# Rural Development Guaranteed Loans > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3AE8-29151 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** December 17, 2008 - **Citation:** 73 FR 76698 ## Text DEPARTMENT OF AGRICULTURE Rural Utilities Service 7 CFR Part 1779 Rural Housing Service 7 CFR Part 3575 Rural Business-Cooperative Service Rural Utilities Service 7 CFR Parts 4279 and 4280 Rural Business-Cooperative Service Rural Housing Service Rural Utilities Service 7 CFR Part 5001 RIN 0570-AA65 Rural Development Guaranteed Loans AGENCIES: Rural Business-Cooperative Service, Rural Housing Service, Rural Utilities Service, USDA. ACTION: Interim rule with request for comments. SUMMARY: This interim rule establishes a unified guaranteed loan platform for the enhanced delivery of four existing Rural Development guaranteed loan programs—Community Facility; Water and Waste Disposal; Business and Industry; and Renewable Energy Systems and Energy Efficiency Improvement Projects. This interim rule eliminates the existing loan guarantee regulations for these four programs and consolidates them under a new, single part. In addition to consolidating these four programs, this interim rule incorporates provisions that will enable the Agency to better manage the risk associated with making and servicing guaranteed loans and that will reduce the cost of operating the guaranteed loan programs. DATES: This interim rule is effective January 16, 2009. Comments must be received on or before February 17, 2009. ADDRESSES: You may submit comments to this rule by any of the following methods: • Federal eRulemaking Portal: http://www.regulations.gov . Follow the instructions for submitting comments. • Mail: Submit written comments via the U.S. Postal Service to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., Washington, DC 20250-0742. • Hand Delivery/Courier: Submit written comments via Federal Express Mail or other courier service requiring a street address to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, 300 7th Street, SW., 7th Floor, Washington, DC 20024. All written comments will be available for public inspection during regular work hours at the 300 7th Street, SW., 7th Floor address listed above. FOR FURTHER INFORMATION CONTACT: Mr. Michael Foore, Rural Development, Business and Cooperative Programs, U.S. Department of Agriculture, 1400 Independence Avenue, SW., Stop 3201, Washington, DC 20250-3201; e-mail: Michael.Foore@wdc.usda.gov ; telephone (202) 690-4730. SUPPLEMENTARY INFORMATION: Executive Order 12866 This interim rule has been determined to be significant and was reviewed by the Office of Management and Budget in conformance with Executive Order 12866. The Agency conducted a qualitative benefit cost analysis to fulfill the requirements of Executive Order 12866. Based on the results of this qualitative analysis of the benefits and costs of the interim rule, the Agency has concluded that the net effect of the rule will be beneficial in part due to improved underwriting. Copies of the benefit cost analysis may be obtained from Cheryl Thompson, Regulations and Paperwork Management Branch, Support Services Division, U.S. Department of Agriculture, Rural Development, STOP 0742, 1400 Independence Ave., SW., Washington, DC 20250-0742 or by calling (202) 692-0043. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) of Public Law 104-4 establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, Rural Development 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 one year. When such a statement is needed for a rule, section 205 of UMRA generally requires Rural Development to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost-effective, or least burdensome alternative that achieves the objectives of the rule. This interim rule contains no Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local, and tribal governments or the private sector. Thus, this rule is not subject to the requirements of sections 202 and 205 of the UMRA. Environmental Impact Statement This document has been reviewed in accordance with 7 CFR part 1940, subpart G, “Environmental Program.” Rural Development has determined that this action does not constitute a major Federal action significantly affecting the quality of the human environment, and in accordance with the National Environmental Policy Act (NEPA) of 1969, 42 U.S.C. 4321 et seq. , an Environmental Impact Statement is not required. Loan applications will be reviewed individually to determine compliance with NEPA. Executive Order 12988, Civil Justice Reform This interim rule has been reviewed under Executive Order 12988, 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 this rule; and (3) Administrative proceedings in accordance with the regulations of the Department of Agriculture National Appeals Division (7 CFR part 11) must be exhausted before bringing suit in court challenging action taken under this rule unless those regulations specifically allow bringing suit at an earlier time. Executive Order 13132, Federalism It has been determined, under Executive Order 13132, Federalism, that this interim rule does not have sufficient federalism implications to warrant the preparation of a Federal Assessment. The provisions contained in the interim rule will not have a substantial direct effect on States or their political subdivisions or on the distribution of power and responsibilities among the various government levels. Regulatory Flexibility Act This interim rule has been reviewed with regard to the requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). Rural Development has determined that this rule will not have a significant economic impact on a substantial number of small entities. Rural Development made this determination based on the fact that this regulation only impacts those who choose to participate in the program. Small entity applicants will not be impacted to a greater extent than large entity applicants. Executive Order 12372, Intergovernmental Review of Federal Programs Rural Development Guaranteed Loans are subject to the Provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials. Rural Development conducts intergovernmental consultation in the manner delineated in RD Instruction 1940-J, “Intergovernmental Review of Rural Development Programs and Activities,” available in any Rural Development office, on the Internet at http://rurdev.usda.gov.regs , and in 7 CFR part 3015, subpart V. Executive Order 13175, Consultation and Coordination With Indian Tribal Governments This executive order imposes requirements on Rural Development in the development of regulatory policies that have tribal implications or preempt tribal laws. Rural Development has determined that the interim rule does not have a substantial direct effect on one or more Indian tribe(s) or on either the relationship or the distribution of powers and responsibilities between the Federal Government and the Indian tribes. Thus, this interim rule is not subject to the requirements of Executive Order 13175. Programs Affected The Catalog of Federal Domestic Assistance Program numbers assigned to this program are: 10.760, Water and Waste Disposal Systems for Rural Communities; 10.766, Community Facilities Loans and Grants; 10.768, Business and Industry Loans; and 10.775, Renewable Energy Systems and Energy Efficiency Improvements Program. Paperwork Reduction Act Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR part 1320), the information collection provisions associated with this interim rule have been submitted to the Office of Management and Budget (OMB) for approval as a new collection and assigned OMB number 0570-0054. In the publication of the proposed rule on September 14, 2007, the Agency solicited comments on the estimated burden. The Agency received one public comment letter in response to this solicitation. This information collection requirement will not become effective until approved by OMB. Upon approval of this information collection, the Agency will publish a notice in the Federal Register . Title: Rural Development Guaranteed Loans. OMB Number: 0570-0054 (assigned) Type of Request: New collection. Expiration Date: Three years from the date of approval. Abstract: The majority of information being collected is associated with lender applications and its associated requirements for lender entities seeking to participate in the program and with loan guarantee applications. The types of information collected for lender applications include, but is not limited to, basic data about the lending entity and a summary of the lending entity's loan origination and servicing policies and procedures as well as, as applicable, its lending history and experience and its relationship with its regulator. The type of information collected with the guarantee application depends on whether it is being submitted by an approved lender or a preferred lender. Approved lender guarantee applications require more information to be submitted than a guarantee application from a preferred lender. Guarantee applications from approved lenders must contain the lender's analysis and credit evaluation, environmental information, technical reports, energy audits or assessments, appraisals if available, business plan, feasibility study, credit reports, and financial statements. An Affirmative Fair Housing Marketing Plan is required where applicable. Guarantee applications from preferred lenders must contain information sufficient for the Agency to confirm project and borrower eligibility, a copy of the lender's loan evaluation and analysis, internal loan approval documents, and environmental information. Information is also collected when the loan is being approved (e.g., conditional commitment, lender's agreement). Once the loan is in place, information is collected during the servicing of the loan. For example, loan status reports, including information on loans that are in default, and borrower financial reports are provided to the Agency by the lender. Additional information is collected when changes occur during the life of the loan (e.g., mergers, subordinations, transfers and assumption). The estimated information collection burden has increased by approximately $357,500, from $2,933,520 estimated for the proposed rule to $3,290,998 estimated for the interim rule. The majority of this increase is attributable to two changes. One change is the addition of the requirement for other lending entities (i.e., those that are not regulated or supervised) to undergo an examination acceptable to the Agency in order to participate in the program. This change, made in response to public comment, will help the Agency manage institutional risk. The second change is the removal of the low documentation application for guarantee. This was also eliminated in response to public comment and further helps the Agency manage institutional risk by requiring approved lenders to submit more information on each guaranteed loan requested. Together, these two changes account for approximately 90 percent of the increase in costs. Other changes are accounted for by such changes as requiring additional notifications (e.g., loan classifications, changes in a lender's policies and procedures), additional guarantee application requirements (for Community Facility and Water and Waste Disposal guaranteed loans), and submittal of borrower financial reports. These changes further help the Agency mitigate the risk associated with the guaranteed loans it approves. E-Government Act Compliance Rural Development is committed to complying with the E-Government Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes. I. Overview This interim rule implements a unified guaranteed loan platform for the delivery of four guaranteed loan programs. The guaranteed loan programs included in the interim rule are Community Facilities, Water and Waste Disposal Facilities, Business and Industry, and the Rural Energy for America Program (previously known as the Renewable Energy System and Energy Efficiency Improvements program). Provisions common to each of the four programs are found in subpart A of the rule. Provisions specific to an individual program are found in subpart B of the rule. The unified guaranteed loan platform will allow USDA Rural Development to simplify, improve, and enhance the delivery of these four guaranteed loan programs across their service areas. II. Background By statutory authority, USDA Rural Development is the leading Federal advocate for rural America, administering a multitude of programs, ranging from housing and community facilities to infrastructure and business development. Its mission is to increase economic opportunity and improve the quality of life in rural communities by providing the leadership, infrastructure, venture capital, and technical support that enables rural communities to prosper and adapt to new technologies, products, and markets. To achieve its mission, USDA Rural Development provides financial support (including direct loans, grants, and loan guarantees) and technical assistance to help enhance the quality of life and provide the foundation for economic development in rural areas. USDA Rural Development has used the four guaranteed loan programs included in this interim rule, as well as other guaranteed loan programs, to achieve Rural Development's mission. The regulations that are being combined under the interim rule have developed over time and, in some aspects, independently of each other. Issues have developed when looking at all four program regulations as a whole as well as individually. This was stated in the proposed rule published on September 14, 2007, Federal Register (72 FR 52618). The four issue areas identified by Rural Development are: Inefficiencies . Many of the same lenders and, in some cases, borrowers, seek loan guarantees under more than one of these four programs. Thus, the same entities are required to learn multiple programs. This is inefficient and costly to the lenders and makes the programs less attractive to lenders. Currently, when new programs are implemented, a whole new regulation is developed that, in many respects, addresses or adopts many of the same requirements. Time and effort are wasted in readdressing issues during the development of new program regulations leading to inefficient rulemaking and a delay in program implementation. Inflexibility . Maintaining four separate sets of basic requirements creates certain inflexibilities. For example, with each program administered under separate regulations, any change to basic requirements calls for multiple concurrences. Similarly, adding a new program requires the addition of a new set of basic requirements, as these are not currently shared. Use of