Usda Rural Development Servicing B I.
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- Usda Rural Development Servicing B I Guaranteed Loans Www Rd Usda Gov 6B68F57C29
Summary
USDA Rural Development Instruction 4287-B, Part 4287, Subpart B, on servicing Business and Industry (B&I) guaranteed loans, with an effective date of October 24, 2022. As of October 1, 2020, the subpart applies only to B&I loans guaranteed before that date and to B&I CARES Act Program Loans under Pub. L. 116-136 for working capital needed because of the COVID-19 pandemic. It makes the lender responsible for servicing the entire loan, requires semiannual status reports and Agency and lender conferences at least annually, and requires borrower financial statements within 120 days of fiscal year end. Later sections cover interest rate changes, release of collateral, transfer and assumption, default, liquidation, loss payment and bankruptcy. Appendixes include a final loss settlement checklist and a sample interest termination letter.
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RD Instruction 4287-B
Effective Date 10/24/2022
PART 4287 - SERVICING
Subpart B - Servicing Business and Industry Guaranteed Loans
Table of Contents
§ 4287.101 Introduction. 1
§ 4287.102 Definitions and abbreviations. 1
§ 4287.103 Exception authority. 1
§§ 4287.104 - 4287.105 [Reserved] 1
§ 4287.106 Appeals. 1
§ 4287.107 Routine servicing. 2
(a) Lender reports and annual renewal fee. 2
(b) Loan classification. 2
(c) Agency and lender conference. 3
(d) Borrower financial reports. 3
(e) Protection of Agency interests. 4
(f) GLS. 4
(g) Borrower visits. 4
§§ 4287.108 - 4287.111 [Reserved] 5
§ 4287.112 Interest rate changes. 5
§ 4287.113 Release of collateral. 6
§§ 4287.114 - 4287.122 [Reserved] 8
§ 4287.123 Subordination of lien position. 8
§ 4287.124 Alterations of loan instruments. 9
§§ 4287.125 - 4287.132 [Reserved] 9
§ 4287.133 Sale of corporate stock. 9
§ 4287.134 Transfer and assumption. 9
(a) Documentation of request. 9
(b) Terms. 10
(c) Release of liability. 10
(d) Proceeds. 10
(e) Additional loans. 10
(f) Credit quality. 10
(g) Appraisals. 10
(h) Documents. 11
(i) Loss/repurchase resulting from transfer. 11
(j) Related party. 11
(k) Cash downpayment. 11
(l) Annual renewal fees. 12
(m) Bankruptcy. 12
(n) Approval. 12
(o) Environmental. 12
§ 4287.135 Substitution of lender. 13
§ 4287.136 Lender failure. 14
(a) Uninsured lender. 14
(b) Insured lender. 14
§§ 4287.137 - 4287.144 [Reserved] 16
§ 4287.145 Default by borrower. 16
§§ 4286.146 - 4287.155 [Reserved] 18
§ 4287.156 Protective advances. 18
§ 4287.157 Liquidation. 19
(a) Decision to liquidate. 19
(b) Repurchase of loan. 19
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(c) Lender's liquidation plan. 20
(d) Approval of liquidation plan. 21
(e) Acceleration. 22
(f) Filing an estimated loss claim. 22
(g) Accounting and reports. 22
(h) Transmitting payments and proceeds to the Agency. 22
(i) Abandonment of collateral. 22
(j) Personal or corporate guarantees. 23
(k) Compromise settlement. 23
(l) Litigation. 24
§ 4287.158 Determination of loss and payment. 25
(a) Report of loss form. 25
(b) Estimated loss. 25
(c) Final loss. 25
(d) Loss limit. 27
(e) Liquidation expenses. 27
(f) Rent. 28
(g) Payment. 28
§ 4287.159 Debt Collection Improvement Act. 28
§§ 4287.160 - 4287.168 [Reserved] 31
§ 4287.169 Future recovery. 31
§ 4287.170 Bankruptcy. 31
(a) Lender’s responsibilities. 32
(b) Reports of loss during bankruptcy. 32
(c) Expenses during bankruptcy proceedings. 35
(d) Personal/corporate guarantors. 35
(e) Agency monitoring. 36
§§ 4287.171 - 4287.179 [Reserved] 36
§ 4287.180 Termination of guarantee. 36
§§ 4287.181 - 4287.199 [Reserved] 36
§ 4287.200 OMB control number. 36
APPENDIX A - MODIFICATION OR ADMINISTRATIVE ACTION FORM 1
APPENDIX B - FINAL LOSS SETTLEMENT CHECKLIST 1
APPENDIX C – LIQUIDATION AND PROPERTY MANAGEMENT GUIDE 1
APPENDIX D – DEBT COLLECTION IMPROVEMENT ACT GUIDANCE 1
APPENDIX E – QUARTERLY DELINQUENT/PROBLEM LOAN REPORT 1
APPENDIX F - USDA LINC/APPLICATION AUTHORIZATION SECURITY MANAGEMENT SYSTEM 1
APPENDIX G – CREDIT EVALUATION GUIDANCE 1
APPENDIX H – SAMPLE LETTER – INTEREST TERMINATION DATE 1
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PART 4287 - SERVICING
Subpart B - Servicing Business and Industry Guaranteed Loans
§ 4287.101 Introduction.
(a) As of October 1, 2020, this subpart is specifically applicable to
and only contains regulations for servicing Business and Industry (B&I)
Loans guaranteed by the Agency prior to October 1, 2020 and Business and
Industry loans under the authority of the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act) (Pub. L. 116-136) to provide B&I
guarantees for loans needed as a result of the Coronavirus Disease 2019
(COVID-19) pandemic for working capital loan purposes to support business
operations and facilities in rural areas (B&I CARES Act Program Loans).
Other than B&I CARES Act Program Loans and B&I loans guaranteed by the
Agency prior to October 1, 2020, this subpart is no longer used for
servicing B&I loans guaranteed by the Agency. Requirements for B&I loans
guaranteed by the Agency after October 1, 2020 (other than B&I CARES Act
Loans) may be found at 7 CFR part 5001.
(b) The lender is responsible for servicing the entire loan and must
remain mortgagee and secured party of record, notwithstanding the fact
that another party may hold a portion of the loan.
(c) Whether specifically stated or not, whenever Agency approval is
required, it must be in writing. Copies of all forms and regulations
referenced in this subpart may be obtained from any Agency office and
from the USDA Rural Development Web site at
http://www.rd.usda.gov/publications. Whenever a form is designated in
this subpart, that designation includes predecessor and successor forms,
if applicable, as specified by the Agency. Any portion of this
Instruction appearing in italicized type is considered by the Agency to
be administrative procedure and has not been published as part of the
regulation in the Federal Register.
§ 4287.102 Definitions and abbreviations.
The definitions and abbreviations contained in § 4279.2 of this chapter
apply to this subpart.
§ 4287.103 Exception authority.
Section 4279.15 of this chapter applies to this subpart.
§§ 4287.104 - 4287.105 [Reserved]
§ 4287.106 Appeals.
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Section 4279.16 of this chapter applies to this subpart.
§ 4287.107 Routine servicing.
The lender is responsible for servicing the entire loan and for taking
all servicing actions that a reasonably prudent lender would perform in
servicing its own portfolio of loans that are not guaranteed. The lender may
contract for services but is ultimately responsible for underwriting, loan
origination, loan servicing, and compliance with all Agency regulations.
Form RD 4279-4, “Lender’s Agreement,” is the contractual agreement between
the lender and the Agency that sets forth some of the lender’s loan servicing
responsibilities. These responsibilities include, but are not limited to,
periodic borrower visits, the collection of payments, obtaining compliance
with the covenants and provisions in the loan agreement, obtaining and
analyzing financial statements, ensuring payment of taxes and insurance
premiums, maintaining liens on collateral, keeping an inventory accounting of
all collateral items, and reconciling the inventory of all collateral sold
during loan servicing, including liquidation. The State Director has the
primary responsibility for ensuring that the lender is servicing the loan in
a prudent manner as required by the Lender's Agreement and the regulations
governing the program and that the lender and borrower are abiding by the
terms of the loan documents. Loan servicing is intended to be preventive
rather than curative. Prompt follow-up on delinquent accounts and early
recognition of and pursuing a solution to potential problems are keys to
resolving many problem accounts. The lender should be immediately notified
in writing when the Agency suspects noncompliance with the legal instruments
governing the loan. In the event the State Office becomes aware of lender
noncompliance with any provision of the loan agreement, Lender’s Agreement,
Loan Note Guarantee, or other similar document, the lender is to be notified
in writing of the Full Faith and Credit provisions as they relate to the
enforceability of the Loan Note Guarantee, with a copy of the letter to be
included in the case file. The Regional OIG should be contacted when fraud
or misrepresentation is suspected. All servicing actions that are submitted
to the National Office must be sent in the format set forth in Appendix A of
this subpart.
(a) Lender reports and annual renewal fee. The lender must
report the outstanding principal and interest balance and the
current loan classification on each guaranteed loan semiannually (at
June 30 and December 31), using either the USDA Lender Interactive
Network Connection (LINC) system (see Appendix F for guidance on the
LINC system) or Form RD 1980-41, “Guaranteed Loan Status Report.”
The lender must transmit the annual renewal fee to the Agency in
accordance with § 4279.120(b) of this chapter calculated based on
the December 31 semiannual status report. Copies of semiannual
reports should be filed in the case file.
(b) Loan classification. The lender must provide the loan
classification or rating under its regulatory standards as of loan
closing, using either the LINC system or Form 1980-19, "Guaranteed
Loan Closing Report.” When the lender changes the loan
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classification in the future, the lender must notify the Agency
within 30 days, in writing, of any change in the loan
classification. The Agency is required to classify all loans within
the guaranteed loan portfolio (see Appendix G for loan
classification guidance). When the lender uses a different
classification system, the Agency must convert the lender's
classification to a corresponding GLS classification for entry into
GLS. Loan classifications may change during the term of a loan. If
the Agency feels a change in classification may be warranted, or
disagrees with the lender’s classification, the Agency should
conduct its own analysis of the loan and discuss concerns with the
lender. The Agency’s opinion of the appropriate loan classification
must be entered into GLS within 30 days of receipt of the lender’s
classification. The integrity of the data in GLS is vitally
important, and every effort should be made to maintain GLS in a
current status.
(c) Agency and lender conference. At the Agency’s request, the lender
must consult with the Agency to ascertain how the guaranteed loan is
being serviced and that the conditions and covenants of the loan
agreement are being enforced. The Agency will hold conferences with
the lender at least annually. An Agency and lender conference may
be a face-to-face visit or held via teleconference and must be
documented on Form RD 4279-15, “Field Visit Review Report.” The
Agency, at a minimum, should remind the lender of its servicing
responsibilities under the Lender's Agreement during the conference,
review the lender's latest financial analysis, and check the loan
classification. It is suggested that the application of loan
payments also be reviewed. The Agency should:
(1) Coordinate the conference with the lender.
(2) Prepare for the conference by reviewing the previous field
visit reports.
(3) During the conference, discuss with the lender the borrower's
performance and financial reporting, and review the lender's
analysis of the reports.
(4) Determine the economic impact of the program by verifying jobs
created and saved and documenting the number of employees broken
down by full time and part time jobs.
(d) Borrower financial reports. The lender must obtain, analyze, and
forward to the Agency the borrower’s and any guarantor’s annual
financial statements required by the loan agreement within 120 days
of the end of the borrower’s fiscal year. States, local government,
Indian Tribes, institution of higher education, and nonprofit
organization borrowers who meet the Federal awards expended threshold
established in 2 CFR part 200, subpart F, “Audit Requirements” during
their fiscal year must submit an audit conducted in accordance with 2
CFR 200, subpart F. When the borrower’s audit is conducted in
accordance with 2 CFR 200, subpart F, audits must be submitted no
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later than nine months after the end of the borrower’s fiscal year or
30 days after the borrower’s receipt of the auditor’s report,
whichever is earlier. The lender must analyze these financial
statements and provide the Agency with a written summary of the
lender’s analysis, ratio analysis, and conclusions, which, at a
minimum, must include trends, strengths, weaknesses, extraordinary
transactions, violations of loan covenants and covenant waivers
proposed by the lender, any routine servicing actions performed, and
other indications of the financial condition of the borrower.
Spreadsheets of the financial statements must also be included.
Following the Agency’s review of the lender’s financial analysis, the
Agency will provide a written report of any concerns to the lender.
Any concerns based upon the Agency’s review must be addressed by the
lender. If the lender makes a reasonable attempt to obtain financial
statements but is unable to obtain the borrower’s cooperation, the
failure to obtain financial statements will not impair the validity
of the Loan Note Guarantee. See Appendix G for credit evaluation
guidance on the lender’s analysis of borrower financial statements.
For reporting requirements for public bodies, nonprofit corporations,
and Indian Tribes see § 4279.71 of subpart A of part 4279.
(e) Protection of Agency interests. If the Agency determines that the
lender is not in compliance with its servicing responsibilities, the
Agency reserves the right to take any action the Agency determines
necessary to protect the Agency’s interests with respect to the loan.
If the Agency exercises this right, the lender must cooperate with
the Agency to rectify the situation. In determining any loss, the
Agency will assess against the lender any cost to the Agency
associated with such action.
(f) GLS. State Offices should place increased emphasis on maintaining
the GLS in a current status for all guaranteed loans, which includes
reporting all nondelinquent problem loans into GLS. The State Office
should institute a verification mechanism to ensure that the
information entered into GLS is accurate and up to date. It is
important that the Agency properly monitor guaranteed lenders and the
guaranteed loan portfolio to minimize potential losses to the
Government. The National Office will compare nondelinquent problem
loans serviced by the State Office and the numbers reported in the
GLS.
(g) Borrower visits. For all loans, including those made prior to
August 2, 2016, all borrowers, especially problem and delinquent
borrowers, should be visited as frequently as necessary, but
regularly scheduled borrower visits by the Agency are not required.
It is the lender’s responsibility to conduct borrower visits, and the
Agency may accompany the lender on these visits. All field visits
must be documented on Form RD 4279-15, "Field Visit Review Report."
The Agency should:
(1) Coordinate the visit with the lender.
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(2) Prepare for the visit by reviewing the case file, including
previous field visit reports.
(3) Before the visit, discuss with the lender the borrower's
performance and financial reporting, and review the lender's most
recent analysis of the borrower.
(4) Determine the economic impact of the program by spot checking
the number of jobs and documenting the number of employees broken
down by full time and part time jobs.
(5) Check the condition of the business premises and the equipment
and observe how the borrower is maintaining and utilizing the
collateral.
(6) Check for potential hazardous contamination.
(7) Document any adverse findings or concerns in written
correspondence with the lender.
§§ 4287.108 - 4287.111 [Reserved]
§ 4287.112 Interest rate changes.
(a) The borrower, lender, and holder (if any) may collectively initiate
a permanent or temporary reduction in the interest rate of the guaranteed
loan at any time during the life of the loan upon written agreement among
these parties. The lender must obtain prior Agency concurrence and
provide a copy of the modification agreement to the Agency. If any of
the guaranteed portion has been purchased by the Agency, the Agency (as a
holder) will affirm or reject interest rate change proposals in writing.
(b) No increases in interest rates will be permitted, except the normal
fluctuations in approved variable interest rates, unless a temporary
interest rate reduction occurred or to change from a variable rate to a
fixed rate. Variable rates can be changed to a fixed rate at the request
of the borrower, lender, agreement of the holder, if any, and with the
Agency’s prior written concurrence. After the rate change, the rate must
meet the requirements of 7 CFR 4279.125.
(c) The interest rate, after adjustments, must comply with the interest
rate requirements set forth in § 4279.125 of this chapter.
(d) The lender is responsible for the legal documentation of interest-
rate changes by an endorsement or any other legally effective amendment
to the promissory note; however, no new notes shall be issued. The
lender must provide copies of all legal documents to the Agency.
(e) The State Office must notify the office of the DCFO of any interest-
rate change by using Form RD 1980-47, "Guaranteed Loan Borrower
Adjustments," make corrections to GLS reflecting the change, and document
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the loan file to reflect the change. A system must be established to
monitor receipt from the lender of interest-rate changes and the
effective date of change on all guaranteed loans, especially where the
Agency is the holder.
§ 4287.113 Release of collateral.
(a) Within the parameters of paragraph (c) of this section, lenders may,
over the life of the loan, release collateral (other than personal and
corporate guarantees) without Agency concurrence if the proceeds
generated are used to pay down debt in order of lien priority, reduce the
guaranteed loan or to acquire replacement collateral. Working assets,
such as accounts receivable, inventory, and work-in-progress that are
routinely depleted or sold and proceeds used for the normal course of
business operations may be used in and released for routine business
purposes without prior concurrence of the Agency as long as the loan is
not in monetary default or liquidation.
(b) If a release of collateral does not meet the requirements of
paragraph (a) of this section, the lender must complete a written
evaluation to justify the release and obtain written Agency concurrence
in advance of the release.
(c) Collateral must remain sufficient to provide for adequate collateral
coverage for the outstanding guaranteed loan(s). For a release of
collateral request when the Borrower is not in monetary default or
liquidation, the lender must support all releases of chattel collateral
with a value exceeding $250,000 and real estate collateral with a value
exceeding $500,000 with a current appraisal on the collateral being
released and otherwise meets the requirements of §4279.144 of this
chapter. All other release of collateral requests must meet the
appraisal requirements of §4279.144 of this chapter. The cost of this
appraisal will not be paid for by the Agency. The Agency may, at its
discretion, require an appraisal of the remaining collateral in cases
where it has been determined that the Agency may be adversely affected by
the release of collateral. The sale or release of the collateral must be
based on an arm’s length transaction, and there must be adequate
consideration for the release of collateral. Such consideration may
include, but is not limited to:
(1) Application of the net proceeds from the sale of collateral to
the borrower's debts in order of their lien priority against the
sold collateral;
(2) Use of the net proceeds from the sale of collateral to
purchase other collateral of equal or greater value for which the
lender will obtain as security for the benefit of the guaranteed
loan with a lien position equal or superior to the position
previously held;
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(3) Application of the net proceeds from the sale of collateral to
the borrower's business operation in such a manner that a
significant improvement to the borrower's debt service ability will
be clearly demonstrated. The lender's written request must detail
how the borrower's debt service ability will be improved; or
(4) Assurance that the release of collateral is essential for the
success of the business, thereby furthering the goals of the
program. Such assurance must be supported by written documentation
from the lender acceptable to the Agency.
(d) When considering loan servicing actions for guaranteed loans
involving subordinations or the release of collateral, the State Office
must:
(1) Review the regulatory requirements that are set forth in the
regulations that are pertinent to the servicing action being
considered;
(2) Obtain current (not more than 90 days old) financial
statements on the borrower and guarantors;
(3) Obtain a current independent appraisal, in accordance with §
4279.144 of subpart B of part 4279, for any affected collateral
that exceeds $250,000 in value;
(4) Consider whether the guaranteed loan will be adequately
secured upon completion of the servicing action; and
(5) Ensure the borrowers’ and guarantors’ obligations and ability
to repay the guaranteed loan before the servicing action remains
unchanged after the completion of the servicing action. This may
be verified by receipt of the lender’s analysis and current
financial statements of the borrower and guarantors.
(e) The Agency should take the following into consideration:
(1) The lender’s interest - The Agency may have just a lender’s
interest in the collateral. This is when the Agency has an
outstanding guaranteed loan that has not been sold or that has been
sold but the Agency has not repurchased any holder’s interest.
(2) The Agency’s interest - To the extent the Agency repurchases
all or part of the guaranteed portion of the loan from the
holder(s) or the lender, the Agency owns an interest in the loan.
This is covered by a Comptroller General opinion, which states that
Government officers are not authorized to modify the terms of a
contract by a supplemental or substitute agreement if such
modification is prejudicial to the interest of the U.S., nor to
give away the money, property, or any claim of the Government.
Therefore, the Agency will not modify its interest in the loan,
including modifying loan covenants, releasing personal or corporate
guarantees or other collateral, or subordinating its lien position
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without receiving new consideration that will adequately secure the
loan. Consideration that will adequately secure the loan
encompasses some new benefit to the Agency either in the form of
money, additional security, or some other benefit to the goals and
objectives of the Agency.
(3) Combination Interest - The Agency may have both an owner’s and
lender’s interest in the collateral. This could arise when the
Agency has repurchased a holder’s interest in an outstanding
guaranteed loan. The Agency must consider the request of the
lender without regard to the Agency’s owner interest. If the
Agency’s lender and owner interests are in conflict, forward the
request to the National Office Program Processing Division for
review and consideration using Appendix A of this subpart.
§§ 4287.114 - 4287.122 [Reserved]
§ 4287.123 Subordination of lien position.
A subordination of the lender’s lien position must be requested in
writing by the lender and concurred with in writing by the Agency in advance
of the subordination. The lender’s subordination proposal must include a
financial analysis of the servicing action and be fully supported by current
financial statements of the borrower and guarantors that are less than 90
days old.
(a) The subordination of lien position must enhance the borrower’s
business (increases sales, net profit, or otherwise improves cash flow
and repayment ability) and not adversely affect the potential for
collection of the B&I loan through repayment or liquidation.
(b) The lien to which the guaranteed loan is subordinated is for a fixed
dollar limit and for a fixed term after which the guaranteed loan lien
priority will be restored.
(c) Collateral must remain sufficient to provide for adequate collateral
coverage. The Agency may require a current independent appraisal in
accordance with § 4279.144 of this chapter.
(d) Lien priorities must remain for the portion of the collateral that
was not subordinated.
(e) A subordination to a line of credit cannot exceed 1 year. The term
of the line of credit cannot be extended.
(f) A subordination is considered a servicing action requiring the
appropriate environmental review by the Agency in accordance with 7 CFR
part 1970, “Environmental Policies and Procedures.”
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(g) In the event of default, the lender’s lien position and the Agency’s
subordination of collateral may continue beyond the maturity date of the
note. The Agency may require the use of borrowing based certificates and
cross-default provisions when subordinating collateral to an operating
line of credit.
(h) When considering a subordination of lien position, refer to
administrative guidance in § 4287.113(d) and (e).
§ 4287.124 Alterations of loan instruments.
The lender must neither alter nor approve any alterations or
modifications of any loan instrument without the prior written approval of
the Agency. The State Office may, if necessary, consult with the Regional
OGC and the National Office Program Processing Division for additional
guidance.
§§ 4287.125 - 4287.132 [Reserved]
§ 4287.133 Sale of corporate stock.
Any sale or transfer of corporate stock must be approved by the Agency in
writing and must be to an eligible individual or entity in accordance with §§
4279.108(a) and 4279.108(b) of this chapter. In the event a portion of the
borrower’s stock is sold or transferred, the Agency may require personal or
corporate guarantees from those then owning a 20 percent or more interest in
the borrower in accordance with § 4279.132 of this chapter.
§ 4287.134 Transfer and assumption.
The lender may request a transfer and assumption of a guaranteed loan in
situations where the total indebtedness, or less than the total indebtedness,
is transferred to another eligible borrower on the same or different terms.
A transfer and assumption of the borrower's operation can be accomplished
before or after the loan goes into liquidation. However, if the collateral
has been purchased through foreclosure or the borrower has conveyed title to
the lender, no transfer and assumption is permitted. Additionally, no
transfer and assumption is permitted when the Agency has repurchased 100
percent of the guaranteed portion of the loan.
(a) Documentation of request.
All transfers and assumptions must be approved in writing by the
Agency and must be to an eligible borrower. The lender must provide
credit reports for each individual or entity owning 20 percent or more
interest in the transferee, along with such other documentation as the
Agency may request to determine eligibility. In accordance with §
4279.132 of this chapter, the Agency will require personal and/or
corporate guarantee(s) from all owners that have a 20 percent or more
ownership interest in the transferee. When warranted by an Agency
assessment of potential financial risk, the Agency may also require
guarantees of parent, subsidiaries, or affiliated companies (owning less
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than a 20 percent interest in the borrower) and may require security for
any guarantee. Although a transfer and assumption is normally considered
loan servicing, it should be processed in the same manner as a new loan.
The new borrower must sign Form RD 4279-1, “Application for Loan
Guarantee,” and any guarantors of the guaranteed loan must sign Form RD
4279-14, “Unconditional Guarantee.” Borrowers and co-borrowers do not
execute Form RD 4279-14; only personal and corporate guarantors are
required execute the guarantor form.
(b) Terms.
Loan terms may be changed with the concurrence of the Agency, all
holders, and the transferor (including guarantors) if the transferor has
not been or will not be released from liability. Any new loan terms must
be within the terms authorized by § 4279.126 of this chapter.
(c) Release of liability.
The transferor, including any guarantor, may be released from
liability only with prior Agency written concurrence and only when the
fair market value of the collateral being transferred is at least equal
to the amount of the loan being assumed and is supported by a current
appraisal and a current financial statement of the transferee. The
Agency will not pay for the appraisal. If the transfer is for less than
the debt, for a release of liability, the lender must demonstrate to the
Agency that the transferor and guarantors have no reasonable debt-paying
ability considering their assets and income in the foreseeable future.
(d) Proceeds.
The lender must credit any proceeds received from the sale of
collateral before a transfer and assumption to the transferor's
guaranteed loan debt in order of lien priority before the transfer and
assumption is closed.
(e) Additional loans.
Loans to provide additional funds in connection with a transfer and
assumption must be considered a new loan application, which requires
submission of a complete Agency application in accordance with §
4279.161(b) of this chapter.
(f) Credit quality.
The lender will provide a credit analysis of the proposal that
addresses capacity (sufficient cash flow to service the debt), capital
(net worth), collateral (assets to secure the debt), conditions (of the
borrower, industry trends, and the overall economy), and character
(integrity of the transferee management) in accordance with § 4279.131 of
this chapter.
(g) Appraisals.
If the proposed transfer and assumption is for the full amount of
the Agency guaranteed loan, the Agency will not require an appraisal,
unless a guarantor is being released from liability in accordance with
paragraph (c) of this section. If the proposed transfer and assumption
is for less than the full amount of the Agency guaranteed loan, the
Agency will require an appraisal on all of the collateral being
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transferred, and the amount of the assumption must not be less than this
appraised value. The lender is responsible for obtaining this appraisal,
which must conform to the requirements of § 4279.144 of this chapter.
The Agency will not pay the appraisal fee or any other costs associated
with this transfer.
(h) Documents.
Prior to Agency approval, the lender must provide the Agency a
written legal opinion that the transaction can be properly and legally
transferred and assurance that the conveyance instruments will be
appropriately filed, registered, and recorded.
(1) The lender must not issue any new promissory notes. The
assumption must be completed in accordance with applicable law and
must contain the Agency case number of the transferor and
transferee. The lender must provide the Agency with a copy of the
transfer and assumption agreement. The lender must ensure that all
transfers and assumptions are noted on all original Loan Note
Guarantees.
(2) A new loan agreement, consistent in principle with the
original loan agreement, must be executed to establish the terms
and conditions of the loan being assumed. An assumption agreement
can be used to establish the loan covenants.
(3) Upon execution of the transfer and assumption, the lender must
provide the Agency with a written legal opinion that the transfer
and assumption is completed, valid, and enforceable, and
certification that the transfer and assumption is consistent with
the conditions outlined in the Agency’s conditions of approval for
the transfer and complies with all Agency regulations.
(i) Loss/repurchase resulting from transfer.
(1) Any resulting loss must be processed in accordance with
§ 4287.158.
(2) If a holder owns any of the guaranteed portion, such portion
must be repurchased by the lender or the Agency in accordance with
§ 4279.78 of this chapter.
(j) Related party.
If the transferor and transferee are affiliated or related parties,
any transfer and assumption must be for the full amount of the debt.
(k) Cash downpayment.
The lender may allow the transferee to make cash downpayments
directly to the transferor provided:
(1) The transfer and assumption is made for the total
indebtedness;
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(2) The lender recommends that the cash be released, and the
Agency concurs prior to the transaction being completed. The
lender may require that an amount be retained for a defined period
of time as a reserve against future defaults. Interest on such
account may be paid periodically to the transferor or transferee as
agreed;
(3) The lender determines that the transferee has the repayment
ability to meet the obligations of the assumed guaranteed loan, as
well as any other indebtedness; and
(4) Any payments by the transferee to the transferor will not
suspend the transferee's obligations to continue to meet the
guaranteed loan payments as they come due under the terms of the
assumption.
(l) Annual renewal fees.
The lender must pay any annual renewal fee published in the Federal
Register and then in effect at the time the loan is closed for the
duration of the Loan Note Guarantee. Annual renewal fees are due for the
entire year even if the Loan Note Guarantee is terminated before the end
of the year. The annual renewal fee does not apply to loans obligated
before October 3, 2005; therefore, a transfer and assumption of a loan
obligated before October 3, 2005, would not carry an annual renewal fee.
However, a transfer and assumption of a loan obligated October 3, 2005,
or after, continues to carry the annual renewal fee.
(m) Bankruptcy.
The lender is responsible for protecting the guaranteed loan and all
collateral securing the loan in bankruptcy proceedings. The court does
not have any jurisdiction to require a lender to accept another debtor
or to transfer a loan to another entity. In such a case, contact your
Regional OGC immediately.
(n) Approval.
The Agency will handle a transfer and assumption as a new loan,
which must be approved within the approval official’s delegated loan
approval authority. If there will be a loss or if the guaranteed loan
balance is in excess of the State Director's delegated loan approval
authority, the request must be submitted to the National Office Program
Processing Division for review and concurrence. The Agency will approve
the transfer and assumption by providing a letter to the lender outlining
the conditions of approval and continuance of the Loan Note Guarantee
subject to any new conditions. The signed Form RD 1980-7, “Notification
of Transfer and Assumption of a Guaranteed Loan,” should be transmitted
to the office of the DCFO if the field office chooses not to process the
transfer and assumption in GLS themselves or if assistance is required.
A copy of the assumption agreement must be placed in the case file.
(o) Environmental.
Transfers and assumptions are considered servicing actions requiring
the appropriate environmental review by the Agency in accordance with 7
CFR part 1970, “Environmental Policies and Procedures.”
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§ 4287.135 Substitution of lender.
After the issuance of a Loan Note Guarantee, the lender is prohibited
from selling or transferring the entire loan without the prior written
approval of the Agency. Because the Loan Note Guarantee is associated with a
specific promissory note and cannot be transferred to a new promissory note,
the lender must transfer the original promissory note to the new lender, who
must agree to its current loan terms, including the interest rate, secondary
market holder (if any), collateral, loan agreement terms, and guarantors.
The new lender must also obtain the original Loan Note Guarantee,
original personal and corporate guarantee(s), and the loan payment history
from the transferor lender. If the new lender wishes to modify the loan
terms after acquisition, the new lender must submit a request to the Agency.
