial

feasibility analysis prepared by the

borrower fairly represents the financial

feasibility of the facility and the

financial feasibility analysis contains an

accurate projection of the usage,

revenues, and expenses of the facility.

(b) Insufficient information. When the

lender or Agency has insufficient

information to determine the borrower’s

repayment ability, an independent

feasibility analysis is required.

§ 1779.48 Collateral.

(a) Lender responsibility. The lender

is responsible for obtaining and

maintaining proper and adequate

collateral to protect the interest of the

lender, the holder, and the Government.

(b) Type of collateral. Collateral must

be of such a nature that repayment of

the loan is reasonably ensured when

considered with the integrity and ability

of project management, soundness of

the project, and the borrower’s

prospective earnings. The collateral may

include, but is not limited to, the

following: General obligation bonds,

revenue bonds, pledge of taxes or

assessments, assignment of facility

revenue, land, easements, rights-of-way,

water rights, buildings, machinery,

equipment, accounts receivable,

contracts, cash, or other accounts or

assignments of leases or leasehold

interest.

(c) Separate collateral. All collateral

must secure the entire loan. The lender

will not take separate security to secure

only the unguaranteed portion of the

loan. The lender will not require

compensating balances or certificates of

deposit as a means of eliminating the

lender’s exposure on the unguaranteed

portion of the loan.

§§ 1779.49–1779.51 [Reserved]

§ 1779.52 Processing.

(a) Preapplications. (1) The

preapplication package may be

submitted either alone or the necessary

23144 Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations

information may be submitted

simultaneously with the application.

The preapplication package will

contain:

(i) An Application for Federal

Assistance on a form provided by the

Agency (available in any Agency office);

(ii) State intergovernmental or other

type review comments and

recommendations for the borrower’s

project (clearinghouse comments, if

applicable);

(iii) Supporting documentation

necessary to make an eligibility

determination such as financial

statements, audits, copies of

organizational documents, or existing

debt instruments; and

(iv) Documentation of lender

eligibility in accordance with § 1779.27.

(2) If the Agency determines that the

project may meet requirements and is

likely to be funded, the lender must

submit a complete application if it has

not previously submitted one.

(b) Applications. Contents of

application package:

(1) Application for Loan and

Guarantee on a form prescribed by the

Agency (available in any Agency office);

(2) Proposed loan agreement;

(3) Environmental Report. (See RUS

Bulletin 1794A–602; this document is

available in any Agency State Office or

online at http://www.usda.gov/rus/

water/ees/index.htm);

(4) Preliminary architectural or

engineering report (PER);

(5) Cost estimates;

(6) Appraisal reports (as appropriate);

(7) Credit reports (as appropriate);

(8) Financial feasibility analysis and

report (as appropriate) if not included in

PER; and

(9) Any additional information

required.

§ 1779.53 Evaluation of application.

If the Agency determines that the

borrower is eligible, the proposed loan

is for an eligible purpose, there is

reasonable assurance of repayment

ability, sufficient collateral and equity

exists, the proposed loan complies with

all applicable statutes and regulations,

the environmental impact analyses is

complete, and adequate funds are

available, the Agency will provide the

lender and the borrower with the

Conditional Commitment for Guarantee,

listing all conditions for the guarantee.

Applicable requirements will include

the following:

(a) Approved use of guaranteed loan

funds (source and use of funds);

(b) Rates and terms of the loan;

(c) Scheduling of payments;

(d) Number of customers;

(e) Security and lien priority;

(f) Appraisals;

(g) Insurance and bonding;

(h) Financial reporting;

(i) Equal opportunity and

nondiscrimination;

(j) Mitigation measures for

environmental issues (if necessary);

(k) Americans with Disabilities Act;

(l) By-laws and articles of

incorporation changes; and

(m) Other requirements necessary to

protect the Government.

§§ 1779.54–1779.58 [Reserved]

§ 1779.59 Review of requirements.

(a) Lender and borrower. The lender

and borrower must complete and sign

the Acceptance of Conditions and return

a copy to the Agency as soon as

possible. Notwithstanding the preceding

sentence, if certain conditions cannot be

met, the lender and borrower may

propose alternate conditions for Agency

consideration.

(b) Cancellation. If the lender decides

at any time after receiving a Conditional

Commitment for Guarantee that it no

longer wants a guarantee, the lender

must immediately advise the Agency of

the cancellation.

(c) Modifications. The lender agrees

that once the Conditional Commitment

for Guarantee is issued and accepted by

the lender and borrower, it will not be

modified as to the scope of the project,

overall facility concept, project purpose,

use of proceeds, or other terms and

conditions.

§§ 1779.60–1779.62 [Reserved]

§ 1779.63 Conditions precedent to

issuance of the Loan Note Guarantee.

The Loan Note Guarantee will not be

issued until:

(a) The lender certifies that:

(1) No changes have been made in the

lender’s loan conditions and

requirements since the issuance of the

Conditional Commitment for Guarantee

except those approved in the interim by

the Agency in writing.

(2) All planned property acquisition

has been completed and all

development has been substantially

completed in accordance with plans,

specifications, and applicable building

codes. No costs have exceeded the

amounts approved by the lender and the

Agency.

(3) Required insurance is in effect.

(4) The loan has been properly closed

and the required security instruments

have been obtained on any afteracquired property that cannot be

covered initially under State statutory

provisions.

(5) The borrower has marketable title

to the collateral then owned by the

borrower, subject to the instrument

securing the loan to be guaranteed and

subject to any other exceptions

approved, in writing, by the Agency.

(6) When required, the entire amount

of the loan for working capital has been

disbursed except in cases where the

Agency has approved disbursement over

an extended time.

(7) All other requirements of the

Conditional Commitment for Guarantee

have been met.

(8) Lien priorities are consistent with

requirements of the Conditional

Commitment for Guarantee.

(9) The loan proceeds have been

disbursed for purposes and in amounts

consistent with the Conditional

Commitment for Guarantee and as

specified on the application for the

guaranteed loan. A copy of a detailed

statement by the lender detailing the use

of loan funds will be attached to support

this certification.

