Rural Utilities Service, USDA.
The Rural Utilities Service (RUS) is discontinuing the use of its existing regulations for its Water and Waste Disposal (WW) Guaranteed Loan Program, and implementing a new regulation for its WW Guaranteed Loan Program. This action is needed to streamline and update the WW Guaranteed Loan Program. The intended effect is to simplify and clarify the regulation; shift some responsibility for loan documentation and analysis from the Government to the lenders; make the program more responsive to the needs of lenders, local community public bodies, and nonprofit corporations; and provide for smoother processing of applications.
June 7, 2001.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Linda Scott, Water Programs Division Loan Specialist, Rural Utilities Service, U.S. Department of Agriculture, STOP 1570, 1400 Independence Ave. SW., Washington, DC 20250-1570, telephone: (202) 720-9639.End Further Info End Preamble Start Supplemental Information
Executive Order 12866
This final rule has been determined to be not significant for the purposes of Executive Order 12866 and, therefore, has not been reviewed by the Office of Management and Budget (OMB).
Information Collection and Recordkeeping Requirements
The information collection and recordkeeping requirements contained in this regulation have been approved by the Office of Management and Budget (OMB) under the provisions of 44 U.S.C. chapter 35 and were assigned OMB control number 0572-0122, in accordance with the Paperwork Reduction Act of 1995. Under the Paperwork Reduction Act of 1995, no person is required to respond to a collection of information unless it displays a valid OMB control number. This final rule does not impose any new information recordkeeping.
National Environmental Policy Act Certification
The Administrator of RUS has determined that this final rule will not significantly affect the quality of the human environment as defined by the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). Therefore, this action does not require an environmental impact statement or assessment.
Regulatory Flexibility Act Certification
RUS has determined that this final rule will not have a significant economic impact on a substantial number of small entities, as defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The RUS Water and Waste loan and grant programs provide loans to borrowers at interest rates and on terms that are more favorable than those generally available from the private sector. RUS borrowers, as a result of obtaining federal financing, receive economic benefits that exceed any direct economic costs associated with complying with RUS regulations and requirements.
This final rule has been reviewed under Executive Order 12988, Civil Justice Reform. RUS has determined that this rule meets the applicable standards provided in section 3 of that Executive Order. In addition, all State and local laws and regulations that are in conflict with this rule will be preempted, no retroactive effect will be given to this rule, and, in accordance with Sec. 212(e) of the Department of Agriculture Reorganization Act of 1994 (7 U.S.C. Sec. 6912(e)), administrative appeal procedures, if any, must be exhausted before an action against the Department or its agencies may be initiated.
This rule contains no Federal mandates (under the regulatory provisions of Title II of the Unfunded Mandates Reform Act of 1995) for State, local, and tribal governments or the private sector. Thus, this rule is not subject to the requirements of section 202 and 205 of the Unfunded Mandates Reform Act of 1995.
This program is listed in the Catalog of Federal Domestic Assistance under number 10.760 and is subject to the provisions of Executive Order 12372 which requires intergovernmental consultation with State and local officials. This catalog is available on a subscription basis from the Superintendent of Documents, the United States Government Printing Office, Washington, DC 20402-9325. An electronic version is available at www.cfda.gov.
Discussion of the Final Rule
This action replaces the Water and Waste Disposal facilities portion of the guaranteed loan program administered under 7 CFR part 1980, subparts A and I. Under the final rule, this guaranteed loan program will be more flexible and place more reliance on lenders. There are fewer specific requirements for lenders. The lender has added responsibility for analyzing credit quality; for making, securing, and servicing the loan; and for monitoring construction. Application processing procedures will be more efficient; less burdensome for borrowers, lenders, and Rural Development staff; and will provide for more rapid decisions.
The WW Guaranteed Loan program was authorized by the Rural Development Act of 1972. The loans are made by private lenders to public bodies, nonprofit corporations, and Indian tribes for the purpose of Start Printed Page 23136improving rural living standards and for other purposes that create safe and affordable drinking water and waste disposal facilities located in rural areas or towns with a population not exceeding 10,000 inhabitants.
These loans can be made to construct or improve drinking water or waste disposal facilities serving the most financially needy communities. The rates and terms of the loan are negotiated between the borrower and the lender. This regulation is a high-priority effort to streamline the administration and operation of the program, respond to the requests of users of the program, and assist the field staff administering the program. The revised regulation is simpler, clearer, and more logically organized. The volume of regulatory material which a lender must review to request, make, or service a WW guaranteed loan under the new regulation is significantly less than the current regulation.
The President and the Secretary of Agriculture are committed to streamlining all Federal regulations. This WW regulation streamlines our application procedures, reduces loan application processing time by placing greater emphasis on State resources, and allows more management flexibility and decision-making capacity at the State Office level.
The Agency has implemented revisions to make the program more user-friendly for lenders and borrowers. Also, the Agency recognizes that changes are necessary to make the program more effective in creating jobs and stimulating economic activity (particularly in chronically low-income rural areas). Under the new WW regulation, the material that must be submitted to, and reviewed by, the Agency before approval of the guarantee has been reduced. Some responsibilities for credit analysis and application processing tasks will be shifted from the Agency to the lender, where feasible. Following is a discussion of some of the most significant policy revisions included in the final regulation.
To streamline the regulation, the Agency has combined applicable portions of the Direct Water and Waste Disposal Loan and Grant Program (7 CFR part 1780), Water and Waste Loans and Grants, General Guaranteed Regulation (7 CFR part 1980, subparts A and I), and program requirements contained in forms which were not in regulations into the Guaranteed Water and Waste Disposal Programs Regulation (7 CFR part 1779). The Agency also divided the regulation into general, processing, and servicing sections. These actions should significantly reduce the amount of regulatory material that a lender and a borrower must review to determine eligibility and complete the application. This will also simplify making and servicing a WW guaranteed loan.
Additionally, the necessary information contained in the preapplication package can be submitted simultaneously with the application. Except the year that loan funds are received, the types of audited financial statements will be determined by the lender (with Agency concurrence).
Under the new regulation, the lender is responsible for ensuring that all loan requirements are met, the loan is properly secured, documents are duly executed and binding, and all necessary certifications are furnished. The lender will not only be able to negotiate interest rates, but will also be able to negotiate incremental increases and caps for each loan. This will give the lender more flexibility to fit the WW guaranteed loan program into its lending policies and procedures. The lender does not have to be a local lender provided it can demonstrate the ability to adequately service the loan. This will permit an expansion of eligible lenders to include such organizations as State bond banks, Co-Bank, the Rural Utilities Cooperative Finance Corporation, and other lenders that are subject to credit examination and supervision by a State or Federal entity that supervises and regulates credit institutions. All of these organizations have expressed an interest in the WW guaranteed lending program in the past.
Discussion of Comments
The proposed rule was published in the Federal Register on October 7, 1997 (62 FR 52277), for public comment. All comments received were from Rural Development employees. Three State Directors, one Program Director, the National Association of Credit Specialists, and one Programs Specialist submitted comments. All of the comments received expressed support for the changes in this streamlined regulation. The comments ranged from making the regulation easier to read and follow to agreeing that the regulatory burden was lessened on the lenders as well as on our field employees. Also, the ability to change interest rates on a quarterly basis was supported as more in line with industry standards. Other changes which were supported are: permitting the lender to monitor construction rather than the Agency; permitting the preapplication information and the application to be completed as one process; and making the lender responsible for ensuring that all loan requirements are met, the loan is properly secured, documents are duly executed and binding, and all necessary certifications are furnished. The comments relating to the Community Facilities (CF) Programs portion of the proposed rule were addressed in a Final Rule published on May 26, 1999, at 64 FR 28333 (7 CFR part 3575).
One respondent requested consistent wording concerning the 5 percent which the lender must retain in its portfolio. The wording has been changed to clarify that the amount which the lender must hold will be 5 percent of the total loan amount and that this amount must be from the unguaranteed portion of the loan.
One respondent wanted to know what is contained in chapter 37 of title 31 of the United States Code. This chapter is commonly referred to as the Debt Collection Act.
One respondent suggested that all Rural Development program areas have similar definitions for “rural” and “rural area.” The Agency agrees that similar definitions would make the programs easier for our field employees to implement. However, the definitions of “rural” and “rural area” are mostly statutory and cannot be changed regulatorily.
One respondent wanted to include sole-member corporations as eligible for the Community Facilities (CF) program. This does not pertain to WW guaranteed loans. The CF response may be found in 7 CFR part 3575.
One respondent suggested that business incubators be made an eligible purpose. Because this suggestion pertains solely to the CF program, it was addressed in 7 CFR part 3575.
One respondent indicated that combining the floodplain management plan requirements with flood insurance would eliminate service to most of his State. The Agency did not intend to change the existing floodplain requirements. However, in our efforts to streamline the regulations, we combined two requirements and used a conjunction which tied the two requirements together. The Agency has separated and reworded these requirements in this final regulation. The requirements are the same as our existing regulation. To make a loan in a Federal Emergency Management Agency designated 100-year floodplain, a floodplain management plan must be in Start Printed Page 23137place. Also, National Flood Insurance must be available, and the lender must require such insurance.
As a result of internal discussions, the Environmental Requirements section has been expanded slightly in order to highlight the requirement imposed on the applicant to take no actions that would either limit the range of alternatives to be considered or which might adversely effect the environment prior to completion of the Agency's environmental review process.
Equal Opportunity and Fair Housing Act Requirements
One respondent suggested listing all the specific individual requirements under these laws. This comment pertains to the CF programs. The CF response may be found in 7 CFR part 3575.
One respondent requested clarification concerning the Agency's review of the equal opportunity and nondiscrimination requirements when evaluating an application. The Agency will further clarify our employees' responsibilities for reviewing loan applications in Agency instructions.
Rates and Terms
One respondent supported permitting both variable and fixed interest rates in the same loan but pointed out that the restriction which requires the guaranteed portion of the loan to always have a lower interest rate than the unguaranteed portion of the loan would prevent lenders from making the guaranteed portion fixed and the unguaranteed portion variable when the interest rate market is declining. We agree, and have removed the last sentence of § 1779.33(e) to ensure consistency when determining an acceptable interest rate.
