Guaranteed Loanmaking and Servicing Regulations

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:

Final 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 published a proposed rule on September 15, 2014, that proposed 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 changes to the program are expected to reduce the subsidy rate and thereby lower program subsidy costs over time as the 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:

Effective August 2, 2016.

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.

SUPPLEMENTARY INFORMATION:

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 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 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 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 rule replaces 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 strengthens criteria for non-regulated lenders to participate in the program. It also codifies 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 most recent delinquency effective date or to a holder the greater of: 90 days from the date of the most recent delinquency effective date as reported by the lender or 30 days from the date of the interest termination letter. 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.

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. 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. Historically, insurance companies have had significant default and loss rates in the Agency B&I Guaranteed Loan portfolio and merit closer scrutiny. 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 final 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, have a line of credit issued by a regulated lender, 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 (7 U.S.C. 1991(a)(13)(E)) 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 2 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 the first provision of Section 343(a)(13)(D) of the Consolidated Farm and Rural Development Act (7 U.S.C. 1991(a)(13)(D)) 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.

The eligibility section is revised to include cooperative equity security guarantees as eligible loan purposes in accordance with the 2008 Farm Bill and the purchase of stock in a business by employees forming an Employee Stock Ownership Plan or worker cooperative. 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 purchase of stock in a cooperative or Employee Stock Ownership Plan (ESOP) is limited to $600,000 per loan, which is the threshold for using the short application process; however, cooperatives and ESOPs may still obtain loan guarantees in amounts up to $25 million ($40 million for rural cooperative organizations that process value-added agricultural commodities) in accordance with § 4279.119.

The eligibility section is 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 (7 U.S.C. 1932(g)(9)(A)(i)). 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 may be located in urban areas, as well as rural areas. 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 (7 U.S.C. 1932(g)(9)(A)(ii)), 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 (which the Agency will assess from 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 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, increased percentages of guarantee 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 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 Cs” 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. The Agency is also revising 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 of 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 leveraging of B&I program dollars 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 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 rule also clarifies that the Agency will not allow the write-down of debt while leaving the borrower in business, except as directed or ordered under the Bankruptcy Code, and that 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 to be released, and the requirement for a current appraisal for collateral to be liquidated will be 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 percentage of 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, have been 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 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.

A significant change that is expected to decrease the cost to the taxpayer is that interest accrual is limited to any lender to 90 days from the most recent delinquency effective date and any holder the greater of: 90 days from the date of the most recent delinquency effective date as reported by the lender or 30 days from the date of the interest termination letter. 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.

Executive Order 12866, Regulatory Planning and Review

This rule has been reviewed under Executive Order (EO) 12866 and has been determined to be economically significant. The EO defines an “economically significant regulatory action” as one that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this EO. This rule was determined to be economically significant because the changes to the B&I Guaranteed Loan Program regulations are estimated to have an impact on the economy of more than $100 million.

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 accordance with 2 CFR part 415, subpart C.

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 rule do not have any substantial direct effect on States, on the relationship between the Federal government and the States, or on the distribution of power and responsibilities among the various levels of government. Nor does this 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 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 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 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 approximately 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 final rule will have an impact on a substantial number of small entities.

However, the Agency has determined that the economic impact of the 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 rule to be approximately $1,600 per non-regulated 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. The Small Business Administration'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 non-regulated lender represents less than 0.003 percent 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 1970, “Environmental Policies and Procedures.” 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 have been issued for each approved application. Taken collectively, the applications show limited potential for significant adverse cumulative effects.

Paperwork Reduction Act

The information collection requirements contained in this final rule have been submitted to the Office of Management and Budget (OMB) for review and approval.

E-Government Act Compliance

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

I. Background

Rural Development 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 generally 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; Indian tribes on a Federal or State reservation or other federally recognized tribal group; public bodies; or individuals, provided the borrower is engaged 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; limited 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.

II. Discussion of Comments Received on the Proposed Rule

The Agency received a total of 717 comments from 233 commenters. Approximately 277 comments received supported the rule as written, and approximately 170 of the comments resulted in minor changes to the rule. The remaining comments were adverse to certain proposed changes in the rule. The following is a discussion of the comments received on the proposed rule.

Fourteen comments were received on the definitions section. One commenter recommended revising the agricultural production definition to clarify that “for fiber or food for human consumption” only applies to the breeding, raising, feeding, or housing of livestock and not to the cultivation, growing, or harvesting of crops, which should remain ineligible no matter what the purpose of the crop. This comment was adopted. One commenter recommended deleting the definition of “person” and revising the definition of “borrower” to avoid confusion. This comment was not adopted because “person” is a standard legal definition, which means a person or entity, and is used many times throughout the rule. Two commenters recommended changing the definition of delinquency to “a scheduled loan payment that is more than 90 days past due and cannot be cured within 30 days.” These comments were not adopted because loans are considered delinquent by many lenders when the payment is not made by the payment due date. The Agency is already allowing for more time by considering a loan delinquent when the loan payment is 30 days past due and cannot be cured within 30 days, which effectively is 60 days late. One commenter recommended revising the energy project definition so that projects that have energy outputs that are a by-product of operations, or that the Agency otherwise determines is not an energy project, would not be subject to the increased equity requirements for energy projects. This comment was adopted. One commenter recommended changing the definition of high-priority project to exclude State Director and Administrator priority points from the total number of priority points because of the discretionary nature of those points, which was not adopted. The Agency feels that the reasons to award State Director and Administrator priority points are compelling and are not adequately captured under other categories. Additionally, not counting State Director and Administrator points would likely lead to errors in calculating a project's priority score. Five commenters supported the definition of high-priority project as proposed. Additionally, one commenter recommended adding a definition for “farm or ranch”, another recommended adding a definition for “residential housing”, and one commenter recommended adding a definition for “business plan” and “feasibility study.” These comments were not adopted. Definitions for these terms are not necessary because these are commonly used terms that are generally understood and have caused no confusion in the past.

Forty-five comments were received on the eligible lenders section. One commenter recommended mortgage companies that are approved by the Rural Housing Service be considered regulated lenders for the B&I program. This comment was not adopted because housing lenders are generally not commercial lenders and usually do not have adequate expertise in commercial lending. Four commenters recommended that Community Development Financial Institutions (CDFI) be considered regulated lenders. These comments were not adopted because CDFIs are not subject to credit examination and supervision by either an agency of the United States or a State. One commenter recommended either eliminating non-regulated lenders or further strengthening the criteria for them to be considered eligible, such as requiring the lender to have a line of credit issued by a regulated lender and requiring the lender to submit that line of credit information and their audited financial statements for review annually. The Agency is adopting part of this comment. The Agency will require non-regulated lenders to have a line of credit issued by a regulated lender and to submit their audited financial statements annually but will not be eliminating non-regulated lenders because they are an additional source of funding for businesses in rural areas.

