Rural Microentrepreneur Assistance Program

DEPARTMENT OF AGRICULTURE

Rural Business-Cooperative Service

7 CFR Part 4280

RIN 0570-AA71

Rural Microentrepreneur Assistance Program

AGENCY:

Rural Business-Cooperative Service, USDA.

ACTION:

Interim rule with request for comments.

SUMMARY:

This interim rule establishes the Rural Microentrepreneur Assistance Program. This interim rule provides technical and financial assistance in the form of loans and grants to qualified Microenterprise Development Organizations (MDOs) to support microentrepreneurs in the development and ongoing success of rural microenterprises.

DATES:

This interim rule is effective June 28, 2010. Comments must be received on or before July 27, 2010.

ADDRESSES:

You may submit comments to this rule by any of the following methods:

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

•

Mail:

Submit written comments via the U.S. Postal Service to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., Washington, DC 20250-0742.

•

Hand Delivery/Courier:

Submit written comments via commercial mail delivery or other courier service requiring a street address to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, 300 7th Street, SW., 7th Floor, Washington, DC 20024.

All written comments will be available for public inspection during regular work hours at the 300 7th Street, SW., 7th Floor address listed above.

FOR FURTHER INFORMATION CONTACT:

Lori Washington, Loan Specialist, Business Programs, Specialty Programs Division, USDA, Rural Development, Rural Business-Cooperative Service, Room 6868, South Agricultural Building, Stop 3225, 1400 Independence Avenue, SW., Washington, DC 20250-3225; Telephone: (202) 720-9815, E-mail:

lori.washington@wdc.usda.gov.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This interim rule has been determined to be significant and has been reviewed by the Office Management and Budget in conformance with Executive Order 12866. The Agency conducted a qualitative benefit cost analysis to fulfill the requirements of Executive Order 12866. Based on the results of this qualitative analysis, the Agency has identified potential benefits to prospective program participants and the Agency that are associated with improving the availability of microlevel business capital, business-based training and technical assistance, and enhancing the ability of microlenders to service the microentrepreneurs to whom they are making their microloans.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act 1995 (UMRA), Public Law 104-4 establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, Rural Development generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures to State, local, or tribal governments, in the aggregate, or to the private sector of $100 million or more in any one year. With certain exception, section 205 of UMRA requires Rural Development to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost-effective, or least burdensome alternative that achieves the objectives of the rule. This interim rule contains no Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local, and tribal governments or the private sector. Participation in this program is voluntary. Thus, this rule is not subject to the requirements of sections 202 and 205 of the UMRA.

Environmental Impact Statement

This document has been reviewed in accordance with 7 CFR part 1940, subpart G, “Environmental Program.” Rural Development has determined that this action does not constitute a major Federal action significantly affecting the quality of the human environment, and in accordance with the National Environmental Policy Act (NEPA) of 1969, 42 U.S.C. 4321

et seq.,

an Environmental Impact Statement is not required.

Executive Order 12988, Civil Justice Reform

This interim rule has been reviewed under Executive Order 12988, Civil Justice Reform. In accordance with this rule:

(1) All State and local laws and regulations that are in conflict with this rule will be preempted;

(2) No retroactive effect will be given this rule; and

(3) Administrative proceedings in accordance with the regulations of the Department of Agriculture National Appeals Division (7 CFR part 11) must be exhausted before bringing suit in court challenging action taken under this rule unless those regulations specifically allow bringing suit at an earlier time.

Executive Order 13132, Federalism

It has been determined, under Executive Order 13132, Federalism, that this interim rule does not have sufficient federalism implications to warrant the preparation of a Federal Assessment. The provisions contain in the interim rule will not have a substantial direct effect on States or their political subdivisions or on the distribution of power and responsibilities among the various government levels.

Regulatory Flexibility Act

This interim rule has been reviewed with regard to the requirements of the Regulatory Flexibility Act (5 U.S.C 601-612). Rural Development has determined that this action will not have a significant economic impact on a substantial number of small entities for the reasons discussed below. While, the majority of MDOs expected to participate in this Program will be small businesses, the average cost to an MDO is estimated to be approximately 1 percent of the total mandatory funding available to the program in fiscal years 2009 through 2012. Further, this regulation only affects MDOs that choose to participate in the program.

Executive Order 12372, Intergovernmental Review of Federal Programs

This program is subject to Executive Order 12372, which requires intergovernmental consultation with State and local officials. Intergovernmental consultation will occur for the assistance to MDOs in accordance with the process and procedures outlined in 7 CFR part 3015, subpart V. Assistance to rural microenterprises will not require intergovernmental review.

Rural Development will conduct intergovernmental consultation using RD Instruction 1940-J, “Intergovernmental Review of Rural Development Programs and Activities,”

available in any Rural Development office, on the Internet at

http://www.rurdev.usda.gov/regs

and in 7 CFR part 3015, subpart V. Note that not all States have chosen to participate in the intergovernmental review process. A list of participating States is available at the following Web site:

http://www.whitehouse.gov/omb/grants/spoc.html.

Executive Order 13175, Consultation and Coordination With Indian Tribal Governments

This executive order imposes requirements on Rural Development in the development of regulatory policies that have tribal implications or preempt tribal laws. Rural Development has determined that the proposed rule does not have a substantial direct effect on one or more Indian tribe(s) or on either the relationship or the distribution of powers and responsibilities between the Federal Government and the Indian tribes. Thus, this interim rule is not subject to the requirements of Executive Order 13175.

Programs Affected

The Catalog of Federal Domestic Assistance Program numbers assigned to this program is 10.870.

Paperwork Reduction Act

Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35;

see

5 CFR part 1320), the information collection provisions associated with this interim rule have been submitted to the Office of Management and Budget (OMB) for approval as a new collection and assigned OMB number 0570-XXXX. In the publication of the proposed rule on October 7, 2009, the Agency solicited comments on the estimated burden. The Agency received no public comment letters in response to this solicitation. This information collection requirement will not become effective until approved by OMB. Upon approval of this information collection, the Agency will publish a notice in the

Federal Register.

Title:

Rural Microentrepreneur Assistance Program.

OMB Number:

0570-XXXX (assigned).

Type of Request:

New collection.

Expiration Date:

Three years from the date of approval.

Abstract:

The collection of information is vital to Rural Development to make decisions regarding the eligibility of projects and loan and grant recipients in order to ensure compliance with the regulations and to ensure that the funds obtained from the Government are being used for the purposes for which they were awarded. Microenterprise development organizations seeking funding under this program will have to submit applications that include specified information, certifications, and agreements as stated in the interim rule.

The estimated information collection burden has decreased by approximately $38,500, from $275,844 estimated for the proposed rule to $237,339 estimated for the interim rule. The majority of this decrease is attributable to removing enhancement grants from the interim rule. This change was made in response to public comment, but will be re-evaluated by the Agency upon receipt of public comment on enhancement grants after the interim rule is published.

E-Government Act Compliance

USDA is committed to complying with the E-Government Act of 2002 (Pub. L. 107-347, December 17, 2002), to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to government information and services, and for other purposes.

I. Background

Title VI, Section 6022 of the Food, Conservation, and Energy Act of 2008 (Pub. L. 110-246, June 18, 2008) (the Act) established the Rural Microentrepreneur Assistance Program (RMAP). This interim rule implements the program to make loans and grants to microenterprise development organizations (MDOs) to support microentrepreneurs in the development and ongoing success of rural microenterprises.

Under this program, the Agency will make available to MDOs direct loans and grants. As provided in the Act, MDOs that qualify for direct loans (participating microlenders) will use the funds borrowed from the Agency to make fixed interest rate microloans of not more than $50,000 at a term not to exceed 20 years to microentrepreneurs for startup and growing rural microenterprises.

The Agency will also make available technical assistance (TA) grants for microlenders and technical assistance only (TA-only) grants for entities that provide training and technical assistance to microentrepreneurs and microenterprises but do not wish to fund microloans under this program. The TA grants will be annual grants made to participating microlenders to provide business based training and technical assistance to microentrepreneurs that have received or are seeking a microloan from a microlender under this program.

TA-only grants will also be made available, on a limited basis, to MDOs that are not participating in the program as microlenders.

II. Discussion of the Interim Rule

USDA Rural Development is issuing this regulation as an interim rule, with an effective date of June 28, 2010. All provisions of this regulation are adopted on an interim final basis, are subject to a 60-day comment period, and will remain in effect until the Agency adopts a final rule.

III. Changes to the Rule

This section presents changes from the proposed rule. Most of the changes were the result of the Agency's consideration of public comments on the proposed rule. Some changes, however, are being made to clarify proposed provisions. Unless otherwise indicated, rule citations refer to those in this interim rule.

A. Highlighted Changes

The following list highlights some of the changes made to the rule. These changes are also discussed in the section specific change portion that follows this list. All changes resulting from public comments are explained in detail in that portion of the preamble.

• Creation of a technical assistance only grant program for non-lending MDOs.

• Deferral of the enhancement grant category.

• Increasing the maximum size of technical assistance grants.

• Implementation of a simplified interest rate structure.

• Removing the maximum margin requirement on loans made by the microlender to the microentrepreneur.

• Implementation of a minimum score for qualification as a microlender or grantee.

• Adjusting the cost share and matching requirements, including limiting the cost share requirement to loans and the matching requirement to grants.

• Allowing microlenders two cost share options for establishing the rural microloan revolving fund.

B. Section-Specific Changes

Purpose and Scope (§ 4280.301)

There were two primary changes to this section:

First. The Agency added discussion concerning the availability of technical assistance-only grants as one of the types of funding to be available under the program (§ 4280.301(a)(4) and (d)).

Second. The Agency clarified that participating microlenders can use the

TA grants to provide technical assistance not only to microentrepreneurs who have actually received a loan from the microlender, but also to microentrepreneurs who are seeking a loan from the microlender (§ 4280.301(a)(2)).

As the purpose of this Program is to support the development and ongoing success of rural microentrepreneurs and microenterprises, microentrepreneurs are encouraged to contact the Agency for a list of MDOs in or near their geographic area that are participating in this Program.

Definitions and Abbreviations (§ 4280.302)

The Agency made changes to the definitions section of the rule, including adding several new definitions. Except for terms in which the changes were grammatical, the following identify each affected term.

Agency personnel.

Because no Agency personnel are eligible for a microloan under the interim rule, revised by removing the last clause (“who are more than 6 months from separating from the Agency”) because it is no longer necessary.

Close relative.

Added to clarify the implementation of § 4280.323(d) concerning the restrictions on the use of loan funds.

Default.

Has been simplified for purposes of clarity.

Eligible project cost.

Has been added as part of the implementation of the cost share requirement.

Facilitation of access to capital.

To clarify this term, the words “access to” have been added.

Fiscal year.

Added the word “Federal” for clarity.

Indian tribal government employee.

Has been removed as a conforming change.

Loan loss reserve fund.

Revised by removing text not associated with the definition of the term, but which was also covered elsewhere within the rule.

Microborrower.

Added for clarification in implementing the rule.

Microentrepreneur.

Revised to clarify that both the microentrepreneur and the microenterprise to be assisted under the program must be located in a rural area. In addition, the phrase “business financing” was replaced with “business capital.” Lastly, a sentence was added to note that a microentrepreneur who has received a loan under this program may also be referred to as a microborrower within the rule.

Military personnel.

Revised to add the words “or grade” after the word “rank”; “United States” after the word “active”; “active duty” after the word “their”; and to remove to the word “enlisted”.

Nonprofit entity.

Has been simplified and reference to the “U.S. Internal Revenue Service” has been removed.

Rural microenterprise.

Revised the term to “microenterprise” and expanded the definition for clarity.

Rural microloan revolving fund.

Revised for clarity.

Significant outmigration.

Removed because the term is not used in the interim rule for the reasons discussed in the responses to comments.

State.

Added to clarify the applicability of the program.

Review of Appeal Rights and Administrative Concerns (§ 4280.304)

In paragraph (a), the words “a microlender, or grantee MDO” were added after the word “MDO” to clarify the applicability of this paragraph.

Nondiscrimination and Compliance With Other Federal Laws (§ 4280.305)

In paragraph (a), “Applicant” was replaced with “Any entity receiving funds under this subpart” to clarify the applicability of this paragraph.

Forms, Regulations, and Instructions (§ 4280.306)

This section has been added to identify where applicants can access forms, regulations, and instructions noted within the subpart.

Program Requirements for MDOs (§ 4280.310)

This section has been revised and redesignated. The substantive changes are described below:

First.

The citizenship requirements have been clarified to apply only to non-profit entities (paragraph (a)(2)), not American Indian tribes or United States public institutions of higher education.

Second.

In addition to moving the requirements specific to potential microlenders into paragraph (a)(4), the Agency has added a new provision (paragraph (a)(4)(ii)) regarding obtaining an attorney's opinion regarding the microlender's legal status and its ability to enter into program transactions at the time of initial entry into the program.

Third.

A minimum score threshold has been added for MDOs to be considered for receiving an award under this subpart (paragraph (b)). Generally, applicants must receive at least 70 points out of 100 in order to be eligible to receive an award under the program.

Fourth.

The Agency removed “is delinquent in meeting U.S. Internal Revenue Service (IRS) requirements” from the list of provisions identifying ineligible applicants.

Loan Provisions for Agency Loans to Microlenders (§ 4280.311)

A number of changes have been made to this section, including grammatical changes and redesignation of paragraphs. The substantive changes are described below:

First.

The Agency revised the provisions associated with the cost share requirements by applying them only to loans and identifying two options for how microlenders can establish Rural Microloan Revolving Funds (RMRFs). The provisions also allow microlenders the option of setting up multiple RMRFs (paragraph d)). Because of this revision, a conforming change was made to paragraph (c) to refer to “RMRF” funds instead of “Agency loan” funds.

Second.

The provisions concerning the term of a loan have been recast to state that a term shorter than 20 years will be considered if requested by the applicant MDO and must be agreed to by the microlender and the Agency (paragraph (e)(3)).

Third.

The number of days loan closing must take place has been revised to within 90 days, rather than 60 days as proposed, before funds would be forfeited (paragraph (e)(8)).

Fourth.

Revised the number of day microlenders have to make at least one microloan from within 30 days to within 60 days of disbursement (paragraph (e)(10)). Further, failure to make a microloan within this time period may result in the microlender not receiving any additional funds from the Agency and may result in the Agency demanding return of any funds already disbursed to the microlender.

Fifth.

Revised substantially the interest rate provisions. In the interim rule, each microloan made to a microlender during the first five years of participation will bear an interest rate of 2 percent and each loan made to the microlender after the fifth year of participation will bear an interest rate of 1 percent (paragraph (e)(12)).

Sixth.

Revised several dates in the section, including the date when the Agency will calculate and amortize the microlender's debt after the deferral period (

e.g.,

(paragraph (e)(13)).

Seventh.

Removed the provisions associated with negative amortization and reamortization (proposed § 4280.311(d)(15)(i) and (ii)).

Eighth.

Modified the rule to indicate that loans can be used to recapitalize existing Agency funded RMRFs (paragraph (f)(2)).

Ninth.

Added a provision to provide microlenders 30 days to replenish the loan loss reserve fund (LLRF) if it falls

below the required amount (paragraph (g)(2)(i)).