Design and Construction
One respondent said that this regulation seems to say that if the Agency guarantees a loan on an existing building, we would not require any changes to make the building meet the Americans with Disabilities Act (ADA). The ADA does not require that existing buildings be made accessible unless they are remodeled. Then only the portion which is remodeled must be made accessible. For example, if four interior offices were remodeled, only those four offices would have to be made accessible. But the restrooms or the entry way would not have to be accessible. If you remodeled the building front, then the front entry would have to be made accessible. In conclusion, any new work must be accessible and designed in accordance with the ADA. Any area of the existing structure that is not remodeled does not have to meet the ADA. This concept will be clarified for our employees in our instructions.
One respondent suggested a standard certification form for the lender to complete certifying that construction has been completed in accordance with the proper building codes. To maintain flexibility and keep the regulations and public paperwork at a minimum, we have incorporated this as a lender certification.
One respondent suggested amending our concurrence to preliminary architectural or engineering reports or plans because many projects do not require complex reports but rather simple drawings and estimates of project costs. We agree. This was our original intent in the proposed general portion of the design and construction requirements section. We have added the words “or plans” to this section.
One respondent questioned the lack of a reference to procurement utilizing free and open competition. The borrower and the lender both benefit from free and open competition. In the spirit of reducing the regulatory burden to the public, the lender will now be responsible for determining the best method to ensure that the project is completed within budget. If the lender determines that design and build is a better method than sealed bids, the lender will have the flexibility to approve such construction.
One respondent strongly supported the loan approval official being able to determine if an independent feasibility analysis is necessary. The respondent also stated that the economic section of the regulation confuses the lender credit analysis with the feasibility report. The Agency intends that the loan approval official will determine whether or not an independent feasibility analysis is necessary. Consequently, the lender's financial credit analysis may serve as a feasibility analysis when the loan approval official concludes sufficient economic information is provided in its analysis. A sentence has been added to clarify this issue.
One respondent indicated that we should have included a timeframe to provide the lender an answer. While we agree, this is an administrative matter within the Agency and will be incorporated into our field employee instructions.
One respondent suggested moving the subsection concerning changing the scope of the project from the section describing the conditions precedent to issuing a loan note guarantee to the section discussing the review of requirements in the conditional commitment. This subsection has been moved as suggested.
One respondent suggested that the number of customers discussed in the loan application evaluation section should apply only to Water and Waste Disposal projects. This comment is directed to Community Facilities Programs and was addressed in 7 CFR part 3575. However, the respondent is correct in that WW projects do require that the number of customers is used when evaluating a loan application.
One respondent questioned whether the certifications listed under the conditions precedent to issuance of the loan note guarantee section met all applicable requirements contained out in the regulations. It was suggested clarification was needed. The Agency listed the items which the lender must certify to before the loan note guarantee could be issued. By certifying to these conditions, the lender is stating that it has met the requirements contained in the regulation.
One respondent requested clarification concerning the title report under the lender's certifications in the conditions precedent to issuance of a loan note guarantee. The respondent wanted to know whether or not the title report was referring to a final title opinion or a preliminary title opinion. The Agency intends this to be the lender's legal counsel's opinion which states that the loan has been closed and proper title has been obtained in accordance with the security instrument and other agreements between the lender and the Agency.
One respondent requested further clarification of the guaranteed loan closing report. This report is a Rural Development form. All references to specific form numbers have been eliminated from the actual text of the Federal Register. The actual form numbers will appear in the Agency instructions to our field employees. Only the form names appear in the Federal Register.
One respondent questioned the need to require a parity lien position. We agree, the lender should determine that adequate security is obtained for the loan and the Agency can either concur or choose not to guarantee the loan accordingly. This requirement has been deleted.
One respondent requested that the Agency eliminate the test for credit. The respondent further points out that the Rural Development Business and Start Printed Page 23138Industry (B&I) program does not require such a test for credit to be eligible for a guaranteed loan. The Agency is bound by statute and must require this test for credit. The B&I program is exempt from this statutory provision.
One respondent suggested that finder and packaging fees be considered an eligible loan purpose. This comment also suggested paying real estate broker fees. This comment is directed to Community Facilities Programs and was addressed in 7 CFR part 3575.
One respondent requested clarification concerning whether or not the preapplication forms are still necessary when the Agency receives an application for a loan guarantee from a lender without going through the preapplication process. The Agency will accept applications without a preapplication package.
Two respondents strongly suggested that the audit requirements should be the lender's responsibility. We agree, based upon discussions with our sister agencies and the Office of Management and Budget (OMB), we have determined that we do not have continuing compliance requirements as described in the OMB circular A-133. Consequently, in the year that funds are received by the borrower, the Agency will require an audit in accordance with the OMB circular A-133. In subsequent years, the lender (with Agency concurrence) will determine the type of financial reporting and financial audits that will be required for the duration of the loan.
One respondent noted that the lender and borrower visits were omitted and suggested that they should be required periodically. While we agree, this is an administrative matter and will be addressed in the Agency's field instruction.
One respondent wanted to clarify that the sale of one lender to another in a merger situation did not constitute a transfer of lender. We agree.
One respondent suggested that we increase the amount of protective advances from $500 to $5,000 dollars. This amount would be consistent with other mission area regulations and would be consistent with inflation. We agree, the amount of protective advances which the lender can make without Agency concurrence has been increased from $500 to $5,000.Start List of Subjects
List of Subjects
- Guaranteed loans
- Loan programs
- Waste treatment and disposal
- Water supply
- Business and industry
- Community development
- Community facilities
- Grant programs—housing and community development
- Rural areas
- Waste treatment and disposal
- Water supply
- Loan programs—agriculture
- Loan programs—business and industry
- Loan programs—housing and community development
- Rural development assistance
Accordingly, chapters XVII and XVIII, title 7, Code of Federal Regulations, are amended as follows:End Amendment Part
Chapter XVII—Rural Utilities Service, Department of AgricultureStart Amendment Part
1. Add a new part 1779 to read as follows:End Amendment Part Start Part
PART 1779—WATER AND WASTE DISPOSAL PROGRAMS GUARANTEED LOANS
- Full faith and credit.
- Conditions of guarantee.
- Access to lender's records.
- Environmental requirements.
- Exception authority.
- Eligible loan purposes.
- Ineligible loan purposes.
- Eligible lenders.
- Transfer of lenders or borrowers (prior to issuance of Loan Note Guarantee).
- Fees and charges by lender.
- Loan guarantee limitations.
- Interest rates.
- Terms of loan repayment.
- Insurance and fidelity bonds.
- Design and construction requirements.
- Other Federal, State, and local requirements.
- Economic feasibility requirements.
- Evaluation of application.
- Review of requirements.
- Conditions precedent to issuance of the Loan Note Guarantee.
- Issuance of Lender's Agreement, Loan Note Guarantee, and Assignment Guarantee Agreement.
- Lender's sale or assignment of the guaranteed portion of loan.
- Loan servicing.
- Replacement of loss, theft, destruction, mutilation, or defacement of Loan Note Guarantee or Assignment Guarantee Agreement.
- Defaults by borrower.
- Repurchase of loan.
- Interest rate changes after loan closing.
- Protective advances.
- Additional loans or advances.
- Transfer and assumptions.
- Disposition of acquired property.
- Determination and payment of loss.
- Future recovery.
- Termination of Loan Note Guarantee.
- OMB control number.
(a) This part contains the regulations for Water and Waste Disposal (WW) loans guaranteed by the Agency and applies to lenders, holders, borrowers, and other parties involved in making, guaranteeing, holding, servicing, or liquidating such loans.
(b) The purpose of the WW guaranteed loan program is to provide a loan guarantee for the construction or improvement of water and waste projects serving the financially needy communities in rural areas. This purpose is achieved through bolstering the existing private credit structure through the guarantee of quality loans which will provide lasting benefits.
The following general definitions are applicable to the terms used in this part:
Agency. The Rural Utilities Service which is within the Rural Development mission area of the United States Department of Agriculture or its successor agencies with authority delegated by the Secretary of Agriculture to administer the Water and Waste Disposal Programs.
Application. An Agency prescribed form to request an Agency guarantee (available in any Agency office).
Arm's length transaction. The sale, release, or disposition of assets in which Start Printed Page 23139the title to the property passes to a ready, willing, and able third party who is not affiliated with, or related to, and has no security, monetary, or stockholder interest in the borrower or transferor at the time of the transaction.
Assignment Guarantee Agreement. The signed agreement among the Agency, the lender, and the holder setting forth the terms and conditions of an assignment of the guaranteed portion of a loan or any part thereof (available in any Agency office).
Borrower. The entity that borrows money from the lender.
Collateral. Property pledged to secure the guaranteed loan.
Conditional Commitment for Guarantee. The Agency's written statement to the lender that the material submitted is approved subject to the completion of all conditions and requirements contained in the commitment (available in any Agency office).
Guaranteed loan. A loan made and serviced by a lender for which the Agency and lender have entered into a Lender's Agreement and for which the Agency has issued a Loan Note Guarantee.
Holder. The person or entity (other than the lender) who holds all or a part of the guaranteed portion of the loan with no servicing responsibilities. When the lender assigns part or all of the guaranteed portion of the loan to an assignee, the assignee becomes a holder when the Assignment Guarantee Agreement is signed by all parties.
Immediate family. Individuals who are closely related by blood or by marriage, or within the same household, such as a spouse, parent, child, brother, sister, aunt, uncle, grandparent, grandchild, niece, or nephew.
In-house expenses. In-house expenses include, but are not limited to, employees' salaries, retainers being paid to lawyers, travel, and overhead.
Insurance. Fire, windstorm, lightning, hail, explosion, riot, civil commotion, aircraft, vehicles, smoke, builder's risk, liability, property damage, flood or mudslide, worker's compensation, fidelity bond, malpractice, or any similar insurance that is available and needed to protect the security or that is required by law.
Joint financing. Two or more lenders (or any combination of lenders and other financial sources) making separate relatively contemporaneous loans or grants to supply the funds required by one borrower. For example, such joint financing may consist of the Agency's financial assistance with the Economic Development Administration, Department of Housing and Urban Development (HUD), or other Federal and State agencies, and private and quasi-public financial institutions.
Lender. The person or organization making and responsible for servicing the loan. The lender is also referred to in this part as the applicant who is requesting a guarantee during the preapplication and application stage of processing.
Lender's Agreement. The signed agreement between the Agency and the lender containing the lender's responsibilities when the Loan Note Guarantee is issued (available in any Agency office).
Loan Note Guarantee. The signed commitment issued by the Agency containing the terms and conditions of the guarantee of an identified loan (available in any Agency office).
