[Federal Register: September 14, 2007 (Volume 72, Number 178)] [Proposed Rules] [Page 52617-52666] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr14se07-21] [[Page 52617]] ----------------------------------------------------------------------- Part II Department of Agriculture ----------------------------------------------------------------------- Rural Utilities Service Rural Housing Service Rural Business-Cooperative Service ----------------------------------------------------------------------- 7 CFR Parts 1779, 3575, 4279, et al. Rural Development Guaranteed Loans; Proposed Rule [[Page 52618]] ----------------------------------------------------------------------- DEPARTMENT OF AGRICULTURE Rural Utilities Service 7 CFR Part 1779 Rural Housing Service 7 CFR Part 3575 Rural Business-Cooperative Service Rural Utilities Service 7 CFR Parts 4279 and 4280 Rural Business-Cooperative Service Rural Housing Service Rural Utilities Service 7 CFR Part 5001 RIN 0570-AA65 Rural Development Guaranteed Loans AGENCY: Rural Business-Cooperative Service, Rural Housing Service, Rural Utilities Service, USDA. ACTION: Proposed rule. ----------------------------------------------------------------------- SUMMARY: Rural Development, a mission area within the U.S. Department of Agriculture, is proposing a unified guaranteed loan platform for enhanced delivery of four existing Rural Development guaranteed loan programs--Community Facility; Water and Waste Disposal; Business and Industry; and Renewable Energy Systems and Energy Efficiency Improvement Projects. This proposed rule would eliminate the existing loan guarantee regulations for these four programs and consolidate them under a new, single part. In addition to consolidating these four programs, the proposed rulemaking incorporates provisions that will enable the Agency to better manage the risk associated with making and servicing guaranteed loans and that will reduce the cost of operating the guaranteed loan programs. Such provisions include incorporating specific project eligibility criteria, revisions to the requirements for lenders to participate in the programs, allowing approved lenders to become preferred lenders, and allowing guaranteed loan applications to be submitted with less documentation accompanying the application under certain conditions. DATES: Comments on the proposed rule must be received on or before November 13, 2007. The comment period for the information collection under the Paperwork Reduction Act of 1995 continues through November 13, 2007. ADDRESSES: You may submit comments to this rule by any of the following methods: Agency Web Site: http://www.rurdev.usda.gov/regs. Follow instructions for submitting comments on the Web site. E-Mail: comments@wdc.usda.gov. Include the RIN No. 0570- AA65 in the subject line of the message. Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. Mail: Submit written comments via the U.S. Postal Service to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., Washington, DC 20250-0742. Hand Delivery/Courier: Submit written comments via Federal Express Mail or other courier service requiring a street address to the Branch Chief, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, 300 7th Street, SW., 7th Floor, Washington, DC 20024. All written comments will be available for public inspection during regular work hours at the 300 7th Street, SW., 7th Floor address listed above. FOR FURTHER INFORMATION CONTACT: Mr. Michael Foore, Rural Development, Business and Cooperative Programs, U.S. Department of Agriculture, 1400 Independence Avenue, SW., Stop 3201, Washington, DC 20250-3201; e-mail: Michael.Foore@wdc.usda.gov; telephone (202) 690-4730. SUPPLEMENTARY INFORMATION: Executive Order 12866 This proposed rule has been reviewed under Executive Order (EO) 12866 and has been determined to be significant by the Office of Management and Budget. The EO defines a ``significant regulatory action'' as one that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 million or more or adversely affect, in a material way, the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities; (2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this EO. The Agency conducted a qualitative benefit cost analysis to fulfill the requirements of Executive Order 12866. Based on the results of this qualitative analysis of the benefits and costs of the proposed rule, the Agency has concluded that the net effect of the rule will be beneficial in part due to improved underwriting. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act 1995 (UMRA) of Public Law 104-4 establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. Under section 202 of the UMRA, Rural Development generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with ``Federal mandates'' that may result in expenditures to State, local, or tribal governments, in the aggregate, or to the private sector of $100 million or more in any one year. When such a statement is needed for a rule, section 205 of UMRA generally requires Rural Development to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost-effective, or least burdensome alternative that achieves the objectives of the rule. This proposed rule contains no Federal mandates (under the regulatory provisions of Title II of the UMRA) for State, local, and tribal governments or the private sector. Thus, this rule is not subject to the requirements of sections 202 and 205 of the UMRA. Environmental Impact Statement This document has been reviewed in accordance with 7 CFR part 1940, subpart G, ``Environmental Program.'' Rural Development has determined that this action does not constitute a major Federal action significantly affecting the quality of the human environment, and in accordance with the National Environmental Policy Act (NEPA) of 1969, 42 U.S.C. 4321 et seq., an Environmental Impact Statement is not required. Loan applications will be reviewed individually to determine compliance with NEPA. Executive Order 12988, Civil Justice Reform This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. In accordance with this rule: (1) All State and local laws and regulations that are in conflict with this rule will be preempted; (2) no retroactive effect will be given this rule; and (3) administrative proceedings in accordance with the regulations of the Department of Agriculture National Appeals Division (7 CFR part 11) must [[Page 52619]] be exhausted before bringing suit in court challenging action taken under this rule unless those regulations specifically allow bringing suit at an earlier time. Executive Order 13132, Federalism It has been determined, under Executive Order 13132, Federalism, that this proposed rule does not have sufficient federalism implications to warrant the preparation of a Federalism Assessment. The provisions contained in the proposed rule will not have a substantial direct effect on States or their political subdivisions or on the distribution of power and responsibilities among the various government levels. Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601-602) (RFA) generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administrative Procedure Act or any other statute unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small organizations, and small governmental jurisdictions. In compliance with the RFA, Rural Development has determined that this action will not have a significant economic impact on a substantial number of small entities. Rural Development made this determination based on the fact that this regulation only impacts those who choose to participate in the program. Small entity applicants will not be impacted to a greater extent than large entity applicants. Executive Order 12372, Intergovernmental Review of Federal Programs Rural Development Guaranteed Loans are subject to the Provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials. Rural Development will conduct intergovernmental consultation in the manner delineated in RD Instruction 1940-J, ``Intergovernmental Review of Rural Development Programs and Activities,'' available in any Rural Development office, on the Internet at http://rurdev.usda.gov.regs, and in 7 CFR part 3015, subpart V. Executive Order 13175, Consultation and Coordination With Indian Tribal Governments This executive order imposes requirements on Rural Development in the development of regulatory policies that have tribal implications or preempt tribal laws. Rural Development has determined that the proposed rule does not have a substantial direct effect on one or more Indian tribe(s) or on either the relationship or the distribution of powers and responsibilities between the Federal Government and the Indian tribes. Thus, the proposed rule is not subject to the requirements of Executive Order 13175. Programs Affected The Catalog of Federal Domestic Assistance Program numbers assigned to this program are 10.760, Water and Waste Disposal Systems for Rural Communities; 10.766, Community Facilities Loans and Grants; 10.768, Business and Industry Loans; and 10.775, Renewable Energy Systems and Energy Efficiency Improvements Program. Paperwork Reduction Act In accordance with the Paperwork Reduction Act of 1995, Rural Development will seek OMB approval of the reporting and recordkeeping requirements contained in this proposed rule and hereby opens a 60-day public comment period. Title: Rural Development Guarantee Loans. Type of Request: New collection. Abstract: Rural Development is implementing a new consolidated guaranteed loan platform. The new guaranteed loan platform would combine the following four existing guaranteed loan regulations into a consolidated rule: (1) The Community Facility Program, (2) the Water and Waste Disposal Program, (3) the Business and Industry Program, and (4) the Renewable Energy Systems and Energy Efficiency Improvements Program under Title IX, Section 9006 of the Farm Security and Rural Investment Act of 2002 (FSRIA 2002). These programs provide loan guarantees for a variety of projects intended to improve the economies of rural America. The information required under the proposed rule is similar to much of the information currently being required under the four separate regulations. Under these four separate regulations, the current information being collected is approved under OMB control numbers 0570- 0016, 0670-0018, 0572-0122, and 0575-0137. The proposed rule, however, is requesting some new information from lenders. The two primary examples are: (1) lenders are required to supply information to the Agency in order to be approved for participation in the program and (2) more frequent reporting of loans that are in default. On the other hand, the proposed rule would not include some information previously being requested. This is most evident for the Renewable Energy Systems and Energy Efficiency Improvements guaranteed loan program, where technical reports are being required only for higher cost renewable energy systems projects because renewable energy projects of less than $200,000 are less complex, so for such projects the technical reports only have marginal value, and the energy audit requirements from energy efficiency improvement projects are sufficient so that separate technical reports also have only marginal value. The proposed rule creates a single set of common forms that lenders can use across all four programs, thereby creating efficiencies in reporting. On net, the information being requested to support the consolidated program is estimated to reduce burden and cost to lenders and borrowers. As noted in the previous paragraph, the information requirements contained in this proposed rule require information from lenders and borrowers. This information is vital to Rural Development to make wise decisions regarding the eligibility of projects, borrowers, and lenders in order to reduce the risk associated with making the loan guarantees, to ensure compliance with the proposed rule, to ensure that the funds obtained from the Government are used appropriately, and to effectively monitor the borrowers and lenders to protect the financial interests of the Government. In sum, this collection of information is necessary in order to implement the consolidated guaranteed loan regulation being proposed. The following estimates are based on the average over the first three years the program is in place. Estimate of Burden: Public reporting burden for this collection of information is estimated to average 2.6 hours per response. Respondents: Rural developers, farmers and ranchers, rural businesses, public bodies, local governments, lenders. Estimated Number of Respondents: 3,450. Estimated Number of Responses per Respondent: 5.4. Estimated Number of Responses: 18,472. [[Page 52620]] Estimated Total Annual Burden (hours) on Respondents: 48,892. Copies of this information collection may be obtained from Cheryl Thompson, Regulations and Paperwork Management Branch, Support Services Division, U.S. Department of Agriculture, Rural Development, STOP 0742, 1400 Independence Ave., SW., Washington, DC 20250-0742 or by calling (202) 692-0043. Comments: Comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of Rural Development, including whether the information will have practical utility; (b) the accuracy of the new Rural Development estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (c) ways to enhance the quality, utility, and clarity of the information to be collected; and (d) ways to minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology. Comments may be sent to Cheryl Thompson, Regulations and Paperwork Management Branch, U.S. Department of Agriculture, Rural Development, STOP 0742, 1400 Independence Ave., SW., Washington, DC 20250. All responses to this proposed rule will be summarized and included in the request for OMB approval. All comments will also become a matter of public record. E-Government Act Compliance Rural Development is committed to complying with the E-Government Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes. I. Background Rural Development proposes a unified platform for delivery of four existing Rural Development guaranteed loan programs--Community Facility; Water and Waste Disposal; Business and Industry; and Renewable Energy Systems and Energy Efficiency Improvement Projects. These four programs are administered by Rural Housing Service (Community Facilities), Rural Utilities Services (Water and Waste Disposal), and Rural Business-Cooperative Service (Business and Industry and the Renewable Energy Systems and Energy Efficiency Improvements Projects). Collectively, Rural Development's programs work together to assist in building and maintaining entire, sustainable rural communities. Under the unified guaranteed loan platform, Rural Development will simplify, improve, and enhance the delivery of these four guaranteed loan programs across their service areas. The remainder of this section describes Rural Development's mission, the four current guaranteed loan programs being aligned under the new platform, why the new platform is being proposed, and how the new platform will work. A. Rural Development's Mission By statutory authority, Rural Development is the leading Federal advocate for rural America, administering a multitude of programs, ranging from housing and community facilities to infrastructure and business development. Its mission is to increase economic opportunity and improve the quality of life in rural communities by providing the leadership, infrastructure, venture capital, and technical support that enables rural communities to prosper and supports them in the dynamic global environment defined by the Internet revolution, and the rise of new technologies, products, and markets. To achieve its mission, Rural Development provides financial support (including direct loans, grants, and loan guarantees) and technical assistance