Business and Industrial Loan Program

SUMMARY: The Rural Business-Cooperative Service (RBS) is the successor

to the Rural Business and Cooperative Development Service, which was

the successor to the Rural Development Administration (RDA), which was

the successor to the Farmers Home Administration (FmHA).

RBS is issuing new Business and Industry Guaranteed Loan Program

regulations to replace the FmHA regulations for the program. This

action is needed to streamline and update the program. The intended

effect is to shorten, simplify, and clarify the regulation, shift some

responsibility for loan documentation and analysis from the Government

to the lenders, make the program more responsive to the needs of

lenders and businesses, and provide for smoother and faster processing

of applications.

DATES: Written comments must be received on or before April 2, 1996.

ADDRESSES: Submit written comments in duplicate to the Chief,

Regulations, Analysis, and Control Branch, Rural Economic and Community

Development, U.S. Department of Agriculture, Ag Box 0743, 14th and

Independence SW., Washington, DC 20250-0743. All written comments will

be available for public inspection during regular work hours at the

above address.

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

Industry Senior Loan Specialist, RBS, U.S. Department of Agriculture,

Ag-Box 3221, 14th & Independence Avenue SW., Washington, DC 20250-3221,

Telephone (202) 720-6819.

SUPPLEMENTARY INFORMATION:

Classification

This proposed rule has been determined to be a ``significant

regulatory action'' and was reviewed by OMB under Executive Order

12866.

Programs Affected

The Catalog of Federal Domestic Assistance program impacted by this

action is: 10.768, Business and Industrial Loans.

Intergovernmental Review

As set forth in the final rule and related Notice to 7 CFR part

3015, subpart V, 48 FR 29112, June 24, 1983, Business and Industrial

Loans are subject to the provisions of Executive Order 12372 which

requires intergovernmental consultation with state and local officials.

RBS conducts intergovernmental consultation in the manner delineated in

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

Administration Programs and Activities.''

Civil Justice Reform

The proposed rule has been reviewed under Executive Order 12778,

Civil Justice Reform. In accordance with this rule: (1) All state and

local laws and regulations that are in conflict with this rule will be

preempted; (2) no retroactive effect will be given to this rule; and

(3) administrative proceedings in accordance with the regulations of

the agency at 7 CFR part 1900, subpart B or those regulations published

by the Department of Agriculture to implement the provisions of the

National Appeals Division as mandated by the Department of Agriculture

Reorganization Act of 1994 must be exhausted before bringing suit in

court challenging action taken under this rule.

Environmental Impact Statement

The action has been reviewed in accordance with 7 CFR part 1940,

subpart G, ``Environmental Program.'' RBS has determined that this

action does not constitute a major Federal action significantly

affecting the quality of the human environment, and in accordance with

the National Environmental Policy Act of 1969, Public Law 91-190, an

Environmental Impact Statement is not required.

Discussion of the Proposed Rule

This action replaces the Business and Industrial loan program

administered under 7 CFR part 1980 with a program to be administered

under 7 CFR parts 4279 and 4287 which significantly departs from the

previous program of loan guarantees for businesses in rural areas. The

new Business and Industrial Guaranteed Loan Program will be more

flexible and will place more reliance on lenders. There are fewer

specific requirements for lenders and businesses. Eligible loan

purposes are broader. The lender has added responsibility for analyzing

credit quality, and for making, securing, and servicing the loan and

monitoring construction. The priority system will give increased

priority to underserved communities. Application processing procedures

will be more efficient, less burdensome for borrowers, lenders, and RBS

staff, and will provide for more rapid decisions.

The Business and Industry (B&I) guaranteed loan program was

authorized by the Rural Development Act of 1972. The loans are made by

private lenders to rural businesses for the purpose of creating new

businesses, expanding existing businesses, and for other purposes that

create employment opportunities in rural areas. Eligibility for this

program includes businesses located in cities of up to 50,000

population, but priority is given to areas outside cities of 25,000 or

more population.

Since 1974, more than 5,120 businesses have received loans totaling

nearly $5 billion guaranteed through the B&I program. These loans have

helped to create or save over 460,000 jobs. The program level peaked in

1979 at just over $1 billion, then was reduced to $100 million annually

through much of the 1980's. The program level for FY 1994 was about

$249 million and for FY

[[Page 3854]]

1995 it was about $500 million. The FY 1996 budget is approximately

$700 million, which required only $6.5 million in budget authority to

be appropriated by Congress.

Loans can be made for a variety of purposes including business

acquisition, expansion, or improvement; purchase of land, easements, or

buildings; purchase of equipment, machinery, or supplies; repair and

modernization; pollution control; transportation services; start up and

working capital; and feasibility studies. The rate and term of the loan

is negotiated between the business and the lender.

The Rural Business-Cooperative Service proposes to replace the

regulations for the B&I program with a compete set of new regulations.

This is a high priority effort to streamline the administration and

operation of the program, responding to the requests of users of the

program and the field staff administering the program. The revised

regulations are shorter, simpler, clearer, and more logically

organized. The volume of material in the new regulations is about one-

half that of the current regulation.

The revisions are not required by statute. However, the senate

report on the FY 1995 Appropriations Act did contain a directive for

the department to streamline the B&I regulations and application

procedures, reduce loan application processing time by relying on in-

state resources, allow more management flexibility and decision making

capacity at the state office level, and expand eligible loan purposes

to include recreation and tourism.

Recognizing the need to streamline the regulations, the Agency

established a task force of State Directors and B&I program chiefs from

state offices to examine changes that needed to be made in the program

to attract additional lenders and to make the program more user

friendly and customer oriented. Task force recommendations and drafts

have been further developed by national office staff. In addition, the

Department's Office of inspector General (OIG) agreed to work in

conjunction with the Agency in competing an evaluation of the program

and to assist the agency in determining areas that could be changed to

assist in making the program more effective and more efficiently

administered. The OIG evaluation determined that (1) RBS needs to

better promote the program and encourage lender and borrower

participation, (2) lenders have little experience with the B&I program,

(3) some of the requirements of the program are too costly to be

attractive to borrowers wanting a relatively small loan, and (4) RBS

needs to employ its resources more efficiently by relying more on

lenders to analyze and monitor smaller loans. OIG surveyed 800 lenders

and, based on the responses to the survey, projected that only 5.2

percent of the universe of lenders have had any experience with the

program, but of those that did the experience was favorable. Further,

the Agency determined that of the lenders participating in the program,

the average number of times they did participate was 1.2. In a few

states, the program has been used more frequently by lenders, but

according to task force members and others familiar with the program

this has been true only because Agency officials in those states took

the time and effort to make the program more widely known.

OIG also determined that smaller borrowers refused to participate

in the program because they feel that meeting some of the requirements

is too costly to make a loan feasible. For example, the requirement to

submit annual audited financial statements is believed to be too costly

and OIG found that private lenders do not always request audited

financial statements from smaller commercial borrowers. The General

Accounting Office, in a 1992 report, also found that the cost of

feasibility studies and the annual audit requirements coupled with

appraisal fees and credit reports may impede participation.

Presently State office personnel analyze financial information

provided by the lenders and the borrowers regardless of the size of the

loan and regardless of the fact the lender has performed an analysis of

the borrower's financial condition. In order to increase the level of

lending activity as called for in the 1996 and 1997 budgets, and

improve the effectiveness of the program and the efficiency with which

it is delivered, RBS must rely more on the capabilities of the lending

community to deliver the program.

Based on the recommendations of the task force and other reviews,

the Agency has proposed these revisions to make the program more usable

by the lenders and the borrowers. More importantly, the Agency

recognizes the changes are necessary to make the program more effective

in creating jobs and stimulating economic activity, particularly in

chronically low income rural areas. Under the proposed new B&I

regulations, the material that must be submitted to and reviewed by the

Agency before approval of the guarantee is reduced and responsibilities

for credit analysis and application processing tasks will be shifted

from the Agency national office to field offices and from the Agency to

the lender where feasible. Following is a discussion of some of the

most significant policy revisions included in the proposed new

regulations.

Currently, most lenders participating in the B&I program are

commercial banks and eligibility to be a lender under the program is

limited to certain types of organizations. This proposal allows the

Agency to approve additional lenders when determined by the

Administrator to have sufficient legal authority, lending expertise,

and financial strength.

The Agency proposes to reduce the loan guarantee fee if it is

determined that the business seeking the guarantee provides high-impact

business development and is located in a community experiencing long-

term population decline and job deterioration, a community that has

remained persistently poor over the past 60 years, or a community

experiencing economic trauma due to natural disaster or fundamental

economic structural change. The intent of this provision is to

encourage businesses to locate in areas with persistent economic

problems.

Presently, individual borrowers must be citizens of the United

States or reside in the United States after being legally admitted for

permanent residence and organization borrowers must be at least 51

percent owned by citizens or persons legally admitted. The proposed

regulations would allow guaranteed loans to businesses that do not meet

that requirement if the facility being financed will create or save

jobs for rural United States residents, adequate management is

available, and loan funds are used only for fixed assets that will

remain in the United States. The intent of this provision is to have

the flexibility to create jobs in rural areas even if the company is

owned by foreign interests. The Agency has experienced requests for

guarantees in such situations in border states.

Presently, agricultural production loans are not eligible for B&I

guarantees. RBS proposes to provide guarantees for agricultural

production, but limit eligibility to integrated businesses involved in

both production and processing.

Current regulations will not allow a lender to bring loans it has

previously made under a guarantee through refinancing unless the

percentage of guarantee is adjusted to maintain the previous

unguaranteed exposure. The new regulations will allow the previous

exposure to be guaranteed, provided the

[[Page 3855]]

refinancing is a secondary part of the loan and will allow the lender

to restructure the rates and terms.

The Agency is particularly interested in public comments on a new

priority system, designed to target loan guarantees to locations of

greatest need and businesses that will have the most impact. High

impact considers factors that effect such things as job quality,

potential to stimulate the local economy other than just through the

direct jobs provided, and potential for long term presence in the

community and future expansion. For example, businesses in industries

in the top half of the industrial life cycle are likely to be

successful for a longer period of time than those in an industry that

is declining. Businesses tied in some way to the community are less

likely to move on in a few years to a more favorable location outside

the community. A business in an industry new to the community provides

economic diversification. Businesses that will need new suppliers or

customers are likely to have a ripple effect, causing other new

businesses to be formed nearby. Priority points are also given for

lenders that will structure the loan at favorable rates to the borrower

or less risk for the Government.

Eligible loan purposes would be expanded to include hotels, motels,

and other tourism and recreational facilities, which have been

ineligible for the past several years. Loans for such facilities would

be evaluated on the merits and financial feasibility of each proposal,

except for racetracks, golf courses, and gambling facilities, which

would remain ineligible. The Agency is particularly requesting comments

on whether there is a significant need for loan guarantees for tourism

and recreation businesses and whether offering loan guarantees for such

businesses will significantly increase the risk to the Government and

satisfy otherwise unmet needs for financing of such businesses.

Current regulations limit the size of loans considered for

guarantee to $10 million. The proposed regulations would give the

Administrator the authority to approve exceptions for high priority

projects of up to $25 million.

The proposed regulations limit the guarantee percentage to 80

percent for loans of $5 million or less and 70 percent for loans

exceeding $5 million, but provide authority for the Administrator to

approve exceptions up to 90 percent when the higher percentage is

necessary to allow a high priority project to proceed.

In conjunction with implementation of the new regulations, the

Agency intends to provide a new application form that will serve the

function of 10 forms now in use. The application form will, of course,

be supplemented by additional information provided by the lender.

The proposed regulations also provide for experienced lenders to

apply for status as certified lenders. Certified lenders will submit

about one-half as much application material for agency review as

regular lenders. Consideration was given to creating another

classification of lender determined to be very reliable and familiar

with the program that would be able to obtain guarantees with little or

no review of individual projects by the Agency. However, it was

determined that the Agency does not have sufficient legal authority to

implement that alternative.

Agency staff will be authorized to rely on a written credit

analysis prepared by the lender rather than the Agency completing its

own complete credit analysis.

For the most part, the lender will determine the frequency of

financial statements to be required from the business after the loan is

closed and whether or not the statements must be audited.

The lender and its legal counsel will be responsible for loan

closing, without a required review by the Office of General Counsel.

Loan servicing will also be simplified and shifted toward the

lender. Loans will classified by the lender. Lenders will be able to

release collateral with a cumulative value of up to 20 percent of the

loan if the proceeds will be used to reduce the loan or buy replacement

collateral. Lenders may make protective advances of up to $5,000

without prior agency approval. If unsecured personal or corporate

guarantees cannot be settled promptly, a final loss report may be filed

and paid and the guarantees treated as future recovery.

RBS believes the streamlining of the regulations for this program

will enhance the use of the program in improving the future prosperity

of rural residents through targeted investments that enhance rural

competitiveness, facilitate industrial conversion, and enable rural

residents to profit from private sector activity. The proposed

revisions are consistent with the Administration's efforts to

streamline government functions, improve efficiency and the

effectiveness of government activities, and be more customer friendly.

The changes proposed will enable the Agency to deliver a larger program

with less staff resources, and simultaneously meet the objectives of

the National Performance review regarding improved customer service,

less regulation and streamlined Agency operations.

Incorporation of the proposed changes will provide more flexibility

for both lenders and agency staff. Many errors will be reduced because

the guidelines and requirements are much more clear and items are more

easily found in a reduced and better organized volume of regulations.

Lenders will be more interested in using the program because the

procedures are more simple and direct. The ultimate benefit to be

realized is increased lending activity resulting in the expansion of

business opportunities and the creation of more jobs in rural areas,

particularly in those areas that have experienced historical economic

distress.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995, the Rural

Business-Cooperative Service (RBS) announces its intention to seek OMB

approval of the reporting/recordkeeping requirements contained in these

new regulations.

The purpose of the B&I loan program is to improve, develop, or

finance business, industry, and employment and improve the economic and

environmental climate in rural communities. This purpose is achieved by

bolstering the existing private credit structure through the guarantee

of loans which will provide lasting community benefits. Loans to rural

businesses are made by private lenders, primarily commercial banks, and

guaranteed by RBS. These proposed regulations include various

requirements for information from the lenders and borrowers. The

information requested is vital for RBS to be able to process

applications for loan guarantees in a responsible manner, make prudent

credit and program decisions, and effectively monitor the lenders'

servicing activities to protect the Government's financial interest. It

includes information to identify the lender and borrower, describe the

business and use of loan funds, indicate the rates and terms of the

loan, allow for credit quality analysis, and other information

necessary for prudent program and credit decisions. The lender or

borrower may need to provide information regarding some special

assistance or consideration, such as when a lender requests a change in

specific conditions cited by the Agency for approval of a guarantee.

Additional information is necessary to ensure a loan is adequately

serviced and continues to perform as expected, or, if necessary,

properly liquidated.

[[Page 3856]]

Currently, the regulations for the B&I Loan Program are contained

in 7 CFR 1980, subpart E. The information collection associated with 7

CFR 1980-E has been previously approved by the Office of Management and

Budget (OMB) and assigned control number 0575-0029. RBS is now

proposing new regulations for the B&I program to replace 7 CFR 1980-E.

RBS's primary reason for proposing new regulations is to simplify the

requirements and streamline the application and loanmaking process. The

total public reporting burden under these regulations is expected to be

significantly reduced, as compared to the burden contained in the

current regulation. The average public reporting burden for the

collections of information contained in these regulations is expected

to range from .75 to 54 hours per response. Lending institutions and

rural businesses are the primary respondents for this data collection.

The number of respondents for the various collections of information

contained in these regulations is expected to range from 15 to 1240 per

year. The number of annual responses per respondent is expected to

range from less than 1 to 4 per year. Total annual burden on

respondents is estimated at 67,456 hours. This is based on an estimated

volume of activity of 500 preapplications, 425 applications, and 360

new loan guarantees. The estimated total annual burden for 7 CFR 1980,

subpart E, was 78,318 hours. However, the larger estimated burden for 7

CFR 1980, subpart E, was based on a lower estimated volume of activity

of only 350 preapplications, 275 applications, and 220 new loan

guarantees.