Market value. The amount for which property would sell for its highest and best use at a voluntary sale in an arm's length transaction.
Note. An evidence of debt. In those instances where the Agency guarantees a bond issue, “note” shall also be construed to include a bond or other evidence of indebtedness, as appropriate.
Participation. Sale of an interest in a loan in which the lender retains the note, collateral securing the note, and all responsibility for loan servicing and liquidation.
Principals of borrowers. The owners, officers, directors, entities, and supervisors directly involved in the operation and management of the borrower.
Protective advances. Advances made by the lender for the purpose of preserving and protecting the collateral where the debtor has failed to, and will not or cannot, meet obligations to protect or preserve collateral.
Report of loss. An Agency form used by lenders when reporting a loss under an Agency guarantee (available in any Agency office).
Rural and rural area. Any area not in a city or town with a population in excess of 10,000 inhabitants, according to the latest decennial census of the United States
Service area. The area reasonably expected to be served by the project being financed by the guaranteed loan.
State. Any of the 50 States, the Commonwealth of Puerto Rico, the Virgin Islands of the United States, Guam, American Samoa, Commonwealth of the Northern Mariana Islands, Republic of the Marshall Islands, Republic of Palau, and the Federated States of Micronesia.
State Bond Banks and State Bond Pools. An entity authorized by the State to issue State debt instruments and utilize the funds received to finance the construction or improvement of drinking water or waste disposal facilities.
State Director. The Rural Development State Director or the staff member who has been delegated authority to perform action on behalf of the State Director.
Substantive change. Any change in the purpose of the loan or any change in the financial condition of the borrower or the collateral which would jeopardize the performance of the loan.
Transfer and assumption. The conveyance by a debtor to an assuming party of the assets, collateral, and liabilities of the loan in return for the assuming party's binding promise to pay the outstanding debt.
Waste disposal. Sanitary sewer (treatment and collection), solid waste, and storm drainage facilities.
WW. An acronym for Water and Waste Disposal.
The Loan Note Guarantee constitutes an obligation supported by the full faith and credit of the United States and is not contestable except for fraud or misrepresentation (including negligent misrepresentation) of which the lender or holder has actual knowledge, participates in, or condones. A note which provides for the payment of interest on interest shall not be guaranteed and any Loan Note Guarantee or Assignment Guarantee Agreement attached to, or relating to, a note which provides for payment of interest on interest is void. The Loan Note Guarantee will not be enforceable by the lender to the extent any loss is occasioned by violation of usury laws, negligent servicing, or failure to obtain the required security regardless of the time at which the Agency acquires knowledge of the foregoing. Any losses occasioned will not be enforceable by the lender to the extent that loan funds are used for purposes other than those specifically approved by the Agency in its Conditional Commitment for Guarantee. Negligent servicing is defined as the failure to perform those services which a reasonably prudent lender would perform in servicing its own portfolio of loans that are not guaranteed. The term includes not only the concept of a failure to act, but also not acting in a timely manner, acting in a manner contrary to the manner in which a reasonably prudent lender would act up to the time of loan maturity, or until a final loss is paid. The Loan Note Guarantee or Assignment Guarantee Agreement in the hands of a Start Printed Page 23140holder shall not cover interest accruing 90 days after the holder has demanded repurchase by the lender, nor shall the Loan Note Guarantee or Assignment Guarantee Agreement in the hands of a holder cover interest accruing 90 days after the lender or Agency has requested the holder to surrender the evidence of debt for repurchase.
A loan guarantee under this part will be evidenced by a Loan Note Guarantee issued by the Agency. Each lender will also execute a Lender's Agreement.
(a) The entire loan will be secured by the same security with equal lien priority for the guaranteed and non-guaranteed portions of the loan. The non-guaranteed portion of the loan will not be paid first nor given any preference or priority over the guaranteed portion.
(b) The lender will be responsible for servicing the entire loan and will remain mortgagee or secured party of record notwithstanding the fact that another party may hold a portion of the loan.
(c) When a guaranteed portion of a loan is sold to a holder, the holder shall have all rights of the lender under the Loan Note Guarantee to the extent of the portion purchased. The lender will remain bound by all the obligations under the Loan Note Guarantee, Lender's Agreement, and Agency program regulations. If the Agency makes a payment to a holder, then the lender must reimburse the Agency.
(d) A lender will receive all payments of principal and interest on the account of the entire loan and will promptly remit to each holder a pro rata share, less any lender servicing fee.
(e) The lender may retain all of the unguaranteed portion of the loan or may sell part of the unguaranteed portion of the loan through participation. However, the lender is required to retain 5 percent of the loan amount from the unguaranteed portion in their portfolio.
Upon request by the Agency, the lender will permit representatives of the Agency (or other agencies of the U.S. Department of Agriculture authorized by that Department or the U.S. Government) to inspect and make copies of any of the records of the lender pertaining to the guaranteed loans. Such inspection and copying may be made during regular office hours of the lender or at any other time the lender and the Agency agree upon.
Facilities financed must undergo an environmental impact analysis in accordance with the National Environmental Policy Act and Agency requirements as contained in part 1794 of this chapter. In accordance with Agency guidance documents (RUS Bulletin 1794A-602; this document is available in any Agency State Office or online at http://www.usda.gov/rus/water/ees/index.htm), the environmental review requirements shall be performed by the applicant simultaneously and concurrently with the project's engineering planning and design. This should provide flexibility to consider reasonable alternatives to the project and development methods to mitigate any adverse environmental effects. Facility planning and design must not only be responsive to the owner's needs but must consider the environmental consequences of the proposed project. Facility design will incorporate and integrate, where practicable, mitigation measures that avoid or minimize adverse environmental impacts. The lender must assist the Agency in ensuring that the borrower complies with the Agency's environmental review process and implements any mitigation measure identified in the environmental review document or Conditional Commitment for Guarantee. This assistance includes ensuring that the borrower takes no action (for example, initiation of construction) or incur any obligations that will have an adverse environmental impact or limit the range of alternatives to be considered prior to completion of the environmental review process. If construction is started prior to completion of the environmental review and the Agency is deprived of its opportunity to fulfill its obligation to comply with applicable environmental requirements, the application for financial assistance may be denied. Satisfactory completion of the environmental review process must occur prior to the approval of the applicant's request or commitment of Agency resources.
The lender will notify the Agency of any scheduled field inspections during construction and after issuance of the Loan Note Guarantee. The Agency may attend such field inspections. Any inspections or review conducted by the Agency, including those with the lender, are for the benefit of the Agency only and not for the benefit of other parties in interest. Agency inspections do not relieve any parties in interest of their responsibilities to conduct necessary inspections.
Only the borrower, lender, or holder can appeal an Agency decision. In cases where the Agency has denied or reduced the amount of final loss payment to the lender, the adverse decision may be appealed only by the lender. A decision by a lender adverse to the interest of the borrower is not a decision by the Agency, whether or not concurred in by the Agency. Appeals will be handled in accordance with the regulations of the National Appeals Division, U.S. Department of Agriculture, published at 7 CFR part 11.
The Administrator may, in individual cases, make an exception to any requirement or provision of this part which is not inconsistent with the authorizing statute or other applicable law and is determined to be in the Government's interest.
(a) Availability of credit from other sources. The Agency must determine that the borrower is unable to obtain the required credit without the loan guarantee from private, commercial, or cooperative sources at reasonable rates and terms for loans for similar purposes and periods of time. The Agency must also determine if an outstanding judgment obtained by the United States in a Federal Court (other than the U.S. Tax Court) has been entered against the borrower or if the borrower has an outstanding delinquent debt with any Federal agency. Such judgment or delinquency shall cause the potential borrower to be ineligible to receive a loan guarantee until the judgment is paid in full or otherwise satisfied or the delinquency is cured.
(b) Legal authority and responsibility. (1) Each borrower must have, or will obtain, the legal authority necessary to construct, operate, and maintain the proposed facility and services. They must also have legal authority for obtaining, giving security for, and repaying the proposed loan.
(2) The borrower shall be responsible for operating, maintaining, and managing the facility and services, and providing for the continued availability and use of the facility and services at reasonable rates and terms.
(c) Applicant. Eligible entities are: Start Printed Page 23141
(1) A public body such as a municipality, county, district, authority, or other political subdivision of a State located in a rural area.
(2) An organization operated on a not-for-profit basis, such as an association, cooperative, or private corporation. The organization must be an association controlled by a local public body or bodies, or have a broadly based ownership by or membership of people of the local community; or
(3) Indian tribes on Federal and State reservations and other federally recognized Indian tribes.
(d) Facility location. Facilities must be located in rural areas, except: For utility services such as drinking water, sanitary sewer, solid waste disposal or storm drainage facilities serving both rural and non-rural areas. In such cases, Agency funds may be used to finance only that portion serving rural areas, regardless of facility location.
(e) Facilities for public use. All facilities financed under the provisions of this part shall be for public purposes.
(1) Facilities will be installed to serve any user within the service area who desires service and can be feasibly and legally served.
(2) In no case will boundaries for the proposed service area be chosen in such a way that any user or area will be excluded because of race, color, religion, sex, marital status, age, disability, or national origin.
(3) The lender will determine that, when feasible and legally possible, inequities within the proposed project's service area for the same type service proposed will be remedied by the owner on, or before, completion of the project. Inequities are defined as unjustified variations in availability, adequacy, or quality of service. User rate schedules for portions of existing systems or facilities that were developed under different financing, rates, terms, or conditions do not necessarily constitute inequities.
(a) To construct, enlarge, extend, or otherwise improve rural drinking water, sanitary sewage, solid waste disposal, and storm wastewater disposal facilities.
(b) To construct or relocate public buildings, roads, bridges, fences, or utilities, and to make other public improvements necessary for the successful operation or protection of facilities authorized in paragraph (a) of this section.
(c) To relocate private buildings, roads, bridges, fences, or utilities, and other private improvements necessary for the successful operation or protection of facilities authorized in paragraph (a) of this section.
(d) For payment of other utility connection charges as provided in service contracts between utility systems.
