# Guaranteed Loanmaking and Servicing Regulations

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2014-21351

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** September 15, 2014
- **Citation:** 79 FR 55316

## Text

DEPARTMENT OF AGRICULTURE
Rural Business-Cooperative Service
Rural Utilities Service
7 CFR Parts 4279 and 4287
RIN 0570-AA85
Guaranteed Loanmaking and Servicing Regulations

AGENCY:

Rural Business-Cooperative Service and Rural Utilities Service, USDA.

ACTION:

Proposed rule.

SUMMARY:

The Rural Business-Cooperative Service (Agency) is an agency within the Rural Development mission area of the United States Department of Agriculture (USDA) responsible for administering the Business and Industry (B&I) Guaranteed Loan Program. The B&I Guaranteed Loan Program is authorized by the Consolidated Farm and Rural Development Act and provides loan guarantees to banks and other approved lenders to finance private businesses located in rural areas.

The Agency is proposing changes to refine the regulations for the B&I Guaranteed Loan Program in an effort to improve program delivery, clarify the regulations to make them easier to understand, and reduce delinquencies. The proposed changes to the program are expected to reduce the subsidy rate and thereby lower program subsidy costs over time as the proposed rule is implemented. By lowering the subsidy rate, the Agency may be able to provide greater leverage for the budget authority provided by Congress. This will allow the Agency to guarantee a higher total dollar amount of loan requests and, assuming the same average size of loans being guaranteed, to guarantee more loans. These changes could also result in increased lending activity, expanded business opportunities, and creation of more jobs in rural areas.

DATES:

Comments on the proposed rule must be received on or before November 14, 2014. The comment period for the information collection under the Paperwork Reduction Act of 1995 continues through November 14, 2014.

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 with a copy to Brenda Griffin, Rural Development, Business Programs, U.S. Department of Agriculture, 1400 Independence Avenue SW., Stop 3224, Washington, DC 20250-3224.

•
Hand Delivery/Courier:
Submit written comments via Federal Express Mail or other courier service requiring a street address to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, 300 7th Street SW., 7th Floor, Washington, DC 20024 with a copy to Brenda Griffin, Rural Development, Business Programs, U.S. Department of Agriculture, 1400 Independence Avenue SW., Room 6847, Washington, DC 20250-3224.

All written comments will be available for public inspection during regular work hours at the 300 7th Street SW., 7th Floor address listed above. Comments will also be available through regulations.gov referencing RIN number 0570-AA85.

FOR FURTHER INFORMATION CONTACT:

Brenda Griffin, Rural Development, Business Programs, U.S. Department of Agriculture, 1400 Independence Avenue SW., Stop 3224, Washington, DC 20250-3224; email:
brenda.griffin@wdc.usda.gov;
telephone (202) 720-6802.

I. SUPPLEMENTARY INFORMATION

Executive Order 12866, Regulatory Planning and Review

This proposed rule has been reviewed under Executive Order (EO) 12866 and has been determined to be significant. The EO defines a “economically significant regulatory action” as one that is likely to result in a rule that may have an annual effect on the economy of $100 million or more or adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities. The actions in this rule collectively are not expected to have an impact of $100 million or more, which negates the need for a more detailed assessment of likely benefits and costs and analysis of potentially effective and reasonably feasible alternatives.

Programs Affected

The Catalog of Federal Domestic Assistance program number assigned to the B&I Guaranteed Loan Program is 10.768.

Executive Order 12372, Intergovernmental Review of Federal Programs

B&I Guaranteed Loans are subject to the Provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials. The Agency will conduct intergovernmental consultation in the manner delineated in 7 CFR part 3015, subpart V, or successor regulations.

Executive Order 12988, Civil Justice Reform

This rule has been reviewed under Executive Order 12988, Civil Justice Reform. The Agency has determined that this rule meets the applicable standards provided in section 3 of the Executive Order. Additionally, (1) all state and local laws and regulations that are in conflict with this rule will be preempted; (2) no retroactive effect will be given to the rule; and (3) administrative appeal procedures, if any, must be exhausted before litigation against the Department or its agencies may be initiated, in accordance with the regulations of the National Appeals Division of USDA at 7 CFR part 11.

Executive Order 13132, Federalism

The policies contained in this proposed rule do not have any substantial direct effect on states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government. Nor does this proposed rule impose substantial direct compliance costs on state and local governments. Therefore, consultation with states is not required.

Executive Order 13175, Consultation and Coordination With Indian Tribal Governments

This executive order imposes requirements on the Agency in the development of regulatory policies that have tribal implications or preempt tribal laws. Rural Development has determined that this 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 Indian tribes. Thus, this proposed rule is not subject to the requirements of Executive Order 13175. If a tribe determines that this rule has implications of which Rural Development is not aware and would like to engage with Rural Development on this rule, please contact Rural Development's Native American Coordinator at (720) 544-2911 or
AIAN@wdc.usda.gov.

Regulatory Flexibility Act

Under section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 605(b), the Agency certifies that this rule will not have a significant economic impact on a substantial number of small entities. This proposed rule affects lenders that utilize the B&I Guaranteed Loan Program and any potential lenders that may utilize the program in the future. There are currently 1,117 active lenders in the B&I portfolio. The Agency estimates that approximately 50 percent of the lenders that utilize the program are small community banks that are considered a small entity, as defined by the Regulatory Flexibility Act. Therefore, the Agency has determined that this proposed rule will have an impact on a substantial number of small entities.

However, the Agency has determined that the economic impact of the proposed rule on these small lenders will not be significant. Many of the changes being implemented in the rule are tweaks to the program that lenders have suggested at a series of lender roundtable meetings or during annual lender visits that do not have any economic impact on the lenders. The most significant change in the rule that affects lenders is the criteria to become an approved non-regulated lender. This change by itself, however, does not have a significant economic impact on a substantial number of entities as it affects less than 2 percent of the active lenders (approximately 21 non-regulated lenders). Based on the data in the Paperwork Reduction Act (PRA) burden package, the Agency estimates the cost of the proposed rule to be approximately $1,600 per lender. This is based on determining which of the estimated costs in the PRA burden package would be incurred by the lenders applying for and participating in the program, and the estimated number of lenders. SBA's definition of a small business for lenders is total assets of $500 million or less. The Agency selected 20 small lenders at random to determine their total assets. Based on 2014 data, the range of total assets for these 20 lenders is $52.6 million to $476 million. The average cost of $1,600 per lender represents less than 0.003% of the total assets of the smallest of these 20 lenders. Therefore, this rule will not have a significant impact on a substantial number of small entities.

Unfunded Mandates Reform Act

This rule contains no Federal mandates (under the regulatory provisions of Title II of the Unfunded Mandates Reform Act of 1995) for State, local, and tribal governments or the private sector. Thus, this rule is not subject to the requirements of sections 202 and 205 of the Unfunded Mandates Reform Act of 1995.

Environmental Impact Statement

This rule has been reviewed in accordance with 7 CFR part 1940, subpart G, “Environmental Program.” The Agency 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 Protection Policy Act of 1969 (NEPA), 42 U.S.C. 4321
et seq.,
an Environmental Impact Statement is not required.

Under this program, the Agency conducts a NEPA review for each application received. To date, no significant environmental impacts have been reported, and Findings of No Significant Impact (FONSI) have been issued for each approved application. Taken collectively, the applications show limited potential for significant adverse cumulative effects.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995, the Rural Business-Cooperative Service announces its intention to seek OMB approval of the new reporting and recordkeeping requirements contained in this regulation.

The following estimates are based on an estimated volume of activity of 100 preapplications, 600 applications, and 550 new loan guarantees. Preapplications are not required and are submitted at the option of the lender. The purpose of a preapplication is to allow a lender to submit a limited amount of information, most of which should be easily obtained, so that the Agency can determine and advise the lender whether the request is likely to meet the requirements of the program. Some lenders will skip the preapplication process and submit a full application as the first contact with the Agency. If the information is submitted in a preapplication, it would not need to be resubmitted in the application unless the financials become more than 90 days old between the time of preapplication and application. Applications are evaluated by the Agency to determine whether the borrower is eligible, the proposed loan is for an eligible purpose, there is reasonable assurance of repayment ability, there is sufficient collateral and equity, and the proposed loan complies with all applicable statutes and regulations.

Estimate of Burden:
Public reporting burden for the additional proposed requirements will increase the current collection of information by an estimated total of 5,111 hours. The Agency anticipates the number of respondents to fluctuate based on funding levels. The average burden per respondent under the current rule is estimated to be 8 hours, and the average burden under the proposed rule is estimated to be 11 hours, for an estimated increase of 3 hours per respondent.

Respondents:
Primary respondents for this data are lending institutions and rural for profit businesses but also include individuals, non-profit businesses, Indian tribes, public bodies, and cooperatives. The estimates below are for all three subparts associated with this rule and include the additional proposed requirements.

Estimated Number of Respondents:
3,675.

Estimated Number of Responses per Respondent:
1-4.

Estimated Number of Responses:
27,076.

Estimated Total Annual Burden (hours) on Respondents:
40,511.

Copies of this information collection can be obtained from Jeanne Jacobs, Regulations and Paperwork Management Branch, Support Services Division, U.S. Department of Agriculture, Rural Development, STOP 0742, 1400 Independence Ave. SW., Washington, DC 20250-0742 or by calling (202) 692-0040.

Comments

Comments are invited on: (a) The accuracy of the new Rural Development estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (b) ways to enhance the quality, utility, and clarity of the information to be collected; and (c) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology. Comments may be sent to Jeanne Jacobs, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, Rural Development, STOP 0742, 1400 Independence Ave. SW., Washington, DC 20250. All responses to this proposed rule will be summarized and included in the request for OMB approval. All comments will also become a matter of public record. Comments can be viewed at

regulations.gov under RIN number 0570-AA85.

E-Government Act Compliance

Rural Development is committed to complying with the E-Government Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes.

II. Background

Rural Development administers a multitude of Federal programs for the benefit of rural America, ranging from housing and community facilities to infrastructure and business development. Its mission is to increase economic opportunity and improve the quality of life in rural communities by providing the leadership, infrastructure, access to capital, and technical support that enables rural communities to prosper. To achieve its mission, Rural Development provides financial support—including direct loans, grants, and loan guarantees—and technical assistance to help improve the quality of life and provide the foundation for economic development in rural areas.

The B&I Guaranteed Loan Program was authorized by the Rural Development Act of 1972. The loans are made by private lenders to rural businesses for the purpose of creating new businesses, expanding existing businesses, and for other purposes that create employment opportunities in rural America. Businesses in rural areas are eligible for this program. Rural area, as defined by 7 CFR 4279.108(c), is defined as any area other than a city or town of more than 50,000 inhabitants and the urbanized area contiguous and adjacent to such a city or town. The types of borrowers that are served by the B&I Guaranteed Loan Program are cooperative organizations, corporations, partnerships, or other legal entities organized and operated on a profit or nonprofit basis; an Indian tribe on a Federal or State reservation or other Federally recognized tribal group; a public body; or an individual, provided the borrower is engage in, or proposing to engage, in a business. Loans can be made for a variety of purposes including business acquisition, expansion or improvement; purchase of real estate, machinery and equipment, or supplies; debt refinancing; and working capital. The rate and term of the loan is negotiated between the business and the lender.

The regulations for the B&I Guaranteed Loan Program were rewritten in 1996 to streamline and simplify the regulations for the program while shifting primary responsibility for loan documentation and analysis from the Agency to the lenders to make the program more responsive to the needs of lenders and rural businesses.