Agency Resources . Agency personnel spend a large amount of time performing process-related tasks that are not necessarily productive in making loan guarantees available to more lenders and, in turn, to more borrowers. These tasks are often inefficient and could be better managed by the private sector at the lender level. Further, these tasks are applied equally regardless of the relative level of risk of the associated loans. In sum, the current delivery of these four programs is not making the best use of Agency resources. Risk Management . In making and managing a portfolio of loan guarantees, consideration must be given to project risk, institutional risk, Agency loss exposure, and internal operational risk. Project risk refers to the ability of a project to repay its debt. The current process relies on the lender's evaluation of the project and then the Agency's review of the lender's analysis. The types of information required to be assessed under each of the programs by the lender may vary. Currently, the Agency lacks definitive parameters to evaluate project risk and is inconsistent in its evaluation of risk across State Offices. The lack of definitive parameters might create more risk. It allows projects to be funded based on completed processes as opposed to set evaluation criteria. This can result in funding more risky projects that may come at the expense of less risky projects over time because of limited program funds. Institutional risk refers to the quality of the lender seeking the loan guarantee. Some lenders simply do a better job at managing their portfolios and thereby have a lower rate of defaults. The current system does little to pre-qualify lenders; that is, the criteria for a lender to originate a loan with the Agency are insufficient. Agency loss exposure refers to the Agency's risk for potential loss in any one project in terms of the percent of guarantee and the size of the loan. Currently, Agency loss exposure is managed by putting limits on the percent of guarantee relative to the size of the loan, by having collateral requirements, and, for some of the programs, by limiting the size of the loan. While these limits are the primary mechanism for managing Agency loss exposure, the current programs could do more to manage this risk. Agency operational risk refers to internal weaknesses inherent in administering multiple programs using a variety of regulations that require unique sets of processes and procedures. Rural Development is addressing the issues associated with these four guaranteed loan programs through this unified guaranteed loan platform. This platform addresses the inefficiencies in maintaining separate regulations, better manages the risks associated with their delivery, significantly reduces inconsistencies in the implementation of these four programs across State offices, improves underwriting for loan guarantees, and reduces operational risk. By implementing a defined set of criteria to assess lender performance, Rural Development improves its management of lenders participating in these programs. III. Discussion of the Interim Rule USDA Rural Development is issuing this regulation as an interim rule, with an effective date January 16, 2009. All provisions of this regulation are adopted on an interim final basis, are subject to a 60-day comment period, and will remain in effect until the Agency adopts a final rule. IV. Changes to the Rule This section presents changes to the proposed rule. Most of the changes were the result of the Agency's consideration of public comments to the proposed rule. Some changes, however, are being made in response to the provisions of the 2008 Farm Bill. The changes to the proposed rule are presented by section. Unless otherwise indicated, rule citations refer to those in the interim rule. Highlighted Changes There were several portions of the rule that drew numerous comments. The following list highlights some of the changes made to the rule. These changes are also presented in the section specific change portion that follows this list. • Cash equity as a minimum financial criterion has been replaced with a debt-to-tangible net worth ratio criterion. • Low application documentation provisions have been deleted. • Preferred lender status now applies only to the Business and Industry program and the requirements for becoming a preferred lender have changed. The Agency may administratively allow other programs to have preferred lender status at some date in the future and, in this event, would publish a Federal Register Notice to this effect. • The requirement that a lender comply with either its lending policies and procedures or those in the rule, whichever is more stringent, has been modified by the addition of the phrase “unless otherwise approved by the Agency.” • Lenders are not required to submit copies of their policies and procedures, but are instead to submit a written summary of their policies and procedures when submitting an application. • The proposed provision that “The guaranteed portion will be paid first and given preference and priority over the unguaranteed portion” has been replaced with “the unguaranteed portion of the loan will neither be paid first nor given any preference or priority over the guaranteed portion.” Section Specific Changes Subpart A—General Provisions Purpose and Scope (§ 5001.1) This section has been revised in two ways. First. Paragraph (a) of this section adds that the provisions of this part apply only to those guaranteed loan programs that are included in subpart B. This clarifies the scope of the part. Second. The Agency added paragraph (b) to clarify the relationship between the provisions in subpart A and those in subpart B. By including this paragraph, the Agency was able to remove from the rest of the rule such clauses as “unless otherwise specified in subpart B.” Definitions (§ 5001.2) The Agency made numerous changes to the definitions section of the rule, including redefining certain terms, adding new definitions, and deleting several definitions. The following identify each affected term. Applicant . This definition was deleted. Approved lender . This definition was added to clarify responsibilities. Borrower . This definition was redefined, in two ways, in order to clarify who constitutes a borrower and to identify in the rule which requirements apply to the borrower or to the lender or to both. First. The word “entity” was replaced with “person” and the phrase “or seeks to borrow” was added after “The person that borrows.” Second. The definition for “person” was added. Business plan . This definition was clarified by replacing the word “applicant” with “borrower.” Conditional commitment . The Agency added “of commitment” after “The Agency-approved form” and replaced “it” with “the lender.” Conflicts of interest . This definition was removed. The Agency has made revisions elsewhere in the rule such that the Agency does not believe that this term needs to be defined in the rule. Instead, the Agency will provide guidance on this term in the handbook to the rule. Cooperative organization . This definition was expanded to include “any entity that is legally chartered as a cooperative.” This was done to correct an oversight in the proposed rule that would have excluded “true” cooperatives. Day . This definition was added for clarity. Debt coverage ratio . This definition was revised in response to comments to make the term more in keeping with normal banking practice. Essential community facility. This definition was redefined in three ways: First. At the beginning of the definition, the Agency added “(including machinery, and/or equipment)” after “The physical structure” and before “financed” to help illustrate what physical structure includes. Second. The sentence “Not include a project that benefits a single individual or group of single individuals as opposed to a class within a community” was replaced with “Benefit the community at large.” The Agency believes that this change better identifies the Agency's intent. (paragraph (3)) Third. The phrase “Be located in a rural area” was removed. The Agency moved this phrase to subpart B for the Community Facilities program, where the Agency believes it is more appropriate. Existing businesses. The second sentence of this definition has been rewritten to further define certain types of changes that constitute existing businesses. Feasibility study. This definition was revised to state that the analysis is “by a qualified consultant.” High impact business. Significant revisions to this definition clarify what businesses constitute a “high impact” business. Immediate family. This definition adds reference to “or adoption,” to individuals living within the same household, and to domestic partners. The definition now reads “Individuals who are closely related by blood, marriage, or adoption, or live within the same household, such as a spouse, domestic partner, parent, child, brother, sister, aunt, uncle, grandparent, grandchild, niece, or nephew.” Lender. This definition was redefined to clarify the relationship between an entity that is seeking to participate (lending entity) and one that has been approved (lender). Lender's agreement. This definition was revised to refer to it as a form. Lending entity. This definition was added to clarify the applicability of the rule's requirements. Loan note guarantee. This definition was revised to refer to it as a form. Material change. This definition replaces the definition for “substantive change” and is used to provide consistency with the rule. Monetary default. This definition was added to clarify when certain requirements in the rule apply to “monetary defaults” or to defaults in general. Negligent loan origination. This definition was revised by changing “at the time of the loan” to “at the time the loan is made.” This clarifies how this aspect of negligent loan origination will be evaluated by the Agency. (paragraph (2)) Negligent loan servicing. The phrase “with its current servicing policies and procedures” was replaced with “with its servicing policies and procedures in use by the lender at the time the loan is made.” This clarifies how this aspect of negligent loan servicing will be evaluated by the Agency. (paragraph (2)) Other lending entity. This definition was added to clarify the provisions of the rule. Permanent working capital. This definition was deleted. Instead, as shown below, the Agency is defining “working capital.” This change was made to clarify the Agency's intent and to make the Agency's intent clearer to the commercial lending community. Person. This definition was revised to include public bodies, which will ensure such entities as Tribes are included. Post-application. There were two changes to this definition. First. The word “applicant” was replaced with “borrower” to clarify that it is the borrower's eligibility being determined and not the lender's eligibility. Second. The phrase “to score the application” was removed because it is no longer needed under the rule. Pre-application. This definition was added to clarify what constitutes a pre-application. Preferred lender. This definition was added to clarify who is subject to the preferred lender provisions of the rule. Preliminary architectural report. This definition was added as a conforming change to the rule. Preliminary engineering report. Reference to the RUS bulletins was removed. These will be addressed in the handbook to the rule. Promissory note. This definition was revised to remove the phrase “or on demand” from the end of the first sentence because guaranteeing a demand note can create a balloon payment. Qualified consultant. This definition was added because the rule now has provisions that require the use of a “qualified consultant.” Regulated or supervised lender. This definition was revised by removing the word “credit” and by replacing the word “and” with “or” in two places to ensure that the sentence was not interpreted as requiring both conditions. Renewable biomass. This definition was added because the revision to the definition of “renewable energy” uses the term. This definition is from the 2008 Farm Bill. Renewable energy. This definition was revised based on the definition in the 2008 Farm Bill. Rural or rural area. This definition was revised to clarify what constitutes rural or rural areas. In addition, a paragraph was added for determining which census blocks in an urbanized area are not in a rural area. Startup business. This definition was completely revised in response to comments to clarify the types of business that would constitute startup businesses. State. This definition was clarified to indicate that “any of the 50 States” referred to those “of the United States.” Substantive change. This definition was removed and replaced by the definition “material change.” Tangible net worth. This definition was added because it is now used in the financial metric criteria used to determine project eligibility. Unincorporated area. This definition was deleted because it is no longer needed as the result of changes to the definition of “rural or rural area.” Working capital. This definition was added to the rule to replace “permanent working capital.” It is defined as “Current assets available to support a business' operations and growth. Working capital is calculated as current assets less current liabilities.” Finally, paragraph (b), “abbreviations” was removed because it is no longer needed for the rule. Agency Authorities (§ 5001.3) Exception authority (§ 5001.3(a)). The Agency revised paragraph (a)(1) in this section by replacing “applicant” with “lender” to clarify that it is both the lender's eligibility and the borrower's eligibility that cannot be excepted. Review or appeal rights (§ 5001.3(b)). The words “Review or” were added to the heading. The definition was revised by removing reference to “the appropriate Agency official that oversees the program in question” so that a person seeking review would seek such review from the National Appeals Division in accordance with the Division's regulation. Oversight and Monitoring (§ 5001.4) Paragraph (a) was modified to clarify that the lender is required to cooperate fully with the Agency in the Agency's oversight and monitoring of lenders. Paragraph (b)(1) was corrected by replacing the word “lender” with “borrower” so that it now reads “any material change in the general financial condition of the borrower.” Paragraph (b)(2) was revised to indicate that monthly default reports are required for loans that are in monetary default. At proposal, this provision referred to a loan that goes into default, without specifying what kind of default. Paragraph (b)(3) was modified in two