to help enhance the quality of life and provide the foundation for economic development in rural areas. This proposed rulemaking addresses the use of guaranteed loans in achieving Rural Development's mission. B. Current Guaranteed Loan Programs Under this proposed rule, Rural Development is combining under one regulation the four guaranteed loan regulations of the following programs: Community Facilities, Water and Waste Disposal, Business and Industry, and Renewable Energy Systems and Energy Efficiency Improvements. The following paragraphs describe briefly the scope of each of the four current programs with regard to eligible projects, borrowers, and lenders; application processes; and guarantee and loan terms. Community Facilities Guaranteed Loan Program. The Community Facilities Guaranteed Loan Program guarantees loans to develop essential community facilities in rural areas and towns of up to 20,000 in population. Loan funds may be used to construct, enlarge, or improve community facilities for health care, public safety, and public services. This can include costs to acquire land needed for a facility, pay necessary professional fees, and purchase equipment required for its operation. Refinancing existing loans may be considered an eligible guaranteed loan purpose under some circumstances. Eligible borrowers for Community Facilities guaranteed loans are public entities, such as municipalities, counties, and special-purpose districts, as well as not-for-profit corporations and tribal governments who are unable to obtain a loan without the Government's guarantee. Borrowers must have the legal authority to borrow and repay loans; to pledge security for loans, and to construct, operate; and maintain the facilities. Eligible lenders for Community Facilities guaranteed loans include banks, savings and loan associations, mortgage companies that are part of bank holding companies, banks of the Farm Credit System, and insurance companies regulated by the National Association of Insurance Commissioners. 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. Lenders must also have the capability to adequately service the loans for which a guarantee is requested. The lender is responsible for conducting an analysis of the proposed project to ensure loan repayment, taking into consideration tax assessments, revenues, fees, or other sources of money sufficient for operation and maintenance, reserves, and debt retirement. Financial feasibility studies, prepared by independent consultants, are normally required when loans are for start-up facilities or for existing facilities when the project will significantly change the borrower's financial operations. Recently under this program, guarantees have averaged 85 percent of the eligible loss of the loan. Lenders may impose an interest rate that is similar to unguaranteed projects. Interest rates may be fixed or variable, are determined by the lender and borrower, and are subject to Agency review and approval. Loan repayment terms may not exceed the lender's authority (under State law or organizational structure), the useful life of the facility, or a maximum 40 years. Water and Waste Disposal Guaranteed Loan Program. The Water and Waste Disposal Guaranteed Loan Program guarantees loans to develop [[Page 52621]] water and wastewater systems, including solid waste disposal and storm drainage, in rural areas and to cities and towns with a population of 10,000 or less. Example projects include construction of water lines, pumping stations, wells, storage tanks, and sewage treatment facilities. Eligible borrowers include public entities, such as municipalities, counties, special-purpose districts, and Indian tribes. In addition, funds may be made available to corporations operated on a not-for- profit basis. Borrowers must be unable to obtain funds from other sources at reasonable rates and terms. Borrowers must have the legal authority to borrow and repay loans, to pledge security for loans, and to construct, operate, and maintain the facilities. Eligible lenders for Water and Waste Disposal guaranteed loans include banks, savings and loan associations, mortgage companies that are part of a bank holding company, banks of the Farm Credit System, and insurance companies regulated by the National Association of Insurance Commissioners. 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. Lenders must also have the capability to adequately service the loans for which a guarantee is requested. The lender is responsible for conducting an analysis of the proposed project to ensure loan repayment, taking into consideration tax assessments, revenues, fees, or other sources of money sufficient for operation and maintenance, reserves, and debt retirement. Feasibility studies are normally required when loans are for start-up facilities or existing facilities when the project will significantly change the borrower's financial operations. The feasibility study should be prepared by an independent consultant with recognized expertise in the type of facility being financed. The Agency will determine borrower eligibility, project priority status, and funding availability. Priority is given to public entities, in areas with less than 5,500 people, to restore a deteriorating water supply, or to improve, enlarge, or modify a water facility or an inadequate waste facility. Preference is also given to requests that involve the merging of small facilities and those serving low-income communities. After an application is submitted, the time to process the application depends upon the scope of the project, environmental review, and legal issues. Recently under this program, guarantees have averaged 90 percent of the eligible loss of the loan. Interest rates are set periodically, usually quarterly, and are based on current market yields for municipal obligations. Interest rates may be fixed or variable, are determined by the lender and borrower, and are subject to Agency review and approval. The maximum term for all loans is 40 years; however, no repayment period will exceed State statutes or the useful life of the facility. Business and Industry Guaranteed Loan Program. The Business and Industry (B&I) Guaranteed Loan Program guarantees loans that help create jobs and stimulate rural economies by providing financial backing for rural businesses. Loan guarantees expand the lending capability of private lenders who provide financing to credit worthy entities and individuals in rural areas, helping them make and service quality loans that provide lasting community benefits. Loan proceeds may be used for permanent working capital, machinery and equipment, buildings and real estate, and refinancing of any loan. Except for the refinancing of Agency direct loans, refinancing of other loans will be limited to a minority portion of the guaranteed loan. The primary purpose is to create and maintain employment and improve the economic climate in rural communities. Eligible borrowers for B&I loans include virtually any legally organized entity, including a cooperative, corporation, partnership, trust or other profit or not-for-profit entity, Indian tribe or Federally recognized tribal group, municipality, county, or other political subdivision of a State. Pursuant to section 310B(a) of the Consolidated Farm and Rural Development Act, borrowers need not have been denied credit elsewhere to apply for this program. Eligible lenders for B&I loans include recognized commercial or other authorized lenders in rural areas (all areas other than cities of more than 50,000 people and the contiguous and adjacent urbanized areas of such cities or towns). Generally, authorized lenders include Federal or State chartered banks, credit unions, insurance companies, savings and loan associations, Farm Credit Banks or other Farm Credit System institutions with direct lending authority, a mortgage company that is part of a bank holding company, and the National