Community Programs Guaranteed Loan Program

DEPARTMENT OF AGRICULTURE

Rural Housing Service

Rural Business-Cooperative Service

Rural Utilities Service

Farm Service Agency

7 CFR Part 1980

RIN 0575-AC17

Community Programs Guaranteed Loan Program

AGENCIES: Rural Housing Service and Rural Utilities Service, USDA.

ACTION: Proposed rule.

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SUMMARY: The Agencies are proposing to issue a new Community Programs

(CP) guaranteed loan regulation (part 1980, subpart I) to replace the

current regulation for the program. This action is needed to streamline

and update the program. The intended effect is to simplify and clarify

the regulation; shift some responsibility for loan documentation and

analysis from the Government to the lenders; make the program more

responsive to the needs of lenders, local community public bodies, and

nonprofit corporations; and provide for smoother processing of

applications.

DATES: Written comments must be received on or before December 8, 1997.

The comment period for information collections under the Paperwork

Reduction Act of 1995 continues through December 8, 1997.

ADDRESSES: Submit written comments to the Chief, Regulations and

Paperwork Management Branch, Support Services Division, Rural

Development, U.S. Department of Agriculture, STOP 0743, 1400

Independence Ave. SW., Washington, D.C. 20250-0743. Also, comments may

be submitted via the Internet by addressing them to

``[email protected]'' and must contain Community Programs

Guaranteed Loans in the subject line. All written comments will be

available for public inspection during regular work hours at the above

address.

FOR FURTHER INFORMATION CONTACT: Mel Padgett, Community Programs Senior

Loan Specialist, Rural Housing Service, U.S. Department of Agriculture,

STOP 3222, 1400 Independence Ave. SW., Washington, D.C. 20250-3222,

telephone: (202) 720-1495.

SUPPLEMENTARY INFORMATION:

Classification

This proposed rule has been determined to be not significant for

the purposes of Executive Order 12866 and, therefore, has not been

reviewed by OMB.

Programs Affected

The Catalog of Federal Domestic Assistance Programs impacted by

this action are 10.766, Community Facilities loans, and 10.760, Water

and Waste Disposal Systems for Rural Communities.

Intergovernmental Review

These loans are subject to the provisions of Executive Order 12372

which require intergovernmental consultation with State and local

officials. RHS conducts intergovernmental consultations for each loan

in the manner delineated in FmHA Instruction 1940-J.

Civil Justice Reform

The proposed rule has been reviewed under Executive Order 12778,

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

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

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

(3) administrative proceedings of the National Appeals Division (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 received in accordance with 7 CFR part 1940,

subpart G, ``Environmental Program.'' The Agencies have 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, Pub. L. 91-190, an

Environmental Impact Statement is not required.

Unfunded Mandates Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub.

L. 104-4, established 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, the

Agencies 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 the Agencies to

identify and consider a reasonable number of regulatory alternatives

and adopt the least costly, most cost-effective, or least burdensome

alternative that achieves the objectives of 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. Therefore, this rule is not subject

to the requirements of sections 202 and 205 of the UMRA.

National Performance Review

This regulatory action is being taken as part of the National

Performance Review program to eliminate unnecessary regulations and

improve those that remain in force.

Regulatory Flexibility Act

This proposed rule has been reviewed with regard to the

requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). The

undersigned has determined and certified by signature of this document

that this rule will not have a significant economic impact on a

substantial number of small entities since this rulemaking action does

not involve a new or expanded program.

Discussion of the Proposed Rule

This action replaces the CP guaranteed loan program administered

under 7 CFR part 1980. Under the proposed rule, this guaranteed loan

program will be more flexible and place more reliance on lenders. There

are fewer specific requirements for lenders. The lender has added

responsibility for analyzing credit quality; for making, securing, and

servicing the loan; and for

[[Page 52278]]

monitoring construction. Application processing procedures will be more

efficient; less burdensome for borrowers, lenders, and Rural

Development staff; and will provide for more rapid decisions.

The CP loan program was authorized by the Rural Development Act of

1972. The Agencies were authorized to guarantee CP loans under Pub. L.

101-161 enacted November 21, 1989. The loans are made by private

lenders to public bodies and nonprofit corporations for the purpose of

improving rural living standards and for other purposes that create

essential community facilities located in cities, towns, or

unincorporated areas of up to 50,000 population required by the Federal

Agriculture Improvement and Reform Act of 1996 (Pub. L. 104-127) and

water and waste disposal facilities located in cities or towns of up to

10,000 population. The previous statutory population limit for loans

for essential community facilities had been 20,000.

Since 1990, more than 240 community programs projects, totaling

slightly more than $210 million, have received loans which were

guaranteed through the CP program.

These loans can be made for a variety of purposes including health

care; public buildings and improvements; fire and rescue; easements;

purchase of equipment, machinery, and supplies; repair and

modernization; pollution control; transportation studies; and water and

waste disposal facilities. The rate and terms of the loan are

negotiated between the borrower and the lender.

The Agencies propose to replace the regulation for the CP

guaranteed loan programs with a completely new regulation. This is a

high-priority effort to streamline the administration and operation of

the program, respond to the requests of users of the program, and

assist the field staff administering the program. The revised

regulation is shorter, simpler, clearer, and more logically organized.

The volume of regulatory material which a lender must review to

request, make, or service a CP guaranteed loan under the new regulation

is significantly less than the current regulation. Clarifications of

various items are also included, such as what is meant by the term

``essential community facility.''

Except for the increase in the population limit, the revisions are

not required by statute. However, the President, as well as the

Secretary of Agriculture, are committed to streamlining all Federal

regulations. This CP regulation streamlines our application procedures,

reduces loan application processing time by placing greater emphasis on

State resources, allows more management flexibility and decision-making

capacity at the State Office level, and expands eligible loan purposes

to include recreation.

Recognizing the need to streamline the regulation, the Agencies

established two task forces. One was comprised of CP Program Chiefs, CP

Loan Specialists, and other field office personnel. The second was

comprised of lenders, secondary market representatives, and National

Office management. They examined changes that needed to be made in the

program to attract additional lenders and to make the program more user

friendly and customer oriented. Task force recommendations have been

incorporated into this regulation.

Based on the recommendations of the task forces, the Agencies have

proposed these revisions to make the program more usable by lenders and

borrowers. Also, the Agencies recognize that changes are necessary to

make the program more effective in creating jobs and stimulating

economic activity (particularly in chronically low-income rural areas).

Under the proposed new CP regulation, the material that must be

submitted to, and reviewed by, the Agencies before approval of the

guarantee has been streamlined. Responsibilities for credit and

analysis and application processing tasks will be shifted from the

Agencies' National Offices to field offices and from the Agencies to

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

most significant policy revisions included in the proposed new

regulation.

To streamline the regulation, the Agencies have combined applicable

portions of the Direct Community Loan Programs (7 CFR part 1942,

subpart A), Fire and Rescue (7 CFR part 1942, subpart C), General

Guaranteed Regulation (7 CFR part 1980, subpart A), previously drafted

Guaranteed Community Programs Regulation, and parts of forms which were

not in regulations into the Guaranteed Community Programs Regulation (7

CFR part 1980, subpart I). The Agencies also divided the regulation

into general, processing, and servicing sections. These actions should

significantly reduce the amount of regulatory material that a lender

and a borrower must peruse to determine eligibility and complete the

application. This will also simplify making and servicing a CP loan.

Additionally, the necessary information contained in the

preapplication package can be submitted simultaneously with the

application. The threshold for requiring audited financial statements

has been increased from $100,000 to $500,000 to reduce the reporting

burden on small organizations. Also, we have included recreation as

well as clarified telecommunications as eligible loan purposes.

Under the revised regulations, the lender is responsible for legal

sufficiency. The lender will not only be able to negotiate interest

rates but will also be able to negotiate interest rate incremental

increases and caps for each loan. This will give the lender more

flexibility to fit the CP guaranteed loan program to its lending

policies and procedures. The lender does not have to be a local lender

provided it can demonstrate the ability to adequately service the loan.

This will permit an expansion of eligible lenders to include such

organizations as State bond banks, the Rural Utilities Cooperative

Finance Corporation, and Sallie Mae. All of these organizations have

expressed an interest in the CP guaranteed lending program in the past.

Conclusion

The Agencies believe the streamlining of the regulation for this

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

prosperity of rural residents through targeted investments that enhance

rural competitiveness, improve and diversify community services, and

enable rural residents to have a better quality of life. The proposed

revisions are consistent with Administration efforts to streamline

Government functions, improve efficiency and the effectiveness of

Government activities, and be more customer friendly. The changes

proposed will enable the Agencies to deliver a larger program with

fewer staff resources, simultaneously meet the objectives of the

National Performance Review regarding customer service, reduce

regulation, and streamline Agencies operations.

The proposed changes will provide more flexibility for both lenders

and Agencies staff. Many errors will be reduced because the guidelines

and requirements are much clearer and items are more easily found in a

reduced and better-organized regulation. Lenders will be more

interested in using the program because the procedures are simpler and

more direct with significantly fewer cross references to other

regulations. The ultimate benefits to be realized are increased lending

activity resulting in a better-living standard for rural communities

with the infrastructure to attract new businesses

[[Page 52279]]

and the creation of more jobs in rural areas, particularly in those

areas that have experienced historical economic distress.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995, the

Agencies will seek Office of Management and Budget (OMB) approval of

the reporting and recordkeeping requirements contained in this

regulation. These reporting and recordkeeping requirements have been

previously approved under control numbers 0575-0024 and 0575-0137. We

have made the appropriate adjustments based upon the programs' 6-year

history.

The loans are made by private lenders to public bodies and

nonprofit corporations for the purpose of improving rural living

standards and for other purposes that create employment opportunities

in rural areas. Eligibility for this program includes community

facilities located in cities, towns, or unincorporated areas of up to

50,000 population and water and waste disposal facilities located in

cities of up to 10,000 population.

The information collected is used by the Agencies to manage, plan,

evaluate, and account for Government resources. The reports are

required to ensure the proper and judicious use of public funds.

Estimate of Burden: Public reporting burden for this collection of

information is estimated to average 13.97 hours per response.

Respondents: Nonprofit corporations and public bodies.

Estimated Number of Respondents: 125.

Estimated Number of Responses per Respondent: 10.12.

Estimated Total Annual Burden on Respondents: 17,677.

Copies of this information collection can be obtained from Barbara

Williams, Information Collection Coordinator, Regulations and Paperwork

Management Branch, Support Services Division, Rural Development,

telephone (202) 720-9734.

Comments are invited on (a) whether the proposed collection of

information is necessary for the proper performance of the functions of

the Agencies, including whether the information will have practical

utility; (b) the accuracy of the Agencies' estimate of the burden of

the proposed collection of information, including the validity of the

methodology and assumptions used; (c) ways to enhance the quality,

utility, and clarity of the information to be collected; and (d) ways

to minimize the burden of the collection of information on those who

are to respond, including through the use of appropriate automated,

electronic, mechanical, or other technological collection techniques or

other forms of information technology.

All responses to this notice will be summarized, included in the

request for OMB approval, and will become a matter of public record.

Comments should be submitted to the Desk Officer for Agriculture,

Office of Information and Regulatory Affairs, Office of Management and

Budget, Washington, D.C. 20503 and to Barbara Williams, Information

Collection Coordinator, Regulations and Paperwork Management Branch,

Support Services Division, Rural Housing Service, U.S. Department of

Agriculture, STOP 0743, 1400 Independence Avenue SW., Washington, D.C.