Six commenters recommended allowing only regulated lenders to participate in the B&I program. These comments were not adopted because the Agency is strengthening eligibility criteria for non-regulated lenders but does not intend to deny all non-regulated lenders access to the program. Historically, non-regulated lenders have provided a meaningful lending source to businesses in rural areas, and the Agency believes the strengthened criteria to become a non-regulated lender will ensure that non-regulated lenders participating in the program have adequate commercial lending experience to operate a successful lending program. Fifteen comments were received on the 3-year renewal process for non-regulated lenders. Eleven commenters were against a 3-year renewal process, two suggested a 5-year renewal process with existing approved lenders being grandfathered in, one suggested only grandfathering in existing approved lenders in good standing, and one recommended automatic renewal as long as the lender is in good standing. None of these comments were adopted for the following reasons. First, the Agency needs to implement a renewal process to maintain a list of actively approved lenders. Second, there is currently no vehicle to ensure non-regulated lenders continue to meet lender eligibility criteria once they are initially approved. Third, all non-regulated lenders must meet the new criteria to be an eligible non-regulated lender; therefore, they

must reapply. Lastly, a 5-year period is too long a period of time for the Agency to review a lender's information to ensure they continue to meet the requirements of an eligible lender. Seven comments were received with regard to the specific requirements set forth in section 4279.29(b)(1)(ii) that a non-regulated lender must meet, including suggested changes to the number of commercial loans and delinquency percentage required. These comments were not adopted as the Agency is strengthening eligibility criteria for non-regulated lenders, and those suggestions do not accomplish that objective. Three comments were received that did not support the requirement for a loan loss reserve of 3 percent for non-regulated lenders. The Agency recognizes that many lenders use a loan loss reserve coverage ratio to establish the amount of a loan loss reserve, but this requires regular screening of a lender's loan portfolio, which is not something the Agency can easily manage. According to the Federal Administrator of National Banks, the amount set aside for loan losses is about 2 to 2.5 percent of outstanding loan receivables, depending on the quality of the loans in the portfolio, which indicates the 3 percent requirement is not out of line for a non-regulated lender. Four comments were received recommending that credit examinations performed by Aeris, formerly known as the CDFI Assessment and Ratings System, be accepted as an acceptable credit examination. The Agency concurs with this suggestion. However, these comments do not require a rule change and will be addressed administratively. One commenter recommended the credit examination requirement be stricken, which was not adopted because non-regulated lenders need to undergo some type of examination to give the Agency a level of comfort approving them as non-regulated lenders for the program. Two commenters recommended not requiring audited financial statements for non-regulated lenders (a current requirement), which was also not adopted. The Agency needs to better monitor its approved non-regulated lenders and is requiring not only an audited financial statement at the time of application and renewal but annually as review of financial statements is a routine way of monitoring. Lastly, one commenter recommended deleting the requirement that rates and fees charged by non-regulated lenders must not be greater than those charged by similarly located regulated commercial lenders. This comment was adopted because section 4279.120 allows the lender to establish charges and fees for the loan provided they are similar to those normally charged other applicants for the same type of loan in the ordinary course of business.

Two comments were received with regard to environmental issues. One commenter suggested that the new environmental proposed rule and the B&I proposed rule be aligned, which the Agency will ensure. Another commenter suggested that the Agency use the site assessment from the lender for the Agency's requirements, which could not be adopted because of National Environmental Policy Act of 1969 requirements.

One comment was received with regard to audits for public bodies and nonprofits suggesting that the rule align with 2 CFR part 200, subpart F. This comment was adopted.

Seven comments were received suggesting specifically stating that amendments may be made to the Conditional Commitment, which were adopted. The Agency made changes to the rule to clarify that the Conditional Commitment can be modified.

Nine comments were received with regard to limiting interest accrual to holders. Three commenters indicated they did not believe the liquidity event of one investor should force the repurchase of a loan by the Agency, and one commenter indicated that one holder should not be able to initiate a claim and dictate the timeline for other holders. These comments were taken into consideration. The Agency agrees and has implemented these concepts by providing that for loans closed on or after the effective date of the final rule, the lender or the Agency will issue an interest termination letter to the holder(s) establishing the termination date for interest accrual. The guarantee will not cover interest to any holder accruing after the greater of: 90 Days from the date of the most recent delinquency effective date as reported by the lender or 30 days from the date of the interest termination letter. Four commenters supported the regulation change as proposed, and one commenter recommended that the new interest cap for lenders appear in the Full Faith and Credit section for consistency since the interest cap for holders is reflected there. This comment was adopted.

One commenter recommended a requirement that the lender submit to the holder its pro rata share of payments within 5 business days, which was not adopted. The regulation indicates the payment should be remitted promptly, and the Agency declines to define “promptly” or set a specific time period for the lender to remit payment to the holder. Based upon discussions with some of the largest secondary market holders, lenders typically take as much as 30 days to process and remit payments to holders.

One commenter suggested clarifying that a holder typically notifies the lender and the Agency of reassignments after a sale and recommended changing reference of the Bond Market Association to the Securities Industry and Financial Markets Association. Both recommendations were adopted. Another commenter recommended language stating that holders are encouraged to consult with the Agency in order to validate authenticity of guaranteed loans they purchase, which also was adopted.

Two commenters suggested the minimum retention section be modified to allow lenders to sell the unguaranteed portion in any way as long as they buy back and retain the minimum 5 percent of the total loan amount. These suggestions were not adopted because of the potential for fraud or abuse. One commenter recommended clarifying that under the multi-note system, the lender does not retain title to the notes. This comment was adopted.

Fourteen comments were received on the repurchase from holder section. Ten commenters recommended that the “lender is encouraged to repurchase” text be stricken, and three others recommended that the “in the opinion of lender” text be stricken. Both of these provisions are in the current rule, as well as the Biorefinery Assistance Program regulation, although one sentence was added to emphasize the benefit to the lender. This was added to encourage lenders to repurchase guaranteed loans in default versus the Agency having to repurchase them. As such, the suggestions to strike the text were not adopted. One commenter suggested adding “if the default is not cured” to the repurchase text for clarification, which was adopted along with integrating paragraph (c) of § 4279.78 into paragraph (a).

One commenter suggested that a form be developed in lieu of requiring an indemnity bond when documents are lost, stolen, destroyed, mutilated, or defaced. This comment was not adopted because an indemnity bond is the only way the Agency is guaranteed to be made whole in the event the Agency erroneously makes payment on both an original and duplicate document. One commenter recommended § 4279.84(b)(4) be neutered to apply to both single note and multi-note options, which was adopted.

The Agency invited public comment as to whether guaranteed loans should be made to businesses that do not meet citizenship requirements, 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 United States. Sixteen comments were received with regard to the citizenship requirement for corporations or other non public-body type borrowers. Fifteen comments supported removing the citizenship requirement, and one did not. As such, the rule was revised to remove the citizenship requirement for corporations or other non public-body type borrowers 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 United States. The B&I program is focused on the creation and retention of jobs in rural America. It is critical that jobs be created and retained in the United States, and this provision will help to achieve that.

Nine comments were received with regard to rural area exceptions. Eight of the comments support addition of the Farm Bill language, and one suggested that the language for rural area exceptions in § 4279.108(c)(6) be rewritten, which was not adopted due to the text's statutory nature.

