The lender is responsible for servicing the entire loan and taking all servicing actions that a reasonably prudent lender would perform in servicing its own portfolio of loans that are not guaranteed. The lender must certify that it will service the guaranteed loan in accordance with this part, its loan servicing policies and procedures, and the lender's agreement. Where a lender's loan servicing policies and procedures address a corresponding requirement in this part or in the lender's agreement, the lender must comply the corresponding requirement in this part, unless otherwise approved by the Agency.

(a) A lender's servicing responsibilities include, but are not limited to,

(1) Periodic borrower visits;

(2) Distribution of guaranteed loan funds;

(3) Collecting payments on guaranteed loans;

(4) Ensuring compliance with the covenants and provisions in the loan agreement, security instruments, and other supplemental agreements relating to the guaranteed loan;

(5) Obtaining and analyzing financial statements;

(6) Ensuring payment of taxes and insurance premiums;

(7) Maintaining liens and lien priority on collateral;

(8) Keeping an inventory of all collateral items, and reconciling the inventory of all collateral sold during guaranteed loan servicing, including liquidation;

(9) Obtaining Agency approvals or concurrence as required; and

(10) Cooperating fully with all oversight and monitoring efforts of the Agency or its representatives as specified in § 5001.502.

(b) The lender must remain mortgagee and secured party of record, notwithstanding the fact that another party may hold a portion of the loan.

(c) The lender must ensure that the borrower has obtained and will maintain all necessary insurance coverage appropriate to the proposed project.

(d) 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 guaranteed loan. If the Agency exercises this right, the lender must cooperate with the Agency to rectify the situation.

The Agency will employ various oversight and monitoring activities in order to ensure compliance with this part. All lenders involved in any manner with any loan note guarantee issued under this part or under a loan note guaranteed previously issued under a guaranteed loan program identified in § 5001.1 of this part must cooperate fully with the Agency in its oversight and monitoring efforts, including, but not necessarily limited to, those identified in paragraphs (a) through (c) of this section.

(a) Reports and notifications. Lenders must submit to the Agency reports and notifications as required by this part. To facilitate the Agency's oversight and monitoring including, but not necessarily limited to, those identified in paragraphs (a)(1) through (4), as applicable, of this section.

(1) Status reports. No less than semi-annual status reports as of June 30 and December 31 each year (unless more frequent reports are needed as determined by the Agency to protect the financial interests of the government) regarding the condition of the lender's guaranteed loan portfolio (including borrower status and loan classification) and any material change in the general financial condition of any borrower since the last report was submitted. The lender must submit these reports within 30 calendar days after the reporting period, using the appropriate Agency online reporting system.

(2) Default reports. Monthly default reports for each guaranteed loan in monetary default using the appropriate Agency online reporting system are due on the 15th working day of each month.

(3) Notifications. The lender(s) must notify the Agency by written notification within 15 calendar days of any:

(i) Loan agreement violation by any borrower, including when the borrower is 30 days past due or is otherwise in default of the covenants in the loan agreement;

(ii) Permanent or temporary reduction in the interest rate;

(iii) Downgrade in the lender's loan classification of any guaranteed loan; and

(iv) Protective advances in accordance with § 5001.516.

(4) Collection activities report. If a lender is liquidating the assets of a borrower, the lender must also evaluate and provide a report of collection activities regarding the collectability of personal and corporate guarantees.

(b) Records—(1) Lenders. Upon request by the Agency, the lender must permit representatives of the Agency (or other authorized persons) to inspect and make copies of any of the records of the lender pertaining to each guaranteed loan issued under this part or previously issued under one of the programs identified in § 5001.1 of this part. Such inspection and copying may be made during regular office hours of the lender or at any other time the lender and the Agency agree upon.

(2) Borrowers. Except as provided by law, upon request by the Agency, the borrower must permit representatives of the lender (or other authorized persons) to inspect and make copies of any of the records relating to the borrower's project. Such inspection and copying may be made during regular office hours of the borrower or at any other time agreed upon between the borrower and the lender.

(c) Agency and lender conference. When requested by the Agency, 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.

(d) Access to the project. Until the loan note guarantee is terminated, the borrower must allow the lender and therefore the Agency access to the project and its performance information and permit periodic inspections of the project by an authorized representative of the lender or the Agency.

Once a REAP RES or EEI project has been completed, the lender or borrower is required to submit the applicable project performance report as identified in paragraphs (a) and (b) of this section by January 31 each year.

(a) Renewable energy systems. For RES projects, commencing the first full calendar year following the year in which project construction was completed and continuing for three full years, the borrower must provide an outcome project performance certification noting that either the system has or has not performed at the steady state operating level as described in the technical report filed with the REAP guaranteed loan application, and whether projected jobs created or saved have occurred. If it has not performed as intended, a report detailing the circumstances affecting performance must be provided to the Agency along with the actual energy production of the system (in BTUs, kilowatt-hours, or similar energy equivalents) and the actual number of jobs created or saved as a direct result of the RES project for which guaranteed loan funds were used.

(b) Energy efficiency improvements. For EEI projects, commencing the first full calendar year following the year in which project construction was completed and continuing for two full years, the borrower must provide an outcome project performance certification noting that either the energy efficiency improvements have or have not been utilized at or above the projected operating levels as described in the technical report filed with the REAP guaranteed loan application, and whether projected jobs created or saved have occurred. If it has not performed as intended, a report detailing the circumstances affecting performance must be provided to the Agency along with the actual energy savings of the system and the actual number of jobs created or saved as a direct result of the EEI project for which guaranteed loan funds were used.

(a) The lender must obtain the borrower's and any guarantor's financial statements required by this part and the loan agreement. The Agency may require an annual audited financial statement based on a project's circumstances. 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 part 200, subpart F.

(b) The lender must submit financial statements obtained under this section to the Agency within 120 days of the end of the borrower's fiscal year. When the borrower's audit is conducted in accordance with 2 CFR part 200, subpart F, audits must be submitted no 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. If a lender makes reasonable documented attempts to obtain financial statements but is unable to obtain the borrower's (or guarantor's) cooperation, the failure to obtain financial statements does not impair the validity of the loan note guarantee.

(c) Annual financial statements must be in accordance with accounting practices acceptable to the Agency as prescribed in § 5001.9 for all borrowers with a guaranteed loan balance in excess of $600,000. The lender may determine the type and frequency of financial statements for borrowers with a total guaranteed loan balance below $600,000 upon notification and justification to the Agency. This section does not supersede the borrower financial statement requirements of 2 CFR part 200, subpart F.

(d) The lender must analyze the financial statements obtained under paragraph (a) of this section and provide the Agency with a financial analysis including a credit evaluation of trends, strength and weaknesses, ratio analysis, and conclusions, plus any extraordinary transactions; borrower 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.

(e) Following the Agency's review of the lender's financial analysis, the Agency will notify the lender in writing of any concerns. The lender must address each concern identified in the Agency's findings by the due date stated in the correspondence.

(f) The lender should routinely confirm the outstanding principal balance of a guarantee held by a holder to avoid any discrepancy and delay in reconciliation in the event of a lender or Agency repurchase of the guaranteed loan from a holder in accordance with § 5001.511.

(a) Inspection of collateral. The lender must inspect the collateral as often as necessary to properly service the guaranteed loan.

(b) Release of collateral. The lender must provide written justification for the release and obtain Agency approval before releasing any collateral. The lender is not required to provide justification for the release of collateral when the loan is not in default or liquidation and the collateral being released is a working asset, 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.

(1) Exceptions to prior approval. Lenders are not required to obtain Agency approval prior to releasing collateral when the collateral sale proceeds are used to pay down debt in order of lien priority, pay down the guaranteed loan principal, or to acquire replacement collateral.

