Rural Development Guaranteed Loans, 76698-76791 [E8-29151]

Agencies

• DEPARTMENT OF AGRICULTURE
• Rural Business-Cooperative Service
• Rural Housing Service
• Rural Utilities Service

[Federal Register Volume 73, Number 243 (Wednesday, December 17, 2008)]
[Rules and Regulations]
[Pages 76698-76791]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-29151]



[[Page 76697]]

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Part II





Department of Agriculture





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Rural Utilities Service



Rural Housing Service



Rural Business-Cooperative Service



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7 CFR Parts 1779, 3575, 4279 et al.



Rural Development Guaranteed Loans; Interim Rule

Federal Register / Vol. 73, No. 243 / Wednesday, December 17, 2008 / 
Rules and Regulations

[[Page 76698]]


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DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1779

Rural Housing Service

7 CFR Part 3575

Rural Business-Cooperative Service

Rural Utilities Service

7 CFR Parts 4279 and 4280

Rural Business-Cooperative Service

Rural Housing Service

Rural Utilities Service

7 CFR Part 5001

RIN 0570-AA65


Rural Development Guaranteed Loans

AGENCIES: Rural Business-Cooperative Service, Rural Housing Service, 
Rural Utilities Service, USDA.

ACTION: Interim rule with request for comments.

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SUMMARY: This interim rule establishes a unified guaranteed loan 
platform for the enhanced delivery of four existing Rural Development 
guaranteed loan programs--Community Facility; Water and Waste Disposal; 
Business and Industry; and Renewable Energy Systems and Energy 
Efficiency Improvement Projects. This interim rule eliminates the 
existing loan guarantee regulations for these four programs and 
consolidates them under a new, single part. In addition to 
consolidating these four programs, this interim rule incorporates 
provisions that will enable the Agency to better manage the risk 
associated with making and servicing guaranteed loans and that will 
reduce the cost of operating the guaranteed loan programs.

DATES: This interim rule is effective January 16, 2009. Comments must 
be received on or before February 17, 2009.

ADDRESSES: You may submit comments to this rule by any of the following 
methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Submit written comments via the U.S. Postal Service 
to the Branch Chief, Regulations and Paperwork Management Branch, U.S. 
Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., 
Washington, DC 20250-0742.
     Hand Delivery/Courier: Submit written comments via Federal 
Express Mail or other courier service requiring a street address to the 
Branch Chief, Regulations and Paperwork Management Branch, U.S. 
Department of Agriculture, 300 7th Street, SW., 7th Floor, Washington, 
DC 20024.
    All written comments will be available for public inspection during 
regular work hours at the 300 7th Street, SW., 7th Floor address listed 
above.

FOR FURTHER INFORMATION CONTACT: Mr. Michael Foore, Rural Development, 
Business and Cooperative Programs, U.S. Department of Agriculture, 1400 
Independence Avenue, SW., Stop 3201, Washington, DC 20250-3201; e-mail: 
Michael.Foore@wdc.usda.gov; telephone (202) 690-4730.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This interim rule has been determined to be significant and was 
reviewed by the Office of Management and Budget in conformance with 
Executive Order 12866. The Agency conducted a qualitative benefit cost 
analysis to fulfill the requirements of Executive Order 12866. Based on 
the results of this qualitative analysis of the benefits and costs of 
the interim rule, the Agency has concluded that the net effect of the 
rule will be beneficial in part due to improved underwriting. Copies of 
the benefit cost analysis may be obtained from Cheryl Thompson, 
Regulations and Paperwork Management Branch, Support Services Division, 
U.S. Department of Agriculture, Rural Development, STOP 0742, 1400 
Independence Ave., SW., Washington, DC 20250-0742 or by calling (202) 
692-0043.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) of 
Public Law 104-4 establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on State, local, and 
tribal governments and the private sector. Under section 202 of the 
UMRA, Rural Development generally must prepare a written statement, 
including a cost-benefit analysis, for proposed and final rules with 
``Federal mandates'' that may result in expenditures to State, local, 
or tribal governments, in the aggregate, or to the private sector of 
$100 million or more in any one year. When such a statement is needed 
for a rule, section 205 of UMRA generally requires Rural Development to 
identify and consider a reasonable number of regulatory alternatives 
and adopt the least costly, more cost-effective, or least burdensome 
alternative that achieves the objectives of the rule. This interim rule 
contains no Federal mandates (under the regulatory provisions of Title 
II of the UMRA) for State, local, and tribal governments or the private 
sector. Thus, this rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' Rural Development has determined 
that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment, and in 
accordance with the National Environmental Policy Act (NEPA) of 1969, 
42 U.S.C. 4321 et seq., an Environmental Impact Statement is not 
required. Loan applications will be reviewed individually to determine 
compliance with NEPA.

Executive Order 12988, Civil Justice Reform

    This interim rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. In accordance with this rule:
    (1) All State and local laws and regulations that are in conflict 
with this rule will be preempted;
    (2) No retroactive effect will be given this rule; and
    (3) Administrative proceedings in accordance with the regulations 
of the Department of Agriculture National Appeals Division (7 CFR part 
11) must be exhausted before bringing suit in court challenging action 
taken under this rule unless those regulations specifically allow 
bringing suit at an earlier time.

Executive Order 13132, Federalism

    It has been determined, under Executive Order 13132, Federalism, 
that this interim rule does not have sufficient federalism implications 
to warrant the preparation of a Federal Assessment. The provisions 
contained in the interim rule will not have a substantial direct effect 
on States or their political subdivisions or on the distribution of 
power and responsibilities among the various government levels.

Regulatory Flexibility Act

    This interim rule has been reviewed with regard to the requirements 
of the Regulatory Flexibility Act (5 U.S.C. 601-612). Rural Development 
has determined that this rule will not have a significant economic 
impact on a substantial number of small entities.

[[Page 76699]]

Rural Development made this determination based on the fact that this 
regulation only impacts those who choose to participate in the program. 
Small entity applicants will not be impacted to a greater extent than 
large entity applicants.

Executive Order 12372, Intergovernmental Review of Federal Programs

    Rural Development Guaranteed Loans are subject to the Provisions of 
Executive Order 12372, which require intergovernmental consultation 
with State and local officials. Rural Development conducts 
intergovernmental consultation in the manner delineated in RD 
Instruction 1940-J, ``Intergovernmental Review of Rural Development 
Programs and Activities,'' available in any Rural Development office, 
on the Internet at https://rurdev.usda.gov.regs, and in 7 CFR part 3015, 
subpart V.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    This executive order imposes requirements on Rural Development in 
the development of regulatory policies that have tribal implications or 
preempt tribal laws. Rural Development has determined that the interim 
rule does not have a substantial direct effect on one or more Indian 
tribe(s) or on either the relationship or the distribution of powers 
and responsibilities between the Federal Government and the Indian 
tribes. Thus, this interim rule is not subject to the requirements of 
Executive Order 13175.

