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 (B&I) 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

Agency to the lenders; make the program more responsive to the needs of

lenders and businesses; and provide for smoother and faster processing

of applications.

EFFECTIVE DATE: December 23, 1996.

FOR FURTHER INFORMATION CONTACT: Dwight A. Carmon, Business Programs

Processing Division Director, RBS, U.S. Department of Agriculture, Stop

3221, 1400 Independence Avenue, SW., Washington, DC 20250-3221,

Telephone (202) 690-4100.

SUPPLEMENTARY INFORMATION:

Classification

This final 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 related Notice to 7 CFR, part 3015,

subpart V, 48 FR 29112, June 24, 1983, Business and Industry

(previously ``Industrial'') Loans are subject to the provisions of

Executive Order 12372 which requires intergovernmental consultation

with state and local officials. RBS has conducted intergovernmental

consultation in the manner delineated in FmHA Instruction 1940-J,

``Intergovernmental Review of Farmers Home Administration Programs and

Activities.''

Civil Justice Reform

The final 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 11 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.

Unfunded Mandate Reform Act of 1995

Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Public

Law 104-4, establishes requirements for Federal agencies to assess the

effects of their regulatory actions on State, local, and tribal

governments and the private sector. Under section 202 of the UMRA, RBS

generally must prepare a written statement, including a cost-benefit

analysis, for proposed and final rules with ``Federal mandates'' that

may result in expenditures to State, local or tribal governments, in

the aggregate, or to the private sector, of $100 million or more in any

1 year. When such a statement is needed for a rule, section 205 of the

UMRA generally requires RBS to identify and consider a reasonable

number of regulatory alternatives and adopt the least costly, more

cost-effective, or least burdensome alternative that achieves the

objectives or the rule.

This rule contains no Federal mandates (under the regulatory

provisions of Title II of the UMRA) for State, local and tribal

governments or the private sector. Thus today's rule is not subject to

the requirements of sections 202 and 205 of the UMRA.

Background

This action replaces the Business and Industrial (B&I) loan program

regulations at 7 CFR, part 1980, with regulations published at 7 CFR,

parts 4279 and 4287, and 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; 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 in making, servicing, and

liquidating loans.

The B&I loan program is 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 fewer population.

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 Agency is promulgating these regulations to make the program

more usable by lenders and 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 these 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's National Office to field offices and from the Agency to the

lender where feasible.

[[Page 67625]]

Following is a discussion of some of the most significant policy

revisions included in the new regulations.

Automatic eligibility to be a lender under the program is limited

to certain types of organizations. This regulation allows the Agency to

approve additional lenders when they are determined by the Agency to

have sufficient legal authority, lending expertise, and financial

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

commercial banks.

The Agency is reducing 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.

During the preparation of this rule, it was proposed that loans

could be guaranteed to businesses with a majority ownership by a

foreign entity. During the comment period, no one responded to the

proposed rule concerning this issue. Because of uncertainty of how this

provision may relate to the provisions of the Welfare Reform Act, the

Agency has determined to remove this provision so as to provide an

opportunity to further examine this relationship. This will avoid a

delay in implementation of this rule that could be caused by conducting

a potentially lengthy investigation.

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

guarantees. This new regulation will allow guarantees for agricultural

production, but limit eligibility to integrated businesses involved in

both production and processing.

Previous regulations would not allow a lender to bring loans it had

previously made under a guarantee through refinancing unless the

percentage of guarantee was adjusted to maintain the previous

unguaranteed exposure. The new regulations will allow the previous

exposure to be guaranteed, provided the refinancing is a secondary part

of the loan and the rates and terms will be restructured to improve

cash flow.

Eligible loan purposes are expanded to include hotels, motels, and

other tourism and recreational facilities which have been ineligible

for the past several years. Loans for such facilities will be evaluated

on the merits and financial feasibility of each proposal, except for

racetracks, golf courses, and gambling facilities which will remain

ineligible.

Previous regulations limited the size of loans considered for

guarantee to $10 million. The new regulations will give the

Administrator the authority to approve exceptions to the $10 million

ceiling for high-priority projects of up to $25 million. The

regulations limit the guarantee percentage to 80 percent for loans of

$5 million or less, 70 percent for loans between $5 million and $10

million, and 60 percent for loans exceeding $10 million. Authority is

provided for the Administrator to approve exceptions so that up to 90-

percent of loans of $10 million may be guaranteed when the higher

percentage is necessary to approve a high-priority project as specified

in the regulation. The State Director has the authority to approve

exceptions so that up to a 90 percent guarantee may be approved for

loans of up to $2 million (within the State Director's loan approval

authority) when the higher percentage is necessary to approve a high-

priority project.

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 be

supplemented by additional information provided by the lender.

The regulations provide for certain experienced lenders to apply

for status as certified lenders. Certified lenders will submit

significantly less information for Agency review as regular lenders.

Agency staff will be authorized to rely on an acceptable written

credit analysis prepared by the lender rather than the Agency

completing its own complete credit analysis.

Usually, 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 the General Counsel.

Loan servicing is simplified. Loans will be classified by the

lender. Lenders will be able to release collateral with a cumulative

value of up to 20 percent of the original loan amount, over the life of

the loan, if the proceeds will be used to reduce the loan amount due 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's effect by improving the

prosperity of rural residents through guarantees of targeted

investments that enhance rural competitiveness, facilitate industrial

conversion, and enable rural residents to profit from private sector

activity. The 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 will enable the Agency to deliver a larger program with

less staff resources and simultaneously meet the objectives of the

National Performance Review concerning the Regulatory Reinvention

Initiative dated March 4, 1995, as related to the President's

initiative to improve customer service, provide for less regulations,

and streamline Agency operations.

Incorporation of the changes will provide more flexibility for both

lenders and Agency staff. Many errors will be reduced because the

guidelines and requirements are clearer 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

simpler and more direct. The ultimate benefit of these changes will be

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 historically experienced economic

distress.

Paperwork Reduction Act

Under the Paperwork Reduction Act of 1995, no persons are required

to respond to a collection of information unless it displays a valid

OMB control number. The valid OMB control number assigned to the

collection of information in these final regulations is displayed at

the end of the affected section of the regulations. The information

collection requirements contained in this regulation have been approved

by the Office of Management and Budget (OMB) under the provisions of 44

U.S.C. chapter 35 and have been assigned OMB control numbers 0575-0168,

0575-0170, 0575-0171, 0575-0029, and 0575-0024 and in accordance with

the Paperwork Reduction Act of 1995. This final rule does not impose

any new information collection requirements from those approved by OMB.

1996 Farm Bill Initiatives

The Federal Agriculture Improvement and Reform Act of 1996 (Pub. L.

104-

[[Page 67626]]

127) requires the Agency to include language in the B&I regulations

that will expand eligible loan purposes to allow the purchase of

startup capital stock in a cooperative to allow family-sized farmers be

eligible if selling their products to the cooperative. The definition

of a family-sized farmer will be the same as used by the Farm Service

Agency (FSA).

In addition, the Agency will include language to allow B&I loan

guarantees to assist agriculture-related industries adjusting to the

terminated Federal agricultural programs or increased competition from

foreign competitors.

Discussion of Revision and Comments

The proposed rule was published in the Federal Register on February

2, 1996 (61 FR 3853), and provided for a comment period ending April 2,

1996.

In response to the proposed rule, 86 respondents provided comments

to the Agency. Of the 86 comments, 18 comments were considered late

because they were received after April 2, 1996. However, the Agency

reviewed and addressed all issues raised by all of the comments.

Of the 86 commenters that responded to various sections of the

proposed rule, 34 were lenders, mortgagors or related to the lending

industry, 15 were Agency employees, 7 were various Government

officials, 5 were housing authorities, chambers of commerce or planning

commissions, 1 was a railroad association, 2 or more businesses, 2

cooperatives, and the remaining were a combination of council members

and others.

Of the 86 respondents, 24 respondents provided general comments

supporting the regulation. Several respondents provided editorial

changes that indicated a personal preference which were not adopted.

These changes included changes in sentence structure, wording, etc.,

that do not improve the regulation.

The Agency requested comments from the public concerning the

paperwork burden of the streamlined regulations and the loan priority

system. Several respondents responded favorably to the changes,

supporting the reduction in the paperwork, the streamlining of the

regulations, moving more of the credit decisions to the lender, and

increasing the enterprises that would be eligible under these

streamlined regulations. Five comments suggested the proposed loan

priority system is too complicated, time consuming, and difficult to

explain to potential customers. The commenters further suggested that

the criteria are too subjective, vague, difficult as a tool of

measurement, and should be revised. The priority system has been

modified to be more user friendly, however, the integrity of the system

still meets the goal of reaching high-impact areas.