(2) Appraisals. Current appraisals are required on all transactions pursuant to the requirements of § 5001.203 of this part.

(3) Sale or release transaction. The sale or release of collateral must be based on an arm's length transaction, unless otherwise approved, in writing, by the Agency when the sale or release of collateral results in paying the guaranteed loan in full and termination of the loan note guarantee. There must be adequate consideration at market value for the release of collateral. Such consideration may include, but is not limited to:

(i) 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;

(ii) Use of the net proceeds from the sale of collateral to purchase other collateral of equal or greater value 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;

(iii) Application of the net proceeds from the sale of collateral to the borrower's guaranteed loan or to its 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; and

(4) No adverse impact. Any release of collateral must not materially cause an adverse effect to the project's operation or financial condition and the remaining collateral must be sufficient to provide for adequate collateral coverage. Such assurance must be supported by written documentation from the lender and be acceptable to the Agency. If the Agency determines that the project may be adversely affected by a release of collateral, the Agency may, at its discretion, require an appraisal on the remaining collateral in accordance with § 5001.203 of this part.

(a) General. A lender must obtain prior written Agency approval in accordance with paragraph (c) of this section before the lender conducts a transfer and assumption of a guaranteed loan. The transferee will assume a loan amount at least equal to the outstanding loan balance or the present market value of the collateral, whichever is less. If the transferor is to receive a payment for their equity, the total debt must be assumed. The following conditions must be met:

(1) All transfers and assumptions will have a fee as provided by § 5001.509(b).

(2) For each transfer and assumption, the lender must concur in plans for the disposition of funds, if any, in the transferor's debt service, operations and maintenance, or other reserve accounts.

(3) The lender must confirm that the transfer and assumption can be completed in accordance with applicable laws.

(4) The lender must confirm that the conveyance instruments will be filed, registered, and recorded as appropriate and legally permissible. The transfer and assumption must be made on the Lender's form of assumption agreement and contain the Agency case number of the transferor and transferee. The lender must provide the Agency with a copy of the assumption agreement.

(5) The lender may request a transfer and assumption when the total indebtedness, or less than the total indebtedness, of the guaranteed loan is assumed by another borrower. If the assumption is for less than the total indebtedness, the transfer and assumption must be an arm's length transaction and the transfer must be of all loan collateral.

(6) In the event of default of the guaranteed loan, a transfer and assumption of the borrower's operation and guaranteed loan 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.

(7) No transfer and assumption is permitted when the Agency has repurchased any guaranteed portion of the guaranteed portion of the loan.

(8) If the transfer is for less than the total indebtedness, the pro rata share of an eligible loss will be paid to the lender after execution of the transfer and assumption documents.

(b) Documentation. The lender will provide to the Agency documentation to support the transferee's status as an eligible borrower, and such other documentation as the Agency may request to determine eligibility and credit evaluation.

(1) The new borrower must sign an Agency-approved application form.

(2) The Agency will require personal and/or corporate guarantee(s) in accordance with § 5001.204 of this part, as applicable. Any required new personal, partnership or corporate guarantors of the transferred guaranteed loan must sign an Agency approved guarantee form.

(c) Agency approval. The Agency will only approve a transfer and assumption if the transferee will continue the eligible purpose of the guaranteed loan and such transfer and assumption complies with the conditions specified in paragraphs (c)(1) through (3) of this section, as applicable.

(1) Whenever the transferor and transferee are affiliates or related parties, the transfer and assumption must:

(i) Be to an eligible borrower to continue the project for eligible purposes;

(ii) Transfer all the loan collateral; and

(iii) Be for the full amount of the guaranteed loan indebtedness.

(2) A transfer and assumption may be approved when the present borrower is unable or unwilling to accomplish the objectives of the guaranteed loan, and the transfer will be in the best financial interest of the borrower and the Agency.

(3) The Agency prefers to transfer to an eligible borrower subject to the policies and procedures governing the type of guaranteed loan being made, however the Agency will consider approving a transfer of a guaranteed loan to an ineligible borrower only if:

(i) The sale price is greater than it would be if the transfer was to an eligible borrower;

(ii) The transfer to an ineligible borrower is needed as a method for servicing a problem case; or

(iii) When an eligible borrower is not available. All transfers to an ineligible borrower must meet the following requirements:

(A) Transfer fees will be collected, and payments applied, in accordance with § 5001.509(b);

(B) The ineligible borrower agrees to pay the loan balance within the remaining term of the original guaranteed loan in periodic installments that will not result in a balloon payment at the loan's maturity;

(C) Interest rates are at the rate specified in the promissory note of the transferor or at rates customarily charged borrowers in similar circumstances in the ordinary course of business. The rates can be either fixed or variable, and are subject to Agency review and approval;

(D) The ineligible borrower must have the legal authority to enter into the contract and have the ability to repay the loan, as determined by the lender and the Agency. The ineligible borrower must submit a current balance sheet to the lender. The lender must obtain and analyze the credit history of the ineligible borrower.

(d) Release of liability. The transferor, including any guarantor, can be released from liability only with prior Agency written approval when the transfer and assumption is for the full outstanding balance of the guaranteed loan. If the assumption is for less than the full amount of the loan and the Agency pays a loss to the lender, the transferor, including any guarantor, are specifically subject to the Debt Collection Improvement Act provisions unless other workout arrangements have been made.

(e) Loan agreement. A new loan agreement or an assumption agreement, acceptable to the Agency must be executed to establish the terms and conditions of the loan being assumed.

(f) Changes in loan terms. When a transfer or assumption is made to an eligible borrower continuing the project for eligible purposes, the loan terms may remain the same or may be changed whether the transfer is for the total indebtedness or less than the total indebtedness. If the loan terms are to be changed, the lender must submit a request in accordance with this paragraph (f). The changed loan terms must be concurred to by the Agency, all holders, and the transferee (including guarantors). If there are changes in loan terms, the lender's request will require the following:

(1) An explanation of the reasons for the proposed change in the loan terms, and

(2) Certification that the lien position securing the guaranteed loan will be maintained or improved, and proper insurances will continue to be in effect.

(g) Loan note guarantee. The lender is responsible for noting each transfer and assumption on all originals of the loan note guarantee.

(h) Proceeds. Before the transfer and assumption is closed, the lender must credit any proceeds received from the sale of collateral to the transferor's guaranteed loan debt in order of lien priority.

(i) Additional loans. Guaranteed loans may be used to provide additional funds in connection with a transfer and assumption. The Agency will consider approving a guaranteed loan to provide additional funds in connection with a transfer and assumption pursuant to the lender's submission of a complete application in accordance with 7 CFR part 5001, subpart D.

(j) Credit quality. The lender must make a complete credit evaluation in accordance with § 5001.202 of this part to determine viability of the project (subject to the Agency review and approval) including any requirement for deposits in an escrow account as security to meet the applicable equity requirements for the project.

(k) Appraisals. If the proposed transfer and assumption is for less than the full amount of the guaranteed loan, an appraisal is required on all the collateral being transferred, and the amount of the assumption must not be less than this appraised value. The lender is responsible for obtaining the appraisal, which must conform to the requirements of § 5001.203 of this part. However, if the original appraisal is more than one year old, but less than two years old, the lender may provide an appraisal with a new effective date of evaluation in lieu of a completely new appraisal.