ways: First. Notifications are required within 15 calendar days rather than 5 days as was proposed. Second. Notifications are now being required for loans made under this part that receive any downgrade in their classification. Paragraph (b)(4) was added to require, from a lender who receives a final loss payment, an annual report on the lender's collection activities for each unsatisfied account for 3 years following payment of the final loss claim. This requirement was added to help the Agency manage and mitigate risk inherent in delivering and administering this program. Project Eligibility (§ 5001.6) Numerous changes were made to this section. First. The introductory text was modified to indicate that the requirements in this section apply to both borrower and project elements. Second. A new paragraph (a) replaces paragraphs (a) and (b) in the proposed rule. Paragraph (a) references the reader to the project requirements specified in subpart B. Because the requirements in subpart B address the two requirements identified in proposed paragraphs (a) and (b), the Agency removed these two proposed paragraphs from this section. Third. Paragraph (b), which corresponds to paragraph (c) in the proposed rule, addresses the financial metric criteria. Changes incorporated in this paragraph are: • The rule clarifies that these financial metric criteria are based on the borrower and not on the individual project; • The Agency has added that these financial metric criteria are to be calculated from “the realistic information in the pro forma statements or borrower financial statements * * * of a typically operating year after the project is completed and stabilized;” and • The Agency has replaced the proposed cash equity criterion with a debt-to-tangible net worth ratio criterion. Unauthorized Projects and Purposes (§ 5001.7) Paragraph (b) has been revised to refer to only golf courses and similar recreational facilities. The references to racetracks, water parks, and ski slopes found in the proposed rule have been relocated to subpart B in the Community Facilities provisions. However, the Agency has added additional underwriting criteria that allows the Agency to require higher underwriting standards for projects that are deemed more risky, such as racetracks and water parks. Paragraph (c), which addresses businesses deriving more than 10% of its annual gross revenue from gambling activity, has been modified by allowing State-authorized proceeds and, for public bodies and for not-for-profit approved projects only, any other funds derived from gambling proceeds, as approved by the Agency, to be excluded from this calculation. Paragraph (e) was reorganized to make clear that “made by other Federal agencies” applies to loans and not to lines of credits or lease payment. The introductory text to paragraph (e) was revised to read “Any guarantee of a:” rather than “Any:”. Proposed paragraph (g), which addressed facilities used primarily for the purpose of housing Federal and State agencies, was removed from subpart A in the rule and is addressed, instead, in subpart B for Community Facilities. Paragraph (h) addresses any business deriving income from illegal drugs, drug paraphernalia, and other illegal product or activity. At proposal, this paragraph used the phrase “deriving income from the sale of illegal drugs.” The Agency removed the phrase “the sale of” as it is unnecessary and potentially too restrictive. Paragraph (i) was rephrased to clarify that payment to the borrower for the rental of equipment or machinery owned by the borrower is an unauthorized purpose. Paragraph (j) was revised from “The payment of a judgment” to “The payment of either a Federal judgment or a debt owed to the United States, excluding other Federal loans.” Paragraph (k) was revised to read “Any project that creates, directly or indirectly, a conflict of interest or an appearance of a conflict of interest.” At proposal, this provision read “Any project resulting in a conflict of interest.” Borrower Eligibility (§ 5001.8) Paragraph (a)(1)(i) was modified to make clear that citizens of the U.S. include citizens of the Republic of Palau, the Federated States of Micronesia, the Republic of the Marshall Islands, and American Samoa. Paragraph (a)(1)(ii) was modified to address the clarification made in paragraph (a)(1)(i) of this section and to add “or controlled” after “Entities other than individuals must be at least 51% owned.” Paragraph (b) was revised to include the provision that a borrower would be ineligible if any owner with more than 20 percent ownership interest in the borrower was also found to be ineligible using the same criteria provided for the borrower itself. Participation Eligibility Requirements (§ 5001.9) The Agency has made numerous and significant changes to this section, which was titled Lender Eligibility and Designation in the proposed rule. A new paragraph (a) was added that identifies three requirements applicable to all lending entities (at proposal, the term used was lenders) that wish to participate in this program. These three requirements are: • Submittal of a written summary of their loan origination and servicing policies and procedures. Under the proposed rule, all lending entities would have been required to submit copies of these policies and procedures (see also § 5001.9(b)(1)(ii), (b)(2), and (c)(2)(i)). • Maintenance of internal audit and management control systems to evaluate and monitor the overall quality of their loan origination and servicing activities. This was not part of the proposed rule. • Not being otherwise debarred or suspended by the Federal government. This was part of the proposed rule. Paragraph (b), which corresponds to paragraph (a) under this section in the proposed rule, includes revisions for regulated or supervised lending entities that do not have an outstanding Agency guaranteed loan with the Agency (referred to at proposal as not having an existing portfolio) and for regulated or supervised lending entities that have at least one outstanding Agency guaranteed loan. The interim rule makes clear that the determination of whether a lending entity has an outstanding Agency guaranteed loan is based on the date on which the interim rule is effective. For regulated and supervised lending entities that do not have outstanding guaranteed loans, the interim rule makes clear as to whom the lending entity is to submit the lender application (§ 5001.9(b)(1)(i)). At proposal, the rule did not make clear to whom a federally chartered lending entity would submit the lender application. The interim rule requires regulated and supervised lending entities that do not have outstanding guaranteed loans to submit information on their lending history and experience with their lender application (§ 5001.9(b)(1)(iii)). This was not part of the proposed rule. The Agency believes that this requirement will allow the Agency to further reduce institutional risk. Lastly, for these lending entities, the interim rule identifies the process under which the Agency will determine whether or not to approve the lender application (§ 5001.9(b)(1)(iv)). At proposal, this process was not addressed other than to make reference to the requirement that the lending entity be in good standing with its regulator. For regulated or supervised lending entities that have at least one outstanding Agency guaranteed loan, the interim rule makes clear the process under which the Agency will approve such lenders (§ 5001.9(b)(2)(i) and (ii)). In paragraph (b)(4), the Agency has expanded the requirements for approved regulated or supervised lenders to maintain their approved status (proposed § 5001.9(a)(3)) to include the provision that if a lender fails to maintain its status as a lender or has no outstanding loans with the Agency for two consecutive years, it must reapply under this section for lender approval. The Agency has also modified the requirements for other lending entities (referred to as “other lenders” in the proposed rule) to participate in this program. The Agency has added the requirement that other lending entities must have undergone an examination acceptable to the Agency in order to be eligible for submitting a lender application for approval (§ 5001.9(c)(1)(iv)). The Agency added this criterion in response to public comments and its assessment that such an examination will assist the Agency in mitigating institutional risk. The results of this examination are to be submitted with the lender application (§ 5001.9(c)(2)(viii)). Paragraph 5001.9(c)(2) was modified to indicate that certificates of good standing must be obtained from the States in which the other lending entity is licensed and intends to conduct business; at proposal, this provision did not include the “is licensed” aspect of the provision. Paragraph 5001.9(c)(3) makes clearer the process that the Agency will use in reviewing other lending entity applications for lender approval, which is very similar to what was proposed. Paragraph 5001.9(c)(5), which addresses maintenance of approved status for approved other lenders, adds the requirement (as for regulated or supervised lenders) that if the lender fails to maintain its status as a lender or has no outstanding loans with the Agency for two consecutive years, it must reapply under this section for lender approval. Lastly, the Agency has revised the requirements associated with preferred lenders. Under the interim rule, preferred lender status will apply only to lenders participating in the Business and Industry guaranteed loan program. The Agency may administratively allow other programs to have preferred lender status at some date in the future and, in this event, would publish a Federal Register Notice to this effect. Under the proposed rule, any approved lender could apply for preferred lender status. In making this change, the Agency has dropped in its entirety proposed § 5001.9(c), Lender designation. Paragraph (d) of this section addresses all of the requirements associated with preferred lenders. The proposed rule (§ 5001.9(c)(1)(i) through (c)(1)(iii)) identified three criteria—current level of experience, number of losses (which varied depending on how long the lender was making commercial loans), and instances of Federal government negligent loan origination or servicing. The interim rule identifies seven criteria to be met to become a preferred lender: • Lender loss rate not in excess of a maximum “preferred lender” loss rate; • A minimum of 10 guaranteed Business and Industry loans, unless otherwise provided for in a notice in the Federal Register ; • Consistent practice of submitting guaranteed loan applications with accurate information supporting a sound loan proposal; • No more than one instance of Federal government loan origination or servicing where a loss has been paid; • Not be under any regulatory enforcement action; • Demonstrated high standards of professional competence; and • Adequate lender facilities to conduct its Agency business at a high level of performance. The Agency will publish in the Federal Register notices that identify the maximum preferred lender loss rate and minimum number of guaranteed Business and Industry loans to qualify for preferred lender status when there are changes in these rates or numbers. Paragraph (d)(2) requires the lender to identify the States in which the lender is seeking preferred status and to identify those branch offices for which it is seeking preferred lender status. Under the proposed rule, a lender approved as a preferred lender would have preferred lender status in each State. Paragraph (d)(3) allows the lender to have preferred lender status for a period not to exceed 4 years and requires the lender to submit material to retain preferred status once the 4 years (or other applicable time period) has expired. At proposal, there was no timeframe associated with preferred lender status. Paragraph (d)(4) identifies the situations under which a lender may lose its preferred status. The interim rule contains more specifics than found in the proposed rule and applies the criteria under which a lender can lose its preferred lender status regardless of how long the lender has been making commercial loans. Guarantee Application Process (§ 5001.11) The Agency has made two changes to this section. First. The Agency has clarified § 5001.11(b)(2) by defining what is meant by “those areas” in the paragraph where it states, in part, “the Agency may require the lender to obtain additional assistance in those areas where the lender does not have the requisite expertise to originate or service the loan.” Second. The Agency has added a new paragraph (c) in which the Agency will approve (subject to the availability of funds) or reject complete applications from preferred lenders within 10 working days after their receipt. This processing timeframe will not begin until all information required to make an approval decision, including a completed environmental review, is received by the Agency. Application for Loan Guarantee Content (§ 5001.12) The Agency has made significant changes to this section in the interim rule. First. The rule no longer differentiates between full documentation applications and low documentation applications. Instead, all approved lenders submit applications that contain information that is very similar to what would have been required under the proposed rule's “full documentation” applications. The interim rule does not contain a low documentation application provision and, as such, no longer requires a “determination of documentation level” provision as provided in the proposed rule (proposed § 5001.12(c)). Second. The interim rule provides requirements for guarantee loan applications from preferred lenders. While guarantee loan applications from preferred lenders require less documentation than those from approved lenders, they are not referred to as “low documentation” applications in the interim rule, but as “preferred lender” loan guarantee applications. The loan guarantee application requirements for approved lenders are the same as those found in the proposed rule for full documentation applications, with the following exceptions: • A copy of Form 10-K is no longer required to be submitted for companies listed on major stock exchanges (proposed § 5001.12(a)(5)). • The proposed loan agreement between the lender and the borrower is no longer required to be submitted (proposed § 5001.12(a)(6)). • Appraisals acceptable to the Agency are to be submitted if available. If they are not available at the time the application is submitted, complete appraisals must be submitted to the Agency before loan closing. At proposal, this requirement stated “Appraisals (as specified in § 5001.16(c))” (proposed § 5001.12(a)(8)). • In newly designated § 5001.12(a)(8), the “for for-profit” qualifier for nursing homes has been removed (proposed § 5001.12(a)(11)). • In newly designated § 5001.12(a)(9), the word “prospective” was removed because it is no longer needed (proposed § 5001.12.