Twenty-one comments were received with regard to eligible uses of funds. Four commenters support the enhanced and clarified uses of funds as proposed. Two commenters recommended that nursing homes and assisted living facilities be specifically listed as eligible loan purposes for clarification because the ineligible loan purpose/entity section uses the term “or other residential housing.” These comments were adopted. One commenter recommended clarifying that the purchase and development of land, buildings, etc., is for commercial or industrial properties, which was also adopted. One commenter recommended requiring documentation that newly proposed residential units as part of mixed-use properties be necessary to fill a lack of currently available housing. This comment was not adopted because in mixed-use properties, the housing component is critical to project viability. One commenter recommended recasting the existing lender debt sentence to state existing lender debt refinancing may not exceed 50 percent of the overall loan instead of existing lender debt refinancing must be less than 50 percent of the overall loan. This comment was adopted. One commenter recommended stating that “except for the refinancing of lines of credit”, debt being refinanced must have been for an eligible loan purpose. This comment was adopted. The same commenter further suggested that this paragraph reiterate that 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. This comment was not adopted because § 4279.108(c) already states this and reiteration is not necessary. One commenter recommended removing industries undergoing adjustment from terminated Federal agricultural price and income support programs or increased competition from foreign trade as an eligible loan purpose. This comment was not adopted as the provision is required by Section 310B(a)(2)(D) of the Consolidated Farm and Rural Development Act. Seven comments were received with regard to energy projects. One commenter indicated energy projects should be eligible regardless of whether the project is eligible for the Rural Energy for America Program (REAP), which was not accepted because the intent of this provision was to steer energy projects to the REAP program to the extent possible. Two comments from the same commenter were received with regard to expanding eligibility for “next phase” technology, which were not adopted because there is too much risk involved with next-phase technology. Energy projects are risky by nature, but requiring the energy project to be commercially available reduces risk. Three comments were received with regard to locally or regionally produced agricultural food products. Two commenters recommended allowing only non-rural local foods projects when the project assists rural businesses and creates and/or saves jobs in the surrounding rural communities. These comments were not adopted because they conflict with the statute. There could be projects in non-rural areas that serve underserved communities that do not necessarily provide an economic benefit to the surrounding rural communities, assist rural businesses, or create and/or save jobs in the surrounding rural communities. One commenter recommended the Agency retain the current policy that projects that are eligible under the locally or regionally produced agricultural food products initiative may be located in urban areas, as well as rural areas. This comment was adopted.

Four commenters support the addition of the cooperative stock/cooperative equity sections, and two commenters recommended not requiring a prospectus and striking reference to Securities Exchange Commission regulations for cooperatives since cooperatives are exempt from these requirements. These comments were adopted.

Thirteen comments were received on the New Markets Tax Credit (NMTC) program. One commenter stated that unless legislation is passed to continue the NMTC program, the entire section should be stricken. As Section 141 of Division Q of the Consolidated Appropriations Act of 2016, which was signed into law on December 18, 2015, extended the NMTC program through 2019 and the fact that Community Development Entities (CDE) have several years to deploy allocated funds, this comment was not adopted. One commenter suggested reserving guarantee authority for a pilot program, but this comment was not adopted because the Agency has no authority to reserve funding for an NMTC pilot program. One commenter suggested incorporating a requirement for “reasonable and customary fees” or the approved unwind at the end of the NMTC compliance period to include the sub-CDE conferring some significant percentage, if not all, of the NMTC subsidy to the Qualified Active Low Income Business (QALICB). This comment was adopted since § 4279.120 allows the lender to establish charges and fees for the loan. Furthermore, the regulation was revised to require the plan to unwind the fund be included in the guaranteed loan application to the Agency. Two commenters suggested that the rule be clarified that the guarantee is provided to a loan made to a qualified business in a rural area, and two commented that the Agency should consider allowing the guarantee to attach to the leveraged loan(s) made to the upper-tier investment fund, both of which were adopted. One commenter suggested clarifying that the guarantee could only attach to the QALICB's loan, which was not adopted because, as a result of other comments, the rule has been expanded to include a lender's leveraged loan to accommodate the mechanics of the NMTC program. The entire section was restructured to separate guarantees for QALICBs' loans and guarantees for lenders' leveraged loans. Three commenters recommended a “direct tracing” method. These suggestions were also adopted. Two commenters suggested that CDEs should not have to provide audited financial statements and loan performance statistics to become an eligible non-regulated lender. These comments were

not adopted because CDEs must meet the requirements of § 4279.29(b) to be an approved non-regulated lender.

Fifty comments were received on the ineligible loan purpose/entity type section. One commenter suggested that § 4279.117 be revised to align with Section 363 of the Consolidated Farm and Rural Development Act to include as an ineligible loan purpose any project that drains, dredges, fills, levels, or otherwise manipulates a wetland, which was adopted. One commenter suggested that transactions among immediate family members that are not arm's length transactions be value-validated via an appropriate appraisal, which was also adopted. Another commenter recommended clarifying what documentation would be obtained from the selling immediate family member to ensure they are not trying to circumvent the regulation by staying on running/operating or assisting with the business. This comment does not require a rule change. The Agency will provide administrative guidance to clarify that the selling immediate family member is prohibited from having an ownership interest in the business but that does not preclude the former owner from remaining as an employee of the business during a transitional period. One commenter recommended a sentence be added to more specifically state that documented construction or installation costs may not include any profit or wages to related persons/entities and that all such work must be done at cost. This comment was adopted. One commenter recommended that a selling immediate family member be allowed to maintain a minority ownership interest in the borrower. This recommendation was not adopted because the business must be acquired in full to be a business acquisition in accordance with § 4279.113(b). One commenter recommended that “on account of an ownership interest” be added and that the Agency allow reasonable overhead, developer fees, and profit in line with market standards. These comments were not adopted because the addition of “on account of an ownership interest” does not add anything to the sentence and the Agency only allows construction or installation work to be done by an affiliate at cost with no profit to the affiliate. Three comments were received questioning the prohibition of guaranteeing projects in excess of $1 million that would likely result in the transfer of jobs from one area to another and increase direct employment by more than 50 employees. These comments were not adopted because this is a statutory provision. Five commenters stated that campgrounds should be an eligible loan purpose. These comments were adopted, and campgrounds and resort trailer parks will not be listed as ineligible loan purposes. Campgrounds and resort trailer parks will be added to the list of examples under tourist and recreation facilities in the eligible loan purpose section. Eight commenters stated that apartments, duplexes, and other housing projects that would not be eligible for multi-family housing programs should be an eligible loan purpose. These comments were not adopted because these types of projects do not generally provide lasting community benefits and create or save quality jobs, and guarantee authority would be better utilized for projects that do. One commenter suggested clarification of the prohibition on supporting inherently religious activities, specifically as it relates to the financing of hospitals with chapels, funeral homes conducting religious services, or event centers that periodically host weddings. This comment was not adopted because it is already addressed at 7 CFR part 16. In line with the Faith Based Initiative, the Agency revised its provision precluding the funding of “church-controlled” organizations to precluding the funding of “inherently religious activity.” While mere control by a church no longer disqualifies a proposed applicant, it is the Agency's position that religious entities are charitable organizations and, as such, must not exceed the 10 percent cap on charitable donations. One commenter suggested allowing next-phase technology, which was not adopted because the B&I program only guarantees projects that are commercially available, which by definition would exclude next-phase technology. There is too much risk involved with next-phase technology. Energy projects are risky by nature, but requiring the energy project to be commercially available reduces risk. Thirteen commenters recommended that debt service reserves be eligible. These comments were adopted, and debt service reserves were removed as an ineligible loan purpose. One commenter indicated the conflict of interest prohibition was overly broad and not well defined. The text is broad by design to provide flexibility while encompassing any conflict of interest situation. The Agency is available to provide eligibility determinations, which would enable applicants to determine whether a conflict of interest exists. One commenter suggested defining “lender's officers” and asked what the rationale was for removing the lender's directors, stockholders, or other owners from the prohibition and what documentation would be required on what policies the lender has in place to remove the lender's director, stockholder, or other owner from the decisionmaking process. The intent of this revision was to allow a borrower's owner who has a nominal interest (less than 5 percent) in the lender or who is a member of the lender's board of directors (as long as they are not also officers) to still have the lender provide the guaranteed loan to the borrower. The suggestion to add a definition for “lender's officers” was not adopted because it is not necessary, although additional language was added to address the concern of the lender's director, stockholder, or other owner being removed from the decisionmaking process. Two commenters recommended that charitable organizations engaged in or proposing to engage in a business be eligible. These comments were adopted when it can be demonstrated that not more than 10 percent of a charitable organization's revenue is generated from tax deductible charitable donations. A charitable organization proposing to engage in a business could charter that business separately as a for-profit business.