Tenth.

Removed the phrase “and partially funded” in paragraph (g)(4).

Eleventh.

Added a conforming change to the requirement for maintaining a minimum 100 percent of the amount owed by the microlender to the Agency for those microlenders with 3 years or less experience (paragraph (h)(2)).

Twelfth.

Added a provision requiring microlenders to provide Agency access to any of the microlender's records pertaining to any microloan made to the microlender under this program. This was added to enable the Agency to better enforce the provision of this program (paragraph (h)(7)).

Thirteenth.

Added a provision requiring prior written Agency approval before the microlender makes any key personnel changes (paragraph (h)(8)).

Loan Approval and Closing (§ 4280.312)

This section has been added and is comprised of proposed § 4280.311(g) and (h) for clarity. Changes to these paragraphs are:

• The promissory note and security agreement have been added to the list of items that may be used to demonstrate that the RMRF and LLRF have been established and the LLRF has been, or will be, funded as described in § 4280.11(f)(4) prior to loan closing (paragraph (c)(1)).

• This section has been clarified to explain what constitutes “sufficient evidence” to demonstrate that no law suits are pending or threatened that would adversely affect the security of the microlender when the security instruments are filed (paragraph (c)(3)).

Grant Provisions (§ 4280.313)

This section has been redesignated (proposed § 4280.312) and a number of changes have been made, including grammatical changes and reordering of paragraphs. The substantive changes are described below:

First.

The calculation of the maximum TA grant amount has been revised such that the maximum annual TA grant to any one microlender could be $205,000 (paragraphs (a)(1)(i) and (b)(2)). The maximum TA grant amount for a microlender is now calculated as 25 percent of the first $400,000 of outstanding microloans owed to the microlender under this program, plus an additional 5 percent of the outstanding loan amount owed by the microborrowers to the lender over $400,000 up to and including $2.5 million.

Second.

The addition of provisions that a microlender who expends more than 10 percent of its TA grant funding on administrative expenses will be considered in performance default and may have to forfeit funding (paragraph (b)(3)(iii)).

Third.

Provisions have been added to address funding of the TA-only grants (paragraphs (a)(1)(ii) and (c)).

Fourth.

The matching requirements have been revised (paragraph (a)(2)).

Fifth.

The Agency added a provision requiring prior written Agency approval before the microlender makes any key personnel additions (paragraph (a)(5)).

Sixth.

The grant oversight provisions were moved from this section and consolidated with those in § 4280.320.

MDO Application and Submission Information (§ 4280.315)

Most of the changes to the section reflect a reorganization of the provisions found in the proposed rule. Substantive changes include:

• Redefining less experienced MDOs as those with 3 years or less experience, rather than less than 3 years experience, and redefining more experienced MDOs as those with more than 3 year experience, rather than 3 or more years experience;

• Requiring certificates of good standing to be not more than 6 months old;

• Adding documentation requirements for TA-only grant applications;

• Requiring documentation that the applicant has certified to the Agency that it cannot find credit elsewhere (pursuant to the requirements as provided in the Consolidated Farm and Rural Development Act (Sec. 333(1));

• Revising and simplifying the requirement associated with separate applications to indicate that MDOs may only submit and have pending for consideration, at any given time, one application, regardless of funding category; and

• Requiring all applicants seeking status as a microlender to identify which cost share option(s) they will use to set up their RMRF(s) and the amount(s) and source(s) of the non-Federal share.

Application Scoring (§ 4280.316)

A number of changes have been made to this section, including grammatical changes, redesignation of paragraphs, and clarification as to whether the information to be submitted applied to rural or non-rural microentrepreneurs and microenterprises, or both, and to microloans or loans or the microlenders entire portfolio. The substantive changes are described below:

The Agency notes that, except for applications from microlenders with more than 5 years experience with this program:

1. The maximum number of points that each application can receive is 100;

2. Each application will be scored against the criteria specified in § 4280.316(a) for which it can receive a maximum of 45 points;

3. Each application will be scored against the criteria specified in § 4280.316(b), (c), or (d), as applicable, for which it can receive a maximum of 55 points; and

4. An application must receive at least 70 points in order to be eligible.

Applications from lenders with more than 5 years experience in this program will be scored on a pass/fail basis. Those applications that pass will be assigned a score of 90 points.

Figure 1 illustrates the RMAP scoring process.

Application Requirements for All Applicants (§ 4280.316(a))

BILLING CODE 3410-XY-P

ER28MY10.002

BILLING CODE 3410-XY-C

Changes to these application requirements are mostly editorial in nature; there were no changes in the basic scoring criteria or points to be awarded. Substantive changes included:

• Indicating that there should be a corresponding resume for each of the key individuals noted and named on the organizational chart;

• Noting that the mission statement does not need to be submitted twice if it is already included in other submitted documents; and

• Deleting “as well as the needs of the service area” and reference to areas of significant outmigration from the scoring criterion addressing information regarding the geographic area to be served.

Program Loan Application Requirements for MDOs Seeking To Participate as RMAP Microlenders With More Than 3 Years of Experience (§ 4280.316(b))

There were several important changes associated with the scoring criteria for these applications, including:

• Removing reference to demographic group and replacing that term with reference to racial and ethnic minorities, women, and the disabled in Figure 1;

• Replacing reference to the U.S. Census Bureau with the “applicable decennial census for the State” (paragraph (b)(1)(v));

• Replacing “race, ethnicity, and socio-economic status” with “racial and ethnic minority status” and indicating that disability will be defined as under The Americans with Disabilities Act under the scoring criterion for diversity (paragraph (b)(1)(v));

• Replacing “percentage points” with “percent” (paragraph (b)(1)(v));

• Removing the scoring criterion for outmigration and adding “non-rural” to the total number of microentrepreneurs that received both microloans and TA services in the scoring criterion for history of provision of technical assistance to microentrepreneurs (paragraph (b)(3));

• Removing “socially-disadvantaged” and clarifying that the percentage of rural entrepreneurs that received both microloans and TA services will be broken down by racial and ethnic minority, disabled, and gender in paragraph (b)(3)(iii); and

• Adding a new scoring criterion on the ratio of TA clients that also received microloans during each of the last three years (paragraph (b)(4)).

With the removal of outmigration as a scoring criterion for loans and the addition of the new scoring criterion, the points associated with most of the criteria also changed.

Application Requirements for MDOs Seeking To Participate as RMAP Microlenders With 3 Years or Less Experience (§ 4280.316(c))

There are no significant substantive changes to the scoring criteria for these applications other than a redistribution of points.

Application Requirements for MDOs Seeking Technical Assistance-Only Grants (§ 4280.316(d))

This is a completely new set of scoring criteria required by the addition to the interim rule of providing technical assistance grants to MDOs that are otherwise not participating as a microlender. The criteria included address: History of provision of technical assistance to microentrepreneurs, ability to provide technical assistance to microentrepreneurs, technical assistance plan, and proposed administrative expenses to be spent from TA grant funds.

Re-Application Requirements for Participating Microlenders With More Than 5 Years Experience as a Microlender Under This Program (§ 4280.316(e))

The substantive changes to this section were to:

• Replace “the number of businesses” with “the number and percent of program microentrepreneurs and microenterprises” and replace “after loan repayment” with “after microloan disbursement” in paragraph (e)(1)(iii);

• Add to paragraph (e)(2) “over the life of its participation in the program” to indicate the appropriate timeframe that data are to be reported;

• Provide better guidance on requirements for assessing overall program performance with regards to the successful use of TA dollars (paragraph (e)(2)(iii));

• Replaced proposed § 4280.316(e)(2)(iv), because it is duplicative of § 4280.316(e)(1)(iii), with a request for a statement discussing the need for more funding; and

• Removing proposed § 4280.316(e)(2)(vi) regarding other such issues as deemed appropriate.

Selection of Applications for Funding (§ 4280.317)

A few changes have been made to this section as briefly described below:

• The introductory text is revised to clarify that all applications will be scored on a 100-point scale and will be ranked together and to allow the Administrator to prioritize applications that score the same for geographic diversity. This latter provision is added in order to facilitate the distribution of limited program funds throughout rural America, because the Agency does not want program funds to be concentrated in a few states.

• Provisions for application packages have been added (paragraph (a)(1)).

• Provisions associated with internal procedures were removed (proposed § 4280.317(c) and (d)).

• Clarification that awardees have 90 days to close or forfeit their funding (paragraph (d)).

Grant Administration (§ 4280.320)

The changes made to this section addressed presentation of the requirements and updating and revising the forms to be submitted. This section now also states that if a microlender has more than one grant from the Agency, a separate report must be made for each.

Loans From the Microlenders to the Microentrepreneurs and Microenterprises (§ 4280.322)

A number of changes have been made to this section, including grammatical changes and reordering of paragraphs.

The substantive changes are described below:

• The provision limiting the margin of the interest rate on the loan made to the microborrower has been deleted. Instead, the microlender may establish its margin of earnings but may not adjust the margin so as to violate Fair Credit Lending laws. In addition, margins must be reasonable so as to ensure that microloans are affordable to the microborrowers (paragraph (b)(3)).

• The provisions in § 4280.322(c) concerning insurance requirements have been revised by removing “except that * * * excessive.”

• The requirement that a microborrower has been turned down has been removed and replaced with more appropriate options for meeting the test that have a lesser impact on the microborrower's ability to build a favorable credit history. (paragraph (d)), In the introductory text of paragraph (f), the rule clarifies that Agency loan funds may be used for any legal business purpose provided it is not identified in § 4280.323 as ineligible.

• The rule includes clarification on the eligibility of military personnel for funding under the program (paragraph (g)). The rule also clarifies that Indian Tribal government employees will be treated as any other MDO employee regarding eligibility for a microloan.

Ineligible Microloan Purposes (§ 4280.323)

A few changes have been made to this section

:

• Reference to “his/her family members” has been removed (paragraph (d));

• The paragraph on military personnel has been moved to § 4280.322;

• Reference to swimming pools has been removed from (paragraph (l);

• Proposed paragraphs (o) and (p) have been removed; and

• Lines of credit and subordinated liens were added as an ineligible purpose (paragraphs (n) and (o)).

IV. Discussion of Comments

The proposed rule was published in the

Federal Register

on October 7, 2009 (74 FR 51713), with a 45-day comment period that ended November 23, 2009. Comments were received from 48 commenters yielding over 450 individual comments on the proposed rule, which have been grouped into similar categories. Commenters included members of Congress, Rural Development personnel, microenterprise development organizations, trade associations, states, universities, environmental organizations, and individuals. As a result of some of the comments, the Agency made changes in the rule. The Agency sincerely appreciates the time and effort of all commenters. Responses to the comments on the proposed rule are discussed below.

General

Comment:

Several commenters provided general support for the program, and positive discussion of other microenterprise development activities and programs to address rural need.

One commenter provided general support for the program's efforts to build the capacity of the microenterprise development industry to achieve new levels of performance and effectiveness. Due to tightened credit markets as a result of the recession, microlenders face increased demands to provide capital and technical assistance to both start-ups and existing microentrepreneurs.

Several commenters stated that they strongly support this commenter's comments on the proposed rule.

Response:

The Agency appreciates the support for the program reflected by the commenters, acknowledges the microenterprise development work that has produced positive activity both in the United States and abroad for several decades, and looks forward to formalizing the Agency's participation in this economic development sector.

Comment:

One commenter stated that they believe RMAP will do much good in reversing the economic and financial crisis in rural communities. With many rural areas underserved or not served at all by MDOs, the Agency should be doing all it can to recruit as many qualified organizations as possible to become engaged in rural training and microentrepreneur lending. The proposed rule's scoring should encourage the effort to build MDO networks to serve these communities with as many organizations with the necessary expertise as possible.

Response:

The Agency acknowledges the commenter's support.

Funding Allocations

Comment:

Four commenters stated that the terms of the proposed rule make it difficult to determine how USDA will make decisions on applications that seek funding from different components (the so-called “enhancement grants” and the loans/TA grants) without stating how much of available funding goes to each component. The commenters recommended that the final rule should contain information concerning program funding, including the subsidy rate that will be used to calculate the RMAP loan program level and legislative intent in the USDA FY 2010 appropriations bill. If this information is unattainable or otherwise not available, the commenter recommended that all RMAP dollars not previously identified by Congress as loan subsidy dollars be used to provide TA training grants to MDOs.

Response:

The Agency considered a standard division among the program components and determined that such a balance should be adjustable in future years based on market demands and conditions. Therefore, the Agency has not included program funding in the rule with one exception. As noted later in this preamble, the Agency plans to use up to 10 percent of program funding each year for technical assistance only grants for MDOs that are not otherwise participating in the program. The Agency will publish program levels annually in a Notice of Funding Availability (NOFA).

Existing MDO Emphasis

Comment:

Several commenters were concerned that the proposed rule applies exclusively to existing MDOs, especially those heavily involved in lending. The commenters stated that one of the purposes of the law is to build and enhance microenterprise services in rural areas, particularly remote rural areas and believe the application and scoring emphasis on MDO history (particularly an MDO's lending history) implies funding only for existing MDOs, and the “enhancement grants” provision (of the proposed rule) is defined in terms of “microlenders” and “projects” and activities that enhance the microlenders' capabilities, implying that funds will go exclusively for existing MDOs involved in lending. According to the commenters, this upsets the intended balance in RMAP between training, technical assistance (not connected to loans to MDOs) and lending, and between existing MDOs and developing a network of MDOs in unserved and underserved rural areas. The commenters suggested that the final rule restore the intended balance in both respects.

Response:

With regard to the comment concerning training and technical assistance, the Agency agrees that microlenders who are not participating in RMAP as lenders should have access to technical assistance grants in order to provide such assistance to rural microentrepreneurs. Thus, the Agency has included in the rule § 4280.301 provisions for MDOs who are otherwise not participating in the program to be eligible to receive technical assistance grants.

With regard to the comment concerning existing MDOs and developing a network of MDOs, the Agency disagrees with the commenters that the rule does not address both. As provided in both the proposed rule and this interim rule, MDOs with less than 3 years experience are eligible to compete for program funds. Thus, this would allow for developing a network of MDOs. However, to further meet the need for developing a network, the Agency is requesting that comments and suggestions regarding the delivery of an enhancement grant program be submitted (

see

Section V of this preamble).

Administrative Management

Comment:

One commenter expressed concern that the interest rate criteria specified were too complex for the current automated systems to monitor or effectively manage.

Response:

During the development of the regulation, the program area has been engaged in system requirements discussions with Agency information technology staff. The Agency anticipates that, by the time the first applications are received, systems (the Rural Utilities Loan Servicing System (RULSS)) will be ready to accommodate the interest rate provisions in the rule.

Comment:

One commenter stated that the program should be aligned with existing Rural Development programs and administrative capabilities. The

commenter believes that the Administrative requirements overall are too complex to manage within existing Agency systems and substantially out of sync with other Agency programs to be cost-effective to the taxpayer for management. According to the commenter, the proposed rule must align payment and deferral options with the Intermediary Relending Program (IRP) in order to be cost-effective.