(e) When a necessary part of the project relates to those facilities authorized in paragraphs (a), (b), (c) or (d) of this section the following may be considered:
(1) Reasonable fees and costs such as: legal, engineering, administrative services, fiscal advisory, recording, environmental analyses and surveys, possible salvage or other mitigation measures, planning, establishing or acquiring rights;
(2) Costs of acquiring interest in land: rights, such as water rights; leases; permits; rights-of-way; and other evidence of land or water control or protection necessary for development of the facility;
(3) Purchasing or renting equipment necessary to install, operate, maintain, extend, or protect facilities;
(4) Cost of additional applicant labor and other expenses necessary to install and extend service;
(5) In unusual cases such as a low-income area, the cost for connecting the user to the main service line;
(6) Interest incurred during construction in conjunction with multiple advances or interest on interim financing;
(7) Initial operating expenses, including interest, for a period ordinarily not exceeding one year when the applicant is unable to pay such expenses;
(8) The purchase of existing facilities when it is necessary either to improve service or prevent the loss of service; and
(9) Refinancing non-Agency debts incurred by, or on behalf of, an applicant when all of the following conditions exist:
(i) The debts being refinanced are a secondary part of the total loan unless the debt being refinanced is an Agency direct loan;
(ii) The debts were incurred for the facility or service being financed or any part thereof; and
(iii) 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.
(10) Refinancing Agency debts.
Loan funds may not be used to finance:
(a) Facilities which are not modest in size, design, and cost;
(b) Loan or grant finder's fees;
(c) The construction of any new combined storm and sanitary sewer facilities;
(d) Any portion of the cost of a facility which does not serve a rural area;
(e) That portion of project costs normally provided by a business or industrial user, such as wastewater pretreatment;
(f) Rental for the use of equipment or machinery owned by the applicant;
(g) For other purposes not directly related to operating and maintenance of the facility being installed or improved; or
(h) The payment of a judgment which would disqualify an applicant for a loan under § 1779.20(a).
(a) Eligible lenders. Eligible lenders may participate in the loan guarantee program. These lenders must be subject to credit examination and supervision by an appropriate agency of the United States or a State that supervises and regulates credit institutions. A lender must have the capability to adequately service loans for which a guarantee is requested. Eligible lenders are:
(1) Any Federal or State chartered bank or savings and loan association;
(2) Any mortgage company that is a part of a bank holding company;
(3) Co-Bank, National Rural Utilities Cooperative Finance Corporation, Farm Credit Bank of the Federal Land Bank, or other Farm Credit System institution with direct lending authority authorized to make loans of the type guaranteed by this part;
(4) An insurance company regulated by a State or National insurance regulatory agency;
(5) State Bond Banks or State Bond Pools; and
(6) Other lenders that possess the legal powers necessary and incidental to making and servicing guaranteed loans involving community development-type projects. Lenders under this category must be approved by the National Office prior to the issuance of the loan guarantee.
(b) Conflict of interest. When the lender's officers, stockholders, directors, or partners (including their immediate families) or the borrower, its officers, stockholders, directors, or partners (including their immediate families) own, or have management responsibilities in each other, the lender must disclose such business or ownership relationships. The Agency will determine if such relationships are likely to result in a conflict of interest. Start Printed Page 23142This does not preclude lender officials from being on the borrower's board of directors.
(a) Prior to issuance of the loan guarantee, the Agency may approve the transfer of an outstanding Conditional Commitment for Guarantee from the present lender to a new eligible lender: Provided, That:
(1) The former lender states in writing why it does not wish to continue to be the lender for this project;
(2) No substantive changes in ownership or control of the borrower has occurred;
(3) No substantive changes in the borrower's written plan, scope of work, or changes in the purpose or intent of the project has occurred; and
(4) No substantive changes in the loan agreement or Conditional Commitment for Guarantee are required.
(b) The substitute lender must execute a new application for loan and guarantee (available in any Agency office).
(c) If approved, the Agency will issue a letter of amendment to the original Conditional Commitment for Guarantee reflecting the new lender who will acknowledge acceptance of the offer in writing.
(d) Once the Conditional Commitment for Guarantee is issued, the Agency will not approve any substitution of borrowers, including changes in the form of the legal entity, except a change in the legal entity may be requested when the original borrower is replaced with substantially the same individuals or officers with the same interest as originally approved.
(a) Routine charges and fees. The lender may establish charges and fees for the loan if they do not exceed those charged other borrowers for similar types of transactions. “Similar types of transactions” mean those transactions involving the same type of loan for which a non-guaranteed loan borrower would be assessed charges and fees.
(b) Late payment fees. Late payment charges will not be covered by the Loan Note Guarantee. Such charges may not be added to the principal and interest due under any guaranteed note. Late payment charges may be made only if:
(1) They are routinely made by the lender in all types of loan transactions;
(2) Payment has not been received within the customary timeframe allowed by the lender; or
(3) The lender agrees with the borrower, in writing, that the rate or method of calculating the late payment charges will not be changed to increase charges while the Loan Note Guarantee is in effect.
(c) Guarantee fees. The guaranteed loan fee will be the applicable guarantee fee rate multiplied by the principal loan amount multiplied by the percent of guarantee. The one-time guarantee fee is paid when the Loan Note Guarantee is issued.
(1) The fee will be paid to the Agency by the lender and is nonreturnable. The lender may pass the fee to the borrower.
(2) The guarantee fee rates are available in any Agency office.
(a) The guarantee will be 90 percent of eligible loss.
(b) The lender will retain a minimum of 5 percent of the total loan amount. The retained amount must be from the unguaranteed portion of the loan and cannot be participated to another lender.
(a) General. Rates will be negotiated between the lender and the borrower. They may be either fixed or variable rates. Interest rates will be those rates customarily charged borrowers in similar circumstances in the ordinary course of business and are subject to Agency review and approval.
(b) Variable rate publication. A variable interest rate must be tied to a base rate published periodically in a recognized national or regional financial publication specifically agreed to by the lender and borrower. Such an agreement must be documented in the borrower or lender loan agreement.
(1) Interest rate caps and incremental adjustment limitations will also be negotiated between the lender and the borrower. Notice of any interest rate change proposed by the lender should allow a sufficient time period for the borrower to obtain any required State or other regulatory approval and to implement any user rate adjustments necessary as a result of the interest rate change. The intervals between interest rate adjustments will be specified in the loan agreement (but not more often than quarterly).
(2) The lender must incorporate within the variable rate note, the provision for adjustment of payments coincident with an interest rate adjustment. This will ensure the outstanding principal balance is properly amortized within the prescribed loan maturity and eliminate the possibility of a balloon payment at the end of the loan.
(c) Changes. Any change in the interest rate between the date of issuance of the Conditional Commitment for Guarantee and before the issuance of the Loan Note Guarantee must be approved by the Agency. Approval of such change will be shown as an amendment to the Conditional Commitment for Guarantee.
(d) Different rates on guaranteed and unguaranteed portion of the loan. It is permissible to have one interest rate on the guaranteed portion of the loan and another interest rate on the unguaranteed portion of the loan, provided the lender and borrower agree, and:
(1) The rate on the unguaranteed portion does not exceed that currently being charged on loans for similar purposes to borrowers under similar circumstances; and
(2) The rate on the guaranteed portion of the loan will not exceed the rate on the unguaranteed portion. This requirement does not apply when the unguaranteed rate is variable and the guaranteed portion is fixed.
(e) Multi-rates. When multi-rates are used, the lender will provide the Agency with the overall effective interest rate for the entire loan. Multi-rate loans may be either fixed, variable, or a combination of fixed and variable.
(a) General. Principal and interest on the loan will be due and payable as provided in the note except, any interest accrued as the result of the borrower's default on the guaranteed loan over and above that which would have accrued at the note rate on the guaranteed loan will not be guaranteed by the Agency. The lender will structure repayments as established in the loan agreement between the lender and borrower. Ordinarily, such installments will be scheduled for payment as agreed upon by the lender and borrower on terms that reasonably ensure repayment of the loan. However, the first installment to include a repayment of principal may be scheduled for payment after the project is operable and has begun to generate income. Such installment must be due and payable within 3 years from the date of the note and at least annually thereafter. Interest will be due at least annually from the date of the note. Monthly payments will be required except for borrowers with income limited to less frequent intervals.
(b) Term length. The maximum time allowable for final maturity for a guaranteed WW loan will be limited to the useful life of the facility, not to exceed 40 years. Start Printed Page 23143
(c) Balloon payments. The principal balance should be properly amortized within the prescribed loan maturity. Balloon payments at the end of the loan are prohibited.
The lender must provide evidence that the borrower has adequate insurance and fidelity bond coverage by loan closing or start of construction, whichever occurs first. Adequate coverage must be maintained for the life of the loan and is subject to Agency review and approval.
The lender will provide the Agency with a written certification at the end of construction that all funds were utilized for authorized purposes. The borrower and the lender will authorize designs and plans based upon the preliminary architectural and engineering reports or plans approved by the lender and concurred in by the Agency. The borrower will take into consideration any lender or Agency comments when the facility is being designed.
(a) Architectural and engineering practices. All project facilities must be designed utilizing accepted architectural and engineering practices and must conform to applicable Federal, State, and local codes and requirements. The lender must ensure that the planned project will be completed within the available funds and, once completed, will be suitable for the borrower's needs.
(b) Construction monitoring. The lender will monitor the progress of construction and undertake the reviews and inspections necessary to ensure that construction proceeds in accordance with the approved plans, specifications, and contract documents and that funds are used for eligible project costs. The lender must expeditiously report any problems in project development to the Agency.
(c) Equal employment opportunities. For all construction contracts in excess of $10,000, the contractor must comply with Executive Order 11246 (30 FR 12319, 3 CFR, 1964-1965 Comp., p. 339) entitled “Equal Employment Opportunity” as amended and as supplemented by applicable Department of Labor regulations (41 CFR part 60-1). The borrower and lender are responsible for ensuring that the contractor complies with these requirements.
(d) Americans with Disabilities Act. WW loans which involve the construction of, or addition to, facilities that accommodate the public and commercial facilities as defined by the Americans with Disabilities Act (42 U.S.C. 12181—et seq.) must comply with that Act. The lender and borrower are responsible for compliance.
(e) Administrative. When the Agency reviews the preliminary architectural and engineering reports or plans, they must also consider all applicable Federal laws such as the seismic requirements of Executive Order 12699 (55 FR 835, 3 CFR, 1990 Comp., p. 269), the debarment requirements of 7 CFR part 3017, and the Copeland Anti-Kickback Act (18 U.S.C. 874).