20250-0743. A comment to OMB is best assured of having its full effect

if OMB receives it within 30 days of publication of this rule.

List of Subjects in 7 CFR Part 1980

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

Rural development assistance, Loan programs--Community facilities--

Rural development assistance, Loan programs--Housing and community

development.

Accordingly, part 1980, chapter XVIII, title 7 of the Code of

Federal Regulations, is proposed to be amended as follows:

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

Sec. 1980.47 [Amended]

2. Section 1980.47(d) is removed.

Sec. 1980.60 [Amended]

3. Section 1980.60(a)(12) is amended by removing the words ``or

Form FmHA or its successor agency under Public Law 103-354 1980-10,

`Application for Loan and Guarantee' (Community Programs),'' in the

first sentence.

Subpart I--Community Programs Guaranteed Loans

4. Subpart I is revised to read as follows:

Sec.

1980.801 General.

1980.802 Definitions.

1980.803 Full faith and credit.

1980.804 Conditions of Guarantee.

1980.805--1980.807 [Reserved]

1980.808 Access to lender's records.

1980.809 Environmental requirements.

1980.810--1980.811 [Reserved]

1980.812 Inspections.

1980.813 Appeals.

1980.814--1980.816 [Reserved]

1980.817 Exception authority.

1980.818--1980.819 [Reserved]

1980.820 Eligibility.

1980.821 Priorities.

1980.822--1980.823 [Reserved]

1980.824 Eligible loan purposes.

1980.825 Ineligible loan purposes.

1980.826 [Reserved]

1980.827 Eligible Lenders.

1980.828 Transfer of lender or borrower prior to issuance of loan

note guarantee.

1980.829 Fees and charges by lender.

1980.830 Loan guarantee limitations.

1980.831--1980.832 [Reserved]

1980.833 Interest rates.

1980.834 Terms of loan repayment.

1980.835--1980.836 [Reserved]

1980.837 Insurance and fidelity bonds.

1980.838--1980.839 [Reserved]

1980.840 Equal opportunity and Fair Housing Act requirements.

1980.841 [Reserved]

1980.842 Design and construction requirements.

1980.843 Other Federal, State, and local requirements.

1980.844--1980.846 [Reserved]

1980.847 Economic feasibility requirements.

1980.848 Security.

1980.849--1980.851 [Reserved]

1980.852 Processing.

1980.853 Evaluation of application.

1980.854--1980.858 [Reserved]

1980.859 Review of requirements.

1980.860--1980.862 [Reserved]

1980.863 Conditions precedent to issuance of the Loan Note

Guarantee.

1980.864 Issuance of Lender's Agreement, Loan Note Guarantee, and

Assignment Guarantee Agreement.

1980.865 Lender's sale or assignment of the guaranteed portion of

loan.

1980.866--1980.868 [Reserved]

1980.869 Loan servicing.

1980.870--1980.872 [Reserved]

1980.873 Replacement of loss, theft, destruction, mutilation, or

defacement of Loan Note Guarantee or Assignment Guarantee Agreement.

1980.874 [Reserved]

1980.875 Defaults by borrower.

1980.876--1980.877 [Reserved]

1980.878 Repurchase of loan.

1980.879 Transfer of lender after issuance of Loan Note Guarantee.

1980.880 Interest rate changes after loan closing.

1980.881 Liquidation.

1980.882 [Reserved]

1980.883 Protective advances.

1980.884 Additional loans or advances.

1980.885 Bankruptcy.

1980.886--1980.887 [Reserved]

1980.888 Transfers and assumptions.

1980.889 Mergers.

1980.890 Disposition of acquired property.

1980.891--1980.893 [Reserved]

1980.894 Determination and payment of loss.

[[Page 52280]]

1980.895 Future recovery.

1980.896 Termination of Loan Note Guarantee.

1980.897--1980.900 [Reserved]

PART 1980--GENERAL

Subpart I--Community Programs Guaranteed Loans

Sec. 1980.801 General.

(a) This subpart contains the regulations for Community Programs

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) The purpose of the Community Programs guaranteed loan program

is to improve, develop, or finance essential community and water and

waste disposal facilities in rural areas. This purpose is achieved

through bolstering the existing private credit structure through the

guarantee of quality loans which will provide lasting community

benefits.

Sec. 1980.802 Definitions.

The following general definitions are applicable to the terms used

in this subpart:

Agency. The Rural Housing Service and the Rural Utility Service

which are within the Rural Development mission area of the United

States Department of Agriculture (USDA) or their successor agencies

with authority delegated by the Secretary of Agriculture to administer

the Community Facilities and Water and Waste Disposal programs. This

also includes the Rural Development mission area.

Application. An Agency prescribed form to request an Agency

guarantee. (Available in any Agency office.)

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 third party who is not affiliated with, or related to, and has

no security, monetary, or stockholder interest in the borrower or

transferor at the time of the transaction.

Assignment Guarantee Agreement. The signed agreement among the

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

conditions of an assignment of the guaranteed portion of a loan or any

part thereof. (This is an Agency prescribed form available in any

Agency office.)

Borrower. The entity that borrows money from the lender.

Collateral. Property pledged to secure the guaranteed loan.

Community facility (essential). The term ``facility'' as used in

this subpart refers to both the physical structure financed and the

resulting service provided to rural residents. An essential community

facility must:

(1) Be a function customarily provided by a local unit of

government;

(2) Be a public improvement needed for the orderly development of a

rural community;

(3) Not include private affairs or commercial or business

undertakings (except for limited authority for industrial parks);

(4) Be the area of jurisdiction or operation for the public bodies

eligible to receive assistance or a similar local rural service area of

a not-for-profit corporation; and

(5) Be located in a rural area.

Conditional Commitment for Guarantee. The Agency's written

statement to the lender that the material submitted is approved subject

to the completion of all conditions and requirements set forth in the

agreement. (This is an Agency prescribed form available in any Agency

office.)

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

Agency and lender have entered into a Lender's Agreement and for which

the Agency has issued a Loan Note Guarantee.

Holder. The person or entity (other than the lender) who holds all

or a part of the guaranteed portion of the loan with no servicing

responsibilities. When the lender assigns parts of the guaranteed

portion of the loan to an assignee, the assignee becomes a holder when

the Assignment Guarantee Agreement is signed by all parties.

Immediate Family. Individuals who are closely related by blood or

by marriage, such as a spouse, significant other, parent, child,

brother, sister, aunt, uncle, grandparent, grandchild, niece, nephew,

or first cousin.

Insurance. Fire, windstorm, lightning, hail, explosion, riot, civil

commotion, aircraft, vehicles, smoke, builder's risk, public liability,

property damage, flood or mudslide, worker's compensation, fidelity

bond, malpractice, or any similar insurance that is available and

needed to protect the security, or that is required by law.

Joint financing. The situation occurring when two or more lenders

(or any combination of lenders and other financial sources) make

separate loans to supply the funds required by one borrower. For

example, such joint financing may consist of the Agency's financial

assistance with the Economic Development Administration, Department of

Housing and Urban Development (HUD), or other Federal and State

agencies, and private and quasi-public financial institutions.

Lender. The person or organization making and responsible for

servicing the loan. The lender is also referred to in this subpart as

the applicant who is requesting a guarantee during the preapplication

and application stage of processing.

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

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

Guarantee is issued. (This is an Agency prescribed form available in

any Agency office.)

Loan classification system. The process by which loans are examined

and categorized by degree of potential for loss in the event of

default.

Loan Note Guarantee. The signed commitment issued by the Agency

setting forth the terms and conditions of the guarantee of an

identified loan. (This is an Agency prescribed form available in any

Agency office.)

Market value. The amount for which property would sell for its

highest and best use at a voluntary sale in an arm's length

transaction.

Note. An evidence of debt. In those instances where the Agency

guarantees a bond issue, ``note'' shall also be construed to include a

bond or other evidence of indebtedness, as appropriate.

Participation. Sale of an interest in a loan in which the lender

retains the note, collateral securing the note, and all responsibility

for loan servicing and liquidation.

Principals of borrowers. The owners, officers, directors, entities,

and others directly involved in the operation and management of the

borrower.

Problem loan. A loan which is not performing according to its terms

and conditions.

Protective advances. Advances made by the lender for the purpose of

preserving and protecting the collateral where the debtor has failed to

and will not, or cannot, meet obligations to protect or preserve

collateral.

Public body. A municipality, county, or other political subdivision

of a State, special purpose district, an Indian Tribe on a Federal or

State reservation, or another federally recognized Indian Tribe.

Report of loss. An Agency prescribed form used by lenders when

reporting a loss under an Agency guarantee. (Available in any Agency

office.)

Rural and rural area. Any area defined by the latest Decennial

Census of the United States except:

(1) For water and waste disposal facilities--any city or town with

a population in excess of 10,000 inhabitants.

[[Page 52281]]

(2) For essential community facilities--any city, town, or

unincorporated area with a population in excess of 50,000 inhabitants,

and any urbanized area immediately adjacent to a city, town, or

unincorporated area that has a population of more than 50,000

inhabitants.

Service area. The area reasonably expected to be served by the

facility being financed by the guaranteed loan.

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

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

of the Northern Mariana Islands, Republic of the Marshall Islands,

Republic of Palau, and the Federated States of Micronesia.

State Director. The Rural Development State Director or the staff

member who has been delegated authority to perform action on behalf of

the State Director.

Substantive Change. Any change in the purpose of the loan or any

change in the financial condition of the borrower or the collateral

which would jeopardize the performance of the loan.

Transfer and assumption. The conveyance by a debtor to an assuming

party of the assets, collateral, and liabilities of the loan in return

for the assuming party's binding promise to pay the outstanding debt.

Water or waste disposal facility. A facility designed to provide,

enlarge, extend, or otherwise improve water, wastewater or sanitary

sewer, solid waste disposal, or storm wastewater services to rural

residents.

Sec. 1980.803 Full faith and credit.

The Loan Note Guarantee constitutes an obligation supported by the

full faith and credit of the United States and is not contestable

except for fraud or misrepresentation (including negligent

misrepresentation) of which the lender or holder has actual knowledge,

participates in, or condones. A note which provides for the payment of

interest on interest shall not be guaranteed and any Loan Note

Guarantee or Assignment Guarantee Agreement attached to, or relating

to, a note which provides for payment of interest on interest is void.

The guarantee and right to require purchase will be directly

enforceable by the holder notwithstanding any fraud, misrepresentation,

or any unenforceability of the Loan Note Guarantee. The Loan Note

Guarantee will not be enforceable by the lender to the extent any loss

is occasioned by violation of usury laws, negligent servicing, or

failure to obtain the required security regardless of the time at which

the Agency acquires knowledge of the foregoing. Any losses occasioned

will not be enforceable by the lender to the extent that loan funds are

used for purposes other than those specifically approved by the Agency

in its Conditional Commitment for Guarantee. Negligent servicing is

defined as the failure to perform those services which a reasonably

prudent lender would perform in servicing 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, acting in a

manner contrary to the manner in which a reasonably prudent lender

would act up to the time of loan maturity, or until a final loss is

paid. The Loan Note Guarantee or Assignment Guarantee Agreement in the

hands of a holder shall not cover interest accruing 90 days after the

holder has demanded repurchase by the lender, nor shall the Loan Note

Guarantee or Assignment Guarantee Agreement in the hands of a holder

cover interest accruing 90 days after the lender or Agency has

requested the holder to surrender the evidence of debt for repurchase.