In conjunction with implementation of the proposed new regulations,

RBS plans to initiate use of a new application form. The new form

should not be more difficult or time consuming to complete than the

current application but it will facilitate the elimination of 10 other

forms currently in use. Some items of information required by the

agency have been made easier to provide, such as the material

incorporated into the new application. Some has been eliminated by

changing program requirements and providing more flexibility to

lenders. An example of this is the documentation regarding refinancing

required by 7 CFR 1980, section 1980.452 Administrative C (1). Under

the proposed rule there are less restrictions on refinancing so there

is no need for the specific documentation. Some information will be

collected less frequently, as in the case of feasibility studies.

Feasibility studies will be required for new businesses at the

discretion of the loan approval official, rather than for all new

businesses. Financial statements will still be required at least

annually, but whether they are required more often than annually and

whether they must be audited statements will be decided by the lender.

Some new items of burden have also been created. For the most part,

however, these are the result of new options being made available. For

example, requesting status as a certified lender is a burden upon the

lenders that choose to make a request. That burden has not existed

previously because there were no certified lenders. To become certified

a lender must submit an executed Lender's Agreement (if it does not

already have a valid Lender's Agreement), a new form called ``Certified

Lender, Business and Industry,'' and a written request summarizing its

history of commercial lending activity with information on

delinquencies and losses. Loan officers of certified lenders must

receive training from RBS on the B&I program. The burden for completing

a request for certification has been estimated at 2.5 hours.

Certified lenders will submit less material for agency review for

each individual loan application proposed for guarantee. A complete

application for guarantee from a certified lender will include the

application form, a Form FmHA 1940-20, ``Request for Environmental

Information,'' the lender's written financial analysis with

spreadsheets, a proposed Loan Agreement or list of conditions for a

Loan agreement, and intergovernmental review comments. A complete

application for guarantee from an eligible lender that is not certified

will include all of those items plus the business's historical and

projected financial statements, financial statements of personal or

corporate guarantors, personal credit reports on the principals,

appraisals, commercial credit report on the business, and a business

plan or feasibility study.

Although it is not reflected in the proposed rule or the estimates

of burden, RBS is also working on a project to automate forms. It is

intended that most of the forms used in connection with an application

will be made available on computer disk so the form can be brought up

on a screen, the appropriate information typed in, and the entire

completed form printed. When completed, the appropriate disks will be

made available to the public as well as to Agency staff.

The complete text of the subject regulations is published herein

for public review and comment. Additional copies of the proposed

regulations or copies of the referenced forms may be obtained from Jack

Holston, Agency Information Collection Coordinator, at (202) 720-9736.

Send comments regarding the accuracy of the burden estimate, ways

to minimize the burden, including through the use of automated

collection techniques or other forms of information technology, or any

other aspects of this collection of information, to: Jack Holston,

Agency Information Collection Coordinator, U.S. Department of

Agriculture, RECD, Ag. Box 0743, Washington, DC 20250. These comments

must be received on or before April 2, 1996 to be assured of

consideration. All responses to this notice will be summarized and

included in the request for OMB approval. All comments will also become

a matter of public record.

List of Subjects

7 CFR Part 1980

Loan programs--Agriculture, Loan programs--Business and industry--

Rural development assistance, Loan programs--Housing and community

development, Loan programs--Community programs--Rural development

assistance, Rural areas.

7 CFR Part 4279

Loan programs--Business and industry--Rural development assistance,

Rural areas.

7 CFR Part 4287

Loan programs--Business and industry--Rural development assistance,

Rural areas.

Accordingly, chapters XVIII and XLII, title 7 of the Code of

Federal Regulations are proposed to be amended as follows:

CHAPTER XVIII--RURAL HOUSING SERVICE, RURAL BUSINESS-COOPERATIVE

SERVICE, RURAL UTILITIES SERVICE, AND FARM SERVICE AGENCY, DEPARTMENT

OF AGRICULTURE

PART 1980--GENERAL

1. The authority citation for part 1980 is revised to read as

follows:

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

Subpart A--General

2. Section 1980.6(a) is amended by: removing the definitions for

``Borrower,'' ``Disaster Assistance for Rural Business Enterprises,''

and

[[Page 3857]]

``Drought and Disaster Guaranteed loans;'' in the heading for the

definition of ``Assignment Guarantee Agreement,'' removing ``, 1980-70

or 1980-73;'' revising the definition of ``Guaranteed loan,'' to read

as set forth below; in the third sentence of the definition of

``Holder,'' removing the parenthetical phrase ``(or 1980-70 or 1980-

73);'' in the heading for the definition of ``Lender's Agreement,''

removing the comma and adding the word ``or'' in its place immediately

following ``449-35'' and removing ``, 1980-68, or 1980-71'' immediately

following ``1980-38;'' in the heading for the definition of ``Loan Note

Guarantee,'' removing the parenthetical phrase ``(or 1980-69 or 1980-

72)''.

Sec. 1980.6 Definitions and abbreviations.

(a) * * *

Guaranteed loan. A loan made and serviced by a lender for which

FmHA or its successor agency under Public Law 103-354 has entered into

a Form FmHA 449-35 or Form FmHA 1980-38, ``Lender's Agreement,'' and

for which FmHA or its successor agency under Public Law 103-354 has

issued a Form FmHA 449-34, ``Loan Note Guarantee.''

* * * * *

3. Section 1980.6 (b) is amended by removing the entries for

``B&I,'' ``DARBE,'' and ``D&D'' from the list of abbreviations.

Sec. 1980.13 [Amended]

4-5. Section 1980.13 is amended in the second sentence of paragraph

(a) introductory text by revising the reference ``paragraphs (a) (1),

(2) and (3)'' to read ``paragraphs (a) (1) and (2);'' in paragraph

(a)(2) by removing ``;or'' and adding a period at the end of the

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

removing the parenthetical phrase ``(See subpart E of this part.)''.

Sec. 1980.20 [Amended]

6. Section 1980.20 is amended in paragraph (a) introductory text by

removing the third and forth sentences in their entirety; in the fifth

sentence, by removing the words ``for all other loans covered by this

section;'' and in the sixth sentence by removing the words ``except in

regards to D&D and DARBE guaranteed loans (see Subpart E of this

part),''.

Sec. 1980.41 [Amended]

7. Section 1980.41 is amended in the first sentence of paragraph

(b)(3)(iii)(A) by removing the parenthetical phrase ``(State Director

for B&I)''.

Sec. 1980.46 [Amended]

8. Section 1980.46 is amended in paragraph (a)(2) by removing the

parenthetical phrase ``(State Director for B&I)'' at the end of the

paragraph.

Sec. 1980.47 [Amended]

9. Section 1980.47 is amended in the first sentence of paragraph

(d) by removing the words ``and Business''.

10. Section 1980.60 is amended by revising paragraph (a) (2) to

read as follows:

Sec. 1980.60 Conditions precedent to issuance of the Loan Note

Guarantee or Contract of Guarantee.

(a) * * *

(1) * * *

(2) All planned property acquisition has been completed and all

development has been substantially completed in accordance with plans

and specifications. All costs have not exceeded the amounts approved by

the lender and FmHA or its successor agency under Public Law 103-354.

* * * * *

Sec. 1980.61 [Amended]

11. Section 1980.61 is amended in the first sentence of paragraph

(b)(3) by revising ``Forms FmHA or its successor agency under Public

Law 103-354 449-35,'' to read ``Form FmHA 449-35'' and removing ``FmHA

or its successor agency under Public Law 103-354 1980-68, and FmHA or

its successor agency under Public Law 103-354 1980-71;'' in paragraph

(b)(4) by revising the word ``request'' to read ``requests,'' revising

``Forms FmHA or its successor agency under Public Law 103-354 449-

35,'' to read ``Form FmHA 449-35'' removing, ``FmHA or its successor

agency under Public Law 103-354 1980-68, and FmHA or its successor

agency under Public Law 103-354 1980-71,'' and removing the

parenthetical phrase ``(State Director for B&I);'' and in paragraph (h)

by removing the words ``,except for B&I where the State Director and

State B&I or C&BP Chief will execute these forms.''

Sec. 1980.63 [Amended]

12. Section 1980.63 is amended in paragraph (b) by removing the

parenthetical phrase ``(State Director for B&I)'' from the second and

fourth sentences and removing the parenthetical phrase ``(except for

B&I)'' from the third sentence.

Sec. 1980.67 [Amended]

13. Section 1980.67 is amended in the first sentence of paragraph

(a) by removing the reference ``E,''.

Sec. 1980.68 [Amended]

14. Section 1980.68 is amended by revising the reference

``paragraph 5'' to read ``paragraph 6'' in the second sentence and

removing the parenthetical phrase ``(State Director for B&I)'' from the

third and fourth sentences.

Sec. 1980.83 [Amended]

15. Section 1980.83 is amended in the table of forms in paragraph

(b) by removing the entries beginning with ``1980-68,'' ``1980-69,''

``1980-70,'' ``1980-71,'' ``1980-72,'' and ``1980-73.''

Subpart E--Business and Industrial Loan Program

16. Section 1980.401 is amended by revising paragraph (a) to read

as follows:

Sec. 1980.401 Introduction.

(a) This subpart contains the regulations for direct Business and

Industrial (B&I) loans disbursed by the Agency. All references to

guaranteed loan processing or servicing are not applicable. B&I loan

guarantees are to be processed and serviced under the provisions of

subparts A and B of part 4279 of this title and subpart B of part 4287

of this title. Any processing or servicing activity conducted pursuant

to this subpart involving authorized assistance to relatives, or

business or close personal associates, is subject to the provisions of

subpart D of part 1900 of this chapter. Applicants for this assistance

are required to identify any known relationship or association with any

Agency employee.

* * * * *

CHAPTER XLII--RURAL BUSINESS--COOPERATIVE SERVICE AND RURAL UTILITIES

SERVICE, DEPARTMENT OF AGRICULTURE

17. A new part 4279 is added to chapter XLII to read as follows:

PART 4279--GUARANTEED LOANMAKING

Subpart A--General

Sec.

4279.1 Purpose.

4279.2 Definitions.

4279.3-4279.14 [Reserved]

4279.15 Exception authority.

4279.16 Appeals.

4279.17-4279.28 [Reserved]

4279.29 Eligible lenders.

4279.30 Lenders' functions and responsibilities.

4279.31-4279.42 [Reserved]

4279.43 Certified Lender Program.

4279.44 Access to records.

4279.45-4279.57 [Reserved]

4279.58 Equal Credit Opportunity Act.

4279.59-4279.70 [Reserved]

4279.71 Public bodies and nonprofit corporations.

[[Page 3858]]

4279.72 Conditions of guarantee.

4279.73-4279.74 [Reserved]

4279.75 Sale or assignment of guaranteed loan.

4279.76 Participation.

4279.77 Minimum retention.

4279.78 Repurchase from holder.

4279.79-4279.83 [Reserved]

4279.84 Replacement of document.

4279.85-4279.100 [Reserved]

Subpart B--Business and Industry Loans

4279.101 Introduction.

4279.102 Definitions.

4279.103-4279.106 [Reserved]

4279.107 Guarantee fee.

4279.108 Eligible borrowers.

4279.109-4279.112 [Reserved]

4279.113 Eligible loan purposes.

4279.114 Ineligible purposes.

4279.115 Prohibition under Agency programs.

4279.116-4279.118 [Reserved]

4279.119 Loan guarantee limits.

4279.120 Fees and charges.

4279.121-4279.124 [Reserved]

4279.125 Interest rates.

4279.126 Loan terms.

4279.127-4279.130 [Reserved]

4279.131 Credit quality.

4279.132-4279.136 [Reserved]

4279.137 Financial statements.

4279.138-4279.142 [Reserved]

4279.143 Insurance.

4279.144 Appraisals.

4279.145-4279.148 [Reserved]

4279.149 Personal and corporate guarantees.

4279.150 Feasibility studies.

4279.151-4279.154 [Reserved]

4279.155 Loan priorities.

4279.156 Planning and performing development.

4279.157-4279.160 [Reserved]

4279.161 Filing preapplications and applications.

4279.162-4279.164 [Reserved]

4279.165 Evaluation of application.

4279.166-4279.172 [Reserved]

4279.173 Loan approval and obligating funds.

4279.174 Transfer of lenders.

4279.175-4279.179 [Reserved]

4279.180 Changes in borrower.

4279.181 Conditions precedent to issuance of Loan Note Guarantee.

4279.182-4279.185 [Reserved]

4279.186 Issuance of the guarantee.

4279.187 Refusal to execute Loan Note Guarantee.

4279.188-4279.200 [Reserved]

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

Subpart A--General

Sec. 4279.1 Purpose.

(a) This subpart contains general regulations for making and

servicing Business and Industry (B&I) loans guaranteed by the Agency

and applies to lenders, holders, borrowers and other parties involved

in making, guaranteeing, holding, servicing, or liquidating such loans.

(b) It is the responsibility of the lender to ascertain that all

requirements for making, securing, servicing, and collecting the loan

are met.

(c) Copies of all forms, regulations, and instructions referenced

in this subpart are available in any state or district office or the

National office.

Sec. 4279.2 Definitions.

Agency. The Federal agency within the United States Department of

Agriculture (USDA) with responsibility assigned by the Secretary of

Agriculture to administer the B&I program.

Arm's-length transaction. The sale, release, or disposition of

assets in which the title to the property passes to a ready, willing,

and able disinterested third party that is not affiliated with or

related to and has no security, monetary or stockholder interest in the

borrower or transferor at the time of the transaction.

Assignment Guarantee Agreement. The signed agreement among the

Agency, the lender, and the holder setting forth the terms and

conditions of an assignment of a guaranteed portion of a loan, using

the single note system. Such agreement will be documented using Form

RECD 4279-6, ``Assignment Guarantee Agreement.''

Borrower. All parties liable for the loan except for guarantors.

Conditional Commitment. Agency's notice to the lender that the loan

guarantee it has requested is approved subject to the completion of all

conditions and requirements set forth by the Agency. The commitment

will be documented on Form RECD 4279-3, ``Conditional Commitment.''

Deficiency balance. The balance remaining on a loan after all

collateral, including the personal guarantees, has been liquidated.

Deficiency judgment. A money judgment rendered by a court of

competent jurisdiction after foreclosure and liquidation of all

collateral securing the loan.

Existing lender debt. A debt not guaranteed by the Agency, but owed

by a borrower to the same lender that is applying for or has received

the Agency guarantee.

Fair market value. The price that could reasonably be expected for

an asset in an arms-length transaction between a willing buyer and a

willing seller in ordinary economic and business conditions.

Farmers Home Administration (``FmHA''). The former agency of the

United States Department of Agriculture (``USDA'') that previously

administered the programs of this Agency. Many Instructions and forms

of FmHA are still applicable to Agency programs.

Finance office. The office which maintains the Agency financial

accounting records and is located at 1520 Market Street, St. Louis,

Missouri 63103.

Holder. A person or entity, other than the lender, who owns all or

part of the guaranteed portion of the loan with no servicing

responsibilities. When the single note option is used and the lender

assigns a part of the guaranteed note to an assignee, the assignee

becomes a holder only when the Agency receives notice and the

transaction is completed through use of Form RECD 4279-6, ``Assignment

Guarantee Agreement.''

Interim Financing. A temporary or short-term loan made with the

clear intent that it will be repaid through another loan. Interim

financing is frequently used to pay construction and other costs

associated with a planned project, with permanent financing to be

obtained after project completion.

Lender. The organization making, servicing, and collecting the loan

which is guaranteed under the provisions of the appropriate subpart.

Lender's Agreement. The agreement between the Agency and the lender

setting forth the lender's loan responsibilities when the Loan Note

Guarantee is issued. The agreement is Form RECD 4279-4, ``Lender's

Agreement.''

