Business and Industry Guaranteed Loan Program Annual Renewal Fee, 57483-57486 [05-19722]

Agencies

• DEPARTMENT OF AGRICULTURE
• Rural Business-Cooperative Service

[Federal Register Volume 70, Number 190 (Monday, October 3, 2005)]
[Rules and Regulations]
[Pages 57483-57486]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-19722]



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Federal Register / Vol. 70, No. 190 / Monday, October 3, 2005 / Rules 
and Regulations

[[Page 57483]]



DEPARTMENT OF AGRICULTURE

Rural Business-Cooperative Service

7 CFR Parts 4279 and 4287

RIN 0570-AA34


Business and Industry Guaranteed Loan Program Annual Renewal Fee

AGENCY: Rural Business-Cooperative Service, USDA.

ACTION: Final rule.

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SUMMARY: In this final rule the Rural Business-Cooperative Service (the 
Agency) amends its regulation for the Business and Industry (B&I) 
Guaranteed Loan Program to provide the authority for the charging of an 
annual renewal fee on all loans obligated after the publication of the 
final rule. This annual renewal fee is in addition to the existing one-
time guarantee fee. Changes to modify the program regulations were 
originally proposed on February 28, 2005. The intended effect of this 
rule is to reduce the subsidy rate for guaranteed loans allowing the 
budget authority dollar level to support a greater level of assistance 
to the public (i.e., higher supportable loan level). A notice will be 
published in the Federal Register each fiscal year that will establish 
the guarantee fee rate and any annual renewal fee rate for loans 
obligated during that fiscal year.

DATES: This rule is effective October 3, 2005.

FOR FURTHER INFORMATION CONTACT: Rick Bonnet, Special Projects/Programs 
Oversight Division, Rural Business-Cooperative Service, U.S. Department 
of Agriculture, STOP 3221, 1400 Independence Avenue, SW., Washington, 
DC 20250-3221, telephone (202) 720-1804, or by e-mail to 
rick.bonnet@wdc.usda.gov.

SUPPLEMENTARY INFORMATION:

Classification

    This final rule has been determined to be non-significant and has 
not been reviewed by the Office of Management and Budget (OMB) under 
Executive Order 12866.

Programs Affected

    The Catalog of Federal Domestic Assistance number for the program 
impacted by this action is 10.768, Business and Industry Loans.

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 of the National Appeals Division (7 CFR part 
11) must be exhausted before bringing suit in court challenging action 
taken under this rule.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' The Agency has determined that 
this action does not constitute a major Federal action significantly 
affecting the quality of the human environment, and, in accordance with 
the National Environmental Policy Act of 1969, 42 U.S.C. 4321 et seq., 
this is a categorical exclusion and therefore an Environmental Impact 
Statement is not required.

Government Paperwork Elimination Act (GPEA) Statement

    The Agency is committed to compliance with GPEA, which requires 
Government agencies, in general to provide the public the option of 
submitting information or transacting business electronically to the 
maximum extent possible.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, the 
information collection requirements contained in this regulation have 
been approved by OMB under control number 0570-0017.

Unfunded Mandates

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pubic 
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, 
agencies generally must prepare a written statement, including a cost-
benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures to State, local, or tribal 
governments, in the aggregate, or to the private sector of $100 million 
or more in any one year. When such a statement is needed for a rule, 
section 205 of UMRA generally requires agencies 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 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.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act, the Agency has 
determined that this action would not have a significant economic 
impact on a substantial number of small entities, because the action 
will not affect a significant number of small entities, as defined by 
the Regulatory Flexibility Act (5 U.S.C. 601). The Agency 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 13132

    It has been determined that, under Executive Order 13132, 
Federalism, this rule does not have sufficient federalism implications 
to warrant the preparation of a Federalism Assessment. The provisions 
contained in this 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 levels of government.