Sec. 1980.804 Conditions of Guarantee.

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

Guarantee issued by the Agency. Each lender will also execute a

Lender's Agreement. The provisions of this subpart in effect at the

issuance of the Loan Note Guarantee and execution of the Lender's

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

(a) The entire loan will be secured by the same security with equal

lien priority for the guaranteed and non-guaranteed portions of the

loan. The non-guaranteed portion of the loan will not be paid first nor

given any preference or priority over the guaranteed portion.

(b) The lender will be responsible for servicing the entire loan

and will remain mortgagee or secured party of record notwithstanding

the fact that another party may hold a portion of the loan.

(c) When a guaranteed portion of a loan is sold to a holder, the

holder shall have all rights of the lender under the Loan Note

Guarantee to the extent of the portion purchased. The lender will

remain bound by all the obligations under the Loan Note Guarantee,

Lender's Agreement, and Agency program regulations. A guarantee and

right to require purchase will be directly enforceable by a holder

notwithstanding any fraud or misrepresentation by the lender or any

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

misrepresentation of which the holder had actual knowledge at the time.

If the Agency makes a payment to a holder, then the lender must

reimburse the Agency.

(d) A lender will receive all payments of principal and interest on

the account of the entire loan and will promptly remit to each holder a

pro rata share, less any lender servicing fee.

(e) The lender may retain all of the unguaranteed portion of the

loan or may sell part of the unguaranteed portion of the loan through

participation. However, the lender is required to retain 5 percent of

the loan amount from the unguaranteed portion in their portfolio.

Secs. 1980.805--1980.807 [Reserved]

Sec. 1980.808 Access to lender's records.

Upon request by the Agency, the lender will permit representatives

of the Agency (or other agencies of the U.S. Department of Agriculture

authorized by that Department) to inspect and make copies of any of the

records of the lender pertaining to the guaranteed loans. Such

inspection and copying may be made during regular office hours of the

lender or at any other time the lender and the Agency agree upon.

Sec. 1980.809 Environmental requirements.

Requirements for an environmental review or mitigation actions are

contained in part 1940, subpart G, of this chapter. The lender must

assist the Agency to ensure that the borrower complies with any

mitigation measures required by the Agency's environmental review for

the purpose of avoiding or reducing the adverse environmental impact of

construction or operations of the facility financed with the guaranteed

loan.

Secs. 1980.810--1980.811 [Reserved]

Sec. 1980.812 Inspections.

The lender will notify the Agency of any scheduled field

inspections during construction and after issuance of the Loan Note

Guarantee. The Agency may attend such field inspections. Any

inspections or review conducted by the Agency, including those with the

lender, are for the benefit of the Agency only and not for other

parties of interest. Agency inspections do not relieve any parties of

interest of their responsibilities to conduct necessary inspections.

Sec. 1980.813 Appeals.

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

In cases where the Agency has denied or reduced the amount of final

loss payment to the lender, the adverse

[[Page 52282]]

decision may be appealed only by the lender. A decision by a lender

adverse to the interest of the borrower is not a decision by the

Agency, whether or not concurred in by the Agency. Appeals will be

handled in accordance with the regulations of the National Appeals

Division, U.S. Department of Agriculture, published at 7 CFR part 11.

Secs. 1980.814--1980.816 [Reserved]

Sec. 1980.817 Exception authority.

The appropriate Agency Administrator may, in individual cases, make

an exception to any requirement or provision of this subpart or address

any omission of this subpart provided the Administrator determines that

application of the requirement, or provision, or failure to take action

in the case of an omission would adversely affect the Government's

financial interest. Requests for exceptions must be in writing by the

State Director.

Secs. 980.818--1980.819 [Reserved]

Sec. 1980.820 Eligibility.

(a) The Agency must determine that the borrower is unable to obtain

the required credit without the loan guarantee from private,

commercial, or cooperative sources at reasonable rates and terms for

loans for similar purposes and period of time. This determination shall

become a part of the Agency casefile. The Agency should also determine

if an outstanding judgment obtained by the United States in a Federal

Court (other than the U.S. Tax Court) has been entered against the

borrower or if the borrower has an outstanding debt with any Federal

agency that is in a delinquent status. Such judgment or delinquency

shall cause the potential borrower to be ineligible to receive a loan

guarantee until the judgment is paid in full or otherwise satisfied or

the delinquency is cured.

(b) Legal authority and responsibility. (1) Each borrower must

have, or will obtain, the legal authority necessary to construct,

operate, and maintain the proposed facility and services. They must

also must have legal authority for obtaining security and repaying the

proposed loan.

(2) The borrower shall be responsible for operating, maintaining,

managing the facility and services, and providing for the continued

availability and use of the facility and services at reasonable rates

and terms.

(i) These responsibilities must be exercised by the borrower even

though the facility may be operated, maintained, or managed by a third

party under contract, management agreement, or written lease.

(ii) Leases may only be used when this is the only feasible way to

provide the service, is the customary practice to provide such service

in the State, and must provide for the borrower's management control of

the facility.

(iii) Contracts, management agreements, or leases must not contain

options or other provisions for transfer of ownership.

(3) The lender is responsible for reviewing any contracts,

management agreements, or leases to determine that they will not

adversely impact the borrower's repayment ability or the security value

of the guaranteed loan.

(c) Borrower. (1) A public body such as a municipality, county,

district, authority, or other political subdivision of a State located

in a rural area.

(2) An organization operated on a not-for-profit basis such as an

association, cooperative, or private corporation. Borrowers organized

under the general profit corporation laws may be eligible if they

actually will be operated on a not-for-profit basis under their

charter. Single member corporations or corporations owned or

substantially controlled by other corporations or associations are not

eligible organizations. Before a loan is made to a borrower other than

a public body, the articles of incorporation or the loan agreement will

include a condition similar to the following:

If the corporation dissolves or ceases to perform the community

facility objectives and functions, the board of directors shall

distribute all business property and assets to one or more nonprofit

corporations or public bodies. This distribution must be approved by

75 percent of the users or members and must serve the public welfare

of the community. The assets may not be distributed to any members,

directors, stockholders, or others having financial or managerial

interest in the corporation. Nothing herein shall prohibit the

corporation from paying its debts.

(3) A non-public body essential community facility borrower (other

than utility-type) must have significant ties with the local rural

community. Such ties are necessary to ensure to the greatest extent

possible that a facility under private control will carry out a public

purpose and continue to primarily serve rural areas. Ties may be

evidenced by items such as:

(i) Association with, or controlled by, a local public body or

bodies or broadly based ownership and controlled by members of the

community.

(ii) Substantial public funding through taxes, revenue bonds, or

other local government sources, or substantial voluntary community

funding such as would be obtained through a community-wide funding

campaign.

(4) Indian tribes on Federal and State reservations and other

federally recognized Indian tribes.

(d) Facilities must be located in rural areas, except:

(1) For utility-type services such as water, sewer, natural gas, or

hydroelectric serving both rural and non-rural areas. In such cases,

Agency funds may be used to finance only that portion serving rural

areas, regardless of facility location.

(2) Telecommunication projects. The part of the facility located in

a non-rural area must be necessary to provide the essential services to

rural areas.

(e) All facilities financed under the provisions of this subpart

shall be for public use.

(1) Facilities will be installed to serve any user within the

service area who desires service and can be feasibly and legally

served.

(2) In no case will boundaries for the proposed service area be

chosen in such a way that any user or area will be excluded because of

race, color, religion, sex, marital status, age, handicap, or national

origin. This does not preclude:

(i) Financing or constructing projects in phases when it is not

practical to finance or construct the entire project at one time, and

(ii) Financing or constructing facilities where it is not

economically feasible to serve the entire area, provided economic

feasibility is determined on the basis of the entire system or

facilities and not by considering the cost of separate extensions to,

or parts thereof. Additionally, the borrower must publicly announce a

plan for extending service to areas not initially receiving service.

Also, the borrower must provide written notice to potential users

located in the areas not to be initially served.

(3) The lender will determine that, when feasible and legally

possible, inequities within the proposed project's service area for the

same type service proposed (i.e., water or waste disposal) will be

remedied by the owner on, or before, completion of the project.

Inequities are defined as unjustified variations in availability,

adequacy, or quality of service. User rate schedules for portions of

existing systems or facilities that were developed under different

financing rates, terms, or conditions do not necessarily constitute

inequities.

[[Page 52283]]

Sec. 1980.821 Priorities.

The Agency will publish a project selection guide for

administrative use. This guide will include items and conditions which

must be considered in selecting preapplications for further

development. Copies of this project selection guide will be available

in any Agency office. When ranking eligible preapplications for

consideration for limited funds, Agency officials must consider the

priority items met by each preapplication and the degree to which those

priorities are met. The project selection guide may change from time to

time but preapplication and application will be evaluated in accordance

with the project selection guide in existence at the time the

preapplication is submitted.

(a) The preapplication (and supporting information submitted with

it) will be used to determine the proposed project's priority for

available funds.

(b) Those lenders with eligible lower-scoring preapplications which

cannot be funded within the foreseeable future should be notified that

funds are not available and asked if they wish to have their

preapplication maintained in an active file for future consideration.

Lenders whose preapplications are found to be ineligible will be

advised.

(c) After completing the review, the Agency will normally select

the preapplications with the highest scores for further processing. The

Agency may select a lower-scoring preapplication for processing when an

eligible, high-scoring preapplication:

(1) Requires more than 25 percent of the State allocation, or

(2) Exceeds the remaining State allocation for the fiscal year, or

(3) Is incomplete in that the lender has not met the administrative

requirements to develop the loan. However the higher-scoring

preapplication must be notified and given an opportunity to revise and

resubmit their proposal. A written justification must be prepared and

placed in the project file when an eligible higher-rating

preapplication is not selected for further processing.

(d) The Agency will notify the lender if an application should be

developed. Applications should be developed expeditiously following

good management practices. Applications that are not developed in a

reasonable period of time may be removed from the State's active file.

Lenders will be advised when such action is taken.

(e) A cost overrun will receive consideration for funding before

others.

Secs. 980.822--1980.823 [Reserved]

Sec. 1980.824 Eligible loan purposes.

(a) Funds may be used to construct, enlarge, extend, or otherwise

improve water or waste disposal and other essential community

facilities providing essential service primarily to rural residents and

rural businesses.

(1) Water or waste disposal facilities include water, sanitary

sewerage, solid waste disposal, and storm wastewater facilities.

(2) Essential community facilities include but are not limited to:

(i) Fire, rescue, and public safety,

(ii) Health services,

(iii) Community, social, or cultural services,

(iv) Transportation facilities such as streets, roads, and bridges,

(v) Telecommunication equipment,

(vi) Hydroelectric generating facilities and related connecting

systems and appurtenances only when not eligible for financing under

the authorities of the Rural Utilities Service. Funds may not be used

to finance other types of electrical generating or transmitting

facilities,

(vii) Supplemental and supporting structures for other rural

electrification or telephone systems (including facilities such as

headquarters and office buildings, storage facilities, and maintenance

shops) only when not eligible for financing under the authorities of

the Rural Utilities Service,

(viii) Natural gas distribution systems,

(ix) Industrial park sites (but only to the extent of land

acquisition and necessary site preparation) including access ways and

utility extensions to and throughout the site. Funds may not be used in

connection with industrial parks to finance on-site utility systems or

business and industrial buildings, and

(x) Recreational facilities.