Rural Utilities Cooperative Finance Corporation. Other lenders include eligible Rural Utilities Program electric and telecommunications borrowers, acting as financial intermediaries, and other lenders approved by Business and Cooperative Programs who have met the designated criteria. The application process may be initiated using a preapplication or application. The Agency reviews each application for compliance with borrower eligibility guidelines, project priority, and the availability of funds. Recently under this program, guarantees have averaged 78 percent of the eligible loss of the loan. The maximum aggregate debt that can be incurred by a borrowing entity at any given time under the B&I Guaranteed Loan program is $25 million. A maximum of 10 percent of program funding is available to value-added cooperative organizations for loans above $25 million to a maximum aggregate of $40 million. Repayment terms are up to 30 years for real estate; up to 15 years or useful life, whichever is less, for machinery and equipment; up to 30 years for combined loans on real estate and equipment; and up to 7 years on working capital loans. Renewable Energy Systems and Energy Efficiency Improvements Guaranteed Loan Program. The Renewable Energy Systems and Energy Efficiency Improvements Guaranteed Loan Program provides loan guarantees for the purchase and installation of renewable energy systems and energy efficiency improvements. Eligible borrowers include farmers, ranchers, and rural small businesses. In addition to being a renewable energy system or energy efficiency improvement project, project eligibility requirements include the project site being controlled by the agricultural producer or small business for the proposed financing term of any associated Federal loans or loan guarantees. Recently under this program, guarantees have averaged 78 percent of the eligible loss of the loan. Repayment terms are up to 30 years for real estate; up to 20 years or useful life, whichever is less, for machinery and equipment; up to 30 years for combined loans on real estate and equipment; and up to 7 years on working capital loans. The minimum amount of a guaranteed loan is $5,000 (less any program grant awards). The maximum amount of a guaranteed loan is $10 million. The amount of the loan that will be made available to an eligible project can not exceed 50 percent of total eligible project costs. How the Current Programs Work While differences occur within each of the programs (e.g., borrower and [[Page 52622]] project eligibility, necessary documentation, and funding limits), the same basic framework for making loan guarantees applies to each. Each prospective borrower works with a lender to obtain a loan for a project eligible under one of the four programs, providing the lender with necessary information on the borrower and the project. Each lender evaluates borrower and project eligibility and performs a detailed credit analysis and, as applicable, an economic or financial analysis of the project to ensure that the project will be able to repay the loan. Each lender submits the guaranteed loan application, including its credit analysis, and all accompanying documentation to the Agency for review and approval. The Agency reviews each guaranteed loan application package in accordance with program requirements and approves or denies the guarantee. Subject to the availability of funds, each approved package is provided a loan guarantee. Each lender is responsible for the origination and servicing of its guaranteed loan portfolio and for working with the Agency, as necessary, to resolve borrower issues (such as default). Variations do occur in this basic framework, but for the most part are not as significant as the scope of each of the programs. Issues With the Current Programs The regulations that are being combined under the proposed rule have developed over time and, in some aspects, independently of each other. Issues have developed when looking at all four program regulations as a whole as well as individually. Four of these operational issues are discussed below. Inefficiencies. Many of the same lenders and, in some cases, borrowers, seek loan guarantees under more than one of these four programs. Thus, the same entities are required to learn multiple programs. This is inefficient and costly to the lenders and makes the programs less attractive to lenders. Currently, when new programs are implemented, a whole new regulation is developed that, in many respects, addresses or adopts many of the same requirements. Time and effort are wasted in readdressing issues during the development of new program regulations leading to inefficient rulemaking and a delay in program implementation. Inflexibility. Maintaining four separate sets of basic requirements creates certain inflexibilities. For example, with each program administered under separate regulations, any change to basic requirements calls for multiple concurrences. Similarly, adding a new program requires the addition of a new set of basic requirements, as these are not currently shared. The proposed combined platform will streamline basic loan guarantee requirements, allowing all programs to reach a uniform functionality of process. Use of Agency Resources. Agency personnel spend a large amount of time performing process-related tasks that are not necessarily productive in making loan guarantees available to more lenders and, in turn, to more borrowers. These tasks are often inefficient and could be better managed by the private sector at the lender level. Further, these tasks are applied equally regardless of the relative level of risk of the associated loans. In sum, the current delivery of these four programs is not making the best use of Agency resources. Risk Management. In making and managing a portfolio of loan guarantees, consideration must be given to project risk, institutional risk, Agency loss exposure, and internal operational risk. Project risk refers to the ability of a project to repay its debt. The current process relies on the lender's evaluation of the project and then the Agency's review of the lender's analysis. The types of information required to be assessed under each of the programs by the lender may vary. Currently, the Agency lacks definitive parameters to evaluate project risk and is inconsistent in its evaluation of risk across State Offices. The lack of definitive parameters inherently creates more risk. It allows projects to be funded based on completed processes as opposed to appropriate evaluation. Furthermore, this funding may come at the expense of less risky projects over time because of limitations of available funds. The proposed unified platform will significantly reduce inconsistencies in the implementation of these four programs across State offices and improve underwriting for loan guarantees, which should result in a reduction in risk and an improvement in the credit subsidy scores for these programs. Institutional risk refers to the quality of the lender seeking the loan guarantee. Some lenders simply do a better job at managing their portfolios and thereby have a lower rate of defaults. The current system does little to pre-qualify lenders; that is, the criteria for a lender to originate a loan with the Agency are insufficient. By implementing a defined set of criteria to assess lender performance, the Agency can improve its management of lenders participating in these programs. Agency loss exposure refers to the Agency's risk for potential loss in any one project in terms of the percent of guarantee and the size of the loan. Currently, Agency loss exposure is managed by putting limits on the percent of guarantee relative to the size of the loan, by having collateral requirements, and, for some of the programs, by limiting the size of the loan. While these limits are the primary mechanism for managing Agency loss exposure, the current programs could do