Executive Order 13175

    Executive Order 13175, Consultation and Coordination with Indian 
Tribal Governments, imposes requirements on USDA in the development of 
regulatory policies that have tribal implications or

[[Page 57484]]

preempt tribal law. USDA has determined that the proposed regulation 
does not have a substantial direct effect on one or more Indian tribes 
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.

Background

    The cost of the B&I Guaranteed Loan Program has gone up in recent 
years. This is due to higher defaults and lower interest rates. In the 
meantime, there is still an interest in funding this program in order 
to improve, develop, or finance business, industry, and employment and 
improve the economic and environmental climate in rural communities. To 
do that in a cost efficient manner for the taxpayer, the Agency is 
implementing its authority to impose an annual renewal fee. This will 
reduce the subsidy allowing the Agency, without additional costs to the 
taxpayer, to maintain the level of assistance that has been 
historically provided for this program to meet demand.
    The annual renewal fee is based on similar fees charged in the 
Small Business Administration (SBA) programs. Additionally, this type 
of fee is consistent with the recently authorized Renewable Energy 
Systems and Energy Efficiency Improvements Guaranteed Loan Program 
within the Agency. The borrower pool for the B&I Guaranteed Loan 
Program is even more likely to be able to afford this type of fee 
compared to other programs mentioned because the amount of the fee is 
anticipated to be less.
    The SBA 7(a) Loan Guarantee Program and the B&I program are similar 
in that they both require an initial one-time fee; and 7(a) loans have 
an annual fee similar to the one being implemented for the B&I program. 
In fiscal year (FY) 1996, SBA made major changes in its 7(a) program by 
lowering the maximum percentage of the loan which could be guaranteed 
and increasing both the initial fee and the annual fee, which made the 
program more expensive and less valuable for borrowers and lenders. We 
examined changes in loan volume and loss levels associated with these 
changes, and found no convincing evidence that the FY 1996 changes 
decreased demand for the 7(a) program.
    Subsidy rates are established using historic loss data from the 
program and other assumptions. In recent years the subsidy rate has 
increased significantly, resulting in a reduction in the amount of 
loans that could be guaranteed with the same budget authority. In the 
absence of additional budgetary authority, the proposed annual fee is 
necessary to cover expected losses from the program. The effect of the 
fee on the loan demand and program activity over the long term will 
depend on the size of the fee and other factors not related to the fee, 
including interest rates and general economic growth. This change is 
prudent and cost efficient and will allow us to maintain the level of 
assistance going to rural America at a reasonable cost to the taxpayer.
    The Agency is waiving the 30-day waiting period between publication 
of the rule and when it will take effect. The reason is to make all 
loans obligated in FY 2006 subject to the same fee structure. Having 
loans obligated with different fee structures in the same fiscal year 
could cause confusion and impose an additional administrative burden on 
lenders. Also, because lenders will not need to make the first renewal 
fee payments to the Agency until January of 2007, and because the Final 
Rule makes only minor changes to the Proposed Rule, program 
participants are not expected to be disadvantaged by this rule's 
earlier implementation. For these reasons, the Agency finds that good 
cause exists for this rule's immediate implementation.