(3) Otherwise improve includes, but is not limited to, the

following:

(i) The purchase of major equipment (such as solid waste collection

trucks, telecommunication equipment, and X-ray machines) which will in

themselves provide an essential service to rural residents;

(ii) The purchase of existing facilities, when necessary, either to

improve or to prevent a loss of service; and

(iii) Payment of tap fees and other utility connection charges as

provided in utility purchase contracts.

(b) Funds also may be used:

(1) To construct or relocate public buildings, roads, bridges,

fences, or utilities and to make other public improvements necessary to

the successful operation or protection of facilities authorized in

paragraphs (a)(1) and (a)(2) of this section.

(2) To relocate private buildings, roads, bridges, fences, or

utilities, and other private improvements necessary to the successful

operation or protection of facilities authorized in paragraph (a) of

this section.

(3) To pay the following expenses (but only when such expenses are

a necessary part of a loan to finance facilities authorized in

paragraphs (a), (b)(1), and (b)(2) of this section):

(i) Reasonable fees and costs such as origination fee, loan

guarantee fee, legal, engineering, architectural, fiscal advisory,

recording, environmental impact analyses, archaeological surveys,

possible salvage or other mitigation measures, planning and

establishing or acquiring rights.

(ii) Interest on loans until the facility is self-supporting, but

not for more than 2 years unless a longer period is approved by the

Agency; interest on loans secured by general obligation bonds until tax

revenues are available for payment, but not for more than 2 years

unless a longer period is approved by the National Office; and interest

on interim financing.

(iii) Costs of acquiring interest in land; rights such as water

rights, leases, permits, rights-of-way; and other evidence of land or

water control necessary for development of the facility.

(iv) Purchasing or renting equipment necessary to install,

maintain, extend, protect, operate, or utilize facilities.

(v) Initial operating expenses for a period ordinarily not

exceeding 1 year when the borrower is unable to pay such expenses.

(vi) Refinancing debts incurred by, or on behalf of, a community

when all of the following conditions exist:

(A) The debts being refinanced are less than 50 percent of the

total loan,

(B) The debts were incurred for the facility or service being

financed or any part thereof (such as interim financing, construction

expenses, etc.), and

(C) Arrangements cannot be made with the creditors to extend or

modify the terms of the debts so that a sound basis will exist for

making a loan.

(4) To pay obligations for construction incurred prior to filing a

preapplication and application with the Agency. Construction work

should not be started (and obligations for such work or materials

should not be incurred) before the Conditional Commitment for Guarantee

is issued. However, if there are compelling reasons for proceeding with

construction before the Conditional Commitment for Guarantee is issued,

lenders may request Agency

[[Page 52284]]

approval to pay such obligations. Such request must comply with the

following:

(i) Provide conclusive evidence that the contract was entered into

without intent to circumvent the requirements of Agency regulations.

(ii) Modify the outstanding contract to conform with the provisions

of this subpart. Where this is not possible, modifications will be made

to the extent practicable and, as a minimum, the contract must comply

with all State and local laws and regulations as well as statutory

requirements and executive orders related to the Agency financing. When

construction is complete and it is impracticable to modify the

contracts, the borrower and lender must provide the certification

required by paragraph (b)(5)(iii) of this section.

(iii) Provide a certification by an engineer or architect that any

construction performed complies fully with the plans and

specifications.

(iv) The borrower and the contractor must have complied with all

statutory and executive order requirements related to Agency financing

for construction already performed even though the requirements may not

have been included in the contract documents.

Sec. 1980.825 Ineligible loan purposes.

Loan funds may not be used to finance:

(a) Properties to be used for commercial rental when the borrower

has no control over tenants and services offered except for industrial-

site development,

(b) Facilities primarily for the purpose of housing Federal or

State agencies,

(c) Community antenna television services or facilities,

(d) Telephone systems,

(e) Facilities which are not modest in size, design, and cost,

(f) Finder's and packager's fees,

(g) Projects located within the Coastal Barriers Resource System

that do not qualify for an exception as defined in section 6 of the

Coastal Barriers Resource Act, Pub. L. 97-348 (available in any Agency

office),

(h) New combined sanitary and storm water sewer facilities,

(i) Projects located in a special flood or mudslide hazard area (as

designated by the Federal Insurance Administration (FIA) of the

Department of Housing and Urban Development) when it is not part of an

approved floodplain area management plan or flood insurance is not

available.

Sec. 1980.826 [Reserved]

Sec. 1980.827 Eligible lenders.

(a) Eligible lenders (as defined in this section) may participate

in the loan guarantee program. These lenders must be subject to credit

examination and supervision by either an agency of the United States or

a State. A lender must have the capability to adequately service loans

for which a guarantee is requested. Eligible lenders are:

(1) Any Federal or State chartered:

(i) Bank, or

(ii) Savings and loan association.

(2) Any mortgage company that is a part of a bank holding company,

(3) Bank for Cooperatives, National Rural Utilities Cooperative

Finance Corporation, Farm Credit Bank of the Federal Land Bank, or

other Farm Credit System institution with direct lending authority

authorized to make loans of the type guaranteed by this subpart,

(4) An insurance company regulated by a State or National insurance

regulatory agency,

(5) State Bond Banks and State Bond Pools, and

(6) Other lenders that possess the legal powers necessary and

incidental to making and servicing guaranteed loans involving community

development-type projects. These lenders must also be subject to credit

examination and supervision by either an agency of the United States or

a State and provide documentation acceptable to the Agency that they

have the ability to service the loan. Lenders under this category must

be approved by the National Office prior to the issuance of the loan

guarantee.

(b) When the lender's officers, stockholders, directors, or

partners (including their immediate families) or the borrower, its

officers, stockholders, directors, or partners (including their

immediate families) own, or have management responsibilities in each

other, the lender must disclose such business or ownership

relationships. The Agency shall determine if such relationships are

likely to result in a conflict of interest. This does not preclude

lender officials from being on the borrower's board of directors.

Sec. 1980.828 Transfer of lenders or borrowers (prior to issuance of

Loan Note Guarantee)

(a) Prior to issuance of the loan guarantee, the Agency may approve

the transfer of an outstanding Conditional Commitment for Guarantee

from the present lender to a new eligible lender, provided there are:

(1) A letter from the former lender stating why they do not wish to

continue to be the lender for this project,

(2) No substantive changes in ownership or control of the borrower,

(3) No substantive changes in the borrower's written plan, scope of

work, or changes in the purpose or intent of the project,

(4) No substantive changes in the loan agreement or Conditional

Commitment for Guarantee,

(b) The substitute lender must execute a new application for loan

and guarantee (available in any Agency office).

(c) If approved, the Agency will issue a letter of amendment to the

original Conditional Commitment for Guarantee reflecting the new lender

who will acknowledge acceptance of the offer in writing.

(d) Once the Conditional Commitment for Guarantee is issued, the

Agency will not approve any substitution of borrowers including changes

in the form of the legal entity. Exceptions to a change in the legal

entity may be requested by Agency staff from the Agency's National

Office when the original borrower is replaced with substantially the

same individuals or officers with the same interest as originally

approved.

Sec. 1980.829 Fees and charges by lender.

(a) The lender may establish the charges and fees for the loan,

provided they do not exceed those charged other borrowers for similar

types of transactions. ``Similar types of transactions'' mean those

transactions involving the same type of loan which a non-guaranteed

loan borrower would be assessed charges and fees.

(b) Late payment charges will not be covered by the Loan Note

Guarantee. Such charges may not be added to the principal and interest

due under any guaranteed note. Late payment charges may be made only

if:

(1) They are routinely made by the lender in all types of loan

transactions.

(2) Payment has not been received within the customary timeframe

allowed by the lender.

(3) The lender agrees with the borrower, in writing, that the rate

or method of calculating the late payment charges will not be changed

to increase charges while the Loan Note Guarantee is in effect.

(c) The guaranteed loan fee will be the applicable guarantee fee

rate multiplied by the principal loan amount multiplied by the percent

of guarantee. The one-time guarantee fee is paid when the Loan Note

Guarantee is issued.

(1) The fee will be paid to the Agency by the lender and is

nonreturnable. The lender may pass the fee to the borrower.

(2) The guarantee fee rates are available in any Agency office.

[[Page 52285]]

Sec. 1980.830 Loan guarantee limitations.

The percentage of guarantee, up to the maximum allowed by this

section, is a matter for negotiation between the lender and the Agency.

(a) The maximum allowable guarantee will be 90 percent.

(b) The lender will retain a minimum of 5 percent of the total

guaranteed loan amount. The retained amount must be from the

unguaranteed portion of the loan and cannot be participated to another

lender.

Secs. 1980.831-1980.832 [Reserved]

Sec. 1980.833 Interest rates.

(a) Rates will be negotiated between the lender and the borrower.

They may be either fixed or variable rates. Interest rates will be

those rates customarily charged borrowers in similar circumstances in

the ordinary course of business and are subject to Agency review and

approval.

(b) A variable interest rate must be tied to a base rate published

periodically in a recognized national or regional financial publication

specifically agreed to by the lender and borrower. Such an agreement

must be documented in the borrower or lender loan agreement.

(1) Interest rate caps and incremental adjustment limitations will

also be negotiated between the lender and the borrower. Notice of any

interest rate change proposed by the lender should allow a sufficient

time period for the borrower to obtain any required State or other

regulatory approval and to implement any user rate adjustments

necessary as a result of the interest rate change. The intervals

between interest rate adjustments will be specified in the loan

agreement (but not more often than quarterly).

(2) The lender must incorporate within the variable rate note, the

provision for adjustment of payments coincident with an interest rate

adjustment. This will ensure the outstanding principal balance is

properly amortized within the prescribed loan maturity and eliminate

the possibility of a balloon payment at the end of the loan.

(c) Any change in the interest rate between the date of issuance of

the Conditional Commitment for Guarantee and before the issuance of the

Loan Note Guarantee must be approved by the Agency. Approval of such

change will be shown on an amendment to the Conditional Commitment for

Guarantee.

(d) It is permissible to have one interest rate on the guaranteed

portion of the loan and another interest rate on the unguaranteed

portion of the loan, provided the lender and borrower agree, and:

(1) The rate on the unguaranteed portion does not exceed that

currently being charged on loans for similar purposes to borrowers

under similar circumstances; and,

(2) The rate on the guaranteed portion of the loan will not exceed

the rate on the unguaranteed portion.

(e) When multi-rates are used, the lender will provide the Agency

with the overall effective interest rate for the entire loan. Multi-

rate loans may be either fixed, variable, or a combination of fixed and

variable. When a combination of fixed and variable interest rates are

used, the interest rate for the unguaranteed portion will not be lower

than the guaranteed portion of the loan.

Sec. 1980.834 Terms of loan repayment.

(a) Principal and interest on the loan will be due and payable as

provided in the note except, any interest accrued as the result of the

borrower's default on the guaranteed loan over and above that which

would have accrued at the note rate on the guaranteed loan will not be

guaranteed by the Agency. The lender will structure repayments as

established in the loan agreement between the lender and borrower.