(10) There has been no substantive

adverse change in the borrower’s

financial condition nor any other

adverse change in the borrower during

the period of time from the Agency’s

issuance of the Conditional

Commitment for Guarantee to issuance

of the Loan Note Guarantee. The

lender’s certification must address all

adverse changes of the borrower and the

guarantors. For purposes of this

paragraph (a)(10), the term borrower

includes any parent, affiliate, or

subsidiary of the borrower.

(11) All Federal, State, and local

design and construction requirements

have been met.

(12) The lender understands and will

meet the requirements of the Debt

Collection Act (31 U.S.C. Chapter 37).

(13) The lender would not make the

loan without an Agency guarantee.

(b) The lender has executed and

delivered the Lender’s Agreement and

closing report for the guaranteed loan

along with the appropriate guarantee

fee.

(c) The lender has advised the Agency

of plans to sell or assign any part of the

loan as provided in the Lender’s

Agreement.

(d) Where applicable, the lender must

certify that the borrower has obtained:

(1) A legal opinion relative to the title

to rights-of-way and easements. Lenders

are responsible for ensuring that

borrowers have obtained valid,

continuous, and adequate rights-of-way

and easements needed for the

construction, operation, and

maintenance of a facility.

(2) A title opinion or title insurance

showing ownership of the land and all

mortgages or other lien defects,

restrictions, or encumbrances, if any. It

Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations 23145

is the responsibility of the lender to

ensure that the borrower has obtained

and recorded such releases, consents, or

subordinations to such property rights

from holders of outstanding liens or

other instruments as may be necessary

for the construction, operation, and

maintenance of the facility and to

provide the required security. For

example, when a site is for major

structures and the lender and borrower

are able to obtain only a right-of-way or

easement on such a site rather than a fee

simple title, such a title opinion must be

requested.

(e) If the Loan Note Guarantee cannot

be issued before the Conditional

Commitment expires, the lender must

submit a written request for an

extension of the expiration date. The

lender must document and certify to

paragraph (a)(1) and (a)(11) of this

section specifically identifying any

modifications.

(f) Coincident with, or immediately

after, loan closing, the lender will

contact the Agency and provide those

documents and certifications required

in this section. For loans to public

bodies, lenders may require an opinion

from recognized bond counsel regarding

the adequacy of the preparation and

issuance of the debt instruments. Only

when the Agency is satisfied that all

conditions for the guarantee have been

met will the Loan Note Guarantee be

executed.

§ 1779.64 Issuance of Lender’s

Agreement, Loan Note Guarantee, and

Assignment Guarantee Agreement.

(a) Lender’s Agreement. If the Agency

finds that all requirements have been

met, the lender and the Agency will

execute the Lender’s Agreement. The

original will be retained by the Agency

and a signed duplicate original will be

retained by the lender. A separate

Lender’s Agreement must be executed

for each loan to be guaranteed by the

Agency.

(b) Loan Note Guarantee. (1) Upon

receipt of the executed Lender’s

Agreement and after all requirements

have been met, the Agency will execute

the Loan Note Guarantee. All originals

of the Loan Note Guarantee will be

provided to the lender and attached to

the note.

(2) If the lender has selected the

multi-note system, a Loan Note

Guarantee will be prepared and attached

to each note the borrower issues. All the

notes will be listed on the Loan Note

Guarantee. Not more than ten notes will

be issued for the guaranteed portion

(unless the Agency and borrower agree

otherwise) and one note issued for the

unguaranteed portion.

(c) Assignment of Guarantee. In the

event the lender assigns the guaranteed

portion of the loan to a holder, the

lender, holder, and Agency will execute

an Agency prescribed Assignment

Guarantee Agreement.

(d) Failure to meet conditions. If the

Agency determines that it cannot

execute the Loan Note Guarantee

because all requirements have not been

met, the lender will have a reasonable

period within which to satisfy the

objections. If the lender satisfies the

objections within the time allowed, the

guarantee will be issued.

(e) Loan closing report. The lender

will prepare and deliver a guaranteed

loan closing report for each loan to be

guaranteed and a guarantee fee to the

Agency in return for the Loan Note

Guarantee.

§ 1779.65 Lender’s sale or assignment of

the guaranteed portion of loan.

The lender may retain all of the

guaranteed loan. The lender must not

sell or participate any amount of the

guaranteed or non-guaranteed portion of

the loan to the borrower or to members

of the borrower’s immediate families,

the borrower’s officers, directors,

stockholders, other owners, or a

subsidiary or affiliate. Disposition of the

guaranteed portion of a loan may not be

made prior to full disbursement,

completion of construction, and

acquisition of real estate and equipment

without the prior written approval of

the Agency. If the lender desires to

market all or part of the guaranteed

portion of the loan at, or subsequent to,

loan closing, the loan must not be in

default.

(a) Assignment. Any sale or

assignment by the lender of the

guaranteed portion of the loan must be

accomplished in accordance with the

conditions in the Lender’s Agreement.

(b) Participation. The lender may

obtain participation in the loan under

its normal operating procedures.

(c) Minimum retention. The lender is

required to hold in its own portfolio or

retain a minimum of 5 percent of the

total loan amount. This amount must be

of the non-guaranteed portion of the

loan and cannot be participated to

another. The lender may sell the

remaining amount of the nonguaranteed portion of the loan only

through participation.

§§ 1779.66–1779.68 [Reserved]

§ 1779.69 Loan servicing.

(a) Lender responsibilities. The lender

is responsible for servicing the entire

loan in accordance with the lender’s

loan agreement. The unguaranteed

portion of the loan will not be paid first

nor given any preference or priority over

the guaranteed portion of the loan. The

lender is responsible for taking all

servicing actions that a prudent lender

would perform in servicing a portfolio

of loans that are not guaranteed. This

responsibility includes, but is not

limited to, the collection of payments;

obtaining compliance with the

covenants and provisions in the note,

loan agreement, security instrument, or

any supplemental agreements; obtaining

and analyzing financial statements;

verifying the payment of taxes and

insurance premiums; and maintaining

liens on collateral. The lender must

notify the Agency of any violation of the

loan agreement with the borrower

within 30 days of such violation.

(b) Financial reports. The lender must

obtain the financial statements required

by the Loan Agreement. The lender

must submit the borrower’s annual

financial statements to the Agency

within 120 days of the end of the

borrower’s fiscal year. The lender must

analyze the financial statements and

provide the Agency with a written

summary of the lender’s analysis and

conclusions, including trends, strengths,

weaknesses, extraordinary transactions,

and other indications of the financial

condition of the borrower. Additionally,

when applicable, the lender will require

an audit in accordance with Office of

Management and Budget (OMB)

circulars (available in any Agency

office).