(l) Legal opinion. Prior to Agency approval, the lender must provide the Agency a preliminary written legal opinion that the guaranteed loan can be properly and legally transferred and assurance that the conveyance instruments will be appropriately filed, registered, and recorded. Upon execution of the transfer and assumption, the lender must provide the Agency with a final legal opinion that the assumption is completed, valid, and enforceable, and the assumption is consistent with the conditions outlined in the Agency's conditions of approval for the transfer and complies with all Agency regulations.

(m) Promissory notes. The lender must not issue any new promissory notes, release any mortgages and/or deeds of trust on the existing debt being transferred. An allonge may be attached to existing promissory notes as needed.

(n) Loss/repurchase resulting from transfer and assumption. (1) Any resulting loss must be processed in accordance with § 5001.521.

(2) If a holder owns any of the guaranteed portion of the loan, such portion must be repurchased by the lender or the Agency in accordance with § 5001.511.

(o) Cash down payment. The lender may allow the transferee to make cash down payments directly to the transferor provided:

(1) The transfer and assumption are made for the total indebtedness to an eligible borrower to continue the project for eligible purposes;

(2) The lender recommends that the cash be released, and the Agency concurs prior to the assumption being completed. The lender can 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; and

(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.

(p) Change in control of borrower. The Agency will deem that a transfer and assumption has occurred whenever there is a significant change in the control of the borrower.

(a) After the issuance of a loan note guarantee, a lender may sell or transfer the entire loan to a new lender with prior written approval of the Agency. The Agency may approve the sale or transfer to a new lender if the following conditions are met. The new lender:

(1) Is an eligible lender in accordance with § 5001.130 of this part and is approved as such;

(2) Is able to service the loan in accordance with the original loan documents;

(3) 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; and

(4) The transfer to the new lender is requested in writing by the borrower, the proposed new lender, and the original lender of record, if still in existence.

(b) Upon Agency approval, the original lender must transfer to the new lender the:

(1) Original promissory note and loan security documents;

(2) Original loan note guarantee;

(3) Original personal and corporate guarantee(s);

(4) Loan payment history; and

(v) The new lender must agree to accept the current loan terms, including the interest rate, secondary market holder (if any), collateral, loan agreement terms, and guarantors. The new lender can modify the loan terms after acquisition only by submitting a written request to the Agency and receiving Agency approval.

(vi) The new lender must certify to the Agency that the loan transfer has been completed in accordance with applicable laws and all provisions of the original loan remain in full force and effect.

(c) The Agency will not pay any loss or share in any costs (e.g., legal fees, appraisal fees and environmental assessments) for a voluntary transfer of lender. 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 Federal regulatory agency such as the Federal Deposit Insurance Corporation (FDIC) and the loan is subsequently sold to another lender. However, in situations where the lender has failed and been taken over by a Federal regulator and the loan is liquidated rather than being sold to another lender, the Agency will pay losses and share in costs as if the Federal regulatory agency were an approved new lender.

(d) In cases when there is a transfer to a new lender or when a lender has been merged with or acquired by another lender, the Agency and the new lender must execute a new lender's agreement, unless the new lender already has a valid lender's agreement with the Agency.

(e) After Agency approval of a transfer of lender, all terms of the original loan note guarantee shall transfer to the benefit of the new lender.

Agency approval. All borrower mergers or consolidations (herein referred to as “mergers”) require approval by the Agency and the lender. The Agency may approve a merger when—

(a) The resulting organization will be eligible for a guaranteed loan and assumes all the liabilities and acquires all the assets of the merged borrower;

(b) The merger is in the best interest of the government and the merging organization;

(c) The resulting organization can meet all required conditions as contained in specific loan agreements; and

(d) All property can be legally transferred to the resulting organization.

The lender may pass the servicing fees on to the borrower but may not delay payment of the fee to the Agency while collecting the payment from the borrower.

(a) Guarantee retention fees. Where the lender is required to pay a periodic guarantee retention fee (see § 5001.455), the fee is due for the entire payment period even if the loan note guarantee is terminated or transferred before the next retention fee payment is due.

(b) Borrower transfer fee. The Agency will charge the following fees:

(1) A one-time, $1,500 nonrefundable transfer fee at the time of transfer to an eligible borrower.

(2) Payment of a one-time nonrefundable transfer fee of 1 percent of the guaranteed loan balance to ineligible borrowers.

(a) Request for subordination. A lender seeking a subordination of its lien position in collateral must submit a written request to the Agency. The lender must include in the request a financial analysis of the servicing action. The financial analysis must be fully supported by current financial statements, less than 90 calendar days old, of the borrower and guarantors. The lender must receive written Agency approval prior to the subordination.

(b) Agency approval. Agency approval of the subordination request requires that:

(1) The subordination of the lender's lien position enhances the borrower's business and is in the best financial interest of the Agency;

(2) The lien to which the guaranteed loan is subordinated is for a fixed dollar amount or fixed credit limit and for a fixed term, after which the guaranteed loan lien priority will be restored;

(3) Remaining collateral is sufficient to provide for adequate collateral coverage of the guaranteed loan after taking into account the lender's discount of collateral consistent with the lender's sound loan-to-discounted value practices and satisfactory justification of the discount used. The Agency may require a current independent appraisal in accordance with § 5001.203. However, if the original appraisal is more than one year old, but less than two years old, the lender may provide an appraisal with a new effective date of evaluation in lieu of a completely new appraisal;

(4) Lien priorities remain for the portion of the loan collateral that was not subordinated;

(5) The subordination of collateral to a line of credit does not extend beyond the term of the line of credit and in no event exceeds more than three years.

(6) Subordination to a tax-exempt obligation is strictly prohibited in compliance with OMB Circular A-129, “Policies for Federal Credit Programs and Non-Tax Receivables.”

(a) General. A holder can make written demand on either the lender or the Agency to repurchase the unpaid guarantee portion of the loan when the borrower is in monetary default or when the lender has failed to pay the holder its pro-rata share of any payment made by the borrower within 30 days of the lender's receipt thereof from the borrower. When making written demand on the lender, the holder must concurrently send a copy of the demand letter to the Agency.

(1) The lender is encouraged to repurchase the guarantee, upon written demand of a holder, to facilitate the accounting of funds, resolve any loan problem, and resolve the monetary default, where and when reasonable. The benefit to the lender is that it may re-assign the guaranteed portion of the loan and then continue collection of its servicing fee, if any, when the monetary default is cured.

(2) When a lender receives a written demand for repurchase from a holder, the lender must notify any other holder and the Agency within 30 calendar days of receipt of the written demand. The lender must inform all parties if the lender will repurchase the unpaid guaranteed portion of the loan from the requesting holder.

(3) Upon repurchase the holder will re-assign the assignment guarantee agreement to the lender without recourse.

(b) Repurchase by lender for loan servicing purposes. If the lender, borrower, and holder are unable to agree to restructuring of loan repayment, interest rate, or loan terms to resolve any loan problem or resolve any default and repurchase of the guaranteed portion of the loan is necessary to adequately service the loan, the holder must reassign the guaranteed portion of the loan to the lender. The reassignment must be for an amount not less than the holder's unpaid principal and accrued interest, in accordance with § 5001.450(c) of this part, on such portion less the lender's servicing fee.

(1) Upon repurchase the holder will re-assign the assignment guarantee agreement to the lender without recourse.

(2) The lender must not repurchase from the holder for arbitrage or other purposes to further its own financial gain.

(3) Any repurchase from a holder may only be made after the lender obtains the Agency's written approval.

(c) Agency repurchase. If the lender does not repurchase the guaranteed portion from the holder, the Agency may, at its option, purchase such guaranteed portion of the loan for loan servicing purposes. A holder can submit a written demand to the Agency for repurchase only if the lender declines to repurchase. If a prior written demand was not made upon the lender, the Agency will notify the lender and allow up to seven calendar days for the lender to exercise their option to repurchase as provided in this section.