III. Executive Summary

Purpose of the Regulatory Action

The Agency is promulgating these regulations to improve program delivery, clarify the regulations to make them easier to understand, and reduce delinquencies. The changes should reduce the cash outflows and increase the cash inflows associated with the B&I Guaranteed Loan Program portfolio, resulting in a lower subsidy rate. A lower subsidy rate should result in increased lending activity, the expansion of business opportunities, and the creation of more jobs in rural areas. Changes proposed originated from informal third party comments and Agency experience in administering the program, including observations from assessment reviews and recommendations from the Agency's internal Business Programs Advisory Team.

The Agency believes the proposed changes in the rule may increase lending activity, resulting in the expansion of business opportunities and the creation of more jobs in rural America, and improve the program's effectiveness by improving the prosperity of rural residents through guarantees of targeted investments that may improve rural competitiveness, facilitate industrial conversion, and enable rural residents to profit from private sector activity. The revisions contained herein may improve the efficiency and effectiveness of the program and make the regulation more customer friendly and easier to understand. The Agency thinks that errors may be reduced because the guidelines and requirements will be clearer and better organized.

The proposed rule's incremental effect to the public will be to nominally increase the burden for lenders seeking to be an eligible lender and for “new” investors in projects that receive B&I loan guarantees after the Loan Note Guarantee is issued by a total of approximately $4,800 per year. The cost to participating lenders and borrowers was estimated to be approximately $2.5 million. The cost to the Federal government to administer the program was estimated to be approximately $2.1 million.

Summary of the Major Provisions of the Regulatory Action

This proposed rule is intended to replace the B&I Guaranteed Loan Program regulations under 7 CFR parts 4279 and 4287, which will not significantly depart from the current program of loan guarantees for businesses in rural areas.

The rule will strengthen criteria for non-regulated lenders to participate in the program. It will also codify provisions of the 2008 Farm Bill, including two types of rural area exceptions and eligibility of local foods projects and cooperative equity security guarantees. The rule also includes provisions for New Markets Tax Credits and the Cooperative Stock Purchase Program. Changes are also made to the loan scoring criteria. Loan servicing changes include the termination of interest accrual to the lender after 90 days from the delinquency effective date or to a holder 90 days from the date of the first demand letter from any holder of the guaranteed portion. Additionally, attorney/legal fees that the lender can claim in the liquidation process will be reduced from full reimbursement to being shared equally between the lender and the Agency. The rule also adds the ability to obtain personal and corporate guarantees from those owning 20 percent of the business when there is a sale of the borrower's stock.

IV. Discussion of the Proposed Rule

Following is a discussion of some of the most significant policy revisions included in this proposed rule.

Eligible lenders for the program include regulated lenders (formerly known as “traditional lenders”) and Agency-approved non-regulated lenders (formerly known as “other lenders”). Insurance companies will no longer be considered traditional or regulated lenders under the program because historically, insurance companies have had significant default and loss rates in the Agency B&I Guaranteed Loan portfolio. However, insurance companies will be able to apply to become Agency-approved eligible lenders by meeting criteria of a non-regulated lender established in the regulation. Lenders will have to execute a new Lender's Agreement to originate new guaranteed loans; however, existing lenders are bound by their existing Lender's Agreements and must continue to service existing guaranteed loans in their portfolio regardless of whether they wish to originate new guaranteed loans.

Criteria to become an approved non-regulated lender for the B&I program

will be strengthened under this proposed rule due to higher than usual default and loss rates for this type of lender in the Agency B&I Guaranteed Loan portfolio. Non-regulated lenders will be able to become eligible lenders for a 3-year period and may request renewals to continue originating loans under the program. Non-regulated lenders will have to have and maintain 10 percent tangible balance sheet equity, which is up from the 7 percent previously required. Non-regulated lenders will have to have a record of successfully making at least 10 commercial loans annually totaling at least $1 million for each of the last 5 years, with lender's delinquent commercial loan portfolio over that period not exceeding 6 percent of all commercial loans made and 3 percent in commercial loan losses based on the original principal loan amount. In addition, non-regulated lenders will have to maintain a loss reserve and undergo a credit examination that must be acceptable to the Agency. These requirements are being strengthened to ensure participation in the program by lenders that have a thorough knowledge of commercial lending and high standards of professional competence to operate a successful lending program.

Under the B&I program, a rural area is generally any area of a State other than a city or town that has a population of greater than 50,000 inhabitants and any urbanized area contiguous and adjacent to such a city or town. In making this determination, the Agency will use the latest decennial census from the U.S. Census Bureau. The 2008 Farm Bill added the ability to make two different types of rural area exceptions, which was incorporated into the Consolidated Farm and Rural Development Act. Section 343(a)(13)(E) of the Consolidated Farm and Rural Development Act states: “Notwithstanding any other provision of this definition, in determining which census blocks in an urbanized area are not in a rural area, the Agency shall exclude any cluster of census blocks that would otherwise be considered not in a rural area only because the cluster is adjacent to not more than two census blocks that are otherwise considered not in a rural area under this definition.” Additionally, the Under Secretary for Rural Development may determine that areas are “rural in character,” and therefore eligible for the program, under certain circumstances. Any determination made by the Under Secretary under this provision will be to areas that are determined to be “rural in character” in accordance with Section 343(a)(13)(D) of the Consolidated Farm and Rural Development Act and are within: (1) An urbanized area that has two points on its boundary that are at least 40 miles apart, which is not contiguous or adjacent to a city or town that has a population of greater than 150,000 inhabitants or the urbanized area of such city or town; or (2) an area within an urbanized area contiguous and adjacent to a city or town of greater than 50,000 inhabitants that is within a quarter mile of a rural area.

Presently, corporations or other non public-body type borrowers must be at least 51 percent owned by persons who are either citizens of the U.S. or reside in the U.S. after being legally admitted for permanent residence to be eligible borrowers under the B&I program. The Agency is inviting public comment on whether guaranteed loans should be made to businesses that do not meet this requirement, if the facility being financed will create new or save existing jobs for rural U.S. residents and when loan funds are used only for fixed assets that will remain in the U.S. This could provide flexibility to create or save jobs in rural areas when the business is owned, in whole or in part, by a foreign interest.

The eligibility section is proposed to be revised to include cooperative equity security guarantees as eligible loan purposes in accordance with the 2008 Farm Bill. Separate sections of the regulation specifically address the requirements for New Markets Tax Credits and cooperative equity security guarantees, as well as requirements for the cooperative stock purchase program.

The eligibility section is being revised to include projects that process, distribute, aggregate, store, and/or market locally or regionally produced agricultural food products to support community development and farm and ranch income. This is also a provision of the 2008 Farm Bill. The term “locally or regionally produced agricultural food product” means any agricultural food product that is raised, produced, and distributed in the locality or region in which the final product is marketed, so that the distance the product is transported is less than 400 miles from the origin of the product or within the State in which the product is produced, as defined by Section 310B(g)(9)(A)(i) of the Consolidated Farm and Rural Development Act. Food products could be raw, cooked, or a processed edible substance, beverage, or ingredient used or intended for use or for sale in whole or in part for human consumption. A significant amount of the food product sold by the borrower must be locally or regionally produced, and a significant amount of the locally or regionally produced food product must be sold locally or regionally. Projects in non-rural areas may be included when the project provides an economic benefit to the surrounding rural communities. Funding priority will be given to projects that provide a benefit to underserved communities. In accordance with Section 310B(g)(9)(A)(ii) of the Consolidated Farm and Rural Development Act, an underserved community is a community (including an urban or rural community and an Indian tribal community) that has limited access to affordable, healthy foods, including fresh fruits and vegetables, in grocery retail stores or farmer to consumer direct markets and that has either a high rate of hunger or food insecurity or a high poverty rate as reflected in the most recent decennial census.

The ineligible loan purpose section is being modified to permit distribution or payment to an immediate family member of the owner to accommodate intergenerational business acquisitions. Previously, no loan proceeds could be distributed to a close relative of the owner who retained an ownership interest in the borrower. This is being changed so that an immediate family member of the owner, partner, or stockholder can purchase the business from an owner, partner or stockholder when the seller does not retain an ownership interest and the Agency determines the price paid to be reasonable.

A definition for a high priority project is being added to the rule. A high priority project is defined in the proposed rule as one that scores more than half of the points available under the scoring criteria outlined in the priority scoring section.

In an effort to reduce the cost for the taxpayer, 90 percent guarantees will be limited to loans of $5 million and less that are either high priority projects or where the lender needs the higher percentage of guarantee because of its legal or regulatory lending limit. Additionally, reduced guarantee fees will only be available on loans of $5 million or less, unless an authorizing statute provides otherwise (e.g., the Alaska Roadless Areas statute).

Previously, the interest rate on the guaranteed portion of the loan could not exceed the unguaranteed portion of the loan. This was to prevent the Agency from paying a higher loss on the guaranteed portion than it otherwise would have if the interest on the guaranteed portion was equal to or less than the unguaranteed portion. This requirement has been relaxed to prevent

lenders from having to set floors and ceilings to remain compliant with this requirement. The proposed rule now allows for the interest rate on the guaranteed portion to be higher than the unguaranteed portion in situations where a fixed rate on the guaranteed portion becomes a higher rate than the variable rate on the unguaranteed portion due to the normal fluctuation in the approved variable interest rate.

Although credit quality standards have not changed, the credit quality section is being modified to be in line with the five C's of credit (capacity, capital, collateral, conditions, character). The Agency's policy on standardized collateral discounting has also been added. The Agency is adding the ability to require guarantees from persons whose ownership in the borrower is held indirectly through other companies.

The Agency is relaxing the requirement for business plans with the application for loans where the use of loan proceeds is exclusively for debt refinancing and fees, but has added a requirement for feasibility studies for all biofuels proposals, whether new or existing. The Agency is also proposing to revise the requirement for 3 years of historical financial statements for parent, subsidiary, and affiliated companies to only require current financial statements. Additionally, the number of attachments that need to be included as part a complete application for loans of $600,000 and less are reduced.

Loan scoring criteria, which is used to fund projects by priority, is being modified to award more points for the following: Leveraging B&I program dollars, the business' loan-to-job ratio, and providing quality jobs. The administrative points section has also been modified to account for community economic development strategies and State strategic plans and to allow for the awarding of points for projects that will fulfill an Agency initiative, such as the biobased product initiative or the Investing in Manufacturing Communities Partnership initiative. The proposed rule now allows for 150 possible priority points.

Loan servicing requirements under the B&I program have been clarified. The annual conference between the lender and the Agency can be held via teleconference. This change is not meant to replace a face-to-face annual lender conference. However, it does give some flexibility when face-to-face lender visits are not practical. The lender may contract loan servicing activities. However, the lender remains responsible for complying with all requirements of the regulations. The contracting out of any loan servicing activities does not relieve the lender of its responsibility to comply with the statutes and regulations governing the program. The proposed rule also clarifies that the Agency will not allow the write-down of debt while leaving the borrower in business and no new promissory notes may be issued to process a transfer and assumption since the Loan Note Guarantee references a specifically dated promissory note(s) with specific amount(s). The lender may use an allonge to the existing promissory note to facilitate the transaction.

Lenders will also be able to utilize balloon payments to restructure a guaranteed loan in default in a workout situation as long as there is a reasonable prospect for success and the remaining life of the collateral supports the workout terms.

Lenders will provide the loan classification of the guaranteed loan at loan closing rather than 90 days after the loan has closed. Additionally, lenders must notify the Agency when a borrower is 30 days past due and cannot cure the delinquency within 30 days. The lender must also provide a monthly default status report, as opposed to bimonthly. This will allow the Agency to be more responsive to delinquencies.