Response:

The Agency disagrees with the commenter's characterization of the proposed RMAP regulation. The Agency is in the process of placing its administrative systems under RULSS. RMAP will be aligned with other similar programs to leverage electronic reporting resources with the objective of improved information-gathering and more efficient program management. The RMAP program will begin the program area's move to newer, more flexible, more responsive administration of the program. This is expected to result in improved electronic reporting, less paper-based program administration, and mitigation of duplicative or unnecessary work, thereby allowing RMAP to be implemented efficiently.

Furthermore, RMAP is different from the IRP and, thus, certain provisions will not align intentionally with the IRP. Finally, the Agency believes that the RMAP provisions are very similar to other existing Federal microenterprise programs and the participating entities will understand the provisions contained in RMAP.

Comment:

One commenter believes that the rule as proposed could cause issues with Office of the Inspector General (OIG) audits.

Response:

The Agency believes that OIG audits are helpful in terms of suggesting program improvements. It further believes that programs that are efficiently and effectively managed will have few negative comments as the result of such audits.

Micromanagement

Comment:

One commenter stated that as proposed there is too much micro-management in the program, especially if the MDO is applying for the minimum loan amount of $50,000. According to the commenter, the reporting burden is too great to make it worth their while.

Response:

Reporting requirements for this program have been kept to a minimum as a result of instituting an electronic reporting system. Reporting is flexible, automated, and easily accessed by lenders, grantees, and agency personnel.

Loans, TA Grants, Enhancement Grants

Comment:

A number of commenters believe that the proposed rule should be revised to maintain the intent of Congress by restoring the balance between the funding for loan capital and funding for training and technical assistance. As one claimed, the proposed rule is in “direct contradiction to the law” because it eliminates all grants to microenterprise programs to provide business training to existing and prospective microentrepreneurs. The commenter stated that, by eliminating the training funds (and by capping technical assistance funds), the proposed rule will make it difficult for organizations to fund the staff needed to work with borrowers and other clients.

Another commenter stated that the proposed rule directs most of the RMAP funds to loan capital and gives short shrift to support for training, financial planning, and critical support services that MDOs offer. The proposed rule does this by limiting the purposes of grants to support microenterprise development and by capping the maximum technical assistance grant an MDO can receive at $100,000, rather than 25 percent of the MDO's total balance of microloans.

Response:

The Agency disagrees that the proposed rule was in direct contradiction to the law, because it provided for loans and for grants for both technical assistance to microentrepreneurs (referred to as technical assistance grants) and training of MDOs staff to enhance their capabilities in providing technical assistance to their clients (referred to as enhancement grants). Nevertheless, the Agency, as noted later in this preamble, has added in § 4280.301 that technical assistance grants may be made available to MDOs that are not otherwise participating in RMAP. The Agency believes that this change provides for an improved program and satisfies the concerns expressed by these commenters.

Finally, the Agency understands that those seeking technical assistance funding would prefer no funding cap. The Agency believes that, in order to fund more MDOs in rural areas nationwide, a cap is necessary. However, as later discussed, the maximum amount of technical assistance grants has been increased.

Inflexibility

Comment:

Several commenters stated that the proposed rule is inflexible and will unnecessarily increase expenses for microenterprise service providers. To illustrate their concern, one commenter states that programs must identify prospective borrowers before they can receive loan funds from USDA. The result is that more time must be spent completing paperwork, leaving less time to serve microentrepreneurs. These rules ignore the flexibility needed to help microentrepreneurs be successful.

One commenter believes that the proposed rule does not reflect the reality of how lending to microentrepreneurs actually works.

Another commenter believes that the approach is far too elaborate and unnecessarily complex, particularly in the way RMAP loans are structured and reamortized and in the scoring system. The commenter stated there is the maximum need for flexibility and latitude for the program to succeed.

Three of the commenters stated that the rule, as proposed, will add to the administrative burdens on MDOs and decrease the portion of staff time that can be devoted where it should be devoted—servicing loans, providing technical assistance and conducting outreach that brings more microentrepreneurs in the door for services.

Response:

It is not the intent of the Agency to require microlenders to identify prospective borrowers before they can receive loan funds from the USDA. There is no such requirement in the proposed rule. Similarly, the restrictions placed on the relationship between the microlender and the microborrowers are minimal and stem from statutory requirements, such as the maximum loan amount, the maximum term of a microloan, and the provision of technical assistance and training for microborrowers. The proposed rule did, however, require that the microlender make a microloan within 30 days of receipt of funds from the Agency. To the extent that the commenter may be referring to this policy, the interim rule instead adopts a 60 day requirement to provide microlenders more flexibility.

Notice of Funding Availability

Comment:

Two commenters proposed that the Agency set a timeline for a NOFA that both reflects the Congressional funding process and allows for greater accountability to RMAP participants. The commenter recommended that a NOFA be made either no later than 45 days after the enactment of the appropriate spending bill or no later than 30 days after the disbursement of funds and/or budget authority to USDA.

Response:

The Agency disagrees that it is necessary to set a timeline for issuing a NOFA, in part because there is no relationship between when the

Agency will accept applications and when it issues a NOFA. It is the Agency's intent, however, to publish RMAP NOFAs as early as possible each fiscal year. This comment is associated with the administration of RMAP and not with the proposed rule itself. Thus, no changes have been made to the rule as a result of this comment.

MDO Administrative Costs

Comment:

One commenter believes that the Agency's expectation, noted under its Regulatory Flexibility Act discussion, that participating MDOs will be able to cover most of their administrative costs by “the interest rate spread between the one percent loan from Rural Development and the interest rate on loans made to the microentrepreneurs by the MDO” seems to be in conflict with subsequent sections of the proposed rule that severely limit MDO uses of interest income and must be clarified.

Response:

The Agency agrees with the commenter that the statement in the preamble to the proposed rule was in error. The Agency has not repeated this statement in this preamble.

Intermediary Relending Program

Comment:

One commenter recommended that the program be delivered under the published IRP regulations with the exception that the term must be 20 years and that microborrowers comply with the criteria in the proposed rule (

i.e.,

proposed §§ 4280.322 and 4280.323). The commenter further suggested that RMAP grant funds be administered under the published Rural Business Enterprise Grants regulations with the exception that the RMAP grants would be awarded in the proportional amounts indicated in the proposed rule (25 percent of the RMAP loan) and accompany RMAP loan awards. According to the commenter, adopting existing, well-understood, functional program regulations will allow rapid deployment and operation of the important RMAP initiative.

Response:

The Agency disagrees with the commenter's recommendation to administer RMAP under the IRP and RBEG regulations because of the many statutory differences between the programs.

Purpose and Scope—(§ 4280.301)

Comment:

In referring to proposed § 4280.301(b), one commenter expressed concern that the sentence “Technical assistance grants will be awarded to microlenders to provide technical assistance to microentrepreneurs who have received one or more microloans from the MDO under this program” would mean that entrepreneurs that have not received a microloan from an MDO under this program would not be able to receive technical assistance.

Response:

The Agency agrees that it is in the best interest of the program not to limit technical assistance only to those microborrowers who actually receive a microloan under RMAP. Therefore, the Agency has revised the sentence for clarity to indicate that a microentrepreneur seeking a microloan would also be eligible to receive technical assistance.

Definitions and Abbreviations—(§ 4280.302)

Administrative Expenses

Comment:

One commenter recommended removing the limitation on the percent of TA grant funding that may be used to fund expenses because it has nothing to do with the definition.

Response:

While the Agency does not disagree with the commenter's observation, the Agency believes that it is helpful here to explain the limitations to the public and Agency staff. For these reasons, and because it does “no harm,” the Agency has not revised the definition as suggested by the commenter.

Agency Personnel

Comment:

Two commenters asked why there was a distinction made in the definition for personnel who are more than 6 months from separating from the Agency. One of the commenters also asked how someone would know that they are more than 6 months from separating from the Agency. One of the commenters believes that it is inappropriate, if not illegal, for the Agency to ask its staff when they plan to separate and the other commenter suggested deleting this phrase.

Response:

As proposed, the Agency intended to allow Agency personnel who knew that they would be leaving the Agency within 6 months to apply for and receive RMAP funds. This distinction was intended to parallel the provisions for military personnel elsewhere in the proposed rule. After considering this and other similar comments, the Agency has determined that a “blanket” prohibition for all Agency employees while they are still with the Agency is easier to implement and consistent with other program regulations. The Agency, therefore, has removed the language from the rule.

Application

Comment:

One commenter suggested adding “required to be” after the word “documentation” in the definition, so that it would read: “The forms and documentation required to be submitted by an MDO for acceptance into the program.”

Response:

The Agency disagrees with the commenter's suggestion. The application is what is submitted, not what is required. Section 4280.315 makes clear what items are required for a complete application. Therefore, the Agency has not revised this definition.

Business Incubator

Comment:

One commenter stated that a business incubator is not an organization, but is generally a “thing”, such as a building.

Response:

The Agency disagrees with the commenter. As used in this interim rule, a business incubator is an organization that can perform such tasks as renting space, using equipment, etc. A building cannot do such tasks. The Agency, however, is adding to the definition the condition that, to be considered a business incubator, the organization provides temporary premises “at below market rates.” This is a condition that the Agency overlooked when proposing the rule and believes is an important aspect of a business incubator.

Default

Comment:

One commenter asked why a definition of default was included in the proposed rule.

Response:

The Agency is including a definition of default for clarity because its history in the administration of other loan programs has shown that defaults other than the more common monetary default (

e.g.,

nonperformance is a form of default) can and do occur.

Comment:

One commenter stated the definition of monetary default (found in paragraph (i) of the proposed definition of default) is extremely and unnecessarily complex. Further, according to the commenter, it is inconsistent with current Agency practice of annual installments for principal and interest or semi-annual installments for interest.

Response:

The Agency agrees that a simpler definition is sufficient and has revised the definition accordingly. The Agency notes that it will collect payments on a monthly basis via an automated system.

Fiscal Year

Comment:

One commenter stated that “fiscal year” should be clarified as “Federal fiscal year” because most organizations work off of either the calendar year or their individual fiscal year.

Response:

The Agency agrees with the commenter and has revised the rule to

more clearly identify the fiscal year as being the Federal fiscal year.

MDO

Comment:

One commenter suggested adding quasi-public entities that are formed by State or other governmental statutes whose purposes for operation are consistent with the program as eligible MDOs. According to the commenter, many quasi-public state agencies operate business and micro-business programs and, therefore, they need to be included as eligible entities.

Another commenter believes the term “non-profit” is used rather ambiguously in the proposed rule and recommended that the Agency provide a clarification to ensure that public non-profit entities, such as Councils of Governments, Regional Planning Commissions and Economic Development Districts, are eligible to apply for program assistance as MDOs. The commenter stated that many of these entities are experienced lenders as they currently operate USDA IRP, a program similar to RMAP, which also provides valuable assistance for financing business and economic development activity in rural regions of this country.

A third commenter requested that local governments be included as eligible applicants for program funds. The commenter asked why their local government organization is not considered the equivalent of an MDO, or at least eligible to apply for the funding as USDA has considered them capable of providing these services in the past when they awarded funding. The commenter suggests the language of the RMAP be changed to refer to MDOs and other entities that provide assistance to microentrepreneurs.

Response:

Section 379E of the Consolidated Farm and Rural Development Act provides the definition for MDO. The Agency cannot change the definition and, thus, for example, quasi-governmental organizations cannot be included unless they otherwise meet the definition. Consistent with the eligibility requirements provided in other loan programs under the Consolidated Farm and Rural Development Act, the reference to non-profits is understood to mean only private non-profits. If Congress had intended to include other entities, they would have done so as they have done for other provisions in the Consolidated Farm and Rural Development Act. For this reason, the Agency has not revised the definition of MDO as suggested by the commenters.

Comment:

A number of commenters requested that the rule clarify the ability of multiple groups to collaborate on an application (example: statewide microenterprise associations, statewide community action agency/programs). According to the commenters, such collaboratives could prove valuable in unserved and underserved rural areas, and bring together efficient and effective microenterprise development services among multiple MDOs. Potential collaborations are likely to be non-profit entities as contained in the definition of MDO in the proposed rule. The commenters suggest that the final rule be clarified to allow applications by such collaborations where other eligibility requirements are met. Scoring of such collaborative applications should consider the combined strengths and experiences of the collaborators.

Three of the commenters further stated that the Agency should apportion 20 percent of available funds to enhancement grants and allow collaborations and associations that have proven track records in providing capacity building services to MDOs to apply for these grants. Enhancement programs are an opportunity to build the capacity of MDOs to reach more clients with stronger and more effective services. This involves training trainers; curriculum development; increasing access to markets; quality assessment and evaluation; and much more. One of the purposes of this legislation is to create a strong network of MDOs. Collaborations and associations serve to build the strength of the entire industry.

Response:

The Agency is not opposed to collaborative MDO efforts. MDOs selected to participate in the program are encouraged to develop community-based partnerships. However, such partnerships and collaboratives will be developed outside of the relationship between the Agency and the participating MDOs.

The Agency disagrees with the commenters' suggestion to specify a percent of available funds to be apportioned to any single aspect of the program. In order to facilitate equitable distribution between loans and grants and provide for flexibility to meet program needs, the Agency will announce anticipated distributions in an annual

Federal Register

notice.

Microentrepreneur

Comment:

Two commenters pointed out that the proposed definition states that “All microentrepreneurs assisted under this regulation must be located in rural areas.” The commenters recommended changing this to read “All microenterprises assisted under this regulation must be located in rural areas”. The commenters stated that, while some entrepreneurs do work from home, they are concerned that an entrepreneur that provides a service or operates a microenterprise in a rural area may be disqualified from participation under this definition.

Response:

The Agency disagrees with the commenters' recommendation. It is the Agency's intent that both the microenterprise and microentrepreneur be located in a rural area, so both definitions have been revised to clearly state this. The Agency has not revised this definition as suggested by the commenter.

Military Personnel

Comment:

One commenter was concerned that the proposed rule was purposefully eliminating National Guard employees that are not deployed. The commenter pointed out that there was an administrative notice issued for the IRP that addressed IRP loans to certain military personnel. The commenter, therefore, recommended that RMAP be as inclusive as it can to service members.

Response:

Although it was not the intent of the Agency, the Agency agrees with the commenter that National Guard employees that are not deployed would have been excluded from the program. The Agency has revised the definition to remove the reference to “enlisted” and added other provisions (

see

§ 4280.322(g)) that would make such personnel eligible under this program.

Nonprofit Entity

Comment:

One commenter recommended removing “that has applied for or received such designation from the U.S. Internal Revenue Service” as a criterion for defining a non-profit entity. According to the commenter, this criterion is inconsistent with all other Rural Development programs. The commenter suggested that instead the criterion should be “registered as a non-profit in the State, Commonwealth, Territory, etc. in which the entity is located.”

Response:

The Agency agrees with the commenter that the proposed rule would have been too restrictive. Therefore, the Agency removed the IRS requirement from the definition and has revised it to read: “A private entity chartered as a nonprofit entity under State law.”