Of the 86 respondents, 45 respondents provided comments on

Sec. 4279.113, ``Eligible loan purposes,'' and Sec. 4279.114,

``Ineligible loan purposes.'' Of the 45 respondents, 20 respondents

were in favor of recreation and tourism and agricultural production as

eligible loan purposes. There were no adverse comments concerning

recreation and tourism. One of the respondents in favor of recreation

and tourism suggested that the Agency require a minimum of 25-35

percent tangible balance sheet equity because of the risk involved with

these types of businesses. This comment was not adopted. The Agency

feels that the regulations (Sec. 4279.131(d)) sufficiently address this

concern.

Another respondent felt that agricultural production as defined

under Sec. 4279.113(h)(2) should be expanded to allow the agricultural-

production portion of any loan up to 50 percent of the total loan and

that the Agency should not restrict it to integrated processing. This

suggestion was not adopted. The Agency feels that to adopt such a broad

change in the coverage of agricultural production without processing

would result in the Agency competing with other farm lender

organizations.

One respondent felt that the guaranteed mortgage should be exempt

from taxes like the FSA programs. Congress and the Internal Revenue

Service control tax questions. The Agency has no authority to implement

this proposal.

One respondent is in favor of racetracks and gambling being

included as eligible loan purposes. Under Sec. 4279.114(h), the Agency

does not allow any business that derives more than 10 percent of annual

gross revenue from gambling activities to be included as an eligible

purpose. The Agency will not adopt the proposed change. Gambling is not

a high priority loan purpose. Racetracks will continue to be an

ineligible loan purpose as noted under Sec. 4279.114(g) because

professional racetracks are not a high priority loan purpose. However,

slicktracks and related amusement park entertainment, in which a

participant is not receiving a cash award exceeding $500 for

performance, will be considered eligible under the guaranteed loan

program covered in Sec. 4279.113(u).

Several respondents recommended that golf courses be an eligible

loan purpose. This program is intended to provide long-term economic

development to all segments of rural area populations. It has not been

demonstrated that golf courses would provide the benefits intended.

Therefore, the Agency will not adopt the recommendation to allow golf

courses to be an eligible loan purpose.

Several respondents recommended that Sec. 4279.114(n) be revised to

allow multiple-family housing and residential housing. The Agency

agrees and has adopted this change to allow all housing to be an

eligible loan purpose, except guaranteed funds being used for owner-

occupied housing or any types of projects that would be eligible for

the Rural Rental Housing and Rural Cooperative Housing loans under

Sections 515, 521 and 538 of the Housing Act of 1949, as amended.

Mobile home parks are considered eligible under this section.

One respondent recommended that the Agency revise the definition of

a rural area under Sec. 4279.108(c) to allow guaranteed funds to be

utilized in urban areas which are not presently allowed under the

current definition. The statutory authority prohibits a broader

definition.

Several respondents suggested that Sec. 4279.113(q), debt

refinancing, be revised to eliminate the requirement in the proposed

rule that the existing lender debt being refinanced only be a secondary

part of the overall loan. It was also suggested that the Agency include

language that would allow guaranteed funds to be offered on long-term

rates to customers just as freely as other bank customers. One

respondent recommended that the ``secondary part'' be defined as less

than 50 percent of the debt being refinanced. The Agency will provide

more clarification concerning ``secondary part'' adopting the 50

percent requirement. However, the other comment concerning long-term

rates being freely offered will not be adopted because the Agency wants

flexibility to match interest rates or loan term adjustments to the

individual loan.

One respondent suggested that Sec. 4279.113(r), Interim Financing,

be revised to allow the guaranteed lender to provide the appropriate

documentation by a credit memorandum that the intent of the lender was

that interim financing be considered as a take-out loan, and not to

making this request a part of the preapplication or application request

thereby reducing paperwork burden. This comment was not adopted because

the request is not considered to be an excessive paperwork burden. It

is a reasonable request for a credit review. The Agency feels that

proper documentation should be included as

[[Page 67627]]

part of the preapplication and application to support the justification

for using loan funds for this purpose.

One respondent asked for a clarification of Sec. 4279.113(u),

education and training, as an eligible loan purpose as compared to

Sec. 4279.114(d), prohibition of funding for charitable institutions,

churches, or church-controlled or fraternal organizations. Guarantees

for education and training would not be available to any charitable

institutions, churches, or church-controlled or fraternal organization,

either directly or indirectly, even without any religious affiliation.

The Agency has adopted the position that guaranteed funds will not be

utilized for the above organizations because they are not cash

generating business institutions.

One respondent stated facilities constructed for lease to

Government agencies, including USDA Rural Development, should be

eligible. This comment will not be adopted because such a guarantee

could lead to a perception of a conflict of interest.

One comment asked ``what determines not being eligible for Farm

Credit Programs'' under Sec. 4279.113(h). The Agency relies upon the

referenced regulations as published by the FSA concerning what

constitutes a customer not being eligible for farm credit programs.

One comment suggested that the Agency limit guaranteed funds for

housing-related loans due to the excessive demand that may be placed on

our funds in future years. This comment will not be adopted. The Agency

feels that the priority scoring system set up in the regulations will

limit funding for housing-related loans to a manageable level.

One respondent suggested that the definition under Sec. 4279.114(o)

be clarified to note that guaranteed funds are eligible for taxable

bond issues. The Agency will not adopt this comment because the

regulation is clear as currently written.

One respondent recommended that a ``line of credit'' be determined

as an eligible loan purpose under Sec. 4279.113. This change will not

be considered until further research can be concluded to determine the

actual need for a line of credit guarantee.

Twenty respondents provided comments on Sec. 4279.43, Certified

Lender Program (CLP). Four comments requested clarification whether the

CLP approval determination is made at the State or National level. The

intent of the regulation is that the State Office will be point of

approval.

Two comments suggested establishing a turnaround time for

application processing ranging from 3 to 20 working days. At this point

in time, no turnaround time is established but the comments will be

considered in our customer service activities.

A comment suggested the CLP designation be made available only to

active lenders, recognized in the area instead of in the State as a

commercial lender, who has made at least two B&I loans in the last 24

months. The lender who is recognized as a commercial lender in the area

will also meet the requirement of being recognized in the State as a

commercial lender. The intent of the regulation is to expand lender

participation; therefore, the suggestion of only issuing a CLP

designation to an active recognized lender is not adopted.

Two comments suggested the requirements to become a CLP lender be

waived for a lender already designated as a Small Business

Administration (SBA) Certified or FSA Approved or Certified lender. The

Agency will not adopt the proposed change because the requirements with

which the lender must comply for this program are, to some extent,

unique to this program.

Two comments were received concerning Agency funding reserves. One

was concerned that the CLP designation and the associated ability to

reserve funds for 30 days will defeat the priority scoring system since

a CLP lender with a low-priority project could reserve funds over a

non-CLP lender with a high-priority project. This is a valid concern.

Therefore, the rule has been changed to provide that there will be no

reservation of funds during the last 60 days of the fiscal year in an

effort to ensure full utilization of program funding authority. While

this solution may not entirely eliminate the comments' concern, it

should reduce the problem perceived, at least at the end of the year.

The other comment wanted to establish a mechanism to create and

operate a sufficiently funded National Reserve account to ensure

adequate funds are available when requested, especially in smaller

States. This concern will be addressed by a National Office reserve in

an amount of not less than 10 percent of the total yearly allocation.

A comment was made that the CLP feature should be eliminated

altogether because of the excessive paperwork, complexity of the

requirements, revocation of CLP status could appear to be onerous and

punitive in nature, and because use of the CLP designation would be

minimal due to lack of repeat lenders. This comment was not adopted

because the Agency believes that with sufficient safeguards, the

concept is workable.

A comment suggested that CLP lenders be required to repurchase

loans for servicing rather than having the ``option'' as is now the

case. The Agency does not wish to place such a requirement on CLP

lenders because the objective of the program is to improve customer

service and encourage use of the program.

A comment suggested Form 4279-2 be completed by the borrower not

the lender. The Agency is relying on the lender to process most aspects

of a loan. Therefore it is appropriate for the lender to complete and

submit the form.

A comment suggested basing the CLP designation on lender ratings

available from examiner reports instead of published guidelines. The

Agency did not adopt this suggestion because it believes the published

guidelines are sufficient to allow the Agency to decide which lenders

have requisite expertise to fulfill CLP responsibilities.

A comment asked (1) if lenders could utilize their forms instead of

Rural Development forms; and (2) whether approval authority is held by

the lender or the Agency. The Agency agrees. The lenders can utilize

their own forms as long as the form includes all of the information of

the approved Agency forms, is approved by the Regional OGC and State

Offices, and will not add additional burden to the public.

Fourteen respondents submitted comments on Sec. 4279.137, Financial

Statements. Nine of the comments were favorable. Two comments suggested

eliminating loan size as the overriding factor while two other comments

suggested different levels of CPA-developed statements based on loan

size. One comment suggested having the principals (and their financial

strength) provide a personal guarantee as the determining factor

regarding the loan threshold size audited statement requirement. The

Agency determines the application of this option on a case-by case-

basis due to individual circumstances. This section will remain the

same.