The lender can proceed with liquidation after the loan has been properly accelerated while the Agency has the liquidation plan under review. This will allow the lender to take such action as appropriate to protect the interest of the lender and the Agency while the liquidation plan is under review by the Agency. The appraisal requirement threshold will be increased from $100,000 to $250,000 on all collateral being released, and the requirement for a current appraisal for collateral being liquidated is being increased from $200,000 to $250,000. The $250,000 threshold is consistent with Office of Management and Budget (OMB) guidelines set forth in OMB Circular A-129.

The future recoveries section has been modified. The lender must use reasonable efforts to attempt collection from any party still liable for the guaranteed loan. Any net proceeds from that effort must be split pro rata between the lender and the Agency based on the original amount of the loan guarantee. To the extent any party to the loan has a written agreement with the Agency to repay all or part of any loss claim paid by the Agency, any collection on that agreement will not be split with the lender. This is because the Federal Government has collection remedies available to it that are not available to the lender and that are not intended to benefit private parties.

Several changes have been made in an effort to reduce the cost to the taxpayer in guaranteeing business and industry loans. Reasonable attorney/legal fees that the lender can claim in the liquidation process, as well as a Chapter 7 or Liquidating 11 bankruptcy, will be reduced from full reimbursement to being shared equally between the lender and the Agency. The Agency will not allow default or penalty interest to be charged to the borrower. This could cause the Agency to pay a loss when a solution could have been possible if the interest rate had not been increased. Additionally, the proposed rule clarifies that late payment fees and interest on interest will not be covered by the guarantee. The Agency has added the ability to require personal or corporate guarantees from those owning 20 percent or more of the borrower when stock of the borrower is sold. The ability for the Agency to charge a transfer and assumption fee has been added to the proposed rule. Notification for any such fee will be published annually in the
Federal Register
.

A significant change that is expected to decrease the cost to the taxpayer is that interest accrual is limited (1) to any holder to 90 days from the date of the first demand letter from a secondary market holder for payment and (2) to any lender 90 days from the delinquency effective date. A holder is a person or entity, other than the lender, who owns all or part of the guaranteed portion of the loan. The Agency was finding instances where holders were collecting interest on the guaranteed portion of the loan for a much longer period of time than other holders on the same loan. This was costing the Agency a substantial amount of money in interest paid and complicating the administration of the defaulted loan.

List of Subjects for 7 CFR Parts 4279 and 4287

Loan programs—Business and industry—Rural development assistance, Economic development, Energy, Direct loan programs, Grant programs, Guaranteed loan programs, Renewable energy systems, Energy efficiency improvements, and Rural areas.

For the reasons set forth in the preamble, parts 4279 and 4287 of title 7 of the Code of Federal Regulations are proposed to be amended as follows:

PART 4279—GUARANTEED LOANMAKING

1. The authority citation for part 4279 continues to read as follows:

Authority:

5 U.S.C. 301; 7 U.S.C. 1932(a), and 7 U.S.C. 1989.

2. Revise Subpart A to read as follows:

Subpart A—General

Sec.
4279.1
Introduction.
4279.2
Definitions and abbreviations.
4279.3-4279.14
[Reserved]
4279.15
Exception authority.
4279.16
Appeals.
4279.17-4279.28
[Reserved]
4279.29
Eligible lenders.
4279.30
Lenders' functions and responsibilities.
4279.31-4279.43
[Reserved]
4279.44
Access to Records.
4279.45-4279.58
[Reserved]
4279.59
Environmental requirements.
4279.60
Civil rights impact analysis.
4279.61
Equal Credit Opportunity Act.
4279.62-4279.70
[Reserved]
4279.71
Public bodies and nonprofit corporations.
4279.72
Conditions of guarantee.
4279.73
[Reserved]
4279.74
[Reserved]
4279.75
Sale or assignment of guaranteed loan.
4279.76
[Reserved]
4279.77
Minimum retention.
4279.78
Repurchase from holder.
4279.79-4279.83
[Reserved]
4279.84
Replacement of document.
4279.85-4279.99
[Reserved]
4279.100
OMB control number.

Subpart A—General

§ 4279.1
Introduction.
(a) This subpart contains general regulations for making and servicing Business and Industry (B&I) loans guaranteed by the Agency and applies to lenders, holders, borrowers and other parties involved in making, guaranteeing, holding, servicing, or liquidating such loans. This subpart is supplemented by subpart B of this part, which contains loan processing regulations, and subpart B of part 4287 of this chapter, which contains loan servicing regulations.

(b) The lender is responsible for ascertaining that all requirements for making, securing, servicing, and collecting the loan are complied with.

(c) Whether specifically stated or not, whenever Agency approval is required, it must be in writing. Copies of all forms, regulations, and instructions referenced in this subpart may be obtained from any Agency office and from the USDA Rural Development Web site at
www.rurdev.usda.gov/rbs.
Whenever a form is designated in this subpart, it is initially capitalized and its reference includes predecessor and successor forms, if applicable.

§ 4279.2
Definitions and abbreviations.

(a)
Definitions.

Administrator.
The Administrator of Rural Business-Cooperative Service within the Rural Development mission area of the U.S. Department of Agriculture.

Affiliate.
An entity that is related to another entity by owning shares or having an interest in the entity, by common ownership, or by any means of control.

Agency.
The Rural Business-Cooperative Service or successor Agency assigned by the Secretary of Agriculture to administer the B&I program. References to the National or State Office should be read as prefaced by “Agency” or “Rural Development” as applicable.

Agricultural production.
The cultivation, growing or harvesting of crops and the breeding, raising, feeding or housing of livestock for fiber or food for human consumption.

Annual renewal fee.
The annual renewal fee is a fee that is paid once a year by the lender and is required to maintain the enforceability of the Loan Note Guarantee.

Appraisal surplus.
The difference between the fair market value of an asset and its depreciated book value when the fair market value is higher.

Arm's-length transaction.
A transaction between ready, willing, and able disinterested parties that are not affiliated with or related to each other and have no security, monetary, or stockholder interest in each other.

Assignment Guarantee Agreement.
Form RD 4279-6, “Assignment Guarantee Agreement,” is the signed agreement between the Agency, the lender, and the holder containing the terms and conditions of an assignment of a guaranteed portion of a loan, using the single note system.

Biogas.
Renewable biomass converted to gaseous fuel.

Biomass.
Any organic material that is available on a renewable or recurring basis including agricultural crops, trees grown for energy production, wood waste and wood residues, plants, including aquatic plants and grasses, fibers, animal waste and other waste materials, and fats, oils, greases, including recycled fats, oils and greases. It does not include paper that is commonly recycled or unsegregated solid waste.

Bond.
A form of debt security in which the authorized issuer (borrower) owes the bond holder (lender) a debt and is obligated to repay the principal and interest (coupon) at a later date(s) (maturity). An explanation of the type of bond and other bond stipulations must be attached to the bond issuance.

Borrower.
The person that borrows, or seeks to borrow, money from the lender, including any party liable for the loan except for guarantors.

Collateral.
The asset(s) pledged by the borrower to secure the loan.

Commercially available.
A system that has a proven operating history for at least 1 year specific to the proposed application. Such a system is based on established design and installation procedures and practices. Professional service providers, trades, large construction equipment providers, and labor are familiar with installation procedures and practices. Proprietary and the balance of system equipment and spare parts are readily available, and service is readily available to properly maintain and operate the system. An established warranty exists for major parts and labor. If the system is currently commercially available only outside of the U.S., authoritative evidence of the foreign operating history, performance and reliability is required in order to address the proven operating history.

Conditional Commitment.
Form RD 4279-3, “Conditional Commitment,” is the Agency's notice to the lender that the loan guarantee it has requested is approved subject to the completion of all conditions and requirements set forth by the Agency and outlined in the attachment to the Conditional Commitment.

Conflict of interest.
A situation in which a person has competing personal, professional, or financial interests that prevents the person from acting impartially.

Cooperative organization.
An entity that is legally chartered as a cooperative or an entity that is not legally chartered as a cooperative but is owned and operated for the benefit of its members, with returns of residual earnings paid to such members on the basis of patronage.

Debt Collection Improvement Act (DCIA).
The Debt Collection Improvement Act of 1996, 31 U.S.C. 3701
et seq,
requires that any monies that are payable or may become payable from the United States under contracts and other written agreements to any person not an agency or subdivision of a State or local government may be subject to administrative offset for the collection of a delinquent debt the person owes to the United States.

Default.
The condition that exists when a borrower is not in compliance with the promissory note, the loan

agreement, or other related documents evidencing the loan. Default could be a monetary or non-monetary default.

Deficiency judgment.
A monetary judgment rendered by a court of competent jurisdiction after foreclosure and liquidation of all collateral securing the loan.

Delinquency.
A loan for which a scheduled loan payment is more than 30 days past due and cannot be cured within 30 days.

Energy projects.
Commercially available projects that produce or distribute energy or power and/or projects that produce biomass or biogas fuel.

Existing business.
A business that has been in operation for at least 1 full year. Mergers or changes in the business name or legal type of entity of a currently operating business are considered to be existing businesses as long as there is not a significant change in operations. Newly-formed entities that are buying existing businesses will be considered an existing business as long as the business being bought remains in operation and there is no significant change in operations.

Existing lender debt.
A debt owed by a borrower to the same lender that is applying for or has received the Agency guarantee.

Fair market value.
The price that could reasonably be expected for an asset in an arm's-length transaction between a willing buyer and a willing seller under ordinary economic and business conditions.

Future recovery.
Funds collected by the lender after a final loss claim is processed.

High impact business development investment.
A business that scores at least 20 points under § 4279.166(b)(4).

High priority project.
A project that scores more than 50 percent of the priority points available under § 4279.166(b)(1) through (5).

Holder.
A person, other than the lender, who owns all or part of the guaranteed portion of the loan with no servicing responsibilities. When the single note option is used and the lender assigns a part of the guaranteed note to an assignee, the assignee becomes a holder only when the Agency receives notice and the transaction is completed through use of the Assignment Guarantee Agreement.

Immediate family.
Individuals who live in the same household or who are closely related by blood, marriage, or adoption, such as a spouse, domestic partner, parent, child, sibling, aunt, uncle, grandparent, grandchild, niece, nephew, or cousin.

In-house expenses.
Expenses associated with activities that are routinely the responsibility of a lender's internal staff or its agents. In-house expenses include, but are not limited to, employees' salaries, staff lawyers, travel, and overhead.

Interest.
A fee paid by a borrower to the lender as a form of compensation for the use of money. When money is borrowed, interest is paid as a fee over a certain period of time (typically months or years) to the lender as percentage of the principal amount owed. The term interest does not include default or penalty interest or late payment fees or charges.

Interim financing.
A temporary or short-term loan made with the clear intent when the loan is made that it will be repaid through another loan that provides permanent financing. Interim financing is frequently used to pay construction and other costs associated with a planned project, with permanent financing to be obtained after project completion.

Lender.
The eligible lender approved by the Agency to make, service, and collect the Agency guaranteed loan that is subject to this subpart. Agency approval of the lender will be evidenced by an outstanding Form RD 4279-4, “Lender's Agreement,” between the Agency and the lender.

Lender's Agreement.
Form RD 4279-4, “Lender's Agreement,” or predecessor form, between the Agency and the lender setting forth the lender's loan responsibilities.