(a) The Agency may approve the substitution of a new lender if:
(1) The proposed substitute lender:
(i) Is an eligible lender in accordance with § 4279.29 of
this chapter and is approved as such;
(ii) Is able to service the loan in accordance with the
original loan documents; and
(iii) Agrees in writing to acquire title to the unguaranteed
portion of the loan held by the original lender and assumes
all original loan requirements, including liabilities and
servicing responsibilities.
(2) The substitution of the lender is requested in writing by the
borrower, the proposed substitute lender, and the original lender
of record, if still in existence.
(b) The Agency will not pay any loss or share in any costs (e.g.,
appraisal fees and environmental assessments) with a new lender unless a
relationship is established through a substitution of lender in
accordance with paragraph (a) of this section. This includes situations
where a lender is merged with or acquired by another lender and
situations where the lender has failed and been taken over by a
regulatory agency such as the Federal Deposit Insurance Corporation
(FDIC) and the loan is subsequently sold to another lender.
(c) Where the lender has failed and been taken over by the FDIC and the
loan is liquidated by the FDIC rather than being sold to another lender,
the Agency will pay losses and share in costs as if the FDIC were an
approved substitute lender. In cases where the lender has failed and
been taken over by the FDIC and the FDIC subsequently sells or transfers
the loan, a request from the borrower regarding the substitution of
lender is not required. Further, in this case, prior written
authorization by the Agency on the sale or transfer of the loan may not
be possible to obtain as the FDIC is authorized to sell or transfer loans
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to maximize recovery. However, in accordance with this section, a
substitution of lender must be executed prior to any losses or shared
costs being paid by the Agency.
(d) In cases where there is a substitution of the lender, the Agency and
the new lender must execute a new Form RD 4279-4, “Lender’s Agreement,”
unless a valid Lender’s Agreement already exists with the new lender.
The State Office should contact the new lender to obtain the new Lender’s
Agreement, tax identification number, and discuss program requirements,
including the annual renewal fee and servicing responsibilities.
(e) The Regional OGC may be requested to review the proposed
substitution documents to ascertain whether the documents will comply
with legal requirements. State Directors may approve a substitution of
lender for loans where the outstanding loan balance is within their
delegated loan servicing authority.
(f) GLS should be updated to reflect the change, and the office of the
DCFO should be notified using Form RD 1980-42, "Notice of Substitution of
Lender," or some form of written notification. This includes cases where
a lender is acquired by another institution.
§ 4287.136 Lender failure.
(a) Uninsured lender.
The lender or insuring agency cannot arbitrarily change the Lender's
Agreement and related documents on the guaranteed loan, and the Agency
will make the successor to the failed institution aware of the statutory
and regulatory requirements. If the acquiring institution is not an
eligible lender as set forth in § 4279.29 of this chapter, the Loan Note
Guarantee will not be enforceable, and the institution must promptly
apply to become an eligible lender. The failure of the uninsured lender
to become an eligible lender will result in the Loan Note Guarantee being
unenforceable. A new lender approved by the Agency will be afforded the
benefits of the Loan Note Guarantee in the sharing of any loss and
eligible expenses subject to the limits that are set forth in the
regulations governing the program. When an uninsured lender with an
Agency guaranteed loan fails, the State Office must notify both the
National Office Program Processing Division and the Regional Attorney, in
writing, at once. The Agency will likely be dealing with a bankruptcy
situation where the receiver will control any B&I guaranteed loan and
sell it as part of the liquidation process. These are lengthy,
complicated affairs, and the Agency needs to keep track of the B&I
guaranteed loan and monitor the bankruptcy progress.
(b) Insured lender.
The FDIC and the Agency have entered into an Inter-Agency Agreement
and all parties are to abide by this Agreement or successor document(s).
This document sets forth the duties and responsibilities of each Agency
when an institution fails. The lender must take such action that a
reasonably prudent lender would take if it did not have a Loan Note
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Guarantee to protect the lender and Agency’s mutual interest. When an
insured lender fails, its assets, including its loans, are normally taken
over by an insuring agency such as the FDIC. B&I guaranteed loans are
usually acquired by either the insuring agency or a private institution.
(1) Initial action. As soon as the Agency becomes aware that a
lender has failed, the Agency should contact the FDIC office (if
there is one) or the State agency servicing the lender's area at
once. The Agency should brief the FDIC or State agency on the
requirements contained in the Lender's Agreement as well as any
other Agency regulations that apply. The Regional Attorney should
be contacted for legal advice, including determining the time
period established by applicable law in which a proof of claim can
be filed.
(2) Recovery by the Agency. When the Agency has repurchased the
guaranteed portion of the loan, the lender has failed, and the
Agency suspects that the guarantee is unenforceable due to
negligent servicing, unauthorized use of loan funds, fraud, or
misrepresentation by the lender:
(i) Involve the National Office Program Processing Division
and Regional Attorney as soon as it is suspected that the Loan
Note Guarantee may be unenforceable.
(ii) Determine and document the exact amount of loss paid by
the Agency as a result of negligent servicing.
(iii) Locate the name and address of the insurance company
covering the failed institution and its officers for errors
and omissions. The Agency loan officer should contact the
Regional Attorney to structure a demand letter for payment of
the loss associated with the negligence.
(iv) If the financial institution has been taken over by a
Federal or State regulatory agency, the Agency should request
settlement of the loss from the assets of the failed
institution by filing a timely proof of claim.
(v) If the failed institution's operations and the Agency
guaranteed loan were sold to another institution, with the
concurrence of the Regional Attorney and the National Office,
a timely appropriate demand for payment should be made from
the new entity. A detailed analysis substantiated with any
supporting documents should accompany the demand for payment
within the time constraints established by law.
(vi) Should the demand on the successor financial institution
be denied, the Agency should obtain the documented reasons in
writing. The Regional Attorney should be consulted to prepare
the rebuttal and request for reconsideration of payment.
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§§ 4287.137 - 4287.144 [Reserved]
§ 4287.145 Default by borrower.
The lender’s primary responsibilities in default are to act prudently and
expeditiously, to work with the borrower to bring the account current or cure
the default through restructuring if a realistic plan can be developed, or to
accelerate the account and conduct a liquidation in a manner that will
minimize any potential loss. The lender may initiate liquidation subject to
submission and approval of a complete liquidation plan. The Agency’s role is
one of concurrence, assuring that servicing of the loan is realistic, and
protecting the interest of the Government.
(a) The lender must notify the Agency when a borrower is more than 30
days past due on a payment and the delinquency cannot be cured within 30
days or when a borrower is otherwise in default of covenants in the loan
agreement by promptly submitting Form RD 1980-44, "Guaranteed Loan
Borrower Default Status," or processing the Default Status report in
LINC. The lender must update the loan’s status each month using either
Form RD 1980-44 or the LINC Default Status report until such time as the
loan is no longer in default. If a monetary default exceeds 60 days, the
lender must meet with the Agency and, if practical, the borrower to
discuss the situation. Although a joint conference can often be
effective in resolving a problem case, in some instances, a meeting with
the borrower is not practicable, such as when there is a bankruptcy or
when the borrower is not cooperative. If the lender fails to initiate
the conference, the Agency will contact the lender once the account is 60
days past due to discuss the lender’s plans for servicing the default.
The Agency will discuss the servicing options available as well as
liquidation requirements. Discussions should include plans for obtaining
a liquidation appraisal.
(b) In considering options, the prospects for providing a permanent cure
without adversely affecting the risk to the Agency and the lender is the
paramount objective.
(1) Curative actions (subject to the rights of any holder and
Agency concurrence) include, but are not limited to:
(i) Deferment of principal and/or interest payments;
(ii) An additional unguaranteed temporary loan by the lender
to bring the account current;
(iii) Reamortization of or rescheduling the payments on the
loan;
(iv) Transfer and assumption of the loan in accordance with
§ 4287.134;
(v) Reorganization;
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(vi) Liquidation; and
(vii) Changes in interest rates with the Agency's, the
lender's, and any holder's approval. Any interest payments
must be adjusted proportionately between the guaranteed and
unguaranteed portion of the loan.
(2) The term of any deferment, rescheduling, reamortization, or
moratorium will be limited to the lesser of the remaining useful
life of the collateral or remaining limits as set forth in §
4279.126 of this chapter (excluding paragraph (c)). During a
period of deferment or moratorium on the guaranteed loan, the
lender’s unguaranteed loan(s) and any stockholder loans must also
be under deferment or moratorium. Balloon payments are permitted
as a loan servicing option as long as there is a reasonable
prospect for success and the remaining life of the collateral
supports the action.
(3) In the event of a loss or a repurchase, the lender cannot
claim default or penalty interest, late payment fees, or interest
on interest. If the restructuring includes the capitalization of
interest, interest accrued on the capitalized interest will not be
covered by the guarantee. Consequently, it is not eligible for
repurchase from the holder and cannot be included in the loss
claim.
(4) This section provides options for curing loans in default, but
does not prohibit their use for loans that are not in default.
Section 4287.124 authorizes the lender to alter or modify loan
instruments with Agency approval. When a lender requests Agency
concurrence in a loan servicing action, including loan
restructuring and payment deferral, and the request makes business
sense and complies with the regulations, the approval official may
concur in the servicing action within their delegated loan
servicing authority.
(c) Debt write-downs for an existing borrower, where the same principals
retain control of and decisionmaking authority for the business, are
prohibited, except as directed or ordered under the Bankruptcy Code.
(d) For loans closed on or after August 2, 2016, in the event of a loss,
the guarantee will not cover note interest to the lender accruing after
90 days from the most recent delinquency effective date as reported in
item number 8 on Form RD 1980-44, "Guaranteed Loan Borrower Default
Status."
(e) For loans closed on or after August 2, 2016, the lender or the
Agency will issue an interest termination letter to the holder(s)
establishing the termination date for interest accrual. The guarantee
will not cover interest to any holder accruing after the greater of: 90
days from the date of the most recent delinquency effective date as
reported by the lender or 30 days from the date of the interest
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termination letter. The Agency must ensure the interest termination
letter is issued, whether by the lender or the Agency, 60 days from the
date of the most recent delinquency effective date to ensure that not
more than 90 days of interest is paid. The lender should issue the
interest termination letter to the holder(s) and provide the Agency with
a copy. In the event the lender cannot or will not issue the letter, the
Agency will issue the letter to the holder(s) and provide the lender with
a copy (see Appendix H of this subpart for a sample letter). The Agency
should confirm current holder contact information with the lender and
ensure that information in GLS is accurate.
(f) For repurchases of guaranteed loans, refer to § 4279.78 of this
chapter.
(g) Any fully justified rescheduled, deferred, or reamortized loan that
meets the revised performance agreed to by the lender and the Agency will
no longer be classified as delinquent but should be considered a problem
loan for a reasonable period of time and watched closely. The State
Office must notify the DCFO, in writing, of any changes in payment terms
(interest-rate adjustment and reamortizations) as well as the effective
dates of such changes.
(h) All problem loans that are in excess of the State's delegated loan
servicing authority, all delinquent loans, and any loans in bankruptcy
must be reported to the National Office on a quarterly basis using Form
RD 4279-16, "Quarterly Delinquent/Problem Loan Report." See Appendix E
for guidance. This report is due to the National Office Program
Processing Division by the 10th day of the month following the end of the
quarter.
§§ 4286.146 - 4287.155 [Reserved]
§ 4287.156 Protective advances.
Protective advances are advances made by the lender for the purpose of
preserving and protecting the collateral where the debtor has failed to, will
not, or cannot meet its obligations. Lenders must exercise sound judgment in
determining that the protective advance preserves collateral and recovery is
actually enhanced by making the advance. Lenders cannot make protective
advances in lieu of additional loans. A protective advance claim will be
paid only at the time of the final report of loss payment. Legal/attorney
fees are not protective advances.
(a) The maximum loss to be paid by the Agency will never exceed the
original loan amount plus accrued interest times the percentage of
guarantee regardless of any protective advances made.
(b) In the event of a final loss, protective advances will accrue
interest at the note rate and will be guaranteed at the same percentage
of guarantee as provided for in the Loan Note Guarantee. The guarantee
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will not cover interest on the protective advance accruing after 90 days
from the most recent delinquency effective date.
(c) Protective advances must constitute an indebtedness of the borrower
to the lender and be secured by the security instruments. Agency written
authorization is required when the cumulative total of protective
advances exceeds $200,000 or 10 percent of the aggregate outstanding
balance of principal and interest, whichever is less.
(d) Once collateral is conveyed directly to the lender, expenses
thereafter incurred with that property are liquidation expenses. The
lender’s liquidation expenses may only be recovered from proceeds of the
disposition of primary collateral in accordance with § 4287.158(e).
§ 4287.157 Liquidation.
In the event of one or more incidents of default or third party actions
that the borrower cannot or will not cure within a reasonable period of time,
the lender, with Agency consent, must liquidate the loan. In accordance with
§ 4287.145(d), for loans closed on or after August 2, 2016, in the event of a
loss, the guarantee will not cover note interest to the lender accruing after
90 days from the most recent delinquency effective date as reported in item
number 8 on Form RD 1980-44, "Guaranteed Loan Borrower Default Status."
(a) Decision to liquidate.
A decision to liquidate must be made when the lender determines that
the default cannot be cured through actions such as those contained in §
4287.145, or it has been determined that it is in the best interest of
the Agency and the lender to liquidate. The decision to liquidate or
continue with the borrower must be made as soon as possible when one or
more of the following exist:
(1) A loan is 90 days behind on any scheduled payment and the
lender and the borrower have not been able to cure the delinquency
through actions such as those contained in § 4287.145.
(2) It is determined that delaying liquidation will jeopardize
full recovery on the loan.
(3) The borrower or lender is uncooperative in resolving the
problem or the Agency or lender has reason to believe the borrower
is not acting in good faith, and it would improve the position of
the guarantee to liquidate immediately.
(b) Repurchase of loan.
When the decision to liquidate is made, if any portion of the loan
has been sold or assigned under § 4279.75 of this chapter and not already
repurchased, provisions will be made for repurchase in accordance with §
4279.78 of this chapter. The State Office can request that the office of
the DCFO stop interest accrual for accounting purposes only if the Agency
buys back 100 percent of the guaranteed portion of the loan.
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(c) Lender's liquidation plan.
The lender is responsible for initiating actions immediately and as
necessary to assure a prompt, orderly liquidation that will provide
maximum recovery. Within 30 days after a decision to liquidate, the
lender must submit a written, proposed plan of liquidation to the Agency
for approval. The liquidation plan must be detailed and include at least
the following:
(1) Such proof as the Agency requires to establish the lender's
ownership of the guaranteed loan promissory note and related
security instruments and a copy of the payment ledger, if
available, that reflects the current loan balance, accrued interest
to date, and the method of computing the interest;
(2) A full and complete list of all collateral, including any
personal and corporate guarantees;
(3) The recommended liquidation methods for making the maximum
collection possible on the indebtedness and the justification for
such methods, including recommended action for acquiring and
disposing of all collateral and collecting from guarantors;
(4) Necessary steps for preservation of the collateral;
(5) Copies of the borrower's most recently available financial
statements;
(6) Copies of each guarantor's most recently available financial
statements;
(7) An itemized list of estimated liquidation expenses expected to
be incurred along with justification for each expense;
(8) A schedule to periodically report to the Agency on the
progress of liquidation, not to exceed every 60 days;
(9) Estimated protective advance amounts with justification;
(10) Proposed protective bid amounts on collateral to be sold at
auction and a breakdown to show how the amounts were determined. A
protective bid may be made by the lender, with prior Agency written
approval, at a foreclosure sale to protect the lender's and the
Agency's interest. The protective bid will not exceed the amount
of the loan, including expenses of foreclosure, and must be based
on the liquidation value considering estimated expenses for holding
and reselling the property. These expenses include, but are not
limited to, expenses for resale, interest accrual, length of time
necessary for resale, maintenance, guard service, weatherization,
and prior liens; If the liquidation value is not more than the
sale expenses plus any liens superior to the lien of the guaranteed
loan, a protective bid should not normally be made.
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(11) If a voluntary conveyance is considered, the proposed amount
to be credited to the guaranteed debt;
(12) Legal opinions, if needed by the lender’s legal counsel; and
(13) An estimate of fair market and potential liquidation value of
the collateral. If the value of the collateral is $250,000 or
more, the lender must obtain an independent appraisal report
meeting the requirements of § 4279.144 of this chapter for the
collateral securing the loan, which reflects the fair market value
and potential liquidation value. For collateral values under this
threshold, lenders must follow their primary regulator's policies
relating to appraisals and evaluations or, if the lender is not
regulated, normal banking practices and generally accepted methods
of determining value. The liquidation appraisal of the collateral
must evaluate the impact on market value of any release of
hazardous substances, petroleum products, or other environmental
hazards. The independent appraiser's fee, including the cost of
the environmental site assessment, will be shared equally by the
Agency and the lender. In order to assure prompt action, the
liquidation plan can be submitted with an estimate of collateral
value, and the liquidation plan may be approved by the Agency
subject to the results of the final liquidation appraisal. The
Agency may pay for additional appraisals, as warranted. To request
payment for the Agency’s share of the liquidation appraisal and/or
environmental assessment fee(s), the Agency will complete and sign
Form RD 1980-46, “Report of Liquidation Expense,” attaching a copy
of the invoice(s) or receipt(s) and faxing to the Guaranteed Loan
Branch (GLB) in the office of the DCFO at (314) 457-4279. Upon
receipt, the DCFO will make payment utilizing GLS. Any questions
or concerns with regard to the payment should be addressed to GLB,
DCFO, by calling the main line at (314) 457-4192.
(d) Approval of liquidation plan.
The lender’s liquidation plan must be approved by the Agency in
writing. The lender and Agency must attempt to resolve any Agency
concerns. If the liquidation plan is approved by the Agency, the lender
must proceed expeditiously with liquidation and must take all legal
action necessary to liquidate the loan in accordance with the approved
liquidation plan. The lender must update or modify the liquidation plan
when conditions warrant, including a change in value based on a
liquidation appraisal. If the liquidation plan is not approved by the
Agency, the lender must take such actions that a reasonably prudent
lender would take without a guarantee and keep the Agency informed in
writing. The lender must continue to develop a liquidation plan in
accordance with this section. The liquidation plan may be approved
within the State Director’s delegated loan servicing authority. In the
event the loan balance is in excess of the State
Director's delegated authority, the liquidation plan must be
forwarded to the National Office Program Processing Division for review
and concurrence, submitted in accordance with Appendix A of this subpart,
along with supporting documentation. The liquidation plan may be
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modified when conditions warrant. All modifications must be approved in
writing by the Agency prior to implementation.
(e) Acceleration.
The lender will proceed to accelerate the indebtedness as
expeditiously as possible when acceleration is necessary, including
giving any notices and taking any other legal actions required. The
guaranteed loan will be considered in liquidation once the loan has been
accelerated and a demand for payment has been made upon the borrower.
The lender must obtain Agency concurrence prior to the acceleration of
the loan if the sole basis for acceleration is a nonmonetary default. In
the case of monetary default, prior approval by the Agency of the
lender’s acceleration is not required, although Agency concurrence must
still be given not later than at the time the liquidation plan is
approved. The lender will provide a copy of the acceleration notice or
other acceleration document to the Agency.
(f) Filing an estimated loss claim.
When the lender owns any of the guaranteed portion of the loan, the
lender must file an estimated loss claim once a decision has been made to
liquidate if the liquidation is expected to exceed 90 days. The
estimated loss payment will be based on the liquidation value of the
collateral. For the purpose of reporting and loss claim computation, for
loans closed on or after August 2, 2016, the guarantee will not cover
note interest to the lender accruing after 90 days from the most recent
delinquency effective date as reported in item number 8 on Form RD 1980-
44, "Guaranteed Loan Borrower Default Status." The Agency will promptly
process the loss claim in accordance with applicable Agency regulations
as set forth in § 4287.158.
(g) Accounting and reports.
The lender must account for funds during the period of liquidation
and must, in accordance with the Agency-approved liquidation plan,
provide the Agency with reports on the progress of liquidation including
disposition of collateral, resulting costs, and additional procedures
necessary for successful completion of the liquidation.
(h) Transmitting payments and proceeds to the Agency.
When the Agency is the holder of a portion of the guaranteed loan,
the lender must transmit to the Agency its pro rata share of any payments
received from the borrower, liquidation, or other proceeds using Form RD
1980-43, "Lender's Guaranteed Loan Payment to Rural Development."
(i) Abandonment of collateral.
When the lender adequately documents that the cost of liquidation
would exceed the potential recovery value of certain collateral and
receives Agency concurrence, the lender may abandon that collateral.
When the lender makes a recommendation for abandonment of collateral, it
must comply with 7 CFR part 1970, “Environmental Policies and
Procedures.” Examples where abandonment may be considered include, but
are not limited to:
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(1) The cost of liquidation is increased or the value of the
collateral is decreased by environmental issues;
(2) The collateral has deteriorated or is functionally or
economically obsolete;
(3) There are superior liens held by other parties in excess of
the value of the collateral; or
(4) There is little or no demand for the collateral.
(j) Personal or corporate guarantees.
The lender must take action to maximize recovery from all personal
and corporate guarantees, including seeking deficiency judgments when
there is a reasonable chance of future collection.
(k) Compromise settlement.
Compromise settlements must be approved by the lender and the
Agency. Complete current financial information on all parties obligated
for the loan must be provided. At a minimum, the compromise settlement
must be equivalent to the value and timeliness of that which would be
received from attempting to collect on the guarantee. The guarantor
cannot be released from liability until the full amount of the compromise
settlement has been received. In weighing whether the compromise
settlement should be accepted, among other things, the Agency will weigh
whether the comparison is more financially advantageous than collecting
on the guarantee.
(1) Before the Agency will release a guarantor from liability, the
Agency will consider each of the following factors:
(i) Cash, either lump sum or over a period of time, or other
consideration offered by the guarantor;
(ii) Age and health of the guarantor;
(iii) Potential income of the guarantor;
(iv) Inheritance prospects of the guarantor;
(v) Availability of the guarantor's assets;
(vi) Possibility that the guarantor's assets have been
concealed or improperly transferred; and
(vii) Effect of other guarantors on the loan. The lender may
need the prior written consent from other guarantors before a
guarantor is released.
(2) Once the Agency and the lender agree on a reasonable amount
that is fair and adequate, the lender can initiate the settlement
compromise. Releases should not be executed until all payments or
other considerations have been received by the lender and the
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Agency. Such cases involving fraud, negligent servicing, or
misrepresentation must be reviewed by the Regional OGC and have the
concurrence of the National Office.
(3) A compromise should only be accepted if it is in the best
interest of the Agency. In order to avoid referral of the debt to
the U.S. Treasury under the DCIA, the borrower and guarantors must
repay the debt in full or agree to a repayment plan acceptable to
the Agency. A repayment plan will typically be paid over a 3-year
period and must be supported by financial statements and
independent verifications. If the guarantor has fulfilled an
Agency settlement agreement, then there is no debt to refer to
DCIA. Once the repayment plan has been paid in full, the original
Form RD 4279-14, “Unconditional Guarantee,” must be returned with a
cover letter to the guarantor. For additional DCIA guidance, see §
4287.159 and Appendix D of this subpart.
(4) For guaranteed loans closed after January 22, 2004, and for
guaranteed loans closed after December 20, 2006, in which the
guarantors executed Form RD 4279-14, “Unconditional Guarantee,” if
a State Office can substantiate for any reason why a borrower or
guarantor who has not filed bankruptcy should not be referred for
DCIA collection, the State Office should confer with their Regional
OGC and request concurrence from the National Office for the
Account Receivable to be written-off by the DCFO. When the sale of
the promissory note is utilized in the liquidation of a guaranteed
loan, the sale of the promissory note does not relieve the
borrower, guarantor, or any other liable third party from their
liability for any loss claim paid by the Government. For
additional DCIA guidance, see section § 4287.159 and Appendix D of
this subpart.
(5) For borrowers and guarantors that are subject to DCIA, a
compromise settlement offer may be considered by the Agency after
the final report of loss has been processed and during the 60 day
due process period prior to referral to the Treasury Department for
collection.
(l) Litigation.
In all litigation proceedings involving the borrower, the lender is
responsible for protecting the rights of the lender and the Agency with
respect to the loan and keeping the Agency adequately and regularly
informed, in writing, of all aspects of the proceedings. If the Agency
determines that the lender is not adequately protecting the rights of the
lender or the Agency with respect to the loan, the Agency reserves the
right to take any legal action the Agency determines necessary to protect
the rights of the lender, on behalf of the lender, or the Agency with
respect to the loan. If the Agency exercises this right, the lender must
cooperate with the Agency. Any cost to the Agency associated with such
action will be assessed against the lender. For example, in the case of
a bankruptcy or liquidation, if the lender fails to protect its rights in
a timely fashion, the Agency will solicit the advice of the Regional OGC
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and may initiate or assume the role of plaintiff in legal proceedings
against the borrower.
§ 4287.158 Determination of loss and payment.
Unless the Agency anticipates a future recovery, the Agency will make a
final settlement with the lender after the collateral is liquidated or after
settlement and compromise of all parties has been completed. The Agency has
the right to recover losses paid under the guarantee from any party that may
be liable. State Directors are authorized to approve estimated and final
reports of loss within their delegated loan servicing authority. Approval of
estimated and final reports of loss that exceed the State Director's
delegated loan servicing authority must be forwarded to the National Office
Program Processing Division for review and concurrence in the format set
forth in Appendix A of this Instruction. See Appendix B for a final loss
settlement checklist.
(a) Report of loss form.
Form RD 449-30, “Loan Note Guarantee Report of Loss,” will be used
for reporting and calculating all estimated and final loss
determinations.
(b) Estimated loss.
In accordance with the requirements of § 4287.157(f), the lender
must prepare an estimated loss claim, based on liquidation appraisal
value, and submit it to the Agency. When the lender is conducting the
liquidation and owns any or all of the guaranteed portion of the loan,
the lender must file an estimated loss claim once a decision has been
made to liquidate if the liquidation will exceed 90 days. The estimated
loss payment will be based on the liquidation value of the collateral.
(1) Such estimate will be prepared and submitted by the lender on
Form RD 449-30 using the basic formula as provided on the report,
except that the liquidation appraisal value will be used in lieu of
the amount received from the sale of collateral. Interest accrual
eligible for payment under the guarantee on the defaulted loan will
be discontinued when the estimated loss is paid.
(2) A protective advance claim will be paid only at the time of
the final report of loss payment.
(c) Final loss.
Within 30 days after liquidation of all collateral is completed
(except for certain unsecured personal or corporate guarantees as
provided for in this section), the lender must prepare a final report of
loss and submit it to the Agency. If the lender holds all or a portion
of the guaranteed loan, the Agency will not guarantee interest to the
lender accruing after 90 days from the most recent delinquency effective
date as reported in item number 8 on Form RD 1980-44, “Guaranteed Loan
Borrower Default Status.” The Agency will not guarantee interest to any
holder accruing after the greater of: 90 days from the date of the most
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recent delinquency effective date as reported by the lender or 30 days
from the date of the interest termination letter. The Agency must ensure
the interest termination letter is issued, whether by the lender or the
Agency, 60 days from the date of the most recent delinquency effective
date to ensure that not more than 90 days of interest is paid. The
lender should issue the interest termination letter to the holder(s) and
provide the Agency with a copy. In the event the lender cannot or will
not issue the letter, the Agency will issue the letter to the holder(s)
and provide the lender with a copy (see Appendix H of this subpart for a
sample letter). The Agency should confirm current holder contact
information with the lender and ensure that information in GLS is
accurate. Before approval by the Agency of any final loss report, the
lender must account for all funds during the period of liquidation,
disposition of the collateral, all costs incurred, and any other
information necessary for the successful completion of liquidation. Upon
receipt of the final accounting and report of loss, the Agency may audit
all applicable documentation to determine the final loss. The lender
must make its records available and otherwise assist the Agency in making
any investigation. The documentation accompanying the report of loss
must support the amounts reported as losses on Form RD 449-30, “Loan Note
Guarantee Report of Loss.”
(1) The lender must make a determination regarding the
collectability of unsecured personal and corporate guarantees. If
reasonably possible, the lender must promptly collect or otherwise
dispose of such guarantees in accordance with § 4287.157(j) prior
to completion of the final loss report. However, in the event that
collection from the guarantors appears unlikely or will require a
prolonged period of time, the lender must file the report of loss
when all other collateral has been liquidated. Unsecured personal
or corporate guarantees outstanding at the time of the submission
of the final loss claim will be treated as a future recovery with
the net proceeds to be shared on a pro rata basis by the lender and
the Agency. Debts owed to the Agency (Federal debt) may be
collected using DCIA authority. The Agency may consider a
compromise settlement of Federal debt after it has processed a
final report of loss and issued a 60 day due process letter. Any
funds collected on Federal debt will not be shared with the lender.
The State Office will establish a follow-up system to ensure that
the lender is making reasonable collection efforts and distributing
any collections properly. DCIA applies to all loans closed on or
after January 22, 2004. As such, the lender must cease collection
efforts, and there would be no recovery. The U.S. Treasury will
collect the debt and all collections will be posted as a receivable
payment in GLS minus a fee for the Treasury Department.
Loansclosed prior to January 22, 2004, may have future recoveries,
and loans closed on or after January 22, 2004, that are not
eligible for DCIA may have future recoveries.
(2) The lender must document that all of the collateral has been
accounted for and properly liquidated and that liquidation proceeds
have been accounted for and applied correctly to the loan.
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(3) The lender must provide receipts and a breakdown of any
protective advance amount as to the payee, purpose of the
expenditure, date paid, and evidence that the amount expended was
proper.
(4) The lender must provide receipts and a breakdown of
liquidation expenses as to the payee, purpose of the expenditure,
date paid, and evidence that the amount expended was proper.
Liquidation expenses are recoverable only from liquidation
proceeds. The Agency may approve attorney/legal fees as
liquidation expenses provided that the fees are reasonable, require
the assistance of attorneys, and cover legal issues pertaining to
the liquidation that could not be properly handled by the lender
and its employees. The Agency should review all liquidation
expenses to determine if the expenses were proper, reasonable, and
in accordance with the approval given by the Agency.
(5) The lender must support accrued interest by documenting how
the amount was accrued. If the interest rate was a variable rate,
the lender must include documentation of changes in both the
selected base rate and the loan rate.
(6) The Agency will pay loss payments within 60 days after it has
reviewed the complete final loss report and accounting of the
collateral.
(7) Should there be a circumstance where the lender cannot or will
not sign a report of loss, the State Director may complete the
estimated or final report of loss and submit it to the office of
the DCFO without the lender's signature. Before this action can be
taken, all collateral must be disposed of or accounted for; there
must be no evidence of fraud, misrepresentation, or negligent
servicing by the lender; and all efforts to obtain the cooperation
of the lender must have been exhausted and documented.
