This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

3853

Vol. 61, No. 23

Friday, February 2, 1996

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1980

Rural Business-Cooperative Service

Rural Utilities Service

7 CFR Parts 4279 and 4287

RIN 0570–AA09

Business and Industrial Loan Program

AGENCIES: Rural Housing Service, Rural

Business-Cooperative Service, Rural

Utilities Service, and Farm Service

Agency, USDA.

ACTION: Proposed rule.

SUMMARY: The Rural BusinessCooperative Service (RBS) is the

successor to the Rural Business and

Cooperative Development Service,

which was the successor to the Rural

Development Administration (RDA),

which was the successor to the Farmers

Home Administration (FmHA).

RBS is issuing new Business and

Industry Guaranteed Loan Program

regulations to replace the FmHA

regulations for the program. This action

is needed to streamline and update the

program. The intended effect is to

shorten, 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 and businesses, and provide for

smoother and faster processing of

applications.

DATES: Written comments must be

received on or before April 2, 1996.

ADDRESSES: Submit written comments

in duplicate to the Chief, Regulations,

Analysis, and Control Branch, Rural

Economic and Community

Development, U.S. Department of

Agriculture, Ag Box 0743, 14th and

Independence SW., Washington, DC

20250–0743. All written comments will

be available for public inspection during

regular work hours at the above address.

FOR FURTHER INFORMATION CONTACT: M.

Wayne Stansbery, Business and

Industry Senior Loan Specialist, RBS,

U.S. Department of Agriculture, Ag-Box

3221, 14th & Independence Avenue

SW., Washington, DC 20250–3221,

Telephone (202) 720–6819.

SUPPLEMENTARY INFORMATION:

Classification

This proposed rule has been

determined to be a ‘‘significant

regulatory action’’ and was reviewed by

OMB under Executive Order 12866.

Programs Affected

The Catalog of Federal Domestic

Assistance program impacted by this

action is: 10.768, Business and

Industrial Loans.

Intergovernmental Review

As set forth in the final rule and

related Notice to 7 CFR part 3015,

subpart V, 48 FR 29112, June 24, 1983,

Business and Industrial Loans are

subject to the provisions of Executive

Order 12372 which requires

intergovernmental consultation with

state and local officials. RBS conducts

intergovernmental consultation in the

manner delineated in FmHA Instruction

1940–J, ‘‘Intergovernmental Review of

Farmers Home Administration Programs

and Activities.’’

Civil Justice Reform

The proposed rule has been reviewed

under Executive Order 12778, Civil

Justice Reform. In accordance with this

rule: (1) All state and local laws and

regulations that are in conflict with this

rule will be preempted; (2) no

retroactive effect will be given to this

rule; and (3) administrative proceedings

in accordance with the regulations of

the agency at 7 CFR part 1900, subpart

B or those regulations published by the

Department of Agriculture to implement

the provisions of the National Appeals

Division as mandated by the

Department of Agriculture

Reorganization Act of 1994 must be

exhausted before bringing suit in court

challenging action taken under this rule.

Environmental Impact Statement

The action has been reviewed in

accordance with 7 CFR part 1940,

subpart G, ‘‘Environmental Program.’’

RBS has determined that this action

does not constitute a major Federal

action significantly affecting the quality

of the human environment, and in

accordance with the National

Environmental Policy Act of 1969,

Public Law 91–190, an Environmental

Impact Statement is not required.

Discussion of the Proposed Rule

This action replaces the Business and

Industrial loan program administered

under 7 CFR part 1980 with a program

to be administered under 7 CFR parts

4279 and 4287 which significantly

departs from the previous program of

loan guarantees for businesses in rural

areas. The new Business and Industrial

Guaranteed Loan Program will be more

flexible and will place more reliance on

lenders. There are fewer specific

requirements for lenders and

businesses. Eligible loan purposes are

broader. The lender has added

responsibility for analyzing credit

quality, and for making, securing, and

servicing the loan and monitoring

construction. The priority system will

give increased priority to underserved

communities. Application processing

procedures will be more efficient, less

burdensome for borrowers, lenders, and

RBS staff, and will provide for more

rapid decisions.

The Business and Industry (B&I)

guaranteed loan program was

authorized by the Rural Development

Act of 1972. The loans are made by

private lenders to rural businesses for

the purpose of creating new businesses,

expanding existing businesses, and for

other purposes that create employment

opportunities in rural areas. Eligibility

for this program includes businesses

located in cities of up to 50,000

population, but priority is given to areas

outside cities of 25,000 or more

population.

Since 1974, more than 5,120

businesses have received loans totaling

nearly $5 billion guaranteed through the

B&I program. These loans have helped

to create or save over 460,000 jobs. The

program level peaked in 1979 at just

over $1 billion, then was reduced to

$100 million annually through much of

the 1980’s. The program level for FY

1994 was about $249 million and for FY
3854 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

1995 it was about $500 million. The FY

1996 budget is approximately $700

million, which required only $6.5

million in budget authority to be

appropriated by Congress.

Loans can be made for a variety of

purposes including business

acquisition, expansion, or improvement;

purchase of land, easements, or

buildings; purchase of equipment,

machinery, or supplies; repair and

modernization; pollution control;

transportation services; start up and

working capital; and feasibility studies.

The rate and term of the loan is

negotiated between the business and the

lender.

The Rural Business-Cooperative

Service proposes to replace the

regulations for the B&I program with a

compete set of new regulations. This is

a high priority effort to streamline the

administration and operation of the

program, responding to the requests of

users of the program and the field staff

administering the program. The revised

regulations are shorter, simpler, clearer,

and more logically organized. The

volume of material in the new

regulations is about one-half that of the

current regulation.

The revisions are not required by

statute. However, the senate report on

the FY 1995 Appropriations Act did

contain a directive for the department to

streamline the B&I regulations and

application procedures, reduce loan

application processing time by relying

on in-state resources, allow more

management flexibility and decision

making capacity at the state office level,

and expand eligible loan purposes to

include recreation and tourism.

Recognizing the need to streamline

the regulations, the Agency established

a task force of State Directors and B&I

program chiefs from state offices to

examine changes that needed to be

made in the program to attract

additional lenders and to make the

program more user friendly and

customer oriented. Task force

recommendations and drafts have been

further developed by national office

staff. In addition, the Department’s

Office of inspector General (OIG) agreed

to work in conjunction with the Agency

in competing an evaluation of the

program and to assist the agency in

determining areas that could be changed

to assist in making the program more

effective and more efficiently

administered. The OIG evaluation

determined that (1) RBS needs to better

promote the program and encourage

lender and borrower participation, (2)

lenders have little experience with the

B&I program, (3) some of the

requirements of the program are too

costly to be attractive to borrowers

wanting a relatively small loan, and (4)

RBS needs to employ its resources more

efficiently by relying more on lenders to

analyze and monitor smaller loans. OIG

surveyed 800 lenders and, based on the

responses to the survey, projected that

only 5.2 percent of the universe of

lenders have had any experience with

the program, but of those that did the

experience was favorable. Further, the

Agency determined that of the lenders

participating in the program, the average

number of times they did participate

was 1.2. In a few states, the program has

been used more frequently by lenders,

but according to task force members and

others familiar with the program this

has been true only because Agency

officials in those states took the time

and effort to make the program more

widely known.

OIG also determined that smaller

borrowers refused to participate in the

program because they feel that meeting

some of the requirements is too costly

to make a loan feasible. For example,

the requirement to submit annual

audited financial statements is believed

to be too costly and OIG found that

private lenders do not always request

audited financial statements from

smaller commercial borrowers. The

General Accounting Office, in a 1992

report, also found that the cost of

feasibility studies and the annual audit

requirements coupled with appraisal

fees and credit reports may impede

participation.

Presently State office personnel

analyze financial information provided

by the lenders and the borrowers

regardless of the size of the loan and

regardless of the fact the lender has

performed an analysis of the borrower’s

financial condition. In order to increase

the level of lending activity as called for

in the 1996 and 1997 budgets, and

improve the effectiveness of the

program and the efficiency with which

it is delivered, RBS must rely more on

the capabilities of the lending

community to deliver the program.

Based on the recommendations of the

task force and other reviews, the Agency

has proposed these revisions to make

the program more usable by the lenders

and the borrowers. More importantly,

the Agency recognizes the 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 proposed new B&I

regulations, the material that must be

submitted to and reviewed by the

Agency before approval of the guarantee

is reduced and responsibilities for credit

analysis and application processing

tasks will be shifted from the Agency

national office to field offices and from

the Agency to the lender where feasible.

Following is a discussion of some of the

most significant policy revisions

included in the proposed new

regulations.

Currently, most lenders participating

in the B&I program are commercial

banks and eligibility to be a lender

under the program is limited to certain

types of organizations. This proposal

allows the Agency to approve additional

lenders when determined by the

Administrator to have sufficient legal

authority, lending expertise, and

financial strength.

The Agency proposes to reduce the

loan guarantee fee if it is determined

that the business seeking the guarantee

provides high-impact business

development and is located in a

community experiencing long-term

population decline and job

deterioration, a community that has

remained persistently poor over the past

60 years, or a community experiencing

economic trauma due to natural disaster

or fundamental economic structural

change. The intent of this provision is

to encourage businesses to locate in

areas with persistent economic

problems.

Presently, individual borrowers must

be citizens of the United States or reside

in the United States after being legally

admitted for permanent residence and

organization borrowers must be at least

51 percent owned by citizens or persons

legally admitted. The proposed

regulations would allow guaranteed

loans to businesses that do not meet that

requirement if the facility being

financed will create or save jobs for

rural United States residents, adequate

management is available, and loan

funds are used only for fixed assets that

will remain in the United States. The

intent of this provision is to have the

flexibility to create jobs in rural areas

even if the company is owned by foreign

interests. The Agency has experienced

requests for guarantees in such

situations in border states.

Presently, agricultural production

loans are not eligible for B&I guarantees.

RBS proposes to provide guarantees for

agricultural production, but limit

eligibility to integrated businesses

involved in both production and

processing.

Current regulations will not allow a

lender to bring loans it has previously

made under a guarantee through

refinancing unless the percentage of

guarantee is adjusted to maintain the

previous unguaranteed exposure. The

new regulations will allow the previous

exposure to be guaranteed, provided the
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3855

refinancing is a secondary part of the

loan and will allow the lender to

restructure the rates and terms.

The Agency is particularly interested

in public comments on a new priority

system, designed to target loan

guarantees to locations of greatest need

and businesses that will have the most

impact. High impact considers factors

that effect such things as job quality,

potential to stimulate the local economy

other than just through the direct jobs

provided, and potential for long term

presence in the community and future

expansion. For example, businesses in

industries in the top half of the

industrial life cycle are likely to be

successful for a longer period of time

than those in an industry that is

declining. Businesses tied in some way

to the community are less likely to move

on in a few years to a more favorable

location outside the community. A

business in an industry new to the

community provides economic

diversification. Businesses that will

need new suppliers or customers are

likely to have a ripple effect, causing

other new businesses to be formed

nearby. Priority points are also given for

lenders that will structure the loan at

favorable rates to the borrower or less

risk for the Government.

Eligible loan purposes would be

expanded to include hotels, motels, and

other tourism and recreational facilities,

which have been ineligible for the past

several years. Loans for such facilities

would be evaluated on the merits and

financial feasibility of each proposal,

except for racetracks, golf courses, and

gambling facilities, which would remain

ineligible. The Agency is particularly

requesting comments on whether there

is a significant need for loan guarantees

for tourism and recreation businesses

and whether offering loan guarantees for

such businesses will significantly

increase the risk to the Government and

satisfy otherwise unmet needs for

financing of such businesses.

Current regulations limit the size of

loans considered for guarantee to $10

million. The proposed regulations

would give the Administrator the

authority to approve exceptions for high

priority projects of up to $25 million.

The proposed regulations limit the

guarantee percentage to 80 percent for

loans of $5 million or less and 70

percent for loans exceeding $5 million,

but provide authority for the

Administrator to approve exceptions up

to 90 percent when the higher

percentage is necessary to allow a high

priority project to proceed.

In conjunction with implementation

of the new regulations, the Agency

intends to provide a new application

form that will serve the function of 10

forms now in use. The application form

will, of course, be supplemented by

additional information provided by the

lender.

The proposed regulations also provide

for experienced lenders to apply for

status as certified lenders. Certified

lenders will submit about one-half as

much application material for agency

review as regular lenders. Consideration

was given to creating another

classification of lender determined to be

very reliable and familiar with the

program that would be able to obtain

guarantees with little or no review of

individual projects by the Agency.

However, it was determined that the

Agency does not have sufficient legal

authority to implement that alternative.

Agency staff will be authorized to rely

on a written credit analysis prepared by

the lender rather than the Agency

completing its own complete credit

analysis.

For the most part, the lender will

determine the frequency of financial

statements to be required from the

business after the loan is closed and

whether or not the statements must be

audited.

The lender and its legal counsel will

be responsible for loan closing, without

a required review by the Office of

General Counsel.

Loan servicing will also be simplified

and shifted toward the lender. Loans

will classified by the lender. Lenders

will be able to release collateral with a

cumulative value of up to 20 percent of

the loan if the proceeds will be used to

reduce the loan or buy replacement

collateral. Lenders may make protective

advances of up to $5,000 without prior

agency approval. If unsecured personal

or corporate guarantees cannot be

settled promptly, a final loss report may

be filed and paid and the guarantees

treated as future recovery.

RBS believes the streamlining of the

regulations for this program will

enhance the use of the program in

improving the future prosperity of rural

residents through targeted investments

that enhance rural competitiveness,

facilitate industrial conversion, and

enable rural residents to profit from

private sector activity. The proposed

revisions are consistent with the

Administration’s efforts to streamline

government functions, improve

efficiency and the effectiveness of

government activities, and be more

customer friendly. The changes

proposed will enable the Agency to

deliver a larger program with less staff

resources, and simultaneously meet the

objectives of the National Performance

review regarding improved customer

service, less regulation and streamlined

Agency operations.

Incorporation of the proposed changes

will provide more flexibility for both

lenders and agency staff. Many errors

will be reduced because the guidelines

and requirements are much more clear

and items are more easily found in a

reduced and better organized volume of

regulations. Lenders will be more

interested in using the program because

the procedures are more simple and

direct. The ultimate benefit to be

realized is increased lending activity

resulting in the expansion of business

opportunities and the creation of more

jobs in rural areas, particularly in those

areas that have experienced historical

economic distress.

Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1995, the Rural

Business-Cooperative Service (RBS)

announces its intention to seek OMB

approval of the reporting/recordkeeping

requirements contained in these new

regulations.

The purpose of the B&I loan program

is to improve, develop, or finance

business, industry, and employment

and improve the economic and

environmental climate in rural

communities. This purpose is achieved

by bolstering the existing private credit

structure through the guarantee of loans

which will provide lasting community

benefits. Loans to rural businesses are

made by private lenders, primarily

commercial banks, and guaranteed by

RBS. These proposed regulations

include various requirements for

information from the lenders and

borrowers. The information requested is

vital for RBS to be able to process

applications for loan guarantees in a

responsible manner, make prudent

credit and program decisions, and

effectively monitor the lenders’

servicing activities to protect the

Government’s financial interest. It

includes information to identify the

lender and borrower, describe the

business and use of loan funds, indicate

the rates and terms of the loan, allow for

credit quality analysis, and other

information necessary for prudent

program and credit decisions. The

lender or borrower may need to provide

information regarding some special

assistance or consideration, such as

when a lender requests a change in

specific conditions cited by the Agency

for approval of a guarantee. Additional

information is necessary to ensure a

loan is adequately serviced and

continues to perform as expected, or, if

necessary, properly liquidated.
3856 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

Currently, the regulations for the B&I

Loan Program are contained in 7 CFR

1980, subpart E. The information

collection associated with 7 CFR 1980–

E has been previously approved by the

Office of Management and Budget

(OMB) and assigned control number

0575–0029. RBS is now proposing new

regulations for the B&I program to

replace 7 CFR 1980–E. RBS’s primary

reason for proposing new regulations is

to simplify the requirements and

streamline the application and

loanmaking process. The total public

reporting burden under these

regulations is expected to be

significantly reduced, as compared to

the burden contained in the current

regulation. The average public reporting

burden for the collections of

information contained in these

regulations is expected to range from .75

to 54 hours per response. Lending

institutions and rural businesses are the

primary respondents for this data

collection. The number of respondents

for the various collections of

information contained in these

regulations is expected to range from 15

to 1240 per year. The number of annual

responses per respondent is expected to

range from less than 1 to 4 per year.

Total annual burden on respondents is

estimated at 67,456 hours. This is based

on an estimated volume of activity of

500 preapplications, 425 applications,

and 360 new loan guarantees. The

estimated total annual burden for 7 CFR

1980, subpart E, was 78,318 hours.

However, the larger estimated burden

for 7 CFR 1980, subpart E, was based on

a lower estimated volume of activity of

only 350 preapplications, 275

applications, and 220 new loan

guarantees.

In conjunction with implementation

of the proposed new regulations, RBS

plans to initiate use of a new

application form. The new form should

not be more difficult or time consuming

to complete than the current application

but it will facilitate the elimination of

10 other forms currently in use. Some

items of information required by the

agency have been made easier to

provide, such as the material

incorporated into the new application.

Some has been eliminated by changing

program requirements and providing

more flexibility to lenders. An example

of this is the documentation regarding

refinancing required by 7 CFR 1980,

section 1980.452 Administrative C (1).

Under the proposed rule there are less

restrictions on refinancing so there is no

need for the specific documentation.

Some information will be collected less

frequently, as in the case of feasibility

studies. Feasibility studies will be

required for new businesses at the

discretion of the loan approval official,

rather than for all new businesses.

Financial statements will still be

required at least annually, but whether

they are required more often than

annually and whether they must be

audited statements will be decided by

the lender.