Comments on the Proposed Rule and Responses

    The following paragraphs summarize the comments received and the 
Agency responses. We received 11 responses of which 8 were from the 
lending community (3 from the same bank), 2 were from Agency employees, 
and one was from a national association. Generally, the comments were 
negative. The only positive comment was that the annual renewal fee was 
the best alternative to reduced funding levels in the short term.
    Several changes were made to the final rule as a result of comments 
received. The most significant change was to give the Agency discretion 
in canceling the guarantee for nonpayment of the renewal fee and to 
charge lenders interest on any unpaid renewal fees.
    Seven respondents felt an annual fee would be a financial burden/
hardship on the borrowers, especially new businesses and those with 
more limited recourses. The Agency acknowledges that the fee will most 
likely represent an increased cost to the borrower. However, because 
the B&I Guaranteed Loan Program is intended only for credit-worthy 
businesses, the Agency feels the additional financing cost will not 
jeopardize the success of the businesses assisted. Agencies, in 
accordance with the Federal Credit Reform Act of 1990 and guidance 
provided in OMB Circular A-129, Appendix A(II)(4)(b)(1), are to 
establish fees structures at levels that minimize subsidy costs while 
supporting achievement of program objectives. The Agency is taking 
measures to improve the quality of its portfolio and reduce loan 
losses. Nevertheless, the Agency is required to further minimize 
subsidy costs. The Agency feels the renewal fee is the most equitable 
solution to increased costs without jeopardizing the achievement of 
program objectives.
    Six respondents felt the renewal fee would make the B&I Guaranteed 
Loan Program more complicated and difficult to market. The uncertainty 
of the amount of the fee percentage rate would make it especially 
difficult to market, which would discourage lenders from marketing the 
program. USDA could lose its competitive advantage with SBA if 
additional SBA-like fees are imposed. One respondent commented that the 
fee rate could change if the initial application was received in a 
fiscal year, but not obligated until the next fiscal year, which would 
further hamper marketing activities. The Agency acknowledges the 
program complexity and marketing challenges the renewal fee will add, 
but a reduction in the subsidy cost is needed to maintain the level of 
assistance that has been historically provided for this program. As 
described in Sec.  4279.107(b)(1) of the rule, the Agency will publish 
the fee percentage rate in a Federal Register notice each fiscal year. 
The Agency will publish the notice as soon as the fee percentage rate 
has been determined to provide as much advanced notice as possible. All 
loans obligated that fiscal year will be subject to that same fee 
percentage rate for the full term of the loan.
    Four respondents felt the increased cost of the program would 
result in fewer loans and businesses being assisted, thereby hindering 
economic development and job creation. The Agency had a Regulatory 
Impact Analysis completed to determine the impact that a renewal fee 
would likely have on loan demand. As mentioned earlier in this 
document, in FY 1996, SBA made major changes in its 7(a) program by 
lowering the maximum percentage of the loan which could be guaranteed 
and increasing both the initial fee and the annual fee, which made the 
program more expensive and less valuable for borrowers and lenders. A 
review of the changes in loan volume and loss levels associated with 
these changes revealed no convincing evidence that the FY 1996 changes

[[Page 57485]]