(8) Appendix B of this subpart must be completed on each final
report of loss and a copy placed in the loan file.
(d) Loss limit.
The amount payable by the Agency to the lender cannot exceed the
limits set forth in the Loan Note Guarantee.
(e) Liquidation expenses.
The Agency will deduct liquidation expenses from the liquidation
proceeds of the collateral. The lender cannot claim any liquidation
expenses in excess of liquidation proceeds. Any changes to the
liquidation expenses that exceed 10 percent of the amount proposed in the
liquidation plan must be approved by the Agency. Reasonable
attorney/legal expenses will be shared by the lender and Agency equally,
including those instances where the lender has incurred such expenses
from a trustee conducting the liquidation of assets. The lender cannot
claim the guarantee fee or the annual renewal fee as authorized
liquidation expenses, and no in-house expenses of the lender will be
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allowed. In-house expenses include, but are not limited to, employee's
salaries, staff lawyers, travel, and overhead.
(f) Rent.
The lender must apply any net rental or other income that it
receives from the collateral to the guaranteed loan debt.
(g) Payment.
Once the Agency approves Form RD 449-30, “Loan Note Guarantee Report
of Loss,” and supporting documents submitted by the lender:
(1) If the loss is greater than any estimated loss payment, the
Agency will pay the additional amount owed by the Agency to the
lender.
(2) If the loss is less than the estimated loss payment, the
lender must reimburse the Agency for the overpayment plus interest
at the note rate from the date of payment.
§ 4287.159 Debt Collection Improvement Act.
Refer to Appendix D for additional guidance on DCIA. The following is
applicable to the B&I, Biorefinery, and the Rural Energy for America
Guaranteed Loan Programs:
(a) On January 22, 2004, a final rule was published in the Federal
Register regarding the DCIA in order to make debtors aware that the DCIA
provisions are applicable to the program. RD Instruction 1951-C, section
1951.133, Offsets of Federal Payment to USDA Agency Borrowers, was
amended regarding the establishment of Federal debt for the program.
This section states that any amounts paid by the Agency on account of
liabilities of guaranteed loan borrower(s) and/or co-borrower(s) will
constitute a Federal debt owing to the Agency by the guaranteed loan
borrower(s) and/or co-borrower(s). All guaranteed loans closed on or
after January 22, 2004, are subject to the DCIA provisions. The Agency
will refer all borrowers under the DCIA to the U.S. Treasury for
collection. The date of the Agency’s final loss claim payment will
establish the date for determining the referral deadline to the U.S.
Treasury under the DCIA.
(b) On November 20, 2006, a final rule was published in the Federal
Register with an effective date of December 20, 2006, that addressed the
concern that guarantors might successfully assert a defense that they did
not know they were guaranteeing a loan. When the Agency implemented this
second regulation, several Agency forms were modified and a new form was
created, Form RD 4279-14, “Unconditional Guarantee.” All
personal/corporate guarantors that sign the Unconditional Guarantee form
acknowledge that delinquent guaranteed loan debt is subject to DCIA.
Therefore, any guaranteed loan closed after December 20, 2006, where the
guarantor signed the Unconditional Guarantee form is governed by these
requirements. As a reminder, borrowers and co-borrowers do not execute
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Form RD 4279-14; only personal and corporate guarantors are required
execute the guarantor form. When the Agency pays a loss claim, both the
borrower(s) and/or co-borrower(s) and the guarantor(s) must be sent to
the U.S. Treasury for offset within the 180 day time period. All
eligible key members, including co-borrowers and those individuals or
entities that execute Form RD 4279-14, should be entered as Key members
in GLS for referral to the U.S. Treasury Department under the DCIA.
Before a debt is referred to the Treasury Department, you should ensure
that all eligible co-borrowers, individuals and entities are properly
listed in GLS as key members. Once referred to the U.S. Treasury, the
lender should cease all collection efforts. In the event that the
guarantors did not sign the Unconditional Guarantee form, you should
consult with OGC before referring a claim against a guarantor to the U.S.
Treasury.
(c) When a borrower or guarantor has a pending bankruptcy as a result of
the final loss, they will not be referred for the DCIA collection action
unless the Agency has obtained a relief from stay. However, if a State
Office can substantiate for any reason why a borrower and/or guarantor
who has not filed bankruptcy should not be referred for the DCIA
collection, the State Office should confer with their Regional OGC and
request concurrence from the National Office for the Account Receivable
to be written-off by the DCFO.
(d) The lender will prepare a final loss claim on Form RD 449-30,
“Guaranteed Loan Report of Loss,” and submit it to the State Office.
After approval by the State Office, the claim will be forwarded to the
DCFO for payment. The State Office will ensure that all guarantor
information located in the BP Fund Request View (application) in GLS is
accurate. When the DCFO pays the final loss and updates it to GLS, a
DCIA Accounts Receivable will be established for the borrower and/or any
guarantors subject to the DCIA.
(e) A 60-day “Due Process Letter” (as outlined in Appendix D) is system
generated by the DCFO on or around the 15th of the month and will be sent
to the borrower and each guarantor identifying their options of setting
up a repayment plan or making a payment in full and notifying the debtors
that the guaranteed loan balance is a Federal debt, which will be
referred to the U.S. Treasury to collect the debt in accordance with
statutory requirements and authorities, including Cross-Servicing and
TOP. If the State/Field Office does not receive a response to the due
process notification within this due process period, the debt will be
referred to the U.S. Treasury for collection. Treasury will use all
remedies available under the DCIA to collect the debt from the borrower
and/or guarantors. The State/Field Office should notify the lender in
writing to cease further collection efforts against the borrower and/or
guarantors after the debt has been referred to the U.S. Treasury for
collection. The DCIA accounts receivable and all subsequent servicing
activities can be viewed by the State Office via the View Debt Offset web
page in GLS.
(f) In order for the borrower and/or guarantor to avoid referral of the
debt to the U.S. Treasury, they must agree to a repayment plan acceptable
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to the Agency or repay the debt in full. A repayment plan generally does
not exceed 3 years and must be supported by a current financial statement
and independent verification. If the guarantor has fulfilled an Agency
settlement agreement, then there is no debt to refer to DCIA.
(g) Adequate consideration must be received before a release from
liability is issued. Adequate consideration includes money or additional
security. For personal guarantors, § 4287.157(l) provides guidance on
factors to consider when evaluating settlement offers.
The case file should be documented on any compromise settlements approved
within the State’s delegated loan servicing authority.
(h) The National Office must concur in the release of all borrowers
and/or guarantors from liability. The borrower and/or guarantor should
not be released from liability until the settlement amount is paid in
full.
(i) The approved payment plan should be coordinated with the State/Field
Office representatives and submitted to the DCFO, Mail Code FC-350, for
the purpose of ensuring the debt is posted in the GLS system as a
repayment plan. Collections received in the field office from the
borrower or guarantors will be sent to the Wholesale Lockbox by
submitting Form RD 451-2, “Schedule of Remittances,” as Miscellaneous
Collection Code 35. A copy of the Form RD 451-2 should be sent to the
DCFO. These collections as well as any receipts from Cross-Servicing and
TOP will be updated to the DCIA Account Receivable by the DCFO. The
original Form RD 4279-14, “Unconditional Guarantee,” should be returned
to the guarantor after full satisfaction of the settlement agreement. If
the borrower and/or guarantor defaults on the repayment plan, they will
be referred to the U.S. Treasury.
(j) Generally for all loans subject to the DCIA, the Agency should not
initiate the recall of Agency debt that has been referred to the U.S.
Treasury.
(1) However, should the Agency receive a request to recall the
debt, the debt can only be recalled from the U.S. Treasury under
one of the following conditions:
(i) The debtor has filed for bankruptcy and the automatic
stay is in effect;
(ii) The debt is not enforceable;
(iii) The debt is not delinquent;
(iv) The debt is not valid or has been paid in full;
(v) The creditor agency discovers that it incorrectly
certified the debt;
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(vi) The creditor agency discovers any other reason that
would render its certification invalid.
(2) If a debt must be recalled from the U.S. Treasury, the State
Office will need to provide the following:
(i) A cover memorandum, signed by the Program Director (or
designee), addressed to the Business and Industry Division
Director to the attention of the Loan Servicing Branch Chief,
stating the history of the loan, reason for the recall and
State Office recommendation;
(ii) A completed Modification or Administrative Action form;
(iii) Supporting information/materials including any analysis
the State Office has performed and the reason for the recall.
(3) The National Office will review the request at the appropriate
loan committee level and will notify the State Office of the
decision.
(4) Upon approval, the State Office will forward the request to
the DCFO, Program Reporting Division, Debt Collection Improvement
Branch, for review and processing.
§§ 4287.160 - 4287.168 [Reserved]
§ 4287.169 Future recovery.
Unless notified otherwise by the Agency, after the final loss claim has
been paid, the lender must use reasonable efforts to attempt collection from
any party still liable on any loan that was guaranteed. Any net proceeds
from that effort must be split pro rata between the lender and the Agency
based on the percentage of guarantee. Any collection of Federal debt made by
the United States from any liable party to the guaranteed loan will not be
split with the lender. For loans closed prior to January 22, 2004, and for
those loans not eligible for DCIA, after a loan has been liquidated and a
final loss has been paid by the Agency, the lender must prorate any future
funds that it recovers between the Agency and the lender based on the
original percentage of guarantee. For loans closed on or after January 22,
2004, the Agency is required to refer debt owed to the Government to the U.S.
Treasury for collection. The Agency will use all remedies available under
DCIA to collect the debt from the borrower, guarantors, and any other liable
third party. Any proceeds received from such efforts will not be shared with
the lender. The Agency will notify the lender when a DCIA referral occurs,
at which time the lender must cease collection efforts.
§ 4287.170 Bankruptcy.
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(a) Lender’s responsibilities.
It is the lender’s responsibility to protect the guaranteed loan and
all of the collateral securing it in bankruptcy proceedings, including
taking actions that result in greater recoveries and not taking actions
that would not likely be cost-effective. These responsibilities include,
but are not limited to, the following:
(1) Monitoring confirmed bankruptcy plans to determine borrower
compliance, and, if the borrower fails to comply, seeking a
dismissal of the bankruptcy plan;
(2) Filing a proof of claim, where necessary, and all the
necessary papers and pleadings concerning the case;
(3) Attending and, where necessary, participating in meetings of
the creditors and all court proceedings;
(4) Requesting modifications of any bankruptcy plan whenever it
appears that additional recoveries are likely; and
(5) Keeping the Agency adequately and regularly informed in
writing of all aspects of the proceedings.
(6) The lender must submit a default status report when the
borrower defaults and every 30 days until the default is resolved
or a final loss claim is paid by the Agency. The default status
report will be used to inform the Agency of the bankruptcy filing,
the plan confirmation date, when the plan is complete, and when the
borrower is not in compliance with the plan.
(7) With written Agency consent, the lender and Agency will
equally share the cost of any independent appraisal fee to protect
the guaranteed loan in any bankruptcy proceedings.
(b) Reports of loss during bankruptcy.
In bankruptcy proceedings, payment of loss claims will be made as
provided in this section. Attorney/legal fees and protective advances as
a result of a bankruptcy are only recoverable from liquidation proceeds.
(1) Estimated loss payments.
(i) If a borrower has filed for bankruptcy and all or a
portion of the debt has been discharged, the lender must
request an estimated loss payment of the guaranteed portion of
the accrued interest and principal discharged by the court.
Only one estimated loss payment is allowed during the
bankruptcy. All subsequent claims of the lender during
bankruptcy will be considered revisions to the initial
estimated loss. A revised estimated loss payment may be
processed by the Agency, at its option, in accordance with any
court-approved changes in the bankruptcy plan. Once the
bankruptcy plan has been completed, the lender is responsible
for submitting the documentation necessary for the Agency to
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review and adjust the estimated loss claim to reflect any
actual discharge of principal and interest and to reimburse
the lender for any court-ordered interest-rate reduction under
the terms of the bankruptcy plan.
(ii) The lender must use Form RD 449-30 to request an
estimated loss payment and to revise any estimated loss
payments during the course of the bankruptcy plan. The
estimated loss claim, as well as any revisions to this claim,
must be accompanied by documentation to support the claim.
(iii) Upon completion of a bankruptcy plan, the lender must
complete Form RD 1980-44, “Guaranteed Loan Borrower Default
Status,” and forward it to the Agency.
(iv) Upon completion of the bankruptcy plan, the lender must
provide the Agency with the documentation necessary to
determine whether the estimated loss paid equals the actual
loss sustained. If the actual loss sustained as a result of
the bankruptcy is less than the estimated loss, the lender
must reimburse the Agency for the overpayment plus interest at
the note rate from the date of payment of the estimated loss.
If the actual loss is greater than the estimated loss payment,
the lender must submit a revised estimated loss claim in order
to obtain payment of the additional amount owed by the Agency
to the lender. State Directors should carefully determine the
amount of the estimated loss payments to avoid litigation that
may become necessary to recover overpayments from the lender.
(2) Bankruptcy loss payments.
(i) The lender must request a bankruptcy loss payment of the
guaranteed portion of the accrued interest and principal
discharged by the court for all bankruptcies when all or a
portion of the debt has been discharged. Unless a court
approves a subsequent change to the bankruptcy plan that is
adverse to the lender, only one bankruptcy loss payment is
allowed during the bankruptcy. Once the court has discharged
all or part of the guaranteed loan and any appeal period has
run, the lender must submit the documentation necessary for
the Agency to review and adjust the bankruptcy loss claim to
reflect any actual discharge of principal and interest.
(ii) The lender must use Form RD 449-30, “Loan Note Guarantee
Report of Loss,” to request a bankruptcy loss payment and to
revise any bankruptcy loss payments during the course of the
bankruptcy. The lender must include with the bankruptcy loss
claim documentation to support the claim, as well as any
revisions to this claim.
(iii) Upon completion of a bankruptcy plan, restructure, or
liquidation, the lender must either complete Form RD 1980-44,
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"Guaranteed Loan Borrower Default Status," and forward it to
the Agency or enter the data directly into LINC.
(iv) If an estimated loss claim is paid during a bankruptcy
and the borrower repays in full the remaining balance without
an additional loss sustained by the lender, a final report of
loss is not necessary.
(3) Interest rate losses as a result of bankruptcy reorganization.
(i) For guaranteed loans closed prior to August 2, 2016:
(A) Interest losses sustained during the period of the
bankruptcy plan will be processed in accordance with
paragraph (b)(1) of this section.
(B) Interest losses sustained after the bankruptcy plan
is confirmed will be processed annually when the lender
sustains a loss as a result of a permanent interest rate
reduction that extends beyond the period of the
bankruptcy plan.
(C) If a bankruptcy loss claim is paid during the
operation of the bankruptcy plan and the borrower repays
in full the remaining balance without an additional loss
sustained by the lender, a final report of loss is not
necessary.
(ii) For guaranteed loans closed on or after August 2, 2016,
the Agency will not compensate the lender for any difference
in the interest rate specified in the Loan Note Guarantee and
the rate of interest specified in the bankruptcy plan.
(4) Final bankruptcy loss payments. The Agency will process final
bankruptcy loss payments when the loan is fully liquidated.
(5) Application of loss claim payments. The lender must apply
estimated loss payments first to the unsecured principal of the
guaranteed portion of the debt and then to the unsecured interest
of the guaranteed portion of the debt. In the event a court
attempts to direct the payments to be applied in a different
manner, the lender must immediately notify the Agency in writing.
The Agency will immediately obtain advice from OGC on what action
to take.
(6) Protective advances. If approved protective advances, as
authorized by § 4287.156, were incurred in connection with the
initiation of liquidation action and were required to provide
repairs, insurance, etc., to protect the collateral as a result of
delays in the case of failure of the borrower to maintain the
security prior to the borrower having filed bankruptcy, the
protective advances together with accrued interest, are payable
under the guarantee in the final loss claim.
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(c) Expenses during bankruptcy proceedings.
(1) Under no circumstances will the guarantee cover liquidation
expenses in excess of liquidation proceeds.
(2) Expenses, such as reasonable attorney/legal fees and the cost
of appraisals incurred by the lender as a direct result of the
borrower’s bankruptcy filing, are considered liquidation expenses.
Liquidation expenses must be reasonable, customary, and provide a
demonstrated economic benefit to the lender and the Agency.
Lender’s in-house expenses, which are those expenses that would
normally be incurred for administration of the loan, including in-
house lawyers, are not covered by the guarantee. Liquidation
expenses must be deducted from collateral sale proceeds. The
lender and Agency will share liquidation expenses equally. To
accomplish this, the lender will deduct 50 percent of the
liquidation expenses from the collateral sale proceeds.
(3) When a bankruptcy proceeding results in a liquidation of the
borrower by a bankruptcy trustee, expenses will be handled as
directed by the court, and the lender cannot claim liquidation
expenses for the sale of the assets. If a trustee is appointed by
the court to sell the collateral, the trustee rather than the
lender is responsible for the liquidation. Other than
attorney/legal expenses, no other liquidation expenses will
normally be incurred by the lender.
(4) If the property is abandoned by the bankruptcy trustee and any
relief from the stay has been obtained, the lender will conduct the
liquidation in accordance with § 4287.157.
(5) Proceeds received from the partial sale of collateral during
bankruptcy may be used by the lender to pay reasonable costs
associated with the partial sale, such as freight, labor, and sales
commissions. Reasonable use of proceeds for this purpose must be
documented with the final loss claim.
(6) Reasonable and customary liquidation expenses in bankruptcy may
be deducted from liquidation proceeds of collateral. Chapter 11
generally pertains to a reorganization of a business contemplating
an ongoing business rather than a termination and dissolution of
the business where legal protection is afforded to the business as
defined under Chapter 11 of the Bankruptcy Code. Consequently,
expenses incurred by the lender in a Chapter 11 bankruptcy can
never be liquidation expenses unless the proceeding becomes a
Chapter 11 liquidation.
(d) Personal/corporate guarantors.
Pursuit of personal and corporate guarantors who are not the
borrower and not in bankruptcy is a matter outside of the jurisdiction of
the court. Reasonable expenses incurred in pursuit of such guarantors
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Effective Date 10/24/2022
would be allowable provided there was sufficient collateral sold or
collections made on the loan to cover such expenses.
(e) Agency monitoring.
State Directors are responsible for seeing that the Agency is fully
informed by the lender on all bankruptcy cases and monitoring the
lender's files to ensure timely action on bankruptcy cases. The Agency
may approve the repurchase of the unpaid guaranteed portion of the loan
from the holders to reduce interest accrual during Chapter 7 proceedings
or after a Chapter 11 proceeding becomes a liquidation proceeding. State
Directors must approve in advance and in writing the lender's estimated
liquidation expenses on loans in liquidation bankruptcy.
§§ 4287.171 - 4287.179 [Reserved]
§ 4287.180 Termination of guarantee.
The Loan Note Guarantee will terminate under any of the following
conditions:
(a) Upon full payment of the guaranteed loan;
(b) Upon full payment of any loss obligation; or
(c) Upon written notice from the lender to the Agency that the guarantee
will terminate 30 days after the date of notice, provided that the lender
holds all of the guaranteed portion and the Loan Note Guarantee is
returned to the Agency to be canceled. The State Office must notify the
DCFO that the Loan Note Guarantee has been terminated or the loan has
been paid in full.
§§ 4287.181 - 4287.199 [Reserved]
§ 4287.200 OMB control number.
In accordance with the Paperwork Reduction Act of 1995, the information
collection requirements contained in this rule have been submitted to the
Office of Management and Budget (OMB) under OMB Control Number 0570-0069 for
OMB approval.
oOo
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RD Instruction 4287-B
Effective Date 10/24/2022
Appendix A
Page 1
APPENDIX A - MODIFICATION OR ADMINISTRATIVE ACTION FORM
BORROWER INFORMATION:
Name and address of borrower:
Number of employees:
History of the account:
LOAN INFORMATION:
Name and address of lender: (If different from lender holding guarantee, has
the lender been substituted as outlined in § 4287.135 of this subpart?)
Loan 1 - Date loan note guarantee was issued:
Loan 1 - Original amount of the loan:
Loan 1 - Interest rate:
Loan 1 - Term:
Loan 1 - Unpaid balance: As of
Principal:
Interest:
Per Diem:
Loan 1 - Status:
Current: Delinquent: Liquidation: Chapter 7: Chapter 11: Other
(specify):
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Appendix A
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Loan 1 - Use of loan funds:
Borrower
Purpose: Contribution: B&I Loan: Other: Total:
Land - - - -
Real Estate
Improvements - - -
Contingency and Reserve - - - -
Machinery and
Equipment - - -
Working Capital - - -
Refinance - -
Fees and Costs - - -
Total = - - - -
Percent Contribution =
Loan 1 - Market and liquidation value of collateral:
Collateral: Appraisal Lien Market Liquidation
date: position: value: value:
Real Estate
Depreciated
Equipment
Vehicles
Excess A/R
Total
Loan 1 - Who owns the guaranteed portion?
Lender: %
Agency: %
Holder: %
Loan 1 - Has an estimated loss been paid:
Loan 1 - Amount paid and date:
FINANCIAL INFORMATION:
Financial Analysis:
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Appendix A
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Financial condition of personal guarantors:
Guarantor:
Dates Of Latest
Financials:
Net Worth:
Comments on collectibility:
SERVICING REQUEST:
Nature of request:
State Office analysis of request:
Lender recommendation:
Review comments by Regional Attorney (copy of opinion attached):
RECOMMENDATIONS:
State Director Recommendations:
Program Chief Recommendations:
Reviewed by:
__ ________
State Office Loan Specialist Date
__ ________
Business Programs Director Date
__ ________
<State> State Director Date
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Appendix A
Page 4
National Office Recommendation:
Reviewed by:
_______________________________ __________
National Office Loan Specialist Date
________________________ _________ _____________________
__________
Branch Chief Date Director
Date
Program Processing Division Program Processing
Division
Instructions for modifications or administrative actions:
1. Start with number 1 when the first modification is approved and enter
this number in the upper right hand corner of the Letter of Concurrence and
related “Modification or Administrative Action” sheet.
2. Next to the modified wording on the work copy of the Conditional
Commitment and the term loan agreement or any form that has been modified,
pencil in a short cross reference to the modification and identify the number
given it.
3. File the copies of the “Modification or Administrative Action” sheet and
related Letters of Concurrence numerically in the case file directly on top
of the affected original documents of conditions. Recordkeeping should
include any requests that were declined by the National Office.
oOo
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Effective Date 10/24/2022
Appendix B
Page 1
APPENDIX B - FINAL LOSS SETTLEMENT CHECKLIST
GENERAL INFORMATION:
Date _______________________________ State ______________________________
Name of Borrower ________________________________________________________
Case Number _____________________________________________________________
Type of Project _________________________________________________________
Type Organization _______________________________________________________
Servicing Office ________________________________________________________
Original Loan Amount ____________________________________________________
Date of Loan ____________________________________________________________
Loan Number _____________________________________________________________
Repayment Period ________________________________________________________
Interest Rate ___________________________________________________________
Fixed ____________________ * Variable ___________________________________
Daily Accrual, 360, Actual/360, 365 or Actual/365 days __________________
Percent of Guarantee ____________________________________________________
Subsequent Loan Amount __________________________________________________
Date of Subsequent Loan _________________________________________________
Repayment Period ________________________________________________________
Interest Rate ___________________________________________________________
Fixed _____________________* Variable ___________________________________
Daily Accrual, 360, Actual/360, 365 or Actual/365 days __________________
Percent of Guarantee ____________________________________________________
Type of Security:
General Obligation Bond _________________________________________________
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Appendix B
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Revenue Bond_____________________________________________________________
Real Estate _____________________________________________________________
Machinery and Equipment _________________________________________________
Accounts Receivable _____________________________________________________
Inventory _______________________________________________________________
Furniture and Fixtures __________________________________________________
Personal Guarantee ______________________________________________________
Other ___________________________________________________________________
Name of Lender __________________________________________________________
Percent of Loan Held by Lender __________________________________________
Name of Holder __________________________________________________________
Percent of Loan Held by Holder __________________________________________
Amount of Holder's interest repurchased by Lender _______________________
_________________________________________________________________________
Percent of Holder's interest repurchased by Lender ______________________
_________________________________________________________________________
Amount of Holder's interest repurchased by Agency _______________________
_________________________________________________________________________
Percent of Holder's interest repurchased by Agency ______________________
_________________________________________________________________________
* List below the dates and interest rate changes for variable rate loans
from the date the loan was last current through the settlement date.
Exact Date of Interest Guaranteed Unguaranteed
Rate change Rate Note Note
_________________________________________________________________________
_________________________________________________________________________
_______________________________________________
_________________________________________________________________________
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Appendix B
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II. COLLATERAL FOR THE LOAN:
Total Value at Loan Approval _____________ Date of Appraisal ____________
* List both current market and liquidation value for the following listed
below:
Land-Buildings _____________________________ Date of Appraisal ____________
Machinery and
Equipment _______________________________ Date of Appraisal ____________
Furniture and
Fixtures _______________________________ Date of Appraisal ____________
Accounts
Receivable _________________________________ Date of Book Value ___________
Inventory ________________________________ Date of Book Value ___________
Other _________________________________ Date of Appraisal ____________
III. LOAN BALANCE AT LIQUIDATION:
Date Liquidation Plan Submitted ___________________________________________
Date of Liquidation Plan _________________________________________________
Effective Date of Liquidation ____________________________________________
Principal Balance at Liquidation _________________________________________
Interest Balance at Liquidation __________________________________________
Total Balance at Liquidation _____________________________________________
Daily Interest Accrual ___________________________________________________
IV. LIQUIDATION COSTS:
Phase I Assessment Cost ___________________________________________________
Phase II Assessment Cost __________________________________________________
Attorney/legal Fees _______________________________________________________
Sheriff's Cost ____________________________________________________________
Taxes Due and Paid ________________________________________________________
Auction Cost ______________________________________________________________
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Appendix B
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Broker Cost _______________________________________________________________
Other fees (identify below): ________________________
________________________ ________________________
________________________
Total Liquidation Expenses ________________________________________________
Appraisal Fees ____________________________________________________________
Protective Advances _______________________________________________________
Dates Protective Advances Paid _____________________
(1)_____________________
(2)_____________________
V. USE OF LIQUIDATION PROCEEDS:
Net Proceeds Applied to Guaranteed Loan ___________________________________
Proceeds Applied to Liquidation Expenses __________________________________
Other Applications (identify) _____________________________________________
VI. SOURCE OF LIQUIDATION PROCEEDS:
Sale Proceeds Received _________________
Land-Building _________________
Machinery and Equipment _________________
Furniture and Fixtures _________________
Inventory _________________
Other (identify) _________________
Collection on Personal Guarantee _________________
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Appendix B
Page 5
VII. DCIA:
DCIA Eligible (closing => 1/22/04) YES NO
If YES – questions for State Office:
Should this loss be eligible for DCIA? YES NO
Is the guarantor(s) eligible for DCIA => 12/20/06 YES NO
1a. If yes, did guarantor sign an unconditional
guarantee form? YES NO
1b. Is there a Repayment/Settlement plan? YES NO
(If YES, must submit to DCFO within 60 day
due process period)
2. Is the delinquency code identified correctly? YES NO
3. Was there a Bankruptcy as a result of this loss? YES NO
Has the State Office identified the liable
guarantors in the BP Fund Request View of the
application in GLS? YES NO
Generate 1099-C (Cancellation of Debt) YES NO
Unconditional Guarantee Form YES NO
**Letter to Lender at end of 60 day due process to cease ALL collection
action**
**Due Process letter to be sent to guarantor(s) when loss is input into GLS**
==========================================================================
Estimated Loss Paid Amount $____________ Basis ____________
Percentage of Guarantee ____________%
BP Annual/Late Fees:
Check UnPd/Pd Annual/Late fees,
if another type loss was previously processed YES $ NO______
Check UnPd/Pd Annual/Late fees,
if a Final Loss w/no other previous type losses YES $ NO______
==========================================================================
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Appendix B
Page 6
Final Loss Payment to Lender
$__________________________________
Total Principal Loss Amount
$__________________________________
Total Interest Loss Amount
$__________________________________
VIII. SUMMARY (circle the proper answer):
NOTE: All questions answered with "NO" must be explained and fully
documented to support the reason for the "NO" answer.
1. (YES - NO - NA) Did the lender submit a liquidation plan and did the
Agency approve, in writing, the lender’s liquidation plan and any subsequent
revision?
2. (YES - NO - NA) Were all liquidation expenses and protective advances
approved?
3. (YES - NO - NA) Was a determination made that the lender did not charge
for "in house" fees in connection with the liquidation?
4. (YES - NO - NA) Were all liquidation appraisal fees shared equally
between the lender and the Agency?
5. (YES - NO - NA) Did the lender obtain the proper security and lien
position at loan closing?
6. (YES - NO - NA) Did the lender maintain proper liens, insurance coverage
and security instruments on security?
7. (YES - NO - NA) Was all collateral disposed of and proceeds accounted
for and were liquidation expenses deducted from sale proceeds?
8. (YES - NO - NA) Has a list of all unaccounted for security been
provided and has the value been taken into account for
the final loss settlement amount?
9. (YES - NO - NA) Have lender payment records been reviewed to determine
that payments were applied correctly and interest was properly accrued and
posted to the borrower's account?
10. (YES - NO - NA) Has a determination been made whether to pursue the
personal guarantee, if one was taken, and is a
deficiency judgment warranted?
11. (YES - NO - NA) Are all guarantors (key members) listed in GLS (“BP Fund
Request View” of the application)?
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Appendix B
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12. (YES - NO - NA) Is the borrower/co-borrower(s) or any guarantors
eligible for DCIA?
Borrower/co-borrower(s) for loans closed on or after January 22, 2004, with
no bankruptcy.
Guarantor(s) (key members) - that signed an unconditional guarantee on or
after December 20, 2006, with no bankruptcy.
13. (YES - NO - NA) Did OGC provide a ruling/opinion with National Office
approval as to why the borrower(s) and guarantor(s) should not be referred to
Treasury for DCIA and to have the debt written off?
14. (YES - NO - NA) Has the lender been notified in writing to cease
collection actions from the borrower(s) or guarantor(s) if it has been
determined that the borrower(s) or guarantor(s) will be referred to Treasury
for DCIA?
15. (YES - NO - NA) Have required signatures been obtained on Form
RD 449-30, "Loan Note Guarantee Report of Loss"?
16. (YES - NO - NA) Have interest computations been verified?
17. (YES - NO - NA) Is there additional interest to be paid to the check
date?