(c) Delinquent loans. The lender will

service delinquent loans in accordance

with the Lender’s Agreement and

reasonable and prudent lending

standards.

(d) Loan balances. The lender must

report to the Agency the outstanding

principal and interest balance on each

guaranteed loan semiannually.

(e) Collateral inspections. The lender

will inspect the collateral as often as

necessary to properly service the loan.

§§ 1779.70–1779.72 [Reserved]

§ 1779.73 Replacement of loss, theft,

destruction, mutilation, or defacement of

Loan Note Guarantee or Assignment

Guarantee Agreement.

(a) Replacement. The Agency may

issue a replacement Loan Note

Guarantee or Assignment Guarantee

Agreement which may have been lost,

stolen, destroyed, mutilated, or defaced

to the lender or holder upon receipt of

a certificate of loss and an indemnity

bond in accordance with this section.

(b) Lender responsibilities. When a

Loan Note Guarantee or Assignment

Guarantee Agreement is lost, stolen,

destroyed, mutilated, or defaced while

in the custody of the lender or holder,

23146 Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations

the lender will coordinate the activities

of the party who seeks the replacement

documents and will submit the required

documents to the Agency for processing.

The requirements for replacement are as

follows:

(1) A certificate of loss properly

notarized which includes:

(i) Legal name and present address of

either the lender or the holder who is

requesting the replacement forms;

(ii) Legal name and address of the

lender of record;

(iii) Capacity of person certifying;

(iv) Full identification of the Loan

Note Guarantee or Assignment

Guarantee Agreement, including the

name of the borrower, Agency case

number, date of the Loan Note

Guarantee, Assignment Guarantee

Agreement, face amount of the evidence

of debt purchased, date of evidence of

debt, present balance of the loan,

percentages of guarantee and, if

Assignment Guarantee Agreement, the

original named holder and the

percentage of the guaranteed portion of

the loan assigned to that holder. Any

existing parts of the document to be

replaced must be attached to the

certificate;

(v) A full statement of circumstances

of the loss, theft, or destruction of the

Loan Note Guarantee or Assignment

Guarantee Agreement; and

(vi) The holder shall present evidence

demonstrating current ownership of the

Loan Note Guarantee and Note or

Assignment Guarantee Agreement. If the

present holder is not the same as the

original holder, a copy of the

endorsement of each successive holder

in the chain of transfer from the initial

holder to present holder must be

included. If copies of the endorsement

cannot be obtained, best available

records of transfer must be presented to

the Agency (e.g., order confirmation,

canceled checks).

(2) An indemnity bond acceptable to

the Agency shall accompany the request

for replacement except when the holder

is the United States, a Federal Reserve

Bank, a Federal Government

corporation, a State or Territory, or the

District of Columbia.

(3) All indemnity bonds must be

issued and payable to the United States

of America. The bond shall be in an

amount not less than the unpaid

principal and interest. The bond shall

hold the Government harmless against

any claim or demand which might arise

or against any damage, loss, costs, or

expenses which might be sustained or

incurred by reasons of the loss or

replacement of the instruments.

§ 1779.74 [Reserved]

§ 1779.75 Defaults by borrower.

(a) Lender notification to Agency. The

lender must notify the Agency when a

borrower is 30 days past due on a

payment, has not met its responsibilities

of providing the required financial

statements, or is otherwise in default.

The lender will continue to keep the

Agency informed on a bimonthly basis

until such time as the loan is no longer

in default. If a monetary default exceeds

60 days, the lender will arrange a

meeting with the borrower to resolve the

default. The lender will provide a

summary of the meeting and any

decisions or actions agreed upon.

(b) Servicing options. In considering

servicing options, the prospects for

providing a permanent cure without

adversely affecting the risks to the

Agency and the lender must be the

paramount objective. Temporary

curative actions (such as payment

deferments or collateral subordination)

must strengthen the loan and be in the

best financial interest of the lender and

the Agency. Some of these actions may

require concurrence of the holder.

(c) Multi-note. If the loan was closed

with the multi-note option, the lender

may need to possess all notes to take

some servicing actions. In those

situations when the Agency is holder of

some of the notes, the Agency may

endorse the notes back to the lender,

provided a proper receipt is received

from the lender which defines the

reason for the transfer. Under no

circumstances will the Agency endorse

the original Loan Note Guarantee to the

lender.

§§ 1779.76–1779.77 [Reserved]

§ 1779.78 Repurchase of loan.

(a) Repurchase by lender. The lender

has the option to repurchase the loan

from a holder within 30 days of written

demand from the holder when the

borrower is in default not less than 60

days on payment. The repurchase will

be for an amount equal to the unpaid

guaranteed portion of principal and

accrued interest less the lender’s

servicing fee. The guarantee does not

cover the note interest to the holder on

the guaranteed loan accruing after 90

days from the date of the demand letter

to the lender. The holder will

concurrently send a copy of the demand

to the Agency. The lender will accept an

assignment without recourse from the

holder upon repurchase. The lender is

encouraged to repurchase the loan to

facilitate the accounting of funds,

resolve the problem, and permit the

borrower to cure the default, where

reasonable. The lender will notify the

holder and the Agency of its decision

within 30 days of receipt of demand

from the holder.

(b) Agency repurchase. (1) If the

lender does not repurchase as provided

in paragraph (a) of this section, the

Agency will purchase from the holder

the unpaid principal balance of the

guaranteed portion together with

accrued interest to date of repurchase

(less the lender’s servicing fee) within

30 days after a specific written demand

directed to the Agency. The copy of the

demand on the lender is not sufficient.

The guarantee will not cover the note

interest to the holder on the guaranteed

loan accruing after 90 days from the

date of the original demand letter. The

lender shall not charge the Agency any

servicing fees nor are any such fees

collectible from the Agency.

(2) The holder’s demand to the

Agency must include a copy of the

written demand made upon the lender.

The holder or duly authorized agent

must also include evidence of the right

to require payment from the Agency.