more to manage this risk. Agency operational risk refers to internal weaknesses inherent in administering multiple programs using a variety of regulations that require unique sets of processes and procedures. The new platform will reduce operational risk through reliance on commonalities, reduction of regulatory language, and integration of information management systems. C. The New Platform As noted above, Rural Development manages multiple guaranteed loan programs in separate regulations requiring users to become familiar with each. These regulations share many common elements. The inefficiencies in maintaining separate regulations have resulted in an in-depth evaluation of current program delivery. Further, in assessing the delivery of these programs, Rural Development sees the opportunity to better manage the risks associated with their delivery. The proposed new platform simplifies, improves, and enhances the delivery of Rural Development's guaranteed loan programs, applies shared requirements when applicable, maintains programmatic nuances for varying rural development needs, and intends to reduce the amount of Agency loss claims paid through the provision of loan guarantees through improved underwriting. This new structure will also make it easier and faster to promulgate regulations for new loan guarantee programs in the future. The following paragraphs address improvements under the proposed platform. These improvements provide the requisite flexibility to accommodate additional or new programs and enable the Agency to better manage its risk. 1. Increase efficiency. Having a common rule for multiple programs will reduce burden for the Rural Development staff, lenders, and borrowers, easing delivery and [[Page 52623]] increasing efficiency. A common platform will be easier to administer, improve communication of basic program aspects, and reduce end user confusion. Internally, a common regulation will reduce the time, effort, and training necessary to guarantee a loan. Externally, a common regulation will reduce the lender's and borrower's cost by providing simpler and more consistent program requirements. Further efficiencies will be realized as common program elements facilitate consolidation of information technology platforms and systems' maintenance cost. Internal management controls will improve with standardized servicing and oversight. Common elements will assist lenders in managing a diverse portfolio and meeting Federal requirements. Uniform processes will facilitate electronic commerce between Rural Development and its customers. 2. Flexibility. The structure of the new platform provides for the addition of other Agency, or newly authorized, guaranteed loan programs as needed without the addition of new sets of basic requirements. The common elements (proposed subpart A) of the proposed rule are intended to remain unchanged, while additional programs would be added to proposed subpart B. 3. Refocus of Agency resources. The new platform directs Agency resources away from a processing centric model toward a rural development model by emphasizing lender expertise, refocusing time spent on process to time spent with clients, and increasing access by eliminating regulatory redundancy. 4. Reduce risk. In developing the proposed new platform, the key consideration was how to implement it in a manner that reduces the overall risk that a loan would not be repaid. The Agency considered the risk associated with making and managing a portfolio of guaranteed loans in developing the new platform. How these risks are addressed in the proposed new platform is covered in the following section. D. How the New Platform Works Under the proposed platform, the common features of the four programs are incorporated into a single subpart (subpart A), with program specific features provided in a separate subpart (subpart B). While each of the four existing programs remains, the way these four programs will be delivered to Rural Development's customers is different. In delivering the proposed platform, the Agency will also publish Federal Register notices containing specific information associated with the guaranteed loan program. The following paragraphs address the new platform by examining the proposed delivery mechanisms, concluding with a discussion of the Federal Register notices that will be used as part of the implementation of the new platform. 1. Eligibility. Under the new platform, three basic types of eligibility are identified--project eligibility, borrower eligibility, and lender eligibility. Project eligibility is based on the proposed project being for the benefit of a rural area, on the ability of the activity to be funded to meet the requirements of the applicable program, on meeting a minimum set of project criteria, and, when applicable, on the boundaries of the proposed service area meeting a non-discrimination criterion. Projects that do not meet these proposed criteria would be ineligible under the new program. In addition, these criteria can not be voided under the exception authority provided in the proposed rule. The applicable project eligibility requirements, located in proposed subpart B, remain essentially unchanged for those of the four current programs. Some differences are being proposed and these are discussed in sections II. and III. of this preamble. One important difference is that the proposed platform uses three minimum project financial conditions, which are specifically discussed, in detail, in section II.B. of this preamble, to reduce project risk by screening out those projects less likely to achieve a level of success that will support loan repayment. These three financial conditions establish minimum requirements for debt coverage ratio, cash equity or community support, and loan-to-value ratio. While the four existing programs address cash equity and community support, they do not have requirements associated with debt coverage ratios and loan-to-value ratios. By specifying these project financial conditions within the rule, borrowers and lenders will be able to determine a project's eligibility for a loan guarantee early in the process. In addition to identifying eligible projects, the proposed rule identifies specific projects and purposes that are ineligible under all circumstances from receiving a loan guarantee. The Agency assembled this list mainly from the list of ineligible projects and purposes identified in the regulations for the four current programs. Borrower eligibility is based on the borrower meeting two common requirements, which are citizenship and legal authority and responsibility, and program-specific criteria, which are contained in proposed subpart B. The proposed rule also identifies borrowers who would be categorically ineligible. In terms of eligible and ineligible entities, little has changed under the new platform compared to the four current programs. Lender eligibility is based on criteria dependent on whether or not the lender is a regulated or supervised lender. A lender, who is not otherwise debarred or suspended by the Federal government, must be approved, as described below, by the Agency to participate in this program. As part of the approval process, the Agency may consider the experience and capabilities of the lender to properly originate and service the variety of guaranteed loans available within the Agency. If the Agency disapproves a lender for participation, the lender has the right to appeal that decision. In addition, all participating lenders will be reviewed for eligibility at least every two years. Although the B&I guaranteed loan program has a process for ``other lenders'' to participate in the current B&I guaranteed loan program, the process for an eligible lender to participate in the proposed platform is generally new compared to the four current programs. Figure 1 illustrates the basic process for lender approval under the proposed platform, with the