(a)(13)). • Proposed § 5001.12(a)(12) for preliminary engineering report was relocated to subpart B for the water and waste disposal facility program. • Proposed § 5001.12(a)(14) requiring the most recent audited financial statements if the guaranteed loan is $1 million or more is significantly revised. In the interim rule, this paragraph (§ 5001.12(a)(10)) requires borrowers that have been in existence for one or more years seeking a guaranteed loan of $3 million or more to submit their most recent audited financial statements, unless alternative financial statements are authorized by the Agency. For borrowers that have been in existence for one or more years seeking a guaranteed loan of less than $3 million, the interim rule requires such borrowers to submit either the most recent audited or Agency-acceptable financial statements of the borrower. Lastly, for borrowers that have been in existence for less than one year, the interim rule requires the submittal of “the most recent Agency-authorized financial statements of the borrower regardless of the amount of the guaranteed loan request.” Paragraph 5001.12(a)(10)(iii) allows the Agency to request additional financial statements and related information depending on the complexity of the project. • Finally, newly designated § 5001.12(a)(11) has been added to provide the Agency the flexibility to request any additional information determined by the Agency as necessary to evaluate the application. The provisions for guaranteed loan applications for preferred lenders are found in § 5001.12(b), and are new to the rule. Preferred lenders are required to submit: • A copy of Form RD 5001-3, “Application for Loan Guarantee”; • Information sufficient for the Agency to confirm project and borrower eligibility; • A copy of lender's loan evaluation and analysis; • An internal loan approval document showing approval by in-house appropriate office/committee; and • Environmental information required by the Agency to conduct its environmental reviews (as specified in § 5001.16(h)). Lender Responsibilities—General (§ 5001.15) The interim rule contains three additional requirements applicable to all lenders participating in this program to help further mitigate institutional risk. These requirements are: • Notifying the Agency of any changes to its loan origination and servicing policies and procedures provided under § 5001.9(a). For any changes to the lender's loan origination and servicing policies and procedures that are inconsistent with the requirements of this part, the lender must notify the Agency in writing and receive written Agency approval prior to applying the changes to loan guarantees under this part. • Compiling and maintaining in its files a complete application for each guaranteed loan for at least one year after the final loss has been paid. • Maintaining internal audit and management control systems to evaluate and monitor the overall quality of its loan origination and servicing activities. Lender Responsibilities—Origination (§ 5001.16) The Agency has made a number of changes to this section. One editorial change throughout the section was the replacement of the words “prospective borrower” with “borrower” (e.g., § 5001.16(b)(2)(i)). General (§ 5001.16(a)). In the introductory text to § 5001.16(a), the Agency made two substantive changes. First. The Agency revised the first sentence to read: “The lender is responsible for originating all loans in accordance with its loan origination policies and procedures at the time the loan is made and with the requirements of this part.” The text in the proposed rule did not include “at the time the loan is made.” The revised sentence also replaces the phrase “current written policies and procedures” with “loan origination policies and procedures.” Second. The Agency revised the second sentence to read: “Where a lender's loan origination policies and procedures address a corresponding requirement in this part, the lender must comply with whichever is more stringent, unless otherwise approved by the Agency.” The text in the proposed rule did not include the phrase “unless otherwise approved by the Agency.” This added phrase is cross-referenced as necessary in other places within the interim rule (e.g., § 5001.16(b)). The inclusion of this phrase allows the Agency and the lender to work together and to consider each loan application on a case-by-case basis. The Agency has also added a requirement (§ 5001.16(a)(2)) for the lender to provide the Agency the lender's classification of the loan no later than 90 days after loan closing. Appraisals (§ 5001.16(c)). The Agency made three changes to the introductory text to this paragraph and one change to § 5001.16(c)(2). In the introductory text, the Agency included chattel collateral appraisals, which were not addressed in the proposed rule. In addition, the Agency dropped reference to specific sections within the Uniform Standards of Professional Appraisal Practices (USPAP) standards, as these were unnecessary to continue to include in the rule. Lastly, the Agency added the provision that complete appraisals must be submitted to the Agency before loan closing. In § 5001.16(c)(2), the Agency added that the potential effect of environmental hazards on the market value of the collateral are to be “determined in accordance with the appropriate ASTM Real Estate Assessment and Management environmental standards.” Personal, partnership, and corporate guarantees (§ 5001.16(d)). The heading has been revised to include “partnership.” In addition, here and elsewhere in the rule, the Agency revised the phrase “personal or corporate guarantees” (and similar phrases) to “personal, partnership, or corporate guarantees.” The proposed rule was not clearly written as which personal, partnership, and corporate guarantees could be used to secure a loan. A new paragraph (d)(1) has been added to make clear that secured, unconditional personal, partnership, and corporate guarantees may be used to determine the security of the loan, but that unsecured, unconditional personal, partnership, and corporate guarantees will not be considered in determining whether a loan is adequately secured for loan making purposes. Re-designated paragraph (d)(2) addresses Agency-approved, unsecured personal, partnership, and corporate guarantees and incorporates the provision found in the proposed rule under proposed § 5001.16(d)(1) and (d)(2). Concerning exceptions to the requirement for personal guarantees, the Agency replaced “concurred by the Agency approval official” with “approved by the Agency.” Lastly, a new paragraph (d)(3) was added to address the requirement for guarantors to execute an Agency-approved unconditional guarantee (which was required in the proposed rule). The interim rule adds three provisions to explain how amounts paid by the Agency will constitute a Federal debt and the handling of interest charges. These provisions are: • Any amounts paid by the Agency on account of liabilities of an Agency guaranteed loan borrower will constitute a Federal debt owed to the Agency by the guaranteed loan borrower. In such case, the Agency may use all remedies available to it, including offset under the Debt Collection Improvement Act of 1996, to collect the debt from the borrower. • Any amounts paid by the Agency pursuant to a claim by a guaranteed program lender will constitute a Federal debt owed to the Agency by a third-party guarantor of the loan, to the extent of the amount of the third-party guarantee. In such case, the Agency may use all remedies available to it, including offset under the Debt Collection Improvement Act of 1996, to collect the debt from the third-party guarantor. • In all instances under the above paragraphs, interest charges will be assessed in accordance with 7 CFR 1951.133. Design requirements (§ 5001.16(e)). The Agency made two substantive changes to this paragraph. First. The phrase “or other Agency-approved code” was added to the end of the first sentence. Second. In the second sentence the word “original” was replaced with the word “approved.” Compliance with other Federal Laws (§ 5001.16(g)). The Agency removed the last sentence in the proposed rule text, because it is not applicable to guaranteed loans. Conflicts of interest (§ 5001.16(i)). The Agency added the phrase “and appearances of conflicts of interest” to the end of this paragraph, which should have been included in the proposed rule. Surety (§ 5001.16(j)). The Agency added this paragraph to the rule. Under this paragraph, surety will be required in cases when the guarantee will be issued prior to completion of construction unless the contractor will receive a lump sum payment at the end of work. In addition, surety is to be made a part of the contract, if the applicant requests it or if the contractor requests partial payments for construction work. Finally a latent defects bond may be required to cover the work in instances where no surety is provided and the project involves pre-commercial technology, first of its type in the U.S., or new designs without sufficient operating hours to prove their merit. Lender's Responsibilities—Servicing (§ 5001.17) General (§ 5001.17(a)). Consistent with the revision made to § 5001.16(a), the Agency revised the second sentence to read “Where a lender's loan servicing policies and procedures address a corresponding requirement in this part, the lender must comply with whichever is more stringent, unless otherwise approved by the Agency.” The text in the proposed rule did not include the phrase “unless otherwise approved by the Agency.” This added phrase is cross-referenced as necessary in other places within the interim rule (e.g., § 5001.17(b)). The inclusion of this phrase allows the Agency and the lender to work together and to consider each loan application on a case-by-case basis. The revised sentence also replaces “current written policies and procedures” with “loan servicing policies and procedures.” Certification (§ 5001.17(b)). The phrase “current written” was removed from this paragraph and a cross-reference to the exception to the “whichever is more stringent” requirement in paragraph (a) of this section was added. Audits (§ 5001.17(c)). This is a new provision, which requires lenders, when applicable, to audit a borrower in accordance with Office of Management and Budget requirements. Financial reports (§ 5001.17(d)). This is a new provision addressing when lenders are to submit financial reports of the borrower. The requirements differ depending on whether or not the lender is a regulated or supervised lender. Specifically, these requirements are: • For regulated or supervised lenders, the information that would be contained in financial reports required by the appropriate regulatory institution. Unless otherwise provided in the Conditional Commitment, such information must be submitted at the same time it should be made available to the appropriate regulatory institution. • For lenders who are not regulated or supervised, financial reports as required in the Conditional Commitment. Collateral inspection and release (§ 5001.17(e)). As proposed (§ 5001.17(c)), the Agency would have been allowed to require the lender to obtain prior Agency approval of any release of collateral and to require an appraisal on the remaining collateral in cases in which the Agency determined that it may be adversely affected by the release. Because the proposed rule did not clearly indicate when such appraisals would be required, the Agency has revised this provision to state that: • It will require prior approval of the release of collateral except in two instances—where the proceeds are used to pay down debt in order of lien priority, or to acquire replacement equipment, or where the release of collateral is made under the abundance of collateral provision of an applicable security agreement ( e.g. , a blanket security agreement); and • Appraisals on the collateral being released will be required on all transactions exceeding $250,000. The Agency has also revised this paragraph by adding the phrase “unless otherwise approved by the Agency in writing” to the end of the last sentence and deleting “In all cases” from the beginning of the last sentence, which now reads in full “The sale or release of collateral must be based on an arm's length transaction, unless otherwise approved by the Agency in writing.” Processing transfers and assumptions (§ 5001.17(f)(2)). As proposed (§ 5001.17(d)(2)), this paragraph would have allowed the lender to release the transferor (including any guarantor) from liability without Agency approval. The Agency has revised this provision to now require such releases to be subject to Agency approval. The Agency also added conditions under which the transferor (including any guarantor) may be released from liability (§ 5001.17(f)(2)(iii)). Mergers (§ 5001.17(g)) . As proposed (§ 5001.17(e)), the Agency would have been allowed to withdraw the guarantee when a borrower participates in a merger. This provision has been revised entirely. In the interim rule, all borrower mergers require prior approval by the Agency and the lender. Further, if a borrower merges without Agency approval, the lender must accelerate the loan unless subsequently agreed to in writing by the Agency. Subordination of lien position (§ 5001.17(h)). The Agency has made several revisions to the Agency's concurrence as follows: • The proposed rule required that the Agency's financial interest be enhanced. This has been changed to the subordination being in the Agency's best financial interest. • The proposed rule required that the collateral will remain adequate to secure the loan. This has been removed from the interim rule. • The proposed rule limited a subordination to a revolving line of credit to no more than one year. This has been changed to read “the subordination of line of credit does not extend the term of the line of credit and in no event exceeds more than three years.” Repurchases from holder(s) (§ 5001.17(i)). The Agency has made two changes to the introductory text to this paragraph. First. The first sentence was revised to refer to “monetary default” rather than “default” so that the first sentence now reads, in part, “the Agency to repurchase the unpaid guarantee portion of the loan in the case of borrower monetary default or failure of the lender to pay the holder its pro-rata share.” Second. In the beginning of the second