Such evidence will consist of either the

original of the Loan Note Guarantee

properly endorsed to the Agency or the

original of the Assignment Guarantee

Agreement properly assigned to the

Agency without recourse including all

rights, title, and interest in the loan. The

Agency will be subrogated to all rights

of the holder. The holder must include

in the demand the amount due

including unpaid principal, unpaid

interest to date of demand, and interest

subsequently accruing from the date of

demand to the proposed payment date.

Unless otherwise agreed to by the

Agency, such proposed payment will

not be later than 30 days from the date

of demand.

(3) The lender must promptly provide

the Agency with the information

necessary for the Agency’s

determination of the appropriate

amount due the holder upon the

Agency’s notification to the lender of

the holder’s demand for payment. This

information must be certified by an

authorized officer of the lender. Any

discrepancy between the amount

claimed by the holder and the

information submitted by the lender

must be resolved before payment will be

approved. The Agency will notify both

parties and such conflict will suspend

the running of the 30-day payment

requirement.

(4) Any purchase by the Agency does

not change, alter, or modify any of the

lender’s obligations to the Agency

arising from the loan or guarantee nor

does it waive any of the Agency’s rights

against the lender. The Agency may set

off against the lender all rights inuring

Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations 23147

to the Agency as the holder of the

instrument against the Agency’s

obligation to the lender under the Loan

Note Guarantee.

(c) Repurchase for servicing. When

the lender determines that repurchase of

the guaranteed portion of the loan is

necessary to service the loan, the holder

must sell the guaranteed portion to the

lender for the unpaid principal and

interest balance (less the lender’s

servicing fee). The guarantee does not

cover interest accruing after 90 days

from the date the lender’s or Agency’s

letter requesting the holder to tender its

guaranteed portion. The lender must not

repurchase from the holder for arbitrage

purposes to further its own financial

gain. Any repurchase must be made

only after the lender obtains the Agency

written approval. If the lender does not

repurchase the portion from the holder,

the Agency may, at its option, purchase

such guaranteed portion for servicing

purposes.

§ 1779.79 [Reserved]

§ 1779.80 Interest rate changes after loan

closing.

(a) General. Subject to the restrictions

below, the borrower, lender, and holder

(if any) may collectively effect a

permanent reduction in the interest rate

on the guaranteed loan at any time

during the life of the loan on written

agreement by all of the applicable

parties. After such a permanent

reduction, the Loan Note Guarantee will

only cover losses of interest at the

reduced interest rate. The Agency must

be notified by the lender, in writing,

within 10 calendar days of the change.

When the Agency is a holder, it will

concur only when it is demonstrated

that the change is more viable than

liquidation and that the Government’s

financial interests are not adversely

affected. Factors which will be

considered in making such

determination are the Government’s cost

of borrowing money and the project’s

enhancement of rural development. The

monetary recovery must be greater than

the liquidation recovery, and a financial

feasibility analysis must show the

project’s continued viability.

(1) Fixed rates cannot be changed to

variable rates to reduce the interest rate

to the borrower unless the variable rate

has a ceiling which is less than the

original fixed rate.

(2) Variable rates can be changed to a

lower fixed rate. In a final loss

settlement when qualifying rate changes

are made with the required written

agreements and notification, the interest

will be calculated for the periods the

given rates were in effect. The lender

must maintain records which

adequately document the accrued

interest claimed.

(3) The lender is responsible for the

legal documentation of interest rate

changes. However, the lender may not

issue a new note.

(b) Increases. No increases in interest

rates will be permitted under the loan

guarantee except the normal

fluctuations in approved variable

interest rate loans.

§ 1779.81 Liquidation.

Liquidation will occur when the

lender concludes that liquidation of the

guaranteed loan is necessary because of

default or third party actions that the

borrower cannot, or will not, cure or

eliminate within a reasonable period of

time and the Agency concurs with the

lender; or the Agency, at any time,

independently concludes that

liquidation is necessary. The lender will

proceed as expeditiously as possible,

including giving any notices or taking

any legal actions required by the

security instruments.

(a) General. If a lender has made a

loan guaranteed by the Agency under

previous regulations, the lender has the

option to liquidate the loan under the

provisions of this part or under the

provisions of previous regulations. The

lender will notify the Agency in writing

within 10 days after its decision to

liquidate, which regulatory provisions it

chooses to use. The lender may not

choose some provisions of one

regulation and other provisions of the

other regulation.

(b) Acquiring property titles. If a

lender acquires title to property, the

Agency may elect to permit the lender

the option of calculating the final loss

settlement using the net proceeds

received at the time of the ultimate

disposition of the property. The lender

must submit to the Agency a written

request to use this option within 15

days of acquiring title and the Agency

must agree, in writing, prior to the

lender submitting any request for

estimated loss payment.

(c) Liquidation plan. The lender will

(within 30 days after a decision to

liquidate) submit to the Agency, in

writing, a proposed, detailed liquidation

plan. Upon approval by the Agency of

the liquidation plan, the lender will

commence liquidation. The lender’s

liquidation plan must include, but is not

limited to, the following:

(1) Such proof as the Agency requires

to establish the lender’s ownership of

the guaranteed loan notes and related

security instruments, a copy of the

payment ledger or other documentation

which reflects the outstanding loan

balance and accrued interest to date,

and the method of computing the

interest;

(2) A complete list of collateral;

(3) The recommended liquidation

methods for making the maximum

collection possible on the indebtedness

and the justification for such methods,

including the recommended action for

acquiring and disposing of all collateral;

(4) Necessary steps for preservation of

the collateral;

(5) Copies of the borrower’s latest

available financial statements;

(6) An itemized list of estimated

liquidation expenses expected to be

incurred and justification for each

expense;

(7) A schedule to periodically report

to the Agency on the progress of the

liquidation;

(8) Estimated protective advance

amounts with justification;

(9) Proposed protective bid amounts

on collateral to be sold at auction and

a discussion of how the amounts were

determined;

(10) If a voluntary conveyance is

considered, the proposed amount to be

credited to the guaranteed debt;

(11) Legal opinions, as needed; and

(12) If the outstanding balance of

principal and interest is less than

$250,000, the lender will obtain an

estimate of fair market and potential

liquidation value of the collateral. If the

outstanding balance of principal and

interest is $250,000 or more, the lender

will obtain an independent appraisal

report on all collateral securing the loan

which will reflect the fair market value

and potential liquidation value. The

independent appraiser’s fee will be

shared equally by the Agency and the

lender.