Loan Agreement. The agreement between the borrower and lender

setting out the terms and conditions of the loan and the

responsibilities of the borrower and lender.

Loan Note Guarantee. The signed instrument issued by the Agency

setting out the terms and conditions of the guarantee. The guarantee is

Form RECD 4279-5, ``Loan Note Guarantee.''

Loan-to-value. The ratio of the dollar amount of a loan to the

dollar value of the collateral for the loan.

Negligent Servicing. The failure to perform those services which a

reasonably prudent lender would perform in servicing (including

liquidation of) its own portfolio of loans that are not guaranteed. The

term includes not only the concept of a failure to act but also not

acting in a timely manner or acting in a manner contrary to the manner

in which a reasonably prudent lender would act.

Parity. A lien position whereby two or more lenders share a

security interest of equal priority in collateral. In the event of

default, each lender will be affected on a proportional basis.

Participation. Sale of an interest by the lender in a loan wherein

the lender retains the note, collateral securing the

[[Page 3859]]

note, and all responsibility for loan servicing and liquidation.

Poor. A community or area is considered poor if, based on the most

recent decennial census data, either the county, city, or census tract

where the community or area is located has a median household income at

or below the poverty line for a family of four; has a median household

income below the nonmetropolitan median household income for the state;

or has a population of which 25 percent or more have income at or below

the poverty line.

Promissory Note. An evidence of debt. ``Note'' or ``Promissory

Note'' shall also be construed to include ``Bond'' or other evidence of

debt where appropriate.

RECD. The Under Secretary for Rural Economic and Community

Development (``RECD'') has policy and operational oversight

responsibilities for the Rural Housing Service (``RHCDS''), Rural

Business-Cooperative Service (``RBS''), and the Rural Utilities Service

(``RUS'').

Spreadsheet. A table containing data from a series of financial

statements of a business over a period of time. Financial statement

analysis normally contains spreadsheets for balance sheet items and

income statements and may include funds flow statement data and

commonly used ratios. The spreadsheets enable a reviewer to easily scan

the data, spot trends, and make comparisons.

State. Any of the 50 states, the Commonwealth of Puerto Rico, the

Virgin Islands of the United States, Guam, American Samoa, the

Commonwealth of the Northern Mariana Islands, the Republic of Palau,

the Federated States of Micronesia, and the Republic of the Marshall

Islands.

Subordination. An agreement between the lender and borrower whereby

lien priorities on certain assets pledged to secure payment of the

guaranteed loan will be reduced to a position junior to, or on parity

with, the lien position of another loan in order for the Agency

borrower to obtain additional financing, not guaranteed by the Agency,

from the lender or a third party.

Veteran. For the purposes of assigning priority points, a veteran

is a person who has been discharged or released from the active forces

of the United States Army, Navy, Air Force, Marine Corps, or Coast

Guard under conditions other than dishonorable and who served on active

duty in such forces:

(1) During the period of April 6, 1917, through March 31, 1921;

(2) During the period of December 7, 1941, through December 31,

1946;

(3) During the period of June 27, 1950, through January 31, 1955;

or

(4) For a period of more than 180 days, any part of which occurred

after January 31, 1955; but on or before May 17, 1975.

Secs. 4279.3-4279.14 [Reserved]

Sec. 4279.15 Exception authority.

The Administrator may, in individual cases, grant an exception to

any requirement or provision of this part or part 4287 which is not

inconsistent with any applicable law; provided that: the Administrator

determines that application of the requirement or provision would

adversely affect the Government's financial interest.

Sec. 4279.16 Appeals.

Only the borrower, lender, or holder can appeal an Agency decision

made under this part or part 4287. Except as set forth in this section,

the borrower and lender must jointly execute the written request for

review or appeal of an adverse decision made by the Agency. In cases

where the Agency has denied or reduced the amount of final loss payment

to the lender, the adverse decision may be appealed by the lender only.

An adverse decision that only impacts the holder may be appealed by the

holder only. A decision by a lender adverse to the interest of the

borrower is not a decision by the Agency, whether or not concurred in

by the Agency. Appeals will be handled in accordance with the

departmental appeal regulations.

Secs. 4279.17-4279.28 [Reserved]

Sec. 4279.29 Eligible lenders.

(a) An eligible lender is any Federal or state chartered bank, Farm

Credit Bank, other Farm Credit System institution with direct lending

authority, Bank for Cooperatives, Savings and Loan Association, or

mortgage company that is part of a 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 credit unions, provided they are subject to credit examination

and supervision by either the National Credit Union Administration or a

state agency, and insurance companies provided they are regulated by a

state or National insurance regulatory agency. Eligible lenders include

the National Rural Utilities Cooperative Finance Corporation.

(b) Rural Utilities Service borrowers and other lenders not meeting

the criteria of paragraph (a) of this section may be considered by the

Agency for eligibility to become a guaranteed lender provided the

Agency determines that they have the legal authority to operate a

lending program and sufficient lending expertise and financial strength

to operate a successful lending program.

(1) Such a lender must:

(i) Have a record of successfully making at least three commercial

loans for at least the most recent 3 years, with delinquent loans not

exceeding 10 percent of loans outstanding and historic losses not

exceeding 10 percent of dollars loaned; and

(ii) Have tangible balance sheet equity of at least 7 percent of

tangible assets and sufficient funds available to disburse the

guaranteed loans it proposes to approve within the first 6 months of

being approved as a guaranteed lender.

(2) A lender not covered under paragraph (a) of this section that

wishes consideration to become a guaranteed lender must submit a

request in writing to the state office for the state where the lender's

lending and servicing activity takes place. The National office will

notify the prospective lender, through the state director, whether the

lender's request for eligibility is approved or rejected. If rejected,

the reasons for the rejection will be indicated to the prospective

lender in writing, and appeal rights will be provided in accordance

with departmental appeal regulations. The lender's written request must

include:

(i) Evidence showing that the lender has the necessary capital and

resources to successfully meet its responsibilities.

(ii) Copy of any license, charter, or other evidence of authority

to engage in the proposed loanmaking and loan servicing activity. If

licensing by the state is not required, an attorney's opinion to this

effect must be submitted.

(iii) Information on lending experience, including length of time

in the lending business, range and volume of lending and servicing

activity, and status of loan portfolio including delinquency rate, loss

rate as a percentage of loan amounts, and other measures of success;

experience of management and loan officers; audited financial

statements not more than 1 year old; sources of funds for the proposed

loans; office location and proposed lending area; and proposed rates

and fees, including loan origination, loan preparation, and servicing

fees. Such fees must not be greater than those charged by similarly

located commercial lenders in the ordinary course of business.

(iv) An estimate of the number and size of guaranteed loan

applications the lender will develop.

[[Page 3860]]

(c) Expertise. Loan guarantees will only be approved for lenders

with adequate experience and expertise to adequately make, secure,

service, and collect B&I loans.

Sec. 4279.30 Lenders' functions and responsibilities.

(a) General. Lenders have the primary responsibility for the

successful delivery of the B&I loan program. All lenders obtaining or

requesting a B&I loan guarantee are responsible for processing

applications for guaranteed loans, developing and maintaining

adequately documented loan files, recommending only loan proposals that

are eligible and financially feasible, obtaining valid evidence of debt

and collateral in accordance with sound lending practices, supervising

construction and distribution of loan funds, servicing guaranteed loans

in a prudent manner, including liquidation if necessary, following

Agency regulations, and obtaining Agency approvals or concurrence as

required. This subpart, along with subpart B of this part and subpart B

of part 4287 sets out the regulations for this program, including the

lenders' responsibilities.

(b) Credit evaluation. This is a key function of all lenders during

the loan processing phase. The lender must analyze all credit factors

associated with each proposed loan and apply their professional

judgment to determine that the credit factors, considered in

combination, ensure loan repayment. The lender should have an adequate

underwriting process to ensure that loans are reviewed by other than

the originating officer. There must be good credit documentation

procedures.

(c) Environmental assessment. All lenders should alert the Agency

to any controversial environmental issues related to a proposed project

or items that may require extensive environmental review. Lenders

should help the borrower prepare Form FmHA 1940-20, ``Request for

Environmental Information,'' and attachments when required by FmHA

Instruction 1940-G.

(d) Loan closing. The lender will conduct loan closings at its

discretion.

Secs. 4279.31-4279.42 [Reserved]

Sec. 4279.43 Certified Lender Program.

(a) General. This section provides policies and procedures for the

Certified Lender Program (``CLP'') for loans guaranteed under this

part. The objectives are to expedite loan approval for those lenders

with a proven ability, in accordance with paragraph (b) of this

section, to process, service, and collect loans.

(b) CLP eligibility criteria. The lender must meet established

eligibility criteria prior to being considered for CLP status as

follows:

(1) Be an ``eligible lender'' as defined in Sec. 4279.29 and

authorized to do business in the state in which CLP status is desired.

(2) Demonstrate to the Agency's satisfaction that it has a thorough

knowledge of commercial lending. The lender will demonstrate such

knowledge by providing a summary of its guaranteed and unguaranteed

business lending activity. At a minimum, the summary should include the

dollar amount and number of loans in the lender's portfolio,

unguaranteed and guaranteed by any Federal agency, with information on

delinquencies and losses and, if applicable, the performance of the

lender as an SBA certified or preferred lender. A certified lender

should be recognized throughout the state as a commercial lender and

have a track record of successfully making at least five commercial

loans per year for at least the most recent 5 years, with delinquent

loans not exceeding 6 percent of loans outstanding and historic losses

not exceeding 6 percent of dollars loaned. The lender will provide a

written certification to this effect along with a statistical analysis

of its loan portfolio for the last 3 of its fiscal years.

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

in the upper half of possible ratings as reported by a lender rating

service selected by the Administrator.

(4) Possess loan officers and other appropriate personnel who have

received training conducted by the Agency. Additional training may be

required if the lender's contact person changes or if the Agency feels

further instruction is needed.

(5) Have committed no action within the most recent 2 years prior

to requesting CLP status which would be considered cause for revoking

CLP status under Sec. 4279.43(e).

(c) CLP approval. The Agency may grant CLP status for a period not

to exceed 5 years by executing Form RECD 4279-8, ``Certified Lender,

Business and Industry Program,'' with the lender. The Form RECD 4279-8

will not apply to branches or suboffices of the lender unless so

specified in the agreement. Such branches or suboffices may submit

loans as regular lenders or apply for their own CLP status. Any lender

who desires CLP status must prepare a written request to the state

director for the state in which it desires status. The request should

address each of the required criteria outlined in paragraph (b) of this

section except for paragraph (b)(3) and may be accompanied by any other

information the lender believes will be helpful. The request will also

include Form RECD 4279-8 completed and executed by the lender and an

executed Lender's Agreement, if it does not already have a valid

Lender's Agreement on file with the Agency. Loans made by the lender

and guaranteed by the Agency prior to the lender receiving CLP status

shall continue to be governed by the forms and agreements executed

between the lender and the Agency for those loans.

(d) Renewal of CLP status. Renewal of CLP status is not automatic.

CLP status will lapse upon the expiration date of Form RECD 4279-8

unless the lender obtains a renewal. A lender whose CLP status has

lapsed may continue to submit loan guarantee requests, but only as a

regular lender. The lender must provide a new Form RECD 4279-8

completed and executed by the lender, along with a written update of

the eligibility criteria required in this section for CLP approval.

This information should be supplied at least 60 days prior to the

expiration of the existing agreement to be processed for uninterrupted

status. The information should address how the lender is complying with

each of the required criteria described in paragraph (b) of this

section. It should include any proposed changes in the designated

persons for processing guaranteed loans or operating methods used in

processing and servicing Agency guaranteed loans.

(e) Revocation of CLP status. The lender's CLP status may be

revoked at any time for cause. The debarment of a lender is an

additional alternative the Agency may consider. A lender which has lost

its CLP status, but has not been debarred and still meets the

requirements of Sec. 4279.29 may continue to submit loan guarantee

requests as a regular lender. Cause for revoking CLP status includes:

(1) Failure to maintain status as an eligible lender as set forth

in Sec. 4279.29.

(2) Knowingly submitting false information when requesting a

guarantee or basing a guarantee request on information known to be

false or upon information which the lender should have known to be

false.

(3) Making an Agency guaranteed loan with deficiencies which may

cause losses under the Loan Note Guarantee not to be covered by the

Loan Note Guarantee.

(4) Conviction for acts in connection with any loan transaction,

regardless of whether the loan was guaranteed by the Agency.

[[Page 3861]]

(5) Violation of usury laws in connection with any loan guaranteed

by the Agency.

(6) Failure to obtain the required security for any loan guaranteed

by the Agency.

(7) Using loan funds guaranteed by the Agency for purposes other

than those specifically approved by the Agency in the Conditional

Commitment.

(8) Violation of any terms of the Lender's Agreement.

(9) Failure to correct any cited deficiency in loan documents in a

timely manner.

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

manner.

(11) Failure to process Agency guaranteed loans in a reasonably

prudent manner.

(12) Failure to provide for adequate construction planning and

monitoring in connection with any loan to ensure that the project will

be completed within the available funds and, once completed, will be

suitable for the borrower's needs.

(13) Repetitive recommendations for guaranteed loans with marginal

or substandard credit quality or that do not comply with Agency

requirements.

(14) Repetitive recommendations for servicing actions that do not

comply with Agency requirements.

(15) Negligent servicing.

(16) Failure to conduct any approved liquidation of a loan

guaranteed by the Agency or its predecessors in a timely and effective

manner and in accordance with the approved liquidation plan.

(f) General loan processing and servicing guidelines. All requests

for guaranteed loans will be processed and serviced under subparts A

and B of this part and subpart B of part 4287 except as modified by

this section. When determining whether or not to request a guarantee

for a proposed loan, lenders must consider the priorities set forth in

Sec. 4279.155.

(1) Prior to processing an application, the CLP lender may give

written notice to the state director of its intention to submit an

application. Upon receipt of such written notice, the Agency will

notify the CLP lender whether or not there is sufficient guarantee

authority for the loan. Such guarantee authority will be held for 30

days pending receipt of the application. If a complete application for

which guarantee authority is being held is not received within 30 days

of the notice of intent to file, or is rejected, the guarantee

authority for this application will no longer be held in reserve.

(2) Refinancing of existing lender debt in accordance with

Sec. 4279.113(q) will not be permitted without prior Agency approval.

(3) CLP lenders will process all guaranteed loans as a ``complete

application'' by obtaining and completing all items required by

Sec. 4279.161(b). The CLP lender must maintain all information required

by Sec. 4279.161(b) in its loan file, and determine that such material

complies with all requirements.

(4) CLP lenders will make all material relating to any guarantee

application available to the Agency upon request.

(5) At the time of the Agency's issuance of the Loan Note

Guarantee, the CLP lender will provide the Agency with copies of the

following documents:

(i) Executed Loan Agreement.

(ii) Executed Promissory Notes.

(iii) Executed copies of security documents including personal and

corporate guarantees.

(g) Unique characteristics of the CLP. A proposed loan by a CLP

lender requires only a review by the Agency of the information

submitted by the lender. The Agency may rely on the lender's credit

analysis.

(1) The following will constitute a complete application submitted

by a CLP lender:

(i) Form RECD 4279-1, ``Application for Loan Guarantee (Business

and Industry),'' (marked with the letters ``CLP'' at the top) completed

in its entirety and executed by the borrower and CLP lender.

(ii) Copy of the proposed Loan Agreement or a list of proposed

requirements.

(iii) Form FmHA 1940-20, completed and signed, with attachments.

(iv) The lender's complete written analysis of the proposal,

including spreadsheets of the balance sheets and income statements for

the 3 previous years (for existing businesses), pro forma balance sheet

at startup, and 2 years projected yearend balance sheets and income

statements, with appropriate ratios and comparisons with industry

standards (such as Dun & Bradstreet or Robert Morris Associates). All

data must be shown in total dollars and also in common size form,

obtained by expressing all balance sheet items as a percentage of

assets and all income and expense items as a percentage of sales. The

lender's credit analysis must address the borrower's management,

repayment ability, history of debt repayment, necessity of any debt

refinancing, and the credit reports of the borrower, its principals,

and any parent, affiliate, or subsidiary.