sentence the word “or” is replaced with “and” to read: “When the lender and the Agency determine that repurchase is necessary to adequately service the loan, the holder must sell the guaranteed portion to the requesting entity.” This edit was made in order to ensure that the Agency always participates in this decision. The Agency added to this section a new paragraph (i)(2) addressing provisions regarding repurchase by lender for servicing. Within the provisions for repurchases by the Agency (§ 5001.17(i)(3)), “unless provided for in the Assignment Guarantee Agreement” was deleted from the end of the sentence “The lender may not charge the Agency any fees.” In addition, language was added addressing the calculation of the amount of the repurchase and the length of accruing interest that will be covered (§ 5001.17(i)(3)(iii)). Additional expenditures and loans (§ 5001.17(j)). The Agency made two edits to this provision. The words “will not” were replaced by the word “may” and the phrase “unless the expenditure or loan will violate one or more of the loan covenants of the borrower's loan agreement” was added at the end of the paragraph. Lender failure (§ 5001.17(k)). The Agency added the phrase “or ceases servicing the loan,” in the first sentence to read: “In the event a lending institution fails or ceases servicing the loan, the Agency will provide instruction to the successor entity on a case-by-case basis.” Delinquent loans (§ 5001.17(l)). The phrase “coordinate with the Agency and the borrower to” was removed so that the second sentence reads: “If a borrower is delinquent more than 30 days, the lender must implement appropriate curative actions to resolve the problem.” Protective advances (§ 5001.17(m)). The Agency added four additional conditions associated with protective advances. These additional conditions are: • Protective advances must constitute an indebtedness of the borrower to the lender and be secured by the security instruments. (§ 5001.17(m)(4)) • Upon Agency approval, protective advances can be used to pay Federal tax liens and other Federal debt. (§ 5001.17(m)(5)) • Protective advances and interest thereon at the note rate will be guaranteed at the same percentage of loss as provided in the Loan Note Guarantee. (§ 5001.17(m)(6)) • The maximum loss to be paid by the Agency will be determined according to the procedures specified in § 5001.17(p)(1) regardless of any protective advances made. (§ 5001.17(m)(7)) Liquidation (§ 5001.17(n)) . The Agency has made several modifications to this paragraph. First. In the introductory text, the phrase “and the Agency will then liquidate the loan” was added to the end of the paragraph to read: “The Agency reserves the right to unilaterally conclude that liquidation is necessary and require the lender to assign the security instruments to the Agency and the Agency will then liquidate the loan.” Second. The Agency has added the provisions that it will approve or disapprove the plan within 30 days and that, upon approval of the liquidation plan by the Agency, the lender may implement the plan. (§ 5001.17(n)(1)(i)). Third. A new paragraph (n)(1)(ii) has been added that addresses liquidation appraisals. This paragraph requires liquidation appraisals to be a part of the liquidation planning process. It further states that they are not required for liquidation plan approval, provided they are obtained prior to the completion of the liquidation. Lastly, this paragraph states that, if the outstanding principal loan balance including accrued interest is more than $200,000, the lender will obtain an independent appraisal report on all collateral securing the loan, which will reflect the current market value and potential liquidation value. Fourth. A new paragraph (n)(1)(iii) has been added containing provisions for appraisal costs. Under this new paragraph, any independent appraiser's fee will be shared equally by the Agency and the lender. In addition, if an environmental site assessment in accordance with the appropriate ASTM Real Estate Assessment and Management environmental standards of the property is necessary in connection with liquidation, the cost will be shared equally between the Agency and the lender. Fifth. A new paragraph (n)(1)(iv) has been added containing provisions for rent. Under this new paragraph, any net rental or other income that has been received by the lender from collateral will be applied on the guaranteed loan debt. Loss calculations and payment (§ 5001.17(p)) . The Agency has substantially rewritten the introductory paragraph to this section detailing how estimated losses and final losses are calculated. The Agency also made several other revisions to this paragraph. First. A new paragraph (p)(1) has been added to address maximum loss. The proposed rule (§ 5001.17(n)) stated in the introductory text that “The maximum loss allowed is the lower of the percent of loss guarantee times the foregoing or the sum of principal advances and accrued interest. The amount due the lender is adjusted to take into account protective advances and accrued interest. The amount due the lender is adjusted to take into account protective advances and interest.” The interim rule has revised the calculation of maximum loss to be in-line with current Business and Industry provisions. Second. The Agency added to this section a new paragraph (p)(2)(iv) stating that, upon payment of an estimated loss to the lender, interest accrual on the defaulted loan will be discontinued. Third. In § 5001.17(p)(5)(i), the Agency has revised this paragraph to indicate that “any loss will be based on the collateral value at the time the collateral is liquidated” rather than, as proposed, “at the time the lender obtains title.” Fourth. In § 5001.17(p)(5)(ii), the Agency has revised this paragraph to include that the lender “must submit an estimated loss claim when liquidation is expected to exceed 90 days.” At proposal, this paragraph read “it may request an estimated loss payment by submitting an estimate of loss that will occur in connection with liquidation of the loan.” Fifth. In § 5001.17(p)(6), the Agency has replaced the proposed text (§ 5001.17(n)(4)) that stated “The lender shall submit with each loss claim the current version of its written policies and procedures for origination and servicing” with “In response to a loss claim, the Agency may request and the lender must provide the Agency with a copy of the applicable loan origination and servicing policies and procedures in place for the loan.” Sixth. A new paragraph (§ 5001.17(p)(7)) has been added addressing final loss. This new paragraph states: When the Agency finds the final report of loss to be proper in all respects, it will approve the final loss. If the loss is less than the estimated loss payment, the lender will reimburse the Agency for the overpayment plus interest at the note rate from the date of the estimated loss payment. Basic Guarantee and Loan Provisions General (§ 5001.30) The Agency made three revisions to provisions within this section. First. Paragraph (b)(1) was revised so that the last sentence reads: “The unguaranteed portion of the loan will neither be paid first nor given any preference or priority over the guaranteed portion.” This means, for example, that in the case of a 1 million dollar loan where the Agency's participation is $800,000 and the lender's share is $200,000, each will be repaid pari passu; that is for each dollar repaid, the Agency would receive 80 cents and the lender 20 cents. This change addresses one of the major concerns expressed by commenters. At proposal, this sentence read: “The guaranteed portion will be paid first and given preference and priority over the unguaranteed portion.” Second. Paragraph (c)(1) was revised so that the last sentence reads: “Any claim against a Loan Note Guarantee or Assignment Guarantee Agreement that is attached to, or relating to, a note that provides for payment of interest on interest will be reduced to remove the interest on interest.” At proposal, this provision read: “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.” Third. Paragraph (c)(2) was revised so that the sentence that began “Any losses occasioned will not be enforceable by the lender to the extent” now states “Any losses occasioned by the lender will not be enforceable to the extent”. Guaranteed Loan Requirements (§ 5001.31) The Agency has made changes to interest rates, renewal fees, and lender fees, as described below. Interest rates (§ 5001.31(a)) . In the introductory text, the last sentence of the paragraph was removed. This sentence had stated: “When combined fixed and variable rates are used, the lender will provide the Agency with the overall effective interest rate for the entire loan.” Negotiated rates (§ 5001.31(a)(1)) . The Agency has added to the end of this paragraph “and will be subject to Agency concurrence” so that this paragraph now reads “Interest rates, interest rate caps, and incremental adjustment limitations will be negotiated between the lender and the borrower and will be subject to concurrence by the Agency.” Interest rate changes (§ 5001.31(b)(1)(i)) . The Agency has qualified the need to approve any change in the interest by adding “unless the only change is to the base rate of a variable interest rate.” Increases (§ 5001.31(b)(3)) . The Agency has revised this paragraph in identifying when increases in the interest rate are not permitted. At proposal, this paragraph read: “Increases in interest rates are not permitted except when the increase results from normal fluctuations in approved variable interest rates, or the increase returns the rate to the rate prior to the temporary reduction.” In the interim rule, this paragraph now reads: “Increases in interest rates are not permitted beyond what is provided in the loan documents. Increases from a variable interest rate to a higher interest rate that is a fixed rate are allowed, subject to concurrence by the Agency.” Guarantee fee (§ 5001.31(g)(1)) . The payment of the guarantee fee was changed from “at the time the Guarantee is issued” to “the time the lender requests the Loan Note Guarantee.” Renewal fee (§ 5001.31(g)(2)) . As proposed, the annual renewal fee would have been assessed annually based on a fixed fee rate established “at the beginning of the loan.” The Agency has revised this phrase to read: “at the time the loan is obligated.” Lender fees (§ 5001.31(h)) . The Agency has added text to indicate that late payment fees can be part of the lender fees that lenders may levy. The revised text reads, in part, “The lender may levy reasonable, routine, and customary charges and fees, including late payment fees, for the guaranteed loan.” The Agency has also identified default charges and additional interest expenses as two additional expenses that will not be covered by the Loan Note Guarantee. Conditional Commitment (§ 5001.32) The Agency has identified two specific conditions to which the lender must certify in the Conditional Commitment (§ 5001.32(a)(1) and (2)). These two conditions are: (1) The lender will monitor construction in accordance with approved plans and specifications, and (2) Project funds will be used only for Agency-approved project costs. Conditions Precedent to Issuance of Loan Note Guarantee (§ 5001.33) The Agency has substantially revised this section. Except for certification for insurance obtained by the borrower, the entire section has been revamped and greatly expanded by including in the rule 17 specific conditions (§ 5001.33(a)) to which the lender must certify prior to the Agency's issuance of the Loan Note Guarantee under § 5001.34. Subject areas addressed by the 17 conditions in § 5001.33(a) are: • Changes in the lender's loan conditions and requirement since issuance of the Conditional Commitment; • Planned property acquisitions; • Insurance; • Truth-in-lending and equal credit opportunity requirements; • Closing and security instruments; • Title to the collateral; • Disbursement of working capital; • Personal, partnership, or corporate guarantees; • Requirements of the Conditional Commitment; • Lien priorities; • Disbursement of loan proceeds; • Material changes during period between Conditional Commitment and issuance of the Loan Note Guarantee; • Financial interest in the borrower; • Loan agreement content; • Anti-Lobby Act (18 U.S.C. 1913); • Title to rights-of-ways and easements and title opinion or insurance; and • Maintaining the minimum financial criteria under which a loan application has been submitted, including those financial criteria contained in the Conditional Commitment, through the issuance of the Loan Note Guarantee. If these financial criteria are not maintained, the application will be ineligible. In addition, a new paragraph (b) has been added, which requires the lender to provide an explanation satisfactory to the Agency if the lender is unable to provide any of these certifications. Issuance of the Guarantee (§ 5001.34) A new paragraph (a), Loan agreement, has been added, which requires the lender to provide a copy of the loan agreement between the lender and the borrower to the Agency prior to loan closing. The Agency has moved the proposed requirement to provide the lender's certification and guarantee fee from proposed § 5001.34(a) into § 5001.34(b) and requires their provision at the time the lender requests the Loan Note Guarantee (rather than at loan closing as was proposed). Reference to the secondary market sale document has been dropped. Paragraph (c) essentially is the same as proposed § 5001.34(b), with the reference to the issuance of the Assignment Guarantee Agreement dropped in the interim rule. Reorganizations (§ 5001.36) The Agency has made changes to paragraphs (a) and (b) of this section. Change in borrower prior to closing (§ 5001.36(a)) . As proposed, the last sentence in this paragraph read: “Once the Conditional Commitment for Guarantee is issued, no substitution of borrower(s) or change in the form of legal entity will be approved, except that a change in the legal entity may be approved when the original borrower is replaced with substantially the same individuals or officers with the same interest as originally approved.” The Agency has replaced the “exception” clause with “unless Agency approval, in writing, is obtained” so that this sentence now reads: “Once the Conditional Commitment is issued, no substitution of borrower(s) or change in the form of legal entity will be approved, unless Agency approval, in writing, is obtained.” Transfer of lender prior to issuance of the Loan Note Guarantee (§ 5001.36(b)). The Agency has reorganized this paragraph and has made a few edits to it. One change to note is the clarification that when the transfer