Ordinarily, such installments will be scheduled for payment as agreed

upon by the lender and borrower on terms that reasonably ensure

repayment of the loan. However, the first installment to include a

repayment of principal may be scheduled for payment after the project

is operable and has begun to generate income. Such installment must be

due and payable within 3 years from the date of the note and at least

annually thereafter. Interest will be due at least annually from the

date of the note. Monthly payments will be required except for

borrowers with income limited to less frequent intervals.

(b) The maximum time allowable for final maturity for a guaranteed

CP loan will be limited to the useful life of the facility, not to

exceed 40 years.

(c) The principal balance should be properly amortized within the

prescribed loan maturity. Balloon payments at the end of the loan are

prohibited.

Secs. 1980.835-1980.836 [Reserved]

Sec. 1980.837 Insurance and fidelity bonds.

The lender must provide evidence that the borrower has adequate

insurance and fidelity bond coverage by loan closing or start of

construction, whichever occurs first. Adequate coverage must be

maintained for the life of the loan and is subject to Agency review and

approval.

Secs. 1980.838-1980.839 [Reserved]

Sec. 1980.840 Equal opportunity and Fair Housing Act requirements.

(a) The lender will comply with the requirements of title V of the

Equal Credit Opportunity Act (Pub. L. 93-495). See the Federal Reserve

Board Regulation, 12 CFR part 202.

(b) Certain housing-related projects such as nursing homes, group

homes, or assisted-living facilities must comply with the requirements

of the Fair Housing Amendment Act of 1988 (Pub. L. 100-430). This

includes completion of an Affirmative Fair Housing Marketing Plan and

compliance with the Housing and Urban Development accessibility

guidelines except for areas open to the public which are covered by the

Americans with Disabilities Act (Pub. L. 101-336). The lender will

determine that the borrower has a valid plan in effect at all times.

Sec. 1980.841 [Reserved]

Sec. 1980.842 Design and construction requirements.

The lender will provide the Agency with a written certification at

the end of construction that all funds were utilized for authorized

purposes. The borrower and the lender will authorize designs and plans

based upon the preliminary architectural and engineering reports

approved by the lender and concurred in by the Agency. The borrower

will take into consideration any lender or Agency comments when the

facility is being designed.

(a) All project facilities must be designed utilizing accepted

architectural and engineering practices and must conform to applicable

Federal, State, and local codes and requirements. The lender must

ensure that the planned project will be completed within the available

funds and, once completed, will be suitable for the borrower's needs.

(b) The lender will monitor the progress of construction and

undertake the reviews and inspections necessary to ensure that

construction proceeds in accordance with the approved plans,

specifications, and contract documents and that funds are used for

eligible project costs. The lender must expeditiously report any

problems in project development to the Agency.

(c) 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

[[Page 52286]]

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) Community Facilities loans which involve the construction of,

or addition to, facilities that accommodate the public and commercial

facilities as defined by the Americans with Disabilities Act (Pub. L.

101-336) must comply with this Act. The lender and borrower are

responsible for compliance.

Sec. 1980.843 Other Federal, State, and local requirements.

In addition to the specific requirements of this subpart and

beginning on the date of issuance of the Loan Note Guarantee, proposals

for facilities financed in whole or in part with a loan guaranteed by

the Agency will be coordinated with all appropriate Federal, State, and

local agencies. Borrowers and lenders will be required to comply with

any Federal, State, or local laws or regulatory commission rules which

are in existence and which affect the project including, but not

limited to:

(a) Organization and authority to design, construct, develop,

operate, and maintain the proposed facilities;

(b) Borrowing money, giving security, and raising revenues for

repayment;

(c) Land use zoning;

(d) Health, safety, and sanitation standards; and

(e) Protection of the environment and consumer affairs.

Secs. 1980.844-1980.846 [Reserved]

Sec. 1980.847 Economic feasibility requirements.

All projects financed under the provisions of this section must be

based on taxes, assessments, revenues, fees, or other sources of

revenues in an amount sufficient to provide for facility operation and

maintenance, a reasonable reserve, and debt payment. Other sources of

revenue or guarantors are particularly important in considering the

feasibility of recreation-type loans. The lender is responsible for

determining the credit quality and economic feasibility of the proposed

loan and must address all elements of the credit quality in a written

financial feasibility analysis which includes adequacy of equity, cash

flow, security, history, and management capabilities. Financial

feasibility reports must take into consideration any interest rate

adjustment which may be instituted under the terms of the note.

(a) The borrower may prepare the financial feasibility analysis

(suggested financial feasibility guidelines are available in any Agency

office) in the following instances:

(1) Facilities primarily used for fire and rescue services;

(2) Facilities that are not dependent on facility revenues for debt

payment;

(3) Loans of less than $500,000; or

(4) Projects in which the borrower has operated similar facilities

on a financially successful basis.

(b) The borrower's consulting engineer may complete the financial

feasibility analysis for utility systems.

(c) Financial feasibility reports for all other facilities must be

prepared by a qualified entity not having a direct interest in the

management of the facility. The lender may prepare the feasibility

study if qualified staff is available.

(d) The Agency loan approval official may exempt the lender from

the requirement for an independent financial feasibility report (when

requested by the borrower and the lender) provided the approval

official determines that the financial feasibility analysis prepared by

the borrower fairly represents the financial feasibility of the

facility and the financial feasibility analysis contains an accurate

projection of the usage, revenues, and expenses of the facility.

(e) When the lender or Agency has insufficient information to

determine the borrower's repayment ability, an independent feasibility

analysis will be required.

Sec. 1980.848 Security.

(a) The lender is responsible for obtaining and maintaining proper

and adequate security to protect the interest of the lender, the

holder, and the Government.

(b) Security must be of such a nature that repayment of the loan is

reasonably ensured when considered with the integrity and ability of

project management, soundness of the project, and the borrower's

prospective earnings. The security may include, but is not limited to,

the following: General obligation bonds, revenue bonds, pledge of taxes

or assessments, assignment of facility revenue, land, easements,

rights-of-way, water rights, buildings, machinery, equipment, accounts

receivable, contracts, cash, or other accounts or assignments of leases

or leasehold interest.

(c) All security must secure the entire loan. The lender will not

take separate security to secure only the unguaranteed portion of the

loan. The lender will not require compensating balances or certificates

of deposit as a means of eliminating the lender's exposure on the

unguaranteed portion of the loan.

(d) For projects utilizing joint financing with the same security

to be shared, the Agency guaranteed loan will be secured by at least a

parity (equal) lien position.

Secs. 1980.849--1980.851 [Reserved]

Sec. 1980.852 Processing.

(a) Preapplications. (1) The preapplication package may be

submitted alone or simultaneously with the application. The

preapplication package will contain:

(i) An application for Federal assistance (available in any Agency

office).

(ii) State intergovernmental or other type review comments and

recommendations for the borrower's project (clearinghouse comments, if

applicable).

(iii) Supporting documentation necessary to make an eligibility

determination such as financial statements, audits, copies of

organizational documents, existing debt instruments, etc. The Agency

will advise lenders and borrowers on what documents are necessary.

Borrowers should not expend significant amounts of money or time

developing supporting documentation at the preapplication stage.

(iv) Documentation of lender eligibility in accordance with

Sec. 1980.828.

(2) The Agency will review each application for Federal assistance

along with other information that is deemed necessary to determine

eligibility and whether financing from commercial sources at reasonable

rates and terms is available without a guarantee.

(3) If the project appears to be eligible, has sufficient priority,

is economically feasible, and loan guarantee authority is expected to

be available, the Agency will inform the lender and borrower, in

writing, and request a complete application. An environmental review

will be necessary, and no major commitment should be made by the lender

or borrower that could affect the consideration of alternatives.

(b) Applications. Contents of application package.

(1) Application for loan and guarantee (available in any Agency

office),

(2) Proposed loan agreement,

(3) Request for environmental information (available in any Agency

office),

(4) Preliminary architectural or engineering report,

(5) Cost estimates,

(6) Appraisal reports (as appropriate),

[[Page 52287]]

(7) Credit reports,

(8) Financial feasibility analysis and report, and

(9) Any additional information required.

Sec. 1980.853 3Evaluation of application.

The Agency will evaluate the application and determine whether the

borrower is eligible, the proposed loan is for an eligible purpose,

there is reasonable assurance of repayment ability, sufficient

collateral and equity exists, the proposed loan complies with all

applicable statutes and regulations, and adequate funds are available.

If approved, the Agency will provide the lender and the borrower with

the Conditional Commitment for Guarantee, listing all conditions for

the guarantee. Applicable requirements will include the following:

(a) Approved use of guaranteed loan funds (source and use of

funds),

(b) Rates and terms of the loan,

(c) Scheduling of payments,

(d) Number of customers,

(e) Security and lien priority requirements,

(f) Appraisal requirements,

(g) Insurance and bonding requirements,

(h) Financial reporting requirements,

(i) Equal opportunity and nondiscrimination requirements,

(j) Environment or mitigation requirements,

(k) Americans with Disabilities Act requirements,

(l) By-laws and articles of incorporation change requirements, and

(m) Other requirements necessary to protect the Government.

Secs. 1980.854--1980.858 [Reserved]

Sec. 1980.859 Review of requirements.

(a) Immediately after reviewing the Agency's conditions and

requirements in the Conditional Commitment for Guarantee, the lender

and borrower must complete and sign the Acceptance of Conditions and

return a copy to the Agency. Notwithstanding the preceding sentence, if

certain conditions cannot be met, the lender and borrower may propose

alternate conditions for Agency consideration.

(b) If the lender indicates in the Acceptance of Conditions that it

desires to obtain a Loan Note Guarantee and subsequently decides at any

time after receiving a Conditional Commitment for Guarantee that it no

longer wants a guarantee, the lender must immediately advise the

Agency.

Secs. 1980.860--1980.862 [Reserved]

Sec. 1980.863 Conditions precedent to issuance of the Loan Note

Guarantee.

The Loan Note Guarantee will not be issued until:

(a) The lender certifies that:

(1) No major changes have been made in the lender's loan conditions

and requirements since the issuance of the Conditional Commitment for

Guarantee except those approved in the interim by the Agency in

writing.

(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.

(3) Required insurance is in effect.

(4) Truth in lending requirements have been met.

(5) All equal employment opportunity and Fair Housing Plan

requirements have been met.

(6) The loan has been properly closed and the required security

instruments have been obtained on any after-acquired property that

cannot be covered initially under State statutory provisions.

(7) The borrower has marketable title to the collateral then owned

by the borrower, subject to the instrument securing the loan to be

guaranteed and subject to any other exceptions approved, in writing, by

the Agency.

(8) When required, the entire amount of the loan for working

capital has been disbursed except in cases where the Agency has

approved disbursement over an extended time.

(9) All other requirements of the Conditional Commitment for

Guarantee have been met.

(10) Lien priorities are consistent with requirements of the

Conditional Commitment for Guarantee.

(11) The loan proceeds have been disbursed for purposes and in

amounts consistent with the Conditional Commitment for Guarantee and as

specified on the application for the guaranteed loan. A copy of a

detailed statement by the lender detailing the use of loan funds will

be attached to support this certification.

(12) There has been no substantive adverse change in the borrower's

financial condition nor any other adverse change in the borrower during

the period of time from the Agency's issuance of the Conditional

Commitment for Guarantee to issuance of the Loan Note Guarantee. The

lender's certification must address all adverse changes of the borrower

and the guarantors. For purposes of this paragraph, the term borrower

includes any parent, affiliate, or subsidiary of the borrower.