(1) Lender does not repurchase. If the lender does not repurchase the unpaid guaranteed portion of a loan as provided in paragraph (a) of this section, the Agency will, within 30 calendar days after written demand to the Agency from the holder, purchase from the holder the unpaid principal balance of the guaranteed portion together with accrued interest to date of repurchase or the interest termination date, whichever is sooner, less the lender's servicing fee. The guarantee will pay accrued interest to the holder on the loan as determined under § 5001.450(c) of this part.

(2) Written demand content. The holder must include in its written demand to the Agency:

(i) A copy of the written demand made upon the lender;

(ii) A copy of the lender's denial to repurchase the unpaid guaranteed portion of the guaranteed loan;

(iii) Evidence of the right to require payment from the Agency as provided by the holder or duly authorized agent. Such evidence must consist of the original assignment guarantee agreement properly assigned to the Agency without recourse including all rights, title, and interest in the loan;

(iv) The amount due including unpaid principal, unpaid interest to date of demand, and interest subsequently accruing from date of demand to proposed payment date; and

(v) When the initial holder has assigned its interest, the original assignment guarantee agreement and an original of each Agency-approved reassignment document in the chain of ownership, with the latest reassignment being assigned to the Agency without recourse, including all rights, title, and interest in the guarantee.

(3) Payment. Unless otherwise agreed upon, payment will not be later than 30 calendar days from the date of demand.

(i) Upon request by the Agency, the lender must promptly furnish (within 30 calendar days of such request) a current statement, certified by an appropriate authorized officer of the lender, of the unpaid principal and interest then owed by the borrower on the loan and the amount then owed to any holder, along with the information necessary for the Agency to determine the appropriate amount due the holder.

(ii) Any discrepancy between the amount claimed by the holder and the information submitted by the lender must be resolved between the lender and the holder before payment will be approved. The Agency will notify both parties and such conflict will suspend the running of the 30-calendar-day payment requirement.

(iii) If a repurchase of a guaranteed loan includes the capitalization of interest, interest accrued on the capitalized interest will not be paid to the holder.

(4) Subrogation. When the Agency purchases a loan from a holder it assumes all rights that were previously held by the holder.

(5) Servicing fee. When the Agency purchases the guaranteed portion of the loan from a holder, the lender's servicing fee will stop on the date that interest was last paid by the borrower. The lender can neither charge a servicing fee to the Agency nor collect such fee from the Agency.

(6) Accrued interest. If the Agency repurchases 100 percent of the guaranteed portion of a loan and becomes the holder, interest accrual on the loan will cease until the lender resumes remittance of the pro rata payments to the Agency.

(7) Establishing interest termination date. When a guaranteed loan has been delinquent more than 60 calendar days and no holder comes forward or when the lender has accelerated the account, and subject to the expiration of any forbearance or workout agreement, the lender, or the Agency at its sole discretion, must issue a letter to the holder(s) establishing the interest termination date in accordance with § 5001.450(c)(2).

(8) Obligations and rights. Purchase by the Agency neither changes, alters, or modifies any of the lender's obligations to the Agency arising from the lender's agreement, guaranteed loan or loan note guarantee, nor does it waive any of the Agency's rights against the lender. The Agency will have the right to set-off against the lender all rights inuring to the Agency as the holder of the instrument against the Agency's obligation to the lender under the loan note guarantee.

(9) Accelerated loan. When the lender has accelerated the loan and the lender holds all or a portion of the guaranteed loan, an estimated loss claim must be filed by the lender with the Agency within 60 calendar days from the date the loan was accelerated. Accrued interest paid to the lender in accordance with § 5001.450(c)(1).

(10) Interest termination during bankruptcy. When a borrower files a Chapter 7 liquidation plan, the lender shall immediately notify the Agency and submit a liquidation plan. The Agency will establish an interest termination date based on the date interest was last paid to the lender. When a borrower files either a Chapter 9 or Chapter 11 bankruptcy restructuring plan, the Agency and lender shall meet to discuss the bankruptcy procedure, the ability of the borrower to meet their restructuring plan, the lender's treatment of accruing interest, and potentially establish an interest termination date for the guaranteed loan. If the restructuring bankruptcy Chapter 9 or Chapter 11 is converted to a liquidation bankruptcy Chapter 7 by court order, the interest termination date will be the date of such conversion.

The lender shall not make additional expenditures on behalf of, or provide new loans to, the borrower without notification to the Agency even though such expenditures or loans will not be guaranteed. The lender shall not approve additional expenditures or new loans where the expenditure or loan will violate, or cause a violation of, any of the loan covenants in the borrower's loan agreement.

(a) Interest rate freezes. The guaranteed loan interest rate will freeze at the earliest uncured default date and will remain unchanged until the cancellation of the loan note guarantee in compliance with § 5001.524.

(b) Reductions. 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. After a permanent reduction, the loan note guarantee will only cover losses of interest at the reduced interest rate.

(1) When the Agency is a holder, the lender must obtain Agency approval before implementing the reduction. The lender must provide a copy of the modification agreement to the Agency for approval. The Agency will approve the reduction only when it is demonstrated that the change is more viable than liquidation and that the government's financial interests are not adversely affected.

(2) Factors that the Agency will consider in determining whether to approve the change are the Government's cost of borrowing money; the monetary recovery is greater than the liquidation recovery; and the project's continued viability as demonstrated by a financial feasibility analysis.

(c) Increases. Unless a temporary interest rate reduction occurred, increases in fixed interest rates and increases in variable interest rate structure are prohibited.

(d) Fixed rate to variable rate change. Fixed rates can be changed to variable rates to reduce the borrower's interest rate only when the variable rate has a ceiling that is less than or equal to the original fixed rate.

(e) Variable rate to fixed rate change. Variable rates can be changed to a fixed rate at the request of the borrower, agreement of the holder, if any, and Agency concurrence.

(f) After adjustments. The interest rates, after adjustments, must comply with the requirements for interest rates on new loans as established by paragraph § 5001.401.

(g) Documentation. 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 promissory notes can be issued. The lender must provide copies of all such documents to the Agency within 10 calendar days of the change.

(3) In a final loss settlement when qualifying interest rate changes are made in compliance with this part, the lender must calculate interest based on the periods the given rates were in effect. The lender must maintain records that adequately document the accrued interest claimed, which must be determined in accordance with § 5001.450(c).

(a) General. In the event a lender fails or ceases to service a guaranteed loan, the Agency will make the successor lending entity aware of the statutory and regulatory requirements and will provide instruction to the successor lending entity on a case-by-case basis. Such instructions may include the Agency's determination that the Agency will service the entire loan or the guaranteed portion of the loan.

(1) Any successor lender must take such action that a reasonable lender would take if it did not have a loan note guarantee to protect the lender and Agency's mutual interest.

(2) A successor entity approved by the Agency as a lender 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 loan guarantee.

(b) Non-regulated lender. If the successor lending entity is a non-regulated lender, the lending entity is prohibited from making changes to the lender's agreement and related documents on the guaranteed loan. The successor lending entity must comply with the provisions of this part, including promptly applying to become a lender if not already an eligible lender. If the successor lending entity is not or fails to become a lender as set forth in § 5001.130 of this part within 60 calendar days, the loan note guarantee will not be enforceable.