following paragraphs describing this process. Any lender that is a regulated or supervised lender is eligible to participate in the guaranteed loan programs described in proposed subpart B. If a regulated or supervised lender has an existing portfolio with the Agency, it is considered to be ``approved'' for participation and would not be required to submit an application to the Agency for approval to participate. However, the lender would be required to submit certification to the Agency that it is in ``good standing'' with its regulator. If a regulated or supervised lender does not have an existing portfolio with the Agency, it must submit an application for lender approval to the Rural Development State Office in the State in which the lender is chartered. The State Office will review the application and make a decision to approve or disapprove the lender for participation in this program. State Office approval of the lender will extend to all States and all programs covered by this part. If disapproved, the lender will have the right to appeal the decision to the National Appeals Division. To be approved, a regulated or supervised lender must be in good standing with its regulator(s). [[Page 52624]] [GRAPHIC] [TIFF OMITTED] TP14SE07.000 As proposed, all regulated or supervised lenders would be required to submit to the Agency a copy of their current written policies and procedures for originating and servicing guaranteed loans. This is not currently required under any of the four current programs. If the lender is not a regulated or supervised lender, it must submit an application to the Rural Development State Office in the State in which the lender is chartered for approval for participation. The application will address a number of criteria that the Agency will consider in approving or disapproving the lender (see section II.B. for more detail on these criteria). The State Office will review the application and submit it, along with its comments, to the National Office for review. The National Office will make the determination as to whether to approve the lender for participation. If the National Office approves the lender, that approval will apply to all States for all programs covered by this part. If disapproved by the National Office, the lender will have the right to appeal the decision to the National Appeals Division. The process described above is intended to help the Agency ensure that only qualified lenders participate in this program, and thereby mitigate institutional risk by encouraging the participation of better qualified and performing lenders. 2. Preferred Lender versus Approved Lender. An important aspect for managing institutional risk under the new platform is the ability of an approved lender to apply for preferred lender status (see Figure 1 above and Sec. 5001.9(c) of the proposed rule). Currently, only the B&I guaranteed loan program has provisions for a preferred lender program, although there has been no material participation in it to date. Under the proposed program, there are several benefits for being a preferred lender. Preferred lenders would have more opportunities to submit applications for guarantee with less supporting documentation, would be subject to fewer Agency visits, and would be eligible to receive higher percent guarantees than lenders without preferred status. In addition, the Agency may expend fewer resources evaluating preferred lender loan guarantee applications and reallocate resources to better manage risk and encourage program participation. To receive preferred lender status, a Rural Development approved lender would submit an application for preferred lender status to the State Office in the State in which the lender is chartered. The State Office would then forward the application and its comments to the National Office for review and decision. The criteria proposed for obtaining preferred lender status (see Figure 2) address the qualifications of the lender for loans of similar nature and the quality of the lender in managing its loan portfolio by examining its commercial loan losses and any instances of Federal negligent loan origination or servicing. The Agency will also consider any comments submitted by State Offices when evaluating these applications. National Office approval will apply to all States. 3. Guaranteed loan approval. Under the four current programs, the Agency views proper loan origination as a responsibility of the lender. The new platform clarifies this responsibility by [[Page 52625]] reinforcing the concept of negligent loan origination. To help lenders understand the importance of conducting proper credit analysis and sound loan origination, the new platform will clarify the Agency's policy regarding negligence in the origination and servicing of loans. In the case where the lender is the holder of the guarantee, losses associated with the lender's negligence will be deducted from the loss claims paid under the guarantee. In the case where there is a subsequent holder, losses associated with the lender's negligence will not be deducted from the loss payment under the guarantee. However, in such cases, loss claims paid under the guaranteed will be collected from the lender. The Agency anticipates that the clarification for negligent loan origination will reduce loan defaults through improved loan origination. [GRAPHIC] [TIFF OMITTED] TP14SE07.001 Under the new platform, Rural Development has standardized, to the extent possible, the type of information to be included in the loan guarantee application, although some additional content information is required by some of the programs described in subpart B. In general, the information associated with a loan guarantee application is not significantly different than currently required under the four current programs. The main difference in the application for loan guarantee under the new platform will be the amount of supporting documentation that is required to be submitted with or accompany the application for certain projects. If criteria are met as described below, the lender will have the option of submitting a ``low documentation'' application, which would allow the lender to self-certify that it has complied with certain Agency requirements. (See section II.B. for more information.) The Agency expects the lender to obtain the same level of documentation and to perform the same level of analysis and other origination activities whether the lender submits a full documentation application or a low documentation application. The determination of whether a low documentation application can be submitted will depend on the borrower's status as a startup or existing business, on whether the lender has preferred lender status, and on certain project criteria. As proposed, all loan guarantee applications for startup businesses must be submitted with full documentation (see section II.B. for details) given the risk associated with startup businesses. [[Page 52626]] For existing businesses, the proposed rule would allow Rural Development approved lenders with preferred lender status to submit applications with either low or full documentation if the loan guarantee request is for $5 million or less. For a larger loan guarantee request, a full documentation application would be required. These provisions apply to all four programs under the proposed platform. For Rural Development approved lenders that do not have preferred lender status, all applications would have to be submitted with full documentation unless the project meets certain criteria, as discussed in section II.B., intended to lower the risk associated with the project. If the project meets the lower risk identification criteria, the Rural Development approved lender without preferred status would be allowed to submit a low documentation application. The Agency will examine the lender's analysis of the project, the technical merit, any business plans or feasibility studies required, and environmental information. If the Agency disapproves the application, the lender and borrower have the right to appeal the decision. 