Nine respondents provided comments on Sec. 4279.155, Loan

priorities, that ranged from short statements of support to substantial

regulation rewrites. Five comments stated the proposed system is too

complicated, time consuming, and difficult to explain to potential

customers. The criteria are subjective, vague, difficult to determine,

complex, defy measurement or are overly exacting. The Agency considered

the concerns and the following sections were changed:

[[Page 67628]]

Section 4279.155(b)(1)(ii) was eliminated because, as suggested by

the comments, the language was unclear and the factors not measurable.

Sections 4279.155(b)(5)(i) (A) and (B) were eliminated because the

criteria requested was not measurable or not available. Sections

4279.155(b)(5)(i)(C) and (D) were changed to (A) and (B) because of the

elimination of the above items. These changes added clarity to this

section and will be more measureable in determining priority points.

The words ``potential to achieve'' were eliminated under the new (A),

and the points changed from 3 to 5 to place more weight on this

category. Under the new (B), the sentence was amended to end after the

word ``community'', deleting the balance of the sentence because the

information required was not measureable. The points in new (B) were

changed from 3 to 4 to place more weight on the category.

Section 4279.155(b)(5)(ii)(A) revises the sentence to end after the

word ``prices''. This change provided more clarity to the sentence, and

the points were reduced from 3 to 2 to place less weight on this

category because of the criteria measured.

Section 4279.155(b)(5)(ii)(B) is changed to eliminate the words

``has a significant potential to stimulate the development of a broader

complex of business activities that provide inputs to or serve as the

market for the initial business''. The words ``provides an additional

market for existing local business'' will be inserted. This change was

adopted to clarify this category.

As one commenter noted, proposed Sec. 4279.155(b)(5)(ii)(D)

eliminated the current language which favors the cooperative form of

organization. The comment suggested that the wording be changed to

refer to a business that produces a natural resource value-added

product which is more measureable. The Agency agrees and has changed

the language to read: ``Business that will produce a natural resource

value-added product.'' Points were changed from 3 to 2, to add less

weight to this category as compared to other categories.

Section 4279.155(b)(5)(iii)(A) is deleted as recommended by one

comment which suggested that this category was not measureable and

should be removed.

As a result of another comment, Sec. 4279.155(b)(5)(iii)(B) is

modified to read: ``average wage exceeding 125 percent of the Federal

minimum wage'', instead of ``150 percent of minimum wage'' to allow

more points to be scored at lower minimum wage categories, and more

weight will be placed on this category. With the deletion of (A) under

this section, this category becomes (A). The points increased from 4 to

5. The Agency adopted the recommended change.

One comment suggested Sec. 4279.155(b)(5)(iii)(C) be modified to

read: ``average wage exceeding 150 percent of the Federal minimum

wage'', instead of ``200 percent of the minimum wage'' to allow more

points to be scored at lower minimum wage categories. The Agency

adopted the change and placed more weight on the category. The points

increased from 4 to 10.

One comment suggested developing points for improving the

environmental climate in rural communities or eliminating this

objective from B&I program purposes. This comment was not adopted by

the Agency because ``improving the environmental climate'' is one

purpose of the program and no other program purposes are given priority

points. The Agency does not feel one program purpose is more valuable

than another.

One comment suggested that the phrase ``persistently poor'' in

Sec. 4279.155(b)(2)(ii), Community Priority, be defined. Instead, a

list of eligible communities will be made available through State

Offices.

One comment suggested increasing the points in Sec. 4279.155(b)(4),

Loan features, points to 20. The Agency feels that this category should

receive more emphasis and adopted the suggestion.

Two comments requested a clarification for the secondary market

rate in Secs. 4279.155(b)(4) (i) and (ii). It was also noted that there

is no point difference between these two criteria. The words

``secondary market'' are changed to ``Wall Street Journal published

Prime Rate''. This change provides a reference that is readily

available for comparison with the rate proposed by the lender. While

there is no difference in points between the two criteria, if an

interest rate is low enough, it can qualify for the points awarded in

each subsection.

Two comments pointed out that there is no priority point

differentiation between Secs. 4279.155(b)(5)(iii) (A) and (B) regarding

the wages of jobs created with assistance. These criteria are

cumulative which means a project that creates higher wage jobs can

obtain points for both. No change is made.

Two comments suggesting the elimination of Secs. 4279.155(b)(3) (i)

and (ii) will not be adopted since the initiatives were included to

provide emphasis on the location of businesses in EZ/EC communities

where job creation is important.

One respondent suggested that the priority system be amended to

include points for transportation improvement and infrastructure

safety. The Agency did not adopt this recommendation. The Agency has

determined that specific emphasis should be directed to the areas

already included. While these areas are important, we do not believe

they promote program purposes to the extent as the included areas.

Transportation improvement and infrastructure safety remain eligible

purposes and desirable goals.

One comment suggested eliminating Sec. 4279.155(b)(1)(i) regarding

the 25,000 population limit while another comment suggested giving

10,000 population communities priority. The section retains the 25,000

population guideline because previous Congressional guidance has

indicated 25,000 population is a reasonable application of the priority

rule.

One respondent provided a comment on Sec. 4279.165(b), Evaluation

of application, suggesting the words, ``the Agency's'' prior to the

last two words in the sentence, ``environmental requirements''. This

section was rewritten to provide clarity concerning the evaluation

process.

Thirteen respondents provided comments on Sec. 4279.161, ``Filing

preapplications and applications,'' and of the 13 respondents, eight

comments were favorable. One comment suggested eliminating the

requirement for the lender to submit any item beyond those mentioned in

Secs. 4279.161(a)(1) (i)-(iv). This comment was not adopted because the

Agency needs this information to evaluate the proposal and to determine

if the proposal is feasible and reasonable.

One comment suggested eliminating written subjective information

and data that are intended for the lender's internal reference and

guidance and always requiring instead that the lender include only

ratios and comparisons with industrial standards. The Agency needs the

lender's complete written analysis and requested associated material in

order to determine whether the lender is exercising due diligence and

meeting the intent of this regulation which places more reliance on

lenders for analyzing credit quality.

Two comments suggested changes in proposed forms which were not a

part of this regulation. They will be considered in the form

development process.

One comment suggested the need to specify that the business plan

include economic, market, technical, financial and management

information to ensure uniformity. This suggestion is not

[[Page 67629]]

adopted. The Agency feels that the requirements in Secs. 4279.150 and

4279.161(b)(12) are sufficient for the intended purposes.

One comment suggested changing the word ``must'' to ``should'' in

Sec. 4279.161(b)(11) regarding items to be addressed in the Loan

Agreement. These are minimal requirements. The Agency will not adopt

this change because the items are mandatory.

One comment suggested eliminating the intergovernmental

consultation requirement to expedite loan processing and protect the

applicant's privacy. Executive Order 12372 requires this action on all

projects. The suggestion is not implemented.

One comment proposed the adoption of another agency's application.

The instant program focuses entirely on rural development. This comment

was not adopted because this application is better suited to this

program's missions and objectives.

One respondent provided a comment on Sec. 4279.126, Loan terms,

suggesting that the term of the loan for refinancing purposes be

determined based on the weighted average of the underlying collateral's

life. The regulation already provides for this.

Five respondents provided comments on Sec. 4279.131, Credit

quality. Four comments identified a need for the Agency to establish

objective, minimum standards for tangible balance sheet equity to avoid

abuse of the program and vulnerability in the appeals process.

Suggested minimum standards ranged from 10 percent to 20 percent

tangible balance sheet equity at time of issuance of the Loan Note

Guarantee based on a variety of subjective criteria. The Agency adopts

these suggestions changing the regulation to indicate that the minimum

tangible balance sheet equity required at the time of issuance of the

Loan Note Guarantee will be 10 percent for existing and 20 percent for

new businesses. An exception to this requirement may be granted by the

Administrator or designee based upon the objective standard delineated

in the section.

One comment supported establishing written discounting standards

for collateral to ensure consistency but also recommended that an

exception authority provision be developed. The regulation requires

lenders to discount collateral consistent with sound loan-to-value

policy. The Agency believes that this requirement is sufficient to

protect the Agency and yet provide needed flexibility. Therefore, the

suggestion is not adopted.

Sixteen respondents provided comments on Sec. 4279.108, Eligible

borrowers, and of the sixteen comments, four were favorable. Nine

comments requested the Freely Associated States be determined eligible

for program assistance. Under Sec. 4279.2, Definitions, ``State''

encompasses this area making it eligible. The Agency added language

under Sec. 4279.108, Eligible borrowers, to amend the citizenship and

residence requirements in Sec. 4279.108(b)(3). Under this section,

citizens and residents of the United States include citizens and

residents of the Republic of Palau, the Federated States of Micronesia,

and the Republic of the Marshall Islands.