is from a preferred lender to an approved lender, the approved lender submits an application that conforms to the requirements for an approved lender application for guarantee as found in § 5001.12(a). Sale or Assignment of Guaranteed Loan (§ 5001.37) General (§ 5001.37(a)). The Agency revised the requirement for lender retention. At proposal, the lender would have been required to maintain “sufficient interest to perform its duties under this part.” In the interim rule, this has been revised to read that the lender must “retain a minimum of 5% of the total loan amount in its portfolio. The amount required to be retained must be of the unguaranteed portion of the loan and cannot be participated.” The Agency also modified paragraph (a)(5) by: (1) Removing “at, or”, and (2) Replacing “market” with “sell” and “in default” with “in monetary default” so that the paragraph now reads: “If the lender desires to sell all or part of the guaranteed portion of the loan subsequent to loan closing, the loan must not be in monetary default.” Lastly, the Agency removed proposed paragraph (a)(6), which addresses lender retention. This paragraph is no longer needed as a result of the other changes made in the interim rule. Servicing fee (§ 5001.37(b)) . The Agency revised this paragraph to read: “The lender cannot charge the Agency a servicing fee and no such fees are covered under the guarantee.” At proposal, the paragraph was titled “Termination of lender servicing fee,” and read: “The lender's servicing fee will stop when the Agency purchases the guaranteed portion of the loan from the secondary market. No such servicing fee may be charged to the Agency and all loan payments and collateral proceeds received will be applied first to the guaranteed loan.” Provisions in this paragraph were revised in § 5001.37(b) or carried over and revised in new paragraph, § 5001.37(c), as discussed below. Distribution of proceeds (§ 5001.37(c)) . The Agency added a separate paragraph to address the distribution of proceeds. As proposed, all loan payments and collateral proceeds received would have been applied first to the guaranteed loan. Instead, under the interim rule, all loan payments and collateral proceeds received will be applied to the guaranteed and unguaranteed portions of the loan on a pro rata basis. Subpart B—Program Specific Provisions Community Facilities Program (§ 5001.101) Eligible projects (§ 5001.101(a)) . The Agency has added “except as provided in paragraph (a)(6) of this section” to the end of the introductory text of paragraph (a). In addition, the Agency revised the requirements associated with refinancing (paragraph (a)(1)(vii) of this section) and added leasehold interest as a new eligible project (paragraph (a)(1)(viii) of this section). As proposed, the eligible project was “refinancing any loan,” and provided that “Except for the refinancing of Agency direct loans, refinancing of other loans will be limited to a minority portion of the guaranteed loan.” In the interim rule, this eligible purpose is now titled “refinancing debt (excluding working capital debt, operating or other debt whose repayment is scheduled to take place in one year or less)” and includes three specific conditions to be met: • The debts being refinanced are less than 50% of the total loan; • The debts were incurred for the facility or service being financed or any part thereof (such as interim financing, construction expenses, etc.); and • 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. The Agency, as noted above, has added “leasehold interest” as an eligible project and identifies several conditions, at a minimum, that must be met. These conditions are: • The length of lease must be greater than or equal to loan term; • There are no reverter clauses in the lease; and • There are no restrictive clauses that would impair the use or value of the property as security for the loan. The Agency has added a new paragraph (a)(5) to this section, which requires the project to primarily serve a rural area. The Agency has revised the demonstration of community support (paragraph (a)(6)) to indicate that community support can be used in lieu of the debt-to-tangible net worth ratio and the loan-to-value ratio requirements for in subpart A. This is a conforming change. Unauthorized projects and purposes (§ 5001.101(b)) . Proposed paragraphs (b)(1) and (b)(6) were removed because they were duplicative of subpart A provisions. The Agency added a new paragraph (b)(5), which identifies racetracks, water parks, and ski slopes as unauthorized projects and purposes. At proposal, these projects were identified in subpart A as unauthorized projects and purposes. Borrower eligibility (§ 5001.101(c)) . The Agency added introductory text to this paragraph, added a new paragraph (c)(1) to clearly specify the eligible borrowers, and revised paragraph (c)(2) to identify the YMCA, YWCA, Girl Scouts, and Boy Scouts as eligible organizations. At proposal, this paragraph only made reference to the later organizations. Additional application documentation provisions (§ 5001.101(d)) . The Agency has added four additional documentation requirements—organizational documents of the borrower, a complete list of governing board members of the borrower, a copy of the management and other legal documents between the borrower and the proposed management company, and a preliminary architectural report. Additional application processing requirements—appraisals (§ 5001.101(e)) . This is a new paragraph to the rule. This paragraph states: “When a loan's collateral appraises at a level less than 100% of the loan amount, the Agency will consider community support in evaluating the application for guarantee.” Additional origination responsibilities—leasehold interest (§ 5001.101(f)) . This is a new paragraph to the rule. This paragraph states: “Subject to approval by the Agency, a leasehold interest may be used as collateral for loans under this section provided the leasehold interest meets each of the conditions specified in paragraphs (a)(1)(viii)(A) through (C) of this section.” The cross-referenced paragraphs refer to the requirements for leasehold interest to be an eligible project. Additional servicing responsibilities—financial reports (§ 5001.101(g)) . This is a new paragraph, which states: “Annual financial reports required shall conform to 7 CFR part 3052.” Additional guarantee- and loan-related requirements (§ 5001.101(h)) . With the elimination of the low documentation and the preferred lender provisions for this program, the maximum percent guarantee for all projects under this section is now 90%. At proposal, a lower maximum percent guarantee (80%) was identified for lenders without preferred lending status who submit low documentation applications. Water and Waste Disposal Facilities Program (§ 5001.102) Project eligibility (§ 5001.102(a)) . The Agency has revised the introductory text of paragraph (a) inserting “except as provided in paragraph (a)(4) of this section” to the end of the introductory text. Paragraph (a)(1)(i) was revised from “a water or wastewater facility” to now read “a water, waste disposal, solid waste disposal, or storm water facility.” As for the Community Facilities program, the Agency has added a new paragraph (a)(3) to this section, which requires the project to primarily serve a rural area. Also, as for the Community Facilities program, the Agency has revised the demonstration of community support (paragraph (a)(4) of this section) to indicate that community support can be used in lieu of the debt-to-tangible net worth ratio and the loan-to-value ratio requirements for in subpart A. This is a conforming change. Unauthorized projects and purposes (§ 5001.102(b)) . Proposed paragraph (b)(2) was removed because it was duplicative of a subpart A provision. The Agency clarified paragraphs (b)(5) and (b)(8) by replacing the word “applicant” with “borrower.” The Agency added a new unauthorized project/purpose in paragraph (b)(6), which states: “Any project where an individual, or membership of another organization sponsors the creation of a nonprofit organization with the intent to control negotiations for employment or contracts that provide financial benefit to the sponsoring organization, affiliate organization, or a subsidiary organization of the sponsoring individuals or organization.” The Agency also removed proposed paragraph (b)(8), which addressed the payment of a judgment which would disqualify a borrower for a loan under proposed § 5001.102(c)(2), because changes elsewhere in the interim rule made this paragraph duplicative and thus no longer necessary. Additional lender approval requirements (§ 5001.102(d)) . This paragraph was added and states: “The examination required under § 5001.9(c)(1)(iv) may be conducted by the Agency or a qualified consultant.” This allows for the Agency to conduct the examination, whereas the referenced paragraph requires the examination to be conducted by a qualified consultant. Additional application documentation provisions (§ 5001.102(e)) . In paragraph (e)(1), the Agency rephrased “qualified independent consultant” to “qualified consultant,” because the term defined is “qualified consultant” and, as defined, includes the concept of “independent.” As for the Community Facilities program, the Agency has added three additional documentation requirements—organizational documents of the borrower, a complete list of governing board members of the borrower, and a copy of the management and other legal documents between the borrower and the proposed management company. The Agency removed proposed § 5001.102(d)(3), which addressed financial reports, because the requirement for financial reports is addressed in subpart A in the rule. The Agency added a new paragraph, § 5001.(e)(6), requiring lenders to submit intergovernmental consultation comments in accordance with 7 CFR part 3015, subpart V, of this title. Additional servicing responsibilities—financial reports (§ 5001.102(f)) . As for the Community Facilities program, this is a new paragraph, which states: “Annual financial reports required shall conform to 7 CFR part 3052.” Additional guarantee- and loan-related requirements (§ 5001.102(g)) . With the elimination of the low documentation and the preferred lender provisions for this program, the maximum percent guarantee for all projects under this section is now 90%. At proposal, a lower maximum percent guarantee (80%) was identified for lenders without preferred lending status who submit low documentation applications. Business and Industry Loan Program (§ 5001.103) Definitions (§ 5001.103(a)) . The Agency added two new definitions specific to this program in response to the 2008 Farm Bill. These definitions are for locally or regionally produced agricultural food product and for underserved community. Project eligibility (§ 5001.103(b)) . The Agency made several changes in this paragraph. First. The Agency added the requirement that a project be located in a rural area (§ 5001.103(b)(1)). Second. The Agency removed the word “permanent” so that § 5001.103(b)(2)(iv) now refers to working capital rather than to permanent working capital. Third. The Agency revised the conditions under which refinancing would be an acceptable use of Agency funds. At proposal (§ 5001.103(a)(1)(x)), the provision for refinancing any loan read: “Except for the refinancing of Agency direct loans, refinancing of other loans will be limited to a minority portion of the guaranteed loan.” In the interim rule, this provision (§ 5001.103(b)(2)(x)) reads: “refinancing any loan when the Agency determines that the project is viable and equal or better rates or terms are offered. Same lender debt refinancing will be additionally required to be less than 50% of the new loan amount unless the amount of the loan to be refinanced is already Federally guaranteed. Subordinated owner debt is not eligible.” Fourth. The Agency moved the word “complete” from in front of “pre-application” and placed it in front of “application” in § 5001.103(b)(2)(xi). Fifth. The Agency clarified that, while Business and Industry guarantee loan funds can be used for “professional services,” they cannot be used for either packager fees or broker fees (see § 5001.103(b)(2)(xii)). Sixth. The Agency modified the conditions associated with tourist and recreation facilities, including hotel, motels, and bed and breakfast establishments (§ 5001.103(b)(2)(xiii)) by adding “when the owner's living quarters is not included in the guaranteed loan” at the end of the paragraph. This change also makes this provision consistent with the change to § 5001.103(c)(1). Seventh. The Agency modified § 5001.103(b)(2)(xv) by replacing “with certain restrictions” with “with Agency-approved restrictions” so that this paragraph reads: “housing development sites with Agency-approved restrictions.” Eighth. The Agency added five additional uses and purposes for which guaranteed loan funds could be used as follows: • Mixed use commercial and residential buildings on a pro-rata basis (residential real estate use portion not eligible); • Operating lines of credit that are part of an overall guaranteed loan financing package under this section and that are used for certain payments (see § 5001.103(b)(2)(xix)); • Leasehold improvements, provided the underlying lease meets the requirements specified in § 5001.101(a)(1)(viii); • The purchase of preferred stock or similar equity issued by a cooperative organization or a fund that invests primarily in cooperative organizations, if the guarantee significantly benefits one or more entities eligible for assistance for the purposes described in paragraph (d) of this section; and • Establish and facilitate enterprises that process, distribute, aggregate, store, and market locally or regionally produced agricultural food products to support community development and farm and ranch income. The provision to allow lines of credit as an authorized use of loan funds, as noted above, is only available for the Business and Industry loan guarantee program at this time. Ninth. Lastly, the Agency removed proposed § 5001.103(a)(1)(xviii), assisting cooperative organizations, because such organizations are eligible borrowers and thus this provision is not required in this part of the section. Unauthorized projects and purposes (§ 5001.103(c)) . The Agency made changes to several paragraphs. First. The Agency clarified the end of § 5001.103(c)(1). At proposal, this provision read: “Businesses housed in private homes, except when the pro-rata value of the owner's living quarters is deleted from the value of the project.” The rule changes this to now read: “Businesses housed in private homes, except when the pro-rata