USDA Business and Industrial Loan Community Bank Program Revisions : The Business and Industry (B&I) loan program administered by the United States Department of Agriculture (USDA or Agency) guarantees loans by qualified lenders to benefit rural businesses.
For eligible projects, community banks can obtain 80% guarantee on loans up to $5 million, 70% guarantee on loans between $5 million and $10 million, and 60% guarantee on loans between $10 million and $25 million.
The B&I secured loan program enables lenders to expand their loan portfolios, obtain shortfall guarantees, increase income by participating in the secondary market, provide loans in smaller communities with lower traditional collateral values and extend loans above their legal lending limits.
For each loan, the lender submits a detailed collateral application to the Agency’s office in the state where the project is located. The approval or rejection decision usually takes several weeks. Projects eligible for B&I financing include business acquisitions, purchases of commercial real estate, start-up and working capital costs, purchases of machinery and equipment, and some refinancing.
On December 17, 2008, the USDA published new interim rules relating to the B&I lending program on the Federal Register. Effective October 1, 2009, these new rules are designed to streamline applications, speed up the assurance approval process and expand the types of eligible projects. The agency ultimately decided to ignore the new rules and instead focus on working within the existing regulatory framework to improve the B&I lending program.
Under the previous rule, the B&I loan program required lenders to draft demanding applications and to deal with long approval periods and limited loan features. For example, a common lender complaint is that the collateral application process takes a long time.
For each loan under the foregoing regulation, B&I lenders must submit to their local Agency all of their loan guarantee and approval documents, at least three B&I application forms, draft loan agreement, copies of loan policies and procedures and origin of services, and details of loan history, experience and relationship with regulators.
The agency also provides guarantees on a “priority assessment” basis, providing loans in rural areas primarily with the aim of attracting priority over other eligible loans of lower value. The decision to approve or reject a lower-scoring loan can take months from the time the application is submitted.
USDA aims to mitigate this weakness with revised rules. The new rules try to streamline the native application process. Lenders must apply to participate in a guaranteed loan program by submitting background information such as a description of loan history and experience, policies and procedures and regulatory compliance documentation (7 CFR 5001.9).
Although lenders had to submit this information under the old rules, they are now allowed to send summaries instead of copies of their policies and procedures (§5001.9(a)(1)). Once approved by the agent, lenders no longer have to submit this background information when applying for loan guarantees (§5001.9(b)(4)). The revised rules also reduce the number of collateral application forms (§ 5001.12(a)) and eliminate the draft loan agreement (§5001.34). In addition to simplifying the application process, this new rule seeks to reduce the warranty approval deadline.
Both changes aim to speed up the guarantee approval process. The agency has removed the “priority assessment” system in favor of a simpler, first-come approach (§5001.103(f)(1)). In addition, the Agency has created a preferred lender program (PLP) (§5001.9(d)).
Benefits of obtaining PLP status include ten days of approval or disapproval (§5001.11(c)), a smaller package of guarantee applications (§5001.12(b)) and the opportunity to obtain preferred status in more than one state with a single PLP application (§5001 ,9(d)(2)). In addition to streamlining the application process, the Agency has introduced several new lending features for the B&I loan program.
The B&I warranty can now be issued for additional uses and purposes. Based on the previous regulation, the line of credit was not eligible. A current line of credit is eligible when used for annual operating/business expenses, outstanding debt for the current operating cycle, unscheduled term borrower debt or closing costs (§5001.103(b)(2)(xix)).
Projects involving infrastructure upgrades and the purchase of mixed use commercial and residential buildings are also now eligible for the B&I guarantee (§5001.103(b)(2)(xviii, xx)). Another new feature removes the prohibition that interest rates change no more frequently than quarterly, and allows lenders to set variable interest rates that adjust as often as daily (§5001.31(a)).
These new features allow lenders to secure valuable B&I collateral for previously ineligible projects.
While this feature is now available to lenders, some less clear rule revisions and useful tools have been removed. For example, the Agency has replaced the proposed cash equity criterion with the debt-to-tangible net worth ratio criterion (§5001.6(c)), but failed to specify this calculation other than referring to Generally Accepted Accounting Principles.
In addition, the regulation eliminates the Agency’s limited authority to issue a 90% guarantee. Once again, the Agency ultimately decided to ignore the new rules and instead focus on working within the existing regulatory framework to improve the B&I lending program.