Rural or Rural Area

Comment:

One commenter stated that, for the purposes of this program, the terms “rural” and “rural area” are defined as any area of a State not in a city or town that has a population of more than 50,000 inhabitants, according to the latest decennial census of the

United States; and the contiguous and adjacent urbanized area. The commenter then pointed out that the Freely Associated States (Republic of Palau, Republic of the Marshall Islands, and the Federated States of Micronesia) are not under the jurisdiction of the U.S. Census Bureau and do their own internal Census. The commenter, therefore, recommended adding after “according to the latest decennial census of the United States” the following: “or of any of the Freely Associated States, as appropriate.”

Response:

The Agency agrees with the commenter's concern. However, rather than revising the text as suggested by the commenter, the Agency has added a definition of “State” to include reference to each of the Freely Associated States identified by the commenter. By doing so, it is unnecessary to make the change suggested by the commenter.

Significant Outmigration

Comment:

Four commenters stated that this definition was more restrictive than it should be and that the definition rejects the definitions of the term that already exist in law or proposed in legislation. The commenters provided, as examples, the American Jobs Creation Act of 2004 (Pub. L. 108-357) and the proposed “New Homestead Act of 2007” (S. 1093). These use a net out-migration of at least 10 percent during a 20-year period. The commenters suggested defining “significant outmigration” as outmigration of 7.5 percent over two Census periods and/or 5 percent outmigration over one Census period in order to recognize the current state of rural demographics and to enable the program to be widespread throughout the nation.

Another commenter suggested that the population outmigration criteria be lowered from 15 percent over thirty years to 10 percent over thirty years. In Iowa, this change would provide a threefold increase in the number of targeted outmigration counties compared to the 12 counties under the currently proposed criteria.

One commenter stated that the U.S. Department of the Treasury's Community Development Financial Institutions Fund (CDFI Fund) uses the following definition of “significant outmigration:” “In counties located outside of a Metropolitan Area, the county population loss during the period between the most recent decennial census and the previous decennial census is at least 10 percent; or (5) in counties located outside of a Metropolitan Area, the county net migration loss during the five-year period preceding the most recent decennial census is at least five percent.” The commenter urged USDA to adopt this definition.

Response:

The Agency agrees that the definition of outmigration should take other current definitions into consideration. However, because outmigration issues apply to enhancement grants only, the Agency will address this issue when it publishes the final rule.

Comment:

One commenter pointed out that the Freely Associated States (Republic of Palau, Republic of the Marshall Islands, and the Federated States of Micronesia) are not under the jurisdiction of the U.S. Census Bureau and do their own internal Census. The commenter, therefore, recommended revising the definition of significant outmigration to reflect this.

Response:

The Agency agrees with the commenter's concern regarding the Freely Associated States. The Agency has revised the text in this definition (as noted in the response to the previous comment) and, in doing so, has removed reference to the U.S. Census Bureau.

Socially Disadvantaged

Comment:

One commenter requested that the Agency define racially and ethnically diverse populations by using the same definition as found in the Small, Socially Disadvantaged Producer Program. Socially-Disadvantaged Individuals are those who have been subjected to racial, ethnic or gender prejudice because of their identity as members of a group, without regard for their individual qualities.

Another commenter recommended either including a definition for “socially disadvantaged” under proposed § 4280.302 that includes women and other disadvantaged groups or expanding proposed § 4280.316(b)(1)(v) to include an explanation of the term “socially disadvantaged.” The commenter pointed out that the scoring rules concerning provision of technical assistance to microentrepreneurs (proposed § 4280.316(b)(3)(iii)) contain a reference to an undefined group of “socially disadvantaged” microentrepreneurs. It is not stated whether “socially disadvantaged” includes gender (presumably female microentrepreneurs). This is inconsistent with proposed § 4280.316(b)(1)(v) where gender is a specifically-mentioned demographic group. The commenter stated that any provision under the Program's rules should ensure that female microentrepreneurs should be considered “socially disadvantaged.”

Response:

The Agency agrees with the commenters that, as proposed, the rule did not adequately address whether gender was included in “socially disadvantaged.” The Agency, however, has determined that “socially disadvantaged” is too broad a phrase and has changed the scoring criteria to include racial and ethnic minorities, the disabled, and gender. The Agency made this determination in consultation with Agency Civil Rights staff, consideration of other agencies, and Civil Rights reporting requirements. The latter is based on demographic data and “socially disadvantaged” is not specified.

Non-Discrimination and Other Federal Laws—(§ 4280.305)

Comment:

One commenter expressed concern with the use of the word “applicants” in the beginning of proposed § 4280.305(a) that states “All applicants must comply with other applicable Federal laws.” The commenter asked: What about ultimate recipients? The commenter suggested that there needs to be consistency with this proposed rule and the IRP.

Response:

The Agency agrees with the commenter that the provisions of this paragraph need to apply to both the microlender participating in this program and to the microborrower receiving RMAP funds from the participating microlender. Therefore, the Agency has revised the text in this paragraph to state clearly that any entity receiving funds under this program is covered by this paragraph.

MDO Requirements—(§ 4280.310)

General

Comment:

One commenter recommended that the rule minimize duplication, and the unintended development of underutilized surplus reserves in local RMRF loan capacity, by discouraging MDOs from providing services in overlapping service areas unless the MDO first approved in a designated area provides a letter of endorsement for the second MDO. According to the commenter, differing MDOs may target different market segments, which can be a rationale for overlapping service areas. However, the application approach should encourage collaboration when appropriate and discourage duplication when inappropriate.

Response:

The Agency acknowledges that different MDOs may target different market segments, but disagrees with suggestion to discourage MDOs from providing services in overlapping areas. The Agency has determined that

encouraging competition generally provides the greatest potential for benefits for intended end users. The Agency encourages collaboration among MDOs regarding client referrals across different market segments. No changes have been made in response to this general comment.

Eligibility (Proposed § 4280.310(a))

Comment:

One commenter suggested replacing “under RMAP” with “per § 4280.302(a)”.

Response:

While not inaccurate, the Agency believes that “under this program” should reference the subpart instead and has rephrased the text to read, in part, “To be eligible for a loan or grant award under this subpart, an applicant”. The Agency believes the broader designation is more appropriate than the commenter's suggested cross-reference to § 4280.302(a) by itself.

Citizenship (Proposed § 4280.310(a)(2))

Comment:

One commenter believes the requirement in § 4280.310(a)(2) for MDO “citizenship” is unworkable because nonprofits, tribes, and institutions of higher learning are entities with no “owners”. Therefore, establishing their citizenship is not possible. Instead, the commenter suggests requiring that the nonprofit/tribe/institution of higher learning be legally established within the U.S.

Response:

The Agency agrees with commenter that the citizenship requirements would not be “workable” as applied to tribes and institutions of higher learning. However, for nonprofit entities, the Agency has determined that the citizenship requirements are applicable. Therefore, the Agency has revised the citizenship requirements in the rule to apply only to applicants that are non-profit entities, as is consistent with other Rural Development programs.

Legal Authority/Responsibility (Proposed § 4280.310(a)(3))

Comment:

One commenter asked whether the Rural Development State Office will determine whether the applicant has the legal authority to carry out the purpose of the award or, as in the case with Rural Business Opportunity Grants (RBOG), will concurrence from the Office of General Counsel (OGC) be required. The commenter stated that having the applicant provide a current (not more than 6 months old) Certificate of Good Standing in addition to articles and by-laws would allow the Agency (National or State Office official) to make a preliminary determination. The commenter then recommended that OGC concurrence be obtained for entities with an initial application and subsequent applicants that have experienced a material change to their articles or bylaws since their last OGC eligibility concurrence.

Response:

The Agency will make an eligibility determination, including whether the applicant has the legal authority necessary to carry out the purpose of the award, based on the information provided in the application. Consultation with OGC is an internal operating procedure which is beyond the scope of this regulation. The rule now requires an attorney's opinion regarding the microlender's legal status to make loans specifically to allow the Agency to make such determination. The Agency may seek OGC advice as needed.

Direct Loans (Proposed § 4280.310(a)(4))

Comment:

One commenter would like the Agency to consider easing the requirement for receiving education and training from a qualified microenterprise training entity (proposed § 4280.310(a)(4)(ii)). Being a relatively new lending concept, such education, according to the commenter, is not common to a majority of professionals involved in agriculture in the U.S. nor is such training readily available. If not, the commenter states the Agency should define what is considered “adequate experience.”

Response:

The microenterprise development industry has been active in the United States for more than two decades. It is important that the minimum standards of quality that have been generally recognized over time be maintained so that the industry can continue to grow. The Agency has determined that experience (as determined in the scoring), or training/education, or participation in the similar Small Business Administration (SBA) Microloan Program will help to ensure a baseline of capacity. No changes have been made in response to this comment.

Comment:

In commenting on proposed § 4280.310(a)(4)(iii), one commenter suggested easing the requirement that MDOs be “actively and successfully participating as an intermediary lender.” According to the commenter, this requirement will exclude many small producer groups with clientele that would benefit greatly from a microenterprise lending program. According to the commenter, most microlending institutions in the U.S. are located in major urban areas serving urban clients, not rural ones.

Response:

The Agency notes that § 4280.310(a)(4)(i) indicates that only one of the three provisions found in §§ 4280.310(a)(4)(i)(A), 4(i)(B), or 4(i)(C), is required to be met, not all three. Thus, an applicant is eligible if it meets any one of the following:

• Has demonstrated experience in the management of a revolving loan fund, or

• Certifies that it, or its employees, have received education and training as described, or

• Is actively and successfully participating as an intermediary lender in good standing under the SBA Microloan Program or other similar Federal loan program.

Thus, no single organization will be required to meet all three of these requirements and newer organizations will be accommodated via the second option.

Enhancement Grants (Proposed § 4280.310(a)(5))

Comment:

Several commenters believe that the proposed rule fails to properly implement section 379E(b)(4)(A) of the Consolidated Farm and Rural Development Act as added by the 2008 Farm Bill, which addresses grants to support rural microenterprise development, and as expressed in the report accompanying the 2008 Farm Bill.

One commenter noted that the proposed rule limits enhancement grants to organizations that already operate a program for training and other enhancement services, which would ultimately result in strengthening these organizations internally. According to the commenter, the overall purpose of section 379E(b)(4)(A) was to develop the technical infrastructure necessary to increase the success of microentrepreneurs by offering them training in critical business skills. This could be accomplished by building the capacity of local nonprofit organizations to provide training and technical assistance to microentrepreneurs. The proposed rule does not contemplate this approach and should be changed to accommodate the capacity building, training, and technical assistance clearly authorized under the law. By eliminating the training funds and capping technical assistance funds, the proposed rule will make it difficult for organizations to provide the services microentrepreneurs need to succeed.

One commenter stated that the proposed rule leaves out rural microenterprise development grants. The commenter stated that the final rule should be amended to include the missing statutory subprogram. According to the commenter, there are two appropriate ways to accomplish this. First, retain the enhancement grant

category, which is overall a very helpful idea, and to create a rural microenterprise development grant category and purpose statement. Second, incorporate the enhancement grant idea into the rural microenterprise development grant category and purpose as a noteworthy addition to the statutory requirements. One of these two approaches is required in order for the rule to conform to the statute.

Another commenter also believes that the Agency misinterpreted the statutory provision as well as the accompanying report language in creating “enhancement grants.” According to this commenter, the statute shows the primary intent to be the provision of operating grants to MDOs, so they may better serve rural microentrepreneurs, and the commenter believes that the proposed “enhancement grant” method is not an accurate regulatory representation of statute. In support of this position, the commenter referred to the report language accompanying the statute (H. Rept. 110-256 Sec.367(b)(3)), which states that “The Secretary may make a grant under the program to a qualified organization (i) to provide training, operational support, or a rural capacity building service to a qualified organization to assist the qualified organization in developing microenterprise training, technical assistance * * * and other related services.” According to the commenter, the proposed “enhancement grants” fail to meet stated Congressional intent as expressed in the law's report language, primarily by awarding grants to MDO trainees rather than MDO trainers as mandated.

This commenter claimed that the result of these misinterpretations are that the proposed “enhancement grants” result in neither technical assistance to rural microentrepreneurs, as intended by the law, nor as a tool for broader field-wide capacity building. While capacity building can involve the staff development purposes expressed in the “enhancement grants” provision, capacity building of the rural microenterprise development field as a whole provides a broader scope by which to build the field's infrastructure capacity. As a general rule, rural MDOs have few resources for technical assistance for their clients, and RMAP should be designed and implemented to help to fill the gaps in service that exist in many rural areas.

This commenter, therefore, (and as similarly expressed by several other commenters) recommended deleting “enhancement grants” and replacing them with “Rural Microenterprise Field Technical Assistance Grants” that adheres to both statute and report language. The commenter suggested several approaches including funding for State Microenterprise Associations and for MDOs. The commenter also recommended a 4:1 ratio towards providing MDOs with core funding.

Response:

In consideration of these comments, the Agency considered a number of options for implementing a technical assistance and network enhancement category. As noted, the comments differed on appropriate approaches. Due to the broad range of suggestions, and the considerable interest in an enhancement grant program, this interim rule is published without reference to an enhancement grant category. Instead, comments and concepts regarding the best delivery approaches are requested (

see

Section V of this preamble). Submitted comments and concepts will be fully considered prior to publication of an RMAP final rule.

However, the interim rule does make technical assistance grants available to MDOs that are not participating in the program as microlenders (

see

§ 4280.313(c)). By broadening the eligibility for technical assistance grants, the Agency is addressing the concerns of the commenters indicating the need for more technical assistance funding. No specific provision was made for State Associations.

Technical Assistance Grants (Proposed § 4280.310(a)(6))

Comment:

One commenter suggested that the text “with the exception that up to 10 percent of the grant funds may be used to cover administrative expenses” be revised by replacing “to cover” with “for MDO”.

Response:

The Agency revised the text (

see

§ 4280.313(b)(3)) identified by the commenter by inserting “the microlender's” as follows: “may be used to cover the microlender's administrative expenses.” The Agency believes this adequately addresses the commenter's suggestion.

Delinquencies (Proposed § 4280.310(a)(8))

Comment:

One commenter suggested that proposed § 4280.310(a)(8) be made part of § 4280.310(a)(7), Ineligible applicants.

Response:

The Agency understands the commenter's suggestion, but has elected to keep the subject paragraph as a stand-alone paragraph to ensure its visibility to the public (

see

§ 4280.310(d)).

Business Incubators (Proposed § 4280.310(c))

Comment:

One commenter was unclear as to what the “business incubator” paragraph was saying.

Response:

The paragraph referred to by the commenter (now § 4280.310(f)) states that a microlender who owns or operates a small business incubator is eligible to participate in RMAP. The paragraph also states that such a microlender may use RMAP funding to make a loan to an eligible microentrepreneur who is a tenant in that microlender's facility. This language is clear and was not further clarified. However, regulatory instructions will be published after promulgation of the interim rule that may assist with this commenter's concern.

Loan Provisions for Agency Loans to Microlenders (§ 4280.311)

Complicated Process

Comment:

Eleven commenters stated that the proposed rule outlines an unnecessarily complicated process for the disbursement of loan funds to lenders participating in RMAP, with one commenter referencing in particular proposed § 4280.311(d)(10), (11), and (12). The commenters expressed concern that if these rules are not revised, the cumbersome methods outlined for loan disbursement will keep many qualified rural MDOs from participating in RMAP.