Some new items of burden have also

been created. For the most part,

however, these are the result of new

options being made available. For

example, requesting status as a certified

lender is a burden upon the lenders that

choose to make a request. That burden

has not existed previously because there

were no certified lenders. To become

certified a lender must submit an

executed Lender’s Agreement (if it does

not already have a valid Lender’s

Agreement), a new form called

‘‘Certified Lender, Business and

Industry,’’ and a written request

summarizing its history of commercial

lending activity with information on

delinquencies and losses. Loan officers

of certified lenders must receive training

from RBS on the B&I program. The

burden for completing a request for

certification has been estimated at 2.5

hours.

Certified lenders will submit less

material for agency review for each

individual loan application proposed

for guarantee. A complete application

for guarantee from a certified lender will

include the application form, a Form

FmHA 1940–20, ‘‘Request for

Environmental Information,’’ the

lender’s written financial analysis with

spreadsheets, a proposed Loan

Agreement or list of conditions for a

Loan agreement, and intergovernmental

review comments. A complete

application for guarantee from an

eligible lender that is not certified will

include all of those items plus the

business’s historical and projected

financial statements, financial

statements of personal or corporate

guarantors, personal credit reports on

the principals, appraisals, commercial

credit report on the business, and a

business plan or feasibility study.

Although it is not reflected in the

proposed rule or the estimates of

burden, RBS is also working on a project

to automate forms. It is intended that

most of the forms used in connection

with an application will be made

available on computer disk so the form

can be brought up on a screen, the

appropriate information typed in, and

the entire completed form printed.

When completed, the appropriate disks

will be made available to the public as

well as to Agency staff.

The complete text of the subject

regulations is published herein for

public review and comment. Additional

copies of the proposed regulations or

copies of the referenced forms may be

obtained from Jack Holston, Agency

Information Collection Coordinator, at

(202) 720–9736.

Send comments regarding the

accuracy of the burden estimate, ways to

minimize the burden, including through

the use of automated collection

techniques or other forms of information

technology, or any other aspects of this

collection of information, to: Jack

Holston, Agency Information Collection

Coordinator, U.S. Department of

Agriculture, RECD, Ag. Box 0743,

Washington, DC 20250. These

comments must be received on or before

April 2, 1996 to be assured of

consideration. All responses to this

notice will be summarized and included

in the request for OMB approval. All

comments will also become a matter of

public record.

List of Subjects

7 CFR Part 1980

Loan programs—Agriculture, Loan

programs—Business and industry—

Rural development assistance, Loan

programs—Housing and community

development, Loan programs—

Community programs—Rural

development assistance, Rural areas.

7 CFR Part 4279

Loan programs—Business and

industry—Rural development

assistance, Rural areas.

7 CFR Part 4287

Loan programs—Business and

industry—Rural development

assistance, Rural areas.

Accordingly, chapters XVIII and XLII,

title 7 of the Code of Federal

Regulations are proposed to be amended

as follows:

CHAPTER XVIII—RURAL HOUSING

SERVICE, RURAL BUSINESSCOOPERATIVE SERVICE, RURAL UTILITIES

SERVICE, AND FARM SERVICE AGENCY,

DEPARTMENT OF AGRICULTURE

PART 1980—GENERAL

1. The authority citation for part 1980

is revised to read as follows:

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

U.S.C. 1480.

Subpart A—General

2. Section 1980.6(a) is amended by:

removing the definitions for

‘‘Borrower,’’ ‘‘Disaster Assistance for

Rural Business Enterprises,’’ and
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3857

‘‘Drought and Disaster Guaranteed

loans;’’ in the heading for the definition

of ‘‘Assignment Guarantee Agreement,’’

removing ‘‘, 1980–70 or 1980–73;’’

revising the definition of ‘‘Guaranteed

loan,’’ to read as set forth below; in the

third sentence of the definition of

‘‘Holder,’’ removing the parenthetical

phrase ‘‘(or 1980–70 or 1980–73);’’ in

the heading for the definition of

‘‘Lender’s Agreement,’’ removing the

comma and adding the word ‘‘or’’ in its

place immediately following ‘‘449–35’’

and removing ‘‘, 1980–68, or 1980–71’’

immediately following ‘‘1980–38;’’ in

the heading for the definition of ‘‘Loan

Note Guarantee,’’ removing the

parenthetical phrase ‘‘(or 1980–69 or

1980–72)’’.

§ 1980.6 Definitions and abbreviations.

(a) * * *

Guaranteed loan. A loan made and

serviced by a lender for which FmHA or

its successor agency under Public Law

103–354 has entered into a Form FmHA

449–35 or Form FmHA 1980–38,

‘‘Lender’s Agreement,’’ and for which

FmHA or its successor agency under

Public Law 103–354 has issued a Form

FmHA 449–34, ‘‘Loan Note Guarantee.’’

* * * * *

3. Section 1980.6 (b) is amended by

removing the entries for ‘‘B&I,’’

‘‘DARBE,’’ and ‘‘D&D’’ from the list of

abbreviations.

§ 1980.13 [Amended]

4–5. Section 1980.13 is amended in

the second sentence of paragraph (a)

introductory text by revising the

reference ‘‘paragraphs (a) (1), (2) and

(3)’’ to read ‘‘paragraphs (a) (1) and (2);’’

in paragraph (a)(2) by removing ‘‘;or’’

and adding a period at the end of the

paragraph; by removing paragraph

(a)(3); and in paragraph (c) by removing

the parenthetical phrase ‘‘(See subpart E

of this part.)’’.

§ 1980.20 [Amended]

6. Section 1980.20 is amended in

paragraph (a) introductory text by

removing the third and forth sentences

in their entirety; in the fifth sentence, by

removing the words ‘‘for all other loans

covered by this section;’’ and in the

sixth sentence by removing the words

‘‘except in regards to D&D and DARBE

guaranteed loans (see Subpart E of this

part),’’.

§ 1980.41 [Amended]

7. Section 1980.41 is amended in the

first sentence of paragraph (b)(3)(iii)(A)

by removing the parenthetical phrase

‘‘(State Director for B&I)’’.

§ 1980.46 [Amended]

8. Section 1980.46 is amended in

paragraph (a)(2) by removing the

parenthetical phrase ‘‘(State Director for

B&I)’’ at the end of the paragraph.

§ 1980.47 [Amended]

9. Section 1980.47 is amended in the

first sentence of paragraph (d) by

removing the words ‘‘and Business’’.

10. Section 1980.60 is amended by

revising paragraph (a) (2) to read as

follows:

§ 1980.60 Conditions precedent to

issuance of the Loan Note Guarantee or

Contract of Guarantee.

(a) * * *

(1) * * *

(2) All planned property acquisition

has been completed and all

development has been substantially

completed in accordance with plans and

specifications. All costs have not

exceeded the amounts approved by the

lender and FmHA or its successor

agency under Public Law 103–354.

* * * * *

§ 1980.61 [Amended]

11. Section 1980.61 is amended in the

first sentence of paragraph (b)(3) by

revising ‘‘Forms FmHA or its successor

agency under Public Law 103–354

449–35,’’ to read ‘‘Form FmHA 449–35’’

and removing ‘‘FmHA or its successor

agency under Public Law 103–354

1980–68, and FmHA or its successor

agency under Public Law 103–354

1980–71;’’ in paragraph (b)(4) by

revising the word ‘‘request’’ to read

‘‘requests,’’ revising ‘‘Forms FmHA or

its successor agency under Public Law

103–354 449–35,’’ to read ‘‘Form

FmHA 449–35’’ removing, ‘‘FmHA or its

successor agency under Public Law

103–354 1980–68, and FmHA or its

successor agency under Public Law

103–354 1980–71,’’ and removing the

parenthetical phrase ‘‘(State Director for

B&I);’’ and in paragraph (h) by removing

the words ‘‘,except for B&I where the

State Director and State B&I or C&BP

Chief will execute these forms.’’

§ 1980.63 [Amended]

12. Section 1980.63 is amended in

paragraph (b) by removing the

parenthetical phrase ‘‘(State Director for

B&I)’’ from the second and fourth

sentences and removing the

parenthetical phrase ‘‘(except for B&I)’’

from the third sentence.

§ 1980.67 [Amended]

13. Section 1980.67 is amended in the

first sentence of paragraph (a) by

removing the reference ‘‘E,’’.

§ 1980.68 [Amended]

14. Section 1980.68 is amended by

revising the reference ‘‘paragraph 5’’ to

read ‘‘paragraph 6’’ in the second

sentence and removing the parenthetical

phrase ‘‘(State Director for B&I)’’ from

the third and fourth sentences.

§ 1980.83 [Amended]

15. Section 1980.83 is amended in the

table of forms in paragraph (b) by

removing the entries beginning with

‘‘1980–68,’’ ‘‘1980–69,’’ ‘‘1980–70,’’

‘‘1980–71,’’ ‘‘1980–72,’’ and ‘‘1980–73.’’

Subpart E—Business and Industrial

Loan Program

16. Section 1980.401 is amended by

revising paragraph (a) to read as follows:

§ 1980.401 Introduction.

(a) This subpart contains the

regulations for direct Business and

Industrial (B&I) loans disbursed by the

Agency. All references to guaranteed

loan processing or servicing are not

applicable. B&I loan guarantees are to be

processed and serviced under the

provisions of subparts A and B of part

4279 of this title and subpart B of part

4287 of this title. Any processing or

servicing activity conducted pursuant to

this subpart involving authorized

assistance to relatives, or business or

close personal associates, is subject to

the provisions of subpart D of part 1900

of this chapter. Applicants for this

assistance are required to identify any

known relationship or association with

any Agency employee.

* * * * *

CHAPTER XLII—RURAL BUSINESS—

COOPERATIVE SERVICE AND RURAL

UTILITIES SERVICE, DEPARTMENT OF

AGRICULTURE

17. A new part 4279 is added to

chapter XLII to read as follows:

PART 4279—GUARANTEED

LOANMAKING

Subpart A—General

Sec.

4279.1 Purpose.

4279.2 Definitions.

4279.3–4279.14 [Reserved]

4279.15 Exception authority.

4279.16 Appeals.

4279.17–4279.28 [Reserved]

4279.29 Eligible lenders.

4279.30 Lenders’ functions and

responsibilities.

4279.31–4279.42 [Reserved]

4279.43 Certified Lender Program.

4279.44 Access to records.

4279.45–4279.57 [Reserved]

4279.58 Equal Credit Opportunity Act.

4279.59–4279.70 [Reserved]

4279.71 Public bodies and nonprofit

corporations.
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4279.72 Conditions of guarantee.

4279.73–4279.74 [Reserved]

4279.75 Sale or assignment of guaranteed

loan.

4279.76 Participation.

4279.77 Minimum retention.

4279.78 Repurchase from holder.

4279.79–4279.83 [Reserved]

4279.84 Replacement of document.

4279.85–4279.100 [Reserved]

Subpart B—Business and Industry Loans

4279.101 Introduction.

4279.102 Definitions.

4279.103–4279.106 [Reserved]

4279.107 Guarantee fee.

4279.108 Eligible borrowers.

4279.109–4279.112 [Reserved]

4279.113 Eligible loan purposes.

4279.114 Ineligible purposes.

4279.115 Prohibition under Agency

programs.

4279.116–4279.118 [Reserved]

4279.119 Loan guarantee limits.

4279.120 Fees and charges.

4279.121–4279.124 [Reserved]

4279.125 Interest rates.

4279.126 Loan terms.

4279.127–4279.130 [Reserved]

4279.131 Credit quality.

4279.132–4279.136 [Reserved]

4279.137 Financial statements.

4279.138–4279.142 [Reserved]

4279.143 Insurance.

4279.144 Appraisals.

4279.145–4279.148 [Reserved]

4279.149 Personal and corporate

guarantees.

4279.150 Feasibility studies.

4279.151–4279.154 [Reserved]

4279.155 Loan priorities.

4279.156 Planning and performing

development.

4279.157–4279.160 [Reserved]

4279.161 Filing preapplications and

applications.

4279.162–4279.164 [Reserved]

4279.165 Evaluation of application.

4279.166–4279.172 [Reserved]

4279.173 Loan approval and obligating

funds.

4279.174 Transfer of lenders.

4279.175–4279.179 [Reserved]

4279.180 Changes in borrower.

4279.181 Conditions precedent to issuance

of Loan Note Guarantee.

4279.182–4279.185 [Reserved]

4279.186 Issuance of the guarantee.

4279.187 Refusal to execute Loan Note

Guarantee.

4279.188–4279.200 [Reserved]

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

Subpart A—General

§ 4279.1 Purpose.

(a) This subpart contains general

regulations for making and servicing

Business and Industry (B&I) 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) It is the responsibility of the lender

to ascertain that all requirements for

making, securing, servicing, and

collecting the loan are met.

(c) Copies of all forms, regulations,

and instructions referenced in this

subpart are available in any state or

district office or the National office.

§ 4279.2 Definitions.

Agency. The Federal agency within

the United States Department of

Agriculture (USDA) with responsibility

assigned by the Secretary of Agriculture

to administer the B&I program.

Arm’s-length transaction. The sale,

release, or disposition of assets in which

the title to the property passes to a

ready, willing, and able disinterested

third party that 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 a guaranteed portion of

a loan, using the single note system.

Such agreement will be documented

using Form RECD 4279–6, ‘‘Assignment

Guarantee Agreement.’’

Borrower. All parties liable for the

loan except for guarantors.

Conditional Commitment. Agency’s

notice to the lender that the loan

guarantee it has requested is approved

subject to the completion of all

conditions and requirements set forth by

the Agency. The commitment will be

documented on Form RECD 4279–3,

‘‘Conditional Commitment.’’

Deficiency balance. The balance

remaining on a loan after all collateral,

including the personal guarantees, has

been liquidated.

Deficiency judgment. A money

judgment rendered by a court of

competent jurisdiction after foreclosure

and liquidation of all collateral securing

the loan.

Existing lender debt. A debt not

guaranteed by the Agency, but owed by

a borrower to the same lender that is

applying for or has received the Agency

guarantee.

Fair market value. The price that

could reasonably be expected for an

asset in an arms-length transaction

between a willing buyer and a willing

seller in ordinary economic and

business conditions.

Farmers Home Administration

(‘‘FmHA’’). The former agency of the

United States Department of Agriculture

(‘‘USDA’’) that previously administered

the programs of this Agency. Many

Instructions and forms of FmHA are still

applicable to Agency programs.

Finance office. The office which

maintains the Agency financial

accounting records and is located at

1520 Market Street, St. Louis, Missouri

63103.

Holder. A person or entity, other than

the lender, who owns all or part of the

guaranteed portion of the loan with no

servicing responsibilities. When the

single note option is used and the

lender assigns a part of the guaranteed

note to an assignee, the assignee

becomes a holder only when the Agency

receives notice and the transaction is

completed through use of Form RECD

4279–6, ‘‘Assignment Guarantee

Agreement.’’

Interim Financing. A temporary or

short-term loan made with the clear

intent that it will be repaid through

another loan. Interim financing is

frequently used to pay construction and

other costs associated with a planned

project, with permanent financing to be

obtained after project completion.

Lender. The organization making,

servicing, and collecting the loan which

is guaranteed under the provisions of

the appropriate subpart.

Lender’s Agreement. The agreement

between the Agency and the lender

setting forth the lender’s loan

responsibilities when the Loan Note

Guarantee is issued. The agreement is

Form RECD 4279–4, ‘‘Lender’s

Agreement.’’

Loan Agreement. The agreement

between the borrower and lender setting

out the terms and conditions of the loan

and the responsibilities of the borrower

and lender.

Loan Note Guarantee. The signed

instrument issued by the Agency setting

out the terms and conditions of the

guarantee. The guarantee is Form RECD

4279–5, ‘‘Loan Note Guarantee.’’

Loan-to-value. The ratio of the dollar

amount of a loan to the dollar value of

the collateral for the loan.

Negligent Servicing. The failure to

perform those services which a

reasonably prudent lender would

perform in servicing (including

liquidation of) its own portfolio of loans

that are not guaranteed. The term

includes not only the concept of a

failure to act but also not acting in a

timely manner or acting in a manner

contrary to the manner in which a

reasonably prudent lender would act.

Parity. A lien position whereby two or

more lenders share a security interest of

equal priority in collateral. In the event

of default, each lender will be affected

on a proportional basis.

Participation. Sale of an interest by

the lender in a loan wherein the lender

retains the note, collateral securing the
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3859

note, and all responsibility for loan

servicing and liquidation.

Poor. A community or area is

considered poor if, based on the most

recent decennial census data, either the

county, city, or census tract where the

community or area is located has a

median household income at or below

the poverty line for a family of four; has

a median household income below the

nonmetropolitan median household

income for the state; or has a population

of which 25 percent or more have

income at or below the poverty line.

Promissory Note. An evidence of debt.

‘‘Note’’ or ‘‘Promissory Note’’ shall also

be construed to include ‘‘Bond’’ or other

evidence of debt where appropriate.

RECD. The Under Secretary for Rural

Economic and Community Development

(‘‘RECD’’) has policy and operational

oversight responsibilities for the Rural

Housing Service (‘‘RHCDS’’), Rural

Business-Cooperative Service (‘‘RBS’’),

and the Rural Utilities Service (‘‘RUS’’).

Spreadsheet. A table containing data

from a series of financial statements of

a business over a period of time.

Financial statement analysis normally

contains spreadsheets for balance sheet

items and income statements and may

include funds flow statement data and

commonly used ratios. The spreadsheets

enable a reviewer to easily scan the

data, spot trends, and make

comparisons.

State. Any of the 50 states, the

Commonwealth of Puerto Rico, the

Virgin Islands of the United States,

Guam, American Samoa, the

Commonwealth of the Northern Mariana

Islands, the Republic of Palau, the

Federated States of Micronesia, and the

Republic of the Marshall Islands.

