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Attachment III - Business and Industry Guaranteed Loans (10.768)
I. Program Objectives
The objective of the Business and Industry (B&I) Guaranteed Loan Program is to improve, develop, or finance business, industry, and employment to improve the economic and environmental climate in rural communities.
II. Program Procedures
Loans by private sector lenders to businesses guaranteed by Rural Development guaranteed loans can be sold in the secondary market. The lender is responsible for loan origination, including underwriting and subsequent loan servicing. The program is administered through the Rural Development State Director who is the point of contact for all processing and servicing activities. Loans must improve the economic and/or environmental climate of rural communities by bolstering the existing private credit structure through loan guarantees that will provide lasting community benefits.
III. Compliance Requirements and Suggested Audit Procedures
A. Types of Services Allowed or Unallowed
Compliance Requirements
Loans may be used for:
business and industrial acquisitions, construction, repair and modernization;
purchasing and developing land, easements, buildings, rights-of-way and facilities;
purchasing equipment, leasehold improvements, machinery and supplies;
pollution control and abatement;
transportation services incidental to industrial development;
startup costs and working capital;
interest subject to certain provisions;
feasibility studies;
debt refinancing; and
reasonable professional fees and Agency guarantee fees and charges (7 CFR Part 4279.113).
Compliance Requirements
Loans may not be used for items detailed in 7 CFR Part 4279.114.
Suggested Audit Procedures
Test the borrower's financial records to ascertain that loan funds were only used for eligible loan purposes.
B. Eligibility
The auditor is not expected to test for borrower eligibility.
C. Matching, Level of Effort, and/or Earmarking Requirements
Test to verify if the lender has maintained the appropriate level of ownership of guaranteed loan (i.e., 5 percent).
D. Reporting Requirements
Compliance Requirements
The following financial reports must be submitted periodically for this program:
Annual financial statements prepared by an accountant in accordance with GAAP will be required (7 CFR Part 4279.137(a)).
The Agency will generally require audited financial statements if loan security concerns warrant, and the proposed guaranteed loan will exceed $3 million (7 CFR Part 4279.137(b)).
Suggested Audit Procedures
Ascertain whether the borrower complied with any special financial reporting requirements, as contained in the loan closing documents or subsequent loan covenant modifications.
Test the accuracy of the financial reports to the borrower's financial records.
Ascertain whether the borrower submitted audited financial statements.
Ascertain whether the lender has adhered to all conditions in the Loan Agreement and Conditional Commitment, and verify that the lender has submitted a certification to Rural Development that these have been met prior to issuance of the Loan Note Guarantee.
E. Special Tests and Provisions
Compliance Requirements
All fees and charges by the lender and others should be similar to those reasonably and customarily charged borrowers in similar circumstances in the ordinary course of business (7 CFR Part 4279.120).
A minimum of 10 percent tangible balance sheet equity will be required for existing businesses at the time the Loan Note Guarantee is issued. A minimum of 20 percent tangible balance sheet equity will be required for new businesses at the time the Loan Note Guarantee is issued (7 CFR Part 4279.131(d)).
Interest rates negotiated between the borrower and lender must not be more than those rates customarily charged borrowers in similar circumstances in the ordinary course of business (7 CFR Part 4279.125).
The lender is responsible for seeing that the borrower has proper and adequate collateral to protect the interest of the lender and Rural Development (7 CFR Part 4279.131(b)).
The loan agreement between the lender and borrower may impose other financial and program requirements (7 CFR Part 4279.161 (b)(11)(xii)).
Suggested Audit Procedures
Test lender records to determine whether the lender's fees and other professional fees charged to guaranteed borrowers were reasonable and customary. If packaging services were provided by the lender, ascertain from the lender records whether the fees charged guaranteed borrowers were comparable to fees charged on lender nonguaranteed loans.
Ascertain whether the interest rate negotiated between the lender and borrower on guaranteed loans was comparable to the rate customarily charged borrowers in similar circumstances on lender nonguaranteed loans, adjustments are proper, and appropriate approvals were obtained.
Through visual inspection or record of collateral, test whether collateral pledged as security for the loan is being maintained by the borrower.
Ascertain whether the required appraisal reports were prepared by an independent appraiser and were obtained in a timely manner.
Test loans (loan and lender's agreements) relating to the following requirements for compliance:
Prohibition against assuming liabilities or obligations of others.
Restriction on dividend payments.
Limitation on purchase or sale of equipment and fixed assets.
Limitation on compensation of officers and owners.
Minimum working capital requirements.
Maximum debt to net worth ratio.
Restrictions concerning consolidations, mergers or other circumstances.
Limitations on selling the business without concurrence of the lender and Rural Development.
Compliance Requirement
Section 319 of Public Law (P.L.) 101-121, the Department of Interior and Related Agencies Appropriations Act, prohibits applicants and recipients of Federal contracts, grants, and loans from using appropriated funds for lobbying the Federal government in connection with a specific award. Section 319 also requires each individual who requests or receives a Federal contract, grant, loan, or a Federal commitment to guarantee a loan to disclose the expenditure of any funds, other than appropriated funds, for lobbying activities.
RD Instruction 1940-Q, "Restrictions on Lobbying", requires that recipients of assistance exceeding certain financial thresholds provide certifications concerning lobbying activities, and submit disclosure statements if nonappropriated funds have been used for certain purposes.
Suggested Audit Procedures
The auditor will test for compliance with the provisions of section 319 of P.L. 101-121, by verifying that the required certifications and disclosure statements have been prepared.
The auditor must check to ensure certifications and disclosure statements are signed and dated by the appropriate officials.
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