18. (YES - NO - NA) Has the OIG and the OGC been consulted, where
necessary?
19. (YES - NO - NA) Was the loan properly closed in accordance with the
Conditional Commitment and were loan funds used for
authorized purposes?
20. (YES - NO - NA) If loan funds were not used for authorized purposes,
has the unauthorized use of funds been taken into
consideration?
21. (YES - NO - NA) If a future recovery possibility is likely, has the
Agency set up a monitoring system to follow-up with the
lender?
22. (YES - NO - NA) If the Agency has a receivable, has the lender remitted
to the Agency its pro rata share of funds?
23. (YES - NO - NA) Has pro rata application of funds been made to the
guaranteed and unguaranteed portions of the loan?
DATE _________________ ______________________________________
AGENCY APPROVAL OFFICIAL
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Effective Date 10/24/2022
Appendix C
Page 1
APPENDIX C – LIQUIDATION AND PROPERTY MANAGEMENT GUIDE
TABLE OF CONTENTS
I. Purpose
II. General Comments
III. Involving OGC
IV. When to Liquidate
V. Do’s and Don’ts in Liquidation
VI. Phasedown of Borrower’s Operation
VII. Sale of the Promissory note without Recourse
VIII. Liquidation Plan
IX. Reviewing the Lender’s Liquidation Plan
X. Lender’s Documentation Review
XI. Risk Factors Associated with Agency Guaranteed Loans
XII. Collateral Evaluation in Liquidation
XIII. Appraisal Reports
XIV. Environmental Requirements in Liquidation
XV. Liquidation Expenses
XVI. Protective Advances
XVII. Different Options of Liquidation
XVIII. Protective Bids
XIX. Method of Disposition of Collateral
XX. Guarantors
XXI. Comprise Settlement
XXII Negligent Origination/Servicing
XXIII. Fraud or Misrepresentation
XXIV. Final Report of Loss
I. Purpose
This Liquidation and Property Management Guide is designed to help
Agency personnel better understand Agency regulations and procedures when
faced with liquidations. There is a liquidation plan checklist at the end of
this Appendix.
While lenders have the primary responsibility for the liquidation of
loans and the protection of collateral in liquidation, the Agency is
responsible for assuring that lenders fully comply with Agency regulations.
Because not all lenders are experienced in handling liquidation of an Agency
guaranteed loan, Agency personnel must closely follow their liquidation
actions with the primary concern to maximize recovery on the loan in the
least amount of time.
This guide contains basic, practical information in handling liquidation
cases and is an outline to address the general issues normally encountered in
guaranteed loan liquidations but is not intended to address every
circumstance that may occur.
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Appendix C
Page 2
II. General Comments
Only a small percentage of borrowers ever reach a liquidation status.
Keep in mind that these borrowers have invested substantial time and money
into their business and may have an uncertain future. Most of these failed
borrowers as well as the lenders are honest and want to cooperate and assist
in closing out the case. Agency officials should expect this attitude and
should not take a negative stance with the involved parties. Agency
personnel can help by being reasonable and cooperating with these parties
while keeping in mind that their main function is protecting the Government's
interests.
One of the primary functions of the Agency is the monitoring of the
lender's servicing and liquidation activities in order to ensure that
servicing, as required by Agency regulations, is carried out in such a manner
that the best interests of the Government are served. However, the lender
should not be told how to function with the borrower. The lender has total
responsibility for servicing the loan and liquidating the business assets
while making recommendations that the Agency then evaluates. The more
experienced the lender, the fewer problems one will normally have in
liquidation. The inexperienced lender may need guidance and the liquidation
process more closely monitored.
Liquidation is a business operation and should be handled as such.
Prompt action by the lender is essential once the decision has been made to
liquidate the collateral and the business assets. The importance of
maintaining a good relationship with the lender during the life of the loan
is of great importance because once liquidation starts, the Agency will
likely receive better cooperation during the liquidation. A positive
relationship should also be maintained during any contact with the borrower.
With proper portfolio management, there should never be any surprises
when it comes to borrower liquidations. Extra servicing and monitoring
should have been occurring for the time leading up to the liquidation. In
order to better service these “at risk” loans, it is suggested that the State
Office maintain a periodically updated “Watch List.” This list or report
should contain all delinquent borrowers, those classified as Special Mention
that may become delinquent, as well as those in bankruptcy and liquidation.
All servicing actions, meetings, and conversations with the lender or
borrower should be carefully documented in the case file.
III. Involving OGC
When involved in a liquidation, lenders turn to their attorneys for
advice and assistance. The Regional OGC may be involved as necessary in
workouts and liquidations of guaranteed loans. These offices have been
cooperative and willing to review legal issues involving such cases; however,
do not expect the Regional OGC to make the administrative decisions that are
necessary on these loans. Do not get into a situation where wrong
information has been given to the lender and, based on this, certain
decisions have been made that must be reversed. Involve the Regional OGC at
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Appendix C
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the beginning of any liquidation case and seek legal advice during the course
of liquidation on issues that cannot be resolved as administrative decisions.
In order to assist the Regional OGC in the review of a liquidation case,
a memorandum addressed to the Regional OGC should be prepared by the State
Director giving a narrative history of the loan along with a full explanation
of the facts. This document should set forth clearly and concisely what the
Regional OGC is being requested to review. The Regional OGC will be better
able to provide prompt and helpful legal assistance if it is properly
informed of all the facts.
The memorandum to OGC must explain or provide sufficient facts and
evidence to sustain the Agency's position:
(1) Each issue should be fully addressed;
(2) The reasons for each decision reached should be discussed and supported
by citing the appropriate regulation;
(3) Supply the necessary facts and evidence that relate to each decision;
(4) Explain any facts or evidence that would tend to undermine the
decision or position; and
(5) Discuss the action recommended by the Agency and why the Agency
wants to take this action. Where several alternatives suggest themselves,
explain why the Agency prefers one alternative to another.
Servicing actions for liquidations that involve legal issues and also
require National Office review and concurrence must have the Regional OGC's
comments as part of the submitted material.
OGC opinions and memoranda will never be given to persons outside the
Agency nor will non-Agency personnel be allowed to see or discuss these
opinions. The use of OGC does not relieve Agency personnel of their
administrative responsibility to assure compliance with Agency regulations.
OGC renders advice, but any decision is the Agency's.
IV. When to Liquidate
In the event of one or more incidents of borrower default or third party
actions that the borrower cannot or will not cure or eliminate within a
reasonable period of time, liquidation may be considered. If the lender
concludes that liquidation is necessary, it must request the Agency's
concurrence. Refer to page 57 of this Appendix for a sample letter regarding
the decision to liquidate.
The loan can be either in technical default of a loan agreement covenant
or in monetary default, or both, when the lender and Agency decide to
liquidate. Before commencing with liquidation, the lender should evaluate
all proposed methods of liquidation, i.e., listing collateral with a real
estate agent, auctioneer, sealed bid, selling the note, as well as the costs
associated with each method. The lender should also include a net recovery
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Appendix C
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value for each liquidation option so that the Agency can properly compare and
evaluate the options. In all cases, it is the lender’s responsibility to
conclude that liquidation is necessary, suggest a liquidation method, and
obtain Agency concurrence of this decision. The lender should continue to
work with the borrower to resolve the issues, but unless meaningful proposals
are presented, the Agency expects liquidation to proceed as soon as
practicable.
It is time to consider liquidation when:
(a) The lender determines that the borrower cannot succeed.
(b) The lender's and/or Agency's interest in the collateral securing the
debt is in jeopardy. Examples of such action may be prior lien holders of
the collateral taking foreclosure action against the borrower; bankruptcy
actions; abandonment of the collateral by the borrower; and default on the
loan agreement and/or other conditions.
The Agency does not consider a loan in liquidation until the loan has
been accelerated and a demand for payment has been made upon the borrower.
The lender will proceed to accelerate the indebtedness as expeditiously as
possible when acceleration is necessary, including giving any notices and
taking any other legal actions required. A copy of the demand letter or
other acceleration document will be sent to the Agency. All obligors must be
included in this action, as improper notification could delay liquidation and
result in serious legal consequences. Once the lender is in the position to
liquidate the collateral, a liquidation plan submitted to the Agency is
required.
Liquidation status can be changed by subsequent events, such as a
Chapter 11 bankruptcy reorganization, in which event liquidation is either
ceased or directed by the court. If the borrower files for protection under
bankruptcy reorganization, before or after liquidation begins, liquidation of
the borrower is no longer in effect and, therefore, the lender is not
required to file a liquidation plan.
V. Do's and Don’ts in Liquidation
Listed below are a few basic reminders for Agency officials confronted
with liquidations:
(1) Do's
(i) Keep the Agency's interests paramount. Throughout the liquidation
process, be cooperative but never lose sight of the fact that your primary
responsibility is to protect the Agency's interests.
(ii) Encourage the lender to take strong steps to prevent the theft,
deterioration, surreptitious sale, or disposal of machinery and equipment.
Such expenditures as are necessary in this area may possibly be imputed to
protective advances or liquidation expenses.
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Appendix C
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(iii) Ask the lender to provide a list of all collateral (especially
machinery and equipment) on hand at the time the liquidation plan is
submitted. All items should be tagged and identified if possible. This list
will often differ somewhat from earlier lists due to maintenance and
replacement of some items. However, it is important to have a complete,
written list of all items in existence at the time of liquidation.
(iv) Insist upon a complete accounting from the lender of the disposal of
all items listed in this inventory and such collateral as accounts
receivable, recoveries from guarantors, etc.
(v) Remember that an operating business is always more attractive to
prospective buyers than one that has ceased operations. Make sure that the
lender and borrower make every possible effort to help find a buyer before
the business doors are officially closed.
(vi) Be prepared to assist the lender and borrower with identifying possible
buyers of specialized equipment. In many instances, trade associations can
help identify potential buyers.
(vii) Be aware of State and local laws pertaining to liquidations and what
the attitudes of the local courts are toward liquidation.
(viii) If property used as loan collateral is to be sold at auction, make
sure an Agency representative attends.
(ix) Prepare a written memorandum to the file explaining what the Agency
would do differently if it had the opportunity to do the project again. The
experience and the memorandum may be useful in servicing other cases.
(2) Don’ts
(i) Don't make decisions for the lender regarding actions that are the
responsibility of the lender. The Agency's role is one of concurrence. The
lender should be amenable to the Agency's concerns because the goal of both
parties is to maximize recovery.
(ii) Don't be reluctant to call the Regional OGC and National Office for
advice.
(iii) Don't take for granted the lender's evaluation of the collateral when
the lender is negotiating a private sale. An independent appraisal is
usually required by the regulations.
(iv) Don't allow the lender to schedule a liquidation sale for a time when
it would be difficult for prospective buyers to attend. Weekends may be the
best time for liquidation sales in certain industries.
(v) Don't release the liquidation appraisal to the borrower, prospective
bidders, or anyone else. Note any action by the lender in this regard as
failure to protect the collateral during foreclosure, or it may also be
negligent servicing.
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Appendix C
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(vi) Don't release information about the amount of the protective bid. Note
any action by the lender in this regard as failure to protect the collateral
during foreclosure, or it may also be negligent servicing.
(vii) Don't hesitate to notify OGC and the National Office if there is any
indication that the lender is not fulfilling its contract with the Agency.
Make it known to the lender and the National Office when it is suspected this
is the case.
(viii) Don't forget to keep a thorough record of everything that happens in
connection with a liquidation process. Remember that auditors and others
reviewing the loan file several years later won't know why the Agency took
certain actions unless a detailed written record of the events as they
happened is kept.
VI. Phasedown of Borrower's Operation
In some cases, the lender may be able to employ a technique known as
operational phasedown rather than placing the borrower in liquidation.
Operational phasedown is designed to get the borrower out of its operation
with a full payoff on the guaranteed loan plus expenses through a plan agreed
upon by all interested parties.
The phasedown plan may include continued operations of the borrower for
a period of time in order to move the inventory and/or complete work in
process to finished goods. Before submitting such a plan, the lender must
fully understand the borrower's operations, have reliable current financial
information, and the full cooperation of the borrower and all creditors.
Be sure that the borrower's principals' compensation (salary, bonus,
withdrawals, etc.) does not increase during this time. Consideration should
be given to decreasing the principals' compensation based on any extenuating
circumstances during the phasedown of the operation.
In the process of continued operations, the plan may call for the
borrower to begin selling portions of the business, machinery, equipment, and
reduce their payroll expenses. If accounts receivable and inventory are part
of the collateral, the accounts receivable can be collected and the inventory
sold through the borrower's customers. If the customer base has been lost,
the supplier may be willing to take back the inventory at a discounted price.
If money is owed to inventory suppliers, the supplier would very likely
apply the value of any returned inventory toward its own account instead of
paying the lender. Another alternative would be to not return the
merchandise, but instead sell the collateral for the best offer to an
independent entity. The object, of course, is to maximize the return on the
sale of the assets.
If payment in full is not expected and it is advantageous for the lender
and Agency to involve the borrower in the liquidation of the collateral,
other options, including a private sale, should be considered. After the
sale of all assets, the borrower should make a settlement agreement with all
remaining creditors as called for in the phasedown plan.
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VII. Sale of the Promissory Note without Recourse
One method of liquidation is the sale of the promissory note.
Advantages of a promissory note sale include a reduction of liquidation costs
and access to a larger pool of potential investors. The sale of the
promissory note as a method of liquidation should not be considered on
guaranteed loans that are current.
When the lender is considering the sale of the promissory note as a
method of liquidation, including loans in bankruptcy, the lender must
document that this method would yield the highest and best recovery in their
detailed Liquidation Plan. The lender must offer the entire loan for sale,
both the guaranteed and unguaranteed portions of the loan. All sales must be
on a non-recourse basis, and the Loan Note Guarantee will not transfer.
Due diligence must be performed that includes an evaluation of all
potential companies that perform this service to ascertain their expertise in
this area. The companies should be reputable, with a track record in
executing these types of transactions, and aware of the associated risks
involved.
The Purchase and Sales Agreement must be reviewed in advance by the
Regional OGC. When the sale is consummated, the lender will promptly remit
to the Agency its pro-rata share, and the lender will promptly file a final
report of loss claim in accordance with regulations.
The lender, with Agency approval, can also establish a minimum bid and
reserve the right to pull the loan from the bid process if the reserve bid is
not met. This option can be used concurrently with other liquidation
methods.
This liquidation method must also follow regulatory requirements,
including a current appraisal that reflects both current and liquidation
values of collateral, if necessary. The State Office is authorized to
approve all promissory note sale transactions within its delegated loan
servicing authority. Any transaction that is in excess of its delegated loan
servicing authority must be submitted to the National Office Program
Processing Division using the Modification or Administrative Action form
outlined in Appendix A of this subpart.
The sale of the promissory note does not relieve the borrower,
guarantor, or any other liable third party from liability if the promissory
note sale results in a loss to the Government. The Agency will reserve its
rights to collect from the guarantor and any other liable third party,
including remedies available under DCIA, if applicable.
VIII. Liquidation Plan
It is strongly recommended that an Agency representative visit the
lender at the time a loan default is considered to discuss other available
remedies, or if there are none available, to encourage an orderly liquidation
of the loan. A discussion of the tentative plan of liquidation will help the
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lender to prepare a complete liquidation plan for submission to the Agency.
At the same time, the Agency official gains valuable knowledge regarding the
case, and the Agency’s response time to the liquidation plan can be
expedited.
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As soon as the lender has made the decision to liquidate the loan, the
lender should begin preparing the liquidation plan. The lender has 30 days
in which to submit the liquidation plan as set forth in the regulations. A
guide as to what should be covered in the lender’s liquidation plan is
outlined in this section. Bear in mind that liquidations vary from area to
area and case to case. This guide should not be construed to cover all the
material that may be necessary to fit a particular liquidation case.
The regulations require the Agency to respond to the lender’s proposed
liquidation plan within 30 days of receipt or the lender may proceed without
Agency approval (refer to page 58 of this Appendix for a sample letter
regarding approval of the liquidation plan). Priority should be given to the
liquidation plan when received by the Agency, and the response should be made
as quickly as possible. The Agency's potential loss exposure is increased
daily, thus a liquidation of the loan in the least amount of time maximizes
collections.
Within delegated authorities, the State Director may approve a written
partial liquidation plan submitted by the lender covering collateral that
must be immediately protected or cared for in order to preserve or maintain
its value. Approval of the partial liquidation plan must be in the best
interest of the Government. The approved partial liquidation plan is only
good for those actions necessary to immediately preserve and protect that
identified collateral and must be followed promptly by a complete liquidation
plan prepared by the lender in accordance with the requirements of the
regulations.
The liquidation plan must be in writing and should explain the current
situation and the remedies suggested by the lender. RD Instruction 4287-B, §
4287.157(c), details the requirements of a liquidation plan. Information
that should be provided includes but is not limited to:
(1) Such proof as the Agency requires to establish ownership of the
guaranteed loan promissory note(s) and related security instruments. Also, a
copy of the payment ledger should be included that reflects the current loan
balance, accrued interest to date, and the method or basis of computing the
interest.
(2) A copy of the demand letter sent to the borrower accelerating the loan
balance. The lender should give the borrower the minimum time allowable to
pay the balance in full on the loan. Any additional time over and above what
is required by the respective State laws would not be in the best interests
of the lender or the Agency.
(3) The recommended plan of action on the best liquidation methods and the
justification for such action, including acquisition and disposal of all
collateral and actions to be taken on the guarantor(s) of the loan.
(4) A full and complete listing of all collateral, including the lien
position held by the lender, and any necessary steps for preservation of the
collateral.
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(5) A listing of all personal and/or corporate guarantees and the most
recent financial information on the guarantors.
(6) Copies of the borrower's latest available financial statements.
(7) A list of the estimated liquidation expenses expected to be incurred and
the justification for each expense. Each expense item should specify what it
covers and the estimated amount. It should be emphasized that attorney's
services are to be concerned with those issues in liquidation proceedings
with a strictly legal nature. In-house administrative expenses incurred by
the lender such as travel to and from the borrower's business, telephone
calls, typing and internal secretarial services, related bank personnel
salaries and wages, accounting and all other miscellaneous expenses are not
reimbursable liquidation expenses.
(8) Protective advance amounts that may be necessary and the justification
for the protective advance. Protective advances can only be claimed on the
Final Report of Loss.
(9) Protective bid amounts on the collateral to be sold and a breakdown of
how the amount(s) were determined (if collateral is scheduled to be sold at
public auction).
(10) If a voluntary conveyance of the collateral is considered, the lender,
with the Agency's concurrence, must determine the amount that will eventually
be credited to the guaranteed debt.
(11) Establishment of a schedule to periodically report to the Agency on the
progress of liquidation.
(12) Legal opinions, if necessary, to justify recommended liquidation
methods, acquisition, preservation of the collateral, and for DCIA.
(13) An estimate of fair market and potential liquidation value of the
collateral. If the value of the collateral is $250,000 or more, the lender
must obtain an independent appraisal report meeting the requirements of §
4279.144 of this chapter for the collateral securing the loan, which reflects
the fair market value and potential liquidation value. For collateral values
under this threshold, lenders must follow their primary regulator's policies
relating to appraisals and evaluations or, if the lender is not regulated,
normal banking practices and generally accepted methods of determining value.
The liquidation appraisal of the collateral must evaluate the impact on
market value of any release of hazardous substances, petroleum products, or
other environmental hazards. The independent appraiser's fee, including the
cost of the environmental site assessment, will be shared equally by the
Agency and the lender. In order to assure prompt action, the liquidation
plan can be submitted with an estimate of collateral value, and the
liquidation plan may be approved by the Agency subject to the results of the
final liquidation appraisal. The Agency may pay for additional appraisals as
warranted.
The Agency employee requesting payment for the lender's share of the
liquidation appraisal and/or environmental assessment fee(s) must complete a
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Report of Liquidation Expense form and sign, attaching a copy of the
invoice(s) or receipt(s), and fax to the Guaranteed Loan Branch (GLB) in the
office of the DCFO at (314) 457-4279. Upon receipt of the faxed signed form
and copy(s) of the invoice(s) or receipt(s), GLB, DCFO will make payment
utilizing GLS. Any questions or concerns in regards to the payment should be
addressed to GLB, DCFO, by calling the main line at (314) 457-4192.
If a lender acquires title to property either through voluntary
conveyance or foreclosure proceeding, the Agency may elect to permit the
lender the option to calculate the final loss settlement using the net
proceeds received at the time of ultimate disposition of such property. This
option allows the lender to sell the property after bidding on it in a
foreclosure before a Final Report of Loss is submitted. The lender must
submit its written request for this option to Agency, and Agency must agree,
prior to the lender submitting any request for an estimated loss payment.
If the lender submits a written request to the Agency asking the Agency
to delay calculation of final loss until the lender finally disposes of the
collateral out of its inventory, pursuant to the option above, the Agency, at
its option, may accede to the request. Loss occasioned by accruing interest
will be covered to the extent of the guarantee to the date of final
settlement when the liquidation is conducted by the lender, provided it
proceeds expeditiously with the liquidation plan approved by the Agency. For
loans closed on or after [DATE OF FINAL RULE PUBLICATION], in the event of a
loss, the guarantee will not cover note interest to the lender accruing after
90 days from the most recent delinquency effective date.
If the lender does not wish to extend the time for the loss claim to the
point of ultimate disposition of the collateral (except for personal and
corporate guarantees) then any loss covered under the guarantee would be
based on the collateral's value at the time the lender obtained title through
the foreclosure method or a voluntary conveyance of the collateral by the
borrower.
The final loss should not be paid until all of the collateral, including
any guarantees, if applicable, is liquidated or settled.
IX. Reviewing the Lender's Liquidation Plan
After receiving the liquidation plan from the lender, the Agency must
carefully review the plan and associated documents. The liquidation plan
must address the borrower’s current situation and remedies suggested by the
lender, plus provide a reasonable plan to protect the collateral and
liquidate the business assets expediently and in the best interests of the
lender and the Agency. The Agency should consider the following items and
take appropriate action, if necessary, to protect the Agency's interests:
If the guaranteed portion of the loan is being held in the secondary
market and the holder has made no request for either the Agency or the lender
to repurchase and the loan is in liquidation, the lender should repurchase
the guaranteed portion of the loan to adequately service the loan. The
lender must not repurchase from the holder(s) for arbitrage purposes or other
purposes to further its own financial gain. Any repurchase will only be made
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after the lender obtains Agency's written approval. If the lender does not
repurchase the guaranteed portion from the holder(s), the Agency will
purchase such guaranteed portions.
The lender must establish reasonable control of the collateral in any
liquidation case. This is true even if voluntary liquidation by the borrower
is considered. The only difference would be the type of control initiated by
the lender. The lender will be expected to account for all collateral;
therefore, the controls necessary to perform in this fashion are left to the
lender. The lender should initiate control to determine the collateral on
hand, its location, and keep track of any sale of collateral. Protection
against pilferage would be expected of a reasonable and prudent lender.
If there is any question concerning an owner’s cooperation or integrity,
consideration should be given to the appointment of a Receiver to handle the
operation of the business and sale to ensure proper accounting of all assets
and funds.
Hope and belief that there will be a future economic change that would
enhance recovery on the debt almost always results in a diminished recovery
on the guaranteed loan due to accumulating interest, costs of maintaining the
property, and deteriorating collateral. The lender should recommend a quick
and expeditious liquidation of any real estate and collateral.
Liquidation expenses and protective advance amounts requested by the
lender should be closely reviewed to determine, before actual approval by the
Agency, that the expenses are necessary to properly conduct the liquidation
of the loan. Examples of abuse by lenders, as cited by the OIG, of
liquidations approved by the Agency include inappropriate attorney fees, in-
house expenses, lender fees, and care and maintenance of the collateral
property. Just because a lender recommends an expense item, the Agency
should not grant automatic approval to such expense. Obtain the necessary
facts and be satisfied that the expenses are necessary and reasonable. By
giving close attention to all expenses, the Agency's loss exposure could
possibly be further reduced.
Agency review should consider whether the liquidation plan submitted by
the lender properly addresses liquidation of the collateral from start to
final disposition of the collateral and that all areas of liquidation,
including legal issues, are satisfactorily covered by the lender.
If for some reason the Agency cannot concur in the liquidation plan, a
meeting should take place between the lender and the Agency to resolve the
concerns and move forward in a prudent and expedient manner.
If there are subsequent changes in the liquidation plan to the one
originally agreed to by the lender and the Agency, the lender should inform
the Agency in writing of the changes. The Agency should review the
modification plan and inform the lender in writing as to its position on the
proposed changes made from the original liquidation plan.
X. Lender’s Documentation review
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After assessing the current situation and the appropriate liquidation of
the borrower’s business and assets, in conjunction with the liquidation
process, the Agency should perform a post-review of the loan’s documentation.
This review is performed to provide insight on weaknesses that can be
addressed in future applications and to protect the Agency’s interests.
(1) Begin the review at the loan disbursement date:
(i) Was the loan disbursement proper and in accordance with the Conditional
Commitment and/or the Application for Loan Guarantee?
(ii) Were the conditions of the Conditional Commitment met?
(iii) What is the collateral position and the type of collateral, including
guarantors? Were the agreed upon lien priorities obtained?
(iv) Was the loan properly closed? Were the loan disbursements proper? Can
the lender confirm that they were?
(2) From loan closing to date, was the lender's servicing
satisfactory?
(i) Were proper visits made by the lender to the borrower's place of
business?
(ii) Was the loan agreement complied with by all parties?
(iii) Did the lender make routine checks of the collateral and properly
account for same?
(iv) Review all correspondence in the file for any servicing actions that
took place that could affect the loan.
(v) Were there servicing actions taken (or not taken) that a reasonably
prudent lender would have taken?
(3) Look at the guarantor's balance sheet at loan closing and compare to the
current balance sheet obtained at liquidation. Were all assets listed at
loan closing accounted for on the balance sheet given at liquidation? If not
accounted for, what happened to the assets? Was any transfer of assets made
to avoid legal attachment by the lender for the guaranteed loan?
(4) Are the lien positions and collateral properly stated as compared
to loan closing documents and the Conditional Commitment? Review the legal
documents and UCC filings for proper documentation (lien position) of the
collateral and all legal matters. Check with the Regional OGC if you have
questions on perfection of security interests.
(5) Compare current appraisals to appraisals made at the time of loan
closing. Do the amounts generally correspond? If not, obtain a satisfactory
explanation from the lender for any large differences.
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In the rare instance where the Agency has concerns regarding the above
questions, a meeting with the lender must be made to clarify and resolve any
discoveries. Actions by the lender at loan closing or during servicing of
the loan that have an adverse impact and may cause greater loss exposure to
the government may result in a reduced guarantee payment and a claim against
the lender for use of loan funds for an unauthorized purpose or negligent
servicing.
XI. Risk Factors Associated with Agency Guaranteed Loans
Guaranteed loans in liquidation contain certain built-in risks to the
Agency. These risks create potentially greater loss exposure than are
normally prevalent when lenders handle unguaranteed loan liquidations in
their portfolio. The increased risk factors to the Agency are:
(1) Time restraints.
(2) Interest accruals.
(3) Dependency upon the lender to handle the liquidation.
(4) Deterioration of the collateral.
(5) Additional expenses.
As stated in section VIII of this Appendix, the lender must submit a
proper liquidation plan to the Agency within 30 days after the lender and
Agency agree that liquidation is proper and necessary. The Agency has 30
days to respond to the liquidation plan. In some cases, 60 days or more
elapse before any real action is taken by the lender on the liquidation of
the loan. During this 60-day period, insurance, taxes, and other expenses
may accrue. Additionally, the collateral securing the loan may be
deteriorating and the lender continues to accrue interest within the terms of
the Loan Note Guarantee at the promissory note rate. For loans closed on or
after [DATE OF FINAL RULE PUBLICATION], in the event of a loss, the guarantee
will not cover note interest to the lender accruing after 90 days from the
most recent delinquency effective date as reported in item number 8 on Form
RD 1980-44, "Guaranteed Loan Borrower Default Status." Agency personnel must
show preference on any liquidation case as opposed to loanmaking or servicing
of non-problem cases and keep liquidation of the loan expeditiously moving to
a conclusion.
If the lender has an attractive interest rate and holds the guaranteed
portion, the lender may not pursue liquidation of the loan as vigorously as
an unguaranteed loan in its own portfolio, especially if the lender has
pressing problems on one or more of its other loans. Any delay in
liquidating the collateral increases the Agency's loss exposure; therefore,
it is important that the lender move as quickly as reasonably possible to
liquidate the collateral.
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The following is an illustration reflecting potential expenses caused by
Agency requirements that the lender might avoid if it was handling the loan
and the loan was unguaranteed:
A $1,500,000 original Agency 90% guaranteed loan held by the lender reduced
to a balance of $1,200,000 at an interest rate of 7.5% at the time of
liquidation. Additional risk factors to the Agency as explained above
reflect:
$15,000 - Interest at 7.5% per annum on $1,200,000 for 60 days (30 days for
lender to submit a liquidation plan and 30 days for Agency to respond).
$ 1,667 - Insurance for 2 months based on a $10,000 annual insurance premium.
$ 5,000 - Taxes for 2 months on real estate collateral based
on a $30,000 annual tax bill.
$12,000 - Heat, electricity, water and guard services for 2 months assuming
that the borrower walked away from the property.
Unknown collateral deterioration and/or possible loss of ideal market
conditions in selling the collateral if there is any delay in liquidation.
$33,667 Total
_x__90%_ Agency Guarantee
$30,300 Agency's loss exposure for the 60-day period
Based on this illustration, the Agency's additional risk exposure is
$505 daily for the 60-day period allowable under Agency regulations for the
lender to submit a liquidation plan and for the Agency to address the plan.
Any additional delay by either the lender and/or the Agency further increases
the loss exposure. Although $30,300 may not seem to be a large exposure on
the Agency's part, consider the number of loans in liquidation nationwide.
As one can see, any delays in actual days lost by not vigorously
pursuing the end result of liquidation exposes the Agency to tremendous
losses. Therefore, a quick and expeditious liquidation is the manner in
which to proceed.
Another procedure to utilize in order to possibly reduce Agency loss
exposure, if the lender is holding the guaranteed portion of the loan, would
be to pay an estimated loss to the lender. If Government interest rates on
long term borrowing are less than the current interest rate on the Agency
guaranteed loan, the net savings by paying the estimated loss would be the
difference between the cost of money to the Government and the guaranteed
promissory note rate. However, before paying any estimated loss, be sure
that the lender will continue to expeditiously liquidate the loan and that
the lender has performed satisfactorily to date on the closing and servicing
of the loan. Otherwise, if a claim against the lender for negligent
servicing or use of loan funds for unauthorized purposes arose and the Agency
was holding the guaranteed portion of the loan, the lender may refuse to
honor such a claim, making legal action necessary by the Agency to claim the
rightful amount due to the Agency for the lender's improprieties. The
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Government would have to initiate legal action to obtain the amount due the
Agency and the burden of proof would rest on the Government in a claim of
negligent servicing and/or unauthorized use of loan funds.