In addition to the specific requirements of this part and beginning on the date of issuance of the Loan Note Guarantee, proposals for facilities financed in whole or in part with a loan guaranteed by the Agency will be coordinated with all appropriate Federal, State, and local agencies. Borrowers and lenders will be required to comply with any Federal, State, or local laws or regulatory commission rules which are in existence and which affect the project including, but not limited to:
(a) Applicant's authority to design, construct, develop, operate, and maintain the proposed facilities;
(b) Borrowing money, giving security, and raising revenues for repayment;
(c) Land use zoning;
(d) Health, safety, and sanitation standards as well as design and installation standards; and
(e) Protection of the environment and consumer affairs.
All projects financed under the provisions of this section must be based on taxes, assessments, revenues, fees, or other sources of revenues in an amount sufficient to provide for facility operation and maintenance, a reasonable reserve, and debt payment. The lender is responsible for determining the credit quality and economic feasibility of the proposed loan and must address all elements of the credit quality in a written financial feasibility analysis which includes adequacy of equity, cash flow, security, history, and management capabilities. Financial feasibility reports must take into consideration any interest rate adjustment which may be instituted under the terms of the note. The lender's financial credit analysis may also serve as the feasibility analysis when sufficient evidence is included to determine economic feasibility as well as financial viability. The borrower's consulting engineer may complete the financial feasibility analysis for WW systems. If the facility is used by businesses and the success or failure of the facility is dependent on individual businesses, then the economic viability of those businesses must be assessed.
(a) Exceptions. The Agency loan approval official may exempt the lender from the requirement for an independent financial feasibility report (when requested by the borrower and the lender) provided the approval official determines that the financial feasibility analysis prepared by the borrower fairly represents the financial feasibility of the facility and the financial feasibility analysis contains an accurate projection of the usage, revenues, and expenses of the facility.
(b) Insufficient information. When the lender or Agency has insufficient information to determine the borrower's repayment ability, an independent feasibility analysis is required.
(a) Lender responsibility. The lender is responsible for obtaining and maintaining proper and adequate collateral to protect the interest of the lender, the holder, and the Government.
(b) Type of collateral. Collateral must be of such a nature that repayment of the loan is reasonably ensured when considered with the integrity and ability of project management, soundness of the project, and the borrower's prospective earnings. The collateral may include, but is not limited to, the following: General obligation bonds, revenue bonds, pledge of taxes or assessments, assignment of facility revenue, land, easements, rights-of-way, water rights, buildings, machinery, equipment, accounts receivable, contracts, cash, or other accounts or assignments of leases or leasehold interest.
(c) Separate collateral. All collateral must secure the entire loan. The lender will not take separate security to secure only the unguaranteed portion of the loan. The lender will not require compensating balances or certificates of deposit as a means of eliminating the lender's exposure on the unguaranteed portion of the loan.
(a) Preapplications. (1) The preapplication package may be submitted either alone or the necessary Start Printed Page 23144information may be submitted simultaneously with the application. The preapplication package will contain:
(i) An Application for Federal Assistance on a form provided by the Agency (available in any Agency office);
(ii) State intergovernmental or other type review comments and recommendations for the borrower's project (clearinghouse comments, if applicable);
(iii) Supporting documentation necessary to make an eligibility determination such as financial statements, audits, copies of organizational documents, or existing debt instruments; and
(iv) Documentation of lender eligibility in accordance with § 1779.27.
(2) If the Agency determines that the project may meet requirements and is likely to be funded, the lender must submit a complete application if it has not previously submitted one.
(b) Applications. Contents of application package:
(1) Application for Loan and Guarantee on a form prescribed by the Agency (available in any Agency office);
(2) Proposed loan agreement;
(3) Environmental Report. (See RUS Bulletin 1794A-602; this document is available in any Agency State Office or online at http://www.usda.gov/rus/water/ees/index.htm);
(4) Preliminary architectural or engineering report (PER);
(5) Cost estimates;
(6) Appraisal reports (as appropriate);
(7) Credit reports (as appropriate);
(8) Financial feasibility analysis and report (as appropriate) if not included in PER; and
(9) Any additional information required.
If the Agency determines that the borrower is eligible, the proposed loan is for an eligible purpose, there is reasonable assurance of repayment ability, sufficient collateral and equity exists, the proposed loan complies with all applicable statutes and regulations, the environmental impact analyses is complete, and adequate funds are available, the Agency will provide the lender and the borrower with the Conditional Commitment for Guarantee, listing all conditions for the guarantee. Applicable requirements will include the following:
(a) Approved use of guaranteed loan funds (source and use of funds);
(b) Rates and terms of the loan;
(c) Scheduling of payments;
(d) Number of customers;
(e) Security and lien priority;
(g) Insurance and bonding;
(h) Financial reporting;
(i) Equal opportunity and nondiscrimination;
(j) Mitigation measures for environmental issues (if necessary);
(k) Americans with Disabilities Act;
(l) By-laws and articles of incorporation changes; and
(m) Other requirements necessary to protect the Government.
(a) Lender and borrower. The lender and borrower must complete and sign the Acceptance of Conditions and return a copy to the Agency as soon as possible. Notwithstanding the preceding sentence, if certain conditions cannot be met, the lender and borrower may propose alternate conditions for Agency consideration.
(b) Cancellation. If the lender decides at any time after receiving a Conditional Commitment for Guarantee that it no longer wants a guarantee, the lender must immediately advise the Agency of the cancellation.
(c) Modifications. The lender agrees that once the Conditional Commitment for Guarantee is issued and accepted by the lender and borrower, it will not be modified as to the scope of the project, overall facility concept, project purpose, use of proceeds, or other terms and conditions.
The Loan Note Guarantee will not be issued until:
(a) The lender certifies that:
(1) No changes have been made in the lender's loan conditions and requirements since the issuance of the Conditional Commitment for Guarantee except those approved in the interim by the Agency in writing.
(2) All planned property acquisition has been completed and all development has been substantially completed in accordance with plans, specifications, and applicable building codes. No costs have exceeded the amounts approved by the lender and the Agency.
(3) Required insurance is in effect.
(4) The loan has been properly closed and the required security instruments have been obtained on any after-acquired property that cannot be covered initially under State statutory provisions.
(5) The borrower has marketable title to the collateral then owned by the borrower, subject to the instrument securing the loan to be guaranteed and subject to any other exceptions approved, in writing, by the Agency.
(6) When required, the entire amount of the loan for working capital has been disbursed except in cases where the Agency has approved disbursement over an extended time.
(7) All other requirements of the Conditional Commitment for Guarantee have been met.
(8) Lien priorities are consistent with requirements of the Conditional Commitment for Guarantee.
(9) The loan proceeds have been disbursed for purposes and in amounts consistent with the Conditional Commitment for Guarantee and as specified on the application for the guaranteed loan. A copy of a detailed statement by the lender detailing the use of loan funds will be attached to support this certification.
(10) There has been no substantive adverse change in the borrower's financial condition nor any other adverse change in the borrower during the period of time from the Agency's issuance of the Conditional Commitment for Guarantee to issuance of the Loan Note Guarantee. The lender's certification must address all adverse changes of the borrower and the guarantors. For purposes of this paragraph (a)(10), the term borrower includes any parent, affiliate, or subsidiary of the borrower.
(11) All Federal, State, and local design and construction requirements have been met.
(12) The lender understands and will meet the requirements of the Debt Collection Act (31 U.S.C. Chapter 37).
(13) The lender would not make the loan without an Agency guarantee.
(b) The lender has executed and delivered the Lender's Agreement and closing report for the guaranteed loan along with the appropriate guarantee fee.
(c) The lender has advised the Agency of plans to sell or assign any part of the loan as provided in the Lender's Agreement.
(d) Where applicable, the lender must certify that the borrower has obtained:
(1) A legal opinion relative to the title to rights-of-way and easements. Lenders are responsible for ensuring that borrowers have obtained valid, continuous, and adequate rights-of-way and easements needed for the construction, operation, and maintenance of a facility.
(2) A title opinion or title insurance showing ownership of the land and all mortgages or other lien defects, restrictions, or encumbrances, if any. It Start Printed Page 23145is the responsibility of the lender to ensure that the borrower has obtained and recorded such releases, consents, or subordinations to such property rights from holders of outstanding liens or other instruments as may be necessary for the construction, operation, and maintenance of the facility and to provide the required security. For example, when a site is for major structures and the lender and borrower are able to obtain only a right-of-way or easement on such a site rather than a fee simple title, such a title opinion must be requested.
(e) If the Loan Note Guarantee cannot be issued before the Conditional Commitment expires, the lender must submit a written request for an extension of the expiration date. The lender must document and certify to paragraph (a)(1) and (a)(11) of this section specifically identifying any modifications.
(f) Coincident with, or immediately after, loan closing, the lender will contact the Agency and provide those documents and certifications required in this section. For loans to public bodies, lenders may require an opinion from recognized bond counsel regarding the adequacy of the preparation and issuance of the debt instruments. Only when the Agency is satisfied that all conditions for the guarantee have been met will the Loan Note Guarantee be executed.
(a) Lender's Agreement. If the Agency finds that all requirements have been met, the lender and the Agency will execute the Lender's Agreement. The original will be retained by the Agency and a signed duplicate original will be retained by the lender. A separate Lender's Agreement must be executed for each loan to be guaranteed by the Agency.
(b) Loan Note Guarantee. (1) Upon receipt of the executed Lender's Agreement and after all requirements have been met, the Agency will execute the Loan Note Guarantee. All originals of the Loan Note Guarantee will be provided to the lender and attached to the note.
(2) If the lender has selected the multi-note system, a Loan Note Guarantee will be prepared and attached to each note the borrower issues. All the notes will be listed on the Loan Note Guarantee. Not more than ten notes will be issued for the guaranteed portion (unless the Agency and borrower agree otherwise) and one note issued for the unguaranteed portion.
(c) Assignment of Guarantee. In the event the lender assigns the guaranteed portion of the loan to a holder, the lender, holder, and Agency will execute an Agency prescribed Assignment Guarantee Agreement.
(d) Failure to meet conditions. If the Agency determines that it cannot execute the Loan Note Guarantee because all requirements have not been met, the lender will have a reasonable period within which to satisfy the objections. If the lender satisfies the objections within the time allowed, the guarantee will be issued.
(e) Loan closing report. The lender will prepare and deliver a guaranteed loan closing report for each loan to be guaranteed and a guarantee fee to the Agency in return for the Loan Note Guarantee.