One hundred and seventy five comments were received supporting allowing an owner to stay involved in a phased ownership buyout by employees for ESOPs and worker cooperatives. Three commenters recommended a specific eligibility provision for worker cooperative and ESOP stock purchases. These comments were adopted. Two commenters recommended that there be a limited time period where the transferred business must be fully employee owned upon completion. One of those suggestions was a 5-year period, which was adopted. One commenter suggested a more detailed description of the kind of stock to be transferred/financed, and one commenter suggested allowing loan guarantees in stages. These comments were adopted, and a new section was added to address staged financing and the transfer of stock within cooperatives.

Fifteen comments were received on the loan guarantee limit section. One commenter suggested a guarantor loan limit of $50 million, which was adopted. One commenter suggested that the Agency clarify how legal or regulatory lending limits would impact the percentage of guarantee. The legal or regulatory lending limit does not impact the percentage of guarantee per se. As

long as the lender's legal lending limit would otherwise prevent it from being able to make the loan to the borrower, a lender may request up to a 90 percent guarantee. Two commenters recommended that guarantees of up to 90 percent be allowed for local and regional food enterprise loans of up to $10 million. Seven commenters recommended guarantees of up to 90 percent remain for loans of up to $10 million. These comments were not adopted because the $5 million loan limit for increased percentages of guarantee mirrors the loan limit for reduced guarantee fees, and these are steps the Agency is taking to reduce the cost of administering the program. Four comments were received supporting the limitation of increased percentages of guarantee to loans of $5 million or less.

Ten comments were received on the fees and charges section. Seven commenters recommended that reduced guarantee fees be available for all loans, regardless of loan amount. These comments were not adopted because there is a negative impact on program subsidy for reduced guarantee fees, and the Agency is trying to reduce the costs of administering the program. One commenter suggested deleting “or fundamental structural changes in its economic base” in the criteria for allowing a reduced guarantee fee, which was adopted because the priority scoring section no longer contains that clause. Two commenters recommended that the responsibility to ensure that annual renewal fees have been paid be that of the lender. These comments were accepted as the requirement is directed at the lender.

Twenty comments were received on the interest rate section. Three commenters addressed interest rate swaps, which the current regulation allows. One commenter recommended that interest rate swaps not be allowed because they expose users to interest rate and credit risk. Two commenters, however, pointed out that borrowers who opt for a variable rate loan will not have the opportunity to hedge against rising interest rates if interest rate swaps are not allowed. The Agency notes that it has long been its policy for the B&I Guaranteed Loan Program that interest rates are negotiated between the lender and the borrower, including instances of interest rate swaps. As noted by the commenters, interest rate swaps may benefit some borrowers and may expose other borrowers to interest rate and credit risk. On balance, the Agency has decided retain its long-standing policy of allowing interest rate swaps under this program. The Agency points out that the loan guarantees it issues under this program covers only the principal and interest on the guaranteed loans and does not cover any fees associated with interest rate swaps. One commenter suggested that a variable interest rate be tied to a base rate published in a national or regional financial publication, which was adopted. One commenter recommended that interest rates on the unguaranteed portion be allowed at the outset to be lower than the guaranteed portion if the adjustment period on the unguaranteed portion is shorter than the guaranteed portion, which would represent a lower rate risk to the bank. This comment was not adopted because allowing the guaranteed portion to have a higher interest rate would cause the Agency to pay more on a loss than it otherwise would if the guaranteed portion was equal to or less than the unguaranteed portion. Seven commenters support the new provision providing that lenders do not have to set interest rate floors and ceilings to remain in compliance with the regulation. Four commenters support the addition of the requirement that the lender's promissory note may not contain provisions for default or penalty interest. Three commenters recommended this provision be stricken. These comments were not adopted because allowing default interest rates could cause the borrower to continue in default because of the higher payment, which increases the likelihood of the Agency having to pay a loss. One commenter recommended adding a provision that the lender may not charge late payment fees for the same reason; however, this comment was not adopted because the Agency believes there needs to be some incentive for the borrower to get its payments in on time.

One commenter suggested clarifying what is meant by project cash flow statements, which was adopted. Administrative text was added to the Instruction to provide clarification.

Sixteen comments were received on collateral requirements. One commenter recommended that intangible assets not be allowed to serve as primary collateral and recommended minor changes to the rule text, both of which were adopted. Three commenters suggested tying collateral discount rates to the Federal Deposit Insurance Corporation (FDIC) supervisory loan-to-value limitations. These comments were not adopted because FDIC supervisory loan-to-value limitations only apply to real estate, and there are no set limitations for machinery and equipment or accounts receivables and inventory. Furthermore, the loan-to-value limitations are excluded when loans are guaranteed or insured by the U.S. Government when the amount of the guarantee or insurance is at least equal to the portion of the loan that exceeds the supervisory loan-to-value limit. Five commenters stated they did not believe there was a need to change the current language because lender regulatory requirements define collateral and appropriate discounts. These comments were not adopted because changes are necessary to bring consistency in collateral requirements. Seven comments were received on the requirement for reviewed financial statements when there is a predominant reliance on inventory and/or receivable collateral that exceeds $250,000. Four of these commenters mistakenly thought if the loan amount exceeds $250,000, reviewed financial statements would be required and recommended the threshold be $1 million. These comments were not adopted because reviewed financial statements would only be required when there is a predominant reliance on inventory and/or receivable collateral that exceeds $250,000, which will usually only be applicable for working capital loans. If receivables and inventory are the predominant or only collateral for a loan, the Agency must ensure collateral for these types of loans is adequate.

Thirty-six comments were received with regard to equity. Three commenters suggested reducing the tangible balance sheet equity requirement for new businesses from 20 percent to 10 percent. These comments were not adopted because startup businesses are generally cost intensive, and those that are financed with more equity and less debt are more likely to succeed. Two commenters indicated that Generally Accepted Accounting Principles (GAAP) accounting allows related entities to transfer assets to one another at fair market value and asked why the Agency would not allow such a transaction if it is in accordance with GAAP. The Agency adopted the comments and modified the sentence to allow it when in accordance with GAAP and evidence is provided that the transaction was entered into at market terms. One commenter indicated clarification was needed on owner subordinated debt and asked if payments could be made on the subordinated debt and whether interest could be paid on the subordinated debt. This comment was accepted, and administrative text was added to the Instruction to clarify that as it is the principal amount of cash being injected as owner subordinated debt that the Agency will consider equity when