If interest accrual has not already been stopped, the lender and DCFO
should be notified to stop interest accrual as of the date the estimated loss
is paid. For loans closed on or after [DATE OF FINAL RULE PUBLICATION], in
the event of a loss, the guarantee will not cover note interest to the lender
accruing after 90 days from the most recent delinquency effective date.
XII. Collateral Evaluation In Liquidation
(a) Accounts Receivable
(1) Accounts receivable are the easiest to convert to cash in liquidation in
that the only effort required is to notify the borrower's debtors that the
receivables are collateral of the loan and payments should be made to the
lender. Since this type of collateral is easily converted to cash, it can be
used by the borrower to keep operations going during periods of financial
difficulty. Therefore, when liquidation occurs, more often than not, the
accounts receivable have been partially collected by the borrower, thereby
dissipating the collateral on the guaranteed loan. Also, when the borrower
is experiencing financial difficulties, the quality of goods manufactured
could deteriorate, thereby creating claims by the borrower's debtors when
collection is pursued by the lender.
(2) If the lender properly secures the accounts receivable and has included
in the Security Agreement the right to inform the borrower's debtors in
writing in any acceleration of the debt, this is the action that should be
taken. The lender, to protect itself, should if possible, obtain the
authorized borrower's signature(s) on any notice to the borrower's debtors
requesting payment be made directly to the lender. If the lender quickly
takes action once the decision to liquidate the loan has been made, there is
a better chance of maximizing recovery on this type of collateral.
(b) Inventory
(1) Inventory is more difficult than accounts receivable to move and convert
into cash in liquidation. A buyer must be found for the inventory collateral
before it can be converted to cash. Normally, in a manufacturing business,
the inventory is in three stages; raw materials, work in process, and
finished goods. The raw materials and finished goods normally have value in
liquidation, whereas work in process may have little value.
(2) If the borrower is experiencing financial difficulties, the quality of
goods produced could deteriorate, and the demand for this collateral may
diminish. Additionally, the borrower may be utilizing the collateral to
continue operations without replacement during periods of financial
difficulty, thereby diminishing the collateral value or the amount of
collateral on hand. A prudent lender should take action as quickly as
possible to gain control of this type of collateral.
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(3) Once the lender has the inventory in its possession, arrangements should
be made to secure the collateral and tag it for identification purposes. A
reasonably prudent lender understands that adequate insurance coverage is
necessary on the inventory collateral.
(c) Machinery, Equipment and Parts
(1) Machinery, equipment and parts take a good deal of effort and time to
liquidate. Much of this type of collateral is of a specialized nature that
may make locating an interested party difficult. Also, if the collateral is
of a specialized nature, the demand and value of such collateral is greatly
diminished. In many instances, trade associations can be a resource to
identify potential machinery and equipment buyers.
(2) A prudent lender, upon gaining control of the collateral, should take
steps to preserve and account for all such collateral. Preservation and
control would include such items as:
(i) A listing of all machinery and equipment.
(ii) Storing and tagging of all collateral.
(iii) Moving exposed equipment under shelter.
(iv) Protecting the collateral from theft or damage.
(v) Protective maintenance such as greasing, oiling, etc.
(vi) Adequate insurance coverage.
(3) If there is any question of ownership when the lender is listing the
collateral, a prudent lender would indicate the problem on the listing. The
completed list of collateral made by the lender and submitted to the Agency
should be compared to the list of collateral taken at loan closing to
determine whether all the collateral has been accounted for and under the
control of the lender. The lender is responsible for accounting for the
collateral.
(d) Rolling Stock
(1) Rolling stock type of collateral consists of automobiles, trucks,
tractors, operating equipment, etc. Vehicles and trailers, if used on State
highways, must be titled in the appropriate State and a lien placed against
each vehicle in order to perfect a valid lien on the respective collateral.
This type of collateral, provided it is in good condition, is normally in
demand in any liquidation. The collateral is easy to move and secure, and
value is easily determined as various publications are available for this
purpose.
(2) The lender should act quickly in any liquidation to gain physical
control of rolling stock as it can easily disappear from the borrower's place
of business and can be difficult to locate.
(3) Adequate legal title cannot be transferred to another party on rolling
stock until the lien position on the respective vehicle has been released by
the secured party. Deciding whether a valid lien was perfected may be more
difficult if the rolling stock is not titled. If there is any doubt, the
National Office OGC should be contacted.
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(e) Real Estate
(1) Real estate is normally the most difficult to liquidate. It usually
takes longer to sell and is expensive to hold until liquidated. Prospective
buyers of the property in question are often limited, and arriving at a fair
sale price is difficult in most cases. The lender must obtain an independent
appraisal report on all collateral securing the loan that reflects the
current market value and potential liquidation value. The appraisal reports
are very important and are utilized to determine the current market and
liquidation values, the appropriate liquidation action, and if necessary, to
determine a proper protective bid amount for a public auction sale.
(2) There may be reluctance on the part of lenders to make loans secured by
industrial property because the specialized use limitations make it poor
collateral for a loan. When the borrower is not successful in its operations
and the collateral must be foreclosed, there is usually a limited list of
prospective purchasers willing to venture into business in a rural area.
Consequently, limited prospective purchasers, specialized collateral, and the
fact that the collateral is located in a rural area make it difficult to
sell.
XIII. Appraisal Reports
The appraisal is made for the benefit of the lender and the Agency and
should not be discussed with any other individuals. A prudent lender should
treat the appraisal as confidential. The Agency official must always be the
final judge of the value of the collateral based on the known facts. If the
Agency official disagrees with the appraisal, the reason for disagreement
must be fully documented. In a situation such as this, the National Office
should be consulted for the necessary action to take. In some cases more
than one appraisal may be necessary, such as cases with specialized machinery
and equipment. An appraisal report by a qualified independent appraiser in
accordance with § 4279.144 is required on all collateral securing loans when
the value of the collateral is more than $250,000.
(a) An acceptable appraisal should include:
(1) The appraiser's transmittal letter, which should state:
(i) The collateral being appraised and its location.
(ii) Explanation and description of condition (excellent, good,
satisfactory, etc.) including photographs, if possible.
(iii) A definition of the current market and liquidation values.
(iv) Date the appraisal was completed.
(v) Different approaches used in determining the value of the collateral.
In appraising machinery and equipment, very seldom is the income approach
used, whereas in appraising real estate, all three approaches are utilized;
i.e., cost, income and market.
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(vi) Methods used to determine the value of the collateral should be
defined.
(vii) Purpose of the appraisal. In liquidation cases, it is to establish
market and liquidation values.
(2) Certification from the appraiser that he/she:
(i) Has no interest in the property.
(ii) Personally inspected the property.
(iii) The report is accurate and correct to the best of his/her knowledge.
(iv) Appraisal was made in accordance with the standard of practices and
within the code of ethics of the various appraiser's organizations.
(3) Qualifications of the appraiser:
(i) Background.
(ii) Experience.
(iii) Names of companies that appraisals have been made for.
(iv) Education.
(v) Certificates, licenses, etc.
(b) It is important to obtain a value on each piece of collateral as it may
be decided to sell each piece separately rather than as a bulk sale
arrangement.
(c) In addition to the aforementioned information that would normally be in
a machinery and equipment liquidation appraisal, a real estate appraisal
should contain the following information:
(1) Income approach to the real estate.
(2) Comparables of property similar to the property being appraised. Make
sure comparables used are local and not out of the trading area.
(3) Values reflected in the cost, income and market approach.
XIV. Environmental Requirements in Liquidation
This guidance explains how to evaluate the economic impacts posed by
contamination by hazardous substances or petroleum products when determining
the liquidation value of real property.
The purpose of an appraisal report is to permit the lender and the
Agency to determine the appropriate liquidation actions. The cost of the
appraisal report will be shared equally with the lender.
In order to formulate a liquidation plan that maximizes recovery, the
collateral must be evaluated for the presence of contamination or the release
of hazardous substances or petroleum products that may adversely impact the
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market value of the collateral. An appraisal that does not consider this
aspect is incomplete and possibly misleading. Because these environmental
evaluations are performed in conjunction with the appraisal process, the cost
of these evaluations will also be shared equally between the Agency and the
lender.
An evaluation of the environmental condition of collateral is made by
conducting environmental due diligence in conjunction with the appraisal.
Environmental due diligence, in the context of a real estate transaction, is
defined as the process of evaluating real estate for the presence of
contamination from release of hazardous substances or petroleum products, and
determining the effect, if any, the contamination has on the regulatory
status or security value of the property. If contamination is present, the
cost of environmental restoration activities can be estimated and used to
adjust the market value of the collateral. The process of environmental due
diligence is designed to reduce the uncertainty regarding the environmental
condition of collateral and meet the “appropriate inquiry” and “due care”
provisions in the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. 9601, et seq.
The Agency considers the use of the (1) initial investigation using the
Transaction Screen Questionnaire (TSQ), and (2) professional evaluation by a
Phase I Environmental Site Assessment (ESA) to be the acceptable way of
conducting environmental due diligence. The TSQ and ESA standards are
published by the American Society of Testing and Materials (ASTM E-1528 and
E-1527 respectively) as an adequate format for performing due diligence. It
is not necessary to complete both steps in performing due diligence if (1)
the TSQ concludes an ESA is unnecessary, or (2) an ESA is completed without
using a TSQ. It is necessary only to complete the level of review required
to ascertain and document economic risks posed by contamination.
The Agency considers ASTM standards to be an effective way to determine
and document the environmental conditions of collateral and reduce the
potential effect that an adverse environmental condition will pose to the
market value of the property, particularly at the time of liquidation. The
ASTM two-step due diligence process is further explained as follows:
The TSQ is the initial level of inquiry that evaluates the environmental
condition of collateral and concludes whether additional evaluation is
necessary. The TSQ is a series of questions that determine present or past
land uses or activities that have the potential for adversely impacting the
environmental conditions and market value of collateral. If the results of
the TSQ are inconclusive, a Phase I Environmental Site Assessment is needed.
If contamination or hazardous materials are obvious during site visit, the
TSQ may be eliminated and a Phase I ESA conducted.
The next level of review, a Phase I ESA, may be necessary to clarify the
issues raised by the TSQ. A Phase I ESA is a detailed investigation and
evaluation of a property’s environmental condition and involves a review of
all pertinent records, a site reconnaissance of the property, interviews with
current and past owners or operators of the property, and the preparation of
a narrative report communicating the findings and conclusions about the
environmental condition of the property. The Phase I ESA may indicate a need
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for further detailed investigation, in the form of a Phase II ESA, to
determine the extent of contamination, remediation measures, and associated
costs. The Agency and the lender, if further investigation is warranted, may
share the cost of these additional investigations. Phase I ESAs are
performed by environmental professionals. Such professionals must be trained
in the fields of environmental science and engineering and have the
experience necessary to perform the ESA, in accordance with the ASTM
standards. The environmental professional must develop conclusions regarding
the environmental status of a site and, if necessary, develop remedial
options and estimate associated costs. This information is then shared with
the appraiser so that a more accurate determination of market value can be
made. Remediation plans proposed in ESAs need to be cleared with State or
local agencies having jurisdiction over site remediation activities.
Lenders should contact the Program Director for further assistance in
incorporating environmental due diligence into their liquidation plans. The
Program Director will contact the State Environmental Coordinator for advice
as needed.
XV. Liquidation Expenses
The preparation of the liquidation plan and the liquidation of the loan
is the lender's responsibility. When submitting a liquidation plan, the
lender must include as part of the plan an estimate of the liquidation
expenses that are expected to be incurred during the course of liquidation.
If the expenses to be incurred are not in-house and are reasonable and
customary when compared to the anticipated recovery value of the collateral
property to be sold, the expenses can be approved by the Agency when
approving the liquidation plan. The lender should be reminded that
liquidation expenses can only be reimbursed to the lender by deduction from
the gross proceeds from the sale of the collateral.
If after submission of the liquidation plan, circumstances arise that
may dictate a revision of liquidation costs, the lender must obtain the
Agency's written concurrence prior to proceeding with any proposed changes.
In-house expenses of the lender, such as routine travel costs, accounting
expenses or employee's time in handling the liquidation, will not be allowed.
Attorney/legal fees are approved liquidation expenses provided the fees
are reasonable and cover legal issues pertaining to the liquidation that
could not be properly handled by the lender and its in-house counsel or
retainer. This should not be construed to mean that when liquidation occurs,
the lender engages the services of an attorney to handle the liquidation of
the loan. Attorney/legal fees incurred by the lender while the borrower is
in a Chapter 11 reorganization would not be deducted from collateral proceeds
as liquidation expenses. A reorganization is not a liquidation. Regulations
require the lender to protect the collateral in bankruptcy, receivership and
insolvency. Expenses incurred by the lender in these situations are not
recoverable by the lender under the loan guarantee.
If a trustee is appointed by the court to sell the collateral under a
Chapter 11 liquidation or Chapter 7, the trustee, rather than the lender in
this instance, is responsible for liquidating the collateral. Most expenses
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will be the trustee's expenses and will be approved by the court. Normally,
even though the loan will then be in liquidation, there will be no
liquidation expenses of the lender, except legal fees associated with
protecting the lenders rights and collateral within the bankruptcy process.
If you have questions, contact your Regional OGC or the National Office
Program Processing Division.
Pursuit of personal/corporate guarantors (who are not the borrower on
the loan) while the borrower is in Chapter 11 reorganization or a Chapter 7
proceeding is a matter outside the bankruptcy. The automatic stay imposed by
the Bankruptcy Code does not apply to proceedings against persons who are not
in the bankruptcy proceedings. Reasonable expenses incurred in pursuit of
these guarantors (even though the borrower is in bankruptcy) would be
allowable provided there was sufficient collateral sold or collections made
on the guarantee that would at a minimum cover the expenses.
The lender must provide a list of all liquidation expenses before
payment of a final loss or closing out of the loan guarantee.
XVI. Protective Advances
Protective advances generally cannot be authorized unless the borrower
is in liquidation. Any advances must constitute an indebtedness of the
borrower to the lender and be secured by the security instrument(s). The
lender must obtain written Agency approval for any protective advance that
will singularly or cumulatively amount to more than $200,000 or 10% of the
guaranteed loan, whichever is less.
Protective advances include, but are not limited to, advances made for
taxes, annual assessments, ground rent, hazard or flood insurance premiums
affecting the collateral, and other expenses necessary to preserve or protect
the security.
Protective advances are not generally authorized while the borrower is
in a Chapter 11 reorganization since a reorganization is not a liquidation.
The court can order protection of the collateral while the borrower is under
Chapter 11 protection, and the lender, whose collateral is subject to being
used by the trustee in bankruptcy, should immediately seek adequate
protection of the collateral.
When classifying liquidation expenses and protective advances, keep in
mind that liquidation expenses do not accrue interest, whereas protective
advance amounts do accrue interest at the promissory note rate. Therefore,
it is to the Agency's advantage that whenever possible, any amount authorized
by the Agency during liquidation be classified as liquidation expense. For
example, hazard insurance premiums may be a liquidation expense rather than a
protective advance if hazard insurance is necessary while the loan is in
liquidation. Payment of the hazard insurance premium could also be a
protective advance if it is necessary to protect the security of the
guaranteed loan. Thus, an item such as payment of hazard insurance, in
certain circumstances, could be treated two different ways if it occurred
during liquidation.
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XVII. Different Options of Liquidation
As a general rule, any liquidation sale of the collateral property must
be to an independent purchaser not connected in any way with the borrower or
the lender except for financing of the transaction. Only in rare
circumstances would such a sale to the borrower, its principals, or
relatives, be approved by the Agency. Be careful and assured that any sale
of the collateral is independent of the borrower as well as the lender except
for financing of the transaction and include this as one of the conditions of
sale.
Never be too anxious to settle a bad loan just to avoid a problem.
Remember, Agency regulations state that the lender must maximize the return
on the collateral. It is the Agency official’s responsibility to see that
the lender fulfills this obligation.
The options open to the lender in liquidating a loan are:
(a) Sale of the business as an on-going operation, provided this method can
be legally utilized. In any sale of this type, the corporate/personal
guarantor(s) liability on the loan should be adequately addressed and
resolved, especially if the anticipated sale may be for less than the full
loan balance.
Normally, this sale option comes into being before the lender actually places
the borrower in liquidation; however, it can be an option to sell the
collateral after acceleration of the loan balance. This option is similar to
a private sale of the collateral by the borrower except all parties are
interested in trying to locate a purchaser. In order to utilize this option,
a cooperative borrower who can legally convey fee simple title to the
collateral is essential. This type of sale normally brings the maximum
dollars for the collateral and is normally advantageous for both the borrower
and the purchaser (buyer). The advantages and disadvantages to such a sale
include:
(1) Advantages
(A) Maximizes collections on the loan.
(B) Buyer obtains an operating entity; the business is in place with no
moving expenses.
(C) Several parties, including the borrower, are interested in locating
prospects.
(D) No liquidation costs.
(E) Reduced legal expenses.
(F) No piecemeal sale of collateral is necessary.
(2) Disadvantages
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(A) The lender or Agency may be called upon to finance the purchase over a
period of years, possibly extending terms and changing other terms in order
to obtain a purchaser. Such a purchase may require a new guaranteed loan.
(B) In some cases, the borrower wishes to remain discreet in locating
prospects for the business. Interested purchasers may never receive notice
that the business is for sale.
(C) Borrower may attempt to continue to extract a living from the operations
and discourage any prospects.
(D) Borrower may want a higher sales price than is realistic for the
collateral.
(E) Borrower may not put "best foot forward" in preparing the business for
sale.
(F) Once a purchaser is located and the sale ready for liquidation, borrower
could withdraw from the transaction.
(3) In order to maximize collections on the loan, the lender cannot always
make a cash settlement when selling an on-going business. However, a cash
settlement has some real advantages. A cash settlement is a sure transaction
and one in which a loan can be cleared without any further obligation by the
Agency.
While a cash settlement offer is always preferred to a long-term transaction,
it is usually less than the sales price that could be obtained on a financing
arrangement. Consider the additional incidental expenses of holding on to
the property for a longer period of time compared to the immediate return of
a cash sale.
If an extended financing arrangement is considered, be sure the collateral is
adequate to support the loan. Strive to sufficiently support the loan
balance with collateral and additional personal/corporate guarantees and,
when possible, secure the guarantee with additional collateral.
When considering long-term financing, it may be possible to build flexible
conditions into any proposal such as a net earnings recapture clause and
certain sales ratios whereby if the transferee (purchaser) performs better
than expected, it is possible to capture a greater return on the sale. This
technique has been used in several cases, and the purchaser is usually
agreeable to such arrangements.
Documentation is very important. Make sure any offer made on the property is
documented in the files along with the reasons for considering or rejecting
the offer. This type of documentation serves to justify an offer that is
finally accepted.
Most important, keep in mind that a saleable company is necessary to attract
potential purchasers. If the borrower's operations have been such that the
production has been of poor quality, the borrower has lost its sales base
(customers) or the plant and equipment have been abused, the chances of
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selling a company such as this are poor. Face reality in situations such as
this and encourage the lender to move as quickly as possible to liquidate the
collateral.
(b) Transfer and assumption of the borrower's operations.
Transfer and assumption of the borrower's operations can be accomplished
before or after the loan goes into liquidation. A transfer and assumption
has certain advantages in that it may be the best means to keep an active
business operating; keeps the Agency guarantee intact (a good selling point
with the lender), and provides an opportunity to strengthen the loan through
additional collateral and/or additional guarantees.
If the lender has purchased the collateral property through a foreclosure
public auction sale or the borrower has conveyed title to the lender, no
transfer and assumption is permitted. Any other transactions that affect the
promissory note may also rule out transfer and assumption of the debt. These
situations should be referred to the Regional OGC.
Follow the regulations in any transfer and assumption case. RD Instruction
4287-B, § 4287.134, states the regulatory requirements of a transfer and
assumption. The advantages and disadvantages to such a transfer include:
(1) Advantages
(A) A transfer of the loan can be made without liquidating the collateral;
thus eliminating or reducing liquidation costs.
(B) The purchaser obtains an operating entity whose business is in place
with no moving expenses.
(B) Opportunity to transfer a potential or existing problem loan and keep
existing collateral and guarantor(s).
(C) Opportunity to strengthen the loan through additional collateral and/or
additional guarantor(s) while keeping existing collateral and guarantor(s).
(D) May maximize collections on a loan in liquidation.
(2) Disadvantages
(A) Transferee may request more liberal terms. If different terms are
requested, there may be regulatory problems with the terms. If the guarantee
has been sold to a holder, this may also create problems if different terms
are being considered. The Regional OGC and National Office can furnish
advice on specific transactions.
(B) No final loss or protective advance amount, if applicable, can be paid
to the lender until the transferee fulfills its obligations under the
transfer.
(C) Without proper analysis, the Agency may be blindly trading one problem
for another.
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(D) Side transactions could take place between the transferee and the
borrower without the lender's knowledge.
(E) An ownership change may have an impact on the customer base.
Any transfer and assumption case should be fully understood and
evaluated before concurring with the lender. The Agency official should
treat any transfer and assumption as if the Agency was evaluating a new loan,
obtaining proper documentation on the new management team, financial reports,
projections, pro formas (if applicable) and assurances of adequate
collateral.
(c) Leases and purchase money contracts.
This option is only available after the lender has purchased the collateral
property through a foreclosure public auction sale or the borrower has
conveyed title to the lender. The lender may wish to have the collateral
begin generating income to be applied to the guaranteed debt without
transferring title, though generally, leasing the collateral or utilizing a
purchase money contract is not in the best interest of the Agency. There may
be times when such an arrangement is advantageous and if such a situation
arises, the guaranteed lender must make a written request for continuation of
the Agency guarantee.
The only real advantage of a lease or purchase money contract is the
availability of a servicing tool for an improved recovery on the potential
loan loss when faced with a low cash sale probability.
When considering such a proposal, make the terms and conditions fit the
Agency's interests. Fully understand the proposal before committing the
Agency to any such arrangement. Otherwise, the Agency could be agreeing to
long term contracts that may cause additional problems. The object is to
liquidate collateral as soon as practical, not to create long standing
relationships.
Before concurring in any lease arrangement or a purchase money contract,
involve the Regional OGC to review all legal documents and comply with the
Regional OGC's legal advice on these issues.
(d) Private sale of the collateral by the borrower.
This method of liquidation is similar to a sale of the business as an on-
going concern except, in this case, the lender is directly guiding the
borrower in the sale of the collateral.
This option permits the borrower to dispose of the collateral and liquidate
the loan under the lender's guidance. Liquidation by the borrower would be
advantageous when certain collateral is involved in which the borrower's
expertise and knowledge is needed to obtain the best price for the
collateral. For example, if inventory was taken as collateral, the borrower
may be able to utilize its customer base to move the inventory; thus,
obtaining top dollar for this type of collateral.
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Generally liquidation by the borrower is not advantageous to the Agency as
liquidation could be prolonged due to the borrower wanting more than the
collateral is worth. Also, in a liquidation of this type, the borrower must
be of unquestionable integrity.
The advantages and disadvantages of this type of liquidation
include:
(1) Advantages
(A) No liquidation costs.
(B) Saves legal expenses.
(C) Possibility of realizing greater proceeds on collateral sales,
especially accounts receivable, inventory, and assets of some value that
needs the borrower's knowledge to maximize collections.
(2) Disadvantages
(A) Title to the collateral remains with the borrower.
(B) Borrower may attempt to extract a living from the operations, extending
the time of liquidation.
(C) Borrower may attempt to obtain a higher sale price than is reasonable
for the collateral to create funds over and above the loan balance for
personal use.
(D) Lender does not have control of the liquidation.
(E) Borrower is first to touch collateral sale proceeds.
(F) Any delays by the borrower in paying off the loan balance increases the
Agency's obligations due to interest accruals.
(G) Borrower may sell only the good saleable collateral, leaving the less
desirable collateral that eventually may have to be sold by the lender.
(e) Voluntary conveyance of the collateral.
This option permits the borrower to deed title of the collateral immediately
to the lender and is voluntary to both parties (lender and borrower). If
this action is considered, the lender must be certain that the borrower can
convey clear title.
The lender should consider such action when there would be long delays to
obtain clear title to the collateral property. It is always desirable to cut
delays in the liquidation process whenever possible; however, the proposal
should be fully understood before acceptance by the Agency.
Most voluntary conveyances of clear title mean a cancellation of the full
debt. This action would automatically cancel any guarantor's liability on
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the debt. Be careful when handling such an arrangement and involve the
Regional OGC before acceptance of such a plan. Careful documentation of the
file demonstrating the commercial reasonableness of the decision is
necessary. If the loan is subject to DCIA, the National Office must approve
the release of liability to the borrower and guarantors.
A voluntary conveyance of the collateral can be accomplished at a set amount
of less than the full amount of the debt. To accomplish this objective, an
arrangement must be made whereby the parties agree to a fixed amount for
which the collateral property would be conveyed to the lender.
When looking to the guarantor(s) for collection on the loan deficiency
balance, the guarantor(s) and the lender with Agency's consent should agree
to a value to be credited on the promissory note, and the lender should
attempt to have the guarantor(s) execute a continued liability agreement to
the effect that the guarantor(s) remain liable for the loan balance before
the voluntary conveyance. Again, the Regional OGC should provide guidance
before the Agency accepts this type of conveyance.
The advantages and disadvantages to such an option include:
(1) Advantages
(A) Lowers liquidation costs.
(B) Saves legal expenses.
(C) Lender has control of liquidation.
(D) Speeds up liquidation.
(E) Eliminates any redemption rights the borrower holds.
(2) Disadvantages
(A) Private sale could involve a conflict of interest.
(B) Possibility of losing legal rights to collect any loan deficiency
amounts from the personal/corporate guarantor(s) unless handled properly.
Usually the personal guarantor will also be a principal of the business and
the lender and the Agency will have to agree not to pursue the guarantor in
order to get them to agree to a voluntary conveyance.
(C) Lose right to any potential transfer and assumption of the loan.
(D) Lender may lose incentive to sell the collateral if holding only the
unguaranteed portion of the loan or if holding the full loan and the lender
has a good interest rate on the loan.
(E) DCIA considerations and lack of State approval authority to release
liability in DCIA cases.
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Any time a voluntary conveyance of title takes place or the lender acquires
title to any real property through other means, the title to the property
should be immediately recorded at the proper locations.
(f) Foreclosure by public auction sale.
A public auction foreclosure is necessary when the lender has an
uncooperative borrower who will not convey title to the collateral and/or
when there are liens against the collateral property that must be cleared in
order to obtain fee simple title. The lender should be familiar with state
and local foreclosure laws and the timing requirements to facilitate such a
sale.
The advantages and disadvantages to such a sale include:
(1) Advantages
(A) Clears existing liens.
(B) Ascertains the demand for the collateral and value.
(C) Protects the lender's legal rights to proceed against guarantor(s), if
necessary, for any deficiency balance.
(D) Easier to prevent a defense by the guarantor(s) on the deficiency
balance amount when proceeding legally against guarantor(s).
(2) Disadvantages
(A) Increases liquidation costs, including legal expenses.
(B) Protective advances may be necessary.
(C) Loss of option for any transfer and assumption of the loan.
(D) Lender may have to bid on the collateral at a price up to a negotiated
protective bid price and arrange a private sale.
(E) Auction sale possibly would not realize maximum value of the collateral
as opposed to other methods of collateral disposition.
(F) Normally requires quick and immediate decisions on sale.
(G) The foreclosure process can be an extremely slow, tedious process in
states where real estate liens are perfected with mortgages.
(H) Sheriff sales are generally not well attended and may not offer the most
reasonable bidding terms. Some jurisdictions will allow a private auction to
take the place of the Sheriff sale, and this should be encouraged.
XVIII. Protective Bids
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In establishing a protective bid amount, the lender should work closely
with the Agency in arriving at a proper protective bid amount. There must be
a sound and current appraisal available that reflects both the fair market
value and the potential liquidation value of the collateral. Protective bid
amounts should be reasonable and equitable for an amount when added to the
various expenses of sale and other considerations and should not exceed the
liquidation appraisal values. In order to fully understand these values and
their purpose, a definition of each is given below:
(A) Fair market value is the price a willing buyer would be justified in
paying and a willing seller would be warranted in accepting if each is (1)
well informed or well advised; (2) motivated by reactions of typical users;
(3) free from undue stimulus; (4) financially capable of ownership and/or
use; and (5) allowed a reasonable time period in which to test the market.
(B) Forced sale liquidation values (public auction sales) is defined as a
price that the collateral will bring if exposed for immediate sale on the
open market, both buyers and sellers having knowledge of the uses and
purposes to which the collateral is capable of being used, the seller being
compelled to sell and the buyer being willing but not compelled to buy.
Before the protective bid amount is established, the Agency official
must agree with the appraised values. If the Agency official or the lender
disagrees with the amounts in the appraisal, those concerns should be noted
and the amounts adjusted accordingly with concurrence of both parties. The
Agency official must document the justification for the change in the values.
The protective bid amount is made by the lender (with prior Agency
concurrence) at a foreclosure sale to protect the lender's and Agency's
interests. In normal situations, the lender should not be interested in
purchasing the collateral at the sale but merely enters a protective bid
amount, if necessary, to protect the collateral and to ensure that a
reasonable selling price has been established. The reason for the protective
bid is to ensure that the collateral is not sold at unrealistically low
values to other bidders and press other interested parties into making higher
bids for the collateral at the foreclosure sale.
The protective bid should be high enough to protect the lender's and
Agency's interests; however, the protective bid amount should be reasonable
and equitable. Otherwise, the lender could run into legal problems should
the protective bid amount be the successful bid price. For example, the
lender could have legal problems when attempting to establish a deficiency
judgment.
If the collateral appraised liquidation value is in excess of the amount
owed on the loan plus expenses incurred, the protective bid amount should not
exceed the aggregate of these amounts. The lender should never bid more than
is owed on the loan.
Should the collateral appraised liquidation value reflect that sales
proceeds would cover only the cost of the sale and/or pay off senior lien
positions in front of the lien covering the guaranteed loan balance, normally
a protective bid amount would not be established.
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Special considerations to be taken into account in establishing the
protective bid amount are:
(1) Expenses of resale (real estate taxes, commissions, recording costs,
etc.).
(2) Continuing interest accrual on the loan.
(3) Length of time necessary for the resale of the collateral.
(4) Collateral deterioration and maintenance plus additional protective
costs.