The lender may retain all of the guaranteed loan. The lender must not sell or participate any amount of the guaranteed or non-guaranteed portion of the loan to the borrower or to members of the borrower's immediate families, the borrower's officers, directors, stockholders, other owners, or a subsidiary or affiliate. Disposition of the guaranteed portion of a loan may not be made prior to full disbursement, completion of construction, and acquisition of real estate and equipment without the prior written approval of the Agency. If the lender desires to market all or part of the guaranteed portion of the loan at, or subsequent to, loan closing, the loan must not be in default.
(a) Assignment. Any sale or assignment by the lender of the guaranteed portion of the loan must be accomplished in accordance with the conditions in the Lender's Agreement.
(b) Participation. The lender may obtain participation in the loan under its normal operating procedures.
(c) Minimum retention. The lender is required to hold in its own portfolio or retain a minimum of 5 percent of the total loan amount. This amount must be of the non-guaranteed portion of the loan and cannot be participated to another. The lender may sell the remaining amount of the non-guaranteed portion of the loan only through participation.
(a) Lender responsibilities. The lender is responsible for servicing the entire loan in accordance with the lender's loan agreement. The unguaranteed portion of the loan will not be paid first nor given any preference or priority over the guaranteed portion of the loan. The lender is responsible for taking all servicing actions that a prudent lender would perform in servicing a portfolio of loans that are not guaranteed. This responsibility includes, but is not limited to, the collection of payments; obtaining compliance with the covenants and provisions in the note, loan agreement, security instrument, or any supplemental agreements; obtaining and analyzing financial statements; verifying the payment of taxes and insurance premiums; and maintaining liens on collateral. The lender must notify the Agency of any violation of the loan agreement with the borrower within 30 days of such violation.
(b) Financial reports. The lender must obtain the financial statements required by the Loan Agreement. The lender must submit the borrower's annual financial statements to the Agency within 120 days of the end of the borrower's fiscal year. The lender must analyze the financial statements and provide the Agency with a written summary of the lender's analysis and conclusions, including trends, strengths, weaknesses, extraordinary transactions, and other indications of the financial condition of the borrower. Additionally, when applicable, the lender will require an audit in accordance with Office of Management and Budget (OMB) circulars (available in any Agency office).
(c) Delinquent loans. The lender will service delinquent loans in accordance with the Lender's Agreement and reasonable and prudent lending standards.
(d) Loan balances. The lender must report to the Agency the outstanding principal and interest balance on each guaranteed loan semiannually.
(e) Collateral inspections. The lender will inspect the collateral as often as necessary to properly service the loan.
(a) Replacement. The Agency may issue a replacement Loan Note Guarantee or Assignment Guarantee Agreement which may have been lost, stolen, destroyed, mutilated, or defaced to the lender or holder upon receipt of a certificate of loss and an indemnity bond in accordance with this section.
(b) Lender responsibilities. When a Loan Note Guarantee or Assignment Guarantee Agreement is lost, stolen, destroyed, mutilated, or defaced while in the custody of the lender or holder, Start Printed Page 23146the lender will coordinate the activities of the party who seeks the replacement documents and will submit the required documents to the Agency for processing. The requirements for replacement are as follows:
(1) A certificate of loss properly notarized which includes:
(i) Legal name and present address of either the lender or the holder who is requesting the replacement forms;
(ii) Legal name and address of the lender of record;
(iii) Capacity of person certifying;
(iv) Full identification of the Loan Note Guarantee or Assignment Guarantee Agreement, including the name of the borrower, Agency case number, date of the Loan Note Guarantee, Assignment Guarantee Agreement, face amount of the evidence of debt purchased, date of evidence of debt, present balance of the loan, percentages of guarantee and, if Assignment Guarantee Agreement, the original named holder and the percentage of the guaranteed portion of the loan assigned to that holder. Any existing parts of the document to be replaced must be attached to the certificate;
(v) A full statement of circumstances of the loss, theft, or destruction of the Loan Note Guarantee or Assignment Guarantee Agreement; and
(vi) The holder shall present evidence demonstrating current ownership of the Loan Note Guarantee and Note or Assignment Guarantee Agreement. If the present holder is not the same as the original holder, a copy of the endorsement of each successive holder in the chain of transfer from the initial holder to present holder must be included. If copies of the endorsement cannot be obtained, best available records of transfer must be presented to the Agency (e.g., order confirmation, canceled checks).
(2) An indemnity bond acceptable to the Agency shall accompany the request for replacement except when the holder is the United States, a Federal Reserve Bank, a Federal Government corporation, a State or Territory, or the District of Columbia.
(3) All indemnity bonds must be issued and payable to the United States of America. The bond shall be in an amount not less than the unpaid principal and interest. The bond shall hold the Government harmless against any claim or demand which might arise or against any damage, loss, costs, or expenses which might be sustained or incurred by reasons of the loss or replacement of the instruments.
(a) Lender notification to Agency. The lender must notify the Agency when a borrower is 30 days past due on a payment, has not met its responsibilities of providing the required financial statements, or is otherwise in default. The lender will continue to keep the Agency informed on a bimonthly basis until such time as the loan is no longer in default. If a monetary default exceeds 60 days, the lender will arrange a meeting with the borrower to resolve the default. The lender will provide a summary of the meeting and any decisions or actions agreed upon.
(b) Servicing options. In considering servicing options, the prospects for providing a permanent cure without adversely affecting the risks to the Agency and the lender must be the paramount objective. Temporary curative actions (such as payment deferments or collateral subordination) must strengthen the loan and be in the best financial interest of the lender and the Agency. Some of these actions may require concurrence of the holder.
(c) Multi-note. If the loan was closed with the multi-note option, the lender may need to possess all notes to take some servicing actions. In those situations when the Agency is holder of some of the notes, the Agency may endorse the notes back to the lender, provided a proper receipt is received from the lender which defines the reason for the transfer. Under no circumstances will the Agency endorse the original Loan Note Guarantee to the lender.
(a) Repurchase by lender. The lender has the option to repurchase the loan from a holder within 30 days of written demand from the holder when the borrower is in default not less than 60 days on payment. The repurchase will be for an amount equal to the unpaid guaranteed portion of principal and accrued interest less the lender's servicing fee. The guarantee does not cover the note interest to the holder on the guaranteed loan accruing after 90 days from the date of the demand letter to the lender. The holder will concurrently send a copy of the demand to the Agency. The lender will accept an assignment without recourse from the holder upon repurchase. The lender is encouraged to repurchase the loan to facilitate the accounting of funds, resolve the problem, and permit the borrower to cure the default, where reasonable. The lender will notify the holder and the Agency of its decision within 30 days of receipt of demand from the holder.
(b) Agency repurchase. (1) If the lender does not repurchase as provided in paragraph (a) of this section, the Agency will purchase from the holder the unpaid principal balance of the guaranteed portion together with accrued interest to date of repurchase (less the lender's servicing fee) within 30 days after a specific written demand directed to the Agency. The copy of the demand on the lender is not sufficient. The guarantee will not cover the note interest to the holder on the guaranteed loan accruing after 90 days from the date of the original demand letter. The lender shall not charge the Agency any servicing fees nor are any such fees collectible from the Agency.
(2) The holder's demand to the Agency must include a copy of the written demand made upon the lender. The holder or duly authorized agent must also include evidence of the right to require payment from the Agency. Such evidence will consist of either the original of the Loan Note Guarantee properly endorsed to the Agency or the original of the Assignment Guarantee Agreement properly assigned to the Agency without recourse including all rights, title, and interest in the loan. The Agency will be subrogated to all rights of the holder. The holder must include in the demand the amount due including unpaid principal, unpaid interest to date of demand, and interest subsequently accruing from the date of demand to the proposed payment date. Unless otherwise agreed to by the Agency, such proposed payment will not be later than 30 days from the date of demand.
(3) The lender must promptly provide the Agency with the information necessary for the Agency's determination of the appropriate amount due the holder upon the Agency's notification to the lender of the holder's demand for payment. This information must be certified by an authorized officer of the lender. Any discrepancy between the amount claimed by the holder and the information submitted by the lender must be resolved before payment will be approved. The Agency will notify both parties and such conflict will suspend the running of the 30-day payment requirement.
(4) Any purchase by the Agency does not change, alter, or modify any of the lender's obligations to the Agency arising from the loan or guarantee nor does it waive any of the Agency's rights against the lender. The Agency may set off against the lender all rights inuring Start Printed Page 23147to the Agency as the holder of the instrument against the Agency's obligation to the lender under the Loan Note Guarantee.
(c) Repurchase for servicing. When the lender determines that repurchase of the guaranteed portion of the loan is necessary to service the loan, the holder must sell the guaranteed portion to the lender for the unpaid principal and interest balance (less the lender's servicing fee). The guarantee does not cover interest accruing after 90 days from the date the lender's or Agency's letter requesting the holder to tender its guaranteed portion. The lender must not repurchase from the holder for arbitrage purposes to further its own financial gain. Any repurchase must be made only after the lender obtains the Agency written approval. If the lender does not repurchase the portion from the holder, the Agency may, at its option, purchase such guaranteed portion for servicing purposes.
(a) General. Subject to the restrictions below, the borrower, lender, and holder (if any) may collectively effect a permanent reduction in the interest rate on the guaranteed loan at any time during the life of the loan on written agreement by all of the applicable parties. After such a permanent reduction, the Loan Note Guarantee will only cover losses of interest at the reduced interest rate. The Agency must be notified by the lender, in writing, within 10 calendar days of the change. When the Agency is a holder, it will concur only when it is demonstrated that the change is more viable than liquidation and that the Government's financial interests are not adversely affected. Factors which will be considered in making such determination are the Government's cost of borrowing money and the project's enhancement of rural development. The monetary recovery must be greater than the liquidation recovery, and a financial feasibility analysis must show the project's continued viability.
(1) Fixed rates cannot be changed to variable rates to reduce the interest rate to the borrower unless the variable rate has a ceiling which is less than the original fixed rate.
(2) Variable rates can be changed to a lower fixed rate. In a final loss settlement when qualifying rate changes are made with the required written agreements and notification, the interest will be calculated for the periods the given rates were in effect. The lender must maintain records which adequately document the accrued interest claimed.
(3) The lender is responsible for the legal documentation of interest rate changes. However, the lender may not issue a new note.
(b) Increases. No increases in interest rates will be permitted under the loan guarantee except the normal fluctuations in approved variable interest rate loans.
Liquidation will occur when the lender concludes that liquidation of the guaranteed loan is necessary because of default or third party actions that the borrower cannot, or will not, cure or eliminate within a reasonable period of time and the Agency concurs with the lender; or the Agency, at any time, independently concludes that liquidation is necessary. The lender will proceed as expeditiously as possible, including giving any notices or taking any legal actions required by the security instruments.