Two comments suggested that the college student population not be

included in determining population limits because student populations

are seasonal and truly do not add to the industrial and tax base of a

community. The Agency will not adopt this change since it cannot

determine U.S. decennial census methodology upon which a statutory

provision requires the determination to be made.

One comment questioned whether communities under 25,000 population,

Sec. 4279.155(b)(1)(i), population priority, is consistent with the

preamble to the proposed rule. The Agency was unable to locate any such

inconsistency and no change was made.

Seven respondents provided comments on Sec. 4279.150, Feasibility

studies. Three comments suggested establishing a dollar threshold for

determining when to require a study. This suggestion was not adopted

because, in the Agency's view, the business, not loan size, should be

the determining factor in deciding whether to require a feasibility

study.

Two comments suggested adding the five elements of a feasibility

study as outlined in the current program regulation, FmHA Instruction

1980-E. It was suggested that the term ``significantly affect'' is

vague and should be defined to limit appeal situations. The five

elements of a feasibility study will be added; however, ``significantly

affect'' was purposefully not defined to allow for determination on a

case-by-case basis.

One comment suggested feasibility studies are important only in

start-up businesses. The Agency disagrees with this suggestion. There

may be occasions when a significant impact on an existing business

needs to be discussed via a feasibility study.

Two respondents provided comments on Sec. 4279.75, Sale or

assignment of guaranteed loan. One respondent was concerned that

allowing lenders to sell the guaranteed portion for premium prices will

allow the lender to cover its risk and encourage aggressive, high risk

lending practices. The Agency does not dictate lender asset management

practices. A prudent lender will work with the secondary market to

achieve maximum benefits for its customer. Furthermore, the guarantee

by its terms does not cover any premium an investor may pay.

One comment suggested a provision be added which, at the lender's

request, would require the Agency to purchase the loan at default. The

Agency will not adopt this suggestion. It neither has the staff nor the

resources to conduct liquidations of defaulted loans. The program

requires the lender to make and service the loan. The Agency is to

ensure a fair and equitable loss management is made to the lender.

Four respondents provided comments on Sec. 4279.181, Conditions

precedent to issuance of Loan Note Guarantee. Two comments proposed the

creation of a single, standard form like FSA is developing containing

all of the required lender certifications. The Agency does not agree

because we guarantee different loans than FSA does. This mission of

this Agency is to enhance the ability of rural citizens to create,

build, and sustain non-farming ventures and communities.

One comment suggested modifying the certification language to allow

lenders to make determinations based on third party representations.

This suggestion is not adopted because the lender is the one the Agency

relies upon to ascertain the representations it makes in the

certifications are true. Both the regulations and the Lender's

Agreement make it clear that the lender must act as a reasonable and

prudent lender.

Two comments supported the elimination of lender's legal counsel

certifying to the sufficiency of loan and security instruments and the

efficacy of liens. Section 4279.181 requires certain lender

certifications including this. The Agency has limited its internal

legal review and feels the lender's legal counsel is needed. No change

is made.

One comment proposed changing Sec. 4279.181(1) from ``the

Conditional Commitment Form 4279-1'' to ``Form 4279-1 as amended by the

Conditional Commitment''. The regulation is correct as written, Form

4279-1 is the Conditional Commitment.

Two comments proposed expanding Sec. 4279.173, Loan approval and

obligating funds, to explain that when the guarantee is approved and

funding authority is available, the guarantee will be obligated and the

Conditional Commitment issued on the obligation date. No change can be

made since FmHA Instruction 2015-C (available in any RBS field office)

provides for a

[[Page 67630]]

reservation period that is not covered by this Instruction. The 6 day

reservation period gives political leaders an opportunity to announce

projects which have a positive impact on the program. The

recommendation is not adopted.

Two respondents provided comments on Sec. 4279.161(b)(11), Filing

preapplications and applications, suggesting either eliminating certain

subsections or the Agency allowing lender discretion to modify the

requirements. The sections that the respondents suggested be eliminated

for preapplication submissions include the amount of borrower's equity

and description of collateral; for existing businesses, a current

balance sheet and a profit and loss statement; and for start-up

businesses, a preliminary business plan. The respondents felt that this

is excessive paperwork for a preapplication submission and suggested

that only the application, environmental information, and a personal

credit report be submitted. In addition, one respondent suggested that

the lender has the ability to modify financial ratios for businesses

and other requirements for an application submission and should not

have to share internal bank information concerning the credits with the

Agency. The suggestions will not be adopted by the Agency because these

items requested from the lender under Sec. 4279.161 for a

preapplication or application are items required to meet the standards

of good prudent lending practices (see Sec. 4279.161).

One respondent provided a comment on Sec. 4279.126, Loan terms,

which supported Sec. 4279.131, Credit quality, paragraph (b)(2), which

allows less than normal loan-to-value coverage for predominately cash

flow oriented businesses. It proposed that the ``useful life or 15 year

loan limit, whichever is less'' standard in Sec. 4279.126 not apply on

certain equipment which has clear useful life beyond 15 years. The

Agency disagrees because the established criteria outlined in this

section are standard prudent lending criteria used by financial

institutions to determine the term of the loan. The suggestion is not

adopted.

A comment on Sec. 4279.144, Appraisals, recommended that language

be added discharging lenders from responsibility for assuring that

appraisal values adequately reflect the actual value of all collateral

if appraisals meet the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA), the Uniform Standards of Professional

Appraisal Practices (USPAP), and generally accepted methods of

determining value. The suggestion is not adopted because a reasonable,

prudent lender will ensure that appraisal values reflect actual values.

Four respondents provided comments on Sec. 4279.125, Interest

rates. Two comments support the regulation which allows different

interest rates on the unguaranteed and guaranteed portion of the loan;

however, they want the restriction that the rate on the guaranteed

portion cannot exceed the rate on the unguaranteed portion eliminated.

This suggestion will not be adopted because the lender is already

receiving the benefit of a guarantee on the guaranteed portion and

allowing a higher rate on that portion causes the Agency to exceed its

stated percentage.

One comment recommended allowing daily changes in variable interest

rate loans. The Agency will not adopt this suggestion because the

quarterly adjustment limitation provides borrowers with a financial

planning tool in that they have at least some assurance of these costs

for the quarter.

One comment suggested combining fixed and variable rates on the

same loan to allow a fixed rate for the guaranteed portion and a

variable rate for the unguaranteed portion. The regulation allows this

as long as the guaranteed portion rate is not higher.

Seven respondents provided generally supportive comments for the

entire regulation. Several individual items raised included the hope

that RBS staff will maintain involvement regarding due diligence. The

Farm Credit System requested any reference on farm credit programs

anywhere in the rule be in lower case to prevent misinterpretation by

the reader. The Agency complied with that request. The Agency will

continue to maintain the oversight needed to protect the taxpayer.

Four respondents provided comments about Sec. 4279.113(r), Eligible

loan purpose, regarding construction and interim loans. Comments

suggested consideration be given to developing a mechanism for partial

interim advances, making construction loans an eligible purpose, and

issuing the guarantee at closing instead of at project completion.

Additionally, two other comments suggested such a change so that in

those instances the guaranteee could be sold sooner in the secondary

market. The time period in which material adverse changes could occur

would be reduced. The Agency agrees and has adopted the comments to

allow the Loan Note Guarantee to be issued at closing on the interim

financing based on certain conditions as set forth in the final

regulations instead of when the project is substantially complete.

Four respondents provided comments on Sec. 4279.186, Issuance of

the guarantee. One comment suggested adding ``unless a valid lender's

agreement already exists per Sec. 4279.72'' after Executed Lender's

Agreement in Sec. 4279.186(a)(2). This comment is adopted because a

valid Lender's Agreement may already be in existence.

One respondent provided a comment on Sec. 4279.78(c), Purchase for

servicing, disagreeing with not allowing the repurchase from the holder

for arbitrage or other purposes to further its own financial gain. The

secondary market option provides a risk management tool for the lender;

however, it is also necessary to consider financial stability for the

business. The language will not be changed.

One respondent provided a comment on Sec. 4279.101, Introduction,

recommending ``field office'' replace ``district, regional or area

office''. This change is adopted.

Five respondents provided comments on Sec. 4279.107, Guarantee fee,

supporting the 1 percent option. Two of those comments requested

clarification of the term ``high impact''. Section 4279.155, Loan

priorities, paragraph (b)(5), was changed to provide clarification.

One respondent felt Sec. 4279.107(a)(4) allowing a reduction in the

guarantee fee in certain circumstances was too general. The Agency

feels the language provides flexibility to respond to unique and

unusual situations. This comment is not adopted.

Seven respondents provided comments suggesting other guarantee fee

structures. Four comments supported the determination of lower fees

being made at the State Office level. This regulation provides that the

Agency will have the authority to reduce the guarantee fee if the

business meets the criteria in Sec. 4279.107. In writing this

provision, budget considerations and OMB limitations must be considered

since the program loan level is affected adversely if the guarantee fee

is reduced. The National Office must monitor the loan level to ensure

funds are available to provide the greatest benefit to rural customers

that utilize this program. However, the State Director does have the

authority to reduce guarantee fees if it is determined that the

business meets the criteria in Sec. 4279.107.