(c) Regulated lender. Where the failed lending entity is an FDIC regulated lender, the FDIC and the Agency will enter into an Inter-Agency Agreement regarding the FDIC's role as the successor lending entity, and all parties are to abide by this agreement or successor document(s). This agreement sets forth the duties and responsibilities of each Agency when a lender fails. When the FDIC is not the successor to a failed regulated lender, the regulatory agency serving as the successor lending entity and the Agency will abide by terms of the lender's agreement as executed by the originating lender. The Agency reserves the right to request a meeting with the successor lending entity to further define the duties and responsibilities of each agency when a lender fails.

(d) No successor entity. In the event no successor lending entity can be determined, the Agency reserves the right to enforce the provisions of the loan documents on behalf of the lender or to purchase the lender's interest in the loan.

When there is a default by a borrower, the lender must act prudently and expeditiously in working 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 accordance with § 5001.517 and in a manner that will minimize any potential loss.

(a) Default notification and meetings. The lender must notify the Agency within the timeframe as provided in § 5001.502(a)(3)(i).

(1) The lender will provide this notification by submitting the guaranteed loan borrower default status report in the Agency's electronic reporting system. The lender must update the loan's status each month until such time as the loan is no longer in default.

(2) If a monetary default exceeds 30 calendar days, the lender must meet with the borrower and, if necessary, the Agency within 45 calendar days of the date of the default to discuss the situation. The lender must provide the Agency with a written summary of the meeting, including any decisions and actions agreed upon within 10 calendar days of the meeting.

(b) Curative options. In considering curative actions, providing a permanent cure without adversely affecting the risk to the Agency and the lender is the paramount objective. The lender may consider temporary curative actions (e.g., payment deferments or collateral subordination) provided they strengthen the loan and are in the best financial interest of the lender and the Agency.

(1) Curative actions (subject to the rights of any holder and Agency concurrence) include, but are not limited to, the following options:

(i) Deferment of principal and/or interest payments;

(ii) An additional unguaranteed temporary loan by the lender to bring the account current;

(iii) Re-amortization of or rescheduling the payments on the loan excluding capitalization of accrued interest;

(iv) Transfer and assumption of the loan in accordance with § 5001.506;

(v) Reorganization;

(vi) Liquidation;

(vii) Changes in interest rates in accordance with § 5001.513. Any interest payments must be adjusted proportionately between the guaranteed and unguaranteed portion of the loan; and

(viii) Troubled debt restructure.

(2) The term of any deferment, rescheduling, re-amortization, or moratorium cannot exceed the lesser of the remaining useful life of the collateral or remaining term of the loan as set forth in § 5001.402(b) of this part.

(i) During a period of deferment or moratorium on the guaranteed loan, the lender's non-guaranteed loan(s) and any stockholder or affiliate loans must also be under deferment or moratorium.

(ii) Balloon payments are permitted as a loan servicing option as long as there is a reasonable prospect for successful repayment of the guaranteed loan and the remaining life of the collateral supports the action.

Protective advances are allowed only when they are necessary to preserve the value of the collateral. Therefore, a lender must exercise sound judgment in determining that the protective advance preserves collateral and recovery is actually enhanced by making the advance.

(a) Protective advances must be reasonable with respect to the outstanding loan amount and the value of the collateral being preserved.

(b) A lender cannot make protective advances in lieu of additional loans.

(c) A lender must obtain written Agency approval for any protective advance that will cumulatively amount to more than $200,000, or 10 percent of the aggregate outstanding balance of principal and interest, whichever is less, to the same borrower. Payment of real estate taxes by the lender is considered a protective advance, subject to the requirements of this section, and does not require Agency advance approval.

(d) Protective advances constitute an indebtedness of the borrower to the lender and must be secured by collateral to the same extent as the original guaranteed loan. It is the lender's responsibility to ensure that any protective advances are secured by the collateral of the guaranteed loan.

(e) Notwithstanding § 5001.22(c) of this part, upon Agency approval, protective advances can be used to pay Federal tax liens or other Federal debt.

(f) A Protective advance claim will be paid only at the time of the final payment as indicated in the report of loss. In the event of a final loss, protective advances may accrue interest at the promissory note rate from the date of such advance and will be guaranteed at the same percentage of loss as provided for in the loan note guarantee. The loan note guarantee will not cover interest on the protective advance accruing after the interest termination date.

(g) 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.

(h) Holders do not have an interest in protective advances.

In the event of one or more incidents of default or third-party actions that the borrower cannot or will not cure or eliminate within a reasonable period of time, the lender, with Agency consent, must provide for liquidation in accordance with paragraphs (a) through (n) of this section. The lender is responsible for initiating actions immediately and as necessary to assure a prompt, orderly liquidation that will provide maximum recovery. The Agency reserves the right to unilaterally conclude that liquidation is necessary and require the lender to assign the collateral to the Agency and the Agency will then liquidate the loan per paragraph (o) of this section.

(a) Decision to liquidate. A decision to liquidate a loan or proceed otherwise must be made when the lender determines that the default cannot be cured or when the Agency and the lender determine that it is in the best interest of the Agency and the lender to liquidate. The decision to liquidate or proceed otherwise with the borrower must be made as soon as possible when one or more of the following exist:

(1) The loan is 90 calendar days behind on any scheduled payment and the lender and the borrower have not been able to cure the delinquency;

(2) Delaying liquidation will jeopardize full or maximum recovery on the loan; or

(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 immediate liquidation would minimize loss to the Agency.

(b) Repurchase of loan. When the decision to liquidate a loan is made, if any portion of the loan has been sold or assigned under § 5001.408 of this part and has not already been repurchased, the lender must make provisions for repurchase in accordance with § 5001.511.

(c) Lender's liquidation plan. Within 30 calendar days after the lender decides to liquidate a loan, 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 information:

(1) Such proof as the Agency requires to establish the lender's ownership of the guaranteed loan promissory note and related security instruments. Such proof may include copies of executed notes; and copies of mortgages or deeds of trust recorded in the appropriate jurisdiction;

(2) A copy of the payment ledger, if available, or other documentation that reflects the current outstanding loan balance, accrued interest to date, and the method of computing the accrued interest. If the interest rate was a variable rate, the lender must include documentation of changes in the agreed upon base rate and when the changes in the loan rate became effective.

(3) A full and complete list of all collateral and a listing of all liens held and status of such liens, plus any personal and corporate guarantees;

(4) 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;

(5) Necessary steps for preservation of the collateral including any anticipated protective advances;

(6) The market value and the potential liquidation value, or estimates thereof, of all the collateral securing the loan.

(i) These values or estimates of the collateral must be obtained by the lender through an independent appraisal. If the outstanding balance of principal and interest is less than $250,000, the lender may, instead of an appraisal, obtain these values or estimates by using 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. A copy of the appraisal or valuation will be provided to the Agency with the liquidation plan or as soon as it is available.

(ii) The procedure used to obtain these values or estimates of the collateral must include an evaluation of the impact of any release of hazardous substances, petroleum products, or other environmental hazards.

(iii) Any independent appraiser's fee, including the cost of the environmental site assessment if necessary, will be shared equally by the Agency and the lender;

(7) Proposed protective bid amounts on collateral to be sold at auction and a description to show how the amounts were determined.

(i) A protective bid can be made by the lender, with prior Agency written approval, at a foreclosure sale to protect the lender's and the Agency's interest.