(a) General. If a lender has made a loan guaranteed by the Agency under previous regulations, the lender has the option to liquidate the loan under the provisions of this part or under the provisions of previous regulations. The lender will notify the Agency in writing within 10 days after its decision to liquidate, which regulatory provisions it chooses to use. The lender may not choose some provisions of one regulation and other provisions of the other regulation.
(b) Acquiring property titles. If a lender acquires title to property, the Agency may elect to permit the lender the option of calculating the final loss settlement using the net proceeds received at the time of the ultimate disposition of the property. The lender must submit to the Agency a written request to use this option within 15 days of acquiring title and the Agency must agree, in writing, prior to the lender submitting any request for estimated loss payment.
(c) Liquidation plan. The lender will (within 30 days after a decision to liquidate) submit to the Agency, in writing, a proposed, detailed liquidation plan. Upon approval by the Agency of the liquidation plan, the lender will commence liquidation. The lender's liquidation plan must include, but is not limited to, the following:
(1) Such proof as the Agency requires to establish the lender's ownership of the guaranteed loan notes and related security instruments, a copy of the payment ledger or other documentation which reflects the outstanding loan balance and accrued interest to date, and the method of computing the interest;
(2) A complete list of collateral;
(3) The recommended liquidation methods for making the maximum collection possible on the indebtedness and the justification for such methods, including the recommended action for acquiring and disposing of all collateral;
(4) Necessary steps for preservation of the collateral;
(5) Copies of the borrower's latest available financial statements;
(6) An itemized list of estimated liquidation expenses expected to be incurred and justification for each expense;
(7) A schedule to periodically report to the Agency on the progress of the liquidation;
(8) Estimated protective advance amounts with justification;
(9) Proposed protective bid amounts on collateral to be sold at auction and a discussion of how the amounts were determined;
(10) If a voluntary conveyance is considered, the proposed amount to be credited to the guaranteed debt;
(11) Legal opinions, as needed; and
(12) If the outstanding balance of principal and interest is less than $250,000, the lender will obtain an estimate of fair market and potential liquidation value of the collateral. If the outstanding balance of principal and interest is $250,000 or more, the lender will obtain an independent appraisal report on all collateral securing the loan which will reflect the fair market value and potential liquidation value. The independent appraiser's fee will be shared equally by the Agency and the lender.
(d) Partial liquidation plan. If actions are necessary to immediately preserve and protect the collateral, a partial liquidation plan may be submitted and, when approved, must be followed by a complete liquidation plan prepared by the lender.
(e) Disposition of collateral. Disposition of collateral acquired by the lender must be approved, in writing, by the Agency when:
(1) The lender's cost to acquire the collateral of a borrower exceeds the potential recovery value of the security and the lender proposes abandoning the collateral in lieu of liquidation; or
(2) The acquired collateral is to be sold to the borrower, borrower's stockholders or officers, or the lender or lender's stockholders or officers.
(f) Agency liquidation. The Agency will liquidate at its option only when it is a holder and there is reason to believe the lender is not likely to initiate Start Printed Page 23148liquidation efforts that will result in maximum recovery. When the Agency liquidates, proceeds derived from the sale of the collateral will be applied first to reasonable liquidation expenses and second to the guaranteed portion of the loan.
(g) Final loss payment. Final loss payments will be made only after all collateral has been properly accounted for and liquidation expenses are determined to be reasonable and within approved limits. Any estimated loss payments made to the lender will be credited against the final loss on the guaranteed loan. The amount of an estimated loss payment must be credited as a deduction from the principal balance of the loan.
Protective advances can only be added to the loan account for purposes of requirements to preserve the value of the security. Protective advances constitute an indebtedness of the borrower to the lender and must be secured by collateral to the same extent as principal and interest. Protective advances include, but are not limited to, advances made for taxes, annual assessments, ground rent, hazard and flood insurance premiums affecting the collateral (including any other expenses necessary to protect the collateral). Attorney fees are not a protective advance.
(a) Agency approval. The Agency must approve, in writing, all protective advances on loans within its loan approval authority which exceed a total cumulative advance amount of $5,000 to the same borrower. Protective advances must be reasonable when associated with the value of the collateral being preserved.
(b) Preserving collateral. When considering protective advances, sound judgment must be exercised in determining that the additional funds advanced will actually preserve collateral and recovery is actually enhanced by making the advance.
The lender will not make additional expenditures or new loans to the borrower without first obtaining the written approval of the Agency even though such expenditures or loans will not be guaranteed.
(a) Calculating losses. Report of Loss form (available in any Agency office) will be used for calculating estimated and final loss determinations.
(b) Lender responsibility. The lender is responsible for protecting the guaranteed loan debt and all the collateral securing it in bankruptcy proceedings. These responsibilities include, but are not limited to, the following:
(1) Filing a proof of claim, where necessary, and all necessary papers and pleadings;
(2) Attending and, where necessary, participating in meetings of the creditors and all court proceedings;
(3) Immediately seeking adequate protection of the collateral if it is subject to being used by the trustee in bankruptcy or the debtor in possession;
(4) Where appropriate, seeking involuntary conversion of a pending chapter 11 case to a liquidation proceeding or seeking dismissal of the proceedings; and
(5) Keeping the Agency adequately and regularly informed, in writing, of all aspects of the proceedings.
(c) Appraisals. In a chapter 9 or chapter 11 reorganization, the lender must obtain an independent appraisal of the collateral if the Agency believes an independent appraisal is necessary. The Agency and the lender will share the appraisal fee equally.
(d) Liquidation expenses. Only expenses authorized by the court of chapter 9 plans or chapter 11 reorganizations, or chapters 11 or 7 liquidation (unless the liquidation is by the lender), may be deducted from the collateral proceeds.
(e) Repurchase from the holder. The Agency or the lender, with the approval of the Agency, may initiate the repurchase of the unpaid guaranteed portion of the loan from the holder. If the lender is the holder, an estimated loss payment may be filed at the initiation of a chapter 7 proceeding or after a chapter 9 or chapter 11 proceeding becomes a liquidation proceeding. Any loss payment on loans in bankruptcy must be approved by the Agency.
(f) Chapter 11 bankruptcy. If a borrower has filed for protection under chapters 9 or 11 of the United States Code for a reorganization (but not chapter 13) and all or a portion of the debt has been discharged, the lender may request an estimated loss payment of the guaranteed portion of the accrued interest and principal discharged by the court. If the court approves revisions to the chapter 9 plan or chapter 11 reorganization plan, subsequent estimated loss payments may be requested in accordance with the court approved changes. Once the reorganization plan has been satisfactorily completed, the lender is responsible for submitting the documentation necessary for the Agency to review and adjust the estimated loss claim to reflect any actual discharge of principal and interest and to reimburse the lender for any court ordered interest-rate reduction under the terms of the reorganization plan.
(g) Agency approval of estimated liquidation expenses. The Agency must approve, in advance and in writing, the lender's estimated liquidation expenses of collateral in a liquidation if the liquidation is performed by the lender. These expenses must be reasonable and customary and not include in-house expenses of the lender.
(h) Reconciliation. In the event that the estimated loss payment exceeds the actual loss, the lender will reimburse the Agency the amount in excess of the actual loss plus interest at the note rate from the date of the estimated loss payment.
(a) General. For all transfers and assumptions, the lender must concur in the plans for disposition of funds in the transferor's debt service, reserve, and operation and maintenance account. The Agency will approve, in writing, transfers and assumptions of loans to transferees who will continue the original purpose of the guaranteed loan subject to the following applicable provisions:
(1) When the transaction is to a member of the borrower's organization, it will be at an amount which will not result in a loss to the lender.
(2) Transfers to eligible borrowers will receive preference if recovery to the lender from the sale price is not less than it would be if the transfer was to an ineligible borrower.
(3) The present borrower is unable or unwilling to accomplish the objectives of the guaranteed loan, and the transfer will be to the lender's and Agency's advantage.
(4) The transferee will assume an amount at least equal to either the present market value or the debt, whichever is less.
(b) Transfers to an eligible borrower. (1) The total indebtedness may be transferred to an eligible borrower on the same terms.
(2) The total indebtedness may be transferred to another eligible borrower on different terms not to exceed those terms for which an initial guaranteed loan can be made.
(3) Less than the total indebtedness may be transferred to another eligible borrower on the same or different terms Start Printed Page 23149and the pro rata share of any eligible loss paid to the lender.
(4) A guaranteed loan for which the transferee is eligible may be made in connection with a transfer subject to the policies and procedures governing the type of loan being made.
(5) If the transferor is to receive a payment for the equity, the total debt must be assumed.
(c) Ineligible borrower. Transfers to ineligible borrowers are considered only when needed as a method for servicing problem cases when an eligible transferee is not available. Transfers should not be considered as a means by which members can obtain equity or as a method of providing a source of easy credit for purchasers. Transfers must meet the following requirements:
(1) All transfers to ineligible borrowers will include a one-time nonrefundable transfer fee to the Agency of no more than 1 percent. Transfer fees will be collected, and payments applied, in accordance with paragraph (d) of this section.
(2) For all loans covered by this part, the Agency may approve a transfer of indebtedness to, and assumption of, a loan by a transferee who does not meet the eligibility requirements for the kind of loan being assumed when the ineligible borrower will:
(i) Make a significant down payment, and
(ii) Agree to pay the remaining balance within not more than 15 years. Installments will be at least equal to the amount amortized over a period not greater than the remaining life of the debt being transferred, and the balance will be due the fifteenth year.
(3) Interest rates to ineligible transferees will be the rate specified in the note of the transferor or the rates customarily charged borrowers in similar circumstances in the ordinary course of business and are subject to Agency review and approval. The rates may be either fixed or variable.
(i) Transferees must have the ability to repay as determined by the lender the debt according to the Assumption Agreement and must have the legal authority to enter into the contract. The transferee will submit a current balance sheet to the lender. The lender will obtain and analyze the credit history of the transferee.
(ii) The transferor may receive equity payments only when the full amount of the debt is assumed. However, equity payments will not be made on more favorable terms than those on which the balance of the debt will be paid.
(d) Transfer fees. Transfer fees are a one-time nonrefundable cost to be collected by the lender at the time of application or proposal.
(1) The transfer fees will be a standard fee plus the cost of the appraisal.