Subordination. An agreement

between the lender and borrower

whereby lien priorities on certain assets

pledged to secure payment of the

guaranteed loan will be reduced to a

position junior to, or on parity with, the

lien position of another loan in order for

the Agency borrower to obtain

additional financing, not guaranteed by

the Agency, from the lender or a third

party.

Veteran. For the purposes of assigning

priority points, a veteran is a person

who has been discharged or released

from the active forces of the United

States Army, Navy, Air Force, Marine

Corps, or Coast Guard under conditions

other than dishonorable and who served

on active duty in such forces:

(1) During the period of April 6, 1917,

through March 31, 1921;

(2) During the period of December 7,

1941, through December 31, 1946;

(3) During the period of June 27, 1950,

through January 31, 1955; or

(4) For a period of more than 180

days, any part of which occurred after

January 31, 1955; but on or before May

17, 1975.

§§ 4279.3–4279.14 [Reserved]

§ 4279.15 Exception authority.

The Administrator may, in individual

cases, grant an exception to any

requirement or provision of this part or

part 4287 which is not inconsistent with

any applicable law; provided that: the

Administrator determines that

application of the requirement or

provision would adversely affect the

Government’s financial interest.

§ 4279.16 Appeals.

Only the borrower, lender, or holder

can appeal an Agency decision made

under this part or part 4287. Except as

set forth in this section, the borrower

and lender must jointly execute the

written request for review or appeal of

an adverse decision made by the

Agency. In cases where the Agency has

denied or reduced the amount of final

loss payment to the lender, the adverse

decision may be appealed by the lender

only. An adverse decision that only

impacts the holder may be appealed by

the holder only. 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 departmental appeal

regulations.

§§ 4279.17–4279.28 [Reserved]

§ 4279.29 Eligible lenders.

(a) An eligible lender is any Federal

or state chartered bank, Farm Credit

Bank, other Farm Credit System

institution with direct lending

authority, Bank for Cooperatives,

Savings and Loan Association, or

mortgage company that is part of a bankholding company. These entities must

be subject to credit examination and

supervision by either an agency of the

United States or a state. Eligible lenders

may also include credit unions,

provided they are subject to credit

examination and supervision by either

the National Credit Union

Administration or a state agency, and

insurance companies provided they are

regulated by a state or National

insurance regulatory agency. Eligible

lenders include the National Rural

Utilities Cooperative Finance

Corporation.

(b) Rural Utilities Service borrowers

and other lenders not meeting the

criteria of paragraph (a) of this section

may be considered by the Agency for

eligibility to become a guaranteed

lender provided the Agency determines

that they have the legal authority to

operate a lending program and sufficient

lending expertise and financial strength

to operate a successful lending program.

(1) Such a lender must:

(i) Have a record of successfully

making at least three commercial loans

for at least the most recent 3 years, with

delinquent loans not exceeding 10

percent of loans outstanding and

historic losses not exceeding 10 percent

of dollars loaned; and

(ii) Have tangible balance sheet equity

of at least 7 percent of tangible assets

and sufficient funds available to

disburse the guaranteed loans it

proposes to approve within the first 6

months of being approved as a

guaranteed lender.

(2) A lender not covered under

paragraph (a) of this section that wishes

consideration to become a guaranteed

lender must submit a request in writing

to the state office for the state where the

lender’s lending and servicing activity

takes place. The National office will

notify the prospective lender, through

the state director, whether the lender’s

request for eligibility is approved or

rejected. If rejected, the reasons for the

rejection will be indicated to the

prospective lender in writing, and

appeal rights will be provided in

accordance with departmental appeal

regulations. The lender’s written request

must include:

(i) Evidence showing that the lender

has the necessary capital and resources

to successfully meet its responsibilities.

(ii) Copy of any license, charter, or

other evidence of authority to engage in

the proposed loanmaking and loan

servicing activity. If licensing by the

state is not required, an attorney’s

opinion to this effect must be submitted.

(iii) Information on lending

experience, including length of time in

the lending business, range and volume

of lending and servicing activity, and

status of loan portfolio including

delinquency rate, loss rate as a

percentage of loan amounts, and other

measures of success; experience of

management and loan officers; audited

financial statements not more than 1

year old; sources of funds for the

proposed loans; office location and

proposed lending area; and proposed

rates and fees, including loan

origination, loan preparation, and

servicing fees. Such fees must not be

greater than those charged by similarly

located commercial lenders in the

ordinary course of business.

(iv) An estimate of the number and

size of guaranteed loan applications the

lender will develop.
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(c) Expertise. Loan guarantees will

only be approved for lenders with

adequate experience and expertise to

adequately make, secure, service, and

collect B&I loans.

§ 4279.30 Lenders’ functions and

responsibilities.

(a) General. Lenders have the primary

responsibility for the successful delivery

of the B&I loan program. All lenders

obtaining or requesting a B&I loan

guarantee are responsible for processing

applications for guaranteed loans,

developing and maintaining adequately

documented loan files, recommending

only loan proposals that are eligible and

financially feasible, obtaining valid

evidence of debt and collateral in

accordance with sound lending

practices, supervising construction and

distribution of loan funds, servicing

guaranteed loans in a prudent manner,

including liquidation if necessary,

following Agency regulations, and

obtaining Agency approvals or

concurrence as required. This subpart,

along with subpart B of this part and

subpart B of part 4287 sets out the

regulations for this program, including

the lenders’ responsibilities.

(b) Credit evaluation. This is a key

function of all lenders during the loan

processing phase. The lender must

analyze all credit factors associated with

each proposed loan and apply their

professional judgment to determine that

the credit factors, considered in

combination, ensure loan repayment.

The lender should have an adequate

underwriting process to ensure that

loans are reviewed by other than the

originating officer. There must be good

credit documentation procedures.

(c) Environmental assessment. All

lenders should alert the Agency to any

controversial environmental issues

related to a proposed project or items

that may require extensive

environmental review. Lenders should

help the borrower prepare Form FmHA

1940–20, ‘‘Request for Environmental

Information,’’ and attachments when

required by FmHA Instruction 1940–G.

(d) Loan closing. The lender will

conduct loan closings at its discretion.

§§ 4279.31–4279.42 [Reserved]

§ 4279.43 Certified Lender Program.

(a) General. This section provides

policies and procedures for the Certified

Lender Program (‘‘CLP’’) for loans

guaranteed under this part. The

objectives are to expedite loan approval

for those lenders with a proven ability,

in accordance with paragraph (b) of this

section, to process, service, and collect

loans.

(b) CLP eligibility criteria. The lender

must meet established eligibility criteria

prior to being considered for CLP status

as follows:

(1) Be an ‘‘eligible lender’’ as defined

in § 4279.29 and authorized to do

business in the state in which CLP

status is desired.

(2) Demonstrate to the Agency’s

satisfaction that it has a thorough

knowledge of commercial lending. The

lender will demonstrate such

knowledge by providing a summary of

its guaranteed and unguaranteed

business lending activity. At a

minimum, the summary should include

the dollar amount and number of loans

in the lender’s portfolio, unguaranteed

and guaranteed by any Federal agency,

with information on delinquencies and

losses and, if applicable, the

performance of the lender as an SBA

certified or preferred lender. A certified

lender should be recognized throughout

the state as a commercial lender and

have a track record of successfully

making at least five commercial loans

per year for at least the most recent 5

years, with delinquent loans not

exceeding 6 percent of loans

outstanding and historic losses not

exceeding 6 percent of dollars loaned.

The lender will provide a written

certification to this effect along with a

statistical analysis of its loan portfolio

for the last 3 of its fiscal years.

(3) If a bank or savings and loan, have

a financial strength rating in the upper

half of possible ratings as reported by a

lender rating service selected by the

Administrator.

(4) Possess loan officers and other

appropriate personnel who have

received training conducted by the

Agency. Additional training may be

required if the lender’s contact person

changes or if the Agency feels further

instruction is needed.

(5) Have committed no action within

the most recent 2 years prior to

requesting CLP status which would be

considered cause for revoking CLP

status under § 4279.43(e).

(c) CLP approval. The Agency may

grant CLP status for a period not to

exceed 5 years by executing Form RECD

4279–8, ‘‘Certified Lender, Business and

Industry Program,’’ with the lender. The

Form RECD 4279–8 will not apply to

branches or suboffices of the lender

unless so specified in the agreement.

Such branches or suboffices may submit

loans as regular lenders or apply for

their own CLP status. Any lender who

desires CLP status must prepare a

written request to the state director for

the state in which it desires status. The

request should address each of the

required criteria outlined in paragraph

(b) of this section except for paragraph

(b)(3) and may be accompanied by any

other information the lender believes

will be helpful. The request will also

include Form RECD 4279–8 completed

and executed by the lender and an

executed Lender’s Agreement, if it does

not already have a valid Lender’s

Agreement on file with the Agency.

Loans made by the lender and

guaranteed by the Agency prior to the

lender receiving CLP status shall

continue to be governed by the forms

and agreements executed between the

lender and the Agency for those loans.

(d) Renewal of CLP status. Renewal of

CLP status is not automatic. CLP status

will lapse upon the expiration date of

Form RECD 4279–8 unless the lender

obtains a renewal. A lender whose CLP

status has lapsed may continue to

submit loan guarantee requests, but only

as a regular lender. The lender must

provide a new Form RECD 4279–8

completed and executed by the lender,

along with a written update of the

eligibility criteria required in this

section for CLP approval. This

information should be supplied at least

60 days prior to the expiration of the

existing agreement to be processed for

uninterrupted status. The information

should address how the lender is

complying with each of the required

criteria described in paragraph (b) of

this section. It should include any

proposed changes in the designated

persons for processing guaranteed loans

or operating methods used in processing

and servicing Agency guaranteed loans.

(e) Revocation of CLP status. The

lender’s CLP status may be revoked at

any time for cause. The debarment of a

lender is an additional alternative the

Agency may consider. A lender which

has lost its CLP status, but has not been

debarred and still meets the

requirements of § 4279.29 may continue

to submit loan guarantee requests as a

regular lender. Cause for revoking CLP

status includes:

(1) Failure to maintain status as an

eligible lender as set forth in § 4279.29.

(2) Knowingly submitting false

information when requesting a

guarantee or basing a guarantee request

on information known to be false or

upon information which the lender

should have known to be false.

(3) Making an Agency guaranteed loan

with deficiencies which may cause

losses under the Loan Note Guarantee

not to be covered by the Loan Note

Guarantee.

(4) Conviction for acts in connection

with any loan transaction, regardless of

whether the loan was guaranteed by the

Agency.
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(5) Violation of usury laws in

connection with any loan guaranteed by

the Agency.

(6) Failure to obtain the required

security for any loan guaranteed by the

Agency.

(7) Using loan funds guaranteed by

the Agency for purposes other than

those specifically approved by the

Agency in the Conditional Commitment.

(8) Violation of any terms of the

Lender’s Agreement.

(9) Failure to correct any cited

deficiency in loan documents in a

timely manner.

(10) Failure to submit reports required

by the Agency in a timely manner.

(11) Failure to process Agency

guaranteed loans in a reasonably

prudent manner.

(12) Failure to provide for adequate

construction planning and monitoring

in connection with any loan to ensure

that the project will be completed

within the available funds and, once

completed, will be suitable for the

borrower’s needs.

(13) Repetitive recommendations for

guaranteed loans with marginal or

substandard credit quality or that do not

comply with Agency requirements.

(14) Repetitive recommendations for

servicing actions that do not comply

with Agency requirements.

(15) Negligent servicing.

(16) Failure to conduct any approved

liquidation of a loan guaranteed by the

Agency or its predecessors in a timely

and effective manner and in accordance

with the approved liquidation plan.

(f) General loan processing and

servicing guidelines. All requests for

guaranteed loans will be processed and

serviced under subparts A and B of this

part and subpart B of part 4287 except

as modified by this section. When

determining whether or not to request a

guarantee for a proposed loan, lenders

must consider the priorities set forth in

§ 4279.155.

(1) Prior to processing an application,

the CLP lender may give written notice

to the state director of its intention to

submit an application. Upon receipt of

such written notice, the Agency will

notify the CLP lender whether or not

there is sufficient guarantee authority

for the loan. Such guarantee authority

will be held for 30 days pending receipt

of the application. If a complete

application for which guarantee

authority is being held is not received

within 30 days of the notice of intent to

file, or is rejected, the guarantee

authority for this application will no

longer be held in reserve.

(2) Refinancing of existing lender debt

in accordance with § 4279.113(q) will

not be permitted without prior Agency

approval.

(3) CLP lenders will process all

guaranteed loans as a ‘‘complete

application’’ by obtaining and

completing all items required by

§ 4279.161(b). The CLP lender must

maintain all information required by

§ 4279.161(b) in its loan file, and

determine that such material complies

with all requirements.

(4) CLP lenders will make all material

relating to any guarantee application

available to the Agency upon request.

(5) At the time of the Agency’s

issuance of the Loan Note Guarantee,

the CLP lender will provide the Agency

with copies of the following documents:

(i) Executed Loan Agreement.

(ii) Executed Promissory Notes.

(iii) Executed copies of security

documents including personal and

corporate guarantees.

(g) Unique characteristics of the CLP.

A proposed loan by a CLP lender

requires only a review by the Agency of

the information submitted by the lender.

The Agency may rely on the lender’s

credit analysis.

(1) The following will constitute a

complete application submitted by a

CLP lender:

(i) Form RECD 4279–1, ‘‘Application

for Loan Guarantee (Business and

Industry),’’ (marked with the letters

‘‘CLP’’ at the top) completed in its

entirety and executed by the borrower

and CLP lender.

(ii) Copy of the proposed Loan

Agreement or a list of proposed

requirements.

(iii) Form FmHA 1940–20, completed

and signed, with attachments.

(iv) The lender’s complete written

analysis of the proposal, including

spreadsheets of the balance sheets and

income statements for the 3 previous

years (for existing businesses), pro

forma balance sheet at startup, and 2

years projected yearend balance sheets

and income statements, with

appropriate ratios and comparisons with

industry standards (such as Dun &

Bradstreet or Robert Morris Associates).

All data must be shown in total dollars

and also in common size form, obtained

by expressing all balance sheet items as

a percentage of assets and all income

and expense items as a percentage of

sales. The lender’s credit analysis must

address the borrower’s management,

repayment ability, history of debt

repayment, necessity of any debt

refinancing, and the credit reports of the

borrower, its principals, and any parent,

affiliate, or subsidiary.

(v) Intergovernmental consultation

comments in accordance with 7 CFR

part 3015, subpart V.

(vi) If the loan will exceed $1 million

and will increase direct employment by

more than 50 employees, Form RECD

4279–2, ‘‘Certification of NonRelocation and Market Capacity

Information Report,’’ must be completed

by the lender. For such loans, the

Agency will submit Form RECD 4279–

2 to the Department of Labor and obtain

clearance before a Conditional

Commitment may be issued.

(2) The Agency will make the final

credit decision based primarily on a

review of the credit analysis submitted

by the lender except that refinancing of

existing lender debt in accordance with

§ 4279.113(q) will not be approved

without review of the borrower’s

complete financial statements and

complete credit analysis by the Agency.

The Agency may request additional

information to clarify or complete the

submission.

(h) Lender loan servicing

responsibilities. CLP lenders will be

fully responsible for all aspects of loan

servicing and, if necessary, liquidation

as described in subpart B of part 4287.

§ 4279.44 Access to records.

The lender will permit representatives

of the Agency (or other agencies of the

United States) to inspect and make

copies of any records of the lender

pertaining to the Agency guaranteed

loans during regular office hours of the

lender or at any other time upon

agreement between the lender and the

Agency.

§§ 4279.45–4279.57 [Reserved]

§ 4279.58 Equal Credit Opportunity Act.

In accordance with Title V of Pub.L.

93–495, the Equal Credit Opportunity

Act, with respect to any aspect of a

credit transaction, neither the lender nor

the Agency will discriminate against

any applicant on the basis of race, color,

religion, national origin, sex, marital

status or age (providing the applicant

has the capacity to contract), or because

all or part of the applicant’s income

derives from a public assistance

program, or because the applicant has,

in good faith, exercised any right under

the Consumer Protection Act. The

lender will comply with the

requirements of the Equal Credit

Opportunity Act as set out in the

Federal Reserve Board’s Regulation

implementing this Act (see 12 CFR part

202). Such compliance will be

accomplished prior to loan closing.
3862 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

§§ 4279.59–4279.70 [Reserved]

§ 4279.71 Public bodies and nonprofit

corporations.

Any public body or nonprofit

corporation that receives a guaranteed

loan that meets the thresholds

established by Office of Management

and Budget (OMB) Circulars A–128 or

A–133 or successor circulars must

provide an audit in accordance with the

applicable OMB Circular for the fiscal

year (of the borrower) in which the Loan

Note Guarantee is issued. If the loan is

for development or purchases made in

a previous fiscal year through interim

financing, an audit will also be provided

for the fiscal year in which the

development or purchases occurred.

Any audit provided by a public body or

nonprofit corporation in compliance

with OMB Circulars A–128 or A–133 or

their successsors will be considered

adequate to meet the audit requirements

of the B&I program for that year.

§ 4279.72 Conditions of guarantee.

A loan guarantee under this part will

be evidenced by a Loan Note Guarantee

issued by the Agency. Each lender will

execute a Lender’s Agreement. If a valid

Lender’s Agreement already exists, it is

not necessary to execute a new Lender’s

Agreement with each loan guarantee.

The provisions of this subpart, other

appropriate subparts of this part, and

part 4287 of this chapter will apply to

all outstanding guarantees unless

directly in conflict with the Loan Note

Guarantee or Lender’s Agreement issued

for the guarantee. In the event of such

a conflict, the lender may elect to have

the loan serviced in accordance with

these regulations. The lender must

notify the Agency of such election in

writing. Without such written election,

the provisions of the Loan Note

Guarantee and Lender’s Agreement will

control.