Programs Affected

    The Catalog of Federal Domestic Assistance Program numbers assigned 
to this program are: 10.760, Water and Waste Disposal Systems for Rural 
Communities; 10.766, Community Facilities Loans and Grants; 10.768, 
Business and Industry Loans; and 10.775, Renewable Energy Systems and 
Energy Efficiency Improvements Program.

Paperwork Reduction Act

    Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 
35; see 5 CFR part 1320), the information collection provisions 
associated with this interim rule have been submitted to the Office of 
Management and Budget (OMB) for approval as a new collection and 
assigned OMB number 0570-0054. In the publication of the proposed rule 
on September 14, 2007, the Agency solicited comments on the estimated 
burden. The Agency received one public comment letter in response to 
this solicitation. This information collection requirement will not 
become effective until approved by OMB. Upon approval of this 
information collection, the Agency will publish a notice in the Federal 
Register.
    Title: Rural Development Guaranteed Loans.
    OMB Number: 0570-0054 (assigned)
    Type of Request: New collection.
    Expiration Date: Three years from the date of approval.
    Abstract: The majority of information being collected is associated 
with lender applications and its associated requirements for lender 
entities seeking to participate in the program and with loan guarantee 
applications. The types of information collected for lender 
applications include, but is not limited to, basic data about the 
lending entity and a summary of the lending entity's loan origination 
and servicing policies and procedures as well as, as applicable, its 
lending history and experience and its relationship with its regulator.
    The type of information collected with the guarantee application 
depends on whether it is being submitted by an approved lender or a 
preferred lender. Approved lender guarantee applications require more 
information to be submitted than a guarantee application from a 
preferred lender. Guarantee applications from approved lenders must 
contain the lender's analysis and credit evaluation, environmental 
information, technical reports, energy audits or assessments, 
appraisals if available, business plan, feasibility study, credit 
reports, and financial statements. An Affirmative Fair Housing 
Marketing Plan is required where applicable.
    Guarantee applications from preferred lenders must contain 
information sufficient for the Agency to confirm project and borrower 
eligibility, a copy of the lender's loan evaluation and analysis, 
internal loan approval documents, and environmental information.
    Information is also collected when the loan is being approved 
(e.g., conditional commitment, lender's agreement). Once the loan is in 
place, information is collected during the servicing of the loan. For 
example, loan status reports, including information on loans that are 
in default, and borrower financial reports are provided to the Agency 
by the lender. Additional information is collected when changes occur 
during the life of the loan (e.g., mergers, subordinations, transfers 
and assumption).
    The estimated information collection burden has increased by 
approximately $357,500, from $2,933,520 estimated for the proposed rule 
to $3,290,998 estimated for the interim rule. The majority of this 
increase is attributable to two changes. One change is the addition of 
the requirement for other lending entities (i.e., those that are not 
regulated or supervised) to undergo an examination acceptable to the 
Agency in order to participate in the program. This change, made in 
response to public comment, will help the Agency manage institutional 
risk. The second change is the removal of the low documentation 
application for guarantee. This was also eliminated in response to 
public comment and further helps the Agency manage institutional risk 
by requiring approved lenders to submit more information on each 
guaranteed loan requested. Together, these two changes account for 
approximately 90 percent of the increase in costs.
    Other changes are accounted for by such changes as requiring 
additional notifications (e.g., loan classifications, changes in a 
lender's policies and procedures), additional guarantee application 
requirements (for Community Facility and Water and Waste Disposal 
guaranteed loans), and submittal of borrower financial reports. These 
changes further help the Agency mitigate the risk associated with the 
guaranteed loans it approves.

E-Government Act Compliance

    Rural Development is committed to complying with the E-Government 
Act, to promote the use of the Internet and other information 
technologies to provide increased opportunities for citizen access to 
Government information and services, and for other purposes.

I. Overview

    This interim rule implements a unified guaranteed loan platform for 
the delivery of four guaranteed loan programs. The guaranteed loan 
programs included in the interim rule are Community Facilities, Water 
and Waste Disposal Facilities, Business and Industry, and the Rural 
Energy for America Program (previously known as the Renewable Energy 
System and Energy Efficiency Improvements program). Provisions common 
to each of the four programs are found in subpart A of the rule. 
Provisions specific to an individual program are found in subpart B of 
the rule. The unified guaranteed loan platform will allow USDA Rural 
Development to simplify, improve, and enhance the delivery of these 
four guaranteed loan programs across their service areas.