A commenter was concerned that the reduced fee option provided the

Agency an unfair marketing advantage over another agency. It is not the

intent to compete with any other agency for loans. The focus is on

rural development and the intent of the lower

[[Page 67631]]

fee option is to help lenders assist business development in the areas

that need it the most.

One comment recommended elimination of a lower guarantee fee

because the amount does not matter to the lender or business. The

Agency will not adopt this change because the lower guarantee fee will

benefit businesses located in high-priority areas.

One comment suggested changing the Sec. 4270.107(a)(3) requirement

that a community be persistently poor for 60 years or more to a

requirement of 60 years and eliminate the words ``or more''. The Agency

agrees nothing is added by the use of the phrase ``or more.'' The

phrase has been deleted.

One comment suggested an editorial change to Sec. 4279.113(r)

regarding removing the hyphen between the words ``take-out''. The

regulation will be conformed to the Government Style Manual which says

the term used as a noun is ``takeout'' but if it were used as an

adjective, for example ``take-out financing'', it would be two words

with a hyphen.

One comment recommends packager fees be limited in amount but still

be considered eligible. The regulation already allows packager fees as

an eligible purpose, provided it is an amount that is reasonable and

customary in the local area. See Sec. 4279.120(b), fees and charges.

One respondent provided comments on Sec. 4279.115, Prohibition

under Agency programs, recommending this entire section be eliminated.

This is a statutory requirement and cannot be eliminated.

Twenty-three respondents provided comments on Sec. 4279.119, Loan

guarantee limits.

Two comments recommended the percentage of guarantee determined by

the Agency not be subject to the appeal process. The comment was not

adopted because the Agency does not determine the appealability of any

decision.

Six comments suggested alternative options for issuing guarantee

percentages. No change is made because the Agency is satisfied that as

written it provides sufficient flexibility in providing program

benefits.

One comment suggested determining the percentage of guarantee based

on the size of the lender. The comment was not adopted because such a

requirement is already inherent in the regulation. Variations in loan

sizes, lender capitalization, and lender loan size limits established

by lender regulators limit the sizes of lenders and the loans they can

make.

One comment suggested that increasing the guarantee percentage is

more important than reducing the guarantee fee. The Agency prefers to

retain the latitude to allow both options.

Five respondents recommended the State Director be able to grant an

exception to allow 90 percent guarantees. The respondents; suggestion

is already in effect because the regulation has been changed to give

the State Director limited authority to approve projects with a

decreased guarantee fee for high-priority projects not exceeding $2

million when it is within the State Director's approval authority to do

so. If not within the State Director's approval authority, the loan

request will be submitted to the National Office for review.

One comment suggested the guarantee percentage be stairstepped

versus a single rate to provide more increased coverage for loan

requests that exceed the $5 million and $10 million thresholds. This

was not adopted for a variety of loan servicing considerations

involving variations in lender payment applications and effective

maximum percentage of loss payments which would not make application of

program regulations consistent.

One comment wants the Agency to determine whether a loan is

eligible for a 90 percent guarantee without submitting an application.

The Agency can make this determination from a preapplication.

Three comments did not support loans over $10 million being

eligible because of possible funding concerns and credit quality

issues. The commenters' concerns were considered. The Agency believes

the revised regulations will provide measures through the priority

scoring system, by reducing the guarantee percentage to 60 percent or

less, and oversight of the Under Secretary's office for loans exceeding

$10 million to control credit quality and aggressive use of funding.

One comment suggested the State Director's loan approval authority

be increased to $5 million based on staff expertise. This is internal

management and is not a regulatory requirement.

One comment suggested an exception authority be established for 7

CFR, subpart B of parts 4279 and 4287. This comment has been adopted to

include the exception authority language in subpart B of parts 4279 and

4287.

One comment expressed a concern for development of a standardized

application software package for lenders. Such a package is being

developed but it will not be part of this regulation.

Nine respondents provided comments on Sec. 4279.29, Eligible

lenders. Of the nine comments, three comments were from existing non-

lenders that desire consideration be given to eligibility under

Sec. 4279.29. The Agency will not make any changes to the regulation

since the current language will allow any lender the right to request

an eligibility determination under the regulations.

One comment suggested that ``adequately'' be removed from

Sec. 4279.29(c). The Agency agrees and the word will be removed.

Four comments support expanding eligible lender determination;

however, two of the comments contained qualifying criteria. Of the four

comments, two contained qualifying criteria such as audits by State or

Federal Government auditing bodies at least every 12 months and non-

bank lenders be limited by their past experience in other Government

guaranteed programs. The Agency feels that a change is not necessary

because the proposed regulations provide the flexibility to make a

determination of eligibility.

Two comments objected to nonbanks being considered possible

eligible lenders. The Agency does not agree. The program offers a

variety of lenders an opportunity to participate and provide credit in

rural areas so as to provide a greater availability of credit to rural

residents.

Two respondents provided editorial change comments on Sec. 4279.2,

Definitions. The Agency adopted the comment that for the definition of

``Deficiency balance,'' the words ``including the personal guarantee''

be eliminated.

One respondent suggested reducing the State allocation of guarantee

authority only by the guaranteed portion of the loan. Federal budget

procedures require scoring the entire amount of a loan against the

allocation regardless of the percentage of guarantee.

Two comments recommended Sec. 4279.84, Replacement of document, be

changed to indicate that the notarized certificate of loss should

include limited information since the Agency has copies of the noted

documents. This proposal is not adopted because the information

requested is necessary to ensure the legal sufficiency of the

replacement documents.

One comment requested Sec. 4279.113, Eligible loan purposes, be

changed to allow the growing of seed crops. Production of agriculture

alone is not an eligible purpose. Section 4279.113(b)(h) addresses

eligible agricultural production in a manner to ensure that no one area

of business receives a disproportionate amount of funding.

One comment recommended the adverse change period be changed to

[[Page 67632]]

cover from the date the application is submitted to the Agency to the

date of the issuance of the Loan Note Guarantee. The Agency will not

adopt this change since the final conditions are established at the

time the Agency issues the Conditional Commitment.

Two respondents provided comments on Sec. 4279.149, Personal and

corporate guarantees. One supported the section, the other comment

raised a concern that the language would appear to require a guarantee

from significant customers. This concern is valid and the section

language was revised to clarify intercompany relationships.

Twelve respondents provided comments on 7 CFR, part 4287, subpart

B--Servicing Business and Industry Guaranteed Loans.

One comment on Sec. 4287.106, Routine servicing, suggested that the

Agency establish internal monitoring of account servicing requirements.

These are the lender's loans and as such the lender is accountable for

its actions. The Agency is to pay the appropriate loss to those lenders

which have exercised due diligence.

One comment on Sec. 4287.106(d), Financial reports, proposed

relaxing the requirement that lenders must obtain and provide the

borrower's financial statements to the Agency within 120 days of the

borrower's fiscal yearend.

The lenders requested specific actions they are to use when they

are unable to comply with these regulations due to uncooperative

borrowers. Current regulations are appropriate and conform with

industry standards so no change was made.

One comment questioned Sec. 4287.106(e), Additional expenditures,

asking why the Agency requires concurrence for additional expenditures

if the loans security position is not altered. Additional expenditures

may deplete operating capital which could cause default. The Agency has

an interest to see that a loan is repaid by the borrower rather than

the Agency having to provide funds pursuant to its guarantee.

Five respondents provided comments on Sec. 4287.113(a), Release of

collateral, stating they did not support the requirement that all

releases of collateral must be supported by a current appraisal on the

remaining collateral. They proposed several alternatives including

prorating values established at loanmaking and documenting by means

other than appraisal. The Agency agrees, and the language in this

section has been revised.

One respondent provided a comment about Secs. 4287.113 (a)(4), (b),

and (c) regarding whether the 20-percent figure is for each instance or

cumulative over the life of the loan. Lenders may, over the life of the

loan, release collateral (other than personal and corporate guarantees)

with a cumulative value of up to 20 percent of the original loan amount

without Agency concurrence. The regulation has been changed to make

this clear.

One respondent provided a comment about Sec. 4287.156(a),

Protective advances, pointing out that it does not reference a dollar

amount. A ceiling will not be established because each case is unique

and flexibility is desired.

Two respondents made comments on Sec. 4287.157, Liquidation,

suggesting the authority to approve liquidation plans be at the State

Office and not the National Office level. This comment is adopted and

the authority to approve liquidation plans will be at the State Office

based on the State's delegated loan servicing authority without

National Office concurrence.

Two comments stated paragraphs (b)(2) and (c) of Sec. 4287.158,

Determination of loss and payment, are in direct conflict. It appears

that the writer may have felt there was a conflict concerning interest

accrual. Under certain circumstances, interest accrual may continue.