(d) Partial liquidation plan. If actions

are necessary to immediately preserve

and protect the collateral, a partial

liquidation plan may be submitted and,

when approved, must be followed by a

complete liquidation plan prepared by

the lender.

(e) Disposition of collateral.

Disposition of collateral acquired by the

lender must be approved, in writing, by

the Agency when:

(1) The lender’s cost to acquire the

collateral of a borrower exceeds the

potential recovery value of the security

and the lender proposes abandoning the

collateral in lieu of liquidation; or

(2) The acquired collateral is to be

sold to the borrower, borrower’s

stockholders or officers, or the lender or

lender’s stockholders or officers.

(f) Agency liquidation. The Agency

will liquidate at its option only when it

is a holder and there is reason to believe

the lender is not likely to initiate

23148 Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations

liquidation efforts that will result in

maximum recovery. When the Agency

liquidates, proceeds derived from the

sale of the collateral will be applied first

to reasonable liquidation expenses and

second to the guaranteed portion of the

loan.

(g) Final loss payment. Final loss

payments will be made only after all

collateral has been properly accounted

for and liquidation expenses are

determined to be reasonable and within

approved limits. Any estimated loss

payments made to the lender will be

credited against the final loss on the

guaranteed loan. The amount of an

estimated loss payment must be

credited as a deduction from the

principal balance of the loan.

§ 1779.82 [Reserved]

§ 1779.83 Protective advances.

Protective advances can only be

added to the loan account for purposes

of requirements to preserve the value of

the security. Protective advances

constitute an indebtedness of the

borrower to the lender and must be

secured by collateral to the same extent

as principal and interest. Protective

advances include, but are not limited to,

advances made for taxes, annual

assessments, ground rent, hazard and

flood insurance premiums affecting the

collateral (including any other expenses

necessary to protect the collateral).

Attorney fees are not a protective

advance.

(a) Agency approval. The Agency

must approve, in writing, all protective

advances on loans within its loan

approval authority which exceed a total

cumulative advance amount of $5,000 to

the same borrower. Protective advances

must be reasonable when associated

with the value of the collateral being

preserved.

(b) Preserving collateral. When

considering protective advances, sound

judgment must be exercised in

determining that the additional funds

advanced will actually preserve

collateral and recovery is actually

enhanced by making the advance.

§ 1779.84 Additional loans or advances.

The lender will not make additional

expenditures or new loans to the

borrower without first obtaining the

written approval of the Agency even

though such expenditures or loans will

not be guaranteed.

§ 1779.85 Bankruptcy.

(a) Calculating losses. Report of Loss

form (available in any Agency office)

will be used for calculating estimated

and final loss determinations.

(b) Lender responsibility. The lender

is responsible for protecting the

guaranteed loan debt and all the

collateral securing it in bankruptcy

proceedings. These responsibilities

include, but are not limited to, the

following:

(1) Filing a proof of claim, where

necessary, and all necessary papers and

pleadings;

(2) Attending and, where necessary,

participating in meetings of the

creditors and all court proceedings;

(3) Immediately seeking adequate

protection of the collateral if it is subject

to being used by the trustee in

bankruptcy or the debtor in possession;

(4) Where appropriate, seeking

involuntary conversion of a pending

chapter 11 case to a liquidation

proceeding or seeking dismissal of the

proceedings; and

(5) Keeping the Agency adequately

and regularly informed, in writing, of all

aspects of the proceedings.

(c) Appraisals. In a chapter 9 or

chapter 11 reorganization, the lender

must obtain an independent appraisal of

the collateral if the Agency believes an

independent appraisal is necessary. The

Agency and the lender will share the

appraisal fee equally.

(d) Liquidation expenses. Only

expenses authorized by the court of

chapter 9 plans or chapter 11

reorganizations, or chapters 11 or 7

liquidation (unless the liquidation is by

the lender), may be deducted from the

collateral proceeds.

(e) Repurchase from the holder. The

Agency or the lender, with the approval

of the Agency, may initiate the

repurchase of the unpaid guaranteed

portion of the loan from the holder. If

the lender is the holder, an estimated

loss payment may be filed at the

initiation of a chapter 7 proceeding or

after a chapter 9 or chapter 11

proceeding becomes a liquidation

proceeding. Any loss payment on loans

in bankruptcy must be approved by the

Agency.

(f) Chapter 11 bankruptcy. If a

borrower has filed for protection under

chapters 9 or 11 of the United States

Code for a reorganization (but not

chapter 13) and all or a portion of the

debt has been discharged, the lender

may request an estimated loss payment

of the guaranteed portion of the accrued

interest and principal discharged by the

court. If the court approves revisions to

the chapter 9 plan or chapter 11

reorganization plan, subsequent

estimated loss payments may be

requested in accordance with the court

approved changes. Once the

reorganization plan has been

satisfactorily completed, the lender is

responsible for submitting the

documentation necessary for the Agency

to review and adjust the estimated loss

claim to reflect any actual discharge of

principal and interest and to reimburse

the lender for any court ordered

interest-rate reduction under the terms

of the reorganization plan.

(g) Agency approval of estimated

liquidation expenses. The Agency must

approve, in advance and in writing, the

lender’s estimated liquidation expenses

of collateral in a liquidation if the

liquidation is performed by the lender.

These expenses must be reasonable and

customary and not include in-house

expenses of the lender.

(h) Reconciliation. In the event that

the estimated loss payment exceeds the

actual loss, the lender will reimburse

the Agency the amount in excess of the

actual loss plus interest at the note rate

from the date of the estimated loss

payment.

§§ 1779.86–1779.87 [Reserved]

§ 1779.88 Transfers and assumptions.

(a) General. For all transfers and

assumptions, the lender must concur in

the plans for disposition of funds in the

transferor’s debt service, reserve, and

operation and maintenance account.

The Agency will approve, in writing,

transfers and assumptions of loans to

transferees who will continue the

original purpose of the guaranteed loan

subject to the following applicable

provisions:

(1) When the transaction is to a

member of the borrower’s organization,

it will be at an amount which will not

result in a loss to the lender.

(2) Transfers to eligible borrowers will

receive preference if recovery to the

lender from the sale price is not less

than it would be if the transfer was to

an ineligible borrower.