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II. Background

    By statutory authority, USDA Rural Development is the leading 
Federal advocate for rural America, administering a multitude of 
programs, ranging from housing and community facilities to 
infrastructure and business development. Its mission is to increase 
economic opportunity and improve the quality of life in rural 
communities by providing the leadership, infrastructure, venture 
capital, and technical support that enables rural communities to 
prosper and adapt to new technologies, products, and markets.
    To achieve its mission, USDA Rural Development provides financial 
support (including direct loans, grants, and loan guarantees) and 
technical assistance to help enhance the quality of life and provide 
the foundation for economic development in rural areas. USDA Rural 
Development has used the four guaranteed loan programs included in this 
interim rule, as well as other guaranteed loan programs, to achieve 
Rural Development's mission. The regulations that are being combined 
under the interim rule have developed over time and, in some aspects, 
independently of each other. Issues have developed when looking at all 
four program regulations as a whole as well as individually. This was 
stated in the proposed rule published on September 14, 2007, Federal 
Register (72 FR 52618). The four issue areas identified by Rural 
Development are:
    Inefficiencies. Many of the same lenders and, in some cases, 
borrowers, seek loan guarantees under more than one of these four 
programs. Thus, the same entities are required to learn multiple 
programs. This is inefficient and costly to the lenders and makes the 
programs less attractive to lenders. Currently, when new programs are 
implemented, a whole new regulation is developed that, in many 
respects, addresses or adopts many of the same requirements. Time and 
effort are wasted in readdressing issues during the development of new 
program regulations leading to inefficient rulemaking and a delay in 
program implementation.
    Inflexibility. Maintaining four separate sets of basic requirements 
creates certain inflexibilities. For example, with each program 
administered under separate regulations, any change to basic 
requirements calls for multiple concurrences. Similarly, adding a new 
program requires the addition of a new set of basic requirements, as 
these are not currently shared.
    Use of Agency Resources. Agency personnel spend a large amount of 
time performing process-related tasks that are not necessarily 
productive in making loan guarantees available to more lenders and, in 
turn, to more borrowers. These tasks are often inefficient and could be 
better managed by the private sector at the lender level. Further, 
these tasks are applied equally regardless of the relative level of 
risk of the associated loans. In sum, the current delivery of these 
four programs is not making the best use of Agency resources.
    Risk Management. In making and managing a portfolio of loan 
guarantees, consideration must be given to project risk, institutional 
risk, Agency loss exposure, and internal operational risk.
    Project risk refers to the ability of a project to repay its debt. 
The current process relies on the lender's evaluation of the project 
and then the Agency's review of the lender's analysis. The types of 
information required to be assessed under each of the programs by the 
lender may vary. Currently, the Agency lacks definitive parameters to 
evaluate project risk and is inconsistent in its evaluation of risk 
across State Offices. The lack of definitive parameters might create 
more risk. It allows projects to be funded based on completed processes 
as opposed to set evaluation criteria. This can result in funding more 
risky projects that may come at the expense of less risky projects over 
time because of limited program funds.
    Institutional risk refers to the quality of the lender seeking the 
loan guarantee. Some lenders simply do a better job at managing their 
portfolios and thereby have a lower rate of defaults. The current 
system does little to pre-qualify lenders; that is, the criteria for a 
lender to originate a loan with the Agency are insufficient.
    Agency loss exposure refers to the Agency's risk for potential loss 
in any one project in terms of the percent of guarantee and the size of 
the loan. Currently, Agency loss exposure is managed by putting limits 
on the percent of guarantee relative to the size of the loan, by having 
collateral requirements, and, for some of the programs, by limiting the 
size of the loan. While these limits are the primary mechanism for 
managing Agency loss exposure, the current programs could do more to 
manage this risk.
    Agency operational risk refers to internal weaknesses inherent in 
administering multiple programs using a variety of regulations that 
require unique sets of processes and procedures.
    Rural Development is addressing the issues associated with these 
four guaranteed loan programs through this unified guaranteed loan 
platform. This platform addresses the inefficiencies in maintaining 
separate regulations, better manages the risks associated with their 
delivery, significantly reduces inconsistencies in the implementation 
of these four programs across State offices, improves underwriting for 
loan guarantees, and reduces operational risk. By implementing a 
defined set of criteria to assess lender performance, Rural Development 
improves its management of lenders participating in these programs.

III. Discussion of the Interim Rule

    USDA Rural Development is issuing this regulation as an interim 
rule, with an effective date January 16, 2009. All provisions of this 
regulation are adopted on an interim final basis, are subject to a 60-
day comment period, and will remain in effect until the Agency adopts a 
final rule.

IV. Changes to the Rule

    This section presents changes to the proposed rule. Most of the 
changes were the result of the Agency's consideration of public 
comments to the proposed rule. Some changes, however, are being made in 
response to the provisions of the 2008 Farm Bill. The changes to the 
proposed rule are presented by section. Unless otherwise indicated, 
rule citations refer to those in the interim rule.
Highlighted Changes
    There were several portions of the rule that drew numerous 
comments. The following list highlights some of the changes made to the 
rule. These changes are also presented in the section specific change 
portion that follows this list.
     Cash equity as a minimum financial criterion has been 
replaced with a debt-to-tangible net worth ratio criterion.
     Low application documentation provisions have been 
deleted.
     Preferred lender status now applies only to the Business 
and Industry program and the requirements for becoming a preferred 
lender have changed. The Agency may administratively allow other 
programs to have preferred lender status at some date in the future 
and, in this event, would publish a Federal Register Notice to this 
effect.
     The requirement that a lender comply with either its 
lending policies and procedures or those in the rule, whichever is more 
stringent, has been modified by the addition of the phrase

[[Page 76701]]

``unless otherwise approved by the Agency.''
     Lenders are not required to submit copies of their 
policies and procedures, but are instead to submit a written summary of 
their policies and procedures when submitting an application.
     The proposed provision that ``The guaranteed portion will 
be paid first and given preference and priority over the unguaranteed 
portion'' has been replaced with ``the unguaranteed portion of the loan 
will neither be paid first nor given any preference or priority over 
the guaranteed portion.''