value of the owner's living quarters is not included in the guaranteed loan.” Second. The Agency recast how § 5001.103(c)(2) reads, but did not change its effect. At proposal, this provision (§ 5001.103(b)(2)) read: “Projects in excess of $1 million that would likely result in the transfer of jobs from one area to another and increase direct employment by more than 50 employees.” In the rule, this now reads: “Any project that does not meet the requirements of paragraphs (d)(2), (d)(3), and (d)(4) in 7 U.S.C., § 1932.” This same change was made later in this section to § 5001.103(g)(2). Third. The Agency removed from the rule proposed § 5001.103(b)(3). Fourth. The Agency revised § 5001.103(c)(4) to address distributions or payment to immediate family members and employee-owned cooperatives. At proposal, § 5001.103(b)(5) read: “Distribution or payment to an individual owner, partner, stockholder, or beneficiary of the borrower or a close relative of such an individual when such individual will retain any portion of the ownership of the borrower.” In the rule, this provision now reads: “Distribution or payment to an individual owner, partner, stockholder, or beneficiary of the borrower or the immediate family of such an individual when such individual will retain any portion of the ownership of the borrower, unless the Agency has determined that the distribution or payment is a part of the transfer of ownership within: (i) The immediate family; or (ii) an Employee-owned Cooperative. Fifth. The Agency added a new paragraph (c)(5), addressing loan guarantees to lending institutions, investment institutions, and insurance companies. Sixth. The Agency removed proposed § 5001.103(b)(6), assistance to Government employees, because this is adequately covered by conflict of interest prohibitions. Seventh. The Agency added a new paragraph (c)(9) addressing loan funds may not be used to support inherently religious activities. Borrower eligibility (§ 5001.103(d)) . The Agency added a new paragraph (d)(1)(v), which makes cooperative organizations housed in an urban area eligible provided certain rural benefits and requirements are met. Additional borrower requirements (§ 5001.103(e)) . This is a new paragraph added as a result of the 2008 Farm Bill. This provision adds a requirement for borrowers with projects that establish and facilitate enterprises that process, distribute, aggregate, store, and market locally or regionally produced agricultural food products to support community development and farm and ranch income. Additional application process requirements (§ 5001.103(f)) . Two changes were made under this paragraph. First. Proposed § 5001.103(d) would have obligated funds using a priority scoring system if funds were insufficient to cover all applications pending approval. The Agency would also have established a scoring priority system each year for publication in the Federal Register . In the interim rule, the Agency has replaced this method for determining which applications pending approval would be funded (when there are insufficient funds to cover all applications pending approval) based on the date and time a complete application is received, with first priority going to those complete applications received first. Second. In response to the 2008 Farm Bill, a new paragraph has been added (§ 5001.103(f)(2)) in which the Agency in making or guaranteeing a loan for projects that establish and facilitate enterprises that process, distribute, aggregate, store, and market locally or regionally produced agricultural food products to support community development and farm and ranch income will give priority to projects that have components benefiting underserved communities. Additional application documentation provisions (§ 5001.103(g)) . The Agency added two new provisions to this paragraph. First. The Agency added a new paragraph (g)(1)(iii) addressing the requirement for intergovernmental consultation comments to be submitted in accordance with 7 CFR part 3015, subpart V, of this title. Second. The Agency added a new paragraph (g)(2) addressing simplified applications. This paragraph allows lenders to submit applications in accordance with § 5001.12(b) for loan guarantees of $400,000 or less. Additional origination responsibilities (§ 5001.103(h)) . The Agency has added four paragraphs concerning additional origination responsibilities and removed one proposed paragraph as described below. First. The Agency added paragraph (h)(1) on financial statements to this section. This paragraph requires consolidated financial statements for variable interest entities in accordance with the Financial Accounting Standards Board financial interpretation 46, Consolidation of Variable Interest Entities, and eliminating intercompany transactions. Second. The Agency added paragraph (h)(2)(ii) on leasehold interest as collateral to this section. This paragraph allows the use of leasehold interest as collateral subject to approval by the Agency provided the leasehold interest meets the requirements specified in § 5001.101(a)(1)(viii). Third. The Agency has added paragraph (h)(2)(iii) for the discounting of collateral to this section. This paragraph identifies requirements to be followed when discounting collateral for this program. These requirements are specified in paragraphs (h)(2)(iii)(A) through (E) of this section. Fourth. The Agency added paragraph (h)(3) on payment and performance bonds to this section. This paragraph requires a payment and performance bond sufficient to mitigate Agency risk if the project is never completed. Fifth. The Agency removed proposed § 5001.103(e)(1), which addressed audited financial statements, because the rule now contains the financial statements requirements in subpart A for all of the programs included in the rule. Thus, this proposed paragraph is not required in this section. Additional servicing requirements (§ 5001.103(i)) . The Agency added this paragraph, which addresses repurchases. This paragraph states: “Repurchased loans may be sold without recourse to third-party private investors.” Additional guarantee- and loan-related requirements (§ 5001.103(j)) . The Agency added two new paragraphs and revised three proposed paragraphs as described below. First. The Agency added paragraph (j)(1) addressing marginal or substandard loans to this section. This paragraph states: “It is not intended that the guarantee authority will be used for marginal or substandard loans or for the relief of lenders having such loans.” Second. The Agency added paragraph (j)(3) addressing five conditions for lines of credit, which are found in paragraphs (j)(3)(i) through (v) of this section. Third. The Agency has added a condition under which it may issue the Loan Note Guarantee prior to all planned property acquisition having been completed and all development having been substantially completed in accordance with plans and specification. This provision is found in paragraph (j)(4) of this section. Fourth. The Agency revised paragraph (j)(5) (paragraph (g)(3) at proposal) to specify that the funding limits are to be applied on a per borrower basis. At proposal, individual borrowers could have obtained guaranteed loans totaling more than $25 million (or $40 million, if a cooperative). In addition, the Agency removed reference to “under this section” in paragraphs (j)(3), (j)(3)(i), and (j)(3)(ii). Lastly, the Agency added a provision under which the maximum principal amount of $40 million may be made to cooperative organizations. As proposed, the $40 million limit would apply to rural projects processing value added commodities (proposed § 5001.103(g)(3)). In the interim rule, this maximum amount can now be applied to a project that “significantly benefits one or more entities eligible for assistance for the purposes described in paragraph (d) of this section.” This provision was added as required by the 2008 Farm Bill. Fifth. Because low documentation applications were dropped from the rule, the Agency has simplified the maximum loan guarantee percentages, which now apply equally to both approved and preferred lenders. There have been no changes to the maximum percent guarantees and loan amounts. Rural Energy for America Program (§ 5001.104) Project eligibility (§ 5001.104(a)) . The Agency has added the requirement that the project be located in a rural area in order to be eligible (§ 5001.104(a)(3)). The Agency also revised paragraph (a)(1) by removing the word “project” from the end of the paragraph, so that it now reads, in part, “or to make energy efficiency improvements.” The Agency has added a provision (§ 5001.104(a)(4)) that would enable a project to include the refinancing of any loan when the Agency determines that the project is viable and equal or better rates or terms are offered provided that the debt being refinanced will be less than 50% of the new loan amount. Additional application process requirements—obligation of funds (§ 5001.104(c)) . As for the Business and Industry program, proposed § 5001.104(c) would have obligated funds using a priority scoring system if funds were insufficient to cover all applications pending approval. The Agency would also have established a scoring priority system each year for publication in the Federal Register . In the interim rule, the Agency has replaced this method for determining which applications pending approval would be funded (when there are insufficient funds to cover all applications pending approval) based on the date and time a complete application is received, with first priority going to those complete applications received first. Additional application documentation provisions (§ 5001.104(d)) . The Agency made several modifications to this paragraph as described below. First. The Agency made two changes to the technical report requirement (§ 5001.104(d)(2)): • The $200,000 threshold in the interim rule is to be based on total eligible project costs, whereas at proposal this threshold was based on the size of the loan guarantee being sought. • In the interim rule, the lender is to submit the technical report “to the Department of Energy (DOE) for review unless otherwise stated in a Federal Register Notice.” This replaces the proposal language that discussed, in part, approval by the DOE and the submittal of a DOE technical report. Second. For energy assessments and audits (§ 5001.104(d)(3)), the interim rule makes clear that the lender is to submit energy assessments and audits to the Agency for review. This direction was not included in the proposed rule. Third. The Agency has clarified that the feasibility study is required for renewable energy system projects, and not for all projects, as would have been the case under the proposed rule, seeking a loan guarantee greater than $200,000 (§ 5001.104(d)(4)). Fourth. The Agency added a new paragraph (d)(5) addressing the requirement for intergovernmental consultation comments to be submitted in accordance with 7 CFR part 3015, subpart V, of this title. Additional origination responsibilities (§ 5001.104(e)) . The Agency has added this paragraph, which contains three requirements. These three requirements parallel those in the Business and Industry program. First. The Agency added a paragraph on financial statements (paragraph (e)(1) of this section). This paragraph requires consolidated financial statements for variable interest entities in accordance with the Financial Accounting Standards Board financial interpretation 46, Consolidation of Variable Interest Entities, and eliminating intercompany transactions. Second. The Agency added a paragraph on discounting collateral (paragraph (e)(2) of this section). This paragraph requires the discounting collateral for this program in accordance with the provision found in § 5001.103(h)(2)(iii). Third. The Agency added a paragraph on payment and performance bonds (§ 5001.104(e)(3)). This paragraph requires a payment and performance bond sufficient to mitigate Agency risk if the project is never completed. Additional guarantee- and loan-related requirements (§ 5001.104(g)) . The Agency has made a number of revisions to this paragraph, several of which were made in response to requirements in the 2008 Farm Bill. These revisions are described below. First. The Agency clarified in paragraph (g)(1) that the lender must certify to the conditions specified in the paragraph. Second. In response to the 2008 Farm Bill, the Agency added to this section paragraph (g)(2)(i), which establishes the maximum loan amount under this program at $25,000,000 and applies this limit on a per borrower basis. Third. In response to the 2008 Farm Bill, the Agency added to this section paragraph (g)(2)(ii), which lays out seven criteria that the Agency will take into account in determining the amount of a loan guarantee under this section (see paragraphs (g)(2)(ii)(A) through (G) of this section). Fourth. In response to the 2008 Farm Bill, the limit on matching funds has been raised from 50% to 75% (see paragraph (g)(3) of this section). Fifth. The Agency clarified that, while professional service fees are considered part of eligible project costs, packager fees and broker fees are not eligible project costs (see paragraph (g)(3)(v) of this section). Sixth. The Agency replaced “permanent working capital” with “working capital” in the list of eligible project costs (see paragraph (g)(3)(x) of this section). Discussion of Comments The proposed rule was published in the Federal Register on September 14, 2007 (72 FR 52618), with a 60-day comment period that ended November, 13, 2008. Comments were received from 55 commenters, yielding over 800 individual comments on the proposed rule, which have been grouped into similar comments. Commenters included Rural Development personnel, attorneys, financial institutions, trade groups, lender associations, and individuals. Most of the comments that the Agency judged to have merit have resulted in changes in the rule. There are also responses to many of the comments where the Agency has indicated that it will provide additional guidance in the handbook to the rule. The Agency sincerely appreciates the time and effort of all commenters. Responses to the comments on the proposed rule are discussed below. General Comment: Nine commenters stated that they “commend” or “support” USDA in proposing a unified guaranteed loan platform for its existing guaranteed loan programs. Response: The Agency appreciates the commenters' support of the proposed platform. Comment: In expressing their general opposition to the proposed rule, nine commenters stated that, if adopted as proposed, the rule would be the final step in getting the Agency out of the guaranty loan business and its mandate to create