(v) Intergovernmental consultation comments in accordance with 7

CFR part 3015, subpart V.

(vi) If the loan will exceed $1 million and will increase direct

employment by more than 50 employees, Form RECD 4279-2, ``Certification

of Non-Relocation and Market Capacity Information Report,'' must be

completed by the lender. For such loans, the Agency will submit Form

RECD 4279-2 to the Department of Labor and obtain clearance before a

Conditional Commitment may be issued.

(2) The Agency will make the final credit decision based primarily

on a review of the credit analysis submitted by the lender except that

refinancing of existing lender debt in accordance with Sec. 4279.113(q)

will not be approved without review of the borrower's complete

financial statements and complete credit analysis by the Agency. The

Agency may request additional information to clarify or complete the

submission.

(h) Lender loan servicing responsibilities. CLP lenders will be

fully responsible for all aspects of loan servicing and, if necessary,

liquidation as described in subpart B of part 4287.

Sec. 4279.44 Access to records.

The lender will permit representatives of the Agency (or other

agencies of the United States) to inspect and make copies of any

records of the lender pertaining to the Agency guaranteed loans during

regular office hours of the lender or at any other time upon agreement

between the lender and the Agency.

Secs. 4279.45-4279.57 [Reserved]

Sec. 4279.58 Equal Credit Opportunity Act.

In accordance with Title V of Pub.L. 93-495, the Equal Credit

Opportunity Act, with respect to any aspect of a credit transaction,

neither the lender nor the Agency will discriminate against any

applicant on the basis of race, color, religion, national origin, sex,

marital status or age (providing the applicant has the capacity to

contract), or because all or part of the applicant's income derives

from a public assistance program, or because the applicant has, in good

faith, exercised any right under the Consumer Protection Act. The

lender will comply with the requirements of the Equal Credit

Opportunity Act as set out in the Federal Reserve Board's Regulation

implementing this Act (see 12 CFR part 202). Such compliance will be

accomplished prior to loan closing.

[[Page 3862]]

Secs. 4279.59-4279.70 [Reserved]

Sec. 4279.71 Public bodies and nonprofit corporations.

Any public body or nonprofit corporation that receives a guaranteed

loan that meets the thresholds established by Office of Management and

Budget (OMB) Circulars A-128 or A-133 or successor circulars must

provide an audit in accordance with the applicable OMB Circular for the

fiscal year (of the borrower) in which the Loan Note Guarantee is

issued. If the loan is for development or purchases made in a previous

fiscal year through interim financing, an audit will also be provided

for the fiscal year in which the development or purchases occurred. Any

audit provided by a public body or nonprofit corporation in compliance

with OMB Circulars A-128 or A-133 or their successsors will be

considered adequate to meet the audit requirements of the B&I program

for that year.

Sec. 4279.72 Conditions of guarantee.

A loan guarantee under this part will be evidenced by a Loan Note

Guarantee issued by the Agency. Each lender will execute a Lender's

Agreement. If a valid Lender's Agreement already exists, it is not

necessary to execute a new Lender's Agreement with each loan guarantee.

The provisions of this subpart, other appropriate subparts of this

part, and part 4287 of this chapter will apply to all outstanding

guarantees unless directly in conflict with the Loan Note Guarantee or

Lender's Agreement issued for the guarantee. In the event of such a

conflict, the lender may elect to have the loan serviced in accordance

with these regulations. The lender must notify the Agency of such

election in writing. Without such written election, the provisions of

the Loan Note Guarantee and Lender's Agreement will control.

(a) Full faith and credit. A guarantee under this part constitutes

an obligation supported by the full faith and credit of the United

States and is incontestable except for fraud or misrepresentation of

which a lender or holder has actual knowledge at the time it becomes

such lender or holder or which a lender or holder participates in or

condones. The guarantee will be unenforceable to the extent that any

loss is occasioned by a provision for interest on interest. In

addition, the guarantee will be unenforceable by the lender to the

extent any loss is occasioned by the violation of usury laws, negligent

servicing, or failure to obtain the required security regardless of the

time at which the Agency acquires knowledge of the foregoing. Any

losses occasioned will be unenforceable to the extent that loan funds

are used for purposes other than those specifically approved by the

Agency in its Conditional Commitment. The Agency will guarantee payment

as follows:

(1) To any holder, 100 percent of any loss sustained by the holder

on the guaranteed portion of the loan and on interest due on such

portion.

(2) To the lender, the lesser of:

(i) Any loss sustained by the lender on the guaranteed portion,

including principal and interest evidenced by the notes or assumption

agreements and secured advances for protection and preservation of

collateral made with Agency's authorization; or

(ii) The guaranteed principal advanced to or assumed by the

borrower and any interest due thereon.

(b) Rights and liabilities. When a guaranteed portion of a loan is

sold to a holder, the holder shall succeed to all rights of the lender

under the Loan Note Guarantee to the extent of the portion purchased.

The lender will remain bound to all obligations under the Loan Note

Guarantee, Lender's Agreement, and the Agency program regulations. A

guarantee and right to require purchase will be directly enforceable by

a holder notwithstanding any fraud or misrepresentation by the lender

or any unenforceability of the guarantee by the lender, except for

fraud or misrepresentation of which the holder had actual knowledge at

the time it became the holder or in which holder participates or

condones. In the event of material fraud, negligence or

misrepresentation by the lender or the lender's participation in or

condoning of such material fraud, negligence or misrepresentation, the

lender will be liable for payments made by the Agency to any holder.

(c) Payments. A lender will receive all payments of principal and

interest on account of the entire loan and will promptly remit to the

holder its pro rata share thereof, determined according to its

respective interest in the loan, less only the lender's servicing fee.

Secs. 4279.73-4279.74 [Reserved]

Sec. 4279.75 Sale or assignment of guaranteed loan.

The lender may sell all or part of the guaranteed portion of the

loan on the secondary market or retain the entire loan. The lender

shall not sell or participate any amount of the guaranteed or

unguaranteed portion of the loan to the borrower or members of the

borrower's immediate families, officers, directors, stockholders, other

owners, or a parent, subsidiary or affiliate. If the lender desires to

market all or part of the guaranteed portion of the loan at or

subsequent to loan closing, such loan must not be in default. Loans

made with the proceeds of any obligation the interest on which is

excludable from income under Section 103 of the Internal Revenue Code

of 1954, as amended, will not be guaranteed.

(a) Single note system. The entire loan is evidenced by one note,

and one Loan Note Guarantee is issued. The lender may assign all or

part of the guaranteed portion of the loan to one or more holders by

using Agency's Assignment Guarantee Agreement. The holder, upon written

notice to the lender and the Agency, may reassign the unpaid guaranteed

portion of the loan sold under the Assignment Guarantee Agreement. Upon

notification and completion of the assignment through the use of Form

RECD 4279-6, ``Assignment Guarantee Agreement,'' the assignee shall

succeed to all rights and obligations of the holder thereunder. If this

option is selected, the lender may not at a later date cause any

additional notes to be issued.

(b) Multinote system. Under this option the lender may provide one

note for the unguaranteed portion of the loan and no more than 10 notes

for the guaranteed portion. When this option is selected by the lender,

the holder will receive one of the borrower's executed notes and a Loan

Note Guarantee. The Agency will issue a Loan Note Guarantee for each

note, including the unguaranteed note, to be attached to the note. An

Assignment Guarantee Agreement will not be used when the multinote

option is utilized.

(c) After loan closing. If a loan is closed using the multinote

option and at a later date additional notes are desired, the lender may

cause a series of new notes, not to exceed the total number provided

for in paragraph (b) of this section, to be issued as replacement for

previously issued guaranteed notes, provided:

(1) Written approval of the Agency is obtained;

(2) The borrower agrees and executes the new notes;

(3) The interest rate does not exceed the interest rate in effect

when the loan was closed;

(4) The maturity of the loan is not changed;

(5) The Agency will not bear or guarantee any expenses that may be

incurred in reference to such reissuances of notes;

(6) There is adequate collateral securing the notes;

[[Page 3863]]

(7) No intervening liens have arisen or have been perfected and the

secured lien priority remains the same; and

(8) All holders agree.

(d) The lender's servicing fee will stop when the Agency purchases

the guaranteed portion of the loan from the secondary market. No such

servicing fee may be charged to the Agency and all loan payments and

collateral proceeds received will be applied first to the guaranteed

loan and when applied to the guaranteed loan, will be applied on a pro

rata basis.

(e) When the Agency purchases the guaranteed portion, the loan

shall not be sold with recourse. The purchased loans may be sold on a

nonrecourse basis only, i.e., without a Loan Note Guarantee attached

and without recourse.

Sec. 4279.76 Participation.

The lender may obtain participation in the loan under its normal

operating procedures; however, the lender must retain title to the

notes if any of them are unguaranteed and retain the lender's interest

in the collateral.

Sec. 4279.77 Minimum retention.

The lender is required to hold in its own portfolio a minimum of 5

percent of the total loan amount. The amount required to be maintained

must be of the unguaranteed portion of the loan and cannot be

participated to another. The lender may sell the remaining amount of

the unguaranteed portion of the loan only through participation.

Sec. 4279.78 Repurchase from holder.

(a) Repurchase by lender. A lender has the option to repurchase the

unpaid guaranteed portion of the loan from a holder within 30 days of

written demand by the holder when the borrower is in default not less

than 60 days on principal or interest due on the loan; or the lender

has failed to remit to the holder its pro rata share of any payment

made by the borrower within 30 days of its receipt thereof. The

repurchase by the lender will be for an amount equal to the unpaid

guaranteed portion of principal and accrued interest less the lender's

servicing fee. The holder will concurrently send a copy of the demand

letter to the Agency. The guarantee will not cover the note interest to

the holder on the guaranteed loan accruing after 90 days from the date

of the demand letter to the lender requesting the repurchase. The

lender will accept an assignment without recourse from the holder upon

repurchase. The lender is encouraged to repurchase the loan to

facilitate the accounting of funds, resolve the problem, and permit the

default, where and when reasonable. The lender will notify the holder

and the Agency of its decision.

(b) Agency purchase. (1) If the lender does not repurchase as

provided in paragraph (a) of this section, the Agency will purchase

from the holder the unpaid principal balance of the guaranteed portion

together with accrued interest to date of repurchase, less the lender's

servicing fee, within 30 days after written demand to the Agency from

the holder. (This is in addition to the copy of the written demand on

the lender.) The guarantee will not cover the note interest to the

holder on the guaranteed loan accruing after 90 days from the date of

the original demand letter of the holder to the lender requesting the

repurchase.

(2) The holder's demand to the Agency must include a copy of the

written demand made upon the lender. The holder must also include

evidence of its right to require payment from the Agency. Such evidence

will consist of either the original of the Loan Note Guarantee properly

endorsed to the Agency or the original of the Assignment Guarantee

Agreement properly assigned to the Agency without recourse including

all rights, title, and interest in the loan. The holder must include in

its demand the amount due including unpaid principal, unpaid interest

to date of demand, and interest subsequently accruing from date of

demand to proposed payment date. The Agency will be subrogated to all

rights of the holder.

(3) The Agency will notify the lender of its receipt of the

holder's demand for payment. The lender must promptly provide the

Agency with the information necessary for the Agency to determine the

appropriate amount due the holder. Upon request by the Agency, the

lender will furnish a current statement certified by an appropriate

authorized officer of the lender of the unpaid principal and interest

then owed by the borrower on the loan and the amount then owed to any

holder. Any discrepancy between the amount claimed by the holder and

the information submitted by the lender must be resolved between the

lender and the holder before payment will be approved. Such conflict

will suspend the running of the 30-day payment requirement.

(4) Purchase by the Agency neither changes, alters, nor modifies

any of the lender's obligations to the Agency arising from the loan or

guarantee nor does it waive any of Agency's rights against the lender.

The Agency will have the right to set-off against the lender all rights

inuring to the Agency as the holder of the instrument against the

Agency's obligation to the lender under the guarantee.

(c) Purchase for servicing. If, in the opinion of the lender,

repurchase of the guaranteed portion of the loan is necessary to

adequately service the loan, the holder must sell the guaranteed

portion of the loan to the lender for an amount equal to the unpaid

principal and interest on such portion less the lender's servicing fee.

The guarantee will not cover the note interest to the holder on the

guaranteed loan accruing after 90 days from the date of the demand

letter of the lender or the Agency to the holder requesting the holder

to tender its guaranteed portion. The lender must not repurchase from

the holder for arbitrage or other purposes to further its own financial

gain. Any repurchase must only be made after the lender obtains the

Agency's written approval. If the lender does not repurchase the

portion from the holder, the Agency may, at its option, purchase such

guaranteed portion for servicing purposes.

Secs. 4279.79-4279.83 [Reserved]

Sec. 4279.84 Replacement of document.

(a) Authorized representative. The Agency may issue a replacement

Loan Note Guarantee or Assignment Guarantee Agreement which may have

been lost, stolen, destroyed, mutilated, or defaced to the lender or

holder upon receipt of an acceptable certificate of loss and an

indemnity bond.

(b) Requirements. When a Loan Note Guarantee or Assignment

Guarantee Agreement is lost, stolen, destroyed, mutilated, or defaced

while in the custody of the lender or holder, the lender will

coordinate the activities of the party who seeks the replacement

documents and will submit the required documents to the Agency for

processing. The requirements for replacement are as follows:

(1) A certificate of loss, notarized, which includes:

(i) Name and address of owner;

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

(iii) Capacity of person certifying;

(iv) Full identification of the Loan Note Guarantee or Assignment

Guarantee Agreement including the name of the borrower, the Agency's

case number, date of the Loan Note Guarantee or Assignment Guarantee

Agreement, face amount of the evidence of debt purchased, date of

evidence of debt, present balance of the loan, percentage of guarantee,

and, if Assignment Guarantee Agreement, the

[[Page 3864]]

original named holder and the percentage of the guaranteed portion of

the loan assigned to that holder. Any existing parts of the document to

be replaced should be attached to the certificate;

(v) A full statement of circumstances of the loss, theft, or

destruction of the Loan Note Guarantee or Assignment Guarantee

Agreement; and

(vi) For the holder, evidence demonstrating current ownership of

the Loan Note Guarantee and Note or the Assignment Guarantee Agreement.

If the present holder is not the same as the original holder, a copy of

the endorsement of each successive holder in the chain of transfer from

the initial holder to present holder must be included if in existence.

If copies of the endorsement cannot be obtained, best available records

of transfer must be presented the Agency (e.g., order confirmation,

canceled checks, etc.).

(2) An indemnity bond acceptable to the Agency shall accompany the

request for replacement except when the holder is the United States, a

Federal Reserve Bank, a Federal Government corporation, a state or

territory, or the District of Columbia. The bond shall be with surety

except when the outstanding principal balance and accrued interest due

the present holder is less than $1 million verified by the lender in

writing in a letter of certification of balance due. The surety shall

be a qualified surety company holding a certificate of authority from

the Secretary of the Treasury and listed in Treasury Department

Circular 580.

(3) All indemnity bonds must be issued and payable to the United

States of America acting through the USDA. The bond shall be in an

amount not less than the unpaid principal and interest. The bond shall

hold USDA harmless against any claim or demand which might arise or

against any damage, loss, costs, or expenses which might be sustained

or incurred by reasons of the loss or replacement of the instruments.

(4) In those cases where the guaranteed loan was closed under the

provision of the multinote system, the Agency will not attempt to

obtain, or participate in the obtaining of, replacement notes from the

borrower. It will be the responsibility of the holder to bear costs of

note replacement if the borrower agrees to issue a replacement

instrument. Should such note be replaced, the terms of the note cannot

be changed. If the evidence of debt has been lost, stolen, destroyed,

mutilated or defaced, such evidence of debt must be replaced before the

Agency will replace any instruments.