Liquidation expenses.
Costs directly associated with the liquidation of collateral, including preparing collateral for sale (e.g., repairs and transport) and conducting the sale (e.g., advertising, public notices, auctioneer expenses, and foreclosure fees). Liquidation expenses do not include in-house expenses. Legal/attorney fees are considered liquidation expenses provided that the fees are reasonable, as determined by the Agency, and cover legal issues pertaining to the liquidation that could not be properly handled by the lender and its in-house counsel.

Loan agreement.
The agreement between the borrower and lender containing the terms and conditions of the loan and the responsibilities of the borrower and lender.

Loan classification.
The process by which loans are examined and categorized by degree of potential loss in the event of default.

Loan Note Guarantee.
Form RD 4279-5, “Loan Note Guarantee,” or predecessor form, issued and executed by the Agency containing the terms and conditions of the guarantee.

Loan packager.
A person, other than the applicant borrower or lender, that prepares a loan application package.

Loan service provider.
A person, other than the lender of record, that provides loan servicing activities to the lender.

Loan-to-discounted value.
The ratio of the dollar amount of a loan to the discounted dollar value of the collateral pledged as security for the loan.

Loan-to-value.
The ratio of the dollar amount of a loan to the dollar value of the collateral pledged as security for the loan.

Local government.
A county, municipality, town, township, village, or other unit of general government, including tribal governments, below the State level.

Material adverse change.
Any change in circumstance associated with a guaranteed loan, including the borrower's financial condition or collateral, that could be reasonably expected to jeopardize loan performance.

Natural resource value-added product.
Any naturally occurring resource, including agricultural resources, that is processed to add value or the generation of renewable energy from a natural resource.

Negligent loan origination.
The failure of a lender to perform those services that a reasonably prudent lender would perform in originating its own portfolio of loans that are not guaranteed. The term includes the concepts of failure to act, not acting in a timely manner, or acting in a manner contrary to the manner in which a reasonably prudent lender would act.

Negligent loan servicing.
The failure of a lender to perform those services which a reasonably prudent lender would perform in servicing (including liquidation of) its own portfolio of loans that are not guaranteed. The term includes not only the concept of a failure to act, but also not acting in a timely manner, or acting in a manner contrary to the manner in which a reasonably prudent lender would act.

New business.
A startup or otherwise new business that has been in operation for less than 1 full year. New businesses include newly-formed entities leasing space or building ground up facilities, even if the owners of the new or startup business own affiliated businesses doing the same kind of business.

Parity.
A lien position whereby two or more lenders share a security interest of equal priority in collateral. In the event of default, each lender will be affected on an equal basis.

Participation.
Sale of an interest in a loan by the lead lender to one or more participating lenders wherein the lead

lender retains the note, collateral securing the note, and all responsibility for managing and servicing the loan. Participants are dependent upon the lead lender for protection of their interests in the loan. The relationship is typically formalized by a participation agreement. The participants and the borrower have no rights or obligations to one another.

Person.
An individual or entity.

Poverty.
A community or area is considered a poverty area if the county, city, or equivalent (such as parish, borough, municipio or census designated place) where the community or area is located has a population of which 20 percent or more have income below the poverty line.

Pro rata.
On a proportional basis.

Promissory note.
Evidence of debt with stipulated repayment terms. “Note” or “promissory note” shall also be construed to include “Bond” or other evidence of debt, where appropriate.

Protective advances.
Advances made by the lender for the purpose of preserving and protecting the collateral where the debtor has failed to, and will not or cannot, meet its obligations to protect or preserve collateral. Protective advances include, but are not limited to, advances affecting the collateral made for property taxes, rent, hazard and flood insurance premiums, and annual assessments. Legal/attorney fees are not a protective advance.

Public body.
A municipality, county, or other political subdivision of a State; a special purpose district; or an Indian tribe on a Federal or State reservation or other Federally-recognized Indian tribe; or an organization controlled by any of the above.

Report of loss.
Form RD 449-30, “Guaranteed Loan Report of Loss,” used by lenders when reporting a financial loss under an Agency guarantee.

Rural Development.
The mission area of USDA that is comprised of the Rural Business-Cooperative Service, Rural Housing Service, and Rural Utilities Service and is under the policy direction and operational oversight of the Under Secretary for Rural Development.

Spreadsheet.
A table containing data from a series of financial statements of a business over a period of time. Financial statement analysis normally contains spreadsheets for balance sheet and income statement items and includes a cash flow analysis and commonly used ratios. The spreadsheets enable a reviewer to easily scan the data, spot trends, and make comparisons.

State.
Any of the 50 States of the U.S., the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, the Republic of Palau, the Federated States of Micronesia, and the Republic of the Marshall Islands.

Subordination.
An agreement among the lender, borrower, and Agency whereby lien priorities on certain assets pledged to secure payment of the guaranteed loan will be reduced to a position junior to, or on parity with, the lien position of another loan in order for the Agency's borrower to obtain additional financing, not guaranteed by the Agency, from the lender or a third party.

Tangible balance sheet equity.
Tangible equity divided by tangible assets. Formula: ((Assets−intangible assets)−liabilities)/(Assets−intangible assets) or (Equity−intangible assets)/(Assets−intangible assets)

Transfer and assumption.
The conveyance by a borrower to an assuming borrower of the assets, collateral, and liabilities of the loan in return for the assuming borrower's binding promise to pay the outstanding debt.

USDA Lender Interactive Network Connection (LINC).
The portal Web site currently at
https://usdalinc.sc.egov.usda.gov/
used by lenders to update loan data in the Agency's Guaranteed Loan System. Current capabilities include loan closing and status reporting.

Veteran.
For the purposes of assigning priority points, a veteran is a person who is a veteran of any war, as defined in title 38 U.S.C. 101(12).

Working capital.
Current assets available to support a business's operations and growth. Working capital is calculated as current assets less current liabilities.

(b)
Abbreviations.

B&I—Business and Industry

CFR—Code of Federal Regulations

DCIA—Debt Collection Improvement Act

FDIC—Federal Deposit Insurance Corporation

FSA—Farm Service Agency

GAAP—Generally Accepted Accounting Principles of the U.S.

GLS—Guaranteed Loan System

LINC—USDA Lender Interactive Network Connection

NAD—National Appeals Division

OMB—Office of Management and Budget

REAP—Rural Energy for America Program

U.S.—United States of America

USDA—United States Department of Agriculture

(c)
Accounting terms.
Accounting terms not otherwise defined in this part shall have the definition ascribed to them under GAAP.

§§ 4279.3-4279.14
[Reserved]

§ 4279.15
Exception authority.
The Administrator may, on a case-by-case basis, grant an exception to any requirement or provision of this subpart provided that such an exception is in the best financial interests of the Federal Government. Exercise of this authority cannot be in conflict with applicable law.

§ 4279.16
Appeals.
Applicants, borrowers, lenders, and holders have appeal or review rights for Agency decisions made under this subpart, subpart B of this part, or subpart B of part 4287. Programmatic decisions based on clear and objective statutory or regulatory requirements are not appealable; however, such decisions are reviewable for appealability by the NAD. The borrower, lender, and holder can appeal any Agency decision that directly and adversely impacts them. For an adverse decision that impacts the borrower, the lender and borrower must jointly execute a written request for appeal for an alleged adverse decision made by the Agency. An adverse decision that only impacts the lender may be appealed by the lender only. An adverse decision that only impacts the holder may be appealed by the holder only. A decision by a lender adverse to the interest of the borrower is not a decision by the Agency, whether or not concurred in by the Agency. Appeals will be conducted by USDA NAD and will be handled in accordance with 7 CFR part 11.

§§ 4279.17-4279.28
[Reserved]

§ 4279.29
Eligible lenders.

An eligible lender must be domiciled in a State as defined in § 4279.2 and must not be debarred or suspended by the Federal government. If the lender is under a cease and desist order, or similar constraint, from a Federal agency, the lender must inform the Agency. The Agency will evaluate the lender's eligibility on a case-by-case basis given the risk of loss posed by the cease and desist order. The Agency will only approve loan guarantees for lenders with adequate capital to fund and cover potential liquidation expenses for guaranteed loans it proposes to make and adequate experience and expertise to make, secure, service, and collect B&I loans. The lender must provide documentation as to its capital and experience in commercial lending. The lender and the Agency will execute a Lender's Agreement for each lender approved to participate in the program. If a valid Lender's Agreement already exists, it is

not necessary to execute a new Lender's Agreement with each loan guarantee; however, a new Lender's Agreement must be executed with any existing lenders making new loans on or after [DATE OF FINAL RULE PUBLICATION]. The Agency may revoke a lender's eligible status at any time for cause, including those examples cited in § 4279.29(c).

(a)
Regulated lenders.
A regulated lender is any Federal or State chartered bank, Farm Credit Bank, other Farm Credit System institution with direct lending authority, Bank for Cooperatives, Savings and Loan Association, Savings Bank, or mortgage company that is part of a bank-holding company. These entities must be subject to credit examination and supervision by either an agency of the U.S. or a State. Eligible lenders may also include the National Rural Utilities Cooperative Finance Corporation and credit unions provided that they are subject to credit examination and supervision by either the National Credit Union Administration or a State agency.

(b)
Non-regulated lenders.
The Agency may consider an applicant lender that does not meet the criteria of paragraph (a) of this section for eligibility to become a guaranteed lender for a 3-year period provided that the Agency determines that the applicant lender has the legal authority to operate a lending program and sufficient lending expertise and financial strength to operate a successful lending program. When the applicant lender is a multi-tiered entity, it will be considered in its entirety. Insurance companies (formerly included as traditional lenders) and non-regulated lenders (formerly known as other lenders) previously approved as guaranteed lenders prior to [DATE OF FINAL RULE PUBLICATION] must reapply to become an approved non-regulated lender in order to originate new guaranteed loans. However, both insurance companies and non-regulated lenders that have executed a Lender's Agreement must continue to service the guaranteed loans in their portfolios in accordance with that agreement.

(1) Non-regulated lenders must:

(i) Have been making commercial loans for at least 5 years;

(ii) Have a record of successfully making at least 10 commercial loans annually totaling at least $1 million for each of the last 5 years, with lender's delinquent commercial loan portfolio over this period not exceeding (a) 6 percent of all commercial loans made and (b) 3 percent in commercial loan losses (based on the original principal loan amount);

(iii) Have and maintain tangible balance sheet equity of at least 10 percent of tangible assets and sufficient funds available to disburse the guaranteed loans it proposes to approve within the first 6 months of being approved as a guaranteed lender;

(iv) Agree to establish and maintain an Agency approved loss reserve equal to 3 percent of each B&I loan closed and agree to increase the loss reserve for anticipated losses as required by the Agency;

(v) Have adequate policies and procedures to ensure that internal credit controls provide adequate loanmaking and servicing guidance; and

(vi) Have undergone a credit examination at its own expense from a recognized independent reviewer acceptable to the Agency. The applicant lender should consult with the Agency prior to receiving an examination to ensure the examiner will be acceptable.