and preserve American jobs, because the Agency will have no lenders left participating in its programs. One commenter noted that the proposed rule is much more restrictive than the current regulations and that, if this rule is implemented, the Agency will lose the support of the lenders, particularly because of the requirement that lenders use the more restrictive of lender's loan policy or program regulations. Response: The Agency has made revisions to the rule in response to specific comments that address the general concerns of these commenters. For example, the rule does not require lending entities that wish to participate in the guaranteed loan programs included in this rule to submit copies of their loan origination policies and procedures, but instead a summary of those policies and procedures. As another example, the Agency reinstituted the current policy that the unguaranteed portion of the loan will neither be paid first nor given any preference or priority over the guaranteed portion. The Agency disagrees with the commenter that the requirement for a lender to comply with its own policies and procedures where those are more stringent than those in the rule will result in a lender being more or less inclined to participate in the loan guaranteed programs included in this rule. Where a rule provision is more stringent than a lender's particular corresponding loan origination or servicing policy or procedure, the Agency understands that such a lender may be more inclined not to participate. However, the Agency believes that in such instances it is necessary to require compliance with the rule's more stringent policy or procedure, unless otherwise approved by the Agency, in order to manage risk. Comment: One commenter stated that, as proposed, the requirements are too burdensome and serve no practical utility in eliminating project risk, borrower risk, or loan guaranty risk. This commenter also stated that, as proposed, the rule serves no practical utility to the Agency in making rural development guaranteed loan decisions, and increases the Agency's administration of the program rather than concentrating on rural economic development. Response: The Agency agrees with the commenter that the proposed rule had provisions that were unnecessarily burdensome and perhaps provided limited benefits. The Agency has revised the rule to incorporate many suggestions made by commenters. Under the interim rule, the Agency is requesting the minimum amount of information necessary to suitably evaluate risk. For example, rather than requesting copies of a lender's policies and procedures, the Agency is requesting that the lender provide a summary of its policies and procedures. In addition, the Agency is implementing a preferred lender program for Business and Industry guaranteed loans that further reduces lender burden and Agency staff time on such loan applications. Further, the preferred lender program in the rule has more tangible benefits to the lender. With these and other changes made throughout the rule, the Agency does not believe that the provisions of the rule will impose undue financial hardship or unattainable eligibility requirements for lending entities wishing to participate in the loan guaranteed programs included in this rule. Lastly, the Agency's goal is to better manage and reduce the risks discussed in the rule, not eliminate them as suggested by the commenter, from current program practices. To this end, the Agency believes that the rule achieves this goal. Comment: One commenter stated that the Agency's Rural Development loan programs included in the proposed rule have a mission to create jobs and stimulate rural economies. According to the commenter, most of the proposed rule would impose undue financial hardship or unattainable eligibility requirements, making them ineligible projects. Response: The Agency does not believe that the provisions will impose undue financial hardship or unattainable eligibility requirements. In addition, in response to specific comments that suggest reduction of unnecessary financial hardships and eligibility requirements, the Agency has made appropriate adjustments to the rule. For example, the Agency has revised the definition of debt coverage ratio to reflect its calculation on the basis of a typical year for the project. This reduces the eligibility issue for startup businesses and those that might experience hardships during economic downturns. The Agency has also removed the proposed equity requirement and replaced it with debt-to-tangible net worth ratio, a more useful and practical eligibility requirement. Comment: One commenter stated that he did not see an improvement with offering a unified guarantee loan platform, especially from the lenders' perspective. In the commenter's opinion, the complaint of inconsistency from the Agency is overblown by a very few lenders who cross state lines and program lines. According to the commenter, having the guaranteed loan program regulations located in one series (7 CFR part 5001) will be handy for Agency staff but doubts that the lending community will really care or appreciate the effort. Response: The Agency believes that having these guaranteed loan programs under one series (i.e., 7 CFR part 5001) will be useful to both Agency staff and lenders. It is the Agency's experience that there are a number of lenders currently participating in these guaranteed loan programs that cross state lines. This rule would expand the number of programs that these lenders can offer. Thus, the Agency believes there are tangible benefits to this platform that lenders will appreciate. Comment: One commenter stated that the proposed rule fails to address what the commenter characterized as a “lender- and borrower-unfriendly atmosphere (us against them)”. Another commenter stated that the Agency should look at financial institutions as partners in a worthwhile endeavor, and that the proposed changes will seriously diminish that partnership and will drive lenders away from the program. Response: The goal of the rule is to strengthen the partnership between the Agency and its lenders and borrower partners by streamlining the regulatory requirements of the guaranteed loan programs included in the rule. In addition, in preparing the rule, the Agency has accepted numerous comments from program stakeholders to further strengthen this relationship. Comment: One commenter stated that the Business and Industry program must leverage the skill and delivery systems that already exist within the commercial bank lending community of this country and that the key is to develop a sound and measurable approval process for lenders that includes (among other things) minimum capital, minimum reserves, qualified personnel, risk rate management, documentation and delinquency review, underwriting supervision, and historical review for continued authority. Response: The Agency agrees with the commenter and has accepted many of the lender's comments to ensure that this rule is consistent with business practices of the commercial lending community for the Business and Industry program and all of the programs associated with this rule's guaranteed loan platform. Comment: Five commenters stated that the Agency should address the current problems with the slow delivery system of the guaranty programs (minimum 1 month, but usually much longer). The commenters stated that these issues result in borrowers and/or lenders declining to be involved in the guaranty programs because the timeframes for turnaround and the variance in requirements are not realistic in today's world. Two of these commenters stated that they do not believe the rule, as proposed, does enough to address the slow delivery system. One commenter suggested that a better program for lenders, especially for Business and Industry lenders, would include streamlining the process to make sure the Agency can deliver the guarantees in a very timely basis. One of the commenters suggested that the Agency mandate approval time for loan approval and servicing actions, as the Small Business Administration (SBA) did years ago. Response: One of the goals of this regulatory process is to develop a better balance between the needs of the Agency to provide proper oversight over the loan guarantee programs versus the needs of our lender partners for rapid loan guarantee decisions. In response to this and other comments, the Agency has revised the rule to further reduce the burden on lenders and the Agency to address only those areas necessary to properly manage risk associated with the programs. For preferred lenders, the rule now commits the Agency to act on loan applications from preferred lenders within 10 working days of the receipt of a complete loan guarantee application. Lastly, the Agency notes that, through this new platform, the paperwork burden for this program has been reduced by approximately 25 percent. Comment: One commenter stated that the proposal retains the current limited delegated lending authority. According to the commenter, there is no value to requiring lenders to submit origination and servicing policies, provide monthly reports on loans in default, and provide notification within 5 days of any loan agreement violation, because these further restrict a lender's ability to manage these loans. The commenter recommended using the SBA's Preferred Lender Program as a guideline to expand delegated lending authority. Response: In response to this and other related comments, the Agency has revised the rule to provide more tangible benefits to the lender by: (1) Requiring lending entities seeking to participate in the guaranteed loan programs included in this rule to submit summaries of their loan origination and servicing policies and procedures, (2) Providing monthly reports on loans that are in monetary default (rather than any kind of default as was proposed), and (3) Providing notification of loan agreement violations within 15 calendar days (rather than 5 days as was proposed). Finally, the Agency reviewed several other loan guarantee programs, including those for the SBA and for the Farm Services Agency (FSA). The Agency determined that the FSA loan guarantee program had features more appropriate for this rule and has adopted a number of the FSA program features for this rule. Comment: One commenter stated that the delivery system that is so unique to the Agency, that has been so successful in the past, and that is envied by so many within government is being substantially abolished. The commenter also stated that local outreach, information, and accountability would become practically nonexistent. Response: The Agency agrees that its delivery system provides extraordinary service to our rural customers. The Agency believes that the adoption of this rule will better empower the Agency's delivery system team to provide even better service in the future by enabling Agency staff to engage in increased program outreach and community development, in large measure by eliminating regulatory redundancy and emphasizing lender expertise. Comment: One commenter stated that there is no provision in the proposed rule for outreach to lenders, and two commenters recommended that the Agency participate in the National Association of Government Guaranteed Lenders (NAGGL) and the National Association of Development Companies (NADCO) to improve communication with its lenders. Another commenter suggested that making sure the USDA staff are well trained and experienced in the programs they are administering will do more for the program than a new platform, especially for the Business and Industry program. A fourth commenter stated that local outreach, information, and accountability would become practically nonexistent under the proposed platform. Response: Outreach, information, and accountability are delivered at the State and local level to ensure our relationship with lenders is maintained. At the national level, the Agency works with a variety of national organizations to promote the programs and to determine if program adjustments are necessary to better meet the needs of our rural customers. Comment: Two commenters stated that the proposed rule should address the current problems with the lack of uniformity in administration, due largely to decentralization and lack of training both at USDA and with lenders. One of the commenters encouraged the Agency to address these issues and offer a more responsive, more uniformly delivered, and more efficiently administered guaranty program that is borrower and lender friendly, but still maintains program integrity. The other commenter recommended that the Agency needed to better manage staff. Response: The Agency acknowledges the commenters' points and considers the new platform to be just the first step in achieving greater uniformity in its administration of the loan guarantee programs. In addition, after the adoption of this rule, the Agency will accelerate its numerous training activities to ensure uniform and consistent adoption of the requirements of the regulation nationwide. Comment: Two commenters stated that the Agency should rely more on the input of local offices and staff. One of the commenters stated that the proposed rule practically ignores grassroots participation and is aimed at large lenders, stating that “local involvement is too little, too late” and that local knowledge and input should be obtained as soon as a request is received. This commenter recommended that the present structure and Divisions become an integral part of the rule. The other commenter stated that local directors should be allowed to approve loans high enough to allow for reasonable loan volume. According to this commenter, micro-management by the Agency's central office makes no sense at all—let your offices perform the tasks at local levels—this is why you hired them. Response: The Agency believes that its field delivery system is critical to the operations of its loan guarantee activities. The regulation does nothing to diminish the importance of the field office in developing and processing loan guarantee applications. In fact, by eliminating unnecessary differences among the loan guarantee programs, the field offices will be able to spend more time in processing and servicing loan guarantees in these programs. Lastly, with regard to the comment concerning the level of loans that local directors can approve, certain Agency field offices currently have approval authority of up to $10 million. The Agency believes that this level is sufficiently high and has not modified approval authority levels in this rule. Comment: O [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE8-29151. Public record. Not legal advice.