Program Overview for Lenders
USDA Rural Development (RD) provides a credit enhancement to help finance community facilities in rural areas. Through the Community Facilities (CF) Guaranteed Loan Program, RD guarantees up to 90 percent of loss of principal and interest on loans made and serviced for construction or improvements of community facilities that provide essential public services in rural areas. Eligible lenders are banks, savings and loan associations, bank-affiliated mortgage companies, farm credit banks, and insurance companies.
A broad range of community facilities are eligible for guaranteed loans. These include cultural and educational facilities (such as schools, libraries, art museums, and theaters), transportation facilities (such as airports, municipal garages, street improvements, rail, or bus service), recreational facilities (such as parks, health clubs, and campgrounds), community health services (such as assisted-living facilities, hospitals, nursing homes, and medical and vocational rehabilitation centers), community support services (such as child or adult day care and business incubators), public buildings and improvements (including community centers), and fire, rescue and public-safety facilities.
Eligible borrowers are municipalities, counties, special purpose districts, nonprofits, and tribal governments.
Eligible nonprofits, which are broadly defined, must be formally organized and able provide their articles of incorporation and bylaws, as well as have significant ties to the local rural community. Applicants must have the legal authority to borrow and repay loans, pledge security for loans, and construct, operate, and maintain facilities. They must also be financially sound and have the ability to organize and manage the facilities effectively.
Projects must be located in rural areas with population of up to 20,000. Because of differences in how state laws define municipalities, lenders should contact their state RD offices to determine community eligibility for the program.
In this flexible program, RD can provide below market direct loans or grants in combination with guaranteed loans, enhancing the financing package available to an applicant. Combining guarantees on bank loans with direct loans or grants reduces the overall interest rate, improves cash flow, and may increase the borrower’s financing options. Direct loans and grants can be combined with guaranteed loans for all eligible purposes except recreation loans, which are eligible only under the guaranteed loan program.
Along with the benefit of reducing their credit risk, lenders are able to finance essential community projects that lack the ability to obtain credit elsewhere. Although the lender must maintain a minimum of five percent of the total loan amount, the guaranteed portion of the loans can be sold on the secondary market to increasing the lender’s return.
All lenders and borrowers interested in the Community Facility Guaranteed Loan Program should contact their Rural Development state office for the pre-application package to determine eligibility. Upon initial review and approval, Rural Development will assist you with the application process.
Lender Handbook (click here to access the Lender Handbook)
Primarily used for securing financing for community facilities, a CF Guaranteed Loan can cover the costs of the facility’s operational equipment, CF guarantee fee, up to two years of interest on the loan, and, in special circumstances, first year’s operating expenses. RD is not involved in the construction phase of a project unless direct loan funds are included in the permanent financing of the project.
Lenders subject to federal or state regulatory lending agencies are eligible for the program. Lenders may charge a fee for the servicing.
Although the borrower is seeking financing, the lender is the applicant for the loan note guarantee. Therefore, the lender is responsible for making prudent lending decision, ensuring the success of the loan.
These decisions are those that a lender would make in servicing a non-guaranteed loan, and include but no limited to:
- Collection of payments
- Obtaining covenant compliance
- Verifying tax and insurance payments
- Maintaining liens on collateral
- Obtaining and analyzing financial statements
- Notify RD in case of violation of the loan agreement
No minimum equity is required, and the maximum loan limit is determined by the size, scope, and complexity of the project. The interest rate is negotiable between the lender and borrower and may be fixed or variable. The lender may charge a pre-payment penalty.
The lender is the applicant; therefore, certain requirements must be made. Besides making prudent lending decision, including ensuring the project is financially feasibility, the lender must meet specific eligibility requirements. Lender must be subject to:
- Credit examination,
- Supervision by an appropriate U.S. agency or a State supervised and regulated credit institution, and be
- Capable of adequately servicing loans requesting a CF guarantee,
- Posses the legal powers necessary to make and service community development guaranteed loan, and
- Disclose any relationships with the borrower, other than lender-borrower.
The repayment period is limited to the useful life of the facility, but the maximum term for all loans in the community facilities program is 40 years. (Guaranteed community facilities loans tend to be for 15 to 20 years, while loans for fixtures, furniture, and equipment tend to be for 5 to 10 years). Loan repayment must be based on tax assessments, revenues, fees or other sources sufficient for the operation and maintenance, reserves, and debt retirement. Financial feasibility studies prepared by an independent consultant are normally required for start-up facilities or those that will result in a significant change in the borrower’s financial operations.
The lender determines acceptable security, which is approved by RD. Such security can include real estate, equipment, accounts receivable, and insurance of income. Tax-exempt notes or bonds cannot be used for guaranteed loans. If the real estate appraised value is less than the loan amount, RD may guarantee a loan based on sound security, repayment ability, and financial projections. RD may also subordinate a direct loan to a guaranteed loan.
Guarantees are backed by the full faith and credit of the U.S. government and can be sold on the secondary market. They are issued by the Rural Housing Service of USDA Rural Development; the agency pays cash in the event of a loss. Guarantees cover up to 90% of any loss of principal or interest. The guarantee fee, which is 1% of the guaranteed portion of the loan, is paid by the lender and may be passed on to the borrower.
Loans are primarily processed on the lender’s forms. The lender determines financial-reporting requirements. If a pre-application is submitted, a borrower provides historical financial statements, financial projections, organizational documents, information on existing debt, budgets, site information, information on potential environmental issues that may affect project viability, and evidence of public support. A bank provides an application for federal assistance and certification of the need for a guarantee. If a full application is submitted, the bank provides an application for loan and guarantee, a proposed security package, environmental information, and its credit analysis. The borrower provides cost estimate, copies of permits, certifications, and recommendations of appropriate regulatory agencies, financial feasibility reports, and preliminary engineering and architectural reports.
A public body, nonprofit entity, or a federally recognized Indian tribe attempting to develop an essential community facility is the basic requirements for a borrower. Further requirements stipulate that borrowers be financially sound and unable to obtain needed funds from other sources at reasonable rates and terms, and that borrowers have the ability to organize and manage the facility effectively. They must demonstrate that the proposed community facility has substantial community support.
Applications are handled by USDA Rural Development field offices. After a pre-application is submitted, reviewed, and approved, the lender will be directed complete an application. Community Programs has no later than 30 days after receipt of a completed application to notify the lender of the agency’s decision, unless further approval is required.
For specific information on CRA eligibility, lenders should contact their respective regulatory agency.
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