decreased demand for the 7(a) program. Due to the similarities of the 
programs, the Agency believes the results will be similar.
    One respondent felt the additional cost of the program would 
undermine worthwhile projects and discourage the more credit-worthy 
businesses from participating in the program. This could result in a 
decline in the quality of the overall portfolio over time, which would 
tend to increase costs to the government. The Regulatory Impact 
Analysis revealed that there was no convincing evidence that the 
changes in the SBA program resulted in a decrease in the quality of the 
SBA 7(a) loan portfolio. Due to the similarities of the programs, the 
Agency believes the impact on the B&I Guaranteed Loan Program will be 
similar.
    Six respondents felt it would be a significant administrative 
burden for the lenders. The Agency appreciates the burden this change 
will impose. In an effort to keep the burden to a minimum, the Agency 
is combining the lender's existing semiannual reporting requirement 
with the renewal fee payment process. Currently, lenders are required 
to report the principal and interest balances, amount advanced, 
interest rate, loan status, and amount ahead or behind schedule on each 
guarantee loan, semiannually. The Agency is web-enabling this process 
where the lender will be required to enter a secure website, enter the 
currently required information, as of December 31 of each year, and the 
system will calculate the annual fee due on that loan. The fee will 
then be drawn from a specified account in the lender's bank on a 
specified date. This action will satisfy both the annual renewal fee 
payment and the semi-annual status report to the Agency. The due date 
of the renewal fee was also changed from March 1 to January 31 to 
correspond with the due date of the lender's semiannual status 
reporting requirement, but the date any unpaid fee was considered 
delinquent remained April 1.
    One respondent suggested a change in the name of the form used to 
collect the renewal fee. The final rule is revised to remove the name 
of the form to provide maximum flexibility in the mechanism used to 
collect the fee.
    One respondent thought the renewal fee should be paid monthly or 
quarterly to reduce the financial impact from one annual payment. The 
Agency acknowledges the language in the proposed rule suggested the 
borrower was expected to pay the renewal fee once a year. The Agency 
anticipates lenders will likely factor the renewal fee into their 
interest rate structure, and collect the renewal fee as a part of the 
regular borrower payments. The language is therefore revised to give 
the lender maximum flexibility in establishing a rate structure. The 
final rule does not stipulate who is responsible for the fee. The 
lender actually pays the fee, but may pass the fee on to the borrower.
    One respondent felt the fee should be restricted to the guaranteed 
portion of the loan. The Agency agrees, and the fee will be charged 
only on the guaranteed portion of the loan.
    One respondent felt the Agency should refund the ``unearned'' 
portion of the renewal fee when the borrower prepays its loan before 
the end of the year, after the renewal fee has been paid for the year. 
The Agency is not adopting this suggestion as the administrative burden 
on lenders and the Agency would be prohibitive. The amount of the fee 
on the average B&I loan is relatively small. With the proposed annual 
renewal fee rate of \1/8\ of one percent for FY 2006, the amount of the 
fee on a $1 million B&I loan for a full year would be only $1,250. 
Depending on how a lender structures the loan payments, the borrower 
may not benefit from the return of ``unearned'' fees. Section 4279.107 
states the guarantee fees are non-refundable, and this has been the 
policy in the B&I Guaranteed Loan Program for many years.
    One respondent felt there could be significant servicing and legal 
issues for the Agency if a guarantee is cancelled for non-payment of 
the renewal fee. The Agency agrees and is changing the language to 
state that the Agency may, at its discretion, cancel the guarantee to 
the lender for nonpayment of the renewal fee. Language is also added 
where the Agency will charge the lender interest on any delinquent 
renewal fees and will deduct any unpaid renewal fees from any loss 
payment made to the lender.
    One respondent suggested alternatives to the renewal fee, such as 
varying the amount of initial fee, based on the size of the loan. The 
Agency has statutory limitations on the maximum initial fee that may be 
charged and is charging the maximum initial fee allowed, with certain 
limited exceptions. The Agency feels the annual renewal fee approach is 
the most equitable alternative.
    Two respondents felt the proposed rule change would be a violation 
of statute. The Farm Security and Rural Investment Act of 2002 (Farm 
Bill) gives the Secretary authority to assess a 1-time fee in an amount 
that does not exceed 2 percent of the guaranteed principal portion of 
the loan. One respondent indicated that the proposed rule eliminates 
the language concerning the cap, which could result in a perceived 
conflict with the terms of the Farm Bill. The Agency is replacing the 
language concerning the 2 percent cap. The other respondent suggested 
the renewal fee violates statute because the combined fees will very 
likely exceed 2 percent cap established in the statute. The Rural 
Development Manager's Report to the 2002 Farm Bill states that the 2 
percent initial fee limit established by statute does not prevent the 
Secretary from imposing annual fees which may be needed to preserve an 
appropriation level.
    One respondent stated that Sec.  4279.107(b)(2) states the holder's 
rights will continue in effect as specified in the Loan Note Guarantee, 
and suggested the reference should be to the Assignment Guarantee 
Agreement instead. The final rule references both the Loan Note 
Guarantee and the Assignment Guarantee Agreement.
    Several technical changes not made in the proposed rule were made 
in the final rule to help Agency employees and lenders administer the 
program. Language was also added to the B&I loan servicing regulation 
(7 CFR Part 4287, subpart B) to reference the annual renewal fee 
requirements described in Sec.  4279.107.
    Section 4279.107(a)(2)(i) of the proposed rule stated the rate of 
the fee is the rate in effect at the time of the original issuance of 
the Conditional Commitment for the loan and will remain in effect for 
the life of the loan. It is very unlikely, but possible, for the 
Conditional Commitment and loan obligation to occur in different fiscal 
years. Because the fee rate and obligation are tied to the fiscal year 
in the Agency's accounting system, the controlling event was changed to 
the date of obligation.