(a) Full faith and credit. A guarantee

under this part constitutes an obligation

supported by the full faith and credit of

the United States and is incontestable

except for fraud or misrepresentation of

which a lender or holder has actual

knowledge at the time it becomes such

lender or holder or which a lender or

holder participates in or condones. The

guarantee will be unenforceable to the

extent that any loss is occasioned by a

provision for interest on interest. In

addition, the guarantee will be

unenforceable by the lender to the

extent any loss is occasioned by the

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 be unenforceable to the

extent that loan funds are used for

purposes other than those specifically

approved by the Agency in its

Conditional Commitment. The Agency

will guarantee payment as follows:

(1) To any holder, 100 percent of any

loss sustained by the holder on the

guaranteed portion of the loan and on

interest due on such portion.

(2) To the lender, the lesser of:

(i) Any loss sustained by the lender

on the guaranteed portion, including

principal and interest evidenced by the

notes or assumption agreements and

secured advances for protection and

preservation of collateral made with

Agency’s authorization; or

(ii) The guaranteed principal

advanced to or assumed by the borrower

and any interest due thereon.

(b) Rights and liabilities. When a

guaranteed portion of a loan is sold to

a holder, the holder shall succeed to all

rights of the lender under the Loan Note

Guarantee to the extent of the portion

purchased. The lender will remain

bound to all obligations under the Loan

Note Guarantee, Lender’s Agreement,

and the Agency program regulations. A

guarantee and right to require purchase

will be directly enforceable by a holder

notwithstanding any fraud or

misrepresentation by the lender or any

unenforceability of the guarantee by the

lender, except for fraud or

misrepresentation of which the holder

had actual knowledge at the time it

became the holder or in which holder

participates or condones. In the event of

material fraud, negligence or

misrepresentation by the lender or the

lender’s participation in or condoning of

such material fraud, negligence or

misrepresentation, the lender will be

liable for payments made by the Agency

to any holder.

(c) Payments. A lender will receive all

payments of principal and interest on

account of the entire loan and will

promptly remit to the holder its pro rata

share thereof, determined according to

its respective interest in the loan, less

only the lender’s servicing fee.

§§ 4279.73–4279.74 [Reserved]

§ 4279.75 Sale or assignment of

guaranteed loan.

The lender may sell all or part of the

guaranteed portion of the loan on the

secondary market or retain the entire

loan. The lender shall not sell or

participate any amount of the

guaranteed or unguaranteed portion of

the loan to the borrower or members of

the borrower’s immediate families,

officers, directors, stockholders, other

owners, or a parent, subsidiary or

affiliate. If the lender desires to market

all or part of the guaranteed portion of

the loan at or subsequent to loan

closing, such loan must not be in

default. Loans made with the proceeds

of any obligation the interest on which

is excludable from income under

Section 103 of the Internal Revenue

Code of 1954, as amended, will not be

guaranteed.

(a) Single note system. The entire loan

is evidenced by one note, and one Loan

Note Guarantee is issued. The lender

may assign all or part of the guaranteed

portion of the loan to one or more

holders by using Agency’s Assignment

Guarantee Agreement. The holder, upon

written notice to the lender and the

Agency, may reassign the unpaid

guaranteed portion of the loan sold

under the Assignment Guarantee

Agreement. Upon notification and

completion of the assignment through

the use of Form RECD 4279–6,

‘‘Assignment Guarantee Agreement,’’

the assignee shall succeed to all rights

and obligations of the holder

thereunder. If this option is selected, the

lender may not at a later date cause any

additional notes to be issued.

(b) Multinote system. Under this

option the lender may provide one note

for the unguaranteed portion of the loan

and no more than 10 notes for the

guaranteed portion. When this option is

selected by the lender, the holder will

receive one of the borrower’s executed

notes and a Loan Note Guarantee. The

Agency will issue a Loan Note

Guarantee for each note, including the

unguaranteed note, to be attached to the

note. An Assignment Guarantee

Agreement will not be used when the

multinote option is utilized.

(c) After loan closing. If a loan is

closed using the multinote option and at

a later date additional notes are desired,

the lender may cause a series of new

notes, not to exceed the total number

provided for in paragraph (b) of this

section, to be issued as replacement for

previously issued guaranteed notes,

provided:

(1) Written approval of the Agency is

obtained;

(2) The borrower agrees and executes

the new notes;

(3) The interest rate does not exceed

the interest rate in effect when the loan

was closed;

(4) The maturity of the loan is not

changed;

(5) The Agency will not bear or

guarantee any expenses that may be

incurred in reference to such

reissuances of notes;

(6) There is adequate collateral

securing the notes;
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3863

(7) No intervening liens have arisen or

have been perfected and the secured

lien priority remains the same; and

(8) All holders agree.

(d) The lender’s servicing fee will stop

when the Agency purchases the

guaranteed portion of the loan from the

secondary market. No such servicing fee

may be charged to the Agency and all

loan payments and collateral proceeds

received will be applied first to the

guaranteed loan and when applied to

the guaranteed loan, will be applied on

a pro rata basis.

(e) When the Agency purchases the

guaranteed portion, the loan shall not be

sold with recourse. The purchased loans

may be sold on a nonrecourse basis

only, i.e., without a Loan Note

Guarantee attached and without

recourse.

§ 4279.76 Participation.

The lender may obtain participation

in the loan under its normal operating

procedures; however, the lender must

retain title to the notes if any of them

are unguaranteed and retain the lender’s

interest in the collateral.

§ 4279.77 Minimum retention.

The lender is required to hold in its

own portfolio a minimum of 5 percent

of the total loan amount. The amount

required to be maintained must be of the

unguaranteed portion of the loan and

cannot be participated to another. The

lender may sell the remaining amount of

the unguaranteed portion of the loan

only through participation.

§ 4279.78 Repurchase from holder.

(a) Repurchase by lender. A lender

has the option to repurchase the unpaid

guaranteed portion of the loan from a

holder within 30 days of written

demand by the holder when the

borrower is in default not less than 60

days on principal or interest due on the

loan; or the lender has failed to remit to

the holder its pro rata share of any

payment made by the borrower within

30 days of its receipt thereof. The

repurchase by the lender will be for an

amount equal to the unpaid guaranteed

portion of principal and accrued interest

less the lender’s servicing fee. The

holder will concurrently send a copy of

the demand letter to the Agency. The

guarantee will 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

requesting the repurchase. 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 default, where

and when reasonable. The lender will

notify the holder and the Agency of its

decision.

(b) Agency purchase. (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 written demand to the Agency

from the holder. (This is in addition to

the copy of the written demand on the

lender.) 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 of the holder to the lender

requesting the repurchase.

(2) The holder’s demand to the

Agency must include a copy of the

written demand made upon the lender.

The holder must also include evidence

of its 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 holder must

include in its demand the amount due

including unpaid principal, unpaid

interest to date of demand, and interest

subsequently accruing from date of

demand to proposed payment date. The

Agency will be subrogated to all rights

of the holder.

(3) The Agency will notify the lender

of its receipt of the holder’s demand for

payment. The lender must promptly

provide the Agency with the

information necessary for the Agency to

determine the appropriate amount due

the holder. Upon request by the Agency,

the lender will furnish a current

statement certified by an appropriate

authorized officer of the lender of the

unpaid principal and interest then owed

by the borrower on the loan and the

amount then owed to any holder. Any

discrepancy between the amount

claimed by the holder and the

information submitted by the lender

must be resolved between the lender

and the holder before payment will be

approved. Such conflict will suspend

the running of the 30-day payment

requirement.

(4) Purchase by the Agency neither

changes, alters, nor modifies any of the

lender’s obligations to the Agency

arising from the loan or guarantee nor

does it waive any of Agency’s rights

against the lender. The Agency will

have the right to set-off against the

lender all rights inuring to the Agency

as the holder of the instrument against

the Agency’s obligation to the lender

under the guarantee.

(c) Purchase for servicing. If, in the

opinion of the lender, repurchase of the

guaranteed portion of the loan is

necessary to adequately service the loan,

the holder must sell the guaranteed

portion of the loan to the lender for an

amount equal to the unpaid principal

and interest on such portion less the

lender’s servicing fee. The guarantee

will not cover the note interest to the

holder on the guaranteed loan accruing

after 90 days from the date of the

demand letter of the lender or the

Agency to the holder requesting the

holder to tender its guaranteed portion.

The lender must not repurchase from

the holder for arbitrage or other

purposes to further its own financial

gain. Any repurchase must only be

made after the lender obtains the

Agency’s 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.

§§ 4279.79–4279.83 [Reserved]

§ 4279.84 Replacement of document.

(a) Authorized representative. 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 an acceptable certificate of

loss and an indemnity bond.

(b) Requirements. When a Loan Note

Guarantee or Assignment Guarantee

Agreement is lost, stolen, destroyed,

mutilated, or defaced while in the

custody of the lender or holder, the

lender will coordinate the activities of

the party who seeks the replacement

documents and will submit the required

documents to the Agency for processing.

The requirements for replacement are as

follows:

(1) A certificate of loss, notarized,

which includes:

(i) Name and address of owner;

(ii) 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, the Agency’s case

number, date of the Loan Note

Guarantee or Assignment Guarantee

Agreement, face amount of the evidence

of debt purchased, date of evidence of

debt, present balance of the loan,

percentage of guarantee, and, if

Assignment Guarantee Agreement, the
3864 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

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 should 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) For the holder, evidence

demonstrating current ownership of the

Loan Note Guarantee and Note or the

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 in existence. If copies of the

endorsement cannot be obtained, best

available records of transfer must be

presented the Agency (e.g., order

confirmation, canceled checks, etc.).

(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. The bond shall be

with surety except when the

outstanding principal balance and

accrued interest due the present holder

is less than $1 million verified by the

lender in writing in a letter of

certification of balance due. The surety

shall be a qualified surety company

holding a certificate of authority from

the Secretary of the Treasury and listed

in Treasury Department Circular 580.

(3) All indemnity bonds must be

issued and payable to the United States

of America acting through the USDA.

The bond shall be in an amount not less

than the unpaid principal and interest.

The bond shall hold USDA 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.

(4) In those cases where the

guaranteed loan was closed under the

provision of the multinote system, the

Agency will not attempt to obtain, or

participate in the obtaining of,

replacement notes from the borrower. It

will be the responsibility of the holder

to bear costs of note replacement if the

borrower agrees to issue a replacement

instrument. Should such note be

replaced, the terms of the note cannot be

changed. If the evidence of debt has

been lost, stolen, destroyed, mutilated

or defaced, such evidence of debt must

be replaced before the Agency will

replace any instruments.

§§ 4279.85–4279.100 [Reserved]

Subpart B—Business and Industry

Loans

§ 4279.101 Introduction.

(a) Content. This subpart contains

loan processing regulations for the

Business and Industry (B&I) Guaranteed

Loan Program. It is supplemented by

subpart A of this part, which contains

general guaranteed loan regulations, and

subpart B of part 4287, which contains

loan servicing regulations.

(b) Purpose. The purpose of the B&I

Guaranteed Loan Program is to improve,

develop, or finance business, industry,

and employment and improve the

economic and environmental climate in

rural communities. This purpose is

achieved by bolstering the existing

private credit structure through the

guarantee of quality loans which will

provide lasting community benefits. It is

NOT intended that the guarantee

authority will be used for marginal or

substandard loans or to relieve lenders

having such loans.

(c) Documents. Copies of all forms,

regulations, and Instructions referenced

in this subpart are available in any state

or district office or the National office.

§ 4279.102 Definitions.

The definitions in § 4279.2 of subpart

A of this part also apply to this subpart.

§§ 4279.103–4279.106 [Reserved]

§ 4279.107 Guarantee fee.

The guarantee fee will be paid to the

Agency by the lender and is

nonrefundable. The fee may be passed

on to the borrower. Except as provided

in this section, the guarantee fee will be

2 percent multiplied by the principal

loan amount multiplied by the percent

of guarantee and will be paid one time

only at the time the Loan Note

Guarantee is issued.

(a) The guarantee fee may be reduced

to 1 percent if the Agency determines

that the business meets the following

criteria:

(1) High-impact business

development investment (It is the goal

of this program to encourage highimpact business investment in rural

areas. The weight given to business

investments will be in accordance with

§ 4279.155(b)(5)); and

(2) The business is located in a

community that is experiencing longterm population decline and job

deterioration; or

(3) The business is located in rural

community that has remained

persistently poor over the last 60 years

or more; or

(4) The business is located in a rural

community that is experiencing trauma

as a result of natural disaster or that is

experiencing fundamental structural

changes in its economic base.

(b) Each fiscal year, the Agency shall

establish a limit on the maximum

portion of guarantee authority available

for that fiscal year that may be used to

guarantee loans with a guarantee fee of

1 percent. The limit will be announced

by publishing a notice in the Federal

Register. Once the limit has been

reached, the guarantee fee for all

additional loans guaranteed during the

remainder of that fiscal year will be 2

percent.

§ 4279.108 Eligible borrowers.

(a) Type of entity. A borrower may be

a cooperative, corporation, partnership,

or other legal entity organized and

operated on a profit or nonprofit basis;

an Indian tribe on a Federal or state

reservation or other Federally

recognized tribal group; a public body;

or an individual. A borrower must be

engaged in or proposing to engage in a

business. Business may include

manufacturing, wholesaling, retailing,

providing services, or other activities

that will:

(1) Provide employment;

(2) Improve the economic or

environmental climate;

(3) Promote the conservation,

development, and use of water for

aquaculture; or

(4) Reduce reliance on nonrenewable

energy resources by encouraging the

development and construction of solar

energy system.

(b) Citizenship. Borrowers must meet

one of the following sets of conditions:

(1) Individual borrowers must be

citizens of the United States or reside in

the United States after being legally

admitted for permanent residence.

Corporations or other nonpublic body

organization-type borrowers must be at

least 51 percent owned by persons who

are either citizens of the United States

or reside in the United States after being

legally admitted for permanent

residence; or,

(2) The borrower does not meet the

requirements of paragraph (1) of this

section; but,

(i) The facility financed will create or

save jobs for U.S. residents in a rural

area, and

(ii) The principals or other capable

management are present and able to

remain in the U.S. and will remain in

the U.S. to continue the operation of the

company; and,

(iii) The loan funds will only be used

to finance fixed assets that will be

located in the U.S.
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3865

(c) Rural area. The business financed

with a B&I Guaranteed Loan must be

located in a rural area. Loans to

borrowers with facilities located in both

urban and rural areas will be limited to

the amount necessary to finance the

facility located in the eligible rural area.

(1) Rural areas include all territory of

a state that is:

(i) Not within the outer boundary of

any city having a population of 50,000

or more; and,

(ii) Not within an area that:

(A) Is urbanized or urbanizing as

defined in this section; and,

(B) Has a population density of more

than 100 persons per square mile,

according to the latest decennial census

of the United States. All density

determinations will be made on the

basis of minor civil divisions or census

county divisions as used by the Bureau

of the Census. In making the density

calculations, large nonresidential tracts

devoted to urban land uses such as

railroad yards, airports, industrial sites,

parks, golf courses, cemeteries, office

parks, shopping malls, or land set aside

for such purposes will be excluded.

(2) An urbanized area is an area

immediately adjacent to a city with a

population of 50,000 or more, that for

general social and economic purposes

forms a single community with such a

city. An urbanizing area is an area

immediately adjacent to a city with a

population of 50,000 or more or its

urbanized area, which appears likely,

based on development and population

trends, to become urbanized in the

foreseeable future. The corporate status

of an urbanized or urbanizing area is not

material. An area located in

recognizable open country or separated

from any city of 50,000 or more

population by recognizable open

country or by a river, will be assumed

to be not urbanized or urbanizing.

(d) Other credit. All applications for

assistance will be accepted and

processed without regard to the

availability of credit from any other

source.

§§ 4279.109–4279.112 [Reserved]

§ 4279.113 Eligible loan purposes.

Loan purposes must be consistent

with the general purpose set forth in

§ 4279.101. They include but are not

limited to the following:

(a) Business and industrial

acquisitions when the loan will keep the

business from closing, prevent the loss

of employment opportunities, or

provide expanded job opportunities.

(b) Business conversion, enlargement,

repair, modernization, or development.

(c) Purchase and development of land,

easements, rights-of-way, buildings, or

facilities.

(d) Purchase of equipment, lease-hold

improvements, machinery, supplies, or

inventory.

(e) Pollution control and abatement.

(f) Transportation services incidental

to industrial development.

(g) Startup costs and working capital.

(h) Agricultural production, when not

eligible for a Farm Credit Programs loan

from the Farm Service Agency and

when it is part of an integrated business

also involved in the processing of

agricultural products.

(1) Examples of potentially eligible

production include but are not limited

to: an apple orchard in conjunction with

a food processing plant; poultry

buildings linked to a meat processing

operation; or sugar beet production

coupled with storage and processing.

Any agricultural production considered

for B&I financing must be owned,

operated, and maintained by the

business receiving the loan for which a

guarantee is provided. Independent

agricultural production operations, even

if not eligible for Farmer Programs

loans, are not eligible for the B&I

program.

(2) The agricultural production

portion of any loan will not exceed 50

percent of the total loan or $1 million,

whichever is less.

(i) Purchase of membership, stocks,

bonds, or debentures necessary to obtain

a loan from Farm Credit System

institutions and other lenders provided

the purchase is required for all of their

borrowers.

(j) Aquaculture, including

conservation, development, and

utilization of water for aquaculture.

(k) Commercial fishing.

(l) Commercial nurseries engaged in

the production of ornamental plants and

trees and other nursery products such as

bulbs, flowers, shrubbery, flower and

vegetable seeds, sod, and the growing of

plants from seed to the transplant stage.