(13) All Federal, State, and local design and construction

requirements have been met.

(14) The lender understands and will meet the requirements of

chapter 37 of title 31 of the United States Code.

(15) The lender would not make the loan without an Agency

guarantee.

(b) The lender has executed and delivered the Lender's Agreement

and closing report for the guaranteed loan along with the appropriate

guarantee fee.

(c) The lender has advised the Agency of plans to sell or assign

any part of the loan as provided in the Lender's Agreement.

(d) The lender agrees that once the Conditional Commitment for

Guarantee is issued and accepted by the lender and borrower, it shall

not be modified as to the scope of the project, overall facility

concept, project purpose, use of proceeds, or terms and conditions.

Only minor changes will be considered unless otherwise provided for in

this subpart.

(e) Where applicable, the lender must certify that the borrower has

obtained:

(1) A legal opinion relative to the title to rights-of-way and

easements. Lenders are responsible for ensuring that borrowers have

obtained valid, continuous, and adequate rights-of-way and easements

needed for the construction, operation, and maintenance of a facility.

(2) A title report showing ownership of the land and all mortgages

or other lien defects, restrictions, or encumbrances, if any. It is the

responsibility of the lender to ensure that the borrower has obtained

and recorded such releases, consents, or subordinations to such

property rights from holders of outstanding liens or other instruments

as may be necessary for the construction, operation, and maintenance of

the facility and to provide the required security. For example, when a

site is for major structures for utility-type facilities (such as a

reservoir or pumping station) and the lender and borrower are able to

obtain only a right-of-way or easement on such a site rather than a fee

simple title, such a title report should be requested.

(f) For loans exceeding $150,000, the lender has certified its

compliance with Public Law 101-121 (Anti-lobbying Act). Also, if any

funds have been, or will be, paid to any person for influencing or

attempting to influence an officer or employee of any agency, a Member

of Congress, an officer or

[[Page 52288]]

employee of Congress, or an employee of a Member of Congress in

connection with this commitment providing for the United States to

guarantee a loan, the lender shall completely disclose such lobbying

activities in accordance with 31 U.S.C. 1352.

(g) If the Loan Note Guarantee cannot be issued before the

Conditional Commitment expires, the lender must submit a written

request for an extension of the expiration date. The lender must

document and certify to paragraph (a)(1), (a)(12), and (e) of this

section specifically identifying any modifications.

(h) Coincident with, or immediately after, loan closing, the lender

will contact the Agency and provide those documents and certifications

required in this section. For loans to public bodies, lenders may

require an opinion from recognized bond counsel regarding the adequacy

of the preparation and issuance of the debt instruments. Only when the

Agency is satisfied that all conditions for the guarantee have been met

will the Loan Note Guarantee be executed.

Sec. 1980.864 Issuance of Lender's Agreement, Loan Note Guarantee, and

Assignment Guarantee Agreement.

(a) If the Agency finds that all requirements have been met, the

lender and the Agency will execute the Lender's Agreement. The original

will be retained by the Agency and a signed duplicate original will be

retained by the lender. A Lender's Agreement must be executed for all

loans to be guaranteed by the Agency.

(b) Loan Note Guarantee. (1) Upon receipt of the executed Lender's

Agreement and after all requirements have been met, the Agency will

execute the Loan Note Guarantee. All originals of the Loan Note

Guarantee will be provided to the lender and attached to the note.

(2) If the lender has selected the multi-note system, a Loan Note

Guarantee will be prepared and attached to each note the borrower

issues. All the notes will be listed on the Loan Note Guarantee. Not

more than ten notes will be issued for the guaranteed portion (unless

the Agency and borrower agree otherwise) and one note issued for the

unguaranteed portion.

(c) In the event the lender assigns the guaranteed portion of the

loan to a holder, the lender, holder, and Agency will execute an Agency

prescribed Assignment Guarantee Agreement. The original of the

agreement will be provided to the holder with conformed copies to the

lender and the Agency. If the lender desires to assign a part of the

guaranteed loan to a holder, an Agency prescribed Assignment Guarantee

Agreement will be executed for each assigned portion.

(d) If requested by the lender, the Agency will provide a

Certificate of Incumbency and signature and title of the Agency

official who executes the Agency prescribed Loan Note Guarantee,

Lender's Agreement, and Assignment Guarantee Agreement.

(e) If the Agency determines that it cannot execute the Loan Note

Guarantee because all requirements have not been met, the lender will

have a reasonable period within which to satisfy the objections. If the

lender satisfies the objections within the time allowed, the guarantee

will be issued.

(f) The lender will prepare and deliver a guaranteed loan closing

report for each loan to be guaranteed and guarantee fee to the Agency

which concurrently will deliver the Loan Note Guarantee.

Sec. 1980.865 Lender's sale or assignment of guaranteed portion of

loan.

The lender may retain all of the guaranteed loan. The lender must

not sell or participate any amount of the guaranteed or non-guaranteed

portion of the loan to the borrower or to members of the borrower's

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

other owners, or a subsidiary or affiliate. Disposition of the

guaranteed portion of a loan may not be made prior to full

disbursement, completion of construction, and acquisition without the

prior written approval of the Agency. 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.

(a) Assignment. Any sale or assignment by the lender of the

guaranteed portion of the loan must be accomplished in accordance with

the conditions in the Lender's Agreement. Should the lender know at the

time the loan application is prepared that it plans to sell or assign

any part of the guaranteed portion, the lender will provide this

information with the application.

(b) Participation. The lender may obtain participation in the loan

under its normal operating procedures.

(c) Minimum retention. The lender is required to hold in its own

portfolio or retain a minimum of 5 percent of the total guaranteed loan

amount. This amount must be of the non-guaranteed portion of the loan

and cannot be participated to another. The lender may sell the

remaining amount of the non-guaranteed portion of the loan only through

participation.

Secs. 1980.866--1980.868 [Reserved]

Sec. 1980.869 Loan servicing.

(a) The lender is responsible for servicing the entire loan in

accordance with the lender's loan agreement. The unguaranteed portion

of the loan will not be paid first nor given any preference or priority

over the guaranteed portion of the loan. The lender is responsible for

taking all servicing actions that a prudent lender would perform in

servicing their portfolio of loans that are not guaranteed. This

responsibility includes, but is not limited to, the collection of

payments; obtaining compliance with the covenants and provisions in the

note, loan agreement, security instrument, or any supplemental

agreements; obtaining and analyzing financial statements; verifying the

payment of taxes and insurance premiums; and maintaining liens on

collateral. The lender will notify the Agency of any violations of the

loan agreement with the borrower.

(b) The lender will require, at a minimum, annual audited financial

statements which will be reviewed by the lender and a copy forwarded to

the Agency with a summary evaluation by the lender. The lender will

service delinquent loans in accordance with the lender's agreement The

Agency may waive the audit requirement for financial statements for

borrowers with gross annual income of less than $500,000.

(c) The lender must report the outstanding principal and interest

balance on each guaranteed loan semi-annually.

(d) The lender will inspect the collateral as often as necessary to

properly service the loan.

Secs. 1980.870-1980.872 [Reserved]

Sec. 1980.873 Replacement of loss, theft, destruction, mutilation, or

defacement of Loan Note Guarantee or Assignment Guarantee Agreement.

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

Assignment Guarantee Agreement which may have been lost, stolen,

destroyed, mutilated, or defaced to the lender or holder upon receipt

of an acceptable certificate of loss and an indemnity bond.

(b) 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

[[Page 52289]]

requirements for replacement are as follows:

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

(i) Legal name and present address of either the lender or the

holder who is requesting the replacement forms,

(ii) Legal 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, Agency case

number, date of the Loan Note Guarantee, Assignment Guarantee

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

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

and, if 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) The holder shall present evidence demonstrating current

ownership of the Loan Note Guarantee and Note or Assignment Guarantee

Agreement. If the present holder is not the same as the original

holder, a copy of the endorsement of each successive holder in the

chain of transfer from the initial holder to present holder must be

included. If copies of the endorsement cannot be obtained, best

available records of transfer must be presented 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 Government corporation, a State or

Territory, or the District of Columbia.

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

States of America. The bond shall be in an amount not less than the

unpaid principal and interest. The bond shall hold the Government

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.

Sec. 1980.874 [Reserved]

Sec. 1980.875 Defaults by borrower.

(a) The lender must notify the Agency when a borrower is 30 days

past due on a payment, has not met its responsibilities of providing

the required financial statements, or is otherwise in default. The

lender will continue to keep the Agency informed on a bimonthly basis

until such time as the loan is no longer in default. If a monetary

default exceeds 60 days, the lender will arrange a meeting with the

borrower to resolve the default. The lender must advise the Agency of

the meeting in the event an Agency representative wishes to attend. The

lender will provide a summary of the meeting and any decisions or

actions agreed upon.

(b) In considering servicing options, the prospects for providing a

permanent cure without adversely affecting the risks to the Agency and

the lender must be the paramount objective. Temporary curative actions

(such as payment deferments or collateral subordination) must

strengthen the loan and be in the best financial interest of the lender

and the Agency. Some of these actions may require concurrence of the

holder.

(c) If the loan was closed with the multi-note option, the lender

may need to possess all notes to take some servicing actions. In those

situations when the Agency is holder of some of the notes, the Agency

may endorse the notes back to the lender, provided a proper receipt is

received from the lender which defines the reason for the transfer.

Under no circumstances will the Agency endorse the original Loan Note

Guarantee to the lender.

Secs. 1980.876-1980.877 [Reserved]

Sec. 1980.878 Repurchase of loan.

(a) The lender has the option to repurchase the loan from a holder

within 30 days of written demand from the holder when the borrower is

in default not less than 60 days on principal or interest. The

repurchase will be for an amount equal to the unpaid guaranteed portion

of principal and accrued interest less the lender's servicing fee. The

guarantee does 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. The holder will concurrently send a copy of the

demand to the Agency. The lender will accept an assignment without

recourse from the holder upon repurchase. The lender is encouraged to

repurchase the loan to facilitate the accounting of funds, resolve the

problem, and permit the borrower to cure the default, where reasonable.

The lender will notify the holder and the Agency of their decision

within 30 days of receipt of demand from the holder.

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

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

from the holder the unpaid principal balance of the guaranteed portion

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

servicing fee) within 30 days after written demand to the Agency. 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. The lender shall not charge the Agency any servicing

fees nor are any such fees collectible from the Agency.

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

written demand made upon the lender. The holder or duly authorized

agent must also include evidence of the 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 Agency will be subrogated to all rights of the holder. The holder

must include in the demand the amount due including unpaid principal,

unpaid interest to date of demand, and interest subsequently accruing

from the date of demand to the proposed payment date. Unless otherwise

agreed to by the Agency, such proposed payment will not be later than

30 days from the date of demand.

(3) The lender must promptly provide the Agency with the

information necessary for the Agency's determination of the appropriate

amount due the holder upon the Agency's notification to the lender of

the holder's demand for payment. This information must be certified by

an authorized officer of the lender. Any discrepancy between the amount

claimed by the holder and the information submitted by the lender must

be resolved before payment will be approved. The Agency will notify

both parties and such conflict will suspend the running of the 30-day

payment requirement.

(4) Any purchase by the Agency does not change, alter, or modify

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

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

lender. The Agency may 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 Loan Note Guarantee.