(ii) The protective bid must not exceed the amount of the loan balance plus applicable foreclosure expenses and must be based on the liquidation value and estimated net recovery considering prior liens and outstanding taxes, expenses of foreclosure, and estimated expenses for holding and reselling the property. Foreclosure 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;

(8) Copies of the borrower's latest available financial statements;

(9) Copies of each guarantor's latest available financial statements;

(10) An itemized list of estimated liquidation expenses expected to be incurred along with justification for each expense. These may include attorney, auctioneer, and other professional fees for services the lender will need to contract to maximize recovery on the loan. Cost could also include legal representation to protect Agency/lender joint interest in bankruptcy or receivership;

(11) Estimated protective advance amounts with justification. Protective advances include, but are not limited to, advances made for taxes, annual assessments, ground rent, hazard and flood insurance premiums affecting the collateral, and other expenses necessary to protect the collateral. Protective advances may include advances necessary to maintain services or address unique situations with proper justification. If the lender has advanced funds without agency approval during the life of the loan, such expenditures or loans will not be guaranteed;

(12) If a voluntary conveyance is considered, the proposed amount to be credited to the guaranteed debt;

(13) Legal opinions, if needed by the lender's legal counsel; and

(14) A schedule to periodically report to the Agency on the progress of liquidation, not to exceed every 60 days.

(d) Partial liquidation plan. If actions are necessary to immediately preserve and protect the collateral, the lender may submit a partial liquidation plan and, when approved by the Agency, submit a complete liquidation plan prepared by the lender in accordance with paragraph (c) of this section.

(e) Approval of liquidation plan. The lender cannot implement its liquidation plan before obtaining written approval from the Agency. The Agency will approve or disapprove the plan within 30 calendar days of its receipt. In order to ensure prompt action, the lender may submit its liquidation plan with an estimate of collateral value, and the Agency may approve the liquidation plan subject to the results of the final liquidation appraisal.

(1) If the Agency approves the lender's liquidation plan, the lender must:

(i) Proceed expeditiously with liquidation. The lender must actively market the collateral for a reasonable period of time. If after this period of time the lender is unable to sell the collateral, then consideration should be given to submission of a final loss claim based on the fair market value of the collateral prior to its ultimate disposition;

(ii) Take all legal action necessary to liquidate the loan in accordance with the approved liquidation plan; and

(iii) Update or modify the liquidation plan when conditions warrant, including a change in value based on a liquidation appraisal.

(iv) If changed circumstances after submission of the liquidation plan require a revision of liquidation costs, the lender must obtain the Agency's written approval prior to proceeding with the proposed changes if the revised liquidation costs exceed 10 percent of the amount proposed in the liquidation plan approved by the Agency.

(2) If the Agency does not approve the lender's liquidation plan, the Agency will meet with the lender to resolve the concern(s). Until the concerns are resolved, the lender must take such actions that a reasonable lender would take without a guarantee and keep the Agency informed, in writing, of those actions. Once the revised liquidation plan is approved by the Agency, the lender must proceed in accordance with paragraphs (e)(1)(i) through (iii) of this section.

(f) Acceleration. The lender must proceed to accelerate the loan as expeditiously as possible when acceleration is necessary, including giving any notices and taking any other required legal actions. The guaranteed loan will be considered in liquidation once it has been accelerated and a demand for payment has been made upon the borrower.

(1) If the sole basis for acceleration is a non-monetary default, the lender must obtain concurrence from the Agency prior to accelerating the loan. In the case of monetary default, the lender may accelerate the loan without prior approval by the Agency, although Agency concurrence must still be given no later than the time the Agency approves the liquidation plan.

(2) The lender must provide the Agency a copy of the acceleration notice, or other acceleration document sent to the borrower.

(g) Estimated loss claim and payment. If the lender is conducting the liquidation and owns any or all 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 calendar days. The Agency will process the estimated loss claim and will make final loss payments in accordance with § 5001.521.

(h) Liquidation expenses. (1) The guarantee will not cover liquidation expenses in excess of liquidation proceeds under any circumstances.

(2) When a liquidation is performed by the lender, the Agency must approve, in advance and in writing, the lender's estimated liquidation expenses of collateral.

(3) Liquidation expenses must be reasonable and customary and must provide a demonstrated economic benefit to the lender and the Agency. The lender and Agency will share liquidation expenses equally. To accomplish this, the lender must deduct 50 percent of the liquidation expenses from the collateral sale proceeds.

(i) Accounting and reports. The lender must account for funds during the period of liquidation and must provide the Agency with reports on the progress of liquidation including disposition of collateral and resulting costs. If in the course of implementing the approved liquidation plan the lender determines additional procedures are necessary for the successful completion of the liquidation or otherwise makes any other changes to or deviations from the approved liquidation plan, the lender must identify in the report such procedures, changes, and deviations.

(j) 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 within 14 calendar days the Agency's pro rata share of any payments received from the borrower, liquidation, or other proceeds using an Agency approved form.

(k) Disposition of collateral. (1) Disposition of collateral acquired by the lender must be approved, in writing, by the Agency when—

(i) The lender's cost to acquire the collateral of a borrower exceeds the potential recovery value of the security and the lender proposes abandoning the collateral in lieu of liquidation; or

(ii) The acquired collateral is to be sold to the borrower, affiliates or members of the borrower or to borrower's stockholders or officers, or the lender or lender's stockholders or officers.

(2) A recommendation by the lender for abandonment of collateral is considered a servicing action under 7 CFR 1970.8(e) and a separate NEPA review is not required.

(l) Disposition of 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.

(m) Compromise settlement. Compromise settlements must be approved by the lender and the Agency. The lender must provide complete current financial information on all parties obligated for the loan. 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. Any guarantor cannot be released from liability until the full amount of the compromise settlement has been received. In determining whether to approve a compromise settlement, the Agency will consider, among other things, whether the compromise is more financially advantageous than collecting on the guarantee.

(n) Liquidation provisions selection. (1) If a lender has made a loan guaranteed under one of the programs identified in § 5001.1 of this part, the lender has the option to liquidate the loan under the provisions of this part or under the entire provisions of applicable regulation at the time the loan was guaranteed by the Agency.

(2) The lender must notify the Agency in writing within 10 calendar days after its decision to liquidate as to which regulatory provisions it chooses to use. If the lender does not notify the Agency in writing within these 10 calendar days, it must use the liquidation provisions in this part.

(o) Agency liquidation. The Agency will liquidate a guaranteed loan at its option only when it is a holder and there is reason to believe the lender is not likely to undertake liquidation efforts that will result in maximum recovery. When it conducts a liquidation, the Agency will apply proceeds derived from the sale of the collateral first to reasonable liquidation expenses and second to the guaranteed portion of the loan.

(a) Lender's responsibilities. The lender is responsible for protecting the guaranteed loan and the collateral securing it in bankruptcy and any related appellate proceedings. These responsibilities include, but are not limited to, the following:

(1) Taking actions that result in greater recoveries and avoiding actions that are likely not to be cost-effective;

(2) Monitoring confirmed bankruptcy plans to determine borrower compliance, and, if the borrower fails to comply, pursuing appropriate relief, including seeking a dismissal of the bankruptcy plan;

(3) Requesting modifications of any proposed bankruptcy plan whenever it appears that the lender could obtain additional recoveries via plan modification;

(4) Filing a proof of claim, when necessary, and all the necessary papers and pleadings concerning the case;

(5) Attending and, when necessary, participating in meetings of the creditors and all court proceedings;

(6) Immediately seeking adequate protection of the collateral if it is subject to being used by the trustee in bankruptcy or the debtor in possession;

(7) When appropriate, seeking involuntary conversion of a pending chapter 11 case to a liquidation proceeding or seeking dismissal of the proceedings;

(8) Submitting a default status report within 15 calendar days after the date when the borrower defaults and every 30 calendar days thereafter until the default is resolved or a final loss claim is paid by the Agency; and

(9) Informing the Agency within 10 working days upon notification of the filing of a bankruptcy case and keeping the Agency adequately and regularly informed, in writing, of all aspects of the proceedings, at a minimum, on a bi-monthly basis.