Response:

Of particular concern to the commenters was that the Agency would require a list of probable microentrepreneurs prior to disbursement of loan funds. This is not the case and language has been added to § 4280.311(e)(11) to address this concern. Specifically, descriptions of anticipated need provided with a request for disbursement will indicate the anticipated amount and number of microloans to be made with the funds but need not identify each loan. These requirements are needed to adequately monitor use of program funds.

Co-financing

Comment:

One commenter recommended that co-financing with local lenders and revolving loan funds for projects with total loan requests up to $150,000 be allowed with the $50,000 microloan maximum and subordinated position of the RMRF. According to the commenter, this would multiply the benefits of the program, encourage collaboration rather than duplication with commercial lenders and other loan funds, and encourage the transition of microloan clients back to commercial

lenders. The commenter also noted that this would be consistent with the flexibility for MDOs that is allowed under the SBA Microloan program.

Response:

The Agency understands the recommendation that microlenders be allowed more flexibility in lending to microborrowers. In addition, small businesses that can receive loans from commercial lenders should not be able to receive microloans, because microborrowers must meet the credit elsewhere test; that is, microborrowers must be able to show that, but for the microloan, they would not have access to business capital. At this time, lines of credit and subordinated liens will not be authorized. However, the Agency will continue to accept comments during the interim rule phase.

Purpose of Loan (Proposed § 4280.311(a))

Comment:

One commenter was unclear as to what “interest earnings” were being referred to in the introductory text to proposed § 4280.311(a). The commenter stated that this could be referring to either bank account accrued interest or to loan payment interest and that this needed to be clarified.

Response:

The intent of this paragraph is to refer to any type of interest earnings, including the two types referenced by the commenter. While the Agency has removed the referenced text from § 4280.311(a), the Agency has revised the text in § 4280.311(e)(2) to more clearly address the issue raised by the commenter.

Comment:

Two commenters recommended that the Agency clarify that proposed § 4280.311(a) applies only to interest earnings on the underlying USDA loan to the MDO.

Response:

The Agency disagrees. The commenters are most likely referring to the sentence in the proposed rule that states: “Interest earnings accrued by the RMRF will become part of the RMRF and may be used only for the purposes stated above.” The rule requires microlenders to retain the interest earned in the RMRF and LLRF accounts so that earnings may be reloaned or used to recapitalize the LLRF.

Comment:

One commenter referred to the sentence: “However, with advance written approval by the Agency, the microlender may increase the funding in its LLRF with interest earnings from the RMRF.” According to the commenter, this is going to be very hard to monitor and will ultimately result in OIG findings because the Agency has failed to provide advance approval to increase the account via interest earnings.

Response:

The Agency disagrees that monitoring the movement of interest earnings will be difficult because the movement of those earnings between the RMRF and the LLRF will be evident in bank statements and quarterly reports. Because it will be able to monitor such movement, the Agency further disagrees with the commenter's assertion that this provision will lead to OIG concerns or investigations. Finally, the Agency will emphasize during training that microlenders need Agency written permission to move money out of the RMRF unless it is to make a payment on their Agency loan.

Comment:

One commenter stated that Community Development Financial Institutions (CDFIs) often reinvest interest earnings into capital available for lending. However, interest earnings are also a source of operations revenue that help support technical assistance, allow CDFIs to lower the interest rate to borrowers, and otherwise provide products and services to their markets. Especially if the Agency maintains the scoring criteria related to use of administrative funds, it should allow flexibility in the use of interest earned from the RMRF and LLRF. USDA should, in addition, explicitly state that income earned from RMAP loans to microborrowers belongs to the lender and can be used flexibly.

Two other commenters stated that USDA should codify that interest income from microloans: (a) Need not be deposited into the RMRF, and/or (b) may be deposited and withdrawn from the RMRF without restriction. The commenters stated that failure to clearly allow MDOs to keep and use microloan interest income would likely render RMAP unusable for MDOs.

Twelve commenters noted that the proposed rule does not explicitly state that income earned from RMAP loans to microborrowers belongs to the lender. They stated that they believe that microlenders should be allowed to keep earnings on microloans, and that this needs to be explicitly stated in the appropriate section of the RMAP final rule.

Three other commenters stated that limiting MDO use of accrued interest that comes about as a result of an agreement between the MDO and a borrower is an overreach by USDA, limits the ability of an MDO to realize program income from its activities, and ultimately will limit the ability of MDOs to fund their programs and services. The commenters suggested the Final Rule remove all limits on use of interest accrued by RMRFs. In particular, The commenters suggested that, because the law and the proposed rule limit the amount funding for administrative expenses to an MDO, administrative expenses should be an allowed use of interest earnings on the RMRF in proposed § 4280.311(d)(2).

Two commenters recommended allowing accrued interest to be used by MDOs for purposes consistent with the mission of the organization and the purposes of the RMAP statute. One commenter noted that this would be consistent with current practices with other USDA loan funds including IRP. As proposed, such interest must be deposited in the LLRF.

One other commenter stated that, as written, the proposed rule would not allow the MDO to use any revenues from the operation of the microloan funds to cover its administrative expenses. All repayments on microloans must be deposited in the loan fund and used for either new microloans or payments to USDA. Thus, there is no provision for paying the MDO's loan officer, etc. and the presumption is that all these costs will be covered by other funding sources. According to the commenter, this is unfair to the MDO, which should be able to use the revenues from their operations for the operation of the microloan program.

Response:

While the Agency acknowledges the points raised, the Agency has not revised RMAP as recommended by the commenters. It is the Agency's position that, because the interest is earned on monies owed back to the Agency, the Agency is within its purview to dictate the use of interest earned on that money. Further, requiring interest earned to be used to recapitalize the RMRF and LLRF will help ensure that those two funds are maintained at adequate levels over time and that earnings that remain in the LLRF account will help to mitigate the cost of reimbursing the RMRF from the LLRF in the event of a loss. Such earnings may also be used to help fund the non-Federal share.

Finally, the Agency notes that the rule allows MDOs that receive technical grants to use up to 10 percent of the funds to cover MDO administrative expenses for administering the technical assistance grants.

Term of Loan (Proposed § 4280.311(d)(3))

Comment:

One commenter recommended that the Agency eliminate the uncertainty about the term “20 years and may be less” and simply follow the loan structure used by the IRP program—a 1 percent fixed rate loan with a 20-year term with 3 years of interest-only payments and with annual payments. The commenter stated that

this will allow for a predictable payment level for the MDO which is very helpful in running a microlending program.

Response:

The Agency disagrees that RMAP needs to set the same term requirements as found in the IRP. While the Agency acknowledges that setting a standard term length would simplify the loan structure, the Agency wants to provide flexibility to accommodate lesser term lengths as permitted by statute. The Agency has revised the rule to allow a term of less than 20 years if requested by the microlender and as agreed upon between the microlender and the Agency.

Loan Repayments (Proposed § 4280.311(d)(4))

Comment:

One commenter stated that the reference to the 24th month of the life of the loan is confusing at this point in the rule because not until later in the rule is the 2-year deferral referred to.

Response:

The Agency has rearranged and revised proposed paragraphs (d)(4), (d)(5), and (d)(8), as discussed in response to a later comment. This rearrangement addresses the commenter's concern by placing this provision after reference to the two-year deferral period.

Comment:

One commenter recommended that proposed § 4280.311(d)(4) be revised to state the payments would begin on the 1st day of the 25th month instead of making payments beginning on the last day of the 24th month. The commenter noted that traditionally the Agency has avoided making payments due on the 29th, 30th, or 31st of the month due to the fluctuating number of days in the month and the fact that the payments are not credited to the account for several days after the beginning of the next month. Thus, all end-of-the-month reports will show the payment not made when, in fact, the funds may already be in the Finance Office.

Response:

The Agency disagrees with the commenter and has kept the provision to read “on the last day of the 24th month” to be consistent with RULSS system requirements.

Comment:

One commenter stated that monthly installments are not practical and that annual payments would be far less burdensome and labor intensive for both the MDO and USDA. According to the commenter, this approach works well with the IRP program and there is no real advantage to using monthly payments. Many microentrepreneur borrowers, especially farm borrowers, will not have year-round, monthly revenues and so will not be able to make monthly payments to the MDO. The commenter asked how, in such cases, the MDO can be expected to make monthly payments to USDA.

Response:

The Agency disagrees with the commenter that monthly installments are not practical. It is the Agency's experience that by requiring monthly payments, lenders are better able to manage and match their portfolio cash flow and that the Agency is better able to monitor the repayment behavior of the microlender. Therefore, the Agency has not revised the rule as suggested by the commenter.

Prepayment (Proposed § 4280.311(d)(5))

Comment:

One commenter recommended that proposed § 4280.311(d)(5) simply state that there is no pre-payment penalty.

Response:

The Agency is satisfied that this paragraph clearly states a no pre-payment penalty provision, but has clarified that this also applies to pre-payments during the deferral period (

see

§ 4280.311(e)(5)).

Deferral Period (Proposed § 4280.311(d)(8))

Comment:

One commenter asked why the proposed rule was making the 2-year deferral automatic and what if the MDO does not want a deferral.

Response:

Section 379E of the Act allows the Agency to defer payments for 2 years. The Agency has provided a commensurate default provision wherein no payments are required until this 2-year period is completed. However, if a microlender wishes to make payments prior to the end of the 2-year period, the microlender can do so and without any prepayment penalties being assessed. The Agency has revised and rearranged proposed paragraphs (d)(4), (d)(5), and (d)(8) to make this more clear.

Loan Closing (Proposed § 4280.311(d)(9))

Comment:

Five commenters were concerned about the 60 day time limit imposed by this paragraph. According to one of the commenters, it is often difficult to get loan closing instructions from OGC and get title set up and the loan closed in 60 days. This commenter was also concerned that there may be unusual and unavoidable issues that prevent a loan being closed within 60 days of loan approval. To address these concerns, the commenter recommended adding at the end of the paragraph: “Unless otherwise negotiated and agreed to by the Agency.”

Two of the other commenters recommended a longer deadline of 90 or 120 days. Finally, one commenter recommended that the period be extended to at least 180 days, and further suggested that the timeframe be left to the judgment of the USDA State Office.

Response:

In considering all of the commenters' suggestions, the Agency has revised the proposed timeframe for closing loans from 60 days to 90 days (

see

§ 4280.311(e)(8)). This longer timeframe is sufficient to close loans under RMAP. The Agency has not accepted the suggestion to include “unless otherwise negotiated and agreed to by the Agency.” The Agency is concerned that such an open-ended deadline would result in unnecessary delays. Lastly, if loans are not closed within 90 days, the funds will be forfeited.

Loan Disbursement (§ 4280.311(e)(10))

Comment:

Several commenters noted that the rule, as proposed, allows microlenders to receive a disbursement of up to 25 percent of the total loan amount at the time of the loan closing. In general, the commenters stated that it is not clear why this limit is necessary and that it appears arbitrary. According to the commenters, this draw down limitation has the potential to limit the number of loans an MDO can make and limit the funds an MDO can loan. The commenters suggested modifying the rule to allow MDOs to draw down their entire loan if needed.

Another commenter recommended that, once a loan has been closed between the Agency and a microlender, the MDO be able to draw down at least half of the total loan amount. The commenter stated, in addition, that requests for draw downs should not require an iteration of specific pending loans for specific amounts, but should be based on the organization's lending history schedule. The commenter noted that successful microlending is more time consuming than conventional lending and that onerous paperwork requirements subtract from the time MDO staff can spend conducting outreach, providing technical assistance, and servicing loans. If an MDO has the track record, credibility and financial controls in place to warrant a loan from the Agency that MDO should be trusted to do their work and not be hamstrung by unnecessarily rigid requirements.

Response:

The Agency included the provision (

see

§ 4280.311(e)(9)) to limit full disbursement of the loan to the microlender in order to ensure that microloans are made in an expedient fashion and that disbursed funds are not accruing interest on the Agency loan before they begin to earn interest on microloans. The Agency, therefore, has

not revised the rule as suggested by the commenters.

30-Day Disbursement Provision (Proposed § 4280.311(d)(11))

Comment:

A number of commenters noted that the requirement for an MDO to make one or more microloans within 30 days of any disbursement it receives from USDA seems to be an unnecessary rule. The commenters stated that, if an MDO is drawing down funds, they are clearly planning on placing loans in the near future and that if a loan to a client would not happen at the last minute, programs could easily violate this 30 day rule. One of the commenters stated that it seems arbitrary to insist that at least one loan be made within 30 days of disbursement and not particularly realistic given the realities of microlending in the field. The commenters, therefore, recommended omitting this from the rule.

Another commenter stated that the limitations that a microlender can only request funds once a quarter based on their pipeline and then must relend the drawn funds within 30 days is unnecessarily burdensome. The commenter acknowledged that there is certainly an expectation that the drawn funds will be promptly reloaned, but recommended that mitigating circumstances be allowed for.

Response:

As noted by the commenters, the proposed rule required that the microlender make a microloan within 30 days of receipt of funds from the Agency. The Agency agrees that this may be too short under certain circumstances, but disagrees with the suggestion to have no timeframe. For example, some microlenders will already have a list of potential microborrowers for RMAP funds. For these microlenders, some amount of time may be required to evaluate and verify the eligibility of the microborrower for participation in the program. Some microlenders will not begin aggressively marketing the availability of RMAP loan funds until such funds have been drawn. Some amount of time, therefore, will be required to attract microentrepreneurs to the program. Thus, the Agency believes that a 30-day period may be insufficient. The Agency has, therefore, revised the rule to reflect a 60-day requirement (

see

§ 4280.311(e)(10)).

Comment:

One commenter asked what the ramifications would be if loans are not made within the specified timeframe.

Response:

If a microlender fails to make a loan within 60 days of disbursement, the Agency may not provide the microlender with any additional funds and the Agency may demand return of any funds already disbursed to the microlender (

see

§ 4280.311(e)(10)).

Quarterly Disbursement of Funds (Proposed § 4280.311(d)(12) and § 4280.320)

Comment:

Several commenters were concerned over the proposed disbursement of loans and grants on a quarterly basis as found in proposed §§ 4280.311(d)(12) and 4280.320(b).

One commenter asked why grant payments would not be made more often than quarterly. According to the commenter, monthly payments for loans or grants can be acceptable if they are accompanied by a brief narrative of activity that justifies the requested funds. The commenter also asked why the Agency should not allow monthly draw downs for loans.

Another commenter stated that the requirement for quarterly disbursements seems overtly regulatory rather than necessary. According to this commenter, an active MDO may need funds prior to the end of the 90 waiting period. The commenter stated that the IRP currently allows disbursements every 30 days.

Another commenter stated that the quarterly disbursement of loan dollars is cumbersome and unnecessary. The commenter stated that, if the Agency's goal in restricting loan disbursements is to ultimately prevent the misuse of the loan dollars as well as the technical assistance grant dollars that accompany those loan dollars, a better way to do this would be to allow the MDO to draw down as needed and receive annual or quarterly technical assistance grants. As currently designed, an MDO with four loans from the Agency would need to keep track of four RMRF accounts, and submit various reports per year. According to the commenter, these regulations are unnecessarily burdensome, and could deter many small, rural MDOs from participating in RMAP. The commenter, thus, recommended allowing MDOs to draw down as needed and receive annual or quarterly technical assistance grants based on statutory allowances, program performance, and demonstrated needs.

