7 CFR 4274.320 – Loan purposes
(a) Agency IRP loans. The intermediary must deposit the Agency IRP loans into the intermediary’s IRP revolving loan fund to provide loans directly to eligible ultimate recipients or in cooperation with banks and other lending organizations through loan participation agreements.
(b) IRP revolving loan fund loans. Ultimate recipients receiving loans from an IRP revolving loan fund must use those loans for business or community development projects and for projects that predominately serve communities and residents in rural areas.
(1) The Secretary may relend funds to eligible intermediaries for projects that:
(i) Promote community development;
(ii) Establish new businesses;
(iii) Establish and support microlending programs; and
(iv) Create or retain employment opportunities.
(2) Such loan purposes may include, but are not limited to, those purposes identified in paragraphs (b)(2)(i) through (xx) of this section.
(i) Business and industrial acquisitions when the loan will keep the business from closing, prevent the loss of employment opportunities, or provide expanded job opportunities.
(ii) Business construction, conversion, enlargement, repair, modernization, or development.
(iii) Purchase and development of land, easements, rights-of-way, buildings, facilities, leases, or materials.
(iv) Purchase of equipment, leasehold improvements, machinery, or supplies.
(v) Pollution control and abatement.
(vi) Transportation services.
(vii) Start-up operating costs and working capital.
(viii) Interest (including interest on interim financing) during the period before the facility becomes income producing, but not to exceed three years.
(ix) Feasibility studies.
(x) Debt refinancing.
(A) The intermediary is responsible for making prudent lending decisions based on sound underwriting principles when considering the restructuring of an ultimate recipient’s debt.
(B) Refinancing debts may be allowed only when it is determined by the intermediary that the project is viable, and refinancing is necessary to create new or save existing jobs or create or continue a needed service.
(xi) Reasonable fees and charges to the ultimate recipient are allowed only as specifically listed in this paragraph. Authorized fees include loan documentation and fees for recording a collateral lien, environmental data collection fees, management consultant fees, and other fees for services rendered by professionals in relation to the loan project. Professionals are generally persons licensed by States or accreditation associations, such as engineers, architects, lawyers, accountants, and appraisers. Additional charges to the ultimate recipient, whether by a fee or interest rate increase, for an intermediary’s costs related to loan participations are not allowed. In addition, the intermediary shall not be charged fees related to the purchase or sale of a loan participation. The maximum amount of any fee will be what is reasonable and customary in the community or region where the project is located; provided, however, that all costs must be actual costs and shall not be marked-up beyond actual cost. Any such fees or charges are to be fully documented and justified.
(xii) Hotels, motels, tourist homes, bed and breakfast establishments, nonowner-occupied real estate, convention centers, and other tourist and recreational facilities except as prohibited by § 4274.321. These types of facilities are allowed when the pro rata value, supported by an analysis of the supporting real estate appraisal, of the owner’s living quarters is deleted from the appraised value.
(xiii) Educational institutions.
(xiv) Revolving lines of credit provided the portion of the intermediary’s total IRP revolving loan fund that is committed to, or in use for revolving lines of credit, will not exceed 25 percent at any time.
(A) All ultimate recipients receiving revolving lines of credit must reduce the outstanding balance of the revolving line of credit to zero at least once each year.
(B) The intermediary must approve all revolving lines of credit for a specific maximum amount and for a specific maximum time period, not to exceed two years.
(C) The intermediary must provide a detailed description, which will be incorporated into the intermediary’s work plan and be subject to Agency approval, of how the revolving lines of credit will be operated and managed. The description must include evidence that the intermediary has an adequate system for:
(1) Interest calculations on varying balances; and
(2) Monitoring and control of the ultimate recipients’ cash, inventory, and accounts receivable.
(D) If, at any time, the Agency determines that an intermediary’s operation of revolving lines of credit is causing excessive risk of loss for the intermediary or the government, the Agency may terminate the intermediary’s authority to use the IRP revolving loan fund for revolving lines of credit. Such termination will be by written notice and will prevent the intermediary from approving any new lines of credit or extending any existing revolving lines of credit beyond the effective date of termination contained in the notice.
(xv) Aquaculture and hydroponics, as defined in this subpart.
(xvi) Commercial fishing.
(xvii) Commercial nurseries engaged in the production of ornamental plants and trees and other nursery products such as bulbs, flowers, shrubbery, flower and vegetable seeds, sod, and the growing of plants from seed to the transplant stage.
(xviii) Forestry, which includes businesses primarily engaged in the commercial operation of timber tracts, tree farms, and forest nurseries and related activities such as reforestation.
(xix) Value-added production.
(xx) Housing, only when related to community development projects and, limited to working capital, equipment, pre-business development costs, and other such business purposes. Agency IRP loan funds may be used to assist a housing project planner, a housing project builder, a construction sub-contractor (indirect soft costs such as architectural, engineering and legal fees), or for any other business-related aspect of a housing project that is separate from the sale and/or purchase transaction involved in transferring ownership of a single or multi-family dwelling. While the proceeds from a sale might be used by an ultimate recipient to repay an Agency IRP loan, an Agency IRP loan cannot be used to finance a residential housing purchase. Agency IRP loans may not be used to assist in the purchase of residential housing (single, multiple dwelling, etc.) as financial assistance moves outside of community development when the financial assistance (a mortgage loan) is requested for a purchase.
(c) Participations. (1) Loans made to eligible ultimate recipients by eligible intermediaries in cooperation with banks and other organizations through loan participation agreements shall be considered an eligible loan to an ultimate recipient for the purposes of this program. Loan participations are allowed in the IRP program, subject to the provisions of this regulation, with the intent to assist intermediaries in the management of their revolving loan fund, to meet the needs of larger ultimate recipient projects, and to promote cooperation in community projects where multiple lenders may be involved. In a participation, the lead (originating) bank retains a partial interest in the loan, holds all loan documentation in its own name, services the loan, and deals directly with the customer for the benefit of all participants. All loan participants share in the credit risk of the associated loan up to the amount of their participation.
(2) Loan participant buyers are able to compensate for low loan demand or invest in large loans without servicing burdens and origination costs. Lenders selling loan participations can accommodate a larger credit while mitigating some of the risk by reducing their credit exposure.
(3)(i) Participation agreements between the lead lender and buying participants are executed with each transaction and must address, among other items:
(A) The obligation of the lead lender to furnish timely credit information and to provide notification of material changes in the borrower’s status;
(B) Requirements that the lead lender consult with participants and obtain their consent prior to modifying any loan, guaranty, or security agreements and before taking any action on defaulted loans; and
(C) The specific rights and remedies available to the lead and participating lenders upon default of the borrower.
(ii) A Master (open ended) participation agreement between the intermediary and any lender is not allowed. All loans made through use of participation agreements must be to eligible ultimate recipients and for eligible purposes. The ultimate recipients, lead lender and all participating lenders must agree to be bound by the applicable requirements of this regulation.
(4) Participation in loans where 50 percent or more of the loan funds are used to refinance a lead lender’s existing loans to the borrower are ineligible. The Agency does not consider take out or terming out a construction loan as refinancing.
(5) No more than 50 percent of an intermediary’s loan funds may be used to purchase loans from any individual lender or affiliation of lenders, to prevent an exclusive relationship with a lender or lender holding company. Likewise, no more than 50 percent of the total intermediary loans to ultimate recipients may be sold or participated to an individual lender or affiliation of lenders. An exception to these limits may be requested by the intermediary and is subject to review by the Agency of the intermediary’s lending portfolio, credit quality and overall use of loan participations.