(b) Appraisals. In a Chapter 9 or Chapter 11 reorganization, the lender must obtain an independent appraisal of the collateral if the Agency has determined that an independent appraisal is necessary. 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.

(c) Repurchase from the holder. The Agency or the lender, with the approval of the Agency, can initiate the repurchase of the unpaid guaranteed portion of the loan from the holder. If the lender is the holder, an estimated loss payment may be filed at the initiation of a Chapter 7 proceeding or after a Chapter 9 or Chapter 11 proceeding becomes a liquidation proceeding. Any loss payment on loans in bankruptcy must be approved by the Agency.

(d) Reports of loss during bankruptcy. In bankruptcy proceedings, the lender must use the report of loss form for reporting all estimated and final loss determinations. Payment of loss claims will be made as provided in this section.

(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 and any related appellate proceedings. The Agency will treat all subsequent claims of the lender during bankruptcy and any related appellate proceedings as revisions to the initial estimated loss. At its option, the Agency may process a revised estimated loss payment in accordance with any court-approved changes in the bankruptcy plan. Once the bankruptcy plan has been satisfactorily completed, the lender is responsible for submitting the documentation necessary for the Agency to review and adjust the estimated loss claim to reflect any actual discharge of principal and interest and to reimburse the lender for any court-ordered interest rate reduction under the terms of the bankruptcy plan.

(ii) The lender must use the report of loss to request an estimated loss payment and to revise any estimated loss payments during 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—

(A) Enter the data directly into the Agency's electronic system; and

(B) Provide the Agency with the documentation necessary to determine whether the estimated loss paid equals the actual loss sustained. Where the actual loss sustained is different than the estimated loss paid, the difference will be handled in accordance with § 5001.521(h).

(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 final court decree 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 a final court decree 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 the 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 enter the data directly into the Agency's electronic reporting system.

(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 will be filed to terminate the loan.

(3) Interest losses as a result of bankruptcy reorganization. Interest losses as a result of bankruptcy reorganization will be paid as described in paragraphs (e)(3)(i) and (ii) of this section, as applicable.

(i) For guaranteed loans closed for which the Agency has not issued an interest termination letter—

(A) The loss of interest income sustained during the period of the bankruptcy plan will be processed in accordance with paragraph (d)(1) of this section;

(B) The loss of interest income 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; and

(C) If an estimated 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 will be filed to terminate the loan.

(ii) For guaranteed loans closed for which the Agency has issued an interest termination letter, 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 principal balance of the guaranteed portion of the debt and then to the 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.

(6) Protective advances. If approved protective advances, as authorized by § 5001.516, were incurred in connection with the initiation of liquidation action and were required to protect the collateral as result of delays in the case or failure of the borrower to maintain the security prior to the borrower having filed bankruptcy, the protective advances together with accrued interest, as determined under § 5001.450(c) of this part, are payable under the guarantee in the final loss claim.

(e) Liquidation expenses during bankruptcy proceedings. (1) The liquidation expenses will be in compliance with § 5001.517(h).

(2) Reasonable and customary liquidation expenses in bankruptcy may be deducted from liquidation proceeds of collateral. In the case of Chapter 11 reorganizations or Chapters 11 or 7 liquidation, only expenses authorized by the court can be deducted from the collateral proceeds, unless the liquidation is by the lender.

(3) When a bankruptcy proceeding results in a liquidation of the borrower by a bankruptcy trustee appointed under 11 U.S.C. 701, 702, 703, or 1104, expenses will be handled as directed by the court, and the lender cannot claim liquidation expenses for the sale of the assets.

(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 § 5001.517.

(5) Proceeds received from partial sale of collateral during bankruptcy can be used by the lender to pay reasonable costs (e.g., freight, labor, and sales commissions) associated with the partial sale. Reasonable use of proceeds for this purpose must be documented with the final loss claim request.

(6) Legal fees as a result of a bankruptcy are limited by the Agency to an amount not to exceed 3 percent of the current principal balance and are only recoverable from liquidation proceeds. Legal fees in excess of 3 percent of the current principal balance shall be borne by the lender and are not recoverable from liquidation proceeds or any loss claim by the lender.

(a) 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 and Agency, on behalf of the lender or the Agency. If the Agency exercises this right, the lender must cooperate with the Agency. The Agency will assess against the lender any cost the Agency incurs with such action.

(b) Notwithstanding any other provision of this part, the Agency reserves the right to be represented by the U.S. Department of Justice in any litigation where the Agency is named as a party.

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.

(a) Report of loss form. The lender must use the report of loss form for all estimated and final loss claim requests.

(b) Estimated loss claim. The lender must submit to the Agency a completed report of loss form for all estimated loss claims. In calculating the estimated loss, the lender must use the estimated or current appraised liquidation value of the collateral.

(c) Estimated loss payment. The Agency will approve estimated loss payments only after it has approved the lender's liquidation plan. For a loan which has been approved by the Agency for a debt write-down (or debt restructure), the maximum amount of loss payment will not exceed the percent of guarantee multiplied by the difference between the outstanding principal and interest balance of the loan before the write-down and the outstanding balance of the loan after the write-down.

(1) The amount of an estimated loss payment must be credited first as a deduction from the principal balance of the loan with any remaining balance to accrued interest.

(2) The estimated loss payment cannot be applied as a payment on the loan for purposes of reducing the unpaid balance owed by the borrower for status reporting or any debt collection actions against the borrower or any guarantors.

(d) Reduction of loss claims payable. (1) Negligent loan origination and negligent loan servicing will result in a reduction of loss claims payable under the guarantee to the lender if any losses have occurred as the result of such negligence. The Agency will assess against the lender any cost to the Agency associated with actions taken by the Agency necessary to protect the Agency's interests with respect to the loan where a lender is not in compliance with its origination and servicing responsibilities. The extent of the reduction, which could be a total reduction of the loss claims payable, will depend on the extent of the losses incurred as a result of the negligent loan origination or servicing.

(2) Non-compliance with the requirements of § 5001.205(a) or § 5001.305(a) will result in a reduction of loss claims payable. The Agency's review of the non-compliance could result in a total reduction of the loss claim payable. The Agency's review of the non-compliance could result in a total reduction of the loss claim payable. The lender must ensure during loan making and project development that the project is designed utilizing accepted architectural and engineering practices and conforms to applicable Federal requirements including the seismic requirements of Executive Order 12699 (55 FR 835, January 5, 1990), State and local codes and requirements, and facility plans or plans and specifications reviewed and approved by the applicable State regulatory agency. The lender must also ensure that the planned project will be completed within the available funds and once completed, will be suitable for the borrower's needs.

(3) Any delinquent fees, including any interest due thereon, will be deducted from any loss payment due the lender.

(e) Final loss claim. Except for certain unsecured personal or corporate guarantees as provided for in this section, the lender must submit a final report of loss to the Agency within 30 calendar days after liquidation of all collateral is completed. The Agency will not guarantee interest beyond the interest termination date or this 30-day period, other than for the period of time it takes the Agency to process the loss claim. The lender must apply the total amount of the loss payment remitted by the Agency to the guaranteed portion of the loan debt. At the time of final loss settlement, the lender must notify the borrower that the loss payment has been so applied. Such application does not release the borrower from liability. Once the lender receives a final loss payment from the Agency, the Agency will collect any outstanding debts owed to the government in accordance with part 3 of this title.

(1) Loss. In the event of a loss, the loan note guarantee will not cover—

(i) Interest to the lender accruing after the interest termination date;

(ii) Any interest accrued as the result of the borrower's default on the guaranteed loan over and above that which would have accrued at the Agency-approved promissory note rate on the guaranteed loan (e.g., default interest rate); or

(iii) Any late fees, penalties, bond fees, interest rate swap charges, liquidation expenses, and other costs unless authorized under paragraph (e)(7) of this section.