(m) Forestry, which includes

businesses primarily engaged in the

operation of timber tracts, tree farms,

and forest nurseries and related

activities such as reforestation.

(n) The growing of mushrooms or

hydroponics.

(o) Interest (including interest on

interim financing) during the period

before the first principal payment

becomes due or the facility becomes

income producing, whichever is earlier.

(p) Feasibility studies.

(q) To refinance outstanding debt

when it is determined that the project is

viable and refinancing is necessary to

improve cash flow and create new or

save existing jobs. Existing lender debt

may be included provided that, at the

time of application, the loan has been

current for at least the past 12 months

(unless such status is achieved by the

lender forgiving the borrower’s debt),

the lender is providing better rates or

terms, and the refinancing is a

secondary part of the overall loan.

(r) Take out of interim financing.

Guaranteeing a loan to pay off a lender’s

interim loan will not be treated as debt

refinancing provided that the lender

submits a complete preapplication or

application which proposes such

interim financing prior to completing

the interim loan. A lender that is

considering an interim loan should be

advised that the Agency assumes no

responsibility or obligation for interim

loans advanced prior to the Conditional

Commitment being issued.

(s) Fees and charges for professional

services and routine lender fees.

(t) Agency guarantee fee.

(u) Tourist and recreation facilities,

including hotels, motels, bed and

breakfast establishments, and

convention centers, except as prohibited

under ineligible purposes.

(v) Educational or training facilities.

(w) Community facility projects

which are not listed as an ineligible loan

purpose.

(x) Constructing or equipping

facilities for lease to private businesses

engaged in commercial or industrial

operations.

(y) The financing of housing

development sites provided that the

community demonstrates a need for

additional housing to prevent a loss of

jobs in the area or to house families

moving to the area as a result of new

employment opportunities.

(z) Community antenna television

services or facilities.

§ 4279.114 Ineligible purposes.

(a) Distribution or payment to an

individual owner, partner, stockholder,

or beneficiary of the borrower or a close

relative of such an individual when

such individual will retain any portion

of the ownership of the borrower.

(b) Projects in excess of $1 million

that would likely result in the transfer

of jobs from one area to another and

increase direct employment by more

than 50 employees.

(c) Projects in excess of $1 million

that would increase direct employment

by more than 50 employees, if the

project would result in an increase in

the production of goods for which there

is not sufficient demand, or if the

availability of services or facilities is

insufficient to meet the needs of the

business.
3866 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

(d) Charitable institutions, churches,

or church-controlled or fraternal

organizations.

(e) Lending and investment

institutions and insurance companies.

(f) Assistance to government

employees and military personnel who

are directors or officers or have a major

ownership of 20 percent or more in the

business.

(g) Golf courses or race tracks.

(h) Any business that derives more

than 10 percent of annual gross revenue

from gambling activity.

(i) Any illegal business activity.

(j) Prostitution.

(k) Any line of credit.

(l) The guarantee of lease payments.

(m) The guarantee of loans made by

other Federal agencies.

(n) Residential housing except when

health care or assisted living is

involved.

(o) Loans made with the proceeds of

any obligation the interest on which is

excludable from income under section

103 of the Internal Revenue Code, as

amended. Funds generated through the

issuance of the tax-exempt obligations

may neither be used to purchase the

guaranteed portion of any Agency

guaranteed loan nor may an Agency

guaranteed loan serve as collateral for a

tax-exempt issue. The Agency may

guarantee a loan for a project which

involves tax-exempt financing only

when the guaranteed loan funds are

used to finance a part of the project that

is separate and distinct from the part

which is financed by the tax-exempt

obligation, and the guaranteed loan has

at least a parity security position with

the tax-exempt obligation.

§ 4279.115 Prohibition under Agency

programs.

No B&I loans guaranteed by the

Agency will be conditioned on any

requirement that the recipients of such

assistance accept or receive electric

service from any particular utility,

supplier, or cooperative.

§§ 4279.116–4279.118 [Reserved]

§ 4279.119 Loan guarantee limits.

(a) Loan amount. The total amount of

Agency loans to one borrower,

including the guaranteed and

unguaranteed portions, the outstanding

principal and interest balance of any

existing Agency guaranteed loans, and

new loan requests, must not exceed $10

million except as provided for in this

paragraph. The Administrator may, at

the Administrator’s discretion, grant an

exception to the $10 million limit under

the following circumstances:

(1) The project to be financed is a high

priority project. Priority will be

determined in accordance with the

criteria set forth in § 4279.155;

(2) The lender must document to the

satisfaction of the Agency that the loan

will not be made and the project will

not be completed if the guarantee is not

approved;

(3) In no circumstances will the total

amount of guaranteed loans to one

borrower, including the guaranteed and

unguaranteed portions, the outstanding

principal and interest balance of any

existing Agency guaranteed loans, and

new loan requests, exceed $25 million;

(4) The percentage of guarantee will

not exceed 60 percent. No exception to

this requirement will be approved under

paragraph (b) of this section for loans

exceeding $10 million; and,

(5) Any request for a guaranteed loan

exceeding the $10 million limit must be

submitted to the Agency in the form of

a preapplication. The preapplication

must be submitted to the National office

for review and concurrence before

encouraging a full application.

(b) Percent of guarantee. The

percentage of guarantee, up to the

maximum allowed by this section, is a

matter of negotiation between the lender

and the Agency. Except as provided in

paragraphs (b) (1) through (4) of this

section, the maximum percentage of

guarantee is 80 percent for loans of $5

million or less and 70 percent for loans

exceeding $5 million. The

Administrator may, at the

Administrator’s discretion, grant an

exception to the guarantee percentage

limits under the following

circumstances:

(1) The project to be financed is a high

priority project. Priority will be

determined in accordance with the

criteria set forth in § 4279.155;

(2) The lender must document to the

satisfaction of the Agency that the loan

will not be made and the project will

not be completed if the higher guarantee

percentage is not approved;

(3) The percentage of guarantee will

not exceed 90 percent; and

(4) Each fiscal year, the Agency shall

establish a limit on the maximum

portion of guarantee authority available

for that fiscal year that may be used to

guarantee loans with a guarantee

percentage exceeding 80 percent. The

limit will be announced by publishing

a notice in the Federal Register. Once

the limit has been reached, the

guarantee percentage for all additional

loans guaranteed during the remainder

of that fiscal year will not exceed 80

percent.

§ 4279.120 Fees and charges.

(a) Routine lender fees. The lender

may establish charges and fees for the

loan provided they are similar to those

normally charged other applicants for

the same type of loan in the ordinary

course of business.

(b) Professional services. Professional

services are those rendered by

professionals generally licensed or

certified by states or accreditation

associations, such as architects,

engineers, packagers, accountants,

attorneys, or appraisers. The borrower

may pay fees for professional services

needed for planning and developing a

project provided that the amounts are

reasonable and customary in the area.

Professional fees may be included as an

eligible use of loan proceeds.

§§ 4279.121–4279.124 [Reserved]

§ 4279.125 Interest rates.

The interest rate for the guaranteed

loan will be negotiated between the

lender and the applicant and may be

either fixed or variable as long as it is

a legal rate. Interest rates will not be

more than those rates customarily

charged borrowers in similar

circumstances in the ordinary course of

business and are subject to Agency

review and approval. Lenders are

encouraged to utilize the secondary

market and pass interest rate savings on

to the borrower.

(a) A variable interest rate agreed to

by the lender and borrower must be a

rate that is tied to a base rate agreed to

by the lender and the Agency. The

variable interest rate may be adjusted at

different intervals during the term of the

loan, but the adjustments may not be

more often than quarterly and must be

specified in the Loan Agreement. The

lender must incorporate, within the

variable rate Promissory Note at loan

closing, the provision for adjustment of

payment installments coincident with

an interest rate adjustment. The lender

will assure that the outstanding

principal balance is properly amortized

within the prescribed loan maturity to

eliminate the possibility of a balloon

payment at the end of the loan.

(b) Any change in the interest rate

between the date of issuance of the

Conditional Commitment and before the

issuance of the Loan Note Guarantee

must be approved in writing by the

Agency approval official. Approval of

such a change will be shown as an

amendment to the Conditional

Commitment.

(c) It is permissible to have one

interest rate on the guaranteed portion

of the loan and another rate on the

unguaranteed portion of the loan

provided that the rate on the guaranteed

portion does not exceed the rate on the

unguaranteed portion.
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3867

(d) A combination of fixed and

variable rates will be allowed.

§ 4279.126 Loan terms.

(a) The maximum repayment for loans

on real estate will not exceed 30 years;

machinery and equipment repayment

will not exceed the useful life of the

machinery and equipment purchased

with loan funds or 15 years, whichever

is less; and working capital repayment

will not exceed 7 years. The term for a

loan that is being refinanced may be

based on the collateral the lender will

take to secure the loan.

(b) The first installment of principal

and interest will, if possible, be

scheduled for payment after the project

is operational and has begun to generate

income. However, the first full

installment must be due and payable

within 3 years from the date of the

Promissory Note and be paid at least

annually thereafter. Interest-only

payments will be paid at least annually

from the date of the note.

(c) Only loans which require a

periodic payment schedule which will

retire the debt over the term of the loan

without a balloon payment will be

guaranteed.

(d) A loan’s maturity will take into

consideration the use of proceeds, the

useful life of assets being financed, and

the borrower’s ability to repay the loan.

The lender may apply the maximum

guidelines specified above only when

the loan cannot be repaid over a shorter

term.

§§ 4279.127–4279.130 [Reserved]

§ 4279.131 Credit quality.

The lender is primarily responsible

for determining credit quality and

should address all of the elements of

credit quality in a written credit

analysis including adequacy of equity,

cash flow, collateral, history,

management, and the current status of

the industry for which credit is to be

extended.

(a) Cash flow. All efforts will be made

to structure or restructure debt so that

the business has adequate debt coverage

and the ability to accommodate

expansion. All loans guaranteed through

the B&I program must be sound, with

reasonably assured repayment.

(b) Collateral.

(1) Collateral must have documented

value sufficient to protect the interest of

the lender and the Government and

collateral value will normally be at least

equal to the loan amount. Lenders will

discount collateral consistent with

sound loan-to-value policy.

(2) Some businesses are

predominantly cash flow oriented, and

where cash flow and profitability is

strong, loan-to-value coverage may be

less than normal policy. A loan

primarily based on cash flow must be

supported by a successful and

documented financial history.

(c) Industry. Current status of the

industry will be considered and

businesses in areas of decline will be

required to provide strong business

plans which outline how they differ

from the current trends. The regulatory

environment surrounding the particular

business or industry will be considered.

(d) Equity. The equity amount will

indicate a significant investment by the

owners, sufficient to provide reasonable

protection to creditors, and an ability to

maintain a positive equity position

through a normal economic downturn.

(e) Lien priorities. The entire loan will

be secured by the same security with

equal lien priority for the guaranteed

and unguaranteed portions of the loan.

The unguaranteed portion of the loan

will neither be paid first nor given any

preference or priority over the

guaranteed portion. A parity or junior

position may be considered provided

discounted collateral values are

adequate to secure the loan in

accordance with paragraph (b) of this

section after considering prior liens.

(f) Management. A thorough review of

key management personnel will be

completed to assure that the business

has adequately trained and experienced

managers.

§§ 4279.132–4279.136 [Reserved]

§ 4279.137 Financial statements.

(a) The lender will determine the type

and frequency of submission of

financial statements by the borrower. At

a minimum, annual financial statements

prepared by an accountant in

accordance with Generally Accepted

Accounting Principles will be required.

(b) If specific circumstances warrant

and the proposed guaranteed loan will

exceed $3 million, the Agency may

require annual audited financial

statements. For example, the need for

audited financial statements will be

carefully considered in connection with

loans that depend heavily on inventory

and accounts receivable for collateral.

§§ 4279.138–4279.142 [Reserved]

§ 4279.143 Insurance.

(a) Hazard. Hazard insurance with a

standard mortgage clause naming the

lender as beneficiary will be required on

every loan in an amount that is at least

the lesser of the depreciated

replacement value of the collateral or

the amount of the loan. Hazard

insurance includes fire, windstorm,

lightning, hail, explosion, riot, civil

commotion, aircraft, vehicle, marine,

smoke, builder’s risk during

construction by the business, and

property damage.

(b) Life. The lender may require life

insurance to insure against the risk of

death of persons critical to the success

of the business. When required,

coverage will be in amounts necessary

to provide for management succession

or to protect the business. The cost of

insurance and its effect on the

applicant’s working capital must be

considered as well as the amount of

existing insurance which could be

assigned without requiring additional

expense.

(c) Worker compensation. Worker

compensation insurance is required in

accordance with state law.

(d) Flood. National Flood insurance is

required when it is available.

(e) Other. Public liability, business

interruption, malpractice and other

insurance appropriate to the borrower’s

particular business and circumstances

should be considered and required

when needed to protect the interests of

the borrower.

§ 4279.144 Appraisals.

Lenders will be responsible for

assuring that appraisal values

adequately reflect the actual value of all

collateral. All real property appraisals

associated with Agency guaranteed

loanmaking and servicing transactions

will meet the requirements set forth by

the Financial Institutions Reform,

Recovery and Enforcement Act

(FIRREA) of 1989 and the appropriate

guidelines set forth in Standards 1 and

2 of the Uniform Standards of

Professional Appraisal Practices

(USPAP). For additional guidance and

information concerning the completion

of real property appraisals, refer to

subpart A of part 1922. Chattels will be

evaluated in accordance with normal

banking practices and generally

accepted methods of determining value.

§§ 4279.145–4279.148 [Reserved]

§ 4279.149 Personal and corporate

guarantees.

(a) Personal and corporate guarantees,

when obtained, are part of the collateral

for the loan. However, the value of such

guarantee is not considered in

determining whether a loan is

adequately secured for loanmaking

purposes.

(b) Personal/corporate guarantees for

those owning greater than 20 percent of

the borrower or those providing

significant revenues or income to the

borrower will be required where legally
3868 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

permissible, except as provided for by

this section.

(c) Exceptions to the requirements for

personal guarantees must be requested

by the lender and concurred in by the

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

document that collateral, equity, cash

flow, and profitability, or a combination

of these, indicates an above average

ability to repay the loan.

§ 4279.150 Feasibility studies.

A feasibility study by a qualified

independent consultant may be required

by the Agency for startup businesses or

existing businesses when the project

will significantly affect the borrower’s

operations.

§§ 4279.151–4279.154 [Reserved]

§ 4279.155 Loan priorities.

Applications and preapplications

received by the Agency will be

considered in the order received;

however, for the purpose of assigning

priorities as described in paragraph (b)

of this section, the Agency will compare

an application to other pending

applications.

(a) When applications on hand

otherwise have equal priority,

applications from qualified veterans

will have preference.

(b) Priorities will be assigned by the

Agency to eligible applications on the

basis of a point system as set forth in

this section. The application and

supporting information will be used to

determine an eligible proposed project’s

priority for available guarantee

authority. All lenders, including CLP

lenders, will consider Agency priorities

when choosing projects for guarantee.

The lender will provide necessary

information related to determining the

score, as requested.

(1) Population priority. The priority

score for population will be the total

score for the following categories:

(i) Located in an unincorporated area

or in a city with under 25,000

population (10 points).

(ii) Located in a county defined as

nonadjacent to a metropolitan area,

according to the latest definition

provided by the Economic Research

Service of the Department of Agriculture

(5 points).

(2) Community priority. The priority

score for community will be the total

score for the following categories:

(i) Located in an eligible area of long

term population decline and job

deterioration based on reliable statistical

data (5 points).

(ii) Located in a rural community that

has remained persistently poor over the

last 60 years or more (5 points).

(iii) Located in a rural community that

is experiencing trauma as a result of

natural disaster or experiencing

fundamental structural changes in its

economic base (5 points).

(iv) Located in a city or county with

an unemployment rate 125 percent of

the statewide rate or greater (5 points).

(3) Empowerment Zone/Enterprise

Community (EZ/EC).

(i) Located in an EZ/EC selected or

designated area (10 points).

(ii) Located in a EZ/EC applicant

community which was not selected or

designated as EZ/EC. (5 points).

(4) Loan features. The priority score

for loan features will be the total score

for the following categories except that

the total score for loan features cannot

exceed 15 points:

(i) Lender will price the loan at

secondary market rate plus 1.5 percent

or less (5 points).

(ii) Lender will price the loan at

secondary market rate plus 1 percent or

less (5 points).

(iii) The Agency guaranteed loan is

less than 50 percent of project cost (5

points).

(iv) Percentage of guarantee is 10 or

more percentage points less than the

maximum allowable for a loan of its size

(5 points).

(5) High impact Business Investment

Priorities. The priority score for high

impact business investment will be the

total score for the following three

categories:

(i) Industry. The priority score for

industry will be the total score for the

following, except that the total score for

industry cannot exceed 10 points.

(A) Industry that ranks among the

leading-edge industries for industrial

growth potential, as measured by being

in the top half of industries in terms of

industrial life cycle (3 points).

(B) Industry whose basis for

competitiveness results from effective

use of the local natural resource base,

rural location, or special assets or

contributions from the community, and

not from extraordinary tax abatements

or other industrial attractions (3 points).

(C) Industry that has potential to

achieve 20 percent or more of its sales

in international markets (3 points).

(D) Industry that is not already

present in the community and therefore

represents a diversification of the local

economy and reduces overall

community vulnerability to cyclical

changes in the fortunes of the

predominant local industries (3 points).

(ii) Business. The priority score for

business will be the total score for the

following, except that the total score for

business cannot exceed 10 points.

(A) Business that offers high value,

specialized products and services that

command high prices because of

uniqueness, high quality, or niche

marketing strategies and which displays

the capacity for innovativeness and

rapid response in capitalizing on market

opportunities (3 points).