The language will not change as noted in the proposed rule.

One comment suggested retaining the existing option which allows

the Agency to permit the lender to calculate the final loss settlement

using net proceeds received from the collateral at the time of ultimate

disposition rather than at liquidation. Lenders feel it is unfair to

settle when they acquired the collateral as it reflects what is

actually received for the collateral. The Agency feels settlement at

ultimate disposition is preferable because it reflects what is actually

received for the collateral.

One respondent provided a comment on Sec. 4287.170, Bankruptcy,

expressing displeasure with the Agency's position that Chapter 11

reorganization legal expenses are not considered liquidation costs.

Reorganization legal expenses are not incurred in contemplation of

liquidation. Therefore, they should not be treated as a liquidation

expense which by definition is only deductible during a liquidation

when there are adequate proceeds from collateral liquidation to cover

the expense. This provision was not changed.

One respondent provided editorial changes for the entire section.

The editorial changes were not substantive and reflected a preference

of the respondent. To ensure no confusion concerning the meaning of the

regulation and to ensure consistency of language, the editorial changes

were not adopted with the exception of the following items:

In Sec. 4287.157, Liquidation, paragraph (c), Submission of

liquidation plan, the third sentence which reads, ``State Directors

have no authority to exercise the option to liquidate by the Agency

without National Office approval'' is changed to state under what

authority liquidation is carried out by the Agency, not the lender. The

Agency clarified the language to indicate that in cases where the

Agency carries out liquidation of the loan, the State Director must

request approval from the National Office; and

In Sec. 4287.157, Liquidation, paragraph (j), Abandonment of

collateral, the words, ``National Office'' are replaced by ``Agency''.

Those sections of the regulation that are administrative in nature

and apply only to procedures within the Agency have been removed from

the document. These procedures are available from any Agency office

upon request.

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 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: 5 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 ``Drought and Disaster Guaranteed

[[Page 67633]]

loans;'' in the heading for the definition of ``Assignment Guarantee

Agreement,'' removing ``, 1980-70 or 1980-73;'' 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''; 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, 1980-72)''; and revising the definition of

``Guaranteed loan'' to read as follows:

Sec. 1980.6 Definitions and abbreviations.

(a) * * *

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

FmHA or its successor agency has entered into a Form FmHA 449-35 or

Form FmHA 1980-38, ``Lender's Agreement,'' and for which FmHA or its

successor agency has issued a Form FmHA 449-34, ``Loan Note

Guarantee.''

* * * * *

Sec. 1980.6 [Amended]

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. Section 1980.13 is amended in the introductory text of paragraph

(a) in the second sentence 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]

5. Section 1980.20 is amended in the introductory text of paragraph

(a) by removing the third and fourth sentences; 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 ``in regards to D&D and

DARBE guaranteed loans (see Subpart E of this part) or''.

Sec. 1980.41 [Amended]

6. 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]

7. 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]

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

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

9. 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) * * *

(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 the Agency.

* * * * *

Sec. 1980.61 [Amended]

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

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

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

the words ``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]

11. 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]

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

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

Sec. 1980.68 [Amended]

13. 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.

Subpart E--Business and Industrial Loan Program

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

as follows:

Sec. 1980.401 Introduction.

(a) Direct Business and Industry (B&I) loans are disbursed by the

Agency under this subpart. B&I loan guarantees are to be processed and

serviced under the provisions of subparts A and B of part 4279 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 part 1900 subpart D of this chapter.

Applicants for this assistance are required to identify any known

relationship or association with any Agency employee.

* * * * *

15. A new part 4279, consisting of 4279.1 through 4279.200, is

added to chapter XLII to read as follows:

PART 4279--GUARANTEED LOANMAKING

Subpart A--General

Sec.

4279.1 Purpose.

4279.2 Definitions and abbreviations.

4279.3-4279.14 [Reserved]

4279.15 Exception authority.

4279.16 Appeals.

4279.17-4279.28 [Reserved]

4279.29 Eligible lenders.

4279.30 Lenders' functions and responsibilities.

4279.31-4279.42 [Reserved]

4279.43 Certified Lender Program.

4279.44 Access to records.

4279.45-4279.57 [Reserved]

4279.58 Equal Credit Opportunity Act.

4279.59 [Reserved]

4279.60 Civil Rights Impact Analysis

4279.61-4279.70 [Reserved]

4279.71 Public bodies and nonprofit corporations.

4279.72 Conditions of guarantee.

4279.73-4279.74 [Reserved]

4279.75 Sale or assignment of guaranteed loan.

4279.76 Participation.

4279.77 Minimum retention.

4279.78 Repurchase from holder.

4279.79-4279.83 [Reserved]

4279.84 Replacement of document.

4279.85-4279.99 [Reserved]

4279.100 OMB control number.

Subpart B--Business and Industry Loans

4279.101 Introduction.

4279.102 Definitions.

4279.103 Exception Authority.

4279.104 Appeals.

4279.105-4279.106 [Reserved]

[[Page 67634]]

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.

4279.188-4279.199 [Reserved]

4279.200 OMB control number.

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 complied with.

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

in this subpart are available in any Agency office. Whenever a form is

designated in this subpart, that designation includes predecessor and

successor forms, if applicable, as specified by the field or National

Office.

Sec. 4279.2 Definitions and abbreviations.

(a) Definitions.

Agency. The Rural Business-Cooperative Service or successor Agency

assigned by the Secretary of Agriculture to administer the B&I program.

References to the National Office, Finance Office, State Office or

other Agency offices or officials should be read as prefaced by Agency

or ``Rural Development'' as applicable.

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 (Business and Industry). Form 4279-

6, the signed agreement among the Agency, the lender, and the holder

containing the terms and conditions of an assignment of a guaranteed

portion of a loan, using the single note system.

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

Conditional Commitment (Business and Industry). Form 4279-3, the

Agency's notice to the lender that the loan guarantee it has requested

is approved subject to the completion of all conditions and

requirements set forth by the Agency.

Deficiency balance. The balance remaining on a loan after all

collateral has been liquidated.

Deficiency judgment. A monetary 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 arm's-length transaction between a willing buyer and a

willing seller under ordinary economic and business conditions.

Farmers Home Administration (FmHA). The former agency of 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 located in St. Louis, Missouri.

High-impact business. A business that offers specialized products

and services that permit high prices for the products produced, may

have a strong presence in international market sales, may provide a

market for existing local business products and services, and which is

locally owned and managed.

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 4279-6 or predecessor

form.

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 (Business and Industry). Form 4279-4 or

predecessor form between the Agency and the lender setting forth the

lender's loan responsibilities when the Loan Note Guarantee is issued.

Loan Agreement. The agreement between the borrower and lender

containing the terms and conditions of the loan and the

responsibilities of the borrower and lender.

Loan Note Guarantee (Business and Industry). Form 4279-5 or

predecessor form issued and executed by the Agency containing the terms

and conditions of the guarantee.

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

dollar value of the collateral pledged as security for the loan.

Natural resource value-added product. Any naturally occurring

product that is processed to add value to the product. For example,

straw is processed into particle board.

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 pro rata basis.

[[Page 67635]]

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

the lender retains the note, collateral securing the 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. Evidence of debt. ``Note'' or ``Promissory Note''

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

where appropriate.

Rural Development. The Under Secretary for Rural Development has

policy and operational oversight responsibilities for RHS, RBS, and

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 is a veteran of any war, as defined in section 101(12)

of title 38, United States Code.

(b) Abbreviations.

B&I--Business and Industry

CF--Community Facilities

CLP--Certified Lender Program

FSA--Farm Service Agency

FMI--Forms Manual Insert

NAD--National Appeals Division

OGC--Office of the General Counsel

RBS--Rural Business-Cooperative Service

RHS--Rural Housing Service

RUS--Rural Utilities Service

SBA--Small Business Administration

USDA--United States Department of Agriculture

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 subpart which is not inconsistent

with any applicable law provided, the Administrator determines that

application of the requirement or provision would adversely affect

USDA's interest.

Sec. 4279.16 Appeals.

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

made under this subpart. 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 7 CFR, part 11. Any party adversely

affected by an Agency decision under this subpart may request a

determination of appealability from the Director, National Appeals

Division, USDA, within 30 days of the adverse decision.

Secs. 4279.17-4279.28 [Reserved]

Sec. 4279.29 Eligible lenders.

(a) Traditional lenders. 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) Other lenders. 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 annually 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, or when the proposed lender

can demonstrate that it has personnel with equivalent previous

experience and where the commercial loan portfolio was of a similar

quantity and quality; and

(ii) Have tangible balance sheet equity of at least seven 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 eligible 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. 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 servicing activities. 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; 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

[[Page 67636]]

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.

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

with adequate experience and expertise to make, secure, service, and

collect B&I loans.

Sec. 4279.30 Lenders' functions and responsibilities.