(3) The present borrower is unable or

unwilling to accomplish the objectives

of the guaranteed loan, and the transfer

will be to the lender’s and Agency’s

advantage.

(4) The transferee will assume an

amount at least equal to either the

present market value or the debt,

whichever is less.

(b) Transfers to an eligible borrower.

(1) The total indebtedness may be

transferred to an eligible borrower on

the same terms.

(2) The total indebtedness may be

transferred to another eligible borrower

on different terms not to exceed those

terms for which an initial guaranteed

loan can be made.

(3) Less than the total indebtedness

may be transferred to another eligible

borrower on the same or different terms

Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations 23149

and the pro rata share of any eligible

loss paid to the lender.

(4) A guaranteed loan for which the

transferee is eligible may be made in

connection with a transfer subject to the

policies and procedures governing the

type of loan being made.

(5) If the transferor is to receive a

payment for the equity, the total debt

must be assumed.

(c) Ineligible borrower. Transfers to

ineligible borrowers are considered only

when needed as a method for servicing

problem cases when an eligible

transferee is not available. Transfers

should not be considered as a means by

which members can obtain equity or as

a method of providing a source of easy

credit for purchasers. Transfers must

meet the following requirements:

(1) All transfers to ineligible

borrowers will include a one-time

nonrefundable transfer fee to the

Agency of no more than 1 percent.

Transfer fees will be collected, and

payments applied, in accordance with

paragraph (d) of this section.

(2) For all loans covered by this part,

the Agency may approve a transfer of

indebtedness to, and assumption of, a

loan by a transferee who does not meet

the eligibility requirements for the kind

of loan being assumed when the

ineligible borrower will:

(i) Make a significant down payment,

and

(ii) Agree to pay the remaining

balance within not more than 15 years.

Installments will be at least equal to the

amount amortized over a period not

greater than the remaining life of the

debt being transferred, and the balance

will be due the fifteenth year.

(3) Interest rates to ineligible

transferees will be the rate specified in

the note of the transferor or the rates

customarily charged borrowers in

similar circumstances in the ordinary

course of business and are subject to

Agency review and approval. The rates

may be either fixed or variable.

(i) Transferees must have the ability to

repay as determined by the lender the

debt according to the Assumption

Agreement and must have the legal

authority to enter into the contract. The

transferee will submit a current balance

sheet to the lender. The lender will

obtain and analyze the credit history of

the transferee.

(ii) The transferor may receive equity

payments only when the full amount of

the debt is assumed. However, equity

payments will not be made on more

favorable terms than those on which the

balance of the debt will be paid.

(d) Transfer fees. Transfer fees are a

one-time nonrefundable cost to be

collected by the lender at the time of

application or proposal.

(1) The transfer fees will be a standard

fee plus the cost of the appraisal.

(2) The lender will collect and submit

the fee to the Agency.

(3) The Agency may waive the

transfer fee if it determines that such

waiver is in the best interest of the

Agency.

(e) Processing transfers and

assumptions. (1) In any transfer and

assumption case, the transferor

(including any guarantor) may be

released from liability by the lender

only with prior Agency written

concurrence and only when the value of

the collateral being transferred is at least

equal to the amount of the loan, or part

of the loan, being assumed. If the

transfer is for less than the entire debt:

(i) The Agency must determine that

the transferor and any guarantor have no

reasonable debt-paying ability

considering their assets and income at

the time of transfer, and

(ii) The lender must certify that the

transferor has cooperated in good faith,

used due diligence to maintain the

collateral against loss, and has

otherwise fulfilled all of the regulations

of this part to the best of the borrower’s

ability.

(2) The lender will make, in all cases,

a complete credit analysis to determine

viability of the project (subject to the

Agency review and approval) including

any requirement for deposit in an

escrow account as security to meet the

determined equity requirements for the

project.

(3) The lender will confirm that the

transaction can be properly transferred

and the conveyance instruments will be

filed, registered, or recorded as

appropriate and legally permissible.

(4) The assumption will be made on

the lender’s form of Assumption

Agreement and will contain the Agency

case number of the transferor and

transferee.

(5) Loan terms cannot be changed by

the Assumption Agreement unless

previously approved in writing by the

Agency with the concurrence of holder

and the transferor (including guarantor

if it has not been released from personal

liability). Any new loan terms cannot

exceed those authorized in this part.

The lender’s request will be supported

by:

(i) An explanation of the reasons for

the proposed change in the loan terms,

and

(ii) Certification that the lien position

securing the guaranteed loan will be

maintained or improved, and proper

hazard insurance will be continued in

effect.

(6) In the case of a transfer and

assumption, it is the lender’s

responsibility to see that all such

transfers and assumptions will be noted

on all originals of the Loan Note

Guarantee. The lender will provide the

Agency a copy of the Transfer and

Assumption Agreement.

(7) If a loss should occur upon a

complete transfer of assets and

assumption for less than the full amount

of the debt and the transferor-debtor

(including personal guarantor) is

released from personal liability (as

provided in paragraph (e)(1)(i) of this

section), the lender (if holding the

guaranteed portion) may file an

estimated Report of Loss to recover their

pro rata share of the actual loss at that

time. Approved protective advances and

accrued interest made during the

arrangement of a transfer and

assumption, if not assumed by the

transferee, will be entered on the

estimated Report of Loss.

§ 1779.89 Mergers.

(a) General. The Agency may approve

mergers or consolidations (herein

referred to as ‘‘mergers’’) when the

resulting organization will be eligible

for an Agency guaranteed loan and

assumes all the liabilities and acquires

all the assets of the merged borrower.

Mergers may be approved when:

(1) The merger is in the best interest

of the Government and the merging

borrower;

(2) The resulting borrower can meet

all required conditions as contained in

specific loan note agreements; and

(3) All property can be legally

transferred to the resulting borrower.

(b) Distinguishing mergers from

transfers and assumptions. Mergers

occur when one entity combines with

another entity in such a way that the

first entity ceases to exist as a separate

entity while the other continues. In a

consolidation, two or more entities

combine to form a new, consolidated

entity with the original entity ceasing to

exist. Such transactions must be

distinguished from transfers and

assumptions in which a transferor will

not necessarily go out of existence, and

the transferee will not always take all

the transferor’s assets nor assume all the

transferor’s liabilities.