Section Specific Changes

Subpart A--General Provisions

Purpose and Scope (Sec.  5001.1)
    This section has been revised in two ways.
    First. Paragraph (a) of this section adds that the provisions of 
this part apply only to those guaranteed loan programs that are 
included in subpart B. This clarifies the scope of the part.
    Second. The Agency added paragraph (b) to clarify the relationship 
between the provisions in subpart A and those in subpart B. By 
including this paragraph, the Agency was able to remove from the rest 
of the rule such clauses as ``unless otherwise specified in subpart 
B.''
Definitions (Sec.  5001.2)
    The Agency made numerous changes to the definitions section of the 
rule, including redefining certain terms, adding new definitions, and 
deleting several definitions. The following identify each affected 
term.
    Applicant. This definition was deleted.
    Approved lender. This definition was added to clarify 
responsibilities.
    Borrower. This definition was redefined, in two ways, in order to 
clarify who constitutes a borrower and to identify in the rule which 
requirements apply to the borrower or to the lender or to both.
    First. The word ``entity'' was replaced with ``person'' and the 
phrase ``or seeks to borrow'' was added after ``The person that 
borrows.''
    Second. The definition for ``person'' was added.
    Business plan. This definition was clarified by replacing the word 
``applicant'' with ``borrower.''
    Conditional commitment. The Agency added ``of commitment'' after 
``The Agency-approved form'' and replaced ``it'' with ``the lender.''
    Conflicts of interest. This definition was removed. The Agency has 
made revisions elsewhere in the rule such that the Agency does not 
believe that this term needs to be defined in the rule. Instead, the 
Agency will provide guidance on this term in the handbook to the rule.
    Cooperative organization. This definition was expanded to include 
``any entity that is legally chartered as a cooperative.'' This was 
done to correct an oversight in the proposed rule that would have 
excluded ``true'' cooperatives.
    Day. This definition was added for clarity.
    Debt coverage ratio. This definition was revised in response to 
comments to make the term more in keeping with normal banking practice.
    Essential community facility. This definition was redefined in 
three ways:
    First. At the beginning of the definition, the Agency added 
``(including machinery, and/or equipment)'' after ``The physical 
structure'' and before ``financed'' to help illustrate what physical 
structure includes.
    Second. The sentence ``Not include a project that benefits a single 
individual or group of single individuals as opposed to a class within 
a community'' was replaced with ``Benefit the community at large.'' The 
Agency believes that this change better identifies the Agency's intent. 
(paragraph (3))
    Third. The phrase ``Be located in a rural area'' was removed. The 
Agency moved this phrase to subpart B for the Community Facilities 
program, where the Agency believes it is more appropriate.
    Existing businesses. The second sentence of this definition has 
been rewritten to further define certain types of changes that 
constitute existing businesses.
    Feasibility study. This definition was revised to state that the 
analysis is ``by a qualified consultant.''
    High impact business. Significant revisions to this definition 
clarify what businesses constitute a ``high impact'' business.
    Immediate family. This definition adds reference to ``or 
adoption,'' to individuals living within the same household, and to 
domestic partners. The definition now reads ``Individuals who are 
closely related by blood, marriage, or adoption, or live within the 
same household, such as a spouse, domestic partner, parent, child, 
brother, sister, aunt, uncle, grandparent, grandchild, niece, or 
nephew.''
    Lender. This definition was redefined to clarify the relationship 
between an entity that is seeking to participate (lending entity) and 
one that has been approved (lender).
    Lender's agreement. This definition was revised to refer to it as a 
form.
    Lending entity. This definition was added to clarify the 
applicability of the rule's requirements.
    Loan note guarantee. This definition was revised to refer to it as 
a form.
    Material change. This definition replaces the definition for 
``substantive change'' and is used to provide consistency with the 
rule.
    Monetary default. This definition was added to clarify when certain 
requirements in the rule apply to ``monetary defaults'' or to defaults 
in general.
    Negligent loan origination. This definition was revised by changing 
``at the time of the loan'' to ``at the time the loan is made.'' This 
clarifies how this aspect of negligent loan origination will be 
evaluated by the Agency. (paragraph (2))
    Negligent loan servicing. The phrase ``with its current servicing 
policies and procedures'' was replaced with ``with its servicing 
policies and procedures in use by the lender at the time the loan is 
made.'' This clarifies how this aspect of negligent loan servicing will 
be evaluated by the Agency. (paragraph (2))
    Other lending entity. This definition was added to clarify the 
provisions of the rule.
    Permanent working capital. This definition was deleted. Instead, as 
shown below, the Agency is defining ``working capital.'' This change 
was made to clarify the Agency's intent and to make the Agency's intent 
clearer to the commercial lending community.
    Person. This definition was revised to include public bodies, which 
will ensure such entities as Tribes are included.
    Post-application. There were two changes to this definition.
    First. The word ``applicant'' was replaced with ``borrower'' to 
clarify that it is the borrower's eligibility being determined and not 
the lender's eligibility.
    Second. The phrase ``to score the application'' was removed because 
it is no longer needed under the rule.
    Pre-application. This definition was added to clarify what 
constitutes a pre-application.
    Preferred lender. This definition was added to clarify who is 
subject to the preferred lender provisions of the rule.
    Preliminary architectural report. This definition was added as a 
conforming change to the rule.
    Preliminary engineering report. Reference to the RUS bulletins was 
removed. These will be addressed in the handbook to the rule.

[[Page 76702]]

    Promissory note. This definition was revised to remove the phrase 
``or on demand'' from the end of the first sentence because 
guaranteeing a demand note can create a balloon payment.
    Qualified consultant. This definition was added because the rule 
now has provisions that require the use of a ``qualified consultant.''
    Regulated or supervised lender. This definition was revised by 
removing the word ``credit'' and by replacing the word ``and'' with 
``or'' in two places to ensure that the sentence was not interpreted as 
requiring both conditions.
    Renewable biomass. This definition was added because the revision 
to the definition of ``renewable energy'' uses the term. This 
definition is from the 2008 Farm Bill.
    Renewable energy. This definition was revised based on the 
definition in the 2008 Farm Bill.
    Rural or rural area. This definition was revised to clarify what 
constitutes rural or rural areas. In addition, a paragraph was added 
for determining which census blocks in an urbanized area are not in a 
rural area.
    Startup business. This definition was completely revised in 
response to comments to clarify the types of business that would 
constitute startup businesses.
    State. This definition was clarified to indicate that ``any of the 
50 States'' referred to those ``of the United States.''
    Substantive change. This definition was removed and replaced by the 
definition ``material change.''
    Tangible net worth. This definition was added because it is now 
used in the financial metric criteria used to determine project 
eligibility.
    Unincorporated area. This definition was deleted because it is no 
longer needed as the result of changes to the definition of ``rural or 
rural area.''
    Working capital. This definition was added to the rule to replace 
``permanent working capital.'' It is defined as ``Current assets 
available to support a business' operations and growth. Working capital 
is calculated as current assets less current liabilities.''
    Finally, paragraph (b), ``abbreviations'' was removed because it is 
no longer needed for the rule.
Agency Authorities (Sec.  5001.3)
    Exception authority (Sec.  5001.3(a)). The Agency revised paragraph 
(a)(1) in this section by replacing ``applicant'' with ``lender'' to 
clarify that it is both the lender's eligibility and the borrower's 
eligibility that cannot be excepted.
    Review or appeal rights (Sec.  5001.3(b)). The words ``Review or'' 
were added to the heading. The definition was revised by removing 
reference to ``the appropriate Agency official that oversees the 
program in question'' so that a person seeking review would seek such 
review from the National Appeals Division in accordance with the 
Division's regulation.
Oversight and Monitoring (Sec.  5001.4)
    Paragraph (a) was modified to clarify that the lender is required 
to cooperate fully with the Agency in the Agency's oversight and 
monitoring of lenders.
    Paragraph (b)(1) was corrected by replacing the word ``lender'' 
with ``borrower'' so that it now reads ``any material change in the 
general financial condition of the borrower.''
    Paragraph (b)(2) was revised to indicate that monthly default 
reports are required for loans that are in monetary default. At 
proposal, this provision referred to a loan that goes into default, 
without specifying what kind of default.
    Paragraph (b)(3) was modified in two ways:
    First. Notifications are required within 15 calendar days rather 
than 5 days as was proposed.
    Second. Notifications are now being required for loans made under 
this part that receive any downgrade in their classification.
    Paragraph (b)(4) was added to require, from a lender who receives a 
final loss payment, an annual report on the lender's collection 
activities for each unsatisfied account for 3 years following payment 
of the final loss claim. This requirement was added to help the Agency 
manage and mitigate risk inherent in delivering and administering this 
program.
Project Eligibility (Sec.  5001.6)
    Numerous changes were made to this section.
    First. The introductory text was modified to indicate that the 
requirements in this section apply to both borrower and project 
elements.
    Second. A new paragraph (a) replaces paragraphs (a) and (b) in the 
proposed rule. Paragraph (a) references the reader to the project 
requirements specified in subpart B. Because the requirements in 
subpart B address the two requirements identified in proposed 
paragraphs (a) and (b), the Agency removed these two proposed 
paragraphs from this section.
    Third. Paragraph (b), which corresponds to paragraph (c) in the 
proposed rule, addresses the financial metric criteria. Changes 
incorporated in this paragraph are:
     The rule clarifies that these financial metric criteria 
are based on the borrower and not on the individual project;
     The Agency has added that these financial metric criteria 
are to be calculated from ``the realistic information in the pro forma 
statements or borrower financial statements * * * of a typically 
operating year after the project is completed and stabilized;'' and
     The Agency has replaced the proposed cash equity criterion 
with a debt-to-tangible net worth ratio criterion.
Unauthorized Projects and Purposes (Sec.  5001.7)
    Paragraph (b) has been revised to refer to only golf courses and 
similar recreational facilities. The references to racetracks, water 
parks, and ski slopes found in the proposed rule have been relocated to 
subpart B in the Community Facilities provisions. However, the Agency 
has added additional underwriting criteria that allows the Agency to 
require higher underwriting standards for projects that are deemed more 
risky, such as racetracks and water parks.
    Paragraph (c), which addresses businesses deriving more than 10% of 
its annual gross revenue from gambling activity, has been modified by 
allowing State-authorized proceeds and, for public bodies and for not-
for-profit approved projects only, any other funds derived from 
gambling proceeds, as approved by the Agency, to be excluded from this 
calculation.
    Paragraph (e) was reorganized to make clear that ``made by other 
Federal agencies'' applies to loans and not to lines of credits or 
lease payment. The introductory text to paragraph (e) was revised to 
read ``Any guarantee of a:'' rather than ``Any:''.
    Proposed paragraph (g), which addressed facilities used primarily 
for the purpose of housing Federal and State agencies, was removed from 
subpart A in the rule and is addressed, instead, in subpart B for 
Community Facilities.
    Paragraph (h) addresses any business deriving income from illegal 
drugs, drug paraphernalia, and other illegal product or activity. At 
proposal, this paragraph used the phrase ``deriving income from the 
sale of illegal drugs.'' The Agency removed the phrase ``the sale of'' 
as it is unnecessary and potentially too restrictive.
    Paragraph (i) was rephrased to clarify that payment to the borrower 
for the rental of equipment or machinery owned by the borrower is an 
unauthorized purpose.