(a) General. (1) 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:

(i) Processing applications for guaranteed loans,

(ii) Developing and maintaining adequately documented loan files,

(iii) Recommending only loan proposals that are eligible and

financially feasible,

(iv) Obtaining valid evidence of debt and collateral in accordance

with sound lending practices,

(v) Supervising construction

(vi) Distribution of loan funds,

(vii) Servicing guaranteed loans in a prudent manner, including

liquidation if necessary,

(viii) Following Agency regulations, and

(ix) Obtaining Agency approvals or concurrence as required.

(2) This subpart, along with subpart B of this part and subpart B

of part 4287 of this chapter, contain 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 its professional judgment

to determine that the credit factors, considered in combination, ensure

loan repayment. The lender must have an adequate underwriting process

to ensure that loans are reviewed by other than the originating

officer. There must be good credit documentation procedures.

(c) Environmental responsibilities. Lenders have a responsibility

to become familiar with Federal environmental requirements; to

consider, in consultation with the prospective borrower, the potential

environmental impacts of their proposals at the earliest planning

stages; and to develop proposals that minimize the potential to

adversely impact the environment. Lenders must alert the Agency to any

controversial environmental issues related to a proposed project or

items that may require extensive environmental review. Lenders must

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

Environmental Information'' (when required by subpart G of part 1940 of

this title); assist in the collection of additional data when the

Agency needs such data to complete its environmental review of the

proposal; and assist in the resolution of environmental problems.

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

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, making, and servicing.

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

eligibility criteria as follows:

(1) Be an ``eligible lender'' as defined in 4279.29 of this subpart

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 must 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 a Small Business Administration (SBA) certified or preferred

lender. A certified lender must 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 commercial loans outstanding not exceeding 6

percent of commercial loans outstanding and historic losses not

exceeding 6 percent of dollars loaned, or it must demonstrate that it

has personnel with equivalent previous experience where the commercial

loan portfolio was of a similar quantity and quality. The lender will

provide a written certification to this effect along with a statistical

analysis of its commercial loan portfolio for the last 3 of its fiscal

years.

(3) The percentage of guarantee will not exceed 80 percent.

(4) If the lender is a bank or savings and loan, it must have a

financial strength rating in the upper half of possible ratings as

reported by a lender rating service selected by the Agency.

(5) 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

determines further instruction is needed.

(6) 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 paragraph (e) of this section.

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

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

Business and Industry Program,'' with the lender. CLP status 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 where it

desires CLP status. The request must address each of the required

criteria outlined in paragraph (b) of this section, except paragraph

(b)(3), and should be accompanied by any other information the lender

believes will be helpful. The request will also include Form 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 4279-8 unless

the lender obtains a renewal. A lender whose CLP status has lapsed may

continue to submit loan guarantee requests as a regular lender. A new

Form 4279-8 completed and executed by the lender must be provided,

along with a written update of the eligibility criteria required by

this section for CLP approval. This information must be supplied at

least 60 days prior to the expiration of the existing agreement to be

assured of uninterrupted status. The information must address how the

lender is complying with each of the required criteria described in

paragraph (b) of this section. It must include any proposed changes in

the designated

[[Page 67637]]

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 of this subpart 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 of this subpart;

(2) Knowingly submitting false information when requesting a

guarantee or basing a guarantee request on information known to be

false or which the lender should have known to be false;

(3) Making a guaranteed loan with deficiencies which may cause

losses not to be covered by the Loan Note Guarantee;

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

whether or not the loan was guaranteed by the Agency;

(5) Violation of usury laws in connection with any loan 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 term 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 with 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; or

(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 of this chapter 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. 279.155 of subpart B of this part.

(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. Notwithstanding

the preceding, no guarantee authority will be held in reserve the last

60 days of the Agency's fiscal year.

(2) Refinancing of existing lender debt in accordance with

Sec. 4279.113(q) of subpart B of this part 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) of subpart B of this part. 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; and

(iii) Executed security documents including personal and corporate

guarantees.

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

lender requires a review by the Agency of the information submitted by

the lender, plus satisfactory completion of the environmental review

process by the Agency. 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 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 include the borrower's management,

repayment ability including a cash flow analysis, 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; and

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

employment by more than 50 employees, Form 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

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 and approval

of the Agency's completed environmental analysis, if required, except

that refinancing of existing lender debt in accordance with

Sec. 4279.113(q) of subpart B of this part will not be approved without

a credit analysis by the Agency of the borrower's complete financial

statements; and completion by the Agency of the environmental analysis.

The Agency may request such additional information as it determines is

needed to make a decision.

[[Page 67638]]

(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 of this chapter.

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 Public Law 93-495, the Equal Credit

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

neither the lender nor the Agency will discriminate against any

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

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

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

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

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

lender will comply with the requirements of the Equal Credit

Opportunity Act as contained in the Federal Reserve Board's Regulation

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

accomplished prior to loan closing.

Sec. 4279.59 [Reserved]

Sec. 4279.60 Civil Rights Impact Analysis

The Agency is responsible for ensuring that all requirements of

FmHA Instruction 2006-P, ``Civil Rights Impact Analysis'' are met and

will complete the appropriate level of review in accordance with that

instruction.

Secs. 4279.61-4279.70 [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 OMB Circulars A-128 or A-

133 or successor regulations or circulars must provide an audit in

accordance with the applicable circular or regulation 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 successors 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 part and part 4287 of this chapter will apply to

all outstanding guarantees. In the event of a conflict between the

guarantee documents and these regulations as they exist at the time the

documents are executed, the regulations will control.

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

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

States and is incontestable except for fraud or misrepresentation of

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

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

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

loss is occasioned by a provision for interest on interest. 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 thereof. 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 the Agency's authorization; or

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

borrower and any interest due thereon.

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

sold to a holder, the holder 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 the 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 26 U.S.C. 103 (interest on State and local

banks) or any successor section 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 the 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 4279-6, the assignee shall succeed to all rights and

obligations of the holder thereunder. If

[[Page 67639]]

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, so that the total number of notes issued

does not 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 date 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;

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

secured lien priority is better or remains the same; and

(8) All holders agree.

(d) Termination of lender servicing fee. 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.

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 the lender's 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 must 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 prevent

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 the

unpaid guaranteed portion of the loan as provided in paragraph (a) of

this section, the Agency will purchase from the holder the unpaid

principal balance of the guaranteed portion together with accrued

interest to date of repurchase, less the lender's servicing fee, within

30 days after written demand to the Agency from the holder. (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) Repurchase for servicing. If, in the opinion of the lender,

repurchase of the guaranteed portion of the loan is necessary to

adequately service the loan, the holder must sell the guaranteed

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

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

The 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.

[[Page 67640]]

Secs. 4279.79-4279.83 [Reserved]

Sec. 4279.84 Replacement of document.

(a) The Agency may issue a replacement Loan Note Guarantee or

Assignment Guarantee Agreement which was lost, stolen, destroyed,

mutilated, or defaced to the lender or holder upon receipt of an

acceptable certificate of loss and an indemnity bond.

(b) When a Loan Note Guarantee or Assignment Guarantee Agreement is

lost, stolen, destroyed, mutilated, or defaced while in the custody of

the lender or holder, the lender 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 and containing a jurat, which

includes:

(i) Name and address of owner;

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

(iii) Capacity of person certifying;

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

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

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

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

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

and, if an Assignment Guarantee Agreement, the original named holder

and the percentage of the guaranteed portion of the loan assigned to

that holder. Any existing parts of the document to be replaced must be

attached to the certificate;

(v) A full statement of circumstances of the loss, theft, 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 submitted to 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 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. 4279.85-4279.99 [Reserved]

Sec. 4279.100 OMB control number.

The information collection requirements contained in this

regulation have been approved by OMB and have been assigned OMB control

number 0575-0171. Public reporting burden for this collection of

information is estimated to vary from 1 hour to 8 hours per response,

with an average of 4 hours per response, including time for reviewing

the collection of information. Send comments regarding this burden

estimate or any other aspect of this collection of information,

including suggestions for reducing this burden, to the Department of

Agriculture, Clearance Officer, OIRM, Stop 7630, Washington, D.C.

20250. You are not required to respond to this collection of

information unless it displays a currently valid OMB control number.

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 of this

chapter, which contains loan servicing regulations.

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

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

improve the economic and environmental climate in rural communities.

This purpose is achieved by bolstering the existing private credit

structure through the guarantee of quality loans which will provide

lasting community benefits. It is not intended that the guarantee

authority will be used for marginal or substandard loans or for relief

of lenders having such loans.

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

referenced in this subpart are available in any Agency office.

Sec. 4279.102 Definitions.

The definitions and abbreviations in Sec. 4279.2 of subpart A of

this part are applicable to this subpart.

Secs. 4279.103 Exception Authority.

Section 4279.15 of subpart A of this part applies to this subpart.

Sec. 4279.104 Appeals.

Section 4279.16 of subpart A of this part applies to this subpart.