(5) Seasonability of collateral and weatherization.
(6) Prior liens and taxes.
(7) Utilities.
(8) Storage costs.
(9) Moving expenses.
A hypothetical example of a protective bid amount is shown below:
The appraised liquidation value of the collateral to be sold is $1,000,000
and total debt owed on the loan including interest is $1,600,000. It is
estimated that the collateral is in good condition and could be sold within a
6 month time frame if the lender bid the property in at the foreclosure sale.
One guard would be needed to protect the collateral until sold. Some utility
costs would be involved. There are no prior liens or taxes due, and it is
not necessary to consider the seasonability of the collateral. The
protective bid amount would be $760,000 as shown below:
Consideration given for:
a. 6% commission at resale = $53,000
b. Interest accrual for 12 mos. @ 8% = $128,000
c. Guard service for 12 mos. @ $500 weekly = $26,000
d. Utility costs for 12 mos. = $8,000
e. Miscellaneous costs (Advertising, Attorney, fees, etc.) = $25,000
APPRAISED LIQUIDATION VALUE of $1,000,000
LESS: Cost Considerations of $240,000
EQUALS: Protective Bid Amount of $760,000
If the highest bid was $800,000 placed at the liquidation sale, a prudent
lender should permit the respective bidder to purchase the property.
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The lender who decides upon a foreclosure public auction sale of the
collateral must know and fully understand the legal aspects of any superior
lien(s) on the collateral. The lender is responsible for payment in full on
such liens when selling the collateral unless the property is sold subject to
such lien(s). If there are any junior liens, the proceeds will be available
to pay such liens only to the extent of funds remaining after paying expenses
and prior liens.
A final payoff amount in writing as of the day of the sale should be
obtained from any superior lien holder. The junior lien holder (lender), to
protect its position, could purchase the mortgage for the unpaid balance and
have the respective lender assign all of its rights and interests in the
mortgage on a non recourse basis. The promissory note should not be marked
paid as this would destroy the superior lien position.
The lender should be bidding on the collateral along with all other
bidders up to the maximum of the protective bid amount. If the protective
bid amount entered by the lender is the highest bid entered, the lender would
purchase the collateral. If other bids entered are higher than the lender's
protective bid amounts, the person entering the highest bid would purchase
the property subject to a confirmation period, if a confirmation period was
established in the terms of the sale. A confirmation period is normally a
good practice as it gives the lender the opportunity to determine all factors
and confer with the Agency on the sale.
If the lender acquired the collateral and it was agreed by the lender
and the Agency in the liquidation plan that this practice would be acceptable
to all parties, the Agency guarantee would continue in effect and any loss
occasioned by accruing interest will be covered to the extent of the
guarantee to the date of final settlement provided the lender proceeds
expeditiously with the liquidation plan approved by Agency. For loans closed
on or after August 2, 2016, in the event of a loss, the guarantee will not
cover note interest to the lender accruing after 90 days from the most recent
delinquency effective date.
XIX. Method of Disposition of Collateral
If the lender acquires title to the collateral through a voluntary basis
or foreclosure means, the Agency final loss claim is not paid until final
disposition. The lender should proceed as quickly as possible to develop a
plan to see that the collateral is fully protected and a process to dispose
of the collateral is commenced.
Any collateral accepted by the lender on a voluntary basis or through
foreclosure must be titled in only the lender's name. The Agency should
never be named as owner or co-owner of the collateral as the Agency's
position is only that of a guarantor.
The first step the lender should take after acquiring the collateral is
to see that the collateral is protected from deterioration (weather,
vandalism, etc.). Hazard insurance in an amount necessary to cover the fair
market value of the collateral should be maintained by the lender.
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The lender should prepare a plan on the best method of sale, keeping in
mind any prospective purchasers, and send the plan to the Agency for its
review and comments. It may be that the lender addressed such a plan of
action when submitting the liquidation plan. If this is the case and the
method of sale as addressed in the liquidation plan is still feasible, no
further action on the lender's part is necessary.
If some modification to the plan is necessary, the lender and the Agency
official should discuss the modification(s) and work together to attempt to
assure that the modified liquidation plan is in the best interests of the
Agency and the lender. The Agency should approve the plan in writing if it
concurs with the lender. Otherwise, address the objections to the plan and
put the lender on notice of your disapproval.
Methods and options open to the lender in considering a plan of action
to sell the collateral property include:
(1) Direct sale by the lender.
Some questions for consideration by the lender are: (A) should the collateral
be sold piecemeal or in bulk?; (B) is the collateral stored at a convenient
and safe area?; (C) will the collateral need to be maintained during the
lender's possession?; and (D) should the collateral be improved and "window
dressed" in order to obtain a greater value for the collateral? These
questions should not be the only ones to consider but are listed to provide
some insight in the areas that must be considered when the lender is
preparing to sell the collateral.
The Agency should be satisfied that the lender's plan of sale is realistic,
sound, and maximizes the return on the collateral.
(2) Commercial Broker.
In dealing with a commercial broker, the lender should engage an experienced
salesman who is knowledgeable about the product or industry for sale. The
contract should be on a short-term basis of preferably no more than 120 days
and can always be renewed if it is considered worthwhile to do so.
The commercial broker engaged should have knowledge of the product the lender
is selling, the value of such collateral, and prospective purchasers
throughout the country. Some commercial brokers have computer listings of
prospects that may be interested in a particular type of property. The
broker would list the property, mail notices to possible buyers, and
advertise in the respective trade journals and various publications.
Most important is the engaging of an experienced and knowledgeable broker.
If the broker is inexperienced or unsure of himself/herself, he/she is less
likely to aggressively seek a prospective purchaser. If the broker finds a
prospect, the prospect being experienced and knowledgeable in the type of
property for sale would have a distinct advantage over the inexperienced
broker.
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If the property for sale is a general type of commercial building that could
be beneficial to several different types of industries, the broker engaged
does not need the expertise necessary as in selling larger or more complex
property. The lender, in those cases, could engage a less experienced
commercial broker with multiple listing arrangements.
The lender may want to consider continuing its efforts to locate a buyer for
the property even though the collateral is in the broker's hands. If
possible, when engaging a commercial broker, a prudent lender should have an
agreement with the broker to the effect that should the lender locate a
purchaser for the property, no sales commission would be paid to the broker.
If the lender has engaged the proper commercial broker and the commercial
broker cannot locate any serious prospects within a reasonable period of
time, the only other approach is a public auction of the property if the
collateral has value.
(3) Public auction sale.
This option could be selected first if it is obvious that it will maximize
recovery; however, normally the net proceeds from the sale of collateral by
means of a public auction will not be as great as the recovery realized by
the other methods of sale previously mentioned; therefore, after exhausting
all other options to sell the collateral and if the lender has been unable to
successfully complete a sale, a public auction sale should be strongly
considered. The sale should be carefully planned and well organized.
Consideration should be given to engaging a professional auctioneer
experienced in selling the type of property that will be listed. The fee for
a professional auctioneer may be high when compared to the cost of engaging a
broker to sell the property or having the lender conduct the sale. However,
experience has shown that in engaging a professional auctioneer, the loan
official obtains expert services and advice usually resulting in a higher
return on the collateral sold.
A professional auctioneer makes an evaluation of the property for sale,
determines the market area, and the prospects most likely to be interested in
the collateral. Additionally, the auctioneer has knowledge of advertising
methods and knows which advertising medium will give the maximum exposure for
the dollars spent.
A real estate auction under the guidance of a professional auctioneer
normally attracts more potential buyers because of proper advertising and,
therefore, usually produces a better price for the property. A professional
auctioneer may recover more than its fees charged netting to the lender on
the guaranteed loan a larger return than would have been obtained using other
methods. In addition, by engaging the professional auctioneer, the lender is
more likely to sell the collateral.
The lender, in considering a public auction, should determine a minimum sale
price for the collateral and should carry prior Agency concurrence. The
minimum amount acceptable can be included in the advertisements or the
auctioneer can announce the minimum sale price on the day of the sale. If
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the lender does not wish to proceed in this manner, the public auction could
be held with the lender retaining the approval rights of any sale. Normally,
the lender retains a 5-7 day confirmation period on any sale to review the
highest bid and to consult with the Agency on whether to accept the bid.
If the collateral being auctioned consisted of real property and machinery
and equipment, consideration should be given to holding the public auction
sale in different stages; first to sell the real property; secondly, to sell
the machinery; thirdly, to sell in a bulk sale. The lender and auctioneer
should determine which arrangement brings the greatest return, and, if the
price meets the lender's and Agency’s approval, the property should be sold.
When deciding whether to accept the highest bid offer, keep in mind that a
professional auctioneer has covered the market for the collateral to be sold
and informed all interested prospects of the sale. In a case such as this,
if it can be said that the public auction was the best and most effective
method of determining the true market value of the collateral, the highest
bid should probably be accepted and the file documented accordingly. Before
turning down the offer, consider the expenses that may continue on the
property while being held in the lender's possession along with the length of
time the lender may have to hold on to the property before another interested
party can be found.
(4) Abandonment of the collateral.
The primary purpose of collateral is to afford a net return on the loan funds
not repaid in cases of liquidation. However, there will be times when the
Agency will be faced with situations when converting the collateral to cash
would result in a loss.
Situations when this type of action could exist are:
(A) Senior lien claims held by other parties against the guaranteed loan
collateral and the senior lien claims are more than the collateral value.
(B) Collateral on the loan has deteriorated to the point where the net sale
value (after expenses) of the collateral would not produce any funds that
could be applied to the outstanding debt.
(C) Specialized collateral that has little or no value, or demand for the
collateral is minimal and will provide limited proceeds after taking into
consideration the expenses of the sale.
Any time there is a case when the conversion of collateral to cash can
reasonably be expected to result in a negative net recovery amount,
abandonment of the collateral should be strongly considered. However, the
lender should rarely find itself in this position. Abandonment of the
collateral is a judgment factor and before any decision is made to abandon
the collateral, make sure the facts are known and document both the facts and
the reasons for the decision in the file.
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When considering the action of abandoning the collateral, it must also be
determined what effect this would have on the pursuing of collection on the
guarantor(s) before proceeding.
Worksheet for Determining Business and Industry Guaranteed Loan Programs
Maximum Bid on Real Estate Property
_________________________
(Name of Borrower)
The holding period to be used is 365 days (12 months) or less if it can be
justified by the actual State average holding period. Any State right of
redemption should be considered.
1. LIQUIDATION VALUE OF PROPERTY $______________________________
Date of Appraisal __________________
The appraisal must be current (no more than 12 months) and must be in
accordance with RD Instruction 4279-B, section 4279.144.
2. INCOME
Holding
a. Annual Rent _____________ x Period ____________ = ______________
Holding
b. Annual Royalties ________ x Period ____________ = ______________
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c. Other Annual Holding
Income __________________ x Period ____________ = ______________
d. Annual% Holding
Land Appreciation _______ x Period ____________ = ______________
Holding
e. Other (describe) ________ x Period ____________ = ______________
TOTAL ADDITIONS = $________________
3. EXPENSES
a. Total Prior Lien Holder Indebtedness (P and I) = __________________
b. Other Acquisitions Costs (taxes presently owed, closing costs,
(survey costs, administrative costs, junior liens, etc.) List:
______________________ ______________________ = ______________________
c. Annual Taxes Holding
and Assessment ___________________ x Period = _____________________
d. Annual Holding
Insurance ________________________ x Period = _____________________
e. Annual Holding
Estimated Protective Advances_____ x Period = _____________________
f. Total Estimated Repairs to Secure and Resell = _____________________
g. Annual% Decrease Holding
In Land Value ____________________ x Period = _____________________
(if applicable)
h. Total Anticipated Expenses
(Auction, Commissions, Advertising, etc.) = _____________________
i. Total Interest Cost:
Liquidation Value Regular Holding
$ _______________ x OL Rate _______ x Period = ____________________
j. Hazardous Waste Clean-up Costs = ___________________________________
TOTAL DEDUCTIONS (ITEMS A THROUGH J) = ______________________
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4. BID WILL BE THE LESSER OF
a.________ +________ - =___________ +____________ =_________
Liquidation Total _________ Net Recovery Only if NRV _
Value Additions Total Value(NRV)If is positive NRV +
Deduction zero or add prior Prior
s negative, liens, unless Liens Bid
Do not bid is being sold
subject to
prior liens
Or, [Agency’s Guaranteed Debt + Prior Liens]
b. __________________ __________________ = ___________________
Unpaid Guaranteed Prior Liens Total
Loan Balance on
Secured Debt
Review by: _________________________ ____________________
Agency Official Date
Concurrence by: _________________________ ____________________
State Program Director Date
XX. Guarantors
The following considerations should be carefully reviewed before a
determination is made whether to release or settle the guarantor(s) liability
on any guaranteed loans:
(1) Potential income, including any inheritance prospects.
(2) The possibility that assets have been concealed or improperly
transferred by the guarantor(s).
(3) The availability of assets or income that may be realized.
(4) Age and health of the guarantor(s).
(5) Effect of other guarantor(s) on the loan. The lender may need consent
of other guarantor(s) on loan if one guarantor is released.
(6) Cash consideration or other collateral in exchange for the guarantee.
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Any compromise for release of a guarantor must be reasonable when
compared with what could be recovered if enforced collection procedures were
followed but may be impossible due to DCIA.
When releasing a guarantor from liability on a guaranteed loan, adequate
consideration must be received. This concept encompasses some new benefit to
the Agency either in the form of money, additional security, or some other
benefit to the goals and objectives of the Agency. When the question of
consideration arises in the context of Agency goals and objectives, the
National Office should be contacted. The National Office must approve such
releases if the loan and/or guarantor are subject to DCIA.
XXI. Compromise Settlement
This section pertains to those guaranteed loans not subject to DCIA;
otherwise, a compromise settlement must be part of the 60 day due process
under DCIA.
There are situations when compromise of the remaining debt may be in the
best interest of everyone concerned. A compromise settlement normally will
not take place until all the collateral has been sold and an identified
deficiency balance remains.
A compromise settlement would be considered when attempting to settle
with any guarantor(s) on the loan when the deficiency balance of the loan is
larger than the financial ability of the guarantor(s) to pay the remaining
loan debt.
Before consideration is given to compromising the debt, the lender
should have a current financial statement on any guarantor(s). The financial
statement(s) must reflect all assets, and the lender and the Agency should be
reasonably satisfied all assets are properly reflected. If the Agency
official cannot put full faith in the financial material received or wishes
additional documentation to support the financial condition of the
guarantor(s), a deposition could be taken from the guarantor(s). The lender
can request such action on any guarantee(s) even before compromising or
settling a claim against the guarantor(s).
The current personal financial statement(s) should be compared to the
financial statement(s) taken at loan closing to determine if all assets are
accounted for. The Agency expects a full disclosure of all assets before
considering any compromise settlement. After reviewing all assets and
determining values, a reasonable settlement amount should be set as to the
amount the lender and the Agency feel is fair and adequate under the
circumstances.
If the Agency can concur in an amount presented by the lender, the
lender can proceed to effect the compromise with the guarantor. The Agency
should not become involved with the guarantor in any settlement negotiations.
It is the lender's job to take all necessary steps to maximize recovery. The
Agency is a guarantor for the loan, not the servicer.
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Another instance when the Agency would consider a compromise settlement
is in a situation when the Agency may have a claim against the lender for
negligent origination or negligent servicing of the loan. However, before
considering compromising a settlement in such cases, review the case with the
Regional OGC to determine what the Agency's chances are of collecting the
debt in full from the lender through the legal process. If there is some
doubt that the case can be successfully collected through the legal process,
a compromise settlement could be the answer. If fraud or misrepresentation
is involved, the case must be sent to the Regional OGC so that the Regional
OGC can decide whether the case must be referred to the Department of
Justice.
Before considering a compromise settlement, all the facts must be known.
Ascertain what amount may be collected through the legal process and take
into consideration legal costs and time when arriving at a fair compromise
settlement.
XXI. Bankruptcies
In bankruptcies, there are two separate proceedings under the court's
protection; liquidation and reorganization. It is the lender's
responsibility to protect the guaranteed loan debt and all collateral
securing the loan in bankruptcy proceedings. The regulations set forth
certain responsibilities of the lender. These responsibilities include, but
are not limited to, the following:
(1) Filing proof of claim, where necessary, and all the necessary papers and
pleadings concerning the case.
(2) Attending and, where necessary, participating in meetings of the
creditors and all court proceedings.
(3) Seeking immediate adequate protection of the collateral. Adequate
protection of the collateral, depending on interpretation, may take several
forms. In a bankruptcy, the trustee is authorized to sell, lease or use the
collateral if the borrower's business is in operation. The only collateral
the trustee cannot utilize is cash collateral unless the secured creditor
grants permission or the court authorizes the use of such after giving a
proper hearing and notice.
(i) Cash collateral means cash, negotiable instruments, documents of title,
securities, deposit accounts, or other cash equivalents, such as accounts
receivable.
(ii) Adequate protection can be interpreted differently under Chapter 11
reorganization concerning machinery, equipment and real estate. The
bankruptcy trustee could dispose of certain collateral and grant to the
secured party a replacement lien on some other collateral that may or may not
have the same value. For example, the lender may hold a first lien on a good
saleable piece of real estate that could be replaced with a second or
possibly a third lien on another parcel of land that the lender may find
undesirable for adequate protection. There are no guarantees to the lender
when the borrower is in Chapter 11 reorganization that the collateral will be
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protected to the lender's satisfaction. The lender should be fully aware of
what is taking place with the collateral and resist any adverse changes that
may be made in the collateral securing the Agency guaranteed loan.
(4) Where appropriate, the lender should seek involuntary conversion of a
pending Chapter 11 case to a liquidating proceeding under Chapter 7 or under
Section 1123(b)(4) or seek dismissal of the proceedings. A Chapter 11 case
can be converted into a liquidating Chapter 11 or Chapter 7 upon the request
of the lender if the lender can show cause and it is in the best interest of
all creditors. Cause may be:
(i) Continuing losses and very little likelihood that the borrower can
successfully reorganize;
(ii) Borrower's failure to submit a plan to the court within the prescribed
time set by the court;
(iii) Unreasonable delays by the borrower detrimental to creditors;
(iv) Inability on the borrower's part to submit a sound reorganization plan;
or
(v) Court decision denying the proposed reorganization plan and failure on
the borrower's part to gain additional time from the court to submit an
amended plan.
The Agency must be kept adequately and regularly informed in writing of
all aspects of the proceedings. It is the responsibility of the State Program
Director to see that the Agency is being fully informed by the lender in all
bankruptcy cases. All bankruptcy cases should be reported immediately to the
National Office by utilizing and completing a problem/delinquent status
report. Court records are public documents and should be available to the
Agency if the lender is not adequately providing such documents.
In a Chapter 11 reorganization, if an independent appraisal is necessary
in the Agency's opinion, the Agency and the lender will share such appraisal
fee equally.
Lender expenses on Chapter 11 reorganization cases are not to be
deducted from the collateral proceeds because a reorganization is not
considered liquidation. All expenses incurred (except a collateral
appraisal) by the lender while the borrower is in reorganization are the
responsibility of the lender and are not deducted from collateral proceeds or
covered under the Agency guarantee. Attorney/legal fees incurred by the
lender, without exception, cannot be approved. Reasonable and customary
liquidation expenses may be deducted from the collateral proceeds in
liquidation cases under Chapter 7 or Section 1123.
If a trustee is appointed by the court to sell the collateral under a
Chapter 11 liquidation or Chapter 7, the trustee, rather than the lender in
this instance, is responsible for liquidating the collateral. Normally, any
expenses incurred by the lender during this period are not considered
liquidation expenses and cannot be deducted from collateral proceeds. The
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lender is not engaged in the actual liquidation but is performing in a manner
considered to be normal servicing of the loan under the circumstances.
If the property is abandoned by the trustee and the lender is actually
engaged in actual liquidation, reasonable liquidation expenses would be
recoverable from liquidation proceeds with prior written concurrence for each
expense from the Agency before the expense is incurred.
Even if the loan is not in default, the State Director may approve the
repurchase of the unpaid guaranteed portion of the loan from the holder(s) to
reduce interest accrual during Chapter 7 proceedings or after a Chapter 11
proceeding becomes a liquidation proceeding. On loans in bankruptcy, any
loss payment must be handled in accordance with the regulations and carry the
approval of the State Director.
XXII. Negligent Origination/Servicing
Negligent origination is defined in the regulation as the failure of a
lender to perform those services that a reasonably prudent lender would
perform in origination its own portfolio of unguaranteed loans; or the
failure of the lender to perform its origination responsibilities in
accordance with the origination policies and procedures in use by the lender
at the time of the loan. The term includes the concepts of failure to act,
not acting in a timely manner, or acting in a manner contrary to the manner
in which a reasonably prudent lender would act.
Negligent servicing is defined in the regulations as the failure to
perform those services which a reasonably prudent lender would perform in
servicing its own portfolio of loans that are not guaranteed. The term
includes not only the concept of a failure to act but also not acting in a
timely manner or action contrary to the manner in which a reasonably prudent
lender would act up to the time of loan maturity or until a final loss is
paid.
If a lender fails to act responsibly as stated above, the guarantee is
unenforceable by the lender to the extent any loss is occasioned by negligent
origination or negligent servicing. As a practical matter, in many cases it
is hard to prove negligent origination or servicing actually caused a loss.
A connection must be made between the lender's act or failure to act and the
loss amount to be established. The loss amount must be ascertainable.
When such a case arises, obtain all the facts and submit these facts in
writing to the Regional OGC for a legal opinion. Do not notify the lender of
any negligent act until such time as the Regional OGC legally clears such
actions. Refer to page 59 of this Appendix for a sample letter regarding
possible negligent loan servicing.
Legally the Agency cannot withdraw the guarantee for negligent
origination or servicing. The response to the lender in negligent
origination or servicing cases, when no loss has been established, should
merely put the lender on notice that the act(s) of negligent origination or
servicing will cause the guarantee to be unenforceable to the extent the
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act(s) causes a loss (refer to pages 60-63 of this Appendix for a sample
letter regarding a determination of negligent loan servicing).
When the lender holds the guaranteed portion of the loan and the Agency
refuses to reimburse the lender for the portion of the guarantee because of
negligent origination or servicing, the Agency will have the burden of proof
regarding the loss occasioned by such negligent origination or servicing.
Also, if the Agency repurchased the guaranteed portion and the lender refuses
to reimburse the Agency for the amount designated as negligent origination or
servicing, the Agency bears the burden of proof in court.
An amount of loss must be ascertainable in negligent origination or
servicing cases. If this cannot be accomplished, a legal case against the
lender would not be handled by the U.S. Attorney. A negotiated settlement
would be a practical course to take in these situations.
XXIII. Fraud or Misrepresentation
The guarantee constitutes an obligation supported by the full faith and
credit of the U.S. and is incontestable except for fraud or misrepresentation
of which the lender has actual knowledge at the time it became such lender or
which the lender participates in or condones.
Fraud is established by showing that an individual (lender/borrower)
made a material representation, and such representation was false, that the
individual knew it was false when the individual made it, and it was made
with the intention that the individual would benefit from such
misrepresentation and another party would act in reliance on such information
and suffer damages.
Misrepresentation is generally any material statement of alleged fact
which is untrue, or partly untrue, or which is so stated as to lead to false
conclusions. For example, a false description of the condition of property
on an insurance application that would lead to the wrong premium being
charged, is clearly a misrepresentation.
Nondisclosure can amount to misrepresentation or fraud if a transaction
is based on the existence of a particular fact and one party fails to tell
the other that the circumstances have changed with regard to that particular
fact.
If the borrower makes fraudulent representation to the lender to induce
the lender/Agency to provide a loan or other benefits, which the
lender/Agency relied upon to its detriment, the Loan Note Guarantee would
still be enforceable by the lender as long as the lender had no knowledge or
participated in the misrepresentations. When such an act occurs and the
Agency becomes knowledgeable of such act, the Regional OGC must be
immediately notified of all such facts for a determination of action to be
taken by the Agency.
If the lender made fraudulent representations, the Loan Note Guarantee
would be contestable for the full amount of the loan in most cases. However,
the Agency must:
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(1) Prove that the lender made or participated in making a false
representation.
(2) Prove that the lender had knowledge or belief that the representation
was false, or that the lender had an insufficient basis to make the
representation.
(3) Prove that the lender intended to induce the Government to act or
refrain from action in reliance on the misrepresentation.
(4) Prove justifiable reliance by the Government on the misrepresentation.
(5) Prove that such reliance caused damage to the Government.
If the Agency becomes aware of fraud or misrepresentation by the lender,
the Regional OGC must be notified immediately of all the facts for a
determination of the action to be taken by the Agency. If for some reason
the Agency strongly suspects the lender may have committed fraud or
misrepresentation, it may be necessary to request OIG to do an investigation
to determine the facts. If possible, this action should take place prior to
referral of the case to OGC.
If the guaranteed portion of the loan has been sold in the secondary
market and the holder makes a demand on the Agency to purchase the guaranteed
portion of the loan, the Agency will repurchase the guaranteed portion of the
loan except for fraud or misrepresentation of which the holder has actual
knowledge at the time it became the holder.
Generally what must be proven by the Government in cases of fraud or
misrepresentation is that the fraudulent representation made by the lender
was intentional and not negligent. The Government will also likely be
expected to establish that the lender knew the representation was false or
that the lender made the representation without having knowledge of its
truth. Nondisclosure of information can amount to a false representation if
a transaction is based on the existence of a particular fact and the
Government is not informed that material circumstances have changed with
regard to that particular fact.
Further, the Government would likely be expected to show that the
representation concerned a material fact. This would be a representation of
a fact that individually or cumulatively would have caused the Government to
not issue the guarantee. Additionally, the Government would likely have to
prove that the intent of the representation was to cause the Government to
issue the guarantee, which the Government ultimately did.
These elements are provided as an illustrative (and not exhaustive) list
to highlight that proving fraud or misrepresentation is very difficult. It
is also important to not confuse or interchange fraud or misrepresentation
with negligent servicing and the remedies related to each (denying the
guarantee for fraud or misrepresentation versus reducing the guarantee for
negligent servicing). If you believe the guarantee should be terminated
because of fraud or misrepresentation, you should consult with your Regional
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OGC. If the conclusion is to proceed on this ground, the lender should be
notified immediately.
Generally what must be proven by the Government, in order to prevail in
cases of negligent servicing is that the lender had a duty to take a certain
action that he failed to perform or failed to adequately perform. This duty
is established in the regulations by the general reference to what a
reasonable lender would have done. The lender’s failure to meet this
standard must have caused a loss to the Government. Again, this list of what
the Government must prove is illustrative and not exhaustive.
When there is negligent servicing, the loan guarantee is reduced by the
amount of the associated loss. Therefore, there must be some way of
quantifying the loss. This latter requirement is not always easy to prove.
For instance, assume the lender fails to assure that the insurance premiums
are paid and the policy is cancelled. If a subsequent fire causes $50,000 in
damage to a building that serves as collateral, the loss could be reduced
accordingly. However, what if the lender failed to timely obtain periodic
reports that a reasonable lender would have obtained and that would have
shown the company was not performing as expected? Calculating the amount of
any resulting loss in this case could prove very difficult.
Keep in mind that the Agency cannot terminate the guarantee because of
negligent servicing. However, the Agency can reduce a loss claim payable to
the lender under the guarantee to the extent of loss caused by the lender’s
negligence. In some instances, this reduction may even be for the full
amount of the guarantee. Again, you should consult with your Regional OGC
before proceeding with a reduction of the guarantee. Once a decision to
reduce the claim has been made, you should notify the lender immediately.
XXIV. Final Report of Loss
Before approval by the Agency of any final loss report, the lender must
account for all funds during the period of liquidation, disposition of the
collateral, all costs incurred, and any other information necessary for the
successful completion of liquidation. Also before approval by the Agency of
any final loss report, the borrower must be made aware of the DCIA
provisions. Guidance regarding the DCIA provisions are contained in Appendix
D of this part.
The Agency, upon receipt of the final accounting and report of loss,
will review and determine the final loss in accordance with regulations. If
the Agency has any questions regarding the amounts set forth in the final
report of loss, the matter should be investigated. The lender should make
its records available and otherwise assist the Agency in making the
investigation. If the Agency finds any discrepancies, the Agency will
contact the lender as soon as possible for any necessary corrections.
Documentation should accompany the report of loss to support the figures
shown on the final loss report. Areas of special concern include:
(1) The lender should document and show that all of the collateral has been
accounted for, properly liquidated, and that liquidation proceeds were
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properly accounted for and applied correctly on the loan. The State Office
must be satisfied that the lender has accomplished this in the manner set
forth in the regulations and that the lender maximized the collections in
conducting the liquidation.
(2) The lender should show a breakdown of any protective advance amount(s)
as to the payee, purpose of the expenditure, date paid, evidence supporting
the amount expended was proper, and data showing the bill was paid.
(3) Liquidation expenses must be accounted for by the lender in the same
manner as protective advance amounts. The lender should show a breakdown of
the liquidation expenses as to the payee, purpose of the expenditure, date
paid, evidence supporting the amount expended was proper, and data showing
the bill was paid. The Agency should review all liquidation expenses to
determine if the expenses were proper, reasonable and claimed in accordance
with the approval given by the Agency. The lender should also provide
accounting of the proceeds from the sale of any collateral and indicate any
payments to the lender for reimbursement of their liquidation expenses.
(4) Accrued interest owed to the lender should be supported by attachments
as to how the amount was accrued by the lender. A copy of the promissory
note and ledger should also be attached. If an estimated report of loss was
paid previously, the accrued interest shown on the estimated report of loss
should be the same amount shown on the final report of loss. Interest
accrual stops on the unpaid principal balance of the loan on the payment date
of the estimated report of loss if paid before the final report of loss. The
State Office is responsible for the accuracy of the interest calculations on
the final report of loss before submission to the DCFO.
If the interest on the loan was a variable interest rate tied to a
published standard, the interest charged by the lender should be supported by
documentation of when the changes in the interest rate became effective. The
Agency should review this to see that the lender complied with the rise and
fall of the changes in the selected base rate and the changes, if any.
The maximum loss that can be paid by the Agency on any loan guarantee
will never exceed the original advanced amount guaranteed plus any accrued
interest times the percentage of guarantee. For example, a $1,000,000
(principal advanced), 90% guaranteed loan with $100,000 accrued interest on
the loan and there is no collateral to liquidate and no payments were made on
the loan, the maximum loss would be $900,000 principal and $90,000 accrued
interest. In this example, if there were protective advance amounts, these
amounts could not be authorized or paid by the Agency since the maximum
amount was reached. Rarely would a situation occur as stated because
normally payments have been made on the loan before liquidation takes place.