§ 1779.90 Disposition of acquired

property.

(a) General. When the lender acquires

title to the collateral and the final loss

claim is not paid until final disposition,

the lender must proceed as quickly as

possible to develop a plan to fully

protect the collateral, and the lender

23150 Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations

must dispose of the collateral without

delay.

(b) Re-title collateral. Any collateral

accepted by the lender must not be

titled in the Agency’s name in whole or

in part. The Agency’s position is that of

a guarantor relating to losses, not a

lender.

(c) Collateral preservation. After

acquiring the collateral, the lender must

protect the collateral from deterioration

(weather, vandalism, etc.). Hazard

insurance in an amount necessary to

cover the fair market value of the

collateral must be maintained.

(d) Collateral sale. (1) The lender will

prepare and submit to the Agency a plan

on the best method of sale, keeping in

mind any prospective purchasers. The

Agency must approve the plan in

writing. If an existing approved

liquidation plan addresses the

disposition of acquired property, no

further review is required unless

modification of the plan is needed.

(2) Anytime there is a case when the

conversion of collateral to cash can

reasonably be expected to result in a

negative net recovery amount,

abandonment of the collateral should be

considered. The Agency must approve

abandonment in writing.

§§ 1779.91–1779.93 [Reserved]

§ 1779.94 Determination and payment of

loss.

In all liquidation cases, final

settlement will be made with the lender

after the collateral is liquidated. The

Agency will have the right to recover

losses paid under the guarantee from

any liable party.

(a) General. If the lender takes title to

collateral, any loss will be based on the

collateral value at the time the lender

obtains title.

(b) Loss calculations. The Report of

Loss form (available in any Agency

office) will be used for calculations of

all estimated and final loss

determinations. Estimated loss

payments may only be approved after

the lender has submitted a liquidation

plan approved by the Agency.

(c) Estimated loss payments. When

the lender is conducting the liquidation

and owns any of the guaranteed portion

of the loan, it may request an estimated

loss payment by submitting an estimate

of loss that will occur in connection

with liquidation of the loan. An

estimated loss payment may be

approved after the Agency has approved

the liquidation plan.

(1) The lender will prepare and

submit a Report of Loss using the

appraised value in lieu of amount

received from sale of collateral.

(2) The estimated loss payment shall

be calculated as of the date of such

payment. The total amount of the loss

payment remitted by the Agency will be

applied by the lender on the guaranteed

portion of the loan debt. Such

application does not release the

borrower from liability. At the time of

final loss settlement, the lender may

notify the borrower that the loss

payment has been so applied.

(3) After liquidation has been

completed, a final Report of Loss will be

submitted by the lender to the Agency.

(d) Final report of loss. In all cases, a

final Report of Loss must be submitted

to the Agency. Before Agency approval

of any final loss report, the lender must

account for all funds obtained,

disposition of the collateral, all costs

incurred, and any other information

necessary for the successful completion

of liquidation. Upon receipt of the final

accounting and Report of Loss, the

Agency may conduct an audit and will

determine the final loss. The lender will

make its records available to, and

otherwise assist, the Agency in making

any audit it requires of the Report of

Loss. The documentation accompanying

the Report of Loss must support the loss

claimed.

(1) The lender must document and

show that all of the collateral has been

accounted for and properly liquidated

and that liquidation proceeds have been

properly accounted for and applied

correctly on the loan. The Agency must

be satisfied that the lender has

accomplished this in the manner

contained herein and that the lender has

maximized the collections in

conducting the liquidation.

(2) The lender must show a

breakdown on any protective advance

amount as to the payee, purpose of the

expenditure, date paid, evidence that

the amount expended was proper, and

that the amount was actually paid.

(3) The lender must show a

breakdown of liquidation expenses as to

the payee, purpose of the expenditure,

date paid, evidence that the amount

expended was proper, and that the

amount was actually paid.

(4) Accrued interest should be

supported by attachments showing how

the amount was accrued by the lender.

A copy of the promissory note and

ledger will be attached. If the interest

rate was a variable rate, the lender must

include documentation of changes in

the selected base rate and when the

changes in the loan rate became

effective.

(e) Liquidation income. Any net rental

or other income that has been received

by the lender from the collateral will be

applied on the guaranteed loan debt.

(f) Liquidation costs. Certain

reasonable liquidation costs will be

allowed during the liquidation process.

The liquidation costs must be submitted

as a part of the liquidation plan. Such

costs will be deducted from gross

proceeds received from the disposition

of collateral unless the costs have been

previously determined by the lender

(with Agency concurrence) to be

protective advances. If changed

circumstances after submission of the

liquidation plan require a revision of

liquidation costs, the lender will obtain

the Agency’s written concurrence prior

to proceeding with the proposed

changes. No in-house expenses of the

lender will be allowed.

(g) Protective advance losses. In those

instances where the lender made

authorized protective advances, the

lender may claim recovery for the

guaranteed portion of any loss of monies

advanced as well as interest resulting

from such protective advances. These

claims shall be included in the final

Report of Loss.

(h) Final loss approval. After the final

Report of Loss has been tentatively

approved:

(1) If the actual loss is greater than

any estimated loss payment, such loss

will be paid by the Agency;

(2) If the actual loss is less than any

estimated loss payment, the lender will

reimburse the Agency;

(3) If the Agency conducted the

liquidation, it will provide an

accounting to the lender and will pay

the lender in accordance with the Loan

Note Guarantee.

(i) Loss limits. The amount payable by

the Agency to the lender cannot exceed

the limits contained in the Loan Note

Guarantee. If the Agency conducts the

liquidation, loss occasioned by accruing

interest will be covered by the guarantee

only to the date the Agency accepts this

responsibility. When the liquidation is

conducted by the lender, loss

occasioned by accruing interest will be

covered to the extent of the guarantee to

the date of final settlement provided the

lender proceeds expeditiously with the

liquidation plan approved by the

Agency.

§ 1779.95 Future recovery.

After a loan has been liquidated and

a final loss has been paid by the Agency,

any future funds which may be

recovered by the lender will be prorated between the Agency and the

lender in accordance with the

guaranteed percentage even if the Loan

Note Guarantee has been terminated.