Another commenter noted that, with the tools of electronic funds transfer, the approach should simply be that an MDO may request RMAP draws as microloans are ready to close; they should not be limited to once a quarter.

Response:

The Agency is requiring quarterly draws rather than monthly draws for several reasons. The Agency has determined that quarterly payments enable both the Agency and the MDO to more efficiently utilize staff resources in part because quarterly payments match the quarterly reporting requirements. Further, monthly draws would require undue Agency resources. Second, matching fund payments with reporting requirements allows the Agency and the microlender to keep like calendars, which will facilitate reconciliations. Thus, the Agency has not incorporated the commenter's suggestion into the rule.

Comment:

Two commenters stated that proposed § 4280.311(d)(12) requires that requests by MDOs for loan disbursement must be accompanied by a description of the incoming microloan pipeline. The commenters stated that it is questionable whether any MDO has a “microloan pipeline” that can be described to a funder. Generally, MDOs do not line up loans and then make a drawdown. The incoming pipeline is totally unpredictable. MDOs typically base their drawdowns on previous history and draw down as needed. The commenters recommended that the Agency remove this requirement from the rule and replace it with a provision that draw downs be allowed as needed by the MDO. According to the commenters, keeping this requirement will add to the administrative burdens on MDOs and decrease the portion of staff time that can be devoted where it should be devoted—servicing loans, providing technical assistance and conducting outreach that brings more microentrepreneurs in the door for services.

Another commenter stated that, regarding the “microloan pipeline,” the rule has two very serious flaws: (a) It conflates borrower interest in pursuing a microloan with the certainty of that borrower qualifying for a microloan, and (b) it fails to consider the impact of unpredictable economic factors and outside forces. This commenter stated that a “microloan pipeline,” as the term is used in the microenterprise field, is not a predictor of future borrowers, but rather an expression of loans in the process of closing. While an MDO may work to forecast demand for microloans, the incoming pipeline is ultimately unpredictable and does not provide a reliable proxy by which to judge the intent of MDOs requesting a loan disbursement. The commenter recommended that the “microloan pipeline” be utilized as an indicator of microloan demand.

Response:

Agency experience indicates that lenders are able to anticipate what they will lend over the next 3 to 6 months. Generally, a microloan pipeline can be anticipated by assessing those clients that are in the pre-loan technical assistance and

planning stages. A well managed microlending institution will recognize those clients that are ready for loan approval and those clients that are not. They will also recognize those clients that intend to borrow and those clients that do not. Therefore, it should not be difficult for a microlender to anticipate the need for microlending funds. The “microloan pipeline” language, therefore, has been removed to state that the request for disbursement will be accompanied by a description of the microlender's anticipated need (

i.e.,

the amount and number of microloans anticipated to be made with the funding) (

see

§ 4280.311(e)(11)).

Interest Rate Adjustment (Proposed § 4280.311(d)(13))

Comment:

Many commenters expressed concern over the interest rate provisions in the rule at proposed §§ 4280.311(d)(13) and (d)(17). One of the commenters noted that the statute established a minimum interest rate of at least 1 percent for USDA loans (section 379E(b)(3)(B)(ii)) and claimed that the proposed rule does not implement the interest rate as set out under the law. This commenter then referred to the proposed formulations in proposed § 4280.311(d)(17) and stated that they may have merit, but are not clearly explained in the rule and have the potential to raise interest rate charges to microenterprises. In the interest of time, clarity, and ease, the commenter believes that the Agency should follow the law and implement the loan rate set out by the statute.

The other commenters recommended adopting fixed rate loans at a 1 percent interest rate.

Response:

The Agency agrees that the interest rate provisions found in proposed § 4280.311(d)(13) and (d)(17) should be revised to reflect a simpler structure. However, the Agency disagrees that the rate should be less than 1 percent. The statute does not anticipate a 1 percent rate at all times on every loan. It only states that the interest rate must be at least 1 percent. To address the commenters' concerns regarding the rate structure, and Agency concerns regarding the cost and broad distribution of loan funds, the Agency has revised the rule at § 4280.311(e)(12) to set a fixed interest rate of 2 percent on all loans to any MDO that are made in the first 5 years of an MDO's participation in RMAP. After 5 years of successful and continuous participation in RMAP, each new loan to an MDO will be at a fixed 1 percent interest rate. Depending on future Treasury bill rates, these revised interest rate provisions may be more expensive to the Government, but comply with the law and will eventually provide the lower 1 percent rate to the best MDO performers. In addition, these revised interest rate provisions should encourage microlenders to continue successful participation in the program.

Interest Rate Adjustments (Proposed § 4280.311(d)(14) and (d)(15))

Comment:

One commenter asked how the Agency's Financial Office would deal with the provisions of proposed § 4280.311(d)(14) and (d)(15).

Response:

The RMAP will utilize the RULSS technology platform, which includes the calculation of capitalized interest.

Amortization (Proposed § 4280.311(d)(15)(i))

Comment:

One commenter suggested replacing “subject itself to negative amortization” with “subject itself to a balloon payment” as being clearer.

Response:

The Agency has revised the rule to remove reference to negative amortization. Because the Agency's Finance Office will always adjust payments so that negative amortization will not occur, there is no need to address this issue in the rule.

Comment:

One commenter asked why amortization calculations are performed at month 22 for the end of the deferral period and to start payments, but then turning around and automatically reamortizing their loan at month 34.

Response:

The Agency has removed the paragraph concerning reamortizing loans at month 34, because it is no longer necessary for the implementation of this program. The Agency notes that amortization calculations are to be performed during the 24th month of the deferral period, rather than on the first day of the 22nd month as had been proposed. Section 4280.311(e)(13) has been revised accordingly.

Loan Deobligation and Evaluation (Proposed § 4280.311(d)(16) and (d)(17))

Comment:

One commenter asked how the Agency's Financial Office would deal with the provisions of these paragraphs.

Response:

The RMAP will utilize the RULSS technology platform, which can facilitate the calculations.

Interest Rate Adjustments (Proposed § 4280.11(d)(17))

Comment:

Two commenters were concerned over how the Agency was proposing to adjust the interest rates on loans made to microlenders. One of the commenters requested clarification of when interest rates will change for MDO's that have used all their funds (proposed § 4280.311(d)(17)(i)) by the 24th month and expressed concern regarding proposed § 4280.311(d)(17)(ii).

The other commenter stated that different incentives to reward microlenders who relend their funds quickly can be developed instead of the interest rate adjustment. The commenter also suggested that incentives be built into the use of the TA grant funds.

Response:

For the reasons discussed earlier in response to comments on proposed § 4280.311(d)(13), the Agency has revised the interest rate structure and has removed proposed § 4280.311(d)(17). Thus, it is unnecessary to adopt the commenters' suggestions.

Minimum and Maximum Loan Amounts (Proposed § 4280.311(e)(1))

Comment:

A number of commenters were concerned about the maximum loan amounts being proposed. Most recommended raising both the single year maximum and the aggregate maximum to $1 million and $5 million, respectively. Other amounts suggested were $750,000 for single year maximum and $4 million aggregate maximum. Points made by the commenters included:

• While most rural MDOs will not borrow the maximum amount, large lenders that can demonstrate success in making and managing a large volume of loans should have the opportunity to do so;

• The low limit may constrain MDOs with robust pipelines of potential borrowers; and

• The low limit creates additional administrative expenses for both the Agency and the MDO.

Response:

In order to fund as many qualified microlenders as possible, it is important to have a maximum loan amount that is both large enough for larger lenders and small enough to allow equitable distribution of loan funds. Additionally, the current maximums and minimums provide the Agency with the opportunity to spread risk across a higher number of local economies than would a more condensed distribution. Therefore, the Agency has not revised these limits in response to the comments.

The Agency notes that it has retained the proposed minimum loan amount of $50,000 in the interim rule. The Agency considered whether to lower this minimum amount, but decided against doing so for two primary reasons. First, the Agency is concerned that an MDO seeking to borrow, for example, only $10,000 or $20,000 is unlikely to be a well established MDO with a sufficient

“critical mass” and would therefore present a higher risk to the Agency for repayment. Second, even if the MDO seeking such a small amount was well-established, the Agency believes that a $10,000 or $20,000 loan to the MDO under this Program would represent a small portion of the MDO's overall portfolio of loans and would not be the type of MDO the Agency is most interested in for the Program.

Use of Funds (Proposed § 4280.311(e)(2))

Comment:

One commenter asked what an MDO would do concerning establishing an RMRF if the MDO wants to apply in a subsequent year to recapitalize the loan fund.

Response:

The Agency has rewritten the beginning part of § 4280.311(f)(2) to state: “Loans must be used only to establish or recapitalize an RMRF out of which microloans will be made.” By including “or recapitalize”, the Agency is allowing MDOs to apply in subsequent years for loan funds to recapitalize an existing loan fund. In addition, other changes have been made to this paragraph.

Comment:

One commenter suggested revising the sentence “Interest earned by the microlender on these funds may, with advance written authorization from the Agency, be used to help fund the LLRF” to read “Repayments plus Interest earned on these funds may be used to help fund the LLRF.” The commenter believes that requiring advance written authorization is another opportunity for Agency non-compliance.

Response:

The Agency has not revised the provision requiring advanced written notification for using the interest earned on the RMRF for increasing funding to the LLRF (

see

§ 4280.311(e)(2)). The Agency disagrees with the commenter's assertion that this is an opportunity for Agency non-compliance. This requirement is a sound oversight provision.

Loan Loss Reserve Fund (LLRF) (Proposed § 4280.311(f))

Comment:

One commenter asked why the LLRF would be set up to cover delinquent payments.

Response:

The statute requires the establishment of at least a 5 percent LLRF (

see

section 379E(b)(3)(C)). The purpose of the LLRF is to cover microloans that have gone into default. This provides a cushion to protect the microlender from becoming delinquent to the Federal government.

Comment:

One commenter stated the “105 percent rule” that requires the MDO at all times to maintain a microloan fund and loss reserve equal to 105 percent of the RMAP loan balance, or be in default, is unworkable and unnecessary. What this means is that if an MDO suffers any loss whatsoever (which is realistically likely), it either must immediately refund the entire loss up to the 105 percent level, or be liquidated by USDA. This is required even if the MDO is otherwise current on their RMAP loan and performing as agreed. If an MDO suffers a loss but continues to stay current on its payments, it should be monitored closely by USDA, but it may yet recover its losses through operations or other means. There is no benefit or reason to liquidate an MDO that is making payments as agreed and operating its microloan fund in accordance with the mission of the RMAP program. Again, the IRP program's approach to default is perfectly workable as a quick substitute.

Another commenter recommended that USDA provide further guidance on the available grace period for an MDO to replenish the LLRF in case of microloan default.

Response:

The statute requires that each microlender establish and maintain a loan loss reserve fund of at least 5 percent of the outstanding balance of debt owed to the Agency under the program by the microlender. It is not the intent of the Agency to declare a microlender in default based on the loss by a microborrower. The Agency is also aware that it takes time to replenish the reserves. Therefore, the Agency has added a 30-day grace period for such replenishment. Regarding the reference to the IRP program, it is not the Agency's intent to operate the RMAP as if it were an extension of the IRP.

Capitalization and Maintenance (Proposed § 4280.311(f)(2))

Comment:

A number of commenters were concerned with the proposed provision that would require the 5 percent funding level for the loan loss reserve fund to be met using “non-Federal funding” (

e.g.,

RMAP funds cannot be used to establish the loan loss reserve) (proposed § 4280.311(f)(2)(iii)). The commenters noted that this provision would require the LLRF to be funded by the borrower. The commenters stated that this is contrary to Congressional intent that the 5 percent level be met using the USDA/RMAP loan. Most of the commenters recommended that the rule reflect this Congressional intent.

In supporting this position, several of the commenters stated that requiring the use of non-Federal funds would limit the ability of smaller rural MDOs to participate in the program. According to the commenters, many rural MDOs depend on federal funds to operate, as state, local and private funds for microenterprise development are limited and decreasing. According to one commenter, even in the best of times, securing non-Federal funding is a challenge. These funds provide critical resources for achieving the MDOs mission of serving rural microenterprises. Making them nearly inaccessible for 20 years will pose significant challenges for all MDOs. The commenters believe that, if forced to use non-Federal funds for the LLRF, the program will be unattractive to many MDOs and many rural MDOs will not be able to participate in RMAP because they have no (or limited) non-federal funds to capitalize the required loan loss reserve.

Two of the commenters indicated that they understood the Agency's reluctance to allow use of RMAP funds to capitalize the loan loss reserve. These commenters stated that some flexibility should be provided to allow the use of other federal funds and suggested that, as an alternative, this provision be modified to allow federal funds other than RMAP (Rural Business Enterprise Grant (RBEG) or Community Development Block Grants (CDBG) funds, for example) to capitalize the required loan loss reserve.

Finally, one commenter suggested that the requirement for the LLRF as proposed be eliminated in its entirety and be replaced with the IRP's approach of requiring that a 6 percent loss reserve be built up by the third year of operations and maintained thereafter, with the understanding that losses will cut into the reserve and that therefore time is allowed in rebuilding the loss reserve.

Response:

While the Agency understands the issues raised by the commenters, especially as it regards MDOs with less history, the Agency has not revised the requirement to use non-Federal funds. Based on the lending program history of Rural Development, it has greatest level of long-term success awarding projects with program participants who have their own capital in the project rather than having the government fully finance the project. In addition, there is a statutory requirement in section 379E to provide a 25 percent non-Federal share against funds received from the Federal Government for the cost of the project. The MDO's non-federal investment in the LLRF can be considered a part of the non-Federal share.

LLRF Funded in Advance (Proposed § 4280.311(f)(4))

Comment:

One commenter in reference to “The LLRF account must be established and partially funded” asked: If they do not initially establish at 5 percent, what is the period of time the microlender has to fully capitalize the account? The commenter pointed out that proposed § 4280.311(h), Loan closing, requires at least 5 percent of initial disbursement be deposited. One commenter also asked: Why would the LLRF need to be funded with 5 percent of the initial disbursement when the account is required to have 5 percent of each loan made. If no loans have been made, the commenter believes that such a requirement would be an undue financial burden on the applicant to tie up funds for this.

Response:

The initial amount of capitalization will be 5 percent of the initial disbursal amount requested from the Agency by the MDO. The remaining loan loss reserve funds can be front loaded into the account, or built over time as microloans are made. The MDO will maintain a minimum cash balance of 5 percent of the amount owed to the Agency under this program in the LLRF at all times, including at the time of the initial and all subsequent draws, with the exception that if the LLRF falls below the required amount, the microlender will have 30 days to replenish the LLRF. The paragraph has been clarified accordingly.

Approval/Obligation (Proposed § 4280.311(g))

Comment:

One commenter pointed to the part of proposed § 4280.311(g) that states that the Request for Obligation of Funds form “may be executed by the loan approving official provided the microlender has the legal authority to contract for a loan, and to enter into required agreements.” The commenter then asked if OGC will be making the determination that the MDO has the legal authority to contract for a loan.