Secs. 4279.85-4279.100 [Reserved]

Subpart B--Business and Industry Loans

Sec. 4279.101 Introduction.

(a) Content. This subpart contains loan processing regulations for

the Business and Industry (B&I) Guaranteed Loan Program. It is

supplemented by subpart A of this part, which contains general

guaranteed loan regulations, and subpart B of part 4287, which contains

loan servicing regulations.

(b) Purpose. The purpose of the B&I Guaranteed Loan Program is to

improve, develop, or finance business, industry, and employment and

improve the economic and environmental climate in rural communities.

This purpose is achieved by bolstering the existing private credit

structure through the guarantee of quality loans which will provide

lasting community benefits. It is NOT intended that the guarantee

authority will be used for marginal or substandard loans or to relieve

lenders having such loans.

(c) Documents. Copies of all forms, regulations, and Instructions

referenced in this subpart are available in any state or district

office or the National office.

Sec. 4279.102 Definitions.

The definitions in Sec. 4279.2 of subpart A of this part also apply

to this subpart.

Secs. 4279.103-4279.106 [Reserved]

Sec. 4279.107 Guarantee fee.

The guarantee fee will be paid to the Agency by the lender and is

nonrefundable. The fee may be passed on to the borrower. Except as

provided in this section, the guarantee fee will be 2 percent

multiplied by the principal loan amount multiplied by the percent of

guarantee and will be paid one time only at the time the Loan Note

Guarantee is issued.

(a) The guarantee fee may be reduced to 1 percent if the Agency

determines that the business meets the following criteria:

(1) High-impact business development investment (It is the goal of

this program to encourage high-impact business investment in rural

areas. The weight given to business investments will be in accordance

with Sec. 4279.155(b)(5)); and

(2) The business is located in a community that is experiencing

long-term population decline and job deterioration; or

(3) The business is located in rural community that has remained

persistently poor over the last 60 years or more; or

(4) The business is located in a rural community that is

experiencing trauma as a result of natural disaster or that is

experiencing fundamental structural changes in its economic base.

(b) Each fiscal year, the Agency shall establish a limit on the

maximum portion of guarantee authority available for that fiscal year

that may be used to guarantee loans with a guarantee fee of 1 percent.

The limit will be announced by publishing a notice in the Federal

Register. Once the limit has been reached, the guarantee fee for all

additional loans guaranteed during the remainder of that fiscal year

will be 2 percent.

Sec. 4279.108 Eligible borrowers.

(a) Type of entity. A borrower may be a cooperative, corporation,

partnership, or other legal entity organized and operated on a profit

or nonprofit basis; an Indian tribe on a Federal or state reservation

or other Federally recognized tribal group; a public body; or an

individual. A borrower must be engaged in or proposing to engage in a

business. Business may include manufacturing, wholesaling, retailing,

providing services, or other activities that will:

(1) Provide employment;

(2) Improve the economic or environmental climate;

(3) Promote the conservation, development, and use of water for

aquaculture; or

(4) Reduce reliance on nonrenewable energy resources by encouraging

the development and construction of solar energy system.

(b) Citizenship. Borrowers must meet one of the following sets of

conditions:

(1) Individual borrowers must be citizens of the United States or

reside in the United States after being legally admitted for permanent

residence. Corporations or other nonpublic body organization-type

borrowers must be at least 51 percent owned by persons who are either

citizens of the United States or reside in the United States after

being legally admitted for permanent residence; or,

(2) The borrower does not meet the requirements of paragraph (1) of

this section; but,

(i) The facility financed will create or save jobs for U.S.

residents in a rural area, and

(ii) The principals or other capable management are present and

able to remain in the U.S. and will remain in the U.S. to continue the

operation of the company; and,

(iii) The loan funds will only be used to finance fixed assets that

will be located in the U.S.

[[Page 3865]]

(c) Rural area. The business financed with a B&I Guaranteed Loan

must be located in a rural area. Loans to borrowers with facilities

located in both urban and rural areas will be limited to the amount

necessary to finance the facility located in the eligible rural area.

(1) Rural areas include all territory of a state that is:

(i) Not within the outer boundary of any city having a population

of 50,000 or more; and,

(ii) Not within an area that:

(A) Is urbanized or urbanizing as defined in this section; and,

(B) Has a population density of more than 100 persons per square

mile, according to the latest decennial census of the United States.

All density determinations will be made on the basis of minor civil

divisions or census county divisions as used by the Bureau of the

Census. In making the density calculations, large nonresidential tracts

devoted to urban land uses such as railroad yards, airports, industrial

sites, parks, golf courses, cemeteries, office parks, shopping malls,

or land set aside for such purposes will be excluded.

(2) An urbanized area is an area immediately adjacent to a city

with a population of 50,000 or more, that for general social and

economic purposes forms a single community with such a city. An

urbanizing area is an area immediately adjacent to a city with a

population of 50,000 or more or its urbanized area, which appears

likely, based on development and population trends, to become urbanized

in the foreseeable future. The corporate status of an urbanized or

urbanizing area is not material. An area located in recognizable open

country or separated from any city of 50,000 or more population by

recognizable open country or by a river, will be assumed to be not

urbanized or urbanizing.

(d) Other credit. All applications for assistance will be accepted

and processed without regard to the availability of credit from any

other source.

Secs. 4279.109-4279.112 [Reserved]

Sec. 4279.113 Eligible loan purposes.

Loan purposes must be consistent with the general purpose set forth

in Sec. 4279.101. They include but are not limited to the following:

(a) Business and industrial acquisitions when the loan will keep

the business from closing, prevent the loss of employment

opportunities, or provide expanded job opportunities.

(b) Business conversion, enlargement, repair, modernization, or

development.

(c) Purchase and development of land, easements, rights-of-way,

buildings, or facilities.

(d) Purchase of equipment, lease-hold improvements, machinery,

supplies, or inventory.

(e) Pollution control and abatement.

(f) Transportation services incidental to industrial development.

(g) Startup costs and working capital.

(h) Agricultural production, when not eligible for a Farm Credit

Programs loan from the Farm Service Agency and when it is part of an

integrated business also involved in the processing of agricultural

products.

(1) Examples of potentially eligible production include but are not

limited to: an apple orchard in conjunction with a food processing

plant; poultry buildings linked to a meat processing operation; or

sugar beet production coupled with storage and processing. Any

agricultural production considered for B&I financing must be owned,

operated, and maintained by the business receiving the loan for which a

guarantee is provided. Independent agricultural production operations,

even if not eligible for Farmer Programs loans, are not eligible for

the B&I program.

(2) The agricultural production portion of any loan will not exceed

50 percent of the total loan or $1 million, whichever is less.

(i) Purchase of membership, stocks, bonds, or debentures necessary

to obtain a loan from Farm Credit System institutions and other lenders

provided the purchase is required for all of their borrowers.

(j) Aquaculture, including conservation, development, and

utilization of water for aquaculture.

(k) Commercial fishing.

(l) Commercial nurseries engaged in the production of ornamental

plants and trees and other nursery products such as bulbs, flowers,

shrubbery, flower and vegetable seeds, sod, and the growing of plants

from seed to the transplant stage.

(m) Forestry, which includes businesses primarily engaged in the

operation of timber tracts, tree farms, and forest nurseries and

related activities such as reforestation.

(n) The growing of mushrooms or hydroponics.

(o) Interest (including interest on interim financing) during the

period before the first principal payment becomes due or the facility

becomes income producing, whichever is earlier.

(p) Feasibility studies.

(q) To refinance outstanding debt when it is determined that the

project is viable and refinancing is necessary to improve cash flow and

create new or save existing jobs. Existing lender debt may be included

provided that, at the time of application, the loan has been current

for at least the past 12 months (unless such status is achieved by the

lender forgiving the borrower's debt), the lender is providing better

rates or terms, and the refinancing is a secondary part of the overall

loan.

(r) Take out of interim financing. Guaranteeing a loan to pay off a

lender's interim loan will not be treated as debt refinancing provided

that the lender submits a complete preapplication or application which

proposes such interim financing prior to completing the interim loan. A

lender that is considering an interim loan should be advised that the

Agency assumes no responsibility or obligation for interim loans

advanced prior to the Conditional Commitment being issued.

(s) Fees and charges for professional services and routine lender

fees.

(t) Agency guarantee fee.

(u) Tourist and recreation facilities, including hotels, motels,

bed and breakfast establishments, and convention centers, except as

prohibited under ineligible purposes.

(v) Educational or training facilities.

(w) Community facility projects which are not listed as an

ineligible loan purpose.

(x) Constructing or equipping facilities for lease to private

businesses engaged in commercial or industrial operations.

(y) The financing of housing development sites provided that the

community demonstrates a need for additional housing to prevent a loss

of jobs in the area or to house families moving to the area as a result

of new employment opportunities.

(z) Community antenna television services or facilities.

Sec. 4279.114 Ineligible purposes.

(a) Distribution or payment to an individual owner, partner,

stockholder, or beneficiary of the borrower or a close relative of such

an individual when such individual will retain any portion of the

ownership of the borrower.

(b) Projects in excess of $1 million that would likely result in

the transfer of jobs from one area to another and increase direct

employment by more than 50 employees.

(c) Projects in excess of $1 million that would increase direct

employment by more than 50 employees, if the project would result in an

increase in the production of goods for which there is not sufficient

demand, or if the availability of services or facilities is

insufficient to meet the needs of the business.

[[Page 3866]]

(d) Charitable institutions, churches, or church-controlled or

fraternal organizations.

(e) Lending and investment institutions and insurance companies.

(f) Assistance to government employees and military personnel who

are directors or officers or have a major ownership of 20 percent or

more in the business.

(g) Golf courses or race tracks.

(h) Any business that derives more than 10 percent of annual gross

revenue from gambling activity.

(i) Any illegal business activity.

(j) Prostitution.

(k) Any line of credit.

(l) The guarantee of lease payments.

(m) The guarantee of loans made by other Federal agencies.

(n) Residential housing except when health care or assisted living

is involved.

(o) Loans made with the proceeds of any obligation the interest on

which is excludable from income under section 103 of the Internal

Revenue Code, as amended. Funds generated through the issuance of the

tax-exempt obligations may neither be used to purchase the guaranteed

portion of any Agency guaranteed loan nor may an Agency guaranteed loan

serve as collateral for a tax-exempt issue. The Agency may guarantee a

loan for a project which involves tax-exempt financing only when the

guaranteed loan funds are used to finance a part of the project that is

separate and distinct from the part which is financed by the tax-exempt

obligation, and the guaranteed loan has at least a parity security

position with the tax-exempt obligation.

Sec. 4279.115 Prohibition under Agency programs.

No B&I loans guaranteed by the Agency will be conditioned on any

requirement that the recipients of such assistance accept or receive

electric service from any particular utility, supplier, or cooperative.

Secs. 4279.116-4279.118 [Reserved]

Sec. 4279.119 Loan guarantee limits.

(a) Loan amount. The total amount of Agency loans to one borrower,

including the guaranteed and unguaranteed portions, the outstanding

principal and interest balance of any existing Agency guaranteed loans,

and new loan requests, must not exceed $10 million except as provided

for in this paragraph. The Administrator may, at the Administrator's

discretion, grant an exception to the $10 million limit under the

following circumstances:

(1) The project to be financed is a high priority project. Priority

will be determined in accordance with the criteria set forth in

Sec. 4279.155;

(2) The lender must document to the satisfaction of the Agency that

the loan will not be made and the project will not be completed if the

guarantee is not approved;

(3) In no circumstances will the total amount of guaranteed loans

to one borrower, including the guaranteed and unguaranteed portions,

the outstanding principal and interest balance of any existing Agency

guaranteed loans, and new loan requests, exceed $25 million;

(4) The percentage of guarantee will not exceed 60 percent. No

exception to this requirement will be approved under paragraph (b) of

this section for loans exceeding $10 million; and,

(5) Any request for a guaranteed loan exceeding the $10 million

limit must be submitted to the Agency in the form of a preapplication.

The preapplication must be submitted to the National office for review

and concurrence before encouraging a full application.

(b) Percent of guarantee. The percentage of guarantee, up to the

maximum allowed by this section, is a matter of negotiation between the

lender and the Agency. Except as provided in paragraphs (b) (1) through

(4) of this section, the maximum percentage of guarantee is 80 percent

for loans of $5 million or less and 70 percent for loans exceeding $5

million. The Administrator may, at the Administrator's discretion,

grant an exception to the guarantee percentage limits under the

following circumstances:

(1) The project to be financed is a high priority project. Priority

will be determined in accordance with the criteria set forth in

Sec. 4279.155;

(2) The lender must document to the satisfaction of the Agency that

the loan will not be made and the project will not be completed if the

higher guarantee percentage is not approved;

(3) The percentage of guarantee will not exceed 90 percent; and

(4) Each fiscal year, the Agency shall establish a limit on the

maximum portion of guarantee authority available for that fiscal year

that may be used to guarantee loans with a guarantee percentage

exceeding 80 percent. The limit will be announced by publishing a

notice in the Federal Register. Once the limit has been reached, the

guarantee percentage for all additional loans guaranteed during the

remainder of that fiscal year will not exceed 80 percent.

Sec. 4279.120 Fees and charges.

(a) Routine lender fees. The lender may establish charges and fees

for the loan provided they are similar to those normally charged other

applicants for the same type of loan in the ordinary course of

business.

(b) Professional services. Professional services are those rendered

by professionals generally licensed or certified by states or

accreditation associations, such as architects, engineers, packagers,

accountants, attorneys, or appraisers. The borrower may pay fees for

professional services needed for planning and developing a project

provided that the amounts are reasonable and customary in the area.

Professional fees may be included as an eligible use of loan proceeds.

Secs. 4279.121-4279.124 [Reserved]

Sec. 4279.125 Interest rates.

The interest rate for the guaranteed loan will be negotiated

between the lender and the applicant and may be either fixed or

variable as long as it is a legal rate. Interest rates will not be more

than those rates customarily charged borrowers in similar circumstances

in the ordinary course of business and are subject to Agency review and

approval. Lenders are encouraged to utilize the secondary market and

pass interest rate savings on to the borrower.

(a) A variable interest rate agreed to by the lender and borrower

must be a rate that is tied to a base rate agreed to by the lender and

the Agency. The variable interest rate may be adjusted at different

intervals during the term of the loan, but the adjustments may not be

more often than quarterly and must be specified in the Loan Agreement.

The lender must incorporate, within the variable rate Promissory Note

at loan closing, the provision for adjustment of payment installments

coincident with an interest rate adjustment. The lender will assure

that the outstanding principal balance is properly amortized within the

prescribed loan maturity to eliminate the possibility of a balloon

payment at the end of the loan.

(b) Any change in the interest rate between the date of issuance of

the Conditional Commitment and before the issuance of the Loan Note

Guarantee must be approved in writing by the Agency approval official.

Approval of such a change will be shown as an amendment to the

Conditional Commitment.

(c) It is permissible to have one interest rate on the guaranteed

portion of the loan and another rate on the unguaranteed portion of the

loan provided that the rate on the guaranteed portion does not exceed

the rate on the unguaranteed portion.

[[Page 3867]]

(d) A combination of fixed and variable rates will be allowed.

Sec. 4279.126 Loan terms.

(a) The maximum repayment for loans on real estate will not exceed

30 years; machinery and equipment repayment will not exceed the useful

life of the machinery and equipment purchased with loan funds or 15

years, whichever is less; and working capital repayment will not exceed

7 years. The term for a loan that is being refinanced may be based on

the collateral the lender will take to secure the loan.

(b) The first installment of principal and interest will, if

possible, be scheduled for payment after the project is operational and

has begun to generate income. However, the first full installment must

be due and payable within 3 years from the date of the Promissory Note

and be paid at least annually thereafter. Interest-only payments will

be paid at least annually from the date of the note.

(c) Only loans which require a periodic payment schedule which will

retire the debt over the term of the loan without a balloon payment

will be guaranteed.