(2) A non-regulated lender that wishes consideration to become a guaranteed lender must submit a request in writing to the Agency. The Agency will notify the prospective lender whether the lender's request for eligibility is approved or rejected. If rejected, the Agency will notify the prospective lender, in writing, of the reasons for the rejection. The lender must include in its written request the following:

(i) An audited financial statement not more than 1 year old that evidences that the lender has the required tangible balance sheet equity and the resources to successfully meet its responsibilities;

(ii) A copy of any license, charter, or other evidence of authority to engage in the proposed loanmaking and servicing activities. If licensing by the State is not required, an attorney's opinion stating that licensing is not required and that the entity has the legal authority to engage in the proposed loanmaking and servicing activities must be submitted;

(iii) Information on lending experience, including length of time in the lending business; range and volume of lending and servicing activity, including a list of the industries for which it has provided financing; status of its loan portfolio, including a list of loans in the portfolio with each loan's current loan classification code and delinquency and loss rates as outlined in § 4279.29(b)(1)(ii); experience of management and loan officers; sources of funds for the proposed loans; office location and proposed lending area; an estimate of the number and size of guaranteed loan applications the lender will develop; and proposed rates and fees, including loan origination, loan preparation, and servicing fees. Such rates and fees must not be greater than those charged by similarly located regulated commercial lenders in the ordinary course of business;

(iv) A copy of the examination required under paragraph (b)(1)(vi) of this section; and

(v) Documentation as to how the lender will fulfill the requirements of § 4279.30.

(3) Renewal of eligible lender status to continue making B&I loans is not automatic. Eligible lender status will lapse 3 years from the date of Agency approval and execution of the Lender's Agreement unless the lender obtains a renewal. A lender whose eligible status has lapsed must continue to service any outstanding loans guaranteed under this part but may not submit requests for new loan guarantees. Lenders whose eligibility has lapsed may file a subsequent request under this subsection. Lenders requesting renewal must complete and execute a new Lender's Agreement, along with a written update of the eligibility criteria required by this section for approval. Lenders requesting renewal must resubmit the information required by paragraph (b)(2) of this section and must address how the lender is complying with each of the required criteria described in paragraph (b)(1) of this section. The written update of the eligibility criteria must also include any change in the persons designated to process and service Agency guaranteed loans or change in the operating methods used in the processing and servicing of loans since the original or last renewal date of eligible lender status. The lender must provide this information to the Agency at least 60 days prior to the expiration of the existing agreement to be assured of a timely renewal.

(c)
Revocation of eligible lender status.
The Agency may revoke a lender's status at any time for cause. Cause for revoking eligible status includes:

(1) Failure to maintain status as an eligible lender as set forth in § 4279.29 of this subpart;

(2) Knowingly submitting false information when requesting a guarantee or basing a guarantee request on information known to be false or which the lender should have known to be false;

(3) Making a guaranteed loan with deficiencies that may cause losses not to be covered by the Loan Note Guarantee, such as negligent loan origination;

(4) Conviction of the lender or its officers for criminal acts in connection with any loan transaction whether or not the loan was guaranteed by the Agency;

(5) Violation of usury laws in connection with any loan transaction whether or not the loan was guaranteed by the Agency;

(6) Failure to obtain and maintain the required security for any loan guaranteed by the Agency;

(7) Using loan funds guaranteed by the Agency for purposes other than those specifically approved by the Agency in the Conditional Commitment;

(8) Violation of any term of the Lender's Agreement;

(9) Failure to correct any Agency cited deficiency in loan documents in a timely manner;

(10) Failure to submit reports required by the Agency in a timely manner;

(11) Failure to process Agency guaranteed loans as would a reasonably prudent lender;

(12) Failure to provide for adequate construction planning and monitoring in connection with any loan to ensure that the project will be completed with the available funds and, once completed, will be suitable for the borrower's needs;

(13) Repetitive recommendations for servicing actions or guaranteed loans with marginal or substandard credit quality or that do not comply with Agency requirements;

(14) Negligent loan origination;

(15) Negligent loan servicing;

(16) Failure to conduct any approved liquidation of a loan guaranteed by the Agency or its predecessors in a timely and effective manner and in accordance with the approved liquidation plan; or

(17) Violation of applicable nondiscrimination law, including, but not limited to, statutes, regulations, USDA Departmental Regulations, the Secretary's Civil Rights Policy Statement, and the Equal Credit Opportunity Act.

(d)
Debarment of lender.
The Agency may debar a lender in addition to the revocation of the lender's status.

§ 4279.30
Lenders' functions and responsibilities.

(a)
General.
(1) Lenders have the primary responsibility for the successful delivery of the guaranteed loan program. Any action or inaction on the part of the Agency does not relieve the lender of its responsibilities to originate and service the loan guaranteed under this subpart, subpart B of this part, and subpart B of part 4287. Lenders may contract for services but are ultimately responsible for underwriting, loan origination, loan servicing, and compliance with all Agency regulations. Agents and persons are prohibited from acting as both loan packager and loan service provider on the same guaranteed loan. All lenders obtaining or requesting a loan guarantee are responsible for:

(i) Processing applications for guaranteed loans;

(ii) Developing and maintaining adequately documented loan files, which must be maintained for at least 3 years after any final loss has been paid;

(iii) Recommending only loan proposals that are eligible and financially feasible;

(iv) Properly closing the loan and obtaining valid evidence of debt and collateral in accordance with sound lending practices prior to disbursing loan proceeds;

(v) Keeping an inventory accounting of all collateral items and reconciling the inventory of all collateral sold during loan servicing, including liquidation;

(vi) Supervising construction;

(vii) Distributing loan funds;

(viii) Servicing guaranteed loans in a prudent manner, including liquidation if necessary;

(ix) Reporting all conflicts of interest, or appearances thereof, to the Agency;

(x) Following Agency regulations and agreements; and

(xi) Obtaining Agency approvals or concurrence as required.

(2) This subpart, subpart B of this part, and subpart B of part 4287 contain the regulations for this program, including the lenders' responsibilities. If a lender fails to comply with these requirements, the Agency may reduce any loss payment in accordance with the applicable regulations.

(b)
Credit evaluation.
The lender must analyze all credit factors associated with each proposed loan and apply its professional judgment to determine that the credit factors, considered in combination, ensure loan repayment. The lender must have an adequate underwriting process to ensure that loans are reviewed by persons other than the originating officer, and there must be good credit documentation procedures. The Agency will only guarantee loans that are sound and have reasonable assurance of repayment. The Agency will not guarantee marginal or substandard loans.

(c)
Environmental responsibilities.
Lenders are responsible for becoming familiar with Federal environmental requirements; considering, in consultation with the prospective borrower, the potential environmental impacts of their proposals at the earliest planning stages; and developing proposals that minimize the potential to adversely impact the environment.

(1) Lenders must assist the borrower in completing Form RD 1940-20, “Request for Environmental Information,” (when required by 7 CFR part 1940, subpart G) or successor forms; assist in the collection of additional data when the Agency needs such data to complete its environmental review of the proposal; and assist in the resolution of environmental problems.

(2) Lenders must ensure the borrower has:

(i) Provided the necessary environmental information to enable the Agency to undertake its environmental review process in accordance with 7 CFR part 1940, subpart G, or successor regulations, including the provision of all required Federal, State, and local permits;

(ii) Complied with any mitigation measures required by the Agency; and

(iii) Not taken any actions or incurred any obligations with respect to the proposed project that will either limit the range of alternatives to be considered during the Agency's environmental review process or that will have an adverse effect on the environment.

(3) Lenders must alert the Agency to any environmental issues related to a proposed project or items that may require extensive environmental review.

§§ 4279.31—4279.43
[Reserved]

§ 4279.44
Access to records.
The lender must permit representatives of the Agency (or other agencies of the U.S.) to inspect and make copies of any records of the lender pertaining to Agency guaranteed loans during regular office hours of the lender or at any other time upon agreement between the lender and the Agency. In addition, the lender must cooperate fully with Agency oversight and monitoring of all lenders involved in any manner with any guarantee to ensure compliance with this subpart, subpart B of this part, and subpart B of part 4287. Such oversight and monitoring will include, but is not limited to, reviewing lender records and meeting with lenders in accordance with subpart B of part 4287.

§§ 4279.45—4279.58
[Reserved]

§ 4279.59
Environmental requirements.

The Agency is responsible for ensuring that the requirements of the National Environmental Policy Act of 1969 (under 40 CFR part 1500) and related compliance actions (such as Section 106 of the National Historic Preservation Act (under 36 CFR part 800) and Section 7 of the Endangered Species Act) are met and will complete the appropriate level of environmental review in accordance with subpart G of part 1940 or successor regulations.

Because development of the loan application occurs simultaneously with development of the environmental review, applicants, including lenders and borrowers, must not take any actions or incur any obligations that would either limit the range of alternatives to be considered in the environmental review or that would have an adverse effect on the environment. Satisfactory completion of the environmental review process must occur prior to issuance of the Conditional Commitment to the lender.

§ 4279.60
Civil Rights Impact Analysis.
Issuance of a Conditional Commitment is conditioned on the Agency being able to satisfactorily complete a Civil Rights Impact Analysis.

§ 4279.61
Equal Credit Opportunity Act.
In accordance with Title V of Public Law 93-495, the Equal Credit Opportunity Act, with respect to any aspect of a credit transaction, neither the lender nor the Agency will discriminate against any applicant on the basis of race, color, religion, national origin, sex, marital status or age (providing the applicant has the capacity to contract), or because all or part of the applicant's income derives from a public assistance program, or because the applicant has, in good faith, exercised any right under the Consumer Protection Act. The lender must comply with the requirements of the Equal Credit Opportunity Act as contained in the Federal Reserve Board's Regulation implementing that Act (see 12 CFR part 202) prior to loan closing.

§§ 4279.62—4279.70
[Reserved]

§ 4279.71
Public bodies and nonprofit corporations.
Any public body or nonprofit corporation that receives a guaranteed loan that meets the thresholds established by OMB must provide an audit in accordance with applicable regulations. Any audit meeting OMB's requirements will be adequate to meet any audit requirements of the B&I program for that year.

§ 4279.72
Conditions of guarantee.
A loan guarantee under this part will be evidenced by a Loan Note Guarantee issued by the Agency. The provisions of this part and part 4287 will apply to all outstanding guarantees. In the event of a conflict between the guarantee documents and these regulations as they exist at the time the documents are executed, these regulations will control.

(a)
Full faith and credit.
A guarantee under this part constitutes an obligation supported by the full faith and credit of the U.S. and is incontestable except for fraud or misrepresentation of which a lender or holder has actual knowledge at the time it becomes such lender or holder or which a lender or holder participates in or condones. The guarantee will be unenforceable to the extent that any loss is occasioned by a provision for interest on interest or default or penalty interest. In addition, the guarantee will be unenforceable by the lender to the extent any loss is occasioned by the violation of usury laws, use of loan proceeds for unauthorized purposes, negligent loan origination, negligent servicing, or failure to obtain or maintain the required security regardless of the time at which the Agency acquires knowledge thereof. Any losses occasioned will be unenforceable to the extent that loan funds were used for purposes other than those specifically approved by the Agency in its Conditional Commitment. The Agency may for cause terminate or reduce the Loan Note Guarantee at any time. The Agency will guarantee payment as follows:

(1) To any holder, 100 percent of any loss sustained by the holder on the guaranteed portion of the loan it owns and on interest due on such portion less any servicing fee. For those loans closed on or after [DATE OF FINAL RULE PUBLICATION], the guarantee will not cover note interest to any holder after 90 days from the date of the first repurchase demand to the lender made by a holder. Upon receipt of the first demand letter from a holder, the Agency will notify any remaining holders known by the Agency in writing that interest will discontinue after 90 days from the date of the first holder's demand.

(2) To the lender, subject to the provisions of this part and subpart B of part 4287, the lesser of:

(i) Any loss sustained by the lender on the guaranteed portion, including principal and interest evidenced by the notes or assumption agreements and secured advances for protection and preservation of collateral made with the Agency's authorization; or

(ii) The guaranteed principal advanced to or assumed by the borrower and any interest due thereon.