[[Page 52290]]

(c) When the lender determines that repurchase of the guaranteed

portion of the loan is necessary to service the loan, the holder must

sell the guaranteed portion to the lender for the unpaid principal and

interest balance (less the lender's servicing fee). The guarantee does

not cover interest accruing after 90 days from the date the lender's or

Agency's letter requesting the holder to tender its guaranteed portion.

The lender must not repurchase from the holder for arbitrage purposes

to further its own financial gain. Any repurchase must be made only

after the lender obtains the Agency 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.

Sec. 1980.879 Transfer of lender after issuance of Loan Note

Guarantee.

Subsequent to issuance of the Loan Note Guarantee, the Agency may,

under extraordinary circumstances, approve the transfer of an

outstanding Loan Note Guarantee from the present lender to another

eligible lender, provided the new lender agrees to assume all original

loan requirements including liabilities, servicing responsibilities,

and acquiring legal title to the unguaranteed portion of the loan.

Sec. 1980.880 Interest rate changes after loan closing.

(a) The borrower, lender, and holder (if any) may collectively

effect a permanent reduction in the interest rate on the guaranteed

loan at any time during the life of the loan on written agreement by

these parties. After such a permanent reduction, the Loan Note

Guarantee will only cover losses in interest at the reduced interest

rate. The Agency must be notified by the lender, in writing, within 10

calendar days of the change. When the Agency is a holder, it will

concur only when it is demonstrated that the change is more viable than

liquidation and that the Government's financial interests are not

adversely affected. Factors which will be considered in making such

determination are the Government's cost of borrowing money and the

project's enhancement of rural development. The monetary recovery must

be greater than the liquidation recovery, and a financial feasibility

analysis must show the project's continued viability.

(1) Fixed rates cannot be changed to variable rates to reduce the

interest rate to the borrower unless the variable rate has a ceiling

which is less than the original fixed rate.

(2) Variable rates can be changed to a lower fixed rate. In a final

loss settlement when qualifying rate changes are made with the required

written agreements and notification, the interest will be calculated

for the periods the given rates were in effect. The lender must

maintain records which adequately document the accrued interest

claimed.

(3) The lender is responsible for the legal documentation of

interest rate changes. However, the lender may not issue a new note.

(b) No increases in interest rates will be permitted under the loan

guarantee except the normal fluctuations in approved variable interest

rate loans.

Sec. 1980.881 Liquidation.

Liquidation will occur when the lender concludes that liquidation

of the guaranteed loan is necessary because of one or more defaults or

third party actions that the borrower cannot, or will not, cure or

eliminate within a reasonable period of time and the Agency concurs

with the lender; or the Agency, at any time, independently concludes

that liquidation is necessary. The lender, or the Agency (if it

liquidates) will proceed as expeditiously as possible, including giving

any notices or taking any legal actions required by the security

instruments.

(a) If a lender has made a loan guaranteed by the Agency under

regulations in this subpart in effect prior to [the effective date of

the final rule] \1\, the lender has the option to liquidate the loan

under the provisions of this subpart in effect on [the effective date

of the final rule] or under the provisions in effect previous to that

date. The lender will notify the Agency in writing within 10 days after

its decision to liquidate, which regulatory provisions they choose to

use. The lender may not choose some provisions in effect on one date

and other provisions in effect on another date.

---------------------------------------------------------------------------

\1\ See 7 CFR part 180, subpart I, contained in the 7 CFR, parts

1950 to 1999, edition revised as of January 1, 1997 and amended at

[Federal Register cites and dates to be inserted in final rule].

---------------------------------------------------------------------------

(b) If a lender acquires title to property, the Agency may elect to

permit the lender the option of calculating the final loss settlement

using the net proceeds received at the time of the ultimate disposition

of such property. The lender must submit a written request within 15

days of acquiring title for this option to the Agency, and the Agency

must agree, in writing, prior to the lender submitting any request for

estimated loss payment.

(c) The lender will (within 30 days after a decision to liquidate)

submit to the Agency, in writing, a proposed, detailed liquidation

plan. Upon approval by the Agency of the liquidation plan, the lender

will commence liquidation. When the Agency liquidates, reasonable

liquidation expenses will be assessed against the proceeds derived from

the sale of the collateral. The lender's liquidation plan must include,

but is not limited to, the following:

(1) Such proof as the Agency requires to establish the lender's

ownership of the guaranteed loan notes and related security

instruments, a copy of the payment ledger or other documentation which

reflects the outstanding loan balance and accrued interest to date, and

the method of computing the interest;

(2) A complete list of all collateral;

(3) The recommended liquidation methods for making the maximum

collection possible on the indebtedness and the justification for such

methods, including the recommended action for acquiring and disposing

of all collateral;

(4) Necessary steps for preservation of the collateral;

(5) Copies of the borrower's latest available financial statements;

(6) An itemized list of estimated liquidation expenses expected to

be incurred and justification for each expense;

(7) A schedule to periodically report to the Agency on the progress

of the liquidation;

(8) Estimated protective advance amounts with justification;

(9) Proposed protective bid amounts on collateral to be sold at

auction and a breakdown on how the amounts were determined;

(10) If a voluntary conveyance is considered, the proposed amount

to be credited to the guaranteed debt;

(11) Legal opinions, as needed; and

(12) If the outstanding balance of principal and interest is less

than $200,000, the lender will obtain an estimate of fair market and

potential liquidation value of the collateral. If the outstanding

balance of principal and interest is $200,000 or more, the lender will

obtain an independent appraisal report on all collateral securing the

loan which will reflect the fair market value and potential liquidation

value. The independent appraiser's fee will be shared equally by the

Agency and the lender.

(d) If actions are necessary to immediately preserve and protect

the collateral, a partial liquidation plan may be submitted and when

approved, must

[[Page 52291]]

be followed by a complete liquidation plan prepared by the lender.

(e) Disposition of collateral acquired by the lender must be

approved by the Agency.

(1) There may be instances when the lender acquires the collateral

of a borrower where the cost of liquidation exceeds the potential

recovery value of the security. Whenever this occurs, the lender, with

the concurrence of the National Office, may abandon the collateral in

lieu of liquidation.

(2) Sale of acquired collateral to the borrower, borrower's

stockholders or officers, or the lender or lender's stockholders or

officers requires the written concurrence of the Agency.

(f) The Agency will exercise the option to liquidate only when

there is reason to believe the lender is not likely to initiate

liquidation efforts that will result in maximum recovery. When the

Agency liquidates, reasonable liquidation expenses will be assessed

against the proceeds derived from the sale of the collateral.

(g) Final loss payments will be made within the 60 days required

but only after all collateral has been properly accounted for and

liquidation expenses are determined to be reasonable and within

approved limits. Any estimated loss payments made to the lender will be

credited against the final loss on the guaranteed loan. The amount of

an estimated loss payment must be credited as a deduction from the

principal balance of the loan.

Sec. 1980.882 [Reserved]

Sec. 1980.883 Protective advances.

Protective advances constitute an indebtedness of the borrower to

the lender and must be secured by collateral to the same extent as

principal and interest. Protective advances include, but are not

limited to, advances made for taxes, annual assessments, ground rent

hazard, or flood insurance premiums affecting the collateral (including

any other expenses necessary to protect the collateral). Attorney fees

are not a protective advance.

(a) The Agency must approve, in writing, all protective advances on

loans within their loan approval authority which exceed a total

cumulative advance amount of $500 to the same borrower. Protective

advances must be reasonable when associated with the value of the

collateral being preserved.

(b) When considering protective advances, sound judgment must be

exercised in determining that the additional funds advanced will

actually preserve collateral interests and recovery is actually

enhanced by making the advance.

Sec. 1980.884 Additional loans or advances.

The lender will not make additional expenditures or new loans to

the borrower without first obtaining the written approval of the Agency

even though such expenditures or loans will not be guaranteed.

Sec. 1980.885 Bankruptcy.

(a) An Agency Report of Loss form will be used for calculating

estimated and final loss determinations.

(b) Lender's are responsible to protect the guaranteed loan debt

and all the collateral securing it in bankruptcy proceedings. These

responsibilities include, but are not limited to, the following:

(1) Filing a proof of claim, where necessary, and all necessary

papers and pleadings,

(2) Attending and, where necessary, participating in meetings of

the creditors and all court proceedings,

(3) Immediately seeking adequate protection of the collateral if

its collateral is subject to being used by the trustee in bankruptcy or

the debtor in possession.

(4) Where appropriate, seeking involuntary conversion of a pending

Chapter 11 case to a liquidation proceeding or seeking dismissal of the

proceedings, and

(5) Keeping the Agency adequately and regularly informed, in

writing, of all aspects of the proceedings.

(c) In a Chapter 9 or Chapter 11 reorganization, obtaining an

independent appraisal of the collateral if the Agency believes an

independent appraisal is necessary, the Agency and the lender will

share the appraisal fee equally.

(d) Only expenses of Chapter 11 reorganizations, or Chapter 11 or

Chapter 7 liquidations (unless the liquidation is by the lender)

authorized by the court may be deducted from the collateral proceeds.

(e) The Agency or the lender, with the approval of the Agency, may

initiate the repurchase of the unpaid guaranteed portion of the loan

from the holder. If the lender is the holder, an estimated loss payment

may be filed at the initiation of a Chapter 7 proceeding or after a

Chapter 11 proceeding becomes a liquidation proceeding. On loans in

bankruptcy, any loss payment must be approved by the Agency.

(f) The Agency must approve, in advance and in writing, the

lender's estimated liquidation expenses of collateral in liquidation

bankruptcy. These expenses must be reasonable and customary and not

include in-house expenses of the lender.

Secs. 1980.886-1980.887 [Reserved]

Sec. 1980.888 Transfers and assumptions.

(a) The Agency will approve in writing transfers and assumptions of

loans to transferees who will continue the original purpose of the

guaranteed loan.

(1) When the transaction is to a member of the borrower's

organization, it will be at a price which will not result in a loss to

the lender.

(2) Transfers to eligible borrowers will receive preference over

transfers to ineligible borrowers if recovery to the lender from the

sale price is not less than it would be if the transfer was to an

ineligible borrower.

(3) The present borrower is unable or unwilling to accomplish the

objectives of the guaranteed loan, and the transfer will be to the

lender's and Agency's advantage.

(4) The transferee will assume an amount at least equal to either

the present market value or the debt, whichever is less. The percentage

of the Agency's guarantee will be based on the amount assumed.

(5) The lender concurs in the plans for disposition of funds in the

transferor's debt service, reserve, and operation and maintenance

account.

(b) Transfers to eligible borrower.

(1) The total indebtedness may be transferred to an eligible

borrower on the same terms.

(2) The total indebtedness may be transferred to another eligible

borrower on different terms not to exceed those terms for which an

initial guaranteed loan can be made.

(3) Less than the total indebtedness may be transferred to another

eligible borrower on the same or different terms.

(4) A guaranteed loan for which the transferee is eligible may be

made in connection with a transfer subject to the policies and

procedures governing the kind of loan being made.

(5) If the transferor is to receive a payment for the equity, the

total debt must be assumed.

(c) Transfers to ineligible borrowers are considered only when

needed as a method for servicing problem cases when an eligible

transferee is not available. Transfers should not be considered as a

means by which members can obtain equity or as a method of providing a

source of easy credit for purchasers. Transfers are as follows:

(1) All transfers to ineligible borrowers will include a one-time

nonrefundable transfer fee. Transfer fees will be collected, and

payments applied, in accordance with paragraph (d) of this section.