(d) A loan's maturity will take into consideration the use of

proceeds, the useful life of assets being financed, and the borrower's

ability to repay the loan. The lender may apply the maximum guidelines

specified above only when the loan cannot be repaid over a shorter

term.

Secs. 4279.127-4279.130 [Reserved]

Sec. 4279.131 Credit quality.

The lender is primarily responsible for determining credit quality

and should address all of the elements of credit quality in a written

credit analysis including adequacy of equity, cash flow, collateral,

history, management, and the current status of the industry for which

credit is to be extended.

(a) Cash flow. All efforts will be made to structure or restructure

debt so that the business has adequate debt coverage and the ability to

accommodate expansion. All loans guaranteed through the B&I program

must be sound, with reasonably assured repayment.

(b) Collateral.

(1) Collateral must have documented value sufficient to protect the

interest of the lender and the Government and collateral value will

normally be at least equal to the loan amount. Lenders will discount

collateral consistent with sound loan-to-value policy.

(2) Some businesses are predominantly cash flow oriented, and where

cash flow and profitability is strong, loan-to-value coverage may be

less than normal policy. A loan primarily based on cash flow must be

supported by a successful and documented financial history.

(c) Industry. Current status of the industry will be considered and

businesses in areas of decline will be required to provide strong

business plans which outline how they differ from the current trends.

The regulatory environment surrounding the particular business or

industry will be considered.

(d) Equity. The equity amount will indicate a significant

investment by the owners, sufficient to provide reasonable protection

to creditors, and an ability to maintain a positive equity position

through a normal economic downturn.

(e) Lien priorities. The entire loan will be secured by the same

security with equal lien priority for the guaranteed and unguaranteed

portions of the loan. The unguaranteed portion of the loan will neither

be paid first nor given any preference or priority over the guaranteed

portion. A parity or junior position may be considered provided

discounted collateral values are adequate to secure the loan in

accordance with paragraph (b) of this section after considering prior

liens.

(f) Management. A thorough review of key management personnel will

be completed to assure that the business has adequately trained and

experienced managers.

Secs. 4279.132-4279.136 [Reserved]

Sec. 4279.137 Financial statements.

(a) The lender will determine the type and frequency of submission

of financial statements by the borrower. At a minimum, annual financial

statements prepared by an accountant in accordance with Generally

Accepted Accounting Principles will be required.

(b) If specific circumstances warrant and the proposed guaranteed

loan will exceed $3 million, the Agency may require annual audited

financial statements. For example, the need for audited financial

statements will be carefully considered in connection with loans that

depend heavily on inventory and accounts receivable for collateral.

Secs. 4279.138-4279.142 [Reserved]

Sec. 4279.143 Insurance.

(a) Hazard. Hazard insurance with a standard mortgage clause naming

the lender as beneficiary will be required on every loan in an amount

that is at least the lesser of the depreciated replacement value of the

collateral or the amount of the loan. Hazard insurance includes fire,

windstorm, lightning, hail, explosion, riot, civil commotion, aircraft,

vehicle, marine, smoke, builder's risk during construction by the

business, and property damage.

(b) Life. The lender may require life insurance to insure against

the risk of death of persons critical to the success of the business.

When required, coverage will be in amounts necessary to provide for

management succession or to protect the business. The cost of insurance

and its effect on the applicant's working capital must be considered as

well as the amount of existing insurance which could be assigned

without requiring additional expense.

(c) Worker compensation. Worker compensation insurance is required

in accordance with state law.

(d) Flood. National Flood insurance is required when it is

available.

(e) Other. Public liability, business interruption, malpractice and

other insurance appropriate to the borrower's particular business and

circumstances should be considered and required when needed to protect

the interests of the borrower.

Sec. 4279.144 Appraisals.

Lenders will be responsible for assuring that appraisal values

adequately reflect the actual value of all collateral. All real

property appraisals associated with Agency guaranteed loanmaking and

servicing transactions will meet the requirements set forth by the

Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of

1989 and the appropriate guidelines set forth in Standards 1 and 2 of

the Uniform Standards of Professional Appraisal Practices (USPAP). For

additional guidance and information concerning the completion of real

property appraisals, refer to subpart A of part 1922. Chattels will be

evaluated in accordance with normal banking practices and generally

accepted methods of determining value.

Secs. 4279.145-4279.148 [Reserved]

Sec. 4279.149 Personal and corporate guarantees.

(a) Personal and corporate guarantees, when obtained, are part of

the collateral for the loan. However, the value of such guarantee is

not considered in determining whether a loan is adequately secured for

loanmaking purposes.

(b) Personal/corporate guarantees for those owning greater than 20

percent of the borrower or those providing significant revenues or

income to the borrower will be required where legally

[[Page 3868]]

permissible, except as provided for by this section.

(c) Exceptions to the requirements for personal guarantees must be

requested by the lender and concurred in by the Agency approval

official on a case-by-case basis. The lender must strongly document

that collateral, equity, cash flow, and profitability, or a combination

of these, indicates an above average ability to repay the loan.

Sec. 4279.150 Feasibility studies.

A feasibility study by a qualified independent consultant may be

required by the Agency for startup businesses or existing businesses

when the project will significantly affect the borrower's operations.

Secs. 4279.151-4279.154 [Reserved]

Sec. 4279.155 Loan priorities.

Applications and preapplications received by the Agency will be

considered in the order received; however, for the purpose of assigning

priorities as described in paragraph (b) of this section, the Agency

will compare an application to other pending applications.

(a) When applications on hand otherwise have equal priority,

applications from qualified veterans will have preference.

(b) Priorities will be assigned by the Agency to eligible

applications on the basis of a point system as set forth in this

section. The application and supporting information will be used to

determine an eligible proposed project's priority for available

guarantee authority. All lenders, including CLP lenders, will consider

Agency priorities when choosing projects for guarantee. The lender will

provide necessary information related to determining the score, as

requested.

(1) Population priority. The priority score for population will be

the total score for the following categories:

(i) Located in an unincorporated area or in a city with under

25,000 population (10 points).

(ii) Located in a county defined as nonadjacent to a metropolitan

area, according to the latest definition provided by the Economic

Research Service of the Department of Agriculture (5 points).

(2) Community priority. The priority score for community will be

the total score for the following categories:

(i) Located in an eligible area of long term population decline and

job deterioration based on reliable statistical data (5 points).

(ii) Located in a rural community that has remained persistently

poor over the last 60 years or more (5 points).

(iii) Located in a rural community that is experiencing trauma as a

result of natural disaster or experiencing fundamental structural

changes in its economic base (5 points).

(iv) Located in a city or county with an unemployment rate 125

percent of the statewide rate or greater (5 points).

(3) Empowerment Zone/Enterprise Community (EZ/EC).

(i) Located in an EZ/EC selected or designated area (10 points).

(ii) Located in a EZ/EC applicant community which was not selected

or designated as EZ/EC. (5 points).

(4) Loan features. The priority score for loan features will be the

total score for the following categories except that the total score

for loan features cannot exceed 15 points:

(i) Lender will price the loan at secondary market rate plus 1.5

percent or less (5 points).

(ii) Lender will price the loan at secondary market rate plus 1

percent or less (5 points).

(iii) The Agency guaranteed loan is less than 50 percent of project

cost (5 points).

(iv) Percentage of guarantee is 10 or more percentage points less

than the maximum allowable for a loan of its size (5 points).

(5) High impact Business Investment Priorities. The priority score

for high impact business investment will be the total score for the

following three categories:

(i) Industry. The priority score for industry will be the total

score for the following, except that the total score for industry

cannot exceed 10 points.

(A) Industry that ranks among the leading-edge industries for

industrial growth potential, as measured by being in the top half of

industries in terms of industrial life cycle (3 points).

(B) Industry whose basis for competitiveness results from effective

use of the local natural resource base, rural location, or special

assets or contributions from the community, and not from extraordinary

tax abatements or other industrial attractions (3 points).

(C) Industry that has potential to achieve 20 percent or more of

its sales in international markets (3 points).

(D) Industry that is not already present in the community and

therefore represents a diversification of the local economy and reduces

overall community vulnerability to cyclical changes in the fortunes of

the predominant local industries (3 points).

(ii) Business. The priority score for business will be the total

score for the following, except that the total score for business

cannot exceed 10 points.

(A) Business that offers high value, specialized products and

services that command high prices because of uniqueness, high quality,

or niche marketing strategies and which displays the capacity for

innovativeness and rapid response in capitalizing on market

opportunities (3 points).

(B) Business that has a significant potential to stimulate the

development of a broader complex of business activities that provide

inputs to or serve as the markets for the initial business (3 points).

(C) Business that is locally owned and managed (3 points).

(D) Business that is a cooperative form of enterprise (3 points).

(iii) Job quality. The priority score for job quality will be the

total score for the following, except that the total score for job

quality cannot exceed 10 points.

(A) Business that provides jobs with career and earnings growth

opportunities within the local plant and does not require employees to

move away from the community in order to achieve career advancement (4

points).

(B) Business in which the average wage for project jobs exceeds 150

percent of the Federal minimum wage (4 points).

(C) Business in which the average wage for project jobs exceeds 200

percent of the Federal minimum wage (an additional 4 points).

(6) Administrative points. The state director may assign up to 10

additional points to an application to account for such factors as

statewide distribution of funds, natural or economic emergency

conditions, area economic development strategies, or other factors the

state director believes are not adequately covered elsewhere in the

scoring system. An explanation of the assigning of these points by the

state director will be appended to the calculation of the project score

maintained in the case file. If an application is considered in the

National office, the Administrator may also assign up to an additional

10 points. The Administrator may assign the additional points to an

application to account for items such as geographic distribution of

funds and emergency conditions caused by economic problems or natural

disasters or other factors the Administrator believes are not

adequately covered elsewhere in the scoring system.

Sec. 4279.156 Planning and performing development.

(a) Design policy. All project facilities must be designed

utilizing accepted architectural and engineering practices and must

conform to applicable Federal, state, and local codes and requirements.

The lender must ensure that the planned project will be completed

[[Page 3869]]

within the available funds and, once completed, will be suitable for

the borrower's needs.

(b) Project control. The lender will monitor the progress of

construction and undertake the reviews and inspections necessary to

ensure that construction proceeds are used in accordance with the

approved plans, specifications, and contract documents and that funds

are used for eligible project costs.

(c) Equal opportunity. For all construction contracts in excess of

$10,000, the contractor must comply with Executive Order 11246,

entitled ``Equal Employment Opportunity,'' as amended by Executive

Order 11375, and as supplemented by applicable Department of Labor

regulations (41 CFR part 60). The borrower and lender are responsible

for ensuring that the contractor complies with these requirements.

(d) Americans with Disabilities Act (ADA). B&I Guaranteed Loans

which involve the construction of or addition to facilities that

accommodate the public and commercial facilities, as defined by the

ADA, must comply with the ADA. The lender and borrower are responsible

for compliance.

Secs. 4279.157-4279.160 [Reserved]

Sec. 4279.161 Filing preapplications and applications.

Borrowers and lenders are encouraged to file preapplications and

obtain Agency comments before completing an application. However, if

they prefer, they may file a complete application as the first contact

with the Agency. Neither preapplications nor applications will be

accepted or processed unless a lender has agreed to finance the

proposal.

(a) Preapplications. Lenders may file preapplications by submitting

the following to the Agency:

(1) A letter signed by the borrower and lender containing the

following:

(i) Borrower's name, organization type, address, contact person,

and federal tax identification and telephone numbers.

(ii) Amount of the loan request, percent of guarantee requested,

and the proposed rates and terms.

(iii) Name of proposed lender, address, telephone number, contact

person, and lender's Internal Revenue Service (IRS) identification

number.

(iv) Brief description of the project, products, and services

provided, and availability of raw materials and supplies.

(v) Type and number of jobs created or saved.

(vi) Amount of borrower's equity and a description of collateral,

with estimated values, to be offered as security for the loan.

(vii) If a corporate borrower, the names and addresses of the

borrower's parent, affiliates, and/or subsidiary firms, if any, and a

description of the relationship.

(2) A completed Form RECD 4279-2, ``Certification of Non-Relocation

and Market Capacity Information Report,'' if the proposed loan is in

excess of $1 million and will increase direct employment by more than

50 employees.

(3) For existing businesses, a current balance sheet and a profit

and loss statement not more than 90 days old and financial statements

for the borrower and any parent, affiliates, and subsidiaries for at

least the 3 most recent years.

(4) For startup businesses, a preliminary business plan must be

provided as part of the preapplication.

(b) Applications. Except for CLP lenders, applications will be

filed with the Agency by submitting the following information: (CLP

applications will be completed in accordance with Sec. 4279.43(g)(1)

but CLP lenders must have the material listed in this paragraph in

their files.)

(1) A completed Form RECD 4279-1, ``Application for Loan Guarantee

(Business and Industry).''

(2) The information required for filing a preapplication, as listed

above, if not previously filed or if the information has changed.

(3) Form FmHA 1940-20, ``Request for Environmental Information,''

and attachments, unless the project is categorically excluded under

Agency environmental regulations. If a Phase I site assessment has been

completed, a copy must be provided.

(4) A personal credit report from an acceptable credit reporting

company for a proprietor (owner), each partner, officer, director, key

employee, and stockholder owning 20 percent or more interest in the

applicant, except for those corporations listed on a major stock

exchange. Credit reports are not required for elected and appointed

officials when the applicant is a public body.

(5) Intergovernmental consultation comments in accordance with 7

CFR part 3015, subpart V.

(6) Appraisals, if available. (Agency approval in the form of a

Conditional Commitment may be issued subject to receipt of adequate

appraisals.)

(7) For all businesses, a current (not more than 90 days old)

balance sheet, a pro forma balance sheet at startup, and projected

balance sheets, income and expense statements, and cash flow statements

for the next 2 years. Projections should be supported by a list of

assumptions showing the basis for the projections.

(8) Lender's complete written analysis, including spreadsheets of

the balance sheets and income statements for the 3 previous years (for

existing businesses), pro forma balance sheet at startup, and 2 years

projected yearend balance sheets and income statements, with

appropriate ratios and comparisons with industrial standards (such as

Dun & Bradstreet or Robert Morris Associates). All data must be shown

in total dollars and also in common size form, obtained by expressing

all balance sheet items as a percentage of assets and all income and

expense items as a percentage of sales. The lender's credit analysis

must address the borrower's management, repayment ability, history of

debt repayment, necessity of any debt refinancing, and the credit

reports of the borrower, its principals, and any parent, affiliate, or

subsidiary.

(9) Commercial credit reports obtained by the lender on the

borrower and any parent, affiliate, and subsidiary firms.

(10) Current personal and corporate financial statements of any

guarantors.

(11) A proposed Loan Agreement or a sample Loan Agreement with an

attached list of the proposed loan agreement provisions for the loan.

The final Loan Agreement must be executed by the lender and borrower

before the Agency issues a Loan Note Guarantee. The following

requirements must be addressed in the Loan Agreement:

(i) Prohibition against assuming liabilities or obligations of

others.

(ii) Restriction on dividend payments.

(iii) Limitation on purchase or sale of equipment and fixed assets.

(iv) Limitation on compensation of officers and owners.

(v) Minimum working capital or current ratio requirement.

(vi) Maximum debt to net worth ratio.

(vii) Restrictions concerning consolidations, mergers, or other

circumstances.

(viii) Limitations on selling the business without the concurrence

of the lender.

(ix) Repayment and amortization of the loan.

(x) List of collateral and lien priority for the loan including a

list of persons and corporations guaranteeing the loan with a schedule

for providing the lender with personal and corporate financial

statements. Financial statements on the corporate and personal

guarantors must be updated no less than annually.

[[Page 3870]]

(xi) Type and frequency of financial statements to be required for

the duration of the loan.

(xii) The final Loan Agreement between the lender and borrower will

contain any additional requirements imposed by the Agency in its

Conditional Commitment.