4. Servicing. Once the loan has been approved, the lender will continue to be responsible for servicing the entire loan. The lender's servicing responsibilities, including those regarding negligent servicing, under the proposed unified platform are essentially the same as under the four existing regulations. 5. Oversight and Monitoring. As under the four current programs, the Agency will conduct under the proposed new platform any and all oversight and monitoring activities necessary to ensure that lenders are originating and servicing Agency guaranteed loans in a manner consistent with lender and Agency standards. These tools include, but are not limited to, conducting lender visits and meetings and requiring various reports and notifications. There are a few differences between the proposed platform and the four current programs for conducting these activities. These differences are discussed later in this preamble. The Agency will also use this oversight and monitoring to ensure that lenders maintain the qualification criteria for being a Rural Development approved lender and, where applicable, for being a preferred lender. 6. Managing Risk. As noted above, the Agency has incorporated into the proposed new platform certain features to help manage risk. To limit loss exposure, the Agency will require full supporting documentation on all applications for projects from startup businesses and from existing businesses unless, for existing businesses, the project is a ``lower risk'' project as defined by the criteria in the proposed rule. Applications for projects that meet these criteria may be submitted with less supporting documentation (i.e., a low documentation application). The Agency will mitigate the possibility of increased loss exposure associated with low documentation applications as the discussed below. The loan amount that will be guaranteed under a low documentation application would be limited to $5 million. In other words, all loan requests for more than this amount must be submitted as full documentation applications. This applies across all four programs under the new platform. Setting a maximum value for which a low documentation application can be submitted will provide the Agency the ability to better monitor loans that represent greater potential liability. If the low documentation application is from a lender who does not have preferred status, the maximum percent guarantee that the Agency will consider for that loan is 10 percentage points lower than for a full documentation application. Reducing the maximum percent guarantee available will mitigate Agency loss exposure. In consideration of the additional criteria necessary to become a preferred lender, the Agency has determined that the risk mitigation obtained by applying the preferred lender criteria offsets the risk mitigation obtained by reducing the guarantee. Therefore, the Agency is proposing to not apply this reduction in the maximum guarantee available to a preferred lender. If the low documentation application if from a lender who does not have preferred status, the proposed rule requires additional financial criteria in order to qualify the project for a low documentation application. Requiring projects to meet additional financial criteria will mitigate project risk. To limit project risk, the new platform requires projects to meet a minimum set of project financial criteria to prevent high risk projects from being proposed at all. In addition, in order to avoid bypassing project eligibility criteria, the Agency is proposing that exception authority not be extended to any project eligibility criterion, including the project financial criteria. To limit institutional risk, the new platform requires lenders to meet criteria that help ensure the lender has the appropriate origination and servicing experience and track record to reduce the likelihood of loan defaults. The Agency is proposing different criteria for regulated and supervised lenders as opposed to those that are unregulated and not supervised. Further, by providing a preferred status designation, the Agency is hoping to attract more qualified lenders to the programs. Finally, to limit operational risk, the new platform relies on commonalities, reduction of regulatory language, and integration of information management systems. The use of electronic reporting and standardized forms also allows the Agency to better manage its portfolio of outstanding guaranteed loans. 7. Federal Register notices. To implement the new platform, the Agency will publish at least one Federal Register notice each year. Each notice will address the following items as necessary: Ineligible projects and purposes. If the Agency has identified any additional projects or purposes for which guaranteed loans will not be made, it will include such ineligible projects and purposes in the Federal Register notice. If there are no new ineligible projects or purposes have been identified, the notice would include a statement to that effect. Maximum loan amounts. The Agency will identify in the Federal Register notice the maximum loan amount per loan that will be available under each of the programs. Fees. If any are required, the Agency will identify in the Federal Register notice the guarantee fee and the renewal fee that will be used for that year in the calculation of the guarantee fee and the renewal fee for each program. In addition, for the B&I guaranteed loan program, the Agency will specify in the Federal Register notice the limit on the maximum portion of the guarantee authority available for that fiscal year that may be used to guarantee loans with the reduced guarantee fee of 1 percent. Priority Scoring. For the B&I guaranteed loan program, the Agency will identify the scoring criteria that will be used, if necessary, to allocate funds if funds are insufficient to cover all applications within the program. The Agency will manage the Renewable Energy Systems and Energy Efficiency Improvements guaranteed loan program funds in the same manner. II. Discussion of Proposed Rule In this section, the proposed rule is described. First, an overall organization of the proposed rule is presented, [[Page 52627]] followed by a section-by-section discussion of each part. A. Overall Organization of the Rule The proposed rule is divided into two main parts. The first part, subpart A, contains the provisions that apply to all of the guaranteed loan programs covered by the proposed rule. The second part, subpart B, contains the provisions specific to the four programs identified earlier in this preamble. Subpart A. Subpart A is divided into five major elements. In the first element are general provisions that cover the purpose of this part (Sec. 5001.1), the definitions and abbreviations used in this part (Sec. 5001.2), various Agency authorities associated with providing guaranteed loans (Sec. 5001.3), oversight and monitoring (Sec. 5001.4), and forms, regulations, and instructions (Sec. 5001.5). The second element covers the basic eligibility requirements for the project (Sec. 5001.6) and unauthorized projects and purposes (Sec. 5001.7), for the borrower (Sec. 5001.8), and for the lender, including how a lender can be approved for preferred status, (Sec. 5001.9). The third element covers the basic requirements associated with the guaranteed loan application, describing the process for submitting an application and its approval (Sec. 5001.11) and the contents of the application (Sec. 5001.12). The fourth element covers the responsibilities of the lender and the borrower. Section 5001.15 covers general responsibilities of the lender. Lender responsibilities for originating the loan are covered by Sec. 5001.16 and for servicing the loan by Sec. 5001.17. Responsibilities of the