Procedures for Paying a Loss
This procedure will be used to process and manually pay estimated,
bankruptcy, interest, and final reports of loss until software becomes
available to systematically generate the payments. This applies to all
losses on guaranteed loans. The loss claim, Form RD 449-30, “Loan Note
Guarantee Report of Loss,” (Guaranteed Loan Report of Loss form), will be
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completed and signed by the lender, approved and signed by the field office,
and processed for payment by the Guaranteed Loan Branch (GLB) in the office
of the DCFO. The documents to be submitted to GLB will include, but are not
limited to:
(1) Form RD 449-30, “Loan Note Guarantee Report of Loss (Report of Loss
form);”
(2) Cover letter with any special instructions;
(3) The lender’s or Agency’s ledgers/transcripts to account for the unpaid
principal balance and accrued interest owed remaining on the loan (for loans
closed on or after the effective date of this regulation or of the regulation
that cross-references this section, in the event of a loss, the guarantee
will not cover note interest to the lender accruing after 90 days from the
most recent delinquency effective date);
(4) A list of protective advances and the dates advanced:
(a) Written Agency approval is required for any protective advance that will
singularly or cumulatively amount to more than $200,000 or 10% of the
guaranteed loan, whichever is less.
(b) Written Agency approval to pay accrued interest on the protective
advances (for loans closed on or after August 2, 2016, in the event of a
loss, the guarantee will not cover accrued intereston the protective advances
to the lender accruing after 90 days from the most recent delinquency
effective date.);
(5) Payment instructions to include ACH routing/account numbers (no wires or
checks will be allowed);
(6) A copy of the promissory note (normally the first few pages indicating
the basis, interest rate changes, indexes used, any other special
instructions). The promissory note will also provide the name(s) of any co-
borrower(s);
(7) A copy of Form RD 4279-14, “Unconditional Guarantee,” for each
guarantor; and
(8) A copy of the Guaranteed Final Loss Settlement Checklist, which is
Appendix B of this subpart.
GLB will assure that the Report of Loss form is correctly completed and
the loss payments are properly authorized. The Report of Loss form for
estimated, bankruptcy, interest, and final losses must be signed by both the
lender and an authorized RD approving official. Original signatures are
required to make payment (electronic signatures are acceptable as originals).
Estimated, bankruptcy, interest, and final losses on the Report of Loss
form that exceed the State Director’s delegated loan servicing approval
authority must be approved by the National Office. If applicable, a copy of
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the National Office’s approval memorandum must be attached to the Report of
Loss form.
The top of the Report of Loss form outlines which items on the form must
be completed for the various types of loss claims that can be filed. This
form also provides instructions on how to complete a recovery and a voluntary
payment for those loans not subject to DCIA.
Corrections can be made to the Report of Loss form as long as the field
office and lender concur with the corrections. Revised data on the forms
will be entered above the incorrect data. The incorrect data will be
circled. All telephone contacts with the field must be documented on the
cover page prepared by GLB. Changes to claim amounts must be approved by the
field office and a copy of the revised Report of Loss form will be faxed to
the field office.
Liquidation Plan Check List
Lender: ______________________ Borrowers: _______________________
Reviewed by: __________________ Date: _______________________
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Appendix C
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Comments and Proof/Supporting
Completed Liquidation must include:
document provided:
Yes: ___ (1) Lien position on the collateral
held by the lender.
No: ___
Yes: ___ (2) Such proof as Agency requires to
establish ownership of the guaranteed
No: ___ loan promissory note(s) and related
security instruments. Also, a copy
of the payment ledger should be
included that reflects the current
loan balance and accrued interest to
date and the method of computing the
interest.
Yes: ___ (3) A full and complete listing of
all collateral including any personal
No: ___ and/or corporate guarantees and
current financial information on the
guarantors.
Yes: ___ (4) A copy of the demand letter sent
to the borrower accelerating the loan
No: ___ balance. The lender should give the
borrower the minimum time allowable
to pay the balance in full on the
loan. It is not likely that the
borrower can/will pay the loan in
full, and any additional time over
and above what is required by the
respective State laws would not be in
the best interest of the lender or
Agency.
Yes: ___ (5) Copies of the borrower's latest
available financial statements.
No: ___
Yes: ___ (6) The recommended plan of action
on the best liquidation methods and
No: ___ the justification for such action.
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Yes: ___ (7) Recommended action acquiring and
disposing of all collateral.
No: ___
Yes: ___ (8) Recommended action to be taken
on the guarantor(s) of the loan.
No: ____
Yes: ___ (9) Necessary steps for preservation
of the collateral.
No: ___
Yes: ___ (10) A list of the estimated
liquidation expenses expected to be
No: ___ incurred and the justification for
each expense. Each expense item
should specify what it covers and the
estimated amount. It should be
emphasized that the attorney’s
services are to be concerned with
those issues in liquidation
proceedings with a strictly legal
nature. In-house administrative
expenses incurred by the lender such
as travel to and from the borrower’s
business, telephone calls, typing and
internal secretarial services,
related bank personnel salaries and
wages, accounting and all other
miscellaneous expenses are not
reimbursable liquidation expenses.
Yes: ___ (11) Establishment of a schedule to
periodically report to the Agency on
No: ___ the progress of liquidation.
Yes: ___ (12) Protective advance amounts that
may be necessary and the
No: ___ justification for the protective
advance. Protective advances can
only be claimed on the Final Report
of Loss.
Yes: ___ (13) Protective bid amounts on the
collateral to be sold and a breakdown
No: ___ of how the amount(s) were determined
(if collateral is scheduled to be
sold at public auctions).
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Yes: ___ (14) If a voluntary conveyance of the
collateral is considered, the lender,
No: ___ with the Agency’s concurrence, must
determine the amount to be credited to
the guaranteed debt. It is necessary
to determine the amount to be credited
to the guaranteed debt because any
deficiency between the guaranteed debt
and the amount credited to that debt
is a liability of the guarantor(s)
that must be settled before
establishing any final loss.
Yes: ___ (15) Legal opinions, if necessary, to
justify recommended liquidation
No: ___ methods, acquisition, preservation of
the collateral and for DCIA (borrowers
and guarantors).
Yes: ___ (16) An estimate of fair market and
potential liquidation value of the
No: ___ collateral. If the value of the
collateral is $250,000 or more, the
lender must obtain an independent
appraisal report meeting the
requirements of § 4279.144 of this
chapter for the collateral securing
the loan, which reflects the fair
market value and potential liquidation
value. For collateral values under
this threshold, lenders must follow
their primary regulator's policies
relating to appraisals and evaluations
or, if the lender is not regulated,
normal banking practices and generally
accepted methods of determining value.
The appraisal report is very important
and is utilized to determine the
current market liquidation value, the
appropriate liquidation action and, if
necessary, to determine a proper
protective bid price for a public
auction sale. The fee for the
appraisal is shared equally between
the lender and the Agency.
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Appendix C
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Sample Letter – Decision to Liquidate
DATE
LENDER
ADDRESS
CITY, STATE ZIP
RE: BORROWER – LOAN AMOUNT
Decision to Liquidate
Dear LENDING OFFICER,
We have reviewed your DATE correspondence requesting Agency concurrence with
the decision to liquidate. As the Agency understands the situation, BORROWER
was $AMOUNT behind schedule as of DATE.
SUMMARY NARRATIVE OF SERVICING REQUESTS ATTEMPTING TO CURE THE DELINQUENT
ACCOUNT THAT LED UP TO THE DECISION TO LIQUIDATE. Consequently, LENDER has
requested Agency concurrence with the decision to liquidate the loan.
In accordance with 7 CFR § 4287.157, the Agency concurs with the LENDER’S
decision to liquidate. Please submit a liquidation plan within 30 days that
meets the requirements of 7 CFR § 4287.157(c). Details as to what should be
included in the plan are enclosed with this letter. Please submit the
liquidation plan as one complete package. We recognize that the appraisals
and environmental survey (discussed below) will take additional time to
acquire. Your office will need to engage an appraisal service immediately to
update the collateral values and recovery estimates.
Your office should continue submitting Form RD 1980-44, “Guaranteed Loan
Borrower Default Status,” on a monthly basis until such time as the loan is
no longer in default.
We will review your proposed plan and provide feedback as soon as possible.
Please contact AGENCY CONTACT at EMAIL ADDRESS or PHONE if you have any
questions. Thank you for your interest in the business programs of Rural
Development.
Sincerely,
Business Programs Director
Enclosure: Liquidation Plan Outline,
7 CFR § 4287.157(c)
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Appendix C
Page 53
Sample Letter – Approval of Liquidation Plan
DATE
LENDER
ADDRESS
CITY, STATE ZIP
RE: BORROWER – LOAN AMOUNT
Approval of Liquidation Plan
Dear LENDING OFFICER,
This is in response to your proposed liquidation plan for BORROWER. The
Agency has reviewed the proposed plan in accordance with 7 CFR § 4287.157(c),
and we concur with your office’s recommendation to liquidate subject to the
following conditions being met:
STATE CONDITIONS
As the lender of record, your office should implement the approved liquidation
plan expeditiously. Your office is responsible for accelerating the loan and
providing a copy of the letter to the Agency. The loan is considered in
liquidation from the date of the acceleration and demand for payment. Any
modifications to the plan must be approved by the Agency in writing.
Please contact AGENCY CONTACT at EMAIL ADDRESS or PHONE if you have any
questions.
Sincerely,
Business Programs Director
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RD Instruction 4287-B
Effective Date 10/24/2022
Appendix C
Page 54
Sample Letter – Possible Negligent Loan Servicing
DATE
Sent via Email and 1st Class Mail
LENDER
ADDRESS
CITY, STATE ZIP
RE: BORROWER – LOAN AMOUNT
Possible Negligent Loan Servicing
Dear LENDING OFFICER,
The purpose of this letter is to advise LENDER that USDA Rural Development is
concerned with ACTION in connection with the BORROWER loan. This ACTION may
be considered negligent loan servicing.
Please advise this office of any actions taken to cure this concern.
This letter also serves to remind LENDER that the Loan Note Guarantee will be
unenforceable by LENDER to the extent that any loss is occasioned by violation
of usury laws, negligent loan servicing, or failure to obtain the required
security, regardless of the time at which USDA acquires knowledge of the
foregoing.
If you have any questions, please feel free to contact this office. Thank
you for your interest in the business programs of Rural Development.
Sincerely,
Business Programs Director
Enclosures: Lender’s Agreement
Loan Note Guarantee
cc: Regional Coordinator
Loan Servicing Branch Chief, Washington, DC
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Appendix C
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Sample Letter – Determination of Negligent Loan Servicing
DATE
Sent via Email and 1st Class Mail
LENDER
ADDRESS
CITY, STATE ZIP
RE: BORROWER – LOAN AMOUNT
Determination of Negligent Loan Servicing
Dear LENDING OFFICER,
The purpose of this letter is to advise LENDER that Rural Development has made
a determination of negligent loan servicing in connection with the BORROWER
loan. Please refer to Section IV of the enclosed Form RD 4279-4, “Lender’s
Agreement,” executed by you on DATE with regard to specific routine servicing
requirements.
EXPLAIN NEGLIGENT LOAN SERVICING ACTION(S).
EXPLAIN HOW THE LENDER COULD POSSIBLY CURE THE DETERMINATION OF NEGLIGENT LOAN
SERVICING.
One of the above options must be completed and received by close of business,
DUE DATE, in order to protect the enforceability of your Loan Note Guarantee.
The decision described in this letter will terminate or reduce the
collectability of your Loan Note Guarantee. If you believe this decision or
the facts used in this case are in error, you may pursue any or all of the
following three options:
Option 1 – Request an Informal Administrative Review
If you have questions concerning this decision or the facts used making it and
desire further explanation, you may write this office to request an informal
review. There is no cost for an informal review. This written request must
be received no later than 15 calendar days from the date you received this
letter. You must present any new information, evidence, and possible
alternatives along with your request.
You may also have a representative or legal counsel participate in the
process at your cost. The informal review may be conducted by telephone or
in person at the discretion of the Agency. Please include a daytime phone
number in your request to arrange for the review. You may skip this step in
the informal process and select one of the following two options. If you do,
you will automatically waive your right to an informal review.
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Option 2 – Request Mediation
You have the right to request mediation. The purpose of mediation is to
resolve disputes through the use of a neutral mediator. A mediator will
listen to all parties involved in the dispute and work with all parties to
achieve a mutually agreeable resolution. If you need information on the
mediation process to assist you in deciding whether to utilize Option 2,
contact the State Rural Development Alternative Dispute Resolution
Coordinator for business programs listed below.
Alternative Dispute Resolution Contact:
NAME
ADDRESS
CITY, STATE ZIP
Mediation Contact:
NAME
ADDRESS
CITY, STATE ZIP
Rural Development’s policy is to pay 50 percent of the reasonable cost for
mediation. If you qualify for poverty status for the particular Rural
Development program, then the State Director will agree to pay for 75 percent
of the mediation cost and you will have to pay the remaining 25 percent.
If you elect to seek mediation, your written request for this service must be
sent to the Rural Development State Director listed below and must be
postmarked no later than 30 days from the date of this letter. Once you
request mediation, it stops the running of the 30-day period in which you may
request an appeal hearing (described in Option 3) but does not waive your
right to an appeal.
Once you have requested mediation, the Rural Development State Director will
advise you of the estimated cost of mediation, the amount the Agency will
contribute, and the process and procedures for this service. In States with
a USDA-sponsored mediation program, you will generally be referred to such
service. In States without a USDA-sponsored mediation program, you will be
either directed to a mediation service, or you will be provided with the names
of three mediators from which you will need to select one. Also, you may
suggest a mediator subject to the Agency’s approval. Once you have selected
the mediator, you will be advised directly by the mediation source if they
can mediate your case. Once the case has been referred to the mediator, you
have 45 days to complete the mediation, unless the participants agree to an
extension. If mediation does not result in resolution of the issues, you have
the right to continue with a request for an appeal hearing as set forth in
Option 3.
When mediation is concluded, you will be notified of the result and your right
to request an appeal hearing, if applicable. If you request mediation prior
to filing for an appeal, the number of days you will have to request an
appeal will be 30 days from the date of the adverse decision minus the number
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of days you took to request mediation. Mediation does not take the place of,
or limit your rights to, an appeal to the National Appeals Division (NAD);
however, a NAD appeal hearing would take place only after mediation. You may
skip mediation and request an appeal hearing. However, in doing so, you will
automatically waive your right to an informal meeting. Once the appeal
hearing begins, you also waive your right to mediation.
Option 3 – Request an Appeal Hearing
You may request an appeal hearing by NAD rather than an informal review or
mediation. There is no cost for an appeal hearing. Your request for an
appeal must be made no later than 30 days from the date you received this
letter. You must write the Assistant Director, NAD, for your region at the
following address:
Appeal Contact:
NAME
ADDRESS
CITY, STATE ZIP
Your request must state the reasons why you believe the decision is wrong, be
personally signed by you, and include a copy of this letter. A copy of your
request must also be sent to Rural Development State Director at:
NAME
ADDRESS
CITY, STATE ZIP
You, or your representative or counsel, may contact this office anytime during
regular office hours to examine or copy the Agency’s record relative to the
adverse decision. Photocopies will be provided to you. Your representative
or counsel must have your written authorization to represent you and review
your file. The NAD Hearing Officer will contact you regarding a time and
place for the hearing.
The Federal Equal Credit Opportunity Act prohibits creditors from
discriminating against credit applicants based on race, color, religion,
national origin, sex, marital status, age (provided that the applicant has the
capacity to enter into a binding contract); because all or part of the
applicant’s income derives from any public assistance program; or because the
applicant has in good faith exercised any right under the Consumer Credit
Protection Act. The agency that administers compliance with this law
concerning this creditor is the Federal Trade Commission. If a person
believes he or she was denied assistance in violation of this law, they should
contact the Federal Trade Commission, Washington DC 20580.
The Fair Housing Act prohibits discrimination in real estate related
transactions, or in the terms or conditions of such a transaction, race,
color, religion, sex, disability, familial status, or national origin. The
Federal agency that is responsible for enforcing this law is the U.S.
Department of Housing and Urban Development. If a person believes that they
have been discriminated against in violation of this law, they should contact
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the U.S. Department of Housing and Urban Development, Washington, DC 20410 or
call (800) 669-9777.
If you have any questions, please give me a call.
Sincerely,
Business Programs Director
Enclosures: Lender’s Agreement
Loan Note Guarantee
cc: Regional Coordinator
Loan Servicing Branch Chief, Washington, DC
oOo
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RD Instruction 4287-B
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Appendix D
Page 1
APPENDIX D – DEBT COLLECTION IMPROVEMENT ACT GUIDANCE
Background Information:
(a) On January 22, 2004, a final rule was published in the Federal Register
regarding the DCIA in order to make debtors aware that the DCIA provisions
are applicable to the program. RD Instruction 1951-C, section 1951.133,
Offsets of Federal Payment to USDA Agency Borrowers, was amended regarding
the establishment of Federal debt for the program. This section states that
any amounts paid by the Agency on account of liabilities of guaranteed loan
borrower(s) and/or co-borrower(s) will constitute a Federal debt owing to the
Agency by the guaranteed loan borrower(s) and/or co-borrower(s). All
guaranteed loans closed on or after January 22, 2004, are subject to the DCIA
provisions. The Agency will refer all borrowers under the DCIA to Treasury
for collection. The date of the Agency’s final loss claim payment will
establish the date for determining the referral deadline to the U.S. Treasury
under the DCIA.
(b) On November 20, 2006, a final rule was published in the Federal Register
with an effective date of December 20, 2006, that addressed the concern that
guarantors might successfully assert a defense that they did not know they
were guaranteeing a loan. When the Agency implemented this second
regulation, several Agency forms were modified and a new form was created,
Form RD 4279-14, “Unconditional Guarantee.” All personal/corporate
guarantors that sign the Unconditional Guarantee form acknowledge that
delinquent guaranteed loan debt is subject to DCIA. Therefore, any
guaranteed loan closed after December 20, 2006, where the guarantor signed
the Unconditional Guarantee form is governed by these requirements. As a
reminder, borrower and co-borrowers do not execute Form RD 4279-14; only
personal and corporate guarantors are required execute the guarantor form.
When the Agency pays a loss claim, both the borrower(s) and/or co-borrower(s)
and the guarantor(s) must be sent to the U.S. Treasury for offset within the
180 day time period. All eligible key members, including co-borrowers and
those individuals or entities that execute Form RD 4279-14, should be entered
as Key members in GLS for referral to the U.S. Treasury Department under the
DCIA. Before a debt is referred to the Treasury Department, you should
ensure that all eligible co-borrowers, individuals and entities are properly
listed in GLS as key members. Once referred to the U.S. Treasury, the lender
should cease all collection efforts. In the event that the guarantors did
not sign the Unconditional Guarantee form, you should consult with OGC before
referring a claim against a guarantor to the U.S. Treasury.
(c) For guaranteed loans, all guarantors must execute Form RD 4279-14,
“Unconditional Guarantee,” and be aware that:
(1) Any amounts paid by the Agency on account 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 DCIA to collect the debt from the borrower.
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Appendix D
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(2) 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 DCIA to collect the debt from the third-party
guarantor.
(3) In all instances under paragraphs (1) and (2) of this section, interest
charges will be assessed in accordance with RD Instruction 1951-C, section
1951.133. Based on Federal Claims Collection (FCC) Standards, Agencies may
waive interest if the Agency determines that collection of these charges is
not in the best interest of the Government, and, at this time, automation and
effort to charge interest would not be cost-effective due to minimal
collections and volume.
Procedures:
U.S. TREASURY REFERRAL PROCEDURES IN REFERENCE TO THE DCIA
The lender is responsible for preparing a final loss utilizing Form RD
449-30, “Loan Note Guarantee Report of Loss,” and submitting it to the Agency
for review and approval. After approval, the claim is forwarded to the
Guaranteed Loan Branch (GLB) located in the office of the DCFO for review,
certification and payment.
When the office of the DCFO pays the final loss and updates the payment
to GLS, a DCIA account receivable will be established for the borrower(s)/co-
borrower(s) and/or any guarantor(s) determined subject to DCIA. The DCIA
receivable account and all subsequent servicing activities can be viewed by
the field via the “View Debt Offset” web page in GLS.
The accountant in DCFO conducting the review of the final loss claim and
processing the claim in GLS should:
(a) Ensure that the final loss settlement checklist, Appendix B of this
subpart, is used as a part of the review for any final loss claim received
from the field prior to making payment;
(b) Verify via the Key Member Table as part of the “BP Fund Request View” of
the application web page in GLS to ensure no guarantor is identified as being
eligible for DCIA if only the borrower and/or co-borrower is referred for
DCIA; and
(c) Request a copy of the Unconditional Guarantee form from the State Office
if it is not included in the claim package for any guarantor for those loans
closed on or after December 20, 2006.
GLS generates and mails a 60-day due process letter to the borrower and/or
co-borrower, and each guarantor subject to DCIA provisions, with a copy to
the servicing office advising the debtors that the guaranteed loan balance is
a Federal debt, which will be referred to the U.S. Treasury to collect the
debt in accordance with statutory requirements and authorities.
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Appendix D
Page 3
In order for the borrower/co-borrower or guarantor to avoid referral of the
debt to the U.S. Treasury, they must repay the debt in full or agree to a
repayment plan. All options must be approved by the National Office and
submitted to DCFO within the 60-day due process period so that DCFO can
update the terms of the DCIA Account Receivable in GLS.
In the event the State Office has questions regarding whether a guarantor is
eligible for referral to the U.S. Treasury under Cross Servicing, the State
Office should seek Regional OGC guidance. If no guarantor form was signed,
it is highly unlikely that the guarantor can be referred to the U.S.
Treasury.
After the 60-day due process period has expired on the balance owed, the
Program Reporting Branch (PRB) in the office of the DCFO submits a file on
the 15th of each month to the U.S. Treasury for all loans eligible for DCIA.
At this time, the State Office must issue notification to the lender to cease
all collection action against the borrower/co-borrower or guarantor.
If the U.S. Treasury contacts PRB for information requested by the debtors,
they will contact GLB for documentation to support the debt. The designated
GLB accountant will provide PRB the information requested. The documents
will at a minimum include a copy of the signed Unconditional Guarantee form
for each guarantor, copy of the Loan Note Guarantee for each co-borrower, and
the Notice of Final Settlement Report of Loss (Report 4063).
All collections received in a field office from the borrower/co-borrower
or guarantor will be sent to the Wholesale Lockbox utilizing a Schedule of
Remittances form using miscellaneous collection code 33 (payment). A copy of
the Schedule of Remittances form and a copy of the payment item should be
sent to GLB via fax at (314) 457-4279. All collections as well as any
receipts from the U.S. Treasury (Cross Servicing) will be processed to the
DCIA account receivable established in GLS.
the borrower and/or co-borrower to the U.S. Treasury under Cross Servicing.
Frequently Asked Questions (FAQ):
(1) Does the final regulation published in the Federal Register dated
January 22, 2004, only pertain to the borrower and/or co-borrower? How does
this rule pertain to the guarantor?
Response: The January 22, 2004, Federal Register notice pertained to the
borrower and/or co-borrower only. This regulation does not affect the
guarantor(s). When the Agency pays a loss claim, the lender should be
notified in writing by the Agency to cease all collection efforts. The
Agency will refer
(2) Does the final regulation published in the Federal Register dated
November 20, 2006, only pertain to the guarantor? Is this considered an
amendment to the earlier final rule of January 22, 2004?
Response: The November 20, 2006, Federal Register pertained primarily to the
guarantor. Both the borrower/co-borrower and guarantor can be referred to
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Appendix D
Page 4
the U.S. Treasury after this final rule was published. The January 22, 2004,
Federal Register and the November 20, 2006, are complementary publications
regarding implementation of the DCIA.
(3) For guaranteed loans closed on or after January 22, 2004, but before
December 20, 2006, does the January 22, 2004, final rule apply to the
borrower/co-borrower and can the borrower/co-borrower be referred to the U.S.
Treasury if no bankruptcy exists?
Response: Yes, for guaranteed loans closed on or after January 22, 2004, the
borrower and/or co-borrower may be referred to the U.S. Treasury under Cross
Servicing if no bankruptcy exists.
(4) For guaranteed loans closed on or after January 22, 2004, but before
December 20, 2006, and correction amendment published in the May 15, 2007,
Federal Register, does the final rule apply to the guarantor? Can the
guarantor be referred to the U.S. Treasury even though the guarantor did not
sign an Unconditional Guarantee form if no bankruptcy exists?
Response: The January 22, 2004, Federal Register applies to the borrower
and/or co-borrower. The State Office should submit the signed guarantor form
to the Regional OGC for guidance on whether the guarantor is eligible for
referral to the U.S. Treasury under Cross Servicing. If no guarantor form
was signed, it is highly unlikely that the guarantor can be referred to the
U.S. Treasury.
(5) For guaranteed loans closed after January 22, 2004, but before
December 20, 2006, does the January 22, 2004, final rule apply to the
guarantor and can the guarantor can be referred to the U.S. Treasury if the
guarantor signed the Unconditional Guarantee form if no bankruptcy exists?
Response: The January 22, 2004, Federal Register pertained only to the
guaranteed loan borrower and/or co-borrower. Provide a copy of the guarantee
document and consult the Regional OGC for guidance on whether the guarantor
is eligible for referral to the U.S. Treasury under Cross Servicing.
(6) The November 20, 2006, rule indicates that if the loan was closed on or
after December 20, 2006, the borrower(s)/co-borrower(s) and guarantors can be
referred to the U.S. Treasury if no bankruptcy exists if the Unconditional
Guarantee form was signed. What happens if the form wasn’t signed by the
guarantor?
Response: Both the borrower and/or co-borrower and the guarantor claims can
be referred.
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Effective Date 10/24/2022
Appendix D
Page 5
Letter - 60-Day Due Process Notice
Name:
Address:
RE: Amount of Debt Owed to Rural Development
Date loss incurred by Rural Development:
State/County:
Borrower/Co-borrower ID:
Loan number:
Lender:
As a guarantor on your debt with the above lender, the Agency has paid a loss
claim to cover your defaulted debt. As a result, Rural Development now has
the right to collect your defaulted debt for the amount of loss paid to the
lender. The public was notified in a Federal Register notice dated
January 22, 2004, entitled “Debt Collection Improvement Act-Cross Servicing”
that any amounts paid by Rural Development on the liabilities of a guaranteed
loan borrower and/or co-borrower will constitute a Federal debt and that
Rural Development may use any remedies available to it to collect. If you do
not pay your debt or take other action described below within 60 days from
the date of this letter, Rural Development will submit your debt to the U.S.
Department of the Treasury for collection via Cross-Servicing. We will
continue to add any applicable principal, interest, penalties, and fees to
your unpaid debt.
Once your debt is submitted to the U.S. Treasury for Cross-Servicing, they
will service and collect the debt in accordance with applicable statutory
requirements and authorities. Treasury may take adverse actions to enforce
recovery of a delinquent debt including, but not limited to:
referring the debt to a private collection agency;
referring the debt to the Department of Justice or agency counsel for
litigation;
reporting the debt to a credit bureau;
garnishing your wages; and
reporting of the debt to the Internal Revenue Service (IRS) as potential
taxable income.
Once your debt is submitted to the U.S. Treasury for Cross-Servicing, it will
also be included in the Treasury Offset Program (TOP). TOP reduces or
withholds any eligible Federal payments by the amount of your debt. This
process, known as “offset,” is authorized by 31 U.S.C. Chapter 37. The U.S.
Treasury is not required to send you notice before your payment is offset.
Most Federal payments, including certain loans and income tax refunds, are
eligible for offset.
Before we submit your debt to the U.S. Treasury, we are required to tell you
that you may (1) inspect and copy our records related to your debt; (2) be
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Appendix D
Page 6
entitled to a review if we determine that a review is required; (3) submit a
request for a written repayment agreement to the Rural Development Business
Programs Director at the address listed at the end of this letter; (4) repay
your debt; and (5) request mediation or an appeal hearing.
INSPECT AND COPY RECORDS RELATED TO YOUR DEBT: To discuss arrangements for
inspecting and copying your records, you must contact the Rural Development
Program Director in writing at the address listed at the end of this notice.
This does not stop the process of referring your debt to the U.S. Treasury.
TO AVOID U.S. TREASURY CROSS-SERVICING, you must do one of the following
within 60 days from the date of this letter:
REQUEST A REVIEW IF YOU BELIEVE THE DEBT IS NOT OWED: If you believe that
all or part of the debt is not due or legally enforceable, you must file a
written request for review no later than 60 days from the date of this
letter. Your request must include evidence to support your position and
should be sent in writing to the address listed at the end of this letter.
We will inform you of our decision about your debt. The timely filing of a
request for review will suspend the offset process until a determination is
made.
AGREE TO A REPAYMENT PLAN: If you are unable to pay your debt in full, you
must contact the Rural Development Business Programs Director in writing at
the address listed at the end of this letter no later than 60 days from the
date of this letter, agree to a repayment plan acceptable to the Agency, and
make payments required in the repayment plan.
REPAY YOUR DEBT: To repay your debt, send a check or money order, payable to
Rural Development, for the full amount of your debt, to the Rural Development
Business Programs Director at the address listed at the end of this letter.
Please include your account number on your payment. The payment must be
received within 60 days from the date of this letter.
REQUEST MEDIATION OR AN APPEAL HEARING: The request to use mediation may be
made any time prior to a formal National Appeals Division (NAD) appeal
hearing. You must pay half of the cost associated with the mediation
process. A request for mediation must be in writing and sent to the
following address:
State Director
U.S. DEPARTMENT OF AGRICULTURE
RURAL DEVELOPMENT
City, State Zip Code
You may request an appeal hearing by NAD rather than an informal review or
mediation. There is no cost for an appeal hearing. Your request for an
appeal must be made no later than 30 days from the date you received the
attached letter and must meet the requirements for such a request outlined in
7 CFR 11.6. You must write the Area Supervisor, NAD, for your region at the
following address:
Area Supervisor
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Effective Date 10/24/2022
Appendix D
Page 7
U.S. DEPARTMENT OF AGRICULTURE
NATIONAL APPEALS DIVISION,
___________REGIONAL OFFICE,
POST OFFICE BOX _____
City, State Zip Code
A request for either the informal review or mediation will suspend the 30 day
time period for filing a formal written NAD appeal. If after the informal
review or mediation you still desire to appeal, you will have the balance of
the 30 days to make the formal written request for a NAD appeal hearing. If
you file an appeal and then request mediation, you will waive your right to a
NAD appeal hearing until after the conclusion of the mediation process. You
then have the right to a NAD appeal hearing within 45 days of the conclusion
of the mediation.