(B) Business that has a significant

potential to stimulate the development

of a broader complex of business

activities that provide inputs to or serve

as the markets for the initial business (3

points).

(C) Business that is locally owned and

managed (3 points).

(D) Business that is a cooperative form

of enterprise (3 points).

(iii) Job quality. The priority score for

job quality will be the total score for the

following, except that the total score for

job quality cannot exceed 10 points.

(A) Business that provides jobs with

career and earnings growth

opportunities within the local plant and

does not require employees to move

away from the community in order to

achieve career advancement (4 points).

(B) Business in which the average

wage for project jobs exceeds 150

percent of the Federal minimum wage (4

points).

(C) Business in which the average

wage for project jobs exceeds 200

percent of the Federal minimum wage

(an additional 4 points).

(6) Administrative points. The state

director may assign up to 10 additional

points to an application to account for

such factors as statewide distribution of

funds, natural or economic emergency

conditions, area economic development

strategies, or other factors the state

director believes are not adequately

covered elsewhere in the scoring

system. An explanation of the assigning

of these points by the state director will

be appended to the calculation of the

project score maintained in the case file.

If an application is considered in the

National office, the Administrator may

also assign up to an additional 10

points. The Administrator may assign

the additional points to an application

to account for items such as geographic

distribution of funds and emergency

conditions caused by economic

problems or natural disasters or other

factors the Administrator believes are

not adequately covered elsewhere in the

scoring system.

§ 4279.156 Planning and performing

development.

(a) Design policy. 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
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3869

within the available funds and, once

completed, will be suitable for the

borrower’s needs.

(b) Project control. The lender will

monitor the progress of construction

and undertake the reviews and

inspections necessary to ensure that

construction proceeds are used in

accordance with the approved plans,

specifications, and contract documents

and that funds are used for eligible

project costs.

(c) Equal opportunity. For all

construction contracts in excess of

$10,000, the contractor must comply

with Executive Order 11246, entitled

‘‘Equal Employment Opportunity,’’ as

amended by Executive Order 11375, and

as supplemented by applicable

Department of Labor regulations (41

CFR part 60). The borrower and lender

are responsible for ensuring that the

contractor complies with these

requirements.

(d) Americans with Disabilities Act

(ADA). B&I Guaranteed Loans which

involve the construction of or addition

to facilities that accommodate the

public and commercial facilities, as

defined by the ADA, must comply with

the ADA. The lender and borrower are

responsible for compliance.

§§ 4279.157–4279.160 [Reserved]

§ 4279.161 Filing preapplications and

applications.

Borrowers and lenders are encouraged

to file preapplications and obtain

Agency comments before completing an

application. However, if they prefer,

they may file a complete application as

the first contact with the Agency.

Neither preapplications nor applications

will be accepted or processed unless a

lender has agreed to finance the

proposal.

(a) Preapplications. Lenders may file

preapplications by submitting the

following to the Agency:

(1) A letter signed by the borrower

and lender containing the following:

(i) Borrower’s name, organization

type, address, contact person, and

federal tax identification and telephone

numbers.

(ii) Amount of the loan request,

percent of guarantee requested, and the

proposed rates and terms.

(iii) Name of proposed lender,

address, telephone number, contact

person, and lender’s Internal Revenue

Service (IRS) identification number.

(iv) Brief description of the project,

products, and services provided, and

availability of raw materials and

supplies.

(v) Type and number of jobs created

or saved.

(vi) Amount of borrower’s equity and

a description of collateral, with

estimated values, to be offered as

security for the loan.

(vii) If a corporate borrower, the

names and addresses of the borrower’s

parent, affiliates, and/or subsidiary

firms, if any, and a description of the

relationship.

(2) A completed Form RECD 4279–2,

‘‘Certification of Non-Relocation and

Market Capacity Information Report,’’ if

the proposed loan is in excess of $1

million and will increase direct

employment by more than 50

employees.

(3) For existing businesses, a current

balance sheet and a profit and loss

statement not more than 90 days old

and financial statements for the

borrower and any parent, affiliates, and

subsidiaries for at least the 3 most

recent years.

(4) For startup businesses, a

preliminary business plan must be

provided as part of the preapplication.

(b) Applications. Except for CLP

lenders, applications will be filed with

the Agency by submitting the following

information: (CLP applications will be

completed in accordance with

§ 4279.43(g)(1) but CLP lenders must

have the material listed in this

paragraph in their files.)

(1) A completed Form RECD 4279–1,

‘‘Application for Loan Guarantee

(Business and Industry).’’

(2) The information required for filing

a preapplication, as listed above, if not

previously filed or if the information

has changed.

(3) Form FmHA 1940–20, ‘‘Request

for Environmental Information,’’ and

attachments, unless the project is

categorically excluded under Agency

environmental regulations. If a Phase I

site assessment has been completed, a

copy must be provided.

(4) A personal credit report from an

acceptable credit reporting company for

a proprietor (owner), each partner,

officer, director, key employee, and

stockholder owning 20 percent or more

interest in the applicant, except for

those corporations listed on a major

stock exchange. Credit reports are not

required for elected and appointed

officials when the applicant is a public

body.

(5) Intergovernmental consultation

comments in accordance with 7 CFR

part 3015, subpart V.

(6) Appraisals, if available. (Agency

approval in the form of a Conditional

Commitment may be issued subject to

receipt of adequate appraisals.)

(7) For all businesses, a current (not

more than 90 days old) balance sheet, a

pro forma balance sheet at startup, and

projected balance sheets, income and

expense statements, and cash flow

statements for the next 2 years.

Projections should be supported by a

list of assumptions showing the basis for

the projections.

(8) Lender’s complete written

analysis, including spreadsheets of the

balance sheets and income statements

for the 3 previous years (for existing

businesses), pro forma balance sheet at

startup, and 2 years projected yearend

balance sheets and income statements,

with appropriate ratios and comparisons

with industrial standards (such as Dun

& Bradstreet or Robert Morris

Associates). All data must be shown in

total dollars and also in common size

form, obtained by expressing all balance

sheet items as a percentage of assets and

all income and expense items as a

percentage of sales. The lender’s credit

analysis must address the borrower’s

management, repayment ability, history

of debt repayment, necessity of any debt

refinancing, and the credit reports of the

borrower, its principals, and any parent,

affiliate, or subsidiary.

(9) Commercial credit reports

obtained by the lender on the borrower

and any parent, affiliate, and subsidiary

firms.

(10) Current personal and corporate

financial statements of any guarantors.

(11) A proposed Loan Agreement or a

sample Loan Agreement with an

attached list of the proposed loan

agreement provisions for the loan. The

final Loan Agreement must be executed

by the lender and borrower before the

Agency issues a Loan Note Guarantee.

The following requirements must be

addressed in the Loan Agreement:

(i) Prohibition against assuming

liabilities or obligations of others.

(ii) Restriction on dividend payments.

(iii) Limitation on purchase or sale of

equipment and fixed assets.

(iv) Limitation on compensation of

officers and owners.

(v) Minimum working capital or

current ratio requirement.

(vi) Maximum debt to net worth ratio.

(vii) Restrictions concerning

consolidations, mergers, or other

circumstances.

(viii) Limitations on selling the

business without the concurrence of the

lender.

(ix) Repayment and amortization of

the loan.

(x) List of collateral and lien priority

for the loan including a list of persons

and corporations guaranteeing the loan

with a schedule for providing the lender

with personal and corporate financial

statements. Financial statements on the

corporate and personal guarantors must

be updated no less than annually.
3870 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

(xi) Type and frequency of financial

statements to be required for the

duration of the loan.

(xii) The final Loan Agreement

between the lender and borrower will

contain any additional requirements

imposed by the Agency in its

Conditional Commitment.

(12) A business plan, which includes

at a minimum a description of the

business and project, management

experience, products and services,

proposed use of funds, availability of

labor, raw materials and supplies, and

the names of any corporate parent,

affiliates, and subsidiaries with a

description of the relationship. This

may be omitted if the information is

included in a feasibility study.

(13) Independent feasibility study, if

required.

(14) For companies listed on a major

stock exchange and/or subject to the

Securities and Exchange Commission

(SEC) regulations, a copy of SEC Form

10–K, ‘‘Annual Report Pursuant to

Section 13 or 15D of the Act of 1934.’’

(15) For health care facilities, a

certificate of need, if required by state

law.

(16) A certification by the lender that

it has completed a comprehensive

analysis of the proposal, the applicant is

eligible, the loan is for authorized

purposes, and there is reasonable

assurance of repayment ability based on

the borrower’s history, projections and

equity, and the collateral to be obtained.

(17) Any additional information

required by the Agency.

§§ 4279.162–4279.164 [Reserved]

§ 4279.165 Evaluation of application.

(a) General review. If the Agency

determines it is unable to guarantee the

loan, the lender will be informed in

writing. Such notification will include

the reasons for denial of the guarantee.

Review of CLP applications will be

modified in accordance with

§ 4279.43(g).

(b) Environment. Before loan

approval, the proposed project must

comply with environmental

requirements.

§§ 4279.166–4279.172 [Reserved]

§ 4279.173 Loan approval and obligating

funds.

(a) Upon approval of a loan guarantee,

the Agency will issue a Conditional

Commitment to the lender to set forth

conditions under which a Loan Note

Guarantee will be issued. The

Conditional Commitment must be

accepted by the lender and borrower in

writing.

(b) If certain conditions of the

Conditional Commitment cannot be

met, the lender and applicant may

propose alternate conditions. Within the

requirements of the applicable

regulations and instructions and

prudent lending practices, the Agency

may negotiate with the lender and the

applicant regarding any proposed

changes to the Conditional

Commitment.

§ 4279.174 Transfer of lenders.

(a) The loan approval official may

approve the substitution of a new

eligible lender in place of a former

lender who holds an outstanding

Conditional Commitment when the

Loan Note Guarantee has not yet been

issued, provided that there are no

changes in the borrower’s ownership or

control, loan purposes, or scope of

project and loan conditions in the

Conditional Commitment and the Loan

Agreement remain the same.

(b) The new lender’s servicing

capability, eligibility, and experience

will be analyzed by the Agency prior to

approval of the substitution. The

original lender will provide the Agency

with a letter stating the reasons it no

longer desires to be a lender for the

project. The substituted lender must

execute a new Part B of Form RECD

4279–1.

§§ 4279.175–4279.179 [Reserved]

§ 4279.180 Changes in borrower.

Any changes in borrower ownership

or organization prior to the issuance of

the Loan Note Guarantee must be

approved by the Agency loan approval

official.

§ 4279.181 Conditions precedent to

issuance of Loan Note Guarantee.

The Loan Note Guarantee will not be

issued until the lender, including a CLP

lender, certifies to the following:

(a) No major changes have been made

in the lender’s loan conditions and

requirements since the issuance of the

Conditional Commitment, unless such

changes have been approved by the

Agency.

(b) All planned property acquisition

has been completed, all development

has been substantially completed in

accordance with plans and

specifications, and costs have not

exceeded the amount approved by the

lender and the Agency.

(c) Required hazard, flood, liability,

worker’s compensation, and personal

life insurance, when required, are in

effect.

(d) Truth in lending requirements

have been met.

(e) All equal credit opportunity

requirements have been met.

(f) The loan has been properly closed,

and the required security instruments

have been obtained or will be obtained

on any acquired property that cannot be

covered initially under state law.

(g) 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.

(h) 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 period of time.

(i) When required, personal,

partnership, or corporate guarantees

have been obtained.

(j) All other requirements of the

Conditional Commitment have been

met.

(k) Lien priorities are consistent with

the requirements of the Conditional

Commitment. No claims or liens of

laborers, subcontractors, suppliers of

machinery and equipment, or other

parties have been filed against the

collateral and no suits are pending or

threatened that would adversely affect

the collateral when the security

instruments are filed.

(l) The loan proceeds have been

disbursed for purposes and in amounts

consistent with the Conditional

Commitment and Form RECD 4279–1. A

copy of the detailed loan settlement of

the lender must be attached to support

this certification.

(m) There has been neither any

material adverse change in the

borrower’s financial condition nor any

other material adverse change in the

borrower, for any reason, during the

period of time from the Agency’s

issuance of the Conditional

Commitment to issuance of the Loan

Note Guarantee regardless of the cause

or causes of the change and whether or

not the change or causes of the change

were within the lender’s or borrower’s

control. The lender’s certification must

address all adverse changes of the

borrower, any parent, affiliate, or

subsidiary of the borrower, and

guarantors.

(n) None of the lender’s officers,

directors, stockholders, or other owners

(except stockholders in an institution

that has normal stockshare requirements

for participation) has a substantial

financial interest in the borrower and

neither the borrower nor its officers,

directors, stockholders, or other owners

has a substantial financial interest in the

lender. If the borrower is a member of

the board of directors or an officer of a
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3871

Farm Credit System (FCS) institution

that is the lender, the lender will certify

that an FCS institution on the next

highest level will independently process

the loan request and act as the lender’s

agent in servicing the account.

§§ 4279.182–4279.185 [Reserved]

§ 4279.186 Issuance of the guarantee.

(a) When loan closing plans are

established, the lender will notify the

Agency. Coincident with, or

immediately after loan closing, the

lender will provide the following to the

Agency:

(1) Lender’s certifications as outlined

in § 4279.181.

(2) Executed Lender’s Agreement.

(3) Form FmHA 1980–19,

‘‘Guaranteed Loan Closing Report,’’ and

appropriate guarantee fee.

(b) When the Agency is satisfied that

all conditions for the guarantee have

been met, the Loan Note Guarantees and

the following documents, as

appropriate, will be issued:

(1) Assignment Guarantee Agreement.

In the event the lender uses the single

note option and assigns the guaranteed

portion of the loan to a holder, the

lender, holder, and the Agency will

execute the Assignment Guarantee

Agreement; and

(2) Certificate of Incumbency. If

requested by the lender, the Agency will

provide the lender with a certification

on Form RECD 4279–7, ‘‘Certificate of

Incumbency and Signature,’’ of the

signature and title of the Agency official

who signs the Loan Note Guarantee,

Lender’s Agreement, and Assignment

Guarantee Agreement.

(c) The Agency may, at its discretion,

request copies of loan documents for its

file.

(d) There may be instances when not

all of the working capital has been

disbursed, and it appears practical to

disburse the balance over a period of

time. The state director, after review of

a disbursement plan, may amend the

Conditional Commitment in accordance

with the disbursement plan and issue

the guarantee.

§ 4279.187 Refusal to execute Loan Note

Guarantee.

If the Agency determines that it

cannot execute the Loan Note

Guarantee, the Agency will promptly

inform the lender of the reasons and

give the lender a reasonable period

within which to satisfy the objections. If

the lender writes the Agency within the

period allowed requesting additional

time to satisfy the objections, the

Agency may grant the request. If the

lender satisfies the objections within the

time allowed, the guarantee will be

issued.

§§ 4279.188–4279.200 [Reserved]

18. A new part 4287, is added to

chaper XLII to read as follows:

PART 4287—SERVICING

Subpart A—[Reserved]

Subpart B—Servicing Business and

Industry (B&I) Guaranteed Loans

Sec.

4287.101 Introduction.

4287.102 Definitions.

4287.103–4287.105 [Reserved]

4287.106 Routine servicing.

4287.107–4287.111 [Reserved]

4287.112 Interest rate adjustments.

4287.113 Release of collateral.

4287.114–4287.122 [Reserved]

4287.123 Subordination of lien position.

4287.124 Alterations of loan instruments.

4287.125–4287.133 [Reserved]

4287.134 Transfer and assumption.

4287.135 Substitution of lender.

4287.136–4287.144 [Reserved]

4287.145 Default by borrower.

4287.146–4287.155 [Reserved]

4287.156 Protective advances.

4287.157 Liquidation.

4287.158 Determination of loss and

payment.

4287.159–4287.168 [Reserved]

4287.169 Future recovery.

4287.170 Bankruptcy.

4287.171–4287.179 [Reserved]

4287.180 Termination of guarantee.

4287.181–4287.200 [Reserved]

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

Subpart A—[Reserved]

Subpart B—Servicing Business and

Industry Guaranteed Loans

§ 4287.101 Introduction.

(a) This subpart supplements subparts

A and B of part 4279 by providing

additional requirements and

instructions for servicing and

liquidating all Business and Industry

(B&I) Guaranteed Loans. This includes

Drought and Disaster (D&D), Disaster

Assistance for Rural Business

Enterprises (DARBE), and Business and

Industry Disaster (BID) loans.

(b) The lender will be responsible for

servicing the entire loan and will

remain mortgagee and secured party of

record notwithstanding the fact that

another party may hold a portion of the

loan. The entire loan will be secured by

the same security with equal lien

priority for the guaranteed and

unguaranteed portions of the loan. The

unguaranteed portion of a loan will

neither be paid first nor given any

preference or priority over the

guaranteed portion of the loan.

(c) Copies of all forms, regulations,

and instructions referenced in this

subpart are available in any state or

district office or the National office.

§ 4287.102 Definitions.

The definitions contained in § 4279.2

apply to this subpart.

§§ 4287.103–4287.105 [Reserved]

§ 4287.106 Routine servicing.

The lender is responsible for servicing

the entire loan and for taking all

servicing actions that a prudent lender

would perform in servicing its own

portfolio of loans that are not

guaranteed. The Loan Note Guarantee is

unenforceable by the lender to the

extent any loss is occasioned by

violation of usury laws, use of loan

funds for unauthorized purposes,

negligent servicing, or failure to obtain

the required security regardless of the

time at which the Agency acquires

knowledge of the foregoing. This

responsibility includes but is not

limited to the collection of payments,

obtaining compliance with the

covenants and provisions in the Loan

Agreement, obtaining and analyzing

financial statements, checking on

payment of taxes and insurance

premiums, and maintaining liens on

collateral.