Response:

As indicated previously in this preamble, the interim rule now requires the MDO to submit an attorney's opinion regarding the MDO's legal status to make loans, which the Agency will use in making the determination but may consult with OGC as necessary.

Comment:

One commenter suggested replacing “loan approving official” with “Agency” for consistency within the rule.

Response:

The Agency agrees with the suggestion to replace “loan approving official” with “Agency” and has revised the paragraph accordingly.

Loan Closing (Proposed § 4280.311(h))

Comment:

One commenter suggested that the proposed rule needs to address the applicant signing a promissory note, security agreement, financing statement, etc., at loan closing.

Response:

The Agency agrees that the rule needs to identify the promissory note and security agreement and has added them accordingly.

Comment:

One commenter asked: Wouldn't the RMRF account have to be set up prior to “loan closing” because the Agency would have had to establish the electronic funds transfer (EFT)?

Response:

The Agency agrees with the commenter that the RMRF account would have to be set up prior to loan closing. Section 4280.312(c)(1) provides, in part: “Prior to loan closing, microlenders must provide evidence that the RMRF and LLRF bank accounts have been set up.” No change has been made in response to this comment.

Comment:

One commenter suggested using the term “Agency Personnel” in proposed § 4280.311(h)(2)(ii) in order to allow seamless movement of the program from the national level to the state level at a future date if necessary.

Response:

The commenter is referring to an earlier version of the proposed rule. The Agency is using the term “Agency” and that is sufficient to address the commenter's concern.

Comment:

One commenter suggested replacing “processing officer” with “Agency Official” in proposed § 4280.311(h)(4) for consistency.

Response:

The Agency agrees with the suggestion to replace “processing officer” with “Agency” and has made the change accordingly.

Comment:

One commenter asked why tax considerations were included in proposed § 4280.311(h)(4) as a reason for not approving changes (“Changes in legal entities or where tax considerations are the reason for the change will not be approved”).

Response:

The Agency does not believe it is necessary to refer to “tax considerations” as questioned by the commenter. The Agency has recast the sentence to state: “Changes in legal entities prior to loan closing will not be approved.” (

See

§ 4280.312(b).) Such a change would be considered a material change since the issuance of the letter of conditions, so the loan would not be closed.

Comment:

One commenter referred to the phrase “provide sufficient evidence” in proposed § 4280.311(h)(5) and asked what this meant. According to the commenter, this is inconsistent with other Rural Development programs.

Response:

The Agency agrees that the phrase “provide sufficient evidence” needs clarification and has revised the rule accordingly (

see

§ 4280.312(c)(3)). The Agency has determined that sufficient evidence is best demonstrated through the provision of mechanics' lien waivers. In some cases, the Agency recognizes that such waivers may not be available or applicable. In such instance, the provision of receipts of payment would suffice.

Comment:

One commenter recommended that the program require a standard closing opinion, as required under the Intermediary Relending Program via OGC standard format in order to be consistent with existing programs.

Response:

The Agency has determined that an attorney's opinion regarding the entity's legal status and its ability to enter into program transactions at the time of initial entry into the program will be required (

see

§ 4280.310(a)(4)(ii)). Subsequent to an entity's acceptance into the program, an attorney's opinion will not be required unless the Agency determines significant changes to the entity have occurred. The rule has been revised accordingly.

Report/Records/Oversight (Proposed § 4280.311(i))

Comment:

One commenter stated that the program appears to be heavily bureaucratic in terms of data collection and reporting requirements compared to the SBA Microloan program. The reporting requirements need to be streamlined and reduced so administrative costs of the MDOs can be kept lower with more focus on serving the microloan clients.

Response:

The Agency makes every attempt to streamline requirements. The portfolio reporting system for this program will be fully electronic. The grant reporting requirements are in line with Standard Federal reports. Therefore, no changes have been made in response to the comment.

Reporting Frequency

Comment:

One commenter requested that reporting be semi-annual, and not quarterly, for both loans and grants. According to the commenter, only qualified and experienced MDOs will be selected, via the scoring criteria, as lenders in the program and that, in the “spirit of non-micromanagement”, reporting should start out as semi-annual. The commenter also suggested quarterly reports until loan funds are spent by MDO and then convert to semi-annual reporting unless there are servicing or delinquency issues and then they may be reverted to quarterly reports until operations are found to be

satisfactory. Lastly, the commenter recommended that, for grants, reports be required quarterly during drawdown of the grant, and then semi-annually thereafter.

Response:

The Agency does not disagree that selected applicants will be qualified and experienced MDOs will be selected to participate. However, the level of experience may vary widely. The Agency proposed that reporting be quarterly because microloans will be short- to intermediate-term loans. With short- and intermediate-term lending, more frequent reporting (quarterly versus semi-annual) should help the microlender better manage the loan.

Comment:

One commenter was concerned with the phrase “such information as the Agency may require” (proposed § 4280.311(i)(1)(i)) and suggested that the rule needs to be specific in what information will be asked for in order to ensure consistency across the States.

Response:

The list of required reporting forms is provided in § 4280.311(h)(1) and any other requirements will be determined by the Agency as necessary based on the activities of the particular MDO.

Comment:

In reference to proposed § 4280.311(i)(4), one commenter stated that there is no “RD Form 1951-4, Report of RMAP/RMRF Lending Activity” but that there is a “Form 1951-04, Report of IRP/RDLF Lending Activity”. The commenter then asked if there is a plan to make a new form or use the existing form.

Response:

The Agency has determined that Form RD 1951-4 is no longer needed because the relevant part of that form will be moved into the Guaranteed Loan System (GLS). Thus, reference to the form has been removed from the rule and the Agency will use the GLS.

Grant Provisions (§ 4280.313)

Grant Amounts (Proposed § 4280.312(a)(1))

Comment:

Many commenters expressed concern that the proposed rule would limit technical assistance grants to $100,000 despite “clear legislative language allowing such grants up to 25 percent of outstanding loans.” Three of the commenters referred to Section 6022(b)(4)(B), stating that this section clearly states that the maximum amount of grant is “an amount equal to not more than 25 percent of the total balance of microloans made by the MDO * * * as of the date the grant is awarded.” One commenter stated that the statute does not place any limit on the amount of the grants to support rural microenterprise development. According to this commenter, the purpose statement in the law could be read to suggest that these grants should generally represent 50 percent of the program, with technical assistance and financial assistance the other 50 percent. This commenter, therefore, recommended that, at a minimum, rural microenterprise development grants to an individual MDO be capped no lower than $250,000 annually.

These commenters believe that such a cap will make it difficult for organizations to fund the staff needed to work with borrowers and other clients, noting that good business planning, skills in marketing, management, and accounting are essential to business success. Several stated that the rule should be “revised to reflect the language of the law.”

Two commenters believe that by capping technical assistance funds, the proposed rule will make it difficult for organizations to provide the services microenterprises need to succeed. Often, borrowers from this program have been deemed not creditworthy by commercial lenders. Microenterprise programs work exclusively with such borrowers and help microenterprises succeed by committing significant staff resources to training and technical assistance. A cap in technical assistance will likely result in more defaults.

Another commenter stated that this limitation ignores the possibility of high performing, successful organizations that may not be able to meet market demand for loans simply because of the limitation on technical assistance funds available. In the commenter's view, the reason for this provision was to ensure that micro-lenders had adequate financial capacity to support their loan volume. The $100,000 cap undermines this provision.

In sum, commenters requested (1) no cap, (2) using the 25 percent cap across the board, or (3) raising the limit from $100,000 to $250,000 (to be consistent with the $1 million annual RMRF limit for the MDO).

Finally, some commenters requested clarification as to whether the maximum amount of the TA grant accompany every borrowed loan; that is, if there is a separate TA grant of up to $100,000 for every loan to a microlender (in proposed § 4280.311(e)), and the proposed rule provides a maximum loan of $500,000, with an aggregate debt owed the program by any single microlender of $2,500,000, the implication is a possibility of up to five separate loans to a single microlender and the potential of up to an aggregate of $500,000 in TA grants to a single microlender). The commenters suggested that the final rule be clarified to allow the TA grant accompanying the loan to an MDO to be the maximum amount allowed by law.

Response:

The Agency has determined that the $100,000 proposed maximum could be more limiting than intended in order to provide sufficient technical assistance to microenterprises and microentrepreneurs. However, the Agency has also determined that, considering the economies of scale, funding technical assistance grants at 25 percent for all outstanding loans up to the $2.5 million maximum is unnecessary and could divert too much of the program's funds away from loan purposes. Therefore, the Agency has revised the rule to allow technical assistance grants at a rate of 25 percent for the first $400,000 of aggregate outstanding microloans owed to the microlender under this program and then 5 percent on all additional outstanding microloans owed to the microlender under this program above $400,000 up to the $2.5 million total debt cap (

see

§ 4280.313(a)(1)(i)). As a result, the maximum TA grant to any one MDO in any given year would now be $205,000. The Agency has also clarified that the TA grant amount is an annual amount, as specified in the statutory language.

Cost Share (Proposed § 4280.312(a)(2))

Comment:

One commenter was concerned with the cost share provision limiting the “Federal share” to 75 percent as it would be applied to the Freely Associated States (Republic of Palau, Republic of the Marshall Islands, and the Federated States of Micronesia). The commenter pointed out that the Freely Associated States get much of their financial support from the Compact of Free Association with the United States, which is funneled through the Department of Interior, Office of Insular Affairs. This Compact funding could be a potential source of match for the RMAP program and the commenter would hate to see it excluded. The commenter, therefore, suggested this provision be revised to reflect “Rural Development” funding.

The commenter suggested combining proposed § 4280.312(a)(2) and (a)(3) to simply say that the Agency portion cannot exceed 75 percent of the grant amount.

Lastly, one commenter stated that the math in proposed § 4280.312(a)(2) and (a)(3) does not “add up”. The commenter provided the following example: Paragraph (a)(2) states the maximum TA or enhancement grant cannot exceed 75

percent and paragraph (a)(3) states that the total matching requirement is 25 percent of the grant. If the cost of the grant project is $10,000 and the grant portion is 75 percent or ($7,500) and the match is 25 percent of the grant amount ($1,875), there is a shortage of $625 of complete funding for the project.

Response:

Federal funding may not be used as the non-Federal share or match for the RMAP program unless specifically permitted by laws other than the statute authorizing RMAP. Instead, language has been provided that clarifies the statutory language regarding cost share (

see

§ 4280.311(d)) and matching funds (

see

§ 4280.313(a)(2)). The Agency has revised the cost share and matching requirements, which address the commenters' concerns (

see

§§ 4280.311(d) and 4280.313(a)(2)).

Matching Requirements (Proposed § 4280.312(a)(3))

Comment:

One commenter suggested recasting the text to refer to the “non-Agency cash”.

Response:

With regard to the suggested text edit, the Agency has retained “non-Federal” because, with the exception of certain laws that allow the use of specific funding, other Federal funding may not be used.

Comment:

Two commenters expressed concern about an apparent inconsistency between the law and the proposed rule with respect to matching funds for the grant provisions in the RMAP.

One of the commenters referred to section 379E(c)(1)(B) of the 2008 Farm Bill, which indicates that an MDO must provide a match of 15 percent the grant amount in the form of matching funds, indirect costs, or in-kind goods or services. For both enhancement grants and for technical assistance grants, proposed § 4280.312(a)(3) states that microlenders must provide a 10 percent match against any grant and a 15 percent cash or in-kind contribution against any grant for a total matching requirement of 25 percent. The proposed rule indicates that the loan loss reserve fund does not count for this requirement. The law, however, only requires either a cash match or an in-kind contribution. According to this commenter, there seems to be an inconsistency between the law and the proposed rule. For an MDO, the difference could have serious ramifications. Rural MDOs are challenged by the relative lack of local foundations, the fact that fewer corporations are headquartered in rural areas, and continually strained state budgets. The commenter, therefore, recommended that the Agency clarify the matching requirement, which the commenter understands—based on the law—to be a 15 percent match in the form of cash or in-kind funds.

The other commenter also noted that for both enhancement grants and for TA grants, the proposed rule states that microlenders must provide a 10 percent match against any grant and a 15 percent cash or in-kind contribution against any grant for a total matching requirement of 25 percent. The LLRF does not count for this requirement (proposed § 4280.312(a)(3)). The law, however, only requires either a cash match or an in-kind contribution; not both (section 379E(c)(1)(C)).

Lastly, one commenter noted that the law authorizes the use of CDBGs for use as a non-federal match. The commenter thus recommended that the Agency should include this in the final rule.

Response:

The Agency has revised the non-Federal share and matching requirements, which address the commenters' concerns.

With regard to the CDBG comment, when permitted by laws other than the statute authorizing RMAP, Federal funding may be used as the non-Federal share or match for the RMAP program.

Oversight (Proposed § 4280.312(a)(4))

Comment:

One commenter noted that the proposed rule already has provisions for oversight at proposed § 4280.311(i) and suggested combining the two provisions.

Response:

The oversight provisions the commenter is referring to in proposed § 4280.311(i) apply to loans. The oversight provisions in proposed § 4280.312(a)(4) apply to grants. Because the provisions are different and apply to two different types of financial assistance, the Agency has not combined the two paragraphs as suggested by the commenter. However, the Agency has determined that there is no need for two grant oversight paragraphs found in proposed §§ 4280.312(a)(4) and 4280.320(a). Therefore, the Agency has deleted the first occurrence so that all grant oversight provisions are found in § 4280.320(a).

Comment:

In reference to proposed § 4280.312(a)(4)(i), one commenter asked if the reporting will be with SF-269, “Financial Status Report,” (Long Form) or (Short Form). The commenter also asked if this was in addition to the narrative and to Form RD 1951-4.

Response:

The SF-269 has been replaced with SF-PPR, “Performance Progress Report.” The new form will be submitted in conjunction with the narrative. As noted in a previous response, the Agency has determined that Form 1951-4 is no longer needed because the relevant part of that form will be moved into GLS.

Comment:

In reference to proposed § 4280.312(a)(4)(iii), one commenter suggested adding “as revised” after the reference to “OMB Circulars A-102 and A-110.”

Response:

The Agency has replaced reference to these specific circulars with a more general reference to OMB circulars and regulations, eliminating the need to add the language suggested by the commenter.

Comment:

One commenter suggested that all reporting requirements should be listed in one section and not spread out.

Response:

While the Agency agrees with the commenter, the Agency will address this in regulatory instructions.

Administrative Expenses (Proposed § 4280.312(a)(5))

Comment:

One commenter stated that there is a need for additional clarity about what the technical assistance grant may be used for. According to the commenter, the limitation at proposed § 4280.312(a)(5) that not more than 10 percent of the technical assistance grant be used for administrative costs is confusing and problematic. The commenter stated that an MDO should be able to use its technical assistance grant to pay for all of the costs associated with providing a functional staff to provide technical assistance to microentrepreneurs. Such costs should be expressly allowed and not be governed by the 10 percent figure.