calculating tangible balance sheet equity, no payments can be made on this subordinated debt because the cash must remain in the business for the life of the loan. This would not, however, preclude interest from being paid on the subordinated debt as long as the guaranteed loan is current and there are no loan agreement/covenant violations. Because the regulation requires an injection of cash in exchange for the subordinated debt, an owner would not be able to create a subordinated debt note in lieu of drawing a salary because the salary is drawn over time, and the reduction of expenses is not the same as an immediate cash injection. One commenter recommended that subordinated debt of non-owner parties be allowed the same consideration as owner subordinated debt. This comment was not adopted because debt is a liability of the business and is therefore not equity. Owner subordinated debt is only allowed when cash is injected into the business for the life of the loan. One commenter recommended that the Agency consider removing the tangible balance sheet equity requirement and allowing appraisal surplus, which was not adopted. The tangible balance sheet equity requirement cannot be removed as the Consolidated Farm and Rural Development Act contains a provision requiring that no loan commitment be conditioned upon an applicant investment in excess of 10 percent in the business or industrial enterprise unless special circumstances warrant (the Agency determined that startup businesses and energy projects are special circumstances), and review of the balance sheet is the only way to ascertain an applicant's investment in the business. Three commenters suggested removing the tangible balance sheet equity requirement and replacing it with a well-established lending industry metric, such as a leverage or debt-to-worth ratio. These comments were accepted, as a debt-to-worth ratio requirement is already specifically in the rule. Tangible balance sheet equity is the same as a debt-to-worth ratio, simply expressed as a percentage. Three commenters suggested allowing “off balance sheet” items, such as fully subordinated owner debt, stand-by debt, and equity in commonly owned real estate. Aside from fully subordinated owner debt that is already allowed, debt, stand-by or otherwise, is classified as a liability and is not equity. Therefore, this comment is not being accepted. Appraisal surplus is not allowed because it is the asset's book value that is reflected on the balance sheet. Furthermore, appraisals fluctuate widely, and an asset's book value is a more conservative and reliable approach to valuing an asset for equity purposes. Five commenters suggested adding back depreciation. These suggestions were not adopted. As financial statements must be prepared in line with GAAP standards and depreciation is a GAAP concept, it is the asset's depreciated value that is considered in the tangible balance sheet equity calculation. If a business has depreciated its assets in accordance with GAAP for tax purposes, it cannot add that depreciation back in for purposes of meeting the tangible balance sheet equity requirement. One commenter suggested allowing energy projects to meet the equity requirement at issuance of the Loan Note Guarantee, which was not adopted. The practice of allowing loans to close not having met the equity requirement would complicate administration of the program and tie up guarantee authority for projects that otherwise meet the equity requirement. One commenter suggested requiring an independent accountant to prepare the loan closing balance sheet. This comment was not adopted because it would be overly burdensome to require the balance sheet, on which the lender's certification is based, to be prepared by an independent accountant. Four commenters suggested removing the requirement for the loan closing balance sheet to be prepared by an accountant. These comments were adopted. Since it is the lender that is required to make the certification, it would be up to the lender whether or not to require an accountant to prepare the loan closing balance sheet. Two commenters suggested the timing of the tangible balance sheet equity requirement be at issuance of the Loan Note Guarantee versus loan closing. These comments were not adopted because the regulation has always required the Loan Note Guarantee to be issued coincident with or immediately after loan closing, and the regulation has always required the lender's loan agreement to contain all of the requirements of the Conditional Commitment (the tangible balance sheet equity requirement being one of those requirements). However, the Agency was finding that loans were being closed without having met the equity requirement and, in some cases, loans were closed with the hopes that retained earnings would increase at some point in the future to meet the equity requirement. This practice was tying up guarantee authority for projects that met the equity requirement. As a result of these findings, the regulation was changed in 2006 as a corrective action to clarify that equity was to be met at loan closing. Four comments were received with regard to the requirement for real estate holding companies and operating companies to be co-borrowers. These comments were taken into consideration, and the Agency added the ability for this requirement to be waived when the Agency determines that adequate justification exists. Two commenters suggested that the requirement for co-borrowers that are independent operations to both meet the equity requirement individually be removed. These comments were not adopted to prevent situations where a company unrelated to the project is made a co-borrower to compensate for the “borrower” not meeting the equity requirement, which effectively is a circumvention of the regulation. One commenter suggested that GAAP apply to sole proprietorships, which was not adopted because very few B&I loans are made to sole proprietors, and personal financial statements do not typically account for depreciation. One commenter recommended that the rule retain the ability for the Administrator to reduce the borrower's equity requirement, which is accepted as the regulation continues to provide the Administrator discretion to reduce the equity requirement. One commenter suggested adding the word “all” to the requirement for financial statements that meet or exceed industry standards when requesting a reduction in the equity requirement, which was adopted.

Nine comments were received on the personal and corporate guarantee section. One commenter suggested adding a provision where guarantees are not required from owners who are legally prohibited from providing guarantees, which was adopted. One commenter suggested adding the words “for existing businesses” to the guarantee exception language, which was also adopted because, in practice, only an existing business would be able to demonstrate cash flow and profitability. Two commenters suggested adding the exception language back into the rule. These comments were accepted. The exception language still exists but was simply moved to another paragraph. Five commenters suggested removing the ability for the Agency to obtain guarantees from persons whose ownership interest in the borrower is held indirectly through intermediate entities. These comments were not adopted because often times, borrowers are owned by shell companies, whose guarantees are typically worth little. The Agency needs to have the ability to

obtain guarantees where the financial strength lies, which is typically the principal(s) of the business, who may be layers up the ownership chain.

Ten comments were received on the financial statement section. One commenter suggested adding “Except for audited financial statements required by § 4279.71 of this chapter, the lender will determine the type and frequency . . .,” which was adopted. Two commenters suggested increasing the threshold where the Agency may require audited financial statements from $3 million to $10 million, which were also adopted. One commenter suggested requiring an independent accountant to prepare the annual financial statements. This comment was not adopted because it would be overly burdensome to require annual financial statements to be prepared by an independent accountant. Six commenters recommended language be added to allow for the approval of the loan with the requirement for audited financial statements to be provided in subsequent years, as opposed to requiring audited financial statements at the onset of the loan. These comments were not adopted as the lender already has the ability to require future audited financial statements if they wish, and it is not necessary to specifically state they have this ability in the rule.

Eight comments were received on the appraisal section. One commenter suggested adding a requirement for lenders to follow their primary regulator's policies relating to appraisals and evaluations when collateral values are under the $250,000 threshold for requiring an appraisal, which was adopted. Six commenters suggested adding “unless it is a well-established industry norm to use business valuations in calculating the value of the enterprise and is in accordance with the lender's loan policies” to the statement that values attributed to business valuations or as a going concern are not allowed. Although these comments were not adopted, the Agency changed the regulatory text to require that values of both tangible and intangible assets be reported individually/separately in the appraisal. Business valuations or going concern values will be deducted from the reconciled fair market value of the hard assets for purposes of calculating collateral coverage. One commenter recommended requiring a Certified Appraisal by a Certified Machinery and Equipment Appraiser, which was not adopted because this is not a normal banking practice.

Twelve comments were received with regard to feasibility studies. One commenter suggested not requiring a feasibility study from an existing business expanding its facility if the existing facility is sufficient to service the new debt, which was adopted. One commenter recommended removing the requirement for a feasibility study for all biofuels projects, regardless of whether they are new or existing, which was also adopted. Since feasibility studies are required for new businesses and may be required for existing businesses where there is a significant change in operations, this requirement has been determined not to be necessary. Two commenters recommended that feasibility studies conducted with funding from other programs, such as the Value-Added Producer Grants, the Rural Business Enterprise Grants, and the Rural Cooperative Development Grants, be accepted as fulfilling the feasibility study requirement. These commenters further recommended that the Agency work with lenders and borrowers to secure alternative grant funding for development of feasibility studies. These comments were accepted as the Agency currently accepts feasibility studies funded with other programs as long as they meet the requirements of § 4279.150. While the borrower is ultimately responsible for securing any grant funding, the Agency does assist in securing grant funding for development of feasibility studies. Three commenters recommended that feasibility studies not be required for all new businesses. These comments were not adopted because current Agency policy is to obtain feasibility studies for startups/new businesses or when there is a significant change in operations in an existing business, and this provision simply codifies current Agency policy. Five commenters recommended defining “significantly.” These comments were not adopted because “significant” and “significantly” are used many times throughout the rule, and there may be unintended consequences of defining such a generic term. The Agency will rely on the commonly used definition of the term, meaning a noticeably or measurably large amount.