(12) A business plan, which includes at a minimum a description of

the business and project, management experience, products and services,

proposed use of funds, availability of labor, raw materials and

supplies, and the names of any corporate parent, affiliates, and

subsidiaries with a description of the relationship. This may be

omitted if the information is included in a feasibility study.

(13) Independent feasibility study, if required.

(14) For companies listed on a major stock exchange and/or subject

to the Securities and Exchange Commission (SEC) regulations, a copy of

SEC Form 10-K, ``Annual Report Pursuant to Section 13 or 15D of the Act

of 1934.''

(15) For health care facilities, a certificate of need, if required

by state law.

(16) A certification by the lender that it has completed a

comprehensive analysis of the proposal, the applicant is eligible, the

loan is for authorized purposes, and there is reasonable assurance of

repayment ability based on the borrower's history, projections and

equity, and the collateral to be obtained.

(17) Any additional information required by the Agency.

Secs. 4279.162-4279.164 [Reserved]

Sec. 4279.165 Evaluation of application.

(a) General review. If the Agency determines it is unable to

guarantee the loan, the lender will be informed in writing. Such

notification will include the reasons for denial of the guarantee.

Review of CLP applications will be modified in accordance with

Sec. 4279.43(g).

(b) Environment. Before loan approval, the proposed project must

comply with environmental requirements.

Secs. 4279.166-4279.172 [Reserved]

Sec. 4279.173 Loan approval and obligating funds.

(a) Upon approval of a loan guarantee, the Agency will issue a

Conditional Commitment to the lender to set forth conditions under

which a Loan Note Guarantee will be issued. The Conditional Commitment

must be accepted by the lender and borrower in writing.

(b) If certain conditions of the Conditional Commitment cannot be

met, the lender and applicant may propose alternate conditions. Within

the requirements of the applicable regulations and instructions and

prudent lending practices, the Agency may negotiate with the lender and

the applicant regarding any proposed changes to the Conditional

Commitment.

Sec. 4279.174 Transfer of lenders.

(a) The loan approval official may approve the substitution of a

new eligible lender in place of a former lender who holds an

outstanding Conditional Commitment when the Loan Note Guarantee has not

yet been issued, provided that there are no changes in the borrower's

ownership or control, loan purposes, or scope of project and loan

conditions in the Conditional Commitment and the Loan Agreement remain

the same.

(b) The new lender's servicing capability, eligibility, and

experience will be analyzed by the Agency prior to approval of the

substitution. The original lender will provide the Agency with a letter

stating the reasons it no longer desires to be a lender for the

project. The substituted lender must execute a new Part B of Form RECD

4279-1.

Secs. 4279.175-4279.179 [Reserved]

Sec. 4279.180 Changes in borrower.

Any changes in borrower ownership or organization prior to the

issuance of the Loan Note Guarantee must be approved by the Agency loan

approval official.

Sec. 4279.181 Conditions precedent to issuance of Loan Note Guarantee.

The Loan Note Guarantee will not be issued until the lender,

including a CLP lender, certifies to the following:

(a) No major changes have been made in the lender's loan conditions

and requirements since the issuance of the Conditional Commitment,

unless such changes have been approved by the Agency.

(b) All planned property acquisition has been completed, all

development has been substantially completed in accordance with plans

and specifications, and costs have not exceeded the amount approved by

the lender and the Agency.

(c) Required hazard, flood, liability, worker's compensation, and

personal life insurance, when required, are in effect.

(d) Truth in lending requirements have been met.

(e) All equal credit opportunity requirements have been met.

(f) The loan has been properly closed, and the required security

instruments have been obtained or will be obtained on any acquired

property that cannot be covered initially under state law.

(g) The borrower has marketable title to the collateral then owned

by the borrower, subject to the instrument securing the loan to be

guaranteed and subject to any other exceptions approved in writing by

the Agency.

(h) When required, the entire amount of the loan for working

capital has been disbursed except in cases where the Agency has

approved disbursement over an extended period of time.

(i) When required, personal, partnership, or corporate guarantees

have been obtained.

(j) All other requirements of the Conditional Commitment have been

met.

(k) Lien priorities are consistent with the requirements of the

Conditional Commitment. No claims or liens of laborers, subcontractors,

suppliers of machinery and equipment, or other parties have been filed

against the collateral and no suits are pending or threatened that

would adversely affect the collateral when the security instruments are

filed.

(l) The loan proceeds have been disbursed for purposes and in

amounts consistent with the Conditional Commitment and Form RECD 4279-

1. A copy of the detailed loan settlement of the lender must be

attached to support this certification.

(m) There has been neither any material adverse change in the

borrower's financial condition nor any other material adverse change in

the borrower, for any reason, during the period of time from the

Agency's issuance of the Conditional Commitment to issuance of the Loan

Note Guarantee regardless of the cause or causes of the change and

whether or not the change or causes of the change were within the

lender's or borrower's control. The lender's certification must address

all adverse changes of the borrower, any parent, affiliate, or

subsidiary of the borrower, and guarantors.

(n) None of the lender's officers, directors, stockholders, or

other owners (except stockholders in an institution that has normal

stockshare requirements for participation) has a substantial financial

interest in the borrower and neither the borrower nor its officers,

directors, stockholders, or other owners has a substantial financial

interest in the lender. If the borrower is a member of the board of

directors or an officer of a

[[Page 3871]]

Farm Credit System (FCS) institution that is the lender, the lender

will certify that an FCS institution on the next highest level will

independently process the loan request and act as the lender's agent in

servicing the account.

Secs. 4279.182-4279.185 [Reserved]

Sec. 4279.186 Issuance of the guarantee.

(a) When loan closing plans are established, the lender will notify

the Agency. Coincident with, or immediately after loan closing, the

lender will provide the following to the Agency:

(1) Lender's certifications as outlined in Sec. 4279.181.

(2) Executed Lender's Agreement.

(3) Form FmHA 1980-19, ``Guaranteed Loan Closing Report,'' and

appropriate guarantee fee.

(b) When the Agency is satisfied that all conditions for the

guarantee have been met, the Loan Note Guarantees and the following

documents, as appropriate, will be issued:

(1) Assignment Guarantee Agreement. In the event the lender uses

the single note option and assigns the guaranteed portion of the loan

to a holder, the lender, holder, and the Agency will execute the

Assignment Guarantee Agreement; and

(2) Certificate of Incumbency. If requested by the lender, the

Agency will provide the lender with a certification on Form RECD 4279-

7, ``Certificate of Incumbency and Signature,'' of the signature and

title of the Agency official who signs the Loan Note Guarantee,

Lender's Agreement, and Assignment Guarantee Agreement.

(c) The Agency may, at its discretion, request copies of loan

documents for its file.

(d) There may be instances when not all of the working capital has

been disbursed, and it appears practical to disburse the balance over a

period of time. The state director, after review of a disbursement

plan, may amend the Conditional Commitment in accordance with the

disbursement plan and issue the guarantee.

Sec. 4279.187 Refusal to execute Loan Note Guarantee.

If the Agency determines that it cannot execute the Loan Note

Guarantee, the Agency will promptly inform the lender of the reasons

and give the lender a reasonable period within which to satisfy the

objections. If the lender writes the Agency within the period allowed

requesting additional time to satisfy the objections, the Agency may

grant the request. If the lender satisfies the objections within the

time allowed, the guarantee will be issued.

Secs. 4279.188-4279.200 [Reserved]

18. A new part 4287, is added to chaper XLII to read as follows:

PART 4287--SERVICING

Subpart A--[Reserved]

Subpart B--Servicing Business and Industry (B&I) Guaranteed Loans

Sec.

4287.101 Introduction.

4287.102 Definitions.

4287.103-4287.105 [Reserved]

4287.106 Routine servicing.

4287.107-4287.111 [Reserved]

4287.112 Interest rate adjustments.

4287.113 Release of collateral.

4287.114-4287.122 [Reserved]

4287.123 Subordination of lien position.

4287.124 Alterations of loan instruments.

4287.125-4287.133 [Reserved]

4287.134 Transfer and assumption.

4287.135 Substitution of lender.

4287.136-4287.144 [Reserved]

4287.145 Default by borrower.

4287.146-4287.155 [Reserved]

4287.156 Protective advances.

4287.157 Liquidation.

4287.158 Determination of loss and payment.

4287.159-4287.168 [Reserved]

4287.169 Future recovery.

4287.170 Bankruptcy.

4287.171-4287.179 [Reserved]

4287.180 Termination of guarantee.

4287.181-4287.200 [Reserved]

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

Subpart A--[Reserved]

Subpart B--Servicing Business and Industry Guaranteed Loans

Sec. 4287.101 Introduction.

(a) This subpart supplements subparts A and B of part 4279 by

providing additional requirements and instructions for servicing and

liquidating all Business and Industry (B&I) Guaranteed Loans. This

includes Drought and Disaster (D&D), Disaster Assistance for Rural

Business Enterprises (DARBE), and Business and Industry Disaster (BID)

loans.

(b) The lender will be responsible for servicing the entire loan

and will remain mortgagee and secured party of record notwithstanding

the fact that another party may hold a portion of the loan. The entire

loan will be secured by the same security with equal lien priority for

the guaranteed and unguaranteed portions of the loan. The unguaranteed

portion of a loan will neither be paid first nor given any preference

or priority over the guaranteed portion of the loan.

(c) Copies of all forms, regulations, and instructions referenced

in this subpart are available in any state or district office or the

National office.

Sec. 4287.102 Definitions.

The definitions contained in Sec. 4279.2 apply to this subpart.

Secs. 4287.103-4287.105 [Reserved]

Sec. 4287.106 Routine servicing.

The lender is responsible for servicing the entire loan and for

taking all servicing actions that a prudent lender would perform in

servicing its own portfolio of loans that are not guaranteed. The Loan

Note Guarantee is unenforceable by the lender to the extent any loss is

occasioned by violation of usury laws, use of loan funds for

unauthorized purposes, negligent servicing, or failure to obtain the

required security regardless of the time at which the Agency acquires

knowledge of the foregoing. This responsibility includes but is not

limited to the collection of payments, obtaining compliance with the

covenants and provisions in the Loan Agreement, obtaining and analyzing

financial statements, checking on payment of taxes and insurance

premiums, and maintaining liens on collateral.

(a) Lender reports. The lender must report the outstanding

principal and interest balance on each guaranteed loan semiannually

using Form FmHA 1980-41, ``Guaranteed Loan Status Report.''

(b) Loan classification. Within 90 days of receipt of the Loan Note

Guarantee, the lender must notify the Agency of the loan's

classification or rating under its regulatory standards. Should the

classification be changed at a future time, the Agency must be notified

immediately.

(c) Agency/lender conference. The lender will meet with the Agency

at the Agency's request to ascertain how the guaranteed loan is being

serviced and that the conditions and covenants of the Loan Agreement

are being enforced.

(d) Financial reports. The lender must obtain the financial

statements required by the Loan Agreement, and these statements must be

forwarded to the Agency. The lender is required to submit annual

statements to the Agency within 120 days of the borrower's fiscal

yearend. The lender must analyze the financial statements and provide

the Agency with a written summary of its analysis and conclusions,

including trends, strengths, weaknesses, extraordinary transactions,

and other indications of the financial condition of the borrower.

Spreadsheets of the new financial statements and previous financial

statements must also be included.

[[Page 3872]]

(e) Additional expenditures. The lender will not make additional

loans to the borrower without first obtaining the prior written

approval of the Agency, even though such loans will not be guaranteed.

Secs. 4287.107-4287.111 [Reserved]

Sec. 4287.112 Interest rate adjustments.

(a) Reductions. The borrower, lender, and holder (if any) may

collectively initiate a permanent or temporary reduction in the

interest rate of the guaranteed loan at any time during the life of the

loan upon written agreement among these parties. The Agency must be

notified by the lender, in writing, within 10 calendar days of the

change. If the guaranteed portion has been purchased by the Agency,

then the Agency will affirm or reject interest rate change proposals in

writing. When the Agency holds any portion of the loan, it will concur

in such interest rate changes only when it is demonstrated to the

Agency that the change is a more viable alternative than initiating or

proceeding with liquidation of the loan or continuing with the loan in

its present state. The Government's financial interests must not be

adversely affected by the reduction of the interest rate.

(1) Factors which will be considered in making such determinations

include:

(i) Whether the proposed interest rate will be below the

Government's cost of borrowing money;

(ii) Whether continuing with the loan would realistically promote

or enhance rural development and employment in rural areas;

(iii) Whether recovery is maximized and the monetary recovery would

be increased by proceeding immediately to liquidation (if applicable)

or allowing the borrower to continue at a reduced interest rate; and

(iv) Whether an in-depth financial analysis by the lender

reasonably indicates that the business would be successful at a lower

interest rate and reasonably indicates that the borrower could make the

reduced payment and pay off amounts in arrears, if any.

(2) Fixed rates can be changed to variable rates to reduce the

interest rate to the borrower only when the variable rate has a ceiling

which is less than or equal to the original fixed rate.

(3) Variable rates can be changed to a fixed rate, which is at or

below the current variable rate.

(4) The interest rates, after adjustments, must comply with the

requirements for interest rates on new loans, as established by

Sec. 4279.125.

(5) The lender is responsible for the legal documentation of

interest rate changes by an endorsement or any other legally effective

amendment to the promissory note; however, no new notes may be issued.

Copies of all legal instruments should be provided to the Agency for

its records.

(b) Increases. No increases in interest rates will be permitted

except the normal fluctuations in approved variable interest rates.

Sec. 4287.113 Release of collateral.

(a) All releases of collateral must be supported by a current

appraisal on the remaining collateral. The appraisal will be at the

expense of the borrower and must meet the requirements of

Sec. 4279.144. The Agency must not be adversely affected by the

release, and the remaining collateral must be sufficient to provide for

repayment of the Agency's guaranteed loan. Sale or release of

collateral must be based on an arm's-length transaction. There must be

adequate consideration for the release. Adequate consideration for

release of collateral may include, but is not limited to:

(1) Application of the net proceeds from the sale of collateral to

the borrower's debts in order of lien priority (Application of sale

proceeds to the Agency guaranteed debt must be in inverse order of

maturity);

(2) Use of the net proceeds from the sale of collateral to purchase

other collateral of equal or greater value for which the lender will

obtain a lien position equal or superior to the position previously

held;

(3) Application of the net proceeds from the sale of collateral to

the borrower's business operation in such a manner that a significant

enhancement of the borrower's debt service ability can be clearly

demonstrated. (The lender's written request must detail how the

borrower's debt service ability will be enhanced); and

(4) Assurance that the release of collateral is essential for the

success of the business, thereby furthering the goals of the B&I

program. Such assurance must be supported by written documentation from

the lender.

(b) Within the parameters of paragraph (a) of this section, lenders

may release collateral (other than personal and corporate guarantees)

with a cumulative value up to 20 percent of the original loan amount

without Agency concurrence if the proceeds will be used to reduce the

guaranteed loan or to buy replacement collateral.

(c) Within the parameters of paragraph (a) of this section, release

of collateral with a cumulative value in excess of 20 percent of the

original loan or when the proceeds will not be used to reduce the

guaranteed loan or to buy replacement collateral must be requested in

writing by the lender and concurred in by the Agency in writing in

advance of the release. A written evaluation will be done by the lender

to justify the release.

Secs. 4287.114-4287.122 [Reserved]

Sec. 4287.123 Subordination of lien position.

A subordination of the lender's lien position must be requested in

writing by the lender and concurred in by the Agency in writing in

advance of the subordination. The subordination must enhance the

borrower's business, and the Agency's interest in and lien position on

the collateral, after the subordination, must be adequate to secure the

loan. The lien to which the guaranteed loan is subordinated must be for

a fixed dollar limit and fixed or limited term, after which the

guaranteed loan lien priority will be restored. Generally,

subordination to a revolving line of credit will not exceed 1 year.

There must be adequate consideration for the subordination.

Sec. 4287.124 Alterations of loan instruments.

The lender shall neither alter nor approve any alterations of any

loan instruments without the prior written approval of the Agency.