(a) Lender reports. The lender must

report the outstanding principal and

interest balance on each guaranteed loan

semiannually using Form FmHA 1980–

41, ‘‘Guaranteed Loan Status Report.’’

(b) Loan classification. Within 90

days of receipt of the Loan Note

Guarantee, the lender must notify the

Agency of the loan’s classification or

rating under its regulatory standards.

Should the classification be changed at

a future time, the Agency must be

notified immediately.

(c) Agency/lender conference. The

lender will meet with the Agency at the

Agency’s request to ascertain how the

guaranteed loan is being serviced and

that the conditions and covenants of the

Loan Agreement are being enforced.

(d) Financial reports. The lender must

obtain the financial statements required

by the Loan Agreement, and these

statements must be forwarded to the

Agency. The lender is required to

submit annual statements to the Agency

within 120 days of the borrower’s fiscal

yearend. The lender must analyze the

financial statements and provide the

Agency with a written summary of its

analysis and conclusions, including

trends, strengths, weaknesses,

extraordinary transactions, and other

indications of the financial condition of

the borrower. Spreadsheets of the new

financial statements and previous

financial statements must also be

included.
3872 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

(e) Additional expenditures. The

lender will not make additional loans to

the borrower without first obtaining the

prior written approval of the Agency,

even though such loans will not be

guaranteed.

§§ 4287.107–4287.111 [Reserved]

§ 4287.112 Interest rate adjustments.

(a) Reductions. The borrower, lender,

and holder (if any) may collectively

initiate a permanent or temporary

reduction in the interest rate of the

guaranteed loan at any time during the

life of the loan upon written agreement

among these parties. The Agency must

be notified by the lender, in writing,

within 10 calendar days of the change.

If the guaranteed portion has been

purchased by the Agency, then the

Agency will affirm or reject interest rate

change proposals in writing. When the

Agency holds any portion of the loan, it

will concur in such interest rate changes

only when it is demonstrated to the

Agency that the change is a more viable

alternative than initiating or proceeding

with liquidation of the loan or

continuing with the loan in its present

state. The Government’s financial

interests must not be adversely affected

by the reduction of the interest rate.

(1) Factors which will be considered

in making such determinations include:

(i) Whether the proposed interest rate

will be below the Government’s cost of

borrowing money;

(ii) Whether continuing with the loan

would realistically promote or enhance

rural development and employment in

rural areas;

(iii) Whether recovery is maximized

and the monetary recovery would be

increased by proceeding immediately to

liquidation (if applicable) or allowing

the borrower to continue at a reduced

interest rate; and

(iv) Whether an in-depth financial

analysis by the lender reasonably

indicates that the business would be

successful at a lower interest rate and

reasonably indicates that the borrower

could make the reduced payment and

pay off amounts in arrears, if any.

(2) Fixed rates can be changed to

variable rates to reduce the interest rate

to the borrower only when the variable

rate has a ceiling which is less than or

equal to the original fixed rate.

(3) Variable rates can be changed to a

fixed rate, which is at or below the

current variable rate.

(4) The interest rates, after

adjustments, must comply with the

requirements for interest rates on new

loans, as established by § 4279.125.

(5) The lender is responsible for the

legal documentation of interest rate

changes by an endorsement or any other

legally effective amendment to the

promissory note; however, no new notes

may be issued. Copies of all legal

instruments should be provided to the

Agency for its records.

(b) Increases. No increases in interest

rates will be permitted except the

normal fluctuations in approved

variable interest rates.

§ 4287.113 Release of collateral.

(a) All releases of collateral must be

supported by a current appraisal on the

remaining collateral. The appraisal will

be at the expense of the borrower and

must meet the requirements of

§ 4279.144. The Agency must not be

adversely affected by the release, and

the remaining collateral must be

sufficient to provide for repayment of

the Agency’s guaranteed loan. Sale or

release of collateral must be based on an

arm’s-length transaction. There must be

adequate consideration for the release.

Adequate consideration for release of

collateral may include, but is not

limited to:

(1) Application of the net proceeds

from the sale of collateral to the

borrower’s debts in order of lien priority

(Application of sale proceeds to the

Agency guaranteed debt must be in

inverse order of maturity);

(2) Use of the net proceeds from the

sale of collateral to purchase other

collateral of equal or greater value for

which the lender will obtain a lien

position equal or superior to the

position previously held;

(3) Application of the net proceeds

from the sale of collateral to the

borrower’s business operation in such a

manner that a significant enhancement

of the borrower’s debt service ability can

be clearly demonstrated. (The lender’s

written request must detail how the

borrower’s debt service ability will be

enhanced); and

(4) Assurance that the release of

collateral is essential for the success of

the business, thereby furthering the

goals of the B&I program. Such

assurance must be supported by written

documentation from the lender.

(b) Within the parameters of

paragraph (a) of this section, lenders

may release collateral (other than

personal and corporate guarantees) with

a cumulative value up to 20 percent of

the original loan amount without

Agency concurrence if the proceeds will

be used to reduce the guaranteed loan

or to buy replacement collateral.

(c) Within the parameters of

paragraph (a) of this section, release of

collateral with a cumulative value in

excess of 20 percent of the original loan

or when the proceeds will not be used

to reduce the guaranteed loan or to buy

replacement collateral must be

requested in writing by the lender and

concurred in by the Agency in writing

in advance of the release. A written

evaluation will be done by the lender to

justify the release.

§§ 4287.114–4287.122 [Reserved]

§ 4287.123 Subordination of lien position.

A subordination of the lender’s lien

position must be requested in writing by

the lender and concurred in by the

Agency in writing in advance of the

subordination. The subordination must

enhance the borrower’s business, and

the Agency’s interest in and lien

position on the collateral, after the

subordination, must be adequate to

secure the loan. The lien to which the

guaranteed loan is subordinated must be

for a fixed dollar limit and fixed or

limited term, after which the guaranteed

loan lien priority will be restored.

Generally, subordination to a revolving

line of credit will not exceed 1 year.

There must be adequate consideration

for the subordination.

§ 4287.124 Alterations of loan instruments.

The lender shall neither alter nor

approve any alterations of any loan

instruments without the prior written

approval of the Agency.

§§ 4287.125–4287.133 [Reserved]

§ 4287.134 Transfer and assumption.

(a) Documentation of request. All

transfers and assumptions must be

approved in writing by the Agency and

must be to eligible applicants in

accordance with subpart B of part 4279.

An individual credit report must be

provided for transferee proprietors,

partners, officers, directors, and

stockholders with 20 percent or more

interest in the business, along with such

other documentation as the Agency may

request to determine eligibility.

(b) Terms. Loan terms must not be

changed unless the change is approved

in writing by the Agency with the

concurrence of any holder and of the

transferor (including guarantors) if they

have not been or will not be released

from liability. Any new loan terms must

be within the terms authorized by

§ 4279.126. The lender’s request for

approval of new loan terms will be

supported by an explanation of the

reasons for the proposed change in loan

terms.

(c) Release of liability. The transferor,

including any guarantor, may be

released from liability only with prior

Agency written concurrence and only

when the value of the collateral being

transferred is at least equal to the
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3873

amount of the loan being assumed,

supported by a current appraisal and a

current financial statement where

applicable. The Agency will not pay for

the appraisal. If the transfer is for less

than the entire debt, the lender must

demonstrate to the Agency that the

transferor and any guarantors have no

reasonable debt-paying ability

considering their assets and income at

the time of transfer.

(d) Proceeds. Any proceeds received

from the sale of collateral before a

transfer and assumption will be credited

to the transferor’s guaranteed loan debt

in inverse order of maturity before the

transfer and assumption are closed.

(e) Additional loans. Loans to provide

additional funds in connection with a

transfer and assumption must be

considered as a new loan application

under subpart B of part 4279.

(f) Credit quality. In all cases, the

lender must make a complete credit

analysis, subject to Agency review and

approval.

(g) Documents. Prior to Agency

approval, the lender must advise the

Agency, in writing, that the transaction

can be properly and legally transferred,

and the conveyance instruments will be

filed, registered, or recorded as

appropriate.

(1) The assumption will be done on

the lender’s form of assumption

agreement and will contain the Agency

case number of the transferor and

transferee. The lender will provide the

Agency with a copy of the transfer and

assumption agreement. It is the lender’s

responsibility to ensure that all transfers

and assumptions are noted on all

original Loan Note Guarantees.

(2) A new Loan Agreement, consistent

in principle with the original Loan

Agreement, should be executed to

establish the terms and conditions of the

loan being assumed. An assumption

agreement can be used to establish the

loan covenants.

(3) The lender will provide to the

Agency a written certification that the

transfer and assumption are valid,

enforceable, and comply with all

Agency regulations.

(h) Loss resulting from transfer. If a

loss should occur upon consummation

of a complete transfer and assumption

for less than the full amount of the debt

and the transferor (including personal

guarantors) is released from liability, the

lender, if it holds the guaranteed

portion, may file an estimated report of

loss to recover its pro rata share of the

actual loss. In completing the report of

loss, the amount of the debt assumed

will be entered as net collateral

(recovery). Approved protective

advances and accrued interest thereon

made during the arrangement of a

transfer and assumption, if not assumed

by the transferee, will be included in the

calculations.

(i) Related party. If the transferor and

transferee are affiliated or related

parties, any transfer and assumption

must be for the full amount of the debt.

(j) Payment requests. Requests for a

loan guarantee to provide equity for a

transfer and assumption must be

considered as a new loan under subpart

B of part 4279.

(k) Cash downpayment. When the

transferee will be making a cash

downpayment as part of the transfer and

assumption:

(1) The lender should have an

appropriate appraiser, acceptable to

both the transferee and transferor and

currently authorized to perform

appraisals, to determine the value of the

collateral securing the loan. The

appraisal fee and any other costs will

not be paid by the Agency.

(2) The market value of the collateral,

plus any additional property the

transferee proposes to offer as collateral,

must be adequate to secure the balance

of the guaranteed loans.

(3) Cash downpayments may be paid

directly to the transferor provided:

(i) The lender recommends that the

cash be released and the Agency

concurs prior to the transaction being

completed. The lender may wish to

require that an amount be retained for

a defined period of time as a reserve

against future defaults. Interest on such

account may be paid periodically to the

transferor or transferee as agreed;

(ii) The lender determines that the

transferee has the repayment ability to

meet the obligations of the assumed

guaranteed loan as well as any other

indebtedness;

(iii) Any payments by the transferee to

the transferor will not suspend the

transferee’s obligations to continue to

meet the guaranteed loan payments as

they come due under the terms of the

assumption; and

(iv) The transferor agrees not to take

any action against the transferee in

connection with the assumption

without prior written approval of the

lender and the Agency.

(4) The Agency will not consider a

purchase money mortgage or contract

for purchase as an option to maximize

recovery.

§ 4287.135 Substitution of lender.

After the issuance of a Loan Note

Guarantee, the lender shall not sell or

transfer the entire loan without the prior

written approval of the Agency. The

Agency will not pay any loss or share

in any costs (i.e., appraisal fees,

environmental studies, or other costs

associated with servicing or liquidating

the loan) with a new lender unless a

relationship is established through a

substitution of lender in accordance

with paragraph (a) of this section. This

includes cases where the lender has

failed and been taken over by a

regulatory agency such as the Federal

Deposit Insurance Corporation (FDIC)

and the loan subsequently sold to

another lender.

(a) The Agency may approve the

substitution of a new lender if:

(1) The proposed substitute lender:

(i) Is an eligible lender in accordance

with § 4279.29;

(ii) Is able to service the loan in

accordance with the original loan

documents; and

(iii) Agrees in writing to acquire title

to the unguaranteed portion of the loan

held by the original lender and assumes

all original loan requirements, including

liabilities and servicing responsibilities.

(2) The substitution of lender is

requested in writing by the borrower,

the proposed substitute lender, and the

original lender if still in existence.

(b) Where the lender has failed and

been taken over by FDIC and the

guaranteed loan is liquidated by FDIC

rather than being sold to another lender,

the Agency will pay losses and share in

costs as if FDIC were an approved

substitute lender.

§§ 4287.136–4287.144 [Reserved]

§ 4287.145 Default by borrower.

(a) The lender must notify the Agency

when a borrower is 30 days past due on

a payment or is otherwise in default of

the Loan Agreement. Form FmHA 1980–

44, ‘‘Guaranteed Loan Borrower Default

Status,’’ will be used and the lender will

continue to complete this form

bimonthly 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 Agency and

the borrower to resolve the problem.

(b) In considering options, the

prospects for providing a permanent

cure without adversely affecting the risk

to the Agency and the lender is the

paramount objective.

(1) Temporary curative actions

include but are not limited to:

(i) Deferment of principal (subject to

rights of any holder);

(ii) An additional temporary loan by

the lender to bring the account current;

(iii) Reamortization of or rescheduling

the payments on the loan (subject to

rights of any holder);

(iv) Transfer and assumption of the

loan in accordance with § 4287.134;

(v) Reorganization;
3874 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

(vi) Liquidation;

(vii) Subsequent loans guarantees; and

(viii) Changes in interest rates with

the Agency’s, the lender’s, and holder’s

approval, provided such interest rate is

adjusted proportionally between the

guaranteed and unguaranteed portion of

the loan and the type of rate remains the

same.

(2) In the event a deferment,

rescheduling, reamortization, or

moratorium is accomplished, it will be

limited to the remaining life of the

collateral or limits as set out in

§ 4279.126, whichever is less.

§§ 4286.146–4287.155 [Reserved]

§ 4287.156 Protective advances.

Protective advances are advances

made by the lender for the purpose of

preserving and protecting the collateral

where the debtor has failed to, will not,

or cannot meet its obligations. Sound

judgment must be exercised in

determining that the protective advance

preserves collateral and recovery is

actually enhanced by making the

advance. Protective advances will not be

made in lieu of additional loans.

(a) The maximum loss to be paid by

the Agency will never exceed the

original principal plus accrued interest

regardless of any protective advances

made.

(b) Protective advances and interest

thereon at the note rate will be

guaranteed at the same percentage of

loss as provided in the Loan Note

Guarantee notwithstanding the

guaranteed portion of the loan is held by

another.

(c) Protective advances must

constitute an indebtedness of the

borrower to the lender and be secured

by the security instruments. Agency

written authorization is required when

cumulative protective advances exceed

$5,000.

§ 4287.157 Liquidation.

In the event of one or more incidents

of default or third party actions that the

borrower cannot or will not cure or

eliminate within a reasonable period of

time, liquidation may be considered. If

the lender concludes that liquidation is

necessary, it must request the Agency’s

concurrence. The lender will liquidate

the loan unless the Agency, at its

option, carries out liquidation. When

the decision to liquidate is made, if the

loan has not already been repurchased,

provisions will be made for repurchase

in accordance with § 4279.78.

(a) Decision to liquidate. A decision to

liquidate shall be made when it is

determined that the default cannot be

cured through actions listed in

§ 4287.145 or it has been determined

that it is in the best interest of the

Government and the lender to liquidate

because such actions would only delay

liquidation and liquidating early would

enhance the possibility of a maximum

recovery. Therefore, the decision to

liquidate or continue with the borrower

must be made as soon as possible when

any of the following exist:

(1) A loan has been delinquent 90

days and the lender and borrower have

not been able to cure the delinquency

through one of the actions listed in

§ 4287.145.

(2) It has been determined that

delaying liquidation will jeopardize or

eliminate the possibility of full recovery

on the loan.

(3) The borrower or lender has been

uncooperative in resolving the problem

and the Agency or the lender has reason

to believe the borrower is not acting in

good faith, and it would enhance the

position of the guarantee to liquidate

immediately.

(b) Submission of liquidation plan.

The lender will, within 30 days after a

decision to liquidate, submit to the

Agency in writing its proposed detailed

method of liquidation. Upon approval

by the Agency of the liquidation plan,

the lender will commence liquidation.

State directors have no authority to

exercise the option to liquidate by the

Agency without National office

approval. When the Agency liquidates,

reasonable liquidation expenses will be

assessed against the proceeds derived

from the sale of the collateral. Form

FmHA 1980–45, ‘‘Notice of Liquidation

Responsibility,’’ will be forwarded to

the Finance office when the Agency

liquidates.

(c) Lender’s liquidation plan. The

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 promissory note

and related security instruments and a

copy of the payment ledger if available

which reflects the current loan balance

and accrued interest to date and the

method of computing the interest.

(2) A full and complete list of all

collateral including any personal and

corporate guarantees.

(3) The recommended liquidation

methods for making the maximum

collection possible on the indebtedness

and the justification for such methods,

including:

(i) Recommended action for acquiring

and disposing of all collateral; and

(ii) Recommended action to collect

from guarantors.

(4) Necessary steps for preservation of

the collateral.

(5) Copies of borrower’s latest

available financial statements.

(6) Copies of guarantor’s latest

available financial statements.

(7) An itemized list of estimated

liquidation expenses expected to be

incurred and justification for each

expense.

(8) A schedule to periodically report

to the Agency on progress of

liquidation.

(9) Estimated protective advance

amounts with justification.

(10) Proposed protective bid amounts

on collateral to be sold at auction and

a breakdown on how the amounts were

determined.

(11) If a voluntary conveyance is

considered, the proposed amount to be

credited to the guaranteed debt.

(12) Legal opinions, if needed.

(13) If the outstanding balance of

principal and accrued interest is less

than $200,000, the lender will obtain an

estimate of fair market and potential

liquidation value of the collateral. If the

outstanding balance of principal and

accrued interest is $200,000 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.

(14) The Agency must concur in

advance regarding the need for and

scope of an environmental site

assessment. If an environmental site

assessment is needed to evaluate

potential risks associated with the

acquisition of real estate serving as

collateral, the lender will arrange for a

qualified, independent environmental

assessment of the property. The cost of

the assessment will be shared equally by

the Agency and the lender.

