Business and Industrial Loan Program

DEPARTMENT OF AGRICULTURE

Farmers Home Administration

7 CFR Part 1980

RIN 0575-AB37

Business and Industrial Loan Program

AGENCY: Farmers Home Administration and Rural Development

Administration, USDA.

ACTION: Proposed rule.

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SUMMARY: The Farmers Home Administration (FmHA) and Rural Development

Administration (RDA) propose to amend the regulations for the Business

and Industry (B&I) Loan Program. The action is needed to relieve

borrowers with small loans from the existing requirement to provide

annual audited financial statements. The action is expected to clarify

the requirements for annual financial statements and establish

thresholds for determining which borrowers will be required to provide

audited statements.

DATES: Comments must be received on or before May 27, 1994.

ADDRESSES: Submit written comments in duplicate to the Chief,

Regulations Analysis and Control Branch, Farmers Home Administration,

room 6348, South Agriculture Building, 14th and Independence Avenue,

SW., Washington, DC 20250. All written comments made pursuant to this

notice will be available for public inspection during regular working

hours at the above address.

FOR FURTHER INFORMATION CONTACT: M. Wayne Stansbery, Business and

Industry Loan Specialist, Rural Development Administration, USDA, Room

6327, South Agriculture Building, 14th and Independence Avenue, SW.,

Washington DC 20250, Telephone (202) 720-6819

SUPPLEMENTARY INFORMATION:

Classification

We are issuing this proposed rule in conformance with Executive

Order 12866.

Intergovernmental Review

This program is listed in the Catalog of Federal Domestic

Assistance under number 10.422, and is subject to intergovernmental

consultation in accordance with Executive Order 12372, and as stated in

FmHA Instruction 1940-J, ``Intergovernmental Review of Farmers Home

Administration Programs and Activities.''

Environmental Impact Statement

This purposed action has been reviewed in accordance with 7 CFR

part 1940, Subpart G, ``Environmental Program.'' FmHA has determined

that this proposed action does not constitute a major Federal action

significantly affecting the quality of the human environment and, in

accordance with the National Environmental Policy Act of 1969, Public

Law 91-190,, an Environmental Impact Statement is not required.

Civil Justice

This proposed regulation has been reviewed in light of Executive

Order 12778 and meets the applicable standards provided in sections

2(a) and 2(B)(2) of that Order. Provisions within this part which are

inconsistent with State law are controlling. All administrative

remedies pursuant to 7 CFR part 1900, subpart B must be exhausted prior

to filing suit.

Paperwork Reduction Act

The collection of information requirements contained in this

regulation have been submitted to the Office of Management and Budget

for review under section 3504(h) of the Paperwork Reduction Act of

1980. Public reporting burden for this collection of information is

estimated to vary from 3 to 8 hours per response, with an average of 4

hours per response including time for reviewing instructions, searching

existing data sources, gathering and maintaining the data needed, and

completing and reviewing the collection of information. Send comments

regarding this burden estimate or any other aspect of this collection

of information, including suggestions for reducing this burden, to

Department of Agriculture, Clearance Officer, OIRM, room 404-W,

Washington, DC 20250; and to the Office of Management and Budget,

Attention: Desk Officer for the Farmers Home Administration,

Washington, DC 20503.

Background

This regulatory package is an FmHA initiative to enhance the

program by reducing the financial burden on small business borrowers of

obtaining annual audits of their financial statements. The existing

regulations require annual audited financial statements from all

borrowers, except those with loans that have been paid down to no more

than $100,000 and to no more than two thirds of the original balance

and have been current on repayments for at least 24 months. The cost of

the audits can often be the difference between a profit and a loss for

the year for small businesses. Many small businesses that need and want

the assistance of the B&I guaranteed loan decide not to apply because

they are unwilling to commit to the cost of an annual audit. Small

businesses that have obtained B&I guaranteed loans sometimes become

delinquent on the loans because the funds were spent on audits or

refuse to honor their agreement to provide the audits.

The proposed revision will remove or allow FmHA to waive the

requirement for annual audits for all loans of $500,000 or less and for

loans that have been outstanding and have provided audits for three

years, have an unpaid balance not exceeding $1,000,000, and are current

on repayments. All borrowers that do not provide audited financial

statements will be required to provide financial statements compiled or

reviewed by an independent certified public accountant or licensed

public accountant.

Guaranteed loan borrowers subject to OMB Circulars A-128 or A-133

will also have to comply with those Circulars. Insured (direct) B&I

loans are governed by the requirements of 7 CFR part 1942.

List of Subjects in 7 CFR Part 1980

Loan programs, Business and industry, Rural development assistance,

Rural areas.