(2) The lender will collect and submit the fee to the Agency.
(3) The Agency may waive the transfer fee if it determines that such waiver is in the best interest of the Agency.
(e) Processing transfers and assumptions. (1) In any transfer and assumption case, the transferor (including any guarantor) may be released from liability by the lender only with prior Agency written concurrence and only when the value of the collateral being transferred is at least equal to the amount of the loan, or part of the loan, being assumed. If the transfer is for less than the entire debt:
(i) The Agency must determine that the transferor and any guarantor have no reasonable debt-paying ability considering their assets and income at the time of transfer, and
(ii) The lender must certify that the transferor has cooperated in good faith, used due diligence to maintain the collateral against loss, and has otherwise fulfilled all of the regulations of this part to the best of the borrower's ability.
(2) The lender will make, in all cases, a complete credit analysis to determine viability of the project (subject to the Agency review and approval) including any requirement for deposit in an escrow account as security to meet the determined equity requirements for the project.
(3) The lender will confirm that the transaction can be properly transferred and the conveyance instruments will be filed, registered, or recorded as appropriate and legally permissible.
(4) The assumption will be made on the lender's form of Assumption Agreement and will contain the Agency case number of the transferor and transferee.
(5) Loan terms cannot be changed by the Assumption Agreement unless previously approved in writing by the Agency with the concurrence of holder and the transferor (including guarantor if it has not been released from personal liability). Any new loan terms cannot exceed those authorized in this part. The lender's request will be supported by:
(i) An explanation of the reasons for the proposed change in the loan terms, and
(ii) Certification that the lien position securing the guaranteed loan will be maintained or improved, and proper hazard insurance will be continued in effect.
(6) In the case of a transfer and assumption, it is the lender's responsibility to see that all such transfers and assumptions will be noted on all originals of the Loan Note Guarantee. The lender will provide the Agency a copy of the Transfer and Assumption Agreement.
(7) If a loss should occur upon a complete transfer of assets and assumption for less than the full amount of the debt and the transferor-debtor (including personal guarantor) is released from personal liability (as provided in paragraph (e)(1)(i) of this section), the lender (if holding the guaranteed portion) may file an estimated Report of Loss to recover their pro rata share of the actual loss at that time. Approved protective advances and accrued interest made during the arrangement of a transfer and assumption, if not assumed by the transferee, will be entered on the estimated Report of Loss.
(a) General. The Agency may approve mergers or consolidations (herein referred to as “mergers”) when the resulting organization will be eligible for an Agency guaranteed loan and assumes all the liabilities and acquires all the assets of the merged borrower. Mergers may be approved when:
(1) The merger is in the best interest of the Government and the merging borrower;
(2) The resulting borrower can meet all required conditions as contained in specific loan note agreements; and
(3) All property can be legally transferred to the resulting borrower.
(b) Distinguishing mergers from transfers and assumptions. Mergers occur when one entity combines with another entity in such a way that the first entity ceases to exist as a separate entity while the other continues. In a consolidation, two or more entities combine to form a new, consolidated entity with the original entity ceasing to exist. Such transactions must be distinguished from transfers and assumptions in which a transferor will not necessarily go out of existence, and the transferee will not always take all the transferor's assets nor assume all the transferor's liabilities.
(a) General. When the lender acquires title to the collateral and the final loss claim is not paid until final disposition, the lender must proceed as quickly as possible to develop a plan to fully protect the collateral, and the lender Start Printed Page 23150must dispose of the collateral without delay.
(b) Re-title collateral. Any collateral accepted by the lender must not be titled in the Agency's name in whole or in part. The Agency's position is that of a guarantor relating to losses, not a lender.
(c) Collateral preservation. After acquiring the collateral, the lender must protect the collateral from deterioration (weather, vandalism, etc.). Hazard insurance in an amount necessary to cover the fair market value of the collateral must be maintained.
(d) Collateral sale. (1) The lender will prepare and submit to the Agency a plan on the best method of sale, keeping in mind any prospective purchasers. The Agency must approve the plan in writing. If an existing approved liquidation plan addresses the disposition of acquired property, no further review is required unless modification of the plan is needed.
(2) Anytime there is a case when the conversion of collateral to cash can reasonably be expected to result in a negative net recovery amount, abandonment of the collateral should be considered. The Agency must approve abandonment in writing.
In all liquidation cases, final settlement will be made with the lender after the collateral is liquidated. The Agency will have the right to recover losses paid under the guarantee from any liable party.
(a) General. If the lender takes title to collateral, any loss will be based on the collateral value at the time the lender obtains title.
(b) Loss calculations. The Report of Loss form (available in any Agency office) will be used for calculations of all estimated and final loss determinations. Estimated loss payments may only be approved after the lender has submitted a liquidation plan approved by the Agency.
(c) Estimated loss payments. When the lender is conducting the liquidation and owns any of the guaranteed portion of the loan, it may request an estimated loss payment by submitting an estimate of loss that will occur in connection with liquidation of the loan. An estimated loss payment may be approved after the Agency has approved the liquidation plan.
(1) The lender will prepare and submit a Report of Loss using the appraised value in lieu of amount received from sale of collateral.
(2) The estimated loss payment shall be calculated as of the date of such payment. The total amount of the loss payment remitted by the Agency will be applied by the lender on the guaranteed portion of the loan debt. Such application does not release the borrower from liability. At the time of final loss settlement, the lender may notify the borrower that the loss payment has been so applied.
(3) After liquidation has been completed, a final Report of Loss will be submitted by the lender to the Agency.
(d) Final report of loss. In all cases, a final Report of Loss must be submitted to the Agency. Before Agency approval of any final loss report, the lender must account for all funds obtained, disposition of the collateral, all costs incurred, and any other information necessary for the successful completion of liquidation. Upon receipt of the final accounting and Report of Loss, the Agency may conduct an audit and will determine the final loss. The lender will make its records available to, and otherwise assist, the Agency in making any audit it requires of the Report of Loss. The documentation accompanying the Report of Loss must support the loss claimed.
(1) The lender must document and show that all of the collateral has been accounted for and properly liquidated and that liquidation proceeds have been properly accounted for and applied correctly on the loan. The Agency must be satisfied that the lender has accomplished this in the manner contained herein and that the lender has maximized the collections in conducting the liquidation.
(2) The lender must show a breakdown on any protective advance amount as to the payee, purpose of the expenditure, date paid, evidence that the amount expended was proper, and that the amount was actually paid.
(3) The lender must show a breakdown of liquidation expenses as to the payee, purpose of the expenditure, date paid, evidence that the amount expended was proper, and that the amount was actually paid.
(4) Accrued interest should be supported by attachments showing how the amount was accrued by the lender. A copy of the promissory note and ledger will be attached. If the interest rate was a variable rate, the lender must include documentation of changes in the selected base rate and when the changes in the loan rate became effective.
(e) Liquidation income. Any net rental or other income that has been received by the lender from the collateral will be applied on the guaranteed loan debt.
(f) Liquidation costs. Certain reasonable liquidation costs will be allowed during the liquidation process. The liquidation costs must be submitted as a part of the liquidation plan. Such costs will be deducted from gross proceeds received from the disposition of collateral unless the costs have been previously determined by the lender (with Agency concurrence) to be protective advances. If changed circumstances after submission of the liquidation plan require a revision of liquidation costs, the lender will obtain the Agency's written concurrence prior to proceeding with the proposed changes. No in-house expenses of the lender will be allowed.
(g) Protective advance losses. In those instances where the lender made authorized protective advances, the lender may claim recovery for the guaranteed portion of any loss of monies advanced as well as interest resulting from such protective advances. These claims shall be included in the final Report of Loss.
(h) Final loss approval. After the final Report of Loss has been tentatively approved:
(1) If the actual loss is greater than any estimated loss payment, such loss will be paid by the Agency;
(2) If the actual loss is less than any estimated loss payment, the lender will reimburse the Agency;
(3) If the Agency conducted the liquidation, it will provide an accounting to the lender and will pay the lender in accordance with the Loan Note Guarantee.
(i) Loss limits. The amount payable by the Agency to the lender cannot exceed the limits contained in the Loan Note Guarantee. If the Agency conducts the liquidation, loss occasioned by accruing interest will be covered by the guarantee only to the date the Agency accepts this responsibility. When the liquidation is conducted by the lender, loss occasioned by accruing interest will be covered to the extent of the guarantee to the date of final settlement provided the lender proceeds expeditiously with the liquidation plan approved by the Agency.
After a loan has been liquidated and a final loss has been paid by the Agency, any future funds which may be recovered by the lender will be pro-rated between the Agency and the lender in accordance with the guaranteed percentage even if the Loan Note Guarantee has been terminated.
The Loan Note Guarantee under this part will terminate automatically:
(a) Upon full payment of the guaranteed loan; or
(b) Upon full payment of any loss obligation or negotiated loss settlement except for future recovery provisions; or
(c) Upon written request from the lender to the Agency, provided that the lender holds all of the guaranteed portion and the original Loan Note Guarantee is returned to the Agency.
The reporting and recordkeeping requirements contained in this part have been approved by the Office of Management and Budget and have been assigned OMB control number 0572-0122.
PART 1780—WATER AND WASTE LOANS AND GRANTSEnd Part Start Amendment Part
2. The authority citation for part 1780 continues to read as follows:End Amendment Part
Subpart A—General Policies and RequirementsStart Amendment Part
3. Amend § 1780.10(b)(4) by removing the reference “subpart I of part 1980 of this title” and adding in its place “ 7 CFR part 1779.”End Amendment Part
Chapter XVIII—Rural Housing Service, Rural Business—Cooperative Services, Rural Utilities Service, and Farm Service Agency, Department of AgricultureStart Part
PART 1980—GENERALEnd Part Start Amendment Part
4. The authority citation for part 1980 continues to read as follows:End Amendment Part
Subpart A—[Removed and Reserved]Start Amendment Part
5. Remove and reserve subpart A, consisting of §§ 1980.1 through 1980.100 and Appendices A through C.End Amendment Part
Subpart I—[Removed and Reserved]Start Amendment Part
6. Remove and reserve Subpart I, consisting of §§ 1980.801 through 1980.900.End Amendment Part Start Signature
Dated: April 23, 2001.
Acting Deputy Under Secretary, Food, Nutrition and Consumer Services.
[FR Doc. 01-11366 Filed 5-7-01; 8:45 am]
BILLING CODE 3410-15-P