[[Page 76703]]

    Paragraph (j) was revised from ``The payment of a judgment'' to 
``The payment of either a Federal judgment or a debt owed to the United 
States, excluding other Federal loans.''
    Paragraph (k) was revised to read ``Any project that creates, 
directly or indirectly, a conflict of interest or an appearance of a 
conflict of interest.'' At proposal, this provision read ``Any project 
resulting in a conflict of interest.''
Borrower Eligibility (Sec.  5001.8)
    Paragraph (a)(1)(i) was modified to make clear that citizens of the 
U.S. include citizens of the Republic of Palau, the Federated States of 
Micronesia, the Republic of the Marshall Islands, and American Samoa.
    Paragraph (a)(1)(ii) was modified to address the clarification made 
in paragraph (a)(1)(i) of this section and to add ``or controlled'' 
after ``Entities other than individuals must be at least 51% owned.''
    Paragraph (b) was revised to include the provision that a borrower 
would be ineligible if any owner with more than 20 percent ownership 
interest in the borrower was also found to be ineligible using the same 
criteria provided for the borrower itself.
Participation Eligibility Requirements (Sec.  5001.9)
    The Agency has made numerous and significant changes to this 
section, which was titled Lender Eligibility and Designation in the 
proposed rule.
    A new paragraph (a) was added that identifies three requirements 
applicable to all lending entities (at proposal, the term used was 
lenders) that wish to participate in this program. These three 
requirements are:
     Submittal of a written summary of their loan origination 
and servicing policies and procedures. Under the proposed rule, all 
lending entities would have been required to submit copies of these 
policies and procedures (see also Sec.  5001.9(b)(1)(ii), (b)(2), and 
(c)(2)(i)).
     Maintenance of internal audit and management control 
systems to evaluate and monitor the overall quality of their loan 
origination and servicing activities. This was not part of the proposed 
rule.
     Not being otherwise debarred or suspended by the Federal 
government. This was part of the proposed rule.
    Paragraph (b), which corresponds to paragraph (a) under this 
section in the proposed rule, includes revisions for regulated or 
supervised lending entities that do not have an outstanding Agency 
guaranteed loan with the Agency (referred to at proposal as not having 
an existing portfolio) and for regulated or supervised lending entities 
that have at least one outstanding Agency guaranteed loan. The interim 
rule makes clear that the determination of whether a lending entity has 
an outstanding Agency guaranteed loan is based on the date on which the 
interim rule is effective.
    For regulated and supervised lending entities that do not have 
outstanding guaranteed loans, the interim rule makes clear as to whom 
the lending entity is to submit the lender application (Sec.  
5001.9(b)(1)(i)). At proposal, the rule did not make clear to whom a 
federally chartered lending entity would submit the lender application.
    The interim rule requires regulated and supervised lending entities 
that do not have outstanding guaranteed loans to submit information on 
their lending history and experience with their lender application 
(Sec.  5001.9(b)(1)(iii)). This was not part of the proposed rule. The 
Agency believes that this requirement will allow the Agency to further 
reduce institutional risk.
    Lastly, for these lending entities, the interim rule identifies the 
process under which the Agency will determine whether or not to approve 
the lender application (Sec.  5001.9(b)(1)(iv)). At proposal, this 
process was not addressed other than to make reference to the 
requirement that the lending entity be in good standing with its 
regulator.
    For regulated or supervised lending entities that have at least one 
outstanding Agency guaranteed loan, the interim rule makes clear the 
process under which the Agency will approve such lenders (Sec.  
5001.9(b)(2)(i) and (ii)).
    In paragraph (b)(4), the Agency has expanded the requirements for 
approved regulated or supervised lenders to maintain their approved 
status (proposed Sec.  5001.9(a)(3)) to include the provision that if a 
lender fails to maintain its status as a lender or has no outstanding 
loans with the Agency for two consecutive years, it must reapply under 
this section for lender approval.
    The Agency has also modified the requirements for other lending 
entities (referred to as ``other lenders'' in the proposed rule) to 
participate in this program. The Agency has added the requirement that 
other lending entities must have undergone an examination acceptable to 
the Agency in order to be eligible for submitting a lender application 
for approval (Sec.  5001.9(c)(1)(iv)). The Agency added this criterion 
in response to public comments and its assessment that such an 
examination will assist the Agency in mitigating institutional risk. 
The results of this examination are to be submitted with the lender 
application (Sec.  5001.9(c)(2)(viii)).
    Paragraph 5001.9(c)(2) was modified to indicate that certificates 
of good standing must be obtained from the States in which the other 
lending entity is licensed and intends to conduct business; at 
proposal, this provision did not include the ``is licensed'' aspect of 
the provision.
    Paragraph 5001.9(c)(3) makes clearer the process that the Agency 
will use in reviewing other lending entity applications for lender 
approval, which is very similar to what was proposed.
    Paragraph 5001.9(c)(5), which addresses maintenance of approved 
status for approved other lenders, adds the requirement (as for 
regulated or supervised lenders) that if the lender fails to maintain 
its status as a lender or has no outstanding loans with the Agency for 
two consecutive years, it must reapply under this section for lender 
approval.
    Lastly, the Agency has revised the requirements associated with 
preferred lenders. Under the interim rule, preferred lender status will 
apply only to lenders participating in the Business and Industry 
guaranteed loan program. The Agency may administratively allow other 
programs to have preferred lender status at some date in the future 
and, in this event, would publish a Federal Register Notice to this 
effect. Under the proposed rule, any approved lender could apply for 
preferred lender status. In making this change, the Agency has dropped 
in its entirety proposed Sec.  5001.9(c), Lender designation.
    Paragraph (d) of this section addresses all of the requirements 
associated with preferred lenders. The proposed rule (Sec.  
5001.9(c)(1)(i) through (c)(1)(iii)) identified three criteria--current 
level of experience, number of losses (which varied depending on how 
long the lender was making commercial loans), and instances of Federal 
government negligent loan origination or servicing. The interim rule 
identifies seven criteria to be met to become a preferred lender:
     Lender loss rate not in excess of a maximum ``preferred 
lender'' loss rate;
     A minimum of 10 guaranteed Business and Industry loans, 
unless otherwise provided for in a notice in the Federal Register;
     Consistent practice of submitting guaranteed loan 
applications with accurate information supporting a sound loan 
proposal;
     No more than one instance of Federal government loan 
origination or servicing where a loss has been paid;