Response:

The Agency acknowledges that intensive technical assistance is widely recognized in the microlending community as a critical component to the success of potential and existing microborrowers. The 10 percent limitation is statutory (section 379E(b)(4)(C)). With regard to the commenter's request for additional clarity, the Agency disagrees that the rule is not sufficiently clear as to what the technical assistance grant may be used for and no changes have been made to the rule in response to this comment.

Enhancement Grants (Proposed § 4280.312(b))

Comment:

One commenter stated that the enhancement grant is an unnecessary diversion of scarce RMAP funds. Enhancement grants as proposed are small ($25,000) and limited to the purpose of building MDO capacity. There are other USDA Rural Development programs available to do this—RBEG, RBOG, Rural Community

Development Initiative (RCDI)—as well as other sources from other funders and federal programs. There is no expressed requirement in the statute to create an Enhancement Grant program, and it would be a much better approach to direct all of the scarce RMAP grants to supporting the MDO's who are actually making microloans instead.

One commenter suggested an optional approach to provide enhancement grants, recommending that the rule allow the Agency to make larger enhancement grants to microlenders that, on a competitive basis, will select a group of rural microlenders to provide a platform for group, individual, and peer-to-peer enhancement services. The commenter referred to the U.S. Small Business Administration's Program for Investment in Microentrepreneurs (PRIME) as an example of such an approach.

Response:

The Agency disagrees with the commenter concerning the statutory basis for the “enhancement grant” program. The statute states at section 379E(b)(4)(A)(i)(II): “Carry out such other projects and activities as the Secretary determines appropriate to further the purpose of the program.” However, because opinions differ widely on how best to approach an enhancement grant category to this program, the Agency is requesting comments on this subject (

see

Section V of this preamble). Comments will be considered prior to publication of the final rule.

Technical Assistance Grants (Proposed § 4280.312(c))

Comment:

One commenter noted that this section states that TA grants will be based on the loan amount made to an MDO “in accordance with the statute.” The statute does not at any time state that TA grants should be calculated in this manner; however, the report language does allow for this mechanism.

Response:

The statute states at section 379E(b)(4)(B)(ii): “Maximum amount of grant. A microenterprise development organization shall be eligible to receive an annual grant under this subparagraph in an amount equal to not more than 25 percent of the total outstanding balance of microloans made by the microenterprise development organization under paragraph (3), as of the date the grant is awarded.” While the text in the preamble to which the commenter is referring may not reflect this statutory provision clearly, this is the statutory language on which the statement in question was made. The Agency will ensure clarity in the interim rule.

Comment:

Several commenters noted that this section does not address borrowers who are “seeking a loan from an MDO”; that it addresses only people who have received one or more microloans and that this is in contradiction to the statute authorizing the program. As one of the commenters stated: This section of the proposed rule states that TA grants can only be used for people that have “received one or more microloans” from the MDO. However, the law also allows these TA grant funds to be used for services to microentrepreneurs that “are seeking a loan from the” MDO (Section 6022(b)(4)(B)(i)(II)). The law clearly intends to support microentrepreneurs who are owners and operators of rural businesses or prospective owners and operators of rural businesses. The definition of “microentrepreneur” in both the law and Proposed Rule include both types of microentrepreneurs. This section would ignore the need for technical assistance for prospective microborrowers as contemplated by the law. The commenters suggested that the final rule be modified to conform to the law.

One commenter also stated that, in practical terms, most microentrepreneurs seeking a loan need technical assistance to complete the loan process, and it is often difficult for MDO lenders to determine in advance whether an applicant will successfully complete the borrowing process. In fact, in some cases, well-crafted pre-loan assistance will enable a microentrepreneur to determine a means to grow or stabilize their business without taking on the risk of a loan, and as a result they will choose not to borrow.

Response:

The Agency agrees with the commenters that the rule should include these entities and has so modified the rule (

see

§ 4280.313(b)(1)).

Disbursement of TA Grant (Proposed § 4280.312(c)(2))

Comment:

Several commenters discussed the manner proposed for disbursing TA grants. Four suggested that the TA grant be a full year grant and not based on the microloans made for the first year. Another similarly recommended that, during the first year of an intermediary's participation in RMAP, the TA grant should be a full year grant based on the amount of the loan to the intermediary.

Commenters noted that this section of the proposed rule states that during the first year of operation the disbursement of TA grants to MDOs shall be a percentage based on the amount of the loan to the microlender, but will be disbursed on a quarterly basis based on the amount of microloans made. This limitation of TA grant disbursement will limit the amount of technical assistance an MDO can offer to borrowers or potential borrowers. In the long-run it could affect the pipeline of microloan borrowers, something about which the proposed rule is concerned in other sections.

One commenter stated that the manner for disbursement of funds needs to be clearer. This commenter states that it appears that the proposed rule envisions awarding TA grants only in conjunction with the award of RMAP loan funds. Initially this certainly makes sense, but in years after an RMAP fund is established, it is still desirable to provide TA grant support. In fact, it would be ideal if an RMAP MDO, once funded, could depend upon rather than compete for TA grants. A possible structure might be to award a TA grant equal to 25 percent of the RMAP loan award in Year 1, with a commitment that provided the MDO makes satisfactory progress, it will be noncompetitively awarded a subsequent TA grant in Years 2, 3, and 4 equal to 20 percent, 15 percent, and 10 percent respectively of their RMAP microloan portfolio. This will have the effect of creating incentives for the MDO to get their RMAP funds loaned out quickly (since the size of subsequent TA grants will be pegged to their portfolio size) and will provide a reliable funding stream with the understanding that the RMAP MDO will need to get established internally and gradually come to rely less on RMAP TA grant. (It should be noted that there is a precedent for Rural Development awarding grants for multi-year terms—

e.g.,

the Section 523 Self-Help TA program. A similar approach would make sense for the RMAP TA grant.)

A sixth commenter recommended that the TA grant structure allow for the training and technical assistance of prospective microentrepreneurs as well as existing microentrepreneurs by awarding TA grants quarterly or annually, based on statutory allowances, program performance, and demonstrated need.

Response:

With regard to the initial (first year) grant, the amount will be calculated against the initial loan amount. With regard to the manner of disbursement, these will coincide with loan disbursements to ensure that funds are available for microlending for loan ready clients, that these clients can receive post loan technical assistance, and that incoming clients can also receive technical assistance. This will allow the initial disbursement of grant

dollars in advance with the remaining quarters to be funded in reimbursement. The Agency notes that quarterly disbursements do not imply that one-quarter of the grant will be disbursed each quarter. If an MDO needs, for example, 50 percent of the grant in the first quarter, the rule allows the Agency to provide that amount in the first quarter.

Overall, the Agency is satisfied that the proposed distribution of money is sufficient for participating MDOs to implement technical assistance associated with loans made under this program. As the program matures, the Agency will evaluate this method of disbursement.

MDO Application and Submission Information (§ 4280.315)

Comment:

One commenter noted that the application content specified in USDA Rural Development's IRP regulation (7 CFR 4274.338, including the use of the IRP application—Form RD 4274-1) provides a detailed, well-understood, and complete set of all of the information needed for a revolving loan fund loan application. The commenter recommended using this form in lieu of the SF-424 as specified in § 4280.315.

Response:

The Agency disagrees with the commenter's recommendation because this program is not meant to replicate the IRP program. The program information requested by the Agency will provide the data necessary to appropriately evaluate applicants for this program.

Submission Requirements (Proposed § 4280.315(c))

Comment:

One commenter was concerned that the submission requirements did not include mention of a narrative, detailed budget, and submission of lending and servicing policies.

Response:

As proposed, there were several places within § 4280.316 that asked for a narrative. In addition, financial information was requested in proposed § 4280.316(a)(5) and loan policies and procedures were requested in proposed § 4280.316(a)(2). These provisions have been retained and appropriate reference to § 4280.316 has been added to § 4280.315 for clarity.

Comment:

One commenter asked why the proposed rule did not ask for organizational documents and suggested that it be added to the list of documents to be submitted. According to the commenter, organization documents should be submitted to Agency personnel for analysis and eligibility determination. Another commenter suggested adding organizational documents as an additional documentation requirement.

Response:

As proposed, the rule requested organizational documents in § 4280.316(a)(1) as part of the application. This has been retained and an appropriate reference has been added to § 4280.315(d)(1).

Comment:

One commenter suggested using the certification under 1940-Q instead of Form SF LLL. According to the commenter, 1940-Q is used more frequently than SF LLL.

Response:

While the commenter is correct in that either the certification under 1940-Q or Form SF LLL can be used, the Agency prefers to use SF LLL because it is shorter, meets the needs of the Agency, and is consistent with the Agency's other grant programs. Therefore, the reference to SF LLL has been retained in the interim rule.

Additional Documentation (Proposed § 4280.315(d))

Comment:

One commenter recommended adding the following requirement for additional documentation: “Applicants are strongly encouraged to review the scoring criteria and provide documentation that will support the score.” According to the commenter, this needs to be brought to the applicant's attention or they will look only at the application submission requirements and not provide sufficient information for scoring or a successful application. There is a disconnect in many of our programs between “scope of work requirements” and “scoring criteria”. We need to do a better job of having applicants address burdensome scoring data—particularly with a program that is going to be administered at the National level initially.

Response:

The Agency agrees with the commenter that the proposed text would be useful to help ensure receipt of better applications and has modified the rule accordingly with reference to the additional application requirements in § 4280.316.

Comment:

In reference to proposed § 4280.315(d)(1)(i), one commenter expressed concern that the requirement for copies of an applicant's IRS designation as a non-profit would effectively block all non-profits in the Freely Associated States from being eligible. The commenter asked: Why not just get an OGC opinion similar to the Community Facilities program?

Response:

The Agency agrees with the commenter's concern. As noted previously in a response to a comment on the definition of “nonprofit entity,” the Agency has revised this requirement (found in § 4280.315(c)(8)(ii)) to, in part, remove reference to the IRS.

Comment:

In reference to proposed § 4280.315(d)(1)(iv), one commenter suggested adding the words “not more than 6 months old” after “A Certificate of Good Standing.”

Response:

The Agency agrees with the commenter's suggestion that the certificate of good standing not be more than 6 months old and has revised the rule accordingly.

Comment:

Another commenter expressed concern with the requirement that the Certificate of Good Standing come from the applicant's home state's Office of the Secretary of State. According to the commenter, the commenter's State does not provide these certificates to institutions of higher education and doubted that other States would do so for an Indian tribe within their borders.

Response:

The Agency understands the commenter's concern. As a result, the language has been altered to exclude the need of a Certificate of Good Standing for institutions of higher education and for Indian tribes.

Application Scoring (§ 4280.316)

Comment:

One commenter stated that a new application scoring process will be needed if the Agency includes in the rule grants to MDOs solely for the purpose of the provision of training, technical assistance, and other business development services to microentrepreneurs.

Response:

As noted in a response to previous comments, the Agency is including such grants in the rule and has provided a new application scoring system for these grants (

see

§ 4280.316(d)).

Past Experience Requirement

Comment:

Many commenters expressed concern over the proposed rule's emphasis on an MDO's past experience, especially in rural areas, when scoring applications.

Commenters, in general, were concerned with the proposed scoring that would enable MDOs with past experience and those currently operating in rural areas to be awarded more points (and thus be able to score higher) than to those MDOs that do not. According to the commenters, such scoring would not only put urban MDOs at a disadvantage, but would also discourage their expansion into rural areas.

Several commenters also stated that the proposed rule does not adequately account for MDOs creating and proposing an effective plan for providing services to rural areas. By

awarding points to MDOs with past experience, the proposed rule puts rural MDOs who want to add microenterprise services at a disadvantage. As one commenter stated, an MDO with a proven microenterprise track record that has a viable plan to now provide lending services may be prohibited from doing so by the scoring rules, thus potentially denying microlending services to an unserved or underserved rural area.

In sum, these commenters stated that, if RMAP is to succeed, it must prompt both the development of new services by existing providers of a single service and the expansion of existing urban programs into rural areas. The commenters believe that the rule as proposed would discourage both and thereby undermine the success of RMAP in achieving the purposes for which it was created.

On the other hand, another commenter urged the Agency to maintain a strong commitment to supporting microlenders who are located in and predominantly serve rural communities. While understanding the interests of some to incentivize urban-based microlenders to expand their lending territories into rural communities, this commenter believes that the best service providers are locally based, have strong ties to their rural communities, and are intimately connected with the rural economies they serve. The commenter further believes that the greatest benefit to rural entrepreneurs will be felt through building the capacity of rural-based microlenders, not through additional outreach from urban markets and asks that the Agency preserve priority for microlending organizations having a strong history with, and a clear commitment to, rural communities.

Response:

The Agency understands and recognizes the commenter's concern as it regards MDOs with more than 3 years experience, but without rural area experience. However, it is specifically the intent of RMAP to leverage as much as possible the existing rural development experience of MDOs and to serve, exclusively, rural areas.

Further, if the MDO has 3 years or less experience, the scoring does not take into account past experience in making loans to rural areas or to rural microentrepreneurs. Thus, RMAP does not discourage the development of new providers as suggested by the commenter.

Finally, each of the categories of prospective participants adds up to a total score of 100 points so that no category of applicants will have any advantage over another category of applicants.

Too Complex/Replace Scoring System

Comment:

One commenter stated that the proposed scoring system is overly elaborate and complex, and it will not really single out projects with the greatest merit. This commenter recommended replacing the proposed scoring system with a much simpler system that is based on only three factors: Leverage of USDA funds (Matching Funds); Prospect for Success (Experience and Track Record); and Targeted Groups (Outmigration/Minority Focus).

Response:

The commenter's suggested three factors are included in the scoring criteria. The Agency believes that some level of detail, in addition to those three factors, regarding applicant capabilities, legal status, historical performance, and other details are important in determining the applicant's abilities to make and service microloans, provide technical assistance, and facilitate access to capital. Therefore, the scoring criteria have been designed to provide the Agency with in-depth information regarding each applicant and help ensure the success of the program and its end user clients.

Subjective Scoring Criteria

Comment:

Two commenters stated that numerous criteria are subjective and may lead to inconsistent or unreliable scoring, particularly if reviewers were to lack familiarity with rural microlending management best practices. One of the commenters specifically stated that the criteria found in proposed § 4280.316(c)(1), (3), (5), (6), and (7) are highly subjective and scoring may vary greatly from individual reviewer to individual reviewer.

Response:

The Agency disagrees that these provisions are unduly subjective and will result in inconsistent scoring. Because the same staff within the National Office will score all applications as the program is implemented, the Agency can ensure consistent and reliable scoring. As the program matures, the Agency may have State office personnel score RMAP applications. At the time of publication of the final rule, the Agency will publish detailed regulatory instructions with guidance on scoring to help ensure consistency across the State offices.

Points for Partnering

Comment:

Two commenters suggested awarding points for partnering. The commenters noted that under proposed § 4280.316(a) no points will be awarded based on the capacity of the applicant to partner with key local, regional, and statewide stakeholders that can help MDOs succeed in their mission. Most successful economic development efforts are due to key local, regional and statewide partnerships that bring together community stakeholders engaged in economic development efforts. These partnerships provide MDOs with additional sources of financing, technical assistance and buy-in from economic development agencies that are critical to program success. They also help to ensure that MDOs are not working in a vacuum or duplicating services that are alread

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