(d) Approval of liquidation plan. The

Agency will inform the lender in

writing whether it concurs in the

lender’s liquidation plan. Should the

Agency and the lender not agree on the

liquidation plan, negotiations will take

place between the Agency and the

lender to resolve the disagreement.

When the liquidation plan is approved

by the Agency, the lender will proceed

expeditiously with liquidation.

(1) A transfer and assumption of the

borrower’s operation can be

accomplished before or after the loan

goes into liquidation. However, if the

collateral has been purchased through

foreclosure or the borrower has

conveyed title to the lender, no transfer

and assumption is permitted.

(2) A protective bid may be made by

the lender, with prior Agency written

approval, at a foreclosure sale to protect
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3875

the lender’s and the Agency’s interest.

The reason for a protective bid is to

ensure that the collateral is not sold to

other bidders at an unrealistically low

price. The protective bid will not exceed

the amount of the loan, including

expenses of foreclosure, and should be

based on the liquidation value less

estimated expenses for holding and

reselling the property. These expenses

include, but are not limited to, expenses

for resale, interest accrual, length of

time necessary for resale, maintenance,

guard service, weatherization, and prior

liens.

(e) Acceleration. The lender, or the

Agency if it liquidates, will proceed to

accelerate the indebtedness as

expeditiously as possible when

acceleration is necessary including

giving any notices and taking any other

legal actions required. A copy of the

acceleration notice or other acceleration

document will be sent to the Agency (or

lender if the Agency liquidates). The

guaranteed loan will be considered in

liquidation once the loan has been

accelerated and a demand for payment

has been made upon the borrower.

(f) Filing an estimated loss claim.

When the lender is conducting the

liquidation and owns any or all of the

guaranteed portion of the loan, the

lender will file an estimated loss claim

once a decision has been made to

liquidate if the liquidation will exceed

90 days. The estimated loss payment

will be based on the liquidation value

of the collateral. For the purpose of

reporting and loss claim computation,

the lender will discontinue interest

accrual on the defaulted loan in

accordance with Agency procedures,

and the loss claim will be promptly

processed in accordance with applicable

Agency regulations.

(g) Accounting and reports. When the

lender conducts liquidation, it will

account for funds during the period of

liquidation and will provide the Agency

with reports at least quarterly on the

progress of liquidation including

disposition of collateral, resulting costs,

and additional procedures necessary for

successful completion of the

liquidation.

(h) Transmitting payments and

proceeds to the Agency. When the

Agency is the holder of a portion of the

guaranteed loan, the lender will

transmit to the Agency any payments

received from the borrower and pro rata

share of liquidation or other proceeds,

using Form FmHA 1980–43, ‘‘Lender’s

Guaranteed Loan Payment to FmHA.’’

(i) Abandonment of collateral. There

may be instances when the cost of

liquidation would exceed the potential

recovery value of the collection. The

lender, with proper documentation and

the concurrence of the National office,

may abandon the collateral in lieu of

liquidation. A proposed abandonment

will be considered a servicing action

requiring the appropriate environmental

review by the Agency in accordance

with subpart G of part 1940. Examples

where abandonment may be considered

include but are not limited to:

(1) The cost of liquidation is increased

or the value of the collateral is

decreased by environmental issues;

(2) The collateral is functionally or

economically obsolete;

(3) There are superior liens held by

other parties;

(4) The collateral has deteriorated;

and

(5) The collateral is specialized and

there is little or no demand for it.

(j) Disposition of personal or

corporate guarantees. The lender should

take action to maximize recovery from

all collateral, including personal and

corporate guarantees. The lender will

seek a deficiency judgment when there

is a reasonable chance of future

collection of the judgment. The lender

must make a decision whether or not to

seek a deficiency judgment when:

(1) A borrower voluntarily liquidates

the collateral, but the sale fails to pay

the guaranteed indebtedness;

(2) The collateral is voluntarily

conveyed to the lender, but the

borrower and personal and corporate

guarantors are not released from

liability; or

(3) A liquidation plan is being

developed for forced liquidation.

(k) Compromise settlement. A

compromise settlement will normally

not take place until all collateral has

been sold, a deficiency balance exists,

and the deficiency obligation exceeds

the debtor’s repayment ability.

(1) The lender and the Agency must

receive complete financial information

on all parties obligated for the loan and

must be satisfied that the statements

reflect the true and correct financial

position of the debtor including all

assets. Adequate consideration must be

received before a release from liability is

issued. Adequate consideration includes

money, additional security, or other

benefit to the goals and objectives of the

Agency.

(2) Before a personal guarantor can be

released from liability, the following

factors must be considered:

(i) Cash or other consideration offered

by the guarantor;

(ii) Age and health of the guarantor;

(iii) Potential income of the guarantor;

(iv) Inheritance prospects of the

guarantor;

(v) Availability of the guarantor’s

assets;

(vi) Possibility that the guarantor’s

assets have been concealed or

improperly transferred; and

(vii) Effect of other guarantors on the

loan.

(3) Once the Agency and the lender

agree on a reasonable amount that is fair

and adequate, the lender can proceed to

effect the settlement compromise.

§ 4287.158 Determination of loss and

payment.

In all liquidation cases, final

settlement will be made with the lender

after the collateral is liquidated, unless

otherwise designated as a future

recovery or after settlement and

compromise of all parties has been

completed. The Agency will have the

right to recover losses paid under the

guarantee from any party which may be

liable.

(a) Report of loss form. Form FmHA

449–30, ‘‘Loan Note Guarantee Report of

Loss,’’ will be used for calculations of

all estimated and final loss

determinations. Estimated loss

payments may only be approved by the

Agency after the Agency has approved

a liquidation plan.

(b) Estimated loss. In accordance with

the requirements of § 4287.157(f), an

estimated loss claim based on

liquidation appraisal value will be

prepared and submitted by the lender.

(1) The estimated loss payment shall

be applied 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.

(2) An estimated loss will be applied

first to reduce the principal balance on

the guaranteed loan and the balance, if

any, to accrued interest. Interest accrual

on the defaulted loan will be

discontinued.

(3) A protective advance claim will be

paid only at the time of the final report

of loss payment.

(c) Final loss. Within 30 days after

liquidation of all collateral, except for

certain unsecured personal or corporate

guarantees as provided for in this

section, is completed, a final report of

loss must be prepared and submitted by

the lender to the Agency. The Agency

will not guarantee interest beyond this

30-day period other than for the period

of time it takes the Agency to process

the loss claim. Before approval by the

Agency of any final loss report, the

lender must account for all funds during

the period of liquidation, disposition of

the collateral, all costs incurred, and

any other information necessary for the

successful completion of liquidation.
3876 Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules

Upon receipt of the final accounting and

report of loss, the Agency may audit all

applicable documentation to determine

the final loss. The lender will make its

records available and otherwise assist

the Agency in making any investigation.

The documentation accompanying the

report of loss must support the amounts

shown on Form FmHA 449–30.

(1) A determination must be made

regarding the collectibility of unsecured

personal and corporate guarantees. If

reasonably possible, such guarantees

should be promptly collected or

otherwise disposed of in accordance

with § 4287.157(j) prior to completion of

the final loss report. However, in the

event that collection from the guarantors

appears unlikely or will require a

prolonged period of time, the report of

loss will be filed when all other

collateral has been liquidated, and

unsecured personal or corporate

guarantees will be treated as a future

recovery with the net proceeds to be

shared on a pro rata basis by the lender

and the Agency.

(2) The lender must document that all

of the collateral has been accounted for

and properly liquidated and that

liquidation proceeds have been properly

accounted for and applied correctly to

the loan.

(3) The lender will show a breakdown

of any protective advance amount as to

the payee, purpose of the expenditure,

date paid, and evidence that the amount

expended was proper and that payment

was actually made.

(4) The lender will show a breakdown

of liquidation expenses as to the payee,

purpose of the expenditure, date paid,

and evidence that the amount expended

was proper and that payment was

actually made. Liquidation expenses are

recoverable only from collateral

proceeds. Attorney fees may be

approved as liquidation expenses

provided the fees are reasonable and

cover legal issues pertaining to the

liquidation that could not be properly

handled by the lender and its in-house

counsel.

(5) Accrued interest will be supported

by documentation as to how the amount

was accrued. If the interest rate was a

variable rate, the lender will include

documentation of changes in both the

selected base rate and the loan rate.

(6) Loss payments will be paid by the

Agency within 60 days after the review

of the final loss report and accounting

of the collateral.

(d) Loss limit. The amount payable by

the Agency to the lender cannot exceed

the limits set forth in the Loan Note

Guarantee.

(e) Rent. 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. Liquidation costs

will be deducted from the proceeds of

the disposition of primary collateral. If

changed circumstances after submission

of the liquidation plan require a

substantial revision of liquidation costs,

the lender will procure the Agency’s

written concurrence prior to proceeding

with the proposed changes. No in-house

expenses of the lender will be allowed.

In-house expenses include, but are not

limited to, employee’s salaries, staff

lawyers, travel, and overhead.

(g) Payment. When the Agency finds

the final report of loss to be proper in

all respects, it will approve Form FmHA

449–30 and proceed as follows:

(1) If the loss is greater than any

estimated loss payment, the Agency will

pay the additional amount owed by the

Agency to the lender.

(2) If the loss is less than the

estimated loss payment, the lender will

reimburse the Agency for the

overpayment plus interest at the note

rate from the date of payment.

(3) If the Agency has conducted the

liquidation, it will pay the lender in

accordance with the Loan Note

Guarantee.

§§ 4287.159–4287.168 [Reserved]

§ 4287.169 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

based on the original percentage of

guarantee.

§ 4287.170 Bankruptcy.

The lender is responsible for

protecting the guaranteed loan and all

collateral securing the loan in

bankruptcy proceedings.

(a) Legal expenses during bankruptcy

proceedings. (1) When a bankruptcy

proceeding results in a liquidation of

the borrower by a trustee, legal expenses

will be handled as directed by the court.

(2) When a proceeding under Title 11

of the United States Code (Bankruptcy)

results in liquidation by the lender,

legal expenses incurred by the lender

during the entire bankruptcy

proceedings will be considered eligible

liquidation costs for payment only from

liquidation proceeds.

(b) Reports of loss during bankruptcy.

When the loan is involved in

reorganization proceedings, payment of

loss claims may be made as provided in

this section. For a liquidation

proceeding, only paragraphs (b)(3) and

(5) of this section are applicable.

(1) Estimated loss payments. (i) If a

borrower has filed for protection under

Title 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 will request an

estimated loss payment of the

guaranteed portion of the accrued

interest and principal discharged by the

court. Only one estimated loss payment

is allowed during the reorganization. All

subsequent claims of the lender during

reorganization will be considered

revisions to the initial estimated loss. A

revised estimated loss payment may be

processed by the Agency, at its option,

in accordance with any court-approved

changes in the reorganization plan.

Once the reorganization plan has been

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 courtordered interest rate reduction under

the terms of the reorganization plan.

(ii) The lender will use Form FmHA

449–30 to request an estimated loss

payment and to revise any estimated

loss payments during the course of the

reorganization plan. The estimated loss

claim, as well as any revisions to this

claim, will be accompanied by

documentation to support the claim.

(iii) Upon completion of a

reorganization plan, the lender will

complete a Form FmHA 1980–44 and

forward this form to the Finance office.

(2) Interest loss payments. (i) Interest

losses sustained during the period of the

reorganization plan will be processed in

accordance with paragraph (b)(1) of this

section.

(ii) Interest losses sustained after the

reorganization plan is completed will be

processed annually when the lender

sustains a loss as a result of a permanent

interest rate reduction which extends

beyond the period of the reorganization

plan.

(iii) A report of loss will be completed

to compensate the lender for the

difference in interest rates specified on

the Loan Note Guarantee and the rate of

interest specified in the plan.

(iv) If an estimated loss claim is paid

during the operation of the Chapter 11

reorganization plan and the borrower

repays in full the remaining balance

without an additional loss sustained by

the lender, a final report of loss is not

necessary.

(3) Final loss payments. Final loss

payments will be processed when the

loan is liquidated.

(4) Payment application. The lender

must apply estimated loss payments

first to the unsecured principal of the
Federal Register / Vol. 61, No. 23 / Friday, February 2, 1996 / Proposed Rules 3877

guaranteed portion of the debt and then

to the unsecured interest of the

guaranteed portion of the debt. In the

event a bankruptcy court attempts to

direct the payments to be applied in a

different manner, the lender will

immediately notify the Agency servicing

office.

(5) Overpayments. Upon completion

of the reorganization plan, the lender

will provide the Agency with the

documentation necessary to determine

whether the estimated loss paid equals

the actual loss sustained. If the actual

loss sustained as a result of the

reorganization is less than the estimated

loss, the lender will reimburse the

Agency for the overpayment plus

interest at the note rate from the date of

payment of the estimated loss. If the

actual loss is greater than the estimated

loss payment, the lender will submit a

revised estimated loss in order to obtain

payment of the additional amount owed

by the Agency to the lender.

(6) Protective advances. If approved

protective advances were made prior to

the borrower having filed bankruptcy,

these protective advances and accrued

interest will be considered in the loss

calculations.

§§ 4287.171–4287.179 [Reserved]

§ 4287.180 Termination of guarantee.

A guarantee under this part will

terminate automatically:

(a) upon full payment of the

guaranteed loan;

(b) upon full payment of any loss

obligation; or

(c) upon written notice from the

lender to the Agency that the guarantee

will terminate 30 days after the date of

notice, provided that the lender holds

all of the guaranteed portion and the

Loan Note Guarantee is returned to the

Agency to be canceled.

§§ 4287.181–4287.200 [Reserved]

Dated: September 12, 1995.

Jill Long Thompson,

Under Secretary for Rural Economic and

Community Development.

[FR Doc. 96–1576 Filed 2–1–96; 8:45 am]

BILLING CODE 3410–32–U

DEPARTMENT OF ENERGY

10 CFR Parts 1035 and 1036 and 48

CFR Part 909

RIN 1991–AB24

Debarment and Suspension

(Procurement) and Governmentwide

Debarment and Suspension

(Nonprocurement) and

Governmentwide Requirements for

Drug-Free Workplace (Grants) and

Department of Energy Acquisition

Regulation

AGENCY: Department of Energy (DOE).

ACTION: Notice of proposed rulemaking.

SUMMARY: The Department of Energy

(DOE) today is proposing to amend its

regulations governing debarment and

suspension in procurement and

nonprocurement activities. The

proposed amendments to the

nonprocurement rule only include DOE

agency-specific provisions; i.e., none

include provisions in the Governmentwide common rule. The proposed rule

would establish a common fact-finding

process in cases involving a genuine

dispute over material facts. The

proposed rule removes the Department’s

procurement debarment and suspension

regulations from part 10 of the Code of

Federal Regulations (CFR) and

recodifies them in the Department of

Energy Acquisition Regulations (DEAR),

chapter 9 of title 48 of the Code of

Federal Regulations.

DATES: Written comments (3 copies)

must be received on or before April 2,

1996 in order to be assured of

consideration.

ADDRESSES: Persons wishing to submit

comments on this notice of proposed

rulemaking should send them to

Cynthia Yee, Office of Clearance and

Support, Procurement and Assistance

Management, HR–52.2, U. S.

Department of Energy, 1000

Independence Avenue, SW.,

Washington, DC 20585.

FOR FURTHER INFORMATION CONTACT: Mrs.

Cynthia Yee, 202–586–1140.

SUPPLEMENTARY INFORMATION:

I. Background

A. Discussion.

B. Section-by-Section Analysis.

II. Procedural Requirements.

A. Regulatory Review.

B. Review under the Regulatory Flexibility

Act.

C. Review Under the Paperwork Reduction

Act.

D. Review Under the National

Environmental Policy Act.

E. Review Under Executive Order 12612.

F. Review Under Executive Order 12778.

III. Public Comments.

I. Background

A. Discussion

President Reagan signed Executive

Order 12549 on February 18, 1986,

which established governmentwide

effect for an agency’s nonprocurement

debarment and suspension actions. On

October 13, 1994, President Clinton

signed Public Law 103–355, the Federal

Acquisition Streamlining Act of 1994.

Section 2455 of that Act provides that

the debarment, suspension, or other

exclusion of a participant in a

procurement activity under the Federal

Acquisition Regulation, or in a

nonprocurement activity under

regulations issued pursuant to 12549,

shall be given reciprocal

governmentwide effect. This proposed

rulemaking furthers those actions by

changing various provisions to clarify

the DOE procurement suspension and

debarment provisions and to ensure

consistency between the Federal

Acquisition Regulation (FAR) and the

DEAR. Additionally, this proposed rule

deletes some DOE-specific provisions to

provide for uniformity with other

Federal agencies.

B. Section-by-Section Analysis

The DOE today is removing the

current regulation, at 10 CFR Part 1035,

and recodifying the regulation at 48 CFR

Part 909. In recodifying the debarment

and suspension regulations, DOE has

made various changes to clarify the

provisions of procurement debarment

and suspension and to ensure

consistency between the FAR and the

DEAR. The rules of procedure for factfinding conferences in Appendix A of

10 CFR Part 1035 are removed. Under

the recodified regulations, the Energy

Board of Contract Appeals will conduct

fact-finding in disputed suspension or

proposed debarments.

This proposed rule also amends 10

CFR Part 1036, which governs

debarment and suspension with regard

to DOE nonprocurement and grants

programs.

The Department of Energy

Consolidated List of Debarred,

Suspended, Ineligible and Voluntarily

Excluded Awardees (DOE List) has been

eliminated as unnecessary because the

General Services Administration

maintains, pursuant to Executive order

12549, a governmentwide list of parties

excluded from federal procurement and

nonprocurement programs.

The following is a comparison of

existing provisions in 10 CFR Part 1035

with provisions proposed for inclusion

in 48 CFR Part 909 (DEAR).

Subpart 909.400 is not signficantly

different from the previous 10 CFR