(2) Accounting of funds. Before the Agency will approve a final report of loss, 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. The lender must document and show that all the collateral has been accounted for and properly liquidated, and that liquidation proceeds have been properly accounted for and applied correctly on the loan.

(3) Audit. 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 to and otherwise assist the Agency in making any investigation or audit of the report of loss. The documentation accompanying the report of loss must support the amounts reported. The Agency must be satisfied that the lender has maximized the collections in conducting the liquidation.

(4) Guarantees. The lender must determine the collectability of unsecured personal and corporate guarantees required in accordance with § 5001.204 of this part. The lender must promptly collect or otherwise dispose of such guarantees prior to completion of the final loss report. However, if 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 report of loss 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.

(5) Federal debt. Any amounts paid by the Agency on account of liabilities of a borrower constitute a Federal debt owed to the Agency by the borrower. In such case, the Agency can use all remedies available to it to collect the debt from the borrower, including offset in accordance with part 3 of this title.

(i) Any amounts paid by the Agency pursuant to a claim by a lender constitute a Federal debt owed to the Agency by a third-party guarantor of the guaranteed loan, to the extent of the amount of the third-party guarantee. In such case, the Agency can use all remedies available to it to collect the debt from the third-party guarantor including offset in accordance with part 3 of this title.

(ii) The Agency may consider a compromise settlement of a debt owed to the Agency after it has processed a final report of loss and issued a 60-day due process letter. Any funds collected by the Agency will not be shared with the lender.

(6) Protective advances. In those instances where the lender made authorized protective advances, the lender can claim recovery for the guaranteed portion of any loss of monies advanced as well as interest resulting from such protective advances. These claims must be included in the final report of loss. The lender must provide receipts and a breakdown of protective advances as to the payee, purpose of the expenditure, date paid, evidence that the amount expended was proper, and that the amount was actually paid.

(7) Liquidation expenses. As provided in § 5001.517(e), certain reasonable liquidation expenses are allowed during the liquidation process. The lender cannot claim any liquidation expenses in excess of liquidation proceeds.

(i) Liquidation expenses are recoverable only from liquidation proceeds. The Agency will deduct liquidation expenses from the liquidation proceeds of the collateral unless the costs have been previously determined by the lender (with Agency concurrence) to be protective advances. The lender must provide receipts and a breakdown of liquidation expenses as to the payee, purpose of the expenditure, date paid, evidence that the amount expended was proper, and that the amount was actually paid.

(ii) The Agency may approve 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, its employees or in-house counsel. Approved legal expenses are limited by the Agency to an amount not to exceed 3 percent of the current principal balance and will be shared by the lender and Agency equally. This includes those instances where the lender has incurred such expenses from a trustee conducting the liquidation of assets. Legal fees in excess of 3 percent of the current principal balance shall be borne by the lender and are not recoverable from liquidation proceeds or any loss claim by the lender.

(iii) The lender cannot claim the guarantee fee or the other Agency fees as authorized liquidation expenses, and In-house expenses of the lender are not allowed.

(8) Accrued interest. If the lender holds all or a portion of the guaranteed loan, the Agency will guarantee accrued interest in accordance with § 5001.450(c) of this part.

(i) Accrued interest eligible for payment under the guarantee on a defaulted loan will be discontinued when the estimated loss is paid. Interest will not be paid beyond the interest termination date.

(ii) The lender must support accrued interest by documenting how the amount was accrued, including attaching a copy of both the promissory note and ledger. 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.

(iii) If a restructuring of a guaranteed loan includes the capitalization of interest, the guarantee will not cover the interest accrued on the capitalized interest.

(9) Acquiring property titles. If a lender acquires title to property, any loss will be based on the collateral value at the time the lender obtains title. Alternatively, the lender can calculate the final loss settlement using the net proceeds received at the time of the ultimate disposition of the property if—

(i) The lender has submitted to the Agency a written request to use this option within 15 calendar days of acquiring title; and

(ii) The Agency approves the request prior to the lender submitting any request for estimated loss payment.

(f) Loss limit. The amount payable by the Agency to the lender cannot exceed the limits contained in the loan note guarantee. If the lender conducts the liquidation, loss occasioned by accruing interest will be covered to the interest termination date, provided the lender proceeds expeditiously with the liquidation plan approved by the Agency. If the Agency conducts the liquidation, loss occasioned by accruing interest will be covered by the guarantee only to the date the Agency accepts this responsibility.

(g) Rent. The lender must apply any net rental or other income that it receives from the collateral to the guaranteed loan debt.

(h) Final loss payment. The Agency will make loss payments after it has reviewed the complete final report of loss, all collateral has been properly liquidated and accounted for, and the Agency has determined that liquidation expenses are reasonable and within approved limits.

(1) Any estimated loss payments made to the lender will be credited against the final loss payment on the guaranteed loan.

(2) Once the Agency approves the report of loss and supporting documents submitted by the lender—

(i) If the actual loss is greater than any estimated loss payment, the Agency will pay the additional amount owed by the Agency to the lender.

(ii) If the actual loss is less than the estimated loss payment, the lender must reimburse the Agency for the overpayment plus interest at the promissory note rate from the date of payment of the estimated loss.

(iii) If the Agency conducted the liquidation, it will provide an accounting to the lender and will pay the lender in accordance with the loan note guarantee.

After a final loss claim has been paid, the lender must use reasonable efforts to collect from any party still liable for future recovery unless the Agency notifies the lender otherwise. Any net proceeds from future recovery will be split pro rata between the lender and the Agency based on the percent of the loan guarantee even if the loan note guarantee has been terminated. Once the Agency determines a debt is Federal debt and provides notice to the lender, that Federal debt is excluded from future recovery. The lender must cease all collection efforts against the borrower and any individual or corporate guarantors upon referral of the debts by the Agency for collection in accordance with part 3 of this title. The Agency will not share with the lender any collection of Federal debt made by the Federal Government from any liable party to the guaranteed loan.

(a) Collateral preservation. When a lender acquires title to the collateral and the final loss claim is not paid until final disposition, the lender must proceed as quickly as possible to develop a plan to fully protect the collateral from deterioration (weather, vandalism, etc.). Hazard insurance in an amount necessary to cover the market value of the collateral must be maintained.

(b) Collateral sale. (1) Upon acquiring the collateral, the lender must prepare and submit without delay to the Agency a plan on the best method for the sale of the collateral, keeping in mind any prospective purchasers. The Agency must approve the plan in writing. If an existing approved liquidation plan addresses the disposition of acquired property, no further review is required unless modification of the plan is needed.

(2) Whenever the conversion of collateral to cash can reasonably be expected to result in a negative net recovery amount, the lender should consider abandonment of the collateral. If the lender seeks to abandon the collateral, the lender must obtain written Agency approval before abandoning the collateral.

(c) Re-title collateral. Any collateral accepted by the lender must not be titled in the Agency's name in whole or in part.

Each loan note guarantee issued under this part or under one of the guaranteed loan programs identified in § 5001.1 of this part will terminate automatically when one of the events described in paragraphs (a) through (c) of this section occur. The lender will maintain its guaranteed loan files for at least three years after termination of the loan note guarantee.

(a) The guaranteed loan is paid in full;

(b) Full payment by the Agency of any loss claim or compromised settlement except for future recovery provisions; or

(c) Written request from the lender to the Agency to terminate the guarantee, which will be effective the date the Agency receives the request provided that the lender holds all the guaranteed portion of the loan.