[[Page 52292]]

(2) For all loans covered by this subpart, the Agency may approve a

transfer of indebtedness to, and assumption of, a loan by a transferee

who does not meet the eligibility requirements for the kind of loan

being assumed when the ineligible borrower will:

(i) Make a significant downpayment, and

(ii) Agree to pay the remaining balance within not more than 15

years. Installments will be at least equal to the amount amortized over

a period not greater than the remaining life of the debt being

transferred, and the balance will be due the fifteenth year.

(3) Interest rates to ineligible transferees will be the rate

specified in the note of the transferor or the rates customarily

charged borrowers in similar circumstances in the ordinary course of

business and are subject to Agency review and approval. The rates may

be either fixed or variable.

(i) Transferees must have the ability to repay the debt according

to the Assumption Agreement and must have the legal authority to enter

into the contract. The transferee will submit a current balance sheet.

The lender will obtain and analyze the credit history of the

transferee. In all transfers, consideration will be given to obtaining

individual liability agreements from members of the transferee

organization.

(ii) The transferor may receive equity payments when the full

amount of the debt is assumed. However, equity payments will not be

made on more favorable terms than those on which the balance of the

debt will be paid.

(d) Transfer fees are a one-time nonrefundable cost to be collected

by the lender at the time of application or proposal.

(1) The transfer fees will be a standard fee plus the cost of the

appraisal.

(2) The lender will collect and submit the fee to the Agency.

(3) The Agency's National Office may waive the transfer fee if it

determines that such waiver is in the best interest of the Agency.

(e) Processing transfers and assumptions. (1) In any transfer and

assumption case, the transferor (including any guarantors) may be

released from liability by the lender only with prior Agency written

concurrence and only when the value of the collateral being transferred

is at least equal to the amount of the loan, or part of the loan, being

assumed. If the transfer is for less than the entire debt:

(i) The Agency must determine that the transferor and any

guarantors have no reasonable debt-paying ability considering their

assets and income at the time of transfer, and

(ii) The lender must certify that the transferor has cooperated in

good faith, used due diligence to maintain the collateral against loss,

and has otherwise fulfilled all of the regulations of this subpart to

the best of the borrower's ability.

(2) The lender will make, in all cases, a complete credit analysis

to determine viability of the project (subject to the Agency review and

approval) including any requirement for deposits in an escrow account

as security to meet the determined equity requirements for the project.

(3) The lender will issue a statement that the transaction can be

properly transferred and the conveyance instruments will be filed,

registered, or recorded as appropriate and legally permissible.

(4) The assumption will be made on the lender's form of Assumption

Agreement and will contain the Agency case number of the transferor and

transferee.

(5) Loan terms cannot be changed by the Assumption Agreement unless

previously approved in writing by the Agency with the concurrence of

any holder and the transferor (including guarantors) if they have not

been released from personal liability. Any new loan terms cannot exceed

those authorized in this subpart. The lender's request will be

supported by:

(i) An explanation of the reasons for the proposed change in the

loan terms.

(ii) Certification that the lien position securing the guaranteed

loan will be maintained or improved, proper hazard insurance will be

continued in effect, and all applicable Truth in Lending requirements

will be met.

(6) In the case of a transfer and assumption, it is the lender's

responsibility to see that all such transfers and assumptions will be

noted on all originals of the Loan Note Guarantee. The lender will

provide the Agency a copy of the Transfer and Assumption Agreement.

(7) If a loss should occur upon a complete transfer of assets and

assumption for less than the full amount of the debt and the

transferor-debtor (including personal guarantor) is released from

personal liability (as provided in paragraph (e) of this section), the

lender (if holding the guaranteed portion) may file an estimated Report

of Loss to recover their pro rata share of the actual loss at that

time. Approved protective advances and accrued interest made during the

arrangement of a transfer and assumption, if not assumed by the

transferee, will be entered on the estimated Report of Loss.

Sec. 1980.889 Mergers.

(a) The Agency may approve mergers or consolidations (referred to

in this section as ``mergers'') when the resulting organization will be

eligible for an Agency guaranteed loan and assumes all the liabilities

and acquires all the assets of the merged borrower. Mergers may be

approved when:

(1) The merger is in the best interest of the Government and the

merging borrower.

(2) The resulting borrower can meet all required conditions as set

forth in specific loan note agreements.

(3) All property can be legally transferred to the resulting

borrower.

(b) Distinguishing mergers from transfers and assumptions. Mergers

occur when one corporation combines with another corporation in such a

way that the first corporation ceases to exist as a separate entity

while the other continues. In a consolidation, two or more corporations

combine to form a new, consolidated corporation with the original

corporations ceasing to exist. Such transactions must be distinguished

from transfers and assumptions in which a transferor will not

necessarily go out of existence, and the transferee will not always

take all the transferor's assets, nor assume all the transferor's

liabilities.

Sec. 1980.890 Disposition of acquired property.

(a) When the lender acquires title to the collateral and the final

loss claim is not paid until final disposition, the lender must proceed

as quickly as possible to develop a plan to fully protect the

collateral and the lender must dispose of the collateral without delay.

(b) Any collateral accepted by the lender must not be titled in the

Agency's name in whole or in part. The Agency's position is that of a

guarantor, relating to losses.

(c) After acquiring the collateral the lender must protect the

collateral from deterioration (weather, vandalism, etc.). Hazard

insurance in an amount necessary to cover the fair market value of the

collateral must be maintained.

(d) The lender will prepare and submit to the Agency a plan on the

best method of sale, keeping in mind any prospective purchasers.

Concurrence or non-concurrence of the plan will be made in writing to

the lender. If an existing liquidation plan addressed the disposition

of acquired property, no further review is required unless modification

of the plan is needed.

[[Page 52293]]

(e) Methods of liquidation.

(1) Direct sale by lender.

(2) Use of commercial broker.

(3) Public auction.

(f) Abandonment of the collateral. (1) The primary purpose of

collateral is to afford a net return on the loan balance. However,

there will be times when converting the collateral to cash would result

in a loss.

(2) Anytime there is a case when the conversion of collateral to

cash can reasonably be expected to result in a negative net recovery

amount, abandonment of the collateral should be considered.

Secs. 1980.891-1980.893 [Reserved]

Sec. 1980.894 Determination and payment of loss.

In all liquidation cases, final settlement will be made with the

lender after the collateral is liquidated. The Agency will have the

right to recover losses paid under the guarantee from any party liable.

(a) If the lender takes title to collateral any loss will be based

on the collateral value at the time the lender obtains title.

(b) The Report of Loss form will be used for calculations of all

estimated and final loss determinations. Estimated loss payments may

only be approved after the lender has submitted a liquidation plan

approved by the Agency.

(c) When the lender is conducting the liquidation and owns any of

the guaranteed portion of the loan, it may request an estimated loss

payment by submitting an estimate of loss that will occur in connection

with liquidation of the loan. An estimated loss payment may be approved

after the Agency has approved the liquidation plan.

(1) The estimate will be prepared and submitted by the lender on

the Report of Loss form using the basic formula as provided on the

report except that appraisal value will be used in lieu of amount

received from sale of collateral.

(2) The estimated loss payment shall be applied as of the date of

such payment. The total amount of the loss payment remitted by the

Agency will be applied by the lender on the guaranteed portion of the

loan debt. Such application does not release the borrower from

liability. At the time of final loss settlement, the lender may notify

the borrower that the loss payment has been so applied.

(3) After liquidation has been completed, a final Report of Loss

will be submitted by the lender to the Agency.

(d) In all cases, a final Report of Loss must be submitted to the

Agency. Before Agency approval of any final loss report, the lender

must account for all funds obtained, disposition of the collateral, all

costs incurred, and any other information necessary for the successful

completion of liquidation. Upon receipt of the final accounting and

Report of Loss, the Agency may audit, and will determine the final

loss. The lender will make its records available to, and otherwise

assist, the Agency in making any audit it requires of the Report of

Loss. The documentation accompanying the Report of Loss must support

the loss claimed.

(1) The lender must document and show that all of the collateral

has been accounted for and properly liquidated and that liquidation

proceeds have been properly accounted for and applied correctly on the

loan. The Agency must be satisfied that the lender has accomplished

this in the manner set out in this subpart and that the lender has

maximized the collections in conducting the liquidation.

(2) The lender must show a breakdown on any protective advance

amount as to the payee, purpose of the expenditure, date paid, evidence

that the amount expended was proper, and that the amount was actually

paid.

(3) The lender must show a breakdown of liquidation expenses as to

the payee, purpose of the expenditure, date paid, evidence that the

amount expended was proper, and that the amount was actually paid.

(4) Accrued interest should be supported by attachments showing how

the amount was accrued by the lender. A copy of the promissory note and

ledger will be attached. If the interest rate was a variable rate, the

lender must include documentation of changes in the selected base rate

and when the changes in the loan rate became effective.

(e) Any net rental or other income that has been received by the

lender from the collateral will be applied on the guaranteed loan debt.

(f) Certain reasonable liquidation costs will be allowed during the

liquidation process. The liquidation costs will be submitted as a part

of the liquidation plan. Such costs will be deducted from gross

proceeds received from the disposition of collateral unless the costs

have been previously determined by the lender (with Agency concurrence)

to be protective advances. If changed circumstances after submission of

the liquidation plan require a revision of liquidation costs, the

lender will procure the Agency's written concurrence prior to

proceeding with the proposed changes. No in-house expenses of the

lender will be allowed. In-house expenses include, but are not limited

to, employees' salaries, staff lawyers, travel, and overhead.

(g) In those instances where the lender made authorized protective

advances, the lender may claim recovery for the guaranteed portion of

any loss of monies advanced as well as interest resulting from such

protective advances. These claims shall be included in the final Report

of Loss.

(h) After the final Report of Loss has been tentatively approved:

(1) If the actual loss is greater than any estimated loss payment,

such loss will be paid by the Agency.

(2) If the Agency conducted the liquidation, it will provide an

accounting to the lender and will pay the lender in accordance with the

Loan Note Guarantee.

(i) The amount payable by the Agency to the lender cannot exceed

the limits contained in the Loan Note Guarantee. If the Agency conducts

the liquidation, loss occasioned by accruing interest will be covered

by the guarantee only to the date the Agency accepts this

responsibility. When the liquidation is conducted by the lender, loss

occasioned by accruing interest will be covered to the extent of the

guarantee to the date of final settlement provided the lender proceeds

expeditiously with the liquidation plan approved by the Agency.

Sec. 1980.895 Future recovery.

After a loan has been liquidated and a final loss has been paid by

the Agency, any future funds which may be recovered by the lender will

be pro-rated between the Agency and the lender in accordance with the

guaranteed percentage even if the Loan Note Guarantee has been

terminated.

Sec. 1980.896 Termination of Loan Note Guarantee.

The Loan Note Guarantee under this subpart will terminate

automatically:

(a) Upon full payment of the guaranteed loan; or

(b) Upon full payment of any loss obligation or negotiated loss

settlement except for future recovery provisions; or

(c) Upon written request from the lender to the Agency, provided

that the lender holds all of the guaranteed portion and the original

Loan Note Guarantee is returned to the Agency.

Secs. 1980.897-1980.900 [Reserved]

Dated: September 24, 1997.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 97-26363 Filed 10-6-97; 8:45 am]

BILLING CODE 3410-XV-U