(b)
Rights and liabilities.
When a guaranteed portion of a loan is sold to a holder, the holder will succeed to all rights of the lender under the Loan Note Guarantee to the extent of the portion purchased. The full, legal interest in the note must remain with the lender, and the lender will remain bound to all obligations under the Loan Note Guarantee, Lender's Agreement, and Agency program regulations. A guarantee and right to require purchase will be directly enforceable by a holder notwithstanding any fraud or misrepresentation by the lender or any unenforceability of the guarantee by the lender, except for fraud or misrepresentation of which the holder had actual knowledge at the time it became the holder or in which the holder participates in or condones. The lender will reimburse the Agency for any payments the Agency makes to a holder on the lender's guaranteed loan that, under the Loan Note Guarantee, would not have been paid to the lender had the lender retained the entire interest in the guaranteed loan and not conveyed an interest to a holder.

(c)
Payments.
A lender will receive all payments of principal and interest on account of the entire loan and must promptly remit to the holder its pro rata share thereof, determined according to its respective interest in the loan, less only the lender's servicing fee.

§ 4279.73
[Reserved]

§ 4279.74
[Reserved]

§ 4279.75
Sale or assignment of guaranteed loan.
The lender may sell all or part of the guaranteed portion of the loan on the secondary market or retain the entire loan. The lender must fully disburse and properly close a loan prior to sale of the note(s) on the secondary market. The lender cannot sell or participate any amount of the guaranteed or unguaranteed portion of the loan to the borrower or its parent, subsidiary, or affiliate or to officers, directors, stockholders, other owners, or members of their immediate families. The lender cannot share any premium received from the sale of a guaranteed loan in the secondary market with a loan packager or other loan service provider. If the lender desires to market all or part of the guaranteed portion of the loan at or subsequent to loan closing, such loan must not be in default. Lenders may use either the single note or multi-note system as outlined in paragraphs (a) and (b) of this section.

(a)
Single note system.
The entire loan is evidenced by one note, and one Loan Note Guarantee is issued. When the loan is evidenced by one note, the lender may not at a later date cause any additional notes to be issued. The lender may assign all or part of the guaranteed portion of the loan to one or more holders by using Form RD 4279-6, “Assignment Guarantee Agreement.” The lender must complete and execute the Assignment Guarantee Agreement and return it to the Agency for

execution prior to holder execution. The holder, upon written notice to the lender and the Agency, may reassign the unpaid guaranteed portion of the loan, in full, sold under the Assignment Guarantee Agreement. Holders may only reassign the guaranteed portion in the complete Block they have received and cannot subdivide or further split the guaranteed portion of a loan or retain an interest strip. Upon notification and completion of the assignment through the use of Form RD 4279-6, the assignee shall succeed to all rights and obligations of the holder there under. Subsequent assignments require notice to the lender and Agency using any format, including that used by the Bond Market Association, together with the transfer of the original Assignment Guarantee Agreement. The Agency will neither execute a new Assignment Guarantee Agreement to effect a subsequent reassignment nor reissue a duplicate Assignment Guarantee Agreement unless the original was lost, stolen, destroyed, mutilated, or defaced in accordance with § 4279.84. The Assignment Guarantee Agreement clearly states the percentage and corresponding amount of the guaranteed portion it represents and the lender's servicing fee. A servicing fee may be charged by the lender to a holder and is calculated as a percentage per annum of the unpaid balance of the guaranteed portion of the loan assigned by the Assignment Guarantee Agreement. The Agency is not and will not be a party to any contract between the lender and another party where the lender sells its servicing fee in an arm's length marketplace transaction. The Agency will not acknowledge, approve, or have any liability to any of the parties of this contract.

(b)
Multinote system.
Under this option, the lender may provide one note for the unguaranteed portion of the loan and no more than ten notes for the guaranteed portion. All promissory notes must reflect the same payment terms. When the lender selects this option, the holder will receive one of the borrower's executed notes and a Loan Note Guarantee. The Agency will issue a Loan Note Guarantee for each note, including the unguaranteed note, to be attached to each note. An Assignment Guarantee Agreement will not be used when the multinote option is utilized.

§ 4279.76
[Reserved]

§ 4279.77
Minimum retention.
The lender is required to hold in its own portfolio a minimum of 5 percent of the original total loan amount. The amount required to be maintained must be of the unguaranteed portion of the loan and cannot be participated to another. The lender may enter into no agreement that reduces its exposure below the minimum 5 percent it is required to retain in its portfolio. The lender may sell the remaining amount of the unguaranteed portion of the loan only through participation. The lender must retain title to the notes, retain the lender's interest in the collateral, and retain the servicing responsibilities for the guaranteed loan.

§ 4279.78
Repurchase from holder.

(a)
Repurchase by lender.
A lender has the option to repurchase the unpaid guaranteed portion of the loan from a holder within 30 days of written demand by the holder when the borrower is in default not less than 60 days on principal or interest due on the loan; or when the lender has failed to remit to the holder its pro rata share of any payment made by the borrower within 30 days of the lenders receipt thereof. The repurchase by the lender must be for an amount equal to the unpaid guaranteed portion of principal and accrued interest less the lender's servicing fee. The holder must concurrently send a copy of the demand letter to the Agency. For loans closed on or after [DATE OF FINAL RULE PUBLICATION], the guarantee will not cover note interest to any holder accruing after 90 days from the date of the first demand letter of a holder to the lender requesting the repurchase. The lender must accept an assignment without recourse from the holder upon repurchase. The lender is encouraged to repurchase the loan to facilitate the accounting of funds, resolve any loan problems, and prevent default, where and when reasonable. The benefit to the lender is that it may resell the guaranteed portion of the loan in order to continue collection of its servicing fee if the default is cured. The lender will notify the holder and the Agency of its decision.

(b)
Agency repurchase.
(1) The lender's servicing fee will stop on the date that interest was last paid by the borrower when the Agency purchases the guaranteed portion of the loan from a holder. The lender cannot charge such servicing fee to the Agency and must apply all loan payments and collateral proceeds received to the guaranteed and unguaranteed portions of the loan on a pro rata basis.

(2) If the Agency repurchases 100 percent of the guaranteed portion of the loan, the Agency will not continue collection of the annual renewal fee from the lender.

(3) If the lender does not repurchase the unpaid guaranteed portion of the loan as provided in paragraph (a) of this section, the Agency will purchase from the holder the unpaid principal balance of the guaranteed portion together with accrued interest to date of repurchase, less the lender's servicing fee, within 30 days after written demand to the Agency from the holder. For loans closed on or after [DATE OF FINAL RULE PUBLICATION], the guarantee will not cover note interest to any holder accruing after 90 days from the date of the first demand letter of a holder to the lender requesting the repurchase. Accrued interest paid to the holder will be calculated from the date interest was last paid on the loan with a cutoff date being not more than 90 days from the date any holder makes demand. If there is more than one holder, all subsequent holders will be paid using the same date as the first holder (first holder's date of demand to the lender). Once the holder makes demand upon the Agency, the request cannot be rescinded.

(4) When the guaranteed loan has been delinquent more than 60 days and no holder comes forward, the Agency may issue a letter to the holder(s) establishing the cutoff date for interest accrual. Accrued interest to be paid the holder will be calculated from the date interest was last paid on the loan with a cutoff date being no more than 90 days from the date of the most recent delinquency effective date as reported by the lender.

(5) When the lender has accelerated the account and the lender holds all or a portion of the guaranteed loan, an estimated loss claim (loan in the liquidation process) must be filed by the lender with the Agency within 60 days. Accrued interest paid to the lender will be calculated from the date interest was last paid on the loan with a cutoff date being no more than 90 days from the most recent delinquency effective date as reported by the lender.

(6) The holder's demand to the Agency must include a copy of the written demand made upon the lender. The holder must also include evidence of its right to require payment from the Agency. Such evidence must consist of either the original of the Loan Note Guarantee properly endorsed to the Agency or the original of the Assignment Guarantee Agreement properly assigned to the Agency without recourse including all rights, title, and interest in the loan. When the single-note system is utilized and the initial holder has sold its interest, the current holder must present the original Assignment Guarantee Agreement and an original of each Agency approved

reassignment document in the chain of ownership, with the latest reassignment being assigned to the Agency without recourse, including all rights, title, and interest in the guarantee. The holder must include in its demand the amount due including unpaid principal, unpaid interest to date of demand, and interest subsequently accruing from date of demand to proposed payment date. The Agency will be subrogated to all rights of the holder.

(7) Upon request by the Agency, the lender must promptly furnish a current statement certified by an appropriate authorized officer of the lender of the unpaid principal and interest then owed by the borrower on the loan and the amount then owed to any holder, along with the information necessary for the Agency to determine the appropriate amount due the holder. Any discrepancy between the amount claimed by the holder and the information submitted by the lender must be resolved between the lender and the holder before payment will be approved. Such conflict will suspend the running of the 30 day payment requirement.

(8) Purchase by the Agency neither changes, alters, nor modifies any of the lender's obligations to the Agency arising from the loan or guarantee nor does it waive any of Agency's rights against the lender. The Agency will have the right to set-off against the lender all rights inuring to the Agency as the holder of the instrument against the Agency's obligation to the lender under the program.

(c)
Repurchase for servicing.
If, in the opinion of the lender, repurchase of the guaranteed portion of the loan is necessary to adequately service the loan, the holder must sell the guaranteed portion of the loan to the lender for an amount equal to the unpaid principal and interest on such portion less the lender's servicing fee. The lender must not repurchase from the holder for arbitrage or other purposes to further its own financial gain. Any repurchase must only be made after the lender obtains the Agency's written approval. If the lender does not repurchase the guaranteed portion from the holder, the Agency may, at its option, purchase such guaranteed portion for servicing purposes.

§§ 4279.79-4279.83
[Reserved]

§ 4279.84
Replacement of document.
(a) The Agency may issue a replacement Loan Note Guarantee or Assignment Guarantee Agreement that was lost, stolen, destroyed, mutilated, or defaced to the lender or holder upon receipt of an acceptable certificate of loss and an indemnity bond.

(b) When a Loan Note Guarantee or Assignment Guarantee Agreement is lost, stolen, destroyed, mutilated, or defaced while in the custody of the lender or holder, the lender must coordinate the activities of the party who seeks the replacement documents and must submit the required documents to the Agency for processing. The requirements for replacement are as follows:

(1) A certificate of loss, notarized and containing a jurat, which includes:

(i) Name and address of owner;

(ii) Name and address of the lender of record;

(iii) Capacity of person certifying;

(iv) Full identification of the Loan Note Guarantee or Assignment Guarantee Agreement including the name of the borrower, the Agency's case number, date of the Loan Note Guarantee or Assignment Guarantee Agreement, face amount of the evidence of debt purchased, date of evidence of debt, present balance of the loan, percentage of guarantee, and, if an Assignment Guarantee Agreement, the original named holder and the percentage of the guaranteed portion of the loan assigned to that holder. Any existing parts of the document to be replaced must be attached to the certificate;

(v) A full statement of circumstances of the loss, theft, destruction, defacement, or mutilation of the Loan Note Guarantee or Assignment Guarantee Agreement; and

(vi) For the holder, evidence demonstrating current ownership of the Loan Note Guarantee and promissory note or the Assignment Guarantee Agreement. If the present holder is not the same as the original holder, a copy of the endorsement of each successive holder in the chain of transfer from the initial holder to present holder must be included. If copies of the endorsement cannot be obtained, best available records of transfer must be submitted to the Agency (e.g., order confirmation, canceled checks, etc.).