BANKRUPTCY: If you are currently in bankruptcy, then you are not subject to
offset while the automatic stay is in effect. Please notify the Rural
Development Business Programs Director in writing at the address listed at
the end of this letter, and include a copy of the bankruptcy filing. If you
have an attorney, please provide your attorney’s name, address, and phone
number, as well. If we do not know of your status in bankruptcy, we may
inadvertently take collection action that could be avoided.
IF YOU FILE A JOINT INCOME TAX RETURN: If you file a joint income tax
return, you should contact the IRS before filing your return regarding the
steps to take to protect the share of the income tax refund that may be
payable to your spouse, if your spouse is not a delinquent debtor.
FALSE STATEMENTS: If you make or knowingly provide any false statements,
representations, or evidence, you may be liable for civil penalties under the
False Claims Act (31 U.S.C. Sections 3729-3731), or criminal penalties under
18 U.S.C. Sections 286, 287, 1001, 1002, or other applicable statutes.
If you are a Federal employee and you make or knowingly provide any false
statements, representations, or evidence, you also may be subject to
disciplinary actions appropriate under 5 U.S.C. Chapter 75 and 5 CFR Part
752.
IF YOU ARE A FEDERAL EMPLOYEE: Your current net disposable pay is subject to
offset if you do not pay your debt or take other action described above.
This will be approximately 60 days from the date of this letter, and
continuing every pay period until your debt, including any principal,
interest, penalties, and other costs, is paid in full.
You are entitled to the same options as described previously in this letter,
except that your review, if timely requested, would be conducted by a hearing
official upon USDA’s determination of the debt or percentage of disposable
pay to be deducted each pay period. If you wish to petition for a waiver or
review to dispute the existence or amount of the debt, or the amount of the
payroll deduction, you must file a written request for a review no later than
60 days from the date of this letter. The timely filing of a request for
review will suspend the offset process until a determination is made. You
must send evidence to support your position to the Rural Development Business
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Programs Director at the address listed at the end of this letter. A final
decision on the review (if one is requested) will be issued no later than 60
days after filing a request for review (unless extended by the review
official), in accordance with 7 CFR 3.55.
OVERPAYMENTS: Unless prohibited by law or contract, we will promptly refund
any amounts paid by you or deducted from your payment for your debt that are
later waived or found not owed to the United States.
If you have any questions regarding this letter or your rights, you should
contact the Rural Development Business Programs Director in writing at the
following address:
USDA RURAL DEVELOPMENT
PROGRAM TYPE
PROGRAM DIRECTOR
STATE ADDRESS
cc: RURAL DEVELOPMENT BUSINESS PROGRAMS DIRECTOR
GUARANTEED LOAN BRANCH
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RD Instruction 4287-B
Effective Date 10/24/2022
Appendix D
Page 9
Sample Letter to the Lender to Cease Collection Efforts
DATE
LENDING OFFICER, TITLE
LENDER
STREET ADDRESS
CITY, STATE, ZIP
Dear Mr./Ms. LENDING OFFICER,
On DATE USDA Rural Development issued a 60-Day Due Process Notice to
GUARANTOR NAME as a guarantor of a loan by BORROWER under which our Agency
made a loss payment to your institution. The letter was a notification that
the loss amount is now a debt owed to the Federal government and thus
reported to the U.S. Treasury for collection action under the Debt Collection
Improvement Act-Cross Servicing as published in a Federal Register notice
dated January 22, 2004. A copy of this letter is enclosed.
Commensurate with the referral of this debt to the U.S. Treasury, and in
compliance with statutory requirements and authorities, our Agency is
providing notification to you that your collection efforts against GUARANTOR
NAME should cease.
We thank you for your support of our Rural Development programs, and any
questions regarding this action should be addressed to AGENCY CONTACT
INFORMATION.
Respectfully,
RD PROGRAM DIRECTOR NAME
RD PROGRAM DIRECTOR TITLE
Enclosure
Copy:
oOo
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix F
Page 1
APPENDIX E – QUARTERLY DELINQUENT/PROBLEM LOAN REPORT
The State Director is primarily responsible for administering prudent
servicing practices and ensuring that the lender prudently services
guaranteed loans. Reducing the number of problem and delinquent loans, as
well as preventing additional problem and delinquent loans, continues to be a
high priority.
All problem loans in excess of the State's loan servicing authority, all
delinquent loans, and any loans in bankruptcy are to be reported on a
quarterly basis to the National Office using Form RD 4279-16, “Quarterly
Problem/Delinquent Loan Report,” for each loan. The quarterly reports are
due to the National Office B&I Loan Servicing Branch by the 10th day of
January, April, July, and October.
The quarterly reports should contain sufficient documentation to provide any
reader with an understanding of what has occurred to cause the default and
what specific actions are being taken by the lender and/or State Office to
service the account. In monitoring your servicing actions, the National
Office will continue to pay particular attention to the completion of the
quarterly reports submitted. The following considerations must be addressed
completely for each case reported:
1. Basic cause of problem/delinquency and covenants in violation.
2. What curative action is being taken and the lender's latest action.
3. State Office recommendation to eliminate the problem/delinquency.
4. Agency's latest action and date of last contact with lender.
In the event the reports are incomplete or fail to provide a plan of action
for eliminating the cause of each of the existing problem/delinquent loans,
the reports will be returned to the State Office for correction and
resubmission to the National Office.
Quarterly reports should be accompanied by GLSR002, "Guaranteed
Problem/Delinquent Servicing Report," and GLSR030, "Direct Delinquencies
Report." The results of GLSR002 are determined by the status codes that the
State inputs on the criteria page. If the State does not indicate specific
status codes, the report will provide the user with any loan currently having
a GLS status code of 501-549. The State should also pull report GLS2001,
"List of Delinquent Borrowers (Guaranteed Only)" and compare it with GLSR002.
The borrowers listed on report GLS2001 should be the same as the borrowers
having a status code of 520-549 on report GLSR002. If these reports do not
match up, the State must reconcile them by either correcting the status code
in the GLS or updating the default status report showing the loan has been
brought current. Report GLSR030 results are determined by the status found
in the Program Loan Accounting System (PLAS). If a borrower should not be
coded as delinquent in PLAS, you should work with the accountant in the
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Appendix F
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Fiscal and Accounting Branch in the office of the DCFO that is assigned to
your State.
GLS is the official reporting system and absolutely must be accurate. The
National Office continues to receive quarterly reports in which GLSR002 and
GLSR030 are not attached. We cannot stress enough the importance of
submitting these GLS reports in conjunction with the quarterly reports.
These GLS reports are time sensitive, and the data cannot be recreated or
replicated after the end of the quarterly reporting cycle.
It is important to actively service the loans in your portfolio. The
importance of lender and/or borrower visits, spreading and analyzing
financial statements, and monitoring lender and borrower activities cannot be
overstated.
oOo
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix F
Page 1
APPENDIX F - USDA LINC/APPLICATION AUTHORIZATION SECURITY MANAGEMENT SYSTEM
Background Information:
USDA Rural Development has incorporated the Status Reports, Default Status
Reports, and Loan Closing for guaranteed loans to an electronic system. This
allows the lender to submit their monthly default and semiannual status
reports electronically. The forms are submitted in real-time, saving mailing
time, the possibility of lost documents, and paper generation. This system
is secured and incorporates encryption technology used by many commercial
banks in on-line banking applications, and there is no software to buy or
install.
The lender user will be able to submit information in LINC and GLS any time
during normal operating hours (available for use Monday through Saturday from
6am to 7pm Central Standard Time and Sunday from 8am to 4pm CST). If errors
occur in the submission of information from the lender user, field office
personnel must be contacted immediately to determine the error and possibly
have the user resubmit information to GLS through LINC. The Agency will not
be responsible for any damages incurred by the lender as a result of missing
or delayed submissions of information when the problem is not with or caused
by the Agency.
The following terms are used in the LINC and Application Authorization
Security Management System:
Application Authorization Security Management (AASM) System. The system
defining user roles for lender employees and providing a means for the
Systems Administrator to assign those roles and respective access levels.
This system is also used by the office of the DCFO to establish security
administrators and by security administrators to establish lender/branch
representatives and viewers.
Branch Administrator. Employee of the lender who has authorization only for
a specific branch or multiple branches of the lender’s ID and is responsible
for adding Branch Representatives or Branch Viewers to the AASM system and
ensures that all employees adhere to the requirements of electronic data
submission. These employees also have access to the LINC system to input
electronic data.
Branch Representative. Employee of the lender who has authorization only for
a specific branch or multiple branches of the lender’s ID in the LINC system.
Branch Viewer. Employee of the lender who has view-only capacity for a
specific branch or multiple branches of the lender’s ID in the LINC system.
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Effective Date 10/24/2022
Appendix F
Page 2
eAuthentication. eAuthentication is the system used by USDA agencies to
enable customers to obtain accounts that will allow them to access USDA Web
applications and services via the Internet. This access includes submitting
forms electronically, completing surveys online, and checking the status of
USDA accounts. The security system is also used by USDA to restrict LINC
access to authorized users. Users must register and be identity-proofed by a
Local Registration Authority prior to access being granted.
Lender Administrator. Employee of the lender who is authorized and
responsible for adding the Lender Representative/Viewer or Branch
Representative/Viewer for a specific lender’s ID or multiple lender IDs to
the AASM system and ensures that all employees adhere to the requirements of
electronic data submission. These employees also have access to the LINC
system to input electronic data.
Lender Representative. Employee of the lender who has authorization for all
branches of a specific lender’s ID or multiple lender IDs and is responsible
for inputting electronic data in the LINC system.
Lender Viewer. Employee of the lender who has view-only capacity for all
branches of the lender’s ID or multiple IDs in the LINC system.
Level 1 Access. A secured level of limited access to USDA Web site portals
and applications that have minimal security requirements. Level 1 access is
limited and in most cases does not allow one to conduct official electronic
business transactions with USDA via the Internet. The Guaranteed
Underwriting System requires a Level 1 access.
Level 2 Access. A secured level of access providing access to all of the
portals and applications within the USDA Web site that are covered by an
account with Level 2 access. This access also provides the ability to
conduct official electronic business with USDA via the Internet.
Local Registration Authority (LRA). USDA employees who are trained to act as
the “trusted entity” to validate the identity of a customer seeking access to
the USDA eAuthentication system. The role of the LRA can be compared to that
of a Notary Public who ensures the identity of an individual conducting
official business transactions.
Security Administrator. An employee of the lender who is either designated
as a Lender Administrator or Branch Administrator in the AASM system.
USDA Lender Interactive Network Connection (LINC). The portal Web site at
https://usdalinc.sc.egov.usda.gov/ used by lenders to update loan data in the
Agency’s Guaranteed Loan System. Current LINC capabilities include loan
closing and status reporting.
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Appendix F
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Procedures for using LINC:
(a) The lender must select an employee to be their Security Administrator in
order to access LINC and must complete the Agreement for Electronic
Transactions (example of the Agreement is included in this Appendix) to
designate the Security Administrator.
Note: The Security Administrator can process loan closings and status
reports and delegates access to the system to all other lender employees
(representatives and viewers).
(b) The Security Administrator and all other employees who
will use the system must go to the following web site to create an
eAuthentication ID with Level 2 access: www.eauth.usda.gov.
(c) In order to use the status reporting and loan closing system through
LINC, the individual must personally present a valid government photo
identification for Level 2 access to a USDA employee, who has been trained as
an LRA. The LRA must personally verify the lender employee’s identity and
validate their account using a valid ID.
(d) The USDA employee, who is providing the lender training, will fax the
Agreement to the Guaranteed Loan Branch (GLB) in the office of the DCFO at
(314) 457-4279.
(e) When GLB receives the Agreement for Electronic Transaction, they will
authorize the Security Administrator to access the status report and loan
closing system. The Security Administrator will receive an e-mail that they
are authorized as a Security Administrator for the lender.
(f) The Security Administrator is responsible for delegating access to other
employees who will use the status report and loan closing system at the
following web site: https://usdalinc.sc.egov.usda.gov. After accessing the
LINC site, click the RBS, RUS or RHS LINC HOME (access is based on
authorization given for various programs).
(g) The Security Administrator must add each individual to the AASM system
before they will have access to input the status reports and loan closings.
Any individual who will be responsible for completing the electronic
transactions mentioned in this document must be eAuthenticated at Level 2
access and ID proofed by an LRA.
(h) The lender can also request to expand their program access using the
sample letter titled, “Security Administrator Request to Expand Program
Access,” as shown below. The lender will need to work with their local Rural
Development field office to process this request with GLB, DCFO, faxing the
request to (314) 457-4279.
(i) The lender can receive assistance from the Rural Development Help Desk
for access problems, activation of the account, and forgotten (reset)
passwords by calling (800) 457-3642, at the prompt select option #2 (issues
with applications), at the next prompt, select option #2 (Rural Development).
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Effective Date 10/24/2022
Appendix F
Page 4
Procedures for accessing LINC:
LINC gives lenders the capability to add loan closing information, grant USDA
LINC access to other lender employees, and process status/default reports.
The web site URL is https://usdalinc.sc.egov.usda.gov.
Click on the Rural Business Service link to access Business Programs loans,
the Rural Housing Service link to access Community Facility loans, and the
Rural Utilities Service link to access Water and Waste Disposal Facilities
loans.
Press the Continue push button to move to the eAuthentication Login screen.
Enter your Level 2 eAuthentication User ID and Password and press the Login
push button. Local RD staff cannot access any password information. In
cases of a forgotten password, a user must receive assistance to reset any
passwords from the RD Help Desk at (800) 457-3642, and select option 2,
option 2.
If login is successful, the called page will display. For example, if the
Lender Status Report List link was selected, you would see the following:
“This page defaults to show all due and past due status and default reports.
If no due or past due reports exist, no loans will be listed and the
Validation Error “CI00801E: No entries found that meet the search criteria.”
Received and Future status reports can also be viewed on this page by
selecting the appropriate option from the Receipt Status drop down box and
pressing the Submit push button.
To submit a due or past due report, click the applicable Effective Date link,
enter the required data, and press the Submit push button. To submit a
report that is not listed (an initial default report, for example), press the
Add Report push button and enter the required data.
Status Reporting by the Lender via LINC
Form RD 1980-41, “Guaranteed Loan Borrower Status,” (status report) has been
automated and is accessible to the lender through LINC in the form of an
input screen. An e-mail notice will be sent to the Security Administrator
and other users designated by the lender’s Security Administrator
semiannually (on or before June 30 and December 31) indicating the
requirement to update the status report. The status report is due within 30
days (July 31 and January 31 respectively). If the lender completes the
report and marks the loan as delinquent (either behind or default), a default
status report will be generated, and the lender must complete this report
through LINC within 30 days. Field offices should provide guidance to the
lender that the loan should not be designated as delinquent unless the loan
is more than 30 days past due and cannot be cured within 30 days. This will
eliminate inaccurate accounting of delinquent loans. The Guaranteed Loan
Borrower Status report input screen corresponds to the fields on the status
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Effective Date 10/24/2022
Appendix F
Page 5
report. If the report is not completed in LINC within 45 days of the due
date, the office of the DCFO will notify the lender by e-mail. Field offices
should monitor the receipt and update of the status reports by running GLS
report GLSSR01, Past Due Status Report.
GLS:
Agency personnel can view the same Lender Status Report List screens that
lenders can. To do so, select the Lender link on the GLS home page:
Enter the lender’s ID and press the Submit push button.
Switch the Action drop down to Lender Status Report List and click the Lender
ID link.
The Lender Status Report List displays. From this point forward, screen
displays and functionality are identical on both the LINC and GLS web sites.
Note: To see all loans serviced by a particular ID, clear the Lender Branch
field and press the Submit push button.
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix F
Page 6
Agreement for Electronic Transactions:
1.0 INTRODUCTION
This agreement between the U.S. Department of Agriculture (USDA) Rural
Development (RD) and __________________________________, hereafter known as
Lender, prescribes the general procedures and policies to be followed when
the USDA Lender Interactive Network Connection (LINC) is used to enter the
Guaranteed Loan System (GLS) for submitting electronic data in lieu of the
paper documents normally associated with conducting business with RD.
2.0 PURPOSE
This agreement ensures that the electronic transmission of data between USDA
RD and the Lender will be treated equivalently to the manual paper-based
transmission of data.
3.0 TERMS AND CONDITIONS
3.1 RD will bear the cost of making web pages available for retrieval by the
Lender from GLS through LINC and receiving the systemic information
transmitted to GLS through LINC. The Lender is responsible for all costs
associated with retrieving information on the web pages and transmitting the
systemic transactions to GLS through LINC.
3.2 This Agreement authorizes RD to process Loan Closings, Semiannual
Reports, and Default Status Reports electronically, provided that the Lender
inputs all required information. RD will not be responsible for any damages
incurred by the Lender as a result of missing or delayed submissions of
information when the problem is not with or caused by RD.
3.3 The Lender will designate a Security Administrator (SA). The SA will
further be designated as Lender Administrator (having access to all branches)
or a Branch Administrator (having access to a particular branch). The SA
will be required to enter all identified users in the Application
Authorization Security Management (AASM) system through LINC to allow users
to complete electronic transactions.
3.4 This agreement constitutes the entire agreement between the parties. No
changes in the terms and conditions of this agreement shall be effective
unless approved and signed by all parties. In the event a court of competent
jurisdiction negates any of the provisions of this agreement, the remainder
of the agreement will remain in full force and effect.
3.5 In any case where there is a conflict between this agreement and
applicable RD statutes or regulations, the statutes or regulations will
control.
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix F
Page 7
3.6 Individual user identification numbers and passwords may not be
transferred between Lender employees, and the Lender shall ensure that such
transfers do not occur.
3.7 Lender agrees to maintain documentation that substantiates the
electronic data transmission for 6 years. Lender agrees to provide
supporting documentation when requested by RD to complete the electronic
transaction.
3.8 Information needed to add a Security Administrator for loan closing and
status reporting in GLS after Level 2 (security) has been processed/approved
should be faxed, e-mailed, or mailed to DCFO, Guaranteed Loan Branch (GLB)
from the state/field office. The information can be found in the Lender User
Manual.
4.0 FORCE MAJEURE
None of the parties in this agreement will be liable for failure to properly
conduct electronic transmission of data in the event of war, accident, riot,
fire, flood, epidemic, power outage, labor dispute, act of God, act of public
enemy, malfunction or inappropriate design of hardware or software, or any
other cause beyond such party’s control. If, in RD’s judgment, standard
business cannot be conducted by LINC and/or GLS, RD will, at its discretion,
return to paper-based transactions, as appropriate, for processing the
business documents described in this agreement.
5.0 AGREEMENT REVIEW AND UPDATE
Lender will notify RD contact, identified below, in writing within 15
calendar days of any change in company name, Lender ID number, or Security
Administrator. Changes will be incorporated into a new Agreement. RD will
notify Lender in writing at least 60 days in advance of any change in the
technical provisions of LINC and/or GLS. All notifications required under
this agreement will be submitted in writing to the Security Administrator
indicated below.
6.0 TERMINATION
This Agreement may be terminated by either RD or the Lender, effective 30
days after receipt of written notice by either party. Termination notice
will have no affect on transactions occurring prior to the effective date of
termination.
7.0 APPROVAL
The undersigned Lender and Rural Development do hereby agree to the
participation requirements and other provisions of the Agreement.
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix F
Page 8
Lender Name Security Administrator (Indicate Lender or
Branch Administrator):
Lender ID Number: Signature:
USDA Assigned Branch Number Title:
(Required for both Lender and
Branch Administrators):
Signature: eAuthentication ID:
Date: Date:
Print Name: e-mail address:
Title: Telephone:
e-mail address: Fax Number:
Program Access: Check all that apply
Single Family Housing
Business Programs
Community Facility
Multi-Family Housing
Water & Waste Disposal
Rural Development
Loan Approval Official
Name:________________________________________________
Title:_______________________________________________
Signature:___________________________________________
Date:________________________________________________
Telephone:___________________________________________
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix F
Page 9
Security Administrator Request to Expand Program Access
Sample Letter
Subject: Request to Expand Program Access
To: State Director
USDA Rural Development
Attn: Program Director
Business Programs
Community Programs
Water and Environmental Programs
We are requesting an expansion/change of authority for ___________________,
Security Administrator. Currently _____________________ has authority to
access (Business Programs, Community Programs and Water and Waste Disposal
Programs). Please add access to the following programs:
______ Business Programs
______ Community Programs
______ Water and Waste Disposal Programs
The following is the Security Administrator’s information:
eAuthentication ID:__________________________________________________
Name:________________________________________________________________
Phone Number:________________________________________________________
Fax Number:__________________________________________________________
Lender ID:___________________________________________________________
Branch ID:___________________________________________________________
If you have any questions, please contact our office at____________________.
Signature: ___________________________
Lender Name: _________________________
Title: _______________________________
oOo
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix G
Page 1
APPENDIX G – CREDIT EVALUATION GUIDANCE
A. Lender Analysis of Borrower Financial Statements
The Agency must increase its efforts to obtain financial statements, review
lenders’ analyses, and provide follow-up to lenders on servicing
deficiencies. Files should be documented to show attempts to obtain the
required information. A nonexclusive list of the lender’s servicing
responsibilities is contained on Form RD 4279-4, “Lender’s Agreement,”
Section IV, paragraph (c). The lender’s servicing responsibilities include
obtaining compliance with loan covenants and for obtaining, analyzing, and
forwarding borrower and guarantor financial statements to the Agency.
In accordance with § 4287.107(d), the lender is responsible for providing the
Agency with:
1. an analysis of the borrower’s financial statements (including
spreadsheets); and
2. a written trend analysis that compares the borrower’s year-to-year
historical financial information. The lender’s analysis should also include
a borrower ratio comparison to industry standards for similar size
businesses. The lender's written analysis to the Agency must include the
borrower’s strengths, weaknesses, and extraordinary transactions, any loan
agreement violations, and other indications of the financial condition of the
borrower. The lender will submit the annual financial statements to the
Agency, along with its spreadsheets and written analysis, within 120 days of
the end of the borrower’s fiscal year. Upon receipt, the servicing office
should analyze the borrower's annual financial statements. A copy of the
analysis will be filed in the case file.
It is important to note that every borrower is different. As such, recognize
that economic conditions change, industry conditions are not constant, and
public policy and community relations affect how lenders deal with problem
loans. A review of the financial statements assists the lender and Agency in
determining the appropriate action that will maximize recovery to the Agency.
A reasonably prudent lender will include a number of the identified ratios
and provide this information to the Agency, along with its written summary of
the analysis. Promptly obtaining and reviewing financial information from
the borrower can reveal financial red flags that indicate problems the
borrower may be experiencing and has not disclosed.
B. Loan Classification
Guaranteed loans must be properly classified at inception and during the
term of the loan. Properly classified loans will enable the Agency to focus
oversight activities on higher risk loans and enable the State and National
Offices to conduct effective portfolio management and assess the quality or
risk in the portfolio.
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix G
Page 2
Two elements are necessary to develop classification results into
meaningful data: 1) clear, well-understood classification definitions and 2)
uniform application of the definitions. The Agency has essentially adopted
the Uniform Classification System (UCS), which provides classification
definitions necessary to develop meaningful data on the quality of the loan
portfolio. UCS credit classifications are assigned on the basis of risk and
include the following categories: Acceptable, Special Mention, Substandard,
Doubtful, and Loss. The category Seasoned is not recognized by the UCS but
is an option in GLS.
Many lenders use variations of the UCS or entirely different systems. When a
lender submits its loan classifications using a different system or code,
review the differences or ask the lender to explain how its risk rating
system codes correlate to the UCS descriptions used by the Agency. Lenders
may assign more than one classification to different portions of a loan when
portions of the loan meet different classification standards. Because GLS
will accept only one classification per loan, when this occurs, the most
adverse classification should be entered for the entire loan.
The regulations require the lender to provide the classification at loan
closing. All guaranteed loans are to be classified as if they were not
supported by a loan guarantee. The lender is also required to notify the
Agency whenever there is a change in the loan classification (not only when a
loan’s classification is lowered). This will assist the Agency in portfolio
management.
When the Agency receives a loan classification from a lender or
otherwise feels a change in classification may be warranted, the Agency
should conduct its own analysis of the loan. If the Agency disagrees with
the lender’s classification, the Agency should discuss concerns with the
lender. In any event, the Agency’s opinion of the appropriate loan
classification should be entered into GLS within 30 days of receipt of the
lender’s classification. The integrity of the data in GLS is vitally
important, and every effort should be made to maintain GLS in a current
status.
The loan classification codes are maintained within GLS on the Business
Programs Loan/Grant Detail screen. The screen can be found by going to the
Request List, inputting the borrower’s ID, and on the Action dropdown box,
highlight “Maintain Loan/Grant Detail” and click on the type of assistance
code. The loan classification is a dropdown box with the codes as described
below. For further instructions, please review the GLS User Guide. Loans
classified Substandard, Doubtful, and Loss are considered adversely
classified; while Special Mention loans are not.
A general description and application of each classification category and
credit factor is provided below.
Current Non-Problem – GLS code 10
These loans are high quality. They are current and in compliance with loan
conditions and the program regulations, but do not meet all of the criteria
for a Seasoned classification. Loans in this classification are typically
more than 1 year old with a good payment history and where the Agency has
conducted its initial lender visit and found no credit concerns.
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix G
Page 3
Seasoned – GLS code 20
A loan that (1) is in compliance with all loan conditions and applicable
program regulations; (2) the borrower has a remaining guaranteed loan
principal balance of two-thirds or less of the original aggregate of all
existing B&I and REAP guaranteed loans made to that business; (3) has been
current on loan payments for 24 consecutive months; and (4) is secured by
collateral that is determined to be adequate to ensure there will be no loss
on the loan.
Special Mention – GLS code 30
Loans in this category are currently protected but are potentially weak.
They do not presently expose the lender and Agency to a sufficient degree of
risk to warrant a Substandard classification but do possess potential
weaknesses that may, if not checked or corrected, weaken the loan or
inadequately protect the Agency's position at some future date. Special
Mention loans therefore deserve close attention.
All loans, regardless of collateral, financial stability, and responsibility
of the borrower, have certain risks. The credit risk may be relatively minor
yet constitute identifiable risks in light of the circumstances surrounding a
specific loan. Typically (but not always), there is a credit reason for the
lender to request a loan guarantee. Generally, all loans to new/startup
businesses will be classified as Special Mention but are not considered
Substandard. Some examples of credit risk that could warrant a Special
Mention classification may include:
Business is a startup with limited or no operating history.
Adverse trends in the borrower’s operation or industry.
Business is subject to economic or market conditions that may, in the future,
affect the borrower.
Recent change in borrower management.
Lack of proper lender oversight (possibly due to lack of lender expertise),
credit support, on-site appraisals or inspections, failure of the lender to
act prudently, or other similar matters that could lead the reviewer to
question the quality of the loan.
Collateral coverage is tight, the collateral is highly specialized, or the
lender lacks control over the collateral.
Loans in which actual weaknesses, rather than potential weaknesses, are
evident and significant should be considered for an adverse classification.
Substandard – GLS code 40
These loans are inadequately protected by the current sound worth, repayment
capacity, equity, and/or collateral pledged. Loans so classified must have a
well-defined weakness or weaknesses that could jeopardize normal collection
of the debt. They are characterized by the distinct possibility that the
lender will sustain some loss if the deficiencies are not corrected.
All delinquent loans and loans where the borrower is in bankruptcy should be
adversely classified, even when a loss is not likely.
Doubtful – GLS code 50
Loans classified Doubtful have all the weaknesses inherent in those
classified Substandard with the added characteristic that weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix G
Page 4
Loss – GLS code 60
Loans classified Loss are considered uncollectible and of such little value
that their continuance as bookable loans is not warranted. This
classification does not mean the loan has absolutely no recovery or salvage
value, but rather it is not practical or desirable to defer writing off this
basically worthless loan even though partial recovery may be affected in the
future. Delaying the recognition of losses due to the remote possibility
that a restructure will occur is not considered consistent with the
definitions contained in the UCS or generally accepted accounting principles.
Loans in liquidation where a significant loss is anticipated should be
classified Loss. Unfortunately, GLS cannot accommodate split classifications
where only the estimated loss amount would be classified Loss.
oOo
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix H
Page 1
APPENDIX H – SAMPLE LETTER – INTEREST TERMINATION DATE
DATE
Sent via Email and 1st Class Mail
NAME OF HOLDER
ADDRESS
CITY, STATE ZIP
RE: Business and Industry Guaranteed Loans, Section 9003
Bio-refinery Assistance Loans and Section 9007 Rural Energy for America
Program Loans
BORROWER – LOAN AMOUNT
GLS BORROWER ID
GLS LOAN NUMBER
Interest Termination Date
Dear HOLDER OFFICER,
Our records indicate that NAME OF HOLDER currently owns a portion of
BORROWER’S, NOTE DATE loan guaranteed by the United State Department of
Agriculture (USDA) through the Business and Industry Guaranteed Loan Program.
As the Agency understands the situation, BORROWER was $AMOUNT behind schedule
as of DATE. In accordance with 7 CFR § 4287.145, for loans closed on or after
August 2, 2016, the lender or the Agency will issue an interest termination
letter to the holder(s) establishing the termination date for interest
accrual. The guarantee will not cover interest to any holder accruing after
the greater of: 90 days from the date of the most recent delinquency
effective date as reported by the lender or 30 days from the date of the
interest termination letter.
The purpose of this letter is to inform HOLDER that USDA Rural Development is
terminating the interest accrual on the BORROWER’S loan effective as of
INTEREST TERMINATION DATE. If LENDER declines to repurchase your portion of
this loan upon your written demand and you subsequently demand repurchase by
USDA Rural Development, you will only be paid interest through this date.
In accordance with 7 CFR § 4279.16, any party adversely affected by this
decision may request a determination of appealability from the National
Appeals Division (NAD), USDA, within 30 days from the date you received this
letter. Appeals will be handled in accordance with 7 CFR, Part 11. There is
no cost for an appeal hearing. You must write the Area Supervisor, NAD, for
your region at the following address:
(12-08-22) PN 572
RD Instruction 4287-B
Effective Date 10/24/2022
Appendix H
Page 2
Area Supervisor
U.S. DEPARTMENT OF AGRICULTURE
NATIONAL APPEALS DIVISION,
REGIONAL OFFICE,
POST OFFICE BOX _____
City, State Zip Code
If you have any questions, please feel free to contact this office. Thank
you for your interest in the business programs of Rural Development.
Sincerely,
Business & Cooperative Programs Director
Enclosures: Lender’s Agreement
Loan Note Guarantee
cc: Regional Coordinator
Servicing Branch Chief, Washington, DC
oOo
(12-08-22) PN 572
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