[[Page 76704]]

     Not be under any regulatory enforcement action;
     Demonstrated high standards of professional competence; 
and
     Adequate lender facilities to conduct its Agency business 
at a high level of performance.
    The Agency will publish in the Federal Register notices that 
identify the maximum preferred lender loss rate and minimum number of 
guaranteed Business and Industry loans to qualify for preferred lender 
status when there are changes in these rates or numbers.
    Paragraph (d)(2) requires the lender to identify the States in 
which the lender is seeking preferred status and to identify those 
branch offices for which it is seeking preferred lender status. Under 
the proposed rule, a lender approved as a preferred lender would have 
preferred lender status in each State.
    Paragraph (d)(3) allows the lender to have preferred lender status 
for a period not to exceed 4 years and requires the lender to submit 
material to retain preferred status once the 4 years (or other 
applicable time period) has expired. At proposal, there was no 
timeframe associated with preferred lender status.
    Paragraph (d)(4) identifies the situations under which a lender may 
lose its preferred status. The interim rule contains more specifics 
than found in the proposed rule and applies the criteria under which a 
lender can lose its preferred lender status regardless of how long the 
lender has been making commercial loans.
Guarantee Application Process (Sec.  5001.11)
    The Agency has made two changes to this section.
    First. The Agency has clarified Sec.  5001.11(b)(2) by defining 
what is meant by ``those areas'' in the paragraph where it states, in 
part, ``the Agency may require the lender to obtain additional 
assistance in those areas where the lender does not have the requisite 
expertise to originate or service the loan.''
    Second. The Agency has added a new paragraph (c) in which the 
Agency will approve (subject to the availability of funds) or reject 
complete applications from preferred lenders within 10 working days 
after their receipt. This processing timeframe will not begin until all 
information required to make an approval decision, including a 
completed environmental review, is received by the Agency.
Application for Loan Guarantee Content (Sec.  5001.12)
    The Agency has made significant changes to this section in the 
interim rule.
    First. The rule no longer differentiates between full documentation 
applications and low documentation applications. Instead, all approved 
lenders submit applications that contain information that is very 
similar to what would have been required under the proposed rule's 
``full documentation'' applications. The interim rule does not contain 
a low documentation application provision and, as such, no longer 
requires a ``determination of documentation level'' provision as 
provided in the proposed rule (proposed Sec.  5001.12(c)).
    Second. The interim rule provides requirements for guarantee loan 
applications from preferred lenders. While guarantee loan applications 
from preferred lenders require less documentation than those from 
approved lenders, they are not referred to as ``low documentation'' 
applications in the interim rule, but as ``preferred lender'' loan 
guarantee applications.
    The loan guarantee application requirements for approved lenders 
are the same as those found in the proposed rule for full documentation 
applications, with the following exceptions:
     A copy of Form 10-K is no longer required to be submitted 
for companies listed on major stock exchanges (proposed Sec.  
5001.12(a)(5)).
     The proposed loan agreement between the lender and the 
borrower is no longer required to be submitted (proposed Sec.  
5001.12(a)(6)).
     Appraisals acceptable to the Agency are to be submitted if 
available. If they are not available at the time the application is 
submitted, complete appraisals must be submitted to the Agency before 
loan closing. At proposal, this requirement stated ``Appraisals (as 
specified in Sec.  5001.16(c))'' (proposed Sec.  5001.12(a)(8)).
     In newly designated Sec.  5001.12(a)(8), the ``for for-
profit'' qualifier for nursing homes has been removed (proposed Sec.  
5001.12(a)(11)).
     In newly designated Sec.  5001.12(a)(9), the word 
``prospective'' was removed because it is no longer needed (proposed 
Sec.  5001.12.(a)(13)).
     Proposed Sec.  5001.12(a)(12) for preliminary engineering 
report was relocated to subpart B for the water and waste disposal 
facility program.
     Proposed Sec.  5001.12(a)(14) requiring the most recent 
audited financial statements if the guaranteed loan is $1 million or 
more is significantly revised. In the interim rule, this paragraph 
(Sec.  5001.12(a)(10)) requires borrowers that have been in existence 
for one or more years seeking a guaranteed loan of $3 million or more 
to submit their most recent audited financial statements, unless 
alternative financial statements are authorized by the Agency. For 
borrowers that have been in existence for one or more years seeking a 
guaranteed loan of less than $3 million, the interim rule requires such 
borrowers to submit either the most recent audited or Agency-acceptable 
financial statements of the borrower. Lastly, for borrowers that have 
been in existence for less than one year, the interim rule requires the 
submittal of ``the most recent Agency-authorized financial statements 
of the borrower regardless of the amount of the guaranteed loan 
request.'' Paragraph 5001.12(a)(10)(iii) allows the Agency to request 
additional financial statements and related information depending on 
the complexity of the project.
     Finally, newly designated Sec.  5001.12(a)(11) has been 
added to provide the Agency the flexibility to request any additional 
information determined by the Agency as necessary to evaluate the 
application.
    The provisions for guaranteed loan applications for preferred 
lenders are found in Sec.  5001.12(b), and are new to the rule. 
Preferred lenders are required to submit:
     A copy of Form RD 5001-3, ``Application for Loan 
Guarantee'';
     Information sufficient for the Agency to confirm project 
and borrower eligibility;
     A copy of lender's loan evaluation and analysis;
     An internal loan approval document showing approval by in-
house appropriate office/committee; and
     Environmental information required by the Agency to 
conduct its environmental reviews (as specified in Sec.  5001.16(h)).
Lender Responsibilities--General (Sec.  5001.15)
    The interim rule contains three additional requirements applicable 
to all lenders participating in this program to help further mitigate 
institutional risk. These requirements are:
     Notifying the Agency of any changes to its loan 
origination and servicing policies and procedures provided under Sec.  
5001.9(a). For any changes to the lender's loan origination and 
servicing policies and procedures that are inconsistent with the 
requirements of this part, the lender must notify the Agency in writing 
and