List of Subjects in 7 CFR Parts 4279 and 4287

    Loan programs--Business and industry--Rural development assistance, 
Rural areas.


0
Therefore, chapter XLII, title 7, Code of Federal Regulations, is 
amended as follows:

PART 4279--GUARANTEED LOANMAKING

0
1. The authority citation for part 4279 is revised to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989.

[[Page 57486]]

Subpart B--Business and Industry Loans

0
2. Section 4279.107 is revised to read as follows:


Sec.  4279.107  Guarantee fees.

    For all new loans there are two types of non-refundable guarantee 
fees to be paid by the lender. The fees may be passed on to the 
borrower. The fees may be forwarded to the Agency through an electronic 
funds transfer system or, at the Agency's discretion, by a check 
payable to USDA using a USDA-approved form.
    (a) Initial guarantee fee. The initial fee is paid at the time the 
Loan Note Guarantee is issued. The fee may be included as an eligible 
loan purpose in the guaranteed loan. The fee will be the rate (a 
specified percentage not to exceed 2 percent) multiplied by the 
principal loan amount, multiplied by the percent of guarantee. Subject 
to specified annual limits set by the Agency, the initial guarantee fee 
may be reduced to 1 percent if the borrower's business supports value-
added agriculture and results in farmers benefiting financially, or
    (1) Is a high impact business development investment in accordance 
with Sec.  4279.155(b)(5), and
    (2) Is located in a rural community that:
    (i) Is experiencing long-term population decline and job 
deterioration, or
    (ii) Has remained persistently poor over the last 60 years, or
    (iii) Is experiencing trauma as a result of natural disaster, or
    (iv) Is experiencing fundamental structural changes in its economic 
base.
    (b) Annual renewal fee. The annual renewal fee is paid once a year 
and is required to maintain the enforceability of the guarantee as to 
the lender.
    (1) The rate of the annual renewal fee (a specified percentage) is 
established by Rural Development in an annual notice published in the 
Federal Register, multiplied by the outstanding principal loan balance 
as of December 31 of each year, multiplied by the percent of guarantee. 
The rate is the rate in effect at the time the loan is obligated, and 
will remain in effect for the life of the loan.
    (2) Annual renewal fees are due on January 31. Payments not 
received by April 1 are considered delinquent and, at the Agency's 
discretion, may result in cancellation of the guarantee to the lender. 
Holders' rights will continue in effect as specified in the Loan Note 
Guarantee and Assignment Guarantee Agreement. Any delinquent annual 
renewal fees will bear interest at the note rate and will be deducted 
from any loss payment due the lender. For loans where the Loan Note 
Guarantee is issued between October 1 and December 31, the first annual 
renewal fee payment will be due January 31 of the second year following 
the date the Loan Note Guarantee was issued.

PART 4287--SERVICING

0
3. The authority citation for part 4287 continues to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989.

Subpart B--Servicing Business and Industry Guaranteed Loans


Sec.  4287.107  [Amended]

0
4. Section 4287.107(a) is revised to read as follows:
* * * * *
    (a) Lender reports and annual renewal fee. The lender must report 
the outstanding principal and interest balance on each guaranteed loan 
semiannually using a USDA-approved status report or other approved 
format. The lender will transmit the annual renewal fee to the Agency 
simultaneously with the December 31 semiannual status report in 
accordance with 7 CFR part 4279, subpart B, Sec.  4279.107.
* * * * *

    Dated: September 27, 2005.
Thomas C. Dorr,
Under Secretary, Rural Development.
[FR Doc. 05-19722 Filed 9-30-05; 8:45 am]
BILLING CODE 3410-XY-P