(2) An indemnity bond acceptable to the Agency must accompany the request for replacement except when the holder is the United States, a Federal Reserve Bank, a Federal corporation, a State or territory, or the District of Columbia. The bond must be with surety except when the outstanding principal balance and accrued interest due the present holder is less than $1 million verified by the lender in writing in a letter of certification of balance due. The surety must be a qualified surety company holding a certificate of authority from the Secretary of the Treasury and listed in Treasury Department Circular 570.

(3) All indemnity bonds must be issued and payable to the United States of America acting through the Agency. The bond must be in an amount not less than the unpaid principal and interest. The bond must hold the Agency harmless against any claim or demand that might arise or against any damage, loss, costs, or expenses that might be sustained or incurred by reasons of the loss or replacement of the instruments.

(4) In those cases where the guaranteed loan was closed under the provision of the multinote system, the Agency will not attempt to obtain, or participate in the obtaining of, replacement notes from the borrower. The holder is responsible for bearing the costs of note replacement if the borrower agrees to issue a replacement instrument. Should such note be replaced, the terms of the note cannot be changed. If the evidence of debt has been lost, stolen, destroyed, mutilated or defaced, such evidence of debt must be replaced before the Agency will replace any instruments.

§§ 4279.85-4279.99
[Reserved]

§ 4279.100
OMB control number.
The information collection requirements contained in this regulation have been approved by OMB and have been assigned OMB control number ___. Public reporting burden for this collection of information is estimated to vary from 30 minutes to 12 hours per response, with an average of 6 hours per response, including time for reviewing the collection of information. The burden may increase beyond the estimate reported here, if RBS determines additional data will need to be collected to facilitate evaluation, which can enhance the operation and performance of the program. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to the Department of Agriculture, Clearance Officer, OIRM, Stop 7630, Washington, DC 20250. You are not required to respond to this collection of information unless it displays a currently valid OMB control number.

3. Revise Subpart B to read as follows:

Subpart B—Business and Industry Loans

Sec.
4279.101
Introduction.
4279.102
Definitions and abbreviations.
4279.103
Exception Authority.
4279.104
Appeals.
4279.105-4279.107
[Reserved]
4279.108
Eligible borrowers.
4279.109-4279.112

[Reserved]

4279.113
Eligible uses of funds.
4279.114
[Reserved]
4279.115
Cooperative stock/cooperative equity.
4279.116
New Markets Tax Credit program.
4279.117
Ineligible purposes and entity types.
4279.118
[Reserved]
4279.119
Loan guarantee limits.
4279.120
Fees and charges.
4279.121-4279.124
[Reserved]
4279.125
Interest rates.
4279.126
Loan terms.
4279.127-4279.130
[Reserved]
4279.131
Credit quality.
4279.132
Personal and corporate guarantees.
4279.133-4279.135
[Reserved]
4279.136
Insurance.
4279.137
Financial statements.
4279.138-4279.143
[Reserved]
4279.144
Appraisals.
4279.145-4279.149
[Reserved]
4279.150
Feasibility studies.
4279.151-4279.160
[Reserved]
4279.161
Filing preapplications and applications.
4279.162-4279.164
[Reserved]
4279.165
Evaluation of application.
4279.166
Loan priority scoring.
4279.167
Planning and performing development.
4279.168
Timeframe for processing applications.
4279.169-4279.172
[Reserved]
4279.173
Loan approval and obligating funds.
4279.174
Transfer of lenders.
4279.175-4279.179
[Reserved]
4279.180
Changes in borrower.
4279.181
Conditions precedent to issuance of the Loan Note Guarantee.
4279.182-4279.186
[Reserved]
4279.187
Refusal to execute Loan Note Guarantee.
4279.188-4279.199
[Reserved]
4279.200
OMB control number.

PART 4279—GUARANTEED LOANMAKING

Subpart B—Business and Industry Loans

§ 4279.101
Introduction.

(a)
Content.
This subpart contains loan processing regulations for the Business and Industry (B&I) Guaranteed Loan Program. It is supplemented by subpart A of this part, which contains general guaranteed loan regulations, and subpart B of part 4287 of this chapter, which contains loan servicing regulations.

(b)
Purpose.
The purpose of the B&I Guaranteed Loan Program is to improve, develop, or finance business, industry, and employment and improve the economic and environmental climate in rural communities. This purpose is achieved by bolstering the existing private credit structure through the guarantee of quality loans that will provide lasting community benefits. It is not intended that the guarantee authority will be used for marginal or substandard loans or for relief of lenders having such loans.

(c)
Documents.
Whether specifically stated or not, whenever Agency approval is required, it must be in writing. Copies of all forms, regulations, and Instructions referenced in this subpart may be obtained from any Agency office and from the USDA Rural Development Web site at
www.rurdev.usda.gov/rbs.
Whenever a form is designated in this subpart, that designation includes predecessor and successor forms, if applicable, as specified by the Agency.

§ 4279.102
Definitions and abbreviations.
The definitions and abbreviations in § 4279.2 of this chapter are applicable to this subpart.

§ 4279.103
Exception Authority.
Section 4279.15 of this chapter applies to this subpart.

§ 4279.104
Appeals.
Section 4279.16 of this chapter applies to this subpart.

§§ 4279.105-4279.107
[Reserved]

§ 4279.108
Eligible borrowers.

(a)
Type of entity.
A borrower may be a cooperative organization, corporation, partnership, or other legal entity organized and operated on a profit or nonprofit basis; an Indian tribe on a Federal or State reservation or other Federally recognized tribal group; a public body; or an individual. A borrower must be engaged in or proposing to engage in a business. Business may include manufacturing, wholesaling, retailing, providing services, or other activities that will provide employment and improve the economic or environmental climate.

(b)
Citizenship.
Individual borrowers must be citizens of the United States (U.S.) or reside in the U.S. after being legally admitted for permanent residence. For purposes of this subpart, citizens and residents of the Republic of Palau, the Federated States of Micronesia, American Samoa, and the Republic of the Marshall Islands are considered U.S. citizens. Corporations or other non public-body type borrowers must be at least 51 percent owned by persons who are either citizens of the U.S. or reside in the U.S. after being legally admitted for permanent residence. Individuals that reside in the U.S. after being legally admitted for permanent residence must provide a permanent green card as evidence of eligibility.

(c)
Rural area.
The business financed with a guaranteed loan under this subpart must be located in a rural area, except for cooperative organizations financed in accordance with § 4279.113(j)(2) and local foods projects financed in accordance with § 4279.113(x)(2). Loans to borrowers with facilities located in both rural and non-rural areas will be limited to the amount necessary to finance the facility located in the eligible rural area, except for those cooperative organizations financed in accordance with § 4279.113(j)(2) and those local foods projects financed in accordance with § 4279.113(x)(2).

(1) Rural areas are any area of a State other than a city or town that has a population of greater than 50,000 inhabitants and any urbanized area contiguous and adjacent to such a city or town. In making this determination, the Agency will use the latest decennial census of the U.S.

(2) For the purposes of this definition, cities and towns are incorporated population centers with definite boundaries, local self government, and legal powers set forth in a charter granted by the State.

(3) For the Commonwealth of Puerto Rico, the island is considered rural, except for the San Juan Census Designated Place (CDP) and any other CDP with greater than 50,000 inhabitants. However, CDPs with greater than 50,000 inhabitants, other than the San Juan CDP, may be eligible if they are determined to be “not urban in character.”

(4) For the State of Hawaii, all areas within the State are considered rural, except for the Honolulu CDP within the County of Honolulu.

(5) For the Republic of Palau, the Federated States of Micronesia, American Samoa, and the Republic of the Marshall Islands, the Agency will determine what constitutes a rural area based on available population data.

(6) Notwithstanding any other provision of this definition, in determining which census blocks in an urbanized area are not in a rural area, the Agency will exclude any cluster of census blocks that would otherwise be considered not in a rural area only because the cluster is adjacent to not more than two census blocks that are otherwise considered not in a rural area under this definition.

(7)(i) The Under Secretary, whose authority may not be redelegated, may determine that an area is “rural in character.” Any determination made by the Under Secretary under this provision will be to areas that are

determined to be “rural in character” and are within:

(A) An urbanized area that has two points on its boundary that are at least 40 miles apart, which is not contiguous or adjacent to a city or town that has a population of greater than 150,000 inhabitants or the urbanized area of such city or town; or

(B) An area within an urbanized area contiguous and adjacent to a city or town of greater than 50,000 inhabitants that is within
1/4
mile of a rural area.

(ii) Units of local government may petition the Under Secretary for a “rural in character” designation by submitting a petition to both the appropriate Rural Development State Director and the Administrator on behalf of the Under Secretary. The petition must document how the area meets the requirements of paragraph (c)(7) of this section and discuss why the petitioner believes the area is “rural in character,” including, but not limited to, the area's population density; demographics; topography; and how the local economy is tied to a rural economic base. Upon receiving a petition, the Under Secretary will consult with the applicable Governor and Rural Development State Director and request comments within 10 business days, unless those comments were submitted with the petition. The Under Secretary will release to the public a notice of a petition filed by a unit of local government not later than 30 days after receipt of the petition by way of notice in a local newspaper and notice on the applicable Rural Development State Office Web site. The Under Secretary will make a determination not less than 15 days, but no more than 60 days, after the release of the notice. The public notice will appear for at least 3 consecutive days if published in a daily newspaper or otherwise in two consecutive publications. Upon a negative determination, the Under Secretary will provide to the petitioner an opportunity to appeal a determination to the Under Secretary for reconsideration, and the petitioner will have 10 business days to appeal the determination and provide further information for consideration.

(d)
Other credit.
All applications for assistance will be accepted and processed without regard to the availability of credit from any other source.

(e)
Prohibition under Agency programs.
No loans guaranteed by the Agency will be conditioned on any requirement that the recipients of such assistance accept or receive electric or other services from any particular utility, supplier, or cooperative.

§§ 4279.109-4279.112
[Reserved]

§ 4279.113
Eligible uses of funds.
Eligible uses of funds must be consistent with § 4279.101(b) of this subpart and include, but are not limited, to the following:

(a) Purchase and development of land, buildings, and associated infrastructure, including expansion or modernization.

(b) Business acquisitions provided that jobs will be created or saved.

(c) Leasehold improvements when the lease contains no reverter clauses or restrictive clauses that would impair the use or value of the property as security for the loan. The term of the lease must be equal to or greater than the term of the loan.

(d) Constructing or equipping facilities for lease to private businesses engaged in commercial or industrial operations. Financing for mixed-use properties involving both commercial business and residential space is authorized provided that not less than 50 percent of the building's projected revenue will be generated from business use.

(e) Purchase of machinery and equipment.

(f) Startup costs, working capital, inventory, and supplies in the form of a permanent working capital term loan.

(g) Debt refinancing when it is determined that the project is viable and refinancing is necessary to improve cash flow and create new or save existing jobs. Debt being refinanced must be debt of the borrower reflected on its balance sheet, and the lender's analysis must document that the debt being refinanced was for an eligible loan purpose under this subpart. Except as provided for in paragraph (k)(3) of this section, existing lender debt may be included provided that, at the time of application, the loan being refinanced has been closed and current for at least the past 12 months (current status cannot be achieved by the lender forgiving the borrower's debt or servicing actions that impact the borrower's repayment schedule), and the lender is providing better rates or terms. Unless the amount to be refinanced is owed directly to the Federal government or is Federally guaranteed, the existing lender debt refinancing must be less than 50 percent of the overall loan.

