A sweeping change in the rules governing the USDA Rural Development (RD) Business & Industry (B&I) guaranteed loan program will take effect on January 16, 2009.

IN FACT, THE ENTIRE B&I REGULATION IS BEING REPLACED with a single new consolidated rule governing not just B&I but also RD's Rural Energy, Community Facilities, and Water & Waste guaranteed loan programs.

The new rule was published in the Federal Register on December 17, 2008. It puts in place many of the changes which you may recall were first proposed back in September 2007.

You can read the new rule in its entirety at:

http://www.colemanpublishing.com/public/121708FedRegisterNotice.pdf

HIGHLIGHTS FROM THE NEW RULE

Although many of the parameters of the B&I program will continue, there will also be some significant changes. Here are some highlights:

1. All lenders must now apply to participate in the B&I program (even if they have been active B&I lenders in the past). Part of the application for eligible lender status requires the lender to provide a summary of their loan origination and servicing policies for RD approval.

2. Non-regulated lenders will have to meet much steeper criteria in order to use the program. (This will not affect banks, credit unions, or Farm Credit System lenders.)

3. A preferred lender program (PLP) is established for lenders with more than 10 B&I loans, allowing them to submit simpler applications and receive faster approvals.

4. Strict collateral limits are instituted - 80% LTV for real estate, 70% for equipment, 60% for inventory and accounts receivable.

5. Lines of credit will become eligible for B&I guarantees.

6. As has been standard, the maximum B&I guarantee will be 80% for loans up to $5 million; 70% for loans of $5-10 million. However, RD's limited authority to issue 90% B&I guarantees is eliminated.

7. Variable interest rates which vary more often than quarterly (the previous restriction) can now be used. For example, daily variable rate loans will now permitted.

8. The B&I application package is somewhat simplified. For example, a draft loan agreement will no longer be required.

9. The One-Doc application process for loans up to $600,000 is discontinued. However, there will now be a new "One-Doc"-like B&I application submittal for smaller loans, but only up to $400,000.

11. B&I guarantees will be approved on a more business-like, "first-come-first-serve" basis. The old approach of "priority scoring" and awarding guarantees to higher "scoring" loans first is discarded.

12. Lenders continue to be responsible for loan servicing and if needed liquidation. Greater authority is given to lenders in this. For example, subsequent loans which are not RD-guaranteed can be made without consulting RD. More autonomy is also given to lenders to make the protective advances they deem necessary.

13. The new rule is a single consolidated regulation which will govern not just the B&I program but also RD's Rural Energy (REAP), Community Facilities (CF), and Water & Waste Disposal (WWD) guaranteed loan programs. As a consequence, all of these RD guaranteed programs will follow many of the same rules and should be run more consistently.

QUESTIONS REMAIN

It is not yet clear if or how the new rules will change some of the B&I program's historically troublesome features:

a. The tangible balance sheet equity requirement. A "debt-to-tangible net worth ratio" requirement is mentioned, but it is not defined sufficiently to know how this will be calculated.

b. Borrower financial reporting - i.e., allowing borrower tax returns to suffice for annual financial reporting rather than requiring compiled financial statements. The rule for reporting is not clearly spelled out.

c. Lender underwriting criteria vs. B&I underwriting criteria. The new rule requires the lender to follow the more stringent of the two standards, making it unclear if a lender may use more aggressive underwriting with a B&I guarantee.

These details and others will apparently only be clarified after RD releases an interpretive "handbook" later this month.

New forms, including a new Lenders Agreement, will likewise be released later this month.

YOU HAVE A CHANCE TO VOICE YOUR CONCERNS!

Although the new rule takes effect January 16th, RD is also seeking lender comments on the new rule in order to do some additional fine-tuning of the new rule based on customer feedback.

DEADLINE: You must submit comments by February 17, 2009. To comment, see the first page of the final rule in the Federal Register (i.e., the Internet link above) for instructions.

CONTINUITY & CHANGE

Notwithstanding the emerging details of these new regulations, the fundamental features of the B&I program will continue unaltered. RD will still provide Federal guarantees on commercial loans made by lenders for business projects in rural (i.e., nonmetro) areas. B&I guaranteed loans will still be available to business entities of all types, and they may be used to finance real estate, equipment, working capital, refinancing, or transfers of ownership.

Lenders can continue to count on the RD-Oregon staff to work in a fast, flexible fashion to guarantee business credit to rural Oregonians.

We will provide you with more details of the new rule as they become available. We look forward to implementing the new regulations in a manner that allows RD to meet the credit needs of rural Oregon businesses during the present "credit squeeze" and in the bright future on the horizon.

In the meantime, if you have any questions whatsoever, please feel free to contact us.

Jeff Deiss, Business & Cooperative Program Director

USDA Rural Development, Oregon State Office

1201 NE Lloyd Blvd., Ste. 801, Portland, OR 97232-1274

jeff.deiss@or.usda.gov

503-414-3367 phone; 503-414-3397 fax

Visit our web site, http://www.ruralOregon.biz

For energy programs, http://energy.ruralOregon.biz

COMMENT: by Mike Thomas, President & CEO, USAF II

Overall I believe Jeff Deiss gave you an accurate summary of the new regulations and personally I believe the Agency is attempting to improve their programs by consolidating 4 programs into 1 and likewise proceeding with a preferred lender program. The agency by allowing variable rate loans to adjust on a daily or monthly basis is also making their guaranteed paper in greater demand to an investor in the secondary market as investors are prefer having a "matched book" whereby the funds they are receiving adjust simultaneously with those funds they are borrowing. Specific regulations for which I see a problem are as follows:

1) 5001.7(g). This is an attempt by the Agency to eliminate finders, packagers and loan broker fees. Given the dire state of the US economy and given the fact that the majority of USDA loans are originated and/or prepared by brokers and packagers I find this change not only to be "stupid" but also an unnecessary restriction of a free market financial systems which has been bringing funds and creating jobs in underserved rural areas which are skipped over by the money center banks. The small community banks are the back bone of the USDA loan programs and they need the assistance of brokers and packagers, as they cannot afford to carry full time marketing and packaging staff in house.

2) 5001.7(l). I do not know what the agency is attempting to do with this regulation as the regs as published do not include any list or handbook of eligible rental properties. If such a list prohibits commercial shopping centers, office buildings and other rental properties it would be highly discriminatory against small rural community banks that need the guarantees and access to the secondary market to sell large portions of their loans. Again this regulation appears to be biased against small rural community banks and in favor of large money center banks.

3) 5001.12(a)(8). This regulation if imposed on Department of HHR regulated nursing homes and assisted living centers is a redundant as such entities are already required to file reports to HHR to keep their licensing. Additionally, the regulation cited in 1901.203(c)(3) which has always been interpreted by the Agency to apply to direct loans not guaranteed loans. I would like to know if there has been OMB approval of this redundant recording requirement to be placed on already regulated nursing homes and assisted living centers.

4) Also, I would like to know what has happened to the agencies annual 15% allocation of 90% guarantees for high point scoring loans.

Finally, I would like to know if the agency has like SBA taken any affirmative action to be included in President Obama's Economic Stimulus Plan. If not how is rural America going to maintain an equal footing with urban areas that are receiving vast amounts of funds under the new President's Economic Stimulus Plan.