Accordingly, chapter XVIII, title 7, Code of Federal Regulations is

amended as follows:

PART 1980--GENERAL

1. The authority citation for Part 1980 continues to read as

follows:

Authority: 7 CFR 1989; 42 U.S.C. 1480; 5 U.S.C. 301; 7 CFR 2.23;

7 CFR 2.70.

Subpart E--Business and Industrial Loan Program

2. Section 1980.445 is added to read as follows:

Sec. 1980.445 Periodic financial statements and audits.

All borrowers will be required to submit periodic financial

statements to the lender. Lenders must forward copies of the financial

statements and the lender's analysis of the statements to FmHA.

(a) Audited financial statements. Except as provided in paragraphs

(b), (d), and (e) of this section, all recipients of guaranteed loans

of more than $500,000 will be required to submit annual audited

financial statements. The audit must be performed in accordance with

generally accepted government auditing standards (GAGAS) using the

publication, ``Standards for Audit of Governmental Organizations,

Programs, Activities and Functions,'' developed by the Comptroller

General of the United States in 1988, and any subsequent revisions. In

addition, the audits are also to be performed in accordance with

various Office of Management and Budget (OMB) circulars and any FmHA

requirements specified in this subpart.

(b) Unaudited financial statements. For borrowers with a loan

balance (principal plus interest) of $500,000 or less, FmHA will

require annual financial statements which may be statements compiled or

reviewed by an accountant qualified in accordance with the publication

``Standards for audit of Governmental Organizations, Programs,

Activities and Functions,'' instead of audited financial statements.

For all loans, FmHA may also accept compilation or review statements

even though the loan agreement requires an audit, when all of the

following conditions are met:

(1) The loan has been outstanding and satisfactory audits have

been provided for at least 3 years;

(2) The loan balance does not exceed $1,000,000; and

(3) The loan repayment is on schedule.

(c) Internal financial statements. FmHA may require submission of

financial statements prepared by the borrower's staff at whatever

frequency is determined necessary to adequately monitor the loan.

Quarterly financial statements should be required on new business

enterprises or those needing close monitoring.

(d) Minimum requirements. This section sets out minimum

requirements for frequency and quality of financial statements to be

submitted to FmHA. If specific circumstances warrant, FmHA may require

audited financial statements or independent unaudited financial

statements in excess of the minimum requirements. For example, loans

that depend heavily on inventory and accounts receivable for collateral

should normally be audited, regardless of the size of the loan. Nothing

herein shall be considered an impediment to the lender requiring

financial statements more frequently or of a higher quality than

required by FmHA.

(e) Public bodies and Nonprofit Corporations. Notwithstanding other

provisions of this section, any public body or nonprofit corporation

that receives a guarantee of a loan of $100,000 or more must provide an

audit in accordance with Office of Management and Budget (OMB)

Circulars A-128 or A-133 for the fiscal year of the borrower in which

the Loan Note Guarantee is issued. If the loan is for development or

purchases made in a previous fiscal year through interim financing, an

audit will also be provided for the fiscal year in which the

development or purchases occurred. Any audit provided by a public body

or nonprofit corporation in compliance with OMB Circulars A-128 or A-

133 will be considered adequate to meet the requirements of this

section for that year.

3. Section 1980.451 is amended by revising paragraph (i)(13) to

read as follows:

Sec. 1980.451 Filing and processing applications.

* * * * *

(i) * * *

(13) Proposed loan agreement. (See paragraph VII of Form FmHA 449-

35). Loan agreements between the borrower and lender will be required.

The final executed loan agreement must include FmHA's requirements as

set forth in the Form FmHA 449-14 including the requirements for

periodic financial statements and recordkeeping in accordance with

Sec. 1980.445 of this subpart. The loan agreement must also include,

but is not limited to, the following:

* * * * *

4. Section 1980.454 is amended by revising ADMINISTRATIVE A. 1. to

read as follows:

Sec. 1980.454 Conditions precedent to issuance of the Loan Note

Guarantee.

* * * * *

Administrative

A. * * *

1. The loan agreement between the borrower and lender which

provides for frequency of submission of financial statements to the

State Director.

* * * * *

5. Section 1980.469 is amended by revising ADMINISTRATIVE C. 1. to

read as follows:

Sec. 1980.469 Loan Servicing.

* * * * *

Administrative

* * * * *

C. * * *

1. The lender understands upon initial contact during loan

application and in particular at loan closing that the lender is

responsible for loan servicing and, for loans of more than $500,000,

that annual audited financial statements are required.

* * * * *

Dated: February 23, 1994.

Bob J. Nash,

Under Secretary, Small Community and Rural Development.

[FR Doc. 94-7163 Filed 3-25-94; 8:45 am]

BILLING CODE 3410-07-M