Federal Register / Vol. 66, No. 89 / Tuesday, May 8, 2001 / Rules and Regulations 23151

1A ‘‘lead bank’’ is the largest national bank

controlled by a company, based on a comparison of

the total assets held by each national bank

controlled by that company as reported in each

bank’s Call Report. 12 CFR 8.2(a)(6)(ii)(A).

2 Independent trust banks are also assessed based

on the amount of trust assets those banks manage.

See 65 FR 75859 (December 5, 2000).

3 12 CFR 8.6(a) also permits the OCC to assess a

fee for fiduciary examinations and examinations

made pursuant to 12 CFR part 5.

4 12 U.S.C. 1867(c). Thus, as would be the case

if the activity were performed by the bank itself, the

OCC’s authority to examine the activity does not

lapse if the activity is not being conducted at the

same time the OCC undertakes an examination.

5The OCC has recently noted the risks that may

be associated with using service providers in a

recent Advisory Letter and urged national banks to

focus on conducting proper due diligence before

entering into third party arrangements and on

maintaining effective oversight and controls during

the third party relationship. See OCC Advisory

Letter No. 2000–9, ‘‘Third Party Risk,’’ August 29,

2000.

6 65 FR 75196 (December 1, 2000).

§ 1779.96 Termination of Loan Note

Guarantee.

The Loan Note Guarantee under this

part will terminate automatically:

(a) Upon full payment of the

guaranteed loan; or

(b) Upon full payment of any loss

obligation or negotiated loss settlement

except for future recovery provisions; or

(c) Upon written request from the

lender to the Agency, provided that the

lender holds all of the guaranteed

portion and the original Loan Note

Guarantee is returned to the Agency.

§§ 1779.97–1779.99 [Reserved]

§ 1779.100 OMB control number.

The reporting and recordkeeping

requirements contained in this part have

been approved by the Office of

Management and Budget and have been

assigned OMB control number 0572–

0122.

PART 1780—WATER AND WASTE

LOANS AND GRANTS

2. The authority citation for part 1780

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 16

U.S.C. 1005.

Subpart A—General Policies and

Requirements

3. Amend § 1780.10(b)(4) by removing

the reference ‘‘subpart I of part 1980 of

this title’’ and adding in its place ‘‘7

CFR part 1779.’’

Chapter XVIII—Rural Housing Service, Rural

Business—Cooperative Services, Rural

Utilities Service, and Farm Service Agency,

Department of Agriculture

PART 1980—GENERAL

4. The authority citation for part 1980

continues to read as follows:

Authority: 5 U.S.C. 301; 7 U.S.C. 1989; 42

U.S.C. 1480.

Subpart A—[Removed and Reserved]

5. Remove and reserve subpart A,

consisting of §§ 1980.1 through

1980.100 and Appendices A through C.

Subpart I—[Removed and Reserved]

6. Remove and reserve Subpart I,

consisting of §§ 1980.801 through

1980.900.

Dated: April 23, 2001.

Dawn Riley,

Acting Deputy Under Secretary, Food,

Nutrition and Consumer Services.

[FR Doc. 01–11366 Filed 5–7–01; 8:45 am]

BILLING CODE 3410–15–P

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 8

[Docket No. 01–08]

RIN 1557–AB90

Assessment of Fees

AGENCY: Office of the Comptroller of the

Currency, Treasury.

ACTION: Final rule.

SUMMARY: The Office of the Comptroller

of the Currency (OCC) is amending its

assessment regulation to clarify that the

OCC has authority to charge a national

bank when the OCC conducts a special

examination of a third party that

provides services to the bank. The rule

applies in the same way to Federal

branches and agencies and District of

Columbia banks.

EFFECTIVE DATE: June 7, 2001.

FOR FURTHER INFORMATION CONTACT:

Mitchell E. Plave, Senior Attorney,

Legislative and Regulatory Activities

Division, (202) 874–5090.

SUPPLEMENTARY INFORMATION:

Background

The OCC charters, regulates, and

supervises more than 2,200 national

banks, accounting for nearly 60 percent

of the nation’s banking assets, as well as

58 Federal branches and agencies of

foreign banks in the United States. Its

mission is to ensure a safe, sound, and

competitive national banking system

that supports the citizens, communities,

and economy of the United States.

The OCC funds the activities it

undertakes to carry out this mission

through assessments and fees charged to

the banks it supervises. The National

Bank Act authorizes the OCC to collect

‘‘assessments, fees, or other charges as

necessary or appropriate to carry out the

responsibilities of the office of the

Comptroller.’’ 12 U.S.C. 482 (Supp.

1999). The statute requires that our

charges ‘‘be set to meet the

Comptroller’s expenses in carrying out

authorized activities.’’ Id. Under part 8

of our regulations, the OCC currently

assesses national banks and Federal

branches and agencies according to a

formula based on factors that include a

bank’s asset size, its condition, and

whether it is the ‘‘lead’’ bank or ‘‘nonlead’’ bank 1 among national banks in a

holding company.2 The OCC also has

the authority to assess a fee for special

examinations and investigations of these

banks. 12 CFR 8.6(a).

In its current form, section 8.6(a)

refers only to fees for a special

examination of a national bank or its

affiliate.3 It does not reflect the OCC’s

authority to assess a national bank in

connection with special examinations of

any of the bank’s service providers. The

Bank Service Company Act provides

that performance of services for national

banks (or for other entities supervised

by the OCC, including subsidiaries

subject to examination by the OCC)

‘‘shall be subject to regulation and

examination by [the OCC] to the same

extent as if such services were being

performed by the bank itself on its own

premises.’’ 4

Banks historically have used third

parties to perform certain activities—

payment processing, for example. Some

banks, however, have recently entered

new lines of business or introduced

novel, and potentially high-risk,

products, relying substantially on third

party service providers to enable the

bank to participate in or to conduct

those activities. These include, for

instance, certain types of credit card

programs, sub-prime lending, check

cashing, and other specialized types of

lending. In many instances, the service

provider’s interest in, and connection

with, these transactions are significantly

greater than that of the bank. The bank

may nonetheless be exposed to higher

than normal levels of risk. This

increased reliance on service providers

will result in an increased need for the

OCC to examine or investigate third

party service providers in order to

evaluate the effect that third-party

activities and relationships have on the

safety and soundness of the bank.5

On December 1, 2000,6 we proposed

to amend 12 CFR 8.6 to make clear our

authority to assess banks for our