[[Page 76705]]

receive written Agency approval prior to applying the changes to loan 
guarantees under this part.
     Compiling and maintaining in its files a complete 
application for each guaranteed loan for at least one year after the 
final loss has been paid.
     Maintaining internal audit and management control systems 
to evaluate and monitor the overall quality of its loan origination and 
servicing activities.
Lender Responsibilities--Origination (Sec.  5001.16)
    The Agency has made a number of changes to this section. One 
editorial change throughout the section was the replacement of the 
words ``prospective borrower'' with ``borrower'' (e.g., Sec.  
5001.16(b)(2)(i)).
    General (Sec.  5001.16(a)). In the introductory text to Sec.  
5001.16(a), the Agency made two substantive changes.
    First. The Agency revised the first sentence to read: ``The lender 
is responsible for originating all loans in accordance with its loan 
origination policies and procedures at the time the loan is made and 
with the requirements of this part.'' The text in the proposed rule did 
not include ``at the time the loan is made.'' The revised sentence also 
replaces the phrase ``current written policies and procedures'' with 
``loan origination policies and procedures.''
    Second. The Agency revised the second sentence to read: ``Where a 
lender's loan origination policies and procedures address a 
corresponding requirement in this part, the lender must comply with 
whichever is more stringent, unless otherwise approved by the Agency.'' 
The text in the proposed rule did not include the phrase ``unless 
otherwise approved by the Agency.'' This added phrase is cross-
referenced as necessary in other places within the interim rule (e.g., 
Sec.  5001.16(b)). The inclusion of this phrase allows the Agency and 
the lender to work together and to consider each loan application on a 
case-by-case basis.
    The Agency has also added a requirement (Sec.  5001.16(a)(2)) for 
the lender to provide the Agency the lender's classification of the 
loan no later than 90 days after loan closing.
    Appraisals (Sec.  5001.16(c)). The Agency made three changes to the 
introductory text to this paragraph and one change to Sec.  
5001.16(c)(2).
    In the introductory text, the Agency included chattel collateral 
appraisals, which were not addressed in the proposed rule. In addition, 
the Agency dropped reference to specific sections within the Uniform 
Standards of Professional Appraisal Practices (USPAP) standards, as 
these were unnecessary to continue to include in the rule. Lastly, the 
Agency added the provision that complete appraisals must be submitted 
to the Agency before loan closing.
    In Sec.  5001.16(c)(2), the Agency added that the potential effect 
of environmental hazards on the market value of the collateral are to 
be ``determined in accordance with the appropriate ASTM Real Estate 
Assessment and Management environmental standards.''
    Personal, partnership, and corporate guarantees (Sec.  5001.16(d)). 
The heading has been revised to include ``partnership.'' In addition, 
here and elsewhere in the rule, the Agency revised the phrase 
``personal or corporate guarantees'' (and similar phrases) to 
``personal, partnership, or corporate guarantees.''
    The proposed rule was not clearly written as which personal, 
partnership, and corporate guarantees could be used to secure a loan. A 
new paragraph (d)(1) has been added to make clear that secured, 
unconditional personal, partnership, and corporate guarantees may be 
used to determine the security of the loan, but that unsecured, 
unconditional personal, partnership, and corporate guarantees will not 
be considered in determining whether a loan is adequately secured for 
loan making purposes.
    Re-designated paragraph (d)(2) addresses Agency-approved, unsecured 
personal, partnership, and corporate guarantees and incorporates the 
provision found in the proposed rule under proposed Sec.  5001.16(d)(1) 
and (d)(2). Concerning exceptions to the requirement for personal 
guarantees, the Agency replaced ``concurred by the Agency approval 
official'' with ``approved by the Agency.''
    Lastly, a new paragraph (d)(3) was added to address the requirement 
for guarantors to execute an Agency-approved unconditional guarantee 
(which was required in the proposed rule). The interim rule adds three 
provisions to explain how amounts paid by the Agency will constitute a 
Federal debt and the handling of interest charges. These provisions 
are:
     Any amounts paid by the Agency on account of liabilities 
of an Agency guaranteed loan borrower will constitute a Federal debt 
owed to the Agency by the guaranteed loan borrower. In such case, the 
Agency may use all remedies available to it, including offset under the 
Debt Collection Improvement Act of 1996, to collect the debt from the 
borrower.
     Any amounts paid by the Agency pursuant to a claim by a 
guaranteed program lender will constitute a Federal debt owed to the 
Agency by a third-party guarantor of the loan, to the extent of the 
amount of the third-party guarantee. In such case, the Agency may use 
all remedies available to it, including offset under the Debt 
Collection Improvement Act of 1996, to collect the debt from the third-
party guarantor.
     In all instances under the above paragraphs, interest 
charges will be assessed in accordance with 7 CFR 1951.133.
    Design requirements (Sec.  5001.16(e)). The Agency made two 
substantive changes to this paragraph.
    First. The phrase ``or other Agency-approved code'' was added to 
the end of the first sentence.
    Second. In the second sentence the word ``original'' was replaced 
with the word ``approved.''
    Compliance with other Federal Laws (Sec.  5001.16(g)). The Agency 
removed the last sentence in the proposed rule text, because it is not 
applicable to guaranteed loans.
    Conflicts of interest (Sec.  5001.16(i)). The Agency added the 
phrase ``and appearances of conflicts of interest'' to the end of this 
paragraph, which should have been included in the proposed rule.
    Surety (Sec.  5001.16(j)). The Agency added this paragraph to the 
rule. Under this paragraph, surety will be required in cases when the 
guarantee will be issued prior to completion of construction unless the 
contractor will receive a lump sum payment at the end of work. In 
addition, surety is to be made a part of the contract, if the applicant 
requests it or if the contractor requests partial payments for 
construction work. Finally a latent defects bond may be required to 
cover the work in instances where no surety is provided and the project 
involves pre-commercial technology, first of its type in the U.S., or 
new designs without sufficient operating hours to prove their merit.
Lender's Responsibilities--Servicing (Sec.  5001.17)
    General (Sec.  5001.17(a)). Consistent with the revision made to 
Sec.  5001.16(a), the Agency revised the second sentence to read 
``Where a lender's loan servicing policies and procedures address a 
corresponding requirement in this part, the lender must comply with 
whichever is more stringent, unless otherwise approved by the Agency.'' 
The text in the proposed rule did not include the phrase ``unless 
otherwise approved by