(h) Takeout of interim financing. Guaranteeing a loan that provides for permanent, long-term financing after project completion to pay off a lender's interim loan will not be treated as debt refinancing provided that the lender submits a complete preapplication or application that proposes such interim financing prior to closing the interim loan. The borrower must take no action that would have an adverse impact on the environment or limit the range of alternatives to be considered by the Agency during the environmental review process. The Agency will not guarantee takeout of interim financing loans that prevent a meaningful environmental assessment prior to Agency loan approval. Even for projects with interim financing, the Agency cannot approve the loan and issue a Conditional Commitment until the environmental process is complete. The Agency assumes no responsibility or obligation for interim loans.

(i) Purchase of membership, stocks, bonds, or debentures necessary to obtain a loan from Farm Credit System institutions and other lenders provided that the purchase is required for all of their borrowers and is the minimum amount required.

(j) Loans to cooperative organizations.

(1) Guaranteed loans to eligible cooperative organizations may be made in principal amounts up to $40 million if the project is located in a rural area, the cooperative facility being financed provides for the value-added processing of agricultural commodities, and the total amount of loans exceeding $25 million does not exceed 10 percent of the funds available for the fiscal year.

(2) Guaranteed loans to eligible cooperative organizations may also be made in non-rural areas provided:

(i) The primary purpose of the loan is for a facility to provide value-added processing for agricultural producers that are located within 80 miles of the facility;

(ii) The applicant satisfactorily demonstrates that the primary benefit of the loan will be to provide employment for rural residents;

(iii) The principal amount of the loan does not exceed $25 million; and

(iv) The total amount of loans guaranteed under this paragraph does not exceed 10 percent of the funds available for the fiscal year.

(3) An eligible cooperative organization may refinance an existing B&I loan provided that the existing loan is current and performing; the existing loan is not and has not been in monetary default (more than 30 days late) or the collateral of which has not been converted; and there is adequate security or full collateral for the new guaranteed loan.

(k) The purchase of cooperative stock by individual farmers or ranchers in a farmer or rancher cooperative in accordance with § 4279.115(a).

(l) The purchase of preferred stock or similar equity issued by a cooperative organization or a fund that invests

primarily in cooperative organizations in accordance with § 4279.115(b).

(m) Taxable corporate bonds when the bonds are fully amortized and comply with all provisions of § 4279.126, and the bond holder (lender) retains 5 percent of the bond in accordance with § 4279.77. The bonds must be fully secured with collateral in accordance with § 4279.131(b). The bonds must only provide for a trustee when the trustee is totally under the control of the lender. The bonds must provide no rights to bond holders other than the right to receive the payments due under the bond. For instance, the bonds must not provide for bond holders replacing the trustee or directing the trustee to take servicing actions, such as accelerating the bonds. Convertible bonds are not eligible under this paragraph due to the potential conflict of interest of a lender having an ownership interest in the borrower.

(1) The bond issuer (borrower) must not issue more than 11 bonds with no more than 10 of those bonds being guaranteed under this program. The bond issuer must obtain the services and opinion of an experienced bond counsel who must present a legal opinion stating that the bonds are legal, valid and binding obligations of the issuer and that the issuer has adhered to all applicable laws.

(2) The bond holder must purchase all of the bonds and comply with all Agency regulations. There must be a bond purchase agreement between the issuer and the bond holder. The bond purchase agreement must contain similar language to what is required to be in a loan agreement in accordance with § 4279.161(b)(11) and must not be in conflict with subparts A or B of part 4279 or subpart B of part 4287. The bond holder is responsible for all servicing of the loan (bond), although the bond holder may contract for servicing assistance, including contracting with a trustee who remains under the lender's total control.

(n) Interest (including interest on interim financing) during the period before the first principal payment becomes due or when the facility becomes income producing, whichever is earlier.

(o) Fees and charges outlined in § 4279.120(a), (c) and (d).

(p) Feasibility studies.

(q) Agricultural production, when not eligible for Farm Service Agency (FSA) farmer program assistance and when it is part of an integrated business also involved in the processing of agricultural products. Any agricultural production considered for guaranteed loan financing must be owned, operated, and maintained by the business receiving the loan for which a guarantee is provided. Except for cooperative stock purchase loans in accordance with § 4279.115(a), independent agricultural production operations are not eligible, even if not eligible for FSA farmer programs assistance.

(1) The agricultural-production portion of any loan must not exceed 50 percent of the total loan or $5 million, whichever is less.

(2) This paragraph does not preclude financing the following types of businesses:

(i) Commercial nurseries engaged in the production of ornamental plants; trees and other nursery products, such as bulbs, flowers, shrubbery, flower and vegetable seeds, sod, and the growing of plants from seed to the transplant stage; and forestry, which includes businesses primarily engaged in the operation of timber tracts, tree farms, forest nurseries, and related activities such as reforestation.

(ii) The growing of mushrooms or hydroponics.

(iii) The boarding and/or training of animals.

(iv) Commercial fishing.

(v) Aquaculture, including conservation, development, and utilization of water for aquaculture.

(r) Educational or training facilities.

(s) Industries undergoing adjustment from terminated Federal agricultural price and income support programs or increased competition from foreign trade.

(t) Community facility projects that are not listed as an ineligible loan purpose in § 4279.117.

(u) Tourist and recreation facilities, including hotels, motels, and bed and breakfast establishments, except as prohibited under ineligible purposes in § 4279.117.

(v) Pollution control and abatement.

(w) Energy projects that are not eligible under 7 CFR 4280, subpart B, Rural Energy for America Program, unless sufficient funding is not available under subpart B of part 4280, and when the facility has been constructed according to plans and specifications and is producing at the quality and quantity projected in the application. Eligible energy projects must be commercially available. Eligible energy projects also include those that reduce reliance on nonrenewable energy resources by encouraging the development and construction of solar energy systems and other renewable energy systems (including wind energy systems and anaerobic digesters for the purpose of energy generation), including the modification of existing systems in rural areas.

(1) Projects that produce biomass fuel or biogas as an output must utilize commercially available technologies and have completed two operating cycles at design performance levels prior to issuance of a Loan Note Guarantee.

(2) Projects that produce steam or electricity as an output must have met acceptance test performance criteria acceptable to the Agency and be successfully interconnected with the purchaser of the output. An executed power purchase agreement acceptable to the Agency will be required prior to issuance of a Loan Note Guarantee.

(3) Performance or acceptance test requirements for all other energy projects will be determined by the Agency on a case-by-case basis.

(x) Projects that process, distribute, aggregate, store, and/or market locally or regionally produced agricultural food products to support community development and farm and ranch income, subject to each of the following:

(1) The term “locally or regionally produced agricultural food product” means any agricultural food product that is raised, produced, and distributed in the locality or region in which the final product is marketed, so that the distance the product is transported is less than 400 miles from the origin of the product, or within the State in which the product is produced. Food products could be raw, cooked, or a processed edible substance, beverage, or ingredient used or intended for use or for sale in whole or in part for human consumption.

(2) Projects in non-rural areas may be included when the project provides an economic benefit to the surrounding rural communities.

(3) A significant amount of the food product sold by the borrower is locally or regionally produced, and a significant amount of the locally or regionally produced food product is sold locally or regionally.

(4) The borrower must include in an appropriate agreement, with retail and institutional facilities to which the borrower sells locally or regionally produced agricultural food products, a requirement to inform consumers of the retail or institutional facilities that the consumers are purchasing or consuming locally or regionally produced agricultural food products.

(5) The Agency will give funding priority to projects that provide a benefit to underserved communities in accordance with § 4279.166(b)(4)(i)(G). An underserved community is a community (including an urban or rural

community and an Indian tribal community) that has limited access to affordable, healthy foods, including fresh fruits and vegetables, in grocery retail stores or farmer to consumer direct markets and that has either a high rate of hunger or food insecurity or a high poverty rate as reflected in the most recent decennial census or other Agency approved census.

§ 4279.114
[Reserved]

§ 4279.115
Cooperative stock/cooperative equity.

(a)
Cooperative stock purchase program.
The Agency may guarantee loans for the purchase of cooperative stock by individual farmers or ranchers in a farmer or rancher cooperative established for the purpose of processing an agricultural commodity. The cooperative may use the proceeds from the stock sale to recapitalize, to develop a new processing facility or product line, or to expand an existing production facility. The cooperative may contract for services to process agricultural commodities or otherwise process value-added agricultural products during the 5-year period beginning on the operation startup date of the cooperative in order to provide adequate time for the planning and construction of the processing facility of the cooperative. Loan proceeds must remain in the cooperative from which stock was purchased, and the cooperative must not reinvest those funds into another entity.

(1) The maximum loan amount is the threshold established in § 4279.161(c), and all applications will be processed in accordance with § 4279.161(c).

(2) The maximum term is 7 years.

(3) The lender will, at a minimum, obtain a valid lien on the stock, an assignment of any patronage refund, and the ability to transfer the stock to another party, or otherwise liquidate and dispose of the collateral in the event of a borrower default.

(4) The lender must complete a written credit analysis of each stock purchase loan and a complete credit analysis of the cooperative prior to making its first stock purchase loan.

(5) The borrower may provide financial information in the manner that is generally required by commercial agricultural lenders.

(6) A feasibility study of the cooperative is required for startup cooperatives and may be required by the Agency for existing cooperatives when the cooperative's operations will be significantly affected by the proceeds that were generated from the stock sale.

(7) The Agency will conduct an appropriate environmental assessment on the processing facility and will not process individual applications for the purchase of stock until the environmental assessment on the cooperative processing facility is completed. Typically, an individual loan for the purchase of cooperative stock is considered a categorical exclusion.

(b)
Cooperative equity security guarantees.
The Agency may guarantee loans for the purchase of preferred stock or similar equity issued by a cooperative organization or for a fund that invests primarily in cooperative organizations. In either case, the guarantee must significantly benefit one or more entities eligible for assistance under the B&I program.

(1) “Similar equity” is any special class of equity stock that is available for purchase by non-members and/or members and lacks voting and other governance rights.

(2) A fund that invests “primarily” in cooperative organizations is determined by its percentage share of investments in and loans to cooperatives. A fund portfolio must have at least 50 percent of its loans and investments in cooperatives to be considered eligible for loan guarantees for the purchase of preferred stock or similar equity.

(3) The principal amount of the loan will not exceed $10 million.

(4) The maximum term is 7 years or no longer than the specified holding period for redemption as stated by the stock offering, whichever is less.

(5) All borrowers purchasing preferred stock or similar equity must provide a prospectus on the preferred stock being offered and financial information about the issuer of the preferred stock to both the lender and the Agency.

(6) Issuer(s) of preferred stock must be a cooperative organization or a fund and must be able to issue preferred stock to the public in accordance with the securities' regulations as set forth by the Securities and Exchange Commission and any other applicable regulatory body, if required.

(7) A fund must use a loan guaranteed under this subpart to purchase preferred stock that is issued by cooperatives.

(8) The lender will, at a minimum, obtain a valid lien on the preferred stock, an assignment of any patronage refund, and the ability to transfer the stock to another party, or otherwise liquidate and dispose of the collateral in the event of a borrower default. For the purpose of recovering losses from loan defaults, lenders may take ownership of all equities purchased with such loans, including additional shares derived from re-investment of dividends.

(9) Shares of preferred stock that are purchased with guaranteed loan proceeds cannot be converted to common or voting stock.

(10) In the absence of adequate provisions for investors' rights to early redemption of preferred stock or similar equity, a borrower must request from a cooperative or fund issuing such equities a contingent waiver of the holding or redemption period in advance of share purchases. This contingent waiver provides that in the event a borrower defaults on a loan financed under the guaranteed loan program, the borrower waives any ownership rights i

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2014-21351. Public record. Not legal advice.