Secs. 4287.125-4287.133 [Reserved]

Sec. 4287.134 Transfer and assumption.

(a) Documentation of request. All transfers and assumptions must be

approved in writing by the Agency and must be to eligible applicants in

accordance with subpart B of part 4279. An individual credit report

must be provided for transferee proprietors, partners, officers,

directors, and stockholders with 20 percent or more interest in the

business, along with such other documentation as the Agency may request

to determine eligibility.

(b) Terms. Loan terms must not be changed unless the change is

approved in writing by the Agency with the concurrence of any holder

and of the transferor (including guarantors) if they have not been or

will not be released from liability. Any new loan terms must be within

the terms authorized by Sec. 4279.126. The lender's request for

approval of new loan terms will be supported by an explanation of the

reasons for the proposed change in loan terms.

(c) Release of liability. The transferor, including any guarantor,

may be released from liability only with prior Agency written

concurrence and only when the value of the collateral being transferred

is at least equal to the

[[Page 3873]]

amount of the loan being assumed, supported by a current appraisal and

a current financial statement where applicable. The Agency will not pay

for the appraisal. If the transfer is for less than the entire debt,

the lender must demonstrate to the Agency that the transferor and any

guarantors have no reasonable debt-paying ability considering their

assets and income at the time of transfer.

(d) Proceeds. Any proceeds received from the sale of collateral

before a transfer and assumption will be credited to the transferor's

guaranteed loan debt in inverse order of maturity before the transfer

and assumption are closed.

(e) Additional loans. Loans to provide additional funds in

connection with a transfer and assumption must be considered as a new

loan application under subpart B of part 4279.

(f) Credit quality. In all cases, the lender must make a complete

credit analysis, subject to Agency review and approval.

(g) Documents. Prior to Agency approval, the lender must advise the

Agency, in writing, that the transaction can be properly and legally

transferred, and the conveyance instruments will be filed, registered,

or recorded as appropriate.

(1) The assumption will be done on the lender's form of assumption

agreement and will contain the Agency case number of the transferor and

transferee. The lender will provide the Agency with a copy of the

transfer and assumption agreement. It is the lender's responsibility to

ensure that all transfers and assumptions are noted on all original

Loan Note Guarantees.

(2) A new Loan Agreement, consistent in principle with the original

Loan Agreement, should be executed to establish the terms and

conditions of the loan being assumed. An assumption agreement can be

used to establish the loan covenants.

(3) The lender will provide to the Agency a written certification

that the transfer and assumption are valid, enforceable, and comply

with all Agency regulations.

(h) Loss resulting from transfer. If a loss should occur upon

consummation of a complete transfer and assumption for less than the

full amount of the debt and the transferor (including personal

guarantors) is released from liability, the lender, if it holds the

guaranteed portion, may file an estimated report of loss to recover its

pro rata share of the actual loss. In completing the report of loss,

the amount of the debt assumed will be entered as net collateral

(recovery). Approved protective advances and accrued interest thereon

made during the arrangement of a transfer and assumption, if not

assumed by the transferee, will be included in the calculations.

(i) Related party. If the transferor and transferee are affiliated

or related parties, any transfer and assumption must be for the full

amount of the debt.

(j) Payment requests. Requests for a loan guarantee to provide

equity for a transfer and assumption must be considered as a new loan

under subpart B of part 4279.

(k) Cash downpayment. When the transferee will be making a cash

downpayment as part of the transfer and assumption:

(1) The lender should have an appropriate appraiser, acceptable to

both the transferee and transferor and currently authorized to perform

appraisals, to determine the value of the collateral securing the loan.

The appraisal fee and any other costs will not be paid by the Agency.

(2) The market value of the collateral, plus any additional

property the transferee proposes to offer as collateral, must be

adequate to secure the balance of the guaranteed loans.

(3) Cash downpayments may be paid directly to the transferor

provided:

(i) The lender recommends that the cash be released and the Agency

concurs prior to the transaction being completed. The lender may wish

to require that an amount be retained for a defined period of time as a

reserve against future defaults. Interest on such account may be paid

periodically to the transferor or transferee as agreed;

(ii) The lender determines that the transferee has the repayment

ability to meet the obligations of the assumed guaranteed loan as well

as any other indebtedness;

(iii) Any payments by the transferee to the transferor will not

suspend the transferee's obligations to continue to meet the guaranteed

loan payments as they come due under the terms of the assumption; and

(iv) The transferor agrees not to take any action against the

transferee in connection with the assumption without prior written

approval of the lender and the Agency.

(4) The Agency will not consider a purchase money mortgage or

contract for purchase as an option to maximize recovery.

Sec. 4287.135 Substitution of lender.

After the issuance of a Loan Note Guarantee, the lender shall not

sell or transfer the entire loan without the prior written approval of

the Agency. The Agency will not pay any loss or share in any costs

(i.e., appraisal fees, environmental studies, or other costs associated

with servicing or liquidating the loan) with a new lender unless a

relationship is established through a substitution of lender in

accordance with paragraph (a) of this section. This includes cases

where the lender has failed and been taken over by a regulatory agency

such as the Federal Deposit Insurance Corporation (FDIC) and the loan

subsequently sold to another lender.

(a) The Agency may approve the substitution of a new lender if:

(1) The proposed substitute lender:

(i) Is an eligible lender in accordance with Sec. 4279.29;

(ii) Is able to service the loan in accordance with the original

loan documents; and

(iii) Agrees in writing to acquire title to the unguaranteed

portion of the loan held by the original lender and assumes all

original loan requirements, including liabilities and servicing

responsibilities.

(2) The substitution of lender is requested in writing by the

borrower, the proposed substitute lender, and the original lender if

still in existence.

(b) Where the lender has failed and been taken over by FDIC and the

guaranteed loan is liquidated by FDIC rather than being sold to another

lender, the Agency will pay losses and share in costs as if FDIC were

an approved substitute lender.

Secs. 4287.136-4287.144 [Reserved]

Sec. 4287.145 Default by borrower.

(a) The lender must notify the Agency when a borrower is 30 days

past due on a payment or is otherwise in default of the Loan Agreement.

Form FmHA 1980-44, ``Guaranteed Loan Borrower Default Status,'' will be

used and the lender will continue to complete this form bimonthly until

such time as the loan is no longer in default. If a monetary default

exceeds 60 days, the lender will arrange a meeting with the Agency and

the borrower to resolve the problem.

(b) In considering options, the prospects for providing a permanent

cure without adversely affecting the risk to the Agency and the lender

is the paramount objective.

(1) Temporary curative actions include but are not limited to:

(i) Deferment of principal (subject to rights of any holder);

(ii) An additional temporary loan by the lender to bring the

account current;

(iii) Reamortization of or rescheduling the payments on the loan

(subject to rights of any holder);

(iv) Transfer and assumption of the loan in accordance with

Sec. 4287.134;

(v) Reorganization;

[[Page 3874]]

(vi) Liquidation;

(vii) Subsequent loans guarantees; and

(viii) Changes in interest rates with the Agency's, the lender's,

and holder's approval, provided such interest rate is adjusted

proportionally between the guaranteed and unguaranteed portion of the

loan and the type of rate remains the same.

(2) In the event a deferment, rescheduling, reamortization, or

moratorium is accomplished, it will be limited to the remaining life of

the collateral or limits as set out in Sec. 4279.126, whichever is

less.

Secs. 4286.146-4287.155 [Reserved]

Sec. 4287.156 Protective advances.

Protective advances are advances made by the lender for the purpose

of preserving and protecting the collateral where the debtor has failed

to, will not, or cannot meet its obligations. Sound judgment must be

exercised in determining that the protective advance preserves

collateral and recovery is actually enhanced by making the advance.

Protective advances will not be made in lieu of additional loans.

(a) The maximum loss to be paid by the Agency will never exceed the

original principal plus accrued interest regardless of any protective

advances made.

(b) Protective advances and interest thereon at the note rate will

be guaranteed at the same percentage of loss as provided in the Loan

Note Guarantee notwithstanding the guaranteed portion of the loan is

held by another.

(c) Protective advances must constitute an indebtedness of the

borrower to the lender and be secured by the security instruments.

Agency written authorization is required when cumulative protective

advances exceed $5,000.

Sec. 4287.157 Liquidation.

In the event of one or more incidents of default or third party

actions that the borrower cannot or will not cure or eliminate within a

reasonable period of time, liquidation may be considered. If the lender

concludes that liquidation is necessary, it must request the Agency's

concurrence. The lender will liquidate the loan unless the Agency, at

its option, carries out liquidation. When the decision to liquidate is

made, if the loan has not already been repurchased, provisions will be

made for repurchase in accordance with Sec. 4279.78.

(a) Decision to liquidate. A decision to liquidate shall be made

when it is determined that the default cannot be cured through actions

listed in Sec. 4287.145 or it has been determined that it is in the

best interest of the Government and the lender to liquidate because

such actions would only delay liquidation and liquidating early would

enhance the possibility of a maximum recovery. Therefore, the decision

to liquidate or continue with the borrower must be made as soon as

possible when any of the following exist:

(1) A loan has been delinquent 90 days and the lender and borrower

have not been able to cure the delinquency through one of the actions

listed in Sec. 4287.145.

(2) It has been determined that delaying liquidation will

jeopardize or eliminate the possibility of full recovery on the loan.

(3) The borrower or lender has been uncooperative in resolving the

problem and the Agency or the lender has reason to believe the borrower

is not acting in good faith, and it would enhance the position of the

guarantee to liquidate immediately.

(b) Submission of liquidation plan. The lender will, within 30 days

after a decision to liquidate, submit to the Agency in writing its

proposed detailed method of liquidation. Upon approval by the Agency of

the liquidation plan, the lender will commence liquidation. State

directors have no authority to exercise the option to liquidate by the

Agency without National office approval. When the Agency liquidates,

reasonable liquidation expenses will be assessed against the proceeds

derived from the sale of the collateral. Form FmHA 1980-45, ``Notice of

Liquidation Responsibility,'' will be forwarded to the Finance office

when the Agency liquidates.

(c) Lender's liquidation plan. The liquidation plan must include,

but is not limited to, the following:

(1) Such proof as the Agency requires to establish the lender's

ownership of the guaranteed loan promissory note and related security

instruments and a copy of the payment ledger if available which

reflects the current loan balance and accrued interest to date and the

method of computing the interest.

(2) A full and complete list of all collateral including any

personal and corporate guarantees.

(3) The recommended liquidation methods for making the maximum

collection possible on the indebtedness and the justification for such

methods, including:

(i) Recommended action for acquiring and disposing of all

collateral; and

(ii) Recommended action to collect from guarantors.

(4) Necessary steps for preservation of the collateral.

(5) Copies of borrower's latest available financial statements.

(6) Copies of guarantor's latest available financial statements.

(7) An itemized list of estimated liquidation expenses expected to

be incurred and justification for each expense.

(8) A schedule to periodically report to the Agency on progress of

liquidation.

(9) Estimated protective advance amounts with justification.

(10) Proposed protective bid amounts on collateral to be sold at

auction and a breakdown on how the amounts were determined.

(11) If a voluntary conveyance is considered, the proposed amount

to be credited to the guaranteed debt.

(12) Legal opinions, if needed.

(13) If the outstanding balance of principal and accrued interest

is less than $200,000, the lender will obtain an estimate of fair

market and potential liquidation value of the collateral. If the

outstanding balance of principal and accrued interest is $200,000 or

more, the lender will obtain an independent appraisal report on all

collateral securing the loan which will reflect the fair market value

and potential liquidation value. The independent appraiser's fee will

be shared equally by the Agency and the lender.

(14) The Agency must concur in advance regarding the need for and

scope of an environmental site assessment. If an environmental site

assessment is needed to evaluate potential risks associated with the

acquisition of real estate serving as collateral, the lender will

arrange for a qualified, independent environmental assessment of the

property. The cost of the assessment will be shared equally by the

Agency and the lender.

(d) Approval of liquidation plan. The Agency will inform the lender

in writing whether it concurs in the lender's liquidation plan. Should

the Agency and the lender not agree on the liquidation plan,

negotiations will take place between the Agency and the lender to

resolve the disagreement. When the liquidation plan is approved by the

Agency, the lender will proceed expeditiously with liquidation.

(1) A transfer and assumption of the borrower's operation can be

accomplished before or after the loan goes into liquidation. However,

if the collateral has been purchased through foreclosure or the

borrower has conveyed title to the lender, no transfer and assumption

is permitted.

(2) A protective bid may be made by the lender, with prior Agency

written approval, at a foreclosure sale to protect

[[Page 3875]]

the lender's and the Agency's interest. The reason for a protective bid

is to ensure that the collateral is not sold to other bidders at an

unrealistically low price. The protective bid will not exceed the

amount of the loan, including expenses of foreclosure, and should be

based on the liquidation value less estimated expenses for holding and

reselling the property. These expenses include, but are not limited to,

expenses for resale, interest accrual, length of time necessary for

resale, maintenance, guard service, weatherization, and prior liens.

(e) Acceleration. The lender, or the Agency if it liquidates, will

proceed to accelerate the indebtedness as expeditiously as possible

when acceleration is necessary including giving any notices and taking

any other legal actions required. A copy of the acceleration notice or

other acceleration document will be sent to the Agency (or lender if

the Agency liquidates). The guaranteed loan will be considered in

liquidation once the loan has been accelerated and a demand for payment

has been made upon the borrower.

(f) Filing an estimated loss claim. When the lender is conducting

the liquidation and owns any or all of the guaranteed portion of the

loan, the lender will file an estimated loss claim once a decision has

been made to liquidate if the liquidation will exceed 90 days. The

estimated loss payment will be based on the liquidation value of the

collateral. For the purpose of reporting and loss claim computation,

the lender will discontinue interest accrual on the defaulted loan in

accordance with Agency procedures, and the loss claim will be promptly

processed in accordance with applicable Agency regulations.

(g) Accounting and reports. When the lender conducts liquidation,

it will account for funds during the period of liquidation and will

provide the Agency with reports at least quarterly on the progress of

liquidation including disposition of collateral, resulting costs, and

additional procedures necessary for successful completion of the

liquidation.

(h) Transmitting payments and proceeds to the Agency. When the

Agency is the holder of a portion of the guaranteed loan, the lender

will transmit to the Agency any payments received from the borrower and

pro rata share of liquidation or other proceeds, using Form FmHA 1980-

43, ``Lender's Guaranteed Loan Payment to FmHA.''

(i) Abandonment of collateral. There may be instances when the cost

of liquidation would exceed the potential recovery value of the

collection. The lender, with proper documentation and the concurrence

of the National office, may abandon the collateral in lieu of

liquidation. A proposed abandonment will be considered a servicing

action requiring the appropriate environmental review by the Agency in

accordance with subpart G of part 1940. Examples where abandonment may

be considered include but are not limited to:

(1) The cost of liquidation is increased or the value of the

collateral is decreased by environmental issues;

(2) The collateral is functionally or economically obsolete;

(3) There are superior liens held by other parties;

(4) The collateral has deteriorated; and

(5) The collateral is specialized and there is little or no demand

for it.

(j) Disposition of personal or corporate guarantees. The lender

should take action to maximize recovery from all collateral, including

personal and corporate guarantees. The lender will seek a deficiency

judgment when there is a reasonable chance of future collection of the

judgment. The lender must make a decision whether or not to seek a

deficiency judgment when:

(1) A borrower voluntarily liquidates the collateral, but the sale

fails to pay the guaranteed indebtedness;

(2) The collateral is voluntarily conveyed to the lender, but the

borrower and personal and corporate guarantors are not released from

liability; or

(3) A liquidation plan is being developed for forced liquidation.

(k) Compromise settlement. A compromise settlement will normally

not take place until all collateral has been sold, a deficiency balance

exists, and the deficiency obligation exceeds the debtor's repayment

ability.

(1) The lender and the Agency must receive complete financial

information on all parties obligated for the loan and must be satisfied

that the statements reflect the true and correct financial position of

the debtor including all assets. Adeq

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