[[Page 76706]]

the Agency.'' This added phrase is cross-referenced as necessary in 
other places within the interim rule (e.g., Sec.  5001.17(b)). The 
inclusion of this phrase allows the Agency and the lender to work 
together and to consider each loan application on a case-by-case basis.
    The revised sentence also replaces ``current written policies and 
procedures'' with ``loan servicing policies and procedures.''
    Certification (Sec.  5001.17(b)). The phrase ``current written'' 
was removed from this paragraph and a cross-reference to the exception 
to the ``whichever is more stringent'' requirement in paragraph (a) of 
this section was added.
    Audits (Sec.  5001.17(c)). This is a new provision, which requires 
lenders, when applicable, to audit a borrower in accordance with Office 
of Management and Budget requirements.
    Financial reports (Sec.  5001.17(d)). This is a new provision 
addressing when lenders are to submit financial reports of the 
borrower. The requirements differ depending on whether or not the 
lender is a regulated or supervised lender. Specifically, these 
requirements are:
     For regulated or supervised lenders, the information that 
would be contained in financial reports required by the appropriate 
regulatory institution. Unless otherwise provided in the Conditional 
Commitment, such information must be submitted at the same time it 
should be made available to the appropriate regulatory institution.
     For lenders who are not regulated or supervised, financial 
reports as required in the Conditional Commitment.
    Collateral inspection and release (Sec.  5001.17(e)). As proposed 
(Sec.  5001.17(c)), the Agency would have been allowed to require the 
lender to obtain prior Agency approval of any release of collateral and 
to require an appraisal on the remaining collateral in cases in which 
the Agency determined that it may be adversely affected by the release. 
Because the proposed rule did not clearly indicate when such appraisals 
would be required, the Agency has revised this provision to state that:
     It will require prior approval of the release of 
collateral except in two instances--where the proceeds are used to pay 
down debt in order of lien priority, or to acquire replacement 
equipment, or where the release of collateral is made under the 
abundance of collateral provision of an applicable security agreement 
(e.g., a blanket security agreement); and
     Appraisals on the collateral being released will be 
required on all transactions exceeding $250,000.
    The Agency has also revised this paragraph by adding the phrase 
``unless otherwise approved by the Agency in writing'' to the end of 
the last sentence and deleting ``In all cases'' from the beginning of 
the last sentence, which now reads in full ``The sale or release of 
collateral must be based on an arm's length transaction, unless 
otherwise approved by the Agency in writing.''
    Processing transfers and assumptions (Sec.  5001.17(f)(2)). As 
proposed (Sec.  5001.17(d)(2)), this paragraph would have allowed the 
lender to release the transferor (including any guarantor) from 
liability without Agency approval. The Agency has revised this 
provision to now require such releases to be subject to Agency 
approval.
    The Agency also added conditions under which the transferor 
(including any guarantor) may be released from liability (Sec.  
5001.17(f)(2)(iii)).
    Mergers (Sec.  5001.17(g)). As proposed (Sec.  5001.17(e)), the 
Agency would have been allowed to withdraw the guarantee when a 
borrower participates in a merger. This provision has been revised 
entirely. In the interim rule, all borrower mergers require prior 
approval by the Agency and the lender. Further, if a borrower merges 
without Agency approval, the lender must accelerate the loan unless 
subsequently agreed to in writing by the Agency.
    Subordination of lien position (Sec.  5001.17(h)). The Agency has 
made several revisions to the Agency's concurrence as follows:
     The proposed rule required that the Agency's financial 
interest be enhanced. This has been changed to the subordination being 
in the Agency's best financial interest.
     The proposed rule required that the collateral will remain 
adequate to secure the loan. This has been removed from the interim 
rule.
     The proposed rule limited a subordination to a revolving 
line of credit to no more than one year. This has been changed to read 
``the subordination of line of credit does not extend the term of the 
line of credit and in no event exceeds more than three years.''
    Repurchases from holder(s) (Sec.  5001.17(i)). The Agency has made 
two changes to the introductory text to this paragraph.
    First. The first sentence was revised to refer to ``monetary 
default'' rather than ``default'' so that the first sentence now reads, 
in part, ``the Agency to repurchase the unpaid guarantee portion of the 
loan in the case of borrower monetary default or failure of the lender 
to pay the holder its pro-rata share.''
    Second. In the beginning of the second sentence the word ``or'' is 
replaced with ``and'' to read: ``When the lender and the Agency 
determine that repurchase is necessary to adequately service the loan, 
the holder must sell the guaranteed portion to the requesting entity.'' 
This edit was made in order to ensure that the Agency always 
participates in this decision.
    The Agency added to this section a new paragraph (i)(2) addressing 
provisions regarding repurchase by lender for servicing.
    Within the provisions for repurchases by the Agency (Sec.  
5001.17(i)(3)), ``unless provided for in the Assignment Guarantee 
Agreement'' was deleted from the end of the sentence ``The lender may 
not charge the Agency any fees.'' In addition, language was added 
addressing the calculation of the amount of the repurchase and the 
length of accruing interest that will be covered (Sec.  
5001.17(i)(3)(iii)).
    Additional expenditures and loans (Sec.  5001.17(j)). The Agency 
made two edits to this provision. The words ``will not'' were replaced 
by the word ``may'' and the phrase ``unless the expenditure or loan 
will violate one or more of the loan covenants of the borrower's loan 
agreement'' was added at the end of the paragraph.
    Lender failure (Sec.  5001.17(k)). The Agency added the phrase ``or 
ceases servicing the loan,'' in the first sentence to read: ``In the 
event a lending institution fails or ceases servicing the loan, the 
Agency will provide instruction to the successor entity on a case-by-
case basis.''
    Delinquent loans (Sec.  5001.17(l)). The phrase ``coordinate