Thirty-nine comments were received on the application section. One commenter suggested requiring additional information in order to complete the priority score sheet. This comment was accepted, and, although it is already covered by § 4279.161(b)(19), text was added to clarify any information needed to score the project will be required. Nine comments were received supporting the reduction of historical financial information for any parent, affiliates, or subsidiaries from 3 years to current financial statements only. One commenter suggested adding that projections must be prepared in line with GAAP standards for clarification, which was adopted. Three commenters recommended that the Agency not require a loan agreement or ratios in the loan agreement. These comments were not adopted because the loan agreement needs to contain basic loan covenants, including ratios, and the Agency should review the draft loan agreement to ensure it complies with the regulation. At the time of issuance of the Loan Note Guarantee is too far along in the process to learn there may be problems with the loan agreement because, typically, the loan agreement has been executed by the lender and borrower by the time the lender requests issuance of the Loan Note Guarantee. One commenter recommended revising the citation for intergovernmental consultation comments to 2 CFR part 415, subpart C, which was adopted. One commenter suggested that the technical review of the appraisal, which is required by § 4279.144(a), be added to the appraisal requirement in the application section, which was adopted. Seven commenters recommended that the Agency continue to issue Conditional Commitments subject to receipt of satisfactory appraisals. These comments were accepted, although the ability to issue Conditional Commitments subject to receipt of satisfactory appraisals remains. Four commenters suggested removing “at the Agency's discretion” with regard to not requiring a business plan when loan proceeds are used exclusively for debt refinancing and fees in order to remove the burden of decisionmaking from local officials, which may be arbitrary in nature. Six commenters supported doing away with business plans when debt is being refinanced. Two commenters recommended the Agency conduct outreach to make lenders and borrowers aware of the abbreviated application option, and one further recommended that the Agency develop guidelines for common factors that constitute a “significant risk.” The Agency agrees with these comments and will adopt administrative text to address the concern. Three commenters support reducing the amount of documents required for the short application form/process, and one commenter suggested removing the short application form/process in its entirety, which was not adopted because the Consolidated Farm and Rural Development Act requires a simplified application form/process.

Thirteen comments were received on priority scoring. Four commenters support the changes in priority scoring. One commenter recommended deleting the requirement for lenders to consider Agency priorities when choosing projects for guarantee. This comment was not adopted because lenders are not discouraged from submitting applications that would receive a low priority score. They are simply required to consider priorities for scoring, especially the categories they have control over, such as the interest rate category. This requirement is in the current rule. With regard to the categories for loan-to-job ratio, one commenter suggested the Agency add language to explain how jobs should be counted and incorporate a verification component to the scoring criteria. This comment does not need to be addressed because this point category was deleted. Five commenters suggested that the Farmer Mac II rate not be utilized for priority scoring. These comments were accepted, and this point category was deleted as well. The proposal was in response to a concern that it was difficult for fixed rate loans to qualify for priority points using the Wall Street Journal Prime +1 and +1.5 equivalents. One commenter suggested that “an agricultural resource value-added product” be removed in the scoring section because the definition for this term was incorporated into “natural resource value added product.” This comment was adopted. One commenter suggested removing reference to the Work Opportunity Tax Credit Program because program authority expired December 31, 2013, and has not been extended to date. This comment was adopted as well.

Ten comments were received on planning and performance development. Two commenters suggested that “or similar document issued by the relevant building jurisdiction” be included with the requirement for a Notice of Completion, which were adopted. One commenter recommended that the Agency clarify that a project architect or engineer may be a person with demonstrated experience to confirm that the budget is adequate for the planned development, which was also adopted. Five commenters recommended the Agency allow independent monitoring by a reputed nationwide firm during construction as an alternative to a performance bond as long as the contract guarantees project construction. These comments were taken into consideration, and the Agency will allow contracts with independent disbursement and monitoring firms where project construction and completion are guaranteed. One commenter recommended breaking a sentence into two sentences, which was not adopted because a third option was added due to other comments, and restructure of this sentence makes it clear there are several alternatives. One commenter recommended that § 4279.167(c) be revised to remove reference to the Americans with Disabilities Act and insert reference to the Architectural Barriers Act Accessibility Standard, which was adopted.

One commenter recommended that a timeframe be established for responding to preapplications, and five commenters recommended that that timeframe be 30 days. These comments were not adopted in this rule because the Instruction contains an entire preapplication processing section; however, administrative text was added to the preapplication processing section instructing staff to respond to preapplications within 30 days.

One commenter recommended that a transfer of lender request be received in writing from the current lender, the proposed lender, and the borrower, which aligns with the substitution of lender requirements in the servicing regulation, and one commenter recommended deleting a semicolon. Both of these suggestions were adopted.

Three comments were received on the conditions precedent to issuance of the guarantee section. One commenter again recommended that the regulation specify that the loan closing balance sheet must be prepared by an independent accountant, which was not adopted because it would be overly burdensome to require the balance sheet, on which the lender's certification is based, to be prepared by an independent accountant. One commenter suggested that a form be developed for the lender's certification, which was not adopted because simply signing a form would not provide the Agency with the same level of comfort as when a lender has to actually prepare the certification on its own letterhead. One commenter suggested adding a definition for “accountant” and emphasized that if the lender has to make the certification, it should be up to the lender who prepares the balance sheet. Part of this recommendation was adopted. The Agency has decided not to require the loan closing balance sheet to be prepared by an accountant. Since the lender is required to make the certification that tangible balance sheet equity was met, it would be up to the lender whether or not to require an accountant to prepare the balance sheet.

One commenter recommended a field be created in the USDA Lender Interactive Network Connection (LINC) to prompt the lender to complete the loan classification. The Agency agrees with this recommendation and will adopt it administratively. One commenter recommended that § 4287.107(b) include the lender's ability to enter the loan classification in LINC if they remit the guarantee fee via LINC, which was also adopted. Five commenters support requiring the lender to establish the loan classification at loan closing. Five commenters support allowing the flexibility to have teleconferences to complete the Agency and lender annual lender conferences. One commenter recommended that the Agency only allow annual lender conferences to be held via teleconference if the lender has supplied all required servicing reports to the Agency. This comment was not adopted because face-to-face visits can be costly and allowing annual conferences to be held by teleconference not only reduces the cost to the lender, it reduces the cost of administering the program for the Agency. One commenter recommended clarification of a “reasonable attempt to obtain financial statements.” This was not adopted because it is not necessary and allows for flexibility in determining what is reasonable. Reasonable attempts could be documented telephone calls or written letters to the lender.