Sec. 4279.105-4279.106 [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) of this subpart); 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 a rural community that has remained

persistently poor over the last 60 years; or

[[Page 67641]]

(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 obligated 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 systems.

(b) Citizenship. Individual borrowers must be citizens of the

United States (U.S.) or reside in the U.S. after being legally admitted

for permanent residence. Citizens and residents of the Republic of

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

Marshall Islands shall be considered U.S. citizens. Corporations or

other nonpublic body organization-type borrowers must be at least 51

percent owned by persons who are either citizens of the U.S. or reside

in the U.S. after being legally admitted for permanent residence.

(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 is urbanized or urbanizing as defined

in this section.

(2) 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 the latest decennial census of the U.S. 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.

(3) 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 with a population density of more than 100

persons per square mile or is an area with a population density of less

than 100 persons per square mile 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 contained

in Sec. 4279.101 of this subpart. 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, leasehold 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 Farm Service

Agency (FSA) farmer program assistance 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 FSA farmer programs assistance, 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 that the purchase is required for all of their borrowers.

Purchase of startup cooperative stock for family-sized farms where

commodities are produced to be processed by the cooperative.

(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 when 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

[[Page 67642]]

secondary part (less than 50 percent) of the overall loan.

(r) Takeout of interim financing. Guaranteeing a loan after project

completion to pay off a lender's interim loan will not be treated as

debt refinancing provided that the lender submits a complete

preapplication or application 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,

and bed and breakfast establishments, except as prohibited under

ineligible purposes.

(v) Educational or training facilities.

(w) Community facility projects which are not listed as an

ineligible loan purpose such as convention centers.

(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.

(aa) Provide loan guarantees to assist industries adjusting to

terminated Federal agricultural programs or increased foreign

competition.

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.

(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) Racetracks for the conduct of races by professional drivers,

jockeys, etc., where individual prizes are awarded in the amount of

$500 or more.

(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) Owner-occupied housing. Bed and breakfasts, storage facilities,

et al, are allowed when the pro rata value of the owner's living

quarters is deleted.

(o) Projects that are eligible for the Rural Rental Housing and

Rural Cooperative Housing loans under sections 515, 521, and 538 of the

Housing Act of 1949, as amended.

(p) Loans made with the proceeds of any obligation the interest on

which is excludable from income under 26 U.S.C. 103 or a successor

statute. Funds generated through the issuance of 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.

(q) The guarantee of loans where there may be, directly or

indirectly, a conflict of interest or an appearance of a conflict of

interest involving any action by the Agency.

(r) Golf courses.

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 request, must not exceed $10 million. 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 contained in

Sec. 4279.155 of this subpart;

(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; and

(3) Under 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 request, 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. The maximum percentage of guarantee is 80

percent for loans of $5 million or less, 70 percent for loans between

$5 and $10 million, and 60 percent for loans exceeding $10 million.

Notwithstanding the preceding, the Administrator may, at the

Administrator's discretion, grant an exception allowing guarantees of

up to 90 percent on loans of $10 million or less under the following

circumstances:

(1) The project to be financed is a high-priority project. Priority

will be determined in accordance with the criteria contained in

4279.155 of this subpart;

(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; and

(3) The State Director may grant an exception for loans of up to 90

percent on loans of $2 million or less subject to the State Director's

delegated loan authority and meeting all of the conditions as set forth

in this section. In

[[Page 67643]]

cases where the State Director does not have the loan approval

authority to approve a loan of $2 million or less or the proposed

percentage, the case must be submitted to the National Office for

review.

(4) Each fiscal year, the Agency will 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 entities 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 ensure

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.

(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.

(e) All loans guaranteed through the B&I program must be sound,

with reasonably assured repayment.

Secs. 4279.127-4279.130 [Reserved]

Sec. 4279.131 Credit quality.

The lender is primarily responsible for determining credit quality

and must 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.

(b) Collateral. (1) Collateral must have documented value

sufficient to protect the interest of the lender and the Agency and,

except as set forth in paragraph (b)(2) of this section, the discounted

collateral value will 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 are strong, loan-to-value coverage may be

discounted accordingly. 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. A minimum of 10 percent tangible balance sheet equity

will be required for existing businesses at the time the Loan Note

Guarantee is issued. A minimum of 20 percent tangible balance sheet

equity will be required for new businesses at the time the Loan Note

Guarantee is issued. Tangible balance sheet equity will be determined

in accordance with Generally Accepted Accounting Principles.

Modifications to the equity requirements may be granted by the

Administrator or designee. For the Administrator to consider a

reduction in the equity requirement, the borrower must furnish the

following:

(1) Collateralized personal and corporate guarantees, including any

parent, subsidiary, or affiliated company, when feasible and legally

permissible (in accordance with 4279.149 of this subpart), and

(2) Pro forma and historical financial statements which indicate

the business to be financed meets or exceeds the median quartile (as

identified in Robert Morris Associates Annual Statement Studies or

similar publication) for the

[[Page 67644]]

current ratio, quick ratio, debt-to-worth ratio, debt coverage ratio,

and working capital.

(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 that

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 ensure 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.

Sec. Sec. 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 in accordance with

7 CFR, part 1806, subpart B (FmHA Instruction 426.2, available in any

field office or the National Office).

(e) Other. Public liability, business interruption, malpractice,

and other insurance appropriate to the borrower's particular business

and circumstances will be considered and required when needed to

protect the interests of the borrower.

Sec. 4279.144 Appraisals.

Lenders will be responsible for ensuring that appraisal values

adequately reflect the actual value of the collateral. All real

property appraisals associated with Agency guaranteed loanmaking and

servicing transactions will meet the requirements contained in the

Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of

1989 and the appropriate guidelines contained in Standards 1 and 2 of

the Uniform Standards of Professional Appraisal Practices (USPAP). All

appraisals will include consideration of the potential effects from a

release of hazardous substances or petroleum products or other

environmental hazards on the market value of the collateral. For

additional guidance and information concerning the completion of real

property appraisals, refer to subpart A of part 1922 of this title and

to ``Standard Practices for Environmental Site Assessments: Transaction

Screen Questionnaire'' and ``Phase I Environmental Site Assessment,''

both published by the American Society of Testing and Materials.

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 and corporate guarantees for those owning greater than

20 percent of the borrower will be required where legally permissible,

except as provided for in this section. Guarantees of parent,

subsidiaries, or affiliated companies and secured guarantees may also

be required.

(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 document that

collateral, equity, cash flow, and profitability indicate 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 start-up businesses or existing businesses

when the project will significantly affect the borrower's operations.

An acceptable feasibility study should include, but not be limited to,

economic, market, technical, financial, and management feasibility.

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 for loans 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 contained 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. Projects located in an unincorporated area

or in a city with under 25,000 population (10 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 (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).

[[Page 67645]]

(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 designated area (10 points).

(ii) Located in a designated Champion Community (5 points). A

Champion Community is a community which developed a strategic plan to

apply for an EZ/EC designation, but not selected as a designated EZ/EC

Community.

(4) Loan features. The priority score for loan features will be the

total score for the following categories:

(i) Lender will price the loan at the Wall Street Journal published

Prime Rate plus 1.5 percent or less (5 points).

(ii) Lender will price the loan at the Wall Street Journal

published Prime 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 has 20 percent or more of its sales in

international markets (5 points).

(B) Industry that is not already present in the community (5

points).

(ii) Business. The priority score for business will be the total

score for the following:

(A) Business that offers high value, specialized products and

services that command high prices (2 points).

(B) Business that provides an additional market for existing local

business (3 points).

(C) Business that is locally owned and managed (3 points).

(D) Business that will produce a natural resource value-added

product (2 points).

(iii) Occupations. The priority score for occupations will be the

total score for the following, except that the total score for job

quality cannot exceed 10 points:

(A) Business that creates jobs with an average wage exceeding 125

percent of the Federal minimum wage (5 points).

(B) Business that creates jobs with an average wage exceeding 150

percent of the Federal minimum wage (10 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, or area economic development strategies. 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.

Sec. 4279.156 Planning and performing development.

(a) Design policy. The lender must ensure that 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 will also ensure that the

project will be completed using the available funds and, once

completed, will be used for its intended purpose and produce products

in the quality and quantity proposed in the completed application

approved by the Agency.

(b) Project control. The lender will monitor the progress of

construction and undertake the reviews and inspections necessary to

ensure that construction conforms with applicable Federal, state, and

local code requirements; 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 the proposed lender, address, telephone number,

contact person, and lender's Internal Revenue Service (IRS)

identification number.

(iv) Brief description of the project, products, 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 subsidiary firms, if any, and a

description of the relationship.

(2) A completed Form 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 start-up businesses, a preliminary business plan must be

provided.

(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 4279.43(g)(1) but CLP

lenders must have the material listed in this paragraph in their

files.)

[[Page 67646]]

(1) A completed Form 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.

(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, accompanied by a copy of the appropriate

environmental site assessment, 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).

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