borrower are found in Sec. 5001.25. The fifth element covers basic provisions associated with the guarantee, including parameters for the guaranteed loan. General guarantee provisions are found in Sec. 5001.30, with guaranteed loan parameters (e.g., interest rates, term length, maximum percent guarantee, etc.) found in Sec. 5001.31. The remaining sections in the fifth element address the process for obtaining the guarantee through changes in the guarantee and concluding with termination of the guarantee. Subpart B. This subpart addresses provisions that are specific to the individual programs. Section 5001.101 covers provisions specific to the Community Facilities Program, Sec. 5001.102 covers provisions specific to the Water and Waste Disposal Facilities Program, Sec. 5001.103 covers provisions specific to the Business and Industry Program, and Sec. 5001.104 covers provisions specific to the Renewable Energy Systems and Energy Efficiency Improvements Program. Within each of these four sections, the specific provisions are related back to a corresponding section in subpart A. For example, each of the four sections has subsections that address project eligibility. Another example is additional application documentation requirements. The intent of subpart B is to identify all of the provisions specific to each of the four programs. In this way, each of the four programs maintains their integrity under the new platform. B. Discussion of Sections Purpose (Sec. 5001.1) This section defines the purpose of this part. Definitions and Abbreviations (Sec. 5001.2) This section presents the definitions and abbreviations used in this part, including terms that may be specific to one of the four programs found in subpart B. The proposed rule contains fewer definitions than found in the four existing regulations, primarily because the deleted terms are no longer used in the proposed rule. Some definitions have been added or revised, including, but not limited to: Essential community facility, negligent loan origination, negligent loan servicing, rural or rural areas, and water and waste disposal project. Agency Authorities (Sec. 5001.3) Under this section, the proposed rulemaking identifies Exception Authority and Appeal Rights. Exception authority. This paragraph identifies the situations under which the Administrator may make exceptions to the requirements contained in the regulation. The exceptions will be made on a case-by- case basis. Unlike the four current regulations, the proposed rule identifies four exceptions to this Exception Authority, where the Administrator would not be allowed to make exceptions. These four exceptions are: Applicant and borrower eligibility, including both prospective borrowers and lenders. Project eligibility, as found in proposed Sec. 5001.6 and the individual program in subpart B. Rural area definition, as found in proposed Sec. 5001.2. Maximum term length of a guaranteed loan, as found in proposed Sec. 5001.31(c). The Agency believes that applicant/borrower and project eligibility criteria must be maintained at all times in order to maintain an acceptable level of risk associated with guaranteed loans made under this part. The Agency also believes that it is important to maintain the definition of rural area at all times in order to ensure that loans guaranteed under this program are used to benefit rural areas. Lastly, the Agency believes that it is important to ensure a reasonable period of payback on guaranteed loans in order to manage its portfolio of outstanding loans and, therefore, is proposing not to allow exceptions to the maximum term length of a guaranteed loan. For these reasons, the Agency is proposing that the Administrator not be allowed to exempt a project from any of these four criteria. Appeal rights. As provided by the four current programs, this paragraph provides the legal basis for a person to file an appeal of an adverse decision made by the Agency in implementing the proposed program. Such adverse decisions include, but are not limited to: (1) disapproving a lender for participation in the program, (2) disapproving an approved lender for preferred lender status, and (3) denying an application for a loan guarantee for reasons other than a lack of funds. When the Agency makes an adverse decision, a person may file an appeal with either the appropriate Agency official that oversees the program or with the National Appeals Division. Some negative determinations may affect a holder, in which case this paragraph provides the holder the legal right to file an appeal. Oversight and Monitoring (Sec. 5001.4) This section of the rule lays out the types of oversight and monitoring the Agency will perform in implementing this program. Consistent with the four current programs, these activities include, but are not necessarily limited to, reviewing lender records and meeting with the lenders to review the status of their guaranteed loans. The purposes of these oversight and monitoring activities are to: (1) Ensure that the lender has implemented, and is in compliance with, the provisions of this part and (2) determine if the lender is maintaining the appropriate requirements to maintain their status as a Rural Development approved lender and, if applicable, a preferred lender. The amount of oversight and monitoring will vary depending on whether the Rural Development approved lender has preferred lender status or not. Reports. The proposed rule would require each lender to submit periodic reports to the Agency on the condition of its Agency guaranteed loan portfolio. These reports include borrower status, [[Page 52628]] loan classification, and any material changes in the general financial condition of the lender since the last periodic report was submitted. For loans that are not in default, these reports would be submitted semiannually, as is the practice in the four current programs. The Agency considered requiring these reports on a monthly basis. This shorter duration provides the Agency with the more current information on the lenders' portfolio status, which would allow the Agency more ``up-to-date'' information to evaluate its loss exposure. The Agency, however, believes that the benefit of having this more ``up-to-date'' information did not outweigh the costs associated with generating this information on a monthly basis using current Agency technology. The Agency also considered annual submittal of these reports, but rejected this option because it does not provide for a timely assessment of the Agency's loss exposure of all its guaranteed loans. For loans that go into or are in default, the proposed program would require default status reports to be provided on a monthly basis, regardless of the guaranteed loan amortization schedule, until such time the loan is no longer in default. This reporting frequency, which is shorter than found in the four current programs, helps the Agency focus its resources on problem loans sooner and with more frequency, thereby helping to mitigate the risk associated with such loans. Notifications. The Agency is proposing that the lender notify it within 5 days when the borrower has violated any terms of the loan agreement (including if the borrower has missed a scheduled payment by more than 30 days) and when there has been any permanent reduction in the interest rate. The Agency is seeking these notifications to further allow the Agency to better manage its loss exposure in such instances that could affect repayment of the loan. Because both situations have substantial lead times, the Agency believes that 5 days is sufficient time for the lender to notify the Agency when either situation occurs. All four programs currently require notification when there has been a permanent reduction in the interest rate, although they allow a 10-day notification period. Only the current Community Facility and Water and Waste Disposal Facilities guaranteed loan programs require lender