Nine commenters support increasing the requirement for an appraisal from $100,000 to $250,000. One commenter recommended allowing subordination of lien positions when it would “not adversely affect the potential for collection of the B&I loan through repayment or liquidation” instead of stating when it would be in “the best financial interest of the Agency.” This comment was adopted. One commenter recommended changing the word “loan” to “collateral” in the lien priorities paragraph, which was also adopted. Five commenters recommended that subordinations to lines of credit be extended from 1 year to 3 years. These recommendations were not adopted because it would increase the program's subsidy cost. The proposed rule initially proposed subordinations to lines of credit for up to 3 years but was reduced to 1 year during the clearance process due to the increase.

Sixteen comments were received on the transfer and assumption section. One commenter recommended clarifying whether the value of the

collateral being transferred in a transfer and assumption situation is to be calculated on a discounted or non-discounted basis. This comment was adopted, and the words “fair market” will be added to clarify that the value of the collateral is the market value, not the discounted market value. One commenter suggested revising § 4287.134(g) to add “unless a guarantor is being released from liability in accordance with paragraph (c) of the section.” This comment was adopted. Five commenters support clarification that no new notes can be issued upon an assumption. Eight commenters stated the Agency should not charge a transfer fee for a transfer and assumption, and one commenter suggested the fee be lower. These comments were adopted, and the Agency will not charge a transfer fee for a transfer and assumption.

One commenter suggested that § 4287.135(d) be revised to strike “or a lender has been merged with or acquired by another lender” and § 4287.135(b) be revised to add “merged with or” to the second sentence of the paragraph. This comment was adopted.

One commenter suggested adding a statement indicating the Agency may not look as favorably on a request for deferral when a lender's unguaranteed loans are also not deferred. This comment was taken into consideration, and the Agency has decided to require the lender's unguaranteed loan(s) and any stockholder loans to also be deferred or put under a moratorium during the period of deferment or moratorium of the guaranteed loan.

Two commenters indicated that paying only 90 days of interest is not conducive for the bank to work with the borrower and recommended a longer period of time, and six commenters indicated that the Agency should modify the changes to the accrual of interest to better account for expenses and uncertainty that occur during a loan default. These comments were taken into consideration, but the Agency has decided to limit interest accrual to the lender to 90 days from the most recent delinquency effective date and to the holder the greater of: 90 Days from the most recent delinquency effective date as reported by the lender or 30 days from the date of an interest termination letter. One commenter suggested clarifying whether interest on a protective advance that is paid 95 days after the most recent delinquency effective date would be covered. This comment was not adopted because the regulation is clear that the guarantee will not cover interest on the protective advance accruing after 90 days from the most recent delinquency effective date. The Agency is reducing the cost of administering the program, and this is one step to achieve that objective. One commenter suggested adding “not to exceed every 60 days” to the requirement that the lender periodically report to the Agency on the progress of liquidation. This comment was adopted. One commenter recommended a definition of “potential liquidation value” and suggested that the Agency include those things that would impact the fair market value versus potential liquidation value. This comment was not adopted because a definition of potential liquidation value is not necessary, and it is the appraiser's responsibility to establish what would impact fair market value. One commenter suggested clarifying whether interest accrual stops after 90 days to the Agency when the Agency becomes the holder. This comment was adopted.

One commenter suggested that the determination of loss and payment section include a time limit that the lender has to sell collateral it has acquired as a result of liquidation, such as 24 months for real estate. After that time period, the Agency could reduce the loss claim by 25 percent every 6 months, so that after 48 months, the lender would be unable to collect anything further under the Loan Note Guarantee. This comment was not adopted because it was too restrictive. No other Federal agency is imposing such restrictions on their lenders, and this proposal may harm future lender participation in the program because the lending community may view this as punitive. One commenter indicated there were contradictory statements with regard to how attorney/legal fees will be handled in liquidation and bankruptcy scenarios. This comment was adopted, and the rule was rewritten to provide clarification that attorney/legal fees are liquidation expenses and that the lender and the Agency will share in those expenses equally. Fifteen commenters suggested that liquidation expenses, litigation expenses, and bankruptcy expenses be shared on a pro rata basis versus being shared equally. These comments were not adopted because the Agency is reducing the cost of administering the program as part of this rulemaking, and sharing the costs with the lender equally achieves that objective. Additionally, these expenses are deducted from collateral sale proceeds prior to allocating pro rata shares of the sale proceeds. To share in the expenses on a pro rata basis would likely lead to errors in calculating estimated and final reports of loss.

Several general comments were received. One commenter pointed out that the regulation and current forms use the terms “reasonably prudent,” “prudent,” and “reasonable and prudent” and recommended that “reasonable and prudent,” be utilized throughout the regulation and accompanying forms. This comment was taken into consideration, and changes were made for consistency. However, the Agency chose to use “reasonably prudent” in a majority of the occurrences. One commenter recommended a more detailed explanation of the benefit of extending loan guarantees for employees to buy-out selling owners, who may remain for a transitional period to teach the employees how to run the firm, which was adopted administratively. One commenter suggested reviewing forms, giving them consistent numbers, and removing reference to the Section 9006 program on the forms. This comment is outside the scope of this rule and will be addressed administratively. One commenter recommended a handbook to promote consistency among the State Offices. This comment is outside the scope of this rule and will be addressed administratively. One commenter recommended the Agency not use a fiscal and transfer agent. The proposed rule published in the

Federal Register

on September 15, 2014, did not address use of a fiscal and transfer agent and, as such, is outside the scope of this rulemaking. One commenter recommended the Agency adopt a national loan registry system to help verify the validity of guaranteed loans. This comment was not adopted as there are privacy and funding issues with regard to a national loan registry system. One commenter recommended that Agency personnel be better utilized to avoid “bottlenecks” in the processing of loans. This comment is outside the scope of this rule and will be addressed administratively. Lastly, there were two comments made with regard to dividing appropriated funding into subsidized and non-subsidized segments. While this will not be contemplated with this rulemaking, it remains a topic of discussion.

List of Subjects for 7 CFR Parts 4279 and 4287

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

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

PART 4279—GUARANTEED LOANMAKING

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

Authority:

5 U.S.C. 301; 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.

4279.73-4279.74

[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 and regulations referenced in this subpart may be obtained from any Agency office and from the USDA Rural Development Web site at

http://www.rd.usda.gov/publications.

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.

The following definitions apply to this subpart:

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 Guaranteed Loan Program. References to the National or State Office should be read as prefaced by “Agency” or “Rural Development” as applicable.

Agricultural production.

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

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 among 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.

Bankruptcy Code.

The provisions of title 11 of the United States Code or any successor statute.

Biofuel.

A fuel derived from Renewable Biomass.

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.

Certificate of Incumbency and Signature.

Form RD 4279-7, “Certificate of Incumbency and Signature,” is used to validate authenticity of Agency representatives' signatures on Forms RD 4279-4, 4279-5, and 4279-6.

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 United States, 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.

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 certain collection options, such as administrative offset, for 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 documents relating to 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 generate energy or power or projects that produce biofuel. Projects that have energy outputs that are a by-product of operations or that the Agency otherwise determines is not an energy project are not subject to the increased equity requirement for energy projects required by § 4279.131(d)(1).

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 business that has been in operation for at least 1 full year 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 25 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 the 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 a 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,” 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, individually or in the aggregate, has jeopardized, or 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 to generate 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 that a reasonably prudent lender would perform in servicing (including liquidation of) 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.

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 (including a county, city, or equivalent such as parish, borough, municipio, or census designated place) where at least 20 percent of the population 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; an Indian tribe on a Federal or State reservation or other federally-recognized Indian tribe; or an organization controlled by any of the above.

Renewable biomass.

(1) Materials, pre-commercial thinnings, or invasive species from National Forest System land or public lands (as defined in section 103 of the Federal Land Policy and Management Act of 1976 (43 U.S.C. 1702)) that:

(i) Are by-products of preventive treatments that are removed to reduce hazardous fuels; to reduce or contain disease or insect infestation; or to restore ecosystem health;

(ii) Would not otherwise be used for higher-value products; and

(iii) Are harvested in accordance with applicable law and land management plans and the requirements for old-growth maintenance, restoration, and management direction of paragraphs (2), (3), and (4) of subsection (e) of section 102 of the Healthy Forests Restoration Act of 2003 (16 U.S.C. 6512) and large-tree retention of subsection (f) of that section; or

(2) Any organic matter that is available on a renewable or recurring basis from non-Federal land or land belonging to an Indian or Indian Tribe that is held in trust by the United States or subject to a restriction against alienation imposed by the United States, including:

(i) Renewable plant material, including feed grains; other agricultural commodities; other plants and trees; and algae; and

(ii) Waste material, including crop residue; other vegetative waste material (including wood waste and wood residues); animal waste and by-products (including fats, oils, greases, and manure); and food and yard waste.

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, the Rural Housing Service, and the 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. A 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 United States, 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.

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 LINC 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' operations and growth. Working capital is calculated as current assets less current liabilities.

(b)

Abbreviations.

The following abbreviations apply to this subpart:

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 United States

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—U.S. 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 of this chapter. Programmatic decisions based on clear and objective statutory or regulatory requirements are not appealable; however, such decisions are reviewable for appealability by the National Appeals Division (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 or the District of Columbia 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 or State 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 August 2, 2016. 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 United States 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 August 2, 2016 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) In order to become an eligible lender, 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) Have and maintain a line of credit issued by a regulated lender that is acceptable to the Agency;

(v) 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;

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

(vii) 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 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;

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

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

(3) Non-regulated lenders must submit audited financial statements to the Agency annually for monitoring purposes.

(4) 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 or amendment thereof in accordance with § 4279.173(b);

(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 USDA Non-Discrimination Statement, and the Equal Credit Opportunity Act. USDA's Non-Discrimination Statement is located at the following Web site:

http://www.usda.gov/wps/portal/usda/usdahome?navtype=FT&navid=NON_DISCRIMINATION.

(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 of this chapter. Lenders may contract for services but are ultimately responsible for underwriting, loan origination, loan servicing, and compliance with all Agency regulations. No person may act as, or work for, both a 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) Monitoring construction and operation;

(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 of this chapter 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 issue guarantees for loans that are sound and have reasonable assurance of repayment. The Agency will not issue guarantees for 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 providing details of the project's impact on the environment and historic properties in accordance with 7 CFR part 1970, “Environmental Policies and Procedures,” (or successor regulation), when applicable; 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 1970, “Environmental Policies and Procedures,” or successor regulation, 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 United States) 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 of this chapter. 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 of this chapter.

§§ 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 7 CFR part 1970, “Environmental Policies and Procedures,” or successor regulation. 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 the Equal Credit Opportunity Act (15 U.S.C. 1691

et seq.

), 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.

Audits will be required of any public body, nonprofit corporation or Indian Tribe that receives a guaranteed loan that meets the thresholds established by 2 CFR part 200, subpart F. Any audit provided by a public body, nonprofit corporation, or Indian Tribe required by this paragraph will be considered adequate to meet the audit requirements of the B&I program for that year.

§ 4279.72

Conditions of guarantee.

A loan guarantee under this part will be evidenced by a Loan Note Guarantee issued by the Agency. The provisions of this part and part 4287 of this chapter 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 United States and is incontestable except for fraud or misrepresentation of which a lender or holder has actual knowledge at the time it becomes such lender or holder or which a lender or holder participates in or condones. The guarantee will be unenforceable to the extent that any loss is occasioned by a provision for interest on interest 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 loan 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 or amendment thereof in accordance with § 4279.173(b). 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 outstanding servicing fee. For those loans closed on or after August 2, 2016, the lender or the Agency will issue an interest termination letter to the holder(s) establishing the termination date for interest accrual. The guarantee will not cover interest to any holder accruing after the greater of: 90 days from the date of the most recent delinquency effective date as reported by the lender or 30 days from the date of the interest termination letter.

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

(i) Any loss sustained by the lender on the guaranteed portion, including principal and interest (for loans closed on or after August 2, 2016, the guarantee will not cover note interest to the lender accruing after 90 days from the most recent delinquency effective date) 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. For loans closed on or after August 2, 2016, the guarantee will not cover note interest to the lender accruing after 90 days from the most recent delinquency effective date.

(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.

§§ 4279.73-4279.74

[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. The lender may also obtain participation in the loan under its normal operating procedures; however, the lender must retain title to the notes if any of them are unguaranteed and retain the lender's interest in the collateral.

(a)

Single note system.

The entire loan is evidenced by one note, and one Loan Note Guarantee is issued. The lender must retain title to the note, retain the lender's interest in the collateral, and retain the servicing responsibilities for the guaranteed loan. 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 an 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. In order to validate authenticity, holders are encouraged to consult with the Agency. Additionally, a Certificate of Incumbency and Signature may be requested. The holder, with 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 entire guaranteed portion 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 Guarantee Agreement, the assignee shall succeed to all rights and obligations of the holder thereunder. Subsequent assignments require notice to the lender and Agency using any format, including that used by the Securities Industry and Financial Markets Association (formerly known as 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. The Agency will not acknowledge, approve, nor have any liability to any of the parties of this contract.

(b)

Multi-note system.

Under this option, the lender may provide one note for the unguaranteed portion of the loan and no more than 10 notes for the guaranteed portion. All promissory notes must reflect the same payment terms. The lender must retain its interest in the collateral and servicing responsibilities for the guaranteed loan. 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 multi-note 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.

§ 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 lender's 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. The lender must accept an assignment without recourse from the holder upon repurchase. For those loans closed on or after August 2, 2016, the lender or the Agency will issue an interest termination letter to the holder(s) establishing the termination date for interest accrual if the default is not cured. The guarantee will not cover interest to any holder accruing after the greater of: 90 days from the date of the most recent delinquency effective date as reported by the lender or 30 days from the date of the interest termination letter. 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. 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. When the lender repurchases the guaranteed portion from the secondary market for servicing purposes, the lender must discontinue interest accrual if Federal or State regulators place the loan in non-accrual status if the default is not cured within 90 days. 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 and becomes the holder, interest accrual on the loan will cease, and 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 those loans closed on or after August 2, 2016, the lender or the Agency will issue an interest termination letter to the holder(s) establishing the termination date for interest accrual. The guarantee will not cover interest to any holder accruing after the greater of: 90 days from the date of the most recent delinquency effective date as reported by the lender or 30 days from the date of the interest termination letter. 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 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 the 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.

§§ 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 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) 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.

In accordance with the Paperwork Reduction Act of 1995, the information collection requirements contained in this subpart have been submitted to the Office of Management and Budget (OMB) under OMB Control Number 0570-0069 for OMB approval.

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.

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 and regulations referenced in this subpart may be obtained from any Agency office and from the USDA Rural Development Web site at

http://www.rd.usda.gov/publications.

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 are applicable to this subpart.

§ 4279.103

Exception authority.

Section 4279.15 applies to this subpart.

§ 4279.104

Appeals.

This text is long and has been trimmed here. Open the source document for the complete record.